E0308

Based on the New Textbook
NAVNEET
SECRETARIAL
PRACTICE
• Salient features :
1. Prepared in accordance with the latest Syllabus and the New Textbook
2. Chapterwise Syllabus and explanation of important terms and concepts under
Key Terms and Their Meanings at the beginning of each chapter for ready reference
3. Brief Overview of the chapter for quick understanding of the subject
4. Model answers to all textual questions including all types of objective questions
5. Ample number of additional important questions
6. Wherever necessary charts are given for easy understanding
7. Business Letters to different stakeholders drafted in the required format
8. Systematic and logical coverage of topics in lucid language
By
NAVNEET
First Edition : 2020
E0308
Mumbai : Bhavani Shankar Road, Dadar (W), Mumbai – 400 028. (Tel. 6662 6565)
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© All rights reserved. No part of this book may be copied, adapted, abridged or translated, stored in any retrieval
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written permission of the copyright holders, M/s. Navneet Education Limited. Any breach will entail legal action and
prosecution without further notice.
2001
Published by Navneet Education Limited, Dantali, Gujarat. CTP
Printed by Navneet Education Limited, Dantali, Gujarat. (22-07-2020)
2
PREFACE
It is with great pleasure that we present this first edition of Navneet Secretarial
Practice Digest to the Standard XII students. This Digest is prepared in accordance with
the New Textbook.
Important features of this Digest :
(1) Chapterwise Syllabus and the meanings of key terms with explanation given at the
beginning of the chapter.
(2) The summary in the form of Brief Overview is also given at the beginning of each
chapter. To derive best results out of this Digest, the students are advised to study the
summary carefully.
(3) Wherever necessary, charts are included in Summary for easy understanding.
The charts will help them to understand the subject-matter easily. It will also help to have
quick revision.
(4) The Questions and Answers cover the entire chapter. Textual questions and
additional questions of all types, viz. long answer type questions, short answer type
questions, explain the terms/concepts, distinguish between, case study/situation to express
opinion, justify the statements, objective type questions, etc. are included along with their
model answers.
(5) Business Letters to different stakeholders of the company such as members,
debentureholders and depositors are drafted in required format.
(6) The book is written in simple and lucid language to help students comprehend
the subject easily.
In short, this Digest is a comprehensive and student-friendly book. A thorough study

of this Digest will enable the students to score high marks in the board examination.
Every care has been taken to make this Digest perfect in all respects. However,
suggestions for its further improvement are most welcome.
- The Publishers
3
CONTENTS
1. Introduction To Corporate Finance ... 5
2. Sources of Corporate Finance ... 25
3. Issue of Shares ... 58
4. Issue of Debentures ... 89
5. Deposits ... 102
6. Correspondence with Members ... 118
7. Correspondence with Debentureholders ... 131
8. Correspondence with Depositors ... 144
9. Depository System ... 156
10. Dividend and Interest ... 177
11. Financial Market ... 201
12. Stock Exchange ... 223
4
1 INTRODUCTION TO CORPORATE FINANCE
SYLLABUS
1.1 Meaning
1.2 Importance
1.3 Capital Requirements :
(A) Fixed Capital and (B) Working Capital
1.4 Capital Structure :
1.4.1 Definition
1.4.2 Components
KEY TERMS AND THEIR MEANINGS

• Finance : The provision of money when and where required. Finance may be short-term, medium-
term and long-term. Finance may be required for consumption as well as for investment.
• Borrowed (Debt) capital : Funds which are raised by a company from the external source for a
definite period by the issue of debentures, by accepting deposits from the general public and by
borrowing loans from the banks and other financial institutions.
• Owned capital : The funds which are raised by a company from the internal sources and not refunded
during the lifetime of the company. It is raised by the company by issue of different types of shares
and ploughing back of profit. It is a permanent capital of the company and is usually employed for
buying the fixed assets.
• Share capital : Funds collected by the company by issuing different types of shares. It is a major
source of finance for the company.
• Security : A document issued by a company or government acknowledging that the issuer has
received money or some other valuable consideration and for issuing such document to some
specified person (investor) in return, entitled to certain rights against the issuer.
• Preference shares : A preference share is one which enjoys preferential rights over equity share as
to payment of dividend and repayment of capital at the time of the winding-up of the company.
• Equity shares : An equity share is one which carries ownership right in the company, right of
participation in the management and right to get dividend without any limit.
• Budget : A precise and detailed planning of various business activities with certain objectives to
attain. It is prepared prior to the accounting year to which it is made applicable. It is expressed in
financial and quantitative terms.
• Current assets : Current assets are those assets which change their form and ultimately get converted
into cash. Current assets include cash, investment, stock, amount receivables, prepaid expenses, etc.
• Current liabilities : Current liabilities refer to those obligations which are normally paid within a
period of one year out of the current assets or creating further current liabilities. They include Bank
overdrafts, amount payable, provision for taxes, outstanding (unpaid) expenses, prepaid incomes,
etc.
1. INTRODUCTION TO CORPORATE FINANCE 5

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

medium-term as well as long-term finance to industry, trade and business. Finance Corporation of
India (FCI), Axis Bank, Banks, etc. are the some of the examples of financial institutions functioning
in India.
• Public deposit : Public deposit is one of the important sources of corporate finance. Any amount of
money received by a company by way of deposit or loan from the general public for a definite period
of time is called public deposit.
• Sales promotion : Marketing activity concerned with stimulating sales and distribution effectiveness,
e.g. arranging display exhibition, demonstration, reduction in selling price for a limited period, but
normally excluding advertisement.
6 SECRETARIAL PRACTICE DIGEST : STANDARD XII

• Promoter : The person responsible for the convening and formation of a company. They are usually
industrial experts who with the help of big team of experts do preliminary work necessary before a
company can be brought into existence.
• Lease : An agreement whereby the legal owner of real property (especially land, building or
machinery) gives another person the possession of that property with freedom to use it as he wishes,
though under certain conditions, it may imply in return for regular specified payment as rent.
• Overheads : Indirect cost or expenses needed to operate a business. It includes advertising,

insurance, accounting fees, interest, legal fees, rent, taxes, travel expenditure, repairs, etc.
• Merchandise firm : Those firms which are concerned with purchasing and selling of goods and
services without altering the physical form of goods are called merchandise firm or trading concerns.
BRIEF OVERVIEW
Corporate Finance : raised by the company or business firm. It relates

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

profit earning ability. Business enterprises (8) Replace old assets : Corporate finance is
undertake only those projects which are financially required to replace old and outdated fixed assets
viable. In this way corporate finance helps in such as plant, machineries, furniture, vehicles,
decision making process. equipment, etc.
(2) Helps in raising capital for a project : The (9) Payment of dividend and interest :
funds needs to finance the projects or business Corporate finance is required to pay dividend to
ventures can be raised by the business firms from shareholders and to pay interest to debenture-
different sources such as issue of different types holders, creditors and banks.
of shares, debentures, bonds, accepting public
(10) Payment of taxes and fees : Corporate
deposits, borrowing loans from banks and other
finance is also required to pay income tax, Goods
financial institutions.
and Service Tax (GST), etc. to the Government
(3) Helps in Research and Development : and fees to the Registrar of Companies on different
Business organisations need to provide financial occasions.
support to research and development work
1.3 Capital Requirements :
undertaken for growth and development of
business. To attract more customers it is necessary After having set up the business enterprise and
to upgrade old products and develop the new satisfied with the feasibility of the projects, the
products which require further financial support. entrepreneur takes decision on the amount of
(4) Helps in smooth running of business capital requirement to start and run the business.
firm : In every business organisation, smooth flow For this, business enterprise has to draft financial
of corporate finance is required to pay salaries to plan by considering present and future
the staff in scheduled time, to repay interest and requirements of the business. While estimating
loans to creditors on time, to purchase raw the volume of the total capital requirements,
materials, to finance sales promotion of existing entrepreneur has to take into account fixed capital
products, to launch new products in the market, requirement and working capital requirement.
etc. (A) Fixed Capital :
(5) Bring co-ordination between various Fixed Capital is that portion of total capital
activities : Corporate finance is necessary to which is invested in the fixed assets like land,
control and co-ordinate all the activities of different building, plant, machinery, equipment, furnitures,
departments of the business organisation. etc. These assets are used in the business but not
Efficiency of every department in the organisation purchased or kept for resale. Fixed capital stays
depends directly on the effective financial
or remains in the business for a long period i.e.
management.
almost permanently. Fixed capital is required
(6) Promotes expansion and diversification : initially at the time of establishment of a business
Corporate finance is required to purchase and firm or a company. It is also required by well
install modern machinery and techniques which established firms for modernisation, further
required to promote expansion and diversification development, replacement of fixed assets and
of business. diversification. An owner can procure funds for
(7) Managing risks : Corporate finance is purchase of fixed assets from the capital market
necessary to manage different business risks such through issue of shares, debentures, long-term
as sudden fall in sales, loss due to occurrence of borrowings from the banks and other financial
natural calamities, loss due to strikes, etc. institutions.

• Factors affecting fixed capital requirement : entrepreneurs at concessional rate, then in such
Nature of business case fixed capital requirement would reduce to
Size of business certain extent.
Scope of business (8) International conditions : The large scale
Extent of lease or rent business enterprises carrying business on
Factors Arrangement of sub-contract international level need to expand their production.
affecting Acquisition of old assets They need large amount to expand fixed assets to
Fixed Acquisition of assets on produce more so that there would not be any
Capital concessional rate shortage of goods and services.
requirement International conditions (9) Trade in economy : If entrepreneur or
Trend in economy management predicts that the future of company
Population trend to be bright, then it undertakes expansion of
Consumer preference activities in all areas of business. Such expansion
Competitive factor activity need large investment in fixed assets to
(1) Nature of business : The big manufacturing acquire benefits in the future.
industries and public utility concerns need huge (10) Population trend : When population in
amount to purchase and install fixed assets certain ares increases at high rate, some
whereas trading organisations require relatively manufacturers get opportunities to expand their
less investment in fixed assets. business which increases the requirement of fixed
(2) Size of business : The business enterprises assets, e.g. readymade garments, automobile
which carry on large scale operations mostly use industry, etc.
automatic machines and equipment. So, they need (11) Consumer preference : Business firms
huge amount of fixed capital. producing or providing goods and services which
(3) Scope of business : The business are in great demand, need to produce more.
enterprises which are established to undertake Hence, they needs more fund to invest in fixed
production or distribution on a large scale need assets, e.g. mobile phone, laptop manufacturer.
huge amount of fixed capital. (12) Competitive factor : If one of the
(4) Extent of lease or rent : If industrialist or competitors moves towards automation, the other
owner of business enterprises acquires fixed business firms in same line of products also
assets on lease or rental basis, he needs less follow. This increases the requirement of fixed
amount of funds to invest in fixed assets. capital of all the firms going for automation.
(5) Arrangement of sub-contract : If (B) Working Capital :
entrepreneur outsources on sub-contract some of Working Capital is that portion of total capital
which is invested in short-term assets such as
the processes of production to experts to complete,
cash, account receivable, inventories, etc. It is
then fixed capital requirement in such case would
used to carry out day-to-day business activities.
be less.
Gerstenbergh, defines working capital as, ‘‘The
(6) Acquisition of old assets : If entrepreneur
excess of current assets over current liabilities.’’
acquires old plant, equipment, machinery which
It is referred to Net Working Capital. It is also
are in working condition at low prices, then fixed
called ‘Circulating Capital’.
capital requirement would be less.
J. S. Mill, defines working capital as, “The sum
(7) Acquisition of assets on concessional
of current assets is working capital.” It is referred
rate : When Government wants to promote the
as ‘Gross Working Capital’. Business firms require
industrial growth and development at regional
working capital to store sufficient quantity of raw
level, then government provide fixed assets to

material in stock, to maintain adequate stock of requirement of working capital is more. Conversely.
finished goods, to arrange for funds till the amount if a business firm gets more period of time for
is collected from the debtors and to meet making payment to suppliers and adopts less
unexpected expenses. liberal credit polity for sales, then it need less
• Factors affecting requirement of Working amount of working capital.
Capital : (7) Credit control : If credit control policy is
Nature of business sound, its cash inflow increases and need of
Size of business working capital reduces. If credit control policy is
Volume of sales liberal, there is risk of bad debts and need of
Factors
Production cycle working capital increases. The business firm
affecting
Business cycle selling goods on cash basis needs less amount of
requirement
Terms of purchase and sale
of Working working capital and vice versa.
Credit control
Capital (8) Growth and expansion : The need of
Growth and expansion
working capital increases with growth and
Management ability
expansion of business enterprises.
External factors
(9) Management ability : Proper co-ordination
(1) Nature of business : The manufacturing between production department and sales
firms producing products of daily consumption department reduces the requirements of working
and public utility concerns providing services need capital. The business firm that needs to keep large
less working capital as these firms get continuous, stock of inventories requires more amount of
sufficient and constant cash inflow from their working capital.
customers. However, business firms dealing in (10) External factors : If the banks and other
luxurious products and trading in goods and financial institutions supply funds to the business
services need large amount of working capital. firms at the time of need then requirement of
(2) Size of business : A business enterprise
working capital will be less and vice versa.
with large scale operation needs large amount of
working capital whereas the need of working 1.4 Capital Structure :
capital of business firms operated on small scale Capital structure refers to the relative proportion
and at local level is very less. of different types of financing used by the
(3) Volume of sales : The requirement of working organisation to make up the long-term financing
capital directly varies with volume of sales. If the of a business. A combination of different sources
volume of sales increases, there is an increase in such as owned capital which consists of equity
the requirement of working capital and vice versa. share capital, preference share capital, reserves
(4) Production cycle : If the production cycle
and surplus and borrowed capital which consists
period is longer, the firm requires more amount
of bank loans and long-term loans provided by
of working capital and vice versa.
the financial institutions, debentures, bonds, etc.
(5) Business cycle : During boom (i.e.
are used in capital structure. In other words, it
prosperity) period, demand and sales for goods
implies mix-up of various sources of funds in
and services increase which in turn increase the
desired proportion. It is nothing but ‘Composition
requirement of working capital. Conversely, during
of Capital’ or ‘Security Mix’.
recession, the requirement of working capitals
is less. 1.4.1 Definition : According to John Hampton,
(6) Terms of purchases and sale : If business ‘‘A firm’s capital structure is the relation between
firm does not get proper credit from suppliers the debt and equity securities that makes up the
and adopts liberal credit policy for sales, then firm’s financing of its assets.’’

