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Assignment 3
1. What are the various kinds of share capital appearing in schedule 1 of a corporate balance
sheet?
2. How shares and debentures are issued by the Indian company?
3. What are the various methods of redemption of debentures?
4. What is bonus issue? Describe the procedure of issue of bonus shares?
5. Describe in detail the procedure contained in companies act and income tax act with respect
to depreciation. (attached the appendix of schedule)

Submission date 31 October 2014

Q1.
The various kinds of share capital that are appearing in a corporate balance sheet are as follows:
a) Authorised Capital/Nominal Capital/Registered Capital:
It is the sum stated in the memorandum as the capital of the company with which it is to be
registered being the maximum amount which it is authorised to raise by issuing shares, and
upon which it pays the stamp duty. It is usually fixed at the amount, which,it is estimated, the
company will need, including the working capital and reserve capital,if any.
b) Issued Capital:
It is that part of authorized capital which is offered by the company for subscription and
includes the shares allotted for consideration other than cash.
c) Subscribed Capital:
It is the nominal amount of shares taken up by the public.Where any notice, advertisement or
other official communication or any business letter, bill head or letter paper of a company
states the authorized capital, the subscribed and paid-up capital must also be stated in equally
conspicuous characters. A default in this regard is punishable with fine extending up to Rs
10,000.
d) Called up capital: It is the total amount called up on the shares issued. Paid up capital is the
total amount paid or credited as paid up on shares issued. It is equal to called up capital less
calls in arrears.
e) Reserve capital: This is that part of the uncalled capital of the company which can be called
up only in the event of its winding up. A limited company may, by a special resolution,
determine the portion of its uncalled capital shall be called up:
i)
ii)

in the event of winding up

for the purposes of winding up

Reserve capital cant be turned into uncalled capital without the permission of court.
It is available only for the creditors on the winding up of the company. The company
can neither change reserve capital nor cancel it in a reduction of capital [Midland Rly
Carriage Co. Re (1904) W.N. 175]

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Share capital are of two types:

a) Equity Share Capital:
The holders of equity shares are the owners of the company. They are involved in the decision
making process of the company. The ESH arent guaranteed any dividend.And during
liquidation, they would be at the end of the priority list to get the proceeds out of the
process.They have limited liability ie only to the extent of the money they have put in the
company.
b) Preference Share Capital:

a. The name itself suggests the nature of such kind of share holders. They are entitled to
dividend at a fixed rate or a fixed amount. Before any dividend is paid to the Equity share
holders, PSH has to be paid their Preferential dividend.Also, during liquidation, they are
placed just above the Equity Share holders. Usually, PSH dont have voting rights like the the
ESH.
Sec 47 of Companies Act 2013:Provided further that where the dividend in respect of a class
of preference shares has not been paid for a period of two years or more, such class of
preference shareholders shall have a right to vote on all the resolutions placed before the
company.
Types of Preference Shares:
i)

Redeemable or Irredeemable Preference Shares:

Redeemable PS are those PS which have to be repaid by the Company after the term
specified during its issue has been completed. In case of Irredeemble PS, such PS are
not redeemed unless the Company has to face winding-up procedures. As per
Companies Act 2013, no company can issue Irredeemable Preference Shares.As per
Sec 55 of Companies Act 2013, a Company can issue redeemable PS with a period
not exceeding 20 years.

ii)

Cumulative and non-cumulative Preference Shares:

As told earlier, we know that PSH are entitled to Preference Dividend. In case of
Cumulative PSH, if they arent given Preferential dividend in a certain year(due to
lack of profits available for distribution), the pending amount is carried forward to
subsequent years and they shall be entitled to get such amount in the subsequent
years. In case of non cumulative PS, if they dont get Prefential dividend in a single
year, they arent entitled to get it in the subsequent years.

