Tag: Financial Statements

Management Notes

Petty Cash Book, Functions, Examples

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Petty Cash Book is a financial record used to manage and track small, frequent expenses that do not require issuing a check, such as office supplies, minor repairs, or employee reimbursements. The petty cash book is typically maintained by a petty cashier and operates under the imprest system, where a fixed amount of cash is provided, and once spent, it is replenished. This system ensures that minor expenses are efficiently recorded and controlled without burdening the main cash book. The petty cash book simplifies the process of tracking low-value transactions.

Petty Cash Systems:

  • Imprest System

 This is the most common method used for petty cash management. In the imprest system, a fixed amount of cash is allocated to the petty cash fund, and this amount remains constant. As expenses are incurred, they are recorded, and the total cash is periodically replenished back to the fixed amount.

  • Float System

Petty cash is not replenished to a fixed amount. Instead, a balance is maintained, and when the balance runs low, funds are requested to be topped up. This system is less structured than the imprest system.

Functions of Petty Cash Book:

  1. Records Small-Scale Expenses

The primary function of a petty cash book is to track minor expenses that occur frequently, such as stationery purchases, transportation costs, and small office supplies. These expenses are typically too small to be processed through the main cash book or bank transactions. The petty cash book ensures that such small outlays are accurately recorded and accounted for.

  1. Reduces the Workload on the Main Cash Book

By segregating minor expenses from the main cash book, the petty cash book helps reduce the burden of recording trivial amounts in the primary ledger. This not only simplifies the overall accounting process but also ensures that the main cash book is reserved for larger, more significant transactions. The petty cash book provides an efficient way to handle low-value payments separately.

  1. Facilitates Quick Payments

Petty cash book allows for immediate and quick payments without the need to issue a check or go through the formal approval process of larger transactions. This is particularly useful in situations where small amounts need to be disbursed promptly, such as paying for urgent office supplies or covering transportation fares for staff members.

  1. Works Under the Imprest System

Most petty cash books operate under the imprest system, where a fixed amount is allocated to the petty cashier at the start of a period. As expenses are made, the amount decreases, and at the end of the period, the petty cash is replenished back to the original fixed amount. This system ensures control and accountability, making it easier to manage cash flow and avoid misuse of funds.

  1. Provides Detailed Records of Minor Expenses

Petty cash book ensures that each small expense is thoroughly documented, including the date, the purpose of the expense, the amount spent, and any supporting documentation (like receipts). This detailed record-keeping helps in maintaining transparency and accountability for all small transactions.

  1. Simplifies Audit and Internal Control

Petty cash book serves as an essential tool for audits and internal control. By maintaining accurate records of small transactions, it allows auditors to easily review and verify the expenditures. The imprest system, combined with proper documentation, ensures that funds are not misused and that every expense is justified.

Example of a Petty Cash Book (under the Imprest System)

Date Particulars V.No. L.F. Amount (Debit) Amount (Credit) Balance
2024-10-01 Cash received from head cashier (Opening Balance) – – $500 – $500
2024-10-02 Stationery purchased 101 10 – $50 $450
2024-10-04 Refreshments for staff meeting 102 12 – $30 $420
2024-10-05 Taxi fare for delivery 103 15 – $20 $400
2024-10-07 Postage stamps 104 18 – $10 $390
2024-10-09 Office cleaning supplies 105 20 – $25 $365
2024-10-11 Reimbursement to employee (miscellaneous) 106 22 – $40 $325
2024-10-12 Balance replenished by head cashier – – $175 – $500

Explanation of Columns:

  • Date: The date when the transaction occurred.
  • Particulars: A brief description of the expense or transaction.
  • No.: Voucher number associated with the transaction.
  • F.: Ledger folio reference number.
  • Amount (Debit): The amount added to the petty cash (replenishment).
  • Amount (Credit): The amount of money spent on various expenses.
  • Balance: The remaining petty cash after each transaction.
Osmania University Hyderabad BCOM Notes

Accounting Standards Osmania University B.com 6th Semester Notes

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Unit 1 Introduction: {Book}
Introduction to Accounting, Concept of Accounting Theory VIEW VIEW VIEW
Role of Accounting theory VIEW
Classification of Accounting Theory VIEW
Deductive and inductive approach in theory formulation VIEW
Accounting Principles VIEW
Accounting Concepts and Conventions VIEW
Accounting Standard: Concept, Evolution VIEW VIEW

 

Unit 2 Standards Relating to Financial Reporting & Disclosure {Book}
Ind AS-101: First time adoption of Indian Accounting Standards VIEW
Ind AS-1: Presentation of Financial Statements VIEW
Ind AS-7: Cash Flow Statements VIEW VIEW
Ind AS-8: Accounting Policies, Changes in Accounting Estimates and Errors VIEW
Ind AS-10: Events after the Balance Sheet Date VIEW
Ind AS-24: Related Party Disclosures VIEW
Ind AS- 34: Interim Financial Reporting VIEW
Ind AS-105: Non-Current assets held for sale and discontinued operations VIEW
Ind AS- 108: Operating Segments VIEW

 

Unit 3 Standards Providing Guidance on Financial Statement Items {Book}
Ind AS-2: Inventories VIEW
Ind AS-11: Construction contracts VIEW
Ind AS-12: Income taxes VIEW
Ind AS-16: Property, Plant and Equipment VIEW
Ind AS-17: Leases VIEW
Ind AS-18: Revenue VIEW
Ind AS-20: Accounting for Government Grants and Disclosure of Government Assistance VIEW
Ind AS-23: Borrowing Costs VIEW
Ind AS-38: Intangible Assets VIEW

