BOM Lesson 6 Company Org

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Company Organizations

Lesson 6



Genesis

Industrial & Transport revolution brought radical changes in the system of production &

commerce

Change in scale of prod & change from national to international markets Sole Traders &

firms as forms of orgs ceased to exist & joint stock companies emerged

Reasons for Emergence of Company orgs

1 Limitations Of Capital –acted as a bar for expansion a company org could tackle this

2 Problem of management

- Not possible for a single ( proprietary ) or few Partnership org to manage efficiently

Division of labor imperative , ensures proper allocation of duties & specialized

management

professional management demands separation of management & ownership

3 Burden Of Risk & Liability

Expansion involves huge risks & uncertainties as prod is based on anticipateddemand

Unlike sole proprietorship /partnerships a joint company has wide distribution of

risks







Facility of Transfer of Ownership –

-A share of the company is a moveable property & is transferable as laid down in the articles of the

company . A member enjoys statutory rights to sell his shares , & get it transferred in the name of

the buyers on the company's registers of members

If the company has listed its shares on a recognized stock exchange they enjoy a ready ,

continuous & open market . Thus its shares become liquid assets readily convertible into cashFree transferability & good marketability of shares & debentures are considered distinguishing

features of a company in relation to sole traders or firm wherein both features are absent

Large membership ---

The share capital, of m a public company can be raised by any number of persons there being no

upper limit

A share may have a small denomination 25 / - the total amount collected can be very large., The

amount of issued capital & number of shares however governs the max limit of membership in

practice

Capital Mobilization

The combination of ( 1 ) limited liability ( 2 ) transferability of shares 7 ( 3 ) unlimited membership are

responsible for making company orgs a very effective instrument for mobilizing vast amount of

capital for quick industrialization & accelerated economic growth

Distribution of Dividends

The profits of a joint stock company are annually distributed as dividends amongst share holders



Disadvantages of company orgs

1 Elaborate & complicated formation --- Procedure of company promotion & formation

complicated requiring specialists like promoters , underwriters , share brokers . Cost of

floatation is very high

2 Fraudulent Management -- formed by unscrupulous promoters & directors who may exploit

property & assets for making personal profits at the cost of share holders . This danger is alwayspresent when persons in charge of management are called upon to manage the third party's

property & assets

3 Concentration Of economic Power & Wealth

--The share owning democracy or peoples capitalism may be a theoretical advantage of company

form of org . . The diffusion of ownership does not even democratize ownership in practice .

Widening of the investment market may not avoid concentration conc. of economic power in afew hands . This is on account of share holders who behave like sleeping partners & rarely take

interest in affairs of the company

Thus instead of democracy there is conc. of power in the hands of a few . The insiders with only 20

% of capital control management .

This pyramiding of control can be seen in a holding company with a capital of 10 lakh control

number of companies with capital over 3000 lakh

The Indian companies act 1956 /74 has provided measures to break the conc. of economic power &

liquidate the oligarchy of directors . Final solution lies with share holders



4 Reckless spending on Stock exchange

The securities of the company are listed on the stock exchange primarily to establish continuous ,

open , & wide market for them & to provide necessary liquidity or marketability to them

However unscrupulous speculation & temptation of management to trade on inside info for persona

benefits the shares are manipulated .

The stock exchange at such times becomes a gambling place & can not act as an agency for promoting sound & stable investment

Securities Contract act 1956 has provided measures for controlling speculation but it depends on

the authorities of the stock exchange & top agencies of management

5 Excessive legal Control

Public limited companies including holding companies are very strictly regulated & controlled by

legislation at all stages .

Companies Act provides severe penalties for defaults in the fulfillment of various provisions of the

Act

Also Monopolies & Restrictive Trade Practices Act also controls & regulates Monopoly orgs .

