Some important provisions of Banking Regulation Act of 1949

Different types of banks, such as commercial banks, cooperative banks, rural banks, and private sector banks exist in India. The Reserve Bank of India (RBI) is the governing body for regulating and supervising the banks. Banking Regulation Act, 1949 is an Act that provides a framework for regulating the banks of India. The Act came into force on 16th March 1949. This Act gives RBI the power to control the behaviour of banks. This Act was passed as Banking Companies Act, 1949. It did not apply to Jammu and Kashmir until 1956. This Act monitors the day-to-day operations of the bank. Under this Act, the RBI can licence banks, put ​​regulation over shareholding and voting rights of shareholders, look over the appointment of the boards and management, and lay down the instructions for audits. RBI also plays a role in mergers and liquidation.

Objectives of the Banking Regulation Act, 1949

  • To meet the demand of the depositors and provide them security and guarantee.
  • To provide provisions that can regulate the business of banking.
  • To regulate the opening of branches and changing of locations of existing branches.
  • To prescribe minimum requirements for the capital of banks.
  • To balance the development of banking institutions.

Provisons

  1. Prohibition of Trading (Sec. 8):

According to Sec. 8 of the Banking Regulation Act, a banking company cannot directly or indirectly deal in buying or selling or bartering of goods. But it may, however, buy, sell or barter the transactions relating to bills of exchange received for collection or negotiation.

  1. Non-Banking Assets (Sec. 9):

According to Sec. 9 “A banking company cannot hold any immovable property, howsoever acquired, except for its own use, for any period exceeding seven years from the date of acquisition thereof. The company is permitted, within the period of seven years, to deal or trade in any such property for facilitating its disposal”. Of course, the Reserve Bank of India may, in the interest of depositors, extend the period of seven years by any period not exceeding five years.

  1. Management (Sec. 10):

Sec. 10 (a) states that not less than 51% of the total number of members of the Board of Directors of a banking company shall consist of persons who have special knowledge or practical experience in one or more of the following fields:

(a) Accountancy;

(b) Agriculture and Rural Economy;

(c) Banking;

(d) Cooperative;

(e) Economics;

(f) Finance;

(g) Law;

(h) Small Scale Industry.

The Section also states that at least not less than two directors should have special knowledge or practical experience relating to agriculture and rural economy and cooperative. Sec. 10(b) (1) further states that every banking company shall have one of its directors as Chairman of its Board of Directors.

  1. Minimum Capital and Reserves (Sec. 11):

Sec. 11 (2) of the Banking Regulation Act, 1949, provides that no banking company shall commence or carry on business in India, unless it has minimum paid-up capital and reserve of such aggregate value as is noted below:

(a) Foreign Banking Companies:

In case of banking company incorporated outside India, aggregate value of its paid-up capital and reserve shall not be less than Rs. 15 lakhs and, if it has a place of business in Mumbai or Kolkata or in both, Rs. 20 lakhs.

It must deposit and keep with the R.B.I, either in Cash or in unencumbered approved securities:

(i) The amount as required above, and

(ii) After the expiry of each calendar year, an amount equal to 20% of its profits for the year in respect of its Indian business.

(b) Indian Banking Companies:

In case of an Indian banking company, the sum of its paid-up capital and reserves shall not be less than the amount stated below:

(i) If it has places of business in more than one State, Rs. 5 lakhs, and if any such place of business is in Mumbai or Kolkata or in both, Rs. 10 lakhs.

(ii) If it has all its places of business in one State, none of which is in Mumbai or Kolkata, Rs. 1 lakh in respect of its principal place of business plus Rs. 10,000 in respect of each of its other places of business in the same district in which it has its principal place of business, plus Rs. 25,000 in respect of each place of business elsewhere in the State.

No such banking company shall be required to have paid-up capital and reserves exceeding Rs. 5 lakhs and no such banking company which has only one place of business shall be required to have paid- up capital and reserves exceeding Rs. 50,000.

In case of any such banking company which commences business for the first time after 16th September 1962, the amount of its paid-up capital shall not be less than Rs. 5 lakhs.

(iii) If it has all its places of business in one State, one or more of which are in Mumbai or Kolkata, Rs. 5 lakhs plus Rs. 25,000 in respect of each place of business outside Mumbai or Kolkata? No such banking company shall be required to have paid-up capital and reserve excluding Rs. 10 lakhs.

  1. Capital Structure (Sec. 12):

According to Sec. 12, no banking company can carry on business in India, unless it satisfies the following conditions:

(a) Its subscribed capital is not less than half of its authorized capital, and its paid-up capital is not less than half of its subscribed capital.

(b) Its capital consists of ordinary shares only or ordinary or equity shares and such preference shares as may have been issued prior to 1st April 1944. This restriction does not apply to a banking company incorporated before 15th January 1937.

(c) The voting right of any shareholder shall not exceed 5% of the total voting right of all the shareholders of the company.

  1. Payment of Commission, Brokerage etc. (Sec. 13):

According to Sec. 13, a banking company is not permitted to pay directly or indirectly by way of commission, brokerage, discount or remuneration on issues of its shares in excess of 2½% of the paid-up value of such shares.

  1. Payment of Dividend (Sec. 15):

According to Sec. 15, no banking company shall pay any dividend on its shares until all its capital expenses (including preliminary expenses, organisation expenses, share selling commission, brokerage, amount of losses incurred and other items of expenditure not represented by tangible assets) have been completely written-off.

But Banking Company need not:

(a) Write-off depreciation in the value of its investments in approved securities in any case where such depreciation has not actually been capitalized or otherwise accounted for as a loss;

(b) Write-off depreciation in the value of its investments in shares, debentures or bonds (other than approved securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the auditor;

(c) Write-off bad debts in any case where adequate provision for such debts has been made to the satisfaction of the auditors of the banking company.

Floating Charges:

A floating charge on the undertaking or any property of a banking company can be created only if RBI certifies in writing that it is not detrimental to the interest of depositors Sec. 14A. Similarly, any charge created by a banking company on unpaid capital is invalid Sec. 14.

