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UNIT-
QUES-1. MEANING, IMPORTANCE AND SCOPE OF CORPORATE
FINANCE
ANS.
MEANING: One can describe corporate finance as managing financial activities involved in running a corporation. It involves managing the required finances and its sources. The basic role of corporate finance is to maximise the shareholders’ value in both short and long-term. Corporate finance understands the financial problems of the organisation beforehand and prevents them. Capital investments become an important part of corporate financial decisions such as, if dividends should be offered to shareholders or not, if the proposed investment option should be rejected or accepted, managing short-term investment and liabilities. Corporate finance is different from business finance, while business^ finance refers to finance to all types of business such as partnership firms, joint stock companies, etc.., corporate finance includes, planning, raising, investing and monitoring of finance in order to achieve the financial goals of the organisation. IMPORTANCE AND SCOPE:
- Finance Planning In the planning phase, corporate finance needs to get a clear perspective on certain aspects, essentially the finance of the company has to be decided on questions like, what are the sources of finance, how much finance is required by the company and will it be profitable?
- Raising Capital Making capital investments is perhaps one of the most important tasks of corporate finance, which has serious business implications. To raise the finance, the corporate finance has to raise money from the company with the assistance of sources like shares, debentures, banks, financial institutions, creditors etc.., a company may also choose to sell stocks to equity while raising long-term funds for business expansion. Capital financing is a very delicate balancing act. Corporate finance is also supposed to manage short-term financial management with a goal to have enough liquidity to carry out other operations of the organisation.
- Investing Capital There are two types of corporate finance, fixed capital and working capital. As the name suggests fixed capital is used to purchase fixed assets like land, building, property, machinery, etc.., while working capital is generally used to purchase raw material and manage day to day fixed expenses like overheads, salaries etc. Financing and investing decisions are like two sides to the same coin. The organisation raises finances only when they have suitable projects. In corporate finance there are various tools and techniques which help take appropriate informed investing decisions, hence it is very vital for the financial health of an organisation.
- Monitoring the Finance / Managing Risks Monitoring finance is a science, there is a method to it, it is a very complex job. It requires many tools and techniques. Corporate finance has to control and manage the finance of the company, they have to minimise the risk of investment and at the same time assure maximum returns on the invested capital.
QUES-2. SHORT NOTES ANS.
- CAPITALIZATION: In finance, capitalization in finance is the sum of a company’s debt and equity. It represents the capital invested in the company, including bonds and stocks. Capitalization can also mean market capitalization. Market capitalization is the value of a company’s outstanding shares of stock. It also represents the value of the firm according to investors’ perceptions. It is equal to the number of shares outstanding multiplied by the share price.
- WORKING CAPITAL: Working capital, also known as net working capital, is the difference between a company’s current assets, like cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, like accounts payable. Working capital is a measure of both a company's operational efficiency and its short-term financial health. Working Capital = Current Assets - Current Liabilities. 3. SECURITIES BORROWINGS: Stock lending and borrowing (SLB)is a system in which traders borrow shares that they do not already own, or lend the stocks that they own but do not intend to sell immediately. Just like in a loan, SLB transaction happens at a rate of interest and tenure that is fixed by the two parties entering the transaction. However, there are some differences – crucially, the rate of interest is market-determined and free of control. Only stocks in the futures and option segment can be borrowed and lent.
- DEPOSITS: A deposit is the act of placing cash (or cash equivalents) with some entity, most commonly with a financial institution such as a bank. The deposit is a credit for the party (individual or organization) who placed it, and it may be taken back (withdrawn) in accordance with the terms agreed at time of deposit, transferred to some other party, or used for a purchase at a later date. Deposits are usually the main source of funding for banks.
- DEBENTURES: Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. Debentures are the most common form of long-term loans that can be taken out by a corporation. These loans are repayable on a fixed date and pay a fixed rate of interest. A company normally makes these interest payments prior to paying out dividends to its shareholders, similar to most debt
10. PAYMENT OF COMMISSION AND BROKERAGE: Commission is the incentive received by the insurance agent or salesperson for the sales achieved in a given period. Commission is generally paid as a percentage of the premium on the insurance policies. This proves as an efficient way of rewarding the concerned person wherein his rewards are directly proportional to the policies sold by him. INCLUDE AGENT.
