Kinds of Preference Shares & Equity Shares

Shares
According to section 2(46) of the Companies Act, a share
means a share in the share capital of the company and includes
stock, except where a distinction between stock and shares is express
or implied. A share indicates certain rights and liabilities.
The capital of a company is divided into units of a fixed
denomination. Share refers to only such a unit. It is therefore clear
that a share is a fractional part of the company’s share capital.
 Kinds of Shares
According to the Companies Act, 1956 a company can issue
only two types of shares viz.,
 1. Preference shares
 2. Equity shares.
I. Preference Shares
The term preference shares focus certain preferential rights over
other types of shares. They are,
i). A preferential right to get a fixed rate of dividend during the life of the
company. It means that only after payment of dividend to preference
shareholders, the surplus, if any, can be used for paying dividend to equity shareholders.
ii). A preferential right to the return of share capital at the time of winding
up of the company. This means that when the company goes into
liquidation, after discharging debts due to outsiders, the surplus assets
must first be used for returning the share capital contributed by the
preference shareholders. The remaining surplus alone will be enjoyed by equity shareholders.
Preference shareholders must carry both these preferential rights.
However, preference shareholders have certain disabilities. For instance,
they do not normally enjoy voting rights. However they get the right to vote.
1. on any resolution affecting their rights
2. on all resolutions when dividend has not been paid to them for certain
period as prescribed in the Act.

Kinds of Preference Shares
Preference Shares are of different types based on differing rights.
They are briefly described below.

1. Cumulative Preference Shares
In case dividend is not declared, because of inadequate profit,
the right to dividend for that year does not lapse in the case of cumulative
preference shares. Dividends not declared and paid get accumulated so
that they may be paid out of profits of subsequent years as arrears of
dividend before any dividend is paid to equity shareholders.
Preference shares are always cumulative, unless the contrary is
expressly stated in the Articles of Association.

2. Non Cumulative Preference Shares
In the case of non cumulative preference shares if dividend is
not paid in any particular year, it lapses. Dividend is not allowed to
accumulate and such unpaid dividend will not be paid in subsequent
years even though sufficient profits are earned.

3. Participating Preference Shares
In addition to the fixed rate of dividend, these shares carry
a further right to participate with the equity shareholders in the
surplus profits which remain after paying a certain rate of dividend to
equity shareholders. Thus they get two kinds of dividend, one fixed rate
and the other changing every year depending on the level of excess
profits.
Similarly such preference shares have a right to participate in
the surplus assets of the company on its winding up after paying in full
the preference and equity share capital.
The right to participate in the surplus profits or surplus assets at
the time of winding up is available to preference shareholders only if it is
specifically expressed in the articles. In other words preference shares
are presumed to be non-participating unless specifically stated otherwise
in the articles.

4. Non Participating Preference Shares
These shares are entitled to only a fixed rate of dividend. They
do not participate either in the surplus or in the surplus assets. In such a
case, the entire surplus goes to equity shareholders.
If the articles are silent with regard to this right to participate in
the surplus profit or surplus assets, the preference shares will be
considered to be only of non-participating type.

5. Convertible Preference Shares
Where preference shares entitle their shareholders to convert
their preference shares into equity shares within a specified period,
they are known as Convertible Preference Shares.

6. Non-Convertible Preference Shares
Where preference shares cannot be converted into equity shares,
they are called non-convertible preference shares. Once issued as
preference shares, they continue to be only preference shares throughout
the life time of the company without any change in their characteristics.
If the Articles are silent regarding this right to convert, the
preference shares will be considered to be only Non-Convertible Preference Shares.

7. Redeemable Preference Shares
If the Articles of Association authorise, a company can issue
redeemable preference shares. It means, that the capital raised by
means of these shares can be returned after a specified period or at
any time at its options after giving notice as per terms of issue. These
shares can be redeemed either out of profits or out of the proceeds of a
fresh issue of shares. Redeemable preference shares can be redeemed
if they are fully paid-up. A company cannot convert existing preference
shares into redeemable preference shares.

8. Irredeemable Preference Shares
Any preference share that cannot be redeemed during the lifetime
of the company is known as irredeemable preference Shares.

