Tuesday, April 28, 2015

RBI - Need, Objectives and Functions

RESERVE BANK OF INDIA - Introduction

The Reserve Bank of India is the Central Bank of our country. The Reserve Bank of India is the apex financial institution of the country’s financial system entrusted with the task of control, supervision, promotion, development and planning. Reserve Bank of India came into existence on 1st April, 1935 as per the Reserve Bank of India act 1935. But the bank was nationalised by the government after Independence. It became the public sector bank from 1st January, 1949. Thus, Reserve Bank of India was established as per the Act 1935 and empowerment took place in Banking Regulation Act 1949.

The Reserve Bank of India influences the management of commercial banks through its various policies, directions and regulations. Its role in bank management is quite unique. In fact, the Reserve Bank of India performs the four basic functions of management, viz., planning, organising, directing and controlling in laying a strong foundation for the functioning of commercial banks. Reserve Bank of India has 4 local boards basically in North, South, East and West – Delhi, Chennai, Calcutta, and Mumbai.

Need and Objectives of RBI
The main objectives of the RBI are contained in the preamble of the RBI Act, 1934. It reads ‘Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. RBI keeps importance because it was constituted for the following needs:

Monday, April 27, 2015

Mutual Funds: Meaning, Characteristics, Advantages and Limitations, Types and Significance

Meaning of Mutual Fund
A mutual fund is an investment security type that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash and/or other assets. 
There are certain key characteristics of mutual funds:
a.       Mutual Fund Diversification: Most individual investors are unable to purchase 50 or 60 different issues of stocks. They typically have to rely on a few selections and hope for the best. An investor in a mutual fund gets the advantage of being invested in the entire fund’s portfolio. This helps lower the exposure to problems with any individual issue.
b.      Mutual Fund Professional Management: The fund employs professionals to manage the fund's investments. Most small investors can’t possibly spend their days researching individual stocks or bonds and market trends. By owning a fund, the investors can take advantage of the abilities of the fund’s management team. The fund charges a management fee to cover the cost of management.
c.       Mutual Fund Affordability: Investments in mutual funds can often be opened with small investments. Sometimes the initial investment may be as low as Rs.100, and subsequent investments into the fund may be made with similar small amounts.
d.      Mutual Fund Liquidity - Mutual funds are liquid on every business day. They are sold at their net asset value which is computed on every business day after the close of the markets. The price you receive depends on the value of the securities in the fund
Advantages of Mutual Funds for Investors

Elements of Indian Financial System



Structure of Indian Financial System
The formal financial system comprises financial institutions, financial markets, financial instruments and financial services. These constituents or components of Indian financial system may be briefly discussed as below:

A. Financial Institutions: Financial institutions are the participants in a financial market. They are business organizations dealing in financial resources. They collect resources by accepting deposits from individuals and institutions and lend them to trade, industry and others. They buy and sell financial instruments. They generate financial instruments as well. They deal in financial assets. They accept deposits, grant loans and invest in securities.

Sunday, April 26, 2015

Types of Capital Market: Primary and Secondary Market

Primary Market and Secondary Market
Primary Market (New Issue Market):. A primary market refers to any market where new shares of stock are sold. The primary market is the entry market for companies and investors, where a company or institution that requires initial or additional capital sells its shares or financial instrument to the investors. For example, Initial Public Offering (IPO), public offer, rights issue and bond issue are done on the primary market. The primary market is also unique that the initial buyer is the only person who can exchange the securities for funds. When companies are willing to go for publicly listed on the stock exchange and wants to collect funds from general investors, they first sell their financial instrument in the primary market. Primary market is the first place for trading financial instruments including stocks and bonds.

Mode of raising capital in the Primary market
1.     Public issue/Prospectus : Securities are issued to the general public. This is the most popular method of raising long term fund. In this method securities are offered to the public by issuing prospectus.
2.     Right issue : The equity shares of a company are issued to the existing equity shareholders in the form of right issue. In this issue additional securities are offered to the existing shareholders.
3.     Private placement : Under private placement the shares of a company are sold among the selected group of persons.

