Samacheer Kalvi Class 12 Commerce Solutions Chapter 26 Companies Act, 2013

I. Choose the Correct Answers

 

Question 1. The Company will have to issue the notice of situation of Registered Office to the Registrar of Companies within ............ days from the date of incorporation.
(a) 14 days
(b) 21 days
(c) 30 Days
(d) 60 Days
Answer: (c) 30 days
In simple words: A company must tell the Registrar of Companies where its main office is located within 30 days of starting. This rule helps keep company records accurate.

🎯 Exam Tip: Remember specific timeframes like 30 days for legal compliance questions, as they are often key details examiners look for.

 

Question 2. How does a person who envisages the idea to form a company called?
(a) Director
(b) Company Secretary
(c) Registrar
(d) Promoter
Answer: (d) Promoter
In simple words: The person who first thinks of starting a company and puts in the effort to get it going is called a promoter. They are the initial driving force.

🎯 Exam Tip: Understand the different roles in company formation; a promoter's role is crucial in the initial stage.

 

Question 3. For which type of capital a company pays the prescribed fees at the time of registration?
(a) Subscribed Capital
(b) Authorised Capital
(c) Paid-up Capital
(d) Issued Capital
Answer: (b) Authorised Capital
In simple words: A company pays a fee based on its authorised capital when it registers. This authorised capital is the maximum amount of shares the company can ever issue.

🎯 Exam Tip: Differentiate between different types of capital (authorised, issued, subscribed, paid-up) as they relate to company formation and fees.

 

Question 4. Which of the following types of shares are issued by a company to raise capital from the existing shareholders?
(a) Bonus Shares
(b) Rights Shares
(c) Preference Shares
(d) Bonus Shares
Answer: (b) Rights Shares
In simple words: When a company needs more money, it can offer new shares to its current shareholders first. These are called Rights Shares, giving existing owners a chance to buy more.

🎯 Exam Tip: Note that "Bonus Shares" are issued free, while "Rights Shares" are offered for purchase to existing shareholders, often at a discounted price.

 

Question 5. Specify the type of resolution to be passed to choose the location of Registered Office of the company within the town or village or city.
(a) Ordinary
(b) Special
(c) Either Ordinary or Special
(d) Board
Answer: (d) Board
In simple words: The company's board of directors can decide where the registered office will be within the same city or town. This is a common operational decision for them.

🎯 Exam Tip: Understand the difference between board resolutions and shareholder resolutions (ordinary/special) in terms of authority and scope.

 

Question 6. Who can issue stock?
(a) Public
(b) Private
(c) One Person
(d) Small
Answer: (a) Public
In simple words: Only public limited companies are allowed to convert their fully paid-up shares into stock. Private companies cannot do this.

🎯 Exam Tip: Remember that "stock" refers to a consolidated block of fully paid-up shares and is typically associated with public companies.

 

Question 7. Specify the document which comes under the Negotiable Instrument Act.
(a) Share certificate
(b) Share
(c) Share Warrant
(d) Stock
Answer: (c) Share Warrant
In simple words: A Share Warrant is like a special paper that proves you own shares and can be passed to someone else just by handing it over. It falls under laws for negotiable instruments.

🎯 Exam Tip: Know that a Share Warrant is a bearer instrument, meaning whoever holds it is considered the owner, making it easily transferable.

 

Question 8. The shares which are offered to the existing shareholder at free of cost is known as .............
(a) Bonus Share
(b) Equity Share
(c) Right Share
(d) Preference Share
Answer: (a) Bonus Share
In simple words: When a company gives extra shares to its existing shareholders without asking for money, these are called bonus shares. They are a reward from the company's profits.

🎯 Exam Tip: Bonus shares are issued free of cost, increasing the number of shares held by existing shareholders without changing the total capital. This is a key distinction.

 

Question 9. The shares which are offered first to the existing shareholder at reduced price is known as ............
(a) Bonus Share
(b) Equity Share
(c) Right Share
(d) Preference Share
Answer: (c) Right Share
In simple words: When a company offers new shares to its current shareholders first, and often at a lower price than others, these are called Right Shares. This gives them the first chance to buy.

🎯 Exam Tip: Remember that "Right Shares" involve an offer to buy, typically at a discount, while "Bonus Shares" are given for free.

