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Chapter 12, Stock Exchange, hsc, sp, secretarial practice, maharashtra board, full solution,

Chapter 12: Stock Exchange

Select the correct answer from the options given below and rewrite the statement.

1.A stock exchange is where stock brokers and traders can buy and sell ______.

Options
  • gold
  • securities
  • goods

2.The ______ is the first stock exchange to be recognized by the Indian Government under the Securities Contracts (Regulation) Act.

Options
  • BSE
  • NSE
  • OTCEI

3.______ is a dealer in stock exchange who carries on trading of securities in his own name.

Options
  • Jobber
  • Broker
  • Bull

4.A ______ who expects fall in the price of a securities.

Options
  • bull
  • bear
  • jobber

5.The practice of buying and selling within the same trading day before the close of the market on that day is called ______.

Options
  • insider trading
  • day trading
  • auction

Match the pairs.

Group ‘A’Group ‘B’
a) SEBI1) Expects the price of shares rise in future.
b) Day Trading2) Expects the price of shares fall in future.
c) Bull3) Buying and selling of securities within the same trading day
d) Bear4) To protect the interest of investors in securities market.
e) BSE5) Buying and selling of securities to particular investors.
 6) One of the oldest stock exchange in India.
 7) To protect the interest of companies in securities market.
 8) Buying and selling of securities within a week.
 9) Newest Stock Exchange in India.
 10) One who invests in new issues of securities.

SOLUTION

Group ‘A’Group ‘B’
a) SEBI4) To protect the interest of investors in the securities market.
b) Day Trading3) Buying and selling of securities within the same trading day
c) Bull1) Expects the price of shares rise in the future.
d) Bear2) Expects the price of shares fall in the future.
e) BSE6) One of the oldest stock exchange in India.

Write a word or a term or a phrase which can substitute the following statement.

1.A specific place where trading of securities is arranged in an organized method.

SOLUTION

A specific place where trading of securities is arranged in an organized method. – Stock exchange/ Share market

2.The first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act.

SOLUTION

The first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. – Bombay Stock Exchange (BSE)

3.A dealer in stock exchange who carries on trading of securities in his own name.

SOLUTION

A dealer in stock exchange who carries on trading of securities in his own name. – Jobber

4.A speculator who expects the price of shares rise in the future.

SOLUTION

A speculator who expects the price of shares rise in the future. – Bull

State whether the following statement is true or false.

1.A stock exchange is a reliable barometer to measure the economic condition of a country.

Options
  • True
  • False

2.Bombay Stock Exchange is the oldest stock exchange in India.

Options
  • True
  • False

3.A broker is a dealer in stock exchange who carries on trading of securities in his own name.

Options
  • True
  • False

4.Bear is a speculator who expects the prices of shares rise in the future.

Options
  • True
  • False

Complete the sentence.

1.The oldest Stock Exchange in India is the ____________

SOLUTION

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

2.The largest and most modern stock exchange in India is the ____________.

SOLUTION

The largest and most modern stock exchange in India is the National Stock Exchange (NSE).

3.A person who buys or sells shares on behalf of his clients is called as ______.

SOLUTION

A person who buys or sells shares on behalf of his clients is called as broker.

4.A speculator who expects fall in prices of shares ___________.

SOLUTION

A speculator who expects fall in prices of shares bear.

1.Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) Regulator of capital market1) _____________
b) ____________2) Nifty
c) Jobber3) ____________
d) ____________4) Oldest Stock Exchange in the world.

(London Stock Exchange, Index of NSE, SEBI, trades in securities in his own name)

SOLUTION

Group ‘A’Group ‘B’
a) Regulator of capital market1) SEBI
b) Index of NSE2) Nifty
c) Jobber3) Trades securities in his own name
d) London Stock Exchange4) Oldest Stock Exchange in the world.

Answer in one sentence.

1.What is Stock Exchange?

SOLUTION

Stock exchange is a specific place where various types of securities are purchased and sold.

2.Who is Broker?

SOLUTION

A broker is a member of a stock exchange who is licensed by stock exchange to buy or sell securities on his client’s behalf.

3.Who is Jobber?

SOLUTION

A jobber is a dealer in the stock exchange who carries on the trading of securities in his own name.

4.Who is Bull?

SOLUTION

A bull is a speculator who expects the price of shares to rise in the future and buys with the hope of selling them at higher prices to earn a profit.

5.Who is Bear?

SOLUTION

A bear is a speculator who expects the prices of shares to fall in the future and sells his securities at the prevailing prices to avoid loss.

6.Who is Lame Duck?

SOLUTION

A lame duck is a bear broker whose expectations have gone wrong and makes a loss in his dealings.

7.What is Trading Ring?

SOLUTION

The trading or auction of shares takes place on the floor of the stock exchange which is also known as trading ring.

8.What is Sensex?

SOLUTION

Sensex is the index of the BSE which represents the increase or decrease in prices of stocks of a selected group of companies.

9.What is Rally?

SOLUTION

If the Sensex or Nifty moves in an upward direction over a period of 14 to 20 trading sessions, it is called as a rally.

10.What is Crash?

SOLUTION

If the Sensex or Nifty moves in a downward direction, it is called as a crash.

Correct the underlined word and rewrite the following sentence.

1.One of the functions of SEBI is to protect the interest of issuers of securities in the securities market.

SOLUTION

One of the functions of SEBI is to protect the interest of investors in the securities market.

2.A Broker cannot directly deal with investors.

SOLUTION

A jobber cannot directly deal with investors.

3.A Bear expects the prices of shares to rise in future.

SOLUTION

A bull expects the prices of shares to rise in future.

4.A Bull buys new issues of securities from primary market.

SOLUTION

A stag buys new issues of securities from primary market.

5.A stock market is an important constituents of money market.

SOLUTION

A stock market is an important constituents of capital market.

Explain the following term/concept.

1.Stock exchange

SOLUTION

Stock Exchange is a specific place where various securities are bought and sold. The securities include equity shares, preference shares, debentures, government securities and bonds, units of mutual funds, etc. Stock markets act as intermediaries between investors and borrowers and are regulated by SEBI.

2.Broker

SOLUTION

A broker is a member of a stock exchange who is licensed by the stock exchange to buy or sell shares on his client’s behalf. He is an agent between the investors and the jobber. He earns income ins the form of commission or brokerage.

3.Jobber

SOLUTION

A jobber is a dealer in the stock exchange who carries on the trading of securities in his own name. He buys securities as an owner and sells them at a higher price. He is a professional speculator in the stock exchange and is not permitted to deal with investors directly. The profit he makes is his income.

4.Bull

SOLUTION

A bull is a speculator who expects the prices of shares to rise in the future. He buys shares with the hopes of selling them at a higher price in the future with the aim of earning profit. His views are optimistic. The actions of the bulls increase the prices of securities as there is excess of purchases over the sales.

5.Bear

SOLUTION

A bear is a speculator who expects the prices of shares to fall in the future. Hence, he sells his shares at the current prices in order to avoid losses as he expects a further fall in prices. The actions of bears reduce the prices of securities as there is an excess of sales over a purchase.

1.Study the following case/situation and express your opinion.

Mr. Y is a practising Co. Secretary offering advisory services to companies, institutions, etc. on corporate laws including companies Act. He has received few queries from his clients, please assist Mr. Y in answering them.

  1. BDl bank wants to offer DP services. Whom should they approach for registering as DP?
  2. KM Financial wants to offer Debenture Trustee services. Where should they apply for getting registered?
  3. TT Ltd. Co. wants to issue an IPO. Should it get itself registered with SEBI?

SOLUTION

  1. For registering as a depository participant (DP), BDI bank has to approach the Securities and Exchange Board of India (SEBI)
  2. KM Financial should apply to SEBI for getting registered.
  3. SEBI issues rules and regulations to be followed by issuers of securities. Thus, TT Ltd. Co. has to get itself registered with SEBI as it wants to issue an IPO.

2.Study the following case/situation and express your opinion.

Mr. P has a recently got his B.Sc. degree. He has enrolled for a course in securities market. As a new student of this subject, he has few queries as follows :

  1. Does a Company need to be listed on a stock exchange to sell its securities through the stock exchange.
  2. What is the term used for referring to a stock exchange’s ability to reflect the economic conditions of a country?
  3. What is the term which refers to the functions of the stock exchange as a provider of a ready market for sale and purchase of security?

SOLUTION

  1. Yes, a company needs to be listed on a stock exchange to sell its securities through the stock exchange.
  2. ‘Economic mirror’ is the term used for referring to a stock exchange’s ability to reflect the economic conditions of a country
  3. ‘Liquidity’ is the term which refers to the functions of the stock exchange as a provider of a ready market for sale and purchase of the security.

Distinguish between the following.

1.Jobber and Broker.

SOLUTION

PointsJobberBroker
(1) MeaningJobber is one who buys and sells securities in his own name.Broker is an agent who deals in buying and selling of securities on behalf of his client.
(2) Nature of TradingA jobber carries out trading activities only with the broker.A broker carries out trading activities with the jobber on behalf of his investors.
(3) Restrictions on DealingsA jobber is prohibited to directly buy or sell securities in the stock exchange. Also, he cannot directly deal with the investors.A broker acts as a link between the jobber and the investors. He trades i.e. buys and sells securities on behalf of its investors.
(4) AgentA jobber is a special mercantile agent.A broker is a general mercantile agent.
(5) Form of ConsiderationA jobber gets consideration in the form of profit.A broker gets consideration in the form of commission or brokerage.

Answer in brief.

1.State the functions of SEBI.

SOLUTION

SEBI was set up with the objective of promoting the securities market, protecting the interest of the investors in the securities market, and to regulate the securities market. SEBI issues rules and regulations to be followed by the issuers of securities, the market intermediaries, and the investors. It is a regulator of all the Stock exchanges in India.

The various functions of SEBI are –

  1. To protect the interest of investors in the securities market.
  2. To promote the development of securities markets.
  3. To regulate the business in stock exchanges and any other securities market.
  4. To register and regulate the working of stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustee of trust deeds, registrars to an issue, merchants bankers, underwriters, and such other intermediaries who may be associated with the securities market.
  5. To register and regulate the working of the Depositories, Depository Participants, Custodians of securities, foreign institutional investors, credit rating agencies.
  6. To register and regulate the working of venture capital funds and collective investment schemes including mutual funds.
  7. To promote and regulate self-regulatory organizations.
  8. To prohibit fraudulent and unfair trade practices relating to securities markets.
  9. To promote investors’ education and training of intermediaries of the securities market.
  10. To prohibit insider trading in securities.

2.State any four features of Stock Exchange.

SOLUTION

The important features of the Stock Exchange are as follows:

  1. The market for securities:
    Stock Exchange is a market where all types of corporate securities and securities of government and semi-government bodies are traded.
  2. Second-hand securities:
    The securities that are traded on the stock exchange are those securities that are already issued by the companies. In other words, second-hand securities are bought and sold among the investors in a stock exchange.
  3. Listed securities:
    Only the securities that are listed on the stock exchange can be traded on a stock exchange. The companies that are listed on the stock exchange have to strictly comply with the rules laid down by the exchange.
  4. Organised and Regulated Market:
    All companies listed on the stock exchange have to comply with the guidelines of SEBI. Companies will also have to function as per the rules and regulations laid by the stock exchange.
  5. Specific Location:
    The stock exchange is a specific physical place where brokers and intermediaries meet to trade in securities. Today, all trading is done electronically on a stock exchange.
  6. Trading only through members:
    In a stock exchange, securities can be traded only by the members of the exchange on their own behalf or through authorized brokers.

Justify the following statement.

1.The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India.

SOLUTION

  1. SEBI was set up with the objective of promoting the securities market, protecting the interest of the investors in the securities market, and to regulate the securities market.
  2. SEBI issues rules and regulations which are to be followed by the issuers of securities, the intermediaries, and the investors.
  3. It is the regulator of all stock exchanges in India.
  4. SEBI also registers and regulates the working of stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustee of trust deeds, registrars to an issue, merchants, bankers, underwriters, venture capital funds, mutual funds, depositories, and other such intermediaries who may be associated with securities market.
  5. Thus, the Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India.

2.Stock exchanges work for the growth of the Indian economy.

SOLUTION

  1. The stock exchange is a place where various types of securities are purchased and sold.
  2. Securities of various companies are traded on the stock exchange.
  3. Investors invest in those companies which give good return on investment.
  4. Hence, companies also try to invest in the most productive investment projects so as to give good return on investors’ money.
  5. This leads to capital formation and economic growth.
  6. Thus, stock exchanges work for the growth of the Indian economy.

3.Explain the functions of Stock Exchange.

SOLUTION

  1. Mobilisation of Savings: Stock markets are organised and regulated market which protects the interests of the investors. This encourages small and big investors to invest in securities through the stock exchange. It thus provides a ready market for buying and selling securities.
  2. Capital formation: Investors in securities are attracted due to good returns on investments and capital appreciation. This attracts more investors to invest through the stock exchange. Corporates too can easily raise funds by offering various types of securities to meet the needs of different types of investors. Thus Stock exchange serves as a tool for capital formation.
  3. Pricing of Securities: The stock market helps to value the securities on the basis of demand and supply factors. The securities of profitable and growth-oriented companies are valued higher as there is more demand for such securities. The valuation of securities is useful for investors, government, and creditors. The investors can know the market value of their investment. The creditors can estimate the credit worthiness of a company.
  4. Economic Barometer: A stock exchange is a reliable barometer to measure the economic condition of a country. Every major change in the country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy. The stock exchange is also known as a pulse of the economy or economic mirror as it reflects the economic conditions of a country.
  5. Protecting Interest of Investors: Stock exchange protects the interest of investors. In the stock market, only the listed securities are traded. The stock exchange allows listing only after verifying the soundness of the company. The companies which are listed have to operate within the strict rules and regulations laid down by the stock exchange. This ensures the safety of dealing through the stock exchange.
  6. Liquidity: The main function of the stock market is to provide a ready market for the sale and purchase of securities. The presence of the stock market gives assurance to investors that their investment can be converted into cash whenever they want. Investors can invest in long-term investment projects without any hesitation, as because of the stock exchange they can convert the long-term investment into short-term and medium-term or even liquidate their investments whenever they want.
  7. Better Allocation of Capital: The shares of profit-making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from the stock market. The prices of securities traded in the exchange indicate the opportunities for investments. So stock exchange facilitates the allocation of investors’ funds to productive and profitable channels.
  8. Contributes to Economic Growth: In the stock exchange, securities of various companies are bought and sold. Investors invest in companies which give a good return on investments. Hence companies, too, try to invest in the most productive investment projects. This leads to the capital formation as well as economic growth.
  9. Providing Scope for Speculation: To ensure liquidity and demand or supply of securities the stock exchange permits healthy speculation of securities.
  10. Promotes the Habit of Savings and Investment: The stock market offers attractive opportunities for investment in various securities. These attractive opportunities encourage people to save more and invest in securities of the corporate sector rather than investing in unproductive assets such as gold, silver, etc.

Chapter 11, Financial Market, hsc, sp, secretarial practice, maharashtra board, full solution,

Select the correct answer from the options given below and rewrite the statement.

1.A financial market is a market in which people trade _____________ and derivatives at low transaction costs.

Options
  • Gold
  • Financial securities
  • Commodities

2.When the trade bills are accepted by commercial banks it is known as _________.

Options
  • Treasury bills
  • Commercial bills
  • Commercial papers

3.Money market is a market for lending and borrowing of funds for _________ term.

Options
  • short
  • medium
  • long

4.Central Government is a borrower in the money market through the issue of ____________.

Options
  • commercial papers
  • trade bills
  • treasury bills

5.____________ is the market for borrowing and lending long term capital required by business enterprises.

Options
  • Money Market
  • Capital Market
  • Gold Market

Match the pair.

Group ‘A’Group ‘B’
a) Financial market1) Long term fund
b) Money market2) New issue market
c) Primary market3) Trading of commodities
d) Commercial paper4) Short term fund
 5) Trading of financial securities
 6) Share market
 7) Unsecured promissory note
 8) Secured promissory note

SOLUTION

Group ‘A’Group ‘B’
a) Financial market5) Trading of financial securities
b) Money market4) Short term fund
c) Primary market2) New issue market
d) Commercial paper7) Unsecured promissory note

Write a word or a term or a phrase which can substitute the following statement.

1.A market where people trade financial securities and derivatives at low transaction cost

SOLUTION

A market where people trade financial securities and derivatives at low transaction cost-Financial market

2.A market which provides long term funds

One word Answer

SOLUTION

A market which provides long term funds – Capital market

3.A market which provides short term funds

SOLUTION

A market which provides short term funds-Money market

4.A money market instrument used by banks when one bank faces a temporary shortage of cash.

SOLUTION

A money market instrument used by bank when one bank faces a temporary shortage of cash-Call or notice money

5.A bill which is issued by Reserve Bank of India on behalf of the Government of India.

SOLUTION

A bill which is issued by Reserve Bank of India on behalf of theGovernment of India-Treasury bill

6. A market which exclusively deals with the new issue of securities

SOLUTION

A market which exclusively deals with the new issue of securities-Primary market/ New issue market

State whether the following statement is true or false

1.A Financial Market is a market in which people trade financial securities and derivatives at high transaction costs.

Options
  • True
  • False

2.Money market is the market for the long term funds

Options
  • True
  • False

3.Capital market is the market for the long term funds.

Options
  • True
  • False

4.Secondary market is commonly known as stock market.

Options
  • True
  • False

5.Commercial paper is a secured promissory note.

Options
  • True
  • False

6.Treasury bills are issued by commercial banks.

Options
  • True
  • False

1.Find the odd one.

Options
  • Treasury Bills
  • Shares
  • Certificate of Deposit.

2.Find the odd one.

Options
  • FPO
  • Private Placement
  • Commercial paper

3.Find the odd one.

Options
  • New Issues Market
  • Call Money Market
  • Secondary Market.

Complete the sentence.

1.Funds borrowed and lent in money market are for ___________ term.

SOLUTION

Funds borrowed and lent in money market are for short term.

2.When trade bills are accepted by commercial banks, it is known as _________.

SOLUTION

When trade bills are accepted by commercial banks, it is known as commercial bills.

3.Unsecured negotiable promissory notes issued by a commercial bank is called as _______.

Fill in the Blank

SOLUTION

Unsecured negotiable promissory notes issued by a commercial bank is called as Certificate of Deposits (CDs)

4.New shares, debentures, etc. are traded in ____________ market.

SOLUTION

New shares, debentures, etc. are traded in primary/ new issues market.

5.In capital market the instruments traded have maturity period of more than ______ year.

SOLUTION

In capital market the instruments traded have maturity period of more than one year.

1.Select the correct option from the bracket.

Group ‘A’ Group ‘B’
a) Money market1) ____________
b) Zero risk instrument2) _____________
c) __________3) Capital market
d) __________4) Secondary market

(Buying and selling of existing securities, Treasury Bills, Funds for long term, Fund for short term)

SOLUTION

Group ‘A’ Group ‘B’
a) Money market1) Funds for short-term
b) Zero risk instrument2) Treasury Bills
c) Funds for long-term3) Capital market
d) Buying and selling of existing securities4) Secondary market

Answer in one sentence.

1.What is financial market

SOLUTION

It is a market where financial assets i.e. financial instruments are exchanged or bought and sold.

2.What is call money market?

SOLUTION

It is a market where funds are lent or borrowed for very short periods i.e. one day.

3.What is Certificate of Deposits?

SOLUTION

It is unsecured negotiable promissory note usually issued by commercial banks and financial institutions.

4.What is Trade Bill?

SOLUTION

It is a negotiable instrument or bill drawn by a seller on the buyer for value of goods sold under credit sales.

5.What is new issue market?

SOLUTION

New issue market or primary market exclusively deals with the issue of new securities to the public.

Correct the underlined word/s and rewrite the following sentence.

1.In Primary market, already existing securities are traded.

SOLUTION

In secondary market, already existing securities are traded.

2.Companies sell fresh shares for the first time to the public in secondary market.

SOLUTION

Companies sell fresh shares for the first time to the public in primary market.

3.In Money market, the instruments traded have maturity period of more than one year.

SOLUTION

In capital market, the instruments traded have maturity period of more than one year.

4.Financial market can be classified as capital market and call money market.

SOLUTION

Financial market can be classified as capital market and money market.

Explain the following term/concept.

1.Financial market

SOLUTION

It is a market where financial assets i.e. financial instruments are exchanged or bought and sold. It represents the market which raises finance for the long-term via Capital Market and for the short-term via Money Market. The financial market helps in mobilisation of savings and converts it into investments. Thus, the financial market acts as an intermediary between investors and borrowers.

2.Capital market

SOLUTION

It is the market for borrowing and lending long-term capital required by business enterprises. The financial assets dealt with in the capital market have a long or indefinite maturity period. In this market, the capital funds comprising both equity and debt are issued and traded. The capital market is the core of a country’s financial system as it helps in mobilisation of resources.

3.Money market

SOLUTION

The money market is a market wherein lending and borrowing of funds take place for a short period of time, which varies from one day to a year. The financial instruments traded in this market can be converted into cash easily without any loss of time and value. The money market helps in fulfilling the short-term and very short-term requirements of the companies, banks, financial institutions, government agencies, etc.

4.Call money market

SOLUTION

It is a market where funds are lent or borrowed for very short periods i.e. one day. The call money market is an important segment of the money market in India. When one bank faces a temporary shortage of cash, then another bank with surplus cash lends money to it. Hence, it is also called as interbank call money market

5.Treasury bills

SOLUTION

Treasury Bills are short-term securities issued by RBI to meet the government’s short-term funds requirement. These bills are negotiable and freely transferable. They are sold to banks, individuals, firms, institutions, etc. The minimum value of T-bills is  25,000 or in multiples of  25000. These bills are also called Zero-Coupon Bonds. T-bills have three maturity periods – 91 days, 182 days, and 364 days.

6.Commercial bills

SOLUTION

These are the trade bills accepted by commercial banks. Trade bills are negotiable instruments or bills drawn by a seller on the buyer for the value of goods sold under credit sales. Banks can rediscount the bills any number of times till the maturity of the bill.

7.Repurchase agreement

SOLUTION

It is an agreement where the seller of security (i.e. one who needs money) agrees to buy it back from the lender at a higher price on a future date. Usually, this agreement is between RBI and commercial banks. RBI uses this agreement to control the money supply in the economy. These agreements are the most liquid of all money market investments having maturity ranging from 24 hours to several months.

8.Primary market

SOLUTION

In the primary market, companies sell their shares, debentures, etc. for the first time to raise fresh capital. It exclusively deals with the issue of new securities and hence, also called the new issues market. The main function of the primary market is to facilitate capital formation. The primary market is classified as the equity market and debt market.

9.Secondary market

SOLUTION

The secondary market is more commonly known as the stock market or the stock exchange. Here, the previously issued securities are bought and sold by investors. There is no fresh issue. After IPO, when the shares are listed at the stock exchange, they can be traded in the secondary market.

1.Study the following case/situation and express your opinion.

Joy ltd. company is a newly incorporated company. It wants to raise capital for the first time by issuing equity shares.

  1. Should it go to the primary market or secondary market to issue its shares?
  2. Should it offer its shares through public offer or rights issue?
  3. What will be the issue of Equity shares by Joy Ltd. co. called as, IPO or FPO?

SOLUTION

  1. In primary markets, companies can raise capital for the first time from the public. So, Joy ltd. should go to the primary market to issue its shares since it is a newly incorporated company. 
  2. Joy ltd. wants to raise capital for the first time by issuing equity shares. Initial Public Offer (IPO) refers to the process of offering shares of a company to the public for the first time. Therefore, Joy ltd. should offer its shares through public offer.
  3. The issue of equity shares by Joy Ltd. Co. will be called as IPO which means Initial Public Offer.

2.Study the following case/situation and express your opinion.

Mr. X is the CFO ( Chief Financial Officer ) of PQR Co. Ltd. which is a reputed company in the field of construction business. Often Mr. X has to decide on investing surplus funds of the company for short durations. And at times, he also has to decide the sources from where he can raise funds for short durations.

  1. Assume on behalf of the company Mr. X has Rs. 5 lakhs and wants to invest for a short period. Should he buy Equity shares or Certificate of Deposit?
  2. The company has surplus funds and wants to invest it. However, he needs the money back in 4 months, so should he invest in Treasury Bills or Government Securities?
  3. Can the company issue Certificate of Deposit?

SOLUTION

  1. Mr. X wants to invest for a short period and money is in multiple of 1 lakh, so he should invest in a certificate of deposit. This is because the CD is issued for a minimum value of  1 lakh or in multiples of  1 lakh and provides maturity in minimum 7 days to maximum 1 year.
  2. Mr. X should invest surplus funds in government securities as these securities are safe investments. Alternatively, he can also invest in Treasury Bills having a maturity period of 91 days. However, the funds will not remain invested for the entire duration of 4 months in this case. Hence, investing in government securities seems more appropriate.
  3. No, PQR Co. Ltd. Cannot issue a Certificate of Deposit (CD). CDs are unsecured negotiable promissory notes, usually issued by commercial banks and financial institutions, but this company is a construction company.

Distinguish between the following.

1.Primary market and Secondary market.

SOLUTION

 Primary MarketSecondary Market
1) MeaningThe issue of new shares by the company is done in the primary market.The securities issued earlier are traded in the secondary market.
2) Mode of investmentThe securities are acquired directly from the company. It involves direct investment in securities.The securities are acquired from other stakeholders. It involves indirect investment in securities.
3) Parties in actionThe parties dealing in this market are companies and investors.The parties dealing in this market are only investors.
4) IntermediaryThe underwriters are the intermediaries.The security brokers are the intermediaries.
5) Value of securityThe price of a security in the primary market is fixed as it is decided by the company.The price of a security is fluctuating, depending on the demand and supply conditions in the market

2.Money market and Capital market

SOLUTION

 Money MarketCapital Market
1) MeaningIt is a component of the financial market where short-term borrowing and lending takes place.It is a component of the financial market where long-term borrowing and lending takes place.
2) Time PeriodIn the money market, the instruments traded have a maturity period of one year or less than one year.In the capital market, the instruments traded have a maturity period of more than one year
3) InstrumentsCertificate of deposits, repurchase agreements, commercial paper, treasury bills, etc. are the instruments traded in the money market.Stocks, shares, debentures, bonds, securities of the government are the instruments of the capital market.
4) Purpose of borrowingFunds are borrowed to meet working capital requirements or for small investments.Long-term funds help to establish a new business, expand or diversify it, or purchase fixed assets.
5) InstitutionsParticipants in the market are central banks, commercial banks, acceptance houses, non-bank financial institutions, bill brokers, etc.Stock exchanges, commercial banks, non-bank institutions, financial intermediaries, etc. are the participants in the market
6) RiskRisk factor is very less because the maturity period of the instruments is less than one yearRisk is more as compared to the money market as instruments have a long maturity period
7) Return on investmentReturn on investment is less as the money market is highly liquid and safe.Return on investment is comparatively high as the capital market is riskier
8) Role in the economyThis market increases liquidity of funds in the economy.This market helps in mobilisation of savings in the economy

Answer in brief.

1.State any four functions of financial market

SOLUTION

A financial market is a place where financial instruments or assets are exchanged or bought and sold. Financial markets help to mobilise savings and convert it into investments. They also attract funds from investors and channelize them to corporations.

The functions of the financial market are as follows:

1) TRANSFER OF RESOURCES: Financial market facilitates the transfer of real economic resources from lenders to ultimate users. 2) PRODUCTIVE USAGE Financial market allows productive use of the funds. Excess funds of the investors are used by the borrowers for productive purposes.

3) ENHANCING INCOME: Financial market allows lenders to earn interest or dividend on their surplus funds, thus leading to the enhancement of individual and national income.

4) CAPITAL FORMATION: Capital formation is the net addition to the existing stock of an economy’s capital. The financial market provides a channel through which savings flow to industrial and commercial organisations in the form of capital. This leads to capital formation.

5) PRICE DETERMINATION: The financial instruments traded in the financial market get their prices from the mechanism of demand and supply. The interaction between the suppliers of the funds, i.e. investors and the users, i.e. corporates, as well as the other market factors helps to determine the prices.

6) SALE MECHANISM: Financial market provides a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.

7) MOBILISING FUNDS: Investors having idle funds or savings must be linked with corporates that require investment. Thus, the financial market enables investors to invest their saving according to their choices and risk assessment. This will utilize idle funds and the economy will boom.

8) LIQUIDITY: Financial market provides a mechanism for liquidating the financial instruments, i.e., at any given time, the investor can sell these instruments and convert them into cash. It is an important factor for investors who do not want to invest for a long period.

2.State any four features of money market

SOLUTION

The money market is a market for lending and borrowing of funds for short-term which varies from one day to a year.