1.4.2 Component of Capital Structure : for short-term as well as for long-term. On this
borrowings, company has to pay interest at an
Components
agreed rate.
of capital
Structure To understand the above concept, the following
Balance sheet is prepared :
Liabilities Amt. ` Assets Amt. `
Equity Preference
Retained Borrowed Fixed assets
Share Share Share Capital :
Earnings Capital Land and Buildings 2,50,000
Capital Capital 15,000 Equity Shares 1,50,000
Plant and Machinery 1,90,000
of ` 10 each fully paid
Furniture and Fixtures 85,000
5,000 Preference 5,00,000
(a) Debentures (b) Term loan Shares of ` 100 each Current Assets
fully paid Inventories 78,000
(1) Equity share capital : It is primary and
Reserves and Surplus 60,000 Sundry Debtors 52,000
basic source of financing the activities of business. Bills Receivable 40,000
Equity shares are those shares on which dividend Liabilities Cash at Bank 1,20,000
Cash in Hand 90,000
is paid after it is paid on preference shares and
1,000 12% Debentures 1,00,000
in the event of liquidation capital is repaid only of ` 100 each fully
after the repayment of capital to the preference paid

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

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

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

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

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

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

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

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

(c) The Bombay Electricity Supply and (c) Does the size of a business determine the
Transport (BEST) providing electricity and public fixed capital requirement ?
transport services in the Brihan Mumbai is one of Ans. (a) Machinery is a fixed asset to be used
the public utility service providers from whom we in the company.
get electricity and transport services.
(b) Capital used for purchase of machinery is
(2) A company is planning to enhance its fixed capital.
production capacity and is evaluating the
(c) The size of a business determines the
possibility of purchasing new machinery whose
requirement of fixed capital. If the business
cost is ` 2 crore or has alternative of machinery
enterprise is established to undertake and carry
available on lease basis.
on large scale operations, its fixed capital
(a) What type of asset is machinery ? requirement is larger then the business firm which
(b) Capital used for purchase of machinery is carries on small scale business operations.
fixed capital or working capital ?
* 12 Distinguish between the following : (4 marks)
Fixed Capital and Working Capital :

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

is an internal source of finance. It is also called
* 13 Answer in brief : (4 marks each)
ploughing back of profit. This source of financing
(1) Define Capital Structure and state its is available to well established and highly profitable
components. company.
Ans. [A] Definition : A company or a business (4) Borrowed capital : The borrowed capital
enterprise collects its capital from different sources refers to the capital raised by the company by
such as owned capital or borrowed capital or issue of (a) debentures and (b) term loan.
both. Capital structure refers to the relative (a) Debentures : Debentures are the
proportion of different sources used by the acknowledgement of debt issued by the company
business enterprise to make up the long-term under its seal after borrowing money from the
financing of a business. In other words, capital general public. The company is required to pay
structure implies ‘mix-up of various sources of interest at fixed and agreed rate.
funds in desired proportion.’ (b) Term loan : The bank and other financial
According to John Hampton, “A firm’s capital institutions provide term loans at fixed and agreed
structure is the relation between the debt and rate of interest.
equity securities that makes up the firm’s (2) State any four factors affecting fixed
financing of its assets”. In brief, capital structure capital requirement.
refers to the proportion of different securities Ans. For the answer, refer to Q) 15 (3) Long
raised by a firm or a company for long-term
Answer Questions.
finance.
(Write any 4 or 5 points with brief explanation.)
[B] Components : The different components of
(3) What is corporate finance and state two
capital structure are :
decisions which are basis of corporate finance.
(1) Equity share capital : The capital raised by
Ans. [A] Meaning : Corporation finance refers
the company by issuing equity shares is called
to management of corporate funds. It deals with
equity share capital. It is primary and basic source
acquisition and use of capital. It is concerned with
of financing the activities of business. On equity
the raising finance and its efficient and effective
shares dividend payment and repayment of capital
utilisation in the business by a corporation. It is
are made after the payment is made on preference
mainly dealt with financing different activities and
shares. The equity shareholders own the company.
projects of the corporation, capital structuring
They bear the ultimate risk of ownership. They get
and taking investment decisions. The term
dividend at fluctuating rate depending upon the
corporation finance also contains financial
availability of profit.
planning, study of capital market, money market
(2) Preference share capital : The capital and share market. Its scope extends to capital
raised by the company by issuing preference formation and foreign capital. Banks and other
shares is called preference share capital. On financial institutions, play major role in corporate
preference shares dividend at fixed rate is paid financing.
before payment of dividend on equity shares. [B] Decisions which are basis of corporate
Repayment of capital is made to preference finance : The following two decisions are the basis
shareholders before equity shareholders at the of corporate finance :
time of liquidation of a company. (1) Financing decision : To fulfil the financial
(3) Retained earnings : The part of the profit needs, the business enterprise has access to the
retained by the company for meeting future capital market. Financing decision refers to taking
financial needs and for expansion and betterment decision in respect to selection of right sources of
of the company is known as retained earnings. It finance from available multiple options of financing.

The business enterprise raises the needed finance the following multiple choices of sources of
either by issue of equity shares or by issue of debt financing. When new company starts its business,
securities. Even business enterprise can raise it raises capital through issue of equity shares. It
finance by issuing debentures, borrowing term is a basic source of financing activities of the
loans from the bank, accepting public deposits, business. The company also issues preference
etc. In this respect, finance manager confirms that shares to get the funds only for specific period of
company or business enterprise is well capitalised time to the investors who are cautious of their
i.e. they have sufficient amount of capital and the investment.
company has right combination of debt and equity. (2) When company grows, it issues debts
In brief the decision of finance manager which securities such as debentures and bonds, accepts
ensures that business enterprise in well capitalised public deposits, borrows loans from banks and
is called financing decision. other financial institutions. Large manufacturing
(2) Investment decision : When the different firms raise funds by issue of equity shares and
sources of raising the finance from capital market debentures whereas trading concerns raise finance
are made available to the company, the finance through issue of equity shares and preference
manager is required to decide about the systematic shares.
use and judicious investment of such funds to (3) The developed company or business
earn maximum returns for its owners. Accordingly, organisation with stable earnings can easily raise
investment decision refers to the decision taken by funds by issue of debt securities and also use of
the finance manager in respect to utilisation of retained earnings to balance their projects. If
funds raised by the business enterprise in company needs funds on regular basis, it can
systematic manner so that such use of funds or raise funds by issue of equity shares to larger
investment of funds yield maximum returns for its proportion. If funds are required for short period,
owners. It relates to the selection of assets in the company raises funds through issue of
which funds are to be invested. The business preference shares and debentures.
enterprise has to take into account the cost of (4) Retained earnings is one of the important
capital. Once the cost of capital is calculated and sources of internal financing. It is nothing but
ascertained, the business enterprise can allocate ploughing back of profit. The company also
or use the available funds in such a manner that borrows loans from bank and other financial
returns on such investment or use of funds exceed institutions for short-term as well as long-term.
the cost of capital. Thus, searching investment Trade credit is the cheapest and easiest method of
opportunities and deploying the funds successfully raising short-term finance. It is free of cost source
in the business is popularly known as investment of financing. Selling bills of exchange to the bank
decision. It is also called ‘capital budgeting’. In for certain amount slightly lesser than its face
brief the decision of finance manager to deploy the value is called discounting bills of exchange. These
funds in systematic manner is called investment bills are retained by the bank as security and
decision. grant short-term loans to the business enterprises.
(2) There are various factors affecting the
* 14 Justify the following statements : requirement of fixed capital.
(4 marks each) Ans. For the answer, refer to Q. 15 (3) Answer
(1) The firm has multiple choices of sources in Brief.
of financing. (3) Fixed capital stays in the business almost
permanently.
Ans. (1) The business enterprises require
Ans. (1) Fixed capital refers to that part of the
finance for various purposes, at different stages
total capital which is invested or used for
and for different period. The business firm has

purchasing fixed assets such as land and building, (3) A developed company with stable earnings
plant and machinery, furniture and fixtures, motor can easily keep more proportion of borrowed
vehicle, etc. These fixed assets are used in the funds (debt capital) whereas company with
company for a longer period of time. These assets unstable and unpredictable cash inflow cannot
are not meant for resale. In other words, fixed keep more proportion of debt capital in their
capital implies capital invested for acquiring fixed capital structure. If funds are required on regular
assets. basis, the company keeps more proportion of
(2) Fixed capital remains in the business for a equity shares i.e. owned funds where if funds are
long period of time i.e. almost permanently. It required for short period of time, the company
refers to the stock of tangible and durable fixed raises funds through issue of debentures i.e.
assets owned or used. Fixed capital is needed at borrowed funds.
the time of establishment of new company. Fixed (4) If market is in boom, more funds are made
capital is also required for expansion and available through issue of equity shares whereas if
development of business and for purchasing the market is in declining (recession) situation
equipment which are used in the business for a more funds are obtained by issue of debt securities.
long period of time. In order to minimise the cost of capital, more
(3) The big business enterprises such as funds can be obtained through issue of preference
railways, road transport and other utility services shares and debt securities. If the prevailing rate of
invest huge sum in fixed assets. The general rule interest is higher, then funds are raised by issue
states that bigger the size of business, higher the of equity shares, use of free reserves and surplus
need of fixed capital. Newly established organisation and vice versa.
needs more investments in fixed assets than that (5) There are various factors affecting the
required by the established business firm. requirement of working capital.
(4) Capital structure is composed of owned Ans. (1) The nature and size of business have
funds and borrowed funds. great impact on the working capital. Industrial
Ans. (1) Capital structure refers to the relative and manufacturing firms and big retail enterprises
proportion of different types of financing used by need large amount of capital, whereas small
the company to make up the long-term financing concerns need small amount of working capital. If
of a business. Capital structure is the mixture of the volume of sale increases, there will be increase
owned funds and borrowed funds. Owned funds in working capital and vice versa. If the production
consist of share capital, free reserves and surplus cycle period is longer, the company needs more
and borrowed funds consist of debentures, bank working capital and vice versa.
loans and long-term loans borrowed from financial (2) If credit terms of purchases are more liberal
institutions. The pattern of capital structure of and terms of credit sales are less favourable then
various firms or organisations varies widely less amount of working capital is required.
according to the nature and so many other relevant Conversely, if the firm does not get proper credit
factors. facility from suppliers and offers credit facility to
(2) When new company starts its business, it its customers, then more amount of working
raises capital through issue of equity shares. When capital will be required. If credit control policy of
company grows and develops, it issues debts the firm is sound, then cash inflow will improve
securities to raise funds. Large manufacturing which in turn will reduce the requirement of
firms raise funds by issue of equity shares and working capital.
debentures whereas trading concerns raise finance (3) Along with expansion and growth of the firm
through issue of equity shares and preference or company in terms of sales and fixed assets, the
shares.

