Showing posts with label Chapter 2 Sources of Finance. Show all posts

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.

What is a Debenture? Discuss the Different Types of Debentures | 12th HSC Secretarial Practice (S.P.) Chapter 2

The question "What is a Debenture? Discuss the different types of Debentures" is one of the highest-scoring 8-mark long answer questions from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question regularly appears in Question 8 (Answer the Following) for 8 Marks. Just like Types of Preference Shares, there are exactly 8 distinct types of Debentures divided into 4 logical pairs, making it effortless to score a full 8 out of 8 Marks! Below is the complete model answer aligned with the latest Balbharati Textbook.

Board Examiner Marking Scheme (8 Marks):
1. Meaning & Legal Definition of Debentures (Section 2(30)): 2 Marks
2. Classification Chart & Explanation of all 8 Types: 6 Marks
Topper's Tip: Always draw the 4-Category Classification Table right after the definition before explaining the 8 points!

1. Meaning and Definition of Debentures

Meaning of Debentures

Debentures are one of the principal sources of raising borrowed capital (debt capital) to meet long-term and medium-term financial requirements of a company. The word "Debenture" is derived from the Latin word "Debere", which means "to owe". A debenture is an instrument of creditorship security (loan certificate) issued by a company under its seal, acknowledging a debt and containing provisions for the repayment of principal and periodic payment of interest at a fixed rate.

Legal Definition (Section 2(30) of the Companies Act, 2013)

According to Section 2(30) of the Companies Act, 2013:

"Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not."

2. Classification Chart: 8 Types of Debentures

Debentures are classified into 8 distinct types under 4 main bases of classification:

Sr. No.	Basis of Classification	Types of Debentures (8 Types)
A.	On the Basis of Security	1. Secured Debentures 2. Unsecured Debentures
B.	On the Basis of Transferability	3. Registered Debentures 4. Bearer Debentures
C.	On the Basis of Repayment (Redemption Condition)	5. Redeemable Debentures 6. Irredeemable Debentures
D.	On the Basis of Convertibility	7. Convertible Debentures 8. Non-Convertible Debentures

3. Detailed Explanation: Different Types of Debentures

1. Secured Debentures

The debentures can be secured by creating a charge (mortgage) on the property/assets of the company. Such debentures are called Secured Debentures (or Mortgage Debentures). The security may be for some particular fixed asset (Fixed Charge) or it may be on the assets in general (Floating Charge). The debentures are secured through a legal agreement called a "Trust Deed" executed between the company and the Debenture Trustees. If the company defaults in paying interest or repaying the principal, the trustees can sell the charged property to recover the dues.

2. Unsecured Debentures

These are the debentures that have no security backing them. The company does not offer any fixed or floating charge on its assets to the holders of Unsecured Debentures (also called Simple or Naked Debentures). Holders of such debentures are treated like ordinary unsecured creditors. Important Legal Note: The issue of unsecured debentures is now prohibited by the Companies Act, 2013.

3. Registered Debentures

Registered Debentures are those debentures on which the name of the holder is recorded on the debenture certificate as well as in the company's Register of Debenture Holders. The Register of Debenture Holders contains the name, address, and particulars of holdings of every debenture holder. The payment of interest and repayment of principal are made only to the registered holder. The transfer of registered debentures requires the execution of a regular Transfer Deed.

4. Bearer Debentures

On Bearer Debentures, the name of the holder is not recorded on the debenture certificate, nor are their names entered in the Register of Debenture Holders. Such debentures are transferable by mere delivery (just like a currency note) without executing any transfer deed. The payment of interest is made by means of "Interest Coupons" attached to the debenture certificate, which the holder can encash at the company's bank as and when each coupon falls due.

5. Redeemable Debentures

Redeemable Debentures are mostly issued by companies and are payable at the end of some fixed period, as mentioned on the debenture certificate. Repayment can be made at a fixed maturity date at the end of a specific period (lump sum) or by installments during the lifetime of the company. The provision of repayment is normally made in the "Trust Deed".

6. Irredeemable Debentures

These kind of debentures are not repayable during the lifetime of the company (also called Perpetual Debentures). They are repayable only after the liquidation (winding up) of the company, or when there is a breach of any condition or when some contingency arises (such as failure to pay interest regularly).

7. Convertible Debentures

Convertible Debentures give a right to the holder to convert them into equity shares after a specific period of time at a rate of exchange mentioned in the prospectus/debenture certificate. According to Section 71(1) of the Companies Act, 2013, the issue of convertible debentures must be approved by passing a Special Resolution in a General Meeting before they are issued to the public. These debentures are very advantageous for investors because they gain the right to receive equity shares at a rate that may be lower than the market value of the shares at the time of conversion.

8. Non-Convertible Debentures (NCDs)

Non-Convertible Debentures are not convertible into equity shares on maturity. These debentures are duly redeemed (repaid in cash) on maturity. As a disadvantage, there is no appreciation in value for the investor because they continue solely as debt instruments until redemption.

Quick Memory Trick to Remember All 8 Types in the Exam

Memory Shortcut (4 Basis Words — "S-T-R-C"):
Remember the 4 classification bases using the code "STRC" (Security, Transferability, Repayment, Convertibility):
1. Security: Secured & Unsecured Debentures
2. Transferability: Registered & Bearer Debentures
3. Repayment: Redeemable & Irredeemable Debentures
4. Convertibility: Convertible & Non-Convertible Debentures

Key Concept Summary for Objective Questions (Q.1)

Interest Coupons: Interest on Bearer Debentures is paid through "Interest Coupons" attached to the debenture certificate, whereas interest on Registered Debentures is paid via Interest Warrants or ECS/NEFT.
Transfer by Mere Delivery: Bearer Debentures are negotiable instruments and can be transferred by mere delivery without a transfer deed.
Special Resolution for Convertible Debentures: Under Section 71(1) of the Companies Act, 2013, a company must pass a Special Resolution at a General Meeting to issue Convertible Debentures.
Prohibition on Unsecured Debentures: Under the Companies Act, 2013, Indian companies are not permitted to issue Unsecured Debentures.