 

Question 10. The issue of shares at to the public.
(a) Premium
(b) Par
(c) Discount
(d) Both at par and Premium
Answer: (c) Discount
In simple words: Issuing shares at a discount means selling them for less than their face value. However, modern company laws often prohibit issuing shares to the public at a discount.

🎯 Exam Tip: While technically an option, issuing shares at a discount is generally restricted or prohibited by company laws to protect investors.

II. Very Short Answer Questions

 

Question 1. What are the four stages of the formation of a company?
Answer: The four main steps in forming a company are:
1. Promotion: This is when someone first gets the idea to start a company.
2. Registration: This involves getting the company officially registered with the government.
3. Capital subscription: This is about raising money by getting people to buy shares.
4. Commencement of business: This is when the company gets permission to officially start its operations.
In simple words: Starting a company involves four steps: first, someone has the idea; second, the company gets registered; third, money is raised from investors; and fourth, the company gets permission to begin working.

🎯 Exam Tip: List the stages in chronological order and briefly explain what happens in each stage to show a clear understanding of the process.

 

Question 2. What is Share?
Answer: A share is seen by an ordinary person as a small part of the company's total capital, with each part having the same value. The company's total capital is divided among many people, and each share has an equal value. These shares represent ownership in the company.
In simple words: A share is a small piece of a company's total money. Many people own these pieces, and each piece (share) is worth the same amount.

🎯 Exam Tip: Define a share as a unit of ownership in a company and mention that it represents a portion of the company's capital.

 

Question 3. What are Bonus Shares?
Answer: Bonus shares are new shares that a company gives to its current shareholders without asking for any money. The company uses its reserves and extra profits to do this. This is done to reward existing shareholders and convert profits into capital.
In simple words: Bonus shares are free shares a company gives to its current owners, using its stored up profits instead of asking for more money.

🎯 Exam Tip: Highlight that bonus shares are issued free of cost from accumulated reserves, not by collecting new funds from shareholders.

 

Question 4. What are Right Shares?
Answer: If a company's rules allow it, Right Shares can be issued to current shareholders when the company wants to raise more capital. This means the existing shareholders get the first chance to buy new shares, usually on a proportional basis. This helps the company get more investment from people who already own part of it.
In simple words: Right Shares are new shares that a company offers first to its existing owners, letting them buy more parts of the company before anyone else.

🎯 Exam Tip: Emphasise that Right Shares give existing shareholders a preferential right to subscribe to new shares, maintaining their proportional ownership.

 

Question 5. What is Debentures?
Answer: A debenture is a loan certificate issued by a company when it needs money for expansion or development, but does not want to increase its share capital. It is like borrowing money from the general public for a set period and at a fixed interest rate. This allows the company to get funds without giving up more ownership.
In simple words: Debentures are like IOUs from a company, where it borrows money from people for a set time and pays them back with interest.

🎯 Exam Tip: Focus on debentures being a form of debt, not ownership, with fixed interest payments and a repayment date.

III. Short Answer Questions

 

Question 1. What do you understand by Issue of Securities at Premium?
Answer: When shares are sold for a price higher than their original face value, they are said to be issued at a premium. For example, if a share has a face value of Rs.10 but is sold for Rs.12, then Rs.2 is the premium. This extra money collected from the premium can be used for things like writing off early expenses or costs related to issuing shares and debentures. This helps the company cover initial costs or strengthen its financial position.
In simple words: Issuing shares at a premium means selling them for more money than their basic value. The extra money can be used by the company for specific expenses.

🎯 Exam Tip: Clearly define premium as the amount received above face value and list at least two ways this premium amount can be utilised by the company.

 

Question 2. Explain different Kinds of Preference shares.
Answer: There are several kinds of preference shares:
• Cumulative: These shares carry forward any unpaid dividends (profits) from one year to the next until they are fully paid.
• Redeemable: Such preference shares can be bought back by the company after a specific time or after giving proper notice.
• Convertible: These preference shares can be changed into equity shares based on certain conditions mentioned in the agreement.
• Participating: These shares get a right to participate in extra profits of the company after the equity shareholders have been paid their dividends.
In simple words: Preference shares come in different types, like cumulative (where unpaid profits add up), redeemable (can be bought back by the company), convertible (can change into regular shares), and participating (get a share in extra profits).

🎯 Exam Tip: Be sure to name each type of preference share and provide a brief, clear explanation of its unique feature or benefit.

