MP Board Class 11th Business Studies Important Questions Chapter 8 Sources of Business Finance

MP Board Class 11th Business Studies Important Questions Chapter 8 Sources of Business Finance

Sources of Business Finance Important Questions

Sources of Business Finance Objective Type Questions

Question 1.
Choose the correct answer:

Question 1.
Minimum number of members required for making private company –
(a) 2
(b) 3
(c) 5
(d) 7.
Answer:
(a) 2

Question 2.
Minimum number of members required for making public company –
(a) 5
(b) 7
(c) 12
(d) 21.
Answer:
(b) 7

Question 3.
For the approval of name of the company is applied to –
(a) SEBI
(b) Registrar of company
(c) Indian Government
(d) Concerning state government where company is to be registered.
Answer:
(b) Registrar of company

Question 4.
Proposed name of the company is declared void if –
(a) Is resembling to any existing company name
(b) Is resembling to any existing company logo
(c) Is resembling to any symbol of Indian Government or UNO
(d) None of these.
Answer:
(d) None of these.

Question 5.
Prospectus is issued by –
(a) Private company
(b) Public company seeking investment from public
(c) Public corporations
(d) All public companies.
Answer:
(d) All public companies.

MP Board Solutions

Question 6.
Chronological order of formation of a public company –
(a) Promotion, commencement of business, incorporation capital subscription
(b) Incorporation, capital subscription, commencement of business, promotion
(c) Promotion, incorporation, capital subscription, commencement of business
(d) Capital subscription, promotion, incorporation, commencement of business.
Answer:
(b) Incorporation, capital subscription, commencement of business, promotion

Question 7.
Signatures are done on primary documents before incorporation:
(a) Before incorporation
(b) After incorporation but before capital subscription
(c) After incorporation but before commencement of the business
(d) After commencement of the business.
Answer:
(c) After incorporation but before commencement of the business

Question 2.
Fill in the blanks:

  1. …………….. shareholder have the voting right for every proposal of company.
  2. ……………. holder does have preright for the capital at wind up of company.
  3. The capital of every company is divided in equal small parts is called ……………..
  4. The debenture gets mortgage of asset is called ……………..
  5. Indian Industrial finance corporation is established on ……………..
  6. The main office of Indian Industrial finance corporation is in ……………..
  7. Commercial Bank provide loan to business firm for ……………..
  8. The President of unit trust of India is selected by ……………..
  9. Long term finance is called …………….. capital.
  10. Short term finance is called …………….. capital.
  11. …………….. have fixed rate of dividend.
  12. Fully paid up share capital can change in ……………..
  13. The period of long term finance is more than ……………..
  14. On the winding up of company preference is given to ……………..
  15. On debentures the rate of dividend is ……………..

Answer:

  1. Equity
  2. Preference
  3. Shares
  4. Mortgage debenture
  5. 1948
  6. Mumbai
  7. Short – term
  8. Reserve Bank of India
  9. Fixed
  10. Working
  11. Preference
  12. Stock
  13. 10
  14. Preference
  15. Predecided.

MP Board Solutions

Question 3.
Write true or false:

  1. Equity shares are long term sources of Business Finance.
  2. Equity share represents owners equity.
  3. Debenture holders possess right to vote.
  4. Public deposit is a source of medium term finance.
  5. Preference share carry preferential right are distribution of Dividends.
  6. Equity share capital is long term source of business finance.
  7. Equity share included in ownership capital.
  8. Public deposit is source of middle term finance.
  9. Debenture included in ownership capital.
  10. In preference share there is no priority of dividend.
  11. Small scale Industries need small amount of capital.
  12. Public sector’s main aim to earn maximum profit
  13. In private sector emphasis is given of efficiency.
  14. Commercial bank provide long – term finance.
  15. The managemet of mutual fund is in the hands of professional management.
  16. First state finance corporation is established in U.P.
  17. Public deposit is in the form of lent capital.
  18. Preference share are of several types.
  19. Working capital is a short term capital.
  20. American deposit receipt can be converted in any money.

Answer:

  1. True
  2. True
  3. True
  4. True
  5. True
  6. True
  7. True
  8. False
  9. False
  10. True
  11. False
  12. True
  13. False
  14. True
  15. False
  16. True
  17. True
  18. True
  19. False
  20. False.

