Year: 2020

Management Notes

Bank Reconciliation Statement, Definition, Purpose, Importance

indiafreenotesby indiafreenotes3

Bank Reconciliation Statement (BRS) is a document that compares the balance shown in a company’s bank account (as per the bank statement) with the balance in its own financial records. The purpose of BRS is to identify and reconcile any differences due to outstanding checks, deposits in transit, bank charges, or errors. This process ensures that the financial statements reflect the accurate bank balance, resolving discrepancies between the company’s cash records and the bank’s statement. It helps in detecting fraud, errors, and unauthorized transactions, ensuring financial accuracy and control.

Purpose of Bank Reconciliation Statement (BRS):

  1. Ensuring Accuracy of Cash Balances

One of the primary purposes of preparing a BRS is to ensure that the cash balance in the company’s accounting records matches the cash balance in the bank statement. Discrepancies can occur due to outstanding checks, deposits in transit, or errors. The BRS identifies these differences, helping accountants correct their cash balances, ensuring that both records are accurate and reliable.

  1. Identifying Errors in Financial Records

Mistakes can occur either in the company’s books or the bank’s statement. These errors might include incorrect data entries, missed transactions, or duplicated entries. A BRS highlights such errors, allowing the company to rectify them promptly. It ensures that accounting records reflect the actual cash position, minimizing inaccuracies in financial reporting.

  1. Detecting Fraudulent Activities

BRS is an important tool in detecting and preventing fraud. By comparing the company’s records with the bank’s statement, discrepancies such as unauthorized withdrawals or forged checks can be identified. Timely reconciliation helps in identifying fraudulent activities, enabling businesses to take immediate corrective action and secure their funds.

  1. Monitoring Cash Flow

The reconciliation of the bank balance with the company’s records provides insights into cash flow management. A BRS highlights outstanding checks and uncredited deposits, which could distort the perception of cash flow. By monitoring these elements, businesses can manage their liquidity more effectively, ensuring that cash resources are accurately accounted for and available for operations.

  1. Tracking Bank Charges and Interest

Banks may levy charges for services such as account maintenance, overdraft facilities, or bounced checks, which may not immediately be recorded in the company’s books. Similarly, interest credited to the account might not be reflected in the company’s records. A BRS helps track these charges and interest accurately, ensuring the financial records capture all related transactions.

  1. Ensuring Compliance and Control

Regular preparation of a BRS demonstrates strong internal controls and financial discipline. It ensures compliance with auditing standards and accounting regulations, as accurate cash records are crucial for financial reporting. Regular reconciliation strengthens the company’s credibility in the eyes of stakeholders, auditors, and regulators by reflecting sound accounting practices.

  1. Enhancing Decision-Making

An accurate and up-to-date cash balance is essential for effective decision-making. A BRS provides a clear picture of the company’s liquidity position by reconciling the available cash with banking records. This clarity allows management to make informed decisions regarding investments, expenditures, and financial planning, ensuring smooth business operations and financial stability.

Importance of Bank Reconciliation Statement (BRS):

  1. Ensures Accuracy of Cash Balances

The main purpose of the BRS is to reconcile the differences between the company’s cash records and the bank statement. Various reasons, such as unpresented checks or deposits in transit, can cause discrepancies. By reconciling these differences, businesses can ensure the accuracy of their cash balances, making financial statements more reliable.

  1. Helps in Detecting Fraud

BRS plays an essential role in fraud detection. If unauthorized transactions, such as fraudulent withdrawals, forged checks, or unauthorized electronic payments, are made, the discrepancies between the bank statement and the company’s records will reveal them. Regular reconciliation allows businesses to spot these fraudulent activities early and take corrective measures.

  1. Identifies Accounting Errors

Errors in recording transactions can happen in both the company’s books and the bank’s records. Mistakes like omission, duplication of entries, or incorrect amounts can lead to inaccurate cash balances. A BRS helps in identifying and correcting such errors promptly, ensuring that financial records are correct and complete.

  1. Improves Cash Flow Management

BRS provides valuable insight into a company’s actual cash flow by considering outstanding checks and deposits in transit. Without reconciliation, a business may overestimate or underestimate its available cash. By preparing a BRS, businesses can manage their cash flow effectively, ensuring that they have sufficient liquidity to meet operational needs.

  1. Tracks Bank Charges and Interest

Banks often charge fees for services like overdrafts, wire transfers, or account maintenance, which might not be immediately reflected in the company’s books. Similarly, interest income from bank accounts may not be recorded until reconciliation. A BRS helps track these charges and interest, ensuring that the financial records accurately reflect all transactions.

  1. Facilitates Auditing

The preparation of a BRS is crucial for auditing purposes. Auditors often check the reconciliation process to ensure that the cash records are accurate and free from misstatements. A properly prepared BRS demonstrates strong internal control over financial records, boosting the company’s credibility in the eyes of auditors and stakeholders.

  1. Promotes Informed Decision-Making

Accurate and timely cash information is essential for making sound business decisions. The BRS provides a clear picture of the company’s actual cash position, allowing management to make informed decisions regarding investments, payments, and other financial commitments, thereby improving financial stability and operational efficiency.

Entries of Bank Reconciliation Statement (BRS):

Particulars Amount (₹) Explanation
Bank Balance as per Bank Statement ₹ 50,000 Balance shown by the bank
Add: Deposits in Transit ₹ 5,000 Deposits made but not yet credited by the bank
Add: Interest Credited by Bank ₹ 1,000 Interest income not recorded in company’s books
Less: Outstanding Checks ₹ (7,000) Checks issued by the company but not yet cleared
Less: Bank Charges ₹ (500) Bank fees not recorded in company’s books
Less: Direct Debit for Utility Payment ₹ (1,200) Payment made by the bank on behalf of the company
Less: Dishonored Check (Customer) ₹ (2,000) Check deposited but returned by the bank
Adjusted Bank Balance ₹ 45,300 Final reconciled balance

Explanation:

  1. Bank Balance as per Bank Statement: The amount shown on the bank statement.
  2. Deposits in Transit: Deposits that are not yet reflected in the bank account.
  3. Interest Credited by Bank: Bank has credited interest which is not yet recorded in the company’s books.
  4. Outstanding Checks: Checks issued by the company but not cleared by the bank.
  5. Bank Charges: Service fees charged by the bank, not yet recorded in the company’s books.
  6. Direct Debit for Utility Payment: Payments directly debited by the bank for utility bills.
  7. Dishonored Check: Customer’s check that was returned by the bank due to insufficient funds.
Management Notes

Issue of Equity Share, Procedure, Kinds of Share Issues

indiafreenotesby indiafreenotes8

Equity Shares are the main source of finance of a firm. It is issued to the general public. Equity share­holders do not enjoy any preferential rights with regard to repayment of capital and dividend. They are entitled to residual income of the company, but they enjoy the right to control the affairs of the business and all the shareholders collectively are the owners of the company.

