Ch8 ACCOUNTING FOR SHARE CAPITAL

CHAPTER 8 

ACCOUNTING FOR SHARE CAPITAL

 

ONE WORD TO ONE SENTENCE QUESTIONS

Q.1. What is joint stock company?

Ans. A joint stock company is a form of business organization where the ownership is divided into shares, and the capital is contributed by multiple shareholders. It is a legal entity separate from its owners, and the liability of shareholders is limited to the value of their shares. The company's operations are managed by a board of directors elected by the shareholders. It can raise capital by issuing shares to the public through initial public offerings (IPOs) and can have a large number of shareholders. The company's lifespan is not dependent on the existence of its shareholders, as it can continue to operate even if the ownership changes.

 

Q.2. What is meant by’ ’share’’?

Ans. A share is a unit of ownership in a company, typically represented by a certificate or electronic record. It represents a portion of the company's capital and ownership rights. When someone owns shares in a company, they are referred to as a shareholder or stockholder. The ownership of shares gives individuals certain rights, such as voting rights in company matters, the right to receive dividends, and the right to share in the company's profits or losses. Shares can be bought, sold, or transferred, allowing investors to participate in the growth and success of the company.

 

Q.3. What are the various types of share of a company can issue?

Ans. A company can issue various types of shares, including:

Ordinary Shares: Also known as common shares, these are the most common type of shares issued by a company. Ordinary shareholders have voting rights and are entitled to receive dividends and share in the profits of the company.

 

Preference Shares: These shares give preference to the shareholders in terms of receiving dividends and distribution of assets in the event of the company's liquidation. Preference shareholders typically do not have voting rights or have limited voting rights.

Cumulative Preference Shares: These shares entitle the shareholders to receive unpaid dividends in future years if the company is unable to pay dividends in a particular year. The unpaid dividends accumulate and are paid out in subsequent profitable years.

Redeemable Shares: Redeemable shares are shares that can be repurchased by the company at a specified future date or upon certain conditions being met. This allows the company to buy back its own shares from shareholders.

Non-Voting Shares: Non-voting shares, as the name suggests, do not carry voting rights. These shares are often issued to investors or employees as a means of providing them with ownership in the company without the ability to influence decision-making through voting.

Preference Convertible Shares: These shares start off as preference shares but can be converted into ordinary shares at a later date based on predetermined conditions and conversion ratios.

It's important to note that the specific types of shares that a company can issue may vary depending on the jurisdiction and the company's articles of association or bylaws.

 

Q.5. What is sweat equity shares?

Ans. Sweat equity shares refer to shares issued by a company to its employees or directors as a form of compensation for their contribution in the form of skills, expertise, or intellectual property rather than monetary investment. These shares are offered at a discounted price or for free, and they enable the employees or directors to become shareholders and benefit from the company's growth and success. Sweat equity shares are a way for companies to incentivize and reward their employees or directors for their valuable contributions to the company's development and performance.

 

Q.6. What is nominal capital?

Ans. Nominal capital refers to the authorized or stated capital of a company, which represents the maximum amount of capital that a company is authorized to raise by issuing shares. It is also known as authorized capital or registered capital. Nominal capital is specified in the company's memorandum of association and represents the initial capital with which the company is formed. It is used as a basis for determining the company's legal and financial capacity, and it sets the limit for the issuance of shares and the company's borrowing capacity. The actual amount of capital raised by the company may be lower than the nominal capital.

 

Q.7. Which shares have fixed rate of dividend?

Ans. Preference shares have a fixed rate of dividend.

 

Q.8. What are Non-cumulate preference shares?

Ans. Non-cumulative preference shares are a type of preference shares where if the company fails to pay dividends in a particular year, the shareholders do not have the right to claim those unpaid dividends in the future. The right to receive dividends is limited to the specific year only, and any unpaid dividends are not carried forward or accumulated.

 

Q.9. What is the maximum number of mambers in a private company?

Ans. The maximum number of members in a private company is 200.

 

Q.10. What do you mean by convertible preference shares?

Ans. Convertible preference shares are a type of preference shares that can be converted into equity shares or ordinary shares of the company at a later point in time. The conversion is typically done based on predetermined terms and conditions specified by the company. By converting their preference shares into equity shares, the shareholders have the opportunity to participate in the ownership and potential future growth of the company. The conversion ratio and other conversion terms are mentioned in the company's memorandum or articles of association.

 

Q.11. What are preference shares?

Ans. Preference shares are a type of shares issued by a company that gives certain preferential rights and benefits to the shareholders. These shares have a fixed rate of dividend that is paid to the shareholders before any dividend is paid to the equity shareholders. Preference shareholders have a priority claim on the assets and earnings of the company in case of liquidation. They also have preference in the repayment of capital over the equity shareholders. However, preference shareholders generally do not have voting rights or the same level of control as equity shareholders.

 

Q.12 What are cumulative preference shares?

Ans. Cumulative preference shares are a type of preference shares where the right to receive dividends is accumulated if they are not paid in a particular year. If the company is unable to pay dividends in any given year, the unpaid dividends on cumulative preference shares carry forward and must be paid in the future, along with the current year's dividend, before any dividend can be paid to the equity shareholders. In essence, cumulative preference shareholders are entitled to receive all their unpaid dividends, both current and accumulated, before any dividends are paid to the equity shareholders.

 

Q.13. What can be maximum number of members in a private company?

Ans. The maximum number of members in a private company varies by jurisdiction. In many countries, including India, the maximum number of members allowed in a private company is 200. However, it's important to note that specific laws and regulations may vary, so it's advisable to consult the relevant company laws of the specific jurisdiction to determine the exact maximum number of members for a private company.

 

Q.14. What is the minimum number of members in a public company?

Ans. The minimum number of members required for a public company varies by jurisdiction. In many countries, including India, the minimum number of members required for a public company is seven. However, it's important to note that specific laws and regulations may vary, so it's advisable to consult the relevant company laws of the specific jurisdiction to determine the exact minimum number of members for a public company.

 

Q.15. What is the minimum number of members in a private company?

Ans. The minimum number of members required for a private company varies by jurisdiction. In many countries, including India, the minimum number of members required for a private company is two. However, it's important to note that specific laws and regulations may vary, so it's advisable to consult the relevant company laws of the specific jurisdiction to determine the exact minimum number of members for a private company.

 

Q.16. What is a private company?

Ans. A private company, also known as a privately held company, is a type of business entity that is owned and controlled by a small group of individuals or non-public shareholders. It is typically formed by a few individuals for conducting private business activities. A private company is characterized by limited liability, restricted transferability of shares, and a smaller number of shareholders compared to a public company. The shares of a private company are not publicly traded on a stock exchange and are usually held by the founders, their families, or a select group of investors.

 

Q.17. What is a public company?