requirement of working capital increases. If there (2) Helps in raising capital for a project : Every
is proper co-ordination, communication, and business organisation is required finance if it
co-operation between production department and wants to start a new business venture. The needed
sales department, then the requirement of working finance can be raised by the business organisation
capital will be less. If the requirement of funds are from the different sources such issue of different
procured by the firm from the banks and other type of shares, debentures, bonds and by
financial institutions easily, then requirement of borrowing loans from the banks and other financial
working capital is less. If requirement of cash is institutions.
higher, then more amount of working capital is (3) Helps in Research and Development :
required. Business organisations must undertake research
(4) The firms or companies producing or selling and development for its growth and expansion.
seasonal products such as umbrella, rain coats, Even for the execution of projects detailed technical
woollen clothes, crackers, etc., need more working work is necessary. Financial support is required
capital during their respective seasons. Similarly, continuously throughout the process of research
during boom period, sales increase and need of work. In order to attract more customers, it is
working capital also increases to produce more of necessary to upgrade the old products and develop
goods. Conversely, during recession period, sales the new products which requires more financial
decline and consequently need of working capital support.
declines. (4) Helps in smooth running of business
firm : In every business organisation, continuous
* 15 Answer the following question : and smooth flow of corporate finance is necessary
(8 marks each) to pay salaries to the employees in scheduled
time, to repay the loans to creditors on time, to
(1) Discuss the importance of corporate
purchase sufficient quantity of raw materials at
finance.
the time of their requirements, to finance sales
Ans. The importance of corporate finance is promotion of existing products, to launch new
explained as follows : products in the market more effectively, etc.
For the chart showing the importance of (5) Brings co-ordination between various
corporate finance, refer to Brief Overview point activities : Corporate finance is necessary to
no. 1.2. contract and co-ordinate all the activities of
(1) Helps in decision making : In all business different departments of the business organisation,
organisations the decisions in the different areas e.g. finance department has to provide adequate
of the business are taken by considering the finance to the production department to purchase
availability of finance or funds. Without adequate raw materials and to meet daily financial needs
finance business organisation cannot independently for smooth running of production units. In the
perform any function of the business. Most of the absence of regular supply of finance, the production
business decisions are taken by considering their will be adversely affected which in turn will have
impact on the profit earning ability. From the its effects on sales and ultimately on income flow
available alternatives management needs to select and profitability of the organisation. In this
the best alternative that will increase profitability manner, efficiency of every department in the
of the business organisation. Business organisation organisation depends directly on the effective
will undertake those project which are financially financial management.
viable. In this way, corporate finance plays key (6) Promotes expansion and diversification :
role in decision making process. Expansion and diversification in business

organisation are possible through the use of transport, gas, electricity, etc. need less working
modern machinery and techniques. Corporate capital due to continuous inflow of cash from their
finance is necessary to buy and install modern customers. Business enterprises engaged in selling
machines and techniques. Hence, corporate and distribution of luxurious products need huge
finance plays significant role for expansion and amount of working capital. This is due to lack of
diversification of a business organisation. regular and continuous sale. The trading or
(7) Managing risks : Several risks such as merchandising firm engaged in the distribution of
sudden fall in sales, loss due to occurrence of goods need huge amount of working capital
natural calamities, loss due to strikes, etc. are because they need to keep big inventories (stock
inevitable in every business organisation. Corporate in trade) to fulfill customers’ demand.
finance is essential to manage all such risks. (2) Size of business : A business enterprises
(8) Replace old assets : Fixed assets such as with large scale operation will need large amount
plant and machinery, furniture and fixtures, of working capital. However, the need of working
vehicles, etc. are depreciated every year. They capital of business operated on small scale and at
become old and outdated after certain years. local level is comparatively very less.
These assets are required to be replaced by (3) Volume of sales : The requirement of
installing new assets. For purchase and installation working capital directly varies with the volume of
of new asset corporate finance is mandatory. sales. If the volume of sales increases there is
(9) Payment of dividend and interest : corresponding increase in the requirement of
Corporate finance is necessary to pay dividend to working capital and vice versa.
shareholders and to pay interest to debenture- (4) Production cycle : Production cycle (i.e.
holders, creditors, banks, etc. on the finance gestation period) refers to the process of conversion
provided by them in the form of loans. of raw materials into finished products. If the
production cycle period is longer, the firm requires
(10) Payment of taxes/fees : Corporate finance
more working capital. Conversely, if the production
is required by every business organisation to pay
cycle period is short, the firm needs less working
various taxes to the Government such as income
capital.
tax, Goods and Service Tax (GST) and fees to the
Registrar of Companies on different occasions. (5) Business cycle : During boom (i.e.
prosperity), demand and sales for goods and
(2) Discuss the factors determining working
services will increase which in turn will increase
capital requirement.
the requirement of working capital. Conversely,
Ans. The factors determining working capital
during recession period, the demand and sales for
requirement are explained below :
goods and services will decline and consequently
For the factor determining working capital the requirement of working capital will also
requirement, refer to Brief Overview point decrease.
no. 1.3 (B). (6) Terms of purchases and sales : If business
(1) Nature of business : The nature of business enterprise does not get proper credit from the
have great impact on the requirement of working suppliers and adopts liberal credit policy for sales,
capital. Manufacturing and industrial enterprises then requirement of cash will be more which in
engaged in manufacturing essential products of turn will increase the need of working capital.
day-to-day consumption would require relatively Conversely, if a business enterprise gets adequate
less amount of working capital. This is because or more period of time for making payment to
there is continuous and adequate cash inflow in suppliers and adopts less liberal credit policy for
the enterprises to take care of liabilities. Similarly sale, then requirement of cash will be less which
public utility concerns providing services such as in turn will reduce the need of working capital.

(7) Credit control : Volume of credit sales, the carried out through the use of automatic machines
terms of credit sales, the collection policy, etc. are and equipment.
the important components of credit control. Sound (3) Scope of business : The business
credit control policy improves cash flow while enterprises which are established to undertake
liberal credit control policy increases the risks of large scale production or distribution of goods
bad debts. The business enterprises selling goods and services would need large amount of fixed
on cash basis need less working capital whereas capital.
the business enterprises selling goods on credit (4) Extent of lease or rent : If the entrepreneur
terms need more working capital. acquires most of the fixed assets on lease or on
(8) Growth and expansion : The growth and rental basis, his requirement of fixed capital funds
expansion of business enterprise increase the will be very less. He needs to pay rent regularly to
requirement of working capital. Growing the fixed assets owners.
enterprises need more funds constantly to finance (5) Arrangement of sub-contract : If the
large scale operations. entrepreneurs outsourced or sub-contract some
(9) Management ability : Proper co-ordination of his processes of production to expert persons
between production department and sales for certain consideration in monetary terms, his
department reduces the requirements of working fixed capital requirement would be very less or
capital. Lack of proper communication and minimum.
co-ordination among the different departments (6) Acquisition of old assets : If entrepreneur
may lead to excess production and heavy inventory acquires old plant or machinery and equipment at
of finished and semi-finished goods. Ultimately, low prices, his fixed capital requirement would be
requirement of working capital increases. minimum or less.
(10) External factors : If the banks and other (7) Acquisition of assets on concessional
financial institutions supply funds to the business rate : When Government wants to promote the
organisations at the time of need, then requirement industrial growth and development of regional
of working capital will be less and vice versa. level, the industrialists or entrepreneurs get land
(3) Explain the factors affecting fixed capital and building, material at concessional rates as
requirement. well as on instalment basis from the Government.
Ans. For the chart showing the different In such cases, requirement of fixed capital would
factors affecting fixed capital requirement, refer reduce to considerable extent.
to Brief Overview point no. 1.3 (A). (8) International conditions : This factor is
The factors affecting fixed capital requirement very important especially in large business
are explained as follows : enterprises managing business on international
(1) Nature of business : The big business level, e.g. if war is expected in near future, then
enterprises, manufacturing industries and public companies produce goods and services on large
utilities need large fixed investment to acquire scale to avoid shortage. In such cases, requirement
fixed assets whereas trading organisations need of fixed capital would be large.
comparatively very less investments in fixed assets. (9) Trend in economy : If the management of
(2) Size of business : The general rule states the company predicts that there will be lot of
that bigger the size of business, higher the need of opportunities in the near future to develop and
fixed capital. The business enterprise that is grow its business, then it undertakes expansion
established to undertake large scale business activities in all areas of the business. To carry out
operations its fixed capital needs is usually higher. expansion, it need amount to invest in fixed assets
This is because its production processes are so that it will reap benefits in future.

(10) Population trend : When population in preferences of the consumers, they need large
certain areas is growing rapidly, then some amount to invest in fixed assets. For instance,
industrialists or manufacturers get opportunities mobile phone, computers and laptop manufacturers
to expand their business. For expansion of mobile services providers, etc.
business, they require huge amount of fixed (12) Competitive factor : While taking decision
capital. For instance, electronic goods in respect to requirement of fixed capital,
manufacturing industry, readymade garment management is required to consider competitive
industry, automobile industry, leather industry, element. If one of the competitors moves towards
etc. need large amount of fixed capital to expand automation, then other competitors in the same
their business. line of products have to follow that competitor.
(11) Consumer preference : Industrialists or Hence need arises to have more amount of fixed
manufacturers producing goods and services capital.
which are in great demand and according to the
  

2 SOURCES OF CORPORATE FINANCE
SYLLABUS
2.1 Sources of Owned Capital :
2.1.1 Shares
2.1.2 Retained earnings
2.2 Sources of Borrowed Capital :
2.2.1 Debentures 2.2.5 Commercial Banks
2.2.2 Acceptance of deposits 2.2.6 Financial Institutions
2.2.3 Bonds 2.2.7 Trade Credit
2.2.4 ADR / GDR
KEY TERMS AND THEIR MEANINGS

• Memorandum of Association : The basic, fundamental and principal document of a company with
which the company is registered. It serves as the constitution or charter of the company and defines
the essential information, objectives and scope of its activities.
• Articles of Association : The document of the company consisting of its by-laws, the rules and
regulations relating to the internal management of the company.
• Director : A person elected by the members (shareholders) to control for them the day-to-day
management of the business and to decide its general policy.
• Transfer of shares : The passing of ownership and possession of the shares by one shareholder to
another as a result of voluntary sale or gift of shares.
• Stock Exchange : A specific place where trading of the listed and second hand securities such as
shares, debentures, government bonds, etc. is done in an organised method.
• Speculators : The persons or group of persons who buy and sell securities such as shares, bonds,
debentures, etc. with the object of making quick profit from the variations in the prices of these
securities.
• Bonus shares : The shares which are issued by the company free of charge of its existing equity
shareholders out of its reserve or accumulated profits.
• Rights issue : An offer of new shares to existing shareholders only. A company will offer the ‘rights’
in a certain proportion to the existing holdings, depending upon the amount of new equity capital it
wishes to raise.
• Winding-up/Liquidation of company : The legal process whereby the life of a company is brought
to an end. It means the winding-up of the affairs of a company when it ceases business.
• Common seal : A company having a legal personality cannot sign any document. Therefore, law has
provided for the use of common seal with the name of the company engraved on it, as a substitute
for its signature.
2. SOURCES OF CORPORATE FINANCE 25

• Trust deed : When a company borrows money for the period of more than 18 months, especially
from debentureholders, it has to make an agreement with the trustees of debentureholders in respect
to terms and conditions of mortgage or charge created against the properties of the company, such an
agreement is called trust deed.
• Fixed charge : A term used to describe a mortgage of distinct assets against which a loan is taken.
The charge applies to assets specifically identified. These terms usually arise in connection with an
issue by a company of debentures, which may be described as fixed or floating debentures.
• Floating charge : A legal charge, as security for a loan on the assets generally of a business. It is an
alternative to a charge on an identified major asset.
• Collateral security : Security that is additional to the main security for a debt (or an advantage to the
mortgage that is additional security to the payment of interest). For example, a lender may require
as collateral the assignment of a insurance policy in addition to the principal security of mortgage on
the borrower’s home.
• Paid-up capital : The part of the called-up capital which is actually paid by the shareholders. The
actual amount of capital that shareholders have subscribed or paid.
• Globalisation : Increasing internationalisation of the production, distribution and marketing of

goods and services through linking national economy to the world economy.
• Depository : An organisation or an institution which holds and transfers the ownership of the securi-
ties such as shares, bonds, debentures, etc. in electronic form on behalf of its investors. It acts as a
custodian of securities.
• Charge on assets : When a company borrows from a bank it may offer as security for a loan that is
known as a charge on its assets including stock of finished goods. It may be either a fixed charge or
floating charge.
• Underwriting of shares : A new issue of shares in a company may be underwritten. In such case, the
underwriter for certain consideration agrees to take up any shares which are not applied for by the
public and thus guarantee the success of the issue.
• Inflation : A general and persistent increase in prices in an economy and consequent fall in the
purchasing value of money. It also refers to as a sustained rise in the general price level.
• Commercial Paper : The debt instrument which is issued by the corporate house for raising short-
term financial resources from the money market. It is unsecured debt instruments issued in the form
of promissory note.
BRIEF OVERVIEW
Introduction : 2.1 Sources of Owned Capital :

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

Sources of Finance based on types of Capital
Owned Capital Borrowed Capital
Debentures, Public
Shares Retained Earning
Deposits, Bonds,
ADR / GDR,
Equity Shares Preference Shares Banks, Financial
Institutions, Trade
Credit
Thus, the sources of finance may be categorised (3) Distinctive number : If the shares are not
as (1) External Source i.e. the sources outside dematerialised, each share bears a distinctive
the business firm through which funds for initial number for identification of its holder. It is specified
capital are collected and (2) Internal source i.e. on the share certificate.
the sources within the organisation through which (4) Evidence of title : A share is not anything
funds are made available to business organisation. capable of being perceived by the eye or by the
The capital funds provided by the owners of the hand. Share is either shown by share certificate or
company i.e. shareholders are called owned capital. they remain in the form of demat share.
It is also called ownership capital. Retained earnings
(5) Value of a share : The value of a share is
also called ploughing back of profit is considered
expressed in term of money. It may be expressed in
as another form of owned capital. Ploughing back
three ways, viz. –
of profit is nothing but reinvestment of profit in
(a) Face value : The face value of share is
the business by the company itself. It is an internal
mentioned in the Memorandum of Association and
source of finance and considered as a permanent
on the share itself.
capital. It provides initial source of capital for a new
company. Retained earnings although it is a form of (b) Issue price : Issue price is the price at which
owned capital, it is available to the company at a company sells or issues its shares.
later stage when the company starts earning profit (c) Market value : It is the value of share which
at high rate. is determined by demand and supply forces in the
share market. At this value shares are sold in the
2.1.1 Shares :
(i) Meaning : The total capital of a company stock exchange.
when divided into large number of small parts of (6) Rights : Share enables its shareholders to
equal face value, each such part is called a share. have certain rights such as right to receive divi-
According to the Section 1(84) of the Companies dend, right to attend shareholders’ meetings and to
Act 2013, “Shares means a share in the share vote at such meetings, to inspect statutory books,
capital of a company and includes stock.” etc.
(ii) Features : (7) Income : Shareholder is given a share in the
(1) Meaning : A share is the smallest indivisible net profit earned by the company which is called
unit of the total capital of a company. dividend.
(2) Ownership : A person who purchases (8) Transferability : The shares issued by the
and owns the shares is called shareholder. The public company are freely transferable as per the
ownership of the shareholder in a company provisions made in the Articles of Association of
reflected in the share. the company.