Issue of Shares:

When a company wishes to issue shares to the public, there is a procedure and rules that it must follow as prescribed by the Companies Act 2013. The money to be paid by subscribers can even be collected by the company in installments if it wishes. Let us take a look at the steps and the procedure of issue of new shares.

Procedure of Issue of New Shares

  • Issue of Prospectus

Before the issue of shares, comes the issue of the prospectus. The prospectus is like an invitation to the public to subscribe to shares of the company. A prospectus contains all the information of the company, its financial structure, previous year balance sheets and profit and Loss statements etc.

It also states the manner in which the capital collected will be spent. When inviting deposits from the public at large it is compulsory for a company to issue a prospectus or a document in lieu of a prospectus.

  • Receiving Applications

When the prospectus is issued, prospective investors can now apply for shares. They must fill out an application and deposit the requisite application money in the schedule bank mentioned in the prospectus. The application process can stay open a maximum of 120 days. If in these 120 days minimum subscription has not been reached, then this issue of shares will be cancelled. The application money must be refunded to the investors within 130 days since issuing of the prospectus.

  • Allotment of Shares

Once the minimum subscription has been reached, the shares can be allotted. Generally, there is always oversubscription of shares, so the allotment is done on pro-rata bases. Letters of Allotment are sent to those who have been allotted their shares. This results in a valid contract between the company and the applicant, who will now be a part owner of the company.

If any applications were rejected, letters of regret are sent to the applicants. After the allotment, the company can collect the share capital as it wishes, in one go or in instalments.

Features of Equity Shares

  • Ownership and Control

Equity shareholders are the owners of a company, holding a proportional stake based on the number of shares they own. They influence major corporate decisions by voting on critical matters, including mergers, acquisitions, and board member elections. Their level of control depends on their shareholding percentage. While they don’t manage daily operations, their votes impact strategic directions. This ownership grants them residual claims on profits and assets, making them key stakeholders in the company’s growth and decision-making processes.

  • Voting Rights

Equity shareholders have voting rights that allow them to participate in key company decisions. Voting power is typically proportional to the number of shares owned. Shareholders vote on electing directors, approving financial policies, and strategic moves like mergers. Some companies issue shares with differential voting rights (DVR), offering varied voting privileges. While many retail investors do not actively use their voting rights, institutional investors influence company policies significantly. Shareholders may also vote through proxies, delegating their voting authority to representatives.

  • Dividend Payments

Equity shareholders receive dividends, but payments are not fixed and depend on the company’s profitability. The board of directors determines dividend distribution, and shareholders approve it. If a company performs well, it may distribute higher dividends; if it incurs losses, dividends may not be paid at all. Some companies prefer reinvesting profits into business expansion rather than distributing dividends. While dividends provide income, shareholders primarily seek capital appreciation, as stock value growth often leads to higher long-term returns than periodic dividend payouts.

  • Residual Claim in Liquidation

Equity shareholders have a residual claim on a company’s assets if it goes into liquidation. After repaying debts, liabilities, and preference shareholders, remaining funds are distributed among equity shareholders. Since they are the last to receive payments, equity shares are riskier than debt instruments or preference shares. If a company’s liabilities exceed assets, shareholders may receive nothing. Despite this risk, the potential for high returns attracts investors. The residual claim feature reflects the high-risk, high-reward nature of equity investments.

  • High-Risk, High-Return Investment

Equity shares carry high risk but offer significant return potential. Their market price fluctuates due to company performance, economic conditions, industry trends, and investor sentiment. Unlike bonds or preference shares, equity shares do not provide guaranteed income. Investors may experience significant capital appreciation if the company grows, but losses if it underperforms. Long-term investments in well-performing companies often yield substantial gains, while short-term trading benefits from price volatility. Equity shares suit investors willing to tolerate risks for higher financial rewards.

  • Limited Liability

Equity shareholders enjoy limited liability, meaning their financial risk is restricted to their investment amount. If the company incurs heavy losses or goes bankrupt, shareholders are not personally responsible for repaying debts. Their maximum loss is limited to the value of their shares, unlike proprietors or partners who may be liable for company debts. This protection makes equity investment attractive, as investors can participate in company growth without risking personal assets. However, share prices may fluctuate, affecting the overall investment value.

Different Types of Issues:

  • Initial Public Offering (IPO)

An Initial Public Offering (IPO) is when a company issues shares to the public for the first time to raise capital. It helps businesses expand, repay debts, or fund new projects. Companies must comply with regulatory requirements, such as those set by SEBI in India. Investors can buy shares at a predetermined price or through a book-building process. Once issued, these shares are listed on stock exchanges for trading. An IPO allows companies to transition from private to public ownership, increasing their market visibility and credibility.

  • Follow-on Public Offering (FPO)

A Follow-on Public Offering (FPO) occurs when a company that is already publicly listed issues additional shares to raise more capital. It is used to fund expansion, reduce debt, or improve financial stability. FPOs can be of two types: dilutive, where new shares increase total supply, reducing existing shareholders’ ownership percentage, and non-dilutive, where existing shareholders sell their shares without affecting the total share count. Investors analyze FPOs carefully, as they can impact stock prices based on the company’s financial health and growth prospects.

  • Rights Issue

A rights issue allows existing shareholders to purchase additional shares at a discounted price in proportion to their current holdings. This method helps companies raise funds without issuing shares to the general public. Shareholders can either subscribe to new shares or sell their rights in the market. Rights issues prevent ownership dilution by giving preference to existing investors. However, if shareholders do not participate, their ownership percentage decreases. This type of share issue is often used when a company needs urgent capital for expansion or debt repayment.

  • Bonus Issue

A bonus issue involves a company distributing free additional shares to its existing shareholders based on their holdings, without any cost. This is done from the company’s reserves or retained earnings. For example, a 2:1 bonus issue means shareholders receive two extra shares for every one they own. While it does not change the company’s total value, it increases the number of outstanding shares, reducing the stock price per share. Bonus issues enhance liquidity and investor confidence, rewarding shareholders without impacting cash flow.

