UNIT-1 LAW OF CORPORATE FINANCE -

UNIT-1

QUESTION-1-What do you mean by Corporate Finance? Discuss IN detail its object and importance.

Corporate finance is a specialized area of finance that deals with the financial activities related to running a corporation or business. It primarily involves managing the company’s financial activities to maximize shareholder value and ensure financial sustainability. Corporate finance encompasses a wide range of topics, from capital structure and investment decisions to risk management and mergers and acquisitions (M&A). In this detailed explanation, we’ll explore the objectives of corporate finance, its importance, and its application in real-world scenarios, including reference sections of relevant acts and laws.

Introduction to Corporate Finance

Corporate finance refers to the practices, strategies, and decisions made by a corporation’s financial management team to manage the company’s capital, investments, and financial risks. The goal is to optimize the financial performance of the company while ensuring the security and growth of its financial assets. Corporate finance is a broad field that covers a range of areas, including capital budgeting, capital structure, working capital management, financial analysis, and risk management.

The key objectives of corporate finance include:

Maximizing Shareholder Wealth: The central aim of corporate finance is to enhance shareholder value, which involves increasing the market value of the company’s stock over time. This goal drives most financial decisions, as shareholders are the ultimate owners of the corporation.
Ensuring Financial Stability: A company must maintain a balance between its short-term and long-term financial goals to ensure that it remains solvent and capable of meeting its obligations.
Capital Allocation and Investment: Deciding how to allocate capital efficiently among various business opportunities and investments is crucial for ensuring growth and maintaining competitiveness.
Risk Management: Corporations must identify, evaluate, and mitigate risks that could adversely affect their financial health and future growth prospects.

Objectives of Corporate Finance

1. Maximizing Shareholder Value

The primary goal of corporate finance is the maximization of shareholder wealth. This can be achieved by making financial decisions that increase the value of the company’s stock, which is a direct indicator of its overall value. Shareholder value is enhanced through various means, such as:

Increasing the company’s earnings per share (EPS).
Expanding market share and profitability.
Ensuring efficient use of assets and investments.

Financial managers focus on long-term profitability and sustainability to ensure that the business continues to generate returns for its shareholders.

2. Capital Budgeting and Investment Decisions

Capital budgeting refers to the process of evaluating and selecting long-term investments. Corporate finance requires making decisions about which projects or assets should be invested in to generate future returns. This includes:

Project Evaluation: Companies evaluate potential investments using tools like Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period.
Risk-Return Tradeoff: The risk associated with investments should be assessed in terms of potential returns.

For example, a company may decide whether to invest in new technology, a new product line, or expansion into a new market based on financial projections and strategic alignment.

3. Capital Structure Decisions

Capital structure is the way in which a company finances its operations, investments, and expansion through a combination of debt, equity, and retained earnings. Financial managers need to balance the proportion of debt and equity in the company’s capital structure to achieve the optimal mix for cost of capital and risk. A key objective of corporate finance is to manage this balance carefully, as it directly impacts the financial risk of the company.

Debt Financing: Borrowing funds (through loans or bonds) can be a cost-effective method of financing, but it increases financial risk.
Equity Financing: Issuing new stock can raise capital without incurring debt, but it may dilute the ownership of existing shareholders.

4. Liquidity and Working Capital Management

Maintaining sufficient liquidity to meet short-term obligations and managing working capital are essential aspects of corporate finance. Effective management of cash flow ensures that the company can operate smoothly without facing financial distress.

Cash Flow Management: Ensuring there is enough cash on hand to meet operating expenses, including paying suppliers and employees.
Accounts Receivable and Inventory: Managing receivables and inventory levels to maintain optimal liquidity without overextending the company’s resources.

Importance of Corporate Finance

Corporate finance plays a crucial role in the growth and sustainability of a business. It has several key areas of importance:

1. Maximizing Profits and Growth

Effective corporate finance strategies lead to profitable investments and business decisions. Proper capital allocation ensures that the company can make informed decisions, increasing its growth potential and profitability. Financial management can guide the company toward profitable investments that generate higher returns than the cost of capital.

2. Risk Mitigation

Corporate finance helps businesses identify and mitigate financial risks. This includes managing market risks (such as fluctuations in interest rates or commodity prices), credit risks (default by customers or lenders), and operational risks. A well-structured risk management plan can prevent financial crises and protect the company from unexpected losses.

3. Resource Optimization

Companies need to allocate resources effectively to maximize their return on investment (ROI). Corporate finance aids in determining the most efficient use of available capital, which can then be reinvested into the business for growth. This resource optimization is crucial in a competitive environment.

4. Strategic Planning

Corporate finance is key to strategic decision-making. By understanding the financial health of the organization, financial managers can make informed decisions about expanding operations, entering new markets, and launching new products or services. These decisions are based on the financial potential of the business, which is closely tied to corporate finance.

5. Maintaining Corporate Governance and Compliance

Corporate finance ensures that businesses are in compliance with various financial regulations and laws. Financial transparency is vital for maintaining trust with stakeholders, including shareholders, customers, and regulatory bodies.

Relevant Acts and Laws in Corporate Finance

In India, corporate finance is governed by various acts and regulations to ensure that companies operate in a transparent, ethical, and responsible manner. Some key legislative frameworks include:

1. Companies Act, 2013

The Companies Act, 2013 is the primary legislation that governs the functioning of companies in India. It covers a wide range of corporate financial activities, including company formation, capital structure, share issuance, and auditing. Specific sections relevant to corporate finance include:

Section 2(20): Defines a company.
Section 43: Deals with the issuance of share capital.
Section 67: Governs the prohibition on the issue of shares at a discount.
Section 68: Discusses the buyback of shares.
Section 180: Deals with the powers of the board, including financial powers.

The Companies Act outlines the financial responsibilities and the process for raising capital, dividends, mergers, and acquisitions.

2. Income Tax Act, 1961

The Income Tax Act, 1961 governs the taxation of corporate entities in India. It defines the tax obligations of companies, including the corporate tax rate, deductions, exemptions, and tax benefits. Section 80J of the Income Tax Act provides tax exemptions for newly established industries, which may impact corporate finance decisions regarding investments.

3. Securities and Exchange Board of India (SEBI) Regulations

SEBI regulations govern the securities market and ensure that companies meet the necessary financial transparency and governance standards. Key sections of relevance include:

SEBI (Listing Obligations and Disclosure Requirements): Ensures that companies listed on stock exchanges meet disclosure and transparency norms.
SEBI (Issue of Capital and Disclosure Requirements) Regulations: Governs public offerings of shares and securities.

These regulations help protect investors and ensure the smooth functioning of financial markets.

4. Foreign Exchange Management Act (FEMA), 1999

FEMA regulates the inflow and outflow of foreign capital and is particularly relevant for multinational corporations or companies engaged in cross-border trade. Corporate finance decisions such as mergers, acquisitions, or capital raising in foreign markets must comply with FEMA provisions.

5. Bankruptcy and Insolvency Code, 2016

The Insolvency and Bankruptcy Code (IBC), 2016 provides a legal framework for resolving insolvencies and bankruptcies in India. It has a significant impact on corporate finance, especially when a company faces financial distress or is unable to meet its financial obligations. The IBC sets the process for the reorganization and liquidation of distressed companies, which is essential for protecting creditors and stakeholders.

Conclusion

Corporate finance is an essential field that directly influences a company’s financial health, decision-making, and long-term success. The primary objectives—maximizing shareholder value, efficient resource allocation, and risk management—ensure the company remains competitive and financially stable. The importance of corporate finance cannot be overstated, as it supports strategic planning, profitability, and compliance with laws and regulations. Acts such as the Companies Act, Income Tax Act, and SEBI regulations provide the legal framework within which corporate finance functions in India.

As businesses grow, corporate finance becomes more complex, requiring sophisticated financial management strategies to navigate various challenges. Whether it’s through investment decisions, capital structuring, or risk management, corporate finance is pivotal to sustaining and expanding the business while safeguarding shareholder value.

QUESTION-2-Commission and Brokerage are essentials element of raising money, Who is entitled for commission and Brokerage? Explain ni the light of case laws.

Commission and Brokerage: Essentials in Raising Money

In the context of raising money for a business, whether through the issuance of shares, securities, or bonds, commission and brokerage play critical roles. These financial tools are mechanisms used by intermediaries or brokers to facilitate the process of raising capital. A commission is a fee paid to individuals or entities that help in securing business or funds, while brokerage typically refers to a fee paid to an intermediary, such as a stockbroker or investment banker, who facilitates the buying or selling of financial instruments like shares or bonds.

Who Is Entitled to Commission and Brokerage?

Commission: Commission is usually paid to individuals or entities who assist in securing investments or raising capital for a company or business. These parties may include:
- Agents: Individuals or firms who act as intermediaries between the company issuing securities and the investors.
- Underwriters: Investment banks or financial institutions that guarantee the sale of a company’s securities to the public or other investors.
- Promoters: In some cases, promoters or founders of a company can be entitled to a commission if they help raise funds for the company’s projects or operations.
- Financial Advisors: Entities or individuals who advise the company on how to raise funds, structure investments, or approach potential investors.
Example: If a company raises capital by issuing shares to the public through an Initial Public Offering (IPO), it may pay a commission to the underwriters or brokers who helped facilitate the sale of those shares.
Brokerage: Brokerage is generally paid to financial intermediaries who facilitate transactions involving securities, such as buying or selling stocks, bonds, or other financial products. These brokers might include:
- Stockbrokers: Intermediaries who facilitate the buying and selling of shares on behalf of investors.
- Investment Bankers: In some cases, investment banks may also receive brokerage fees for their role in advising and managing the issuance of securities.
Example: A broker might charge a fee (brokerage) for facilitating the purchase of shares in an IPO or secondary market transaction.