Ans. A public company, also known as a publicly traded company or a public limited company (PLC), is a type of business entity that offers its shares to the general public through a stock exchange or other public market. It is owned by shareholders who can buy and sell shares freely on the open market. A public company is subject to more stringent regulations and reporting requirements compared to a private company. It is required to disclose financial information and other important details to the public, including its shareholders. The shares of a public company are traded openly on stock exchanges, allowing for greater liquidity and the potential for a larger number of shareholders.

 

Q.18. Name different types of share capital?

Ans. Authorized Share Capital: It is the maximum amount of capital that a company is authorized to raise by issuing shares.

Issued Share Capital: It refers to the portion of the authorized share capital that has been issued and allotted to shareholders.

Subscribed Share Capital: It represents the portion of the issued share capital that has been subscribed or taken up by the shareholders.

Paid-up Share Capital: It is the amount of the subscribed share capital that has been fully paid by the shareholders.

Called-up Share Capital: It is the portion of the issued share capital that the company has called upon the shareholders to pay.

Uncalled Share Capital: It represents the remaining amount of the issued share capital that the company has not yet called upon the shareholders to pay.

Reserve Share Capital: It refers to the portion of the share capital that is set aside as reserves, typically for specific purposes such as contingencies or future expansion.

Preference Share Capital: It represents the share capital that carries preferential rights over the equity shares, usually in terms of dividend payment and repayment of capital in case of liquidation.

Equity Share Capital: It refers to the share capital that represents ownership in the company and carries voting rights. Equity shareholders participate in the profits and losses of the company.

Sweat Equity Share Capital: It represents shares issued to employees or directors of a company as a form of compensation for their services or contribution to the company's growth.

 

Q.19. What do you mean by authorised capital?

Ans. Authorized capital, also known as authorized share capital or nominal capital, refers to the maximum amount of capital that a company is legally authorized to issue to shareholders. It is the upper limit set by the company's constitutional documents, such as the Memorandum of Association, and represents the total value of shares that can be offered for subscription. The authorized capital is determined at the time of incorporation or during subsequent changes through the approval of shareholders. It provides the company with flexibility to issue shares as needed for various purposes, such as raising funds, acquiring assets, or expanding the business. However, the company is not obligated to issue the entire authorized capital and can choose to issue shares based on its specific requirements and market conditions.

 

Q.20. What is limited liability?

Ans. Limited liability refers to a legal concept in which the shareholders or owners of a company are not personally responsible for the debts and obligations of the company. In other words, their liability is limited only to the extent of their investment or shareholding in the company. If the company incurs financial losses or faces legal claims, the personal assets of the shareholders are protected, and they are not held personally liable beyond their investment in the company. Limited liability is one of the key advantages of operating a business as a separate legal entity, such as a corporation or a limited liability company (LLC). It provides a level of financial protection to shareholders and encourages investment and entrepreneurship by mitigating personal risk.

 

Q.21 What is minimum amount of application money?

Ans. The minimum amount of application money refers to the minimum initial payment required to be made by an investor when applying for shares in a public issue or initial public offering (IPO) of a company. The specific minimum amount can vary depending on the regulations of the country and the requirements of the stock exchange where the shares are listed. It is typically a nominal amount set by the company or regulatory authorities to ensure that investors have a financial commitment in the shares they are applying for. The minimum amount of application money is usually a fraction of the total value of the shares being applied for and is paid at the time of submitting the application form.

 

Q.22. State the name of capital which refers to that amount which is stated in the memorandum of association as the share capital of the company?

Ans. The capital referred to as the "authorized capital" or "nominal capital" is the amount stated in the memorandum of association as the share capital of a company. It represents the maximum amount of capital that the company is authorized to raise through the issuance of shares. The authorized capital is determined at the time of incorporation and is mentioned in the company's constitutional documents. It sets the limit for the company's fundraising capacity, although the company may choose to issue shares for an amount lower than the authorized capital.

 

Q.23. What is issued capital in kinds of share capital?

Ans. The "issued capital" refers to the portion of the authorized capital that has been issued or allotted by a company to shareholders in the form of shares. It represents the total value of shares that have been offered to and subscribed by the shareholders. The issued capital reflects the actual amount of capital raised by the company through the sale of shares. It may be lower than the authorized capital if the company has not utilized its full authorization to issue shares. The issued capital is recorded on the company's balance sheet and is an important indicator of the company's financial structure and resources.

 

Q.25. What is subscribed capital in kinds of share capital?

Ans. The "subscribed capital" refers to the portion of the issued capital that has been subscribed or agreed to be taken up by shareholders. It represents the value of shares for which shareholders have made a commitment to purchase. Subscribed capital indicates the amount of capital that shareholders have agreed to contribute to the company. It may be equal to or less than the issued capital, depending on the level of subscription by shareholders. The subscribed capital is important for assessing the financial commitment of shareholders and the potential inflow of funds into the company. It is recorded in the company's shareholder register and reflects the shareholders' ownership rights in the company.

 

Q.26. Name the head under which securities premium account will appear in the balance sheet?

Ans. Securities Premium Account will appear under the "Reserves and Surplus" head in the balance sheet of a company.

 

Q.27. Point out the section of companies act dealing with use of share premium money?

Ans. The section of the Companies Act that deals with the use of share premium money is Section 52.

 

Q.28. Whether securities premium can be utilised for paying dividend to the shareholders?

Ans. ecurities premium cannot be utilized for paying dividends to shareholders.

 

Q.29. What do you mean by calls in arrears?

Ans. Calls in arrears refer to the unpaid portion of the call money that shareholders are required to pay on their shares. It represents the amount that a shareholder has failed to pay by the due date specified by the company.

 

Q.30. How calls in arrears are shown I the balance sheet?

Ans. Calls in arrears are shown as a deduction from the called-up share capital in the balance sheet. It is treated as a liability of the company and is presented under the "Shareholders' Equity" or "Share Capital" section. The amount of calls in arrears represents the unpaid portion of the call money owed by shareholders.

 

Q.31. What is minimum subscription?

Ans. Minimum subscription refers to the minimum amount of capital that must be subscribed by the public in response to a company's share issuance. It is the minimum level of financial commitment required from potential shareholders to ensure that the company can proceed with its planned activities. If the minimum subscription is not met, the company cannot issue shares, and any funds received must be refunded to the applicants.

 

Q.32. What is Table ‘F’?

Ans. Table F refers to the prescribed format of Articles of Association for companies under the Companies Act. It is a standard set of model articles that can be adopted by companies as part of their Articles of Association. Table F provides a ready-made template that covers various provisions related to the internal management and governance of the company, including the rights and responsibilities of shareholders and directors, meetings, voting, share capital, dividends, and other important matters. Companies can adopt Table F as it is or make modifications to suit their specific requirements.

 

Q.33. What rate of interest on calls in arrears and on calls in advance is specified in table ‘F’?