Question 4.
Match the columns:

MP Board Class 11th Business Studies Important Questions Chapter 7 Sources of Business Finance 1

Answer:

1. (d)
2. (c)
3. (b)
4. (a)
5. (h)
6. (g)
7. (f)
8. (e)
9. (j)
10. (i).

Question 5.
Give answer in one word / sentence:

Question 1.
Return of the debenture holders?
Answer:
Interest.

Question 2.
Debenture holders are called as …………… of company?
Answer:
Creditors.

Question 3.
When Unit Trust of India was established?
Answer:
1st July, 1964.

MP Board Solutions

Question 4.
Return on the equity shares?
Answer:
Dividend.

Question 5.
By which name these shareholders are called who get priority in dividend and capital?
Answer:
Preference shares.

Question 6.
Currently how many states have established finance corporation?
Answer:
18.

Question 7.
By which the profit is called which is left after the payment of dividend and tax?
Answer:
Reserved profit.

Question 8.
By which those preference shares are called which can be converted into equity shares?
Answer:
Convertible preference shares.

Question 9.
Capital invested in long term assets is called …………….
Answer:
Fixed capital or long capital.

Question 10.
What is importance of finance for the business undertaking?
Answer:
Life blood.

Sources of Business Finance Very Short Answer Type Questions

Question 1.
What is Owner’s capital?
Answer:
The capital invested by the owner himself is called as Owner’s capital.

Question 2.
What is Borrowed capital?
Answer:
The capital which is taken from the bank, financial institutions, public or from any other sources is called as Borrowed capital.

Question 3.
Why Owner’s capital is called as capital of risk?
Answer:
Owner’s capital is called as capital of risk as the profit and loss of the firm is to be borne by the owner himself. In the sole trade and partnership the capital increase and decreases directly.

Question 4.
What do you mean by fixed capital?
Answer:
The capital invested in the increase of the fixed assets to enhance the us£, operation and production of the business is called as fixed capital.

Question 5.
What is working capital?
Answer:
That capital of the company which is used to fulfill the current needs of the company is called as working capital.

Question 6.
Define shares.
Answer:
Share represents a portion of capital which in terms refer to the amount of money raised by issue of shares.

Question 7.
How many types of share capital is there?
Answer:
There are two types of share capital:

  1. Preference capital
  2. Equity shares.

Question 8.
What is requirement of finance in the business?
Answer:
Finance is the life blood of the business undertaking. It is very difficult to operate the business in absence of sufficient capital and timely finance.

Question 9.
What is meaning of Bank credit?
Answer:
Bank credit has important role in the creation of short term finance. They provide both secured and unsecured loans.

Question 10.
What kind of loans Bank give?
Answer:
Bank provides following types of loan:

  1. Loans
  2. Line of credit
  3. Cash credit
  4. Overdraft
  5. Discounting of bills.

Question 11.
Write different levels or formation of the company.
Answer:
Different levels of the formation of the company is as under:

  1. Promotion
  2. Incorporation
  3. Capital subscription
  4. Commencement of business.

Question 12.
List the documents which are required for the incorporation of the company.
Answer:
Following documents are required for the incorporation of the company:

  1. Incorporation certificate
  2. Memorandum of association
  3. Acceptance of proposed directors
  4. Any agreement proposed by the directors
  5. Legal declaration.

MP Board Solutions

Question 13.
What is prospectus? Is it necessary for every company to submit the prospectus?
Answer:
A prospectus is any document described or issued as a prospectus including any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of, a body corporate. In other words, it is an invitation to the public to apply for shares or debentures of the company or to make deposits in the company.

It is issued by a public company which is seeking to raise the required funds from the public by means of issue of share and debentures. It is not necessary for every company to file a prospectus. A statement in life of prospectus is filed with the Registrar of Companies if the company has adopted Table A of the Companies Act instead of Articles of Association. Private companies are not required to file a prospectus.

Question 14.
What is Qualification shares?
Answer:
In order to have assurance in participation to the propose company. Some provisions are made in the memorandum of association which make compulsory the purchase of number of shares by the investors. If any person is not doing so then, they are not considered as the Qualified investors. Hence, these shares which are mentioned in the memorandum are called as the Qualification shares.