IV. Long Answer Questions

 

Question 1. Write the difference between Debentures and Shares:
Answer:

In simple words: Debentures are like loans to a company, giving fixed interest, while shares mean owning a part of the company, giving variable dividends. Debenture holders are creditors, while shareholders are owners.

🎯 Exam Tip: When comparing, create a clear table with distinct points of difference for easy understanding and better scoring. Focus on their nature as debt vs. equity.

 

Question 2. Brief different stages in Formation of a Company.
Answer: The formation of a company generally involves different stages, starting from the initial idea to finally being able to start business operations.
Section 3 (1) of the Act says that a company can be formed for any legal reason by:
• Seven or more people, if it's a public company.
• Two or more people, if it's a private company.
• One person, if it's a One Person Company.
The actual process of forming a company has several key stages:
1. Promotion: This stage starts when someone first gets the idea to form a company. They explore the business opportunity and gather initial resources.
2. Registration: This is the second step, also called incorporation. Here, the person (promoter) decides the company's name, prepares important documents like the Memorandum and Articles of Association, sets up the registered office, and names the directors. After all this, the company receives a certificate of incorporation, legally recognizing its existence.
3. Capital Subscription: A public limited company that has share capital needs to go through two steps to raise money. These steps involve:
1. Completing paperwork to raise capital.
2. Issuing a prospectus (a document inviting the public to buy shares).
3. Appointing an official banker to handle money.
4. Passing a resolution to allocate shares to investors.
4. Commencement of Business: According to section 11 of the Act, a company with share capital must file a declaration with the Registrar. This declaration states that:
1. Every person who agreed to buy shares in the Memorandum of Association has paid for them.
2. The paid-up capital is at least Rs.5 lakhs for a public limited company and Rs.1 lakh for a private limited company.
3. The company has informed the Registrar about the verification of its registered office.
After completing these details, the Registrar will issue a certificate allowing the company to start its business operations. This certificate means the company is legally allowed to begin trading.
In simple words: Forming a company has stages: first, someone thinks of the idea (promotion); then it's officially registered; after that, it collects money from investors (capital subscription); and finally, it gets permission to start working (commencement of business).

🎯 Exam Tip: Remember to name and briefly explain each of the four main stages: Promotion, Registration (or Incorporation), Capital Subscription, and Commencement of Business, including the minimum number of members for different company types.

 

Question 3. What are the various kinds of Debentures?
Answer: Debentures can be categorised in several ways based on their features:
I. On the Basis of Registration:
a) Registered Debentures: These debentures are issued in the name of a specific person, whose name is recorded on the debenture certificate and in the company's debenture holder register.
b) Bearer Debentures: These are issued to whoever holds them (the bearer). The name of the owner does not appear on the certificate or in the register. They are like negotiable instruments, meaning they can be transferred just by handing them over.
II. On the Basis of Security:
a) Secured Debentures (Mortgage): These debentures are protected by a charge (like a pledge) on the company's fixed assets. If the company fails to pay interest or the main amount, investors can sell those assets to recover their money.
b) Unsecured Debentures: These debentures are not protected by any specific assets. There is no security if the company fails to make interest or principal payments.
III. On the basis of Redemption:
a) Redeemable Debentures: These debentures have a condition that they will be bought back (redeemed) by the company on a specific date, when requested, or after giving notice, often through a system of regular repayments.
b) Irredeemable Debentures (Perpetual): For these debentures, the company does not specify a particular time to pay back the money. They are repaid only when the company is winding up or in case of a breach of conditions.
IV. On the basis of Convertibility:
a) Convertible Debenture (fully) [FCD]: These debentures can be fully changed into equity shares. The company decides the ratio for this conversion. They may also be partly convertible (PCD) or have an option for the investor to convert (OCD).
b) Non-Convertible Debentures: These debentures cannot be changed into equity shares. They remain as debt instruments until maturity.
In simple words: Debentures come in different types: some are recorded with names, others are just passed by hand; some are backed by company assets, others are not; some are paid back at a fixed time, others are not; and some can be turned into company ownership, while others cannot.

🎯 Exam Tip: Classify debentures systematically based on key characteristics like registration, security, redemption, and convertibility. Provide a short description for each type.

Additional Important Questions And Answers

I. Choose the Correct Answers

 

Question 1. According to New Companies Act 2013, the maximum number of members for private companies is ............
(a) 200
(b) 300
(c) 400
(d) No limit
Answer: (a) 200
In simple words: Under the 2013 Company Act, a private company can have a maximum of 200 members. This limit helps keep private companies smaller and more controlled.