Define Debenture and Explain the Features of Debentures | 12th HSC Secretarial Practice (S.P.) Chapter 2

The question "Define Debenture and explain the features of Debentures" is a core 8-mark long answer question from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question regularly appears in Question 8 (Answer the Following) for 8 Marks (or in Question 5 for 4 Marks). Below is the complete, step-by-step model answer strictly aligned with the latest Balbharati Textbook and official board marking scheme.

Board Examiner Marking Scheme (8 Marks):
1. Meaning, Origin & Legal Definition (Section 2(30)): 2 Marks
2. Explanation of Features (Any 6 to 8 valid points with sub-headings): 6 Marks
Presentation Tip: We have provided all 10 official Balbharati textbook points below. Studying at least 8 points guarantees a full 8 out of 8 score!

1. Meaning and Definition of Debentures

Meaning & Origin of the Word "Debenture"

Debentures are one of the principal sources of raising borrowed capital (debt capital) to meet long-term and medium-term financial needs of a joint-stock company. The word "Debenture" has originated from the Latin word "Debere", which means "to owe". In simple terms, a debenture is a document (certificate of loan) issued by a company under its common seal acknowledging an indebtedness (debt) of a specified sum of money and promising to repay it after a fixed period along with regular interest.

Legal Definition (Companies Act, 2013)

According to Section 2(30) of the Companies Act, 2013:

"Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not."

Expert Definition (Palmer)

According to Palmer:

"A debenture is an instrument under seal evidencing debt, the essence of it being admission of indebtedness."

2. Quick Revision Chart: 10 Features of Debentures

Drawing this quick summary list of the 10 features before explaining them helps the board examiner award full marks immediately:

Sr. No.	Feature Heading (Balbharati Textbook)	Key Keyword for Exam
1.	Promise	Written promise to repay principal amount on maturity
2.	Face Value	High denomination — usually Rs. 100/- or in multiples of Rs. 100/-
3.	Time of Repayment	Repaid on a specified due date (maturity date) written on certificate
4.	Priority of Repayment	Paid before equity and preference shareholders on winding up
5.	Assurance of Repayment	Long-term debt carrying an assured repayment of principal
6.	Interest	Fixed rate of interest payable periodically regardless of profit
7.	Parties to Debentures	3 Parties: (a) Company, (b) Trustees, and (c) Debenture Holders
8.	Authority to Issue Debentures	Issued by the Board of Directors (Section 179(3))
9.	Status of Debenture Holder	Creditor of the company; no voting rights (Section 71(2))
10.	No Voting Right & Security	Secured by fixed or floating charge on assets; listed on Stock Exchange

3. Detailed Explanation: Features of Debentures

1. Promise

A debenture is a written promise by the company that it owes a specified sum of money to the holder of the debenture. It contains an undertaking to repay the principal amount on a specified maturity date or after a fixed period.

2. Face Value

The face value (nominal value) of a debenture normally carries a high denomination. It is generally issued in denominations of Rs. 100/- or in multiples of Rs. 100/- (such as Rs. 500/- or Rs. 1,000/-).

3. Time of Repayment

Debentures are issued with the due date of repayment (maturity date) clearly stated on the face of the debenture certificate. The principal amount of debentures is repaid by the company on the maturity date.

4. Priority of Repayment

Debenture holders have a priority in the repayment of debenture capital over the other claimants (such as preference shareholders and equity shareholders) of the company at the time of liquidation or winding up.

5. Assurance of Repayment

A debenture constitutes a long-term debt. They carry an assurance of repayment on the due date because most debentures are backed by tangible security and a Debenture Redemption Reserve (DRR).

6. Interest

A fixed rate of interest is agreed upon and is paid periodically (annually, half-yearly, or quarterly) in case of debentures. Payment of interest is a fixed liability (charge against profit) of the company. It must be paid by the company irrespective of the fact whether the company makes a profit or suffers a loss.

7. Parties to Debentures

There are generally three parties involved in a debenture issue:

(a) Company: This is the business entity that borrows the money and issues the debentures.
(b) Trustees (Debenture Trustees): A company has to appoint Debenture Trustees if it is offering debentures to more than 500 people. This is an institution through which the company deals with the debenture holders. The company makes a legal contract with the trustees known as the "Trust Deed".
(c) Debenture Holders: These are the investors (lenders) who provide the loan and receive the debenture certificate as evidence of participation.

8. Authority to Issue Debentures

According to the Companies Act, 2013, Section 179(3), the Board of Directors has the power to issue debentures by passing a resolution at a Board Meeting (subject to borrowing limits approved by shareholders).

9. Status of Debenture Holder

A debenture holder is a creditor of the company. Since a debenture is a loan taken by the company, interest is payable on it at a fixed rate, at a fixed interval, until the debenture is redeemed.

10. No Voting Right, Security & Listing

No Voting Right: According to Section 71(2) of the Companies Act, 2013, no company shall issue any debentures carrying any voting rights at general meetings. Debenture holders have no right to participate in the management of the company.
Security: Debentures are generally secured by a fixed or floating charge on the assets of the company. If the company is not in a position to make payment of interest or repayment of capital, the debenture holder can sell off the charged property of the company and recover his money.
Listing: Debentures must be listed with at least one recognized Stock Exchange, and they can be easily transferred through the instrument of transfer.