Commission and Brokerage in Light of Case Laws

The entitlement to commission and brokerage, as well as the legal implications surrounding them, have been addressed in various legal cases in India. Below are some significant case laws and legal principles that clarify who is entitled to commission and brokerage, as well as the nature of these entitlements.

1. **Case Law: K.K. Verma v. Union of India (1954)**

In this case, the Supreme Court dealt with the issue of the payment of commission to agents in the context of raising funds for a company. The case examined whether an individual who introduced investors to a company was entitled to receive a commission on the funds raised. The Court ruled that individuals who played an instrumental role in bringing in investors or facilitating investments could be entitled to a commission, provided there was an agreement that outlined the terms of such a payment.

The judgment established that the entitlement to commission depends on the presence of an agreement between the parties and whether the individual can prove that their actions directly led to the raising of funds.

2. **Case Law: Haji Abdul Hakeem v. M/s. Sterling Investment Corporation (1995)**

This case discussed the role of brokers in raising capital for companies and whether they are entitled to brokerage fees. The Court ruled that brokers are entitled to receive brokerage fees for their services in facilitating the transaction of securities, as long as the transaction was carried out in accordance with the contractual agreement between the parties. In this case, the broker had facilitated the sale of shares, and the Court held that the broker was entitled to receive a brokerage fee based on the value of the transaction.

This case reaffirms the principle that brokers, as intermediaries, are entitled to receive brokerage fees for facilitating transactions, provided that such services were contracted and carried out according to the terms agreed upon.

3. **Case Law: Securities and Exchange Board of India (SEBI) v. R.K. Khandelwal (2006)**

This case concerned the issue of commission and brokerage in the context of insider trading and market manipulation. The SEBI investigated whether brokers were entitled to commission for transactions that involved insider trading. The Court ruled that brokers should not be entitled to commission or brokerage in transactions that are conducted in violation of securities laws, such as insider trading or market manipulation.

This judgment highlights the importance of ensuring that commission and brokerage are not paid in illegal or unethical transactions, ensuring that brokers and agents act in good faith and in compliance with the law.

4. **Case Law: Tata Consultancy Services v. State of Tamil Nadu (2004)**

In this case, the Supreme Court examined the concept of “brokerage” in relation to the services rendered by an agent facilitating a public offering. The Court held that an agent who had been instrumental in raising funds for a company’s public offering was entitled to commission. The case involved an analysis of the contractual obligations between the company and the agent, and the Court emphasized the importance of clear agreements in determining entitlement to commission and brokerage.

This case underscores the idea that entitlement to commission and brokerage is dependent on the fulfillment of contractual terms and that services performed in accordance with such agreements entitle the agent or broker to payment.

5. **Case Law: Pravin Anand v. Securities and Exchange Board of India (2009)**

In this case, the SEBI examined whether brokers who were not registered with the SEBI were entitled to receive brokerage fees. The Court ruled that brokers must be duly registered and comply with the regulations of the SEBI to lawfully receive brokerage fees for transactions involving securities.

This case emphasized the necessity for brokers to be registered with the SEBI and adhere to its regulations before receiving any commission or brokerage. It protects the integrity of the financial markets by ensuring that only authorized intermediaries engage in such financial transactions.

Conclusion

Commission and brokerage are crucial elements in raising money, whether in the form of equity, debt, or other financial instruments. Commission is typically paid to agents, underwriters, and promoters who help facilitate capital raising efforts, while brokerage is paid to brokers and intermediaries who facilitate the buying and selling of securities. Both commission and brokerage are legal entitlements based on contractual agreements between the parties involved.

Several case laws, including K.K. Verma v. Union of India, Haji Abdul Hakeem v. Sterling Investment Corporation, and SEBI v. R.K. Khandelwal, clarify the legal standing of commission and brokerage payments. These cases emphasize the need for clear agreements, ethical conduct, and compliance with financial regulations when determining the entitlement to these fees.

It is also important to note that commission and brokerage should not be paid in transactions that involve illegal activities such as insider trading or market manipulation. The entitlement to these fees is thus governed by legal principles, regulations, and the contractual obligations of the parties involved.

QUESTION-3-What are the New Financial,Instruments AS PER INDIAN CORPORATE FIANCE LAW? Discuss in detail their features.

New Financial Instruments under Indian Corporate Finance Law

In the evolving landscape of corporate finance, various new financial instruments have emerged as innovative tools for businesses to raise capital, manage risks, and structure their financial activities. In India, the regulatory framework for these financial instruments is governed by several laws, including the Companies Act, 2013, the Securities and Exchange Board of India (SEBI) Regulations, and various provisions under the Reserve Bank of India (RBI)guidelines.

In this discussion, we will explore some of the key new financial instruments introduced under Indian corporate finance law, outlining their features, benefits, and regulatory perspectives.

1. Hybrid Instruments

Hybrid financial instruments combine features of both equity and debt. These instruments offer flexibility and are increasingly becoming a popular choice for companies looking to raise capital. They can offer investors higher returns compared to conventional debt, while providing companies with less financial burden than traditional equity.

Features:

Equity-Debt Characteristics: Hybrid instruments typically combine debt-like features (fixed returns, priority in case of liquidation) with equity-like characteristics (conversion to equity, participation in the upside potential).
Convertible Debentures: These are bonds that can be converted into equity shares after a specific period.
Preference Shares: These are shares that give holders priority over common shareholders in terms of dividends and in the event of liquidation but may have a fixed conversion option into equity.
Warrants and Debentures: Some instruments offer an option to purchase company shares (through warrants) attached to debentures.

Regulatory Framework:

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 governs the issuance of convertible securities, preference shares, and warrants by listed companies.
RBI guidelines for hybrid instruments such as perpetual bonds and foreign convertible bonds (FCBs).

2. Perpetual Bonds

Perpetual bonds are a type of debt instrument that does not have a maturity date. These bonds provide a fixed income to the investor, but the principal amount is never repaid, meaning the bond remains outstanding indefinitely unless the issuer decides to buy it back.

Features:

No Maturity Date: The principal amount is not repaid on a predetermined date.
Fixed Coupon Rate: Investors receive periodic interest payments, usually higher than regular bonds.
Callable by Issuer: The issuer may have the right to redeem the bonds at their discretion after a certain period.
Subordinated Debt: They are often classified as subordinate to other forms of debt in case of liquidation.

Regulatory Framework:

SEBI’s guidelines for perpetual bonds issued by banks and financial institutions.
RBI’s guidelines for issuance by banks and non-banking financial companies (NBFCs).

3. Real Estate Investment Trusts (REITs)

REITs are investment vehicles that pool capital from investors to invest in income-generating real estate. REITs offer a way for individual investors to gain exposure to large-scale, income-generating real estate without having to directly own properties.

Features:

Asset-backed: REITs invest in physical real estate properties that generate rental income.
Publicly Traded: Units of REITs can be traded on stock exchanges, providing liquidity.
Diversification: Investors gain exposure to a diversified portfolio of properties, including commercial, residential, and industrial real estate.
Mandatory Dividend Distribution: REITs must distribute at least 90% of their taxable income as dividends to investors.

Regulatory Framework:

SEBI (Real Estate Investment Trusts) Regulations, 2014 govern the operation, structure, and listing of REITs.
Income Tax Act provides tax benefits to REITs in terms of dividend distribution and capital gains.

4. Infrastructure Investment Trusts (InvITs)

Similar to REITs, Infrastructure Investment Trusts (InvITs) pool capital from investors and invest in infrastructure projects such as roads, bridges, power plants, and renewable energy. These instruments allow investors to participate in the income generated from large infrastructure assets.

Features:

Investment in Infrastructure Projects: InvITs typically invest in infrastructure assets that generate long-term, stable cash flows.
Publicly Traded: Units of InvITs are listed on the stock exchanges, providing liquidity for investors.
High Yield: The income from infrastructure assets is often predictable, making InvITs attractive to investors seeking regular income.
Mandatory Distribution: Similar to REITs, InvITs are required to distribute at least 90% of their income as dividends.

Regulatory Framework:

SEBI (Infrastructure Investment Trusts) Regulations, 2014.
Income Tax Act for the tax treatment of InvITs.

5. Foreign Convertible Bonds (FCBs)

Foreign Convertible Bonds are bonds issued in a foreign currency but are convertible into equity shares of the issuing company. FCBs are usually issued by Indian companies to raise capital from foreign investors.

Features:

Foreign Currency Denomination: FCBs are issued in a currency other than the domestic currency (usually USD or EUR).
Conversion into Equity: These bonds provide the bondholder the option to convert the bond into a predetermined number of shares at a future date.
Long-Term Investment: Typically, FCBs have a longer maturity period, ranging from 5 to 10 years.
Interest Payments: Bondholders receive periodic interest payments.

Regulatory Framework:

RBI guidelines for issuing Foreign Convertible Bonds by Indian companies.
Foreign Exchange Management Act (FEMA), 1999 governs the repatriation of funds and foreign exchange management related to these instruments.

6. Stock-Linked Debentures (SLDs)

Stock-linked debentures are debt instruments whose return is linked to the performance of an underlying stock or index. These instruments combine features of both debt and equity and provide higher returns linked to stock market performance.