The features of the money market are as follows:

1) The funds borrowed and lent in the money market are for the short-term. The maximum period for which the funds are traded in the market is one year.

2) It is a wholesale market for short-term debt as the transaction volume is large.

3) Trading may take place over the telephone, after which written confirmation is done by way of e-mails.

4) Participants of the money market include RBI, commercial banks, mutual funds, financial institutions, primary dealers, and corporates.

5) There is an impersonal relationship between the participants of the money market.

6) Money market has no geographical area i.e. there is no fixed place for carrying out transactions.

7) The instruments of the money market can be converted easily into cash or have very short maturity periods. Moreover, the returns on investment are also low.

8) Major segments of the money market are

i. Call money market

ii. Certificate of deposits market

iii. Treasury bill market

iv. Commercial bill market

v. Commercial papers market

3.State any four features of capital market

SOLUTION

It is the market for borrowing and lending long-term capital required by business enterprises. As per SEBI, the capital market is a market for long-term debt and equity shares.

The features of the capital market are as follows:

1) LINK BETWEEN INVESTORS AND BORROWERS: The capital market links investors with the borrowers of funds. It routes money from savers to entrepreneurial borrowers.

2) DEALS IN MEDIUM AND LONG-TERM INVESTMENT: In the capital market, medium and long-term financial instruments are traded. Through this market, corporates, industrial organisations, financial institutions access long-term funds from both, domestic as well as foreign markets.

3) PRESENCE OF INTERMEDIARIES: Capital market operates with the help of intermediaries. The intermediaries like brokers, underwriters, merchant bankers, collection bankers, etc. play an important role in the capital market.

4) PROMOTES CAPITAL FORMATION: Capital market provides a platform for investors and borrowers of long-term funds to engage in trade. This leads to capital formation in the economy as it mobilises funds.

5) REGULATED BY GOVERNMENT RULES, REGULATIONS, AND POLICIES: Capital market operates freely. However, it is regulated by government rules, regulations, and policies. E.g.: SEBI is the regulator of Capital markets.

6) DEALS IN MARKETABLE AND NON-MARKETABLE SECURITIES: It trades in both, marketable and non-marketable securities. Marketable securities are securities that can be transferred. E.g.: shares, debentures, etc. Non-marketable securities are those which cannot be transferred. E.g.: term deposits, loans, and advances.

7) VARIETY OF INVESTORS: It has a wide variety of investors including both, individuals (i.e. general public) and institutional investors like mutual funds, insurance companies, financial institutions, etc.

8) RISK: Risk is very high as the instruments have long maturity periods. But along with that, the return on investments is also very high.

9) INSTRUMENTS: Equity shares, preference shares, debentures, bonds, government securities and public deposits are the main instruments in capital market.

10) TYPES: Capital market is mainly classified into two main types, government securities market or gilt-edged market and industrial securities market. Industrial securities market is further classified into the primary and secondary markets.

4.Explain any 4 types of money market instruments.

SOLUTION

In the money market, only those financial instruments are traded which are immediate substitutes for money. Some of these instruments are explained as follows :

1) Call money and Notice money: Call money and Notice money market is an important segment of the money market in India. Under Call money, funds are lent or borrowed for very short periods i.e. one day. Under Notice money, funds are lent or borrowed for periods between 2 days to 14 days. Funds have to be repaid within a specified time on the receipt of the notice given by the lender. When one bank faces temporary shortage of cash, then another bank with surplus cash lends money to it. Hence Call/ Notice money market is also called as interbank Call money market.

2) Treasury Bills (T-Bills): Treasury Bills are short-term securities issued by the Reserve Bank of India on behalf of the Central Government of India to meet the government’s short-term funds requirement. Treasury Bills have three maturity periods – 91 days, 182 days and 364 days. These bills are sold to banks and individuals, firms, institutions, etc. These bills are negotiable instruments and are freely transferable. The minimum value of T-bills is  25,000 or in multiples of  25000. These are issued at a discount and repaid at par and hence they are also called Zero-Coupon Bonds.

3) Trade Bills/ Commercial Bills: Bill of Exchange also called as Trade bills are negotiable instruments or bills drawn by a seller on the buyer for the value of goods sold under credit sales. These have a short-term maturity period generally of 90 days and can be easily transferred. If the seller wants immediate cash, he can discount the trade bills with Commercial banks i.e. sell it to banks for cash. When the trade bills are accepted by Commercial banks it is known as Commercial Bills. Banks can rediscount the bills any number of times till the maturity of the bill.

4) Commercial Papers (CPs): Commercial Paper is an unsecured promissory note issued by highly rated companies, All India Financial Institutions, like SIDBI, Exim Bank, etc. and Primary Dealers with a fixed maturity period which varies from 7 days to a maximum 1 year. The minimum value of CP is 5 lakhs or in multiples of  5 lakhs. It is issued at a discount to the face value and are highly liquid as it gives better returns than normal bank deposits. Individuals, Banks, Mutual funds, Companies, etc. invest in Commercial Papers.

5) Certificate of Deposits (CDs): These are unsecured negotiable promissory notes usually issued by Commercial Banks and Financial Institutions. It is a receipt of funds deposited in a bank for a fixed period at a specified rate of interest. It can be issued for a minimum value of  1 lakh or in multiples of  1 lakh. They can be issued at a discount to the face value. They have a maturity period of minimum 7 days and maximum 1 year. (Maximum maturity maybe 3 years if the CDs are issued by Financial Institutions.) CDs can be bought by individuals, companies, etc.

6) Government Securities: The marketable debts issued by the government or by semi-government bodies which represent claims on the government are known as government securities. These securities are issued by agencies such as Central Government, State Government, local self-government e.g. Municipalities, etc. These securities are safe investment as payment of interest and repayment of principal amount are guaranteed by the government.

7) Repo or Repurchase Agreement: Repo is an agreement where the seller of a security, (i.e. one who needs money) agrees to buy it back from the lender at a higher price on a future date. Usually, this agreement is made between RBI and commercial banks. Repo rate is the rate at which banks borrow from RBI and Reverse repo rate is the rate at which RBI borrows from banks. RBI uses the repurchase agreement to control the money supply in the economy. These agreements are the most liquid of all money market investments having maturity ranging from 24 hours to several months.

8) Money Market Mutual Funds (MMMFs): A Mutual Fund which invests in Money market instruments like Call Money, Repos, T-bills, CDs, etc. is called as MMMFs. This type of Mutual Fund invests in debt instruments which mature in less than 1 year and have low risk. Individuals and corporates are allowed to invest in MMMFs.

Justify the following statement.

1.Financial markets acts as link between investor and borrower.

SOLUTION

  1. The financial market provides a platform where both, buyers and sellers can find each other easily.
  2. Investors who have savings are linked with entrepreneurial borrowers that require investment.
  3. As a result, the idle funds in the hands of investors can be productively used by corporates. 
  4. This market enables investors to invest their saving according to their choices and risk assessment.
  5. Hence, financial markets acts as link between investor and borrower.

2.Money market makes available short term finance through different instruments.

SOLUTION

  1. In the money market, lending and borrowing of funds take place for a short period of time, which may vary from one day to a year.
  2. Financial instruments in this market can be easily converted into cash without loss of time and value.
  3. In other words, money market deals with only those financial instruments which are immediate substitute for money.
  4. Some of the instruments used in the money market are call and notice money, treasury bills, trade/ commercial bills, commercial papers, certificates of deposits, government securities, repurchase agreements, Money Market Mutual Funds, etc.
  5. All these instruments have a maturity period of less than a year
  6. Hence, the money market makes available short-term finance through different instruments.

3.Capital market is useful for corporate sector.

SOLUTION

  1. Capital market is the market for borrowing and lending long-term capital required by business enterprises.
  2. The capital market is the core of a country’s financial system as it helps in the mobilisation of resources.
  3. Through this market, corporates, industrial organisations, financial institutions access long-term funds from both domestic as well as foreign markets.
  4. Capital market also contribute to capital formation in the economy.
  5. Hence, capital market is useful for corporate sector.

4.There are many participants in money market.

SOLUTION

  1. In the money market, lending and borrowing of funds take place for a short period of time, which may vary from one day to a year.
  2. Participants of the money market include RBI, Central and State governments Public Sector Undertakings, Scheduled commercial banks, Insurance companies, Mutual funds, Non-Banking Finance Companies, Corporates, Primary dealers, etc.

Answer the following question

1.Explain the functions of financial market.

SOLUTION

A financial market is a place where financial instruments or assets are exchanged or bought and sold. Financial markets help to mobilise savings and convert it into investments. They also attract funds from investors and channelize them to corporations.

The functions of the financial market are as follows:

1) TRANSFER OF RESOURCES: Financial market facilitates the transfer of real economic resources from lenders to ultimate users. 2) PRODUCTIVE USAGE Financial market allows productive use of the funds. Excess funds of the investors are used by the borrowers for productive purposes.

3) ENHANCING INCOME: Financial market allows lenders to earn interest or dividend on their surplus funds, thus leading to the enhancement of individual and national income.

4) CAPITAL FORMATION: Capital formation is the net addition to the existing stock of an economy’s capital. The financial market provides a channel through which savings flow to industrial and commercial organisations in the form of capital. This leads to capital formation.

5) PRICE DETERMINATION: The financial instruments traded in the financial market get their prices from the mechanism of demand and supply. The interaction between the suppliers of the funds, i.e. investors and the users, i.e. corporates, as well as the other market factors helps to determine the prices.

6) SALE MECHANISM: Financial market provides a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.

7) MOBILISING FUNDS: Investors having idle funds or savings must be linked with corporates that require investment. Thus, the financial market enables investors to invest their saving according to their choices and risk assessment. This will utilize idle funds and the economy will boom.

8) LIQUIDITY: Financial market provides a mechanism for liquidating the financial instruments, i.e., at any given time, the investor can sell these instruments and convert them into cash. It is an important factor for investors who do not want to invest for a long period.

2.State the instruments in money market.

SOLUTION

Financial instruments are documents in the form of a legal agreement between two parties having a monetary value. It represents a financial asset to one party and a financial liability to another party. In the money market, only those financial instruments are traded which are immediate substitutes for money.

Some of these instruments are explained as follows:

1) Call money and Notice money: Call money and Notice money market is an important segment of the money market in India. Under Call money, funds are lent or borrowed for very short periods i.e. one day. Under Notice money, funds are lent or borrowed for periods between 2 days to 14 days. Funds have to be repaid within a specified time on the receipt of the notice given by the lender. When one bank faces temporary shortage of cash, then another bank with surplus cash lends money to it. Hence Call/ Notice money market is also called as interbank Call money market.

2) Treasury Bills (T-Bills): Treasury Bills are short-term securities issued by the Reserve Bank of India on behalf of the Central Government of India to meet the government’s short-term funds requirement. Treasury Bills have three maturity periods – 91 days, 182 days and 364 days. These bills are sold to banks and individuals, firms, institutions, etc. These bills are negotiable instruments and are freely transferable. The minimum value of T-bills is 25,000 or in multiples of 25000. These are issued at a discount and repaid at par and hence they are also called Zero-Coupon Bonds.

3) Trade Bills/ Commercial Bills: Bill of Exchange also called as Trade bills are negotiable instruments or bills drawn by a seller on the buyer for the value of goods sold under credit sales. These have a short-term maturity period generally of 90 days and can be easily transferred. If the seller wants immediate cash, he can discount the trade bills with Commercial banks i.e. sell it to banks for cash. When the trade bills are accepted by Commercial banks it is known as Commercial Bills. Banks can rediscount the bills any number of times till the maturity of the bill.

4) Commercial Papers (CPs): Commercial Paper is an unsecured promissory note issued by highly rated companies, All India Financial Institutions, like SIDBI, Exim Bank, etc. and Primary Dealers with a fixed maturity period which varies from 7 days to a maximum 1 year. The minimum value of CP is 5 lakhs or in multiples of 5 lakhs. It is issued at a discount to the face value and are highly liquid as it gives better returns than normal bank deposits. Individuals, Banks, Mutual funds, Companies, etc. invest in Commercial Papers.

5) Certificate of Deposits (CDs): These are unsecured negotiable promissory notes usually issued by Commercial Banks and Financial Institutions. It is a receipt of funds deposited in a bank for a fixed period at a specified rate of interest. It can be issued for a minimum value of 1 lakh or in multiples of 1 lakh. They can be issued at a discount to the face value. They have a maturity period of minimum 7 days and maximum 1 year. (Maximum maturity maybe 3 years if the CDs are issued by Financial Institutions.) CDs can be bought by individuals, companies, etc.

6) Government Securities: The marketable debts issued by the government or by semi-government bodies which represent claims on the government are known as government securities. These securities are issued by agencies such as Central Government, State Government, local self-government e.g. Municipalities, etc. These securities are safe investment as payment of interest and repayment of principal amount are guaranteed by the government.

7) Repo or Repurchase Agreement: Repo is an agreement where the seller of a security, (i.e. one who needs money) agrees to buy it back from the lender at a higher price on a future date. Usually, this agreement is made between RBI and commercial banks. Repo rate is the rate at which banks borrow from RBI and Reverse repo rate is the rate at which RBI borrows from banks. RBI uses the repurchase agreement to control the money supply in the economy. These agreements are the most liquid of all money market investments having maturity ranging from 24 hours to several months.

8) Money Market Mutual Funds (MMMFs): A Mutual Fund which invests in Money market instruments like Call Money, Repos, T-bills, CDs, etc. is called as MMMFs. This type of Mutual Fund invests in debt instruments which mature in less than 1 year and have low risk. Individuals and corporates are allowed to invest in MMMFs.

3.State the features of capital market.

SOLUTION

It is the market for borrowing and lending long-term capital required by business enterprises. As per SEBI, the capital market is a market for long-term debt and equity shares.

The features of the capital market are as follows:

1) LINK BETWEEN INVESTORS AND BORROWERS: The capital market links investors with the borrowers of funds. It routes money from savers to entrepreneurial borrowers.

2) DEALS IN MEDIUM AND LONG-TERM INVESTMENT: In the capital market, medium and long-term financial instruments are traded. Through this market, corporates, industrial organisations, financial institutions access long-term funds from both, domestic as well as foreign markets.

3) PRESENCE OF INTERMEDIARIES: Capital market operates with the help of intermediaries. The intermediaries like brokers, underwriters, merchant bankers, collection bankers, etc. play an important role in the capital market.

4) PROMOTES CAPITAL FORMATION: Capital market provides a platform for investors and borrowers of long-term funds to engage in trade. This leads to capital formation in the economy as it mobilises funds.

5) REGULATED BY GOVERNMENT RULES, REGULATIONS, AND POLICIES: Capital market operates freely. However, it is regulated by government rules, regulations, and policies. E.g.: SEBI is the regulator of Capital markets.

6) DEALS IN MARKETABLE AND NON-MARKETABLE SECURITIES: It trades in both, marketable and non-marketable securities. Marketable securities are securities that can be transferred. E.g.: shares, debentures, etc. Non-marketable securities are those which cannot be transferred. E.g.: term deposits, loans, and advances.

7) VARIETY OF INVESTORS: It has a wide variety of investors including both, individuals (i.e. general public) and institutional investors like mutual funds, insurance companies, financial institutions, etc.

8) RISK: Risk is very high as the instruments have long maturity periods. But along with that, the return on investments is also very high.

9) INSTRUMENTS: Equity shares, preference shares, debentures, bonds, government securities and public deposits are the main instruments in capital market.

10) TYPES: Capital market is mainly classified into two main types, government securities market or gilt-edged market and industrial securities market. Industrial securities market is further classified into the primary and secondary markets.

                                  COMPLETED

Chapter 10, Dividend and Interest, hsc, sp, secretarial practice, maharashtra board, full solution,

Chapter 10: Dividend and Interest

Select the correct answer from the options given below and rewrite the statement.

1.Dividend is paid to ___________.

Options
  • Shareholder
  • Debentureholder
  • Depositor

2._________ is profit shared by company with a shareholder.

Options
  • Interest
  • Rent
  • Dividend

3.Dividend is recommended by ______________.

Options

  • Managing Director
  • Secretary
  • Board of Directors

4.Interim Dividend is declared by ______________.

Options
  • Board of Directors
  • Debentureholders
  • Depositors

5.Final Dividend is declared by ______________.

Options
  • Board of Directors
  • shareholders
  • Depositors

6.Dividend cannot be declared out of ______________.

Options
  • Capital
  • Profit
  • Reserves

7.Dividend amount should be transferred in a separate Bank Account within ____________ days of its declaration

Options
  • 5
  • 15
  • 15

8.Dividend should be paid within ________________ days of its declaration

Options
  • 3
  • 13
  • 30

9.__________ holders get dividend from residual profits.

Options
  • Equity share
  • Preference share
  • Debenture

10.Dividend is paid first to __________ shareholders.

Options
  • Equity
  • Preference
  • Deferred

11._________ warrant is a cheque containing dividend amount sent by company to the shareholders.

Options
  • Dividend
  • Share
  • Interest

12.IEPF is created by ______________ where unpaid dividend is transferred by company.

Options
  • Central Govt.
  • Company
  • Shareholders

13.Payment of __________  Dividend must be authorised by the Articles of Association.

Options
  • Interim
  • Final
  • Bonus

14.___________ is a return paid to creditors by the company.

Options
  • Dividend
  • Interest
  • Rent

15.___________ is not linked to profits of the company

Options
  • Dividend
  • Interest
  • Bonus

Match the pairs.

Group ‘A’Group ‘B’
a) Dividend1) Equity Shareholders
b) Interest2) Appropriation of profit.
c) Interim Dividend3) Recommendation of Secretary.
d) Final Dividend4) Registrar of company.
e) Fluctuating Rate of Dividend5) Obligatory to pay
 6) Decided and Declared by the Board of Directors.
 7) Decided by Board; declared by Members.
 8) Decided by President of India.
 9) Company not allowed to pay.
 10) Declared by Govt. of India

SOLUTION

Group ‘A’Group ‘B’
a) Dividend2) Appropriation of profit.
b) Interest5) Obligatory to pay
c) Interim Dividend6) Decided and Declared by the Board of Directors.
d) Final Dividend7) Decided by Board; declared by Members.
e) Fluctuating Rate of Dividend1) Equity Shareholders

2.Match the pairs.

Group ‘A’Group ‘B’
a) Dividend1) Must inform stock exchange about Dividend declaration
b) Interest2) Creditors
c) IEPF3) Registered Shareholders.
d) Unpaid Dividend Account4) Balance of unpaid Dividend Transferred here.
e) Listed Company5) Unregistered company.
 6) Non-listed company.
 7) Unpaid/Unclaimed Dividend.
 8) Balance of unpaid Bonus transferred here.
 9) Must inform Government about Dividend declaration.
 10) General Public.

SOLUTION

Group ‘A’Group ‘B’
a) Dividend3) Registered Shareholders.
b) Interest2) Creditors
c) IEPF4) Balance of unpaid Dividend Transferred here.
d) Unpaid Dividend Account7) Unpaid/Unclaimed Dividend.
e) Listed Company1) Must inform stock exchange about Dividend declaration

Write a word or a term or a phrase which can substitute the following statement.

1.The return on investment paid to the shareholders of the company.

SOLUTION

The return on investment paid to the shareholders of the company. – Dividend

2.The meeting where final dividend is declared.

SOLUTION

The meeting where final dividend is declared. – Annual General Meeting (AGM)

3.The company which has to intimate stock exchange about declaration of dividend.

SOLUTION

The company which has to intimate stock exchange about declaration of dividend. – Listed Company

4.The shareholders who get dividend at a fixed rate.

SOLUTION

The shareholders who get dividend at a fixed rate. – Preference Shareholders

5.The shareholders who get dividend at a fluctuating rate.

SOLUTION

The shareholders who get dividend at a fluctuating rate. – Equity Shareholders

6.Request by shareholder in prescribed form for payment of dividend into shareholders bank amount.

SOLUTION

Request by shareholder in prescribed form for payment of dividend into shareholders bank amount. – Dividend Mandate

7.Number of days within which payment of dividend be completed by company, after its declaration.

SOLUTION

Number of days within which payment of dividend be completed by company, after its declaration. – 30

8.Dividend declared between two AGMs.

SOLUTION

Dividend declared between two AGMs. – Interim Dividend

9.Dividend decided and declared by the Board.

SOLUTION

Dividend decided and declared by the Board. – Interim Dividend

10.The return paid to the creditors by the company.

SOLUTION

The return paid to the creditors by the company. – Interest

State whether the following statement is true or false.

1.Dividend is paid to registered shareholders of the company.

Options
  • True
  • False

2.Dividend is decided by the Board.

Options
  • True
  • False

3.Dividend is decided by the shareholders.

Options
  • True
  • False

4.Dividend once declared cannot be revoked.

Options
  • True
  • False

5.Dividend cannot be paid out of capital.

Options
  • True
  • False

6.Shareholders decide about the rate and amount of profit to be given as dividend.

Options
  • True
  • False

7.All categories of shareholders get a fixed rate dividend.

Options
  • True
  • False

8.IEPF is the fund created by company.

Options
  • True
  • False

9.Interest is a liability for company.

Options
  • True
  • False

10.Interest is paid to shareholders of company.

Options
  • True
  • False

1.Find the odd one.

Options
  • Final Dividend
  • Interim Dividend
  • Interest

2.Find the odd one.

Options
  • Out of Capital
  • Out of free reserve
  • Out of money given by government

3.Find the odd one.

Options
  • Dividend Account
  • Dividend Mandate
  • unpaid/unclaimed dividend Account

4.Find the odd one.

Options
  • Dividend warrant
  • Dividend Mandate
  • Cheque

Complete the sentence.

1.Word dividend is derived from Latin term ______.

SOLUTION

Word dividend is derived from Latin term Dividendum.

2.Dividend is paid to __________.

SOLUTION

Dividend is paid to shareholders.

3.Dividend can be declared only on recommendation of______.

SOLUTION

Dividend can be declared only on recommendation of Board of Directors

4.Dividend must be paid in______.

SOLUTION

Dividend must be paid in cash.

5.The meeting at which final dividend is approved is ______.

SOLUTION

The meeting at which final dividend is approved is Annual General Meeting (AGM).

6.Dividend cannot be paid out of ______.

SOLUTION

Dividend cannot be paid out of capital.

7.Interim dividend is decided and declared by ______.

SOLUTION

Interim dividend is decided and declared by Board of Directors.

8.Predecided and a fixed rate of dividend is paid to ______.

SOLUTION

Predecided and a fixed rate of dividend is paid to preference shareholders.

9.Payment of dividend must be completed within ______.

SOLUTION

Payment of dividend must be completed within 30 days from the date of declaration.

10.Payment of Interim Dividend needs to be authorized by ______.

SOLUTION

Payment of Interim Dividend needs to be authorized by Articles of Association.

11.The obligatory payment made by company to its creditors is called as ______.

SOLUTION

The obligatory payment made by company to its creditors is called as interest.

1.Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) Dividendum1) ____________
b) Interest2) ____________
c) ____________3) Final Dividend
d) ____________4) Interim Dividend
e) Govt. Fund5) ____________

(Creditors, IEPF, Latin term, At Board Meeting, At AGM)

SOLUTION

Group ‘A’Group ‘B’
a) Dividendum1) Latin Term
b) Interest2) Creditors
c) At AGM3) Final Dividend
d) At Board Meeting4) Interim Dividend
e) Govt. Fund5) IEPF

2.Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) Preference Shares1) ____________
b) Equity Shares2) ____________
c) Deposit holders3) ____________
d) ____________4) Payment of Dividend
e) ____________5) Dividend Declared but not paid/claimed

(Unclaimed/Unpaid Dividend, Fixed rate Dividend, Dividend at a Fluctuating Rate, Interest, Within 30 days)

SOLUTION

Group ‘A’Group ‘B’
a) Preference Shares1) Fixed rate dividend
b) Equity Shares2) Dividend at a fluctuating rate
c) Deposit holders3) Interest
d) Within 30 days4) Payment of Dividend
e) Unclaimed/Unpaid Dividend5) Dividend Declared but not paid/claimed

Answer in one sentence.

1.What is Dividend?

SOLUTION

Dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’

2.Who has right to recommend Dividend?

SOLUTION

The Board of Directors have the right to recommend dividend.

3.What is final Dividend?

SOLUTION

The final Dividend is declared and paid after the close of the financial year. It is decided and recommended by the Board of Directors and declared by the shareholders in the AGM.

4.What is Interim Dividend?

SOLUTION

Dividend decided and declared by the Board of Directors between two Annual General Meetings (AGMs) is called Interim Dividend.

5.Who declares Interim Dividend?

SOLUTION

The Board of Directors declares the Interim Dividend.

6.Which shares get dividend at a fixed rate?

SOLUTION

Preference shares get the dividend at a fixed rate.

7.Which shares get dividend at a fluctuating rate?

SOLUTION

Equity shares get dividend at a fluctuating rate.

8.At which Meeting Interim Dividend is decided and declared?

SOLUTION

The Interim Dividend is decided and declared in the Board Meeting.

9.What is Interest?

SOLUTION

Interest is a payment made for using the money of another person. For borrowers, interest is the cost of renting money while for lenders, interest is the income from his lending money.

10.State the time within which Unpaid Dividend be transferred to unpaid dividend Account?

SOLUTION

The Unpaid Dividend must be transferred to the Unpaid Dividend Account within 37 days from the date of its declaration.

Correct the underlined word and rewrite the following sentence.

1.Dividend is paid to creditors.

SOLUTION

Dividend is paid to registered shareholders.

2.Interest is paid to shareholders.

SOLUTION

Interest is paid to creditors.

3.Final Dividend is paid between two AGMs.

SOLUTION

Interim Dividend is paid between two AGMs.

4.Special Resolution must be passed to declare Final Dividend

SOLUTION

Board Resolution and Ordinary Resolution must be passed to declare Final Dividend.

5.Dividend must be paid within 60 days of its declaration.

SOLUTION

Dividend must be paid within 30 days of its declaration.

6.The Dividend to be paid should be transferred to Dividend A/c within 30 days of its declaration.

SOLUTION

The Dividend to be paid should be transferred to Dividend A/c within 5 days of its declaration.

7.Dividend is an obligation to be paid by a company every year.

SOLUTION

Interest is an obligation to be paid by a company every year.

8.Preference shareholders are given the last priority in payment of dividend.

SOLUTION

Equity shareholders are given the last priority in payment of dividend.

9.Preference shareholders get dividend from residual profits.

SOLUTION

Equity shareholders get dividend from residual profits.

10.Dividend is payable every year irrespective of profits made by company.

SOLUTION

Interest is payable every year irrespective of profits made by company.

1.Arrange in Proper Order:

  1. Recommendation of Dividend
  2. Checking sufficiency of profits
  3. Board Meeting

SOLUTION

  1. Checking Sufficiency of Profits
  2. Board Meeting
  3. Recommendation of Profits

2.Arrange in Proper Order:

  1. Transfer to Dividend Account
  2. Transfer to IEPF
  3. Transfer to Unpaid Dividend Account

SOLUTION

  1. Transfer to Dividend Account
  2. Transfer to Unpaid Dividend Account
  3. Transfer to IEPF

3.Arrange in Proper Order:

  1. Closure of Register of Members.
  2. Intimate Stock Exchange of Board Meeting.
  3. Intimate Stock Exchange of declaration of dividend.

SOLUTION

  1. Intimate Stock Exchange of Board Meeting
  2. Intimate Stock Exchange of Declaration of dividend
  3. Closure of Register of Members

4.Arrange in Proper Order:

  1. Decision on Rate of Dividend
  2. Transfer to IEPF
  3. Payment of Dividend.

SOLUTION

  1. Decision on Rate of Dividend
  2. Payment of Dividend
  3. Transfer to IEPF

5.Arrange in Proper Order:

  1. Payment of Interim Dividend
  2. Board meeting deciding and declaring Interim Dividend.
  3. Authorization of Articles of Association.

SOLUTION

  1. Authorization of Articles of Association
  2. Board Meeting deciding and declaring Interim Dividend
  3. Payment of Interim Dividend

Explain the following term/concept.

1.Profit

SOLUTION

Profit is the difference between revenues and the expenses for a given period. Profit making and its maximization is the prime aim of all business organisations. The shareholders invest with an aim of earning returns out of the profits of the company.

2.Dividend

SOLUTION

The term dividend is derived from the Latin word ‘Dividendum’ which means ‘that which is to be divided’. It is that part of the profits of a company which is distributed amongst its shareholders. A dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’

3.Interest

SOLUTION

Interest is the price paid for the productive services rendered by capital. It is a charge against the profit of the company. Even if the company makes no profit, interest should be paid. It is payable at a fixed and generally pre-determined.

