pocket book on finance
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CONTENTS
I. Introduction 3
II Types Of Business Organisation 5
III The Trade License 38
IV Sources Of Funds 40
Investment banking, Personal Banking, Insurance, Stock market,Mutual Funds, Money Market and Secondary Market and IPO(Initial Public Offering)
Stock markets, IPOs or Initial Public Offerings, Fixed Deposits,Secured / Unsecured Deposits, Mutual Funds, Derivatives,Commodities Exchange, Money Market and Primary andSecondary Markets
V Provident Fund & Employees State Insurance 65
VI Service Tax 71
VII How To Read A Balance Sheet, Trading and Profit 79
And Loss Account, Some Important Ratios
Evaluation Of The Cash Flow Of A Company, Evaluation OfFinancial Reports, Balance Sheet, Profit & Loss Account AndOther Statements From The Point Of View Of Shareholders OfA Company
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A Little Of Project Reports
VIII Income Tax & Wealth Tax 105
IX Excise Duty 116
X Professional Tax 119
XI VAT & Central Sales Tax 120
XII Glossary 124
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CHAPTER I
INTRODUCTION
WHAT IS THIS BOOK ALL ABOUT? WHY SHOULD YOU BUY IT?
As the name of the book suggests it is meant for laymen who are not
acquainted with the technicalities of finance or the intricacies of fiscal laws like the
Income Tax Act or the Service Tax Act and others. This small book will of course not
make somebody a professional, but for the newcomer it will provide just that amount of
information, knowledge of which will cause the person to take pre emptive action by
taking professional help to comply with regulations and prevent negative consequences
from legal infractions or non compliances.
Every professional be he a Chartered Accountant or Lawyer or any consultant will tell
you that most clients will come up with questions such as
(a) For my new project should I do it as a partnership firm, proprietorship concern or
an incorporated company?
(b) I am going to form 3 proprietorship concerns, how do I get PAN cards for them?
(c) When Do I file my income tax returns?
(d) Am I required to pay Advance Income Tax?
(e) What kind of funding should I try for with respect to my new project
(f) What kind of facilities can be had from banks
(g) Give me some understanding on this Balance Sheet
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(h) Are my employees eligible for Provident Fund or Employees State Insurance
benefits?
After going through this book the reader will have answers to all these questions and
more, and armed with this kind of knowledge he or she can take part in informed
discussions with his/her consultant and the quantum of time required to be spent with
the professional will be substantially reduced.
To sum up, knowledge acquired from this book will make a person aware of finances
and need for adherence with financial laws and therefore he or she will take action to
ensure compliances before being sucked into or being bogged down by legal pitfalls
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CHAPTER II
TYPES OF BUSINESS ORGANISATIONS
Well, you have decided that you would like to go to business on your own and not work
for anybody else. That is not a bad idea because doing a business of your own means
being your own boss and you are responsible for your actions particularly as to whether
you make a success out of your efforts, and if unfortunately no, in most cases we dont
think it will serve any purpose to blame anybody else but yourself. So, as a general rule
of thumb before getting into anything new in the business world, the best thing would be
to have a preliminary or an initial discussion with your lawyer or Chartered Accountant
about pre-commencement things to be done before you actually start making income and
collecting money into your bank account.
The first thing to do here is decide the type of organisation
that you are going to choose to be the engine of your business efforts. There are many
options available in this regard and the listing below will give the ones that are generally
most popular in India and the order in which they are given is more or less the order of
simplicity with which you can get started using that particular type of organisation:
1. The Proprietorship concern
2. The Partnership concern
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3. The Limited Liability Company
4. The Co-operative Society
5. Societies incorporated under the Societies Registration Act
Now, in the following sections we shall discuss the important features of each type of the
above forms of organisation which may help you to decide what should be done and
would help you in your discussions with your consultant or Chartered Accountant or
lawyer in this regard.
What is the proprietorship concern? This is the simplest form of organisation
available and the name itself suggests what the organisation is all about. It means that you
are the sole owner of this type of business. There is no one else with whom you are
obligated to share the profits, everything is yours, you are liable for the Income Taxes
that may be due because of the income that you earn out of the success of this business
and you are answerable for anything that may need to be said to any authority in any
matter concerning the conduct of the business of this type of establishment.
So, how do you get started to form a proprietorship concern? A couple of years ago
it was very simple. In the beginning, you had to decide what would be the name of your
concern.. Well, you could select any name you like, but there are certain restrictions as to
what would be allowable under the law. For example, you cannot use a word or a
collection of symbols or alphabets that may not have any plausible meaning in that
sequence, where the word or other sequence is a trade mark of anybody. That is, it is the
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trade mark of some commercial organisation and once it is there, they have exclusive
right to the use of that name or mark. Let me give you a simple example of things that
happened some years ago. In those days and even now when you want to make a
photocopy you say Lets get a Xerox of this document or else Lets make a Xerox of
these documents. So, many businesses sprouted all over the country and they used the
word Xerox in the name of that establishment and prominently displayed it in the sign
boards outside their business premises. For example, there could be Agarwal Xerox or
Mehta Xerox or anything else that could use this word Xerox.
Now, it so happens that the word Xerox was the subject
matter of a copyright or a trade mark of Xerox Corporation and for a long time, people in
India especially in the metros, had made the use of this word in the name of their
organisation without inviting the attention of anybody else. One day a newspaper
advertisement appeared, an ad issued by a firm of solicitors probably, where it informed
people that it was illegal for anybody to use the word Xerox in the name of an
organisation and anybody doing so would be required to stop it and change their name to
something else. Of course, the first advertisement did not warn of any dire consequences
but everybody could guess of things that would have come if they didnt do the necessary
amendments in the name of their establishment. So, that is one restriction while selecting
the name of your organisation, but I have seen many organisations that have the same
name and I have not come across of any instance where there has been made any legal
issue of such duplication in the commercial name of their organisation. Though
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it would be interesting to see what would have happen, if a cheque belonging to one
Company went off to another Company of the same name and that kind of a case I
havent heard of as yet too.
So, having decided on the name of the Company, say for example X Y Z & Co,
remember you cannot use Private limited or those famous abbreviations Pvt.Ltd. which
many youngsters find difficult to pronounce without a vowel anywhere in sight. Why
cant we use those words? We will get to know of that when you come to the section on
Limited Liability Companies.
Having decided the name of the business, in earlier
days establishing a proprietorship concern would have been as simple as say for example
making a rubber stamp of your Company, in this case X Y Z & Co. with a gap of about a
centimeter and then the famous words proprietor and you are signing in between after
impressing the stamp on any document. So, that is your rubber stamp over there but there
could be pitfalls in doing a simple thing such as making a rubber stamp. It generally used
to cost Rs.20 earlier but now I think prices have gone to Rs.40 plus, at least in the
biggish cities, and may be in the metros even more. Of course, it depends on the number
of words that there will be on your rubber stamp. Then you take delivery of your rubber
stamp, but before that make sure there is no spelling mistake over there.. These days
however, it is not just sufficient to have the rubber stamp only, you would be in most
cases be in need of a Trade Licence . Anyway, those who would like to know about the
trade license, which is the subject matter of Chapter III, you could fast forward to that
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chapter and read something about it and rewind back to here, to continue about the
proprietorship concern.