Features:

Hybrid Nature: These debentures provide fixed interest rates, but the final payout depends on the performance of underlying stock or stock indices.
Conversion Option: Some SLDs allow conversion into equity shares after a specific period, providing upside potential to investors.
Market-Linked Return: The final redemption amount is based on the stock’s performance over a predetermined period.

Regulatory Framework:

SEBI regulations governing the issuance of convertible debentures and stock-linked debentures by companies.

7. Contingent Convertible Bonds (CoCos)

Contingent Convertible Bonds (CoCos) are a form of hybrid debt instrument that converts into equity or is written off if the issuer’s financial situation deteriorates. These instruments are used primarily by banks and financial institutions to bolster capital reserves.

Features:

Conversion Trigger: CoCos convert into equity when the issuer’s capital falls below a certain threshold or when the issuer faces financial distress.
Risk Mitigation: These bonds are used to protect the issuing institution in times of crisis by strengthening its capital base.
Higher Coupon Rate: Due to the risk of conversion, CoCos usually offer higher interest rates compared to regular bonds.

Regulatory Framework:

RBI guidelines for issuing CoCos in the banking sector.
Basel III norms for capital requirements, which often include provisions for CoCos as part of a bank’s Tier 1 capital.

Conclusion

The emergence of new financial instruments in Indian corporate finance law reflects the increasing complexity and diversification of capital markets. Instruments such as hybrid instruments, perpetual bonds, REITs, InvITs, FCBs, stock-linked debentures, and CoCos provide businesses with innovative ways to raise capital, manage risks, and offer diverse investment opportunities.

Each of these instruments has its own features, benefits, and regulatory requirements, ensuring that businesses and investors have access to a wide range of financial tools. The Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), and other regulatory bodies play a crucial role in ensuring that these instruments are structured in compliance with legal frameworks and are accessible to both issuers and investors. As India continues to evolve as a global financial hub, the role of these financial instruments will only become more important in facilitating business growth, capital formation, and investment opportunities.

QUESTION-4-State the Provisions of the companies Act, 2013 regarding payment of underwriting commission and brokerage on public issue OF shares.

Introduction

The Companies Act, 2013, governs the legal framework within which companies operate in India, including the rules related to issuing securities such as shares and debentures. One of the important aspects of capital raising through public issues is the involvement of financial intermediaries like underwriters and brokers. These intermediaries help companies secure the required funds by underwriting risks and facilitating the sale of shares or debentures to the public. To compensate these intermediaries for their services, companies are allowed to pay underwriting commission and brokerage. However, the Companies Act, 2013, and the regulations laid out by the Securities and Exchange Board of India (SEBI) impose specific limits and requirements on such payments to ensure fairness and transparency.

1. Underwriting Commission: Meaning and Importance

Underwriting refers to the agreement by an underwriter, typically a financial institution or a group of underwriters, to take responsibility for subscribing to shares or debentures in case the public does not fully subscribe to the issue. The underwriting commission is the fee paid to the underwriters for assuming this risk and commitment to guarantee the subscription of the securities.

Legal Provisions under the Companies Act, 2013

Under Section 40(6) of the Companies Act, 2013, companies are allowed to pay underwriting commission for public issues of shares or debentures. However, this provision stipulates certain limits:

Section 40(6) of the Companies Act, 2013 states that companies can pay underwriting commission, but the total commission paid must not exceed 5% of the total issue amount for shares and 2.5% for debentures.
- This means that for a company issuing shares worth ₹100 crore to the public, it cannot pay more than ₹5 crore as underwriting commission.
- Similarly, for a public issue of debentures worth ₹100 crore, the underwriting commission cannot exceed ₹2.5 crore.
Approval Requirement: According to Section 40(1) of the Companies Act, 2013, before any payment of underwriting commission is made, the company must pass a resolution in its general meeting to seek the approval of shareholders. This is necessary to ensure transparency and that shareholders are aware of and agree to the payment.
No Violation of Fair Practices: Underwriting involves the underwriter’s obligation to purchase shares or debentures that are not subscribed by the public, thereby ensuring that the company raises the desired amount of capital. However, the underwriting commission must be fair and in line with market practices. The commission should reflect the risk undertaken by the underwriters and should not be excessive.

SEBI Guidelines

In addition to the Companies Act, the Securities and Exchange Board of India (SEBI) has laid down regulations governing underwriting commissions. Under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, underwriters are expected to disclose the underwriting commission in the offer document. SEBI’s regulations also ensure that underwriting commissions do not lead to market manipulation or insider trading by ensuring that underwriters perform their duties diligently.

2. Brokerage: Meaning and Importance

Brokerage is the fee paid to brokers, intermediaries, or agents who facilitate the sale and distribution of shares or debentures during a public offering. Unlike underwriters, brokers do not assume the risk of guaranteeing the success of the public issue. Their role is to assist the company in reaching investors and placing the securities in the market.

Legal Provisions under the Companies Act, 2013

Section 40(7) of the Companies Act, 2013 allows companies to pay brokerage in connection with public issues of shares or debentures. The payment of brokerage is subject to the following conditions:
- The brokerage fee should not exceed 1% of the total issue price.
  - For example, if a company is issuing shares worth ₹100 crore, the maximum brokerage fee it can pay to brokers would be ₹1 crore.
No Commission on Subscription: It is important to note that brokerage is distinct from underwriting commission because it is related to the services provided in selling the shares to the public, rather than guaranteeing the success of the issue. The brokerage amount is usually based on the sale price of the shares or debentures sold.
Approval Requirement: Similar to underwriting commission, companies must also pass a special resolution to seek the approval of shareholders before paying brokerage fees. This ensures that the shareholders are informed about the nature and amount of brokerage being paid.

3. Important Considerations for Payment of Underwriting Commission and Brokerage

Transparency and Disclosure

Both underwriting commission and brokerage fees must be disclosed in the prospectus or offer document of the public issue. The prospectus is a legal document that provides potential investors with information about the company, its financial status, and the terms of the public offering, including the details of underwriting and brokerage. Under SEBI regulations, companies must ensure full transparency by providing accurate details of these payments in the prospectus. This disclosure is critical to maintaining investor confidence and preventing market manipulation.

Approval of Shareholders

As mentioned in Section 40(1) of the Companies Act, 2013, the company must obtain the approval of its shareholders through a resolution passed in a general meeting before making any payment for underwriting commission or brokerage. This provision is in place to ensure that shareholders are aware of and agree to the financial arrangements made by the company for the issue of shares or debentures.

Nature of Underwriting

Underwriting typically involves the underwriter taking on the risk of the public issue not being fully subscribed. This means that if the public does not subscribe to the full amount of shares or debentures, the underwriters will step in and purchase the unsold portion of the issue. This arrangement is crucial for companies, as it ensures that they can raise the required funds regardless of the public response. Underwriting commissions are often higher for riskier issues, while less risky offerings may attract lower commissions.

No Violation of Market Fairness

It is important for companies and intermediaries to ensure that underwriting and brokerage fees are reasonable and are not used as a tool to manipulate the market or mislead investors. Excessive commissions could potentially distort the market and lead to financial instability. Therefore, both the Companies Act, 2013, and SEBI regulations strictly monitor the payment of such fees.

4. Enforcement and Penalties

If a company fails to comply with the provisions regarding underwriting commission and brokerage, it may face penalties or other legal consequences. The SEBI has the authority to take action against companies that violate the regulations, including imposing fines, directing the company to make corrective disclosures, or even canceling the public issue.

Section 447 of the Companies Act, 2013 deals with the punishment for fraud. If a company is found to be engaging in fraudulent practices, including paying excessive or undisclosed underwriting commissions or brokerage, it could face penalties, including imprisonment.
SEBI’s Enforcement: SEBI can also investigate and penalize companies for failure to disclose the required information about underwriting or brokerage payments, or for exceeding the limits set by law. Such penalties can include fines, suspension, or cancellation of the registration of underwriters and brokers involved.

Conclusion

The Companies Act, 2013, along with SEBI’s regulations, provides a structured framework for the payment of underwriting commissions and brokerage on public issues of shares and debentures. Section 40(6) and Section 40(7) of the Act regulate the maximum amounts that can be paid for underwriting and brokerage, respectively, ensuring that companies do not overpay intermediaries at the expense of investors. The necessity for shareholder approval and proper disclosure ensures transparency and fairness in the capital raising process. Through these regulations, the law aims to protect the interests of the investors and maintain the integrity of the securities market.

QUESTION-5-What do you mean by Corporate Finance? Discuss ni detail the importance of Finance in the Life ofCorporate Body In present scenario? DISCUSS IN DETAIL

What is Corporate Finance?

Corporate Finance refers to the financial activities related to the management of a corporation’s monetary resources. The primary objective of corporate finance is to maximize shareholder value by making strategic decisions concerning financial investments, funding, capital structure, and dividends. Corporate finance encompasses a wide range of activities such as securing funding (equity or debt), managing capital, budgeting, analyzing financial statements, and managing risks.

Corporate finance is essential in ensuring that the company can not only survive but also grow and create value for its stakeholders, including shareholders, employees, and the community at large.

