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COMPANY ACCOUNTS

Rahul Bansal (Finalist) (35929 Points)

01 December 2009

ISSUE, REDEMPTION AND CONVERSION OF SHARES AND DEBENTURES

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Rahul Bansal (Finalist) (35929 Points)
Replied 01 December 2009

Question 1

Conditions to be fulfilled by a Joint Stock Company to buy-back its equity shares.

(4 marks) (Intermediate–Nov. 2001)

Answer

As per section 77A of the Companies Act, 1956 a joint stock company has to fulfill the following conditions to buy-back its own equity shares:

(a) The buy-back is authorised by its articles.

(b) A special resolution has been passed in general meeting of the company authorising the buy-back.

(c) The buy-back does not exceed 25% of the total paid up capital and free reserves of the company. Provided the buy–back must not exceed 25% of its total paid up equity capital in that financial year.

(d) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back.

(e) All the shares for buy-back are fully paid up.

(f) The buy-back is made out of the free reserves (which include securities premium) or out of the proceeds of a fresh issue of any shares or other specified securities.

(g) The buy-back is completed within 12 months of the passing of the special resolution or a resolution passed by the Board.

(h) The buy-back of the shares listed on any recognised stock exchange is in accordance with the regulations made by the SEBI in this behalf.

(i) Before making such buy-back, a listed company has to file with the Registrar and the SEBI a declaration of solvency in the prescribed form.

* If the buy-back by the company is or less than 10% of the total paid-up equity capital and free reserves of the company then it can be authorised by the Board by means of resolution passed at its meeting and no special resolution will be required.

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Rahul Bansal (Finalist) (35929 Points)
Replied 01 December 2009

Questions 2

Sweat equity shares and conditions, which must be fulfilled by a Joint Stock Company to issue these shares. (4 marks)(Intermediate–Nov. 2001)

Answer

The Companies (Amendment) Act, 1999 introduced through section 79A a new type of equity shares called ‘Sweat Equity Shares. The expression ‘sweat equity shares’ means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions by whatever name called.

Notwithstanding anything contained in section 79, which deals with the power of a company to issue shares at a discount, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely:-

(i) the issue of sweat equity shares is authorised by a special resolution passed by the company in the general meeting.

(ii) the resolution specifies the number of shares, current market price, the consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued.

(iii) not less than one year has, at the time of the issue, elapsed since the date on which the company was entitled to commence business.

(iv) the sweat equity shares of company, whose equity shares are listed on a recognised stock exchange, are issued in accordance with the regulations made by the Securities and Exchange Board of India in this behalf. But in the case of company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed.

All the limitations, restrictions and provisions relating to equity shares are applicable to sweat equity shares also

Rahul Bansal (Finalist) (35929 Points)
Replied 01 December 2009

Question 3

Dividend on partly paid shares. (4 marks) (Intermediate May 2002)

Answer

In the case of partly paid-up shares, the dividend is payable either on the nominal, called-up or the paid-up amount of shares, depending on the provisions in this regard that there may be in the articles of the company. In the absence of any such provisions, Table A should be applicable. In such a case the amount of dividend payable will be calculated on the amount paid-up on the shares, and while doing so, the dates on which the amounts were paid must be taken into account. Calls paid in advance do not rank for payment of dividend. A company may if so authorised by its articles, pay a dividend in proportion to the amount paid on each share, where a larger amount is paid on some shares than on others (Section 93 of the Companies Act, 1956). But where the articles are silent and Table A has been excluded, the amount of dividend payable will have to be calculated on the nominal amount of shares. It should, however, be noted that according to Clause 88 of Table A dividends are to be declared and paid according to the amounts paid or credited as paid on the shares in respect whereof the dividend is paid, but if and so long as nothing is paid upon any of the shares of the company, dividends may be declared and paid according to the nominal amount of the shares.

Rahul Bansal (Finalist) (35929 Points)
Replied 01 December 2009

Question 4

State the guidelines of SEBI regarding issue of convertible debentures for disclosure and investor protection. (8 marks) (Intermediate–Nov. 1998)

Answer

SEBI guidelines regarding issue of convertible debentures for disclosure and investor protection are as follows :

(i) Issue of Fully Convertible Debentures (FCDs) having a conversion period of more than 36 months will not be permissible, unless conversion is made optional with “put” and “call” option.

(ii) No company shall make a public issue or rights issue of debts instruments (whether convertible or not), unless credit rating of not less than investment grade is obtained from not less than two registered credit rating agencies and disclosed in the offer document. All the credit ratings including the unaccepted credit ratings shall be disclosed.

(iii) All the credit ratings obtained during the 3 years preceding the public or rights issue of convertible debentures for any listed security of the issuer company shall be disclosed in the offer document.

(iv) No company shall issue a prospectus or a letter of offer to the public for subscripttion of its debentures without the appointment of a debenture trustees or creation of Debenture Redemption Reserve, in accordance with the provisions of the Companies Act, 1956. The names of the debenture trustees shall be stated in the Offer Document and also in all the subsequent periodical communication. Also a trust deed shall be executed within 3 months of the closure of the issue.