II. Equity Shares
Equity shares are those, which are not preference shares. They
were also known as ordinary shares. They are entitled to get
dividend only after the fixed rate of dividend is paid to preference
shareholders. Similarly at the time of winding up of the company, only
after returning preference share capital in full, and if there is any surplus,
it will be paid to equity shareholders.

The rate of dividend varies from year to year depending on the
profits earned by the company. The larger the profits the higher may be
the dividend for equity shareholders. In the case of reputed companies,
rate of dividend paid to equity shareholders is far higher than the fixed
rate paid to preference shareholders. However, when there is no profit
in any year, equity shareholders’ dividend for that year will not be paid
as arrears of dividend in subsequent years even though profits may be very large
.
Equity shareholders are entitled to vote on all resolutions

Prospectus &CONTENTS OF THE PROSPECTUS

Prospectus
Any document issued by a company inviting the public to
buy shares or debentures comes under the definition of prospectus.
It serves as a “window through which a prospective investor can
look into the soundness of a company’s venture” By going through
the information and other particulars, the prospective investors are
encouraged to invest in the shares of the company. A private limited
company is prohibited from issuing a prospectus.
CONTENTS OF THE PROSPECTUS
In order to protect the interests of the investors the
following points must be given in a prospectus :
1. The main objects of the company.
2. The names, addresses, description and occupations of the
signatories to memorandum and the number of shares
subscribed by each of them.
3. The kinds of shares with their total numbers and rights
attaching to each class of shares.
4. Qualification shares which a member must hold in order to
be eligible for election as director. It is fixed by the Articles
5. The names, addresses, descriptions and occupations, the
interest, rights and remuneration of the directors, managing
directors and the secretaries and treasures.
6. The minimum subscription required for allotment of shares
7. The amount payable along with application and on allotment
of each class of shares which is being issued.
8. The time during which subscriptions list will remain open
9. The main points of any contract or proposed contract
relating to preferential rights given to shares or debentures
of the company.
10. The amount of premium or discount on shares
11. The names of underwriters if any.
12. Particulars about reserves and surpluses.
13. The amount of preliminary expenses .
14. The names and addresses of the auditors.
15. Particulars regarding voting rights at the meetings of the
company.
16. A report by the auditors regarding the profits and losses of
the company.

Articles of Association

Articles of Association
It is another important document as it contains the rules and
regulations for its internal functioning of the company.
 Contents of the Articles
The more important contents to be contained in the Articles are listed
below
1. The extent to which the regulations in Table A are to be excluded.
2. Adoption or execution of preliminary contracts if any.
3. Share capital, different classes of shares, rights attached thereto,etc.
4. Allotment of shares, calls on shares.
5. Procedure relating to forfeiture of shares and their re-issue.
6. Issue of share certificates and share warrants.
7. Rules regarding transfer of shares and transmission of shares.
8. Conversion of shares into stock.
9. Payment of underwritting commission on shares and debentures.
10. Alteration of share capital.
11. Qualification and remuneration of directors.
12. Borrowing powers of directors.
13. Appointment, qualifications, powers, duties, remuneration, etc
of managing director, manager and secretary.
14. Appointment of directors.
15. Rules regarding use of common seal of company, Board meetings
and voting rights of members, proxies and polls.
16. Procedure for conducting different kinds of general meetings.
17. Payment of dividends, creation of reserve, etc.
18. Issue of redeemable preference shares, if any.
19. Winding up.
In the case of companies with the liability limited by guarantee,
the articles must also state the number of members with which the
company is to be registered. It must also state the extent of liability
in the event of winding up. In the case of a private company the
articles must also contain the following provisions.
a. restricting the right to transfer shares, if any
b. limiting the number of its members to 50 excluding the past and
present employee members
c. prohibiting any invitation to the public to subscribe for any shares
in or debentures of the company
d. prohibiting any acceptance of deposits from the persons other
than the directors, members or their relatives.

