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Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 11 Financial Market Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 11 Financial Market

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
A financial market is a market in which people trade _____________ and derivatives at low transaction costs.
(a) Gold
(b) Financial securities
(c) Commodities
Answer:
(b) Financial securities

Question 2.
When the trade bills are accepted by commercial banks it is known as _____________
(a) Treasury bills
(b) Commercial bills
(c) Commercial papers
Answer:
(b) Commercial bills

Question 3.
Money market is a market for lending and borrowing of funds for _____________ term.
(a) short
(b) medium
(c) long
Answer:
(a) short

Question 4.
Central Government is a borrower in the money market through the issue of _____________
(a) Commercial Papers
(b) Trade Bills
(c) Treasury Bills
Answer:
(c) Treasury Bills

Question 5.
_____________ is the market for borrowing and lending long term capital required by business enterprises.
(a) Money Market
(b) Capital Market
(c) Gold Market
Answer:
(b) Capital Market

1B. Match the pairs.

Question 1.

Group ‘A’	Group ‘B’
(a) Financial Market	(1) Long term fund
(b) Money Market	(2) New issue market
(c) Primary Market	(3) Trading of commodities
(d) Commercial paper	(4) Short term fund
(e) Capital Market	(5) Trading of financial securities
	(6) Share market
	(7) Unsecured promissory note
	(8) Secured promissory note

Answer:

Group ‘A’	Group ‘B’
(a) Financial Market	(5) Trading of financial securities
(b) Money Market	(4) Short term fund
(c) Primary Market	(2) New issue market
(d) Commercial paper	(7) Unsecured promissory note
(e) Capital Market	(1) Long term fund

1C. Write a word or term or a phrase that can substitute each of the following statements.

Question 1.
A market where people trade financial securities and derivatives at low transaction costs.
Answer:
Financial Market

Question 2.
A market that provides long-term funds.
Answer:
Capital Market

Question 3.
A market that provides short-term funds.
Answer:
Money Market

Question 4.
A money market instrument is used by banks when one bank faces a temporary shortage of cash.
Answer:
Call Money

Question 5.
A bill is issued by the Reserve Bank of India on behalf of the Government of India.
Answer:
Treasury Bill

Question 6.
A market that exclusively deals with the new issue of securities.
Answer:
Primary Market

1D. State whether the following statements are True or False.

Question 1.
A Financial Market is a market in which people trade financial securities and derivatives at high transaction costs.
Answer:
False

Question 2.
The money market is the market for long-term funds.
Answer:
False

Question 3.
The capital market is the market for long-term funds.
Answer:
True

Question 4.
The primary market is also known as the new issue market.
Answer:
True

Question 5.
The secondary market is commonly known as the stock market.
Answer:
True

Question 6.
Commercial paper is a secured promissory note.
Answer:
False

Question 7.
Treasury bills are issued by commercial banks.
Answer:
False

1E. Find the odd one.

Question 1.
Treasury Bills, Shares, Certificate of Deposit.
Answer:
Shares

Question 2.
FPO, Private Placement, Commercial paper.
Answer:
commercial paper

Question 3.
New Issues Market, Call Money Market, Secondary Market.
Answer:
call money market

1F. Complete the sentences.

Question 1.
Funds borrowed and lent in money market are for _____________ term.
Answer:
short

Question 2.
When trade bills are accepted by commercial banks, it is known as _____________
Answer:
Trade Bill

Question 3.
Unsecured negotiable promissory notes issued by a commercial bank is called as _____________
Answer:
certificate of deposit

Question 4.
New shares, debentures, etc. are traded in _____________ market.
Answer:
primary

Question 5.
In capital market the instruments traded have maturity period of more than _____________ year.
Answer:
one

1G. Select the correct option from the bracket.

Question 1.

Group ‘A’	Group ‘B’
(a) Money Market	(1) …………………..
(b) Zero risk instrument	(2) …………………..
(c) ………………….	(3) Capital Market
(d) …………………	(4) Secondary Market

(Buying and selling of existing securities, Treasury Bills, Funds for long term, Fund for short term)
Answer:

Group ‘A’	Group ‘B’
(a) Money Market	(1) Fund for short term
(b) Zero risk instrument	(2) Treasury bills
(c) Fund for long terms	(3) Capital Market
(d) Buying and selling of existing securities	(4) Secondary Market

1H. Answer in one sentence.

Question 1.
What is the financial market?
Answer:
A financial market is a market where financial securities are exchanged. It acts as an intermediary between investors and borrowers.

Question 2.
What is call a money market?
Answer:
The call money market is a market where funds are borrowed or lent for a very short period of 2 days to 14 days.

Question 3.
What is a Certificate of deposit?
Answer:
They are the negotiable term deposit certificates issued by commercial banks and financial institutions to build short-term finance.

Question 4.
What is a Trade bill?
Answer:
The seller draws a bill and the buyer accepts it, on acceptance, the bill becomes a marketable instrument called a Trade bill.

Question 5.
What is the new issue market?
Answer:
The market which is utilized to build fresh capital is called as ‘new issue market.’

1I. Correct the underlined word/s and rewrite the following sentences.

Question 1.
In the Primary market, already existing securities are traded.
Answer:
In the Secondary market, already existing securities are traded.

Question 2.
Companies sell fresh shares for the first time to the public in the secondary market.
Answer:
Companies sell fresh shares for the first time to the public in the Primary market.

Question 3.
In the Money market, the instruments traded have a maturity period of more than one year.
Answer:
In the Capital market, the instruments traded have a maturity period of more than one year.

Question 4.
The financial market can be classified as a capital market and call money market.
Answer:
The financial market can be classified as capital market and Money market.

2. Explain the following terms/concepts.

Question 1.
Financial Market
Answer:

• Every business unit has to raise short-term as well as long-term funds to meet the working and fixed capital requirements.
• In any economy, there are two different groups, one who invests money or lends money and the other who borrows or uses the money.
• The financial market acts as a link between these two different groups.
• The financial market provides a place or a system through which the transfer of funds by investors to the business units is adequately facilitated.
• A financial market consists of two major segments:
  • Money Market
  • Capital Market
• Money market deals in short-term credit and the capital market deals in medium-term and long-term credit.

Question 2.
Capital Market
Answer:

• It is a market for borrowing and lending long-term capital required by business enterprises.
• The financial assets dealt with in a capital market have a long or indefinite maturity period.
• The capital market forms an important core of a country’s financial system.

Definition:
G.H. Peters defines, “Capital Market as being the market or collection of inter-related markets in which potential borrowers are brought into contact with potential lenders.”

Question 3.
Money Market
Answer:

• A market where short-term funds are borrowed and lent is called ‘money market7. It is a market for financial assets that are close substitutes for money.
• The instruments dealt within the market are liquid and can be converted quickly into cash at a low transaction cost.

Definition:
According to the Reserve Bank of India, “The money market is the center for dealings mainly of short-term characters in money assets; it needs the short-term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short-term surplus investible funds at the disposal of financial, institutions or individuals are bid by borrower’s agents comprising institutions and individuals and also by the government itself.”

Question 4.
Call Money Market
Answer:

• Call money and Notice money market is an important segment of the money market in India. Under Call money, funds are lent or borrowed for very short periods i.e. one day.
• Under Notice money, funds are lent or borrowed for periods between 2 days to 14 days. Funds have to be repaid within a specified time on the receipt of the notice given by the lender.
• When one bank faces a temporary shortage of cash, then another bank with surplus cash lends money to it. Hence, the Call/Notice money market is also called as interbank Call money market.

Question 5.
Treasury Bills
Answer:

• Treasury Bills are short-term securities issued by the Reserve Bank of India on behalf of the Central Government of India to meet the government’s short-term funds requirement.
• Treasury Bills have three maturity periods – 91 days, 182 days, and 364 days. These bills are sold to banks and individuals, firms, institutions, etc. These bills are negotiable instruments and are freely transferable.
• The minimum value of T-bills is Rs. 25,000 or in multiples of Rs. 25000. These are issued at a discount and repaid at par and hence they are also called Zero-Coupon Bonds.

Question 6.
Commercial Bills
Answer:
Trade Bills/Commercial Bills:

• Bill of Exchange also called Trade bills are negotiable instruments or bills drawn by a seller on the buyer for the value of goods sold under credit sales.
• These have a short-term maturity period, generally of 90 days, and can be easily transferred.
• If the seller wants immediate cash, he can discount the trade bills with Commercial banks.

Question 7.
Repurchase agreement
Answer:
It is an agreement where the seller of security (i.e. one who needs money) agrees to buy it back from the lender at a higher price on a future date. Usually, this agreement is between RBI and commercial banks. RBI uses this agreement to control the money supply in the economy. These agreements are the most liquid of all money market investments having maturity ranging from 24 hours to several months.

Question 8.
Primary Market
Answer:

• It is a component of the financial market where short-term borrowing takes place.
• In the money market, the instruments are traded for not more than one year.

Question 9.
Secondary Market
Answer:

• The securities issued earlier are traded in the secondary market.
• It is the market where existing securities are resold or traded.
• Only listed securities can be dealt with in the secondary market.

3. Study the following case/situation and express your opinion.

1. Joy Ltd. Company is a newly incorporated company. It wants to raise capital for the first time by issuing equity shares.

Question (a).
Should d go to primary market or secondary market to issue its shares?
Answer:
Joy Ltd. should go to the primary market to issue equity shares in the market. Primary Market is mainly dealing with fresh issues of securities.

Question (b).
Should it offer its shares through public offer or rights issue?
Answer:
Joy Ltd. should offer its shares through public offer (IPO) as Joy Ltd. Company is going to its securities first time.

Question (c).
What will be the issue of Equity shares by Joy Ltd. Company called IPO or FPO?
Answer:
When Joy Ltd. issued its securities first time then it is called as IPO at the same time if Joy Ltd. offered securities for the second, third, or fourth time it is called a follow on public offering (EPO)

2. Mr. X is the CFO (Chief Financial Officer) of PQR Co. Ltd. which is a reputed company in the field of construction business. Often Mr. X has to decide on investing surplus funds of the company for short durations. And at times, he also has to decide the sources from where he can raise funds for short durations.

Question (a).
Assume on behalf of the company Mr. X has Rs. 5 lakhs and wants to invest for a short period. Should he buy Equity shares of Certificate of Deposit?
Answer:
As Mr. X wants to invest for a short period with the amount of Rs. 5 lakhs, then he should buy a certificate of deposit.

Question (b).
The company has surplus funds and wants to invest it. However, he needs the money back in 4 months, so should he invest in Treasury Bills or Government Securities?
Answer:
If he needs money back in 4 months, then he should invest in Treasury bills with the option of 91 days Maturity.

Question (c).
Can the company issue Certificate of Deposit?
Answer:
PQR Company Ltd. is a construction company. Hence it cannot issue a certificate of deposit as it can be issued by commercial banks and financial institutions only.

4. Distinguish between the following.

Question 1.
Primary Market and Secondary Market
Answer:

Points	Primary Market	Secondary Market
1. Meaning	The market is utilized for raising fresh capital in the form of shares and debentures.	It is a market where existing securities are resold or traded.
2. Function	The function is to raise long-term funds through fresh issues of securities.	The function is to provide a continuous and ready market for existing long-term securities.
3. Participants	The participants are financial institutions, mutual funds, underwriters, individual investors.	The participants of the primary market are the stockbrokers and the members of the stock exchange.
4. Listing Requirements	Listing is not required in the case of the primary market.	Only listed securities can be dealt with in the secondary market.
5. Determinants of Prices	The prices are determined by the management of the corporate house with due compliances with the SEBI requirements for the new issues of securities.	In the case of the secondary market, the price is determined by forces of demand and supply of the market and it keeps on fluctuating.
6. Issue of Prospectus	The prospectus is issued to invite the public to subscribe to the issue of shares.	The prospectus is not issued to the public.
7. Relation with investors	Direct contact with the investors at large is established by the companies.	There may not be direct contact with the investors who want to buy or sell the existing securities.

Question 2.
Money Market and Capital Market
Answer:

Points	Money Market	Capital Market
1. Meaning	A market where short-term funds are borrowed and lent.	A market for borrowing and lending long-term capital is required by the business enterprises.
2. Term of Finance	It provides short-term funds in short-term instruments where the maturity is measured in days, weeks, or months.	It is a market for long-term instruments which is measured in years.
3. Instruments	The instruments dealt in the market are bills of exchange, treasury bills, bankers’ acceptance, etc.	The instruments dealt in this market are bonds, debentures, equity shares, and stock.
4. Functions	Money Market exists as a mechanism of liquidity adjustment i.e. a link between depositors and borrowers.	Capital Market functions as a link between investors and entrepreneurs.
5. Risk	The prices of these instruments do not fluctuate and they carry very low market risk.	The instruments are long-term and subject to market fluctuations and so, they carry very high financial and market risk.
6. Institution	Commercial banks are important institutions in the money market.	The stock exchange is an important institution in the capital market.

5. Answer in brief.

Question 1.
State any four functions of the financial market.
Answer:
Functions of financial market:
(i) Capital formation:

• Capital is the main part of the functioning of the business.
• The capital market provides a channel through which savings flow to organizations in the form of capital.
• This leads to capital formation.

(ii) Transfer of Resources:

• The financial market is one of the key sources of transfer of resources.
• The financial market facilitates the transfer of real economic resources from lenders to ultimate users.

(iii) Mobilization of funds:

• Investors that have savings must be linked with corporate that require investment.
• The financial market enables the investors to invest their saving according to their choices and risk assessment.
• This will utilize funds and the economy will boom.

(iv) Price determination:

• The financial instruments traded in a financial market get their prices from the mechanism of demand and supply.
• The interaction between demand and supply will help to determine the prices.

Question 2.
State any four features of the money market.
Answer:
The features of the money market are as follows:
(i) No Fixed Place for Trading of Securities/Shares:
In the money market, there is no definite place to carry out lending and borrowing operations of securities or shares.

(ii) Involvement of Brokers:

• Dealings in such a market can be conducted with or without the participation of brokers.
• Companies, banks, etc. may directly deal in the money market.

(iii) Financial Assets:
The financial assets that are dealt in the money market are close substitutes for money as these assets can be easily converted into cash without any loss in value.

(iv) Organisations Involved:
The main organizations dealing in the money market in India are the Reserve Bank of India (RBI), State governments, banks, corporate investors, etc.

Question 3.
State any four features of the capital market.
Answer:
Following are the main features of the capital market:

• The link between investors and borrowers: The capital market links investors with the borrowers of funds. It routes money from savers to entrepreneurial borrowers.
• Deals in medium and Long-term investment: A capital market is a market where medium and long-term financial instruments are traded. Through this market corporate, industrial organizations, financial institutions access long-term funds from both, domestic and foreign markets.
• Presence of Intermediaries: The capital market operates with the help of intermediaries like brokers, underwriters, merchant bankers, collection bankers, etc. These intermediaries are important elements of a capital market.
• Promotes capital formation: The capital market provides a platform for investors and borrowers of long-term funds to trade. This leads to capital formation in an economy as it mobilizes funds.

Question 4.
Explain any 4 types of money market instruments.
Answer:
Instruments of Money Market:
(i) Commercial Paper:

• Commercial papers were first issued in the Indian money market in 1990.
• They are unsecured debt instruments.
• They are issued only by companies with strong credit ratings. They are issued at a discount rate. They are in the form of promissory notes.
• They are negotiable instruments i.e. they are freely transferable by endorsement and delivery.
• They are issued for a period of 15 days to 1 year.

(ii) Commercial Bills:

• When the goods are sold on credit, the buyer becomes liable to make payment on a specific date in the future.
• The seller draws a bill and the buyer accepts it. On acceptance, the bill becomes a marketable instrument called a Trade Bill.
• When a Trade Bill is accepted by a commercial bank, it is known as a commercial bill.
• They are in the form of negotiable instruments.
• They are usually issued for a period of 90 days. But this period can vary between 30 to 90 days.
• The liquidity of this bill is very high.
• It is the most common method to meet the credit needs of trade and industry.

(iii) Certificate of Deposits:

• Certificate of Deposits was first introduced to the money market of India in 1989.
• They are issued by commercial banks or financial institutions at discount, at par, or at market rate.
• They are in the form of promissory notes and stamp duty is applicable on the instrument.
• The maturity periods of this instrument are from 15 days to 1 year.
• The subscribers for certificates of deposits are individuals, associations, companies, trusts, etc.
• They are freely transferable by endorsement and delivery after a lock-in period of a minimum of 15 days.

(iv) Treasury Bills:

• Issue/Use of Treasury Bills was started by the Indian government in 1917.
• This instrument is issued by the government to institutions or the public to bridge the gap between receipts and expenditure.
• It is issued by the government on a discount for a fixed period not exceeding 1 year.
• These bills are in the nature of promissory notes containing a promise to pay the amount stated to the bearer of the instrument.
• The maturity period of this bill is 182 days.
• These bills enjoy a high degree of liquidity.

6. Justify the following statements.

Question 1.
Financial Markets act as a link between investor and borrower.
Answer:

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

Question 2.
Money Market makes available short-term finance through different instruments.
Answer:

• The money market is the market that provides short-term loans to businesses and governments.
• The loan period ranging from one day to one year.
• Call money and notice money provide finance for periods between 2 days to 14 days.
• Treasury Bills offer finance to the government for 91 days, 182 days, 364 days. Trade Bill or commercial bills offer finance up to 90 days.
• Commercial paper offers finance to the business organization from 7 days to 1 year. Money Market Mutual Fund offers finance for a maximum period of 1 year.
• Hence, the money market makes available short-term finance through different instruments.

Question 3.
Capital Market is useful for the corporate sector.
Answer:

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

Question 4.
There are many participants in the money market.
Answer:
Some important participants in the money market are:
(i) Reserve Bank of India:
It is the most important participant in the money market. Through the money market, RBI regulates the money supply and implements its monetary policy. It issues government securities on behalf of the government and also underwrites them. It acts as an intermediary and regulator of the market.

(ii) Central and State Government:
Central Government is a borrower in the Money Market, through the issue of Treasury Bills (T-Bills). The T-Bills are issued through the Reserve Bank of India (RBI). The T-Bills represent zero risk instruments. Due to its risk-free nature banks, corporate, etc. buy the T-Bills and lend to the government as a part of its short-term borrowing program. The state government issues bonds called State Development Loans.

(iii) Public Sector Undertakings (PSU):
Many listed government companies can issue commercial paper in order to obtain their working capital.

(iv) Scheduled Commercial Banks:
Scheduled commercial banks are very big borrowers and lenders in the money market. They borrow and lend in the call money market, short notice market, Repo and Reverse Repo market.

(v) Insurance Companies:
Both the general and life insurance companies are usual lenders in the money market. They invest more in capital market instruments. Their role in the money market is limited.

(vi) Mutual Funds:
Mutual Funds offer varieties of schemes for the different investment objectives of the public. Mutual funds schemes are liquid schemes. These schemes have the investment objective of investing in money market instruments.

(vii) Non-Banking Finance Companies (NBFCs): NBFCs use their surplus funds to invest in government securities, bonds, etc. (Example of NBFC – Unit Trust of India)

(viii) Corporates:
Corporates borrow by issuing commercial papers which are nothing but short-term promissory notes. They are the lender to the banks when they buy the certificate of deposit issued by the banks.

(ix) Primary Dealers:
Their main role is to promote transactions in government securities. They buy as well as underwrite the government securities.

7. Answer the following questions.

Question 1.
Explain the functions of the financial market.
Answer:
Financial Market – Meaning:

• A financial market is an institution, that facilitates the exchange of financial instruments including deposits, loans, corporate stocks, bonds, etc.
• The financial market provides a place through which the transfer of funds by investors to the business is adequately facilitated.
• Financial Markets attract funds from investors and channelizes them to corporations.
• The financial market consists of money and capital markets. They help to raise short and long-term capital.

Functions of Financial Market:
(i) Capital formation:

• Capital is the main part of the functioning of the business.
• The capital market provides a channel through which savings flow to organizations in the form of capital.
• This leads to capital formation.

(ii) Transfer of Resources:

• The financial market is one of the key sources of transfer of resources.
• The financial market facilitates the transfer of real economic resources from lenders to ultimate users.

(iii) Mobilization of funds:

• Investors that have savings must be linked with corporates that require investment.
• The financial market enables investors to invest their savings according to their choices and risk assessment.
• This will utilize funds and the economy will boom.

(iv) Price determination:

• The financial instruments traded in a financial market get their prices from the mechanism of demand and supply.
• The interaction between demand and supply will help to determine the prices.

(v) Productive usage:

• Financial Market allow productive use of the fund.
• An excess fund of investors is used by the borrowers for productive purposes.

(vi) Enhancing Income:

• The financial market allows lenders to earn interest or dividends on their surplus funds.
• Thus, it helps in the enhancement of the individual and the national income.

(vii) Liquidity:

• The financial market provides a mechanism through which liquidating of financial instruments take place.
• Here, the investor can sell their financial instruments and convert them into cash.

(viii) Sale Mechanism:

• Financial Market provides a mechanism for selling a financial instrument by investors.
• It helps to offer the benefit of marketability and liquidity of such assets.

(ix) Easy access:

• Both industries and investors need each other.
• The financial market provides a platform where buyers and sellers can find each other easily.

(x) Industrial Development:
The financial market transforms saving into capital. Corporate use of funds of investors to undertakes productive or commercial activities leads to economic development.

Question 2.
State the instruments in the money market.
Answer:

• The money market is a market for borrowing and lending of funds for the short term.
• RBI is an apex body that controls the money market.
• The short period of time varies from one day to one year.

Instruments of Money Market:
(i) Commercial Paper:

• Commercial papers were first issued in the Indian money market in 1990.
• They are unsecured debt instruments.
• They can be, therefore, issued only by companies with strong credit ratings.
• They are issued by corporate houses for raising short-term finance mainly to finance their working capital requirements.
• They are issued at a discount rate. They are in the form of promissory notes.
• They are negotiable instruments i.e. they are freely transferable by endorsement and delivery.
• They are issued for a period of 15 days to 1 year.
• Face value is in multiples of ‘5 lakhs.
• The issuing company has to bear all expenses like dealer’s fees, agency fees, etc. related to the uses of the commercial paper.
• The rate of interest varies greatly as it is influenced by various factors such as the economy, the credit rating of the instruments, etc.
• The marketability of these instruments is influenced by the rates prevailing in the call market as well as the foreign exchange market.
• It used to be 30 days and it is further reduced to 15 days w.e.f 25th May 1998.

(ii) Commercial Bills:

• When the goods are sold on credit, the buyer becomes liable to make payment on a specific date in the future.
• The seller draws a bill and the buyer accepts it. On acceptance, the bill becomes a marketable instrument called a Trade Bill.
• When a Trade Bill is accepted by a commercial bank, it is known as a commercial bill.
• The seller draws a bill and the buyer accepts it.
• They are in the form of negotiable instruments.
• They are usually issued for a period of 90 days. But this period can vary between 30 to 90 days.
• The liquidity of this bill is very high.
• It is the most common method to meet the credit needs of trade and industry.
• The bank can rediscount the bills and are able to meet the short-term liquidity requirements.
• The commercial bill lacks development in the money market due to lack of bill culture, high stamp duty, inadequate credit backing, absence of a secondary market, etc.

(iii) Certificate of Deposits:

• Certificate of Deposits was first introduced to the money market of India in 1989.
• They are negotiable term deposit certificates.
• They are issued by commercial banks or financial institutions at discount, at par, or at market rate.
• They are in the form of promissory notes and stamp duty is applicable on the instrument.
• The maturity periods of this instrument are from 15 days to 1 year.
• The subscribers for certificates of deposits are individuals, associations, companies, trusts, etc.
• They are freely transferable by endorsement and delivery after a lock-in period of a minimum of 15 days.

(iv) Treasury Bills:

• Issue/use of Treasury Bills was started by the Indian government in 1917.
• This instrument is issued by the government to institutions or the public for raising short-term funds to bridge the gap between receipts and expenditure.
• It is issued by the government on a discount for a fixed period not exceeding 1 year.
• These bills are in the nature of promissory notes containing a promise to pay the amount stated to the bearer of the instrument.
• The maturity period of this bill is 182 days.
• These bills enjoy a high degree of liquidity.

(v) Government Securities:

• The marketable debt issued by the government or by semi-government bodies represents a claim on the government in known as government securities.
• These securities are issued by agencies such as central government, state government, local government such as municipalities, etc.
• These government securities are in the form of stock certificates, promissory notes, and bearer bonds.
• The liquidity is high for securities issued by the central government and limited for the state government and the local government.
• These securities are safe investments as payment of interest and repayment of the principal amount is guaranteed by the government.
• Rebates for investment in these securities are available under the Income Tax and other Acts.

(vi) Money Market Mutual Funds:

• It is a mutual fund that invests solely in money market instruments.
• These are issued by mutual fund organizations.
• They are in the form of debt.
• These mature in less than a year.
• They are very liquid.
• They are the safest and most secure of all mutual funds investments.
• The assets in money market funds are invested in safe and stable instruments of investments issued by the government, banks, corporations, etc.
• These mutual funds allow retail investors the opportunity of investing in money market instruments and benefit from the price advantage.

(vii) Repo Rate:

• It is the repurchase rate which is also known as the official bank rate.
• The repo rate is the discounted interest rate at which a central bank repurchases the government securities.
• It is the transaction that is carried by the central bank with the commercial bank to reduce some of the short-term liquidity in the system.

Question 3.
State the features of the capital market.
Answer:
Meaning:

• Capital markets provide medium and long-term loans to business enterprises.
• SEBI is responsible to control the working of the capital market.
• It attracts saving from people and form capital to the business.
• It is dealing in shares, debentures, bonds, mutual funds, etc.

Features of Capital Market:
Following are the main features of the capital market:
(i) Link between investors and borrowers:
The capital market links investors with the borrowers of funds. It routes money from savers to entrepreneurial borrowers.

(ii) Deals in medium and Long-term investment: A capital market is a market where medium and long-term financial instruments are traded. Through this market corporate, industrial organizations, financial institutions access long-term funds from both, domestic and foreign markets.

(iii) Presence of Intermediaries:
The capital market operates with the help of intermediaries like brokers, underwriters, merchant bankers, collection bankers, etc. These intermediaries are important elements of a capital market.

(iv) Promotes capital formation:
The capital market provides a platform for investors and borrowers of long-term funds to trade. This leads to capital formation in an economy as it mobilizes funds.

(v) Regulated by government rules, regulations, and policies:
The capital market operates freely. However, it is regulated by government rules, regulations, and policies.
For e.g. SEBI is the regulator of Capital markets.

(vi) Deals in marketable and non-marketable securities:
Capital market traders in both, marketable and non-marketable securities. Marketable securities are securities that can be transferred, e.g. Shares, Debentures, etc. and non-marketable securities are those which cannot be transferred, e.g. Term Deposits, Loans, and Advances.

(vii) Variety of Investors:
The capital market has a wide variety of investors. It comprises both, individuals like the general public and institutional investors like Mutual Funds, Insurance companies, Financial Institutions, etc.

(viii) Risk:
Risk is very high here as the instruments have long maturity periods. However, the return on investments is very high.

(ix) Instruments in capital market:

• Equity shares
• Preference shares
• Debentures
• Bonds
• Government securities
• Public Deposits.

(x) Types of Capital Market:
Capital market is mainly classified as-
(i) Government Securities Market or Gilt-edged markets:
In this market, government and semi-government securities are traded.

(ii) Industrial Securities Market:
In this market, industrial securities, i.e. shares and debentures of new or existing corporate are traded. This market is further divided into:

• Primary or New issues Market – Here companies sell fresh shares, debentures, etc. for the first time to the public.
• Secondary Market – Here already existing shares, debentures, etc. are traded through the Stock Exchanges.

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 10 Dividend and Interest Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 10 Dividend and Interest

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
Dividend is paid to ____________
(a) Shareholder
(b) Debenture holder
(c) Depositor
Answer:
(a) Shareholder

Question 2.
____________ is profit shared by company with a shareholder.
(a) Interest
(b) Rent
(c) Dividend
Answer:
(c) Dividend

Question 3.
Dividend is recommended by ____________
(a) Managing Director
(b) Secretary
(c) Board of Directors
Answer:
(c) Board of Directors

Question 4.
Interim Dividend is declared by ____________
(a) Board of Directors
(b) Debenture holders
(c) Depositors
Answer:
(a) Board of Directors

Question 5.
Final Dividend is declared by ____________
(a) Board of Directors
(b) Shareholders
(c) Depositors
Answer:
(b) Shareholders

Question 6.
Dividend cannot be declared out of ____________
(a) Capital
(b) Profit
(c) Reserves
Answer:
(a) Capital

Question 7.
Dividend amount should be transferred in a separate Bank Account within ____________ days of its declaration.
(a) 5
(b) 15
(c) 50
Answer:
(a) 5

Question 8.
Dividend should be paid within ____________ days of its declaration.
(a) 3
(b) 13
(c) 30
Answer:
(c) 30

Question 9.
____________ holders get dividend from residual profits.
(a) Equity share
(b) Preference share
(c) Debenture
Answer:
(a) Equity Share

Question 10.
Dividend is paid first to ____________ shareholders.
(a) Equity
(b) Preference
(c) Deferred
Answer:
(b) Preference

Question 11.
____________ warrant is a cheque containing dividend amount sent by company to the shareholders.
(a) Dividend
(b) Share
(c) Interest
Answer:
(a) Dividend

Question 12.
IEPF is created by ____________ where unpaid dividend is transferred by company.
(a) Central Government
(b) Company
(c) Shareholders
Answer:
(a) Central Government

Question 13.
Payment of ____________ Dividend must be authorised by the Articles of Association.
(a) Interim
(b) Final
(c) Bonus
Answer:
(a) Interim

Question 14.
____________ is a return paid to creditors by the company.
(a) Dividend
(b) Interest
(c) Rent
Answer:
(b) Interest

Question 15.
____________ is not linked to profits of the company.
(a) Dividend
(b) Interest
(c) Bonus
Answer:
(b) Interest

1B. Match the pairs.

Question (I).

Group ‘A’	Group ‘B’
(a) Dividend	(1) Equity Shareholders
(b) Interest	(2) Appropriation of Profit
(c) Interim Dividend	(3) Recommendation of Secretary
(d) Final Dividend	(4) Registrar of Company
(e) Fluctuating Rate of Dividend	(5) Obligatory to pay
	(6) Decided and Declared by the Board of Directors
	(7) Decided by Board and Declared by Members
	(8) Decided by President of India
	(9) Company not allowed to pay
	(10) Declared by Government of India

Answer:

Group ‘A’	Group ‘B’
(a) Dividend	(2) Appropriation of Profit
(b) Interest	(5) Obligatory to pay
(c) Interim Dividend	(6) Decided and Declared by the Board of Directors
(d) Final Dividend	(7) Decided by Board and Declared by Members
(e) Fluctuating Rate of Dividend	(1) Equity Shareholders

Question (II).

Group ‘A’	Group ‘B’
(a) Dividend	(1) Inform stock exchange about dividend declaration
(b) Interest	(2) Creditors
(c) IEPF	(3) Registered Shareholders
(d) Unpaid Dividend Account	(4) Balance of Unpaid Dividend Transferred
(e) Listed Company	(5) Unregistered Company
	(6) Non-listed company
	(7) Unpaid/Unclaimed Dividend
	(8) Balance of unpaid bonus transferred here
	(9) Must inform the government about dividend declaration
	(10) General Public

Answer:

Group ‘A’	Group ‘B’
(a) Dividend	(3) Registered Shareholders
(b) Interest	(2) Creditors
(c) IEPF	(4) Balance of Unpaid Dividend Transferred
(d) Unpaid Dividend Account	(7) Unpaid/Unclaimed Dividend
(e) Listed Company	(1) Inform stock exchange about dividend declaration

1C. Write a word or term or a phrase that can substitute each of the following statements.

Question 1.
The return on investment is paid to the shareholders of the company.
Answer:
Dividend

Question 2.
The meeting where the final dividend is declared.
Answer:
AGM (Annual General Meeting)

Question 3.
The company has to intimate the stock exchange about the declaration of dividends.
Answer:
Listed company

Question 4.
The shareholders get dividends at a fixed rate.
Answer:
Preference

Question 5.
The shareholders get dividends at a fluctuating rate.
Answer:
Equity

Question 6.
Request by the shareholder in the prescribed form for payment of dividend into shareholders bank amount.
Answer:
Dividend Mandate

Question 7.
The number of days within which payment of dividend be completed by the company after its declaration.
Answer:
30 days

Question 8.
Dividend declared between two AGMs.
Answer:
Interim Dividend

Question 9.
Dividend decided and declared by the Board.
Answer:
Interim Dividend

Question 10.
The return is paid to the creditors by the company.
Answer:
Interest

1D. State whether the following statements are True or False.

Question 1.
The dividend is paid to registered shareholders of the company.
Answer:
True

Question 2.
The dividend is decided by the Board.
Answer:
True

Question 3.
The dividend is decided by the shareholders.
Answer:
False

Question 4.
Dividend once declared cannot be revoked.
Answer:
True

Question 5.
Dividend cannot be paid out of capital.
Answer:
True

Question 6.
Shareholders decide about the rate and amount of profit to be given as dividends.
Answer:
False

Question 7.
All categories of shareholders get a fixed-rate dividend.
Answer:
False

Question 8.
IEPF is the fund created by the company.
Answer:
False

Question 9.
Interest is a liability for the company.
Answer:
True

Question 10.
Interest is paid to shareholders of the company.
Answer:
False

1E. Find the odd one.

Question 1.
Final Dividend, Interim Dividend, Interest
Answer:
Interest

Question 2.
Out of Capital, Out of free reserve, Out of money given by the government
Answer:
Out of Capital

Question 3.
Dividend Account, Dividend Mandate, Unpaid/ Unclaimed Dividend Account
Answer:
Dividend Mandate

Question 4.
Dividend warrant, Dividend Mandate, Cheque
Answer:
Dividend Mandate

1F. Complete the sentences.

Question 1.
Word dividend is derived from Latin term ____________
Answer:
Dividendum

Question 2.
Dividend is paid to ____________
Answer:
registered shareholders

Question 3.
Dividend can be declared only on recommendation of ____________
Answer:
Board of Directors

Question 4.
Dividend must be paid in ____________
Answer:
cash

Question 5.
The meeting at which final dividend is approved is ____________
Answer:
Annual General Meeting

Question 6.
Dividend cannot be paid out of ____________
Answer:
capital

Question 7.
Interim dividend is decided and declared by ____________
Answer:
Board of Directors

Question 8.
Predecided and a fixed rate of dividend is paid to ____________
Answer:
preference shareholder

Question 9.
Payment of dividend must be completed within ____________
Answer:
30 days

Question 10.
Payment of Interim Dividend needs to be authorized by ____________
Answer:
Articles of Association

Question 11.
The obligatory payment made by company to its creditors is called as ____________
Answer:
Interest

1G. Select the correct option from the bracket.

Question 1.

Group ‘A’	Group ‘B’
(a) Dividendum	(1) ………………..
(b) Interest	(2) ………………..
(c) …………………	(3) Final Dividend
(d) ………………..	(4) Interim Dividend
(e) Government Fund	(5) …………………

(Latin term, Creditors, At AGM, At Board Meeting, IEPF)
Answer:

Group ‘A’	Group ‘B’
(a) Dividendum	(1) At Board Meeting
(b) Interest	(2) Latin term
(c) IEPF	(3) Final Dividend
(d) At AGM	(4) Interim Dividend
(e) Government Fund	(5) Creditors

Question 2.

Group ‘A’	Group ‘B’
(a) Preference Shares	(1)  ……………………
(b) Equity Shares	(2) ……………………..
(c) Deposit holders	(3) ……………………..
(d) …………………….	(4) Payment of Dividend
(e) …………………….	(5) Dividend Declared but not paid/claimed

(Fixed rate Dividend, Dividend at a Fluctuating Rate, Interest, within 30 days, Unclaimed/Unpaid Dividend)
Answer:

Group ‘A’	Group ‘B’
(a) Preference Shares	(1) Unclaimed/Unpaid Dividend
(b) Equity Shares	(2) Within 30 days
(c) Deposit holders	(3) Interest
(d) Fixed rate of Dividend	(4) Payment of Dividend
(e) Dividend at a Fluctuating Rate	(5) Dividend Declared but not paid/claimed

1H. Answer in one sentence.