  • Private Placement

Private placement is the issuance of shares to a select group of investors, such as institutional investors, venture capitalists, or high-net-worth individuals, instead of the general public. This method helps companies raise capital quickly without the regulatory complexities of a public offering. Private placements can be preferential allotment, where shares are issued at a pre-agreed price, or qualified institutional placement (QIP), which is exclusive to institutional investors. It is a cost-effective alternative to an IPO, allowing companies to raise funds with minimal market fluctuations.

  • Employee Stock Option Plan (ESOP)

An Employee Stock Option Plan (ESOP) allows employees to purchase company shares at a predetermined price after a specific period. It is a form of employee benefit, motivating and retaining key talent by aligning their interests with the company’s success. ESOPs are granted as an incentive, and employees can exercise their options once they meet the vesting period. This increases employee engagement and long-term commitment. Companies use ESOPs to attract skilled professionals, enhance productivity, and create a sense of ownership among employees.

Management Notes

Forfeiture of equity Share

indiafreenotesby indiafreenotes1

Forfeiture of equity shares refers to the process by which a company cancels or terminates the ownership rights of a shareholder who has failed to pay the full amount of the share capital or has breached other terms and conditions of the share agreement. This means that the shareholder loses both the shares and any money that was paid toward the share value. Forfeiture is typically implemented when a shareholder fails to pay the calls for unpaid amounts on shares, and it serves as a means for the company to reclaim the shares.

Reasons for Forfeiture of Shares:

Forfeiture typically occurs due to the following reasons:

  • Non-payment of Calls:

The most common reason for the forfeiture of shares is when a shareholder fails to pay the calls (amounts due) on the shares within the specified period. A company may issue calls for unpaid amounts on the shares, and if the shareholder does not pay within the stipulated time frame, the company can decide to forfeit the shares.

  • Failure to Pay Share Application or Allotment Money:

Shareholder may be unable or unwilling to pay the application money or allotment money when it is due, leading to the forfeiture of the shares.

  • Breach of Terms and Conditions:

If the shareholder violates the terms of the share agreement, the company may decide to forfeit their shares.

  • Non-compliance with Company Rules:

If a shareholder fails to adhere to certain rules laid down by the company (such as violating shareholder agreements), the company may initiate forfeiture.

Procedure for Forfeiture of Shares:

  • Issuance of Call for Payment:

Before forfeiture occurs, the company usually issues a call notice to the shareholders to pay the amount due on the shares. The call notice specifies the amount payable and the deadline by which the payment must be made.

  • Failure to Pay:

If the shareholder fails to make the payment by the specified due date, the company sends a second notice requesting the payment. This notice usually informs the shareholder that, if the payment is not made, the shares may be forfeited.

  • Board Resolution:

If the shareholder does not make the payment even after the second notice, the company’s board of directors may pass a resolution to forfeit the shares. This decision is made during a board meeting and is documented in the minutes of the meeting.

  • Announcement of Forfeiture:

After passing the resolution, the company announces the forfeiture of the shares. This is typically recorded in the company’s records, and the shareholder is informed of the decision. The shareholder loses their rights and ownership in the shares, and the amount paid toward the shares up until that point is forfeited.

  • Return of Shares to the Company:

Once the shares are forfeited, they are returned to the company, and the shareholder no longer has any claim over the shares.

Effect of Forfeiture

  • Cancellation of Shares:

Once shares are forfeited, they are canceled by the company, and the shareholder loses all rights associated with them. The forfeited shares cannot be sold or transferred to another person, as they are no longer valid.

  • No Refund of Paid Amount:

The amount already paid by the shareholder is forfeited, and the shareholder is not entitled to a refund, even though they have lost their ownership in the shares.

  • Company Gains the Right to Reissue:

After forfeiture, the company has the right to reissue the forfeited shares. These shares can be sold to other investors to raise capital for the company. The company may reissue the shares at a discount or at the nominal value, depending on the circumstances.

  • Loss of Voting Rights:

Once the shares are forfeited, the shareholder loses the right to vote at general meetings, as well as any other rights tied to share ownership, such as receiving dividends or participating in company decisions.

Accounting Treatment of Forfeited Shares:

  • Amount Received from the Shareholder:

When a shareholder’s shares are forfeited, the amount received for those shares is transferred to a separate Forfeited Shares Account. The balance in this account represents the amounts paid by the shareholder up until the forfeiture.

  • Adjusting Share Capital:

The amount received from the forfeited shares is transferred from the Share Capital Account to the Forfeited Shares Account. This reduces the total share capital of the company.

  • Reissue of Forfeited Shares:

If the company reissues the forfeited shares, the amount received from the reissue is credited to the Forfeited Shares Account, and the difference between the original amount paid and the amount received on reissue is adjusted accordingly.

  • Profit or Loss on Forfeiture:

If the amount paid on the reissued shares is more than the original amount paid by the shareholder, the company records a gain. If the amount is less, a loss is recognized.

Legal and Regulatory Framework:

Under the Companies Act of 2013 in India, the forfeiture of shares is governed by Section 50. It specifies that a company must follow a proper process, including giving notice to the shareholder before forfeiting the shares. Forfeiture can only occur after a resolution is passed by the company’s board of directors.

Similarly, in other jurisdictions like the UK and the US, there are provisions in place that guide how and when shares can be forfeited. While the process is similar across countries, it is important to refer to the specific regulations in the relevant jurisdiction for compliance.

Management Notes

Issue and Redemption of Preference Shares

indiafreenotesby indiafreenotes5

Preference Shares, also known as preferred stock, are a type of share capital that gives certain preferences to its holders over common equity shareholders. These preferences typically include a fixed dividend payout and priority in the event of company liquidation. Preference shares are a hybrid instrument, possessing features of both equity and debt. In India, the issuance and redemption of preference shares are governed by the Companies Act, 2013 and related rules.

The process of issuing and redeeming preference shares involves specific legal requirements, terms, and procedures, all aimed at protecting shareholders and ensuring proper corporate governance.

Issue of Preference Shares

The issue of preference shares is governed by Section 55 of the Companies Act, 2013. This section lays down the guidelines for the issuance of such shares, ensuring that companies follow a transparent and regulated process.

Types of Preference Shares

Preference shares can be classified into various categories based on their features:

  • Cumulative Preference Shares:

These shares entitle the shareholders to accumulate unpaid dividends. If the company fails to pay the dividend in a particular year, the amount is carried forward to future years and paid when profits are available.

