Page 311 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes
Example: ABC Company has 10,000 equity shareholders and it has earned 10,000 profit
last year and assumes it may earn a loss of 10,000 in the next year. Here, the shareholder will
get 1 as profit from last year and 1 loss in the coming year’s loss. It is also called as ordinary
share capital. Equity shareholders are the owners of the company, who have control over the
working of the company. They are paid dividend at the rate recommended by Board of Directors
(BoDs). The dividend rate depends on the profits, more profits more dividends and vice versa. If
there are no profits, no dividends will be payable.

14.4.2 Preference Share Capital

Preference share capital gives certain privileges to its holders on the equity shareholders.
Preference shareholders have privileges in two ways:
 A preferential privilege in payment of a fixed dividend. The fixed dividend may be in the
form of fixed rate or fixed amount per share; and
 Preferential right as to repayment of capital in case of liquidation/winding up of the
company.

Preference shares are of different types such as Cumulative preference shares, Non-cumulative
Preference shares, Convertible preference shares, Redeemable preference shares, Irredeemable
preference shares, Participating preference shares and Non-participating preference shares.

14.4.3 Debentures

Debentures are the debt instruments which are issued by companies to raise long term debts.
The issue of debentures by public limited companies is regulated by Companies Act, 1956 and
guidelines issued by SEBI on 11.6.1992. Debenture is a document which either creates a debt or
acknowledges it and any document which fulfils either of these conditions is a debenture.
Debentures are issued through prospects. A debenture is issued by a company and is usually in
the form of a certificate which is an acknowledgement of indebtedness. They are issued under
the company’s seal.

14.4.4 Sweat Equity Shares

The phrase ‘sweat equity’ refers to equity shares given to the company’s employees on favorable
terms, in recognition of their work. Sweat equity usually takes the form of giving options to
employees to buy shares of the company, so they become part owners and participate in the
profits, apart from earning salary. This gives a boost to the sentiments of employees and motivates
them to work harder towards the goals of the company. The Companies Act defines ‘sweat
equity shares’ as equity shares issued by the company to employees or directors at a discount or
for consideration other than cash for providing know how or making available rights in the
nature of intellectual property rights or value additions, by whatever name called.

14.4.5 Derivatives

A derivative is a financial instrument whose characteristics and value depend upon the
characteristics and value of some underlying asset typically commodity, bond, equity, currency,
index, event etc. Advanced investors sometimes purchase or sell derivatives to manage the risk
associated with the underlying security, to protect against fluctuations in value, or to profit
from periods of inactivity or decline. Derivatives are often leveraged, such that a small movement
in the underlying value can cause a large difference in the value of the derivative.

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