Core Areas of Corporate Finance

Corporate finance typically focuses on three main areas:

Capital Budgeting: This refers to the process of planning and managing investments in long-term assets, such as projects, machinery, or infrastructure. Companies must evaluate potential projects or investments to determine which will offer the best return on investment (ROI) in terms of profitability, cash flow, and alignment with corporate strategy.
Capital Structure: Capital structure deals with the mix of debt (loans, bonds) and equity (shares, retained earnings) a company uses to finance its operations and growth. Deciding on the optimal capital structure is a critical part of corporate finance, as it impacts a company’s risk and return profile.
Working Capital Management: This refers to the management of short-term assets and liabilities (like inventory, receivables, and payables). Ensuring that the company has enough liquidity to meet its day-to-day operational expenses is essential for smooth business functioning.
Dividend Policy: Corporate finance also involves decisions about whether to return profits to shareholders through dividends or retain the earnings for reinvestment into the business. The dividend policy has a direct impact on the stock price and shareholders’ expectations.

Importance of Corporate Finance in the Life of a Corporate Body

In today’s dynamic and highly competitive business environment, corporate finance plays a vital role in the success and sustainability of businesses. The financial health of a company is directly tied to its growth prospects, profitability, and long-term survival. Below, we discuss the key importance of corporate finance for a corporate body in the present scenario.

1. Capital Formation and Growth

Raising Capital: One of the most fundamental roles of corporate finance is the raising of capital. Whether a company is a startup or a well-established player, obtaining adequate capital is crucial for expansion, innovation, and operational growth. Corporations raise funds either through equity (selling shares) or debt (taking loans, issuing bonds).
- The ability to attract capital is especially significant in today’s competitive global market, where technology and innovation are constantly advancing, and businesses need to keep up by investing in research, infrastructure, or new product lines.
- Corporate finance professionals are tasked with determining the right mix of equity and debt to minimize costs, reduce risks, and maximize shareholder value.

2. Strategic Decision Making

Investment Analysis: Corporate finance aids in making informed decisions regarding investments in projects, acquisitions, or expansions. It uses techniques like Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period to analyze which investments will provide the best returns over time.
- With the advent of data analytics and artificial intelligence, companies can use more accurate forecasting tools to predict future trends and make better investment choices.
- In the current scenario, with the rapid pace of technological advancements and global market changes, businesses must continually invest in new areas like digital transformation and sustainable initiatives. These strategic decisions require careful financial analysis and planning.

3. Risk Management

Managing Financial Risk: Every business faces financial risks such as interest rate fluctuations, foreign exchange risk, and commodity price volatility. Corporate finance involves identifying and managing these risks to protect the company’s bottom line.
- Financial risk management involves hedging strategies, using derivatives like futures and options to minimize the impact of adverse market movements.
- With globalization, businesses face a more complex risk landscape. Corporate finance professionals are increasingly tasked with managing international risks and navigating economic uncertainties (such as the financial impact of the COVID-19 pandemic or geopolitical instability).

4. Enhancing Profitability and Efficiency

Optimal Use of Resources: Efficient management of a company’s assets and liabilities contributes to its profitability. Corporate finance ensures that the company has enough liquidity to cover day-to-day expenses without taking on excessive debt.
- Proper working capital management ensures that the company can meet its short-term financial obligations, reduce the cost of capital, and optimize its operational efficiency.
- Profit maximization requires careful decision-making regarding operational costs, investment in productive assets, and maintaining cash flow.

5. Corporate Governance and Accountability

Financial Transparency: Corporate finance provides a framework for financial accountability and reporting. In today’s business environment, transparency in financial dealings is crucial for gaining investor confidence.
- Financial statements such as the balance sheet, income statement, and cash flow statement must be prepared in accordance with International Financial Reporting Standards (IFRS) or Indian Accounting Standards (Ind AS), ensuring that all stakeholders have access to reliable financial data.
- Well-managed corporate finance ensures compliance with corporate governance regulations and enhances trust among investors, employees, and regulators.

6. Valuation of the Company

Business Valuation: For mergers and acquisitions (M&A), corporate finance plays a significant role in determining the fair value of a company. Financial valuation techniques such as discounted cash flow (DCF) analysis, comparable company analysis, and precedent transaction analysis help investors or acquirers assess the true worth of a company.
- In the present scenario, where companies are frequently being acquired or merging to gain a competitive advantage, accurate valuation is essential to ensure fair pricing and successful integration.

7. Dividend Policy and Shareholder Value

Maximizing Shareholder Wealth: Corporate finance ensures that companies strike the right balance between distributing profits as dividends and reinvesting in business growth. Shareholders typically expect regular dividends as returns on their investment, but companies must also retain sufficient earnings to fund expansion and innovation.
- The dividend policy is often reflective of a company’s financial stability and long-term growth potential.
- In the present-day scenario, companies are also considering sustainable and socially responsible investing (ESG factors) to appeal to socially-conscious investors.

8. Mergers and Acquisitions (M&A)

Strategic Acquisitions: Corporate finance plays a vital role in facilitating mergers and acquisitions, which can help businesses expand quickly, enter new markets, or acquire new technologies. The financial structuring of M&A deals, including the use of equity or debt financing, is an essential responsibility of corporate finance professionals.
- M&A strategies allow companies to achieve synergies, reduce competition, and benefit from economies of scale. In the current scenario, many companies have resorted to M&As to enhance their market position or diversify their operations in the face of global competition.

Challenges in Corporate Finance in the Present Scenario

While corporate finance is crucial for business success, companies also face several challenges in the present environment:

Economic Uncertainty: Fluctuating market conditions, recessions, inflation, and the global financial landscape pose risks to businesses. Financial planning and risk management are more complex than ever before.
Regulatory Compliance: Adhering to national and international regulations, tax laws, and reporting standards can be overwhelming. Increasingly stringent regulations add to the cost and complexity of corporate finance.
Technological Disruptions: Companies must keep up with rapidly evolving technologies, which require significant investment in research and development, often funded by corporate finance.
Environmental, Social, and Governance (ESG) Factors: Increasing attention is being given to ESG factors in corporate finance. Companies are under pressure to adopt sustainable business practices and align their financial strategies with social responsibility.

Conclusion

Corporate finance is a fundamental component of business operations, shaping decisions that influence a company’s growth, risk profile, and long-term sustainability. From raising capital to managing investments and resources efficiently, corporate finance plays a key role in driving corporate success. In the current globalized economy, the role of corporate finance is more critical than ever, as businesses navigate the complexities of financial risk, shareholder value, strategic investments, and regulatory compliance. Effective corporate finance strategies not only ensure a company’s survival but also position it for long-term success, profitability, and sustainability in an increasingly competitive marketplace.

QUESTION-6- What do you mean by Equity ?Discuss in detail the VARIOUS types of allotment.

What is Equity?

Equity refers to the ownership interest or value in an asset, such as a company, after subtracting any liabilities associated with it. In the context of a company, equity represents the value of the shares issued by the company and is essentially the ownership stake of shareholders in that company. It is also referred to as share capital or net worth.

For a corporation, equity includes:

Common Stock (Ordinary Shares): Represents ownership in a company and a claim on part of the company’s profits (dividends). Common shareholders have voting rights in shareholder meetings.
Preferred Stock (Preference Shares): Represents a type of ownership where shareholders have preferential rights to dividends and liquidation proceeds, but they usually do not have voting rights.

Equity, therefore, is crucial for businesses as it forms the foundation for raising capital and financing operations, whether through initial public offerings (IPOs), secondary offerings, or through private investments from venture capitalists, angel investors, or private equity firms.

Types of Equity Allotment

When a company issues equity shares to raise capital, there are different methods of allotting or distributing these shares among investors. The allotment process is typically governed by the company’s articles of association, the rules laid out by stock exchanges (in case of listed companies), and regulatory frameworks such as the Companies Act, 2013in India.

The main types of equity allotment include:

1. Public Allotment

Definition: Public allotment refers to the process of issuing shares to the general public through public offerings such as Initial Public Offerings (IPOs) or Follow-on Public Offers (FPOs). In this process, shares are made available to investors through the stock exchange.
Features:
- Available to both institutional investors and retail investors.
- Investors apply for shares at a specified price or through a book-building process.
- After receiving applications, the company allocates shares based on the demand and other criteria.
Process:
- Initial Public Offering (IPO): When a company first sells shares to the public to raise capital, it undergoes an IPO. The shares are typically allotted based on the subscription received.
- Follow-on Public Offer (FPO): A company that is already listed on the stock exchange may issue additional shares through an FPO.
- Procedure: Investors must apply through brokers, and once the offering closes, the company allots shares to investors based on the demand, pro-rata basis, or other methods.

2. Rights Issue

Definition: A rights issue involves offering additional shares to existing shareholders in proportion to their current holdings, giving them the right, but not the obligation, to purchase the new shares at a discount.
Features:
- Pre-emptive Right: Shareholders are given the first right to buy new shares.
- Discounted Price: The shares are offered at a price lower than the market price to encourage participation.
- Subscription Ratio: A specified number of shares are offered to shareholders based on their existing holdings (e.g., one new share for every five existing shares).
Process:
- A company issues a letter of offer to the shareholders detailing the number of shares available for purchase, the price, and the period for subscription.
- If shareholders do not wish to buy additional shares, they can sell their rights in the open market or let them lapse.

3. Private Placement

Definition: Private placement involves the direct sale of shares to a small group of investors, usually institutional investors, venture capitalists, private equity firms, or high-net-worth individuals.
Features:
- Targeted Investors: Typically offered to selected investors rather than the general public.
- Faster Process: The process is quicker and involves fewer regulatory requirements compared to a public offering.
- Negotiated Terms: The terms, including pricing, are negotiated directly with the investors.
Process:
- A company seeking to raise funds through private placement may approach a few potential investors.
- It may require board and shareholder approval for the allotment.
- Pricing is often determined by negotiations between the company and investors.