(v) The merchant banker shall ensure that the security created is adequate to ensure 100% asset cover for the debentures and is free from any encumbrances and also the necessary permissions to mortgage the assets or No objection certificate for a second or pari passu charged in cases where assets are encumbered have been obtained.

(vi) Premium amount on conversion and time of conversion, shall be predetermined by the issuer company and stated in the prospectus. Interest rates for the above debentures will also be freely determined by the issuer company.

(vii) Any conversion in part or whole of the debentures will be optional in the hands of the debentureholders, if the conversion takes place at or after 18 months from the date of allotment, but before 36 months.

(viii) Premium amount at the time of conversion for the Partly Convertible Debentures (PCD) shall be predetermined and stated in the prospectus. Redemption amount, period of maturity, yield on redemption for the PCDs or NCDs shall also be indicated in the prospectus.

(ix) In case, the non-convertible portions of PCDs or NCDs are to be rolled over with or without change in the interest rate, a compulsory option should be given to those debentureholders who want to withdraw and encash from the debenture programme. Roll over shall be done only in cases where debentureholders have sent their positive consent and not on the basis of the non-receipt of their negative reply.

(x) Before roll over of any NCDs or non-convertible portion of the PCDs, at least two credit ratings of not less than investment grade shall be obtained within a period of six months prior to the due date of redemption and communicated to debentureholders before roll over and fresh trust deed shall be made.

(xi) Letter of information regarding roll over shall be vetted by SEBI with regard to the credit ratings, debentureholder’s resolution, option for conversion and such other items which SEBI may prescribe from time to time.

(xii) The disclosures relating to raising of debentures will contain, amongst other things, the existing and future equity and long term debt ratio, servicing behaviour on existing debentures, payment of due interest on due dates on long term loans and debentures, certificate from a financial institution or bankers about their no objection for a second or pari passu charge created in favour of the trustees to the proposed debenture issues.

(xiii) SEBI may prescribe additional disclosure requirement from time to time, after due notice.

Rahul Bansal (Finalist) (35929 Points)
Replied 01 December 2009

Problems based on Accounting standards and
Guidance Notes

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Rahul Bansal (Finalist) (35929 Points)
Replied 01 December 2009

Question 1

Events Occurring after the Balance Sheet Date and their disclosure requirements.

(5 marks) (Intermediate–Nov. 1994, May 97 and May 1998)

Answer

Events occurring after the balance sheet date are those significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company and in the case of any other entity by the corresponding approving authority.

Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate. However, assets and liabilities should not be adjusted for but disclosure should be made in the report of the approving authority of events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise.

(ii) Disclosure regarding events occurring after the balance sheet date :

(a) The nature of the event;

(b) An estimate of the financial effect, or a statement that such an estimate cannot be made.

Rahul Bansal (Finalist) (35929 Points)
Replied 01 December 2009

Question 2

Prior-Period items. (2 marks) (Intermediate–Nov. 1994, May 1996 and May 1998)

Answer

When income or expenses arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods, the said incomes or expenses have to be classified as prior period items. The errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts or oversight.

Rahul Bansal (Finalist) (35929 Points)
Replied 01 December 2009

Question 3

Pre–incorporation expenses. (5 marks) (Intermediate–May 1996)

Answer

Pre–incorporation expenses denote expenses incurred by the promoters for the purposes of the company before its incorporation.

Broadly, these include expenses in connection with:

(a) preliminary analysis of the conceived idea,

(b) detailed investigation in terms of technical feasibility and commercial viability to establish the soundness of the proposition,

(c) preparation of ‘project report’ or ‘feasibility report’ and its verification through independent appraisal authority (before giving final approval to the proposition) and

(d) organisation of funds, property and managerial ability and assembling of other business elements.

These expenses should be properly capitalised and shown in the balance sheet under the heading “Miscellaneous Expenditure”. There is no legal requirement to write–off these expenses to profit and loss account within any specified period of time nor is there any rigid accounting convention in regard to this matter. However, good corporate practice recognises the need to write off these expenses to profit and loss account whtin a period of 3 to 5 years

Rahul Bansal (Finalist) (35929 Points)
Replied 01 December 2009

Question 4

Provisions contained in the Accounting Standard in respect of Revaluation of fixed assets.

(10 marks) (Intermediate–Nov. 1996)

Answer

(i) Revaluation of fixed Assts

According to Accounting Standard 10 on “Accounting for Fixed Assets”

(a) When fixed assets are revalued in financial statements, the basis of selection should be an entire class of assets or the selection should be done on a systematic basis. The basis of selection should be disclosed.

(b) The revaluation of any class of assets should not result in the net book value of that class being greater than the recoverable amount of that class of assets.

(d) The net increase in book value should be credited to a revaluation reserve account.

(e) On disposal of a previously revalued item of fixed asset, the difference between net disposal proceeds and the net book value should be charged or credited to the profit and loss account except that to the extent to which such a loss is related to an increase and which has not been subsequently reversed or utilised may be charged directly to that account.