Under-Capitalisation – Meaning, Causes and Remedies

 Q. Define Under Capitalisation. Explain its causes and remedies. 

Ans. Under-capitalisation: The term ‘under-capitalisation’ does not mean shortage or inadequacy of capital. The term is just reverse to over-capitalisation. In the words of Grestenberg :

“A corporation may be under-capitalised when the rate of profits, it is making on total capital, is exceptionally high in relation to the return enjoyed by similarly situated companies in the same industry, or when it has too little capital with which to conduct its business.”

In simple words, under-capitalisation is a state of affairs when the capital or the resources of the company are being utilised more efficiently. As a result, the company succeeds in continuously earning abnormally high rate of return on the capital employed in it. Such company declares a high rate of dividend in comparison to the prevailing rate and the market value of its shares exceeds their book value. Thus, under-capitalisation refers to the sound financial position and good management of the company.  

Causes of Under-Capitalisation: The following are the important causes of under-capitalisation : 

(1) Under-Estmation of Capital Requirements: At the time of promotion, the promoters may under-estimate the capital requirements of the company.  This results in a situation of under-capitalisation at later stages when more capital is required.

(2) Under-Estimation of Earnings: Sometimes at the time of promotion, the future earnings of the company are under-estimated and the company is capitalised accordingly. If, afterwards it is found that the actual earnings are far in excess of the estimates, the company company may find itself in a situation of under-capitalisation.

(3) Over-Estimation of Rate of Return at the Time of Promotion: Sometimes a concern estimate its income correctly but it over-estimates its rate of return (i.e. capitalisation rate) 

(4) Promotion of Company During Deflation: Companies which are floated under recessionary conditions often experience under-capitalisation after recession is over. This is because of two reasons. Firstly, during the recession assets are purchased at a price which is much lower in comparison to their earning capacity. Secondly, companies established during recession are capitalised at a low figure anticipating low earnings but when recession is over the earnings increase and the company becomes under-capitalised.

(5) Conservative Dividend Policy: Certain companies follow a policy of declaring low dividends and ploughing back a major part of their earnings. They build up large funds for replacement, renovation and expansion. The result of such a policy is reflected in high earnings which is a situation of under-capitalisation. 

(6) High Level of Efficiency: In a company where the management is very efficient, the company may operate on a high level of efficiency even with a meagre amount of capital. Over a period, earning position of the company will improve and it will become under-capitalised.

(7) Desire to Retain Control: In many companies, the promoters desire to retain full control over the management of the company. For this purpose, they issue lesser number of shares to monopolise them. This may lead to under-capitalisation.

(8) Difficulty in Raising Capital: Sometimes the promoters find it difficult to raise the required amount of capital. Even then they start the company and run it mostly with the help of short-term loans. This is a situation of under-capitalisation.

Remedies of Under-Capitalisation: Under-capitalisation can be corrected by adopting the following remedial measures: 

(i) Issue of Bonus Shares: If company has adequate balance of reserves and surplus, the company can capitalise it by distributing bonus shares. This is the most widely used and effective remedy for under-capitalisation because by distributing bonus shares, the number of shares will increase which will reduce both dividend per share and earning per share. 

(ii) Issue of Fresh Shares: If under-capitalisation is due to the shortage of capital, it can be remedied by issuing new shares.

(iii) Splitting of Shares: Another effective method of correcting under-capitalisation is to split up the existing shares into large number of shares by reducing the par value of shares. Supposing, the share capital of a company is divided into 10,000 shares of ₹20 each and its earning is ₹80,000 which comes to ₹8 per share. If the management decides to reduce the par value of shares by 50% and increase the number of shares in the same proportions, the new shares after the split will be 20,000 shares of ₹10 each. As a result of split the earning per share will come down to ₹4 per share (i.e., 

₹80,00020,000). Due to this, the market price of shares will decrease and this will have a psychological effect on the investors. Shareholders do not object to this procedure because they would continue to receive the same amount of income even after split.

