|
 |





        

Decision-making is The general partners are The separation of ownership
simple decision-makers. and decision-making.
Can be set up easily & Distinct legal entity
inexpensively
The owners (the partners) Limited liability
The owner receives all divide income according to
income from business. partnership agreement. The business enterprise has a
life in perpetuity
Income is taxed at only Income is taxed once.
one level (that of the Access to additional funds
owner). Set up with ease through the sale of new share
Few government regulations of stock.
Subject to few
regulations Income is distributed
according to proportionate
Unlimited liability. Unlimited liability for each ownership.
Limited life of the partner.
Double taxation on income
proprietorship A limited life of partnership.
Regulated by Companies Act
The business has limited Limited access to additional
access to additional funds.
funds.
    


 

?inimum 2 persons
?aximum Shareholders 50
Public subscription not allowed
Restricted rights to transfer shares
Promoters enjoy unchallenged
control over the firm
Firms ability to raise capital is
limited

?inimum 7 persons
Unlimited Shareholders
Public subscription allowed
Free transfer of shares
Firm can raise substantial funds
Cumbersome procedure for
Formation
Ö Public Company is the most appropriate
form of organisation as
± Limited liability
± Enormous growth potential
± Free and easy transferability of shares
 Limited Liability Partnership
Ö n 12th Dec 2008, Limited Liability Partnership
Bill has been approved by both the houses of
parliament.

Ö Limited liability of partners.

Ö This form will be used by small and medium

enterprises, service providers, doctors, CAs,
lawyers etc. to limit liability and yet have the
flexibility of a partnership structure.
 Limited Liability Partnership
Features-
Ö Liability of the partners would be limited to the agreed contribution of
partners.

Ö Partners would not be liable for independent and unauthorized actions

of other partners.

Ö
ame of an LLP must end with the words µLLP¶

Ö LLPs can have individual, body corporates, including other LLPs,

foreign LLPs and Indian as well as foreign companies as partners

Ö
o upper limit on maximum number of partners.

Ö The mutual rights and duties of partners shall be governed by an

agreement between the partners.
 Limited Liability Partnership

Ö LLP will have perpetual succession.

Ö The rights of a partner to share the profits
and losses are transferable.
Ö LLP will maintain annual accounts
Ö LLP will not be subject to Company Law
Ö ther entities such as firms, companies etc.
can convert to LLP.

 !"
#|
!

$

Ö Reserve Bank of India

Ö Companies Act 1956

Ö Securities and Exchange Board of India

(SEBI) Guidelines 1992
 "!% 

&"' ("'

Impact and incidence

Impact and incidence
of the tax is on
of the tax is on the
different persons
same person
Excise Duty
Income Tax
Sales Tax
Wealth Tax
Service Tax
Gift Tax
Customs duty
  ) *)

Ö Equity Capital
Ö Preference Capital
Ö Debenture Capital
Ö Term Loans
Ö Retained Earnings

( *

Ö Retained earnings are profit after tax and

dividend.

Ö Internal Source of Finance

 |  +  ),
!(*
Ö Readily available
Ö
o additional expenses to raise
Ö
o dilution of control

&(*
Ö Limited Fund
Ö pportunity cost is high. Because, it represents the
dividends foregone by the shareholders.
  (+  ),
!(*
Ö Capital appreciation is subject to lower rate of tax.
Ö Convenient as no hassle of reinvesting.

&(*
Ö Lower dividend
Ö Appreciation may not commensurate the dividend
forgone.
 -
Ö Represents ownership capital
Ö Enjoys the rewards and bear the risks

 "
Ö ! .(  is the amount of capital that a
company can potentially issue, as per its memorandum.
Ö The amount offered by the company to the investors is
called the I( .
Ö The part of issued capital which has been subscribed to
by the investors represents the ( .
Ö The actual amount paid up by the investors is called the
(/ 0
 -
Authorised Capital Say: 10,00,000 Equity
Shares of Rs.10 each

Issued capital Say :5,00,000 Equity

Shares of Rs.10 each

Subscribed Capital Say :4,00,000 Equity

Shares of Rs.10 each

Paid up Capital Say :4,00,000 Equity

Shares of Rs.5 each
1
Face value of the share
The stated value on a stock certificate is called the `

 0
The par of equity shares is generally Rs. 10, or Rs. 100.


The issue price is the price at which the equity share is
issued.
±Generally par and issue price are same for new companies
When issue price exceeds the par value, the difference is
referred as 
Ö  ( Usually refers to
amounts of directly contributed equity capital in
excess of the par value

