Feature Bonus Shares Right Shares

Free shares issued to existing Shares offered to existing shareholders at

Definition shareholders out of the company’s a discounted price to raise additional
reserves. capital.
To reward shareholders and capitalize To raise additional funds for business
Purpose
reserves. needs.
Cost to Shareholders must pay to acquire these
Free of cost; no payment required.
Shareholders shares.
May dilute ownership if shareholders do
Effect on No change in ownership percentage, as
not subscribe and others acquire the
Ownership issued proportionately.
rights.
Issued to all existing shareholders in Issued to existing shareholders, but they
Eligibility
proportion to their holdings. have the option to subscribe or not.
Accounting Capitalizes company’s reserves; no fresh Increases the company’s share capital and
Impact funds raised. generates additional funds.
Share price usually adjusts downward Share price may adjust downward due to
Market Price
due to an increase in the number of dilution but depends on market
Impact
shares. perception.
No obligation to accept as it is a free Shareholders must decide whether to
Compulsion
benefit. subscribe or let the rights lapse.
Less frequent and issued as a goodwill More frequent, especially when the
Frequency
gesture. company needs additional funding.

BONUS SHARES
 A bonus share is a free share issued to existing shareholders without considering their number of
shares.
 It can decrease reserves and surplus or increase issued capital without affecting cash flow or net
worth.
 Capitalizing profits or reserves can be done by paying up unpaid shares on partially paid shares or
issuing fully paid bonus shares to existing members.

Circumstances issuing bonus shares:

1. When the company wishes to capitalize its huge undistributed profits or reserve built.
2. When the company has not sufficient cash reserves, it issues bonus shares without adversely
affecting its working capital.
3. When value of fixed assets of a company exceeds its capital, the difference is capitalized by
issuing bonus shares.
4. The company may capitalize its reserve or profits by issuing bonus shares with a view to avoid
problems such as demand by the workers for higher wages etc.
5. When market value of shares far exceeds the paid up value of the shares, the company may issue
bonus shares.

Sources for fully paid-up bonus shares [Sec 63]

As per Sec 63(1), a company may issue fully paid-up bonus shares to its members out of-
 • Its Free Reserves
• Its Securities Premium Account; or
• Its Capital Redemption Reserve Account

Restrictions:
No issue of bonus shares shall be made by capitalizing reserves created by the Revaluation of Assets
i.e. Revaluation Reserves.

FREE RESERVES
• As per Sec 2(43) of The Companies Act, 2013, defines "Free Reserves" as reserves available for
dividend distribution as per the latest audited balance sheet of a company.
• However, these reserves exclude unrealized gains, notional gains, or revaluation of assets, or
changes in carrying amounts of assets or liabilities recognized in equity, including surplus in the
Profit and Loss Account on measurement of assets or liabilities at fair value.

Bonus Shares Issue Conditions

• Company can issue bonus shares if Articles authorize it.

• Board of Directors must pass a resolution recommending bonus shares.
• Members must approve the Board's resolution.
• Resolution must indicate intention to capitalize profits or reserves.
• Company must not default on interest or principal payments for fixed deposits or debt securities.
• Company must not default on statutory employee dues.
• Partly-paid shares must be fully paid-up.
• Company must comply with Prescribed Conditions.
• Bonus shares cannot be issued in lieu of dividends.

SEBI Guidelines on Bonus Issues

 Companies proposing to issue bonus shares must have capitalization provisions in their articles of
association.
 The company must not default on payment of interest or principal on fixed deposits, existing
debentures, or principal on redemption.
 The company must not default on statutory dues of employees such as contribution to provident
fund, gratuity etc.
 Partly-paid shares outstanding on the date of allotment must be fully paid-up.
 No bonus issue can be issued pending conversion of FCDs/PCDs unless similar benefits are
extended to holders.
 Bonus issue declarations in lieu of dividends are not allowed.
 Companies announcing their bonus issue must implement the proposal within 15 days or 2 months
of approval.
 The decision to issue a bonus cannot be withdrawn.

Advantages of Issuing Bonus Shares

Company's Perspective:

 Provides shareholders with relief when cash dividends are not available due to liquidity shortage.
 Provides satisfaction when the company prefers not to pay dividends for specific purposes like
extension or working capital.
 Can prevent competition and unhealthy worker-company relationships by reducing reserve for
interest.

Shareholder's Perspective:

 No tax on bonus shares, but shareholders pay on cash dividends.

