ALTERATION OF SHARE CAPITAL
(Section 61) (1) A limited company having a share capital may, if so authorised by its articles, alter its memorandum in its general meeting to :
(a) increase its authorised shares capital by such amount as it thinks expedient;
(b) consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares;
Provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner;
(C) convert all or any of its fully paid-up shares into stock and reconvert that stock into fully paid-up shares of any denomination;
(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum;
(e) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled, such cancellation shall not be deemed to be a reduction of share capital.
Difference Between Shares and Stock
(1) Shares may be partly paid-up, but stock have to be fully paid. Only fully paid. Shares can be converted into stock, when fully paid.
(2) Every share bears a serial number, but stock does not have a serial number.
(3) Shares are issued and can be transferred in definite numbers only and not in fractional parts, but stocks are transferred in terms of value i.e., worth five thousand and forty rupees or of any amount.
Auditors Duties
(1) He should check whether shares have been converted into stock as per the provisions of law and the Articles of the company.
(2) If alteration has been done in the procedure of converting shares into stock, it is according to law and the rules.
Auditor’s Duty
(1) The auditor should inspect the Articles to ascertain that the procedure prescribed therein has been followed and the alteration of Share Capital is authorized. (BCom 3rd Year Company Audit Notes Study Material)
(2) He should see that the rules regarding alteration of share capital have been duly complied with.
(3) He should inspect the Minutes of the Shareholders authorizing the alteration.
(4) He should also refer to the Minutes of the Board of Directors for resolutions passed pursuant to the resolution of the members.
(5) He should verify the records made in the financial books and in the Register af Members with the help of allotment lists.
(6) The Cancelled Share Certificates should be examined and compared with the counterfoils of new certificates issued.
(7) He should see that the Share Capital Account is correctly shown in the Balance Sheet.
(8) Lastly, he should confirm that the Registrar has been duly intimated.
Reduction of Share Capital
For reducing the share capital of a company limited by shares or limited by quarantee having a share capital a special resolution has to be passed and application has to be made to Company Law Tribunal for confirmation.
Reduction in share capital can be done by:
(a) By extinguishing or reducing the liability on any of its shares in respect of the share capital not paid-up; or
(b) By cancelling any paid-up share capital which is lost or is unrepresented by available assets; or
(c) By paying off any paid-up share capital which is in excess of the wants of the company.
Company should not have defaulted in repayment of deposits. No such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it or the interest payable thereon.
The Tribunal gives notice of every application made to it for reduction of share capital to the Central Government, Registrar and to the Securities and Exchange Board (in the case of listed companies) and to the creditors of the company and shall take into consideration the representations, if any, made to it by them within a period of three months from the date of receipt of the notice.
The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital on such terms and conditions as it deems fit;
According to accounting standards. No application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards.
The company shall deliver a certified copy of the order of the Tribunal to the Registrar within thirty days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect.
Auditor’s Duty
(1) The auditor should study the Articles to ascertain that the reduction of Share Capital is authorized by the Articles.
(2) He should then inspect the special resolution passed for reducing the Share Capital and verify that the meeting for such a resolution was convened properly.
(3) He should examine the order of the Tribunal confirming the reduction and see that copies of the Order and the Minutes have been filed with the Registrar of Companies. (BCom 3rd Year Company Audit Notes Study Material)
(4) He should inspect the Certificate of the Registrar as regards the reduction of capital.
(5) He should vouch the entries recorded in the Financial Books with the help of the documentary evidence.
(6) If the capital in excess of the wants of the company has been paid-off, the entries in the Cash Book should be compared with those in the Pass Book.
(7) The adjustment so made in the Register of Members should be verified. He should ensure that new certificates have been issued and the old ones have been cancelled. (BCom 3rd Year Company Audit Notes Study Material)
(8) He should see that the assets affected as a result of the reduction of capital have been properly shown in the Balance Sheet.