Contents of the Memorandum

 Contents of the Memorandum
A memorandum of Association must contain the following clauses viz
1. Name Clause
In this clause the name of a company is mentioned to establish
its identity. It is the symbol of its existence. Undesirable name to be
avoided. It should not imitate another company’s name. If it is a public
limited company, it should end with the word ‘limited’. If it is a private
limited company, it should end with the word ‘private limited’.
2. Situation Clause
The State in which a company has its registered office is to be
stated here. Exact address within the State need not be given in this
clause. It determines the jurisdiction of the Registrar of Companies and
of the court.
3. Objects Clause
This is the most important clause as it states the activities of the
company. The objects lay down the maximum permitted range of ac-tivities. A company has the power to carry on only those types of
business which are included in this clause. Any action beyond the pow-ers of the company has no legal effect.
4. Liability Clause
This clause states that the liability of members is limited. In the
case of a company limited by guarantee, the amount each member
undertakes to contribute in the event of winding up, must also be
mentioned.
5. Capital Clause
The amount of share capital with which the company is to be
registered and its division into shares of fixed amount are also stated
here.
6.Association Clause or Subscription Clause
At least two persons in the case of a private limited company
and seven in the case of public limited company must sign the
memorandum and agree to take the number of shares shown against
their names. Further they also express their desire to form themselves
into a company in pursuance to the Memorandum of Association.

some of the features of joint stock companies

Salient Features
1. Separate legal entity
A company is a person created by law. It means that it comes
into existence only by complying with all formalities prescribed
under the Companies Act, 1956. It enjoys a separate personality of
its own, different from the members composing it. This enables a
company to enter into valid contracts with others including its
members and deal with the property in any way it likes. It can sue
others in its own name and be sued in its own name by others
including its members.
2. Perpetual Succession- Continuity of Life
“Members may come and go but the company can go on
forever” (Lord Gower). This is because company’s existence does
not depend upon the existence of even promoters who were
instrumental in its formation. Neither change in the membership of
the company nor the death of its members has any impact on the
continuity of its life.
3. Common Seal
Though the separate personality of the company is legally
recognised, it needs human agency to act. Obviously it cannot sign.
Any contract entered into by a company, to be valid, must bear the
official seal of the company.
4. Limited Liability
The liability of the members of a company is generally
limited to the value of shares. When once the full value of the shares
is paid up, there is no more liability for the shareholders. The feature
of limited liability attracts a large number of investors to subscribe
to the shares of the company.
5. Easy Transferability of Shares
In the case of public limited companies, their fully paid
shares can be transferred to others without any difficulty. However,
in the case of private limited companies, the right to transfer the
shares is subject to certain restrictions.

dissolution of partnership firm

The various circumstances leading to dissolution of partnership
firm can be summarised by taking the first letters used in the term

“Dissolution”.

D - Death of partner
I - Incapacity of a partner
S - Stipulated period of partnership completed in thecase of particular partnership
S - Serious misconduct of a partner
O - Object is completed (Particular partnership)
L - Lunacy of a partner
U - Unavoidable continuous loss
T - Transfer of interest of the firm
I - Insolvency of a partner
O - Objectionable unlawful objectives
N - Notice of dissolution by a partner.

partnership deed

PARTNERSHIP DEED
A partnership firm can be formed through an agreement
among two or more persons. In India this agreement may be oral or
in writing. But it is desirable to have it in writing to avoid any
misunderstanding among the partners in future. All the terms and
conditions of partnership are included in the agreement. The
partnership agreement is also known as Partnership Deed or Articles
of Partnership.
1. Contents of Partnership Deed
A partnership deed will usually provide for the following
matters.
1. Name of the firm.
2. Date of agreement and principal place of business.
3. Names and addresses of all the partners.
4. Nature of business proposed to be carried on by the firm.
5. Duration of the partnership, if any.
6. Amount of capital contributed by each partner.
7. Amount of withdrawal of each partner.
8. Profit sharing ratio.
9. Salary payable to active partner or partners.
10. Interest on capital and interest on drawings.
11. Procedure for admission or retirement of partners.
12. Manner of dissolving the firm and the mode of settlement of
accounts on such dissolution.
13. Maintenance of books of accounts and their audit.
14. Interest to be allowed on partner’s loans and advances to the
firm.
15. Mode of valuation of goodwill on admission, retirement or death
of a partner.
16. Procedure for settlement of disputes among partners by
arbitration.

.
The contents of a partnership deed can be altered only with
the consent of all the partners.

duties of a partner

 Duties of Partners
The duties of partners can be classified into two forms:
1.Absolute duties and
2.Qualified duties.

