SOLUTIONS : PRACTICE PAPER  –  3

Q.  1.  (A)

(1)  Manufacturing industries have to invest huge amount of funds to acquire fixed

assets.

(2)  Share Capital refers to capital made up of equity and preference shares.

(3)  A Government company can accept deposits from public not exceeding 35% of

its paid up capital and free reserves.

(4)  Deposits provide short-term capital to the company.

(5)  The BSE is the first stock exchange to be recognised by the Indian Government

under the Securities Contracts (Regulation) Act.

Q.  1.  (B)

(1)  Depository receipt traded in a country other than USA is called Global

Depository Receipt.

(2)  Secured debentures should be redeemed within 10 years.

(3)  Link between Depository and Investor is Depository Participant (DP).

(4)  Predecided and fixed rate of dividend is paid to Preference Shareholders.

(5)  The oldest stock exchange in India is the Bombay Stock Exchange (BSE).

Q.  1.  (C)

(1)  The process of converting raw materials into finished products is called

production cycle.

(2)  A company should appoint a credit rating agency before it issues debentures.

(3)  Convertible Debentures means the debentures which can be converted into

equity shares after a stipulated period.

(4)  The Board of Directors declares interim dividend.

(5)  New Issue Market refers to a market where newly established companies sell

their shares, debentures, etc. for the first time to raise fresh capital.

Q.  1.  (D)

(1)  Retained earnings is an internal source of finance.

(2)  Under book building method, the price of shares is fixed through bidding

process.

(3)  Deposit receipt is issued within 21 days from date of receipt of deposit.

(4)  Dividend must be paid within 30 days of its declaration.

(5)  Physical mode of holding securities is risky.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 1

Q. 2.  (1)  Fixed Capital : 
(1)  That portion of a total capital which is invested in the fixed assets is called fixed
capital. In other words, capital needed to acquire fixed assets which are used
for a longer period of time is called fixed capital. Fixed assets are purchased for
use and not for resale. They remain in the business for a long period of time i.e.
almost permanently. Fixed assets may be defined as “the stock of tangible,
durable fixed assets owned or used by the business enterprises for long period.”

(2)  An owner can obtain funds to acquire fixed assets from capital market. Funding
can be raised by selling shares, issuing debentures, bonds or even by taking
long-term loans. Fixed capital is needed mostly at the time of establishment of
a new company. Some existing company may also require fixed capital for its
expansion, modernisation and development, replacement of machinery, plant,
equipment, etc. Company’s promoters prepare initial planning of fixed capital
requirements. In recent times, estimating fixed capital requirements gained
vital importance because of modern industrial processes need increasing use of
heavy and automated machineries.

(2)  Private Placement : 

(1)  When a company offers its securities i.e. shares, debentures, bonds, etc. not
through a public offering, but through a private offering, mostly to a selected
group of persons not exceeding 200 persons, it is called private placement. In
this case a company offers its securities only to identified persons and not to
the general public.

(2)  The Board of directors select or identify the persons to be included in the select
group of persons. Mostly these investors include friends, family members of
directors, accredited investors, institutional investors, mutual funds, etc. The
shares offered may be fully or partly paid up and consideration of shares can
be paid by cheque, Demand draft, etc. but not in cash. Under private placement
right to renunciation is not given to the applicants. For private placement, the
company is required to get approval of shareholders through a special resolution.
A company can make private placement in two ways viz. (i) Right Issue and
(ii) Preferential allotment.

(3)  Courtesy : 
(1)  Courtesy means excellence of manners. The Secretary should give due respect
while corresponding with depositors and debentureholders as they are the
creditors of the company. Letters should be written with utmost courtesy. The
Secretary must use courteous language to be polite especially while replying to
complaint letter.

2 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

(2)  While writing the letters to depositors and debentureholders, rude and harsh
language is to be strictly avoided. The language of the letter drafted to the
debentureholders and depositors must be polite convincing, unoffending and
courteous. The approach of the letter should be friendly, skilful and natural.
While writing a letter, the attitude of the Secretary towards the depositors
should be respectful and positive.