 

Unit 4 Standards Relating to Business Acquisitions and Consolidations {Book}
Ind AS-28: Investments in Associate and Joint Ventures VIEW
Ind AS-103: Business Combinations VIEW
Ind AS-110: Consolidated Financial Statements VIEW
Ind AS-111: Joint Arrangements VIEW
Ind AS-112: Disclosure of interest in other entities VIEW

 

Unit 5 Financial Reporting {Book}
Financial reporting Concept VIEW
Development in Financial reporting objectives VIEW
True Blood Report (USA) VIEW
The Corporate Report (UK) VIEW
Stamp Report (Canada) VIEW
Objectives of Financial Reporting VIEW
Qualities of Financial Reporting VIEW
Recent trends in Corporate Reporting in India VIEW

 

Osmania University Hyderabad BCOM Notes

International Financial Reporting-1 Osmania University B.com 5th Semester Notes

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Unit 1 General Purpose of Financial Accounting and Reporting as Per Us GAAP And IFRS: {Book}
GAAP VIEW
IFRS VIEW
Conceptual framework: Standard Setting Bodies & Hierarchy VIEW
Elements of Financial statement VIEW
Primary objectives of financial reporting VIEW
Qualitative Characteristics of Financial statement, Fundamental, Assumptions VIEW
Financial statement Principles VIEW
Accounting Cycle VIEW
Preparation of Financial statement, General-purpose financial statements VIEW
Balance sheet VIEW VIEW
Income Statement VIEW
Statement of Comprehensive income VIEW
Statement of changes in equity VIEW
Statement of changes cash flows VIEW VIEW
Public Company reporting requirements VIEW
SEC Reporting Requirements VIEW
Interim Financial Reporting VIEW
Segment Reporting VIEW
Revenue recognition: 5 Step approach to Revenue Recognition VIEW VIEW
Certain Customer Right’s & Obligations VIEW
Specific Arrangements VIEW
Long Term Construction Contracts VIEW

 

Unit 2 Current Assets and Current Liabilities: {Book}
Monetary Current Assets & Current Liabilities: VIEW
Cash & Cash Equivalents VIEW
Accounts Receivable VIEW
Notes Receivable VIEW
Transfers & Servicing of Financial Assets VIEW
Accounts Payable VIEW
Employee-related Expenses Payable VIEW VIEW
Inventory: Determining Inventory VIEW
Cost of Goods Sold VIEW
Inventory Valuation, Inventory Estimation Methods VIEW VIEW VIEW

 

Unit 3 Financial Investments and Fixed Assets: {Book}
Financial Investments: VIEW
Investments in Equity Securities VIEW VIEW
Investment in Debt Securities VIEW
Financial Instruments VIEW
Tangible Fixed Assets, Acquisition of Fixed Assets VIEW
Capitalization of Interest VIEW
Costs incurred After Acquisition VIEW
Depreciation VIEW VIEW VIEW
Impairment, Asset Retirement Obligation VIEW
Disposal Conversions VIEW VIEW
Involuntary Conversions VIEW
Intangible Assets: VIEW
Knowledge-based intangibles (R&D, Software)
Legal rights-based intangibles (Patent, Copyright, Trademark, Franchise, License, Leasehold improvements)
Goodwill VIEW VIEW

 

Unit 4 Financial Liabilities (As per US GAAP and IFRS): {Book}
Bonds Payable VIEW
Types of Bonds VIEW VIEW
Convertible bonds vs. Bonds with detachable warrants VIEW
Bond Retirement VIEW
Fair Value Option & Fair Value Election VIEW
Debt Restructuring: Settlement, Modification of terms VIEW

 

Unit 5 Select Transactions (As per US GAAP and IFRS): {Book}
Fair value Measurements: Valuation Techniques, Concept VIEW
Fair value hierarchy VIEW
Accounting changes and error correction:
Changes in Accounting estimate VIEW
Changes in Accounting principle VIEW
Changes in Reporting entity VIEW
Correction of an error, Contingencies VIEW
Possibility of occurrence (Remote, reasonably possible or Probable) VIEW
Disclosure vs. Recognition VIEW VIEW
Derivatives and Hedge Accounting: VIEW
Speculation (non-hedge) VIEW
Fair value hedge, Cash flow hedge VIEW
Nonmonetary exchanges: Exchanges with commercial substance, Exchanges without commercial substance VIEW
Leases: Operating lease, Finance lease VIEW
Sale leaseback VIEW

 