Question 15.
Explain the term, Minimum Subscription.
Answer:
Minimum subscription refers to the minimum amount required by. the company for its preliminary functions. It has been provided by the Companies Act, that the company must receive applications for a certain minimum number of shares before going ahead with the allotment of shares in order to prevent companies from commencing business with inadequate resources. This is called the ‘minimum subscription’. The limit of minimum sub – scription is 90% of the size of the issue.

Question 16.
Write Meaning of Allotment?
Answer:
Those person who have applied for the shares, the company allot them the shares which is called as Allotment.

MP Board Solutions

Question 17.
What are preliminary contracts?
Answer:
The contracts signed by the promoters with the third party before the incorporation of company is called as preliminary contracts.

Question 18.
What is SEBI?
Answer:
It stands for Securities and Exchange Board of India. It controls the capitals of public companies, share purchase – sale and Stock of the company.

Question 19.
Write – two functions of promoters?
Answer:
The functions of protomoters are:

  1. To find the business opportunities
  2. To study those business opportunities.

Question 20.
Who can be the promoters?
Answer:
Any person, HUF, firm, company or any institution which find the business opportunities and can set up the companies or establish the companies is called as promoters.

Question 21.
Which companies has to take permission for trading on file stock exchange?
Answer:
Those companies which wants to procure money from the public for the company.

Question 22.
Give two documents which are required for the incorporation of the company.
Answer:

  1. Memorandum of association
  2. Articles of association.

Question 23.
How the birth of the company is decided?
Answer:
By the date and time written in the certificate of the incorporation.

Question 24.
In India from when the number allotment of identification of corporation was started?
Answer:
1st November, 2000 by the Registrar of the Companies.

Question 25.
Who can sign on legal declaration of the company?
Answer:
Either company secretary or director of the company.

MP Board Solutions

Question 26.
Write two privileges of the private company over the public company.
Answer:

  1. No need to make list of members
  2. It can start working at the certificate of incorporation.

Question 27.
Where the company promoter can apply for certificate of incorporation?
Answer:
In the office of Company Registrar.

Question 28.
When can a public company can start their business?
Answer:
At the receipt of certificate of commencement of the business.

Question 29.
Can the promoters can claim for the remuneration?
Answer:
No.

Question 30.
Which two things are necessary for making of the private company?
Answer:

  1. Promotion
  2. Incorporation.

Sources of Business Finance Short Answer Type Questions

Question 1.
What is business finance? Why do businesses need funds? Explain.
Answer:
Business is an economic activity directed towards producing, acquiring wealth through buying and selling of goods. It is a very wide term. Finance is the life blood of the business. Funds are required to commence and carry on business. All business activities such as planning, organizing, managing, controlling, purchasing, selling, directing, marketing etc. cannot take place without finance. Thus, we can say requirements of funds by business to carry out its various activities is called business finance.

When an entrepreneur takes a decision to start business the need of fund arises in order to meet the expenses of establishment of business. Finance is required for purchasing fixed and current assets, for day -to day operations, purchase of raw materials to pay salaries etc. Smooth – functioning, expansion and growth of business is possible when it has sufficient funds.

Question 2.
List sources of raising long term, medium term and short term finance?
Answer:
Sources of Long Term Finance:

  1. Equity Shares
  2. Retained earnings
  3. Preference shares
  4. Debentures
  5. Loans from banks and other financial institutions.

Sources of Medium Term Finance:

  1. Lease financing
  2. Public deposits
  3. Loans from banks and other financial institutions.

Sources of Short Term Finance:

  1. Trade credit
  2. Factoring
  3. Commercial papers
  4. Short term loans from banks.

Question 3.
What preferential rights are enjoyed by preference shareholders? Explain.
Answer:
The followings preferential rights are enjoyed by preference shareholders:

1. Receiving a fixed rate of dividend, out of the pet profits of the company, before any dividend is declared for equity shareholders.

2. Preference over equity shareholders in receiving their capital after the claims of the company’s creditors have been settled, at the time of liquidation.

3. In case of dissolution of the company preference share capital is refunded prior to the refund of equity share capital.

Question 4.
What are debentures?
Answer:
Debentures are common securities issued under borrowed fund capital. Debentures are instruments for raising long term debt capital. Debentures are called creditorship securities because debenture holder are called creditors of a company.