- BUY BACK OF SHARES: Buy-Back is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than market price. When it buys back, the number of shares outstanding in the market reduces. A buyback allows companies to invest in themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. Buybacks can be carried out in two ways: 1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them. 2. Companies buy back shares on the open market over an extended period of time.
- NEW FINANCIAL INSTRUMENTS: Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver cash (bond). International Accounting Standards define a financial instrument as "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity". Financial instruments can be either cash instruments or derivative instruments: i. Cash instruments – instruments whose value is determined directly by the markets. They can be securities, which are readily transferable, and instruments such as loans and deposits, where both borrower and lender have to agree on a transfer. ii. Derivative instruments – instruments which derive their value from the value and characteristics of one or more underlineing entities such as an asset, index, or interest rate. They can be exchange- traded derivatives and over-the-counter (OTC) derivatives
UNIT-
QUES-1. NATURE, CLASS AND ISSUE OF DEBENTURES.
ANS.
NATURE: A Debenture is a unit of loan amount. When a company intends to raise the loan amount from the public it issues debentures. A person holding debenture or debentures is called a debenture holder. A debenture is a document issued under the seal of the company. It is an acknowledgment of the loan received by the company equal to the nominal value of the debenture. It bears the date of redemption and rate and mode of payment of interest. A debenture holder is the creditor of the company. As per section 2(12) of Companies Act 1956, “Debenture includes debenture stock, bond and any other securities of the company whether constituting a charge on the company’s assets or not”. CLASSES OF DEBENTURES: Debenture can be classified as under :
1. From security point of view: i. Secured or Mortgage debentures : These are the debentures that are secured by a charge on the assets of the company. These are also called mortgage debentures. The holders of secured debentures have the right to recover their principal amount with the unpaid amount of interest on such debentures out of the assets mortgaged by the
of shares. A Prospectus is issued, applications are invited, and letters of allotment are issued. On rejection of applications, application money is refunded. In case of partial allotment, excess application money may be adjusted towards subsequent calls. Issue of Debenture takes various forms which are as under :
- Debentures issued for cash
- Debentures issued for consideration other than cash
- Debentures issued as collateral security. Further, debentures may be issued (i) at par (ii) at premium, and (iii) at discount. QUES-2. CREATION OF CHARGE, FIXED AND FLOATING CHARGE ANS. 1. CHARGE- A charge is basically a right which is created by a person or company (borrower) on its assets and properties, whether present or future, in favour of a bank or financial institution (lender) which lends financial assistance. Section 2(16) of the Companies Act, 2014 defines charges so as to mean an interest or lien created on the property or assets of a company or any of tis undertaking or both as security and includes a mortgage. 2. CREATION OF CHARGE: Every venture, company or business requires funds for the smooth functioning of their operations. This money is usually borrowed from the banks or financial institutions. These lenders do not lend money until they are sure that their funds will be repaid along with interest. So in order to secure their loans, the lenders execute loan agreements, mortgage deeds and other similar documents which the borrower executes in the favour of the lender. The creation of rights on the assets and properties of the borrowing company is known as charge on assets. 3. FIXED CHARGE: It is defined as a lien or mortgage created over specific and identifiable fixed assts like land & building, plant & machinery, intangibles i.e. trademarks, goodwill, copyright, patent and so on against the loan. The charge covers all those assets that are not sold by the company normally. It is created to secure the repayment of the debt. In this type of agreement, the special feature is that after the creation of charge the lender has full control over the collateral asset and the company (borrower) is left over with the possession of the asset. Therefore, if the company wants to sell, transfer or dispose of the asset, the either previous approval of the lender is to be taken or it has to discharge all the dues first. 4. FLOATING CHARGE: The lien or mortgage which is not particular to any asset of the company is known as floating charge. The charge is dynamic in nature in which the quantity or value of asset changes periodically. It is used as a mechanism to secure the repayment of a loan. In this type of arrangement, the company (borrower) has the right to sell, transfer or dispose off the asset, in the ordinary course of
