Points Equity Shares Preference Shares

Preferences shares are shares that

Shares that are not preference shares carry preferential rights as to payment
are called equity shares i.e. these of:
1. Meaning shares do not have the preferential
rights for payment of dividends and  Dividend and
repayment of capital.  Repayment of capital.

Equity shares are given dividends at a

Preference shareholders get dividends
2. Rate of Dividend fluctuating rate depending upon the
at a fixed rate.
profits of the company.
Equity shareholders enjoy normal Preference shareholders do not enjoy
3. Voting Right voting rights. They participate in the normal voting right. They can vote
management of their company. only on matters affecting their interest.
Equity capital can not be returned A company can issue redeemable
4. Return of Capital during the lifetime of the company, preference shares, which can be repaid
(except in case of buyback). during the lifetime of the company.
Equity capital is known as ‘Risk Preference capital is ‘Safe Capital’ with
5. Nature of capital
Capital’. a stable return.
Investors who are cautious about the
The investors who are ready to take
6. Nature of investor safety of their investment invest in
risks to invest in equity shares.
preference shares.
The face value of equity shares is
The face value of preference shares is
7. Face Value generally ₹ 1/- or ₹ 10/- it is
relatively higher i.e. ₹ 100/- and so on.
relatively low.
8. Right and bonus Equity shareholder is entitled to get Preference shareholders are not
issue bonus and right issue. eligible for bonuses and right issues.
The market value of equity shares The market value of preference shares
9. Capital increases with the prosperity of the does not fluctuate, so there is no
appreciation company. It leads to an increase in possibility/cheques of capital
the value of shares. appreciation.
Equity shares are subject to higher Preference shares are subject to less
10. Risk
risk. risk.
Preference shares are classified as:

 Cumulative Preference Shares

 Non-Cumulative Preference
Equity shares are classified into: Shares
 Convertible Preference Shares
 Equity shares with normal
 Non-Convertible Preference
11. Types voting rights.
Shares
 Equity shares with differential
 Redeemable Preference Shares
voting rights.
 Irredeemable Preference Shares
 Participating Preference Shares
 Non-Participating Preference
Shares
Question 2.
Shares and Debentures
Answer:

Points Shares Debentures

A debenture is an instrument
Share is the smallest unit in the total
debt under the seal of the Com
1. Meaning share capital of the company. It is
They are also known as credito
known as ownership securities.
securities.
A holder of shares is the owner of the A holder of debenture is the c
2. Status company. Hence, share capital is the company. Hence, Debentu
owned capital. loan capital or borrowed capit
It is permanent capital. It is not repaid It is temporary capital. Genera
3. Nature
during the lifetime of the company. repaid after a specific period.
Shareholders being owners enjoy Debenture holders being cred
normal voting rights in general not have any voting right and
4. Voting/Right
meetings and can participate in the participate in the managemen
management of the company. company.
Return on shares is called a dividend.
Equity shareholders receive dividends Return on debenture is called
5. Return on
at a fluctuating rate whereas is fixed at the time of issue. In
Investment
preference shareholders receive paid even when a company ha
dividends at a fixed rate.
Debenture capital being loan
Share capital is unsecured capital. No
6. Security secured by creating a charge o
security is offered to the shareholder.
Company’s property.

Debentures are issued at a lat

Shares are issued in the initial stages
7. Time of Issue when the company has prope
of the company formation.
offer as security.
Shares are suitable for long-term Debentures are suitable for m
8. Suitability
finance. finance.
9. Types Shares are classified into: A debenture is classified as:

 Equity shares  Registered Debentures

 Preference  Bearer Debentures
 Secured Debentures
  Unsecured Debentures
 Redeemable Debenture
 Irredeemable Debenture
 Convertible Debentures
 Non-Convertible Deben

On liquidation of a company, Debenture holders being cred

10. Position on
shareholders rank last in the list of prior to shareholders for repay
liquidation
claimants. liquidation of the company.

5. Answer in brief:

Question 1.
What is a public deposit?
Answer:

 Public deposit is an important source of financing short-term

requirements of the company.
 Companies generally receive public deposits for a period ranging
from 6 months to 36 months.
 Interest is paid by the companies on such deposits.
 The company issues a’ Deposit Receipt’ to the depositor.
 The receipt is an acknowledgment of debt/loan by the company.
 Deposits are either secured or unsecured loans offered by a
company.
 It is considered a risky investment but investors can earn high returns
on public deposits.

Advantages of deposits to the company

 It is an easier method of mobilizing funds during periods of credit

squeeze.
 The rate of interest payable by the company on public deposits is
lower than the interest from banks and financial institutions.
 It helps the company to borrow funds from a larger segment and
thus, reduces dependence on financial institutions.
Question 2.
What are Global Depository Receipt and American Depository Receipt?
Answer:

