CAF-4 · Chapter 20

Share capital and commencement of business MCQs with Answers

15 multiple-choice questions on Share capital and commencement of business for CAF-4 Business Law Dynamics. Try each one before revealing the answer and explanation.

1. Question 1

   How is a 'share' legally characterized under the Companies Act?

   • A) As an immovable property registered with the local land authority.
   • B) As a transferable moveable property carrying rights and obligations.
   • C) As a non-transferable asset belonging exclusively to the directors.
   • D) As a debt instrument yielding fixed interest.
   Show answer & explanation

   Answer: B) As a transferable moveable property carrying rights and obligations.

   A share means a share in the share capital of a company and is a form of transferable moveable property carrying rights and obligations as per the articles of association.

2. Question 2

   What is the difference between 'Authorised share capital' and 'Paid up share capital'?

   • A) Authorised capital is always lesser than paid up capital.
   • B) Authorised capital is the maximum amount a company can issue, while paid up capital is the amount actually issued and subscribed.
   • C) Paid up capital is reserved for creditors, while authorised capital is for shareholders.
   • D) There is no difference; they are interchangeable terms.
   Show answer & explanation

   Answer: B) Authorised capital is the maximum amount a company can issue, while paid up capital is the amount actually issued and subscribed.

   Authorised share capital is the maximum amount of share capital which a company is authorised to issue, whereas paid up share capital is the amount issued by the company and subscribed by the shareholders.

3. Question 3

   When a company decides to alter its share capital clause in the memorandum, such as sub-dividing its shares, within what time frame must it file the resolution and altered copy with the registrar?

   • A) 7 days
   • B) 15 days
   • C) 21 days
   • D) 30 days
   Show answer & explanation

   Answer: B) 15 days

   The company shall file the resolution and the altered copy of the memorandum with the registrar within 15 days from the date of passing the resolution.

4. Question 4

   JKL Limited sub-divides its shares from a par value of Rs. 100 to Rs. 10 each to increase marketability. What happens to the overall paid-up value of the share capital?

   • A) It increases tenfold.
   • B) It decreases by 90%.
   • C) It remains exactly the same.
   • D) It must be re-approved by the Commission.
   Show answer & explanation

   Answer: C) It remains exactly the same.

   Sub-division of shares into shares of a smaller par value is done without changing the total paid up value of the share capital. Every member possessing one share will now possess 10 shares, but the overall paid-up value remains the same.

5. Question 5

   In a company limited by shares, the share capital represents capital introduced into the company by the:

   • A) Directors
   • B) Guarantors
   • C) Auditors
   • D) Members
   Show answer & explanation

   Answer: D) Members

   In a company limited by shares, the share capital represents capital introduced into the company by the company’s members.

6. Question 6

   What is another legally recognized term used for 'Ordinary shares'?

   • A) Preference shares
   • B) Equity shares
   • C) Founders shares
   • D) Deferred shares
   Show answer & explanation

   Answer: B) Equity shares

   Ordinary shares are also commonly referred to as Equity shares.

7. Question 7

   Normally, what voting rights do standard ordinary shareholders hold at the general meetings of a company?

   • A) Ten votes per share
   • B) One vote per ten shares
   • C) One vote per share
   • D) Voting power based on the length of shareholding
   Show answer & explanation

   Answer: C) One vote per share

   Normally, all ordinary shareholders are entitled to vote at general meetings of the company and have one vote per share.

8. Question 8

   What is the underlying rationale for a company to issue different classes of shares with varying voting rights?

   • A) To avoid paying taxes on dividends.
   • B) To maintain a fair allocation of voting power among different classes of shareholders.
   • C) To prevent the registrar from inspecting the company.
   • D) To allow directors to bypass annual general meetings.
   Show answer & explanation

   Answer: B) To maintain a fair allocation of voting power among different classes of shareholders.

   Varying voting rights for different classes of shares are granted to maintain a fair allocation of voting power among those different classes of shareholders.