Question 1.
What is Dividend?
Answer:
The dividend is a share in distributable profits of the company to which the shareholder in entitled when formally declared by the company.

Question 2.
Who has the right to recommend dividends?
Answer:
The Board of directors has the right to recommend.

Question 3.
What is a Final Dividend?
Answer:
The final dividend is that dividend that is declared and paid after the close of the financial year.

Question 4.
What is an Interim Dividend?
Answer:
The interim dividend is that dividend that is declared and paid between two AGMs of an accounting year.

Question 5.
Who declares Interim Dividend?
Answer:
The Board of directors declares Interim dividends.

Question 6.
Which shares get dividends at a fixed rate?
Answer:
Preference shares get dividends at a fixed rate.

Question 7.
Which shares get dividends at a fluctuating rate?
Answer:
Equity shares get dividends at a fluctuating rate.

Question 8.
At which meeting Interim Dividend is decided and declared?
Answer:
Interim Dividend is decided and declared in Board Meeting.

Question 9.
What is Interest?
Answer:
Interest is the price paid for the productive services rendered by capital

Question 10.
State the time within which unpaid dividends be transferred to the unpaid dividend account.
Answer:
The unpaid dividend should be transferred within 7 days of the end of 30 days within which payment has to be made.

1I. Correct the underlined word and rewrite the following sentences.

Question 1.
The dividend is paid to creditors.
Answer:
The dividend is paid to shareholders.

Question 2.
Interest is paid to shareholders.
Answer:
Interest is paid to creditors.

Question 3.
The final Dividend is paid between two AGM.
Answer:
Interim Dividend is paid between two AGM.

Question 4.
Special Resolution must be passed to declare the Final Dividend.
Answer:
An ordinary resolution must be passed to declare the Final Dividend.

Question 5.
The dividend must be paid within 60 days of its declaration.
Answer:
The dividend must be paid within 30 days of its declaration.

Question 6.
The Dividend to be paid should be transferred to Dividend A/c within 30 days of its declaration.
Answer:
The Dividend to be paid should be transferred to Dividend A/c within 5 days of its declaration

Question 7.
The dividend is an obligation to be paid by a company every year.
Answer:
Interest is an obligation to be paid by a company every year.

Question 8.
Preference shareholders are given the last priority in the payment of dividends.
Answer:
Equity shareholders are given the last priority in the payment of dividends.

Question 9.
Preference shareholders get dividends from residual profits.
Answer:
Equity shareholders get dividends from residual profits.

Question 10.
Dividend is payable every year irrespective of profits made by the company.
Answer:
Interest is payable every year irrespective of profits made by the company.

1J. Arrange in proper order.

Question 1.
(a) Recommendation of Dividend.
(b) Checking sufficiency of profits
(c) Board Meeting
Answer:
(a) Checking sufficiency of profits
(b) Board Meeting
(c) Recommendation of Dividend

Question 2.
(a) Transfer to Dividend Account
(b) Transfer to IEPF
(c) Transfer to Unpaid Dividend Account
Answer:
(a) Transfer to Dividend Account
(b) Transfer to Unpaid Dividend Account
(c) Transfer to IEPF

Question 3.
(a) Closure of Register of Members.
(b) Intimate Stock Exchange of Board Meeting.
(c) Intimate Stock Exchange of declaration of dividend.
Answer:
(a) Intimate Stock Exchange of Board Meeting
(b) Intimate Stock Exchange of declaration of dividend
(c) Closure of Register of Members

Question 4.
(a) Decision on Rate of Dividend
(b) Transfer of IEPF
(c) Payment of Dividend
Answer:
(a) Decision on Rate of Dividend
(b) Payment of Dividend
(c) Transfer to IEPF

Question 5.
(a) Payment of Interim Dividend
(b) Board meeting deciding and declaring Interim Dividend
(c) Authorization of Articles of Association
Answer:
(a) Authorization of Articles of Association
(b) Board meeting deciding and declaring Interim Dividend
(c) Payment of Interim Dividend

2. Explain the following terms/concepts.

Question 1.
Profit
Answer:
Profit is the financial gain from business activity minus expenses. Profit is the income remaining after deducting total costs from total revenue. It is also called financial gain. Profit is the difference between revenues and expenses for a given period. It is the tool for measuring the success of the business. Without profit, the company cannot survive in the market.

Question 2.
Dividend
Answer:
The term dividend is derived from the Latin word ‘Dividendum’ which means that which is to be divided. A dividend is the portion of the company’s earnings distributed to the shareholders decided and managed by the company’s board of directors. The dividend is a share in distributable profits of the company Shareholder is entitled to receive the dividend when it is formally declared by the company

Question 3.
Interest
Answer:
Interest is the cost of borrowing money typically expressed as an annual percentage of a loan. The money people earn on their savings is called Interest. Interest is paid to the lender by the borrower, in case of a loan or from the financial institution to the depositor, in the case of a savings account. In financial terms, it is a payment made for using the money of another i.e. borrower takes money from the lender. Interest is the cost of renting the money for the borrower and it is the income from lending money for the lender.

Question 4.
Final Dividend
Answer:
The final dividend is declared and paid after the financial year is closed. The final dividend is decided and recommended by the Board of Directors. The final dividend is approved by the shareholder in the AGM. The declaration of the final dividend does not require authorization of Articles of Association. The rate of the final dividend is always higher than the Interim dividend. It is declared from sources like the current year’s profits, money provided by Government for dividends, etc.

Question 5.
Interim Dividend
Answer:
The interim dividend is the dividend that is declared and paid in the middle of an accounting year i.e. before the finalization of accounts for the year. Dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend. The interim dividend is paid in the middle of the accounting year.

Question 6.
Unpaid Dividend
Answer:
Dividend declared by the company but neither paid to nor claimed by a shareholder within 30 days of its declaration is termed as Unpaid and Unclaimed Dividend.

Question 7.
Unpaid Dividend Account
Answer:
A dividend declared by the company but neither paid to nor claimed by a shareholder is called an Unpaid/Unclaimed Dividend. This unpaid/unclaimed dividend should be transferred to the Unpaid/Unclaimed Account within 30 days of its declaration. This ‘Unpaid Dividend Account’ is opened in a scheduled Bank by the company.

Question 8.
Dividend Mandate
Answer:
The dividend is paid by different modes of payment like cash, cheque, or warrant or by electronic mode. It can also be paid by using the Dividend Mandate. If the shareholder wishes to get dividend credited directly in the Bank Account he is required to send a request in a prescribed form which is called ‘Dividend Mandate’. The dividend Mandate authorizes the company to pay dividends directly to shareholders’ bankers.

Question 9.
IEPF
Answer:
IEPF means Investors Education and Protection Fund. Any amount in the Unpaid Dividend Account of a company that is unpaid/ unclaimed for a period of 7 (seven years) from the date of such a transfer shall be, transferred to ‘Investors Education and Protection Fund’. The claimant can claim his dividend by filling the prescribed form and submitting the necessary documents. The claimant needs to follow the procedure.

Question 10.
Rate of Dividend
Answer:
The return that a shareholder receives on his investment from the company is called a dividend. The dividend is always declared by the company on the face value of a share irrespective of its market value. The rate of dividend is expressed as a percentage of the face value of a share per annum.

3. Study the following case/situation and express your opinion.

1. LMN Co Limited decides to declare a dividend for the financial year 2018-19 in which it has earned profits less than their expectations.

Question (a).
Is Board right in recommending a dividend of Rs. 5/- per share out of free reserves?
Answer:
Yes, Board is right in recommending a dividend of Rs. 5/- per share out of free reserves, as dividends can be paid out of free reserves.

Question (b).
Can Board declare the dividend though it is not approved by AGM?
Answer:
No Board cannot declare the divided if it is not approved by AGM as dividends should be approved by shareholders by passing an ordinary resolution in AGM.

Question (c).
Can the Board give dividends in the form of gifts?
Answer:
No Board cannot give dividends in the form of gifts. It must be paid in cash, not in kind.

2. ABC Co. Ltd. decides to pay Interim Dividend.

Question (a).
Can it be paid out of free reserves?
Answer:
No. the Interim Dividend cannot be paid out of free reserves.

Question (b).
Is the Board right in declaring the same at the Board Meeting?
Answer:
Yes. Board is right in declaring the same at the Board meeting as it has the power to declare an Interim Dividend.

Question (c).
Can the company distribute the same within 30 days of its declaration?
Answer:
Yes, after the declaration, the Interim dividend should be paid within 30 days of its declaration.

3. RAJ Company limited decides to pay Interim Dividend.

Question (a).
Is the Board justified to decide Interim Dividend of Rs. 5/per share even though profits to date are insufficient?
Answer:
The interim dividend is paid out of profits between two annual general meetings. It cannot be paid out of any reserves. So it is not justified.

Question (b).
Can the Board declare it out of Free Reserves?
Answer:
No Board cannot declare an Interim dividend out of free reserves.

Question (c).
Can the Board declare it out of Capital?
Answer:
No Board cannot declare out of capital.

4. DIAMOND Co. Ltd. is considering declaring an Interim Dividend.

Question (a).
In how many days of the declaration it should transfer the funds to Dividend Account?
Answer:
The interim dividend must be transferred to the Dividend Account within 5 days of its declaration.

Question (b).
In how many days it must pay it to shareholders?
Answer:
The interim dividend should be paid within 30 days of its declaration to shareholders.

Question (c).
In how many days of the declaration it must transfer the funds to the Unpaid Dividend A/c?
Answer:
Unpaid/unclaimed Interim dividend should be transferred to ‘Unpaid Dividend Account’ within 7 days of the expiry of 30 days of declaration i.e. 37 days of its declaration.

5. The Board of Directors of STAR Co. Ltd. which is a listed company recommends a dividend of Rs. 15/- per share to be paid in cash.

Question (a).
Is it justified to pay the dividend firstly to its Preference Shareholders and then after to Equity Shareholders?
Answer:
Yes, because preference shares are entitled to the dividend before it is paid to the equity shareholder. Equity shareholders get dividends from residual profits i.e. after paying to preference shareholders.

Question (b).
Is the AGM required to approve the same?
Answer:
Yes for declaration of final divided Approval of AGM is a must.

Question (c).
Can the company pay dividends in cash?
Answer:
Yes, the company pay a dividend in cash and not in kind.

6. GOLD Co. Ltd. declares a dividend of Rs. 10/- per share for F.Y. 2018-19.

Question (a).
Is the company under default, if the dividend was not paid within 30 days of its declaration?
Answer:
Yes, the company is to default as the time limit within which the company must pay dividends after the declaration is 30 days.

Question (b).
Is the company right in transferring the unpaid dividend to its Debenture Reserve Account?
Answer:
No, the company has to transfer the total amount of dividend which remains unpaid/unclaimed to the ‘Unpaid Dividend Account.

Question (c).
Does the company have to transfer the amount of unpaid dividend to IEPF after 30 days?
Answer:
No, any amount in the unpaid dividend account of a company that remains unpaid/unclaimed for a period of 7 years from the date of such a transfer, should be transferred to (IEPF), ‘Investors Education and Protection Fund’.

4. Distinguish between the following:

Question 1.
Final Dividend and Interim Dividend
Answer:

Points	Interim Dividend	Final Dividend
1. Meaning	Interim Dividend is the dividend that is declared between two Annual General Meetings of a company.	The final Dividend is the dividend that is declared at the Annual General Meeting of a company.
2. When declared?	It is declared between two Annual General Meetings.	It is declared after the completion of the financial year of the company.
3. Who declares?	The interim dividend is declared by the Board of Directors by passing a resolution.	The final dividend is decided and recommended by the Board of Directors. It is declared by the shareholders.
4. Authorization	Authorization of Articles is necessary for the declaration of interim dividends.	Authorization of Articles is not necessary for the declaration of the final dividend.
5. Rate of Dividend	The rate of the Interim dividend is lower than the final dividend.	The rate of the final dividend is always higher than the Interim dividend.
6. Source	It is declared out of profits of the current accounting year.	It is declared from different sources like the current year’s profits, free reserves, capital profits, money provided by Government for dividends, etc.
7. Accounting Aspect	It is declared before the preparation of the final accounts of the company.	It is declared only after the accounts of the year are prepared and finalized.

Question 2.
Dividend and Interest
Answer:

Points	Dividend	Interest
1. Meaning	The dividend is the return payable to the shareholders of the company for their investment in the share capital.	It is the return payable to the creditors of the company. For e.g. Debenture holder, Deposit holders.
2. Intervals	Dividends need not be paid on regular basis and they can vary according to the company’s profits.	Interest has to be paid at regular intervals at a fixed rate.
3. Given to whom	It is paid to the member i.e. the owners of the company.	It is paid to the creditor of the company.
4. Expense	Dividends are not the expense as they are based on the profit made. If no profit, they are not paid for that period.	Interest is the expense to the company.
5. Rate of Dividend	The rate of the Interim dividend is lower than the final dividend.	The rate of the final dividend is always higher than the Interim dividend.
6. Obligation	It has to be paid only when the company made profits.	It is not linked to the Profits of the company. It is an obligation for the company.
7. When payable	It is payable when a company earns sufficient profit.	It is payable every year irrespective of the profits of the company.
8. Rate	It is paid at a fluctuating rate to the equity shareholders.	The rate of Interest is Fixed and pre-determined at the time of issue of the security.

5. Answer in brief.

Question 1.
State any four points to be kept in mind by a listed company with respect to dividends.
Answer:
When a company lists its shares on Stock Exchange, additional listing agreements are to be followed which are as follows:

• Stock exchange should be informed if the securities are listed 2 days prior to the Board meeting in which recommendation of final dividend is to be considered.
• Stock Exchange should be informed immediately regarding the declaration of dividend as soon as the Board meeting gets over.
• Notice of closing book should be informed at least 7 (seven) working days before the closure to the stock exchange.
• Transfer Register and Register of Members should be closed.

Question 2.
Discuss any four features of dividend.
Answer:

• It is the portion of profits of the company paid to its shareholders.
• It is payable out of profits of the company.
• It is an unconditional payment made by the company.
• If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern the rights of shareholders about receiving the dividend.

Question 3.
Explain the features of interest.
Answer:
Interest is the cost of borrowing money typically expressed as an annual percentage of a loan. The money people earn on their savings is called Interest. Interest is paid to the lender by the borrower in case of a loan or from the financial institution to the depositor in the case of a savings account. In financial terms, it is a payment made for using the money of another i.e. borrower takes money from the lender. Interest is the cost of renting the money for the borrower and it is the income from lending money for the lender.
Features:

• Interest is the price paid for the productive services rendered by capital.
• Interest has a direct relation with risk. The higher the risk, the higher is the interest.
• The rate of interest is expressed as the annual percentage of the principal.
• The rate of interest is determined by various factors like money supply, fiscal policy, the volume of borrowings, rate of inflation, etc.
• Interest is a charge against the profit of the Company. Even if, the company makes no profit, interest should be paid.
• The rate of interest is fixed and pre-determined.

6. Justify the following statements.

Question 1.
The dividend is paid out of the profits of the company.
Answer:

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

Question 2.
Interim dividends cannot be paid out of free reserves.
Answer:

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

Question 3.
Annual General Meeting (AGM) is crucial for Final Dividend.
OR
The final Dividend is declared only after the accounts are prepared and finalized.
Answer:

• The final dividend is that dividend that is declared and paid after the closing of the financial year.
• It is decided and recommended by the Board of Directors.
• The rate of final dividend is declared by the shareholders in the AGM.
• It is declared only after the account of the year is prepared and finalized.
• Thus, it is rightly said that AGM is crucial for the Final Dividend. OR Final Dividend is declared only after the accounts are prepared and finalized.
• The final dividend is declared from different sources, and its declaration does not need the authorization of articles.
• Thus, it is rightly said that AGM is crucial for the Final Dividend. OR Final Dividend is declared only after the accounts are prepared and finalized.

Question 4.
Listed Company has to follow additional guidelines on dividend matters.
Answer:

• Notify stock exchange where company’s securities are listed at least 2 (two) days in advance of the date of the meeting of the Board at which recommendation of final dividend is to be considered.
• Intimate Stock Exchange immediately about the declaration of the dividend after the Board Meeting.
• Give notice of Book closure to the stock exchange at least 7(seven) working days before the closure.
• Close the Register of members and the Transfer Register.
• It must use an electronic mode of payment such as Electronic Clearing Services (ECS) or National Electronic Fund Transfer (NEFT); as approved by the Reserve Bank of India (RBI)
• The listed company has to express the dividend on a per-share basis only.

Question 5.
Equity shareholders get the last priority in receiving dividends.
Answer:

• The dividend is the portion of profits of the company paid to its shareholders.
• The dividend is payable only to the registered shareholders of the company.
• Preference shareholders are entitled to the dividend before it is paid to the equity shareholders.
• The equity shares do not enjoy a preference for dividends.
• They do not have priority for the payment of capital at the time of liquidation.
• Equity shareholders will get dividends from residual profit i.e. after paying to preference shareholders and arrears of dividend on cumulative preference shares.
• The equity shares get the last priority in dividends and thus are the residual claimants.
• Thus, it is rightly said that the equity shareholders get the last priority in receiving dividends.

Question 6.
Unpaid dividends cannot be used by the company.
Answer:

• The dividend declared by the company but has not been paid to or claimed by a shareholder within 30 days of its declaration is termed as an unpaid dividend.
• The total amount of dividend which remains unpaid should be transferred to ‘Unpaid Dividend Account’.
• Any amount in the Unpaid Dividend Account of a Company that remains unpaid/unclaimed for a period of 7 years will be transferred to ‘Investors Education and Protection Fund’.
• The company cannot use unpaid dividends. The only claimant of money can claim for it by following certain procedures.
• Thus, it is rightly said that unpaid dividends cannot be used by the company.

Question 7.
Interest is a liability/obligation of the company.
OR
Interest is paid to the creditor of the company.
Answer:

• Interest is a payment made for using another money So it is the cost of renting the money for the borrower and it is the income from lending money for the lender.
• The company has to pay interest, if it has borrowed money from creditors like Debenture holders, Depositors, Bondholders, etc.
• Interest is the liability of the company as it is a payment made for using money from the lender.
• Interest is a charge against the profit of the company.
• Even if, the company makes no profit, it has to pay interest to borrowers.
• Thus, it is rightly said that interest is a liability/ obligation for the company.

Question 8.
Approval of members is not needed for Interim Dividends.
Answer:

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

7. Answer the following questions.

Question 1.
Define Dividend and explain its features.
Answer:
The term dividend is derived from the Latin word ‘Dividendum’ which means that which is to be divided. A dividend is the portion of the company’s earnings distributed to the shareholders decided and managed by the company’s board of directors.
The dividend is a share of distributable profits of the company. A shareholder is entitled to receive the dividend when it is formally declared by the company.
Definitions:

• The Institute of Chartered Accountants of India has defined Dividend “as a distribution to shareholders out of profits or reserves available for this purpose”.
• The Supreme Court has defined it as “In case of going – concern, it means the portion of profits of a company, which is allotted to the holders of shares in a company”.

Features of Dividend:

• It is the portion of profits of the company paid to its shareholders.
• It is payable out of profits of the company.
• It is an unconditional payment made by the company.
• The company pays dividends to the equity shareholders and preference shareholders only.
• If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern the rights of shareholders about receiving the dividend.
• A dividend cannot be declared out of capital.
• Recommendation of the Board of Directors is necessary for the declaration of dividends.
• The dividend is recommended and approved by the Board of Directors by passing a resolution at the Annual General Meeting.
• The previous year’s dividend cannot be declared if that particular year’s Annual Account has been approved in the AGM.
• Dividend once approved and declared by shareholders, creates a debt. It cannot be revoked.
• The dividend includes the interim dividend.
• The dividend must be paid in cash, cheque or transferred through ECS or NEFT and not in kind.
• The dividend is to be paid on the paid-up value of shares.
• Dividend cannot be paid on calls paid in advance.

Question 2.
What is Interest? Explain its features.
Answer:
Interest is the cost of borrowing money typically expressed as an annual percentage of a loan. The money people earn on their savings is called Interest. Interest is paid to the lender by the borrower in case of a loan or from the financial institution to the depositor in the case of a savings account. In financial terms, it is a payment made for using the money of another i.e. borrower takes money from the lender. Interest is the cost of renting the money for the borrower and it is the income from lending money for the lender.
Features:

• Interest is the price paid for the productive services rendered by capital.
• Interest has a direct relation with risk. The higher the risk, the higher is the interest.
• The rate of interest is expressed as an annual percentage of the principal.
• The rate of Interest is determined by various factors like money supply, fiscal policy, the volume of borrowings, rate of inflation, etc.
• Interest is a charge against the profit of the Company. Even if the company makes no profit, interest should be paid.
• The rate of interest is fixed and pre-determined.

Question 3.
Discuss legal provisions for declaration of dividend.
Answer:
The term dividend is derived from the Latin word ‘Dividendum’ which means that which is to be divided.
A dividend means the profit of a company that is not retained in Legal Provisions for declaration of Dividend.
(i) Board Meeting:

• The Board of Directors has the power and authority to declare the dividend.
• The board meeting is called to pass a resolution to discuss the following points.
• Rate of Dividend and amount of Dividend to be paid.
• Book closure date for dividend.
• Date of Annual General Meeting.
• Bank with which a separate account should be opened to remit the dividend amount.

(ii) Shareholders’ Approval:

• The dividend is approved by shareholders by passing an Ordinary Resolution at the Annual General Meeting.
• Shareholders can declare a lower rate of dividend than what is recommended by the Board but not higher than that.
• Once the dividend is declared at the General Meeting, it cannot be canceled. Hence, the company cannot declare dividends for the second time in that year.

(iii) Separate Bank Account:
The company must deposit the dividend amount in a separate bank account i.e. “Dividend Account” opened in a scheduled bank. The dividend must be transferred to this account within 5 days of its declaration.

(iv) Prohibition to pay Dividend:

• A company cannot declare any dividend on equity shares if the company has failed to repay the deposit or any interest on the deposit.
• If the company is found guilty at the time of Payment of Interest to debenture holders, Redemption of Debentures and Preference Shares, Payment of Interest to a financial institution, etc. in that case no dividend can be declared.

Question 4.
Explain Interim Dividend.
Answer:

• The interim dividend is the dividend that is declared and paid in the middle of an accounting year i.e. before the finalization of accounts for the year. Dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend.
• The interim dividend is paid in the middle of the accounting year.
• The interim dividend is declared by the Board of directors during any financial year out of surplus in the profit and loss account and out of profits of the financial year.

Features of Interim Dividend:

• The Board of Directors has the power to declare an interim dividend.
• Interim Dividend is only payment on account of the whole dividend for the year.
• The company should provide depreciation for the entire year and not for a part of the year before declaring an interim dividend.
• Interim dividends cannot be paid out of any reserves.
• The Board of directors can declare interim dividend only when it is mentioned in the Articles of Association of the Company.
• A resolution has to be passed in the Board Meeting for declaring the Interim Dividend.
• A separate Bank account should be maintained in a scheduled bank to credit the interim dividend within 5 (five) days of its declaration.
• Interim Dividend should be paid within 30 days of its declaration.
• Unpaid/Unclaimed dividend should be transferred to ‘Unpaid Dividend Account’ within 7 days of the expiry of 30 days of declaration i.e. 37 days of its declaration.
• Any amount remaining Unpaid/Unclaimed in the ‘Unpaid Dividend Account’ for 7 (seven) years should be transferred to IEPF.

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 9 Depository System Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 9 Depository System

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
In physical mode, securities are held in ____________ form.
(a) Paper
(b) Dematerialization
(c) Electronic
Answer:
(a) Paper

Question 2.
Risk of losing certificates exist in ____________ mode.
(a) Physical
(b) Dematerialization
(c) Digital
Answer:
(a) Physical

Question 3.
In Depository system, securities are held in ____________ form.
(a) Scrip based
(b) Electronic
(c) Physical
Answer:
(b) Electronic

Question 4.
____________ is the institute which facilitates electronic holding of securities.
(a) Depository Participant
(b) Issuer
(c) Depository
Answer:
(c) Depository

Question 5.
There is no payment of ____________ when securities are demated.
(a) Octroi
(b) Wealth Tax
(c) Stamp Duty
Answer:
(c) Stamp Duty

Question 6.
Depository Act was passed in ____________
(a) 1919
(b) 1996
(c) 1999
Answer:
(b) 1996

Question 7.
India has a ____________ depository system.
(a) Sole
(b) Multi
(c) Single
Answer:
(b) Multi

Question 8.
____________ is a constituent of depository system.
(a) Government
(b) Issuer
(c) Trust
Answer:
(b) Issuer

Question 9.
____________ is the oldest depository in India.
(a) Dow Jones
(b) NSDL
(c) CDSL
Answer:
(b) NSDL

Question 10.
Demat account is opened by ____________
(a) Beneficial owner
(b) CDSL
(c) SEBI
Answer:
(a) Beneficial owner

Question 11.
Demated shares are ____________
(a) Non-transferable
(b) Fungible
(c) Bearer
Answer:
(b) Fungible

Question 12.
____________ is a unique code given to a security.
(a) IBM
(b) BBM
(c) ISIN
Answer:
(c) ISIN

Question 13.
In India ISIN for corporate securities is allotted by ____________
(a) NSDL
(b) Central Government
(c) State Government
Answer:
(a) NSDL

Question 14.
____________ has to apply for ISIN.
(a) Company
(b) Depository Participant
(c) Depositors
Answer:
(a) Company

Question 15.
____________ has to pay charges to maintain Demat Account.
(a) Investor
(b) Issuer
(c) Depositor
Answer:
(a) Investor

Question 16.
NSDL is promoted by ____________
(a) NSE
(b) BSE
(c) FTSE
Answer:
(a) NSE

Question 17.
CDSL is promoted by ____________
(a) NSE
(b) BSE
(c) FTSE
Answer:
(b) BSE

1B. Match the pairs.

Question 1.

Group ‘A’	Group ‘B’
(a) Bad delivery	(1) 1956
(b) Depository Act	(2) A 12 digits number code
(c) ISIN	(3) Connects Government and Bank
(d) Depository Participant	(4) Second Depository in India
(e) CDSL	(5) The issuer company
(f) Depository	(6) Problem faced in physical mode
(g) Beneficial owner	(7) A 10 digits number/code
	(8) Connect depository and investor
	(9) First depository in the world
	(10) Custodian of securities in electronic form
	(11) Problem faced in electronic mode
	(12) 1996
	(13) Government organization
	(14) The investor

Answer:

Group ‘A’	Group ‘B’
(a) Bad delivery	(6) Problem faced in physical mode
(b) Depository Act	(12) 1996
(c) ISIN	(2) A 12 digits number code
(d) Depository Participant	(8) Connect depository and investor
(e) CDSL	(4) Second Depository in India
(f) Depository	(10) Custodian of securities in electronic form
(g) Beneficial owner	(14) The investor

1C. Write a word or a term or a phrase that can substitute each of the following statements.

Question 1.
This mode of holding securities may result in loss and theft of certificates.
Answer:
Physical mode of securities

Question 2.
The organization holds the securities in electronic mode.
Answer:
Depository

Question 3.
This system eliminates storing of certificates.
Answer:
Depository system

Question 4.
This system allows faster and easier transfer of securities.
Answer:
Depository system

Question 5.
The oldest Depository of India.
Answer:
NSDL (National Security Depository limited)

Question 6.
The country where the Depository system started for the first time.
Answer:
Germany

Question 7.
The registered owner of securities.
Answer:
Beneficial Owner

Question 8.
The agent of the Depository.
Answer:
Depository Participant

Question 9.
This process converts securities into an electronic form from a physical form.
Answer:
Dematerialization

Question 10.
This process converts securities into physical form from electronic form.
Answer:
Rematerialization

Question 11.
This means securities are without distinctive identity numbers.
Answer:
Fungibility

Question 12.
This is the unique code for security given in the Depository system.
Answer:
International Securities Identification Number

1D. State whether the following statements are true or false.

Question 1.
The physical mode of holding Securities is risky.
Answer:
True

Question 2.
Allotment of Securities takes a longer time when in physical mode.
Answer:
True

Question 3.
Transfer of Securities is easier in electronic mode.
Answer:
True

Question 4.
Bad delivery is likely in the Depository system.
Answer:
False

Question 5.
The depository system began in the USA for the first time in the world.
Answer:
False

Question 6.
India has a multi-depository system.
Answer:
True

Question 7.
The depository system is very similar to the banking system.
Answer:
True

Question 8.
DP is a constituent of the Depository system.
Answer:
True

Question 9.
DP is an Agent of the Depository.
Answer:
True

Question 10.
A bank can work as a DP.
Answer:
True

Question 11.
DRF is required for conversion from physical to electronic.
Answer:
True

Question 12.
ISIN is a unique code given to the specific Securities.
Answer:
True

1E. Find the odd one.

Question 1.
Elimination of storage of certificates, theft of certificates, torn certificates
Answer:
Elimination of storage of certificates

Question 2.
NSDL, CDSL, NBFC
Answer:
NBFC

Question 3.
Depository, DP, RBI
Answer:
RBI

Question 4.
DP, BO, State Government
Answer:
State government

Question 5.
Issuer, BO, Central Government
Answer:
Central government

Question 6.
DRF, RRF, PPF
Answer:
PPF

1F. Complete the sentences.

Question 1.
Central location for keeping Securities in demated form is ____________
Answer:
Depository

Question 2.
Freezing of debit/credit of Securities is possible in ____________
Answer:
Dematerialized Securities

Question 3.
First Depository of the world started in the year ____________
Answer:
1947

Question 4.
The Indian Depository Act was passed in the year ____________
Answer:
1996

Question 5.
Link between Depository and investor is ____________
Answer:
Depository participant

Question 6.
Account of Securities of the investor is maintained by ____________
Answer:
Depository Participant

Question 7.
The process which converts physical Securities in electronic form is ____________
Answer:
Dematerialization

Question 8.
The process which converts digital Securities in physical form is ____________
Answer:
Rematerialization

Question 9.
The issuer company must register with ____________
Answer:
Depository

Question 10.
The unique code identifying a security is ____________
Answer:
(ISIN) International Securities Identification Number

Question 11.
The first Depository of India is ____________
Answer:
NSDL (National Security Depository Limited)

1G. Select the correct option from the bracket.

Question (I).

Group ‘A’	Group ‘B’
(a) Dematerialization	(1) ………………..
(b) ……………………..	(2) DP
(c) First Depository of world	(3) …………………
(d) CDSL	(4) ………………..

(1999, Agent of Depository, Germany, Physical to electronic)
Answer:

Group ‘A’	Group ‘B’
(a) Dematerialization	(1) Physical to Electronic
(b) Agent of Depository	(2) DP
(c) First Depository of world	(3) Germany
(d) CDSL	(4) 1999

Question (II).

Group ‘A’	Group ‘B’
(a) First Depository in India	(1) …………………………
(b) ……………………..	(2) Rematerialisation
(c) Fungibility	(3) …………………………
(d) ……………………	(4) ISIN

(12 digital code, NSDL, Electronic to physical, No distinctive number)
Answer:

Group ‘A’	Group ‘B’
(a) First Depository in India	(1) NSDL
(b) Electronic to Physical	(2) Rematerialisation
(c) Fungibility	(3) No distinctive number
(d) 12 digital code	(4) ISIN

1H. Answer in one sentence.

Question 1.
What is the Depository system?
Answer:
A depository system is a system where Securities are held in electronic form.

Question 2.
Give examples of actions termed as corporate action.
Answer:
Payment of dividend, issue of Bonus Shares, offering of right Shares, Early Redemption of Debentures, Mergers and Acquisitions, etc.

Question 3.
When was Depository Act passed in India?
Answer:
Depository Act was passed in India in the year 1996.

Question 4.
What is a DP?
Answer:
DP means Depository participant, who is an agent of Depository.

Question 5.
What is Dematerialisation?
Answer:
Dematerialization is the process of converting physical Securities into electronic.

Question 6.
What is Rematerialization?
Answer:
Rematerialization is the process of converting electronic Securities into physical.

Question 7.
What is ISIN?
Answer:
ISIN is the unique code given to the specific Securities of the company. ISIN refers to ‘International Securities Identification Number’.

Question 8.
Name the Depositories in India?
Answer:

• National Security Depository Limited (NSDL)
• Central Depository Services Limited (CDSL)

1I. Correct the underlined words and rewrite the following sentences.

Question 1.
The electronic mode of holding Securities is risky.
Answer:
The physical mode of holding Securities is risky.

Question 2.
Allotment and Transfer of Securities are time-consuming in electronic mode.
Answer:
Allotment and Transfer of Securities are time-consuming in physical mode.

Question 3.
Banking system leads to a script less capital market.
Answer:
Depository system leads to a scriptless capital market.

Question 4.
Storage of certificates is not required in the physical mode of holding.
Answer:
Storage of certificates is not required in the electronic mode of holding.

Question 5.
India has a single Depository system.
Answer:
India has a multi Depository system.

Question 6.
Depository participant in India has to register under the Partnership Act.
Answer:
Depository participant in India has to register under the Depository Act.

Question 7.
Demat accounts are opened and maintained by the Depository.
Answer:
Demat accounts are opened and maintained by the Depository Participant.

Question 8.
Securities are fungible in physical mode.
Answer:
Securities are fungible in electronic mode.

Question 9.
ISIN is a code given to a company.
Answer:
ISIN is a code given to the security of a company.

Question 10.
ISIN of Indian government Securities is issued by NSDL.
Answer:
ISIN of Indian government Securities is issued by RBI.

1J. Arrange in proper order.

Question 1.
(a) Gets statement of Account
(b) Open Demat Account
(c) Submit DRF
Answer:
(a) Submit DRF
(b) Open Demat Account
(c) Gets statement of Account

Question 2.
(a) Investor (BO) submits an application for Securities to the issuer company
(b) Depository intimates the DP about crediting Bo’s Account
(c) Issuer company gives details of allotment to Depository.
Answer:
(a) Investor (BO) submits an application for Securities to the issuer company
(b) Issuer company gives details of allotment to Depository
(c) Issuer company gives details of allotment to Depository

2. Explain the following terms/concepts.

Question 1.
Depository System
Answer:

• In the Depository system, securities are held in electronic form.
• The transfer and settlement of securities are done electronically.
• The Depository System maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder.
• This system is also called a scriptless trading system.
• It keeps the securities safe. It offers scope for paperless trading by using state-of-art technology.

Question 2.
Dematerialization
Answer:

• Dematerialization is a process whereby a client can get physical certificates converted into electronic mode.
• For this client has to surrender the certificates along with the Demat Request Form (DRF) to the DP.

Question 3.
Rematerialization

• Rematerialization is the process whereby a client can get his electronic holdings of securities converted into physical certificates.
• For this client has to give a written request in the form of Remat Request Form (RRF) to the DP.

Question 4.
Fungibility
Answer:

• Fungibility means the state of being interchangeable. Securities issued by the same company of the same class have the same value no matter who owns them.
• The securities held in electronic form are fungible which means they don’t have distinctive numbers.

Question 5.
ISIN
Answer:

• ISIN is a standard numbering system that is accepted globally.
• ISIN consists of a 12 (twelve) digit alpha-numeric code which is divided into 3 (Three) parts.
• The company has to apply for ISIN for its securities with documents like a prospectus.

3. Study the following case/situation and express your opinion.

1. Mr. Z holds 100 shares of peculiar Co. Ltd. In physical mode and wishes to convert the same in electronic mode:

Question (a).
Mr. Z holds a savings bank account with CFDH Bank Ltd. Can he deposit his shares in this account for Demat?
Answer:
No. He can’t, as it is a savings bank account.

Question (b).
What type of account is needed for the same?
Answer:
For holding electronic securities, he needs to open a Demat A/c with the Depository Participant (DP).

Question (c).
Is it the RBI that will be the custodian of shares of Mr. Z after demating?
Answer:
No. RBI won’t be the custodian. After demating concerned ‘Depository’ (NSDL/CDSL) will be the custodian of the shares of Mr. Z.

