Telangana TSBIE TS Inter 1st Year Commerce Study Material 5th Lesson Joint Stock Company Textbook Questions and Answers.
TS Inter 1st Year Commerce Study Material Chapter 5 Joint Stock Company
Long Answer Questions
Question 1.
Define Joint Stock Company. Explain the features of a Joint Stock Company?
Answer:
Joint Stock Company Meaning: A Joint Stock Company is a voluntary association of persons formed for undertaking some big business activity. It is an artificial person established by law & can be dissolved by law.
The Companies Act, 2013 made several amendments to the companies Act, 1956. The latest amendment to the Act has been made in 2017 to the companies Act, 2013.
Definition:
- L.H. Haney defined as “A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership”.
- As per the companies Act, 2013, “A company refers to an organization incorporated under the companies Act, 2013 or under any previous company law”.
Features of Joint Stock Company:
The following are the distinctive features of Joint Stock Company.
1) An artificial person created by law: A company is an artificial person created by law and existing only in contemplation of law. It is intangible and invisible legal person having no body and soul.
2) Separate legal entity: A company has an entity (i.e., existence) quite distinct (different) and independent of the existance of the members who constitute it. In other words a company has a separate legal entity entirely different form that of its members. It can make contracts, purchase and sell goods employ people and conduct any lawful business in its own name.
3) Formation: Generally a company is formed with the inititative group of members who are also known as promoters and comes into existence after preparation of several documents and compliance of several legal requirements be-force it starts its operation. A company comes into existence only when it is registered or incorporated under the Indian companies Act, 2013.
4) Common seal as a substitute for signature: As the company is not a natural person it cannot sign on its documents. The common seal with the name of the company engraved on it is therefore, used in place of signature. Any document having common seal and the signature of the officier is binding on the company. The secretary of the company is authorized to keep the seal under his safe custody.
5) Perpetual existance: A company has perpetual existence, once a company is formed, it continues for an unlimited period until it is legally dissolved. A company has a perpetual life and the death, lunacy, retirement or insolvency of its members (share holders) does not affect its existence.
6) Limited Liability of Members: The liability of a member of a company is limited to the extent of the amount of shares he holds. For example if Rishik holds one share of Rs. 10 and has paid Rs. 7 on that share, his liability would be limited only upto Rs. 3. Beyond this, he is not liable to pay anything towards the debts or losses of the company.
7) Transferability of shares: The members of the company are free to transfer or dispose the shares held by them to any persons as and when they like. But in case of private company, some restrictions are imposed for transferring shares.
8) Membership: To form a Joint Stock Company, a minimum of two (2) members are required in case of private limited company and seven(7) members in case of public limited company. The maximum limit is fifty (50) in case fo private limited company. There is no maximum limit on the no. of members in case of a public limited company.
9) Democratic Management: The day-to-day affairs of the company are managed by share holders elected representatives who are called as directors.
10) Women Director: As per the companies Act, 2013 implies that the board of specific companies should consist of atleast one women director in a public company.
Question 2.
Enumerate the classification of companies?
Answer:
Joint Stock Companies are classified based on different points of views. A brief description about each of them is as follows.
1) On the basis of formation:
a) Chartered Companies: A chartered company is an association with investors (or) shareholders and incorporated and granted rights by royal charter for the purpose of trade, exploration and colonization. These companies do not exist in India. Example of such type of corporation are Bank of England (1694), East India Company (1600) etc.
b) Statutory Companies: A company may be incorporated by means of a special Act of the parliament or any state legislature. Such companies are called statutory companies.
Example: Railways, Water works, Electricity generation, Reserve Bank of India etc.
c) Registered Companies: Companies registered under the companies Act, 2013 are called registered companies. Such companies come into existence when they are registered under the company Act and a certificate of incorporation is granted to them by the registrar.
2) On the basis of public interest:
a) Private company: A private company is a very suitable form for carrying on the business of family and small concerns as registered under the companies Act. According to section 2(68) of companies Act, 2013 defines private companies as, “Those companies whose Articles of Association restrict the transferability of shares and prevent the public at large from subscribing to them.