(Sections applicable in Companies Act 1956: Sec 87 on voting rights, Sec 80 and 80A)

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Q2.
Issue of Shares by Indian Companies:
A Company has to comply to various provisions of the Companies Act 2013(and notified Rules
related to it),SEBI Act 1992 (and Amendments thereafter), SEBI Rules/Regulations and specific Acts
which are pertaining to the class of companies (for banks, insurance companies etc).

The 2013 Act has introduced a new section [section 23] to explicitly provide the ways in which a
public company or private company may issue securities. This section explains that a public company
may issue securities in any of the following manners:

To public through prospectus

Through private placement

Through rights issue or a bonus issue.

For private companies, this section provides that it may issue securities through private placement,
by way of rights issue or bonus issue.
Section 23 also provides that compliance with provisions of part I of chapter III is required for the
issue of securities to public through prospectus. For private placement compliance, with the
provisions of part II of chapter III are required.
a)Issue of Prospectus:
Prior to the new Act, the matters and reports to be included in the prospectus are specified in parts I
and II of Schedule II of the 1956 Act. In the 2013 Act, the information to be disclosed in the
prospectus is specified in section 26 of 2013 Act.
The following information has to be disclosed in the prospectus:
(i) names and addresses of the registered office of the company, company secretary, Chief Financial
Officer, auditors, legal advisers, bankers, trustees, if any, underwriters and such other persons as may
be prescribed;
(ii) dates of the opening and closing of the issue, and declaration about the issue of allotment letters
and refunds within the prescribed time;
(iii) a statement by the Board of Directors about the separate bank account where all monies received
out of the issue are to be transferred and disclosure of details of all monies including utilised and
unutilised monies out of the previous issue in the prescribed manner;
(iv) details about underwriting of the issue
(v) consent of the directors, auditors, bankers to the issue, experts opinion,if any, and of such other
persons, as may be prescribed;
(vi) the authority for the issue and the details of the resolution passed therefor;
(vii) procedure and time schedule for allotment and issue of securities;
(viii) capital structure of the company in the prescribed manner;
(ix) main objects of public offer, terms of the present issue and such other particulars as may be
prescribed;

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(x) main objects and present business of the company and its location, schedule of implementation of
the project;
(xi) particulars relating to
(A) management perception of risk factors specific to the project;
(B) gestation period of the project;
(C) extent of progress made in the project;
(D) deadlines for completion of the project; and
(E) any litigation or legal action pending or taken by a Government Department or a
statutory body during the last five years immediately preceding the year of the issue of prospectus
against the promoter of the company;
(xii) minimum subscription, amount payable by way of premium, issue of shares otherwise than on
cash;
(xiii) details of directors including their appointments and remuneration, and such particulars of the
nature and extent of their interests in the company as may be prescribed; and
(xiv) disclosures in such manner as may be prescribed about sources of promoters contribution;

The prospectus also must give the following reports:

(i) reports by the auditors of the company with respect to its profits and losses and assets and
liabilities and such other matters as may be prescribed;
(ii) reports relating to profits and losses for each of the five financial years immediately preceding the
financial year of the issue of prospectus including such reports of its subsidiaries and in such manner
as may be prescribed:
Provided that in case of a company with respect to which a period of five years has not elapsed from
the date of incorporation, the prospectus shall set out in such manner as may be prescribed, the reports
relating to profits and losses for each of the financial years immediately preceding the financial year
of the issue of prospectus including such reports of its subsidiaries.
iii) reports about the business or transaction to which the proceeds of the securities are to be applied
directly or indirectly;
Various other provisions of the Act has to be followed. It should be signed by the directors and after
due procedures be submitted to RoC, who will register it after verification.
The Companies Act 2013 (or 1956) also has provisions regarding the underwriting of shares,shelf
prospectus,red herring prospectus,etc. All the money received from the public has to be kept in a
separate bank account. In case a share is oversubscribed, then the shares are allocated on a pro-rata
basis.
The 2013 Act extends the facility of shelf prospectus by enabling SEBI to prescribe the classes of
companies that may file a shelf prospectus. The 1956 Act limited the facility of shelf prospectus to
public financial institutions, public sector banks or scheduled banks [section 31 (1) of 2013 Act].