Quick Memory Trick to Remember All 10 Points in the Exam

Memory Shortcut (Mnemonic — "PFT-PAI-PASN"):
Group the 10 textbook headings into 3 easy logical sets:
1. Certificate & Repayment (5 Points): Promise, Face Value (Rs. 100), Time of Repayment, Priority of Repayment & Assurance of Repayment
2. Return & Parties (3 Points): Fixed Interest, 3 Parties (Company, Trustees, Holders) & Authority to Issue (Board of Directors)
3. Status & Rights (2 Points): Status (Creditor) & No Voting Right / Security on Assets

Key Concept Summary for Objective Questions (Q.1)

Latin Origin: The word Debenture comes from the Latin word "Debere", which means "to owe".
Authority to Issue Debentures: Under Section 179(3) of the Companies Act, 2013, the power to issue debentures rests with the Board of Directors.
Debenture Trustees Threshold: A company must appoint one or more Debenture Trustees when it invites more than 500 persons to subscribe for its debentures.
Creditorship Security: Debentures are known as "Creditorship Securities" because debenture holders are creditors of the company.

What is a Preference Share? Explain the Features of Preference Shares | 12th HSC S.P. Chapter 2

The question "What is a Preference Share? Explain the features of Preference Shares" is a major long answer question from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question frequently appears in Question 8 (Answer the Following) for 8 Marks (or in Question 5 for 4 Marks). Below is the complete, step-by-step model answer strictly aligned with the latest Balbharati Textbook and official board marking scheme.

Board Examiner Marking Scheme (8 Marks):
1. Meaning & Legal Definition (Section 43): 2 Marks
2. Explanation of Features (Any 6 to 8 valid points with sub-headings): 6 Marks
Presentation Tip: We have provided all 10 official Balbharati textbook points below. Studying at least 8 points guarantees a full 8 out of 8 score!

1. Meaning and Definition of Preference Shares

Meaning of Preference Shares

As the name indicates, Preference Shares are those shares which enjoy certain preferential rights (priorities) over equity shares. They carry a special priority regarding the payment of annual dividend and the return of capital at the time of winding up of the company. Preference shareholders are co-owners of the company, but unlike equity shareholders, they do not enjoy normal voting rights or control over the management.

Legal Definition (Section 43(b) of the Companies Act, 2013)

According to Section 43(b) of the Companies Act, 2013, a Preference Share is one which fulfills the following two essential conditions:

Preference for Dividend: It carries a preferential right to receive dividend (either as a fixed amount or an amount calculated at a fixed rate) during the lifetime of the company, before any dividend is paid to equity shareholders.
Preference for Repayment of Capital: It carries a preferential right to the repayment of paid-up capital in the event of winding up (liquidation) of the company, before any capital is returned to equity shareholders.

2. Quick Revision Chart: 10 Features of Preference Shares

Drawing this quick summary list of the 10 features before explaining them helps the board examiner award full marks immediately:

Sr. No.	Feature Heading (Balbharati Textbook)	Key Keyword for Exam
1.	Preference for Dividend	First charge on distributable net profit
2.	Preference for Repayment of Capital	Paid before equity shareholders during winding up
3.	Fixed Return	Pre-determined, fixed rate of dividend out of profits
4.	Nature of Capital	Safe Capital; redeemable within maximum 20 years
5.	Market Value	Remains steady/stable; no wide fluctuations
6.	Voting Rights	No normal voting rights; vote only on matters affecting them
7.	Risk	Less risky; steady return and priority in repayment
8.	Face Value	Relatively higher than equity shares — usually Rs. 100/-
9.	Rights or Bonus Issue	Not entitled to Bonus Shares or Rights Issue
10.	Nature of Investor	Attracts cautious, conservative, and safety-conscious investors

3. Detailed Explanation: Features of Preference Shares

1. Preference for Dividend

Preference shares hold the first charge on the distributable net profit of the company. Whenever the company earns distributable profit and decides to declare a dividend, the dividend is payable to preference shareholders first, before any dividend is paid to equity shareholders.

2. Preference for Repayment of Capital

Preference shareholders also have a preferential right over equity shareholders in respect of return of capital when the company is wound up (liquidated). After paying all external creditors and debenture holders, the company repays preference share capital in full before returning any money to equity shareholders. It saves preference shareholders from heavy capital losses.

3. Fixed Return

These shares carry dividend at a fixed, pre-determined rate (e.g., 9% Preference Shares). The rate of dividend is decided at the time of issue. This fixed dividend is payable only out of the net profits of the company. During a financial crisis or loss, the Board of Directors may decide not to pay dividend cleanly unless they are cumulative preference shares.

4. Nature of Capital

Preference shares do not provide permanent capital to the company. They are redeemed (repaid) after a certain fixed period of time. As per Section 55 of the Companies Act, 2013, a company cannot issue irredeemable preference shares, and preference shares must be redeemed within a maximum period of 20 years from the date of issue. Preference capital is generally raised at a later stage when the company is well-established, and it is called "Safe Capital" because the rate of dividend and market value remain stable.

5. Market Value

The market value of preference shares does not change (fluctuate) widely because the rate of dividend payable to them is fixed. Therefore, there is very little scope for capital appreciation as compared to equity shares, and they do not attract stock market speculators.

6. Voting Rights

The preference shareholders do not enjoy normal voting rights at general meetings. They do not enjoy the right of control over the affairs and management of the company. They can vote only on those resolutions of the company that directly affect their rights (such as winding up of the company, repayment or reduction of preference share capital), or if their dividend remains unpaid for two or more consecutive years.