Structure of Indian money market and It's instruments

MONEY MARKET INSTRUMENTS (Constituents) or Structure of Indian money Market
The entire money market can be divided into two parts. They are
a)      Organised money market
b)      Unorganized money market.
Organised money markets are also known as authorised money market and unorganized money markets are known as unauthorized money market. Both of these components comprises off several components which are illustrated below with the help of a chart:

After studying above organizational chart of the Indian money market it is necessary to understand various components or sub markets within it. They are explained below:

Merchant Bankers and Underwriters and Financial Services Provided by them

MERCHANT BANKER OR LEAD MANAGERS
Merchant bankers are body corporate who engaged in issue of securities. It acts as manager or advisor or consultant to issuing company. A merchant banker requires compulsory registration under the regulation 3 of SEBI (Merchant Bankers) Regulations, 1992. These activities mainly includes determining the composition of capital structure, compliance with procedural formalities , appointment of registration , listing of securities, arrangement of underwriting , selection of brokers and bankers, publicity and advertisement agent , private placement of securities, advisory services, etc.
The merchant bankers are responsible to make all efforts to protect the interest of investors. The merchant bankers has to exercise due diligence, high standards of integrity, dignity. The merchant bankers are also responsible in providing adequate information without misleading about the applicable regulations and guidelines. It is now mandatory for all public issue s to be managed by merchant bankers functioning as the lead managers.

UNDERWRITER
An underwriter may be an individual, broker, merchant banker, financial institution or banks. The underwriting is an agreement between the issuing company and the assuring party through an agreement to take up shares or debentures or other securities to a specified extent in case public subscription does not amount to the expected level. Thus, in case any short-fall, it has to be made good by underwriting arrangements by the underwriter as per the agreement. 

Financial Market - Meaning, Types and Role

Meaning of Financial Market
A financial market is an institution that facilitates exchange of financial instruments including deposits, loans, corporate stocks, government bonds, etc.

According to Brigham Eugene F. "The place where people and organizations wanting to borrow money, are brought together, with those having surplus funds is called a financial market". This definition makes it clear that a financial market is a place where those who need money and those who have surplus money are brought together. They may come together directly or indirectly. 

Financial market in India performs an important function of mobilization of savings and channelizing them into most productive uses.

Role and Functions of Financial Market
A financial market is of great use for a country as it helps its economy in the following ways

1.       Saving mobilization : Obtaining funds from surplus units such as households, individuals, public sector units, central government, etc and channelizing these funds for productive purposes.

2.       Investments : The financial market plays an important role in arranging to invest funds thus collected in those units which are in need of funds.

Capital Market - Meaning, Importance and Difference

Meaning of Capital Market
Capital Market is generally understood as the market for long-term funds. This market supplies funds for financing the fixed capital requirement of trade and commerce as well as the long-term requirements of the Government. The long-term funds are made available through various instruments such as debentures, preference shares, and common shares. The capital market can be local, regional, national, or international. The capital market is classified into two categories, namely,

Ø  Primary market or new issue market, and
Ø  Secondary market or stock exchange.
As a rule, only when a country’s primary market is alone, it is possible to ensure a good degree of activity in the secondary market because it is the primary market which ensures a continuous flow of securities to the secondary market.

On the contrary, if secondary marker is only active but not transparent and disciplined, it becomes difficult to develop and sustain the flow of equity and related investment in the primary market. This is because the liquidity which the secondary market imparts to such investments in the hands of the investors is adversely affected.

Importance of Capital Market
Capital markets are markets where productive capital is raised and made available for industrial purposes. Importance of Capital Market are mentioned below:

Indian Money Market - Meaning, Features, Essentials and Importance

Meaning of Money Market
The money market is not a well-defined place where the business is transacted as in the case of capital markets where all business is transacted at a formal place, i.e. stock exchange. The money market is basically a telephone market and all the transactions are done through oral communication and are subsequently confirmed by written communication and exchange of relative instruments.
According to the RBI, "The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government.
From the above definition, it is clear that the money market consist of many sub-market such as the inter-bank call money, bill discounting, treasury bills, Certificate of deposits (CDs), Commercial paper (CPs), Repurchase Options/Ready Forward (REPO or RF), Inter-Bank participation certificates (IBPCs), Securitized Debts, Options, Financial Futures, Forward Rate Agreement (FRAs), etc. which collectively constitute the money market.