± For example, suppose 1,000 shares of common stock

having a par value of Rs.1 each are sold to investors for
Rs. 8 per share. The contributed surplus would be
(8 ± 1) × 1,000 = Rs. 7,000
Ö Book Value-
Paid up capital+Reserves and Surplus

o of Equity Shares

Ö ?arket Price is the price at which the share

is traded in the stock market

*(   )-
 (
Ö Right to Control
± Elect the board
± Lack effective control
Ö Right to Income = Profit After Tax
± Income of the shareholder is called &((
± as recommended by the Board
± unchallengeable
Ö Pre-emptive right on pro rata basis
Ö Right in liquidation
± Residual claim over assets of the firm
 Initially a shareholder has 100 shares at Rs 20 each, now 50
new shares at Rs 12 each are offered as pre-emptive rights.
What happens to the value of his holdings, if he takes the
rights shares or if he does not take the rights shares-
"2/
*  /
*

Value of initial Value of initial

holding( 20 * 100) = 2000 holding( 20 * 100 = 2000

Additional Subscription Additional Subscription = 0

(12 * 50) = 600

Value of equity holding Value of equity holding

after the additional after the additional
Issue (17.33 * 150) = 2600 Issue (17.33 * 100) =1733

Expected Price = 100*20 + 50*12 = 17.33

150
    +  ),
Ö  

Ö Permanent Capital- no liability for repayment

Ö Dividend
on obligatory
Ö Enhances Creditworthiness

*

Ö Pay dividend Tax

Ö Expect High rate of return/ high cost of capital
Ö Paid out of Profit After Tax
± not tax deductible payments
Ö Issue cost quite high
± Underwriting commission, brokerage costs, publicity cost etc
Ö Dilution of control
  (+  ),
 

Ö Limited liability
Ö High rewards
Ö Equity dividend exempted from tax

*

Ö
o say in Dividend matters

Ö Residual claim to income & assets
Ö Risky investment- wide fluctuations in price
 &
Ö Debentures are instruments for raising long term debt
capital
Ö Characteristics
ƒ "± Bank , Institution, Insurance Company-
ƒ Appointed through a Deed
ƒ ± Secured by a charge on assets present and future
assets
ƒ &
( 

- For all issues beyond a maturity period of 18 months
- ?inimum balance ± 50% of the issue amount before
beginning redemption
ƒ   
3
 - Fixed or floating

ƒ  ( ± fixed maturity period

ƒ (  

ƒ Issuing company can call/redeem before maturity at a certain
price
ƒ The holder has the right to put/redeem before maturity at a
certain price

ƒ   -
ƒ Partly Convertible
ƒ Fully Convertible
  
 +  ),
(
Ö Post tax cost of debentures is lower than shares
Ö
o dilution of control

& ,(
Ö bligatory payment
Ö The protective covenants may be restrictive
± Composition of the Board
± Bring additional funds in the form of Unsecured Loan
±
o expansion without approval
 Example
Case1: Total Capital is Rs 100000 at Rs 10 per share
Case 2: Total Capital is Rs 100000 out of which Equity is Rs
50000 at Rs 10 per share and Debt is Rs 50000 @ 10% interest.
If the PBIT is Rs 20000
4 5
PBIT 20000 20000
Interest 0 5000
PBT 20000 15000
Tax @30% 6000 4500
PAT 14000 10500

o. of equity shares 10000 5000
Earning per Share (EPS) 1.4 2.1
 +  ),

(
Ö Stable earnings
Ö Secured Investment

& ,(
Ö Interest is Fully taxable
Ö
o right to vote
 )
Ö A hybrid form of financing
Equity + Loan

Ö Preference dividend is paid out of profit after tax

±
ot a Tax-deductible payment
Ö Dividend rate is fixed

ot an obligatory payment
Ö Preference over equity shareholders
Ö
o voting power
 | ))
Ö Cumulation of dividends
Ö Callability
± company may buyback whole/part at a certain price
Ö Convertible into equity
Ö Redeemability
Ö
o voting power
± Exception:
± Dividend in arrear for 2 or more years incase of
cumulative preference shares
± Dividend not paid for an aggregate period of 3 or more
years in preceding 6 years
  
 +  ),

(
Ö
o legal obligation to pay dividend
Ö
o dilution of control
Ö Enhances creditworthiness
Ö
o collateral security

& ,(
Ö Pay dividend Tax
Ö
o tax advantage
Ö Skipping of dividend adversely affects corporate image
  (+  ),

(
Ö Stable dividend
Ö Dividend exempted from income tax

& ,(
Ö Can not enforce payment of dividend
Ö ?odest returns
 " 
Ö A source of Debt Finance ±
± for a period more than a year
± For financing Fixed Assets and Working Capital

)  6 *

( '
Ö The assets financed with the loan are termed as Prime
Security
Ö ther securities are known as Collateral securities
  
 +  ),
(
Ö Tax rebate
Ö
o dilution of control
& ,(
Ö bligatory payments
Ö Restrictive covenants

Ö (+  ),

Ö Fixed Income
Ö Secured loans
Ö
o right to vote