1.Absolute Duties
Absolute duties are fixed by law which cannot be violated
by partners agreement. These duties are applicable to all partnership.
1. Every partner must act diligently and honestly in the discharge
of his duties to the maximum advantage of all partners.
2. Every partner must act in a loyal and faithful manner towards
each other.
3. Every partner must act within the scope of the authority entrusted
to him
4. Every partner is bound to share the losses of the firm equally unless
otherwise agreed.
5.Every partner must indemnify the firm against loss sustained due
to his willful negligence in the ordinary course of business.
6. No partner can transfer or assign his interest in the firm to others
without the consent of other partners.
7. Every partner must maintain and render true and correct accounts
relating to the firm’s business.
8. No partner can engage himself in a business which is likely to
compete with the business of the firm.
9. Every partner should use the firm’s property only for the firm’s
business and interest.
10. No partner can make any secret profit by way of commission
on purchases or sales effected on behalf of the firm.

2. Qualified Duties
Qualified duties given in the Act can be modified by an
agreement of partners entered into.

3. Liabilities of partners.
1. Every partner is liable for the debts of the firm to an unlimited
extent, jointly and severally.
2. A retiring partner is liable for all the debts incurred before his
retirement
3. An incoming partner is liable only for the debts incurred by the
firm after his admission into the partnership.
4. In case of deceased partner, his legal representatives are liable
only for the debts incurred by the firm before his death
5. In the case of minor partner, he is not personally liable for the debts
of the firm. Only his share in the profits and assets of the partnership is
liable for the debts of the firm.
6. Every partner is liable to make good the loss that the firm or other
partners suffer as a result of his negligence.

rights of a partner

 Rights of Partners
1) Every partner has a right to take part in the conduct and
management  of the business.
2) Every partner has a right to express opinion  on any matter related
to the firm
.3) Every partner has a right to be consulted before taking important
decisions.
4) Every partner has a right to inspect and take copy of books of account
and records of the firm.
5) Every partner has the right to an equal share in the profits of the
firm unless otherwise agreed by the partners.
6) Every partner has the right to receive interest on loans and advances
at the rate of 6% per annum.
7) Every partner has the right to be indemnified for the expenses
incurred  and losses sustained by him in the ordinary conduct of
the firm’s business.
8) Every partner has an equal right to use the assets of the firm for
its business.
9) No new partner can be admitted  into partnership without the
consent of other partners.
10) Every partner has a right to retire from the firm.

kinds of partners

KINDS OF PARTNERS
There are different kinds of partners classified on the basis
of managerial interests, profit sharing, behaviour and and status.
They are as follows.
1. Active Partner
A partner who takes active part in the management of the
partnership firm is known as active or working or managing or
general partner. His liability is unlimited.
2. Sleeping Partner or Dormant Partner
The partners who merely contribute capital and do not take
active interest in the conduct of the business of the firm are called
sleeping or dormant or financing partners.
3. Nominal or Ostensible Partner
He is a partner who neither contributes capital nor takes
any part in the management of the firm. He lends his name to be
used as partner in the business to increase the reputation of the
firm. They are not eligible for a share in the profit. They are also
liable to the creditors for the debts of the firm.
4. Partners in Profit Only
A person who shares the profit of a firm but does not share
the loss, is called “partner in profit only”. Usually he has no voice in
the management of the firm. But his liability to third parties is
unlimited .
5. Partner by Estoppel
A person may not be really a partner in the business. But by
his behaviour he makes outsiders believe that he is a partner in the
business. Then, he is liable to such outsiders who advance money
to the firm or enter into a contract under such false belief. Such a
person is known as “partner by estoppel”. He cannot later on deny
that he is not a partner.
6. Partner by Holding out
When a person who is not really a partner in a business, is
described as a partner to others, then he must at once deny it when he
comes to know about it. If he keeps quiet, then he is liable to other
persons who do business with that partnership believing that he is also a
partner. Such a person is called partner by holding out.
7. Sub-Partner
When a person makes an arrangement with a partner to share
his profit, he is known as a sub-partner. Such a sub-partner has no
rights against the firm, as he is not liable for the debts of the firm.
8. Minor as a Partner
A minor is a person who has not completed 18 years of age,
where a guardian is appointed by a court, his age of majority extends
to 21 years. Legally, a minor cannot become a partner because he
is incapable of entering into a contract. He may, however, be
admitted to the benefits of partnership with the consent of all partners.