 Shareholders can convert shares into cash by disposing of them at a higher price.
 If partially paid shares are converted into fully paid, shareholders don't need to pay a further sum.

Disadvantages of issuing Bonus Shares:

 If the rate of dividend fluctuates, i.e., cannot be maintained, the market value of shares may go
down.
 If the rate of profit is not increased, the rate of dividend may be decreased.
 It encourages speculation which is not desirable.

BUY BACK OF SHARES

Buy back is the reverse of issue of shares. Buy back simply means buying of own shares. It is a process of
capital restructuring. It allows a company to buy back its own shares, which were issued by its earlier.

Objectives/Advantages of Buy-back of shares:

 Increases promoters' holding by cancelling bought shares.

 Increases EPS without dilution in earnings.
 Supports share price when management believes it's less than fair value.
 Pays surplus cash to shareholders when not needed for business.
 Rewards shareholders by buying shares at higher prices than market price.
 Safeguards against hostile takeover by increasing promoter holding.

Restrictions on Purchase by Company or giving of Loans by it for Purchase of its Shares [Section 67]

 No company limited by shares or guarantee can buy its own shares unless the share capital
reduction is effected under the Act.
 No public company can provide financial assistance for the purchase or subscription of shares in
the company or its holding company.
 This section does not apply to lending money by a banking company in the ordinary course of its
business, providing money for the purchase or subscription of fully paid-up shares in the company
or its holding company, or giving loans to persons in the company's employment other than its
directors or key managerial personnel for an amount not exceeding their salary or wages for a
period of six months.
 This section does not affect the right of a company to redeem any preference shares issued by it
under this Act or any previous company law.
  If a company contravenes this section, it will be punishable with a fine of up to twenty-five lakh
rupees.

Prohibition for Buy-Back in Certain Circumstances [Section 70]

 No company can directly or indirectly purchase its own shares or specified securities through any
subsidiary company, investment company, or if a default is made in repayment of deposits,
interest payments, redemption of debentures, preference shares, dividend payments, or repayment
of term loans or interest payable to any financial institution or banking company.
 Buy-back is not prohibited if the default is remedied and a period of three years has lapsed after
the default ceased to subsist.
 No company can purchase its own shares or specified securities if it has not complied with the
provisions of sections 92, 123, 127, and section 129.

Buy-Back Modes and Regulations

 Buy-back permissible from existing security holders through tender offer.

 Buy-back from open market through book-building process or stock exchange.
 Buy-back from odd lots where the lot of securities is smaller than the marketable lot.
 Purchase of securities issued to company employees under stock option or sweat equity scheme.
 Company must make a public announcement in English, Hindi, and Regional Language Dailys
after passing special resolution.
 The announcement must specify a date for determining shareholders and the letter of offer.
 The offer must be opened 7 days or later after the specified date.
 Companies buying back through tender offer must open an escrow account.
 A company cannot buy-back its shares through negotiated deals, spot transactions, or private
arrangements, whether on or off the stock exchange.

Escrow Account

 Regulation 10(1) of the Securities and Exchange Board of India mandates that a company deposits
a specified sum in an escrow account as security for performance of obligations before the
opening of a re-purchase offer.
 The amount is specified in 10(2) and is based on the consideration payable. If the consideration is
less than `100 crores, 25% of the consideration is deposited.
 If the consideration exceeds `100 crores, 25% is deposited up to `100 crores, and 10% thereafter.
 The escrow account is used until the consideration for buy-back of shares is paid to shareholders.

Advantages of Buy-Back

 Allows companies with unprofitable capital to restructure their capital.

 Utilizes free reserves instead of dividends to enhance share value and earnings per share.
 Allows companies to use surplus cash for buyback, avoiding dividend tax.
 Can be used to deter hostile take-overs by undesirable individuals.

 Buy-back of shares is the reverse of issue of shares.

 It can be at par, at a premium, or at a discount.
  The accounting basis for buy-back is Section 68 of the Amended Companies Act.
 The source of re-purchase is from free reserves, securities premium account, or proceeds of
specified securities.
 No buy-back of shares can occur from the proceeds of an earlier issue of the same kind of shares.
 All shares or specified securities for buy-back must be fully paid up.
 When a company purchases its own shares from free reserves, a sum equal to the nominal value of
the purchased shares is transferred to the capital redemption reserve account.