The following are the features of a public company:
- The minimum paid up capital is Rs. 1,00,000.
- The minimum number of members is two.
- The maximum number of members is fifty.
- It is prohibited from issue of shares to the public.
- It is prohibited from transfer of shares.
The private companies have to follow all these conditions noted above. It is compulsory for these companies to write “Private Limited” after their names.
According to companies Act, 2013 the private companies can be divided into 2 types.
i) Small Company: According to section 2(85) of Indian companies Act, 2013, a small company is a company other than public company. It consists of the following features.
- It has a share capital does not exceeding Rs. 50 lakhs. In case of higher amount (if any prescribed) it should not exceed Rs. 5 crores.
- Its turnover does not exceed Rs. 2 crore. In case of higher amount (if any prescribed) it should not exceed Rs. 20 crore.
ii) One person company: As per the Companies Act, 2013, “One Person Company (OPC) means a company which has only one person as member”. This is a company in which only one man holds practically the whole of the share capital of the company. In order to meet the requirement of minimum number of members, some dummy members who mostly may be his family members or his relation or friends hold just 1 or 2 shares each.
b) Public Company: It is suitable form of company for carrying on the business at large scale involving huge amount of capital. As per the provisions of the companies Act, 2013 a public company in one which has the following features:
- The minimum paid up capital is 5,00,000.
- The minimum number of members is seven.
- The maximum number of members is unlimited.
Public company must use the word “Ltd” as part of its name.
Example: Steel Authority of India Limited, Reliance Industries Limited etc.
3) On this basis of ownership:
a) Government Company: Any company in which more than 51% of paid up share capital is held either by the central Government or any state Government or both Governments or partly by the central government and partly by one or more state governments is known as Government company.
Ex: State Trading Corporation of India Ltd. And minerals and Metals Trading Corporation India Ltd., BHEL, ONGC, etc.
b) Non-Government Company: All other companies except the government companies are called non-government companies.
4) On the basis of Liability:
a) Companies limited by shares: A company having the liability of its members limited by the memorandum to the value of shares held by them is called a company limited by shares.
b) Companies limited by guarantee: A company having the liability of its member limited by its memorandum to such amount as the members may respectively undertake to contribute to the assets of the company.
c) Unlimited Companies: The members of these companies can be called upon to pay from their private assets to satisfy the liabilities in the event of winding up of the company.
5) On the basis of Control:
a) Holding Company: Where one company controls the management for another company the controlling company is called ‘Holding Company’.
For example: If company A holds more than 51% of paid up share capital of company B, the company A is called holding company.
b) Subsidiary company: Where one company controls the management of another company so controlled is called subsidiary company. For example if company A holds more than 51% of paid up share capital of company B, the company B is called subsidiary company.
6) On the basis of Nationality:
a) Indian Company: A company registered in India having place of business in India is called Indian company. It may be a private (or) public company.
b) Foreign Company: It is a company incorporated outside India and having place of business in India.
7) On the basis of Area:
a) National Company: Such companies continue their operations within the boundaries of the country in which they are registered are national companies.
b) Multi-national Company: Such companies which extend the areas of their operations beyond the country in which they are registered are multi national companies or international companies.
8) On the basis of commencement of business:
a) Dormant Company: It is a company which does not carry any accounting transaction for a period of two years.
b) Defunct Company: A company who has no assets and no liabilities and failed to commence business within one year of its incorporation such company is a defunct company.
Question 3.
Differentiate between a private company and a public company?
