Company Law

Ch.
1 Introduction-Companies Act, 2013

Historical Information
Companies Bill, 2012 Passed in Lok Sabha on 18-12-2012
Companies Bill, 2012 Passed in Rajya Sabha on 8-8-2013
Companies Bill, 2012 President gave assent on 29-8-2013
Companies Bill, 2012 became Companies Act, 2013
Companies Act, 2013 notified in the Official Gazette of India 30-8-2013
Total 281 Sections Commencement for one section (Sec. 1) 30-8-2013

notified in Official
Gazette of India Commencement of 98 Sections out of 470 12-9-2013
Sections in the Act came on
Notification for the applicability of 183 1-4-2014

Sections from
General Information
Total number of Sections 470
Total number of Chapters 29
Total number of Schedules 7
Rules notified under Chapters 21
Provisions relating to NCLT/NFRA/IEPF/ Winding up are yet to be notified by C. Govt.
National Company Law Tribunal (NCLT) is a proposed quasi-judicial body in India that
will govern the companies in India.
The National Financial Reporting Authority (NFRA) is the proposed apex body for
accounting and auditing standards.
Investor Education and Protection Fund (IEPF) is for promotion of investors' awareness
and protection of the interests of investors.
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Procedure adopted for the introduction of new Companies Act, 2013
Drafting of Companies Bill, 2012
Placed before Standing Committee of

Parliament and approved by the same
Approved by Lok Sabha
Approved by Rajya Sabha
Signed by President of India,

Companies Bill, 2012 becomes
Companies Act, 2013
Notified in Official Gazette of India
History of Company Legislation

The company legislation in India is primarily based on the company legislation in England. In
order to register Joint Stock Companies in India, the first enactment, i.e., Companies Act, was
passed in the year 1850, which was based on English Companies Act, 1844. Over the period of
time, a number of amendments were made in the Companies Act, closely following the
amendments made in the English law.
Till 1956, the companies in India were regulated by the Companies Act, 1913. In 1950, the
government of independent India appointed a Company Law Committee under the chairmanship
of Shri H.C. Bhaba to review the entire functioning of Indian Companies Act. The committee
submitted its report in 1952. On the basis of recommendations of this committee in general, a bill
to enact The Companies Act, 1956, was introduced in the Parliament. The Companies Act, 1956,
by and large, once again followed the English Companies Act, 1948.
After a number of amendments in the Companies Act, 1956, this Act has been replaced by new
Companies Act, 2013, keeping in view the changed global economic scenario.
Introduction to Companies Act, 2013
COM +PANIES The word “company” is derived from the Latin term “COM” means “with or
Meaning together” and the term “PANIES” means bread).
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Originally, it referred to an association of persons who took their meals
together.
In Smith v. It was observed as “a company may mean an association of individuals
Anderson formed for some purpose”.
A company may be an incorporated company (or a “corporation”) Or an unincorporated
company.
Incorporated An incorporated company is a separate person distinct from the individuals
company constituting it.
Unincorporated An unincorporated company, such as a partnership, is mere collection or
company aggregation of individuals. The partnership, which is governed by
Partnership Act, is the most apt example of an un-incorporated association.
Definition “Company” means a company incorporated under Companies Act, 2013 or

Sec 2(20) under any previous company law.”
Meaning A co. is a voluntary association of persons for some common purpose, with
capital divisible into parts, known as shares, and is an artificial person,
having separate legal personality with a perpetual succession and common
seal.
NATURE OF A COMPANY
Person Law divides persons into two categories: - Natural Persons (such as Human Beings)
and Legal Persons (such as Companies – which are created by law). So we have
natural persons and legal persons.
Human The natural persons are called human beings, which are created by a
Persons process of natural birth.
Legal The non-human (Legal Persons) are called Companies, which are created
Persons by a process other than natural birth, i.e., by complying with the legal
formalities to form a company.
A human person is a legal person all his life, but all legal persons are not human.
Law has granted same rights to legal persons in relation to running of business as have been
given to human being. But there are certain similarities and distinction in these two persons.
SIMILARTIES
Basis Natural Person Legal Person
Contract Natural person can enter into Legal person can also enter into contract.
contract.
Buy assets Natural person can buy assets. Legal Person can also buy assets
Open Bank Natural person can open bank Legal Person can also open bank account.
account account
Business Natural person can start doing Legal Person can also start doing some lawful
any lawful business business
Sue and be Natural person can file suit Legal person can file suit against others and
sued against others and suit can be suit can be filed against it also.
filed against him also.
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DISSIMILARITIES
Birth Natural person gets birth through Legal person gets birth through compliance
the process of nature. with the legal formalities.
Physical It has a physical existence and It has no physical existence and not visible to
body visible to others. others except to law. These physical
disabilities make a company an artificial
person.
A co., being an artificial person, can do
everything like a natural person except that:
It cannot take oath,
It cannot be sent to jail,
It cannot marry,
It cannot practice a profession like medical &
it cannot vote.
Company as an artificial person
Whatever rights, the law has granted to natural person to do business, the same rights to do
business are also granted companies. Since, Human being come into an existence through natural
process, they are therefore, termed as natural persons. But company come into an existence
through compliance of legal process, therefore, company can be termed as legal person or juristic
person. However, a natural person has body, mind and soul. Legal person does not have any
body, mind or soul but still it is a person. Therefore, a company is an artificial person created by
law. It is called an artificial person since it is invisible, intangible, existing only in the
contemplation of law. It is capable of enjoying rights and being subject to duties. Since law has
created it, it is considered as a legal person which can enter into contracts, possess properties in
its own name, sue and can be sued by others etc. It is not a human being but it acts through
natural person (human beings).
COMPANY – ITS CHARACTERISTICS
1. Separate Independent Legal Entity
A co. is a legal entity quite distinct and separate from its members. It is an artificial person
created by law. Though it exists only in the contemplation of law, it has the qualities similar to
those of individuals. It can hold, and deal with in any type of property, of which it is owner. It can
enter into a contract.
Effect of It can open a bank account in its own name.

separate It can sue and be sued by its members as well as outsiders.
Legal Entity A co. cannot be the property of the person who owns all the shares in the co., nor
can it be considered to be his agent.
The rights and obligations of a co. are distinct from its constituent members.
A co. can enter into partnership with one or more individuals or another co.
It can buy shares and debentures of another co.
The principal of separate legal entity of the company is clarified in the following
case.
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Salomon V. Salomon & Co. Ltd.
Salomon carried on business as a leather merchant. He sold his proprietorship business for a sum
of £30,000 to a company formed by him along with his wife, a daughter and four sons. The
purchase consideration made by the company was as follow: -
Allotment of 20,000 shares of £1 each and issue of secured debentures worth £ 10,000 to Mr.
Salomon. The other family members subscribed for one share of £ 1 each. Mr. Salomon was also
the managing director of the company. The company immediately ran into difficulties and
eventually became insolvent and winding up commenced.
At the time of winding up, the financial position of the company is as follow: -
Total assets - £6,050;
Liabilities: - £10,000 secured debentures
£ 8,000 owing to unsecured trade creditors
Contention of Unsecured creditors: one man cannot owe money to himself. The unsecured
creditors contended that Salomon was carrying on business in the name of Salomon & Co. Ltd.
Thus, Salomon and Co. Ltd. was a mere agent for Salomon. The unsecured creditors claimed the
whole of the company's assets, viz. £6,050 on the ground that the company was a mere agent for
Salomon.
Decision of the Court:
1. Once the certificate of incorporation is issued, the company comes into an existence and it
becomes a separate legal entity which is different from those seven persons who formed
such company.
2. Even if almost all the shares of the company are held by one individual and the company
is virtually a “One Man Company”, controlled by such individual, still it has its own
separate legal existence apart from such individual.
3. A single individual can be shareholder as well as creditor of the company simultaneously.
Therefore, the contention of the trade creditors could not be maintained, because the company
being in law a person quite distinct from its members, could not be regarded as an agent of
Salomon.
Also, the company's assets must be, applied in payment of the debentures as a secured creditor is
entitled to payment out of the assets on which his debt is secured in priority to unsecured
creditors.
Held that, in this case, Mr. Salomon, being a secured creditor, shall be paid before other
unsecured creditors.
Lee v. Lee Air Farming Ltd.
Lee, a qualified pilot, held all but one of the shares in the company. He was appointed governing
director of the company and chief pilot. Lee was killed while piloting the company's aircraft, and
his widow claimed compensation for his death under the Workmen Compensation Act.
Contention by the company
The company opposed the claim on the ground that Lee was not a 'worker' as the same person
could not be employer and the employee.
Decision of court
It was held that Lee was a separate person from the company he had formed.
There is a valid contract between Lee and the Company, and Lee was, therefore, a worker.
Therefore, he could be legally employed under the company.
As he was killed in the course of employment under the company, Mrs. Lee's was entitled to get
compensation.
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Bacha F. Guzdar v. The Commissioner of Income-Tax
A shareholder received dividend income from a company carrying on agricultural business.

The income from agriculture business was exempt from tax.
Contention by the shareholder
The shareholder contended that her dividend income should be treated as agricultural income and
therefore exempt from tax.
Decision of court
The Court held that the company was a separate person from its members, having its own business,
and its own income. The income received by the shareholders was not the same income as earned
by the company.
2. Limited Liability
In case of company limited by shares, the liability of the members of a company is limited to the
extent of the nominal value of the shares held by them. In no event can a shareholder be asked to
pay anything more than the unpaid value of his shares.
The liability of members in different types of companies is explained below: -

Type of Company Extend of Liability
Company limited by shares Up-to the face value of shares held by him
Company limited by guarantee Amount guaranteed by every member
Company limited by guarantee Aggregate of amount unpaid on the shares held by a member
and having share capital and the amount guaranteed by him.
Unlimited Liability Co Liable to contribute to the asset of the company until all the
debts of the company are paid in full.
Exceptions to the principle of limited liability
1. False Where a company has been incorporated by furnishing any false or incorrect
information information or by suppressing any material fact or information in any of the
documents or declaration filed or made for incorporating such company or by
any fraudulent action, the Tribunal may, on an application made to it, on being
satisfied that the situation so warrants, direct that liability of the members of such
company shall be unlimited.
[Section 7(7)(b)(Section 7(7) is yet to be notified]
2. Under section 339(1), where in the course of winding up it appears that any
Committing business of the company has been carried on with an intent to defraud creditors
fraud during of the company, the Tribunal may declare the persons who were knowingly
winding up parties to the carrying on of the business in the manner aforesaid as personally
liable, without limitation of liability, for all or any of the debts/liabilities of the
company.
[Section 339 is yet to be notified]
3.Unlimited When the company is incorporated as an Unlimited Company under Section

Company 3(2)(c) of the Act.
4. Wrong Under Section 35(3), where it is proved that a prospectus has been issued with
information intent to defraud the applicants for the securities of a company or any other
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in person, every person who was a director at the time of issue of the prospectus or
Prospectus has been named as a director in the prospectus or every person who has
authorised the issue of prospectus or a person referred to as an expert in the
prospectus shall be personally responsible, without any limitation of liability, for
all or any of the losses or damages that may have been incurred by any person
who subscribed to the securities on the basis of such prospectus.
5. Failure to As per section 75(1), where a company fails to repay the deposit or part thereof
repay or any interest thereon within the time specified or such further time as may be
deposits allowed by the Tribunal and it is proved that the deposits had been accepted with
intent to defraud the depositors or for any fraudulent purpose, every officer of the
company who was responsible for the acceptance of such deposit shall also be
personally responsible, without any limitation of liability, for all or any of the
losses or damages that may have been incurred by the depositors.
6. Fraud by Section 224(5) states that where the report made by an inspector states that fraud
director, has taken place in a company and due to such fraud any director, key managerial
KMP etc. personnel, other officer of the company or any other person or entity, has taken
undue advantage or benefit, whether in the form of any asset, property or cash or
in any other manner, the Central Government may file an application before the
Tribunal for appropriate orders for holding such director, key managerial
personnel, officer or other person liable personally without any limitation of
liability.
3. Perpetual Succession (permanent existence)
Section 9 of the Companies Act, 2013 states that an incorporated company has perpetual
succession. The term perpetual means continuous and the term succession means one after
another. This means that the death or insolvency of individual members does not in any way,
affect the corporate entity, its existence or continuity. The company shall continue to exist
indefinitely till it is wound-up in accordance with the provisions of the Companies Act.
Members may come and members may go but the company can go on for ever. In case of
partnership firm having just two partners, if any one of the two partners dies, then the partnership
firm stands dissolved. In case of a company, even if all the members of a company die, still that
company is alive. As the company gets its birth by complying with the provisions of law (i.e.,
procedure for incorporation) similarly, it goes out of existence by following other provisions of
law (i.e., procedure for the winding up). However, in case of “One Person Company” having one
member, if such member dies, then his shares are transmitted to his nominee, and still the
company continues to exist.
4.Transferability of Shares
The capital of a company is divided into parts, called shares. The shares are movable property
and freely transferable. In the case of a private company, the Companies Act requires it to put
certain restrictions on the transferability of shares. In the case of a public limited company, every
member having fully paid-up shares is at liberty to dispose them off according to his choice. Any
absolute restriction on the right to transfer shares is void.
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Section 44 of the Companies Act, 2013 enunciates the principle by providing that the shares held
by the members are movable property and can be transferred from one person to another in the
manner provided by the Articles of Association.
If the articles do not provide anything for the transfer of shares and the Regulations contained in
Table “F” in Schedule I to the Companies Act, 2013, are also expressly excluded, the transfer of
shares will be governed by the general law relating to transfer of movable property.
5.Separate Property
The company is entitled to own and hold property in its own name. No member can claim
ownership of any item of the company’s assets.
Although its capital is contributed by its shareholders, they are not the private or joint owner of
its property.
Gramophone “The property of the company is not the property of the shareholders; it is
& Typewriter property of the company.”
Co. v. Stanley
Bacha F. The Supreme Court, in this case, held that, though the income of a tea company
Guzdar v. is entitled to be exempted from Income-tax up to 60% being partly agricultural,
Commissioner the same income when received by a shareholder in the form of dividend cannot
of I.T, be regarded as agricultural income for the assessment of income-tax.
Bombay It was also observed by the Supreme Court that a shareholder is not the part
owner of the company or its property, he is only given the certain rights by law,
e.g., to vote, to attend meetings, or to receive dividend. No member can
individually or jointly claim any ownership rights in the assets of the co. during
its existence or on its winding up.
Macaure v. Even where a shareholder held almost entire share capital, he did not even have
Northern an insurable interest in the property of the company.
Assurance Co. In this case, Mr. Macaure held all except one share of a timber company. He
Ltd., insured the company's timber in his personal name. On timber being destroyed
by fire, his claim was rejected for want of insurable interest. The Court applying
principle of separate legal entity held, the insurance company was not liable.
6. Common Seal
In order to enter into some contract, the company needs to sign the documents. Since a company
is an artificial person, it cannot sign documents in order to enter into some contract. It performs
this formality by making use of the common seal of the company to act as the official signature
of a company. The name of the company must be engraved on its common seal. A rubber stamp
does not serve the purpose. A document not bearing common seal of the company is not authentic
and has no legal force behind it.
The common Seal must be kept in the custody of a director or any other responsible officer of the
company. The Article of Association of the company specifies that whose manual signature shall
be affixed along with the common seal on a document belonging to the company.
According to Companies Act, 2013, the common seal is compulsorily required to be affixed only
on following two documents:
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Section 22 (2) In case of Power of Attorney issued by the company, the company may, by writing
under its common seal authorize any person, either generally or in respect of any specified
matters, as its attorney to execute other deeds on its behalf in any place either in or outside India.
Section 46(1) In case of issue of Share Certificate in physical form.
However, a company may voluntarily affix its common seal on other documents also.
7.Capacity to Sue and Be Sued
A company being a body corporate, can sue and be sued in its own name. All legal proceedings
against the company are to be instituted in its own name. Similarly, the company may bring an
action against anyone in its own name.
8. Contractual Rights
A company, being a legal entity, is different from its members. It can enter into contracts for the
conduct of the business in its own name.
A shareholder cannot enforce a contract made by his company; he is neither a party to the
contract, nor be entitled to the benefit derived out of it. Similarly, a shareholder cannot be sued
on contracts made by his company.
9. Limitation of Action
A company cannot go beyond the power stated in its Memorandum of Association. The
Memorandum of Association of the company regulates the powers and fixes the objects of the
company. Any act done beyond the objects specified in the Memorandum of Association shall be
ultra vires.
10. Termination of Existence
A company, being an artificial juridical person, does not die a natural death. It is created by law,
carries on its affairs according to law throughout its life and ultimately is put to an end by law.
Generally, the existence of a company is terminated by means of winding up.
Meaning of a Company
A company is a body corporate and a legal person having status and personality distinct and
separate from the members constituting it.
Why it is called a Body Corporate?
Body Corporate It is called a body corporate because the persons composing it are made
into one body by incorporating it according to the law, and clothing it with
legal personality.
Incorporation Thus, ‘incorporation’ is the act of forming a legal corporation as a juristic

person. A juristic person is in law also conferred with rights and obligations
and is dealt with in accordance with law.
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In other words, the entity acts like a natural person but only through a
designated person, whose acts are processed within the ambit of law
[Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath
Dass].
CASE
Corporation The word “corporation” is derived from the Latin term “corpus” which
means “body”.
Existence of The incorporated company owes its existence to a special Act of Parliament
company or to Companies Law.
The public corporations like Life Companies like Tata Steel Ltd.,
Insurance Corporation of India Reliance Industries Ltd. have been
and SBI have been brought into formed under the Companies Act, 1956
existence through special Acts of which is being replaced by Companies
Parliament. Act, 2013.
Doctrine of Lifting of or Piercing the Corporate Veil
A co. is a legal person distinct from its members. This is known as principle of the “veil of
corporation”. Yet in reality, it is an association of persons who are, in fact, the beneficial owner
of the co.’s property. Real persons behind a co. are disregarded once they have formed the co.
The persons working to assist the company in performing its functions have to work according
to rules. If these members work according to rules and regulations, then for all their acts, the
company is liable. However, if members abuse their powers and try to make the company liable
for their wrong deeds, then in that case, the company shall not be responsible for their acts;
rather they shall be held personally liable for all consequences.
Meaning of lifting up or piercing the corporate veil
Lifting up of corporate veil means ignoring the separate legal identity of a company.
Lifting of corporate veil means disregarding the corporate personality and looking back at the
persons who are actually controlling the affairs of the company.
Reasons for lift The advantages of incorporation are allowed to be enjoyed only by those
up of corporate who want to make an honest use of the 'company'.
veil In case of dishonest and fraudulent use of the facility of incorporation, the
law lifts the corporate veil and identifies the persons who are behind the
scene and are responsible for the perpetration of fraud
Therefore, corporate personality is to be respected, but when this benefit is
misused courts are not powerless to lift the veil.
Prem lata Bhatia v. Union of India

However, the shareholders cannot ask for the lifting of the veil for their
purposes. This was held in Premlata Bhatia v. Union of India wherein the
premises of a shop were allotted on a licence to the individual licencee. She
set up a wholly owned private company and transferred the premises to that
company without Government consent. She could not remove the illegality
by saying that she and her company were virtually the same person.
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Circumstances The circumstances under which the courts may lift the corporate veil may
to lift up the broadly be grouped under the following two heads:
corporate veil (A) Under judicial interpretations
(B) Under statutory provisions
Cases falling under Judicial Interpretation
1. For the Daimler Co. Ltd. v Continental Tyre & Rubber Co. Ltd.
determination A company was formed in England for the purpose of selling tyres made by
of character of a German company. The German company virtually held the entire share
the company, capital of the English company. All the directors were German national and
whether it is an residents.
enemy co. During the First World War, the English company commenced an action to
(Doctrine recover a trade debt from another English company.
conflicts with Decision of the Court
public policy) It was held that the corporate personality of the company be ignored and the
persons in the ultimate control of the company shall be considered. Since
the persons controlling the company were enemies, the suit was not
maintainable.
Accordingly, the suit filed by the company to recover a trade debt was
dismissed on the ground that such payment would amount to trading with
enemy.
Connors Bros. v. Connors
In this case, the Holding company was incorporated in Germany and its
Subsidiary company was formed in England. Subsequently Germany
declared war against England. The British subsidiary company filed the suit
against its customers in England to realize the proceeds of credit sales made
to them.
Decision of the Court
The court denied the recovery of sale proceeds by the British subsidiary
company on the ground that its shareholders were from Germany and that
the revenue earned by British company would go ultimately to German
shareholders who were in fact of enemy character.
2.Protection of Where it was found that the sole purpose for which the company was
revenue formed was to evade taxes the Court will ignore the concept of separate
entity, and make the individuals liable to pay the taxes which they would
have paid but for the formation of the company.
Sir Dinshaw Maneckjee Pettit, Re: An assessee was receiving huge
dividend and interest income on certain investments. In order to avoid the
payment of taxes, he formed four private companies. The whole of the
investments were transferred to these private companies. The interest and
dividend received by these companies were within the exempted limits
under the Income Tax Act of that time. These companies did not have any
business or asset except these investments. The income received on
investments by these companies was diverted to the assessee in the form of
pretended loans, which were never paid back by him.
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The Court held that the only purpose of incorporating these private
companies was to evade taxes. Each of these companies was a sham.
Therefore, income earned by all these private companies was treated as the
income of the assessee.
3. Commission Where the corporate veil has been used for commission of fraud or
of fraud or improper conduct, Courts have lifted the veil and looked at the realities of
improper the situation.
conduct Gilford Motor Co. Ltd. v Horne
An employee entered into a contract with his employer that he will not
solicit the customers of the employer after leaving the employment.
After leaving the employment, the employee formed a company along with
his wife and one other person. The company started soliciting the customers
of the employer.
The Court held that the purpose of formation of the company was to avoid
a legal obligation arising from a contract. Therefore, the company was
restrained from soliciting the customers of the employer.
Jones v. Lipman
L agreed to sell certain land to J. Pending completion of formalities of the
said deal, L sold and transferred the land to a company which he had
incorporated with a nominal capital of £100 and in which he and a clerk
were the only shareholders and directors. This was done in order to escape a
decree for specific performance in a suit brought by J.
The Court held that the company was the creation of L and a mask to avoid
recognition. In the eyes of law L must complete the contract, since he had
the full control of the limited company in which the property was vested.
(4) Formation of In Merchandise Transport Limited v. British Transport Commission, a

Subsidiaries to transport company wanted to get licenses for its vehicles, but it could not do
act as agent so if it made the application in its own name. It, therefore, formed a
subsidiary company and the application for licenses was made in the name
of the subsidiary. The vehicles were to be transferred to the subsidiary.
Held, the parent and the subsidiary company were one commercial unit and
the application for licenses was rejected.
In Re. R.G. Films, a subsidiary company (in Britain) was incorporated by

the holding company (of USA) only as an instrument (tool). Holding
company transferred its entire business to its Subsidiary company due to
lower tax rates in Britain and Subsidiary company (in Britain) had no real
business of its own.
The Court held that in this case, the corporate veil shall be lifted up and the
income of Subsidiary company in Britain can be taxed as income of
American Holding company.
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5. To avoid Workmen of Associated Rubber Industry Lid. v. Associated Rubber
welfare Industry Ltd.
legislation A company was earning huge profits. According to the Bonus Act, some
amount of bonus was to be paid to the workers in proportion of the profits
of the company.
The company incorporated a subsidiary company and transferred some
valuable investments to it. The subsidiary company did no business, and
had no assets except the investments.
Looking at the purpose of formation of the subsidiary, the Supreme Court
lifted the corporate veil. It was held that the subsidiary was formed merely
for the purpose of reducing the liability of bonus payable under the Bonus
Act.
It amounted to avoiding welfare legislation by escaping the liability to pay
bonus. Such an action was not permissible, and therefore the profits earned
by the subsidiary company were held to be the profits of the holding
company.
Kapila Hingorani v. State of Bihar

In this case, the petitioner had alleged that the State of Bihar had not paid
salaries to its employees in PSUs etc. for long periods resulting in starvation
deaths. But the respondent took the stand that most of the undertakings were
incorporated under the provisions of the Companies Act, 1956, hence the
rights etc. of the shareholders should be governed by the provisions of the
Companies Act and the liabilities of the PSUs should not be passed on to
the State Government by resorting to the doctrine of lifting the corporate
veil.
The Court observed that the State may not be liable in relation to the day-to-
day functioning of the PSUs but its liability would arise on its failure to
perform the constitutional duties and the functions of these undertakings.
6. In case of Santanu Ray v. Union of India

economic In case, a company has committed an economic offence, e.g., not paying the
offences taxes, directors of the company can be held liable for wrong.
Decision of the court
The Court held that the veil of the corporate entity could be lifted by
adjudicating authorities so as to determine as to which of the directors was
concerned with the evasion of the excise duty by reason of fraud,
concealment or wilful misstatement or suppression of facts or contravention
of the provisions of the Act and the rules made there under.
Lifting the Inalsa Ltd. v. Union of India

Corporate Veil Where small scale industries were given certain exemptions and the
of Small Scale company owning an industry was controlled by some group of persons or
Industry companies.
Decision of the court
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It was held that it was permissible to lift the veil of the company to see
whether it was the subsidiary of another company and, therefore, not
entitled to the proposed exemptions.
Experience of Re. New Horizons Limited (NHL)Facts of the Case

promoters The Union of India invited tender to print the telephone directory.
NHL filled up the tender and submitted it to Union of India.
NHL is a joint venture of four companies (namely, TPI (Thomson Press
India Ltd.), LMI (Living Media India Ltd.) and WML (World Media Ltd.)
as well as a Singapore based company, IIPL (Integrated Information Pvt.
Ltd.).
TPI, LMI, WML and Mr. Arun Purie hold 60% shares and IIPL holds 40%
shares.
These four companies and Mr. Arun Purie have past experience of printing
telephone directories.
The Tender Evaluation Committee of Union of India rejected the tender of
NHL on the ground that NHL does not have past experience of printing
telephone directories.
NHL Preferred appeal in the court.
The court held that by lifting the corporate veil of the NHL, the past
experience of the promoters of the NHL, can be considered as the past
experience of NHL. Therefore, the Tender Evaluation Committee cannot
reject the tender of NHL on the ground that NHL does not have any past
experience of printing the telephone directories.
Cases falling under provisions of Companies Act, 2013
Sec 7(7) Section 7(7) deals with punishment for incorporation of company by
furnishing false information.
Sec 34 & 35 Misstatement in the prospectus
Sec 39 Failure to return application money
Sec 12 Mis-description of Name
Sec 219 To facilitate the task of an inspector appointed u/s 210, 212, or 213 to
investigate the affairs of the company
Sec 216 For investigation of the ownership of the company
Sec 339 Fraudulent conduct
Liability for Ultra-Vires acts
Company vis-a-vis Body Corporate
Meaning Body corporate means an association of persons which has been incorporated
under some statute having perpetual succession, a common seal and having a
legal entity different from the members constituting it.
Definition Sec “Body corporate' or 'corporation' includes a company incorporated outside India
2(7)] but does not include:
(a) A corporation sole;
14
(b) A co-operative society registered under any Cooperative Societies Act;
(c) Any other body corporate not being a company which the Central
Government may, by notification in the Official Gazette, specify in this behalf."
Types A body corporate may be -
(a) a corporation sole, or
(b) a corporation aggregate.
Corporation A corporation sole is a body corporate constituted in a single person who, in
sole right of some office or function, has corporate status.
Examples of corporate sole are to be found in perpetual offices such as the
President and Governors.
A corporation sole is not a "body corporate" for the purposes of the Companies
Act, 2013.
It is still a legal person and as such person can be a member of a company.
Corporation A corporation aggregate consists of a group of persons associated so that they

aggregate form a single person, e.g., a limited company, a trade union.
NOTE Every company is a body corporate, but every “body corporate” is not a
company.
The expression 'corporation' or 'body corporate' is, thus, wider than the word
company.
Society Society is not a body corporate or a company.

In Board of Trustees, Ayurvedic and Tibbia College, Delhi Vs. State of
Delhi, the Supreme Court held that a society registered under the Societies
Registration Act, 1860 does not fall within the term body corporate under the
Companies Act, although it is true that a society is a legal person capable of
holding property and becoming a member of the company.
The Supreme Court also held that though under the several provisions of the
Societies Registration Act, 1860, a society has certain privileges, and some of
them are similar to those of corporations, but society should not be deemed to
be a body corporate within the meaning of Sec. 2(11) of the Companies Act,
2013.
Is Company a Citizen?
A company is Under the Citizenship Act, 1955, the citizenship is available only to an
not a citizen individual. Therefore, no company can be a citizen of India.
Although it is generally accepted that corporations are not citizens in the same
way that real citizens are -, they cannot hold passports or vote in elections, for
example - it has been recognized that they do share in some of the same or
similar practices, such as paying taxes, engaging in free speech, and expecting
certain protections from the state.
Some rights A company can, however, claim the protection of those fundamental rights
are available to which are available to all persons, whether citizens or not, for example, the
companies right to own property.
15
It is to be noted that certain fundamental rights enshrined in the Constitution
for protection of “person”, e.g., right to equality (Article 14) etc. are also
available to company.
Section 2(f) of Citizenship Act, 1955, expressly excludes a company or
association or body of individuals from citizenship.
Nationality and Residence of a Company
Gasque v. Though it is established through judicial decisions that a company cannot be a

Inland citizen, yet it has nationality, domicile and residence. In Gasque v. Inland
Revenue Revenue Commissioners, held that a limited company is capable of having a
Commissioners domicile and its domicile is the place of its registration.
Re.State The Supreme Court held that the State Trading Corporation though a legal
Trading person, was not a citizen (neither as per Constitution of India, nor as per
Corporation of Citizenship Act, 1955) and can act only through natural persons.
India Ltd.
R.C. Cooper v. Supreme Court held that even if all the members of company are citizen of
Union of India India, still the company cannot be considered as citizen of India, because even
(Bank if all the members of the company are married, the company cannot be
Nationalization considered as married.
case)
Re. Bennet The Supreme Court held that that the company is not a citizen of India but all
Coleman the rights of citizenship are available to the company indirectly through its
&Company members who are citizens of India.
The court said that if any governmental policy adversely affects the trade of
the company then it automatically affects the interest of its members who are
citizens of India. Therefore, the company can invoke citizenship rights
through its members who are citizens or India.
Illegal Association Meaning [Sec 464]
In order to prevent the mischief arising from large trading undertakings being carried on by large
fluctuating bodies so that persons dealing with them did not know with whom they were
contracting, the law has put a ceiling on the number of persons constituting an association or
partnership.
An unincorporated company, association or partnership consisting of large number of persons
has been declared illegal.
Rule 10 of Companies (Miscellaneous) Rules, 2014 prescribes 50 persons in this regard.
By virtue of section 464 of the Companies Act, 2013, no association or partnership consisting of
more than such number of persons as may be prescribed shall be formed for the purpose of
carrying on any business that has the object of earning profits, unless it is registered as a
company under this Act or is formed under any other law for the time being in force. The number
of persons which may be prescribed under this section shall not exceed 100.
16
Exceptions: 1. Section 464 of the Act does not apply to the case of a Hindu undivided
family carrying on any business whatever may be the number of its
members.
2. This section is also not applicable to an association or partnership, if it is
formed by professionals who are governed by special Acts.
3. Stock Exchange – In V.V. Ruia Vs. Dalmia , It was decided that a stock
exchange is not covered by this section, because it is not formed for the
purpose of carrying on any business.
Effects of 1. Every member is personally liable for all liabilities incurred in the business.
Illegal 2. Such an association cannot enter into any contract.
Association 3. Such an association cannot sue any of its members or any outsider.
4. It cannot be sued by a member or an outsider for any debts due to him
because it cannot contract any debt.
5. It cannot be wound up by an order of the Court. In fact, the Court cannot
entertain a petition for its winding up as an unregistered company, for if it
did, it would be indirectly according recognition to the illegal association
(Raghubar Dayal v. Sarafa Chamber).
6. A member cannot sue for partition or dissolution or accounts of an illegal
association.
7. The illegality of an illegal association cannot be cured by subsequent
reduction in the number of its members.
8. The profits made by an illegal association are, however, liable to assessment
to income-tax.
9. Every member of an illegal association shall be punishable with fine which
may extend to one lakh rupees and shall also be personally liable for all
liabilities incurred in such business.
Can a company become partner in a partnership firm?
Legal Person A company being a juristic person is capable of contracting in its own name.
Partnership According to Partnership Act,1932 [section 4] Partnership is a contractual

Act relationship between persons,
Thus, there should be no objection to a partnership being created with or by a
company.
Doubt The only doubt that may arise in the minds of the readers is that the liability of
a partner being unlimited, can a limited liability company become a partner?
To this the simple reply shall be that it is the liability of the members of a
limited company which is limited and not that of the company itself.
Thus, there should be no objection to a limited liability company becoming a
partner of a partnership firm.
Opinion of The Department of Company Affairs, in this regard has opined that the objects
DCA clause must contain a facilitating provision in this regard.
17
COMPANY VIS-A-VIS OTHER FORMS OF BUSINESS
Distinction between Company and Partnership

Difference Partnership Company
Distinct legal A partnership firm is not distinct from A company is a distinct legal
person the several persons who compose it. person.
Assets In a partnership, the assets of the firm In a company, the assets belong to
are the property of the individuals the company and not to the
comprising it. individuals comprising it.
Creditors Creditors of a partnership firm are The creditors of a company can
creditors of individual partners and a proceed only against the company
decree against the firm can be executed and not against its members.
against the partners jointly and
severally.
Agent Partners are the agents of the firm. Members of a company are not its
agents.
Contract A partner cannot contract with his firm. A member of a company can
contract with company.
Transferability A partner cannot transfer his share and A company’s share can ordinarily be
make the transferee a member of the transferred.
firm without the consent of the other
partners.
Liability A partner’s liability is always The liability of shareholder may be
unlimited. limited either by shares or a
guarantee.
Insolvency The death or insolvency of a partner A company has perpetual
dissolves the firm, unless otherwise succession, i.e. the death or
provided. insolvency of a shareholder or all of
them does not affect the life of the
company
Agreement Vs. A partnership firm is the result of an A company, being a creation of law,
Law agreement and can be dissolved at any can only be dissolved as laid down
time by agreement. by law.
Distinction between company and Limited Liability Partnership (LLP)

Alternative LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership.
Perpetuity LLP can continue its existence irrespective of changes in partners.
Separate It is capable of entering into contracts and holding property in its own name.
existence
Liability Further, no partner is liable on account of the independent or un-authorized actions
of other partners, thus individual partners are shielded from joint liability created
by another partner’s wrongful business decisions or misconduct.
Agreement Mutual rights and duties of the partners within a LLP are governed by an
agreement between the partners or between the partners and the LLP as the case
may be.
18
Hybrid Since LLP contains elements of both ‘a corporate structure’ as well as ‘a
form partnership firm structure’ LLP is called a hybrid between a company and a
partnership.
More A basic difference between an LLP and a company lies in that the internal
flexibility governance structure of a company is regulated by statute (i.e. Companies Act)
whereas for an LLP it would be by a contractual agreement between partners.
LLP have more flexibility as compared to a company. LLP have lesser compliance
requirements as compared to a company.
Distinction between Company and Hindu Joint Family Business

HUF Company
Type of A Hindu Undivided Family Business consists A company consists of
Members of homogenous members since it consists of heterogeneous members.
members of the joint family itself.
Authority In a Hindu Joint Family business, the Karta There is no such system in a
(manager) has the sole authority to contract company.
debts for the purpose of the business, other
coparceners cannot do so.
Membership A person becomes a member of Joint Hindu There is no provision to that
Family business by virtue of birth. effect in the company.
Registration No registration is compulsory for carrying on Registration of a company is
business for gain by a Hindu Joint Family even compulsory.
if the number of members exceeds twenty.
Distinction between a Company and a Club
Association A company is a trading association. A club is a non-trading
Type association.
Registration Registration of a company is compulsory. Registration of a club is not
compulsory.
Disadvantages of Incorporation
Formalities Incorporation of a company is coupled with complex, cumbersome and detailed
and expenses legal formalities and procedures, involving considerable amount of time and
money. Even after the company is incorporated, its affairs and working must be
conducted strictly in accordance with legal provisions. Thus various returns and
documents are required to be filed with the Registrar of Companies, some
periodically and some on the happening of an event. Certain books and registers
are compulsorily required to be maintained by a company. Other forms of
business organisations are comparatively free from these legal complexities and
procedural formalities.
Corporate The legal framework is designed to ensure maximum disclosure of corporate
disclosures information.
Separation of Members of a company are not having as effective and intimate control over its
control from working as one can have in other forms of business organisation, say, a
ownership partnership firm. This is particularly so in big companies in which the number
of members is too large to exercise any effective control over its day-to-day
affairs.
Greater social Having regard to the enormous powers attached to the companies and the
responsibility impact they have on the society, the companies are called upon to show greater
19
social responsibility in their working and, for that purpose, are subject to greater
control and regulation than that by which other forms of business organisation
are governed and regulated. [Section 135]
Greater tax In certain circumstances, the tax burden on a company is more than that on
burden in other forms of business organisation. A company is liable to tax without any
certain cases minimum taxable limit as is prescribed in the cases of registered partnership
firms and others. Also it has to pay income-tax on the whole of its income at a
flat rate whereas others are taxed on graduated scale or slab system.
Detailed The Act provides detailed procedure for winding-up of companies which is
winding-up more expensive and time consuming than that which is applicable to other
procedure forms of business organisation.
Can a partnership firm acquire the shares of a company?
No, a partnership firm cannot acquire the shares of a company because partnership firm is neither
a natural person nor an artificial person. However, there is one exception that is, a partnership can
acquire shares of companies formed under section 8 (Association Not for Profit).
Two companies are incorporated with the same set of shareholders. Are these two
companies same or distinct under the Companies Act, 2013?
Two companies which are incorporated with the same set of shareholders are still distinct and
separate legal entities. [Pathinso Vs. Binda Debi]
Union Bank of India v. Khader International Construction and Other
In this case, the question which arose before the Court was whether a company is entitled to sue
as an indigent (poor) person under Order 33, Rule 1 of the Civil Procedure Code, 1908. The
aforesaid Order permits persons to file suits under the Code as pauper/indigent persons if they
are unable to bear the cost of litigation. The appellant in this case had objected to the contention
of the company which had sought permission to sue as an indigent person. The point of contention
was that, the appellant being a public limited company, it was not a ‘person’ within the purview
of Order 33, Rule 1 of the Code and the ‘person’ referred to only a natural person and not to other
juristic persons. The Supreme Court held that the word ‘person’ mentioned in Order 33, Rule 1
of the Civil Procedure Code, 1908, included any company as association or body of individuals,
whether incorporated or not.
The Court observed that the word ‘person’ had to be given its meaning in the context in which it
was used and being a benevolent provision, it was to be given an extended meaning. Thus a
company may also file a suit as an indigent person.
20
Ch. 2 Different Types of Companies
1.Statutory 2. Registered Co. 3. Chartered
On the Company (Registered under Company (Formed
basis of (Under special Companies Act, under Special
Statue Act of Parliament 2013 or Previous Charter of
of India) Companies Act in Parliament of U.K.)
India)
On the
basis of 1.Private Company 2.Public Company 3.One Person Co.
Registratio (Sec. 2(68) (Sec. 2(71) (Sec. 2(62)
n
On the
basis of 1.Company Limited 2.Company Limited 3. Unlimited Liability
Liability by Shares by Guarantee Company
Having Share Capital Not Having Share

Capital
Other
Types of Govt. Co. Foreign Co. Holding Co. Subsidiary
Companies Co.
Associate Co. Investment Producer Co. Dormant Co.

Co.
Classification of Companies
On the basis of Statue: There are three ways in which companies may be incorporated.
1. Chartered Companies 2. Statutory Companies and 3. Registered Companies
Chartered A company created by the grant of a charter by the Crown is called a Chartered
Company Company and is regulated by that Charter.
21
Statutory A company formed by passing a Special Act in the Parliament is called a Statutory
Companies Company or Statutory Corporation
Registered Those companies which are incorporated under the Companies Act, 2013 or under
Companies any previous company law.
STATUTORY COMPANIES / CORPORATIONS
A Company formed under a Special Act of Parliament or State Legislature is called a Statutory
Company/ Corporation.
The special enactment contains its constitution, powers and scope of its activities.
Change in its structure is possible only by a legislative amendment.
Such companies are usually formed to carry on the work of some special public importance and for
which the undertaking requires extraordinary powers, and privileges.
A major objective for incorporating statutory corporations is to serve public interest.
Such companies do not use the word “limited” as part of their names, e.g., Reserve Bank of India,
LIC, ONGC, ICSI, ICAI, etc.
Characteristics of Statutory Companies / Corporations
(i) Owned: It is owned by the State

(ii) Special Law: It is created by a special law of Parliament or State Legislature.
(iii) Immunity from Parliamentary Scrutiny: A statutory corporation is immune from
Parliamentary enquiry into its day-to-day working, as distinct from matters of policy.
(iv) Freedom in regard to personnel: Excluding the officers taken from the Government
department on deputation, its employees are not civil servants and are not governed by
Government regulations in respect of conditions of service.
(v) A body corporate: Each statutory corporation is a body corporate and can sue and be sued,
enter into contracts and acquire property in its own name.
(vi) Distinct relation with the Government: The most important provision which regulate the
relationship of public corporation and Government is the latter’s power to issue directions.
(vii) Commercial Audit: Except in the case of the banks, the financial institutions and the LIC,
where chartered accountants are auditors, in all the other corporations, the audit has been
entrusted to the Comptroller and Auditor General of India (CAG).
REGISTERED COMPANIES
The Companies Act, 2013 provides different kinds of companies that can be promoted and
registered under the Act.
According to Section 3 (1) of the Companies Act 2013, a company may be formed for any lawful
purpose as:
(a) Private Companies;
(b) Public Companies; and
(c) One Person Company (to be formed as Private Limited).
A company formed under sub-section (1) may be either—
22
(a) a company limited by shares; or
(b) a company limited by guarantee; or
(c) an unlimited company.
On the basis of Liability: Under this category there are three types of companies:
Company A company limited by shares may be defined as a “registered company” whether

Limited by public or private company, having the liability of its members limited by its shares,
Shares if any, unpaid on the shares respectively held by them. In other words, a member of
a company limited by shares is required to pay only the nominal amount of shares
held by him and nothing more. If the shares are fully paid-up, he has nothing more to
pay.
Company A company limited by guarantee is a registered company having the liability of its
Limited by members limited by its memorandum to such an amount as the members may
Guarantee respectively undertake by the memorandum to contribute to the assets of the
company in the event of its being wound up.
An An unlimited company is a company not having any limit on the liability of its
Unlimited members. Thus, the maximum liability of the members of such a company, in the
Liability event of its being wound up, might stretch up to the full extent of their properties to
Company meet the obligations of the company by contributing to its assets. However, the
members of an unlimited company are not liable directly to the creditors of the
company, as in the case of partners of a firm. The liability of the members is only
towards the company and in the event of its being wound up only the liquidator can
ask the members to contribute to the assets of the company which will be used in
discharging the debts of the company.
A company registered as an unlimited company may subsequently convert itself as a
limited company.
The name of an unlimited company is written as

“XYZ (A Company with Unlimited Liability)”.
The promoters of an unlimited liability company incorporate these companies for number of
reasons, such as,
Availing bank loans with ease,
Availing credits without mortgage on the property of the company.
An unlimited liability company can be converted into a company with limited liability.
Other Forms of Companies
(a) Associations not for profit having license under Section 8 of the Companies Act, 2013 or under
any previous company law;
(b) Government Companies;
(c) Foreign Companies;
23
(d) Holding and Subsidiary Companies;
(e) Associate Companies/Joint Venture Companies
(f) Investment Companies
(g) Producer Companies.
(h) Dormant Companies
Private According to Section 2(68) of Companies Act, 2013 “private company” means a
Company company which by its articles, –
[Section (i) restricts the right to transfer its shares;
2(68)] (ii) except in case of One Person Company, limits the number of its members to
two hundred:
Provided that where two or more persons hold one or more shares in a company
jointly, they shall, for the purposes of this clause, be treated as a single member.
Provided further that –

(A) Persons who are in the employment of the company; and
(B) Persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have continued
to be members after the employment ceased,
Shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the
company;
According to Sec 2(81), the term Securities means the securities as defined in
Securities Contracts (Regulation) Act, 1956.
The Companies Act, 2013 prohibits a private company from inviting the public to
subscribe for ALL TYPES OF SECURITIES, as opposed to the prohibition in the
Companies Act, 1956, being only on shares and debentures.
A private company can be registered with a minimum of 2 members and cannot have
more than 200 members.
Section 149(1) lays down that a private company shall have a minimum number of
two directors. The only two members may also be the two directors of the private
company.
The words “Private Limited” must be added at the end of its name by a private
limited company.
As per proviso to Section 14 (1), if a company being a private company alters its
articles in such a manner that they no longer include the restrictions and limitations
which are required to be included in the articles of a private company under this Act,
such company shall, as from the date of such alteration, cease to be a private
company. In such a case, it shall be treated as a public company from the date of
alteration of its articles.
24
A private company can only accept deposit from its members in accordance with
section 73 of the Companies Act, 2013.
The express prohibition on invitation/ acceptance of deposits except from directors
or their relatives or from members as was given under the section 3(1)(iii)(d) of
Companies Act, 1956, is omitted under the Companies Act, 2013.
Public “Public company” means a company which is not a private company.

Company
[Section As per section 3 (1) (a), a public company may be formed for any lawful purpose by
2(71)] seven or more persons, by subscribing their names to a memorandum and complying
with the requirements of this Act in respect of registration.
Privileges and Exemptions of Private Company
The Companies Act, 2013, confers certain privileges on private companies which are not
subsidiaries of public companies. Such companies are also exempted from complying with quite a
few provisions of the Act.
Some privileges and exemptions enjoyed by a private company are as:
Sec. 67(2) Financial assistance can be given to its employees for purchase of or subscribing to
its own shares or shares in its holding company.
Sec. 121(1) Need not prepare a report on the Annual General Meeting.
Sec. Need not prepare a statement indicating the manner in which formal annual
134(3)(p) evaluation has been made by the Board of its own performance and that of its
committees and individual directors.
Sec. 149(4) Need not appoint Independent directors on its Board.
Sec. 152(6) A proportion of directors need not retire every year.
Sec. 190(4) The provisions relating to contract of employment with managing or whole-time
directors does not apply to a private company.
Sec. 197(1) Total managerial remuneration payable by a private company, to its directors,
including managing director and whole-time director, and its manager in respect of
any financial year may exceed eleven per cent of the net profits.
According to Sec. 462 (1), the Central Government may in public interest, by notification, direct
that any of the provisions of this Act, shall not apply to such class or classes of companies or shall
apply to the class or classes of companies with such exceptions, modifications and adaptations as
may be specified in the notification.
25
Distinction between a Public and a Private Company
Minimum The minimum number of persons required to form a public company is 7. It is 2

number in case of a private company.
Maximum There is no restriction on maximum number of members in a public company,

number whereas the maximum number cannot exceed 200 in a private company.
Number of A public company must have at least 3 directors, whereas a private company
directors must have at least 2 directors.
Restriction on A public company invites the general public to subscribe for the shares in, or the
invitation to debentures of the company. A private company by its Articles prohibits any such
subscribe for invitation to the public.
shares
Transferability In a public company, the shares are freely transferable. In a private company the
of shares right to transfer shares is restricted by the Articles.
Privileges A private company enjoys some special privileges. A public company enjoys no
such privileges.
One Person Company (OPC)
Meaning As per section 2(62) of the Companies Act, 2013, “One Person Company” means a
company which has only one person as a member.
In other words, one-person company is a kind of private company.
One-person company shall have a minimum of one director. Therefore, a One

Person Company will be registered as a private company with one member and one
director.
Formation According to section 3(2), an OPC may be formed either as a company limited by
shares or a company limited by guarantee; or an unlimited liability company.
The memorandum of One Person Company is required to indicate the name of the
other person, (i.e., nominee) with his prior written consent in the prescribed form,
(Form No. INC 3- Rule 4(2), who shall, in the event of the subscriber’s death or his
incapacity to contract become the member of the company and the written consent
of such person shall be filed with the Registrar at the time of incorporation of the
One Person Company along with its memorandum and articles.
As per Rule 4(1), the subscriber to the MOA of OPC shall nominate a person after
obtaining prior consent of such person who shall, in the event of the subscriber’s
death or incapacity to contract, become the member of that OPC.
As per Rule 4(2), the member shall make nomination in Form No. INC 2.
26
As per Rule 4(3), the nominee may, withdraw his consent be giving a notice in
writing to such (i) Sole member and to (ii) the One Person Company.
Thereafter, the sole member shall nominate another person as nominee within 15
days of the receipt of the notice of withdrawal of consent, and shall send an
intimation of such nomination in writing to the company, along with the written
consent of such other person so nominated in Form No. INC. 3.
As per Rule 4(4), thereafter, the co. shall within 30 days of receipt of the notice of
withdrawal of consent from the nominee under Rule 4(3) file with the ROC, a notice
of such withdrawal of consent and intimation of the name of another person
nominated by the sole member in Form No. INC. 4 along with fee as provided in
the Companies (Registration Offices and Fees) Rules, 2014, and the written consent
of such another person so nominated in Form No. INC 3.
As per Rule 4 (5), the sole member of OPC may, by intimation in writing to
company, change the name of nominee at any time for any reason (including death
or incapacity to contract of nominee), and nominate another person after obtaining
the prior consent of such other person in Form No. INC. 3.
Summary of Usage of Different Forms

Form No. INC 2 - Application of Incorporation of OPC (The name of Nominee is
given in Column 8).
Form No. INC 3 – Nominee (or new nominee) gives his consent.
Form No. INC 4 – Company gives intimation about nominee (or new nominee) to
ROC.
Other conditions for One Person Company are as under:
Rule 3 -OPC
As per Rule 3(1) (a), only a person who fulfils all the following three criteria can incorporate OPC-
(1) Only a natural person (2) who is an Indian citizen and (3) resident in India.
As per Rule 3(1) (b), only a person who fulfils all the three criteria shall be a nominee for the sole
member of OPC-
(1) Only a natural person (2) who is an Indian citizen and (3) resident in India.
It may be noted that “resident in India” means a person who has stayed in India for a period of not
less than one hundred and eighty-two days during the immediately preceding one calendar year.
(2) No person shall be eligible to incorporate more than a One Person Company or become
nominee in more than one such company. [Rule3 (2)]
If a natural person, being a member in OPC in accordance with this rule becomes a member in
another OPC by virtue of his being a nominee in that OPC, such person shall meet the eligibility
criteria specified in Rule 3(2) with in a period of 180 days [Rule3 (3)].
Four Restrictions on OPC
27
(3) No minor shall become member or nominee of the One Person Company. [Rule3 (4)]
(4) Such Company cannot be incorporated or converted into a company under section 8 of
Companies Act, 2013(section 8 deals with Formation of company with charitable objects, etc.)
[Rule3 (5)]
(5) Such Company cannot carry out Non-Banking Financial Investment activities including
investment in securities of anybody corporates. [Rule3 (6)]
(6) No such company can convert voluntarily into any kind of company unless two years have
expired from the date of incorporation of One Person Company, except threshold limit (paid up
share capital) is increased beyond fifty lakh rupees or its average annual turnover during the
relevant period exceeds two crore rupees. [Rule3 (7)]
Rule 5 – Penalty
IF OPC or any officer of OPC contravenes of these rules, then OPC or any officer of the OPC shall
be punishable with fine which may extend to Rs. 10,000 and a further fine which may extend to Rs.
1000 for every day after the first default during which such contravention continues.
Contract by One Person Company
Section 193 (1) provides that where One Person Company limited by shares or by guarantee enters
into a contract with the sole member of the company who is also the director of the company, the
company shall, unless the contract is in writing, ensure that the terms of the contract are recorded in
the minutes of the first meeting of the Board of Directors of the company held next after entering
into contract.
However, above said provision shall not apply to contracts entered into by the one-person company
in the ordinary course of its business.
As per section 193 (2), the company shall inform the Registrar about every contract entered into by
the company and recorded in the minutes of the meeting of its Board of Directors under sub-section
(1) within a period of fifteen days of the date of approval by the Board of Directors.
As per section 152 (1), in case of a One Person Company an individual being its member shall be
deemed to be its first director until a director or directors are duly appointed by the member.
Privileges of a One Person Company
The privileges and exemptions enjoyed by a one-person company are as follows:

Sec. 67(2) Financial assistance can be taken by the member from the OPC for purchase of its
own shares.
Sec. 92(1) The annual return shall be signed by the company secretary, or where there is no
company secretary, by the director of the company.
In other words, it need not be signed by a company secretary in practice.
Sec. 96(1) Need not hold Annual General Meeting.
28
Sec. Need not prepare a report on Annual General Meeting.
121(1)
Sec. Financial statement and Board’s report can be signed only by one director.
134(1)
Sec. Need not prepare a statement indicating the manner in which formal annual evaluation
134(3)(p) has been made by the Board of its own performance and that of its committees and
individual directors.
Sec. One-person company need not to have more than one director on its Board.
149(1)
Sec. Need not to appoint Independent directors on its Board.
149(4)
Sec. Retirement by rotation is not applicable.
152(6)
According to Sec. 462 (1), the Central Government may in public interest, by notification, direct
that any of the provisions of this Act, shall not apply to such class of companies; or shall apply to
the class of companies with such exceptions, modifications and adaptations as may be specified in
the notification.
Classification on the basis of Ownership
Govt. Companies Non-Govt. Companies
Companies owned by C. Companies owned by

Govt. or S. Govt. or partly private entrepreneurs.
by C. Govt. & partly by S.
Govt.
These companies are also These companies are
known Public Sector known as Private Sector
Undertakings (PSU). Companies.
Private Co. Public Co. Private Co. Public Co.

Sec. 2(68) Sec. 2(71) Sec. 2(68) Sec. 2(71)
Example Example Example Example

Delhi SAIL Sony India TCS Ltd.
Internationa GAIL (Pvt.) Ltd. ACC Ltd.
l Airport MTNL Vodafone Reliance
authority BSNL India (Pvt.) Industries
(Pvt.) Ltd. Ltd. Ltd.
29
Government Companies
Govt. Co.
and
Means Includes
A company in which 51% or more A company which is subsidiary of a
paid up share capital is held either by Govt. Company,
1. C. Govt., or (i.e., more than 50% of total paid up
2. S. Govt., or share capital)
3. Partly by C. Govt. & S. Govt.
Section 2(45) of the Companies Act, 2013 defines “Government Company” as any company in
which not less than fifty-one per cent of the paid-up share capital is held by the Central
Government, or by any State Government or Governments, or partly by the Central Government and
partly by one or more State Governments and includes a company which is a subsidiary company of
such a Government company.
All the provisions of the Act are applicable to Government Companies unless otherwise specified.
A Government Company may be formed as a Private Limited Company or Public Limited Company.
The name of all Government Companies shall end with the word “Limited”, be it Public or a Private
Company.”
Name: In case of Government Company, the word “STATE” is allowed in name.
AUDIT REPORT
Where the Central Government is a member of a Government company, the Central Government
shall cause an annual report on the working and affairs of that company to be prepared within three
months of its annual general meeting, and laid before both Houses of Parliament together with a
copy of the audit report and comments upon or supplement to the audit report, made by the
Comptroller and Auditor-General of India.
Where in addition to the Central Government, any State Government is also a member of a
Government company, that State Government shall cause a copy of the annual report prepared
within three months of its annual general meeting and laid before the House or both Houses of the
State Legislature together with a copy of the audit report and the comments upon or supplement to
the audit report, made by the Comptroller and Auditor- General of India.
Where the Central Government is not a member of a Government company, every State
Government which is a member of that company, or where only one State Government is a member
of the company, that State Government shall cause an annual report on the working and affairs of
the company to be prepared and as soon as may be after such preparation, laid before the House or
both Houses of the State Legislature together with a copy of the audit report and comments upon or
supplement to the audit report made by the Comptroller and Auditor-General of India.
30
Important Cases relating to Govt. Company
Hindustan Steel Notwithstanding all the pervasive control of the Government, the Government
Works company is neither a Government department nor a Government
Construction Co. establishment.
Ltd. vs.
State of Kerala
A.K. Bindal v. Since employees of Government companies are not Government servants,
Union of India they have no legal right to claim that the Government should pay their salary
or that the additional expenditure incurred on account of revision of their pay
scales should be met by the Government. It is the responsibility of the
company to pay them the salaries.
Andhra Pradesh The Andhra Pradesh State Road Transport Corporation claimed exemption
Road Transport from taxation by invoking Articles 289 of the Constitution of India according
Corporation vs. to which the property and income of the State are exempted from the Union
ITO taxation.
The Supreme Court, while rejecting the Corporation’s claim, held that though
it was wholly controlled by the State Government, it had a separate entity and
its income was not the income of the State Government.
NOTE: The employees of a Government Company are not the employees of the Central or State
Government.
A Government Company may, in fact, be wound up like any other company registered under the
Companies Act.
It may become insolvent or be unable to pay its debts. That does not mean that the Government
holding the shares, i.e., Central or State, as the case may be, has become bankrupt.
Company with charitable objects or an Association not for Profit (Sec 8)
As per Section 4(1), the memorandum of a company shall state the name of the company with the
last word “Limited” in the case of a public limited company, or the last words “Private Limited” in
the case of a private limited company.
However, Section 8(1) permits the registration, under a licence granted by the Central Government,
of associations not for profit with limited liability without being required to use the word “Limited’
or the words ‘Private Limited” after their names.
Section 8 of the Companies Act, 2013 provides that where it is proved to the satisfaction of the
Central Government that a person or an association of persons proposed to be registered as a limited
company –
(a) has in its objects the promotion of art, science, sports, education, research, social welfare,
religion, charity, protection of environment or any such other object;
(b) intends to apply its profits, if any, or other income in promoting its objects; and
(c) intends to prohibit the payment of any dividend to its members.
Main Provisions
31
(1) The Central Government may by issuing licence, on such conditions as it deems fit, allow that
person or association of persons to be registered as a limited company without the addition to its
name of the word “Limited”, or as the case may be, the words “Private Limited”, and thereupon the
Registrar shall, on application, in the prescribed form, register such person or association of persons
as a company under this section.
[In this case, it is necessary for a company to obtain a licence from C. Govt. (ROC). For this
purpose, powers are delegated to ROC. Application in Form INC.12 and Rule 19 of Companies
(Incorporation) Rules, 2014 apply.]
(2) The company registered under section 8 shall enjoy all the privileges and be subject to all the
obligations of limited companies.
(3) A partnership firm may be a member of the company registered under this section.
(4) A company registered under Section 8 shall not alter the provisions of its memorandum or
articles except with the previous approval of the Central Government.
(5) A company registered under Section 8 may convert itself into company of any other kind only
after complying with such prescribed conditions.
(6) The Central Government may, by order, revoke the licence granted to a company registered
under this section if --
the company contravenes any of the requirements or any of the conditions subject to which a licence
is issued or
the affairs of the company are conducted fraudulently or in a manner violative of the objects of the
company or prejudicial to public interest,
--direct the company to convert its status and change its name to add the word “Limited” or the
words “Private Limited”, as the case may be, to its name and thereupon the Registrar shall register
the company accordingly.
(7) Where a licence is revoked, the Central Government may, by order, if it is satisfied that it is
essential in the public interest, direct that the company be wound up under this Act or amalgamated
with another company registered under this section.
Example- FICCI
Small Company
Small company is a new form of private company under the Companies Act, 2013. A classification
of a private company into a small company is based on its size i.e. paid up capital and turnover.
In other words, such companies are small sized private companies.
As per section 2(85) ‘‘small company’’ means a company, other than a public company, –
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may
be prescribed which shall not be more than five crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or
such higher amount as may be prescribed which shall not be more than twenty crore rupees.
Provided that nothing in this clause shall apply to
32
(A) A Holding Company or a Subsidiary Company;
(B) A company registered under section 8; or
(C) A company formed under any special Act.
MCA amends definition of Small Company [Section 2(85)]

However, there were difficulties faced to ascertain whether a company is a Small Company based
on the paid share capital or turnover as per last profit and loss account. MCA has listed some of the
challenges as follows:
If the company breaches any one criterion for Small Company, it will not be eligible for the benefits
of Small Company, for ex: a company that has a paid up capital Rs. 25 lacs and the turnover for a
particular year is Rs 2.5 crores will not be classified as Small Company. The status of a company as
a Small Company may change from year to year.
Holding Company and Subsidiary Company being exempted from the definition of Small Company
will never be able to avail the special privileges of a Small Company even if they fulfill either
(1) paid up share capital or (2) turnover requirement of a Small Company.
In order to overcome these difficulties, MCA passed an order Companies (Removal of Difficulties)
Order, 2015 on 13th Feb, 2015 to amend the definition of ‘Small Company’ as a company (other
than Public Company) whose paid up capital does not exceed Rs. 50 lacs and turnover as per last
profit and loss account does not exceed Rs. 2 crores.
With the change in the definition of Small Company, some of the companies who were falling under
Small Company category will now move to non-small company category. As a result, the
exemptions which were provided to these companies will not be applicable as mentioned below:
• 1. Cash-flow Statement: - The company which does not fall under Small Company category as
per amended definition will have to prepare the cash flow statement as a part of their financial
statement.
• 2. Filing Annual Return: - The company which does not fall under Small Company category as
per amended definition or which is not a One Person Company (OPC has one shareholder), will
have to get their annual returns signed both by the Director and the Company Secretary.
• In the case of Small Company, One Person Company or Unlisted Company, either the Company
Secretary or the Director can sign the Annual Returns.
• 3. Rotation of Auditor: - . The company which does not fall under Small Company category as
per amended definition will have to ensure the mandatory rotation of auditor, which is 5 years in
the case of individual auditor and 10 years in the case of a firm of auditors. This is exempted for
Small Company as per amended definition.
• 4. Board meeting: -The company which does not fall under Small Company category is
required to hold at least 4 meetings every year and the gap between two consecutive meetings
should not be more than 120 days. Small Company, One Person Company or Dormant Company
33
may hold only two board meetings in a year, i.e. half-yearly board meetings with a minimum
gap of 90 days between two meetings.
As mentioned earlier, a company which is categorized as Small Company may move to non-small
company category through its life term. In case a particular company does not meet the requirement
as mentioned above, for one year, the benefits and exemptions will be withdrawn from the
subsequent year.
Unincorporated Company
According to Sec. 582 of Companies Act, 1956, a partnership firm having 8 or more partners (but
within the limit of 50) shall be deemed / considered as an unincorporated company, and the partners
of such firm have two options at the time of dissolution:
1. Either to dissolve the firm themselves under the Partnership Act, 1932, or
2. To file an application to the Court for the winding up by the liquidator.
Distinction between Unlimited Liability Co. and Unincorporated Co.

