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8/13/2019 Law Unit III
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UNIT III
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Capital contributed by the owner or entrepreneur of a business, and
obtained, for example, by means of savings or inheritance, is known as own
capital or equity, whereas that which is granted by another person or
institution is called borrowed capital, and this must usually be paid back
with interest. The ratio between debt and equity is named leverage
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OWNED CAPITAL
Ownership capital consists of amount contributedby owners as well as profits
FEATURES PROVISION OF RISK CAPITAL
PERMANENT SOURCE OF CAPITAL
SEPARATION OF OWNERSHIP AND
MANAGEMENT NO SECURITY REQUIRED
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we may in general follow the customary line of distinction and say that
most bonds, notes, accounts payable, and other obligations of a
corporation, may be regarded as representative of borrowed capital,and most shares of capital stock may be regarded as representative of
owned capital.
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DEBT CAPITAL
It includes all funds available by way of loans orcredit
FEATURESTIME HORIZON
NEED FOR SECURITY
REPAYMENT
CONTROL
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SHARE- DEFINITION
Section 2(46) of the Companies Act, 1956 hasdefined a share as follows :
“Share means share in the Share capital of the
company and includes stock, except when a
distinction between stock and share is expressedor implied”
A share is the interest of the shareholder in the
company measured by a sum of money for thepurpose of liability in the first place, and of interest
in the second, but also consisting of series of
covenants entered into by all the shareholders inter
se.”
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SHARE CAPITAL
In simple words : Share capital denotes aparticular amount of money with which a business
is started
In the case of a company : Share capital refers to
he amount of money raised by the issue of
shares
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SHARE CAPITAL
Under the companies Act, the capital of thecompany refers to the following
Nominal or registered capital
Issued capital
Subscribed capital
Called-up capital
Paid up capital Reserve capital
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KINDS OF SHARES
EQUITY SHARES With Voting rights
With differential rights
PREFERENCE SHARES
Cumulative & Non Cumulative
Participating & Non participating
Convertible & Non Convertible Redeemable & Irredeemable
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EQUITY SHARES
WITH VOTING RIGHTS
The holder of such Equity shares will have the right
to vote on every resolution placed before the
company.
His voting rights on a poll will be in proportion to his
share of the paid up equity capital of the company
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EQUITY SHARES
WITH DIFFERENTIAL RIGHTS
The holders of such equity shares have differential rights
as to dividend, voting or otherwise in accordance with
rules prescribed by the Central Govt.
The articles of association must authorize the issue of
such equity shares
Approval of shareholders must be obtained in GM bypassing an ordinary resolution
Such shares shall be allowed to the extent of 25% of
the total issued share capital
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EQUITY SHARES
WITH DIFFERENTIAL RIGHTS
The company must have distributable profits for 3financial years preceding such issue & has notdefaulted in the repayment of its deposits or
debentures on maturity or interest thereon
The company will not be allowed to convert itsequity capital with normal voting rights into equitycapital with differential voting rights & vice versa
Members holding equity shares with differentialrights as to voting or dividend shall be entitled tobonus shares and right shares of the same classof the same class
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PREFERENCE SHARES
TYPES OF PREFERENCE SHARES
Cumulative & Non Cumulative
Participating & Non participatingConvertible & Non Convertible
Redeemable & Irredeemable
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PREFERENCE SHARES
REDEEMABLE PREFERENCE SHARES
In case of such shares the capital has to be
returned during the lifetime of the company
as per the terms of issue or whenever the
company so chooses after giving notice
Paying back of capital is known as
redemptionNo company can now issue preference
shares which are redeemable after the
expiry of a period of 20 years from the dateof issue Sec.80 5 A
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PREFERENCE SHARES
REDEEMABLE PREFERENCE SHARES –(CONDITIONS)
The Articles must authorise the issue of
such sharesNo such shares shall be redeemed except
out of the profits of the company or out ofthe proceeds of the fresh issue of shares
No such shares shall be redeemed unlessthey are fully paid up
The premium, if any, payable on redemptionshall be provided out of the profits of thecompany or out of the company‟s premium
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PREFERENCE SHARES
REDEEMABLE PREFERENCE SHARES –(CONDITIONS)
If such shares are redeemed out of the
profits of the company, the company shallcreate a reserve fund to be called „CapitalRedemption Reserve Account‟ out of itsdivisible profits
The redemption of such shares shall not betaken as reduction of the company‟s authorized share capital
The CRRA(capital redemption reserve
account) may be applied by the company in
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PREFERENCE SHARES
REDEEMABLE PREFERENCE SHARES –(NOTICE)
Notice of redemption must be sent to the registrar within
one month of the date of redemption
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PREFERENCE SHARES
IRREDEEMABLE PREFERENCE SHARES
In case of Irredeemable Preference Shares the capital
has to be returned on the winding up of the company
But after the commencement of Companies(Amendment) Act, 1988, no company can issue any
preference shares which are irredeemable
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PREFERENCE SHARES
Redemption of existing IRREDEEMABLEPREFERENCE SHARES
All existing irredeemable preference shares shall be
redeemed within a period of 5 years from thecommencement of this Act (15th June 1988)
Where a company is not in a position to redeem any
such shares within the aforesaid period, it may, with the
approval of NCLT, issue further redeemable preferenceshares of an equal amount & thereupon the
unredeemed preference shares shall be deemed to
have been redeemed by operation of law.
