Forfeiture of Shares

The term ‘forfeiture’ actually means taking away of property on breach of a conditions. It is very common that one or more shareholders fail to pay their allotment and/or calls on the due dates, which results forfeiture of Shares. Forfeiture of Shares is the action taken by the company to cancel the shares.

The directors are usually empowered by article of association to forfeit those shares by serving proper notice to the defaulting shareholder. When shares are forfeited, the title of such shareholders is extinguished but the amount paid to date in not refunded to him. The shareholder then has no further claim on company.

The power of forfeiture must be excised strictly having regard to the rules and regulations’ provided in the articles of association and it should be bona fide in the interest of the company.

Calls-in-Advance

Calls-in-Advance generally arises when there is an over subscription of shares. Here, the excess application money received is adjusted against the amount due on allotment or calls. The excess application money after adjustment for allotment should be transferred to a special account called ‘Calls-in-Advance Account’, if the prospectus so provides. Sometimes, to avoid the botheration of paying calls from time to time, some shareholders may prefer to pay the entire amount at the time of allotment. In such a situation, the advance money in respect of future calls should also be transferred to Calls-in-Advance Account and it is adjusted when calls are made.

Interest may be provided if company authorise

The accounting entries:

• For transferring excess application money

           Share Application Account (Debit) - (adjustment for excess)

                To Calls-in-Advance Account (Credit)

•  For money received in advance against call

           Bank Account (debit)

                To Calls-in-Advance Account (Credit)

• For adjusting with call

           Calls-in-Advance Account (Debit)

                To Call(s) Account

Calls-in-arrear

Calls-in-arrear refer to that portion of the capital, which has been called up but not yet paid by the shareholders. When a shareholder fail to pay the amount due on allotment and/or calls, the allotment account and/or calls account will show debit balance equal to total unpaid amounts of each instalment. Generally such amount is transferred to a special account called ‘Calls-in-arrear Account’

The main purpose of opening a Calls-in-arrear account is to close allotment or any other Call account with the amounts not yet received.

The entry will be:

Calls-in-arrear Account (Debit)

                To Sharer Allotment Account (Credit)

                To Share Call Account     (Credit)

Equity Shares

Equity shares are those shares which are ordinary in the course of company's business. They are also called as ordinary shares. These share holders do not enjoy preference regarding payment of dividend and repayment of capital. Equity shareholders are paid dividend out of the profits made by a company.

Equity shares are the shares which carry voting rights; they do not carry a fixed rate of dividend, their dividend depends upon the volume of profits available for distribution, they get high dividend when the company makes good profits but they do not get anything when the profits are inadequate

They do not get their dividend or refund of share capital before preference share holders are paid

Share capital

Generally ‘Capital’ means a particular amount of money used in business for the purpose of earning revenue. Share capital us that part of the capital of a company which is represented by the total nominal value of the shares which it has issued. In the context of the company law, this term is used in the following senses:

Nominal or Authorized Capital: It means the face value (face value is the amount stated on a share certificate) of the shares which a company is authorized to issue by its memorandum. E.g. A. Ltd has been incorporated with an authorised capital of USD 1000,000 divided into 100,000 shares of USD 10 each.

Issued Capital: It is that part of the Authorised capital which is issued to public for subscription and allotment, say 65,000 shares of USD 10 each.

Subscribed Capital: It is that part of the Issued capital which has been subscribed by the public, say 60,000 shares of USD 10 each.

Called-up Capital: It is that part of the subscribed capital which the directors have called up in order to carry on business of the company, say, USD 5 per shares has been called up, i.e., 60000x$ 5=$300,000.

Paid-up Capital: It is that part of the called up capital which is actually received in cash by the company, say $ 290000 (one shareholder holding 5000 shares failed to pay the call @ $ 2 per share)

Uncalled Capital:  It is that part of the subscribed capital which has not yet been called up by the directors. The difference between the subscribed capital and called up capital is represented by the uncalled capital.

Reserve Capital: A limited company may, by resolution, determine that any portion of its share capital which has not been already called-up shall not be capable of being called up, except in the event and for the purposes of the company being wound up. 

