Pocket Book On Finance

A Pocket Book Of Finance
(A Finance Primer)
CONTENTS
I. II III IV
Introduction Types Of Business Organisation The Trade License Sources Of Funds 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
3 5 38 40
V VI VII
Provident Fund & Employees State Insurance Service Tax How To Read A Balance Sheet, Trading and Profit And Loss Account, Some Important Ratios Evaluation Of The Cash Flow Of A Company, Evaluation Of Financial Reports, Balance Sheet, Profit & Loss Account And Other Statements From The Point Of View Of Shareholders Of A Company
65 71 79

(A Finance Primer)
A Little Of Project Reports VIII IX X XI XII Income Tax & Wealth Tax Excise Duty Professional Tax VAT & Central Sales Tax Glossary 105 116 119 120 124

(A Finance Primer)
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

(A Finance Primer)
(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

(A Finance Primer)
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

(A Finance Primer) 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

(A Finance Primer) 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

(A Finance Primer) 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

(A Finance Primer) 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

(A Finance Primer) 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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(A Finance Primer) 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 nonbusiness purposes.
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(A Finance Primer) 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 mishappening, 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 breakthrough 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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(A Finance Primer) 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 insufficient to clear all your liabilities, then in the worst case scenario you may be completely out of all your assets
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(A Finance Primer) 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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(A Finance Primer) would be borne and in most cases both the profit sharing and the losses bearing ratios are the same. However, one thing must be added that minors cannot be partners in firms, they must be people who are 18 plus. This constitution or the deed of partnership would contain many things depending to what extent the partners would like the agreement to take care, of any type of situations that may arise in the future. For example, one of the things which is almost mandatory in a partnership deed is the authorization to open a bank account and a specification as to the manner in which this bank account is to be opened and operated. In most cases, when there are only two partners, many people say that it will be opened and operated by both the partners, but there could be situations where the partners are so confident of each other and have great trust in their own partners, financial conduct that they are willing to say that this bank account could be operated on the signature of either of the partners. Where there are many partners, in most cases it is not specified that more than two partners have to sign the cheques, it is almost always stated that the account could be operated on the signatures of any two partners or some combination of the available partners. The Partnership deed would contain certain information regarding how a partner could retire from the firm, what would be the procedure to settle the accounts if some partners decides to pull out of the partnership then there could be more information or written specifications regarding when and under what circumstances a person could be admitted into the partnership concern.
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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) office and do anything that may be necessary to make a success out of your hopes. The rest is almost the same as in case of a proprietorship concerns except say for example in the case of a partnership firm you would have to file a return of its income or loss depending on the outcome, in the name of the firm. So, there would be corresponding returns if required under Sales Tax Act, under VAT or under the Central Sales Tax Act and under the Professionals or Employment Tax and other Acts that may be applicable to the organisation. In the case of a partnership concern it is similar to a proprietorship concern in the sense that its liability is not limited, so things could get risky if the finances take a dip particularly if you have borrowed heavily and are not able to generate funds to repay the borrowers. In that case too the lenders can aggressively pursue you first against the firm realize all its assets and adjust the proceeds against the loans and if that is not sufficient they dont stop here but they will go after the partners individually and we presume they would be fair in this regard in that they would attempt to realize from the partners at least in the profit sharing ratios and if thats not possible then somebody may have to shell out more than his profit sharing ratio in the firm warranted. Well, unfortunately I have to remind you of negative possibilities, I think that something like this I cannot skirt, and say for example, you partnerhip concern has run into rough weather and has gone out of business for some reason or the other there is no use deciding who is responsible but rather accept the fact that you are in a bad shape and better think of doing something to cut down your costs and limit the damages and heartaches associated with such a mis adventure. So, if again your borrowers cant realize
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(A Finance Primer) their loans from the assets available with the firm then they go for the personal and other assets of the partners. Regarding the financial conduct to be displayed by the firm there is a certain amount of restriction in the sense that the partners would naturally be required to maintain an accurate accounts if they are to determine how to share the profits or bear the losses as stipulated in the partnership deed. So, you got to have a proper balance sheet and a profit and loss account and divide the profits in order of a ratio, that was earlier decided. As long as you had profits, there would be very few people except may be your partner who could object to your withdrawing money from the firm. It could be as simple as writing a self cheque and taking the cash out and like proprietorship concerns if you are doing too much of cash withdrawals by self cheques your banker would not like it if he has lent you money and if you are using the money lent by him for personal reasons, for example, having an expensive holiday or a riotous party or some kind of an extravaganza. In the case of partnerhip concerns, now-a-days it is generally required to specify what kind of salaries can be drawn by the partners and what kind of interest that they can be given on the amount outstanding to their credit in the capital account. Now-a-days, salaries that are drawn by partners, subject to certain limits, are allowed as a deduction from the income of the firm while arriving at the balance that is available for distributing to the partners or in arriving at the taxable income figure that would be subjected to tax at the concerned tax rate assuming of course that you made a profit. In addition you could also get interest on capital balances as a partner and as of now the Income Tax Act allows you to draw as much as 12% interest on capital and
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(A Finance Primer) 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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(A Finance Primer) conduct of the business and the partners accept the right to his share of profits, having made a slice of his financial muscle available for the good of the firm.
That is essentially what the partnership firm is all about. But let us add one of the interesting pieces of information that something may happen in this regard in the future which could be beneficial for people who would like to go into business as a partnership concern. Remember, like a proprietorship concern, forming a partnership concern is not all that difficult and neither is it too expensive as in the case of a Limited Liability Company which we shall be discussing in the next section. A debate has been initiated about making available the benefits of Limited Liability Companies to partnerships i.e. eliminating the risk factor associated with doing business, of your personal assets being vulnerable to appropriation by your borrowers in case there is a miscarriage of business success delivery. Now a Limited Liability partnership would retain the features regarding simplicity of the conduct in the management of its business in that there wont be too many regulations regarding administration of the business of the firm. As stated earlier, the self cheque drawing facility where you withdraw money for your personal use, without anybody likely to question you provided you are doing it out of profits and it could be your lender of money who could object if he feels you are using his borrowings for your personal use. Now, once you get Limited Liability you could feel more comfortable doing business and we dont know how long it is going to take before any
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(A Finance Primer) concrete shape is given to this concept or given legal sanction in the sense that you could now start having a Limited Liability Partnership concern. An important thing about partnership deed which was not mentioned earlier is that obviously you cannot have a partnership concern without at least two persons being partners and at the same time there is an upper limit as to the total number of partners that can be in a valid partnership firm and in this case it is 20. So, this is a certain kind of limitation, though in my professional life, I dont remember coming across a firm where the number of partners runs into double figures, although, I have heard of instances where there are many partners touching close to 20. So, in case the nature of your business demands and you need an association with a large number of persons, more than 20 may be 100 and even 1000s then in that case, the most widely accepted organisation is the Limited Liability Company whether publicly Limited or privately Limited, which will be subject matter of our discussion in the next section over here. Another thing that is to be touched over here is the discontinuance of a business firm or its dissolution. Sometimes partnership firms may be specified to be of limited duration, in which case when their period of existence is exhausted it automatically seizes to exist and accounts are settled as specified in the partnership deed and if there is no specification in this regard, then the provisions of Indian Partnership Act come into play and settlement of accounts, payments of liabilities is done as per the law specified over here. In the case of the death of a partner the deed could specify what happens in case of such an unfortunate and inevitable occurrence at
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(A Finance Primer) 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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(A Finance Primer) the company then they have no recourse but to write off their lendings as irrecoverable and charge the amounts as an expense in their profit or loss accounts. No way can they go for the shareholders or the directors personal properties to adjust the amounts due to them. But hold it, there could be a problem over here too, as used to happen earlier. Sometimes financial institutions particularly banks require the the directors,(Who exactly the directors are we will come to that later on.) to give personal guarantee in respect of loans given by the banks and in most cases directors are share holders of the company and in many cases they happen to be the principal or major share holders i.e. they control the company. Once a shareholder or a director gives a personal guarantee in respect of loans due to the company then the concept of limited liability and the protection it affords to the shareholders and directors is thrown out. You could say that is wrong though upto now probably personal guarantee has not been invoked. Lets hope the personal guarantee of share holders or directors has never been invoked that they would desist from doing so in the future because it really takes the sheen out of the reasons for doing business as body corporates. So, that is it, you have got limited liability by operating under the cover of the body incorporate. There is a trade off in the sense that you are expected to conduct yourself financially and in matters of administration and decision making according to the sections of the provisions of law governing the operations of Limited Liability Companies, which in India is the Indian Companies Act 1956. Lets take the famous self cheque routine which can be very easily done particularly in case of a proprietorship concern and to a certain extent in the partnership concern too. But here you just cant do that, you cant
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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) order to arrive at a decision regarding the value to be had in respect of the authorized share capital. The first directors and promoters of the company: This is a personal matter of the persons involved in the registration of the company and they can choose the directors of their choice and who can be the share holders of the company who shall sign the necessary papers. There is not much restriction in this regard.