Answer:
Differences between private company and public company:
| Point of Difference | Private Company | Public Company |
| 1) Minimum number of members | To start a company two (2) members are required. | To start a company seven (7) members are required. |
| 2) Maximum no. of members | Max no. of members in a company cannot exceed 50. | Max no. of members is unlimited. |
| 3) Minimum paid up capital | Min paid up capital must be Rs. 1,00,000 | Min paid up capital must be Rs. 5,00,000 |
| 4) Identification | Must suffix ‘Private Limited’ to its name. | Must suffix ‘Public Limited’ to its name. |
| 5) Transfer of shares | It cannot transfer its shares freely. | It can freely transfer or sell their shares to others. |
| 6) Public issue of capital | It cannot secure capital from the public. | It can secure capital from the public. |
| 7) Commencement
business |
It can start its business immediately upon its incorporation. | It cannot start its of business immediately after its incorporation. It has to obtain a certificate for starting. |
| 8) Board of Directors | Minimum: Two (2) Maximum: No limit |
Minimum: Three (3)
Maximum: 20 directors |
| 9) Appointment and Retirement of Directors | Single resolution is enough to appoint or retire the directors. | Separate resolution in a meeting should be passed for appointment or removal of a Director. |
| 10) Managerial Remuneration | There are no restrictions on the remuneration of Directors and Managing Directors. | There are restrictions on remuneration to be paid to Directors. |
| 11) Loans | Directors can borrow from the private company. | Directors cannot borrow money from the public company. |
| 12) Quorum | Minimum members required for meeting is two. | Minimum members required for meeting is five. |
Question 4.
Explain in detail the advantages of a Joint Stock Company?
Answer:
Advantages of a Joint Stock Company:
1) Limited Liability: Shareholders of a company are liable only to the extent of the face value of shares held by them. Their private company cannot be attached to pay the debts of the company. Thus the risk is limited and known.
2) Large financial resources: Company form of organization enables of mobilise huge financial resources. The company collects funds in the form of shares and small de-nominations so that people with small means can also buy them. Benefits of Limited Liability and transferability of shares attract investors.
3) Continuity of existence: A company is an artificial person created by law and possesses independent legal status. It is not affected by the deadth, Insolvency etc., of its members. Thus a company exists irrespective of its members entry, change or exit.
4) Benefits of Large Scale Operations: The Joint Stock Company is the only form of business organization which can provide capital for large scale operations. It result in large scale production which consequently lead to increase inefficiency and reduction in cost of operation.
5) Liquidity: The transferability of shares acts as an added incentive to investors. The shares of a public company can buy shares when they have money. The prospective investors can invest and convert shares into cash whenever they need money.
6) Research and development: A company can generally invests a lot of money on research and development for improved processes of production, designing and innovating new products, improving quality of product, new ways of training its staff, etc.
7) Tax benefits: Although the companies are required to pay tax at high rate, in effect, their tax burden is low as they enjoy many tax exemptions under Income Tax Act.
8) Employment opportunities: A company generators or creates employment to large number of people. Thus, improving the standard of living of an individual and country as a whole.
Question 5.
Analyse the disadvantages of a Joint Stock Company?
Answer:
The following are the disadvantages of Joint Stock Company:
1) Too many legal formation: Promotion of a company is not an easy task. There are so many legal formalities are to be compiled with. Large sum of money is to be spent.
2) Lack of motivation: A company is managed by Board of Directors and paid officials. They do not have share in profits. They do not have any incentive to work hard.
3) Delay in decisions: Quick decisions cannot be taken as all important decisions are taken either by the Board of Directors or referred to the general house.
4) Economic oligarchy: The management of company is supposed to carried on according to the collective will of its members. But, there is rule by few often the directors try to misled the members and manipulate voting power to maintain their control.
5) Fradulent (corrupt) management: In companies, there is often danger of fraud and misuse of property by dishonest management. Unscrupulous persons may manipulate annual accounts to show artificial profits or losses for their personal gain.
6) Excessive government control: At every stage, in the management of the company several legal provisions have to be followed and reports to be filled. A lot of time and money is wasted.
7) Unhealthy speculation: As the liability of the shareholders is limited, the management is tempted to get into speculative activities.
Short Answer Questions
Question 1.
Explain any five advantages of a Joint Stock Company?
Answer:
Advantages of a Joint Stock Company:
1) Limited Liability: Shareholders of a company are liable only to the extent of the face value of shares held by them. Their private company cannot be attached to pay the debts of the company. Thus the risk is limited and known.
2) Large financial resources: Company form of organization enables of mobilise huge financial resources. The company collects funds in the form of shares and small de-nominations so that people with small means can also buy them. Benefits of Limited Liability and transferability of shares attract investors.
3) Continuity of existence: A company is an artificial person created by law and possesses independent legal status. It is not affected by the deadth, Insolvency etc., of its members. Thus a company exists irrespective of its members entry, change or exit.