  • Non-cumulative Preference Shares:

In this case, the shareholders do not have the right to accumulate unpaid dividends. If the dividend is not paid in a particular year, the shareholder cannot claim it in the future.

  • Convertible Preference Shares:

These shares can be converted into equity shares after a specified period or upon the occurrence of certain events, as per the terms agreed upon at the time of issuance.

  • Non-convertible Preference Shares:

These shares cannot be converted into equity shares and remain preference shares until they are redeemed or bought back.

  • Participating Preference Shares:

Holders of these shares are entitled to a share in the surplus profits of the company in addition to the fixed dividend, usually after the equity shareholders are paid.

  • Non-participating Preference Shares:

These shareholders are entitled only to a fixed dividend and have no rights over the surplus profits.

Procedure for Issuing Preference Shares

  • Board Resolution:

The process begins with the board of directors passing a resolution to issue preference shares. This resolution must outline the terms and conditions, such as the type of preference shares, dividend rate, redemption period, and any conversion rights.

  • Shareholder Approval:

The issue of preference shares requires approval from the company’s shareholders. This approval is generally obtained in a general meeting through a special resolution.

  • Compliance with the Companies Act, 2013:

Section 55 mandates that preference shares must be issued for a maximum period of 20 years, except in the case of infrastructure projects, where shares may be issued for a longer period. Companies must also ensure that preference shares are redeemable, meaning that they will be repaid or bought back after a specified period.

  • Prospectus or Offer Document:

If the company is issuing preference shares to the public, it must issue a prospectus or offer document as per the guidelines set by the Securities and Exchange Board of India (SEBI). This document provides details about the offer, including the number of shares, dividend rate, terms of redemption, and risks involved.

  • Filing with Registrar of Companies (RoC):

After obtaining the necessary approvals, the company must file the relevant forms with the Registrar of Companies (RoC), including details of the issued shares.

  • Issuance of Share Certificates:

Once all regulatory approvals are obtained, the company issues share certificates to the preference shareholders, marking the completion of the issuance process.

Rights of Preference Shareholders

Preference shareholders enjoy the following key rights:

  • Fixed Dividend:

Preference shareholders receive a fixed rate of dividend before any dividends are paid to equity shareholders.

  • Priority in Repayment:

In the event of liquidation, preference shareholders have a higher claim on company assets compared to equity shareholders.

  • Voting Rights:

Typically, preference shareholders do not have voting rights in the company’s day-to-day affairs. However, they may obtain voting rights if their dividends remain unpaid for two or more consecutive years.

  • Redemption:

Preference shares are redeemable, meaning that the company must repay the capital to preference shareholders after a certain period, subject to the terms of the issue.

Redemption of Preference Shares

Redemption of preference shares refers to the process by which a company repays the preference shareholders the face value of their shares. This can happen at a pre-determined time, subject to the terms agreed upon at the time of issuance.

Conditions for Redemption under Section 55 of the Companies Act, 2013

  1. Authorized by Articles of Association:

The company’s Articles of Association (AoA) must explicitly permit the redemption of preference shares. If the AoA does not contain such a provision, it must be amended before the redemption can take place.

  1. Fully Paid-up Shares:

Only fully paid-up preference shares can be redeemed. If the shares are only partially paid, the redemption process cannot be initiated until all dues are paid in full.

  1. Redemption out of Profits or Fresh Issue:

The company can redeem preference shares either:

  • Out of profits available for distribution as dividends, or
  • From the proceeds of a new issue of shares.

  1. Capital Redemption Reserve (CRR):

If the company redeems preference shares out of its profits, an equivalent amount must be transferred to a Capital Redemption Reserve (CRR). This CRR serves as a safeguard against the company depleting its capital base and must be maintained as long as the company is in existence.

  1. No Redemption at Premium Without Special Resolution:

If preference shares are to be redeemed at a premium, the terms of redemption must be specified at the time of issuance, and shareholder approval must be obtained through a special resolution.

  1. Filing with Registrar of Companies:

Once preference shares are redeemed, the company must file the necessary documents with the RoC, including the details of the redeemed shares.

Modes of Redemption:

Redemption can occur through one of the following methods:

  1. Redemption at Par:

In this case, preference shareholders are repaid the face value of their shares. No premium is involved, and the redemption amount equals the nominal value of the shares.

  1. Redemption at Premium:

In some cases, companies offer to redeem preference shares at a price higher than the face value. The premium must be paid out of the company’s profits or reserves and requires shareholder approval.

Process of Redemption of Preference Shares:

  • Approval for Redemption:

The board of directors must first approve the redemption plan. The resolution must include details such as the type and number of shares to be redeemed, the redemption price, and the source of funds (profits or fresh issue).

  • Funding the Redemption:

The company must ensure that it has sufficient funds for the redemption. If the redemption is to be made from profits, the company must set aside the requisite amount. If a fresh issue of shares is to fund the redemption, the company must raise the capital before proceeding.

  • Payment to Shareholders:

Once the funds are available, the company repays the preference shareholders according to the agreed terms. This may involve either transferring the redemption amount directly to the shareholders’ accounts or issuing cheques.

  • Capital Redemption Reserve (CRR):

If the shares are redeemed out of profits, an amount equal to the face value of the redeemed shares must be transferred to the CRR. This reserve cannot be used for dividend payments or general business expenses and serves to preserve the company’s capital base.

  • Updating the Register of Members:

After the redemption, the company must update its register of members to reflect the reduction in the number of preference shares.

Key Differences between Issuance and Redemption of Preference Shares

Aspect Issuance of Preference Shares Redemption of Preference Shares
Nature Raises capital for the company Repayment of capital to shareholders
Approval Required Requires board and shareholder approval Requires board approval and sufficient funds
Payment No immediate payment to shareholders Payment of redemption amount to shareholders
Capital Increases company’s capital Reduces company’s capital
Filing Filing required with RoC for issue details Filing required for redemption details
CRR Not applicable Creation of CRR if redeemed out of profits

Management Notes

Issue and Redemption of Debentures

indiafreenotesby indiafreenotes2

Debentures are a common tool used by companies to raise long-term capital without diluting ownership through equity shares. The process of issuing debentures involves selling them to investors who, in return, receive regular interest payments and the promise of repayment of the principal at the maturity date. The redemption of debentures refers to the repayment of the borrowed amount to debenture holders after the debenture’s tenure.

