Law of

Corporate Finance
(B.A.LL.B. – 5.7, 5.9, LL.B. – 3.5)

Presented By:
Unit-1
What is Finance?
 Life Blood of Business.
 Finance may be defined as the administrative area or set of
administrative functions in an organization which relate with the
arrangement of cash and credit so that the organization may have the
means to carry out its objective as satisfactorily as possible.
 It is the science of Money management. Observation or
Understanding of the money management.
 It studies the principles and the method of obtaining Control of
Money.
 Finance is the process of conversion of accumulates funds to
productive use.
What Is Corporate?

It is an association of persons together for a common object to

carry on some business for profit or promote the art, science,
education and charitable purpose.
What is Corporate Finance?
 Corporate Finance broadly speaking business finance can be defined
as the activity concerned with the raising and administering of funds
used in business.
 Every decision that a business makes has financial implications, and
any decision which affects the finances of a business is a corporate
finance decision.
 Defined broadly, everything that a business does fits under the head
of corporate finance.
 It is Concerned with the efficient and effective management of the
finances of an organization in order to achieve the objectives of that
organization.
 Its aim is to raising funds and providing a return to investors.
Contents of Corporate Finance?

 Planning of Finance

 Raising the Finance

 Investing the Finance

 Monitoring the Finance

Importance and Scope of Corporate
Finance?
 Research and Development
 Promotion of the Company
 Expansion and Diversification of the Company
 Motivating Employees
 Meeting Contingencies
 Smooth Conduct of Business
 Managing Risk
 Decision Making
Continued…

 Raising Capital
 Marketing
 Effective Functioning of the Company
 Short-term and Long-term Goals
 Dividend and interest
 Replacement of Assets
 Government Agencies
 Minimizing Cost of Production
 Proper Cash Management
What is Capital ?
 Capital is an economic term that refers to all financial
resources, manufacturing resources and assets necessary to
start any economic activity weather for profit, promotion or
service work.
 Anything that enables any individual or organization to
generate anything of value is Capital.
 Capital covers all the elements (e.g., money, land, building,
machinery, materials, etc.) a businessman needs to start an
enterprise. Capital is the measure of the amount of resources
of an enterprise. Capital develops products, keeps workers
and machines at work, encourages management to make
progress and create value.
General Classification of Capital

 Economic Capital: It focuses on financial resources

necessary for any project.

 Natural Capital: All natural resources that a business

depend on, making it of great importance in large, high
return projects. E.g. land area, raw material, animal
resources, environment etc.

 Human Capital: labour force.

Types of Capital
In terms of dealing in market:
 Fixed Capital: land, machinery, facilities, equipment.
 Working Capital: money

In terms of Financial Value:

 Debt Capital: borrowings
 Equity Capital: Shareholdings
 Trading Capital
Meaning of Securities
The term "security" is a fungible, negotiable financial
instrument that holds some type of monetary value. It
represents an ownership position in a publicly-traded
corporation—via stock—a creditor relationship with a
governmental body or a corporation—represented by owning
that entity's bond—or rights to ownership as represented by
an option.
Definition of Securities
The term ‘Securities’ under Section 2(81) of the Companies Act, 2013 has been defined
to mean ‘securities’ as defined in Section 2(h) of the Securities Contracts (Regulation)
Act, 1956 (SCRA).
Under section 2(h) of SCRA, the term ‘securities’ include the following:
 Shares, scrips, stocks, bonds, debentures, debenture stocks etc. in or of any
incorporated company or another body corporate.
 Units issued by any Collective Investment Scheme to the investors in such scheme.
 Security receipt as defined in Section 2(zg) of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
 Units or any other such instruments issued to the investors under any Mutual fund
scheme.
 Government Securities.
 Such other instruments, rights or interest therein shall be declared by the
government to be securities be declared by the government to be securities.
Securities Borrowings