business. Hence, no prior permission of the lender is required and also there is no obligation to pay off the dues first. The conversion of floating charge into fixed charge is known as crystallization, as a result of which the security is no more floating security. It occurs when: the company is about to wind up, the company ceases to exist in future, the receiver is appointed by court, the company defaulted in payment and the lender has taken action against it to recover the debt. QUES-3. INTER CORPORATE LOANS AND INVESTMENTS. ANS. According to Section 186 of the Companies Act, A company is entitled to provide another company or body corporate with loans, investment, guarantee and securities, either with the consent of the board or that of the shareholders. All companies have a restriction and ceiling on the maximum amount of inter-corporate loan and investment. A company should not provide loans or guarantee or purchase securities of any other body corporate exceeding 60% of its paid-up share capital, free reserves and security premium account or 100% of its free reserves and security premium account, whichever is more. If the aggregate of inter-corporate loan, investment, guarantee and securities in connection with loan already made and proposed to be made together is not above the specified limit, inter-corporate loan and investment can be processed by passing board resolution with consent of all directors present at the board meeting. If the same is beyond the specified limit, prior special resolution must be passed and prior approval of the financial institution should be obtained, the latter if term loan is subsisting. A company is prohibited from making any inter-corporate loan, guarantee and security if it has defaulted in payment of interest. Such prohibition will be effective until the default is completely addressed by the company. Also, a company is not permitted to make any investment through two layers of investment companies, barring a few exceptions. QUES-4. MORTGAGES ANS. A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are^ used^ by^ individuals^ and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear. Mortgages are also known as "liens against property" or "claims on property." If the borrower stops paying the mortgage, the bank can foreclose. fixed-rate mortgage, the borrower pays the same interest rate for the life of the loan. Her monthly principal and interest payment never change from the first mortgage payment to the last. Most fixed-rate mortgages have a 15- or 30-year term. If market interest rates rise, the borrower’s payment does not change. If market interest rates drop significantly, the borrower may be able to secure that lower rate by refinancing the mortgage. A fixed-rate mortgage is also called a “traditional" mortgage.
UNIT-
QUES-1. Dematerialisation and Rematerialisation of Securitites. ANS. Before the enactment of Depositories Act, 1996, in Indian security market transaction of securities i.e. allotment of securities and transfer of securities was based on paper based ownership. Movement of securities was possible only in physical form which resulted in delay in settlement and transfer of securities. Some time it led to bad delivery, theft, forgery etc. As a result investor was deprived liquidity in security. It was a major drawback of the Indian Securities market. This Act was enacted to ensure the transferability of securities with speed, accuracy and security. It gives the option to an investor to choose holding of securities in physical form or hold the securities in a dematerialised from a depository. To understand the process of Dematerialisation of Securities one should know the meaning of Depositories, Depositories Participant, Issuer, Beneficial Owner, Registered Owner and their role under the depositories Act, 1996. A “ depository ” means a company formed and registered under the companies Act and approved by SEBI by getting a certificate of registration. A Depository provides services for recording of allotment of securities or transfer of ownership of securities in the record of a depository. At present mainly two depositories NSDL, CSDL are working in India. Depository participant means a person registered under SEBI Act as “ Depository participant” (DPs) to act as representative or agent of depository system. DPs work as intermediary between Depository and Investor (Beneficial owner of securities). “ Beneficial Owner” means a person whose name is recorded as such with a depository. “Issuer” means any person making an issue of securities. Generally a legal person or company issues the securities to generate fund from the public. Depository is registered in the record of issuer or company as “ registered owner ”.