Issue of Debentures

The process of issuing debentures is an important step in corporate financing, as it enables companies to meet their capital needs without affecting their equity structure. Below are the various aspects of issuing debentures:

Methods of Issuing Debentures:

Debentures can be issued in different ways depending on the needs of the company and the preferences of the investors. The primary methods:

  • Public issue:

Companies can offer debentures to the public by issuing a prospectus that details the terms and conditions of the debenture. The public can then apply to purchase these debentures, just like in a public offering of shares.

  • Private Placement:

Debentures can be issued privately to a select group of investors, usually large institutions or high-net-worth individuals. This method is faster than a public issue and involves fewer regulatory requirements.

  • Rights issue:

Existing shareholders are offered the right to subscribe to debentures in proportion to their existing shareholding. This method ensures that current shareholders have an opportunity to participate in the company’s debt issuance.

  • Preference issue:

Debentures can be issued to selected investors (often existing stakeholders) with preferential terms, such as higher interest rates.

Types of Debentures Issued:

Companies issue different types of debentures based on their capital requirements and investor preferences:

  • Secured Debentures:

These debentures are backed by specific assets of the company. In the case of default, secured debenture holders have a claim on these assets.

  • Unsecured Debentures:

These are not backed by any collateral and are riskier for investors. However, they may offer higher interest rates to compensate for the added risk.

  • Convertible Debentures:

These can be converted into equity shares after a certain period or at the discretion of the debenture holder. This gives the holder the potential to benefit from any increase in the company’s share price.

  • Non-Convertible Debentures:

These cannot be converted into shares and remain a fixed income instrument throughout their tenure.

Key Elements of Debenture Issuance:

When issuing debentures, companies must clearly outline the following key terms:

  • Interest Rate:

Interest rate is usually fixed and is paid to debenture holders periodically (annually or semi-annually). The rate reflects the company’s creditworthiness and the overall market conditions.

  • Maturity Period:

This is the time frame over which the debenture will exist, typically ranging from 5 to 20 years. At the end of the maturity period, the principal amount is repaid to debenture holders.

  • Redemption Terms:

These outline when and how the debentures will be redeemed, which may include specific options like early redemption or repayment in installments.

  • Issue Price:

Debentures can be issued at par (face value), at a premium (above face value), or at a discount (below face value). The issue price influences the yield that investors will earn.

Redemption of Debentures

Redemption refers to the repayment of the principal amount to debenture holders once the debenture matures. There are various methods of redemption, and the specific method is typically outlined in the terms of the debenture issue.

Methods of Redemption:

  • Lump Sum Payment:

This is the most common method, where the company repays the entire principal amount to debenture holders at the maturity date in one single payment.

  • Installment Payments:

Instead of paying the entire principal at once, the company repays a portion of the principal periodically over the debenture’s term. This reduces the financial burden at the time of maturity.

  • Redemption by Purchase in the Open Market:

The company may buy back debentures in the open market before their maturity date if they are available at a lower price than face value. This allows companies to retire debt at a lower cost.

  • Conversion into Shares:

If the debentures are convertible, they can be converted into equity shares of the company at a pre-determined rate. This method is attractive for investors who wish to switch from debt instruments to equity if the company performs well.

  • Call and Put Options:

Some debentures come with a call option, allowing the company to redeem the debentures before the maturity date. Similarly, a put option allows the investor to demand early repayment from the company.

Sources of Redemption Funds:

Companies need to arrange for funds to redeem debentures. Common sources:

  • Sinking Fund:

Many companies set up a sinking fund specifically for debenture redemption. A portion of the company’s profits is periodically transferred to this fund, ensuring that the company has sufficient resources to repay the debentures at maturity.

  • Fresh Issue of Debentures or Shares:

Company may issue new debentures or shares to raise funds for the redemption of existing debentures. This method helps companies avoid liquidity crunches at the time of redemption.

  • Profit Reserves:

If a company has sufficient profits and reserves, it can use these resources to redeem debentures. This is a common practice among financially sound companies.

  • Loans from Banks or Financial Institutions:

If the company does not have sufficient internal resources, it may take out a loan to redeem debentures. While this transfers the debt from debenture holders to financial institutions, it ensures that the debentures are repaid on time.

Premium on Redemption:

In some cases, companies agree to redeem debentures at a price higher than their face value. This is known as redemption at a premium. The premium acts as an additional incentive for investors to subscribe to the debentures at the time of issue, especially if the interest rate is relatively low.

Legal Requirements for Redemption:

The Companies Act, 2013, governs the redemption of debentures in India. Companies are required to comply with certain regulations, such as:

  • Creation of Debenture Redemption Reserve (DRR):

Companies must set aside a portion of their profits in a Debenture Redemption Reserve (DRR) to ensure they have funds available for repayment. However, certain classes of companies are exempt from this requirement.

  • Maintenance of Records:

Companies must maintain accurate records of debenture holders and the terms of redemption. These records are essential for transparency and regulatory compliance.

Management Notes

Disposal of profits

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A disposal account is a gain or loss account that appears in the income statement, and in which is recorded the difference between the disposal proceeds and the net carrying amount of the fixed asset being disposed of. The account is usually labeled “Gain/Loss on Asset Disposal.” The journal entry for such a transaction is to debit the disposal account for the net difference between the original asset cost and any accumulated depreciation (if any), while reversing the balances in the fixed asset account and the accumulated depreciation account. If there are proceeds from the sale, they are also recorded in this account. Thus, the line items in the entry are:

  • Debit the accumulated depreciation account to reverse the cumulative amount of depreciation already recorded for the asset, and credit the disposal account
  • Debit the cash account for any proceeds from the sale, and credit the disposal account
  • Debit the disposal account if there is a loss on disposal
  • Credit the fixed asset account to reverse the original cost of the asset, and debit the disposal account
  • Credit the disposal account if there is a gain on disposal

It is also possible to accumulate the offsetting debits and credits associated with the elimination of an asset and related accumulated depreciation, as well as any cash received, in a temporary disposal account, and then transfer the net balance in this account to a “gain/loss on asset disposal” account. However, this is a lengthier approach that is not appreciably more transparent and somewhat less efficient than treating the disposal account as a gain or loss account itself, and so is not recommended.

