Maharashtra Board Class 12 Secretarial Practice Chapter 2 Sources of Corporate Finance Solutions

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
In simple words: A share is the smallest individual unit of ownership in a company's total capital.

🎯 Exam Tip: Always associate "smallest unit of share capital" with "Share" to secure quick marks in objective questions.

Question 2. The benefit of Depository Receipt is ability to raise capital in ___________ market.
(a) national
(b) local
(c) international
Answer: (c) international
In simple words: Depository Receipts allow a company to get investment money from people living in other countries.

🎯 Exam Tip: Remember that depository receipts like ADRs and GDRs are traded on foreign stock exchanges, which helps companies tap into global financial markets.

 

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
In simple words: Equity shareholders are the last ones to get paid from the company's profits or assets after everyone else, like creditors and debenture holders, has been paid.

🎯 Exam Tip: Use the keyword 'residual' to associate directly with equity shareholders, as they own the remaining profits of the company.

 

Question 4. ___________ participate in the management of their company.
(a) Preference shareholders
(b) Depositors
(c) Equity shareholders.
Answer: (c) Equity shareholders
In simple words: Equity shareholders have voting rights, which allows them to choose directors and help run the company.

🎯 Exam Tip: Clearly state that equity shareholders enjoy normal voting rights, which gives them the power to participate in management.

 

Question 5. ___________ shares are issued free of cost to existing equity shareholders.
(a) Bonus
(b) Right
(c) Equity
Answer: (a) Bonus
In simple words: Bonus shares are like a free gift of extra shares given to current shareholders based on the shares they already own.

🎯 Exam Tip: Do not confuse bonus shares with right shares; bonus shares are completely free, whereas right shares must be purchased, though at a discounted price.

 

Question 6. The holder of preference share has the right to receive ___________ rate of dividend.
(a) fixed
(b) fluctuating
(c) lower
Answer: (a) fixed
In simple words: Preference shareholders get a set, unchanging dividend rate every year, unlike equity shareholders whose dividends can change.

🎯 Exam Tip: Remember that "preference" shares have preferential rights, including a fixed rate of dividend and priority in repayment of capital.

 

Question 7. Accumulated dividend is paid to ___________ preference shares.
(a) redeemable
(b) cumulative
(c) convertible
Answer: (b) cumulative
In simple words: Cumulative preference shares collect or "accumulate" unpaid dividends from bad years and pay them all together when the company makes a profit.

🎯 Exam Tip: The word "cumulative" means to gather or accumulate over time, which helps you remember that unpaid dividends are carried forward only for this type of share.

 

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
In simple words: Convertible preference shares give the owner the option to change their preference shares into regular equity shares after a certain time.

🎯 Exam Tip: Look for the root word "convert" in both the question and the correct option to easily identify the answer.

 

Question 9. Debenture holders are ___________ of the company.
(a) creditors
(b) owners
(c) suppliers
Answer: (a) creditors
In simple words: Debenture holders lend money to the company, so they are creditors whom the company must pay back with interest.

🎯 Exam Tip: Always distinguish between owners (equity shareholders) and creditors (debenture holders) as this is a very common exam question.

 

Question 10. ___________ is paid on borrowed capital.
(a) Interest
(b) Dividend
(c) Profit
Answer: (a) Interest
In simple words: When a company borrows money (like taking a loan or issuing debentures), it must pay interest as a cost for using that money.

🎯 Exam Tip: Remember that dividends are paid on owned capital (shares), whereas interest is always paid on borrowed capital (loans/debentures).

 

Question 11. Debenture holders get fixed rate of ___________ return on their investment.
(a) interest
(b) dividend
(c) discount
Answer: (a) interest
In simple words: When you lend money to a company by buying debentures, the company pays you a fixed regular payment called interest as a reward for lending them money.

🎯 Exam Tip: Remember that debenture holders are creditors of the company, so they always receive interest, whereas shareholders receive dividends.

 

Question 12. Convertible debentures are converted into ___________ after a specific period.
(a) equity shares
(b) deposits
(c) bonds
Answer: (a) equity shares
In simple words: Convertible debentures are special loans that can be changed into regular company ownership shares after a set period of time.

🎯 Exam Tip: The term 'convertible' in corporate finance almost always refers to the option of converting debt instruments into equity shares.

 

Question 13. Retained earnings are ___________ source of financing.
(a) internal
(b) external
(c) additional
Answer: (a) internal
In simple words: Retained earnings are the profits a company saves and keeps inside the business to use later, rather than borrowing from outside.

🎯 Exam Tip: Since retained earnings come from the company's own past profits, they are always classified as an internal source of finance.

 

Question 14. The holder of bond is ___________ of the company.
(a) secretary
(b) owner
(c) creditor
Answer: (c) creditor
In simple words: A bondholder has lent money to the company, which makes them a lender or creditor who must be paid back.

🎯 Exam Tip: Always distinguish between owners (equity shareholders) and creditors (debenture and bondholders) to avoid confusion in multiple-choice questions.

 

Question 15. Company can accept deposits from public, minimum for ___________ months.
(a) six
(b) nine
(c) twelve
Answer: (a) six
In simple words: A company cannot take public deposits for less than six months, ensuring a stable short-term funding period.

🎯 Exam Tip: Remember the minimum period for public deposits is 6 months, which is a standard legal requirement for corporate savings.

 

Question 16. Company can accept deposits from public maximum for ___________ months.
(a) 12
(b) 24
(c) 36
Answer: (c) 36
In simple words: The longest time a company can keep a public deposit is 36 months (or 3 years) to protect depositors from long-term risks.

🎯 Exam Tip: Memorize the limits: minimum is 6 months and maximum is 36 months. This range is frequently asked in exams.

 

Question 17. A depository receipt traded in ___________ is called American Depository Receipt.
(a) London
(b) Japan
(c) USA
Answer: (c) USA
In simple words: Since it is called an "American" Depository Receipt, it is traded in the United States of America (USA).

🎯 Exam Tip: The name itself gives away the answer—"American" Depository Receipts (ADRs) are traded in the USA, while Global Depository Receipts (GDRs) are traded elsewhere.

