Disadvantages Of Holding Company

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The following are the main disadvantages of holding companies:

1. Forced Appointment Of Directors
The subsidiary companies may be forced to appoint persons of the choosing of holding companies as the directors or other officers at unduly high remuneration.

2. Speculation In Shares
By manipulation of accounts, directors may speculate in the shares of the subsidiary companies if such shares are listed in the stock exchange.

3. Creation Of Secret reserves
Secret reserves may be created by dishonest directors to the detriment of the minority interest.

4. Difficulties In Valuation Of Stock
Difficulties may be faced for valuing stock when it consists huge quantities of inter-company goods.

5. Fear Of Mismanagement
When a group has a good number of subsidiary companies and managerial ability is limited, there may be mismanagement resulting into damage the group as a whole.

6. Fraud In Inter-company Transactions
Inter-company transactions are often entered at fanciful and unduly high or low price in order to suit the holding companies.

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Concept And Meaning Of Holding Company
Advantages Of Holding Company

Reasons For The Formation Of Holding Company Or Advantages Of Holding Company

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The following are the advantages of the formation of a holding company:

1. Elimination Of Competition
As both companies are managed by the same group, therefore competition between them is automatically eliminated.

2.Separate Accounts And Results
Both companies are maintained their account separately, the profitability and financial position of each company is known separately.

3. Advantages Of Self Goodwill
Both the companies maintain their separate identity and as such they maintain their goodwill separately.

4. Less Investment
The people controlling the holding company need investment as comparatively small amount in order to control the subsidiaries.

5. Carry Forward The Losses
Both companies are maintained their identity separately. in such case, it would be possible to avail income tax benefit by carrying forward the losses and set off future profits.

6. Smooth Supply Of Raw Materials
If a holding company holds different subsidiary companies, each of which performs functions at the different stages of production, the companies, as a whole, will not have to depend upon other companies in their activities from procurement of raw materials.

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Concept And Meaning Of Holding Company
Disadvantages Of Holding Company

Concept And Meaning Of Holding Company

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The creation of the relationship of holding and subsidiary companies is a form of combination.The procedure involves acquisition of shares in the absorbed company, and not its assets with or without liabilities. The separate legal entity of the absorbed company is, therefore, not disturbed. In other words, the subsidiary company continuous its business as usual because acquisition of controlling interest by another company does not mean its liquidation.

Meaning Of Holding Company
A company may acquire either the whole or the majority of the shares of another company so as to have controlling interest in such a company or companies. The controlling company is known as the 'holding company' and the so controlled company or the company whose shares have been acquired is known as 'subsidiary company' and both together are known as 'group of company'. Holding companies are able to nominate the majority of the directors of subsidiary company. The company gets such right which it purchase more than fifty percent shares of another company. So, the holding company is one which controls one or more other companies either by means of holding more than fifty percent shares in that company or companies or by having power to appoint the whole or majority of the directors of those companies. A company controlled by holding company is known as subsidiary company.

Related Topics
Advantages Of Holding Company
Disadvantages Of Holding Company

Concept And Types Of Reconstruction

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When a company is suffering loss for several past years and suffering from financial difficulties, it may go for reconstruction. In other words, when a company's balance sheet shows huge accumulated losses, heavy fictitious and intangible assets or is in financial difficulties or is to over capitalized, and then the process of reconstruction is restored.
Reconstruction may be internal and external.

1. External reconstruction
When a company is suffering losses for the past several years and facing financial crisis, the company can sell its business to another newly formed company. Actually, the new company is formed to take over the assets and liabilities of the old company. This process is called external reconstruction. In other words, external reconstruction refers to the sale of the business of existing company to another company formed for the purposed. In external reconstruction, one company is liquidated and another new company is formed. The liquidated company is called "Vendor Company" and the new company is called "Purchasing Company". Shareholders of vendor company become the shareholders of purchasing company.

2. Internal Reconstruction
Internal reconstruction refers to the internal re-organization of the financial structure of a company. It is also termed as re-organization which permits the existing company to be continued. Generally, share capital is reduced to write off the past accumulated losses of the company. The accounting procedure of internal reconstruction is distinct from that of amalgamation, absorption and external reconstruction.

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Meaning And Concept Of Business Combination
Advantages And Disadvantages Of Business Combination

Difference Between Amalgamation And Absorption

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Following are the main differences between amalgamation and absorption:

1. Liquidation
Two or more companies are liquidated in the process of amalgamation. One or more companies are liquidated in absorption.

2. Formation
In amalgamation, a new company is formed to take over the business of vendor companies. In absorption, no new company is formed, only purchasing or absorbing company take over the business of liquidated company.

3. Size
There is no such matter of size of amalgamating companies. Generally, size of purchasing company is greater than that of vendor company in absorption.