4.Final Dividend

SOLUTION

Final Dividend is declared and paid after the close of the financial year. It is decided and recommended by the Board of Directors. It is declared by the shareholders in the AGM. It’s declaration does not need authorization by the Articles of Association. It is declared from different sources like; current year’s profits, free reserves, capital profits, Money provided by Govt. for dividend, etc.

5.Interim Dividend

SOLUTION

The dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend. The interim dividend is paid in the middle of the accounting year i.e. before the finalisation of annual accounts for the year. The opinion of the company’s Auditors should be taken before declaring Interim Dividend.

6.Unpaid Dividend

SOLUTION

The dividend which is declared by the company but has not been paid by it or claimed by a shareholder within 30 days of its declaration is termed as Unpaid and Unclaimed Dividend. The Unpaid Dividend should be transferred by the company to ‘Unpaid Dividend Account’ opened in a scheduled bank. This transfer should happen within 37 days from the declaration of dividend.

7.Unpaid Dividend Account

SOLUTION

Entire amount of dividend which remains unpaid/unclaimed should be transferred to ‘Unpaid Dividend Account’ opened in a scheduled Bank by the company. The company should transfer this amount within 37 days from the declaration of dividend.

8.Dividend Mandate

SOLUTION

A shareholder may wish to get dividends credited directly to the bank account. In such a case, the shareholder is required to send a request to the company in the prescribed form called ‘Dividend Mandate’. The dividend mandate authorizes the company to pay dividends directly to shareholder’s bankers.

9.IEPF

SOLUTION

IEPF stands for ‘Investors Education and Protection Fund’ and is set up by the central government. Any amount in the Unpaid Dividend Account of a company that remains unpaid/ unclaimed for a period of 7 years from the date of such a transfer shall be, transferred by the company to IEPF.

10.Rate of Dividend.

SOLUTION

A dividend is that part of the profits of a company which is distributed amongst its shareholders. Equity shares are given dividends at a fluctuating rate depending upon the profits of the company. Preference shareholders get dividends at a fixed rate. Also, the rate of interim dividends is lower than the final dividend.

1.Study the following case/situation and express your opinion :

LMN Co Limited decides to declare a dividend for the financial year 2018-19 in which it has earned profits less than their expectations.

  1. Is Board right in recommending a dividend of Rs. 5/- per share out of free reserves?
  2. Can Board declare the dividend though it is not approved by AGM?
  3. Can the Board give dividends in the form of gifts?

SOLUTION

  1. Yes, the Board can recommend a dividend of Rs. 5/- per share out of free reserves. This is because companies are allowed to pay final dividend out of their free reserves.
  2. No, the Board cannot declare the dividend without shareholders’ approval at the AGM. The dividend, as recommended by the Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
  3. No, the Board cannot give dividends in the form of gifts. This is because dividends must be paid in cash and not in kind.

2.Study the following case/situation and express your opinion :

ABC Co. Ltd. decides to pay Interim Dividend

  1. Can it be paid out of free reserves?
  2. Is the Board right in declaring the same at the Board Meeting?
  3. Can the company distribute the same within 30 days of its declaration?

SOLUTION

  1. No, Interim Dividends cannot be paid out of free reserves. Interim Dividend is declared out of profits of the current accounting year.
  2. Yes, the Board of Directors has the power to decide and declare the same at the Board Meeting.
  3. Yes, the company should distribute the interim dividend within 30 days of its declaration.

3.Study the following case/situation and express your opinion :

RAJ Company limited decides to pay Interim Dividend

  1. Is the Board justified to decide Interim Dividend of ₹ 5/per share even though profits till date are insufficient?
  2. Can the Board declare it out of Free Reserves?
  3. Can the Board declare it out of Capital?

SOLUTION

  1. No, the Board is not justified to decide the interim dividend of ₹ 5/- per share if the profits till date are insufficient. This is because the Interim Dividend is declared out of profits.
  2. No, the Board cannot declare interim dividends out of Free Reserves.
  3. No, the Board cannot declare the interim dividend out of capital. It is declared out of profits of the current accounting year.

4.Study the following case/situation and express your opinion :

DIAMOND Co. Ltd. is considering to declare Interim Dividend.

  1. In how many days of the declaration it should transfer the funds to Dividend Account?
  2. In how many days it must pay it to shareholders?
  3. In how many days of the declaration it must transfer the funds to the Unpaid Dividend A/c?

SOLUTION

  1. The funds should be transferred to the Dividend Account within 5 days from the date of declaration of interim dividend.
  2. The interim dividend must be paid to the shareholders within 30 days from its declaration.
  3. The unpaid dividend must be transferred to Unpaid Dividend A/c within 37 days from its declaration.

5.Study the following case/situation and express your opinion :

The Board of Directors of STAR Co. Ltd. which is a listed company recommends a dividend of ₹ 15/- per share to be paid in cash.

  1. Is it justified to pay the dividend firstly to its Preference Shareholders and then after to Equity Shareholders?
  2. Is the AGM required to approve the same?
  3. Can the company pay dividend in cash?

Short Note

SOLUTION

  1. Yes, it is justified to pay the Preference shareholders first and then the Equity Shareholders. Preference shareholders are entitled to dividends before it is paid to the equity shareholders as per the terms of the issue of preference shares. Equity shareholders will get dividends from residual profits. i.e. after paying to preference shareholders.
  2. Yes, AGM is required to approve the dividend. The dividend, as recommended by the Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
  3. Dividend payable in cash should be paid by cheque or warrant or by electronic mode to the entitled shareholder.

6.Study the following case/situation and express your opinion :

GOLD Co. Ltd. declares a dividend of ₹ 10/- per share for F.Y. 2018-19.

  1. Is the company under default, if the dividend was not paid within 30 days of its declaration?
  2. Is the company right in transferring the unpaid dividend to its Debenture Reserve Account?
  3. Does the company have to transfer the amount of unpaid dividends to IEPF after 30 days?

SOLUTION

  1. Yes, the company is in default if the dividend is not paid within 30 days of its declaration.
  2. No, the company is not right in transferring the unpaid dividend to its Debenture Reserve Account. It should be transferred to the Unpaid Dividend Account. It is a separate bank account opened in a scheduled bank within 5 days of its declaration.
  3. No. Any amount in the Unpaid Dividend Account of a company that remains unpaid/ unclaimed for a period of 7 years from the date of such a transfer shall be, transferred by the company to the Investors Education and Protection Fund (IEPF).

Distinguish between the Following.

1.Final Dividend and Interim Dividend

SOLUTION

PointsFinal DividendInterim Dividend
1. MeaningIt is declared and paid after the close of the financial year.It is declared and paid between two AGMs of an accounting year.
2. Who DeclaresIt is decided and recommended by the Board of Directors. It is declared by the shareholders in the AGM.It is decided and declared by the Board of Directors in the Board Meeting.
3. AuthorizationIt’s declaration does not need authorization by Articles of Association.It can be declared only if Articles of Association permits its declaration.
4. When DeclaredIt is declared at the Annual General Meeting of the company.It is declared between two Annual General Meetings of the company.
5. Rate of DividendRate of final dividend is always higher than Interim Dividend.Rate of Interim dividend is lower than final dividend.
6. SourceIt is declared from different sources like; current year’s profits, free reserves, capital profits, Money provided by Govt. for dividend, etc.It is declared out of profits of the current accounting year.
7. Accounting AspectIt is declared only after the accounts of the year are prepared and finalized.It is declared before the preparation of the final accounts of the company.

2.Dividend and Interest

SOLUTION

PointsDividendInterest
1. MeaningDividend is the return payable to the shareholders of the company for their investment in the share capital.It is the return payable to the creditors of the company viz. Debenture holder/Deposit holders for the loan given by them to the company
2. Given to whomIt is paid to the member i.e. the owners of the company.It is paid to the creditor of the company.
3. ObligationIt is to be paid only when the company has made profits. Therefore no obligation/compulsion to pay dividends.It is not linked to the profits of the company. Payment of interest is an obligation and is to be paid by the company compulsorily.
4. When PayableIt is payable when a company earns sufficient profit in a year after fulfilling all obligations.It is payable every year irrespective of the profits of the company.
5. RateIt is paid at a fluctuating rate to the equity shareholders since it is linked to the profits of the company.The rate of interest is fixed and predetermined at the time of issue of the security
6. ResolutionPayment of Final Dividend requires a Board resolution and an ordinary resolution at the AGM while Interim Dividend can be paid by passing only a Board Resolution.Payment of interest does not require the passing of a resolution at any meeting.
7. Accounting Treatment/AspectA dividend is an appropriation of profit.Interest is a charge on profit.

Answer in brief.

1.State any four points to be kept in mind by a Listed Company with respect to Dividend.

SOLUTION

When a company’s shares are listed in the Stock Exchange, the company has to follow additional requirements with respect to listings agreements. They are as follows:

  1. Notify the stock exchange where the company’s securities are listed at least 2 days in advance of the date of the Board meeting held to consider the recommendation of the final dividend.
  2. Intimate Stock Exchange immediately about the declaration of the dividend after the Board Meeting.
  3. Give notice of Book closure to the stock exchange at least 7 working days before the closure.
  4. Close the Register of members and the Transfer Register.
  5. It must use an electronic mode of payment such as Electronic Clearing Services (ECS) or National Electronic Fund Transfer (NEFT); as approved by the Reserve Bank of India (RBI).
  6. The listed company has to express the dividend on a per-share basis only.

2.Discuss any four features of dividend.

SOLUTION

  1. It is the portion of the profits of the company paid to its shareholders.
  2. It is payable out of the profits of the company.
  3. A dividend is an unconditional payment made by the company.
  4. The company can pay dividends only to the shareholders viz. (1) Equity (2) Preference.
  5. If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern the rights of shareholders about receiving the dividend.
  6. Dividends cannot be declared out of capital.
  7. Dividends can be declared only on recommendation of the Board of Directors.
  8. The dividend, as recommended by the Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
  9. Dividend for any previous year cannot be declared once that year’s Annual Account has been approved in the AGM.
  10. Dividend once approved and declared by shareholders creates a debt. It cannot be revoked.
  11. The dividend includes Interim Dividend.
  12. The dividend must be paid in cash and not in kind.
  13. The dividend is to be paid on the paid-up value of shares.
  14. Dividends cannot be paid on calls paid in advance.

3.Explain the features of Interest.

SOLUTION

  1. Interest is the price paid for the productive services rendered by capital.
  2. It is directly related to risk. The higher the risk, the higher is the interest.
  3. Rate of Interest is expressed as an annual percentage of Principal.
  4. The rate of interest is determined by various factors like money supply, fiscal policy, the volume of borrowings, rate of inflation, etc.
  5. Interest is a charge against the profit of the company. Even if the company makes no profit, interest should be paid.
  6. It is payable at a fixed and generally pre-determined rate. The company has to pay interest if it has borrowed money from creditors like Debentures holders, Depositors, Bondholders, etc.

Justify the following statement.

1.Dividend is paid out of profits of the company.

SOLUTION

  1. Shareholders invest in the company’s shares with aim of earning returns out of the profits of the company.
  2. The shareholders get dividends as a return on their investment.
  3. The shareholder being the owner of the company is entitled to a share in the company’s profits.
  4. A dividend is a share of the distributable profits of the company.
  5. Hence, the dividend is paid out of the profits of the company.

2.Interim dividend cannot be paid out of free reserves.

SOLUTION

  1. A dividend declared by the Board of Directors between two AGMs is called an Interim Dividend.
  2. The interim dividend is paid in the middle of the accounting year.
  3. It is paid before the finalisation of annual accounts for the year.
  4. Free Reserves are the reserves available for distribution of profits as per the latest audited Balance Sheet of the Company.
  5. It is declared out of profits of the current accounting year.
  6. Hence, Interim Dividend cannot be paid out of free reserves.

3.AGM is crucial for Final Dividend.

SOLUTION

  1. The final dividend is declared and paid after the close of the financial year.
  2. It is decided and recommended by the Board of Directors.
  3. Dividend as recommended by the Board of Directors is approved and declared by a resolution passed at the Annual General Meeting (AGM).
  4. The final dividend is declared by the shareholders in the AGM.
  5. Thus, AGM is crucial for the Final Dividend.

4.Listed Company has to follow additional guidelines on dividend matters.

SOLUTION

A dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’ The Board of Directors have the right to recommend a dividend. Once the dividend is approved and declared by the shareholders, it becomes a debt and cannot be revoked by the company. The final Dividend is declared and paid after the close of the financial year. It is decided and recommended by the Board of Directors and declared by the shareholders in the AGM.

5.Equity shares get last priority in dividend.

SOLUTION

  1. A dividend is a share in the distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.
  2. The dividend is payable only to the registered shareholders of the company.
  3. Preference shareholders are entitled to dividends before it is paid to the equity shareholders as per the terms of the issue of preference shares.
  4. Equity shareholders will get dividends from residual profits. i.e. after paying to preference shareholders and arrears of dividend on cumulative preference shares.
  5. This Equity shares get the last priority in dividends.

6.Unpaid dividend cannot be used by the company.

SOLUTION

  1. The dividend which is declared by the company but has not been paid by it or claimed by a shareholder within 30 days of its declaration is termed as Unpaid and Unclaimed Dividend.
  2. The company has to transfer it to an Unpaid Dividend Account opened in a scheduled bank within 37 days from the declaration of dividend.
  3. The company has to put up the details of the unpaid dividend on a website within 90 days of the transfer of the amount in the ‘Unpaid Dividend Account’.
  4. Any amount in the Unpaid Dividend Account that remains unpaid/unclaimed for a period of 7 years should be transferred by the company to the ‘Investors Education and Protection Fund’ (IEPF).
  5. Thus, a company cannot use the Unpaid Dividend.

7.Interest is a liability/obligation of the company.

SOLUTION

  1. Interest is the price paid for the capital borrowed by the company.
  2. Interest is a charge against the profit of the company.
  3. Even if the company makes no profit, interest should be paid.
  4. It is payable at a fixed and generally pre-determined rate
  5. The company is obligated to pay interest if it has borrowed money from creditors like debenture-holders, Depositors, Bondholders, etc.
  6. Thus, interest is a liability/obligation of the company.

8.Approval of members is not needed for Interim Dividend.

SOLUTION

  1. A dividend declared by the Board of Directors between two AGMs is called an Interim Dividend.
  2. The interim dividend is paid in the middle of the accounting year i.e. before the finalisation of annual accounts for the year.
  3. Articles of Association of the company must authorize the Board of Directors to declare Interim Dividend.
  4. The Board Meeting has to pass a resolution for declaring the Interim Dividend.
  5. Thus, the approval of members is not needed for the interim dividend.

Answer the following question.

1.Define Dividend and explain its features.

SOLUTION

Meaning:

  1. Term ‘Dividend’ is derived from the Latin word ‘Dividendum’ which means ‘that which is to be divided’.
  2. It is a part of the profits of the company that is distributed among the shareholders of the company.
  3. A dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’
  4. Usually, the term ‘Dividend’ refers to the Annual/final Dividend unless it is specifically mentioned as an Interim Dividend.

Definition:

  1. The Institute of Chartered Accountants of India (ICAI) has defined Dividend as, “a distribution to shareholders out of profits or reserves available for this purpose.”
  2. The Supreme Court has defined it as, “In case of going concern, it means portion of profits of a company, which is allotted to the holders of shares in a company.”

Features:

  1. It is the portion of the profits of the company paid to its shareholders.
  2. It is payable out of the profits of the company.
  3. A dividend is an unconditional payment made by the company.
  4. The company can pay dividends only to the shareholders viz. Equity and Preference.
  5. If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern the rights of shareholders about receiving the dividend.
  6. The dividend cannot be declared out of capital.
  7. The dividend can be declared only on the recommendation of the Board of Directors.
  8. The dividend, as recommended by the Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
  9. Dividend for any previous year cannot be declared once that year’s Annual Account has been approved in the AGM.
  10. Dividend once approved and declared by shareholders creates a debt. It cannot be revoked.
  11. The dividend includes Interim Dividend.
  12. The dividend must be paid in cash and not in kind.
  13. The dividend is to be paid on the paid-up value of shares.
  14. The dividend cannot be paid on calls paid in advance.

2.What is Interest? Explain its features.

SOLUTION

Meaning:

  • Interest is a payment made for using the money from another person.
  • The borrower takes money from the lender. Thus, for borrowers, interest is the cost of renting money and for the lender, interest is the income from his lending money.
  • The company has to pay interest if it has borrowed money from creditors like Debentures holders, Depositors, Bondholders, etc.

Features:

  1. Interest is the price paid for the productive services rendered by capital.
  2. It is directly related to risk. The higher the risk, the higher is the interest.
  3. Rate of Interest is expressed as an annual percentage of Principal.
  4. The rate of interest is determined by various factors like money supply, fiscal policy, the volume of borrowings, rate of inflation, etc.
  5. Interest is a charge against the profit of the company. Even if the company makes no profit, interest should be paid.
  6. It is payable at a fixed and generally pre-determined rate.

3.Discuss legal provisions for declaration of dividend.

SOLUTION

1) Board Meeting: Dividend can be declared only on the recommendation of the Board of Directors. Board Meeting should be called to pass a resolution about:

  1. Rate of Dividend and amount of Dividend to be paid
  2. Book closure date for the dividend
  3. Date of Annual General Meeting.
  4. Bank with which a separate account should be opened to remit the dividend amount.

2) Shareholders Approval:

  1. The dividend is approved by shareholders by passing an Ordinary Resolution at the Annual General Meeting.
  2. Shareholders can declare a lower rate of dividend than what is recommended by the Board but not higher than that.
  3. Once the dividend is declared at the General meeting it cannot be revoked. The company is not permitted to declare it a second time in that year.

3) Separate Bank Account: The company must deposit the dividend amount in a separate bank account opened in a scheduled bank called a Dividend Account within 5 (Five) days of its declaration.

  • Listed company: Where a company’s shares are listed on the Stock Exchanges, additional requirements with respect to Listings agreements must be followed.
  1. Notify stock exchange where the company’s securities are listed at least 2(two) days in advance of the date of the meeting of the Board at which recommendation of the final dividend is to be considered.
  2. Intimate Stock Exchange immediately about the declaration of the dividend after the Board Meeting.
  3. Give notice of Book closure to the stock exchange at least 7(seven) working days before the closure.
  4. Close the Register of members and the Transfer Register.
  5. It must use an electronic mode of payment such as Electronic Clearing Services (ECS) or National Electronic Fund Transfer (NEFT); as approved by the Reserve Bank of India (RBI)
    1) Book closure: It means the time period when the company does not handle any adjustments to the Register or requests to transfer Shares.
    2) Record Date: It is the cut-off date for determining the number of registered members who are eligible for corporate benefits like Dividends and Bonus shares.
  6. The listed company has to express the dividend on a per-share basis only.

4) Prohibition to Pay Dividend:

  1. A company that has failed to repay deposit or any interest on deposit cannot declare any dividend on its equity shares.
  2. No dividend can be declared if the company has defaulted on :
    1) Redemption of Debentures or payment of interest, Redemption of Preference shares, payment of interest to the financial institution, etc.

4.Explain Interim Dividend.

SOLUTION

Meaning:

  1. The dividend which is declared by the Board of Directors between two Annual General Meetings is called Interim Dividend.
  2. The interim dividend is paid in the middle of the accounting year i.e. before the finalization of annual accounts for the year.
  3. The opinion of the company’s Auditors should be taken before declaring an Interim Dividend.

Features:

  1. It is only payment on account of the whole dividend for the year.
  2. The company should provide depreciation for the entire year and not proportionately for a part of the year before declaring an Interim Dividend.
  3. The interim dividend cannot be paid out of any reserves.
  4. The Board of Directors has the power to declare an Interim Dividend.
  5. Articles of Association of the company must authorize the Board of Directors to declare Interim Dividend.
  6. The Board Meeting has to pass a resolution for declaring the Interim Dividend.
  7. The amount to be given as Interim Dividend must be credited in a separate Bank account in a scheduled bank within 5 days of its declaration.
  8. Interim Dividend should be paid within 30 days of its declaration.
  9. Unpaid/Unclaimed Interim Dividend should be transferred to ‘Unpaid Dividend Account’ within 7 days of the expiry of 30 days of declaration i.e. 37 days of its declaration.
  10. Any amount remaining unpaid/unclaimed in the ‘Unpaid Dividend A/c’ for 7 years should be transferred to IEPF.

                                             COMPLETED


Chapter 9, Depository System, hsc, sp, secretarial practice, maharashtra board, full solution,

Select the correct answer from the options given below and rewrite the statement.

1.In physical mode, securities are held in ______ form.

Options
  • Paper
  • Dematerialization
  • Electronic

2.Risk of losing certificates exists in ______ mode.

Options
  • Physical
  • Dematerialised
  • Digital

3.In Depository System, securities are held in ______ form.

Options
  • Scrip based
  • electronic
  • Physical

4.______ is the institute which facilitates electronic holding of securities.

Options
  • Depository participant
  • Issuer
  • Depository

5.There is no payment of ______ when securities are demated.

Options
  • Octroi
  • Wealth Tax
  • Stamp Duty

6.Depository Act was passed in __________.

Options
  • 1919
  • 1996
  • 1999

7.India has a ______ depository system.

Options
  • sole
  • multi
  • single

8.______ is a constituent of depository system.

Options
  • Government
  • Issuer
  • Trust

9.______ is the oldest depository in India.

Options
  • Dow Jones
  • NSDL
  • CDSL

10.Demat account is opened by ______.

Options
  • Beneficial Owner
  • CDSL
  • SEBI

11.Demated shares are ______.

Options
  • Non-transferable
  • Fungible
  • Bearer

12.______ is a unique code given to a security.

Options
  • IBM
  • BBM
  • ISIN

13.In India ISIN for corporate securities is allotted by ______.

Options
  • NSDL
  • Central Govt.
  • State Govt.

14.______ has to apply for ISIN.

Options
  • Company
  • Depository participant
  • Depositors

15.______ has to pay charges to maintain Demat Account.

Options
  • Investor
  • Issuer
  • Depository

16.NSDL is promoted by ______.

Options
  • NSE
  • BSE
  • FTSE

17.CDSL is promoted by ______.

Options
  • NSE
  • BSE
  • FTSE

Match the pairs.

Group ‘A’Group ‘B’
a) Bad Delivery1) 1956
b) Depository Act2) A 12 digit number/code.
c) ISIN3) Connects Government and Bank.
d) Depository participant4) Second Depository in India.
e) CDSL5) The Issuer Company.
f) Depository6) Problem faced in physical mode.
g) Beneficial owner7) A 10 digit number/code.
 8) Connects Depository and Investor.
 9) First Depository in the world.
 10) Coustodian of securities in electronic form.
 11) Problem faced in electronic mode.
 12) 1996
 13) Government Organisation.
 14) The Investor.

SOLUTION

Group ‘A’Group ‘B’
a) Bad Delivery6) Problem faced in physical mode.
b) Depository Act12) 1996
c) ISIN2) A 12 digit number/code.
d) Depository participant8) Connects Depository and Investor. 
e) CDSL4) Second Depository in India.
f) Depository10) Coustodian of securities in electronic form.
g) Beneficial owner14) The Investor.

Write a word or a term or a phrase which can substitute the following statement.

1.This mode of holding securities may result in loss and theft of certificates.

Match the Columns

SOLUTION

This mode of holding securities may result in loss and theft of certificates. – Physical mode

  2. The organization which holds the securities in electronic mode.

SOLUTION

This mode of holding securities may result in loss and theft of certificates. – Physical mode

3.This system eliminates storing of certificates.

SOLUTION

This system eliminates storing of certificates. – Depository system

4.This system allows faster and easier transfer of securities.

SOLUTION

This system allows faster and easier transfer of securities. – Depository system

5.The oldest Depository of India.

SOLUTION

The oldest Depository of India. – National Security Depository Limited (NSDL)

6.The country where depository system started for the first time.

SOLUTION

The country where depository system started for the first time. – Germany

7.The registered owner of securities.

SOLUTION

The registered owner of securities. – Beneficial owner

8.The Agent of the Depository.

SOLUTION

The Agent of the Depository. – Depository participant

9.This process converts securities into electronic form from physical form.

SOLUTION

This process converts securities into electronic form from physical form. – Dematerialisation

10.This process converts securities into physical form from electronic form.

SOLUTION

This process converts securities into physical form from electronic form. – Rematerialisation

11.This means securities are without distinctive identity number.

SOLUTION

This means securities are without distinctive identity number. – Fungibility

12. is the unique code for security given in depository system.

SOLUTION

This is the unique code for security given in depository system. – ISIN

State whether the following statement is true or false.

1.Physical mode of holding securities is risky.

Options
  • True
  • False

2.Allotment of securities take longer time when in physical mode.

Options
  • True
  • False

3.Transfer of securities is easier in electronic mode.

Options
  • True
  • False

4.Bad delivery is likely in Depository System.

Options
  • True
  • False

5.Depository system began in the USA for the first time in the world.

Options
  • True
  • False

6.India has a multi Depository System.

Options
  • True
  • False

7.Depository system is very similar to banking system.

Options
  • True
  • False

8.DP is a constituent of Depository System.

Options
  • True
  • False

9.DP is an agent of Depository.

Options
  • True
  • False

10.A Bank can work as a DP.

Options
  • True
  • False

11.DRF is required for conversion from physical to electronic.

Options
  • True
  • False

12.ISIN is a unique code given to the specific securities.

Options
  • True
  • False

1.Find the odd one.

Options
  • Elimination of storage of Certificates
  • Theft of Certificates
  • Torn Certificates

2.Find the odd one.

Options
  • NSDL
  • CDSL
  • NBFC

3.Find the odd one.

Options
  • Depository
  • DP
  • RBI

4.Find the odd one.

Options
  • DP
  • BO
  • State Government

5.Find the odd one.

Options
  • Issuer
  • BO
  • Central Government

6.Find the odd one.

Options
  • Issuer
  • BO
  • Central Government

Complete the sentence.

1.Central location for keeping securities in demated form is ______.

SOLUTION

Central location for keeping securities in demated form is depository.

2.Freezing of debit/credit of securities is possible in ______.

SOLUTION

Freezing of debit/credit of securities is possible in depository.

3.First Depository of the world started in the year ______.

SOLUTION

First Depository of the world started in the year 1947.

4.The Indian Depository Act was passed in the year ______.

SOLUTION

The Indian Depository Act was passed in the year 1996.

5.Link between Depository and Investor is ______.

SOLUTION

Link between Depository and Investor is depository participant.

6.Account of securities of the Investors is maintained by ______.

SOLUTION

Account of securities of the Investors is maintained by depository participant.

7.The process which converts physical securities in electronic form is ______.

SOLUTION

The process which converts physical securities in electronic form is dematerialisation.

8.The process which converts digital securities in physical form is ______.

SOLUTION

The process which converts digital securities in physical form is rematerialisation.

9.The Issuer company must register with ______.

SOLUTION

The Issuer company must register with depository.

10.The unique code identifying a security is ______.

SOLUTION

The unique code identifying a security is ISIN.

11.The first depository of India is ______.

SOLUTION

The first depository of India is NSDL.

1.Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) Dematerialization1) ____________
b) ____________2) DP
c) First depository of world3) ____________
d) CDSL4) ____________

(1999, Agent of Depository, Germany, physical to electronic)

SOLUTION

Group ‘A’Group ‘B’
a) Dematerialization1) Physical to electronic
b) Agent of Depository2) DP
c) First depository of world3) Germany
d) CDSL4) 1999

2.Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) First depository in India1) ____________
b) ____________2) Rematerialisation
c) Fungibility3) ____________
d) ____________4) ISIN

(12 digit code, NSDL, Electronic to physical, No distinctive number)

Fill in the Blank

SOLUTION

Group ‘A’Group ‘B’
a) First depository in India1) NSDL
b) Electronic to physical2) Rematerialisation
c) Fungibility3) No distinctive number
d) 12 digit code4) ISIN

Answer in one sentence.

1.What is Depository System?

SOLUTION

The system under which shares are held, transferred, and settled in electronic form is called a depository system.

2.Give examples of action termed as corporate action.

SOLUTION

Payment of dividend, issue of bonus shares, the offering of rights shares, early redemption of debentures, mergers, and acquisitions, etc. are some examples of corporate action.

3.When was Depository Act passed in India?

SOLUTION

The depository Act was passed in 1996 in India.

4.What is a DP?

SOLUTION

Depository Participant (DP) is the agent of the depository. It is an intermediary appointed by the depository.

5.What is Dematerialisation?

SOLUTION

The process of conversion of physical certificates into electronic mode is called dematerialisation.

6.What is Rematerialisation?

SOLUTION

The process of conversion of electronic holdings of securities into physical certificates is called rematerialisation.

7.What is ISIN?

SOLUTION

ISIN is a standard numbering system or code that uniquely identifies a specific securities issue.

8.Name the depositories in India?

SOLUTION

The two depositories in India are National Security Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Correct the underlined word and rewrite the following sentence.

