Please help me to understand the actual capital invested

hi mohit.....  i m a CA final student...

  i ve read ur query and willing to give u a suitable answer..... however the answers to ur queries are very large and detailed... so i ll be restricting as much as possible.... otherwise the answer can run into atleast 10 pages.... 

1) your first query is regarding the paid up capital

   in 3rd para of ur query u have stated tht as per the MCA information obtained by u, the authorized capital of the company is 25 lacs.... and paid up is 2 lac.... now i m assuming u have the right information ....  the authorized capital is the maximum capital which the company can invest into its business activities.... untill and unless the MEMORANDUM OF ASSOCIATION of the company is altered to increase as per the needs of business in future.

and paid up capital is that part of the authorized capital which has ACTUALLY BEEN PAID by the equity shareholders of the company to the company in form of capital... so now do u get the picture....  your uncle and other director have paid only 2 lac till now in form of share capital.... forget about 1crore.. or 25 lac.... the  share capital of the company is only 2 lac.....

2)    as far as ur 2nd query is concerned ... i think my previous answer has also answered it..... the paid up capital is the actual amount paid by ur uncle and other 3 directors to the company in form of share capital..... 

now as far as loan from SBI is concerned .... the information provided by you is nt sufficient..... u ll have to see whether there is a loan standing in the liabilities side of the balance sheet of the company.... although even the loan is capital in business from companies point of view.... but nt from shareholders point of view..... this is complex to explain like ths through a message.... 

3)  the answer to the question tht whether value of the company can increase. ..... so the answer is NO..... the value of shares of a private limited company cannot increase or decrease unlike in case of listed public ltd companies..... however the intrinsic value of a share can increase/decrease and it will depend on the value of assets the company has......

but u should keep one thing in mind tht the value of a company is nt just dependent on the value of shares.... the value of a company can increase if it can be proved or shown beyond reasonable doubt tht it has good earning potential..... so if ur uncle claims tht the value of the company has increased .. ask him on what basis has he formed such an opinion....  

4) and finally ur last query .... i ll explain it to u by an example...  the equity shareholders are the real owners of the company... if a company has 10000 equity shares and every share has a face value of Rs 10 ..... then person holding 5000 shares will hold 50% of the equity share capital and will be entitled to 50% of the assets in the company after paying all liabilities.....  

in ur case if u invest 20 lacs in this company and u are alloted equity shares then you will have 90.90% share in the assets of the company( obviouslly after paying all liabilities..)

however if your investment is to be treated as only a loan .... and the company will pay u only 4% return..... then why should u invest in the company... when u can earn a risk free return of 8% from banks by putting ur money in fixed deposits and other banking intruments....

Mohit... i ve tried to explain in best possible manner i could... however the question tht u asked wasnt meant to be answered in such a way due to its complexities....

  regards

shubham

disclaimer- the above stated opinion is true to my knowlegde and belief. i do not own any responsibility to any person who might act, relying on my opinion in any manner whatsoever.   

Appreciate ur answer Mr. Shubham

In layman language I can simply advise don't invest. 

Originally posted by : shubham
	hi mohit.....  i m a CA final student...   i ve read ur query and willing to give u a suitable answer..... however the answers to ur queries are very large and detailed... so i ll be restricting as much as possible.... otherwise the answer can run into atleast 10 pages....   . . . . Mohit... i ve tried to explain in best possible manner i could... however the question tht u asked wasnt meant to be answered in such a way due to its complexities....   regards shubham

There was no need to write that disclaimer. I really appreciate your answer & the effort you put in helping me in this matter. I really wanna say thanks for the same from inside. It's a true fact that the relatives & friends would never put such an effort in helping their known person as you had put in this matter. Effort means first analyzing the problem of an unknown person & again typing the same on keyboard. It's really great for me to realize that there are still people in this world who love to help others without any benefits.

Regarding my case,
My uncle had a degree of masters in bragging & it's impossible for anyone to uncover the actual truth but I had never thought that he will play such sort of games.

Looking at your & other people's suggestion, I am sure that something is going wrong & I am not going to invest a single penny in his company. I had a feeling that he is not able to pay the bombastic EMI of 4.75 lakhs per month & need some fool people like me to invest in his infeasible idea. He is not even asking for the loan but had simply offered me to invest as he is my uncle & was thinking for my benefits in long run.

Anyway, the loan from SBI is confirmed as I had personally investigated it from the bank, the loan amount is 2.54 Crores under one of the SME Plan of SBI & the same was sanctioned in May, 2010 for a period of 7 years @ 14% interest rate which translates into 4.75 lakhs of EMI per month. 7 years is the upper limit for such type of loans.

Again, this type of loan don't require you to show the existing properties & requires atleast 10 years of practice, your degree & should be above 40 years of age & my uncle & other directors were above 50 during 2010. It's a plan from government of India to help persons of this PROFESSION ONLY to establish companies in their area ONLY as the service provided by them will be useful to the citizens.

I am sorry that I am not able to give the exact details regarding the business & other details of companies due to my privacy reasons.

In general language, he had established a modern looking infratructure in a small town constructed on a 1 acre (45,000 sq-ft.) of land, far away from town limits. So, don't expect the price to be too high for the land. Again, I believe that this land was inherited by either of the directors. So, the same could be free also.

Construction was started only after the loan was passed i.e. after May, 2010 & within 1 year, the same was constructed & started within 1.5 years of time & was formally inagurated by a state Minister during Feb. 2012. Company was registered during Feb. 2008.

So, my questions are:-

1. Is the whole infrastructure created with the help of loan amount only as the maximum possible investment is just 25 lakhs as the infrastructure would definitely costs around 1 crore as the design is great that it can challenge modern companies doing business in similar area in metros.