Ans. Table F of the Companies Act does not specify any specific rate of interest on calls in arrears or on calls in advance. The rate of interest on calls in arrears and on calls in advance is determined by the company's Articles of Association or any applicable regulations or agreements. The company's Articles of Association may include provisions regarding the rate of interest to be charged on calls in arrears and on calls in advance, and it can vary from company to company. It is important to refer to the specific provisions in the company's Articles of Association or relevant regulations for the applicable rate of interest.

Q.34. What is over subs subscription?

Ans. Oversubscription refers to a situation where the number of shares applied for by investors exceeds the number of shares available for allocation. In other words, it occurs when the demand for shares is greater than the supply. This commonly happens during initial public offerings (IPOs) or when a company issues additional shares. When oversubscription occurs, the company may need to allot shares in a proportional manner or use a lottery system to allocate shares among the applicants. Oversubscription indicates a strong investor interest in the company and its shares.

 

Q.35. what is under-subscription?

Ans. Under-subscription refers to a situation where the number of shares applied for by investors is less than the number of shares available for allocation. In other words, it occurs when the demand for shares is lower than the supply. This can happen when investors are not interested in or confident about the company's shares or when market conditions are unfavorable. In the case of under-subscription, the company may have to take measures such as offering the remaining shares to existing shareholders or issuing the shares to underwriters. Under-subscription indicates a lack of investor interest in the company and its shares.

 

Q.36. How securities premium can be utilised by a company?

Ans. Securities premium can be utilized by a company for various purposes, including:

Issuing bonus shares: The company can use the securities premium to issue bonus shares to its existing shareholders. Bonus shares are additional shares given to shareholders without any additional payment, and the premium can be used to cover the costs associated with issuing these bonus shares.

Writing off preliminary expenses: If the company incurred any preliminary expenses during its formation or expansion, the securities premium can be utilized to write off these expenses. This helps in reducing the accumulated expenses and improving the financial position of the company.

Providing for the premium on the redemption of preference shares: In the case of redeemable preference shares, the company may utilize the securities premium to meet the premium payable on the redemption of these shares. This ensures that the company has sufficient funds to honor its obligations towards preference shareholders.

Share buybacks: If the company decides to repurchase its own shares from the market, the securities premium can be utilized to fund the buyback. This provides a mechanism for returning surplus funds to the shareholders.

It is important to note that the utilization of securities premium is subject to legal and regulatory requirements, and companies must comply with applicable laws and regulations governing the use of such funds.

Q.37. What is preliminary expenses?

Ans. Preliminary expenses refer to the costs incurred by a company during its formation or expansion. These expenses are incurred before the company starts its actual operations and include various expenses such as legal fees, registration fees, costs associated with the issue of shares or debentures, promotional expenses, underwriting commission, and other related expenses.

Preliminary expenses are typically one-time costs that are necessary to set up or expand the company. These expenses are not directly related to the day-to-day operations of the company but are incurred to facilitate its establishment or growth.

Companies usually capitalize these preliminary expenses, meaning they are recorded as assets on the company's balance sheet. However, over time, these expenses are gradually written off or amortized through the income statement over a specific period, usually several years.

It is important to note that the treatment of preliminary expenses may vary depending on the accounting standards and regulations applicable in different jurisdictions.

 

Q.38. Differentiate between public and private company on the basis of transferability of shares?

Ans. In a very short explanation, here's how public and private companies differ in terms of the transferability of shares:

Public Company: Shares of a public company are freely transferable. This means that shareholders can sell or transfer their shares to other individuals or entities without any restrictions. The shares of a public company are typically listed on a stock exchange, allowing them to be bought and sold by the general public.

Private Company: In a private company, the transferability of shares is restricted. The shares of a private company cannot be freely traded or transferred. Shareholders need the approval of the existing shareholders or the board of directors to transfer their shares to another person. Private companies often have specific provisions or agreements in their articles of association or shareholders' agreements that govern the transfer of shares.

In summary, while shares of a public company can be freely traded on the stock exchange, shares of a private company have limitations on transferability and require the consent of existing shareholders or the board of directors for any share transfer.

 

Q.39. What do you mean by Reserve capital?

Ans. Reserve capital refers to the portion of a company's authorized share capital that is not intended to be issued immediately. It is the portion of the authorized capital that is set aside for future use and is not available for immediate subscription by shareholders. Reserve capital provides a buffer or reserve for the company to issue additional shares in the future without going through the process of altering its authorized capital. It can be utilized for various purposes such as issuing bonus shares, raising funds for expansion, or adjusting the capital structure of the company.

 

Q.40. What is capital Reserve?

Ans. Capital reserve refers to a reserve created out of the capital profits or gains of a company. It is a type of reserve that is not distributable as dividends to the shareholders. Capital reserves are typically created when there is an increase in the value of assets or through the revaluation of assets and liabilities. They can also be created from the sale of fixed assets, profit on the sale of investments, or any other capital gains. Capital reserves are used to strengthen the financial position of the company, provide a cushion for future contingencies, or for specific capital-related purposes.

 

Q.41. Mention the side of cash book where you will record refund of application money?

Ans. Refund of application money is recorded on the receipt side of the cash book.

 

Q.42. How will you show calls in advance in the balance sheet?

Ans. Calls in advance are shown as a current liability on the liabilities side of the balance sheet under the head "Current Liabilities and Provisions."

 

Q.43. Is there any legal restriction on issue of shares at a premium?

Ans. there are legal restrictions on the issue of shares at a premium. According to the Companies Act, a company can issue shares at a premium only if the following conditions are met:

1. The shares are issued for cash consideration.

2. The premium is received in cash.

3. The premium is not utilised for issuing dividends, writing off preliminary expenses, or writing off the expenses of the company's issue of shares or debentures.

4. The premium is transferred to a separate account called the securities premium account, which is used for specific purposes as prescribed by law.

 

Q.44. What do you mean by forfeiture of share?

Ans. Forfeiture of shares refers to the action taken by a company to cancel the shares of a shareholder who has failed to pay the amount due on the shares. When a shareholder fails to pay the required amount on shares within the specified time, the company has the right to forfeit those shares. This means that the shareholder loses their ownership rights and the shares are taken.

 

Q.45. What do you mean by surrender of share?

Ans. Surrender of shares refers to the voluntary relinquishment or return of shares by a shareholder to the company. When a shareholder decides to surrender their shares, they give up their ownership rights and transfer the shares back to the company. This can be done for various reasons, such as to reduce shareholding, exit from the company, or as part of a restructuring or buyback arrangement. The surrendered shares are typically cancelled by the company, reducing the total number of shares in circulation.

 

Q.46. At the time of forfeiture of shares with what amount the shares forfeited account is credited?