 

1B. Match the Pairs

Question 1. Match the correct pairs from Group 'A' and Group 'B':

Group 'A'	Group 'B'
a) Equity Share Capital	1) Agreement
b) Debenture Trustees	2) Capitalisation of Profit
c) Preference Shareholders	3) Bold Investor
d) Debenture Certificate	4) Venture Capital
e) Bonus Shares	5) Document of Ownership
	6) Capitalisation of Loan
	7) Safe Capital
	8) Instrument of Debt
	9) Trust Deed
	10) Cautious Investor

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

In simple words: This matching exercise pairs key financial concepts like equity capital with venture capital, debenture trustees with trust deeds, and bonus shares with the capitalization of profits.

🎯 Exam Tip: Double-check each match by ensuring the legal or financial definition of the term in Group A directly corresponds to its primary characteristic in Group B.

 

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. They hold the ultimate voting power and ownership control over the company's major decisions.
In simple words: Equity shareholders are the actual owners of the company because they have the right to vote and make key decisions.

🎯 Exam Tip: Always write 'Equity shareholders' rather than just 'shareholders' to be precise and secure full marks.

 

Question 2. A document of ownership of shares.
Answer: Share Certificate. This is a registered document of title issued by a company under its common seal to certify ownership of shares.
In simple words: A share certificate is an official paper issued by a company that proves you own a specific number of its shares.

🎯 Exam Tip: Remember that a share certificate is a document of title, which is the ultimate proof of share ownership.

 

Question 3. The holders of these shares are entitled to participate in surplus profits.
Answer: Participating preference shares. These shareholders are given a share in the extra profits of the company after the normal dividends have been distributed.
In simple words: These are special shares that let the owners get a share of any extra profits the company makes, on top of their regular fixed dividend.

🎯 Exam Tip: Remember that "participating" means taking part in the extra or surplus profits of the company after other shareholders are paid.

 

Question 4. A party through whom the company deals with debenture holders.
Answer: Debenture trustees. They are appointed by the company to protect the interests of the debenture holders and secure their money.
In simple words: A debenture trustee is a person or group that acts as a protector for the people who lend money to the company.

🎯 Exam Tip: Use the term "trustees" as they hold the trust and protect the interests of the debenture holders.

 

Question 5. Name the shareholder who participates in the management.
Answer: Equity shareholders. They have voting rights which allow them to select directors and participate in key decision-making processes.
In simple words: Equity shareholders are the real owners of the company and have the right to vote and help run the business.

🎯 Exam Tip: Clearly state "Equity shareholders" as they are the ones with voting rights, unlike preference shareholders.

 

Question 6. The value of a share is written on the share certificate.
Answer: Face value. This value is printed on the share certificate and is also mentioned in the Memorandum of Association of the company.
In simple words: Face value is the original price of a share that is printed directly on the share paper.

🎯 Exam Tip: Do not confuse face value with market value; face value is fixed and printed on the certificate itself.

 

Question 7. The value of a share is determined by demand and supply forces in the share market.
Answer: Market value. This value fluctuates daily based on how many people want to buy or sell the share in the stock market.
In simple words: Market value is the price at which a share is currently being bought and sold in the stock market.

🎯 Exam Tip: Mention "demand and supply forces" as the key factors that change the market value of shares.

 

Question 8. The policy of using undistributed profit for the business.
Answer: Retained earnings/ploughing back of profit. This is an internal source of finance where a company saves a part of its net profit instead of distributing it all as dividends.
In simple words: This means saving some of the profit made by the company and using it to grow the business instead of giving it all away to owners.

🎯 Exam Tip: Write both terms "retained earnings" and "ploughing back of profits" to show a complete understanding of the concept.

 

Question 9. It is an acknowledgment of a loan issued by the company to the depositor.
Answer: Deposit receipt. It is issued within twenty-one days of receiving the money from the depositor.
In simple words: A deposit receipt is a proof document given by a company to show they have accepted a loan from a depositor.

🎯 Exam Tip: Remember that a deposit receipt is the official receipt or acknowledgment of public deposits accepted by a company.

 

Question 10. A dollar-denominated instrument traded in the USA.
Answer: American Depository Receipt. This financial instrument allows US investors to buy shares in foreign companies easily.
In simple words: It is a special certificate traded on US stock exchanges that represents shares of a foreign company.

🎯 Exam Tip: Remember that ADRs are specifically traded in the USA and denominated in US dollars, which is a key identifying feature for exams.

 

Question 11. The Depository Receipt is traded in a country other than the USA.
Answer: Global Depository Receipt. It helps companies raise capital from international markets outside their home country.
In simple words: It is a certificate traded in international markets outside the US to help companies get foreign investment.

🎯 Exam Tip: Contrast GDR with ADR: ADR is only for the US market, while GDR is for global markets outside the US.

 

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. This is a convenient source of short-to-medium-term finance for well-established companies.
In simple words: This is when a company borrows money directly from the general public for a short period.

🎯 Exam Tip: Pay close attention to the time limits (6 to 39 months) as these specific numbers are highly testable for identifying public deposits.

 

Question 13. Credit extended by the suppliers with an intention to increase their sales.
Answer: Trade Credit. It is a common business practice that allows buyers to pay for goods at a later date.
In simple words: This is when a seller lets a business buy goods now and pay for them later to encourage more buying.

🎯 Exam Tip: Focus on the relationship between supplier and buyer; trade credit does not involve immediate cash exchange.

 

Question 14. The credit facility is provided to a company having a current account with the bank.
Answer: Overdraft. This facility allows the account holder to withdraw more money than what is actually available in their account.
In simple words: This is a bank service that lets a business spend more money than they actually have in their account up to a certain limit.

🎯 Exam Tip: Always associate the "overdraft" facility with "current accounts," as banks do not offer this on savings accounts.

 

1D. State Whether the Following Statements are True or False.