(4)  Share Certificate :

(1)  A share certificate is a registered document of title to shares, issued by the
company under its common seal. It is an evidence of ownership of specified
number of shares of the company. Share certificate is a prima facie evidence of
title to shares. Share certificate always bear the common seal of the company,
signed by two Directors and duly authorised by the Board of Directors and the
Company Secretary or any other authorised person.
(2)  Share certificates can be issued by both the public as well as the private
companies. A share certificate is issued in respect of partly and fully paid-up
shares. It can be transferred only by following the procedure laid down in the
Articles of Association.

(5)  Interest Warrant : 

(1)  Interest warrants are used to pay interest to the debentureholders. Dividend
warrants are used to pay dividend to the registered shareholders. An interest
warrant is a written order given by the company to its banker to pay the amount
mentioned in it to the Debentureholders.
(2)  Debentureholder's name is specified in the interest warrant. Debentureholders
either encash it at the bank counter if not crossed. If interest warrant is crossed,
then they have to deposit the same in their bank accounts.

(6)  Stock Exchange :

(1)  Stock exchange is a basic component of the capital market. It is the main
segment of the financial market where corporate securities such as equity
shares, preference shares, debentures, government securities, bonds, units of
mutual funds, etc. are traded. It is well managed and systematically organised
capital market where previously issued securities are traded repeatedly for
investment and speculation purposes. Only listed securities are bought and
sold on stock exchange. Stock exchange is also named as secondary market,
stock market, share market or share bazar.
(2)  Stock exchange is a specific place where different types of securities are traded.
It acts as an intermediary between the borrowers and investors. To protect the
interest of investors, Stock exchanges in India are well regulated by Securities
Exchange Board of India (SEBI). The Bombay Stock Exchange (BSE) which was
established in 1875 is the oldest stock exchange in India. The Securities Contracts

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 3

 (Regulation) Act 1956, defined stock exchange as, “An association, organisation
or body of individuals, whether incorporated or not, established for the purpose
of assisting, regulating and controlling of business in buying, selling and dealing
in securities.”

Q. 3.  (1) 
(a)  Debentures can be issued for maximum tenure of 10 years.
(b)  No. The proposed issue is not empowered by Articles of Association as it
permits only up to ` 5 crore.
(c)  Company should issue debenture certificate within 6 months of allotment of
debentures.
(2) 
(a)  No. Sun Pvt. Ltd. Company being a private limited company is not eligible to
accept deposits from the public but can accept deposits from its members or
Directors or relatives of Directors.
(b)  Sun Pvt. Ltd. Company should issue circular or statement in lieu of
advertisement to invite deposits.
(c)  It can accept the deposit for maximum period of 36 months.

(3) 
(a)  Joy Ltd. Company should go to primary market to issue its shares first time to
investors.
(b)  Joy Ltd. Company should offer its shares through public offer to raise capital
for the first time.
(c)  The issue of equity shares by Joy Ltd. Company is called as Initial Public Offer
(IPO).

Q. 4. 

(1) Shareholders Debentureholders

1. Meaning
The persons who buy and possess shares The persons who buy and possess
of a company are called shareholders. debentures of a company are called
debentureholders.
2.  Status
Shareholders are the joint owners of the Debentureholders are the loan creditors
company. of the company.
3.  Income
Shareholders get dividend as the return Debentureholders get interest as
on their investments in shares. the return on their investments in
debentures.

4 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 4.  Nature of Return
Shareholders get dividend at fluctuating Debentureholders get interest at a fixed
rate. The rate of dividend depends upon rate (predetermined at the time of issue
availability of disposable profit. of debentures). The payment of interest
does not depend on the profit.
5.  Rights
Equity shareholders have right to vote Debentureholders being creditors of the
at the general meetings and also have company have first right to get refund of
right to participate in the management capital at the time of winding-up of the
of the company. company.
6.  Repayment (Refund)
Shareholders being owners of the Debentureholders being creditors of the
company are the last claimants for the company have the preferential right
return of capital at the time of winding- over the shareholders and unsecured
up of the company. creditors for refund of capital at the time
of winding-up of the company.