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VOTING RIGHTS
VOTING RIGHTS OF PREFERENCESHAREHOLDERS
A preference shareholder of a company will have the right
to vote on resolutions which directly affect his rights.
A preference shareholder is entitled to vote if dividend has
not been paid in the case of cumulative preference shares
for an aggregate period of not less than 2 years preceding
the commencement of the meeting
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VOTING RIGHTS
VOTING RIGHTS OF PREFERENCESHAREHOLDERS
In the case of non cumulative preference shares, they will
have a right to vote on all resolutions if their dividend
remained unpaid for two financial years immediately
preceding the meeting or for any 3 years during a period of
six years ending with the financial year preceding the
meeting
The voting rights of preference shareholders will be in
proportion to the paid up value of preference capital to the
total paid up equity capital of the company
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SOURCES OF FINANCE
Issue of shares
Issue of debentures
Loans from financial institutions
Retained profits Public deposits
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– SHARES
FEATURES
Residual claim on income
Residual claim on company‟s assets in case of
liquidation.
Right to control: Legal power to elect directors on the
board
Voting rights
Limited Liability
Provides risk capital
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– SHARES
Merits Permanent Capital: No
liability for returning the
capital
Borrowing base: Increases the
company’s borrowing base
Dividend payment discretion:
Not legally obliged to paydividends.
Higher cost: Dividends not
tax deductible and higher
floatation costs
Risk: Uncertainty regarding
dividend and capital gains;
investors demand a high
rate of return
Earnings dilution: When
profits do not increase in
proportion to increase in
share
Ownershi dilution
Demerits
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ISSUE OF SHARES – PREFERENCE SHARES
FEATURES
A hybrid security – It has features of both ordinary
shares and debentures Prior claims on income and assets over ordinary
shares
Fixed Dividend: Expressed as a percentage
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SHARES
FEATURES
Cumulative dividends: All past unpaid preference dividend will be paidbefore ordinary dividends are paid
Participation: May participate in extra ordinary profit earned by the
company
Voting Rights: Section 87 of the act confers voting rights on
preference shareholders in certain circumstances. They
have a right to vote only on resolutions that directly affect
the rights attached to preference shares. Any resolutions
regarding the winding-up of the company or therepayment or reduction of share capital are deemed
directly to affect the rights attached to preference shares.
Convertibility: Can be converted fully/partially into ordinary shares
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ISSUE OF SHARES – PREFERENCE SHARES
MERITS
Risk less advantage: Fixed obligation
Payment of dividend can be postponed
Limited voting rights: Control of ordinary
shareholders is preserved
Fixed dividend
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DEBENTURES
FEATURES
A long term promissory note for raising loan
capital
Debentures holders are the creditors of the firm
Interest rate: Fixed; called contractual rate of
interest
Interest is tax deductible
Maturity: Specific period of time
Claims on assets and income: Claim on
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DEBENTURES
FEATURES
Redemption: can be done through
Sinking fund: Cash set aside periodically for retiring
debentures
Buy back Provision: Redeem debentures at a specified price
before the maturity date
Indenture/Debenture trust deed: A legal agreement
between the company and debenture trustees
Security: Can be secured by a lien on company‟s assets;
Unsecured debentures not protected by security
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DEBENTURES
MERITS
Debenture issue is a cheaper source of finance
No ownership dilution
Fixed payment of interest
Funds raised by the issue of debentures can be
used to earn a much higher rate of return thanthe rate of interest
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RETAINED PROFITS
FEATURES
Retained profits are the undistributed profits after the
payment of dividends & taxes They represent the internal source of finance
available to the company
Also known as ploughing back of profits
Basis of financial expansion and growth of thecompany
Cushion of security in times of adversity
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RETAINED PROFITS
MERITS
More dependable than external sources
No cost involved in raising the fund No fixed commitments
Control over the management remains unaffected
Improves credibility of the company
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RETAINED PROFITS
DEMERITS
Misuse of such funds
Large retention of earnings over a long period oftime may lead to dissatisfaction among investors
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PUBLIC DEPOSITS
FEATURES
Unsecured deposits invited by the company from the
public.