 

Question 1. Equity share capital is known as venture capital.
Answer: True. Equity share capital represents the primary risk capital of a company, which is why it is often associated with venture capital.
In simple words: This is true because equity shares carry the most risk, just like venture capital which invests in risky new businesses.

🎯 Exam Tip: Clearly state 'True' or 'False' first, and remember that equity capital is high-risk capital, which links it directly to venture capital.

 

Question 2. Equity shareholders enjoy a fixed rate of dividends.
Answer: False. Equity shareholders receive fluctuating dividends depending on the profits earned by the company.
In simple words: Equity shareholders do not get a fixed amount of profit sharing; their dividend goes up when the company does well and down when it does poorly.

🎯 Exam Tip: Remember that preference shareholders get a fixed rate of dividend, while equity shareholders get a fluctuating rate.

 

Question 3. Debenture holders have the right to vote at a general meeting of the company.
Answer: False. Debenture holders are creditors of the company and do not possess voting rights at general meetings.
In simple words: Since debenture holders are lenders and not owners, they cannot vote on how the company is run.

🎯 Exam Tip: Only owners (equity shareholders) have normal voting rights; creditors (debenture holders) do not.

 

Question 4. Equity shareholders are described as ‘shock absorbers’ when a company has a financial crisis.
Answer: True. They bear the ultimate financial risk and protect other stakeholders during difficult times.
In simple words: Equity shareholders take the biggest hit when a company loses money, acting like a cushion that protects creditors and others.

🎯 Exam Tip: Use the term "risk-bearers" or "shock absorbers" specifically for equity shareholders in your answers.

 

Question 5. Bondholders are owners of the company.
Answer: True. According to the textbook guidelines, bondholders are considered owners of the company.
In simple words: This statement is marked as true in the syllabus, indicating bondholders hold ownership status.

🎯 Exam Tip: Follow your specific textbook answer key for this question, even though in general finance bondholders are typically creditors.

 

Question 6. Cash credit is given against hypothecation of goods and security.
Answer: True. Cash credit is a short-term loan facility secured by pledging or hypothecating inventory and assets.
In simple words: A bank gives cash credit to a business by keeping their stock or goods as security.

🎯 Exam Tip: Clearly distinguish between cash credit (secured by goods) and overdraft (linked to a current account).

 

Question 7. Trade credit is a major source of long-term finance.
Answer: False. Trade credit is a short-term credit facility extended by suppliers to buyers.
In simple words: Trade credit is used for buying goods now and paying later in a few weeks or months, making it a short-term source of finance.

🎯 Exam Tip: Always classify sources of finance into short-term, medium-term, and long-term categories for clarity.

 

Question 8. Depository bank stores the shares on behalf of the GDR holder.
Answer: False. The physical shares are actually stored by the custodian bank, not the depository bank.
In simple words: The custodian bank keeps the actual shares safe, while the depository bank issues the certificates representing those shares.

🎯 Exam Tip: Remember the distinct roles: Custodian Bank stores the physical shares, while Depository Bank issues the GDRs.

 

Question 9. Financial institutions underwrite the issue of securities.
Answer: True. Financial institutions guarantee the purchase of unsold shares to help companies raise capital smoothly.
In simple words: This statement is true because financial institutions promise to buy any shares that the public does not buy, making sure the company gets its needed money.

🎯 Exam Tip: Remember that underwriting acts as an insurance for the company's share issue, ensuring they meet minimum subscription requirements.

1E. Find the Odd One.

 

Question 1. Debenture, Public Deposit, Retained Earnings
Answer: Retained earnings. While debentures and public deposits are external sources of borrowed capital, retained earnings represent internal owned capital accumulated over time.
In simple words: Retained earnings is the odd one out because it is the company's own saved money, whereas debentures and public deposits are loans taken from outsiders.

🎯 Exam Tip: To identify the odd one out, classify the options into owned capital versus borrowed capital or internal versus external sources.

 

Question 2. Face value, Market value, Redemption value
Answer: Redemption value. Face value and market value are related to the pricing and trading of shares, whereas redemption value is specifically associated with the repayment of debt securities like debentures or preference shares.
In simple words: Redemption value is the odd one because it refers to paying back money at the end of a loan period, while face value and market value are everyday prices of a share.

🎯 Exam Tip: Focus on the lifecycle of securities; face and market values apply throughout trading, while redemption happens only at maturity.

 

Question 3. Share certificate, Debenture certificate, ADR
Answer: ADR. Share certificates and debenture certificates are physical documents issued to domestic investors, while American Depository Receipts (ADRs) are traded on foreign stock exchanges for international investors.
In simple words: ADR is the odd one because it is used by foreign investors to trade in international markets, while the other two are standard certificates used locally.

🎯 Exam Tip: Look at the geographical scope of the instruments; ADRs and GDRs are always international, whereas standard certificates are domestic.

 

Question 4. Trade credit, Overdraft, Cash credit
Answer: Trade credit. Overdraft and cash credit are credit facilities provided directly by commercial banks, whereas trade credit is extended by suppliers of goods and services.
In simple words: Trade credit is the odd one because it is given by suppliers when you buy goods, while overdraft and cash credit are loans given directly by banks.

🎯 Exam Tip: Distinguish between bank-provided credit facilities and mercantile/trade-provided credit options.

1F. Complete the Sentences.

 

Question 1. The finance needed by business organisation is termed as ___________
Answer: Capital. This capital is essential for acquiring assets and meeting day-to-day operational expenses of the business.
In simple words: The money required to start and run a business is called capital.

🎯 Exam Tip: Always write the exact term 'Capital' clearly in fill-in-the-blank questions to secure full marks.

 

Question 2. The convertible preference shareholders have a right to convert their shares into ___________
Answer: Equity shares. This conversion option allows preference shareholders to participate in the company's equity growth.
In simple words: Convertible preference shares can be changed into regular equity shares after a certain period. This gives the shareholder ownership and voting rights in the company.

🎯 Exam Tip: Remember that only "convertible" preference shares have this right, while non-convertible ones cannot be changed into equity shares.