7. Risk

The investors who are cautious generally purchase preference shares. Safety of money and a steady fixed return are the primary advantages attached to these shares. Moreover, they are a boon for shareholders during a depression period when interest rates are continuously falling, as their fixed dividend rate remains protected.

8. Face Value

The face value (nominal value) of preference shares is relatively higher than that of equity shares. They are normally issued having a face value of Rs. 100/- per share.

9. Rights or Bonus Issue

Preference shareholders are not entitled to get Bonus Shares (free shares) or Rights Issue of shares. These privileges are reserved exclusively for the existing equity shareholders of the company.

10. Nature of Investor

Preference shares attract moderate and cautious types of investors. Investors who are conservative, cautious about the safety of their principal investment, and interested in fixed, regular returns on investment prefer to buy preference shares.

Quick Memory Trick to Remember All 10 Points in the Exam

Memory Shortcut (Mnemonic — "PP-FN-MV-RF-RN"):
Notice that the points are the exact opposite of Equity Shares! Group them into 3 easy sets:
1. The 3 Priorities & Return: Preference for Dividend, Preference for Capital Repayment & Fixed Return
2. Capital, Market & Control: Nature of Capital (Safe/Redeemable), Market Value (Stable) & Voting Rights (No Normal Voting)
3. Investor & Value: Risk (Low Risk), Face Value (Rs. 100), No Rights/Bonus Issue & Nature of Investor (Cautious)

Key Concept Summary for Objective Questions (Q.1)

Safe Capital: Preference Share Capital is considered "Safe Capital" because it carries a fixed rate of dividend and priority in repayment of capital.
Face Value of Preference Shares: The face value of preference shares is relatively high—normally Rs. 100/-.
Co-owners but Not Controllers: Preference shareholders are co-owners of the company, but they are not controllers because they do not enjoy normal voting rights.

Define Preference Shares. What Are the Different Types of Preference Shares? | 12th HSC S.P. Chapter 2

The question "Define Preference Shares. What are the different types of Preference Shares?" is one of the easiest and highest-scoring 8-mark long answer questions from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question regularly appears in Question 8 (Answer the Following) for 8 Marks. Because there are exactly 8 distinct types divided into 4 logical pairs, students who draw the classification chart and explain the 8 types easily score a full 8 out of 8 Marks! Below is the complete model answer aligned with the latest Balbharati Textbook.

Board Examiner Marking Scheme (8 Marks):
1. Meaning & Legal Definition of Preference Shares (Section 43): 2 Marks
2. Classification Chart & Explanation of all 8 Types: 6 Marks
Topper's Tip: Always draw the 4-Category Classification Table right after the definition before explaining the 8 points!

1. Meaning and Definition of Preference Shares

Meaning of Preference Shares

As the name indicates, Preference Shares are those shares which enjoy certain preferential rights (priorities) over equity shares. They are a safe source of owned capital preferred by cautious investors who want a steady, fixed return with low risk. Preference shareholders are co-owners of the company, though they do not carry normal voting rights.

Legal Definition (Section 43(b) of the Companies Act, 2013)

According to Section 43(b) of the Companies Act, 2013, a Preference Share is one which carries the following two preferential rights over equity shares:

Preferential Right as to Payment of Dividend: A preferential right to receive dividend at a fixed rate (either a fixed amount or an amount calculated at a fixed rate) during the lifetime of the company, before any dividend is paid to equity shareholders.
Preferential Right as to Return of Capital: A preferential right to the repayment of paid-up capital in the event of winding up (liquidation) of the company, before any capital is returned to equity shareholders.

2. Classification Chart: 8 Types of Preference Shares

Preference shares are classified into 8 distinct types under 4 main bases of classification:

Sr. No.	Basis of Classification	Types of Preference Shares (8 Types)
A.	On the Basis of Accumulation of Dividend	1. Cumulative Preference Shares 2. Non-Cumulative Preference Shares
B.	On the Basis of Participation in Surplus Profit	3. Participating Preference Shares 4. Non-Participating Preference Shares
C.	On the Basis of Convertibility into Equity Shares	5. Convertible Preference Shares 6. Non-Convertible Preference Shares
D.	On the Basis of Redemption (Repayment of Capital)	7. Redeemable Preference Shares 8. Irredeemable Preference Shares

3. Detailed Explanation: Different Types of Preference Shares

1. Cumulative Preference Shares

Cumulative Preference Shares are those shares on which the dividend goes on accumulating (adding up) until it is fully paid. This means that if the company fails to pay dividend in any one or more years due to inadequate profit, the unpaid dividend gets accumulated as "Arrears of Dividend". These arrears must be paid out of future profits in subsequent years before any dividend is paid to equity shareholders. Note: All preference shares issued by a company are always presumed to be Cumulative Preference Shares unless stated otherwise in the Articles of Association.

2. Non-Cumulative Preference Shares

Dividend on Non-Cumulative Preference Shares does not get accumulated. It means the dividend on these shares can be paid only out of the profits of that particular year. The right to claim dividend will lapse (expire) if the company does not make profit in that particular year. If dividend is not paid in any year, it is lost forever and cannot be claimed in future years.

3. Participating Preference Shares

The holders of Participating Preference Shares are entitled to participate in the surplus profit besides (in addition to) their fixed preferential dividend. Surplus profit refers to the extra profit remaining after paying the fixed dividend to preference shareholders and a certain fixed limit of dividend to equity shareholders (as specified in the Articles of Association). They may also be entitled to participate in surplus assets at the time of winding up.

4. Non-Participating Preference Shares

The preference shares are deemed to be Non-Participating Preference Shares if there is no clear provision in the Articles of Association. These shareholders are entitled to receive only the fixed rate of dividend prescribed in the issue terms and have no right to share in any surplus profit or surplus assets of the company.

