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Question
Distinguish between the following.
Owned capital and borrowed capital.
Solution
| Owned Capital | Borrowed Capital |
| 1. Meaning |
|
| It is that capital that is contributed by shareholders. | It is that capital is borrowed from creditors. It is also known as debt capital. |
| 2. Sources |
|
| This capital is collected by the issue of equity shares and preference shares. | It is collected by way of issues of debentures, fixed deposits, a loan from a bank/financial institution, etc. |
| 3. Return on Investment |
|
| The shareholders get dividends as income on their investment. The rate of dividend is fluctuating in the case of equity shares but fixed in the case of preference shares. | The debt capital holders get interested as income on their investment. Interest is paid at a fixed rate. |
| 4. Status |
|
|
The shareholders are owners of the company. |
The debt holders are creditors of the company. |
| 5. Voting right |
|
| The equity shareholders enjoy normal voting right at the general meeting. | The creditors do not enjoy voting rights at the general meeting. |
| 6. Repayment of Capital |
|
| The shareholders do not enjoy priority over creditors. They are eligible for repayment of Capital only after making payment to creditors at the time of winding up of the company. | The creditors get priority over the shareholders in case of return of the principal amount at the time of winding up of the company. |
| 7. Charge on assets |
|
| The shareholders do not have any charge on the assets of the company. | The secured debenture holders have a charge on the assets of the company. |
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RELATED QUESTIONS
Match the pairs.
| Group 'A' |
Group 'B' |
|
a) Equity Share Capital |
1) Agreement |
|
b) Debenture Trustees |
2) Capitalisation of Profit |
|
c) Preference Shareholders |
3) Bold Investor |
|
d) Debenture Certificate |
4) Venture Capital |
|
e) Bonus Shares |
5) Document of Ownership |
|
6) Capitalisation of Loan |
|
|
7) Safe Capital |
|
|
8) Instrument of Debt |
|
|
9) Trust Deed |
|
|
10) Cautious Investor |
Study the following case/situation and express your opinion.
Mr. Rohit, an individual investor, invests his own funds in the securities. He depends on investment income and does not want to take any risk. He is interested in definite rate of income and safety of principal.
- Name the type of security that Mr. Rohit will opt for.
- What does he receive as return on his investment?
- The return on investment which he receives is fixed or fluctuating?
Match the pairs.
| Group ‘A’ | Group ‘B’ |
| a) Debenture certificate | 1) Sum of current assets |
| b) FPO | 2) Decided and declared by the board of directors |
| c) Working capital | 3) Any issue after First-time Public offer |
| d) Final dividend | 4) Sum of current liabilities |
| e) Preference share capital | 5) First-time Public offer |
| 6) Risk capital | |
| 7) Document of ownership | |
| 8) Safe capital | |
| 9) Instrument of debt | |
| 10) Decided by board; declared by members |
Match the pairs:
| Group 'A' | Group 'B' | ||
| (a) | Working capital | (1) | First-time issue of shares |
| (b) | Preference shareholders | (2) | Conversion into secured debentures |
| (c) | FPO | (3) | Debts (borrowed) Capital |
| (d) | Convertible debentures | (4) | Bold investors |
| (e) | Share Capital | (5) | Sum of current assets |
| (6) | Any issue after the IPO | ||
| (7) | Conversion into equity shares | ||
| (8) | The sum of current liabilities | ||
| (9) | Owned Capital | ||
| (10) | Cautious investors | ||
