Secretarial Practice चिटणिसाची कार्यपद्धती

Quick summary

Corporate finance deals with how a company raises, manages and uses funds. This chapter explains the meaning and importance of corporate finance, the two types of capital needs — fixed capital and working capital — and capital structure, its components and the distinction between fixed and working capital.

Key points

• Finance is the lifeblood of business. Henry Ford: "Money is an arm or leg — use it or lose it."
• Corporate finance = finance relating to companies: raising funds, investing them wisely and managing them to maximise value for shareholders.
• Importance: starting a business, expansion and growth, buying fixed assets, meeting day-to-day expenses, modernisation, research, meeting contingencies, smooth running, increasing efficiency and goodwill.
• Fixed capital: long-term funds invested in fixed assets — land, building, machinery, furniture. Used for a long time, not for resale.
• Factors affecting fixed capital: nature of business, size, scale of operations, technology, diversification, growth prospects.
• Working capital: funds needed for day-to-day operations — raw material, wages, rent, stock, debtors. Gross working capital = total current assets; net working capital = current assets − current liabilities.
• Factors affecting working capital: nature and size of business, production cycle, credit policy, seasonal demand, availability of raw material, growth.
• Capital structure: the mix of owned capital (equity shares, preference shares, retained earnings) and borrowed capital (debentures, loans, deposits) in the total long-term funds.
• A good capital structure is simple, flexible, cost-effective, gives control to owners, ensures liquidity and keeps risk low.

Important terms

• Owned capital – funds provided by owners (shares, retained earnings).
• Borrowed capital – funds borrowed from outsiders (debentures, loans).
• Gross working capital – total current assets.
• Net working capital – current assets minus current liabilities.

Formats and formulas

• Net Working Capital = Current Assets − Current Liabilities
• Capital structure = Equity share capital + Preference share capital + Retained earnings + Long-term borrowed funds

5 important questions

Q1. Define corporate finance and explain its importance (any four points).

Raising and managing funds of a company. Importance: starting business, buying fixed assets, meeting daily expenses, expansion.

Q2. What is fixed capital? State factors determining it.

Long-term funds invested in fixed assets. Factors: nature of business, size, technology, scale of operations.

Q3. Explain working capital and its factors.

Funds for day-to-day operations. Factors: nature of business, production cycle, credit policy, seasonal demand.

Q4. What is capital structure? State its components.

The mix of owned and borrowed long-term funds: equity shares, preference shares, retained earnings, debentures and long-term loans.

Q5. Distinguish between fixed capital and working capital (three points).

Purpose, period and sources — see the table above.

Exam tip

Distinction questions carry 4 marks — write in table form with 'Basis' as the first column.

Quick summary

A company needs funds from different sources at different times. This chapter explains sources of owned capital (shares and retained earnings) and borrowed capital (debentures, deposits, bonds, ADR/GDR, commercial banks, financial institutions and trade credit), with their merits and limitations.

Key points

• Finance is needed at promotion, organisation and regular operation stages.
• Owned capital belongs to owners, has no fixed repayment and gives ownership rights.
• Equity shares: owners of the company; voting rights; dividend not fixed; bear maximum risk. Preference shares: preference in dividend (fixed rate) and repayment of capital; limited voting rights. Types of preference shares: cumulative/non-cumulative, participating/non-participating, convertible/non-convertible, redeemable.
• Retained earnings (ploughing back of profits): part of profit kept in business; cheapest internal source; no cost of issue; but shareholders may get less dividend.
• Borrowed capital: must be repaid; interest is payable whether there is profit or not.
• Debentures: acknowledgement of debt under the company's seal; fixed interest; no voting rights; can be secured, convertible, redeemable.
• Deposits: short-term funds accepted from members/public (6 to 36 months).
• Bonds: debt instruments, including zero-coupon or deep discount bonds.
• ADR/GDR: instruments to raise funds from foreign investors — ADRs in the USA, GDRs in other world markets (e.g., Luxembourg, London).
• Commercial banks: loans, cash credit, overdraft, bill discounting. Financial institutions: IFCI, IDBI, SIDBI, LIC, state financial corporations give long-term loans.
• Trade credit: credit given by suppliers for buying goods; short-term.