Invited for a period of 3 months - 3 years
They can be renewed from time to time
Company issues deposit receipt as an
acknowledgement of debt by the company High rate of interest- depends on the period &
reputation of the company
Public deposits cannot exceed 25% of share capital
& free reserves
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PUBLIC DEPOSITS
MERITS Less administrative costs
Public deposits are unsecured
Interest paid on PDs are tax deductible
PDs introduce flexibility in the financial structure of
the company
No dilution of shareholder‟s control
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SHARE CERTIFICATE
A share certificate is issued by a company under its
common seal, specifying the number of shares held by
any member & the amount paid on each share
A share certificate is a declaration by the company that
the person in whose name the certificate is made out &
to whom it is given, is a shareholder in the company &
the certificate is given by the company with the intentionthat it shall be used by the person to whom it is given &
acted upon in the sale & transfer of shares
--
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--CONTENTS
Name & address of the registered office of the company
Serial number of the share certificate
Date of issue of the certificate
Name & address of the shareholder Number & class of shares
Nominal value of each share
Amount paid on each share Impression of the common seal of the company
Space for the signatures of 2 directors & secretary
--
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--CONTENTS
The share certificate form consists of 3 parts
Counterfoil for reference
Proper certificate
Receipt to be signed by the shareholder
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SHARE CERTIFICATE – Time limit
Companies are required to deliver the certificates of
shares & debentures
Within three months of allotment or
Within 2 months after the application for registration oftransfer is made
NCLT has been empowered to grant an extended
period of not more than 9 months in appropriate cases
In case of default a notice may be served upon the
company by the person entitled
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SHARE CERTIFICATE – Time limit
Company has to respond within 10 days of the receipt
of the notice otherwise the allottee can file an
application to the NCLT
NCLT may pass an order directing the company toissue such certificate and to pay all costs to the
applicant
All defaulters shall be punishable with a fine which may
extend to 5000 per day till the default continues
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SHARE CERTIFICATE – ISSUE OF
DUPLICATE SHARE CERTIFICATE
If such a certificate is proved to have been lost or
destroyed
If such a certificate is defaced, mutilated or torn & is
surrendered to the company
SHARE CERTIFICATE
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SHARE CERTIFICATE – ISSUE OF
DUPLICATE SHARE CERTIFICATE
When the original certificate is defaced or mutilated :
The shareholder will surrender the certificate & will
request for the duplicate
The secretary must ensure that the application for
duplicate certificate is in proper form & is accompanied by
the requisite fee
The company will cancel the original certificate and a
duplicate of the same is issued in due course
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SHARE CERTIFICATE
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SHARE CERTIFICATE – ISSUE OF
DUPLICATE SHARE CERTIFICATE
When original certificate is lost or destroyed
If the original certificate was for a considerable number of
shares, the shareholder may be required to give a
supporting guarantee from his banker or other person of
known financial standing
Before issuing a duplicate certificate the company shall
give a public notice of the loss /destruction of the
certificate in the leading newspaper at the cost of theshareholder
The shareholder also has to pay a prescribed fee for the
issue of the duplicate certificate
SHARE CERTIFICATE LEGAL
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SHARE CERTIFICATE – LEGAL
EFFECTS
Estoppel as to the title to the shares
Estoppel as to payment
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SHARE WARRANT
A share warrant is a document issued under the
common seal of the company stating that the bearer is
entitled to the specified number of shares Being a bearer document it can be transferred by mere
delivery
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HARE WARRANT -- CONDITIONS
The Articles must empower the company to issue such
share warrants
The shares must be fully paid up
The company must obtain the approval of the Central
Govt. before it can issue warrants
Only public companies limited by shares can issue
share warrants
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SHARE CERTIFICATE SHARE WARRANT
Issued by Pvt & public companies Issued only by public companies
Issued in respect of fully paid as
well as partly paid up shares
Issued only in respect of fully paid
up shares
Approval of Central govt is not
required
Approval of Central Govt is
required
Nominal stamp duty is required Heavy stamp duty is required
Holder is a member Holder is not a member unless theArticles permit
Holder can present a petition for
winding up of the company
Holder doesn’t have any such right
unless the Articles permit
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SHARE CERTIFICATE SHARE WARRANT
It is not a negotiable instrument It is a negotiable instrument
Transfer requires a transfer deed &
its registration is compulsory
Can be transferred by mere
delivery
It forms the share qualification for
directors
It cannot constitute the share
qualification
In this case dividend is paid
through a dividend warrant
Dividend is paid through bearer
dividend coupons
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DEBENTURE
Section 2(12) states that „a debenture includesdebenture stock, bonds & any other securities of a
company whether constituting charge on the assets
of the company or not.‟
In simple words „An instrument in writing , signed by
the company under its common seal, acknowledging
the debt due by it to its holders‟.