(2) Transfer of Shares Transmission of Shares

1. Meaning
The passing of shares voluntarily The passing of ownership of a member’s
or deliberately by one shareholder shares to his legal representative due to
to another person by entering into a operation of law i.e. on death, insolvency
contract with the buyer is called transfer or insanity of the member is called
of shares. transmission of shares.
2.  When Done ?
Transfer of shares takes place when the Transmission of shares takes place when
member wants to sell his shares or give the member dies or becomes insolvent
his shares as gift to other person. or insane.
3.  Nature of Action
Transfer of shares is a voluntary or Transmission of shares is an involuntary
deliberate action initiated by the action. It is due to operation of law i.e.
member. death, insanity or insolvency of the
member.
4.  Parties Involved
In transfer of shares, two parties are In transmission of shares, there is only
involved viz. the shareholder who is one party gets involved i.e. the nominee
called as transferor and the buyer who of the member in case of death of the
is called transferee. member or the legal representative in
the case of insanity or insolvency.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 5

 5.  Instrument of Transfer
For transfer of shares instrument of No instrument of transfer is required for
transfer is required. It is a contract transmission of shares.
between the transferor and transferee.
6.  Initiated by
The transferor i.e. the member initiates Legal representative or official receiver
the process of transfer. or nominee of the concerned member
initiates the process of transmission.

(3) Dematerialisation Rematerialisation

1. Meaning
The process in which shares in the The process in which shares in an
physical form are converted into an electronic form are converted into
electronic form is called physical form is called rematerialisation
dematerialisation of shares. of shares.
2. Conversion
Shares are converted from original Shares are converted from an electronic
physical form into an electronic/digital records again into physical form.
form.
3. Use of form
For dematerialisation of securities For rematerialisation of securities
Dematerialisation Request Form (DRF) Rematerialisation Request Form (RRF)
is used by the investors and submitted is used by the investors and sumitted to
to DP. DP.
4. Sequence
Dematerialisation is initial process. It Rematerialisation is a reverse process.
is primary and main function of This is a secondary and supporting
Depository. Original securities are function of Depository. Already demate-
dematerialised. rialised securities are rematerialised.
5. Identification of securities
Demated securities do not have Remated securities are in the form of
distinctive numbers for identification. certificate. These securities are given
They are fungible i.e. interchangeable. distinctive numbers by the issuer
company for their identification.
6. Securities maintenance authority
The Depository is the custodian and The issuer company is the record
record keeping authority of the keeping authority of rematerialised
dematerialised securities. securities. Investor is the custodian of
rematerialised securities.

6 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 7. Difficulty of process
Dematerialisation is an easy process.  Rematerialisation is a complex process.
It is not time consuming process. It is time consuming process.

(4) Interim Dividend Final Dividend

1. Meaning
Dividend which is declared and paid Dividend which is declared and paid
between two consecutive Annual after the conclusion of the financial
General Meetings of the company is year is called Final Dividend.
called Interim Dividend.
2.  Who declares?
Interim dividend is decided and declared Final dividend is declared as per the
by the Board of Directors by passing a recommendations made by the Board of
resolution if Articles so authorise. Directors, by the shareholders by
passing an ordinary resolution at the
Annual General Meeting.
3.  Authorisation
The Board of Directors is empowered to For declaration of final dividend, the
declare an interim dividend, if adequate authorisation of the Articles is not
provisions to that effect exist in its required. However, the Board of
Articles of Association of the company. Directors is required to pass a resolution
in its meeting to that effect.
4  When is it declared ?
Interim dividend is declared in between Final dividend is declared after the
two consecutive Annual General conclusion of the financial year at the
Meetings. Annual General Meeting.
5.  Rate of dividend
Comparatively, the rate of interim Usually, the rate of final dividend is
dividend is lower than the rate of final higher than the rate of interim dividend.
dividend.
6.  Source
Only one source is available to the Various sources such as profit of current
company for declaration of interim year and previous years, reserves,
dividend, i.e. periodic profit of the capital profits, funds provided by
current financial year. It is usually Central or state government, etc. are
declared on the basis of better financial available to the company for declaration
prospective result which may be of final dividend.
quarterly or half-yearly.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 7