Functions of NABARD – National Bank for Agriculture and Rural Development

 Q. Discuss in detail the functions of NABARD. 

Ans. National Bank for Agriculture and Rural Development (NABARD) is an apex bank for agriculture and rural development established on 12th July, 1982. With the formation of NABARD, the functions of Agriculture Credit Department of RBI, Rural Planning and Credit Cell of RBI and refinance functions of Agricultural Refinance and Development Corporation (ARDC) were handed over to NABARD. 

NABARD is the apex institution regarding all matters related to policy formulation, planning, training and flow of credit for the promotion of agriculture, cottage and village industries, handy crafts send rural crafts and other allied economic activities in rural areas NABARD is playing by pivotal role in strengthening cooperative credit structure in the country and in channelising bank credit to the rural areas. It provides liberal refinance to cooperitive credit institutions working in rural areas. It also works to strengthen the rural infrastructure which is the backbone of the rural and agricultural development. 

Functions/Role/Achievements of NABARD:

(1) Refinance Assistance to Cooperative Institutions and Regional Rural Banks: NABARD provides refinance facility to State Cooperative Banks, Regional Rural Banks (RRBs), Commercial Banks, etc. for providing short-term, medium-term and long-term loans or concessional rate of interest to agriculture sector, cottage and village industries, handicrafts and rural crafts. Credit facilities provided for a period up to 3 years are called short-term loans. Credit provided for a period between 3 to 5 years is termed as medium-term loan. Credit provided for a period between 5 to 10 years is termed as long-term loans. Refinance facility of NABARD is available for loans provided for purposes covered under Section 21(1) of NABARD Act, 1981. These mainly include crop loans, loans given for purchasing farm equipments, minor irrigation projects, storing produce, working capital requirements of village and cottage industries, setting up micro and small enterprises, handlooms, handicrafts, marketing activities, etc. NABARD provides refinance assistance to RRBs, Cooperative Banks and Commercial Banks to disburse crop loans to farmers. 

(2) Development of Farm Sector: One of the main functions of NABARD is to provide agricultural credit at concessional rate of interest. In rural areas, still , farming is one of the main economic activities. Farm sector mainly includes: agriculture and allied activities such as minor irrigation, farm mechanisation, land development, soil conservation, dairy, sheep/goat rearing, poultry, piggery, plantation/horticulture, forestry, fishery, storage and market yards, bio-gas and other alternate sources of energy, sericulture, apiculture, animals and animals driven carts, agro-processing, agro-service centres, etc. NABARD provides refinancing facilities to institutions engaged in providing farm credit. Cooperative institutions like Primary Agricultural Credit Societies (PACS), District Cooperative Banks, Regional Rural Banks, etc. work at the gross root level in rural areas. Farmers can become primary members of cooperative institutions by showing agriculture land records. They become eligible for concessional loans. Farmers can get loan for buying agriculture inputs, farm equipments, setting up minor irrigation projects, etc. 

(3) Development of Non-farm Sector: NABARD also takes measures for development of non-farm sector which mainly includes: small and micro enterprises, handicrafts, handlioms, power-looms, etc. NABARD provides refinancing facilities to cooperative institutions, RRBs, commercial banks for providing liberal credit to non-farm sector in rural areas. In non-farm sector, NABARD runs Composite Loan Scheme and Soft Loan Assistance for margin money scheme. Under composite loan scheme, refinance facility is provided to meet the fixed and/or working capital requirements of small/ micro enterprises set up in rural areas. Under soft loan assistance for margin money, NABARD provides refinance facility to provide financial assistance to prospective entrepreneurs who have requisite skill and talent but lack necessary monetary resources to meet margin requirement of loan. NABARD also provides refinance to rural credit institutions for providing credit facilities for acquisition of transport vehicles which are used for transportation of rural industrial products to market centres. 

(4) Strengthening Rural Infrastructure: NABARD runs two schemes (i) Rural Infrastructure Development Fund (RIDF). (ii) NABARD Infrastructure Development Assistance (NIDA) to provide liberal credit to state governments, state owned institutions/ corporations for developing rural infrastructure. NABARD provides  liberal funds for infrastructure products like irrigation, rural roads, bridges, river embankments, flood protection, market yards, warehouses, cold storages, soil conservation, etc. 