The Trade License is important for many things, for many reasons. In many cases postal
authorities will not deliver letters to your office unless you have a Trade License,
evidencing the establishment of the concern. The courier services do not insist on this
kind of a trade license. They are commercial people more interested to deliver their
letters and getting a return out of such service. The trade license would also be required
while trying to open a bank account. In the earlier days, opening of bank account was not
very difficult, you just had to go with your rubber stamp to the bank, fill up the form then
put your signatures in the place given for specimen signatures in the account opening
application, introduce yourself by someone who has an account with the bank and within
an hour or two, you will probably have your cheque book and your pass book ready for
you. These days however, when you try to open a bank account even if it is a
proprietorship concern, you could need an address proof and that kind of an address proof
would be a telephone bill or an electricity bill or a pass book, if you have an account in
another bank. Apart from this, the bank could ask you also for your PAN Card, though
we will talk about PAN Card later in the chapter on Income Tax (chapter VIII).
Let us add here that in the case of proprietorship concern, you would not have the PAN
Card in the name of your business say for example XYZ and Co .but the PAN Card
would be in the name of yourself as a proprietor i.e. it will be in your individual name
and that would be accepted without question by anybody. So, if you have 10
proprietorship concerns you will not be having 10 PAN Cards, but just one in your own
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name. And again you will not have 10 Income Tax Returns for your 10 proprietorship
concerns, but there will be one consolidated return containing the results of clubbing all
the incomes whether plus or minus of all the different organisations and other incomes
which may be generated from non-business sources. So, this is how a proprietorship
concern is established and you could do it very fast. You could do it even in a day though
opening a bank account will take sometime nowadays but this kind of a concern is the
easiest to establish.
You are now ready to get into the actual business of getting
orders executing them and letting the revenues roll in, though of course there will be
matching expenses, which hopefully will be much lower then what is coming in.
At the outset, you could possibly require registration in certain
departments of the Government depending on what type of business you are in, for
example, if you are in the business of selling goods then you could possibly require a
sales tax registration or VAT registration all of which will be discussed in one of the
subsequent chapters that will be coming up later. Again for example if you are starting a
hospital or a nursing home you could possibly be required to be registered or have some
kind of a license from the Health department and if you are an educational institution you
could possibly be registered with the Education department or with the All India Institute
for Scientific Education and any other statutory body or authority, though we are not
going to touch these things in detail over here as they are outside the purview of this
book.
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You can of course enter into an agreement on behalf of your proprietorship concern in the
name of the Company, i.e. in the name of the business organisation, you could make a
rent agreement if you are taking some space in rent or you can purchase your house or
office space in the name of your proprietorship concern and you could get electrical
connection, water connection, telephone connection in its name too. You could then
prepare a project report depending on whether you require it to be submitted to someone
who could possibly be supporting you either by giving you orders or he could be funding
you. He, she or the funding organisation could be giving you the finance to establish the
organisation, acquire the assets, do the trial runs, get the working capital assets in
position so that your ready to start manufacturing if you are a manufacturer or do the
necessary stocking so that you can start making sales, and anybody who comes looking
for a particular product in your organisation would not have to go away because you
didnt have that kind of a product in your inventory.
Financial Conduct
Even regarding financial conduct, the proprietorship concern is probably the least
restrictive in that it gives you sufficient leeway to do as you please. For example, if you
need to go to a marriage of your sister or your wifes sister and you need to buy her an
expensive present all you could do is probably write a self cheque and withdraw the cash
and show that amount in your individual name as withdrawn by the proprietor and it is
not likely to be objected by anyone except, maybe your banker, if you have borrowed
money a lot and he says that you are drawing money from his loans and using it for non-
business purposes.
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As long as you are using the money for personal reasons out of what is surpluses
generated by you in the course of business then there will probably be no
one who could object to that, provided of course you do pay your taxes which of course is
something that we all have to live with and which is of course expected from all of us.
There are certain situations where the proprietorship concern could be a bit of a risk. This
is because it is oppositely positioned visa vis the limited liabity protective cover
available to body corporates or Limited Companies, which we shall discuss in the
subsequent section of this chapter. Now, what is this? What it exactly means is that when
you have a proprietorship concern your liability is not limited i.e .you may be liable to
pay money to people because of certain circumstances, and proceedings can be drawn
against you, with respect to all your assets whether they belong to the business or not.
Now, you may say that if you dont have any loans then the risk factor is eliminated,
which is true, in fact to a very high extent it is eliminated but there are still circumstances
where certain liabilities could occur. For example, if for some kind of mis-happening,
somebody in your restaurant or in your hotel gets sick because of some food poisoning or
the other ,then if legally it is proved that your organisation was responsible for that mis-
happening, you could be liable to compensate the person or class of persons for damages
that they may have suffered because of the physical distress that they may have had to
undergo. In such cases and in cases for example, your business has ground to a halt,
it could be reasons which may not be your fault, for example, say a new research break-
through results in a competing product which has more attractive features, more utility
value and can be manufactured at a much lower cost than what is possible with the use of
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your product, then it is very likely that your business will very fast take a dip and unless
you re-define your strategy and go to some other product line, you could be out of
business. In that case, if for example you are indebted to banks or financial institutions to
a large extent, then things could be bad because they would take steps against your
properties and try to appropriate those assets after obtaining a court order and use the
funds obtained by realizing the assets against the amounts due to them i.e. to the financial
institutions or the banks. Now, if you are lucky and the sale of assets is sufficient to repay
what is owed to your lenders then the balance, if any comes to you and may become
available to you for starting some other business venture. If however, there is a short fall
then your lender can proceed against your personal assets and that gives a queasy feeling
to a lot of people and that is the reason that people like the Limited Liability Company.
Now, they could go for your car, they could go for your jewellery and if that is not
sufficient to liquidate those debts, then they can go for your house and sell it, adjusting
the proceeds against their debts and even if that is not sufficient to repay them then in
most cases it is a full stop to their efforts and there is little much they can do except lick
their wounds for sometime and forget the whole thing as some kind of a bad experience,
the lessons of which would prevent them from happening again in the future. So, things
could be really bad if you cannot pay out your loans and realization of your assets is in-
sufficient to clear all your liabilities, then in the worst case scenario you may be
completely out of all your assets
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The Partnership Concern:
The next form of organisation which is one step higher up in the ladder of complexity
associated with its creation is the firm or partnership concern. Well, everybody knows
what is a partnership, in that it involves more than 1 person who come
together to carry on the business venture whether it is a service organisation or a trading
organisation or a manufacturing organisation or any other business that there could be.