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Meaning And Features Of Amalgamation
Meaning And Features Of Absorption

Meaning And Features Of Absorption

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Meaning Of Absorption

Absorption is the process under which an existing large company purchases the business of another small company or companies doing similar business. In other words, when an existing company takes over the business of one or more existing companies carrying similar business, it is called absorption. The company whose business is acquired is liquidated. But, no new company is formed. The company which takes over the business is called absorbing or purchasing company and the company, the business of which is taken over is called absorbed or vendor company. The accounting record of absorption is similar to that of amalgamation.

Features Of Absorption
* One or more companies are liquidated.

* No new company is formed.

* The nature of business of both companies is similar.

* Generally, larger company purchase the business of smaller company.

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Meaning And Features Of Amalgamation 
Difference Between Amalgamation And Absorption

Meaning And Features Of Amalgamation

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Meaning Of Amalgamation
When two or more companies carrying on similar business go into liquidation and a new company is formed to take over their business, it is called amalgamation. In other words, amalgamation refers to the formation of a new company by taking over the business of two or more existing companies doing similar type of business. In amalgamation, two or more companies are liquidated and a new company is formed to take over the business of liquidating companies. The companies which go into liquidation are called vendor or amalgamating companies where as the new company which is formed to take over the business of liquidating companies is called purchasing or amalgamated or transferee company. The main aim of amalgamation is to minimize the possibility of cut-throat competition and to secure the advantages of large scale production.

Features Of Amalgamation

* Two or more existing companies are liquidated.

* A new company is formed to take over the business of liquidating companies.

* The nature of business of existing companies is similar.

* Liquidating companies are called vendor companies and the new company is called purchasing company.

* Generally, purchase consideration is discharged by the issue of equity shares of purchasing company.

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Meaning And Features Of Absorption
Difference Between Amalgamation And Absorption

Advantages And Disadvantages Of Business Combination

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The main objective of business combination is to eliminate cut-throat competition and secure the advantages of large scale production. Following are the advantages of business combination.

1. Competition between and among the companies will be eliminated.

2. Amount of capital can be increased by combining business.

3. Establishment and management cost can be reduced.

4. Benefits of large scale production can be secured.

5. Operating cost can be reduced by avoiding duplication.

6. Research and development facilities are increased.

7. Monopoly in the market can be achieved.

8. Bulk purchase of materials at reduced price is possible.

9. Stability of the price of goods is maintained.

Following are the disadvantages of business combination

1. Business combination brings monopoly in the market, which may be harmful for the society.

2. The identity of the old company finishes.

3. Goodwill of the old companies decrease.

4. Management of the company becomes difficult.

5. Business combination may result in over-capitalization.

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Concept And Types Of Reconstruction


Meaning And Concept Of Business Combination

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Business combination is the process under which two or more business organizations or their net assets are brought under common control in a single business entity. Generally, companies doing similar type of business or involved in similar line of activities may go for business combination to get the economies of large scale production and to minimize the possibility of cut-throat competition. Business combination result the growth. Other terms applied to business combination are merger and acquisition. A 'merger' refers to a situation where two or more than two companies of similar nature combine willingly while an 'acquisition' or 'take over' refers to the situation where a bigger company takes over a smaller company. Business combination can take place either through amalgamation or through absorption.

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Measuring Combined Leverage Or Degree Of Combined Leverage (DCL)

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The combination of operating leverage and financial leverage is called combined leverage or total leverage. Operating leverage measures operating or business risk where as financial leverage measures financial risk. Combined leverage measures total risk of the business.
Operating leverage is measured by the percentage change in earning before interest and tax due to percentage change in sales where as financial leverage is measured by percentage change in earning before tax or earning per share due to percentage change in earning before interest and tax. Thus, the combined leverage is measured by percentage change in earning per share (EPS) due to percentage change in sales.
Measuring Degree Of Combined Leverage (DCL) On The Basis Of Income Statement

DCL = DOL x DFL = (CM/EBIT) x (EBIT/EBT) = CM/EBT

Where,
DCL = degree of combined leverage
DOL = degree of operating leverage
DFL = degree of financial leverage
CM = contribution margin
EBIT= earning before interest and tax
EBT = earning before tax

Measuring Degree Of Combined Leverage By Using Formula

DCL = Sales- variable cost/Sales - variable cost - fixed cost - interest
= S_VC/S-VC-FC-I

Related Topics
Degree Of Financial Leverage (DFL)
Degree Of Operating Leverage (DOL)

Measuring Operating Leverage Or Degree Of Operating Leverage (DOL)

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Operating leverage measures the percentage change in operating profit with respect to changes in the sales. Therefore, operating leverage is determined through the relationship of the firm's sales and its operating profit (earning before interest and tax). The relationship between contribution margin and EBIT is called degree of operating leverage. It may be defined as the rate of changes in EBIT due to the change in the rate of sales. Degree of operating leverage (DOL) is measured by using any one of the following approaches.