  1. Reserve Fund/Statutory Reserve (Sec. 17):

According to Sec. 17, every banking company incorporated in India shall, before declaring a dividend, transfer a sum equal to 20% of the net profits of each year (as disclosed by its Profit and Loss Account) to a Reserve Fund.

The Central Government may, however, on the recommendation of RBI, exempt it from this requirement for a specified period. The exemption is granted if its existing reserve fund together with Securities Premium Account is not less than its paid-up capital.

If it appropriates any sum from the reserve fund or the securities premium account, it shall, within 21 days from the date of such appropriation, report the fact to the Reserve Bank, explaining the circumstances relating to such appropriation. Moreover, banks are required to transfer 20% of the Net Profit to Statutory Reserve.

  1. Cash Reserve (Sec. 18):

Under Sec. 18, every banking company (not being a Scheduled Bank) shall, if Indian, maintain in India, by way of a cash reserve in Cash, with itself or in current account with the Reserve Bank or the State Bank of India or any other bank notified by the Central Government in this behalf, a sum equal to at least 3% of its time and demand liabilities in India.

The Reserve Bank has the power to regulate the percentage also between 3% and 15% (in case of Scheduled Banks). Besides the above, they are to maintain a minimum of 25% of its total time and demand liabilities in cash, gold or unencumbered approved securities. But every banking company’s asset in India should not be less than 75% of its time and demand liabilities in India at the close of last Friday of every quarter.

  1. Liquidity Norms or Statutory Liquidity Ratio (SLR) (Sec. 24):

According to Sec. 24 of the Act, in addition to maintaining CRR, banking companies must maintain sufficient liquid assets in the normal course of business. The section states that every banking company has to maintain in cash, gold or unencumbered approved securities, an amount not less than 25% of its demand and time liabilities in India.

This percentage may be changed by the RBI from time to time according to economic circumstances of the country. This is in addition to the average daily balance maintained by a bank.

Again, as per Sec. 24 of the Banking Regulation Act, 1949, every scheduled bank has to maintain 31.5% on domestic liabilities up to the level outstanding on 30.9.1994 and 25% on any increase in such liabilities over and above the said level as on the said date.

But w.e.f. 26.4.1997 fortnight the maintenance of SLR for inter-bank liabilities was exempted. It must be remembered that at the start of the preceding fortnights, SLR must be maintained for outstanding liabilities.

  1. Restrictions on Loans and Advances (Sec. 20):

After the Amendment of the Act in 1968, a bank cannot:

(i) Grant loans or advances on the security of its own shares, and

(ii) Grant or agree to grant a loan or advance to or on behalf of:

(a) Any of its directors;

(b) Any firm in which any of its directors is interested as partner, manager or guarantor;

(c) Any company of which any of its directors is a director, manager, employee or guarantor, or in which he holds substantial interest; or

(d) Any individual in respect of whom any of its directors is a partner or guarantor.

Note:

(ii) (c) Does not apply to subsidiaries of the banking company, registered under Sec. 25 of the Companies Act or a Government Company.

  1. Accounts and Audit (Sees. 29 to 34A):

The above Sections of the Banking Regulation Act deal with the accounts and audit. Every banking company, incorporated in India, at the end of a financial year expiring after a period of 12 months as the Central Government may by notification in the Official Gazette specify, must prepare a Balance Sheet and a Profit and Loss Account as on the last working day of that year, or, according to the Third Schedule, or, as circumstances permit.

At the same time, every banking company, which is incorporated outside India, is required to prepare a Balance Sheet and also a Profit and Loss Account relating to its branch in India also. We know that Form A of the Third Schedule deals with form of Balance Sheet and Form B of the Third Schedule deals with form of Profit and Loss Account.

It is interesting to note that a revised set of forms have been prescribed for Balance Sheet and Profit and Loss Account of the banking company and RBI has also issued guidelines to follow the revised forms with effect from 31st March 1992.

According to Sec. 30 of the Banking Regulation Act, the Balance Sheet and Profit and Loss Account should be prepared according to Sec. 29, and the same must be audited by a qualified person known as auditor. Every banking company must take previous permission from RBI before appointing, re­appointing or removing any auditor. RBI can also order special audit for public interest of depositors.

Moreover, every banking company must furnish their copies of accounts and Balance Sheet prepared according to Sec. 29 along with the auditor’s report to the RBI and also the Registers of companies within three months from the end of the accounting period.

Types of Business Law

Tax Law

In terms of business law, taxation refers to taxes charged upon companies in the commercial sector. It is the obligation of all companies (except a few tax-exempted small-time companies) to pay their taxes on time, failure to follow through which will be a violation of corporate tax laws.

Securities Law

Securities refer to assets like shares in the stock market and other sources of capital growth and accumulation. Securities law prohibits businesspersons from conducting fraudulent activities from taking place in the securities market. This is the business law section which penalises securities fraud, such as insider trading. It is, thus, also called Capital Markets Law.

Intellectual property Tax

Intellectual property refers to the intangible products of the working of the human mind or intellect, which are under the sole ownership of a single entity, such as an individual or company. The validation of this ownership is provided by intellectual property law, which incorporates trademarks, patents, trade secrets and copyrights.

Contract Law

A contract is any document which creates a sort of legal obligation between the parties that sign it. Contracts refer to those employee contracts, sale of goods contracts, lease contracts, etc.

Companies Act,2013

With an unprecedented change in the domestic and international economic landscape, India’s Government decided to replace the Companies Act, 1956, with the new legislation. The Companies Act, 2013, endeavors to make the corporate regulations in India more contemporary. In this article, we will focus on the meaning and features of a Company.

The Companies Act, 2013, completely revolutionized India’s corporate laws by introducing several new concepts that did not exist previously. One such game-changer was the introduction of the One Person Company concept. This led to the recognition of an entirely new way of starting businesses that accorded flexibility which a company form of entity can offer, while also providing the protection of limited liability that sole proprietorship or partnerships lacked.