(i) Rural Infrastructure Development Fund (RIDF): Rural Infrastructure Development Fund was started by NABARD in year 1995-96. The main obJective of RIDF is to provide financial support at low cost to state governments to complete the existing rural infrastructure projects which are held up due to lack of funds. Apart from state government, now some other institutions like Self Help Groups (SHGs), Non Government Organisations (NGOs), village panchayats are also elitible for taking funds for infrastructure development under RIDF. Now, social infrastructure projects like construction of schools, primary health centers in rural areas are also eligible for obtaining funds under RIDF.

• Broad classification of Rural Infrastructure Activities Eligible under RIDF.

(a) All irrigation projects: community, medium and major irrigation projects.

(b) Rural roads and bridges

(c) Soil conservation, flood protection and land reclamation

(d) Marketing infrastructure and infrastructure for rural industries

(e) Drinking water, public health and rural education

(f) E-connectivity and Information Communication Technology (ICT) based infrastructure.

(ii) NABARD Infrastructure Development Assistance (NIDA): NIDA is a credit scheme run by NABARD for funding , rural infrastructure projects which are not covered by RIDF. Under this scheme, funds are provided to state governments and state owned organizations/state corporations. The repayment period of loans under this scheme is 15 years.

(5) Strengthening Primary Agricultural Credit Societies: NABARD has taken an initiative to develop Primary Agricultural Credit Societies (PACS) as multi-service centres. Traditionally, PACS were meeting only credit requirements of farmers but now besides meeting basic credit requirements, PACS provide training about modern agriculture methods, using modern technology, scientific storage, etc. For this purpose, NABARD is providing assistance to PACS under ‘Producers Organisation Development Fund’.

(6) Credit Facilities to Marketing Federations: NABARD provide credit facilities to marketing federations so as to promote marketing of agriculture produce and other agriculture activities. In the absence of marketing federations, farmers go in for distress sale of the agriculture produce , as they are in the need of immediate credit.  NABARD provides credit facilities to marketing federations for effective supply chain management,  scientific storage and other related market infrastructure. These federations purchase crops of farmers at remunerative prices and also provide storage space to farmers at concessional rates. 

(7) NABARD Warehousing Scheme: NABARD launched ‘NABARD Warehousing Scheme’ for providing concessional loans to public and private sector to construct cold storages and warehouses. The main aim of this scheme is to increase storage capacity for agriculture commodities. Under this scheme, priority in funds allocation is given to storage projects in Eastern and North-Eastern states and in food foodgrain deficit areas.

(8) Strengthening Central Cooperative Banks: NABARD provides direct lending facilities to central cooperative banks over and above through state cooperative banks. NABARD provides lending facilities to only such central cooperative banks which have minimum loan recovery of 50 per cent or whose non-performing assets do not exceed 20 per cent of outstanding loans. These loans are provided to Central Cooperative Banks for lending to farmers, traders, artisans, craftsmen, weavers, etc. for various purposes, like working capital requirements, minor irrigation, purchasing farm equipments, storage, grading, packaging, marketing, crop loans, etc.

(9) Financing and Supporting Producers’ Organisations: NABARD has set up ‘Producers Organisation Development Fund’ (PODF) for providing credit support to producers organisations in the form of grants, loans or combination thereof for meeting their credit needs related to capacity building and marketing activities. Any registered producers organization viz. producers company as defined under Companies Act, producers’ cooperatives, registered farmer federations, industrial cooperative societies, primary agricultural credit societies, etc., set up by producers are eligible for assistance from this fund. It will promote setting up micro enterprise and self employment and rural areas which in turn will promote rural development.