(9) He should also ensure that the Memorandum and Articles of Association have been suitably altered.
DEBENTURES OR BONDS
So far we have discussed about ownership instruments. Companies have also to borrow money on long term basis. Money received as loan is called borrowed capital and capital market instrument of long term loan is called a debenture or bond. The document which an investor receives as receipt of loan is called the debenture. The power to issue debentures rests with the Board of Directors. Debentures can be issued at par, at discount or at premium.
Definition. “A debenture is an acknowledgement of debt by a company under its seal.”
It is an instrument executed by a company under its common seal acknowledging indebtedness to some person or persons to secure the sum advanced.
Like shares, debentures are also offered to public by means of a prospectus. The terms and conditions of issue are endorsed on the back of the instruments.
FEATURES OF DEBENTURES
- Fixed interest bearing security. A debenture is a fixed interest bearing security, profits or no profits interest on debentures has to be paid.
- Fixed maturity. A company cannot issue irredeemable debentures generally debenture mature after a specific period. The company has to redeem them at stipulated time (Not exceeding 20 years) or the debentures holders can force winding up of the company.
- Priority in repayment. Debenture holders have priority of claim on the assets of the company, their money has to be paid first, before making any payment to preference or equity shareholders in the event of liquidation of the company. Secured debentures have a charge on the assets of the company also.
- No participation in management. Debenture holders are only creditors of the company, unlike equity shareholders, they are not part-owners of the company. They have no right to attend general meetings or to vote there in.
- Interest on debentures is a charge against profits. Interest paid on debentures is a charge against the profits of the company and hence is eligible for deduction for income tax purposes.
Debenture Trust Deed. When the debentures are sold through public subscription, involving a large number of debentureholders, it is not possible to mortgage the properties of the company as security with individual debenture-holders.
The most common and convenient way of creating a charge is to execute a “Trust Deed” conveying the property of the company to the representatives of debentureholders called “Trustees” through a trust deed. The trust deed, normally, grants the trustees a fixed charge over the company’s freehold and leasehold properties and the floating charge over the rest of properties.
The trust deed contains the terms and conditions endorsed on the debentures and define the rights of the debentureholders and the company. Generally, a financial institution/bank, insurance company/or a firm of attorneys are appointed as trustees. The trustees are responsible to watch the interests of debenture holders and ensure that the company issuing the debentures fulfills its contractual obligations. The debentures trust deed has to be executed within 6 months from the closure of subscription of debentures.
Kinds of Debentures
Debentures can be classified into different types on the basis of terms and conditions of issue.
Classification as regards security
- Naked or unsecured debentures. Naked or unsecured or simple debentures are issued with merely a promise of payment, without any security by way of charge on the assets of the company. For payment of interest or the principal they are mere acknowledgement of debts. They have no right beyond those of ordinary unsecured creditors. (BCom 3rd Year Company Audit Notes Study Material)
- Secured or mortgage debentures. Such debentures are issued with a charge on the undertaking and the assets of the company as security. The charge may be fixed that is be on a particular asset or may be floating that is not fastening on any particular asset unless it crystalises. In case of default in payment of interest or the principal, debentureholders can get the assets sold and receive their money.
- Guaranteed debentures. Repayment of principal and the interest on such debentures is guaranteed by some third party, mostly State or Central Government. (BCom 3rd Year Company Audit Notes Study Material)
Classification as regards registration
- Registered debentures. If the names and addresses of person or persons in whose favour the debentures have been issued are entered in the register of debentureholders, maintained by the company, such debentures are called registered debentures. Registered debentures can be transferred by a regular transfer deed and the transfer has got to be registered with the company.
- Bearer or unregistered debentures. Names and addresses of bearer debentureholders are not entered in the register of debentureholders. They are payable to the bearer and are transferable by mere delivery. For payment of interest, coupons are attached to the debentures and payment is made to any persons who produces the coupons. There is no provision in Companies Act about issue of bearer debentures.