Measuring Degree Of Operating Leverage (DOL) By Income Statement Approach:

DOL = Contribution Margin/EBIT

Measuring Degree Of Operating Leverage By Formula Approach:

DOL = Sales - Variable Cost/Sales - Variable Cost - Fixed Cost
= S-VC/S-VC-FC

Related Topics
Degree Of Financial Leverage (DFL)
Degree Of Combined Leverage (DCL)

Measuring Financial Leverage Or Degree Of Financial Leverage (DFL)

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Degree of financial leverage is the relationship between percentage change in earning per share and percentage change in earning before interest and tax (EBIT). It can also be determined by the relationship between EBIT and EBT (earning before tax). Iy measures the percentage change in earning per share (EPS) due to percentage change in EBIT. The financial leverage can be determined as given below.

Calculation Of DFL On The Basis Of Income Statement:

DFL = EBIT/Ebit-I = EBIT/EBT

Calculation Of DFL By Using Formula:

DFL = (Sales-variable cost- fixed cost/sales - variable cost-fixed cost-interest)
= S-VC-FC/S-VC-FC-I

Calculation Of DFL By Using Percentage Change Method:

DFL = % change in EPS/% change in EBIT

Where,
DFL = degree of financial leverage
EBIT = earning before interest and tax
EBT = earning before tax
EPS = earning per share
I = Interest

Related Topics
Degree Of Operating Leverage (DOL)
Degree Of Combined Leverage (DCL)

Difference Between Operating Leverage And Financial Leverage

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Following are the main differences between operating leverage and financial leverage:

1. Relation
Operating leverage shows the relationship between sales and operating profit. Financial leverage show the relationship between operating profit and earning per share.

2. Cause
Operating leverage arises due to the use of fixed operating cost. Financial leverage arises due to the use of debt or cost of financing.

3. Measurement Of Risk
Operating leverage measures the business risk. Financial leverage measures the financial risk.

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Concept And Meaning Of Leverage
Uses Or Significance Of Leverage
Types Of Leverage

Types Of Leverage

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On the basis of nature of risk associated with the investing and financing activities of a firm, leverage can be divided or classified as follow:

1. Operating Leverage
Operating leverage may be defined as the firm's ability to use fixed operating costs to magnify the effect of changes in sales on its earning before interest and tax. The relationship between contribution margin and earning before interest and tax (EBIT) is called degree of operating leverage. It may be defined as the rate of changes in EBIT due to the change in the rate of sales. The firm operating with high fixed operating cost has higher degree of operating leverage. Higher levels of risk are attached to higher degree of leverage. High operating leverage is good when sales are increasing and bad when they are falling.
Operating leverage is used to measure the business risk. Business risk is the risk of the firm not being able to cover its fixed operating costs.

2. Financial Leverage
Financial leverage is related with the financing activities of a firm. The fixed return sources of capital influence the earning of variable return sources. The effect is known as financial leverage.
The use of fixed charge capital is known as financial leverage. If there is no fixed charge capital, there is no financial leverage. The proper utilization of fixed charged capital like debentures, bonds, bank loan and preference share capital is measured by financial leverage. The firm having more debt capital and preference share capital in its capital structure has higher degree of financial leverage and greater amount of risk.
Financial leverage is used to measure the financial risk. Financial risk refers to the risk of the firm not being able to cover its fixed financial costs.

3. Combined Leverage
The combination of operating leverage and financial leverage is called total leverage or combined leverage. Operating leverage measures operating risk whereas financial leverage measures financial risks. Total leverage or combined leverage measures total risk of the business.
Operating leverage is measured by the percentage change in earning before interest and tax due to percentage change in sales where as financial leverage is measured by percentage change in earning per share due to percentage change in earning before interest and tax.

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Concept And Meaning Of Leverage
Uses Or Significance Of Leverage
Difference Between Operating Leverage And Financial Leverage

Uses Or Significance Of Leverage

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Leverage refers to the use of fixed costs in an attempt to increase the profitability. Leverage affects the level and variability of the firm's after tax earnings and hence, the firm's overall risk and return. The study of leverage is significant due to the following reasons.

Measurement Of Operating Risk
Operating risk refers to the risk of the firm not being able to cover its fixed operating costs. Since operating leverage depends on fixed operating costs, larger fixed operating costs indicates higher degree of operating leverage and thus, higher operating risk of the firm. High operating leverage is good when sales are rising but bad when they are falling.

Measurement Of Financial Risk
Financial risk refers to the risk of the firm not being able to cover its fixed financial costs. Since financial leverage depends on fixed financial cost, high fixed financial costs indicates higher degree of operating leverage and thus, high financial risk.High financial leverage is good when operating profit is rising and bad when it is falling.

Managing Risk
Relationship between operating leverage and financial leverage is multiplicative rather than additive. Operating leverage and financial leverage can be combined in a number of different ways to obtain a desirable degree of total leverage and level of total firm risk.

Designing Appropriate Capital Structure Mix
To design an appropriate capital structure mix or financial plan, the amount of EBIT under various financial plans, should be related to earning per share. One widely used means of examining the effect of leverage to analyze the relationship between EBIT and earning per share.

