Company Account: Issue of Share

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Q.1. Define Company. Mention its main characteristics. Also explain the different kinds of shares, which a public company can issue.

Answer: " A Company is an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share."

The company is an artificial legal person created by law. A Company has a right to sue and can be sued, can own property and has banking account in its own name, own money and be a creditor. A Company has a separate legal entity, which is distinct from its shareholder.

According to Section 3 (1) of Indian Companies Act 1956 " Company means a company formed and registered under this Act."

According to Professor Haney " A Company is an artificial person, created by law having a separate entity with a perpetual succession and a common seal."

Characteristics of a Company:

  1. Artificial Person: A company is an artificial person, which exists only in the eyes of law. The company carries business on its own behalf. It has a right to sue and can be sued, can have its own property and its own bank account. It can also own money and be a creditor.
  2. Created by law: A company can be formed only with registration. It has to fulfill a lot of formalities to be registered. It has also to fulfill a lot of legal formalities in order to be dissolved.
  3. Perpetual succession: A company has a continuous existence. Its existence does not affected by admission, retirement, death or insolvency of its members. The members may come or go but the company may go forever. Only law can terminate its existence
  4. Limited Liability: The liability of every member is limited to the face value of shares, held by him.
  5. Voluntary Association: A company is a voluntary association. It can not compel any one to become its member or shareholder.
  6. Capital Structure: A company has to mention its maximum capital requirements in future in its memorandum of association. Its capital is divided into shares, which are easily transferable from person to person.
  7. Common Seal: As a company is an artificial person, so it can sign any type of contracts. For this purpose its requires a common seal which acts as the official signatories of the company. All the contracts prepared by its directors must bear seal of the company.
  8. Democratic Ownership: The directors of a company are elected by its shareholders in a democratic way.

Q.2. Distinguish between Partnership Firm and Joint Stock Company.

Answer:

Partnership

Joint Stock Company

1. Partnership Firm is formed under Indian Partnership Act 1932.

1. A Joint Stock Company is formed under Indian Companies Act 1956.

2. Minimum number of partners are 2 and maximum 10 in case of banking business and 20 in other kind of business.

2. Minimum number of members are 7 in case of a public company and maximum no limit. In a private limited company minimum number of members are 2 and 50 are maximum.

3. Liability of a Partnership firm is unlimited.

3. Liability of members is limited to extent of shares held by him.

4. Every partner can take active part in the management of the firm.

4. Boards of Directors manage a company.

5. Auditing of books is not compulsory.

5. Auditing of books is compulsory.

6. A Partnership firm can do the business as agreed upon by the partners.

6. A company can do only that business which is stated in Memorandum of Association.

7. A partnership firm do not have a separate legal entity

7. A company has a separate legal entity.

8. Insolvency of a Partnership firm means insolvency of all partners.

8. Winding up of a company does not mean insolvency of its members.

Q.3. Distinguish between Equity Shares and Preference Shares. (CBSE 1991, 1993)

Answer:

Equity Share: According to Indian Companies Act 1956 " an equity share is share which is not preference share". An equity share does not carry any preferential right. Equity shares are entitled to dividend and repayment of capital after the claims of preference shares are satisfied. Equity shareholders control the affairs of the company and have right to all the profits after the preference dividend has been paid.

Preference Share: A share that carries the following two preferential rights is called ‘Preference Share’:

  1. Preference shares have a right to receive dividend at a fixed rate before any dividend given to equity shares.
  2. Preference shares have a right to get their capital returned, before the capital of equity shareholders is returned. in case the company is going to wind up.

Difference between Preference Share and Equity Share

Basis of Difference

Preference Share

Equity Share

Right of Dividend

Preference shares are paid dividend before the Equity shares.

Equity shares are paid dividend out of the balance of profit after the dividend paid to preference shareholders.

Rate of Dividend

Preference shares are given dividend at a fixed rate.

Dividend on Equity shares depend on the balance of profit left after the payment of dividend to preference shares.

Management

Preference shareholders do not carry the right to participate in the management of the company.

Equity shareholders carry the right to interfere in management of the company due to investigating risk of capital in the company.

Voting Right

Preference shareholders do not carry the voting right. They can vote only in special circumstances.

Equity shareholders carry the right to vote in all circumstances.

Redemption of Share Capital

In case the preference shares are redeemable, the amount of capital will be refunded to shareholders after a certain period.

Equity shares capital is refundable only at the time of winding up of the company.

Refund of Capital

At the time of dissolution of the company, preference share capital is paid before the payment of Equity share capital.

Equity shareholders are paid their capital if there is some balance left after the payment of preference shareholders.



Q.4. What is meant by ‘Share Capital’? Explain the different categories of share capital.

Answer: The capital of a joint stock company is divided into shares and called ‘Share Capital’. The share capital may be classified as below:

  1. Nominal/Authorised/Registered Capital: This is the amount of the capital which is stated in Memorandum of Association and with which the company is registered. Nominal capital is the maximum amount which the company is authorised to raise from the public.
  2. Issued Capital: This is the nominal amount of shares actually issued to the public. In other words, issued capital is that part of the nominal capital, which is offered to the public for subscription. The balance of the nominal capital, which is not offered to the public for subscription, is called unissued capital.
  3. Subscribed Capital: This is the nominal amount of the shares taken up by the public. In other words, subscribed capital is that part of the issued capital, which is applied for by the public. The balance of the issued capital, which is not subscribed for by the public is called, unsubscribe capital.
  4. Called up Capital: This is the amount of the capital that the shareholders have been called to pay on the shares subscribed for by them. The nominal amount of the shares is usually collected from the shareholders in installments and it is possible that the entire amount of the subscribed capital may not have been called. The amount of the subscribed capital, which is not called, is known as uncalled capital.
  5. Paid up Capital: This represents that part of the called up capital, which is actually received by the company. The amount of the called-up capital, which not paid by the shareho0lders, is called as unpaid capital or calls in arrears.
  6. Reserve Capital: A company may by special resolution determine that any portion of its share capital which has not been already called up, shall not be capable of being called-up, except in the event of winding up of the company. Such type of share capital is known as reserve-capital.

Q.5. Give the meaning of ‘Issuing the shares at Premium’. For what purpose, the amount of Securities Premium can be utilized?

(CBSE 1996, 1997)

Or

State the provision of Section 78 of the Company Act 1956, regarding the utilisation of Securities Premium.

Or

State any three purposes for which the balance of Securities Premium account can be utilized.

(CBSE 1998, 2001(Outside Delhi)

Answer: If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium.

The Company Act 1956 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Security Premium Account.

Under Section 78 of the Company Act 1956, the amount of security premium may be used only for the following purposes:

  1. To write off the preliminary expenses of the company.
  2. To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.
  3. To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.
  4. To issue fully paid bonus shares to the shareholders of the company.

Q.6. Can a company issue shares at discount.

Or

What condition must a Company satisfy for issuing shares at a discount? (CBSE 1996)

Or

Explain Section 79 of the Company Act 1956.

Answer: As a general rule, a company cannot ordinarily issue shares at a discount. It can do so only in cases such as ‘reissue of forfeited shares’ and in accordance with the provisions of Companies Act.

But according to Section 79 of company act 1956, a company is permitted to issue shares at discount provided the following conditions are satisfied: -

  1. The issue of shares at a discount is authorised by an ordinary resolution passed by the company at its general meeting and sanctioned by the Company Law Board.
  2. The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.
  3. At least one year must have elapsed since the company was entitled to commence the business.
  4. The shares are of a class, which has already been issued.
  5. The shares are issued within two months from the date of sanction received from the Government.

 

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