(9) Property of shareholder : Shares are (10) Kinds of shares : A company can issue two
treated as movable property of the shareholder. types of shares viz. equity shares and preference
shares.
(iii) Kinds of Shares : The different kinds of shares are shown in the following chart :
Shares
(A) Equity Shares (B) Preference Shares
(1) Equity Shares with normal voting right. (1) Cumulative Preference Shares.
(2) Equity Shares with differential voting right. (2) Non-cumulative Preference Shares.
(3) Participating Preference Shares.
(4) Non-participating Preference Shares.
(5) Convertible Preference Shares.
(6) Non-convertible Preference Shares.
(7) Redeemable Preference Shares.
(8) Irredeemable Preference Shares.
(A) Equity Shares : (3) Rights :
(i) Meaning : The equity shares are those shares (i) Right to vote is the basic right of the equity
which do not have preference to receive dividend shareholders through which they elect directors,
and have no priority for repayment of capital amend Memorandum of Association and Articles
at the time of liquidation of the company. The of Association.
equity shares are also called ordinary shares. The (ii) Equity shareholders have right to share profit
Companies Act, 2013 defines equity shares as, whenever it is distributed in the form of dividend.
“those shares which are not preference shares.” (iii) They have right to inspect all statutory books
The equity shareholders are the owners of the of the company.
company and bear ultimate risk connected with the (iv) They have right to transfer its shares to
ownership. So, equity share capital is also known another person by following the procedures laid
as Venture Capital or Risk Capital. The owners of down in the Articles of Association of the company.
equity shares are real risk bearers. (4) No preferential right : Equity shareholders
(ii) Features of Equity Shares : do not have preferential right to receive dividend
and have no priority in receipt of capital amount
(1) Permanent capital : The equity share
in the event of winding up of the company. Their
capital is permanent and long-term capital of the
claims are entertained only after settlement of
company. The equity shares are not redeemable i.e.
claims of preference shareholders.
non-refundable during the life time of the company.
The amount of these shares are repaid only in the (5) Controlling power : Equity shareholders
event of dissolution of the company or if company are the owners of and the real masters of company
decides to buyback its shares. and hence controlling power of the company is
(2) Fluctuating dividend : The rate of dividend vested in them. They elect the Board of Directors
payable to equity shareholders is uncertain and to look after the management of the company. They
fluctuating. It depends upon the quantum or size of have right to vote on all the matters discussed in
profit company earns. If company earns high profit the meeting.
it pays dividend at high rate. If there is insufficient (6) Risk : Equity shareholders bear the
profit or no profit, dividend may be paid at lesser maximum risk associated with the company. If
rate or may not be paid. company’s earnings fall, equity shareholders get

dividend at very low rate which in turn declines the holders have right to vote in the meeting on any
market value of shares. This results into capital loss issue in proportion to their shareholdings.
to equity shareholders. Thus, equity shareholders (2) Equity shares with differential voting
are real risk takers of the company. right : This is the type of equity shares in which their
(7) Residual claimant : A residual claim implies holders have varying (differential) rights in respect
the last claim on the earnings of the company which to dividend, voting or otherwise in accordance
is left over after the payment of taxes, expenses, with Rule 4 of the companies (Share Capital and
interest, dividend, etc. The equity shareholders Debentures) Rules 2014. The company may either
have benefits of receiving entire earnings that is left issue such type of shares with limited voting rights
after paying all dues and expenses. or no voting rights. The holders of such equity
(8) No charge on assets : Unlike secured shares may receive extra rate of dividend, if any.
debentures, equity shares have no charge on the (B) Preference Shares :
assets of this company. (i) Meaning : The type of shares which carry
(9) Bonus issue : Bonus shares are issued free certain preferential rights distinct from the rights of
of cost i.e. gift to the existing shareholders by the equity shareholders with regard to (i) a preferential
company out of retained or accumulated profits. right to receive dividend at fixed rate during the
Bonus shares are issued in specific proportion of lifetime of the company and (ii) a preferential right
the shares held by them. as to receive the entire amount of capital at the time
(10) Right issue : Whenever a company makes of liquidation of the company.
fresh issue of shares to raise additional funds to (ii) Features :
finance expansion or modernisation of business, (1) Preference for dividend : Out of the
the existing equity shareholders are given ‘right’ i.e. available divisible profit, the dividend is paid first
first to buy those shares in proportion to shares to preference shareholders before it is paid to any
held by them. This is called ‘Right issue’. other type of shareholders.
(11) Face value : The face value of equity shares (2) Preference for repayment of capital : In
is very low. Usually it is ` 10/- per share or even the event of liquidation of the company, preference
` 1/- per share. shareholders have right to receive capital amount
(12) Market value : The market value of equity before it is paid to equity shareholders. This right
shares always fluctuates in the stock exchange. saves preference shareholders from capital loss.
When company earns huge profit, the market value (3) Fixed return : The preference shareholders
of equity shares increases. Conversely, if company get dividend at predetermined fixed rate only out of
incurs loss, the market value of shares declines. profit. If company unable to earn sufficient profit,
Due to fluctuating market value, equity shares are the preference shareholders except cumulative
traded on stock exchange and are more appealing preference shares, looses the claim for dividend.
to the speculators. (4) Nature of capital : The preference shares
(13) Capital appreciation : Prosperity and high provide capital for fixed period of time and not
profit earning capacity of the company increase for life time of the company. Preference shares are
reputation of the company in the share capital redeemed after fixed (determined) period is over.
which in turn appreciate market value of the Preference shares capital is considered as safe
shares. Increase in the value of equity shares result capital and reinter capital.
into capital appreciation. (5) Market value : The market value of
• Types of Equity Shares : The equity shares preference shares do not change because the rate
are broadly classified into two categories viz., of dividend payable on them is always fixed.
(1) Equity shares with normal voting right : (6) Voting rights : The preference shareholders
This is the type of equity shares in which their do not enjoy normal voting rights. They have voting

rights only on those matters which directly affect (2) Non-cumulative Preference Shares : The
their interests. type of preference shares in which shareholders get
(7) Risk : The cautious investors usually invest dividend only when company earns profit is called
their holdings in preference shares because these non-cumulative preference shares. If company
shares provided safety to capital and steady and incurs loss, the right of these shareholders to claim
regular income flow to them. During the period dividend lapses.
of depression, these shares become a boon for (3) Participating Preference Shares : The
shareholders. preference shares in which shareholders have right
(8) Face value : The face value of preference to receive regular fixed dividend and also have right
share is very high in comparison to equity shares to participate in the surplus profit left after paying
i.e. ` 100/- per share. dividend to equity shareholders up to certain limit,
(9) Right or bonus issue : Unlike the equity are called participating preference shares.
shareholders, preference shareholders are not (4) Non-participating Preference Shares : The
entitled to get right shares or bonus shares, if they type of preference shares in which shareholders
are issued by the company. have a right to receive only dividend at fixed rate
(10) Nature of investors : The moderate type are called non-participating preference shares.
of investors who are cautious and conservative (5) Convertible Preference Shares : Conver-
usually make investment in preference shares. tible preference shares are those in which holders
(iii) Types of Preference Shares : The different are given right to convert their holdings into equity
types of preference shares are shown in the shares within a certain fixed period.
following chart :
(6) Non-convertible preference shares : The
Cumulative and preference shares which cannot be converted into
Non-cumulative equity shares are called non-convertible preference
Preference Shares shares.
Participating and (7) Redeemable Preference Shares : The

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

profits or retained earnings. By issuing bonus shares is repaid after fixed period of time. The different
to the existing equity shareholders in proportion sources of borrowed capital are as follows :
of their shareholdings free of charge, a company
Issue of debentures
can convert retained earnings into capital. This is
called Ploughing Back of Profit or Capitalization
of Profit. In short, ‘the process of accumulating Accepting deposits
Borrowed
corporate profits and their utilisation in business Capital
is called retained earnings. Sources Issue of Bonds
(ii) Determinants of retained earnings :
(1) Total earnings of company : If there is large
Borrowing loans from
profit, company can save and retain more amount
banks and other financial
of such profit. It is also subject to attitude of the institutions
top management to determine the size of retained
2.2.1 Debentures :
profits.
(2) Taxation policy : If the taxes are levied (i) Meaning :
at high rate by the government, there will be less The word ‘debenture’ is derived from Latin
savings and resultant size of retained profits will be word ‘debere’ which means to ‘owe’. Accordingly
low and vice versa. debenture is a loan borrowed by a company by
(3) Dividend policy : If the company follows issuing a debenture certificate under its common
conservative dividend policy, more amount of profit seal. According to Palmer, “A debenture as an
can be saved and retained. But this may create instrument under seal evidencing debt, the
dissatisfaction among the shareholders. essence of it being admission of indebtedness.”
(4) Government control : The company is (ii) Features :
required to formulate its dividend policy in tune with (1) Promise : The debenture is a written
the rules and regulations framed and prescribed by promise given by the borrowing company that it
the Government. This has great impact on the size owes certain specified sum of money.
of retained earnings. (2) Face Value : The face value of debenture
is usually of high denomination, e.g. ` 100 or
2.2 Sources of Borrowed Capital :
multiples of ` 100.
To supplement its owned capital, a company
(3) Time of repayment : Usually repayment
is required to borrow funds from the available
date is specified on the debenture certificate. The
sources. A company can raise borrowed capital if
principal amount of debenture is refunded on due
it is authorised by Memorandum of Association.
date.
Articles of Association of the company makes
(4) Priority of repayment : The capital of
provisions as to how and by whom such power of
debenture is repaid before making payment of
borrowings should be exercised. A private company
dues to other claimants.
exercises this power immediately after receiving
(5) Assurance of repayment : The debentures
Certificate of Incorporation. However, a public
are long-term debts which carry assurance of
company exercises this power only after obtaining
repayment on the maturity date.
Certificate of Commencement of Business. The
borrowed capital is raised to fulfil short, medium (6) Interest : The debentureholders are entitled
or long-term financial needs of the company at to receive interest at agreed rate at fixed intervals.
later stage of company’s business. Interest at fixed It is a fixed liability of the company to pay interest
rate is paid on borrowed capital. Borrowed capital whether it makes profit or not.

(7) Parties to debentures : There are three (10) No voting right : A debentureholder being
parties to debentures viz. (i) The company, an a creditor of a company, does not have any voting
entity borrowing loan. right at the general meeting of the company. (Section
(ii) The Debenture Trustee appointed by the 71 (2) of the Companies Act, 2013,)
company if it offers debentures to more than 500 (11) Security : The debentures are usually
people. secured by a fixed or floating charge on the property
(iii) Debentureholders, the investors who of the company.
provide loan to the company. (12) Issuers : The public company as well as
(8) Authority to issue debentures : In the case private company can issue debentures to the public
of company, the Board of Directors is the right at large.
authority to issue debentures (Section 179 of the (13) Listing : The debentures must be listed on
Companies Act, 2013). at least one recognised stock exchange.
(9) Status of debentureholder : As debenture
(14) Transferability : The debentures are freely
holder provides loan to the company, he is called
transferable documents.
creditor of the company.
(iii) Types of Debentures : The different types of debentures are shown in the following chart :
Debentures
On the Basis On the Basis On the Basis On the Basis

of Security of Transfer of Repayment Conversion
(1) Secured and (3) Registered and (5) Redeemable and (7) Convertible and
(2) Unsecured (4) Bearer (6) Irredeemable (8) Non-convertible
Debentures Debentures Debentures Debentures
The different types of debentures are explained (4) Bearer debentures : The debentures on
as follows : which the name of the holders are not recorded
(1) Secured debentures : The debentures are called bearer debentures. The company does
which are secured by creating fixed or floating not keep record of bearer debentures. These
charge on the property of the company are called debentures are transferable by mere delivery.
secured debentures. (5) Redeemable debentures : The debentures
(2) Unsecured debentures : These debentures which are refundable after the specific period of
are not covered by any charge on any assets of time is over are called redeemable debentures.
the company. The Companies Act, 2013 is now The amount of debentures is paid on maturity
prohibited the companies from issuing unsecured date either in lumpsum or in instalment which is
debentures. mentioned in Trust Deed.
(3) Registered debentures : The debentures (6) Irredeemable debentures : The debentures
on which the name of the holders are recorded which are not repayable during the lifetime of the
and the same are recorded in the register of company are called irredeemable debentures.
debentureholders are called registered debentures. These debentures are redeemed after the winding
These debentures are transferred through transfer up of the company or when there is breach of any
deed. condition or due to some other contingencies.

(7) Convertible debentures : The debentures type of formal contract between issuer company
which give rights to their holders to convert their and bond holder to repay borrowed money along
debentures into equity shares at a particular rate of with interest to the bond holder by a company.
exchange after a specific period of time are called As bond holder provides loan, he is therefore a
convertible debentures. lender or creditor of the company. Every bond has
maturity date. Interest is payable on bond either at
(8) Non-convertible debentures : The deben-
fixed interval or on maturity date.
tures which cannot be converted into equity shares
According to Webster’s Dictionary, “A bond
are called non-convertible debentures.
is an interest bearing certificate issued by the
2.2.2 Acceptance of Deposit : government or business firm, promising to pay
• Introduction : Public deposit is one of the the holder a specific sum at a specified date.”
important sources of short-term finance required (ii) Features :
by the company. Any amount in the form of fixed (1) Nature of finance : Bond provides long-
deposit received by the company from the general term debt finance. The bonds are issued for longer
public for the period ranging from 6 months to period say for 5 years, 10 years, 25 years, 50 years,
36 months (i.e. 3 years) is called public deposit. etc.
Whenever company needs short-term finance, it (2) Status of bondholder : The bondholders
invites public to deposit their savings or surplus are the lenders or loan creditors of the company.
idle money with the company for varied period. The They are not the owners of the company and hence
company issues Deposit Receipt and pays interest cannot vote in the meeting and participate in the
at fixed rate on such deposits. The deposits may management of the company.
be either secured or unsecured loan given to the (3) Return on bonds : The bondholders are
company. entitled to get interest at fixed rate either at regular
• Meaning : According to Section 2(31) of the interval or on maturity date.
Companies Act, 2013, “Deposit’ includes any (4) Repayment : Every bond has specific
receipt of money by way of deposit or loan or in maturity date. On the maturity date, principal
any other form by a company, but does not include amount of bond is paid along with interest (if not
such categories of amount as may be prescribed paid periodically).
in consultation with the Reserve Bank of India.”