Increase Profitability
Leverage is an effort or attempt by which a firm tries to show high result or more benefit by using fixed costs assets and fixed return sources of capital. It insures maximum utilization of capital and fixed assets in order to increase the profitability of a firm, It helps to know the reasons not having more profit by a company.

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Concept And Meaning Of Leverage
Types Of Leverage
Difference Between Operating Leverage And Financial Leverage

Concept And Meaning Of Leverage

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The common meaning of leverage is the effect of one variable on another variable. If financial accounting, leverage is used to measure the risk i.e. the effect of changes in revenue and costs on the shareholders return. If the leverage is high, a small percentage increase or decrease in revenue (sales) results too much increase or decrease in the shareholders return or earning per share. If the leverage is low, the return changes slightly despite a high increase or decrease in the sales.

The capital of a company can be collected from various sources of financing whose costs are different. Sources of capital can be divided into two types i.e. fixed return and variable return sources of capital.Fixed return sources of capital include debentures, bonds, bank loan and preference share capital, whose return is fixed. Variable return sources of capital include equity share capital whose return is variable because they receive the residual income. The fixed return sources of capital influence the return of variable sources of capital and such effect is known as leverage.

In this way, equity shareholders are the owner of a company and their return is affected by the investing and financing activities of a company. The purchase of fixed assets increases the fixed operating cost. Similarly, the issues of debentures and preference shares increases the fixed financial cost (interest and dividend). Leverage is a mechanism of measuring the possible effect of investing and financing activities on the earning available to shareholders.

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Uses Or Significance Of Leverage
Types Of Leverage
Difference Between Operating Leverage And Financial Leverage

Modes Of Issue Of Debentures

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The procedure and accounting entries for issue of debentures are very much similar to that of share. A prospectus is issued to the public for inviting applications. The money on debentures may be payable in full at a time along with application or by installments on application, allotment and various calls.
There is no legal restriction on the price for which debentures are issued. Thus, a debenture may be issued at par, at premium or at discount. They can be issued at cash, for consideration other than cash and as collateral security as well as issue of debentures with redeemable conditions.

Issue Of Debentures At Par
When a debenture is issued at its face value, it is called issue of debenture at par. If a debenture of $100 is issued at $ 100, it is called the issue of debenture at par.

Issue Of Debentures At Premium
A debenture is said to be issued at premium when the issue price exceeds the par value. If a debenture of $100 is issued at $110, then it is called issue of debenture at premium. The excess amount $10 ($110-$100) is debenture premium.

Issue Of Debentures At Discount
When a debenture is issued at an amount less than its face value, it is said to be issued at discount. If a debenture of $100 is issued at $95, it is said to have been issued at a discount of $5.

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Meaning And Concept Of Debentures
Characteristics Of Debentures
Importance Of Debentures
Difference Between Shares And Debentures
Types Of Debentures

Types Of Debentures

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The major types of debentures are as follows:


1.Types Of Debentures On The Basis Of Record Point Of View

a. Registered Debentures
These are the debentures that are registered with the company. The amount of such debentures is payable only to those debenture holders whose name appears in the register of the company.

b. Bearer Debentures
These are the debentures which are not recorded in a register of the company. Such debentures are transferable merely by delivery. Holder of bearer debentures is entitled to get the interest.

2. Types Of Debentures On The Basis Of Security

a. 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 company.

b. Unsecured Debentures
Debentures which do not carry any security with regard to the principal amount or unpaid interest are unsecured debentures. These are also called simple debentures.

3. Types Of Debentures On The Basis Of Redemption

a. Redeemable Debentures
These are the debentures which are issued for a fixed period. The principal amount of such debentures is paid off to the holders on the expiry of such period. These debentures can be redeemed by annual drawings or by purchasing from the open market.

b. Non-redeemable Debentures
These are the debentures which are not redeemed in the life time of the company. Such debentures are paid back only when the company goes to liquidation.

4. Types Of Debentures On The Basis Of Convertibility

a. Convertible Debentures
These are the debentures that can be converted into shares of the company on the expiry of pre-decided period. The terms and conditions of conversion are generally announced at the time of issue of debentures.

b. Non-convertible Debentures
The holders of such debentures can not convert their debentures into the shares of the company.

5. Types Of Debentures On The Basis Of Priority

a. First Debentures
These debentures are redeemed before other debentures.

b. Second Debentures
These debentures are redeemed after the redemption of first debentures.

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Meaning And Concept Of Debentures
Characteristics Of Debentures
Importance Of Debentures
Difference Between Shares And Debentures
Modes Of Issue Of Debentures

Differences Between Shares And Debentures

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Following are the main differences between shares and debentures:

1. Ownership
The share of a company provides ownership to the shareholders. Debenture-holders are creditors of a company who provide loan to the company.

2. Identity
Person holding share is known as shareholder. person holding debenture is known as debenture-holder.

3.Certainty Of Return
No certainty of return in case of loss for the shareholder. Debenture-holder receives the interest even if there is no profit.