Classification as regards redemption debentures
- Redeemable debentures. The principal of redeemable debentures has to be repaid to investors after a specified period say after 5 years or 10 years (but not exceeding 20 years). The repayment can be made either by installments or in one lump sum.
- Convertible debentures. An option is given to the holders of convertible debentures to convert their debentures into equity or preference shares at stated rate of exchange (e.g., one share for 5 debentures), after a certain period.
The debentures are called fully convertible when all the debentures are convertible into shares. If a portion only of the debentures held by the investor can be converted into shares, these are called partly convertible debentures. The portion which is not convertible is redeemed after the stated period.
- Non-convertible debentures. Non-convertible debentures can not be converted into shares, such debentures are redeemed at the expiry of specified period. (BCom 3rd Year Company Audit Notes Study Material)
SEBI GUIDELINES ABOUT ISSUE OR DEBENTURES
The SEBI has issued the following guidelines about issue of debentures:
- Merchant bank to manage the issue. A listed company shall not make an issue of debentures unlessa merchant banker, holding a valid certificate of registration issued by SEBI, has been appointed to manage the issue.
The merchant banker, acting as the lead manager shall ensure that the offer document provides a true, correct and fair view of the state of affairs of the company which is adequate for the investors to arrive at a well informed investment decision and its complies with SEBI rules, regulation and guidelines and requirement of other laws.
- Approval of offer document by SEBI. The draft of the offer document shall be submitted to SEBI by the merchant banker at least 6 weeks before the issue is scheduled to open. SEBI shall make suggestions, if any, within 3 weeks.
- Compulsory credit rating. No public or rights issue of debt instrument shall be made unless credit rating from a credit rating agency has been obtained and disclosed in the prospectus or the offer document. In case of issue of # 100 crores or more, two rating from two different credit rating agencies must be obtained. All credit ratings, including the unaccepted credit rating must be disclosed.
Besides this, all credit ratings obtained during the three years preceding the issue for any listed security of the issuer company must be disclosed in the prospectus or the offer document. - Interest rate is freely determinable. The interest rate on debentures is freely determinable.
- Appointment of debenture trustees. The names of debenture trustees should be stated in the prospectus and the trust deed should be executed within six months of the closure of the issue.
In the case of debentures with maturity period of 18 months or less the appointment of debenture trustees is not required.
The debenture trustees must be granted powers to protect the interests of debentureholders including the right to appoint a nominee director.
- Pre-determination of premium on conversion and the time of conversion. The premium on conversion into shares in the case of fully convertible and partly convertible debentures is to be disclosed in the prospectus. The time of conversion has also to be stated.
- Conversion to be optional. Where the debentures are convertible into shares either fully or in part which takes place at or after 18 months from the date of allotment, but before 36 months, such conversions shall be made optional at the hands of the debentureholder.
If fully convertible debentures are proposed to be issued, having a conversion period of more than 6 months the conversion is to made optional with ‘put’ and ‘call’ option. (BCom 3rd Year Company Audit Notes Study Material)
- Disclosure of redemption amount, period of maturity and yield. Redemption amount, period of maturity, yield on redemption for the partly convertible debentures or non-convertible debentures are to be indicated in the prospectus.
- Creation of debenture redemption reserve. Creation of debenture redemption reserve on the prescribed basis is compulsory, except for debentures with maturity period of 18 months or less or for infrastructure companies. The company must create debenture redemption equivalent to 50 per cent of debentures liability before the debentures redemption commences.
- Disclosure of creation of charge. The offer document shall specifically state the assets on which security shall be created and shall also state the ranking of the charge. (BCom 3rd Year Company Audit Notes Study Material)
Further, the offer document shall also state the security/asset cover to be maintained. It shall also mention the basis for computation of security/asset cover, the method of valuation and the periodicity of such valuation.
The charge must be created within 6 months from the date of issue of debentures.
