INCORPORATION

FAC213
GROWTH ADVANCED
CORPORATE
INTERNALLY EXPANSION ACCOUNTING
EXTERNALLY EXPAND

DECLINE

LIQUIDATION OR A CLOSURE???

IS THIS DECLINE A DEAD END OR CAN COMPANIES REVIVE FROM THIS

DEAD END WITH THE HELP OF RECONSTRUCTION SCHEMES.

MERGERS & ACQUISTIONS VIBHA TRIPATHI

INTERNAL RECONSTRUCTION
 Difference Between Internal & External Reconstruction.

Basis of distinction Internal Reconstruction External Reconstruction

1.Liquidation of Existing company does not Existing company goes into
existing company go into liquidation. liquidation.
2. Formation of new A new company is formed to
company No new company is formed . take over the business of the
existing company.
3. Reduction of It involves the reduction of It may or may not involve the
Share Capital share capital. reduction of share capital.

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INTERNAL RECONSTRUCTION

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 What is
Internal
Reconstruction

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Internal
Reconstruction is ….

The
reorganization
of the existing • The object of
capital structure Reconstruction is
of a company
without usually to
liquidation of reorganize capital
the existing
company or or to compound
forming a new with creditors or to
one is called
Internal
effect economies.
Reconstruction
VIBHA TRIPATHI
 It is a scheme in which efforts are made to
bail out the company from losses and put
it in profitable position.

It is a scheme of reorganization in which

all interested parties in the capital
structure volunteer to sacrifice.

They are the company’s shareholders,

debenture holders, creditors etc.

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 Need for
Internal
Reconstruction

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Need for Internal Reconstruction….
Accumulated Losses over the years

Fictitious assets

Assets are overvalued

Useless Intangible Assets

Overcapitalization

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Need for Internal Reconstruction….

• Higher net worth than actual net

worth
Conclusion
• Incorrect picture of financial
statement

VIBHA TRIPATHI
AN UNDER CAPITALIZED COMPANY MAY FACE
THESE CHALLENGES
• (i) necessity for injecting more working capital to meet the market
demand for the company’s products or services;
• (ii) unable to meet its current commitments;
• (iii) unable to obtain further credit from suppliers of raw materials,
consumable stores, bought-out components etc. and from other
parties like those doing job work for the company.
• (iv) unable to utilise its full production capacity for lack of liquid funds
Financial restructuring of a company involves rearrangement of its
financial structure so as to make the company’s finances more
balanced.
VIBHA TRIPATHI
Restructuring of under-capitalized Company
• An under-capitalized company may restructure its capital by taking
one or more of the following corrective
• steps:
• (i) injecting more capital whenever required either by resorting to
rights issue/preferential issue or additional public issue.
• (ii) resorting to additional borrowings from financial institutions,
banks, other companies etc.
• (iii) issuing debentures, bonds, etc. or
• (iv) inviting and accepting fixed deposits from directors, their
relatives, business associates and public.

VIBHA TRIPATHI
 If a company is over-capitalized, its capital also
requires restructuring by taking following
corrective measures:

• (i) Buy-back of own shares.

• (ii) Paying back surplus share capital to shareholders.
• (iii) Repaying loans to financial institutions, banks, etc.
• (iv) Repaying fixed deposits to public, etc.
• (v) Redeeming its debentures, bonds, etc.

VIBHA TRIPATHI
The scheme of Internal Reconstruction involves:

Under internal reconstruction, the

•A •B accumulated trading losses and fictitious
assets are written off against the sacrifice
made by these interest holders in the form
Revaluation of reduction of paid up value of their
Re-Assessment
interest.
of Assets of Liabilities

Accumulated Losses over the years

Writing off
Losses & Adjustment of Fictitious assets
Fictitious Share Capital.
Assets.
Assets are overvalued

•D •C Useless Intangible Assets

VIBHA TRIPATHI Overcapitalization

 Procedure of
Internal
Reconstruction

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 Articles Of
Association

Authorized No provision

Special
Sp. Resolution in GM Resolution to
for Reduction alter Articles

Permission of the NCLT

Deliver a certified copy

of order from tribunal
to the Registrar
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It may be noted that No reduction of capital would be allowed
in case of Arrears in the repayment of Deposits and interest
thereon. [Provison to Section 66(1)].

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Methods of Internal Reconstruction….