4. Convertibility
Shares can not be converted into debentures. Debentures can be converted into shares.

5. Control
Shareholders have the right to participate and vote in company's meeting. Debenture holders do not possess any voting right and can not participate in meeting.

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Meaning And Concept Of Debentures
Characteristics Of Debentures
Importance Of Debentures
Types Of Debentures
Modes Of Issue Of Debentures


Importance Of Debentures

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An issue of debenture plays a great role in long-term planning and decision-making. In modern competitive business era, every company needs fund for any business opportunity. This financing can be fulfilled only by issuing owner's capital and debt capital. The issue of debenture, in one side creates the obligation for the payment of interest at a fixed rate and in another side, it causes an increase in ' earning per share' due to comparatively less number of shares issued. The following points are being produced for its importance:

1. Debentures are important to pay interest expenses by a fixed rate.

2. Debentures are important to meet the requirement of long-term capital budgeting.

3. Debentures help to maximize earning per share.

4. Debentures help to reduce the burden of income tax, since interest is charged against profit and loss account.

5. Debentures provide the way, to use leverage in the capital structure of the company.

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Meaning And Concept Of Debentures
Characteristics Of Debentures
Difference Between Shares And Debentures
Types Of Debentures
Modes Of Issue Of Debentures

Characteristics Of Debentures

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Debentures are ranked as creditors of the company. Debenture is long-term debt and issued under the common seal of the company. In brief, a debenture possesses the following characteristics.

1. Debenture is an instrument of loan.

2. Interest is paid at fixed rate every year and debentures is known as"fixed cost bearing capital".

3.Debenture has common seal of the company.

4. Debenture is redeemable at a fixed and specified time.

5. Debenture-holders are the creditors of company not owners.

6. Debenture is a form of long-term borrowed capital.

7. Debenture-holders have no right to cast vote in company's general meting.

8. At the time of liquidation, first priority is given to debenture-holders at the time of repayment.

9. Debentures can be issued to fulfill the requirement of huge capital. Small firms most often find it more expensive source of financing.

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Meaning And Concept Of Debentures
Importance Of Debentures
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Types Of Debentures
Modes Of Issue Of Debentures

Meaning And Concept Of Debentures

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The total capital of joint stock companies can be divided into owner's capital and borrowed capital. Share capital is owner's capital whereas debenture is considered as borrowed capital. The buyers of shares i.e. shareholders possess the voting right through which they own control power of the company. Debenture is a long-term loan. Companies can raise additional capital by the issue of debentures. Debenture-holders receive fixed income in the form of interest during the loan period, however, they do not possess the voting right.

Debenture is a written promise for a debt by a company under its seal which contains the terms and conditions regarding the amount of loan or principal, the rate of interest, maturity date, maturity value etc. In other words, debenture is a certification of acknowledgment issued with the seal of company in favor of lender as an evidence of debt. This written document grants the holder the right to receive interest and return of principal as per the terms under which debentures are issued.

Thus, debenture is a part of total capital of a company and debenture-holders are the creditors. Debenture-holders are entitled the right to receive interest on their fund invested in debenture. The rate of interest is predetermined and stated in the bond certificate. The interest is payable whether there is profit or loss. The amount of debenture is returned to the holders at the end of predetermined maturity period.

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Characteristics Of Debentures
Importance Of Debentures
Difference Between Shares And Debentures
Types Of Debentures
Modes Of Issue Of Debentures

Meaning And Types Of Share Capital

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Meaning Of Share Capital
A joint stock company should have capital in order to finance its activities. It raises its capital by issue of shares. The Memorandum of Association must state the amount of capital with which the company is desired to be registered and the number of shares into which it is to be divided. When total capital of a company is divided into shares, then it is called share capital. It constitutes the basis of the capital structure of a company. In other words, the capital collected by a joint stock company for its business operation is known as share capital. Share capital is the total amount of capital collected from its shareholders for achieving the common goal of the company as stated in Memorandum of Association.

Types Of Share Capital
Share capital of a company can be divided into the following different categories:

1. Authorized, registered, maximum or normal capital
The maximum amount of capital, which a company is authorized to raise from the public by the issue of shares, is known as authorized capital. It is a capital with which a company is registered, therefore it is also known as registered capital.

2.Issued Capital
Generally, a company does not issue its authorized capital to the public for subscription, but issues a part of it. So, issued capital is a part of authorized capital, which is offered to the public for subscription, including shares offered to the vendor for consideration other than cash. The part of authorized capital not offered for subscription to the public is known as 'un-issued capital'. Such capital can be offered to the public at a later date.

3.Subscribed Capital
It can not be said that the entire issued capital will be taken up or subscribed by the public. It may be subscribed in full or in part. The part of issued capital, which is subscribed by the public, is known as subscribed ccapital

4.Called Up Capital
It is that part of subscribed capital, which is called by the company to pay on shares allotted. It is not necessary for the company to call for the entire amount on shares subscribed for by shareholders. The amount, which is not called on subscribed shares, is called uncalled capital.