Ans. At the time of forfeiture of shares, the shares forfeited account is credited with the amount already received on the forfeited shares. This amount represents the total value of the shares forfeited, including any amount paid on application and allotment. By crediting the shares forfeited account, it reflects the fact that the shares have been forfeited and are no longer considered as part of the shareholder's equity in the company.

 

Q.47. How will you show the balance of ‘’Share forfeited account’’ in the balance sheet of a company?

Ans. The balance of the "Share Forfeited Account" is shown on the liabilities side of the balance sheet under the category of Share Capital. It is presented as a deduction from the issued share capital to indicate the reduction in the total value of shares due to the forfeiture. By showing the balance of the Share Forfeited Account on the balance sheet, it provides transparency regarding the forfeited shares and their impact on the company's capital structure.

 

Q.48. At the time of forfeitures of shares, with amount the ‘’share capital account’’ is debited?

Ans. At the time of forfeiture of shares, the "Share Capital Account" is debited with the nominal value of the forfeited shares.

 

Q.49. Can the forfeited shares be issued at a discount?

Ans. forfeited shares cannot be reissued at a discount. According to most company laws, shares can only be issued at their nominal value or at a premium, but not at a discount.

 

Q.50. How will you deal with the profit on reissue of forfeited shares?

Ans. The profit on the reissue of forfeited shares is treated as a capital profit. It is credited to the "Capital Reserve" account, which is a reserve account representing the accumulated profits of the company. This capital reserve can be utilized for various purposes such as writing off capital losses, issuing bonus shares, or paying dividends.

 

Q.51. What do you mean by ‘’Pro-rata’’ allotment of shares?

Ans. Pro-rata allotment of shares refers to the proportionate allotment of shares to the applicants who have applied for shares during the public issue of shares. In other words, it means that the shares are allotted to the applicants in the same proportion as the number of shares they have applied for in relation to the total number of shares offered by the company. For example, if a company offers 10,000 shares to the public and an applicant has applied for 1,000 shares, then he/she will be allotted 10% (1,000/10,000) of the total shares.

 

VERT SHORT ANSWER TYPE QUESTIONS

Q.1. Give any two differences between preference shares and equity shares?

Ans. Ownership and Control: Preference shares represent ownership in a company, but the shareholders do not typically have voting rights or control over the company's decision-making processes. On the other hand, equity shares (also known as common shares) represent ownership with voting rights, allowing shareholders to participate in the decision-making of the company.

Dividend Priority: Preference shareholders have a priority right to receive dividends over equity shareholders. They are entitled to a fixed rate of dividend, which is predetermined and must be paid before any dividend is distributed to equity shareholders. Equity shareholders, on the other hand, receive dividends after the preference shareholders have been paid their fixed dividends, and the amount of dividend they receive depends on the company's profitability and the board's decision.

 

Q.2. Give any two difference between over-subscription and under-subscription of shares?

Ans. Over-subscription: Over-subscription occurs when the number of shares applied for by investors exceeds the number of shares available for allotment. In this case, the company has more demand for its shares than it can fulfill, resulting in a situation where not all applicants can be allocated the full number of shares they applied for.

Under-subscription: Under-subscription happens when the number of shares applied for by investors is less than the number of shares available for allotment. It indicates that the company has not received enough demand for its shares, and there are unallocated shares remaining after the application process.

In summary, over-subscription indicates excess demand for shares, while under-subscription reflects a lack of sufficient demand.

 

Q.3. Give any two difference between calls in arrears and calls in advance?

Ans. Calls in Arrears: Calls in arrears refer to the situation when a shareholder fails to pay the due amount on the calls made by the company for the shares. It indicates that the shareholder has not fulfilled their obligation to make the payment on time.

Calls in Advance: Calls in advance, on the other hand, occur when a shareholder makes a payment towards the future calls on shares before they are actually due. It means that the shareholder has paid an amount higher than the current requirement for the shares.

In summary, calls in arrears indicate unpaid amounts on shares, while calls in advance refer to payments made in advance for future calls.

 

Q.4. What is over-subscription of shares?

Ans. Over-subscription of shares refers to a situation in which the number of shares applied for by investors exceeds the number of shares available for allocation by the company. It occurs when the demand for shares exceeds the supply. In other words, more investors are willing to buy shares than the company can offer. This leads to a situation where the company has to allocate shares proportionally to the applicants or use a lottery system to determine who will receive the shares. Over-subscription is commonly seen in public offerings or popular IPOs (Initial Public Offerings) where there is high investor interest in acquiring shares of the company.

 

Q.5. What do you mean by re-issue of forfeited shares?

Ans. Re-issue of forfeited shares refers to the process of reselling shares that were previously forfeited by the company due to non-payment or non-compliance with the terms of allotment. When a shareholder fails to pay the required amount on their shares within a specified time period, the company has the right to forfeit those shares. Once forfeited, the shares become the property of the company again.

The company can choose to re-issue these forfeited shares to new shareholders. The re-issuance can be done at a different price, either at par value, premium, or at a discount. The proceeds from the re-issuance of forfeited shares are typically recorded as part of the company's capital reserves or used to offset any losses or liabilities. The process of re-issue of forfeited shares helps the company recover any unpaid amounts and utilize the shares for new investors.

 

Q.6. What do you mean by pro-rata allotment?

Ans. Pro-rata allotment refers to the allocation of shares among applicants on a proportionate basis, according to the number of shares they have applied for relative to the total number of shares available for allotment. It ensures fairness and equal treatment of all applicants in the allotment process.

When a company receives more applications for shares than the number of shares available, it may need to make a pro-rata allotment. In such cases, the total number of shares applied for is divided by the total number of shares available, and the resulting ratio is applied to each applicant's requested number of shares.

For example, if Company X receives applications for 10,000 shares but has only 5,000 shares available, a pro-rata allotment will be made. If Applicant A has applied for 2,000 shares and Applicant B has applied for 1,000 shares, each applicant will be allotted a proportionate number of shares based on the ratio of shares available to shares applied for. In this case, Applicant A may receive 3,333 shares (2,000/3,000 shares available * 5,000 shares) and Applicant B may receive 1,666 shares (1,000/3,000 shares available * 5,000 shares).

Pro-rata allotment ensures that the available shares are distributed fairly among the applicants in proportion to their initial requests, maintaining equity and avoiding any undue advantage or disadvantage for any specific applicant.

 

Q.7. What do you mean by forfeiture of share?

Ans. Forfeiture of shares refers to the cancellation or seizure of shares by a company when a shareholder fails to fulfill the payment obligations or comply with the terms of the share agreement. When a shareholder fails to pay the due amount on shares within the specified timeframe, the company has the right to forfeit the shares. Once the shares are forfeited, the shareholder loses all rights and ownership associated with those shares. The forfeited shares can be reissued or sold by the company to new shareholders.

 

Q.8. Explain any two kinds of companies?