Features of Money Market
a)      It is a collection of market for following instruments - Call money, notice money, repos, term money, treasury bills, commercial bills, certificate of deposits, commercial papers inter-bank participation certificates, inter-Corporates deposits, swaps, etc.

Qualitative and Quantitative tools of Credit Control

Instruments of Monetary Policy or Credit Control tools:  
The instruments used by the central Bank for controlling the supply of bank money are classified into two categories namely
A)     General Instruments  (Quantitative Credit Control)and
B)      Selective Instruments (Qualitative Credit Control).

A)     The General Instruments of Credit Control:  These instruments are called general because they are uniformly applicable to all commercial banks and in respect of loans given for all purposes. The general instruments are as follows:
                    i.      The Bank rate policy: Bank rate is the official rate at which the central bank of the country rediscounts bills offered by the commercial banks.
When the central bank wants to bring about a reduction in bank credit, it raises the bank rate. The effect is that the commercial banks raise the market rate in order to retain their profit margin. Rise in the market rate brings about a reduction in the volume of bills offered by the customers to the commercial banks. If the volume of bills is less, the amount of money going out from the commercial banks to the people is less i.e.: the supply of money is less.
If the central bank wants to bring about an expansion of Bank credit it lowers the bank rate. The commercial banks can lower the market rate due to which the people offer more bills for discounting and the supply of money increases.
                  ii.      Open Market Operations:  The Central bank enters in to the bond market and purchases or sells government securities for bringing about expansion or reduction of credit.

Monetary Policy In India: Objectives, Importance and Limitations

Monetary Policy:
Monetary policy refers to policy formulated and implemented for achieving the following objectives:
                     i.      Regulating the supply of money including credit money and adjusting it to the needs of the economy
                   ii.      To control the cost of money by regulating the rates of interest.
                  iii.      Directing the supply of money to the required channels in accordance with the plan of priorities prepared by the planning authority.
According to A.G. Hart "A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy."
From the above discussion, it is clear that a monetary policy is related to the availability and cost of money supply in the economy in order to attain certain broad objectives.
Objectives of Monetary Policy: The objectives of a monetary policy in India are similar to the objectives of its five year plans. In a nutshell planning in India aims at growth, stability and social justice. After the Keynesian revolution in economics, many people accepted significance of monetary policy in attaining following objectives.

Stock Exchange and Its Role

Meaning of Stock Exchange
Stock exchange is a specific place, where trading of the securities, is arranged in an organized method. In simple words, it is a place where shares, debentures and bonds (securities) are purchased and sold. The term securities include equity shares, preference shares, debentures, government bonds, etc. including mutual funds.
According to the Securities Contracts (Regulation) Act 1956, the term 'stock exchange' is defined as ''An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities."        
Husband and Dockerary have defined stock exchange as: "Stock exchanges are privately organized market which are used to facilitate trading in securities."
In simple Words, a stock exchange provides a platform or mechanism to, the investors - individuals or institutions to purchase or sell the securities of the companies, Government or semi Government institutions. It is like a commodity market where securities are bought and sold. It is an important constituent of capital market.
From the above discussion, we get the following important features of a stock exchange:

Securities and Exchange Board of India (SEBI) - Structure, Objectives and Role

SECURITIES AND EXCHANGE BOARD OF INDIA
With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such as price rigging, ‘unofficial premium on new issue, and delay in delivery of shares, violation of rules and regulations of stock exchange and listing requirements. Due to these malpractices the customers started losing confidence and faith in the stock exchange. So government of India decided to set up an agency or regulatory body known as Securities Exchange Board of India (SEBI).
Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of securities market. SEBI promotes orderly and healthy development in the stock market but initially SEBI was not able to exercise complete control over the stock market transactions.
It was left as a watch dog to observe the activities but was found ineffective in regulating and controlling them. As a result in May 1992, SEBI was granted legal status. SEBI is a body corporate having a separate legal existence and perpetual succession.
The Organisational Structure of SEBI:
1. SEBI is working as a corporate sector.
2. Its activities are divided into five departments. Each department is headed by an executive director.
3. The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and Delhi.
4. SEBI has formed two advisory committees to deal with primary and secondary markets.
5. These committees consist of market players, investors associations and eminent persons.