2.2.4 American Depository Receipt (ADR)
However according Rule 2(1) (c) of Companies
and Global Depository Receipt (GDR) :
Due to adoption of free economic policy and
(Acceptance of Deposit) Rules 2014, deposit
globalisation, the shares of an Indian company can
does not include any amount received : (i) from
be listed and traded on foreign stock exchanges
the Central Government or a State Government
like NYSE or NASDAQ. For this, a company is
(ii) as loan from any banking company (iii) from
required to comply with complicated, rigid and
foreign government or international banks (iv) by
lengthy procedure and policies. By avoiding such
a company from any other company (v) by issuing
complicated policies, an Indian company can get
commercial paper (vi) by issue of bonds (vii) in
their shares listed on foreign stock exchanges
trust and (viii) by way of subscriptions to any
indirectly using Global Depository Receipt
shares or debentures.
(GDR) and American Depository Receipt (ADR).
2.2.3 Bond : Both GDR and ADR are Dollar/Euro dominated
(i) Meaning : A bond is a debt security issued by instruments traded on foreign stock exchanges.
the government or business firm, to acknowledge Both are depository receipts and each receipt
the debt borrowed by them from the public. It is contains fixed number of shares.
2/Secretarial Practice Digest : Std. XII E0308

Depository Receipts which are traded in USA this account. This is a temporary loan on which
are called ADRs and Depository receipts which bank charges interest on the actual amount over-
are traded in all foreign countries except USA are drawn.
called GDRs. The Depository Banks issue GDRs (2) Cash credit : Cash credit is similar to
and ADRs to investors against Indian companies overdraft. The borrower is allowed to withdraw
shares. By using regular equity trading account, required amount from this account (specially
Non-Resident Indians (NRI) and foreign nations can opened and certain amount is credited to this
invest their money in Indian companies by buying account by the bank) up to the limit sanctioned by
ADRs and GDRs. Indian company pay dividend the bank. The cash credit limit is determined on
after its declaration to Depository bank in home the basis of security offered. Bank charges interest
currency and then Depository banks pay such on the amount actually withdrawn.
dividend to investors in their currency. GDRs are (3) Cash loan : It is arrangement by which the
traded on London Stock Exchange, Luxembourg bank advances certain amount against securities
Stock Exchange, NASDAQ Dubai, Singapore Stock pledged. Under this arrangement, the loan amount
Exchange and Hongkong Stock Exchange. is directly credited to a separate loan account of the
2.2.5 Commercial Bank : borrower. It is granted for a fixed period. Interest
(i) Meaning : The commercial banks by is charged by the bank on the actual outstanding
introducing different types of deposit schemes balance.
provide finance to fulfil financial needs of individual (4) Discounting bills of exchange : The bills
depositors, mobilise savings of the community and of exchange is also called trade bills. The bank
channelise these funds to meet varied financial advances cash against bills of exchange. If drawer
needs of corporate enterprises. Commercial banks (i.e. creditor) needs funds before due date, he can
help corporate enterprises (i) by giving term loans discount the bill with the bank. Discounting of
to companies, (ii) by purchasing their shares and bill means selling the bill to the bank for certain
debentures and (iii) by underwriting the issue amount slightly less than its face value. Thus, bank
of securities of the company. Commercial banks provides finance against the security of bill.
provide short-term finance in the form of bank 2.2.6 Financial Institutions :
credit and trade credit to fulfil the need of working • Meaning : Immediately after independence,
capital of the business. i.e. in 1948, the Government of India had declared
(ii) Innovative schemes for disbursement of first industrial policy to bring about rapid industri-
credit : al development in the country. To provide medium
(1) Overdraft : Overdraft is an arrangement by term and long-term finance to industry, the Gov-
which a company having current account is allowed ernment of India had established special financial
to overdraw (withdraw more) up to a certain limit institutions in the country. The financial assistance
sanctioned by the bank. Within this predetermined provided by these institutions helps new compa-
limit, any number of withdrawals are permitted. nies and on going concerns to considerable extent.
Repayment may be made by depositing cash into
•The classification of financial institutions is as follow :
Financial Institutions in India
(1) Development (2) Financial (3) Investment (4) State Level

Banks Institutions Institutions Institutions
RCTC TDICI TFCI LIC UTI GIC SFC SIDC
IDBI IFCI ICICI SIDBI IRBI

(1) Development Banks : i(ii) Underwrite (giving guarantee to sell) the
(1) Industrial Development Bank of India (IDBI) issue of securities issued by the company.
(2) Industrial Finance Corporation of India Ltd. (iii) Lend money whenever required.
(IFCI) (iv) Give guarantee for the term loans borrowed
(3) Industrial Credit and Investment Corporation by the company.
of India (ICICI) 2.2.7 Trade Credit :
(i) Meaning : Trade credit is one of the
(4) Small Industries Development Bank of India
major sources of short-term finance to the
(SIDBI)
business organisations. Trade creditors include
(5) Industrial Reconstruction Bank of India
manufacturers, producers, suppliers of goods and
(IRBI)
materials, wholesalers, etc. Usually trade creditors
(2) Financial Institutions :
sell goods and materials to other business
(1) Risk Capital and Technology Finance organisations on the basis of deferred payment i.e.
Corporation Ltd. (RCTC) the payment to be made in future. Credit period is
(2) Technology Development and Information granted or extended by trade creditors to expand
Company of India Ltd. (TDICI) their sales. The credit period is also extended
(3) Tourism Finance Corporation of India Ltd. because of custom.
(TFCI) Trade credit means the facilities in which the
(3) Investment Institutions : business firm who purchases goods on credit
(1) Life Insurance Corporation of India (LIC) is permitted to delay the payment. It does not
(2) Unit Trust of India (UTI) mean cash loan. Trade credit is more important
in distributive trade. The small retailers mostly
(3) General Insurance Corporation of India
get trade credit from suppliers or manufacturers.
(GIC)
This is easy type of credit which may be obtained
(4) State Level Institutions :
without preparing and signing any debt instrument.
(1) State Finance Corporations (SFC)
It is easily made available and is cheap method
(2) State Industrial Development Corporation of financing. In trade credit, usually grace period
(SIDC) of 30 days or more is allowed to make payment
All these financial institutions provide finance in of credit sale. If the bill is paid within very short
the form of term loans. They : period i.e. 10 days or 15 days, trade creditors give
ii(i) Purchase shares and debentures of the some discount. The terms of credit are easier and
company. soft.
EXERCISE
(a) Bondholders (b) Equity Shareholders
1 Select the correct answer from options
(c) Debentureholders
given below and rewrite the statement :
(4) participate in the management of their
(1 mark each)
company.
* [1] (a) Preference Shareholders (b) Depositors
(1) is a smallest unit in the total share (c) Equity Shareholders
capital of the company. (5) shares are issued free of cost to
(a) Debenture (b) Bonds (c) Share existing equity shareholders.
(2) The benefit of Depository Receipt is ability to
(a) Bonus (b) Right (c) Equity
raise capital in market.
(6) The holder of preference shares has right to
(a) national (b) local (c) international
receive rate of dividend.
(3) are residual claimants against the
income or assets of the company. (a) fixed (b) fluctuating (c) lower

(7)
Accumulated dividend is paid to (10) A shareholder is entitled to receive as
preference shares. return on investment.
(a) redeemable (b) cumulative (a) dividend (b) interest (c) discount
(c) convertible Ans. (1) interest (2) equity shares (3) internal
(8) The holder of preference shares have (4) creditor (5) six (6) 36 (7) U.S.A. (8) equity
right to convert their shares into equity shares. (9) fluctuating (10) dividend.
(a) cumulative (b) convertible [3]
(c) redeemable (1) A company must issue shares.
(9) Debentureholders are of the company. (a) preference (b) bonus (c) equity
(a) creditors (b) owners (c) suppliers (2)

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

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

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

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

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

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

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

shareholders in a company is called owned capital. * (4) Overdraft :
The owned capital consists of equity share capital, Ans. Overdraft is an arrangement by which
preference share capital, reserves and surplus.
a company is allowed to overdraw i.e. withdraw
Retained earnings is an important form of owned
money in excess of available balance, up to a certain
capital. Retained earnings refer to reinvestment of
credit limit sanctioned by the bank. Within this
profit in the business by the company itself. It is
predetermined limit, any number of withdrawals
also called ploughing back of profit.
are allowed. Repayment may be made as and when
(2) Owned capital is considered as permanent
cash is deposited during the time period. Overdraft
capital because, it is refunded only at the time of
facility is given by the bank to the company having
liquidation of the company. Owned capital supplies
current account. This is a kind of temporary
initial source of capital for newly established
loan on which the bank charges interest on the
company. Owned capital can be raised later on by
actual amount overdrawn. The overdraft facility is
the new company after its establishment to fulfill
extended on the basis of collateral security of goods
additional capital needs. Retained earnings though
or sometimes even on the personal security of the
it is a form of owned capital made available to the
customer.
company when it runs its business profitably in
later years during its existence. * (5) Trade Credit :
* (3) Ploughing Back of Profit : Ans. (1) For survival and growth of business
Ans. (1) In many companies, during the period enterprise, credit sale of goods is must. Business
of high profit, management does not distribute cannot run on continuous basis without credit sale.
the entire profit in the form of dividend among Credit is treated as soul of business. Trade credit
its shareholders. Prudent (sensible) management is one of the major sources of short-term finance
retain part of the profit every year to be used in to the business enterprises. Trade creditors mean
the future for meeting the financial needs and to and include manufacturers, producers, suppliers
overcome the downswing in the business cycle. of goods and materials, wholesalers, etc. Usually,
A part of the net profit which is not distributed trade creditors sell tangible goods and materials
as dividend to shareholders and retained by the to other business firms on the basis of deferred
company in the form of different types of reserve payment i.e. the payment to be made in future.
funds is called retained profits on retained earnings. Thus, credit period is granted or extended by the
(2) A company can make use of retained profits trade creditors with the main objective to expand
subject to certain rules. The practice of using such sales. The period of trade credit also extended by
retained profit in the business is called ‘ploughting the business firms due to custom i.e. long standing
back of profit’ or ‘self financing’. By issuing practice developed over long period of time.
bonus shares to the existing equity shareholders
(2) Trade credit refers to the facilities by which
in proportion of their shareholdings free of cost,
business firms who purchase goods or materials
a company can convert the retained profit into
on credit basis are permitted to delay payment for
a capital. This is called ploughing back of profit
goods or materials they have bought. Trade credit
or capitalisation of profit. It is a simple and the
does not mean cash loan. It is an outcome of credit
cheapest method of raising finance. It is one of
sale of goods or services. In such credit sale, the
the important sources of internal financing. It is,
payment has been postponed to future date or
however, used by developed and well established
delay the payment.
company.

(6) Bond : (2) Mr. Satish is a speculator. He desires to
Ans. (1) Bond is a debt security issued by the take advantage of growing market for company’s
government or business enterprise, to acknowledge product and earn handsomely.
the money borrowed by them from the public. It is (a) According to you which type of share
a type of formal contract between the bondholder Mr. Satish will choose to invest?
and the issuer company to repay borrowed money (b) What does he receive as return on
along with interest to bond holder by the company investment?
after predetermine period is over. The Bondholder
(c) State any one right which he will enjoy as
is a loan provider and he is therefore, called lender
a shareholder.
or creditor of the company. He is entitled to receive
Ans. (a) In my opinion, Mr. Satish should choose
interest as returns on his investment in bond.
to invest in equity shares issued by the company.
(2) Every bond has maturity date and entire
(b) He receives dividend as return on the
amount of bond is paid on maturity along with
investment in shares.
interest, if it is not paid periodically. The bond-
(c) As a shareholder, he has right to cast vote
holders provides long term finance say for 5 years,
in proportion to his shareholdings. By exercising
10 years, 25 years, 50 years, etc. They get interest
of fixed rate. It is payable either at regular interval voting right he can participate in the management
or on maturity. According to Webster Dictionary, and affairs of the company. He is allowed to vote
“A bond is an interest bearing certificate issued on all matters discussed at the general meeting. He
by the government or business firm, promising to enjoys control over the company.
pay the holder a specific sum at a specified date.” (3) Mr. Rohit, an individual investor, invests
his own funds in the securities. He depends on
* 11 Study the following/situation and express investment income and does not want to take
your opinion : (3 marks each) any risk. He is interested in definite rate of
income and safety of principal.
(1) The Balance Sheet of A Donald Company
for the year 2018-19 reveals equity share capital (a) Name the type of security that Mr. Rohit
of ` 25,00,000 and retained earnings of will opt for.
` 50,00,000. (b) What does he receive as return on his

investment?
(a) Is the company financially sound?
(c) The return on investment which he
(b)
Can the retained earnings be converted
receives is fixed or fluctuating?
into capital?
Ans. (a) Mr. Rohit should opt for preference
(c) What type of source retained earnings is?
shares issued by the company.
Ans. (a) A Donald Company is financially
(b) Mr. Rohit would receive dividend as return
sound. This is because retained earnings is double
on his investment.
of equity share capital.
(c) The return on investment which Mr. Rohit
(b) The retained earnings can be converted receives is fixed.
into share capital by issuing bonus shares to
equity shareholders in specific proportion of their
holdings.
(c) Retained earnings is an internal source of
raising long-term finance.