It is a mechanism through which investors can

borrow or lend shares to other market participants.
Debentures
  A long-term security yielding a fixed rate of interest, issued
by a company and secured against assets.
 Debentures are issued to the public as a contract of
repayment of money borrowed from them. These
debentures are for a fixed period and a fixed interest rate
that can be payable yearly or half-yearly. Debentures are
also offered to the public at large, like equity shares.
Debentures are actually the most common way for large
companies to borrow money.
Share Capital
 The amount required by the company for its business
activities is raised by the issue of shares. The amount so
raised is called ‘Share Capital’ of the company.
 A company limited by shares will have share capital. A
company limited by guarantee or an unlimited company
may not have any share capital.
 The persons who buy the shares of company are called
‘Shareholders’.
Types of Share Capital
 Registered, Authorized or Nominal Capital
 Issued Capital
 Unissued Capital
 Subscribed Capital
 Called up Capital
 Uncalled up Capital
 Paid up Capital
 Reserve Capital or Reserve Liability
 Fixed Capital
 Circulating Capital
Registered, Authorized or Nominal Capital

The Memorandum of Association of every company

has to specify the amount of capital with which it
wants to be registered. The capital so stated is called
Registered, Authorized or Nominal Capital. The
Registered Capital is the maximum amount of share
capital which a company can raise by way of public
subscription.
Issued Capital

The company may not issue the entire authorized

capital at once. It goes on raising the capital as and
when the need for additional fund is felt. So, issued
capital is that part of Authorized/Registered or
Nominal Capital which is offered to the public for
subscription in the form of shares.
Unissued Capital

The balance of nominal capital remaining to be

issued is called Unissued Capital.
Subscribed Capital

It is that part of “issued capital” for which

applications are received from the public. The
subscribed capital is allotted to the respective
subscribers as per resolution passed by the directors
of the company.
Called up Capital

It is that part of subscribed capital which has been

called up by the company. A company does not call at
once the full amount on each of the shares it has
allotted and therefore, calls up only such amount as it
needs.
Uncalled up Capital

It is the uncalled portion of the allotted capital and

represents contingent liability of the shareholders on
the shares.
Paid up Capital

It is that part of called up capital against which

payment has been received from the members on
their respective shares in response to the calls made
by the company.
Reserve Capital or Reserve Liability

By Reserve Capital we mean that amount which is not

callable by the company except in the event of the
company being wound up. The company cannot
demand the payment of money on the shares to that
extent during its life time. Reserve capital may be
created by means of a special resolution passed by
the company in its General Meeting by three-fourths
majority of those voting on it.
Fixed Capital

The fixed capital of a company is what the company

retains in the shape of fixed assets such as land and
buildings, plant and machinery, furniture, etc.
Circulating Capital

The circulating capital is a part of subscribed capital

which is circulated in business in the form of using
goods or other assets such as book debts, bill
receivables, cash, bank balance, etc.
Meaning of Share
 Section 2(84) of Companies Act, 2013:
“share” means a share in the share capital of a company
and includes stock
 A share is referred to as a unit of ownership which
represents an equal proportion of a company’s capital.
A share entitles the shareholders to an equal claim on
profit and losses of the company. There are majorly
two kinds of shares i.e. equity shares and preference
shares.
Classification of Share
 Preference Shares
1. It offers a fixed rate of dividend.
2. Right to get capital on winding up, before anything is paid
to equity shareholders.
 Equity or Ordinary Share
1. These shares have voting rights.
2. It doesn’t offer a fixed rate of return.
3. They are not entitled to get capital on winding up, before
paying to preference shareholders.
Types of Preference Shares
1. Cumulative Preference Shares
 Fixed rate of dividend is guaranteed.
 At the time of inadequate profit, they will not loss anything.
 Arrear will get in subsequent years.

2. Non-Cumulative Preference Shares

 Fixed rate of dividend is guaranteed.
 At the time of inadequate profit, they will not get anything.
3. Participating Preference Shares
 Fixed rate of dividend is guaranteed.
 Entitled to share the surplus profit.