 

Question 3. Equity shareholders elect their representative Called ___________
Answer: Directors. These elected representatives form the Board of Directors to manage the company's daily operations.
In simple words: Since all shareholders cannot run the company themselves, they elect a group of people called directors to manage the business for them.

🎯 Exam Tip: Clearly distinguish between shareholders (owners) and directors (management) to score full marks in corporate governance questions.

 

Question 4. Bonus shares are issued as gift to ___________
Answer: Equity share holders. These shares are issued out of the company's accumulated reserves as a reward to existing shareholders.
In simple words: Bonus shares are extra free shares given to existing shareholders based on how many shares they already own.

🎯 Exam Tip: Always mention that bonus shares are issued free of cost to existing equity shareholders from accumulated profits.

 

Question 5. The bondholders are ___________of the company.
Answer: Creditors. Since bonds represent a debt, bondholders do not have voting rights but are entitled to regular interest payments.
In simple words: Bondholders lend money to the company, so they are like lenders or creditors who must be paid back with interest.

🎯 Exam Tip: Do not confuse bondholders with shareholders; bondholders are creditors (lenders), while shareholders are owners.

 

Question 6. Depository receipt traded in a country other than USA is called ___________
Answer: Global Depository Receipt. It is a financial instrument used by companies to raise capital in international markets.
In simple words: A Global Depository Receipt (GDR) is a certificate issued by a foreign bank that lets people invest in foreign companies outside the US.

🎯 Exam Tip: Remember that receipts traded specifically in the USA are American Depository Receipts (ADRs), while those traded elsewhere are Global Depository Receipts (GDRs).

 

Question 7. First Industrial policy was declared in the year ___________
Answer: 1948. This policy laid the foundation for a mixed economic model in post-independence India.
In simple words: India announced its very first plan for how industries should run and grow in the year 1948, just after independence.

🎯 Exam Tip: Memorize the year 1948 as the first industrial policy resolution, which is a very common objective question.

 

Question 8. When goods are delivered by the supplier to the customer on the basis of deferred payment is called as ___________
Answer: Trade credit. This arrangement helps businesses purchase inventory without immediate cash outflow, improving short-term liquidity.
In simple words: Trade credit is when a seller lets a buyer take goods now and pay for them later at an agreed date.

🎯 Exam Tip: Focus on the term "deferred payment" between business-to-business transactions as the key indicator for trade credit.

1G. Select the Correct Option from the Bracket

 

Question 1. Select the correct option from the bracket:
(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

In simple words: This matching table pairs different financial sources with their correct features, such as equity shares having changing dividends and debentures receiving fixed interest.

🎯 Exam Tip: Double-check that you pair equity shares with fluctuating returns and debt instruments like debentures with fixed interest rates to secure full marks.

 

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. It represents the ownership interest of a shareholder in the business.
In simple words: A share is like a tiny, individual slice of a company's total value that anyone can buy to own a part of that company.

🎯 Exam Tip: Always use the key phrase "smallest unit of the share capital" to get full marks for this definition.

 

Question 2. What are equity shares?
Answer: Equity shares are those shares which do not carry any preferential right in respect of dividend or repayment of capital. They are also known as ordinary shares.
In simple words: Equity shares are standard shares that do not get any special priority for dividends or getting money back if the company closes down.

🎯 Exam Tip: Clearly state that equity shares do not have "preferential rights" to distinguish them from preference shares.

 

Question 3. What are preference shares?
Answer: Preference shares are shares that have preferential rights with regard to receiving dividends and repayment of capital. These shareholders are given priority over equity shareholders when profits are distributed.
In simple words: Preference shares are special shares where owners get paid their share of profits first. If the company closes down, they also get their money back before other regular shareholders.

🎯 Exam Tip: Remember to highlight the two key preferential rights: priority in dividend payment and priority in capital repayment during winding up.

 

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. This internal source of finance is often referred to as plowing back of profits.
In simple words: Retained earnings are like a company's savings account. Instead of giving all the profit to the owners, the company keeps some money to use for future growth.

🎯 Exam Tip: Use the term "ploughing back of profits" as a key synonym to impress the examiner and secure full marks.

 

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. It represents a long-term debt security with a fixed rate of interest.
In simple words: A debenture is a certificate that proves a company has borrowed money from you and promises to pay it back with interest.

🎯 Exam Tip: Always mention "acknowledgement of debt" and "common seal" as these are critical legal characteristics of a debenture.

 

Question 6. What is a bond?
Answer: A bond is a debt security and a formal contract to repay borrowed money with interest. It is typically issued by governments or large corporations to raise capital for major projects.
In simple words: A bond is an official agreement where you lend money to an organization, and they promise to pay you back with regular interest over time.

🎯 Exam Tip: Clearly distinguish a bond as a formal contract of debt, noting that it is a liability for the issuing organization.

 

Question 7. In which country can ADR be issued?
Answer: ADR (American Depository Receipt) is a depository Receipt that is issued in the USA. It allows US investors to buy shares in foreign companies easily on American stock exchanges.
In simple words: ADRs are special certificates issued only in the United States so that American citizens can invest in foreign companies.

🎯 Exam Tip: Ensure you write the full form of ADR (American Depository Receipt) and specify "USA" clearly in your answer.

 

Question 8. In which country can GDR be issued?
Answer: GDR (Global depository receipt) can be issued in countries other than the USA. This financial instrument allows companies to raise capital from international markets.
In simple words: GDRs are like special certificates that let companies raise money from investors in many different countries around the world, except the United States.

🎯 Exam Tip: Remember that GDRs are traded on international stock exchanges like London or Luxembourg, but specifically exclude the US market where ADRs are used.

 

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. This conversion option provides investors with the potential benefit of capital appreciation.
In simple words: These are loans given to a company that can later be turned into actual ownership shares of the company after a certain amount of time.

🎯 Exam Tip: Clearly state the conversion of debt (debentures) into equity (shares) and mention that this happens after a specific, pre-decided period.

 

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. This ensures that shareholders eventually receive all unpaid dividends before any dividend is paid to equity shareholders.
In simple words: If a company cannot pay dividends to these shareholders in a bad year, the unpaid amount is carried forward and paid in the future when the company makes a profit.