5. Paid-up Capital
It is that part of called up capital, which actually paid by the shareholders. Therefore it is known as real capital of the company. Whenever a particular amount is called and a shareholder fails to pay the amount fully or partially, it is known an unpaid calls or calls in arrears.
Paid-up Capital = Called up capital - calls in arrears

6. Reserve Capital
It is that part of uncalled capital which has been reserved by the company by passing a special resolution to be called only in the event of its liquidation. This capital can not be called up during the existence of the company.It would be available only in the event of liquidation as an additional security to the creditors of the company

Related Topics
Meaning Of Equity Shares, Ordinary Shares Or Common Stock
Meaning And Types Of Preference Shares
Distinction Between Equity Share And Preference Share

Distinction Between Equity Shares And Preference Shares

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The main differences between equity shares and preference shares are as follows:

1. Rate Of Dividend
The rate of dividend on equity shares may vary from year to year depending upon the availability of profit. Preference share holders are paid dividend at a fixed rate.

2. Arrears Of Dividend
Equity shareholders can not get the arrears of past dividend. Cumulative preference share holders can get the arrears of past dividend.

3. Redemption
Equity shares can not be redeemed except, under a scheme involving reduction of capital. Preference shares can be redeemed as provided by the articles and terms of issue.

4. Voting
Equity shareholders enjoy voting rights. Preference shareholders do not have the right to participate in the management of the company.

5. Payment Of Dividend
Payment of dividend to equity share is made only after paying to preference shares. Preference shares have a preferential right to receive dividend before equity shares.

Related Topics
Meaning Of Equity Share, Ordinary Share Or Common Stock
Meaning And Types Of Preference Share
Meaning And Types Of Share Capital

Meaning And Types Of Preference Shares

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Meaning Of Preference Shares
Preference shares are those, which enjoy the following two preferential rights:
1. Dividend at a fixed rate or a fixed amount on these shares before any dividend on equity shares.
2. Return of preference share capital before the return of equity share capital at the time of winding up of the company.

Preference shares also have a right to participate or in part in excess profits left after been paid to equity shares, or has a right to participate in the premium at the time of redemption. But these shares do not carry voting rights.

Types Of Preference Shares
Following are the major types of preference shares:

1. Cumulative Preference Shares
When unpaid dividends on preference shares are treated as arrears and are carried forward to subsequent years, then such preference shares are known as cumulative preference shares. It means unpaid dividend on such shares is accumulated till it is paid off in full.

                      Also read: Meaning Of Equity Shares, Ordinary Shares Or Common Stock

2. Non-cumulative Preference Shares
Non-cumulative preference shares are those type of preference shares, which have right to get fixed rate of dividend out of the profits of current year only. They do not carry the right to receive arrears of dividend. If a company fails to pay dividend in a particular year then that need not to be paid out of future profits.

3. Redeemable Preference Shares
Those preference shares, which can be redeemed or repaid after the expiry of a fixed period or after giving the prescribed notice as desired by the company, are known as redeemable preference shares. Terms of redemption are announced at the time of issue of such shares.

4. Non-redeemable Preference Shares
Those preference shares, which can not be redeemed during the life time of the company, are known as non-redeemable preference shares. The amount of such shares is paid at the time of liquidation of the company.

5. Participating Preference Shares
Those preference shares, which have right to participate in any surplus profit of the company after paying the equity shareholders, in addition to the fixed rate of their dividend, are called participating preference shares.

                       Also read: Distinction Between Equity Shares And Preference Shares

6. Non-participating Preference Shares
Preference shares, which have no right to participate on the surplus profit or in any surplus on liquidation of the company, are called non-participating preference shares.

7. Convertible Preference Shares
Those preference shares, which can be converted into equity shares at the option of the holders after a fixed period according to the terms and conditions of their issue, are known as convertible preference shares.

8. Non-convertible Preference Shares
Preference shares, which are not convertible into equity shares, are called non-convertible preference shares.

                    Also read: Meaning And Types Of Share Capital

Meaning And Concept Of Equity Shares, Ordinary Shares Or Common Stock

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Shares that carry no preferential or special rights in respect of annual dividends and in the repayment of capital at the time of liquidation of the company are called equity shares. These shares carry no preferential rights; therefore, these are also known as common stock or ordinary shares.

Dividend on such shares is payable only when there are profits after the payment of preference dividend. But, the rate of dividend on these shares is not fixed. Board of directors, depending upon the dividend policy as well as the availability of profits after dividend on preference shares, declare dividend. No dividend will be paid on these shares, if there are no profits or insufficient profits in a particular year. The value of these shares in stock exchange fluctuates on the basis of rate of dividend declared. Similarly, these shares are redeemed only after the redemption of preference shares at the
time of liquidation of the company.