The Memorandum and Articles of Association: 1. The next step in the process of formation of a company is to draft the Memorandum of Association and the Articles of Association of the company. The Memorandum of Association contains (i) the name of the company (ii) the state in which the registered office of the company is situated. (iii) The objects for which the company is coming into existence. (iv) The authorized capital of the company. Of the above, the object clause is the most important in the sense they specify the activities that can be carried on by the company. If a certain object or activity is not specified in the Memorandum of Association then the company will not be permitted to carry on such business or activity. However, unlike in earlier years, now-adays it is possible to amend the object clause and include additional items of activities that company is entitled to carry out.
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(A Finance Primer) The Articles of Association: The Articles of Association is a separate document which specifies the manner in which the business, administration and the management of the company will be carried out and here also at the end of the document there is a specification as to the authorized capital of the company. One important point is to be noted here is that now-a-days the paid up capital of a limited liability has to be a minimum of Rs.1lakh. Having drafted the Memorandum and Articles of Association it is necessary to get them printed and after printing the promoters of the company have to sign both the Memorandum and Articles of Association after which adhesive stamp of the requisite amount has to be affixed to the Memorandum and Articles from the treasury of the State Government in which the registered office of the company will be situated. Thereafter, form nos. 1, 18 and 32 are to be prepared, we shall not discuss these forms as they are outside the scope of this book, it s best left to your professional involved in the registration of the company. Then all this documents as stated earlier have to be filed in the website of the ministry of company affairs and the necessary fees paid. Thereafter, the hard copies of these documents have to be carried to the concerned registrar of companies who after a scrutiny of these documents will issue the registration certificate of the limited liability company.
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(A Finance Primer) The Ownership and Management of a Limited Liability Company: In the case of a limited liability company, the ownership of the company is said to vest with the shareholders of that company. As seen earlier the promoters of a company who sign the Memorandum and the Articles of Association as a part of getting the company registered are the initial shareholders and the number of shares that they take in the company is specified in the Memorandum and Articles of Association initially. Then to begin with they are the owners of that company and they can if they wish induct more shareholders or in the alternative allot more shares to themselves within of course the limits specified in the authorized share capital. They are the effective controllers of the company because though shareholders do not directly take part in the day to day management of the company they are in a position to control the management by specifying who are to be the directors of the company. The Board of Directors: At the time of registration of the company the articles specifies the first directors of the company. They are usually the same as the promoters of the company and that in a sense would make the owners of the company be directly involved in the day to day business of the company. The shareholders of a company can in a general meeting appoint more directors of their choice, who shall take part in the management and administration of the affairs of that company. As a reciprocal measure they can even remove a director from the post if they think such a drastic step is warranted.
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(A Finance Primer) 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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(A Finance Primer) Board of Directors may fix the remuneration that they can draw. Here there is no self cheque writing for withdrawing money for personal reasons. Apart from salaries, as stated earlier, in the Annual General Meeting business, the shareholders can get money from the company by way of dividends on shares held by them provided of course that there is a surplus of profit from which dividends can be paid. So, it naturally follows that if the company has no profit or reservess then no dividend is possible to be paid to the share holders. The Closure of a Company: Effecting a closure of a company is also quite difficult and the procedures are much more complicated than say in the case of a proprietorship concern or a partnership concern. In the case of a limited liability company it has to go into liquidation and in the process of liquidation, assets of the company will be realized i.e. converted to cash and the proceeds will first be used to pay the outside liabilities. Creditors, lenders will be paid first and then last in line will be the equity shareholders to receive money on their shares, provided some funds are left after having cleared all the liabilities. In this case, the shareholders bear the brunt of the risk associated with doing business. However, we must add here that shareholders are protected unlike proprietorship or partnership concern, in the sense that if after realization of the assets of the company the funds are not sufficient to pay all the liabilities then the parties to whom money is owed by the company can not proceed against the personal properties of the shareholders or the directors in order to satisfy their claims against the company. This is the essential feature and the most distinctive feature of a limited liability company in comparison with other forms of organisation like the
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(A Finance Primer) proprietorship concern and the partnership concern. The only liability that the shareholder has with respect to the company is in respect of unpaid amounts against shares allotted to it. For example if a particular shareholder holds 1,000 shares of Rs.10 each and he has paid Rs.5,000/- with a remaining balance of Rs.5,000/- yet to be paid then his liability towards the company is only to the extent of Rs.5,000/- and for this the company can proceed against him if there is a default in making good that payment.
The Co-Operative Society
The Co-Operative society is a form of organisation which is very similar to that of a limited liability company in the sense that the shareholders of a cooperative are protected from lenders and creditors proceeding against their personal properties to realize amounts due to them by the co-operative society. However, the formation, administration and the legal compliances that a co-operative society must comply with are as per legislation done by individual state governments. Therefore, there are multiple co-operative societies acts in the country depending on the state where a particular co-operative society is to be registered. The management of a co-operative society is also vested in the Board of Directors and the Annual General Meeting is also held in the case of cooperative societies where the share holders decide about the directors, dividends, auditors and other matters.
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(A Finance Primer) 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 cooperative 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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(A Finance Primer) In most cases NGOs are registered as a society under the Societies Registration Act. Like limited liability companies the NGO has a Memorandum of Association where in the objects of the society are spelled out, the name of the society and the persons forming the management committee of the organisation. In addition there is a document called the by laws which is similar to that of the Articles of Association of a company and the document contains clauses that determine and regulate the manner in which the affairs of the society are to be carried out. Societies generally have limited funds and rely heavily on governmental funds and contributions from abroad and the country from organisations who find it desirable, having regard to the objectives of the society, to fund their activities. So this is a form of organisation which is popular for schools, hospitals, orphanages and similar charitable organisations whose profit is incidental but more oriented towards providing service for the common good of everybody.
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(A Finance Primer)
Chapter III
The Trade License
Before you can commence business it is compulsory to have a trade license issued generally by the municipal corporation of the city or town where a business is located or the metropolitan development authority of your area. Obtaining a trade license is relatively simple affair and of course the paper work and the fees schedule will vary from municipality or metropolitan development authority to another depending on which town or city your business will take place. A simple form where you specify the name of the organisation, the business activity for which the trade license is required , the address of the organisaion, in some places the persons or organisations who are to the North, South, East, West of the premises that you have selected for your business. In addition to the form the municipal authorities may require to submit a copy of the rent agreement with the land lord of the premises where your business will be situated unless of course you own the premises yourself. Then apart from these some municipalities require the up to date municipal tax payment receiptsof the premises which should have a commercial holding number. Thereafter, there may be an inspection of the premises after which the trade license is issued, of course the fees for the trade license has to be paid. In some cases it is as low as Rs.1,250/- and in the case of companies it could be Rs.2,500/- The schedule of fees can vary from state to state and city to city. In many cases organisations paste a photo copy of their up to date trade license in a prominent area of their establishment so that anybody including municipal corporation inspectors can have a
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(A Finance Primer) 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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(A Finance Primer)
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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(A Finance Primer) 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 nonmanufacturing 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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(A Finance Primer) Overdraft in the current account and cash credit: These two 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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(A Finance Primer) also generally the case that when the bank finances you by way of a cash credit or overdraft against current account, they expect all your sale proceeds of goods acquired by using funds from the cash credit limit to be routed through this account, so that there is a healthy turnover of withdrawals and deposits in that account. So, this is the cash credit limit. The overdraft limit is very similar to the cash credit limit except that in order to have an overdraft account, you must first have a current account in that branch. And the overdraft limit is a limit again sanctioned by the bank which authorizes you to draw money from that account even when you do not have the cash in the account, and you can withdraw upto the limit specified by the bank in the sanctioning letter. In other respects the overdraft against current account and the cash credit are more or less the same. Bills Discounting: Bills discounting is another facility given to you by the bank, in order to enable you to have funds from the bank even before the customers to whom goods have been sold on credit have paid the amount due against their bills. Now, suppose you make a sale of Rs.1lakh and submit that bill and that bill has been accepted by your customer, then if you have a bill discounting limit with the bank, you can submit that bill to the bank and say if the bill is for Rs.1lakh, the bank may finance after deducting a margin of, say, 25% , give you 75% immediately against the bill with the condition that when the customer pays that Rs.1lakh it will be deposited into the bill discounting account, so that it can be adjusted against the advance made by the bank against that bill. So, in all these cases banks will of course charge you interest for the amount of advance for the duration which it is outstanding. This is the essential feature of bill discounting.
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(A Finance Primer) Advance against Pledge: This is a facility available from banks, though many banks are reluctant to give advances against pledge of your goods. The warehouse or store room where your goods are stocked is not under the lock and key of the management but of the bank rather and by having those goods under pledge to the bank, they give you a limit to which you can withdraw money as long as the pledged goods are under the control of the bank. Now, if you want to withdraw goods from the warehouse for the purpose of delivery to a customer, you must make an appropriate cash deposit into the pledge account with the bank in which case only they will allow you to withdraw the goods and have it supplied to your customers. So, this is the pledge.
Packing Credit There is another form of financing called the packing credit. This form of credit is generally available from EXIM Bank, a name derived from the word export and import and is used to finance export orders obtained by you. Now, for example if you have an export business and if you have an export order of Rs.10lakh, the EXIM Bank may give you a packing credit of Rs.7,50,000/- or Rs.7lakh and you can use the money to make ready the shipment of goods specified in the export orders and of course when you receive the sale proceeds from the foreign importer, it is expected that the amount received would be routed through the packing credit account where the amount will be adjusted against the loan. Any interest due to EXIM Bank will be adjusted from the sale proceeds. So, this is the packing credit available from the EXIM Bank.