Matching Concept

The matching concept is an accounting principle that requires the identification and recording of expenses associated with revenue earned and recognized during the same accounting period.

In order to reach accurate net income figure, the expenses incurred to earn the revenues recognized during the accounting period should be recognized in that time period and not in the next or previous. This is called matching principle of accounting.

Example:

$40,000 worth of sales is made in 2011. Total purchases of inventory were $30,000 of which $1000 remained on hand at the end of 2011. The cost of earnings is $40,000 revenue is $29000 [$30000 minus $1000] and this should be recognized in 2011 thereby yielding a gross profit of $11000.

Bill of Exchange

A bill of exchange comes from an open credit arrangement where the creditor gets the documentary evidence of the amount owing and also the terms of payment. The buyer must pay the amount shown on the bill of exchange on the specified date. Therefore, a bill of exchange can be defined as a legal evidence of debt (an acknowledgement of debt), and which fixes the date of payment. If the buyer has some claim over the seller (e.g. quantity received less than ordered or defective goods delivered, etc.) the former may sue the latter for relief. But this suit has nothing to do with the question of payment of bill of exchange.

“A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of instrument.”

Three parties in a bill of exchange

1.  Drawer ( Maker)
2. Drawee (acceptor or debtor)
3. Payee ( the person who receives money , drawer may make bill himself)

Bills receivable and Bills Payable

Every bill has to be accepted by drawee and it made payable to payee, Since the drawer (creditor) draws the bill, a bill from the point of view of the drawer is called a Bills Receivable because the money receivable by him.

On the other hand, the same bill from the point of view of the drawee (the debtor, who accept the bill) is called a Bills Payable because the money is payable by him.

Advantages of bill of exchange are the drawer c can obtain payment from banker before its due date and a bill can be transferred freely if it is bearer instrument.

Corporate Governance

Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society. The management of the company hence assumes the role of a trustee for all the others.
Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner.

XBRL

Extensible Business Reporting Language (XBRL) is an international standard business language developed by XBRL International Inc. XBRL is a mode of electronic communication of business and financial data to provide a common gateway for smooth management and control over the financial data, information and various other benefits.

Benefits

1. It is easy to prepare in XBRL

2. It is easy to make analysis and

3. Very easy way of communication of business information by corporate.

4. Efficient cost management

5. Accuracy and reliability of data

A large number of data collected through XBRL, it will enhance the ministry or government’s capabilities in formulation of policies and other regulatory functions which is an added advantage towards the corporate. 

Insider Trading

The buying or selling of a security by a person who has access to material, nonpublic information about the security or company. Insider trading is illegal.Trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information.

Insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors.

However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company.

Statutory Liquidity Ratio (SLR)

Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. In short it indicates  the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities.

The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR).  An increase in SLR  also restrict the bank’s leverage position to pump more money into the economy.

Bank Rate

Bank Rate is the rate at which central bank of the country ( Bank Rate in India is decided by RBI)  allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Base Rate / Benchmark Prime Lending Rate.  Thus any revision in the Bank rate indicates that it is likely that interest rates on your deposits are likely to either go up or go down,  and it can also indicate  an increase or decrease in your EMI.

Cash Reserve Ratio (CRR)

CRR means Cash Reserve Ratio.  Banks in India are required to hold a certain proportion of their deposits in the form of  cash.  However, actually Banks  don’t hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as  equivalent to holding cash with RBI. This minimum ratio (that is the part of the total deposits  to be held as cash) is stipulated by the 

RBI and is known as the CRR or  Cash Reserve Ratio. 

Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 6%, the banks will have to hold additional Rs 6 with  RBI and Bank will be able to use only Rs 94 for investments and lending / credit purpose.

Therefore,  higher the  ratio (i.e. CRR), the lower is the amount that banks will be able to  use for lending and investment.  This power of RBI to reduce the lendable amount by increasing the CRR,  makes it an instrument in the hands of a central bank through which it can control the amount that banks lend.