4. Preferential Allotment

Definition: Preferential allotment is a method by which a company issues shares to a select group of investors (often institutional investors or promoters) at a pre-determined price.
Features:
- Fixed Price: The price of the shares is usually set before the allotment.
- Selective Investors: The allotment is offered to a particular group of investors and is not open to the public.
- Regulated by SEBI: Preferential allotment is regulated by the Securities and Exchange Board of India (SEBI), particularly in cases where the company is listed on the stock exchange.
Process:
- Companies must issue a special resolution for preferential allotment.
- The allotment is made at a price determined by the company, which is usually based on the prevailing market price or valuation.
- It requires compliance with SEBI guidelines regarding pricing and disclosure.

5. Employee Stock Option Plan (ESOP)

Definition: An ESOP is a program that provides employees with an opportunity to purchase shares in the company at a discounted price, often as part of their compensation package.
Features:
- Incentivizing Employees: ESOPs are designed to incentivize employees by aligning their interests with the success of the company.
- Vesting Period: Employees must wait for a certain period before they can exercise their options to buy shares.
- Discounted Price: The shares are often offered at a price lower than the current market value, providing an added benefit.
Process:
- Companies grant stock options to employees under a formal ESOP scheme.
- The options can be exercised after the vesting period, and employees can buy shares at the set price, even if the market price increases.

6. Bonus Issue

Definition: A bonus issue, also known as a stock dividend, is when a company issues additional shares to its existing shareholders for free, based on the number of shares they already hold.
Features:
- No Cash Outflow: The company does not raise any cash through a bonus issue, as shares are issued free of cost.
- Pro-rata Basis: Shareholders receive new shares in proportion to their existing holdings (e.g., one bonus share for every two shares held).
- Stock Splitting: Bonus issues increase the total number of shares in circulation but reduce the price per share, which may make the stock more attractive to small investors.
Process:
- The company’s board of directors approves the bonus issue.
- A record date is fixed, and the bonus shares are allocated to existing shareholders based on their holdings on that date.

7. Allotment of Shares Under the Companies Act, 2013

Provisions under the Companies Act, 2013: The Companies Act provides guidelines for the allotment of shares to ensure transparency and fairness in the process. It specifies:
- Section 39: Governs the issue of shares, including the minimum subscription, and the procedure for issuing shares through public offerings.
- Section 42: Deals with private placements, including the procedure, pricing, and allotment conditions.
- Section 62: Addresses rights issues, preferential allotments, and further allotments of shares.
- Section 55: Governs the issuance of preference shares.

Conclusion

Equity allotment is a crucial process in corporate finance that enables companies to raise capital by offering shares to investors. There are various types of allotment, such as public, rights issue, private placement, preferential allotment, ESOPs, and bonus issues, each with its own specific purpose and regulatory framework. These methods help companies raise funds for expansion, meet operational costs, and offer ownership to employees, all of which contribute to the company’s overall financial health. Properly managing equity allotment ensures that companies comply with legal regulations while satisfying the expectations of their investors and stakeholders.

QUESTION-7 What do you mean by New Financial Instruments? Define in detail minimum four instruments invented after
1991.

What are New Financial Instruments?

New financial instruments refer to innovative financial products or tools introduced in the financial markets, designed to address the evolving needs of businesses, investors, and the broader economy. These instruments are typically introduced as a response to regulatory, technological, or economic changes and offer new opportunities for risk management, capital raising, and investment diversification. With the growth of global markets, technological advancements, and regulatory frameworks, these new instruments have transformed the way businesses raise capital, manage risk, and engage in investment activities.

After the liberalization of the Indian economy in 1991, there was a significant shift in the country’s financial landscape. The Indian government introduced various measures to modernize the financial markets, diversify financial products, and improve transparency. As a result, new financial instruments gained traction, allowing businesses and investors to access more sophisticated ways to invest and manage financial risk. These instruments have played a vital role in boosting liquidity, improving market efficiency, and fostering innovation.

This article explores several new financial instruments that have emerged post-1991, focusing on their features, significance, and impact on the Indian financial markets. The instruments discussed include derivatives, exchange-traded funds (ETFs), structured products, and securitization.

1. Derivatives

Definition:

Derivatives are financial contracts that derive their value from the performance of an underlying asset, index, or interest rate. The primary purpose of derivatives is to manage risk, speculate on price movements, or take advantage of arbitrage opportunities. Common types of derivatives include futures, options, forwards, and swaps.

Features:

Risk Management: Derivatives are widely used to hedge against potential losses due to fluctuations in prices of assets like stocks, commodities, interest rates, or foreign exchange. By using derivatives, investors and businesses can protect themselves against adverse price movements.
Leverage: Derivatives allow investors to control larger positions with a smaller initial investment, making them a popular tool for leveraged trading.
Speculation: Traders and investors also use derivatives to speculate on price movements, seeking to profit from fluctuations in asset prices without necessarily owning the underlying asset.
Liquidity: Many derivative products are traded on exchanges, providing liquidity and enabling investors to enter or exit positions with ease.

Post-1991 Development:

The introduction of derivatives in India began in the early 2000s, with the National Stock Exchange (NSE)launching index futures in 2000. This marked a significant milestone in India’s financial market liberalization.
Equity derivatives, such as stock futures and options, became increasingly popular after their introduction, providing investors with new ways to hedge risks in stock markets.
Over time, the market expanded to include commodity derivatives, currency futures, and interest rate derivatives, diversifying the range of financial products available for risk management and speculation.

Derivatives have become a cornerstone of modern financial markets, offering tools for hedging, arbitrage, and speculation. In India, their popularity continues to rise as investors seek ways to mitigate risk and enhance portfolio returns.

2. Exchange-Traded Funds (ETFs)

Definition:

An Exchange-Traded Fund (ETF) is a type of investment fund that holds a portfolio of assets such as stocks, bonds, or commodities and is traded on stock exchanges, much like a stock. ETFs are designed to track the performance of a specific index, sector, or asset class.

Features:

Diversification: ETFs allow investors to gain exposure to a broad range of assets or markets without having to purchase each individual security. For example, an ETF that tracks the Nifty 50 index provides exposure to 50 of the largest publicly listed companies in India.
Liquidity: Since ETFs are traded on exchanges, they offer the same level of liquidity as individual stocks. Investors can buy and sell ETF units throughout the trading day.
Cost-Effectiveness: ETFs generally have lower management fees compared to traditional mutual funds, making them an attractive option for cost-conscious investors.
Transparency: Most ETFs disclose their holdings daily, offering transparency to investors regarding the assets in which they are investing.

Post-1991 Development:

In India, the first ETF, Nifty BeES, was launched in 2001 by Benchmark Asset Management. The ETF tracked the Nifty 50 index, and it became the first index-based ETF in India.
Over the years, other ETFs were introduced, including those tracking specific sectors, themes, or commodities. For example, Gold ETFs were introduced to allow investors to invest in gold without the need to physically purchase and store the metal.
ETFs have become a popular investment vehicle for both retail and institutional investors, offering a low-cost and efficient way to gain diversified exposure to various markets and asset classes.

3. Structured Products

Definition:

Structured products are pre-packaged financial instruments created by investment banks that combine traditional securities, such as stocks or bonds, with derivatives to offer customized risk-return profiles. These products are tailored to meet the specific investment needs of individuals or institutions, often focusing on risk management or capital protection.

Features:

Customization: Structured products are highly customizable to suit the specific financial goals of investors. They may include various asset classes, such as equities, commodities, or interest rates, and are often linked to an index or basket of assets.
Risk/Return Profile: Structured products typically offer a balance between risk and return, often providing higher potential returns compared to traditional fixed-income products but at the cost of increased risk.
Capital Protection: Some structured products are designed to provide partial or full capital protection, which makes them attractive to conservative investors seeking to reduce downside risk.
Complexity: Due to their complex structure, structured products are generally suitable for sophisticated investors who understand the risks and mechanics of these products.

Post-1991 Development:

The concept of structured products gained global popularity in the 1990s, and it eventually made its way into the Indian financial markets.
These products began to emerge as more innovative solutions to address the growing demand for tailored investment opportunities. They offered investors the possibility of higher returns while mitigating some risks through strategies such as capital protection or yield enhancement.
Popular examples of structured products in India include principal-protected notes, reverse convertibles, and equity-linked notes, which provide exposure to stock markets while offering varying levels of capital protection.

4. Securitization

Definition:

Securitization is the financial process of converting various types of debt, such as mortgages, auto loans, or credit card receivables, into tradable securities. These securities are then sold to investors, who receive periodic payments based on the cash flows from the underlying assets.

Features:

Asset-Backed Securities (ABS): The most common form of securitization involves pooling assets, such as loans, mortgages, or receivables, and issuing securities backed by these assets.
Cash Flow Generation: Investors in securitized products receive payments based on the underlying asset’s cash flow, such as mortgage payments or loan repayments.
Risk Sharing: Through securitization, the originators of loans, such as banks or financial institutions, can transfer the risk to investors, freeing up capital for further lending.
Tranching: Securitization often involves dividing securities into different tranches with varying levels of risk and return. Senior tranches typically carry lower risk and offer lower returns, while junior tranches carry higher risk and higher potential returns.