Basis Unlimited Liability Co. Unincorporated Co.
Registered Unlimited liability company is registered It is not registered under the

under Companies Act. 2013. Companies Act, 2013
Certificate of It has a Certificate of Incorporation. It does not have a Certificate of
Incorporation Incorporation.
No. of It has minimum 2 members and maximum It is a partnership firm having
Members/ 200 members, in case of Private company; minimum 8 members and maximum
Partners and in case of Public company, it has 50 partners.
minimum of 7 persons and there is no
maximum limit.
Governed It is governed by the provisions of It is governed by the provisions of
Companies Act, 2013. Partnership Act, 1932.
Liability of Liability of members is unlimited. Liability of partners is unlimited.
Foreign Companies
As per section 2(42) of the Companies Act, 2013 “foreign company” means any company or body
corporate incorporated outside India which –
(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India.
Rule 2(1)(b) Companies Specification of Definition Details) Rules, 2014
Electronic Mode
34
Electronic Mode for the purpose of Section (2(42) of the Act, means carrying out any electronically
based activities, whether main server is installed in India or not, including activities given below;
(i) Business to Business (B2B) and Business to Consumer (B2C) transactions, data
interchange and other digital supply transactions;
(ii) Offering to accept deposits or inviting deposits or accepting deposits OR subscription in
securities in India OR from Citizen of India;
(iii) Financial Settlements, Web based marketing, Advisory and Transactional Services,
Database Services and Products, Supply Chain Management;
(iv) Online services such as telemarketing, telecommuting, telemedicine, educational and
information research; and
(v) All related data communication services, whether conducted by e-mail, mobile devices,
social media, cloud computing, document management, voice or data transmission or
otherwise.
NOTE: According to Rule 2(1)(h), the list of activities given above is inclusive.
Document etc. to be filed with ROC by Foreign Companies
Section 380 of the Act lays down that

(1) Every foreign company which establishes a place of business in India must, within 30 days
of the establishment of such place of business, file with the Registrar of Companies for
registration:
(a) a certified copy of the memorandum and articles, of the company or other instrument
constituting or defining the constitution of the company and, if the instrument is not in the
English language, a certified translation thereof in the English language;
(b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company containing such particulars as may
be prescribed;
(d) the name and address or the names and addresses of one or more persons resident in
India authorised to accept on behalf of the company service of process and any notices or
other documents required to be served on the company;
(e) the full address of the office of the company in India which is deemed to be its
principal place of business in India;
(f) particulars of opening and closing of a place of business in India on earlier occasion or
occasions;
(g) declaration that none of the directors of the company or the authorized representative
in India has ever been convicted or debarred from formation of companies and
management in India or abroad; and
(h) any other information as may be prescribed.
(2) Every Foreign company existing at the commencement of this Act shall, if it has not
delivered to the ROC before the commencement, the document and particulars specified in
sub section (1) of Section 592 of the Companies Act, 1956, continue to be subject to the
obligation to deliver those documents.
(3) Where any alteration is made or occurs in the document delivered to the ROC under this
section, the foreign company shall, within 30 days of such alteration, deliver to the ROC for
registration, a return containing the particulars of the alteration in the prescribed form.
35
Section 381 requires a Foreign Company to maintain Books of Account and file a copy of balance
sheet and profit and loss account in prescribed form with ROC every calendar year.
Every foreign company has to ensure that the name of the company, the country of incorporation,
the fact of limited liability of members is exhibited in the specified places or documents as required
under Section 382.
Section 376 of the Companies Act, 2013 provides further that when a foreign company, which has
been carrying on business in India, ceases to carry on such business in India, it may be wound up as
an unregistered company under Sections 375 to 378 of the Act, even though the company has been
dissolved or ceased to exist under the laws of the country in which it was incorporated.
As per Section 386(c), having a share transfer office or share registration office will constitute a
place of business.
A representative of a foreign company in India was merely receiving orders from customers, it was
held that it was not a “place of business” P.J. Johnson v. Astrofiel Armadorn
The following activities are held as not constituting “carrying on of business”:

(1) carrying small transactions
(2) conducting meetings of shareholders or even directors
(3) operating bank accounts
(4) transferring of shares or other securities
(5) procuring orders
Where not less than fifty per cent of the paid-up share capital, whether equity or preference or partly
equity and partly preference, of a foreign company is held by one or more citizens of India or by one
or more companies or bodies corporate incorporated in India, or by one or more citizens of India and
one or more companies or bodies corporate incorporated in India, whether singly or in the aggregate,
such company shall comply with the provisions of this Act as may be prescribed by the Central
Government with regard to the business carried on by it in India, as if it were a company
incorporated in India.
On the basis of control, companies can be classified into holding, subsidiary and associate
companies.
Holding company
As per Section 2(46) of the Companies Act, 2013, holding company, in relation to one or more
other companies, means a company of which such companies are subsidiary companies.
Subsidiary company
Section 2(87) of the Companies Act, 2013 provides that subsidiary company means a company in
which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either at its own or together
with one of more of its subsidiary companies.
Meaning of Control: According to section 2 (27), control shall include the right to appoint
majority of the directors or to control the management or policy decisions exercisable by a person
or persons by virtue of their shareholding or management rights or shareholder’s agreements.
36
Meaning of Total Share Capital
As per 2(1)(r) “total Share Capital”, means aggregate of the: -
(a) paid-up equity share capital and
(b) convertible preference share capital.
There are 3 ways to determine the relationship of holding and subsidiary company.
1. If H Ltd. controls, the composition of BoDs of S Ltd.

2. If H Ltd. holds more than 50% of the Total Share Capital of S Ltd.
3. Chain Holding – If H Ltd is holding of S Ltd. And S Ltd. is holding of XYZ Ltd. then H
Ltd. is holding of XYZ Ltd also.
Note: C. Govt. may prescribe in the rules the maximum number of layers of Subsidiary
Companies that a particular class of holding Company may have.
MCA Circular dated 27th Dec, 2013 has clarified the shares held by a company (i.e. Holding Co.)
or power exercisable by it in another company (i.e., Subsidiary Co.) in “fiduciary capacity” shall
not be counted for the purpose of determining the holding subsidiary relationship in terms of
provisions of section 2(87) of the Companies act, 2013.
Subsidiary company not to hold shares in its holding company [Section 19]
Section 19 (1) provides that subsidiary company shall not either by itself or through its nominees
hold shares in its holding company and no holding company shall allot or transfer its shares to any
of its subsidiary companies and any such allotment or transfer of shares of a company to its
subsidiary company shall be void.
Following are the circumstances, where a subsidiary can hold the shares of its holding company:
(a) where the subsidiary company holds such shares as the legal representative of a deceased
member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) where the subsidiary company is a shareholder even before it became a subsidiary company of
the holding company:
However, the subsidiary company referred above shall have a right to vote at a meeting of the
holding company only in respect of the shares held by it as a legal representative or as a trustee, as
referred to in item (a) or (b) aforesaid.
Associate Company
As per Section 2(6), “Associate company”, in relation to another company, means a company in
which that other company has a significant influence, but which is not a subsidiary company of the
company having such influence and includes a joint venture company.
Explanation to section 2(6) provides that “significant influence” means control of at least twenty
percent of total share capital, or of business decisions under an agreement.
Example: A Ltd. is an associate company of B Ltd. If:

(i) - B Ltd. has significant influence in A Ltd. and - B Ltd. is not a holding company of A Ltd.
37
or
(ii) A Ltd and B Ltd. are joint venture companies.
Investment Companies
As per explanation (a) to section 186, “investment company” means a company whose principal
business is the acquisition of shares, debentures or other securities.
An investment company is a company, the principal business of which consists in acquiring,
holding and dealing in shares and securities.
The word ‘investment’, no doubt, suggests only the acquisition and holding of shares and securities
and thereby earning income by way of interest or dividend etc.
But investment companies in actual practice earn their income not only through the acquisition and
holding but also by dealing in shares and securities i.e. to buy with a view to sell later on at higher
prices and to sell with a view to buy later on at lower prices.
Producer Company
Producer Companies are still governed by the Companies Act, 1956.

According to Section 581A(l) of the Companies Act, 1956,
"Producer Company" means a body corporate having objects or activities specified in section 581B
and registered as Producer Company under this Act;
The membership of producer companies is open to such people who themselves are the primary
producers, which is an activity by which some agricultural produce is produced by such primary
producers.
The concept of Producer Company in India was introduced to allow cooperatives to function as a
corporate entity under the Ministry of Corporate Affairs.
Objects of Producer Company (Section 581B (1) of the Companies Act, 1956)
(1) The objects of the Producer Company shall relate to all or any of the following matters, namely:
(a) production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of
primary produce of the Members or import of goods or services for their benefit
(b) processing including preserving, drying, distilling, brewing, and packaging of produce of its
Members;
(c) manufacture, sale or supply of machinery, equipment or consumables mainly to its Members;
(d) providing education on the mutual assistance principles to its Members and others;
(e) rendering technical services, consultancy services, training, research and development and all
other activities for the promotion of the interests of its Members;
(f) generation, transmission and distribution of power, revitalisation of land and water resources,
their use, conservation and communications relatable to primary produce;
(g) insurance of producers or their primary produce;
(h) promoting techniques of mutuality and mutual assistance;
(i) welfare measures or facilities for the benefit of Members as may be decided by the Board;
(j) any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i)
(k) financing of procurement, processing, marketing or other activities specified in clauses (a) to (j)
which include extending of credit facilities or any other financial services to its Members.
38
Section 581 B (2) Every Producer Company shall deal primarily with the produce of its active
Members for carrying out any of its objects specified in this section.
Formation of Producer Company and its registration.

Any ten or more individuals, each of them being a producer or any two or more producer
institutions, or a combination of ten or more individuals and producer institutions, desirous of
forming a Producer Company having its objects specified in section 581B and complying with the
provisions of this Act in respect of registration, may form an incorporated Company as a Producer
Company under this Act.
DORMANT COMPANIES
The Companies Act, 2013 has recognized a new set of companies called as dormant companies.
As per section 455 (1) where a company is formed and registered under this Act for a future project
or to hold an asset or intellectual property and has no significant accounting transaction, such a
company or an inactive company may make an application to the Registrar in such manner as may
be prescribed for obtaining the status of a dormant company.
Explanation appended to section 455(1) says that for the purposes of this section—
(i) “inactive company” means a company which has not been carrying on any business or
operation, or has not made any significant accounting transaction during the last two financial
years, or has not filed financial statements and annual returns during the last two financial years;
(ii) “significant accounting transaction” means any transaction other than—

(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.
As per section 455(2), the Registrar on consideration of the application shall allow the status of a
dormant company to the applicant and issue a certificate in such form as may be prescribed to that
effect.
Section 455(3) provides that the Registrar shall maintain a register of dormant companies in such
form as may be prescribed.
According to section 455(4), in case of a company which has not filed financial statements or
annual returns for two financial years consecutively, the Registrar shall issue a notice to that
company and enter the name of such company in the register maintained for dormant companies.
Further a dormant company shall have such minimum number of directors, file such documents and
pay such annual fee as may be prescribed to the Registrar to retain its dormant status in the register
and may become an active company on an application made in this behalf accompanied by such
documents and fee as may be prescribed. [Section 455(5)]
PUBLIC FINANCIAL INSTITUTIONS
39
According to Section 2 (72), “Public financial institution” means—
(i) the Life Insurance Corporation of India,
(ii) the Infrastructure Development Finance Company Limited,
(iii) Unit Trust of India;
(iv) institutions notified by the Central Government;
(v) such other institution as may be notified by the Central Government in consultation with the
Reserve Bank of India:
However, no institution shall be so notified unless—
(A) it has been established or constituted by or under any Central or State Act; or
(B) not less than fifty-one per cent. of the paid-up share capital is held or controlled by the Central
Government or by any State Government or Governments or partly by the Central Government and
partly by one or more State Governments.
Unregistered Companies [Section 375]

Section 375 of the Companies Act, 2013 defines an unregistered company to include:
Any Partnership Firm,
Limited Liability Partnership,
Society,
Cooperative Society,
Association, or
Company consisting of more than seven members.
Pre-emptive Right of Existing Shareholders

According to Sec. 2(68) (i), the Articles of Association of all private companies provide that – if a
particular shareholder of such company wants to sell off his shares, then he shall, first of all, offer
his shares to all the remaining existing shareholders of such company and wait for such period of
time as may be mentioned in AOA and if all the existing shareholders refuse to purchase his shares
(or do not respond back in given time period, then only the concerned shareholder shall offer his
shares to an outsider, i.e., who is not a shareholder of such company. This right of first refusal of
existing shareholders is also called as Pre-emptive Right of Existing Shareholders.
40
Ch.3 Promotion & Incorporation of Company
The whole process of formation of a company may be divided into four stages, namely,
1. Promotion
2. Registration
3. Floatation
4. Commencement of Business.
1. Promotion
Meaning The stage of conceiving an idea to start a business and its working up is termed as
of promotion.
Promotion The person, who assumes the task of promotion, are termed as “Promoters”.
& Therefore, promoter is a person, who conceives an idea of starting a business, plans
Promoter the formulation of co. and actually brings it into an existence.
Promoter According to Section 2 (69) of the Companies Act, 2013, “Promoter” means a
person –
(a) who has been named as such in a prospectus or is identified by the company in
the annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether
as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act.
Provided that sub-clause (c) shall not apply to a person who is acting merely in a
professional capacity.
Further, according to SEBI (Issue of Capital and Disclosure Requirements) Regulations,

2009, “promoter” includes:
(i) the person or persons who are in control of the issuer;
(ii) the person or persons who are instrumental in the formulation of a plan or program pursuant
to which specified securities are offered to public;
(iii) the person or persons named in the offer document as promoters.
Is a A director/officer/employee who has control over the affairs of the company,

director/ directly or indirectly whether as a shareholder, director or otherwise is considered
officer/em as a promoter.
ployee of However, a director or officer or employee of the company or a person, if acting as
the such merely in his professional capacity, shall not be deemed as a promoter.
company a
promoter?
Not [Lagunas Nitrate Co. V. Lagunas Syndicate]
associated
with the Decision of the Court
initial To be a promoter one need not necessarily be associated with the initial formation
formation of the co., one who subsequently helps to arrange floating of its capital will be
regarded as promoter.
41
Profession However, the persons assisting the promoters by acting in a professional capacity
al is not a do not thereby become promoters themselves.
promoter
Example
A solicitor who drafts the articles, or the accountant who values assets of a business to be
purchased are merely giving professional assistance to the promoter.
However, where he goes further than this, e.g., by introducing his clients to a person who may be
interested in purchasing shares in the proposed company, he would be regarded as promoter.
Judiciary has defined the term 'promoter' in various cases
Twycross Decision of the Court

vs. Grant It was held that promoter is "one who undertakes to form a company with reference
to a given project and to set it going, and who takes the necessary steps to
accomplish that purpose".
Whaley Decision of the Court

Bridge It was held that the term "promoter" is a term not of law but of business usually
Calico summing up in a single word, a number of business operations familiar to the
Printing commercial world are performed by which a company is generally brought into
Co. vs. existence".
Green But a person may be a promoter even if he has undertaken a lesser active role in the
formation of a company. Any person who becomes a director, places shares or
negotiates preliminary agreements, may be covered by this term.
A company may have several promoters. A promoter may be a natural person or a
company.
When Promotion Begins and Ends
Relationship [Twycross v. Grant]

The relationship between promoter and the company that he has floated must be
deemed to be fiduciary relationship from the day the work of floating the
company starts and continues up to the time that the directors take into their
hands what remains to be done in the way of forming the company.
Start and Chronologically, the first persons who control or influence the company's affairs
End are its promoters.
It is they who conceive the idea of forming the company, and it is they who take
the necessary steps to incorporate it, to provide it with share capital and loan and
acquire the property for the business.
When these things have been done, they hand over the control of the company to
its directors.
On handing over the control of the company to the directors, the promoter's
fiduciary and common law duties cease.
Therefore, the status of a promoter is generally terminated when the Board of
directors has been formed and the Board starts governing the company.
42
LEGAL POSITION OF A PROMOTER
A promoter is neither an agent nor a trustee of the company yet to be formed. But law holds him
in a fiduciary relationship [relationship of trust and confidence] towards the company, the
subscribers and the original allottees of shares. In this fiduciary capacity, he is supposed to
perform the following duties.
Duties of Promoters: This relationship of trust and confidence imposes certain duties on
promoters.
1. Not to make secret profits
As per section 102(4) of Companies Act, 2013, where as a result of the non-disclosure or
insufficient disclosure in any explanatory statement annexed to the notice of a general meeting,
by a promoter any benefit accrues to such promoter either directly or indirectly the promoter
shall be liable to compensate the company to the extent of the benefit received by him.
The promoters should not make a secret profit from the company.
He should not make any secret profit at the expense of the company he promotes, without the
knowledge and consent of the company and if he does so, the company can compel him to
account for it.
Note: -The law does not prohibit making of a profit by the promoters or paying any remuneration
to promoters. What the law prohibits is making of secret profit by promoters.
In other words, a promoter can make profit in respect of any transaction with the company, only
if he makes a full and fair disclosure of such profit.
Gluckstein v. Barnes
In this case, a syndicate of persons was formed to buy a property called ‘Olympia’ and resells
this 'Olympia' to a company to be formed for the purpose.
The syndicate first bought the debentures of the old Olympia company at a discount. Then they
bought the company itself for £1,40,000.
Out of this money provided by them, the debentures were repaid in full and a profit of £20,000
made thereon.
They promoted a new company and sold Olympia to it for £1,80,000. The profit of £40,000 was
revealed in the prospectus but not the profit of £20,000.
Held, profit of £20,000 was a secret profit and the promoters of the company were bound to pay
it to the company because the disclosure of the profit by themselves in the capacity of vendors to
themselves (in the capacity of directors of the purchasing company) was not sufficient.
2.Selling his property without disclosure
A promoter is not allowed to derive a profit from the sale of his own property to the company
unless all material facts are disclosed. If a promoter contracts to sell his own property to the
company without making a full disclosure, the company may either repudiate the sale or affirm
the contract and recover the profit made out of it by the promoter. Either way the dishonest
promoter is deprived of his advantage.
Erlanger v. New Sombrero Phosphate Co
43
In this case, a syndicate of which E was the head purchased an island containing mines of
phosphate for £ 5,000. E, then formed a company to buy this island. A contract was made
between X a nominee of the syndicate and the company for its purchase at £ 10,000.
The details of the sale were not disclosed to the shareholders or to the independent Board of
directors. The company now sought to rescind the contract of sale.
It was held that as there had been no disclosure by the promoters of the profit they were making,
the company was entitled to rescind the contract.
The disclosure should be made to an independent and competent Board of directors. This duty is
not discharged if he makes the disclosure to the Board of directors who are mere nominees of his
own.
Disclosure to The fact that the promoters have made a profit, it must be disclosed to an
Whom? independent Board of directors.
Disclosure to Where it is, not possible to constitute an independent Board of directors, the
the whole disclosure should be made to the whole body of persons who are invited to
body of become shareholders and this can be done through the prospectus.
shareholders Thus, the promoters have to ensure that 'the real truth is disclosed to those who
are induced by the promoters to join the company.
The legal position of promoter can be well understood with the help of following cases: -
Erlanger v. Decision of the Court

New It was held that a promoter is neither an agent of, nor a trustee for, the company
Sombrero because it is not in existence. But he occupies a fiduciary position in relation to
Phosphate the company and therefore requires to make full disclosure of the relevant facts,
Co. including any profit made by him.
Emma Decision of the Court

Silver It was held that on the basis of fiduciary relationship, a promoter may not make,
Mining Co. any profit at the expense of the company, he promotes. If he does make a secret
v. Grant profit in disregard of this rule, the company can compel him to account for it, and
surrender the secret profit.
LIABILITIES OF PROMOTERS
A promoter is subject to the following liabilities under the various provisions of the Companies
Act, 2013: -
1. As per section 7(6), where, at any time after the incorporation of a company, it
Incorporation is proved that the company has been got incorporated by furnishing any false
of company or incorrect information or by suppressing any material fact or information in
by furnishing any of the documents or declaration filed or made for incorporating such
false company, or by any fraudulent action, the promoters, the persons named as the
information first directors of the company and the persons making declaration shall
be liable for fraud under section 447.
44
2.Disclosure Section 26 of the Act lays down matters to be stated and reports to be set out
in the in the prospectus. The promoter(s) may be held liable for the non-compliance
Prospectus of the provisions of this Section.
3. Civil A promoter is liable for any misleading statement in the prospectus to a person
Liability for who has subscribed for any securities of the company on the faith of the
misstatements prospectus.
in prospectus By virtue of section 35(1), where a person has subscribed for securities of a
company acting on any statement included, or omission of any matter, in the
prospectus which is misleading and has sustained any loss or damage as a
consequence thereof, the company and the person who so authorized the issue
of prospectus, including a promoter of the company shall, be liable to pay
compensation to every person who has sustained such loss or damage. No
promoter shall be liable under this section, if he proves that the prospectus was
issued without his knowledge or consent, and that on becoming aware of its
issue, he forthwith gave a reasonable public notice that it was issued without
his knowledge or consent.
4. Punishment According to section 36, any person who, either knowingly or recklessly
for makes any statement, promise or forecast which is false, deceptive or
fraudulently misleading, or deliberately conceals any material facts, to induce another
inducing person to enter into an agreement for acquiring, disposing of, or underwriting
persons to securities, shall be liable for punishment for fraud under section 447.
invest money
5. If a company makes an offer or accepts monies in contravention of the
Contravention provisions of private placement as stated in section 42, the company, its
of provisions promoters and directors shall be liable for a penalty which may extend to the
relating to amount involved in the offer or invitation or two crore rupees, whichever is
private higher, and the company shall also refund all monies to subscribers within a
placement period of thirty days of the order imposing the penalty. [Section 42(10)]
Private Placement under Companies Act, 2013

Private placement means any offer of securities or invitation to subscribe securities to a select
group of persons by a company (other than by way of public offer) through issue of a
private placement offer letter and which satisfies the conditions specified in section 42.
If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters
into an agreement to allot, securities to more than the 200 persons, whether the payment for the
securities has been received or not or whether the company intends to list its securities or not on
any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the
public and shall accordingly be governed by the provisions of the Companies Act, 2013.
6.Mis- A company may proceed against a promoter on action for deceit or breach of
appropriation duty under Section 340, where the promoter has misapplied or retained any
money or property of the company or is guilty of misfeasance or breach of
trust in relation to the company.
7. Criminal Besides civil liability, the promoters are criminally liable under Section 34 for
Liability for the issue of prospectus containing untrue or misleading statements.
misstatement
in prospectus
45
Section 447 imposes severe punishment for fraud on promoters who make
untrue or misleading statements in prospectus with a view to obtaining capital.
The punishment prescribed is imprisonment for a term which shall not be
less than six months but which may extend to ten years and also a fine which
shall not be less than the amount involved in the fraud, but which may extend
to three times the amount involved in the fraud.
Right of Promoters to receive remuneration
Where If the company after the incorporation has not made any contract with the
company has promoters to pay remuneration to them, following provisions shall be
not made any applicable: -:
contract to (a) The promoters shall have no right to any remuneration from the company.
pay
(b) The promoters shall not have any right recover the expenses properly
incurred by them for incorporation of the company.
(c) Even where the articles provide that the company shall pay remuneration to
the promoters after incorporation, such a provision in the articles is not binding
on the company.
Where If the company, after incorporation, makes a contract with the promoters to pay
company has remuneration to them, the promoters shall have the right to-
made (a) - receive the remuneration that the company has contracted to pay.
contract to (b) - recover the expenses properly incurred by them for incorporation of the
pay company.
Different Remuneration may be paid to the promoters in any of the following ways:
ways to get (a) He may take commission on the shares sold.
remuneration (b) He may be paid a lump sum by the company.
(c) He may sell his own property to the company for cash or against fully
paid shares in the co. at an over valuation after making full disclosure to
all independent BoDs or to the intended shareholders.
PROCEDURE FOR REGISTRATION / INCORPORATION OF A COMPANY
Section 3(1) states that a company may be formed for any lawful purpose by—
(a) seven or more persons, where the company to be formed is to be a public company;
(b) two or more persons, where the company to be formed is to be a private company; or
(c) one person, where the company to be formed is to be One Person Company
by subscribing their names or his name to a memorandum and complying with the requirements
of this Act in respect of registration.
INCORPORATION OF COMPANIES - PROCEDURAL ASPECTS
Introduction of New Form INC-29 (Integrated Form)
46
The Ministry of Corporate Affairs introduced a major reform for businessmen in India. Effective
from 1st May, 2015, the incorporation of new business will require only one form to be filled,
against earlier five forms. The new Form is INC-29, and it replaces earlier tedious process of
filling out several forms for incorporating a new company.
Earlier Form Filling: -

1. Application for obtaining a DIN ------- DIR-3
2. Approving the name of the company ------- INC-1
3. A separate form for Registration of co. (with MOA, & AOA) ------ INC- 7
4. Verification of Regd. Office --------INC- 22
5. Separate form should be sent to every director --------DIR- 12
Now only one form is required, i.e., Form INC – 29.
Application for Availability of Name of company
Application As per section 4(4) a person may make an application to the Registrar for the
for reservation of a name set out in the application as—
Reservation (a) the name of the proposed company; or
of Name (b) the name to which the company proposes to change its name.
As per Rule 9 of Companies (incorporation) Rules 2014, an application for the

reservation of a name shall be made in Form No. INC- 29 (earlier Form No.
INC-1) along with the fee as provided in the Companies (Registration offices and
fees) Rules, 2014.
Name is not According to section 4(2), the name stated in the memorandum of association
identical shall not—
(a) be identical with or resemble too nearly to the name of an existing company
registered under this Act or any previous company law; or
(b) be such that its use by the company—
(i) will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the Central Government.
Name does Section 4(3) provides that a company shall not be registered with a name which
not show contains—
any (a) any word or expression which is likely to give the impression that the
connection company is in any way connected with, the Central Government, any State
with C. Government, or any local authority, corporation or body constituted by the
Govt. & S. Central Government or any State Government.
Govt.
Name Section 4(5) lays down that upon receipt of an application under sub-section (4),
Reserved the Registrar may, on the basis of information and documents furnished along
with the application, reserve the name for a period of 60 days from the date of the
application.
Preparation of Memorandum and Articles of Association
The Memorandum of Association is a document which defines the scope of the company’s
activities and its relations with the outside world.
47
The first step in the formation of a company is to prepare a document called the memorandum of
association. In fact, memorandum is one of the most essential pre-requisites for incorporating
any form of company under the Act.
Memorandum of Association
This is evidenced in Section 3 of the Act, which provides the mode of incorporation of a
company and states that a company may be formed for any lawful purpose by
(i) seven or more persons, where the company to be formed is a public company;
(ii) two or more persons, where the company to be formed is a private company; or
(iii) one person, where the company to be formed is a One Person Company
by subscribing their names or his name to a memorandum and complying with the requirements
of this Act in respect of its registration.
To subscribe means to append one’s signature or mark a document as an approval of its

contents.
Section 4(1) states that the memorandum of a company shall state –
(a) the name of the company with the last word “Limited” in the case of a public limited
company, or the last words “Private Limited” in the case of a private limited company
(b) the State in which the registered office of the company is to be situated;
(c) the objects for which the company is proposed to be incorporated;
(d) the liability of members of the company, whether limited or unlimited,
(e) in the case of a company having a share capital, –
(i) the amount of share capital with which the company is to be registered and the division
thereof into shares of a fixed amount and the number of shares which the subscribers to the
memorandum agree to subscribe which shall not be less than one share; and
(ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite
his name;
(f) in the case of One Person Company, the name of the person who, in the event of death of the
subscriber, shall become the member of the company.
Article of Association
In terms of section 5(1) of the Companies Act, 2013, the articles of a company shall contain the
regulations for management of the company.
The articles of association of a company are its bye-laws or rules and regulations that govern the
management of its internal affairs and the conduct of its business. It deals with the rights of the
members of the company inter se. Thus, the memorandum lays down the scope and powers of
the company, and the articles govern the ways in which the objects of the company are to be
carried out.
FILING OF DOCUMENTS WITH REGISTRAR OF COMPANIES
Section 7(1) of the Companies Act, 2013 states that the following documents shall be filed with
the Registrar within whose jurisdiction the registered office of a company is proposed to be
situated, namely: –
(a) Rule 12 of Companies (Incorporation) Rules 2014 states that an application
Application for incorporation shall be filed with ROC in Form No. INC-2 in case of one-
for
48
Incorporation person company or Form No. INC-29 (earlier Form No. INC-7) in case of
of Companies other companies.
(b) M. A. and According to Section 7(1)(a) the memorandum and articles of the company
A.A. of the duly signed by all the subscribers to the memorandum shall be filed, in such
company duly manner as may be prescribed.
signed
Rule 13 of The Companies (Incorporation) Rules 2014 states that the
Memorandum and Articles of Association of the company shall be signed in
particular manner. This point is discussed under the Ch. MOA.
(c) Section 7(1) (b) of the Companies Act, 2013 requires filing of a declaration in
Declaration the prescribed form by an advocate, a chartered accountant, cost accountant or
from the company secretary in practice, who is engaged in the formation of the
professional company, and by a person named in the articles as a director, manager or
secretary of the company, that all the requirements of this Act have been
complied with.

declaration by an advocate, a Chartered Accountant, Cost Accountant or
Company Secretary in practice shall be in Form No. INC- 8.
(d) Affidavit Section 7(1)(c) of the Companies Act, 2013 requires the filing of an affidavit
from the from each of the subscribers to the memorandum and from persons named as
subscribers to the first directors, if any, in the articles that he is not convicted of any offence
the in connection with the promotion, formation or management of any company,
Memorandum or that he has not been found guilty of any fraud or misfeasance or of any
breach of duty to any company under this Act or any previous company law
during the preceding five years and that all the documents filed with the
Registrar for registration of the company contain information that is correct
and complete and true to the best of his knowledge and belief;

affidavit shall be submitted by each of the subscribers to the memorandum and
each of the first directors named in the articles in Form No. INC- 9.
(e) Furnishing Under Section 12 of the Companies Act, 2013, a company shall, on and from
verification of the 15th day of its incorporation and at all times thereafter, have a registered
Registered office capable of receiving and acknowledging all communications and notices
Office as may be addressed to it.
The company can furnish to the registrar verification of registered office

within 30 days of incorporation in the manner prescribed.
As per rule 25(1) of Companies (Incorporation) Rules 2014, the

verification of registered office shall be filed in Form No. INC- 29 (earlier
Form No. 22).
(f) Particulars Rule 16 of Companies (Incorporation) Rules requires the filing of the
of subscribers particulars of name, including surname or family name, residential address,
49
nationality and such other particulars of every subscriber to the memorandum
along with proof of identity, as prescribed.
(g) Rule 17 of Companies (Incorporation) Rules 2014 states that –

Particulars of The particulars of each person mentioned in the articles as first director of the
first directors company along with his consent to act as director of the company shall be filed
along with in Form No. INC -29 (earlier Form No. DIR.-12) along with the fee.
their consent
to act as As per section 152 (3), no person shall be appointed as a director of a
directors company unless he has been allotted the Director Identification Number under
section 154.
Section 152(4) provides that every person proposed to be appointed as a

director by the company in general meeting or otherwise, shall furnish his
Director Identification Number.
By virtue of section 153 every individual intending to be appointed as director

of a company shall make an application for allotment of Director Identification
Number in Form No. INC 29 (earlier Form No. DIR- 3).
Any individual who intends to be a director of a company will have to

mandatorily apply for DIN first.
DIN has to be obtained by the directors of the company before commencing

the procedure for incorporation of a company.
(h) Power of With a view to fulfilling the various formalities that are required for
Attorney incorporation of a company, the promoters may appoint an attorney
empowering him to carry out the requirements stipulated by the Registrar. This
requires execution of a Power of Attorney on a non-judicial stamp paper of a
value prescribed in the respective State Stamp Laws.
Issue of Certificate of Incorporation by Registrar
Section 7(2) of the Companies Act, 2013 states that the Registrar on the basis of documents and
information filed under sub-section (1) of section 7, shall register all the documents and issue a
certificate of incorporation in the prescribed form to the effect that the proposed company is
incorporated under this Act. From the date of incorporation mentioned in the certificate of
incorporation, such subscribers to the memorandum would become the members of the
company.
Effect of Registration
The effect of registration of the company is as follow: -

(a) The company becomes a body corporate.
(b) The company acquires a legal recognition.
(c) The company gets a name in which it shall carry on business on its own name.
(d) The company comes into existence from such date as is mentioned in the certificate of
incorporation.
50
CERTIFICATE OF INCORPORATION
After scrutinizing the documents filed and on being satisfied that they are in order, that the
requisite fee has been paid and that all other legal requirements have been duly complied with,
the Registrar will enter the name of the company in the Register of Companies and shall certify
under his hand that the company is incorporated.
The certificate so issued by the Registrar is called the 'Certificate of Incorporation.
CONCLUSIVENESS OF 'CERTIFICATE OF INCORPORATION'
Conclusiveness A certificate of incorporation issued by the registrar shall be conclusive

evidence that:
(a) all the requirements of the Companies Act have been complied with in
respect of to be registration;
(b) the association is a company authorized to be registered;
(c) the association has been duly registered under Companies Act.
Meaning The term 'conclusive evidence' means that no inquiry shall be allowed to be
made regarding the correctness or incorrectness of any particulars contained in
the certificate of incorporation.
Instances of The certificate of incorporation shall remain valid even in the following cases:
conclusiveness (a) Where one person has signed on behalf of all the subscribers.
(b) Where all the signatories to memorandum are minors.
(c) Where all the signatures on the memorandum are forged.
(d) Where the memorandum was altered after signing by subscribers, but
before its registration.
Read the following cases carefully
Peel’s case If memorandum is found to be materially altered after signature but before
registration or is signed by only one person for all the seven subscribers or the
signatories be all infants.
The certificate would be nevertheless conclusive and would not affect the
status and existence of the company as a legal person although such
irregularities might give rise to claims between the subscribers.
Moosa v. MOA of a company was signed by two adults and by a guardian of other five
Ibrahim members, who were minors. The Registrar, however, registered the company
and issued under his hand a certificate of incorporation.
The Court held the certificate to be conclusive for all purposes.
51
Jubilee Cotton The Registrar issued a certificate of incorporation on January 8, but dated it
Mills Ltd v. January 6th, which was the date he received the documents.
Lewis On January 6, the company made an allotment of shares to Lewis.
Held, that the certificate was conclusive evidence of incorporation on January

6 and that the allotment was not void on the ground that it was made before the
company was incorporated.
Allotment of Section 7(3) of the Companies Act, 2013 states that on and from the date
Corporate mentioned in the certificate of incorporation issued under sub-section (2), the
identity number Registrar shall allot to the company a corporate identity number, which shall
be a distinct identity for the company and which shall also be included in the
certificate.
Documents of Section 7(4) states that the company shall maintain and preserve at its
incorporation registered office copies of all documents and information as originally filed
to be preserved under sub-section (1) till its dissolution under this Act.
Powers of the Tribunal in case of incorporation of a company by furnishing false or

incorrect information [Section 7(7) is yet to be notified.]
As per Section 7(7), where a company has been got incorporated by furnishing any false or
incorrect information or by suppressing any material fact or information in any of the documents
or declaration filed or made for incorporating such company or by any fraudulent action, the
Tribunal may, on an application made to it,-
(a) pass such orders, as it may think fit, for regulation of the management of the company
including changes, if any, in its memorandum and articles of the company; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit:
Provided that before making any order under this sub-section, —

(i) the company shall be given a reasonable opportunity of being heard in the matter;
and
(ii) the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any liability.
52
Commencement of Business
NOTE Amendment
No declarations for commencement of business, etc.: Section 11 Companies Act 2013 required
all companies to file following additional declarations with the Registrar of Companies prior to
commencement of business or exercising any borrowing power: (i) declaration by a director that
minimum paid-up share capital has been paid; and (ii) company has filed verification of
registered office.
The CA Amendment 2015 has removed the above requirements and deleted Section 11 of CA
2013. This reduces the filings to be made by companies in India.
53
Ch. 4(a) MEMORANDUM OF ASSOCIATION (MOA)
Definition According to Section 2(56) of the Companies Act, 2013 “memorandum” means
Section 2(56) the memorandum of association of a company as originally framed and altered
from time to time in pursuance of any previous company law or this Act.
The definition given above does state the nature and importance of this document.
Meaning- The memorandum of association is a document of great importance in relation to

According to the proposed company.
Palmer
It contains the objects for which the company is formed and therefore identifies
the possible scope of its operations beyond which its actions cannot go.
It defines as well as confines the powers of the company.
If anything is done beyond these powers, that will be ultra vires (beyond powers
of) the company and so void.
According to In Ashbury Railway Carriage & Iron Co: Ltd. v. Riche, Lord Cairns
Lord Cairns observed,
"the memorandum of association of a company defines the limitation on the

powers of the company ... it contains in it both that which is affirmative and that
which is negative.
It states affirmatively the ambit and extent of vitality and power which by law
are given to the corporation and it states, if it is necessary to state, negatively,
that nothing shall be done beyond that ambit…...”
Purpose 1. An intending shareholder can find out the purposes for which his money is
going to be used by the company and what risk he is taking in making the
investment.
2. Anyone dealing with the company, e.g., the supplier of goods or money will
know whether the transaction he intends to make with the company is within
the objects of the company or not.
FORM OF MEMORANDUM OF ASSOCIATION
Section 4(6) of the Companies Act, 2013 provides that the memorandum of association should be
in any one of the Forms specified in Tables A, B, C, D or E of Schedule I to the Act, as may be
applicable in relation to the type of company proposed to be incorporated.
Form in Table A is applicable to companies limited by shares.

Form in Table B is applicable to companies limited by guarantee not having a share capital.
Form in Table C is applicable to companies limited by guarantee having a share capital.
Form in Table D is applicable to unlimited companies not having a share capital.
Form in Table E is applicable to unlimited companies having a share capital.
54
Contents of There are mainly six important clauses in the MOA which are as follow: -
MOA 1. Name clause
[Sec- 4(1)] 2. Situation clause/ Registered Office clause
3. Object clause
4. Liability c1ause
5. Capital clause
6. Association clause
The above clauses are compulsory and are designated as “conditions” prescribed by the Act, on
the basis of which a company is incorporated.
NOTE: The Companies Act, 2013 shall override the provisions in the memorandum of a
company, if the latter contains anything contrary to the provisions in the Act [Section-6].
1. The Name Clause
A company being a legal entity must have a name of its own to establish its separate identity. The
company may adopt any suitable name provided it is not undesirable.
According to section 4(2), the name stated in the memorandum shall not—
(a) be identical with or resemble too nearly to the name of an existing company registered
under this Act or any previous company law; or
(b) be such that its use by the company—

(i) will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the Central Government.
NOTE: A name which is identical to or too nearly resembles, the name by which a company in
existence has been previously registered, will be deemed to be undesirable.
Section 4(3) provides that a company shall not be registered with a name which contains—
(a) any word or expression which is likely to give the impression that the company is in any way
connected with, or having the patronage of, the Central Government, any State Government, or
any local authority, corporation or body constituted by the Central Government or any State
Government under any law for the time being in force; or
(b) such word or expression, as may be prescribed, unless the previous approval of the Central
Government has been obtained for the use of any such word or expression.
Section 4(4) a person may make an application, in Form INC-29 (earlier Form INC1) and
accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name set
out in the application as—
(a) the name of the proposed company; or
(b) the name to which the company proposes to change its name.
Section 4(5) lays down that upon receipt of an application under sub-section (4), the Registrar
may, on the basis of information and documents furnished along with the application, reserve the
name for a period of 60 days from the date of the application.
55
[Methodist Church v. Union of India]
The Registrar must make preliminary enquiries to ensure that the name allowed by him is not
misleading or intended to deceive with reference to the Objects Clause of the memorandum.
[Ewing v. Buttercup Margarine Co. Ltd.]

The plaintiff, who carried on business under the name of the Buttercup Dairy Co., obtained an
injunction against the defendant (Buttercup Margarine Co. Ltd.), on the grounds that the public
might think that the two businesses were connected because of the word “Buttercup”.
The rule will apply also to foreign companies or traders, whose goods are imported into the
country.
Identical or Resembling Name
According to Section 16, the Central Government is empowered to direct a company, at any point
of time to rectify its name if by inadvertence (carelessness, negligence, inattention) a name has
been registered which is identical to or too nearly resembles the name of an existing company,
the Central Government may direct the company to change its name.
If a company is so directed by the Central Government, it must change the name within 3 months
of the direction after passing an ordinary resolution.
The Central Government can order rectification of name where such name in its opinion
constitutes an infringement of a registered trademark.
The proprietor of the registered trade mark may make an application to the Central Government
for an order for rectification of name because it is identical to or too nearly resembles the
applicant’s registered trademarks.
Such application must be made within three years from the date of incorporation or the
registration or change of name.
In such a case the Central Government may direct the company to change its name and the
company shall change its name, within a period of six months from the issue of such direction,
after passing an ordinary resolution for the purpose.
The company shall within a period of fifteen days from the date of such change, give notice of
the change to the Registrar along with the order of the Central Government, for necessary
changes.
Any default in complying with the direction issued by the Central Government would render the
company liable for punishment with fine which may extend to one thousand rupees for every day
during which default continues and its officers in default shall be liable for fine which shall not
be less than five thousand rupees but which may extend to one lakh rupees.
56
Atlas Cycles (Haryana) Ltd. v. Atlas Products Pvt. Ltd
Both the plaintiff and the defendant companies belong to the same family. The plaintiff was the
proprietor of the trade mark in the name “Atlas”.
The Respondent-defendant company containing the name “Atlas” in its corporate name started
dealing in bicycles.
The plaintiff objected to the use of the name “Atlas” by the defendant company.
The Defendants were restrained from using the word ‘Atlas’ in their corporate/trade name in
respect of bicycles and bicycle parts.
D.W. Boulay v. D.W. Boulay
It was held that mere similarity of name is not in itself enough to give a right to an injunction.
The law does not give a person a right to prevent the use of a name by another person. In the case
of companies, however, registration will be refused only if there is likelihood of deception or
confusion.
K.G. Khosla Compressors Ltd. v. Khosla Extractions Ltd.

A person cannot be permitted to name a company even after his personal name if that name
resembles the name of an existing company.
Publication The company must

of Name • Paint or affix its name and address of its registered office and keep the
[Sec.12] same painted or affixed on the outside of every office or place of business.
• Have its name engraved in legible characters on its seal.
• Have its name and address of its registered office mentioned in legible
characters in business documents.
Where a company has changed its name during the last two years, it shall paint or display or
print, as the case may be, along with its name, the former name so changed during the last two
years.
In case of One Person Company, the words ‘‘One Person Company’’ shall be mentioned in
brackets below the name of such company, wherever its name is printed, affixed or engraved.
Ministry of Corporate Affairs (MCA) has clarified that display of its name in English in addition
to the display in the local language will be a sufficient compliance with the requirements of the
section.
2. Registered Office Clause [Sec. 12]
• It states the name of the state in which the registered office of the co. is situated.
• It establishes its domicile.
• It is the address at which the co.’s statutory books must normally be kept and to which
notices and other communications can be sent.
Note: - Within 15 days of its incorporation, and at all times thereafter, the company must have a
registered office to which all communications and notices may be sent.
The company must also furnish to the Registrar verification of its registered office within a
period of thirty days of its incorporation in Form INC 29 (earlier Form No. INC 22).
57
3. Objects Clause [Section 4(1)(c) of the Companies Act, 2013]
All companies must state in their memorandum, the objects for which the company is proposed to
be incorporated.
A co. cannot do anything beyond its objects and any act done beyond that will be ultra vires and
void, and cannot be ratified even the assent of the whole body of shareholders.
[Dr. Lakshmanaswami Mudaliar A. vs. LIC]
However, a co. may do anything which is incidental to and consequential upon the objects
specified and such an act will not be an ultra vires act. [Attorney General vs. G.E. Rly. Co.]
Ultra vires means an act or transaction of a company, which though it may not be illegal, is
beyond the company’s powers by reason of not being within the objects of the memorandum of
association.
4. Liability Clause [Sec 4(1)(d)
In the case of a limited company, the liability of members may be limited by shares or guarantee
(a) In the case of a company limited by shares, the memorandum. must state the fact that the
liability of a member is restricted to the face value of shares held by him.
(b) In the case of a company limited by guarantee, the memorandum must state the amount of
guarantee that each member has given.
(c) In the case of a company limited by guarantee and having share capital, the memorandum
must state: -
(i) the fact that liability of each member is limited to the extent of face value
of shares held by him; and
(ii)the amount that each member shall be liable to pay in the event of winding
up of the company.
5. Capital Clause
The Capital clause states the amount of share capital with which the company is registered and
the mode of its division into shares of fixed value, i.e., the number of shares into which the
capital is divided and the amount of each share.
Limitation This clause lays down the limit beyond which the company cannot issue shares
without altering the memorandum.
The Association or Subscription Clause [Section 4(1)(e)]
Meaning It states that “we the several persons whose names and addresses and
occupations are subscribed, are desirous of being formed into a co. in pursuance
of this M.A., and we respectively agree to take the number of shares in the
capital of the co. set opposite our respective names.”
Legal (a) There should be at least 7 subscribers if the proposed company is a public
Requirements company. If the proposed company is a private company, at least 2 persons must
subscribe to MOA.
(b) In case of a company limited by shares, every subscriber shall take at least
one share- The number of shares subscribed to by him, shall be stated opposite
to his name.
(c) Every subscriber shall state his name, occupation and address.
58
(d)The particulars of every subscriber shall be witnessed.
Effect of (a) A subscriber to MOA is deemed to be a member as soon as the company is

subscription incorporated. After incorporation, his name is entered in the "Register of
Members’.
(b) After incorporation, a subscriber cannot repudiate his liability to take and
pay for the shares subscribed by him even on the ground of misrepresentation of
facts.
Memorandum and Articles of Association of the company duly signed
According to section 7(1)(a) The memorandum and articles of the company duly signed by all the
subscribers to the memorandum are to be filed in such manner as may be prescribed.
Rule 13 of Companies (Incorporation) Rules 2014 states that the Memorandum and Articles of
Association of the company shall be signed in the following manner, namely: -
(1) The memorandum and articles of association of the company shall be signed by each
subscriber to the memorandum, who shall add his name, address, description and occupation,
if any, in the presence of at least one witness who shall attest the signature.
(2) Where a subscriber to the memorandum is illiterate, he shall affix his thumb impression
which shall be described as such by the person, writing for him, who shall place the name of
the subscriber against or below the mark and authenticate it by his own signature and he shall
also write against the name of the subscriber, the number of shares taken by him.
(3) Such person shall also read and explain the contents of the memorandum and articles of
association to the subscriber and make an endorsement to that effect on the memorandum and
articles of association.
(4) Where the subscriber to the memorandum is a body corporate, the memorandum and articles
of association shall be signed by director, officer or employee of the body corporate duly
authorized in this behalf by a resolution of the board of directors of the body corporate.
Subscription induced by misrepresentation
A subscriber to the memorandum cannot, after the issue of the certificate of incorporation,
repudiate his subscription on the ground that he was induced to sign by misrepresentation.
[Re Metal Constituents Ltd.]
ALTERATION OF MEMORANDUM OF ASSOCIATION
1. Alteration in The Name Clause -- Legal Requirements for the change of Name
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Passing of The company shall pass a special resolution to change the name of the
Special company.
Resolution
Prior To change the name of the company, a prior approval is required from the C.
approval of Govt.
C. Govt. But no approval of the Central Government is necessary if the change of name
[Section involves only the addition or deletion of the word "private" (i.e., when public
13(1) & (2)] company is converted into a private company or vice versa).
Effect of Entry of New The Registrar shall enter the new name of the company in the
alteration in Name register of companies maintained by him.
the Name
Clause Fresh The ROC shall issue fresh certificate of incorporation
[ Section Certificate of consisting of new name to the company.
13(3)] Incorporation
When does The alteration of name shall become effective as soon as fresh
alteration certificate of incorporation is issued.
become
effective?
Status of There shall be no change in the rights and obligations of the
company company.
Economic Investment Corporation Ltd. vs. CIT

It was held that by change of name, the constitution of the company is not
changed, only the name changes. It is not similar to the reconstitution of a
partnership which means creation of a new entity altogether.
Rule 29 of Companies(incorporation) Rules 2014
(1) The change of name shall not be allowed to a company which has defaulted in filing its
annual returns or financial statements or any document due for filing with the Registrar or
which has defaulted in repayment of matured deposits or debentures or interest on deposits
or debentures.
(2) An application shall be filed in Form No.INC.24 along with the fee for change in the name
of the company and a new certificate of incorporation in Form No.INC.25 shall be issued to
the company consequent upon change of name.
ALTERATION OF REGISTERED OFFICE CLAUSE
Change from one place to another within same city [Sec 12(5)]
Meaning A company may shift its registered office within the local limits of the city,
town or village in which the registered office is situated.
Requirements 1. The company shall pass a Board resolution.

2. The company shall give notice to Registrar in Form No INC 29 (earlier
Form No INC 22), within 15 days of such change of office.
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No company shall change the place of its registered office from the jurisdiction of one Registrar
to the jurisdiction of another Registrar within the same State unless such change is confirmed by
the Regional Director on an application made in this behalf by the company in the prescribed
manner.
This does not involve alteration of memorandum.
Change from one city to another within same State
Requirements 1. The company shall pass a Special Resolution.

2. A notice of the change is required to be given to the Registrar in Form No
INC 29 (earlier Form No INC 22), within 15 days of such change along with
Form no MGT 14.
Change from jurisdiction of one ROC to another ROC within the same State
Requirements 1. The company shall pass a special resolution

2. Application shall be made to Regional Director.
3. Regional Director shall confirm the alteration within 30 days.
4. Within 60 days, the company shall file with the Registrar
(a) a copy of the confirmation; and
(b) an altered copy of MOA.
5. Within one month, the Registrar shall register the change and give a
certificate of registration of change of registered office.
The certificate shall be conclusive evidence that all the requirements of the.
Companies Act, 2013, with respect to alteration and confirmation of registered
office have been complied with.
6. The company shall change the registered office.
7. The company shall give a notice of new address of the registered office to
the new Registrar, within 3o days of change.
Rule 28 of Companies(Incorporation) Rules 2014
(1) An application seeking confirmation from the Regional Director for shifting the registered
office within the same State from the jurisdiction of one Registrar of Companies to the
jurisdiction of another Registrar of Companies, shall be filed by the company with the Regional
Director in Form No. INC. 23 along with the fee.
(2) The company shall, not less than one month before filing any application with the Regional
Director for the change of registered office. -
(a) publish a notice, at least once in a daily newspaper published in English and in the principal
language of that district in which the registered office of the company is situated and circulating
in that district; and
(b) serve individual notice on each debenture holder, depositor and creditor of the company,
clearly stating that any person whose interest is likely to be affected by the proposed alteration
of the memorandum may intimate objections to the Regional Director with a copy to the
company within twenty-one days of the date of publication of that notice:
(c) Additionally, Form No. MGT.14 is to be filed with the Registrar towards special resolution.
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Change from one State to another State [Sec13(4)]
Requirements 1. The change of registered office from one State to another State involves
alteration of memorandum.
2. The change can be effected by a special resolution of the company which
must be confirmed by the Central Government on an application made to
it.
3. The Central Government shall dispose of the application under sub-section
(4) within a period of sixty days.
4. Before passing its order, C. Govt. may satisfy itself that the alteration has
the consent of the creditors, debenture holders or that a sufficient provision
has been made by the company either for the due discharge of all its debts
and obligations or that adequate security has been provided for such
discharge. [Section 13(5)].
5. A company shall, in relation to any alteration of its memorandum
involving change of registered office from one State to another, file with
the Registrar the special resolution passed by it in MGT- 14 [Section
13(6)].
Rule 30 of Companies (Incorporation) Rules 2014
(1) An application under sub-section (4) of section 13, for the purpose of seeking approval for
alteration of memorandum with regard to the change of place of the registered office from one
State Government or Union territory to another, shall be filed with the Central Government in
Form No. INC-23.
(2) There shall be attached to the application, a list of creditors and debenture holders, drawn up
to the latest practicable date preceding the date of filing of application by not more than one
month.
(3) There shall also be attached to the application an affidavit from the directors of the company
that no employee shall be retrenched as a consequence of shifting of the registered office from
one state to another state.
(4) A duly authenticated copy of the list of creditors shall be kept at the registered office of the
company and any person desirous of inspecting the same may, at any time during the ordinary
hours of business, inspect.
(5) A copy of the application with complete annexures to the Registrar and Chief Secretary of
the State Government or Union territory.
(6) The company shall at least fourteen days before the date of hearing advertise the application
in the Form No. INC- 26 in a vernacular newspaper in the principal vernacular language in the
district in which the registered office of the company is situated, and at least once in English
language in an English newspaper circulating in that district.
(7) Where any objection of any person whose interest is likely to be affected by the proposed
application has been received by the applicant, it shall serve a copy thereof to the Central
Government on or before the date of hearing.
62
(8) Where no objection has been received from any of the parties, who have been duly served,
the application may be put up for orders without hearing.
(9) Before confirming the alteration, the Central Government shall ensure that, with respect to
every creditor and debenture holder who, in the opinion of the Central government, is entitled to
object to the alteration, and who signifies his objection, either his consent to the alteration has
been obtained or his debt or claim has been discharged or has been secured to the satisfaction of
the Central Government.
(10) The Central Government may make an order confirming the alteration on such terms and
conditions, if any, as it thinks fit, and may make such order as to costs as it thinks proper.
[Re: Satya Shree Balaji Wires & Cables (P) Ltd.]
The decision to shift the registered office of the company to another state being a domestic
matter rests with shareholders and the company is the best judge of how to run its business more
economically, efficiently or conveniently, even though it would result in loss of revenue to the
State.
Rule 31.
The certified copy of the order of the Central Government, approving the alteration of the
memorandum for transfer of registered office of the company from one State to another, shall be
filed in Form No.INC.28 along with the fee as with the Registrar of the State within thirty days
from the date of receipt of certified copy of the order.
ALTERATION OF OBJECTS CLAUSE
The alteration of Object Clause can be discussed under two headings:

(1) Alteration of Objects Clause by a co. which has not issued a prospectus.
(2) Alteration of Objects Clause by a co. which has issued a prospectus.
(1) Alteration of Objects Clause by a co. which has not issued a prospectus
The Companies Act, 2013 has not prescribed any procedure to alter object clause by a co. which
has not issued a prospectus. Therefore, the procedure to be followed will be determined by AOA
of such a company. In case AOA is silent, the company may alter its objects clause by passing a
Board of Directors’ resolution.
(2) Alteration of Objects Clause by a co. which has issued a prospectus.
According to section 13(1), a company may, by a special resolution, alter the provisions of its
memorandum. It means that a company can change its objects by passing a special resolution.
Registration of Alteration
Section 13(6)(a) provides that a company shall, in relation to any alteration of its memorandum,
file with the Registrar:
(a) the special resolution passed by the company under section 13(1); and
(b) the approval of the Central Government under section 13(2), if the alteration
involves any change in the name of the company.
63
Further in case of a listed company, the special resolution for alteration in the objects clause of
the Memorandum of Association needs to be passed through Postal Ballot in terms of section
110.
Further, section 13(8) along with Rule 32 of Companies (Incorporation) Rules, 2014 states
that a company, which has raised money from public through prospectus and still has any
unutilized amount out of the money so raised, shall not change its objects for which it raised the
money through prospectus unless a special resolution is passed by the company.
Rule 32 of Companies (Incorporation) Rules, 2014 states that

(1) The notice in respect of the resolution for altering the objects shall contain the following
particulars, namely: -
(a) the total money received;
(b) the total money utilized for the objects stated in the prospectus;
(c) the unutilized amount out of the money so raised through prospectus,
(d) the particulars of the proposed alteration or change in the objects;
(e) the justification for the alteration or change in the objects;
(f) the amount proposed to be utilized for the new objects;
(g) the estimated financial impact of the proposed alteration on the earnings and cash flow of the
co.;
(h) the other relevant information which is necessary for the members to take an informed
decision on the proposed resolution;
(i) the place from where any interested person may obtain a copy of the notice of resolution to be
passed.
(2) The advertisement giving details of each resolution to be passed for change in objects shall
be published in the newspapers (one in English and one in vernacular language) which are in
circulation at the place where the registered office of the company is situated.
(3) The advertisement shall be published simultaneously with the dispatch of postal ballot
notices to shareholders.
(4) The notice shall also be placed on the website of the company.
(5) The dissenting shareholders shall be given an opportunity to exit.
As per section 13(9), the Registrar shall register any alteration of the memorandum with respect
to the objects of the company and certify the registration within a period of thirty days from the
date of filing of the special resolution.
NOTE:
No business other than those given in the “objects clause” can be commenced without obtaining
prior approval of the shareholders by way of special resolution.
It means that a company can commence a new business i.e. a business not covered by its
“objects” clause of the memorandum only after amending the objects clause after obtaining the
approval of the shareholders by special resolution.
64
In this connection, the Department of Company Affairs (now Ministry of Corporate Affairs), has
clarified that new business means a business which is not germane (relevant, useful, connected,
suitable, appropriate) to the existing business carried on by the company.
The guiding criterion, therefore, is whether the new activity is germane to the original business
or not. In case the reply is ‘yes’, no special resolution is necessary and vice versa.
ALTERATION OF CAPITAL CLAUSE

According to Section 61, a limited company having a share capital may make the following
types of alterations in its memorandum by an ordinary resolution, if so authorized by its articles,
at its general meeting.
1. to increase its authorized share capital by such amount as it thinks expedient.

A company may at any time increase its authorized share capital by the alteration of its
memorandum.
2. to consolidate all or any of its share capital into shares of a larger amount than its
existing shares;
3. to convert all or any of its fully paid-up shares into stock, and reconvert that stock into
fully paid-up shares of any denomination;
4. to sub-divide its shares, or any of them, into shares of smaller amount than is fixed by
the memorandum, so, however, that the proportion between the amount paid and
unpaid shall remain the same;
5. to 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.
ALTERATION OF LIABILITY CLAUSE

It appears that the companies Act, 2103 or the Rules made thereunder do not contain any
provisions with respect to the alteration of liability clause.
However, according to section 13(1), a company may, by a special resolution and after
complying with the procedure specified in this section, alter the provisions of its memorandum.
It means that a company can change the liability clause of its memorandum of association by
passing a special resolution.
DOCTRINE OF ULTRA VIRES THE COMPANY
Meaning The term ‘ultra’ means beyond and the term vires means the legal powers.
The term Ultra vires the company means beyond the legal power of the
company.
Effect An act or transaction shall be ultra vires,
➢ if it is not permitted or authorized by the Companies Act, 2013; and
➢ It falls outside the object clause of MOA.
65
[Rajendra The rule is meant to protect shareholders and the creditors of the company.
Nath Dutta v. If the act is ultra vires (beyond the powers of) the directors only, the
Shilendra shareholders can ratify it.
Nath If it is ultra vires the articles of association, the company can alter its articles in
Mukherjee] the proper way.
If the act is ultra vires (beyond the powers of) the company, even the whole
body shareholders cannot ratify it.
The general rule is that an act which is ultra vires the company is incapable of
ratification.
Ashbury Rly. Carriage and Iron Co. vs. Riche
The doctrine of ultra vires was first enunciated in this case.

Facts of the case
The object clause of the company contained the following objects:
(a) To make, sell or lend on hire, railway carriages and wagons.
(b) To carry on the business of mechanical engineers and general contractors.
(c) To purchase, lease, work and sell mine, minerals, and buildings.
Nature of contract made by company. The company entered into a contract with M/s Richie, a
firm of railway contractor, to finance the construction of a railway line in Belgium.
• There was evidence that the agreement had been ratified by all the members of the co.
• Later on the company repudiated the contract on the ground of being ultra-vires.
• Riche sued the company for breach of contract.
Contentions
Riche contentions were:
firstly, that the contract in question came well within the meaning of the words 'general
contractors' and, was, therefore, within the powers of the company, and
secondly, that the contract was ratified by the majority of the shareholders.

The Court held that the word 'general contractors' had to be given a restricted meaning.
Only such contracts could be covered in the term ‘general contractors' as are in some way
related or connected with mechanical engineering.
Therefore, the company could not finance the construction of a railway line by alleging that such
business falls under the business of general contractors.
Hence the contract was entirely beyond the objects in the Memorandum of Association.
A. Lakshmanaswami Mudaliar vs. L.I.C.
Facts of the case

The directors of the company were authorized “to make payments towards any charitable or any
benevolent object or for any general public or useful object”. In accordance with shareholders’
resolution the directors paid 2 lacs to a trust formed for the purpose of promoting technical and
business knowledge. The company’s business having been taken over by L.I.C., it had no
business left of its own.
66
The Supreme Court held that the payment was ultra vires the company. Directors could not
spend company’s money on any charitable or general objects. They could spend for the
promotion of only such charitable objects as would be useful for the attainment of the
company’s own objects.
National Provincial A bank or any other person lending to a company, for purposes ultra
Bank vs. vires the memorandum, cannot recover.
Introductions Ltd.
Corporate bona fide charitable spending under Section 181 and ultra vires rule
Contribution Section 181 of the Companies Act, 2013 authorizes the Board of directors to
to Bona fide contribute to bona fide charitable and other funds.
charitable
However, prior consent of the company in general meeting, has to be obtained
in order to contribute for any bona fide charitable or other purpose any amount
exceeding five per cent of the average net profits for the three immediately
preceding financial years.
Contribution The power of the Board as regards contribution to funds, which do directly
towards relate to business of the company is unrestricted.
funds
directly However, it should not be inferred from the language of the section that with the
related to consent of the company in general meeting, the board of directors may
business contribute to charitable funds to an unlimited extent, unless MOA and AOA
authorizes such expenditure.
If it does not authorize, then, it will be ultra vires the powers of the company.
Loans, borrowings and ultra vires rule
An ultra vires borrowing does not create a relationship of a debtor and creditor. Where a
company had accepted deposits from outsiders which was outside the scope of the
Memorandum, the court held that the company is not liable to pay borrowed money, rather it
shall be the liability of the directors to pay money personally.
Implied Powers
[Oakbank Oil Every company may necessarily possess certain powers which are implied,
Co. vs. Crum] such as, a power to appoint and act through agents, and where it is a trading
company, a power to borrow and give security for the purposes of its business,
and also a power to sell.
Such powers are incidental and can be inferred from the powers expressed in
the memorandum.
As regards implied powers, the rule is to assume that “quite apart from any general words in a
company’s MOA, it has power to do all that is reasonably necessary for attaining its objects”.
Powers which are not implied
The following powers have been held not to be implied and it is, therefore, prudent to include
them expressly in the objects clauses:
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(1) acquiring any business similar to the company’s own business. [Ernest vs. Nicholls]
(2) taking shares in other companies having similar objects. [Re Barned’s Banking Co.]
(3) promoting other companies or helping them financially. [Joint Stock Discount Co. vs.
Brown]
(4) entering into an agreement with other persons or companies for carrying on business in
partnership or for sharing profit, joint venture or other arrangements.
Very clear powers are necessary to justify such transactions.
(5) a power to sell and dispose of the whole of a company’s undertaking;

(6) a power to use funds for political purposes;
(7) a power to give gifts and make donations or contribution for charities not relating to the
objects stated in the memorandum;
(8) acting as a surety or as a guarantor.
Shareholder’s right in respect of ultra vires acts
Null & Void An ultra vires contract is as null and void as a contract with a minor
[Re. Steel Equipment & Construction Co. (P) Ltd.]
Ultra vires A shareholder can get back the money paid by him to the company under an
allotment ultra vires allotment of shares.
However, if he transfers those shares, then the transferee of shares would
not have been so allowed. [Margarate Linz vs. Electric Wire Co. of
Salestine Ltd.]
Effects of ultra vires transactions

1. Void ab The ultra vires acts are null and void ab initio. The company is not bound by
initio these acts; even the company cannot sue or be sued upon it. [ Ashbury
Railway Carriage and Iron Company vs. Riche]
2. Injunction In case, a company is about to undertake an ultra vires act, the members (even
a single member) can get an order of injunction from the Court restraining the
company from going ahead with the ultra vires act.
3. Personal lf funds of the company are misapplied or wasted by entering into ultra vires
liability of transaction, the directors of the company shall be personally liable to
directors to indemnify the company.
third parties The directors are expected to act within the authority available to them. If they
act outside the scope of this authority by presenting themselves to be
possessing the authority, this will be breach of their authority. [Week vs.
Propert]
In other words, if they make misrepresentation of authority, then the directors
shall be personally liable to compensate the third party.
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4. An ultra vires contract cannot become valid by ratification.
Ratification (a)Ultra Acts ultra vires the directors mean those acts which are
vires the beyond the powers of the directors.
directors Such acts are not altogether void and inoperative. The
shareholders may ratify such acts in General Meeting.
Thereafter, the company shall become bound by such acts.
(b)Ultra Ultra vires the articles means those acts which are beyond the
vires AOA powers under the articles, i.e., the acts which are inconsistent
with the provisions of the articles.
Such acts are not altogether void and in-operative.
The shareholders may ratify such acts by amending the
articles. Therefore, the company shall be bound be those
contracts.
(c)Ultra vires Such acts are wholly void and inoperative.

the Such acts cannot be ratified since they are beyond the legal
Company powers of the company; a company is not bound by ultra vires
acts. These acts are also caned as ultra vires the memorandum
or ultra vires the object clause or simply ultra vires.
5. Ultra vires If the money has been lent on behalf of the co., and the lending is ultra vires,
lending of the co. can sue for the recovery of the money since the only objection to this
money loan is that it was made without authority. But borrower cannot set up as
defence to an action that the person who lent him the money, and to whom he
has made a promise to repay that money, had no authority to lend him that
money.
6. Rights of (a) File suit The lender may sue the director for the breach of warranty of
third parties against authority and recover any loss sustained by him.
directors
(b) If the money is in speci (i.e., in the same form), the lender can
Injunction obtain a tracing order from the Court and the company shall be
liable to repay such money.
(c) If the company pays any debt by using- ultra vires borrowed
Subrogation money, the lender shall have a right to recover such money
from the company. However, he shall not have any right to
any security to which the creditor was entitled to.
Doctrine of Alter Ego

According to Doctrine of Alter Ego, the Court/ Tribunal shall ignore the status of shareholders,
officers and directors of the company in reference to their liability, so that they may be held
personally liable for their action when they have acted fraudulently or unjustly.
This doctrine was propounded by Lord Viscount Haidane in the case of Lennards Carrying
Co. Ltd. Vs. Asiatic Petroleum Co. Ltd. The house of Lord stated the default of the MD who
is the “directing mind and will” of the company would be attributed to him and he be held for
the wrong of the company.
69
Ch. 4(b) ARTICLES OF ASSOCIATION
Meaning A.A. are the rules, regulations for the internal management of the affairs of a co.
The articles regulate the internal management of the company.
They define the powers of its officers. They also establish a contract between the
company and the members and between the members inter se.
Definition 'Articles' means the articles of association of a company as originally framed or

[Section as altered from time to time in pursuance of any previous company laws or of
2(5)] the present Act, i.e., the Act of 2013.
It also includes the regulations contained in Table F in Schedule I of the Act, in

so far as they apply to the company.
Signing of AOA must be signed by those persons who have signed MOA.
AOA
Model form Section 5(6) of the Companies Act, 2013 provides that the articles of association
of A.OA shall be in respective Forms specified in Tables F, G, H, I, or J of Schedule I to
the Act, as may be applicable in relation to the type of company proposed to be
incorporated.
Form in Table F is applicable to companies limited by shares.

