SOLUTIONS : PRACTICE PAPER 4

Q.  1.  (A)

(1) Working Capital refers to the excess of current assets over current liabilities.

(2) If a share of ` 100 is issued at ` 110, it is said to be issued at premium.

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

(4) Dividend amount should be transferred in a separate bank account within

5 days of its declaration.

(5) The market which is also known as the government securities market is

called Gilt-edged Market.

Q.  1.  (B) 

(a)  Right issue : Offered to equity shareholders.

(b) Debenture certificate : Issued within 6 months of allotment of debentures.

(c)  CDSL : Second Depository in India.

(d)  Interim Dividend : Decided and declared by the Board of Directors

(e) NSE : Nifty is the main index

Q.  1.  (C)

(1) Investment decision

(2) Special Resolution

(3) Debenture Certificate / Debenture

(4) Interest

(5) Stock Market / Secondary Market

Q.  1.  (D)

(1) Equity shareholders are described as ‘shock absorber’ when company has

financial crisis. : True

(2)  Floor price is the highest bid price under Book Building Method. : False

(3) Company appoints Credit Rating Agency to protect the interest of depositors. :

 False

(4) Dividend once declared cannot be revoked. : True

(5) Investors in securities are attracted due to good returns on investments and

capital appreciation. : True

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

Q. 2. (1) Working capital :
(1) Working capital refers to business firm’s investment in short-term assets such
as cash, account receivable, inventories, etc. According to Gerstenbergh 
‘‘the excess of current assets over current liabilities is termed as working capital.’’
This approach is called net working capital approach. He prefers to call it as
‘circulating capital’. In this respect, J. S. Mill says “the sum of current assets
is working capital of a business.”
(2) Working capital is used in the business firm to arrange and carry out day-to-
day business activities. The business organisations or companies need working
capital for smooth functioning of business activities, to maintain sufficient
stock of raw materials, to maintain adequate stock of finished goods, to arrange
for the funds till the amount of credit sale is collected from the debtors, to pay
overheads, to meet unexpected expenses, etc.
(2) Debenture Trust Deed :
(1) A company which intends to issue prospectus or invite more than 500 persons
to purchase its debentures, is required to appoint one or more Debenture
Trustees. Debenture Trustees protect the interest of debentureholders. The
company is required to appoint them by entering into a contract with them.
Such contract is called Debenture Trust Deed. This trust deed contains terms
and conditions that are agreed between trustees and the company in written
form. It states the role of debenture trustees.
(2) Debenture Trust Deed also defines the rights of debentureholders and duties
and powers of debenture trustees. Company is required to execute the debenture
trust deed within 3 months from the date of closure of issue. The members of
the company as well as debentureholders can inspect the trust deed and get a
copy of trust deed by paying specific fees.
(3) Conciseness :
(1) Conciseness means keeping things short and simple while doing correspondence.
Correspondence should be easy to understand. Conciseness is used by the
Secretary while corresponding with members or the debentureholders of the
company.
(2) The Secretary must use simple words and short sentences without stretching it
unnecessarily. The letter to the debentureholders should be concise, i.e. brief,
short and to the point. Unnecessary and irrelevant information must be avoided.

2 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (4)  ISIN :
(1) ISIN stands for International Securities Identification Number. ISIN is the
identification number given to a security of an issuer company at the time of
admitting such security in the depository system. It is a code that uniquely
recognises particular security. In every country there is its National Numbering
Agency (NNA) which allots ISINs to the demated securities.
(2) ISIN is a standard numbering system accepted worldwide. ISIN’s structure is
currently defined by the International Organisation of Standardisation. In
India, the Securities Exchange Board of India (SEBI) has assigned the work of
issuing ISIN to securities (i.e. demated shares) to National Security Depository
Limited (NSDL). SEBI has been working as National Numbering Agency (NNA).
In case of Government Securities, allotment of ISIN is completed by Reserve
Bank of India.
(5) Unpaid Dividend Account :
(1) Every company is required to open a separate account called Unpaid Dividend
Account in any one of the scheduled banks. A company has to transfer all the
amount of unpaid or unclaimed dividend to this account within 7 days from the
date of expiry of 30 days given to the company for making the payment of
dividend.
(2) After the transfer of the amount in the Unpaid Dividend Account, but before
the completion of 90 days the company is required to post on its website or any
other website as specified by the Central Government, a statement disclosing
therein the names, last known addresses and the unpaid amount due for
payment to each shareholders. If the claim for dividend is made by the claimant
subsequently, it should be settled from this account after careful verification.
After 7 years, the remaining amount in the Unpaid Dividend Account is required
to be transferred by the company to “Investors Education and Protection Fund”,
(IEPF).
(6)  Bear :
(1) A speculator who anticipates the price of a share or other securities, to fall in
the near future and sells them at the prevailing prices to avoid loss, is called
Bear. He always buys securities at lesser prices and sells them at little higher
prices and earns profits (incomes). He sells the securities at prevailing prices
to avoid further loss. He anticipates that the prices of securities will fall further
in future. For these reasons he is called Mandiwala. His views are pessimistic.
(2) A market situation in which the prices of securities are constantly on fall is
called Bearish or Bear market. Bears are active during this period i.e. called
Crash. Bears’ actions result into lowering the prices of the securities, as there
is an upward trend of sales over purchases.