4. Non-Participating Preference Shares

 Fixed rate of dividend is guaranteed.
 Does not share the surplus profit.

5. Redeemable Preference Shares

 Shares which a company may repay after a fixed period of
time or earlier.
6. Irredeemable Preference Shares
 It do not carry the arrangement for redemption.
 Shares are repayable only at winding up

7. Convertible Preference Shares

 It can be converted into Equity shares within a certain
period.

8. Non-Convertible Preference Shares

 It cannot be converted into Equity shares.
Issue and Allotment of Shares

 Issue of Shares is the process in which companies

 allot new shares to shareholders.
 Shareholders can be either individuals or
corporates
 Share allotment is the creation and issuing of new
shares, by a company.
 New shares can be issued to either new or existing
shareholders.
Procedure of Issue of New Shares

1. Issue of Prospectus:

The enterprise initially issues the prospectus to the public

generally. The prospectus is an appeal to the public that a new
enterprise has come into the presence and it would require
funds for operating the trading concern. It comprises of
complete data regarding the enterprise and the way in which
the money is to be collected from the prospective investors.
2. Receipt of Applications:

When the prospectus is circulated to the public, prospective

investors contemplating to sign up and subscribe the share
capital of the enterprise would make an application along with
the application money and deposit it with a scheduled bank as
mentioned in the prospectus.
3. Allocation of shares:

Once the minimum subscription has been done, the shares

can be allocated. Normally, there is always oversubscription of
shares, so the allocation is done on pro-rata ground. Letters of
Allotment are sent out to those people who have been
allocated their part of shares. This results in an authentic
contract between the enterprise and the claimant, who will
now be a part-owner of the enterprise.
Types of Issue of Shares
1. Initial Public Offering:
Initial Public Offering is when an unlisted company makes a fresh
issue of shares or offers for sale its existing shares to the public. IPO
is the first step in listing and trading of a company’s shares in a stock
market.

2. Follow on Public Offering:

Follow on public offering is when an already listed company makes
either fresh issue of shares to the public or offer for sale existing
shares to the public by way of an offer document. Offer for sale is
typically allowed when the company must satisfy listing or
continuous listing obligations.
3. Rights Issue:
Rights issue is when a listed company proposes to issue fresh
securities to existing shareholders as on record date. The rights are
normally offered in a particular ration to the number of securities
held prior to the issue. Rights issue can be used by companies to
raise capital without diluting stake of existing shareholders.

4. Preferential Issue:
Preferential issue is an issue of shares of a listed company to select
group of persons, being neither a rights issue or public issue.
Preferential issue can be used by companies to quickly raise
capital, subject to compliance with Companies Act and SEBI
regulations.
4. Private Placement:
Private placement is an offer of shares of a company to a select
group of persons through issue of a private placement offer
letter.

5. Qualified Institutions Placement:

Qualified institutions placement is private placement of equity
shares or convertible shares of listed company to Qualified
Institutions Buyers as per regulations prescribed by SEBI.
How a Company can Issue Shares

1. Issue at Par:
Shares are deemed to have been issued at par when
subscribers are required to pay only the amount equivalent to
the nominal or face value of the shares issued.

2. Issue at a premium:
If the buyer is required to pay more than the face value of the
shares, then the share is said to be issued or sold at premium.
Issue at a Discount:
If the buyer is required to pay less then the face value of the share,
then the share is said to be issued or sold at discount.

Issue od Sweat-equity Shares:

These are the equity shares issued by the company to the
employees or directors at a discount or a consideration other than
cash.