Q.  5.  (1) Book Building : Under Book Building method, the Board of Directors of the
company decides the number of shares and the price at which its shares will
be issued by bidding process. The company firstly have to issue a Red Herring
Prospectus which contains price range or price band and asks the investors
to bid on it. The company collects bids from the investors at various prices
which are equal to the floor price or even above floor price. The lower price of
bid is known as ‘floor price’ or ‘ask price’. Upper price of bid is known as the
‘cap price’ or ‘bid price' or the ‘ceiling price’. The final price at which shares
are offered to the investors is called as ‘cut off’ price. Investors can bid any
number of shares that they are willing to buy at any price within the price
band. Bidding is kept open for 5 days.
  After the closure of issue, all applications are scrutinised and cut off price 
(final price) is decided by the company on the basis of demand and quotes received
for securities. Bids along with the application money is to be submitted to the Lead
Merchant Bankers called ‘Book Runners’ who enters the bids in a book. After bidding
is over, company fixes ‘cut off price’ based on the highest or best price at which all
shares on offer can be sold. Company issues a Prospectus which contains the final
price. Book Building Method is used for public issues i.e. IPO and FPO. Companies
Act prohibits a company to issue its shares at discount. However, it may be allowed
in certain exceptional cases like when shares are issued to its creditors, when the
debts are converted into shares under a restoration or debt restructuring scheme as
per RBI or Banking Regulation Act, 1949. A company can make public offer through
two methods as follows :
(a) Initial Public Offer (IPO) : Initial Public Offer refers to the process of
offering shares of a company to the public for the first time. It is the process
by which a private company can go public by sale of its stocks to the general
public. Companies can raise equity capital with the help of an IPO by issuing
new shares to the public or the existing shareholders can sell their shares to the
public without raising any fresh capital.
(b) Further Public Offer or Follow on Public Offer (FPO) : When a company
issues shares to the public after an IPO, it is called Further (Follow on) Public
Offer. Every issue of shares by a listed company after its IPO is called FPO. FPO
leads to an increase in the subscribed capital of a company.

(2)  The following are the provisions related to bonus shares : 

(1)  A company can issue Bonus Shares only out of : (i)  Free reserves or (ii)  Securities
Premium Account or (iii)  Capital Redemption Reserve Account.
(2)  A company cannot issue bonus shares only out of reserves created by Revaluation
of Assets.
(3)  Articles of Association must permit the capitalisation of free reserves or retained
earnings by the issue of bonus shares.

8 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

  (4)  It cannot issue bonus shares instead of paying dividend.
  (5)  The Board of Directors must pass necessary resolution to issue bonus shares in
their Board Meeting. The issue of bonus shares must be recommended by the
Board of Directors.
  (6)  Once the announcement for bonus shares is made by the Board of Directors, it
cannot be then withdrawn.
  (7)  The members are required to give formal approval for such an issue in the
Annual General Meeting.
  (8)  Bonus shares are fully paid up shares.
  (9)  Shareholders cannot renounce i.e. give away their Bonus shares to another
person.
(10)  There is no minimum subscription to be collected.
(11)  No bonus issue shall be made within 12 months of any public or right issue.
(12)  The company cannot issue Bonus shares under the following circumstances : 
  (i)  If company fails to pay interest on debentures or public deposits.
 (ii)  If company commits defaults in repayment of principal amount.
(iii)  If company commits default in payment of employees dues like provident
fund, gratuity, etc.
(iv)  If the conversion of convertible debentures into equity shares is pending.

(3) The circumstances under which the Secretary enters into correspondence with
the debentureholders are as follows :
(1) Informing the applicant about allotment of debentures : As soon as the
company allots the debentures to the applicant, the Board of Directors instructs
the Secretary to send the Letter of Allotment to the debentureholders. The
Secretary also requests debentureholders to preserve the letter of allotment as
they will get Debenture Certificate in exchange of this letter.
(2) Informing about payment of interest : Being the creditor of the company all
the debentureholders are entitled to get fixed rate of interest as a return on their
investment in debentures. The company pays interest through Interest Warrant
sent along with this letter. Board Resolution is required for the payment of
interest on debentures. The company pays interest through : (a)  Interest
Warrant (Physical) (b)  Electronically.