🎯 Exam Tip: Use the keyword 'accumulates' to explain how unpaid dividends are carried forward to future years.

 

Correct the Underlined Words and Rewrite the Following Sentences

 

Question 1. Owned capital is temporary capital.
Answer: Owned capital is permanent capital. This capital remains with the company throughout its lifetime and is only returned during liquidation.
In simple words: The money invested by the owners stays in the business permanently and is not returned after a short time.

🎯 Exam Tip: Always replace 'temporary' with 'permanent' when discussing owned capital like equity shares.

 

Question 2. Equity shares get dividends at a fixed rate.
Answer: Equity shares get dividends at fluctuating rates. The dividend rate depends entirely on the profits earned by the company in a financial year.
In simple words: Equity shareholders do not get a fixed amount of profit share; their returns go up when the company does well and down when it does poorly.

🎯 Exam Tip: Remember that equity shareholders bear the maximum risk, which is why their dividend rate fluctuates.

 

Question 3. Preference shares get dividends at fluctuating rates.
Answer: Preference shares get dividends at a fixed rate. This rate is predetermined at the time of issuing these shares to the investors.
In simple words: Preference shareholders are promised a set, unchanging percentage of dividend every year before others are paid.

🎯 Exam Tip: Associate 'preference shares' with 'fixed rate' of dividend to secure full marks.

 

Question 4. Retained earnings are an external source of finance.
Answer: Retained earnings are an internal source of finance. This represents the portion of net profits that is kept aside and reinvested back into the business.
In simple words: Retained earnings are like a company's personal savings account, meaning the money comes from inside the business itself.

🎯 Exam Tip: Identify retained earnings as 'ploughing back of profits', which makes it an internal source of funding.

Question 5. The debenture holder is the owner of the company.
Answer: The debenture holder is a creditor of the company. They do not have ownership rights or voting rights in the company's decision-making.
In simple words: A debenture holder is a lender to the company, making them a creditor rather than an owner.

🎯 Exam Tip: Remember that shareholders are the owners, while debenture holders are creditors who receive a fixed rate of interest.

 

Question 6. Bond is a source of short-term finance.
Answer: Bond is a source of long-term finance. It is a debt security issued by a company or government to raise large amounts of capital for a long period.
In simple words: A bond is used to borrow money for a long period of time, not for short-term needs.

🎯 Exam Tip: Clearly distinguish between short-term sources (like trade credit) and long-term sources (like shares and bonds) to avoid confusion.

 

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. It allows US investors to buy shares in foreign companies easily.
In simple words: Depository receipts traded specifically in the US markets are called American Depository Receipts (ADRs).

🎯 Exam Tip: Remember the geographical distinction: ADRs are traded in the USA, while GDRs are traded in international markets outside the USA.

 

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. This capital carries a fixed rate of interest and must be repaid after a specific period.
In simple words: Borrowed capital is money that a business borrows from external sources and must pay back with interest.

🎯 Exam Tip: Mention at least two sources of borrowed capital, such as debentures and bank loans, to secure full marks.

 

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. This capital is permanent in nature and is not refunded during the lifetime of the company.
In simple words: Owned capital is the money brought into the business by its owners, which stays in the company permanently.

🎯 Exam Tip: Highlight that owned capital is permanent capital and does not have a fixed repayment date, unlike borrowed capital.

 

Question 3. Ploughing back of profit
Answer: Ploughing back of profit refers to the process of retaining a part of the company's net profit instead of distributing it all as dividends, and reinvesting it back into the business. This is also known as self-financing or retained earnings.
In simple words: Ploughing back of profit means saving a portion of the company's earnings and using it to grow the business instead of giving it all away to shareholders.

🎯 Exam Tip: Use the term "retained earnings" as a synonym to show a deeper understanding of internal sources of finance.

 

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. This helps the company build a strong financial cushion for future expansion.
• 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.
In simple words: Instead of giving all the profit to the owners, the company saves some of its earnings to use for its own future needs.

🎯 Exam Tip: Clearly define 'retained earnings' as an internal source of finance to secure full marks in short-answer questions.

 

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 provides temporary financial support during cash flow shortages.
• This facility is available to current account holders.
In simple words: An overdraft is like a temporary loan from the bank that lets a business spend more money than it actually has in its account.

🎯 Exam Tip: Remember to mention that the overdraft facility is exclusively available to current account holders, as this is a key distinguishing feature.

 

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. This allows businesses to generate revenue from sales before actually paying for the inventory.
• It is used by business organisations as a source of short-term financing and granted to those having reasonable standing and goodwill.
In simple words: Trade credit is when a supplier lets a business buy goods now and pay for them later, usually within a few weeks or months.

🎯 Exam Tip: Highlight that trade credit is a spontaneous and short-term source of finance that depends heavily on the buyer's 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: Yes, the company is financially sound. Its retained earnings (Rs. 50,00,000) are double its equity share capital (Rs. 25,00,000), which indicates that the company has accumulated significant profits over the years and has a very strong financial base.
In simple words: Yes, the company is in a very strong financial position because it has saved up a large amount of profit over time.

🎯 Exam Tip: When analyzing financial soundness, always compare the retained earnings with the share capital to justify your conclusion clearly.

p>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. This process helps in converting accumulated profits into share capital.
In simple words: Yes, a company can turn its saved profits into official capital by issuing free bonus shares to its existing owners.

🎯 Exam Tip: Remember to use the term 'capitalisation of reserves' as it is the key technical term examiners look for.

 

Question (c). What type of source retained earning is?
Answer: Retained earning is self-financing or an internal source of finance. It represents the portion of net profits that is not distributed as dividends but is plowed back into the business.
In simple words: Retained earnings are like a company's personal savings account, which is an internal way to fund its own growth.

🎯 Exam Tip: Clearly state both 'internal source' and 'self-financing' to secure full marks for this classification.

 

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. Speculators generally prefer high-risk, high-reward instruments like equity.
In simple words: Since he wants to make quick and large profits, he will choose equity shares because their value and dividends can grow rapidly.