Thus, as we can see, commercial contracts are a very essential part of the business world. Any business during its operation needs to follow all these laws, whether willfully or not. Thus, a person with any venture needs very substantial legal assistance so that any clash in legal matters won’t harm your endeavors.

The Limited Liability Partnership Act, 2008

LLP stands for a Limited Liability Partnership. Limited liability partnership definition is an alternative corporate business form that offers the benefits of limited liability to the partners at low compliance costs. It also allows the partners to organize their internal structure like a traditional partnership. A limited liability partnership is a legal body liable for the full extent of its assets. The liability of the partners, however, is limited. Hence, LLP is a hybrid between a company and a partnership. It is not the same as a limited liability company LLC.

The Indian Partnership Act,1932

The Indian Partnership Act 1932 defines a partnership as a relation between two or more parties to agree to share a business’s profits, either all or only one or more persons acting for them all. A partnership is contractual in nature. As the definition states, a partnership is an association of two or more persons. So a partnership results from a contract or an agreement between two or more persons. A partnership does not arise from the operation of law. Neither can it be inherited. It has to be a voluntary agreement between partners. A partnership agreement can be written or oral. Sometimes such an arrangement is even implied by the continued actions and mutual understanding of the partners.

The Sale of Goods Act,1930

Contracts and agreements regarding the sale of goods and services are governed under the Sale of Goods ACT, 1930. The sale of commodities constitutes one of the essential types of contracts under the law in India. India is one of the largest economies and a great country where and thus has adequate checks and measures to ensure its business and commerce community’s safety and prosperity. Here we shall explain The Sale of Goods Act, 1930, which defines and states terms related to the sale of goods and exchange of commodities.

The Indian Contract Act, 1872

It is the most prominent business law to exist in our country. It came into effect on 1st September 1872 and applied to the whole of India, with the exception of Jammu and Kashmir. It constitutes 266 sections. The Indian Contracts Act,1872 defines the essentials through various judgments in the Indian judiciary. Specific points for valid contracts are Free consent, consideration, competency, eligibility, etc. A valid contract must include at least two parties, or it will be deemed as null and void.

Insolvency and Bankruptcy Code 2016

The Insolvency and Bankruptcy Code (IBC), 2016 is a comprehensive law introduced in India to address issues of insolvency and bankruptcy in a time-bound and efficient manner. Prior to the IBC, India lacked a uniform legal framework to address corporate insolvency, leading to delayed and often ineffective resolutions. The IBC aims to provide a structured process for resolving corporate insolvency, improving the ease of doing business, and enhancing the credit culture in India.

Background and Objectives:

The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 to consolidate and amend the existing laws relating to insolvency and bankruptcy. It aims to:

  • Provide a time-bound process for resolving insolvency of individuals and businesses.
  • Improve the overall business environment by addressing issues such as non-performing assets (NPAs) and corporate debt.
  • Promote entrepreneurship by offering a clean slate to viable businesses that face insolvency.
  • Protect the interests of creditors and other stakeholders while providing an opportunity for companies in distress to restructure.

The IBC combines various laws and procedures related to insolvency and bankruptcy into one comprehensive code. It also introduces mechanisms for resolving insolvency both for individuals and corporate entities, ensuring transparency, accountability, and fairness in the process.

Features of the Insolvency and Bankruptcy Code, 2016:

  1. Insolvency Resolution Process: The IBC sets out a clear, standardized process for insolvency resolution. It is divided into three primary parts:
    • Corporate Insolvency Resolution Process (CIRP): A process for resolving insolvency of companies and limited liability partnerships (LLPs). The process is initiated by creditors, who can file a petition with the National Company Law Tribunal (NCLT).
    • Individual Insolvency Resolution Process (IIRP): For individuals and partnership firms, the IBC provides a process to address insolvency situations.
    • Liquidation: In cases where a resolution plan fails, the company may undergo liquidation, where its assets are sold to settle outstanding debts.
  2. Time-Bound Process: The IBC mandates that the insolvency process be completed within 180 days (extendable by another 90 days). This is to ensure that resolution or liquidation occurs without unnecessary delays. The time-bound nature of the process is crucial in preserving the value of distressed assets and ensuring a quicker recovery for creditors.
  3. Resolution Professional: During the insolvency resolution process, an external expert known as a “Resolution Professional” is appointed. The Resolution Professional manages the affairs of the company and works with creditors and other stakeholders to come up with a resolution plan that maximizes the recovery value of the company. The professional is responsible for overseeing the process and ensuring that the interests of all parties are protected.
  4. Committee of Creditors (CoC): The IBC establishes a Committee of Creditors, composed of financial creditors, which has the power to approve or reject resolution plans. The CoC plays a central role in the insolvency process, and their decision is binding on the debtor company. The committee also oversees the role of the Resolution Professional.
  5. Insolvency and Bankruptcy Board of India (IBBI): The IBBI is the regulatory authority responsible for overseeing the functioning of the insolvency and bankruptcy framework. It is tasked with laying down the regulations and ensuring that professionals involved in the process, including Resolution Professionals and Insolvency Professionals, adhere to the standards set by the law.
  6. Creditor’s Hierarchy and Recovery Process: The IBC provides a clear hierarchy of creditors during the resolution process. Secured creditors (such as banks) are given priority, followed by unsecured creditors. Shareholders, however, are the last in line when it comes to recovery. This ensures that creditors’ interests are prioritized in the distribution of proceeds from asset sales.
  7. Adjudicating Authorities: The National Company Law Tribunal (NCLT) and the Debt Recovery Tribunal (DRT) are the primary adjudicating authorities under the IBC. The NCLT resolves disputes related to the corporate insolvency process, while the DRT is responsible for individual insolvency matters. Appeals can be filed with the National Company Law Appellate Tribunal (NCLAT) and the Appellate Tribunal for Debt Recovery.
  8. Cross-Border Insolvency: The IBC allows for cooperation between Indian courts and foreign courts in cases involving cross-border insolvencies. This ensures that assets held by an Indian company abroad or foreign creditors can participate in the insolvency proceedings. This provision helps multinational companies and foreign creditors resolve insolvency issues efficiently.