Osmania University Hyderabad BCOM Notes

Financial Accounting-2 Osmania University B.com 2nd Semester Notes

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Unit 1 Bills of Exchange {Book}
Bills of Exchange Definition VIEW
Distinction between Promissory note and Bill of exchange VIEW
Accounting Treatment of Trade Bills VIEW
Books of Drawer and Acceptor VIEW
Honor and Dishonor of Bills VIEW
Renewal of Bills VIEW
Retiring of Bills under Rebate VIEW
Accommodation Bills VIEW
Unit 2 Consignment Accounts {Book}
Consignment Meaning, Features VIEW
Proforma invoice, Account sales, Del credere commission VIEW
Accounting treatment in the Books of the Consignor and the Consignee VIEW
Valuation of Consignment stock VIEW
Treatment of Normal and Abnormal Loss VIEW
Invoice of Goods at a Price higher than the cost price VIEW
Unit 3 Joint Venture Accounts {Book}
Joint Venture, Meaning, Features VIEW
Difference between Joint Venture and Consignment VIEW
Accounting Procedure VIEW
Methods of Keeping Records for Joint Venture Accounts VIEW
Method of Recording in co-ventures books VIEW
Separate Set of Books Method VIEW
Joint Bank Account VIEW
Memorandum Joint Venture Account VIEW
Unit 4 Accounts from Incomplete Records {Book}
Single Entry System Meaning, Features, Defects VIEW VIEW
Difference between Single Entry and Double Entry Systems VIEW
Books and Accounts maintained VIEW
Ascertainment of Profit VIEW
Statement of Affairs VIEW
Conversion method VIEW
Unit 5 Accounting for Non-Profit Organizations {Book}
Non-Profit Organization Meaning, Features VIEW
Receipts and Payments Account VIEW
Income and Expenditure Account VIEW
Balance Sheet VIEW

Osmania University Hyderabad BCOM Notes

Financial Accounting-1 Osmania University B.com 1st Semester Notes

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Unit 1 Accounting process {Book}
Financial Accounting: Introduction, Definition, Evolution VIEW
Financial Accounting Scope VIEW
Financial Accounting Functions VIEW
Financial Accounting Advantages and Limitations VIEW
Users of Accounting Information VIEW
Branches of Accounting VIEW
Accounting Principles, Concepts and Conventions VIEW VIEW
Accounting Standards Meaning, Importance VIEW
List of Accounting Standards issued by ASB VIEW
Accounting System, Types of Accounts VIEW
Accounting Cycle VIEW
Journal VIEW VIEW
Ledger VIEW
Trial Balance VIEW VIEW

 

Unit 2 Subsidiary Books {Book}
Subsidiary Books Meaning, Types VIEW
Purchases Book, Purchases Returns Book, Sales Book, Sales Returns Book VIEW
Bills Receivable Book, Bills Payable Book VIEW
Cash Book: Single Column, Two Column, Three Column VIEW
Petty Cash Book VIEW
Journal Proper VIEW

 

Unit 3 Bank Reconciliation Statement {Book}
Bank Reconciliation Statement Meaning, Need VIEW
Reasons for differences between Cash book and Pass book balances VIEW
Favourable and over Draft balances VIEW
Ascertainment of correct cash book balance VIEW
Preparation of Bank Reconciliation Statement VIEW

 

Unit 4 Rectification of Errors and Depreciation {Book}
Capital and Revenue Expenditure VIEW
Capital and Revenue Receipts Meaning and Differences VIEW VIEW
Differed Revenue Expenditure VIEW
Errors and their Rectification VIEW
Types of Errors VIEW
Suspense Account VIEW
Effect of Errors on Profit VIEW
Depreciation (AS-6): Meaning Causes VIEW
Difference between Depreciation, Amortization and Depletion VIEW
Objectives of providing for depreciation VIEW
Factors affecting depreciation VIEW
Accounting Treatment of depreciation VIEW VIEW
Methods of depreciation:
Straight Line Method VEW
Diminishing Balance Method VIEW

 

Unit 5 Final Accounts {Book}
Final Accounts of Sole Trader: Meaning, Uses VIEW
Preparation of Manufacturing Account VIEW
Preparation of Trading Account VIEW
Preparation of Profit & Loss Account VIEW
Balance Sheet Adjustments VIEW VIEW
Closing Entries VIEW
Management Notes

Corporate Directors, CEOs, Expatriates and Executives

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One of the major issues that gained attention after the 2007 and 2009 financial crisis due to Wall Street movement was the unduly high compensation being paid to executives of financial institutions even when the corporations were in a state of collapse. This movement against the executive remuneration gained momentum throughout the world. In U.S and many other countries there was a lot of hue and cry about excessive compensation being paid to top executives. Even though in India the situation regarding excessive executive remuneration has not reached alarming levels yet this issue needs to be taken seriously at this stage itself. If not given proper attention then it is not long enough when this problem would be quite glaring in India too.

Many recent corporate frauds such as Satyam fraud, Kingfisher’s fraud and many others have brought into light the dark side of Indian corporate governance practices. In almost all these frauds the executives were drawing a huge salary from the company at the expense of other stakeholders of the company be it shareholders or creditors etc.They used tricks to defraud the investors as well as creditors. Thus, this issue needs adequate attention else it would lead to more such frauds.

Various studies on remuneration schemes of executives in Indian Companies have reflected majorly 3 issues:

  1. The remuneration is not strictly based on performance. The highest paid executives are usually not from the best performing companies and many a times even when the value of shares is declining constantly there is no major effect on the remuneration of top executives.
  2. There is a huge gap in the compensation level of executives and median employees. The supports for high remuneration state that this is due to the dearth of talent at the top level but even then such a glaring difference in the basic pay as well as in the % increase in pay as compared to median employees is not justified.
  3. Also, the studies have found that the promoter CEOs are paid much more in comparison to Non promoter CEOs.

In this paper I would basically study the reasons behind the above findings and would majorly focus on efficiency of current regime in curbing the same and also the role of other interested entities which can serve as a control mechanism on executive remuneration.

For this purpose firstly, analyze the context of executive remuneration and the issues associated with it wherein will focus on agency problem and also the role of ownership structure in enhancing the problem. Then would annalyse the efficacy of checks provided by the current regime on Executive remuneration i.e. Shareholders say on pay, Remuneration committee and linking Remuneration to performance. Lastly, examine the role of Institutional investors as a control mechanism against executive remuneration.