Form in Table G is applicable to companies limited by guarantee having a share capital.
Form in Table H is applicable to companies limited by guarantee not having a share capital.
Form in Table I is applicable to unlimited companies having a share capital.
Form in Table J is applicable to unlimited companies not having a share capital.
Adoption of The company has three alternatives-:
Table 1. It may adopt Table in full. [Section 5(7)]
2. It may wholly exclude Table and set out its own A.A. in full.
3. It may frame its own A.A. and adopt part of Table.
NOTE-: Unless the A.A. of a public co. expressly exclude any or all provisions
of relevant Table, that Table shall automatically apply to it. [Section 5(8)]
A.A. & M.A. 1. The AOA are subordinate to MOA and any clause in the Articles going
– Their beyond the memorandum will be ultra vires.
Relation 2. The MOA must be read in conjunction with AOA, when it is necessary to
explain any ambiguity in the terms of the MOA. The AOA may explain
or supplement the MOA but cannot extend or enlarge its scope.
3. The terms of the MOA cannot be modified or controlled by the AOA.
70
Articles do not exceed the powers of the company as laid down by its
memorandum [Ashbury vs. Watson].
Articles that go beyond the company’s sphere of action are inoperative, and
anything done under the authority of such article is void and incapable of
ratification.
But neither the articles nor the memorandum can authorize the company to do
anything so as to contravene any of the provisions of the Act. [Re Peveril Gold
Mines]
ENTRENCHMENT PROVISIONS
The Companies Act, 2013 recognizes an interesting concept of entrenchment.
Entrenchment The articles may contain provisions for entrenchment to the effect that specified
[Section 5 (3)] provisions of the articles may be altered only if conditions or procedures that
are more restrictive than those applicable in the case of a special resolution, are
met or complied with.
Purpose Essentially, the entrenchment provisions allow for certain clauses in the articles
to be amended upon satisfaction of certain conditions or restrictions (such as
obtaining a 100% consent) greater than those prescribed under the Act.
This provision acts as a protection to the minority shareholders and is of

specific interest to the investment community.
This shall empower the enforcement of any pre-agreed rights and provide
greater certainty to investors, especially in joint ventures.
For Pvt. Co & The provisions for entrenchment referred to in section 5(3) shall be made either
Public Co. on formation of a company, or by an amendment in the articles agreed to by all
[Section 5 (4)] the members of the company in the case of a private company and by a special
resolution in the case of a public company.
Notice to Where the articles contain provisions for entrenchment, whether made on
Registrar formation or by amendment, the company shall give notice to the Registrar of
[Section5(5) such provision.
Distinction between Memorandum of Association and Articles of Association
Basis MOA AOA
1. Nature of MOA is the charter of the co. indicating AOA are regulations for the internal
document the nature of its business, nationality, and mgt. of the co. and are subsidiary to
its capital the MOA.
2. Scope MOA define the scope of the activities of AOA. are the rules for carrying out
the co. (beyond which it cannot do the objects of the co
anything).
71
3. MOA is the supreme document. AOA are subordinate to the MOA.
Supremacy If there is any conflict between the
AOA and MOA, the latter prevails.
4. Every co. must have its own MOA. A co. limited by shares need not
Requirement have AOA. of its own. It can adopt
Table F.
5. There are strict restrictions on its AOA can be altered by a special

Restrictions alteration in the MOA. resolution.
on alteration
6. Ultra- An act ultra-vires the MOA. is wholly An act ultra-vires the AOA (but
vires void and cannot be ratified even by the intra-vires the MOA) can be
whole body of the shareholders. confirmed by the shareholders.
REGISTRATION OF ARTICLES
Section 7(1) provides that at the time of incorporation of a company there shall be filed with the
Registrar within whose jurisdiction the registered office of a company is proposed to be situated,
the memorandum and articles of the company duly signed by all the subscribers to the
memorandum in the prescribed manner.
Section 5(2) provides that the articles shall also contain such matters, as may be prescribed.
However, nothing prescribed in this sub-section shall be deemed to prevent a company from
including such additional matters in its articles as may be considered necessary for its
management.
STATUTORY REQUIREMENTS
The articles must be printed, divided into paragraphs, numbered consecutively, stamped
adequately, signed by each subscriber to the memorandum and duly witnessed and filed along
with the memorandum.
The articles must not contain anything illegal or ultra vires the memorandum, nor should it be
contrary to the provisions of the Companies Act, 2013.
PROVISION IN ARTICLES AS REGARDS EXPULSION OF A MEMBER
Section 5(2) provides that the articles shall also contain such matters, as may be prescribed. But if
a company intend to introduce some more internal rules, then it can do so.
Section 6 of the Companies Act, 2013 provides that: -

(a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained
in the memorandum or articles of a company, or in any agreement executed by it, or in any
resolution passed by the company in general meeting or by its Board of Directors;
and
72
(b) any provision contained in the memorandum, articles, agreement or resolution shall, to the
extent to which it is repugnant to the provisions of this Act, become or be void, as the case may
be.
In the light of above provisions, if there is a provision in the Articles empowering the Directors
of the company to expel any member of the company under any of the given conditions, then
such a provision shall be totally inconsistent with the provisions of Section 6 of the Act.
It is opposed to the fundamental principles of the company’s jurisprudence and is ultra vires of
the company. [(Circular No. 32 of 1975)]
But the Stock exchanges, registered under the provisions of the Companies Act, can carry such a
provision in its Articles.
The regulation of stock exchanges is mainly governed by Securities Contracts Regulation Act,
1956 (SCRA) and SEBI, Act, 1992 which are Special Acts.
Alteration of A.A.
Companies have been given wide powers to alter their A.A.

Procedure
1. By passing a special resolution.
2. A copy of resolution altering A.A. shall be filed with the ROC within 15 days of its
passing. [section14(1)]
3. ROC shall register the same. [Section 14 (2)]
4. Any alteration of the articles registered under section 14(2) shall be valid as if it were
originally in the articles. [Section 14(3)]
Section 14(1) provides that subject to the provisions of this Act and the conditions contained in
its memorandum, if any, a company may, by a special resolution, alter its articles including
alterations having the effect of conversion of a private company into a public company; or a
public company into a private company.
First proviso to section 14(1) lays down that where a company being a private company alters its
articles in such a manner that they no longer include the restrictions and limitations which are
required to be included in the articles of a private company under this Act, the company shall, as
from the date of such alteration, cease to be a private company.
Second proviso to section 14(1) stipulates that any alteration having the effect of conversion of a
public company into a private company shall not take effect except with the approval of the
Tribunal which shall make such order as it may deem fit. (yet to be notified)
The right to alter the articles is so important that a company cannot in any manner, either by
express provisions in the articles or by independent contract, deprive itself of the powers to alter
its articles. [Walker vs. London Tramway Co]
However, in spite of the power to alter its articles, a company can exercise this power subject
only to certain limitations.
Limitations to Alteration
1. Must not be inconsistent with the Act.
2. Must not conflict with the M.A.
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3. Must not sanction anything illegal.
4. Must be for the benefit of the co.
5. Must not increase the liability of members.
6. Alteration by special resolution only.
7. Must not result in expulsion of a member.
8. Alteration must not be with retrospective effect. The Articles of Association cannot be altered
so as to have retrospective effects. The articles only operate from the date of the amendment
[Pyare Lal Sharma vs. Managing Director, J.K. Industries Ltd.]
9. The alteration must not constitute a fraud on the minority by a majority. If the alteration is
not for the benefit of the company as a whole, but for majority of shareholders, then the
alteration would be bad. In other words, the alteration should not discriminate between the
majority shareholders and the minority shareholders so as to give the former an advantage
over the latter.
Case: Brown vs. British Abrasive Wheel Co.

The majority which held 98% of the shares passed a special resolution that upon the request of
holders of 9/10th of the issued shares, a shareholder shall be bound to sell and transfer his share
to the nominee of such holder at a fair value. The alteration was held to be invalid since it
amounted to oppression of minority.
The minority shareholders not being less than the number specified in Section 397 and 398 could
move the Court for redressing their grievances. The Courts have entertained such applications
from shareholders even where they are smaller in number [ Re. Menier N. Hooper Telegraph
Works].
10. Amendment of Articles relating to Managing, Whole-time director and non-rotational

directors requires Central Government’s approval. (Section 268 –This section is of the
Companies Act, 1956)
By effecting alteration in its articles, a company cannot defeat/ escape from its contractual
obligation with any person. The company will always be liable in such a case. Therefore, a
company is not prevented from altering its Articles on the ground that such an alteration would
be breach of a contract but an action for damages may lie against the company. [Southern
Foundries vs. Shirlaw,]
Section 8 Company cannot alter Article except with the approval of Central Government
Section 8(4)(i) provides that a company registered under section 8 i.e. companies with charitable
objects shall not alter the provisions of its memorandum or articles except with the previous
approval of the Central Government.
LEGAL EFFECT OF THE MEMORANDUM AND ARTICLES or

BINDING EFFECT OF AOA & MOA
The memorandum and articles, when registered, bind the company and its members to the same
extent as if they have been signed by the company and by each member to observe and be bound
by all the provisions of the memorandum and of the articles.
The memorandum and articles bind:
(a) the members to the company;
74
(b) the company to the members;
(c) the members inter se; and
(d) the company to outsiders.
1. (a) Every member of the company is given some individual rights under the Act and
Company the articles. If a company deprives any of its members of such rights, such a
is bound member can sue the company for enforcement of his rights.
to (b) The company is bound to comply with all the terms and conditions contained in
members the MOA and AOA.
Therefore, the following conclusions may be drawn:

If a company is about to commit a breach of any terms and conditions of
memorandum and articles, any member can obtain an injunction from the Court,
thereby restraining the company from committing such breach.
If a company has already committed a breach of any terms and conditions of

memorandum or articles, any member can sue the company, directors and the other
officers who are responsible for the breach.
Wood vs. Odessa Waterworks

The directors proposed to pay dividend in kind, by issuing debentures. The articles
provided for payment of dividends. The court held that payment means payment in
cash and, therefore, the company could be compelled to pay dividend in terms of
the articles.
2. When memorandum and articles are registered, it shall be deemed that these
Members documents were signed by every member of the company individually.
are bound Every member shall be bound to comply with the provisions contained in the
to the memorandum and articles.
company
Borland’s Trustee vs. Steel Bros. Co. Ltd.
The articles of a company contained a clause that on the bankruptcy of a member,

his shares should be sold to other person and at a price fixed by the directors. 'B', a
shareholder was adjudicated bankrupt. His trustee in bankruptcy claimed that he
was not bound by these provisions and should be at liberty to sell the shares at the
true value.
Held, that the trustee was bound by the articles, as a share was purchased by 'B' in
terms of the articles.
3. Every member is bound to all the other members.

Members However, there is no privity of contract between the members.
are bound But a member may enforce his rights against another member only through the
Inter se company and not directly.
(with each
other) Rayfield vs. Hands
The articles of a company provided that whenever any member wished to transfer
his shares, he was under an obligation to inform the directors of his intention and
the directors were under an obligation to take the said shares equally between them
at a fair value. The directors refused to take shares of a particular member on the
ground that the articles did not impose an enforceable liability upon them.
75
Held that the directors were under an obligation to purchase the shares, as members
of the company, in terms of the provisions of the articles. There was a personal
liability of members inter se.
4. The articles do not bind a company to the outsiders. This is based on the general
Company rule of law that a stranger to a contract does not acquire any rights under the
not bound contract. Therefore, an outsider cannot take the help of the articles to establish a
to contract with company.
outsiders
Eley vs. Positive Life Insurance Co.
In this case, the articles provided that the solicitor to the company would not be
removed from office except for misconduct. Eley acted as solicitor to the company
and also became a member of the company. The company discontinued his services
and then he sued the company for damages for breach of contract. It was held that
he had no cause of action because the articles did not constitute any contract
between the company and himself. His action was dismissed.
Doctrine of Constructive Notice
Meaning Every person dealing with the company is presumed to have read these
documents and understood them in their true perspective. This is known as
"doctrine of constructive notice".
Even if the party dealing with the company does not have actual notice of the
contents of these documents it is presumed that he has an implied (constructive)
notice of them.
Applicability This doctrine operates in favor of the company, i.e., it creates a presumption in
favor of company. It operates against the persons dealing with the company.
Effect Once registered with ROC, the MOA and AOA become public documents
Therefore, every person dealing with the company is presumed to have read
these documents and have understood the provisions correctly, i.e., in the right
sense.
Thus, it is required of every person to apprise himself with the requirements of

these documents before entering into any contract with a company.
The doctrine prevents any person dealing with the company from alleging that
he/ she did not know the provisions contained in the articles or memorandum.
If a person enters into a contract with the company in contravention of the
provisions of MOA and AOA, he cannot enforce such a contract.
Koda Venakataswamy vs. C Rammurthi

The articles of a company required that the documents and deeds of the
company shall be signed by: -
(i) MD,
(ii) the secretary and
(iii) a working director of the company.
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A mortgage deed was signed by the secretary and a working director only. It was
held that the mortgage deed was invalid even though the plaintiff had acted in
good faith and money was utilized for the benefit of the company.
DOCTRINE OF INDOOR MANAGEMENT OR TURQUAND'S RULE
The limitation of the doctrine of constructive notice is known as DOCTRINE OF INDOOR

MANAGEMENT.
Meaning The outsiders dealing with the co. are entitled to assume that as far as the internal
proceedings of the co. are concerned, everything has been regularly done.
They are presumed to have read these documents and to see that the proposed
dealing is not inconsistent, but they need not inquire into the regularity of the
internal proceedings as required by the MOA. & AOA. This is termed as
Doctrine of Indoor Management.
Applicability The doctrine of indoor management operates in favor of the outsiders, i.e., this
doctrine creates a presumption in favor of outsiders.
Royal The directors of a company were authorized by the articles to borrow on bonds
British Bank such sums of money as should from time to time, by a resolution of the company
v. Turquand in general meeting, be authorized to be borrowed. The directors gave a bond to T
without the authority of any such resolution. The question arose whether the
company was liable on the bond.
Held, the company was liable on the bond, as T was entitled to assume that the
resolution of the company in general meeting had been passed.
Conclusion The benefit of doctrine of indoor management can be availed only if the person
dealing with the company has the knowledge of the memorandum and articles.
Exceptions to Doctrine of Indoor Management
1. Where the Where the persons dealing with the company have knowledge of an internal
outsider had irregularity, obviously the presumption is that every internal proceeding has been
knowledge conducted regularly i.e., they cannot assume that everything has been done
of regularly.
irregularity Therefore, the benefit of doctrine of indoor management shall not be available in
such a case.
Howard vs. Patent Ivory Manufacturing Company
The directors of a company could borrow money upto £1,000 without the
sanction of members in GM.
The consent of the shareholders was required to borrow in excess of £1,000.
The directors themselves lent £3,500 to the company.
It was held that the directors had the notice of the internal irregularity and
therefore the company was liable to repay them only for £1,000.
77
2. Where an officer of a company does something which shall not ordinarily be
Negligence within his powers, the person dealing with him must make proper enquiries and
satisfy himself as to the officer's authority. If he fails to make an enquiry, he
shall be estopped from relying on the Rule.
Anand Behari Lal vs. Dinshaw & Co. (Bankers) Ltd.
An accountant of a company transferred some property of a company in favour

of Anand Behari. On an action brought by him for breach of contract, the Court
held the transfer to be void. It was observed that the power of transferring
immovable property of the company could not be considered within the apparent
authority of an accountant.
3. No The rule of indoor management cannot be applied in favour of a person who did
knowledge not consult the memorandum and articles and thus did not rely on them.
of articles
Rama Corporation vs. Proved Tin & General Investment Co.
Mr. T was a director in the investment company. He purporting to act on behalf
of the company entered into a contract with the Rama Corporation and took a
cheque from the latter. The articles of the company did provide that the directors
could delegate their powers to one of them. But Rama Corporation people had
never read the articles.
Later, it was found that the directors of the company did not delegate their
powers to T. Plaintiff relied on the rule of indoor management. Held, they could
not, because they even did not know that power could be delegated.
4. Forgery The rule of indoor management does not extend to transactions involving forgery
or otherwise void or illegal ab initio.
Ruben vs. Great Fingal Consolidated
The secretary of a company forged signatures of two of the directors required

under the articles on a share certificate and issued certificate without authority,
the applicants were refused registration as members of the company. The
certificate was held to be a nullity and the holder of the certificate was not
allowed to take advantage of the doctrine of indoor management.
DOCTRINE OF ALTER EGO
It is used by the courts to ignore the status of shareholders, officers, and directors of a company
in reference to their liability in their respective capacity so that they may be held personally
liable for their actions when they have acted fraudulently or unjustly.
In Lennards Carying Co. Ltd. vs. Asiatic Petroleum Co. Ltd. it was held that the default of
the managing director who is the “directing mind and will” of the company, would be attributed
to him and he be held for the wrong doing of the company.
78
Ch. 5 (A) CONTRACT WITH COMPANIES
Earlier there were three situations in the case of every company having a share capital (whether
public or private) in which contracts are made:
1.Preliminary Contracts made on behalf of the company before its incorporation.

or pre-
incorporation
contracts
2. Provisional Contracts made after incorporation but before the company could commence
contracts business were termed as Provisional Contracts.
No declarations for commencement of business, etc.: Section 11 Companies

Act 2013 required all companies to file following additional declarations with
the Registrar of Companies prior to commencement of business or exercising
any borrowing power: (i) declaration by a director that minimum paid-up share
capital has been paid; and (ii) company has filed verification of registered
office.
The CA Amendment 2015 has removed the above requirements and deleted
Section 11 of CA 2013. This reduces the filings to be made by companies in
India.
3. Post- Contracts made after the incorporation of the company (earlier after getting the
Incorporation certificate of incorporation.
contracts
Now, we have Pre-incorporation and Post-Incorporation Contract.
PRE-INCORPORATION OR PRELIMINARY CONTRACTS
Those contracts which are entered into by the promoters before the formation of the company
are termed as preliminary or pre-incorporation contracts.
For example, the promoters of the company may enter into contracts to acquire some property
or right for the co. which is yet to be incorporated.
The promoters generally enter into such contracts as agents for the co. about to be formed.
But the legal position is that two consenting parties are necessary to a contract where as a co.
before incorporation is a non-entity.
The promoters, therefore, cannot act as agent for a co. which has not yet come into existence.
79
Therefore, the co. is not liable for the acts of the promoters done before its incorporation.
A Pre-incorporation contract purported to be made by a co. which does not exist is a nullity.
As such the co., when it comes into existence, can neither sue nor be sued on that contract.
Position of Promoters as to Preliminary Contracts
1. Co. is not [English & Colonial Produce Co. Ltd., Re]

bound by A solicitor had prepared necessary documents such as the MoA etc. for the
pre- incorporation of a company and made payment of the required registration fee
incorporati and other expenses. He claimed these expenses from the company after its
on incorporation.
contracts-
even where Decision of the Court
it takes the He was not allowed since the company was not in existence at the time when
benefit expenses were incurred, and ratification was impossible.
2.Co. cannot [Natal Land & Colonization Co. Ltd. Vs. Pauline Colliery & Development
enforce pre- Syndicate Ltd.]
incorporatio N Co. made an agreement with Mr. K, who acted on behalf of syndicate to give
n contracts lease of coal mining rights to syndicate, yet to formed. After this, the syndicate
was registered as a company. The syndicate (newly formed Company) claimed
the performance of the agreement which N Co. refused to perform.

It was held that the Syndicate could not enforce the contract because it was not
in existence when the contract was entered into.
3.Promoters Where a contract is made on behalf a co. known to both the parties to be non-
personally existent, the contract is deemed to have entered into personally by the
liable promoters.
[Kelner v. Baxter]
In this case three persons A, B and C purported to enter into a contract as agents
on behalf of a company before its incorporation for the purchase of certain
goods from Kelner and signed it: “A, B and C, Directors”. The company later
obtained the certificate of incorporation but collapsed before the money was
paid for the goods which were supplied to it by Kelner.

It was held that A, B and C were personally liable on the agreement and no
subsequent ratification by the company would relieve them from that liability.
Therefore, where promoters haves made a pre-incorporation contract presenting
themselves as the agent of the company, yet to be formed, they would be
personally liable under it to pay damages to the third party for any loss suffered.
4. No A co. cannot ratify a contract entered into by the promoters on its behalf before
Ratification its incorporation. The co. can neither ratify those contracts nor sue the vendors
of Pre-
80
incorporatio after its incorporation because ratification requires the existence of principal at
n contract the time when the contract was entered into.
[Howard v. Patent Ivory Co.]

A company cannot ratify a pre-incorporation contract, but it is open to it to
enter into a new contract after its incorporation to give effect to a contract made
before its formation.
5. No A co. cannot adopt contracts entered into before its incorporation even by
Adoption passing a special resolution or by making adoption of such contracts as one of
the objects of the co. in its M.A.
Thus, preliminary contracts will either have to be left as mere “gentlemen’s
agreements” or the promoters will have to undertake personal liability.
What to do?
The co. can, if it desires, enter into a new contract, after its incorporation, with the other
party. The contract may be on the same basis and terms as given in the pre-incorporation
contract made by the promoters.
• In such cases, it is safer for the promoters, acting on behalf of the co. about to be formed,
to provide in the contract that –
• If the co. makes a fresh contract in terms of the pre-incorporation, the liability of the
promotes shall come to an end; and
• If the co. does not make a fresh contract within a limited time, either of the parties may
rescind the contract.
• However, the principles enunciated above have no application in our country on account
of provisions of Sec. 15(h) and 19(e) Specific Relief Act, 1963
As regards ratification of promoters’ contracts, the view taken in Kelner v. Baxter was that the
company could not ratify contract made by a promoter before its incorporation. Specific
performance of a contract may be enforced against a company in respect of contracts entered
into by promoters on behalf of the company, if such a contract is warranted by the terms of
incorporation and the company has accepted the contract and communicated the acceptance to
the other party. (Section 15 of the Specific Relief Act, 1963). Section 19 of the same Act
provides that the other party can also enforce the contract if the company has adopted it after
incorporation and the contract is within the terms of incorporation.
Specific Performance of Pre-Incorporation Contract
These sections provide that a contract entered into by the promoters on behalf of the co. before
its incorporation can be enforced by or against the co. If two conditions are satisfied: -
1. If the contract is entered into for the working purpose of the co. and such contract is
warranted by the terms of incorporation.
2. The co. accepts the contract after its incorporation and communicates such acceptance to
the other party to the contract.
81
Ch. 5 (B) CONVERSION OF A PRIVATE COMPANY INTO A
PUBLIC COMPANY AND VICE VERSA
Section 14 (1) states a company may, by a special resolution and by altering its articles, may
convert from
(a) a private company into a public company; or
(b) a public company into a private company:
Conversion of Private Ltd. Co. into Public Ltd. Co.
According to Section 14, the following steps shall be necessary for conversion of a private
company into a public company.
Alteration When a private company alters its articles in such a manner that they no longer
of Articles include any of the restrictions and limitations which are required to be included
in the articles of a private company under section 2(68), the company shall, as
from the date of such alteration, cease to be a private company.
So, where AOA of a private company are amended to raise its membership
beyond 200, or permitting free transferability of shares, or to extend invitation to
public to subscribe to its shares or debentures, it becomes a public company,
with effect from the date of such alteration.
Special According to Section 14, a private company can amend its AOA for the purpose
Resolution by passing a Special Resolution.
Increase in If the number of members is less than seven, it must increase to not less than
Membership seven.
Increase in If the number of directors is less than three, it must increase to not less than
no. of three.
directors
Filing of Every alteration of the articles under this section shall be filed with the Registrar
Altered in Form No. INC 27, together with printed copy of altered articles within period
Articles of 15 days.
Privileges It also ceases to have the privileges and exemptions conferred on it by the Act as
cease a private company.
All It becomes a public company and all the provisions of the Act applicable to such
provisions companies become applicable to it.
of public co.
apply
Conversion of Public Ltd. Co. into Private Co.
For conversion of a public company into a private company, Section 14 provides that
Passing of A special resolution at a general meeting of shareholders should be passed
Special authoring the conversion of public company into a private company and altering
Resolution its AOA, so as to contain the matter specified in section 2(68) namely the three
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restrictions, i.e., limiting the total number of members to 200, restricting the
transferability of shares and prohibiting invitation to public for subscribing of its
shares debentures, etc.
Changing Company’s name ought to be changed by adding the word “private” before the
the name of word Limited. As per section 13, it does not require special resolution to be
the co. passed.
Approval of Any alteration having the effect of conversion of a public company into a private
Tribunal company shall not take effect except with the approval of the Tribunal which
shall make such order as it may deem fit.
A public company can be converted into a private company only after the
approval of the Central Government. It cannot be treated as a private company
till the Central Government accords its approval.
Filing of Every alteration of the articles under this section shall be filed with the Registrar
Altered in Form No. INC 27, together with printed copy of altered articles within period
Articles of 15 days.
(1) For effecting the conversion of a private company into a public company or vice versa,
the application shall be filed in Form No. INC-27 with fee.
(2) A copy of order of the competent authority approving the alteration shall be filed with
the Registrar in Form No. INC-27 with fee together with the printed copy of the altered
articles within fifteen days of the receipt of the order from the Central Government.
CONVERSION OF SEC. 8 COMPANY INTO A COMPANY OF ANY OTHER KIND
Section 8(4)(ii) provides that a company registered under section 8 i.e., companies with
charitable objects may convert itself into company of any other kind only after complying with
such conditions as may be prescribed.
Rule 21 and 22 of Companies (Incorporation) Rules 2014
Passing of A company registered under section 8 which intends to convert itself into a
Special company of any other kind shall pass a special resolution at a general meeting
Resolution for approving such conversion.
Explanatory The explanatory statement annexed to the notice convening the general
Statement to meeting shall set out in detail the reasons for opting for such conversion
be annexed to including the following, namely: -
the notice (a) the date of incorporation of the company;
(b) the principal objects of the company as set out in the memorandum of
association;
(c) the reasons as to why the activities for achieving the objects of the
company cannot be carried on in the current structure i.e. as a section 8
company;
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(d) if the principal or main objects of the company are proposed to be altered,
what would be the altered objects and the reasons for the alteration;
(e) what are the privileges or concessions currently enjoyed by the company,
such as tax exemptions;
(f) details of impact of the proposed conversion on the members of the
company including details of any benefits that may accrue to the members as a
result of the conversion.
Certified copy A certified true copy of the special resolution along with a copy of the Notice
of Special convening the meeting including the explanatory statement shall be filed with
Resolution the Registrar in Form No.MGT-14 along with the fee.
Application to The company shall file an application in Form No. INC-18 with the Regional
Regional Director with the fee along with a certified true copy of the special resolution
Director and a copy of the Notice convening the meeting including the explanatory
statement for approval for converting itself into a company of any other kind
and the company shall also attach the proof of the notice served to all the
authorities prescribed.
Copy to ROC A copy of the application with annexures as filed with the Regional Director
shall also be filed with the Registrar.
Publication of The company shall, within a week from the date of submitting the application
notice to the Regional Director, publish a notice at its own expense, and a copy of the
notice, as published, shall be sent forthwith to the Regional Director and the
said notice shall be in Form No. INC.19 and shall be published.
Declaration to The Board of directors shall give a declaration to the effect that no portion of
the effect that the income or property of the company has been or shall be paid or transferred
no dividend directly or indirectly by way of dividend or bonus to persons who are or have
/bonus shares been members of the company.
NOC from Where the company has obtained any special status, privilege, exemption,
relevant benefit or grant(s) from any authority such as Income Tax Department, Charity
authorities, in Commissioner or any organization or Department of
case of special Central Government, State Government, Municipal Body or any recognized
status authority, a “No Objection Certificate” must be obtained.
No failure in The company should have filed all its financial statements and Annual Returns
filing financial up to the financial year preceding the submission of the application to the
statements Regional Director.
/Annual
Return
Attach The company shall attach with the application a certificate from practicing
certificate of Chartered Accountant or Company Secretary in practice or Cost Accountant in
compliance practice certifying that the conditions laid down in the Act and these rules
for conversion relating to conversion of a company registered under section 8 into any other
kind of company, have been complied with.
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Company to On receipt of the application, for the conversion of the Sec. 8 company into a
give up company of any other kind, the Regional Director shall issue an order for
concessions approving the conversion on terms and conditions such as:
enjoyed or (i) The company shall give up and shall not claim any special status,
being enjoyed exemptions or privileges.
(ii) If the company had acquired any immovable property free of cost or at a
concessional cost from any government or authority, it may be required
to pay the difference between the cost at which it acquired such property
and the market price of such property.
(iii) Any accumulated profit or unutilized income of the company brought
forward from previous years shall be first utilized to settle all
outstanding statutory dues, amounts due to lenders claims of creditors,
suppliers, etc.
On receipt of On receipt of the approval of the Regional Director,
Approval of (i) the company shall convene a general meeting of its members to
Regional pass a special resolution for amending its memorandum of
Director association and articles of association.
(ii) the Company shall thereafter file with the Registrar-
(a) a certified copy of the approval of the Regional Director within thirty days
from the date of receipt of the order in Form No. INC-20 along with the fee;
(b) amended memorandum of association and articles of association of the
company.
(c) a declaration by the directors that the conditions, if any imposed by the
Regional Director have been fully complied with.
Issue of Fresh On receipt of the documents referred above, the Registrar shall register the
Certificate documents and issue the fresh Certificate of Incorporation.
CONVERSION OF OPC INTO A PUBLIC CO. OR PRIVATE CO.

Paid up When the paid up share capital of a One Person Company exceeds fifty lakh
capital/ rupees or its average annual turnover during the relevant period exceeds two
turnover of crore rupees, it shall cease to be entitled to continue as a One Person
OPC exceed Company.
prescribed
limits One Person Company where the paid up capital/turnover as the case may be
exceeds the prescribed limits, shall be required to convert itself, within six
months of the date on which its paid up share capital is increased beyond fifty
lakh rupees or the last day of the relevant period during which its average
annual turnover exceeds two crore rupees as the case may be, into either a
private company with minimum of two members and two directors or a public
company with at least of seven members and three directors in accordance
with the provisions of section 18 of the Act.
Alteration of The One Person Company shall alter its memorandum and articles by passing
Memorandum a resolution to give effect to the conversion and to make necessary changes
and Articles incidental thereto.
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Notice to The One Person Company shall within period of sixty days from the date of
Registrar applicability, give a notice to the Registrar in Form No. INC -5 informing that
it has ceased to be a One Person Company and that it is now required to
convert itself into a private company or a public company.
Penalty for If OPC or any officer of the OPC contravenes any of these rules, OPC or any
default officer of the OPC shall be punishable with fine which may extend to ten
thousand rupees and with a further fine which may extend to one thousand
rupees for every day after the first during which such contravention continues.
Minimum no. A One Person company can get itself converted into a Private or Public
of members/ company after increasing the minimum number of members and directors to
directors to be two or minimum of seven members and two or three directors as the case may
complied on be.
conversion
Rule 7- CONVERSION OF PRIVATE COMPANY INTO ONE PERSON COMPANY
Passing of A private company (other than a company registered under section 8 of the
Special Act) having paid up share capital of fifty lakhs rupees or less or average annual
Resolution turnover during the relevant period is two crore rupees or less may convert
itself into one-person company by passing a special resolution in the general
meeting.
No Objection Before passing such resolution, the company shall obtain No objection in
writing from members and creditors.
File Special The one-person company shall file copy of the special resolution with the
Resolution Registrar of Companies within thirty days from the date of passing such
with ROC resolution in Form No. MGT-14.
File an The company shall file an application in Form No. INC-6 for its conversion
application into One Person Company along with prescribed fees as provided in in the
for conversion Companies (Registration offices and fees) Rules, 2014, by attaching the
following documents, namely: -
(i) The directors of the company shall give a declaration by way of affidavit
duly sworn in confirming that all members and creditors of the company have
given their consent for conversion, the paid up share capital company is fifty
lakhs rupees or less or average annual turnover is less than two crores rupees,
as the case may be;
(ii) the list of members and list of creditors;
(iii) the latest Audited Balance Sheet and the Profit and Loss Account; and
(iv) the copy of No Objection letter of secured creditors.
Issue of On being satisfied and complied with requirements stated herein the Registrar
Certificate shall issue the Certificate.
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Ch. 6 CONCEPT OF CAPITAL AND FINANCING OF COMPANIES
Capital In relation to a company limited by shares, the word “capital” means the share
capital i.e., the capital in terms of rupees divided into specified number of shares
of a fixed amount each.
For example, share capital of a company is Rs.1,00,000 which can be divided into
10,000 shares of Rs. 10 each.
THE WORD “CAPITAL” IN DIFFERENT FORMS
Nominal, According to section 2(8), “authorized capital” or “nominal capital” means such
Authorized capital as is authorized by the memorandum of a company to be the maximum
or amount of share capital of the company.
Registered A company pays the prescribed fees for Authorized Capital at the time of
Capital registration.
Issued According to section 2(50), “issued capital” means such capital as the company
Capital issues from time to time for subscription.
It is that part of the authorized or nominal capital which the company issues for
the time being for public subscription and allotment. This is computed at the face
or nominal value.
Subscribed According to Section 2(86), “subscribed capital” means such part of the capital
Capital which is for the time being subscribed by the members of a company.
It is that portion of the issued capital at face value which has been subscribed for
or taken up by the subscribers of shares in the company.
It is clear that the entire issued capital may or may not be subscribed.
Called up According to section 2(15), “called-up capital” means such part of the subscribed
Capital capital, which has been called for payment or demanded on the shares by the
company.
Paid-up According to section 2(64), “paid-up share capital” or “share capital paid-up”
Share means the amount received as paid-up in respect of shares issued.
Capital
Preference and Equity Share Capital (Section 43)
Equity Equity share capital with reference to any company limited by shares, means all
share share capital which is not preference share capital.
capital
Equity share capital may be issued —
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with
such rules as may be prescribed.
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Equity share capital may be issued with similar rights or equity shares with
different voting rights as described in Rule 4 of Companies (Share Capital and
Debentures) Rules, 2014.
Preference Preference share capital with reference to any company limited by shares, means
share that part of the issued share capital of the company which carries or would carry a
capital preferential right with respect to—
(a) payment of dividend, either as a fixed amount or an amount calculated at a
fixed rate, and
(b) repayment of the amount of the share capital paid-up in the case of a winding
up.
Section 47(2) states that every member of a company limited by shares and holding any
preference share capital therein shall have a right to vote
(i) only on resolutions placed before the company which directly affect the rights
attached to his preference shares and,
(ii) on any resolution for the winding up of the company or for the repayment or
reduction of its equity or preference share capital, and
(iii) his voting right on a poll shall be in proportion to his share in the paid-up preference
share capital of the company:
However, where the dividend in respect of preference shares has not been paid for a period of
two years or more, such preference shareholders shall have a right to vote on all the resolutions
placed before the company.
MEANING OF A SHARE
Section 2(84) of the Act defines a share as “a share in the share capital of a company, and
includes stock except where a distinction between stock and shares is expressed or implied.
Nature of a Share
1. A share is a right to a specified amount of the share capital of a company, carrying with
it certain rights and liabilities while the company is a going concern and in its winding
up. (Halsbury's Laws of England)
Halsbury's Laws of England is a unique, comprehensive and authoritative encyclopedia of law,
and provides the only complete narrative statement of law in England.
2. A share is the interest of a shareholder in the company measured by a sum of money.
3. A share is a right to participate in the profits made by a company, while it is a going

concern and declares a dividend and in the assets of company when it is wound up
[Bacha Guzdar vs. CIT].
4. A share is not a sum of money but a bundle of rights and liabilities; it is an interest
measured by a sum of money. These rights and liabilities are regulated by the articles of
a company.
5. Section 44 of the Companies Act provides that a share of any member in a company is a
movable property transferable in the manner provided by the articles of the company.
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6. According to Section 45 of the Companies Act, 2013 every share in a company having a
share capital shall be distinguished by its distinctive number.
Distinction between Equity Share and Preference Share

Basis Equity Share Preference Share
Rate of The rate of dividend on equity shares Preference shares are entitled to a
Dividend depends upon the amount of profit fixed rate of dividend.
available.
Dividend The dividend on equity shares is paid Dividend on the preference shares is
when paid only after the dividend on preference paid in preference to the equity
shares has been paid. shares.
Cumulative Dividend is not cumulative. Dividend on preference share may be
cumulative.
Voting An equity shareholder can vote on all The voting rights of preference
Rights matters affecting the company. shareholders are restricted.
Bonus Shares A company may issue rights shares or No bonus shares/right shares are
/ Right bonus shares to the company’s existing issued to
Shares equity shareholders. preference shareholders.
Redemption Equity shares cannot be redeemed Redeemable preference shares may
except under a scheme involving be
reduction of capital or buy back of its redeemed by the company.
own shares.
ISSUE OF SECURITIES AT A PREMIUM
A company may issue securities at a premium when it is able to sell them at a price above par or
above nominal value.
The Companies Act, 2013, does not stipulate any conditions or restrictions regulating the issue
of securities by a company at a premium.
However, the Companies Act does impose conditions regulating the utilization of the amount of
premium collected on securities. The Share Premium is to be transferred to ‘securities premium
account’.
Utilization of According to Section 52(2) of the Act, the securities premium can be utilized
Securities only for:
premium (a) issuing fully paid bonus shares to members;
(b) writing off the balance of the preliminary expenses of the company;
(c) writing off commission paid or discount allowed, or the expenses incurred
on issue of shares or debentures of the company;
(d) for providing for the premium payable on redemption of any redeemable
preference shares or debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.
NOTE:
1. The premium cannot be treated as profit and as such the amount of premium is not
available for distribution as dividend.
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2. The amount of premium whether received in cash or in kind must be kept in a separate
account, known as the “Securities Premium Account”.
3. The amount of premium is to be maintained with the same sanctity as the share capital.
4. Any premium paid does not give the shareholder any preferential rights in case of a
winding up.
5. Monies in the securities premium account cannot be treated as free reserves, as they are
in the nature of capital reserve.
Where a company issues shares at a premium, even though the consideration may be other than
cash, a sum equal to the amount or value of the premium must be transferred to the securities
premium account. [Head (Henry) & Co. Ltd. vs. Ropner Holding Ltd.]
PROHIBITION TO ISSUE THE SHARES AT DISCOUNT
Section 53 states that except as provided in section 54 (i.e., issue of sweat equity shares), a
company shall not issue shares at a discount.
Any share issued by a company at a discounted price shall be void.
When a company contravenes the provisions of this section, the company shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees
and
every officer who is in default shall be punishable with imprisonment for a term which may
extend to six months or with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees, or with both.
ISSUE OF SWEAT EQUITY SHARES
Meaning According to section 2(88), sweat equity shares mean equity shares issued by a
company to its directors or employees at a discount or for consideration, other
than cash for providing know-how or making available rights in the nature of
intellectual property rights or value additions, by whatever name called.
Rule 8(1) of (i) the expressions ‘‘Employee’’ means-

Companies (a) a permanent employee of the company who has been working in India or
(Share outside India, for at least last one year; or
Capital and (b) a director of the company, whether a whole time director or not; or
Debentures) (c) an employee or a director as defined in sub-clauses (a) or (b) above of a
Rules, 2014. subsidiary, in India or outside India, or of a holding company of the company.
(ii) the expression ‘Value additions’ means

actual or anticipated economic benefits derived or to be derived by the company
from an expert or a professional for providing know-how or making available
rights in the nature of intellectual property rights, by such person to whom sweat
equity is being issued for which the consideration is not paid or included in the
normal remuneration payable under the contract of employment, in the case of an
employee.
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Rationale Section 54 permits issue of such equity shares to employees or directors in
recognition of their contribution for providing know-how etc. as aforesaid.
As the contribution made by employees /directors results in increased profits to
the company for a number of years, sweat equity shares, provide a new form of
adequate return.
Conditions Section 54(1) provides that a company can issue sweat equity shares, of a class of
for Issue of shares already issued, if the following conditions are satisfied:
Sweat (i) the issue has been authorized by a special resolution passed by the company in
Equity the general meeting.
Shares (ii) the following are clearly specified in the resolution:
(a) number of shares;
(b) current market price;
(c) consideration, if any; and
(d) class or classes of directors or employees to whom such equity
shares are to be issued.
(iii) as on the date of issue, at least one year should have elapsed from the date on
which the company had commenced business.
(iv) a company whose shares are listed on a recognized stock exchange issuing
sweat equity shares should comply with the regulations made in this behalf by
SEBI.
(v) a company whose shares are not so listed should issue sweat equity shares in
compliance with the rules made in this behalf by the Central Government (i.e.,
Companies (Share Capital and Debentures) Rules, 2014)
Section 54(2) provides that holders of Sweat Equity Shares to be ranked pari-passu with other
Equity shareholders.
COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014-

ASPECTS RELATING TO SWEAT EQUITY SHARES
Explanatory statement to Special Resolution to contain certain particulars
Rule 8(2) states that the explanatory statement to be annexed to the notice of the general
meeting shall contain the following particulars, namely: -
(a) the date of the Board meeting at which the proposal for issue of sweat equity shares was
approved;
(b) the reasons or justification for the issue;
(c) the class of shares under which sweat equity shares are intended to be issued;
(d) the total number of shares to be issued as sweat equity;
(e) the class or classes of directors or employees to whom such equity shares are to be issued;
(f) the principal terms and conditions on which sweat equity shares are to be issued, including
basis of valuation;
(g) the time period of association of such person with the company;
(h) the names of the directors or employees to whom the sweat equity shares will be issued and
their relationship with the promoter or/and Key Managerial Personnel;
(i) the price at which the sweat equity shares are proposed to be issued;
(j) the consideration including consideration other than cash, if any to be received for the sweat
equity;
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(k) the ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity
and how it is proposed to be dealt with;
(l) a statement to the effect that the company shall conform to the applicable accounting
standards; and
(m) diluted Earning Per Share pursuant to the issue of sweat equity shares.
Validity of Rule 8(3) the special resolution authorizing the issue of sweat equity shares shall
Special be valid for making the allotment within a period of not more than twelve
Resolution months from the date of passing of the special resolution.
authorizing
sweat equity
shares
Limits on Rule 8(4) states that the company shall not issue sweat equity shares for more
issue of than fifteen percent of the existing paid up equity share capital in a year or
sweat equity shares of the issue value of rupees five crores, whichever is higher.
shares
The issuance of sweat equity shares in the Company shall not exceed twenty-
five percent, of the paid up equity capital of the Company at any time.
Locked for The sweat equity shares issued to directors or employees shall be locked in/non-
three years transferable for a period of three years from the date of allotment.
Valuation Rule 8(6) states that the sweat equity shares to be issued shall be valued at a
aspects price determined by a registered valuer as the fair price giving justification for
such valuation.
Rule 8(7) states that the valuation of intellectual property rights or of know how
or value additions for which sweat equity shares are to be issued, shall be carried
out by a registered valuer, who shall provide a proper report addressed to the
Board of directors with justification for such valuation.
Rule 8(8) states that a copy of gist along with critical elements of the valuation
report obtained under Rule 8 (6) and Rule 8 (7) shall be sent to the shareholders
with the notice of the general meeting.
Board’s Report to disclose the details of sweat equity shares
Rule 8(13) states that the Board of Directors shall, inter alia, disclose in the Directors’ Report for
the year in which such shares are issued, the following details of issue of sweat equity shares
namely: -
(a) the class of director or employee to whom sweat equity shares were issued;
(b) the class of shares issued as Sweat Equity Shares;
(c) the number of sweat equity shares issued to the directors, key managerial personnel or other
employees showing separately the number of such shares issued to them, if any, for
consideration other than cash and the individual names of allottees holding one percent or more
of the issued share capital;
(d) the reasons or justification for the issue;
(e) the principal terms and conditions for issue of sweat equity shares, including pricing formula;
(f) the total number of shares arising as a result of issue of sweat equity shares;
(g) the percentage of the sweat equity shares of the total post issued and paid up share capital;
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(h) the consideration (including consideration other than cash) received or benefit accrued to the
company from the issue of sweat equity shares;
(i) the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.
Maintenance of Register [Rule 8 (14) (a)]
The company shall maintain a Register of Sweat Equity Shares in Form No. SH.3 and shall
forthwith enter therein the particulars of Sweat Equity Shares issued under section 54.
The Register of Sweat Equity Shares shall be maintained at the registered office of the company
or such other place as the Board may decide.
The entries in the register shall be authenticated by the Company Secretary of the company or by
any other person authorized by the Board for the purpose.
SHARES WITH DIFFERENTIAL VOTING RIGHTS
Section 43 enables companies to issue a variety of equity shares with differential rights etc.
Rule 4 of Companies (Share Capital and Debentures) Rules, 2014 states the following
conditions regarding shares with differential voting rights.
Conditions
No company limited by shares shall issue equity shares with differential rights as to dividend,
voting or otherwise, unless it complies with the following conditions, namely:
(a)the AOA of the co. authorizes the issue of shares with differential rights;
(b) the issue of shares is authorized by an ordinary resolution passed at a general meeting of the
shareholders:
When the equity shares of a company are listed on a recognized stock exchange, the issue of
such shares shall be approved by the shareholders through postal ballot;
(c) the shares with differential rights shall not exceed twenty-six percent of the total post-issue
paid up equity share capital including equity shares with differential rights issued at any point of
time;
(d) the company having consistent track record of distributable profits for the last three years;
(e) the company has not defaulted in filing financial statements and annual returns for three
financial years immediately preceding the financial year in which it is decided to issue such
shares;
(f) the company has no subsisting default in the payment of a declared dividend to its
shareholders or repayment of its matured deposits or redemption of its preference shares or
debentures that have become due for redemption or payment of interest on such deposits or
debentures or payment of dividend;
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(g) the company has not defaulted in payment of the dividend on preference shares or repayment
of any term loan from a public financial institution or Bank that has become repayable or dues
with respect to statutory payments relating to its employees to any authority or default in
crediting the amount in Investor Education and Protection Fund to the Central Government;
(h) the company has not been penalized by Court or Tribunal during the last three years of any
offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India
Act, 1992 the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management
Act, 1999 or any other special Act, the Securities Contracts Regulation Act, 1956, the Foreign
Exchange Management Act, 1999 or any other special Act, under which such companies being
regulated by sectoral regulators.
Disclosures in the explanatory statement to the notice of the meeting
Rule 4(2) of Companies (Share Capital and Debentures) Rules, 2014 states that the
explanatory statement to be annexed to the notice of the general meeting in pursuance of section
102 or of a postal ballot in pursuance of section 110 shall contain the following particulars,
namely: -
(a) the total number of shares to be issued with differential rights;
(b) the details of the differential rights;
(c) the percentage of the shares with differential rights to the total post issue paid up equity share
capital including equity shares with differential rights issued at any point of time;
(d) the reasons or justification for the issue;
(e) the price at which such shares are proposed to be issued either at par or at premium;
(f) the basis on which the price has been arrived at;
(g) (i) in case of private placement or preferential issue-

(a) details of total number of shares proposed to be allotted to promoters, directors and
KMP;
(b) details of total number of shares proposed to be allotted to persons other than
promoters,
directors and KMP and their relationship if any with any promoter, director or KMP;
(ii) in case of public issue - reservation, if any, for different classes of applicants including
promoters, directors or KMP;
(h) the change in control, if any, in the company that may occur consequent to the issue of
equity shares with differential voting rights;
(i) the diluted Earnings Per Share pursuant to the issue of such shares, calculated in accordance
with the applicable accounting standards;
(j) the pre and post issue shareholding pattern along with voting rights.
.
Rule 4(3) states that he company shall not convert its existing equity share capital with voting
rights into equity share capital carrying differential voting rights and vice–versa.
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Disclosures in the Boards’ Report
Rule 4(4) states that the Board of Directors shall, inter alia, disclose in the Board’s Report for
the financial year in which the issue of equity shares with differential rights was completed, the
following details, namely: -
(a) the total number of shares allotted with differential rights;
(b) the details of the differential rights relating to voting rights and dividends;
(c) the percentage of the shares with differential rights to the total post issue equity share capital
with differential rights issued at any point of time and percentage of voting rights which the
equity share capital with differential voting right shall carry to the total voting right of the
aggregate equity share capital;
(d) the price at which such shares have been issued;
(e) the particulars of promoters, directors or key managerial personnel to whom such shares are
issued;
(f) the change in control, if any, in the company consequent to the issue of equity shares with
differential voting rights;
(g) the diluted Earnings Per Share pursuant to the issue of each class of shares, calculated in
accordance with the applicable accounting standards;
Rule 4(5) states that the holders of the equity shares with differential rights shall enjoy all other
rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to,
subject to the differential rights with which such shares have been issued.
Rule (6) states that when a company issues equity shares with differential rights, the Register of
Members maintained under section 88 shall contain all the relevant particulars of the shares so
issued along with details of the shareholders.
ISSUE AND REDEMPTION OF PREFERENCE SHARES
Section 55. (1) states that no company limited by shares shall issue any preference shares which
are irredeemable.
Section 55(2) further states that a company limited by shares may, if so authorized by its articles,
issue preference shares which are liable to be redeemed within a period not exceeding twenty
years from the date of their issue.
Exceptions
Issue and redemption of preference shares by company in infrastructure projects
Condition:
Rule 10 states that a company engaged in the setting up and dealing with of infrastructural
projects may issue preference shares for a period exceeding twenty years but not exceeding
thirty years, subject to the redemption of a minimum ten percent of such preference shares per
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year from the twenty first year onwards or earlier, on proportionate basis, at the option of the
preference shareholders.
Other conditions:
Proviso to Section 55(2) states that
(a) no such shares shall be redeemed except out of the profits of the company which would
otherwise be available for dividend or out of the proceeds of a fresh issue of shares made
for the purposes of such redemption;
(b) no such shares shall be redeemed unless they are fully paid;
(c) where such shares are proposed to be redeemed out of the profits of the company, there
shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares
to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account; and
(d) the premium, if any, payable on redemption shall be provided for out of the profits of the
company, before the shares are redeemed.
Prescriptions under Companies (Share Capital and Debentures) Rules, 2014 with regard
to issue and redemption of Preference shares
Conditions
Rule 9(1) states that a company having a share capital may, if so authorized by its articles, issue
preference shares subject to the following conditions, namely: -
(a) the issue of such shares has been authorized by passing a special resolution in the general
meeting of the company
(b) the company, at the time of such issue of preference shares, has no subsisting default in the
redemption of preference shares issued either before or after the commencement of this Act or in
payment of dividend due on any preference shares.
Resolution authorizing preference shares to set out certain particulars
Rule 9(2) states that a company issuing preference shares shall set out in the resolution,
particulars in respect of the following matters relating to such shares, namely: -
(a) the priority with respect to payment of dividend or repayment of capital vis-a-vis equity
shares;
(b) the participation in surplus fund;
(c) the participation in surplus assets and profits, on winding-up which may remain after the
entire capital has been repaid;
(d) the payment of dividend on cumulative or non-cumulative basis.
(e) the conversion of preference shares into equity shares.
(f) the voting rights;
(g) the redemption of preference shares
Explanatory Statement
Rule 9(3) states that the explanatory statement to be annexed to the notice of the general
meeting shall, inter-alia, provide the complete material facts concerned with and relevant to the
issue of such shares including-
(a) the size of the issue and number of preference shares to be issued and nominal value of each
share;
(b) the nature of such shares i.e. cumulative or non - cumulative, convertible or non - convertible
(c) the objectives of the issue;
(d) the manner of issue of shares;
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(e) the price at which such shares are proposed to be issued;
(f) the basis on which the price has been arrived at;
(g) the terms of issue, including terms and rate of dividend on each share, etc.;
(h) the terms of redemption, including the tenure of redemption, redemption of shares at
premium and if the preference shares are convertible, the terms of conversion;
(i) the manner and modes of redemption;
(j) the current shareholding pattern of the company;
(k) the expected dilution in equity share capital upon conversion of preference shares.
Register of Members
Rule 9(4) states that when a company issues preference shares, the Register of Members
maintained under section 88 shall contain the particulars in respect of such preference share
holder(s).
Redemption of preference shares
Rule 9(6) states that a company may redeem its preference shares only on the terms on which
they were issued or as varied after due approval of preference shareholders under section 48 of
the Act and the preference shares may be redeemed: -
(a) at a fixed time or on the happening of a particular event;
(b) any time at the company’s option; or
(c) any time at the shareholder’s option
PUBLICATION OF AUTHORISED, SUBSCRIBED AND PAID-UP CAPITAL
Section 60 (1) states that when any notice, advertisement or other official publication, or
document of a company contains a statement of the amount of the authorized capital of the
company, such notice, advertisement or other official publication or document shall also contain
a statement, in an equally prominence of the amount of the capital which has been subscribed
and the amount paid-up.
Section 60 (2) states that any default is made in complying with the requirements of sub-section
(1), the company shall be liable to pay a penalty of ten thousand rupees and every officer of the
company who is in default shall be liable to pay a penalty of five thousand rupees, for each
default.
FURTHER ISSUE OF SHARES OR RIGHT SHARES
Right Section 62 of the Companies Act provides for the issue of “Rights Shares” and
Shares states that whenever at any time, a company having a share capital proposes to
increase its subscribed capital by the issue of further shares, such shares shall be
offered to the existing holders of equity shares in proportion to the paid-up
share capital on their shares at the time of further issue by sending a letter of
offer.
Listed For listed companies, the information as regards the quantum of such issue and
companies the proportion in which rights shall be offered shall be supplied to the concerned
Stock Exchanges in advance.
Time The company must give notice to each of the equity shareholders, giving him
prescribed option to take the shares offered to him by the company. The shareholder must
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be informed of the number of shares he may opt to buy giving him at least 15
days but not more than 30 days to decide.
The said notice shall be dispatched through registered post or through electronic
mode to all the existing shareholders at least 3 days before the opening of the
issue.
No Reply The directors must state in the notice of offer of rights shares the fact that the
shareholder has also the right to renounce the offer in whole or in part, in favor
of some other persons.
If the shareholder does not convey to the company his acceptance of the
company’s offer of further shares he shall be deemed to have declined the offer.
If a shareholder has neither renounced in favor of another person nor accepted
the shares, the Board of directors may dispose of the shares so declined in such
manner which is not dis-advantageous to the shareholders and the company.
Shares to its Section 62(1)(b) provides that a company may issue further shares to its
employees employees under a scheme of employees’ stock option, subject to special
resolution passed by company and subject to such conditions as may be
prescribed.
Shares to Section 62(1)(c) deals with issue of shares to persons other than existing
persons shareholders and provides that a company can issue further shares to persons
other than other than existing shareholders either for cash or for a consideration other than
existing cash, if —
shareholders (1) the company in General Meeting passes a special resolution to this effect;
and
(2) the price of such shares is determined by the valuation report of a registered
valuer subject to such conditions as may be prescribed.
The provisions of section 62 are applicable to all types of companies.
Nanalal Zaver v. Bombay Life Assurance Co. Ltd.,

Section 81 (Corresponding to section 62 of the Companies Act, 2013) is intended to cover cases
where the directors decide to increase the capital by issuing further shares within the authorized
limit, because it is within that limit that the directors can decide to issue further shares, unless, of
course, they are precluded from doing that by the Articles of Association of the company.
Accordingly, the section becomes applicable only when the directors decide to increase the
capital within the authorized limit, by issue of further shares.
The above judgement was followed by the Supreme Court in Needle Industries (India) Ltd. v.
Needle Industries Newey (India) Holding Ltd.
The Court pointed out that the directors of a company must exercise their powers for the benefit
of the company. The directors are in a fiduciary position and if they do not exercise powers for
the benefit of the company but simply and solely for personal gains and to the detriment of the
company, the court will interfere and prevent the directors from doing so,
The power to issue shares need not be used only when there is a need to raise additional capital.
The power can be used to create a sufficient number of shareholders to enable a company to
enable it to comply with statutory requirements.
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Worldwide Agencies (P) Ltd. v. Margaret T. Desor,
It was held that persons who have become entitled to the shares of a deceased member can
exercise all the membership rights of the deceased irrespective of the fact whether their name is
in the register of members or not.
BONUS SHARES
Meaning When a company earns a lot of money and accumulates large distributable profits,
it converts these accumulated profits into capital and divides the capital among
the existing members in proportion to their entitlements. Members do not have to
pay any amount for such shares. They are given free. Issue of bonus shares is a
bare machinery for capitalizing undistributed profits.
Advantages 1. Fund flow is not affected adversely.

of Issuing 2. Market value of the members’ shareholdings increases with the increase in
Bonus number of shares in the company.
Shares 3. Bonus shares is not an income. Hence it is not a taxable income.
4. Paid-up share capital increases with the issue of bonus shares.
Sources for According to section 63(1), a company may issue fully paid-up bonus shares to its
issue of members, in any manner whatsoever, out of—
Bonus (i) its free reserves;
shares (ii) the securities premium account; or
(iii) the capital redemption reserve account.
NOTE: No issue of bonus shares shall be made by capitalizing reserves created by the
revaluation of assets.
Conditions According to section 63(2), no company shall capitalize its profits or reserves for
for issue of the purpose of issuing fully paid-up bonus shares, unless—
Bonus (a) it is authorized by its articles;
Shares (b) it has, on the recommendation of the Board, been authorized in the general
meeting of the company;
(c) it has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are
made fully paid-up.
No Bonus The bonus shares shall not be issued in lieu of dividend. [Section 63(3)].
shares in Under Companies (Share Capital and Debentures) Rules, 2014 with regard to
lieu of issue of Bonus Share, Rule 14 states that the company which has once announced
dividend the decision of its Board recommending a bonus issue, shall not subsequently
withdraw the same.
EMPLOYEE STOCK OPTION SCHEME
Meaning According to Section 2(37), the term ‘Employee Stock Option’ (ESOP) has
been means the option given to the directors, officers or employees of a
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company or of its holding company or subsidiary company or companies, if
any, which gives such directors, officers or employees, the benefit or right to
purchase, or to subscribe for, the shares of the company at a future date at a pre-
determined price.
Special A company may issue further shares to its employees under a scheme of
Resolution employees’ stock option, subject to special resolution passed by company and
subject to such conditions as may be prescribed. Rule 12 of Companies (Share
Capital and Debentures) Rules, 2014 with regard to issue of Employee stock
options covers issue of ESOPs.
Who is an (a) a permanent employee of the company who has been working in India or
employee for outside India; or
the purpose (b) a director of the company, whether a whole time director or not but
of Section excluding an independent director; or
62(1)(b) (c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or
outside India, or of a holding company of the company or of an associate
company but does not include-
(i) an employee who is a promoter or a person belonging to the promoter
group; or
(ii) a director who either himself or through his relative or through any
body-corporate, directly or indirectly, holds more than ten percent of the
outstanding equity shares of the company.
Disclosures Rule 12 (2) states that the company shall make the following disclosures in the
in explanatory statement annexed to the notice for passing of the resolution-
explanatory
statement (a) total number of stock options to be granted;
(b) identification of classes of employees entitled to participate in the
Employees Stock Option Scheme;
(c) the appraisal process for determining the eligibility of employees to the
Employees Stock Option Scheme;
(d) the requirements of vesting and period of vesting;
(e) the maximum period within which the options shall be vested;
(f) the exercise price or the formula for arriving at the same;
(g) the exercise period and process of exercise;
(h) the Lock-in period, if any;
(i) the conditions under which option vested in employees may lapse e.g. in
case of termination of employment for misconduct.
Free pricing Rule 12(3) states that the companies granting option to its employees pursuant
in conformity to Employees Stock Option Scheme will have the freedom to determine the
with exercise price in conformity with the applicable accounting policies, if any.
accounting
policies
For Holding / Rule 12 (4) states that a separate resolution for granting options to employees
Subsidiary of holding/subsidiary companies etc. shall be passed.
Co.
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Varying Rule 12(5) The company may by special resolution, vary the terms of
terms of Employees Stock Option Scheme not yet exercised by the employees provided
ESOP such variation is not prejudicial to the interests of the option holders.
Minimum Rule 12 (6)(a) states that there shall be a minimum period of one year between
one year the grant of options and vesting of option.
vesting
period
Lock-in Rule 12(6)(b) states that the company shall have the freedom to specify the
period lock-in period for the shares issued pursuant to exercise of option.
No right of Rule 12(6)(c) states that the Employees shall not have right to receive any
dividend or dividend or to vote or in any manner enjoy the benefits of a shareholder in
voting respect of option granted to them, till shares are issued on exercise of option.
Forfeiture/ Rule 12(7) states that the amount, if any, payable by the employees, at the time
refund of grant of option-
(a) may be forfeited by the company if the option is not exercised by the
employees within the exercise period; or
(b) the amount may be refunded to the employees if the options are not vested
due to non-fulfillment of conditions relating to vesting of option as per the
Employees Stock Option Scheme.
Conditions Rule 12(8) states the following conditions:

• The option granted to employees shall not be transferable to any other person.
• The option granted to the employees shall not be pledged, hypothecated,
mortgaged or otherwise encumbered or alienated in any other manner.
• No person other than the employees to whom the option is granted shall be
entitled to exercise the option.
Death/ Rule 12(8) states that in the event of the death of employee while in
permanent employment, all the options granted to him till such date shall vest in the legal
disability/ heirs or nominees of the deceased employee.
resignation In case the employee suffers a permanent incapacity while in employment, all
of employees the options granted to him as on the date of permanent incapacitation, shall vest
who were in him on that day.
granted with In the event of resignation or termination of employment, all options vested in
options the employee as on that day shall expire.
Maintenance Rule 12(10) states that the company shall maintain a Register of Employee
of Register Stock Options in Form No. SH-6.
The Register of Employee Stock Options shall be maintained at the registered
office of the company or such other place as the Board may decide.
ISSUE OF SHARES ON PREFERENTIAL BASIS

According to Section 62(1)(c), a company can issue further shares to persons other than existing
shareholders either for cash or for a consideration other than cash, if —
(1) the company in General Meeting passes a special resolution to this effect; and
(2) the price of such shares is determined by the valuation report of a registered valuer.
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Meaning of The expression ‘Preferential Offer’ means an issue of shares or other securities,
Preferential by a company to any select person or group of persons on a preferential basis
Offer and does not include shares or other securities offered through a public issue,
rights issue, employee stock option scheme, or an issue of sweat equity shares or
bonus shares or depository receipts issued in a country outside India or foreign
securities.
RULE 13 OF COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014
• Pass special resolution

• Listed company shall follow SEBI regulations
• Issue to be authorized by the articles
• Securities to be made fully paid up on allotment
• Disclosures to be made in explanatory statement to be annexed to the notice of general
meeting
• Allotment to get completed within 12 months if not completed a fresh resolution is required
• Price determination by the registered valuer’s report
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Ch. 7 Alteration of Share Capital
Ways to alter Share Capital
Section 61 (1) of the Companies Act, 2013 provides that a company limited by shares or
guarantee and having a share capital may, if so authorized by its articles, alter, by an ordinary
resolution, its memorandum in the following ways:
(a) It may increase the authorized share capital by such amount, as it thinks expedient;
(b) It may consolidate and divide, all or any of its existing shares into a larger denomination than
of its existing shares e.g., by consolidating ten shares of Rs10 each into one share of Rs100 each.
(c) It may convert all or any of its fully paid-up shares into stock or reconvert that stock into
fully paid-up shares of any denomination.
(d) It may sub-divide its existing shares or any of them into smaller denomination than fixed by
its Memorandum but it must keep the existing proportion between the paid-up and unpaid
amount e.g., one share of Rs 100 each, Rs 60 paid up and be sub-divided into ten shares of Rs 10
each, Rs 6 paid-up per share.
AA to be In order to alter its capital clause in the Memorandum, the company requires
amended by authority in its articles. But if the articles give no power to this effect, the
Special articles must be amended by a special resolution before the power to alter the
Resolution capital clause can be exercised by the company [Re. Patent Invert Sugar Co]
Section 64(1) states that when—