Advantages of the Insolvency and Bankruptcy Code:

  • Faster Resolution:

IBC ensures quicker resolution of insolvency cases compared to earlier methods. With a fixed timeline, the process helps to minimize delays.

  • Improved Credit Market:

IBC has led to a cleaner and more transparent credit market by providing a legal framework that ensures quicker recovery of debts and reducing defaults.

  • Higher Recovery Rate:

Creditors can expect a higher recovery rate compared to the earlier approach, where a significant portion of their debt went unpaid due to prolonged legal battles.

  • Reduction in Non-Performing Assets (NPAs):

The introduction of IBC has contributed to the reduction of NPAs in the banking sector, improving the financial health of banks and financial institutions.

  • Promotes Entrepreneurship:

By offering a mechanism for revival, the IBC allows businesses to restructure their operations rather than be forced into liquidation. This encourages entrepreneurship and reduces the fear of failure.

Preparation of Minutes of Meeting

The minutes of a meeting are the official written record of the discussions, decisions, and actions taken during a formal meeting. They provide a comprehensive account of the key points deliberated and serve as a reference for participants and stakeholders. Properly documented minutes are vital for legal compliance, organizational transparency, and tracking progress.

Purpose of Minutes of Meeting:

  1. Documentation: Minutes capture the essence of the meeting, including the agenda, discussions, and resolutions.
  2. Accountability: They ensure that responsibilities assigned during the meeting are tracked and executed.
  3. Reference: They act as an official record for reviewing past decisions and actions.
  4. Legal Compliance: For corporate meetings, such as board or shareholder meetings, minutes are a legal requirement under company law.

Structure of Minutes

  1. Header: Includes the meeting title, date, time, venue, and type (e.g., board meeting, annual general meeting).
  2. Attendance: Lists the names of participants, including those present, absent, or excused.
  3. Agenda Items: Summarizes the topics discussed during the meeting.
  4. Discussion Points: Provides a brief overview of key points raised by participants.
  5. Decisions Made: Records resolutions, approvals, or actions agreed upon.
  6. Action Items: Details the tasks assigned, responsible persons, and deadlines.
  7. Conclusion: Notes the meeting’s end time and the date of the next meeting, if applicable.

Steps to Write Effective Minutes:

  1. Prepare Before the Meeting: Familiarize yourself with the agenda and distribute it to attendees in advance.
  2. Record Key Points: Focus on capturing essential details like decisions, action points, and deadlines. Avoid unnecessary commentary.
  3. Use Clear Language: Write in a concise, formal, and neutral tone to ensure clarity.
  4. Organize Chronologically: Follow the sequence of the agenda items discussed.
  5. Review for Accuracy: Cross-check with meeting participants or the chairperson to confirm the accuracy of the notes.

Benefits of Maintaining Minutes:

  1. Transparency: Minutes foster an environment of openness and accountability in decision-making.
  2. Continuity: They provide continuity for participants who may not have attended the meeting, keeping them informed.
  3. Dispute Resolution: Official records can clarify misunderstandings or resolve disputes.
  4. Audit Trail: They serve as evidence for audits, legal matters, or regulatory inspections.

Best Practices

  1. Use Templates: Employ a consistent format or template for uniformity.
  2. Timely Circulation: Share minutes promptly to ensure tasks are started on time.
  3. Digital Archiving: Store minutes electronically for easy retrieval and backup.

International Trade Laws Objectives Set 2

  1. The exchange of goods and services are known as …………………………
  • Domestic Trade
  • International Trade
  • Trade
  • None of these.

 

  1. Which of the following is not considered as factors of production?
  • Land
  • Labour
  • Money
  • Capital

 

  1. Trade between two countries is known as ………….
  • External
  • Internal
  • Inter-regional
  • None of Above

 

  1. International Trade is most likely to generate short-term unemployment in:
  • Industries in which there are neither imports nor exports
  • Import-competing industries
  • Industries that sell to domestic and foreign buyers.
  • Industries that sell to only foreign buyers

 

  1. Free traders maintain that an open economy is advantageous in that it provides all the following except:
  • Increased competition for world producers
  • A wider selection of products for consumers
  • Relatively high wage levels for all domestic workers
  • The utilization of the most efficient production methods

 

  1. Which of the following is not a benefit of international trade?
  • Lower domestic prices
  • Development of more efficient methods and new products
  • A greater range of consumption choices
  • High wage levels for all domestic workers

 

  1. Which is not an advantage of international trade:
  • Export of surplus production
  • Import of defence material
  • Dependence on foreign countries
  • Availability of cheap raw material

 

  1. Trade between two countries can be useful if cost ratios of goods are …………..
  • Equal
  • Different
  • Undetermined
  • Decreasing

 

  1. Foreign trade creates among countries ………………
  • Conflicts
  • Cooperation
  • Hatred
  • Both a. and b.

 

  1. All are advantages of foreign trade except ………….
  • People get foreign exchange
  • Cheaper goods
  • Nations compete
  • Optimum utilization of countries’ resources

 

Q.2. Fill in the blanks.

  1. International Trade means trade between …………………. (Provinces/ Countries/ Regions)
  2. Two countries can give from foreign trade if ………… are different. (Effect/ Tariff/ Cost)
  3. ………….. encourages trade between two countries. (Different tax system/Reduced tariffs/ National currencies)
  4. Drawback of protection system is ……… (Consumers have to pay higher prices/ Producers get higher profits/ Quality of goods may be affected/ All above)
  5. ………….. is a drawback of free trade. (Prices of local goods rise/ Govt. looses incomes from custom duties/National resources are underutilized)
  6. International trade is possible primarily through specialization in production of …… goods. (All/ One/ Few)
  7. A country that does not trade with other countries is called …… country. (Developed/ Closed/ Independent)
  8. Policy of Protection in trade ……… (Facilitates trade/ Protects foreign producers/ Protects local producers/ Protects exporters)
  9. The largest item of Indian import list is ……….. (Consumer goods/ Machinery/ Petroleum/ Computers)
  10. Trade between two states in an economy is known as …… (External/ Internal/None)

 

SET 2

Q.1. Multiple Choice Questions.