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

Q. 3. (1) (a) In my opinion, Mr. Satish should choose to invest in equity shares issued

by the company.

(b) He receives dividend as return on the investment in shares.

(c) As a shareholder, he has right to cast vote in proportion to his shareholdings.

By exercising voting right he can participate in the management and affairs

of the company. He is allowed to vote on all matters discussed at the general

meeting. He enjoys control over the company.

(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 deposits for maximum period of 36 months.

(3) (a) If dividend was not paid by Gold Co. Ltd. within 30 days of its declaration,

the company is in default in compliance of legal requirements and such

company and every officer of the company is responsible for this default

and punishable with fine.

(b) Gold Co. Ltd. is not right in transferring the unpaid dividend to its Debenture

Reserve Account. The company is supposed to transfer the unpaid dividend

amount to Unpaid Dividend Account.

(c) Gold Co. Ltd. does not have to transfer the amount of unpaid dividend to

IEPF after 30 days. The company is required to transfer unpaid dividend

amount from unpaid dividend account to IEPF after 7 years from the date

of transfer of amount to unpaid dividend account.

4 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

Q. 4.

(1) Shares Debentures

1.  Meaning
The smallest part or unit of the owned A specific or smallest part or unit of the
as well as rentier capital subscribed by debt capital borrowed from the public
the public usually for a longer period is for a specific period is called debenture.
called share.

2.  Nature

Capital raised by issue of shares is a Funds raised by issue of debentures is

permanent capital. It is not refunded a temporary capital. It is repaid after a
during the lifetime of the company. specific period of time.

3.  Status

A share is an ownership security. A A debenture is a creditorship security.

shareholder is the owner of the company. A debentureholder is a creditor of the
The share capital is owned capital. company. The capital raised by issue
of debenture is called loan capital or
borrowed capital.

4.  Voting Rights

Equity shareholders have a right to Debentureholders, being the creditors,

receive notices of general meetings, to have no right to receive notices of
vote in such meetings and to participate general meetings, no right to vote in
in the management of the company. such meetings nor to participate in the
management.

5.  Return on investment

The income or monetary return on The income or monetary return on

shares is called dividend. The rate of debentures is called interest. The rate of
dividend is fluctuating, except in the interest is fixed irrespective of profit or
case of preference shares. loss made by the company.

6.  Security

Shares are not secured, against any Debentures are usually secured, by
asset of the company. Share capital is creating fixed or floating charge against
unsecured capital. the assets.

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

 (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 or
his shares as gift to other person. 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 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 is of the member in case of death of the
called transferee. member or the legal representative in
the case of insanity or insolvency.

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.

6 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

(3) Dematerialisation Rematerialisation
1.  Meaning
The process in which shares in The process in which shares in an
the physical form are converted electronic form are converted into
into an 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 to is used by the investors and sumitted to
DP. DP.

4.  Sequence

Dematerialisation is an initial process. Rematerialisation is a reverse

It is primary and main function of process. This is a secondary and
Depository. Original securities are supporting function of Depository.
dematerialised. Already dematerialised 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 The issuer company is the record

and record keeping authority of the keeping authority of rematerialised
dematerialised securities. securities. Investor is the custodian of
rematerialised securities.

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

 (4) Money Market Capital Market
1.  Meaning
Financial market where short-term Financial market where medium-term
funds are borrowed and lent is called and long-term funds are borrowed and
Money Market. lent is called Capital Market.

2.  Time period

In money market, instruments bought In capital market, instruments bought

and sold have maturity period of one and sold have maturity period of more
year or less than one year. than one year.