Question 5.
What are the different kinds of debentures?
Answer:
Followings are the different kinds of debentures:

  1. Secured and unsecured debentures
  2. Registered and bearable debentures
  3. Convertible and non – convertible
  4. Primary and secondary.

MP Board Solutions

Question 6.
Explain trade credit and bank credit as sources of short term finance for business enterprises.
Answer:
Trade Credit:
Trade credit is the credit extended by one trader to another for the purchase of goods and services.

Bank Credit:
Commercial banks provides funds for different purposes and for different time periods to firms of all sizes by way of cash credits, overdrafts, term loans, purchase/discounting of bills and issue of letter of credit.

Question 7.
Write the importance/need of Business finance?
Answer:
Followings are the importance of the Business finance:

1. For establishment of business:
Selection of the business, preliminary expenses of the business, market research, purchase of raw materials, land, building, purchase of machinery etc. require money or finance is required.

2. For operation of business:
Establishment of business is not only important but its operation is also important. Hence, finance is required for the operation of business.

3. For expansion and development of business:
In the progressive societies it is very important to expand and develop the business. For it also business is required.

Question 8.
Write the disadvantages of Equity shares?
Answer:
Disadvantages of Equity Shares:
The main disadvantages of the equity shares are as under:

1. Hindrances in the functioning:
The facility of transfer of share to others causes hindrance in the smooth functioning of the company since shares are transferred by the holders frequently.

2. Difficulty in issuing shares:
Before issuing the equity shares, several legal formalities are required to be fulfilled. It causes delays and difficulties in issuing of shares.

3. Uncertainty of profit:
The dividend to be paid to the equity shareholders always remain uncertain and unpredictable. This discourages the investors who desire to earn in come at a fixed rate.

4. Encourages speculation:
The market value of equity shares changes very frequently which causes the harmful speculation activities. –

Question 9.
Why debentures are not popular in India?
Answer:
Followings are some of the important causes of unpopularity of scheme of debenture issue:

1. Lack of publicity:
Most of the investors are still unaware about the scheme of safer investments in the company. Therefore, most of them either deposit their funds in the savings accounts or invest in government securities.

2. Reduced prestige of the company:
The companies, who issued their debentures,
loose their goodwill in the eyes of the commercial banks and often they are deprived of certain financial facilities.

3. Unattractive terms of issue:
Often in certain cases the investors feel it better to deposit in fixed deposits where they will be getting interest @ 10%, while in debentures it is often less than 10%.

4. Absence of organized market:
The promotion and popularization of debentures is possible through an organized market in our country, stock exchanges are mostly busy in the deals of shares only.

5. Difficulties of the mortgage:
Often the companies are bound to offer the mortgage of their fixed assets, for the debentures issue, which is expensive and causes many technical difficulties.

MP Board Solutions

Question 10.
Name any three special financial institutions and state their objectives?
Answer:
1. Industrial Finance Corporation of India (IFCI):
It was established in July, 1948 as a statutory corporation under the Industrial Finance Corporation Act, 1948. Its objectives include assistance towards balanced regional development and encouraging new entrepreneurs to enter into the priority sectors of the economy. BFCI has also contributed to the development of management education in the country.

2. State Financial Corporations (SFCs):
State Financial Corporations are established by the State Governments under the State Financial Corporations Act, 1951 for providing medium and short term finance to industries which are outside the scope of the IFCI. Its scope is wider than IFCI as it covers not only public limited companies but also private limited companies, partnership firms and proprietary concerns.

3. Life Insurance Corporation of India (LIC):
LIC was set up in 1956 under the LIC Act, 1956 after nationalising 245 existing insurance companies. It mobilises savings in the form of insurance premium and makes it available to industrial concerns in the form of direct loans and underwriting of and subscription to shares and debentures.

Question 11.
Differentiate between Shareholders and Debenture holders?
Answer:
Difference between Shareholders and Debenture holders:
MP Board Class 11th Business Studies Important Questions Chapter 7 Sources of Business Finance 2

Question 12.
Differentiate between Shares and Stock?
Answer:
Differences between Shares and Stock:
MP Board Class 11th Business Studies Important Questions Chapter 7 Sources of Business Finance 3

Question 13.
Write characteristics of Preference shares.
Answer:
Followings are the characteristics of the Preference shares:

1. Maturity:
They are necessarily to be paid off at the end of the term which is decided at the time of issue of the preference shares.