Important terms

• Ploughing back of profits – reinvesting profit in the business.
• ADR – American Depository Receipt.
• GDR – Global Depository Receipt.
• Trade credit – credit allowed by suppliers.

Formats and formulas

5 important questions

Q1. Explain any four features of equity shares.

Owners of the company; voting rights; dividend not fixed; highest risk and permanent capital.

Q2. What are retained earnings? State two merits.

Part of profit kept back in the business. Merits: cheapest source with no issue cost; no dilution of control.

Q3. Explain ADR and GDR.

Depository receipts issued abroad against Indian company shares — ADR traded in the USA, GDR in other international markets — to raise foreign capital.

Q4. Distinguish between shares and debentures (any four points).

Owner vs creditor; dividend vs fixed interest; voting rights vs none; repaid at winding up vs repaid after fixed period.

Q5. Explain trade credit.

Credit given by suppliers allowing the company to pay for goods later; a convenient short-term source of finance.

Exam tip

Learn 4 merits and 4 limitations for each source — 'explain merits of' questions are common.

Quick summary

This chapter covers how a company issues shares and related secretarial work: classification of share capital, methods of issue (public issue, rights and bonus issue, employee schemes, private placement), allotment of shares, share certificate, calls, forfeiture, surrender, transfer and transmission of shares.

Key points

• Share capital: authorised, issued, subscribed, called-up, paid-up.
• Public issue methods: fixed price issue and book-building (price discovered through bids within a price band). IPO = first issue to the public; FPO = further issue by a listed company.
• Rights issue: new shares offered first to existing equity shareholders in proportion to their holding; they may accept, renounce or reject. Minimum subscription of 90% applies.
• Bonus shares: fully paid shares issued free to existing shareholders out of profits/reserves; cannot be withdrawn once announced; cannot be renounced; no minimum subscription.
• Employee schemes: ESOS (option to buy shares later at a fixed price), ESPS (purchase of shares by employees), SARS (benefit of rise in share value), sweat equity shares (issued to directors/employees for know-how or value addition).
• Private placement: shares offered to a selected group of persons; preferential allotment to selected persons at a specific price.
• Allotment requires minimum subscription (90% for public issue) and SEBI/stock exchange compliance; share certificates are issued within two months of allotment (demat entries by depository).
• Share certificate: prima facie evidence of title to shares.
• Calls: demand for unpaid amount on shares. Forfeiture: cancellation of shares for non-payment of calls. Surrender: shareholder voluntarily returns shares.
• Transfer: voluntary change of ownership by a deed (sale or gift). Transmission: change by operation of law (death, insolvency).

Important terms

• Book building – process of fixing issue price on the basis of bids.
• Renunciation – giving up rights shares in favour of another person.
• Sweat equity – shares issued at a discount or for consideration other than cash for know-how.
• Transmission – passing of shares due to death or insolvency.

Formats and formulas

5 important questions

Q1. What is a rights issue? State its features.

Offer of new shares to existing shareholders in proportion to their holdings. They may accept, renounce or reject; 90% minimum subscription is needed.

Q2. Explain bonus shares.

Fully paid shares issued free of cost to existing equity shareholders out of reserves; they cannot be renounced or withdrawn.

Q3. Explain ESOS and sweat equity shares.

ESOS gives employees the option to buy shares at a future date at a fixed price. Sweat equity shares are issued to employees/directors for providing know-how or value addition.

Q4. Distinguish between transfer and transmission of shares.

Transfer is voluntary and needs a transfer deed and stamp duty; transmission happens by law on death or insolvency, without deed or stamp duty.

Q5. What is a share certificate?

A document under the company's seal stating that the holder owns a specified number of shares; prima facie evidence of title.

Exam tip

Practise drafting the difference tables (rights vs bonus; transfer vs transmission) — they are 4-mark questions.

Quick summary

Debentures are a popular way for companies to borrow long-term funds. This chapter explains the legal provisions for issuing debentures under the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014, SEBI's requirements, the procedure for issue of debentures, and the role of debenture trustees.

