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. 

 

Explain Preliminary Expenses

 Q. Explain in brief Preliminary expenses. 

Ans. Expenses incurred on the formation of a company are termed as ‘Preliminary Expenses’. These include the following:

I. Expenses incurred on the preparation and printing of various documents needed for the registration of a company.

II. Stamp duty and registration fees on these documents. 

III. Duty payable on Authorised Capital.

IV. Expenses incurred on the preparation, printing and issue of prospectus.

V. Cost of Preliminary books and the Common Seal.

VI. In case the company has been formed to purchase a running busines, the fees charged by Accountant or Valuer valuing the assests and liabilities of that business.

As per AS-26, Preliminary expenses must be written off against Securities Premium Account or in its absence from Statement of Profit & Loss in the same year in which they are incurred.

Sweat Equity Shares

Q. Explain in brief Sweat Equity Shares.

Sweat equity shares means equity shares issued by the company to its employees or directors at a discount or consideration other than cash for providing know-how or making available intellectual property rights. According to section 54 of Companies Act, 2013, a Company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled:

(i) the issue of sweat equity shares is authorised by a special resolution passed by the company in general meeting.

(ii) the resolution specifies the number of shares, current market price, the consideration, if any, and the class or classes of directors or employees to whom such equity shares are proposed to be issued.

(iii) not less than one year elapsed since the date on which the Company was entitled to commence business.

(iv) the sweat equity shares of a Company whose equity shares are listed on recognised stock exchange, are issued in accordance with the regulations made by the SEBI in this behalf.

(v) such shares cannot be resold by their holders within a period of three years called lock-in period.

It is to be noted that a company may issue sweat equity shares at a price lower than than the nominal value of equity shares.

The entries for issue of sweat equity shares are same as for issue of other equity shares.

Holding Company: What It Is, Advantages and Disadvantages

 Q. What is meant by Holding Company? Explain the advantages and disadvantages of Holding Companies. 

Ans. MEANING OF HOLDING COMPANY: A holding company is a company which controls another which controls another company by acquiring all or majority of its shares carrying voting rights or controlling the composition of board of directors. The company whose shares have been acquired is known as subsidiary company. The subsidiary company continues to operate as before because acquisition of controlling interest by another company does not result in its liquidation. 

ADVANTAGES OF HOLDING COMPANIES: 

(i) Easy Method of Acquiring Control: A company needs to invest comparatively a small amount in order to acquire control over other company through this method. 

(ii) Possibility of Maintaining Separate Goodwill: By maintaining the separate identities of holding and subsidiary companies, it would be possible to naintain their separate goodwill. 

(iii) Ascertainment of Separate Profitability and Financial Position: Since each subsidiary company has to prepare its own accounts, the profitability and financial position of each company is known.

(iv) Availing Income-Tax Benefits: By maintaining separate identities of holding and subsidiary companies, it would be possible to avail income tax benefits by carrying forward the losses of each company to the next year. This is not possible in case of amalgamation.

(v) Easy to Get Rid of Subsidiary: Whenever it is desired to get rid of the subsidiary company, it can be easily done by disposing off the shares of such company in the market.

(vi) Easy to Wind-up the Subsidiary: In case the subsidiary company is continuously running into losses, it can be easily wound-up.

(vii) Efficiency in Management: Since both the companies maintain their separate identity, the size of the holding company remains the same. It is easier to manage both the companies separately.

(viii) Elimination of Competition: Since both the companies are managed by the same group, competition between them is completely eliminated.

(ix) Benefit of Internal and External Economies: Both the companies can avail of the technical know-how and financial resources of each other. Hence, they are able to avail the internal and external economies.

(x) Other Advantages: Other advantages are:

I. Increase in goodwill and credit worthiness of both the companies,

II. Smooth supply of raw material,

III. Getting on assured market, and

IV. Pooling of resources whenever needed.

DISADVANTAGES OF HOLDING COMPANIES:

(i) Fraud in Inter-Company Transactions: Inter-Company transaction between holding and subsidiary are often entered at too high or too low priss in order to suit the holding company.

(ii) Fear of Oppression of Minority Shareholders: Subsidiaries company is run in a manner that suits the interest of holding company. Financial and other resources of the subsidiary are used to the benefit of holding company. As such there is always the danger of oppression of minority shareholder’s interests. 

(iii) Forced Appointment of Directors: Subsidiary companies are forced to appoint the directors or other officers chosen by the holding company. Their remuneration is also fixed by the holding company which may be too high.

(iv) Difficulty in Ascertaining the True Financial Position: Shareholders in the holding company may not be aware of the true profitability and the financial position of subsidiary companies. Likewise, creditors and the outside shareholders in the subsidiary Company also may not be aware of the true picture of the company.

(v) Fear of Mismanagement: Where the group has a good number of constituents and managerial ability is limited, there must be mismanagement resulting into ruin of the group as a whole.

(vi) Difficulties in Valuing the Inventory: Difficulties may be experienced while valuing the Inventory containing huge quantities of inter-company goods.

(vii) Speculation in Shares: By manipulation of profits, reserves, inter-company sales etc. directors may speculate in the shares of the subsidiary companies, when such shares are quoted in the stock exchange.

(viii) Creation of Secret Reserves: Secret reserves may be easily created by the unscrupulous directors to the detriment of the minority interest.

What is meant by Holding Company? Explain the advantages and disadvantages of Holding Companies.