(3)  Letter for conversion of debentures into equity shares : The debentures

which are converted into equity shares on the completion of predetermined
period and at a specified rate mentioned in the terms of issue are called
convertible debentures. After getting the approval of shareholders by passing
special resolution at the Extra Ordinary General Meeting, the Secretary sends
letter of conversion of debentures to debentureholders.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 9

 (4)  Letter for Redemption of Debentures : Letter for Redemption of debentures
is sent to the debentureholders whose debentures are to be refunded after the
specified period. Debenture Redemption form is sent along with this letter. 
It informs them that their debentures have become due for refund.
Q. 6.  (1)
(1)  A company collects the required amount of capital through different sources
such as issue of shares, borrowing, accepting deposits from public, etc. Usually
small part of debts capital, that too for a short period, is raised through accepting
deposits from general public.
(2)  The deposits accepted by the company from general public are called public
deposits. The depositors provide finance to the company by keeping their deposits
with the company. The amount raised by accepting deposits is usually used for
meeting short-term financial requirement of the working capital.
(3)  Under this method, general public is invited to deposit their savings with the
company for varied period. A company may accept the deposits for a minimum
period of 6 months and for a maximum period of 3 years.
(4)  Because of these reasons, the acceptance of deposits is a source of raising capital
for short-term. But, it cannot be a long-term and permanent source of raising
capital.
(2)
(1)  Equity shareholders are the owners of the company who bear ultimate risk
associated with the ownership. They are also called ‘residual claimants’ of the
income and assets. This is because as a owner after paying claims of all other
investors and stakeholders the remaining funds and property belong to equity
shareholders. Conversely at the time of winding-up if no fund is left after paying
claims to other investors, equity shareholders will not get anything. They have
to suffer capital loss.
(2)  Equity shareholders do not have guarantee of getting dividend every year. They
get dividend at the rate recommended by the Board of Directors. The fortune of
equity shareholders fluctuates with the ups and downs of the company.
(3)  If the company earns handsome or huge amount of profit, equity shareholders
enjoy great financial rewards in the form of higher dividend. Conversely, if
the company suffers heavy loss, the risk falls mainly on equity shareholders.
Because of these reasons, equity share capital is known as venture capital or risk
capital. Thus, the owners of equity shares are real risk bearers.
(4)  Equity shareholders are described as, ‘shock absorbers’ when company has
financial crisis. If the company suffers loss or its income falls, the company
forced to reduce the rate of dividend. Because of this situation, the market value
of equity shares falls down in the share market resulting into capital loss to its
shareholders. Thus investment in equity shares is risky.

10 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

(3)  If a company intends to invite deposits from its members, it issues circular.
However, a company has to issue an advertisement if it accepts deposits from
the public.
(1)  Contents of circular or advertisement : (i) Statement of the financial position of
the company. (ii) The proportion of secured deposit and unsecured deposit of
fresh issue. (iii) Eligible public company has to obtain credit rating from a Credit
Rating Agency. (iv) All the details of deposit schemes such as nature, secured or
unsecured, tenure, maturity date, etc. (v) Name of Deposit Trustees. (vi) Amount
due towards deposits of any previously accepted deposits by the company.
(2)  Company is required to file a copy of circular or advertisement signed by all
directors with the Registrar of the companies.
(3)  Company can issue circular or advertisement to the members or public only
after 30 days of filing a copy of circular or advertisement with the Registrar of
Companies. Company can send the circular to its members through registered
post, speed post or e-mail. It has to publish advertisement in one English newspaper
and one vernacular newspaper having wide circulation in the concerned areas.
(4)  The circular or advertisement will remain valid for 6 months from the end of
financial year in which it is issued or the date on which the Annual General
Meeting is held whichever is earlier.
(4) 
(1)  A market place where long term funds are borrowed and lent is called Capital
Market. The financial assets that dealt in capital market have long or indefinite
maturity period. The financial instruments such as equity shares, preference
shares, debentures, bonds, government securities, public deposits, etc. are used
in the capital market. These financial instruments are used by Corporates on
extensive scale to solve the problems of finance.
(2)  The corporate sector issues and sells capital market instruments and collects
huge amount of funds from the different corners of the country from the public,
banks, financial institutions, mutual funds, non-banking, financial companies,
insurance companies, etc.
(3)  Capital market links investors with borrowers of funds. It routes huge flow of
funds from savers/investors to the corporate sector. Through capital market,
corporates, financial institutions, industrial organisations access to the long
term funds from both domestic as well as foreign markets.
(4)  Capital market provides platform for investors and borrowers of long term
funds to organise and carry out trade in financial instruments. This in turn
facilitates capital formation in an economy and provide finance to corporate
sector. Capital market buys and sells both marketable and non-marketable
securities which are useful for corporate sector to raise long term and medium
term finance for its development, growth and diversification. Thus, capital
market is useful for corporate sector.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 11

Q. 7.  (1)  A letter to the member for the payment of Interim Dividend electronically :

RONAK STONES LTD.