Popular mode of borrowing by the company
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FEATURES
It is an acknowledgement of indebtedness by the
company to its holder for the amount stated in it
It is issued under the common seal of the company
It provides for a fixed rate of interest It provides for the repayment of money at a fixed date
except in case of perpetual debentures
Debentures are generally secured
Debentures can be issued at par, at premium or at
discount but cannot be redeemed at discount
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KINDS OF DEBENTURES
Registered & Bearer Debentures Redeemable & Irredeemable Debentures
Secured & Unsecured Debentures
Convertible & Non-convertible Debentures
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SHARES DEBENTURES
Shareholders are the owners of the
company
Debenture holders are the creditors
of the company
Shareholders have voting rights &
the right to attend GMs
Debenture holders do not have any
such rights
Income of shareholders is
‘dividend’ & it can be paid only
out of the profits
Income of debenture holders is
‘interest’ & it can be paid either
out of the profits or out of thecapital (in case of no profits)
Shares do not have any such
security
Debentures are generally secured
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ISSUE OF DEBENTURES
A Private company can issue debentures immediatelyafter obtaining the certificate of incorporation
A Public company can issue debentures only after
obtaining the certificate of commencement of business
BOD can issue debentures (only be means of resolution
passed at the board meeting)
Debentures can be issued by directors for any amount
authorized by its Articles (< sum of paid up capital +
reserves) except with the consent of the company in the
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ISSUE OF DEBENTURES
Debentures can be issued at par, premium or discount But cannot be redeemed at discount
No company can issue debentures carrying voting rights
Legal requirements as to prospectus, allotment, issue ofcertificates –same as shares
No need for minimum subscription
Debentures once redeemed can be reissued
Debenture Certificate should be given within 3 monthsfrom allotment
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Debenture with Pari Passu
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Debenture with Pari Passu
provision
The effect of Pari-passu clause is that Debentures
shall be discharged proportionately.
This happens in case of inadequacy of funds
But in the absence of Pari Passu clause, debenturesshall be payable according to the date of issue
If all the debentures have been issued on the same
date, they shall be payable according to the serial
number
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BONDS
Bonds are another source of Debt financing
Their features are similar to that of Debentures
Different types of Bonds Tax free Bonds
Zero Coupon Bonds
Deep Discount Bonds
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PLOUGHING BACK OF PROFITS
Self financing by a company
In other words, the savings generated internally by acompany in the form of 'retained earnings' are ploughed
back into the company for diversification of its business
It is actually the amount held back by the entrepreneur
after paying a reasonable dividend to the shareholders of
the company and these undistributed profits are used by the company to meet its present and future financial
requirements
PURPOSE--PLOUGHING BACK
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PURPOSE--PLOUGHING BACK
OF PROFITS
For expansion and growth of the business
For strengthening the financial position of the company
For meeting various working capital requirements of the
company For redemption of old debts
For replacement of obsolete assets and modernisation.
BENEFITS--PLOUGHING BACK
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BENEFITS--PLOUGHING BACK
OF PROFITS
A company with such reserves can face unforeseencontingencies; capital market crisis and other downturnsin the economy with lesser difficulty and ease
Help to stabilize the dividend policy of the company.
Helps in improving the company's relations with its
shareholders. It even helps in appreciating the value ofits shares.