  1. Who among the following enunciated the concept of single factoral terms of trade?
  • Jacob Viner
  • G.S.Donens
  • Taussig
  • J.S.Mill

 

  1. ‘Infant industry argument’ in international trade is given in support of:
  • Granting Protection
  • Free trade
  • Encouragement to export oriented small and tiny industries
  • None of the above

 

  1. Terms of trade that relate to the Real Ratio of international exchange between commodities is called:
  • Real cost terms of trade
  • Commodity terms of trade
  • Income terms of trade
  • Utility terms of trade

 

  1. The main advantage in specialization results from:
  • Economies of large-scale production
  • The specializing country behaving as monopoly.
  • Smaller Production runs resulting in lower unit costs.
  • High wages paid to foreign workers.

 

  1. Net export equals ……
  • Export * Import
  • Export + Import
  • Export – Import
  • Exports of service only

 

  1. A tariff ………………….
  • Increase the volume of trade
  • Reduces the volume of trade
  • Has no effect on volume of trade
  • Both a. and c.

 

7. Terms of Trade of developing countries are generally unfavourable because …….

  • They export primary goods
  • They import value added goods
  • They export few goods
  • Both a. and b.

 

  1. Terms of Trade a country show ……………
  • Ratio of goods exported and imported
  • Ratio of import duties
  • Ratio of prices of exports and imports
  • Both a. and c.

 

  1. Terms of trade between two countries refer to a ratio of …..
  • Export prices to import prices
  • Currency values
  • Export to import
  • Balance of trade to Balance of payments

 

10. Rich countries have deficit in their balance of payments ……..

  • Sometimes
  • Never
  • Alternate years
  • Always

 

Q.2. Fill in the blanks.

  1. BOP means balance of Receipts and payments of …… (all banks/ State bank/ Foreign exchange by a country/ Government)
  2. Favourable trade means exports are ……. than imports. (More/ Less/ Neutral)
  3. Net barter terms of trade is also known as …. Terms of trade.(Commodity/ Income/Utility)
  4. ….. is not a factor affecting TOT. (Reciprocal demand/ Size of demand/ Price of demand)
  5. If tariff is higher, then the imports will …… (Increase/ Decrease/ Same as before)
  6. ……. has given the concept of reciprocal demand. (Mills/ Adam/ Ricardo)
  7. ……… is the curve, which expresses the total demand for one good (imports) in terms of the total supply of another good (exports). (Offer/ Official / Corporate)
  8. Balance of payment is prepared by an economy ……. (Yearly/ Monthly/ Weekly)
  9. …….. kinds of accounts are included in BOP. (2/ 3/4)
  10. …….is not a type of disequilibrium in BOP. (Cyclical/ Seasonal/ Frictional/ Disguised)

 

SET 3

Q.1. Multiple Choice Questions.

  1. The first classical theory of International Trade is given by …………………..
  • Keynes
  • Adam Smith
  • Friedman
  • Heckscher-Ohlin

 

  1. In classical theory of International Trade, the exchange of goods and services takes on the basis of ………….. system?
  • Barter
  • Money
  • Labour
  • capital

 

  1. If capital is available in large proportion and labour is less, then that economy is known as ……………..
  • Capital Intensive
  • Labour Intensive
  • Both a. and b
  • None of above

 

  1. In Heckscher Ohlin theory, what is assumed to be same across the countries?
  • Transportation cost
  • Technology
  • Labour
  • capital

 

  1. Opportunity cost is also known as ……………………
  • Next Best alternative
  • Transformation cost
  • Both a. and b
  • None of above.

 

  1. Factor proportions theory is also known as the
  • comparative advantage theory
  • laissez faire theorem.
  • HeckscherOhlin theorem
  • product cycle model.

 

  1. Trade between two countries can be useful if cost ratios of goods are:
  • Equal
  • Different
  • Undetermined
  • Decreasing

 

  1. According to Hecksher and Ohlin basic cause of international trade is:
  • Difference in factor endowments
  • Difference in markets
  • Difference in political systems
  • Difference in ideology

 

  1. The theory explaining trade between two countries is called:
  • Comparative disadvantage theory
  • Comparative cost theory
  • Comparative trade theory
  • None of the above

 

  1. David Ricardo presented the theory of international trade called:
  • Theory of absolute advantage
  • Theory of comparative advantage
  • Theory of equal advantage.
  • Theory of total advantage

 

Q.2. True or False.

  1. Absolute advantage theory is given by Adam Smith.

True

  1. Ricardo has supplemented Absolute advantage theory.

 True

  1. Heckscher and Ohlin have given comparative cost advantage theory of International Trade.

False

  1. Multilateral trade means one country comes into trade with more than one country.

True

  1. Opportunity cost means unforgiving cost.

False

  1. Modern theory of International Trade is given by Ricardo.

False

  1. 2×2×2 model of International Trade is known by Heckscher Ohlin model.

True

  1. Transformation cost is also known as opportunity cost.

True

  1. Gravity model of trade was first used by Jan Tinbergen.

True

  1. Adam Smith advocated free trade and specialized.

True

 

Set 4

Multiple Choice Questions.