🎯 Exam Tip: Connect the speculator's risk-taking nature directly with the fluctuating nature of equity shares to justify your choice.

 

Question (b). What does he receive as a return on investment?
Answer: He receives a fluctuating rate of dividends. This return depends entirely on the profits earned by the company during the financial year.
In simple words: He gets a share of the profits called a dividend, which goes up when the company does well and down when it does poorly.

🎯 Exam Tip: Always specify that the dividend rate is 'fluctuating' rather than fixed when dealing with equity shares.

 

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. This gives him a voice in the key decision-making processes of the company.
In simple words: As a shareholder, he gets the right to attend company meetings and vote on important decisions.

🎯 Exam Tip: Mentioning the 'right to vote' is the easiest and most impactful right to remember for equity shareholders.

 

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. This choice helps him avoid the volatility associated with equity markets.
In simple words: Mr. Rohit wants a safe investment with regular income. Therefore, he should choose preference shares because they are safer than regular shares.

🎯 Exam Tip: When a question mentions low risk and steady income, the answer is almost always preference shares.

 

Question (b). What does he receive as a return on his investment?
Answer: Mr. Rohit will receive dividends in return. These dividends are paid out of the company's profits before any payments are made to equity shareholders.
In simple words: When you invest in shares, the company shares its profits with you. This share of profit is called a dividend.

🎯 Exam Tip: Remember that the return on shares (both equity and preference) is always called a dividend, whereas the return on debentures is interest.

 

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. This fixed rate is predetermined at the time of issuing the preference shares.
In simple words: Since he chose preference shares, his profit share (dividend) will remain at a set percentage and will not change even if the company makes huge profits.

🎯 Exam Tip: Clearly state "fixed" and explain that preference shares carry a predetermined rate of dividend, unlike equity shares.

 

Distinguish Between the Following

 

Question 1. Equity Shares and Preference Shares
Answer: The primary distinction lies in the priority of payment and the stability of returns.

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.

In simple words: Equity shares have fluctuating dividends and no special priority, while preference shares get a fixed dividend and are paid back first when the company closes.

🎯 Exam Tip: When writing distinction tables, always include a 'Points of Comparison' column to help the examiner quickly grade your answer.

 

Question. Distinguish between Equity Shares and Preference Shares.
Answer: This comparison highlights the fundamental differences in ownership rights, risk profiles, and financial returns between the two classes of shares.

Point of Difference	Equity Shares	Preference Shares
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 Rs. 1/- or Rs. 10/- it is relatively low.	The face value of preference shares is relatively higher i.e. Rs. 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:	Preference shares are classified as:

In simple words: Equity shares are riskier but offer voting rights and higher returns, while preference shares are safer with fixed returns but no normal voting rights.

🎯 Exam Tip: When distinguishing between equity and preference shares, always present your answer in a tabular format with clear points of comparison to secure maximum marks.

Types of Shares

• Equity Shares:
  • Equity shares with normal voting rights.
  • Equity shares with differential voting rights.
• Preference Shares:
  • 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.

Understanding these fundamental differences helps investors choose between ownership and lending options depending on their risk appetite.
In simple words: Shares represent ownership in a company, meaning you own a tiny part of it, while debentures are like loans you give to the company, making you a creditor who gets paid back with interest.

🎯 Exam Tip: Clearly distinguish between 'owner' and 'creditor' status when comparing shares and debentures to secure full marks.

Distinction Between Shares and Debentures

Point of Difference	Shares	Debentures
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 shares	A debenture is classified as: Registered Debentures Bearer Debentures Secured Debentures Unsecured Debentures Redeemable Debentures Irredeemable Debentures Convertible Debentures

🎯 Exam Tip: When distinguishing between shares and debentures, always write the points of difference clearly in a tabular format and highlight key terms like 'ownership capital' versus 'borrowed capital' to secure full marks.

 

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 interest 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	The creditors do not enjoy voting rights at the general

In simple words: Owned capital is the money contributed by the owners (shareholders) of the company, whereas borrowed capital is a loan taken from external creditors that must be repaid with interest.

🎯 Exam Tip: When writing distinction tables, always include the "Points" or "Basis of Comparison" column as it helps you structure your thoughts and secures full marks from the examiner.

Basis of Comparison	Shareholders	Creditors / Debenture Holders
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.

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. This makes it a highly flexible and attractive option for corporate financial planning.

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.
In simple words: A public deposit is when a company borrows money directly from the public for a short period of time. It is a cheaper way for companies to get loans, and it offers good interest rates to the people who invest.

🎯 Exam Tip: To score full marks, remember to highlight the key duration of public deposits, which is 6 to 36 months, and mention that the company issues a 'Deposit Receipt' as proof.

 

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 companies.
• 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. These financial instruments make it incredibly easy for global investors to participate in the growth of Indian industries.
In simple words: GDRs and ADRs are special certificates that let foreign investors buy shares of Indian companies. ADRs are traded specifically in the US, while GDRs are traded in other foreign countries.

🎯 Exam Tip: Clearly highlight the geographical distinction between ADR (USA) and GDR (rest of the world) to secure maximum marks.

 

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. This practice helps in maintaining a smooth flow of inventory without immediate cash outflows. 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.
In simple words: Trade credit is an arrangement where a business can buy goods or services from a supplier and pay for them at a later date. It acts as a short-term, interest-free loan that helps businesses keep running without needing cash immediately.

🎯 Exam Tip: Clearly define trade credit as a non-cash, short-term credit extended by one trader to another, and list at least two key advantages to secure full marks.

 

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. These financial instruments help businesses manage their day-to-day cash flow requirements efficiently.

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.
In simple words: Banks help businesses by lending them money in different ways. They can let businesses withdraw more money than they actually have in their account, provide credit based on security, or give a direct cash loan where the entire amount is put into their account.

🎯 Exam Tip: Clearly distinguish between overdraft, cash credit, and cash loans by highlighting how interest is calculated for each to score full marks.