- Other disclosures. The offer document or prospectus shall also contain:
(a) Premium on conversion. Premium amount on conversion and the time of conversion will be specifically disclosed.
(b) Amount and the period of redemption. In the case of partly convertible debentures or non-convertible debentures the redemption amount and the period of maturity and yield on their redemption shall have to be disclosed.
(c) Terms of offer. Full information relating to the terms of offer or re-purchase including the names of party offering to re-purchase the non-convertible portion of partly convertible debentures shall be disclosed.
(d) Amount of discount. The discount at which such offer is made and the effective price for the investor as a result of such discount shall be disclosed.
(e) Debt ratio. The existing and future long-term debt ratio shall be disclosed.
(f) About payments to existing debenture holders. Whether timely payment of interest has been made on already existing debentures and term loans shall be disclosed. (BCom 3rd Year Company Audit Notes Study Material)
(g) No objection certificate for second or paripassu charge. That a certificate from a financial institution or bankers about their no objection for creation of second charge or paripassu charge being created in favour of trustees to the proposed debenture issue has been obtained will be disclosed.
- Monitoring. The lead financial institution/investment institution is required to monitor the progress in respect of debentures issued for project finance/modernisation/ expansion/diversification/normal capital expenditure. In case of debentures issued for financing working capital the lead manager is to monitor the progress. (BCom 3rd Year Company Audit Notes Study Material)
- Certificate from auditor. In each accounting year the trustees shall obtain a certificate from auditors in respect of utilisation of funds during the implementation period of projects.
- Debentures cannot be issued for certain things. Companies can issue debentures for any purpose except for acquiring shareholdings or providing loan to any company in the same group. This restriction is, however, not applicable to the issue of fully convertible debentures convertible within 18 months. (BCom 3rd Year Company Audit Notes Study Material)
Duties of Auditor About Debentures About the Issue
(1) A company auditor should refer to provisions of Memorandum and Articles of Association about issue of debentures and ensure that limits of issue are not crossed. (BCom 3rd Year Company Audit Notes Study Material)
(2) He should check Minute Books of Director’s meetings and ensure that issue of debentures are authorised by a resolution of the Board.
(3) He should ensure that permission of SEBI has been obtained, if required.
(4) He should check whether prospectus or statement-in-lieu of prospectus issued for issue of debentures has been filed with the Registrar.
(5) He should ensure that the debentures have been issued as per terms mentioned in the prospectus.
(6) He should vouch that the money received on issue of debentures has been entered in the cash book.
(7) He should examine the Registrar of Mortgages and Charges where the debentures are covered by any mortgage or charge.
(8) If trustees for debentureholders have been appointed he must check the trust deed’ and the conditions contained therein.
(9) If the debentures have been issued as collateral security against a loan or bank draft, this fact is stated in the Balance Sheet.
(10) He should check that balance in Debenture Account in General Ledger agrecs with the amount shown in the Registrar of debentureholders.
(11) If the debentures have been issued at discount, the auditor should ensure the discount has been debited to “Discount on Debenture Account”, and debentures have been shown at their face value.
Payment of Interest
(12) The auditor should check that payment of interest on debentures is made as per the terms of issue. Interest accrued on the date of preparation of Balance Sheet is shown on its liability side.
Duties About Redemption of Debentures
(13) The auditor should inspect the terms of issue of debentures or The Trust Deed, if any, to check that redemption has been done as per the terms and conditions of redemption. (BCom 3rd Year Company Audit Notes Study Material)
(14) The auditor should examine the ‘Directors Minute Book’ authorising the redemption of debentures.
He should compare debenture cancelled with the entries in the Cash Book.
(15) He should check accounting entries about redemption of debentures. He should carefully vouch proceeds received on the sale of ‘Sinking Fund Account’ and ‘Debenture Redemption Fund Investment Account’. In the case of redemption by periodical drawings the ‘Profit and Loss Account’ should be debited with the amount of annual drawings and “Debenture Redemption Account’ should be credited.