Types of partnership firm

TYPES OF PARTNERSHIP FIRM
1. General or Unlimited Partnership
A partnership in which the liability of all the partners is
unlimited is known as unlimited partnership. All the partners can
take part in the working of the business. In India, only this kind of
partnership exists. General partnership can be classified into three
types such as partnership-at-will, particular partnership and joint
venture. They are discussed below.
a. Partnership–at–will
Partnership-at-will is a partnership which is formed to carry
on business without specifying any period of time. The life of such
a partnership continues as long as the partners are willing to continue
it as such. The partnership can be terminated, if any partner notifies
his desire to quit.
b. Particular Partnership
It is a partnership established for a stipulated period of time
or for the completion of a specified venture. It automatically comes
to an end with the expiry of the stipulated period or on the
completion of the specified venture, as the case may be. For
example, a partnership may be created for one year only. When the
time lapses, the partnership comes to an end.
c. Joint Venture
A joint venture is a temporary partnership which is formed
to complete a specific venture or job during a specified period of
time. Every partner does not have the right of implied agency. No
partner can withdraw his interest in the firm before the completion
of the venture. For example, a partnership is formed for the
construction of a building. The partnership comes to an end if the
construction is over.
2. Limited Partnership
A partnership in which the liability of the partner is limited
is called limited partnership. The Law does not permit the formation
of a limited partnership in India. But in Europe and U.S.A. limited
partnership is allowed. A limited partnership firm must have at
least one partner whose liability is unlimited. The liability of
remaining partners is limited. Thus limited partnership consists of
two types of partners, general partner and limited partner.

PARTNERSHIP

PARTNERSHIP INTRODUCTION
The need for partnership form of organisation arose from
the limitations of sole proprietorship. In sole proprietorship,
financial resources and managerial skills are limited. One man
cannot supervise personally all the business activities. Moreover,
risk - bearing capacity of an individual is also limited. It is at this
stage that a need for associating more persons arises. So more
persons are associated to form groups to carry on business.
The partnership form of organisation comes into existence
in two ways. It may come into existence either as a result of
expansion of the sole trading concern or two or more persons joining
together through an agreement to form a partnership. In otherwords,
it is an extension of sole trading concern.
History reveals that the partnership organisation was started
with the enactment of Partnership Act in 1907 in England. In India,
the Act was approved in 1932. The Act governs the formation,
management and control of various partnership firms in the country.
A number of partnership enterprises are seen in market today.
Examples of partnership firms are: running a cinema theatre, a book
shop, chit funds etc.

ABOUT MULTINATIONAL COMPANIES

Multinational Companies (MNC’s):
The term “multinational” consists of two different words,
‘multi’ and ‘national.’ The prefix ‘multi’ means ‘many’, while the
word ‘national’ refers to nations or countries. Therefore, a
multinational company may be defined as a company that operates
in several countries. Such a company has factories, branches and
in more than one country. According to the United Nations
Commission on Multinational Corporations, a multinational
corporation is a corporation which operates, in addition to the
country in which it is incorporated, in one or more other countries.
A multinational corporation is also known as a transnational
corporation, namely, ‘Global giant’,or ‘World enterprise’ or
‘international enterprise’. All forms of business organisation that
transcend political frontiers may be called as multinational firms.
In simple words, a multinational company is a company
carrying on business in two or more countries. According to Neil
H.Jocoby“A multinational corporation owns and manages business
in two or more countries”
FEATURES:
1. A multinational company is operated in more than one country
simultaneously.
2. It is generally very large in size.
3. Its purpose is to reduce transport costs and to make use of raw
materials, labour, capital and market of foreign countries.

JOINT STOCK COMPANY

Joint Stock Company:
                            A company is an association of many persons. The capital
of the company is divided into small units called a share. Any one
who holds or buys a share in a company is called a shareholder.
Shareholders are the members of the company. A company is called
a joint stock company as the capital is contributed by a large number
of investors. A joint stock company may be a public company a
private company.
A company is defined as, “an incorporated association
which is an artificial person created by law having a common seal
and perpetual succession”.
A company is considered as a person by law. It can enter
into contract in its own name. It must have a common seal as it
cannot sign documents. A company has continuous perpetual
existence. The liability of a share holder is limited.
Shares can be freely transferred from one person to another.
It encourages the people to save even small amount.
A company is an artificial person. It acquires legal entity
through incorporation. Incorporation implies registration of the
company with the Registrar as a body corporate. Whether it is a
private company or a public company, it should be incorporated
with the Registrar of companies as per the Companies Act of 1956.
The management of joint stock company is entrusted to the board
of directors.