1.Electronic mode of holding securities is risky.

SOLUTION

Physical mode of holding securities is risky.

2.Allotment and Transfer of securities are time consuming in electronic mode.

SOLUTION

Allotment and transfer of securities are time consuming in physical mode.

3.Banking system leads to a scrip less capital market.

SOLUTION

Depository system leads to a scrip less capital market

4.Storage of Certificates is not required in Physical mode of holding.

SOLUTION

Storage of certificates is not required in electronic/depository mode of holding.

5.India has a single Depository system.

SOLUTION

India has a multi depository system.

6.Depository Participant in India has to register under the partnership act.

SOLUTION

Depository participant in India has to register under the SEBI Act.

7.Demat accounts are opened and maintained by the Depository.

SOLUTION

Demat accounts are opened and maintained by the Depository Participant.

8.Securities are fungible in Physical mode.

SOLUTION

Securities are fungible in demat/electronic mode.

9.SIN is a code given to a company.

SOLUTION

ISIN is a code given to securities.

10.ISIN of Indian Government securities is issued by NSDL.

SOLUTION

ISIN of Indian Government securities is issued by RBI.

1.Arrange in proper order.

  1. Gets Statement of Accounts
  2. Open Demat Account
  3. Submit DRF

SOLUTION

  1. Open Demat account
  2. Submit DRF
  3. Gets statement of accounts

2.Arrange in proper order.

  1. Investor (BO) submits an application for securities to the issuer company.
  2. Depository intimates the DP about crediting BO’s Account.
  3. Issuer company gives details of allotment to Depository.

SOLUTION

  1. Investor (BO) submits an application for securities to the issuer company
  2. Issuer company gives details of allotment to depository
  3. Depositor intimates DP about crediting BO’s account

Explain the following term/concept.

1.Depository system

SOLUTION

The system under which shares are held, transferred, and settled in electronic form is called a depository system. The depository system maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. This system is also called as scripless trading system.

2.Dematerialisation

SOLUTION

The process of conversion of physical certificates into electronic mode is called dematerialisation. The client has to surrender the physical shares certificates along with the Demat Request Form (DRF) to the DP. The DP forwards these to the depository who in turn forwards it to the issuer. After confirmation from issuer, the depository will credit the securities in the Demat A/c with DP.

3.Rematerialisation

SOLUTION

The process of conversion of electronic holding of securities into physical certificates is called as rematerialisation. The client has to submit the Remat Request Form (RRF) to the DP. The DP forwards the RRF to the issuer and the depository. The issuer prints the certificates and sends them to the client and simultaneously confirms the acceptance of remat request to the depository. The depository via the DP debits accounts of the client with those securities.

4.Fungibility

SOLUTION

In financial terms, fungibility means the state of being interchangeable. The securities held in Demat/electronic forms are fungible. They are interchangeable, substitutable, and cannot be distinguished from each other. Securities bear no notable features like a distinctive number, certificate number, or folio number.

5.ISIN

SOLUTION

ISIN is a code that uniquely identifies a specific securities issue. It is a standard numbering system which is accepted globally. In India, ISINs are assigned by SEBI to NSDL (for demated shares). For Government securities, allotment of ISIN is done by the RBI. ISIN consists of a 12 (Twelve) digit alpha-numeric code which is divided into three parts. The company has to apply for ISIN for its securities with documents like a prospectus.

1.Study the following case/situation and express your opinion.

Mr. Z holds 100 shares of Peculiar Co. Ltd. in Physical mode and wishes to convert the same in electronic mode :

  1. Mr. Z holds a Saving Bank Account with CFDH Bank Ltd. Can he deposit his shares in this account for Demat?
  2. What type of account is needed for the same?
  3. Is it the RBI which will be the custodian of shares of Mr. Z after demating?

SOLUTION

  1. No, Mr. Z cannot deposit his shares in his bank account for demat.
  2. A demat account is required for converting physical shares into electronic holding.
  3. No, RBI will not be the custodian of the shares of Mr. Z. The depository i.e. NSDL or CDSL will be the custodian of shares of Mr. Z after demating.

2.Study the following case/situation and express your opinion.

Mr. R holds 100 shares of Peculiar Co. Ltd. in Demat mode :

  1. He wants to transfer one share each to his wife, daughter, and son. Can he do so?
  2. Does he need to submit DRF or DIS if he wants to transfer his shares?
  3. Can he nominate his wife in his Demat account?

SOLUTION

  1. He can transfer one share each to his wife, daughter, and son if they also have a Demat account.
  2. A DRF is a Demat requisition form. The shares held by Mr. R are already in Demat form. So, he has to submit DIS i.e. delivery instruction slip to transfer his shares to his family.
  3. Every depositor at any time has the right to nominate any person as a nominee in the event of his/her death. So, Mr. R can nominate his wife.

3.Study the following case/situation and express your opinion.

Mrs. Z wishes to open a Demat account in her name :

  1. Can she open the account by going to the Mumbai office of NSDL?
  2. Is she required to pay for the opening of the account and its maintenance?
  3. Does she have to send the shares to the respective company for demating?

SOLUTION

  1. No, Mrs. Z cannot open a demat account by going to the Mumbai office of NSDL. NSDL is a depository which is like a central bank. She has to open a demat account with a depository participant (DP).
  2. Yes, Mrs. Z has to pay for the opening of the account and its maintenance for availing services of DP.
  3. No, she doesn’t have to send the shares to the respective company for demating. She has to send the physical share certificates and Demat requisition form (DRF) in triplicate to the DP.

4.Study the following case/situation and express your opinion.

Mr. L wants to demat his 25 shares of Peculiar Co. Ltd. bearing certificate No. 100 and distinctive No. 76-100.

  1. Which form is he required to fill as a written request to the DP?
  2. Does he have to fill the instrument of transfer if he wishes to transfer the same after demat?
  3. Does he have to quote certificate no. and distinctive no. if he wishes to transfer his shares after it is in demat form?

SOLUTION

  1. Mr. L has to fill the ‘Demat Requisition Form’ (DRF) as a written request to the DP.
  2. After demat, if he wishes to transfer the shares, he does not have to fill the instrument of transfer. However, he will have to submit a delivery instruction slip (DIS) to the DP.
  3. The securities in demat form are fungible. They do not have any certificate no. or distinctive no. So, Mr. L does not have to quote any such number after the shares are converted in demat form.

5.Study the following case/situation and express your opinion.

Mr. S holds 50 shares of Peculiar Co. Ltd. in demat form. The company has declared a dividend of ₹ 5/- per share and a Bonus of 1:1 to its shareholders.

  1. How will Mr. S get his dividend?
  2. Will he get a Bonus share in Physical or demat?
  3. Who is entitled to dividend and Bonus: Mr. S or the depository? (NSDL in this case)

SOLUTION

  1. Under the depository system, the account of the investor is automatically credited in case of corporate action. So, Mr. S will get his divided through the depository in his bank account which is linked with the depository.
  2. Since Mr. S holds the shares in demat form, the bonus shares also will be received in demat form and will be directly credited to this demat A/c.
  3. Mr. S is the beneficial owner and hence, he is entitled to the dividend and bonus.

Distinguish between the following.

Dematerlization and Rematerlization

SOLUTION

PointsDematerializationRematerialization
1. MeaningProcess of converting Physical certificates of securities into electronic form.It is the process of conversion of electronic form of securities into physical form.
2. ConversionHere, the paper form of securities is converted into digitally/ electronically held securities.Here, the electronic records are converted into physical/paper form securities.
3. Use of FormIt uses ‘DRF’: Viz. ‘Dematerialization Request Form’ from Investor to the DP.It uses ‘RRF’: viz Rematerialization Request Form’ from Investor to the DP.
4. SequenceThis is an initial process. It is a primary and Principal function of the depositoryThis is a reverse process. It is a secondary and supporting function of the depository. Already demated securities are remated.
5. Identification of SecuritiesDemated securities have no distinctive numbers. They are fungible.Remated securities will have certificates and distinctive numbers as issued by the company.
6. Securities Maintenance AuthorityThe depository is the custodian of securities and records.The issuing company is the record-keeping authority. Securities are maintained by the investor.
7. Difficulty of ProcessDemat is an easy process. Also, it’s not a time-consuming process.Remat is not only a time consuming but also a complex process.

1.Explain disadvantages of physical mode of holding securities.

SOLUTION

Securities can be held in two modes – physical mode and electronic or dematerialised mode. Physical mode means securities are held in the form of paper certificates. The following are the disadvantages of the physical mode of holding securities.

  1. DELAY IN ALLOTMENT OF SECURITIES
    Allotment of new securities takes a longer time.
  2. RISK
    Certificates of papers can be lost, damaged, torn, stolen, misplaced during transit, etc.
  3. RISK OF BAD DELIVERY
    Delivering certificates which are torn, fake, etc. creates problems in buying and selling of securities.
  4. EFFORTS IN DUPLICATING
    Obtaining duplicate certificates (if the original certificate is lost) involves time, effort, and money.
  5. DELAY IN TRANSFER AND TRANSMISSION OF SECURITIES
    More time is involved in the transfer and transmission of securities as it involves the actual handling of physical certificates.

2.Explain any four advantages of Depository system to Investor.

SOLUTION

  1. Elimination of Risk: All risks associated with physical certificates like delays, loss, theft, mutilation, bad deliveries, etc. are totally eliminated.
  2. Safety: It is the safest and secure way of holding securities. The entire system functions under the Depository Act and is monitored by SEBI. e.g. The Investor can keep his account in a ‘Freeze/Lock’ mode to avoid/prevent unexpected debit or credit or both by giving instructions to the DP.
  3. Easy Transfer of shares:
    (a) Efforts in filling transfer forms and lodging the documents is eliminated.
    (b) Also the stamp duty levied on the transfer of physical shares is not applicable.
    (c) Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for an unnecessarily long time.
  4. Updates and Intimation: The investor is provided with the status of the holdings and transactions by DP and occasionally by the Depository too.
  5. Security against Loan: Dematerialised securities are preferred by banks and financial institutions as security against loans.
  6. No concept of ‘Lots’: The system of odd and even lot stands abolished. The market lot is one share for dematerialised securities.
  7. Nomination Facility: Individual Investors can avail of the nomination facility. This simplifies the process in the event of the death of the investor.
  8. Automatic Credit: The account of investor is automatically credited/debited in case of a change initiated by the company which impacts the securities. This is called ‘Corporate Action’. Few examples which can be termed as Corporate Action are Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares, Early Redemption of Debentures, Mergers and Acquisitions, etc.

3.Explain four advantages of Depository system to the Company.

Short Note

SOLUTION

  1. Up-to-date Information: The up-to-date information about investors is provided by the depository.
  2. Reduction in costs and efforts: Costs, efforts, and time involved in printing and distribution of certificates in cases of new issues, bonuses, transfers, etc. are saved.
  3. Better Investor – Company Relationships: The complaints arising out of the loss of certificates, signature differences, long lapses of time in executing requests, etc. are substantially reduced. It leads to better communication with investors and increased goodwill for the company.
  4. International Investment: Under Depository System, better and quicker services can be provided and this attracts investments from abroad.

4.Explain Depository as constituent of Depository System.

SOLUTION

  1. It is an organization like the Central Bank where securities are held in electronic form at the investor’s request.
  2. It also provides different services related to different transactions in such securities.
  3. It is responsible for the safe-keeping of the investor’s securities.
  4. There is no direct access to investors with the Depository.
  5. It works as a link between the company and investors.

5.Explain DP as the constituent of Depository system.

SOLUTION

  1. It is the agent of Depository
  2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
  3. It is an intermediary appointed by Depository.
  4. DP acts as a link between the Depository and the investor.
  5. It directly deals with customers. It sends a statement of accounts periodically.
  6. It functions like a securities bank.
  7. It facilitates Dematerialisation.
  8. It credits securities in the event of Rights Issue, Bonus Issue, etc.
  9. It handles instant transfers of pay-outs like dividends, interest, etc.
  10. It settles trade electronically.
  11. The following can work as DP’s:
    a) Financial Institutions
    b) Banks
    c) Approved Foreign Banks
    d) Custodians: Responsible for overseeing operations of assets/funds.
    e) Stock Brokers
    f) Clearing Corporation
    g) NBFC (Non-Banking Financial Company)
    h) Registrar to an Issue or Share Transfer Agents
  12. The DP maintains an account of securities of each investor.
  13. The DP has a unique number for identification.

Justify the following statement.

1.The electronic holding of securities is safer than physical holding.

SOLUTION

  1. Under the depository system, securities are held in electronic form.
  2. Physical certificates can be lost, damaged, torn, stolen, misplaced during transit, etc.
  3. Delivering certificates that are torn, fake, etc. creates problems in buying and selling of securities.
  4. Under the depository system, securities are held in electronic form.
  5. The transfer and settlement of securities are done electronically.
  6. It leads to the elimination of storage and handling of certificates.
  7. So, all risks associated with physical holding are eliminated by the electronic holding of securities.
  8. Hence, the electronic holding of securities is safer than physical holding.

2.Depository provides easy and quicker transfer of shares.

SOLUTION

  1. Under the depository system, securities are held in electronic form.
  2. The transfer and settlement of securities are done electronically.
  3. The efforts that were required in filling transfer forms and lodging the documents are eliminated in the depository system.
  4. Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for an unnecessarily long time.
  5. Further, stamp duty levied on the transfer of physical shares is also not applicable.
  6. Hence, the depository provides easy and quicker transfer of shares.

3.The depository system results in reduced time, cost, and efforts.

SOLUTION

  1. Under the depository system, securities are held in electronic form.
  2. The transfer and settlement of securities are done electronically.
  3. The efforts that were required in filling transfer forms and lodging the documents are eliminated in the depository system.
  4. Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for an unnecessarily long time.
  5. Further, stamp duty levied on the transfer of physical shares is also not applicable. So, the cost involved is also eliminated.
  6. Even at the company end, costs, efforts, and time involved in printing and distribution of certificates in cases of new issues, bonuses, transfers, etc. are saved.
  7. Thus, the depository system results in reduced time, cost, and efforts.

4.Depository system is very similar to the Banking system.

SOLUTION

  1. As a bank keeps the money safe. Similarly, a depository system keeps the securities safe.
  2. As in a bank, funds are held in accounts having unique numbers. Similarly, in a depository system, securities are held in accounts having unique IDs.
  3. Like a bank, there is no physical handling of securities during allotments, transfers, etc.
  4. In a bank, the transfer of funds between accounts is done. Similarly, in a depository system, the transfer of securities between accounts is done.
  5. Hence, depository system is very similar to the banking system.

5.DP is an important constituent of Depository system.

SOLUTION

  1. Depository Participant (DP) is the agent of depository. It is an intermediary appointed by depository.
  2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
  3. DP acts as a link between depository and the investor.
  4. It directly deals with customers. It sends statement of accounts periodically.
  5. It functions like a securities bank. The DP maintains account of securities of each investor.
  6. It facilitates dematerialisation. It settles trade electronically.
  7. It credits securities in the event of rights issue, bonus issue, etc. It handles instant transfers of pay-outs like dividend, interest, etc.
  8. Thus, DP is an important constituent of depository system.

6.ISIN is necessary component of Demat.

SOLUTION

  1. ISIN is a code that uniquely identifies a specific securities issue.
  2. It is a standard numbering system which is accepted globally.
  3. ISINs in any country are allotted by that country’s National Numbering Agency (NNA).
  4. In India, ISINs are assigned by SEBI to NSDL (for demated shares). SEBI works as NNA in India.
  5. For Government securities, allotment of ISIN is done by the RBI.
  6. ISIN consists of a 12 (Twelve) digit alpha-numeric code which is divided in three parts.
  7. The DP will be able to transfer the securities to/from the investor’s account only on the basis of the ISIN.
  8. Thus, ISIN is a necessary component of demat.

Justify the following statement.

ISIN is necessary component of Demat

1.What is Depository System and explain its advantages.

SOLUTION

Securities can be held in two modes – physical mode and electronic or dematerialised mode. Under depository system, securities are held in electronic form. The transfer and settlement of securities are done electronically. The depository system maintains accounts of the shareholder, enables transfer, collects dividend, bonus shares etc. on behalf of the shareholder. This system is also called as scripless trading system.

In the depository system, the depository is the custodian of the securities in electronic form and the depository participant (DP) acts as a link between the depository and the investor. Depository system is advantageous to investors and companies alike.

Advantages to Investors :

  1. Safety:
    The depository system is the safest and secure way of holding securities. The entire system functions under the Depository Act and is monitored by SEBI.
    E.g.: the investor can keep his account in a ‘freeze/lock’ mode to avoid/prevent unexpected debit or credit by giving instructions to the depository participant.
  2. Updates and Intimation:
    The DP regularly sends a statement to the investor which provides the status of holdings and transactions. Depository too provides such a statement occasionally.
  3. Risk Elimination:
    All risks associated with physical certificates like delays, loss, theft, bad deliveries, etc. are totally eliminated with depository system.
  4. Easy Transfer of Shares:
    i. The efforts that we required earlier in filing transfer forms and lodging of documents are not required
    ii. Also, the stamp duty levied on transfer of physical shares is not applicable.
    iii. Processing time in transfer of securities is reduced and neither the securities nor the cash is held up for unnecessarily long time.
  5. Facility of Nomination:
    The depository system allows individual investors to avail the nomination facility. In case of death of the investor, the securities are transferred to the account of the person who has been nominated by the investor.
  6. Automatic Credit:
    The account of investor is automatically credited/debited in case of a change initiated by the company which impacts the securities. This is called ‘Corporate Action’. Payment of dividend, issue of bonus shares, offering of rights shares, early redemption of debentures, mergers and acquisitions, etc. are few examples.
  7. No Concept of ‘Lots’:
    In the physical mode, it was compulsory to buy shares in certain lots i.e. lot of 10, lot of 100 etc. This system of ‘lots’ has been abolished with the depository system. The market lot is one share for dematerialised securities.
  8. Security Against Loan:
    Banks and financial institutions also provide loans against dematerialised securities as a collateral (security).

Advantages to Companies :

  1. Up-to-date Information :
    The up-to-date information about investors is provided by the depository.
  2. Reduction in Costs and Efforts :
    Costs, efforts and time involved in printing and distribution of certificates in cases of new issues, bonus, transfers, etc. is saved.
  3. Better Investor – Company Relationships :
    The complaints arising out of loss of certificates, signature differences, long lapses of time in executing requests, etc. is substantially reduced. It leads to better communication with investors and increased goodwill for the company.
  4. Internationl Investments :
    Under depository system, better and quicker services can be provided and this attracts investments from abroad.

2.Explain the constituents of Depository system.

SOLUTION

Under the depository system, securities are held in electronic form. The transfer and settlement of securities are done electronically. The depository system maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. All operations under the depository system are performed by the depository with the help of its constituents as follows:

1) Depository:

  1. It is an organisation like the Central Bank where securities are held in electronic form at the investor’s request.
  2. It also provides different services related to different transactions in such securities.
  3. It is responsible for the safe-keeping of the investor’s securities.
  4. There is no direct access to investors with the depository.
  5. It works as a link between the company and investors.

2) Depository Participant (DP):

  1. It is the agent of the depository.
  2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
  3. It is an intermediary appointed by the depository.
  4. DP acts as a link between the depository and the investor.
  5. It directly deals with customers. It sends a statement of accounts periodically
  6. It functions like a securities bank. The DP maintains an account of securities of each investor.
  7. It facilitates dematerialisation.
  8. It credits securities in the event of rights issues, bonus issues, etc.
  9. It handles instant transfers of pay-outs like dividends, interest, etc.
  10. It settles trade electronically.
  11. Financial institutions, banks, approved foreign banks, custodians, stockbrokers, clearing corporation, nonbanking financial corporations (NBFCs), Registrar, and Share Transfer Agents can work as DPs.
  12. The DP has a unique number for identification.

3) Beneficial Owner (BO):

  1. The BO is the investor of securities who has availed the services of depository participants.
  2. BO is entitled to all rights and benefits and is subject to all liabilities with respect to securities held by the depository. In simple words, the BO is entitled to bonuses, dividends, etc. on the shares held by the depository on his behalf. Similarly, he is also liable for any unpaid amount on shares held by the depository on his behalf.
  3. The BO can also be called as a client of depository and DP.
  4. BO client is required to open a demat account with the DP for the electronic holding of securities.
  5. BO has to pay charges to the DP for availing the services of DP.
  6. BO is given a unique account number in which securities are held.

4) Issuer Company:

  • It is the company that has issued the securities which are dematerialised. It must register with the depository.

                            COMPLETED 

Chapter 9, Depository System, sp, secretarial practice, hsc, maharashtra board, full solution,

Select the correct answer from the options given below and rewrite the statement.

1.In physical mode, securities are held in ______ form.

Options
  • Paper
  • Dematerialization
  • Electronic

2.Risk of losing certificates exists in ______ mode.

Options
  • Physical
  • Dematerialised
  • Digital

3.In Depository System, securities are held in ______ form.

Options
  • Scrip based
  • electronic
  • Physical

4.______ is the institute which facilitates electronic holding of securities.

Options
  • Depository participant
  • Issuer
  • Depository

5.There is no payment of ______ when securities are demated.

Options
  • Octroi
  • Wealth Tax
  • Stamp Duty

6.Depository Act was passed in __________.

Options
  • 1919
  • 1996
  • 1999

7.India has a ______ depository system.

Options
  • sole
  • multi
  • single

8.______ is a constituent of depository system.

Options
  • Government
  • Issuer
  • Trust

9.______ is the oldest depository in India.

Options
  • Dow Jones
  • NSDL
  • CDSL

10.Demat account is opened by ______.

Options
  • Beneficial Owner
  • CDSL
  • SEBI

11.Demated shares are ______.

Options
  • Non-transferable
  • Fungible
  • Bearer

12.______ is a unique code given to a security.

Options
  • IBM
  • BBM
  • ISIN

13.In India ISIN for corporate securities is allotted by ______.

Options
  • NSDL
  • Central Govt.
  • State Govt.

14.______ has to apply for ISIN.

Options
  • Company
  • Depository participant
  • Depositors

15.______ has to pay charges to maintain Demat Account.

Options
  • Investor
  • Issuer
  • Depository

16.NSDL is promoted by ______.

Options
  • NSE
  • BSE
  • FTSE

17.CDSL is promoted by ______.

Options
  • NSE
  • BSE
  • FTSE

Match the pairs.

Group ‘A’Group ‘B’
a) Bad Delivery1) 1956
b) Depository Act2) A 12 digit number/code.
c) ISIN3) Connects Government and Bank.
d) Depository participant4) Second Depository in India.
e) CDSL5) The Issuer Company.
f) Depository6) Problem faced in physical mode.
g) Beneficial owner7) A 10 digit number/code.
 8) Connects Depository and Investor.
 9) First Depository in the world.
 10) Coustodian of securities in electronic form.
 11) Problem faced in electronic mode.
 12) 1996
 13) Government Organisation.
 14) The Investor.

SOLUTION

Group ‘A’Group ‘B’
a) Bad Delivery6) Problem faced in physical mode.
b) Depository Act12) 1996
c) ISIN2) A 12 digit number/code.
d) Depository participant8) Connects Depository and Investor. 
e) CDSL4) Second Depository in India.
f) Depository10) Coustodian of securities in electronic form.
g) Beneficial owner14) The Investor.

Write a word or a term or a phrase which can substitute the following statement.

1.This mode of holding securities may result in loss and theft of certificates.

SOLUTION

This mode of holding securities may result in loss and theft of certificates. – Physical mode

2.The organization which holds the securities in electronic mode.

SOLUTION

This mode of holding securities may result in loss and theft of certificates. – Physical mode

3.This system eliminates storing of certificates.

SOLUTION

This system eliminates storing of certificates. – Depository system

4.This system allows faster and easier transfer of securities.

SOLUTION

This system allows faster and easier transfer of securities. – Depository system

5.The oldest Depository of India.

SOLUTION

The oldest Depository of India. – National Security Depository Limited (NSDL)

6.The country where depository system started for the first time.

SOLUTION

The country where depository system started for the first time. – Germany

7.The registered owner of securities.

SOLUTION

The registered owner of securities. – Beneficial owner

8.The Agent of the Depository.

SOLUTION

The Agent of the Depository. – Depository participant

9.This process converts securities into electronic form from physical form.

SOLUTION

This process converts securities into electronic form from physical form. – Dematerialisation

10.This process converts securities into physical form from electronic form.

SOLUTION

This process converts securities into physical form from electronic form. – Rematerialisation

11.This means securities are without distinctive identity number.

SOLUTION

This means securities are without distinctive identity number. – Fungibility

12.This is the unique code for security given in depository system.

SOLUTION

This is the unique code for security given in depository system. – ISIN


State whether the following statement is true or false.

1.Physical mode of holding securities is risky.

Options
  • True
  • False

2.Allotment of securities take longer time when in physical mode.

Options
  • True
  • False

3.Transfer of securities is easier in electronic mode.

Options
  • True
  • False

4.Bad delivery is likely in Depository System.

Options
  • True
  • False

5.Depository system began in the USA for the first time in the world.

Options
  • True
  • False

6.India has a multi Depository System.

Options
  • True
  • False

7.Depository system is very similar to banking system.

Options
  • True
  • False

8.DP is a constituent of Depository System.

Options
  • True
  • False

9.DP is an agent of Depository.

Options
  • True
  • False

10.A Bank can work as a DP.

Options
  • True
  • False

11.DRF is required for conversion from physical to electronic.

Options
  • True
  • False

12.ISIN is a unique code given to the specific securities.

Options
  • True
  • False

1.Find the odd one.

Options
  • Elimination of storage of Certificates
  • Theft of Certificates
  • Torn Certificates

2.Find the odd one.

Options
  • NSDL
  • CDSL
  • NBFC

3.Find the odd one.

Options
  • Depository
  • DP
  • RBI

4.Find the odd one.

Options
  • DP
  • BO
  • State Government

5.Find the odd one.

Options
  • Issuer
  • BO
  • Central Government

6.Find the odd one.

Options
  • DRF
  • RRF
  • PPF

Chapter 8, Correspondence with Depositors, sp, secretarial practice, maharashtra board, fyjc, 11th std,

Select the correct answer from the options given below and rewrite the statement.

1.Depositors are ______ of a company.

Options
  • Members
  • Creditors
  • Debtors

2.Depositors provide ______ Capital to the company.

Options
  • Short Term
  • Long Term
  • Medium term

3.A Company cannot accept deposit for more than ______ months.

Options
  • 24
  • 36
  • 45

4.A company cannot accept deposit for less than ______ months.

Options
  • 6
  • 3
  • 5

5.Deposits are ______ loans of the company.

Options
  • fixed
  • short term
  • long term

6.Public Deposits are accepted to meet the requirement of ______ Capital.

Options
  • fixed
  • working
  • owned

7.______ has the power to invite deposits from Public.

Options
  • Shareholders
  • Auditors
  • Board of Directors

8.Rate of interest on deposits is ______.

Options
  • fixed
  • fluctuating
  • moderate

9.The return or income for the investment of money on deposits is called ______.

Options
  • Dividend
  • Interest
  • Discount

Match the pairs.

Group ‘A’Group ‘B’
a) Depositors1) Fixed
b) Rate of Interest on Deposits2) Evidence of ownership
c) Deposit Receipt3) Debtors
 4) Creditors
 5) Evidence of deposit
 6) Fluctuating

SOLUTION

Group ‘A’Group ‘B’
a) Depositors4) Creditors
b) Rate of Interest on Deposits1) Fixed
c) Deposit Receipt5) Evidence of deposit

Write a word or a term or a phrase which can substitute the following statement.

1.Return on investment on deposit.

SOLUTION

Return on investment on deposit. – Interest

2.Instrument for payment of interest on deposit.

SOLUTION

Instrument for payment of interest on deposit. – Interest Warrant

3.An acknowledgement of the fixed deposit accepted by a company.

SOLUTION

An acknowledgement of the fixed deposit accepted by a company. – Deposit Receipt

4.Return of deposits on maturity date.

SOLUTION

Return of deposits on maturity date. – Repayment of Deposit

5.Maximum period of deposits.

SOLUTION

Maximum period of deposits. – 36 months


State whether the following statement is true or false.

1.Fixed deposit is a short term source of finance for the company.

Options
  • True
  • False

2.Fixed Deposit holder is creditor of the company.

Options
  • True
  • False

3.Deposits are invited by the company without issuing statutory advertisement.

Options
  • True
  • False

4.Fixed Deposit holders are entitled to receive dividend.

Options
  • True
  • False

5.A Private Company cannot accept the deposits from the general public.

Options
  • True
  • False

6.Depositors are given voting rights.

Options
  • True
  • False

1.Find the odd one.

Options
  • Dividend
  • Depositor
  • Deposit Receipt

2.Find the odd one.