Key points

• A debenture is an acknowledgement of debt; debenture holders are creditors and get fixed interest.
• Companies Act, 2013 provisions: no voting rights; can be secured/unsecured, convertible/non-convertible (issue of convertible debentures needs a special resolution); all debentures are redeemable; interest and redemption as per terms; debenture certificate within 6 months of allotment.
• Debenture Redemption Reserve (DRR) is created out of profits available for dividend, to be used only for redemption. (Amendment Rules 2019 removed DRR for listed companies, NBFCs and housing finance companies.)
• Debenture trustees must be appointed if a prospectus is issued or the offer is made to more than 500 persons. They protect the interests of debenture holders.
• Secured debentures must be secured by a charge on the company's assets.
• SEBI requirements: minimum subscription for public issue of debentures is 75% of the base issue size; if not received, money is refunded within 12 days of closure; over-subscription can be retained up to 100% of base issue size; credit rating is required; listing on a recognised stock exchange.
• Procedure (secretary's role): Board resolution → special resolution if needed → appoint debenture trustees and credit rating → prepare and file prospectus → apply for listing → open issue, receive applications → allotment → issue debenture certificates / credit demat accounts → register of debenture holders.

Important terms

• Debenture trustee – person/institution that protects debenture holders' interests.
• DRR – reserve kept from profits to repay debentures.
• Convertible debenture – debenture that can be changed into equity shares.
• Base issue size – the basic amount the company plans to raise.

Formats and formulas

• Minimum subscription (debentures, public issue) = 75% of base issue size
• Debenture certificate: within 6 months of allotment
• Trustees compulsory: offer to more than 500 persons or by prospectus

5 important questions

Q1. State any four provisions of the Companies Act, 2013 for issue of debentures.

No voting rights; special resolution for convertible debentures; debenture certificate within 6 months; creation of DRR (where applicable).

Q2. When must debenture trustees be appointed? State their role.

When a prospectus is issued or the offer is made to more than 500 persons. They protect debenture holders, check security and ensure timely interest and repayment.

Q3. What is the minimum subscription for a public issue of debentures?

75% of the base issue size; otherwise the money is refunded within 12 days of closure.

Q4. Explain the procedure for issue of debentures.

Board resolution, appointment of trustees and credit rating, prospectus, listing application, receiving applications, allotment, issue of certificates or demat credit.

Q5. What is Debenture Redemption Reserve?

A reserve created out of profits available for dividend, used only for redeeming debentures.

Exam tip

Numbers (6 months, 500 persons, 75%, 12 days) are favourite fill-in-the-blank items — revise them.

Quick summary

Deposits are a cheap short-term source of funds for a company, with no dilution of control. This chapter explains which companies can accept deposits, the terms and conditions under the Companies Act, 2013 and its rules, and the procedure for accepting deposits from the public and from members.

Key points

• Companies that can accept deposits: private company (from members, directors, relatives of directors), public company other than eligible company (from members), eligible public company (from members and public), government company.
• Eligible public company: net worth of at least ₹100 crore or turnover of at least ₹500 crore, with prior approval of shareholders by special resolution.
• Limits (of paid-up share capital + free reserves): private company — up to 100% from members; other public company — up to 35% from members; eligible public company — up to 10% from members and 25% from public; government company — up to 35% from public.
• Period: not less than 6 months and not more than 36 months.
• A circular or advertisement must be issued and filed with the Registrar; it states financial position, secured/unsecured portion, credit rating (for eligible companies), scheme details, deposit trustee and past dues.
• Deposit insurance must be taken at least 30 days before issuing the circular.
• For secured deposits, a charge on tangible assets is created within 30 days in favour of deposit trustees.
• Company must keep a register of deposits, maintain a deposit repayment reserve, and file returns.
• Default in repayment attracts heavy penalties.

Important terms

• Deposit – money received by a company as a loan for a fixed period with interest.
• Net worth – paid-up capital + free reserves + securities premium − accumulated losses and deferred expenses.
• Deposit trustee – person who protects depositors' interests in secured deposits.
• Deposit receipt – document given to the depositor.