Disposal Account Example

The following journal entry shows a typical transaction where a fixed asset is being eliminated. The asset has an original cost of $10,000 and accumulated depreciation of $8,000. We want to completely eliminate it from the accounting records, so we credit the asset account for $10,000, debit the accumulated depreciation account for $8,000, and debit the disposal account for $2,000 (which is a loss).

  Debit Credit
Accumulated depreciation 8,000  
Loss on asset disposal 2,000  
Asset   10,000

If the company had instead sold off the asset for $3,000, this would generate a net gain of $1,000, which is recorded with the following entry:

  Debit Credit
Cash 3,000  
Accumulated depreciation 8,000  
Asset   10,000
Gain on asset disposal   1,000

Management Notes

Financial Statements of companies including Managerial Remuneration

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Overall Maximum and Minimum Remunerations Legal Restrictions:

The Companies Act provides some restrictions on the managerial remuneration provided by a private company (a subsidiary of a public company) or a public company.

These restrictions are enumerated:

(a) Maximum Limit:

According to Sec. 198 of the Companies act, the total managerial remuneration payable by a public company or a private company—which is subsidiary of a public company—to its directors and its managers in respect of a financial year computed in the manner laid down in Sections 349, 350 and 351— except that the remuneration of the directors shall not be deducted from the gross profit.

Explanation:

‘Remuneration’ includes (as per Sections 309, 311, 348 and 387):

(a) Any expenditure incurred by the company in providing any rent-free accommodation or any other benefit or amenity in respect of accommodation free of charge, to any of the persons aforesaid.

(b) Any expenditure incurred by the company in providing any other benefit or amenity free of charge or at a concessional rate to any of the persons aforesaid.

(c) Any expenditure incurred by the company in respect of any obligation or service, which, but for such expenditure by the company, would have been incurred by any of the persons aforesaid;

(d) Any expenditure incurred by the company to effect any insurance on the life of, or to provide any pension, annuity or gratuity for any of the person aforesaid or his spouse or child.

It is to be noted that according to Sec. 200 of the Companies’ Act, 1956, no company can now pay to any of its officer or employees remuneration, fee or any tax or varying with any tax payable by him.

(b) Minimum Limit:

According to Sec. 198 (Subsection 4) of the Companies (Amendment) Act, 1988—subject to the provisions of Sec. 269 (Schedule XIII)—a company shall not pay to its Directors (including any managing or whole time Director or manager) by way of remuneration any sum exclusive of any fees payable to Directors under Sec. 309 (2) except with the previous approval of the Central Government, if the company has inadequate profits or no profits in any financial year. This is subject to the of Sec. 209 (which deals with appointment of managing or whole time Director or manager) read with Schedule XHL

Remuneration to Directors:

The remuneration to Directors is governed by Sec. 309 of the Companies Act, which is to be determined by – the Articles or by the resolution (special resolution if the articles so require).

Fees may be payable by the articles for attendance of the meeting of the board or committee subject to:

(a) A whole-time or managing director may be paid remuneration by way of monthly pay and/or specified percentage of net profit of the company (not exceeding 5% where there is only one such director, and not exceeding 10% in all where there are more than one whole-time director).

(b) A part-time director (i.e., not whole-time or managing director) may be remunerated either by way of monthly, quarterly or annually (with the approval of the Central Government or by way of commission (if the company by special resolution authorizes) not exceeding 1% for all such Directors, Secretaries, Treasurers or Managers and not exceeding 3% for all such Directors in other cases, or at higher percentage with the approval of the Central Government.

(c) Any whole-time or managing director shall not be entitled to receive any commission from any subsidiary of such company.

(d) The special resolution shall remain in force for a maximum period of 5 years. It may, however, be renewed, from time to time, by a special resolution for further periods of 5 years but no renewal can be effected earlier than 1 year from the date on which it is to come into force.

(e) A Director may be paid fees for attending each meeting of the Board or a committee thereof attended by him.

(f) If any Director receives any sum in excess of remuneration due to him, he shall keep the excess amount in trust for the company and shall refund it to the company. The company, however, cannot waive the recovery of any such sum.

(g) The above rules shall not apply to a private company unless it is a subsidiary of a public company.

(h) Prohibition of tax-free payment. A company shall not pay any officer or employee remuneration free of tax (Sec. 200).

(i) The net profit for the purpose of Directors’ remuneration shall be computed as per prescribed manner laid down in Sections 349 and 350 without deducting the Directors’ remuneration from the gross profit.

However, Sec 310 of the Companies Act, 1956, provides that any increase in remuneration of any Director of a public company or a private company which is a subsidiary of a public company, shall not be valid:

(i) In case where Schedule XIII is applicable (unless such increase is as per the conditions specified in that Schedule) and

(ii) In any other case, unless the same is approved by the Central Government.

Sec. 309 does not apply to a private company unless it is a subsidiary of a public company.

It should be noted that the remuneration payable to a director shall include all remuneration payable to him for services rendered in any other capacity unless the services are rendered in professional capacity and the director possesses the requisite qualifications for the practice of the profession in the opinion of the Central Government.

Remuneration to Manager:

According to Sec. 2 (24), ‘Manager’ means an individual who has the management of the whole or substantially the whole of the affairs of a company. He is actually subject to the superintendence, control and directions of the Board of Directors. Thus, ‘Manager’ includes a director or any other person accompanying the position of a manager—by whatever name called.

A company cannot have more than one manager at a time

The remuneration to manager is governed by Sec. 387 of the Companies Act. The manager of a company may receive remuneration by way of a monthly payment and/or by way of a specified percentage on net profit calculate according to Sees. 349, 351 provided that such remuneration shall not exceed in the aggregate of 5% of the net profit without the approval of the Central Government— Sec. 387.

The provisions do not apply to private company unless it a subsidiary of public company.

To Sum Up:

It has already been highlighted above that the Companies Act provides certain restrictions on managerial remuneration (the same is not, however, applicable to a private company which is not a subsidiary of a public company.)

Method of Computation of ‘Profit’ for Calculating Managerial Remuneration:

General Illustrations:

Computation of Managerial Remuneration under Different Conditions:

Illustration 1:

From the following Profit and Loss Account of X Ltd. compute the maximum permissible managerial remunerations under each of the following conditions:

(a) When there is only one whole-time Director

(b) When there are two whole-time directors

(c) When there are two whole-time Directors, a part-time director and a manager

(d) When there is only a part-time Director and no whole-time directors.