There is a law i.e. the Indian Partnership Act which governs the formation of partnership
concerns, the legal restrictions regarding the code of conduct, both financial and
otherwise, there are specifications as to how the constitution of the partnership can
change, be amended, added to and sometimes totally dissolved i.e. taking the partnership
concern out of the business by liquidating its existence. Well, in a nutshell we can say
that a partnership is a joint effort of persons who come together, where they have agreed
to do business jointly and decide that they would share the profits of their efforts in a
ratio that is decided in the outset i.e. at the time of the formation of the firm and the
corresponding ratio in which they stand to loose because of the depletion of the resources
of the firm because of negative business happenings. Well, a partnership concern too is
not very difficult to form. In most cases, it involves just the creation of a partnership deed
i.e. a legal document which specifies the terms of the partnership. First of all it specifies
the name of the persons who enter into the partnership, then there could be a specification
regarding the name of the partnership firm, the business of the partnership could be
specified in this deed and there could be specifications regarding the sharing of profits,
i.e how it will be shared by the partners in what proportion and the ratio in which losses
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Having drawn out the partnership deed, it is just a matter of typing it into an appropriate
stamp paper, at the current rate you need a Rs.100 stamp paper on which to type in your
partnership deed and for additional copies you could do it in Rs.10 or Rs.20 stamp paper
depending on which one is available because sometimes there are pretty prolonged
shortages in the availability of stamp papers of certain denominations. Of course this
deed of partnership has to be signed in each page by all the partners and in the last page it
has to be signed by all the partners too, but the deed has to be witnessed by at least two
unrelated persons who shall put their signatures and specify their names in full
preferably giving their addresses.
So, this is the basic partnership deed but you could take it one step further, in the sense,
that you could record the creation of this deed with the government authorities, which is
generally the Sub Registrar of the concerned district where you have drawn up the
partnership deed. In this case you are supposed to sign the partnership deed in front of
the Sub Registrar of the district and the partners too should be identified by a lawyer,
who puts his signature on the document as having vouched the identity of the concerned
partners who constitute the signatories to the indenture.
So, this is a registered partnership deed which may not be necessary, but which some
people would like to do and some in cases particularly now-a-days it is required if you
want to do an additional registration which is required to be done under the Registrar of
Firms and Societies of the concerned state. We shall take up this method a little later.
Having registered your partnership deed, the original then remains in the custody of the
Sub Registrars office and since you would always require a copy of your deed to be
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submitted to different places, for example, the most likely first use would be the opening
of a bank account, then your banker would naturally insist on the partnership deed to see
the authorization for opening a bank account, and as said earlier, who are the people who
are going to sign the account opening forms and thereafter sign the cheques withdrawing
money and making payments to people. So, certified copies will be needed to be applied
in the Sub Registrars office as and when required and in most cases at the time of the
registration of the deed itself, certain certified copies are taken to take care of all possible
combination of persons who may require the partnership deed. However, in most cases,
people who need the deed may ask for a photocopy of it, which again is certified by one
of the partners by a rubber stamp and at best the person who uses the partnership deed in
a photocopy form will say, May I have a look at the original which is available with you
or with the certified copy given by a Sub Registrars office and after having been
satisfied with himself that the photocopy is in agreement with the original, he or she
would probably return it to you.
Regarding the registration of the firm with the Registrar of Firms and Societies, there is
generally a form to be filled up in this regard.. In the earlier days, partnerships were
almost never registered under the Registrar of Firms and Societies but now many banks
which may lend money to the firms, insist that such firms should be registered with the
Registrar of Firms and Societies. And as indicated in the form all the partners have to
sign this partnership registration form and their signatures have to be certified generally
by a CA or a lawyer or it could be a Gazetted Officer.
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As stated earlier, in the case of partnerships like proprietorship concerns you have to
decide on the name and the same restrictive regulations apply in the selection of the name
as they do to proprietorship concerns and there is no difference between the two forms of
organisation in this regard. There could be two firms with the same name and I know of
firms which have actually been formed with identical names. However, it must be
understood that unlike the proprietorship concern, where it is the proprietor who is the
sole reason behind the organisation, in the case of partnership firms, it has a distinct legal
identity i.e. in courts of law proceedings can be drawn against it separate from its
promoters i.e. the partners. The first difference that may strike you in the case of a
partnership firm is that you need to have a PAN Card in the name of the firm which is not
possible in a proprietorship concern. But if you would have the Pan Card in the name of
the firm and since the firm is a distinct legally recognized organisation, unlike a
proprietorship, there will be no photograph over here and however much, you would like
to have a photo of an attractive partner of the concern, I am sorry to say that that would
not be possible though it may be good for business. The PAN Card would of course state
the date of incorporation of the firm which in most cases would be contained in the
partnership deed and there would of course be no fathers name over here because the
concern does not come into existence from natural procreational procedures.
So, that is the partnership deed that you have made and now you are ready to do
business. Like the proprietorship concern, the first thing would be to have a Trade
License and once you have the trade licence, you could open a bank account, apply for
loans, go to the post office and ask your friendly postman to deliver letters to the firms
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recognize it as a deductible item from the income of your business and to that extent the
firms income that would be subject to tax would get reduced.
1.The sleeping partner
As the name suggests is a person who is a partner in the firm but who does
not actually take part in the day-to-day running of the business or even otherwise not at
all involved in the conduct of the business of the firm. Such a person may have invested
cash or other assets that are required to do the business of the organisation or could be a
person whose reputation increases the desirability of the concern to potential customers
who may be swayed in your direction away from competitors because he has that
appeal that makes him an asset to your firm.
2.The Managing partner
As the term suggests the managing partner is a person who is entrusted with
the management of the affairs of the firm. Generally, there is not more than one
managing partner though there could be and in most cases they are generally
compensated for their efforts by giving them an extra salary that is deducted from the
profits of a firm and the residual that is available is then divided amongst the partners in
the agreed profit sharing ratio.
3.The Financial partner
A financial partner would be, as is obvious, someone who has invested
money required to carry on the business and who is not involved in the day-to-day
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some point or the other. In that case, in most cases the legal heirs stand to get the
deceased partners share collectively, to get whatever would have been due to him from
the partnership firm if he had decided to quit it and I guess that is how accounts would be
settled in the case of the death of a partner.
3.The Limited Liability Company
This is the form of organisation which would make the share holders of a Company
happy, which you as the promoter would be the principal one and you would be
protected from the risk associated with unlimited liability. This is the Limited Liability
Company and the word limited is always there at the end of the name of your corporation
and this brings a sense of security in investors or equity share holders because here is a
company where if something goes wrong then the risk of the investor or the share holder
is limited to just those amounts which he owes to the company in respect of amounts due
from him as his contribution to the shares of the company. As said earlier, unlike in the
proprietorship concerns and partnership concerns, here if because of some business
disaster you are out of it and you have heavy debts then your borrowers can only proceed
against the company to the extent of available assets and have those assets realized and
the proceeds adjusted against their loans, and if there is any surplus left that could be
utilized in the appropriate manner as allowed by the Companies Act, which determines
the way in which the company is to be administered and its business conducted.
Therefore, the amounts due are to be paid from the realizations of the sale of companys
assets and if they are insufficient to repay the amounts due to the lenders or money of to
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write a self cheque and withdraw it from your companys account and use the money for
personal reasons. There are restrictions as to how you will take money out from a
corporation for your personal benefit. We will come to this point later, after you had a
little information about how we can go about forming a company and how expensive it is
and how long it takes. Before we go into the details of this, we would like to point out
certain things that are important to know regarding the limited liability company.