Options
  • Trust Deed
  • Depository
  • Deposit Receipt

Complete the sentence.

1.Depositors are the ______ of the company.

SOLUTION

Depositors are the creditors of the company.

2.The ______ must be cautious and careful while writing letters to the depositors.

SOLUTION

The secretary must be cautious and careful while writing letters to the depositors.

3.Deposit is a ______ term source of finance of the company.

SOLUTION

Deposit is a short term source of finance of the company.

4.A company can accept deposits for the minimum period of ______ months.

SOLUTION

A company can accept deposits for the minimum period of six months.

5.Depositors are entitled to receive ______ at fixed rate.

SOLUTION

Depositors are entitled to receive interest at fixed rate.


Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) Depositor1) ____________
b) Return on Deposits2) ____________
c) ______________3) Maximum Period of Deposits
d) Minimum Period of Deposits4) ____________

(Interest, Creditor of the company, 36 months, 6 months)

SOLUTION

Group ‘A’Group ‘B’
a) Depositor1) ____________
b) Return on Deposits2) ____________
c) ______________3) Maximum Period of Deposits
d) Minimum Period of Deposits4) ____________

Answer in one sentence.

1.Who is depositor?

SOLUTION

A depositor is a person who subscribes to the deposits of a company.

2.What is the return on deposit?

SOLUTION

A fixed rate of interest is the return on deposit.

3.What is Interest Warrant?

SOLUTION

Interest Warrant is an instrument issued by the company for payment of interest on a deposit.

4.What is renewal of deposit?

SOLUTION

A process whereby the deposit holder continues with the deposit for an additional time period after the completion of the initial time period of investment (deposit) is called as ‘Renewal of Deposit’.

5.Which document is enclosed along with the Renewal Letter?

SOLUTION

A Renewal Deposit Receipt is enclosed along with the Renewal Letter.

6.When will the company return the deposit?

SOLUTION

The company will return the deposit on maturity of the tenure of deposit.

7.What is minimum and maximum period of deposit?

SOLUTION

The minimum period of deposit is 6 months and the maximum period is 36 months.


Correct the underlined word and rewrite the following sentence.

1.Depositors are owners of the company.

SOLUTION

Depositors are creditors of the company.

2.Deposits are the internal source of financing.

SOLUTION

Deposits are the external source of financing.

3.Deposit is a long term source of capital.

SOLUTION

Deposit is a short term source of capital.

4.Depositors are entitled to receive dividend.

SOLUTION

Depositors are entitled to receive interest.


1.Arrange in proper order

  1. Renewal of Deposit
  2. Acceptance of Deposits
  3. Deposit Receipt

SOLUTION

  1. Acceptance of Deposit
  2. Deposit Receipt
  3. Renewal of Deposit

2.Arrange in proper order

  1. Payment of Interest
  2. Deposit Receipt
  3. Acceptance of Deposits

SOLUTION

  1. Acceptance of Deposit
  2. Deposit Receipt
  3. Payment of Interest

Explain the following term/concept.

1.Depositor

SOLUTION

A depositor is a person who subscribes to the deposits of a company. He is a creditor of the company. Depositors get interest as a return on their investment of money in deposits.

2.Deposit

SOLUTION

Deposit is a short term source of finance for the company and it is used to meet the short term working capital requirements of the company. The company cannot accept deposits for a period of less than 6 months or more than 36 months. The company is liable to pay regular interest on the deposits at a fixed rate along with the principal amount on maturity.

3.Interest on Deposit

SOLUTION

The company accepts deposits in order to meet the short-term requirement of the company. A deposit is a borrowed capital. The company is liable to pay a fixed rate of interest on the amount invested in deposits by the depositors. The company pays interest through interest warrant or electronic mode i.e. NEFT, ECS etc.

4.Deposit Receipt

SOLUTION

The company accepts deposits in order to meet the short-term requirement of the company. The Deposit Receipt is proof of receipt of deposit. It is sent to the depositor within 21 days from the date of acceptance of deposits.

5.Renewal of Deposit

SOLUTION

A process whereby the deposit holder continues with the deposit for an additional time period after the completion of the initial time period of investment (deposit) is called as ‘Renewal of Deposit’. The additional period can be similar or different from the original time period. Deposit Renewal Form is sent to depositors at least one month before the maturity date.

6.Repayment of Deposit

SOLUTION

Repayment of deposit refers to returning the money invested by the deposits on completion of tenure of the deposits. On maturity of the tenure of deposits, it is binding on the company to repay the deposit. Default in repayment of deposit results in a levy of penalty.


Answer in brief.

1.What precautions are to be borne in mind by the Secretary, while corresponding with Depositors.

SOLUTION

The company secretary has to correspond with the depositors on various occasions. The secretary has to be careful and cautious while corresponding with depositors. The precautions which are to be borne in mind by the secretary are as follows:

  1. CORRECT INFORMATION (Accuracy):
    Letters written to the depositors should be accurate and precise. All the information provided to them should be correct and factual.
  2. CONSIDERATION (You altitude):
    The letters to the depositors should be written from the depositor’s point of view. It should be written after taking into consideration the requirements of the depositors.
  3. POLITENESS (COURTESY):
    Politeness means the use of courteous language in the letter. Being the creditors, due respect should be given to the depositors in secretarial correspondence. The tone of the letter to depositors must be polite. Rude language should be strictly avoided while corresponding with the depositors.
  4. SECRECY:
    As a confidential officer of the company, the secretary should not disclose any important and confidential information related to the company while corresponding with depositors.
  5. PROMPT RESPONSE:
    The secretary should promptly reply to any queries and complaints of the depositors. There should not be any delay in the correspondence.
  6. IMAGE AND GOODWILL:
    While corresponding with depositors, the secretary should always try to maintain goodwill and create a good image of the company in the mind of depositors.
  7. LEGAL PROVISIONS:
    The secretary should follow all the statutory provisions of the Companies Act, 2013, and any other relevant laws while corresponding with the depositors. The secretary should be cautious and careful while corresponding with depositors on legal matters.
  8. TO-THE-POINT LETTERS (Conciseness):
    The letter to the depositors should be concise i.e. it should be brief, short, and to the point. Any unnecessary and irrelevant information must be avoided.

2.What are the circumstances under which the Secretary makes correspondence with depositors?

SOLUTION

1. The company accepts deposits for a short period of time in order to meet the company’s short term working capital requirements.

2. Depositors are the creditors of the company.

3. The Company Secretary has to correspond with depositors on various occasions.

4. The Secretary has to communicate various decisions of the Board of Directors to the depositors.

5. The following are the few circumstances when the Secretary enters into correspondence with the Depositors:

  1. Thanking depositors for depositing the amount and showing faith in the company.
  2. Intimation about payment of interest through –
    i. Interest Warrant
    ii. Electronic payment of Interest
  3. Letter informing about the renewal of deposits.
  4. Informing depositors about repayment of deposit on maturity

Justify the following statement.

1.The Company Secretary should take certain precautions while corresponding with depositors.

SOLUTION

  1. Depositors are creditors of the company.
  2. The company secretary has to correspond with the depositors on various occasions.
  3. While writing letters, a secretary should provide correct, up-to-date, and factual information to the depositors.
  4. He should be prompt in replying to any queries or complaints of depositors.
  5. He should not give out sensitive and confidential information about the company. He should always strive to maintain a good image of the company.
  6. The secretary should follow the provisions of the Companies Act, 2013, and its latest amendments.
  7. Most importantly, he must use courteous language during all his correspondence.
  8. Thus, the company secretary should take certain precautions while corresponding with depositors.

2.There are certain circumstances when a secretary has to correspond with Depositors.

SOLUTION

  1. Deposits are borrowed capital of a company.
  2. Depositors are the creditors of the company.
  3. The secretary has to communicate the decisions of the management and other information to the depositors by conducting correspondence
  4. The secretary has to correspond with depositors under the following circumstances:
    a. Thanking depositors for depositing the amount and showing faith in the company.
    b. Intimation about payment of interest
    c. Renewal of deposits
    d. Informing depositors about repayment of deposits on maturity.
  5. Thus, there are certain circumstances when a secretary has to correspond with depositors.

1.Draft a letter of thanks to the depositor of a company.

SOLUTION

  1. The letter of thanks is sent to the depositors by the company immediately after receiving the deposits.
  2. It gives detailed information about deposits i.e. Amount of deposit, Date of deposit, Period of deposit, etc.
  3. The Deposit Receipt which is proof of the receipt of the deposit by the company is sent to the depositor along with this letter.
  4. This letter is sent within 21 days from the date of acceptance of deposits.

HULK MOTORS LTD.

Registered office: Plot No. 05, Commercial Towers, P.K. Road,

Mumbai – 400067

CIN: R20020 MH 1000 PLC123456

Website: www.hulkmotors.in

Email: hulk4321@gmail.com

Date: 17th Oct, 2020

Phone: 022 12345678

Fax: 022 – 11112222

Ref. No.: C/2060/20-18

Mr. John Methiw

508, Lokesh Apartments,

AK.D. Road,

Mumbai – 4000089

Sub: Thanking Depositor for Fixed Deposit

Dear Sir,

       We have received your application dated 12th Oct, 2020 for an investment of ₹ 1,00,000 in the fixed deposit of our company, as per terms and conditions stated in the advertisement, for a period of 2 years. We are thankful to you for the initiative and the trust you have shown in depositing a substantial amount in our company.

      The details of deposits accepted are given in the following schedule:

12345
Fixed Deposit Receipt No.Amount of Deposit (₹)Period of Deposit (Years)Rate of interest (%)Bank Details
    Name of the BankBank Account No
12350,000210%HDFC Bank00004567

      The Board of Directors of our company expresses its gratitude for depositing money in our company. We assure you of our best services and thank you for the confidence shown in our company.

      Thanking You,

Yours Faithfully,    

For Hulk Motors Ltd.

 Sign           

Mr. Kamlesh Gaikwad

Company Secretary

Encl: Fixed Deposit Receipt No.123

2.Draft a letter of thanks to the depositor of a company.

SOLUTION

  1. Deposit is a borrowed capital of the company.
  2. Depositors get interest as a return on the money invested by them in the deposits.
  3. When the interest on the deposit becomes due, the secretary sends a letter to the depositor informing him about the payment of the interest.
  4. In this letter, the Company Secretary gives detailed information about payment of interest such as – Amount of deposit, Rate of interest, Gross amount of interest, TDS, Net amount of interest, Interest Warrant No., etc.
  5. The company pays interest either through interest warrant or electronically.

HULK MOTORS LTD.

Registered office: Plot No. 05, Commercial Towers, P.K. Road,

Mumbai – 400067

CIN: R20020 MH 1000 PLC123456

Website: www.hulkmotors.in

Email: hulk4321@gmail.com

Date: 17th Oct, 2020

Phone: 022 12345678

Fax: 022 – 11112222

Ref. No.: C/2060/20-18

Mr. John Methiw

508, Lokesh Apartments,

AK.D. Road,

Mumbai – 4000089

Sub: Payment of Interest on Fixed Deposits

Dear Sir,

        I am instructed by the Board of Directors to inform you that the interest @ 10% on your Fixed Deposit approved by the Board has become due for the year ending 31st March, 2020. We are enclosing herewith ‘Interest Warrant’ No. A-432, dated 12th Oct, 2020 drawn on ICICI Bank, Worli Branch for ₹ 5,000/-.

        Your company has complied with all the provisions relating to the payment of interest on deposits. The details of your Fixed Deposit and interest payable on deposit are given in the following schedule:

1234567
Interest Warrant No.Fixed Deposit Receipt No.Deposit Amount (₹)Rate of interest (%)Gross Amount of InterestTDS @ (10%)Net Amount of Interest Payable (₹)
A-43212350,00010%₹ 5,000/-NIL₹ 5,000/-

       The Interest Warrant is enclosed herewith. Please detach the Interest Warrant along the perforated line.

      Thanking You,

Yours Faithfully,    

For Hulk Motors Ltd.

 Sign           

Mr. Kamlesh Gaikwad

Company Secretary

Encl: Interest Warrant


3.Write a letter to depositor regarding renewal of his deposit.

SOLUTION

HULK MOTORS LTD.

Registered office: Plot No. 05, Commercial Towers, P.K. Road,

Mumbai – 400067

CIN: R20020 MH 1000 PLC123456

Website: www.hulkmotors.in

Email: hulk4321@gmail.com

Date: 17th Oct, 2020

Phone: 022 12345678

Fax: 022 – 11112222

Ref. No.: C/2060/20-18

Mr. John Methiw

508, Lokesh Apartments,

AK.D. Road,

Mumbai – 4000089

Sub: Renewal of Fixed Deposit.

Dear Sir,

We have received your application for renewal of the deposit of ₹ 50,000 for a further period of two years. Along with the application we have also received original Fixed Deposit Receipt (FDR) No. 685, and the same has been placed before the Board for consideration and approval.

      The Board of Directors by passing a resolution at the Board meeting held on 12th Oct 2020 has decided to renew the deposits for a further period of 2 years on the same terms and conditions. A Deposit Receipt No. 342 is enclosed along with this letter.

     Thanking You,

Yours Faithfully,    

For Hulk Motors Ltd.

 Sign           

Mr. Kamlesh Gaikwad

Company Secretary

Encl: Fixed Deposit Receipt No. 342


4.Draft a letter to depositor regarding repayment of his deposit.

SOLUTION

  1. On the maturity of the tenure of the deposits, it is binding on the company to repay the amount of the deposit.
  2. If the company defaults in the re-payment of the deposits, the penalty will be levied.
  3. The letter of repayment of the deposit is to be sent to the depositor when the deposit is to be redeemed.
  4. The letter informs the depositor that the fixed deposit receipt is received by the company.
  5. This letter includes information about the Repayment of Deposit such as – tenure of deposit, Fixed Deposit Receipt No., deposit amount, rate of interest, maturity amount, TDS, net amount, the due date of payment of deposits, etc.

HULK MOTORS LTD.

Registered office: Plot No. 05, Commercial Towers, P.K. Road,

Mumbai – 400067

CIN: R20020 MH 1000 PLC123456

Website: www.hulkmotors.in

Email: hulk4321@gmail.com

Date: 17th Oct, 2020

Phone: 022 12345678

Fax: 022 – 11112222

Ref. No.: C/2060/20-18

Mr. John Methiw

508, Lokesh Apartments,

AK.D. Road,

Mumbai – 4000089

Sub: Repayment of Fixed Deposit

Dear Sir,

        This is to inform you that your Fixed Deposit Receipt A-432 dated 27th Oct, 2018 for ₹ 50,000/- will be due for repayment on 28th Oct, 2020.

        We have received from you the original Deposit Receipt No. 567 duly discharged along with your instruction for repayment. The Board of Directors in the meeting held on 12th Oct, 2020 has passed a resolution for the redemption of the deposits.

       The details of repayment of deposit are as under:

12345678
Tenure of DepositFixed Deposit Receipt No.Deposit Amount (₹)Rate of interest (%)Maturity Amt (₹)TDS (10%)Net Amt (₹)Due Date of Deposit
2 years12350,000₹ 10,00060,000₹ 1,00059,00028th Oct, 2020

Please find enclosed herewith a crossed cheque of ₹ 59000, bearing No. 123456 dated 28th Oct, 2020 drawn on ICICI Bank, Worli Branch, Mumbai – 400 008.

      Thanking You,

Yours Faithfully,    

For Hulk Motors Ltd.

 Sign           

Mr. Kamlesh Gaikwad

Company Secretary

Encl: Crossed Cheque No. 456789


5.Draft a letter to depositor informing him about payment of interest electronically.

SOLUTION

The company can pay interest on the deposits to the depositors electronically through ECS or NEFT.

HULK MOTORS LTD.

Registered office: Plot No. 05, Commercial Towers, P.K. Road,

Mumbai – 400067

CIN: R20020 MH 1000 PLC123456

Website: www.hulkmotors.in

Email: hulk4321@gmail.com

Date: 17th Oct, 2020

Phone: 022 12345678

Fax: 022 – 11112222

Ref. No.: C/2060/20-18

Mr. John Methiw

508, Lokesh Apartments,

AK.D. Road,

Mumbai – 4000089

Sub: Payment of Interest on Fixed Deposit Electronically through ECS or NEFT.

Dear Sir,

        I am instructed by the Board of Directors to convey to you that the Board has passed a resolution in the Board Meeting held on 12th Oct, 2020 to pay interest @ 10% on deposits for the year ending 28th March, 2020.

      Your company has complied with all the provisions relating to the payment of interest on deposits.

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

123456
Fixed Deposit Receipt. NoDeposit Amount (₹)Rate of interest (%)Gross Amt. of Interest (₹)TDS (10%)Net Amt. of Interest Payable (₹)
12350,000105000NIL5000

     Interest will be paid by electronic transfer i.e. by crediting the said interest to your bank account, as per details provided by you to the company.

     Thanking You,

Yours Faithfully,    

For Hulk Motors Ltd.

 Sign           

Mr. Kamlesh Gaikwad

Company Secretary


                                            

Chapter 7, Correspondence with Debenture holders, hsc, sp, secretarial practice, maharashtra board, full solution,

Select the correct answer from the options given below and rewrite the statement.

1.Debenture capital is a ______ capital of a company.

Options
  • borrowed
  • owned
  • permanent

2.Debenture holders are ______ of the company.

Options
  • Owners
  • Creditors
  • Debtors

3.Borrowed Capital is provided to the company by ______.

Options
  • Equity shareholder
  • Debenture holder
  • Preference shareholder

4.Interest on Registered Debentures is given through ______.

Options
  • Interest coupons
  • Interest warrant
  • Refund order

5.______ are the creditors of the company.

Options
  • Shareholders
  • Debenture holders
  • Directors

6.Bearer Debentureholders get interest through ______.

Options
  • Interest Warrants
  • Refund orders
  • Interest coupons

7.Return of income on debentures is ______ at fixed rate.

Options
  • Dividend
  • Loan
  • Interest

8.______ is an acknowledgement of debt issued by the company under common seal.

Options
  • Debentures
  • Shares
  • Reserve

9.Debentures repayable after a certain period are ______ debentures.

Options
  • Convertible
  • Registered
  • Redeemable

10.The rate of interest payable on debentures is ______.

Options
  • uncertain
  • floating
  • fixed

11.Debenture holders receive ______certificate from the company.

Options
  • Share
  • Bond
  • Debenture

12.Interest warrants are sent to ______ of the company.

Options
  • Shareholders
  • Debenture holders
  • Owners

Match the pairs.

Group ‘A’Group ‘B’
a) Debentureholder1) Borrowed Capital
b) Interest on Debentures2) Interest coupons
c) Convertible Debentures3) Evidence of Loan
d) Debenture Certificate4) Safe and secured investment
e) Investment in Debentures5) Interest warrant
f) Redeemable Debentures6) Conversion into Debentures
g) Debentures7) Risky investment
 8) Evidence of shares
 9) Creditor
 10) Conversion into equity shares
 11) Redeemed after fixed period
 12) Redeemed at winding up of company
 13) Owner
 14) Owned Capital

SOLUTION

Group ‘A’Group ‘B’
a) Debentureholder9) Creditor
b) Interest on Debentures5) Interest warrant
c) Convertible Debentures10) Conversion into equity shares
d) Debenture Certificate3) Evidence of Loan
e) Investment in Debentures4) Safe and secured investment
f) Redeemable Debentures11) Redeemed after fixed period
g) Debentures1) Borrowed Capital

Write a word or a term or a phrase which can substitute the following statement.

1.Return on investment in debentures.

SOLUTION

Return on investment in debentures. – Interest

2.Documentary evidence of holding the debentures.

SOLUTION

Documentary evidence of holding the debentures. – Debenture Certificate

3.Status of debenture holders.

SOLUTION

Status of debenture holders. – Creditors

4.Debentures which can be converted into equity shares.

SOLUTION

Debentures which can be converted into equity shares. – Convertible Debentures

5.The person who purchases debentures of the company.

SOLUTION

The person who purchases debentures of the company. – Debenture holder

6.An acknowledgement of debt issued by the company under its common seal.

SOLUTION

An acknowledgement of debt issued by the company under its common seal. – Debenture

7.Debentures whose name is mentioned in the Register of debenture holders.

SOLUTION

Debentures whose name is mentioned in the Register of debenture holders. – Registered Debentures


State whether the following statement is true or false.

1.Debenture holders get regular dividend.

Options
  • True
  • False

2.Debenture is a loan capital of the company.

Options
  • True
  • False

3.Convertible Debentures can be converted into equity shares.

Options
  • True
  • False

4.Interest on debentures is paid notwithstanding the volume of profit.

Options
  • True
  • False

5.Debenture holders enjoy full membership rights of the company.

Options
  • True
  • False

6.Dividend warrants are used to pay interest to the debenture holders.

Options
  • True
  • False

7.All types of debentures are eligible for conversion into equity shares.

Options
  • True
  • False

8.Debentures are never redeemed by the company.

Options
  • True
  • False

9.Debenture holders are the owners of the company.

Options
  • True
  • False

10.Debentures are always fully paid-up.

Options
  • True
  • False

Complete the sentence.

1.Debenture holder is a ______ of the company.

SOLUTION

Debenture holder is a creditor of the company.

2.Company issues ______ certificate to the debenture holder after allotment of debentures.

SOLUTION

Company issues debenture certificate to the debenture holder after allotment of debentures.

3.Debenture holder gets ______ at fixed rate as a return or income.

SOLUTION

Debenture holder gets interest at fixed rate as a return or income.

4.In case of Registered Debentures, Interest ______ are used to pay interest.

SOLUTION

In case of Registered Debentures, Interest warrants are used to pay interest.

5.The ______has to correspond with debenture holders on important occasions.

SOLUTION

The company secretary has to correspond with debenture holders on important occasions.

6.The person who purchases the debentures of a company is called ______

SOLUTION

The person who purchases the debentures of a company is called debenture holder.

7.Interest does not depend upon ______ of the company.

SOLUTION

Interest does not depend upon profits of the company.

8.Company cannot issue debentures with ______ rights.

SOLUTION

Company cannot issue debentures with voting rights.

9.Debenture certificate should be issued within a period of ______ months, from the date of allotment of debentures.

SOLUTION

Debenture certificate should be issued within a period of six months, from the date of allotment of debentures.

10.A company cannot issue debentures to more than 500 people without appointing a ______.

SOLUTION

A company cannot issue debentures to more than 500 people without appointing a Debenture Trustee.

11.The power to issue debentures has been vested with the ______.

SOLUTION

The power to issue debentures has been vested with the Board of Directors.


Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) Return on Debentures1) __________________
b) Debenture certificate2) __________________
c) __________________3) Debentureholders
d) __________________4) Debenture
e) __________________5) Power to issue debentures

SOLUTION

Group ‘A’Group ‘B’
a) Return on Debentures1) Interest
b) Debenture certificate2) Issued within 6 months
c) Creditors3) Debenture holders
d) Debt capital4) Debenture
e) Board of Directors5) Power to issue debentures

Answer in one sentence.

1.Who is debenture holder?

SOLUTION

Debenture holder is a person who subscribes to the debentures of a company.

2.What is the income of debenture holder?

SOLUTION

The debenture holder earns income in the form of a fixed rate of interest.

3.What is debenture?

SOLUTION

Debentures are debt instruments issued by a company to raise capital.

4.What is convertible debentures?

SOLUTION

Convertible Debentures are the debentures which are converted into equity shares on the expiry of specified period and at a specified rate mentioned in the terms of issue.

5.Who takes decision to allot the debentures?

SOLUTION

The Board of Directors takes decision to allot the debentures.

6.Which form is enclosed along with the letter of redemption of debentures?

SOLUTION

Debenture Redemption Form is issued along with the letter of redemption of debentures.

7.Which certificate will be issued after allotment of debentures?

SOLUTION

Debenture Certificate is issued after the allotment of debentures.


Correct the underlined word and rewrite the following sentence.

1.The person who purchases debentures of the company is called shareholder.

SOLUTION

The person who purchases debentures of the company is called debenture holder.

2.Debenture holders get regular dividend at fixed rate.

SOLUTION

Debenture holders get regular interest at fixed rate.

3.A Share Certificate must be issued after allotment of debentures.

SOLUTION

A Debenture Certificate must be issued after allotment of debentures

4.A Debenture Redemption Reserve Fund is created by the company for the redemption of Shares.

SOLUTION

A Debenture Redemption Reserve Fund is created by the company for the redemption of Debentures.

5.A Demat Request Form is sent along with the letter of Redemption of Debentures

SOLUTION

A Debenture Redemption Form is sent along with the letter of Redemption of Debentures.

6.A company must issue Debenture Certificate within 8 months of allotment of debentures.

SOLUTION

A company must issue Debenture Certificate within 6 months of allotment of debentures.


1.Arrange in proper order.

  1. Board Resolution
  2. Allotment of Debentures
  3. Board meeting

SOLUTION

  1. Board Meeting
  2. Board Resolution
  3. Allotment of Debentures

2.Arrange in proper order.

  1. Interest warrant
  2. Allotment of Debentures
  3. Board meeting

SOLUTION

  1. Board meeting
  2. Allotment of Debentures
  3. Interest warrant

Explain the following term/concept.

1.Debentures

SOLUTION

Debentures are debt instruments issued by a company to raise capital. Debenture capital is the borrowed capital of a company. A debenture is an acknowledgement of the debt. Debentures are issued for a specific period and it carries a fixed rate of interest as a return on the investment in debentures.

2.Debenture holder

SOLUTION

Debentures are debt instruments issued by a company to raise capital. The registered holders of such debentures are called debenture holders. The debenture holder is a creditor of the company. They get a fixed rate of interest for the amount they have invested in the debentures.

3.Interest on Debentures

SOLUTION

Debenture capital is a loan or borrowed capital of the company. Debenture holders are the creditors of the company. They get a fixed rate of interest as a return on their investment in debentures. Interest is a debt. It is not dependent on profits. The company pays interest on debentures either through interest warrant or via electronic mode i.e. NEFT, ECS, etc.

4.Redemption of debentures

SOLUTION

Redemption of debentures means repayment of the debentures by the company to the debenture holders. Debentures are redeemed on maturity or expiry of the period for which they were issued. A Debenture Redemption Reserve Fund (DRRF) is created by the company for the purpose of redemption of debentures.

5.Conversion of Debentures

SOLUTION

Conversion of debentures means debentures are converted into equity shares on the expiry of a specified period and at a specified rate mentioned in the terms of the issue. The company has to get the approval of shareholders by passing a special resolution at the Extra Ordinary General Meeting for the conversion of debentures into equity shares.

6.Interest warrant

SOLUTION

A fixed-rate of interest is paid by the company on the investment made by the debenture holders. This interest is paid by the company by means of an interest warrant. The interest warrant is attached to the letter for payment of interest which is sent to debenture holders by the secretary.

7.Conciseness

SOLUTION

The secretary has to communicate the decisions of the management and other information to the debenture holders. The letters to debenture holders should be concise i.e. brief, short, and to the point. Unnecessary and irrelevant information must be avoided.

8.Precise information

SOLUTION

The secretary has to communicate the decisions of the management and other information to the debenture holders by conducting correspondence. The secretary should take care that precise and up to date information is provided to the debenture holders. The information provided must be factual and true.

9.Courtesy

SOLUTION

The secretary has to be cautious and careful while corresponding with the debenture holders. Being the creditors, due respect should be given to the debenture holder in secretarial correspondence. The tone of the letter to debenture holders must be polite. Rude language should be strictly avoided while corresponding with the debenture holder

10.Debenture certificate

SOLUTION

Debenture Certificate is a document that certifies that the holder is the creditor of the company for the amount mentioned in the certificate. It is issued to all debenture holders. It is issued within a period of six months from the date of allotment of debentures.


Answer in brief.

1.Which are the precautions to be taken by the Secretary while corresponding with debenture holders?

SOLUTION

A secretary has to communicate the decisions taken by the management and other information to the debenture holders of the company through correspondence. While corresponding, he has to be cautious and careful. The secretary has to keep the following precautions in mind while corresponding with the Debenture holders.

  1. CORRECT & PRECISE INFORMATION: The secretary should always provide correct, up-to-date, and factual information to the debenture holders. The secretary should take due care while providing facts and figures.
  2. CONCISENESS: The letter to the debenture holders should be concise i.e. it should be brief, short, and to the point. Any unnecessary and irrelevant information must be avoided.
  3. POLITENESS (COURTESY): Politeness means the use of courteous language in the letter. Being the creditors, due respect should be given to the debenture holders in secretarial correspondence. The tone of the letter to debenture holders must be polite. Rude language should be strictly avoided while corresponding with the debenture holders.
  4. SECRECY: As a confidential officer of the company, the secretary should not disclose any important and confidential information related to the company while corresponding with debenture holders.
  5. PROMPT RESPONSE: The secretary should promptly reply to any queries and complaints of the debenture holders. There should not be any delay in the correspondence.
  6. IMAGE & GOODWILL OF THE COMPANY: While corresponding with debenture holders, the secretary should always try to maintain goodwill and create a good image of the company in the mind of debenture holders.
  7. LEGAL PROVISIONS: The secretary should follow all the statutory provisions of the Companies Act, 2013, and any other relevant laws while corresponding with the debenture holders. The secretary should be cautious and careful while corresponding with debenture holders on legal matters.
  8. TRANSPARENCY: To maintain greater transparency with the debenture holders, it is necessary to disclose all correct and accurate information of the company, credit rating of the company, true facts of the company’s affairs, etc. in the correspondence.