4) Benefits of Large Scale Operations: The Joint Stock Company is the only form of business organization which can provide capital for large scale operations. It result in large scale production which consequently lead to increase inefficiency and reduction in cost of operation.
5) Liquidity: The transferability of shares acts as an added incentive to investors. The shares of a public company can buy shares when they have money. The prospective investors can invest and convert shares into cash whenever they need money.
Question 2.
Explain any five disadvantages of a Joint Stock Company?
Answer:
The following are the disadvantages of Joint Stock Company:
1) Too many legal formation: Promotion of a company is not an easy task. There are so many legal formalities are to be compiled with. Large sum of money is to be spent.
2) Lack of motivation: A company is managed by Board of Directors and paid officials. They do not have share in profits. They do not have any incentive to work hard.
3) Delay in decisions: Quick decisions cannot be taken as all important decisions are taken either by the Board of Directors or referred to the general house.
4) Economic oligarchy: The management of company is supposed to carried on according to the collective will of its members. But, there is rule by few often the directors try to misled the members and manipulate voting power to maintain their control.
5) Fradulent (corrupt) management: In companies, there is often danger of fraud and misuse of property by dishonest management. Unscrupulous persons may manipulate annual accounts to show artificial profits or losses for their personal gain.
Question 3.
What are the features of a private company?
Answer:
Private Company: A private company is a very suitable form of carrying on the business of family and small concerns as registered under the Companies Act.
According to section 2(68) of Companies Act, 2013 defines private companies as, “Those Companies whose Articles of Association restrict the transferability of shares and prevent the public at large from subscribing to them.
The following are the features of a private company:
- The minimum paid up capital in Rs. 1,00,000.
- The minimum number of members is two.
- The maximum number of members is fifty.
- It is prohibited from issue of shares to the public.
- It is prohibited from transfer of shares.
The private companies have to follow all these conditions noted above. It is compulsory for these companies to write “Private Limited” after their names.
Very Short Answer Questions
Question 1.
Define company as per companies Act, 2013.
Answer:
Definition:
1) L.H. Haney defined as “A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership”.
2) As per the companies Act, 2013, “A company refers to an organization incorporated under the companies Act, 2013 or under any previous company law”.
Question 2.
What is meant by perpetual existence?
Answer:
Perpetual existence:
- A company has perpetual existence. Once a company is formed, it continues for an unlimited period until it is legally dissolved.
- A company has a perpetual life and the death, lunacy, retirement or insolvency of its members does not affect its existence.
Question 3.
What is a small company?
Answer:
Small company:
According to section 2(85) of Indian companies Act, 2013, a small company is a com-pany other than public company. It consists of the following features.
- It has a share capital does not exceeding Rs. 50 lakhs. In case of higher amount (if any prescribed) it should not exceed Rs. 5 crores.
- It turnover does not exceed Rs. 2 crore. In case of higher amount (if any prescribed) it should not exceed Rs. 20 crore.
Question 4.
What is a one person company?
Answer:
One person company:
- As per the companies Act, 2013, “One Person Company (OPC) means a company which has only one person as member.” This is a company in which only one man holds practically the whole of the share capital of the company.
- In order to meet the requirement of minimum number of members, some dummy members who mostly may be his family member or his relation or friends hold just 1 or 2 shares each.
Question 5.
What is a Government company?
Answer:
Government company: Any company in which more than 51% of paid up share capital is held either by the central Government or any state government or both governments or partly by the central government and partly by one or more state governments is known as Government company.
Example: State Trading Corporation of India Ltd. And Minerals and Metals Trading Corporation India Ltd, BHEL, ONGC etc.
Question 6.
What is a Holding Company?
Answer:
Holding Company:
- Where one company controls the management for another company, the controlling company is called ‘Holding Company’.
- For example if company A holds more than 51% of paid up share capital of company B, the company A is called as holding company.
Question 7.
What is a Dormant Company?
Answer:
Dormant Company: A company which does not carry any accounting transaction for a period of two years. Such company can apply to registrar of companies for calling or declaring it as a “Dormant Company”.