Meaning of Remuneration

Remuneration has been described in section 2(78) of the Companies Act 2013.As per this definition any payment in the form of money or its equivalent would be counted as remuneration. Perquisites would also be included in determining total remuneration. Perquisites in this case are those as defined under the Income tax Act, 1961.

Remuneration can be paid in various forms like cash, medical benefits, retirement benefits, share options, shares, sitting fee and perks and allowances like contribution to provident fund, rent free accommodation, travelling expenses, car etc. It is usually a combination of various forms. Certain perquisites and compensations are explicitly exempted from being counted as a part of remuneration

Role of Executive Remuneration

The role of executive remuneration is to attract and retain top talent at executive position and incentivize them in the way that they work for the benefit of the company while furthering the objective of the company and increasing the value of the firm.

Interplay Between Fixed and Variable Component

The role of fixed component is to fulfill the immediate needs of the employees. All types of companies are open to certain sector specific risks and fixed component reduces the effect of this risk by assuring certain determined amount of income.

On the other hand, variable component can be used to align the interest of executives to the interest of company. For example, if the executives are provided with certain number of shares as a part of remuneration then better performance would lead to increase in the share value of the company and would also increase executive’s compensation.

If the executives receive just fixed remuneration with no variable component then instead of working as incentive, it would actually dilute its effect and if the compensation would include only variable component then this would also frustrate the employee.

Thus, there must be combination of fixed as well as variable component wherein the fixed component work as an incentive to work and the variable component makes sure that the work is done in the interest of the company. Also, it is necessary that there must be interaction between various forms of compensation and the remuneration scheme must be arranged in a way that it is incentive based.

Management Notes

Capital Gain (Section. 45, 48, 49, 50 and 54)

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The income from capital gains is not an income which accrues or arises from day-to-day during a specific period but it arises at fixed point of time, namely, on the date of the transfer of a capital asset. Specifically, the income from capital gains is the amount by which the sale price of a capital asset, net of any expense incurred in connection with the sale of the asset, exceeds the acquisition cost of the capital asset. The taxation of capital gains is justified by the taxation policy and law on the premise that capital gains increases the ‘ability to pay’ capacity of the person receiving such a gain.

The provisions related to taxation of capital gains were first introduced in 1947 and then in 1956 and then said section 12B in Income tax Act, 1922 was retained as such in the relevant provisions in Income tax Act, 1961.

Charging sections – Sections 45, 46 and 46A

The charging section explains the subject matter of taxation. Thus, there is one charging section for each head of income for salaries, income from house property, business income and income from other sources. However, for capital gains, there are three independent and separate charging sections:

(i) Section 45: Capital gains

(ii) Section 46: Capital gains on distribution of assets by companies in liquidation

(iii) Section 46A: Capital gains on purchase by company of its own shares or other securities

Section 45 is the general provision while sections 46 and 46A are special provisions.

Incomes to be taxed under the head, ‘Capital Gains’

Thus, the following incomes are taxable as ‘capital gains’:

Sr. No. Particulars Section
(1) Any profits and gains arising from the transfer of a capital asset effected in the previous year. Section 45(1) to (5)
(2) Any profits and gains arising from the receipt of any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or (iv) action taken by an enemy or in combating an enemy. 45(1A)
(3) Capital gains in respect of any money or other assets received by shareholder of a company from the company on its liquidation 46(2)
(d) Difference between (i) value of consideration received by shareholder or holder of specified securities from company on buyback of its own shares or other specified securities; and (ii) cost of acquisition 46A

The situs/location of capital asset matters only for non-resident assessees and not to others. In the cases of Non-resident assessees, if capital asset located outside India is transferred outside India and sale proceeds are received outside India, no taxability to capital gains arises in view of section 5 of the Act. Such assessees will be liable to be taxed under section 9(1) (i) in respect of capital gains accruing or arising “through the transfer of any capital asset situate in India”.

Important Definitions in capital gains

Sr. No. Term Definition Exceptions and remarks
1 Capital Asset A capital asset means property of any kind held by an assessee, whether or not connected with his business or profession

Any securities held by an FII

 Assets Listed:

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art

(g) Land other than agricultural land

(h) Rights in a company
2 Exclusions:

(i) any stock in trade

(ii) movable assets for personal use

(iii) agricultural land in India

(iv) Gold bonds issued by GoI

(v) Special bearer bonds

(vi) Gold Deposit Bonds
2 Agricultural land Land not situated within municipal jurisdiction or Cantt. Board and having population of more than 10000

Within 2 kms of municipal limits of jurisdiction with a population 10000>100000 and 6 kms for jurisdiction with population 100000>1000000 and 8kms for population >1000000

 This amendment is applicable from A Y 2014-15 and the distance from municipal limits has to be measured aerially and not on the ground.
3 Transfer Sale, exchange or relinquishment of the asset

Extinguishment of rights in the asset

Compulsory acquisition under the law

Conversion of asset into stock in trade

Maturity or redemption of a zero coupon bond

Part performance of a contract

Enjoyment of a property through acquisition of shares
Indexed Cost of acquisition an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later; From A Y 2018-19, the year 1981 shall be replaced by 2000
Indexed Cost of any improvement An amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place
Cost Inflation Index Such Index as the Central Government may, having regard to seventy-five per cent of average rise in the (Consumer Price Index (urban)) for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf

Meaning of Transfer [Section 2(47)]

“Transfer”, in relation to a capital asset, includes:

(i) Sale, exchange or relinquishment of the asset;