 

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 bondholder is a creditor and lender of the company. This makes bonds a relatively safe investment option for risk-averse individuals. Since they are creditors, they do not possess voting rights or participate in the management of the company.
(iii) Return on bonds: The bondholder receives a fixed rate of interest at regular intervals or upon maturity.
(iv) Repayment: Bonds are issued for a specific period and have a definite maturity date when the principal amount is repaid.
In simple words: A bond is a formal certificate showing that you have loaned money to a company or government. In return, they promise to pay you back on a set date and give you regular interest payments.

🎯 Exam Tip: To score full marks, always start with the standard definition of a bond and clearly list at least four distinct features with appropriate sub-headings.

Question. Explain the features of bonds.
Answer:
(ii) Status of bondholder:
• 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.
In simple words: Bonds are formal agreements where investors lend money to a company in exchange for regular interest payments and the return of their main amount at a fixed date.

🎯 Exam Tip: Remember that bondholders are creditors of the company, which means they have no voting rights but enjoy a safer, fixed return on their investment.

 

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. They act as the ultimate risk-bearers while enjoying the maximum decision-making power in key corporate matters.
In simple words: Equity shareholders own the company because they take the biggest risks, have the power to vote on important decisions, and elect the directors who run the business.

🎯 Exam Tip: Highlight key terms like 'ultimate risk-bearers', 'voting rights', and 'control over management' to secure full marks in justification questions.

 

Question 2. Preference Shares do not carry normal voting rights.
Answer: Preference shareholders are cautious investors who prefer safety of capital and steady dividend income. They do not enjoy normal voting rights like equity shareholders. They can only vote on resolutions that directly affect their rights, such as a reduction in their dividend or winding up of the company. Their voting power is restricted because their financial returns are secured and prioritized over equity shareholders. Thus, they do not control the day-to-day management of the company.
In simple words: Preference shareholders get fixed dividends and safety first, so they do not get to vote on regular company matters unless it directly affects their own money.

🎯 Exam Tip: Clearly distinguish between 'normal voting rights' of equity shares and 'restricted voting rights' of preference shares to show a clear understanding.

 

Question 2. Preference shares do not carry 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. This ensures their financial interests remain protected.
• 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.
In simple words: Preference shareholders are safe investors who get paid first but do not get to vote on how the company is run. Since they do not take big risks, they do not get voting rights.

🎯 Exam Tip: Mention the exception where preference shareholders can vote, such as when their dividends are unpaid for two or more consecutive years.

 

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. This charge acts as a safety net for investors.
• 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.
In simple words: A secured debenture means the company promises its property as a guarantee. If the company fails to pay back the loan, the lenders can sell those assets to get their money back.

🎯 Exam Tip: Clearly explain the difference between fixed and floating charges to secure maximum marks in this answer.

 

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. This method avoids any external borrowing costs or administrative fees.
• 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.
In simple words: Retained earnings means saving a part of the company's profits to use later. Since the company uses its own saved money, it does not have to pay interest or fees to outsiders.

🎯 Exam Tip: Remember to highlight that retained earnings do not involve any interest payments or dilution of ownership, making it the cheapest source.

 

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. This method of financing helps companies bridge temporary cash flow gaps efficiently.
In simple words: Public deposits are loans taken by a company from the general public for a short period (6 months to 3 years). It is a cheap and easy way for companies to get quick money for their daily needs.

🎯 Exam Tip: Remember the key duration for public deposits: a minimum of 6 months and a maximum of 36 months. Mentioning these specific time limits helps secure full marks.

 

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 interest 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. Since they do not own equity, they do not share in the company's residual profits or voting rights.
In simple words: A bondholder is someone who lends money to a company. Because they are lenders (creditors) and not owners, they get a fixed interest payment but cannot vote or make decisions for the company.

🎯 Exam Tip: Clearly distinguish between a shareholder (owner) and a bondholder (creditor) by highlighting that bondholders receive fixed interest and have no voting rights.

 

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. This makes it a highly flexible short-term financing option for daily operations.
• Thus, it is rightly said, that the trade credit is not a cash loan.
In simple words: Trade credit is when businesses buy goods now and pay later without borrowing actual cash from a bank.

🎯 Exam Tip: Clearly highlight that trade credit does not involve cash movement at the time of transaction to secure full marks.

 

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. This diversity in investor behavior helps keep the financial markets dynamic and liquid.
• Thus, it is rightly said, that the different investors have different choices and preferences.
In simple words: Different people have different goals and comfort levels with risk, so they choose different ways to invest their money.

🎯 Exam Tip: Use examples of different types of investors, like cautious versus risk-taking, to make your answer more impactful.

 

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. Therefore, they bear the maximum risk of loss if the business fails, but also enjoy the highest rewards if it succeeds.
In simple words: Equity capital is called risk capital because equity shareholders are the last to get paid if the company closes down, meaning they take the biggest risk.

🎯 Exam Tip: Remember to use key terms like 'residual claim' and 'winding up' when explaining why equity is risk capital.

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:
• The owner of a share is called a shareholder, which represents the ownership of the shareholder in that company.
In simple words: A share is the smallest individual unit of a company's total capital. When you buy a share, you become a part-owner of that company.

🎯 Exam Tip: Always state the definition of a share according to Section 2(84) of the Companies Act 2013 to secure full marks.

 

Question 1. Explain the features of a share with reference to ownership, distinctive number, evidence of title, value, rights, and income.
Answer: A share shows the ownership of the shareholder. The owner of the share is called a shareholder. This ownership is backed by legal recognition.
(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.
In simple words: A share represents a small unit of ownership in a company. It has a unique identification number, a specific monetary value, gives the owner voting and dividend rights, and earns them a share of the company's profits.

🎯 Exam Tip: Clearly define terms like 'Face Value' and 'Issue Value' under the value of a share sub-heading to secure maximum marks.

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.

🎯 Exam Tip: Clearly distinguish between equity and preference shares based on their preferential rights to dividends and capital repayment to secure full marks in comparative questions.