(a) a company alters its share capital u/s 61(1); or
(b) an order made by the Government has the effect of increasing authorized capital of a
company; or
(c) a company redeems any redeemable preference shares,
the company shall file a notice in the prescribed form with the Registrar within a period of thirty
days of such alteration or increase or redemption, as the case may be, along with an altered
memorandum.
Rule 15 of Companies (Share Capital and Debentures) Rules, 2014 states that the notice of
such alteration, increase or redemption shall be filed by the company with the Registrar in Form
No. SH.7 along with the fee.
Contravention Section 64(2) states that contravention in this case will make the company and
every officer of the company who is in default liable to a fine extending up to
Rs. 1000 per day during which the default continues or Rs. 5 lakh, whichever
is less (Section 64).
103
WHEN SHARE CAPITAL STANDS AUTOMATICALLY INCREASED?
The share capital of a company stands automatically increased when any Government, by its
order made, directs that any debentures issued to, or the loans obtained from the Government by
a company or any part thereof shall be converted into shares in the company, on such terms and
conditions as are considered by that Government to be reasonable in the circumstances.
Appeal However, where the terms and conditions of such conversion are not acceptable to
against the company, it may, within sixty days from the date of communication of such
Govt. order, appeal to the Tribunal which shall after hearing the company and the
Order Government pass such order as it deems fit.
Where Where the Government has, by an order, directed that any debenture or loan or any
appeal is part thereof shall be converted into shares in a company and where no appeal has
dismissed been preferred to the Tribunal or where such appeal has been dismissed, the
or not memorandum of such company shall, where such order has the effect of increasing
preferred the authorized share capital of the company, stand altered and the authorized share
capital of such company shall stand increased by an amount equal to the amount of
the value of shares which such debentures or loans or part thereof has been
converted into. [Section 62(6)].
This Section 62(6) is yet to be notified.
Judicial Pronouncement about a company’s power to alter its share capital
1. The powers can be exercised by the members only if authorized by the articles.
[Re North Cheshire Brewery Co.]
2. The power should be exercised bona fide in the interest of the company and not for
benefiting any group. [Needle Industries (India) Ltd. v. Needle Industries Newey
(India) Holding Ltd.]
3. The notice convening the meeting to pass the resolution for increase must specify the
amount of the proposed increase. [Mac Connell v. E. Prill & Co. Ltd.]
4. Consolidation and sub-division may be effected by the same resolution [Re. North
Cheshire Borewery Co. Ltd.]
5.
6. It is not the function of the Court to interfere with the Company’s power to consider a
resolution for cancelling the unissued portion of its share capital. The exercise of power
by a company to cancel the unissued shares cannot be restrained by an injunction. [Re.
Swindon Town Football Co. Ltd.]
7.
NATURE OF STOCK
Meaning of Section 2(84) of the Act in defining a share, states that “share means a share in
Share the share capital of a company and includes stock”.
Conversion Section 61 allows the company to convert its fully paid-up shares into stock.
to stock
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Stockholder Thus by converting shares into stock, a shareholder is known as a
stockholder. A stockholder has the same rights as to dividends as a shareholder.
NOTE: (i) only fully paid-up shares can be converted into stock, and (ii) no direct issue of
stock by a company is lawful. It is only the conversion of fully-paid shares into stock, that is
allowed by and not a direct issue of stock.
Example: After shares are converted into stock, the stockholder may own Rs.1,000 worth of
stock where formerly he held 100 shares of Rs.10 each.
S. No. Basis Share Stock

1. Distinct Shares in physical form bear Stocks are the consolidated value of
No. distinct numbers. share capital
2. Fully Paid Shares may or may not be fully Stock is always fully paid-up
up paid up.
3. Nominal Shares have a nominal value. Stock does not have any nominal
Value value.
4. Denominat All shares are of equal Denomination of stocks varies.
ion denomination.
5. Fractional It is not possible to transfer Stock is divisible and transferable into
value shares into fraction. any fractional value.
6. Issued Shares comes into existence Stock comes into existence after
before the stock and it is issued conversion of shares into stock and on
initially. conversion of shares into stock, the
provisions of the Act governing the
shares shall cease to apply to the share
capital as it is converted into stock.
REDUCTION OF SHARE CAPITAL (Applicable section 66 is yet to be notified)
Sec. 66 (1) Subject to confirmation by the Tribunal on an application by the company, a

company limited by shares or limited by guarantee and having a share capital may, by a special
resolution, reduce the share capital in any manner and may—
(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-
up; or
(b) either with or without extinguishing or reducing liability on any of its shares, —
(i) cancel any paid-up share capital which is lost or is unrepresented by available
assets; or
(ii) pay off any paid-up share capital which is in excess of the wants of the company,
alter its memorandum by reducing the amount of its share capital and of its shares
accordingly.
Proviso to Section 66(1)] states that the reduction of capital shall not be made if the company is
in arrears in the repayment of any deposits accepted by it, or the interest payable thereon.
Notice by The Tribunal shall give notice of application made to it under sub-section (1)
tribunal to
[Section 66(2)] 1. the Central Government,
2. Registrar
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3. the Securities and Exchange Board, in the case of listed companies, and
4. the creditors of the company
within a period of three months from the date of receipt of the notice.
Proviso to Section 66(2) states that if no representation has been received from the Central
Government, Registrar, the SEBI or the creditors within the said period, it shall be presumed that
they have no objection to the reduction.
Confirmation The Tribunal may, if it is satisfied that the debt or claim of every creditor of
of reduction the company has been discharged or determined or has been secured or his
of capital consent is obtained, make an order confirming the reduction of share capital on
[section 66(3)] such terms and conditions as it deems fit.
Publication of The order of confirmation of the reduction of share capital by the Tribunal
tribunal’s shall be published by the company in such manner as the Tribunal may direct.
order [section
66(4)]
Deliver a copy The company shall deliver a certified copy of the order of the Tribunal
of order of showing—
tribunal to (a) the amount of share capital;
ROC (section (b) the number of shares into which it is to be divided;
66(5) (c) the amount of each share; and
(d) the amount, if any, at the date of registration deemed to be paid-up on each
share, 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.
Difference in Alteration of share capital and reduction of share capital
Basis Alteration of share Reduction of share capital
Applicability Applicable section 61 of the Companies Applicable section 66 of the

Act, 2013. Companies Act, 2013.
Resolution Alteration of share capital is required to Reduction of share capital is

be done by ordinary resolution. required to be done by special
resolution.
Confirmation Alteration of share capital is not required Reduction of share capital is to be
to be confirmed by the Tribunal. confirmed by the Tribunal.
Ways Alteration of share capital may be done Reduction of share capital may be
in the following manner: - done in the following manner: -
(a) Increasing its nominal capital by (a) Extinguishing or reducing the
issuing new shares. liability of members in respect of
(b) Consolidating share capital into the capital not paid up.
shares of large denomination. (b) Paying off any paid up share
(c) Converting fully paid up shares into capital which is in excess of the
stock or vice versa. needs of the company.
(d) Sub dividing its shares into shares of
smaller amount.
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(e) Canceling shares which have not been
taken up and diminishing the amount of
share capital by the amount of the shares
so cancelled.
Diminution of share capital is not a reduction of capital
Diminution According to section 61(1)(e) of the Companies Act, 2013 (enforced),

of capital diminution of capital is the cancellation of the unsubscribed part of the issued
capital. It can be effected by an ordinary resolution provided articles of the
company authorizes to do so. It does not need any confirmation of the Tribunal
under section 66.
In the following cases, the diminution of share capital is not to be treated as reduction of the
capital:
1. Where the company cancels share which have not been taken or agreed to be taken by
any person.
2. Redemption of redeemable preference shares.
3. Where the company buys-back its own shares under Section 68
4. Purchase of shares of a member by the Company on order of the Tribunal u/s 242 of
Companies Act, 2013 (yet to be enforced).
Judicial Pronouncement relating to reduction of Share capital of a company
Re. SIEL Ltd., reduction of the share capital of a company is a domestic concern of the
company and the decision of the majority would prevail. If the majority by special resolution
decides to reduce the share capital of the company, it has the right to decide to reduce the share
capital of the company and it has the right to decide how this reduction should be effected.
Re Indian National Press (Indore) Ltd., The need for reducing capital may arise in various
circumstances for example trading losses, heavy capital expenses and assets of reduced or
doubtful value. As a result, the original capital may either have become lost.
British and American Trustee Corp. vs. Couper When exercising its discretion, the Court
shall consider the following, while sanctioning the reduction:
(i) The interests of creditors must be safeguarded;
(ii) The interests of shareholders must be considered; and
(iii) Lastly, the public interest must be considered as well.
Re. Borough Commercial and Bldg. Society, In case of reduction in shares capital of an
unlimited company-
An unlimited company to which section 66 of the Companies Act, 2013) does not apply, can
reduce its capital in any manner that its Memorandum and Articles of Association allow.
Great Universal Stores Ltd., In case of Reduction of capital when company is defunct-
The Registrar of Companies has been empowered under Section 248 of the Companies Act,
2013) to strike off the name of the company from register on the ground of non-working.
107
Therefore, where the company has ceased to trade, and Registrar exercises his power u/s 248, a
reduction of capital cannot be prevented.
Marwari Stores Ltd. vs. Gouri Shanker Goenka, In case of Equal Reduction of Shares of
One Class:
Where there is only one class of shares, prima facie, the same percentage should be paid off or
cancelled or reduced in respect of each share, but where different amounts are paid-up on shares,
the reduction can be effected by equalizing the amount so paid-up.
REDUCTION OF SHARE CAPITAL WITHOUT SANCTION OF THE COURT
In the following cases regarding reduction of share capital, no confirmation by the Tribunal is
necessary:
Surrender “Surrender of shares” means the surrender to the company by the registered
of shares holder of shares already issued. Where shares are surrendered to the company,
whether by way of settlement of a dispute or for any other reason, it will have the
same effect as a transfer in favor of the company and amount to a reduction of
capital.
But if, under any arrangement, such shares, instead of being surrendered to the
company, are transferred to a nominee of the company then there will be no
reduction of capital [Collector of Moradabad v. Equity Insurance Co. Ltd.].
Surrender may be accepted by the company under the same circumstances where
forfeiture is justified.
The Companies Act contains no provision for surrender of shares. Thus, surrender of shares is
valid only when Articles of Association provide for the same and:
(i) Where forfeiture of such shares is justified; or
(ii) When shares are surrendered in exchange for new shares of same nominal value.
Forfeiture A company may if authorized by its articles, forfeit shares for non-payment of
of shares calls and the same will not require confirmation of the Tribunal.
Where power is given in the articles, it must be exercised strictly in accordance
with the procedure stated therein, otherwise the forfeiture will be void.
Forfeiture will be effected by means of Board resolution.
Both forfeiture and surrender lead to termination of membership. Forfeiture is at the initiative of
company and surrender is at the initiative of member or shareholder.
Creditors’ Right to Object to Reduction
After passing the special resolution for the reduction of capital, the company is required to apply
to the Court by way of petition for the confirmation of the resolution. if the Court so directs, the
following provisions shall have effect:
Consent of The creditors having a debt or claim admissible in winding up are entitled to
creditors object. To enable them to do so, the Court will settle a list of creditors entitled
to object. If any creditor objects, then either his consent to the proposed
reduction should be obtained or he should be paid off or his payment be
secured.
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Confirmation If the Court is satisfied that either the creditors entitled to object have
and consented to the reduction, or that their debts have been paid or secured, it
Registration of may confirm the reduction.
reduction of The Court may also direct that the words “and reduced” be added to the
share capital company’s name for a specified period, and that the company must publish
the reasons for the reduction.
Conclusiveness The Court’s order confirming the reduction of the company’s share capital,
of certificate should be delivered to the ROC. The reduction takes effect only on
for reduction registration of the order, and not before. The Registrar will then issue a
of capital certificate of registration which will be a conclusive evidence that the
requirements of the Act have been complied with.
Where the Registrar had issued his certificate confirming the reduction, the
same was held to be conclusive although it was discovered later that the
company had no authority under its articles to reduce capital. [Re Walkar &
Smith Ltd.]
Buy Back of Shares [Section 68]
Sources According to Section 68(1) of the Companies Act, 2013 a company may
purchase its own shares (referred to as “buy-back”) out of:
(i) its free reserves; or
(ii) the securities premium account; or
(iii) the proceeds of any shares.
However, no buy-back of any kind of shares can be made out of the proceeds
of an earlier issue of the same kind of shares.
The company must have at the time of buy-back, sufficient balance in account
to accommodate the total value of the buy-back.
Authorization The main requirement is that the articles of association of the company should
Section 68(2) authorize buyback.
In case, such a provision is not available, it would be necessary to alter the
articles of association to authorize buyback.
Buy-back can be made with the approval of the Board of directors at a board
meeting and/or by a special resolution passed by shareholders in a general
meeting, depending on the quantum of buy back.
In case of a listed company, approval of shareholders shall be obtained only by
postal ballot.
Quantum (a) Board of directors can approve buy-back up to 10% of the total paid-up
Section 68(2) equity capital and free reserves of the company and such buy back has to be
authorized by the board by means of a resolution passed at the meeting.
(b) Shareholders by a special resolution can approve buy-back up to 25% of the
total paid-up capital and free reserves of the company.
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In respect of any financial year, the shareholders can approve by special
resolution up to 25% of total equity capital in that year.
Notice to be The notice of the meeting at which the special resolution is proposed to be
accompanied passed shall be accompanied by an explanatory statement stating—
by (a) a full and complete disclosure of all material facts;
Explanatory (b) the necessity for the buy-back;
Statement (c) the class of shares or securities intended to be purchased under the buy-
Section 68(3) back;
(d) the amount to be invested under the buy-back; and
(e) the time-limit for completion of buy-back.
Letter of Offer to be Filed with Registrar of Companies before Buy-Back [Rule 17(2)]
The company which has been authorized by a special resolution shall, before the buy-back of
shares, file with the ROC a letter of offer in Form No SH 8, along with the fee as prescribed.
Such letter of offer shall be dated and signed on behalf of the Board of directors of the company
by not less than two directors of the company, one of whom shall be the Managing Director.
Dispatch of letter of offer to shareholders [Rule 17(4)]
The letter of offer shall be dispatched to the shareholders immediately after filing the same with
the Registrar of Companies but not later than 21 days from its filing with the ROC.
Offer for buy back open for [Rule 17(5)]
The offer for buy-back shall remain open for a period of not less than 15 days and not exceeding
30 days from the date of dispatch of the letter of offer.
Post buy-back debt-equity ratio not to exceed 2:1[Section 68(2)(d)]
The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back
is not more than twice the paid-up capital and its free reserves.
Time gap between two buybacks [proviso to Section 68(2)]
No offer of buy-back under Section 68(2) shall be made within a period of one year reckoned
from the date of the closure of the preceding offer of buy-back, if any.
Shares being Bought Back are to be Fully Paid up (Section 68(2)
All the shares for buy-back are to be fully paid-up.
Time limit for completion of buyback (Section 68(4))
Every buy-back shall be completed within a period of one year from the date of passing of the
special resolution, or as the case may be, the resolution passed by the Board.
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Methods of buy-back (Section 68(5))
The buy-back may be—

(a) from the existing shareholders on a proportionate basis;
(b) from the open market;
(c) by purchasing the shares issued to employees of the company pursuant to a scheme of stock
option or sweat equity.
Filing Declaration of Solvency with SEBI/ROC as the case may

Rule 17(3) of Companies Share Capital & Debentures) Rules, 2014.
When a company proposes to buy-back its own shares in pursuance of a special resolution or
board resolution as the case may be, it shall, before making such buyback, file with the Registrar
and the Securities and Exchange Board (in case of listed companies), a declaration of solvency
signed by at least two directors of the company, one of whom shall be the Managing Director, if
any, in Form No. SH.9 and verified by an affidavit to the effect that the Board of Directors of
the company has made a full inquiry into the affairs of the company as a result of which they
have formed an opinion that it is capable of meeting its liabilities and will not be rendered
insolvent within a period of one year from the date of declaration adopted by the Board.
Extinguishment of securities bought back Section 68(7)
When a company buys back its own shares, it shall extinguish and physically destroy the shares
or securities so bought back within seven days of the last date of completion of buy-back.
Prohibition of further issue of shares (Section 68(8)
When a company completes a buy-back of its shares it shall not make a further issue of the same
kind of shares including allotment of new shares within a period of six months except by way of
a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock
option schemes, sweat equity or conversion of preference shares or debentures into equity
shares.
Register of buy-back (Section 68(9)
When a company buys back its shares, it shall maintain a register of the shares so bought, the
consideration paid for the shares bought back, the date of cancellation of shares, the date of
extinguishing and physically destroying the shares and such other particulars as may be
prescribed.
Return of buy back (Section 68(10)
A company shall, after the completion of the buy-back under this section, file with the Registrar
and the Securities and Exchange Board (in case of listed companies) a return containing such
particulars relating to the buy-back within thirty days of such completion.
Rule 17(14) of Companies (Share Capital and Debentures) Rules 2014 states that there shall
be annexed to the return filed with the Registrar in Form No. SH.11, a certificate in Form No.
SH.15 signed by two directors of the company including the Managing Director, if any,
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certifying that the buy-back of securities has been made in compliance with the provisions of the
Act and the rules made thereunder.
Punishments (Section 68(11)

If a company makes any default in complying with the provisions of this section or any
regulation made by the Securities and Exchange Board, in case of listed companies, the
company shall be punishable with fine which shall not be less than one lakh rupees but which
may extend to three lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to three years or with fine which
shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.
Circumstances prohibits buy-back [Section 70(1)]

No company shall directly or indirectly purchase its own shares —
• through any subsidiary company including its own subsidiary companies;
• through any investment company or group of investment companies; or
• if a default, is made by the company, in the repayment of deposits accepted, interest
payment thereon, redemption of debentures or preference shares or payment of dividend
to any shareholder, or repayment of any term loan or interest payable thereon to any
financial institution or banking company:
However, the buy-back is not prohibited, if the default is remedied and a period of three years
has lapsed after such default ceased to subsist. [Proviso to Section 70(i)]
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Ch. 8 PRIVATE PLACEMENT AND PROSPECTUS
Definition Section 2(70) of the Companies Act, 2013 defines a prospectus as “any document
of described or issued as a prospectus and includes a red herring prospectus (referred
Prospectus to in section 32) or shelf prospectus (referred to in section 31) or any notice,
circular, advertisement or other document inviting offers from the public for the
subscription or purchase of any securities of a body corporate.”
Essentials A document should have following essentials to constitute a prospectus:

of a (a) There must be an invitation to the public;
Prospectus (b) The invitation must be made “by or on behalf of the company or in relation to
an intended company”;
(c) The invitation must be “to subscribe or purchase”;
(d) The invitation must relate to any securities of the company.
Invitation A document is deemed to be issued to the public, if the invitation to subscribe for
to public share capital is such as to be open to anyone who brings his money and applies in
prescribed form, whether the prospectus was addressed to him or not.
The test is not who receives the document, but who can apply for the securities in
response to the invitation contained in it.
However, an issue will not be “Public” if-
(i) It is directed to a specified person or a group of persons, and
(ii) It is not calculated to result in the securities becoming available to other
persons.
Important judgements regarding an invitation to be termed as an invitation to public
Pramatha Advertisement in newspaper to invite application for purchase of remaining

Nath shares of a company is prospectus.
Sanyal vs.
Kali Kumar In this case directors were penalized for not complying with the requirements of
Dutt, filing a copy thereof with Registrar of Companies.
Nash vs. A single private communication does not satisfy the term “issue”.
Lynde In this case, several copies of a document marked “strictly confidential” and
containing particulars of a proposed issue of shares, were sent accompanied with
application form by the Managing Director who, in turn, gave it to a client who
passed it on to a relation. Thus, the document was passed on privately through a
small circle of friends of the directors.
It was held that there had been no issue to the public and any action for
compensation by the allottee for loss sustained by reason of an omission in the
document, failed.
Rattan It was held that offer to buy one’s kith and kin (relatives) shares cannot be
Singh vs. considered to be an invitation to public. Offer to buy shares made to an
MD, Moga individual as such is not within the definition of the word public.
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Transport
Co. Ltd.
Govt. Stock It was held that a circular issued by a company to the shareholders of other
and Other companies to acquire their shares held in those companies and issue its own
Securities shares in exchange of those shares did not amount to be a prospectus, as there is
Investment no public issue.
Co. Ltd. vs.
Christopher
Re. South It was held that “Public” is a general word, and includes any section of the
of England public. If a document inviting persons to buy shares is issued, for example, to all
Natural advocates, or to all doctors, or to all foreigners living in India, or to all Indian
Gas and citizens, or to all shareholders in a particular company, it will still be deemed to
Petroleum be issued to the public within the meaning of the Act.
Co. Ltd.
In the aforesaid case, 3,000 copies of a document in the form of a prospectus
were sent out and distributed among the members of certain gas companies only.
It was held that the document so sent and distributed was a prospectus issued to
the public.
PROVISIONS OF COMPANIES ACT, 2013 REGARDING PROSPECTUS
It is divided into 2 parts.

Part I deals with public offer and
Part II deals with private placement.
According to section 23(1), a public company may issue securities—

(a) to public through prospectus (referred to as "public offer") by complying with the provisions
of Part I, or
(b) through private placement by complying with the provisions of Part II; or
(c) through a rights issue or a bonus issue in accordance with the provisions of this Act and
in case of a listed company or a company which intends to get its securities listed also with the
provisions of the Securities and Exchange Board of India Act, 1992 and the rules and regulations
made thereunder.
Section 23 to 42 of the Companies Act, 2013 deals with prospectus and allotment of
securities.
The term "public offer" includes initial public offer or further public offer of securities to the
public by a company, or an offer for sale of securities to the public by an existing shareholder,
through issue of a prospectus. [Section 42(2)]
Private The company has to issue private placement offer letter in Form PAS-4
placement [Section 42(1)].
offer letter
Maximum The offer of securities or invitation to subscribe securities is private placement.
number of
persons to Rule 14(2)(b) of Companies (Prospectus and Allotment of Securities)
whom offer Rules, 2014 states that such offer or invitation shall be made to not more than
can be made two hundred persons in the aggregate in a financial year.
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Any offer or invitation made to Qualified Institutional Buyers, or to employees
of the company under a scheme of employees’ stock option shall not be
considered while calculating the limit of two hundred persons;
The restrictions under sub-clause (b) would be reckoned individually for each
kind of security that is equity share, preference share or debenture;
Monies payable on subscription to securities to be held by joint holders shall be

paid from the bank account of the person whose name appears first in the
application.
Private placement to be approved by special resolution
Rule 14(2) of Companies (Prospectus and Allotment of Securities) Rules, 2014
According to this rule, a company shall not make a private placement of its securities unless -
the proposed offer of securities or invitation to subscribe securities has been previously
approved by the shareholders of the company, by a Special Resolution, for each of the Offers or
Invitations.
Provided that in the explanatory statement annexed to the notice for the general meeting the
basis or justification for the price (including premium, if any) at which the offer or invitation is
being made shall be disclosed.
No fresh offer, in case of earlier offer being withdrawn, pending allotments with respect to
earlier offer etc.,
Section 42(3) states that no fresh offer or invitation under this section shall be made unless the
allotments with respect to any offer or invitation made earlier have been completed or that offer
or invitation has been withdrawn or abandoned by the company.
Private placement under section 42 to be treated as public offer if conditions prescribed

there under is not fulfilled
Section 42(4) states that any offer or invitation not in compliance with the provisions of this
section shall be treated as a public offer and all provisions of this Act, shall be required to be
complied with.
Mode of payment of subscription money

`
Section 42(5) states that all monies payable towards subscription of securities under this section
shall be paid through cheque or demand draft or other banking channels but not by cash.
Subscription money to be kept in a separate bank account
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Proviso to Section 42(6) states that monies received on application under this section shall be
kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose
other than—
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities.
No public advertisements for private placement
Section 42(8) states that no company offering securities under this section shall release any
public advertisements or utilize any media, marketing or distribution channels or agents to
inform the public at large about such an offer.
Return of allotment
Section 42 (9) states that whenever a company makes any allotment of securities under this
section, it shall file with the Registrar a return of allotment.
Rule 14 (4) of Companies (Prospectus and Allotment of Securities) Rules, 2014
Rule 14 (4) states that a return of allotment of securities under section 42 shall be filed with the
Registrar within thirty days of allotment in Form PAS-3, along with a complete list of all
security holders containing-
(i) the full name, address, Permanent Account Number and E-mail ID of such security holder;
(ii) the class of security held;
(iii) the date of allotment of security;
(iv) the number of securities held, nominal value and amount paid on such securities; and
particulars of consideration received if the securities were issued for consideration other than
cash.
Maintenance of Record of Private Placement offer
Rule 14(3) of Companies (Prospectus and Allotment of Securities) Rules, 2014 states that the
company shall maintain a complete record of private placement offers in Form PAS-5.
A copy of such record along with the private placement offer letter in Form PAS-4 shall be filed
with the Registrar and where the company is listed, with the Securities and Exchange Board
within a period of thirty days of circulation of the private placement offer letter.
Penalty
Section 42 (10) states that if a company makes an offer or accepts monies in contravention of
this section, the company, its promoters and directors shall be liable for a penalty which may
extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher,
and the company shall also refund all monies to subscribers within a period of thirty days of the
order imposing the penalty.
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Deemed Prospectus
Section 25(1) states that when a company allots or agrees to allot any securities of the company
through any document by which the offer for sale to the public is made shall, for all purposes, be
deemed to be a prospectus issued by the company; and all enactments and rules of law as to the
contents of prospectus and as to liability in respect of misstatements, in and omissions from,
prospectus, shall apply as if the securities had been offered to the public for subscription and as
if persons accepting the offer in respect of any securities were subscribers for those securities.
Matters to be stated in the prospectus
Section 26(1) states that every prospectus issued by or on behalf of a public company shall be
dated and signed and shall state the information required under Section 26(1) read with Rule 3 of
Companies (Prospectus and Allotment of Securities) Rules 2014.
Matters to be disclosed in the prospectus Matters to be disclosed as per Rule 3 of

as per Section 26(1) Companies (Prospectus and Allotment of
Securities) Rules, 2014
(i) Name and address of the registered office The names, addresses and contact details of the
of the company, company secretary, Chief corporate office of the issuer company,
Financial Officer, auditors, legal advisers, compliance officer of the issuer company,
bankers, trustees, Underwriters, etc. bankers to the issue, stock brokers to the issue,
credit rating agency for the issue.
(ii) Dates of the opening and closing of the The date relating to opening and closing of issue
issue. – A declaration which shall be made by the
Board in the prospectus that the allotment letters
shall be issued or application money shall be
refunded within fifteen days from the closure of
the issue or such lesser time as may be specified
by SEBI.
(iii) A statement by the Board of Directors A statement given by the Board that all monies
about the separate bank account where all received out of the issue shall be transferred to a
monies received out of the issue are to be separate bank account maintained with a
transferred and disclosure of details of all Scheduled Bank.
monies including utilized and unutilized
monies out of the previous issue in the
prescribed manner.
(iv) Details about underwriting of the issue. The names, addresses, telephone numbers, fax
numbers and e-mail addresses of the
underwriters and the amount underwritten by
them.
(v) The written consent of directors, auditors, The consent of trustees, solicitors or advocates,
bankers to the issue, expert’s opinion, if any, bankers to the issue, etc.
and all the persons named in the prospectus.
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(vi) The authority for the issue and the
details of the resolution passed.
(vii) Procedure and time schedule for

allotment.
(viii) Capital structure of the company in the The capital structure of the company shall be
prescribed manner. presented in the following manner, namely: -
(a) the authorized, issued, subscribed and paid
up capital;
(b) the size of the present issue;
(c) the paid up capital-
(i) after the issue;
(ii) after conversion of convertible
instruments;
(d) the share premium account (before and after
the issue);
(ix) Main objects of public offer, terms of the The prospectus to be issued shall contain the
present issue. following particulars, namely: -
(a) the objects of the issue;
(b) the funding plan (means of finance);
(c) the summary of the project appraisal report;
(d) the schedule of implementation of the
project.
(x) Particulars relating to— The details of pending litigation involving the
(a) management perception of risk factors issuer, promoter, director, subsidiaries, group
specific to the project; companies or any other person, whose outcome
(b) gestation period of the project; could have material adverse effect on the
(c) extent of progress made in the project; position of the issuer;
(d) deadlines for completion of the project; The details of default and non-payment of
and statutory dues etc.
(e) any litigation or legal action taken by a
Government Department or a statutory body
during the last five years immediately
preceding the year of the issue of prospectus
against the promoter of the company;
(xi) The details of default and non-payment

of statutory dues etc.
(xii) Details of directors including their The company shall disclose about directors in
appointments and remuneration. the following manner, namely: -
(i) the name, designation, Director Identification
Number (DIN), age, address, period of
directorship,
(ii) the remuneration payable or paid to the
director by the issuer company, its subsidiary
and associate co.
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Reports to be set out in the Prospectus
Section 26(1)(b) states that the following reports to be set out in the prospectus for the purposes
of the financial information, namely: —
Requirement under Section 26(1)(b) Prescribed under Rule 4 and 5 of
Companies (Prospectus and Allotment of
Securities) Rules, 2014
(i) Reports by the auditors of the company The reports by the auditors with respect to
with respect to its profits and losses and assets profit and assets and liabilities - The report
and liabilities. shall also include the amounts or rates of
dividends.
(ii) Reports relating to profits and losses for The reports relating to profits and losses for
each of the five financial years immediately each of the five financial years immediately
preceding the financial year of the issue of preceding the issue of the prospectus shall deal
prospectus including such reports of its with the profits or losses of
subsidiaries. (a) the issuer company, if the company has no
subsidiaries.
(b) The issuer company along with the profits
or losses of subsidiary company combined as
well individually.
(iii) Reports made for assets and liabilities of

its business on the last date to which the
accounts of the business were made up, being
a date not more than one hundred and eighty
days before the issue of the prospectus.
(iv) reports about the business or transaction to

which the proceeds of the securities are to be
applied directly or indirectly.
Rule 5. Companies (Prospectus and Allotment of Securities) Rules, 2014
Other matters and reports to be stated in the prospectus.
The prospectus shall include the following other matters and reports, namely
(1) If the proceeds, or any part of the proceeds, of the issue of the shares or debentures are or is
to be applied directly or indirectly –
(a) in the purchase of any business; or
(b) in the purchase of an interest in any business;
(c) in purchase or acquisition of any immoveable property
(2) If -
(i) the proceeds, or any part of the proceeds, of the issue of the shares or debentures are or are to
be applied directly or indirectly and in any manner resulting in the acquisition by the company
of shares in any other body corporate; and
(ii) by reason of that acquisition, that body corporate shall become a subsidiary of the company.
(3) The matters relating to terms and conditions of the term loans including re-scheduling,
prepayment, penalty, default.
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(4) The aggregate number of securities of the issuer company and its subsidiary companies
purchased or sold by the promoter group and by the directors of the company and their relatives
within six months immediately preceding the date of filing the prospectus with the Registrar of
Companies shall be disclosed.
(5) The matters relating to Material contracts; Time and place at which the contracts together
with documents will be available for inspection from the date of prospectus until the date of
closing of subscription list.
(6) The related party transactions entered during the last five financial years immediately
preceding the issue of prospectus as under -
(a) all transactions with related parties with respect to giving of loans or, guarantees,
providing securities in connection with loans made, or investments made;
(b) all other transactions which are material to the issuer company.
(7) The summary of reservations or adverse remarks of auditors in the last five financial years
immediately preceding the year of issue of prospectus and of their impact on the financial
position of the company and the corrective steps taken and proposed to be taken by the company
for each of the said reservations or adverse remarks.
(8) The details of any inspections or investigations initiated or conducted in the last five years
immediately preceding the year of issue of prospectus in the case of company and all of its
subsidiaries; and if there were any prosecutions filed (whether pending or not); fines imposed or
compounding of offences done in the last five years immediately preceding the year of the
prospectus for the company and all of its subsidiaries.
(9) The details of acts of material frauds committed against the company in the last five years, if
any, and if so, the action taken by the company.
When Section 26(1) is not applicable? [Sec 26(1) Matters to be stated in the prospectus]
Section 26(2) states that section 26(1) does not apply to

(a) to the issue to existing members or debenture-holders of a company; or
(b) to the issue of a prospectus relating to shares or debentures which are in all respects uniform
with shares or debentures previously issued and for the time being dealt in or quoted on a
recognized stock exchange.
Filing a copy of prospectus with registrar etc.,
Section 26(4) states that no prospectus shall be issued by or on behalf of a company unless on or
before the date of its publication, there has been delivered to the Registrar for registration, a
copy thereof signed by every person who is named therein as a director or proposed director of
the company or by his duly authorized attorney.
Including a statement by an expert in the prospectus
Section 26(5) states that a prospectus shall include a statement made by an expert that he has
given his written consent to the issue of the prospectus and has not withdrawn such consent
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before the delivery of a copy of the prospectus to the Registrar for registration and a statement to
that effect shall be included in the prospectus.
Penalty for contravention of Section 26
Section 26(9) states that if a prospectus is issued in contravention of the provisions of this
section, the
company shall be punishable with fine which shall not be less than fifty thousand rupees but
which may extend to three lakh rupees and every person who is knowingly a party to the issue
of such prospectus shall be punishable with imprisonment for a term which may extend to three
years or with fine which shall not be less than fifty thousand rupees but which may extend to
three lakh rupees, or with both.
Variation in terms of contracts referred to in the prospectus or objects for which

prospectus was issued
Section 27 (1) states that a company shall not, at any time, vary the terms of a contract referred
to in the prospectus or objects for which the prospectus was issued, except subject to the
approval of, or except subject to an authority given by the company in general meeting by way
of special resolution.
Rule 7 of Companies (Prospectus and Allotment of Securities) Rules, 2014
1. When the company has raised money from public through prospectus and has any unutilized
amount out of the money so raised, it shall not vary the terms of contracts referred to in the
prospectus or objects for which the prospectus was issued except by passing a special resolution
through postal ballot and the notice of the proposed special resolution shall contain the following
particulars, namely
• the original purpose or object of the Issue;
• the total money raised;
• the money utilized for the objects of the company stated in the prospectus;
• the extent of achievement of proposed objects (that is fifty percent, sixty percent, etc.);
• the unutilized amount out of the money so raised through prospectus,
• the particulars of the proposed variation in the terms of contracts referred to in the
prospectus;
• the reason and justification for seeking variation;
• the proposed time limit within which the proposed varied objects would be achieved;
• the risk factors pertaining to the new objects; and
• the other relevant information which is necessary for the members to take an informed
decision on the proposed resolution.
2. The notice in respect of such resolution to shareholders, shall also be published in the
newspapers.
The advertisement of notice shall be in Form PAS-1 and such advertisement shall be published
simultaneously with dispatch of Postal Ballot Notices to Shareholders.
3. The notice shall also be placed on the web-site of the company, if any.
4. The company shall not use any amount raised by it through prospectus for buying or trading
in equity shares of any other listed company.
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Dissenting shareholders to variation of terms are to be given exit option
Section 27(2) states that the dissenting shareholders being those shareholders who have not
agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus, shall
be given an exit offer by promoters or controlling shareholders at such exit price, and in such
manner and conditions as may be specified by the Securities and Exchange Board by making
regulations in this behalf.
Offer of Sale by Members
Where offer of sale of shares is made by members to the public, it shall for all purposes, be
deemed to be a prospectus issued by the company.
Section 28(1) states that where certain members of a company propose, in consultation with the
Board of Directors to offer, whole or part of their holding of shares to the public, they may do so
in accordance with such procedure as may be prescribed.
Section 28(2) further states that any document by which the offer of sale to the public is made
shall, for all purposes, be deemed to be a prospectus issued by the company and all laws and
rules made thereunder as to the contents of the prospectus and as to liability in respect of
misstatements in and omission from prospectus or otherwise relating to prospectus shall apply as
if this is a prospectus issued by the company.
Rule 8 of Companies (Prospectus and Allotment of Securities) Rules, 2014
(1) Rule 8 states that all rules made for the issue of prospectus shall be applicable in section 28
except for the following, namely: -
(a) the provisions relating to minimum subscription;
(b) the provisions for minimum application value;
(c) the provisions requiring any statement to be made by the Board of directors in respect
of the utilization of money; and
(2) The prospectus issued under section 28 shall disclose the name of the person or persons or
entity bearing the cost of making the offer of sale along with reasons.
Dematerialization of Securities-mandatory
Section 29 (1) states that

(a) every company making public offer; and
(b) such other class or classes of public companies as may be prescribed,
shall issue the securities only in dematerialized form by complying with the provisions of the
Depositories Act, 1996 and the regulations made thereunder.
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Section 29(2) further states that any company, other than a company mentioned in sub-section
(1), may convert its securities into dematerialized form or issue its securities in physical form in
accordance with the provisions of this Act.
Shelf Prospectus
Meaning Shelf Prospectus means a prospectus in respect of which the securities or class of
securities included therein are issued for subscription in one or more issues over a
certain period without the issue of a further prospectus.
The concept of shelf prospectus will save expenditure and time of the companies in issuing a
new prospectus every time they wish to issue securities to the public within a period of one year.
'Shelf prospectus' means a prospectus issued by any financial institution or bank for one or
more issues of the securities or class of securities specified in that prospectus.
Reasons Raising finance from the public by means of various securities is a time
for the consuming process.
issue of
Shelf • Negotiations with various parties have to be finalized.
Prospectus • Matters to be specified in the prospectus have also become quite large and
highly informative particularly under the SEBI guidelines.
• Recently, developmental financial institutions like IDBI and ICICI have
successfully raised money from the public through issue of Bonds.
• Every time any such issue comes a fresh prospectus is required to be filed.
• Although it is a repetitive matter, the procedural aspects take a lot of time.
• In order to minimize the burden on such institutions, it is now provided to
introduce shelf prospectus, which will be valid for a period of one year from the
date of opening of the first offering of the shelf prospectus.
According to Section 31
1. Any class of companies, as prescribed by the Securities and Exchange Board may file a shelf
prospectus with the Registrar at the stage of the first offer of securities included therein which
shall indicate a period not exceeding one year as the period of validity of such prospectus which
shall commence from the date of opening of the first offer of securities under such prospectus.
Further, in respect of a second or subsequent offer issued during the period of validity of shelf
prospectus, no further prospectus is required.
2. A company filing a shelf prospectus shall be required to file an information memorandum

containing all material facts relating to new charges created, changes in the financial position of
the company as have occurred between the first offer of securities or the previous offer of
securities and the succeeding offer and other prescribed changes, with the Registrar within the
prescribed time, prior to the issue of a second or subsequent offer of securities under such
prospectus.
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3. Where an information memorandum is filed, every time an offer of securities is made as
aforesaid, such memorandum together with the shelf prospectus shall be deemed to be a
prospectus.
Rule 10 of Companies (Prospectus and Allotment of Securities) Rules, 2014 states that the
information memorandum shall be prepared in Form PAS-2 and filed with the Registrar along
with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 within
one month prior to the issue of a second or subsequent offer of securities under the shelf
prospectus.
Red-Herring Prospectus
Meaning "Red Herring Prospectus" means a prospectus which does not include complete
particulars of the quantum or price of the securities included therein.
Red herring prospectus is issued during book building process.

Red herring prospectus contains either the floor price of securities offered or a price band along
with the range within which the Bids can move. The applicants bid for the shares quoting the
price and the quantity that they would like to bid at.
Section 32 of the Act deals with Red Herring Prospectus.

It provides that−
1. A company proposing to make an offer of securities may issue a red herring prospectus prior
to the issue of a prospectus.
2. A company proposing to issue a red herring prospectus shall file it with the Registrar at least
three days prior to the opening of the subscription list and the offer.
3. A red herring prospectus shall carry the same obligations as are applicable to a prospectus.
Any variation between the red herring prospectus and a prospectus shall be highlighted as
variations in the prospectus.
4. Once the offer for securities is closed, a final prospectus stating therein the total capital raised
whether by way of debt or share capital, the closing price of the securities and any other details
which are not complete in the red-herring prospectus shall be filed with SEBI in the case of
listed public company and in any other case with the Registrar of companies only.
Abridged Prospectus
Meaning “Abridged Prospectus” means a memorandum containing such salient features of a

prospectus as may be specified by the Securities and Exchange Board by making
regulations in this behalf. [Section 2(1)]
Section 33 states that no form of application can be issued for the purchase of any securities of a
company unless it is accompanied by an abridged prospectus.
There are, however, four exceptions to this rule:

(a) where the offer is made in connection with the bona fide invitation to a person to enter into
an underwriting agreement with respect to such securities;
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(b) where the securities are not offered to the public;
(c) where the offer is made only to the existing members or debenture holders of the company
with or without a right to renounce;
(d) where the shares or debentures offered are in all respects uniform with shares or debentures
already issued and quoted on a recognized stock exchange.
Attached to A company shall not supply any application form for shares or debentures
application unless the application form is accompanied by abridged prospectus.
forms In other words, abridged prospectus shall be attached by way of a perforated
line to every application form issued for subscription of shares or debentures.
The abridged prospectus and share application form shall bear the same
printed number.
Furnishing of A copy of the prospectus shall be furnished to any person who makes a
prospectus request (before closing of the subscription list) for a copy of the prospectus.
If a company makes any default in complying with the provisions of this section, it shall be
liable to a penalty of fifty thousand rupees for each default.
GOLDEN RULE FOR FRAMING THE PROSPECTUS
Untrue Statement A statement included in a prospectus shall be deemed to be untrue if

statement is misleading in the form and context in which it is
included.
Omission If the omission from a prospectus of any matter is calculated to

mislead the investors, the prospectus is deemed to be a misleading
prospectus.
Consequence Where an untrue statement occurs in a prospectus, there may arise

(i) civil liability (ii) criminal liability. Every person who is a director
of the company at the time of the issue of the prospectus, every
promoter of the company and every person, including an expert,
who has authorized the issue of a prospectus, shall be liable.
Golden Rule for This Golden Rule was pronounced New Brunswick, etc., Co. v.
framing the prospectus Muggeridge.
The golden rule is that the prospectus must present the complete
picture of the company. It must disclose all material facts truly,
honestly and accurately. All facts which are likely to influence the
decision regarding applying for shares must be disclosed. The
prospectus should not contain any untrue or misleading statement.
Suppression of a fact, howsoever remote, will make a prospectus
misleading if inclusion of such fact might have affected investor's
decision to subscribe for the shares.
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In Rex Vs. Kylsant, all statements in the prospectus were literally true but it failed to disclose
that the dividends stated in it as paid, were not paid out of trading profits, but out of realized
capital profits. The statement that the company had paid dividends for a number of years was
true. But the company has incurred losses for all those years (1921-27) and no disclosure was
made of this fact. The prospectus was held to be false in material particulars and the managing
director and chairman, who knew that it was false, were held guilty of fraud.
REMEDIES AGAINST-THE COMPANY FOR MIS-STATEMENT IN PROSPECTUS
1. Rescission An investor has a right to rescind the contract to take shares if he subscribes
of contract shares on the basis of a false or untrue statement contained in the prospectus,
i.e., where the prospectus is a misleading prospectus.
Loss of right of Rescission -Where a shareholder gives his affirmation in the following ways: -
1. Attempts to sell the shares
2. Executes a transfer
3. Pays calls or receives dividend
4. Attends and votes at a general meeting
5. Unreasonable delay in cancellation
6. Winding up of the co. starts
• Any person induced by a fraudulent statement in a prospect to take shares is

2. entitled to sue the co. for damages.
Damages
for Deceit • He must prove the same matters in claiming damages for deceit as in claiming
rescission of the contract.
• He cannot both retain the shares and get damages against the co.
Andrews v. Mockford
The directors sent a copy of prospectus of the company to Mr. A. The directors knew that it
contains false facts and it can induce A to purchase shares therein. A did not subscribe for the
shares at that time. However, not much shares were purchased by the public, the directors
thereupon fraudulently published a telegram in newspaper. A believing in the truth of the
telegram was induced to purchase shares in the open market.
The directors were held liable for the systematic fraud. “The function of the prospectus was not
exhausted, and the false telegram was brought into play by defendants to reflect back upon and
countenance the false statements in the prospectus.”
REMEDIES AGAINST PROMOTERS, DIRECTORS AND EXPERTS or

CIVIL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS
A person who subscribed for shares on the faith of a false prospectus may claim from directors
or promoters:
(i) Damages for fraudulent misrepresentation,
(ii) Compensation under Section 35 of the Act,
(iii) Damages for non-compliance with the requirements of Section 26 of the Act.
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(i) Damages for An allottee may sue the director for damages for deceit, if there are
fraudulent fraudulent misrepresentations in the prospectus. But the directors will not
misrepresentation be liable for damages for misstatement if they believed them to be true.
[Derry v. Peek]
(ii) Compensation An allottee is also entitled to claim compensation from directors,

under Section 35 promoters and any other persons who authorized the issue of the false
of the Act, prospectus, for damages sustained by reason of any untrue statement in
it.
According to Section 35(1), the following persons are liable to pay
compensation to every person who has sustained loss or damage by
reason of untrue statement included in a prospectus:
(a) every person who is a director of the company at the time of the issue
of the prospectus;
(b) every person who has authorized himself to be named and is named
in the prospectus as a director of the company, or has agreed to become
such director,
(c) every person who is a promoter of the company;
(d) every person who has authorized the issue of the prospectus; and
(e) is an expert referred in the prospectus.
When civil liability can be avoided [Section 35(2)]

No person referred above shall be liable for civil action if he proves:
(a) that having consented to become a director of the company, he withdrew his consent before
the issue of the prospectus, and that it was issued without his authority or consent; or
(b) that the prospectus was issued without his knowledge or consent, and that on becoming
aware of its issue, he forthwith gave reasonable public notice that it was issued without his
knowledge or consent; or
(c) an expert may also escape the liability, if he proves that having given his consent under
Section 26 to the issue of the prospectus, he withdrew it in writing before delivery of a copy of
the prospectus for registration to the Registrar.
(iii) Damages for non- Read Sec 26 (covered earlier)

compliance with the
requirements of
Section 26 of the Act
CRIMINAL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS (Sec. 34)

According to Section 34 of the Companies Act, 2013, where a prospectus, issued, circulated or
distributed includes any statement which is untrue or misleading or omission of any matter is
likely to mislead, every person who authorizes the issue of such prospectus shall be liable under
section 447.
Section 447 provides that any person who is found to be guilty of fraud, shall be punishable
with imprisonment for a term which shall not be less than six months but which may extend to
ten years and shall also be liable to fine which shall not be less than the amount involved in the
fraud, but which may extend to three times the amount involved in the fraud.
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However, where the fraud in question involves public interest, the term of imprisonment shall
not be less than three years.
However, where a person who has authorized the issue of prospectus proves, either that such
statement or omission was immaterial or that he had reasonable grounds to believe, and did up
to the time of issue of the prospectus believe, that the statement was true or the inclusion or
omission was necessary may be relieved from the criminal liability.
Who is The right to claim compensation for any loss or damage sustained by reason of
entitled to any untrue statement in a prospectus is available only to a person who has
remedies? “subscribed” for securities on the faith of the prospectus containing untrue
statement.
The word ‘subscribed’ denotes that the shares were acquired directly from the
company by allotment.
A subsequent purchaser of shares in the open market has no remedy against the
company or the directors or promoters.
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Ch. 9 Debt Capital
Borrowing Borrowing is a mechanism, whereby the money is arranged through external

resources with an intention of returning money.
Power of The powers to borrow money and to issue debentures whether in or outside
Company to India can only be exercised by the Directors at a duly convened meeting by
Borrow passing a resolution.
The power to issue debentures cannot be delegated by the Board of directors.

However, the power to borrow monies can be delegated by a resolution passed
at a duly convened meeting of the directors to a committee of directors,
managing director, manager or any other principal officer of the company.
The resolution must specify the total amount up to which the moneys may be
borrowed by the delegates.
Limit on Section 180(1)(c) of the Act prohibits the Board of directors of a company from
Borrowing borrowing a sum which together with the monies already borrowed exceeds the
aggregate of the paid-up share capital of the company and its free reserves
apart from temporary loans obtained from the company’s bankers in the
ordinary course of business.
“Temporary loans” means loans repayable on demand or within six months

from the date of the loan.
Unauthorized or Ultra Vires Borrowing
Meaning Where a company borrows without the authority conferred on it by the articles
or beyond the amount stated in the Articles, it is an ultra vires borrowing.
Effect Any act which is ultra vires the company is void.

In such a case, the contract is void and the lender cannot sue the company for
the return of the loan. The securities given for such ultra-vires borrowing are
also void and inoperative. Ultra vires borrowings cannot be ratified by a
resolution passed by the company in general meeting.
Rights of Lender
The lender who is unable to sue for its return, or enforce any security granted to him, he has the
following remedies:
(A) The lender can obtain an injunction provided he can trace and identify the
Injunction money lent, and any property which the company has bought with it. Even if the
and monies advanced by the lender cannot be traced, the lender can claim repayment
Recovery if it can be proved that the company has been benefited thereby.
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(B) Where the money of an ultra vires borrowing has been used to pay off lawful
Subrogation debts of the company, the lender would be subrogated to the position of the
creditor paid off and to that extent would have the right to recover his loan from
the company.
(C) Suit In case of ultra vires borrowing, the lender may be able to sue the directors for
against breach of warranty of authority, especially if the directors deliberately
Directors misrepresented their authority [Executors vs. Himphreys]
Intra vires Borrowing but outside the Scope of Directors’ Authority
Where the directors borrowed money beyond their authority and the borrowing is not ultra vires
the company, such borrowing is called Intra vires borrowing. The company will be liable to
such borrowing if the lender acted in good faith or if the transaction was ratified by the
company.
CASE LAWS
Deonarayan Where the directors mortgaged the company’s property exceeding the limits of
Prasad their authority, it was held that the lending bank was entitled to retain
Bhadani vs. possession and to claim restitution before it could be compelled to surrender
Bank of possession.
Baroda Ltd.
Sometimes it happens that a power to borrow exists but is restricted to a stated
amount, in such a case if by a single transaction an amount in excess is
borrowed, only the excess would be ultra vires and not the whole transaction.
General The power of a company to borrow money is implied in the case of all trading
Auction companies.
Estate Co.
vs. Swith
Baronness A power to borrow money cannot be implied.
Wenlork vs.
River Dee
Sri The acquiescence of all shareholders in excess loans contracted by directors
Balasaraswa beyond their powers but not ultra vires the powers of the company would be
thi Ltd. vs. sufficient to validate such excess debts.
Parameswar
a Aiyar
T.R. Pratt. In this case, there was no limit on the borrowing for business in the
(Bom) Ltd. memorandum of the company. But the directors could not borrow beyond the
vs. E.D. limit of the issued share capital of the company without the sanction of the
Sassoon and general meeting. The directors borrowed money from the plaintiff beyond their
Co. Ltd. powers.
It was held that the money having been borrowed and used for the benefit of the
company either in paying its debts, or for its legitimate business, the company
cannot repudiate its liability on the ground that the directors had no authority
from the company to borrow.
Equity In this case, it was held that where the directors of a company who was not
Insurance authorized to borrow, has borrowed money which is not necessary, neither bona
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Co. Ltd. vs. fide, nor for the benefit of the company, the company is not liable for the
Dinshaw & amount borrowed.
Co
Krishnan Facts of the case
Kumar In this case, the company borrowed an amount of Rs. 5 lakhs from the Bank
Rohatgi and under a Promissory Note. The repayment was made secured by a person by
Others vs. executing a guarantee in favor of the company. The company used to make
State Bank payments towards loan and the promissory note used to be renewed from time
of India and to time. In the suit for recovery, the company contended that the pronote was
Others executed by the Chairman without there being a resolution of the Board of
directors authorizing the Chairman to execute the pro-note.
Rejecting these contentions, the Patna High Court held that in cases where the
directors borrow funds without their having authorization from the company
and if the money has been used for the benefit of the company, the company
cannot repudiate its liability to repay.
Reason Cited
Under the general principles of law, when an agent borrows money for a
principal without the authority of the principal but the principal takes the
benefit of the money so borrowed or when the money so borrowed has gone
into the coffers of the principal, the law implies a promise to be paid by the
principal.
Types of Borrowings
On the basis of Time Span
Long Terms Funds borrowed by a company for a period ranging from five years or more are
Borrowings termed as long-term borrowings.
A long term borrowing is made for getting a new project financed or for
making big capital investment etc.
Generally Long term borrowing is made against charge on fixed assets of the
company.
Medium Funds borrowed by a company for a period ranging from one year to five
Term years, are termed as medium term borrowings.
Borrowings The commercial banks normally finance purchase of land, machinery, vehicles
etc.
Short Term Funds borrowed by a company for a period ranging up to one year or so are
Borrowings termed as short term borrowings.
This is made to meet the working capital need of the company.
Short term borrowing is generally made on hypothecation of stock and debtors.
On the basis of Security
Secured Money borrowed by the company against the security of its assets.
Borrowing
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Unsecured It consists of financial obligations, where creditors do not have recourse to the
Borrowing assets of the company to satisfy their claims.
On the basis of number of lenders
Syndicated Where a borrower requires a large amount of borrowing facility which is

Borrowing commonly provided by a group of lenders known as a syndicate under a
syndicated loan agreement. The borrower enters into one agreement covering
the whole group of banks and different types of facility rather than entering
into a series of separate loans, each with different terms and conditions.
Bilateral Where a borrowing made by a company from a particular bank/financial

Borrowing institution. In this type of borrowing, there is a single contract between the
company and the lender.
Private It consists of bank-loan type obligations whereby the company takes loan from
Borrowing a bank/financial Institution.
Public It consists of borrowing by the company by issuing debentures, bonds etc. to

Borrowing the general public. These instruments are freely tradable on a stock exchange.
Borrowing on Security of Property
The power to borrow includes the power to give security, which may take the form of a
mortgage, a charge, hypothecation, pledge etc. The position of the creditor becomes safe.
Charge on Uncalled Capital
A company does not have implied power of charging its uncalled share capital.
It can create a charge on its uncalled capital if its articles or memorandum authorize it to charge
it.
In Newton v. Debenture holders of Anglo-Australian Investment Co., the memorandum

authorized the company to borrow “upon any security of the company”.
It was held that the power was wide enough to include a charge on uncalled capital.
However, a company cannot charge any part of its “reserve capital”, i.e., such portion (if any)
of its uncalled share capital as is incapable of being called up except in the event of winding up
of the company.
DEBENTURES
According to Section 2(30) of Companies Act 2013 “debenture” includes debenture stock,
bonds or any other instrument of a company evidencing a debt, whether constituting a charge
on the assets of the company or not. Therefore, it is evident from the definition that the term
debentures cover both secured and unsecured debentures.
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Types of Debentures
On the basis of convertibility
Non- These instruments retain the debt character and cannot be converted into equity
Convertible shares.
Debentures
(NCD)
Partly A part of these instruments are converted into Equity shares in the future at
Convertible notice of the issuer. The issuer decides the ratio for conversion. This is
Debentures normally decided at the time of subscription.
(PCD)
Fully These are fully convertible into Equity shares at the issuer's notice. The ratio of
convertible conversion is decided by the issuer. Upon conversion the investors enjoy the
Debentures same status as ordinary shareholders of the company.
(FCD)
Optionally The investor has the option to either convert these debentures into shares at
Convertible price decided by the issuer/agreed upon at the time of issue.
Debentures
(OCD)
On the basis of Security
Secured These instruments are secured by a charge on the fixed assets of the issuer
Debentures company. So if the issuer fails on payment of either the principal or interest
amount, his
assets can be sold to repay the liability to the investors.
Section 71(3) of the Companies Act, 2013 provides that secured debentures
may be issued by a company subject to such terms and conditions as may be
prescribed by the Central Government through rules.
Unsecured These instrument are unsecured in the sense that if the issuer defaults on
Debentures payment of the interest or principal amount, the investor is simply an
unsecured creditors of the company. They are also termed as naked
debentures.
On the basis of Redeem-ability
Redeemable The debentures which are issued with a condition that they will be redeemed at
Debentures a fixed date or upon demand, or after notice.
Debentures are generally redeemable and on redemption these can be reissued
or cancelled. The person who has been re-issued the debentures shall have the
same rights and priorities as if the debentures had never been redeemed.
Perpetual or The debenture, in which no time is fixed by the company to pay back the
Irredeemable money, is an irredeemable debenture.
Debentures The debenture holder cannot demand payment as long as the company is a
going concern and does not make default in making payment of the interest.
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But all debentures, whether redeemable or irredeemable become payable on
the company going into liquidation.
NOTE: After the commencement of the Companies Act, 2013, now a

company cannot issue perpetual or irredeemable debentures.
On the basis of Registration
Registered Those debentures which are issued in the name of a particular person, whose
Debentures name appears on the debenture certificate and who is registered by the
company as holder on the Register of debenture holders.
Such debentures are transferable in the same manner as shares by means of a
proper instrument of transfer duly stamped and executed and satisfying the
other requirements specified in Section 56 of the Companies Act, 2013.
Bearer Those debentures which are made out to bearer, and are negotiable
debentures instruments, and so transferable by mere delivery like share warrants.
The person to whom a bearer debenture is transferred become a “holder in due
course” and, is entitled to receive and recover the principal and the interest
accrued thereon.
Pari Passu Clause in case of Debentures
The expression ‘pari passu’ implies with equal step, equally treated, at the same rate, or at par
with. When debentures are issued with pari passu clause, it implies that no difference will be
made between the old and new debentures. In the event of deficiency of assets, they will abate
proportionately.
If the words pari passu are not used, the debentures will be payable according to the date of
issue, and if they are all issued on the same day, they will be payable accordingly to their
numerical order.
However, a company cannot issue a new series of debentures so as to rank pari passu with prior
series, unless the power to do so is expressly reserved and contained in the debentures of the
previous series.
Debenture Stock
A company, instead of issuing debentures, each in respect of separate and distinct debt, may
raise one aggregate loan fund or composite stock known as ‘debenture stock’.
Accordingly, a debenture stock is a borrowed capital consolidated into one mass for the sake of
convenience.
As in the case of shares, a person may subscribe for, or transfer any amount even a fraction
amount.
Debenture stock is the indebtedness itself, and the debenture stock certificate furnishes
evidence of the title or interest of the holder in the indebtedness.
Debenture stock must be fully paid, while debenture may or may not be fully paid.
Difference between Debenture and Debenture Stock
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Debenture is a document which furnishes evidence of the debt while 'debenture stock' is
“borrowed capital consolidated into one mass for the sake of convenience”.
Distinction between Debenture and Loan
Debenture means a document which creates or acknowledges a debt. A loan creates a right in
the creditor to demand repayment.
BROAD REGULATORY FRAMEWORK FOR DEBT SECURITIES
(a) SEBI (ICDR) Regulations 2009

(b) Listing Agreement for Debentures
(c) Listing agreement for privately placed Debentures
(d) The Companies Act, 2013
(e) Companies (Share Capital and Debentures) Rules, 2014
(a) SEBI SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL

(ICDR) AND DISCLOSURE REQUIREMENTS) Regulations, 2009
Regulations The conditions specified under these regulations for Equity shares are equally
2009 applicable to public issue of convertible debt instruments also.
Additionally, the issuer of convertible debt instruments has to comply with the
following:
(a) obtain credit rating from one or more credit rating agencies;
(b) appoint one or more debenture trustees in accordance with Section 71(5)
of the Companies Act, 2013 and SEBI (Debenture Trustees) Regulations,
1993;
(c) create debenture redemption reserve in accordance with Section 71(4) of
the Companies Act, 2013;
(d) if the issuer proposes to create a charge or security on its assets in
respect of secured convertible debt instruments, it shall ensure that:
• such assets are sufficient to discharge the principal amount at all times;
• where security is already created on such assets in favor of financial
institutions or banks or the issue of convertible debt instruments is
proposed to be secured by creation of security on a leasehold land, the
consent of such financial institution, bank or lessor for a second or pari
passu charge has been obtained and submitted to the debenture trustee
before the opening of the issue.
(b) SEBI These regulations deal with compliances with respect to non-convertible debt
(Issue and instruments and are applicable to (a) Public issue of debt securities and (b)
Listing of listing of debt securities issued through public issue or on private placement
Debt basis on a recognized stock exchange.
Securities) It deals with aspects which include filing of offer documents, disclosures, price
Regulations, discovery mechanism through book building etc.
2008
(c) Listing Listing agreement for public issue of debt instruments and privately placed debt
agreement instruments covers aspects of disclosure mechanism to stock exchanges.
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(d) Issue of Debentures to be approved by special resolution
Provisions Section 71 (1) states that a company may issue debentures with an option to
of convert such debentures into shares, either wholly or partly at the time of
Companies redemption. The issue of debentures with an option to convert such debentures
Act 2013- into shares, wholly or partly, shall be approved by a special resolution passed at
Issue of a general meeting.
Debentures
No debenture shall carry voting rights
Section 71 (2) states that no company shall issue any debentures carrying any
voting rights.
(e) Rule 18(1) of Companies (Share Capital and Debentures) Rules, 2014
Companies prescribes the conditions.
(Share The company shall not issue secured debentures, unless it complies with the
Capital and following conditions, namely: -
Debentures) (a) The date of Redemption of debenture shall not exceed 10 years from the date
Rules, 2014 of issue. A company engaged in the setting up of infrastructure projects may
issue secured debentures up to redemption period of thirty years.
(b) Such an issue of debentures shall be secured by the creation of a charge, on
the properties or assets of the company, having a value which is sufficient for
the due repayment of the amount of debentures and interest thereon;
(c) The company shall appoint a debenture trustee before the issue of prospectus
or letter of offer for subscription of its debentures and not later than sixty days
after the allotment of the debentures, execute a debenture trust deed to protect
the interest of the debenture holders; and
(d) the security for the debentures by way of a charge or mortgage shall be
treated in favor of the debenture trustee on any specific movable or immovable
property of the company.
Creation of debenture redemption reserve account
According to Section 71(4) when debentures are issued by a company, the company shall create
a debenture redemption reserve account out of the profits of the company available for payment
of dividend and the amount credited to such account shall not be utilized by the company
except for the redemption of debentures.
Appointment of Debenture Trustees
Section 71 (5) states that no company shall issue a prospectus or make an offer to the public or
to its members exceeding five hundred for the subscription of its debentures, unless the
company has, before such issue or offer, appointed one or more debenture trustees.
Duties of debenture trustees
Section 71(6) A debenture trustee shall take steps to protect the interests of the debenture
holders and redress their grievances in accordance with such rules as may be prescribed.
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Central Government to prescribe rules as to trust deed, quantum of debenture
redemption reserve etc.
Section 71(13) states that the Central Government may prescribe the procedure,
• for securing the issue of debentures,
• the form of debenture trust deed,
• the procedure for the debenture-holders to inspect the trust deed and to obtain copies
thereof,
• quantum of debenture redemption reserve required to be created.
Rule 18 of Companies (Share Capital and Debentures) Rules, 2014 prescribes the
following conditions:
(i) With regard to trust deed and its inspection
Rule 18(5) states that for the purposes of sub-section (13) of section 71, a trust deed in Form
No.SH.12 or as near thereto as possible shall be executed by the company issuing debentures in
favor of the debenture trustees within sixty days of allotment of debentures.
Rule 18 (8) states that a trust deed for securing any issue of debentures shall be open for
inspection to any member or debenture holder of the company.
(ii) Creation of debenture redemption reserve
Rule 18(7) states that the company shall create Debenture Redemption Reserve equivalent to at
least fifty percent of the amount raised through the debenture issue before debenture
redemption commences.
Exemptions clauses in the trust deed
Section 71 (7) states that any provision contained in a trust deed for securing the issue of
debentures shall be void in so far as it would have the effect of exempting a trustee thereof from
any liability for breach of trust, where he fails to show the degree of care and due diligence
required of him as a trustee.
The liability of the debenture trustee shall be subject to such exemptions as may be agreed upon
by a majority of debenture-holders holding not less than three-fourths in value of the total
debentures at a meeting held for the purpose.
REGISTER OF DEBENTURE HOLDERS
Section 88(1)(b) of the Companies Act, 2013 requires every company to keep a register of
debenture holders.
REMEDIES OPEN TO DEBENTUREHOLDERS
According to Section 71(8), the company is bound to pay interest and redeem the debentures
in accordance with the terms and conditions of their issue.
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According to Section 71(10) if a company fails to redeem the debentures on the date of their
maturity or fails to pay interest on the debentures when it is due, the Tribunal may, on the
application of any or all of the debenture-holders, or debenture trustee and, after hearing the
parties concerned, direct, by order, the company to redeem the debentures forthwith on
payment of principal and interest due thereon.
Section 71(11) provides that if any default is made in complying with the order of the Tribunal,
every officer of the company who is in default shall be punishable with imprisonment for a
term which may extend to three years or with fine which shall not be less than two lakh rupees
but which may extend to five lakh rupees, or with both.
Section 164(2)(b) imposes a disqualification on the directors of a company which has failed to
redeem its debentures on due date and such failure continues for one year or more. Such person
shall not be eligible to be re-appointed as a director of that company or appointed as a director
of any other public company for period of five years from the date from which the company has
failed to redeem the debentures.
PUBLIC SECTOR BONDS