PRINCIPLES OF ORGANISATION

                                          PRINCIPLES OF ORGANISATION

Scalar Principle
Line of authority must proceed from the highest executive
to the worker at the bottom level through a downward flow. This is
known as ‘chain of command’. The superior has a direct authority
over his immediate subordinate. He is responsible for efficient
performance of the work entrusted.
Unity of Command
Each individual should receive orders from only one boss.
A person cannot serve under two masters. He is accountable to his
immediate superior. Dual subordination should be avoided. It
creates disorder and confusion and leads to indiscipline.
 Unity of Objectives
The term objective means a goal to be achieved.The
organisation structure depends upon the objectives of the enterprise.
Therefore the objectives of an enterprise must be clearly fixed.
Every part of the organisation should be designed to facilitate the
accomplishment of common objectives.
Division of Work
The total work should be divided. This is known as
departmentation. All the activities must be planned. This gives an
idea of the total workload of the enterprise. Effective organisation
must promote specialisation.
Span of Control
No executive in the organisation should be required to
supervise more subordinates than he can effectively manage. An
executive should be asked to supervise a reasonable number of
subordinates.
Functional Definition
The authority and responsibility of every individual should
be clearly defined. The relationship between different jobs should
be clearly specified.
Unity of Direction
There must be one head and one plan for a group of activities
directing towards the same objectives. This is necessary to ensure
completion of tasks and co-ordination of activities.
Co-Ordination
The various activities of undertaking should be co-ordinated
to secure the desired results. The different departments may have
to function frequently in close consultation with other departments
in a departmental store. The purchase department and sales
department activities must be well coordinated to increase profit.
Delegation of Authority
Delegation means the entrustment of part of the work or
some duties to the subordinates. Superior has to entrust some of
his duties to his immediate subordinate. The subordinates should
be granted necessary powers and rights. He becomes accountable
to his superior. Delegation creates obligation on the part of the
subordinate.
 The Principle of Responsibility
The superior should be held responsible for the acts of his
subordinates. He cannot escape from the responsibility. He is
accountable to his higher authorities.
Flexibility
The organization should be flexible. It should be adaptable
to changing circumstances. There should be scope for expansion
without disrupting the basic design.
Efficiency
Efficiency should be the watchword of the organisation. The
organisation structure should enable the enterprise to function
efficiently and accomplish its objective with the lowest possible
cost.
Personal Ability
As people constitute an organisation there is need for proper
selection, placement and training of staff. The organisation must
ensure optimum use of human resources and encourage
development programmes.
Simplicity
Another principle of organisation is that it should be simple.
Too many levels of authority for example, complicate
communication channels and by causing confusion and friction
makes achievement of co-ordination impossible.

OBJECTIVES AND FUNCTION OF BUSINESS ORGANISATION

OBJECTIVES AND FUNCTIONS OF BUSINESS ORGANISATION

OBJECTIVES
The objects of business organisation are
1. Profit motive
2. Service motive
3. To get the economies of large scale production
4. To achieve in time and efforts
5. Harmonious relations with employees
FUNCTIONS
The important functions of business are as follows
1. Production function
2. Marketing function
3. Finance function
4. Personnel function
5. Purchase function
6. Public relations function
7. Legal function

meaning of business organisation

                                           “The business is coming to realise that,
                                   education is to business what fertiliser is to farming”

MEANING OF BUSINESS ORGANISATION:
Literally speaking, business means “ State of being busy”
throughout. In economic sense, the word business means work
efforts and acts of people which are connected with the production
of wealth. Functionally, “ those human activities which involve
production or purchase of goods with the object of selling them at

a profit.” are called business.
The term business organisation is very often used in different
senses. Firstly it is used to represent a business enterprise such as
Tata Iron & Steel. “ Secondly business organisation is a subject of
study consisting of topics concerned with organisation and

management of industrial and commercial organisation. Thirdly,he
 term ‘Organisation’ is used to mean bringing together various
elements of business with the object of establishing harmonious
elationship and adjustment in their functioning.