12 Distinguish between the following : (4 marks each)
* (1) Equity Shares and Preference Shares :
Ans.
Equity Shares Preference Shares

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

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

3. Status
A share is an ownership security. A shareholder A debenture is a creditorship security. A debenture-
is the owner of the company. The share capital is holder is a creditor of the company. The capital
owned capital. raised by issue of debenture is called loan capital or
borrowed capital.
4. Voting Rights
Equity shareholders have a right to receive notices Debentureholders, being the creditors, have no
of general meetings, to vote in such meetings and to right to receive notices of general meetings, no right
participate in the management of the company. to vote in such meetings nor to participate in the
management.
5. Return on investment
The income or monetary return on shares is called The income or monetary return on debentures
dividend. The rate of dividend is fluctuating except is called interest. The rate of interest is fixed
in the case of preference shares. irrespective of profit or loss made by the company.
6. Security
Shares are not secured against any asset of the Debentures are usually secured by creating fixed or
company. Share capital is unsecured capital. floating charge against the assets.
* (3) Owned Capital and Borrowed Capital :
Ans.
Owned Capital Borrowed Capital
1. Meaning
The funds collected by a company through issue The funds collected by a company through the issue
of ownership securities such as equity shares and of loan securities such as debentures, accepting
preference shares and ploughing back of profit are public deposits and borrowing from the banks and
called owned capital. other financial institutions are called borrowed
capital.
2. Return on investment
The contributors to the owned capital get dividend The contributors to the borrowed capital get
as the return on their investment. Except preference interest as the return on their investment. The rate
shares rate of dividend is fluctuating. of interest is fixed.
3. Status of supplier
The contributors to the owned capital are the co- The contributors to the borrowed capital are the
owners or the joint owners of the company. creditors of the company.
4. Voting Rights
The contributor to the owned capital has a right to The contributor to the borrowed capital has neither
vote at the general meetings on all the matters also any right to vote at the general meeting nor any
has right to participate in the management of the privilege to participate in the management of the
company. company.
5. Repayment of capital
Repayment or redemption of the owned capital Repayment or redemption of the borrowed capital
is made only at the time of the winding-up of the is made on the maturity or redemption date.
company.

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

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

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

“deposit includes any receipt of money by way of are traded in all foreign countries except USA are
deposit or loan or in any other form by a company, called GDRs.
but does not include such categories of amount (4) Intermediary who buys shares of Indian
as may be prescribed in consultation with the Companies for trading in foreign countries is called
Reserve Bank of India.” ‘Depository’. The foreign banks such as Bank
(4) The definition is further explained in detail of New York. Citi group, etc. act as Depository.
by Rule 2 (1) (c) of the companies (Acceptance The Depository Banks issue GDRs and ADRs to
of Deposits) Rules 2014 as ‘deposit’ means any investors against Indian companies shares. The
receipt of money in the form of deposit or loan Depository Receipts are then listed on foreign stock
accepted by a company. exchanges and are traded like ordinary shares. By
(5) However, deposit does not include any using regular equity trading account, Non-Resident
amount received from (i) Central Government Indians (NRI) and foreign nationals can invest their
or a State Government (ii) as loan from any surplus money in India by buying ADR and GDR.
banking company (iii) from foreign government or (5) The Indian companies pay dividend after its
international banks (iv) from any other company declaration to depository bank in home (Indian)
(v) by issuing commercial paper (vi) by issue of currency and then depository bank converts it into
bonds (vii) in trust and (viii) by way of subscription the currency of the investors and pay such dividend
to any shares or debentures. to them.
The stock exchanges on which GDR is traded
* (2) What is Global Depository Receipt?
are : (i) London Stock Exchange (ii) Luxembourg
Ans. (1) The shares of public company in Stock Exchange (iii) NASDAQ Dubai, (iv) Singapore
India are now listed and traded on different Stock Exchange and (v) Hongkong Stock Exchange.
stock exchanges such as Bombay Stock Exchange
* (3) What is Trade Credit?
(BSE) and National Stock Exchange (NSE). Due to
globallsation and adoption of free economic policy Ans. (1) For survival and growth of business
by the Government of India, shares of an Indian enterprise, credit sale of goods is inevitable.
company can be listed and traded on various share Business cannot run on continuous basis without
markets on foreign stock exchanges like New York credit sale. Credit is treated as soul of business.
Stock Exchange (NYSE) or National Association of Trade credit is one of the major sources of short-
Securities Dealer Automated Quotation (NASDAQ). term finance to the business enterprises. Trade
(2) In order to list the shares on foreign creditors mean and include manufacturers,
stock exchanges, a company has to comply with producers, suppliers of goods and materials,
complicated, rigid and lengthy procedure and wholesalers, etc.
policies. By avoiding such complicated policies, an (2) Usually, trade creditors sell tangible goods
Indian company can get their shares listed on foreign and materials to other business firms on the basis
stock exchanges indirectly using Global Depository of deferred payment i.e. the payment to be made in
Receipt (GDR) and American Depository Receipt future. Thus, credit period is granted or extended
(ADR). by the trade creditors to the borrower with the
(3) GDR and ADR are Dollar/Euro denominated main objective to expand sales. The period of trade
instruments traded on stock exchanges of foreign credit also extended by the business firms due to
countries. Both GDR and ADR are Depository custom i.e. long standing practice developed over
Receipts and each depository receipt contains long period of time.
fixed number of shares. They represent claims of (3) Trade credit refers to the facilities by which
shares noted thereon. Depository Receipts which business firms who purchase goods or materials
are traded in USA are called ADRs and which on credit basis are permitted to delay payment for

goods or materials they have bought. Trade credit limit sanctioned. The limit of the cash credit is
does not mean cash loan. It is an outcome of credit sanctioned against pledge or hypothecation of goods
sale of goods or services. In such credit sale, the or on the basis of alternative securities given. Bank
payment has been postponed to other traders to charges interest on the amount actually withdrawn
delay the payment. or outstanding amount borrowed and not on the
(4) Usually, small retailers rely on getting trade entire credit limit sanctioned.
credit from suppliers to a great extent. Trade credit (3) Cash Loan : Loan is an arrangement by
is an easiest and cheapest method of credit which which the bank advances an amount against
can be raised or obtained without making any certain securities. Under this arrangement, the
agreement or signing any document. It is considered loan amount is directly credited to a separate loan
as free cost source of finance. account in the name of borrower by the bank. It is
(5) Trade creditors i.e. manufacturers, granted for a fixed period. Interest is charged by
wholesalers or suppliers allow 30 days or more to the bank on the actual balance outstanding.
their customers for making payment of bill amount. (4) Discounting Bills of Exchange : The bills of
They also offer cash discount if their customers exchange is also called trade bills. The bank advance
make payment within a short period say 10 days the cash against bills of exchange. The drawer (i.e.
or 15 days from the date of delivery of goods. creditor who draws the bills of exchange) receives
the amount of bill from drawee (i.e. a debtor on
The terms and conditions of trade credit are very
whom bill is drawn) on the due date or after the due
lenient. It is readily available if goods or services
date. If drawer needs funds before the due date of
are purchased on credit in bulk.
the bill, he can discount the bill with bank and gets
* (4) What are the schemes for disbursement
funds immediately to finance business activities.
of credit by the bank?
Discounting a bill of exchange means selling the bill
Ans. The different schemes for disbursement of
to the bank before its due date for certain amount
credit by the bank are explained as follows :
which is slightly lesser than its face value. The
(1) Overdraft : Overdraft facility is given by
difference between face value of the bill and actual
the bank to the company having current account.
amount received from bank on discounting bill is
Overdraft is an arrangement by which a company
called ‘discount’.
is allowed to overdraw i.e. withdraw money
Discount is nothing but the interest charged
in excess of available balance up to a certain
by the bank for advancing loans against bill of
credit limit sanctioned by the bank. Within this
exchange.
predetermined limit, any number of withdrawals
(5) State the features of bonds.
are allowed. Repayment may be made as and
Ans. The features of bonds are as follows :
when cash deposited during the time period. This
(1) Nature of finance : Bond is a debt security.
is a kind of temporary loan on which the bank
It is a debt or loan finance. The Bondholders
charges interest on the actual amount overdrawn.
provide long-term finance to the company. Usually,
The overdraft facility is extended on the basis of
company issues bonds for longer periods such as
collateral security of goods or sometimes even on
5 years, 10 years, 25 years, 50 years, etc.
the personal security of the customer.
(2) Status of bondholder : The company
(2) Cash Credit : Cash credit is an important
borrows money for certain fixed period and issues
mode of financial help. Cash credit is similar to
bonds as evidence of debt. Bondholder is a lender
overdraft facility and operated in similar way as
of the company. Hence, bondholders are creditors
overdraft. The borrower is allowed to withdraw
of the company. The bondholders are not the
amount from this cash credit account up to
owners of the company. So, they cannot attend and

participate in the general meetings of the company. Government at higher rate, there will be less
They do not have voting right and hence they cannot savings and consequently amount of retained profit
participate in the management of the company. will be low.
(3) Return on bonds : The bondholders are (3) Dividend policy : If the Board of Directors
entitled to receive return on their investment in the pay dividend at a lower rate by following conservative
form of interest at fixed rate. Interest on the bonds dividend policy and by transferring very large
may be either paid at regular interval or on the portion of profits to reserve, then size of the
maturity date along with principal amount. retained profit will be larger and vice versa. Paying
(4) Repayment : A bond is a formal contract dividend at lower rate, may lead to dissatisfaction
between the company and bondholder to repay the among shareholders.
borrowed money by the company. All bonds have (4) Government control : A government
maturity date. On maturity date the repayment of regulates and controls the economic system of the
principal amount along with interest (if not paid) is country. While framing the dividend policy, every
made by the company to the bondholder. firm or company has to follow policies, rules and
(6) What is Retained Earnings? What are the
regulations framed by the government. Thus,
determinants of retained earnings.
government’s control has great impact on the
Ans. [A] Meaning : (1) In many companies
retained earnings.
during the period of high profit, management
does not distribute the entire profit in the form * 14 Justify the following statements :
of dividend among its shareholders. Prudent (4 marks each)
(cautious) management retain part of the profit
(1) Equity shareholders are real owners and
every year to be used in the future for meeting the
controllers of company.
financial needs and to overcome the downswing in
Ans. (1) Equity shareholders are the joint
the business cycle. A part of the net profit which
owners of the company. They have ownership rights
is not distributed as dividend to shareholders and
in the company. They have the right to participate
retained by the company in the form of different
in the management of the company. Similarly, they
types of reserve funds is called retained profits on
have the right to vote on every resolution placed
retained earnings.
before any general body meeting of the company.
[B] Determinants of retained earnings : The
(2) Equity shareholders do not have special
determinants of retained earnings are as follows :
preferential rights either as to dividend and return
(1) Total earnings of company : If company
of capital in the event of winding-up of the company.
earns large amount of profit, it can save and retain
more amount of profit even after distribution Equity shareholders run the risk of receiving
of sufficient amount towards dividend to nothing or have the chances of earning attractive
shareholders. The size of the retained profit is also dividend at an increasing rate.
influenced by the attitude of the top management. (3) As equity shareholders accept the business
If attitude of management favours the owners, it risks in real sense, they are the real owners of the
will distribute major portion of profit as dividend company. The control of the company is vested
to shareholders. In such case, company will be able in equity shareholders. This is because they have
to save and retain less amount of profit and vice exclusive voting rights.
versa. (4) By exercising voting rights, equity
(2) Taxation policy : Taxation policy adopted shareholders elect their representatives called
by the government also has great impact on the Directors for management of the company,
corporate savings. If the taxes are levied by the amend Memorandum of Association and Articles

of Association, etc. Similarly, they can remove secured by the assets in general (floating charge).
directors from their posts on genuine grounds by The debentures are secured through Trust Deed.
exercising voting power. (4) Some debentures do not have any charge
(2) Preference shares do not carry any voting on any asset of the company. Such debentures
right. are called unsecured debentures. According to
Ans. (1) Preference shares are those which provisions made in Companies Act, 2013, now the
enjoy priority or preference over equity shares for issue of unsecured debentures is prohibited by the
Government.
the payment of dividend and repayment of capital.
(4) Retained earning is simple and cheapest
Preference shares carry a fixed rate of dividend.
method of raising finance.
(2) Because of these special rights, the preference
Ans. (1) In many companies, the management
shareholders, unlike equity shareholders, do not
does not distribute the entire profit earned during
undertake much risk. Therefore, they cannot
the financial year in the form of dividend to the
participate in the general body meetings of the
shareholders. They retain some part of it to be used
company.
in the future for meeting the financial needs and to
(3) They do not have normal voting rights like overcome the downswing in the business cycle. The
those of the equity shareholders. They have limited part of the profit which is set aside for different
voting rights in respect of those matters which purposes is called Retained Earnings.
affect their interest. (2) Retained profits or earnings refers to the
(4) If they have any problem affecting their sum total of those profits, accumulated over the
interests or if dividend is not paid to them for two years and reinvested in the business rather than
consecutive years, they can ask the company to distributed as dividend. Thus, retained earnings
convene a meeting of all the preference shareholders can be used by the company subject to certain
only and pass resolution in that meeting. rules.
(3) The debentures are secured by charge on (3) Retained profits is kept in the firm in the
the assets of the company. form of Reserve Funds. The amount of such reserve
Ans. (1) A debenture is a document issued under is made available to the business organisation free
the common seal of the company duly attested by of cost for financing different types of projects,
the authorised signatories. A debentureholder, i.e. expansion and modernisation programmes.
a person who buys the debentures of a company, is (4) The management can convert the retained
a creditor of the company. A company may borrow earnings into permanent capital which is known
loan in the form of debentures from the public. as Capitalisation of Retained Earnings by issuing
(2) Debentures being a loan, are required to bonus shares free of charge to the existing
be secured by charge on the company’s assets. To shareholders in the proportion of their holdings.
protect and safeguard the interest of debenture- Thus, retained profits is an important source
holders, debentures can be secured with some of internal financing. It is simple and cheapest
property of the company. When debentures are method of raising finance. However this source
secured with some property of the company, of financing is available to a well established and
debentureholders become tension free. On the highly profitable company.
other hands, it encourages to invest more in the (5) Public deposit is a good source of short-
company. term financing.
(3) The property or assets of the company may Ans. (1) A company collects the required
be charged as security for loan borrowed by issuing amount of capital through different sources such as
debentures. Debentures are usually secured by issue of shares, borrowing, accepting deposits from
some particular fixed asset (fixed charge) or are public, etc. Usually small part of debts capital, that
2. SOURCES OF CORPORATE FINANCE