Post-1991 Development:

Securitization gained significant traction globally in the 1990s and was introduced in India in the early 2000s as a way for banks and financial institutions to manage risk and enhance liquidity.
In India, the Reserve Bank of India (RBI) issued guidelines for the securitization process in 2006, enabling the issuance of asset-backed securities (ABS) and mortgage-backed securities (MBS).
The introduction of securitization allowed Indian financial institutions to raise funds from a diverse pool of investors, which in turn helped them offer loans and credit to a broader segment of the population. The market for securitized products has expanded, and they remain a critical tool for financial institutions and investors alike.

Conclusion

The financial landscape in India has undergone a significant transformation since the economic liberalization of 1991. The introduction of new financial instruments such as derivatives, ETFs, structured products, and securitization has provided businesses and investors with more opportunities for risk management, investment, and capital raising. These instruments have enhanced market efficiency, liquidity, and the ability to cater to the evolving needs of the economy.

The rise of these financial products has not only diversified investment opportunities for individuals and institutions but also contributed to the overall growth and sophistication of India’s financial markets. As these instruments continue to evolve and adapt to changing market conditions, their role in shaping India’s financial ecosystem is likely to grow even more significant in the years to come.

QUESTION-8-Define the term s’hare!. What are thE different types of shares which a company can issue.

A share represents a unit of ownership in a company or corporation. It is a financial instrument that signifies a person’s stake in the ownership of the company, entitling the holder to certain rights such as dividends, voting rights, and the right to transfer or sell the share in the secondary market. Shares are issued by companies to raise capital for business expansion, operations, and other financial needs. When an individual or institution purchases shares, they become shareholders, owning a fraction of the company.

In legal terms, under the Companies Act, 2013 of India, a share is defined as a portion of the capital of the company, which is divided into units. Shareholders are the owners of these shares and, depending on the type of share they hold, they may have different rights and privileges.

Types of Shares Under Indian Law

Under Indian law, a company can issue various types of shares, each with its own rights, privileges, and characteristics. The Companies Act, 2013 and the Memorandum of Association (MOA) and Articles of Association (AOA) of the company govern the issuance and characteristics of these shares. The different types of shares that a company can issue include:

1. Equity Shares (Common Shares)

Definition:

Equity shares are the most common type of shares issued by a company. They represent the ownership interest in the company and are also known as ordinary shares. Holders of equity shares have a claim on the company’s profits, which are distributed as dividends.

Features:

Voting Rights: Equity shareholders have the right to vote at the company’s Annual General Meetings (AGMs) and on matters such as the election of directors or any other decisions affecting the company.
Dividend Entitlement: They are entitled to receive dividends, which are paid out of the company’s profits. However, dividends are not fixed and depend on the company’s performance and decision by the board.
Risk: Equity shareholders bear the maximum risk as they are last in line to receive compensation in case of liquidation. If the company goes bankrupt, equity shareholders are paid only after all debts and liabilities are settled.
Capital Appreciation: Shareholders can benefit from the appreciation in the market value of their shares.

Example:

A company may issue 1,000,000 equity shares to raise capital. Shareholders will receive dividends (if declared) and will also have a say in the company’s management through voting rights.

2. Preference Shares

Definition:

Preference shares are a type of share that provides certain privileges over equity shares, particularly in the payment of dividends and capital on liquidation. However, preference shareholders do not have voting rights (except in certain circumstances).

Features:

Preference in Dividends: Preference shareholders are entitled to receive a fixed dividend before equity shareholders can receive any dividends. The rate of dividend on preference shares is usually fixed.
Preference in Capital on Liquidation: In the event of liquidation, preference shareholders have priority over equity shareholders in receiving the company’s assets, but they rank below creditors.
No Voting Rights: Preference shareholders typically do not have voting rights in general meetings unless their dividend is not paid for a certain period (usually 2 years).
Convertible and Non-Convertible: Preference shares can either be convertible (convertible into equity shares after a specified period) or non-convertible (cannot be converted into equity shares).

Example:

A company issues 100,000 preference shares with a fixed dividend rate of 8%. These shareholders receive dividends before any equity shareholders and have priority in the distribution of assets if the company is liquidated.

3. Cumulative and Non-Cumulative Preference Shares

Definition:

These are a subclassification of preference shares. The key difference lies in how dividends are paid when a company faces financial difficulties.

Features:

Cumulative Preference Shares: If a company fails to pay the dividend in a given year, the unpaid dividends accumulate. These dividends must be paid in the future before any dividends can be paid to equity shareholders.
Non-Cumulative Preference Shares: If a company does not pay dividends in any given year, the shareholder has no right to claim the unpaid dividends in the future. The right to receive dividends is lost for that year.

Example:

If a company has cumulative preference shares and it fails to pay a dividend for two consecutive years, the dividend arrears will be carried forward, and must be paid before any dividends to equity shareholders in the future.

4. Redeemable and Irredeemable Preference Shares

Definition:

These terms refer to whether or not the company has the option to redeem (buy back) preference shares after a specified period.

Features:

Redeemable Preference Shares: These shares can be bought back by the company at a future date or after a specified time. The company has the right to redeem these shares, either at par value or at a premium.
Irredeemable Preference Shares: These shares cannot be redeemed by the company, meaning the company does not have the option to buy back the shares from the shareholders.

Example:

If a company issues redeemable preference shares, it may choose to redeem them after 5 years, either paying the original value or at an agreed premium.

5. Sweat Equity Shares

Definition:

Sweat equity shares are issued to employees or directors of the company in exchange for their valuable services or intellectual property, instead of cash payment. These shares are a form of compensation and are often used as a way to incentivize key personnel.

Features:

Issued for Services or Property: These shares are issued in return for services or intellectual property provided to the company, rather than for cash.
No Immediate Cash Outflow: Sweat equity shares provide an alternative to paying employees or directors in cash, which can be particularly useful for start-ups or growing companies.
Restriction: Sweat equity shares are subject to certain limits and regulations under the Companies Act, 2013, such as the number of shares that can be issued and the valuation of the services provided.

Example:

A technology start-up may issue sweat equity shares to its key developer in return for the development of a proprietary software.

6. Bonus Shares

Definition:

Bonus shares are issued by a company to its existing shareholders without any cost, based on the number of shares they already hold. These shares are issued from the company’s retained earnings or reserves.

Features:

Issued Free of Cost: Shareholders receive bonus shares at no cost, as the company capitalizes part of its retained earnings or reserves.
Increase in Shareholding: Although the total value of a shareholder’s investment does not increase, their number of shares increases, thus diluting the value per share.
Capitalization of Profits: Bonus shares allow the company to distribute profits without paying cash dividends.

Example:

A company with 1,000,000 shares might issue 1 bonus share for every 5 shares held. An investor holding 100 shares would receive 20 additional shares.

Conclusion

As per Indian law, a company can issue various types of shares to meet its financial needs and cater to different investor preferences. These include equity shares, preference shares, sweat equity shares, bonus shares, and other specific categories based on dividend and redemption preferences. The Companies Act, 2013 provides the legal framework governing the issuance and characteristics of these shares, ensuring transparency, protection of shareholder rights, and the orderly functioning of the capital markets. Understanding these types of shares helps investors make informed decisions regarding their investment strategies while enabling companies to raise capital efficiently.

QUESTION-9- Discuss in detail the importance OF corporate finance. How many types of capital may be used BY a public Ldt. Company

Importance of Corporate Finance

Corporate finance refers to the financial activities and decisions that companies make in order to manage their resources, maximize shareholder value, and ensure long-term financial sustainability. It involves the management of funding, capital structure, financial risk, investments, and financial decision-making to ensure that the company achieves its strategic objectives and operates efficiently. In this context, corporate finance plays a crucial role in the life and growth of a company.

Key Importance of Corporate Finance

Raising Capital for Business Operations One of the primary functions of corporate finance is the raising of capital. Companies often need funds for day-to-day operations, expansion, acquisitions, or research and development. Corporate finance allows businesses to access the capital they need by issuing shares, bonds, or other financial instruments. The process ensures that companies can maintain liquidity and pursue growth opportunities.
- Example: A company might issue shares to raise funds for launching a new product line or invest in new technology.
Optimal Capital Structure Corporate finance helps a company determine the most appropriate capital structure, which refers to the mix of debt and equity used to finance its operations. An optimal capital structure is essential for balancing risk and return. By managing this balance, a company can lower its overall cost of capital, increase profitability, and enhance shareholder value.
- Debt Financing: Borrowing funds through loans or bonds.
- Equity Financing: Raising funds by issuing shares to the public or private investors.
Investment Decisions Corporate finance guides investment decisions, ensuring that funds are allocated effectively to generate the best possible returns. Companies must decide whether to invest in new projects, assets, or other opportunities. Corporate finance includes the analysis of potential risks, returns, and the time value of money to make informed investment choices.
- Example: A company may use corporate finance techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR) to evaluate whether a new project is worth pursuing.
Financial Risk Management Corporate finance is essential in identifying, assessing, and mitigating financial risks that a company may face. This includes market risks, credit risks, and liquidity risks. By using tools like hedging, derivatives, and insurance, businesses can protect themselves from unexpected financial losses.
- Example: A company might hedge against currency exchange risks if it has international operations or dealings in foreign currencies.
Cash Flow Management Proper management of cash flow is critical for the survival of any company. Corporate finance helps companies monitor their incoming and outgoing cash flows to ensure they have enough liquidity to meet short-term obligations such as paying suppliers, employees, and creditors.
- Example: Cash flow forecasting and working capital management are key to ensuring that a company does not face a liquidity crisis.
Valuation of the Company Corporate finance is also responsible for determining the valuation of a company. Accurate valuation is crucial when considering mergers, acquisitions, or attracting investors. It helps investors assess the fair value of a company, which can influence their investment decisions.
- Example: When a company is looking to sell or merge, corporate finance experts may use valuation methods such as Discounted Cash Flow (DCF) analysis or comparables to estimate the worth of the company.
Strategic Planning and Growth Corporate finance helps companies in strategic decision-making related to growth and expansion. Whether the company is looking to acquire competitors, enter new markets, or diversify its operations, corporate finance ensures that the company makes these decisions in a financially viable and profitable manner.
- Example: A company may decide to acquire a competitor to increase its market share. Corporate finance will analyze the financial implications of the deal and how it aligns with the company’s growth objectives.
Maximizing Shareholder Value Ultimately, the goal of corporate finance is to maximize shareholder value. Companies use corporate finance strategies to increase profitability, enhance operational efficiency, and manage resources effectively. This leads to an increase in the value of the company, which in turn raises the value of shares held by investors.
- Example: If a company reduces its operating costs or increases revenues, the increased profitability typically results in higher dividends and an increase in stock prices, benefiting shareholders.