2. Mr. R holds 100 shares of Peculiar Co. Ltd. In Demat mode.

Question (a).
He wants to transfer one share each to his wife, daughter, and son. Can he do so?
Answer:
Yes, Mr. R can do so, as under dematerialized securities market lot is of one share.

Question (b).
Does he need to submit DRF or DIS if he wants to transfer his shares?
Answer:
He needs to submit DIS (Delivery Instruction Slip) if he wants to transfer his shares.

Question (c).
Can he nominate his wife in his Demat account?
Answer:
Yes. Mr. R can nominate his wife for the Demat account.

3. Mrs. Z wishes to open a Demat account in her name.

Question (a).
Can she open the account going to the Mumbai office of NSDL?
Answer:
No, Mrs. 2 cannot go directly to the Mumbai office of NSDL.

Question (b).
Is she required to pay for the opening of the account and its maintenance?
Answer:
Yes, she is required to pay for the opening of the account and its maintenance.

Question (c).
Does she have to send the shares to the respective company for demating?
Answer:
Yes, she has to send her original share certificate through Depository Participant to the company.

4. Mr. L wants to demat his 25 shares of Peculiar Co. Ltd bearing certificate no 100 and distinctive no 76-100.

Question (a).
Which form is he required to fill as a written request to the DP?
Answer:
Mr. L is required to fill Demat Request Form (DRF) as a written request to DP.

Question (b).
Does he have to fill instrument of transfer if he wishes to transfer the same after demat?
Answer:
No, he needs to fill instrument of transfer after opening Demat A/c.

Question (c).
Does he have to quote certificate no. and distinctive no. if he wishes to transfer his shares after it is in Demat form?
Answer:
No, Mr. L need not quote certificate no. and distinctive no. if he wishes to transfer his shares after it is in Demat form.

5. Mr. S. holds 50 shares of Peculiar Co. Ltd in Demat form. The company has declared a dividend of Rs 5. Per-share and Bonus of 1 : 1 to its shareholders.

Question (a).
How will Mr. S get his dividend?
Answer:
Mr. S will get his dividend credited directly to his Demat A/c.

Question (b).
Will he get a Bonus share in Physical or Demat?
Answer:
He will get Bonus Share in his Demat A/c.

Question (c).
Who is entitled to dividend and Bonus: Mr. S or the depository? (NSDL in this case).
Answer:
Mr. S is entitled to dividends and Bonuses through the depository services.

4. Distinguish between the following.

Question 1.
Dematerialization and Rematerialization.
Answer:

Points	Dematerialization	Rematerialization
1. Meaning	Conversion of physical securities into electronic form is known as ‘Dematerialization’	Conversion of electronic securities into physical form is known as ‘Rematerialization’
2. Conversion	Securities in physical/paper form are converted into electronic form	The electronic form of securities are converted into physical form
3. Form Used	‘Demat Request Form (DRF) is submitted by the investor to the DP	‘Remat Request Form’ (RRF) is submitted by the investor to the DP
4. Process	It is an initial process	It is a reverse process
5. Function/Sequence	It is a primary and principal function of the depository	It is a secondary and supporting function of the depository
6. Distinctive numbers	Demat securities have no distinctive numbers	Remat securities will have certificates and distinctive numbers issued by the company
7. Securities Maintenance Authority	The depository is the custodian of securities and records	The issuing company keeps the record. The investor also maintains the record
8. Time Consumed	It is an easy and time-saving process	It is a complex and time-consuming process

5. Answer in brief.

Question 1.
Explain the disadvantages of the physical mode of holding securities.
Answer:
Securities mean shares, debentures, bonds, units of mutual funds, securities are held in physical form or paper form. Following are the problems/disadvantages of holding the securities in electronic form:
(i) Risk factor:
Paper certificates can be lost, damaged, torn, stolen, or misplaced during transit, etc.

(ii) Efforts in Duplicating:
If the original certificate is lost it becomes difficult to obtain duplicate certificates. It consumes time, effort, and money.

(iii) Delay in the allotment:
Allotment of new securities in physical form requires a longer time.

(iv) Delay in Transfer and Transmission:
Handling and recording physical certificates take a lot of time in the transfer and transmission of securities.

(v) Risk of Bad Delivery:
Buying and selling securities can create problems if the certificates are torn, forged, etc.

Question 2.
Explain any four advantages of the Depository system to investors.
Answer:
Investor refers to the Beneficial Owner, the one who invests in the company’s securities.
Advantages of Depository System to the Investor are as follows:
(i) No Risk:
Risks related to physical certificates like delays, loss of certificates, theft, mutilation, bad deliveries, etc. are totally eliminated.

(ii) Safety of Investment:
The safest and secure way of holding securities is in the form of DEMAT. It is controlled under Depositories Act and monitored by SEBI. For e.g. If we don’t want to deal in securities, for the time being, we can freeze the account instructing DP to avoid unexpected debit or credit.

(iii) Easy Transfer of Shares:

• There is no need of filling transfer form and submitting documents.
• Stamp duty is not applicable in this process.
• Cash realization and security transfer take place very fast.

(iv) Updated information:
The investor receives updated information about his transactions and holdings from DP and also sometimes from Depository.

(v) Loan against securities:
An investor can raise a loan from the banks against the security of Dematerialized securities.

(vi) No ‘Lots’:
The lot system has been abolished. The market lot is one share for dematerialized securities.

(vii) Nomination Facility:
Nomination Facility is allowed under the Depository system. In the event of the death of the investor, the process becomes simple.

(viii) Automatic Credit:
The investor’s account is automatically credited or debited by the company. This is called ‘Corporate Action.’
For e.g. Payment of dividend, Bonus Issue, Right Issue, Redemption, etc.

Question 3.
Explain any four advantages of the Depository system to the company.
Answer:
Benefits/Advantages of Depository System:
(A) Investors:
(i) Safety:
A safe and secure way of holding securities is in electronic form/mode. The depository system is monitored by SEBI. The Investor can keep his account in a ‘Freeze/Lock’ mode to avoid/prevent unexpected debit or credit or both by giving instructions to the DP.

(ii) Easy Transfer of Shares:
These securities can be easily transferred in electronic mode. Filling out the transfer form and uploading the documents can be easily done online. It is a time and efforts saving process. No stamp duty is levied on the depository system.

(iii) Update and Intimation:
The investor can check his status of holding securities at any time. Depository Participant provides investors with his statement of accounts periodically.

(iv) Automatic Credit:
Under, the depository system the investor’s account is automatically credited/debited. This credit or debit of accounts is usually in case of Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares, Early Redemption of Debentures, Mergers, and Acquisitions, etc.

(B) Companies:
(i) Up-to-date Information:
The depository system enables the company to maintain the information of the investors holding. It also helps the company to keep updated information about its shareholding pattern. The company is able to know the particulars of beneficial owners and their holdings periodically.

(ii) Reduction in costs and efforts:
Due to the depository system, maintaining the documents physically, the printing of certificates has saved a lot of time and cost.

(iii) Better Relationships:
The transfer process under the depository system is prompt and free from defects. So, complaints against the company by an investor are avoided in this regard. This helps the company build a good corporate image.

(iv) International Investment:
Paperless trading is a boon for the company management as it provides better and quicker services to the investors staying within the country and abroad. This attracts investment from abroad.

Question 4.
Explain Depository as a constituent of Depository System.
Answer:

• The depository is a company registered under the Companies Act, to deal in securities.
• It holds the securities in electronic form.
• It is responsible for safeguarding the investor’s securities and preventing any manipulation of records and transactions.
• There is no direct access of investors with the Depository.
• It works as a link between the company and investors.
• Statement of accounts is provided to the investor periodically.

Question 5.
Explain DP as the constituent of the Depository System.
Answer:

• Depository Participant acts as a link between the Depository and the Investor. In other words, it is an agent of the depository.
• DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI Regulations of 1996.
• It is an intermediary appointed by Depository.
• DP directly deals with customers and sends a statement of accounts periodically.
• The DP has a unique number for identification.
• Banks, Financial Institutions, Stock Brokers, etc. can function as Depository Participants.
• Thus, it is rightly justified that DP is an important constituent of the Depository system.

6. Justify the following statements.

Question 1.
Electronic holding of securities is safer than physical holding.
Answer:

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

Question 2.
Depository provides easy and quicker transfer of shares.
Answer:

• Under the Depository system, securities are held in electronic form.
• Not only the transfer and settlement of securities are done electronically but it also maintains the accounts of the shareholder, collects dividends, bonus shares, etc. on behalf of the shareholder.
• Depository Participant acts as a link between the Depository and the Investor.
• No stamp duty is levied on the depository system.
• Processing time in the transfer of securities is reduced and neither the securities nor the cash is held up for an unnecessarily long time.
• Hence it is also called a “Scripless trading system”. Thus, it is rightly justified that the Depository provides easy and quicker transfer of shares.

Question 3.
Depository System results in reduced time, cost and efforts.
Answer:

• The depository System has a very important role to play in the successful functioning of the Capital market.
• Under Depository System, securities are held in electronic form.
• The transfer and settlement of securities are done electronically.
• The Depository system maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder.
• It eliminates a huge volume of paperwork, storage, and handling of physical certificates.
• Thus, it is rightly justified that, Depository system results in reduced time, cost and efforts.

Question 4.
The depository system is very similar to the Banking system.
Answer:

• The depository system is similar to the Banking system in many aspects.
• Depository keeps the securities safe, just like the bank keeps the money of the account holder safe.
• In banks, funds are held in accounts having unique numbers. Similarly, securities are held in accounts having unique IDs.
• There is no physical handling of money in the bank. Similarly, there is no physical handling of securities by the depository.
• Bank facilitates the transfer of funds between accounts. Depository facilitates the transfer of securities between accounts.
• Thus, it is rightly justified that the Depository system is very similar to the Banking system.

Question 5.
DP is an important constituent of the Depository system.
Answer:

• Depository Participant acts as a link between the Depository and the Investor. In other words, it is an agent of the depository.
• DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI Regulations of 1996.
• It is an intermediary appointed by Depository.
• DP directly deals with customers and sends a statement of accounts periodically.
• The DP has a unique number for identification.
• Banks, Financial Institutions, Stock Brokers, etc. can function as Depository Participants.
• Thus, it is rightly justified that DP is an important constituent of the Depository system.

Question 6.
Depository system allows both: Physical to electronic and electronic to physical conversion.
Answer:

• Under the Depository system, physical certificates can be converted into electronic ones known as ‘Dematerialization’.
• Similarly, the conversion of electronic securities into physical certificates is known as ‘Rematerialization’.
• Due to Dematerialization transfer of securities takes place fast and transactions are also settled immediately. Whereas in Rematerialization, settlement of transactions in the physical system takes more time.
• In Rematerialization, storing and handling physical certificates is more time-consuming. Whereas in dematerialization, there is no handling of certificates.
• There are chances of certificates getting lost, damaged, torn, stolen, misplaced during transit, etc.
• In this technological world, Demat securities are more preferred over Rematerialized securities.
• Thus, it is rightly justified that the Depository system allows both: Physical to electronic and electronic to physical conversion.

Question 7.
ISIN is a necessary component of Demat.
Answer:

• International Securities Identification Number (ISIN) is a code that uniquely identifies a specific securities issue.
• ISINs are allotted by that country’s NNA (National Numbering Agency).
• ISIN is a standard numbering system that is accepted globally.
• The ISIN’s structure is currently defined by the International Organization of Standardization (ISO).
• ISIN consists of a 12 (twelve) digit alpha-numeric code which is divided into 3 (three) parts.
• The company has to apply for ISIN for its securities with documents like a prospectus.
• In India, issuing ISIN to securities is assigned by SEBI to NSDL (for Demat shares). SEBI works as NNA in India.
• Thus, from the above points, it is rightly justified that ISIN is a necessary component of Demat.

7. Answer the following.

Question 1.
What is Depository System? Explain its advantages?
Answer:
The depository system came into existence in the year 1996. It is a system where securities are held in electronic form. It also maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. In other words, it is also called a scriptless trading system.

Benefits/Advantages of Depository System:
(A) Investors:
(i) Safety:
A safe and secure way of holding securities is in electronic form/mode. The depository system is monitored by SEBI. The Investor can keep his account in a ‘Freeze/Lock’ mode to avoid/ prevent unexpected debit or credit or both by giving instructions to the DP.

(ii) Easy Transfer of Shares:
These securities can be easily transferred in electronic mode. Filling out transfer forms and uploading the documents can be easily done online. It is a time and efforts saving process. No stamp duty is levied on the depository system.

(iii) Update and Intimation:
The investor can check his status of holding securities at any time. Depository Participant provides investors with his statement of accounts periodically.

(iv) Automatic Credit:
Under, the depository system the investor’s account is automatically credited/debited. This credit or debit of accounts is usually in case of Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares, Early Redemption of Debentures, Mergers, and Acquisitions, etc.

(B) Companies:
(i) Up-to-date Information:
The depository system enables the company to maintain the information of the investors holding. It also helps the company to keep updated information about its shareholding pattern. The company is able to know the particulars of beneficial owners and their holdings periodically.

(ii) Reduction in costs and efforts:
Due to the depository system, maintaining the documents physically, the printing of certificates has saved a lot of time and cost.

(iii) Better Relationships:
The transfer process under the depository system is prompt and free from defects. So, complaints against the company by an investor is avoided in this regard. This helps the company build a good corporate image.

(iv) International Investment:
Paperless trading is a boon for the company management as it provides better and quicker services to the investors staying within the country and abroad. This attracts investment from abroad.

Question 2.
Explain the constituents of the depository system.
Answer:

(i) Depository:

• Depository is an organization or a system where securities/shares are held in electric form.
• Depository transfers securities/shares between accounts on the instruction of the account holders.
• Depository contacts the customer through a depository participant.
• Transfer of shares is made through mere computerized book-entry in the depository.
• This becomes possible because shares are dematerialized.
• Only those securities which are held in the form of the share certificate are one’s names can be dematerialized.
• At present, there are two depositories. They are:
  • National Securities Depository Limited (NSDL)
  • Central Depository Services Limited (CDSL).

(ii) Depository Participant:

• The depository participant is the representative of the depository.
• Depository participant acts as an intermediary between investors and depositories.
• The depository participants have an identity number for identification.
• It has to maintain accounts of securities of each investor.
• Depository participant gives intimation about holdings from time to time by sending a statement of holding.
• According to SEBI guidelines financial institutions, banks, stockbrokers can act as depository participants.

(iii) Beneficial Owner:

• An investor is known as ‘Beneficial Owner’ on whose name Demat account is opened.
• He enjoys the rights and benefits of members such as getting dividends, getting bonus shares, to vote at meetings.
• He is allotted an account number where securities are held.

(iv) Issuer Company:

• It is a company that makes an issue of securities.
• It must get registered with the depository.

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 8 Correspondence with Depositors Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 8 Correspondence with Depositors

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
Depositors are ____________ of a company.
(a) members
(b) creditors
(c) debtors
Answer:
(b) creditors

Question 2.
Depositors provide ____________ capital to the company.
(a) short term
(b) long term
(c) medium-term
Answer:
(a) short term

Question 3.
A company cannot accept deposit for more than ____________ months.
(a) 24
(b) 36
(c) 45
Answer:
(b) 36

Question 4.
A company cannot accept deposit for less than ____________ months.
(a) 6
(b) 3
(c) 5
Answer:
(a) 6

Question 5.
Deposits are ____________ loans of the company.
(a) fixed
(b) short term
(c) long term
Answer:
(b) short term

Question 6.
Public deposits are accepted to meet the requirement of ____________ capital.
(a) fixed
(b) working
(c) owned
Answer:
(b) working

Question 7.
____________ has the power to invite deposits from public.
(a) Shareholders
(b) Auditors
(c) Board of Directors
Answer:
(c) Board of Directors

Question 8.
Rate of interest on deposits is ____________
(a) fixed
(b) fluctuating
(c) moderate
Answer:
(a) fixed

Question 9.
The return or income for the investment of money on deposits is called ____________
(a) dividend
(b) interest
(c) discount
Answer:
(b) interest

1B. Match the pairs.

Question 1.

Group ‘A’	Group ‘B’
1. Depositors	(a) Fixed
2. Rate of Interest on deposits	(b) Evidence of Ownership
3. Deposit receipt	(c) Debtors
	(d) Creditors
	(e) Evidence of deposit
	(f) Fluctuating

Answer:

Group ‘A’	Group ‘B’
1. Depositors	(d) Creditors
2. Rate of Interest on deposits	(a) Fixed
3. Deposit receipt	(e) Evidence of deposit

1C. Write a word or a term or a phrase that can substitute each of the following statements.

Question 1.
Return on investment on deposit.
Answer:
Interest

Question 2.
The instrument for payment of interest on the deposit.
Answer:
Interest Warrant

Question 3.
An acknowledgment of the fixed deposit accepted by a company.
Answer:
Fixed Deposit Receipt

Question 4.
Return of deposits on the maturity date.
Answer:
Repayment of deposit

Question 5.
The maximum period of deposits.
Answer:
36 months

1D. State whether the following statements are true or false.

Question 1.
Fixed deposit is a short-term source of finance for the company.
Answer:
True

Question 2.
Fixed deposit holder is a creditor of the company.
Answer:
True

Question 3.
Deposits are invited by the company without issuing statutory advertisement.
Answer:
False

Question 4.
Fixed deposit holders are entitled to receive dividends.
Answer:
False

Question 5.
A private company cannot accept deposits from the general public.
Answer:
True

Question 6.
Depositors are given voting rights.
Answer:
False

1E. Find the odd one.

Question 1.
Dividend, Depositor, Deposit Receipt
Answer:
Dividend

Question 2.
Trust Deed, Depository, Deposit Receipt
Answer:
Depository

1F. Complete the Sentences.

Question 1.
Depositors are the ____________ of the company.
Answer:
Creditors

Question 2.
The ____________ must be cautious and careful while writing letters to the depositors.
Answer:
Secretary

Question 3.
Deposit is a ____________ term source of finance of the company.
Answer:
Short

Question 4.
A company can accept deposits for the minimum period of ____________ months.
Answer:
6 months

Question 5.
Depositors are entitled to receive ____________ at fixed rate.
Answer:
Interest

1G. Select the correct option from the bracket.

Question 1.

Group ‘A’	Group ‘B’
(1) Depositor	(a) …………………….
(2) Return on Deposits	(b) …………………….
(3) …………………….	(c) Maximum period of Deposits
(4) Minimum Period of Deposits	(d) ………………………

(Interest, Creditors of the company, 36 months, 6 months)
Answer:

Group ‘A’	Group ‘B’
(1) Depositor	(a) creditors of the company
(2) Return on Deposits	(b) interest
(3) 36 months	(c) Maximum period of Deposits
(4) Minimum Period of Deposits	(d) 6 months

1H. Answer in one sentence.

Question 1.
Who is the depositor?
Answer:
The person who keeps his/her money for a fixed period of time with the company is known as ‘Depositor’.

Question 2.
What is the return on deposit?
Answer:
Fixed-rate of interest is provided as the return on a deposit.

Question 3.
What is Interest Warrant?
Answer:
An interest warrant is an instrument of payment of interest.

Question 4.
What is a renewal of deposit?
Answer:
A process of continuing the deposit for an additional time period after maturity of investment (deposit) is called “Renewal of Deposit”.

Question 5.
Which document is enclosed along with the Renewal Letter?
Answer:
Renewal Deposit Receipt is enclosed along with the Renewal Letter.

Question 6.
When will the company return the deposits?
Answer:
The company will return the deposit amount at the time of maturity (after the expiry of the fixed period).

Question 7.
What is the minimum and maximum period of deposit?
Answer:
The deposit can be accepted for a minimum period of 6 months and a maximum period of 36 months.

1I. Correct the underlined words and rewrite the following sentence.

Question 1.
Depositors are owners of the company.
Answer:
Depositors are creditors of the company.

Question 2.
Deposits are the internal source of financing.
Answer:
Deposits are the external source of financing.

Question 3.
Deposit is a long-term source of capital.
Answer:
Deposit is a short-term source of capital.

Question 4.
Depositors are entitled to receive dividends.
Answer:
Depositors are entitled to receive interest.

1J. Arrange in proper order.

Question 1.
(a) Renewal of deposit
(b) Acceptance of deposit
(c) Deposit Receipt
Answer:
(a) Acceptance of deposit
(b) Deposit Receipt
(c) Renewal of deposit

Question 2.
(a) Payment of interest
(b) Deposit Receipt
(c) Acceptance of deposits
Answer:
(a) Acceptance of deposits
(b) Deposit Receipt
(c) Payment of interest

2. Explain the following terms/concepts.

Question 1.
Depositor
Answer:
The person who keeps deposits with the company for a fixed period of time is known as ‘Depositor’.

Question 2.
Deposit
Answer:
Deposit is a short-term source of finance of the company and it is used in order to satisfy the short-term working capital needs of the company.

Question 3.
Interest on deposit
Answer:
Interest on deposit refers to the return on the investment of money in deposits.

Question 4.
Deposit Receipt
Answer:
A deposit Receipt is an acknowledgment of deposit money accepted by the company.

Question 5.
Renewal of deposit
Answer:
Renewal of Deposit means accepting the same deposit for an additional period of time after its maturity.

Question 6.
Repayment of Deposit
Answer:
Refunding the amount of deposit on the maturity of tenure of deposits is known as ‘Repayment of Deposit’.

3. Answer in brief.

Question 1.
Which precautions are to be taken by the secretary while corresponding with depositors?
Answer:
Following precautions should be undertaken while drafting letters to the depositors:
(i) Courtesy:
While writing letters to the depositors, polite replies are essential. Rude and harsh words should be strictly avoided.

(ii) Quick response:
Being the creditors of the company, due respect should be given to the depositors of the company. Immediate replies to be given to the queries and complaints of the depositors without any delay.

(iii) Accuracy:
Letters written to the depositors should be accurate and precise. True and correct information should be provided to them.

(iv) Conciseness:
The letters to the depositors must be concise i.e. short, brief, and to the point. Unnecessary and irrelevant information should be avoided.

(v) Your Attitude:
The letters to the depositors must be written after taking into consideration the requirements of the depositors.

(vi) Secrecy:
As a confidential officer, the secretary has to maintain secrecy regarding correspondence with the depositors. Any secret information regarding the company must not be disclosed through correspondence.

(vii) Image and Goodwill:
Correspondence plays a very important role in maintaining the goodwill of the company. While corresponding, the secretary should take all necessary steps so that the goodwill of the company will not get affected.

(viii) Legal Provision:
The secretary should see to it that all provisions relating to invitation, acceptance, renewal, and repayment of deposits are duly followed by the company while corresponding with depositors.

Question 2.
What are the circumstances under which the Secretary makes correspondence with depositors?
Answer:

• A company secretary has to conduct correspondence with depositors on different occasions.
• This correspondence is limited as they are creditors and not the owners of the company.
• Deposits are accepted for a short period.
• The relationship of depositors also comes to an end immediately after deposits are repaid.

Following are the circumstances under which correspondence is done with the depositors:

• Letter to express thanks to the depositor for showing faith in the company and depositing the amount
• Intimation about payment of interest
  • Interest warrant
  • Electronic payment of Interest
• Letter informing about the renewal of deposit
• Informing the depositor about the maturity of deposits.

4. Justify the following statements.

Question 1.
The Company Secretary should take certain precautions while corresponding with depositors.
Answer:

• The deposit represents the short-term borrowed capital of the company.
• Depositors are the creditors of the company.
• The company secretary should correspond properly with the depositors in order to ensure the continuous flow of investments.
• The reply to queries and complaints of depositors should be prompt and courteous.
• The letter should be written from the depositors’ point of view and accurate information must be supplied to them.
• All the legal provisions must be followed and the goodwill of the company has to be maintained.
• Thus, it is rightly justified that the company secretary should take every precaution while corresponding with depositors.

Question 2.
There are certain circumstances when a secretary has to correspond with depositors.
Answer:

• Depositors are the creditors of the company and not the owners.
• Frequent correspondence with depositors is not required as they do not participate in the management of the company.
• The company secretary has to conduct correspondence with depositors regarding the acceptance of deposits, payment of interest on deposits, renewal of deposits, repayment of deposits, and so on.
• Secretary conducts such correspondence on behalf of the company and also as per the instructions of the Board of Directors.
• The secretary should be very cautious and careful while corresponding with depositors of the company.
• Thus, it is rightly justified that the secretary has to correspond with depositors on certain circumstances.

5. Attempt the following.

Question 1.
Draft a letter of thanks to depositors of a company.
Answer:

RADHIKA INDUSTRIES LIMITED
501A, Bandra-Kurla Complex, Bandra (East), Mumbai: 400 051
CIN: L46001 MH2002 PLC 503433

Tel. No.: 022-24761524
Fax No.: 022-24881242
Ref. No.: D/DEP/05/2018-19

Website: www.radhikalimited.com
Email: radhika4@gmail.com
Date: 15th May 2019

Mr. Deepak Ved
C/25, LIC Colony
L.J. Road, Mahim,
Mumbai – 400 096

Sub: Thanking Depositor For Fixed Deposit.

Dear Sir,
As per your application received for a fixed deposit of ₹ 1,00,000/- for a period of 1 year, dated 10th May 2019, we are thankful to you for showing faith and confidence in the company.

The details of deposits accepted are given in the following schedule:

1	2	3	4	5
Fixed Deposit Receipt No.	Amount of Deposit	Period of Deposit (years)	Rate of Interest (%)	Bank Details
				Name of the Bank	Bank Account No.
412	₹ 1,00,000	1 year	10%	Bank of Baroda	613234

The Board of Directors of our company expresses their gratitude for depositing money in our company. The fixed deposit receipt is enclosed along with this letter.

We assure you the best of our services all the time.
Thanking you,

Yours faithfully
For Radhika Industries Limited,

Sign
Mr. Harshad Sagwekar

Encl: Fixed Deposit Receipt No. 412

Question 2.
Draft a letter to a depositor informing him about payment of interest through interest warrant.
Answer:

RADHIKA INDUSTRIES LIMITED
501A, Bandra-Kurla Complex, Bandra (East), Mumbai: 400 051
CIN: L46001 MH 2002 PLC 503433

Tel. No.: 022-24761524
Fax No.: 022-24881242
Ref. No.: D/DEP/25/2019-20

Email: radhika4@gmail.com
Website: www.radhikalimited.com
Date: 18th April 2019

Mrs Ruchika Korgaonkar
A/23, BPT Colony,
N.K.Road, Mahim,
Mumbai:-400 096.

Sub: Payment of Interest on Fixed Deposits.

Dear Madam,
As per the board resolution passed in the Board Meeting held on 16th April 2019, this is to inform you that the interest @ 10% on your Fixed Deposit is due for payment.

Your company has complied with all the provisions relating to the payment of interest on deposits and the interest warrant drawn on ICICI Bank, Prabhadevi branch is enclosed herewith.

The details of your Fixed Deposit and interest payable on the deposit are given in the following schedule:

1	2	3	4	5	6	7
Interest Warrant No.	Fixed Deposit Receipt No.	Deposit amount	Rate of Interest (%)	Gross amount of interest	TDS @(10%)	The net amount of Interest Payable (₹)
3325	1242	₹ 1,00,000	10%	₹ 10,000	₹ 1,000	₹ 9,000

TDS certificate is enclosed for income tax purposes along with the interest warrant.
Thanking you,

Yours faithfully,
For Radhika Industries Limited

Sign
Mr. Fazal Shahzman

Encl:

1. Interest Warrant No. 3325
2. TDS certificate

Question 3.
Write a letter to the depositor for the renewal of his deposit.
OR
Draft a letter to the depositor for renewal of his deposit.
Answer:

SUNRISE INDUSTRIES LIMITED
50/A, Swami Narayan Road, Tunga Village, Mumbai: 400 072
CIN: L42105 MH2005 PLC 402512

Tel. No.: 022-23731242
Fax No.: 022-23738656
Ref. No.: S/DEP/51/2019-20

Website: www.sunriselimited.com
Email: sunrise5@gmail.com
Date: 17th Feb 2019

Mr. Rajesh Joshi
20, Hilton Complex,
Laxmi Road,
Solapur – 413 018

Sub: Renewal on Fixed Deposits.

Dear Sir,
We, hereby, acknowledge receipt of your application for the renewal of a deposit of ₹ 50,000/- for a further period
of one year. We have also received duly discharged deposit receipt No. 1242 and the same has been placed before the Board for consideration and approval.

As per the resolution passed at the Board meeting held on 15th Feb 2019, the Board has decided to renew the deposits for a further period of 1 year on the same terms and conditions.

A deposit receipt No 4424 is enclosed along with this letter.
Thanking you,

Yours faithfully,
For Sunrise Industries Ltd,

Sign
Miss Shalakha Suvarna
Company Secretary

Encl: Fixed Deposit receipt No 4424

Question 4.
Draft a letter to the depositor regarding redemption or repayment of his deposit.
Answer:

SWARG MARBLE LIMITED
40/B, C – Ramchandra Road, Khar (East), Mumbai: 400 053
CIN: L24308 MH2006 PLC 211388

Tel. No.: 022-4133242
Fax No.: 022-4215212
Ref. No.: S/DEP/15/19-20

Email: swarglimitedl2@gmail.com
Website: www.swarglimited.com
Date: 21st April 2019

Mr. Santosh Vichare
A/21, Swastik Colony,
Bhadkamkar Marg,
Fort, Mumbai:-400 020

Sub: Repayment of Fixed Deposits.

Dear Sir,
This is to inform you that your Fixed Deposit Receipt No. 3225 dated 1st May 2018 for ₹ 1,00,000/- will be due for repayment on 30th April 2019.

We have received original Deposit Receipt No. 3225 duly discharged along with instruction for repayment. The Board of Directors in the meeting held on 20th April 2019 has passed a resolution for the redemption of the deposits.

The details of repayment of deposit are as under:

1	2	3	4	5	6	7	8
Tenure of Deposit	Fixed Deposit Receipt No.	Deposit amount (₹)	Rate of Interest (10%)	Maturity amount (₹)	TDS (10%)	Net amount	Due Date of Deposit
1 year	3225	₹ 1,00,000	₹ 10,000	₹ 1,10,000	₹ 1,000	₹ 1,09,000	30th April 2019

Please find enclosed herewith a crossed cheque of ₹ 1,09,000, bearing No. 126224 dated 30th April 2019 drawn on Bank of India, Tardeo, Mumbai:- 400 034.
Thanking you,

Yours faithfully,
For Sward Industries Ltd,

Sign
Mr. Sandesh Virkar
Company Secretary

Encl: Crossed Cheque No. 126224

Question 5.
Draft a letter to a depositor informing him about payment of interest through electronic mode.
Answer:

RADHIKA INDUSTRIES LIMITED
501 A, Bandra-Kurla Complex, Bandra (East), Mumbai: 400 051
CIN: L46001 MH2002 PLC 503433

Tel. No.: 022-24761524
Fax No.: 022-24881242
Ref. No.: D/DEP/25/2019-20

Email: radhika4@gmail.com
Website: www.radhikalimited.com
Date: 18th April 2019

Mrs Anushka Khanvilkar
A/21, Mahindra Tower,
Tardeo Road, Mumbai Central,
Mumbai – 400 034

Sub: Payment of Interest on Fixed Deposits through ECS or NEFT.

Dear Madam,
As per the board resolution passed in the Board Meeting held on 16th April 2019, this is to inform you that the interest @ 10% on your Fixed Deposit is due for payment.

Your company has complied with all the provisions relating to the payment of interest on the deposits.

The details of your Fixed Deposit and interest payable on the deposit are given in the following schedule:

1	2	3	4	5	6
Fixed Deposit Receipt No.	Deposit amount	Rate of Interest (%)	Gross amount of interest	TDS @ (10%)	The net amount of Interest Payable (₹)
1242	₹ 1,00,000	10%	₹ 10,000/-	₹ 1,000	₹ 9,000

Interest will be payable by electronic transfer (ECS/NEFT), i.e. by crediting said interest to your bank account as per details provided by you to the company.
Thanking you,

Yours faithfully,
For Radhika Industries Limited,

Sign
Mr. Deepak Ved

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 7 Correspondence with Debentureholders Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 7 Correspondence with Debentureholders

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
Debenture Capital is a ______________ capital of a company.
(a) borrowed
(b) owned
(c) permanent
Answer:
(a) borrowed

Question 2.
Debenture holders are ______________ of the company.
(a) Owner
(b) Creditors
(c) Debtors
Answer:
(b) Creditors

Question 3.
Borrowed capital is provided to the company by ______________
(a) Equity shareholder
(b) Debenture holders
(c) Reference Shareholders
Answer:
(b) Debenture holders

Question 4.
Interest on Registered Debentures is given through ______________
(a) Interest Coupons
(b) Interest Warrant
(c) Refund order
Answer:
(b) Interest Warrant

Question 5.
______________ are the creditors of the company.
(a) Shareholders
(b) Debenture holders
(c) Directors
Answer:
(b) Debenture holders

Question 6
Bearer Debenture holders get interest though ______________
(a) Interest Warrants
(b) Refund Orders
(c) Interest Coupons
Answer:
(c) Interest Coupons

Question 7.
Return of income on debentures is ______________ at fixed rate.
(a) Dividend
(b) Loan
(c) Interest
Answer:
(c) Interest

Question 8.
______________ is an acknowledgement of debt issued by the company under common seal.
(a) Debentures
(b) Shares
(c) Reserve
Answer:
(a) Debentures

Question 9.
Debentures repayable after a certain period are ______________ debentures.
(a) Convertible
(b) Registered
(c) Redeemable
Answer:
(c) Redeemable

Question 10.
The rate of interest payable on Debentures is ______________
(a) uncertain
(b) Floating
(c) Fixed
Answer:
(c) Fixed

Question 11.
Debenture holders receive ______________ Certificate from the company.
(a) Share
(b) Bond
(c) Debenture
Answer:
(c) Debenture

Question 12.
Interest Warrants are sent to ______________ of the company.
(a) Shareholders
(b) Debenture holders
(c) Owners
Answer:
(b) Debenture holders

1B. Match the pairs.

Question 1.

Group ‘A’	Group ‘B’
(a) Debenture holder	(1) Borrowed Capital
(b) Interest on Debentures	(2) Interest Coupons
(c) Convertible Debentures	(3) Evidence of Loan
(d) Debenture Certificate	(4) Safe and secure investment
(e) Investment in Debentures	(5) Interest Warrant
(f) Redeemable Debentures	(6) Conversion into Debentures
(g) Debentures	(7) Risky investment
	(8) Evidence of shares
	(9) Creditors
	(10) Conversion into equity shares
	(11) Redeemed after a fixed period
	(12) Redeemed at winding up of the company
	(13) Owner
	(14) Owned Capital

Answer:

Group ‘A’	Group ‘B’
(a) Debenture holder	(9) Creditors
(b) Interest on Debentures	(5) Interest Warrant
(c) Convertible Debentures	(10) Conversion into equity shares
(d) Debenture Certificate	(3) Evidence of Loan
(e) Investment in Debentures	(4) Safe and secure investment
(f) Redeemable Debentures	(11) Redeemed after a fixed period
(g) Debentures	(1) Borrowed Capital

1C. Write a word or a term or a phrase that can substitute each of the following statements.

Question 1.
Return on investment in debentures.
Answer:
Interest

Question 2.
Documentary evidence of holding the debentures.
Answer:
Debenture Certificate

Question 3.
Status of Debenture holders.
Answer:
Creditor

Question 4.
Debentures can be converted into equity shares.
Answer:
Convertible Debentures

Question 5.
The person who purchases debentures of the company.
Answer:
Debenture holders

Question 6.
An acknowledgment of debt issued by the company under its common seal.
Answer:
Debenture

Question 7.
Debentures whose name is mentioned in the Register of Debentures holders.
Answer:
Registered Debentures

1D. State whether the following statements are true or false.