2.What are the circumstances under which correspondence can be made with debenture holders?

SOLUTION

Debenture holders are the creditors of the company. They have the right to know about the decisions taken by the management of the company and other information. The secretary corresponds with the debenture holders under various circumstances. The following are the few circumstances under which the secretary enters into correspondence with the debenture holders:

  1. Informing the applicant about the allotment of debentures.
  2. Informing about payment of interest through:
    i. Interest Warrant
    ii. Electronic Mode
  3. Letter for the conversion of debentures into equity share
  4. Informing the debenture holders about the redemption of their debentures.

Justify the following statement.

1.The company secretary should take certain precautions while corresponding with debenture holders.

SOLUTION

  1. Debenture holders are creditors of the company.
  2. The company secretary has to communicate the decisions of the management and other information to debenture holders through correspondence.
  3. While writing letters, a secretary should provide correct, up-to-date, and factual information to the debenture holders.
  4. He should be prompt in replying to any queries or complaints of debenture holders.
  5. He should not give out sensitive and confidential information about the company. He should always strive to maintain a good image of the company.
  6. The secretary should follow the provisions of the Companies Act, 2013, and its latest amendments.
  7. Most importantly, he must use courteous language during all his correspondence.
  8. Thus, the company secretary should take certain precautions while corresponding with debenture holders.

2.There are certain circumstances when a secretary has to correspond with debenture holders.

SOLUTION

  1. Debenture capital is the borrowed capital of a company.
  2. The debenture holders are the creditors of the company.
  3. The secretary has to communicate the decisions of the management and other information to the debenture holders by conducting correspondence.
  4. The Secretary has to correspond with debenture holders under special circumstances, such as
    a. Allotment of debentures
    b. Payment of interest through interest warrant or electronically
    c. Conversion of debentures into equity shares
    d. Redemption of debentures etc.
  5. Thus, there are certain circumstances when a secretary has to correspond with debenture holders.

1.Draft a letter of allotment to debenture holder.

SOLUTION

  1. When a company allots debentures to the applicant, the letter of allotment is sent to the debenture holders.
  2. The debenture holders get the debenture certificate in exchange for this letter.
  3. This letter contains the details of issue of debentures i.e. Number of debentures applied, Number of debentures allotted, Distinctive numbers of debentures, Amount received, Types of debentures, Rate of Interest, Maturity date, etc.

HULK MOTORS LTD.

Registered office: Plot No. 05, Commercial Towers, P.K. Road,

Mumbai – 400067

CIN: R20020 MH 1000 PLC123456

Website: wwww.hulkmotors.in

Email: hulk4321@gmail.com

Date: 17th Oct, 2020

Phone: 022 12345678

Fax: 022 – 11112222

Ref. No.: C/2060/20-18

Mr. John Methiw

508, Lokesh Apartments,

AK.D. Road,

Mumbai – 4000089

Sub: Allotment of Debentures

Dear Sir,

        In response to your application No. V65432 dated 27th Sep 2020, I am directed by the Board of Directors to inform you that, you have been allotted 100, 10% Non-convertible secured debentures of ₹100/- each. The tenure of debentures is for 5 years.

       These debentures are allotted to you as per Board Resolution passed at Board Meeting held on 15th Oct 2020 and as per terms and conditions of Articles of Association of the company and Debenture Trust Deed.

The details of allotment of debentures are as follows:

12345
Folio No.No. of Debentures AppliedNo. of Debentures AllottedDistinctive NumbersAmount Received (₹)
   FromTo 
D-1231001009011000₹ 10,000

The Debenture Certificate is enclosed herewith.

Thanking You,

Yours Faithfully,

For Hulk Motors Ltd.

Sign

Mr. Kamlesh Gaikwad

Company Secretary

Encl: Debenture Certificate


2.Write a letter to the debenture holder regarding payment of interest through Interest Warrant.

SOLUTION

  1. Debenture capital is a loan or borrowed capital of a company.
  2. Debenture holders are the creditors and they get a fixed rate of interest as a return on their investment in debentures.
  3. The interest paid by the company is a debt and does not depend upon profits.
  4. The company pays interest through an Interest warrant which is sent along with this letter.
  5. This letter contains details such as No. of debentures, Distinctive numbers, Gross amount of interest payable, TDS deducted, Net amount of interest payable, etc.

HULK MOTORS LTD.

Registered office: Plot No. 05, Commercial Towers, P.K. Road,

Mumbai – 400067

CIN: R20020 MH 1000 PLC123456

Website: wwww.hulkmotors.in

Email: hulk4321@gmail.com

Date: 17th Oct, 2020

Phone: 022 12345678

Fax: 022 – 11112222

Ref. No.: C/2060/20-18

Mr. John Methiw

508, Lokesh Apartments,

AK.D. Road,

Mumbai – 4000089

Sub: Payment of Interest on Debentures.

Dear Sir,

I am directed to inform you that, the Board of Directors has passed a resolution in the Board Meeting held on 15th Oct, 2020 regarding payment of interest on your 100, 10% Non-convertible debentures of ₹ 100/- each for the year ending 31st March, 2020.

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

1234567
Folio No.No. of DebenturesDistinctive NumbersGross Amt. of InterestT.D.S (10% on interest)Net Amt. of InterestInterest Warrant No.
  FromTo    
D-1231009011000₹ 1,000NIL₹ 1,000C1234

The Interest Warrant is enclosed herewith. Please detach the Interest Warrant along the perforated line.

Thanking You,

Yours Faithfully,

For Hulk Motors Ltd.

 Sign           

Mr. Kamlesh Gaikwad

Company Secretary

Encl: Interest Warrant


3.Draft a letter to debentureholder informing him about redemption of debentures.

SOLUTION

  1. Letter of Redemption is sent to debentureholders whose debentures are to be redeemed after the specified period.
  2. A Debenture Redemption Reserve Fund (DRRF) is created by the company for the purpose of redemption of debentures.
  3. Debenture Redemption Form is sent along with this letter. This form along with necessary documents has to be submitted to the company by the debentureholders in order to redeem the shares.
  4. This letter is sent in order to inform the debentureholders that their debentures have become due for redemption.

HULK MOTORS LTD.

Registered office: Plot No. 05, Commercial Towers, P.K. Road,

Mumbai – 400067

CIN: R20020 MH 1000 PLC123456

Website: www.hulkmotors.in

Email: hulk4321@gmail.com

Date: 17th Oct, 2020

Phone: 022 12345678

Fax: 022 – 11112222

Ref. No.: C/2060/20-18

Mr. John Methiw

508, Lokesh Apartments,

AK.D. Road,

Mumbai – 4000089

Sub: Redemption of Debentures

Dear Sir,

      This is to inform you that 100000, 10% Non-convertible Debentures issued in June, 2015 are due for redemption on 15th June, 2020. According to Board Resolution No. 1234, passed at the Board Meeting held on 8th June, 2020, debentures shall be redeemed out of the ‘Debenture Redemption Reserve Fund’ of the company.

     Please arrange to submit the enclosed ‘Debenture Redemption Form’ along with the original Debenture Certificate to the company, on or before 3rd July, 2020  On completion of the above formalities, the redemption amount will be credited to your bank account.

     You are requested to provide us your Bank Account details.

      Thanking You,

Yours Faithfully,    

For Hulk Motors Ltd.

 Sign             

Mr. Kamlesh Gaikwad

Company Secretary

Encl: Debenture Redemption Form


4.Write a letter to debentureholder informing him about conversion of debentures into equity shares.

SOLUTION

  1. Convertible debentures are the debentures that are converted into equity shares on the expiry of a specified period at a specified rate mentioned in the terms of issue.
  2. After the receipt of the Letter of Option, the Secretary sends a letter informing the debenture holders that the debentures are converted into equity shares.
  3. The secretary either sends the share certificate along with the letter or states in the letter that the share certificate will be issued to them in due course.
  4. The company has to get the approval of shareholders by passing a special resolution at the Extra Ordinary General Meeting for the conversion of debentures into equity shares.
  5. After receiving the approval, the company sends a letter of conversion of debentures to the debenture holders.

HULK MOTORS LTD.

Registered office: Plot No. 05, Commercial Towers, P.K. Road,

Mumbai – 400067

CIN: R20020 MH 1000 PLC123456

Website: wwww.hulkmotors.in

Email: hulk4321@gmail.com

Date: 17th Oct, 2020

Phone: 022 12345678

Fax: 022 – 11112222

Ref. No.: C/2060/20-18

Mr. John Methiw

508, Lokesh Apartments,

AK.D. Road,

Mumbai – 4000089

Sub: Conversion of Debentures into Equity Shares

Dear Sir,

        I am directed to inform you that in accordance with the terms decided at the time of issue of 1,00,000, 10% fully convertible debentures, the debentures are due for conversion. In accordance with the above, a Special Resolution was passed by the shareholders in the Extra – Ordinary General Meeting held on 5th Oct, 2020 for approval of the conversion of debentures into equity shares in the ratio of 2 : 1.

        As per your Letter of Option you have been allotted 50 Equity shares in lieu of 100 Debentures. Details of your holding after conversion are as follows:

12345
Folio No.No. of Debentures heldNo. Of Equity Shares IssuedDistinctive NumbersShare Certificate No.
   FromTo 
D-123100509011005678

      Duly signed and executed share certificate is enclosed herewith. Debenture Certificate will be null and void w.e.f. 5th Oct, 2020.

      Thanking You,

Yours Faithfully,    

For Hulk Motors Ltd.

 Sign           

Mr. Kamlesh Gaikwad

Company Secretary

Encl: Share Certificate


5.Write a letter to debentureholder informing him about conversion of debentures into equity shares.

SOLUTION

  1. Convertible debentures are the debentures that are converted into equity shares on the expiry of a specified period at a specified rate mentioned in the terms of issue.
  2. After the receipt of the Letter of Option, the Secretary sends a letter informing the debenture holders that the debentures are converted into equity shares.
  3. The secretary either sends the share certificate along with the letter or states in the letter that the share certificate will be issued to them in due course.
  4. The company has to get the approval of shareholders by passing a special resolution at the Extra Ordinary General Meeting for the conversion of debentures into equity shares.
  5. After receiving the approval, the company sends a letter of conversion of debentures to the debenture holders.

HULK MOTORS LTD.

Registered office: Plot No. 05, Commercial Towers, P.K. Road,

Mumbai – 400067

CIN: R20020 MH 1000 PLC123456

Website: wwww.hulkmotors.in

Email: hulk4321@gmail.com

Date: 17th Oct, 2020

Phone: 022 12345678

Fax: 022 – 11112222

Ref. No.: C/2060/20-18

Mr. John Methiw

508, Lokesh Apartments,

AK.D. Road,

Mumbai – 4000089

Sub: Conversion of Debentures into Equity Shares

Dear Sir,

        I am directed to inform you that in accordance with the terms decided at the time of issue of 1,00,000, 10% fully convertible debentures, the debentures are due for conversion. In accordance with the above, a Special Resolution was passed by the shareholders in the Extra – Ordinary General Meeting held on 5th Oct, 2020 for approval of the conversion of debentures into equity shares in the ratio of 2 : 1.

        As per your Letter of Option you have been allotted 50 Equity shares in lieu of 100 Debentures. Details of your holding after conversion are as follows:

12345
Folio No.No. of Debentures heldNo. Of Equity Shares IssuedDistinctive NumbersShare Certificate No.
   FromTo 
D-123100509011005678

       Duly signed and executed share certificate is enclosed herewith. Debenture Certificate will be null and void w.e.f. 5th Oct, 2020.

      Thanking You,

Yours Faithfully,    

For Hulk Motors Ltd.

 Sign           

Mr. Kamlesh Gaikwad

Company Secretary

Encl: Share Certificate


Chapter 6, Correspondence with Members, hsc, 12th std, secretarial practice, sp, maharashtra board, ebalbharathi, solution,

Select the correct answer from the options given below and rewrite the statement.

1.Directors are the ____________

Options
  • paid employee of the company
  • representatives of the share holders
  • creditors of the company

2.Dividend is to be paid to the shareholders within ______ days from the date of declaration.

Options
  • 30
  • 40
  • 20

3.Registered shareholders receive dividend through ______ warrant.

Options
  • share
  • debenture
  • dividend

4.Shares issued free of cost to the shareholders are known as ______ shares.

Options
  • preference
  • equity
  • bonus

5.Share Certificate should be ready for delivery by the company within ______ months after the allotment of shares.

Options
  • 3
  • 5
  • 2

6.Secretarial correspondence with members should be ____________

Options
  • lengthy
  • shortcut
  • prompt and precise

7.Dividend is recommended by ______

Options
  • Board of Directors
  • shareholders
  • Depositors

8.Dividend is paid out of ______ of the company

Options
  • Capital
  • Building Fund
  • Profit

9.______ is issued by the company to its registered shareholders after the declaration of dividend at the Annual General Meeting of the company.

Options
  • Dividend Warrant
  • Interest Warrant
  • Share Warrant

Match the pairs.

Group ‘A’Group ‘B’
a. Dividend Warrant1. Instrument for payment of Interest
b. Return on Shares2. Capitalisation of Building Fund
c. Bonus Shares3. Electronic Clearing Service
d. ECS4. Capitalisation of Reserve Fund
e. NEFT5. National Electronic Fund Transfer
 6. Dividend
 7. Electronic Co-operative Society
 8. National Electronic Fixed Transfer
 9. Instrument for Payment of Dividend
 10. Interest

SOLUTION

Group A’Group ‘B
a. Dividend Warrant9. Instrument for Payment of Dividend
b. Return on Shares6. Dividend
c. Bonus Shares4. Capitalisation of Reserve Fund
d. ECS3. Electronic Clearing Service
e. NEFT5. National Electronic Fund Transfer

Write a word or a term or a phrase which can substitute the following statement.

1.Shares given free of cost to the existing equity shareholders.

SOLUTION

Shares given free of cost to the existing equity shareholders. – Bonus shares

2.Instrument for payment of dividend.

SOLUTION

Instrument for payment of dividend. – Dividend warrant

3.The shareholders to whom the bonus shares are issued.

SOLUTION

The shareholders to whom the bonus shares are issued. – Equity shareholders

4.The authority which recommends the rate of dividend.

SOLUTION

The authority which recommends the rate of dividend. – Board of Directors

5.An officer who comes into contact with all the members of the company through correspondence.

SOLUTION

An officer who comes into contact with all the members of the company through correspondence. – Company secretary

6.A special kind of cheque issued by a company on its banker to pay certain sum of money as dividend to its members.

SOLUTION

A special kind of cheque issued by a company on its banker to pay certain sum of money as dividend to its members. – Dividend warrant


State whether the following statement is true or false.

1.Bonus shares are issued to existing equity shareholders.

Options
  • True
  • False

2.Building fund is used for issue of bonus shares.

Options

  • True
  • False

3.Bonus shares means capitalisation of reserve fund.

Options
  • True
  • False

4.Registered shareholder gets dividend through dividend coupons.

Options
  • True
  • False

5.Dividend is the portion of the profits of the company which is allotted to the holders of the debentures of the company.

Options
  • True
  • False

6.Every company must issue or despatch a share certificate to the allottee within three months after allotment of shares.

Options
  • True
  • False

7.A complaint letter should not be replied promptly.

Options
  • True
  • False

1.Find the odd one.

Options
  • Bonus Letter
  • Dividend Letter
  • Board of Directors

2.Find the odd one.

Options
  • Dividend Warrant
  • Interest Warrant
  • Demat

3.Find the odd one.

Options
  • Secretary
  • Board of Directors
  • Dividend
  • Lucid Language

Complete the sentence.

1.Dividend is recommended by ______

SOLUTION

Dividend is recommended by Board of Directors.

2.A company capitalises its Reserve Fund for issue of ______ shares.

SOLUTION

A company capitalises its Reserve Fund for issue of Bonus shares.

3.Payment of dividend must be made within ______ days of its declaration.

SOLUTION

Payment of dividend must be made within 30 days of its declaration.

4.Dividend is approved by the ______ in the Annual General Meeting.

SOLUTION

Dividend is approved by the Shareholders in the Annual General Meeting.

5.The ______ has to communicate the decisions of the management to the members by conducting correspondence.

SOLUTION

The secretary has to communicate the decisions of the management to the members by conducting correspondence.


1.Select the correct option from the bracket.


Group ‘A’
Group ‘B’
a) Return on share1. ______
b) Capitalisation of Reserve Fund2. ______
c) Correspondence3. ______
d) ______4. Payment of Dividend Electronically

SOLUTION

Group ‘A’Group ‘B’
a) Return on share1. Dividend
b) Capitalisation of Reserve Fund2. Bonus Shares
c) Correspondence3. Written Communication
d) ECS4. Payment of Dividend Electronically

Answer in one sentence:

1.What is dividend warrant?

SOLUTION

A dividend warrant is a cheque sent by a company to a shareholder for payment of dividend to the registered address of the shareholder.

2.What is capitalisation of reserves?

SOLUTION

Capitalisation of reserves is to capitalise profits of the company and to provide additional (bonus) shares to the existing equity shareholders without any additional cost.

3.What is Dividend?

SOLUTION

Dividend is the portion or part of the profits of the company which is distributed to the equity shareholders of the company.

4.Who recommends the rate of dividend ?

SOLUTION

Board of Directors recommends rate of dividend.

5.Which type of shareholders enjoy the benefit of Bonus Shares?

SOLUTION

Existing equity shareholders of the company enjoy the benefits of Bonus Shares.

6.What is meant by payment of dividend electronically?

SOLUTION

A company can use an online payment facility to make payments of dividends to their shareholders i.e. electronically through ECS, NEFT, etc. It is known as the payment of dividends electronically.


Correct the underlined word/s and rewrite the following sentence:

1.Dividend is recommended by shareholders.

SOLUTION

Dividend is recommended by Board of directors.

2.The person who purchases shares of the company is called Depositor

SOLUTION

The person who purchases shares of the company is called Shareholder.

3.Bonus shares are issued as a free gift to the preference shareholders.

SOLUTION

Bonus shares are issued as a free gift to the equity shareholders.

4.Payment of dividend must be made within 21 days of its declaration.

SOLUTION

Payment of dividend must be made within 30 days of its declaration.

5.A company must issue the Share Certificate within three months of allotment of shares.

SOLUTION

A company must issue the Share Certificate within two months of allotment of shares.


1.Arrange in proper order.

a) Allotment of shares

b) Application for shares

c) Share certificate

SOLUTION

(b) Application for shares

(a) Allotment of shares

(c) Share certificate

2.Arrange in proper order.

a) Member

b) Applicant

c) Bonus shares

SOLUTION

(b) Applicant

(a) Member

(c) Bonus shares


Explain the following term/concept:

1.Capitalisation of Reserves

SOLUTION

(1) The process of issuing the bonus shares out of the company’s profits or reserves is known as “Capitalisation of Profits or Reserves.

(2) It is a reward to shareholders, distributed in proportion to the number of shares each owns. The process has no impact on a corporation book value.

2.Bonus Shares

SOLUTION

(1) Bonus issues refer to the fully paid-up shares given to its existing equity shareholders without any cost, based upon the number of shares they are own. It is given at free of cost.

(2) For this purpose, a certain proportion is decided. For instance, if a person holds 100 shares and the company declares 1:2 bonus issues, then for every 2 shares held, he gets 1 share for free of cost.

3.Dividend Warrant

SOLUTION

(1) A dividend warrant is a kind of document that reflects whether a shareholder is entitled for a dividend or not.

(2) It is an order of payment in which the dividend is paid. A company uses the dividend warrant to pay the dividend in the form of cashback.

1.Which precautions are to be taken by the Secretary while corresponding with members?

SOLUTION

Followings are the precautions to be taken by the secretary while corresponding with members:

The Company Secretary has to correspond with Members on various occasions. While writing various letters, the Secretary should give due respect to the Members, provide complete and correct information

Thus, writing letters to the Members is a challenging task and it requires skills, knowledge, and techniques.

1. Correct Information: The Secretary should always provide correct, up-to-date, and factual information to the Members. Due care should be taken while giving facts and figures

2. Lucid Language: The Secretary must use simple words, simple sentences, and adopt a convincing style while writing letters to the Members. Technical words, long sentences should be avoided in the letter. It should be easy to understand.

3. Prompt Response: The Secretary must be prompt in sending replies to the letters received from the Members. Any questions or queries raised by the members must be promptly replied by the Secretary. Complaint letters should be promptly attended to without any delay.

4. Secrecy: The Secretary should not disclose any confidential information of the company to the Members. The Secretary should tactfully answer some letters without giving any secret information of the company.

5. Politeness (Courtesy): A courteous letter shows sympathy, respect, and mutual understanding. Politeness means the use of courteous language. A complaint letter should be replied politely. Rude language should be strictly avoided while corresponding with Members.

6. Legal matters: The Secretary should compulsorily follow relevant provisions of the Companies Act, 2013 with the latest amendments and other relevant laws while corresponding with Members. While drafting these letters, if necessary Secretary should consult with a legal advisor on certain matters.

7. Consideration: The writer should due the importance and consideration to the reader and consider the problems of the members. While sending negative replies, he should draft these letters more carefully, so that Members should not be hurt. Secretary should make the member feel that the management honestly regrets refusal.

8. Image of the Company: The Secretary should try to project a good image of the company in every situation. While drafting the letters, the Secretary has to try his best to remove their doubts, queries, and difficulties in a polite and courteous manner.

2.What are the circumstances under which Secretary undertakes correspondence with members?

SOLUTION

The following are the few circumstances under which the Secretary enters into correspondence with the members of the company

1. Letter for the issue of the Share Certificate.

2. Letter for Payment of Dividend through

a) Dividend Warrant

b) Electronic Payment of Dividend

3. Letter for Issue of Bonus Shares

4. Reply letter to the query of the member on a low rate of dividend.


Justify the following statement

1.The Company Secretary should take certain precautions while corresponding with members

SOLUTION

Justification:

The company secretary should take certain precautions while corresponding with members. They are as follows:

(a) Prompt Reply: In any correspondence prompt reply is very important. The company Secretary must give prompt replies to any queries of the members.

(b) Correct Information: The letter acts as a representative of the organization. Thus, the secretary should always provide all the correct information in a concise or compact manner.

(c) Courtesy: The letter to the members should be polite. A courteous letter shows empathy, respect, and mutual understanding.

(d) Lucid Language: While corresponding with members, the secretary must use simple and lucid language. It should be easy to understand.

(e) Accuracy: In correspondence with members “accuracy” or perfectness is very much important. The Secretary must provide accurate information.

Thus, the company secretary should take certain precautions while corresponding with members.

2.There are certain circumstances when a Secretary has to correspond with members.

SOLUTION

Justification:

There are circumstances under which a secretary has to enter into correspondence with members. They are as follows:

(a) Letter for the issue of share certificate

(b) Letter for Payment of Dividend through:

• Dividend warrant

• Electronic Payment of Dividend Bonus Shares.

(c) Letter for Issue of Bonus Shares

(d) Reply letter to the query of the member on low rate of dividend.

Thus, there are certain circumstances when a secretary has to correspond with members.


Attempt the following.

1.Write a letter to the shareholder regarding issue of Bonus Shares.

SOLUTION

YASH INDUSTRIES LIMITED

Registered office: 102, New MIDC, Usha Tower, Shahu Chowk

Mumbai – 400 031,

CIN: L40407 MH 20050PLC710007

Website: www.yashindustrieslimited.com

E-mail: yash30@gmail.com

Date: 16thOctobar, 2019

Tel.no. 022-23252323

Fax no. 022-23600445

Ref no. Y/MR-B /5/19-20

Ms. Yukta Shroff

715, Narayan Peth

Laxmi Road,

Pune – 411 038.

Sub. : Issue of Bonus Shares

Dear Madam,

       I am directed by the Board of Directors to inform you that in accordance with the resolution passed in the Extra-ordinary General Meeting of the company held on 14th October 2019 Shareholders have unanimously approved the recommendation of the Board of Directors to issue Bonus Shares. Bonus Shares are issued in the ratio of 1:1, i.e. one additional equity share for every equity share held as on record date 13th October 2019.

The Details of issue of Bonus Shares are as follows:

12345
No. of Shares held on record dateNo. of Bonus Shares Issued/AllottedD.P.ID No.Client ID No.Date of Credit to Demat A/c
Credit to Demat Account no.
2525IN 3001001011606131-10-2019

The Company has complied with the provisions for the issue of Bonus Shares. The Bonus Shares issued will rank pari passu with the existing equity shares.

Thanking you,

Yours faithfully,       

For Yash Industries Limited

Sign          

(Mr. S. R. Naik)   

Company Secretary


2.Write a letter to the member for the issue of Share Certificate.

SOLUTION

COMFORT MOTORS LTD.

Registered office: A/30, Aurora Towers, M. G. Road, Camp,

Pune 411 012.

CIN: U12111 MH 2000 PCL300477

Phone: 020-80032844

Fax: 020-50063015

Ref. No. C/MR-SC/30/19-20

Website: www.comfortmotorsltd.com

Email: comfort31@gmail.com

Date: 12th July, 2019

Mr. Jayant Modi

Abhiman Apartment

30, L. B. Road,

Pune – 411 001.

Sub: Issue of Share Certificate

Dear Sir,

This is to inform you that as per your Request Application No. 50, I am hereby authorised to issue you a Share Certificate. The said Share Certificate will be delivered to you within 15 days from the date of this letter by registered post to your registered address as mentioned in the Register of Members.

Details of issue of Share Certificate are as follows:

1234
Folio No.Share Certificate NumbersDistinctive NumbersTotal Number of Shares
FromTo
10069630301400100

It shall always be our endeavour to provide the best of our services to you at all times.

Thanking you

Yours faithfully,       

For Comfort Motors Ltd.

Sign           

Mr. Anand Swami 

Company Secretary


3.Write a letter to the member for the payment of dividend through Dividend Warrant.

SOLUTION

ANMOL STEEL INDUSTRIES LIMITED

Registered office: 30, Anmol Niwas, J. M. Road, Nariman point,

Mumbai – 400 020.

CIN: L30408 MH 2003 PLC110845

Phone: 022-97675877

Fax: 022-30010331

Ref. No. A/MR-D/7/19-20

Website: www.anmolindustrieslimited.com

E-mail: anmol5@gmail.com

Date: 7th May, 2019

Mrs. Jyoti Surti

12, Laxmi Niwas,

Amrapali Marg, Bandra,

Mumbai – 400 050.

Sub: Payment of Dividend on Equity Shares

(Equity Shares of ₹ 10 each at par)

Dear Madam.

      I am instructed by the Board of Directors to convey to you that in the 31st Annual General Meeting held on 20th April 2019, the Final Dividend @ ₹ 2.5 per equity share of ₹ 10/- each has been approved by the members for the year ending 31st March 2019,

Your company has complied with all the statutory provisions (Sec. 123 of the Companies Act. 2013) relating to the declaration of dividend.

Details of dividend payable to you are as follows:

1234567
Register Folio No.No. of Shares heldDistinctive Nos.Dividend Warrant No.Gross DividendIncome Tax Deducted(TDS)Net Dividend
FromTo
A-30100301400B-9931₹ 250/-NIL₹ 250/-

The ‘Dividend Warrant’ is attached herewith. Please detach the ‘Dividend Warrant along the perforated line.

Thanking you,

Yours faithfully,          

For Anmol Steel Industries Limited.

Sign                    

   Secretary                 

Encl. : Dividend Warrant


4.Write a letter to the member for the payment of Interim dividend electronically.

SOLUTION

GURUSAI AUTO LIMITED

Registered Office: 31, Tulsi Complex, Lodhi Road, Camp, Pune – 411 001.

CIN: L40103 MH 1999 PLC300477

Phone: 020-24032844

Fax: 020-24356101

Ref. No. S/MR-D/12/19-20

Website: www.asterclasses.com

E-mail: sai31@gmail.com

Date: 3rd June, 2019

Mr. Jayant Modi

15, Sagar Apartment

Van Vihar Road

Pune – 411 030.