3.  Instruments

In money market, short-term In capital market, long-term instruments

instruments such as commercial papers, such as bonds, debentures, stocks,
treasury bills, repurchase agreements, shares, government securities, etc. are
certificate of deposits, etc, are used for used for lending and borrowing of funds.
lending and borrowing of funds.

4.  Purpose of borrowings

From money market, funds are borrowed From capital market, funds are borrowed
by the business enterprises to meet the to set up new business, expand and
need of working capital and small and diversify the existing business or
short period investments. purchase of fixed assets.

5.  Institutions

Participants functioning in money Participants functioning in capital

market are central bank (RBI), market are stock exchanges, commercial
commercial banks, non-banking finance banks, non-banking finance companies,
companies, corporates, bill brokers, financial intermediaries, etc.
Central and State Governments, etc.

6.  Risk

In money market, the prices of the In capital market, instruments are of

instruments remain stable and maturity long-term and subject to market
period of instrument is less and hence fluctuations and hence in comparison to
they carry low financial and market money market, it carries very high
risk. financial and market risks.

8 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

Q. 5. (1)  The features of Bond are shown in the following chart :

Features of Bond

Nature of finance Return on bonds

Status of bondholder Repayment

The features of bond are explained as follows :

(1) Nature of finance : Bond is a debt security. It is a debt or loan finance. The
Bondholders provide long-term finance to the company. Usually, company
issues bonds for longer periods such as 5 years, 10 years, 25 years, 50 years, etc.
(2) Status of bondholder : The company borrows money for certain fixed period
and issues bonds as evidence of debt. Bondholder is a lender of the company.
Hence, bondholders are creditors of the company. The bondholders are not the
owners of the company. So, they cannot attend and participate in the general
meetings of the company. They do not have voting right and hence they cannot
participate in the management of the company.
(3)  Return on bonds : The bondholders are entitled to receive return on their
investment in the form of interest at fixed rate. Interest on the bonds may be
either paid at regular interval or on the maturity date along with principal
amount.
(4) Repayment : A bond is a formal contract between the company and bondholder
to repay the borrowed money by the company. All bonds have maturity date.
On maturity date the repayment of principal amount along with interest (if not
paid)  is made by the company to the bondholder.
(2) The effects of forfeiture of share are stated as follows :
(1) Cessation of membership : On forfeiture, a member ceases to be member of a
company and loses all membership rights. The member’s name is removed from
the Register of Members.
(2) Liability of member : A member is liable for unpaid calls even after forfeiture
of shares. The liability ceases only when the company reissues the forfeited
shares.
(3) Liquidation of company : If a company goes in for liquidation within one year
of forfeiture of shares, the member whose shares have been forfeited is liable to
pay the calls as a past member.
(4) Reissue of forfeiture shares : The company can reissue the forfeited shares
to the other members or any other person. A company is under obligation to
pay the excess amount to the concerned member, if it receives more amount on
reissue of share.

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

 (3) The Depository Act, 1996 provided for the establishment of depositories in India.
There are two depositories that exist in India, : (i)  NSDL and (ii)  CDSL. NSDL
and CDSL both have played significant role in the grand success of Depository
system in India.
They are explained as follows :
(1) National Security Depository Limited (NSDL) : The NSDL is the first and
the biggest depository in India. It was set up in November, 1996 and developed
by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and
National Stock Exchange (NSE). NSDL’s headquarters are located in Mumbai. It
is a public limited company incorporated as per provisions of the Companies Act,
1956. It offers variety of services to investors, stock exchanges, Banks, Issuers,
Clearing Houses (members), etc. It provides services of different nature such as
account maintenance, dematerialisation, rematerialisation, settlement of trades
through market transfers and off market transfer, transmission, distribution
of non-cash corporate actions, dividend distributions, nomination, facility of
freezing or locking of investors’ accounts, investors’ grievances, etc.
(2)  The Central Depository Services Limited (CDSL) : The CDSL started its
functions in February 1999. It is developed by Bombay Stock Exchange (BSE)
with the association of several banks. The CDSL’s headquarters is located in
Mumbai. It has extensive DP network and provides the demat services as similar
as that of NSDL throughout the country.

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.

10 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (2)

(1) When a member (i.e. a registered shareholder) sells or gives his shares to

another person voluntarily, it is known as transfer of shares. Transfer of shares

is a voluntary act on the part of the shareholder.

(2) The shares cannot be transferred by mere delivery. The transfer has to take

place in the manner as specified in the Act and the Articles which may lay

down certain restrictions in this respect. The transfer is effected by registering

an instrument called ‘Instrument of Transfer’ with the company.