(10) Supervision of RRBs and Cooperative Banks/Regulatory Functions: Banking Regulation Act, 1949 empowers NABARD to conduct inspection of State Cooperative Banks, Central Cooperative Banks and RRBs. NABARD also conducts periodic inspection of state level cooperative institutions. Such inspection is done to protect the interest of depositors, to ensure compliance of guidelines issued by NABARD/Government/RBI to improve the performance of these institutions, to ensure that the business conducted by these institutions is in confirmity with the provisions of relevant bylaws, regulations, Acts and to suggest ways for strengthening these institutions to enable them to work more efficiently in the area of agriculture and rural development. RRBs and cooperative banks seeking permission to open a branch will have to forward its application to RBI through NABARD. NABARD can call any information or statement from the cooperative banks and RRBs. These institutions are required to submit a set of statutory and non-statutory returns to NABARD. Supervisory functions of NABARD help to detect risky areas which need immediate rectification. On this basis, early warning signals are issued and an action plan is made to improve the functioning of RRBs and Cooperative Banks.

(11) Rural Housing Refinancing Scheme: NABARD provides refinance facility to eligible banks engaged in providing credit facilities for rural housing. Housing in rural areas for both farmers and non-farmers leads to overall rural development.

(12) Development Functions: NABARD undertakes various development functions also. For example, it formulates credit plans, builds institutions, promotes research and technology, brings in innovation in credit delivery mechanism, skill upgradation of beneficiaries and client banks. NABARD coordinates the operations of rural credit agencies, develops expertise to deal with agricultural and rural problems, assists government, Reserve Bank and other institutions in their rural development efforts. It provides facilities for training and research, assists the state governments to develop infrastructure and to enable them to contribute to the share capital of eligible institutions. In order to upgrade the technical skill and competence of the personnel engaged in the task of agricultural and rural development, NABARD undertakes comprehensive training programme. 

(13) Promoting Self-employment: NABARD runs various schemes which promote self-employment in farm sector and non-farm sector in rural areas viz., (i) Composite Loan Scheme: It provides refinance facility to rural credit institutions for meeting wide range of fixed and working capital requirements of small/micro enterprises. (ii) Self-employment Scheme for Ex-servicemen: This scheme is specially designed to provide comprehensive package of credit for encouraging ex-servicemen to undertake agricultural and allied activities or to set up non-farm units in rural areas. (iii) Soft Loan Assistance for Margin Money: This scheme provides refinance facility to provide financial assistance to the prospective entrepreneurs who have the requisite talent and skill of entrepreneurship but lack monetary resources to meet margin requirements. (iv) Scheme for Small Road and Water Transport Operators: This scheme provides refinance facility to provide financial assistance for purchasing transport vehicles which are to be used for transportation of farm produce and rural industrial products to market centres.

(14) Coordinating the Activities of Central and State Governments: NABARD coordinates the activities of central government, state governments, planning commission and other central/state level institutions working for the development of agriculture, village and cottage industries, rural crafts, handlooms sector in rural areas. Coordination helps in achieving integrated rural development and optimum utilisation of resources. Duplication of certain activities or neglect of certain other activities can also be avoided through coordination.

(15) Other Functions:

(i) Management of Natural Resources: NABARD runs umbrella programme for management of natural resources. It is a comprehensive programme that covers awareness, generation, capacity building, technology upgradation, subsidy, training, watershed development, tribal area development, etc. This scheme aims to utilise natural resources for sustainable development of rural areas.

(ii) Promoting Solar Power Energy Devices: NABARD is the nodal agency for conducting feasibility study and to promote refinance for eligible projects for promoting solar power energy devices in rural areas. Ministry of New and Renewable Energy provides subsidy to install solar power energy devices for lighting, heating, etc. NABARD provides refinance to this ministry so as to provide subsidy for promoting solar power energy devices. 

(iii) Promoting Research and Development: NABARD maintains ‘Rural Innovation Fund’ whose main objective is to promote research in various areas related to agriculture and rural development. Considering the requirement and features of different areas, it designs various programmes and projects to promote rural development. This fund is utilised for formulating policies for rural development, for providide facilities for training, dissemination of information, promotion of research by undertaking techno-economic studies in the field of agricultural and rural development.

(iv) Providing Consultancy Services: NABARD consultancy services (NABCONS), a subsidiary of NABARD, provides consultancy services to a wide range of clients. It helps in preparing detailed project reports, techno-economic feasibility reports and appraisal studies.  It promotes commercial agricultural projects and other projects related to rural development.