Sub. : Payment of Interim Dividend through Electronic Clearing Service (ECS), Direct Credit/NEFT

Dear Sir,

    We are pleased to inform you that the Board of Directors of Gurusai Auto Limited in its meeting held on Thursday, 28th May 2019 has declared Interim Dividend @ Re. 1/- (i.e. 10%) per equity share of face value of Rs. 10/- each.

As per the instructions given by you (either in person or through Depository Participant), we have remitted the amount of aforesaid Interim Dividend to your Banker for crediting your Bank Account, i.e. Dividend will be payable by electronic transfer. Your company has complied with all the provisions relating to the declaration and payment of dividends.

Details of the Dividend payable to you are given below –

123456
No. of Equity Shares held on Record Date (May 31st, 2019)Dividend Per Share (₹)Dividend Amount (₹)DPID and Client ID No.Date of RemittanceBank A/c. (BOB)
50015006th June, 20195656000 22105 Bank of Baroda

Please verify the credit of amount in your Pass Book/Statement of accounts.

As per the provisions of the Income Tax Act, 1961 no tax is required to be deducted at source in respect of Dividend payment, but dividend Distribution Tax has been paid by the Company.

Thanking you,

Yours faithfully,          

For Gurusai Auto Limited

Sign                  

(Mr. Jitesh M. Gandhi)    

  Company Secretary      


5.Draft a reply letter resolving the query of the member on low rate of dividend.

SOLUTION

SHREE CEMENT INDUSTRIES LIMITED

Registered Office: 31, Tulsi Tower, Bandra (East), Mumbai – 400 050

CIN: L50307 MH 2000 PLC160699

Phone: 022-24245025

Fax: 022-45456035

Ref. No. S/MR-D/25/19-20

Website: www.shreecementindustriesltd.com

E-mail: shree3@gmail.com

Date: 20th April, 2019

Ms. Kishor Malpani

15/21, Lotus Apt.,

Borivali (W),

Mumbai – 400 103.

Sub. : Resolving Query on Low Rate of Dividend made by the Company

Dear Sir,

      This is to inform you that as per your letter dated 15th April 2019 I am hereby authorised to resolve your query regarding the low rate of dividend paid by the company to their faithful members. The reasons for the low rate of dividend are mentioned below :

  1. That during the last year, due to the floods, company’s factory situated at Mahim (E) was not in a condition to operate in a full fledge manner.
  2. That due to such unavoidable circumstances of natural disaster company faced huge financial losses.
  3. That due to such circumstances Board of Directors has decided to transfer Rupees 12.5 crores to General Reserves which is 50% more than the amount transferred to Reserves last year.

Hope you will be satisfied by the above information as provided by the company. We assure you that company will easily come over from such unavoidable circumstances and will deliver much better dividend in the coming years.

Thanking you,

Yours faithfully,          

For Shree Cement Industries Limited

Sign            

(Mr. Suhas Bajaj)   

 Company Secretary 

                                     COMPLETED

Chapter 5, Deposits, hsc, 12th std, secretarial practice, sp, maharashtra board, ebalbharathi, solution,

Select the correct answer from the options given below and rewrite the statement:

1.Deposit is a type of ______________________.

Options
  • Owned capital
  • Short term loan
  • Long term loan

2.Eligible public company and Government Company can collect deposits from _____________.

Options
  • It’s employees
  • Public
  • RBI

3.Private company can accept deposits from its member or Directors upto not more than ___________ % of its aggregate of paid-up share Capital and free reserves.

Options
  • 100
  • 35
  • 25

4.A __________ Company can accept deposits from public not exceeding 35% of its paid-up share Capital and free reserves..

Options
  • Government
  • Private
  • Eligible Public

5.Deposit can be accepted for a minimum of 6 months and maximum for ________ months

Options
  • 36
  • 3
  • 30

6.Company can issue circular or advertisement for inviting deposits after _________ days of filing it with Registrar of Companies.

Options
  • 30
  • 21
  • 7

7.Company has to appoint ________________ to protect the interest of depositors

Options
  • Debenture Trustees
  • Deposit Trustees
  • Credit Rating Agency

8.Charge on assets is to be created when a company issues ______________.

Options
  • Unsecured deposit
  • Unsecured Debenture
  • Secured deposit

9.Deposit Receipt is issued within ______________ days of receipt of deposit

Options
  • 7
  • 30
  • 21

10.For premature repayment of deposit, company deducts __________ % of interest.

Options
  • 1
  • 18
  • 20

11.Return of deposit must be filed every year on or before ____________.

Options
  • 30th June
  • 31st March
  • 30th April

Match the pairs.

Group ‘A’Group ‘B’
a) Private Company10% of aggregate of paid-up share Capital + free reserves
b) Deposit Trust DeedSigned at least 7 days before issuing advertisement
c) Secured DepositMaximum 30 months
d) Tenure of depositCharge on tangible assets
e) Return of Deposit100% aggregate of paid-up share capital + free reserves
 File on or before 31st March every year
 Signed 21 days after issuing advertisement
 Maximum 36 months
 Charge on intangible assets
 File on or before 30th June every year

SOLUTION


Group ‘A’
Answers
a) Private Company100% aggregate of paid-up share capital + free reserves
b) Deposit Trust DeedSigned at least 7 days before issuing advertisement
c) Secured DepositCharge on tangible assets
d) Tenure of depositMaximum 36 months
e) Return of DepositFile on or before 30th June every year

Write a word or a term or a phrase which can substitute the following statement.

1.A company which can accept deposits from its members, directors, or their relatives not exceeding 100% of aggregate of paid up share capital and free reserves.

SOLUTION

Private Company

2.Company which can accept deposits from public up to 35% of its paid-up share capital and free reserves.

SOLUTION

Government Company

3.Minimum tenure of a deposit.

SOLUTION

6 month

4.Maximum tenure of a deposit

SOLUTION

36 month

5.Period within which a company has to create a charge on its tangible assets

SOLUTION

Within 30 days of acceptance of deposits.

6.Document issued by a company to invite its members to subscribe for its Deposits.

SOLUTION

Circular

7.Agreement between company and Deposit Trustee.

SOLUTION

Deposit Trust Deed

8.Account that can be used only for repaying deposits

SOLUTION

Deposit Repayment Reserve Account

9.Time within which company has to issue deposit Receipt

SOLUTION

Within 21 days from date of receipt of deposit

10.Book which contains details of deposits accepted or renewed.

SOLUTION

Register of Deposit


State whether the following statement is true or false.

1.Return of deposit must be filed every year on or before 31st March.

Options
  • True
  • False

2.Eligible public company can collect deposits from its members.

Options
  • True
  • False

3.Government company can collect deposits from its members.

Options
  • True
  • False

4.A private company can collect deposits from public.

Options
  • True
  • False

5.Deposit can be accepted for a maximum of 36 months.

Options
  • True
  • False

6.Eligible public company can collect deposits from public not exceeding 35% of its paidup share capital and free reserves.

Options
  • True
  • False

7.For secured deposits, company has to create a charge on its tangible assets.

Options
  • True
  • False

8.Deposit Receipt is issued within 21 days of receipt of deposits.

Options
  • True
  • False

9.Company appoints Credit Rating Agency to protect the interest of depositors.

Options
  • True
  • False

10.Deposit Trust Deed is an agreement between company and Deposit Trustee

Options
  • True
  • False

1.Find the odd one of depositors.

Options
  • Private company
  • Eligible public company
  • Government company.

2.Find the odd one of depositors.

Options
  • Deposit Trustee
  • Deposit Trust Deed, 
  • Special Resolution

3.Find the odd one of depositors.

Options
  • Appointment of Deposit Trustee
  • Appointment of Registrar of companies
  • Appointment of Credit Rating Agency

Complete the sentence:

1.Deposit is a type of  _____________ term loan.

SOLUTION

Deposit is a type of Short term loan.

2.Eligible Public company and Govt. Company can accept deposits from ______________.

SOLUTION

Eligible Public company and Govt. Company can accept deposits from Public.

3.To collect deposits from public, Eligible public company must have a net worth of not less than ___________

SOLUTION

To collect deposits from public, Eligible public company must have a net worth of not less than ₹100 crores.

4.A Government company can accept deposits from public not exceeding ____________.

SOLUTION

A Government company can accept deposits from public not exceeding 35% of its paid-up share capital and free reserves.

5.Deposits can be accepted or renewed for a period not less than 6 months and not more than ___________.

SOLUTION

Deposits can be accepted or renewed for a period not less than 6 months and not more than 36 months.

6.Company cannot accept or renew deposits repayable on _____________.

SOLUTION

Company cannot accept or renew deposits repayable on Demand.

7.Premature repayment of deposits can be done by a company but not before _____________.

SOLUTION

Premature repayment of deposits can be done by a company but not before 3 months

8.To invite the public to subscribe for its deposits, a company issues __________________.

SOLUTION

To invite the public to subscribe for its deposits, a company issues Advertisement.

9.Agency which gives ratings of the deposits of a company is called ______________.

SOLUTION

Agency which gives ratings of the deposits of a company is called Credit Rating Agency 

10.Account which is used only for repaying deposits is called  _________________.

SOLUTION

Account which is used only for repaying deposits is called Deposit Repayment Reserve Account 

Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) Government Company1) ___________________
b) ___________________2) Deposits from members
c) 36 months3) ___________________
d) ___________________4) Charge on tangible assets
e) Return of deposit5)   __________________

(File on or before 30th June, Private Company, Secured deposits, Deposits from public, Maximum tenure of deposits.)

SOLUTION


Group ‘A’
Group ‘B’
a) Government Company1) Deposit from public
b) Private Company2) Deposits from members
c) 36 months3) Maximum tenure of Deposit
d) Secured Deposit4) Charge on tangible assets
e) Return of deposit5) File on or before 30th June

Answer in one sentence.

1.Which companies can accept deposits from the public?

SOLUTION

Eligible public and government companies can accept deposit.

2.What is the maximum deposit the Government company can collect?

SOLUTION

The maximum deposit the Government company can collect is not more than 35% of paid up capital and free reserves.

3.Who are Deposit Trustees?

SOLUTION

Deposit Trustees are the trustees who protect the interest of the Depositor.

4.What is Deposit Trust Deed?

SOLUTION

The Deposit Trust deed contains the terms and conditions agreed upon or between the company and the Trustee.

5.When does a company create charge on it’s tangible assets?

SOLUTION

Company create charge on assets when company wants to issue secured debentures or deposits.

6.Within what period should a company issue Deposit Receipt?

SOLUTION

Company has to issue Deposit Receipt within 21 days from the date of receipt of the money or realisation of cheque.

7.When should a company Deposit?

SOLUTION

Company should file Return of Deposits on or before 30th June, every year.

8.What is Deposit Repayment Reserve Account?

SOLUTION

Deposit Repayment Reserve Account is an account opened by company only for repayment of deposit money

9.What is Register of Deposit?

SOLUTION

Deposit Register is a register having details like Name of the Depositors, Address, Investment period, repayment, etc.

Correct the underlined word and rewrite the following sentence.

1.Government Company can accept deposit from members.

SOLUTION

Government Company can accept deposit from public

2.Company issues advertisement to invite its members for subscribing to its deposits

SOLUTION

Company issues circular to invite its members for subscribing to its deposits

3.Company appoints Credit Rating Agency to protect the interest of Depositors.

SOLUTION

Company appoints Deposit Trustees to protect the interest of Depositors.

4.Deposit Receipt is issued within seven days from date of receipt of deposits

SOLUTION

Deposit Receipt is issued within 21 days from date of receipt of deposits.

5.Register of deposits is to be filed with the Registrar of companies on or before 30th June every year.

SOLUTION

Return of deposit is to be filed with the Registrar of companies on or before 30th June every year.

6.Charge on assets is created when company issues unsecured deposit.

SOLUTION

Charge on assets is created when company issues secured deposit.

7.Minimum tenure of deposit is 36 months.

SOLUTION

Minimum tenure of deposit is 6 months.

1.Arrange in proper order.

a. Appoint Deposit Trustee.

b. Hold General Meeting.

c. Create charge on assets.

SOLUTION

(b) Hold General Meeting.

(a) Appoint Deposit Trustee.

(c) Create charge on assets.

2.Arrange in proper order.

a. File Return of deposit

b. Issue Deposit Receipt

c. Issue advertisement.

SOLUTION

(c) Issue advertisement.

(b) Issue Deposit Receipt

(a) File Return of deposit

3.Arrange in proper order.

a. Obtain Credit Rating.

b. Entries in Register of Deposits.

c. Issue Deposit Receipt.

SOLUTION

(a) Obtain Credit Rating.

(c) Issue Deposit Receipt.

(b) Entries in Register of Deposits.

Explain the following term/concept.

1.Eligible Public Company

SOLUTION

(1) Eligible public company can accept deposits from members and the public.

(2) Eligible company under section 76(1) of Companies Act, 2013 means:

A company having net worth* of not less than Rs one hundred crores or

Turnover* of not less than Rs five hundred crores.

2.Tenure of Deposit

SOLUTION

(1) Deposits can be accepted for a minimum period of 6 months and a maximum period of 36 months.

(2) However, for short term requirements, deposits up to 10% of the aggregate paid-up capital, free reserves, and securities premium account can be accepted for a period of less than six months but not less than three months Rule 3(2) of Companies (Acceptance of Deposits) Rules, 2014.

3.Secured Deposit

SOLUTION

(1) A company can accept secured or unsecured deposits which should be clearly mentioned in every circular, form, advertisement, or in any document related to invitation or acceptance of deposits.

(2) If the company intends to issue Secured Deposits, it shall create security in favour of trustees within 30 days of acceptance of deposits. Trustees should ensure about the security of depositors. If there is any default in repayment, trustees should organize a meeting of depositors – Rules 6 to 8 of Companies (Acceptance of Deposits) Rules, 2014.

4.Deposit Trustee

SOLUTION

(1) Every company inviting deposits under section 73, of Companies Act 2013, shall appoint deposit trustees for creating security for its deposits, which shall be mentioned on the circular. Written consent shall be obtained from the trustee before their appointment.

(2) A deposit trust deed has to be signed at least 7 days before the issue of the circular. Deposit trustees cannot be removed after the issue of circular / advertisement and before the expiry of his term except with unanimous consent of all directors present at the meeting of the Board, which shall include an independent director if any.

5.Charge on tangible assets

SOLUTION

(1) Every company accepting deposits from the public shall create a charge on its tangible assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with such rules as may be prescribed.

(2) The charge should be created within 30 days from accepting the deposits. The minimum amount of security should be equal to the amount not covered by Deposit Insurance. The security is created in favour of the Deposit Trustee.

6.Deposit Insurance

SOLUTION

(1) The company enters into an agreement with the Insurance Company for taking Deposit Insurance. A company needs to take Deposit Insurance at least 30 days before the date of the circular/advertisement or its renewal.

(2) Insurance is to be taken if the amount of deposit plus interest is up to 20,000.

Insurance above 20,000 per depositor Rs 20,000 insurance.

7.Deposit Repayment Reserve Account

SOLUTION

 (1) A sum not less than 20% of the amount of its deposits maturing during a financial year shall be deposited in a separate bank account in a scheduled bank. For this, a company has to open an account called as ‘Deposit Repayment Reserve Account’.

(2) The amount should be deposited on or before 30th April each year. The ‘Deposit Repayment Reserve Account shall be used by the company only for the purpose of repayment of deposits.

8.Credit Rating

SOLUTION

(1) Every company accepting deposits from the public shall obtain the credit rating (including its net worth, liquidity, and ability to pay its deposits on due date) from a recognised credit rating agency.

(2) The rating shall be obtained for every year during the tenure of deposits. A copy of the credit rating shall be submitted to ROC.

9.Deposit Receipt

SOLUTION

(1) The company has to issue a Deposit Receipt to every deposit holder within 21 days from receipt of the money or realization of cheque or date of renewal.

(2) The receipt has to be signed by the officer duly authorized by the Board of Directors. The receipt contains:

The name and address of the depositor, Amount of deposit, Rate of interest payable, and Date on which it is repayable

10.Return of Deposit

SOLUTION

(1) The company has to file annual return of deposits with Registrar before 30th June every year, with fees.

(2) The Return gives detail of deposit with the company as on 31st March of that year

1.Study the following case/situation and express your opinion.

Apple Company Ltd. plans to raise funds through Public Deposits. Its net worth is 10 Crores.

Can they accept deposits from the public?

SOLUTION

No, they cannot accept deposits from the public. As per the rule, any public company having a net worth of Rs 100 crore or more can accept deposits from the public. In fact, this company can accept deposits from its members or directors.

2.Study the following case/situation and express your opinion.

Apple Company Ltd. plans to raise funds through Public Deposits. Its net worth is 10 Crores.

Can they accept deposits which matures after 4 years?

SOLUTION

As per the rules, the deposit period should not less than 6 months and more than 36 months. Thus, they cannot accept deposits which matures after 4 years.

3.Study the following case/situation and express your opinion.

Apple Company Ltd. plans to raise funds through Public Deposits. Its net worth is 10 Crores.

Within what period should the company issue deposit Receipt to it’s depositors?

SOLUTION

The company should issue Deposit Receipt to the depositors within twenty-one (21) days from the date of receipt of money or realization of cheque. The receipt has to be signed by the officer duly authorized by the Board of Directors.

1.Study the following case/situation and express your opinion.

ABC Company Ltd. is an eligible Public Company as per the Companies Act, 2013 with reference to accepting Public Deposits.

Can the company accept deposits in joint names?

SOLUTION

Yes. The company can accept deposits in the joint names of depositors. But there should not be more than 3 names.

2.Study the following case/situation and express your opinion.

ABC Company Ltd. is an eligible Public Company as per the Companies Act, 2013 with reference to accepting Public Deposits.

Can the company accept deposits from it’s members?

SOLUTION

ABC Company Ltd. is an eligible Public Company as per the Companies Act, 2013. Thus, it can accept the deposits from its members as well as from public.

3.Study the following case/situation and express your opinion.

ABC Company Ltd. is an eligible Public Company as per the Companies Act, 2013 with reference to accepting Public Deposits.

Can the company issue secured deposits?

One line Answer

SOLUTION

Yes. The company can issue secured deposits. If a company offers secured deposits, it has to create a charge on its tangible assets within 30 days of acceptance of deposits.

1.Study the following case/situation and express your opinion.

Apple Company Ltd. is an eligible Public Company. It plans to raise secured deposits from the public. Please advice its Board on the following. 

Does the company need to get shareholders approval for accepting deposits?

SOLUTION

Yes. The company needs to get shareholders’ approval for accepting deposits. For this, the Board of Directors can pass a resolution in a general meeting for the approval of accepting deposits

2.Study the following case/situation and express your opinion.

Apple Company Ltd. is an eligible Public Company. It plans to raise secured deposits from the public. Please advice its Board on the following. 

Does the company have to appoint a Debenture Trustee?

Short Note

SOLUTION

Yes. The company has to appoint a Debenture Trustee. This is because, if the company wants to issue secured deposits, then it is compulsory to appoint a Debenture Trustee.

3.Study the following case/situation and express your opinion.

Apple Company Ltd. is an eligible Public Company. It plans to raise secured deposits from the public. Please advice its Board on the following. 

Within what period should the company create a charge on it’s assets?

SOLUTION

The company has to create a charge on its tangible assets within 30 days of acceptance of deposits

1.Study the following case/situation and express your opinion.

SUN Pvt. Ltd. company wants to raise funds through deposits.

Can the company accept deposits from the public?

SOLUTION

No, the company cannot accept deposits from the public. This is because SUN Pvt. Ltd. is a private limited company and it cannot accept deposits from the public. Only eligible public companies and government companies can accept deposits from the public.

2.Study the following case/situation and express your opinion.

SUN Pvt. Ltd. company wants to raise funds through deposits.

Which document should the company issue to invite deposits?

SOLUTION

In the above case, SUN Pvt. Ltd. is a private limited company. Thus, it should issue a circular to invite deposits from its members.

3.Study the following case/situation and express your opinion.

SUN Pvt. Ltd. company wants to raise funds through deposits.

What is the maximum period for which they can accept deposits?

SOLUTION

The maximum period of accepting deposits is 36 months. Thus, it can accept deposits for a maximum period of 36 months.

Answer in brief.

1.State the amount of deposits that different types of companies can collect by way of deposits.

SOLUTION

The amount of deposits that different types of companies can collect by way of deposits is as follows:

1. Amount of Deposit :

A) Private Company: A Private Company can accept deposits from its members or Directors or Relatives of Directors not more than 100 percent of its aggregate of paid-up share capital and free reserves.

However, a rtain class of Private Companies as specified by the Companies Act can accept deposits more than 100 percent of its aggregate of paid-up share capital and free reserves.

B) Public Company (other than Eligible Company) : These Companies cannot accept fresh deposit from members if the amount of such deposits together with the previous deposits exceeds 25% of the aggregate of the paid up share capital and free reserves of the company

C) Eligible Public Company :

– An ‘Eligible Company’, i.e. company eligible to accept deposits from public under section 76(1) of Companies Act, 2013, can accept deposits up to 25% of paid-up capital, free reserves,and securities premium account from the ic.

– In addition, it can accept deposits up to 10% of the egate of paid-up share capital, free reserves and securities premium account from members Rule 3(4) of Companies (Acceptance of Deposits) Rules, 2014.

(d) Government Company:

A Government company is eligible to accept deposits under section 76 of Companies Act, 2013.

It can accept deposits up to 35% of paid-up capital, free reserves and securities premium account From the ic.

2.State the contents of circular or Advertisement for Deposit

Answer in Brief

SOLUTION

Circular or Advertisement: If a company invites deposits from its members, it issues a circular. But if it invites deposits from the public, the company has to issue an advertisement.

a) Contents of circular or advertisement:

i) Statement about the financial position of the company

ii) The portion of secured and unsecured deposit of fresh issue

iii) Credit rating obtained from a Credit Rating Agency (only for an eligible public company)

iv) Details of the scheme

v) Name of Deposit Trustees

vi) Amount due towards deposits of any previous deposits accepted by the company.

b) Filing of circular or advertisement with Registrar of Companies: Company has to file a copy of the circular or Advertisement signed by all directors with the Registrar of Companies.

c) Issue of circular or Advertisement: Only after 30 days of filing a copy of circular or Advertisement with the Registrar of Companies, the company can issue the circular or advertisement.

The company can send the circular to the members through registered post, speed post, or as email.

For inviting the public, the company has to publish the advertisement in one English newspaper and one vernacular newspaper having wide circulation in the state where the company’s registered office is located.

d) The validity of circular or advertisement: The circular or advertisement is valid for 6 months from the end of the financial year in which it was issued or the date on which the Annual General Meeting was held, whichever is earlier.

3.State the provisions regarding appointment of Deposit Trustee.

Short Note

SOLUTION

The provisions regarding Appointment of Deposit Trustee are explained as follows:

When issuing secured deposits, eligible companies and public companies have to appoint one or more Deposit Trustees. The Trustees protect the interest of the depositor in case a company defaults in repaying the depositors. Company signs a contract with the Deposit Trustees called as Trust Deed. It contains the terms and conditions of the contract. The deed has to be signed at least 7 days before issuing the circular or advertisement.

The Deposit Trustee on its own or on the request of one-tenth of depositors can call a meeting of all depositors when a company defaults in repaying deposits.

4.State any four terms and conditions regarding acceptance of Deposit.

Answer in Brief

SOLUTION

TERMS AND CONDITIONS FOR ACCEPTANCE OF DEPOSITS:

1. Amount of Deposit :

A) Private Company: A Private Company can accept deposits from its members or Directors or Relatives of Directors not more than 100 percent of its aggregate of paid-up share capital and free reserves.

However, certain class of Private Companies as specified by the Companies Act can accept deposits more than 100 percent of its aggregate of paid-up share capital and free reserves.

B) Public Company (other than Eligible Company): These Companies cannot accept fresh deposit from members if the amount of such deposits together with the previous deposits exceeds 25% of the aggregate of the paid-up share capital and free reserves of the company

C) Eligible Public Company :

i) From the Members:

Cannot accept fresh deposits if the amount of such deposits together with the previous deposits exceeds 10% of the aggregate of paid-up share capital and free reserves.

ii) From Public: Cannot accept fresh deposits if the amount of such deposits together with the previous deposits exceeds 25% of the aggregate of paid-up share capital and free reserves.

D) Government companies can accept deposits from the public not exceeding 35% of the paid-up share capital and free reserves of the company.

2. Period / Tenure of Deposit: No deposit can be accepted or renewed which is to be repaid within a period of six months or more than thirty-six months.

In certain circumstances, a company may accept deposits repayable earlier than six months to meet its short term needs. Such deposits must have a tenure of a minimum of three months and the amount of such deposits cannot be more than 10% of the aggregate of the paid-up share capital and free reserves of the company. Under certain circumstances, on the request of the depositor, the company makes premature repayment of deposits. The company may also renew its deposits with the same terms of issue and it will be considered as fresh deposits.

3. No demand deposit: Company cannot accept or renew deposits repayable on demand.

4. Secured or Unsecured Deposit: A company can accept a secured or unsecured deposit which should be clearly mentioned in the circular or advertisement inviting deposits. If the company offers secured deposits, it has to create a charge on its tangible assets within 30 days of acceptance of deposits.

5. Application Form: A company has to provide an application form. It should contain a declaration by the applicant that the deposit he is making is not made out of any money borrowed by him from another person.

6. Joint names: Company can accept deposits in joint names of depositors. But there should not be more than 3 names.

7. Nomination: Every depositor at any time, has the right to nominate any person as a nominee in the event of the death of the depositor

8. Circular or Advertisement: Of a company invites deposits from its members, it issues a circular. But if it invites deposits from the public, the company has to issue an advertisement.

a) Contents of circular or advertisement:

i) Statement about the financial position of the company

ii) The portion of secured and unsecured deposit of fresh issue

iii) Credit rating obtained from a Credit Rating Agency (only for eligible public company)

iv) Details of the scheme

v) Name of Deposit Trustees

vi) Amount due towards deposits of any previous deposits accepted by the company

b) Filing of circular or advertisement with Registrar of Companies :

The company has to file a copy of the circular or Advertisement signed by all directors with the Registrar of Companies.

c) Issue of circular or Advertisement: Only after 30 days of filing a copy of circular or Advertisement with the Registrar of Companies, the company can issue the circular or advertisement. The company can send the circular to the members through registered post, speed post, or as email. For inviting the public, the company has to publish the advertisement in one English newspaper and one vernacular newspaper having wide circulation in the state where the company’s registered office is located.

Justify the following statement

1.All companies cannot accept deposits from public.

Short Note

SOLUTION

Justification:

(1) Eligible Public company, having a net worth of around Rs 100 crores or more or turnover of Rs 500 crores can only accept deposits from the public. Government companies can also accept deposits from the public.

(2) Whereas, Public company can accept deposits from its members or directors only. A private company can accept deposits from its members, directors or relatives of directors only.

(3) An eligible public company can invite or accept deposits from the public only after the publication of an advertisement.

(4) Advertisement inviting deposits must be published in English and vernacular language. The advertisement has to be signed by majority of directors or their authorized agents. Thus, all companies cannot accept deposit from public.

2.There is a limit or restriction on the amount that a company can collect as Deposits.

Short Note

SOLUTION

Justification:

(1) A private company can accept deposits from its members not exceeding 100% of the aggregate of the paid-up share capital and free reserves.

(2) A Public Company can accept deposits up to 25% of the aggregate of paid-up capital, free reserves and securities premium account.

(3) An Eligible company can accept deposits up to 25% of paid-up capital, free reserves, and securities premium account from public. In addition, it can accept deposits up to 10% of the aggregate of paid-up share capital, free reserves, and securities premium account from members.

(4) A Government company is eligible to accept deposits under section 76 of the Companies Act, 2013. It can accept deposits up to 35% of paid-up capital, free reserves, and securities premium account from the public. Thus, it is rightly justified that, there is a limit or restriction on the amount that a company can collect as deposits.

3.Company has to fulfill certain provisions related to issue of circular or advertisement.

Short Note

SOLUTION

Justification:

(1) If a company invites deposits from its members, it issues a circular. But if it invites deposits from the public, the company has to issue an advertisement.

(2) The company has to file a copy of the circular or advertisement with the Registrar of Companies.

(3) The Company can issue circular or advertisement, only after 30 days of filing a copy of circular or advertisement with the Registrar of Company (ROC).

4.While issuing secured deposits, company has to appoint Deposit Trustee.

Short Note

SOLUTION

Justification:

(1) A company can accept secured or unsecured deposits which should be clearly mentioned in every circular, form, advertisement, or in any document related to invitation or acceptance of deposits.

(2) If the company intends to issue Secured Deposits, it shall create security in favour of trustees within 30 days of acceptance of deposits. Trustees should ensure about the security of depositors.

(3) If there is any default in repayment, trustees should organize a meeting of depositors.

(4) Thus, it is rightly justified that, while issuing secured deposits, the company has to appoint a Deposit Trustee.