2. Please elaborate a little about the authorized capital. This amount should be kept in the company's account or the same is needed during the initial investment? Reading certain articles in different blogs, I feel that this is the authorized capital is in air & one can quote anything while forming a company

3. SBI had given loan on which basis, on Authorized capital or on Paid Capital??

If possible, can you give me a link or the name of a book from where I can read more about this authorized capital to clear my doubts 
 

The most important question,
As this is family matter, it is hard to say no in a direct manner. I was thinking to consult a professional CA in my city in order to prove it directly the reason for denying the investment in his company.

But, I don't have any idea regarding how I can find one as CAs are mostly present in the companies. We can connect with the lawyers by visiting any civil courts, there are thousands of them. But, where to look for a private CAs & what is the fee for the same? If the same is above 10K, I will find some other means to decline his offer.

hello mohit....  thanks alot for ur appreciation..... i feel deligted to know tht my opinion has helped u in some way ..... as far as disclaimer is concerned .... it is just to save myself from any adverse contingency...hehehehehe..... i hope u understand .... jokes apart ....lets focus on ur queries now....

well..... 

1)   your 1st query is whether the whole infrastructure was created out of the loan amount ..... on record yes .....  u have to understand how accounting works ....assuming there is only one transaction in company and tht is loan received.....  there is a cash flow in form of loan to a ompany..... it would give rise to 2 effects... one: there will be cash in asset side of  balance sheet of the company under the head current assets ......an  

and two : there would be a loan outstanding on liabilities side .... now if the company wants to create/purchase a fixed asset.... contruct in ur case ..... the company will use either the share capital or the loan or even both ..... considering the information availablewith me in ur case..... it seems tht the infrastructure constructed was financed substantially from the loan amount itself....... 

2)   yes u r right ..... authorized capital is a fictional amount ..... it is possible for a company to have authorized capital as 2 crore with only 5 lac as paid up capital .....  

3)   the loan from SBI is not given on the basis of capital ..... loan is given based on lot of factors.... such as current financial position ..... current cash flow status ..... net profit ratios and many other factors... it basically depends on type of loan ... so it will nt be possible for me to give exact basis on which loan was passed. .......

4)  and finally....... u want to get a report from a CA..... let me tell u tht CA,s just dnt only work in companies.... many CA,s are also in private practice.... it can be in form of sole proprietorship....or partnership firm... u simple have to google for CA firms in your city ......

and as regards fees.... u can talk to some CA,s and find out what they think about the fees for the type of work u have .....

so.... i wish u best of luck...... 

regards

Shubham

disclaimer- the above stated opinion is true to my knowlegde and belief. i do not own any responsibility to any person who might act, relying on my opinion in any manner whatsoever.

 

Originally posted by : shubham
	hello mohit....  thanks alot for ur appreciation..... i feel deligted to know tht my opinion has helped u in some way ..... as far as disclaimer is concerned .... it is just to save myself from any adverse contingency...hehehehehe..... i hope u understand .... jokes apart ....lets focus on ur queries now.... . . . . and as regards fees.... u can talk to some CA,s and find out what they think about the fees for the type of work u have ..... so.... i wish u best of luck......   regards Shubham

Sorry for the late reply. I am able to solve the problem myself without the need of any CA. You had written about the balance sheet several times, this gave me an idea to ask for the balance sheet of his company in physical form. Till the time, everything were on word of mouth & I thought of going inside by involving some realtime paper works.

As soon as I asked about the balance sheet from my uncle, his face expression had changed completely. I told him that I want to consult a CA before investing. He started making emotional arguments & again agressive statements related to our relation. This proved that something is wrong with him & his company.

I am a state government employee & had a good connection with the manager of SBI main branch in my city. I requested him to get the details of all the transactions of his company. Anyhow, I arranged the account number & today, I got the details. It was a lot shocking.

First, the inflow cash of company before the loan was approved was less than 10 lakhs. Again, loan of 2.5 crore was a sure. Now, my uncle & his friends are unable to pay the EMI; as the term is limited to 7 years, it had created an additional pressure over them & needs an idiot like me who can help them to pay the EMI. In September, they had paid only 3.25 lakhs & had tried to cover the same in October, with 5.4 lakhs which is still less than 85K less for the 2 months (4.75x2)

You were right that if I had invested in their company, I would be the leading share holder, better to say the owner. Anyway, I am not going to invest in their dead company. But, there are points one should learn from their way of business. I had analyzed the same from the information, I had collected from various sources.

They took the loan of 2.5 Crores & spent only 1 crore on the construction, leaving the rest amount, they used to pay the EMIs as in the initial times, you will not earn the profit. They saved the money by constructing only half of the proposed architecture. Isn't that a great strategy? Now, this strategy is creating problem for them but is still ready to fight against the problem by searching for fool people.

The 2nd learning point is that even in your bad times, act as everything is fine & you are still superior. My uncle had used this policy to convince me by quoting useless information. From the end of September, he is indirectly targeting me & after diwali had proposed investment in his company. Just because of his nasty past record, I tried to obtain the company information from MCA in a silent & indirect manner.

The information was quite complicated & I was unable to understand. That's why, I posted on this forum & you came as my life saviour, protected me from his fradulent activities. Thanks a lot!

As you are a student & is the time to improve your knowledge base, I will give some information regarding his company & special ideas related to his working procedures related to ease of obtaining loan, which might help you. For the same, I will PM you as I cannot post information at public level.

Anyway, last question, what is the use of authorized capital as it's completely a fake figure & anyone who is in the field of finance knows about the same?