(ii) Extinguishment of any rights in relation to a capital asset;

(iii) Compulsory acquisition of an asset;

(iv) Conversion of capital asset into stock-in-trade;

(v) Maturity or redemption of a zero coupon bond;

(vi) Allowing possession of immovable properties to the buyer in part performance of the contract;

(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or

(viii) Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

Transactions which are not regarded as transfer [Section 47]

Following transactions shall not be regarded as transfer (subject to certain condition). Hence, following transaction shall not be charged to capital gains:

Section Particulars
46(1) Distribution of asset in kind by a company to its shareholders at the time of liquidation
47(i) Distribution of capital asset on total or partial partition of HUF
47(iii) Transfer of capital asset under a gift or will or an irrevocable trust
47(iv) Transfer of capital asset by a company to its wholly owned subsidiary company
47(v) Transfer of a capital asset by a wholly owned subsidiary company to its holding company
47(vi) Transfer of capital assets in a scheme of amalgamation
47(via) Transfer of shares in an Indian company held by a foreign company to another foreign company under a scheme of amalgamation of the two foreign companies
47(viab) Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a foreign company to another foreign company under a scheme of amalgamation (subject to conditions)
47(viaa) Transfer of capital assets in a scheme of amalgamation of a banking company with a banking institution
47(vib) Transfer of capital assets by the demerged company to the resulting company in a demerger
47(vic) Transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company
47(vica) Any transfer of a capital asset by the predecessor co-operative bank to the successor co-operative bank in a business reorganization.
47(vicb) Any transfer of capital asset (being shares) held by a shareholder in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any shares in the successor co-operative bank in a scheme of business reorganization
47(vicc) Transfer of share of a foreign company (which derives, directly or indirectly, its value substantially from the share or shares of an Indian company) held by a demerged foreign company to resulting foreign company in case of demerger (subject to conditions)
47(vid) Transfer or issue of shares by the resulting company to the shareholders of the demerged company in a scheme of demerger
47(vii) Allotment of shares in amalgamated company in lieu of shares held in amalgamating company
47(viia) Transfer of capital assets (being foreign currency convertible bonds or GDR) by a non-resident to another non-resident
47(viiaa) Any transfer made outside India, of a capital asset (being rupee denominated bond of an Indian company issued outside India) by a non-resident to another non-resident
47(viiab) Any transfer of following capital assets by a non-resident on a recognised stock exchange located in any International Financial Services Centre:

a) Bond or GDR

b) Rupee Denominated Bond of an Indian Co.

c) Derivative

d) Such other Securities as may be prescribed.
47(viib) Transfer of capital assets (being a Government security carrying periodic payment of interest) outside India through an intermediary dealing in settlement of securities by a non-resident to another non- resident
47(viic) Redemption of capital asset being sovereign gold bond issued by RBI under the Sovereign Gold Bond Scheme, 2015
47(ix) Transfer of a capital asset (being work of art, manuscript, painting, etc.) to Government, University, National museum, etc.
47(x) Transfer by way of conversion of bonds or debentures into shares
47(xa) Transfer by way of conversion of bonds [as referred to in section 115AC(1)(a)] into shares or debentures of any company
47(xb) Any transfer by way of conversion of preference shares into equity shares
47(xi) Transfer by way of exchange of a capital asset being membership of a recognized stock exchange for shares of a company
47(xii) Transfer of land by a sick industrial company which is managed by its workers’ co-operative
47(xiii) Transfer of a capital asset by a firm to a company in the case of conversion of firm into company
47(xiiia) Transfer of a capital asset being a membership right held by a member of a recognized stock exchange in India
47(xiiib) Transfer of a capital asset by a private company or unlisted public company to an LLP, or any transfer of shares held in the company by a shareholder, in the case of conversion of company into LLP
47(xiv) Transfer of a capital asset to a company in the case of conversion of proprietary concern into a company
47(xv) Transfer involved in a scheme of lending of securities
47(xvi) Transfer of a capital asset in a transaction of reverse mortgage made under a scheme notified by the Government
47(xvii) Transfer of a capital asset (being share of a special purpose vehicle) to a business trust in exchange of units allotted by that trust to the transferor
47(xviii) Transfer of units of a mutual fund pursuant to consolidation of two or more schemes of equity oriented mutual fund or of two or more schemes of a mutual fund other than equity oriented mutual fund
47(xix) Transfer of units of a mutual fund from one plan to another pursuant to consolidation of plans within scheme of mutual funds.

Full Value of Consideration

Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market value (‘FMV’) of such assets shall be taken as full value of consideration.

However, in the following cases “full value of the consideration” shall be determined on notional basis as per the relevant provisions of the Income-tax Act, 1961:

S. No. Nature of transaction Section Full Value of Consideration
1. Money or other asset received under any insurance from an insurer due to damage or destruction of a capital asset 45(1A) Value of money or the FMV of the asset (on the date of receipt)
2. Conversion of capital asset into stock-in-trade 45(2) FMV of the capital asset on the date of conversion
3. Transfer of capital asset by a partner or member to firm or AOP/BOI, as the case may be, as his capital contribution 45(3) Amount recorded in the books of accounts of the firm or AOP/BOI as the value of the capital asset received as capital contribution
4. Distribution of capital asset by Firm or AOP/BOI to its partners or members, as the case may be, on its dissolution 45(4) FMV of such asset on the date of transfer
5. Money or other assets received by share- holders at the time of liquidation of the company 46(2) Total money plus FMV of assets received on the date of distribution less amount assessed as deemed dividend under section 2(22)(c)
6. Buy-back of shares and other specified securities by a company 46A Consideration paid by company on buyback of shares or other securities would be deemed as full value of consideration. The difference between the cost of acquisition and buy-back price (full value of consideration) would be taxed as capital gain in the hands of the shareholder.