🎯 Exam Tip: Memorise the maximum member limits for both private and public companies under the Companies Act, 2013, as it's a frequently tested fact.

 

Question 2. A minimum number of members for a public limited company is ............
(a) 2
(b) 3
(c) 5
(d) 7
Answer: (d) 7
In simple words: To start a public limited company, you need at least 7 people. This is because public companies can raise money from many people and have more owners.

🎯 Exam Tip: Distinguish between the minimum members for a private company (2), a One Person Company (1), and a public company (7).

 

Question 3. In accordance with whose advice, directions, or instructions the Board of Directors of the company is accustomed to act is a ............
(a) Director
(b) Shareholder
(c) Promoter
(d) MD
Answer: (c) Promoter
In simple words: The promoter is the person who first starts the company. The board of directors often follows their advice and instructions, especially in the early stages, as they set the initial vision.

🎯 Exam Tip: Understand that while directors manage, the promoter often has significant influence, especially during the company's formation and initial strategy. This question may imply a 'shadow director' or 'de facto director' influence, but within the provided options, 'Promoter' is the most suitable for setting initial direction.

 

Question 4. A fraction or portion of the total capital of the company which has equal denomination is known as ............
(a) stock
(b) Share
(c) Debenture
(d) Warrant
Answer: (b) Share
In simple words: A share is a small, equal part of a company's total money. Owning a share means you own a piece of the company.

🎯 Exam Tip: Reiterate the basic definition of a share as the smallest unit of capital, representing ownership in a company.

 

Question 5. Pick the odd one out:
(a) Redeemable Shares
(b) Redeemable Debentures
(c) Ir-redeemable Shares
(d) Converting Shares
Answer: (b) Redeemable Debentures
In simple words: "Redeemable Debentures" are different because they are a type of loan, while "Redeemable Shares", "Ir-redeemable Shares", and "Converting Shares" all refer to types of ownership shares.

🎯 Exam Tip: Distinguish between shares (equity) and debentures (debt) to correctly identify the odd one out in questions like these.

 

Question 6. Pick the odd one out:
(a) NCD
(b) PCD
(c) QCD
(d) BCD
Answer: (d) BCD
In simple words: NCD, PCD, and QCD are all types of debentures (Non-Convertible, Partially Convertible, Qualified Convertible Debentures), which are debt instruments. BCD is not a recognised term for a type of debenture.

🎯 Exam Tip: Familiarise yourself with common abbreviations for different types of debentures, such as NCD, PCD, and FCD.

 

Question 7. Which one of the following is not correctly matched?
(a) C.A. – Member of the Institute of Chartered Account
(b) ICWA – Institute of Cost and works Accountant
(c) CLB – Company Legislative Board
(d) NCLT – National Company Law Tribunal.
Answer: (c) CLB – Company Legislative Board
In simple words: The term "Company Legislative Board" for CLB is incorrect. The correct full form for CLB is "Company Law Board". The others are correctly matched.

🎯 Exam Tip: Pay close attention to the exact wording in full forms of abbreviations, as a single incorrect word can make the match wrong.

II. Match The Following.

 

Question 1.

(a) i-4, ii-3, iii-2, iv-1
(b) i-3, ii-4, iii-1, iv-2
(c) i-2, ii-1, iii-4, iv-3
(d) i-1, ii-2, iii-3, iv-4
Answer: (a) i-4, ii-3, iii-2, iv-1
In simple words: Bonus Shares come from profits (4). Sweat Equity Shares are given to employees (3). Right Shares are offered to current equity shareholders (2). Private Placement means selling to a select group (1).

🎯 Exam Tip: Match each term with its primary characteristic or purpose. Bonus shares capitalize profits, sweat equity goes to employees, right shares go to existing shareholders, and private placement targets a select group.

 

Question 2.

(a) i-4, ii-3, iii-1, iv-2
(b) i-4, ii-3, iii-2, iv-1
(c) i-3, ii-4, iii-1, iv-2
(d) i-2, ii-1, iii-4, iv-3
Answer: (b) i-4, ii-3, iii-2, iv-1
In simple words: "Issued at par" means at face value (4). "Issued at Premium" means above face value (3). "Issued at Discount" means below face value (2). A "Public Issue" is done through a prospectus (1).

🎯 Exam Tip: Connect each issuance term (par, premium, discount) with its price relative to face value. Remember that a public issue always involves a prospectus to invite public subscription.