(v) Providing SHG Bank Linkage: NABARD provides liquidity support to banks for Self Help Group Bank Linkage. NABARD provides 100 per cent refinance assistance to banks for financing SHGs. 

[Self-Help Groups - SHGs: Sometimes some persons of an area organise themselves in a group. The members of the group regularly save a small amount, pool it and indulge in some economic activity. SHGs also become elligible to borrow from banks. SHGs provide redit to the members at low interest rate and provide self employment.]

(vi) Facilitates Core Banking Solutions (CBS) for Cooperatives: NABARD plays the role of facilitator and advisor in implementing core banking solutions in cooperative banks. The CBS enable the customers of banks to undertake their transactions from any branch of a bank instead of being attached to a particular branch, i.e. customers can operate their account from any branch of the bank. It will ensure better customer services by the bank. 

(vii) Facilitates Implementation of Subsidy Schemes and Revival Packages: On behalf of central government, NABARD implements revival, reform and restructuring packages and other subsidiary schemes for various sectors related to rural development, like animal husbandry, poultry development, cold storages, rural godowns, handloom sector, etc. NABARD is a nodal agency for Capital Investment Subsidy Scheme of Government of India for following activities:

(a) Construction of cold storages and rural godowns. 

(b) Strengthening agricultural marketing infrastructure.

(c) Establishing agri-clinics and agri-business-centres.

(d) Promoting production of organic inputs like bio-fertilisers, vermiculture, composting units of agriculture waste, etc.

(e) Recharge of ground water.

NABARD also acts as nodal agency for implementing ‘Interest Subvention Subsidy Scheme’ of Government of India to provide concessional crop loan upto ₹3,00,000 to the farmers. Under this scheme, concessional interest is charged on loans. Farmers can get these concessional loans from RRBs, commercial banks and cooperative banks.

(viii) Promotes Financial Inclusion and Financial Literacy: Financial inclusion means delivery of banking services at very low cost to vast sections of disadvantaged and low income groups and linking them with banking sector. NABARD has set up financial inclusion fund and financial inclusion technology fund for promoting financial inclusion and financial literacy. NABARD provide assistance to RRBs and State Cooperative Banks for setting up Financial Literacy and Credit Counselling Centres.

(ix) Kisan Credit Card Scheme: At the initiative of NABARD, Kisan Credit Scheme was launched. KCC is a credit card which is issued by banks to farmers for availing credit facility as per their requirements. The Reserve Bank at the initiative of NABARD has advised all banks to issue Kisan Credit Card to the farmers. KCCs provide flexibility to farmers to avail production credit and also avoid procedural delays in getting the loan sanctioned.

(x) Women Empowerment: NABARD has started special programmes for women empowerment like ‘Women Development Cell’, ‘Marketing of Non-farm Products made by Rural Women’, ‘SHG Bank Linkage Programme’, etc. All these programmes facilitate increased credit flow to women and create awareness about self-employment avenues among women.

(xi) Co-financing: NABARD has executed ‘Memorandum of Understanding’ (MoU) with some banks for co-financing agriculture projects. It has given further impetus to agricultural development.

Minimum Subscription – Meaning and Explanation

Q. Explain in brief Minimum Subscription.

Ans. Section 39(1) of the Companies Act, 2013 provides that a company cannot allot any securities of the company to public unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been received by the company by cheque or other instrument which has been paid.

Minimum Subscription means the amount which, in the opinion of the directors, is the minimum to be raised by the issue of shares so as to provide for the following requirements :

(i) For the payment of purchase price of any property purchased or agreed to be purchased;

(ii) For the payment of preliminary expenses, including underwriting commission and brokerage on issue of shares;

(iii) For the repayment of any moneys borrowed by the company for the above purposes;

(iv) For working capital; and

(v) For any other expenditure required for the usual conduct of business operations.

According to SEBI Guidelines minimum Subscription has been fixed at 90% of the issued amount. As per section 39(3) the company has to get minimum subscription within 30 days from the date of the issue of the prospectus. If the company fails to receive the minimum subscription within the said period, the company cannot proceed for the allotment of shares and the entire application money must be returned within next 15 days. If there is delay in refund of such amount by more than 15 days, the company shall be liable to repay it with interest at the rate of 12% per annum for the delayed period. 