In 1985, the Government evolved a scheme for issue of bonds by telecommunication and power
sector. Under this scheme the Government corporate bodies in area of telecommunication and
power were permitted to issue bonds for—
(a) setting up of new projects; and/or
(b) expansion or diversification of existing project; or
(c) meeting normal capital expenditure for modernization; or
(d) for augmenting the long term resources of the company for working capital requirements.
In July 1986 the scheme was extended to other public sector enterprises. The Government
introduced the scheme for issue of tax free bonds in addition to the earlier series of power and
telecom bonds. In the new series the maximum rate of interest was 10% and the period of
redemption up to 10 years. The interest income from these bonds was completely free from
income-tax. These bonds were required to be listed on Stock Exchanges. These bonds were also
transferable by endorsement and delivery.
The SEBI guidelines for debentures equally apply to bonds as well.
FEATURES OF NEW FINANCIAL INSTRUMENT
Convertible It means the issue made in the form of partly or wholly convertible issue,
capital issue with varying conversion terms and premium on par value of equity.
Zero coupon It refers to those bonds which are sold at a discount from its eventual maturity
bonds value and have zero interest rate.
Shares with It signifies a share with differential right to vote, dividend etc. The investor is
differential compensated for renouncing the voting right through a higher rate of dividend
rights than that on the conventional voting share.
Secured SPN, which is issued along with detachable warrant, is redeemable after a
Premium notified period, say 4 to 7 years. The warrants attached to it ensure the holder,
Notes with the right to apply to get allotted equity shares, provided SPN is fully paid.
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Detachable
Warrants
Zero Interest Fully Convertible Debentures
The investors in zero interest fully convertible debentures will not be paid any
interest.
Fully Equipref is a recent introduction in the market. It has two parts: A and B. Part
Convertible A, is convertible into equity shares automatically and compulsorily on the date
Cumulative of allotment without any further act or application by the allottee and Part B
Preference will be redeemed at par-converted into equity shares after a lock-in-period at
Shares the option of the investors.
(Equipref)
Preference Under this instrument, each preference share should carry certain number of
shares with warrants entitling the holder to apply for equity shares for cash at 'premium' at
warrants any time between the third and fifth year from the date of allotment. If the
attached warrant holder fails to exercise his option, the unsubscribed portion will lapse.
Secured zero interest Partly Convertible Debentures with Detachable and

separately tradeable warrants
The instrument has two parts - Part A is convertible into equity shares at a fixed
amount on the date of allotment and Part B - non-convertible to be redeemed at
par at the end of a specific period from the date of allotment.
Fully convertible Debentures with interest (optional)

This instrument will not yield any interest for a short period, say 6 months.
After this period, option is given to the holders of FCDs to apply for equities at
'premium' for which no additional amount needs to be payable.
Deep It refers to those bonds which are sold at discount value by the company
discount and on maturity face value is paid to the investors.
bond
Option It covers those cumulative and non-cumulative bonds where interest is payable
bonds on maturity periodically and redemption premium is offered to attract investors.
Global It is a form of depository receipt on certificate created by the Overseas

depository Depository Bank outside India denominated in dollar and issued to non-resident
receipts investor against the issue of ordinary shares.
Instruments in Money Market
(1) Certificate of deposit: Certificate of deposit is a document of title to a time deposit. Being
a bearer document, CDs are readily negotiable and are attractive, both to the banker and to the
investors in that, the banker is not required to encash the deposits prematurely, while the
investor can sell the same in the secondary market. This ensures ready liquidity. Minimum size
of issue of a CD is Rs. 1 lakh.
(2) Commercial paper: CP refers to unsecured promissory notes issued by credit worthy
companies to borrow funds on a short term basis. It can be issued in denominations of Rs. 5
lakh or multiples thereof.
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Ch. 10 Creation and Registration of Charges
Introduction
Borrowings by companies are often backed by securities on the strength of which loans are
given by the banks or FIs. A charge is created when security is given for securing loans or
debentures by way of a mortgage on the assets of the company.
The purpose of registration of a charge is to give notice to the Registrar of Companies and to
people who intend to advance money to the company about the charge created on the assets of
the company. The lender may inspect the RoC files in the MCA Portal. Non registration of
charges does not make the transaction invalid, but such charge shall not be taken into account
by the liquidators and any other creditors of the company.
Charge- A charge is a security given for securing loans or debentures by way of a

Meaning mortgage on the assets of the company.
A company, like a natural person, can offer security for its borrowings.
Normally, the debentures and other borrowings of the company are secured
by a charge on the assets of the company. Where property, both existing and
future, is agreed to be made available as a security for the repayment of debt
and creditors have a present right over it.
Definition According to Section 2(16) of the Act, “charge” means an interest or lien
created on the property or assets of a company or any of its undertakings or
both as security and includes a mortgage.
Types of A charge on the property of the company as security for debts may be of:
Charges (i) Fixed or specific charge; and (ii) Floating charge.
Fixed or A charge is called fixed or specific when it is created to cover assets which
Specific Charge are ascertained and definite or are capable of being ascertained and defined,
at the time of creating the charge e.g., land, building, or plant and
machinery.
A fixed charge, therefore, is a security in terms of certain specific property,
and the company gives up its right to dispose-off that property until the
charge is satisfied.
Floating A floating charge is not attached to any definite property but covers
Charge property of a fluctuating type e.g., stock-in-trade. A floating charge is a
charge on a class of assets present and future which in the ordinary course
of business is changing from time to time and leaves the company free to
deal with the property as it sees fit until the holders of charge take steps to
enforce their security.
“The essence of a floating charge is that the security remains dormant until
it is fixed or crystallized”. But a floating security is not a future security. It
is a present security, which presently affects all the assets of the company.
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The advantage of a floating charge is that the company may continue to deal
in any way with the property which has been charged. The company may
sell or lease such property in the ordinary course of its business if it is
authorized by its memorandum of association.
Crystallization A floating charge crystallizes and the security becomes fixed in the
of Floating following cases:
Charge (a) when the company goes into liquidation;
(b) when the company ceases to carry on its business;
(c) when the creditors or the debenture holders take steps to enforce their
security e.g. by appointing receiver to take possession of the property
charged;
(d) on the happening of the event specified in the deed.
In the aforesaid circumstances, the floating charge is said to become fixed

or to have crystallized. Until the charge crystallizes or attaches or becomes
fixed, the company can deal with the property so charged in any manner it
likes.
Effect of On crystallization, the floating charge converts itself into a fixed charge on
Crystallization the property of the company.
Although a floating charge is a present security, yet it leaves the company free to create a
specific mortgage on its property having priority over the floating charge.
In Government Stock Investment Co. Ltd. v. Manila Railway Co. Ltd., the debentures were
secured by a floating charge. Three months’ interest became due but the debenture holders took
no steps and so the charge did not crystallize but remained floating. The company then made a
mortgage of a specific part of its property.
Held, the mortgagee had priority. The security for the debentures remained merely a floating
security as the debenture holders had taken no steps to enforce their security.
Postponement of a Floating Charge
The creation of a floating charge leaves the company free to create a mortgage on the same
property until the floating charge crystallizes. Where such a mortgage is created it has priority
over the floating charge which gets postponed.
The floating charge is postponed in favor of the following persons if they act before the
crystallization of the security:
(a) a creditor who obtains a garnishee order.
(b) the employees of the company, as well as other preferential creditors in the event of
winding-up of the company;
(c) the supplier of goods to the company under a hire-purchase agreement on terms that goods
are to remain the property of the seller until they are paid for in full, has priority over the
floating charge whether such hire-purchase agreement is made before or after the issue of the
debentures with a floating charge.
Debenture-holders with a floating charge do not enjoy the same rights as the secured creditors,
for claims against the company. The deed creating the floating charge may, however, contain a
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clause restricting the power of the company to create charges in priority to or pari passu with it.
But even in such a case a person who takes mortgage without notice of floating charge gets
priority. But such a contingency can be safeguarded by registering the charge.
Section 332 of the Act provides that a floating charge on the property of the company, which is
created within 12 months immediately preceding the commencement of the winding up
proceedings of a company shall be invalid, unless it is proved that the company was solvent
immediately after the creation of the charge.
But the charge will be valid to the extent of the amount of any cash paid to the company at the
time of or after the creation of the charge.
Judicial Pronouncement
1. Official Liquidator vs. Sri Krishna Deo, and Roy & Bros. v. Ramnath Das, The plant
and machinery of a company embedded in the earth or permanently fastened to things
attached to the earth became a part of the company’s immovable property and therefore
apart from the registration under the Companies Act, registration under the Indian
Registration Act would also be necessary to make the charge valid and effective.
2. Re. Cosslett (Contractors) Ltd., A construction company’s washing machine which was
in use at the site was declared under the terms of the contract to be the employer’s property
during the period of construction. This was held to have created a fixed charge and not a
floating charge on the machine because the machine was only one fixed item and was not
likely to change.
3. Wheatly vs. Silkstone & High Moor Coal Co. Ltd., Unless specifically precluded, the
company can create fixed charge subsequent to floating charges over the same property.
4. In Smith vs. Bridgend County Borougn Council, the agreement was held to constitute a
floating charge, in so far as it allowed the employer, in various situations of default by the
contractor, to sell the contractor’s plant and equipment and apply the proceeds in discharge
of its obligations. A right to sell an asset belonging to a debtor and appropriate the
proceeds to payment of the debt could not be anything other than a charge. It was a floating
charge because the property in question was a fluctuating body of assets which could be
consumed or removed from the site in the ordinary course of the contractor’s business.
Difference between Mortgage and Charge

Basis Mortgage Charge
Creation A mortgage is created by the act of A charge may be created either through
the parties. the act of parties or by operation of law.
Registration A mortgage requires registration A charge created by operation of law does

under the Transfer of Property Act, not require registration, but a charge
1882. created by act of parties requires
registration.
Time A mortgage is for a fixed term. The charge may be in perpetuity.
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Property A mortgage is a transfer of an A charge only gives a right to receive
interest in specific immovable payment out of a particular property.
property.
Personal A simple mortgage carries personal In case of charge, no personal liability is

Liability liability unless excluded by express created.
contract.
Charges to be Registered u/s

77
Charges created Charges created

Charges created weather tangible
on its Property
within/ outside or intangible&
/assets or any of
India situated in India
its undertaking
or outside India
To be registered with ROC in Form CHG 1(other than Debentures) or Form CHG
9(Debentures) within 30 days of its creation
Company failing to register to charge within 30 days may seek extension from C.
Govt. in Form CHG 8 u/s 87
File the order of C. Govt. with ROC in Form No. INC 28
Application for registration of charge by the charge-holder, when company fails to

register a charge
According to Section 78 where a company fails to register the charge within the period
specified above, the person in whose favor the charge is created may apply to the Registrar for
registration of the charge along with the instrument created for the charge in Form No.CHG-1
or Form No.CHG-9, as the case may be, duly signed along with fee.
The registrar may, on such application, give notice to the company about such application. The
company may either itself register the charge or shows sufficient cause why such charge
should not be registered. On failure on part of the company, the Registrar may allow
registration of such charge within fourteen days after giving notice to the company shall allow
such registration.
Where registration is affected on application of the person in whose favor the charge is
created, that person shall be entitled to recover from the company, the amount of any fee or
additional fees paid by him to the Registrar for the purpose of registration of charge.
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Certificate of Registration of Charge
According to Section 77(2) read with Rule 6 of Companies (Registration of Charges) Rules,
2014, when a charge is registered with the Registrar, Registrar shall issue a certificate of
registration of charge in Form No.CHG-2 and for registration of modification of charge in
Form No.CHG-3 to the company and to the person in whose favor the charge is created.
Satisfaction of Charges
According to section 82, the company shall give intimation to the Registrar of the payment or
satisfaction in full of any charge within a period of thirty days from the date of such payment
or satisfaction in Form No.CHG-4 along with the fee. Where the satisfaction of the charge is
not filed within thirty days from the date on which such payment of satisfaction, the Registrar
shall not register the same unless the delay is condoned by the Central Government.
Notice of Charge
According to section 80, where any charge on any property or assets of a company or any of
its undertakings is registered under section 77, any person acquiring such property or part
thereof shall be deemed to have notice of the charge from the date of such registration.
The section clarifies that if any person acquires a property, assets or undertaking for which a
charge is already registered, it would be deemed that he has complete knowledge of charge
from the date the charge is registered.
Register of Charges Maintained in Roc’s Office
According to section 8, the Registrar of Companies shall maintain a register containing

particulars of the charges registered in respect of every company. The particulars of charges
maintained on the Ministry of Corporate Affairs portal (www.mca.gov.in/MCA21) shall be
deemed to be the register of charges for the purposes of section 81 of the Act.
This charge register shall be open to inspection by any person on payment of fee for each
inspection.
Intimation of appointment of receiver or manager
Section 84 provides that if any person obtains an order for the appointment of a receiver of the
property, subject to a charge, of a company, he shall, within a period of thirty days from the
date of the passing of the order, give notice of such appointment to the company and the
Registrar along with a copy of the order and the on payment of the prescribed fees, Registrar
shall register particulars of the receiver, person or instrument in the register of charges.
Section 84(2) states that any person so appointed shall, on ceasing to hold such appointment,
give to the company and the Registrar a notice to that effect and the Registrar shall register
such notice.
As per Rule 9 the notice of appointment or cessation of a receiver of, or of a person to manage,
the property, subject to charge, of a company shall be filed with the Registrar in Form No.
CHG.6 along with fee.
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Company’s Register of Charges
Section 85 read with rule 10 provides that every company shall keep at its registered office a
register of charges in Form No. CHG.7 which shall include therein all charges and floating
charges affecting any property or assets of the company.
The entries in the register of charges maintained by the company shall be made forthwith after
the creation, modification or satisfaction of charge, as the case may be.
All the entries in the register shall be authenticated by a director or the secretary of the
company or any other person authorized by the Board for the purpose.
The register of charges shall be preserved permanently and the instrument creating a charge or
modification thereon shall be preserved for a period of eight years from the date of satisfaction
of charge by the company.
Inspection of Charges
The register of charges and instrument of charges shall be kept open for inspection during
business hours by members, creditors or any other person.
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Ch. 11 Allotment of Securities and Issue of Certificates
Introduction
Allotment is an act of appropriation of certain number of securities to those persons who have
applied for it.
The Certificate conveys the title to the security and is issued subsequent to allotment.
The Companies Act, 2013, SEBI (Issue of Capital and Disclosure Requirements), Regulations,
2009 (“SEBI ICDR Regulations”), and Securities (Contracts) Regulations, provide for
procedural aspects as to allotment and issue of Certificates for securities.
Share According to 2(84) of the Act, “share” means a share in the share capital
of a company and includes stock.
Securities The word “securities” includes shares and other instruments.

As per Section 2(h) of the Securities Contracts (Regulation) Act, 1956
“securities” include—
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated
company; and
(ii) Government securities; such other instruments as may be declared
by the Central Government to be securities.
General principles regarding allotment
“Allotment” of shares means the act of appropriation by the Board of directors of the company
out of the previously un-appropriated capital of a company of a certain number of shares to
persons who have made applications for shares.
The general principles regarding allotment of securities are as follow:
1.Proper The allotment should be made by proper authority, i.e. the Board
Authority Directors of the company, or a committee authorized to allot securities
on behalf of the Board.
2.Reasonable Allotment of securities must be made within a reasonable time. What is a

Time reasonable time being a question of fact in each case. An applicant may
refuse to take securities if the allotment is made after a long time.
3.Absolute & The allotment should be absolute and unconditional. Allotment of

Unconditional securities subject to certain conditions is also not valid.
4.Communication The allotment must be communicated. Posting of letter of allotment or

allotment advice will be taken as a valid communication even if the letter
is lost in transit.
5.In Writing Allotment should be made against application only. No valid allotment
can be made on an oral request. Section 2(55) of the Act requires that a
person should agree in writing to become a member.
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6. No Allotment should not be in contravention of any other law. If securities
Contravention are allotted on an application of a minor, the allotment will be void.
Judicial pronouncement
1. Allotment made without proper authority will be invalid. Allotment of shares made by an
irregularly constituted Board of directors shall be invalid [Changa Mal v. Provisional
Bank]
2. An allotment may be valid even if some defect was there in the appointment of directors
but which was subsequently discovered. [Section 290 and the Rule in Royal British
Bank v. Turquand]
3. An allotment by a Board irregularly constituted may be subsequently ratified by a regular

Board. [Re. Portugese Consolidated Copper Mines]
4. A director who has joined in an allotment to himself will be estopped from alleging the
invalidity of the allotment. [Yark Tramways Co. v. Willows]
5. The interval of about 6 months between application and allotment was held
unreasonable.
[Ramsgate Victoria Hotel Company v. Montefione]
6. Grant applied for certain shares in a company, the company dispatched letter of allotment
to him which never reached him. It was held that he was liable for the balance amount
due on the shares. [Household Fire & Carriage Accident Insurance Co. Ltd. Vs.
Grant]
7. The mere entry of a shareholder’s name in the company’s register is insufficient to

establish that an allotment was in fact made. [Official Liquidator, Bellary Electric
Supply Co. v. Kanni Ram Ramwoothmal]
8. There can be no proper allotment of shares unless the applicant has been informed of the
allotment. [Re. British and American Steam Navigation Co.]
Provisions relating to allotment of securities – Companies Act 2013
Minimum Section 39(1) states that no allotment of any securities of a company shall be
Amount made unless the amount stated in the prospectus as the minimum amount has
been subscribed and the sums payable on application for the amount so stated
have been paid to and received by the company.
Minimum According to Section 39(2), the amount payable on application on every

Application security shall not be less than five per cent of the nominal amount of the
Money security.
Money to If the stated minimum amount has not been subscribed and the sum payable on
be returned application is not received within a period of thirty days from the date of issue
of the prospectus, the amount so received shall be returned within 15 days from
147
the closure of the issue. If any such money is not so repaid within such period,
the directors of the company who are officers in default shall jointly and
severally be liable to repay that money with interest at 15% P.A.
File Return Whenever a company having a share capital makes any allotment of securities,
of it shall file with the Registrar a return of allotment in Form PAS-3.
allotment
Companies (Prospectus and Allotment of Securities) Rules, 2014 -
Rules relating to allotment of securities
Rule 12 states that whenever company having a share capital makes any allotment of its
securities, the company shall, within thirty days thereafter, file with the Registrar a return of
allotment in Form PAS-3.
There shall be attached to the Form PAS-3 a list of allottees stating their names, address,
occupation, if any, and number of securities allotted to each of the allottees.
In the case of securities (not being bonus shares) allotted as fully or partly paid up for
consideration other than cash, there shall be attached to the Form PAS-3 a copy of the
contract, duly stamped, pursuant to which the securities have been allotted together with any
contract of sale if relating to a property or an asset, or a contract for services.
In the case of issue of bonus shares, a copy of the resolution passed in the general meeting,
authorizing the issue of such shares shall be attached to the Form PAS-3.
Penalty for default

In case of any default, the company and its officer who is in default shall be liable to a penalty,
for each default, of one thousand rupees for each day during which such default continues or
one lakh rupees, whichever is less.
Judicial Pronouncement about return of Allotment
1. In Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange Association Ltd., the Supreme
Court held that the exchange was not liable to file any return of the forfeited shares under
Section 39 of the Companies Act, 2013, when the same were re-issued. The Court
observed that when a share is issued and forfeited there is no allotment.
2. Allotment of shares against promissory notes shall not be valid. [Chokkalingam vs.
Official Liquidator]
SHARE CERTIFICATE
Meaning A share certificate is a certificate issued to the members by the company under
its common seal specifying the number of shares held by him and the amount
paid on each share.
Distinct According to Section 45 of the Companies Act, 2013 each share of the share
No. capital of the company shall be distinguished with a distinct number for its
individual identification.
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However, such distinction shall not be required, as per proviso to Section 45, if
the shares are held by a person whose name is entered as holder of beneficial
interest in such share in the records of a depository.
This certificate is a prime facie evidence of title to the shares in the possession of
shareholders. [Society Generale De Paris vs. Walker]
Nature According to Section 46(1) of the Act, a certificate under the common seal of the
company is prima facie evidence of the title of the person to the shares specified
therein.
Duplicate Section 46 (2) states that a duplicate certificate of shares may be issued, if such
share certificate —
Certificate (a) is proved to have been lost or destroyed; or
(b) has been defaced, mutilated or torn and is surrendered to the company.
Form No. Every certificate of share or shares shall be in Form No. SH.1 or as near thereto
as possible. The particulars of every share certificate issued shall be entered
forthwith in a Register of Renewed and Duplicate Share Certificates maintained
in Form No.SH.2
ISSUE OF SHARE CERTIFICATE ISSUE OF RENEWED OR DUPLICATE

RULE 5 OF THE COMPANIES SHARE CERTIFICATE RULE 6 OF THE
(SHARE CAPITAL AND COMPANIES (SHARE CAPITAL AND
DEBENTURES) RULES, 2014 DEBENTURES) RULES, 2014
Pass board resolution. Renewal to be made only on surrender of old
Certificate.
Letter of offer surrendered to company if Company may charge fee for duplicate share
the letter is lost or destroyed the board may certificate as the board decides but not exceeding
impose reasonable terms. Rs. 50 per certificate.
Certificate shall be issued in Form No. SH- Company shall not issue any duplicate share
1 and shall specify the name of person in certificate in lieu of those lost or destroyed
whose favor the certificate is issued without the prior consent of Board.
Certificate shall be issue under the If the company is listed, then the duplicate share
common seal of the company. certificates shall be issued within 15 days and if
the company is unlisted it shall issue the
certificates in 3 months.
The certificate shall be signed by The particulars of renewed and duplicate share
-Two directors duly authorized by the certificate to be entered in Form No. SH.2.
board if the composition of board permits
at least one of the aforesaid two directors The register to be kept at registered office of the
shall be a person other than managing or company.
whole time director
-The secretary or any person authorized by
the board.
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Particulars of shares certificates to be On fraudulent issue the company shall be
entered in the Register of Members. punishable with: fine which shall not be less than
five times the face value of shares involved
which may extend to ten times.
Register of renewed and duplicate share certificates shall be maintained in Form SH2.
Maintenance of share certificate forms and related books and documents-(Rule 7)
(1) All blank forms to be used for issue of share certificates shall be printed and the printing
shall be done only on the authority of a resolution of the Board and the blank form shall be
consecutively machine numbered and the printing blocks, engravings and other things relating
to the printing of such forms shall be kept in the custody of the secretary or such other person
as the Board may authorize.
(2) The following persons shall be responsible for the maintenance, preservation and safe
custody of all books and documents relating to the issue of share certificates, including the
blank forms of share certificates
(a) the committee of the Board, if so authorized by the Board or where the company has
a company secretary, the company secretary; or
(b) where the company has no company secretary, a Director specifically authorized by
the Board for such purpose.
(3) All books referred to in sub-rule (2) shall be preserved in good order not less than thirty
years and in case of disputed cases, shall be preserved permanently.
Record of Section 46 (4) states that where a share is held in depository form, the record of
depository the depository is the prima facie evidence of the interest of the beneficial owner.
Issuing Section 46 (5) If a company with intent to defraud issues a duplicate certificate
duplicate of shares, the company shall be punishable with fine which shall not be less than
share five times the face value of the shares involved in the issue of the duplicate
certificates certificate but which may extend to ten times the face value of such shares or
to defraud rupees ten crores whichever is higher and every officer of the company who is in
default shall be liable for action under section 447, for fraud.
Time of issue of Certificate of Securities
Under Section 56(4) of the Act, every company must deliver the certificates of all securities
allotted, transferred or transmitted: -
(a) within a period of two months from the date in the case of subscribers to the
of incorporation, memorandum;
(b) within a period of two months from the date in the case of any allotment of any of its
of allotment, shares;
(c) within a period of one month from the date of in the case of a transfer or transmission of
receipt by the company of the instrument of securities;
transfer or of the intimation of transmission
(d) within a period of six months from the date in the case of any allotment of debenture.
of allotment,
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However, where the securities are dealt with in a depository, the company shall intimate the
details of allotment of securities to depository immediately on allotment of such securities.
Where any default is made in complying with the above provisions, the company shall be
punishable with fine which shall not be less than Rs 25,000 but which may extend to Rs. 5
lakh and every officer of the company who is in default shall be punishable with fine which
shall not be less than Rs. 10,000 but which may extend to Rs. 1,00,000. [Section 56(6)]
Split Certificate
A split certificate means a separate certificate claimed by a shareholder for a portion of his
holding. The advantages of a split certificate are that the shareholder may benefit in case of a
transfer by way of sale or mortgage in small lots and the right to multiply the certificates into
as many shares held by the shareholder.
Whether Share Certificate is an Official Publication or not
The question whether a share certificate is an official publication within the meaning of
Section 12(3)(c) was considered by the Department of Company Affairs (Now, Ministry of
Corporate Affairs) and the Department has clarified as follows:
According to Section 82 the shares in a company are movable property transferable in the
manner provided in the articles of the company.
According to Section 84, a certificate under the common seal of the company specifying any
share held by any member shall be prima facie evidence of the title of the member to such
share.
Thus, shares are movable property transferable in the manner provided in the articles of the
company and that the share certificates are certificates of title but are not publications in the
nature of prospectus, balance sheet, profit and loss account, notice or advertisement.
Therefore, the conclusion reached is that the share certificate is not an official publication
within the meaning of Section 12(3)(c).
Legal Effect of Share Certificate
A share certificate is prima facie evidence to the title of the person whose name is entered on
it. It means that the share certificate is a statement by the company that the moment when it
was issued, the person named in it was the legal owner of the shares specified in it, and those
shares were paid-up to the extent stated.
A share certificate once issued by the company binds it in two ways, namely:
(a) by estoppel as to title, and
(b) by estoppel as to payment.
Estoppel as to Title It is a declaration by the company to the entire world that the person in
whose name the certificate is made out and to whom it is given is a
shareholder in the company. In other words, the company is estopped
from denying his title to the shares.
Estoppel as to If the certificate states that on each of the shares full amount has been
Payment paid, the company is estopped as against a bona fide purchaser of the
shares, from alleging that they are not fully paid.
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Calls- A call is a demand, by the company in pursuance of a Board resolution and in
accordance with the articles of the company, upon its shareholders to pay the whole or part of
the balance still due on shares allotted or held by them made at any time during the life of the
company.
The amount payable in application on each share shall not be less than five per cent of the
nominal amount of the share. The balance may be payable as and when called for in one or
more calls.
In the event of default in payment of a valid call, the company can enforce payment of such
moneys by legal process and forfeit the shares in case the call is not paid. The liability of
members is enforceable only after a proper notice which is called ‘call letter’ or call notice as
1st, 2nd and final or so on, is given to him in accordance with the articles.
Requisites of a valid call
1. Board of Directors to The power to make calls is exercised by the Board in its meeting
make call(s) on shares by means of a resolution.
2. Call(s) to be made The power to make call is in the nature of trust and must be
bona-fide in the interest exercised only for the benefit of the company, and not for the
of the company private ends of the directors. If the call is made for the personal
benefit of directors, the call will be invalid.
3. Call(s) must be made According to Section 49 of the Act, calls on same class of shares
on uniform basis must be made on a uniform basis. In other words, there cannot be
any discrimination between shareholders of the same class as
regards amount and time of payment of call.
4. Notice of call(s) The notice of call must specify the exact amount and time of
payment.
5. Time limitations for If the issuer proposes to receive subscription monies in calls, it
receiving the call money shall ensure that the outstanding subscription money is called
within twelve months from the date of allotment of the issue.
Rules for Call money (Table-F of Schedule-I)

(a) For each call at least 14 days’ notice must be given to members.
(b) An interval of one month is required between two successive calls and not more than one-
fourth of the nominal value of shares can be called at one time. However, companies may have
their own articles and raise the limit.
(c) The Board of directors has the power to revoke or postpone a call after it is made.
(d) Joint shareholders are jointly and severally liable for payment of calls.
(e) If a member fails to pay call money he is liable to pay interest not exceeding the rate
specified in the articles. The directors are free to waive the payment of interest wholly or in
part.
(f) If any member desires to pay the call money in advance, the directors may at their
discretion accept and pay interest not exceeding the rate specified in the articles.
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(g) A defaulting member will not have any voting right till call money is paid by him.
Forfeiture of Shares
Forfeiture of shares means taking back of shares by the company from the shareholders. If the
shareholder makes default in payment of calls on shares, then the company can use the option
of forfeiting the shares. For a valid forfeiture, satisfaction of following conditions is necessary:
1. Authorization of If Articles authorize, the forfeiture shall include forfeiture of all

forfeiture of shares dividends declared in respect of the forfeited shares and such
dividend is not actually paid before the forfeiture of the shares.
2. Resolution for If the defaulting shareholder does not pay the amount within the
Forfeiture specified time as required by the notice, the directors may pass a
resolution forfeiting the shares.
3. Proper Notice Before the shares of a member are forfeited, a proper notice to that
effect must have been served.
4. Power of forfeiture The power of forfeiture must be exercised bona fide and in the
interest of the company.
Effect
When forfeiture of shares takes place, shareholder ceases to be a member and the forfeited
shares become the property of the company.
Legal Pronouncement about forfeiture of shares
1. Naresh Chandra Sanyal vs. Calcutta Stock Exchange Assn. Ltd.

According to Regulation 28 of Table F of Schedule I to the Companies Act, 2013,
shares can be forfeited only against non-payment of any call, or instalments of a call.
However, the Articles of a company may lawfully incorporate any other grounds of
forfeiture.
2. Hope vs. International Finance Society

Where the articles authorize the directors to forfeit the shares of a shareholder, who
commences an action against the company or the directors, by making a payment of the
full market value of his shares, it was held that such a clause was invalid as it was
against the rights of a shareholder.
Re-issue of Forfeited Shares
Shares forfeited by a company may either be cancelled or re-issued to another person at the
discretion of the Board. This is done by a Board resolution. After the money due is received
from the new member(s), the company executes a transfer deed and issues a share certificate,
and if the original holder has already surrendered the share certificate, it is duly transferred,
otherwise after a public notice in a newspaper, a new share certificate is issued.
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If the shares are re-issued at a price more than the face value, the excess of the proceeds of sale
is not payable to the former owner, if the Articles so provides. [Re. Calcutta Stock Exchange
Assn.]
However, in the case of Naresh Chandra Sanyal vs. Calcutta Stock Exchange Ass. Ltd.,
Supreme Court held that, where the articles are silent with regard to such surplus, the right of a
company upon the forfeiture and sale of forfeited shares is to use the proceeds for discharging
the liability for which the forfeiture was effected and if there is any balance, it belongs to the
defaulter and cannot be appropriated by the company.
Surrender of shares
A company cannot accept a surrender of its shares “as every surrender of shares, whether fully
paid-up or not involves a reduction of capital which is unlawful...forfeiture is a statutory
exception and is the only exception”. [Bellerby vs. Rowland and Marwood’s S.S. Co. Ltd.]
However, a surrender can be accepted in circumstances absolutely parallel to the requirements

of a forfeiture, the only difference being that instead of going to the length of the formalities of
a forfeiture, the company accepts in good faith in its own interest the shares which the
shareholder is voluntarily surrendering.
154
Ch. 12 Membership
Introduction
The terms “members” and “shareholders” are usually used interchangeably. In general, every
shareholder is a member and every member is a shareholder. However, there may be
exceptions to this statement, e.g., a person may be a holder of share(s) by transfer but will not
become its member until the transfer is registered in the books of the company in his favor and
his name is entered in the register of members. Similarly, a member who has transferred his
shares, though he does not hold any shares yet he continues to be member of the company
until the transfer is registered and his name is removed from the register of members
maintained by the company.
Herdilia Unimers Ltd. v. Renu Jain

It was held that the moment the shares were allotted and share certificate signed and the name
entered in the register of members, the allottee became the member and shareholder,
irrespective of whether the allottee received the shares or not.
Members In the case of a company limited by shares, the shareholders, in general, are the
members.
In a company limited by guarantee, the persons who are liable under the
guarantee clause in its Memorandum of Association are members of the
company.
In an unlimited company, those persons who are liable to contribute the sums
necessary to discharge in full, the debts and liabilities of the company, in the
event of its being wound-up, are members.
Definition According to Section 2(55) of the Companies Act, 2013:

of
Member (1) The subscribers to the memorandum of a company who shall be deemed to
have agreed to become members of the company, and on its registration, shall be
entered as members in its register of members;
(2) Every other person who agrees in writing to become a member of a company
and whose name is entered in its register of members shall, be a member of the
company;
(3) Every person holding shares of a company and whose name is entered as a
beneficial owner in the records of a depository shall be deemed to be a member of
the concerned company.
The two important elements, which must be present before a person can become member of a
company, are as, (i) agreement to become a member; and (ii) entry of the name of the person
so agreeing, in the register of members of the company. [Balkrishan Gupta v. Swadeshi
Polytex Ltd.]
155
MODES OF ACQUIRING MEMBERSHIP
According to Section 2(55) of the Companies Act, 2013, a person may acquire the
membership of a company:
(a) by subscribing to the Memorandum of Association (deemed agreement); or
(b) by agreeing in writing to become a member:
(i) by making an application to the company for allotment of shares; or
(ii) by executing an instrument of transfer of shares as transferee; or
(iii) by consenting to the transfer of share of a deceased member in his name; or
(iv) by acquiescence or estoppel.
(c) by holding shares of a company and whose name is entered as beneficial owner in the
records of a depository (Under the Depositories Act, 1996).
(a) Subscribers to the Memorandum
In the case of a subscriber, no application or allotment is necessary to become a member. By

virtue of his subscribing to the memorandum, he is deemed to have agreed to become a
member and he becomes ipso facto (as a result, therefore, hence, thus, in consequence,
consequently) member on the incorporation of the company and is liable for the shares he has
subscribed.
A subscriber to the memorandum cannot rescind the contract for the purchase of shares even
on the ground of fraud by the promoters. [Re. Metal Constituents Co.,]
According to Section 10(2) of the Companies Act, 2013, all monies payable by any member to
the company under the memorandum or articles shall be debt due from him to the company.
A subscriber to the memorandum must pay for his shares in cash even if the promoters have
promised him the shares for services rendered in connection with the promotion of the
company.
Again, he must take the shares directly from the company, and not through transfer from other
member(s).
(b) Agreement in Writing

(i) By an A person who applies for shares becomes a member when shares are allotted
application to him, a notice of allotment is issued to him and his name is entered on the
and allotment register of members.
(ii) By A person can become a member by acquiring shares from an existing

transfer of member and by having the transfer of shares registered in the books of the
shares company, i.e. by getting his name entered in the register of members of the
company.
(iii) By A person may become a member of a company by operation of law i.e. if he

transmission succeeds to the estate of a deceased member. Membership by this method is a
of shares legal consequence. On the death of a member, the person who is entitled
under the law to succeed to his estate, gets the right to have the shares
transmitted and registered in his name in the company’s register of members.
No instrument of transfer is necessary in this case.
156
(iv) By A person is deemed to be a member of a company if he allows his name,
acquiescence without sufficient cause, to be on the register of members of the company or
or estoppels otherwise holds himself out or allows himself to be held out as a member. In
such a case, he is estopped from denying his membership.
(c) Holding Shares as Beneficial Owner in the Records of Depository.
Every person holding shares of the company and whose name is entered as a beneficial owner
in the records of the depository shall be deemed to be a member of the concerned company.
WHO MAY BECOME A MEMBER

Subject to the Memorandum and Articles, any sui juris (a person who is competent to contract)
except the company itself, can become a member of a company.
The relevant points in this context are as:
Company as A company is a legal person and so is competent to contract. Therefore, it

a member of can become a member of any other company. However, it must be authorized
another by its Memorandum of Association to invest in the shares of that company or
company any other company.
Also a company cannot become a member of itself.
Limited LLP, being an incorporated body under the statute, can become a member of a
Liability company.
Partnership
Section 8 A non-profit making company licensed under Section 8 of the Companies
company Act,
2013 can become a member of another company if it is authorized by its
Memorandum of Association to invest into shares of the other company.
Foreigners A foreigner may take shares in an Indian company and become a member
subject to the provisions of the Foreign Exchange Management Act, 1999.
Minor as A member who is not sui juris e.g., a minor, is wholly incompetent to enter
member into a contract and as such cannot become a member of a company.
An agreement in writing for a minor to become a member of the co. may be

signed on behalf of the minor by his lawful guardian and the registration of
transfer of shares in the name of the minor, especially where the shares are
fully paid cannot be refused on the ground of the transferee being a minor
[Miss Nandita Jain v. Benett Coleman and Co. Ltd.]
If shares are transferred to a minor, the transferor will remain liable for all
future calls on such shares so long as they are held by the minor even if the
transferor was ignorant of his minority.
Insolvent as An insolvent may be a member of a company as long as he is on the register

member of members. He is entitled to vote, but he loses all beneficial interest in the
shares and company will pay dividend on his shares to the Official Assignee
or Receiver. [Morgan v. Gray]
157
Persons A person who takes shares in the name of a fictitious person, becomes liable
taking shares as a member besides incurring criminal liability under Section 38 of the Act,
in fictitious wherein punishment is provided for commission of fraud.
names
Trade Union A trade union registered under the Trade Union Act, can be registered as a
as member member and can hold shares in a company in its own corporate name. [All
India Bank Officers Confederation v. Dhanlakshmi Bank Ltd.]
Holder of A person is a member of the company, (i) who is a subscriber to the

Global Memorandum or (ii) whose name has been entered in the register of
Depository members. Since, holder of Global Depository Receipts is neither the
Receipts subscriber to the Memorandum nor a holder of the shares, his name cannot be
(GDRs) entered in the Register of Members. Therefore, a holder of Global Depository
Receipts cannot be called a member of the company.
NOTE: When the holder of GDR redeems the same into underlying shares,
he/she becomes the member.
Registration The Companies Act, 2013 contains no provisions with regard to the
of Shares in registration of shares in the name of a public office. Shares cannot, therefore,
the name of be registered in the names of public offices like the Collector of Central
Public Office Excise or the Commissioner of Income-tax etc.
Partnership A partnership firm is not a legal person and as such it cannot, in its own
firm as a name, become a member of a company except in company registered u/s 8 of
member Companies Act, 2013.
Pawnee A pawnee cannot be treated as the holder of the shares pledged in his favor,
and the pawner continues to be a member and can exercise the rights of a
member. [Balakrishna Gupta v. Swadeshi Polytex Ltd.]
CESSATION OF MEMBERSHIP
A person ceases to be a member of a company when his name is removed from its register of
members, which may occur in any of the following situations.
(a) He transfers his shares to another person, the transfer is registered by the company and his
name is removed from the register of members;
(b) His shares are forfeited;
(c) His shares are sold by the company;
(d) He dies; (his estate, however, remains liable for calls);
(e) He is adjudged insolvent;
(f) His redeemable preference shares are redeemed;
(g) He rescinds the contract of membership on the ground of fraud or misrepresentation or a
genuine mistake;
(h) His shares are purchased either by another member or by the company itself under an order
of the Tribunal under Section 242 of the Companies Act, 2013.
158
Though one ceases to be a member, he remains liable as a contributory and is also entitled to
share in the surplus, if any.
Expulsion of a Member
Can a public limited company insert an article in its Articles of Association relating to
expulsion of a member by the Board of Directors of the company where the directors were of
the view that the activities or conduct of such a member was detrimental to the interests of the
company?
The Department of Company Affairs (now MCA) has clarified that any assumption of the
powers by the Board of Directors to expel a member by alteration of Articles of Association
shall be illegal and void.
The Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia has laid down that any
provision pertaining to the expulsion of a member by the management of a company which is
against the law, will be illegal and ultra vires. Therefore, an assumption by the Board of
directors of a company of any power to expel a member by amending its AoA is illegal and
void.
Personation and Penalty
According to Section 57, if any person fraudulently personates as an owner of any security,
and thereby obtains or attempts to obtain any such security or receives or attempts to receive
any money due to any such owner, he shall be punishable with imprisonment for a term which
shall not be less than one year but which may extend to three years and with fine which shall
not be less than one lakh rupees but which may extend to five lakh rupees.
REGISTER OF MEMBERS
According to Sec 88,

(1) Every company shall keep and maintain the following registers as may be prescribed,
namely:
(a) register of members indicating separately for each class of equity and preference shares
held by each member residing in or outside India;
(b) register of debenture-holders; and
(c) register of any other security holders.
(2) Every register maintained under sub-section (1) shall include an index of the names
included therein.
(3) The register and index of beneficial owners maintained by a depository.
If a company does not maintain a register of members as stated above, the company and every
officer of the company who is in default shall be punishable with fine which shall not be less
than fifty thousand rupees but which may extend to three lakh rupees and where the failure is a
continuing one, with a further fine which may extend to one thousand rupees for every day,
during which the failure continues.
Rule 3 of Companies (Management and Administration) Rules, 2014
159
Every company limited by shares shall from the date of its registration maintain a register of
its members in Form No. MGT-1.
In the case of existing companies, registered under the Companies Act, 1956, particulars shall
be compiled within six months from the date of commencement of these rules.
(1) The entries in the registers maintained under section 88 shall be made within seven days
after the Board of Directors or its duly constituted committee approves the allotment or
transfer of shares, debentures, etc.
(2) The registers shall be maintained at the registered office of the company unless a special
resolution is passed in a general meeting authorizing the keeping of the register at any other
place where the registered office is situated or any other place in India in which more than
one-tenth of the total members entered in the register of members reside.
(3) Consequent upon any forfeiture, buy-back, sub-division, consolidation or cancellation of

shares, issue of sweat equity shares, transmission or by issue of duplicate or new share
certificates entry shall be made within seven days after approval by the Board or committee, in
the register of members.
(4) If any change occurs in the status of a member or debenture holder or any other security
holder whether due to death or insolvency or change of name, entries thereof explaining the
change shall be made in the respective register.

The entries in the registers maintained under section 88 and index included therein shall be
authenticated by the company secretary of the company or by any other person authorized by
the Board for the purpose.

Every register maintained under section 88 shall include an index of the names entered in the
respective registers and the index, so that records of member could easily be found.
Provided that the maintenance of index is not necessary in case the number of members is less
than fifty.
Registers (including Register of members) and copies of Annual Return to be kept at the
Registered office
A copy of the proposed special resolution in advance to be filed with the registrar, shall be
filed with the Registrar, at least one day before the date of general meeting of the company in
Form No. MGT.14.
Inspection of Registers- Rule 14 of Companies (Management and Administration) Rules,

2014
(1) The registers and their indices, and the copies of all the returns shall be open for
inspection by any member, debenture-holder, other security holder during business hours
without payment of any fees and by any other person on payment of such fees as may be
specified in the articles of association of the company but not exceeding Rs. 50 for each
inspection.
160
(2) Any such member, debenture holder, security holder or any other person may require a
copy of any such register or return on payment of such fee as may be specified in the
articles of association of the company but not exceeding ten rupees for each page. Such
copy or return shall be supplied within seven days of deposit of such fee.
Consequences According to Section 94(4), if any inspection or the making of any extract
if inspection is or copy required under this section is refused, the company and every
refused officer of the company who is in default shall be liable, for each such
default, to a penalty of one thousand rupees for every day subject to a
maximum of one lakh rupees during which the refusal or default continues.
Register prima A register of members is prima facie evidence of the truth of its contents.
facie evidence Accordingly, if a person’s name, to his knowledge, is there in the register of
members of a company, he shall be deemed to be a member and onus lies
on him to prove that he is not a member.
Re. M.F.R.D. Cruz, the plaintiff applied for 4,000 shares in a company but no allotment was
made to him. Subsequently 4,000 shares were transferred to him without his request and his
name was entered in the register of members. The plaintiff knew it but took no steps for
rectification of the register of members. The company went into liquidation and he was held
liable as a contributory. The Court held “when a person knows that his name is included in the
register of shareholders and he stands by and allows his name to remain, he is holding out to
the public that he is a shareholder and thereby he loses his right to have his name removed”.
Rectification of Though the time limit for filing an application for rectification of register of
a Register of members has not been specified in the Act, the provisions of Article 137 of
Members the Limitation Act would apply and in consequence, the application for
rectification must be made within three years from the date on which the
right occurs [ Anil Gupta v. Delhi Cloth & General Mills Co. Ltd.]
Foreign Register
Section 88(4) of the Companies Act, 2013 empowers companies to keep foreign registers of
members or debenture-holders, other security holders residing outside India.
A company may, if so authorized by its articles, keep in any country outside India, in such
manner as may be prescribed, a part of the register, called “foreign register” containing the
names and particulars of the members, debenture-holders, other security holders’ resident in
that country (residing outside India).
If a company does not maintain foreign register of members or debenture-holders or other

security holders, the company and every officer of the company who is in default shall be
punishable with fine which shall not be less than fifty thousand rupees but which may extend
to three lakh rupees and where the failure is a continuing one, with a further fine which may
extend to one thousand rupees for every day, during which the failure continues. [Section
88(5)]

(1) A company which has share capital or which has issued debentures or any other security
may, if so authorized by its articles, keep in any country outside India, a part of the register of
161
members or of debenture holders or of any other security holders, resident in that country.
(hereafter referred to as the "foreign register").
(2) The company shall, within thirty days from the date of the opening of any foreign register,
file with the Registrar notice of the situation of the office in Form No.MGT.3 along with the
fee where such register is kept.
(3) A foreign register shall be deemed to be part of the company's register (hereafter in this
rule referred to as the "principal register") of members or of debenture holders or of any
other security holders.
(4) The foreign register shall be maintained in the same format as the principal register.
(5) A foreign register shall be open to inspection and may be closed, and extracts may be taken
there from and copies thereof, in the same manner, as is applicable to the principal register.
(6) If a foreign register is kept by a company in any country outside India, the decision of the
appropriate competent authority in regard to the rectification of the register shall be binding.
(7) Entries in the foreign register maintained under sub-section (4) of section 88 shall be made
simultaneously after the Board of Directors or its duly constituted committee approves the
allotment or transfer of shares, debentures or any other securities, as the case may be.
Closing of Register of Members
According to Section 91 (1) A company may close the register of members or the register of
debenture-holders or the register of other security holders for any period or periods not
exceeding in the aggregate forty-five days in each year, but not exceeding thirty days at any
one time, subject to giving of previous notice of at least 7 days or such lesser period as may be
specified by Securities and Exchange Board for listed companies.
If the register of members or of debenture-holders or of other security holders is closed

without giving the notice as provided above, the company and every officer of the company
who is in default shall be liable to a penalty of 5000 rupees for every day subject to a
maximum of one lakh rupees during which the register is kept closed.
RIGHTS OF MEMBERS
When once a person becomes a member he is entitled to exercise all the rights of a member
until he ceases to be a member.
So long a person’s name stands registered in the books as a member, even if he has sold the
share and has given the share certificates and the blank transfer deed duly signed, he alone is
entitled to exercise the rights of membership. [Balakrishna Gupta & Others v. Swadeshi
Polytex Ltd.] & [ Life Insurance Corporation of India vs. Escorts Ltd.]
Individual Rights
162
Members of a company enjoy certain rights in their individual capacity. These rights can be
categorized as: -
Right to receive (i) Abridged financial statement and auditor’s report;
copies of certain (ii) (Report of the Cost Auditor
documents (iii) Notices of the general meetings of the company
Right to inspect (i) Debenture trust deed (Section 71);
statutory (ii) Register of Charges and instrument of charges (Section 85 & 87);
registers/returns (iii) Copies of contract of employment with Managing or Whole-time
and get copies directors);
thereof (iv) Shareholders’ Minutes Book (Section 119);
(v) Register of Contracts, Companies and Firms in which directors are
interested (Sec-189);
(vi) Register of directors and key managerial personnel and their
shareholding (Section 170);
Right to attend Right to attend meetings of the shareholders and exercise voting rights at
meetings these meetings either personally or through proxy (Sections 96, 100, 105
and 107).
Other Rights To transfer shares (Sections 44 and 56 and Articles of Association of the
company).
To resist and safeguard against increase in his liability without his written
consent.
To receive dividend when declared.
To have rights shares (Section 62).
To appoint directors (Section 152).
To share the surplus assets on winding up (Section 320).
Right of dissentient shareholders to apply to Tribunal (Section 48).
Right to make application collectively to the Tribunal for relief in cases of
oppression and mismanagement (Sections 241).
Right to file class action suits before the Tribunal (Section 245)
Right of Nomination. (Section 72)
Right to file a suit or take any other action in case of any misleading
statement or the inclusion or omission of any matter in the prospectus.
(Section 37)
Class Rights Member’s rights are determined by the Companies Act, Memorandum of
association, Articles of association of the company and the terms of issue
of shares. Rights attached to a class of shares are known as “class rights”.
Nomination by Security holders (including members) (Section 72)
Section 72(1) states that every holder of securities of a company may, at any time, nominate
any person to whom his securities shall vest in the event of his death.
Section 72(2) states that when the securities of a company are held by more than one person
jointly, the joint holders may together nominate any person to whom all the rights in the
securities shall vest in the event of death of all the joint holders.
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Section 72 (4) states that when the nominee is a minor, it shall be lawful for the holder of the
securities, making the nomination to appoint any person to become entitled to the securities of
the company, in the event of the death of the nominee during his minority.
Rule 19 of Companies (Share Capital and Debentures) Rules, 2014 with respect to
nomination
(1) Any holder of securities of a company may, at any time, nominate, in Form No. SH.13,
any person as his nominee in whom the securities shall vest in the event of his death.
(2) On the receipt of the nomination form, a corresponding entry shall forthwith be made in the
relevant register of securities holders, maintained under section 88.
(3) Where the nomination is made in respect of the securities held by more than one person
jointly, all joint holders shall together nominate in Form No.SH.13 any person as nominee.
(4) The request for nomination should be recorded by the Company within a period of two
months from the date of receipt of the duly filled and signed nomination form.
(5) In the event of death of the holder of securities or where the securities are held by more
than one person jointly, in the event of death of all the joint holders, the person nominated as
the nominee may upon the production of such evidence as may be required by the Board, elect,
either-
(a) to register himself as holder of the securities; or
(b) to transfer the securities, as the deceased holder could have done.
(6) If the person being a nominee, so becoming entitled, elects to be registered as holder of the
securities himself, he shall deliver or send to the company a notice in writing signed by him
stating that he so elects and such notice shall be accompanied with the death certificate of the
deceased share or debenture holder(s).
(7) All the limitations, restrictions and provisions of the Act relating to the right to transfer and
the registration of transfers of securities shall be applicable to nominee.
8) A person, being a nominee, becoming entitled to any securities by reason of the death of the
holder shall be entitled to the same dividends or interests and other advantages to which he
would have been entitled to if he were the registered holder of the securities
(9) A nomination may be cancelled, or varied by nominating any other person in place of the
present nominee, by the holder of securities who has made the nomination, by giving a notice
of such cancellation or variation, to the company in Form No. SH.14.
(10) The cancellation or variation shall take effect from the date on which the notice of such
variation or cancellation is received by the company.
(11) When the nominee is a minor, the holder of the securities, making the nomination, may
appoint a person in Form No. SH.14 specified under sub-rule (1), who shall become entitled
to the securities of the company, in the event of death of the nominee during his minority.
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Ch. 13 Transfer and Transmission of Securities
Provisions regarding Transferability
Free According to section 58(2), the shares in a public company shall be freely
transferability transferable. The Board of directors of a Company or the concerned
of securities depository has no discretion to refuse or withhold transfer of any shares. The
transfer has to be effected by the company/depository automatically and
immediately.
Instruments Under section 56 of the Companies Act, 2013, a company will register a
of transfer to transfer of securities of the company, only when a proper instrument of
be presented transfer as per the format laid down in Form No SH. 4 (when such securities
to the are held in the physical form) is submitted to the company.
company
(Rule 11 of Companies (Share Capital and Debentures) Rules, 2014).
The form needs to be duly stamped, with adequate value, dated and executed
by or on behalf of the transferor and the transferee.
The form needs to be sent to the company by the transferor or the transferee
within a period of sixty days from the date of execution, along with the share
certificate/certificate relating to the securities. In case there is no such
certificate, the application must be sent along with the letter of allotment of
securities.
A company will not register a transfer of partly paid shares, unless the
company has given a notice in Form SH-5 to the buyer and has obtained no
objection from the buyer within two weeks from the date of receipt of notice.
Time Limit for Delivery of certificates
According to Section 56(4), every company, unless prohibited by any provision of law or any
order of court, tribunal or other authority, deliver the certificates of all securities allotted,
transferred or transmitted, within a period of one month from the date of receipt by the
company of the instrument of transfer or as the case may be of the intimation of transmission.
Intimation to depository
Section 56(4) states that where the securities are dealt with in a depository, the company shall
intimate the details of allotment of securities to depository immediately on allotment of such
securities.
Transfer of securities by legal representative
According to section 56(5) of the Companies Act, 2013, the transfer of any security of a
deceased person in a company made by his legal representative shall, even if the legal
representative is not a holder thereof, be valid as if he had been the holder at the time of the
execution of the instrument of transfer.
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Penalties
According to Section 56(6), when any default is made in complying with the above
provisions, the company shall be punishable with fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees and every officer of the company
who is in default shall be punishable with fine which shall not be less than ten thousand
rupees but which may extend to one lakh rupees.
Punishment for Personation of Shareholders [Section 57]
Where any person deceitfully personates an owner of any share and (i) thereby obtains or
attempts to obtain any such share or (ii) receives or attempt to receive any money due to any
such owner, he shall be punishable with imprisonment for a term which shall not be less than
one year but which may extend to 3 years and with fine which shall not be less than one lakh
rupees but which may extend to 5 lakh rupees.
POWER TO REFUSE REGISTRATION AND APPEAL AGAINST REFUSAL
According to section 58(1) of the Companies Act, 2013, if a private company limited by
shares refuses to register the transfer of, or the transmission by operation of law of the right
to, any securities of a member in, the company, it shall, within a period of thirty days from
the date on which the instrument of transfer, or the intimation of such transmission, as the
case may be, was delivered to the company, send notice of the refusal to the transferee and
the transferor or to the person giving intimation of such transmission, as the case may be,
giving reasons for such refusal.
STATUTORY REMEDY AGAINST REFUSAL UNDER SECTION 58
The right of the holder of securities to transfer his securities in a company is absolute but
subject to provisions of the Act and restrictions, laid down in the AOA.
If a private company limited by shares refuses to register the transfer or transmission, the
transferee may appeal to the Tribunal against the refusal within 30 days from the date of
receipt of the notice or in case no notice has been sent by the company, within 60 days from
the date on which the instrument of transfer or the intimation of transmission, as the case may
be, was delivered to the company. [Section 58 (3)]
If a public company without sufficient cause refuses to register the transfer of securities
within 30 days from the date on which the instrument of transfer or the intimation of
transmission, as the case may be, is delivered to the company, the transferee may, within 60
days of such refusal or where no intimation has been received from the company, within 90
days of the delivery of the instrument of transfer or intimation of transmission, appeal to the
Tribunal. [Section 58 (4)]
The Tribunal, while dealing with an appeal, after hearing the parties, either dismiss the
appeal, or by order—
(a) direct that the transfer or transmission shall be registered by the company and the
company shall comply with such order within 10 days of the receipt of the order; or
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(b) direct rectification of the register and also direct the company to pay damages, if any,
sustained by any party aggrieved. [Section 58 (5)]
If a person contravenes the order of the Tribunal, he shall be punishable with imprisonment
for a term which shall not be less than 1 year but which may extend to 3 years and with fine
which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees. [Section 58
(6)]
Case Laws
Shri Nirmal Refusal to register share transfer on suspicion that the employee if
Kumar vs. admitted as a member will attend general meetings of the company and
Jaipur Metal may create nuisance by raising irrelevant issues and also obtain access to
and Electrical the records to the company as a shareholder is not a valid reason.
Limited)
Rangpur Tea The mere attempts of a person to wind up a company more than once
Association cannot be a ground for refusing to register transfer by the directors.
Ltd. vs.
Makkan Lal
Samaddar
M.J. Where the articles of association of a company confers a discretion on the
Amrithalingam directors with regard to acceptance of transfers, this discretion is a
vs. fiduciary one to be exercised bona fide in what the Board considers to be
Gudiyatham in the interest of the company. If on a true construction of the articles, the
Textiles Pvt. directors are only given the powers to reject on certain prescribed grounds
Ltd., and it is proved that on these grounds the request for transfer was rejected,
the Court cannot substitute the opinion of the Board. If the articles of
association give an unrestricted discretion, the court would interfere with it
only on proof of bad faith.
Bajaj Auto Limited v. N.K. Firodia
The Supreme Court observed, in the exercise of the discretion, the directors will act in the
paramount interest of the company and in the general interest of the shareholders. The
directors are, therefore, required to act bona fide and not arbitrarily and not for any collateral
motive”.
In this case, the articles permitted the directors to decline to register transfer of shares without
stating reasons, the Court would not draw un-favorable inferences against the directors
because they did not give reasons. The Court would assume that the directors acted
reasonably and bona fide and those who allege to the contrary would have to prove and
establish the same by evidence.
However, if the directors gave reasons, the Court would consider whether they were
legitimate and whether the directors proceeded on right or wrong principle. The Court has
also laid down three tests to determine the proper exercise of power by the Board of directors.
The tests are:
1. Whether the directors acted in the interest of the company;
2. Whether they acted on a wrong principle; and
3. Whether they acted on a collateral purpose.
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If the directors have uncontrolled and absolute discretion in regard to declining registration of
transfer of shares, the Court would consider whether the reasons were legitimate or the
directors acted on a wrong principle, or from corrupt motive. If the reasons for refusal given
by the directors were legitimate, the Court would not over-rule that decision.
Where the appellant transferee and respondent company were in the same line of business and
were rivals, the refusal on the ground of rivalry will be justified in terms of the decision
rendered by the Supreme Court in the Bajaj Auto Case.
RECTIFICATION OF REGISTER OF MEMBERS (Section-59)
Without sufficient cause, if the name of any person is entered in the register of members of a
company, or omitted therefrom, or unnecessary delay takes place in entering in the register,
the fact of any person having become or ceased to be a member, the aggrieved person, or any
member of the company, or the company may appeal to the Tribunal, for rectification of the
register. [Section 59(1)]
The Tribunal may, after hearing the parties to the appeal, by order, either dismiss the appeal
or direct that the transfer or transmission shall be registered by the company within 10 days of
the receipt of the order or direct rectification of the records of the depository or the register
and in the latter case, direct the company to pay damages, if any, sustained by the party
aggrieved. [Section 59 (2)]
During the pendency of the appeal before the Tribunal, the holder of securities can transfer
such securities and such further transfer would entitle the transferee to voting rights also,
unless the voting rights in case of transferee have also been suspended by the Tribunal.
[Section 59 (3)]
Where the transfer of securities is in contravention of any of the provisions of the Securities
Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the
Tribunal may, on an application made by the depository, company, the holder of the securities
or the Securities and Exchange Board, direct any company or a depository to set right the
contravention and rectify its register or records concerned [Section 59(4)].
If any default is made in complying with the order of the Tribunal, the company shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to
five lakh rupees and every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to one year or with fine which shall not be less
than one lakh rupees but which may extend to three lakh rupees, or with both [Section 59(5)].
STAMP DUTY PAYABLE
The transfer of securities attracts stamp duty under the Indian Stamp Act, 1899.
Only the Central Government can levy stamp duty on share transfers.
Stamps at the rate of twenty-five paise for consideration of Rs.100.
The stamp duty payable on transfer of debentures is, also governed by the Indian Stamp Act,
1899, and also varies from State to State.
In this case, the duty would be:
(i) The duty applicable where the deed is executed, or
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(ii) The duty applicable where the registered office of the company is situated, whichever is
higher.
The amount of consideration is required to be mentioned in the share transfer deed as

otherwise the companies cannot verify whether share transfer stamp duty has been correctly
charged thereby attracting the penal provisions of the Stamp Act in case of a default. Thus, in
case where question of consideration does not arise like in the case of a gift of shares, stamp
duty will be paid on the basis of the market value of shares and in case of unquoted shares or
where quotations are not available at the face value of the shares.
NOTE No stamp duty is payable for registration of transfer of shares in depository

form.
However, transaction charges are payable to depository participants.
REVIEW QUESTIONS
CASES
Shri Parveen Sharda vs. Chopsani Ice Aerated Water and Oils Mills Ltd.,
According to section 56(1) of the Companies Act, 2013, it is mandatory that the company
shall not register the transfer of shares unless a properly executed instrument of transfer duly
stamped has been delivered to the company.
Vardhaman Publishers Ltd. vs. Mathrubhumi Printing & Publishing Co. Ltd.
The Kerala High Court held that affixing stamps on a separate sheet of paper and attaching it
to the transfer application or cancellation of stamps by drawing a line across the stamp was
not improper and would not invalidate the said application.
On the question of whether a newly added Article empowering the Board to reject transfer of
shares would affect transactions of sale of shares entered into before the insertion of the
Article, the Court held that the property in the shares passes on the date of transfer and the
right to have the shares registered in the transferee’s name becomes crystallized on that day
itself.
Any alteration of articles will not affect concluded transactions and in respect of such
transactions, the existing articles would prevail. So, if the original (unaltered) Articles as on
the date of transfer permit free transfer of shares, the Board cannot refuse registration of the
transfer.
LOST TRANSFER DEEDS

It is sometimes found that the transfer documents sent to companies are lost, say, in transit. In
such a case, the proviso to section 56(1) of the Act provides that where the instrument of
transfer has been lost or the instrument of transfer has not been delivered within the
prescribed period (within 60 days from the date of execution of the instrument of transfer),
the company may register the transfer on such terms as to indemnity as the Board may think
fit.
The Board of directors of the company should be satisfied that the instrument of transfer
signed by or on behalf of the transferor and by or on behalf of the transferee has been lost.
The proof may be in the form of an affidavit from the transferor or the transferee and
supported by the purchase or sale note of the broker and the registration receipt issued by the
postal authorities.
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DELEGATION OF POWERS FOR TRANSFER
It is the articles of the company which authorize the Board of directors to accept or refuse
transfer of securities, at their discretion. The Board further have the power to delegate all or
any of their powers to any of the directors of the company or any person even not in the
employment of the company. Therefore, the articles of association should authorize the Board
of directors to delegate the powers suitably. Only in the case of refusal to register a transfer,
the directors are required to exercise their discretion.
TRANSFER OF SHARES TO A MINOR
According to Section 11 of the Indian Contract Act, 1872, a minor is not competent to enter
into any contract, it follows that his name cannot be entered in the Register of Members and
therefore, he cannot become a member of a company.
However, there is no objection in law to the guardian of a minor entering into a contract on
behalf of a minor, by virtue of the statutory right conferred on the guardian of a minor under
the Hindu Minority and Guardianship Act, 1956.
Since Section 56 of the Companies Act, the transfer deed can be executed by a minor through
his natural guardian as transferee, and the contract so entered into by a minor through his
natural guardian is a binding and valid contract under Section 8 of the Hindu Minority and
Guardianship Act, 1956.
NOTE: The articles of association of a company cannot impose a blanket ban prohibiting
transfer of shares in favor of a minor, as such a restriction is unreasonable.
Where a blanket restriction is imposed on transfer to a minor, it would mean that the shares of
a deceased member can never be inherited by the legal heir who might be a minor. This
would lead to a highly unjust situation and cannot be accepted as tenable.
Accordingly, there is no reason why the shares which are fully paid-up and in respect of
which no financial liability devolves on the minor are to be held as not transferable merely
because of the ban imposed in the articles of association [Saroj v. Britannia Industries
Ltd.].
TRANSFER OF SHARES TO PARTNERSHIP FIRM

A firm is not a person and as such is not entitled to apply for membership.
TRANSFER OF SECURITIES TO A BODY CORPORATE
An incorporated body being a legal person can acquire securities in its own name. Where a
company is a transferee, the following documents are required to be submitted to the
company:
(a) A certified true copy of the Board resolution to execute the instruments;
(b) A certified true copy of a Board resolution passed under Section 179(3)(e) of the
Companies Act; and
(c) A certified true copy of Memorandum and Articles of Association of a company.
The Board of Directors of a company or the concerned depository has no discretion to refuse
or withhold transfer of any security.
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TRANSMISSION OF SECURITIES
Meaning
Transmission of securities means where a person acquires an interest in property by operation
of law, such as by right of inheritance or by reason of the insolvency or lunacy of the holder
of securities or by purchase in a Court-sale.
Secretarial Standard SS-6 on transmission of shares and debentures by ICSI provides for the
procedure to be followed for transmission.
Section 56(1) of the Companies Act, 2013 states that the transfer of securities must be
effected by a proper instrument of transfer and that a provision in the articles of an automatic
transfer of securities of a deceased securities-holder is illegal and void.
But for such transmission, instrument of transfer is not required, merely an application
addressed to the company by the legal representative is sufficient.
The legal representative is, however, not a member of the company by reason only of being
the legal owner of the shares. But he may apply to be registered as a member. On the
contrary, instead of being registered himself as a member, he may make such transfer of the
shares as the deceased member could have made. The Board of directors also have the same
right to decline registration as they would have had in the case of transfer of shares before
death. But if the company unduly refuses to accept a transmission, the same remedies are
available to the legal representative as in the case of a transfer namely, an appeal to the
Tribunal u/s 58.
DISTINCTION BETWEEN TRANSFER AND TRANSMISSION OF SECURITIES

Basis Transfer of Securities Transmission of Securities
Nature Transfer takes place by a voluntary Transmission is the result of the

act of the transferor. operation of law.
Instrument An instrument of transfer is No instrument of transfer is required
required in case of transfer. in case of transmission.
Circumstance Transfer is a normal course of Transmission takes place on death or
transferring property. insolvency of a holder of securities
Consideration Transfer of securities is generally Transmission of securities is generally
made for some consideration made without any consideration
Stamp Duty Stamp duty is payable on transfer No stamp duty is payable on
of securities by a holder of transmission of securities.
securities
Rejected Documents
Documents which are not duly stamped or where stamps are not cancelled should be returned
to the person lodging them pointing out the errors so as to enable them to rectify the error.
In Federal Bank Ltd. v. Smt. Sarla Devi Rathi, the company had not registered 100 shares
that Smt. Sarla Devi Rathi, the respondent, had purchased and neither they returned the share
certificates to her. The company urged that since the respondent had not become a
shareholder of the company, no cognizance of the complaint could be taken. The Tribunal
held that there was a prima-facie case against the company.
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The Tribunal has pointed out that the company on not registering the transfer should have
returned the documents to the party who lodged them (the transferee in this case) and not to
the transferor as the transferor loses his right in the shares as soon as he executes the transfer
in blank.
Time for pointing out insufficiency of stamps
Where a company by mistake or otherwise registers a transfer which should have been
refused because of insufficient or un-cancelled stamps, or because of the instrument being
unstamped, it should point out the error to the transferee within one year from the date of
execution so that the transferee can have the matters rectified through the orders of the
Collector. Afterwards it would be too late. [Kothari Industrial Corpn. Ltd. v. Lazor
Detergents P. Ltd.]
Impounding of Documents Relating to Share Transfer
The Board of directors are not persons to impound or regularize an instrument of transfer
which is not duly stamped. [Mathrubhumi Co. Ltd. v. Vardhaman Publishers Ltd.]
Cases Regarding Transfer of Shares
Re. Letheby & Christopher Ltd.,

A transfer deed executed by the transferor alone does not pass the title in the shares to the
transferee. Where the transferor’s address and the distinctive numbers of the shares were not
mentioned in the transfer form, the same was held to be not void because those particulars
were verifiable from the accompanying share certificate.
CIT v. Ramaswamy
A transfer is complete as between the transferor and transferee when all the formalities such
as execution of the transfer deed and handing over the share certificates are completed.
LIC of India v. Escorts Ltd.