 

Question 2. Match the following.

(a) i-4, ii-3, iii-2, iv-1
(b) i-4, ii-3, iii-2, iv-1
(c) i-3, ii-4, iii-1, iv-2
(d) i-2, ii-1, iii-4, iv-3
Answer: (b) i-4, ii-3, iii-2, iv-1
This means:
i. Issued at par matches 4. Face value.
ii. Issued at Premium matches 3. Above the face value.
iii. Issued at Discount matches 2. Below the face value.
iv. Public Issue matches 1. Through Prospectus is Issued.
In simple words: When shares are issued 'at par', it means they are sold at their face value. 'At premium' means above face value, and 'at discount' means below face value. A 'public issue' is when shares are offered to the general public, usually through a prospectus.

🎯 Exam Tip: When matching, always carefully read both lists and eliminate options you know are incorrect first to narrow down the choices.

 

III. Assertion and Reason

 

Question. Assertion (A) : Debentures constitutes a Loan Reason (R): Gets fixed rate of interest.
(a) Both (A) and (R) are True
(b) Both (A) and (R) are False,
(c) (A) is True (R) is False.
(d) (A) is False (R) is True
Answer: (a) Both (A) and (R) are True
In simple words: Debentures are indeed a type of loan taken by a company. The people who buy debentures, called debenture holders, receive a fixed interest payment on their investment. This makes them a predictable way for companies to borrow money and for investors to earn a steady income.

🎯 Exam Tip: Remember that debentures represent debt, not ownership, and their interest payments are usually fixed, unlike dividends on shares which can vary.

 

IV. Very Short Answer Questions

 

Question 1. What is Stock?
Answer: Stock refers to fully paid-up shares that can be converted from existing shares, usually bypassing an ordinary resolution if the company's articles allow it. This conversion helps simplify management of large blocks of fully paid shares. These shares can also be reconverted back into individual shares.
In simple words: Stock is like a big bundle of fully paid shares that a company can create. It makes managing many shares easier.

🎯 Exam Tip: Remember that stock represents fully paid-up shares and is often used for administrative convenience, differing from individual shares which may not be fully paid.

 

Question 2. What is Share Certificate?
Answer: A share certificate is a written document that acts as legal proof of a person's ownership of shares in a company. It includes important details like the company's name, the date it was issued, information about the shareholder, how many shares are held, their face value, the amount paid up, and a unique definite number for identification. This document serves as clear evidence for ownership.
In simple words: A share certificate is a paper that proves you own shares in a company. It shows how many shares you have and other important details.

🎯 Exam Tip: Emphasize that a share certificate is legal proof of ownership and includes all essential identifying details of the shareholding.

 

Question 3. Mention the stages to form a Company.
Answer: The main stages involved in forming a company are:

• Promotion
• Registration
• Capital Subscription
• Commencement of Business

Each stage involves specific legal and administrative steps that ensure the company is properly established and ready to operate.
In simple words: To start a company, you first get the idea (promotion), then register it, then collect money (capital subscription), and finally start doing business.

🎯 Exam Tip: Listing all four stages correctly is crucial. Briefly understanding what each stage entails helps reinforce the answer.

 

Question 4. What is a Memorandum of Association? [MOA]
Answer: The Memorandum of Association (MOA) is a very important legal document that acts as the company's charter, defining its purpose and scope of operations (external management). It clearly sets out the boundaries within which the company can conduct its business. The MOA contains several key clauses: Name, Object, Situation, Capital, Liability, and Subscription.
In simple words: The MOA is the main rulebook for a company. It says what the company's name is, what it will do, where it is located, how much money it has, and who its first owners are.

🎯 Exam Tip: Remember that the MOA defines the company's external relationship and its fundamental powers, making it a critical document for any company.

 

Question 5. What is Articles of Association? [AOA]
Answer: The Articles of Association (AOA) is the second most important document for a company, setting out the rules and regulations for its internal management. While the MOA defines the company's external scope, the AOA governs how the company will operate internally, including the rights and duties of its members and directors.
In simple words: The AOA is a rulebook that tells how the company will work inside. It covers things like how meetings are held and how decisions are made.

🎯 Exam Tip: Differentiate AOA (internal rules) from MOA (external scope) to score full marks. The AOA guides the everyday operations and governance.