In fact, there could be 2 types of limited companies, there is a third one too, which is very
rarely used but there are essentially 2 types of a company namely:
1.Private Limited Company
2.Public Limited Company
As the word private in Private Limited Company suggests the
share holdings in Private Limited Companies are generally restricted to a limited number
of persons consisting generally of relations, friends and business associates who are
known to each other or professionals who come in to the conduct the business in an
efficient manner. And in the case of a Private Limited Company you must have a
minimum of two share holders and a minimum of two directors and the total number of
share holders shall in no case exceed 50, except that in certain cases employee
shareholders of the company may not be counted in determining whether the upper limit
of the 50 shareholders has been crossed or not.
Now, the other type of company that is used is a Public Limited Company, where the
word Private does not precede the limited at the end of the name. The essential
ingredients of a Public Limited Company are that it must have a minimum of seven share
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holders and 3 directors and the upper limit of the shareholder count of 50 that is
applicable to private limited companies is over ruled here. In the case of private limited
companies the share holdings of persons may not be transferred to the persons who may
not be allowed by the Board of Directors of the company or by the document known as
the Articles of Association of the company which we shall discuss in detail later. This
document, the Articles of Association is the listing of the provisions which have to be
adhered to while conducting the management and business of the company. In case of a
public limited company, the shares are freely transferable and the directors or the share
holders cannot block the transfer to anyone they dont approve and that is you cant
blackball anyone who you dont want to be a shareholder of your company. Another
important thing about the public limited company is that it can publicly raise money from
investors by following the necessary provisions, the legal provisions, in this regard and
which cannot be done by a private limited company.
Another interesting ingredient which has been relatively recently incorporated in the
Companies Act is that the minimum paid up capital of a company, whether private or
public must be at least Rs.1,00,000 which was not the case some years back.
So,what is this body corporate? It must be remembered that a
company like a partnership concern has a distinct legal existence. You could refer it to as
an artificial juridical person which can be proceeded against by the law and which is
responsible for the conduct of its affairs or complying with various provisions of the laws
that may be applicable to corporates, like for example The Service Tax Act, The
Employees State Insurance Act, The Workmens Compensation Act or other Acts. The
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share holders too are distinct from the company but they have the ultimate say
in how the business actually has to be conducted ,though the share holders are not
directly involved in the day-to-day management of the business. In fact, all companies
are managed by a Board of Directors and as told earlier there should be a minimum of 2
directors in case of private limited company and 3 in the case of a public limited
company.
How to form a limited liability company?
The clauses below give the steps involved in the formation of a limited company
whether private or public limited:
1. Decide on the name of the company, select three or four additional alternative names
and have the name approved by the ministry of the company affairs.
2. Decide on the value of the authorized capital (all this will be discussed later).
3. Decide on the first directors and the promoters of the company.
4. Draft the Memorandum of Association and the Articles of Association and have them
printed.
5. Have the Memorandum and Articles signed by the promoters of the company and then
have them stamped with adhesive stamp of the requisite amount.
6. Make ready the form nos. 1, 18 and 32.
7. Have the necessary Memorandum and Articles and the forms filed in the ministry of
company affairs website and pay the requisite fees.
8. Go with an authorized professional to the appropriate registrar of companys office and
have the companies registered.
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The Name Of The Company
The name of the company has to be approved by the department of company affairs
through the registrar of companies and there are certain restrictions in according the
availability of a particular name to the company. For example if your company is small as
indicated by the size of the authorized capital, you may not be allowed to use words such
as enterprise or corporations which brings images of a huge size. When deciding about
the name of the companies select three or four additional names in case the first and
second are not available then you have alternate names which could be approved
provided they are available. Remember in the case of limited liability companies no
duplication in the name is allowed.
The Authorised Share Capital:
The authorized share capital of a company represents the upper limit of the extent to
which shares can be raised or issued by the company. Therefore, if your authorized
capital is Rs.5lakh then you cannot have more than Rs 5 lakh worth of shares in the
company. So, when deciding what should be the authorized capital of the company, make
an assessment of how much would be necessary to be raised by the company as share
capital. This would depend on the magnitude of the project cost in order to commence
the business of the company. Another thing, registering a private limited company is
expensive and as the authorized capital increases the fees payable for registration of the
company also increases. There is no need to have a limited liability company with an
authorized capital of 50lakhs if you need only 10lakhs as equity share capital. So, this is a
point that you could discuss with your chartered accountant or lawyer or consultant in
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So, it can be said that the share holders control the company through the directors they
appoint. And another appointment that the shareholders make is the auditors of the
company. who will verify and audit, the accounts of the organisation annually and the
board shall have that audited accounts in the form of the profit & loss account and
balance sheet, submitted in a meeting of the shareholders at the Annual General Meeting.
The Annual General Meeting:
The agenda for this meeting mostly comprises of election of directors, adoption of
auditors report and discussion on the accounts statements, the declaration of dividends
which is a source of earning in respect of shares held by the share holders of a company,
appointment of Auditors. Apart from this any other matter can be discussed with the
permission of the chairman of the Annual General Meeting.
The financial Conduct:
As we have seen earlier in the case of proprietorship and partnership firms withdrawing
money from the business is as simple as writing an account payee cheque or a self cheque
to the person who needs the money and thereafter, there is very little that any one can
object to such a course of action. As stated earlier the only person who is likely to object
is if a lender thinks that his money, the money that he has lent is being used for personal
considerations, then that would be a legitimate injunction against that kind of financial
conduct.
However, in the case of limited liability company the shareholders can get
salaries only if they are directors of the company and that too involved in the
administration management affairs of the business of the company.and in which case the
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The essence of a co-operative society is that certain persons get together for mutual
benefit by co-operating with each other in the pursuance of certain business or
commercial activity. However, there is a difference in the shareholders right from that of
a limited liability company in the sense that in a limited liability company your voting
rights in the affairs of the company depends on how much shares you hold in the
company. The more shares you hold the more votes you have with you to swing decisions
your way. However, in the case of a co-operative society irrespective of the share
holdings of individual shareholders their voting right is the same for everybody.
Similarly, the Board of Directors or the management of a co-operative
society is generally statutorily required to be changed after a specified period of time.
The time period is specified in the concerned Act and the government of the particular
state has a say in the composition of the Board of Directors of the co-operative society.
Like the limited liability company the co-operative society is a taxable
entity on its own and is liable to pay income tax in respect of profits earned by the co-
operative society in the course of its business.
A Society Registered Under The Societies Registration Act.
Non-governmental organisations or NGOs for short are combination of people who
come together to carry on some object of public utility and earning profit is not part of
their objective except that it could be incidental to the carrying on of their normal
activities.
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look at it to find it if it is valid for the current year. So, that is a trade license a very
simple document and whether you are a partnership or proprietorship or limited liability
company or co-operative society or any other organisation you are liable to have a trade
license.
The trade license has to be renewed annually.
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Chapter IV
Sources Of Funds From Banks And Other Financial Institutions
Also Investment banking, Personal Banking, Insurance, Stock market,Mutual Funds, Money Market and Secondary Market and IPO(Initial Public Offering)
Stock markets, IPOs or Initial Public Offerings, Fixed Deposits,
Secured / Unsecured Deposits, Mutual Funds, Derivatives ,
Commodities Exchange, Money Market and Primary and
Secondary Markets
Suppose you have decided to commence business on your own, there is a likelihood that
you may not have all the funds that may be necessary to make your venture operational.