5. Convertible Preference Shares

The holders of Convertible Preference Shares have a right to convert their preference shares into equity shares within a certain fixed period, if approved by passing a Special Resolution. Once converted, they lose their preferential status and enjoy all the rights and benefits of equity shareholders.

6. Non-Convertible Preference Shares

Non-Convertible Preference Shares are those shares which cannot be converted into equity shares at any time during their tenure. Unless the Articles of Association or terms of issue explicitly state otherwise, all preference shares are assumed to be non-convertible.

7. Redeemable Preference Shares

Shares which can be redeemed (repaid) after a certain fixed period of time during the lifetime of the company are called Redeemable Preference Shares. A company limited by shares, if authorized by its Articles of Association, issues redeemable preference shares. Under Section 55 of the Companies Act, 2013, such shares must be redeemed out of divisible profits or out of the proceeds of a fresh issue of shares made for the purpose of redemption (within a maximum period of 20 years).

8. Irredeemable Preference Shares

Shares which cannot be redeemed during the lifetime of the company are known as Irredeemable Preference Shares. The money invested in these shares is repaid only at the time of winding up (liquidation) of the company. Important Legal Provision: As per Section 55(1) of the Companies Act, 2013, a company in India cannot issue Irredeemable Preference Shares.

Quick Memory Trick to Remember All 8 Types in the Exam

Memory Shortcut (4 Opposite Pairs — "C-P-C-R"):
Never memorize 8 separate names! Just remember 4 keywords ("CPCR") and add "Non-" / "Ir-" for the opposite pair:
1. Cumulative & Non-Cumulative (About Unpaid Dividend Accumulating)
2. Participating & Non-Participating (About Sharing in Surplus Profit)
3. Convertible & Non-Convertible (About Converting into Equity Shares)
4. Redeemable & Ir-Redeemable (About Repayment of Capital During Lifetime)

Key Concept Summary for Objective Questions (Q.1)

Default Nature of Preference Shares: Unless the Articles of Association state otherwise, all Preference Shares are deemed to be Cumulative, Non-Participating, and Non-Convertible.
Maximum Tenure (20 Years): Under Section 55 of the Companies Act, 2013, a company cannot issue preference shares redeemable after 20 years from the date of issue (except up to 30 years for infrastructure companies).
Prohibition on Irredeemable Preference Shares: Under the Companies Act, 2013, Indian companies are prohibited from issuing Irredeemable Preference Shares.
Condition for Redemption: Preference shares can be redeemed only if they are fully paid-up. Partly paid-up preference shares cannot be redeemed.

What is an Equity Share? Explain the Features of Equity Shares | 12th HSC Secretarial Practice (S.P.) Chapter 2

The question "What is an Equity Share? Explain the features of Equity Shares" is the most repeated 8-mark long answer question from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question regularly appears in Question 8 (Answer the Following) for 8 Marks (and is also asked for 4 Marks in Question 5). Below is the complete, step-by-step model answer strictly aligned with the latest Balbharati Textbook and official board marking scheme.

Board Examiner Marking Scheme (8 Marks):
1. Meaning & Legal Definition (Section 43): 2 Marks
2. Explanation of Features (Any 6 to 8 valid points with sub-headings): 6 Marks
Presentation Tip: We have provided all 13 official Balbharati textbook points below. Studying at least 8 to 10 points guarantees a full 8 out of 8 score!

1. Meaning and Definition of Equity Shares

Meaning of Equity Shares

Equity Shares are also known as "Ordinary Shares". They represent the primary and fundamental source of long-term finance for any joint-stock company. Equity shareholders are the real owners of the company and bear the ultimate financial risk associated with the business. They do not enjoy any preferential rights regarding the payment of dividend or the repayment of capital at the time of winding up of the company; they are paid only after all other claims have been settled.

Legal Definition (Companies Act, 2013)

According to Section 43(a) of the Companies Act, 2013:

"Equity share capital, with reference to any company limited by shares, means all share capital which is not preference share capital."

From the above legal definition, it is clear that equity shares have two fundamental characteristics:

They do not enjoy preference for dividend before preference shares.
They do not have priority for repayment of capital at the time of winding up of the company.

Types of Equity Shares

Under the Companies Act, 2013, a company can issue two types of equity shares:

(a) Equity Shares with Normal Voting Rights: Where the voting rights of a shareholder are in proportion to his share of the paid-up equity capital.
(b) Equity Shares with Differential Voting Rights (DVR): Where shareholders have varying rights regarding dividend, voting, or otherwise in accordance with Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014.

2. Quick Revision Chart: 13 Features of Equity Shares

In the board exam, drawing a quick summary list or chart of the headings before explaining them creates an outstanding impression on the examiner:

Sr. No.	Feature Heading (Balbharati Textbook)	Key Keyword for Exam
1.	Permanent Capital	Irredeemable Shares (Returned only on winding up)
2.	Fluctuating Dividend	No fixed rate; depends on company profits
3.	Rights of Equity Shareholders	Right to Vote, Share in Profit, Inspect Books & Transfer
4.	No Preferential Right	Paid dividend and capital after preference shares
5.	Controlling Power	Real Masters; elect Board of Directors & vote on all matters
6.	Risk	Shock Absorbers; bear maximum financial risk
7.	Residual Claimant	Claim on remaining profits and remaining assets
8.	No Charge on Assets	Unsecured capital; no mortgage on company property
9.	Bonus Issue	Entitled to free fully paid-up Bonus Shares
10.	Right Issue	Pre-emptive right to subscribe to new shares first
11.	Face Value	Low face value — generally Rs. 10/- or Re. 1/-
12.	Market Value	Fluctuates widely according to demand and supply
13.	Capital Appreciation	Market value increases with company prosperity

3. Detailed Explanation: Features of Equity Shares

1. Permanent Capital

Equity shares are irredeemable shares. The amount received from equity shares is not refundable by the company during its lifetime (except in the case of a legal buy-back of shares). Equity share capital becomes refundable only in the event of winding up (liquidation) of the company. Thus, equity share capital provides long-term and permanent capital to the company.