Equity share holders enjoy full voting rights in all matters of the company. They have right to elect directors and participate in the management and control of the company. They also share residual profits.

Related Topics
Meaning And Types Of Preference Shares
Distinction Between Equity Shares And Preference Shares
Meaning And Types Of Share Capital

Meaning And Concept Of Share

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Every company should have capital in order to finance its activities. When capital of a company is divided into a number of units of fixed value, then such units are called shares of a company. In other words, a share is one of the units into which the total capital of the company is divided. Share is a fractional part of the total capital of the company. It is the proportional part of the share capital and forms ownership in a company. In other words, a share represents the extent of ownership or interest in the assets and profits of the company.

A share is issued by a company in the form of certificate under its common seal. It is a personal and movable property, which can either be mortgaged or pledged or transferred. It is measured by a sum of money for the purpose of liability and of interest (dividend) of its holder. The persons who contribute money through shares are known a ' shareholders'. A shareholder enjoys certain rights such as right to dividend, right to vote and is liable to pay the unpaid balance on the shares, if any.

Related Topics
Meaning Of Equity Shares, Ordinary Shares Or Common Stock
Meaning And Types Of Preference Shares
Distinctions Between Equity Shares And Preference Shares
Meaning And Types Of Share Capital

Meaning Of Company Promoters And Their Functions

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Company Promoters

The person or a group of persons who takes necessary steps to give birth to a company form of business organization are known as company promoters. Company promoters conceive an idea of starting a joint stock company and work-up on it to develop the idea and finally form the joint stock company. In other words, company promoters are those who discover the opportunities to make money, investigate such proposition, assemble and finance them and thereby give a shape of a joint stock company. Company promoters give not only the birth to a joint stock company but also nourish it till it stands on its own feet.

Functions Of Company Promoters

* Conceive an idea of forming a company.

* Analyze profitability and feasibility of the idea.

* Investigate the workability of the idea by consulting experts.

* Decide the name and location of the company and also the amount and form of its share capital.

* Prepare the Memorandum of Association, Prospectus and other necessary documents and file them for incorporation.

Related Topics
Distinction Between Public Company And Private Company
Advantages Of Company Form Of Organization

Advantages Of Company Form Of Organization

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The company form of organization provides the following advantages:

1. Huge Amount Of Capital
A public company can collect huge amount of capital from its unlimited number of shareholders for large- scale enterprises.

2. Limited Liability
The members or shareholders of a company enjoy the advantage of limited liability. They can not be called upon to pay anything more than the face value of the shares held by them.

3. Permanent Existence
A company has permanent existence. Its life does not depend on the life of its members.

4. Transferability Of Shares
In a public company, the shares of a member can easily be transferred without the consent of other members.

5. Democratic Management
A company management is a democratic in nature, it is managed by elected representatives of its members, which are called 'directors' and their group is called 'Board Of Directors'.

6. Advantages Of Large Scale Of Business
Generally, a joint stock company is a large scale organization, therefore, it enjoys the advantages of large scale in every area of business.

Related Topics
Distinction Between Public Company And Private Company
Company Promoters And Their Functions

Distinction Between Public Company And Private Company

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Following are the main differences between public company and private company.

1. Number Of Members
Public company requires minimum seven members and maximum unlimited. Private company needs at least one member for its formation but can not exceed fifty.

2. Issue Of Prospectus
Public company issues a prospectus for inviting public to subscribe its shares or debentures. Private company can not issue prospects to invite public for subscription of its shares or debentures.

3. Restriction On Share Transfer
In public company, there is no restriction on the transfer of shares. In private company, no member is allowed to transfer his/her shares without the consent of the directors of the company.

4. Commencement Of Business
Public company can commence business only after receiving the certificate for the commencement of business. Private company can commence business after getting certificate of incorporation from the Company Registrar.

5. Allotment Of Shares
A public company can allot its shares only after receiving the amount of minimum subscription. A private company can allot its shares as and when directors desire to do so after the incorporation.

6. Statutory Meeting
Statutory meeting must be held and statutory reports must be sent to the Registrar as well as shareholder of the company in public company. It is neither required to hold statutory meeting nor file and issue statutory report in private company.

7. Legal Formalities
A public company has to fulfill more legal formalities. A private company is required to observe a less number of legal formalities.

Related Topics
Advantages Of Company Form Of Organization
Company Promoters And Their Functions

Types Of Companies

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There are different types of company, which can be classified on the basis of formation, liability, ownership, domicile and control.

1. Types Of Companies On The Basis Of Formation Or Incorporation

a. Chartered Companies
Companies which are incorporated under special charter or proclamation issued by the head of state, are known as chartered companies. The Bank Of England, The East India Company, Chartered Bank etc. are the examples of chartered companies.

b. Statutory Companies
Companies which are formed or incorporated by a special act of parliament, are known as statutory companies. The activities of such companies are governed by their respective acts and are not required to have any Memorandum or Articles Of Association.

c. Registered Companies
Registered companies are those companies which are formed by registration under the Company Act. Registered companies may be divided into two categories.