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b) Issue via private placement:

This is governed by Sec 42 of the Companies Act 2013 and Rule 14 under Companies (Prospectus
and Allotment of Securities) Rules 2014. Some of the conditions to be fulfilled are as under:

The offer of securities or invitation to subscribe securities in a financial year shall be made to
such number of persons not exceeding 50 or such higher number as may be prescribed (as per Rules,
it is 200) {excluding qualified institutional buyers, and employees of the company being offered
securities under a scheme of employees stock option in a financial year and on such conditions
(including the form
and manner of private placement) as may be prescribed}. This provision of the 2013 Act is in line
with the existing provision of the 1956 Act.

The allotments with respect to any earlier offer or invitation may have been completed.

All the money payable towards the subscription of securities shall be paid through cheque,
demand draft or any other banking channels but not by cash.

The offers shall be made only to such persons whose names are recorded by the company
prior to the invitation to subscribe, and that such persons shall receive the offer by name.

The company offering securities shall not release any advertisements or utilise any media,
marketing or distribution channels or agents to inform the public at large about such an offer.

A company making an offer or invitation under this section shall allot its securities within
sixty days from the date of receipt of the application money for such securities and if the company is
not able to allot the securities within that period, it shall repay the application money to the
subscribers within fifteen days from the date of completion of sixty days and if the company fails to
repay the application money within the aforesaid period, it shall be liable to repay that money with
interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day:

All offers covered under this section shall be made only to such persons whose names are
recorded by the company prior to the invitation to subscribe, and that such persons shall receive the
offer by name, and that a complete record of such offers shall be kept by the company.

Whenever a company makes any allotment of securities under this section, it shall file with the
Registrar a return of allotment in such manner as may be prescribed.

c)Issue of right shares:

When a company proposes to increase the share capital by issue of equity, convertible
debentures (fully or partly), convertible preference shares to its existing equity shareholders,
then companies (including private limited companies) have to comply with the new
procedures laid out under Companies Act 2013. (Section 62 of Companies Act 2013 and
Rule 13 of Companies (Share Capital and Debentures) Rules 2014 ).
Other provisions to be followed are mentioned in the abovementioned section/rule. In
simple words, an existing shareholder is given a chance to purchase extra shares at price less
than market price.

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Issue of bonus shares

Bonus issue refers to a further issue of shares made by a company having share capital to its existing
share holders without receipt of any consideration from the shareholders for issuance of the shares. It
is an offer of free additional shares to existing shareholders in proportion to their holdings.

The existing 1956 Act does not have any specific provision dealing with issue of bonus
shares although it has referred to the concept of bonus shares at many places. The 2013 Act
includes a new section that provides for issue of fully paid-up bonus shares out of its free
reserves or the securities premium account or the capital redemption reserve account, subject
to the compliance with certain conditions such as authorisation by the articles, approval in
the general meeting and so on [section 63 of CA2013].
Conditions for issue of bonus shares:

Only fully paid up bonus shares can be issued to the members of the company.
Articles must contain provision for issue of bonus shares
Bonus issue must be authorised by the members of the company on recommendation of Board
Company should not have defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it.
Company should not have defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus.
Partly paid-up shares, if any outstanding on the date of allotment, should be made fully paidup. The bonus shares shall not be issued in lieu of dividend.

Sources of funds for bonus issue:

Free reserves
Securities Premium Account
Capital Redemption Reserve Account
No issue of bonus shares shall be made capitalizing reserves created by the revaluation of
assets.

Checklist for issue of bonus shares: CHECKLIST FOR ISSUE OF BONUS SHARES

Check availability of resources for issue of Bonus shares.