Calculation of Maximum Managerial Remuneration:

(a) When there is only one Director:

As per Sec. 349 of the Companies Act, where there is only one Director the maximum limit of managerial remuneration will be @ 5% of the net profit. So, the Managerial Remuneration will be Rs.1, 46,650 (i.e. Rs.29, 33,000 x5/100)

(b) When there are two Whole-time Directors:

The Maximum limit of managerial remuneration will be @ 10% of net profit i.e. Rs.2,93,300 (i.e. Rs. 29,33,000 x 10/100)

(c) When there are two Whole-time Directors, a Part-time Director and a Manager

Under the circumstances, the maximum limit of managerial remuneration will be @ 11% of Net Profit.

So, the Managerial Remuneration will be Rs.3, 22,630. (i.e. Rs.29, 33,000 x11/100).

(d) When there is only a Part-time Director and no Whole-time Director:

The maximum limit of managerial remuneration in this case will be only @ 1% of net profit. So the managerial remuneration will be Rs.29, 330 (i.e. Rs.29, 33,000 x 1/100).

Management Notes

Bonus Shares, Objects, Types, Sources, SEBI Guidelines

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Bonus Shares are additional shares issued by a company to its existing shareholders, typically free of charge. They are distributed in proportion to the shares already held, meaning that shareholders receive a certain number of bonus shares for each share they own. Bonus shares are often issued as a way to distribute retained earnings, allowing companies to reward shareholders without depleting cash reserves. This practice can enhance liquidity in the market and may indicate the company’s strong financial position and growth potential.

Objects of Bonus Issue:

  1. Rewarding Shareholders:

One of the primary objectives of a bonus issue is to reward existing shareholders for their loyalty and investment in the company. By providing additional shares, companies acknowledge shareholders’ trust and commitment.

  1. Utilizing Retained Earnings:

Companies often have substantial retained earnings or reserves. Issuing bonus shares is a way to capitalize these profits, converting them into equity without distributing cash. This helps maintain a strong capital base while still providing value to shareholders.

  1. Enhancing Liquidity:

Bonus shares increase the number of shares in circulation, which can enhance the liquidity of the company’s stock. Higher liquidity may make it easier for investors to buy and sell shares, potentially attracting more investors and improving marketability.

  1. Improving Share Price:

Issuing bonus shares can help lower the market price per share by increasing the number of shares outstanding. This may make the shares more affordable for small investors, potentially broadening the shareholder base and increasing demand.

  1. Creating a Positive Market Sentiment:

Bonus issue is often perceived as a positive signal about a company’s financial health and growth prospects. It can boost investor confidence and improve the company’s image in the market, encouraging both current and potential investors.

  1. Encouraging Long-Term Investment:

Bonus shares can serve as an incentive for shareholders to hold onto their shares for the long term. This can help stabilize the share price and reduce market volatility, as more investors may choose to retain their shares to benefit from future growth.

  1. Aligning Interests of Employees and Shareholders:

Companies may issue bonus shares to employees as part of an incentive plan, aligning their interests with those of shareholders. This helps to motivate employees by giving them a stake in the company’s success and fostering a sense of ownership.

  1. Improving Financial Ratios:

Bonus issues can improve certain financial ratios, such as earnings per share (EPS) and return on equity (ROE). While EPS may decrease due to the increase in the number of shares, it can also reflect a more significant total equity, contributing to a more favorable perception of financial health.

Types of Bonus Issue:

  1. Fully Paid Bonus Shares:

These are shares issued to existing shareholders without any additional cost. The company capitalizes its reserves or profits to issue fully paid bonus shares, increasing the number of shares in circulation while maintaining the same overall value of equity.

  1. Partly Paid Bonus Shares:

In this type, bonus shares are issued with a requirement for shareholders to pay a portion of the share price. The company may decide to issue partly paid bonus shares as a way to raise additional capital while rewarding existing shareholders.

  1. Pro-rata Bonus Issue:

A pro-rata bonus issue is where the bonus shares are issued to shareholders in proportion to their existing holdings. For example, if a company issues a bonus share for every four shares held, a shareholder with four shares would receive one additional share.

  1. Bonus Shares from Reserves:

Companies may issue bonus shares by capitalizing reserves or profits. This approach allows companies to convert their retained earnings into equity shares, enhancing liquidity without affecting cash reserves.

  1. Bonus Shares for Employee Stock Options (ESOPs):

Some companies issue bonus shares to employees as part of an employee stock ownership plan or ESOP. These shares serve to motivate and retain key personnel by giving them a stake in the company’s success.

  1. Reverse Bonus Shares:

In contrast to traditional bonus shares, reverse bonus shares involve consolidating shares into fewer units. This type of issuance typically occurs when a company aims to increase its share price or comply with stock exchange listing requirements.

  1. Free Shares:

This category includes shares given as a reward to existing shareholders without requiring any payment. Free shares are often issued as part of an incentive plan to enhance shareholder loyalty and boost investor sentiment.

Source of Bonus Issue:

  1. Retained Earnings:

The most common source for issuing bonus shares is retained earnings. This represents the cumulative profits that a company has retained rather than distributed as dividends. By capitalizing retained earnings, a company can issue bonus shares to its shareholders without affecting its cash flow.

  1. General Reserve:

Companies can also use their general reserves, which are created out of profits not earmarked for any specific purpose. General reserves serve as a cushion for unforeseen expenses or losses, and utilizing them for bonus shares can help improve shareholder value while maintaining financial stability.

  1. Capital Redemption Reserve:

If a company has redeemed its preference shares, it may create a capital redemption reserve. This reserve can be used to issue bonus shares to ordinary shareholders, ensuring that the equity base remains strong after redeeming preference shares.

  1. Securities Premium Account:

When shares are issued at a premium, the amount received over and above the face value is credited to the securities premium account. Companies can utilize this account to issue bonus shares, provided they comply with the relevant legal provisions and regulations.

  1. Profit and Loss Account:

Companies can capitalize amounts from their profit and loss account, which reflects the net earnings after expenses and taxes. Issuing bonus shares from this account indicates that the company has sufficient profits to convert into equity.

  1. Other Reserves:

In addition to the above sources, companies may utilize other reserves, such as the revaluation reserve (created when assets are revalued to reflect current market value) or specific reserves set aside for particular purposes. These reserves can be capitalized to issue bonus shares, subject to regulatory compliance.

SEBI Guidelines for Issue of Bonus Shares:

  1. Eligibility Criteria:

Only companies that have a track record of consistent profits and are compliant with the listing requirements can issue bonus shares.