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(A Finance Primer) Letter of Credit or LC: Now, this is 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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(A Finance Primer) letter according the availability of the LC . So, this is the letter of credit funding by financial institutions other than banks.
OTHER SOURCES OF FUNDS Venture Capital, Angel Capital , Issue of Shares, Debenture Issue, FCCB or
Foreign Currency Convertible Bonds, Fixed Deposits Issued By Companies and External Commercial Borrowings.
VENTURE CAPITAL Venture capital is a source of fund that is predominantly available in the west though such capital has been obtained by organisations in India and there are certain venture capital firms in India and abroad who do finance Indian undertakings set up for particular purposes. Typically, venture capital provides equity funding generally to start-up
companies engaged in developing high-tech products where the investors feel very confident about the new technological products that will be the outcome of the research effort of this organisation and which will lead to substantial profits. Venture capital frims provide equity capital and they expect to earn high returns should the company go for a public issue which will then result in a high value to the value of their investment and which can be traded in a stock exchange. Or the venture capitalist can go for the sale of
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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) organisation, and that is equal to 10% of the share capital of the company plus its free reserves. Free reserves here means surpluses that have been earned by the company or acquired by the company and as a rule belong to the share holders of the company. In the case of accepting fixed deposit from the public there is a restriction in the sense that the value of the capital and the free reserve of the organisation must be at least Rs.1crore otherwise it cannot invite fixed deposits from the public. These fixed deposits , of course, are for fixed tenure and are repayable at the end of that period. It may be noted over here that certain deposits are not considered to be fixed deposits that need to be taken into consideration while calculating the upper limit of the 10% of the aggregate of paid-up share capital and free reserve. For example such moneys are amounts received from the government whether central or state or from a bank or financial institution or from another body corporate.
EXTERNAL COMMERCIAL BORROWINGS Subject to the approval of Reserve Bank of India and notifying it, certain classes of entities can borrow funds from external sources namely commercial sources subject to certain limitations which are reproduced over here. The persons who can borrow moneys from external sources are: 1. A limited liability company. 2. Certain non-government organisations which are engaged in micro-finance activities. 3. Any other entity that may be specified by the Reserve Bank of India from time to time.
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(A Finance Primer) The amount that can be borrowed in the case of a limited liability company is not more than US $500 million in any one financial year. In the case of non-government organisations engage in micro finance the amount that can be borrowed from external commercial sources cannot exceed US $5 million. One of the limitation of the use of external commercial borrowing is that it cannot be used for investment in stock exchange or in real estate. It is generally the case that large corporate organisations have been successful in organizing this kind of funds, may be because foreign investors, foreign lenders may not have the confidence in smaller organisation or corporations.
Other Financial Institutions Apart from banks there are certain important financial institutions which finance in most cases industrial projects by providing long term finance like term loans and also sometimes they may participate in the equity of the organisation in order to make up the shortfall of finance required by the promoters to execute the projects and make it operational. The list of the important financial institutions which does this kind of funding are the following: 1. Industrial Development Bank of India or IDBI 2. Industrial Finance and Construction Finance Corporation of India or IFC 3. State Financial Corporation 4. Power Finance Corporations
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(A Finance Primer) So, these above are some of the financial institutions that provide specialist finance to new industrial undertakings at what could possibly be in terms of lower interest rate than available from other sources like normal banking institutions. So, the above list is not exhaustive but just a listing of important financial institution that do this kind of finance.
Investment banking, Personal Banking, Insurance, Stock market, Mutual Funds, Money Market and Secondary Market and IPO (Initial Public Offering) Investment Banking An investment banking organisation is a financial institution which does not do banking as we normally know, that is organisations that raise money from customers in the form of deposits which generally entail a payment of interest on the deposit in order to provide an incentive for making the deposit. Now, the organisation that raises such deposits and it gives advances from these funds at a rate of interest higher than the cost of acquisition of the deposits and from where it meets the organisations expenses and other outgoings and the balance remains as a profit available for distribution amongst the owners who are generally the shareholders of the bank. Now, an investment bank does not raise deposits and make advances of that sort, it helps other organisations with various kinds of financial functions like for example raising money in the capital markets, trading in securities such as bonds or shares or any other negotiable financial instruments and it also facilitates mergers and acquisitions. Now, in many cases an investment bank will manage a fresh issue of capital by an organisation for which it is given a commission. These issues are generally called Initial public offerings but there can be public offerings after an initial public offerings has been done.
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(A Finance Primer) For rendering these services it gets a commission from the organisation that is helped out by the investment bankers in the mobilization of capital and with this commission it manages itself , meets its expenses and other outgoings and the remainder being a profit. Sometimes, investment banks also act as underwriters which means that in respect of a capital issue or initial public offering i.e raising money in the form of equity shares or bonds, it guarantees that it will insure subscription to the shares of a particular amount at the minimum, and if that is not raised from the public then the balance in the shortfall in the capital inflow that it had guaranteed will be subscribed by the investment bank. It can of course later on sell the shares in the stock exchanges and recover the investment that it had made because of its underwriting commitments. Other areas where investment bankers can operate are the management of mutual funds, the trading of different kind of security on behalf of clients handling derivatives (which we shall discuss later) foreign exchange and money market transaction, commodity trading and dealing in various other financial instruments .
Personal Banking Personal banking refers to the act of keeping/managing deposits in banks in various forms of deposits that banks may offer at the personal level and many other functions like having overdraft in your current account, that is you can draw more than the balance you have in an account provided you have an agreement with the banker in this regard. Now, personal banking is more or less the same in the Indian context for a pretty long
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(A Finance Primer) 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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(A Finance Primer) intimated to you. Apart from that with the use of SMS with appropriate terminology you can find out the balance in your account, you can even make stop payment of cheque.. With the advent of internet banking in order to know your account balance you need not go to the bank with the pass book or a personal request for the balance in your account, you can do it on the net after having an initial proper go ahead from the bank. The banks e-mail banking transactions in your account and also you can make payments, Bill payments and other facilities through internet banking over here.
Insurance matters Now, when we talk of insurance, in the early days there was only the Life Insurance Corporation which covered life risk on payment of a certain amount premium for a particular period and should death visit the insured person or the term of the insurance
policy is over, in that case the holder of the policy or the nominee is entitled to receive the proceeds under the insurance. One interesting point about life insurance policy is that the amount received on maturity or on the death of a person is non taxable in the hands of the recipient. Now-a-days, life insurance is undertaken by private sector organisations also and there has been an evolution of various kinds of policies involving various kinds of risks as far as the investment of the premium proceeds is concerned.. For example a particular life insurance policy may not take risks but invest safely in secured bonds, govt. bonds and other bonds which assure a fixed income and part or none of the proceeds is invested in opportunities that carry market risks, so that at the end of
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(A Finance Primer) 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 insure
the high cost of education you can also have an education policy where you 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 Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer) 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 or NAV 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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(A Finance Primer) 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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(A Finance Primer) 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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(A Finance Primer)
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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(A Finance Primer)
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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(A Finance Primer)
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 25th 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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(A Finance Primer)
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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(A Finance Primer)
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 20th 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 11th 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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(A Finance Primer)
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.
2. Advertisement services 4. Airport service 6. Asset management services 8. Automated teller machine operation, maintenance or management service.
9. Associations Membership.
10. ATM Operation, Maintenance or Management Services.
11. Architect
12. Authorised Service Stations for Motor Vehicles Servicing or Repair.
13. Auction service
14. Beauty Parlours.
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(A Finance Primer) 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. 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 33. Construction of residential complexes. 34. Construction or renovation of commercial / industrial buildings or pipelines or conduits Services. 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 online information Services. 44. Custom House Agents Services. 46. Design services 48. Dry cleaning service 36. Consulting Engineers Services. 38. Convention service 40. Courier services 42. Credit Rating services
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(A Finance Primer) 49. Dredging services 50. Erection, commissioning or installation 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. 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. 63. Insurance Auxiliary Services General 64. Insurance Auxiliary service.- Life Insurance service. 65. Insurance Business Services (General Insurance). 67. Intellectual property services. 69. Internet accessing facility. 71. Investment Management Service. Insurance service. 66. Insurance Business Services (Life Insurance) 68. Interior Decorator. 70. Internet Telecommunication service. 72. Mailing list compilation and mailing services. 73. Management or Business Consultant. 74. Management, Maintenance or repair service. 75. Mandap keeper service. 76. Manpower recruitment or supply
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(A Finance Primer) services. 77. Map Making Services. 79. Market Research Agency. 78. Mining services. 80. Motor vehicles (light motor vehicles) Service and repair. 81. Motor cars and two-wheelers Service and repair. 83. Online information and database access or retrieval service. 85. Packaging services. 87. Photography service. 89. Port services (Minor Port) 91. Public Relation Services 93. Rail travel agent. 86. Pandal or shamiana services. 88. Port services (Major Port) 90. Programme Services. 92. Rail Transport. 94. Recruitment or Supply Agencys Services 95. Recovery service. 96. Real Estate, broking and consultation services. 97. Rent a cab service. 99. Road Transport 101. Sale of Space or Time. 103. Scientific or technical consultancy. 105. Share transfer agents service. 107. Site formation and clearance, excavation and earthmoving and 98. Registrar to an Issue service. 100. Renting of immovable property. 102. Security Agency. 104. Ship management services. 106. Sound recording service. 108. Steamer Agents service. 84. Outdoor Caterers Services. 82. Opinion poll services.