Check eligibility of the company for issuing bonus shares like provision in AOA, no default
in payment of dues, no partly paid up shares etc.
Check whether the authorized capital is sufficient for issue of bonus shares Decided on the
quantum of issue Convene Board Meeting to seek Boards approval for issue of bonus shares
and also to fix the time, date and place for holding general meeting for seeking members
approval.
Convene general meeting and seek members approval for issue of bonus shares. Convene
Board meeting and make allotment of shares File return of allotment with Registrar of
Companies within 30 days of making allotment. Issue share certificates, update registers and
minutes book.

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Issue of debentures:
The issue of debentures are covered by Sec 71 of Companies Act 2013 and Rule 18 of Companies
(Share Capital and Debenture) Rules 2014.
Some of the relevant clauses are :
(1) A company may issue debentures with an option to convert such debentures into shares, either
wholly or partly at the time of redemption (Provided that the issue of debentures with an option to
convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed
at a general meeting.)
(2) No company shall issue any debentures carrying any voting rights.
(3) Secured debentures may be issued by a company subject to such terms and conditions as may be
prescribed.
(4) Where debentures are issued by a company under this section, the company shall create a
debenture redemption reserve account out of the profits of the company available for payment of
dividend and the amount credited to such account shall not be utilised by the company except for the
redemption of debentures.
(5) No company shall issue a prospectus or make an offer or invitation to the public or to its members
exceeding 500 for the subscription of its debentures, unless the company has, before such issue or
offer, appointed one or more debenture trustees and the conditions governing the appointment of such
trustees shall be such as may be prescribed.
6) An issue of secured debentures may be made, provided the date of its redemption shall not exceed
10 years from the date of issue. If a company engaged in the setting up of infrastructure projects may
issue secured debentures for a period exceeding 10 years but not exceeding 30 years.

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(Sources: www.taxguru.com)

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Q3
Methods of redemption of debentures:
There are 4 methods of redemption of debentures:
a) Lumpsum payment method:
It means when company repay the Lump sum amount to debenture holder at the end of the
tenure/term.
Copyright

www.www.examrace.com

Journal entries:
On transfer of profits from P&L Appropriation A/c:
P&L Appropriation A/c Dr
To Debentures Redemption Reserve A/c Cr
On redemption of debentures:
Debentures a/c Dr
To Bank a/c Cr
When all the debentures are redeemed:
Debentures Redemption Reserve a/c Dr
To General Reserve A/c Cr

b) Creation of Sinking fund or Debentures Redemption Fund:

When the amount of DRR is invested outside the business,it is known as SF/DRF. If a sinking
fund is created, theres no need to create DRR. The interests earned from such fund is added to
the Sinking fund and in the end, that will be used to redeem the debentures.
c) Redemption by draw of lots:
In this, certain amount of total debentures are redeemed in annual instalments. Transfers to
DRR is compulsory.
d) Conversion to shares:
This happens only in the case of Convertible Debentures. These are converted to Equity
shares depending on the conditions agreed during its issue. There is no need to create DRR as
there is no cash outflow.
X% Debenture a/c Dr
Premium of Redemption a/c Dr (if issued to be redeemed at premium)
To debentureholders a/c Cr

Debentureholders a/c Dr
To Equity Share Capital a/c Cr
To Security Premium a/c Cr

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e) Purchasing from open market:

Own Debentures a/c Dr
To Bank a/c Cr
X% Debentures a/c Dr
To Own Debentures a/c Cr
To Capital Reserve (profit on cancellation)

Q4

Bonus issue refers to a further issue of shares made by a company having share capital to its existing
share holders without receipt of any consideration from the shareholders for issuance of the shares. It
is an offer of free additional shares to existing shareholders in proportion to their holdings. For
example, the company may give one bonus share for every five shares held. These are companys
accumulated earnings which are not given out in the form of dividends, but are converted into free
shares.
While the issue of bonus shares increases the total number of shares issued and owned, it does not
change the value of the company. Although the total number of issued shares increases, the ratio of
number of shares held by each shareholder remains constant.
Companies issue bonus shares to encourage retail participation and increase their equity base. When
price per share of a company is high, it becomes difficult for new investors to buy shares of that
particular company. Increase in the number of shares reduces the price per share. But the overall
capital remains the same even if bonus shares are declared.
Companies Act, 1956, does not prescribe any specific procedure or conditions for issue of bonus
shares except that Table A contains provision relating to capitalization of profits. Companies Act,
2013 on the other hand has detailed the conditions for issue of bonus shares and also the sources from
which bonus issue can be made. Issue of bonus shares is covered under Section 63 of the Companies
Act, 2013 read with relevant (draft) rules issued there under.
Conditions for issue of bonus shares:

