Notesale: Turn your study into money

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ISC CLASS XII
COMMERCE
FLOW CHART CUM
REVISION
(CHAPTER – 3)
- By CS Bajrang Agarwal

CHAPTER 3: SOURCE OF FINANCE FOR A JOINT
STOCK COMPANY
SOURCES OF FUND

LONG TERM FINANCE

SHORT TERM FINANACE

1
...
PUBLIC DEPOSITS

2
...
COMMERCIAL BANKS

3
...
TRADE CREDITS

4
...
CUSTOMER ADVANCES

5
...
FACTORING

6
...
INTER-CORPORATE DEPOSIT
7
...
MOST IMPORTANT METHOD OF RAISING LONG TERM FUNDS
2
...
ISSUED PRIOR TO PREFERENCE SHARES & DEBENTURES
2
...
REPAID ON WINDING UP OF THE COMPANY
4
...
NO BURDEN ON EARNINGS
2
...
INTERFERENCE IN MANAGEMENT

3
...
OVER-CAPITALISATION
3
...
HIGH RISK
5
...
SOURCES OF STRENGTH
5
...
HIGHER RETURNS

PREFERENCE SHARES
MEANING
1
...
DIVIDEND AT A FIXED RATE MUST BE PAID

TYPES
1
...
PARTICIPATING & NON-PARTICIPATING PREFERENCE SHARES
3
...
REDEEMABLE AND IRREDEEMABLE PREFERENCE SHARES

ADVANTAGES
1
...
LIMITED APPEAL DUE TO UNCERTAIN RETURNS

2
...
NO CHARGE ON ASSETS

3
...
NO BURDEN ON PROFITS
4
...
FEARING OF SHOWING THE DOOR

5
...
FLEXIBILITY

COMPARISON BETWEEN PREFERENCE AND EQUITY SHARES

BASIS

PREFERENCE SHARE

EQUITY SHARE

NOMINAL VALUE

GENERALLY HIGH

GENERALLY LOW

DEGREE OF RISK

COMPARATIVELY LOW
...
SINK AND
SWIM WITH THE COMPANY

RIGHT TO DIVIDEND

PRIOR TO DIVIDEND ON EQUITY
SHARES

AFTER DIVIDEND ON
PREFERENCE SHARES

RATE OF DIVIDEND

GENERALLY FIXED

REFUND OF CAPITAL

PRIOR TO REFUND OF EQUITY
CAPITAL

VARIES WITH THE
COMPANY'S PROFIT
REPAYMENT AFTER ALL
OTHER OBLIGATIONS ARE
REFUNDED

VOTING RIGHTS

LIMITED VOTING RIGHTS, WHEN
DIVIDEND REMAINS UNPAID
FOR A CERTAIN PERIOD OR
WHEN MATTERS DIRECTLY
AFFECTING THEM ARE
INVOLVED

FULL VOTING RIGHTS

APPEAL

APPEAL TO CAUTIOUS AND
CONSERVATIVE INVESTORS

APPEAL TO BOLD AND
ADVENTUROUS INVESTORS

REDEMPTION

REDEEMABLE DURING THE LIFE
TIME OF THE COMPANY

CONVERTIBILITY

MAY BE CONVERTIBLE INTO
EQUITY SHARES

NOT REDEEMABLE DURING
THE LIFE TIME OF THE
COMPANY
NOT CONVERTIBLE INTO
PREFERENCE SHARES

ARREARS OF DIVIDEND

MAY ACCUMULATE

NEVER ACCUMULATE

ORDER OF REFUND

BEFORE EQUITY SHARES ARE
PAID

AFTER PREFERENCE SHARES
ARE PAID

FURTHER ISSUE OF
SHARES

NOT ENTITLED TO ISSUE OF
RIGHT SHARES AND BONUS
SHARES

ENTITLED TO ISSUE OF RIGHT
SHARES AND BONUS SHARES

COMPARISON BETWEEN RIGHT AND BONUS SHARES

BASIS

RIGHT SHARES

BONUS SHARES

MEANING

WHENEVER A COMPANY COMES
OUT WITH A FURTHER ISSUE OF
SHARES WHICH AFTER 2 YEARS
OF FORMATION OR ONE YEAR
ALLOTMENT THEY MUST BE
OFFERED TO EXISTING
SHAREHOLDERS FIRST, SUCH
SHARES ARE CALLED RIGHTS
SHARES

WHEN COMPANIES HAVE LARGE
UNDISTRIBUTED PROFITS
WHICH IT WANTS TO
DISTRIBUTE AMONG ITS
SHAREHOLDERS AND FREE OF
CHARGE IN PROPORTION TO
THEIR EXISTING
SHARESHOLDINGS THEY ARE
KNOWN AS BONUS SHARE

STATUS

PARTLY PAID UP

ALWAYS FULLY PAID UP

CASH

BRING CASH TO THE
COMPANY'S COFFERS

FREE AND HENCE DO NOT ADD
ANYTHING TO THE COMPANY'S
CASH BOX

PAYMENT

IS TO BE PAID FOR EXISTING
SHAREHOLDERS

ABSOLUTELY FREE FOR THE
EXISTING SHAREHOLDERS

MINIMUM
SUBSCRIPTION

MUST COMPLY WITH THE
MINIMUM SUBSCRIPTION
REQUIREMENT AS PER WHICH
90% OF THE MINIMUM
SUBSCRIPTION MUST BE
RECEIVED WITHIN 60 DAYS OF
THE CLOSE OF THE ISSUES
FAILING