1. NEFT (National Electronic Funds Transfer)

 Definition: NEFT is a nationwide payment system enabling individuals, companies, and firms to
transfer funds electronically between bank accounts.
 Key Features:
o Operated by Reserve Bank of India (RBI).
o Funds are transferred in batches, typically on a half-hourly basis.
o Available 24x7, including holidays.
o No upper or lower limit for transactions.
o Charges are minimal or nil for small transactions.
 Use Cases:
o Payment of utility bills.
o Transferring funds between accounts of different banks.
o E-commerce payments.

2. RTGS (Real Time Gross Settlement)

 Definition: RTGS facilitates real-time and gross settlement of funds between banks for high-value
transactions.
 Key Features:
o Operates on a real-time basis with immediate fund transfer.
o Minimum transaction amount: ₹2 lakhs; no upper limit.
o Available 24x7 for customer transactions.
o Transactions are settled individually rather than in batches.
o Suitable for large-value transactions.
 Use Cases:
o Corporate payments.
o Interbank settlements.
o Urgent payments involving significant amounts.

3. IMPS (Immediate Payment Service)

 Definition: IMPS is an instant interbank electronic funds transfer service available through
mobile phones, ATMs, and internet banking.
 Key Features:
o Operates 24x7, including bank holidays.
o No minimum transaction amount; the upper limit depends on the bank.
o Transfers are instant, making it ideal for emergencies.
o Requires details such as account number and IFSC or a Mobile Money Identifier (MMID).
 Use Cases:
o Peer-to-peer payments.
 o Small merchant transactions.
o E-commerce and utility bill payments.

4. KYC (Know Your Customer)

 Definition: KYC is a regulatory process by which banks and financial institutions verify the
identity and address of their customers.
 Purpose:
o To prevent money laundering and fraudulent activities.
o To ensure that financial services are not misused.
 Key Components:
o Proof of Identity (PoI): Documents like PAN Card, Aadhaar Card, Passport, etc.
o Proof of Address (PoA): Utility bills, driving license, etc.
o In-person verification (IPV): Physical verification of documents or biometric
authentication.
 Use Cases:
o Opening bank accounts.
o Availing loans, insurance, and mutual funds.
o Large financial transactions.

5. CRR (Cash Reserve Ratio)

 Definition: CRR is the percentage of a bank’s total deposits that must be maintained with the RBI
in cash.
 Key Features:
o Set by RBI as a monetary policy tool.
o No interest is earned by banks on the CRR balance.
o Helps control liquidity in the banking system.
 Purpose:
o To ensure banks maintain a minimum reserve.
o To curb inflation by restricting excess liquidity.
o To support economic growth during low liquidity phases.
 Impact on Banks:
o High CRR reduces the amount banks can lend.
o Low CRR increases lending capacity.

6. SLR (Statutory Liquidity Ratio)

 Definition: SLR is the percentage of a bank’s net demand and time liabilities (NDTL) that must
be maintained in the form of liquid assets such as gold, cash, or approved government securities
before offering credit.
 Key Features:
o Mandated by RBI under Section 24 of the Banking Regulation Act, 1949.
o Used as a monetary policy tool.
o Helps banks ensure liquidity and financial discipline.
 Purpose:
o To control credit flow to the economy.
o To safeguard the bank’s solvency.
 Impact on Banks:
 o A higher SLR restricts a bank’s lending capabilities.
o A lower SLR boosts credit availability in the economy.

REBATE ON BILLS DISCOUNTED

 Banks discount customers' bills, debiting the Discounted and Purchased Accounts with the full
amount and crediting the Customers' Current Account with the net amount.
 The total discount earned during the year is credited to the Interest and Discount Account.
 Discount is calculated from the period of discounting the bill to the date of bill maturity.
 In real-world situations, the entire discount amount may not be received during the period of
account closure, necessitating adjustments for discounting related to next accounting periods.
 To rebates on bill discount Account Computation of rebates on Bills discounted
Rebate on Bills Discounted = Amount of Bill × Rate of Discount × Unexpired Period
12
Life Insurance
 A life insurance contract is a long term contract in which the assured must pay the premium at
stated intervals and the insurer guarantee to pay a certain sum of money to the assured on the
happening of the event which is certain (either death or expiry of the fixed period).
 Section 2 of Indian Insurance Act 1938 defines life insurance as “life insurance business is the
business of effecting contracts upon human life”.