2. Fluctuating Dividend

Equity shares do not have a fixed rate of dividend. The rate of dividend depends upon the amount of profit earned by the company and the recommendation of the Board of Directors. If the company earns more profit, dividend is paid at a higher rate. On the other hand, if there is insufficient profit or loss, the Board of Directors may postpone the payment of dividend. Even the shareholders cannot compel them to declare a dividend. Hence, the income of equity shareholders is uncertain and irregular.

3. Rights of Equity Shareholders

Equity shareholders enjoy four fundamental corporate rights:

(a) Right to Vote: It is the basic right of equity shareholders through which they elect directors, alter the Memorandum and Articles of Association, etc.
(b) Right to Share in Profit: They have the right to share in the distributable profits in the form of dividend when declared.
(c) Right to Inspect Books: They have the statutory right to inspect the statutory books and registers of their company.
(d) Right to Transfer Shares: They enjoy the right to freely transfer their shares (in a public company) as per the procedure laid down in the Articles of Association.

4. No Preferential Right

Equity shareholders do not enjoy any preferential right in respect of payment of dividend. They are paid dividend only after dividend on preference shares has been paid at a fixed rate. Similarly, at the time of winding up of the company, the equity shareholders are paid last—only if any surplus assets remain after paying all creditors and preference shareholders.

5. Controlling Power

The control of the company is vested with the equity shareholders. They are often described as the "Real Masters" of the company. It is because they enjoy the exclusive right to vote in general meetings on every resolution placed before the meeting. Their voting right is in proportion to their shareholding. They can exercise their voting right by proxies as well, and they participate in the management through their elected representatives called the Board of Directors.

6. Risk

Equity shareholders bear the maximum risk in the company. They are described as the "Shock Absorbers" when the company has a financial crisis. If the income of the company falls, the rate of dividend also comes down, resulting in a fall in the market value of equity shares, which leads to capital loss. Thus, equity shareholders are the main risk-takers, and equity capital is known as "Risk Capital" or "Venture Capital".

7. Residual Claimant

Equity shareholders are the owners of the company and also the residual claimants to all earnings after expenses, taxes, interest, and preference dividends are paid. A residual claim means the last claim on the earnings and assets of the company. Although equity shareholders come last, they also have the advantage of receiving the entire remaining surplus profit, which can be huge during prosperous years.

8. No Charge on Assets

The equity shares do not create any charge (mortgage or security) over the assets of the company. This leaves the company's fixed assets completely free to be mortgaged later when raising borrowed capital through debentures or loans.

9. Bonus Issue

Bonus shares are issued as a gift (free of cost) to the existing equity shareholders out of accumulated profits and free reserves. These shares are issued as fully paid-up shares in proportion to their existing shareholding. Only equity shareholders (and not preference shareholders) are entitled to receive bonus shares.

10. Right Issue

When a company needs more funds for expansion and issues further equity share capital, the existing equity shareholders have the priority right (pre-emptive right) to get newly offered shares first under Section 62 of the Companies Act, 2013. This is called a "Right Issue" of shares.

11. Face Value

The face value (nominal value) of equity shares is always low compared to preference shares and debentures. It is generally kept at Rs. 10/- per share or even Re. 1/- per share so that even small investors can afford to buy them.

12. Market Value

The market value of equity shares fluctuates widely on the stock exchange according to the demand and supply of these shares. The demand and supply depend on the profits earned, dividend declared, and future growth prospects of the company. Therefore, equity shares appeal to speculators as well.

13. Capital Appreciation

Share capital appreciation takes place when the market value of equity shares increases in the share market. Profitability and prosperity of the company enhance the reputation of the company in the share market, which automatically pushes up the market price of equity shares, giving huge capital gains to investors.

Quick Memory Trick to Remember All Points in the Exam

Memory Shortcut (Mnemonic — "PF-RNC-RR-BR-FMC"):
Group the 13 points into 4 easy logical pairs/sets:
1. Capital & Return: Permanent Capital & Fluctuating Dividend
2. Status & Control: Rights of Shareholders, No Preferential Right & Controlling Power
3. Risk & Claim: Risk (Shock Absorbers), Residual Claimant & No Charge on Assets
4. Benefits & Value: Bonus Issue, Right Issue, Face Value (Rs. 10/1), Market Value & Capital Appreciation

Key Concept Summary for Objective Questions (Q.1)

Real Owners & Shock Absorbers: Equity Shareholders are known as the "Real Owners", "Real Masters", "Residual Claimants", and "Shock Absorbers" of the company.
Risk / Venture Capital: Equity Share Capital is known as "Risk Capital" or "Venture Capital".
Face Value of Equity Shares: The face value of an equity share is generally Rs. 10/- or Re. 1/-.

Distinguish Between Owned Capital and Borrowed Capital | 12th HSC Secretarial Practice (S.P.) Chapter 2

The distinction between Owned Capital and Borrowed Capital is a core question from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question is frequently asked under Question 4 (Distinguish Between) carrying 4 Marks. Below is the complete, textbook-accurate tabular solution strictly aligned with the latest Balbharati Textbook and official board marking scheme.