Ans. Private Limited Company: A private limited company is a type of business entity where the ownership is privately held and restricted to a small group of shareholders. It is characterized by limited liability, meaning the shareholders are not personally liable for the company's debts beyond their invested capital. Private limited companies have restrictions on the transferability of shares, and they cannot invite the public to subscribe to their shares. The number of shareholders in a private limited company is limited, usually to a maximum of 200 members. These companies are commonly used for small and medium-sized businesses.

Public Limited Company: A public limited company is a business entity that offers its shares to the general public for subscription and is listed on a stock exchange. The ownership of a public limited company is dispersed among numerous shareholders, and the shares are freely transferable. Public limited companies have higher regulatory requirements and are subject to stricter reporting and disclosure obligations. They can raise substantial capital from the public through the issuance of shares and can have a large number of shareholders. Public limited companies are often preferred by larger corporations seeking public investment and growth opportunities.

 

Q.9. Give any four difference between preference shares and equity shares?

Ans. Voting Rights: Preference shares generally have limited or no voting rights, whereas equity shares carry voting rights. Equity shareholders have the right to participate and vote in the company's decision-making process, including the appointment of directors and major policy decisions.

Dividend Priority: Preference shareholders are entitled to receive a fixed rate of dividend before any dividend is distributed to equity shareholders. The dividend on preference shares is usually predetermined and fixed, whereas equity shareholders are entitled to receive dividends based on the company's profitability and discretion of the board of directors.

Capital Ownership: Equity shareholders are the owners of the company and have residual claim over the company's assets and profits. They bear the highest risk and reward potential, as they participate in the company's growth and also bear the losses in case of liquidation. On the other hand, preference shareholders have a preferential claim on the company's assets in the event of liquidation, but their ownership rights are subordinate to equity shareholders.

Redemption Rights: Preference shares may carry a redemption feature, allowing the company to redeem or buy back the shares from the shareholders after a certain period. Equity shares, in general, do not have a redemption feature and are considered perpetual in nature. This means that equity shares remain outstanding indefinitely, unless they are voluntarily bought back or cancelled by the company.

It's important to note that the specific rights and features of preference shares and equity shares may vary based on the company's articles of association and the terms of issuance.

 

Q.10. Differentiate between preference shares and equity shares?
Ans. Preference Shares:

Dividend Priority: Preference shareholders have a preferential right to receive a fixed rate of dividend before any dividend is distributed to equity shareholders. The dividend on preference shares is usually predetermined and fixed.

Voting Rights: Preference shares generally have limited or no voting rights. Preference shareholders may only have voting rights on matters that directly affect their rights, such as changes to dividend rates or conditions.

Capital Ownership: Preference shareholders do not have ownership rights in the same way as equity shareholders. They do not have residual claim over the company's assets and have limited participation in the company's growth. In the event of liquidation, preference shareholders have a preferential claim on the company's assets over equity shareholders.

Redemption: Preference shares may carry a redemption feature, allowing the company to redeem or buy back the shares from the shareholders after a certain period. This provides an exit option for preference shareholders.

Equity Shares:

Dividend Participation: Equity shareholders have the right to participate in the company's profits and are entitled to receive dividends based on the company's profitability and discretion of the board of directors. The dividend on equity shares is not fixed and may vary based on the company's performance.

Voting Rights: Equity shareholders have voting rights in the company and can participate in the decision-making process. They can vote on matters such as the appointment of directors, major policy decisions, and changes to the company's articles of association.

Capital Ownership: Equity shareholders are the owners of the company and have residual claim over the company's assets and profits. They bear the highest risk and reward potential, as they participate in the company's growth and also bear the losses in case of liquidation.

No Redemption: Equity shares are usually perpetual in nature and do not have a redemption feature. They remain outstanding indefinitely, unless they are voluntarily bought back or cancelled by the company.

It's important to note that the specific rights and features of preference shares and equity shares may vary based on the company's articles of association and the terms of issuance.

 

Q.11. What do you mean by capital reserve?

Ans. Capital reserve refers to the amount of reserve created by a company from its profits which are not distributable as dividends to the shareholders. Capital reserve is usually created when a company sells any capital assets like land, building, machinery, etc. and earns a profit on it. It can also be created when a company receives any capital profits, like profits earned from the sale of shares at a premium or debentures at a discount. The purpose of creating capital reserve is to keep the funds aside for a specific purpose, like paying off the company's liabilities or using it to invest in long-term projects. Capital reserve is shown on the liabilities side of the balance sheet.

 

Q.12. What is Reserve capital?

Ans. Reserve capital refers to the portion of a company's authorized share capital that is not intended to be issued immediately for raising funds. It is the portion of the authorized capital that remains unissued and is kept as a reserve for future use. Reserve capital can be utilized by the company only if it goes through a formal process of converting the reserve capital into issued capital. This conversion requires complying with the legal requirements and obtaining the necessary approvals from the shareholders and regulatory authorities. Reserve capital provides flexibility to the company to issue additional shares in the future without the need for further authorization or alteration of its memorandum of association.

 

Q.13. What is Reserve capital?

Ans. Reserve capital refers to a specific portion of a company's authorized share capital that is not intended for immediate issuance or subscription. It is the capital that is set aside by a company and kept as a reserve, typically for future use or for specific purposes outlined in the company's articles of association. Reserve capital can be used by the company at a later stage, subject to legal and regulatory requirements. It provides the company with flexibility in raising additional capital without the need for further authorization or alteration of its share capital structure.

 

Q.14. Give any two difference between private company and public company?

Ans. Ownership and Shareholders: In a private company, ownership is usually held by a small group of individuals or entities, and the shares are not freely traded on a public stock exchange. The number of shareholders is limited, often with a minimum requirement of two and a maximum of 200. In contrast, a public company can have a large number of shareholders, and its shares are freely traded on a stock exchange, allowing the public to buy and sell the shares.

Disclosure and Transparency: Private companies have fewer disclosure requirements compared to public companies. They are not obligated to disclose their financial information or other company details to the public. In contrast, public companies are subject to more stringent regulations and are required to publish financial statements, reports, and other information regularly. They must adhere to transparency standards to provide shareholders and the public with accurate and timely information about the company's operations and financial performance.

 

Q.15. What are deferred shares?

Ans. Deferred shares, also known as founders' shares or founders' stock, are a type of share that carries certain special rights and privileges. These shares are typically issued to the founders or early investors of a company. The key characteristic of deferred shares is that they have limited or no voting rights, but they may entitle the holders to a higher portion of the company's profits or assets in the event of liquidation or sale. The purpose of issuing deferred shares is to provide the founders or early investors with preferential treatment or rewards for their contributions to the company's establishment or growth.

 

Q.16. Distinguish between forfeiture of shares and surrender of shares?

Ans. Forfeiture of shares and surrender of shares are two different concepts in relation to shares. Here are their distinctions:

Forfeiture of Shares:

Forfeiture of shares occurs when a shareholder fails to pay the due amount on shares subscribed by them.