Registered Office: UG 50, Avior Complex,
L.D. Road, Main City, Hyderabad  –  500 004.
CIN : P08765 AP 1679 PLC300487
Phone : 040-59706549 Website : ronakstones.com
Fax : 040-597053456 E-mail : ronakstones@gmail.com
Ref. No. G/AP-D/212/20-21 Date : 20th June, 2020

Mr. Ganesh Pradhan,

15, Vasant Villa,
Pokhran Road,
Thane - 400 602.
Sub. : Payment of Interim Dividend through Electronic
   Clearing Service (ECS), Direct Credit / NEFT
Dear Sir,
  It is with great pleasure that I am directed to inform you that the meeting of Board of
Directors of Ronak Stones Ltd. held on Thursday, 15th June 2020 has decided and declared
Interim Dividend @ ` 1.5/- (i.e. 15%) per equity share of face value of ` 10/- each.
  As per the details furnished by you through your Depository Participant, we have
transferred the amount of above stated Interim Dividend to your Banker for crediting
your Bank Account, i.e. Dividend will be payable by electronic transfer. Your company
has completed all the formalities as per the provisions relating to declaration and
payment of dividend.

1 2 3 4 5 6
No. of Equity Dividend Dividend DPID and   Date of Bank Account
Shares held on per Share Amount Client Remittance (BOI)
Record Date
(`) (`) ID No.
(May 31st, 2020)
200 1.5 300 IN 347601 22nd June, 636377899753
42296590 2020 Bank of India

  You are requested to check the credit of the amount in your Pass book or statement
of accounts.
  In accordance with the provisions of the Income Tax Act, 1961 the company has not
deducted any tax at source in respect of Dividend payment. However, dividend
distribution tax is paid by the company.

Thanking you,
Yours faithfully,
For Ronak Stones Ltd.

Sign
(Mr. Ashutosh Rane)
Company Secretary

12 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (2)  A letter of allotment to debentureholder :

RUSHI VED LTD.

Registered Office : C / 33, Ekvira Tower,
M.M.M Road, Nashik  –  422 003.
CIN : L67003MH 2000PLC504734

Phone : 234-56774778 Website : www.rushived.com

Fax : 234-56774353 E-mail : rushived@gmail.com
Ref. No. R/RD/WD/20-21 Date : 10th May, 2020.

Mr. Aamir Tonk,

Flat No. 22, Ashok Complex,
Bapat Marg, Dadar,
Mumbai  –  400 025.
Sub. : Allotment of Debentures
Dear Sir,

  I am pleased to inform you that with regards to your application No. WK - 79574 dated
27th April, 2020, you have been allotted 250, 10% Non-convertible secured debentures of
`100/- each. The maturity period of debentures is for 7 years.

  These debentures are allotted to you by the company as per Board Resolution passed
at Board Meeting held on 7th May, 2020 and in accordance with and as per terms and
conditions of Debenture Trust Deed and Articles of Association of the company.

  The Details of Allotment of Debentures are shown in the following schedule :

1 2 3 4 5
Folio No. No. of No. of Distinctive Numbers Amount Received
Debentures Debentures From To (`)
Applied Allotted
WK79574 250 250 23351 23600 ` 25,000

  The Debenture Certificate is attached with this letter.

Thanking you,
Yours faithfully,
For Rushi Ved Limited.