Board Exam Marking Scheme Tip: Each Distinguish Between question in Q.4 carries 4 Marks (1 mark per valid point). Always present your answer in a neat 3-column table including the Basis of Distinction. Write at least 5 to 6 clear points (starting with Meaning, Sources, Return on Investment, and Status) to guarantee a full 4 out of 4 score!

Distinguish Between: Owned Capital and Borrowed Capital

Sr. No.	Basis of Distinction	Owned Capital	Borrowed Capital
1.	Meaning	It is that capital which is contributed by the shareholders (owners) of the company. It also includes internal accruals (retained earnings).	It is that capital which is borrowed from creditors (external lenders). It is also known as Debt Capital or Loan Capital.
2.	Sources	This capital is collected by the issue of Equity Shares and Preference Shares, as well as through Retained Earnings (free reserves and surplus).	It is collected by way of issue of Debentures, Bonds, Fixed Deposits (Public Deposits), and Loans from banks and financial institutions.
3.	Return on Investment	The shareholders get Dividend as income on their investment. The rate of dividend is fluctuating in the case of equity shares, but fixed in the case of preference shares.	The debt capital holders get Interest as income on their investment. Interest is paid at a fixed rate regardless of whether the company makes a profit or not.
4.	Status of Investors	The shareholders are the owners of the company.	The debt holders are the creditors of the company.
5.	Voting Rights	The equity shareholders enjoy normal voting rights at the general meeting and participate in the management of the company.	The creditors (debenture holders, depositors, etc.) do not enjoy voting rights at the general meeting.
6.	Repayment of Capital	The shareholders do not enjoy priority over creditors. They are eligible for repayment of capital only after making payment to all creditors at the time of winding up of the company.	The creditors get priority over the shareholders in case of return of the principal amount at the time of winding up of the company.
7.	Charge on Assets	The shareholders do not have any charge (security) on the assets of the company.	The secured debenture holders and institutional lenders have a fixed or floating charge on the assets of the company.
8.	Nature of Capital	Owned capital is permanent capital which remains in the business throughout the lifetime of the company.	Borrowed capital is temporary capital which must be repaid after a specific, pre-determined period.

Quick Memory Trick to Remember All Points in the Exam

Memory Shortcut (Mnemonic — "MSR-SVR-CN"):
Notice how similar this answer is to Shares vs. Debentures! Just remember these 6 headings:
1. Meaning (Contributed by Shareholders vs. Borrowed from Creditors)
2. Sources (Equity/Preference Shares & Retained Earnings vs. Debentures, Deposits & Loans)
3. Return on Investment (Dividend vs. Fixed Rate of Interest)
4. Status of Investors (Owners of the Company vs. Creditors of the Company)
5. Voting Rights (Enjoy Normal Voting Rights vs. No Voting Rights)
6. Charge on Assets (No Charge on Assets vs. Charge Created on Assets)

Key Concept Summary for Objective Questions (Q.1)

Two Main Sources of Finance: Corporate finance is broadly classified into two categories based on ownership: (1) Owned Capital and (2) Borrowed Capital.
Internal Source of Owned Capital: Retained Earnings (also known as "Ploughing Back of Profits" or "Self-Financing") is an internal source of owned capital because it represents undistributed profits reinvested into the business.
Tax Benefit on Borrowed Capital: Interest paid on Borrowed Capital is treated as a business expense and is deductible for income tax purposes, whereas dividend paid on Owned Capital is an appropriation of profit and is not tax-deductible.

Distinguish Between Shares and Debentures | 12th HSC Secretarial Practice (S.P.) Chapter 2

The distinction between Shares and Debentures is a 5-star board exam favourite from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question is frequently asked under Question 4 (Distinguish Between) carrying 4 Marks. Below is the complete, textbook-accurate tabular solution strictly aligned with the latest Balbharati Textbook and official board marking scheme.

Board Exam Marking Scheme Tip: Each Distinguish Between question in Q.4 carries 4 Marks (1 mark per valid point). Always present your answer in a neat 3-column table including the Basis of Distinction. Write at least 5 to 6 clear points (starting with Meaning, Status, Return, and Voting Rights) to guarantee a full 4 out of 4 score!

Distinguish Between: Shares and Debentures

Sr. No.	Basis of Distinction	Shares	Debentures
1.	Meaning	A Share is a part of the share capital of a company. It is known as an instrument of ownership security.	A Debenture is a certificate of loan taken by a company. They are also known as creditorship securities.
2.	Status	A holder of shares is the owner of the company. Therefore, share capital is Owned Capital.	A holder of debentures is the creditor of the company. Debenture capital is Loan Capital or Borrowed Capital.
3.	Nature	It is permanent capital. It is not repaid during the lifetime of the company (except in the case of redeemable preference shares or buy-back).	It is temporary capital. Generally, it is repaid after a specific, pre-determined period.
4.	Voting Rights	Being owners, shareholders enjoy normal voting rights (in the case of equity shares). They participate in the management of the company.	Being creditors, debenture holders do not have any voting rights. They cannot participate in the management of the company.
5.	Return on Investment	Return on shares is paid out of profits in the form of Dividend. Equity shareholders receive a fluctuating dividend, whereas preference shareholders receive a fixed dividend.	Return on debentures is paid in the form of Interest at a fixed rate. Interest is payable at regular intervals even if the company makes no profit.
6.	Security	Share capital is unsecured capital. No charge or mortgage is created on the assets of the company in favour of shareholders.	Debenture capital, being loan capital, is generally secured by creating a fixed or floating charge on the company's property/assets.
7.	Time of Issue	Shares are issued in the initial stages of the company's formation to raise primary capital.	Debentures are usually issued at a later stage, when the company has acquired properties/assets to offer as security.
8.	Suitability	Shares are suitable for long-term finance requirements of the business.	Debentures are suitable for medium-term and long-term finance requirements.
9.	Position on Liquidation	On winding up (liquidation) of the company, shareholders are ranked last in the priority list for repayment of capital.	Being creditors, debenture holders get priority over shareholders for repayment of principal amount when the company is liquidated.