2. Priority in payment of assets:
They get the priority in the payment of the assets at the time of the liquidation of the company.

3. No right in the management and control:
The preference shareholders do not have any right in management and control of the company.

4. Preference in income:
At the time of the distribution of the interest they are given die preference.

MP Board Solutions

Question 14.
Explain the elements which affect the need of the fixed capital?
Answer:
Followings are the elements which affect the need of the fixed capital:

1. Nature of business:
Construction and public welfare undertakings require more capital.

2. Size of business:
Big size firms require large amount of capital as compared to the small size firms.

3. Method of production:
Heavy machinery if required for production then capital requirement will be more.

Sources of Business Finance Long Answer Type Questions – 1

Question 1.
How financial institutions work as a sources of finance? Write its merits and demerits.
Answer:
For providing the finance to the different industries government have established different finance institutions. They make the availability of long term and short term loans to the different industries.

Merits:

  1. Finance institutions provide long term loans which banks sometime don’t provide.
  2. They also provide technical and financial advice.
  3. Goodwill of the firm increases if loan is taken from these institutions.
  4. Repayment of the loan is done under small instalments.

Demerits:

  1. They have some strict rules for giving loans.
  2. They impose some restriction on the company.
  3. They sometime may appoint their representative which can put restriction on the company working.

Question 2.
Why finance is needed in the business?
Answer:
Finance is needed in the business because:

1. For setting up of business:
When a business entrepreneur seriously conceives the idea of setting up an enterprise, he investigates the commercial possibilities of the idea. Once he is satisfied with the feasibility of the project idea, he takes up various steps to concretise it. The first and foremost step is to take precise decision as to how much capital would be needed and in what form to run the business. Financial plan should therefore be drafted as the light of present and forthcoming requirements of the business.

2. For business operation:
After establishment of business, funds are required for its proper function which is generally known as working capital. It is required for purchase of raw materials, production, payment of wages and salaries, advertisement expenses, rent, repairs, commission, office expenses, stationery expenses, etc.

3. For business growth and expansion:
The growth and expansion of a business has a vital role to play in a developing economy because the growth of a business has a direct effect on the growth of the developing country. Thus, modernization of business becomes essential. Improved and efficient machines are to be installed and new technology is to be adopted for the growth and expansion of business for which sufficient funds are required.

4. For various other purposes:
Apart from the above mentioned reasons, finance is required for the fulfilment of the following requirements such as.

(i) Purchase of fixed assets:
Like land, building, machinery, furniture and fittings, etc.

(ii) Purchase of floating assets:
Like stock, raw materials, etc.

(iii) For maintenance:
Like repairs, power electricity, office expenses, conveyance, advertisement, sale expenses, etc.

(iv) To meet other expenses:
Like commission, brokerage, discounting, etc. Because of the above mentioned reasons, the finance is of great importance in the business.

Question 3.
Discuss the sources from which a large industrial enterprise can raise capital for financing modernization and expansion?
Answer:
Financial institutions established by the Central as well as State Governments all over the country to provide finance to business organizations are considered the most suitable source of finance when large funds for longer duration are required for expansion, reorganization and modernization of an enterprise. These institutions provide both owned capital and loan capital for long and medium term requirements and supplement the traditional financial agencies like commercial banks.

In addition to providing financial assistance, these institutions also conduct market surveys and provide technical assistance and managerial services to people who run the enterprises. The various Special Financial Institutions in India are as under –

1. Industrial Finance Corporation of India (IFCI):
It was established in July, 1948 as a statutory corporation under the Industrial Finance Corporation Act, 1948. Its objectives include assistance towards balanced regional development and encouraging new entrepreneurs to enter into the priority sectors of the economy. IFCI has also contributed to the developmental management education in the country.

2. State Financial Corporations (SFCs):
State Financial Corporations are established by the State Governments under the State Financial Corporations Act, 1951 for providing medium and short term finance to industries which are outside the scope of the IFCI. Its scope is wider than IFCI as it covers not only public limited companies but also private limited companies, partnership firms and proprietary concerns.