Methods of
Internal
Reconstruction

Variation of
Alteration of Reduction of Compromise / Surrender of
Share Holders
Share Capital Share Capital Arrangement Shares
Rights

VIBHA TRIPATHI
Companies limited by shares can reduce their share
capital in• Journal
one ofEntry:
the three ways:
• Share
Extinguish capital
or reduce A/c Dr. on
the liabilities (10)
any of its shares in respect of
the share capital not paid up;
• To Share Capital (8)

• No Change in total capital

• ifExample:
(For example, the shares are of face value of INR 10 each of which INR 8
has been paid,
• 80,000 shares of 10 each 8 paid up-6,40,000
• 80,000 shares of 8 each fully paid up-6,40,000

the company may reduce them to INR 8 fully paid-up shares and thus
relieve the shareholders from liability on the uncalled capital of INR 2 per
share); or
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 Companies limited by shares can reduce their share
•
capital in one of the three ways:
For example, if the shares of face value of Rs. 100 each fully paid-up is
represented
Either by
withRs.
or 30 worthextinguishing
without of assets. In such a case,liabilities
or reducing reductiononofany
share
of its
shares,
capital may cancel any paid
be effected by up share capital
reducing Rs. 70which is lost or
per share andunrepresented
writing off by
similar amount of assets available assets;
Journal Entry:
Share Capital A/c Dr. 100
To Share Capital A/c (30) 30
For example,
To capital Reductionif the shares of70
(70) face value of INR 100 each fully paid-up is
(Being share reduced torepresented
Rs. 30 each) by INR 30 worth of assets.

In such a case, reduction of share capital may be effected by reducing Rs.

70 per share and writing off similar amount of assets
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Either with or without extinguishing or reducing
liabilities on any of its shares, pay off any paid up capital
which is in excess of the wants of the company
• For example, shares of face value of Rs. 10 each fully paid-up can be
reduced to face value of Rs. 2 each by paying back Rs. 8 per share.)
Journal Entry: Ques: In real
Share Capital A/c Dr. (Rs.10) life has any
To Shareholders A/c (Rs. 8) company
To Share capital A/c (Rs.2) followed this
(Being conversion of share capital and money due to members) pattern of
capital
Shareholders A/c Dr. (Rs. 8) reduction?
To Bank A/c (Rs.8)
(Being excess capital returned to shareholders.)
VIBHA TRIPATHI
• However, income tax act deals
with deemed dividend under Amendment
section 2(22) (a) to 2(22) (e), which The Finance Bill 2018 has proposed to levy the Dividend
talks about the income which is Distribution Tax (DDT) on ‘Deemed Dividend’ under section
considered as dividends. 115-O of the Income Tax Act, 1961 at the rate of 30% (plus
applicable surcharge and cess) in the hands of the closely held
companies to prevent hiding dividend in the form of
• Any such distribution by the loans/advances.
company to its shareholders by The amendment shall apply to the transactions undertaken on
reduction of its capital, to such or after 1st April, 2018.
extent to which company As discussed in the guide on section 10(34) the dividend
possesses accumulated profits, income which are subject to DDT under section 115-O are
which arose after the end of exempted in the hands of the shareholders under section
previous year; 10(34).
Since, Deemed dividend under section 2(22)(e) is also
• It means that the income termed proposed to brought under the purview of DDT u/s 115-O,
as dividend is actually not dividend therefore, exemption u/s 10(34) shall also be applicable to
distributed by a company but the shareholders and income from such deemed dividend shall be
amount paid is still treated as tax free.
dividend and hence the term
“Deemed Dividend”.
VIBHA TRIPATHI
 At the time of formulating a scheme of capital reduction/internal reconstruction ,the
following points must be kept in mind:
1.
to the creditors,
The scheme must give an debenture holders,
incentive lenders and
shareholders.

that they will be better

off by accepting the
scheme
Creditors and debenture
holders must be
convinced
rather than participating
in a liquidation of the
company.
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2. The scheme must be ‘fair’ between different types of
shareholders , creditors and vendors.
‘equitable’

3. Capital reduction scheme is worth considering

only if the company has recovery prospects

4. The scheme must provide for

Adequate working capital by injecting cash by way of

Right issue Loan

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At the time of formulating a scheme of capital reduction ,the following steps
must be followed:

Step 1

• To determine the total amount of the losses to be written off.

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 STEP:2
All the fictitious assets are to be written off

Eg. Preliminary expenses , discount on issue of shares and

debentures ,debit balance of Profit & Loss A/c.

If there is a goodwill in the balance sheet , it is also to be written off.

All assets are to be revalued .Loss on Revaluation is to be written –

off.