  1. GATT was made in the year ………………..
  • 1945
  • 1947
  • 1950
  • 1951

 

  1. The new world Trade organization WTO., which replaced the GATT came into effect from____
  • 1ST January 1991
  • 1st January 1995
  • 1st April 1994
  • 1st May 1995

 

  1. 5 banks of BRICS nations have agreed to establish credit lines in ….. currencies.
  • Legal
  • Plastic
  • Crypto currency
  • National

 

  1. Where was the 11th meeting of BRICS Trade Ministers held from 13 Nov 2019 – 14 Nov 2019?
  • Shanghai
  • Beijing
  • Tokyo
  • Brasilia

 

  1. What is the name of the SAARC satellite to be launched on May 5, 2017?
  • South Asia Satellite
  • South Asian Association Satellite
  • South East Asia satellite
  • SAARC satellite

 

  1. Full form of SAFTA is ……………………..
  • South Asia Free Trade Agreement
  • South Asia Foreign Trade Agreement
  • South Asia Framework Trade Agreement
  • Both a and b

6. Which of the following commitments has not been made by India to WTO?

  • Reduction in tariffs
  • Increase in quantitative restrictions
  • Increase in qualitative restrictions
  • Trade related Intellectual Property Rights

 

  1. The European Union was formally established on …..
  • November, 1993
  • April, 1995
  • January, 1997
  • May, 1996

 

8. SAARC was established in …..

  • 1980
  • 1985
  • 1990
  • 1995

 

  1. NAFTA came into effect in …..
  • 1990
  • 1994
  • 1998
  • 2004

10. The dominant member state of OPEC is ……………..

  • Iran
  • Iraq
  • Kuwait
  • Saudi Arabia

 

Q.2. Fill in the blanks.

  1. Headquarter of WTO is in ………….. Geneva/USA/Germany.
  2. Before WTO, ……………… was working instead of that. GATY/ GATR/ GATT.
  3. …………….. round negotiations initiated the establishment of WTO. Uruguay/ Urdun/ Urbuny .
  4. India had joined WTO in the year …………. (1995/ 1996/ 1997)
  5. In …………….. , SAARC was established. (1985/ 1986/ 1987)
  6. The first SAARC summit was organized at …….. (Dhaka/ Kathmandu/ Nepal)
  7. ……..is not a country in SAFTA. (India/ Nepal/ Pakistan/ USA)
  8. ……… countries are member of OECD. (34/ 35/ 36)
  9. ………… is not a country under OECD. (Norway/ Canada/ China)
  10. ………….. are the member states of European Union. (28/ 29/30)

Audit Committee, Composition, Role, Responsibilities, Importance

Audit Committee is typically composed of independent non-executive directors, with at least one member having expertise in finance, accounting, or auditing. Its main purpose is to assist the board of directors in fulfilling its oversight responsibilities, particularly related to financial reporting, internal control, and compliance with laws and regulations. The committee works closely with both external and internal auditors to monitor the effectiveness of the audit process and ensure that financial statements provide a true and fair view of the company’s financial performance and position.

Composition of the Audit Committee:

  • Independent Directors:

The audit committee must include a majority of independent non-executive directors to ensure impartiality and prevent conflicts of interest. The inclusion of independent directors ensures objectivity in overseeing the audit process.

  • Financial Expert:

At least one member of the audit committee must have financial expertise to understand complex accounting principles, financial statements, and audit processes.

  • Chairperson:

The chairperson of the audit committee is typically an independent director. This role is crucial in ensuring the proper functioning of the committee and its collaboration with auditors and the board.

Role and Responsibilities of the Audit Committee:

  • Overseeing Financial Reporting:

The committee ensures that the company’s financial statements are prepared in accordance with applicable accounting standards and regulatory requirements. It reviews the annual financial reports before submission to the board and shareholders.

  • Monitoring Internal Control Systems:

The audit committee evaluates the effectiveness of the company’s internal control systems, ensuring that policies and procedures are in place to mitigate risks, prevent fraud, and ensure the accuracy of financial records.

  • Reviewing the External Audit Process:

The committee selects and appoints external auditors and ensures their independence. It meets regularly with auditors to discuss their audit findings, key concerns, and any issues that may affect the company’s financial reporting.

  • Risk Management Oversight:

The audit committee is involved in reviewing the company’s risk management framework and processes. It assesses potential risks (financial, operational, or compliance-related) and evaluates how they are being managed or mitigated.

  • Compliance with Laws and Regulations:

The committee ensures that the company complies with legal and regulatory requirements, such as tax laws, securities regulations, and corporate governance standards. It plays a key role in overseeing compliance with laws that affect financial reporting.

  • Internal Audit Function:

The audit committee is responsible for overseeing the internal audit function, which evaluates the company’s internal controls and operational effectiveness. The committee works with internal auditors to identify areas for improvement and ensures timely action is taken.

Importance of the Audit Committee

  • Enhancing Transparency:

By ensuring proper oversight of the financial reporting process and the internal and external audits, the audit committee enhances transparency and accountability in the company’s financial disclosures. This boosts the confidence of shareholders, investors, and other stakeholders in the financial health of the company.

  • Strengthening Corporate Governance:

The audit committee is a cornerstone of good corporate governance. It promotes transparency, ethical conduct, and sound financial practices, helping the company to operate in a manner that is aligned with the best interests of its shareholders.

  • Improving Internal Controls and Risk Management:

The audit committee helps identify weaknesses in internal controls and ensures corrective actions are implemented. This strengthens the company’s ability to manage risks effectively and ensures that operations are running efficiently and securely.

  • Facilitating Effective Auditing:

The audit committee ensures that auditors have the resources, access, and independence they need to perform their duties. It facilitates the smooth functioning of the auditing process by acting as a bridge between the auditors and the company’s management.

  • Protecting Stakeholder Interests:

By ensuring proper financial reporting and compliance, the audit committee helps protect the interests of stakeholders, including shareholders, employees, regulators, and creditors.

Regulatory Framework Governing Audit Committees

In many countries, including India, the establishment of an audit committee is mandated by law for listed companies and certain public interest entities. In India, the Companies Act, 2013 and SEBI (Securities and Exchange Board of India) regulations require that listed companies form an audit committee. Some key requirements under Indian law include:

  • The committee must consist of at least three directors, with a majority of independent directors.
  • The committee must meet at least four times a year, with a quorum of two members present for meetings.
  • The audit committee must review and discuss financial statements, the internal audit process, the external audit’s scope, and the company’s risk management strategy.

CSR Committee, Composition, Role and Responsibilities, Importance, Challenges

Corporate Social Responsibility (CSR) Committee is a specialized committee formed within a company’s board of directors to oversee and implement its CSR activities. The committee ensures that the company fulfills its social, environmental, and ethical obligations in accordance with the law and promotes sustainable development. It plays a vital role in strategizing, monitoring, and evaluating CSR initiatives to align them with the organization’s vision and regulatory requirements.