Only fully paid up bonus shares can be issued to the members of the company.
Articles must contain provision for issue of bonus shares
Bonus issue must be authorised by the members of the company on recommendation of Board
Company should not have defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it.
Company should not have defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus.
Partly paid-up shares, if any outstanding on the date of allotment, should be made fully paidup. The bonus shares shall not be issued in lieu of dividend.

Sources of funds for bonus issue:

Free reserves
Securities Premium Account

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Capital Redemption Reserve Account

No issue of bonus shares shall be made capitalizing reserves created by the revaluation of
assets.

Checklist for issue of bonus shares: CHECKLIST FOR ISSUE OF BONUS SHARES

Check availability of resources for issue of Bonus shares.

Check eligibility of the company for issuing bonus shares like provision in AOA, no default
in payment of dues, no partly paid up shares etc.
Check whether the authorized capital is sufficient for issue of bonus shares Decided on the
quantum of issue Convene Board Meeting to seek Boards approval for issue of bonus shares
and also to fix the time, date and place for holding general meeting for seeking members
approval.
Convene general meeting and seek members approval for issue of bonus shares. Convene
Board meeting and make allotment of shares File return of allotment with Registrar of
Companies within 30 days of making allotment. Issue share certificates, update registers and
minutes book.

Q5.
Depreciation under Companies Act 2013 [section 123(2) and Schedule II]
Schedule II to the 2013 Act requires systematic allocation of the depreciable amount of an
asset over its useful life unlike Schedule XIV of the Act (which specifies minimum rates of
depreciation to be provided by a company). The depreciable amount is defined as the cost of an asset,
or other amount substituted for cost, less its residual value. The residual value is generally not be
more than 5 percent of the original cost of the asset.
The 2013 Act states that Schedule II will be applicable as follows:
For a prescribed class of companies (whose financial statements are required to comply with
accounting standards prescribed under the 2013 Act), the useful lives should normally be in
accordance with the Schedule. However, if a prescribed company uses a different useful life, it should
disclose a justification for doing so;
For other companies, the useful life and the residual value applied should not be higher than
that prescribed.
Prescribed companies are, however, permitted to use different useful lives than those
specified in the Act and disclose their reasons for doing so.
Amortisation of intangible assets should be in accordance with notified accounting standards
and is not specified in the 2013 Act.
The useful lives specified in Schedule II of the 2013 Act for various assets will result in their
depreciation over a different period than it was applicable under Schedule XIV of the old Act.
Component approach: Schedule II of the 2013 Act also statesthat the specified useful lives are
for the whole of the asset. When the cost of a part (component) of the asset is significant to total cost
of the asset and useful life of that part is different from the useful life of the remaining asset, useful
life of that significant part should be determined separately.