Necessary form protecting the interests of the share holders

6 Conflicting Interests

Employees demand higher wages & consumers expect lower prices & better quality . Share holders

yearn for ever rising dividends

, preference share holders want stability even at the cost of progress whereas equity share holders

are the votaries of progress even at the cost of stability . Difficult to satisfy such diverse interests

7 Ab f l I t t & l l t



7 Absence of personal, Interest & personal element

Unlike sole trader /partnership orgs there is separation of ownership from control. In company type

of orgs there is representative management

Lack of commitment from salaried management may lead to waste & inefficiency . Also due to lack

of direct relationship between effort & reward . Can be addressed by giving bonus or commission

8 Slow decision making

Kinds of Companies

Chartered Registered Statutory

Ordinary business

company

Public Private

Ltd by shares

Ltd by

GuaranteeUnltd company

Govt Company

PrivatPublic

H i C it l R i d b j i t t k



How is Capital Raised by joint stock company

Method of Raising capital

1 Through sale of shares or stocks or ( 2 ) Sale of bonds /debentures

Sale of Shares & Stocks

Types of Share capital1 Registered or authorized capital ---Refers to max amount which can be raised by selling shares say

. 20 crores

2 Issued capital ---refers to part of authorized capital which is issued to the public for subscription

by dividing into shares . Say 14 crores

3 Subscribed capital --- Refers to that part of issued capital which is actually subscribed by the

public , say 12 crores

4 Paid up capital --- refers to that part of the subscribed which the public directly pay up to the

company as apart of the payment of the value of their shares . This may be say 10 crores . The

remaining part of the subscribed capital is paid after further calls from the company

Types of Shares

Equity or ordinary shares –

--form the main basis of the finance of a company . The holders of such shares get dividends only

after the Preference share holders are paid out of its profits . Hence bear max risk . , as they do not

get any dividends if the company does not ,make profit.

When profits are very high they get more than the rate of dividends paid to preference share

holders . The ordinary share holders have the right to elect the Board of Directors also right to vote

Preference Shares



Preference Shares

These share holders enjoy a preferential or prior right over equity shareholders to the profit of a

company .

They are entitled to a fixed of dividends after paying interest on debentures & before any dividends

is paid to equity share holders

Preference share are classified as

a ) simple or non cumulative ---people holding such shares are entitled to a fixed of dividend only in

the year in which profits are made . They get the dividends before it is paid to other type of share

holders

b ) Cumulative preference shares --- entitled to a fixed share of dividends even when there are no

profits in any year . These claims will stand as arrears to be paid first out of subsequent years profit

before it is paid to other type of share holders

C ) participating preference shares --- The holders of such shares are paid a fixed rate of dividend

before it is paid to other classes of share holders . They are also entitled to participate in the balance

of profits , in a certain proportion along with equity share holders after reasonable claims of these

equity share holders are met .

d ) redeemable preference shares --- capital raised by issuing such shares must be paid back after

certain period either out of profits or by raising fresh capital by issuing new shares or by sellingsome of the assets of the company .

The preference share holders do not enjoy voting rights . However they have a prior claim on the

assets of the company in the event of its liquidation

Deferred Shares



Deferred Shares

They are called promoters or managements or founders shares . The holders of such shares are paid

dividends last out of the profits left after meeting the claims of ordinary & preference share

holders & the reserve funds

Normally issued to the promoters of the company but they may also be issued to the public . If

dividends paid to other classes of share holders is restricted the deferred share holders will

enjoy a bigger share of the profits . But if no profits they do not get anything

The deferred share holders special or preferred voting rights . But Indian companies Act 1956 has

eliminated the system of issuing deferred shares by public limited companies . However a private

limited company can issue deferred shares

Sales of Bonds or Debentures

Debentures --- A company may also raise additional finance by borrowing from the public for aspecified period of time say 15 to 20 years , at a particular rate of interest . This is done by

issuing bonds or debentures .

A Debenture is an undertaken by a company to repay the borrowed money on or before the

specified date at a particular interest rate , irrespective of profit or loss made by company

The capital raised by selling debentures is like taking loans from the public . Hence a debenture

holder is a creditor of a company with no voting rights . As such he cannot directly interfere withthe activities of its management

A debenture may be classified as secured / simple Secured debenture is secured against assets/

property . simple debenture is not secured against assets or property at a ratio fixed in advance

A company is also free to issue convertible debentures which can be converted into equity shares

after a period of time say 5 to 10 years at a fixed ratio in advance

Types of joint stock company



Types of joint stock company

On ownership, basis ---all types of registered companies in the private sector can be classified as

( 1 ) public limited ( 2 ) private limited

In the public sector we have govt companies in which 51% of the paid up capital is held by the govt

Difference between public & private limited ( limited by shares )