At the time of making payment “Debenture Redemption Account is debited and ‘Cash/Bank Account’ is credited, the ‘Redemption Account is debited and ‘General Reserve Account is credited. (BCom 3rd Year Company Audit Notes Study Material)
PUBLIC DEPOSITS
Deposit include any receipt of money by way of deposit or loan or in any other form by a company.(BCom Company Audit in Auditing Notes Study Material)
These rules do not apply to banking and non-banking financial company and such other companies as Central Government may which consultation with the Reserve Bank of India specify. (BCom 3rd Year Company Audit Notes Study Material)
Previously Companies managed to get deposits from public offering high rates of interest and neither returned principal amount nor paid the interest. Companies Act, 2013 has made stringent rules about safety of deposits made by members and the public in companies.
Provisions relating to deposits are contained in Sections 73 to 76 of Companies Act, 2013 which are as follows:
Now no company can invite, accept or renew deposits from the public except in the following manner.
Deposits from members. For accepting deposits from members (i.e., its own shareholders) the company has to pass a resolution in the general meeting and has to observer rules prescribed by the Reserve Bank of India in this regard. The deposits can be tiaben on such terms and conditions as may be agreed upon between the company and its members.
For accepting deposits from members the following conditions must be satisfied:
(i) Issuing a circular. The company must issue a circular to members, including a statement showing its financial position, the credit rating obtained, the total numbers of past depositors and the amount due towards previous deposits.
(ii) Filing copy of circular with the Registrar. A copy of circular inviting deposits has to be filed with the Registrar within 30 days, before its issue.
(iii) Depositing in some part of maturing deposit amount in bank. The company has to deposit such sums, which should not be less than 15 per cent of the amount of deposits maturing during the financial year and the financial year next following, in a scheduled bank, in separate account called ‘Deposit Repayment Reserve Account.’
(iv) Providing deposit insurance. The company must provide deposit insurance about the deposits in prescribed manner.
(v) Certify no default. The company has to certify that it has not committed any default in repayment of deposits or interest on deposits accepted before the commencement Companies Act, 2013.
(vi) Provide security. The company has to provide security, if any, for due payment of the amount of deposits or interest on them. If the company does not provide any security the deposits are treated as unsecured and this fact has to be stated in the circular inviting deposits.
Acceptance of deposits from public
Public companies having networth or turnover as may be prescribed, can accept deposits from public, but it has to comply such all the conditions mentioned above for accepting deposits from its members. The company has to follow rules prescribed by the Central Government in this regard.
Such a company is also required to obtain, within thirty, the rating from a recognised credit rating agency. The credit rating should also be about companies net worth, liquidity and ability to pay its deposits on due date. The rating will have to be obtained for every year during the tenure of deposits. This rating has to be informed to the public. (BCom 3rd Year Company Audit Notes Study Material)
Every company accepting secured deposits from the public will have create a charge on companies assets equal to the amount of deposits accepted within thirty days of such acceptance. (BCom 3rd Year Company Audit Notes Study Material)
Auditors Duties about Deposits
(1) The auditor should check that resolution for accepting deposits from members or public has been passed at a general meeting.
(2) That a circular is issued informing members and public about the financial position of the company and the company obtains credit rating. A copy of this circular should be filed with the Registrar.
(3) At least fifteen percent of the deposit amount maturing are deposited in a scheduled bank under a separate bank account.
(4) Check that deposit insurance has been taken on the deposits.
(5) That charge has been created on the assets of the company for secured deposits.
(6) Verify the refund and renewals/with the master list of depositors. The original requisition letters for refunds and renewals should be verified completely and not on sample basis. (BCom 3rd Year Company Audit Notes Study Material)
(7) Vouch entries for accepting deposits and repayment with the cash book. He should also ensure that refunds etc. are made in the personal name of depositors and not with just bank account numbers.