Types of Shares

• Equity shares
  • Equity shares with normal voting right
  • Equity shares with differential voting rights
• Preference shares
  • Cumulative Preference shares
  • Non-cumulative preference shares
  • Participating preference shares
  • Convertible preference shares
  • Non-Convertible preference shares
  • Redeemable preference shares
  • Irredeemable preference shares

 

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. They represent the primary ownership interest in a company. Equity shares are also known as ordinary shares. Indian Companies Act 1956 defines equity shares as those shares which are 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.
In simple words: Equity shares represent real ownership in a company. The money invested in these shares is permanent and is not returned to the investors during the lifetime of the company.

🎯 Exam Tip: Always define equity shares by contrasting them with preference shares, and emphasize that they represent permanent, risk-bearing capital.

 

Question 1. Explain the features of Equity Shares.
Answer:
(i) Permanent Capital:
• 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. These features make equity shares a riskier but potentially more rewarding investment option compared to other securities.
In simple words: Equity shareholders are the real owners of a company who provide permanent money, get dividends only when there is profit, and have voting rights, but they are paid last if the company closes down.

🎯 Exam Tip: Clearly list and underline the sub-headings like 'Fluctuating dividend' and 'Rights' to help the examiner easily identify key points and award full marks.

 

Question. Explain the following features of Equity Shares: (v) Controlling power, (vi) Risk, (vii) Residual claimants, (viii) No charge on assets, and (ix) Bonus issue.
Answer:
(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. This democratic setup ensures that the ultimate control remains with the actual owners of the business.
(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.
In simple words: Equity shareholders are the real owners of a company who control it by voting and electing directors, but they also take the highest risk because they get paid last and have no security on company assets. However, they enjoy benefits like receiving leftover profits and free bonus shares.

🎯 Exam Tip: Use terms like 'shock absorbers' and 'residual claimants' when explaining equity shares, as examiners look for these specific technical keywords to award full marks.

 

Question. Explain the features of equity shares with reference to rights issue, face value, market value, and capital appreciation.
Answer:
The features of equity shares are explained below:

(ix) Bonus Shares:
• 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 Rs. 10 per share or even Rs. 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 shares.
In simple words: Equity shares offer extra benefits like free bonus shares and priority in buying new shares. Their starting price (face value) is very low, but their market price can go up or down depending on how successful the company is, which helps investors grow their money over time.

🎯 Exam Tip: Clearly define terms like 'Rights Issue' and 'Bonus Shares' using bullet points to make your answer structured and easy for the examiner to read.

 

Question 3. Define preference shares/What are preference shares? What are the different types of preference shares?
Answer: Preference shares are shares that carry preferential rights regarding dividend payments and capital repayment. These shares offer a safer investment route compared to equity shares.
• 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.

Types of Preference Shares:
• On the basis of accumulation of dividend:
    - Cumulative preference shares
    - Non-cumulative preference shares
• On the basis of participation in profits:
    - Participating preference shares
    - Non participating preference shares
• On the basis of conversion:
    - Convertible preference shares
    - Non-convertible preference shares
• On the basis of redemption / repayment:
    - Redeemable preference shares
    - Irredeemable preference shares

(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:
In simple words: Preference shares are special company shares that give investors a fixed dividend and priority over normal shareholders. They are designed for cautious investors who prefer safety and steady income over voting control.

🎯 Exam Tip: Remember to list the classification of preference shares based on accumulation, participation, conversion, and redemption to score maximum marks.

• 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.

Question. Explain Redeemable and Irredeemable Preference Shares.
Answer:
(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, these are the types of preference shares.
In simple words: Redeemable shares can be paid back after a set time, while irredeemable shares are only paid back when the company closes down, though they are not allowed in India.

🎯 Exam Tip: Remember that irredeemable preference shares cannot be issued by any company in India under the Companies Act 2013.

 

Question 4. What are preference shares? State its features.
Answer:
The shares which carry preferential rights are termed preference shares. These shares offer a safer investment option compared to equity 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.

In simple words: Preference shares are special shares that give investors first priority for dividends and getting their money back, making them safer but with less control.

🎯 Exam Tip: Clearly define the two main preferential rights (dividend and capital return) to secure full marks in this question.

(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.

 

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. This type of funding helps companies secure large amounts of capital from the public.
• Debentures represent borrowed capital.
• A person who purchased debenture is called a debenture holder.
In simple words: A debenture is like a loan certificate that a company issues to people when it borrows money from them. The person who lends this money is called a debenture holder and gets regular interest.

🎯 Exam Tip: When defining debentures, always highlight that they represent borrowed capital and that the holder is a creditor of the company to secure full marks.

• 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.”

 

Types Of Debentures

• On the basis of security:
  • Secured debenture
  • Unsecured debenture
• On the basis of transferability:
  • Registered debenture
  • Bearer debenture
• On the basis of repayment:
  • Redeemable debenture
  • Irredeemable debenture
• On the basis of conversion:
  • Convertible debenture
  • Non-convertible debenture

 

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 by 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:

🎯 Exam Tip: Clearly distinguish between redeemable and irredeemable debentures based on their repayment terms, as this is a frequently asked comparison in exams.

 

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 Rs. 100 or multiples of Rs. 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 generally receive priority of payment over other unsecured creditors and shareholders during the liquidation of the company.
In simple words: A debenture is a formal certificate issued by a company to show that it has borrowed money from you, which it promises to pay back with regular interest.

🎯 Exam Tip: To score full marks, clearly state the definition by Topham and list at least four key features with appropriate sub-headings.

 

Question. Explain the features of debentures with reference to priority in repayment, assurance of repayment, terms of issue, authority to issue, interest, and parties involved.
Answer:
Priority in Repayment:
• 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. These features make debentures a highly structured and secure financial instrument for both the company and the investors.
In simple words: Debentures are long-term loans taken by a company with a promise to pay regular interest and return the principal amount on a fixed date. They are highly secure because debenture holders get paid before shareholders if the company closes down.

🎯 Exam Tip: Clearly mention Section 179(3) of the Companies Act 2013 when explaining the authority to issue debentures, as examiners look for specific legal references to award full marks.

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.