3. Life Insurance Corporation of India (LIC):
LIC was set up in 1956 under the LIC Act, 1956 after nationalizing 245 existing insurance companies. It mobilizes savings in the form of insurance premium and makes it available to industrial concerns in the form of direct loans and underwriting of and subscription to shares and debentures.

4. Industrial Credit and Investment Corporation of India (ICICI):
This was established in 1955 as a public limited company under the Companies Act. ICICI assists the creation, expansion and modernization of industrial enterprises exclusively in the private sector. The corporation has also encouraged the participation of foreign capital in the country.

5. Industrial Development Bank of India (IDBI):
It was established in 1964 under the Industrial Development Bank of India Act, 1964 with an objective to co-ordinate the activities of other financial institutions including commercial banks. The bank performs three types of functions, namely, assistance to other financial institutions, direct assistance to industrial concerns, and promotion and coordination of financial technical services.

6. Unit Trust of India (UTI):
It was established by the Government of India in 1964 under the Unit Trust of India Act, 1963. The basic objective of UTI is to mobilize the savings into productive ventures. It sanctions direct assistance to industrial concerns, invests in their shares and debentures, and participates with other financial institutions.

MP Board Solutions

Question 4.
What do you mean by issue of shares ? Explain the types of shares?
Answer:
The total capital of company is divided into small units of equal denominations, each such unit is called a share. Share are universal and typical form of raising long term capital to form capital market.

Types of Shares:

1. Equity Share Capital:
This kind of shares are the base of the company. Dividend on the equity share is not fixed it is uncertain whatever amount of profit which is left after distribution interest to debenture or the preference share and balance is distributed to the equity shareholders.

2. Preference Share Capital:
These are such kind of shares which have two rights:

  • Preference in profit
  • Preference in the return of the capital. They provide the limited rights to the preference shareholders

Question 5.
Explain the different short term sources of finance of the companies?
Answer:
Followings are the short term sources of business finance:

1. Loans:
They are given in the lumpsum and its payment is also done in the lumpsum.

2. Line of credit:
It is a kind of current contract in which the contractee has the right to get amount of credit at different interval of the time.

3. Cash credit:
These are such kind of credit facilities which are given by the institution by pledging any of the assets of the company.

4. Overdraft:
When any firm or institution get the facility of withdrawing excess money in the current account then it is called as overdraft.

5. Discounting of bills:
This is such kind of the facility where money is available at the discounting of the certain bills at the particular discount rate.

Question 6.
Differentiate between Shares and Debentures?
Answer:
Differences between Shares and Debentures
MP Board Class 11th Business Studies Important Questions Chapter 7 Sources of Business Finance 4

Sources of Business Finance Long Answer Type Questions – II

Question 1.
Differentiate between Memorandum of Association and Articles of Association?
Answer:
Differences between Memorandum of Association and Articles of Association.
MP Board Class 11th Business Studies Important Questions Chapter 7 Sources of Business Finance 5

Question 2.
Explain the effect of Certificate of Incorporation and the commencement of business certificate.
Answer:
Effect of Certificate of Incorporation:
A company becomes a legal entity with perpetual succession on the date printed on the Certificate of Incorporation. After conclusiveness of the certificate of incorporation, the company becomes entitled to enter into valid contracts. The Certificate of Incorporation is a conclusive evidence of the regularity of the incorporation and legal existence of a company.

Once a Certificate of Incorporation has been issued, the company has become a legal business entity irrespective of any flaw in its registration. Thus, whatever be the deficiency in the formalities, the Certificate of Incorporation once issued, is a conclusive evidence of the existence of the company. Even when a company gets registered with illegal objects, the birth of the company cannot be questioned. The only remedy available is to wind it up.

On the issue of Certificate Of Incorporation, a private company can immediately commence its business. It can raise necessary funds from friends, relatives or through private arrangement and proceed to start business. A public company, however, has to undergo two more stages in its formation.

Effect of Certificate of Commencement of Business:
The Registrar, after examining the required documents like memorandum of association, articles of association and consent of directors, etc. issues a ‘Certificate of Commencement of Business’ if these documents are found satisfactory.

This certificate is conclusive evidence that the company is entitled to do business. With the grant of this certificate the formation of a public company is complete and the company can legally start doing business.