 The shares that are issued by public limited companies are traded in
various share markets.
 In India, shares are traded in the Bombay Stock Exchange (BSE)
National Stock Exchange (NSE), etc.
 Similarly, Shares are traded in foreign stock exchanges like NYSE
(New York Stock Exchange) or NASDAQ (National Association of
Securities Dealers Automated Quotation).
 Companies that cannot list directly on foreign stock exchange get
listed indirectly using GDR & ADR.
 GDR and ADR are Dollar/Euro denominated instruments traded on
stock exchanges of foreign countries and are depository receipts
containing a fixed number of shares.
 The Depository Receipts which are traded in the USA are called ADRs
and Depository Receipts which are traded in all foreign countries
other than the USA are called GDR.
 Indian Companies raise equity capital in the international market
through GDR and ADR.
 Companies issue shares to an intermediary called ‘depository’.
 Bank of New York, Citigroup, etc act as Foreign Depository Bank.
 The Depository Banks issue GDRs or ADRs to investors against Indian
Company’s shares.
 These ‘Depository Receipts’ are then, sold to foreign investors who
wish to invest their savings in Indian Cost.
 The Depository Receipts are listed on the stock exchanges like regular
shares.
 It is a depository bank that stores the shares on behalf of the receipt
holder.
 NRI and foreign investors buy Depository Receipt Using their regular
equity trading account.
 The company pays dividends in the home currency to the depository
and the depository converts them into the currency of investor and
pays dividends.
  Indian Companies like HDFC, ICICI, Infosys Technologies, MTNL,
WIPRO have ADR and GDR.
o Tata Motors and VSNL have ADRs.
o Bajaj Auto Limited ITC, L&T, Hindalco, Ranbaxy Laboratories,
and SBI have GDRs.
o ADR allows the sale of securities only in the American market
whereas GDR allows the sale of securities globally.

Question 3.
What is Trade Credit?
Answer:

 Every business requires trade credit and is common to all business

types.
 Credit sales or granting of credit is inevitable in the present
competitive business world.
 It is short-term financing to businesses.
 The small retailers, to a large extent, rely on obtaining trade credit
from their suppliers.
 The cheapest method of financing; it is an easy kind of credit that can
be obtained without signing any debt instrument.
 This is not a cash loan. It results from a sale of goods services which
have to be paid sometime after the sale takes place.
 It is given by one trader to another trader to delay payment for
goods and services involved in the transaction.
 Suppliers sell goods and willingly allow 30 days or more credit period
for the bill to be paid.
 They offer discounts if bills are cleared within a short period such as
10 or 15 days.
 Such credit is given/granted to those having reasonable standing and
goodwill.

Advantages of Trade Credit:

 Trade Credit is the cheapest and easiest method for raising short-
term finance.
 It can be obtained without making any formal and written agreement
or signing the same.
  It is readily available whenever goods and services are purchased on
credit in bulk.
 It is free of cost source of financing.
 The terms of trade are lenient and not rigid.

Question 4.
What are the schemes for disbursement of credit by banks?
Answer:
Meaning: Banks play an important role in terms of providing finance to the
companies.
They provide short-term finance for working capital, in the form of bank
and trade credits.

The innovative schemes by banks for disbursement of credit are as follows:

(i) Overdraft:

 A company having a current account with the bank is allowed an

overdraft facility.
 The borrower can withdraw funds/overdraw on his current account
up to the credit limit sanctioned by the bank.
 Any number of drawings up to the sanctioned limit is allowed for a
stipulated term period.
 Interest is determined/calculated on the basis of the actual amount
overdrawn.
 Repayments can be made during the time period.

(ii) Cash Credit:

 The borrower can withdraw the amount from his cash credit up to a
stipulated/granted limit based on security margin.
 Cash credit is given against pledge or hypothecation of goods or by
providing alternate securities.
 Interest is charged on the outstanding amount borrowed and not on
the credit limit sanctioned.

(iii) Cash Loans:

 In this, the total amount of the loan is credited by the bank to the
borrower’s account.
 Interest is payable on the actual outstanding balance.
(iv) Discounting bills of exchange:

 In the bill of exchange, the drawer of the bill (seller) receives money
from the drawee (buyer) on the date or after the due date (the term
mentioned in the bill).
 But due to discounting facility the drawer can receive money before
the due date by discounting the bill with the bank (by giving the bill
as security to the bank).
 The bank gives money to the drawer less than the face value of the
bill (amount mentioned in the bill) after deducting a certain amount
known as discounting charges.
 The bills are usually traded bills i.e. outcome of trade transactions.
 The bills are accepted by the banks and cash is advanced against
them.

Question 5.
State the features of bonds.
Answer:
Definition:
According to Webster Dictionary, “a bond is an interest bearing certificate
issued by a Government or business firm promising to pay the holder a
specific sum at a specified date”.
A bond is thus-

 A formal contract to repay borrowed money with interest.

 Interest is payable at a fixed internal or on the maturity of the bond.
 A bond is a loan.
 The holder is a lender to the company.
 He gets a fixed rate of interest.

Features:
(i) Nature of finance:

 It is debt or loan finance.

 It provides long-term finance of 5 years, 10 years, 25 years, 50 years.

(ii) Status of investor:

  The bondholders are creditors.
 They are non-owners and hence, not entitled to participate in the
general meetings.
 The bondholder has no right to vote.

(iii) Return on bonds:

 The bondholders get a fixed rate of interest.

 It is payable on maturity or at a regular interval.
 Interest is paid to the bondholder at a fixed rate.

(iv) Repayment:

 A bond is a formal contract to repay borrowed money.

 Bonds have a specific maturity date, on which the principal amount is
repaid.