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(A Finance Primer) demolition services. 109. Sponsorship service. 110. Stock Exchange, commodity Exchange and Processing & Clearing Service. 111. Stock Broking service. 107. Storage and warehousing services. 113. Technical inspection and certification services. 115. Telecommunication services. 117. Tour Operators Servives 116. Survey and map making services. 118. Technical testing and analysis services. 119. Transport of goods by Road Services 121. Transport of goods through Pipeline/ Conduit Services. 123. Travel by Air for International journey 124. Transport of goods in containers by Services. 125. Travel by Rail 127. Travel by cruise Ship Services. 129. Underwriter. 131. Works Contract services. Rail Services. 126. Travel Agents Services. 128. TV or Radio. 130. Video tape production service. 132. Warehousing Services. 120. Testing and Analysis Services. 122. Transport of goods by Air Services. 112. Survey and exploration of minerals services. 114. Supply of Tangible Goods Service.
The rate of service tax to be paid:
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(A Finance Primer) The current rate of service tax to be paid is 12% of the value of taxable service plus an educational cess of 3% of the 12% service tax charged, which makes a total tax rate of 12.36%. Note: There is a threshold exemption limit i.e. if the service fees or the taxable services bill is less than or equal to Rs 8 lakh, then no service tax is to be paid. Therefore, if in a particular year taxable service is 10lakh then your liable to pay service tax on the Rs.2lakh.
Service Tax Registration: Before you can submit bills to collect service tax from the recipient of your services, you are liable to have your establishment registered under the Service Tax Act. The service tax registration is done by filling in form ST 3. It is a simple form where you have to give the particulars of the owners, the addresses and other details, along with this ST3 you have to give a copy of the PAN card of your establishment. Now, if you are a proprietorship concern then the PAN card of the proprietor has to be given otherwise the PAN card of the business organisation has to be given. In addition to the copy of the PAN card, address proof like the telephone bill or electricity bill has to be given along with the form. And once you comply with these formalities you are liable to be registered and you will receive a registration no. which is first received generally by an e-mail.
Service Tax When Payable
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(A Finance Primer) As stated earlier the effective rate of service tax is 12.36% and is liable to be paid only in respect of money collected from the bills of taxable services that has been submitted to concerned recipients of the service. At the same time suppose you have paid service tax with respect to services availed by you during the relevant period then the amount of service tax that you have paid can be deducted from your liability to service tax payment for that concerned period. The frequency with which service tax is liable to be paid by an organisation If you are an incorporated limited liability company then you have to make service tax payments every month and within the 5th of the succeeding month . Delay in payment attracts interest charges of 13%.
If you are a non- corporate assessee then you are liable to pay service tax on a quarterly basis within the 5th of the end of the concern quarter i.e. for the quarter ended on 30th June you have to pay service tax for that quarter by the 5th of July.
Returns to be made under Service Tax Act: Two half yearly returns have to be made under the Service Tax Act. In respect of the half year ended on 30th September within the 25th of October, a return in form ST4 has to be made with the concerned service tax authorities under whose jurisdiction your business organisation falls. Similarly, in respect of the half year ended on 31st March, the return in
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(A Finance Primer) form ST4 has to be made within the 25th of April. One important point to be noted that service tax for the month of March has to be paid within March itself. You cannot wait till the 5th of April i.e. the 5th day of the next succeeding month in respect of service tax payment obligation for the month of March or quarter ended in March.
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(A Finance Primer)
CHAPTER VII
How To Read A Balance Sheet, Trading And Profit & Loss Account, Ratio Analysis And A Little About Project Reports Evaluation Of The Cash Flow Of A Company, Evaluation Of Financial Reports, Balance Sheet, Profit & Loss Account And Other Statements From The Point Of View Of Shareholders Of A Company
Even if you are a layman not directly involved with the financial world you have in all probability seen a balance sheet of some organisation or the other. In a nutshell the balance sheet of an organisation contains on one side, by convention the right hand side when you face the balance sheet, the list and value of all the assets owned by an organisation and finally gives the total value of all the assets at the bottom of that list. Secondly, on the left hand side of the balance sheet is the listing of all the liabilities of the organisation with the total of the liabilities again at the bottom of the list. Note that the value of the total assets is equal to the value of the total liabilities. A balance sheet of an organisation is a listing of the assets and liabilities as on particular date. and the balance sheet of an undertaking which is engaged in some activity or the other will undergo change all the time because there will be incomes, expenses, loans taken, liabilities added , assets acquired or disposed and so the balance sheet will change from day to day .and so is prepared as on a particular date.
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(A Finance Primer)
Let us see a typical balance sheet of a retail organization called Smart Apparel Liabilities Capital Term Loan Cash Credit Loan Sundry Creditors Amount (Rs.) 1,10,000 50,000 2,00,000 50,000 Assets Furniture & Fixture Computers Inventories Sundry Debtors Cash at Bank Total 4,10,000 Cash in Hand Total Amount (Rs.) 50,000 25,000 2,50,000 50,000 20,000 15,000 4,10,000
Now, the above is the balance sheet of an organisation which is in retail business and presumably it requires furniture and fixture in the form of utilities such as shelves and almirahs for keeping the products on sale , furniture and fixtures to sit down,
computer to maintain the accounts and other administrative records. Then there is inventories which is items meant for sale, Sundry Debtors is amounts receivable i.e.
owed to the organisation because of having sold goods on credit. Then there is cash at bank of a certain amount and then there is cash in the cash box in the business
premises itself. The assets side you can say is the value of all the assets owned by an organisation. And the liabilities listing is a statement of how the assets owned by an organisation have been financed. First item in the liabilities side is the capital Rs.1,10,000/-. Now, capital is something that is contributed by the owner of the business to carry on its affairs. Now,
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(A Finance Primer) you could say that how is capital a liability after all it is the owners money and he owns everything that the organisation has. There is a certain point to be made over here that is for accounting purposes the business is considered to be a distinct entity separate from the identity of the owner and the capital account value represents the amount that the business organisation owes to the owner by the business. Therefore, capital is that which is owed to the proprietor of the business and it has been used to finance the assets of the organisation. Then we have a term loan. The term loan was presumably taken to finance the assets of the organisation like the furniture and fixtures, computers and this has been taken to the extent of Rs.50,000/-presumably from the bank and is to be repaid in equal installments maybe 36 installments or 60 installments or whatever time frame that is allowed by the lending bank. Then there is the cash credit loan of Rs.2,00,000/- which is used to finance the stocks that are necessary to be bought by the organisation in order to be meant for sales. In this case there is a cash credit loan of Rs.2,00,000/-. Now, there is the 5th amount outstanding a sundry creditor. Sundry creditor represents an amount that is owed by a business to parties from which the items has been bought in credit i.e. items that are meant for resale. In this case it is valued to Rs.50,000/-. Now, let us make a final point regarding the balance sheet and the type of assets that it contains. Now, in this instant case furniture and fixtures and computers are classified as fixed assets. How come they are fixed assets.? They are fixed assets in the sense that they have to be in the business as long as it continues to be done and they are not meant for
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(A Finance Primer) resale. Only thing is that they undergo loss in value because of wear and tear and when accounting for their value at the end of the year provision is made for any loss in the value of the assets in the form of depreciation. Therefore, the original cost would be more and the value that is reflected in the balance sheet is after deducting normal depreciation from the value of the asset. So, these are fixed assets. Now, the other items inventories, sundry debtors, cash at bank, cash in hand are known as current assets of the organisation. Their values are constantly changing for example inventories get sold on credit, they become debtors, then debtors pay cash after the
credit period is over and that debtors become changed to cash at bank or cash in hand depending on where the business keeps its cash for that matter. So, these items are known as current assets i.e. items used in the course of sales and purchases and making expenses. For example in this case inventories will probably include clothes are meant for resale. Similarly, the liabilities in the case of term loan is known as a long term loan. It is long term because it has to be repaid over the period of generally over1 year. It could be 3 years or 5 years or 7 years also. Now, the cash credit loan is constantly changing throughout the year on a day to day basis i.e. you use cash credit to buy goods meant for resale and when after being sold when cash is received from the customers it is deposited into the cash credit loan account and value of the loan gets reduced and again you buy more goods and so its value keep fluctuating depending on the withdrawal, deposits made by the organisation. Similarly, sundry creditors is also a short term finance facility given by the supplier of goods meant that
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(A Finance Primer) to be sold by you and generally it is repaid within 1 year, generally, it is 15 days or 30 days you are given credit for repayment of these liabilities. These liabilities i.e. cash credit loan and sundry creditors are known as current liabilities or short term liabilities. Capital of Rs.1,10,000/- represents the value that the owner is to get from the business. Suppose the business is going to stop functioning. If a business is going to stop its activities generally what happens is either it is sold or the assets individually sold and the proceeds first have to be applied for meeting the outside liabilities and then whatever is left belongs to the proprietor in the form of repayment of capital which may include a surplus or if the luck is bad there may be a deficit because on realizing of assest there is insufficient funds to pay the total amount that is due to the owner of the
organisation. So, this in the nutshell is how to read a balance sheet.
THE TRADING AND PROFIT AND LOSS ACCOUNT In the previous section we have explained how to understand a balance sheet which is not a very difficult exercise once you get the hang of it. Now, in this case we are going to find out the results of the operations of the business carried on by an organisation and the trading and profit and loss account gives quantitative monetary information about the profits or losses made by an organisation on account of its business.
The Trading Account Let us say that you are a retailer of T-shirts and for each T-shirt that you buy for Rs.50/you sell for Rs.100/-. In this case your gross margin per T-shirt is Rs.50/- and if in a year
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(A Finance Primer) you sell 2000 piece of T-shirts then the aggregate of gross margin for all the sales of the T-shirts is Rs.1,00,000/- and this is called the gross profit of the organisation. This gross profit is not to be mistaken with net profit in the sense that having earned the gross margin that is the difference between the sales value and the direct cost of purchasing of these shirts we have to deduct from this gross profit other expenses that a business organisation has to incur like for example the rent of the showroom, electricity cost, telephone expenses, conveyance, printing & stationary, depreciation of assets and after having deducted all these expenses, which in this example say is Rs.70,000/-, then since you have a gross profit of Rs.1,00.000/- you have a net profit of Rs.30,000/-. Now, let us see how the trading account will look. We have Sales of less deduct from here the cost of goods sold in which case it is Rs.50 X Rs.2,000 = leaving you a gross profit of Rs.1,00,000/Rs.1,00,000/-. Rs.2,00,000/-