Bonus Shares:
Issued to existing members of the company free of charge.
Payment of Commission and brokerage
A company may enter into an underwriting or brokerage agreement for the
sale of its shares and debentures. An underwriter guarantees that if the
public do not take up all the shares, the underwriter will himself purchase
the remaining shares and thus the company is able to obtain subscription for
all the shares issued.
The company undertakes to pay an underwriting commission for the
services rendered by the underwriters. According to Companies Act,
underwriting commission should not exceed 5 per cent of the nominal value
of a share and 2½ per cent in the case of debentures.
A brokerage contract is different from an underwriting contract. A broker
undertakes only to find buyers who are willing to buy shares and debentures
and does not guarantee the sale of a specified number of securities (shares,
debentures). Thus, if shares and debentures could not be sold by the
company, the broker will not buy the securities which have not been
subscribed for.
Buy-Back of Shares

The repurchase of outstanding shares by a company

in order to reduce the number of shares on the
market. Companies will buyback shares either to
increase the value of shares still available, or to
eliminate any threats by shareholders who may be
looking for a controlling stake.
Reasons for buy-back of shares
Attempt to boost earnings per share (EPS): Share buyback reduces
outstanding shares in the market.
Reward shareholders: distribute excess cash to shareholders because
the tender offer is usually more than the current price.
Undervalued shares: At times when the company feels the shares are
undervalued, a share buyback is used to pump up the stock price,
which acts like a support or new base for the stock.
Tax advantage: Since dividends are taxed at higher rate than capital
gains, companies prefer buyback to reward their Investors instead of
distributing cash dividends, as capital gains tax is generally lower. At
present, short-term capital gains are taxed at 10% and long-term
capital gains are not taxed while DDT is 15%.
To pay surplus cash not required by business.
Conditions of Buy-back
 The buy-back should be authorized by the Articles of
association of the Company.
 A Special Resolution have to be passed in the General
Meeting of the company authorizing the buy-back. In the
case of a listed company, this approval is required by means
of a Postal Ballot
Exception: The buy back can be made by a Board Resolution If
the quantity of buyback is or less than 10% of the Paid up
Capital and Free Reserves.
Condition: Similar Buyback i.e. by passing Board Resolution
shall not be made in the next 365 days.
Limit on Buyback by passing SR: The buyback (by
passing SR) shall not exceed 25% of aggregate of Paid-up
Capital and Free Reserve.

Time limit for completion of buy-back: Buyback shall be

completed within 12 months from passing of SR or Board
Resolution , as the case may be.

Debt-Equity Ratio: The ratio of the debt owed by the

company is not more than twice the aggregate of capital and
its free reserves after such buy-back; i.e. not more than 2:1.
 Fully paid-up Shares: All the shares for buyback must be
fully paid-up i.e. partly paid-up shares not allowed.

 Declaration of Solvency: The company shall file with

the Registrar a declaration of solvency stating it will not be
rendered insolvent within next 1 year.

 Prohibition on further Issue of similar shares for the

period of 6 months.
 Prohibition of Buy-back in certain Cases
(Sec. 77 B) of Companies Act, 2013
No company shall directly or indirectly
Purchase its own shares
i. Through any subsidiary co. including its own subsidiary
company; or
ii. Through any Investment co. or group of Investment co.; or
iii. If the company has not complied with the provisions of-
*Sec.159 (filing of annual return)
*Sec.207 (Payment of dividend within 30 days)
*Sec.211 (Annual accounts to present True and Fair view)
iv. If any of the following defaults are subsisting:
*Repayment of deposit or interest payable thereon;
*Redemption of Debenture
*Redemption of Preference Shares
*Payment of dividend to any Shareholder
*Repayment of any term loan or interest payable thereon
to any Financial Institution or Bank.
How Companies Perform a Buyback
1. Shareholders might be presented with a tender offer, where
they have the option to submit, or tender, all or a portion of
their shares within a given time frame at a premium to the
current market price. This premium compensates investors
for tendering their shares rather than holding onto them.
2. Companies buy back shares on the open market over an
extended period of time and may even have an outlined
share repurchase program that purchases shares at certain
times or at regular intervals.
New Financial Instruments