Meaning and Legal Mandate

CSR Committee is mandated under Section 135 of the Companies Act, 2013 in India for companies that meet specific criteria related to net worth, turnover, or net profit. It is responsible for formulating and monitoring CSR policies and ensuring compliance with statutory obligations. The formation of a CSR Committee underscores the growing importance of corporate accountability towards societal and environmental welfare.

Composition of CSR Committee

  • Members:

CSR Committee should consist of at least three directors, with at least one being an independent director. For private companies, the committee may include only two directors, and for unlisted public companies without independent directors, it is not mandatory to have an independent director on the committee.

  • Chairperson:

The committee often elects a chairperson from among its members to lead its activities.

The composition ensures diversity in perspectives and expertise, enabling the committee to design and execute effective CSR strategies.

Role and Responsibilities of CSR Committee

The CSR Committee is tasked with several critical responsibilities, including:

a. Formulating CSR Policy

  • Developing a detailed CSR policy that outlines the company’s CSR vision, objectives, and areas of focus, such as education, healthcare, environmental sustainability, and community welfare.
  • Aligning the policy with the company’s long-term goals and the provisions of Schedule VII of the Companies Act, 2013.

b. Recommending CSR Activities

  • Identifying specific CSR projects or programs to be undertaken.
  • Ensuring that these activities align with the objectives mentioned in the CSR policy.

c. Budget Allocation

  • Recommending the amount of expenditure to be incurred on CSR activities.
  • Ensuring that the prescribed percentage of profits (2% of the average net profit of the preceding three years) is allocated for CSR activities.

d. Monitoring and Implementation

  • Monitoring the implementation of CSR projects to ensure compliance with the CSR policy and timelines.
  • Evaluating the impact of CSR initiatives and ensuring that they contribute positively to the targeted beneficiaries.

e. Reporting

  • Preparing an annual report on CSR activities, including details of projects undertaken, expenditure incurred, and outcomes achieved.
  • Ensuring that the report is included in the company’s board report and submitted to regulatory authorities.

Importance of CSR Committee

CSR Committee plays a pivotal role in bridging the gap between corporate objectives and societal needs. Its importance can be summarized as follows:

  • Strategic Oversight: Provides a structured approach to CSR by integrating it into the company’s strategic framework.
  • Compliance: Ensures adherence to legal mandates and regulatory requirements related to CSR.
  • Sustainability: Promotes sustainable development through impactful initiatives addressing social and environmental concerns.
  • Accountability: Enhances transparency and accountability by monitoring and reporting CSR activities.
  • Corporate Reputation: Strengthens the company’s image as a socially responsible organization, fostering goodwill among stakeholders.

Key Activities of the CSR Committee

Some of the typical activities undertaken by the CSR Committee:

  • Identifying key areas of intervention such as education, healthcare, sanitation, rural development, and environmental sustainability.
  • Partnering with non-governmental organizations (NGOs), government bodies, or other organizations for effective project implementation.
  • Reviewing and approving CSR proposals and budgets.
  • Assessing the long-term impact of CSR projects and making necessary adjustments to the CSR policy or projects as needed.

Challenges Faced by CSR Committees

  • Limited Resources: Balancing financial constraints with the need for impactful CSR initiatives.
  • Measuring Impact: Accurately assessing the outcomes of CSR projects can be challenging.
  • Stakeholder Engagement: Ensuring alignment with the expectations of all stakeholders, including communities, employees, and shareholders.
  • Regulatory Compliance: Keeping up with changes in CSR regulations and ensuring adherence.

CSR Committee in India

In India, the Companies Act, 2013 makes CSR mandatory for companies meeting certain financial thresholds:

  • Net worth: ₹500 crore or more.
  • Turnover: ₹1,000 crore or more.
  • Net profit: ₹5 crore or more.

Such companies must spend at least 2% of their average net profit from the preceding three financial years on CSR activities. The CSR Committee ensures that these requirements are met effectively.

Certificate of Commencement of Business

Certificate of Commencement of Business is an official document issued by the Registrar of Companies (RoC), which authorizes a company to begin its operations. This certificate is a key legal requirement under the Companies Act, 2013, particularly for public companies. It signifies that the company has met all the necessary conditions stipulated by law and can officially commence its business activities.

In India, the need for a Certificate of Commencement of Business was initially required only for public companies that issued shares to the public. However, with amendments to the Companies Act, 2013, the issuance of this certificate remains a critical step for such companies.

Requirements for Obtaining the Certificate of Commencement of Business:

Before a company can commence its business, it must fulfill several legal obligations. These requirements include:

  • Incorporation of the Company:

The company must first complete the process of incorporation. This involves the submission of the necessary documents, such as the Memorandum of Association (MoA), Articles of Association (AoA), and the directors’ details to the Registrar of Companies (RoC).

  • Minimum Subscription:

A public company must raise a minimum subscription for its issued shares. This ensures that there is adequate financial backing to commence business. The company must receive at least 90% of the issued capital within a specified period, as stipulated by the Companies Act, 2013.

  • Filing of Declaration:

The directors of the company are required to submit a declaration stating that the minimum subscription has been received, and the company is ready to commence business. This declaration is filed with the RoC.

  • Payment of Share Capital:

The company must ensure that the shareholders have paid the full amount of the subscribed capital. In the case of shares issued at a premium, the company must ensure that the premium is collected as well.

  • Appointment of Statutory Auditor:

The company must appoint its first statutory auditor, who will be responsible for auditing the company’s financial statements.

  • Filing with RoC:

After fulfilling the above requirements, the company must submit the necessary forms (Form 20A) to the Registrar of Companies (RoC) for approval.

Once these conditions are met and the Registrar of Companies is satisfied, the Certificate of Commencement of Business is issued. This certificate serves as official proof that the company is legally permitted to commence its business operations.

Importance of the Certificate of Commencement of Business:

  • Legality of Operations:

The certificate signifies that the company has fulfilled all legal requirements to begin its business activities. Without this certificate, the company cannot engage in any commercial transactions, sign contracts, or carry out its operations.