This in a nutshell is the trading account. For simplistic reasons we are presuming that the organisation is not maintaining any stocks but in real life there will be substantial quantity of stocks and we shall discuss this issue a little in the subsequent section. Now, from this gross profit of Rs.1,00,000/- we deduct the following expenses rent, salaries, conveyance, printing & stationary, telephone, depreciation, miscellaneous expenses totaling Rs.70,000/- leaving you a net profit of Rs.30,000/-. The trading and profit and loss account will look as follows:-
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(A Finance Primer) TRADING ACCOUNT Sales Less Cost Of goods sold Gross Profit 2,00,000 1,00,000 1,00,000
Profit And Loss Account Gross Profit Less Expenses Salaries Conveyance Printing & Stationery Telephone 30,000 5,000 5,000 10,000 1,00,000
Depreciation, Miscellaneous 10,000 Total Expenses Net Profit 70,000 30,000
Now, what is the concept of this net profit? It means the excess of income over the expenses of the organisation and where exactly is this Rs.30,000/- held. Now, if your business were all cash in that case your cash aand bank balance at the end of the year would have increase by Rs.30,000/- and who would this Rs.30,000/- belong to? Obviously to the proprietor of the organisation. Now, if his capital at the beginning of the
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(A Finance Primer) year was Rs.50,000/- you add another Rs.30,000/- then the capital at the end of the year amounts to Rs.80,000/- meaning that the surplus is something that the business owes
the owner of the organisation. However, this capital may be reduced as for example if he withdraws money for personal expenses. Say for example if he withdraws Rs.10,000/then his capital would come down to Rs.70,000/- but his profit would remain Rs.30,000/because the withdrawal of the proprietor is not an expenditure it is a discharge by the business of its liability to the proprietor of the organisation. So, this in the sense is the trading and profit & loss account. Now, let us discuss the concept of stocks and how it is accounted for while preparing the trading account of an organisation. Let us again start with the example the business of T-shirts. Say for example the proprietor purchases 2,000 T-shirts at Rs.50/- each and he spends Rs.1,00,000/- on the T-shirts. Now, of the 2,000 T-shirts say he has sold 1500 of these T-shirts at Rs.100/- earning him a sales revenue of Rs.1,50,000/-. Now, the expense that he has incurred on the T-shirts for the 2,000 is Rs.1,00,000/-. Now, is the whole of Rs.1,00,000/an expense that we will reduce
from the sales in order to earn the gross profit i.e. Rs.1,50,000 Rs.1,00,000 = Rs.50,000/-. The answer is no because he has sold only 1500 pieces while he had purchased 2000 meaning he has 500 T-shirts in stock which is an item of value to him and can be sold in the subsequent period and converted into sales revenue. In this case in order to arrive at the gross profit we have to deduct from the sales of Rs.1,50,000/- the cost of 1500 T-shirts which is in this case Rs.75,000/-. Therefore, in this case his gross profit would be Rs.75,000/- and the balance Rs.25,000/- of T-shirts would be in stock to
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(A Finance Primer) be charged as an expense when these are sold. Therefore, the trading account would look as follows: Sales less cost of goods sold Gross profit Rs.1,50,000/Rs.75,000/Rs.75,000/-.
So, this is the concept of closing stock.
RATIO ANALYSIS Both the balance sheet figures and the trading and profit & loss account can be analysed with ratios with the resulting figures giving an indication of the health of a business as well as its operational performance in terms of the profits and surpluses it has earned. In context of this book we shall limit ourselves to just four ratios. 1. In the case of the balance sheet we will look at the (a) current ratio and the (b) debt equity ratio.
2. In the case of trading and profit & loss account we shall look at the gross profit ratio and the net profit ratio. Let us presume that in the case of a balance sheet we have the following figures.
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(A Finance Primer) Assets: Furniture Rs.25,000/-
Electrical equipment Stock
Rs.15,000/Rs.40,000/-
Accounts Receivables Rs.50,000/Cash & Bank Balance Rs.20,000/Total 1,50,000
Liabilities: Capital Term Loan Sundry Creditors Total Rs.1,05,000/Rs.20,000/Rs.25,000/Rs.1,50,000/-
Now, in the Asset side of the balance sheet we will introduce two new terms i.e. Capital Assets and Current Assets. Now, in this case the furniture and the electrical equipment which are a part of the business is not intended for resale but is intended for use for an extended period of time, usually several years, and hence they remain constant fixtures within the organisation and are known as fixed assets. They only reduce in value because of wear and tear or depreciation and in this case it is furniture and electrical equipment. Now, the other item of assets in the balance sheet are stock, accounts receivable and sundry debtors, cash & bank balance. Now, these are current assets whose values are
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(A Finance Primer) constantly changing with the result of business being carried out by the organisation. For example stock gets increase by fresh purchases , reduced by sales. Credit sales results in the increase of the value of sundry debtors while payments by sundry creditors reduces
the value of sundry debtors. Similarly, cash is use for meeting expenses will reduce its value and increase by receipt from debtors and sale and decrease by payment to creditors who give their goods on credit. So, these three items are known as current assets. Similarly, in the Liabilities side we have long term liabilities and short term liabilities or current liabilities. Now, in the case of capital it is a liability(due to the owner) but term loan is a long term liability in the sense that you do not have to repay it in one shot, you have to repay generally in several years and hence it is known as a long term liability. Sundry Creditors are generally paid well within one year within one or two weeks may be a month and again they get increased by buying fresh goods, get reduced by making payments and hence these are known as current liabilities. Now, the financial health of an organisation i.e. ability to do business depends on how the value of current assets are visa viz. its current liabilities. If it has sufficient current assets to meet its obligations then sundry creditors will be paid in time, they will make fresh credit sales to them and which can be sold to earn profits. Now, one way of knowing the financial health of an organisation is known as the current ratio which is the value of all the current assets divided by the current liabilities. Now, in this case the total of the current assets stock Rs.40,000/-, sundry debtors Rs.50,000/-, Cash & bank balance Rs.20,000/- which is Rs.1,10,000/-. Current liabilities is Rs.25,000/- and therefore the current ratio is
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(A Finance Primer) Rs.1,10,000/- divided by Rs.25,000/- which is 4.4%. Now, this is a very healthy ratio and in fact experts are in agreement that the current financial solvency of an organisation is good if its current ratio is 2 or more. So, this is the current ratio.
Next ratio that we are going to study is known as the debt equity ratio this is the ratio of the capital employed, that is the owners contribution, visa viz. long term loan taken by an organisation and in this case the debt equity ratio is 20000 : 105000 which works out to be 4 : 21. This is also quite healthy in fact in many businesses S of ratio of 2 : 1 where the liability is more than the asset is considered as ok and not very risky as far as the business is concerned. So, this is the debt equity ratio and the current ratio. Now, let us look at the trading account of an organisation and its profit & loss account and understand the two ratios namely the gross profit ratio and the net profit ratio. A trading and profit & loss account looks as follows: Sales Rs.4,00,000/-
Less: Cost of Sales Rs.3,00,000/-
Gross Profit Less: Expenses Rs. 50,000/-.
Rs.1,00,000/Rs.50,000/- not shown in details over here, leaving a net profit of
Now, let us first calculate the gross profit ratio. It is the gross profit divided by the total sales multiplied by 100 and gives the percentage of the gross margin. In this case the
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(A Finance Primer) gross profit ratio is 1,00,000 / 4,00,000 X 100 which is equal to 25% . This means that out of a sale of Rs.100/- there is a gross profit or gross margin of Rs.25/- i.e. purchase price of that item is just Rs.75/- leaving a margin of Rs.25/. Similarly, the net profit
ratio is the net profit divided by the total sales multiply by 100. In this case it is 50000 /
400000 X 100 which is equal to 12.5%. This too is a pretty healthy net profit ratio known as the ratio of profit to sales.
Evaluation Of The Cash Flow Of A Company Let us understand the concept of cash flow or sometimes synonymously called fundflow with reference to a very simple business that is undertaken by a proprietorship concern. Say you are in the business of buying and selling jeans and you have no regular office or office establishment, you just run it from home, you buy from a known purchaser the goods that you want for sale and you sell it to a person having a retail outlet. Now, let us say that on the first day i.e. say 1st April you decide to allocate Rs.20,000/- in cash to do the business then the opening balance sheet will look as follows: Liabilities Proprietors Capital Amount (Rs.) 20000 Assets Cash in Hand Amount (Rs.) 20000
Total
20000
Total
20000
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(A Finance Primer) Now, suppose the next day you use Rs.15,000/- of the cash that you have allocated for doing business in purchasing jeans, then your cash balance would diminish by Rs.15000/but in this place you will have a stock of Rs.15,000/- worth of jeans. In that case, the balance sheet after that days transaction will look as follows: Liabilities Proprietors Capital Amount (Rs.) 20000 Assets Stock of Jeans Cash in Hand Amount (Rs.) 15000 5000
Total
20000
Total
20000
Now, what is the fund flow involved in this transaction. In the first case, there has been no selling only purchases has been done. And the fund flow for purchases was your contribution. Therefore, if we prepare a fund flow statement for the first day it will look as follows:
The Sources of Fund:
Funds i.e. money or moneys worth with which expenses and other asset acquisitions can be done will look as follows:
Sources of Fund: Proprietors Capital Account Application of Funds: Rs.20,000/-
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(A Finance Primer) Cash in Hand Rs.20,000/-
So, this is the fund flow statement on the 1st day of business. Now, from the next day suppose on the third day you sell the Rs.15,000/- worth of jeans to your friendly retail outlet for Rs.20,000/-, who paid for you in cash, then your balance sheet after your transaction what would it look like. First of all you have liquidated your Rs.15,000/worth of asset for Rs.20,000/- which means you have made a profit of Rs.5,000/-. And where is this profit? You sold the goods for Rs.20,000/- in cash, so your cash balance increases by Rs.20,000/- from Rs.5,000/-. And what is the source of increasing the asset? It is the profit that you have made. Therefore, the fund flow or the cash flow statement for the next day will look as follows:
Sources of Fund:
There is no additional inflow of capital so, capital has already been taken care of in the first fund flow statement.
Other source of fund is profit from operation Rs.5,000/There has been an increase in your cash balance from Rs.20,000/- to Rs.25,000/-. Or to be more precise if we consider the second days balance sheet where there was Rs.15,000/- worth of jeans and Rs.5,000/- making a total working capital availability of Rs.20,000/-. On the third day the jeans were sold off and in this a place Rs.20,000/- came in cash increasing it to 25000/-. These are the current assets. So, on the third day what is
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(A Finance Primer) the net increase in the current assets on the third day? What was the initial position of the current asset at the beginning of the day? It was Rs.20,000/-. Rs.15,000/- of jeans and Rs.5,000/- in cash. And what is the closing value of the current assets at the end of day 3 after the sales transaction? Your jeans balance became nil because you sold out everything. But in this state the cash in hand became Rs.25,000/-. Therefore, there was an increase in current assets by Rs.5,000/-. Therefore, we have a source of fund on the left hand side which says funds from profit Rs.5,000/-. Now, how were the funds utilized? There was an increase in cash balance of Rs.5,000/- or current assets R.5,000/-. So, we write over there increase in current assets Rs.5,000/-. So, you have the source of fund and application of fund Rs. 5,000/- each. And looks as follows
Sources of Funds Funds from Profit Application of Funds Increase in Current Assets Rs 5000 Rs 5000
For another example of Funds Flow Statement let us have a look at the following Balance Sheets and Profit & Loss Account. Liabilities Capital Amount (Rs.) 25000 Assets Furniture & Fixture Stock of Jeans Cash in Hand Amount (Rs.) 5000 15000 5000
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(A Finance Primer) Total Expenses Opening Stock Purchases Depreciation Net Profit 25000 Amount (Rs.) 15000 80000 500 15500 Total Income Sales Closing Stock jeans 25000 Amount (Rs.) 91000 20000
Total
111000
Total
111000
Liabilities Capital Add profit 25000 15500 40500 Less Drawings 5000
Amount (Rs.)
Assets Furniture & Fixture Less Depreciation
Amount (Rs.) 5000 500 4500 20000 11000
35500
Stock of Jeans Cash in Hand
Total
35500
Total
35500
Let us have a look at the profit & loss account for the year 2. First item of the expense side is the opening stock of jeans purchased last year available for sale this year and is charged as an expense against sale, so this is Rs.15,000/-. We have made purchases worth 95