1 A private limited company can be formed with two 2 to 50 members max excluding employee

share holders . A public limited company can have any number of members but a minimum of at

least seven

2 Public limited companies are required to issue prospectus before issuing shares , not in the

case of private limited companies

3 Public limited companies must submit statutory reports to the Registrar of companies .

4 Public ltd company has to send its duly audited accounts to the share holders but a private

limited company does not have to publish its accounts for the info of the public . However a

private limited company must send three certified copies of its balance to the registrar of

companies

5 The shares of private limited companies can not be freely transferred on the stock exchange ,

unlike public limited companies

6 The share of a public limited company openly invites public to subscribe to its share of

debentures , a private Ltd company can not do so

7 A private company can start its business after its registered but a public ltd company only after i





Points Private Company public company



Points Private Company public company

Name Must have private limited only limited endorsed

Shares Can issue deferred shares with since 1956 no public company can issue

Disproportionate voting rights deferred shares can issue only equity

& preference shares

Index of

members

Membership is limited no need if membership exceeds 50 it must have a

Of separate index of members separate index of members



Cooperative Orgs



Better living , better business , & better farming . In short cooperation is nothing but self help made



g , , g p g p

effective by org

Systems approach gives a comprehensive meaning to cooperative societies

“ a cooperative society is defined as an enterprise formed & directed by an association of users ,

applying within itself the rules of democracy & directly intended to serve both its own members

& the environment or the community as a whole . It draws resources from the environment & it is

naturally expected to fulfill the needs & desires of the environment as it is an integral, part of the

community

Based on the two definitions in essence a cooperative org always prefers ( 1 ) profit maximization ( 2

) cooperation ( 3 ) Self help & self reliance instead of undue & unwanted dependence on externa

bodies which are always tempted to exploit the situation in their self interest ( 4 ) development

of moral character in stead of pure material development

Distinctive Features Of Cooperative Orgs

1 Spirit of cooperation ---Every member works in org interest . Service is of primary imp & self

interest is secondary

2 Unity –

3 Common Interest can be economic activity such as agriculture , trade , finance , manufacturing

4 Economic democracy & democratic management --- Ensured by one man one vote , irrespective

of the value of contribution all have same rights ,privileges & responsibilities . A member with

only one share can become president . Gen management is honorary

Open membership --- Any adult is eligible . One share enough to become a member



Moral Emphasis ---In the absence of capital invested emphasis is on integrity & honesty , In the

absence of any tangible or ,material security . Selfless workers instead of profiteering &

competition provide service & sacrifice

Absence of dividend Hunting Element & fair return on investment -----

In cooperatives there is no dividend hunting . In a consumer store , return of income on the sharecapital is fixed & usually not more than 12 % per annum

. This surplus profits are distributed in the form of bonus or dividends but it is directly connected

with the amount of purchases by member in one year . Linking of dividend with the annual

purchase is a novel, principle of consumer co operatives

. Gives double advantage ( 1 ) every member is compelled to be loyal with his store & not go to

outside retailers ( 2 ) leads to automatic increase in sales & profits w/o ads & publicity .The store can thus secure max business as each member will max purchase to secure higher share

in profits

In capitalistic orgs dividend is linked with the amount of investment in shares

Cash sale ----In a cooperative org “cash & carry sys became a universal feature . In the absence of

adequate capital grant of credit & locking up of working capital was not feasible . Cash sales avoided

risks due to bad debts

Corporate status --- has to be registered under separate legislation “ cooperative societies Act .

Every society must have at least ten members . Registration is desirable as it gives a separate legal

status to all cooperative orgs, just like a companyt. It also gives exemptions & privileges as per the

Act

Procedure for Registration



There must be at least ten adults to form a co operative society ( 2 ) The application for registration

will provide all essential info ----- like name , aims & objectives of the society , particulars of

the share capital etc ( 3 ) Application will be duly dated & signed by at least ten members ( 4 )

along with the application duplicate copies of bye laws i. e rules & regs governing the internal org

&management of the society ( 5 ) The registrar after the scrutiny of the application if satisfied may

issue under his seal & signature a cert of registration & the society will now become a separate

legal person just like a company ( 6 ) the society must have its own common seal which acts as its

signature . ( 7 ) once the society is registered it can admit new members & also issue shares .

Management of co operative orgs

Same as that of a company . It has a governing council or a Board on which the members elect their

representatives each year .

One man one vote is the rule . Routine matters are looked after by a working committee consisting o

a few members of the governing council . The office bearers are ( president – VP , secretary &

Treasurer

Comparison co operatives Vs Companies

Formation --- Co operatives societies act





















Documents

BOM Lesson 6 Company Org