MP Board Solutions

Question 3.
What steps are taken by the promoters for the promotion of the company?
Answer:
Following steps are taken by the promoters for the promotion of the company:

1. Identification of Business Opportunity:
The first step to be taken by a promoter is to identify a business opportunity. The opportunity may be in respect of producing a new product or service or making some product using a different process or any other opportunity having an investment potential.

2. Feasibility Studies:
All the identified business opportunities may not be feasible or profitable as real Projects. The promoters, therefore, undertake detailed feasibility studies to investigate all aspects of the business they intend to start. Various types of feasibility have to be assessed which include.

  • Technical Feasibility
  • Financial Feasibility
  • Economic Feasibility.

These feasibility studies are undertaken with the help of the specialists like engineers, chartered accountants etc. and only when these investigations throw up positive results, the promoters may decide to actually launch a company.

3. Name Approval:
The promoters have to select a name for the company and submit an application to the registrar of companies of the state in which the registered office of the company is to be situated, for its approval. The proposed name may be approved if it is not considered undesirable. According to the name clause the name of a company should not be identical or resembling the name of an existing company and should not violate the provisions of ‘The Emblem and Names (Prevention of Improper Use) Act, 1950.

Three names, in order of their priority are given in the application to the Registrar of Companies so that alternative name may be alloted in case the first preference does not fulfil the name clause.

4. Fixing up Signatories to the Memorandum of Association : Promoters have to decide about the members who will be signing the Memorandum of Association of the pro-posed company. Usually the people signing memorandum are also the first Directors of the Company. Their written consent to act as Directors and to take up the qualification shares in the company is necessary.

5. Appointment of Professionals:
Certain professionals such as mercantile bankers, auditors etc. are appointed by the promoters to assist them in the preparation of necessary documents which are required to be submitted with the Registrar of Companies.

The names and addresses of shareholders and the number of shares allotted to each is submitted in a statement called return of allotment to the Registrar with the help of these professionals.

6. Preparation of Necessary Documents:
The promoter takes up steps to prepare certain legal documents which include Memorandum of Association, Articles of Association and Consent of Directors. These docupients have to be submitted under the law, to the Registrar of the Companies for getting the company registered.

Question 4.
Is it necessary for a public company to get its share listed on a stock exchange? What happens if a public company going for a public issue fails to apply to a stock exchange for permission to deal in its securities or fails to get such permission?
Answer:
A public company can raise the required funds from the public by means of issue of shares and debentures. For doing the same, it has to issue a prospectus which is an invitation to the public to subscribe to the capital of the company and undergo various other formalities. It is necessary for the company to make an application to at least one stock exchange for permission to deal in its shares or debentures by getting its shares listed on the stock exchange.

If a public company going for a public issue fails to apply to a stock exchange for permission to deal in its securities or fails to get such permission before the expiry of ten weeks from the date of closure of subscription list, the allotment of shares done by the company shall become void and all money received from the applicants will have to be returned to them within eight days.

Question 5.
What is meaning of the promotion ? Discuss the legal status of the company which had been promoted by the company.
Answer:
Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking and Initiative to form a company so the particular shape can be given to exploiting the available business opportunity. Promoters under take various activities to get a company registered and get it to the position of commencement of business. But they are neither the agents nor the trustee of the company. They can’t be the agents as the company is yet to be incorporated.

Question 6.
What is a ‘Memorandum of Association’? Briefly explain its clauses.
Answer:
Memorandum of Association is the most important document. It defines the objectives of the company and determines the boundary line, with in which the company has to perform tasks. No company can legally undertake activities that are not contained in its Memorandum of Association. The Memorandum of Association contains different clauses, which are given as follows.

1. The Name Clause:
This clause contains the name of the company with which die company will be known, which has already been approved by the Registrar of Companies. According to name clause the name of a company should not be identical or resembling the
name of an existing company and should not violate the provisions of ‘The Emblem and Names (Prevention of Improper Use) Act, 1950.

2. Registered Office Clause:
This clause contains the name of the state, in which the registered office of the company is proposed to be situated. The exact address of the registered office is not required at this stage but the same must be notified to the Registrar within thirty days of the incorporation of the company.

3. Objects Clause:
This clause is the most important one as it defines the purpose for which the company is formed. A company is not legally entitled to undertake an activity, which is beyond the objects stated in this clause. The object clause is divided into two objects.

(a) The Main Objects:
The main objects for which the company is formed are listed in this sub-clause.