  • Investor Confidence:

Investors often rely on the Certificate of Commencement of Business to ensure that a company is in compliance with the law and is legally allowed to begin its operations. This document assures investors that their investments are secure and that the company is operational.

  • Financial Security:

By obtaining the certificate, the company assures its stakeholders, including creditors and suppliers, that it has met the necessary capital requirements and is ready to begin its business activities. This adds a layer of credibility and financial stability to the company.

  • Legal Compliance:

For public companies, obtaining the certificate is an essential part of complying with the Companies Act, 2013. It ensures that the company follows the regulatory framework governing business activities in India.

  • Commencement of Legal Transactions:

The certificate serves as the official permission for the company to commence legal transactions. This includes signing contracts, borrowing funds, and engaging in business dealings that are crucial for the company’s success.

  • Avoiding Penalties:

Failure to obtain the Certificate of Commencement of Business within the prescribed period may result in penalties or legal consequences. The company may face fines or the possibility of being struck off from the register of companies if it does not comply.

Consequences of Not Obtaining the Certificate:

If a company fails to obtain the Certificate of Commencement of Business, it cannot legally engage in any business activity. The consequences include:

  • Inability to operate: The company cannot begin its business operations, sign contracts, or make transactions.
  • Legal penalties: The company may be fined or even struck off from the Registrar of Companies.
  • Loss of investor confidence: Lack of this certificate may cause investors to question the legitimacy of the company.

Red herring prospectus, Components, Process, Importance

Red Herring Prospectus (RHP) is a preliminary document issued by a company that is planning to offer its securities (such as shares or bonds) to the public in an initial public offering (IPO) or other securities offering. The document provides important information about the company, including financial details, business operations, and risks, but it does not include the offer price or the number of securities being issued, which are typically finalized later.

The term “red herring” refers to the red ink used on the cover page of the document to highlight that the document is not the final prospectus and that certain details are yet to be finalized.

Purpose of Red Herring Prospectus:

The primary purpose of a Red Herring Prospectus is to inform potential investors about a company’s offerings, business, and financial situation while the company seeks to finalize the terms of its public offering. The document serves as a tool for initial evaluation by investors and is often used to generate interest in the offering.

Components of a Red Herring Prospectus

A Red Herring Prospectus typically includes several key sections, which help investors assess the offering, even though the final terms are still pending.

  • Company Overview:

RHP provides a comprehensive overview of the company’s history, management, structure, and business model. It outlines the products or services the company offers, its competitive landscape, and its strategic plans for growth.

  • Financial Information:

It includes key financial statements, such as the balance sheet, income statement, and cash flow statement, as well as financial ratios and performance metrics. This section helps investors gauge the company’s financial health, profitability, and potential risks.

  • Risk Factors:

One of the most important sections, the risk factors section, outlines potential risks that investors should be aware of before purchasing securities. These risks could include industry-specific risks, regulatory risks, market competition, and financial uncertainties.

  • Use of Proceeds:

This section explains how the company plans to utilize the funds raised from the offering. The funds might be used for purposes such as expansion, debt repayment, research and development, or working capital.

  • Management and Governance:

RHP contains details about the company’s directors, senior executives, and their experience and qualifications. Information about corporate governance practices, including board composition and committees, is also provided.

  • Offer Details (Preliminary):

RHP includes preliminary details of the offering, such as the size of the issue and the type of securities being offered, but does not specify the final offer price or the exact number of securities. These details will be determined closer to the offering date.

  • Legal and Regulatory Disclosures:

Information about the company’s legal standing, compliance with regulations, and any pending lawsuits or regulatory investigations will be disclosed in the RHP. This is crucial for investors to understand any potential legal or regulatory risks.

  • Underwriting Arrangements:

The underwriting section describes the institutions or banks that will manage the offering process and whether they are acting as lead underwriters. It provides details on underwriting fees, their responsibilities, and the process of distributing the shares to the public.

Red Herring Prospectus vs. Final Prospectus

Red Herring Prospectus is not the final document that investors receive. It is part of the IPO process and is used to generate interest in the offering before all details are finalized. The final prospectus, often referred to as the Prospectus, includes all the necessary details about the offering, including the offer price and the number of securities being issued. The final prospectus is issued once the company has completed its regulatory filing and the offer details are confirmed.

Process of Issuing a Red Herring Prospectus:

  • Preparation and Filing:

The company prepares a Red Herring Prospectus and files it with the regulatory authority (such as the Securities and Exchange Board of India (SEBI) in India or the U.S. Securities and Exchange Commission (SEC) in the United States). This document is made available to the public and investors before the offering.

  • Review by Regulatory Authorities:

The regulatory authorities review the RHP to ensure that all required disclosures are made and that it complies with securities laws. The company may need to make revisions based on feedback from the regulators.

  • Roadshow and Marketing:

After the regulatory approval, the company may conduct a “roadshow,” where the company’s management meets with potential institutional investors to generate interest in the offering. The RHP is typically used during these meetings to provide detailed information about the company.

  • Pricing and Final Prospectus:

After the roadshow, the company finalizes the offer price, the number of securities being issued, and other final terms. A final Prospectus is issued, which includes these finalized details, and the securities are offered to the public.

Importance of Red Herring Prospectus:

  • Transparency:

RHP helps ensure transparency in the process of raising funds through public offerings. By providing crucial financial data, business details, and risk factors, it allows potential investors to make informed decisions.

  • Regulatory Compliance:

The Red Herring Prospectus ensures that the company is in compliance with legal and regulatory requirements. It helps authorities assess whether the offering meets the necessary standards.

  • Investor Confidence:

By making the company’s plans, risks, and financial health publicly available, the RHP fosters investor confidence. Potential investors can assess the viability of the investment and decide whether they wish to participate in the offering.

  • Market Reception:

RHP allows the company to gauge the market’s interest in its securities offering, which can help in determining the final price range and quantity of the securities to be issued.

Forfeiture of equity Share

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.

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