Various Innovative Services Provided by Bank in Current Banking System

NEW TECHNOLOGY IN BANKING:
The IT (Information Technology) has changed the Indian structure of Indian Banking. Technology has been identified by banks as an important element in their strategy to improve productivity and render sufficient customer service. In banking computerization has taken place all over the world. The purpose is to bring technology to the counter and to enable Employees to have information at their fingertips. The New technologies that are being used in banks are:-
1.    Electronic Fund Transfer (EFT): It is easy transfer of funds from one place to another. It enables the beneficiary to receive money on same day or next day. The customer can transfer money instantly from one bank to another, from one bank account to another or from one branch to other or a different bank not only within the country but also anywhere else in t5hre world through electronic message.
2.    Credit Card: Credit Card (post Card) is a convenient medium of exchange. With the help of credit card a customer can purchase goods and services from authorized outlets without making immediate cash payments but, within the prescribed limit.
3.    Debit Card: Debit Card is a prepaid card and it allows customers anytime anywhere access to his saving or current account. For using debit card a PIN (Personal Identification Number) is issued to customers. Any transaction taking place is directly debited to the customer’s bank account.

Commercial Banks: Role and Funtions

MEANING AND DEFINATION OF COMMERCIAL BANK
In modern economy commercial Banks plays an important role in the financial sector. A Bank is an institution dealing in money and credit. Credit money is the major component of money supply in a modern economy. Commercial banks are the creators of credit. The strength of economy of any country basically depends on a sound and solvent banking system.
A Commercial bank is a profit seeking business firms dealing in money or rather claims to money. It safeguards the savings of the public and give loans and advances. The Banking Companies Act of 1949 defines banking company as “accepting for the purpose of lending or investment of deposit money from the public, repayable on demand or otherwise and withdrawable by cheque, drafts, and order or otherwise”.
FUNCTIONS OF COMMERCIAL BANKS:
Modern commercial banks perform a variety of functions. They keep the wheels of commerce, trade and industry always revolving. Major functions of a commercial bank are:
                    I.      Primary or Banking functions
                  II.      Secondary or Non-Banking functions.
                III.      Subsidiary Activities

Banking Sector Reforms in India After 1991

BANKING SECTOR REFORMS POST LIBERALIZATION PERIOD
Since nationalisation of banks in 1969, the banking sector had been dominated by the public sector. There was financial repression, role of technology was limited, no risk management etc. This resulted in low profitability and poor asset quality. The country was caught in deep economic crises. The Government decided to introduce comprehensive economic reforms. Banking sector reforms were part of this package. In august 1991, the Government appointed a committee on financial system under the chairmanship of M. Narasimhan.
FIRST PHASE OF BANKING SECTOR REFORMS / NARASIMHAN COMMITTEE REPORT – 1991: To promote healthy development of financial sector, the Narasimhan committee made recommendations.
I) RECOMMENDATIONS OF NARASIMHAN COMMITTEE:
1.    Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including SBI) at top and at bottom rural banks engaged in agricultural activities.
2.    The supervisory functions over banks and financial institutions can be assigned to a quasi-autonomous body sponsored by RBI.
3.    Phased reduction in statutory liquidity ratio.
4.    Phased achievement of 8% capital adequacy ratio.
5.    Abolition of branch licensing policy.

Indian Financial System - Meaning, Features and Functions

Meaning and definition of financial system:
The financial system is possibly the most important institutional and functional vehicle for economic transformation. Finance is a bridge between the present and the future and whether the mobilization of savings or their efficient, effective and equitable allocation for investment, it the access with which the financial system performs its functions that sets the pace for the achievement of broader national objectives.

According to Christy, the objective of the financial system is to “supply funds to various sectors and activities of the economy in ways that promote the fullest possible utilization of resources without the destabilizing consequence of price level changes or unnecessary interference with individual desires.”

According to Robinson, the primary function of the system is “to provide a link between savings and investment for the creation of new wealth and to permit portfolio adjustment in the composition of the existing wealth.

A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the deficit. It is a composition of various institutions, markets, regulations and laws, practices, money manager analyst, transactions and claims and liabilities.