(A Finance Primer) Rs.80,000/-. Depreciation on furniture is Rs.500/-. Note one thing about depreciation is that it is not paid in cash to anyone, it is just accounted for by making a diminution in the value of asset and it does not entail a cash outflow, and the fourth item is net profit Rs.15, 500/-. Now, profit is source of fund so you have got Rs.15,500/- of addition of funds and depreciation too is a source of fund as receipt because we dont have to pay for it to anyone in cash. Therefore, the total cash or fund flow during the year is Rs.16,000/-. So, our fund flow statement on the sources of fund side will show funds from operation or funds from profit i.e. Rs.16,000/- inclusive of depreciation. Now, how has these funds been utilized 1. Go to the balance sheet and see the drawings have been made of Rs.5,000/- that means the proprietor have withdrawn Rs.5,000/-. So, some of the finance from operation have been utilised by the proprietor by making a drawings so it appears in the application of fund as drawings. The balance of funds from operations how has it been utilized? Notice that the balance at the end of the year 1 we had current asset of stock jeans Rs.15,000/and cash in hand Rs.5,000/-.i.e total current asset is Rs.20,000/-. Furniture remain static except its value is diminished by Rs.500/- because of depreciation but there has been no additional acquisition of any fixed asset. Now, the current asset position i.e stock of jeans has increased to Rs.20,000/- and cash in hand Rs.11,000/- that is a total of Rs.31,000/-. Therefore, there has been an increase in the current assets to the extent of .Rs 11000/-.
The current asset position at the end of year 2 is Rs.31,000/- i.e. Rs.20,000 plus Rs.11,000/-. And at the beginning of the year it was Rs.20,000/- so there has been an
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(A Finance Primer) application of fund in the form of increase in working capital by Rs.11,000/- and you notice that drawings have gone to Rs.5,000/- so total application of funds is Rs.16,000/and your funds from operation too is Rs.16,000/- in the form of net profit Rs.15,500/plus 500 so this is how the fund flow of the organisation is reflected. Sources of Funds Funds from operations Application Of Funds Drawings Increase in current assets Total 5000 11000 16000 Rs 16000
Evaluation of financial reports, the balance sheet, profit & loss account and fundflows from the shareholders point of view. 1. Calculating the earnings per share or EPS. Suppose a company has 1,00,000 equity shares of Rs.10/- i.e. for a total share capital of Rs.10,00,000/- and it earns say a profit of Rs.2,00,000/- during the year then the earnings per share is Rs.2/-. Now, if you calculate this as a percentage of face value i.e.Rs.10/- per share i.e. a company is earning for its shareholder Rs.2/- per share on an investment of Rs.10/- and that works out to be a percentage value of 20 which is quite good in the sense that the fixed deposit rate at the maximum touches just about 10%, so it is a double earnings over here. However, if you have bought your shares say from the secondary market and the price that you paid per share was Rs.20/- then notice that your return is 2 divided by 20 multiply by 100 is just 10% which is just above the rate of earning in fixed
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(A Finance Primer) deposit which may not be too good from the point of view and investment in shares is a risky business because you never know what the fortunes of the business will turn out to be in the course of time. So you expect higher returns than fixed deposit at least say 20% 2. The second way of evaluating the balance sheet let us have a balance sheet over here.
Liabilities Share Capital Term loan Current liabilities Total
Amount (Rs.) 1000000 2000000 500000 3500000
Assets Fixed Assets Current Asset
Amount (Rs.) 2000000 1500000
Total
3500000
Now, from this balance sheet you can find out what is the level of risk in terms of having incurred liabilities. Now, the debt equity ratio over here is 2:1 (200000: 1000000) which may be risky in the sense that if there is a down turn in the business of the organisation. Similarly, the current ratio is 3: 1 i.e. the current assets divided by the current liabilities. And this is a healthy current asset position which will ensure that the company can carry on business without any financial difficulties because of lack of working capital and so it can continue to make sales, earn money and profits for the shareholders who can earn in the form of dividends and as well as appreciation in the value of shares in the secondary market.
Apart from the current ratio we can find out the return on investment. Return on investment is discussed here is earnings, net profit before interest and tax divided by the
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(A Finance Primer) capital employed which is long term debt plus shareholders fund multiplied by 100 and your return in the region of 15 20 is good from the point of view of shareholders of that organisation. From the point of view of the profit & loss account we have calculated the return on investment. We can also look at net profit ratio which is the net profit after interest and tax divided by the turnover that is the total sales made by the company and any return over 10% would be very good, in fact many cases returns are in the region of about 5%. Another important figure of ratio that a shareholder could be interested is the net worth or the book value of a share. Now, suppose a balance sheet looks as follows: Fixed Asset Current Asset Rs.2000000 Rs.1500000
Total Rs.3500000 Shareholders fund or Equity share capital Rs. 700000 Reserves Rs 300000 Term Loan Rs. 1700000 Current Liabilities Rs. 800000 Total Rs 3500000
Now, in this case the total value of the assets is Rs.35,00,000/- if you deduct the liability of term loan Rs.17,00,000/- and current liabilities of Rs.8,00,000/- the 10,00,000 belongs to the share holders i.e. for a face value investment of Rs.7,00,000/- the value that is contained in the organisation is Rs.10,00,000/- So, if you have paid Rs.7,00,000/to acquire all the shares you would be having a book value of Rs.10,00,000/- that is a surplus of Rs.3,00,000/-. Now, again there can be certain adjustments to the value of asset because assets are recorded at cost price and over the passage of years they are far
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(A Finance Primer) removed from their actual market price if they are disposed off. Therefore, if the fixed assets were Rs.10,00,000/- and value after revaluation accounting for inflation and increase in the cost of assets became Rs.20,00,000/- then this surplus of Rs.10,00,000/would belong to the equity shareholders. Therefore, there would been a book value of Rs.20,00,000/- if evaluation were done though as a matter of accounting policy evaluation is not often done. Therefore, while the face value is Rs.7,00,000/- the market value of shares in terms of asset is Rs.27,00,000/- which is about almost 4 times the face value of the asset. So, this is net worth and accounting revaluation reserve i.e. accounting for increase in the asset value because of inflation and other market movement of the prices of asset in an upward direction.
Money Related Websites There are many sites involved in the handling of money and finance related matters and some important ones are moneycontrol.com, largedividends.com, personalfinance201.com and last if you want to add other finance related sites there is master site known as financesites.com. Now, like for example money control.com there are various links which provide you information on CNNTV next is market, mutual fund , IPOs, commodities , wealth .
So, you can get different kinds of information made available to you. For example you get information about capital goods, prices, metals prices, commodities prices of different kinds , information of technical advice, information about earnings and different kinds of statistics involved. Similarly, for mutual fund and IPOs you will get all
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(A Finance Primer) the information that you need about them. Therefore you can get information on shares and commodities prices in real time . So, this is essentially what a finance and money related website is..
A Little About The Project Report Now, let us say that an organisation or an individual is going to start-up a new business, it could be a manufacturing business or a trading business or a service rendering business. Whatever it is, in order to make his venture functional he probably will not have all the funds at his disposal to do it solo without taking recourse to money from other persons or banks or any other financial institution. The Project Report is generally prepared in order to be submitted to funding agencies so that on the basis of the information contained in the report they feel confident that not only is their money safe but that repayment would be regular and they would in turn earn a profit from the risk involved in lending money to an organisation. In a nutshell, a project report generally contains the following information:
1. A general overview of the project. This gives a detail about what business is this is all about, what is going to be done, what is the product going to be like, where it is going to be located, what is the space required in terms of land and building and several such information. 2. In the case of a manufacturing organisation there will be typical discussions about the manufacturing process involved which could involve detailed process flow statements showing how the manufacturing will take place from the raw materials to the final output.
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(A Finance Primer) 3. There would be a demand analysis of the product so that the lenders would be sure that there is sufficient demand that could be tapped by the business in order to earn revenues, meet its expenses, earn a surplus and service the loans and funds taken from different people. 4. A sale forecast statement showing what the projected sales are going to be and how the products are going to be marketed by the organisation. 5. A statement about the power required where it is a major factor of cost especially in the case of a manufacturing concern. Lenders would like to know that sufficient power will be available in order to run the business without any interruption. 6. A statement of the manpower required, different categories of manpower, the cost involved and a statement of the availability of the persons in that locality or in other localities of persons who will be willing to relocate to the place where the business is being conducted. 7. A complete financial analysis of the project. This is in fact the most important part of the project report as it contains the complete financial information and the figures are relied upon by the funding organisations in order to assess the degree of comfort they feel in injecting the funds to the new venture. Let us look at the most important financial statements that a project could have in its project report. Let us say in the case of a retail where business of clothing will be done. Now, let us say it requires furniture of Rs.20,000/- and electrical equipment of Rs.15,000/- .In that case the statement of fixed asset required would be furniture Rs.25,000/- , electrical equipment Rs.40,000/-. This is the fixed asset or capital items required. Then there is working capital requirement to be computed and how this working
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(A Finance Primer) capital is going to financed. For example, we first estimate the amount of money that will be blocked in current assets for example stock Rs.40,000/-, sundry debtors Rs.50,000/and cash & bank balance of Rs.20,000/- which would mean a total current asset position of Rs.1,10,000/-. Of this, for example, creditors give you a credit of about Rs.25,000/- so that your financing of current asset is to that extent reduced that means you require just Rs.85,000/-. Now, out of this working capital requirement of Rs.85,000/- let us say that you will be taking a cash credit limit of Rs.50,000/- which means the promoter have to contribute Rs.35,000/- making it a total requirement of Rs.85,000/-. Similarly, in the case of furniture fixture and electrical equipment the total requirement is Rs.40,000/- and if a term loan of Rs.25,000/- is required then the balance will have to be financed by the promoter to the extent of Rs.20,000/-. So, the total project cost statement would look as follows:
Furniture and fixture Electrical Equipment
Rs.25,000/Rs.15,000/-
Working Capital Total
Rs.85,000/Rs.1,25,000/-
Term Loan Cash Credit Capital of
Rs.20,000/Rs.50,000/Rs. 45,000/-
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So, this is the statement of Total project cost.which estimates the requirement of assets including working capital and how they are to be financed. Finally, as you have seen a profit & loss account is prepared for say 5 years which I the tenure of the term loan. A term loan statement will be prepared showing how the loan will be repaid within the years 3-5 years, the interest per year which would be charged to the profit & loss account. Finally, a balance sheet will be prepared for the several years for at least the 5 yaer duration of the term loan and these statements will be relied upon by the financial institutions which shall be funding the organisation. Apart from this( we will not be discussing the here) important statements prepared are for example cash and fund flow statement analysis and other important ratio calculation. So, this in a nutshell is the story about the project report.
CHAPTER VIII
Useful Information To Know About The Income Tax Act And Wealth Tax Act Note: 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
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(A Finance Primer) You may be liable to pay income tax under the Income Tax Act if your total income computed in accordance with the law laid down in the Income Tax Act exceeds the threshold limit not liable to tax . Then you will have to pay income tax at the rate specified under the law. For example: 1. If you are an individual other than a lady assessee or any other individual whose age
is not more than 65 years of age you are liable to pay income tax if the total income exceeds Rs.1,10,000/2 Similarly if you are a lady assessee below the age of 65 years then you are liable to pay income tax. if your total income exceeds Rs.1, 45,000/-. 3. If you are an individual of 65 years of age or more then you are liable to pay income tax if your total income exceeds Rs.1,95,000/-. Now, if you are any other type of assessee other than an individual for example a partnership concern or a co-operative society or a limited liability company then you are liable to pay income tax at the rates specified in the Act. even if your income is well