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This indicates that companies are now required to adopt what is known as the component
approach to compute depreciation on fixed assets. A company will have to estimate the useful life of
such a component (since it may not be provided in Schedule II) and depreciate the cost of that specific
component over this estimated useful life.
Extra Shift Depreciation:
This concept is introduced in Schedule II, Companies Act 2013 which specifies:
a) Forbdoublebshift:
To provide for 50% increase in depreciation for that period for which asset is used.
b) Forbtriplebshift
To provide for 100% increase in depreciation for that period for which asset is used.
APPLICABILITY OF EXTRA SHIFT DEPRECIATION:
Schedule II provides that Extra Shift Depreciation not applicable to items marked NESD in
the Schedule, though it will apply to plant and machinery items subject to general rate- i.e., useful life
of 15 years. While Schedule XIV specifies that Extra Shift Depreciation shall not applicable to items
marked NSED in the Schedule and Specified items of plant and machinery to which general rate of
depreciation was applicable.
Depreciation as per Income Tax Act 1961
Depreciation a non-cash expenditure allowed under Income Tax Act, 1961 following block concept.
Under the block concept, all the assets falling within the same class and subject to same rate of
depreciation are clubbed together and considered as single asset. Any alterations to the value of the
block have to be strictly in accordance with the provisions of Chapter IV D of Income Tax Act, 1961
As per section 32 of Income Tax Act, 1961, a assessee is entitled to claim depreciation on fixed assets
only if the following conditions are satisfied: 1. Assessee must be owner of the asset registered
owner need not be necessary. 2. The asset must be used for the purposes of business or profession. 3.
The asset must be used during the previous year
Some Case laws:

In the case of Chowgule & Company v ACIT, it was held that mere accounting entries do not give
right to assessee to claim depreciation on goodwill.
An assessee should not be deprived of benefit of depreciation u/s 32 for not running its factory due
to adverse law and order situation. Refer, CIT v Norplex Oak India 10 Taxmann.com 163.
After the amandment of sec 32, depreciation is to be allowed on tangible & intangible assets
irrespective of fact that there is no erosion in value of these assets. Refer Eypore Sugar Company
Limited v ACIT 9 Taxmann.com 122.
Assessee is entitled to claim depreciation on plant and machinery even if it is used during the year
for trial production. Refer, CIT vs. Mentha & Allied Products 47 DTR 284 (All). Again ,
Depreciation is allowable even where trialrun production takes place. Refer, Finolex Cables Ltd 29
SOT 595
Actual user of the machinery was not required with respect of discarded machinery and condition for
eligibility for depreciation that the machinery being used for the purpose of the business would mean
that the discarded machinery was used for the purpose of the business in the earlier years for which
depreciation has been allowed. Refer, CIT vs. Yamaha Motor India Pvt. Ltd (2010) 328 ITR 297
(Delhi).

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In the case of CIT v Paliwal Glass Works 326 ITR 407 it was decided that Subsidy received from
State government for specific purpose of purchase of generator set. Subsidy to be deducted in
computing actual cost
In case of expenditure on leased premises in order to make it fit for assessees business, if any extra
facility was created by way of brick works and connected expenditure, the same would be a capital
expenditure eligible for depreciation under explanation 1 to s. 32(1) and if not, the expenditure would
be revenue in nature covered by s. 30(a)(ii). Refer, EDS Electronic Data Systems (India) (P) Ltd.
(2009) 23 DTR 10 (Del)(Trib).
Scrap value of the assets which have been written off during the year is to be reduced from the WDV
of the block of assets for the purpose of allowing depreciation and not of the individual assets. Refer,
Xerox India Ltd. (2010) 127 TTJ 84 (Del).
Defective machineries found during trial run Whether depreciation is allowable on machineries
which were brought for business purpose and found to be defective after the trial installation. Held,
Yes. The defective machineries cannot be said that they were not for business purposes. Hence, the
claim is allowable. Sri Chamundeshwari Sugar Ltd. 223 CTR 423.
As per s. 32(1) the asset is to be owned and used for the purpose of business or profession, the
expression used for the purpose of business when applied to block asset would mean use of block
asset and not any specific items in the said block as individual assets have lost their identity after
becoming inseparable part of the block asset. Refer, Bharat Aluminium.

Schedule for Depreciation Rate as per Companies Act 2013 (Part C, Schedule II)

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Depreciation Rates chart as per Income Tax Act 1961 : Attached

References:
1.
2.
3.
4.

Ministry of Corporate Affairs

KPMG and PWC reports
www.taxguru.com
ICAI study materials

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