 

Question 6. What is issue of shares at Par or Face value?
Answer: When shares are issued at their face value or nominal value, it is known as issuing shares "at par." For example, if a share has a face value of Rs.10 and is issued for Rs.10, it is considered issued at par. This means the company sells the shares for their original listed price.
In simple words: Shares are issued "at par" when they are sold for the same price as their original value, like selling a Rs.10 share for Rs.10.

🎯 Exam Tip: Understand that 'at par' means the issue price exactly equals the nominal (face) value of the share.

 

Question 7. What do you mean by Equity Share?
Answer: An Equity Share is a type of share that does not carry any special or preferential rights regarding dividends or the repayment of capital when a company is closed down (liquidated). These are also known as "ordinary" shares, and their holders are considered the true owners of the company, sharing in its profits and losses.
In simple words: Equity shares are regular shares. They don't have special rights for getting profits or money back first when a company closes.

🎯 Exam Tip: The key characteristic of equity shares is their lack of preferential rights, making them the most common form of ownership in a company.

 

Question 8. What do you understand by Preference Share?
Answer: A Preference Share is a type of share that gives its holders special rights over equity shareholders. These preferential rights typically include getting a fixed rate of dividend before equity shareholders and receiving their share capital back first if the company is liquidated. This makes them a more stable investment than equity shares.
In simple words: Preference shares are special shares that get fixed profits (dividends) first and also get their money back before others if the company closes.

🎯 Exam Tip: Focus on the two main preferential rights: fixed dividends and priority in capital repayment, to clearly distinguish them from equity shares.

 

Question 9. What is Sweat Equity Shares?
Answer: Sweat Equity Shares are shares issued by a company to its employees or directors at a reduced price (discount) or for reasons other than cash payment. These shares are given in exchange for providing special know-how, intellectual property rights, or any other valuable contributions that benefit the company.
In simple words: Sweat Equity shares are special shares given to employees or directors. They get them cheaper or for their skills, not just for money.

🎯 Exam Tip: Highlight that sweat equity shares are compensation for non-cash contributions like expertise or intellectual property, often at a discounted price.

 

Question 10. What is Private placement?
Answer: Private Placement is a process where a company offers its securities (like shares or debentures) to a select group of identified investors or clients, instead of offering them to the general public. This is done through a private placement offer letter. It's often used to raise capital quickly and avoids the lengthy process of a public offering.
In simple words: Private placement means selling shares or other investments only to a few chosen people or groups, not to everyone.

🎯 Exam Tip: The key feature of private placement is the offer of securities to a limited, specific group of investors, distinct from a public offering.

 

Question 11. Define Share Warrant.
Answer: A Share Warrant is a negotiable instrument, which means it can be freely transferred by simply handing it over. It is issued only by a public limited company, and only against fully paid-up shares. This document acts as a "Document of Title," entitling the holder to the number of shares mentioned on it, making it easy to transfer ownership.
In simple words: A share warrant is like a ticket for fully paid shares from a public company. You can pass it to someone else just by giving it to them.

🎯 Exam Tip: Remember that share warrants are negotiable instruments, always for fully paid shares, and issued by public companies, enabling easy transfer of ownership.

 

Question 12. Who is called as Promoters?
Answer: Promoters are the individuals who first conceive the idea of forming a company and take all the necessary steps to bring it into existence. The promotion stage begins with their initial thought to form a company. They are the ones who envisage the idea and turn it into a reality, initiating all the required actions to set up the business.
In simple words: Promoters are the people who get the idea to start a company and then do all the first steps to make it happen.

🎯 Exam Tip: A promoter is the person who envisions and takes the initial steps to form a company, crucial for its very inception.

 

V. Short Answer Questions

 

Question 1. What are the features of Debentures?
Answer: Here are the key features of debentures:

• A debenture certificate is issued by the company under its common seal, serving as official proof.
• It is considered a movable property, meaning it can be transferred from one person to another.
• Debenture holders are creditors of the company, not owners.
• Debentures carry a fixed rate of interest, paid regularly to the holders.
• They can be either unsecured (no specific asset backing) or secured (backed by company assets).
• Debentures are typically redeemed (paid back) after a specific period of time.

Debentures provide a way for companies to borrow money for a set period at a fixed interest rate.
In simple words: Debentures are like loans a company takes. They are certificates, can be moved, pay a fixed interest, make you a lender, and get paid back later.

🎯 Exam Tip: When listing features, remember debentures represent debt, offer fixed returns, and have a defined repayment period, distinguishing them from shares.