below the threshold limit for individuals. In this class of assessees there is no threshold limit. If you got little amount of income as computed under the Act you will be liable to pay that little amount of tax also. So, there is no exemption limit over here.
The PAN (Permanent Account Number) Card Before any body takes any steps under the Income Tax Act , he ,she or the organisation needs a Permanent Account Number allotted by the Income Tax Department.. This is a
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(A Finance Primer) unique combination of uppercase alphabets and digits which needs to be quoted in any document to be submitted to the department. The PAN card can be obtained by making an online application in the website tin-nsdl.com
Payment of Income Tax in advance or Advance Tax for short: If for a particular year known as the income year or previous year you estimate that your total income will be more than the amount not liable to income tax then you have to pay income tax in advance. The due dates for paying the advance income tax are the following: 1. If you are an individual other than a body corporate or a firm, the following are the dates in which advance tax are to be paid: a). First installment 15th September of the relevant previous year: or income year The amount of advance tax to be paid is 30% of the total income tax estimated to be payable by the end of the year.
b). Second installment by 15th December It is that amount of tax which will make the total of the first and second installment equal to 60% of the total income tax estimated to be payable by the assessee during that previous year. c). 15th March of the relevant previous year: you have to pay the balance of the income tax payable in total by you, after deducting the amount paid in the first and the second
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(A Finance Primer) installment i.e. in 15th March you have to make up 100% of the total amount of the income tax estimated by you to be payable by the assessee.
2 For body corporates the time frame for paying advance tax is the following: There are 4 installments over here. a). 15th June of the previous year: 15% of the total tax estimated as payable by the company. b) 15th September of the relevant previous year: That amount of second installment which along with the first installment will be equal to 45% of the total income tax due for the whole year. c). 15th December: That amount of advance tax which will make the total income tax paid ,inclusive of the first and second installment, equal to 75% of the total income tax payable by the assessee as estimated. d). 15th March:
That amount of advance tax which will make the last installment tax plus the amount paid previously, that is the first, second and the third installments equal to 100% of the payable by an assessee. So, those are the dates under the Income Tax Act f as far as advance tax is concerned and note that in all cases amounts of tax deducted at source will reduce the advance tax payable to that extent. tax
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Assessment year and Due Date of filing of Income Tax Return: Now you earn income during the previous year and in respect of that previous year you file your return of income under the due dates specified under that Act. Now, if the income year i.e. in consideration is the 12 months ended on 31st March, 2008 the previous year is then called 2007-2008 and the assessment year is 1 year ahead of the previous year in which case the assessment year for the previous year ended on 31st March,2008 will be the 12 months ended on 31st March, 2009 and that assessment year is called 20082009.
The due dates for filing the returns are as follows: 1. In the case of individuals 31st July of the relevant assessment year. 2. In all other cases 30th September of the relevant assessment year.
The rate of Income Tax Act charged and the education cess for different categories of income: 1. If you are an individual not being a female and below 65 years of age then the rate of tax will be the following: a. Income greater than Rs.1,10,000/- less than or equal to Rs.1,50,000/-.
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(A Finance Primer) Income tax is 10% of excess of Rs.1,10,000/- then there is an educational cess of 2% of income tax computed for the year and there is a secondary and higher educational cess of 1% of the income tax computed per year. b. If income is greater than Rs.1,50,000/- but less than or equal to Rs.2,50,000/- then income tax is Rs.4,000/- plus 20% of excess of Rs.1,50,000/- ,educational cess and secondary and higher education cess are the same as stated earlier. c. If your income is greater than Rs.2,50,000/- then income tax is Rs.24,000/- plus 30% of the excess of income over Rs.2,50,000/-, education cess and special secondary and higher education cess is the same. 2. In the case of woman assessee below 65 years of age the income tax is calculated as follows: a. Income greater than Rs.1,45,000/- but less than or equal to Rs.1,50,000/- the income tax is 10% of the excess of Rs.1,45,000/-. As in the previous case there is an education cess of 2% of the income tax and a secondary and higher education cess of 1% of the income tax. b. Where the income is more than Rs.1,50,000/- but less than Rs.2,50,000/- then the rate of tax is Rs.500 plus 20% of the excess of Rs.1,50,000/-. In addition there is an education
cess of 2% and a secondary and higher education cess of 1% of the income tax computed earlier. c. Where the income exceeds 2,50,000/- the income tax is Rs. 20,500/- plus 30% of the excess of Rs.2,50,000/-. Education cess and secondary and higher education cess of 2% and 1% respectively applied here also.
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3. In the case where an individual is a person 65 years or more years of age then in this case threshold limit for non-taxability is Rs.1,95,000/- and the income tax is calculated as follows: a. Income greater than Rs.1,95,000/- less than or equal to Rs.2,50,000/- 20% of the excess of Rs.1,95,000, there is an educational cess and higher education cess of 2% and 1% of the income tax computed earlier. b. Where the income is more than Rs.2,50,000/- the income tax is Rs11000/- plus 30% of the excess of Rs.2,50,000/- with the same educational cess and secondary and higher educational cess Note: In all the above cases if the total income exceeds Rs.10,00,000/- then there is a surcharge of 10% of the income tax involved. There is a slightly complicated marginal relief where the income is slightly more than Rs.10,00,00/- but we shall not go into that in this book over here.
4. In the case of firms and companies the rate of tax is 30% of the income computed under the Income Tax Act and there is an education cess and secondary and higher educational cess of 2% and 1% respectively. 5. Where the total income exceeds Rs.1crore, then there is a surcharge of 10% of the income tax involved.
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Deduction from the gross total income in order to arrive at the total income that will be subject to income tax. Section 80C is a very famous section of the Income Tax Act and it lists the types of payments whose total amount can be deducted from the total income of an individual to the extent of Rs.1,00,000/- in total. The payments which qualifies for deduction in this regard are the following: 1. Life insurance premium paid. 2. Payments made to an insurer to secure a deferred annuity. 3. Deduction made by the Government from the salary of any person in order to secure a deferred annuity to the person. 4. Contribution to the provident fund where the Provident Fund Act, 1925 applies. 5. Contribution made to the public Provident Fund Scheme,1968. 6. Contribution made by an employee to a recognized provident fund. 7. Contribution to a pension fund. 8. Subscription to specified securities of the Central Government.
9. Subscription to specified savings certificates to the Government. 10 Contributions made to Unit Link Insurance Plan, 1971. 11. Payments made to a mutual fund. 12. Any outgoings to a notified deferred annuity plan
13. Subscription to any units of a mutual fund.
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(A Finance Primer) 14. Contribution to a notified pension fund. 15. Subscription to notified deposits scheme of the National Housing Bank. 16 Subscription to notified deposits scheme of a public sector company engaged in providing long term finance for construction or purchase of residential houses or any authority constituted in India for providing housing accommodation. 17. Tuition fees paid an individual for his childrens education. 18. Specified amount of payments made for purchase or construction of a residential house. 19. Subscription to equity shares or debentures forming part of an eligible issue of capital approved by the board. 20. Subscription to any units of any mutual funds referred to in section 10(23B) and approved by the board. 21. Any fixed deposits with a schedule bank for not less than 5 years.
Deduction of Income Tax at Source: Under certain circumstances persons making certain kinds of payments are liable to deduct income tax at the rates specified under the Act and have the same deposited to the Central Government within the time limit specified for the purpose. The following categories of payments may require deduction of tax at source:
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(A Finance Primer) 1. Under section 192 where salary is paid to a person who is liable to income tax. 2. Section 193 interest on security. 3. Section 194 dividends. 4. Section 194A interest under the head interest on securities. 5. Section 194B winnings from lottery or crossword puzzle. 6. Section 194BB winnings from horse race. 7. Section 194C payments to contractors and sub-contractors. This section however does not apply to payers to contractors who are individuals or a Hindu undivided family. 8. Section 194D insurance, commission. 9. Section 194E payments to non-residents sportsman or sports association. 10. Section 194EE payments in respects of deposits under National Savings Scheme. 11. Section 194F payments on account of repurchase of units by mutual fund or Unit Trust of India. 12. Section 194G commission on sale on the lottery tickets. 13. Section 194H commission on brokerage. 14. Section 194I Rent
15. Section 194J fees for professional or technical services. 16. Section 194K income in respects of units. 17. Section 194L payment of compensation on acquisition of capital assets. 18. Section 194LA payment of compensation on acquisition of certain immovable property.
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(A Finance Primer) 19. Section 195 other sums payable to non resident individuals. 20. Section 195A income payable net on tax. 21. Section 196 interest or dividends or other sums payable to Government, Reserve Bank or certain corporations. 22. Section 196A income in respect of units of non-residents. 23. Section 196B income from units. 24. Section 196C income from foreign currency bonds or shares of Indian companies. 25. Section 196D income of foreign institutional investors from securities.
Information under the Wealth Tax Act: Where the total value of assets specified in the Wealth Tax Act less the liabilities incurred with respect to those assets is over Rs.15,00,000/- then you are liable to pay Wealth Tax on the net value of the wealth so computed. The assets that have been specified to be includable in the wealth of an assessee are the following: 1. A guest house, a residential house or a commercial property. Note over here that one residential house below 500 sq. metre in area is not included in the net wealth.
2. Motor cars not meant for business. 3. Jewellery 4. Aircrafts not meant for commercial purposes.
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(A Finance Primer) 5. Urban land situated in the jurisdiction of a municipality or cantonment board having a population not less than 10,000 or it is within 8 km. from the local limits of a municipality or contentment board 6. Cash in hand in excess of Rs.50,000/- owned by the assessee. The rate of wealth tax payable by an individual or a Hindu undivided family is 1% of the value of net wealth in excess of Rs.15lakh. The same is the case of wealth tax of limited companies.
CHAPTER IX
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(A Finance Primer) The Central Excise Duty Act If you are a manufacturer who produces goods where excise duty is leviable under the Act then you are obliged to pay excise duty on the product when it is manufactured and invoiced for sale. There are however certain exemptions where excise duty is not payable at all. These are: 1. A production unit which is situated in a special economic zone. 2. A production unit which is wholly 100% export oriented manufacturing company.
There is also an exemption from excise duty in respect of small scale units under the following conditions: 1. In the preceding financial year the aggregate clearance should not have been more than Rs.4 crores. 2. In the current year the production and sale clearance from the factory should not be more than Rs.1,50,00,000. If these two conditions complied then the small scale industry is not liable to pay any excise duty.
Registration In the case of a person who is liable to pay excise duty he has to have his manufacturing facility registered under the excise duty office in his locality. This is done by filling up a
form 1A in duplicate and it is necessary to annex with the form an attested copy of the PAN card or where no PAN card is available then an attested copy of the
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(A Finance Primer) acknowledgement evidencing the fact that an application for allotment of a PAN no. has been made. Rates Of Duty The rates of excise duty is mentioned under the Central Excise Tariff Act and if you want to know what is the rate of excise duty applicable to a product of your manufacture, you could go the site http:/www.cbec.gov.in In the home page move the cursor to the link Central Excise then a drop down box becomes automatically open. In this drop down box click on Know your Central Excise Tariff link. This will open another window where you are required to confirm that you agree to the terms set up in the window for use of the information being provided to you under this link. After you click on the I Accept link, a new window will open up which is headlined or titled Know your Central Excise Tariff. In that you enter the products name and click on the submit button. If no levy is payable on that product then 0 will appear otherwise the rate of excise duty of percentage will be shown to you. This is the best procedure for knowing whether your product is leviable to excise duty or not. And if yes what is the tariff because the list of excisable commodities is really huge. When is the excise duty payable? After the goods have been manufactured and invoiced they become duty leviable at that point of time and the amount of duty on that invoice is required to be paid by the 5th day