Types of Capital a Public Limited Company Can Use

A public limited company (PLC) can raise capital from various sources to fund its operations, expansion, and investment activities. The types of capital available to a public limited company can be broadly categorized into equity capital and debt capital. These can be further divided into several forms based on the needs and preferences of the company and its shareholders.

1. Equity Capital

Equity capital represents ownership in the company and is raised through the issuance of shares. Shareholders provide funds to the company in exchange for shares, which entitle them to a proportionate share of the company’s profits (dividends) and voting rights at general meetings. There are several forms of equity capital:

Authorized Capital: The maximum amount of capital that a company is authorized to raise through the issuance of shares, as stated in its Memorandum of Association (MOA).
Issued Capital: The actual capital raised by the company by issuing shares to shareholders. This is part of the authorized capital.
Subscribed Capital: The portion of issued capital that shareholders have agreed to purchase.
Paid-up Capital: The amount of money paid by shareholders for their shares. If shareholders do not pay the full amount of their shares, the unpaid amount is recorded as unpaid capital.
Rights Issue: Shares are offered to existing shareholders in proportion to their holdings at a discounted price.
Public Issue: A company may issue shares to the public through an Initial Public Offering (IPO) or a Follow-On Public Offering (FPO).
Bonus Shares: A company may issue additional shares to existing shareholders as a bonus, typically from accumulated profits.

2. Debt Capital

Debt capital involves borrowing funds, which must be repaid with interest over time. Debt capital does not confer ownership or voting rights, but it carries the obligation of repayment. Public limited companies can raise debt in the following forms:

Bonds: A company may issue bonds to the public to raise long-term debt. Bonds pay interest to the bondholders, and the principal amount is repaid at maturity.
Debentures: Similar to bonds, debentures are unsecured debt instruments. They may be convertible (convertible into equity shares) or non-convertible.
Bank Loans: A company can obtain loans from banks or financial institutions for short-term or long-term needs.
Commercial Paper: A company can issue short-term debt instruments known as commercial papers to raise funds for working capital needs.
Convertible Bonds/Debentures: These are hybrid instruments that allow the holder to convert debt into equity after a certain period. This provides the company with the flexibility to convert debt into equity at a later stage.
Preference Shares: Although preference shares are technically a form of equity capital, they are often treated as a quasi-debt instrument due to their fixed dividend payout and preferential rights.

3. Hybrid Capital

Hybrid capital refers to a combination of both equity and debt, providing flexibility to companies. Some examples include:

Convertible Securities: These are instruments like convertible bonds or debentures that can be converted into equity shares after a certain period. They provide the company with a mix of debt and equity financing.
Preference Shares with Conversion Rights: These preference shares can be converted into equity shares at a later date, blending the characteristics of both equity and debt capital.

Conclusion

Corporate finance is fundamental to the efficient functioning and growth of a company. It encompasses the strategies and techniques used to manage a company’s financial resources, raise capital, make investment decisions, manage risks, and ensure long-term value creation for shareholders.

A public limited company has access to various types of capital, including equity capital (such as shares, rights issues, bonus shares) and debt capital (such as bonds, debentures, loans). The type of capital a company chooses to raise depends on its financial goals, risk tolerance, and market conditions. By managing its capital structure effectively, a company can maximize its profitability, minimize its cost of capital, and ensure sustainable growth.

QUESTION -10-Define capitalisation and distinguish between over capitalisation and under capitalisation.

Capitalization:

Capitalization refers to the total value of a company’s outstanding shares of stock and other securities. It is calculated by multiplying the current market price of a company’s shares by the number of shares in circulation. Capitalization represents the financial structure of a company and gives a sense of its overall market value. It also reflects how much investors are willing to pay for the company’s assets, earnings, and growth potential.

In corporate finance, capitalization can refer to:

Market Capitalization: The total market value of a company’s outstanding shares. This is calculated by multiplying the total number of shares by the current share price.
Total Capitalization: The sum of the company’s debt and equity. This includes long-term debt, common stock, and retained earnings. It represents the total amount of capital used to finance the company’s assets.

For example, if a company has 1 million shares of stock, and the current market price of each share is ₹50, the company’s market capitalization would be:Market Capitalization=1,000,000×₹50=₹50,000,000Market Capitalization=1,000,000×₹50=₹50,000,000

Over-Capitalization:

Over-capitalization occurs when a company has more capital than it actually requires for its operations or business expansion. In simple terms, over-capitalization happens when the company’s capital exceeds the real value or potential returns it can generate. This condition can lead to a reduced return on investment (ROI) and financial inefficiency, as the company may not be able to generate sufficient earnings or profits to justify the high level of capital.

Characteristics of Over-Capitalization:

Excessive Debt or Equity: The company raises more funds than necessary, either through debt or equity, leading to financial strain.
Low Profitability: The company’s profits are not sufficient to provide an adequate return to investors or cover the interest and other expenses related to excess capital.
Declining Stock Prices: As investors realize the company is not generating enough returns to support its valuation, stock prices may fall.
Higher Financial Costs: Excessive capital leads to higher costs, such as interest payments on debt or dividend payments to shareholders.
Underutilization of Capital: The company may have funds lying idle or underutilized, which could otherwise be put to productive use.

Example:

A company issues 10 million shares at ₹100 per share, raising ₹1,000,000,000 (₹1 billion) in capital. However, the company only requires ₹600 million for its business expansion, leaving ₹400 million idle. This excessive capital can result in lower earnings per share (EPS), reduced returns, and market discontent.

Under-Capitalization:

Under-capitalization is the opposite of over-capitalization. It occurs when a company does not have enough capital to meet its needs, whether for expansion, operations, or other business requirements. In other words, the company is insufficiently funded to take advantage of growth opportunities or maintain smooth operations.

Characteristics of Under-Capitalization:

Inadequate Capital: The company does not have enough equity or debt to support its operations or growth strategies.
Difficulty in Financing: The company may struggle to obtain loans or other financial resources due to its underfunded position, leading to cash flow problems.
Limited Expansion: The company may miss opportunities for expansion, research, or technology investment due to a lack of funds.
Overburdened Debt: To meet operational needs, the company may resort to borrowing, resulting in high-interest expenses and financial strain.
Increased Risk: Under-capitalized companies face higher financial risks because they may lack the cushion to absorb losses or weather economic downturns.

Example:

A small startup company might need ₹50 million for its operations but only raises ₹30 million. This under-capitalization leads to struggles with covering day-to-day expenses, missing opportunities for growth, or running into liquidity problems.

Distinction Between Over-Capitalization and Under-Capitalization:

Aspect	Over-Capitalization	Under-Capitalization
Definition	The company has excessive capital, beyond its requirements.	The company has insufficient capital to meet its operational or expansion needs.
Cause	Raising more capital than needed, leading to idle resources.	Inadequate capital raising, not enough to fund the business properly.
Result	Reduced return on investment, low profitability, and inefficiency.	Cash flow problems, missed opportunities for growth, and increased risk.
Financial Strain	Higher financial costs due to interest payments or dividend payouts on excessive capital.	Struggles to cover operational expenses, resulting in borrowing and debt.
Stock Performance	Declining stock prices due to poor returns on high capital.	Higher risk of stock instability due to financial underperformance.
Risk of Financial Stress	Financial inefficiency, which could lead to losses.	Increased financial vulnerability, potentially leading to insolvency.
Common Example	A company raising more funds through equity or debt than it can productively use.	A business that cannot raise enough capital to expand or operate efficiently.

Conclusion:

The balance of capitalization is crucial for the health of a company. Over-capitalization leads to inefficiency and lower returns on investment, while under-capitalization results in financial stress, missed growth opportunities, and risk of insolvency. Both conditions are detrimental to a company’s long-term success, as they impede profitability and strategic growth. Corporate finance focuses on ensuring that a company’s capital structure is optimal, with enough capital to fuel its operations and growth without incurring unnecessary financial burdens.

QUESTION -11-Define ‘Corporate Finance. Discuss importance and scope of Corporate Finance

What is Corporate Finance?

Corporate Finance refers to the area of finance that deals with the financial activities of a corporation, including the management of funds, capital structure, investments, and financial decision-making. It encompasses a broad range of practices and strategies aimed at maximizing the value of the company for its shareholders while managing risks and ensuring profitability.