However, in case of buy-back of shares by a domestic company (whether listed* or unlisted), the company shall be liable to pay additional tax at the rate of 20% under section 115QA on the distributed income (i.e., buy-back price as reduced by the amount received by the company for issue of such shares). Consequently, capital gain arising in hands of shareholder shall be exempt by virtue of section 10(34A) in such cases.
*With effect from 05/07/2019, section 115QA has been amended to levy additional tax on buy back of shares by listed companies as well. Consequently, section 10(34A) has also been amended to exempt income arising in hands of shareholder on account of buy back of shares by listed companies. x
7. Shares, debentures, warrants (‘securities’) allotted by an employer to an employee under notified Employees Stock Option Scheme and such securities are gifted by the concerned employee to any person Fourth Proviso to Section 48 Fair Market value of securities at the time of gift
7A. Conversion of capital asset into stock-in-trade 49 FMV of the inventory as on the date of conversion
8. In case of transfer of land or building, if sale consideration declared in the conveyance deed is less than the stamp duty value 50C The value adopted or assessed or assessable by the Stamp Valuation Authority shall be deemed to be the full value of consideration. However, no such adjustment is required to be made if value adopted for stamp duty purposes does not exceed 110% of the sale consideration.

Note: Where the date of agreement (fixing the amount of consideration) and the date of registration for the transfer of property are not the same, the value adopted or assessed or assessable by Stamp Valuation Authority on the date of agreement may be taken as full value of consideration.
8A. Where consideration for transfer of unquoted shares is less than the Fair Market Value 50CA The Fair Market Value (so determined in prescribed manner) shall be deemed to be the full value of consideration

Note: The Board may prescribe transactions undertaken by certain class of persons to which the provisions of Section 50CA shall not be applicable. (w.e.f. Assessment Year 2020-21)
9. If consideration received or accruing as a result of transfer of a capital asset is not ascertainable or cannot be determined 50D FMV of asset on the date of transfer

Cost of Acquisition

Cost of acquisition of an asset is the amount for which it was originally acquired by the assessee. It includes expenses of capital nature incurred in connection with such purchase or for completing the title of the property.

However, in cases given below, cost of acquisition shall be computed on notional basis:

S. No. Particulars Notional Cost of Acquisition
1. Additional compensation in the case of compulsory acquisition of capital assets Nil
2. Assets received by a shareholder on liquidation of the company FMV of such asset on the date of distribution of assets to the shareholders
3. Stock or shares becomes property of taxpayer on consolidation, conversion, etc. Cost of acquisition of such stock or shares from which such asset is derived
4. Allotment of shares in an amalgamated Indian co. to the shareholders of amalgamating co. in a scheme of amalgamation Cost of acquisition of shares in the amalgamating co.
5. Conversion of debentures into shares That part of the cost of debentures in relation to which such asset is acquired by the assessee
5A. Conversion of preference shares into equity shares The part of the cost of preference shares in relation to which such asset is acquired by the assessee.
6. Allotment of shares/securities by a co. to its employees under ESOP Scheme approved by the Central Government a) If shares are allotted during 1999-2000 or on or after April 1, 2009, FMV of securities on the date of exercise of option

b) If shares are allotted before April 1, 2007 (not being during 1999-2000), the amount actually paid to acquire the securities

c) If shares are allotted on or after April 1, 2007 but before April 1, 2009, FMV of securities on the date of vesting of option (purchase price paid to the employer or FBT paid to employer shall not be considered)
6A. Listed Equity Shares or Units of Equity Oriented Funds or Units of Business Trust as referred to in Section 112A acquired before February 1, 2018. Higher of :

(i) Cost of acquisition of such asset; and

(ii) Lower of:

(A) The fair market value of such asset; and

(B) The full value of consideration received or accruing as a result of transfer of such asset.

Note: For meaning of ‘Fair market Value’ refer Explanation to Section 55(2)(ac).
7. Property covered by section 56(2)(vii) or (viia) or (x) The value which has been considered for the purpose of Section 56(2)(vii) or (viia) or (x)
8. Allotment of shares in Indian resulting company to the existing shareholders of the demerger company in a scheme of demerger Cost of acquisition of shares in demerged company ? Net book value of assets transferred in demerger ? Net worth of the demerged company immediately before demerger
9. Cost of acquisition of original shares in demerged company after demerger Cost of acquisition of such shares minus amount calculated above in point 8.
10. Cost of acquisition of assets acquired by successor LLP from predecessor private company or unlisted public company at the time of conversion of the company into LLP in compliance with conditions of Section 47(xiiib) Cost of acquisition of the assets to the predecessor private company or unlisted public company
11. Cost of acquisition of rights of a partner in a LLP which became the property of the taxpayer due to conversion of a private company or unlisted public company into the LLP Cost of acquisition of the shares in the co. immediately before conversion
12. Depreciable assets covered under Section 50 Opening WDV of block of assets on the first day of the previous year plus actual cost of assets acquired during the year which fall within the same block of assets
13. Depreciable assets of a power generating unit as covered under Section 50A* WDV of the asset minus terminal depreciation plus balancing charge
14. Undertaking/division acquired by way of slump sale as covered under Section 50B Net worth of such undertaking
15. New asset acquired for claiming exemptions under sections 54,  54B, 54D, 54G or 54GA if it is transferred within three years Actual cost of acquisition  minus exemption claimed under these sections
16. Goodwill of business or trade mark or brand name associated with business or right to manufacture, produce or process any article or thing or right to carry on any business or profession, tenancy right, stage permits or loom hours a) If these assets were acquired by gift, will, etc., under section 49(1) and the previous owner had purchased these assets: Cost of acquisition to the previous owner