The Supreme Court held that “a transfer effective between transferor and the transferee is not
effective as against the company and any person without notice of the transfer being
registered in the company’s register.
Choukhani v. Western India Theatres Ltd.

If the director refuses the request for transfer of shares with mala fide intent i.e. if they act
oppressively or corruptly, the Company Law Board (Now NCLT) will interfere and order
registration of the transfer of shares.
Re. Wahib Bus and Mails Transport Co.

The onus of proving bad faith on the part of directors rests on the plaintiff.
Dr. Rajiv Das v. The United Press Ltd.

In the case, where the shares of a company are held in joint names and one of these joint
holders requests the company to split the shares equally between the joint holders by issuing
fresh certificates, the company shall not be legally bound to do so unless the share transfer
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deeds executed by both the joint holders duly completed and stamped are lodged with the
company together with the relevant share certificates, u/s 56 of the Companies Act, 2013.
T.S. Premkumar v. Tamil Nadu Mercantile Bank Ltd.

There shall be no justification, if a company/bank asks for information on Income Tax
Returns (including that of the nominees of the transferee), the sources of the consideration
paid for the purchase of shares, the details of the group to which the transferee is attached, for
the purposes of registration of transfer of shares, if the number of the shares which are subject
matter of transfer, is insignificant, and after the registration of which the controlling of
interest in the company/bank is not changing.
COMPLIANCE WITH SECTION 56 – A MANDATORY PROVISION
The Allahabad High Court had held that the provisions of Section 56 are not mandatory but
only directory and, therefore, the registration of a transfer of shares without an instrument of
transfer is not void.
Maheshwari Khetan Sugar Mills vs. Ishwari Khetan Sugar Mills.
But section 56 of the Companies Act, 2013 mentions the words ‘shall not register’ which
have the effect of forbidding the act of transfer except on the fulfilment of certain conditions
precedent.
The above decision of the Allahabad High Court has since been reversed by the Supreme
Court in Mannalal Khetan vs. Kedar Nath Khetan where the mandatory nature of the
provisions of section 56 of the Companies Act, 2013 has been emphasized. The result is that
without production of the share certificate along with the application for transfer, the transfer
cannot be registered and if registered, the registration will be void.
In Vasant Investment Corporation Ltd. vs. Company Law Board, it was held that it is for
the party making an appeal to the CLB (Now Tribunal) to prove that the decision of the Board
of directors is initiated by an ulterior motive in case of a refusal by the Board to register a
transfer.
BLANK TRANSFER
When a shareholder signs the transfer form without filling in the name of the transferee and
the date of execution and hands it over with the share certificate to the transferee thereby
enabling the transferee to deal with the shares, he is said to have made a transfer ‘in blank’ or
a ‘blank transfer’.
Pledge of Security
Shares are usually transferred in blank when a shareholder borrows money on its security,
e.g., by pledging the shares. If pledger makes a default in payment of the amount due at the
time appointed for repayment, the pledgee, holding the share certificate and the blank transfer
instrument, has implied power to fill up the blanks in the instrument by inserting the date and
his own name as transferee and to get himself registered as a member of the company.
This right to get himself registered as a member is available to the transferee(pledgee) even
after the death of the transferor (pledger). [ Re. Bengal Silk Mills Co. Ltd.]
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Howrah Trading Co. Ltd. v. C.I.T., the Supreme Court recognized the validity of “blank
transfers” viz., where the name of transferor is entered and the transferor signs the transfer
with the share scrip annexed, and hands it over to the transferee who, if he chooses, may
complete the transfer by entering his name and then apply to the company to register his
name in the place of that of the transferor.
FORGED TRANSFER
It may happen that a forged instrument of transfer is presented to the company for
registration. In order to avoid the consequences which will follow a forged transfer,
companies normally write to the transferor about the lodgment of the transfer instrument so
that he can object if he wishes. The company informs him that if no objection is made by him
before a day specified in the notice, it would register the transfer.
Consequences of a Forged Transfer
1. A forged transfer is a nullity and, therefore, the original owner of the shares continues to
be the shareholder and the company is bound to restore his name on the register of
members. [People’s Ins. Co. vs. Wood and Co.]
2. If the company issues a share certificate to the transferee and he sells the shares to an
innocent purchaser, the company is liable to compensate such a purchaser, if it refuses to
register him as a member, or if his name has to be removed on the application of the true
owner.
The fact that the transferee was a bona fide purchaser for value did not make any
difference and the transferee was bound to return the scrips to the person to whom the
same rightfully belong. [Kaushalya Devi vs. National Insulated Cable Company of
India]
3. If the company is put to loss by reason of the forged transfer, as it may have paid
damages to an innocent purchaser, it may recover the same independently from the
person who lodged the forged transfer.
4. Section 57 states that if any person deceitfully personates as an owner of any security,
and thereby obtains or attempts to obtain any such security, or receives or attempts to
receive any money due to any such owner, he shall be punishable with imprisonment for
a term which shall not be less than one year but which may extend to three years and
with fine which shall not be less than one lakh rupees but which may extend to five lakh
rupees.
TRANSPOSITION OF NAME
Transposition of Name
In the case of joint-shareholders, one or more of them may require the company to alter or
rearrange the serial order of their names in the register of members of the company. In this
process, there will be need for effecting consequential changes in the share certificates issued
to them. If the company provides in its articles that the senior-most among the joint-holders
will be recognized for all purposes like service of notice, a copy of balance sheet, profit and
loss account, voting at a meeting etc., the request of transposition may be duly considered and
approved by the Board or other authorized officer of the company. Since no transfer of any
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interest in the shares takes place on such transposition, the question of insisting on filling
transfer deed with the company, may not arise. Transposition does not also require stamp
duty.
DEATH OF TRANSFEROR OR TRANSFEREE BEFORE REGISTRATION OF

TRANSFER
Where the transferor dies and the company has no notice of his death the company would
obviously register the transfer. But if the company has notice of his death, the proper course
is not to register until the legal representative of the transferor has been referred to.
Where the transferee dies and company has notice of his death, a transfer of shares cannot be
registered in the name of the deceased. With the consent of the transferor and the legal
representatives of the transferee, the transfer may be registered in the names of the later. But
if there is a dispute, an order of Court will have to be insisted upon.
In Killick Nixon Ltd. vs. Dhanraj Mills Ltd., it was held that the company is not bound to
enquire into the capability of the transferee to enter into a contract. The company has to act
on the basis of what is presented in the transfer deed.
Relationship between Transferor and Transferee
Pending registration, the transferee has only an equitable right to the shares transferred to
him. He does not become the legal owner until his name is entered on the Register of
Members in respect of the shares. But as between the transferor and the transferee,
immediately after the transfer is made, the contract of transfer will subsist and the transferee
becomes the beneficial owner of the shares so transferred to him. A relation of trustee
(transferor) and beneficiary (transferee) is thereby established between them. The transferee
should, however, take prompt steps to get himself registered as a member.
Section 126 of the Companies Act, 2013 provides that where the transferor gives a mandate
to pay the dividend to the transferee pending registration of transfer, the same should be paid
to the transferee, otherwise the dividend in relation to such shares should be transferred to the
Unpaid Dividend Account mentioned in Section 124.
It is further provided that in the case of offer of right shares or fully paid bonus shares, the
same should be kept in abeyance till the title to the shares is decided.
Supreme Court held that the transferor could not be compelled by the transferee to take up on
his behalf the rights shares offered to the transferor. [Mathalone (R) vs. Bombay Life
Assurance Co. Ltd.]
Where a shareholder executes a blank transfer to enable another to deal with the shares, he is
bound not to do anything to obstruct registration of the transfer and if he improperly
intervenes he is liable in damages. [Hooper vs. Herts]
Transferor’s right to indemnity for calls - Where a transferor has paid for calls to the
company after the shares are transferred, there arises an implied promise by the transferee to
indemnify the transferor. Such a promise to indemnify can be implied even in the case of
blank transfers.
[Re. Ashworth Partington & Co.]
Transferee’s right to Dividends, Bonus and Rights Shares –
175
Where the transferor, by reason of the shares standing in his name, has received after the
transfer, any dividend on shares, bonus or other benefit accruing in respect thereof, the
transferee being the person lawfully entitled thereto, can recover the same from the transferor.
[Chunnilal Khushaldas Patel vs. H.K. Adhyaru]
Dividend to transferee after transfer –
In this case, the transfer was registered and dividends paid to the transferee. Later, the
register was rectified by removing the transferee’s name from the register on the ground of a
technical nature, like inadequacy of stamps, it was held that the transferee was not bound to
handover the dividend amount to the transferor. [Kothari Industrial Corp. Ltd. vs. Lazor
Detergents P. Ltd].,
However, the Madras High Court held in this case that the company should not be allowed to
rectify the register on a technical ground after transferring the shares.
Effect of Transfer
A company cannot refuse to register a transfer on the ground that the transfer was without
consideration. Any objection about inadequate consideration can be raised only by the
transferor himself and not by the company particularly where the shares are fully paid.
[Sanatan Investment Co. Pvt. Ltd. v. Prem Chand Jute Mills Ltd.]
Pledging of Shares
In Kanhaiyalal Jhanwar vs Pandit Shirali and Co., the Calcutta High Court held that the
deposit of share certificates themselves is sufficient to create a pledge thereon.
Death of Owner
On the death of a sole owner of shares, the rights and liabilities goes in favour of the legal
heirs. They are entitled to be registered as the holder of the shares. But the company can
register them as members with only their consent and when they apply for it. [Re Cheshire
Banking Co., Duff’s Executor’s case]
Transmission of shares to widow

If a widow applies for transmission of the shares standing in the name of her deceased
husband without producing a succession certificate and if the articles of association of the
company so authorizes, the directors may dispense with the production of succession
certificate, upon such terms as to indemnity as the directors may consider necessary, and
transmit the shares to the widow of the deceased by obtaining an indemnity bond.
Transmission of joint holdings

In case some shares are registered in joint names and the articles of the company provide that
the survivor shall be the only person to be recognized by the company as having any title to
the shares, the company is justified in refusing to register the transmission of title by
operation of law in favor of the son of the deceased holder even though he may obtain
succession certificate from the Court.
What is free transferability of securities?
176
It refers to a situation where on receipt of intimation regarding settlement of purchase
transaction, the transfer of a security is effected immediately and the transferee enjoys all the
rights and obligations associated with the securities. Once a genuine purchase transaction is
settled, nobody including the issuer, depository, participant, any intermediary or regulatory
authority can withhold the transfer of security.
Types of securities freely transferable
Only securities i.e. the shares, debentures, any other securities of a public limited company
(listed as well as unlisted companies) have been made freely transferable.
The Board of directors of such a company or the concerned depository shall not have any
discretion to refuse or withhold a transfer of such security.
Any other security, for example, shares or debentures of a private company or any unit of a
mutual fund, or any security issued by any issuer other than a public limited company are not
freely transferable and would be subject to the restrictions contained in the articles of
association of the concerned issuer and terms of issue.
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Ch. 14 Institution of Directors
Definition “Director” means a director appointed to the Board of a company.

Section 2 (34)
Section 2 (10) “Board of Directors” or “Board”, in relation to a company, means the
collective body of the directors of the company.
Minimum No. Every company shall have a minimum number of 3 directors in the case of
of Directors a public company, two directors in the case of a private company, and one
[Section 149(1)] director in the case of a One Person Company.
Maximum No. A company can appoint maximum 15 fifteen directors.

of Directors A company may appoint more than fifteen directors after passing a special
resolution in general meeting and approval of Central Government is not
required.
No. of Maximum number of directorships, including any alternate directorship a

Directorship person can hold is 20.
[Section 165] & The maximum number of public companies in which a person can be
Conditions appointed as a director shall not exceed ten.
The members of a company may, by special resolution, specify any lesser
number of companies in which a director of the company may act as
director.
Therefore, the number of directorships in public companies/ private
companies that are either holding or subsidiary company of a public
company shall be limited to 10.
Punishment for If a person accepts an appointment as a director in contravention of above

contravention mentioned provisions, he shall be punishable with fine which shall not be
less than Rs. 5,000 but which may extend to Rs. 25,000 for every day after
the first day during which the contravention continues.
Residence of a According to this section 149 (3), the residence of a director in India is
director in compulsory i.e. every company shall have at least one director who has
India [Section stayed in India for a total period of not less than 182 days in the previous
149 (3)] calendar year.
Clarification by MCA:
It is clarified by MCA that the, residency requirement' would be reckoned
from the date of commencement of section 14 of the Act i.e. 1st April,
2014.
One Woman Director
Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014,

It prescribes the following class of companies shall appoint at least one-woman director-
(i) every listed company;
(ii) every other public company having: -
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(a) paid–up share capital of one hundred crore rupees or more; or
(b) turnover of three hundred crore rupees or more.
Director elected by small shareholders
Section 151 Every listed company may have one director elected by such small
shareholders.
Small Small shareholder” means a shareholder holding shares of nominal value of

shareholder not more than twenty thousand rupees or such other sum as may be
prescribed.
Terms & Conditions for Small Shareholders’ Director
Rule 7, Companies (Appointment and Qualifications of Directors) Rules, 2014 has laid
down the following terms and conditions for appointment of small shareholder’s director,
which are as under:
(i) 1000 or A listed company, may upon notice of not less than 1000 or one-tenth of
1/10th of the total number of small shareholders, whichever is lower, have a small
total no of shareholders’ director elected by the small shareholders.
shareholders A listed company may suo moto opt to have a director representing small
shareholders.
(ii)Notice of The small shareholders intending to propose a person as a candidate for the
candidature post of small shareholder’s director shall submit a signed notice of their
intention with the company at least 14 days before the meeting specifying
their details and proposed director’s details. The details include name,
address, shares held etc.
(iii) Statement The notice shall be accompanied by a statement signed by the proposed
by proposed director for the post of small shareholders’ director stating
director (a) his Director Identification Number;
(b) that he is not disqualified to become a director under the Act; and
(c) his consent to act as a director of the company.
(iv)Can be If proposed director is qualified u/s 149 (6) for appointment as an

considered as independent director and has given declaration for his independence u/s
an Independent 149 (7) then such director shall be considered as an independent director.
Director
(v)Director’s The director’s tenure as small shareholders’ director shall not exceed a
Tenure period of 3 consecutive years and he shall not be liable to retire by
rotation.
Further he shall not be eligible for reappointment after the expiry of his
tenure.
(vi) If the person is not eligible for appointment according to section 164 (i.e.,
Disqualification disqualification for the appointment of director), then he can’t be appointed
under as small shareholder’s director.
section164
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(vii) Vacation Small shareholders’ director shall vacate the office if -
of Office (a) he ceases to be a small shareholder, on and from the date of cessation;
(b) he incurs any of the disqualifications specified in section 164
(disqualification for the appointment of director);
(c) the office of the director becomes vacant in pursuance of section 167,
(Vacation of office of director);
(d) he ceases to meet the criteria of independence as provided u/s 149(6).
(viii) No. of He shall not hold the office of small shareholders’ director in more than
small two companies.
shareholder’s If second company is in competitive business or is in conflict with
directorship in business of the first company, then he shall not be appointed in second
2 companies company.
(ix) Subsequent He shall directly or indirectly not be appointed or associated in any other
to cessation of capacity with the company for a period of 3 years from the date of
small cessation as a small shareholder’s director.
shareholder’s
directorship
APPOINTMENT OF DIRECTORS – Section 152
First Director
Normal The first directors of most of the companies are named in their articles.
company If they are not so named in the articles of a company, then subscribers to the
memorandum who are individuals shall be deemed to be the first directors of
the company until the directors are duly appointed.
One-person In the case of a One Person Company, an individual being a member shall be
company deemed to be its first director until the director(s) are duly appointed by the
member in accordance with the provisions of Section 152.
General provisions relating to appointment of directors
1.Appointment in General Meeting

Every director shall be appointed by the company in general meeting.
2. Director Identification Number (DIN)
Director Identification Number is compulsory for appointment of director of a company.

Sec 153- Application for allotment of DIN- Every individual intending to be appointed as
director of a company shall make an application for allotment of DIN to the C. Govt. in such
form and manner and along with such fees as may be prescribed.
Rule 9
(1) Every individual, who is to be appointed as director of a company shall make an
application electronically in Form DIR-3 (Application for allotment of Director
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Identification Number) to the Central Government for the allotment of a Director
Identification Number (DIN).
(2) The Central Government shall provide an electronic system to facilitate submission of
application for the allotment of DIN through the portal on the website of the Ministry of
Corporate Affairs.
(3) The applicant shall download Form DIR-3 from the portal, fill in the required particulars
and attaching photograph; proof of identity; proof of residence; and verification by the
applicant in Form DIR-4, specimen signature duly verified and sign the form digitally.
Sec 154- Allotment of DIN- C. Govt. shall within one month from the receipt of the
application u/s 153 allot a DIN to an applicant.
Rule 10
The Central Government shall, within one month from the receipt of the application under
section 153, allot a Director Identification Number to an applicant in such manner as
mentioned below:
(1) On the submission of the Form DIR-3 on the portal and payment of the requisite amount
of fees through online mode, the provisional DIN shall be generated by the system
automatically which shall not be utilized till the DIN is confirmed by the Central Government.
(2) After generation of the provisional DIN, the Central Government shall process the
application. It may approve or reject the application and communicate the same to the
applicant within a period of one month from the receipt of application.
(3) If the Central Government, on examination, finds such application to be defective or

incomplete in any respect, it shall give intimation of such defect or incompleteness, by placing
it on the website and by email to the applicant who has filed such application, directing the
applicant to rectify such defects or incompleteness by resubmitting the application within a
period of fifteen days of such placing on the website and email.
(4) In case of rejection or invalidation of application, the provisional DIN so allotted by the
system shall get lapsed automatically and the fee so paid with the application shall neither be
refunded nor adjusted with any other application.
(5) All Director Identification Numbers allotted to individual(s) by the Central Government
before the commencement of these rules shall be deemed to have been allotted to them under
these rules.
(6) The Director Identification Number so allotted under these rules is valid for the life-time
of the applicant and shall not be allotted to any other person.
Cancellation/Surrender/Deactivation of DIN – Rule 11

The Competent Authority (Central Government/RD (North), Noida/ Authorized Officer by the
RD) may, upon being satisfied on verification of particulars or documentary proof attached
with the application received from any person, cancel or deactivate the DIN in case –
(a) the DIN is found to be duplicated in respect of the same person;
(b) the DIN was obtained in a wrongful manner or by fraudulent means;
(c) of the death of the concerned individual;
(d) the concerned individual has been declared as a lunatic or of unsound mind by a competent
Court;
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(e) if the concerned individual has been adjudicated an insolvent.
(f) on an application made in Form DIR-5 by the DIN holder to surrender his or her DIN along
with declaration that he has never been appointed as director in any company and the said DIN
has never been used for filing of any document with any authority, the Central Government
may deactivate such DIN but after verification of e-records.
Intimation of changes in particulars of Director - Rule 12

(1) Every director having DIN in the event of any change in his particulars as stated in Form
DIR-3, intimate such change(s) to the Central Government within a period of 30 days of such
change(s) in Form DIR-6 (Intimation of change in particulars of Director to be given to the
Central Government).
Form DIR-6 will be filed along copy of the proof of the changed particulars and verification
in the Form DIR-7 (Verification of applicant for change in DIN particulars) all of which shall
be scanned, signed digitally by applicant and submitted electronically. Form requires pre-
certification by the professional CA/CS/CMA in practice.
(2) The Central Government shall incorporate the said changes in the electronic database after
due verification from the enclosed proofs and confirm the applicant by post/email/any other
mode.
(3) The DIN cell of the MCA shall also intimate the change(s) in the particulars of the director
submitted to it in Form DIR-6 to the concerned Registrar(s) under whose jurisdiction the
registered office of the company(s) in which such individual is a director is situated.
(4) The concerned individual shall also intimate the change(s) in his particulars to the
company or companies in which he is a director within fifteen days of such change.
Sec 155- Prohibition to obtain more than one DIN- No individual, who has already been
allotted a DIN u/s 154, shall apply for, obtain or possess another DIN.
Sec 156- Director to intimate DIN- Every existing director shall, within one month of the
receipt of DIN from C. Govt., intimate his DIN to the company or all companies wherein he is
a director.
Sec 157- Company to inform DIN to Registrar- within 15 days of the receipt of intimation
u/s 156.
If a company fails to furnish Director Identification Number u/s 157, before the expiry of the
270 days period from the date by which it should have been furnished with additional fee, the
company shall be punishable with fine which shall not be less than Rs. 25,000 but which may
extend to Rs. 1,00,000 and every officer of the company who is in default shall be punishable
with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1,00,000.
Sec 158- Obligation to indicate DIN – Every person or company, while furnishing any return
or information as are required to be furnished under this Act, shall mention DIN in such return
or information.
Section 159- Punishment - If any individual or director of a company, contravenes any of the
provisions of section 152,155 and 156, such individual or director of the company shall be
punishable with imprisonment for a term which may extend to 6 months or with fine which
182
may extend to Rs. 50,000 and where the contravention is a continuing one, with a further fine
which may extend to Rs. 500 for every day after the first day during which the contravention
continues.
3. Not He shall file a declaration that he is not disqualified to become a director

disqualified under the Act.
4. Consent to A person appointed as a director shall on or before the appointment give his
act as a consent to hold the office of director in physical form DIR-2 i.e. Consent to
director of a act as a director of a company.
company
5. [Rule 8] Company shall file Form DIR-12 (particulars of appointment of directors and
KMP along with the Form DIR-2 as an attachment within 30 days of the
appointment of a director, necessary fee.
6. Retirement of Director
Articles of the Company may provide the provisions relating to retirement of the all directors.
If there is no provision in the article, then at least two-thirds of the total number of directors of
a public company shall be liable to retire by rotation.
But they are eligible to be reappointed at annual general meeting.
However, independent directors shall not be included for the computation of total number of
directors.
At the annual general meeting of a public company one-third of such of the directors for the
time being as are liable to retire by rotation, or if their number is neither three nor a multiple of
three, then, the number nearest to one-third, shall retire from office.
The directors to retire by rotation at every annual general meeting shall be those who have
been longest in office since their last appointment.
At the annual general meeting at which a director retires as aforesaid, the company may fill up
the vacancy by appointing the retiring director or some other person thereto.
If the vacancy of the retiring director is not so filled-up and the meeting has not expressly
resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next
week, at the same time and place, or if that day is a national holiday, till the next succeeding
day which is not a holiday, at the same time and place.
If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that
meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be
deemed to have been re-appointed at the adjourned meeting, unless—
(i) a resolution for the re-appointment of such director has been put to the meeting and lost;
(ii) the retiring director has expressed his unwillingness to be so re-appointed;
(iii) he is disqualified for appointment.
Appointment of Additional Director- Section 161 (1)
The additional directors can be appointed by BODs, if such power is conferred on them by the
articles of association.
Such additional directors hold office only up to the date of next annual general meeting.
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A person who fails to get appointed as a director in a general meeting cannot be appointed as
Additional Director.
Appointment of Alternate Director- Section 161 (2)

(i) The Board of Directors of a company must be authorized by its articles or by a resolution
passed by the company in general meeting for appointment of alternate director.
(ii) The person in whose place the Alternate Director is being appointed should be absent for a
period of not less than 3 months from India.
(iii) The person to be appointed as the Alternate Director shall be the person other than the
person holding any alternate directorship for any other Director in the Company.
(iv) If it is proposed to appoint an Alternate Director to be an Independent Director, it must be
ensured that the proposed appointee also satisfies the criteria for Independent Directors.
(v) An alternate director shall not hold office for a period longer than that permissible to the
director in whose place he has been appointed and shall vacate the office if and when the
director in whose place he has been appointed returns to India.
Appointment of Directors by Nomination Section 161(3)
Subject to the articles of a company, the Board may appoint any person as a director
nominated by any institution.
Appointment of Directors in causal vacancy- Section 161 (4)
If any vacancy is caused by death or resignation of a director appointed by the shareholders in

General meeting, before expiry of his term, the Board of directors can appoint a director to fill
up such vacancy.
The appointed director shall hold office only up to the term of the director in whose place he is
appointed.
Appointment of directors to be voted individually- Section 162(1)
A single resolution shall not be moved for the appointment of two or more persons as directors
of the company. A resolution moved in contravention of aforesaid provision shall be void.
Right of persons other than retiring directors to stand for directorship- Sec. 160
A person who is not a retiring director shall be eligible for appointment to the office of a
director at any general meeting, if he has, not less than fourteen days before the meeting, left at
the registered office of the company, a notice in writing under his hand signifying his
candidature as a director along with the deposit of one lakh rupees or such higher amount as
may be prescribed which shall be refunded to such person, if the person proposed gets elected
as a director or gets more than 25% of total valid votes cast either on show of hands or on poll
on such resolution.
Disqualifications for appointment of director (Section 164)
(1) A person shall not be eligible for appointment as a director of a company, if —

(a) he is of unsound mind and stands so declared by a competent court;
184
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a court of any offence, whether involving moral turpitude or
otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a
period of five years has not elapsed from the date of expiry of the sentence.
If a person has been convicted of any offence and sentenced in respect thereof to imprisonment
for a period of seven years or more, he shall not be eligible to be appointed as a director in any
company;
(e) an order disqualifying him for appointment as a director has been passed by a court or
Tribunal and the order is in force;
(f) he has not paid any calls in respect of any shares of the company held by him, and six
months have elapsed from the last day fixed for the payment of the call;
(g) he has been convicted of the offence dealing with related party transactions under section
188 at any time during the last preceding five years; or
(h) he has not got the DIN.
(2) An additional disqualification is provided in sub section (2) of Section 164 relating to
consequences of non-filing of financial statements or annual returns. Any person who is or has
been director of any company which has not filed any financial statements and Annual Return
for 3 continuous financial year or has defaulted in payment of debentures/deposit/dividend
etc., shall also not be eligible for appointment as director of any public company and for re-
appointment in the same company for a period of five years from the date on which the said
company fails to do so.
Rule 14 prescribed that every director who disqualified u/s 164 (2), shall inform to the
company concerned in Form DIR-8 (Intimation by Director) before he is appointed or re-
appointed.
Whenever a company fails to file the financial statements/annual returns/fails to repay any
deposit, interest, dividend/fails to redeem its debentures as specified u/s 164 (2), the company
shall immediately file Form DIR-9 (Report by the company to Registrar), to the Registrar
furnishing therein the names and addresses of all the directors of the company during the
relevant financial years.
But when a company fails to file the Form DIR-9 within a period of 30 days of the failure it
would attract the disqualification u/s 164(2), officers of the company shall be the officers in
default.
Upon receipt of the Form DIR-9 the Registrar shall immediately register the document and
place it in the document file for public inspection.
Any application for removal of disqualification of directors shall be made in Form DIR-10.
185
Duties of directors- Section 166
A director of a company shall:

— Act in accordance with the articles of the company.
— Act in good faith in order to promote the objects of the company for the benefit of all
stakeholders.
— Exercise his duties with due and reasonable care, skill and diligence and shall exercise
independent judgment.
— Not involve in a situation in which he may have a direct or indirect interest that conflicts, or
possibly may conflict, with the interest of the company.
— Not achieve or attempt to achieve any undue gain or advantage either to himself or to his
relatives, partners, or associates and if such director is found guilty of making any undue gain,
he shall be liable to pay an amount equal to that gain to the company.
— Not assign his office and any assignment so made shall be void.
If a director of the company contravenes the provisions of this section such director shall be
punishable with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs.
5,00,000.
Vacation of office of director- Section 167
The office of a director shall become vacant in case—

(a) He incurs any of the disqualifications specified in section 164;
(b) He absents himself from all the meetings of the Board of Directors held during a period
of twelve months with or without seeking leave of absence of the Board;
(c) He acts in contravention of the provisions of section 184 relating to entering into
contracts or arrangements in which he is directly or indirectly interested;
(d) He fails to disclose his interest in any contract or arrangement in which he is directly or
indirectly interested
(e) He becomes disqualified by an order of a court or the Tribunal;
(f) He is convicted by a court of any offence, whether involving moral turpitude and
sentenced in respect thereof to imprisonment for not less than 6 months;
Provided that the office shall be vacated by the director even if he has filed an appeal against
the order of such court;
(g) He is removed in pursuance of the provisions of this Act.
Contravention If a person, functions as a director even when he knows that the office of
director held by him has become vacant on account of any of the
disqualifications specified above, he shall be punishable with imprisonment
for a term which may extend to 1 year or with fine which shall not be less
than Rs. 1,00,000 but which may extend to Rs. 5,00,000 or with both.
186
Where all the directors of a company vacate their offices under any of the disqualifications
specified above, the promoter or, in his absence, the Central Government shall appoint the
required number of directors who shall hold office till the directors are appointed by the
company in the general meeting.
Resignation from Board’s Office
A director may resign from his office by giving notice in writing. The Board shall, on receipt
of such notice within 30 days intimate the Registrar in Form DIR-12 and also place the fact of
such resignation in the Directors’ Report of subsequent general meeting of the company and
post the information on its website. The director shall also forward a copy of resignation along
with detailed reasons for the resignation to the Registrar in Form DIR-11 within 30 days from
the date of resignation. The notice shall become effective from the date on which the notice is
received by the company or the date, if any, specified by the director in the notice, whichever
is later.
The director who has resigned shall be liable even after his resignation for the offences which
occurred during his tenure.
If all the directors of a company resign from their office or vacate their office, the promoter or
in his absence the Central Government shall appoint the required number of directors to hold
office till the directors are appointed by the company in General Meeting.
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Ch. 15 Independent Directors
Introduction
In order to provide better governance, and to act as an oversight body in monitoring the
performance and should raise red flags whenever suspicion occurs in the functioning of the
company, the concept of Independent Directors arises.
Companies Act 2013 mandates appointment of independent directors by listed companies and
other class of companies.
It also prescribes other aspects such as maximum tenure of independent directors, separate
meeting of independent directors, tenure, their qualifications, liability, appointment,
remuneration and other aspect.
Definition of Independent Director [Section 149(6)]
Independent Director, in relation to a company, means a director other than a managing

director or a whole time director or a nominee director-
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise
and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate
company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or
associate company;
(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or
associate company, or their promoters, or directors, during the two immediately preceding
financial years or during the current financial year.
Pecuniary Interest
(i) Section 149(6)(c): "pecuniary interest in certain transactions”: -
(a) This provision inter alia requires that an 'ID' should have no 'pecuniary relationship' with
the company concerned or its holding/ subsidiary/ associate company and certain other
categories specified therein during the current and last two preceding financial years.
Clarifications have been sought whether a transaction entered into by an 'ID' with the
company concerned at par with any member of the general public and at the same price as is
payable/paid by such member of public would attract the bar of 'pecuniary relationship' under
section 149(6)(c).
The matter has been examined and it is hereby clarified that in view of the provisions of
section 188 which take away transactions in the ordinary course of business at arm's length
price from the purview of related party transactions, an 'ID' will not be said to have
'pecuniary relationship', under section 149(6)(c) in such cases.
(b) Stakeholders have also sought clarification whether receipt of remuneration by an ‘ID’
from a company would be considered as having pecuniary interest while considering his
appointment in the holding company, subsidiary company or associate company of such
company.
188
The matter has been examined in consultation with SEBI and it is clarified that 'pecuniary
relationship' provided in section 149(6)(c) of the Act does not include receipt of remuneration,
from one or more companies, by way of fee, reimbursement of expenses for participation in the
Board and other meetings and profit related commission approved by the members, in
accordance with the provisions of the Act.
(d) none of whose relatives has or had pecuniary relationship or transaction with the
company, its holding, subsidiary or associate company, or their promoters, or directors,
amounting to two percent or more of its gross turnover or total income or fifty lakh
rupees or
such higher amount as may be prescribed,
whichever is lower, during the two immediately preceding financial years or during the current
financial year;
(e) who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is or has been
employee of the company or its holding, subsidiary or associate company in any of
the three financial years immediately preceding the financial year in which he is
proposed to be appointed;
(ii) is or has been an employee or proprietor or a partner, in any of the three
financial years immediately preceding the financial year in which he is proposed to
be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of
the company or its holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the
company, its holding, subsidiary or associate company amounting to ten per
cent. or more of the gross turnover of such firm;
(iii) holds together with his relatives two percent or more of the total voting
power of the company; or
(iv) is a Chief Executive or director of any non-profit organisation
(a) that receives twenty-five percent or more of its receipts from the
company, any of its promoters, directors or its holding, subsidiary or
associate company or
(b)that (non-profit organization) holds two percent or more of the total
voting power of the company;
or who possesses such other qualifications as may be prescribed.
Explanation—For the purposes of this section, “nominee director” means a director nominated
by any financial institution in pursuance of the provisions of any law for the time being in
force, or of any agreement, or appointed by any Government, or any other person to represent
its interests.
NOTE: Nominee Directors are not Independent Directors.
Number of Independent Directors [Section 149(4)]
Every listed public company shall have at least one-third of the total number of directors
as independent directors and the Central Government may prescribe the minimum number of
independent directors in case of other classes of public companies
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Rule 4 of Companies (Appointment and Qualification of Directors) Rules 2014, provides
that the following classes of companies shall have at least two directors as independent
directors -
(i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and
deposits, exceeding fifty crore rupees.
Qualification of independent Directors
Rule 5 of Companies (Appointment and Qualification of Directors) Rules,2014 provides

that an independent director shall possess appropriate skills, experience and knowledge in one
or more fields of finance, law, management, sales, marketing, administration, research,
corporate governance, technical operations or other disciplines related to the company’s
business.
Manner of selection of an Independent Director [Section 150 (1)]
Independent directors may be selected from a data bank of eligible and willing persons
maintained by the agency (as may be authorized by Central Government). Such agency shall
put data bank of independent directors on the website of Ministry of Corporate Affairs or any
other notified website. Company must exercise due diligence before selecting a person from
the data bank referred to above, as an independent director.
Further, the appointment of independent directors has to be approved by members in a

General Meeting and the explanatory statement annexed to the notice must indicate
justification for such appointment.
Any person who desires to get his name included in the data bank of independent directors
shall make an application to the agency in Form DIR-1 Application for inclusion of name in
the databank of Independent Directors which includes the personal, educational, professional,
work experience, other Board details of the applicant [Rule 6(4)].
The agency may charge a reasonable fee from the applicant for inclusion of his name in the
data bank of independent directors [Rule 6 (5)].
An existing or applicant of such data bank of independent directors shall intimate any changes
in his particulars within fifteen days of such change to the agency [Rule 6 (6)].
The databank posted on the website shall:

a. be accessible at the specified website;
b. be substantially identical to the physical version of the data bank;
c. be searchable on the parameters specified;
d. be presented in a format convenient for both printing and viewing online; and
e. contains a link to obtain the software required to view printing free of charge. [Rule 6]
Declaration by independent director
Section 149(7) provides that every independent director shall at the first meeting of the
Board in which he participates as a director and thereafter at the first meeting of the Board in
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every financial year or whenever there is any change in the circumstances which may affect
his status as an independent director, give a declaration that he meets the criteria of
independence as provided in section 149 (6).
Code for Independent Directors [Section 149 (8)]
The company and independent directors shall abide by the provisions specified in Schedule
IV (Code of Conduct for Independent Director). It is a guide to professional conduct for
independent directors.
Code of Conduct includes:
1. Guidelines of professional conduct
2. Role and functions
3. Duties
4. Manner of appointment
5. Re-appointment
6. Resignation or removal
7. Separate meetings
8. Evaluation mechanism
1.Guidelines An independent director shall:

of (1) uphold ethical standards of integrity;
professional (2) act objectively and constructively while exercising his duties;
conduct (3) exercise his responsibilities in a bona fide manner in the interest of the
company;
(4) devote sufficient time and attention to his professional obligations for
informed and balanced decision making;
(5) not allow any extraneous considerations that will vitiate his independent
judgment in the paramount interest of the company as a whole, while
concurring in or dissenting from the collective judgment of the Board in its
decision making;
(6) not abuse his position to the detriment of the company or its shareholders
or for the purpose of gaining personal advantage;
(7) refrain from any action that would lead to loss of his independence;
(8) where circumstances arise which make an independent director lose his
independence, the independent director must immediately inform the Board
accordingly;
(9) assist the company in implementing the best corporate governance
practices.
2.Role and The independent directors shall:

functions (1) help in bringing an independent judgment to bear on the Board’s
deliberations especially on issues of strategy, performance, risk management,
resources, key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and
management;
(3) scrutinize the performance of management in meeting agreed goals and
monitor the reporting of performance;
(4) satisfy themselves on the integrity of financial information and that
financial controls and the systems of risk management are robust and
defensible;
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(5) safeguard the interests of all stakeholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key
managerial personnel and senior management and have a prime role in
appointing and where necessary recommend removal of executive directors,
key managerial personnel and senior management;
(8) arbitrate in the interest of the company as a whole, in situations of conflict
between management and shareholder’s interest.
3. Duties The independent directors shall—

(1) undertake appropriate induction and regularly update and refresh their
skills, knowledge and familiarity with the company;
(2) seek appropriate clarification or amplification of information and, where
necessary, take and follow appropriate professional advice and opinion of
outside experts at the expense of the company;
(3) strive to attend all meetings of the Board of Directors and of the Board
committees of which he is a member;
(4) participate constructively and actively in the committees of the Board in
which they are chairpersons or members;
(5) strive to attend the general meetings of the company;
(6) where they have concerns about the running of the company or a proposed
action, ensure that these are addressed by the Board and, to the extent that they
are not resolved, insist that their concerns are recorded in the minutes of the
Board meeting;
(7) keep themselves well informed about the company and the external
environment in which it operates;
(8) pay sufficient attention and ensure that adequate deliberations are held
before approving related party transactions and assure themselves that the
same are in the interest of the company;
(9) report concerns about unethical behavior, actual or suspected fraud or
violation of the company’s code of conduct or ethics policy;
(10) acting within his authority, assist in protecting the legitimate interests of
the company its stakeholders;
(11) not disclose confidential information, including commercial secrets,
technologies, advertising and sales promotion plans, unpublished price
sensitive information, unless such disclosure is expressly approved by the
Board or required by law.
4. Manner (1) Appointment process of independent directors shall be independent of the

of company management; while selecting independent directors the Board shall
appointment ensure that there is appropriate balance of skills, experience and knowledge in
the Board so as to enable the Board to discharge its functions and duties
effectively.
(2) The appointment of independent director(s) of the company shall be

approved at the meeting of the shareholders.
(3) The explanatory statement attached to the notice of the meeting for
approving the appointment of independent director shall include a statement
that in the opinion of the Board, the independent director proposed to be
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appointed fulfils the conditions specified in the Act and the rules made
thereunder and that the proposed director is independent of the management.
(4) The appointment of independent directors shall be formalised through a

letter of appointment, which shall set out:
(a) the term of appointment;
(b) the expectation of the Board from the appointed director; the Board-level
committee(s) in which the director is expected to serve and its tasks;
(c) the Code of Business Ethics that the company expects its directors and
employees to follow;
(d) the list of actions that a director should not do while functioning as such in
the company; and
(e) the remuneration, mentioning periodic fees, reimbursement of expenses for
participation in the Boards and other meetings and profit related commission,
if any.
(5) The terms and conditions of appointment of independent directors shall be

open for inspection at the registered office of the company by any member
during normal business hours.
(6) The terms and conditions of appointment of independent directors shall

also be posted on the company’s website.
5. Re- The re-appointment of independent director shall be on the basis of report of

appointment performance evaluation.
6. (1) The resignation or removal of an independent director shall be in the same

Resignation manner as is provided in sections 168 and 169 of the Act.
or removal
(2) An independent director who resigns or is removed from the Board of the
company shall be replaced by a new independent director within a period of
not more than 180 days from the date of such resignation or removal, as the
case may be.
(3) Where the company fulfils the requirement of independent directors in its
Board even without filling the vacancy created by such resignation or removal,
as the case may be, the requirement of replacement by a new independent
director shall not apply.
7. Separate (1) The independent directors of the company shall hold at least one meeting
meetings in a year, without the attendance of non-independent directors and members of
management;
(2) All the independent directors of the company shall strive to be present at
such meeting;
(3) The meeting shall:

(a) review the performance of non-independent directors and the Board
as a whole;
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(b) review the performance of the Chairperson of the company, taking
into account the views of executive directors and non-executive directors;
(c) assess the quality, quantity and timeliness of flow of information
between the company management and the Board that is necessary for
the Board to effectively and reasonably perform their duties.
8. (1) The performance evaluation of independent directors shall be done by the

Evaluation entire Board of Directors, excluding the director being evaluated.
mechanism (2) On the basis of the report of performance evaluation, it shall be determined
whether to extend or continue the term of appointment of the independent
director.
Tenure of Independent Director
Section 149(10) provides that subject to the provisions of section 152 (Appointment of
Directors),
(a) an independent director shall hold office for a term up to five consecutive years on the
Board of a company.
(b) He shall be eligible for reappointment on passing of a special resolution by the company
and disclosure of such appointment in the Board's report.
(c) No independent director shall hold office for more than two consecutive terms.
(d) An independent director shall be eligible for appointment after the expiration of three years
of ceasing to become an independent director. During the said period of three years, an
independent director shall not be appointed in or be associated with the company in any other
capacity, either directly or indirectly.
Clarification has been sought if "IDs' appointed prior to April 1, 2014 may continue and
complete their remaining tenure, under the provisions of the Companies Act, 1956 or they
should demit office and be re-appointed (should the company so decide) in accordance with
the provisions of the new Act.
Explanation to section 149(11) clearly provides that any tenure of an "ID' on the date of
commencement of the Act shall not be counted for his appointment/ holding office of director
under the Act.
Appointment of 'IDs' for less than 5 years: -

Clarification has been sought as to whether it would be possible to appoint an individual as an
ID for a period less than five years.
It is clarified that section 149(10) of the Act provides a term of "upto five consecutive years"
for an 'ID’. As such while appointment of an ‘ID' for a term of less than five years would be
permissible, appointment for any term (whether for five years or less) is to be treated as a one
term under section 149(10) of the Act.
Further, under section 149(11) of the Act, no person can hold office of 'ID' for more than 'two
consecutive terms'. Such a person shall have to demit office after two consecutive terms even
if the total number of years of his appointment in such two consecutive terms is less than 10
years.
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In such a case the person completing 'consecutive terms of less than ten years' shall be eligible
for appointment only after the expiry of the requisite cooling-off period of three years.
Independent Director shall hold office for a term up to 5 consecutive years, but shall be
eligible for reappointment on passing of a special resolution. He shall not hold office for more
than 2 consecutive terms, but such independent director shall be eligible for appointment after
the expiration of 3 years of ceasing to become an independent director.
Remuneration of Independent Director
Section 149(9) provides that an independent director shall not be entitled to any stock option
and may receive remuneration by way of fee, reimbursement of expenses for participation in
the Board and other meetings.
Liability of Independent Director
Section 149(12) provides that—

(i) an independent director;
(ii) a non-executive director not being promoter or key managerial personnel, shall be held
liable, only in respect of such acts of omission or commission by a company which had
occurred with his knowledge, attributable through Board processes, and with his consent or
connivance or where he had not acted diligently.
Retirement by rotation not applicable to independent directors
Section 149(13) states that the provisions relating to retirement of directors by rotation shall not
be applicable to appointment of independent directors.
The Companies Act, 2013 for Independent Directors

Regulatory Framework
Basis Companies Act, 2013

Board Every listed company and prescribed class of companies to have at least
Independence 1/3rd of total number of directors as independent directors. (Section 149)
Office of Office of Chairman and CEO cannot be held by same individual. (Section
Chairman and 203)
CEO
Lead Not required to be appointed
Independent
Director
Nominee An independent director in relation to a company, means a director other
Director than a MD or a WTD or a nominee director. (Section 149(6)
Declaration as Section 149(7) mandates declaration from Independent Directors stating

to that they are meeting the criteria for independence.
independence
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Qualification Companies (Appointment and qualification of Directors) Rules, 2014
of specifies certain criteria as to qualification.
Independent
Directors
Stock Options Independent Directors are not entitled to any stock option [section 197(7)]
Separate The IDs of the company shall hold at least one meeting in a year, without
Meeting of the attendance of non-independent directors and members of management.
Independent [ Section 149]
Directors
Audit (1) The Board of Directors of every listed company and such other class
Committee or classes of companies, as may be prescribed, shall constitute an Audit
Committee.
(2) The Audit Committee shall consist of a minimum of three directors
with independent directors forming a majority. [Section 177.]
CSR Every company having net worth of rupees five hundred crore or more, or
Committee turnover of rupees one thousand crore or more or a net profit of rupees
five crore or more during any financial year shall constitute a Corporate
Social Responsibility Committee of the Board consisting of three or more
directors, out of which at least one director shall be an independent
director. [Sec. 135. (1)]
Nomination The Nomination and Remuneration Committee is applicable to the

Committee following classes of Companies
(i) Every listed Company
(ii) Every other Public company-
(a) Having Paid up capital of Rs.10crores or more; or
(b) Having turnover of Rs.100 Crores
(c) Which have, in aggregate, outstanding loans or borrowings or
debentures or deposits exceeding Rs.50 Crores.
The above mentioned classes of companies shall constitute the
Nomination and Remuneration Committee consisting of 3 or more Non-
Executive Directors out of which not less than one half shall be IDs. The
chairperson of the company (whether executive or non-executive) may be
appointed as a member of the Nomination and Remuneration Committee
but shall not chair such Committee.
Stakeholders The Board of Directors of a company which consists of more than one
Grievance thousand shareholders, debenture-holders, deposit holders and any other
Committee security holders at any time during a financial year shall constitute a
Stakeholders Relationship Committee
consisting of a chairperson who shall be a non-executive director and such
other members as may be decided by the Board.
The SRC shall consider and resolve the grievances of security holders of
the company [Section 178(5)].
Performance Section 178(2):

Evaluation The Nomination and Remuneration Committee shall identify persons who
are qualified to become directors and who may be appointed in senior
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of management in accordance with the criteria laid down, recommend to the
Independent Board their appointment and removal and shall carry out evaluation of
Directors every director’s performance.
The performance evaluation of independent directors shall be done by the
entire Board of Directors, excluding the director being evaluated. On the
basis of the report of performance evaluation, it shall be determined
whether to extend or continue the term of appointment of the independent
director.
Tenure of An independent director shall hold office for a term up to five consecutive
Independent years on the Board of a company, but shall be eligible for reappointment
Directors on passing of a special resolution by the company and disclosure of such
appointment in the Board's report. No independent director shall hold
office for more than two consecutive terms, but such independent director
shall be eligible for appointment after the expiration of three years of
ceasing to become an independent director.
Training of No provision as to training.

Independent
Directors
Liability of An independent director a non- executive
Directors director not being promoter or KMP, shall be held liable, only in respect
of such acts or omission or commission by a company which had occurred
with his knowledge, attributable through board processes and with his
consent or connivance or where he had not acted diligently. (Section
149(12)
CH. 16 BOARD AND ITS POWERS
DISTRIBUTION OF POWERS OF A COMPANY
A company is an entity distinct from its shareholders and its directors.
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Some of its powers may, according to its articles, be exercised by directors, certain other
powers may be reserved for the shareholders in general meeting.
The powers of management are vested in the directors. They and they alone can exercise these
powers.
The only way in which the general body of the shareholders can control over the powers of dire
tors, is by altering the articles, or if opportunity arises, by refusing to re-elect the directors
whose action they disapprove. They cannot themselves usurp the powers which by the articles
are vested in the directors.
In Milan Sen vs. Guardian Plasticate Ltd., the directors passed a resolution for rights issue
which was questioned by certain shareholders.
The Calcutta High Court held that the question whether the company needed additional capital
was a question which should primarily be decided by the directors of the company and if they
were of the view that further capital in the form of rights issue was required, the Court would
be slow to disturb the same unless there were extreme circumstances of mala-fides or breach of
trust.
Division of Power between Directors & Shareholders
The Companies Act, 2013 has reserved some powers especially for the Board e.g. appointing
directors in casual vacancies, the power to issue debentures, etc.
On the other hand, some powers are exclusively reserved for the members in general meeting
e.g. borrowing in excess of the paid-up capital and free reserves, selling or disposing off the
whole or substantially the whole of the undertaking etc.
However, in the following exceptional cases, the general body of shareholders is competent to
act even in matters delegated to the Board:
GB competent to decide matters even though they are delegated to the BoDs.
1.Directors The general body of shareholders can intervene when it is proved that the
Acting directors have acted with bad intention.
Mala-fide
In Satya Charan Lal vs. Romeshwar Prasad Bajoria, it was stated that
ordinarily the directors of a company are the only persons who can conduct
litigation in the name of company, but when they are themselves the wrong doers,
and have acted mala-fide and their personal interest is in conflict with their duty
in such a way that they cannot or will not take steps to seek redress for the wrong
done to the company, the majority of the shareholders may take steps for
redressal of the wrong.
Marshal’s Valve Gear Co. Ltd. vs. Manning Wardle & Co. Ltd.
Mr. A and three other persons were four directors of Marshal’s Valve Gear Co.
Ltd (M. Co.) and they held almost the whole of the subscribed capital of the
company. Mr. A was the majority shareholder, but held less than three-fourth of
the share capital.
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Another company, Manning Wardle & Co. Ltd. (say as N. Co.) was committing
infringement of M. Co.’s trademark and other three directors were interested in
that company (N. Co.).
The result was that at a meeting of the Board they (other three directors) declined
to sanction any proceeding against N. Co.
What is the remedy available in this case?

Mr. A, at a general meeting of the shareholders, resolved and commenced an
action to restrain the alleged infringement.
2. The general body of shareholders may exercise the powers vested in the Board
Incompetent when the Board is incompetent to act, for instance, where all the directors are
Board interested in the transaction or when there are no validly appointed directors
functioning.
Vishwanathan vs. Tiffins B.A. & P. Ltd.,
AOA of the company authorized the directors to fill casual vacancies and also
to increase the number of directors within the maximum number fixed in the
articles.
Some casual vacancies occurred, and they were promptly filled at a general
meeting of the shareholders. This was challenged on the ground that once the
power to appoint was delegated to the Board, it could not have been exercised
at a general meeting.
The Court upheld (supported, maintained, defended, endorsed, encouraged) the

appointments by the company in the general meeting, as it found that at the
time of the general meeting there was no director in office and therefore, the
members had the right to elect.
3.Deadlock If the directors are unable or unwilling to act, on account of deadlock, the
in the Board shareholders have the inherent power to act.
Barron vs. Potter

In this case, there were only two directors on the Board of the Company and
one refused to act with the other. There was no provision in the articles
enabling the general meeting of the shareholders to increase or reduce the
number of directors. Therefore, there was a deadlock in the administration.
The court held that the residuary powers can be pressed into service by the
shareholders in general meeting.
Meetings of the Board (Section 173)
1. The Act provides that the first Board meeting should be held within thirty days of the date
of incorporation.
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2. There shall be minimum of four Board meetings every year and not more one hundred and
twenty days shall intervene between two consecutive Board meetings.
3. In case of One Person Company (OPC), small company and dormant company, at least one
Board meeting should be conducted in each half of the calendar year and the gap between
two meetings should not be less than ninety days.
Notice of Board Meetings
1. The Act requires that not less than seven days’ notice in writing shall be given to every
director at the registered address as available with the company. The notice can be given by
hand delivery or by post or by electronic means.
2. In case the Board meeting is called at shorter notice, at least one independent director
shall be present at the meeting. If he is not present, then decision of the meeting shall be
circulated to all directors and it shall be final only after ratification of decision by at least one
Independent Director.
Agenda of Board Meetings
The Act does not prescribe such requirement to circulate Agenda etc. However Good
governance envisage such requirement.
1. The SS-1 issued by ICSI requires a Company to circulate Agenda, setting out the business to
be transacted at the Meeting, and Notes on Agenda to the Directors at least seven days before
the date of the Meeting, unless the Articles prescribe a longer period.
2. Notes on items of business which are in the nature of Unpublished Price Sensitive
Information may be given at a shorter period of time than stated above, with the consent of a
majority of the Directors, which shall include at least one Independent Director.
Requirements and Procedures for Convening and Conducting Board’s Meetings
Directors may participate in the meeting either in person or through video conferencing or other
audio visual means.
Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides:
(1) Every company shall make necessary arrangements to avoid failure of video or audio visual
connection.
(2) The Chairperson of the meeting and the company secretary shall take due and reasonable
care:
(a) to safeguard the integrity of the meeting by ensuring sufficient security and
identification procedures;
(b) to ensure the availability of proper video conferencing or other audio visual
equipment or facilities for providing transmission of the communications for effective
participation of the directors and other authorized participants at the Board meeting;
(c) to record the proceedings and prepare the minutes of the meeting;
(d) to store for safekeeping and marking the tape recording(s) or other electronic
recording mechanism as part of the records of the company at least before the time of
completion of audit of that particular year;
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(e) to ensure that no person other than the concerned director are attending or have access
to the proceedings of the meeting through video conferencing mode or other audio visual
means; and
(f) to ensure that participants attending the meeting through audio visual means are able
to hear and see the other participants clearly during the course of the meeting.
3. (a) The notices of the meeting shall be sent to all the directors.
(b) The notice of the meeting shall inform the directors regarding the option available to them
to participate through video conferencing mode or other audio visual means, and shall provide
all the necessary information to enable the directors to participate through video conferencing
mode or other audio visual means.
(c) A director intending to participate through video conferencing mode or audio visual means
shall communicate his intention to the Chairman or the company secretary of the company.
(d) If the director intends to participate through video conferencing or other audio visual means,
he shall give prior intimation to that effect sufficiently in advance so that company is able to
make suitable arrangement in this behalf.
(e) The director, who desire, to participate may intimate his intention of participation through
the electronic mode at the beginning of the calendar year and such declaration shall be valid for
one calendar year.
(f) In the absence of any such intimation from the director, it shall be assumed that the director
will attend the meeting in person.
4. At the commencement of the meeting, a roll call shall be taken by the Chairperson when
every director participating through video conferencing or other audio visual means shall state,
for the record, the following namely:
(a) name;
(b) the location from where he is participating;
(c) that he can completely and clearly see, hear and communicate with the other
participants;
(d) that he has received the agenda and all the relevant material for the meeting; and
(e) that no one other than the concerned director is attending or having access to the
proceedings of the meeting at the location mentioned in (b) above.
5. (a) After the roll call, the Chairperson or the Secretary shall inform the Board about the
names of persons other than the directors who are present for the said meeting at the request or
with the permission of the Chairman and confirm that the required quorum is complete.
Explanation: It is clarified that a director participating in a meeting through video conferencing

or other audio visual means shall be counted for the purpose of quorum.
(b) The roll call shall also be made at the conclusion of the meeting and at the re-
commencement of the meeting after every break to confirm the presence of a quorum
throughout the meeting.
(6) With respect to every meeting conducted through video conferencing or other audio visual
means authorized under these rules, the scheduled venue of the meeting as set forth in the
notice convening the meeting, which shall be in India, shall be deemed to be the place of the
said meeting and all recordings of the proceedings at the meeting shall be deemed to be made at
such place.
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(7) The statutory registers which are required to be placed in the Board meeting as per the
provisions of the Act shall be placed at the scheduled venue of the meeting.
(8) (a) Every participant shall identify himself for the record before speaking on any item of
business on the agenda.
(b) If a statement of a director in the meeting through video conferencing or other audio visual
means is interrupted, the Chairperson or company secretary shall request for a repeat or
reiteration by the director.
(9) If a motion is objected to and there is a need to put it to vote, the Chairperson shall call the
roll and note the vote of each director who shall identify himself while casting his vote.
(10) From the commencement of the meeting until the conclusion of such meeting, no person
other than the Chairperson, directors, Secretary and any other person whose presence is
required by the Board shall be allowed access to the place where any director is attending the
meeting either physically or through video conferencing without the permission of the Board.
(11) (a) At the end of discussion on each agenda item, the Chairperson of the meeting shall
announce the summary of the decision taken on such item along with names of the directors, if
any, dissented from the decision taken by majority.
(b) The minutes shall disclose the particulars of the directors who attended the meeting through
video conferencing or other audio visual means.
(12) (a) The draft minutes of the meeting shall be circulated among all the directors within
fifteen days of the meeting either in writing or in electronic mode as may be decided by the
Board.
(b) Every director who attended the meeting, whether personally or through video conferencing
or other audio visual means, shall confirm or give his comments, about the accuracy of
recording of the proceedings of that particular meeting in the draft minutes, within seven days
or some reasonable time as decided by the Board, after receipt of the draft minutes failing
which his approval shall be presumed.
(c) After completion of the meeting, the minutes shall be entered in the minute book as
specified under section 118 of the Act and signed by the Chairperson.
Matters not to be dealt with in a Meeting through Video Conferencing or other Audio
Visual Means
Rule 4 prescribe restriction on following matters which shall not be dealt with in any meeting
held through video conferencing or other audio visual means:
(i) the approval of the annual financial statements;
(ii) the approval of the Board’s report;
(iii) the approval of the prospectus;
(iv) the Audit Committee Meetings for consideration of accounts; and
(v) the approval of the matter relating to amalgamation, merger, demerger, acquisition and
takeover.
Penalty Every officer of the company who is duty bound to give notice under this section if
fails to do so shall be liable to a penalty of twenty-five thousand rupees.
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Quorum for Board Meetings [Section 174]
One third of total strength of directors or two directors, whichever is higher, shall be the
quorum for a meeting.
For the purpose of determining the quorum, the participation by a director through Video
Conferencing or other audio visual means shall also be counted.
If due to resignations or removal of director(s), the number of directors of the company is

reduced below the quorum as fixed by the Articles of Association of the company, then, the
continuing Directors may act for the purpose of increasing the number of Directors to that
required for the quorum or for summoning a general meeting of the Company. It shall not act
for any other purpose.
If at any time the number of interested directors exceeds or is equal to two-thirds of the total
strength of the Board of directors, the number of directors who are not interested and present at
the meeting, being not less than two shall be the quorum during such time.
The meeting shall be adjourned due to want of quorum, shall be held to the same day at the
same time and place in the next week or if the day is National Holiday, the next working day at
the same time and place.
Quorum shall be present not only at the time of commencement of the Meeting but also while
transacting business.
After exemption notification dated 05.06.2015, in case of Section 8 Company

In sub-section (1) of Section 174,
(a) for the words "one-third of its total strength or two directors, whichever is higher", the
words "either eight members or twenty-five per cent. of its total strength whichever is less" has
been substituted;
(b) the following proviso has been inserted, namely: -
"Provided that the quorum shall not be less than two members."
Note: In case of Section 8 companies the quorum for the board meetings shall be either eight
members or twenty-five per cent of its total strength whichever is less. However, the quorum
shall not be less than two members.
Passing of Resolution by Circulation [ Section 175]
A company may pass the resolutions through circulation. The resolution in draft form together
with the necessary papers may be circulated to the directors or members of committee at their
address registered with the company in India or through electronic means which may include e-
mail or fax.
The said resolution must be passed by majority of directors or members entitled to vote. If more
than one third of directors require that the resolution must be decided at the meeting, the
chairperson shall put the resolution to be decided at the meeting.
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Defects in Appointment of Directors not to Invalidate Actions Taken: Section 176
All acts done by directors shall be valid notwithstanding that it is subsequently noticed that his
appointment was invalid by reason of any defect or disqualifications or had terminated by
virtue of the provisions of Companies Act or the articles of the company.
BOARD COMMITTEES
COMMITTEES
Committees are usually formed as a means of improving board effectiveness and efficiency in
areas where more focused, specialized and technical discussions are required. These
committees prepare the groundwork for decision-making and report at the subsequent board
meeting. Committees enable better management of full board’s time and allow in-depth
scrutiny and focused attention.
Quorum for Committee Meetings
The Companies Act, 2013 does not prescribe the quorum with respect to Board Committee
meetings.
Whereas the SS-1 states that the presence of all the members of any Committee constituted by
the Board is necessary to form the Quorum for Meetings of such Committee unless otherwise
stipulated in the Act or other law or the Articles or by the Board.
Regulation 18 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations,

2015 prescribes Quorum for Audit Committee as lower of 1/3 of total strength or 2 Member
with presence of at least two Independent Directors.
VARIOUS COMMITTEES OF THE BOARD
The following are some of the important committees of the Board:

Audit Committee
Nomination & Remuneration Committee
Stakeholders Relationship Committee
CSR Committee
Corporate Governance Committee