3/Secretarial Practice Digest : Std. XII E0308 49
too for a short period, is raised through accepting (7) Trade credit is not cash loan.
deposits from general public. Ans. (1) In order to increase turnover, many
(2) The deposits accepted by the company manufacturers, wholesalers or suppliers supply or
from general public are called public deposits. sell goods, services or raw materials on credit to
The depositors provide finance to the company their customers and allow certain period of time for
by keeping their deposits with the company. The making payment. Credit sales or granting credit to
amount raised by accepting deposits is usually customers is inevitable in the present competitive
used for meeting short-term financial requirement business world. It is considered as short-term
of the working capital. financing of business funds.
(3) Under this method, general public is invited (2) Trade credit refers to the facility or credit
to deposit their savings with the company for varied extended by one business firm to other business
period. A company may accept the deposits for a firm. It may occur through the issue of Bills of
minimum period of 6 months and for a maximum exchange or may arise from delay of receipts and
period of 3 years. payments for goods sold or services performed.
(4) Because of these reasons, the acceptance of Credit is given or extended with an ultimate motive
deposits is a source of raising capital for short-term. of increasing turnover or sales.
But, it cannot be a long-term and permanent source (3) In trade credit, goods or services are supplied
of raising capital. or sold on the basis of future (deferred) payments.
(6) Bondholder is creditor of the company. Trade credit is not a cash loan. It is a facility given
Ans. (1) Bond is a debt security. When a company by one trader to other traders to delay the payment.
borrows money for long-term finance and issues a (4) Trade creditors i.e. manufacturers, whole-
certificate under its seal as acknowledgement, it salers or suppliers usually allow 30 days or more
is called Bond. Thus, bond is an interest bearing to their customers for making payment of bill
certificate issued by a government or business firm, or purchase consideration. They also offer cash
promising to pay to its holder a specified amount discount if their customers make payment of bill
after a specified period. within a short period say 10 days or 15 days from
(2) The bondholder is a creditor of the company. the date of delivery of goods. Trade credit can be
The bondholders are entitled to get fixed rate of obtained without making any agreement or signing
interest on the amount invested in the company in any document. It is readily available if goods or
the form of bonds. The rate of interest is decided services are purchased on credit in bulk. It is
and fixed at the time of issue of bonds. Interest considered as cost free source of finance.
is payable either at regular intervals or on the (8) Different investors have different
maturity. preferences.
(3) Interest payable to the bondholders is a fixed Ans. (1) The person who invests money or
charge and an item of direct expenditure of the capital in an enterprise or in securities with the
company. It is paid compulsorily by the company expectation of profit or of earning regular income
even if profit is not earned. As the bondholders in the form of interest is called investor. The term
are non-owners of the company, they have no right securities include, shares, debentures, bonds,
to attend general meetings and participate in the Fixed Deposit Receipts (FDRs), etc. The different
management through voting. investors have different preferences liking, etc.
(4) The bondholders are not entitled to get They have different opportunities to invest their
dividend from the company, because dividend is a funds in different types of securities.
part of distributable profit of the company and it is (2) There is direct relationship between the risk
paid only to the owners i.e. shareholders. Hence, undertaken and its rewards in the form of profits or
bondholders are not the owners of the company. incomes. Higher the risk undertaken, greater will be

the profit or income and vice versa. The investors claims to other investors, equity shareholders will
who want to undertake risk in the investment prefer not get anything. They have to suffer capital loss.
to invest in equity shares. Investment in equity (2) Equity shareholders do not have guarantee
shares is risky in nature because it does not carry of getting dividend every year. They get dividend at
fixed commitment of dividend. If there is no profit, the rate recommended by the Board of Directors.
no dividend will be payable to these shareholders. The fortune of equity shareholders fluctuates with
Similarly, if there is less profit, lesser dividend will the ups and downs of the company.
be paid. If company is successful they enjoy great (3) If the company earns handsome or huge
financial rewards and if company fails the risk falls amount of profit, equity shareholders enjoy great
mainly on equity shareholders. financial rewards in the form of higher dividend.
(3) The investors who are conservative, cautious Conversely, if the company suffers heavy loss, the
and interested in safety of investment and who risk falls mainly on equity shareholders. Because
want steady returns on investment prefer to invest of these reasons, equity share capital is known as
in preference shares. These shares carry dividend venture capital or risk capital. Thus, the owners of
at fixed rate which is determined at the time of equity shares are real risk bearers.
issue. These shares are boon for the shareholders (4) Equity shareholders are described as, ‘shock
during depression period when interest rate is absorbers’ when company has financial crisis. If
continuously falling. The holders of participating the company suffers loss or its income falls, the
preference shares are entitled to participate in company forced to reduce the rate of dividend.
surplus profit besides preferential dividend. The Because of this situation, the market value of equity
holders of convertible preference shares have a shares falls down in the share market resulting into
right to convert their preference shares into equity capital loss to its shareholders. Thus investment in
shares. The holders of redeemable preference equity shares is risky.
shares get their investment money back after
* 15 Answer the following questions :
certain fixed period of time.
(4) Apart from above investment preferences, (8 marks each)
investors have options to invest their holdings in (1) What is Share and state its features ?
debentures of different types. Interest at fixed rate is Ans. [A] Meaning : The total capital of a
paid on debentures periodically. It must be paid by company when divided into large number of small
the company irrespective of fact whether it makes parts having equal value, each of such parts is
profit or incurs loss. They are usually secured by called a Share. According to the provisions made
fixed or floating charge. Investors may also prefer in Section 2(84) of the Companies Act, 2013,
to invest their fund in term deposits scheme in the ‘share means a share in the share capital of a
bank to earn fixed regular income. Thus, different company and includes stock.’ The monetary value
investors have different preferences to invest their of each part or unit is called face value of the share.
funds. Share is a small unit or unit of measurement of
(9) Equity share capital is risk capital. capital of a company e.g. a capital of ` 1,00,000
Ans. (1) Equity shareholders are the owners may be divided into 10,000 shares of ` 10 each.
of the company who bear ultimate risk associated [B] Features :
with the ownership. They are also called ‘residual (1) Meaning : A share is the smallest indivisible
claimants’ of the income and assets. This is because unit of the total share capital of a company.
as a owner after paying claims of all other investors (2) Ownership : The person who purchases
and stakeholders the remaining funds and property shares of a company is called shareholder of
belong to equity shareholders. Conversely at the that company. The shareholder is called part
time of winding-up if no fund is left after paying owner of the company. The ownership interest

of shareholders in a company is reflected in the (2) What is an Equity Share ? Explain its
instrument called share. features.
(3) Distinctive number : Unless shares are Ans. [A] Meaning : An equity share is the one
dematerialised each share is given distinct number which has no priority claim either for payment of
for identification. This distinctive numbers of dividend or for repayment of capital at the time
shares are noted in the share certificate. of winding-up of the company. Equity shares are
(4) Evidence of title : A share is not any visible also referred to as ordinary shares. Companies
item or thing. It is always shown or expressed in Act, 2013 defines equity shares as “those shares
the form of a share certificate. Even shares may which are not preference shares.” The equity
also be expressed in dematerialised form. A share shareholders often described as residual claimants
certificate is a registered document of title of of all earnings and assets that left after the payment
ownership of shares issued by the company under of claims of all other investors and stakeholders.
its common seal. Equity shareholders are the owner of the company
(5) Value of a share : Every share has specific and bear ultimate risk associated with the
money value. The value of share is expressed ownership of the company.
in terms of money. The value of shares may be [B] Features :
expressed in three ways viz. (1) Permanent capital : The amount received
(a) Face value : The value of share which is by the company from the issue of equity shares is
mentioned on the share certificate and in the irredeemable in nature, i.e. the amount of equity
Memorandum of Association is called face value of shares is not refundable during the lifetime of
share, e.g. ` 10, ` 100, etc. the company. It is refunded only at the time of
(b) Issue price : The price at which company dissolution of the company or as and when
sells or issues its shares is called issue price of company decides to buy back its shares. Equity
shares. shareholders provide long-term and permanent
(c) Market value : The value of share which is capital to the company.
fixed by demand and supply forces in the share (2) Fluctuating dividend : The rate of dividend
market is called market value. payable to equity shareholders is not fixed. It
(6) Rights : The share grants (gives) certain depends upon the quantum of profit earned by the
rights on its holder such as right to attend company. If company earns handsome profit, it
shareholder’s meeting, right to vote in the meetings, pays dividend at higher rate. If there is inadequate
right to inspect statutory books, right to receive or no profit, dividend may not be paid or paid at
dividend, etc. very low rate. Thus, income of equity shareholders
(7) Income : Every shareholder is entitled to get is uncertain and fluctuating.
a share in the net profit of the company. This share (3) Rights : The equity shareholders enjoy the
of net profit is called dividend. following rights :
(8) Transferability : As per the procedure laid (a) Right to vote : Right to vote is the basic
down in the Articles of Association, the shares of a right of the equity shareholders. Through right to
public limited company are freely transferable. vote, its shareholders elect directors and amend or
(9) Property of shareholder : Shares of a alter the Memorandum of Association and Articles
company are treated as movable property of the of Association.
shareholder. (b) Right to share in profit : Equity
(10) Kinds of shares : As per the provisions shareholders have right to share profits when
made in Section 43 of the Companies Act, 2013, distributed as dividend. If company earns more
a company can issue two types of shares viz. profit, equity shareholders entitled to get dividend
(i) Equity shares and (ii) Preference shares. at higher rate.

(c) Right to inspect books : It is another benefits of receiving entire earnings whatever is left
important right of the equity shareholders. They over.
have right to inspect all statutory books of their (8) No charge on the assets : Unlike secured
company. debentures, equity shares do not create any charge
(d) Right to transfer shares : The equity on the assets of the company.
shareholders have right to transfer their shares to (9) Bonus issue : Bonus shares are issued free
another person as per the procedure laid down in of cost as gift to the existing equity shareholders by
the Articles of Association. the company. The Bonus shares are issued out of
retained or accumulated profits in proportion to
(4) No preferential right : Equity shareholders
the shares held by equity shareholders.
do not have special preferential rights as to
Thus, there is an increase in the capital
payment of dividend. They get dividend only after
investment of equity shareholders on its own.
the dividend is paid on preference shares. In the
These benefits are not available to any other types
event of winding up of the company, the capital is
of shareholders or investors.
refunded to the equity shareholders only after it
(10) Right issue : Whenever a company makes
is refunded to preference shareholders. If nothing
fresh issue of shares for the purpose of raising
is left behind after paying other claims, the equity
additional finds for expansion or modernisation of
shareholders may not get anything.
business, the existing equity shareholders are given
(5) Controlling power : Equity shareholders
‘rights’ first to buy those newly offered shares in
are the owners and real masters of the company proportion to their shareholdings. This is called
and hence control of the company is vested in rights issue.
them. They can exercise their voting rights by (11) Face value : The face value of equity shares
proxies without attending the meeting in person. is usually very low. Generally, it is ` 10/- per share
Through their right of voting, equity shareholders or even ` 1/- per share.
can participate in the management and affairs of (12) Market value : The market value of shares
the company. They can elect the Board of Directors is determined by forces of demand and supply
to look after the management of the company. They in the share market. The market value of equity
have right to vote on all the matters discussed in shares always fluctuates in the stock exchange.
the general meeting. Thus, equity shareholders It depends on quantum of profit earned and rate
exercise the control over the company. of dividend declared. When company earns huge
(6) Risk : Equity shareholders have to face profit, the market value of shares increases.
maximum risks of the company. They are also Conversely, if loss is incurred by the company, the
called as “shock absorbers” when company faces market value of shares declines. Equity shares are
financial crisis. If the earnings of the company fall, traded on stock exchange and are more appearing
equity shareholders get dividend at very low rate. to the speculations.
This in turn declines the market value of equity (13) Capital appreciation : Prosperity and high
shares resulting into capital loss. Thus, they bear profit earning capacity of the company increases
maximum risk associated with the ownership of reputation of the company in the share market
the company. which in turn appreciates the market value of the
(7) Residual claimants : A residual claim shares. Share capital appreciation takes place
implies the last claim on the earning of the company. along with appreciation in market value of shares.
The equity shareholders often described as residual (3) Define Preference Shares. What are the
claimants of all earnings that left after payment of different types of preference shares.
taxes, expenses, interest and dividend to preference Ans. [A] Definition : The Preference Shares are
shareholders, etc. The equity shareholders have those shares which carry certain preferential rights