b) If the owner has purchased these assets: Actual cost of acquisition

c) If these assets are self-generated: Nil
17. Right shares Amount actually paid by assessee
18. Right to subscribe to shares (i.e., right entitlement) Nil
19. Bonus shares a) If allotted to the assessee before April 1, 1981: Fair market value on that date

b) In any other case: Nil
20. Allotment of equity shares and right to trade in stock exchange, allotted to members of stock exchange under a scheme of demutualization or corporatization of stock exchanges as approved by SEBI a) Cost of acquisition of shares: Cost of acquisition of original membership of the stock exchange

b) Cost of acquisition of trading or clearing rights of the stock exchange: Nil
21. Capital asset, being a unit of business trust, acquired in consideration of transfer as referred to in section 47(xvii) Cost of acquisition of shares as referred to in section 47(xvii) [applicable from AY 2015-16]
Units allotted to an assessee pursuant to consolidation of two or more scheme of a mutual fund as referred to in Section 47(xviii) Cost of acquisition of such units shall be the cost of acquisition of units in the consolidating scheme of the mutual fund
Shares in a company acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in Section 115AC(1)(b) Cost of acquisition of such shares shall be calculated on the basis of the price prevailing on any recognized stock exchange on the date on which a request for such redemption was made.
24. Any other capital asset: a) If it became property of taxpayer before April 1, 2001 by gift, will, etc., in modes specified in section 49(1): Cost of acquisition to the previous owner or FMV as on April 1, 2001, whichever is higher.

Note: The FMV on 1st April, 2001 shall not exceed the stamp duty value of such asset as on 1st April, 2001 where such stamp duty value is available. (this amendment will be applicable w.e.f. AY 2021-22)

b) If it became property of taxpayer before April 1, 2001 : Cost of acquisition or FMV as on April 1, 2001, whichever is more

Note: The FMV on 1st April, 2001 shall not exceed the stamp duty value of such asset as on 1st April, 2001 where such stamp duty value is available. (this amendment will be applicable w.e.f. AY 2021-22)

c) If it became property of taxpayer after April 1, 2001 by gift, will, etc., in modes specified in section 49(1): Cost of acquisition to the previous owner

d) If it became property of taxpayer after April 1, 2001 : Actual cost of acquisition

* Terminal Depreciation/Balancing Charge:

  1. a) Balancing Charge = Sales Consideration – WDV of the depreciable asset
  2. b) Terminal Depreciation = WDV – Sales Consideration
Management Notes

Private placements of Shares

indiafreenotesby indiafreenotes2

Private placement, the issue is placed directly with a few selected small number of investors. This is also known as non-public offering. Typical investors include large banks, mutual funds, insurance companies and pension funds. The private placement does not have to be registered with the Securities and Exchange Commission.

Private placements are much cheaper than IPOs. However, this method cannot be used for large issues because a small group of investors will have limited risk appetite. Also, these issues are not traded in the secondary market, as opposed to IPO securities, which once listed are traded in the secondary market. This makes it difficult for investors to liquidate these securities.

The term private placement refers to the sale of securities to a small number of private investors to raise capital. These private investors include mutual fund investors, banks, insurance companies and etc. Private placements are different from public issue since in the latter one the shares are sold in the open market to anyone willing to buy them whereas in private placements of shares the shares are sold to specific investors.

Private placement is a method of raising capital in which securities are sold directly to a selected group of investors rather than through a public offering. This targeted approach allows companies to raise funds from a specific set of investors, often institutions or high-net-worth individuals, without the need for public registration. Private placements are regulated by securities laws, and the process involves meticulous planning, compliance, and negotiations between issuers and investors.

Private placement is a valuable tool for companies seeking to raise capital efficiently while maintaining a degree of confidentiality. It provides flexibility in structuring deals, selecting investors, and tailoring terms to meet specific needs. While private placements may not be suitable for all companies, they offer a strategic avenue for raising capital, attracting strategic partners, and fueling growth in a controlled and efficient manner. Companies considering private placements should carefully assess their capital needs, regulatory obligations, and strategic goals before engaging in this form of capital raising.

Features of Private Placement:

  1. Limited Investor Pool:

Private placements involve a restricted number of investors. This targeted approach allows issuers to negotiate terms with a select group, often chosen based on their strategic alignment with the company’s goals.

  1. Exemption from Public Registration:

Unlike public offerings, private placements are exempt from the rigorous public registration process. This exemption is provided under various securities regulations, such as Regulation D in the United States or the SEBI (Securities and Exchange Board of India) guidelines in India.

  1. Negotiable Terms:

Issuers and investors have more flexibility in negotiating the terms of the private placement. This includes aspects such as pricing, the structure of securities, and any covenants or conditions attached to the investment.

  1. Diverse Securities:

Private placements can involve a variety of securities, including equity, debt, convertible securities, or preferred shares. The choice of security depends on the company’s capital needs and the preferences of investors.

  1. Customized Agreements:

The terms and conditions of private placement agreements are often customized to suit the specific needs of both parties. This flexibility allows for tailoring the investment structure to align with the company’s strategy.