Science Technology and Sustainability Committee
Risk Management Committee
Regulatory, Compliance and Governmental affairs committee
Corporate Compliance Committee
Audit Committee
Purpose
A key element in the corporate governance process of any organization is its audit committee.
The purpose of constitution of this committee is to make it responsible for the oversight of the
quality and integrity of the company’s accounting and reporting practices; controls and
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financial statements; legal and regulatory compliance, etc. The committee functions as liaison
between the board of directors and the auditors- external & internal.
AUDIT COMMITTEE UNDER SECTION 177 OF THE COMPANIES ACT, 2013
The Act has enlarged the responsibilities of auditors to include valuation of their performance,
approval of modification of related-party transactions, scrutiny of loans and investments,
valuation of assets and evaluation of internal controls and risk management. They have to
establish a vigil mechanism and protection for any whistle-blower. The members must be able
to understand financial statements and have a majority of Independent Directors. Large
companies must mandatorily have professional internal auditors.
Constitution
1. The requirement of constitution of Audit Committee has been limited to:
(a) Every listed Companies; or
(b) The following class of companies –
(i) all public companies with a paid up capital of ten crore rupees or more;
(ii) all public companies having turnover of one hundred crore rupees or more;
(iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures;
or deposits exceeding fifty crore rupees or more.
Explanation - The paid up share capital or turnover or outstanding loans, or borrowings or
debentures or deposits, as the case may be, as existing on the date of last audited Financial
Statements shall be taken into account for the purposes of this rule.
2. The Committee shall comprise of minimum 3 directors with majority of the directors being
Independent Directors. The majority of members of audit committee including its chairperson
shall be person with ability to read and understand the financial statement.
3. A transition period of one year from the date on which the new Act comes into effect has
been provided to enable companies to reconstitute the Audit Committee.
4. The terms of reference of the Audit Committee have now been specified and inter alia
includes, -
(i) the recommendation for appointment, remuneration and terms of appointment of auditors of
the company;
(ii) review and monitor the auditor’s independence and performance, and effectiveness of audit
process;
(iii) examination of the financial statement and the auditors’ report thereon;
(iv) approval or any subsequent modification of transactions of the company with related
parties;
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is necessary;
(vii) evaluation of internal financial controls and risk management systems;
(viii) monitoring the end use of funds raised through public offers and related matters.
5. The Audit Committee may call for the comments of the auditors about internal control
systems, the scope of audit.
6. The audit committee hold the authority to investigate into matters or referred by the Board
and have the powers to obtain professional advice from external sources and have full access to
records of the company.
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7. In addition to the auditor, the KMP shall also have a right to be heard in the meetings of the
Audit Committee.
8. Every listed company and the companies belonging to the following class or classes shall
establish a vigil mechanism for their directors and employees to report genuine concerns or
grievances
(a) The companies which accept deposits from the public;
(b) The companies which have borrowed money from banks and public financial institutions in
excess of fifty crore rupees.
Default
If a default is made in complying with the provisions of section 177 of the Companies Act,
2013, the company and every officer who is in default, shall be punishable with imprisonment
for a term which may extend to one year, or with fine which may extend to fifty thousand
rupees or with both.
Additional role of the Audit Committee under SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015
Role of The role of Audit Committee are as follows:
Audit 1. Oversight of the company’s financial reporting process and the disclosure of
Committee its financial information to ensure that the financial statement is correct,
sufficient and credible.
2. Recommending to the Board, the appointment, re-appointment and, if
required, the replacement or removal of the statutory auditor and the fixation of
audit fees and terms of engagement.
3. Reviewing, with the management, the annual/quarterly financial statements
before submission to the Board for approval.
4. Reviewing, with the management, performance of statutory and internal
auditors.
5. Discussion with internal auditors, any significant findings and follow up
there on.
6. Reviewing the findings of any internal investigations by the internal auditors
into matters where there is suspected fraud or irregularity and reporting the
matter to the board.
7. Discussion with statutory auditors before the audit commences, about the
nature and scope of audit as well as post-audit discussion to ascertain any areas
of concern.
8. To look into the reasons for substantial defaults in the payment to the
depositors, debenture holders, shareholders (in case of non-payment of declared
dividends) and creditors.
9. To review the functioning of the Whistle Blower mechanism, in case the
same is existing.
10. Approval of appointment of CFO after assessing the qualifications,
experience & background, etc. of the candidate.
Mandatory The Audit Committee shall mandatorily review the following information
Review of 1. Management discussion and analysis of financial condition and results
information of operations;
by Audit 2. Statement of significant related party transactions (as defined by the
Committee audit committee), submitted by management;
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3. Management letters/letters of internal control weaknesses issued by the
statutory auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and remuneration of the Chief internal
auditor.
2. Nomination and Remuneration Committee Section 178
The Nomination and Remuneration Committee helps the Board of Directors in the preparations
relating to the election of members of the Board of Directors, and in handling matters that relate
to the conditions of employment and remuneration of senior management, and to
management’s and personnel’s remuneration and incentive schemes.
Except for certain large listed companies, the importance of constitution of the Nomination and
remuneration Committee has not been realized fully in India. The Board of directors of
following companies shall constitute:
(a)Every listed Companies; or

(b) The following class of companies –
(i) all public companies with a paid up capital of ten crore rupees or more;
(ii) all public companies having turnover of one hundred crore rupees or more;
(iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures
or deposits exceeding fifty crore rupees or more.
NOTE: After exemption notification dated 05.06.2015 the provisions of Section 178 of the
Act are not applicable to the Section 8 Companies.
The committee shall consist of three or more non-executive directors out of which not less than
one-half shall be independent directors. The chairperson of the company may be appointed as
member, but shall not chair such committee.
The Committee shall identify the person qualified to become directors and may be appointed in
senior management and recommend their appointment and removal and also carry out
evaluation of every director.
The Committee shall formulate the criteria, for determining qualifications, and independence of
a director and recommend to the Board the policy relating to remuneration for directors, KMPs
and other employees.
While formulating its policy, the Nomination and Remuneration Committee shall ensure that
(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and
motivate the directors
(b) relationship of remuneration to performance is clear and
(c) remuneration to Directors, KMP and senior management involves a balance between fixed
and incentive pay reflecting short and long term performance objectives which are suitable for
the working of the company and its objectives.
NOTE: After exemption notification dated 05.06.2015, in case of the Government Company
provisions of Section 178 shall apply for the appointment of Senior management and other
employees only.
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Duties of the Nomination and Remuneration Committee
The duties of the Nomination and Remuneration Committee include:

(a) identifying persons who are qualified to become Directors and who may be appointed in
senior management in accordance with the criteria laid down;
(b) recommend to the Board their appointment and removal;
(c) carry out evaluation of every Director’s performance;
(d) formulate the criteria for determining qualifications and independence of a Director, and
(e) recommend to the Board, a policy relating to the remuneration for the Directors, KMP and
other employees.
3. The Stakeholders Relationship Committee – Under Companies Act, 2013
Section 178(5) of the Companies Act, 2013 provides for constitution of the Stakeholders
Relationship Committee. The Board of a company that has more than one thousand
shareholders, debenture-holders, deposit-holders and any other security holders at any time
during a financial year is required to constitute a Stakeholders Relationship Committee
consisting of a chairperson who shall be a non-executive director and such other members as
may be decided by the Board. The Stakeholders Relationship Committee shall consider and
resolve the grievances of security holders of the company.
Who can attend the general meeting of the company on behalf of committee constituted under
this section?
The chairperson of each of the committees constituted under this section or, in his absence, any
other member of the committee authorized by him in this behalf shall attend the general
meetings of the company.
Penalty for Contravention

The company shall be punishable with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees. Every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to one year or with fine not less
than rupees twenty-five thousand but which may extend to one lakh rupees or with both.
The non-consideration of resolution of any grievance by the Stakeholders Relationship
Committee in good faith shall not constitute a contravention of this section.
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4. Corporate Social Responsibility Committee
Corporate Social Responsibility (CSR) refers to way that businesses are managed to bring
about an overall positive impact on the communities, cultures, societies and environments in
which they operate. The fundamentals of CSR rest on the fact that not only public policy but
even corporate should be responsible enough to address social issues.
The basic objective of CSR in these days is to maximize the company’s overall impact on the
society and stakeholders. CSR policies, practices and programs are being comprehensively
integrated by an increasing number of companies throughout their business operations.
CSR programs ranges from community development to development in education,

environment and healthcare etc. Provision of improved medical and sanitation facilities,
building schools and houses, and empowering the villagers and in process making them more
self-reliant by providing vocational training etc.
One of the key changes in the Companies Act, 2013 is the introduction of a Corporate Social
Responsibility section making India the first country to mandate CSR through a statutory
provision. While CSR is not mandatory for companies, the rules are in line with the ‘Comply
or Explain’ principle with penalties applicable only if an explanation is not offered.
The provisions of the Section may be summarized as under:

1. The Section applies to the following classes of companies during any financial year:
(i) Companies having Net Worth of rupees five hundred crore or more;
(ii) Companies having turnover of rupees one thousand crore or more;
(iii) Companies having Net Profit of rupees five crore or more.
2. The companies specified above shall constitute a Corporate Social Responsibility
Committee (CSR Committee) of the Board.
3. The CSR Committee shall consist of three or more Directors, out of which at least one
Director shall be an Independent Director.
4. After taking into account the recommendations of the CSR Committee, the Board shall
approve the CSR Policy for the company.
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5. The contents of the Policy shall be disclosed in the Board’s report.
6. It shall also be placed on the Company’s website, if any, in a manner to be prescribed by the
Central Government.
7. The Board shall ensure that the activities as are included in the CSR Policy (from the
activities as specified in Schedule VII) are undertaken by the Company.
The following additional features of the Section are relevant:

1. While spending the amount earmarked for CSR activities, the company shall give
preference to the local area and areas around it where it operates;
2. If the Company fails to spend the amount, the Board shall specify the reasons for not
spending the amount in the Board’s Report.
3. The eligible companies are required to spend in every financial year, at least two per cent of
the Average Net Profits of the Company made during the three immediately preceding
financial years in pursuance of its CSR Policy. For this purpose, “Average Net Profit” shall be
calculated in accordance with the provisions of Section 198 of the Companies Act, 2013.
Corporate Governance Committee
A company may constitute Corporate Governance committee to develop and recommend the
board a set of corporate governance guidelines applicable to the company and implement
policies relating to corporate governance. Many companies give the mandate of corporate
governance to nomination committee and is given the nomenclature Nomination and
Corporate Governance Committee.
Regulatory, Compliance & Government Affairs Committee
The primary objective of the Compliance Committee is to review and monitor:

• the Company’s compliance with applicable legal and regulatory requirements,
• the Company’s policies, programs, and procedures to ensure compliance with relevant laws
and the Company’s Code of Conduct;
• the Company’s efforts to implement legal obligations arising from settlement agreements;
and
• perform any other duties as are directed by the Board of Directors of the company.
Science, Technology & Sustainability Committee
It:
• Monitors and reviews the overall strategy, direction and effectiveness of the Company’s
research and development.
• Provides input, as needed, regarding the scientific and technological aspects of product
safety matters.
• Reviews the Company’s policies, programs and practices on environment, health, safety
and un- sustainability.
• Assists the Board in identifying and comprehending significant emerging science and
technology policy and public health issues.
• Assists the Board in the Company’s major acquisitions and the acquisition or development
of new science or technology.
Risk Management Committee
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Risk Management Committee under SEBI (Listing Obligations and Disclosure
Requirement) Additional Regulations, 2015
As per regulations 21of the SEBI (Listing Obligations and Disclosure Requirement)
Regulations, 2015, the board of directors of the top 100 listed entities, determined on the basis
of market capitalization, as at the end of the immediate previous financial year shall constitute
a Risk Management Committee.
The majority of members of Risk Management Committee shall consist of members of the
board of directors.
The Chairperson of the Risk management committee shall be a member of the board of
directors and senior executives of the listed entity may be members of the committee.
The board of directors shall define the role and responsibility of the Risk Management
Committee and may delegate monitoring and reviewing of the risk management plan to the
committee and such other functions as it may deem fit.
Power of Board: Section 179
The power of the company is divided into two parts, i.e., powers to be exercised by the BODs
and the powers to be exercised by the shareholders in the general body meeting.
Powers to be exercised in the Board’s meetings
The following [section 179(3) and Rule 8] powers of the Board of directors shall be exercised
only by means of resolutions passed at meetings of the Board, namely: -
(1) to make calls on shareholders in respect of money unpaid on their shares;
(2) to authorize buy-back of securities under section 68;
(3) to issue securities, including debentures, whether in or outside India;
(4) to borrow monies;
(5) to invest the funds of the company;
(6) to grant loans or give guarantee or provide security in respect of loans;
(7) to approve financial statement;
(8) to diversify the business of the company;
(9) to approve amalgamation, or merger;
(10) to take over a company or acquire a controlling or substantial stake in another company;
(11) to make political contributions;
(12) to appoint or remove key managerial personnel (KMP); etc.
The Board may, by a resolution passed at a meeting, delegate to any committee of directors,
the managing director, the manager, the powers specified in (4) to (6) above on such
conditions as it may specify.
Restriction on Powers of Board [Section 180]
The board can exercise the following powers only with the consent of the company by special
resolution, namely –
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(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the
undertaking of the company.
(b) to invest the amount of compensation received by it as a result of any merger or
amalgamation;
(c) to borrow money, where the money to be borrowed, together with the money already
borrowed by the company will exceed aggregate of its paid-up share capital and free reserves;
(d) to give time for the repayment of, any debt due from a director.
NOTE: After exemption notification dated 05.06.2015, in case of Private Companies

provisions of Section 180 shall not apply.
Contributions to Charitable Funds and Political Parties [Section 181]
The power of making contribution to ‘bona fide’ charitable and other funds is available to the
board subject to certain limits.
Further, the permission of company in general meeting is required if such contribution exceeds
five percent of its average net profits for the three immediately preceding previous years.
Prohibitions and Restrictions Regarding Political Contributions [Section 182]
The non-government company or the company which has been in existence for less than three
financial years may contribute any amount directly or indirectly to any political party.
Further, the limit of contribution to political parties is 7.5% of the average net profits during
the three immediately preceding financial years.
The contribution so made if or likely to affect the public support for a political party deemed to
be the contribution for political purpose.
The company is required to disclose in its profit and loss account any amount or amounts
contributed by it to any political party during the financial year and the particular of total
amount contributed and the name of political party to whom the contribution so made.
Penalty for Contravention
The contribution in contravention of the provisions of this section, the company shall be
punishable for an amount of which may extend to five times of the amount so contributed and
every officer who is in default shall be punishable with imprisonment for a term which may
extend to six months and with fine which may extend to five times of the amount so
contributed.
Power of Board and other Persons to make Contributions to National Defence Fund, etc.
[Section 183]
The Board is authorised to contribute such amount as it thinks fit to the National Defence Fund
or any other fund approved by the Government for the purpose of national defence.
The company is required to disclose in its P&L Account the total amount contributed by it
during the financial year.
Disclosure of Interest by Director [Section 184]
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The Act provides for the disclosure by directors relating his interest in any company or
companies, firms or other association of individuals by giving a notice in writing in Form
MBP -1 (Rule 9(1)) at the first meeting of board after being appointed as director and at first
meeting of board of every financial year.
As per section 184 (2) of the Act, every director is required to disclose the nature of his
concern or interest at the meeting of board in which the contract or arrangement is discussed
and he has not to participate in such meeting.
The above mentioned interest may be direct or indirect and relating to some contract or
arrangement entered into or to be entered into with a body corporate in which such director or
such director in association with other director holds more than two percent shareholding or is
a promoter, manager, Chief Executive Officer of that body corporate or with a firm or other
entity in which such director is a partner, owner or member as the case maybe.
If a director is not interested at the time of contract but, subsequently becomes interested is
required to disclose his interest or concern at the first meeting of the board.
If a contract or arrangement is entered into by the company without disclosure of interest by

director, it shall be voidable at the option of the company. The contravention of the provisions
leads to punishment for a term which may extend to one year or with fine which shall not be
less than fifty thousand rupees but which may extend to one lakh rupees or both.
NOTE: In case of private companies the interested directors may participate in the Board
Meetings after disclosure of interest. [Vide exemption notification dated 5th June, 2015.]
NOTE: After exemption notification dated 05.06.2015, In case of section 8 companies:

Provisions of Section 184 (2) shall apply only if the transaction with reference to section 188
on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees.
Loans to Directors, etc. [Section 185]
No company shall directly or indirectly advance any loan to any of its directors or to any
person in whom director is interested or give any guarantee or provide any security in
connection with any loan taken by him or such other person.
But a company may advance loan to managing or whole-time director as part of the conditions
of service extended by the company to all its employees or pursuant to any scheme approved
by the members by a special resolution or the company provides loans or gives guarantee or
securities for the due repayment of any loan in due course of its business.
Rule 10 provides that any loan made by a holding company to its wholly owned subsidiary
company or any guarantee given or security provided by a holding company in respect of any
loan made to its wholly owned subsidiary company is exempted from the requirements under
this section and any guarantee given or security provided by a holding company in respect of
loan made by any bank or financial institution to its subsidiary company is exempted from the
requirements under this section; provided that such loans are utilized by the subsidiary
company for its principle business activities.
Penalty
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In case of contravention of any provisions of this section, there is punishment with fine which
shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees. The
director or to whom loan or advance is given or guarantee or security is given or provided shall
be imprisonment which may extend to six months or with fine mentioned above or with both.
Related Party Transactions [Section 188]

Meaning of Related Party
The term ‘related party’, in relation to company, means and includes the following:
1. a director or his relative,
2. KMP or their relative,
3. a firm in which a director, manager or his relative is a partner,
4. a private company in which a director or manger is a director or members,
5. a public company in which a director or Manager is a director or holds along with his
relatives more than 2% of its paid up share capital.
6. a person on whose advice, directions or instruction (except given in professional
capacity) a director or manager is accustomed to act,
7. a holding/ subsidiary or associate company, subsidiary ’s subsidiary, and
8. such person as would be prescribed.
1. Scope of Transactions [Section 188 (1)]
The scope of dealing with Related Party Transactions has been widened in Companies Act,
2013.
Section 188(1) of the 2013 Act provides below for approval of related party transactions:
Except with the consent of the Board of Directors given by a resolution at a meeting of the Board
and subject to such conditions as may be prescribed, no company shall enter into any contract
or arrangement with a related party with respect to:
(a) sale, purchase or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods, materials, services or property;
(f) such related party’s appointment to any office or place of profit in the company, its
subsidiary company or associate company; and
(g) underwriting the subscription of any securities of the company.
The expression “office or place of profit” means any office or place—

(i) where such office or place is held by a director, if the director holding it receives from the
company anything by way of remuneration over and above the remuneration to which he is
entitled as director, by way of salary, fee, commission, perquisites, any rent-free
accommodation, or otherwise;
(ii) where such office or place is held by an individual other than a director, if the individual
receives from the company anything by way of remuneration, salary, fee, commission,
perquisites, any rent-free accommodation, or otherwise;
The expression “arm’s length transaction” means a transaction between two related parties
that is conducted as if they were unrelated, so that there is no conflict of interest.
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However, nature of transactions covered are comprehensive as they include routine to rare
supply of goods or material either by way of direct sale, purchase or supply of any goods or
services (technical support, maintenance, consultancy, advisory, or sharing professional
knowledge etc.) or by appointing agent for the same and underwriting financial instruments of
the Company. While entering into such type of transactions, Company will be required to take
prior approval of Board of Directors, by way of a resolution passed in the board meeting. The
transactions done in ordinary course of business on arm length’s basis shall be outside the
scope of this provision.
As per second proviso of the section 188(1) of the Act, no member of the company, shall vote
on such resolution if such member is a related party to the contract or arrangement which may
be entered in to by the company.
Note: After exemption notification dated 05.06.2015 the second proviso of the section 188(1)
of the Act shall not apply to the private company.
Entering into Contract or Arrangement with Related Party [Rule 15 of The Companies
(Meeting of Board and its Powers) Rules 2014]
A company shall enter into any contract or arrangement with a related party subject to the
following (Rule 15) conditions –
(1) The agenda of the Board meeting at which the resolution is proposed to be moved shall
disclose-
(a) the name of the related party and nature of relationship;
(b) the nature, duration of the contract and particulars of the contract or arrangement;
(c) the material terms of the contract or arrangement including the value, if any;
(d) any advance paid or received for the contract or arrangement, if any;
(e) the manner of determining the pricing and other commercial terms, both included as part of
contract;
(f) whether all factors relevant to the contract have been considered, if not, the details of
factors not considered with the rationale for not considering those factors; and
(g) any other information relevant or important for the Board to take a decision on the
proposed transaction.
(2) Where any director is interested in any contract or arrangement with a related party, such
director shall not be present at the meeting during discussions on the subject matter of the
resolution relating to such contract or arrangement.
(3) For the purposes of first proviso to sub-section (1) of section 188, except with the prior
approval of the company by a special resolution –
(i) a company having a paid-up share capital of ten crore rupees or more shall not enter into a
contract or arrangement with any related party; or
(ii) a company shall not enter into a transaction or transactions, where the transaction or
transactions to be entered into –
(a) as contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of
section 188 with criteria, as mentioned below –
(i) sale, purchase or supply of any goods or materials directly or through
appointment of agents exceeding twenty-five percent of the annual
turnover as mentioned in clause (a) and clause (e) respectively of sub-
section (1) of section 188;
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(ii) selling or otherwise disposing of, or buying, property of any kind directly
or through appointment of agents exceeding ten percent of net worth as
mentioned in clause (b) and clause (e) respectively of sub-section (1) of
section 188;
(iii) leasing of property of any kind exceeding ten percent of the net worth
or exceeding ten percent of turnover as mentioned in clause (c) of sub-
section (1) of section 188;
(iv) availing or rendering of any services directly or through appointment of
agents exceeding ten percent of the net worth as mentioned in clause (d)
and clause (e) of sub-section (1) of section 188;
(b) appointment to any office or place of profit in the company, its subsidiary
company or associate company at a monthly remuneration exceeding two and half
lakh rupees as mentioned in clause (f) of sub-section (1) of section 188; or
(c) remuneration for underwriting the subscription of any securities or derivatives
thereof of the company exceeding one percent of the net worth as mentioned in
clause (g) of subsection (1) of section 188.
In case of wholly owned subsidiary, the special resolution passed by the holding company
shall be sufficient for the purpose of entering into the transactions between wholly owned
subsidiary and holding company.
After exemption notifications dated 05.06.2015, in case of Government company:

First and second proviso to sub section (1) of Section 188 shall not apply to –
(a) a Government company in respect of contacts or arrangements entered into by it with any
other Government company;
(b) a Government company, other than a listed company, in respect of contracts or
arrangements other than those referred to in clause (a), in case such company obtains approval
of the Ministry or Department of the Central Government which is administratively in charge
of the company, of, as the case may be, the State Government before entering into such
contract or arrangement.
Disclosure in Board’s Report
Every related party contracts or arrangements shall have to be disclosed in the Board’s report
and referred to shareholders along with the justification for entering into such type of
transactions.
Consequences of Contravention of Provisions
In case, where any contract or arrangement is entered into by a director or any other employee,
without obtaining the consent of the Board or approval by a special resolution in the general
meeting under subsection (1) and,
(i) if it is not ratified by the Board or
(ii) by the shareholders at a meeting within three months from the date on which such contract
or arrangement was entered into, such contract or arrangement shall be voidable at the option
of the Board and if the contract or arrangement is with a related party to any director, or is
authorised by any other director, the directors concerned shall indemnify the company against
any loss incurred by it.
Recovery of Loss in Related Party Transaction
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Besides subsequent approval, it shall be open to the company to proceed against a director or
any other employee who had entered into such contract or arrangement in contravention of the
provisions of this section for recovery of any loss sustained by it as a result of such contract or
arrangement.
Penal Provisions
Any director or any other employee of a company, who authorised to enter into the contracts
or arrangement, in violation of the provisions of this section, shall be punishable as under -
(i) In case of listed company – Any director or other employee of the listed company be
punishable with,
(a) imprisonment for a term which may extend to 1 year; or
(b) fine which shall not be less than twenty-five thousand rupees but which may
extend to five lakh rupees; or
(c) with both.
(ii) In case of other than listed company – Any director or other employee of the unlisted
company be punishable with fine which shall not be less than twenty-five thousand rupees but
which may extend to five lakh rupees.
Additional requirement for Related Party Transactions under the Listing Regulations
As per Regulation 23 of the SEBI (Listing Obligation and Disclosure Requirements)
Regulations, 2015,
(1) The listed entity shall formulate a policy on materiality of related party transactions and on
dealing with related party transactions which shall also be placed on the website of the
company.
Explanation- A transaction with a related party shall be considered material if the transaction(s)
to be entered into individually or taken together with previous transactions during a financial
year, exceeds ten percent of the annual consolidated turnover of the listed entity as per the last
audited financial statements of the listed entity.
(2) All related party transactions shall require prior approval of the audit committee.
(3) Audit committee may grant omnibus approval for related party transactions proposed to be
entered into by the listed entity subject to the following conditions, namely-
(a) the audit committee shall lay down the criteria for granting the omnibus (compilation,
collection) approval in line with the policy on related party transactions of the listed entity and
such approval shall be applicable in respect of transactions which are repetitive in nature;
(b) the audit committee shall satisfy itself regarding the need for such omnibus approval and
that such approval is in the interest of the listed entity;
(c) the omnibus approval shall specify:
(i) the name(s) of the related party, nature of transaction, period of transaction, maximum
amount of transactions that shall be entered into,
(ii) the indicative base price / current contracted price and the formula for variation in the
price if any; and
(iii) such other conditions as the audit committee may deem fit:
Provided that where the need for related party transaction cannot be foreseen and aforesaid
details are not available, audit committee may grant omnibus approval for such
transactions subject to their value not exceeding rupees one crore per transaction.
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(d) the audit committee shall review, at least on a quarterly basis, the details of related party
transactions entered into by the listed entity pursuant to each of the omnibus approvals given.
(e) Such omnibus approvals shall be valid for a period not exceeding one year and shall require
fresh approvals after the expiry of one year.
(4) All material related party transactions shall require approval of the shareholders through
resolution and the related parties shall abstain from voting on such resolutions whether the
entity is a related party to the particular transaction or not.
(5) The provisions of sub-regulations (2), (3) and (4) shall not be applicable in the following
cases:
(a) transactions entered into between two government companies;
(b) transactions entered into between a holding company and its wholly owned subsidiary
whose accounts are consolidated with such holding company and placed before the
shareholders at the general meeting for approval.
(6) The provisions of this regulation shall be applicable to all prospective transactions.
(7) For the purpose of this regulation, all entities falling under the definition of related parties
shall abstain from voting irrespective of whether the entity is a party to the particular
transaction or not.
(8) All existing material related party contracts or arrangements entered into prior to the date of
notification of these regulations and which may continue beyond such date shall be placed for
approval of the shareholders in the first General Meeting subsequent to notification of these
regulations.
Section 189: Register of Contracts or Arrangements in which Directors are interested
Every company is required to keep one or more registers in Form MBP 4 giving separately the
particulars of all contracts or arrangements and shall enter therein the particulars of (Rule
16(1))- company or companies or bodies corporate, firms or other association of individuals, in
which any director has any concern or interest.
But the particulars of the company or companies or bodies corporate in which a director himself
together with any other director holds two percent or less of the paid-up share capital would not
be required to be entered in the register.
The entries in the register shall be made at once, whenever there is a cause to make entry, in
chronological order and shall be authenticated by the company secretary of the company or by
any other person authorized by the Board for the purpose. (Rule 16(2))
Such register shall be kept at the registered office of the company and the register shall be
preserved permanently and shall be kept in the custody of the company secretary of the
company or any other person authorized by the Board for the purpose. (Rule 16(3))
Such register or registers are required to be placed before the next meeting of the Board and
signed by all the directors present at the meeting.
Every director within thirty days of his appointment or relinquishment is required to disclose
his concern or interest in other associations, which are required to be included in the register.
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The register be kept at the registered office of the company and also open for inspection during
business hours. The company shall provide extracts from such register to a member of the
company on his request, within seven days from the date on which such request is made upon
the payment of such fee as may be specified in the articles of the company but not exceeding
ten rupees per page. (Rule 16(4))
Penalty
Every director who fails to comply is liable to a penalty of twenty- five thousand rupees.
Section 190: Contract of Employment with Managing Director or Whole-Time Directors
Every company which is not a private company is required to keep the copy of contract if in
writing with a managing director or whole-time director for contract of service or a written
memorandum setting its terms if not in writing.
The abovementioned copies required to be kept open to inspection for any member of the
company free of cost.
Penalty
The default in complying with the provisions of this section, the company is liable to a penalty
of twenty-five thousand rupees and every officer of the company who is in default liable to a
penalty of five thousand rupees for each default.
Section 191: Payment to Director for Loss of Office, etc., in Connection with Transfer of
Undertaking, Property or Shares
No director of a company shall receive any payment by way of compensation in case of transfer
of the whole or any part of any under taking or property of the company or the transfer to any
person of all or any of the shares in a company.
The following particulars mentioned in Rules 17 are required to be disclosed to the members of
the company and they pass a resolution at a general meeting approving the payment of such
amount: -
(a) name of the director
(b) amount proposed to be paid;
(c) event due to which compensation become payable;
(d) date of Board meeting recommending such payment;
(e) basis for the amount determined;
(f) reason/justification for the payment;
(g) manner of payment - whether payable in cash or otherwise and how;
(h) sources of payment; and
(i) any other relevant particulars as the Board may think fit.
Any payment made by the company to a managing director or whole-time director or manager
of the company by way of compensation for loss of office or as a consideration for retirement
from office or in connection with such loss or retirement subject to the limit as set out under
section 202. (Rule 17(2))
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No payment shall be made to the managing director or whole time director or manager of the
company by way of compensation for the loss of office or as consideration for retirement from
office (Rule 17(3)) (other than notice pay and statutory payments in accordance with the terms
of appointment of such director or manager, as applicable) or in connection with such loss or
retirement if:
(a) the company is in default in repayment of public deposits or payment of interest thereon;
(b) the company is in default in redemption of debentures or payment of interest thereon;
(c) the company is in default in repayment of any liability, secured or unsecured, payable to any
bank, public financial institution or any other financial institution;
(d) the company is in default in payment of any dues towards income tax, VAT, excise duty,
service tax or any other tax or duty, by whatever name called, payable to the Central
Government or any State Government, statutory authority or local authority (other than in cases
where the company has disputed the liability to pay such dues);
(e) there are outstanding statutory dues to the employees or workmen of the company which
have not been paid by the company (other than in cases where the company has disputed the
liability to pay such dues); and
(f) the company has not paid dividend on preference shares or not redeemed preference shares
on due date.
If the payment is not approved for want of quorum either in a meeting or an adjourned meeting,
the proposal shall not be deemed to have been approved.
Penalty upon Contravention

The director who contravenes shall be punishable with fine which shall not be less than twenty-
five thousand rupees but which may extend to one lakh rupees.
Restriction on Non- Cash Transactions Involving Directors [Section 192]
A company can’t enter into an agreement by which –

(a) a director of the company or its holding, subsidiary or associate company or a person
connected with him acquires or is to acquire assets for consideration other than cash, from the
company; or
(b) the company acquires or is to acquire assets for consideration other than cash, from such
director or person so connected. A company can enter into an arrangement only with the prior
approval for such arrangement is accorded by a resolution of the company in general meeting
and if the director or connected person is a director of its holding company, approval shall also
be required to be obtained by passing a resolution in general meeting of the holding company.
The notice for approval of the resolution by the company or holding company in general
meeting shall include the particulars of the arrangement along with the value of the assets
involved in such arrangement duly calculated by a registered valuer.
Effect of Any arrangement entered into by a company or its holding company in

Violation contravention of the provisions of this section shall be voidable at the instance
of the company.
Contract is The arrangement will be valid if the company has been indemnified by that
valid person for any loss or damage caused to it or any rights are acquired bona fide
for value and without notice of the contravention of the provisions of this
section by any other person.
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In case of Where One Person Company limited by shares or by guarantee enters into a
OPC contract except in its ordinary course of business with the sole member of the
company who is also the director of the company, the company shall ensure
that the contract is in writing. If the contract is not in writing, it ensures that the
terms of the contract or offer are contained in a memorandum or are recorded in
the minutes of the first meeting of the Board of Directors of the company held
next after entering into contract.
The company is required to inform the Registrar about every contract entered
into by the company and recorded in the minutes of the meeting of its Board
within a period of fifteen days of the date of approval by the Board.
Prohibition on Insider Trading of Securities [Section 195]
Meaning An act of subscribing, buying, selling, dealing or agreeing to subscribe, buy,

sell or deal in any securities by any director or key managerial personnel or
any other officer of a company either as principal or agent if such director or
key managerial personnel or any other officer of the company is reasonably
expected to have access to any non-public price sensitive information in
respect of securities of company; or An act of counselling about procuring or
communicating directly or indirectly any non-public price-sensitive
information to any person.
Prohibited Insider trading is totally prohibited in the Act, including any trading by
director or key managerial personnel.
Information Any communication required in the ordinary course of business or

in ordinary profession or employment or under any law is not amounting to insider
course of trading.
business
Contravention If any person contravenes the provisions of this section, he shall be
and Penalty punishable with imprisonment for a term which may extend to five years or
with fine which shall not be less than five lakh rupees but which may extend
to twenty-five crore rupees or three times the amount of profits made out of
insider trading, whichever is higher, or with both.
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CH. 17 APPOINTMENT AND REMUNERATION OF KMP
The executive management of a company is responsible for the day to day management of a
company. The companies Act, 2013 has used the term key management personnel to define
the executive management.
While the Board of Directors are responsible for providing the oversight, it is the key
management personnel who are responsible for laying down the strategies as well as its
implementation.
Definition Key Managerial Personnel in relation to a company means:

Section (i) The Chief Executive Officer or the Managing Director or the Manager;
2(51) (ii) The Company Secretary;
(iii) The Whole Time Director;
(iv) The Chief Financial Officer and
(v) such other officer as may be prescribed.
MANAGING DIRECTOR
The Board of directors manage the affairs of a company either by mean of a committee of its
own or by appointing managerial personnel such a Managing Directors, Whole Time Directors
and managers to work under their superintendence.
Ways to The companies must opt between two modes of management- namely by a
manage Managing Director or by a Manager. But both Managing Director and
Manager cannot co-exist, as section 196 prohibits the simultaneous
appointment of a Managing Director and a Manager in a company.
However, the Companies Act, 2013, doesn't prohibit the simultaneous

employment of:
(i) more than one Managing Director; or
(ii) one or more Whole Time Director along with the Managing Director or
Manager.
This implies that a whole-time director can co-exist with a Managing
Director or Manager.
Meaning & Section 2 (54) of the Companies Act defines 'Managing Director' as a
Appointment director who by
of Managing (a) virtue of an agreement with the company, or
Director (b) a resolution passed by the company in a general meeting, or
(c) its Board of directors, or
(d) virtue of its Memorandum or Articles, is entrusted with 'substantial'
powers of management of the affairs of the company and includes a director
occupying the position of a Managing Director.
Important Managing Director must necessarily be a director.

Points Managing Directors' powers of managing the affairs of the company must be
'substantial'.
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The power to do acts of routine nature such as, power to affix the common
seal of the company to any document, or to draw and endorse any cheque on
account of the company in any bank, or to sign any share certificate, shall
not be included within substantial powers of management.
The Managing Director is the executive head of the company, who exercises
his powers subject to the superintendence, control and direction of the Board
of Directors.
This means that any director entrusted with managerial functions will be a
Managing Director.
Employee as Whether a Managing Director is an employee of the company or not. Since

well as he derives his status as a Managing Director from his appointment by the
director Board of Directors to this office, he is both a director as well as an employee
of the company.
Termination A Managing Director is normally appointed through a separate service

& agreement with the company. If his appointment is prematurely terminated,
Compensation he is entitled to compensation.
Again if termination is brought about by an alteration of articles in a manner
which is inconsistent with the terms of appointment, damages will have to be
paid.
APPOINTMENT OF MANAGING DIRECTOR/WHOLE TIME DIRTECTOR/

MANAGER
Section 196 of the Companies Act, 2013 provides that no company shall appoint or employ at
the same time a Managing Director and a Manager.
Further, a company shall not appoint or reappoint any person as its Managing Director, Whole
Time Director or manager for a term exceeding five years at a time and no reappointment shall
be made earlier than one year before the expiry of his term.
Appointment of Managing/whole time Director require Board and general meeting

approval
The appointment of a managing director or whole-time director or manager and the terms and
conditions of such appointment and remuneration payable thereon must be first approved by
the Board of directors at a meeting and then by an ordinary resolution passed at a general
meeting of the company.
Earlier no appointment of a managerial personnel could be made without the approval of

Central Government. Now, Section 196 of the Companies Act enables a company to appoint a
managerial personnel i.e., a Managing or Whole Time Director or Manager, without the
approval of the Central Government, if the conditions laid down in Part I of Schedule V to the
Companies Act are satisfied.
Part I of Schedule V - Conditions

(a) he had not been sentenced to imprisonment for any period, or to a fine exceeding Rs.
1000/- for conviction of an offence under any of the following 15 Acts, namely:
(i) the Indian Stamp Act, 11899,
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(ii) the Central Excise Act, 1944,
(iii) the Industries (Development and Regulation) Act, 1951,
(iv) the Prevention of Food Adulteration Act, 1954,
(v) the Essential Commodities Act, 1955,
(vi) the Companies Act, 2013,
(vii) the Securities Contracts (Regulation Act) 1956,
(viii) the Wealth Tax Act 1957,
(ix) the Income Tax Act 1961,
(x) the Customs Act 1962,
(xi) the Monopolies and Restrictive Trade Practices Act 1969,
(xii) the FEMA, 1999
(xiii) the Sick Industrial Companies Act 1985,
(xiv) the Securities & Exchange Board of India Act, 1992,
(xv) the Foreign Trade (Development and Regulation) Act 1992;
(b) he had never been detained for any period under Conservation of Foreign Exchange and
Prevention of Smuggling Activities Act 1974.
NOTE: Where Central Government has given its approval to the appointment of a personnel
convicted or detained under clause (a) or (b) of Schedule V, no further approval of Central
Government shall be necessary for subsequent appointments if he has not been convicted or
detained after such appointment.
(c) He has completed the age of 21 years and has not attained the age of 70 years.
NOTE: Where he is already 70 years or more, then a special resolution should be passed by
the shareholders in the annual general meeting approving his appointment. The explanatory
statement annexed to the notice for such a meeting should indicate the justification for the
appointing such a person.
(d) Where he is a managerial person in more than one company, draws remuneration from one
or more companies subject to ceilings given in Part II of Schedule V.
(e) He is resident in India.

NOTE: resident in India means a person who has been staying in India continuously, for not
less than 12 months, from the date of his appointment.
Other conditions
In addition to requirements given by Schedule V, the conditions prescribed by section 196 for
the appointment of Managing Director, Whole Time Director or Manager must be met.
Disqualifications
Section 196(3) provides that no company shall appoint or continue the employment of any
person as Managing Director, Whole Time Director, or Manager who:
(a) is below the age of 21 years,
(b) is an undischarged insolvent or has at any time been adjudged as an insolvent,
(c) has at any time suspended payment to its creditors, or
(d) has at any time being convicted by a court of an offence and sentenced for a period of more
than 6 months.
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Appointment with the Approval of Central Government
In case the provisions of Schedule V of the Companies Act, 2013 are not fulfilled by company,
an application seeking approval to the appointment of a managing director (Whole-time
director or manager) shall be made to the Central Government, in e-Form No. MR 2.
According to section 200, the Central Government or a company may, while according its
approval under section 196, to any appointment of a managing director, whole-time director or
manager, the Central Government or the company shall have regard to—
(a) the financial position of the company;
(b) the remuneration or commission drawn by the individual concerned in any other capacity;
(c) the remuneration or commission drawn by him from any other company;
(d) professional qualifications and experience of the individual concerned;
(e) such other matters as may be prescribed.
Rule 3 of Companies (Appointment and Remuneration of Managerial Personnel) Rules,

2014
A company shall file a return of appointment of a Managing Director, Whole Time Director or
Manager, Chief Executive Officer (CEO), Company Secretary and Chief Financial Officer
(CFO) within sixty days of the appointment, with the Registrar in Form No. MR.1 along with
such fee as may be specified for this purpose.
Case Law
Wasava Tyres vs. Printers (Mysore) Ltd.
The managing director of a company filed a suit on behalf of the company against the tenants
and the trial court granted decree directing the tenants to vacate and deliver possession of the
tenanted premises. The court also directed payment of damages and, in default, to pay interest.
The tenants filed an application and contended that in the instant case, the managing director,
who had filed suit, had no proper authorization from the board of directors. The Court
dismissed the application of the tenants and held that the words ‘substantial powers of
management’ specifically excludes certain acts from its purview. Therefore, except the
excluded acts, the managing director has power and privilege of conducting the business of the
company in accordance with the memorandum and articles of association of the company. The
institution of the suit on behalf of the company by the managing director is deemed to be
within the meaning of ‘substantial powers of management’, since such a power is necessary
and incidental to manage the day-to day affairs and business of the company.
The suit was obviously filed for the benefit of the company. In that view of the matter, the
contention that the managing director had no authority to file a suit is untenable and the same
is rejected.
Shanta Shamsher Jung Bahadur vs. Kamani Brothers (P) Ltd.

A managing director must hold and continue to hold the office of director. A managing
director is first a director and then a managing director with certain additional powers.
A managing director is an ordinary director entrusted with special powers. If a company wants
to appoint a person as managing director, who is not a director of the company, he has first to
be appointed as an additional director in accordance with the provisions of section 161 of the
Companies Act, 2013 of the Act.
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Managerial Remuneration
Section 196(4) provides that subject to the provision of Section 197 which deals with overall
managerial remuneration, a Managing Director, Whole-time Director or Manager shall be
appointed by the Board of Directors at a meeting, which is convened through a notice
specifying the terms and conditions of such appointment, remuneration payable etc.
Subsequent to their appointment at a Board meeting, Managing Director, Whole-time Director
or Manager's appointment must be approved by an ordinary resolution passed at the next
general meeting of the company.
NOTE: As per Section 196(5) where an appointment of a Managing Director, Whole-time

Director or Manager is not approved by the company at a general meeting, any act done by
him before such approval shall be valid.
Exemption to private company for section 196(4) & (5) vide notification dated 05.06.2015
Section 196(4) and Section 196(5) is not applicable to Private Company
Note: Exemption is given to the private companies for Section 196(4) which deals with
appointment of Managing/Whole time director /manager /approval of Central Government as
the case may be and Section 196(5) deals with validating actions of Managing/Whole time
Director/manager, if the appointment is not approved by a company in general meeting.
NUMBER OF COMPANIES IN WHICH ONE PERSON MAY BE APPOINTED AS

MANAGING DIRECTOR
Section 203 provides that a person who is already a Managing Director or Manager of another
company, cannot be appointed as the Managing Director of a company.
But such an appointment can be made if the Board of Directors of such a company approves
the appointment through a unanimous resolution passed at the meeting provided specific
notice had been given to all the directors then in India about the Board meeting.
Thus, no person can be appointed as the Managing Director or Manager in more than two
companies.
Tenure of According to Section 196, the term of office of a Managing Director cannot
Appointment exceed 5 years at a time. However, reappointment or extension is possible
within the last 1 year of the present appointment.
Reappointment or extension cannot exceed more than 5 years on each
occasion.
Remuneration A Managing Director may be remunerated either

(i) by way of a monthly payment; or
(ii) as a specified percentage of the net profits of the company; or
(iii) partly by (i) and partly by (ii).
However, such remuneration should not exceed 5% of the net profits without
the company's sanction.
NOTE: Where there are more than one Managing Director, the total
remuneration payable to them must not exceed 10% of the net profits
without sanction of the company.
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WHOLE TIME DIRECTOR
Meaning Section 2(94) provides that the term Whole Time Director includes a
director in the whole time employment of the company.
Thus, a Whole Time Director means a director who devotes all his time and attention to the
carrying on of the affairs of the company as may be assigned to him by the Board. Therefore,
he is almost like a Managing Director though not so designated.
But a person who does not devote "substantiality the whole of his time to manage the affairs of
the company" is not a Whole Time Director.
Appointment/ Regarding appointment/reappointment and remuneration of whole-time

Reappointment directors, same provisions which are applicable to Managing Directors
and shall be applicable to whole-time directors.
Remuneration
Similarly provisions of Section 196 dealing with disqualification of
Managing Directors and are also applicable to whole-time directors.
Also the provisions dealing with remuneration of directors and other

managerial personnel are applicable to whole time directors.
NOTE: A company can have more than one whole-time director, each looking after a different
aspect of the business of the company such as Whole-Time Director Finance, Whole Time
Director Marketing.
DISTINCTION BETWEEN A MANAGING DIRECTOR AND WHOLE-TIME

DIRECTOR
S. No. Basis Managing Director Whole-Time Director

1. Appointment The appointment of a Appointment of a whole-time director
Managing Director need not requires the sanction of the
necessarily be made with the shareholders by means of a
consent of the shareholders resolution.
in a meeting.
Instead, it can be made by
virtue of an agreement with
the company, or by virtue of
a resolution passed by the
BOD, or by virtue of a
provision in the
Memorandum or Articles.
2. Number of A person can be a Managing A whole-time director being
Companies Director of two companies. a whole-time employee of
the company cannot be a
whole-time director in more
than one company.
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3. Powers A Managing Director is A Whole Time Director
entrusted with substantial exercises the powers as per the terms
powers of management i.e., of his employment, which need not
discretionary powers to take be as wide as those of a Managing
decisions regarding policy Director.
matters.
4. Manager A Managing Director cannot A Whole Time Director can be
coexist with a Manager. appointed together with the Manager.
MANAGER
Meaning As per Section 2 (53), Manager means "an individual, who subject to the
superintendence, control and direction of the Board of Directors, has the
management of the whole, or substantially the whole of the affairs of a
company, and includes a director or any other person occupying the position
of a director, by whatever name called, whether under a contract of service
or not."
From the above definition, it is clear that only an individual can be appointed as the Manager
of a company. No company can appoint any firm, body corporate or association of persons as
its Manager.
Again, a Manager may be a director of the company. Where a director is a Manager of a
company and for some reason, his office of director is vacated, the office of Manager held by
him shall not be affected.
A Manager, shall have the management of the whole or substantially the whole of the affairs
of a company.
Manager is not an agent who has to act as a servant or who is to obey orders, but a person who
is entrusted with the power to transact the whole of the affairs of the company.
NOTE: A person who is one of the departmental Manager or a branch Manager is not deemed
to be a Manager in this sense.
Appointment The provisions of Section 196 which are applicable to a Managing Director
of Manager and Whole Time Director regarding appointment and reappointment shall
apply to a Manager also.
Tenure of An individual cannot be appointed as a Manager for more than 5 years, as

Appointment per Section 196. He may be reappointed the, reappointment within the last 1
year of the present term.
Number of Section 203 provides that no company shall appoint any person as Manager
Manager if he is either the Manager or the Managing Director of any other company
ships unless his appointment is approved by the unanimous consent of the
directors at the Board meeting provided that a specific notice for the meeting
had been given to all the directors then in India.
Remuneration The Manager of a company may receive remuneration either by way of a

monthly payment, or by way of specified percentage of the net profits of the
company. The remuneration payable shall not exceed 5% of the net profits of
the company. This limit can exceed, however, with the approval of the
company only.
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Disqualificati The provisions of Section 196 which prescribed conditions for the
ons of appointment of persons as Managing Directors or Whole Time Director
Manager equally apply to Managers.
DIFFERENCE BETWEEN MANAGER AND MANAGING DIRECTOR
S. No. Basis Manager Managing Director
1. Director A Manager may not be a A Managing Director must be a

director of a company. director.
2. Number There cannot be more than There may be more than one
one Manager in a company. Managing Director in a company.
3. Method of A Manager may be A Managing Director may be

Appointment appointed under a contract of appointed by (1) virtue of an
service or by way of a agreement with the company, or (2)
resolution passed by resolution passed by company in a
shareholders in general general meeting, or (3) or by BOD,
meeting. or (4) by virtue of Memorandum
and Articles of the company.
4. Remuneration The maximum remuneration Where there are more than one
payable to a Manager cannot Managing Director, the maximum
exceed 5% of the net profits. remuneration payable will be
limited to 10% of the net profits.
Sitting Fees to Directors for Attending the Meetings [Section 197(5)]
A director may receive remuneration by way of fee for attending the Board/Committee
meetings or for any other purpose as may be decided by the Board.
The Central Government through rules prescribed that the amount of sitting fees payable to a
director for attending meetings of the Board or committees thereof may be such as may be
decided by the Board of directors or the Remuneration Committee thereof which shall not
exceed the sum of rupees 1 lakh per meeting of the Board or committee thereof.
The Board may decide different sitting fee payable to independent and non-independent
directors other than whole-time directors.
Remuneration Drawn in Excess of Prescribed Limit

If any director draws or receives, directly or indirectly, by way of remuneration any such sums
in excess of the limit prescribed or without the prior sanction of the Central Government,
where it is required, he shall refund such sums to the company and until such sum is refunded,
hold it in trust for the company. [Section 197(9)]
Managerial Remuneration under Schedule V (Part II)
Section I: A company having profits in a financial year may pay remuneration to its
Remuneration managerial persons in accordance with Section 197.
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by companies
having Profits
Section II: Where in any financial year during the currency of tenure of a managerial
Remuneration person, a company has no profits or its profits are inadequate, it, may, without
by Central Government approval, pay remuneration to the managerial person not
Companies exceeding the higher of the limits under (A) and (B) below:
having no (A)
profits or Where the effective capital is Limit of yearly remuneration payable
inadequate shall not exceed (Rs)
profits Less than 5 Crore 30 Lakhs
without 5 Crore and above but less 42 Lakhs
Central Govt. than 100 Crore
approval 100 Crore and above but less than 60 Lakhs
250 Crore
250 Crore and above 60 Lakhs plus 0.01% of the effective
capital in excess of Rs. 250 Crore
If a special resolution is passed by the shareholders, the above limits shall
be doubled.
(B) In the case of managerial person who was not a shareholder, employee or
a Director of the company at any time during the two years prior to his
appointment as managerial person- 2.5% of the current relevant profit.
If a special resolution is passed by the shareholders, this limit shall be

doubled.
Central Government or Company to Fix Remuneration Limit (Section 200)
In case, where the company has inadequate or no profits, the Central Government or a
company may fix the remuneration within the limits specified in the Act. While doing so, the
Central Government or the company shall have regard to—
(a) the financial position of the company;
(b) the remuneration or commission drawn by the individual concerned in any other capacity;
(c) the remuneration or commission drawn by him from any other company;
(d) professional qualifications and experience of the individual concerned;
Compensation for Loss of Office of Managing or Whole- time Director or Manager (Sec
202)
Section 202 provides that a company may make payment to a managing or whole-time director
or manager, but not to any other director, by way of compensation for loss of office.
However, no payment shall be made in the following cases: —
(a) where the director resigns from his office as a result of the reconstruction/amalgamation of
the company and is appointed as the managing or whole-time director, manager or other
officer of the reconstructed company/of resulting company from the amalgamation;
(b) where the office of the director is vacated due to disqualification;
(c) where the company is being wound up due to the negligence or default of the director;
(d) where the director has been guilty of fraud or breach of trust or gross negligence or
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mismanagement of the conduct of the affairs of the company or any subsidiary company or
holding company; and
(e) where the director has instigated, or has taken part directly or indirectly in bringing about,
the termination of his office.
Remuneration to Managerial Personnel [Section 197]
Overall Section 197 of the Companies Act, 2013 prescribed the maximum ceiling for
managerial payment of managerial remuneration by a public company to its managing
remuneration director whole-time director and manager which shall not exceed 11% of the
net profit of the company in that financial year.
Remuneration to Managing Director/whole time Director/Manager
The remuneration payable to any one managing director or whole- time director or manager
shall not exceed 5% of the net profits of the company and if there are more than one such
director remuneration shall not exceed 10% of the net profits to all such directors and manager
taken together.
Remuneration to other directors
Except with the approval of the company in general meeting, the remuneration payable to
directors who are neither managing directors nor whole-time directors shall not exceed, - 1%
of the net profits of the company, if there is a managing or whole-time director or manager; -
3% of the net profits in any other case.
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CH. 18 GENERAL MEETINGS
Introduction Co. is an artificial person created by law. The business of a co. is carried on by
the elected representatives of the shareholders. They take decisions regarding
matters affecting the co. by calling meetings. They cannot decide all matters
themselves.
Certain matters are required to be decided by the whole body of members.
Therefore, members’ meetings are held from time to time.
Shareholder Democracy, Class Action Suits and Protection of interest of
investors are the essence and attributes of the Companies Act, 2013.
Secretarial Secretarial Standard 2 (SS-2) on General Meeting issued by the Institute of

Standard on Company Secretaries of India (ICSI) and approved by central government is to
General be mandatorily adhered by all companies as per the provision of Section 118
Meetings of (10) of Companies Act, 2013.
companies
The objective of secretarial standard is to promote good corporate governance.
This Standard is applicable to all types of General Meetings of all companies
incorporated under the Act except One Person Company (OPC) and class or
classes of companies which are exempted by the Central Government through
notification.
Applicability: Secretarial Standards were issued on 23rd April 2015 and are effective from
1st July 2015. SS- 2 shall only apply to general meetings in respect of which
notices are issued on or after 1st July, 2015.
Members’ Meetings
Members Meeting or General Meeting or General Body Meeting or GB Meeting
1. Annual General Meeting (AGM)
2. Extra-ordinary General Meeting (EGM)
3. Class Meetings
Annual General Meeting (AGM) [Section 96]
Section 96 provides that every company, other than a one-person company is required to hold
an annual general meeting every year.
Key provisions regarding the holding of an annual general meeting:

Business AGM is called for the purpose of transacting Ordinary Business. The term
to be ordinary business for which AGM is called for includes:
transacted 1. Passing of annual accounts
2. Declaration of dividends
3. Election of directors
4. Appointment and fixation of remuneration of auditors
Any other item of agenda except above four is considered as Special Business.
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In case of any other meeting, all business shall be deemed to be special.
Holding 1. Annual general meeting should be held once in each calendar year.
of AGM
2. First annual general meeting of the company should be held within 9
months from the closing of the first financial year. Hence it shall not be
necessary for the company to hold any annual general meeting in the year
of its incorporation.
3. Subsequent annual general meeting of the company should be held

within 6 months from the date of closing of the relevant financial year.
4. The gap between two annual general meetings shall not exceed 15
months.
A one-person company is exempt from holding an AGM.
Extension In case, it is not possible for a company to hold an annual general meeting within
of validity the prescribed time, the Registrar may, for any special reason, extend the time
period of within which any annual general meeting shall be held. Such extension can be for
AGM a period not exceeding 3 months.
No such extension of time can be granted by the Registrar for the holding of the
first annual general meeting.
Date, An annual general meeting can be called during business hours, that is, between
Time and 9 a.m. and 6 p.m. on any day that is not a National Holiday.
place for
holding It should be held either at the registered office of the company or at some other
an annual place within the city, town or village in which the registered office of the
general company is situated.
meeting
The Central Government is empowered to exempt any company from these
provisions, subject to such conditions as it may impose.
In case of Government company, the Central Government may approve such

other place for holding AGM, if the place is other than registered office.
Penalty Section 99 provides that if any default is made in complying or holding a

for meeting of the company, the company and every officer of the company who is
default in in default shall be punishable with fine which may extend to one lakh rupees and
holding in case of continuing default, with a further fine which may extend to five
the thousand rupees for each day during which such default continues.
annual
general If any default is made in holding the annual general meeting of a company, any
meeting member of the company may make an application to the Tribunal to call or direct
[Sec. 99] the calling of, an annual general meeting of the company and give such
directions as the Tribunal thinks expedient.
Such directions may include a direction that one member of the company present
in person or by proxy shall be deemed to constitute a meeting.
233
Extra Ordinary General Meeting (Section 100)
EGM is called for transacting some urgent or special business which cannot be postponed till
the next AGM.
It may be convened by: -
(i) BODs on its own or
(ii) On the requisition of the members; or
(iii) Requisitionists themselves on the failure of the BODs to call the meeting;
(iv) Tribunal.
(1) By the The Board may, whenever it deems fit, call an extraordinary general meeting
Board Suo of the company, as per SS-2 such EGM may be held at any place within
motu [Sec100 India.
(1)]
(2) By Board The Board shall, call an extraordinary general meeting on receipt of the
on requisition requisition from the following number of members:
of members (a) in the case of a company having a share capital: members who hold, on
[Sec. 100 (2)] the date of the receipt of the requisition, not less than one-tenth of such of the
paid-up share capital of the company as on that date carries the right of
voting;
(b) in the case of a company not having a share capital: members who
have, on the date of receipt of the requisition, not less than one-tenth of the
total voting power of all the members having on the said date a right to vote.
Matter set out for consideration in requisition:

The requisition made as above, shall set out the matters for the consideration
of which the meeting is to be called and shall be signed by the requisitionists
and sent to the registered office of the company.
Time period for calling the meeting: The Board is required to proceed to
call a meeting within 21 days from the date of receipt of a valid requisition,
to convene a meeting which should be held within 45 days of such deposit of
the requisition with the company.
(3) By (1) Board’s Failure: If the Board fails to call a meeting as required by the
requisitionists requisitionist, the meeting may be called by requisitionists themselves and
[Sec 100(4)] held within 3 months from the date of deposit of the requisition.
Such requisition shall not pertain to any item of business that is required to be
transacted mandatorily through postal ballot.
(2) Timings & Days: The notice shall specify the place, date, day and hour
of the meeting and shall contain the business to be transacted at the meeting.
(3) Notice to be signed: The notice shall be signed by all the requistionists or
by a requistionists duly authorized in writing by all other requistionists on
their behalf or by sending an electronic request attaching therewith a scanned
copy of such duly signed requisition.
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(4) No explanatory statement annexed to the notice: No explanatory
statement as required under section 102 need be annexed to the notice of an
extraordinary general meeting convened by the requistionists and the
requistionists may disclose the reasons for the resolution(s) which they
propose to move at the meeting.
(5) Serving of notice of the meeting: The notice of the meeting shall be
given to those members whose names appear in the Register of members of
the company within three days on which the requistionists deposit with the
Company a valid requisition for calling an extraordinary general meeting.
(6) Mode of giving notice: The notice of the meeting shall be given by speed
post or registered post or through electronic mode. Any accidental omission
to give notice to, or the non-receipt of such notice by, any member shall not
invalidate the proceedings of the meeting.
• Where a meeting is called by requisitionist themselves and the

registered office is not available to them, they may hold the meeting
anywhere else.
• Requisitionist shall not be allowed to hold the meeting after the
expiry of 3 months from the date of deposit of the requisition.
• Requisitionists are entitled to claim all expanses.
• Co. shall be entitled to indemnify itself and to deduct the sum so paid
out of fee payable to defaulting directors.
• Resolutions properly passed at meeting called by the requisitionists
shall be binding upon the co.
• In case, the quorum is not present within half-an-hour from the time
appointed for holding a meeting called by requisitionists, the meeting
shall stand cancelled. [Sec. 103(2)(b)]
(4) By Section 98 provides that if for any reason it is impracticable to call a meeting
Tribunal of a company or to hold or conduct the meeting of the company, the Tribunal
[Section 98 may, either suo motu or on the application of any director or member of the
(yet to be company who would be entitled to vote at the meeting:
notified)] (a) order a meeting of the company to be called, held and conducted in such
manner as the Tribunal thinks fit; and
(b) give such directions as the Tribunal thinks expedient.
Such directions may include a direction that one member of the company
present in person or by proxy shall be deemed to constitute a meeting.
Procedure for convening of a valid general meeting

The essentials of a valid meeting are that the meeting should be:
(a) Properly (i) The meeting must be called by proper authority; and
convened (ii) Proper notice must be served in the manner specified under Section 101
and 102 of the Act.
(b) Properly (i) Proper quorum must be present in the general meeting (Sec. 103 of the
constituted Act)
(ii) Proper chairman must preside the meeting (Sec. 104 of the Act)
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(c) Properly (i) The business must be validly transacted at the meeting i.e. resolutions must
conducted be properly moved and passed, and voting by show of hands and on poll.
(ii) Proper minutes of the meeting must be prepared. (Sec. 118 of the Act)
Notice of Meeting (Sec. 101)

Notice Period
A general meeting of a company may be called by giving not less than 21 clear days’ notice
either in writing or through electronic mode.
In case of section 8 company, 14 days’ clear notice is required instead of 21 days.
‘Clear days’ means days exclusive of the day of the notice of service and of the day on which
the meeting is held.
Where a notice of general meeting is sent by post, it shall be deemed to be served at the
expiration of 48 hours after the letter containing the same is posted (Rule 35(6) of the
Companies (Incorporation) Rules, 2014).
The day on which the notice is deemed to be served on the member, and the day of the general
meeting have to be in addition to the 21 days.
Shorter A general meeting may be called after giving a shorter notice also if consent is
notice given in writing or by electronic mode by not less than 95% of the members
entitled to vote at such meeting.
Contents of Notice
Place of The notice should state the place where the general meeting is scheduled to be
meeting (Sec. held. In case of an annual general meeting, the place of the meeting has to be
96) either the registered office of the company or some other place within the city,
town or village in which the registered office of the company is situated.
Day of The day and date of the meeting should be clearly stated in the notice. In case
meeting (Sec. of an annual general meeting, the day should be one that is not a National
96) Holiday. An extraordinary general meeting can however be held on any day.
However, a meeting called by the requisitionists shall be convened only on a
working day.
Time of Exact time of holding the meeting should be given in the notice. An annual
meeting (Sec. general meeting can be called during business hours only, i.e. between 9:00
96) a.m. and 6:00 p.m. There is no restriction of timings in case of an
extraordinary general meeting.
Agenda (Sec. A statement of the business to be transacted at the general meeting should be
102) given in the notice. In case, the meeting is to transact a special business, an
explanatory statement should be attached about such item.
Proxy clause Voting by proxy at the meeting, should carry with reasonable prominence, a
with statement that a member entitled to attend and vote is entitled to appoint a
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reasonable proxy, or, where one or more proxies are allowed, then proxy(ies) can attend
prominence and vote instead of member, and that a proxy need not be a member.
[Sec. 105(2)]
Notice through Electronic Mode (Rule 18 of Companies (Management and

Administration) Rules 2014)
The company may serve the notice in electronic mode in following manner.
(1) A company may give notice through electronic mode.
(2) A notice may be sent through e-mail as a text or as an attachment to e-mail.
(3) (i) The e-mail shall be addressed to the person entitled to receive such e-mail as per
the records of the company or as provided by the depository.
(ii) The subject line in e-mail shall state the name of the company, notice of the type of
meeting, place and the date on which the meeting is scheduled.
(iii) If notice is sent in the form of a non-editable attachment to e-mail, such

attachment shall be in the Portable Document Format.
(iv) When notice or notifications of availability of notice are sent by e-mail, the
company should ensure that it uses a system which produces confirmation of the total
number of recipients e-mailed and a record of each recipient to whom the notice has
been sent and copy of such record and any notices of any failed transmissions and
subsequent re-sending shall be retained by or on behalf of the company as ‘‘proof of
sending’’.
(v) The company’s obligation shall be satisfied when it transmits the e-mail and the
company shall not be held responsible for a failure in transmission beyond its control.
(vi) If a member entitled to receive notice fails to provide or update relevant e-mail
address to the company, the company shall not be in default for not delivering notice
via e-mail.
(vi) The company may send e-mail through in-house facility or authorize any third
party agency providing bulk e-mail facility.
(vii) The notice made available on the electronic link or Uniform Resource Locator
has to be readable, and the recipient should be able to obtain and retain copies and
the company shall give the complete Uniform Resource Locator (or address of the
website) and full details of how to access the document or information.
(viii) The notice of the general meeting of the company shall be simultaneously placed
on the website of the company if any and on the website as may be notified by the
Central Government.
Persons According to Section 101(3), notice of every meeting of the company must be
entitled to given to:
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receive (a) every member of the company, legal representative of any deceased member
Notice or the assignee of an insolvent member;
(b) the auditor or auditors of the company; and
(c) every director of the company.
The non-receipt of notice or accidental omission to given notice to any member shall not
invalidate the proceedings in the meeting [Sec.101(4)].
However, omission to serve notice of meeting on a member on the mistaken ground that he is
not a shareholder cannot be said to be an accidental omission.
[Musselwhite Vs. C.H. Musselwhite & Sons Ltd.]
Secretarial SS-2 provides that where the company has received intimation of death of a
Standard Member, the Notice of Meeting shall be sent as under:
on (a) where securities are held singly, to the Nominee of the single holder;
entitlement (b) where securities are held by more than one person jointly and any joint
to receive holder dies, to the surviving first joint holder;
notice: (c) where securities are held by more than one person jointly and all the joint
holders die, to the Nominee appointed by all the joint holders;
(i) In the absence of a Nominee, the notice shall be sent to the legal
representative of the
deceased Member.
(ii) In case of insolvency of a Member, the Notice shall be sent to the
assignee of the insolvent Member.
(iii) In case the Member is a company or body corporate which is being
wound up, Notice shall be sent to the liquidator.
Contents of Explanatory Statement
In case of special business items to be transacted at a general meeting, a statement consisting

of following material facts, shall be annexed to the notice calling the meeting:
(I) (a) the nature of concern or interest, in respect of each item of:
− every director and the manager;
− every other key managerial personnel; and
− relatives of every director, manager and key managerial person.
(b) any other information and facts that may enable members to understand the
implications of the items of business and to take decision thereon.
(II) Where any item of business refers to any document, which is to be considered at the
meeting, the time and place where such document can be inspected shall be specified in the
explanatory Statement.
Effect of non-disclosure
Where as a result of the non-disclosure or insufficient disclosure in any statement referred as

above, being made by a promoter, director, manager or other key managerial personnel,
any benefit which accrues to such promoter, director, manager or other key managerial
personnel or their relatives, the promoter, director, manager or other key managerial
personnel, as the case may be, shall hold such benefit in trust for the company, and shall be
liable to compensate the company to the extent of the benefit received by him.
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If the explanatory statement is vague and tricky, or insufficient and misleading, the resolution
passed, is bad in law. [Central Industrial Alliance Ltd. Vs. Pravin Kantilal Vakil ]
Secretarial SS-2 provides that Notice shall be sent by hand or by ordinary post or by speed
Standard post or by registered post or by courier or by facsimile or by e-mail or by any
on other electronic means.
issuance of
notice Notice shall be sent to Members by registered post or speed post or courier or e-
mail and not by ordinary post in the following cases:
(a) if the company provides the facility of e-voting;
(b) if the item of business is being transacted through postal ballot.
If a Member requests for delivery of notice through a particular mode, other than
one of those listed above, he shall pay such fees as may be determined by the
company in its Annual General Meeting and the Notice shall be sent to him in
such mode.
Notice shall be sent to Members by registered post or speed post or email if the
Meeting is called by the requisitionists themselves and where the Board had not
proceeded to call the Meeting.
Quorum for Meetings[Section-103]
Quorum refers to the minimum number of members required to constitute a valid meeting.
(a) In the case of a public company,
S. No. Quorum for the meeting Number of members
1 5 members personally present Not more than one thousand

2 15 members personally More than one thousand but up to five
present thousand
3 30 members personally Exceeds five thousand
present
(b) In the case of a private company, two members personally present, shall be the quorum
for a meeting of the company.
However, the Articles of Association of the company may provide for a higher number.
Secretarial Standard on Quorum
SS-2 provides that where the Quorum provided in the Articles is higher than that provided
under the Act, the Quorum shall conform to such higher requirement. Members need to be
personally present at a Meeting to constitute the Quorum. Proxies shall be excluded for
determining the Quorum.
SS-2 provides that a duly authorized representative of a body corporate or the representative of
the President of India or the Governor of a State is deemed to be a Member personally present
and enjoys all the rights of a Member present in person.
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One person can be an authorized representative of more than one body corporate. In such a
case, he is treated as more than one Member present in person for the purpose of Quorum.
However, to constitute a Meeting, at least two individuals shall be present in person. Thus, in
case of a public company having not more than 1000 members with a Quorum requirement of
five Members, an authorized representative of five bodies corporate cannot form a Quorum by
himself but can do so if at least one more Member is personally present.
Members who have voted by Remote e-voting have the right to attend the General Meeting
and accordingly their presence shall be, counted for the purpose of Quorum.
A Member who is not entitled to vote on any particular item of business being a related party,
if present, shall be counted for the purpose of Quorum.
The stipulation regarding the presence of a Quorum does not apply with respect to items of
business transacted through postal ballot.
Consequences of no quorum
If the quorum is not present within half-an-hour from the time appointed for holding a meeting
of the company—
(a) the meeting shall stand adjourned to the same day in the next week at the same time and
place, or to such other date and such other time and place as the Board may determine; or
(b) the meeting, if called by requisitionists (under section 100), shall stand cancelled.
Notice of an adjourned meeting
Where the meeting stands adjourned to the same day in the next week at the same time and
place, or to such other day, not being a National Holiday, or at such other time and place as the
Board may determine, there the company shall give at least 3 days’ notice to the members
either individually or by publishing an advertisement in 2 newspapers (one in English and one
in vernacular language).
No quorum in an adjourned meeting
If at the adjourned meeting also, a quorum is not present within half an- hour from the time
appointed for holding meeting, the members present, being not less than two in numbers,
will constitute the quorum.
If a Meeting, other than a requisitioned Meeting, stands adjourned for want of Quorum, the
adjourned Meeting shall be held on the same day, in the next week at the same time and place
or on such other day, not being a National Holiday, or at such other time and place as may be
determined by the Board.
If a Meeting is adjourned sine-die (Without a date fixed) or for a period of thirty days or more,
a Notice of the adjourned Meeting shall be given in accordance with the provisions contained
herein above relating to Notice.
If a Meeting is adjourned for a period of less than thirty days, the company shall give not less
than three days’ Notice specifying the day, date, time and venue of the Meeting, to the
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Members either individually or by publishing an advertisement in a vernacular newspaper in
the principal vernacular language of the district in which the registered office of the company
is situated, and in an English newspaper in English language, both having a wide circulation in
that district.
Personally The words, personally present exclude proxies. However, the representative of a
Present body corporate appointed under Section 113 or the representative of the
President or a Governor of a State under Section 112 is a member ‘personally
present' for purpose of counting a quorum. [Re. Kelantan Coconut Estate Ltd.]
In case two or more corporate bodies who are members of a company are represented by
single individual, each of the bodies corporate will be treated as personally present by the
individual representing it.
If, for instance, he represents three corporate bodies, his presence will be counted as three
members being present in person for purposes of quorum.
One individual may count as more than one member if he attends the meeting in more than one
capacity, e.g. as a member holding shares in his own right and as a member entitled to vote in
person in respect of a trust holding [Re. Neil McLeod & Sons Ltd.]
Chairman of Meetings (Section 104)
• Every general meeting is presided over by a CM.