Question 1.
Debenture holders get regular dividends.
Answer:
False

Question 2.
The debenture is the loan capital of the company.
Answer:
True

Question 3.
Convertible Debentures can be converted into equity shares.
Answer:
True

Question 4.
Interest on Debentures is paid notwithstanding the volume of profit.
Answer:
True

Question 5.
Debenture holders enjoy full membership rights of the company.
Answer:
False

Question 6.
Dividend warrants are used to pay interest to the debenture holders.
Answer:
False

Question 7.
All types of debentures are eligible for conversion into equity shares.
Answer:
False

Question 8.
Debentures are never redeemed by the company.
Answer:
False

Question 9.
Debenture holders are the owners of the company.
Answer:
False

Question 10.
Debentures are always fully paid up.
Answer:
True

1E. Find the odd one.

Question 1.
Depository Interest, Dividend.
Answer:
Depository

Question 2.
Interest Warrant, Dividend Warrant, Demat.
Answer:
Demat

Question 3.
Debenture holders, Shareholders, Dematerialisation.
Answer:
Dematerialization

Question 4.
Debenture holders, Shareholders, SEBI.
Answer:
SEBI

1F. Complete the Sentences.

Question 1.
Debenture holder is a ______________ of a company.
Answer:
Creditor

Question 2.
Company issues ______________ certificate to the Debenture holder after allotment of Debentures.
Answer:
Debenture

Question 3.
Debenture holder gets ______________ at fixed rate as a return or income.
Answer:
Interest

Question 4.
In case of Registered Debentures, Interest ______________ are used to pay interest.
Answer:
Warrants

Question 5.
The ______________ has to correspond with Debenture holders on important occasions.
Answer:
Secretary

Question 6.
The person who purchases the Debentures of a company is called ______________
Answer:
Debenture holder

Question 7.
Interest does not depend upon ______________ of the company.
Answer:
Profit

Question 8.
Company cannot issue Debentures with ______________ rights.
Answer:
Voting

Question 9.
Debenture Certificate should be issued within a period of ______________ months, from the date of allotment of Debentures.
Answer:
6

Question 10.
A company cannot issue Debentures to more than 500 people without appointing a ______________
Answer:
Debenture trustee

Question 11.
The power to issue Debentures has been vested with the ______________
Answer:
Board of Directors

1G. Select the correct option from the bracket.

Question 1.

Group ‘A’	Group ‘B’
(a) Return on Debentures	(1) ………………………….
(b) Debenture Certificate	(2) …………………………
(c) …………………………	(3) Debenture holders
(d) ………………………..	(4) Debenture
(e) ………………………..	(5) Power to issue Debentures

(Debt capital, Board of Directors, Creditors, Issued within 6 months, Interest)
Answer:

Group ‘A’	Group ‘B’
(a) Return on Debentures	(1) Interest
(b) Debenture Certificate	(2) Issued within 6 months
(c) Creditors	(3) Debenture holders
(d) Debt capital	(4) Debenture
(e) Board of Directors	(5) Power to issue Debentures

1H. Answer in one sentence.

Question 1.
Who is the Debenture holder?
Answer:
The person who purchases Debentures of the company is known as a Debenture holder.

Question 2.
What is the income of Debentures holder?
Answer:
The income received by the Debenture holder is the fixed rate of interest.

Question 3.
What is Debenture?
Answer:
A debenture is an acknowledgment of debt received by the company.

Question 4.
What are Convertible Debentures?
Answer:
Convertible Debentures are the Debentures that are converted into equity shares.

Question 5.
Who takes the decision to allot the debentures?
Answer:
The Board of Directors takes the decision to allot the Debentures.

Question 6.
Which form is enclosed along with the letter of redemption of debentures?
Answer:
The debenture Redemption form is enclosed along with the letter of redemption of Debentures.

Question 7.
Which certificate will be issued after the Allotment of debenture?
Answer:
A debenture Certificate will be issued after the allotment of the debenture.

1I. Correct the underlined words and rewrite the following sentence.

Question 1.
The person who purchases debentures of the company is called Shareholders.
Answer:
The person who purchases Debentures of the company is called a Debenture holder.

Question 2.
Debenture holders get regular dividends at a fixed rate.
Answer:
Debenture holders get regular interest at a fixed rate.

Question 3.
A Share Certificate must be issued after the allotment of debentures.
Answer:
A Debenture Certificate must be issued after allotment of debentures.

Question 4.
A Debenture Redemption Reserve Fund is created by the company for the redemption of shares.
Answer:
A Debenture Redemption Reserve Fund is created by the company for the redemption of debentures.

Question 5.
A Demat Request Form is sent along with the letter of redemption of debentures.
Answer:
A Debenture Redemption Form is sent along with the Letter of Redemption of Debentures.

Question 6.
A company must issue a Debenture Certificate within 8 months of allotment of debentures.
Answer:
A company must issue a Debentures certificate within 6 months of allotment of debentures.

1J. Arrange in proper order.

Question 1.
(a) Board Resolution
(b) Allotment of Debentures
(c) Board Meeting.
Answer:
(a) Board Meeting
(b) Board Resolution
(c) Allotment of Debentures

Question 2.
(a) Interest Warrant
(b) Allotment of debentures
(c) Board meeting.
Answer:
(a) Board Meeting
(b) Allotment of Debentures
(c) Interest Warrant

2. Explain the following terms/concepts.

Question 1.
Debentures
Answer:

• Debentures represent the borrowed capital of the company.
• A debenture is an acknowledgment of debt given to the company.
• Debenture Capital is also known as the ‘Supporting Capital’ of the company.

Question 2.
Debenture holder
Answer:

• The person who buys Debentures of the company is known as ‘Debenture holders’.
• The debenture holder is the creditor of the company and has no right to participate in the management of the company.
• They get a fixed rate of interest as a return on their investment.

Question 3.
Interest on Debentures
Answer:

• The returns paid on investment in Debentures are known as ‘Interest’.
• The Rate of interest on Debentures is decided at the time of issue of Debentures.
• Debenture holders get a fixed rate of interest which does not depend upon the profit of the company.

Question 4.
Redemption of Debentures
Answer:

• Redemption means repayment.
• Debenture represents borrowed capital of the company and hence, it has to be repaid.
• Redeemable Debentures are repaid at the time of maturity. It is medium-term capital.

Question 5.
Conversion of Debentures
Answer:

• Conversion of Debentures means converting Debentures into equity shares.
• Convertible Debentures are those Debentures that are not repaid on maturity but converted into equity shares.
• Before conversion, they enjoy all rights of creditors whereas after conversion they get all benefits of the owner.

Question 6.
Interest Warrant
Answer:

• An interest Warrant is an instrument or payment of interest to the Debenture holders.
• It is like a crossed cheque that can be encashed through the Debenture holder’s bank account.

Question 7.
Conciseness
Answer:

• Conciseness refers to avoiding irrelevant and unnecessary information.
• As far as possible the letter should be brief, short, and to the point so that, the reader should develop an interest in reading it.

Question 8.
Precise Information
Answer:

• Precise information refers to providing timely and up-to-date information.
• The data given in the letter must be accurate and based on factual information.

Question 9.
Courtesy
Answer:

• Courtesy means politeness.
• The secretary has to be polite while corresponding with debenture holders. Due respect should be given to them being the Creditors of the company.
• The language in the letter should be courteous. Rude and harsh words should be avoided.

Question 10.
Debenture Certificate
Answer:

• A debenture Certificate is an acknowledgment of debt given to the company.
• It is issued under the common seal and signature of two directors of the company as a witness.
• It contains the name of the Debenture holder, number of Debentures, type of Debenture, rate of interest, maturity, etc.

3. Answer in brief.

Question 1.
Which are the precautions to be taken by the Secretary while corresponding with debenture holders?
Answer:
The following precautions are to be kept in mind by the secretary while corresponding with the debentures.
(i) Transparency:
Transparency means disclosing the correct and accurate information of the company. Including the credit rating of the company, true and real facts of companies’ affairs, etc. in correspondence.

(ii) Quick Response:
Secretary should promptly respond to the queries and complaints of debenture holders without any delay.

(iii) Courtesy:

• As debenture holders are the creditors of the company, proper respect should be given to them in correspondence.
• The wordings in the letter should be courteous. Rude and harsh words should be strictly avoided.

(iv) Conciseness:
Letters to the debenture holders should be brief and to the point avoiding unnecessary information.

(v) Accuracy:
The secretary should provide precise and up-to-date information to debenture holders. The information must be true and correct.

(vi) Confidentiality:
As a confidential officer of the company, the secretary must take due care and should not disclose any secret information about the company while writing letters.

(vii) Reputation of the company:
While corresponding with debenture holders, the secretary should try to maintain goodwill and create a good image of the company in the mind of debentures.

(viii) Legal Provisions:
The secretary should follow the statutory provisions of the Companies Act, 2013 and other related laws while corresponding with debenture holders. Secretary must be very careful in corresponding as it can cause legal consequences.

Question 2.
What are the circumstances under which correspondence can be made with debenture holders?
Answer:
Debenture holders are the creditors of the company. They have the right to know about the decisions taken by the management of the company and other information. The secretary corresponds with the debenture holders under various circumstances. The following are the few circumstances under which the secretary enters into correspondence with the debenture holders:

• Informing the applicant about the allotment of debentures.
• Informing about payment of interest through:
  • Interest Warrant
  • Electronic Mode
• Letter for the conversion of debentures into equity shares.
• Informing the debenture holders about the redemption of their debentures.

4. Justify the following statements.

Question 1.
The company secretary should take certain precautions while corresponding with debenture holders.
Answer:

• Secretary has to be more careful while drafting the letters. The languages used in the letter should be courteous, i.e. showing due respect to the shareholders.
• A prompt reply should be given to the queries raised by the debenture holder.
• The letter should be short and precise containing important information. The data provided in the letter should be up to date.
• It is also necessary for the secretary to keep in mind the goodwill of the company. Simultaneously, it is also necessary to be aware that the company follows all the legal provisions of the Companies Act, 2013.
• Thus, it is rightly justified that, the company secretary should take certain precautions while corresponding with debenture holders.

Question 2.
There are certain circumstances when a secretary has to correspond with debenture holders.
Answer:

• (i) Debenture holders are the creditors of the company and are entitled to receive the interest.
• (ii) Secretary being the link between the company and debenture holders has to draft various letters:
  • Allotment letter has to be sent to Debenture holders when the Debentures are allotted.
  • Letter for payment of interest has to be written to Debenture holders to inform them.
  • Payment can be done either through an interest warrant or ECS/ NEFT.
  • Letter informing the Debenture holders about conversion of debentures into equity shares.
  • Letter informing the Debenture holders about the redemption (repayment) of Debentures.
  • Thus, it is rightly justified that, there are different circumstances when a secretary has to correspond with Debenture holders.

5. Attempt the following.

Question 1.
Draft a ‘Letter of Allotment’ to debenture holders.
Answer:

RADHIKA INDUSTRIES LIMITED
50/A, Bandra-Kurla Complex, Bandra (East), Mumbai: 400 051
CIN: L46001 MH 2002 PLC 503433

Website: www.radhikalimited.com
Email: radhika4@gmail.com
Date: 14th May 2019

Tel. No.: 022-24761524
Fax No.: 022-24881242
Ref. No.: D/DH/2018-19

Mr. Amit Desai,
C/23, LIC colony,
L.J Road, Mahim,
Mumbai – 400 096

Sub.: Public issue of 10,00,000 @ 12.5% non-convertible debentures of ₹ 100 each at par.

Dear Sir,
In response to your application AD- 1884 dated 19th April 2019, I am directed by the Board of Directors to inform you that, you have been allotted 100,12.5% non-convertible debentures of ₹ 100 each. The period of debentures is for 7 years.

These debentures are allotted to you as per the resolution passed at the Board Meeting held on 8th May 2019 and as per the terms and conditions of Debenture Trust Deed and Articles of Association of the company.

Details of allotment are as follows:

1	2		3		4
Folio No.	No. of Debentures		Distinctive Nos.		Amount received
	Applied	Allotted	From	To
B-520	100	100	101	200	₹ 10,000

The debenture Certificate will be sent to you within the stipulated period.
Thanking you,

Yours faithfully,
For, Radhika Industries Limited.

Sign
Company Secretary

Question 2.
Write a letter to debenture holders regarding payment of interest through an Interest Warrant.
Answer:

RADHIKA INDUSTRIES LIMITED
50/A, Bandra-Kurla Complex, Bandra (East), Mumbai: 400 051
CIN: L46001 MH 2002 PLC 503433

Website: www.radhikalimited.com
Email: radhika4@gmail.com
Date: 10th Jan 2019

Tel. No.: 022-24761524
Fax No.: 022-24881242
Ref. No.: D/DH/2018-19

Mrs. Bharati Nikumbh,
A/22, BPT colony,
N.K Road, Mahim,
Mumbai – 400 096

Sub.: Payment of interest on debentures.

Dear Madam,
As per the board resolution passed in the Board Meeting held on 20th Jan 2019, this is to inform you that, the payment on your 10% non-convertible debentures of ₹ 100 each is due.

The details of the amount of interest payable to you are as follows:

1	2	3		4	5	6	7
Folio No.	No. of Debentures	Distinctive Nos.		Gross Amount of Interest	T.D.S (10% on interest)	Net Amount of interest	Interest Warrant No.
		From	To
B-110	100	101	200	₹ 1,000	NIL	₹ 1,000	TW-1242

The interest warrant is enclosed herewith. Please acknowledge the receipt.
Thanking you,

Yours faithfully,
For, Radhika Industries Limited.

Sign
Company Secretary

Encl: Interest Warrant No. IW-1242.

Question 3.
Draft a letter to the debenture holder informing him about the redemption of debentures.
Answer:

SWARG MARBLE LIMITED
40/B, C-Ramchandra Road, Khar (East), Mumbai: 400 053
CIN: L24308 MH2006 PLC211388

Website: www.swarglimited.com
Email: swarglimitedl2@gmail.com
Date: 16th March 2019

Tel. No.: 022-4133242
Fax No.: 022-4215212
Ref. No.: R/DH/14/18-19

Mr. Amit Berde
A/21, Swastik Colony,
Bhadkamkar Marg,
Fort, Mumbai 400 020

Sub: Redemption of debentures.

Dear Sir,
In accordance with the terms decided at the time of issue of 1,00,000, 10% Non-convertible debentures, this is to inform you that, the said debentures are due for redemption on 30th April 2019.

According to Board Resolution No. 4432 passed at the Board meeting held on 15th March 2019, said debentures shall be redeemed out of the Debentures Redemption Reserve of the company.

Please arrange to submit a duly filled up Debentures Redemption Form along with a duly discharged debenture certificate at the Registered Office of the company on or before 7th April 2019.

On completion of the above formalities, the redemption amount will be credited to your bank account. You are requested to provide us your bank account details.
Thanking you,

Yours faithfully,
For, Swarg Marble Limited.

Sign
Company Secretary

Encl: Debenture Redemption Form.

Question 4.
Draft a letter to debenture holder informing him about conversion of debentures into equity shares.
Answer:

SUNRISE INDUSTRIES LIMITED
50/A, Swami Narayan Road, Tunga Village, Mumbai: 400 072
CIN: L42105 MR 2005 PLC: 402512

Tel. No.: 022-23731242
Fax No.: 022-23738656
Ref. No.: D/DH/2018-19

Email: sunrise5@gmail.com
Website: www.sunriselimited.com
Date: 2nd May 2019

Mr. Uddhav Ansurkar
20, Hilton Complex,
Laxmi Road,
Solapur- 413018

Sub: Conversion of Debentures into Equity shares.

Dear Sir,
In accordance with the terms decided at the time of issue of 1,00,000, 10% fully Convertible debentures, this is to inform you that, the said debentures are due for conversion.

Accordingly, a special resolution was passed at the Extra Ordinary General Meeting held on 20th April 2019 for approval of the conversion of debentures into equity shares in the ratio of 5: 1. As per your letter of option, you have been allotted 10 equity shares in lieu of your 50 debentures.

Details of your holding after conversion are as follows:

1	2	3	4		5
Folio No.	No. of Debentures held	No. of Equity Shares issued	Distinctive Nos.		Share certificate No.
			From	To
225	50	10	201	210	1210

A duly signed and executed shares Certificate is enclosed.
Debenture Certificate will be null and void w.e.f. 30th April 2019.
Thanking you,

Yours faithfully
For, Sunrise Industries Limited.

Sign
Company Secretary

Encl: Share Certificate No. 1210

Question 5.
Write a letter to debenture holders regarding payment of interest electronically.
Answer:

RADHIKA INDUSTRIES LIMITED
50/A, Bandra-Kurla Complex, Bandra (East), Mumbai: 400 051
CIN: L46001 MH 2002 PLC 503433.

Tel. No.: 022-24761524
Fax No.: 022-24881242
Ref. No.: D/DH/2018-19

Email: radhika4@gmail.com
Website: www.radhikalimited.com
Date: 10th March 2019

Mrs. Shweta Gawde.
B/20 Mahindra Tower,
Tardeo Road, Mumbai Central,
Mumbai – 400 034

Sub.: Payment of interest on debenture through ECS or NEFT.

Dear Madam,
As per the Board resolution passed in the Board Meeting held on 8th March 2019, this is to inform you that, the board is finalizing to pay interest @10% on Redeemable Debentures of ₹ 100 each for the year ending 31st March 2019.

We have complied with all the provisions relating to the payment of interest on debentures.

Details of your interest payment are as follows:

1	2	3		4	5	6
Register No.	No. of Debentures	Distinctive Nos.		Gross Amount of Interest	T.D.S (10% on interest)	Net Amount of interest
		From	To
E-340	100	201	300	₹ 1,000	NIL	₹ 1,000

Interest will be paid through ECS or NEFT transfer by crediting your bank account as per details provided by you to the company.
Thanking you,

Yours faithfully,
For, Radhika Industries Limited.

Sign
Company Secretary

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 6 Correspondence with Members Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 6 Correspondence with Members

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
Directors are the ____________
(a) paid employee of the company
(b) representatives of the shareholders
(c) creditors of the company
Answer:
(b) representatives of the shareholders

Question 2.
The dividend is to be paid to the shareholders within ____________ days from the date of declaration.
(a) 30
(b) 40
(c) 20
Answer:
(a) 30

Question 3.
Registered shareholders receive dividend through ____________ warrant.
(a) share
(b) debenture
(c) dividend
Answer:
(c) dividend

Question 4.
Shares issued free of cost to the shareholders are known as ____________ shares.
(a) preference
(b) equity
(c) bonus
Answer:
(b) equity

Question 5.
Share Certificate should be ready for delivery by the company within ____________ months after the allotment of shares.
(a) 3
(b) 5
(c) 2
Answer:
(c) 2

Question 6.
Secretarial correspondence with members should be ____________
(a) lengthy
(b) shortcut
(c) prompt and precise
Answer:
(c) prompt and precise

Question 7.
Dividend is recommended by ____________
(a) Board of Directors
(b) shareholders
(c) Depositors
Answer:
(a) Board of Directors

Question 8.
Dividend is paid out of ____________ of the company.
(a) Capital
(b) Building Fund
(c) Profit
Answer:
(c) Profit

Question 9.
____________ is issued by the company to its registered shareholders after the declaration of dividend at the Annual General Meeting of the company.
(a) Dividend Warrant
(b) Interest Warrant
(c) Share Warrant
Answer:
(a) Dividend Warrant

1B. Match the pairs.

Question 1.

Answer:

Group ‘A’	Group ‘B’
(a) Dividend Warrant	(9) Instrument for Payment of Dividend
(b) Return on Shares	(6) Dividend
(c) Bonus Shares	(4) Capitalisation of Reserve Fund
(d) ECS	(3) Electronic Clearing Service
(e) NEFT	(5) National Electronic Fund Transfer

1C. Write a word or term or a phrase which can substitute each of the following statements.

Question 1.
Shares given free of cost to the existing equity shareholders.
Answer:
Bonus shares

Question 2.
Instrument for payment of dividend.
Answer:
Dividend Warrant

Question 3.
The shareholders to whom the bonus shares are issued.
Answer:
Equity shareholders

Question 4.
The authority which recommends the rate of dividend.
Answer:
Board of Directors

Question 5.
An officer who comes into contact with all the members of the company through correspondence.
Answer:
Secretary

Question 6.
A special kind of cheque issued by a company on its banker to pay certain sum of money as dividend to its members.
Answer:
Dividend warrant

1D. State whether the following statement are True or False.

Question 1.
Bonus shares are issued to existing equity shareholders.
Answer:
True

Question 2.
Building fund is used for issue of bonus shares.
Answer:
False

Question 3.
Bonus shares means capitalisation of reserve fund.
Answer:
True

Question 4.
Registered shareholder gets dividend through dividend coupons.
Answer:
True

Question 5.
Dividend is the portion of the profits of the company which is allotted to the holders of the debentures of the company.
Answer:
True

Question 6.
Every company must issue or dispatch a share certificate to the allottee within three months after allotment of shares.
Answer:
False

Question 7.
A complaint letter should not be replied promptly.
Answer:
True

1E. Find the odd one.

Question 1.
Secrecy, Dividend, Interest
Answer:
Secrecy

Question 2.
Bonus Letter, Dividend Letter, Board of Directors
Answer:
Board of directors

Question 3.
Dividend Warrant, Interest Warrant, Demat
Answer:
Demat

Question 4.
Secretary, Board of Directors, Dividend, Lucid Language
Answer:
Lucid Language

1F. Complete the sentences.

Question 1.
Dividend is recommended by ____________
Answer:
Board of Directors

Question 2.
A company capitalises its Reserve Fund for issue of ____________ shares.
Answer:
Bonus

Question 3.
Payment of dividend must be made within ____________ days of its declaration.
Answer:
30

Question 4.
Dividend is approved by the ____________ in the Annual General Meeting.
Answer:
Shareholders

Question 5.
The ____________ has to communicate the decisions of the management to the members by conducting correspondence.
Answer:
Secretary

1G. Select the correct option from the bracket.

Question 1.

(Written communication, Bonus shares, Dividend, ECS)
Answer:

Group ‘A’	Group ‘B’
(a) Return on shares	(1) Dividend
(b) Capitalisation of Reserve Fund	(2) Bonus shares
(c) Correspondence	(3) Written communication
(d) ECS	(4) Payment of Dividend Electronically

1H. Answer in one sentence.

Question 1.
What is dividend warrant?
Answer:
Dividend warrant is written order given by the company to its banker to pay amount mentioned in it to the shareholder whose name is specified therein.

Question 2.
What is capitalization of reserve?
Answer:
Capitalization of reserves is the use of corporate reserves to pay a bonus to the shareholders in the form of additional shares.

Question 3.
What is Dividend?
Answer:
Dividend is the portion of profits of the company which is distributed to the shareholders of the company.

Question 4.
Who recommends the rate of dividend?
Answer:
The Board of Directors of the company recommends the rate of dividend.

Question 5.
Which type of shareholders enjoys the benefit of Bonus Shares?
Answer:
Equity share holders enjoy the benefit of bonus shares.

Question 6.
What is meant by payment of dividend electronically?
Answer:
Payment of dividend electronically means transfer of dividend amount through ECS (Electronic Clearing Service) NEFT(National Electronic Fund Transfer) etc.

1I. Correct the underlined word and rewrite the following sentences.

Question 1.
Dividend is recommended by shareholders.
Answer:
Dividend is recommended by shareholder.

Question 2.
The person who purchases shares of the company is called Depositor.
Answer:
The person who purchases shares of the company is called shareholder.

Question 3.
Bonus shares are issued as a free gift to the preference shareholders.
Answer:
Bonus shares are issued as a free gift to the equity shareholders.

Question 4.
Payment of dividend must be made within 21 days of its declaration.
Answer:
Payment of dividend must be made within 30 days of its declaration.

Question 5.
A company must issue the Share Certificate within three months of allotment of shares.
Answer:
A company must issue the Share Certificate within two months of allotment of shares.

1J. Arrange in proper order.

Question 1.
(a) Allotment of shares
(b) Application for shares
(c) Share certificate
Answer:
(a) Application for shares
(b) Allotment of shares
(c) Share certificate

Question 2.
(a) Member
(b) Applicant
(c) Bonus shares
Answer:
(a) Applicant
(b) Member
(c) Bonus shares

2. Explain the following terms/concepts.

Question 1.
Capitalisation of Reserve
Answer:
Capitalisation of reserves is the use of corporate reserves to pay a bonus to the shareholders in the form of additional shares. It is distributed to equity shareholders in pre-determined ratio.

Question 2.
Bonus Shares
Answer:
Bonus shares are fully paid up shares given by a company as a gift out of its accumulated profits or reserves to the existing equity share holders in proportion of shares held by them. It is given free of cost and also known as capitalization of reserves.

Question 3.
Dividend Warrant
Answer:
Dividend warrant is written order given by the company to its banker to pay amount mentioned in it to the shareholder whose name is specified therein. Dividend can be paid through Dividend warrant or by means of electronic mode ECS or NEFT etc. to those shareholders who are registered members i.e their names appear in the Register of members.

3. Answer in brief.

Question 1.
Which precautions are to be taken by the Secretary while corresponding with members?
Answer:
The Secretary has to communicate the decisions of the Management and other information to the members through correspondence. The Secretary should be very cautious and careful while corresponding with members of the company. Writing letters to the members is a challenging task and it requires skills, knowledge and techniques.
Following are the precautions that are needed to be taken by the secretary while writing different letters on different occasions:
(i) Correct Information:
The Secretary should always provide correct, up- to date and factual information to the members. Due care should be taken while giving facts and figures.

(ii) Lucid Language:
The Secretary must use simple words and sentences and adopt convincing style while writing letters to the members. The use of simple language makes it easy to understand. Technical words, long sentences should be avoided in the letter.

(iii) Prompt Response:
The Secretary must be prompt in sending replies to the letters received from the members. Any questions or queries raised by the members must be replied promptly by the Secretary. Complaint letters should be attended to without any delay.

(iv) Secrecy:
The Secretary should not disclose any confidential information of the company to the members. The Secretary should tactfully answer letters without giving any secret information of the company.

(v) Politeness (Courtesy):
A courteous letter shows sympathy, respect mutual understanding and consideration for the receiver. Use of courteous language means using polite words. A complaint letter should be replied politely. Rude language should be strictly avoided as it spoils image of the company.

(vi) Legal matters:
The Secretary should compulsorily follow provisions of the Companies Act, 2013 with latest amendments and other relevant laws. If necessary, secretary should consult with legal advisor on certain matters before drafting.

(vii) Consideration:
The Secretary should give importance and consideration to the reader and write the contents keeping in mind the problems of the member. While sending negative replies, he should draft these letters more carefully, so that members should not be hurt. Secretary should make the member feel that the management honestly regrets refusal.

(viii) Image of the Company:
The Secretary should try to project good image of the company in every situation. While drafting the letters, Secretary has to try his best to remove their doubts, queries and difficulties in a polite and courteous manner.

Question 2.
What are the circumstances under which Secretary undertakes correspondence with members?
Answer:
The following are the various occasions when the Secretary writes the letters to the members of the company:

• Allotment Letter when shares are issued to an applicant.
• Letter of Regret when shares are not issued to an applicant for any reason.
• Letter for issue of Share Certificate to the allotted members.
• Letter for Payment of Dividend through Dividend Warrant or Electronic Payment of Dividend.
• Letter for issue of Bonus Shares or rights issue.
• Reply letter to the query of the member on low rate of dividend.
• Approval of Transfer of Shares after serving lodgement notice to the transferor as well as the transferee.
• Refusal of Transfer of Shares, if call money is unpaid or any lien.
• Notice and Agenda of General Meeting.
• Reply to certain queries raised by the members.
• Letters to legal representatives regarding Transmission of Shares.
• Notice of loss of Share Certificate.

4. Justify the following statements.

Question 1.
The Company Secretary should take certain precautions while corresponding with members.
Answer:

• The Secretary has to communicate the decisions of the management and other information to the members through correspondence and hence, should be very cautious and careful while corresponding with members of the company. The Secretary should take precautionary measures while writing the letter by giving due respect to the members, and also provide complete and correct information techniques.
• The Secretary should always provide correct, up- to date and factual information to the members.
• The language used should be simple and convincing.
• The Secretary must be prompt in sending replies to the letters received from the members.
• He should compulsorily follow provisions of the Companies Act, 2013 with latest amendments and other relevant laws.
• The Secretary should try to project good image of the company in every situation.
• Thus, it is rightly said that, the Company Secretary should take certain precautions while corresponding with members.

Question 2.
There are certain circumstances when a Secretary has to correspond with members.
Answer:

• Secretary correspond with members on behalf of the company.
• Secretary acts as a link between the company and its members.
• When the shares are allotted to the members they are been informed through the allotment letter. Similarly, if the application of shares has been rejected then members are been informed by the regret letter.
• Secretary also informs members through letters on various occasions like issue of share certificate, payment of dividend, issue of bonus share, reply to the query raised by the member, etc.
• Thus, it is rightly said that, there are certain circumstances when a Secretary has to correspond with members.

5. Attempt the following.

Question 1.
Write a letter to the shareholder regarding issue of Bonus Shares.
Answer:

YASH INDUSTRIES LIMITED
Registered Office: 102, New MIDC, Usha Tower, Shahu Chowk, Mumbai – 400 031.
CIN : L40407 MH 2005 PLC710007

Tel. No.: 022-23252323
Fax No.: 022-23600445
Ref. No.: Y/MR-B/5/19-20

Website: www.yashindustrieslimited.com
Email: yash30@gmail.com
Date: 16th October, 2019

Ms. Yukta Shroff
715, Narayan Peth,
Laxmi Road,
Pune – 411 038.

Sub.: Issue of Bonus Shares

Dear Madam,

I am directed by the Board of Directors to inform you that in accordance with the resolution passed in the Extra-ordinary General Meeting of the company held on 14th October, 2019, shareholders have unanimously approved the recommendation of Board of Directors to issue Bonus Shares. Bonus Shares are issued in the ratio of 1:1, i.e. one additional equity share for every equity share held as on 13th October, 2019.

The Details of issue of Bonus Shares are as follows:

1	2	3	4	5
No. of Shares held on record date	No. of Bonus Shares Issued/Allotted	D.P. ID No. Credited to Demat Account No.	Client ID No. Credited to Demat Account No.	Date of Credit to Demat A/c
25	25	IN 300100	10116061	31-10-2019

The Company has complied with the provisions for the issue of Bonus Shares.
The Bonus Shares issued will rank pari passu /equal with the existing equity shares.

Thanking you,

Yours faithfully,
For Yash Industries Limited

Sign
(Mr. S. R. Naik)
Company Secretary

Question 2.
Write a letter to the member for the issue of Share Certificate.
Ans.

COMFORT MOTORS LTD.
Registered Office : A/30, Aurora Towers, M. G. Road, Camp, Pune 411 012.
CIN : U12111 MH 2000 PCL300477

Tel. No.: 020-80032844
Fax No.: 020-50063015
Ref. No.: C/MR-SC/30/19-20

Website: www.comfortmotorsltd.com
Email: comfort31@gmail.com
Date: 12th November, 2019

Mr. Jayant Modi
Abhiman Apartment
30, L. B. Road,
Pune-411 001.

Sub.: Issue of Share Certificate

Dear Sir,
As per your Request Application No. 50, I am, hereby, authorized by the Board to issue you a Share Certificate. The said Share Certificate will be delivered to you within 15 days from the date of this letter by registered post to your registered address as mentioned in the Register of Members.

1	2	3		4
Folio No.	Share Certificate Numbers	Distinctive Numbers		Total No. of Shares
		From	To
1006	9630	301	400	100

It shall always be our endeavor/attempt to provide best of our services to you.
Thanking you,

Yours faithfully,
For Comfort Motors Ltd.

Sign
Mr. Anand Swami
Company Secretary

Question 3.
Write a letter to the member for the payment of dividend through Dividend Warrant.
Answer:

ANMOL STEEL INDUSTRIES LIMITED
Registered Office : 30, Anmol Niwas, J. M. Road, Nariman Point, Mumbai – 400 020.
CIN : L30408 MH 2003 PLC110845

Tel. No.: 022-97675877
Fax No.: 022-30010331
Ref. No.: A/MR-D/7/19-20

Website: www.anmolindustrieslimited.com
Email: anmol5@gmail.com
Date: 7th May, 2019

Mrs. Jyoti Surti 12, Laxmi Niwas,
Amrapali Marg, Bandra,
Mumbai – 400 050.

Sub.: Payment of Dividend on Equity Shares
(Equity Shares of ₹ 10 each at par)

Dear Madam,
As per the instructions issued by the Board of Directors it is being conveyed to you that in the, Final Dividend @ ₹ 2.5 per equity share of ₹ 10/- each has been approved by the members for the year ending 31st March, 2019 in the 31st Annual General Meeting held on 20th April, 2019.

Your company has complied with all the statutory provisions (Sec. 123 of the Companies Act. 2013) relating to declaration of dividend. Details of dividend payable to you are as follows:

1	2	3		4	5	6	7
Register Folio No.	No. of Shares held	Distinctive Numbers		Dividend Warrant No.	Gross Dividend	Income Tax Deducted (TDS)	Net Dividend
		From	To
A-30	100	301	400	B-9931	Rs.250/-	NIL	250/-

The ‘Dividend Warrant’ is attached herewith. Please detach the ‘Dividend Warrant’ along the perforated line.
Thanking you,

Yours faithfully,
For Anmol Steel Industries Limited.

Sign
Secretary

Encl.: Dividend Warrant

Question 4.
Write a letter to the member for the payment of Interim dividend electronically.
Answer:

GURUSAI AUTO LIMITED
Registered Office: 31, Tulsi Complex, Lodhi Road, Camp, Pune – 411 001.
CIN : L40103 MH 1999 PLC300477

Tel. No.: 020-24032844
Fax No.: 020-24356101
Ref. No.: S/MR-D/12/19-20

Website: www.gurusailimited.com
Email: sai31@gmail.com
Date: 3rd June, 2019

Mr. Jay ant Modi
15, Sagar Apartment,
Van Vihar Road,
Pune-411 030.

Sub.: Payment of Interim Dividend through Electronic Clearing Service (ECS), Direct Credit/NEFT

Dear Sir,

We are pleased to inform you that the Board of Directors of Gurusai Auto Limited in its meeting held on Thursday, 28th May 2019 has declared Interim Dividend @ ₹ 1/- (i.e. 10%) per equity share of face value of ₹ 10/- each.

As per the instructions given by you (either in person or through Depository Participant), we have remitted the amount of the Interim Dividend to your Banker for crediting your Bank Account, for electronic transfer. Your company has complied with all the provisions relating to declaration and payment of dividend.

Details of Dividend payable to you are given below:

1	2	3	4	5	6
No. of Equity Shares held on Record Date (May 31st, 2019)	Dividend Per Share (₹)	Dividend Amount (₹)	DPID and Client ID No.	Date of Remittance	Bank A/c. (Bank of Baroda)
500	1	500	12033 200074 79005	6th June, 2019	5656000 22105 (Bank of Baroda)

Please verify the credit of amount in your Pass Book/Statement of accounts.
As per the provisions of the Income Tax Act, 1961 no tax is required to be deducted at source in respect of Dividend payment, but dividend Distribution Tax has been paid by the Company.
Thanking you,

Yours faithfully,
For Gurusai Auto Limited.

Sign
(Mr. Jitesh M. Gandhi)
Company Secretary

Question 5.
Draft a reply letter resolving the query of the member on the low rate of dividend.
Answer:

SHREE CEMENT INDUSTRIES LIMITED
Registered Office: 31, Tulsi Tower, Bandra (East), Mumbai – 400 050
CIN : L50307 MH 2000 PLC160699

Tel. No.: 022-24245025
Fax No.: 022-45456035
Ref. No.: S/MR-D/25/19-20

Website: www.shreecementindustriesltd.com
Email: shree3@gmail.com
Date: 20th April, 2019

Ms. Kishor Malpani
15/21, Lotus Apt.,
Borivali (W),
Mumbai – 400 103.

Sub.: Resolving Query on Low Rate of Dividend made by the Company.