distinct from the rights of equity shareholders with (5) Convertible Preference Shares :
regard to (i) receive dividend at a fixed rate during Convertible preference shares are those preference
the lifetime of the company and (ii) a preferential shares in which holders have a right to convert
right as to receive the entire amount of capital at their preference shares into equity shares. The
the time of winding-up (closure) of the company. It conversion may take place within a certain fixed
means preference shareholders are paid dividend period.
before it is paid to the equity shareholders. (6) Non-convertible preference shares :
Similarly, in the case of the winding-up of the Preference shares which cannot be converted into
company, preference share capital is refunded first. equity shares are called non-convertible preference
[B] Types : shares.
For the different types of preference shares, (7) Redeemable Preference Shares :
refer to Brief Overview point no. 2.1.1 (iii). Preference shares which are redeemed after specific
or certain fixed period of time are called redeemable
(1) Cumulative Preference Shares : Cumula-
preference shares. A company limited by shares, if
tive Preference Shares are those shares which
authorised by the Articles of Association, can issue
have the right to claim a fixed dividend of the
redeemable preference shares. Such shares must
current year (if not paid) out of future profits. The
be fully paid either out of distributable (divisible)
dividend in their case goes on accumulating unless
profit or out of fresh issue of shares made
paid. If the company is unable to earn sufficient
specifically for redemption of preference shares.
profits in any year, the unpaid dividend shall be
(8) Irredeemable Preference Shares :
paid from the profit of the subsequent years. The
Irredeemable preference shares cannot be paid
accumulated arrears of dividend become payable
back during the existence of the company. They
before anything is paid out of profits to the holders
are paid back only in the event of winding-up of
of any other class of shares. Preference shares are
the company. However, as per Section 55 (1) of the
always cumulative unless otherwise stated in the
Companies Act, 2013, the issue of irredeemable
Articles of Association.
preference shares is not permitted.
(2) Non-cumulative Preference Shares : Non- (4) What are Preference Shares? State its
cumulative preference shares are those shares in features.
which shareholders get dividend only when the Ans. [A] Meaning : For the answer, refer to
company earns profit. Dividend if not paid by the Q. 15 (3) (A) Answer in Brief.
company in any year due to inadequate profit or
[B] Features : The features of preference shares
loss, it does not accumulate. In such case, right to
are explained as follows :
claim dividend lapses.
(1) Preference for dividend : Preference
(3) Participating Preference Shares :
shares rank before the equity shares for payment
Participating preference shareholders have the
of dividend. They have the first charge on divisible
normal right to get fixed dividend as well have the
amount of net profit of the current year. The
additional right to participate (receive additional
dividend is paid first to the preference shareholders
amount) in the surplus profits left after paying before it is paid to any other type of shareholders.
equity shareholders up to a certain limit. (2) Preference for repayment of capital : In
(4) Non-participating Preference Shares : the event of winding-up of the company, preference
Non-participating preference shareholders are shareholders have a right to receive their capital
entitled to get only dividend at fixed rate prescribed before such capital is paid to equity shareholders.
at the time of issue. If the Articles of Association is Thus, preferential treatment in respect of repayment
silent about this issue, then it is implied that the of capital saves the preference shareholders from
preference shares are non-participating. capital losses.

(3) Fixed return : The preference shareholders are not entitled to get right shares or bonus shares,
get dividend at predetermined fixed rate. The if at all they are issued by the company.
dividend paid every year is in the form of fixed (10) Nature of investor : The moderate type
sum calculated at fixed rate. The dividend is paid of investors who are conservative and cautious,
to preference shareholders only out of profits. If interested in steady return on investment and in
the directors decide not to pay dividend due to safety of investment, etc. usually attracted towards
financial instability, the preference shareholders preference shares and hence they prefer to purchase
(except cumulative preference shareholders) lose preference shares.
the claim for dividend. (5) What is Debenture? Discuss the different
(4) Nature of capital : The preference shares types of debentures.
provide capital funds only for specific period of time Ans. [A] Meaning : The word ‘debenture’ is
and not for longer period of time. Preference shares derived from the Latin word, “debere” which
are redeemed i.e. paid back after predetermined means ‘to owe some thing to some one’. According
period is over. No company can issue irredeemable Topham, “A debenture is a document given by a
preference shares. Usually preference shares are company as evidence of debt to the holder, usually
issued by the company at later stage when company arising out of loan, and most commonly secured
is well established to fulfill the need of additional by charge.” Debentures are one of the important
capital. As the rate of dividend is fixed and there is sources of acquiring borrowed capital to meet long-
no chance of capital loss, preference share capital term and the medium-term requirements of the
is treated as safe capital. finance. In recent years debentures have secured a
(5) Market value : The market value of key position in the capital structure of the company.
preference shares do not change because the rate A debenture is a loan accepted by a company
of dividend payable on the preference shares is by issuing a debenture certificate. A debenture
always fixed. Hence capital appreciation is almost certificate is a document issued by the company
very low in comparison to equity shares. under its common seal and signed by the directors,
(6) Voting rights : The preference shareholders acknowledging the loan accepted by the company
do not enjoy normal voting rights and hence they from a party, under certain terms and conditions
do not have control over the affairs of the company. stated therein.
They have voting rights only on those matters which [B] Types of Debentures :
directly affect their interests, e.g. dividend due for For the chart showing different types of
payment for last three consecutive years, sudden debentures, refer to Brief Overview point
change in the terms of repayment of capital, etc. no. 2.2.1 (iii).
(7) Risk : The cautious investors usually invest 1. On the Basis of Security :
their holdings in the preference shares. These (1) Secured debentures : These debentures
shares provide safety of capital and also provide are secured by creating a charge on the property
steady and regular income flow to the investors. of the company. The charge may be for particular
During depression period, when interest rate is property (fixed charge) or it may be for the assets
continuously falling, these shares become blessing in general (floating charge). The debentures are
(boon) for the preference shareholders. secured by creating trust deed.
(8) Face value : In comparison to the equity (2) Unsecured debentures : These debentures
share, the face value of the preference share is high. are not covered by any charge on any assets of the
Usually, it’s face value is ` 100. company. In recent years, the issue of unsecured
(9) Right issue or Bonus issue : Unlike the debentures is completely prohibited by the
equity shareholders, the preference shareholders Companies Act, 2013.

2. On the Basis of Transfer : (2) Non-convertible debentures : These
(1) Registered debentures : These are the debentures are not convertible into equity shares.
debentures on which the name of the holders These debentures are usually redeemed on their
is recorded. The company keeps and maintains due date. For this type of debentures there is no
register of debentureholders in which the names appreciation in value.
addresses and details of the holdings are recorded.
(6) Define Debenture and explain the features
Registered debentures can be transferred through
of debentures.
execution of regular instrument of transfer.
Ans [A] Definition : For the answer, refer to
(2) Bearer debentures : Bearer debentures are
those debentures on which the names of debenture- Q. 15 (5) (A) Answer in Brief.
holders are not recorded. The company does not [B] Features :
keep any record of the names and addresses of (1) Promise : The debenture is a written
the holders. Bearer debentures are transferable promise given by the borrowing company that it
by mere delivery. Interest coupons are attached to owes certain specified sum of money and to pay
these debenture certificates to enable the holders that money to the holder of the debenture after
to encash them on due dates. specified period is over.
3. On the Basis of Repayment : (2) Face value : Each debenture has a definite
(1) Redeemable debentures : Usually, face value which is expressed in terms of money.
debentures are redeemed i.e. repaid at the end The face value of debenture is usually of high
of specified period as specified on the debenture
denomination. e.g. ` 100 or multiples of ` 100.
certificate. The repayment of debenture amount
(3) Time of repayment : Usually, repayment
is made on maturity date in lump sum or in
date is specified in the debenture certificate. The
installments during the life period of the company.
principal amount is refunded on due date.
Trust deed is prepared to record provisions of
repayment. (4) Priority of repayment : The capital of the
(2) Irredeemable debentures : The debentures debentureholders is repaid before making payment
which are not repayable during lifetime of the of dues to the other claimants of the company.
company are called irredeemable debentures. Thus, Debentureholders have priority in payment
These debentures are redeemed only after the of their capital.
liquidation of the company or when there is breach (5) Assurance of repayment : Debentures
of any condition or some other contingencies. are considered as long-term debts. They carry an
4. On the Basis of Conversion : assurance of repayment of such debts on maturity
(1) Convertible debentures : The convertible date.
debentures are those debentures which give right (6) Interest : Debentureholders are paid
to the holders to convert their debentures into interest at the rate agreed upon at fixed intervals.
equity shares at a particular rate of exchange after
It is a fixed liability of the company to pay interest
a specific period of time. The right of conversion is
to the debentureholders at regular interval
specified in the debenture certificate. The approved
irrespective of the fact whether the company earns
of the members by special resolution in the general
profits or not.
meeting is necessary before they are issued to
the public. These debentures are beneficial to the (7) Parties to debentures : There are 3 parties
holders because after their conversion they are to the debentures :
entitled to equity shares at a rate lower than the (a) Company : The company is an entity which
market value. borrows the money by issuing debentures.

(b) Trustees : A company is required to (10) No voting right : As per the provisions
appoint debenture trustee if company offers (or made under Section 71 (2) of the Companies Act,
issues) debentures to more than 500 people. 2013, a company cannot issue debentures carrying
Through trustee, the company deals with the voting right. A debentureholder being a creditor,
debentureholders. An agreement which company does not have any voting right in the general
makes with the trustee is called Trust deed. It meetings of the company.
includes the rights of debentureholders, powers of (11) Security : The debentures are usually
trustees and obligations of company. secured by a fixed or floating charge on the property
(c) Debentureholders : The persons or of the company. If company fails to make payment
investors who provide loan and receive of interest or repayment of principal amount of
debenture certificates as an evidence are called debenture, the debentureholder can sell off the
debentureholders. property so charged to recover his dues.
(8) Authority to issue debentures : The provi- (12) Issuers : Both the companies viz. public
sions made under Section 179 of the Companies company and private company can issue debentures
Act, 2013 have empowered the Board of Directors to the public at large.
to issue debentures. (13) Listing : The debentures must be listed on
(9) Status of debentureholder : As debenture- minimum one recognised stock exchange.
holder provides loan to the company, he is called as
(14) Transferability : The debentureholders
creditor of a company. The company who borrows
can transfer debentures to any other person
the loan is required to pay interest on it at fixed
through transfer deed or through instrument of
rate, at regular interval until the debenture is
transfer.
redeemed by the company.
  

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Based on the New Textbook

First Edition : 2020

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

1. Introduction To Corporate Finance ... 5

2. Sources of Corporate Finance ... 25

3. Issue of Shares ... 58

4. Issue of Debentures ... 89

5. Deposits ... 102

6. Correspondence with Members ... 118

7. Correspondence with Debentureholders ... 131

8. Correspondence with Depositors ... 144

9. Depository System ... 156

10. Dividend and Interest ... 177

11. Financial Market ... 201

12. Stock Exchange ... 223

KEY TERMS AND THEIR MEANINGS

1. INTRODUCTION TO CORPORATE FINANCE 5

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

6 SECRETARIAL PRACTICE DIGEST : STANDARD XII

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

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

1. INTRODUCTION TO CORPORATE FINANCE 7

8 SECRETARIAL PRACTICE DIGEST : STANDARD XII

1. INTRODUCTION TO CORPORATE FINANCE 9

10 SECRETARIAL PRACTICE DIGEST : STANDARD XII

after the repayment of capital to the preference paid

1. INTRODUCTION TO CORPORATE FINANCE 11

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

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

12 SECRETARIAL PRACTICE DIGEST : STANDARD XII

1. INTRODUCTION TO CORPORATE FINANCE 13

14 SECRETARIAL PRACTICE DIGEST : STANDARD XII

1. INTRODUCTION TO CORPORATE FINANCE 15

16 SECRETARIAL PRACTICE DIGEST : STANDARD XII

* 12 Distinguish between the following : (4 marks)

Fixed Capital and Working Capital :

Fixed Capital Working Capital

1. INTRODUCTION TO CORPORATE FINANCE 17

18 SECRETARIAL PRACTICE DIGEST : STANDARD XII

1. INTRODUCTION TO CORPORATE FINANCE 19

20 SECRETARIAL PRACTICE DIGEST : STANDARD XII

1. INTRODUCTION TO CORPORATE FINANCE 21

22 SECRETARIAL PRACTICE DIGEST : STANDARD XII

1. INTRODUCTION TO CORPORATE FINANCE 23

24 SECRETARIAL PRACTICE DIGEST : STANDARD XII

KEY TERMS AND THEIR MEANINGS

2. SOURCES OF CORPORATE FINANCE 25

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

Introduction : 2.1 Sources of Owned Capital :

26 SECRETARIAL PRACTICE DIGEST : STANDARD XII

Owned Capital Borrowed Capital

2. SOURCES OF CORPORATE FINANCE 27

(A) Equity Shares (B) Preference Shares

28 SECRETARIAL PRACTICE DIGEST : STANDARD XII

2. SOURCES OF CORPORATE FINANCE 29

Participating and (7) Redeemable Preference Shares : The

30 SECRETARIAL PRACTICE DIGEST : STANDARD XII

2. SOURCES OF CORPORATE FINANCE 31

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

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

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

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

* 12 Distinguish between the following : (4 marks)

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

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