Most convenient and economical method of finance and
involves no legal formalities or negotiations
DRAWBACKS--PLOUGHING
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DRAWBACKS--PLOUGHING
BACK OF PROFITS
Dissatisfaction among shareholders as they may getlower dividends.
It may tempt the management to raise bonus shares tothe equity shareholders leading to overcapitalization ofreserves
The company may not always use the retained earningsto promote the interests of the shareholders.
Instead, it may be invested in unprofitable avenues or
misused by locking them up in those business concerns
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FACTORS DETERMINING
Net profits
Dividend policy Corporate tax
Age of the company
Future plans of the company
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PUBLIC DEPOSITS
The Companies Act, 1974 has introducedSec58A,58B to regulate and control the
acceptance of deposits of companies other
than banking Companies.
The NCLT in consultation with RBI fixes the
limit up to which the Companies can accept
deposits either from a public or from its
members
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PUBLIC DEPOSITS --MEANING
Sec 2(b) of the Companies Acceptance of Deposit rules,1975 defines ………
“any deposit of money with the Company and any
deposit borrowed by a Company but does not
include………..
Any money received from the government.
Any amount received as a loan from any bankingCompany
Any amount received as a loan from any financialInstitutions
Any amount received by a Company from anotherCompany
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PUBLIC DEPOSITS --MEANING
Any amount received as an advance in the course ofbusiness of the Company
Any amount by way of subscription to any shares, stock
bonds or debentures pending the allotment of suchSecurities
Any amount received from the directors of the company
Any amount brought in by the promoters of the company
Any amount received from the shareholders by a privatecompany
RESTRICTIONS ON THE
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RESTRICTIONS ON THE
ACCEPTANCE
Only companies having a net worth of Rs 1 croreare allowed to issue deposits.
No deposit can be invited without issuingadvertisement specifying the financial condition,management structure of the Company
Any company defaulted in repaying the deposits inthe past is prohibited from issuing deposits.
RESTRICTIONS ON THE
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RESTRICTIONS ON THE
ACCEPTANCE
Every deposit holder need to give a nomination
No deposits shall be repayable on demand
Premature repayments is allowed in case of deathof the deposit holder
The maximum period up to which a deposit can beaccepted is 3 yrs.
The minimum period has been fixed at 6 months
RESTRICTIONS ON THE
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RESTRICTIONS ON THE
ACCEPTANCE
A company can accept deposit which are repayable after
3 months in following cases :
Its shareholders (in case of public company)
Deposits guaranteed by any director of the company Deposits against unsecured debentures
The amount of such deposits should not exceed 10% of
the aggregate of the paid up share capital and freereserves
A company is permitted to accept other deposits up to a
maximum of 25 % of the aggregate of the paid up share
ca ital and free reserves
RESTRICTIONS ON THE
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RESTRICTIONS ON THE
ACCEPTANCE
After 6m but before maturity-1% less rate thanapplicable
Within 8 weeks from the date of receipt of money areceipt should be given to the deposit holder
o Interest should not exceed the rate fixed by the RBI(Currently it is 12.5%)
RESTRICTIONS ON THE
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RESTRICTIONS ON THE
ACCEPTANCE
Any deposits issued in contravention of the aboverules should be repaid within 30 days from the
date of receipt or within the extended time allowedby Central Govt.
If a company fails to refund the amount within the
allotted time, the company shall be punishablewith fine which shall not be less than twice theamount of the deposit not refunded
PENALTY FOR
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PENALTY FOR
CONTRAVENTION OF RULES
Where the company accepts or invites either directly orindirectly any deposits either in excess of the limits orwithout making a proper advertisement, the company
shall be punishable with fine which shall not be less thanan amount equal to the amount of deposit so accepted
It the contravention is related to the invitation of deposit,
the fine may extend to 10 lakhs but shall not be lessthan Rs. 50,000
All defaulters shall be punished with imprisonment for aterm which may extend to 5 yrs.
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PENAL RATE OF INTEREST
The Companies Third Amendment Rules, 2001 provide
for payment of a penal rate of interest of 18% for the
overdue period in case of public deposits matured &claimed but remaining unpaid
In case of a deposit made by a small depositor the penal
rate of interest shall be 20% compoundable on an
annual basis
MAINTENANCE OF LIQUID
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MAINTENANCE OF LIQUID
ASSETS
A company accepting public deposits is required to
maintain liquid assets at least equal to 15% of the
deposits maturing for repayment during the financialyear.