General Insurance
 All insurance other than life insurance is general insurance.
 Under this type of insurance, the insurer undertakes to indemnify the loss suffered by the insured
on happening of a certain event in consideration for a fixed premium.
 Usually all these are short term agreements for a year.
 Fire insurance, marine insurance, accident insurance, burglary insurance, third party insurance etc.
are the examples for general insurance.

Life insurance fund

 Life insurance fund is maintained by life insurance company.
 It represents the excess of revenue income over revenue expenditure.
 The object of maintaining this fund is to meet the aggregate liability on all outstanding policies.
 This is shown in schedule 6.

Final Accounts of Life Insurance Companies

The final accounts of a life insurance company consist of
 (a) Revenue Account,
(b) P&L A/c and
(c) Balance Sheet.

Revenue Account (Form A RA)

Revenue Account is prepared as per the provisions of IRDA regulations 2002 and complies with the
requirements of Schedule A.

Notes to Form A RA and A PL:

 Premium income received from business concluded in and outside India shall be separately
disclosed.
 Reinsurance premiums whether on business ceded or accepted are to be brought into account
gross (i.e., before deducting commissions) under the head reinsurance premiums
 Claims incurred shall comprise claims paid, specific claims settlement costs wherever applicable
and change in the outstanding provisions for claims at the year end.
 Items of expenses and income in excess of one percent of the total premiums (less reinsurance) or
Rs.500000 whichever is higher, shall be shown as a separate line item.
 Fees and expenses connected with claims shall be included in claims.
 Under the sub head “Others” shall be included items like foreign exchange gains or losses and
other items.
 Interest, dividends and rentals receivable in connection with an investment should be stated at
gross amount, the amount of income tax deducted at source being included under “advance taxes
paid and taxes deducted at source”.
 Income from rent shall include only the realized rent. It shall not include any notional rent.

 Claims – Claim is the amount payable by the insurance company. In life insurance business,
claims may arise due to two reasons i.e., by death or maturity.
 Annuity – It is an annual payment which a life insurance company guarantees to pay for lump sum
money received in the beginning.
 Surrender value – If an insured is unable to pay the further premium, he can get his policy paid
from the company. It is the present cash value of the policy which a holder gets from the company
on surrendering all the rights of the policy.
 Bonus in reduction of premium – instead of paying bonus in cash, the insurance company may
deduct the bonus from the premium due from the insured. This is known as bonus in reduction of
policy.
 Consideration for annuities granted Any lump sum payment received by the insurance company in
lieu of granting annuity is called consideration for annuity granted.
 Re insurance – When a company accepts a business of more value and in order to reduce the risk,
may pass on some business to the other company, it is called reinsurance.
 Commission on Reinsurance Accepted or Ceded – The Company which passes some business to
the other company gets some commission which is known as commission on reinsurance business
ceded. Commission paid on reinsurance business accepted is known as Commission on
Reinsurance Accepted.
 Type of Policy Description Best For
Provides coverage for a specific period
Those who want affordable coverage
Term Life (e.g., 10, 20, or 30 years). If you pass away
for a specific time (e.g., until debts are
Insurance during the term, your beneficiaries receive a
paid off or kids are grown).
pay-out.
A lifelong policy that includes a savings Those seeking permanent coverage and
Whole Life
component (cash value) and a guaranteed a guaranteed inheritance for loved
Insurance
pay-out to beneficiaries. ones.
Permanent coverage with flexible premiums
Universal Life Those who want lifelong coverage
and potential to grow cash value based on
Insurance with flexibility to adjust payments.
interest rates.
Permanent coverage where the cash value Those comfortable with investment
Variable Life
can be invested in various accounts (e.g., risks and seeking potentially higher
Insurance
stocks, bonds). cash value growth.
Requires no medical exam, only a health
Simplified Issue Those who want quick coverage and
questionnaire. Offers faster approval but
Life Insurance may have minor health concerns.
higher premiums.
No medical exam or health questions; Those with serious health conditions
Guaranteed Issue
anyone can qualify, but premiums are high, who otherwise cannot qualify for life
Life Insurance
and benefits may be limited initially. insurance.
Offered by employers or organizations; Employees or members of
Group Life
typically, term insurance with limited organizations looking for basic, low-
Insurance
coverage. cost coverage.
Final Expense A small whole life policy designed to cover Seniors or those looking for coverage
Insurance funeral and burial costs. specifically for end-of-life expenses.
Child Life Covers children and can include a savings Parents seeking small coverage and
Insurance component that grows over time. long-term savings for their children.