It is an action taken by the company against the shareholder for non-payment, usually after sending multiple reminders and granting a specified period for payment.

The forfeited shares are cancelled by the company and become the property of the company.

The company may reissue the forfeited shares to other individuals at a later stage.

Surrender of Shares:

Surrender of shares refers to the voluntary act of returning or giving up shares by a shareholder to the company.

It is a decision made by the shareholder based on personal choice or specific circumstances.

The surrendered shares are typically cancelled by the company and cease to exist.

The surrendered shares cannot be reissued by the company.

In summary, forfeiture of shares is an action taken by the company due to non-payment, resulting in the cancellation of shares and the potential for reissuance. On the other hand, surrender of shares is a voluntary act by the shareholder to return the shares to the company, leading to the cancellation of shares without the possibility of reissuance.

 

Q.17. What is under-subscription and over-subscription?

Ans. Under-subscription and over-subscription are terms used to describe the demand for shares during a company's initial public offering (IPO) or a subsequent rights issue. Here's what they mean:

Under-subscription:

Under-subscription occurs when the number of shares applied for by investors is less than the number of shares offered by the company.

It indicates that the demand for shares is lower than expected or the offering price is not attractive to investors.

In under-subscription, the company may choose to allocate the available shares to the applicants proportionately or reject the applications and refund the application money.

Over-subscription:

Over-subscription happens when the number of shares applied for by investors exceeds the number of shares offered by the company.

It indicates that the demand for shares is higher than the available supply, which may be a result of favorable market conditions or investor confidence in the company.

In over-subscription, the company needs to determine the allocation process. This can be done through methods like pro-rata allotment or lottery system to ensure a fair distribution of shares among the applicants.

In summary, under-subscription occurs when the demand for shares is lower than the available supply, while over-subscription happens when the demand exceeds the supply. Companies aim for a balanced subscription level to ensure the successful completion of the offering while meeting investor expectations.

 

Q.18. Explain one person company?

Ans. A One Person Company (OPC) is a type of business structure that allows a single individual to establish and run a company. In other words, it enables a sole proprietor to enjoy the benefits of a corporate entity, including limited liability, while being the sole owner and director of the company. Here are some key points to understand about One Person Companies:

Single Ownership: Unlike traditional companies that require a minimum of two shareholders, an OPC can be formed with just one individual as its member and shareholder. This individual holds 100% ownership of the company.

Limited Liability: One of the main advantages of an OPC is that the liability of the owner is limited to the extent of their investment in the company. This means that the personal assets of the owner are protected in case of any legal or financial liabilities incurred by the company.

Separate Legal Entity: An OPC is treated as a separate legal entity distinct from its owner. It has its own PAN (Permanent Account Number) and can enter into contracts, acquire assets, and conduct business activities in its own name.

Nominee Director: As per the Companies Act, an OPC must appoint a nominee director who will take over the management and ownership of the company in case of the owner's incapacitation or death. The nominee director ensures continuity and protects the interests of the company.

Restriction on Conversion: An OPC has certain limitations, such as restrictions on conversion to other types of companies. It cannot be converted into a partnership or a public company. However, it can be converted into a private limited company after fulfilling certain criteria.

Compliance Requirements: OPCs have specific compliance requirements, such as the filing of annual financial statements, conducting board meetings, and maintaining proper books of accounts. These obligations ensure transparency and good governance within the company.

It's important to note that the concept of One Person Company may vary in different jurisdictions, and it is essential to consult the relevant laws and regulations applicable in your country when considering the formation of an OPC.

 

Q.19. What do you mean by mean by holding company and subsidiary company?

Ans. A holding company and a subsidiary company are two related terms that refer to the relationship between two companies. Here's a brief explanation of each:

Holding Company: A holding company, also known as a parent company, is a company that holds a significant amount of shares in another company, referred to as its subsidiary. The holding company usually controls and manages the subsidiary company through its ownership of voting shares. The primary purpose of a holding company is to exercise control and influence over its subsidiaries, often for strategic or financial reasons.

Key characteristics of a holding company include:

Ownership: The holding company owns a majority or significant portion of the shares of the subsidiary company, usually more than 50%.

Control: The holding company exercises control over the subsidiary's operations, decision-making, and strategic direction.

Separate Legal Entities: Both the holding company and the subsidiary are separate legal entities, with their own rights, obligations, and financial statements.

Financial Consolidation: The holding company consolidates the financial statements of the subsidiary into its own financial statements, providing a comprehensive view of the group's financial performance.

Subsidiary Company: A subsidiary company is a company that is controlled and majority-owned by another company, known as the parent or holding company. The subsidiary operates as a separate legal entity but is subject to the control and influence of the parent company. The subsidiary's operations, management, and strategic decisions are typically influenced by the holding company.

Key characteristics of a subsidiary company include:

Ownership: The subsidiary company is owned, directly or indirectly, by the holding company, which holds a majority of its shares.

Control: The holding company exercises control over the subsidiary's operations, often through the appointment of directors and influencing decision-making.

Separate Legal Entity: The subsidiary is a distinct legal entity from the holding company, with its own assets, liabilities, and operations.

Financial Reporting: The subsidiary prepares its own financial statements, which are consolidated into the financial statements of the holding company.

The relationship between a holding company and a subsidiary allows for strategic management, diversification, and consolidation of resources within a corporate group structure. It offers benefits such as risk management, tax planning, centralized control, and access to economies of scale.

 

Q.20. What do you mean by-certificate of commencement of business?

Ans. A Certificate of Commencement of Business, also known as a Commencement Certificate, is a legal document issued by the Registrar of Companies (RoC) in some jurisdictions, including India. It signifies that a company is officially permitted to commence its business operations.

In India, a Certificate of Commencement of Business is required for companies that have share capital. Here are the key points to understand about this certificate:

Requirement: According to the Companies Act, 2013, a company cannot commence its business activities or exercise any borrowing powers unless it obtains a Certificate of Commencement of Business.

Application Process: To obtain the certificate, the company must file a declaration with the RoC stating that every subscriber to the memorandum has paid the value of shares agreed to be taken by them and that the company has complied with all legal requirements for registration.

Verification: The RoC verifies the documents submitted by the company and examines if all legal requirements are met. This includes ensuring that the minimum subscription required to be received in the company's bank account has been met.

Issuance: If the RoC is satisfied with the company's compliance, it issues the Certificate of Commencement of Business. This certificate serves as proof that the company is authorized to commence its business activities.

It is important to note that not all companies are required to obtain a Certificate of Commencement of Business. For example, companies without share capital (such as non-profit organizations) or companies that were incorporated after a certain date specified by the government may be exempt from this requirement.