Sunday, April 19, 2015

Issue of Shares and Share Capital

Unit – 1: Issue of Shares and Share capital
Company - Introduction:             
A Company is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.
According to Section 3 (20) of the Companies Act 2013 " Company means a company formed and registered under this Act."
According to Professor Haney “A Company is an artificial person, created by law having a separate entity with a perpetual succession and a common seal."
Characteristics of a Company: Following are the salient features of a Company:
a)      Artificial Person: A company is an artificial person, which exists only in the eyes of law. The company carries business on its own behalf. It has a right to sue and can be sued, can have its own property and its own bank account. It can also own money and be a creditor.
b)      Created by law: A company can be formed only with registration. It has to fulfill a lot of formalities to be registered. It has also to fulfill a lot of legal formalities in order to be dissolved.
c)       Separate Legal entity: A company has a separate legal entity and is not affected by changes in its membership.
d)      Perpetual succession: A company has a continuous existence. Its existence does not affected by admission, retirement, death or insolvency of its members. The members may come or go but the company may go forever. Only law can terminate its existence.

Bonus Shares

Provisions relating to Issue of Bonus Shares:
The undistributed profits, after the necessary provisions for taxation, are the property of the equity shareholders and the same may be used by the company for distribution as dividends to them. But the sound financial policy demands that some of the profits at least must be ploughed back into the business. Thus when a company has accumulated substantial amount of past profits as might be found in the credit of capital reserves, revenue or general reserve of profit and loss account; it is desirable to bring the amount of issued share capital closer to the actual capital employed as represented by the net assets (Assets – Liabilities) of the company. This would reflect the true amount of capital invested by the shareholders in the company.
For example, the capital, which the shareholders have contributed for shares, is clearly visible since this was contributed in cash. But the capital, which they have contributed in the form of accumulated profits, remains unknown because this was not a direct contribution in cash.
In order to rectify these, accumulated profits in full or in part are capitalized, that is, accumulated profits are converted into shares. Shares are distributed free of charge and therefore are known as Bonus Shares, which are given to existing shareholders pro rata to their holdings. It may be added the bonus shares may be issued to make up the existing partly paid shares as fully paid.
Object behind the issue of bonus shares:
a)      Company’s cash resources may not be sufficient to pay dividend in cash.
b)      Company wants to build up cash resources for expansion or for repayment of a liability.

Redemption of Preference Shares

Redemption of Preference Shares
Preference Shares:
Preference shares:  Sec. 43 (b) of the Companies Act, 2013 defines preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. Thus, both the preferential rights viz.
(a) Preference in payment of dividend and
(b) Preference in repayment of capital in case of winding up of the company, must attach to preference shares.
 The rate of dividend on these shares is fixed and the dividend on these shares must be paid before any dividend is paid to ordinary shares. Directors, however, may decide not to pay any dividend to any class of shareholders even if there are sufficient profits. But, if any how, they decide to pay the dividend, preference shareholders will get the priority to pay the ordinary shareholders.
Following are the basic features of preference share:
a)      Fixed rate of dividend
b)      Preferential payment of dividend
c)       Preferential right in redemption of capital in case of winding up of a company.
d)      Absence of voting rights

Preference shares may be classified according to the rights attached to them as follows:

Issue and Redemption of Debentures

Issue and Redemption of Debentures
Meaning of Debentures
According to Sec. 2 (30) of the companies Act, 2013, debentures include “debenture stock, bonds and any other securities of a company evidencing a debt, whether constituting a charge on the assets of the company or not.
Debentures are debt instruments issued by a joint stock company. Amounts collected by way of debentures form part of the loan capital of a company. They are repayable after a fixed period. Debenture holders get interest on their debentures. They are creditors of the company. They do not get dividend. Only shareholders get dividend.
The characteristics of debentures can be summarised as follows:
a)      Debentures are debt instruments.
b)      They generally carry fixed rate of interest.
c)       They are normally repayable at the end of a fixed period. Repayment of debenture or cancellation of debenture liability in the books of the company is known as redemption of debentures.
d)      They can be issued at par, premium or at discount depending on the reputation of the company.
e)      They can either be placed privately or offered for public subscription.
f)       They may or may not be listed in the stock exchange.
g)      If offered for public subscription, they should be rated by a credit rating agency approved by SEBI, prior to listing.
h)      Interest is payable on debentures at a fixed rate irrespective of the profit earned by the business.

