Short Notes on Retained Earnings, Public Deposits, and ADR & GDR | 12th HSC S.P. Chapter 2

The short notes on Retained Earnings (Ploughing Back of Profits), Public Deposits, and American Depository Receipt (ADR) / Global Depository Receipt (GDR) are the most frequently asked 4-mark questions from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, these topics regularly appear in Question 5 (Answer in Brief - 4 Marks), Question 2 (Explain the Terms - 2 Marks), and Question 6 (Justify Statements - 4 Marks). Below are the complete, textbook-accurate solutions for all three topics strictly aligned with the latest Balbharati Textbook.

Board Examiner Marking Scheme (4 Marks):
1. Meaning & Alternative Names / Definition: 1 Mark
2. Key Features / Determinants / Explanation (4 to 5 well-explained points): 3 Marks
Topper's Tip: Always mention alternative terms like "Self-Financing" or "Ploughing Back of Profits" for Retained Earnings, and the "6 months to 36 months" tenure for Public Deposits!

Part A: Retained Earnings (Ploughing Back of Profits) & Its Determinants

1. Meaning of Retained Earnings

Business organizations are subject to variation in earnings. Therefore, it is a wise decision for a company not to distribute the entire net profit among shareholders as dividend, but to keep aside (retain) a part of its net profit in the form of reserves and use it for future business expansion. This process of accumulating corporate profits and their utilization in the business is called "Retained Earnings".

Alternative Names: In simple words, the part of net profit (earnings) which is not distributed to shareholders as dividend and is retained by the company in the form of "Reserve Fund" is known as "Retained Earnings", "Ploughing Back of Profits", or "Internal Financing / Self-Financing".
Capitalization of Reserves: The company can convert these reserves into permanent share capital by issuing free "Bonus Shares" to existing equity shareholders. This process is known as "Capitalization of Profits or Reserves".
Free Source of Capital: Bonus shares are issued free of cost to existing equity shareholders out of accumulated profit. Thus, the management can convert retained earnings into permanent share capital without issuing any new shares for cash in the market. It is an important source of raising long-term capital Because it is a simple and cheapest (cost-free) method of raising finance for an established company.

Definition by R. C.Guthmann and H. E. Dougall:
"The process of accumulating corporate profits and their utilization in business is called retained earnings."

2. Determinants of Retained Earnings (4 Official Textbook Points)

The amount of retained earnings that a company can accumulate depends upon the following 4 key determinants (factors):

Total Earnings of Company: If there is an ample (high) profit, the company can easily save and retain a large part of its earnings. The attitude of top management towards ploughing back of profits also plays an important role; the higher the net profit, the higher the capacity to save.
Taxation Policy of Government: The taxation policy of the government is an important determinant of corporate savings. If the taxes levied by the government are at a high rate, the company cannot save much of the profits in the form of reserves, as a major portion of profit goes towards paying corporate tax. Lower tax rates encourage higher retained earnings.
Dividend Policy: It is a term which refers to the policy of the Board of Directors in respect of distribution of profit. A conservative dividend policy (paying dividend at a moderate rate even in years of high profit) is essential for having a good accumulation of profits. However, this policy affects shareholders as they get dividend at a lower rate.
Government Control: A government is a regulatory body of the economic system of the country. Its policies, rules, and regulations ensure that companies work as per its regulations. The company has to formulate its dividend policy and reserve policy in accordance with the rules and regulations framed by the Government and the Companies Act, 2013.

Part B: Short Note on Public Deposits as a Source of Finance

1. Meaning of Public Deposits

Public Deposits are an important source of financing short-term and medium-term requirements of a company. Companies receive fixed deposits from the general public or their own members for a period ranging from 6 months to 36 months (3 years). Such deposits are called "Public Deposits".

2. Key Features & Provisions of Public Deposits

Meaning & Tenure: Under this method, the general public is invited by the company to deposit their savings with the company for a varied period ranging from a minimum of 6 months to a maximum of 36 months.
Rate of Interest: The company pays interest on these deposits at a fixed, pre-determined rate (which cannot exceed the maximum rate prescribed by the RBI). The rate of interest is generally higher than bank fixed deposit rates, making it attractive to investors.
Deposit Receipt (Within 21 Days): The company issues a "Deposit Receipt" to the depositor within 21 days from the date of receipt of money or realization of cheque. The Deposit Receipt is an acknowledgement of debt (loan) by the company, and the terms of deposit are printed on it.
Nature of Security & Risk: Public deposits are either secured or unsecured loans offered to the company. Unsecured deposits are considered a risky source of finance because failing to repay deposits on maturity severely damages the company's reputation and leads to strict legal penalties.
Governing Legal Section [Section 73 to 76]: Acceptance of deposits is strictly regulated by Sections 73 to 76 of the Companies Act, 2013 read with the Companies (Acceptance of Deposits) Rules, 2014 and directions of the RBI.
Ceiling Limit (Maximum 35%): A company cannot accept fresh deposits if the amount of such deposit together with the previous deposits exceeds 25% (from public) and 10% (from members) — i.e., a total of 35% of the aggregate of the paid-up share capital and free reserves of the company.

Part C: Short Note on American Depository Receipt (ADR) and Global Depository Receipt (GDR)

1. Meaning of ADR and GDR

In India, the shares of any public company are listed and traded on Indian Stock Exchanges like BSE and NSE in Indian Rupees (INR). With the adoption of a free economic policy and globalization, cross-border movement of capital is allowed. Therefore, big Indian companies now raise equity capital from foreign investors in international markets by issuing Depository Receipts (ADR and GDR).

2. How ADR and GDR Work (Step-by-Step Mechanism)

Issue to Domestic Custodian Bank: The Indian company issues its equity shares in India to an intermediary called the "Domestic Custodian Bank".
Issue of Depository Receipts Abroad: Against these shares, an "Overseas Depository Bank" issues Depository Receipts (ADRs or GDRs) to foreign investors in the foreign country. Each Depository Receipt represents a fixed number of underlying equity shares of the Indian company.
Trading & Benefits: These GDRs/ADRs are then listed and traded on foreign stock exchanges just like regular shares. The foreign investor gets regular dividends in foreign currency and enjoys capital appreciation.

3. Difference Between ADR and GDR

Basis	American Depository Receipt (ADR)	Global Depository Receipt (GDR)
Where Traded	Traded only in the United States of America (USA).	Traded in any country other than the USA (mostly in European markets).
Stock Exchanges	Listed on American exchanges like New York Stock Exchange (NYSE) and NASDAQ.	Listed on exchanges like London Stock Exchange, Luxembourg Stock Exchange, Frankfurt, Singapore, or Dubai.
Currency	Traded purely in US Dollars (USD).	Mostly traded in Euros or US Dollars.

Quick Memory Trick to Remember in the Exam

Memory Shortcut for Determinants of Retained Earnings ("TT-DG"):
1. Total Earnings of Company (Higher profit = Higher savings)
2. Taxation Policy of Government (Higher tax = Lower savings)
3. Dividend Policy (Conservative dividend policy = Higher reserves)
4. Government Control (Compliance with Companies Act rules)

Key Concept Summary for Objective Questions (Q.1)

Self-Financing / Ploughing Back of Profits: Retained Earnings is an internal source of finance also known as "Self-Financing" or "Ploughing Back of Profits".
Tenure of Public Deposits: A company can accept Public Deposits for a minimum period of 6 months and a maximum period of 36 months (3 years).
ADR vs. GDR: Depository Receipts traded in the USA are called ADRs, whereas those traded in countries other than the USA are called GDRs.