Capital market refers to a type of financial market, where

individuals and institutions are trading in financial securities.
Public and private institutions or organizations usually list
their securities for selling among investors and for raising
their funds. This kind of a market is made for both primary
and secondary market. In this market, long term maturity
instruments are listed, which have a period of more than one
year. Capital market has various instruments for investment.
Shares
Shares are a unit of ownership in an organization or corporation. It
is a part of the company’s capital. Those individuals who are getting
shares from any company, are called Shareholders. When a
company wants to borrow and increase their capital, they issue
their shares in the stock market (exchange) for their investors.
However, companies also require to refund the amount from their
Net Profit. Therefore, shares play a significant role in the lives of
companies and investors / shareholders. Companies can issue two
types of shares, which they offer to investors/shareholders. The two
types of shares are:
(a) Equity shares
(b) Preference shares
Bonds
Bonds are issued by the banks, organizations and financial
institutions. They issue bonds for getting an amount of money  from
public (as a loan) and commit them a refund with an actual interest
and within a maturity period. They issue their bonds for financing
their capital expenses and their various projects or activities.
This is one of the most frequently used methods for increasing their
capital and profits. When companies offer their bonds to public,
they define a specified interest rate and maturity period in an
applicant form.
Bonds have various types( i.e. risk free bonds, high interest bonds,
etc.) and different companies issued  various types of bond to public
Debentures
Debenture is an instrument which is used by the Corporations and
Government for getting a loan from public and it is given under the
company’s Stamp Act. Corporations and Government can secure
 their debenture on company assets which it issues as long term
loans. In Debentures, companies are required to announce a fixed
return at the time of issuing.
Therefore, holders know that, how much amount they will get in
future by issuer. Debentures have various advantages for holders and
issuers. It implies that holders know that how much amount they will
get in future, therefore they do not worry about their payment and, in
general, debentures are freely transferable by their holder to others.
Therefore, holders have a right to transfer their shares to anyone
before their redemption.
Fixed Deposit
Fixed Deposit is that kind of bank account, where the amount of
deposit is fixed for a specified period of time. All Commercial banks
are given these opportunities to their customers for opening a fixed
account in their bank. In a Fixed account, the amount of deposit is
fixed, which means we cannot withdraw an unlimited amount from
this account, therefore it is also called a Fixed Deposit.
If an account holder wants to withdraw a small amount of money
from their account, then he will require closing of the Fixed deposit
account. The main purpose of account holders to open this account,
is to earn interest money from their actual money, which is given by
the banks during a specified period of time.
Foreign exchange market
(Forex market)
Forex is one of the most biggest investment markets in the world and it is a huge
platform for investors for their investment. There are various forms of
currencies included for trading on international level. The investors invest their
money on the value of  currencies fluctuation because of variation in the
economic position of countries and entire world economy.
In the Forex market, we are dealing with different currencies of countries. We
are not dealing with only one currency at one time, we have to deal with a couple
of currencies at one time, for example USD/INR. In the example, the left side
currency is called a Base currency and the right side currency is called a
Quote/Counter currency.
A price of one currency expressed in terms of the currency of another country is
called as the exchange rate. For example, the ratio of both currencies is 53.9,
which implies that one unit of US Dollar can buy or equals 53.9 Rupees of India.
In that case, the US Dollar is a base currency and the Indian Rupee is quote
currency.
Gold ETF
Gold ETF is one of the most popular funds as it does not get
influenced due to stock fluctuations or inflation. Gold ETF fund is a
fiscal instrument which works as a mutual fund and whose prices
are depending upon the market price of gold. When the market
price of gold increases, gold ETF prices also increase.
The services of Gold ETF fund transfers is available in few stock
exchanges, such as Mumbai, Paris, Zurich and New York. Gold ETF
fund provides a variety of advantages to their holders, such as Low
cost, Tax advantage, Gold purity, there is no  need to worry about
safety, Issue of selling gold bars and also beneficial in short term
investments.
Thank You