The purpose of the Certificate of Commencement of Business is to ensure that companies have fulfilled the necessary requirements and are ready to commence their business operations in accordance with the law. It provides legal recognition and protects the interests of shareholders, creditors, and other stakeholders by confirming that the company has met its initial obligations before initiating business activities.

 

SHORT ANSWER TYPE QUESTIONS

Q.1. What is a company? What are its feature?

Ans. A company is a legal entity formed by individuals, known as shareholders or members, who come together with a common objective of carrying out a business or any other lawful activity. It is an organized and separate legal entity from its owners, providing certain rights, liabilities, and obligations.

Here are some key features of a company:

Separate Legal Entity: A company is considered a separate legal entity distinct from its owners. It can enter into contracts, own assets, sue or be sued, and conduct business activities in its own name.

Limited Liability: One of the significant advantages of a company is limited liability. The liability of the shareholders or members is limited to the amount they have invested in the company. Their personal assets are generally protected from the company's debts and liabilities.

Perpetual Succession: A company has perpetual succession, meaning it continues to exist even if the shareholders or members change. The death or withdrawal of a member does not affect the existence of the company, allowing for seamless transfer of ownership.

Common Seal: A company has a common seal that acts as its official signature. It is used to authenticate important documents, such as contracts and agreements, and represents the authority and identity of the company.

Transferability of Shares: In most cases, shares of a company are freely transferable, allowing shareholders to buy or sell their ownership interest in the company. This provides liquidity and flexibility to shareholders.

Separation of Ownership and Management: Shareholders are the owners of the company, while the management and day-to-day operations are carried out by directors and appointed officers. This separation allows for professional management and decision-making.

Regulatory Compliance: Companies are governed by specific laws and regulations, such as company law or corporate governance codes, that outline their formation, operation, and dissolution. Compliance with these laws is mandatory to ensure legal and ethical business practices.

These features of a company provide a framework for its establishment, operation, and governance, allowing it to engage in business activities, raise capital, attract investment, and protect the interests of its shareholders and other stakeholders.

 

Q.2. What is a public company ? how it is different from private company?
Ans. A public company, also known as a publicly traded company or a corporation, is a type of company that offers its shares to the public through a stock exchange or other public market. It is owned by shareholders and has a larger number of shareholders compared to a private company. Here are some key characteristics and differences between a public company and a private company:

Ownership: In a public company, ownership is widely distributed among the general public, institutional investors, and other shareholders who purchase shares in the company through the open market. In contrast, a private company has a limited number of shareholders, often including founders, family members, or a small group of investors.

Shareholder Liability: In a public company, shareholders have limited liability, which means their personal assets are protected from the company's debts and liabilities. Shareholders' liability is generally limited to the amount they have invested in the company. In a private company, the extent of liability may vary depending on the legal structure and agreements among the shareholders.

Regulatory Requirements: Public companies are subject to more stringent regulatory requirements and extensive financial reporting obligations compared to private companies. They are required to comply with securities laws, disclose financial information regularly, and meet specific corporate governance standards. Private companies have fewer regulatory obligations and may have more flexibility in their reporting requirements.

Access to Capital: Public companies have the ability to raise substantial capital from the public through the sale of shares in the stock market. They can issue new shares, issue bonds or debentures, and attract investment from a wide range of investors. Private companies, on the other hand, typically rely on a smaller group of investors, loans from financial institutions, or retained earnings to fund their operations and expansion.

Transferability of Shares: Shares of a public company are freely transferable, allowing shareholders to buy or sell their ownership interest in the company without restrictions. This provides liquidity and the ability to easily enter or exit investments. In a private company, shares are often subject to transfer restrictions, such as pre-emption rights or shareholder agreements, which limit the transferability of shares.

Disclosure and Transparency: Public companies are required to provide regular and comprehensive financial disclosures to the public, including financial statements, annual reports, and other relevant information. This promotes transparency and accountability to shareholders and potential investors. Private companies, although they may also disclose financial information to stakeholders, have more discretion in determining the extent and timing of their disclosures.

Listing and Stock Exchange: Public companies have the option to list their shares on a stock exchange, which provides a regulated marketplace for trading their securities. This listing enhances the company's visibility, liquidity, and access to capital. Private companies do not have the opportunity to be listed on stock exchanges.

These differences between public and private companies reflect the contrasting nature of their ownership, governance, access to capital, and regulatory obligations. The choice of operating as a public or private company depends on various factors, including the company's size, growth objectives, ownership preferences, and regulatory considerations.

 

Q.4. What do you mean by calls in advance? How it is different from calls in arrears?

Ans. Calls in advance and calls in arrears are terms used in relation to the payment of the outstanding amount on shares issued by a company. Here's an explanation of each term and how they differ:

Calls in Advance: Calls in advance refer to the situation when a shareholder pays the full or partial amount of the future calls on shares before they are actually due. In other words, the shareholder makes an early payment on the shares they hold. This is typically done voluntarily and may be advantageous for the shareholder in terms of cash flow management or taking advantage of any discounts offered on early payment. Calls in advance are treated as a liability in the company's books until the actual calls become due.

Calls in Arrears: Calls in arrears, on the other hand, occur when a shareholder fails to pay the required amount on the shares as per the agreed-upon payment schedule. This means the shareholder is behind on their payments or has not paid the full amount due. Calls in arrears are considered a debt owed by the shareholder to the company. The company may take certain actions to recover the outstanding amount, such as imposing penalties or forfeiting the shares if the arrears are not settled.

Differences between Calls in Advance and Calls in Arrears:

Timing of Payments: Calls in advance involve early payment of the outstanding amount on shares before it is due, while calls in arrears indicate that the shareholder has not made the required payment on time.

Treatment and Accounting: Calls in advance are recorded as a liability in the company's books until the actual calls become due. On the other hand, calls in arrears are considered a debt owed by the shareholder and may be subject to penalties or other actions by the company to recover the outstanding amount.

In summary, calls in advance refer to early payment of future calls on shares, whereas calls in arrears indicate the failure to make the required payment on shares as per the agreed-upon schedule.

 

Q.5. What are the categories in which the share capital of a company is divided?

Ans. The share capital of a company is typically divided into two main categories:

Equity Shares (Common Shares): Equity shares represent the ownership interest in a company. These shares carry voting rights, and the shareholders are entitled to a share in the profits of the company in the form of dividends. Equity shareholders bear the highest risk in the company as they have residual claims on the assets and earnings after all other obligations are met. They also have the potential to benefit from capital appreciation if the company's value increases.

Preference Shares: Preference shares are a type of share capital that carry certain preferential rights and privileges over equity shares. These shares provide preferential treatment to the shareholders in terms of dividend payments and repayment of capital in the event of liquidation. The preference shareholders receive a fixed rate of dividend before any dividend is paid to equity shareholders. However, preference shareholders usually do not have voting rights or have limited voting rights.