In that case, apart from your own funds, which is called your capital contribution to your
business, you will need to borrow funds from elsewhere. You may decide not to borrow
from your friends or relations in which case a more agreeable source of funds would be
people whose business it is to provide funds for business such as banks and other
financial institutions.
Some Examples OF Borrowings Possible From Banks And Financial Institutions
Now, there are various types of funds that are available from banks. Let us discuss this in
a little bit of details so that it can give you an idea of what are the facilities that can be
made available to you .
Term Loans
In order to purchase the fixed assets for a business, banks provide term loans which can
be secured or unsecured. A term loan as the name implies is a loan which is repayable
over a number. of years in either equated monthly installments or quarterly installments
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or by bi-annual or annual installments. For example if you are in the business of taxi
hire, you will need money to buy taxis in which case banks can provide you the necessary
term loan to buy those fixed assets that you require for the business. So, if you are a
manufacturer, you may require funds for buying plant and machinery, if you are a non-
manufacturing concern you may still require a term loan, for example for buying
computers, furniture and fixtures, Air Conditioners, and other office equipment and
fixtures such as showroom facilities for stocking of goods for retail sales or wholesale
marketing The term loan carries a fixed rate of interest and it is generally the case that if
your total cost of plant and machinery is, say Rs.5 lakhs, it is very unlikely that you will
get all the Rs.5 lakhs from the bank. They would insist on a margin to be contributed as a
owner of the firm and this margin percentage varies according to the policy of the bank.
It can be as low as 25% or it could be as high as 40%-50%. In this case if the bank insists
on a margin of 25% then the owner will have to bring in 1.25 laks and the bank would
give a term loan of 3.75 lakhs. So, this is the term loan. It can be secured and it is
generally the case that it is secured by the assets acquired. The assets are hypothecated
to the bank or financial institution which finances the acquisition and in case you are
unable to repay the loan the bank has the option of arranging for the sale of the assets
and use the proceeds to be adjusted against the loan given to you and the surplus if any
left after the repayment of the loan is made over to you , or if there is deficit, call for
alternate funds from you to make up the deficit in the loan that could not be satisfied by
the proceeds of the sale of the assets. So, this in a sense in a nutshell is the term loan.
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Overdraft in the current account and cash credit:
Thesetwo types of finance, the overdraft in the current account and the cash credit are
used to finance the working capital needs of your business. Now, what exactly is working
capital. Working capital is the investment made by you in respect of goods, materials,
stores and spare parts that are required by you to make the make the products ready for
sale, or if you are a trader that amount invested by you in finished goods which you will
sell to your customers . For example to start a business and you need to stock up, say,
Rs.10 lakhs of goods in order to sell them from your retail outlet. In that case, here again
the bank will not give you a cash credit limit or an overdraft facility against a current
account to the whole extent of Rs.10 lakhs required by you. Here also they will insist on
a margin of 25% at the minimum generally, which means they would be able to give a
limit of Rs.7,50,000/- and the shortfall of Rs.2,50,000/- you have to make up from your
own resources or alternate sources of borrowings. Now, this cash credit limit or overdraft
limit is generally secured, that means the bank holds a security against the advance made
to you in the cash credit account by hypothecating the goods that you purchase using
those funds and which will be sold and the earnings then deposited into the cash credit
account and again reused to acquire fresh material. Cash credit limits and conditions are
set out in the banks sanctioning letter. If for example, they say that they grant you a limit
of Rs.1lakh, then when the cash credit account is set up and you get the necessary cheque
book to operate the account, you can write cheques to a total of Rs.1lakh and you will
have to make up any interest that may be charged in that account so that at no point of
time the balance in the cash credit account overshoots the limit set up by the bank. It is
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Letter of Credit or LC:
Now, thisis an important financing device available from banks. For example, suppose
you have an order from a party not in your state or out of where you are, for the supply
of certain of goods that you deal in, and let us assume that the whole transaction is
Rs.10lakh. Then you can make an arrangement with your customer that he should obtain
an irrevocable letter of credit in a particular bank in your name. What happens then is
that as soon as you ship the goods ordered by your customers and you submit the
shipping documents to the bank where the letter of credit has been made in your favour
then the amount due on the letter of credit , say for example Rs.10lakh is paid to you
from the letter of credit account of your customer into the bank account of your choice.
Shipping documents are railway receipts , transporters bills, airway bills along with your
invoice. On the reverse side if you are buying from a foreign seller or from anyone else
outside your town or state or even from your city then your seller who is going to sell
you the goods may insist that you open an irrevocable letter of credit in his name to the
extent of the amount due in the supply order. For example if you order goods worth
Rs.5lakh from an international seller he may insist for a letter of credit of Rs.5lakh. In
that case you open an irrevocable letter of credit in your bank on behalf of your seller. As
soon as the seller dispatches the goods to you, submits the shipping documents to the
bank which has issued the letter of credit or LC then the amount of Rs.5lakh gets
transferred to the sellers account.
Letter of credits are also in most cases secured advances given by the bank and you are
expected to repay them within a specified period, which is mentioned in the sanctioning
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the organisation and then partake in the surplus generated from such disposal and in
many cases the profits earned by the venture capitalist by using this source of fund is
phenomenal. This source of fund is generally taken recourse to by people and
organisations who may not have access to conventional sources of funds discussed in the
earlier section on the sources of funds. Typically venture capitalists are either
institutional investors or very rich i.e high. net worth individuals who have a lot of
surplus cash and use this money to invest in what could be considered to be risky
ventures but if successful the returns could be phenomenal.
ANGEL CAPITAL
Angel capital is similar to venture capital in the sense that they provide equity to firms
generally involved in a start-up business in a high-tech area and with the expectation that
with the sale of the shares through a public issue or the sale of the company phenomenal
profits shall accrue to the original investors of angel funds. Now, since the angel funds
are similar to venture capital let us look to a few important differences between venture
capital and angel capital in order to bring out the essential characteristics of each.
Angel investors are generally rich investors acting alone or in consortium and .
Venture capital on the other hand is predominantly provided by the corporate
organisations, though high net worth individuals could also be involved in providing
venture capital funds.
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In the case of angel capital the amount of investment is limited compared to that of
venture capital fund and could be as low as $25,000 to a upper limit of $100,000 and
where the investors are acting in groups the total amount of angel capital provided is
more or less limited to a value of about $1million. Venture capital on the other hand
starts from about US $500000 and can be as high as $10million and even more. In case of
angel investors they do not restrict themselves only to high-tech areas unlike venture
capitalists who more or less predominantly focus their investments in high-tech
organisations Angel investors on the other hand look more for growth and potential for
earning super profits. So, these are the essential differences between venture capital and
angel capital.