(3) The application for transfer of shares may be made in the prescribed printed

form either by the transferor or by the transferee. Such transfer instrument or

form must be signed by the transferor, transferee and a witness. Such duly

filled in form, stamped and signed must be submitted to the company’s office

along with original share certificate.

(4) In respect of transfer of partly-paid shares, (applied by the transferor) a notice

must be given by the company to the transferee mentioning therein that the

shares to be transferred are partly paid up. If an application for transfer of

partly-paid shares is made by the transferee, such a notice is not required to be

given by the company to the transferee.

(3)

(1) Deposit is a type of short-term loan taken by the company from the public or by

its own members. It is one of the cheapest modes of raising fund by accepting

deposits but can be risky too in case it defaults in repaying deposits.

  Following is the justification about which companies can collect deposits, the

terms and conditions to be fulfilled to collect deposits from members and public.

(2)  All companies, accepting deposits, except :

(i)  A Banking Company

(ii)  A Non-Banking Finance Company (NBFC)

(iii)  A Housing Finance Company and,

(iv) Such other company as the Central Government will specify have to

comply with the provisions of (a) Sections 73 to 76 of Companies Act, 2013

(b) Companies (Acceptance of Deposits) Rules 2014 and (c) Directives

issued by Reserve Bank of India regarding acceptance of deposits.

(3) (i) Private Company : A private company can accept deposits from its
members or Directors or relatives of Directors.

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

 (ii) Public Company (other than eligible company) : These companies can
accept deposits from its members or Directors.
(iii) Eligible Public Company : These companies can accept deposits from
their members and also from the public.
(4)  Eligible public company means a company having :
(a) A Net worth of not less than ` 100 crores or,
(b) Turnover of not less than ` 500 crores and which has obtained prior approval
of its shareholders through special resolution for accepting public deposits.
 (i)  Net worth  Total of paid up capital Free Reserves  Securities
Premium Account after deducting accumulated losses deferred expenses
and miscellaneous expenses not written off.
(ii)  Turnover Income from sales for a particular period.
(4)
(1) In India, due to the existence of stock exchanges, new industries and commercial
enterprises easily acquire capital funds as well as loan funds, through the issue
of securities thereon. In the stock exchange, the demand for issued (second-
hand) securities is created by the members (brokers), leading banks, related
financial institutions and their branches. As a result, industries and commercial
enterprises easily raise the required capital and loan funds through the issue
of securities in the stock exchange in Indian economy.
(2) In Indian economy, the stock exchanges support and promote industrial
development and growth. They stimulate investment in productive sector which
helps in the process of economic development of the nation. Usually in India
investors, instead of investing their savings and surplus funds in the
unproductive field, invest them in the securities of the companies. As a result,
new capital and finance are made available to the companies. Thus, growth of
stock exchanges reflects financial progress and growth of economy.
(3) In the stock exchanges, new opportunities are available for investments. The
long-term as well as medium-term capital for their development and
modernisation are made available to the new as well as existing companies,
when they issue securities. Thus, stock exchanges contribute a lot in the process
of financial growth of the company in Indian economy.
(4) According to Alfred Marshall, the stock exchanges are barometer, which
indicate the general conditions of the business in the economy. The level or
height of the index of the stock exchange reflects the financial progress and
economic development of the nation. If a nation’s economy is strong and
financially healthy, then the stock exchanges will reflect such a strong economic
position.

12 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

Q. 7. (1) A letter to the member informing him/her about the issue of Share certificate :

EDUTECH STUDY LIMITED

Registered Office : A/30, Maurya Towers,
V. P. Road, Kothrud, Pune  –  411 012.
CIN : U13157 MH 2000 KFL21346

Phone : 020-81119785 Website : www.edutechstudy.com

Fax : 020-31245102 E-mail : edutechstudy@gmail.com
Ref. No. P/MM-SC/22/21-22 Date : 12th January, 2022

Mrs. Mira Apte,

Mira Mansion,
H.G. Road,
Pune  –  411 001.

Sub. : Issue of Share Certificate

Dear Madam,
This is to inform you that as instructed by the Board of Directors, pertaining to your
share application No. 12509, I am directed to issue you a Share Certificate. This Share
Certificate will be delivered to you within 15 days from the date of this letter, through
registered post, to your corresponding address as recorded in the Register of Members.
The details of issue of Share Certificate are given below :

1 2 3 4
Share
Distinctive Numbers Total Number
Folio No. Certificate
of Shares
Number From To

1250 3413 1351 1550 200

It will be our pleasure to provide excellent services to you at all time.