Formats and formulas

(percent of paid-up share capital + free reserves)

5 important questions

Q1. What is an eligible public company?

A public company with net worth of ₹100 crore or more, or turnover of ₹500 crore or more, which has passed a special resolution to accept public deposits.

Q2. State the period for which deposits can be accepted.

Not less than 6 months and not more than 36 months.

Q3. State the limits of deposits for an eligible public company.

Up to 10% of paid-up share capital and free reserves from members and 25% from the public.

Q4. What does a circular or advertisement inviting deposits contain?

Financial position, secured and unsecured portion, credit rating, details of the scheme, name of deposit trustee, and dues of earlier deposits.

Q5. State any two merits of deposits for a company.

Cheaper than other sources; no dilution of control since depositors have no voting rights.

Exam tip

Make a small chart of company type and limits — it helps answer 'fill in the blanks' and 'state limits' quickly.

Quick summary

Members (shareholders) are the owners of a company, and the Company Secretary is the link between the Board of Directors and the members. This chapter explains the precautions a Secretary must take while writing to members, the occasions for such letters, and how to draft the main letters asked in the board exam.

Key points

• The Secretary communicates the decisions of the Board to members and answers their queries.
• Precautions: correct information, lucid (simple) language, prompt response, courtesy and politeness, legal compliance (Companies Act, SEBI rules), confidentiality, consistency with company policy, proper format and presentation, brevity.
• Occasions for correspondence: allotment letter, regret letter, issue of share certificate, bonus issue, rights issue, payment of dividend, dividend mandate, approval or refusal of transfer, notice and agenda of general meeting, loss of share certificate, transmission of shares, replies to queries.
• Important specimen letters in the textbook:
• Letter for issue of share certificate (certificate under common seal, signed by at least two directors and countersigned by the Secretary).
• Letter for payment of dividend — by dividend warrant or electronic payment (ECS/NEFT).
• Letter for issue of bonus shares.
• Reply to a member's query about low rate of dividend (give genuine reasons like expansion, lower profit, need to build reserves; assure better future returns).
• Letters must mention folio number, number of shares, distinctive numbers and certificate numbers where relevant.

Important terms

• Folio number – member's account number in the Register of Members.
• Dividend warrant – an order on the company's bank to pay dividend.
• Distinctive numbers – serial numbers of shares held.
• Dividend mandate – member's instruction to pay dividend to his bank account.

Formats and formulas

Parts of a business letter:

1. Letterhead (name, address, CIN, phone, email of company)
2. Reference number and date
3. Inside address (member's name, address, folio number)
4. Subject
5. Salutation (Dear Sir/Madam)
6. Body – opening, main message, closing
7. Complimentary close (Yours faithfully)
8. Signature, name and designation (Company Secretary)
9. Enclosures, if any

5 important questions

Q1. Explain any four precautions to be taken by the Secretary while corresponding with members.

Give correct and updated information; use simple language; reply promptly; be polite and follow the law.

Q2. State any six occasions when the Secretary writes to members.

Issue of share certificate, payment of dividend, bonus issue, rights issue, refusal of transfer, notice of general meeting.

Q3. Draft a letter to a shareholder informing him about issue of share certificate.

Mention allotment details (number of shares, distinctive numbers, folio), state that the certificate is enclosed/dispatched, ask him to keep it safely and acknowledge receipt; signed by the Company Secretary.

Q4. Draft a reply to a member complaining about low rate of dividend.

Thank him for his interest; explain reasons (lower profit, expansion plans, transfer to reserves); assure that future prospects are good; express hope for his continued support.

Q5. Why is the Secretary called a link between Board and members?

Because he conveys Board decisions to members and members' queries and complaints to the Board through correspondence.

Exam tip

Board letters carry marks for layout: letterhead, reference number, date, inside address, subject, salutation, body, complimentary close, signature with designation, and enclosures.

Quick summary

Debentureholders are creditors who lend money to the company. The Secretary keeps them informed about allotment, interest, conversion and redemption. This chapter explains the precautions while writing to debentureholders, the occasions for correspondence and the drafting of specimen letters.