 

Transfer of Ownership under Sale of Goods Act – Meaning and Rules

 Q. What do you mean by “Transfer of ownership”. Give the rules relating to transfer of ownership under Sale of Goods Act. 

Ans. Meaning of Transfer of ownership: Transfer to ownership implies the transfer of all rights to the property in goods from seller to the buyer by virtue of which the buyer can use the goods as he desires, and this right of buyer cannot be restricted. 

For example, Ram gives his watch to Shyam on ‘approval or return’ basis, and allows him to keep it for ten days, and buys it if he likes it, otherwise return the watch. Here Ram has only given the possession of the watch to Shyam; he has not transferred his ownership. If, after ten days, Shyam wants to buy the watch and pays its price to Ram, the ownership will be transferred and Shyam will become the owner.

Transfer of ownership from the seller to the buyer is important in a contract of sale for the following reasons:

(i) Risk follows ownership: The fundamental principle of law is that risk and ownership are co-existent— one follows the other even if there is no transfer of possession. If the goods are damaged or destroyed by any reason, the loss is the owner’s even if he is not in possession of goods at that time. The transfer of ownership in a sale deal is vital because it defines the rights and obligations of the seller and the buyer. Risk follows ownership whether or not a transfer possession of goods has taken place. In case of a delay in the delivery of goods because of a default on the part of the buyer or the seller, the goods are at the risk of the defaulter. 

(ii) Action against third parties: If the goods are destroyed or damaged by any action of a third party only the owner of goods can initiate any proceedings against the third party.

(iii) Insolvency of the seller or the buyer: In case of insolvency of the seller or the buyer, it becomes important to know if the official receiver can take over the goods. This depends on who becomes involvement and who is the owner of the goods — the seller or the buyer. 

Rules: The transfer of ownership from the seller to the buyer can be discussed under the following headings: 

(a) Time when the property changes hands: Normally, it is agreed between parties when transfer will take place, but, in the absence of such agreement, the act stipulates when the transfer of ownership will deemed to be affected in a sale contract.  As per the provisions of the act, the transfer of ownership depends on the type of goods sold, and each type has different rules governning such transfer. The types of goods are:

(i) Ascertained or specific goods

(ii) Unascertained or generic goods

(iii) Goods sent on approval or sale or return

(i) Passing of property in ascertained goods: Ascertained or specific goods refers to such goods that have been identified or specified by the parties at the time of making the contract, and the seller does not have to make any modification or addition to the goods. In this case, both parties, i.e., the seller and the buyer, know specifically what the goods are and what is the quantity for which the transfer of ownership is to take place. For example, A says to B that he wants to buy the blue jar that is displayed in the show window of B’s shop. In this case, both parties have clearly identified the ‘goods’ that is to be sold. Ascertain goods are available with the seller at the time of the contract.

According to Section 19, if the contract of sale is about a ascertained or specific goods,  and the parties to contract have agreed to the terms of the sale, in the absence of contract to the contrary, the transfer of ownership will be affected according to the following rules:

– When the goods are in a deliverable state: Goods are deemed to be in deliverable state when the buyer agrees to accept the delivery of goods and the goods are in a condition that they can be delivered. According to Section 20 of the Sale of Goods Act, when the contract is about the sale of a ascertained goods which are in a ‘deliverable state’, the ownership of goods is transferred to the buyer when the contract is made, if the contract is unconditional.  Whether the payment of goods or the delivery thereof,  or both, are postponed to a later date does not affect the transfer of ownership. For example, A offers to buy B’s horse for ₹2,000, and B accepts the offer, but the horse dies before it is delivered from B to A. The loss in this case will be A’s, and he will have to pay price to B because the ownership of the horse was legally transferred to B when the contact was made. 