Sign
(Mr. Zahir Shami)
Company Secretary

Encl. : Debenture Certificate

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 13

 (3)  A letter of thanks to the depositor of a company :

SEJAL PARASITE LIMITED

Registered Office : 24 / 2, Suraj Complex, J. D. Road, Worli  –  400 018.
CIN : L3684 MH 2002 PLC07867

Phone : 022-35673240 Website : www.sejalparasite.com

Fax : 022-35670923 E-mail : sejalparasite@gmail.com
Ref. No. ST/DP/32/20-21 Date : 7th May, 2020

Mr. Gaurav Taneja,

78/68, Gunjan Enclave,
City Campus, Thane  –  400 604.
Sub. : Thanking Depositor for Fixed Deposit
Dear Sir,
We have immense pleasure to inform you that we have received an application from you
dated 4th May 2020 for investment of ` 2,00,000 in the fixed deposit for a period of 3 years
as per terms and conditions stated in advertisement. We are thankful to you for the
trust you have shown in our company and initiating a deposit of a substantial sum with
us.
The details of deposits accepted from you are shown in the following schedule :

1 2 3 4 5
Fixed Amount of Period of Rate of Bank Details
Deposit Deposit (`) Deposit Interest Name of the Bank Bank Account
Receipt (years) (%) No.
No.
C9032 ` 2,00,000 3 years 8.5% State Bank of India 7454749

  The Board of Directors is once again thankful to you for reposing confidence and
showing interest in our company.
  The company assures you prompt service in the future and also expects cooperation
from your side.

  Please find the Deposit Receipt enclosed herewith. Kindly acknowledge the same.

Thanking you,
Yours faithfully,
For Sejal Parasite Ltd.

Sign
(Mr. Jayant Shahani)
Company Secretary
Encl. : Deposit Receipt No. C9032

14 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

Q. 8. 
(1)  The importance of corporate finance is shown in the following chart :

Importance of Corporate Finance

• • • • •
Helps in Helps in Brings co- Payment of
decision ordination Managing dividend and
Research and
making between various risks interest
Development activities

• •
Helps
• • •
Helps in smooth Payment
Promotes Replace old
in raising of taxes and
running of expansion and
capital for a assets
business diversification fees
project
firm

The importance of corporate finance is explained as follows :

(a) Helps in decision making : In all business organisations the decisions in the
different areas of the business are taken by considering the availability of
finance or funds. Without adequate finance, business organisation cannot
independently perform any function of the business. Most of the business
decisions are taken by considering their impact on the profit earning ability.
From the available alternatives management needs to select the best alternative
that will increase profitability of the business organisation. Business
organisation will undertake those project which are financially viable. In this
way, corporate finance plays key role in decision making process.
(b) Helps in raising capital for a project : Every business organisation is
required finance if it wants to start a new business venture. The needed finance
can be raised by the business organisation from the different sources such as
issue of different type of shares, debentures, bonds and by borrowing loans
from the banks and other financial institutions.
(c) Helps in Research and Development : Business organisations must undertake
research and development for its growth and expansion. Even for the execution
of projects detailed technical work is necessary. Financial support is required
continuously throughout the process of research work. In order to attract more
customers, it is necessary to upgrade the old products and develop the new
products which requires more financial support.
(d) Helps in smooth running of business firm : In every business organisation,
continuous and smooth flow of corporate finance is necessary to pay salaries
to the employees in scheduled time, to repay the loans to creditors on time, to
purchase sufficient quantity of raw materials at the time of their requirements,
to finance sales promotion of existing products, to launch new products in the
market more effectively, etc.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 15

 (e) Brings co-ordination between various activities : Corporate finance is
necessary to co-ordinate all the activities of different departments of the
business organisation, e.g. finance department has to provide adequate finance
to the production department to purchase raw materials and to meet daily
financial needs for smooth running of production units. In the absence of
regular supply of finance, the production will be adversely affected which in
turn will have its effects on sales and ultimately on income flow and profitability
of the organisation. In this manner, efficiency of every department in the
organisation depends directly on the effective financial management.
(f) Promotes expansion and diversification : Expansion and diversification in
business organisation are possible through the use of modern machinery and
techniques. Corporate finance is necessary to buy and install modern machines
and techniques. Hence, corporate finance plays significant role for expansion
and diversification of a business organisation.
(g) Managing risks : Several risks such as sudden fall in sales, loss due to
occurrence of natural calamities, loss due to strikes, etc. are inevitable in every
business organisation. Corporate finance is essential to manage all such risks.
(h) Replace old assets : Fixed assets such as plant and machinery, furniture and
fixtures, vehicles, etc. are depreciated every year. They become old and outdated
after certain years. These assets are required to be replaced by installing new
assets. For purchase and installation of new asset corporate finance is
mandatory.
  (i) Payment of dividend and interest : Corporate finance is necessary to pay
dividend to shareholders and to pay interest to debentureholders, creditors,
banks, etc. on the finance provided by them in the form of loans.
  (j) Payment of taxes/fees : Corporate finance is required by every business
organisation to pay various taxes to the Government such as income tax,
Goods and Service Tax (GST)  and fees to the Registrar of Companies on
different occasions.