Key points

• Debenture is an acknowledgement of debt; debentureholders get fixed interest and repayment on maturity, and have no voting rights.
• The Secretary must maintain the company's image and the confidence of debentureholders.
• Precautions: correct and complete information, simple and clear language, prompt reply, courtesy, compliance with the Companies Act, SEBI rules and terms of issue, mention of certificate and folio numbers, confidentiality.
• Occasions for correspondence (textbook):
• informing the applicant about allotment of debentures;
• informing about payment of interest through an interest warrant or electronic payment;
• conversion of debentures into equity shares;
• redemption of debentures.
• Letter of allotment states: number of debentures applied for and allotted, distinctive numbers, amount payable, and that the debenture certificate will be given in exchange for this letter.
• Interest letter states: rate of interest, period, gross amount, TDS deducted, net amount, warrant number or bank details.
• Conversion letter states: conversion ratio, number of equity shares to be allotted, date, and that new share certificates or demat credit will follow.
• Redemption letter states: date of redemption, amount payable, mode of payment, and request to surrender debenture certificates.

Important terms

• Interest warrant – instrument sent for payment of debenture interest.
• TDS – tax deducted at source from interest.
• Conversion – changing debentures into equity shares as per terms of issue.
• Redemption – repayment of debentures.

Formats and formulas

• Net interest = Gross interest − TDS
• Gross interest = Face value × Number of debentures × Rate × Period

Letter layout: Letterhead → Ref. no. and date → Inside address → Subject → Salutation → Body → Yours faithfully → Company Secretary → Enclosure.

5 important questions

Q1. State any four precautions while corresponding with debentureholders.

Correct information; simple language; prompt reply; follow legal rules and terms of issue.

Q2. State the circumstances under which a Secretary writes to debentureholders.

Allotment of debentures, payment of interest, conversion into equity shares and redemption of debentures.

Q3. Draft a letter informing a debentureholder about payment of interest by electronic mode.

State the rate and period of interest, gross amount, TDS and net amount credited to his registered bank account with date; request him to check and contact for discrepancy.

Q4. Draft a letter to debentureholders about redemption of debentures.

Inform the date of redemption and amount payable, ask them to surrender the debenture certificates duly discharged, and state the mode of payment.

Q5. What details does a letter of allotment of debentures contain?

Number of debentures applied for and allotted, distinctive numbers, amount due, and that it is to be exchanged for the debenture certificate.

Exam tip

Board letters carry marks for layout: letterhead, reference number, date, inside address, subject, salutation, body, complimentary close, signature with designation, and enclosures.

Quick summary

Deposits are short-term funds that a company accepts from the public or its members for 6 to 36 months at a fixed rate of interest. The Secretary corresponds with depositors to thank them, inform them about interest, renewal and repayment. This chapter covers precautions, occasions and specimen letters to depositors.

Key points

• A company cannot accept deposits for less than 6 months or more than 36 months.
• Interest is payable at a fixed rate at regular intervals; the deposit is repaid on maturity or renewed.
• Precautions: correct and up-to-date information, simple language, promptness, courtesy, legal compliance (Companies Act, Acceptance of Deposits Rules), maintaining trust and the company's image, confidentiality of depositor's details.
• Occasions for correspondence (textbook):
• thanking depositors for depositing money and showing faith in the company (deposit receipt enclosed);
• intimation about payment of interest through an interest warrant or electronic payment;
• renewal of deposits;
• repayment of deposit on maturity.
• Letter of thanks mentions amount, date, period, rate of interest, receipt number and maturity date.
• Renewal letter informs the maturity date, renewal terms (rate, period) and asks for the depositor's consent with the old receipt.
• Repayment letter informs the maturity date and amount, and asks the depositor to return the deposit receipt duly discharged for payment.

Important terms

• Deposit receipt – document given to the depositor as proof of deposit.
• Maturity – date on which the deposit becomes repayable.
• Renewal – continuing the deposit for a further period.
• Discharged receipt – receipt signed by the depositor acknowledging repayment.