5.Companies have to create a charge on their tangible assets while issuing secured deposits.

Short Note

SOLUTION

Justification:

(1) Every company accepting deposits from the public shall create a charge on its tangible assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with such rules as may be prescribed.

(2) The charge should be created within 30 days from accepting the deposits.

(3) The minimum amount of security should be equal to the amount not covered by Deposits Insurance. The security is created in favour of the Deposit Trustee.

(4) Thus, it is rightly justified that, companies have to create a charge on tangible assets while issuing secured deposits.

6.Companies have to create a charge on their tangible assets while issuing secured deposits.

Short Note

SOLUTION

Justification:

(1) A company has to open an account called as “Deposit Repayment Reserve Account for issuing deposits.

(2) A sum not less than 20% of the amount of its deposits maturing during a financial year shall be deposited in a separate bank account in a scheduled bank.

(3) The amount should be deposited on or before 30th April each year. The Deposit Repayment Reserve Account shall be used by the company only for the purpose of repayment of deposits.

(4) Thus, it is rightly justified that, the company issuing deposit must open Deposit Repayment Reserve Account.

Answer the following question:

1.Explain the type of companies that can raise deposits along with the maximum amount they can raise as deposits.

SOLUTION

Type of companies that can raise deposits along with the maximum amount they can raise as deposits are as follows:

(a) Private Company:

A private company can accept deposits from its members not exceeding 100% of the aggregate of the paid-up share capital and free reserves.

It can file details of such deposits to the Registrar in such manner as may be specified

(b) Public Company (Other than Eligible Company :

Both public and private companies can accept deposits from members.

A public company can accept deposits up to 25% of the aggregate of paid-up capital, free reserves and securities premium account

Rule 3(4) of Companies (Acceptance of Deposits) Rules, 2014.

For your understanding:  Words ‘securities premium account’ have been inserted w.e.f. 15-9-2015.

(c) Eligible Public Company:

An ‘Eligible Company’, i.e. company eligible to accept deposits from the public under section 76(1) of Companies Act, 2013, can accept deposits up to 25% of paid-up capital, free reserves, and securities premium account from the public.

In addition, it can accept deposits up to 10% of the aggregate of paid-up share capital, free reserves, and securities premium account from members Rule 3(4) of Companies (Acceptance of Deposits) Rules, 2014.

(d) Government Company: A Government company is eligible to accept deposits under section 76 of Companies Act, 2013.

It can accept deposits up to 35% of paid-up capital, free reserves, and securities premium account from the public.

2.Explain the provisions related to circular or advertisement for inviting deposits.

Answer in Brief

SOLUTION

If a company invites deposits from its members, it issues a circular. But if it invites deposits from the public, the company has to issue an advertisement. The provisions related to circular or advertisement for inviting deposits are as follows:

(a) Contents of circular or advertisement: Statement about the financial position of the company. The portion of secured and unsecured deposits of fresh issues.

Credit rating obtained from a Credit Rating Agency (only for an eligible public company). Details of the scheme. Name of Deposit Trustees.

Amount due towards deposits of any previous deposits accepted by the company.

(b) Filing of circular or advertisement with Registrar of Companies: Company has to file a copy of the circular or advertisement with the Registrar of Companies.

The advertisement or circular shall be signed by the majority of directors or their authorized agents.

(c) Issue of circular or advertisement: The Company can issue circular or advertisement, only after 30 days of filling a copy of the circular or advertisement with the Registrar of Company (ROC).

A company can send the circular to all its members by registered post, speed post, or electronically.

In addition, the company has to publish the circular as an advertisement in newspapers in English and vernacular language.

(d) The validity of Circular or Advertisement: The circular or advertisement shall be valid till the expiry of six months from date of closure of financial year or till the financial statement of the company is laid before AGM of the company, whichever is earlier. After that, fresh circular or advertisement should be published Rule 46) of Companies (Acceptance of Deposits) Rules, 2014.


                         COMPLETED

Chapter 4, Issue of Debentures, hsc, 12th std, secretarial practice, sp, maharashtra board, ebalbharathi, solution,

Select the correct answer from the option given below and rewrite the statement:

1.A company cannot issue _____________ with voting rights

Options
  • Equity shares
  • Debentures
  • Securities

2.A company can issue ____________ convertible debentures.

Options
  • Only partly
  • Only fully
  • Partly or fully

3.Money from ___________  Account is used for redemption of debentures

Options
  • Capital
  • Debenture Redemption Reserve
  • Profit or loss

4._______  protects the interest of debenture holders

Options
  • Debenture Trustees
  • Debenture holders
  • Redemption Reserve

5.Secured debentures must be redeemed within _____________ from the date of its issue

Options
  • 10 days
  • 10 years
  • 15 years

6.A company issuing ______________ debenture must create a charge on the assets of the company

Options
  • Secured
  • Unsecured
  • Redeemable

7.Debenture certificate must be issued within ___________ of allotment of debentures

Options
  • 3 months
  • 6 months
  • 60 days

8.The details of allotment of Debentures must be entered in ___________.

Options
  • Register of debenture
  • Register of members
  • Register of creditors

9.A company which issues prospectus or invites more than 500 persons to buy its debenture has to appoint ____________.

Options
  • Register of companies
  • Debenture holders
  • Debenture trustees

10.The contract between company and Debenture trustees of companies is called as _____________.

Options
  • Debenture trust deed
  • Letter of offer
  • Prospectus

12.Procedure for allotment of Debenture should be completed within ___________ from the date of receipt of applications.

Options
  • 6 months
  • 3 months
  • 60 days

Match the pairs.

Group ‘AGroup ‘B’
a) Debenture Trustees1) Power to issue debentures
b) Debenture holders2) Protects interest of shareholders
c) Charge on assets3) Secured debentures
d) Board of Directors4) NCLT
e) Debenture certificate5) No voting rights
 6) Unsecured debentures
 7) Protects interest of debenture holders
 8) Voting rights
 9) Proof of ownership of shares
 10) Issued within 6 months of allotment of debentures

SOLUTION

Group ‘A’Group ‘B’
a) Debenture Trustees7) Protects interest of debenture holders
b) Debenture holders5) No voting rights
c) Charge on assets3) Secured debentures
d) Board of Directors1) Power to issue debentures
e) Debenture certificate10) Issued within 6 months of allotment of debentures

Write a word or a term or a phrase which can substitute the following statement.

1.Type of resolution needed to issue convertible debentures.

SOLUTION

Special resolution

2.Account to be created for redemption of debentures.

SOLUTION

Debenture Redemption Reserve

3.Institution appointed by company to protect the interest of debenture holders.

SOLUTION

Debenture Trustees

4.Period within which secured debentures should be redeemed.

SOLUTION

10 Years

5.Type of debentures on which company has to create a charge on its assets.

SOLUTION

Secured Debentures

6.The document which contains terms and conditions agreed upon by the company and the Debenture trustees.

SOLUTION

Debenture Trust Deed

7.Time period within which the procedure for allotment of debenture is to be completed from the date of receipt of applications.

SOLUTION

60 Days

8.Period within which debenture certificate must be issued by a company.

SOLUTION

 6 months

9.Institution which redresses grievances of debenture holders.

SOLUTION

Debenture Trustee

10.Authority which has power to issue debentures.

SOLUTION

Board of Directors


State whether the following statement is or false.

1.Debenture holders have no voting rights.

Options
  • True
  • False

2.Company cannot issue non-convertible debentures.

Options
  • True
  • False

3.Special Resolution is needed to issue convertible debentures.

Options
  • True
  • False

4.Debentures holders are paid interest.

Options
  • True
  • False

5.Debenture Trustees can not approach NCLT to redress grievances of debenture holders.

Options
  • True
  • False

6.All secured debentures should be redeemed within 20 years from date of its issue.

Options
  • True
  • False

7.Company has to create a charge on its assets when it issues secured debentures.

Options
  • True
  • False

8.Debenture trustees are appointed to protect the interest of shareholders.

Options
  • True
  • False

9.Debenture certificate is issued within 6 six months of allotment of debentures.

Options
  • True
  • False

10.After allotment of Debentures their names are entered in the register of members.

Options
  • True
  • False

1.Find the odd one.

Options
  • Debenture holders
  • Interest
  • Dividend

2.Find the odd one.

Options
  • Debenture Trustees
  • Court
  • NCLT

3.Find the odd one.

Options
  • Secured Debentures
  • Convertible debentures
  • Irredeemable debentures

4.Find the odd one.

Options
  • Debenture trustees
  • Trust Deed
  • Shareholders

Complete the sentence.

1.A legal instrument conveying the assets of a company to the Debenture trustees is called  _______________.

SOLUTION

A legal instrument conveying the assets of a company to the Debenture trustees is called Debenture Trust Deed 

2.To protect the interest of Debenture holders, a company appoints _______________.

SOLUTION

To protect the interest of Debenture holders, a company appoints Debenture Trustees .

3.On receipt of application and money, the procedure for allotment of debentures should be completed within __________.

SOLUTION

On receipt of application and money, the procedure for allotment of debentures should be completed within 60 days 

4.Authority to create charge on company’s assets is with the ___________.

SOLUTION

Authority to create charge on company’s assets is with the Debenture Trustees

5.Secured debentures should be redeemed within  ____________.

SOLUTION

Secured debentures should be redeemed within 10 years .

6.To stop a company from incurring further liabilities, the Debenture trustee can approach ___________.

SOLUTION

To stop a company from incurring further liabilities, the Debenture trustee can approach NCLT.

7.A company which issues prospectus or invites more than 500 persons to subscribe for its debentures, has to appoint _______________.

SOLUTION

A company which issues prospectus or invites more than 500 persons to subscribe for its debentures, has to appoint Debenture Trustees .

8.Return on investment on debenture is called ________.

SOLUTION

Return on investment on debenture is called Interest.

9.For public issue of debentures of ₹100 crores, minimum subscription should be ______.

SOLUTION

For public issue of debentures of ₹100 crores, minimum subscription should be 75%.


1.Select the correct option from the bracket

Group ‘A’Group ‘B’
a) Debenture Trustees1) ___________
b) _______________2) Charge on assets
c) Register of Debenture3) _______________
d)  _______________4) Debenture certificate
e) No voting rights5)  _______________

(Issued within 6 months of allotment, Names of debenture holders, Secured debentures, Trust deed, Debenture holders.)

SOLUTION

Group ‘A’Group ‘B’
a) Debenture Trustees1) Trust deed
b) Secured debentures2) Charge on assets
c) Register of Debenture3) Name of Debenture holders
d) Issued within 6 month of allotment4) Debenture certificate
e) No voting rights5) Debenture holders

Answer in one sentence:

1.Who are debenture holders?

SOLUTION

Debenture holders are the creditors of the company.

2.What do debenture holders receive as return on investment?

SOLUTION

Debenture holders receive fixed rate of interest as per quantum as return on investment.

3.Whom does the company appoint to protect the interest of debenture holders?

SOLUTION

To protect the interest of debenture holders, the company appoints Debenture Trustees.

4.Within what period should secured debentures be redeemed?

SOLUTION

Secured debentures must be redeemed within 10 years from the date of allotment.

5.Name the document which is an agreement between the debenture trustee and company?

SOLUTION

Debenture Trust Deed is an agreement between the debenture trustee and the company.

6.Who has the authority to create charge on assets of a company?

SOLUTION

Debenture Trustees has the authority to create charge on assets of a company.

7.Name the meeting in which approval for increasing the borrowing powers of board of directors is passed?

SOLUTION

In Extra-Ordinary General Meeting the approval for increasing the borrowing powers of the board of directors is passed.

8.Within what period should be debenture certificate be issued?

SOLUTION

Within 6 months the debenture certificate should be issued.

9.What is the minimum subscription that a company must collect for an issue of debentures of 100 crores?

SOLUTION

The minimum subscription that a company must collect for an issue of debentures of Rs.100 crores is 75% of the base issue size.

10.When should a company appoint a credit rating agency?

SOLUTION

A company should appoint a credit rating agency at the time of Public Issue or Rights Issue.


Correct the underlined word and rewrite the following sentence:

1.The details of debenture holders are entered in Register of Members.

SOLUTION

The details of debenture holders are entered in Register of Debenture holder.

2.Secured debentures must be redeemed within 15 years from the date of its issue.

SOLUTION

Secured debentures must be redeemed within 30 days from the date of its issue.

3.A company issuing irredeemable debentures must create a charge on assets of the company.

SOLUTION

A company issuing Secured debentures must create a charge on assets of the company.

4.Return on investment on debenture is dividend.

SOLUTION

Return on Investment on debenture is interest.

5.Debenture trustees redress the grievances of Shareholders.

SOLUTION

Debenture trustees redress the grievances of Debenture holders.

6.Debenture certificates are issued within 3 months of allotment of debentures.

SOLUTION

Debenture certificates are issued within 6 months of allotment of debentures.

7.Procedure for allotment of debentures should be completed within 90 days from date of receipt of application.

SOLUTION

Procedure for allotment of debentures should be completed within 60 days from date of receipt of application.

8.To rate its debentures a company appoints underwriters.

SOLUTION

To rate its debentures a company appoints Credit Rating Agency


Arrange in proper order.

a. Obtain Credit Rating.

b. Entry in register of debenture

c. Receive application with money

SOLUTION

(a) Obtain credit rating

(c) Receive application with money

(b) Entry in register of debenture

2.Arrange in proper order.

a. Issue debenture certificate

b. Issue prospectus

c. Open bank Account

SOLUTION

(c) Open bank account

(b) Issue prospectus

(a) Issue debenture certificate


Explain the following term/concept.

1.Debenture Certificate.

SOLUTION

(1) Debenture certificate is the certificate given to the debenture holder. It certifies that the holder is the creditor of the company to the limit of the number of debentures.

(2) The company has to issue debenture certificate within 6 months of allotment of debentures. Debenture certificates are prepared by the secretary, signed by at least two

(3) directors and issued under common seal.

2.Debentures Trustee.

SOLUTION

(1) Debentures Trustee is a person or institution which protects the interest of the debenture holders. The Trustees become the custodian of the assets on which charge has been created.

(2) According to SEBI Rules, 1993 “debentures trustee” means a trustee of a trust deed for securing any issue of debentures of a body corporate (section 2 (bb)). (Applicable to public companies only).

3.Charge on assets.

SOLUTION

(1) Company has to create a charge on the assets of the company or its subsidiary company or holding company. The value of charge should be sufficient for the repayment of the amount of debentures and interest thereon.

(2) If a Government company issues secured debentures which has Central or State Government’s guarantee, then it need not create any charge on its assets.

4.Debenture Trust Deed.

SOLUTION

(1) The agreement created by the company, whereby trustees are appointed to protect the interest of debenture – holders before they are offered for public subscription is known as Debenture Trust Deed.

(2) Company enters into a contract with one or more Debenture Trustees. The terms and conditions of the agreement is written in the Debenture Trust Deed. It is a legal instrument conveying the assets of a company to the Trustees.


1.Study the following case/situation and express your opinion.

Rose limited company proposes to issue debenture to the public to raise funds. After discussions, the board of directors have decided to issue secured, redeemable, non-convertible debentures with a tenure of ten years. Please advise the board on the following matters:

1.Should the company appoint a debentures trustee?

SOLUTION

Yes. The company should appoint a Debentures trustee. This is because, in the above case, Rose Limited Company proposes to issue debenture to the public to raise funds. Thus, the company issuing debenture must appoint one or more debentures trustees.

2.Study the following case/situation and express your opinion.

Rose limited company proposes to issue debenture to the public to raise funds. After discussions, the board of directors have decided to issue secured, redeemable, non-convertible debentures with a tenure of ten years. Please advise the board on the following matters:

.Should the company create a charge on its assets?

SOLUTION

Yes. The company should create a charge on tangible assets. The charge is created in the favour of the Debenture Trustee and they become the custodian of the assets on which charge has been created.

3.Study the following case/situation and express your opinion.

Rose limited company proposes to issue debenture to the public to raise funds. After discussions, the board of directors have decided to issue secured, redeemable, non-convertible debentures with a tenure of ten years. Please advise the board on the following matters:

Can the tenure of debentures be less than ten years?

SOLUTION

A company can issue secured debentures with a date of redemption not exceeding ten (10) years from the date of issue.

4.Study the following case/situation and express your opinion.

Violet Ltd. company plans to raise 10 crores by issuing debentures. The Board of Directors have some queries. Please advise them on the following:

Can the company issue unsecured debentures?

SOLUTION

Yes. The company can issue secured and unsecured debentures. But they have to get the approval of shareholders in a general meeting by passing a special resolution.

5.Study the following case/situation and express your opinion.

Violet Ltd. company plans to raise 10 crores by issuing debentures. The Board of Directors have some queries. Please advise them on the following:

Can they issue irredeemable debentures?

One line Answer

SOLUTION

No. All the debentures are redeemable i.e, have to be repaid. Thus, the company cannot issue irredeemable debentures.

6.Study the following case/situation and express your opinion.

Violet Ltd. company plans to raise 10 crores by issuing debentures. The Board of Directors have some queries. Please advise them on the following:

As the company is offering debentures to its members, can such debentures have normal voting rights?

SOLUTION

As per the Companies Act, 2013, the company cannot issue debentures with voting rights. Debenture holders are the creditors of the company. So, they don’t have normal voting rights. They can vote only matters related to them.

7.Study the following case/situation and express your opinion.

DDS financial plans to raise 10 crores by issuing secured non-convertible debentures. However, as per the Articles of Association, the board of directors have authority only to raise up to 5 crores. They are also considering whether to go for private placement or make public offer. Please advise them on the following:

What can be the maximum tenure of the debentures to be issued?

SOLUTION

 The maximum tenure of the debentures to be issued is of 10 years. Only certain companies permitted by the Ministry of Corporate Affairs, Central Government, or RBI can issue debentures beyond a period of 10 years but not exceeding 30 years.

8.Study the following case/situation and express your opinion.

DDS financial plans to raise 10 crores by issuing secured non-convertible debentures. However, as per the Articles of Association, the board of directors have authority only to raise up to 5 crores. They are also considering whether to go for private placement or make public offer. Please advise them on the following:

Is the proposed issue within the borrowing powers of the board?

SOLUTION

No. The proposed issue is not within the borrowing powers of the board. The board can use their borrowing power up to limit permitted by Articles of Associations. In case, the Board wants to increase its borrowing power, they have to get approval from shareholders by passing a special resolution in general meeting.

9.Study the following case/situation and express your opinion.

DDS financial plans to raise 10 crores by issuing secured non-convertible debentures. However, as per the Articles of Association, the board of directors have authority only to raise up to 5 crores. They are also considering whether to go for private placement or make public offer. Please advise them on the following:

Within what period should company issue debenture certificate?

SOLUTION

Debenture certificate is a document issued by a company as an evidence of debts to the holder. As per the Companies Act, 2013, company has to issue debenture certificate within 6 months of allotment of debentures.


 Answer in brief.

1.State any four provisions of Companies Act 2013 for issue of debentures.

SOLUTION

Provisions for issue of debentures as per Companies Act, 2013. Following are some of the provisions of the Act which a company has to comply wine issuing debentures:

1. No voting rights: A company cannot issue debentures with voting rights. Debenture holders are creditors of the company and so they do not have any voting rights except in matters affecting them.

2. Types of Debentures: A company can issue secured or unsecured debentures and fully

or partly convertible debentures or non-convertible debentures. To issue convertible debentures, a Special Resolution has to be passed in the General Meeting. All debentures are redeemable in nature,

3. Payment of interest and redemption: A company shall redeem the debentures and pay interest as per the terms and conditions of this issue

4. Debenture Certificate: Company has to issue a Debenture certificate to the debenture holders within 6 months of allotment of Debentures,

5. Create Debenture Redemption Reserve: Company has to create a Debenture Redemption Reserve account out of profits of the company available for payment of dividends. This money can be used only for the redemption of debentures. As per Companies (Share Capital and Debentures) Amendment Rules 2019, MCA has removed the Debenture Redemption Reserve requirement for Listed companies, NBFCs, and Housing Finance Companies.

6. Appoint of Debenture Trustees: If the company issues prospectus or invites more than 500 people, either to Public or its Member) the company has to appoint one or more Debenture Trustees. Debenture trustees protect the interest of the debenture holders. The company has to appoint trustees by entering into a contract with them called as Debenture Trust Deed.

7. Debentures Trustee can approach NCLT: Debenture Trustees have to redress the grievances of debenture holders. If the company defaults in repaying the principal amount,

on maturity or defaults in paying interest there on the Debenture Trustees can approach the National Company Law Tribunal for redressal. NCLT can direct a defaulting company to repay the principal amount or interest.

8. Impose restrictions: When the Debenture Trustee is of the opinion that the assets of the company are insufficient or likely to become insufficient to redeem the principal amount of debentures, it may approach the NCLT. NCLT can order a company to restrict incurring further liabilities so as to protect the interest of the debenture holders.

9. Punishment for contravention of provisions of the Companies Act: If the company fails to comply with any provisions of the Act, then the company and its officers shall be liable to pay fine or imprisonment or both as prescribed in the Act.

2.What is debenture trust deed?

SOLUTION

(a) Trust Deed needs to be made between the company and trustees.

 (b) The agreement created by the company, whereby trustees are appointed to protect the interest of debenture-holders before they are offered for public subscription is known as Debenture Trust Deed.

(c) Company enters into a contract with one or more Debenture Trustees. The terms and conditions of the agreement is written in the Debenture Trust Deed.

(d) It is a legal instrument conveying the assets of a company to the Trustees. The Deed also defines the rights of debenture holders and the duties and powers of Debenture Trustees.

(e) Company has to execute the Deed within 3 months of closure of the issue. Members as well as debenture holders can inspect the deed and also get a copy of it by paying a certain fee.

3.Who are debentures trustee?

SOLUTION

(1) Debentures Trustee is a person or institution which protects the interest of the debenture holders. The Trustees become the custodian of the assets on which charge has been created.

(2) A company which issues prospectus or invites more than 500 persons to buy its debentures has to appoint one or more Debentures Trustee. Companies issuing secured debentures also must appoint Debentures Trustee.

(3) Debentures Trustee is appointed before prospectus or letter of offer/offer letter is issued or within 60 days after the allotment of the debenture. The Trustees must give written consent to act as Debenture Trustees.

(4) According to SEBI Rules, 1993 “debentures trustee” means a trustee of a trust deed for securing any issue of debentures of a body corporate (section 2 (bb)). (Applicable to public companies only).

(5) The trustee can appoint a nominee to the board of directors of the company. Before the trustee appoints the nominee, the following conditions must be satisfied:

• Two consecutive defaults made by the company in payment of interest to the debenture holders; or

• Default in the creation of security for debentures or default in the redemption of debentures.

Justify the following statement:

1.A company has to create charge on its assets for issuing secured debentures.

SOLUTION

Justification:

(1) The company has to create a charge on the assets of the company or its subsidiary company or holding company.

(2) The value of charge should be sufficient for the repayment of the amount of debentures and interest thereon.

(3) If a Government company issues secured debentures which has Central or State Government’s guarantee, then it need not create any charge on its assets.

(4) Thus, it is rightly justified that, a company has to create the charge on its assets for issuing secured debentures for the security of the repayment of loans.

2.A company has to create charge on its assets for issuing secured debentures.

SOLUTION

Justification: 

(1) Debentures Trustee is a person or institution which protects the interest of the debenture holders. The Trustees become the custodian of the assets on which charge has been created.

(2) A company which issues prospectus or invites more than 500 persons to buy its debentures has to appoint one or more Debentures Trustee. Companies issuing secured debentures also must appoint Debentures Trustee.

(3) Debentures Trustee is appointed before prospectus or letter of offer/offer letter is issued or within 60 days after the allotment of the debenture. The Trustees must give written consent to act as Debenture Trustees.

(4) Thus, it is rightly justified that, debentures trustee is appointed by a company issuing debentures.

3.A company can issue only certain types of debentures.

SOLUTION

Justification: 

(1) A company can issue secured as well as unsecured debentures. It can also issue non-convertible debentures or debentures which can be converted fully or partly into equity shares.

(2) The Board of Directors of a company have the authority to issue debentures. All debentures are redeemable i.e, have to be repaid.

(3) The company can issue debentures to its members or make a public offer or offer it even through private placement.

(d) Thus, it is rightly justified that, a company can issue only certain types of debentures.


1.Briefly explain the provisions of Companies Act, 2013 for issue of debentures.

SOLUTION

Section 2 (30) of the Companies Act, 2013 define debenture as “debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

Following are some of the provisions of the Act which a company has to comply, while issuing debentures:

1. No voting rights: A company cannot issue debentures with voting rights. Debenture holders are creditors of the company and so they do not have any voting rights except in matters affecting them.

2. Types of Debentures : A company can issue secured or unsecured debentures and fully or partly convertible debentures or non-convertible debentures. To issue convertible debentures, a Special Resolution has to be passed in the General Meeting. All debentures are redeemable in nature.

3. Payment of interest and redemption: A company interest as per the terms and conditions of their issue shall redeem the debentures and pay

4. Debenture Certificate: Company has to issue a Debenture certificate to the debenture holders within 6 months of allotment of Debentures.

5. Create Debenture Redemption Reserve: Company has to create a Debenture Redemption

Reserve account out of profits of the company available for payment of dividends. This money can be used only for the redemption of debentures. As per Companies (Share Capital and Debentures) Amendment Rules 2019, MCA has removed the Debenture Redemption Reserve requirement for Listed companies, NBFCs and Housing Finance Companies.

6. Appoint of Debenture Trustees: If the company issues prospectus or invites more than 500 people, (either to Public or its Member) company has to appoint one or more Debenture Trustees. Debenture trustees protect the interest of the debenture holders. The company has to appoint trustees by entering into a contract with them called as Debenture Trust Deed.

7. Debentures Trustee can approach NCLT: Debenture Trustees have to redress the grievances of debenture holders. If the company defaults in repaying the principal amount, on maturity or defaults in paying interest there on, the Debenture Trustees can approach the National Company Law Tribunal for redressal. NCLT can direct a defaulting company to repay the principal amount or interest.

8. Impose restrictions: When the Debenture Trustee is of the opinion that the assets of the company are insufficient or likely to become insufficient to redeem the principal amount of debentures, it may approach the NCLT. NCLT can order a company to restrict incurring further liabilities so as to protect the interest of the debenture holders.

9. Punishment for contravention of provisions of the Companies Act: If the company fails to comply with any provisions of the Act, then the company and its officers shall be liable to pay fine or imprisonment or both as prescribed in the Act.

2.Explain briefly the procedure for issue of debentures.

SOLUTION

Section 2 (30) of the Companies Act, 2013 define debenture as “debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

Following is the procedure to be followed by a company issuing debentures –

1. Pass resolution in Board Meeting: In the Board Meeting following resolution will

have to be passed :

i) amount and type of debentures to be issued and the terms and conditions for issue.

ii) approve prospectus or offer letter or letter of offer.

iii) approve appointment of Debenture Trustees and get their written consent.

iv) authorize Board to create charge on assets of the company.

v) call Extra-ordinary General Meeting if the Board’s borrowing powers need to be increased.

vi) authorizes Board to open a separate bank account for receiving money from applicants

2. Hold Extra-ordinary General Meeting (EGM) : If the borrowing powers of the Board is to be increased, EGM must be held to get the shareholders’ approval through a Special Resolution.

3. Filing with Registrar of Companies: Secretary has to file the Special resolution and copy of Prospectus, offer letter / Letter of offer with Registrar of Companies within 30 days of the Board Meeting.

4. Obtain Credit Rating: Company gets its debentures rated by one or more Credit Rating Agencies. The ratings must be mentioned in the prospectus/offer letter/Letter of the offer.

5. Enter into underwriting agreement: Company enters into an underwriting agreement for underwriting its debenture issue.

6. Issue prospectus / letter of offer/offer letter: Company issues prospectus, if it is inviting the public to buy its debentures. An offer Letter is issued if a company makes a private placement and Letter of an offer for Rights Issue.

7. Open Separate Bank Account: The company opens a separate bank account in a scheduled Bank to receive the money from the applicants.

8. Receiving application money: Subscribers will submit their application along with the required amount to the specified bank within the time period mentioned in the prospectus or letter of offer / Offer Letter

9. Hold Board Meeting: After the issue closes, a Board Meeting is held to decide and approve allotment of debentures. Board also approves the creation of charges on the company’s assets.

10. Issue of Debenture certificate: The allotment procedure has to be completed within 60 days from the receipt of application money. The company has to issue a Debenture certificate within 6 months of allotment of debentures.

11. Make entries in Register of Debenture holders: Secretary has to make entries in the Register of Debenture holders within 7 days after the Board approval of allotment. However, if debentures are issued in Demat form, the company does not maintain the Register of Debenture holders.


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