Dear Sir,
This is to inform you that as per your letter dated 15th April, 20191 am, hereby, authorized to resolve your query regarding the low rate of dividend paid by the company to their faithful members. The reasons for the low rate of dividends are mentioned below:

1. During the last year, due to the floods, the company’s factory situated at Mahim (E) was not in a condition | to operate in a full-fledged manner.
2. Due to such unavoidable circumstances of natural disaster company faced huge financial losses.
3. Hence, the Board of Directors has decided to transfer 12.5 crores to General Reserves which is 50%; more than the amount transferred to Reserves last year.

Hope you will be satisfied by the above information as provided by the company. We assure you that the company will easily come over from such unavoidable circumstances and will deliver/pay/declare much better! dividend in the coming years.

Thanking you,

Yours faithfully,
For Shree Cement Industries

Sign
(Mr. Suhas Bajaj)
Company Secretary

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 5 Deposits Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 5 Deposits

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
Deposit is a type of ____________
(a) Owned capital
(b) Short term loan
(c) Long term loan
Answer:
(b) Short term loan

Question 2.
Eligible Public Company and Government Company can collect deposits from ____________
(a) It’s employees
(b) Public
(c) RBI
Answer:
(b) Public

Question 3.
A private company can accept deposits from its Member of Directors up to not more than ____________ % of its aggregate of paid-up share capital and free reserves.
(a) 100
(b) 35
(c) 25
Answer:
(a) 100

Question 4.
A ____________ Company can accept deposits from the public not exceeding 35% of its paid-up share capital and free reserves.
(a) Government
(b) Private
(c) Eligible Public
Answer:
(a) Government

Question 5.
Deposits can be accepted for a minimum of 6 months and maximum for ____________ months.
(a) 36
(b) 3
(c) 30
Answer:
(a) 36

Question 6.
Company issues ____________ to invite its members to subscribe for its deposit scheme.
(a) Advertisement
(b) Circular
(c) Newspaper
Answer:
(b) Circular

Question 7.
The company can issue a circular or advertisement for inviting deposits after ____________ days of filing it with the Registrar of Companies.
(a) 30
(b) 21
(c) 7
Answer:
(a) 30

Question 8.
Company has to appoint ____________ to protect the interest of depositors.
(a) Debenture Trustees
(b) Deposit Trustees
(c) Credit Rating Agency
Answer:
(a) Deposit Trustees

Question 9.
Charge on assets is to be created when a company issues ____________
(a) Unsecured deposit
(b) Unsecured Debenture
(c) Secured deposit
Answer:
(c) Secured deposit

Question 10.
Deposit Receipt is issued within ____________ days of receipt of deposit.
(a) 7
(b) 30
(c) 21
Answer:
(c) 21

Question 11.
For premature repayment of deposit, company deducts ____________ % of interest.
(a) 1
(b) 18
(c) 20
Answer:
(a) 1

Question 12.
Return of deposit must be filed every year on or before ____________
(a) 30 June
(b) 31 March
(c) 30 April
Answer:
(a) 30 June

1B. Match the pairs.

Question 1.

Group ‘A’	Group ‘B’
(a) Private Company	(1) 10% of the aggregate of paid-up share capital + free reserves
(b) Deposit Trust Deed	(2) Signed at least 7 days before issuing advertisement
(c) Secured Deposit	(3) Maximum 30 months
(d) Tenure of deposit	(4) Charge on tangible assets
(e) Return of Deposit	(5) 100% aggregate of paid-up share capital + free reserves
	(6) File on or before 31 March every year
	(7) Signed 21 days after issuing advertisement
	(8) Maximum 36 months
	(9) Charge on intangible assets
	(10) File on or before 30 June every year

Answer:

Group ‘A’	Group ‘B’
(a) Private Company	(5) 100% aggregate of paid-up share capital + free reserves
(b) Deposit Trust Deed	(2) Signed at least 7 days before issuing advertisement
(c) Secured Deposit	(4) Charge on tangible assets
(d) Tenure of deposit	(8) Maximum 36 months
(e) Return of Deposit	(10) File on or before 30 June every year

1C. Write a word or a term or a phrase that can substitute each of the following statements.

Question 1.
A company that can accept deposits from its members, directors, or their relatives not exceeding 100% of the aggregate of paid-up share capital and free reserves.
Answer:
Private Company

Question 2.
The company can accept deposits from the public up to 35% of its paid-up share capital and free reserves.
Answer:
Government Company

Question 3.
Minimum tenure of a deposit.
Answer:
6 months

Question 4.
The maximum tenure of the deposit.
Answer:
36 months

Question 5.
Period within which a company has to create a charge on its tangible assets.
Answer:
30 days of Acceptance

Question 6.
Document issued by a company to invite its members to subscribe for its Deposits.
Answer:
Circular

Question 7.
Agreement between the company and Deposit Trustee.
Answer:
Deposit Trust Deed

Question 8.
The account can be used only for repaying deposits.
Answer:
Deposit Repayment Reserve Account

Question 9.
Time within which company has to issue deposit Receipt.
Answer:
21 days

Question 10.
Book which contains details of deposits accepted or renewed.
Answer:
Register of Deposits

1D. State whether the following statements are true or false.

Question 1.
Return of deposit must be filed every year on or before 31 March.
Answer:
False

Question 2.
An eligible public company can collect deposits from its members.
Answer:
True

Question 3.
A government company can collect deposits from its members.
Answer:
False

Question 4.
A private company can collect deposits from the public.
Answer:
False

Question 5.
The deposit can be accepted for a maximum of 36 months.
Answer:
True

Question 6.
An eligible public company can collect deposits from the public not exceeding 35% of its paid-up share capital and free reserves.
Answer:
False

Question 7.
For secured deposits, the company has to create a charge on its tangible assets.
Answer:
True

Question 8.
Deposit Receipt is issued within 21 days of receipt of deposits.
Answer:
True

Question 9.
Company appoints Credit Rating Agency to protect the interest of depositors.
Answer:
False

Question 10.
Deposit Trust Deed is an agreement between the company and Deposit Trustee.
Answer:
True

1E. Find the odd one.

Question 1.
Private Company, Eligible Public Company, Government Company.
Answer:
Private company

Question 2.
Deposit Trustee, Deposit Trust Deed, Special Resolution.+
Answer:
Special Resolution

Question 3.
Appointment of Deposit Trustee, Appointment of Registrar of companies, Appointment of Credit Rating Agency.
Answer:
Appointment of Registrar of companies

1F. Complete the sentences.

Question 1.
Deposit is a type of ____________ term loan.
Answer:
Short term loan

Question 2.
Eligible Public company and Government Company can accept deposits from ____________
Answer:
Public

Question 3.
To collect deposits from the public, Eligible public company must have a net worth of not less than ₹ ____________
Answer:
₹ 100 Crores

Question 4.
A Government company can accept deposits from public not exceeding ____________
Answer:
35% of the paid-up share capital and free reserves of the company

Question 5.
Deposits can be accepted or renewed for a period not less 6 months and not more than ____________
Answer:
36 months

Question 6.
Company cannot accept or renew deposits repayable on ____________
Answer:
Demand

Question 7.
Premature repayment of deposits can be done by a company but not before ____________
Answer:
3 months

Question 8.
To invite the public to subscribe for its deposits, a company issues ____________
Answer:
Advertisement

Question 9.
Agency which gives ratings of the deposits of a company is called ____________
Answer:
Credit rating agency

Question 10.
Account which is used only for repaying deposits is called ____________
Answer:
Deposit Repayment Reserve Account

1G. Select the correct option from the bracket.

Question 1.

Group ‘A’	Group B’
(a) Government Company	(1) ………………….
(b) …………………….	(2) Deposits from members
(c) 36 months	(3) …………………….
(d) …………………….	(4) Charge on tangible assets
(e) Return of deposit	(5) ……………………

(File on or before 30 June, Private Company, Secured deposits, Deposits from public, Maximum tenure of deposits)
Answer:

Group ‘A’	Group B’
(a) Government Company	(1) Deposits from public
(b) Private Company	(2) Deposits from members
(c) 36 months	(3) Maximum tenure of deposits
(d) Secured deposits	(4) Charge on tangible assets
(e) Return of deposit	(5) File on or before 30 June

1H. Answer in one sentence.

Question 1.
Which companies can accept deposits from the public?
Answer:
Government Companies and Eligible Public companies can accept deposits from the public.

Question 2.
What is the maximum deposit the Government company can collect?
Answer:
Government companies can accept deposits from the public not exceeding 35% of the paid-up share capital and free reserves of the company.

Question 3.
What is the tenure of a deposit?
Answer:
A company can accept deposits for a minimum of 6 months and a maximum of 36 months.

Question 4.
Who are Deposit Trustees?
Answer:
Eligible companies and public companies have to appoint one or more Deposit Trustees to protect the interest of the depositor, in case a company defaults in repaying the depositors.

Question 5.
What is Deposit Trust Deed?
Answer:
Company signs a contract with the Deposit Trustees called as Trust Deed which contains the terms and conditions of the contract.

Question 6.
When does a company create a charge on its tangible assets?
Answer:
A Company accepting secured deposits from the public has to create a charge on its tangible assets.

Question 7.
Within what period should a company issue a Deposit Receipt?
Answer:
The company has to issue a Deposit Receipt to the depositors within twenty-one (21) days from the date of receipt of money or realization of cheque.

Question 8.
When should a company file Return of Deposit?
Answer:
A company has to file a Return of Deposit on or before 30 June every year with the Registrar of Companies.

Question 9.
What is Deposit Repayment Reserve Account?
Answer:
Every company accepting deposits has to open a Deposit Repayment Reserve Account in a scheduled Bank which can be used only for repaying deposits.

Question 10.
What is the Register of Deposit?
Answer:
A company has to maintain a separate Register for deposits accepted or renewed at its registered office which is called as Register of Deposits.

1I. Correct the underlined word/s and rewrite the following sentences.

Question 1.
Government companies can accept deposits from members.
Answer:
Government companies can accept deposits from the public.

Question 2.
Company issues advertisement to invite its members for subscribing to its deposits.
Answer:
Company issues are circular to invite its members for subscribing to its deposits.

Question 3.
Company appoints Credit Rating Agency to protect the interest of Depositors.
Answer:
Company appoints Deposit Trustees to protect the interest of Depositors.

Question 4.
Deposit Receipt is issued within 7 days from the date of receipt of deposits.
Answer:
Deposit Receipt is issued within 21 days from the date of receipt of deposits.

Question 5.
Register of deposits is to be filed with the Registrar of companies on or before 30th June every year.
Answer:
Return of deposits is to be filed with the Registrar of companies on or before 30th June every year.

Question 6.
Charge on assets is created when a company issues unsecured deposits.
Answer:
Charge on assets is created when the company issues secured deposits.

Question 7.
The minimum tenure of the deposit is 36 months.
Answer:
The minimum tenure of the deposit is 6 months.

1J. Arrange in proper order.

Question 1.
Appoint Deposit Trustee, Hold General Meeting, Create charge on assets.
Answer:
Hold General Meeting, Appoint Deposit Trustee, Create charge on assets.

Question 2.
File Return of deposit, Issue Deposit Receipt, Issue advertisement.
Answer:
Issue advertisement, Issue Deposit Receipt, File Return of deposit.

Question 3.
Obtain Credit Rating, Entries in Register of Deposits, Issue Deposit Receipt.
Answer:
Obtain Credit Rating, Issue Deposit Receipt, Entries in Register of Deposits.

2. Explain the following terms/concepts:

Question 1.
Eligible Public Company
Answer:
These companies can accept deposits from their members and also from the public.
Eligible public company means a company having:

• A net worth, not less than ₹ 100 crores or
• Turnover not less than ₹ 500 crores and which has obtained prior approval of its shareholders through special resolution for accepting public deposits.

Question 2.
Tenure of Deposit
Answer:

• Tenure of the deposit is the term or period of deposit.
• A company can accept deposits for a period of six months or more than thirty-six months.
• In certain circumstances, a company may accept deposits repayable earlier than six months to meet its short-term needs.
  Premature repayment is made after 3 months.

Question 3.
Secured Deposit
Answer:

• Secured deposits are those deposits against which a charge is created within 30 days of the issue.
• A company can accept secured or unsecured deposits which should be clearly mentioned in the circular or advertisement inviting deposits.

Question 4.
Deposit Trustee
Answer:

• Deposit Trustee acts as a link between the company and deposit holder.
• Eligible companies and public companies issuing secured deposits appoint one or more Deposit Trustees.
• The Trustees protect the interest of the depositor in case a company defaults in repaying the depositors.

Question 5.
Charge on tangible assets
Answer:

• A Company accepting a secured deposit from the public, within thirty days of acceptance, has to create a charge on its tangible assets for an amount not less than the amount of deposit accepted.
• It means keeping tangible assets as security for the secured deposit hold.

Question 6.
Deposit Insurance
Answer:

• Deposit Insurance is a protection cover for deposit holders.
• It is to be taken at least 30 days before the issue of circular or advertisement.
• If the amount of deposit plus interest on it is up to ₹ 20,000, insurance is to be taken.

Question 7.
Deposit Repayment Reserve Account
Answer:

• DRRA is an account opened in a scheduled bank for repaying the deposit amount.
• Every company has to open DRRA that accepts deposits.
• Every year, on or before 30 April, the company has to deposit an amount not less than 15% of the number of deposits maturing during the current year and following financial year.

Question 8.
Credit Rating
Answer:

• Credit rating is an estimate of the ability of the organization to fulfill its financial commitments.
• Every company has to get a credit rating of its deposits through a Credit Rating Agency.
• The Credit Rating Agency considers the net worth of the company, liquidity position, ability to repay deposits on time, etc., and accordingly gives a rating.
• The rating shall be obtained every year during the tenure of the deposits.

Question 9.
Deposit Receipt
Answer:

• A deposit Receipt is issued by the company to depositors.
• Deposit Receipt is issued within twenty-one (21) days from the date of receipt of money or realization of cheque.
• The receipt has to be signed by the officer duly authorized by the Board of Directors.
• The Receipt contains the name and address of the depositor, amount of deposit, rate of interest payable, and date on which it is repayable.

Question 10.
Return of Deposit
Answer:

• A company has to file a Return of Deposit, on or before 30 June every year, with the Registrar of Companies.
• The Return gives details of deposit with the company as of 31 March of that year.

3. Study the following case/situation and express your opinion.

1. Apple Company Ltd. plans to raise funds through Public Deposits. Its net worth is ₹ 10 Crores.

Question (a).
Can they accept deposits from the public?
Answer:
No, the company cannot accept deposits from the public as its net worth is less than ₹ 100 crores.

Question (b).
Can they accept deposits that mature after 4 years?
Answer:
No, the deposit can be accepted or renewed which mature after four years.

Question (c).
Within what period should the company issue deposit Receipts to its depositors?
Answer:
The company has to issue a Deposit Receipt to the depositors within twenty-one (21) days from the date of receipt of money or realization of the cheque.

2. ABC Company Ltd. is an Eligible Public Company as per the Companies Act, 2013 with reference to accepting Public Deposits.

Question (a).
Can the company accept deposits in joint names?
Answer:
Yes, the company can accept deposits in joint names of depositors. But there should not be more than 3 names.

Question (b).
Can the company accept deposits from it’s members?
Answer:
Yes, the company can accept fresh deposits only if the amount of such deposits together with the previous deposits does not exceed 10% of the aggregate of paid-up share capital and free reserves.

Question (c).
Can the company issue secure deposits?
Answer:
Yes, the company can issue a secured deposit only if it is clear which should be clearly mentioned in the circular or advertisement inviting deposits.

3. Apple Company Ltd. is an Eligible Public Company. It plans to raise secured deposits from the public. Please advise its Board on the following.

Question (a).
Does the company need to get shareholders’ approval for accepting deposits?
Answer:
Yes, the company has to seek the shareholder’s approval for accepting deposits by passing a special resolution.

Question (b).
Does the company have to appoint a Deposit Trustee?
Answer:
Yes, the company has to appoint a Deposit Trustee as it is issuing secured deposits.

Question (c).
Within what period should the company create a charge on it’s assets?
Answer:
A Company can create a charge on its tangible assets within 30 days of acceptance.

4. SUN Pvt. Ltd. company wants to raise funds through deposits.

Question (a).
Can the company accept deposits from the public?
Answer:
No, it cannot accept deposits from the public because it is a private company.

Question (b).
Which document should the company issue to invite deposits?
Answer:
A Private Ltd. Company can issue circulars to invite deposits.

Question (c).
What is the maximum period for which they can accept deposits?
Answer:
The maximum period for accepting deposits is 36 months.

4. Answer in brief.

Question 1.
State the number of deposits that different types of companies can collect by way of deposits.
Answer:
Deposits are a source of short-term funds for the company. Deposits can be accepted by the company by the public, directors, or its members. It is a loan taken by the company and there are various terms and conditions that a company needs to follow to accept them.

The amount of deposits that different types of companies can collect by way of deposits is as follows:
Amount of Deposit:
a) Private Company: A Private Company can accept deposits from its members or Directors or Relatives of Directors not more than 100 percent of its aggregate of paid-up share capital and free reserves.

However, a certain class of Private Companies as specified by the Companies Act can accept deposits of more than 100 percent of its aggregate of paid-up share capital and free reserves.

b) Public Company (other than Eligible Company): These Companies cannot accept fresh deposits from members if the amount of such deposits together with the previous deposits exceeds 25% of the aggregate of the paid-up share capital and free reserves of the company.

c) Eligible Public Company:
An ‘Eligible Company’, i.e. company eligible to accept deposits from the public under section 76(1) of Companies Act, 2013, can accept deposits up to 25% of paid-up capital, free reserves, and securities premium account from the ic.

In addition, it can accept deposits up to 10% of the gate of paid-up share capital, free reserves, and securities premium account from members Rule 3(4) of Companies (Acceptance of Deposits) Rules, 2014.

(d) Government Company:
A Government company is eligible to accept deposits under section 76 of the Companies Act, 2013.
It can accept deposits up to 35% of paid-up capital, free reserves, and securities premium account From the ic.

Question 2.
State the contents of Circular or Advertisement for Deposit.
Answer:
Circular or Advertisement:

• If a company invites deposits from its members, it issues a circular.
• If a company invites deposits from the public, it issues an advertisement.

Contents of circular or advertisement:

• Statement about the financial position of the company.
• The portion of secured and unsecured deposit of fresh issue.
• Credit rating obtained from a Credit Rating Agency (only for eligible public companies).
• Details of the scheme.
• Name of Deposit Trustees.
• Amount due towards deposits of any previous deposits accepted by the company.

Question 3.
State the provisions regarding the appointment of Deposit Trustee.
Answer:
Appointment of Deposit Trustee:

• Eligible companies and public companies appoint one or more Deposit Trustees while issuing secured deposits.
• They protect the interest of the depositor, in case a company defaults in repaying the deposit amount and interest.
• Company signs a contract with the Deposit Trustees called as Trust Deed.
• It contains the terms and conditions of the contract.
• The deed has to be signed at least 7 days before issuing the circular or advertisement.
• The Deposit Trustee on his own or on the request of one-tenth of depositors can call a meeting of all depositors when a company defaults in repaying deposits.

Question 4.
State any four terms and conditions regarding the acceptance of the Deposit.
Answer:
(i) Period/Tenure of Deposit:

• The tenure of deposit should be more than six months but less than thirty-six months.
• Under certain circumstances only, the company can accept deposits for 3 months.
• The company can make premature repayment of deposits after a minimum of 3 months.

(ii) No demand deposit:
The company cannot accept or renew deposits repayable on demand.

(iii) Secured or Unsecured Deposit:

• A company can accept secured or unsecured deposit if it is mentioned in the circular or advertisement.
• A company offering secured deposits has the right to create a charge on its tangible assets within 30 days of acceptance of deposits.

(iv) Application Form:

• A prescribed application form is to be filled by the applicant.
• This application form is given by the company.
• It includes a declaration made by the applicant that the deposit he is making is not borrowed from any person.

(v) Joint names:
The company can accept deposits in joint names of depositors. But there should not be more than three names.

5. Justify the following statements.

Question 1.
All companies cannot accept deposits from the public.
Answer:

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

Question 2.
There is a limit or restriction on the amount that a company can collect as Deposits.
Answer:

• There are different types of companies that can accept deposits from the public as well as members.
• A private company can accept deposits from the public of more than 100% of their aggregate of paid-up share capital and free reserves.
• Eligible Public Company and Public Company cannot accept deposits from the public exceeding 25% of the aggregate paid-up share capital and free reserves of the company.
• Government company can accept deposits up to 35% of the paid-up share capital and free reserves. Thus, we can conclude that there is a limit or restriction on the amount that a company can collect as Deposits and the statement stands justified.

Question 3.
The company has to fulfill certain provisions related to the issue of circular or advertisement.
Answer:

• The company has to file a copy of the circular or advertisement with the Registrar of Companies before inviting the public.
• Circular or advertisement should be issued to the public after 30 days of filing.
• It should be signed by all directors of the company.
• Circular is sent to the members by the speed post, registered post, or email.
• Thus, it is rightly said that a company has to fulfill certain provisions related to the issue of circular or advertisement.

Question 4.
While issuing secured deposits, the company has to appoint a Deposit Trustee.
Answer:

• When issuing secured deposits, eligible companies and public companies have to appoint one or more Deposit Trustees.
• The Trustees protect the interest of the depositor in case a company defaults in repaying the depositors.
• Company signs a contract with the Deposit Trustees called as Trust Deed.
• It contains the terms and conditions of the contract.
• The deed has to be signed at least 7 days before issuing the circular or advertisement.
• The Deposit Trustee on its own or on the request of one-tenth of depositors can call a meeting of all depositors when a company defaults in repaying deposits.
• Thus, the statement, while issuing secured deposits, the company has to appoint a Deposit Trustee is fully justified.

Question 5.
Companies have to create a charge on their tangible assets while issuing secured deposits.
Answer:

• A Company accepting a secured deposit from the public, within thirty days of acceptance, has to create a charge on its tangible assets for an amount not less than the amount of deposit accepted.
• The chargeable asset amount should not be less than the amount of deposit accepted.
• The minimum amount of security should be equal to the amount not covered by Deposit Insurance.
• The Security is created in favour of the Deposit trustees.
• Creating a charge on the assets ensures safety to the deposits of deposit holders.
• In case a company fails to repay the number of deposits, the deposit holders can sell the assets and recover the amount invested.
• Thus, it is rightly justified that the companies have to create a charge on their tangible assets while issuing secured deposits.

Question 6.
The company issuing deposit must open Deposit Repayment Reserve Account.
Answer:

• Every company accepting deposits has to open a Deposit Repayment Reserve Account in a Scheduled Bank.
• These banks satisfy certain criteria laid by RBI and enjoy certain facilities of RBI.
• Every year, on or before 30 April, the company has to deposit an amount not less than 15% of the number of deposits maturing during the current year and following financial year.
• This account can be used only for repaying deposits.
• Thus, it is rightly justified that, a company issuing deposit must open Deposit Repayment Reserve Account.

6. Answer the following questions.

Question 1.
Explain the type of companies that can raise deposits along with the maximum amount they can raise as deposits.
Answer:
The company can accept deposits from both public and private companies. This acceptance of deposits by companies are further classified into:

(i) Private Company:

• A private company can accept deposits from
  • Member or Directors or Relatives of Directors.
  • The certain class specified by Companies Act.
• They can accept deposits up to 100% of its aggregate of paid-up Share Capital.

(ii) Public Company (other than an eligible company):

• Public companies (other than eligible companies) accept deposits from members.
• They cannot accept fresh deposits if the previous deposits combined exceed 25% of the aggregate of the paid-up Share Capital and Free Reserves of the company.

(iii) Eligible Public Company:

• Eligible Public Company can accept deposits from Members and Public
• Eligible Public Company can accept fresh deposits only if the previous deposits combined do not exceed 10% of the aggregate of paid-up share capital and free reserves.
• Eligible Public Company can accept fresh deposits only if the previous deposits combined do not exceed 25% of the aggregate of paid-up share capital and free reserves.

(iv) Government Company:

• Government companies can accept deposits from the public.
• These deposits can be accepted not exceeding 35% of the paid-up share capital and free reserves.

Question 2.
Explain the provisions related to circular or advertisement for inviting deposits.
Answer:
A circular is issued when the company invites deposits from its members. An advertisement is issued when the company invites deposits from the public.
(a) Contents of Circular or Advertisement:

• Statement showing the financial position of the company
• The portion of secured and unsecured deposit of fresh issue
• Credit rating obtained from a Credit Rating Agency (only for eligible public companies)
• Details of the scheme
• Name of Deposit Trustees
• Amount due towards deposits of any previous deposits accepted by the company.

(b) Filing of Circular or Advertisement with Registrar of Companies:
A company has to file a copy of a circular or advertisement signed by all directors with the Registrar of Companies.

(c) Issue of Circular or Advertisement:

• The company must file a copy of the circular or advertisement with the Registrar of the Company.
• The filing of circular or advertisement must be done within 30 days.
• Only after filing the circular or advertisement, the company can issue it to the public.
• The advertisement must be published in an English newspaper and in the regional language newspaper where the company’s registered office is located.
• The company can send the circular to the members through registered post, speed post, or email.

(d) Validity of Circular or Advertisement:
The validity of circular or advertisement is valid for 6 months from the end of the financial year in which it was issued or the date on which the Annual General Meeting was held, whichever is earlier.

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 4 Issue of Debentures Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 4 Issue of Debentures

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
A company cannot issue ___________ with voting rights.
(a) Equity shares
(b) Debentures
(c) Securities
Answer:
(a) Equity shares

Question 2.
A company can issue ___________ convertible debentures.
(a) Only Partly
(b) Only fully
(c) Partly or fully
Answer:
(c) Partly or fully

Question 3.
Money from ___________ Account is used for redemption of debentures.
(a) Capital
(b) Debenture Redemption Reserve
(c) Profit or Loss
Answer:
(b) Debenture Redemption Reserve

Question 4.
___________ protects the interest of debenture holders.
(a) Debenture Trustees
(b) Debenture holders
(c) Redemption Reserve
Answer:
(a) Debenture Trustee

Question 5.
Secured debentures must be redeemed within ___________ from the date of its issue.
(a) 10 days
(b) 10 years
(c) 15 years
Answer:
(b) 10 years

Question 6.
A company issuing ___________ debenture must create a charge on the assets of the company.
(a) Secured
(b) Unsecured
(c) Redeemable
Answer:
(a) secured

Question 7.
Debenture certificate must be issued within ___________ of allotment of debentures.
(a) 3 months
(b) 6 months
(c) 60 days
Answer:
(b) 6 months

Question 8.
The details of allotment of Debentures must be entered in ___________
(a) Register of debenture
(b) Register of members
(c) Register of creditors
Answer:
(a) register of debenture

Question 9.
A company that issues a prospectus or invites more than 500 persons to buy its debenture has to appoint ___________
(a) Register of companies
(b) Debenture holders
(c) Debenture trustees
Answer:
(c) Debenture Trustees

Question 10.
The contract between the company and Debenture trustees of companies is called as ___________
(a) Debenture trust deed
(b) Letter of offer
(c) Prospectus
Answer:
(a) Debenture Trusts Deed

Question 11.
Procedure for allotment of Debenture should be completed within ___________ from the date of receipt of applications.
(a) 6 months
(b) 3 months
(c) 60 days
Answer:
(c) 60 days

1B. Match the pairs.

Question 1.

Answer:

Group ‘A’	Group ‘B’
a) Debenture Trustees	7) Protects interest of debenture holders
b) Debenture holders	5) No voting rights
c) Charge on assets	3) Secured debentures
d) Board of Directors	1) Power to issue debentures
e) Debenture certificate	10) Issued within 6 months of allotment of debentures

1C. Write a word or term or a phrase that can substitute each of the following statements.

Question 1.
Type of resolution needed to issue convertible debentures.
Answer:
Special Resolution

Question 2.
Account to be created for the redemption of debentures.
Answer:
Debenture Redemption Reserve Account

Question 3.
Institution appointed by the company to protect the interest of debenture holders.
Answer:
Debenture Trustee

Question 4.
Period within which secured debenture should be redeemed.
Answer:
10 years

Question 5.
Type of debentures on which the company has to create a charge on its assets.
Answer:
Secured Debenture

Question 6.
The document contains terms and conditions agreed upon by the company and the Debenture trustees.
Answer:
Debenture Trust Deed

Question 7.
The time period within which the procedure for allotment of debenture is to be completed from the date of receipt of applications.
Answer:
60 days

Question 8.
Period within which debenture certificate must be issued by a company.
Answer:
6 months

Question 9.
An institution that redresses grievances of debenture holders.
Answer:
Debenture Trustee/NCLT

Question 10.
The authority has the power to issue debentures.
Answer:
Board of Directors

1D. State whether the following statements are True or False.

Question 1.
Debenture holders have no voting rights.
Answer:
True

Question 2.
The company cannot issue non-convertible debentures.
Answer:
False

Question 3.
Special Resolution is needed to issue convertible debentures.
Answer:
True

Question 4.
Debentures holders are paid interest.
Answer:
True

Question 5.
Debenture Trustees cannot approach NCLT to redress grievances of debenture holders.
Answer:
False

Question 6.
All secured debentures should be redeemed within 20 years from the date of their issue.
Answer:
False

Question 7.
The company has to create a charge on its assets when it issues secured debentures.
Answer:
True

Question 8.
Debenture Trustees are appointed to protect shareholders.
Answer:
False

Question 9.
Debentures certificate should issue within 6 months of allotment of debentures.
Answer:
True

Question 10.
After allotment of Debentures names of Debenture holders is entered in the Register of Members.
Answer:
True

1E. Find the odd one.

Question 1.
Debenture holders, Interest, Dividend
Answer:
Dividend

Question 2.
Debenture Trustee, Court, NCLT
Answer:
Court

Question 3.
Secured debenture, convertible debenture, Irredeemable debenture
Answer:
Irredeemable

Question 4.
Debenture Trustee, Trust deed, Shareholder.
Answer:
Shareholder

1F. Complete the sentences.

Question 1.
A legal instrument conveying the assets of a company to the Debenture trustees is called ___________
Answer:
Debenture Trust Deed

Question 2.
To protect the interest of Debenture holders a company appoints ___________
Answer:
Debenture Trustee

Question 3.
On receipt of application and money, the procedure for allotment of debentures should be completed within ___________
Answer:
60 days

Question 4.
Authority to create charge on company’s assets is with the ___________
Answer:
Debenture Trustee

Question 5.
Secured debentures should be redeemed within ___________
Answer:
10 years

Question 6.
To stop a company from incurring further liabilities, the Debenture trustee can approach ___________
Answer:
NCLT

Question 7.
A company which issues prospectus or invites more than 500 persons to subscribe for its debentures, has to appoint ___________
Answer:
Debenture Trustee

Question 8.
Return on investment on debenture is called ___________
Answer:
Interest

Question 9.
For public issue of debentures of ₹ 100 crores, minimum subscription should be ___________
Answer:
75%

Question 10.
For public issue or rights issue of convertible debentures, as per SEBI, a company must obtain ___________
Answer:
Consent of shareholder

1G. Select the correct option from the bracket.

Question 1.

(Issued within 6 months of allotment, Names of debenture holders, Secured debentures, Trust Deed, Debenture holders)
Answer:

Group ‘A’	Group ‘B’
(1) Debenture Trustees	(a) Trust deed
(2) Secured debenture	(b) Charge on assets
(3) Register of Debenture	(c) Name of debenture holders
(4) Issued within 6 months of allotment	(d) Debenture certificate
(5) No voting rights	(e) Debenture holder

1H. Answer in one sentence.

Question 1.
Who are the debenture holders?
Answer:
Debenture holders are the applicants who purchase the debentures of the company. They are the creditors of the company.

Question 2.
What do debenture holders receive as a return on Investment?
Answer:
Debenture holders receive interest on investment.

Question 3.
Whom does the company appoint to protect the interest of debenture holders?
Answer:
Debenture Trustees are appointed to protect the interest of debenture holders.

Question 4.
Within what period should secured debenture be redeemed?
Answer:
Within 10 years, secured debenture should be redeemed.

Question 5.
Name of the document which acts as an agreement between company and trustee.
Answer:
The debenture Trust deed is a document that acts as an agreement between the company and the Trustee.

Question 6.
Who has the authority to create charges on assets of a company?
Answer:
Debenture Trustees have the authority to create charges on the assets of a company.

Question 7.
Name of the meeting in which approval for increasing the borrowing powers of the Board is passed.
Answer:
An Extra-Ordinary General Meeting, a resolution regarding the increase in borrowing powers of Board is passed.

Question 8.
Within what period should the debenture certificate be issued?
Answer:
A period of 6 months is required to issue a debenture certificate.

Question 9.
What is the minimum subscription that a company must collect for an issue of debentures of ₹ 100 crores?
Answer:
The minimum subscription that a company must collect for an issue of debentures of Rs.100 crores is 75% of the base issue size.

Question 10.
When should the company appoint a credit rating agency?
Answer:
In order to credit rating of securities, the company can appoint a Credit Rating Agency.

1I. Correct the underlined word and rewrite the following sentences.

Question 1.
The details of debenture holders are entered in the Register of Members.
Answer:
The details of debenture holders are entered in the Register of the debenture.

Question 2.
Secured debentures must be redeemed within 15 years from the date of its issue.
Answer:
Secured debentures must be redeemed within 10 years from the date of its issue.

Question 3.
A company issuing irredeemable debentures must create a charge on the assets of the company.
Answer:
A company issuing Secured Debentures must create a charge on assets of the company.

Question 4.
Return on investment on debentures is the dividend.
Answer:
Return on investment on debentures is Interest.

Question 5.
Debenture Trustees redress the grievances of shareholders.
Answer:
Debenture Trustees redress the grievances of Debenture holders.

Question 6.
Debenture certificates are issued within 3 months of allotment of debentures.
Answer:
Debenture certificates are issued within 6 months of allotment of debentures.

Question 7.
The procedure for allotment of debentures should be completed within 90 days from the date of receipt of applications.
Answer:
The procedure for allotment of debentures should be completed within 60 days from the date of receipt of applications.

Question 8.
To rate its debentures a company appoints underwrites.
Answer:
To rate its debentures a company appoints a Credit Rating Agency.

1J. Arrange in proper order.

Question 1.
(a) Obtain Credit Rating
(b) Entry in register of debenture
(c) Receive application with money
Answer:
(a) Obtain Credit Rating
(b) Receive application with money
(c) Entry in register of debenture

Question 2.
(a) Issue debenture certificate
(b) Issue prospectus
(c) Open Bank Account
Answer:
(a) Issue prospectus
(b) Open Bank Account
(c) Issue debenture certificate

Question 3.
(a) Hold Board Meeting for allotment
(b) Issue debenture certificate
(c) Receive application with money
Answer:
(a) Hold Board Meeting for allotment
(b) Receive application with money
(c) Issue debenture certificate

2. Explain the following terms/concepts.

Question 1.
Debenture Certificate
Answer:
A debenture Certificate is an acknowledgment issued by a company with its common seal and signature against debenture issued. It includes all the information of debenture issued, its face value, rate of interest details of debenture holder, etc. A debenture certificate should be issued by the company within 6 months -from the debenture’s allotment.

Question 2.
Debenture Trustee
Answer:
Debenture Trustees are institutions that are responsible to protect the interest of debenture holders. If the company invites more than 500 persons to buy debentures, then it has to appoint one more debenture trustee. The company issuing secured debentures also must appoint a debenture trustee. The company enters into a contract with debenture trustee

Question 3.
Charge on Assets
Answer:
Charge on assets means the right of the lender to be paid from a borrower’s asset if the debt is not paid on time. Every year the company must report its total debts secured by a charge on assets. The value of the charge should be adequate to cover the entire debenture issued.

Question 4.
Debenture Trust Deed
Answer:
Debenture Trust Deed is an agreement between the company and debenture trustees. It is a legal instrument stating a relationship between the company and the trustee. It covers all terms of conditions to be followed by the debenture trustee.

3. Study the following case/situation and express your opinion:

1. Rose limited company proposes to issue debenture to the public to raise funds. After discussion, the Board of directors has decided to issue secured, Redeemable non-convertible debentures with a tenure of ten years. Please advise the board on the following matters:

Question (a).
Should the company appoint a Debenture trustee?
Answer:
The company should appoint debenture trustees as they are responsible to protect the interests of debenture holders and they are the link between the company and Debenture holders.