DOES NOT NEED TO COMPLY
WITH THIS REQUIREMENT

SEPERATE BANK
ACCOUNT

CONCERNED STOCK EXCHANGE
APPROVES THE ALLOTMENT
MONEY MUST BE KEPT IN A
SEPARATE BANK ACCOUNT IN A
SCHEDULED BANK

THIS IS NOT RELEVENT FOR A
BONUS ISSUE AS NO MONEY IS
TO BE RECEIVED BY THE
COMPANY

RIGHT

AN EXISTING SHAREHOLDER
HAS THE RIGHT TO RENOUNCE
ALL OR PART OF THE SHARES
OFFERED TO HIM AS RIGHTS
SHARES, IN FAVOUR OF HIS
NOMINEE

NO SUCH FACILITY IS AVAILABLE
IN CASE OF BONUS SHARES

PURPOSE

MADE FOR RAISING FUND TO
MEET THE GROWTH AND
DIVERSIFICATION NEEDS OF THE
COMPANY

MADE TO CAPTLISE
UNDISTRIBUTED PROFITS

EMPLOYEE STOCK OPTION PLAN (ESOP)
MEANING
 AN EMPLOYEE OF THE COMPANY GIVEN A RIGHT TO PURCHASE ITS SHARES AT A
STIPULATED PRICE DURING A GIVEN PERIOD OF TIME

MERITS
 LINK COMPENSATION PACKAGE CLOSELY TO PERFORMANCE
 RETAIN EFFICIENT EMPLOYEE REDUCING EMPLOYEE TURNOVER
 ENCOURAGES THE EMPLOYEE
 SENSE OF OWNERSHIP AND RESPONSIBILITY AMONG EMPLOYEE

DEMERITS
 USED BY ONLY PROFIT-MAKING COMPANIES
 SHARE PRICES DO NOT ALWAYS REFLECT FUNDAMENTALS
 FALLING SHARE PRICES RESULT IN LOSS TO EMPLOYEES
 INCONVENIENCE TO EMPLOYEES IN ENCASHING THEIR INVESTMENT
 LACK OF TRANSPARENCY CAN EARN ACCUSATIONS OF FAVOURITISM

SWEAT EQUITY SHARES
MEANING
 ISSUED BY A COMPANY U/S 79A OF THE COMPANIES ACT,1956 TO EMPLOYEES OR DIRECTOR
AT A DICOUNT / FOR CONSIDERATION OTHER THAN CASH / FOR PROVIDING KNOW-HOW
...


DISADVANTAGES

CONVENIENCE

1
...
ECONOMICAL

DANGER OF OVER-CAPITALISATION

3
...
DISSATISFACTION AMONG
SHAREHOLDERS

4
...
SPECULATION

5
...
UNBALANCED GROWTH

6
...
TRADING ON EQUITY
2
...
APPEAL TO CAUTIOUS INVESTORS

1
...
LOSS OF PRESTIGE

4
...
CHARGE ON ASSETS

5
...
LIMITED APPEAL

6
...
NAKED AND MORTGAGE DEBENTURES
2
...
BEARER AND REGISTERED DEBENTURES
4
...
A BANKS ADVANCES A FIXED AMOUNT IN LUMP SUM TO THE BORROWER
2
...
LOAN AGAINST SECURITY OF SOME ASSETS OR ON THE PERSONAL GUARANTEE

ADVANTAGES
1
...
BENEFITS OF TRADING ON EQUITY

3
...
REPAYMENT MADE FOR FUTURE EARNINGS
5
...
HAVE TO BE PLEDGED OR MORTGAGED FOR RAISING BANK LOANS
2
...
INTEREST ON LOANS HAS IRRESPECTIVE OF PROFITS
4
...
PROVIDING LONG TERM AND MEDIUM TERM FINANCE TO BUSINESS ENTERPRISES
2
...
MAJOR SOURCE OF FINANCE FOR FLOATATION OF NEW CONCERNS

ADVANTAGES


BOTH RISK AS WELL AS LOAN CAPITAL IS AVAILABLE



NEW COMPANIES WHICH FINDS DIFFICULT TO RAISE FINANCIAL FROM THE PUBLIC CAN
GET FINANCE FROM THESE INSTITUTIONS
...
DEPOSITS
MEANING:
DEPOSITS OF MONEY MADE BY THE PUBLIC WITH NON-BANKING COMPANIES
REPRESENTING LOANS FROM PUBLIC INCLUDING EMPLOYEES & SHAREHOLDERS OF THE
COMPANY

ADVANTAGES
1
...
ECONOMY
3
...
FLEXIBILITY
5
...
UNCERTAINTY
2
...
RESTRICT GROWTH OF CAPITAL MARKETS
4
...
COMMERCIAL BANK (BANK CREDIT)
SOURCES:
LOANS AND ADVANCES
CASH CREDITS
BANK OVERDRAFT

ADVANTAGES

DISADVANTAGES

FLEXIBILITY

LEGAL FORMALITIES

SECRECY

CHARGE ON ASSETS

WIDE CHOICE

SHORT PERIOD

NO INTERFERENCE IN MANAGEMENT

HIGH RATE OF INTEREST

EASY REPAYMENTS

3
...
SIMPLE AND CONVENIENT

DISADVANTAGES
1
...
NO FORMALITIES
3
...
LOSS OF CASH DISCOUNT

4
...
FLEXIBILITY

4
...
NO INTEREST PAYABLE

2
...
NO CHARGE ON ASSETS
4
...
AVAILABLE ONLY TO SUPPLIERS OF DURABLE ITEMS
2
...
UNRELIABLE

5
...
FACTORING (ACCOUNTING RECEIVABLE FINANCING)

FUNDS RAISED AGAINST SECURITY OF OR BY SALE OF RECEIVABLES

7

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