Formats and formulas

• Interest = Deposit amount × Rate × Period
• Net interest = Interest − TDS

Letter layout: Letterhead → Ref. no. and date → Inside address → Subject → Salutation → Body → Yours faithfully → Company Secretary → Enclosure.

5 important questions

Q1. Why does a Secretary correspond with depositors?

To thank them, to inform about interest payments, renewal and repayment of deposits, and to maintain their trust in the company.

Q2. State any four precautions while corresponding with depositors.

Correct information, simple language, prompt reply, compliance with deposit rules.

Q3. Draft a letter thanking a depositor for depositing money with the company.

Thank the depositor, give amount, date, period, rate of interest and maturity date, enclose the deposit receipt and ask him to keep it safely.

Q4. Draft a letter informing a depositor about renewal of deposit.

State the maturity date, offer renewal at the current rate for a stated period, and ask him to send consent and the old receipt.

Q5. Draft a letter informing a depositor about repayment on maturity.

Inform maturity date and amount, ask him to return the discharged deposit receipt, and state the mode of payment (cheque or bank transfer).

Exam tip

Board letters carry marks for layout: letterhead, reference number, date, inside address, subject, salutation, body, complimentary close, signature with designation, and enclosures.

Quick summary

Securities can be held in physical form (certificates) or in electronic (dematerialised) form. The depository system holds shares and other securities electronically, like a bank holds money. This chapter explains its meaning, importance, benefits, constituents, key terms, how it works (demat, IPO, transfer) and India's two depositories, NSDL and CDSL.

Key points

• Depository system: securities are held in electronic form in an account, and transfers happen by book entry — also called scripless trading.
• In India it was introduced by the Depositories Act, 1996; two depositories — NSDL and CDSL — work under a multi-depository system. The world's first depository was set up in Germany in 1947.
• Importance and benefits: no risk of loss, theft, forgery or damage of certificates; quick transfer; no stamp duty on transfer of demat securities; lower paperwork and cost; faster credit of bonus/rights/dividends; easy pledge and loans; helps attract foreign investment.
• Constituents: Depository (holds securities electronically, works through DPs), Depository Participant (DP) (agent registered with SEBI, links investor and depository — banks, brokers), Beneficial Owner (BO) (investor whose name is recorded), Issuer company.
• Terms: demat account, dematerialisation, rematerialisation, ISIN (International Securities Identification Number), DIS (Delivery Instruction Slip), DRF (Dematerialisation Request Form), pledge.
• Demat process: open demat account with DP → submit DRF with physical certificates → DP sends to company/RTA → company verifies and informs depository → depository credits the BO's account.
• In an IPO, the investor gives DP and client ID in the application; allotted shares are credited directly to the demat account.
• Transfer: off-market (direct between two persons through DIS) and market (through broker and clearing house on the stock exchange).

Important terms

• Dematerialisation – converting physical certificates into electronic form.
• Rematerialisation – converting electronic holdings back into physical form.
• Beneficial owner – the investor who actually owns the securities.
• ISIN – unique 12-character code for each security.

Important dates and people

• 1947 – world's first depository in Germany.
• 1996 – Depositories Act; NSDL starts in India.
• 1999 – CDSL set up.

5 important questions

Q1. What is the depository system?

A system in which securities are held in electronic form in demat accounts and transferred by book entries, without physical certificates.

Q2. State any four benefits of the depository system.

No loss, theft or forgery of certificates; quick transfer; no stamp duty on transfer; quick credit of corporate benefits.

Q3. Explain the constituents of the depository system.

Depository (NSDL/CDSL), Depository Participant (agent), Beneficial Owner (investor) and Issuer Company.

Q4. Explain the process of dematerialisation.

Open a demat account, fill a DRF and submit certificates to the DP, DP forwards to the company, company confirms to the depository, holdings are credited to the account.

Q5. Distinguish between NSDL and CDSL (two points).

NSDL is promoted by IDBI, UTI and NSE and set up in 1996; CDSL is promoted by BSE and set up in 1999.

Exam tip

Draw a simple flow chart: Investor → DP → Company/RTA → Depository → Investor's account — it fetches easy marks.