Question (b).
Should the company create a charge on its assets?
Answer:
The company should create a charge on its assets because if the company failed to repay the amount to debenture holders, assets can be realized and the claim can be settled.

Question (c).
Can the tenure of debentures be less than ten years?
Answer:
The maximum tenure of redemption of secured debenture is 10 years. It can be less than 10 years. It shows the strong liquidity position of a company.

2. Violet Ltd. Company plans to raise ₹ 10 crores by issuing debentures. The Board of Directors has some queries. Please advise them on the following:

Question (a).
Can the company issue unsecured debentures?
Answer:
In India, as per the guidelines of SEBI, the issue of unsecured debenture is prohibited. So, the company can’t issue unsecured debenture.

Question (b).
Can they issue irredeemable debentures?
Answer:
The company can issue irredeemable debenture if it is permitted by the Ministry or department of central government or by RBI. It can be issued for a maximum period of 30 years.

Question (c).
As the company is offering debenture to its members, can such debentures have normal voting rights?
Answer:
As the company is offering debentures to its members, such debentures have no normal voting rights. It can enjoy the voting rights on the matters associated with them.

3. DDS financial plans to raise ₹ 10 crores by issuing secured, Non-convertible debentures. However, as per the Articles of Association, the board of directors has authority only to raise up to 5 crores. They are also considering whether to go for a private placement or make a public offer. Please advise them on the following:

Question (A).
What can be the maximum tenure of the debentures to be issued?
Answer:
All the secured debentures should be redeemed for 10 years. Only those companies permitted by RBI/ Dept. Of corporate affairs can issue debentures of more than 10 years but less than 30 years.

Question (b).
Is the proposed issue within the borrowing powers of the board?
Answer:
The proposed issue is not within the borrowing powers of the Board of Directors. If they want to increase their borrowing powers, they have to get the approval of shareholders.

Question (c).
Within what period should the company issue a Debenture certificate?
Answer:
A debenture certificate should be issued within 6 months from the date of allotment of debentures.

4. Answer in brief.

Question 1.
State any four provisions of the Companies act 2013 for the issue of debenture?
Answer:
The company can issue debentures to the public. But to issue debentures, companies need to follow provisions.
Following are the provisions of the Companies Act, 2013:
1. No Voting Rights:
A Company cannot issue debentures with voting rights. Debentures are the creditors of the company and hence, they do not have any voting rights. However, they can enjoy voting rights on the matters associated with them.

2. Payment of interest and redemption:
A debenture holder is responsible to get fixed interest on their investment from the company. The rate of interest is decided at the time of the issue of the debenture. A Company shall redeem the debentures after a specific period of time. It is a temporary capital of a company.

3. Debenture Certificate:
The company issues debenture certificates to the debenture holders. It should be issued by the company within six months from the date of allotment of debentures.

4. Create Debenture Redemption Reserve:
The company has to create a Debenture Redemption Reserve Account out of the profits of the company. Debenture Redemption Reserve is created for the payment of dividends and redemption of debentures only As per the Companies Amendment Act, 2019 no Listed companies, NBFC’s and Housing Finance Companies require Debenture Redemption Reserve.

Question 2.
What is Debenture Trust Deed?
OR
Write a note on Debenture Trust Deed.
Answer:

• A debenture is a loan document that helps the company to raise long-term loans from the Market.
• A person who purchases debenture of a company is called a debenture holder.
• A debenture holder is a creditor of the company and cannot participate in the management of the company.
• The company appoints debenture trustees to protect the interest of debenture holders.
• The company enters into the contract with debenture trustees, which is called as ‘Debenture Trust Deed’.
• The company can enter into a contract with one or more debenture trustees.
• The Terms and Conditions of debenture trustees are written into the debenture trust deed.
• It is a legal instrument conveying the assets of the company to the trustees.
• Debenture Trust Deed is a right of debenture holder and duty of debenture trustees.
• A company has to execute a trust deed within 3 months of the closure of the issue.
• Member and debenture holder can inspect the copy of the deed and also get the copy by paying a certain fee.

Question 3.
Who are debentures trustees?
Answer:

1. Debentures Trustee is a person or institution which protects the interest of the debenture holders. The Trustees become the custodian of the assets on which charge has been created.
2. A company that issues a prospectus or invites more than 500 persons to buy its debentures has to appoint one or more Debentures Trustees. Companies issuing secured debentures also must appoint Debentures Trustee.
3. Debentures Trustee is appointed before prospectus or letter of offer/offer letter is issued or within 60 days after the allotment of the debenture. The Trustees must give written consent to act as Debenture Trustees.
4. According to SEBI Rules, 1993 “debentures trustee” means a trustee of a trust deed for securing any issue of debentures of a body corporate (section 2 (bb)). (Applicable to public companies only).
5. The trustee can appoint a nominee to the board of directors of the company. Before the trustee appoints the nominee, the following conditions must be satisfied:
   • Two consecutive defaults made by the company in payment of interest to the debenture holders; or
   • Default in the creation of security for debentures or default in the redemption of debentures.

5. Justify the following statements.

Question 1.
A company has to create a charge on its asset for issuing secured debenture.
Answer:

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

Question 2.
Debenture trustees are appointed by a company issuing debentures.
Answer:

• Debenture trustees are appointed when the company issues a prospectus or invites more than 500 people.
• They are appointed to protect the interest and redress the grievances of debenture holders.
• Debenture trustees act as custodians of assets and create a charge on assets of the company on behalf of debenture holders.
• In case, the company failed to redemption of a debenture or its interest, then debenture trustees by the order of NCLT can realize the assets and settle the dues.
• Thus, it is rightly said that debenture trustees are appointed by the company for issuing debenture.

Question 3.
A company can issue only certain types of debentures.
Answer:

• The debenture holders are the creditors of the company. They offered borrowed capital to the company but cannot participate in the management of the company.
• Therefore, in order to protect the interest of debenture holders, SEBI, through its guidelines allowing companies to issue certain types of debentures in India.
• Therefore, the companies operating in India can issue secured debentures, convertible debentures, redeemable debentures to the applicant.
• It protects the interest of creditors in the company.
• Thus, it is rightly said that a company can issue only certain types of debentures.

6. Answer the following questions.

Question 1.
Briefly explain the provisions of the Companies Act, 2013 for the issue of debentures.
OR
State the statutory provisions related to the issue of debentures.
Answer:
The company can issue debentures to the public. But to issue debentures companies need to follow provisions.
Following are the provisions of the Companies Act, 2013:
1. No Voting Rights:
A Company cannot issue debentures with voting rights. Debentures are the creditors of the company and hence, they do not have any voting rights. However, they can enjoy voting rights on the matters associated with them.

2. Types of Debentures:
There are various types of debentures like secured and unsecured debentures, convertible and non-convertible debentures, redeemable and irredeemable debentures, registered and bearer debentures, etc. All the debentures are redeemable in nature. A special resolution is to be passed in the general meeting for issuing convertible debentures.

3. Payment of interest and redemption:
A debenture holder is responsible to get fixed interest on his investment from the company. The rate of interest is decided at the time of the issue of the debenture. A Company shall redeem the debentures after a specific period of time. It is a temporary capital of a company.

4. Debenture Certificate:
The company issues debenture certificates to the debenture holders. It should be issued by the company within six months from the date of allotment of debentures.

5. Create Debenture Redemption Reserve:
The company has to create a Debenture Redemption Reserve Account out of the profits of the company. Debenture Redemption Reserve is created for the payment of dividends and redemption of debentures only. As per the Companies Amendment Act, 2019 no Listed companies, NBFC’s and Housing Finance Companies require Debenture Redemption Reserve.

6. Appointment of Debenture Trustees:
The company issuing debentures for more than 500 people or issuing prospectus has to appoint one or more Debenture Trustees. They are responsible to protect the interest of the debenture holders. Trustees are appointed by entering into the contract with the company which is called Debenture Trust Deed.

7. Debenture Trustees can approach NCLT:
Debenture Trustees have to redress the problem of debenture holders. Debenture Trustees can approach National Company Law Tribunal (NCLT) if the company fails to repay the principal amount on maturity or paying interest. NCLT can direct a defaulting company to repay the principal amount of interest.

8. Impose Restrictions:
Debenture Trustees can also approach NCLT when the company is not able to pay the principal amount of debentures, even after selling the company assets. In such a case, NCLT can order a company to restrict incurring further liabilities so as to protect the interest of the debenture holders.

9. Punishment for not complying with the provisions of the Companies Act:
If the company or any of its officers fails to comply with any of the provisions, then the company or the responsible officer who is in default will be liable to pay a fine or imprisonment or both as prescribed in the Act.

Question 2.
Explain briefly the procedure for the issue of debentures.
Answer:
A Company’s Secretary is mainly responsible to supervise the process of issue of the debenture. As the employee of the company, the secretary has to look into the matter that company complies with all the provisions.
Procedure for Issue of Debentures:

• Board Meeting and Resolution
• EOGM and Shareholder’s Approval
• Filing with Registrar of Companies
• Approval and Permission
• Credit Rating
• Underwriting Contract
• Trust Deed
• Issue of prospectus
• Open Bank Account with Scheduled Bank
• Receiving Applications and Allotment
• Board Meeting
• Issue Debenture Certificate
• Entries in register of member

1. Board Meeting and Resolution:

• Board Meetings should be conducted before issuing debentures. A resolution is passed before issuing debentures to the public. The resolution should specify the following points:
• Amount and type of debentures to be issued with terms and conditions
• Approve Prospectus/Offer Letter/Letter of Offer
• Appointment of Debenture Trustees with their consent
• Call Extra Ordinary General Meeting
• Opening of Separate Bank Account to receive money from applicants

2. EOGM and Shareholder’s Approval:
If the issue of debenture exceeds the limit of paid-up capital and free reserve, then the company needs to conduct extraordinary general meetings. An extraordinary General Meeting is held for passing a special resolution and getting the shareholder’s approval related to the increase in the issue of debentures.

3. Filing with Registrar of Companies:
Secretary has to file the special resolution and copy of the prospectus with the Registrar of Companies. It has to be filed within 30 days of the board meeting.

4. Approval and Permission:
Permission of SEBI is compulsory, in case the issue of debenture exceeds ₹ 1 crore or more. Simultaneously, approval of the stock exchange is required to be taken before a prospectus is issued to the public. It is mandatory to list the debentures on the recognized stock exchange before issuing them to the public.

5. Credit Rating:
As per SEBI guidelines, the company has to get its debenture rated by two recognized credit rating agencies such as CRISIL, CARE, ICRA, etc.

6. Underwriting contract:
The company may enter into an underwriting agreement with underwriters for its public issue of debentures. The appointment of underwriters must be mentioned in the prospectus.

7. Trust Deed:
The Trust Deed has to be executed between the company and trustees. Trustees give a guarantee of protection of debenture holder’s interest.

8. Issue of Prospectus/Letter of Offer/Offer Letter:
Company issues prospectus, if it is inviting the general public. An offer letter is issued if the company makes a private placement. Letter of Offer is issued for Right Issue (Offer to exist shareholders).

9. Appointment of Banker:
Issuing Company must appoint a ‘Scheduled Bank’ as a banker of the company. The company must open a separate account in the name of the company. This account is opened to receive the money from the applicants.

10. Receiving and Allotment of debenture:
A board meeting is held to decide and approve the allotment of debentures. Board also approves the creation of charges on the company assets. The company must make the arrangement to receive the application with application money. After Board Meeting, the company allows debentures to the applicants.

11. Issue of Debenture Certificate:
The allotment procedure has to be completed within 60 days from the receipt of application money. Debenture certificates are prepared by the secretary and issued to the debenture holders within 180 days from the date of allotment.

12. Entries in Register of Debenture:
If the debentures are issued in DEMAT form, the company does not maintain the Register of Debenture holders. After allotment, all details of debenture holders are entered in the register of the debenture. In case of debenture holders exceed 50, the company should maintain the ‘Index of Debenture holders.

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 3 Issue of Shares Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 3 Issue of Shares

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
___________ refers to capital made up of Equity and preference shares.
(a) Share capital
(b) Debt capital
(c) Reserve fund
Answer:
(a) Share capital

Question 2.
___________ capital refers to maximum capital a company can raise by issuing shares.
(a) Issued
(b) Authorised
(c) Paid up
Answer:
(b) Authorised

Question 3.
___________ means shares are offered to the public.
(a) Rights Issue
(b) Private Placement
(c) Public Issue
Answer:
(c) Public Issue

Question 4.
Under ___________ method, issue price of shares is based on bidding.
(a) Book Building
(b) Fixed Price
(c) Bonus Issue
Answer:
(a) Book Building

Question 5.
In ___________, shares of a company are offered to the public for the first time.
(a) Further Public Offer
(b) Initial Public Offer
(c) Public Offer
Answer:
(b) Initial Public Offer

Question 6.
___________ is offered to existing equity shareholders.
(a) IPO
(b) ESOS
(c) Rights Issue
Answer:
(c) Rights Issue

Question 7.
Bonus shares are issued free of cost to ___________
(a) existing Equity shareholders
(b) existing employees
(c) Directors
Answer:
(a) existing Equity shareholders

Question 8.
___________ are offered to permanent employees Directors and Officers of a company.
(a) Bonus Shares
(b) Rights Issue
(c) ESOS
Answer:
(c) ESOS

Question 9.
Under ___________, a company offers its securities to a select group of persons not exceeding 200.
(a) Private Placement
(b) IPO
(c) Public Offer
Answer:
(a) Private Placement

Question 10.
The ___________ have the power to allot shares.
(a) Director
(b) Board of Directors
(c) Company Secretary
Answer:
(b) Board of Directors

Question 11.
Letter of ___________ is sent to applicants who have been given shares by the company.
(a) Regret
(b) Renunciation
(c) Allotment
Answer:
(c) Allotment

Question 12.
___________ is a proof of title to Shares.
(a) Share Certificate
(b) Register of Member
(c) Letter of Allotment
Answer:
(a) Share Certificate

Question 13.
The gap between two calls should not be less than ___________
(a) 14 days
(b) One month
(c) 21 days
Answer:
(b) One month

Question 14.
Company can ___________ shares on non-payment of calls.
(a) forfeit
(b) surrender
(c) allot
Answer:
(a) forfeit

Question 15.
Voluntarily giving away one’s share to another person is called as ___________ of shares.
(a) Transfer
(b) Transmission
(c) Surrender
Answer:
(a) Transfer

Question 16.
___________ of shares takes place due to operation of law.
(a) Forfeiture
(b) Allotment
(c) Transmission
Answer:
(c) Transmission

1B. Match the Pairs.

Question (I).

Answer:

Group ‘A’	Group ‘B’
(a) Death of member	(5) Transmission of shares
(b) Voluntary return of shares to company by member	(4) Surrender of shares
(c) Price of shares mentioned in prospectus	(7) Offered to existing Equity Shareholders
(d) ESPS	(3) Offered to existing employees
(e) Regret Letter	(6) Non-allotment of shares

Question (II).

Answer:

Group ‘A’	Group ‘B’
(a) Issued capital	(4) Capital offered to public to subscribe
(b) FPO	(8) Maximum capital a company can raise
(c) Bonus shares	(7) Free shares issued to existing equity shareholder
(d) Issued within two months of allotment of shares	(5) Share Certificate
(e) Forfeiture of shares	(1) Non-payment of calls

1C. Write a word or a term or a phrase which can substitute each of the following statements.

Question 1.
Capital collected by way of issue of Equity and Preference shares.
Answer:
Share Capital

Question 2.
Part of issued capital subscribed by investors.
Answer:
Subscribed capital

Question 3.
Capital that will be collected only at the time of winding up of a company.
Answer:
Reserve capital

Question 4.
Highest bid price in Book Building method.
Answer:
Cap price

Question 5.
Offering of shares by a company to the public for the first time.
Answer:
IPO

Question 6.
Subsequent issue of shares after an IPO.
Answer:
FPO

Question 7.
Pre-emptive right given to existing Equity shareholders to subscribe to new issue of shares by company.
Answer:
Rights issue/shares

Question 8.
It is also called as ‘Capitalization of Profits’.
Answer:
Bonus shares

Question 9.
Appropriation of shares to an applicant.
Answer:
Allotment of shares

Question 10.
Committee set up to decide the formula for allotment of shares in case of over-subscription.
Answer:
Allotment committee

Question 11.
Minimum amount to be collected from subscribers within thirty days of issue of prospectus.
Answer:
Minimum subscription

Question 12.
Document which is a prima facie evidence of ownership of certain shares of a company.
Answer:
Share certificate

Question 13.
Penal action taken by company on non-payment of calls.
Answer:
Forfeiture of shares

Question 14.
Person to whom transferor is transferring the shares.
Answer:
Transferee

Question 15.
Transfer of shares due to operation of law.
Answer:
Transmission of shares

1D. State whether the following statements are true or false.

Question 1.
Only fully paid-up shares can be forfeited.
Answer:
False

Question 2.
The member transferring shares is called a transferor.
Answer:
True

Question 3.
A share certificate is issued for partly or fully paid up shares.
Answer:
True

Question 4.
Allotment of shares must be done within one month of receipt of application money.
Answer:
False

Question 5.
Sweat Equity shares are offered to Directors or employees of a company.
Answer:
True

Question 6.
Bonus Shares are issued at a discounted price to the Equity Shareholder.
Answer:
False

Question 7.
The floor price is the highest bid price under the Book Building method.
Answer:
False

Question 8.
Calls not paid by shareholders are called calls in arrears.
Answer:
True

Question 9.
Shares not offered to the public for subscription are called subscribed capital.
Answer:
False

Question 10.
Authorized capital is mentioned in the capital clause of the Memorandum of Association.
Answer:
True

1E. Find the odd one.

Question 1.
Authorized capital, Equity share capital, Issued capital, Paid-up Capital.
Answer:
Equity share capital

Question 2.
ESOS, ESPS, Rights Shares, Sweat Equity.
Answer:
Rights Shares

Question 3.
Floor Price, Cap Price, Cut-off price, Face Value.
Answer:
Face Value

Question 4.
Bonus Shares, Rights Shares, ESOS.
Answer:
ESOS

Question 5.
Allotment of Shares, Forfeiture of shares, Surrender of shares.
Answer:
Allotment of shares

1F. Complete the sentences.

Question 1.
Share Capital refers to capital made up of Equity shares and ___________
Answer:
Preference Share

Question 2.
Reserve capital is part of ___________
Answer:
Uncalled Capital

Question 3.
Transfer of shares due to death, insolvency, or insanity of the member is called ___________
Answer:
Transmission Shares

Question 4.
The two parties involved in transfer of shares are transferor and ___________
Answer:
transferee

Question 5.
Voluntarily giving up of shares by a member due to inability to pay calls is called as ___________
Answer:
surrender of shares

Question 6.
Company can forfeit only ___________ paid shares.
Answer:
partly

Question 7.
In case the original Share Certificate is torn or mutilated, company can issue ___________
Answer:
Duplicate Share Certificate

Question 8.
In case of transfer of shares, the company has to issue to the transferee a new share certificate within ___________
Answer:
one month

Question 9.
Letter sent to applicants for informing them shares are allotted is called as ___________
Answer:
Letter of Allotment

Question 10.
When applications received is more than the number of shares offered, it is called as ___________
Answer:
Over Subscription

Question 11.
In Book Building Method, the final price at which shares are offered to investors is called as ___________
Answer:
Cut-off price

Question 12.
Shares issued free of cost to existing Equity shareholders is called as ___________
Answer:
Bonus Shares

1G. Select the correct option from the bracket.

Question 1.

(The first-time offer of shares, Shares offered to the public, Shares offered to exist, Equity shareholders, Shares offered to exist, employees, Transmission of shares)
Answer:

Group ‘A’	Group ‘B’
(a) Public offer of shares	(1) Shares offered to Public
(b) First time offer of shares	(2) Initial public offer
(c) Rights Issue	(3) Shares offered to existing equity share holders
(d) Shares offered to existing employees	(4) ESOS
(e) Operation of law	(5) Transmission of Shares

1H. Answer in one sentence.

Question 1.
When does the transmission of shares take place?
Answer:
Transmission of Shares takes place on death, insolvency, or insanity of the members.

Question 2.
Name the two parties involved in the transfer of shares.
Answer:
The transferor and Transferee are the two parties involved in the transfer of shares.

Question 3.
What is the time limit to issue a share certificate on allotment of shares?
Answer:
Secretary should issue share certificate within two months of allotment of shares.

Question 4.
What is the time limit for Filing a Return of Allotment with the Registrar on the allotment of shares?
Answer:
Secretary has to file a ‘Return of Allotment’ with the Registrar of Companies within 30 days of allotment of shares.

Question 5.
When can a company forfeit shares?
Answer:
If a shareholder fails to pay calls on shares within a certain period company can forfeit shares.

Question 6.
What is a share certificate?
Answer:
Share Certificate is a registered document issued by a company that is evidence of ownership of a specified number of shares of the company.

Question 7.
What is the minimum application money to be collected by Company as per the Companies Act?
Answer:
As per the companies act, the company should collect a minimum of 25% of the nominal value of shares.

Question 8.
To whom should the prospectus be filed before issuing it to the public?
Answer:
The prospectus should be filed with the Registrar of Companies before issuing it to the public.

Question 9.
What is meant by private placement?
Answer:
When a company offers its securities to a select group of persons not exceeding 200, it is called Private Placement.

Question 10.
To whom is Sweat Equity shares offered by a company?
Answer:
Sweat equity shares are issued to directors or employees of the company.

Question 11.
To whom can a company issue Bonus Shares?
Answer:
The company can issue Bonus Shares to its existing equity shares.

Question 12.
What is the subsequent issue after IPO called as?
Answer:
The subsequent issue after IPO is called FPO.

Question 13.
Name the method under which the issue price of shares is fixed through a bidding process.
Answer:
Under the Book Building method, the issue price of shares is fixed through a bidding process.

Question 14.
What is Public Issue?
Answer:
Public issue or offer means offering the shares to the public. The company invites the public to subscribe to its shares by issuing a prospectus.

Question 15.
Name the capital which is mentioned in the capital clause of the Memorandum of Association.
Answer:
Authorized Capital is mentioned in the capital clause of the Memorandum of Association.

1I. Correct the underlined words/and rewrite the following sentences.

Question 1.
Issued capital is the maximum capital that a company can raise by issuing shares.
Answer:
Authorized capital is the maximum capital that a company can raise by issuing shares.

Question 2.
Under the Fixed-Price issue method, the price of shares is fixed through a bidding process.
Answer:
Under Book Building Method the price of shares is fixed through a bidding process.

Question 3.
FPO refers to offering shares to the public for the first time.
Answer:
IPO refers to the offering of shares to the public for the first time.

Question 4.
Only Fully paid up shares can be forfeited.
Answer:
Only Partly paid-up shares can be forfeited.

Question 5.
Bonus shares are offered to existing employees of a company.
Answer:
Bonus shares are offered to existing shareholders of a company.

Question 6.
The company enters into an underwriting agreement with the shareholders.
Answer:
The company enters into an underwriting agreement with the underwriters.

Question 7.
Letter of Allotment is sent to applicants when no shares are allotted to them.
Answer:
Letter of Regret is sent to applicants when no shares are allotted to them.

Question 7.
IPO refers to the offering of shares to the public for the second time.
Answer:
FPO refers to offering shares to the public for the second time.

Question 8.
A duplicate share certificate must be issued within one month from the date of application.
Answer:
A duplicate share certificate must be issued within three months from the date of application.

Question 9.
Call money can not exceed 5% of the nominal value of shares.
Answer:
Call money can not exceed 25% of the nominal value of shares.

1J. Arrange in proper order.

Question 1.
(a) Forfeiture of shares
(b) Calls on shares
(c) Allotment of shares
Answer:
(a) Allotment of shares
(b) Calls on shares
(c) forfeiture of shares

Question 2.
(a) Share certificate
(b) Allotment letter
(c) Application from
Answer:
(a) Application form
(b) Allotment letter
(c) share certificate

Question 3.
(a) Return of allotment
(b) Application form
(c) Minimum Subscription
Answer:
(a) Minimum subscription
(b) Application form
(c) Return of allocation

2. Explain the following terms/concepts.

Question 1.
Transmission of shares.
Answer:

• Transmission of shares means the transfer of the title of shares by the operation of law.
• When the shares of a member are automatically transferred to another person on the death, insolvency, or insanity of a member it is called Transmission of shares.
• Transmission of shares is an involuntary action.
• There is only one party i.e., a legal heir who indicates the process of transmission.
• The legal heir or official receiver need not pay any consideration for the shares.
• There is no need to submit an Instrument of Transfer of pay stamp duty.

Question 2.
Bonus shares
Answer:

• Bonus Shares are shares distributed by a company to its current shareholders as fully paid shares free of charge.
• The Bonus Shares are given to the existing equity shareholders according to their existing proportion of equity shareholdings.

Question 3.
Allotment of Shares
Answer:

• Allotment means the distribution of shares among the applicants. It means giving shares to share applicants of to specific persons with whom the company has entered into the contract.
• Allotment of shares is a procedure in which shares are distributed to those applicants who have submitted a written application along with the application money.

Question 4.
Employees Stock Option Scheme
Answer:
An employee stock option plan is an employee benefits scheme under which the company encourages its employees to acquire ownership in the form of shares. Under this scheme, permanent employees, Directors or Officers of the Company or its holding company or subsidiary company are offered the benefit or right to purchase the equity shares of the company at a future date at a predetermined price.

Question 5.
Surrender of Shares
Answer:

• This means the voluntary return of shares by the member to the company for cancellation.
• Surrender of shares is allowed only if there is no other option but to forfeit the shares.
• Only partly paid-up shares can be surrendered.
• Surrendered shares can be surrendered when a company provides for such surrender of shares.

Question 6.
Sweat equity shares
Answer:
These are shares issued by a company to its directors or employees at a discount or for consideration other than cash. It is one of the modes of making share-based payments to employees. It is issued in recognition of their valuable contribution to the prosperity of the company.

Question 7.
Share Certificate
Answer:
A Share certificate refers to documents that are issued by a company evidencing that a person named in such certificate is the owner of the shares of the company stated in the share certificate. Share certificate has to be issued under the common seal of the company. It should be issued within 2 months from the date of allotment against the allotment letter.

Question 8.
Authorized Capital
Answer:

• The Authorized capital is the maximum amount of capital that a company can raise through the issue of shares to the shareholders.
• The Authorized capital of a company is also called Registered Capital or Nominal Capital.
• Authorized capital is the maximum capital that is authorized by the company’s memorandum of Association.

Question 9.
Forfeiture of shares
Answer:
If a shareholder, who is called upon to pay any call fails to pay the amount, even after sending many reminders the company may forfeit its shares. Thus forfeiture of shares means cancellation of shares.

Question 10.
Paid-up capital
Answer:

• Paid-up capital is the amount of money a company has received from shareholders in exchange for shares.
• It is the total amount of money paid up by the shareholders when the company has called up or demanded them to pay.
• The paid-up capital can be equal to or less than the authorized capital.

Question 11.
Calls on Shares
Answer:

• Whenever a company issue shares, the company may ask shareholders to pay the value of shares in installment which is known as calls on shares.
• The company can demand part or full amount of the balance amount of unpaid shares.

Question 12.
Subscribed Capital.
Answer:

• Subscribed share capital is that part of issued share capital for which a company has positively received a subscription from the investor.
• It is a part of Issued Capital that has been subscribed by investors or purchased by the general public.

Question 13.
Minimum Subscription
Answer:
Minimum subscription means a minimum amount decided by the ROC which should be build-up by the company by issuing securities to the general public. If the company failed in minimum subscription then it has to return the entire amount back to the applicants.

Question 14.
Transfer of shares
Answer:

• Transfer of shares means the transfer of ownership of the shares from one person to another against consideration.
• Transfer of shares is effected by removing the name of the existing shareholders (transferor) from the register of members and inserting the name of the new member (transferee).
• Transfer of shares is a voluntary process of transferring shares by a member of a company.

Question 15.
Initial Public Offer (IPO)
Answer:
The initial public offering is the sale of equity shares to the public first time in order to raise capital. This is the most popular and common method used by companies. The company invites the public to subscribe to its shares by issuing prospects.

Question 16.
Blank Transfer
Answer:

• The Blank transfer means the sale or transfer of securities in which the name of the buyer or transferee is not recorded.
• When a member signs the Instrument of transfer without filling in the name of the transferee and hands it over to the transferee with the share certificate it is called ‘Blank Transfer.’
• The blank transfer enables easy to purchase and sale of shares as the blank transfer form can be sold any number of times.
• The intermediate buyers need not pay stamp duty.

Question 17.
Further Public Offer (FPO)
Answer:
It is also called a follow-on public offer. When the company issue shares to the public after IPO, it is called a further public offer. Thus every issue of shares by a listed company after its IPO is called an FPO. FPO leads to an increase in the subscribed capital of the company.

Question 18.
Forged Transfer
Answer:

• An instrument on which if the signature of the transferor is forged is called forged transfer.
• It is a null transfer and does not counter any title.
• As the signature of the transferor is forged, the company should not register such transfer of shares.

Question 19.
Rights issue
Answer:
A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. A rights issue is a way by which a listed company can raise additional capital.

Question 20.
Private Placement
Answer:
When a company offers its securities to a selected group of persons not exceeding 200, it is called private placement. Here securities are not offered to the general public.

5. Study the following cases and express your opinion.

1. Eva Ltd. Company’s capital structure is made up of 1,00,000 equity shares having a face value of ₹ 10/- each. The company has offered to the public 40,000 equity shares and out of this, the public has subscribed for 30,000 equity shares. State the following in rupees-

Question (a).
Authorized capital
Answer:
The authorized capital is ₹ 10,00,000 (1,00,000 equity shares × ₹ 10/- each)

Question (b).
Subscribed capital
Ans. The subscribed capital is ₹ 3,00,000 (30,000 equity shares × ₹ 10/- each)

Question (c).
Issued capital
Answer:
The issued capital is ₹ 4,00,000 (40,000 equity shares × ₹ 10/- each)

2. TRI. Ltd company is a newly incorporated public company and wants to raise share capital by issuing equity shares in the market. The board of directors is considering various options for this. Advise the board on the following matters:

Question (a).
What should the company offer – IPO or FPO?
Answer:
The Company should offer IPO.

Question (b).
Can the company offer Bonus shares to raise its capital?
Answer:
The company cannot offer Bonus Shares. Bonus Shares are given out of only accumulated capital or reserves only.

Question (c).
Can the company enter into an underwriting Agreement?
Answer:
Yes. The company can enter into an Underwriting Agreement. The underwriters assure the company to take up the unsold shares so that company can be able to raise the minimum subscription.

3. Silver ltd. The company has recently come out with its public offer through FPO. Their issue was over-subscribed. The board of directors now wants to start the allotment process.

Question (a).
Should the company set up an allotment committee?
Answer:
Yes. The company should set up an allotment committee as the issue is over-subscribed so the Board has to set up an allotment committee.

Question (b).
How should the company information to whom the company is allotting shares?
Answer:
The company should inform the applicants through a letter of allotment for allotting shares.

Question (c).
Within what period should the company issue a share certificate?
Answer:
The company should issue share certificates within two months from the date of allotment.

4. Red Tubes Ltd. has made a demand on its shareholders to pay the balance unpaid amount of ₹ 20/- per share (having a face value of ₹ 100) held by them. The company has sent letters asking the shareholders to pay the money to its Bankers within the specified time.

Question (a).
Are the shareholders liable to pay ₹ 20/- for the shares held by them?
Answer:
Yes. The shareholders are liable to pay ₹ 20 for the shares held by them. When a company demands the shareholder to pay a part or full amount of the balance amount unpaid on shares it is called ‘calls on shares’.

Question (b).
Name the letter sent by the company to its shareholders asking them to pay ₹ 20/-
Answer:
The company will send a ‘Call Letter’ to its shareholders for asking them to pay ₹ 20.

Question (c).
What happens if the shareholders fail to pay the money within a specific time?
Answer:
If a shareholder fails to pay call money within the specified time, the company can forfeit the shares.

5. X owns 100 shares and Y owns 500 shares of RED tubes. The company has asked all its shareholders to pay the balance unpaid amount of rupees 20. X pays full money demanded by the company and Y failed to pay the money due to poor financial condition.

Question (a).
Can the company forfeit the shares of Y?
Answer:
Yes. The company can forfeit the shares of ‘Y’ as he failed to pay calls on shares within a certain period.

Question (b).
Can the company forfeit the shares of X?
Answer:
The company cannot forfeit the shares of ‘X’ as he paid the full amount of shares. Only partly paid-up shares can be forfeited.

Question (c).
Can X transfer his shares?
Answer:
Yes. X can transfer his shares by filling Instrument of transfer.

4. Distinguish between the following.

Question 1.
Initial Public Offer and Further Public Offer
Answer:

Points	Initial Public offer	Further Public offer
1. Meaning	IPO refers to an offer of Securities by an unlisted public company to the public for the first time.	FPO means an offer of securities by a listed public company to the public to raise subsequent capital.
2. Raising Money	Raising Money for the first time from the public.	Before FPO Company has already raised money through an IPO.
3. When Issued	It is usually issued by an existing company that wants to raise capital from the public for the first time.	It is usually issued by a listed public company when it wants to raise further capital from the public.
4. Order of Issue	IPO precedes FPO. IPO is the first time sale of shares to the public.	FPO is always done after IPO. FPO is the second or subsequent sale of shares to the public.
5. Listing	The company has to get itself listed for the first time before issuing IPO.	A company making an FPO is already a listed company.
6. Risk	It is very risky for the investor as he cannot predict the company’s performance.	It is less risky for the investor as he has an idea of the company’s past performance and can judge its future performance.

Question 2.
Fixed Price Issue Method and Book Building Method
Answer:

Points	Fixed Price Issue Method	Book Building Method
1. Meaning	Under this method, the issue price of shares is mentioned in the prospectus and investors have to buy shares at that price only.	Under this method, the issue price is determined by a bidding process.
2. Price of Shares	The exact price of shares is known in advance and it is mentioned in the prospectus.	The price of shares is not known in advance only the minimum price and maximum price at which the company is willing to sell the shares is known in advance.
3. Prospectus	The company has to issue a prospectus and it contains the details of the price at which shares are offered and the total number of shares offered by the company.	The company issues a Red Herring Prospectus. It contains only the price band and the total size of the issue.
4. Determination of Demand	The company comes to know the public demand for its shares only after the closure of the issue.	The company comes to know the public demand for its shares every day. The bids are registered in the book .everyday till the closure of the issue.
5. Payment of Application Money	Application money or entire money has to be paid by the investor at the time of submitting the application for shares.	Only application money has to be paid at the time of bidding. Money will be collected only after the issue price has been fixed.
6. When Used	It can be used for any issue i.e., Public issues, Rights Issues, FSOS, etc.	It is usually used in public issues i.e., IPO and FPO

Question 3.
Right shares and Bonus shares
Answer:

Points	Rights Shares	Bonus Shares
1. Meaning	In the rights issues, shares are offered to the existing equity shareholders.	Bonus shares are issued to the existing equity shareholders free of cost.
2. Payment	Subscribers have to pay for the Right Shares.	Bonus Shares are issued free of cost to the shareholders.
3. Partly/Fully paid-up shares	Shareholders have to pay for these shares as Application Money, Allotment, Call money, etc.	Bonus Shares are fully paid up shares so no money has to be paid by shareholders to the company.
4. Minimum Subscription	The company has to obtain a minimum subscription for Rights shares.	There is no minimum Subscription to be collected for Bonus shares.
5. Right to Renounce	The shareholders can renounce their shares.	Shareholders cannot renounce their bonus share.
6. Purpose of Issue	The main purpose to issue rights shares is to raise fresh funds and along with it to give a chance to their existing members to increase their shareholding.	The main purpose of issuing bonus shares, is to give rewards to its existing equity shareholders out of its accumulated huge profits or Reserves.