  1. Confidentiality:

Private placements offer a level of confidentiality that is not present in public offerings. Companies can raise capital without disclosing sensitive information to competitors or the broader market.

Regulatory Framework for Private Placement:

While private placements offer flexibility, they are subject to regulatory oversight to protect the interests of investors. The regulatory framework varies by jurisdiction, but common elements:

  1. Accredited Investors:

Many jurisdictions restrict private placements to accredited investors, who are deemed to have the financial sophistication to understand and assess the risks associated with these investments.

  1. Exemptions from Registration:

Private placements are exempt from the full registration requirements that public offerings must undergo. However, issuers must comply with specific regulations governing private placements.

  1. Disclosure Requirements:

While private placements provide confidentiality, issuers are still required to provide certain disclosures to investors. These disclosures may include financial statements, risk factors, and other relevant information.

  1. Limited Marketing and Solicitation:

The solicitation of investors in a private placement is limited compared to public offerings. Issuers must be cautious in their approach to avoid violating regulations related to marketing and advertising.

  1. Resale Restrictions:

Investors in private placements may face restrictions on selling their securities in the secondary market. These restrictions help maintain the private nature of the placement.

Advantages of Private Placement:

  1. Efficiency and Speed:

Private placements are generally faster and more cost-effective than public offerings. The absence of extensive regulatory reviews and public registration processes accelerates the capital-raising timeline.

  1. Selective Investor Engagement:

Issuers can choose investors strategically, targeting those with industry expertise, strategic alignment, or specific financial capabilities.

  1. Flexibility in Terms:

The negotiated nature of private placements allows issuers to tailor terms and conditions to meet the specific needs and goals of both the company and investors.

  1. Confidentiality:

Private placements offer a level of confidentiality, allowing companies to raise capital without divulging sensitive information to the public.

  1. Strategic Alignment:

By selectively choosing investors, companies can attract strategic partners who bring not just capital but also industry knowledge, networks, and expertise.

  1. Lower Costs:

The costs associated with private placements are generally lower than those of public offerings due to reduced regulatory requirements and marketing expenses.

Challenges and Considerations:

  1. Limited Capital:

Private placements may not be suitable for companies seeking significant amounts of capital, as the investor pool is restricted.

  1. illiquidity for Investors:

Investors in private placements may face challenges in selling their securities, as these transactions are often subject to restrictions.

  1. Regulatory Compliance:

Companies must navigate complex regulatory requirements to ensure compliance with securities laws. Failure to comply can result in legal consequences.

  1. Market Perception:

Companies choosing private placements may miss out on the visibility and market perception that comes with a public offering.

  1. Negotiation Complexity:

Negotiating terms with a select group of investors can be complex, requiring skilled negotiation and legal expertise to strike a mutually beneficial deal.

Provisions as per Companies Act

(1) A company may, subject to the provisions of this section, make a private placement of securities.

(2)  A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed.

(3) A company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed.

Statutory Provisions for Private Placement of Securities:

Private Placement of Securities is covered under Section 42 of the Companies Act, 2013 and Companies (Prospectus and Allotment of Securities) Rules, 2014. Private Placement is defined as any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through Private Placement Offer-cum-Application.

To whom can a Private Placement offer be made:

Private Placement Offer can be made to a prospective investor or any person who intends to invest a specific amount of funds in the Company against issue of securities. Offer to subscribe for the securities of a Company under Private Placement cannot be made to more than 200 persons in a Financial Year. If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, same shall be deemed to be an offer to the public.

Advertisement:

No advertisements, media marketing or distribution channels or agents to be used by the company to inform the public at large about such an issue.

Procedure:

Following procedure should be followed by the Company intending to issue securities under Private Placement:

  • Calling for the meeting of the Board of Directors of the Company to offer securities on Private Placement Basis.
  • Passing of Board Resolution for issue of shares under Private Placement to specified persons and calling for Extra-Ordinary General Meeting of the Company to take members approval.
  • Filing form MGT-14- Board Resolution for issue of shares under Private Placement.
  • Issuing notices to the shareholders for Extra-Ordinary General Meeting of the Company as per timelines or with shorter consents.
  • Passing Special Resolution in the Shareholders meeting for issue and allotment of shares under Private Placement.
  • Sending Offer cum Application Letters in form PAS-4 to identified persons within 30 days of recording the names of the identified persons. Such Offer cum Application Letters can be sent in electronic mode (emails) or by post.
  • Receiving allotment amount in a separate bank account within the offer period as mentioned in the Offer cum Application Letter.
  • The Company shall allot shares to the applicants who has subscribed for the same through application letter and deposited the subscription amount within the offer period.
  • After Closure of Offer Period call a Board Meeting and pass Resolution for Allotment of Securities to the entitled subscribers.
  • Filing of return of allotment in Form PAS-3 within 15 days from the date of the allotment i.e. After passing Board Resolution for allotment
  • Make sure the securities are allotted within 60 days of the receipt of Application amount by the Company.
  • Stamp Duty on allotment shall be paid @ 0.10% through channels as available in respective states. e.g. In Mumbai it can be paid to ESBTR or GRASS MAHAKOSH site
  • The Company will be allowed to utilize the money raised through Private Placement only after Return of Allotment in Form PAS-3 is filed with the Registrar of Companies.
  • Record of Private Placement should be maintained by the Company in prescribed Form PAS-5.
  • The Company should update its Registrar of Members in a proper manner upon completion of allotment.
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