Page 97 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes for a 45 per cent stake in the Great Eastern Shipping Company (GESCO) at 27 a share. The price
offered was less than half the book value of the company. The offer and counter offers made by
the A H Dalmia group and the promoters of GESCO pushed up the bidding cost. The A H Dalmia
group ultimately sold its 10.5% stake (around 3 million shares) at 54 per share for a consideration
of 163 million before the year end. The A H Dalmia group had acquired the 10.5% stake in
Gesco at an average cost of 24 per share for a consideration of 72 million. Hence, the A H
Dalmia group was able to make a profit of 91 million through green mail transaction in less
than 6 months.
Companies can also use the book building process to buy back shares. The book building
process is a mechanism of price discovery which helps determine market price of securities. If
the book building option is used, a draft prospectus has to be filed with SEBI. The prospectus
should contain all the details of the offer, except the price at which the securities will be offered
(a price band is specified). The copy of the draft prospectus is filed with SEBI and is circulated
among institutional buyers by a leading merchant banker acting as the book runner. Institutional
investors specify the price as well as the volume of shares they intend to buy. The book runner,
on receiving the above information, determines the price at which the offer is to be made to the
public.

Self Assessment

Fill in the blanks:
8. The .......................... can consist of either cash deposited with a scheduled commercial bank.
9. Where a company purchases it own shares out of free reserves, then a sum equal to the
nominal value of the shares purchased shall be transferred to the ................................
State True or False:
10. Notice convening EGM should be sent to each and every shareholder entitled to receive
and attend the general meeting along with an explanatory statement.
11. If the escrow account consists of a bank guarantee, the said bank guarantee shall be in
favour of the merchant banker.

12. There must be a specific provision in the Articles of Association authorising the Company
to buy back its own shares.
Problem 1: K Ltd. furnishes you with the following Balance Sheet as at 31st March, 2009:

( in crores)
Sources of Funds
Share capital:
Authorised 100
Issued:
12% redeemable preference shares of 100 each fully paid 75
Equity shares of 10 each fully paid 25 100
Reserves and surplus
Capital Reserve 15
Securities Premium 25
Revenue Reserves 260 300
400
Funds employed in : Contd...

Fixed assets : cost 100
Less: Provision for depreciation 100 nil
90 LOVELY PROFESSIONAL UNIVERSITY
Investments at cost (Market value 400 cr.) 100
Current assets 340
Less : Current liabilities 40 300
400