Question 4.
Transfer of shares and Transmission of shares
Answer:

Points	Transfer of shares	Transmission of shares
1. Meaning	Transfer of shares means the transfer of ownership of shares from one person to another by entering into a contract.	It means the transfer of ownership of a member’s shares to his legal representative due to the operation of law. It takes place on the death of insolvency or insanity of the members.
2. When Done	It is done when the member wants to sell his shares or give his shares as a gift.	It is done when the member dies or becomes insolvent or suffering from insanity.
3. Nature of Action	It is a voluntary action taken by the member.	It is an involuntary action. It is performed by operation of law.
4. Parties Involved	In the transfer of shares, there are two parties involved – the member who is called as transferor and the buyer who is called as transferee.	There is only one party e.g., the nominee of the members in case of death of the member or the legal representative.
5. Instrument of transfer	Transfer requires an Instrument of transfer.	No instrument of transfer is needed.
6. Initiated by	The transferor initiates the transfer process.	Legal representative or official receiver initiates the process of transmission.
7. Consideration	Transfer of shares is done often by the member to receiving some consideration e.g., money.	In the transmission of shares, no consideration is involved.
8. Liability	The liability of the transferor ends after the shares are transferred.	Original liability of the member continues in case of transmission of shares.
9. Stamp duty	Stamp duty as per the market value of shares has to be paid.	No stamp duty is to be paid.

5. Answer in brief.

Question 1.
What is Book Building Method?
Answer:

• The method of offering shares by providing a price range is called the book building method.
• In the book, building method shares will be sold by the bidding process.
• The company issues a Red Herring Prospectus which contains a price range or price band and as the investor to bid on it.
• In this method, the company doesn’t fix up a particular price for the share but gives a price range e.g., ₹ 80 to ₹ 100.
• When bidding for the shares, investors have to decide at which price they would like to bid for the shares e.g. ₹ 80, ₹ 90, ₹ 100.
• The lower price band (₹ 80) is known as the floor price and the highest price band (₹ 100) is known as the cap price. The final price at which shares are offered to investors is called the cut-off price.
• Board on the demand and supply of the shares, decides the final price is to be fixed.
• Investors can bid on any number of shares that they are willing to buy at a given price band. Such Bidding is kept open for 5 days.
• The bids with application money are to be submitted to the Lead Merchant Bankers called ‘Book Runners’ who enter the bids in a book.
• After bidding, the company fixes a cut-off price at which shares on offer can be sold.
• The company issues a prospectus that contains the final price.
• Book Building method is used for public issues i.e., IPO and FPO.

Question 2.
State the provisions for the Rights issue.
Answer:

• When a company wants to issue further capital it can issue shares to its existing equity shareholders which are called Rights Issue.
• According to the Companies Act, 2013 company has to fulfill certain provisions for making a Rights Issue.
• the provisions are
  • Rights shares are sold to the existing shareholders at a price that is lesser than its market price.
  • A company has to send a ‘Letter of offer’ to the existing shareholders at the time of issuing Rights Shares.
  • The letter of offer shall mention
  • The number of shares offered.
  • The period of offer i.e., offer is valid for a period not less than fifteen days and not exceeding thirty days from the date of offer.
  • The letter of offer can be sent by registered post, speed post, courier, or through electronic mode.
  • If a shareholder does not respond to the Rights Issue offer within a given time, it is implied that he is not interested in the offer and the company can offer the unsold shares to new Investors.

Question 3.
State the provisions related to Bonus Shares.
Answer:

• Bonus Shares are fully paid shares issued free of cost to the existing equity shareholders.
• According to Companies Act 2013, every company has to follow certain provisions to issue Bonus Shares.

Following are the provisions related to Bonus Issue-

• A company can issue Bonus Shares only out of
  • Free reserves or
  • Securities Premium Account
  • Capital Redemption Reserve Account
• A company cannot issue Bonus Shares only out of Reserves credited by the Revaluation of Assets.
• It also cannot issue Bonus Shares instead of paying dividend.
• Once the announcement for Bonus Shares is made by the Board of Directors, it cannot be then withdrawn.
• Bonus shares are fully paid up shares.
• Shareholders cannot renounce i.e give away their Bonus Shares to another person.
• There is no minimum subscription to be collected.

Question 4.
State the general principles/rules for allotment of shares.
Answer:
Every company issuing shares has to follow rules or general principles given by the Companies Act 2013 as follows:

• Proper Authority: The Board of Directors or the allotment committee set up by the Board has the authority to allot shares.
• Allotment must be against application only: A Company can allot shares only if it has received a written application for shares from the applicant. Allotment of shares cannot take place on the basis of an oral request.
• Reasonable time: As per the Act, allotment shall be done within 60 days of receipt of application money. Allotment can be made from the fifth day from the date of issue of prospectus.
• Absolute and Unconditional allotment: Shares should be allotted on the same terms as stated in the prospectus and application form. No change in terms of allotment or new conditions can be added at the time of allotment.
• Communication: Company has to inform the applicant that shares have been allotted, to him by sending a letter of allotment or allotment advice. The letter gives details of a number of shares allotted amount of Allotment money to be paid etc.
• Allotment should not be in Contravention (Violation) of any other laws: A company cannot allot shares by violating or contradicting any other existing laws e.g., shares cannot be allotted to a minor, of a country where a company operates its business.

Question 5.
State the contents of the Share Certificate.
Answer:
A Share certificate refers to a document which is issued by a company evidencing that a person named in such certificate is the owner of the shares of the company stated in the share certificate.
Share certificate has to be issued under the common seal of the company. It should be issued within 2 months from the date of allotment against the allotment letter.

Contents of Share Certificate:
Share Certificate should be in Form SH – 1 as prescribed under Companies (Share Capital and Debenture) Rules 2014.

• Name of the company with Registered office address
• Folio Number
• Share Certificate Number
• Name of Member
• Nature of share number of shares and a distinctive number of shares.
• Amount paid on shares
• Common seal, if any, and signature of two directors and company secretary.

Question 6.
What are the effects of forfeiture of shares?
Answer:
If a shareholder, who is called upon to pay any call fails to pay the amount, even after sending many reminders the company may forfeit his shares. Thus forfeiture of shares means cancellation of shares.

Effects of Forfeiture

• Cessation of Membership: On forfeiture, a member ceases to be a member of a company and loses all membership rights. The member’s name is removed from the Register of Members.
• Liability of Member: A member is liable for unpaid calls even after forfeiture of shares. The liability ceases only when the company reissues the forfeited shares.
• Liquidation of Company: If a company goes in for liquidation within one year of forfeiture of shares, the member whose shares have been forfeited is liable to pay the calls as a past member.

Question 7.
When can the Board of Directors refuse the transfer of shares?
Answer:

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

Question 8.
Explain Employee Stock Option Scheme.
Answer:
An employee stock option plan is an employee benefits scheme under which the company encourages its employees to acquire ownership in the form of shares. Under this scheme, permanent employees, Directors or Officers of the Company or its holding company or subsidiary company are offered the benefit or right to purchase the equity shares of the company at a future date at a predetermined price. Generally these shares are issued at discount. The shares are offered at a price lesser than their market price.

Following are the provisions related to ESOS:

• A company may offer the shares directly to the employees or through an Employee Welfare Trust.
• The shares are offered at a price lesser than their market price.
• There is a minimum vesting period of one year.
• Company specifies the lock-in period. It is a minimum of one year between grant of option and vesting.
• Shares issued under this scheme enjoys dividend or voting rights only after buying by employees.
• Company has to get the approval of shareholders through a special resolution to issue ESOS.
• Employee neither transfer his option to any other person nor pledge/mortgage the shares issued under ESOS.
• Company has to set up a compensation committee to administer ESOS.
• The company has to fulfil the provision of SEBI (Share Based Employee Benefits) Regulations, 2014.

Question 9.
What are Calls on shares?
Answer:

• Whenever a company issues shares, the company may ask its shareholder to pay value of shares in installment which is known as calls on shares.
• Company can demand part or full amount of balance amount of unpaid shares.
• Beside the application money and allotment money if a company demands the balance unpaid amount on shares it is called as calls on shares.
• The unpaid amount on partly paid-up shares is a liability of the shareholders.
• Calls on shares can be made by the Board of Directors in the interest of the company.
• To make a call on shares, company has to send a call letter or notice to the shareholders. This notice is drafted by a secretary and issued in the name of the board of directors. The company gives them a minimum of 14 days notice to pay calls money to the Company’s Banker.
• No call can be made for more than 25% of the nominal value of shares.

Question 10.
Explain private placement method for the issue of shares.
Answer:

• When a company offers its securities to a select group of persons not exceeding 200, it is called a private placement.
• In private placement, the company offers its securities only to identified person and not to the general public.
• Statement in lieu of prospectus should be filed by the company with ROC before making a private placement.
• The Board of directors selects or identify the persons to be included in the select group. They can be mutual funds, Institutional Investors etc.
• Company has to issue private placement offer letter along with the application.
• The shares offered can be fully or partly paid up and the consideration should be paid by cheque, Demand Draft, etc. but not by cash.
• Right to renunciation is not given to applicants under private placement. The company has to get approval of shareholders through a special resolution.
• A company can make private placement through a rights issue and preferential allotment.

6. Justify the following statements.

Question 1.
Company has to fulfill certain provisions while making Right Issue.
Answer:

• When a company wants to issue further capital it can issue shares to its existing equity shareholders which is called Rights Issue.
• According to the Companies Act 2013 company has to fulfil certain provisions for a making Rights Issue.
• The provisions are
  • Rights shares are sold to the existing shareholders at a price that is lesser than its market price.
  • A company has to send ‘Letter of offer’ to the existing shareholders at the time of issuing Right Shares.
  • The letter of offer shall mention
    • The number of shares offered.
    • The Period of offer i.e., offer is valid for a period not less than fifteen days and not exceeding thirty days from the date of offer.
  • The letter of offer can be sent by registered post, speed post, courier or through electronic mode.
  • If a shareholder does not respond to the Rights Issue offer within a given time, it is implied that he is not interested in the offer and company can offer the unsold shares to new Investors.

Question 2.
To issue Bonus shares a company has to fulfil certain provisions.
Answer:

• Bonus shares are fully paid shares issued free of cost to the existing equity shareholders.
• According to Companies Act 2013, every company has to follow certain provisions to issue Bonus Shares.

Following are the provisions related to Bonus Issue-

• A company can issue Bonus shares only out of
  • Free reserves or
  • Securities Premium Account
  • Capital Redemption Reserve Account
• A company cannot issue Bonus Shares only out of Reserves credited by the Revaluation of Assets.
• It also cannot issue Bonus Shares instead of paying dividends.
• Once the announcement for Bonus Shares is made by the Board of Directors, it cannot be then withdrawn.
• Bonus shares are fully paid up shares.
• Shareholders cannot renounce i.e., give away their Bonus Shares to another person.
• There is no minimum subscription to be collected.

Question 3.
ESOS is offered by a company to its permanent employees, Directors, and officers.
Answer:

• A company can raise funds by offering shares to its existing permanent employees by ESOS Scheme.
• Under this scheme permanent employees Directors or officers of the company are offered the benefit or right to purchase the equity shares of the company at a future date with a pre-determined price.
• ESOS is followed by the company to encourage its employees and to give certain benefits to them.
• Through ESOS, the company can retain its good and talented employees.
• A company may offer the shares directly to the employees or through an Employee Welfare Trust.
• It is helpful to the company to generate goodwill in the market also.

Question 4.
The company has to fulfill general principles/rules for allotment of shares.
Answer:
Every company issuing shares has to follow rules or general principles given by the Companies Act, 2013 as follows:

• Proper Authority: The Board of Directors or the allotment committee set up by the Board has the authority to allot shares.
• Allotment must be against application only: A Company can allot shares only if it has received a written application for shares from the applicant. Allotment of shares cannot take place on the basis of an oral request.
• Reasonable time: As per the Act, allotment shall be done within 60 days of receipt of application money. Allotment can be made from the fifth day from the date of issue of prospectus.
• Absolute and Unconditional allotment: Shares should be allotted on the same terms as stated in the prospectus and application form. No change in terms of allotment or new conditions can be added at the time of allotment.
• Communication: Company has to inform the applicant that shares have been allotted to him by sending a letter of allotment or allotment advice. The letter gives details of a number of shares allotted, amount of Allotment Money to be paid etc.
• Allotment should not be in Contravention (Violation) of any other laws: A company cannot allot shares by violating or contradicting any other existing laws e.g., shares cannot be allotted to a minor, of a country where a company operates its business.

Question 5.
A Company can issue a duplicate share certificate.
Answer:
A Company can issue a duplicate share certificate in the following circumstances:

• If original share certificate has been defaced, mutilated or tom and is surrendered to the company.
• If it has been proved by the holder that the original share certificate is lost or destroyed.
• In case of loss of share certificate, the company puts up a notice in the newspaper to announce the loss of the share certificate.
• If the company does not get any response from the public within the specified time, then the company issues a duplicate share certificate.
• Duplicate share certificate should be issued within three months from the date of application.
• Duplicate share certificate should be issued within 3 months from the date of application with bold ‘duplicate share certificate’ marked on it.

Question 6.
Board of directors has the authority to forfeit shares.
Answer:

• Forfeiture of shares is a process where the company forfeits the shares of a member or shareholder who fails to pay a call on shares. The forfeiture of a share is a forceful activity performed by a company due to non-payment of calls by shareholders.
• Only the Board of directors can forfeit the shares if the process of forfeiture is authorised by the Articles of Association.
• Board of directors can forfeit shares only in the interest of the company.
• A 14 days of notice should be sent to a concerned member.
• Thus Board of directors can make forfeiture of shares.

Question 7.
A member of a public company can transfer shares.
Answer:

• Transfer of shares means voluntary transfer of shares by a member of a company to another person against consideration.
• In the case of public companies, shares are freely transferable subject to provisions of the Articles of Association.
• A member has to apply to the company for the transfer of shares by filling the ‘Instrument of Transfer’.
• Member who is transferring the shares is called as Transferor and to whom shares are transferred is called Transferee.
• Transfer is said to be completed only when the transfer is registered in the Register of Members.

Question 8.
The Board of Directors can refuse the transfer of shares.
Answer:

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

7. Answer the following questions.

Question 1.
Explain the classification of Share Capital.
OR
Explain types of Share Capital.
Answer:
Share capital is the capital that is built up by the company by issuing shares in the market. Share capital consist of capital that is made up of Equity shares and Preference shares.
Share capital can be classified as-

(i) Authorised or Nominal or Registered Capital

• The Authorized capital is the maximum amount of capital that a company can raise through the issue of shares to the shareholders.
• The Authorized capital of a company is also called as the Registered capital or Nominal Capital.
• Authorized capital is the maximum capital that is authorized by the company’s Memorandum of Association.
• The Authorized capital is mentioned in the Memorandum of Association of the company under the heading ‘capital clause’ and the company pays stamp duty on this amount at the time of incorporation.
• Authorized capital is also called as ‘Nominal Capital’ as usually a company never issues the entire Authorized Capital.
• A company can increase its Authorized Capital by altering its Memorandum of Association.
• The maximum limit of authorized capital is registered with the registrar of the companies.
• Example of Authorized Capital: XYZ Ltd. Company has an authorized capital of ₹ 10,00,000, then it can issue shares worth up to ₹ 10,00,000 to its shareholders and cannot issue anything beyond it.

(ii) Issued and Unissued capital:

• Issued capital is that portion of authorized shares capital that had been raised by issuing shares to the general public.
• These are the shares that the company offers to prospective investors for a subscription.
• The issued capital of a company may be equal to or less than the Authorized Capital of incorporation.
• The balance part of Authorized Capital which is not offered to the public for subscription is called ‘unissued capital’.
• Unissued capital is that capital which a Company is authorized to issue but has not issued as shares.
• Unissued capital is the balance part of Authorised capital which is not offered to the public.
• Example of Issued and Unissued Capital: XYZ Ltd Company can have issued Capital of ₹ 4,00,000 divided into 40,000
• Equity Shares at Face Value of ₹ 10/- each and the Unissued Capital 6,00,000 divided into 60,000 equity shares of ₹ 10/- each.

(iii) Subscribed and Unsubscribed Capital:

• Subscribed share capital is that part of issued share capital for which a company has positively received a subscription from the investor.
• It is a part of Issued Capital that has been subscribed by investors or purchased by the general public.
• The subscribed capital may be equal to or less than the issued capital.
• The part of the Issued Capital which is not subscribed by the investors is called as ‘Unsubscribed Capital’.
• Example of Issued and Unissued capital: If XYZ Ltd company has issued capital ₹ 4,00,000 i.e., it has issued 40,000 equity shares of ₹ 10 each and company has received subscription for 30,000 shares i.e., for 30,000 equity shares of ₹ 10/- each then its subscribed capital is ₹ 3,00,000 and unsubscribed capital will be ₹ 1,00,000 divided into 10,000 Equity shares of ₹ 10/- each.

(iv) Called up and Uncalled capital and Reserve capital:

• Called up share capital is that part of share capital that has been called by the company for payment from shareholders.
• The company collects the full value of shares in installments and each installment is called a ‘call’.
• Uncalled Capital is that part of subscribed capital that is not demanded from the shareholders.
• A company can decide to keep aside a part of its uncalled capital to be called up only at the time of winding up of a company to meet its financial requirements. Which is called a Reserve Capital.

Example of call up, uncalled and Reserve Capital.
If XYZ Ltd company is to subscribed capital is ₹ 3,00,000 i.e., 30,000 equity shares of face value of ₹ 10/- each. Out of which company made first call of ₹ 5/- per share, so company called up capital will be ₹ 1,50,000 (30,000 Equity shares × ₹ 5/- each = ₹ 1,50,000)

If the company decides to keep ₹ 1/- per share as capital to be collected at the time of the winding-up, the Reserve Capital will be 30,000 (30,000 equity shares of ₹ 10 each.)
Uncalled Capital will be ₹ 1,20,000 (30,000 equity shares were 4 per share which will be called up in the future.)

(v) Paid-up capital and calls in Arrears:

• Paid-up capital is the amount of money a company has received from shareholders in exchange for shares.
• It is the total amount of money paid up by the shareholders when the company has called up or demanded them to pay.
• The paid-up capital can be equal to or less than the authorized capital.
• Unpaid capital means any uncalled or unpaid share capital. The amount not paid to shareholders is also called as calls in Arrears.
• Every shareholder has to pay calls as and when the company demands, failure to pay the calls may lead to future forfeiture of shares (cancellation of shares).

Example of paid up capital and calls in Arrears.
‘XYZ’ Ltd Company has made a call of ₹ 5/- per share on 30,000 equity shares, so if all the shareholder have paid the calls, then paid-up capital will be ₹ 1,50,000 (30,000 equity shares of ₹ 5/- per share). But if 10,000 Equity Shareholders have not paid calls then the paid-up capital will be ₹ 1,00,000 (20,000 Equity Shares × ₹ 5/- per share) and calls in Arrears will be ₹ 50,000 (10,000 Equity Shares × ₹ 5/- per share).

Question 2.
What are the methods of issue of shares to the public through public offer?
Answer:
Issue of shares is the process in which companies offer new shares to shareholders. The company follows different methods prescribed by the Companies Act 2013 while issuing the shares. There are two methods of issue of shares to the public through public offer, they are – Public issue or Public offer of shares.

A public offering is the sale of equity shares to the public in order to raise capital. This is the most popular and common method used by companies. The company invites the public to subscribe to its shares by issuing prospects. A company can use two pricing methods to offer shares to the public.

(i) Fixed Price Issue method:

• In an initial public offering (IPO), if the shares are offered at a fixed price such issue is known as Fixed Price issue.
• In this method, company mentions the Quantity and the price at which shares are offered.
• Investors can pay a certain portion of face value of shares or the entire issue price along with the application.
• Company issues shares at par. E.g., shares having a face value of ₹ 100 and is issued as ₹ 100, at premium e.g., a share having a face value of 100 and is issued at ₹ 150, or at discount e.g., face value is ₹ 100 and the insured price is ₹ 80/-.
• Fixed price method is used for all types of issues i.e. Public issue, Right issue, Esos etc.

(ii) Book Building Method:

• The method of offering shares by providing a price range is called the book building method.
• In the book building method shares will be sold by the bidding process.
• The company issues a Red Herring Prospectus which contains a price range or price band and asks the investor to bid on it.
• In this method the company doesn’t fix up a particular price for the share but gives a price range e.g., ₹ 80 to 100.
• When bidding for the shares, investors have to decide at which price they would like to bid for the shares e.g., ₹ 80, ₹ 90, ₹ 100.
• The lower price band (₹ 80) is known as the floor price and the highest price band (₹ 100) is known as cap price. The final price at which shares are offered to investors is called cut off price.
• Based on the demand and supply of the shares, the final price is fixed.
• Investors can bid on any number of shares that they are willing to buy at given price band. Such bidding is kept open for 5 days.
• The bids with application money is to be submitted to the Lead Merchant Bankers called ‘Book Runners’ who enter the bids in a book.
• After bidding, the company fixes cut off the price at which shares on offer can be sold.
• Company issues a prospectus which contains the final price.
• Book Building method is used for public issues i.e. IPO and FPO.

Further public offer:
It is also called a follow on public offer. When the company issue shares to the public after IPO, it is called a a further public offer. Thus every issue of shares by a listed company after its IPO is called as FPO. FPO leads to an increase in the subscribed capital of the company.

Question 3.
Explain briefly the different types of shares offered by a company to its existing equity shareholders.
Answer:
The company issues equity shares in the market. The equity shareholders are the real owner of the company.
A company can raise funds by offering shares to its existing equity shareholders as follows.

(i) Right Issue:
A right issue is an invitation to existing shareholders to purchase additional new shares in the company. A right issue is a way by which a listed company can raise additional capital. Instead of going for the public issue of shares, the company gives its existing shareholders, the right to subscribe to newly issued shares in proportion to their existing equity shareholding.

Whenever a company makes the further issue of shares the existing equity shareholders have preemptive rights means the first option to buy shares.

Company making rights issue has to fulfil the following provision:

• Rights shares are sold to the existing shareholders at a price that is lesser than its market price.
• A company has to send a ‘Letter of offer’ to the existing shareholders at the time of issuing Rights Shares.
• The letter of offer shall mention
• The number of shares offered.
• The period of offer i.e., offer is valid for a period not less than fifteen days and not exceeding thirty days from the date of the offer.
• The letter of offer can be sent by registered post, speed post, courier or through electronic mode.
• If a shareholder does not respond to the Rights Issue offer within a given time, it is implied that he is not interested in the offer and company can offer the unsold shares to new Investors.

(ii) Bonus Issue/Bonus Shares:
Bonus Shares are shares distributed by a company to its current shareholders as fully paid shares free of charge. The Bonus shares are given to the existing equity shareholders according to their existing proportion of equity shareholdings.

Like for example, a company declaring one for two bonus share proportion means that an existing shareholder would get one bonus share of the company for every two shares held. Financially sound companies issue Bonus shares out of their accumulated distributable profits or reserves. Hence as the profits or reserves are capitalized, it is called “Capitalisation of Profits or Reserves.”

Following are the provisions related to Bonus Issue-

• A company can issue Bonus shares only out of
• Free reserves or
• Securities Premium Account
• Capital Redemption Reserve Account
• A company cannot issue bonus shares only out of Reserves Credited by the Revaluation of Assets.
• It also cannot issue Bonus Shares instead of paying dividends.
• Once the announcement for Bonus shares is made by the Board of Directors, it cannot be then withdrawn.
• Bonus shares are fully paid up shares.
• Shareholders cannot renounce i.e, give away their Bonus Shares to another person.
• There is no minimum subscription to be collected.

Question 4.
Explain the statutory provisions for the allotment of shares.
Answer:

• The allotment of shares is the issuing of new shares to an applicant based on the application submitted or to the existing shareholders.
• Every company has to fulfill the provisions of the Companies Act for making allotment of shares.
• The provisions which are laid down by the Companies Act, 2013 are called statutory provisions.

(i) Registration of Prospectus:

• A copy of the prospectus must be filed with the Registrar of Companies for registration on or before the date of its publication.
• In the case of the newly formed company, a prospectus must be signed by every proposed director or director or his duly authorized advocate. The copy of the prospectus is drafted by the secretary of the company with the permission of the board of directors.

(ii) Application Money:

• The applicant has to pay a minimum of 5% of nominal amount of the shares along with the application form.
• For public limited companies SEBI has specified that application money should be minimum of 25% of the nominal amount of shares.
• The application money is to be paid in the Bank specified by the company.

(iii) Minimum Subscription:

• Minimum Subscription is the amount which is mentioned in the prospectus. It is the minimum amount of shares which should be bought by the subscribers.
• According to SEBI minimum subscription should be 90% of the issue.
• In case the minimum subscription is not collected within the specified time, the company has to return the entire amount of application money to the subscribers.

(iv) Closing of Subscription list:

• According to SEBI a company has to keep open its subscription list for at least three working days and not more than ten working days.
• Applicants can apply for shares only when the subscription list is open.

(v) Basic of allotment:

• Allotment of shares will be decided on the basis of each category of subscribers.
• Allotment of shares will be as per the minimum application size which is fixed by the company.

(vi) Over Subscription:

• Oversubscription refers to a situation in which a company receives more application of shares than the number of shares offered.
• SEBI does not allow any allotment which is in excess of the offer given by the company through a document or prospectus.
• SEBI may permit to allot the shares not more than 10% of the net offer.

(vii) Permission to deal on Stock Exchanges:

• Every company, before making a public offer shall apply to one or more recognized Stock Exchanges to take permission for listing its shares with them
• The prospectus must mention the name of the stock exchange in which the company is listed.
• The prospectus should also state the fact that an application for permission to list in that stock exchange has been made by the company.

(viii) Appointment of Managers to the issue and various other agencies.

• The company has to appoint one or more Merchant Bankers to act as managers to the public issue.
• The company has to appoint Registrar to the issue (institutions that keeps the records of the issue), collecting bankers and underwriters to the issue as well as brokers to the issue.
• The company has to also appoint self-certified syndicate banks (banks certified by SEBI which offers ASBA facility to investors), which are certified by SEBI, advertising agents, etc.

Question 5.
Explain briefly the procedure for allotment of shares.
Answer:
Allotment of Shares:

• Allotment means distribution of shares among the applicants. It means giving shares to share applicants or to specific persons with whom the company has entered into contract.
• Allotment of shares is a procedure in which shares are distributed to those applicants who have submitted a written application along with the application money. If company allots shares alter fulfilling all statutory and general provisions of Companies Act, 2013 such allotment is called as “Regular Allotment”.

Procedure for Allotment of Shares
(i) Appointment of Allotment Committee

• When the subscription list is closed the secretary informs the Board of Directors to make preparations for allotment of shares.
• If the issue is par subscribed or under subscribed, the Board can do the allotment of shares.
• In case of over subscription the board has to appoint and Allotment Committee to undertake the work of Allotment.
• The Allotment Committees decides the basis of allotment and submits a report to the Board.

(ii) Hold Board Meeting to Decide Basis of Allotment

• Board meeting is held to approve the allotment formula suggested by the Allotment Committee.
• A representative of SEBI should be present when the allotment committee prepares the allotment formula.
• After approval of the allotment formula, an allotment list is made.
• If the shares are listed, then the company should take the permission of the concerned stock exchange.
• The allotment list contains the names of allotters. Which should be signed by the chairman and secretary.

(iii) Pass Board Resolution for allotment:

• A resolution is passed to allot shares in board meeting.
• Secretary sends ‘Letter of Allotment’ to allotters those applicant whom shares are allotted.
• Secretary has to send a ‘Letter of Regret’ to those applicants to whom no shares have been issued.
• Along with the letter of Regret the application money is also refunded.
• The company that issues shares in electronic form informs respective Depository (NSDL or CDSL) about allotment of shares.
• It also provides details of applicants whom shares are allotted, number of shares allotted, etc.

(iv) Collection of Allotment Money:

• The letter of allotment states the money to be paid by the applicant on the allotment of shares.
• The money has to be paid in the Bank specified by the company within the stipulated time.
• For all public issues and rights issues ASBA is compulsory since January 2016.

(v) Arrangement Relating to Letters of Renunciation:

• An applicant who has been allotted shares can renounce the shares in favor of another person.
• The applicant has to fill up a form for renunciation to the company with the original copy of the letter of allotment.
• After the permission of the board, the secretary enters the detail of the new person in the application and allotment list.

(vi) Arrangement Relating to Splitting of Allotment letters:

• An applicant who has been allotted shares can request for the splitting of allotment shares.
• After getting the approval of the Board for the splitting. Secretary enters the details of the split in the list of split allotment for which secretary has to ensure spilled letter.

(vii) File Return of Allotment:

• Secretary has to file a “Return of Allotment’ with the Registrar of Companies within 30 days of allotment of shares.
• The return of allotment contains details of allotment of shares which includes the names and addresses of allotters, the value of shares allotted amount paid or payable on each share, etc.

(viii) Prepare Register of Members and Issue of Share Certificate

• Secretary has to enter the names of all those applicants who have paid the allotment money in the Register of Members.
• Secretary also has to prepare the share certificates and distributes them to all the members within two months from the date of allotment of shares.

Balbharti Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 2 Sources of Corporate Finance Textbook Exercise Questions and Answers.

Maharashtra State Board Class 12 Secretarial Practice Solutions Chapter 2 Sources of Corporate Finance

1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.
___________ is the smallest unit in the total share capital of the company.
(a) Debenture
(b) Bonds
(c) Share
Answer:
(c) Share

Question 2.
The benefit of Depository Receipt is ability to raise capital in ___________ market.
(a) national
(b) local
(c) international
Answer:
(c) international

Question 3.
___________ are residual claimants against the income or assets of the company.
(a) Bondholders
(b) Equity shareholders
(c) Debenture holders
Answer:
(b) Equity shareholders

Question 4.
___________ participate in the management of their company.
(a) Preference shareholders
(b) Depositors
(c) Equity shareholders.
Answer:
(c) Equity shareholders

Question 5.
___________ shares are issued free of cost to existing equity shareholders.
(a) Bonus
(b) Right
(c) Equity
Answer:
(a) Bonus

Question 6.
The holder of preference share has the right to receive ___________ rate of dividend.
(a) fixed
(b) fluctuating
(c) lower
Answer:
(a) Fixed

Question 7.
Accumulated dividend is paid to ___________ preference shares.
(a) redeemable
(b) cumulative
(c) convertible
Answer:
(b) Cumulative

Question 8.
The holder of ___________ preference shares has the right to convert their shares into equity shares.
(a) cumulative
(b) convertible
(c) redeemable
Answer:
(b) Convertible

Question 9.
Debenture holders are ___________ of the company.
(a) creditors
(b) owners
(c) suppliers
Answer:
(a) creditors

Question 10.
___________ is paid on borrowed capital.
(a) Interest
(b) Discount
(c) Dividend
Answer:
(a) Interest

Question 11.
Debenture holders get fixed rate of ___________ return on their investment.
(a) interest
(b) dividend
(c) discount
Answer:
(a) interest

Question 12.
Convertible debentures are converted into ___________ after a specific period.
(a) equity shares
(b) deposits
(c) bonds
Answer:
(a) equity shares

Question 13.
Retained earnings are ___________ source of financing.
(a) internal
(b) external
(c) additional
Answer:
(a) internal

Question 14.
The holder of bond is ___________ of the company.
(a) secretary
(b) owner
(c) creditor
Answer:
(c) creditor

Question 15.
Company can accept deposits from public, minimum for ___________ months.
(a) six
(b) nine
(c) twelve
Answer:
(a) six

Question 16.
Company can accept deposits from public maximum for ___________ months.
(a) 12
(b) 24
(c) 36
Answer:
(c) 36

Question 17.
A depository receipt traded in ___________ is called American Depository Receipt.
(a) London
(b) Japan
(c) USA
Answer:
(c) the USA

1B. Match the pairs.

Question 1.

Answer:

Group ‘A’	Group ‘B’
(a) Equity share capital	(1) Venture capital
(b) Debenture Trustees	(2) Trust Deed
(c) Preference shareholders	(3) Cautious investor
(d) Debenture Certificate	(4) Instrument of Debt
(e) Bonus shares	(5) Capitalisation of profit

1C. Write a word or a term or a phrase that can substitute each of the following statements.

Question 1.
The real masters of the company.
Answer:
Equity shareholders

Question 2.
A document of ownership of shares.
Answer:
Share certificate

Question 3.
The holders of these shares are entitled to participate in surplus profits.
Answer:
Participating preference shares

Question 4.
A party through whom the company deals with debenture holders.
Answer:
Debenture trustees

Question 5.
Name the shareholder who participates in the management.
Answer:
Equity shareholders

Question 6.
The value of a share is written on the share certificate.
Answer:
Face value

Question 7.
The value of a share is determined by demand and supply forces in the share market.
Answer:
Market value

Question 8.
The policy of using undistributed profit for the business.
Answer:
Retained earnings/ploughing back of profit

Question 9.
It is an acknowledgment of a loan issued by the company to the depositor.
Answer:
Deposit receipt

Question 10.
A dollar-denominated instrument trader in the USA.
Answer:
American Depository Receipt

Question 11.
The Depository Receipt is traded in a country other than the USA.
Answer:
Global depository receipt

Question 12.
Money raised by the company from the public for a minimum of 6 months to a maximum of 39 months.
Answer:
Public Deposits

Question 13.
Credit extended by the suppliers with an intention to increase their sales.
Answer:
Trade Credit

Question 14.
The credit facility is provided to a company having a current account with the bank.
Answer:
Overdraft

1D. State Whether the following statements are True or False.

Question 1.
Equity share capital is known as venture capital.
Answer:
True

Question 2.
Equity shareholders enjoy a fixed rate of dividends.
Answer:
False

Question 3.
Debenture holders have the right to vote at a general meeting of the company.
Answer:
False

Question 4.
Equity shareholders are described as ‘shock absorbers’ when a company has a financial crisis.
Answer:
True

Question 5.
Bondholders are owners of the company.
Answer:
True

Question 6.
Cash credit is given against hypothecation of goods and security.
Answer:
True

Question 7.
Trade credit is a major source of long-term finance.
Answer:
False

Question 8.
Depository bank stores the shares on behalf of the GDR holder.
Answer:
True

Question 9.
Financial institutions underwrite the issue of securities.
Answer:
True

1E. Find the odd one.

Question 1.
Debenture, Public Deposit, Retained Earnings
Answer:
Retained earnings

Question 2.
Face value, Market value, Redemption value
Answer:
Redemption value

Question 3.
Share certificate, Debenture certificate, ADR
Answer:
ADR

Question 4.
Trade credit, Overdraft, Cash credit
Answer:
Trade credit

1F. Complete the sentences.

Question 1.
The finance needed by business organisation is termed as ___________
Answer:
Capital

Question 2.
The convertible preference shareholders have a right to convert their shares into ___________
Answer:
Equity shares

Question 3.
Equity shareholders elect their representative Called ___________
Answer:
Directors

Question 4.
Bonus shares are issued as gift to ___________
Answer:
Equity share holders

Question 5.
The bondholders are ___________of the company.
Answer:
Creditors

Question 6.
Depository receipt traded in a country other than USA is called ___________
Answer:
Global Depository Receipt

Question 7.
First Industrial policy was declared in the year ___________
Answer:
1948

Question 8.
When goods are delivered by the supplier to the customer on the basis of deferred payment is called as ___________
Answer:
Trade credit

1G. Select the correct option from the bracket.

Question 1.

(Fluctuating rate of dividend, Preference shares, Interest at fixed rate, Retained earnings, short term loan)
Answer:

Group ‘A’	Group ‘B’
(a) Equity shares	(1) Fluctuating rate of dividend
(b) Preference shares	(2) Dividend at a fixed rate
(c) Debentures	(3) Interest at a fixed rate
(d) Retained earnings	(4) Accumulated corporate profit
(e) Public Deposit	(5) short term loan

1H. Answer in one sentence.

Question 1.
What is a share?
Answer:
A share is the smallest unit of the share capital of a company.

Question 2.
What are equity shares?
Answer:
Equity shares are shares that do not preference shares and do not carry priority in receiving dividends nor repayment of capital.

Question 3.
What are preference shares?
Answer:
Preference shares are shares that have preferential rights with regard to receiving dividends and repayment of capital.