Quick summary

Shareholders invest to earn a share of the profits, called dividend, while lenders like debentureholders and depositors earn interest. This chapter explains the meaning and features of dividend, legal provisions on its source, declaration and payment, unpaid and unclaimed dividend, modes of payment, interim dividend, and interest.

Key points

• 'Dividend' comes from the Latin word 'Dividendum' — that which is to be divided. It is the part of distributable profit paid to shareholders.
• Features: paid out of profits; declared by the company in general meeting (final) or by Board (interim); paid only to registered shareholders; preference shareholders are paid before equity shareholders; recommended by Board, cannot exceed Board's recommendation.
• Sources of dividend: current year's profit (after depreciation), profits of previous years, money provided by government for dividend.
• Dividend is declared at the Annual General Meeting on the Board's recommendation; listed companies inform stock exchanges and give notice of book closure at least 7 working days before.
• Payment provisions: paid in cash (cheque, warrant or electronic mode — ECS/NEFT), not in kind; to the first-named joint holder; within 30 days of declaration.
• Unpaid/unclaimed dividend: transferred to an Unpaid Dividend Account in a scheduled bank within 7 days after the 30-day period (i.e., within 37 days of declaration); details are put on the website within 90 days; later transferred to the Investor Education and Protection Fund if not claimed.
• Interim dividend: declared by the Board between two AGMs, out of profits of the current year.
• Interest: fixed return on borrowed funds (debentures, deposits, loans); a charge on profit, payable even in case of loss.

Important terms

• Book closure – period when the Register of Members is closed to decide who gets dividend.
• Final dividend – declared at the AGM.
• Interim dividend – declared by the Board during the year.
• Dividend warrant – order to the company's bank to pay dividend.

Formats and formulas

• Dividend amount = Number of shares × Face value × Rate of dividend
• Interest = Face value of debentures × Rate × Period

5 important questions

Q1. Define dividend and state its features.

Part of distributable profits paid to shareholders. Features: from profits only, declared by members on Board's recommendation, paid in cash, paid to registered holders.

Q2. State the legal provisions for payment of dividend.

In cash or electronic mode, to registered shareholders (first joint holder), within 30 days of declaration, preference before equity.

Q3. What is unpaid dividend? How is it treated?

Dividend not paid or claimed within 30 days. It is transferred to an Unpaid Dividend Account in a scheduled bank within the next 7 days and details are published on the website.

Q4. A shareholder holds 200 shares of ₹10 each. Dividend is declared at 15%. Find the dividend.

200 × 10 × 15/100 = ₹300.

Q5. Distinguish between dividend and interest (any three points).

Dividend goes to owners, interest to creditors; dividend is an appropriation, interest a charge; dividend is paid only from profit, interest even in loss.

Exam tip

Remember the three time limits: 30 days (payment), 7 days (transfer to Unpaid Dividend A/c), 90 days (website statement).

Quick summary

The financial market brings together investors who have surplus funds and borrowers who need funds. This chapter explains the meaning and functions of the financial market and its two types — the money market (short-term funds) and the capital market (long-term funds) — with their features, participants, instruments and types, and the difference between primary and secondary markets.

Key points

• Financial market: a market where financial assets (shares, bonds, bills) are created and traded, linking savers and borrowers.
• Functions: mobilisation of savings, price discovery of securities, liquidity, reducing cost of transactions, efficient use of funds, capital formation and economic development.
• Money market: market for lending and borrowing of short-term funds (up to one year). Features: short-term, no fixed place, dealings through phone/electronic means, large amounts, highly liquid, low risk.
• Sub-markets/instruments of money market: call money market, certificate of deposit (CD), treasury bills (T-bills), commercial bills, commercial paper (CP).
• Participants: RBI (most important — regulates money supply, issues government securities), central and state governments (issue T-bills through RBI), commercial banks, financial institutions, corporates, mutual funds.
• Capital market: market for medium and long-term funds. Instruments: equity shares, preference shares, debentures/bonds, government securities, mutual fund units.
• Types of capital market: gilt-edged (government securities) market and industrial securities market, which has the primary market (new issues) and secondary market (stock exchanges for existing securities).
• Capital market is regulated by SEBI; money market by RBI.