Quick Memory Trick to Remember All Points in the Exam

Memory Shortcut (Mnemonic — "MS-NV-RSTS"):
Remember these 6 easiest points from the Balbharati textbook to write in under 4 minutes:
1. Meaning (Part of Share Capital vs. Certificate of Loan)
2. Status (Owner / Owned Capital vs. Creditor / Borrowed Capital)
3. Nature (Permanent Capital vs. Temporary Capital)
4. Voting Rights (Enjoy Voting Rights vs. No Voting Rights)
5. Return on Investment (Dividend out of Profit vs. Fixed Interest even without Profit)
6. Security (Unsecured Capital vs. Secured by Charge on Assets)

Key Concept Summary for Objective Questions (Q.1)

Definition of Share: According to Section 2(84) of the Companies Act, 2013, "Share means a share in the share capital of a company and includes stock."
Definition of Debenture: According to Section 2(30) of the Companies Act, 2013, the word "Debenture" includes debenture stock, bonds, and any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.
Origin of Word "Debenture": The word Debenture is derived from the Latin word "Debere", which means "to owe".

Distinguish Between Equity Shares and Preference Shares | 12th HSC Secretarial Practice (S.P.) Chapter 2

The distinction between Equity Shares and Preference Shares is the most repeated and important question from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question regularly appears in Question 4 (Distinguish Between) carrying 4 Marks. Below is the complete, point-wise tabular solution strictly aligned with the latest Balbharati Textbook and official board marking scheme.

Board Exam Marking Scheme Tip: To score a guaranteed 4 out of 4 Marks in Question 4, always write your answer in a 3-column table including the Basis of Distinction. While 4 valid points fetch 4 marks, always write 5 to 6 points (starting with Meaning, Rate of Dividend, and Voting Rights) as a safety buffer!

Distinguish Between: Equity Shares and Preference Shares

Sr. No.	Basis of Distinction	Equity Shares	Preference Shares
1.	Meaning	Shares that are not preference shares are called Equity Shares. Simply stated, these shares do not have a preferential right for payment of dividend and repayment of capital.	Preference Shares are shares that carry a preferential right as to the payment of dividend during the lifetime of the company and the return of capital on winding up of the company.
2.	Rate of Dividend	Equity shares are given dividend at a fluctuating rate depending upon the profits of the company and the recommendation of the Board of Directors.	Preference shareholders get dividend at a fixed rate out of the net profits before any dividend is paid to equity shareholders.
3.	Voting Rights	Equity shareholders enjoy normal voting rights on all matters. They participate in the management of their company by electing directors.	Preference shareholders do not enjoy normal voting rights. They can vote only on matters directly affecting their rights or when dividend remains unpaid for two or more years.
4.	Return of Capital	Equity capital cannot be returned during the lifetime of the company (except in the case of a buy-back of shares). In winding up, they are paid last.	A company can issue redeemable preference shares, which can be repaid during the lifetime of the company. In winding up, they are repaid before equity capital.
5.	Nature of Capital	Equity capital is known as "Risk Capital" or "Venture Capital" because it stays permanently with the company and bears the maximum financial risk.	Preference capital is considered "Safe Capital" with a stable and fixed return. It stays with the company for a pre-decided period (maximum 20 years).
6.	Nature of Investors	Investors who are ready to take risks for higher returns and capital growth prefer equity shares.	Investors who are cautious about the safety of their investment and prefer a steady, fixed income opt for preference shares.
7.	Face Value	The face value of equity shares is generally low — usually Rs. 1/- or Rs. 10/- per share.	The face value of preference shares is relatively higher — usually Rs. 100/- and so on.
8.	Right and Bonus Issue	Equity shareholders are entitled to get Bonus Shares (free shares) and Rights Issue of shares.	Preference shareholders are not eligible for Bonus Shares or Rights Issue of shares.
9.	Capital Appreciation	The market value of equity shares increases with the prosperity of the company, leading to high capital appreciation.	The market value of preference shares does not fluctuate widely, so there is no chance of capital appreciation.

Quick Memory Trick to Remember All Points in the Exam

Memory Shortcut (Mnemonic — "MR-VR-NF-RBC"):
Remember these 6 easiest points from the Balbharati textbook to write in under 4 minutes:
1. Meaning (No Preferential Rights vs. Two Preferential Rights)
2. Rate of Dividend (Fluctuating Rate vs. Fixed Rate)
3. Voting Rights (Normal Voting Rights vs. Restricted Voting Rights)
4. Return of Capital (Not Repaid During Lifetime vs. Redeemable After Fixed Period)
5. Nature of Capital (Risk / Venture Capital vs. Safe Capital)
6. Face Value (Low: Rs. 1 or Rs. 10 vs. Higher: Rs. 100)

Key Concept Summary for Objective Questions (Q.1)

Legal Provision: According to Section 43 of the Companies Act, 2013, a company limited by shares can issue two kinds of share capital: (a) Equity Share Capital and (b) Preference Share Capital.
Residual Claimants: Equity Shareholders are known as the "Real Owners" and "Residual Claimants" of the company because they receive whatever profit or asset value is left after paying all other stakeholders.
Irredeemable Preference Shares: Under Section 55 of the Companies Act, 2013, a company in India cannot issue irredeemable preference shares or preference shares redeemable after 20 years (except for infrastructure projects).