(b) Other Objects:
Objects not included in the main objects could be stated in this sub – clause. A company can undertake a business included in this subclause, either by pass-ing a special resolution or passing an ordinary resolution and get central government’s approval for the same.

4. Liability Clause:
This clause limits the liability of the members to the amount unpaid on the shares owned by them.

5. Capital Clause:
This clause specifies the maximum capital which the company will be authorised to raise through the issue of shares. The authorised share capital of the proposed company along with its division into the number of shares having a fixed face value is specified in this clause.

6. Association Clause:
In this clause, the signatories to the Memorandum of Association state their intention to be associated with the company and also give their consent to purchase qualification shares. The Memorandum of Association must be signed by at least seven persons in case of a public company and by two persons in case of a private company.

MP Board Solutions

Question 7.
Discuss the financial instruments used in international financing?
Answer:
Various financial instruments used in international facing include:

1. International Agencies and Development Banks (IADBs):
A number of international agencies and development banks provide long and medium term loans and grants to promote the development of economically backward areas in the world. These bodies were set up by the Governments of developed countries of the world at national, regional and international levels for funding various projects. The more notable among them include International Finance Corporation (IFC), EXIM Bank and Asian Development Bank.

2. International Capital Markets (ICMs):
Prominent financial instruments used for international financing through capital markets are.

(a) Global Depository Receipts (GDRs):
These are the depository receipts denominated in US dollars issued by depository bank to which the local currency shares of a company are delivered. GDR is a negotiable instrument and can be traded freely like any other security. In the Indian context, a GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange.

(b) American Depository Receipts (ADRs):
The depository receipts issued by a company in the USA are known as American Depository Receipts. ADRs are bought and sold in American markets like regular stocks. ADR is similar to a GDR except that it can be issued only to American citizens and can be listed and traded on a stock exchange of USA.

(c) Foreign Currency Convertible Bonds (FCCBs):
Foreign currency convertible bonds are equity linked debt securities that are to be converted into equity or depository receipts after a specific period at a predetermined exchange rate. The FCCB’s are issued in a foreign currency and carry a fixed interest rate which is lower than the rate of any other similar non – convertible debt instrument. FCCB’s are listed and traded in foreign stock exchanges.

Question 8.
What is a commercial paper (CP)? What are its advantages and limitations?
Answer:
Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period, varyingfrom 90 days to 364 days. It is issued by one firm to other business firms, insurance companies, pension funds and banks. The amount raised by CP is generally very large. The CP can be issued only by firms having good credit rating as this debt is totally unsecured. Issue of CP is regulated by the Reserve Bank of India.

Merits of Commercial Paper:

  1. A commercial paper does not contain any restrictive conditions as it is sold on an unsecured basis.
  2. It has high liquidity as it is a freely transferable instruments.
  3. It provides more funds compared to other sources.
  4. A commercial paper provides a continuous source of funds because their maturity can be tailored to suit the requirements of the issuing firm.

Companies can invest their excess funds in commercial paper and can earn good return on them.

Limitations of Commercial Paper:

1. Only firms which are financially sound and have high credit ratings can raise money through commercial papers. New and moderately rated firms are not in a position to raise funds by this method as these are unsecured.

2. The amount of money that can be raised through commercial paper is limited.

3. Commercial paper is an impersonal method of financing and if a firm is not in a position to redeem its paper due to financial difficulties, extending the maturity of a CP is not possible.

MP Board Solutions

Question 9.
Explain the types of Preference Share?
Answer:
Types of Preference shares are as follows:

1. Cumulative Preference Shares:
The preference shares on which dividend gets accumulated are known as cumulative preference shares.

2. Non – cumulative Preference Shares:
The preference shares on which dividend does not get accumulated are known as non – cumulative preference shares.

3. Participating Preference Shares:
The preference shares which get share in the surplus profit of the company are known as participating preference shares.

4. Non – participating Preference Shares:
The preference shares which get a fixed rate of dividend only is known as non – participating preference shares.

5. Redeemable Preference Shares:
The preference shares which are redeemed on expiry of a fixed period of time is called redeemable preference shares.

6. Irredeemable Preference Shares:
The preference shares which are not redeemed during the lifetime of a company are known as irredeemable preference shares.

MP Board Class 11 Business Studies Important Questions

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