Corporate finance primarily involves three key areas:

Capital Budgeting: Deciding which projects or investments a company should undertake, such as purchasing new equipment or entering new markets.
Capital Structure: Determining the optimal mix of debt and equity financing to fund the company’s operations and growth.
Working Capital Management: Ensuring the company has enough liquidity to meet short-term obligations and manage its day-to-day operations.

In essence, corporate finance is all about making financial decisions that increase the value of a business for its stakeholders, especially shareholders, while balancing risks and returns.

Importance of Corporate Finance

Corporate finance plays a central role in the success and growth of any company. Its importance can be understood from various perspectives:

Maximizing Shareholder Value: One of the primary goals of corporate finance is to make decisions that maximize the value of the company, thereby increasing shareholders’ wealth. By making strategic investments, controlling costs, and improving profitability, corporate finance helps the company grow, enhancing stock value and dividends for shareholders.
Optimizing Capital Structure: The way a company finances its operations (through equity, debt, or a combination of both) is critical to its performance. Corporate finance helps in determining the right capital structure, balancing debt and equity to minimize the cost of capital while maintaining financial flexibility. This also affects the risk profile of the company and its ability to raise future funds.
Managing Risks: Corporate finance involves assessing and managing financial risks, such as credit risk, market risk, and operational risk. Companies can use various tools like derivatives, insurance, and hedging strategies to manage and mitigate these risks, ensuring the company’s financial stability in volatile markets.
Investment Decisions: Corporate finance aids in making informed decisions regarding long-term investments and capital budgeting. By evaluating potential projects through techniques like Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period, the company ensures that its resources are allocated to the most profitable opportunities.
Liquidity Management: Corporate finance is essential for maintaining optimal liquidity levels, ensuring that the company can meet its short-term obligations without compromising its long-term financial stability. This involves careful management of cash flow, receivables, payables, and inventory.
Financial Planning and Forecasting: Corporate finance involves setting long-term financial goals and developing budgets, forecasts, and strategies to achieve them. Effective financial planning allows companies to anticipate future cash flows, identify funding requirements, and ensure that the business remains solvent.
Mergers and Acquisitions (M&A): Corporate finance is involved in facilitating mergers, acquisitions, and restructuring activities. These strategic decisions help companies expand, enter new markets, or improve efficiencies, often resulting in increased profitability and shareholder value.
Corporate Governance and Compliance: Corporate finance helps companies comply with financial regulations and reporting standards. Proper governance ensures transparency, accountability, and the protection of shareholder interests.
Dividend Policy: Corporate finance is also concerned with how a company distributes its profits. Deciding how much of the profits should be paid out as dividends versus reinvested back into the business is a key decision that affects both short-term and long-term financial strategies.

Scope of Corporate Finance

Corporate finance is a broad field that covers various activities and areas. Its scope extends across multiple functions within a company, as outlined below:

Financial Management: The core of corporate finance, it involves managing the company’s financial resources to achieve its goals. This includes managing cash flow, investments, financing activities, and financial risk management.
Funding and Capital Raising: Corporate finance is crucial for raising capital through equity or debt markets, including issuing shares, bonds, and other securities. It also involves selecting appropriate financial instruments and managing investor relations.
Investment Analysis and Management: Corporate finance involves evaluating and selecting investment opportunities that contribute to the growth of the company. It uses various financial metrics and models to assess the risk and return of investments, mergers, and acquisitions.
Strategic Financial Planning: This involves aligning financial goals with the company’s overall strategic vision. Financial planning covers budgeting, forecasting, financial analysis, and the formulation of strategies to achieve long-term objectives.
Risk Management: Corporate finance includes identifying potential financial risks and implementing strategies to mitigate those risks. This may involve insurance, hedging, and diversification of the company’s financial portfolio.
Capital Structure Management: Corporate finance involves deciding on the right mix of debt and equity capital to finance the company’s operations and expansion. This decision impacts the cost of capital, financial stability, and risk exposure.
Mergers and Acquisitions (M&A): Corporate finance plays a crucial role in the M&A process, from identifying potential targets to conducting valuations, negotiating terms, and structuring deals. M&A can be a significant strategy for growth, diversification, and gaining a competitive edge.
Corporate Restructuring: Corporate finance is involved in reorganizing a company’s structure to improve operational efficiency, reduce costs, or align the business with changing market conditions. This may include spinning off businesses, reducing debt, or altering the capital structure.
Corporate Taxation: Tax planning and management are critical components of corporate finance. By ensuring compliance with tax laws and using strategies such as tax-efficient investments, companies can optimize their tax liabilities and improve their overall financial position.
Financial Reporting and Analysis: Corporate finance involves preparing and analyzing financial statements such as income statements, balance sheets, and cash flow statements. These reports provide valuable insights into the company’s performance, financial health, and growth prospects.
Dividends and Profit Distribution: Deciding the dividend policy is a significant aspect of corporate finance. Companies must balance between paying dividends to shareholders and reinvesting profits into the business for future growth.

Conclusion

Corporate finance is integral to the overall success and growth of a business. It is the backbone that helps a company manage its financial resources, plan for the future, assess investment opportunities, and maximize shareholder wealth. The importance of corporate finance lies in its ability to optimize capital usage, manage risks, and make strategic decisions that ensure long-term profitability and financial stability. As businesses continue to expand globally, the scope and complexity of corporate finance will also increase, making it a crucial discipline for both established corporations and emerging startups.

UNIT-1

Table of Contents

QUESTION-1-What do you mean by Corporate Finance? Discuss IN detail its object and importance.

Introduction to Corporate Finance

Objectives of Corporate Finance

1. Maximizing Shareholder Value

2. Capital Budgeting and Investment Decisions

3. Capital Structure Decisions

4. Liquidity and Working Capital Management

Importance of Corporate Finance

1. Maximizing Profits and Growth

2. Risk Mitigation

3. Resource Optimization

4. Strategic Planning

5. Maintaining Corporate Governance and Compliance

Relevant Acts and Laws in Corporate Finance

1. Companies Act, 2013

2. Income Tax Act, 1961

3. Securities and Exchange Board of India (SEBI) Regulations

4. Foreign Exchange Management Act (FEMA), 1999

5. Bankruptcy and Insolvency Code, 2016

Conclusion

QUESTION-2-Commission and Brokerage are essentials element of raising money, Who is entitled for commission and Brokerage? Explain ni the light of case laws.

Commission and Brokerage: Essentials in Raising Money

Who Is Entitled to Commission and Brokerage?

Commission and Brokerage in Light of Case Laws

1. Case Law: K.K. Verma v. Union of India (1954)

2. Case Law: Haji Abdul Hakeem v. M/s. Sterling Investment Corporation (1995)

3. Case Law: Securities and Exchange Board of India (SEBI) v. R.K. Khandelwal (2006)

4. Case Law: Tata Consultancy Services v. State of Tamil Nadu (2004)

5. Case Law: Pravin Anand v. Securities and Exchange Board of India (2009)

Conclusion

QUESTION-3-What are the New Financial,Instruments AS PER INDIAN CORPORATE FIANCE LAW? Discuss in detail their features.

New Financial Instruments under Indian Corporate Finance Law

1. Hybrid Instruments

Features:

Regulatory Framework:

2. Perpetual Bonds

Features:

Regulatory Framework:

3. Real Estate Investment Trusts (REITs)

Features:

Regulatory Framework:

4. Infrastructure Investment Trusts (InvITs)

Features:

Regulatory Framework:

5. Foreign Convertible Bonds (FCBs)

Features:

Regulatory Framework:

6. Stock-Linked Debentures (SLDs)

Features:

Regulatory Framework:

7. Contingent Convertible Bonds (CoCos)

Features:

Regulatory Framework:

Conclusion

QUESTION-4-State the Provisions of the companies Act, 2013 regarding payment of underwriting commission and brokerage on public issue OF shares.

Introduction

1. Underwriting Commission: Meaning and Importance

Legal Provisions under the Companies Act, 2013

SEBI Guidelines

2. Brokerage: Meaning and Importance

Legal Provisions under the Companies Act, 2013

3. Important Considerations for Payment of Underwriting Commission and Brokerage

Transparency and Disclosure

Approval of Shareholders

Nature of Underwriting

No Violation of Market Fairness

4. Enforcement and Penalties

Conclusion

QUESTION-5-What do you mean by Corporate Finance? Discuss ni detail the importance of Finance in the Life ofCorporate Body In present scenario? DISCUSS IN DETAIL

What is Corporate Finance?

Core Areas of Corporate Finance

Importance of Corporate Finance in the Life of a Corporate Body

1. Capital Formation and Growth

2. Strategic Decision Making

3. Risk Management

4. Enhancing Profitability and Efficiency

5. Corporate Governance and Accountability

6. Valuation of the Company

1. **Case Law: K.K. Verma v. Union of India (1954)**

2. **Case Law: Haji Abdul Hakeem v. M/s. Sterling Investment Corporation (1995)**

3. **Case Law: Securities and Exchange Board of India (SEBI) v. R.K. Khandelwal (2006)**

4. **Case Law: Tata Consultancy Services v. State of Tamil Nadu (2004)**

5. **Case Law: Pravin Anand v. Securities and Exchange Board of India (2009)**

QUESTION-7 What do you mean by New Financial Instruments? Define in detail minimum four instruments invented after
1991.