PUBLIC ISSUE OF SHARES
Unlike private limited companies public limited companies can issue shares to the public
by inviting applications where the terms of the issue of shares are set out in a document
called the prospectus. Now, the shares that investors acquire by subscribing to the public
issues are tradable in the stock exchanges because such shares are what is known as listed
in the stock exchanges. Depending on the investors mood shares can be subscribed many
times more than what the company intends to raise as fresh capital. In such a case the
surplus has to be refunded and the allotment of the shares to the different applicants has
to be done according to the guidelines of the Companies Act and the stock exchange
of India who has to be consulted before such shares are issued. Public issue of shares are
generally undertaken by companies which are big and it is unlikely that small companies
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will undertake public issue because of the cost associated with the handling of such an
issue.
DEBENTURE ISSUE
Debenture issue is another source of fund that is available to public limited companies.
Unlike equity shares that that we discussed earlier debentures are debt instruments in the
sense that people who own debentures in a company have a claim to recover that money
from the company if there is a default and such instrument is from the point of view of
the company issuing debentures a debt of that company. Therefore, debenture holders
are not entitled to dividends from the company unlike equity share holders but they are
entitle to interest specified in the contract or prospectus i.e. issued at the time of inviting
applications to acquire debentures in the company. Debentures are also negotiable
instrument in the sense that they can be transferred freely and traded in the stock
exchanges and the current holder is entitle to the redemption proceeds if the company
decides to pay off its debts under its debentures. It may be mentioned here that currently
debenture issue is not very prevalent or used as a source of fund by companies though it
used to be done in the earlier years.
FCCB or FOREIGN CURRENCY CONVERTIBLE BONDS
As the name of this source of fund suggests, money from this source is sent in foreign
currency by the person making the investment for the purpose stated in the contract
calling for the investment of money. These foreign currency convertible bonds are debt
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instruments in the sense that they are entitled to a fixed range of interest though in order
to make them attractive to the investors they are sometimes given a stake in the profits of
organisation which uses these funds. Foreign currency convertible bonds have periodic
payment of interest and as well as of principal as per terms contained in the instrument
calling for the investment of such fund. The name convertible within such an
investment source suggests that at the option of the investor after an efflux of time or the
happening of some event the investor may at his option ask for the conversion of his bond
into equity from which date onwards he would no longer be entitled to interest but he
would be entitled to other forms of profit repayments such as dividends paid by a
company and also profits also from the sale of such shares in the stock exchanges
because such equity shares would necessarily be tradable in the stock market. Another
plus point of the foreign currency convertible bond is that it is cheaper than another
source of financing that we will discuss later and that is External Commercial
Borrowings that is available to certain companies and organisations.
DEPOSIT / FIXED DEPOSIT
Companies both private and public can take deposits, sometimes also called fixed
deposits from other people where such deposits carry interest at a particular rate. The rate
of interest on fixed deposit cannot exceed 12.5% and such deposit cannot be made
repayable on demand or repayable less than 6 months or more than 36 months of their
acceptance. There is another limitation regarding fixed deposit in the sense that there is
an upper limit to which a company can accept deposits from people and other
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time but there has been various banking innovations and adaptation which makes the
personal banking function more convenient and a pleasant experience to maintain
Opening of a bank account in earlier days involved ,generally, the
filling up a form, making an initial deposit having yourself introduced by another account
holder in the bank and within an hour or two generally you could have your cheque book
and initial pass book and you are ready to operate your bank account. Now, these days
however, the act of opening a bank account an take a couple of days because there are
directives, Reserve Bank Regulation/directives that before opening a bank account apart
from having a new client identified or introduced by a person already having an account
in the bank he will have to produce his user ID or personal identity proof which is
generally in the form of a bank pass book , driving license or a copy of a life insurance
policy or educational certificate. Apart from this he or she would also have to provide an
address proof which will vouch for the address given to the bank. In some cases even
if you are not an income tax assessee banks can still insist on a PAN card prior to
opening of your bank account.
Now-a-days, with the widespread use of computers, internet and mobile cell phones
certain convenient facilities have been offered by the bank to carry on your banking
function in your personal accounts. For example if you are a cell phone user you can
apply for mobile alerts of transactions that happen in your accounts , like for example,
that certain money has gone out from the account because of having paid by somebody
by cheque, then the fact of having that money paid isintimated by a SMS. Apart from
this deposits are informed and any other operation such as thatof charging interest is
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the tenure of the insurance policy the person is assured of receiving the sum assured plus
certain pre-agreed share in the surpluses that arise from investment of the premiums.
Now, at the other end of the scale there could be a lure for bigger profits by having your
premium funds invested in a relatively high risk manner involving stock market
operations like purchasing of equity, or preference shares, or debentures and upward
movement in the value of these investments will be available to the holder of the
insurance policy. There can be a reverse happening in the sense that money may be lost
by the holder of the insurance policy if there is a downward fall in the prices of shares,
debentures over a period of time. Insurance policy features also provide option to the
holder of the life insurance policy to switch his funds between different types of
investment avenues in terms of the associated risk. For example at a particular point of
time when the stock market does not look profitable, then low risk deposits such as
govt. bonds are selected or in case where the share market is moving upward it may
direct that a major part of the funds may be transferred to the equity or preference shares
where higher returns may be had by the policy holder.
Apart from Life Insurance you can have poliices on kids, for example , because of
the high cost of education you can also have an education policy where you insure
yourself such that the policy may mature at a time when it is time to pay for high
school fees or college fees. If you have such an insurance policy then you may not need
to take an educational loan to finance your childs education expenses.
Apart from these type of insurance policies there are two additional
categories of insurance i.e.
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a. accident insurance
b. medical insurance
Accidental insurance is moneys that comes to the policy holder suffering from an
accident injury and that money can be used to meet medical expenses or make up for
lost of earnings while undegoing medical treatment .
Medical Insurance is important particularly for elf employed people and as well as
company employees or other organisations where their health expenses are not
reimbursable, in that case if they have medical insurance policy then hospital bills, cost of
medicines and even loss of income is compensated by the insured company during the
treatment process.
Leveraged Buyout
A leverage buyout is a process of acquiring one company by another company using
borrowed money to make the acquisition. The amount of money that may be borrowed
could be as high as 100% but it is generally the case that 90% is borrowed funds and the
balance is equity funds of the shareholders of the acquiring company. Because of this
high risk of debt compared to equity and the associated risk of having such high amounts
of debt these bonds have earned themselves disparaging nomenclature junk bonds. The
assets that are acquired from the bonds are given as collateral against the bonds and as
well as the assets of acquiring company so this is a leveraged buyout. Though leveraged
buyouts are common features in developed economies but not so in developing
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economies like India, Pakistan or other Asian countries who have not made it to
developed economies.
Stock markets, IPOs or Initial Public Offerings, Fixed Deposits, Secured /
Unsecured Deposits, Mutual Funds, Derivatives , Commodities Exchange, Money
Market and Primary and Secondary Markets
Stock Market
Stock market or stock exchange is a place where financial instruments like equity shares,
preference shares, debentures, govt. bonds can be bought or sold at rates prevailing on
that particular date. For example if you have shares in a public limited company and you
want to sell them, instead of looking for a buyer on your own you can instruct a broker to
sell the shares for you at a particular price and he will sell it if the price is at least equal
or more than what you have said, though before selling it at a lower price than the base
price he may call you and ask to take your go ahead for affecting the sale. Therefore,
stock markets, you could say provide the opportunity and facility of acquiring financial
instruments in the form of shares or bonds, or in disposing of securitiesfor a particular
price if you require funds for a particular purpose. In order that a particular bond or a
share of a company allowed to be sold in the stock market, that company will have to
have its shares listed in the stock exchange by paying necessary fees and submitting
necessary forms and agree to comply with the terms and conditions of the stock market.