of the succeeding month. It may be noted that if in the purpose of manufacture you use materials on which you pay excise duty, then the amount of excise duty paid by you is
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(A Finance Primer) deductible from the excise duty payable by you and which has to be deposited with the Government as duty.
Monthly Return Then every month the return showing the particulars of the production, sales and closing stock of commodities in your factory has to be made in form ER1 and this has to be filed with the excise duty authorities within the 10th day of the succeeding month. Note: The registration certificate given by the excise duty authorities is in the form RC
CHAPTER X
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Taxes On Professions, Trades, Callings and Employments. These taxes are levied on individuals, business organisations by state governments, and the rates of tax and the laws covering the imposition, collection and liability to this tax varies from state to state. In a nutshell, it can be said that in some cases the minimum tax is Rs.360/- per year and the maximum is Rs.2,500/- a year. This tax is paid by salaried people, people in professions like legal, medical, technical, accountants, actuaries, consultants, tax consultants, agents etc. In fact, anyone who is earning income is likely to fall within the purview of this profession, trades, callings and employment taxation Act and is liable to make the payment of this tax on the dates specified by the Individual State Acts. So, depending on the state you are earning income from get in touch with a professional from that area and find out how much tax is required to be paid by you under such Act and have it paid within the time limit specified in the Act for making such payment.
CHAPTER XI
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(A Finance Primer) Value Added Tax and Central Sales Tax Act Value Added Tax: This Value Added Tax or VAT for short has been levied by State Governments by way of legislation. So, the legalities involved in each Value Added Tax Act for the different states may differ from one to the other. In respect of a person engaged in the sale of a product where a value
added tax is payable to the State Government at the rates specified in the concerned Act and rules of the State VAT Act where the sale takes place, he/she is liable for that tax payment. For example if an item of sale attracts a VAT rate of 12%, then if a sale of Rs.100/- is made, the VAT to be added to the sale price is Rs.12/- and this Rs.12/- is payable by way of VAT to the State Government. However, there could be an adjustment. If for example while acquiring the product to be sold, your purchase price includes a VAT of Rs.7/- then your liability of Rs.12/- is reduced by that amount of VAT on the purchase that you had made i.e Rs.7/-, so your total VAT liability comes to Rs.5/-. This is similar to Cenvat credit In certain states there is a facility for making a composite payment of VAT at a flat rate say 1% of the sale price where the total turnover of VAT taxable goods does not exceed a specified upper limit.
Each seller of a commodity who is liable to VAT
has to get registered under the
Value Added Tax Act and the form for registration will of course vary from state to state.
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(A Finance Primer) The Value Added Tax is payable generally on a monthly basis within the 21st day of the succeeding month and a return of the tax paid has also to be filed with the concerned State Government tax authorities within the 21st of that month. In some states if the value of taxable turnover is less than Rs.3 lakh then the payments and the return of taxable turnover need be done quarterly within the 21st of the month following the end of the quarter. Apart from filing the tax return on a monthly or quarterly basis, under VAT an annual return has to be filed setting out the total turnover of taxable goods, and that return has to be filed in certain case within 2 months of the end of the concern financial year. In some states where the taxable turnover exceeds Rs.40lakh then the accounts of the registered dealer has to be audited by a Chartered Accountant and the audit reports submitted in the prescribed form. In such cases the time for submitting the annual return is 7 months from the end of the concern financial year
The Central Sales Tax Act The Central Sales Tax Act fixes the liability for tax where the purchaser and the seller are in different states i.e. the seller bills the purchaser in the state other than the state in which he normally does a business. In that case Central Sales Tax has to be paid at the rates specified in the Act. Registration: Any person who is likely to do business in inter state trade is required to obtain a CST registration of his business. This is done by submitting form no.3 to the appropriate tax
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(A Finance Primer) authorities on which Rs.25/- court fee stamp has to be affixed. A security deposit is
likely to be fixed , payable by the dealer or the seller to the tax department so that any default in tax liability can be adjusted against such security. The rates of tax: Central Sales Tax is levied at the rate of general sales tax of that product in the state where the seller is situated but however if the purchaser gives what is known as a C Form to the seller then the rate of Central Sales Tax currently is just 2%.. Now, what is a C Form? C Forms are special purpose forms that are issued to a purchaser of goods from other states and a form of application has to be made by the registered dealer to obtain C Forms and when he makes a purchase from another state, he can give the C Form to the seller and obtain goods at a CST rate of 2% which is most likely to be much less than a normal rate of sales tax applicable to that product in that state.
Tax Payment: The Central Sales Tax collected by a seller is required to be paid monthly by a challan before the 21st of the succeeding month. Along with this payment a monthly turnover statement is also required to be given by the 21st of the month. So, this in a nutshell gives you an idea of Central Sales Tax and the likelihood that you may be liable to CST in which case it would be in your interest to obtain the registration and collect the Central Sales Tax and pay it to the government, or if you are a dealer
who makes purchases from outside the state then you can obtain C Forms and by giving
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(A Finance Primer) the C Form to the seller you will obtain a tax rebate in the sense that the rate of Central Sales Tax would be just 2%.
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(A Finance Primer) Glossary Annual Report This is a report submitted mainly by a business organisation and it contains the result of operations i.e. a profit or loss statement and consequent financial position reflected in the balance sheet.
Annuity Annuity is a fixed income accruing to a person because of investment made under an
insurance poring or acquiring shares and securities in an investment company.
Asset Asset is an item of value belonging to a business organisation converted into money. and which can be
Balance sheet A statement showing the total value of properties owned by an organisation and how these assets are financed by sources of funds known as liabilities and equity share capital fund.
Book Value. Book value is the cost of an asset as recorded by its purchase value and adjusted for depreciation where it is a depreciable asset.
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(A Finance Primer) Capital Gain It is a gain that occurs when selling an of asset of an organisation is not an item of the business of an organisation. i.e it is not a current asset
Cash Flow Cash flow represents either an outgoing of cash because of some payments and cash inflow would be the incoming of money to the organisation and in the form of income or borrowings or capital contribution by the owners.
Charge Charge is the setting aside as security a particular asset of an organisation against a liability that has been incurred by it.
Current Asset It refers to those assets which are involved in the day-to-day business of the organisation. For example stock are current assets because they are used to manufacture or trade, sundry debtors are current assets because they arise because of selling on credit supply of goods that is dealt with by an organisation and it is expected that the
amounts s that the parties owe to the organisation will be repaid within a relatively short period of time. Generally, 15 days to 30 days or it could be as short as 3 days or a week.
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(A Finance Primer) Current liabilities It refers to the liabilities of short duration which are incurred for acquiring goods to be traded or used in the process of manufacture or in respect of expenses such as electricity, telephone where credit is given for a particular month. So, you have to repay them at the end of the month.
Debentures Debenture is an instrument evidencing a debt by a body incorporate and this debenture can be traded in the stock exchange. Debt equity Ratio This is the ratio of long term debt to the share capital of an organisation. Ratio of 2:1 is considered to be good.
Depreciation It is a value of the wear and tear incurred in the course of use of an asset in the business of your organisation.
Discount Discount means a relief granted to a person from whom money is receivable for any reason and could be an incentive for quick payment.
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(A Finance Primer) Dividend Dividend is the outgoing paid by a corporation to the shareholders in respect of shares owned by a company. Out of accumulated profits
Earnings before interest and tax This is the value of the profit of an organisation before interest and tax is charged.
Earnings per share This is the total earning of an organisation during an year and divided by total no. of shares in the company.
Floating Capital It refers to the capital whose value undergoes changes because of accounting of profits and withdrawals and interest and salaries of the capital owners who are generally the partners in the firm.
Fixed Capital It refers to the capital whose value remains constant and it is not meant for withdrawal in the short term.
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(A Finance Primer) Goodwill It refers to the value of reputation of the organisation because of which it receives a steady business from customers and it is an intangible asset.
Gross Profit Gross profit means the profit or mark up earned from sales minus te cost of acquiring the assets but not overheads
Income Statement This refers to the profit & loss account of an organisation which shows on the income side the rvenues flowing in and on the other side the expenses and the balance if the income is more than the expenses it is profit and if it is less then it is loss.
Investment Investment will refer to the appropriation of funds to an income earning financial asset could be investment in shares or interest in the partnership concern. capital of a partnership firm or a
Junk Bond It refers to bonds (borrowings) which are used to acquire another company and secured by the assets to be acquired from the company that is intended to be purchased from these bonds.
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(A Finance Primer) Liabilities Liability is something that is owed to some other persons or organisation.
Long term Liability Now, long term liability is a liability that need not be discharged within a year but may have to be repaid in installments over a period of 3, 5, 7, 10, even 20 years.
Mutual Funds Mutual fund is a collection of moneys contributed by the owners of the fund and is placed in the hands of professionals to be used for investment in securities (shares , bonds etc) in order to maximize the wealth and earnings of the owners of the mutual fund.
Net Asset Value Net asset value refers to the total value of the assets of the mutual fund divided by the number of units or number of shareholders of equal amount of that mutual fund.
Price Earning Ratio Price earning ratio is the value of the price of the share divided by the amount of earnings per share. Now, therefore, higher the price earnings ratio the more risky is the fund because its price is too high compared to the earnings of the corporation.
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(A Finance Primer) Premium It refers to the excess money paid in addition to the normal amount due to acquire a particular asset. For example a share may be worth 200 but because of expectations that in the future it would rise it could be possible to sell it at 200 plus premium at the moment. Rs.20/-as
Profit It refers to the surplus i.e. the excess of income over expenditure of an organisation.
Return on Investment Return on investment refers to the percentage of net profit compared to the capital employed which is share capital plus long term
Sales Revenue Sales revenue refers to the income to the organisation because of the sale of the products the organisation generally deals in
Short term Debt It refers to the debt that has to be paid within a relatively short period of time
Value Value refers to the worth of a particular asset or liability.
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(A Finance Primer) Yield Yield refers to the earnings made by an organisation or person , for example if a person invest Rs 100 and earns Rs.50 as profit then the yield or profit is Rs.50/- or 50%.
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TYPES OF BUSINESS ORGANISATIONS

1. The Proprietorship concern 2. The Partnership concern

A Pocket Book Of Finance

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3.The Limited Liability Company

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The Co-Operative Society

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A Society Registered Under The Societies Registration Act.

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A Pocket Book Of Finance

at a time when it is time to pay for high