Similarly , any profit on revaluation of assets or excess provision of liabilities

are to be considered for reduction of total loss
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Who bears the loss:

Equity
Shareholders

Preference
Shareholders

Creditors

Debenture
Holders
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Internal Reconstruction is a
scheme formulated to reorganize a
loss making company.
(Profit & Loss A/c Dr. )

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 Balance Sheet of Smart Ltd. (Before reconstruction scheme) Balance Sheet of Smart Ltd. (After reconstruction scheme)
Equity and Liabilities Equity and Liabilities
Shareholder's Funds Shareholder's Funds
Equity Share Capital 7,00,000 8,00,000 Equity Share Capital 1,00,000
12% Preference share Capital 3,20,000 4,00,000 12% Preference share Capital 80,000
Reserves & Surplus Reserves & Surplus
Profit & Loss(Debit balance) (16,00,000) Profit & Loss(Debit balance) -
Non-Current Liabilities Non-Current Liabilities
8% Debenture 80,000 10,00,000 8% Debenture 9,20,000
Current Liabilities Current Liabilities
Trade payables 2,00,000 10,00,000 Trade payables 8,00,000
Other current liabilities 3,00,000 18,00,000 Other current liabilities 15,00,000
Total 34,00,000 Total 34,00,000
II Assets II Assets
Non-Current Assets Non-Current Assets
Land & Building 4,00,000 Land & Building 4,00,000
Plant & Machinery 6,00,000
Plant & Machinery 6,00,000
Furniture 8,00,000
Furniture 8,00,000
Current Assets
Current Assets
Trade Receivables 4,00,000
Trade Receivables 4,00,000
Inventory 8,00,000 Inventory 8,00,000
Cash and Cash Equivalents 4,00,000 Cash and Cash Equivalents 4,00,000
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Total 34,00,000 Total 34,00,000
Why capital reduction A/c is prepared
• A new account, viz. Capital Reduction Account, is to be opened for
transferring the part of capital which is lost, i.e., not represented by assets.
In other words, this account reveals the sacrifices made by various parties,
viz. equity shareholders, preference shareholders, debenture-holders,
creditors, etc.
• It is needless to say that this is done by writing-off accumulated losses,
intangible assets, over-valuation of assets, etc.
• At the same time it must be remembered that appreciation of the assets, if
any, must be passed through this account (i.e. Re-
organisation/Reconstruction Account), that is, this account should be
credited. The balance if any, should be transferred to Capital Reserve
Account.

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Internal Reconstruction is a scheme
formulated to reorganize a loss making
company.
(Profit & Loss A/c Dr. )

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The scheme of Internal Reconstruction involves:

•A •B
Revaluation Re-Assessment
of Assets of Liabilities

Writing off
Losses & Adjustment of
Fictitious Share Capital.
Assets.

•D •C
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ASSETS LIABILITIES -PROFIT

ASSETS LIABILITIES -LOSS

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 Capital Reduction A/c

Loss Profit

Dr. Cr.

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 Internal Reconstruction A/c
Particulars Debit Particulars Credit

To Plant & Machinery A/c By Equity Share Capital A/c

To Preliminary Expense A/c By Preference Share Capital A/c
To Goodwill A/c By Debentures A/c
To Profit & Loss A/c By Land & Building A/c
To Bank A/c
To Capital Reserve A/c

A new account, viz. Capital Reduction Account, is to be

opened for transferring the part of capital which is lost,
i.e., not represented by assets. In other words, this
account reveals the sacrifices made by various parties,
viz. equity shareholders, preference shareholders,
debenture-holders, creditors, etc.
VIBHA TRIPATHI
Reduction of Share Capital Example

Example • A company having 10,000 shares of Rs. 100 each.

Equity shares to be reduced to Rs. 10 each.

Particulars Dr Cr
Share Capital Account (Rs. 100) 10,00,000
To Share Capital (Rs 10) 1,00,000
To Capital Reduction Account (Rs.90) 9,00,000

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 Methods of
Internal
Reconstruction

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Alteration of Share Capital

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Alteration of Share Capital

Sub-division of Shares

Consolidation of Share

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• Outstanding shares refer to a company's stock currently held by all its
shareholders, including share blocks held by institutional investors
and restricted shares owned by the company’s officers and insiders.
Outstanding shares are shown on a company’s balance sheet under
the heading “Capital Stock.”

• The number of outstanding shares is used in calculating key metrics

such as a company’s market capitalization, as well as its earnings per
share (EPS) and cash flow per share (CFPS).

VIBHA TRIPATHI
 Sub-division of Shares/share split/stock split
Increase in Number of Shares
Decrease in Value of Shares
• A company has 1,000 shares
of Rs 100 each decides to
Example convert the share capital into
equity shares of Rs 10 each.
The entry would be:
Particulars Dr Cr

Equity Share Capital (Rs 100) 10,00,000

To Equity Share Capital(Rs10) VIBHA TRIPATHI

10,00,000
(Being 1000 shares of 100 each converted into 10,000 shares of 10 each.)
 • For example assume that there is
• Stock Split as the name suggests is any company named T&T Ltd. You
nothing but splitting of stocks. Due have bought 100 shares of T&T ltd.
to Stock Split the number of shares at Rs.10 each. Hence your total
of a company increases but the investment will be 100*10= 1000.
price of shares decreases. • Now if T&T Ltd. decides to split
• The ratio of increase in number of their stock in the ratio of 2:1, that
shares and decrease in price of means 1 share will split into 2
share is exactly same hence the shares.
value of investment never changes • Hence its price will also decrease
after stock split. by 50% that is Rs.5.
• Now you have 200 shares of T&T
Ltd. with price of Rs.5 each i.e total
value will be 200*5=1000. Hence
there will be no change in total
investment.