Internal Reconstruction and Capital Reduction

Reconstruction of a Company
A company can be reconstructed in any of the two ways. These are:
(i) ‘External’ Reconstruction and 
(ii) ‘Internal’ Reconstruction.
(i) External Reconstruction: The term ‘External Reconstruction’ means the winding up of an existing company and registering itself into a new one after a rearrangement of its financial position. Thus, there are two aspects of ‘External Reconstruction’, one, winding up of an existing company and the other, rearrangement of the company’s financial position. Such arrangement shall be approved by its shareholders and creditors and shall be sanctioned by the National Company Law Tribunal (NCLT). Such a step usually involves the writing off of a debit balance on Profit and Loss Account, elimination of all fictitious assets if any from the Balance Sheet, and the consequent readjustment of share capital.
(ii) Internal Reconstruction: Internal reconstruction means a recourse undertaken to make necessary changes in the capital structure of a company without liquidating the existing company. In internal reconstruction neither the existing company is liquidated, nor is a new company incorporated. It is a scheme in which efforts are made to bail out the company from losses and put it in profitable position. Internal reconstruction of a company is done through the reorganization of its share capital. It is a scheme of reorganization in which all interested parties in the capital structure volunteer to sacrifice. They are the company’s shareholders, debenture holders, creditors etc. Under internal reconstruction, the accumulated trading losses and fictitious assets are written off against the sacrifice made by these interest holders in the form of reduction of paid up value of their interest.

Amalgamation and External Reconstruction

Amalgamation: Introduction
Amalgamation means the merging of two or more than two companies for eliminating competition among them or for growing in size to achieve the economies of scale. Amalgamation is a broad term which includes mergers (uniting of two existing companies) and acquisition (one company buying out another company).
There are two types of amalgamation: According to AS-14 amalgamation is divided into the following two categories for accounting purposes: 
(A) Amalgamation in the nature of merger; and 
(B) Amalgamation in the nature of purchase.
Objectives of amalgamation of companies: The following are the main objectives of amalgamation of companies:
(a) To avoid competition: The main purpose of amalgamation of   companies is to avoid competition among themselves. This will give the company an edge over its competitors.
(b)  To reduce cost: The amalgamated company can derive the operating cost advantage through lowering the cost of production. This is possible because of ‘economies of large scale’.
(c) To gain financially: The amalgamated company can derive financial gain which may be in the form of tax advantage, higher credit worthiness and lower rate of borrowing.
(d)  To achieve growth: The amalgamated company can pool its resources to facilitate internal growth and to prevent the advent of a new competitor. 
(e) To diversify the activities: The risk of a company can be lowered by diversifying its activities into two or more industries. At times, amalgamation may act as hedging the weak operation with a stronger one.

Accounts for Holding Companies

Meaning of Holding and Subsidiary Company
An important development of recent times in the business world is the combining of independent business units into a group or an economic unit. A company may acquire either the whole or majority of shares of another company so as to have a controlling interest in such a company or companies. The controlling company is known as Holding or Parent Company and the company controlled is known as Subsidiary Company.
Holding Company: As per Section 2(46) “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. According to this section, one company can become the holding company of another in any of the following three ways:
1. By holding more than 50% of nominal value of the equity shares of the other company i.e. the holding company holds the majority of voting power in the subsidiary company.
2. By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.
3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.
Purpose: The purpose of getting the control over another company may be to gain advantages such as:-

Issue of Shares and Share Capital - Multiple Choice Questions and Answers

1. Match the following: Minimum number of members in
a)      Private Company
2 members
b)      Public Company
7 members

2. Match the following: Maximum number of members in:
a)      Private Company
50 members
b)      Public Company
Any number of members
c)       Partnership Firm
10 in case of banking business, 20 in case of trading business.

3. Match the following: Minimum Capital:
a)      Private Company
1 lac
b)      Public Company
5 lacs

4. Match the following:
a)      Interest on calls in advance
6% p.a.
b)      Interest on calls in arrear
5% p.a.
c)       Minimum subscription in case of public company
90% of the entire issue
d)      Minimum application money in case of public limited company
5% of the nominal face value
e)      Maximum Rate of discount
10% of the nominal value of share

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