(8) Tally the number of deposits as per the depositor-wise schedule with certificate Control Register. He should match the cancelled deposit certificates much fresh renewal certificates issued. (BCom 3rd Year Company Audit Notes Study Material)
REGISTRATION OF CHARGES
Charge means an interest or lieu on the property or assets of the company as security and includes mortgage. When a company creates a charge on its property or assets, it becomes its duty to register it with the Registrar within thirty days of creation.
The company has to give intimation to the Registrar about payment or satisfaction in full, of any registered charge.
If the company fails to register a charge, the charge holder can apply to Registrar for registration. The company and the Registrar keeps a register of charges for each company which is open for inspection by any person. Any person acquiring property on which a charge has been created is deemed to have notice of such charge. (BCom 3rd Year Company Audit Notes Study Material)
Audit of Mortgage and Charges
(1) Entry. The auditor should see that entries are made in ‘Register of Charges’ maintained by the company of all the charges created on the company’s properties. He should compare it with loans taken records.
(2) Within borrowing powers. He should check that loans have been taken within borrowing powers of the company.
(3) See Directors Minute Book. The auditor should check ‘Directors Minute Book’ to see that loan was authorised and it was raised by creating charge on assets of the company. (BCom 3rd Year Company Audit Notes Study Material)
(4) Charges registered. He should check that registration of charge has been done with Registrar and entry has been made in the ‘Registrar of Charges’. (BCom 3rd Year Company Audit Notes Study Material)
(5) Shown in the Balance Sheet. He should see that loans on which charge has been created are shown as secured loans in the Balance Sheet as required under schedule vi of the companies Act. (BCom 3rd Year Company Audit Notes Study Material)
PRELIMINARY EXPENSES
Expenses incurred by a company before its incorporation are called preliminary expenses. A company legally comes into existence only when it gets a certificate of incorporation from the Registrar of Companies. The promoters have to incurr a lot of expenses before the company legally comes into existence; these are for startup expenses. Following are usual preliminary expenses:
(1) Meeting expenses of promoters;
(2) Preliminary consultation charges on formation of the company.
(3) Actual government fee and stamp duty paid in the course of incorporation.
(4) Secretarial cost incurred for dealing with Registrar of companies.
(5) Expenses incurred towards human resources prior to incorporation.
(6) Expenses incurred for payment of salaries to people prior to incorporation including fees for professionals like accountants, valuers, engineers, surveyors etc. (BCom 3rd Year Company Audit Notes Study Material)
(7) Expenses incurred towards any pre-incorporation agreement.
(8) Expenses incurred in advertising the prospectus. Project report and feasibility study related expenses etc.
(9) All kinds of other expenses spent by promoters of the company.
Only an Indian company and a resident Indian company can claim deduction of preliminary expenses under Section 35 D of Income Tax Act, which can be claimed in five equal installments, beginning with previous year of commencement of business with previous year of commencement of business or commencement of production. (BCom 3rd Year Company Audit Notes Study Material)
The expenses should not exceed 5 percent of the project cost or 5 percent of capital employed, whichever is beneficial to the company. The unwritten off amount should be shown on the asset side of the Balance Sheet as Miscellaneous Expenditure.
Expenses incurred for preparation of building i.e., electricity installation, floor preparation, carpeting charges, before starting of business, are not treated as preliminary expenses. (BCom 3rd Year Company Audit Notes Study Material)
Auditors’ Duties About Preliminary Expenses
(1) Check the Board resolution approving preliminary expenses.
(2) Examine supporting papers and vouchers. contracts, agreements etc. to support promoters claim.
(3) Check bills and receipts issued to by the printer of memorandum and articles of Association, share certificates etc.
(4) Check receipts for the registration fee paid for registration of the company.
(5) Verify rates of stamps required to be affixed on the Memorandum and Articles of Association.
(6) As certain Boards’ Minute book for the decision to write off the preliminary expenses in installments.