(2) 

[A] Meaning : An equity share is the one which has no priority claim either for
payment of dividend or for repayment of capital at the time of winding-up of
the company. Equity shares are also referred to as ordinary shares. Companies
Act, 2013 defines equity shares as “those shares which are not preference
shares.” The equity shareholders often described as residual claimants of all
earnings and assets that left after the payment of claims of all other investors
and stakeholders. Equity shareholders are the owner of the company and bear
ultimate risk associated with the ownership of the company.

16 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

[B]  Features : 
(a) Permanent capital : The amount received by the company from the issue of
equity shares is irredeemable in nature, i.e. the amount of equity shares is not
refundable during the lifetime of the company. It is refunded only at the time of 
dissolution of the company or as and when company decides to buy back its
shares. Equity shareholders provide long-term and permanent capital to the
company.
(b) Fluctuating dividend : The rate of dividend payable to equity shareholders
is not fixed. It depends upon the quantum of profit earned by the company.
If company earns handsome profit, it pays dividend at higher rate. If there is
inadequate or no profit, dividend may not be paid or paid at very low rate. Thus,
income of equity shareholders is uncertain and fluctuating.
(c)  Rights : The equity shareholders enjoy the following rights :
  (i) Right to vote : Right to vote is the basic right of the equity shareholders.
Through right to vote, its shareholders elect directors and amend or alter the
Memorandum of Association and Articles of Association.
 (ii) Right to share in profit : Equity shareholders have right to share profits when
distributed as dividend. If company earns more profit, equity shareholders
entitled to get dividend at higher rate.
(iii) Right to inspect books : It is another important right of the equity shareholders.
They have right to inspect all statutory books of their company.

(iv) Right to transfer shares : The equity shareholders have right to transfer

their shares to another person as per the procedure laid down in the Articles of
Association.

(d) No preferential right : Equity shareholders do not have special preferential

rights as to payment of dividend. They get dividend only after the dividend is
paid on preference shares. In the event of winding-up of the company, the capital
is refunded to the equity shareholders only after it is refunded to preference
shareholders. If nothing is left behind after paying other claims, the equity
shareholders may not get anything.

(e) Controlling power : Equity shareholders are the owners and real masters of the
company and hence control of the company is vested in them. They can exercise
their voting rights by proxies without attending the meeting in person. Through
their right of voting, equity shareholders can participate in the management
and affairs of the company. They can elect the Board of Directors to look after
the management of the company. They have right to vote on all the matters
discussed in the general meeting. Thus, equity shareholders exercise the control
over the company.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 17

 (f) Risk : Equity shareholders have to face maximum risks of the company. They
are also called as “shock absorbers” when company faces financial crisis. If the
earnings of the company fall, equity shareholders get dividend at very low rate.
This in turn declines the market value of equity shares resulting into capital loss.
Thus, they bear maximum risk associated with the ownership of the company.

(g) Residual claimants : A residual claim implies the last claim on the earning of
the company. The equity shareholders often described as residual claimants of
all earnings that left after payment of taxes, expenses, interest and dividend to
preference shareholders, etc. The equity shareholders have benefits of receiving
entire earnings whatever is left over.

(h) No charge on the assets : Unlike secured debentures, equity shares do not

create any charge on the assets of the company.

(i) Face value : The face value of equity shares is usually very low. Generally, it is
` 10/- per share or even ` 1/- per share.

(j) Market value : The market value of shares is determined by forces of demand

and supply in the share market. The market value of equity shares always
fluctuates in the stock exchange. It depends on quantum of profit earned and
rate of dividend declared. When company earns huge profit, the market value
of shares increases. Conversely, if loss is incurred by the company, the market
value of shares declines. Equity shares are traded on stock exchange and are
more appearing to the speculations.

__________

18 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)