Thanking you,
Yours faithfully,
For Edutech Study Ltd.

Sign
(Mr. Pranav Sood)
Company Secretary

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

 (2) A letter to debentureholder regarding payment of interest through interest

warrant :

QURA PLATES LIMITED

Registered Office : Delta Tower,
India Technology Park,
M.G. Road, Bengaluru – 560 002.
CIN : L5443 KT 2001 PLC094351
Phone : 041-44689912 Website :www.quraplates.com
Fax : 041-4468664 E-mail : quraplates@gmail.com
Ref. R/DH/07/22-23 Date : 19th July, 2022

Mrs. Devki Rana,

Onyx Appartment,
V. P. Road, Sion,
Mumbai  –  400 022.
Sub. : Payment of interest on debentures
Dear Madam,
This is to bring to your notice that the Board of Directors, in their Board Meeting
held on 17th July, 2022 has decided and passed a resolution in respect to payment

of interest on your 300, 10% Non-convertible debentures of ` 100 each.

The details of payment of interest payable to you are as follows :

1 2 3 4 5 6 7
Folio No. No. of Distinctive Gross Amt. T. D. S. Net Amt. of Interest
Debentures Numbers of Interest (10% On Interest (`) Warrant
From To Interest) No.

K 6240 300 11401 11700 ` 3,000 NIL ` 3,000 IW 533

Please find the interest warrant attached herewith. Please separate the Interest
Warrant along the perforated line.
Thanking you,
Yours faithfully,
For Qura Plates Limited

Sign

(Mr. Simran Patil)

Company Secretary
Encl.: Interest Warrant

14 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (3) A letter to depositor informing him/her about the renewal of his/her deposit :

TRANS TOOLS LIMITED

Registered Office : 2004, Maker Tower,
Churchgate, Mumbai  –  400 020.
CIN : L3546 MH 2009 PLC354633

Phone : 022-32224456 Website: www.transtools.com

Fax : 022-32254667 E-mail : transtools@gmail.com
Ref. No. D/DP/61/21-22 Date : 22nd March, 2022

Miss Alia Das,

26, Guru Apartment,
Government Colony,
Bandra (East),
Mumbai  –  400 051.
Sub.: Renewal of Fixed Deposit
Dear Madam,

We are thankful to you for the application for renewal of deposit of ` 2,00,000 for
a further period of 3 years. With the application we have received original duly
discharged Fixed Deposit Receipt (FDR) No. 4340. Your application and FDR have
been put before the Board, for consideration and approval.

The Board of Directors in its Board Meeting held on 20th March, 2022 has
approved the proposal of the renewal of the old deposits vide Resolution No. 7.

In accordance with the directions of the Board and your request, the deposit of

` 2,00,000 (Rupees Two Lakhs only) kept with the company has been renewed
and accepted for a further period of 3 years on same terms and conditions at the
interest rate of 12% per annum.
The Board of Directors of our company expresses its gratitude for reposing
confidence and showing interest in our company.
Please find the Deposit Receipt No. 4340 enclosed herewith.

Thanking you,
Yours faithfully,
For Trans Tools Ltd.

Sign

(Mr. Trilok Shukla)

Company Secretary
Encl. : Fixed Deposit Receipt No. 4340

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

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

Importance of Corporate Finance

  1. Helps in decision making

  2. Helps in raising capital for a project
  3. Helps in Research and Development
  4. Helps in smooth running of business firm
  5. Brings co-ordination between various activities
  6. Promotes expansion and diversification
  7. Managing risks
  8. Replace old assets
  9. Payment of dividend and interest
10. Payment of taxes and fees

(1) 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 projects which are financially viable. In this

way, corporate finance plays key role in decision making process.

(2) Helps in raising capital for a project : Every business organisation requires

finance if it wants to start a new business venture. The needed finance can be

raised by the business organisation from different sources such as by issue of

different type of shares, debentures, bonds and by borrowing loans from the
banks and other financial institutions.

(3) 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.

(4) 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

16 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 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.

(5)  Brings co-ordination between various activities : Corporate finance is

necessary to control and 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.

(6) 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.

(7) 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.

(8)  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.

(9)  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.

(10)  Payment of taxes and fees : Corporate finance is required by every business

organisation to pay various taxes to the Government such as Income Tax,

Goods and Services Tax (GST)  and fees to the Registrar of Companies on

different occasions.