– When specific goods need to be put in a deliverable condition: According to Section 21, when the contract of sale is for such ascertained goods, which are not in a deliverable state, and the seller is required to do something to bring the goods into a deliverable state, the transfer of ownership is not affected till such time as the necessary work has been done on the goods, and the buyer has been informed about it. For example, A buys a gold ring from B which will be delivered to A only after it has been polished. The ownership of the ring will only be deemed to be transferred to A when it is been polished and B has informed A that the ring is in a deliverable state. 

– When the seller has to do something for ascertaining the price: According to section 22, where the sale contract is about such ascertained goods which are in a deliverable state but the seller needs to assertain their price – by measurement, weightage or doing any other act on the goods – the ownership cannot be transferred till such time that the seller has ascertained the price of goods and communicate the same to the buyer. If anything remains to be donn with the goods, the ownership of, and the risk of damage to, the goods remains the seller’s. For example, A makes a contract to sell 200 books to B. The books are stored in racks and A has to select the titles and separate them before they can be delivered. If there is a fire and the books are destroyed, the loss of the loss will be A’s because the ownership of the books has not yet been transferred. 

(ii) Passing of property in unascertained goods: According to Section 18, if the contract is for the sale of unascertained goods, the transfer of ownership is not affected till the goods have been ascertained. Unascertain goods refer to such goods that have not been identified when the contract is made; only a description of the goods has been given in the contract. For example, A contacts to buy a sheet of glass of a particular size and thickness from B’s godown. The ownership of the sheet is not transferable to A until he selects or identifies the sheet that he wants to buy. The ownership of an unascertained goods cannot be transferred till such time that the goods are ascertained. The rules governning the transfer of ownership of unascertained goods are as follows:

– Goods must be ascertained: According to Section 18, when a contract is made for the sale of unascertained goods, the ownership is not transferable to the buyer till such time that they are ascertained. Ascertained here implies that, if the goods have not been manufactured, they need to be manufactured; and if they have not been procured, they need to be procured. 

– Goods must be appropriated: By appropriation is meant the separation of goods to be sold from other goods. When there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriate to the contract either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in goods thereupon passes to the buyer.” Such assent may be expressed or implied and may be given either before or after the appropriation is made. 

– Goods must be delivered to the carrier:  Where the seller delivers the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract. 

(iii) Passing of property in case of goods sent on approval, or on sale or return: According to Section 24, when the goods are delivered to the buyer for his approval on sale or return basis, or, on some other normal condition in practice, the transfer of ownership to the buyer can be affected as under:

– When the buyer expressly communicates to the seller his acceptance of goods or does something to indicate his acceptance, the transfer of ownership is completed.

– When the buyer does not indicate his acceptance of goods to the seller but retains the goods without communicating his dispproval to the seller or, if a time limit has been fixed for approval, at the expiry of the time, or within a reasonable time if no limit has been fixed, the ownership is deemed to be transferred to the buyer. What is reasonable time, depends upon the circumstances of the case. 

Example: Ram delivers his car to Shayam on 1 January on the condition that, if he likes the car, he should communicate his approval to Ram by 10 January or return the car. If shayam does not communicate his approval even after that date, and does not return the car, his approval is implied and Ram is entitled to receive the payment for the car. 

(b) Reservation of the right of disposal: The Latin for ‘the right of disposal’ is jus disponendi. When the goods sold to a buyer who is far away and the goods id despatched to the buyer by public transport, in order to ensure that he receives the payment for the good, the seller reserves the right of disposal. 

Normally, if the goods are delivered to the carrier and the Bill of Lading or the Railway Receipt is taken in the name of the seller or agent, it is presumed that the seller has reserved the right of disposal, and any damage to the goods in transit is borne by the seller. Section 25(1) lays down that, when a contract of sale is made for specific goods and the goods are delivered after the contract is made, under the terms of the contract of delivery, the seller is entitled to reserve the right of disposal till such time as such terms are met. In such case, even if the seller has dispatched the goods to the buyer, he retains the right of ownership of goods till the conditions of the contract are satisfied. When the goods are delivered to shipping company or the railways, the seller sends the Bill of Lading or the Railway Receipt along with other documents to the buyer through his agent or bank with instructions that these be delivered to the buyer only when he has made the payment for the goods. In this way, the seller reserves the right of disposal of goods.