 

Question 2. What is a Memorandum of Association? What are its contents?
Answer: The Memorandum of Association (MOA) is a foundational document for a company, acting as its constitution. It defines the company's scope and its relationship with the outside world. This document outlines the boundaries within which the company can legally operate. The MOA contains several important clauses that specify key aspects of the company:

• Name clause: States the official name of the company.
• Object clause: Defines the main business activities and purposes of the company.
• Liability clause: Specifies the liability of the members (usually limited).
• Association clause: Declares the desire of the signatories to form a company.
• Capital clause: Details the authorized share capital of the company.
• Situation clause: Mentions the state where the company's registered office is located.

Understanding these clauses is vital for legal and operational compliance.
In simple words: The MOA is the main rulebook for a company. It states the company's name, what it does, how much money it has, where it is, and who started it.

🎯 Exam Tip: To answer this thoroughly, first define MOA and then clearly list and briefly explain each of its essential clauses.

 

Question 3. Distinguish between shares and stocks.
Answer: Here's a comparison between shares and stocks:

Shares represent individual units of capital with a specific face value, while stock often refers to a consolidated block of fully paid-up shares without a nominal value.
In simple words: Shares can be partly or fully paid and have a fixed value and number. Stocks are always fully paid and don't have a fixed value or number, they are like a large collection of shares.

🎯 Exam Tip: Remember that shares are identifiable units with a face value, whereas stock is a consolidated form representing fully paid capital without individual nominal values.

 

Question 4. What is the issue of shares at discount? What conditions should be fulfilled?
Answer: Issuing shares at a discount means selling them at a price lower than their face (nominal) value. For example, if a share has a face value of Rs.10 but is issued for Rs.9, then Rs.1 is the discount. However, under the Companies Act 2013, the issue of shares at a discount is generally prohibited to protect investors and maintain fair market practices.

Conditions (if it were allowed under older rules or special circumstances):

• The first issue of shares should not be at a discount.
• A period of one year must have passed since the company commenced business.
• The discount rate should not exceed 10% on the nominal value.

It's important to note the current legal restrictions.
In simple words: Issuing shares at a discount means selling them for less than their original price. However, this is mostly not allowed by law now. In the past, there were rules like not doing it for the first sale, waiting a year, and keeping the discount small.

🎯 Exam Tip: Clearly state that issuing shares at a discount is generally prohibited under current law, and then discuss historical conditions or exceptions if the question implies prior regulations.

 

VI. Long Answer Questions

 

Question 1. What formalities need to be fulfilled for companies having share capital to commence business?
Answer: For a company with share capital to begin its business operations, several formalities must be completed as per Section 11 of the Companies Act. These requirements ensure that the company is properly capitalized and registered:

• The company must file a declaration with the Registrar of Companies stating that every subscriber to the Memorandum of Association (MOA) has paid the full value of the shares they agreed to take.
• The paid-up capital of the company must meet the minimum thresholds: not less than Rs.5 lakhs for a public limited company and Rs.1 lakh for a private limited company. These minimums ensure a certain level of financial stability.
• The company must also file with the Registrar a verification of its registered office address.
• These restrictions outlined in Section 11 specifically apply to companies that have a share capital.
• Once all these formalities are completed, the company can commence its business activities and exercise its borrowing powers immediately after its incorporation.

Fulfilling these steps is essential for legal operation.
In simple words: To start business, a company with shares must tell the government that all shareholders have paid their money. It must have a minimum amount of paid-up money (Rs.5 lakhs for public, Rs.1 lakh for private companies), and show its office address. After these checks, it can start working.

🎯 Exam Tip: Focus on the three key aspects: payment for subscribed shares, minimum paid-up capital requirement, and filing of registered office verification, all under Section 11.

 

Question 2. Write the difference between Share Certificate and Share Warrant.
Answer: Here are the differences between a Share Certificate and a Share Warrant:

Share certificates serve as proof of ownership and are registered, while share warrants are bearer documents for fully paid shares, offering easier transferability.
In simple words: A share certificate shows registered ownership and needs a deed to transfer. A share warrant is a simple paper that can be passed by hand for fully paid shares, and only public companies can give them.

🎯 Exam Tip: Key distinctions include transfer method (deed vs. delivery), amount paid (partly vs. fully), who issues them (private/public vs. only public), and whether they are registered (certificate) or bearer (warrant).