Companies must ensure that they have adequate reserves or profits to capitalize for issuing bonus shares.

  1. Board Resolution:

The issuance of bonus shares requires the approval of the Board of Directors. A board resolution must be passed detailing the number of shares to be issued, the proportion in which they will be issued, and the source of capitalization.

  1. Shareholder Approval:

Companies are required to obtain approval from shareholders through a special resolution in a general meeting before issuing bonus shares. The resolution must specify the number of shares and the rationale behind the issuance.

  1. Pro-rata Basis:

Bonus shares must be issued on a pro-rata basis to existing shareholders. This means that shareholders receive additional shares in proportion to their existing holdings, ensuring equitable treatment.

  1. Disclosure Requirements:

Companies must disclose the details of the bonus issue in their annual reports, including the rationale, source of capitalization, and any impact on the earnings per share (EPS) and other financial ratios. Additionally, companies should provide adequate information to shareholders and the stock exchanges regarding the bonus issue.

  1. Lock-in Period:

There is no specific lock-in period mandated by SEBI for bonus shares. However, the company may impose a lock-in period as part of its internal policies or based on the terms of the bonus issue.

  1. Credit of Shares:

Upon approval, the bonus shares must be credited to the demat accounts of shareholders within the stipulated timeframe, ensuring prompt delivery and compliance with market regulations.

  1. No Cash Consideration:

Bonus Shares are issued without any cash consideration. This means that shareholders do not have to pay for the additional shares they receive.

  1. Regulatory Compliance:

Companies must comply with all applicable provisions of the Companies Act, 2013, and SEBI regulations while issuing bonus shares. Any non-compliance can lead to penalties or legal consequences.

  1. Impact on Share Capital:

Companies must assess the impact of the bonus issue on their share capital and provide necessary disclosures regarding the revised capital structure post-issuance.

Management Notes

Barriers to Entrepreneurship

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1. Finances

We are all bustling with ideas that are unique and can make for an amazing business start-up. But no matter how good your idea is, you will always need stable finances and funding from the investors to begin the process and take the first step towards your journey of entrepreneurship.

And getting a sound financial investment or funding can be one of the biggest Barriers to Entrepreneurship as many of banks, private investors, angel investors, and organizations find it quite difficult to believe in the start-up ideas owing to the risk of failure and losing their money.

2. Fear of not to be a success

We all go through the fear of failure. And if the fear is associated with the risks and stakes taken in the stream of business and entrepreneurship, the level of fear elevates.

There is a fear if we are on the right track, is the idea worthwhile, will there be profit, will I find investors, and various such fears and tensions act as the Barriers to Entrepreneurship.

3. No strategic plan in place

Lack of proper planning and strategy in place is one of the most common Barriers to Entrepreneurship. Many of us think to build a business out of a hobby without having any sort of long term and short term vision and plan in mind.

Running a fully-fledged business or being an entrepreneur requires a huge amount of skill set, passion for excelling, strategic vision, the mission to accomplish the goals, market research, and a lot more.

Right from the target market, finances, human resources, to a proper strategic plan is required to build a successful business or a brand in the market.

4. Human resource issues

Entrepreneurs cannot handle and run a business alone by themselves. We require the support of human resource to carve a niche in the market.

Employees with the required knowledge, expertise, and experience are needed for the efficiency of the business processes and high levels of productivity.

First of all, it is quite difficult to find the employees that share the same vision and wavelength of the business. Plus paying a hefty annual or even a monthly retainer income is a problem of the start up’s as the finances at hand are always limited, and the overheads and expenses are also to be taken care of.

And secondly, it is also difficult to manage human resources as each of us work with a different mindset and perspective. Hence, human resources and employees can be as one of the Barriers to Entrepreneurship.

5. Stringent rules and regulations of the market

It is not very easy for entrepreneurs to enter the new market as there are quite many rules and regulations imposed by the government authorities.

Plus there are various laws and compliances to be adhered to such as taxation, environmental regulations, licenses, property rights, and much more than act as the Barriers to Entrepreneurship.

Some of the countries have many corrupt officials that act as a hindrance for the new entrepreneurs and start-up brands to start or expand their business in the new market. And if the brand is planning to expand its business operations in any of the foreign countries, it gets even more difficult.

6. Fewer opportunities

Even though there is a lot of talent pool in the market with the aspiring entrepreneurs buzzing with the ideas, but the opportunities presented to them are quite less and fewer.

Reasons such as nepotism and corruption act as the Barriers to Entrepreneurship with not many vital and lucrative opportunities.

7. Lack of capacity

Even if there are opportunities presented to the aspiring entrepreneurs, there is a lack of capacity in some them to embrace the opportunities with open arms. The reasons can vary from lack of knowledge, lack of education, lack of willingness, lack of strategic knowledge, and cultural hindrances amongst others; but the factor of motivation and zeal gets missing.

To start a new business venture amidst all the risks and market-related issues, it requires a lot of hard work, passion, and high capacity to handle all of it.

8. Less market experience

The experts always mention that one should never rush in setting up a business. It is quite necessary to gain a relative amount of work experience by working in the industry domain or sector of choice and as per the education levels. It also helps to sharpen the required expertise and find the ground in the career graph.

Once the person is ready to take risks and have a relative amount of market exposure, he is ready to take the entrepreneurial plunge.

9. Lack of risk-taking capacity

It is always said that entrepreneurs never sail in safe waters and are never confined to their comfort zones. Lack of risk-taking capacity is the psychological mindset and perspective towards the business and acts as one of the major Barriers to Entrepreneurship.

The budding entrepreneur has to have a structured and organized approach towards the various business elements and should risks rather than averting them.

10. Corrupt business situations

As mentioned earlier, if the business situations and the environment are not very supportive and corrupt for the young and aspiring entrepreneurs, it acts as one of the top Barriers to Entrepreneurship.

Bribing, rampant corruption, unfriendly ties of government with other nations, inconsistent laws, stringent compliances, and enforcing regulations that are unhealthy and negative in their approach hamper the growth of businesses in the country.

Russia is one of the examples of having an unhealthy and unsupportive business environment.

11. Inadequate training

With no proper education, development, training, entrepreneurial skills, and technical know-how acts as the Barriers to Entrepreneurship.

12. Lack of practical knowledge

Having a strong educational background is just not enough to pursue business as it requires practical knowledge as well to stay relevant amidst the various market cycles. And many entrepreneurs lack practical knowledge.

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