So, this is the stock market.
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Now a days , however, unlike in the earlier days where it is very essential to go through
a broker either to purchase or sell shares and the broker takes some sort of commission
and affects your sale and hands over the proceeds at the appropriate time, it is possible to
go online in respect of shares and other securities by having what is known as a demat
account with a financial institution or a bank. Once a particular demat account is set up
then to the extent of money that you have in that account or to the credit limit that is
allowed to you can buy and sell shares online and a complete account is maintained in the
database of that account of your holding. You can use your holding to have it
hypothecated as a collateral against loans or financial facilities that you may avail from
someone, particularly a bank or financial institution. Accounts are generally kept by the
banks and they obviate the necessity of brokers, you can do it directly online and you can
ultimately move the shares without having to go to the company with the share
certificate and ask them to transfer them to you. It happens online and the record is
made of your holdings on different shares in that account of yours.
Equity Research
Equity research is the function of making the analysis of the value of particular shares in
the short term or long term. It takes into account various factors like what is the earning
per share of the company, what is the value of shares prevailing in the market at that
particular time and the technology aspect of the organisation whether it is up to date or
likely to become redundant because of new technology innovation and using these kind
of information you make a valuation on the share of a particular company both in the
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short term and in the long term. When it is long term some imaginary factors come into
play, such as future expectations of the financial scenario likely to prevail in the long
term. So, the price of such shares depends upon future expectation of what the financial
picture going to be like in the future.
IPO or Initial Public Offerings, Primary And Secondary Market
IPOs are initial shares and bonds issued first time to the public for being raised as capital
. It is a transaction which happens between an investor and the company . So, this is
known as an Initial Public Offering and it happens once only. When a particular share
or bond is put up for initial public offering there is a document called the prospectus
which contains the terms and conditions of the issue and the prospects of the company
issuing the shares. Application money from the potential share holders is collected
generally through various branches of banks and after the money is received if there is a
surplus the excess has to be refunded and from the balance shares are allotted to
different share holders in the manner and ratio that is stipulated by the stock exchange
regulatory authority and also done in consultation with the stock exchange regulatory
authority. So, this is the initial public issue. Anyone who acquires shares can later on sell
them through stock exchange to potential buyers and here the deal that does not involve
company. Its a deal between two investors, so this kind of a thing is known as a
secondary market operation. A primary market is the market where direct capital is
raised from potential investors and in the secondary market liquidity is made available to
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the shareholder by having the ability to sell the shares in the stock exchange to potential
customers . So, this is essentially the primary and secondary market.
Mutual Funds
Mutual funds are funds set up for investment from many investors who do not have the
time or information to research and decide which company shares to buy and in what
quantities and price. This is left to a specialist and the fund is created by investments
from investors and this fund is under the control of those who know how to invest
and do it in such a way that the wealth of the investors in the mutual funds is maximized
to the utmost .. Mutual funds can be redeemed at market prices by selling the
shares/securities in the market or make additional investments depending on the terms
and condition of the mutual fund.
An investor is allotted units in the fund depending on how much he has invested and the
market value of invested securities divided by thr total unir is known as the Net Asset
Value orNAV for short.
Derivatives
The derivatives is a financial instrument whose value depends on the underlying assets
backing/controlling it. For example a loan due from someone or the value of assets held
by some one as evidenced by the legal instrument confirming the control is known as a
derivative. Such instruments have value and they can be traded in a derivatives exchange
just like any other exchange or financial marketplace. For example if a person has a
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warehouse receipt of a lot of tons of rice then it can be traded in the derivative market
for having it sold/purchased in the market so that the ultimate holder of the document
will have a right to withdraw the rice contained in the warehouse to sell it or do whatever
he wants to do with the derivative. Such derivatives are therefore known as financial
instruments and the underlying asset could be anything, not only agricultural products it
could be loans, it could be landholdings, or residential loans or anything else and they are
known as derivatives.
Commodities Exchange
A commodity exchange is similar to stock exchange but the only difference over here is
that instead of shares and financial instruments here commodities are traded.
Commodities can be anything it could be agricultural, non-agricultural commodities that
are required for consumption or investment by any person or organisation involved in
the cultivation/manufacture. Trading is done in the form of documents evidencing
possession or a right to the commodities, for example the receipts of a particular
warehouse for agricultural commodities or different kinds of commodities and these
can be traded in the commodities exchange just like a share transaction in stock
exchange. Of course there could be fluctuations in the prices there could be ups and
downs depending on how you position yourself with reference to the commodity. You
may earn a huge profit if there is a rise or in the reverse you may suffer a loss if there is a
rise or you may gain/profit if there is a diminishing in the value of the commodity. In
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India the commodity exchange have started becoming online and in such kinds of
commodity exchanges like NCDEX, you can trade through the internet by being
registered and complying with the rules and regulation and the fees required for being
enabled to trade in that exchange. So, this is what commodity exchange is all about.
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Chapter V
The Contributory Profident Fund Act and The Employees State Insurance Act
The Contributory Provident Fund Act:
If you are a businessman then you may be liable to deduct Provident Fund from the
salaries of your employees, make a matching contribution of your own and have the
combined sum deposited into the bank account of the fund by a challan for Provident
Fund payment along with the some administrative charges. Now, when are you liable to
deduct Provident Fund and make payments after making a matching contribution of
your own ?
1. If you are doing business with power and you have 10 or more employees whose
salary is less than or equal to Rs.6,500/- then you are liable to deduct from the salary,
provident fund and make your own matching contribution of the deduction and have it
deposited to the bank by a challan in respect to Provident Fund deduction and
contribution.
2. If you are doing business without power and you have 20 or more employees whose
salaries is less than or equal to Rs.6,500/- then again you are liable to deduct Provident
Fund make your own matching contribution and administrative charges and have the
resultant sum deposited under the Provident Fund head account in a nationalized bank.
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Now, what is the meaning of salary which is required to be less or equal to Rs.6,500/- in
order to make an employee eligible for Provident Fund benefits. Salary in this case is
Basic Pay plus Dearness Allowance and all other allowances are ignored. Amount of
Provident Fund deduction and percentage of matching contribution where in respect of an
employee a deduction has to be made of Provident Fund shall be made at 12.0% of basic
pay plus Dearness Allowance. Therefore, if an employee earns Rs.5,000/- per month i.e.
basic pay plus Dearness Allowance then a deduction of Rs.600/- has to be made from the
salary of the employee, reducing his take home pay to Rs.4,400/-. Along with the
Rs.600/- deducted from the employee, the employer has to make another matching
contribution of Rs.600/- from his own pocket or resources, and make the same
calculation with respect to all the employees eligible for Provident Fund deduction.