* Private Company
A company is said to be a private company which by its Memorandum of Association restricts the right of its members to transfer shares, limits the number of its members and does not invite the public to subscribe its shares or debentures.
* Public Company
A company, which is not private, is known as public company. It needs minimum seven persons for its registration and maximum to the limit of its registered capital. There is no restriction on issue or transfer of its shares and this type of company can invite the public to purchase its shares and debentures.

2. Types Of Companies On The Basis Of Liability
Registered companies are divided into two types, namely, companies having limited liability and companies having unlimited liability.

a. Companies Having Limited Liability
This liability can be limited in two ways:
* Liability Limited By Shares
These are those companies in which the capital is divided into shares and liability of members (share holders) is limited to the extent of face value of shares held by them. This is the most popular class of company.
* Liability Limited By Guarantee
These are such companies where shareholders promise to pay a fixed amount to meet the liabilities of the company in the case of liquidation.

b. Companies Having Unlimited Liability
A company not having any limit on the liability of its members as in the case of a partnership or sole trading concern is an unlimited company. If such a company goes into liquidation, the members can be called upon to pay an unlimited amount even from their private properties to meet the claim of the creditors of the company.

3. Types Of Companies On The Basis Of Ownership

a. Government Companies
A government company is a company in which at least 51% of the paid up capital has been subscribed by the government.

b. Non-government Companies
If the government does not subscribe a minimum 51% of the paid up capital, the company will be a non-government company.

4. Types Of Companies On The Basis Of Domicile

a. National Companies
A company, which is registered in a country by restricting its area of operations within the national boundary of such country is known as a national company.

b. Foreign Companies
A foreign company is a company having business in a country, but not registered in that country.

c. Multinational Companies
Multinational companies have their presence and business in two or more countries. In other words, a company, which carries on business activities in more than one country, is known as multinational company.

5. Types Of Companies On The Basis Of Control

a. Holding Companies
A holding company is a company, which holds all, or majority of the share capital in one or more companies so as to have a controlling interest in such companies.

b. Subsidiary Company
A company, which operates its business under the control of another company (i.e holding company), is known as a subsidiary company.

Related Topics
Meaning And Concept Of Company
Characteristics Of A Company

Characteristics Of A Company

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Following are the main characteristics of a company

1. Legal Entity
A company is an artificial person created by law. So, it has a separate legal entity from its members. It can hold and deal with any type of property of which it is owner in any way like, can enter into contracts, open bank account in its own name, sue and be sued in its name and capacity.

2. Perpetual Succession
Joint stock company is a corporate body. It acquires a separate legal personality difference from its member with a common seal. It does not depend upon the existence of its members. It means company is not at all affected by the death, lunacy or bankruptcy of its members or shareholders. The shareholders may come or go but the company goes on forever. Only law can terminate its existence.

3. Limited Liability
The liabilities of shareholders of the company is limited up to their capital investment only. The liability of the shareholders in the public limited company is limited to the extent of the amount of share, they have subscribed. The shareholders are not liable for the payment of excess claim of the creditors even if capital of the company becomes insufficient.

                          Also read: Meaning And Concept Of Company

4. Common Seal
However, a company being artificial person, it can not sign on documents like natural person. Therefore, a common seal is used as a substitute of signature. The common seal affixed on all documents of the company.

5. Transferability Of Share Capital
The shares of a company are freely transferable from one person to another person except in case of private companies.

                        Also read: Types Of Companies

6. Separation Of Ownership And Management
Every member or shareholder, who is real owner of the company can not take active part in day-to-day management of the company. It is managed and controlled by a board of directors.

7. Maintenance Of Books Of Accounts
A company has to keep and maintain a prescribed set of accounting books and any failure in this regard attracts penalties.

8. Audit Of Account And Publication Of Financial Statements
It is compulsory for each and every company to get its accounts to be audited. A joint stock company has to publish its financial statement at the end of every fiscal year.

Meaning And Concept Of Company

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Company is the most popular form of business organization. An increase in the size and volume of business has made it more difficult for sole trader or a partnership firm to run their business effectively because of lack of resources and technical know-how. Further, these two forms of business suffer from unlimited liability as well as absence of continuity of existence. In order to remove these limitations, a new form of business is developed called a "joint Stock Company". A joint stock company is popularly known as "Company" or a "Corporation".

A company in common language means group of persons associated together for some common purpose voluntarily. It is an artificial being, invisible, intangible and existing only in contemplation of law. A company is a voluntary association of persons formed for the purpose of some business for profit with common capital, divisible into transferable shares, possessing a corporate legal entity and a common seal. Company collects capital by issuing shares to promoters and general public. Share of public limited company is easily transferable from one person to another. The company is managed by a group of members called "Board Of Directors" elected by the members or shareholders.

Related Topics
Characteristics Of A company
Types Of Companies