1. Dematerialisation: It is the process by which a client can get physical certificates converted into electronic balances. An investor intending to dematerialise its securities needs to have an account with a Depository Participant. The client has to deface and surrender the certificates registered in its name to the Depository Participant. After intimating NSDL electronically, the Depository Participant sends the securities to the concerned Issuer/ R&T agent. NSDL in turn informs the Issuer/ R&T agent electronically, using NSDL Depository system, about the request for dematerialisation. If the Issuer/ R&T agent finds the certificates in order, it registers NSDL as the holder of the securities (the investor will be the beneficial owner) and communicates to NSDL the confirmation of request
electronically. On receiving such confirmation, NSDL credits the securities in the depository account of the Investor with the Depository Participant.
2. Rematerialisation: Rematerialisation is the process by which a client can get his electronic holdings converted into physical certificates. The client has to submit the rematerialisation request to the Depository Participant with whom he has an account. The Depository Participant enters the request in its system which blocks the client’s holdings to that extent automatically. The Depository Participant releases the request to NSDL and sends the request form to the Issuer/ R&T agent. The Issuer/ R&T agent then prints the certificates, despatches the same to the client and simultaneously electronically confirms the acceptance of the request to NSDL. Thereafter, the client’s blocked balances are debited.
QUES-2. SHAREHOLDER DERIVATIVE ACTION. ANS. A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation. Generally, a shareholder can only sue on behalf of a corporation when the corporation has a valid cause of action, but has refused to use it. This often happens when the defendant in the suit is someone close to the company, like a director or a corporate officer. If the suit is successful, the proceeds go to the corporation, not to the shareholder who brought the suit. In a shareholder derivative action, an individual or institutional shareholder, serving as a representative plaintiff, takes legal action on behalf of the corporation. The shareholder derivative action is typically brought against insiders of the company, such as the executive officers, directors, and/or board members, who are suspected of misconduct or other acts that cause harm to the corporation. A shareholder derivative action allows shareholders to redress harm to the corporation caused by management where it is unlikely that management will redress the harm itself. By filing a shareholder derivative action, a single shareholder may be able to compel changes that otherwise might not happen at the company, such as pro- investor corporate governance reform, removal of officers or directors whose misconduct injured the corporation, and monetary payments in the form of damages and/or disgorgement (recovery) of ill-gotten gains. QUES-3. CORPORATE MEMBER AND INDIVIDUAL SHARE HOLDER RIGHTS ANS.
1. CORPORATE MEMBER: A person whose name is entered in the register of members of a company becomes a member of that company. The register includes every single detail about the member like name, address, occupation, date of becoming a member, etc. It also includes every person who holds company’s shares and whose name is entered as the beneficial owners in depository records. The liabilities of members are limited to the amount of shares held by them in the case of a company having share capital while in the case of a company
individuals who are its members. It also noted that only in certain exceptional circumstances may the corporate veil be lifted, the corporate personality ignored and the individual members recognised for who they are. Eventually, however, the Supreme Court ruled that in the facts of this case, and only for the purposes of ascertaining the ownership in the investment, lifting of the veil would be necessary to a limited extent, i.e. to ascertain the nationality or origin of the shareholders. It was not necessary to ascertain the individual identity of each of them. Merely because more than 60% of the shares of the foreign investor companies were held by a trust of which Mr. Swraj Paul and the members of his family were beneficiaries, could not deny the companies the facility of the scheme on the basis that the permission granted was illegal. As such, the Court ignored that the identity of the shareholders may be common, thus recognising that each company was an independent juristic entity, looking only at nationality for compliance with the requirements of the scheme. The Supreme Court also took the opportunity to set out the basic conditions and principles to be applied and the various circumstances under which the corporate veil of a company could be pierced, i.e. to cast responsibility or liability for an act carried out by the company. Such acts would include fraud or improper conduct, the evasion of a taxing or a beneficent statute or where associated companies are inextricably connected as to be, in reality, part of one concern and should therefore, be treated as such.
UNIT-IV
QUES-1. CREDITOR PROTECTION, COLLECTIVE INVESTMENT
SCHEMES, INSTITUTIONAL INVESTEMENT AND AGENCIES, MUTUAL
FUNDS.