VIBHA TRIPATHI
• Share Split, also known as • Companies pursue Share Split
to improve market liquidity
“Share Subdivision”, is an and trading activity of the
exercise undertaken by the company’s shares as the
company to increase the total reduced share price makes
number of shares in issue while the shares more affordable
simultaneously decreasing the and accessible to investors as
nominal or par value of each well as to broaden the
share. company’s shareholder base.

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 Consolidation of Shares

Decrease in Number of Shares

Increase in Value of Shares

• A Company has 10,000 shares of
Rs 100 each decided to
Example consolidate its shares into 1000
shares of Rs 1000 each. The entry
would be:
Particulars Dr Cr
Equity Share Capital (Rs 100) 10,00,000
To Equity Share Capital(Rs1000) 10,00,000
(Being 10,000 shares of 100 each converted into 1,000 shares of Rs. 1000
VIBHA TRIPATHI
each
• Companies pursue Share
Consolidation primarily to Another reason for
increase the company’s share Share Consolidation
price so as to generate greater would be for
interest in the company’s companies to meet the
shares, in particular from
minimum trading bid
institutional investors who may
have a mandate to only invest in size to ensure its listing
shares above a certain price status on the stock
point. exchange.

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Variation of Share Holders Right

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 Variation of Share holders Rights

Changes in rights and

privileges attached to shares
• Change rate of dividends of
preference shares
Example • Convert cumulative
preference shares into non-
cumulative
Particulars Dr Cr
10% cum preference share capital a/c 10,00,000
To 9% cumulative pref share capital 10,00,000
VIBHA TRIPATHI
Compromise / Arrangement
 Debentureholders forgoing their claims

 Debentures exchanging their debentures for new

debentures or shares

 Creditors forgoing their claims

 Creditors agreeing to receive shares/deb in part or

whole payment of their claims

 PSH Forgoing their claims or arrears of dividend

 Fresh issue of shares to raise additional capital
 When equity shareholders give up their claims to
reservesVIBHA
and accumulated profits
TRIPATHI
Compromise/Arrangement

Sacrifice of individual share- agreement

between company and its stake holders

• Creditors worth Rs. 5,00,000 make

Example an agreement to accept Rs.
2,00,000 as final settlement

Particulars Dr Cr
Creditors Account 5,00,000
To Bank 2,00,000
To Capital Reduction Account VIBHA TRIPATHI 3,00,000
Surrender of Shares

VIBHA TRIPATHI
Surrender of Shares

Shareholders are made to surrender shares

Surrendered shares allotted to Debenture holders and

creditors in satisfaction of their claims

Unutilized shares are then cancelled

VIBHA TRIPATHI
 Adopted
Appreciation in Debit Concerned A/c
Special Asset Value
Scheme Resolution (or)
Reduction in Credit Capital
Confirmed Reduction A/c
Liability
by Court

Fictitious Credit Concerned A/c

Assets,
Accounting Entries Overvaluation
of Assets Debit Capital
Reduction A/c

Balance Sheet
Balance Capital Reduction A/c

Name of The Capital Reserve A/c

Company
VIBHA TRIPATHI
“And Reduced”
• https://www.sptulsian.com/f/cf/buyback---promoter-is-the-biggest-
gainer

VIBHA TRIPATHI
VIBHA TRIPATHI
• https://www.moneycontrol.com/news/business/corporate-
action/buyback-offers-and-what-do-they-mean-for-investors-
explained-6777891.html

VIBHA TRIPATHI
• Wipro Buyback
• Azim Premji and the promoter group of Wipro Ltd have sold stock
worth over a billion dollars (Rs 7,300 crore) in the buyback
programme announced by India’s fourth-largest IT services company.
It amounted to 224.6 million shares, amounting to about 3.96% of the
total equity stake held by them.

VIBHA TRIPATHI
• Premji and the promoter group holding in Wipro before the buyback
• They hold 73.83% of the shares.
• What will be their holding post the buyback
• They will have 74.05% stake in the company
• How will their holding increase if they have sold shares to the company in
the buyback
• Wipro will extinguish or cancel 323.3 million shares that it got from
shareholders in the buyback, for which it spent around Rs 10,500 crore.
This will reduce the total volume of shares of the company and this would
increase Premji and promoter holding their holding in proportional to the
reduced shares.

VIBHA TRIPATHI