Question 4.
What are retained earnings?
Answer:
A part of the net profit which is not distributed to shareholders as dividend but retained by the company as reserve fund is retained earnings.

Question 5.
What is a debenture?
Answer:
It is a document/instrument issued in the form of a debenture certificate under the common seal of the company acknowledging/evidencing the debt.

Question 6.
What is a bond?
Answer:
A bond is a debt security and a formal contract to repay borrowed money with interest.

Question 7.
In which country can ADR be issued?
Answer:
ADR (American Depository Receipt) is a depository Receipt that is issued in the USA.

Question 8.
In which country can GDR be issued?
Answer:
GDR (Global depository receipt) can be issued in countries other than the USA.

Question 9.
What are convertible debentures?
Answer:
Convertible debentures are debentures that are converted into equity shares after a specific period as specified at the time of issue.

Question 10.
What are cumulative preference shares?
Answer:
Cumulative preference shares are shares where dividend, if not paid in a year accumulates till it is paid.

1I. Correct the underlined words and rewrite the following sentences.

Question 1.
Owned capital is temporary capital.
Answer:
Owned capital is permanent capital.

Question 2.
Equity shares get dividends at a fixed rate.
Answer:
Equity shares get dividends at fluctuating rates.

Question 3.
Preference shares get dividends at fluctuating rates.
Answer:
Preference shares get dividends at a fixed rate.

Question 4.
Retained earnings are an external source of finance.
Answer:
Retained earnings are an internal source of finance.

Question 5.
The debenture holder is the owner of the company.
Answer:
The debenture holder is a creditor of the company.

Question 6.
Bond is a source of short-term finance.
Answer:
Bond is a source of long-term finance.

Question 7.
Depository receipt traded in the USA is called Global Depository Receipt.
Answer:
Depository receipt traded in the USA is called American Depository Receipt.

2. Explain the following terms/Concepts.

Question 1.
Borrowed capital
Answer:

• It consists of capital that is raised through borrowings.
• It can be raised by issuing debentures, deposits, loans from banks or financial institutions.

Question 2.
Owned capital
Answer:

• Owned capital is the capital raised by the company with the help of owners (shareholders).
• It can be raised by issuing equity and preference shares.

Question 3.
Ploughing back of profit
Answer:

• Ploughing back of profit or retained earnings is a management policy under which all profits are not distributed amongst shareholders.
• It is an internal source of financing or self-financing as when the need arises, such reserves are ploughed back, brought into the business to meet the financial needs.

Question 4.
Overdraft
Answer:

• It is a credit agreement made with a bank that allows an account holder to withdraw more money than what a company has in its account up to a specific/prescribed limit.
• This facility is available to current account holders.

Question 5.
Trade Credit
Answer:

• Trade credit is credit extended by one trader to another when goods and services are bought/sold on credit.
• It facilitates the purchase of supplies without making an immediate payment.
• It is used by business organisations as a source of short-term financing and granted to those having reasonable standing and goodwill.

3. Study the following case/situation and express your opinion.

1. The Balance sheet of a Donald Company for the year 2018-19 reveals equity share capital of Rs. 25,00,000 and retained earnings of Rs. 50,00,000.

Question (a).
Is the company financially sound?
Answer:
The company is financially sound as it has double the amount as reserves or retained earnings or kept aside profits.

Question (b).
Can the retained earnings be converted into capital?
Answer:
Yes, the retained earnings can be converted into capital by means of capitalisation of reserves.

Question (c).
What type of source retained earning is?
Answer:
Retained earning is self-financing or an internal source of finance.

2. Mr. Satish is a speculator. He desires to take advantage of the growing market for the company’s products and earn handsomely.

Question (a).
According to you, which type of share Mr. Satish will choose to invest in.
Answer:
As Mr. Satish is a speculator, he will choose equity shares to invest in because if there are good earnings/profits, so will be the rate of dividend.

Question (b).
What does he receive as a return on investment?
Answer:
He receives a fluctuating rate of dividends.

Question (C).
State anyone, right he will enjoy as a shareholder.
Answer:
The right to attend the meeting and vote on resolutions can be the right Mr. Satish can exercise as a member.

3. Mr. Rohit, an individual investor, invests his own funds in the securities. He depends on investment income and does not want to take any risk. He is interested in the definite rate of income and safety of the principal.

Question (a).
Name the type of security that Mr. Rohit will opt for.
Answer:
As Mr. Rohit does not want to take risks, he will opt for preference shares which will assure him of steady income and safety of his investment.

Question (b).
What does he receive as a return on his investment?
Answer:
Mr. Rohit will receive dividends in return.

Question (c).
The return on investment which he receives is fixed or fluctuating.
Answer:
The return on his investment will be fixed and not fluctuating.

4. Distinguish between the following.

Question 1.
Equity Shares and Preference Shares
Answer:

Points	Equity Shares	Preference Shares
1. Meaning	Shares that are not preference shares are called equity shares i.e. these shares do not have the preferential rights for payment of dividends and repayment of capital.	Preferences shares are shares that carry preferential rights as to payment of: Dividend and Repayment of capital.
2. Rate of Dividend	Equity shares are given dividends at a fluctuating rate depending upon the profits of the company.	Preference shareholders get dividends at a fixed rate.
3. Voting Right	Equity shareholders enjoy normal voting rights. They participate in the management of their company.	Preference shareholders do not enjoy normal voting right. They can vote only on matters affecting their interest.
4. Return of Capital	Equity capital can not be returned during the lifetime of the company, (except in case of buyback).	A company can issue redeemable preference shares, which can be repaid during the lifetime of the company.
5. Nature of capital	Equity capital is known as ‘Risk Capital’.	Preference capital is ‘Safe Capital’ with a stable return.
6. Nature of investor	The investors who are ready to take risks to invest in equity shares.	Investors who are cautious about the safety of their investment invest in preference shares.
7. Face Value	The face value of equity shares is generally ₹ 1/- or ₹ 10/- it is relatively low.	The face value of preference shares is relatively higher i.e. ₹ 100/- and so on.
8. Right and bonus issue	Equity shareholder is entitled to get bonus and right issue.	Preference shareholders are not eligible for bonuses and right issues.
9. Capital appreciation	The market value of equity shares increases with the prosperity of the company. It leads to an increase in the value of shares.	The market value of preference shares does not fluctuate, so there is no possibility/cheques of capital appreciation.
10. Risk	Equity shares are subject to higher risk.	Preference shares are subject to less risk.
11. Types	Equity shares are classified into: Equity shares with normal voting rights. Equity shares with differential voting rights.	Preference shares are classified as: Cumulative Preference Shares Non-Cumulative Preference Shares Convertible Preference Shares Non-Convertible Preference Shares Redeemable Preference Shares Irredeemable Preference Shares Participating Preference Shares Non-Participating Preference Shares

Question 2.
Shares and Debentures
Answer:

Points	Shares	Debentures
1. Meaning	Share is the smallest unit in the total share capital of the company. It is known as ownership securities.	A debenture is an instrument evidencing debt under the seal of the Company. They are also known as creditor ship securities.
2. Status	A holder of shares is the owner of the company. Hence, share capital is owned capital.	A holder of debenture is the creditor of the company. Hence, Debenture capital is loan capital or borrowed capital.
3. Nature	It is permanent capital. It is not repaid during the lifetime of the company.	It is temporary capital. Generally, it is repaid after a specific period.
4. Voting/Right	Shareholders being owners enjoy normal voting rights in general meetings and can participate in the management of the company.	Debenture holders being creditors, do not have any voting right and can not participate in the management of the company.
5. Return on Investment	Return on shares is called a dividend. Equity shareholders receive dividends at a fluctuating rate whereas preference shareholders receive dividends at a fixed rate.	Return on debenture is called interest. It is fixed at the time of issue. Interest is paid even when a company has no profit.
6. Security	Share capital is unsecured capital. No security is offered to the shareholder.	Debenture capital being loan capital is secured by creating a charge on Company’s property.
7. Time of Issue	Shares are issued in the initial stages of the company formation.	Debentures are issued at a later stage when the company has properties to offer as security.
8. Suitability	Shares are suitable for long-term finance.	Debentures are suitable for medium-term finance.
9. Types	Shares are classified into: Equity shares Preference	A debenture is classified as: Registered Debentures Bearer Debentures Secured Debentures Unsecured Debentures Redeemable Debentures Irredeemable Debentures Convertible Debentures Non-Convertible Debentures
10. Position on liquidation	On liquidation of a company, shareholders rank last in the list of claimants.	Debenture holders being creditors, rank prior to shareholders for repayment on liquidation of the company.

Question 3.
Owned Capital and Borrowed Capital
Answer:

Points	Owned Capital	Borrowed Capital
1. Meaning	It is that capital that is contributed by shareholders.	It is that capital that is borrowed from creditors. It is also known as debt capital.
2. Sources	This capital is collected by the issue of equity shares and preference shares, ploughing back of profits (ownership securities).	It is collected by way of the issue of debentures, fixed deposits, loans from banks/financial institutions, etc. (loan, borrowings).
3. Return on Investment	The shareholders get dividends as income on their investment. The rate of dividend is fluctuating, in the case of equity shares but is fixed in the case of preference shares.	The debt capital holders get interested as income on their investment. Interest is paid at a fixed rate.
4. Status	The shareholders are owners of the company.	The debt holders are creditors of the company.
5. Voting right	The equity shareholders enjoy normal voting right at the general meetings.	The creditors do not enjoy voting rights at the general meeting.
6. Repayment of Capital Redemption	The shareholders do not enjoy priority over creditors. They are eligible for repayment of Capital only after making payment to creditors at the time of windings up of the company.	The creditors get priority over the shareholders in case of return of principal amount at the time of winding up of the company.
7. Charge on assets	The shareholders do not have any charge on the assets of the company.	The secured debenture holders have a change on the assets of the company.

5. Answer in brief:

Question 1.
What is a public deposit?
Answer:

• Public deposit is an important source of financing short-term requirements of the company.
• Companies generally receive public deposits for a period ranging from 6 months to 36 months.
• Interest is paid by the companies on such deposits.
• The company issues a’ Deposit Receipt’ to the depositor.
• The receipt is an acknowledgment of debt/loan by the company.
• Deposits are either secured or unsecured loans offered by a company.
• It is considered a risky investment but investors can earn high returns on public deposits.

Advantages of deposits to the company

• It is an easier method of mobilizing funds during periods of credit squeeze.
• The rate of interest payable by the company on public deposits is lower than the interest from banks and financial institutions.
• It helps the company to borrow funds from a larger segment and thus, reduces dependence on financial institutions.

Question 2.
What are Global Depository Receipt and American Depository Receipt?
Answer:

• The shares that are issued by public limited companies are traded in various share markets.
• In India, shares are traded in the Bombay Stock Exchange (BSE) National Stock Exchange (NSE), etc.
• Similarly, Shares are traded in foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation).
• Companies that cannot list directly on foreign stock exchange get listed indirectly using GDR & ADR.
• GDR and ADR are Dollar/Euro denominated instruments traded on stock exchanges of foreign countries and are depository receipts containing a fixed number of shares.
• The Depository Receipts which are traded in the USA are called ADRs and Depository Receipts which are traded in all foreign countries other than the USA are called GDR.
• Indian Companies raise equity capital in the international market through GDR and ADR.
• Companies issue shares to an intermediary called ‘depository’.
• Bank of New York, Citigroup, etc act as Foreign Depository Bank.
• The Depository Banks issue GDRs or ADRs to investors against Indian Company’s shares.
• These ‘Depository Receipts’ are then, sold to foreign investors who wish to invest their savings in Indian Cost.
• The Depository Receipts are listed on the stock exchanges like regular shares.
• It is a depository bank that stores the shares on behalf of the receipt holder.
• NRI and foreign investors buy Depository Receipt Using their regular equity trading account.
• The company pays dividends in the home currency to the depository and the depository converts them into the currency of investor and pays dividends.
• Indian Companies like HDFC, ICICI, Infosys Technologies, MTNL, WIPRO have ADR and GDR.
  • Tata Motors and VSNL have ADRs.
  • Bajaj Auto Limited ITC, L&T, Hindalco, Ranbaxy Laboratories, and SBI have GDRs.
  • ADR allows the sale of securities only in the American market whereas GDR allows the sale of securities globally.

Question 3.
What is Trade Credit?
Answer:

• Every business requires trade credit and is common to all business types.
• Credit sales or granting of credit is inevitable in the present competitive business world.
• It is short-term financing to businesses.
• The small retailers, to a large extent, rely on obtaining trade credit from their suppliers.
• The cheapest method of financing; it is an easy kind of credit that can be obtained without signing any debt instrument.
• This is not a cash loan. It results from a sale of goods services which have to be paid sometime after the sale takes place.
• It is given by one trader to another trader to delay payment for goods and services involved in the transaction.
• Suppliers sell goods and willingly allow 30 days or more credit period for the bill to be paid.
• They offer discounts if bills are cleared within a short period such as 10 or 15 days.
• Such credit is given/granted to those having reasonable standing and goodwill.

Advantages of Trade Credit:

• Trade Credit is the cheapest and easiest method for raising short-term finance.
• It can be obtained without making any formal and written agreement or signing the same.
• It is readily available whenever goods and services are purchased on credit in bulk.
• It is free of cost source of financing.
• The terms of trade are lenient and not rigid.

Question 4.
What are the schemes for disbursement of credit by banks?
Answer:
Meaning: Banks play an important role in terms of providing finance to the companies.
They provide short-term finance for working capital, in the form of bank and trade credits.

The innovative schemes by banks for disbursement of credit are as follows:
(i) Overdraft:

• A company having a current account with the bank is allowed an overdraft facility.
• The borrower can withdraw funds/overdraw on his current account up to the credit limit sanctioned by the bank.
• Any number of drawings up to the sanctioned limit is allowed for a stipulated term period.
• Interest is determined/calculated on the basis of the actual amount overdrawn.
• Repayments can be made during the time period.

(ii) Cash Credit:

• The borrower can withdraw the amount from his cash credit up to a stipulated/granted limit based on security margin.
• Cash credit is given against pledge or hypothecation of goods or by providing alternate securities.
• Interest is charged on the outstanding amount borrowed and not on the credit limit sanctioned.

(iii) Cash Loans:

• In this, the total amount of the loan is credited by the bank to the borrower’s account.
• Interest is payable on the actual outstanding balance.

(iv) Discounting bills of exchange:

• In the bill of exchange, the drawer of the bill (seller) receives money from the drawee (buyer) on the date or after the due date (the term mentioned in the bill).
• But due to discounting facility the drawer can receive money before the due date by discounting the bill with the bank (by giving the bill as security to the bank).
• The bank gives money to the drawer less than the face value of the bill (amount mentioned in the bill) after deducting a certain amount known as discounting charges.
• The bills are usually traded bills i.e. outcome of trade transactions.
• The bills are accepted by the banks and cash is advanced against them.

Question 5.
State the features of bonds.
Answer:
Definition:
According to Webster Dictionary, “a bond is an interest bearing certificate issued by a Government or business firm promising to pay the holder a specific sum at a specified date”.
A bond is thus-

• A formal contract to repay borrowed money with interest.
• Interest is payable at a fixed internal or on the maturity of the bond.
• A bond is a loan.
• The holder is a lender to the company.
• He gets a fixed rate of interest.

Features:
(i) Nature of finance:

• It is debt or loan finance.
• It provides long-term finance of 5 years, 10 years, 25 years, 50 years.

(ii) Status of investor:

• The bondholders are creditors.
• They are non-owners and hence, not entitled to participate in the general meetings.
• The bondholder has no right to vote.

(iii) Return on bonds:

• The bondholders get a fixed rate of interest.
• It is payable on maturity or at a regular interval.
• Interest is paid to the bondholder at a fixed rate.

(iv) Repayment:

• A bond is a formal contract to repay borrowed money.
• Bonds have a specific maturity date, on which the principal amount is repaid.

6. Justify the following statements:

Question 1.
Equity shareholders are real owners and controllers of the company.
Answer:

• They do not have special preferential rights as to dividends or returns of capital in the event of the winding-up of the company.
• They are joint owners and thus, have ownership rights.
• They have the right to participate in the management of the company and to vote on every resolution in the meetings thus, having exclusive voting rights.
• They use the right to vote to appoint directors, amend Memorandum of Association, Articles of Association, can remove directors appoint bankers, etc.
• Their shares bear ultimate risks associated with ownership.
• Thus, it is rightly said, that the equity shareholders are real owners and controllers of the company.

Question 2.
Preference Shares do not carry normal voting rights.
Answer:

• Preference shares enjoy priority or preference over equity shareholders as regards payment of dividends and repayment of capital.
• They carry a fixed rate of dividend.
• They do not take much risk as they are cautious investors.
• They attend class meetings if they have any problem affecting their interests or dividend is not paid to them for two or more consecutive years.
• As they do not take risks, they do not attend general meetings or take part in the management nor vote at the meetings.
• Thus, it is rightly said, that the preference shares do not carry voting rights.

Question 3.
The debenture is secured by a charge on assets of the company.
Answer:

• A debenture is a document that grants lenders a charge over a company’s assets giving them a means of collecting debt if a default occurs.
• The charges may be floating or fixed.
• A specific property is pledged as security.
• In case the debenture is not redeemed or exercised, the lenders can recover the cost by selling the fixed assets.
• Thus, it is rightly said, that the debenture is secured by a charge on assets of the company.

Question 4.
Retained earnings are the simple and cheapest method of raising finance.
Answer:

• Retained earnings is an internal source of financing used by established companies.
• Retained earnings is a kept aside profit by the company instead of distributing all the dividends to the shareholders.
• The accumulated profits are re-invested by the companies by issuing bonus shares.
• It does not create a charge on assets, nor dilute the shareholdings.
• Thus, it is rightly said, that the retained earnings also known as ploughing back of profit/capitalization of reserves/self-financing are the simple and cheapest methods of raising finance.

Question 5.
Public deposit is a good source of short-term financing.
Answer:

• Deposits can be accepted by the general public by public limited companies and not private limited companies.
• Deposits are accepted from the general public for a short term i.e. minimum 6 months and a maximum of 36 months or a 3-year term.
• The amount so raised is used for short-term financial requirements.
• The time of deposit is predetermined in advance and paid after the expiry of such period as per terms and conditions agreed.
• The depositors form the general public not necessarily equity shareholders.
• The administrative cost of deposits of the company is lower than that involved in the issue of shares and debentures.
• The rate of interest payable is lower than other loans. Thus, it is rightly said, that the public deposit is a good source for meeting short-term requirements.

Question 6.
The bondholder is a creditor of the company.
Answer:

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

Question 7.
Trade credit is not a cash loan.
Answer:

• Trade credit is a business-to-business agreement wherein there is an arrangement to purchase goods and services on credit and pays at a later date and not immediately.
• The credit period extends up to a month.
• Discount is given if the same is paid earlier.
• It is an interest-free loan given by one businessman to another.
• It does not involve loan formalities but only a trade transaction. Hence, not a cash loan.
• Thus, it is rightly said, that the trade credit is not a cash loan.

Question 8.
Different investors have different preferences.
Answer:

• Investors make different decisions and have different risk preferences when getting gains and losses.
• Educated ones may opt for capital markets as compared to others who may invest in gold or silver.
• Cautious investors are ready to have steady income rather than fluctuations.
• Risk-takers are ready to face the ups and downs of their invested money and on their returns.
• Active investors try to beat the market while passive track the market index.
• Thus, it is rightly said, that the different investors have different choices and preferences.

Question 9.
Equity Capital is risk capital.
Answer:

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

7. Answer the following questions.

Question 1.
What are a share and state its features?
Answer:

• The term share is defined by section 2(84) of the Companies Act 2013 ‘Share means a share in the share capital of a company and includes stock.’ The capital of a company is divided into a large number of shares.
• It facilitates the public to subscribe to the company’s capital in smaller amounts.
• The share is thus, an indivisible unit of share capital.
• It is a unit by which the share capital is divided.
• The total capital is divided into small parts and each such part is called a share.
• The value of each part/unit is known as face value.
• A person can purchase any number of shares as and when he or she desires.
• A person who purchases shares of the company is known as a shareholder of the company.
• Generally, companies issue equity shares and preference shares in the market.

Features of shares:
(i) Meaning:

• Share is the smallest unit in the total share capital of a company.
• The total share capital of a company is divided into small parts and each part is called a share.

(ii) Ownership:

• A share shows the ownership of the shareholder.
• The owner of the share is called a shareholder.

(iii) Distinctive number:

• Unless dematerialized, each share has a distinct number, which is noted in the share certificate.
• A share has a distinct number for identification.

(iv) Evidence of title:

• The company issues a share certificate under its common seal.
• It is a document of title of ownership of the share.
• A share is not a visible thing.
• It is shown by share certificate or in the form of ‘Demat share’

(v) Value of a share:

• Each share has a value expressed in terms of money.
• Face value: This value is written on the share certificate and mentioned in the Memorandum of Association.
• Issue Value: It is the price at which a company sells its shares. At par – equal to face value; At premium – more than the face value; At discount – Less than the face value.

(vi) Rights:

• A share confers/gives certain rights to the shareholders.
• Rights such as the right to receive dividends, right to inspect statutory books, right to attend shareholders’ meetings, right to vote in meetings, etc. (group rights), and right to receive notice, circulars, dividends, bonus shares, rights issue, etc. (individual rights).

(vii) Income:

• A shareholder is entitled to get a share in the net profit of the company.
• It is called a dividend.

(viii) Transferability:

• The shares of the public Ltd. company are freely transferable as per the rules laid down in the Articles of Association.
• Shares of a private company cannot be transferred.

(ix) Property of shareholder:

• A share is a movable property of a member.
• It can be transferred (gifted, sold) or transmitted (passed on to the legal heir after/due to death, insolvency or insanity of a member).

(x) Kinds of shares:

• A company issues two types of shares depending upon the right to control, income and risk.
• Equity shares – which do not carry preferential right to receive dividend or repayment of capital when the company winds up its activities.
• Preference shares – which carry preferential rights as regards dividend and repayment of capital in the event of winding up of the company.

Question 2.
What is an equity share? Explain its features.
Answer:

• Equity shares are the fundamental and basic source of financing activities of the business.
• Equity shares are also known as ordinary shares.
• Indian Companies Act 1956 defines equity shares as those shares which do not preference shares.
• The equity shares do not enjoy a preference in getting dividends.

Features of equity shares:
(i) Permanent Capital:

• Equity shares are irredeemable shares. It is permanent capital.
• The amount received from equity shares is not refunded by the company during its lifetime.
• Equity shares become redeemable/refundable only in the event of the winding-up of the company or the company decides to buy back shares.
• Equity shareholders provide long-term and permanent capital to the company.

(ii) Fluctuating dividend:

• Equity shares do not have a fixed rate of dividend.
• The rate of dividend depends upon the amount of profit earned by the company.
• If a company earns more profit, the dividend is paid at a higher rate.
• If there is insufficient profit, the Board of Directors may postpone the payment of dividends.
• The shareholders cannot compel them to declare and pay the dividend.
• The dividend is thus, always uncertain and fluctuating.
• The income of equity shares is uncertain and irregular.

(iii) Rights:

• Equity shareholders enjoy certain rights.
• Right to share in profit when distributed as dividend.
• Right to vote by which they elect Directors, amend Memorandum, Articles, etc.
• Right to inspect books of account of their company.
• Right to transfer shares.
• Participation in management.
• Enjoy Right Issue and Bonus Issue.

(iv) No preferential right:

• Equity shareholders do not enjoy preferential rights in respect to the payment of dividends.
• They are paid dividends only after the dividend is paid to preference shareholders.
• At the time of winding up, they are the last claimants. They are paid last after all the other claims are settled.

(v) Controlling power:

• The control of a company vests in the hands of equity shareholders.
• They are often described as real masters of the company as they enjoy exclusive voting rights.
• Equity shareholders may exercise their voting right by proxies, without attending the meeting in person.
• The Act provides the right to cast vote in proportion to the number of shareholdings.
• They participate in the management of the company.
• They elect their representatives called the Board of Directors for management of the company.

(vi) Risk:

• Equity shareholders bear maximum risk in the company.
• They are described as ‘shock absorbers when the company is in a financial crisis.
• The rate of dividend falls if the income of the company falls.
• The market value of shares goes down resulting in capital loss.

(vii) Residual claimants:

• A residual claim means the last claim on the earnings of the company.
• Equity shareholders are owners and they are residual claimants to all earnings after expenses, taxes, dividends, interests are paid.
• Even though equity shareholders are the last claimants, they have the advantage of receiving the entire earnings that are leftover.

(viii) No charge on assets:

• The equity share does not create any charge over the assets of the company.
• There is no security/guarantee of capital invested being returned.

(ix) Bonus issue:

• Bonus shares are issued as gifts to equity shareholders.
• They are issued ‘free of cost’.
• These shares are issued out of accumulated profits.
• These shares are issued to existing equity shareholders in a certain ratio or proportion of their existing shareholdings.
• Capital investment of equity shareholders grows on its own.
• This facility is available only to equity shareholders.

(x) Rights issue:

• Equity shareholders get the benefit of rights issues.
• When a company raises further capital by issue of shares, the existing shareholders are given priority to get newly offered shares, known as a rights issue.

(xi) Face value:

• The face value of equity share is very less.
• It can be ₹ 10 per share or even ₹ 1/- per share

(xii) Market value:

• Market value fluctuates, according to the demand and supply of shares.
• The demand and supply of equity shares depend on profits earned and dividends declared.
• When a company earns huge profits, the market value of shares increases.
• When it incurs a loss, the market value of shares decreases.
• There are frequent fluctuations in the market value of shares in comparison to other securities.
• Equity shares are more appealing to speculators.

(xiii) Capital Appreciation:

• Share capital appreciation takes place when the market value of share increases in the share market.
• The profitability and prosperity of a company enhance the reputation of the company in the share market and thus, facilitates appreciation of the market value of equity shares.

Question 3.
Define preference shares/What are preference shares? What are the different types of preference shares?
Answer:

• These shares have certain privileges and preferential rights such as to payment of dividends, return of capital, etc.
• Preference Share has which fixed rate of dividend is prescribed at the time of issue.
• The preference shareholders are co-owners but not controllers.
• They are cautious investors as they are interested in the safety of the investment.

(i) Cumulative Preference Shares:

• Cumulative preference shares are those shares on which dividend accumulates until it is fully paid.
• That is if the dividend is not paid in one or more years due to inadequate profit, then such unpaid dividend gets accumulated and is carried forward till next year.
• The accumulated dividend is paid when the company performs well.
• The arrears of dividends are paid before making payment to equity shareholders.
• The preference shares are always cumulative unless otherwise stated in Articles of Association.

(ii) Non-Cumulative Preference Shares:

• The dividend on these shares does not accumulate.
• That is the dividend on shares can be paid only out of profits of that particular year.
• The right to claim dividends will lapse if the company does not make a profit in that particular year.
• If the dividend is not paid in a year, it is lost.

(iii) Participating Preference Shares:

• The holders of these shares are entitled to participate in surplus profit besides preferential dividends. They participate in the high-profit condition of the company.
• Surplus profit here means excess profit that remains after making payment of dividends to equity shareholders.
• Such surplus profit up to a certain limit is distributed to preference shareholders.

(iv) Non-Participating Preference Shares:

• The preference shares are deemed to be non-participating if there is no clear provision in Articles of Association regarding participation in surplus profit.
• Such shareholders are entitled to receive a fixed rate of a dividend prescribed in the issue.

(v) Convertible Preference Shares:

• These shares have a right to convert their preference shares into equity shares.
• The conversion takes place within a certain agreed fixed period.

(vi) Non-Convertible Preference Shares:

• These shares are not converted into equity shares.
• They will remain as preference shares forever till paid back.

(vii) Redeemable Preference Shares:

• Shares that can be redeemed after a certain fixed period are called redeemable preference shares.
• A company limited by shares if authorized by Articles of Association issues redeemable preference shares.
• Such shares must be fully paid.
• The shares are redeemed out of divisible profit or out of the fresh issue of shares made for this purpose.

(viii) Irredeemable Preference Shares:

• Shares which are not redeemable are payable only on winding up of the company and are called irredeemable preference shares.
• As per section 55(1) of the Companies Act 2013, the company cannot issue irredeemable preference shares in India.
• Thus, are the types of preference shares.

Question 4.
What are preference shares? State its features.
Answer:

• The shares which carry preferential rights are termed preference shares.
• These shares have certain privileges and preferential rights such as payment of dividend, return of capital, etc.
• The preference shareholders are co-owners but not controllers.
• They are cautious investors as they are interested in the safety of the investment.
• They prefer a steady rate of returns on investment.

Features of preference shares:
(i) Preference for dividend:

• They have the first charge on the distributable amount of annual profits.
• The dividend is payable to preference shareholders before anything else is paid to equity shares, but after the settlement of dues of debentures, bonds and loans.

(ii) Prior repayment of capital:

• Preference shareholders have a preference over equity shareholders in respect of return of capital when the company is liquidated.
• It saves preference shareholders from capital losses.

(iii) Fixed return:

• These shares carry dividends at a fixed rate.
• The rate of dividend is predetermined at the time of issue.
• It may be in the form of a fixed sum or may be calculated at a fixed rate.
• The preference shareholders are entitled to dividends which can be paid only out of profit.
• Though the rate of dividend is fixed, the director in the financial crisis of the company may decide that no dividend be paid if there are no profits, the preference shareholders would have no claims for the dividend.

(iv) Nature of capital:

• Preference share capital is safe capital as the rate of dividend and market value do not fluctuate.
• Preference shares do not provide permanent share capital.
• They are redeemed after a certain period of time.
• It is generally issued at a later stage when a company gets established business.
• They are used to satisfy the need for additional capital of the company.

(v) Market value:

• The market value of preference shares does not change as the rate of dividend payable to them is fixed.
• The capital appreciation is considered to be low as compared with equity shares.

(vi) Voting right:

• The preference shares do not have normal voting rights.
• They have voting rights in matters that affect their interests – change of rights in terms of repayment of capital, or dividend payable to them are in arrears for two or more years.

(vii) Risk:

• Cautious investors generally purchase preference shares.
• Safety of capital and fixed return on investment are advantages attached with preference shares.
• These shares are a boon for shareholders during the depression when the interest rate is continuously falling.

(viii) Face value:

• The face value of preference shares is relatively higher than equity shares.
• They are normally issued at a face value of ₹ 100/-

(ix) Right or Bonus issue:

• Preference shareholders are not entitled to bonus or rights issues.
• It can be issued to the equity shares only.

(x) Nature of investor:

• Preference shares attract a moderate type of investors.
• Investors who are conservative, cautious, interested in the safety of capital, expect a steady rate of returns on investment purchase preference shares.

Question 5.
What is Debenture/Define Debenture. Discuss the different types of Debentures.
Answer:

• Debentures are one of the main sources of raising debt capital for meeting long-term and medium-term financial needs.
• Debentures represent borrowed capital.
• A person who purchased debenture is called a debenture holder.
• The holders get a fixed rate of interest as a return on their investment.
• The Board of Directors has the power to issue debentures.

Definitions:
Topham defines: “A debenture is a document given by a company as evidence of debt to the holder, usually arising out of the loan and most commonly secured by the charge.”

They are as follows:
(i) Secured Debentures:

• The debentures can be secured.
• The property of a company is charged as security for the loan.
• The security may be for some particular asset (fixed charge) or it may be the asset in general (floating charge).
• The debentures are secured through ‘Trust Deed’.

(ii) Unsecured Debentures:

• These debentures do not have security.
• The issue of unsecured debentures is prohibited by the Companies Act, 2013.

(iii) Registered Debentures:

• They are the ones whose details are mentioned in the Register of debenture maintained by the company.
• The details include the name, address, particulars of
• The transfer of such debentures requires the execution of regular transfer deeds.
• Interest is paid through Dividend warrants.

(iv) Bearer Debentures:

• The details of the debentures are not recorded in the register of the debenture.
• Their names do not appear in the Register of Debenture Holders.
• Such debentures are transferred by mere delivery.
• Payment of interest is made by means of coupons attached to the debentures certificate.

(v) Redeemable Debentures:

• Debentures are mostly redeemable i.e. payable at the end of some fixed period, mentioned on the Debentures Certificate.
• Repayment may be made at a fixed date, at the end of a specific period, or six installments during the lifetime of the company.
• The provision of repayment is normally made in Trust Deed.

(vi) Irredeemable Debentures:

• These debentures are not repayable during the lifetime of the company.
• They are repayable only on liquidation of the company or when there is a breach of any condition or in contingencies.

(vii) Convertible Debentures:

• These debentures give the right to the holder to convert the debentures into equity shares after a specific period.
  the period of conversion is mentioned in the debenture certificate.
• The issue must be approved by a special resolution in the general meeting before they are issued to the public.
• A Convertible debentures holder is hence entitled to equity shares at a rate lower than the market value after which he can participate in the profits and meetings of the company.

(viii) Non-Convertible Debentures:

• These are not convertible into equity shares on maturity.
• They are normally redeemed on the maturity date.
• There is no appreciation in their value which acts as a disadvantage.

Question 6.
Define Debenture/What is a debenture? Explain the features of debenture?
Answer:

• A debenture is one of the main sources of raising debt capital for meeting long-term and medium-term financial needs.
• Debentures represent borrowed capital.
• A person who purchases debenture is called a debenture holder.
• The holders get a fixed rate of interest as a return on their investment.
• The Board of Directors has the power to issue debentures.

Definitions:
Topham defines: “A debenture is a document given by a company as evidence of debt to the holder, usually arising out of the loan and most commonly secured by the charge.”
A debenture is evidence of indebtedness.

Features of Debenture:
(i) Written Promise:

• A debenture is a written promise by a company that it owes a specified sum of money to the holder of the debenture.

(ii) Face Value:

• The face value of debenture normally carries a high denomination.
• It is ₹ 100 or multiples of ₹ 100.

(iii) Time of payment:

• A debenture is issued with the due date stated in the Debenture Certificate.
• It provides for repayment of the principal amount on the maturity date.

(iv) Priority of Payment:

• Debenture holders have a priority in repayment of their capital over other claimants of the company.
• The amounts of debentures are settled before shareholders.

(v) Assurance of repayment:

• Debenture constitutes a long-term debt.
• They carry an assurance of repayment on the due date.

(vi) Terms of issue and redemption of Debenture:

• Debenture can be issued at par, premium, and even at discount.
• Its redemption takes place only at par and premium.

(vii) Authority to issue:
Board of Directors has the authority/power to issue debenture as per Companies Act 2013 Section 179(3).

(viii) Interest:

• A fixed-rate of interest is agreed upon and is paid periodically.
• The rate of interest that a company pays/offers depends upon the market conditions and nature of the business.
• Payment of interest is a liability of the company. It has to be paid whether the company makes a profit or not.

(ix) Parties to Debenture:

• Company: This is an entity that borrows money.
• Trustees: The company has to appoint Debenture Trust if it is offering debenture to more than 500 people.
• Trust is a party through whom the company deals with debenture holders and enters into an agreement known as Trust Deed.
• Trust Deed contains obligations of the company rights of debenture holders, power of trustees, etc.
• Debenture holders: They are the parties who provide loans to the company and receive a ‘Debenture Certificate’ as evidence.

(x) Status of debenture holder:

• The debenture holder is a creditor of the company.
• Debenture being loan taken by the company interest is payable on it at a fixed interval and fixed-rate till redeemed/paid.
• They cannot participate in the management of the company.

(xi) No Voting Right:

• According to sec. 71 (2) of Companies Act 2013, no company shall issue debenture carrying voting rights.
• Debenture holders do not have the right to vote in the general meetings of the company.

(xii) Security:

• Debenture can be secured with some property of the company by fixed or floating charge.
• Debenture holders can sell of charged property of the company and recover their money if the company is not in a position to make payment of interest or repayment of capital.

(xiii) Issuers:

• Debenture can be issued by both, private as well as public limited companies.

(xiv) Listing:

• A debenture must be listed with at least one recognized stock exchange.

(xv) Transferability:

• Debentures can be easily transferred through instruments of transfer.