Apart from the total value of all deductions plus contribution an administrative charge
which is 1.61% of the Provident Fund deducted plus employers contribution. The
Resultant sum has to be paid by challan into the Provident Fund account with the
government.
The due date for depositing Provident Fund dues plus contribution with the bank.
The challan for Provident Fund payment along with the necessary form has to be
deposited into a relevant nationalized bank which is generally the State Bank of India and
this should be done within the 20th of the succeeding month i.e. for the salary of April the
Provident Fund dues has to be deposited within the 20th of May. A copy of the form 12A
and challan evidencing the payment of Provident Fund dues has to be deposited with the
concerned Provident Fund office by the 25th of the succeeding month.
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Apart from the payment of Provident Fund dues, a yearly return has to be made in Form
3A , 6A with the relevant Provident Fund office. This Form 3A , 6A in respect of year
ended on 28th February has to be filed within the 25 th of March immediately following
the end of the 12 months period . .
Registration under the Provident Fund Act:
Before you begin deducting Provident Fund and making your own matching contribution
along with administrative charges, you have to register yourself under the Provident Fund
Act with the relevant Provident Fund office of your area. The procedure of registration is
as follows:
1. The form Business Number Allotment Form , Coverage Proposal Form, Forms 2 and
5A has to be filled up.
2. Documents such as Pan card copy , Trade License has to be annexed with the
necessary registration form.
3. The Provident Fund for the first month has to be paid by draft favouring the concerned
Commissioner of Provident Fund of that area.
After that you will be entitled to registration and then you can normally make your
Provident Fund deductions and contribution and make them over to the bank by a
relevant Provident Fund challan.
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The Employees State Insurance Corporation Act:
Employees may be covered under the Employees State Insurance Corporation Act
depending on the salaries they earn and if they are covered then employees state
insurance has to be deducted at a particular rate from their salaries. The employer has to
make a certain contribution in respect of each covered employee at a percentage rate
specified in the Act and make over the total by a challan under the Employees State
Insurance Contribution Act. Employees covered by the ESIC Act are entitled to medical
benefits in the relevant ESIC hospitals and other facilities as specified details under the
Act.
When is a concern liable to deduct employees state insurance and
make contributions of its own.?
1. If you are carrying on business with power and have 10 or more employees drawing
less than or equal to Rs.10,000/- as salary, inclusive of all allowances then you are liable
to deduct employees state insurance contributions and make them over to the concerned
bank account of the Employees State Insurance Corporation via a challan.
2. If you are carrying on business without power and you have 20 employees drawing
salary ,inclusive of all allowances, of less than or equal to Rs.10,000/- then again you are
liable under the Employees State Insurance Corporation Act.
The quantum of deduction to be made and a contribution percentage
to be made by the employer.
The employer is liable to deduct from the employees salary 1.75% as employees state
insurance corporation contribution. And to this 1.75% of a particular employee, the
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employer has to pay another 4.75% of the salary as the employers contribution , make a
similar calculation for all the employees covered by the Act and pay over the total to the
relevant bank account for ESIC contribution via a challan.
Due date for depositing Employees State Insurance Corporation contribution:
The due date for making over the Employees State Insurance Corporation payments due
to be made by an employer is to be done within the 20th of the succeeding month i.e. for
an employer in respect of salaries for the month of April the payment of Employees State
Insurance Corporation contribution has to be made within the 20
th
of the succeeding May.
Half yearly returns:
Half yearly returns in the prescribed form i.e. form 5 has to be made by the employer
within 42 days following the end of the 6 months period i.e. 6 months period ended on
September, the half yearly return has to be made within the 12th of November, for the
half year ended on March the half yearly return has to be filed within the 11 th of May of
the relevant year.
Registration Under The Employees State Insurance Act:
Like the Provident Fund Act before you begin to make Employees State Insurance
Corporation deductions and make the contributions over to the Government, you are
obliged to have your organisations registered under the Employees State Insurance Act.
The procedure for obtaining the registration is the following:
1. A form 01 has to be filled and signed by the principal officer of the organisation in
most cases it is the owner of the organisation.
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2. The following documents are to be annexed along with the application for registration:
a. Trade License
b. PAN card copy
c. Address Proof
The due date for depositing the Employees State Insurance Corporation contribution with
via challan is to be done by the 20th of the succeeding month..
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CHAPTER VI
The Service Tax Act
The Service Tax Act specifies the categories of services in respect of which service tax is
payable by the person providing taxable service at the rate specified under the Act. Now,
most services fall within the Service Tax Act and in all 132 numbers of service
categories have been specified as liable to Service Tax . The listing of the services is as
follows:=
LIST OF TAXABLE SERVICES
Note: The list of services and the periodicity for filing returns and payment of taxes and
registering are sometimes subject to change from year and so regarding current
compliance confirm with your lawyer or CA or The Internet
1. Advertising services
3. Air travel passenger booking services
5. Air Transport
7. Air Travel Agents Services.
9. Associations Membership.
11. Architect
13. Auction service
2. Advertisement services
4. Airport service
6. Asset management services
8. Automated teller machine operation,
maintenance or management service.
10. ATM Operation, Maintenance or
Management Services.
12. Authorised Service Stations for Motor
Vehicles Servicing or Repair.
14. Beauty Parlours.
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15. Business Exhibition Services.
17. Banking and other financial services
19. Business support services.
21. Cargo handling services
23. Chartered Accountant
25. Clearing and forwarding service
27. Commercial Training and coaching
29. Coaching services.
31. Commodity Exchange Service.
33. Construction of residential complexes.
35. Consultancy Services.
37. Content development and supply
39. Cost Accountant
41. Credit card, debit card, charge card or
other payment card service.
43. Cruise Travel.
45. Customs Clearing service
47. Development & Supply for
telecommunication, advertising and on-
line information Services.
16. Business auxiliary services
18. Broadcasting service.
20. Cable operator.
22. Catering Outdoor catering service
24. Cleaning services
26. Clearing and Processing House Service
28. Clubs or associations Membership
30. Company Secretary
32. Construction of Commercial or
Industrial Building services
34. Construction or renovation of
commercial / industrial buildings or
pipelines or conduits Services.
36. Consulting Engineers Services.
38. Convention service
40. Courier services
42. Credit Rating services
44. Custom House Agents Services.
46. Design services
48. Dry cleaning service
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49. Dredging services
51. Engineering consultation
service/Consulting Engineers Service.
53. Event management service.
55. Fitness Centre Services.
57. Fashion designing service.
59. Franchise service.
61. Health and fitness service.
63. Insurance Auxiliary Services General
Insurance service.
65. Insurance Business Services (General
Insurance).
67. Intellectual property services.
69. Internet accessing facility.
71. Investment Management Service.
73. Management or Business Consultant.
75. Mandap keeper service.
50. Erection, commissioning or installation
services.
52. Exhibition Business exhibition
service.
54. Financial Services.
56. Foreign Exchange broker Services.
58. Forward contract services.
60. Habitat Services.
62. Information Technology Software
Service Development of software,
provision of advice and acquiring right
to use.
64. Insurance Auxiliary service.- Life
Insurance service.
66. Insurance Business Services (Life
Insurance)
68. In