Unit – 1
ISSUE OF SHARES AND DEBENTURES, FORFEITURE OF SHARES, REDEMPTION OF PREFERENCE SHARES AND DEBENTURES, PREPARATION OF FINAL ACCOUNTS
Q1) Why does a company issue shares?
A1) The main reason a company will issue new shares is to raise money to finance the business.
Following are the scenarios when a company requires to raise money:
1) When the company is incorporated, shares are issued for the purpose of initial capital.
2) Shares may be issued in order to repay some or all of the company’s borrowing.
3) New funds may also support the growth of the business
4) Shares can also be issued to fund the purchase of another company. This can be done by two ways. One, the company may raise cash from a share issue and use that cash to buy the other business. Alternatively, new shares could be issued to the current shareholders of the target company.
5) If a director or employees exercise a share option that they have been granted by the company, they may acquire the shares via an allotment to them.
Q2) What are the two types of shares as per Companies Act, 2013?
A2) There are two types of Shares.
- Preference Shares are those which carries two exclusive preferential rights over the other type of shares.
- These rights are – 1) Preferential right with respect to the dividends declared by a company.
This means that the dividend is first paid to preference shareholders before the other type of shareholders and
2) Preferential right when it comes to repayment of capital in case of liquidation of the company.
This means that the preference shareholders get paid out earlier than the other type of shareholders.
- Another type of Shares is Equity Shares.
- The shares that do not enjoy any preferential rights are thus equity shares.
- The dividend given to equity shareholders is not fixed.
- It is decided by the Board of Directors according to the financial performance of the company.
Q3) List down the points that differentiate Preference Shares and Equity Shares.
A3) Difference between Preference Shares and Equity Shares:
Point | Preference Shares | Equity Shares |
1) Right of Dividend
2) Rate of Dividend
3) Management
4) Voting Right
5) Redemption Of Capital | Preference Shares are paid Dividend before Equity Shares.
They are given dividend at a Fixed rate.
Shareholders do not have right to Take part in the management.
Preference Shareholders can Vote only when a decision affect Their rights.
Redeemable Preference Shares Are redeemable and the amount Of capital is refunded at the end Of the tenure of the issued class. | Equity Shares are paid dividend Out of the balance profits and only After payment of dividend to Preference Shares.
Rate of dividend is not fixed, it Varies.
These shareholders have a default Right to participate in the Management of the company.
Equity Shareholders have the Right to vote in all management Decisions.
Equity Share capital is refunded Only at the time of winding up of Company and that too even after Settling the liabilities of Preference shareholders, if any. |