Important terms

• Treasury bill – short-term zero-risk instrument issued by RBI for the government.
• Commercial paper – unsecured short-term promissory note issued by large companies.
• Certificate of deposit – negotiable time deposit issued by banks.
• Call money – very short-term inter-bank loans.

Formats and formulas

5 important questions

Q1. What is a financial market? State its functions.

A market where financial assets are traded. Functions: mobilising savings, price discovery, liquidity, low transaction cost.

Q2. Explain any four money market instruments.

Treasury bills, commercial paper, certificates of deposit and commercial bills.

Q3. Explain the role of RBI in the money market.

It is the main participant and regulator; it controls money supply, implements monetary policy and issues government securities.

Q4. Distinguish between money market and capital market.

Period, instruments, regulator and risk — see the table above.

Q5. Distinguish between primary and secondary market.

Primary deals in new issues bought from the company; secondary deals in existing securities traded among investors on stock exchanges.

Exam tip

Two distinction tables in this chapter are almost always asked — learn four points for each.

Quick summary

A stock exchange is an organised market where existing (second-hand) securities of listed companies are bought and sold. This chapter explains its meaning and functions, the major stock exchanges in India (BSE and NSE), important terms used in stock markets, and the Securities and Exchange Board of India (SEBI) and its functions.

Key points

• The stock market is part of the capital market; only listed securities can be traded.
• Securities Contracts (Regulation) Act, 1956 defines a stock exchange as an association or body that assists, regulates or controls the business of buying, selling or dealing in securities.
• London Stock Exchange (1571) is the world's oldest; Bombay Stock Exchange (1875) is India's and Asia's oldest, started as 'The Native Share and Stock Brokers' Association', on Dalal Street, Mumbai. Its index is the SENSEX (30 companies).
• NSE was set up in 1992, recognised in 1993 and started trading in 1994; first fully automated screen-based trading; index NIFTY (launched 1996).
• Functions: mobilisation of savings, capital formation, pricing of securities, liquidity, safety of transactions, contributes to economic growth, spreads equity cult, scope for speculation, barometer of the economy.
• Terms: broker, jobber, bull (expects rise and buys), bear (expects fall and sells), stag (applies for new issues to sell quickly at profit), lame duck, blue-chip shares, day trading, stop-loss order, Sensex, Nifty.
• SEBI was established in 1992 under the SEBI Act, 1992 (headquarters Mumbai) as the regulator of capital markets.
• SEBI functions: protective (protect investors, stop insider trading and price rigging, fair practices), regulatory (register and regulate brokers and intermediaries, mutual funds, takeovers), development (investor education, training intermediaries, promoting fair practices).

Important terms

• Listing – admitting a company's securities for trading on a stock exchange.
• Bull – speculator who buys expecting prices to rise.
• Bear – speculator who sells expecting prices to fall.
• Blue-chip shares – shares of strong, well-known companies.
• Insider trading – trading on secret price-sensitive information.

Important dates and people

• 1571 – London Stock Exchange.
• 1875 – Bombay Stock Exchange.
• 1992 – SEBI Act; NSE set up (trading from 1994).
• 1996 – NIFTY launched.

5 important questions

Q1. What is a stock exchange? Explain any four functions.

An organised market for buying and selling listed securities. Functions: mobilises savings, gives liquidity, fixes fair prices, helps capital formation.

Q2. Write a short note on BSE.

Set up in 1875 in Mumbai (Dalal Street), oldest in Asia, index SENSEX of 30 companies, offers online trading.

Q3. Explain the terms bull and bear.

Bull buys securities expecting prices to rise; bear sells expecting prices to fall, to buy back later cheaper.

Q4. State the functions of SEBI.

Protect investors, regulate stock exchanges and intermediaries, prevent insider trading and price rigging, promote investor education and market development.

Q5. Distinguish between BSE and NSE (two points).

BSE: established 1875, index SENSEX. NSE: established 1992, index NIFTY, first fully automated exchange.

Exam tip

Memorise the years (1571, 1875, 1992) and index names — they are favourite one-mark questions.