9. Question 9

   Which of the following is a mandatory requirement for a public company to obtain a certificate of commencement of business?

   • A) The company must have operated profitably for one year.
   • B) The directors should have paid in cash to the company the full amount on each of the shares taken or contracted to be taken.
   • C) The company must have paid all its preliminary expenses.
   • D) The company must have at least 1,000 shareholders.
   Show answer & explanation

   Answer: B) The directors should have paid in cash to the company the full amount on each of the shares taken or contracted to be taken.

   For obtaining the certificate of commencement of business, a public company requires that the directors should have paid in cash to the company the full amount on each of the shares taken or contracted to be taken.

10. Question 10

    Maroon (Private) Limited wants to raise capital by issuing shares to the general public. What must the company do regarding its status before it can proceed?

    • A) It must issue a special private placement document.
    • B) It must convert its status into a public company and remove the word '(Private)' from its name.
    • C) It can raise capital from the public as long as it limits the investors to 50.
    • D) It must obtain a special waiver from the High Court.
    Show answer & explanation

    Answer: B) It must convert its status into a public company and remove the word '(Private)' from its name.

    A private company is legally restricted from inviting the general public to subscribe to its shares. To do so, it must alter its memorandum and articles to convert into a public company, removing '(Private)' from its name.

11. Question 11

    Which of the following companies is NOT required to obtain a 'Certificate of Commencement of Business' before starting its operations?

    • A) A newly incorporated public unlisted company.
    • B) A newly incorporated public listed company.
    • C) A private company.
    • D) A public company having share capital.
    Show answer & explanation

    Answer: C) A private company.

    A private company, a company converted from private to public, and a company limited by guarantee not having share capital are exempted. They can commence business immediately upon incorporation.

12. Question 12

    If a public company decides not to issue shares to the general public initially, what document must it file with the registrar before commencing business?

    • A) A Prospectus
    • B) A Statement in lieu of prospectus
    • C) A Directors' Declaration
    • D) A Statement of Affairs
    Show answer & explanation

    Answer: B) A Statement in lieu of prospectus

    If a public company does not issue a prospectus offering shares to the public, it must file a 'Statement in lieu of prospectus' with the registrar before it can obtain a certificate of commencement of business.

13. Question 13

    When a company issues different classes of shares (e.g., Class A and Class B), what is the statutory requirement regarding the voting rights attached to these shares?

    • A) Class A must always have double the voting power of Class B.
    • B) The voting rights must be strictly proportionate to the paid-up value of the shares.
    • C) Only one class of shares is allowed to have voting rights.
    • D) Voting rights can vary, but they are granted to maintain a fair allocation of voting power among different classes.
    Show answer & explanation

    Answer: D) Voting rights can vary, but they are granted to maintain a fair allocation of voting power among different classes.

    Different classes of shares may have varying voting rights, but the fundamental rationale is to maintain a fair allocation of voting power among the different classes of shareholders, not necessarily strictly proportionate to paid-up value if classes differ.

14. Question 14

    What is the legal definition of 'Nominal share capital'?

    • A) The amount of capital actually received in the bank.
    • B) The maximum amount of share capital as authorized by the memorandum of association.
    • C) The capital held exclusively by the directors.
    • D) The minimum amount required to commence business.
    Show answer & explanation

    Answer: B) The maximum amount of share capital as authorized by the memorandum of association.

    Nominal share capital (or authorized share capital) is the maximum amount of share capital that a company is authorized to issue as per its memorandum of association.

15. Question 15

    A company decides to alter its share capital by consolidating 10 shares of Rs. 10 each into 1 share of Rs. 100. What resolution is required to effect this alteration?

    • A) An ordinary resolution
    • B) A special resolution
    • C) A resolution passed by creditors
    • D) A unanimous board resolution only
    Show answer & explanation

    Answer: B) A special resolution

    Any alteration to the share capital clause of the memorandum of association, including consolidation or sub-division of shares, requires the company to pass a special resolution.