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

 (2) Classification of Share Capital is shown in the following chart :

Authorised or Nominal or Registered Capital

Issued Capital Unissued Capital

Subscribed Capital Unsubscribed Capital

Called-Up Capital Uncalled Capital

Reserve Capital

Paid-up Capital Calls in Arrears

(1) Authorised / Nominal or Registered Capital :  Authorised capital is the
maximum capital which company is authorised to raise as mentioned in the
Memorandum of Association of the company. It is also called as registered capital
as it is mentioned in the capital clause of Memorandum of Association and the
company pays stamp duty on this amount at the time of incorporation. Company
has to calculate the total authorised capital based on its current financial need
and also to consider the future needs too. Authorised Capital is also called as
Nominal Capital as usually a company never issues the entire Authorised
Capital.
    For e.g. Dream Time Ltd. has Authorised Capital of ` 1,00,00,000 which
can be divided into 10,00,000 equity shares having a face value of ` 10 each. In
future, a company has a right to increase its authorised capital by altering its
capital clause of Memorandum of Association.
(2)  Issued and Unissued Capital : Generally, company does not raise its entire
authorised capital but only a part of it is offered by the company to prospective
investors to subscribe. The part which is offered to investors to subscribe
is called as Issued Capital. The balance part which is not offered to public is
called as Unissued Capital. In future, the company can issue shares from the
unissued capital. The issued capital of a company may be equal to or less than
the authorised capital.
   For e.g. Dream Time Ltd. can have Issued Capital of ` 40,00,000 divided into
4,00,000 equity shares at face value of ` 10 each and the unissued capital will be
` 60,00,000 divided into 6,00,000 equity shares of ` 10 each.

18 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (3)  Subscribed and Unsubscribed Capital : Subscribed capital is that part of Issued
capital which has been subscribed or bought by investors or subscribers. The
public may or may not subscribe for the entire issued capital. Hence, that part
of the issued capital not subscribed by the investors is called as unsubscribed
capital. Thus, the subscribed capital may be equal to or less than the issued
capital.
   For e.g. If ‘Dream Time Ltd.’ has issued capital of ` 40,00,000 i.e. has issued
4,00,000 Equity shares of ` 10 each but the investors have bought or subscribed
shares worth of only ` 36,00,000 i.e. 3,60,000 shares of  ` 10 each then ` 36,00,000
is called as subscribed capital. Hence, the unsubscribed capital will be ` 4,00,000
divided into 40,000 equity shares of ` 10 each.
(4)  Called-up Capital, Uncalled Capital and Reserve Capital : At the time of
issue, full value of the shares is usually not demanded by the company. Company
collects the full value of shares in instalments as per its requirement of funds.
Each instalment is called as ‘calls’. Called-up capital is that part of subscribed
capital which a company has ‘called’ or demanded to be paid by the shareholders.
The balance capital which is not demanded from the shareholders is called as
uncalled capital. Reserve Capital is a part of uncalled capital. A company can
decide to keep aside, a part of its uncalled capital to be called up only at the time
of winding-up of a company to meet its financial requirements.
   For e.g. ‘Dream Time Ltd.’ may have called-up capital of ` 18,00,000 i.e.
3,60,000 equity shares of face value of ` 10 each out of which ` 5 per share has
been called up / demanded by the company. If the company decides to keep ` 1
per share as capital to be collected at the time of the winding-up, the Reserve
Capital will be 3,60,000 i.e. 36,000 equity shares of ` 10 each where  ` 1 per share
is kept as Reserve Capital. Uncalled capital will be ` 14,40,000 i.e. 3,60,000 equity
shares where ` 4 per share which will be called up in future.
(5) Paid-up Capital and Calls in Arrears  : Paid-up capital is the total amount of
money actually paid up by the shareholders when the company has called up or
demanded them to pay. The amount not paid-up by the shareholders is called as
Calls in Arrears or unpaid calls. Every shareholder has to pay calls as and when
the company demands. Failure to pay the calls may lead to forfeiture of shares.
     For e.g. ‘Dream Time Ltd.’ has made a call of ` 5 per share, so if all the
shareholders have paid the calls, then the paid up capital will be ` 18,00,000
(3,60,000 equity shares @ ` 5 per share). But if for e.g. 10,000 equity shares calls are
not paid then the paid-up capital will be ` 17,50,000 (3,50,000 equity shares   ` 5
per share) and Calls-in-Arrears will be ` 50,000 (10,000 equity shares    ` 5 per
share).
__________

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 19