(7) Check that no expenses, other than allowed as preliminary expenses, are included under this heading.
PROFITS PRIOR TO INCORPORATION
Profit prior to incorporation is the profit earned or loss suffered during the period before incorporation. It is a capital profit and is not legally available for distribution as dividend because a company can not earn profit before it comes into existence. Profits prior to incorporation can accrue when promoters take over a running business prior to the date of incorporation.
Such profit has to be transferred to Capital Reserve or may be adjusted against! goodwill. Loss prior to incorporation is treated as capital loss and is shown under the head “Miscellaneous Expenditure” on the asset side of the Balance Sheet.
Determining profits prior to Incorporation
In simple cases gross profit is apportioned between the two periods, i.e., the period prior to incorporation and period post incorporation on the basis of sales in two periods. Various expenses of Profit & Loss Account are also similarly apportioned on some logical basis and net profits for the two periods are thus found. (BCom 3rd Year Company Audit Notes Study Material)
Losses. If there are losses prior to incorporation these may be debited to Profit and Loss Account or to Goodwill Account or transferred to suspense account which may be written off afterwards. (BCom 3rd Year Company Audit Notes Study Material)
Auditors Duties
The auditor should check accuracy of method of calculating profits prior to incorporation and check that these are not distributed as dividends and are treated as capital profits. (BCom 3rd Year Company Audit Notes Study Material)
COMMISSION ON ISSUE OF SHARES AND DEBENTURES
A company may pay commission to any person in connection with subscription to its securities subject to prescribed conditions. [Sec. 40(6)] underwriting commission is payable to a person who agrees to subscribe to the shares of the company to the extent to which they are not taken up by the public. (BCom 3rd Year Company Audit Notes Study Material)
The commission should not exceed five percent of share value in case of shares and 2.5 percent in case of debentures or rate mentioned in the Articles, whichever is less. This rate has to be disclosed in the Prospectus. (BCom 3rd Year Company Audit Notes Study Material)
Brokerage is different from underwriting commission, it is payable to professional men such as “stock brokers”, bankers etc. who induce their clients to subscribe to the securities of companies. Companies can pay upto 2.5 percent as brokerage.
Auditor’s Duties
(1) Examine Articles. The auditor should examine the Articles of Association and provisions of the Companies Act about the rate of Commission on shares and debentures. (BCom 3rd Year Company Audit Notes Study Material)
(2) Vouch payments. He should vouch payment of commission with reference to agreements, receipts and stamps of agents on the application form for shares and debentures. (BCom 3rd Year Company Audit Notes Study Material)
(3) Whether underwriters have fulfilled their commitments. He should check whether underwriters have fulfilled their commitment to take securities which have not been taken up by the public and they have paid application and allotment money on shares taken by them or these amounts have been adjusted against commission payable to them. (BCom 3rd Year Company Audit Notes Study Material)
(4) Unabsorbed amount shown in the Balance Sheet. He should check that unabsorbed mount of this item has been shown on the asset side of the Balance Sheet under the head “Miscellaneous Expenditure” until it is completely written off.
CONTRIBUTION FOR CHARITABLE FUNDS
The Board of Directors of a company can contribute towards charitable purposes. Prior permission of the company in, general meeting, is required if the total amount of contribution in any financial year exceeds five percent of its average net profits for the three years immediately preceding that financial year. (BCom 3rd Year Company Audit Notes Study Material)
Political contributions
All companies can contribute any amount directly or indirectly to any political party, but this cannot be done by a government company or company which has been in existence for less than three years. The Board of Directors must pass a resolution authorising this. The contribution has to be made by ‘account payee’ cheque or draft or through electronic system through a bank account.
The company has to disclose the total amount contributed by it in a financial year in its Profit and Loss Account.
Auditor’s duties
(1) Check that the Board of Directors passed a resolution for political contribution.
(2) The company has been in existence for three years or more.
(3) The contributions are debited to Profit and Loss Account of the company.