General Insurance:
General insurance refers to non-life insurance policies that provide financial protection against losses and
damages other than those covered by life insurance. These policies cover assets, liabilities, health, and
other aspects.

Key Types of General Insurance

1. Health Insurance
Covers medical expenses incurred due to illness or injury.
o Examples: Mediclaim policies, critical illness plans.
2. Motor Insurance
Covers vehicles against damage, theft, and third-party liabilities.
o Types:
 Third-party liability insurance (mandatory in many regions).
 Comprehensive insurance (covers own damages and third-party liabilities).
3. Property Insurance
Covers damages or losses to property due to fire, theft, natural disasters, etc.
o Examples: Home insurance, fire insurance.
 4. Travel Insurance
Provides coverage for unforeseen events during travel such as trip cancellation, lost baggage, or
medical emergencies.
5. Liability Insurance
Protects businesses and individuals against legal liabilities arising from injury or damage caused
to others.
o Examples: Professional indemnity insurance, public liability insurance.
6. Marine Insurance
Covers goods, cargo, ships, and freight from risks associated with sea transport.
7. Commercial Insurance
Tailored to protect businesses against risks like property damage, theft, or liability claims.

Key Features of General Insurance

 Premium: The amount paid to avail of the insurance policy.

 Coverage Period: Typically shorter than life insurance (usually 1 year, renewable).
 Claim Settlement: Compensation provided in case of covered losses.
 No Maturity Benefits: Unlike life insurance, there are no pay-outs unless a claim arises.

Importance of General Insurance

1. Financial Security: Covers unexpected expenses due to accidents, illnesses, or property damage.
2. Legal Compliance: Mandatory for certain assets like vehicles (motor insurance).
3. Risk Mitigation: Transfers risks to the insurer, minimizing financial loss.
4. Peace of Mind: Provides confidence to manage unforeseen events.

Exclusions

General insurance policies often come with exclusions such as:

 Pre-existing medical conditions (in health insurance).

 Wear and tear of assets.
 Damages due to negligence or illegal activities.

Feature Life Insurance General Insurance

Provides financial protection to your family Covers risks like accidents, health, property
Purpose
after your death. damage, etc.
Coverage Covers the life of the insured. Covers assets (e.g., car, home, health).
Usually short-term (1 year, renewable
Term Usually long-term (10+ years or lifetime).
annually).
Paid out when a claim arises due to a
Payout Paid out on death or policy maturity.
loss/damage.
Paid periodically (e.g., monthly, yearly)
Premium Paid periodically, often annually.
over a longer term.
Term insurance, whole life insurance, Health insurance, car insurance, home
Examples
endowment plans. insurance.
Policyholder themselves or affected third
Beneficiary Nominee (usually family members).
parties.
Objective To secure financial stability for dependents. To protect against unforeseen events and
 Feature Life Insurance General Insurance
financial losses.

Feature Double Insurance Reinsurance

Taking multiple insurance policies for the When an insurance company transfers part
Definition
same risk from different insurers. of its risk to another insurance company.
To ensure full compensation in case one
To manage and reduce the insurer’s risk
Purpose insurer cannot pay or to get extra
exposure.
coverage.
The policyholder and multiple insurance The original insurance company (cedent)
Involves
companies. and a reinsurer.
Who Benefits The policyholder directly. The original insurance company.
Claim All insurers contribute proportionally to The reinsurer reimburses the insurer for the
Settlement the compensation. agreed portion of the claim.
A homeowner insures the same house with An insurer covers a factory for $1M but
Example
two companies for $100,000 each. transfers $500,000 of the risk to a reinsurer.
Strictly monitored to prevent over- Governed by agreements between insurers
Regulation
insurance and fraud. and reinsurers.
Premium The insurer pays a premium to the
Paid separately to each insurer.
Costs reinsurer.
Key Focus Risk coverage for the insured. Risk management for the insurer.

Aspect Double Insurance Reinsurance

Insuring the same risk with multiple Insurer transfers part of the risk to another
Definition
insurers. insurer.
Purpose Extra coverage for the policyholder. Risk reduction for the insurer.
Parties
Policyholder and multiple insurers. Insurer and reinsurer.
Involved
Claim Payment All insurers share the claim. Reinsurer reimburses the insurer.
Premium Paid by the policyholder to each insurer. Paid by the insurer to the reinsurer.