It's important to note that within these categories, there can be different classes or types of shares with varying rights and features. For example, within preference shares, there can be different classes such as cumulative preference shares, non-cumulative preference shares, redeemable preference shares, etc. Similarly, within equity shares, there can be different classes such as ordinary shares, founder's shares, or different classes with differential voting rights.

The division of share capital into different categories allows companies to customize the rights and preferences attached to each class of shares, providing flexibility in terms of ownership structure and capital management.

 

Q.6. What do you mean by issue of share at a premium? For what purpose the amount of security premium can be utilised?

Ans. The issue of shares at a premium refers to the situation when a company sells its shares to investors at a price higher than their face value or par value. The difference between the issue price and the face value of the shares is called the share premium.

The purpose of issuing shares at a premium is to raise additional capital for the company, especially when the market value of the shares is higher than their face value. It allows the company to capitalize on the perceived value of its shares and generate more funds for various purposes, such as:

 

Expansion and Growth: The premium amount received from the issue of shares can be utilized to finance the company's expansion plans, invest in new projects, acquire assets, or undertake research and development activities.

Debt Repayment: The company may use the share premium to repay its existing debts, reducing its interest burden and improving its financial position.

Infrastructure Development: The funds raised through share premium can be allocated towards building or upgrading infrastructure facilities, purchasing equipment, or enhancing operational capabilities.

Working Capital Requirements: The share premium can be utilized to meet the company's working capital needs, such as funding day-to-day operations, managing inventory, and meeting short-term liabilities.

It's important to note that the utilization of share premium is subject to legal and regulatory provisions. In many jurisdictions, companies are restricted from using share premium for certain purposes, such as distribution as dividends or providing loans to directors. The utilization of share premium is typically governed by the applicable company laws and regulations in the respective jurisdiction

 

Q.7. Explain the procedure for raising the share capital?

Ans. The procedure for raising share capital involves several steps and compliances to ensure the proper issuance of shares to investors. Here is a general outline of the procedure:

Determine the Capital Structure: The company needs to determine its capital structure, including the authorized share capital, number of shares, face value, and types of shares (e.g., equity shares, preference shares).

Obtain Necessary Approvals: Obtain necessary approvals as per the laws and regulations of the jurisdiction where the company is registered. This may involve approvals from the board of directors, shareholders, and regulatory authorities like the Registrar of Companies.

Draft Prospectus/Offer Document: Prepare a prospectus or offer document that contains detailed information about the company, its financials, the purpose of raising capital, terms of the shares, and any other relevant disclosures. The prospectus is necessary for public companies, while private companies may require an offer document for private placements.

File with Regulatory Authorities: Submit the prospectus or offer document with the regulatory authorities as per the requirements of the jurisdiction. This may involve filing with the Registrar of Companies or other regulatory bodies overseeing securities offerings.

Marketing and Investor Subscription: Market the shares to potential investors through various channels such as advertising, roadshows, or private placements. Investors interested in subscribing to the shares will provide their subscription details, including the number of shares they wish to purchase and the amount to be paid.

Allotment of Shares: After receiving the applications and subscription amounts, the company will review and process the applications. The shares will be allotted to the subscribers based on the allocation criteria mentioned in the prospectus/offering document.

Payment of Share Capital: Once the shares are allotted, the shareholders need to make the required payment as per the terms of the share allotment. This can be done by paying the share capital in full or in installments as specified in the prospectus/offering document.

Issuance of Share Certificates: Upon receipt of the full payment, the company will issue share certificates to the shareholders as evidence of their ownership in the company.

Compliance and Reporting: The company must comply with reporting requirements, such as filing necessary documents with regulatory authorities, updating the company's share register, and maintaining proper records of share issuances.

It is essential to consult legal and financial professionals and adhere to the specific laws and regulations applicable in your jurisdiction while raising share capital. The procedure may vary based on the type of company, country-specific regulations, and the method chosen to raise capital (e.g., initial public offering, private placement).

 

Q.8. What is the difference between equity shares & preference shares?

Ans. The main difference between equity shares and preference shares lies in the rights and preferences associated with each type of share. Here are the key differences:

Rights to Dividends: Preference shareholders have a preferential right to receive a fixed rate of dividend before any dividend is paid to equity shareholders. The dividend on preference shares is typically fixed or determined based on a predetermined formula. On the other hand, equity shareholders are entitled to dividends out of the remaining profits after the preference shareholders have been paid their fixed dividends. Equity shareholders do not have a fixed dividend rate and their dividends are distributed based on the company's profitability and the discretion of the board of directors.

Voting Rights: Preference shareholders usually have limited or no voting rights in the company's general meetings. They may only have the right to vote on matters directly affecting their rights, such as changes to the rights attached to their shares. On the contrary, equity shareholders have voting rights and can participate in the decision-making process of the company. The number of votes typically corresponds to the number of shares held by the equity shareholder.

Repayment of Capital: In the event of liquidation or winding up of the company, preference shareholders have a preferential right to repayment of their capital before equity shareholders. They are entitled to receive the amount of their investment back before any distribution is made to equity shareholders. Equity shareholders have residual rights and will receive the remaining assets after the payment of all debts and liabilities, including the repayment to preference shareholders.

Participation in Company's Growth: Equity shareholders have the potential to participate in the growth and profitability of the company to a greater extent than preference shareholders. They benefit from the appreciation in the company's share price and may receive higher returns through capital gains. Preference shareholders, on the other hand, have a fixed dividend rate and do not directly benefit from the company's growth in the same manner.

It's important to note that the specific rights and preferences attached to preference shares and equity shares can vary depending on the company's articles of association and the terms of the share issuance. Therefore, it is essential to refer to the company's governing documents for detailed information on the rights and preferences of each share class.

 

Q.9. What is the difference between calls in arrears & calls in advance?

Ans. Calls in arrears and calls in advance are two terms related to the payment of outstanding amounts on shares. Here are the differences between the two:

Calls in Arrears: Calls in arrears refer to the unpaid or overdue amounts on shares that shareholders are required to pay. When a company issues shares, it sets a schedule for payment, typically in multiple installments. If a shareholder fails to pay any installment or payment is delayed, the amount becomes "in arrears." It means the shareholder is in default or behind on their payment obligations. Calls in arrears are considered a liability of the shareholder to the company and are shown in the balance sheet as an amount owed by the shareholder.

Calls in Advance: Calls in advance, on the other hand, occur when a shareholder pays more than the required amount on their shares. It means the shareholder has made an advance payment towards future calls that are yet to be due. This situation may arise if the shareholder wishes to pay the entire amount upfront or pays an installment in advance. Calls in advance are considered as an asset to the shareholder, as they have made a payment beyond their immediate obligations.

In summary, calls in arrears represent unpaid or overdue amounts that shareholders owe to the company, while calls in advance indicate the excess payment made by a shareholder towards their share obligations.