• He regulates and supervises the proper conduct of the business.
• Unless the A.A. otherwise provide, the members personally present at the meeting shall
elect one of themselves to be CM.
Duties: To see proper discipline is maintained
• To act in bona-fide manner
• To perform both judicial and ministerial duties
Powers of Chairman
• Prima facie authority to decide all questions, but members are not precluded from
maintaining by litigation that he was wrong.
• Entry in the minute books of CM’s decision is evidence of correctness of decision.
• Right to decide priority amongst speakers, to demand poll, to exercise Casting vote, to
expel an unruly member, to apply closure to discussion after it has been reasonably
debated.
• Adjourn a meeting when it is impossible, by reason of disorder.
Secretarial Standard on appointment and role of Chairman

SS-2 provides that the Chairman of the Board shall take the chair and conduct the Meeting.
If the Chairman is not present within fifteen minutes after the time appointed for holding the
Meeting, or if he is unwilling to act as Chairman of the Meeting, or if no Director has been so
designated, the Directors present at the Meeting shall elect one of themselves to be the
Chairman of the Meeting.
If no Director is present within fifteen Minutes after the time appointed for holding the
Meeting, or if no Director is willing to take the chair, the Members present shall elect, on a
241
show of hands, one of themselves to be the Chairman of the Meeting, unless otherwise
provided in the Articles.
Election of If a poll is demanded on the election of the Chairman, it shall be taken

the forthwith in accordance with the provisions of the Act and the Chairman
Chairman elected on a show of hands shall continue to be the Chairman of the Meeting
until some other person is elected as Chairman as a result of the poll, and such
other person shall be the Chairman for the rest of the Meeting.
Objective & SS-2 requires that the Chairman shall explain the objective and implications of
Implications the Resolutions before they are put to vote at the Meeting.
Interested SS-2 provides that in case of public companies, the Chairman shall not propose
Chairman any Resolution in which he is deemed to be concerned or interested.
Explain SS-2 provides that if any Director is unable to attend the Meeting, the
Chairman shall explain such absence at the Meeting.
Seated SS-2 requires that Directors who attend General Meetings of the company and
the Company Secretary shall be seated with the Chairman.
PRESENCE OF STATUTORY AUDITOR AND SECRETARIAL AUDITOR
Presence of According to Sec. 146, qualified Auditors shall be present in general meetings
Auditor unless otherwise exempted, either himself or through his authorized
representative. He shall have right to be heard at such meeting on any part of the
business which concerns him as the auditor.
The authorized representative who attends the General Meeting of the company
shall also be qualified to be an Auditor.
Proxies (Section 105)
The term proxy has a double meaning: -

1. The person authorized to attend and vote for another at a meeting.
2. The instrument by which a person is appointed to act for another at a meeting.
If the A.A. do not otherwise provide: -
1. A proxy can vote only on a poll.
2. A member of a private co. cannot appoint more than one proxy to attend on the same
occasion.
3. A member of a co. not having a share capital cannot appoint a proxy.
Proxy form to be deposited 48 hours before the meeting.
Proxy is revocable at any time. Where a shareholder who having appointed a proxy
personally attends and votes at the meeting, the proxy is revoked thereby, and he can vote
in person.
The death or insanity of a shareholder after he has appointed a proxy shall not revoke the
authority of the proxy, until the co. has notice of the death or insanity.
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Section 105 of the Companies Act, 2013 provides that a member, who is entitled to attend to
vote, can appoint another person as a proxy to attend and vote at the meeting on his behalf.
This section also provides the manner of appointing proxy.
The provisions are as follows.
Who can Any member of a company who is entitled to attend and vote at a meeting of the
appoint a company shall be entitled to appoint another person as a proxy to attend and
proxy vote at the meeting on his behalf.
Member The proxy may or may not be a member of the co.

or not However, a Proxy shall be a Member in case of companies with charitable
objects etc. and not for profit registered under the specified provisions of
the Act.
A Proxy can act on behalf of Members not exceeding fifty and holding in the
aggregate not more than ten percent of the total share capital of the company
carrying Voting Rights.
However, a Member holding more than ten percent of the total share capital of
the company carrying Voting Rights may appoint a single person as Proxy for
his entire shareholding and such person shall not act as a Proxy for another
person or shareholder.
If a Proxy is appointed for more than fifty Members, he shall choose any fifty
Members and confirm the same to the company before the commencement of
specified period for inspection. In case, the Proxy fails to do so; the company
shall consider only the first fifty proxies received as valid.
Disabilities A proxy shall not have the right to speak at the meeting. A proxy cannot vote on
of proxy a show of hands. A proxy is not counted for the purpose of quorum.
Rights of A proxy has the right to attend the meeting. A proxy has the right to vote only
proxy on a poll. A proxy, if eligible, has the right to demand a poll.
Restriction A member of a company registered under section 8 (Not for Profit company)
on proxy shall not be entitled to appoint any other person as his proxy unless such other
person is also a member of such company.
Time limit The instrument appointing the proxy must be deposited with the company, 48
for deposit hours before the meeting. Any provision contained in the articles, requiring a
of proxy longer period than 48 hours shall have effect as if a period of 48 hours had been
forms specified.
The prescribed proxy form is Form No. MGT 11.
Inspection Every member entitled to vote at a meeting of the company is entitled to inspect
of proxy the proxies lodged with the company, if at least 3 days’ notice in writing is
given to the company. Such notice shall be received at least three days before
the commencement of the Meeting. Such inspection can be taken during the
period beginning 24 hours before the time fixed for the commencement of the
meeting, during the business hours of the company, and ending with the
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conclusion of the meeting. Such inspection should be allowed between 9:00 am
and 6:00 pm during such period.
Revocation If after appointment of proxy, the member himself attends the meeting, it
of proxy amounts to automatic revocation of proxy. But once the proxy has voted, it
cannot be revoked.
A Proxy need not be informed of the revocation of the Proxy issued by the
Member.
Restriction on Voting Rights (Section 106)
Calls pending The articles of a company may provide that a member shall not exercise any
voting right in respect of any shares registered in his name on which any calls
or other sums presently payable by him have not been paid or on which
company has exercised any right or lien.
No member can be prohibited from exercising his voting right on any other
ground.
Voting by Show of Hands (Section 107)
At any general meeting, a resolution put to the vote of the meeting shall in the first instance be
decided on a show of hands, unless-
(a) A poll is demanded under section 109 of the Act.
(b) Voting is carried out electronically under section 108 of the Act.
A declaration by the Chairman of the meeting of the passing of a resolution on show of hands
and an entry to that effect in the minutes book shall be conclusive evidence of the fact of
passing of such resolution. No proof of numbers of votes casts in favor of and against the
resolution is required.
Voting through Electronic Means (Section 108)
e-Voting General meetings of companies are held at their registered offices and it is not
possible for every member specially members holding minor shares to travel
up to the registered office of the company and participate in the general
meetings of the company.
To eliminate this type of difficulty and to enhance the participation of
minority members, concept of e-voting has been introduced by the
Companies Act 2013. Now a member can cast his vote easily through
electronic mode without physically attending the general meeting.
Attend the E-voting do not eliminate members right to physically attend and vote at the
meeting general meeting. However, member can cast his vote through one mode only.
A member after casting his vote through e-voting can go and attend the
general meeting but cannot cast vote in that general meeting.
Applicability: Section 108 of the Act shall apply to such companies as may be prescribed by
the Central Government. The prescribed class of companies, for this purpose,
are-
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(i) All companies whose equity shares are listed on a recognized stock
exchange; and
(ii) All companies having 1000 or more members.
Non- Following companies are out of ambit of e-voting: -

applicability 1. Companies having whose debenture/preference shares are only listed.
2. Companies listed on SME trading platform.
3. Companies listed on institutional trading platform.
Meaning of certain terms

Rule 20 of Companies (Management and Administration) Amendment Rules, 2015 defines
some of the terms relating to voting through electronic means as follows:
Cut-off “Cut-off date” means a date not earlier than seven days before the date of
date general meeting for determining the eligibility to vote by electronic means in the
general meeting.
Cyber “Cyber security” means protecting information, equipment, devices, computer,

security computer resource, communication device and information stored therein from
un-authorized access, use, disclosures, disruption, modification or destruction.
Electronic “Electronic voting system” means a secured system based process of display of
voting electronic ballots, recording of votes of the members and the number of votes
system polled in favor or against, in such a manner that the entire voting exercised by
way of electronic means gets registered and counted in an electronic registry in a
centralized server with adequate cyber security.
Remote e- “Remote e-voting” means the facility of casting votes by a member using an
voting electronic voting system from a place other than venue of a general meeting.
Secured “Secured system” means computer hardware, software, and procedure that
system (a) are reasonably secure from unauthorized access and misuse;
(b) provide a reasonable level of reliability and correct operation;
(c) are reasonably suited to performing the intended functions; and
(d) adhere to generally accepted security procedures.
E-Voting
(a) The Board shall appoint one or more scrutinizers for e-voting or the ballot
process
The scrutinizer (s) may be a Company Secretary in Practice, a Chartered Accountant in
Practice, a Cost Accountant in Practice, or an Advocate or any other person of repute who is
not in the employment of the company and who can, in the opinion of the Board, scrutinize the
e-voting process or the ballot process in a fair and transparent manner.
(b) The Board shall appoint an Agency.
(c) The Board shall decide the cut-off date for the purpose of reckoning the names of
Members who are entitled to Voting Rights.
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(d) The Board shall authorize the Chairman or in his absence, any other Director to
receive the scrutinizer’s register, report on e-voting and other related papers with
requisite details.
(e) Notice of Meeting

The notice of the meeting shall clearly state that: -
(i) the company is providing facility for voting by electronic means and the business may be
transacted through such voting.
(ii) the facility for voting, either through voting by electronic means or ballot/polling paper
shall also be made available at the meeting and members attending the meeting who have not
already cast their vote by remote e-voting shall be able to exercise their right at the meeting.
(iii) that the members who have cast their vote by remote e-voting prior to the meeting may
also attend the meeting but shall not be entitled to cast their vote again.
Voting through Electronic Means- Other Provisions
1. Additional The notice shall –

Disclosures (i) indicate the process and manner for voting by electronic means;
in notice (ii) indicate the time schedule including the time period during which the
votes may be cast by remote e-voting;
(iii) provide the details about the login lD;
(iv) specify the process and manner for generating or receiving the
password and for casting of vote in a secure manner.
2. Public notice (i) The company shall cause a public notice by way of an advertisement to
by way of be published, immediately on completion of dispatch of notice of general
advertisement meeting.
(ii) The public notice shall be published at least twenty-one days before the
date of general meeting, at least once in a vernacular language of the district
in which the registered office of the company is situated, and at least once
in English language in an English newspaper having country-wide
circulation.
(iii) The public notice shall specify the following matter in the said
advertisement
(a) a statement that the business may be transacted through voting by
electronic means;
(b) The date and time of commencement of remote e-voting;
(c) The date and time of end of remote e-voting;
(d) Cut-off date;
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(e) The manner in which persons who have acquired shares and become
members of the company after the dispatch of notice may obtain the login
ID and password;
(f) A statement that remote e-voting shall not be allowed beyond the said
date and time;
(g) Website address of the company, if any, and of the agency where notice
of the meeting is displayed; and
(h) Name, designation, address, email id and phone number of the person
responsible to address the grievances connected with facility for voting by
electronic means.
The public notice shall be placed on the website of the company, if any, and
of the agency. Such notice shall remain on the website till the date of
general meeting.
3.Remote e- (i) The facility for remote e-voting shall remain open for not less than three
voting days and shall close at 5.00 p.m. on the date preceding the date of the
general meeting.
(ii) During the period when facility for remote e-voting is provided, the
members of the company, holding shares either in physical form or in
dematerialized form, as on the cut-off date, may opt for remote e-voting.
(iii) Once a member has cast his vote on a resolution, he shall not be
allowed to change it subsequently or cast the vote again.
(a) A member may participate in the general meeting even after

exercising his right to vote through remote e-voting but shall not be
allowed to vote again.
(b) At the end of the remote e-voting period, the facility shall
forthwith be blocked.
4. (i) The Board of Directors shall appoint one or more scrutinizer(s).

Appointment
of scrutinizer (ii) The scrutinizer(s) may be a Chartered Accountant in practice, Cost
Accountant in practice, or Company Secretary in practice or an Advocate,
or any other person who is not in employment of the company and is a
person of repute who, in the opinion of the Board can scrutinize the voting
and remote e-voting process in a fair and transparent manner. At least one
of the scrutinizers shall be a member who is present at the Meeting provided
such members is available and willing to be appointed.
(iii) The scrutinizer may take assistance of a person who is not in

employment of the company and who is well-versed with the electronic
voting system.
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5. Voting at (i) During general meeting, a company may opt to provide the same
General electronic voting system as used during remote e-voting. In such a case, the
Meeting members attending the general meeting and who have not exercised their
right to vote through remote e-voting, shall be entitled to vote using the
electronic voting system.
(ii) At the general meeting, after conclusion of the discussion, the chairman
shall, with the assistance of scrutinizers, allow voting on the resolutions, by
use of polling paper or by using an electronic voting system for all those
members who are present at the general meeting but have not cast their
votes by availing the remote e-voting facility.
6. Declaration (i) The scrutinizer shall, immediately after the conclusion of voting at the
of result of general meeting, first count the votes cast at the meeting, thereafter unblock
voting the votes cast through remote e-voting in the presence of at least two
witnesses not in the employment of the company.
(ii) The scrutinizer shall make, not later than three days of conclusion of the
meeting, a consolidated scrutinizer’s report of the total votes cast in favor or
against, if any, to the Chairman or a person authorized by him in writing
who shall countersign the same.
(iii) The Chairman or a person authorized by him in writing shall declare

the result of the voting forthwith.
(iv) The result of the voting, with details of the number of votes cast for and
against the Resolution, invalid votes and whether the Resolution has been
carried or not shall be displayed on the Notice Board of the company at its
Registered Office.
(v) The scrutinizers’ register, report and other related papers received from
the scrutinizer(s) shall be kept in the custody of the Company Secretary or
any other person authorized by the Board for this purpose.
(vi) The manner in which members have cast their votes, that is, affirming
or negating the resolution, shall remain secret and not available to the
Chairman, scrutinizer or any other person till the votes are cast in the
general meeting.
(vii) If the requisite number of votes are cast in favor of the resolution, the
resolution shall be deemed to be passed on the date of relevant general
meeting.
(viii) The results declared along with the report of the scrutinizer shall be
placed on the notice board of the company at its registered office and on the
website of the company.
(ix) In case of companies whose equity shares are listed on a recognized

stock exchange, the company shall, simultaneously, forward the results to
the concerned stock exchange or exchanges where its equity shares are
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listed and such stock exchange or exchanges shall place the results on its or
their website.
Demand for Poll (Section 109)
Before or on the declaration of the result of the voting on any resolution on show of hands, a
poll may be ordered to be taken by the Chairman of the meeting on his own motion, and shall
be ordered to be taken by him on a demand made in that behalf by the following person(s):
(a) in the case a company having a share capital: by the members present in person or by
proxy, where allowed, and having not less than one-tenth of the total voting power or holding
shares on which an aggregate sum of not less than Rs.5,00,000/- or such higher amount as may
be prescribed, has been paid-up; and
(b) in the case of any other company: by any member or members present in person or by
proxy, where allowed, and having not less than one-tenth of the total voting power.
A poll shall be taken at such time, not being later than 48 hours from the time when the
demand was made on any other question.
The Chairman shall announce the date, venue and time of taking the poll to enable members to
have adequate and convenient opportunity to exercise their votes.
Further, the Chairman may permit any member who so desires to be present at the time of
counting the votes.
Where a poll is to be taken, the Chairman of the meeting shall appoint such number of persons,
as he deems necessary, to scrutinize the poll process and votes given on the poll and to report
thereon to him. The result of the poll shall be deemed to be the decision of the meeting on the
resolution on which the poll was taken.
Postal Ballot (Section 110)
Meaning of As per section 2(65) “postal ballot” means voting by post or through any
postal electronic mode. It includes voting by shareholders by postal or electronic
ballot mode instead of voting personally for transacting businesses in a general
meeting of the company.
Each item proposed to be passed through postal ballot shall be in the form of a
Resolution.
Send draft A company shall send a notice and draft resolution by registered post to all
resolution shareholders explaining the reasons and requesting them to send their assent or
along with dissent in writing on a postal ballot.
notice
If a resolution is assented to by the requisite majority of the shareholders by
means of postal ballot, it shall be deemed to have been duly passed at a general
meeting convened in that behalf.
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Meaning of Requisite majority with regard to special resolution means votes cast in favor of
requisite the business is three times more than the votes cast against, with regard to
majority ordinary resolution, votes cast in favor is more than the votes cast against.
Postal Every company shall transact such items of business as the Central Government
ballot may, by notification, declare to be transacted only by means of postal ballot.
mandatory
in certain
cases
Postal A company may use postal ballot for transacting any item of business, other
ballot than
optional in (a) Ordinary business and
certain (b) Any business in respect of which directors or auditors have a right to be
cases heard at any meeting.
MANDATORY BUSINESS TO BE TRANSACTED THROUGH POSTAL BALLOT
[Rule 22 of Companies (Management and Administration) Rules, 2014]
The following items of business shall be transacted only by means of voting through postal
ballot:
(a) Alteration of the objects clause of the memorandum.

(b) Alteration of articles of association in relation to insertion or removal of provisions
defining a private company.
(c) Change in place of registered office outside the local limits of any city, town or village.
(d) Change in objects for which a company has raised money from public through prospectus
and still has any unutilized amount out of the money so raised.
(e) Issue of shares with differential rights as to voting or dividend or otherwise.
(f) Buy-back of shares by a company.
(g) Election of a ‘small shareholders ‘director.
(h) Sale of the whole or substantially the whole of an undertaking of a company.
(i) Giving loans or extending guarantee or providing security exceeding 60% of its paid up
share capital, free reserves and securities premium account or 100% of its free reserves and
securities premium account.
NOTE Following companies are not required to transact any business through postal
ballot.
(i) One-person company
(ii) All other companies having members up to 200.
Rule 22 of the Companies (Management and Administration) Rules, 2014 lay down the
procedure to be followed for conducting business through postal ballot.
(1) Notice to The company shall send a notice to all the shareholders, along with a draft
all resolution explaining the reasons therefor and requesting them to send their
shareholders assent or dissent in writing on a postal ballot because postal ballot means
voting by post or through electronic means within a period of thirty days
from the date of dispatch of the notice.
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(2) Mode of The notice shall be sent
sending (a) By Registered Post or speed post, or
documents (b) Through electronic means like registered e-mail id or
(c) Through courier service
(3) Publishing The company shall issue an advertisement to be published at least once in a
of an vernacular newspaper of the district in which the registered office of the
advertisement company is situated, and having a wide circulation in that district, and at least
once in English language in an English newspaper having a wide circulation
in that district, stating that the ballot papers have been dispatched.
(4) Notice to The notice of the postal ballot shall also be placed on the website of the
be placed on company forthwith after the notice is sent to the members. Such notice shall
the website remain on such website till the last date for receipt of the postal ballots from
the members.
(5) The Board of directors shall appoint one scrutinizer, who is not in
Appointment employment of the company and who, in the opinion of the Board can
of scrutinizer conduct the postal ballot voting process in a fair and transparent manner.
The scrutinizer may be a Company Secretary in Practice, a Chartered

Accountant in Practice, a Cost Accountant in Practice, an Advocate or any
other person of repute who is not in the employment of the company and,
who can in the opinion of the Board, scrutinize the postal ballot process in a
fair and transparent manner.
(6) Safe Postal ballot received back from the shareholders shall be kept in the safe
custody of custody of the scrutinizer and after the receipt of assent or dissent of the
registers and shareholder in writing on a postal ballot, no person shall deface or destroy
papers the ballot paper or declare the identity of the shareholder.
(7) The scrutinizer shall submit his report as soon as possible after the last date
Submission of of receipt of postal ballots but not later than seven days thereof.
report of the
scrutinizer
(8) The scrutinizer shall maintain a register either manually or electronically to
Maintenance record their assent or dissent received, mentioning the particulars of the
of register by shareholder and details of postal ballots which are received in defaced or
the mutilated form and postal ballot forms which are invalid.
Scrutinizer
(9) The postal ballot and all other papers relating to postal ballot including
Preservation voting by electronic means, shall be under the safe custody of the scrutinizer
of postal till the chairman considers, approves and signs the minutes and thereafter, the
ballots scrutinizer shall return the ballot papers and other related papers or register to
the company who shall preserve such ballot papers and other related papers
or register safely.
(10) Reply The assent or dissent received after thirty days from the date of issue of
from notice shall be treated as if reply from the member has not been received.
members
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(11) The results shall be declared by placing it, along with the scrutinizer’s report,
Declaration on the website of the company.
of result
(12) The resolution shall be deemed to be passed on the date of at a meeting
Resolution convened in that behalf.
deemed to be
passed
A postal ballot form shall be considered invalid if:
(a) A form other than one issued by the company has been used;
(b) It has not been signed by or on behalf of the Member;
(c) Signature on the postal ballot form doesn’t match the specimen signatures with the
company;
(d) It is not possible to determine without any doubt the assent or dissent of the Member;
(e) Neither assent nor dissent is mentioned;
(f) Any competent authority has given directions in writing to the company to freeze the
Voting Rights of the Member;
(g) The envelope containing the postal ballot form is received after the last date prescribed;
(h) The postal ballot form, signed in a representative capacity, is not accompanied by a
certified copy of the relevant specific authority;
(i) It is received from a Member who is in arrears of payment of calls;
(j) It is defaced or mutilated in such a way that its identity as a genuine form cannot be
established.
Rescinding the Resolution
A Resolution passed by postal ballot shall not be rescinded otherwise than by a Resolution
passed subsequently through postal ballot.
Modification to the Resolution
No amendment or modification shall be made to any Resolution circulated to the Members for
passing by means of postal ballot.
Circulation of Members’ Resolution (Section 111)
A company shall, on requisition in writing of certain number of members, give notice to

members of any proposed resolution intended to be moved in the meeting. The company shall
be bound to give notice of resolution only if the requisition is deposited not less than six weeks
before the meeting.
Representation of President and Governors in Meetings (Section 112)
Section 112 of the Act provides that President of India or the Governor of a State, if he is a
member of a company, may appoint such person as he thinks fit, to act as his representative at
any meeting of the company. The person so appointed shall be deemed to be a members and
have the same rights including the right to vote by proxy or postal ballot, as the President or
Governor could exercise as a member of the company.
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Ordinary and Special Resolutions (Section 114)
Ordinary Resolution
A resolution shall be an ordinary resolution if it is required to be passed by the votes cast,
whether on a show of hands, or electronically or on a poll in favor of the resolution, including
the casting vote, if any, of the Chairman, by members who, being entitled so to do, vote in
person, or where proxies are allowed, by proxy or by postal ballot, exceed the votes cast
against the resolution by members, so entitled and voting.
Special Resolution
A resolution shall be a special resolution when:
(a) the intention to propose the resolution as a special resolution has been duly specified in the
notice calling the general meeting or other intimation given to the members of the resolution;
(b) the notice required under this Act has been duly given; and
(c) the votes cast in favor of the resolution, whether on a show of hands, or electronically or on
a poll, as the case may be, by members who, being entitled so to do, vote in person or by proxy
or by postal ballot, are required to be not less than three times the number of the votes, if
any, cast against the resolution by members so entitled and voting.
NOTE: If the notice convening the meeting (where at special business will be transacted)
does not state, the nature of the special business, the meeting would be deemed to
have been convened irregularly.
Consequently, that special business cannot be dealt with at the meeting.
Resolutions requiring Special Notice (Section 115)
Section 115 provides that where, by any provision contained in this Act or in the articles of a
company, special notice is required of any resolution, notice of the intention to move such
resolution shall be given to the company by such number of members holding not less than 1%
of total voting power or holding shares on which such aggregate sum not exceeding
Rs.5,00,000/- as may be prescribed has been paid-up and the company shall give its members
notice of the resolution in the following manner as prescribed in Rules.
The matters in respect of which special notice is required are:

(a) A resolution for appointment of a person as auditor at the annual general meeting other
than the retiring auditor for providing expressly that the retiring auditor shall not be re-
appointed [Section 140(4)];
(b) A resolution for removing a director before the expiry of the period of his office and
appointing someone in the place of the director so removed [Section 169(2)].
Procedure for special notice
1.Signing of Special notice required to be given to the company shall be signed, either
special notice individually or collectively by such number of members holding not less than
one percent of total voting power or holding shares on which an aggregate
sum of not more than five lakh rupees has been paid up on the date of the
notice.
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2. Sending of Such notice shall be sent by members to the company not earlier than three
notice to the months but at least 14 days before the date of the meeting at which the
company resolution is to be moved, exclusive of the day on which the notice is given
and the day of the meeting.
3. On receipt The company shall immediately after receipt of the notice, give its members
of notice by notice of the resolution at least seven days before the meeting, exclusive of
the company the day of dispatch of notice and day of the meeting, in the same manner as it
gives notice of any general meetings.
4. Publication Where it is not practicable to give the notice in the same manner as it gives
of notice notice of any general meetings, the notice shall be published in English
language in English newspaper and in vernacular language in a vernacular
newspaper, both having wide circulation in the State where the registered
office of the Company is situated. Such notice shall also be posted on the
website, if any, of the Company. Such notice shall be published at least seven
days before the meeting, exclusive of the day of publication of the notice and
day of the meeting.
Resolutions passed at Adjourned Meeting
As per Section 116 where a resolution is passed at an adjourned meeting of a company; or the
holders of any class of shares in a company; or the Board of Directors, the resolution shall be
treated as passed on the day it was actually passed and not on any earlier date.
Resolutions and Agreements to be filed with the Registrar
Section 117 provides that a copy of every resolution and an agreement in respect of matters
specified therein together with the explanatory statement shall be filed in Form No. MGT.14
with the Registrar within thirty days of its passing.
The Registrar shall register the same and in case of any default, a company and every officer
who is in default including the liquidator shall be punishable with fine which shall not be less
than one lakh rupees but which may extend to five lakh rupees.
Resolutions and agreements to be filed with the Registrar are as under:

(a) special resolutions
(b) resolutions which have been agreed to by all the members of a company
(c) any resolution of the Board of Directors of a company
(d) resolutions or agreements which have been agreed to by any class of members
(e) resolutions requiring a company to be wound up voluntarily
Minutes
Meaning Minutes are written records of the proceedings of a meeting.
Required Section 118 provides that every company shall prepare, sign and keep minutes of
proceedings of every general meeting, including the meeting called by the
requisitionists and all proceedings of meeting of any class of shareholders or
creditors or Board of Directors or committee of the Board and also resolution
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passed by postal ballot within thirty days of the conclusion of every such meeting
concerned.
In case of meeting of Board of Directors or of a committee of Board, the minutes

shall contain name of the directors present and also name of dissenting director
or a director who has not concurred the resolution.
Important It preserves a correct record of the decisions of a meeting.

Points Recording of the minutes starts with the name of the meeting, date, time, place
and the persons who attended the meeting.
Each page of the book be initialed by CM.
The minutes of each meeting shall contain a fair and correct summary of the
proceedings.
All appointments of officers made at any of the meeting shall be included.
Minutes need not contain such matters which in the opinion of CM :-
1. Is or could reasonably be regarded as defamatory of any person.
2. Is irrelevant
3. Is detrimental to the interest of the co.
CM shall exercise an absolute discretion in regard to inclusion or non-inclusion

of any matter in the minutes. Minutes must be ready within 30 days of meeting.
Location The minute book shall be kept at the registered office of the co. and
and Open, during business hours, to the inspection of any member without charge
inspection subject to reasonable restrictions. However, at least 2 hours in each day are to be
of minute allowed for inspection.
books A member shall be entitled to get a copy of any minutes on payment of
prescribed fee.
As per section 118(10) every company shall observe Secretarial Standards with respect to
General and Board Meetings specified by the Institute of Company Secretaries of India.
Secretarial Standard on Minutes
A distinct Minutes Book shall be maintained for Meetings of the Members of the company,
creditors and others.
Resolutions passed by postal ballot shall be recorded in the Minutes book of General
Meetings.
Precautions to be taken while preparing the minutes

(1) Every company shall, however, follow a uniform and consistent form of
Uniformity maintaining the Minutes. Any deviation in such form of maintenance shall be
in the authorized by the Board.
manner of
maintaining Minutes may be maintained in electronic form in such manner as prescribed
minutes under the Act and as may be decided by the Board.
Minutes in electronic form shall be maintained with Time stamp.
Time stamp under SS-2 has been defined to mean the current time of an event
that is recorded by a secured computer system and is used to describe the time
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that is printed to a file or other location to help keep track of when data is
added, removed, sent or received.
(2) Page The pages of the Minutes Books shall be consecutively numbered.
Numbering In the event any page or part thereof in the Minutes Book is left blank, it shall
be scored out and initialed by the Chairman who signs the Minutes.
(1) Binding of minutes: Minutes of Meetings, if maintained in loose-leaf form,

shall be bound periodically depending on the size and volume.
(2) Place of keeping minutes: Minutes Books shall be kept at the Registered
Office of the company or at such other place, as may be approved by the Board.
Contents of Minutes
(i) General Minutes shall state, at the beginning the Meeting, name of the company, day,
Contents date, venue and time of commencement and conclusion of the Meeting.
In case a Meeting is adjourned, the Minutes shall be entered in respect of the
original Meeting as well as the adjourned Meeting.
In respect of a Meeting convened but adjourned for want of Quorum a
statement to that effect shall be recorded by the Chairman or any Director
present at the Meeting in the Minutes.
Minutes shall record the names of the Directors and the Company Secretary
present at the Meeting.
The names of the Directors shall be listed in alphabetical order or in any other
logical manner, but in either case starting with the name of the person in the
Chair.
(ii) Specific Minutes shall, inter alia, contain:

Contents (a) The Record of election, if any, of the Chairman of the Meeting.
(b) The fact that certain registers, documents, the Auditor’s Report and
Secretarial Audit Report, as prescribed under the Act were available for
inspection.
(c) The Record of presence of Quorum.
(d) The number of Members present in person including representatives.
(e) The number of proxies and the number of shares represented by them.
(f) The presence of the Chairmen of the Audit Committee, Nomination and
Remuneration Committee and Stakeholders Relationship Committee or their
authorized representatives.
(g) The presence if any, of the Secretarial Auditor, the Auditors, or their
authorized representatives, the Court/Tribunal appointed observers or
scrutinizers.
(h) Summary of the opening remarks of the Chairman.
(i) In respect of each Resolution, the type of the Resolution, the names of the
persons who proposed and seconded and the majority with which such
Resolution was passed.
(j) In the case of poll, the names of scrutinizers appointed and the number of
votes cast in favor and against the Resolution and invalid votes.
(k) If the Chairman vacates the Chair in respect of any specific item, the fact
that he did so and in his place some other Director or Member took the Chair.
(l) The time of commencement and conclusion of the Meeting.
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Minutes of E-Voting and postal ballot
In respect of Resolutions passed by e-voting or postal ballot, a brief report on the e-voting or
postal ballot conducted including the Resolution proposed, the result of the voting thereon and
the summary of the scrutinizer’s report shall be recorded in the Minutes Book and signed by
the Chairman or in the event of death or inability of the Chairman, by any Director duly
authorized by the Board for the purpose, within thirty days from the date of passing of
Resolution by e-voting or postal ballot.
Recording of Minutes
Minutes shall contain a fair and correct summary of the proceedings of the Meeting. The
Company Secretary shall record the proceedings of the Meetings. Where there is no Company
Secretary, any other person authorized by the Board or by the Chairman in this behalf shall
record the proceedings.
Minutes shall be written in clear, concise and plain language.

Minutes shall be written in third person and past tense.
Resolutions shall however be written in present tense.
Minutes need not be an exact transcript of the proceedings at the Meeting.
Entry in Minutes shall be entered in the Minutes Book within thirty days from the date of
the conclusion of the Meeting.
Minutes In case a Meeting is adjourned, the Minutes in respect of the original Meeting as
Book well as the adjourned Meeting shall be entered in the Minutes Book within thirty
days from the date of the respective meetings.
The date of entry of the Minutes in the Minutes Book shall be recorded by the
Company Secretary. Where there is no Company Secretary, it shall be entered by
any other person authorized by the Board or the Chairman. Minutes, once entered
in the Minutes Book, shall not be altered.
Signing Minutes of a General Meeting shall be signed and dated by the Chairman of the
and Meeting or in the event of death or inability of that Chairman, by any Director
Dating who was present in the Meeting and duly authorized by the Board for the purpose,
of within thirty days of the General Meeting.
Minutes The Chairman shall initial each page of the Minutes, sign the last page and append
to such signature the date on which and the place where he has signed the Minutes.
Any blank space in a page between the conclusion of the Minutes and signature of
the Chairman shall be scored out.
If the Minutes are maintained in electronic form, the Chairman shall sign the
Minutes digitally.
Rule 25 of Companies (Management and Administration) Rules, 2014 contains provisions

with regards to minutes of meetings.
(A) Distinct A distinct minute book shall be maintained for each type of meeting namely:
minute book (i) general meetings of the members;
for each (ii) meetings of the creditors;
(iii) meetings of the Board; and
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type of (iv) meetings of the committees of the Board.
meeting It may be noted that resolutions passed by postal ballot shall be recorded in the
minute book of general meetings.
(B) Manner Minutes of proceedings of each meeting shall be entered in the books
of maintained for that purpose along with the date of such entry within thirty days
maintenance of the conclusion of the meeting.
of minutes
(C) Manner Each page of every minute book shall be initialed or signed and the last page
of signing of of the record of proceedings of each meeting or each report in such books shall
minutes be dated and signed by:
─ in the case of minutes of proceedings of a meeting of the Board or of a
committee thereof, by the chairman of the said meeting or the chairman of the
next succeeding meeting;
─ in the case of minutes of proceedings of a general meeting, by the chairman
of the same meeting within the aforesaid period of thirty days;
─ in case of every resolution passed by postal ballot, by the chairman of the
Board within the aforesaid period of thirty days.
(D) Minute books of general meetings shall be kept at the registered office of the
Preservation company. Minutes of the Board and committee meetings shall be kept at the
of minutes registered office or at such other place as may be approved by the Board.
book Minutes books shall be preserved permanently and kept in the custody of the
company secretary of the company or any director duly authorized by the
Board for the purpose and shall be kept in the registered office or such place as
the members may decide by passing special resolution.
Inspection of Minute book of General Meeting (Section 119)
(1) Place The minute’s book of general meetings or of a resolution passed by postal ballot
of shall
keeping (a) be kept at the registered office of a company; and
minutes (b) shall be open for inspection to members during business hours without any
book charge subject to such restrictions as the company may, by its articles or in
general meeting, impose so, however, that shall not be less than two hours in each
business day are allowed for inspection.
(2) Issue Any member shall be entitled to be furnished, within seven working days after he
of copy of has made a request in that behalf to the company, with a copy of any minutes of
minutes any general meeting, on payment of such sum as may be specified in the articles
to the of the company but not exceeding a sum of ten rupees for each page or part of any
member page. A member who has made a request for provision of soft copy in respect of
minutes of any previous general meetings held during a period of immediately
preceding three financial years shall be entitled to be furnished, with the same
free of cost.
Refusal of inspection or furnishing of copy of minutes:
If any inspection under sub- section (1) is refused, or if any copy required under
sub-section (2) is not furnished within the time specified therein, the company
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shall be liable to a penalty of twenty-five thousand rupees and every officer of the
company who is in default shall be liable to a penalty of five thousand rupees for
each such refusal or default, as the case may be.
Secretarial Standard on Inspection and Extracts of Minutes
Inspection of Minutes Book may be provided in physical or in electronic form.

While providing inspection of Minutes Book, the Company Secretary or the official of the
company authorized by the Company Secretary to facilitate inspection shall take all
precautions to ensure that the Minutes Book is not mutilated or in any way tampered with by
the person inspecting.
Extract of the Minutes shall be given only after the Minutes have been duly signed. However,
any Resolution passed at a Meeting may be issued even pending signing of the Minutes,
provided the same is certified by the Chairman or any Director or the Company Secretary.
Where a Member requests for the copy of the Minutes in electronic form, in respect of any
previous General Meetings held during a period immediately preceding three financial years,
the company shall furnish the same on payment of not exceeding Rs. 10 per page.
Report on Annual General Meeting (Section 121)
Section 121 of the Companies Act, 2013 provides the preparation of report on each annual
general meeting which is to be filed with the registrar.
(1) Report to Every listed public company is required to prepare a report on each annual
be prepared general meeting including the confirmation to the effect that the meeting
by the listed was convened, held and conducted as per the provisions of the Act and the
public rules made thereunder.
company
(2) Filing of A copy of the report is to be filed with the Registrar in Form No. MGT. 15
the report with within thirty days of the conclusion of annual general meeting along with
the Registrar the prescribed fee, within the time as specified, under section 403.
(3) Default in If the company fails to file the report before the expiry of the period
filing of the specified under section 403 with additional fee, the company shall be
report punishable with fine which shall not be less than one lakh rupees but which
may extend to five lakh rupees and every officer of the company who is in
default shall be punishable with fine which shall not be less than twenty-five
thousand rupees but which may extend to one lakh rupees.
According to Rule 31 of Companies (Management and Administration) Rules, 2014, the

report shall be prepared in the following manner:
(1) AGM Report

(a) The report on AGM shall be prepared in addition to the minutes of the general meeting.
(b) The report shall contain fair and correct summary of the proceedings of the AGM.
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(2) Signing of the report:
The report shall be signed and dated by the Chairman of the meeting or in case of his inability
to sign, by any two directors of the company, one of whom shall be the Managing director, if
there is one and company secretary.
(3) Contents of the report:

Such report shall contain the details in respect of the following:
─ The day, date, hour and venue of the annual general meeting.
─ Confirmation with respect to appointment of Chairman of the meeting.
─ Number of members attending the meeting.
─ Confirmation of quorum.
─ Confirmation with respect to compliance of the Act and the Rules, secretarial standards
made there under with respect to calling, convening and conducting the meeting.
─ Business transacted at the meeting and result thereof with a brief summary of the discussion.
─ Particulars with respect to any adjournment, postponement of meeting, change in venue.
─ Any other points relevant for inclusion in the Report.
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CH. 19 LOANS AND INVESTMENTS BY COMPANIES
Introduction The power to invest the funds of the company is the prerogative of the Board
of Directors. [Sec 179]
However, the Companies Act, 2013 contains provisions for restrictions on
investments that a company can make and loans it can provide.
Moreover, giving corporate guarantee or security is also as good as giving a

loan, because the person to whom guarantee or security is given can decide to
enforce the guarantee or security in certain conditions and in such a situation,
the company will have to pay the amount.
Thus, apart from loan and investments, restrictions are also placed on the
guarantees which the company can give or security it can provide for a loan.
Meaning The term 'Investments' is used in a limited sense to mean the investment of
money in shares, stock, debentures, or other securities.
TERMINOLOGY
Investment The expression “investment company” means a company whose principal
Company business is the acquisition of shares, debentures or other securities. [Sec 186]
Infra- “Infrastructure facilities” means the facilities specified in Schedule VI.

structure
facilities
As per Schedule VI, the term “infrastructural projects” or “infrastructural facilities” includes
the following projects or activities.
Infrastructure is the support system on which the working of a modern industrial economy
depends. It is the physical framework which is essential for giving services to people such as
roads, railways, ports, airports, dams, power stations, oil and gas pipelines,
telecommunications, etc.
LOANS AND INVESTMENTS BY COMPANIES (Section 186)
Not more than two layers of investment companies - Section 186(1)

A company shall unless otherwise prescribed, make investment through not more than two
layers of investment companies.
However, the aforesaid provisions shall not affect —
(i) a company from acquiring any other company incorporated in a country outside India if
such other company has investment subsidiaries beyond two layers as per the laws of such
country;
(ii) a subsidiary company from having any investment subsidiary.
Restriction on providing loans, guarantees and investment - Section 186(2)
No Company shall, directly or indirectly:

(a) give any loan to any person or other body corporate;
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(b) give any guarantee, or provide security, in connection with a loan to any other person body
corporate or person; and
(c) acquire, by way of subscription, purchase or otherwise the securities of any other body
corporate; exceeding 60% of its paid-up share capital, free reserves and securities premium
account or 100% of its free reserves and securities premium account, whichever is more unless
the same is previously authorized by a special resolution passed in a general meeting.
The Ministry of Corporate Affairs has clarified vide its general Circular No, 04/2015 dated
10th March 2015 that loans and/or advances made by the companies to their employees, other
than the managing or whole time directors (which is governed by section 185) are not
governed by the requirements of section 186 of the Companies Act, 2013.
Loan/investment to be made with the approval of all the directors at the Board Meeting-
Sec. 186(5)
No loan or investment shall be made or guarantee or security given by the company unless the
resolution sanctioning it is passed at a meeting of the Board with the consent of all directors
present at the meeting.
Note: Every proposal for making loan to any other body corporate, exceeding 60% of its paid-
up share capital, free reserves and securities premium account or 100% of its free reserves and
securities premium account whichever is more, shall be approved at the meeting of the Board
with the consent of all the directors present at the meeting and also to be approved by the
shareholders at the general meeting by way of special resolution. [Section 186(3)]
Disclosure in financial statements - Section 186(4)
The company shall disclose to the members in the financial statement the full particulars of the
loans given, investment made or guarantee given or security provided and the purpose for
which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or
guarantee or security.
Prior Approval of Financial Institution - Section 186(5)
Section 186(5) provides that no investment shall be made or loan or guarantee or security
given by the company unless the resolution sanctioning it is passed at a meeting of the Board
with the consent of all the directors present at the meeting and the prior approval of the public
financial institution concerned where any term loan is subsisting, is obtained.
Prior approval by Special Resolution
(1) Where the aggregate of the loans and investment so far made, the amount for which
guarantee or security so far provided to or in all other bodies corporate along with the
investment, loan, guarantee or security proposed to be made or given by the Board, exceed the
limits specified under section 186 no investment or loan shall be made or guarantee shall be
given or security shall be provided unless previously authorized by a special resolution passed
in a general meeting.
(2) A resolution passed at a general meeting to give any loan or guarantee or investment or
providing any security shall specify the total amount up to which the Board of Directors are
authorized to give such loan or guarantee, to provide such security.
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Loans and investments by intermediaries etc. - Section 186(6)
No company, which is registered under section 12 of the Securities and Exchange Board of
India Act, 1992 and covered under such class or classes of companies as may be prescribed,
shall take inter-corporate loan or deposits exceeding the prescribed limit and such company
shall furnish in its financial statement the details of the loan or deposits.
Pursuant to the above provisions no stock broker, sub-broker, share transfer agent, banker to
issue, underwriter, investment advisor or any intermediary associated with capital market and
which is registered under section 12 of the SEBI Act, shall make loans or investments or give
guarantees or provide security in excess of the limits specified above.
Default subsists with respect to repayment of deposits - Section 186(8)
No company, which is in default in repayment of any deposits accepted before or after the
commencement of the Companies Act, 2013 or in payment of interest thereon, shall give any
loan or give any guarantee, or provide any security or make an acquisition till such default is
subsisting.
REGISTER OF LOANS MADE, GUARANTEES GIVEN, SECURITIES PROVIDED

AND INVESTMENTS MADE
Section 186(9) provides that every company giving loan or giving a guarantee or providing
security or making an acquisition under this section shall keep a register which shall contain
such particulars and shall be maintained in such manner as may be prescribed.
Rule 12 states that
(1) Every company giving loan or giving guarantee or providing security or making an
acquisition of securities shall, from the date of its incorporation, maintain a register in Form
MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities
provided and acquisitions made as aforesaid.
(2) The entries in the register shall be made chronologically in respect of each such transaction
within seven days of making such loan or giving guarantee or providing security or making
acquisition.
(3) The register shall be kept at the registered office of the company and the register shall be
preserved permanently and shall be kept in the custody of the company secretary of the
company or any other person authorized by the Board for the purpose.
(4) The entries in the register shall be authenticated by the company secretary of the company
or by any other person authorized by the Board for the purpose.
(5) For the purpose of sub-rule (4), the register can be maintained either manually or in
electronic mode.
(6) The extracts from the register maintained under section 186(9) may be furnished to any
member of the company on payment of such fee as may be prescribed in the Articles of the
company which shall not exceed ten rupees for each page.
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Inspection of Register Inspection of Register
Section 186(10) provides that the register referred to in sub-section (9) shall be kept at the
registered office of the company and —
(a) shall be open to inspection at such office; and
(b) extracts may be taken therefrom by any member, and copies thereof may be furnished
to any member of the company on payment of such fees as may be prescribed.
Offence and Penalty [Section 186(3)]
If a company contravenes the provisions of this section, the company shall be punishable with
fine which shall not be less than twenty-five thousand rupees but which may extend to five
lakh rupees and every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to two years and with fine which shall not be less
than twenty-five thousand rupees but which may extend to one lakh rupees.
Exemptions
Section 186(11) provides that nothing contained in section 186, except sub-section (1), shall
apply—
(a) to a loan made, guarantee given or security provided by a banking company or an insurance
company or a housing finance company in the ordinary course of its business or a company
engaged in the business of financing of companies or of providing infrastructural facilities;
(b) to any acquisition—
(i) made by a non-banking financial company and whose principal business is
acquisition of securities:
(ii) made by a company whose principal business is the acquisition of securities.
Exemption from Applicability of Section 186 to Government Company
In view of the Central Government’s notification dated 5th June 2015 under Section 462 of the
Companies
Act, 2013, Section 186 shall not apply to:
(a) a Government company engaged in defence production;
(b) a Government company, other than a listed company.
INVESTMENTS TO BE HELD IN COMPANY'S OWN NAME

According to Section 187(1), all investments made or held by a company in any property,
security or other asset shall be made and held by it in its own name.
As per proviso to section 187(1), the company may hold any shares in its subsidiary company
in the name of any nominee or nominees of the company, if it is necessary to do so, to ensure
that the number of members of the subsidiary company is not reduced below the statutory
limit.
Where the shares of a company were registered in the joint names of the company and one of
its directors, it was held that the director was a nominee of the company for that purpose and
could only act jointly as he had no rights of his own. [Re Exchange Travel (Holdings) Ltd.]
If company holds shares in dematerialized form, the name of depository is entered in the
register of members as member of the company and the name of the investing company as the
beneficial owner of the said shares.
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CH. 20 DEPOSITS
Sections 73 to 76 of the Companies Act 2013 read with the Companies (Acceptance of
Deposits) Rules, 2014 regulate the invitation, acceptance and repayment of deposits by
Companies.
Applicability
Sections 73 to 76 of the Companies Act 2013 and the Companies (Acceptance of Deposits)
Rules, 2014 shall apply to all companies except -
(i) a banking company and
(ii) a non- banking financial company as defined in the Reserve Bank of India Act, 1934 and
(iii) a housing finance company registered with the National Housing Bank established under
the National Housing Bank Act, 2013; and
(iv) such other company as the Central Government may, after consultation with the Reserve
Bank of India, specify in this behalf.
What is Deposit?
According to the Section 2(31) of the Act, “deposit” includes any receipt of money by way of
deposit or loan or in any other form by a company,
but does not include-
(i) any amount received from the Central Government or a State Government, or any amount
received from any other source whose repayment is guaranteed by the Central Government or
a State Government or any amount received from a local authority.
(ii) any amount received from foreign Governments, foreign/international banks, and foreign
citizens, foreign authorities or persons resident outside India subject to the provisions of
Foreign Exchange Management Act.
(iii) any amount received as a loan or facility from any banking company.
(iv) any amount received as a loan or financial assistance from Public Financial Institutions,
Insurance Companies or Scheduled Banks.
(v) any amount received against issue of commercial paper.

Commercial paper - the term Commercial Paper refers to an unregulated promissory note of
short duration that is usually not secured by assets. Commercial Paper generally has a fixed
maturity that might typically range from one to 270 days in length.
(vi) any amount received by a company from any other company.
(vii) any amount received and held pursuant to an offer made in accordance with the
provisions of the Act towards subscription to any securities, including share application, so
long as such amount is appropriated only against the amount due on allotment of the securities
applied for.
265
If the securities for which application money or advance for such securities was received
cannot be allotted within 60 days from the date of receipt of the application money or advance
for such securities and such application money or advance is not refunded to the subscribers
within 15 days from the date of completion of 60 days, such amount shall be treated as a
deposit under these rules.
(viii) any amount received from a Peron who, at the time of the receipt of the amount, was a
director of the company or a relative of the director of the Private company.
Provided that the director of the company or relative of the director of the private company, as
the case may be, from whom money is received, furnishes to the company at the time of giving
the money, a declaration in writing to the effect that the amount is not being given out of funds
acquired by him by borrowing or accepting loans or deposits from others and the company
shall disclose the details of money so accepted in the Board's report.
[Inserted vide Companies (Acceptance of Deposits) Second Amendment Rules, 2015]
(ix) Any amount raised by the issue of bonds or debentures secured by a first charge or a
charge ranking pari passu with the first charge on any assets excluding intangible assets of the
company or bonds/ debentures compulsorily convertible into shares of the company within
five years.
(x) Interest free security deposit from an employee not exceeding his annual salary.
(xi) Interest free amount received or held in trust.
(xii) Any amount received in the course of or for the purposes of the business of the company:
(a) as an advance for the supply of goods or provision of services provided that such
advance is appropriated against supply of goods or provision of services within a period
of 365 days from acceptance of such advance.
(b) as advance received in connection with consideration for an immovable property
under an agreement. [Amended vide Companies (Acceptance of Deposits) Amendment
Rules, 2015]
(c) as security deposit for the performance of the contract for supply of goods or
provision of services.
(d) as advance received under long term projects or for supply of capital goods except
those covered under item (b) above.
If the amount received under (a) (b) and (d) above becomes refundable (with or without
interest) because the company accepting the money does not have necessary permission or
approval to deal in the goods or properties or services for which the money is taken, the
amount received shall be deemed to be a Deposit under these rules.
Explanation: For the purpose of sub-clause the amount referred to shall be deemed to be
deposits on the expiry of 15 days from the date they become due for refund.
[Inserted vide Companies (Acceptance of Deposits) Amendment Rules, 2015]
(xiii) Any amount brought in by the promoters of the company by way of unsecured loan in
pursuance of the stipulation of any lending financial institution or a bank.
(xiv) Any amount accepted by a Nidhi Company.
266
MCA vide circular no. 5/2015 dated 30th March, 2015 in consultation with RBI has clarified
that the amounts received by private companies prior to 1st April 2014 from their members,
directors or their relatives shall not be treated as deposits under the Companies Act 2013.
Who is depositor?
‘Depositor’ means-
(i) any member of the company who has made a deposit with the company u/s 73(2) of the
Act, or
(ii) any person who has made a deposit with a public company u/s 76 of the Act.
Acceptance of deposit from members [Section 73(2)]
Section 73(2) states that a company may accept deposits from its members on such terms and
conditions, including the provision of security, or for the repayment of such deposits with
interest, as may be agreed upon between the company and its members,
1. subject to the passing of a resolution in general meeting,
2. subject to such rules as may be prescribed in consultation with the Reserve Bank of
India and
3. subject to the fulfillment of following conditions under Section 73(2)

(a) issuance of a circular to its members including therein a statement showing the
financial position of the company, the credit rating obtained, the total number of
depositors and the amount due towards deposits in respect of any previous deposits
accepted by the company and such other particulars in such form and in such
manner as prescribed under Rule 4 of Companies (Acceptance of deposits)
Rules, 2014.
(b) filing a copy of the circular along with such statement with the Registrar within
thirty days before the date of issue of the circular;
(c) depositing such sum which shall not be less than 15% of the amount of its deposits
maturing during a financial year and the financial year next following, and kept in a
scheduled bank in a separate bank account to be called as deposit repayment
reserve account;
(d) providing such deposit insurance in such manner and to such extent as prescribed
under Rule 5 of Companies (Acceptance of deposits) Rules, 2014.
(e) certifying that the company has not committed any default in the repayment of
deposits accepted either before or after the commencement of this Act or payment
of interest on such deposits; and
(f) providing security, if any, for the due repayment of the amount of deposit or the
interest thereon. In case when a company does not secure the deposits or secures
such deposits partially, then, the deposits shall be termed as ‘‘unsecured deposits’’
and shall be so quoted in every circular, form, advertisement or in any document
related to invitation or acceptance of deposits.
Exemption for Private companies
The MCA through their notification, dated 5th June 2015 has allowed private companies to
accept deposits from its members, monies not exceeding 100% of aggregate of the paid up
share capital and free reserves, and such company shall file the details of monies so accepted
267
to the Registrar in such manner as may be specified without complying with Section 73(2) (a)
to (e).
Thus a private company will have to follow only the condition mentioned in Section 73(2) (f).
Acceptance of Deposit from Public [Section 76]
Eligible companies, may accept deposits from persons other than its members
1. subject to the fulfillment of all requirements provided in Section 73(2)
2. subject to such rules as may be prescribed in consultation with the Reserve Bank of
India.
3. Such a company shall be required to obtain the rating (including its net-worth,
liquidity and ability to pay its deposits on due date) from a recognized credit rating
agency for informing the public the rating given to the company at the time of
invitation of deposits from the public which ensures adequate safety and the rating
shall be obtained for every year during the tenure of deposits.
4. Every company accepting secured deposits from the public shall within 30 days of
such acceptance, create a charge on its assets of an amount not less than the amount
of deposits accepted in favor of the deposit holders in accordance with such rules as
may be prescribed.
Who is an Eligible Company?

As per Rule 2(1)(e) of Companies (Acceptance of Deposits) Rules, 2014,
“Eligible company” means a public company having a net worth of not less than 100 crore
rupees or a turnover of not less than 500 crore rupees and which has obtained the prior consent
of the company in general meeting by means of a special resolution and also filed the said
resolution with the Registrar of Companies and with the Reserve Bank of India before making
any invitation to the Public for acceptance of Deposits.
Terms and conditions for acceptance of deposits [Rule 3]
(1) Time No company under section 73(2) and no eligible company shall accept or renew
period any deposit, whether secured or unsecured, which is repayable on demand or
upon receiving a notice, within a period of less than six months or more than
thirty-six months from the date of acceptance or renewal of such deposit.
However, a company may, for the purpose of meeting any of its short-term
requirements of funds, accept or renew such deposits for repayment earlier than
six months from the date of deposit or renewal, subject to following conditions:
(a) such deposits shall not exceed 10 per cent of the aggregate of the paid up
share capital, free reserves and securities premium account of the company, and
(b) such deposits are repayable not earlier than three months from the date of
such deposit or renewal thereof. [Rule 3(1)]
(2) Joint Deposits may be accepted in joint names not exceeding three, with or without
names any of
the clauses, namely, “Jointly”, “Either or Survivor”, “First named or Survivor”,
“Anyone or Survivor”, if the depositors desires so. [Rule 3(2)]
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(3) No company (except private company) referred to in section 73(2) shall accept
Acceptance or renew any deposits from its Members, if the amount of such deposits together
Limit for with the amount of other deposits outstanding as on the date of acceptance or
Deposits renewal of such deposits exceeds 25% of the aggregate of the paid-up share
capital, free reserves and securities premium account of the company. [Rule
3(3)]
No Eligible company shall accept or renew any other deposit, if the amount of
such deposit together with the amount of such other deposits, other than the
deposit referred to in (a), outstanding on the date of acceptance or renewal
exceeds 25% aggregate of the paid-up share capital, free reserves and securities
premium account of the company. [Rule 3(4)]
No Government company eligible to accept deposits under section 76 shall

accept or renew any deposit, if the amount of such deposits together with the
amount of other deposits outstanding as on the date of acceptance or renewal
exceeds 35% of the aggregate of its paid up share capital, free reserves and
securities premium account of the company. [Rule 3(5)]
(4) Rate of No company under section 73(2) or any Eligible company shall invite or accept
interest or renew any deposits in any form, carrying a rate of interest or pay brokerage
and thereon at a rate exceeding the maximum rate of interest or brokerage prescribed
brokerage by the Reserve Bank of India for acceptance of deposits by non-banking
financial companies. [Rule 3(6)]
(5) Change The Company shall not reserve to itself either directly or indirectly a right to
of terms alter, to the prejudice or disadvantage of the depositor, any of the terms and
and conditions of the deposit contract. [Rule 3(7)]
conditions
(6) Credit Every Eligible Company shall obtain, at least once in a year, credit rating for
Rating deposits accepted by it in the manner specified as below and a copy of the rating
shall be sent to the Registrar of Companies along with the return of deposits in
Form DPT-3. [Rule 3(8)]
Name of the agency Minimum investment

Grade Rating
The Credit Rating Information Services of India FA- (FA Minus)
Ltd.
ICRA Ltd. MA- (MA Minus)
Credit Analysis and Research Ltd. CARE BBB(FD)
Fitch Ratings India Private Ltd. A-(indxFD)
SME Rating Agency of India Ltd. SMERA A
Deposit Insurance [Rule 5]

(1) Every company referred in section 73(2) (except Private company) or any
Contract Eligible company inviting deposits shall enter into a contract for providing
for Deposit deposit insurance at least 30 days before the issue of circular or advertisement
Insurance or at least 30 days before the date of renewal, as the case may be. [Rule 5(1)]
269
(2) Amount The amount specified in the deposit insurance contract shall be the amount in
of Deposit respect of both principal amount and interest due thereon.
Insurance
(3) The deposit insurance contract shall specifically provide that in case the
Repayment company defaults in repayment of principal amount and interest thereon, the
depositor shall be entitled to the repayment of principal amount of deposits and
the interest thereon by the insurer up to the aggregate monetary ceiling as
specified in the contract. [Rule 5(2)]
In the case of any deposit and interest not exceeding 20,000 rupees, the deposit
insurance contract shall provide for payment of the full amount of the deposit
and interest and in the case of any deposit and the interest thereon in excess of
20,000 rupees, the deposit insurance contract shall provide for payment of an
amount not less than 20,000 rupees for each depositor.
(4) The amount of insurance premium paid on the insurance of such deposits shall
Premium be borne by the company itself and shall not be recovered from the depositors
Amount by deducting the same from the principal amount or interest payable thereon.
[Rule 5(3)]
(5) Default If any default is made by the company in complying with the terms and
conditions of the deposit insurance contract which makes the insurance cover
ineffective, the company shall either rectify the default immediately or enter
into a fresh contract within thirty days and in case of non-compliance, the
amount of deposits covered under the deposit insurance contract and interest
payable thereon shall be repaid within the next 15 days and if such a company
does not repay the amount of deposits within said 15 days it shall pay 15%
interest per annum for the period of delay and shall be treated as having
defaulted and shall be liable to be punished in accordance with the provisions of
the Act.
Creation of Security [Rule 6]

(1) Every company referred to in section 73(2) including Private Company and every
eligible company inviting secured deposits shall provide for security by way of a charge on
its assets for the due repayment of the amount of deposit and interest thereon for an amount
which shall not be less than the amount remaining unsecured by the deposit insurance. [Rule
6(1)]
(2) The amount of deposits and the interest payable secured by way of a charge on its
assets shall not exceed the market value of such assets as assessed by a registered valuer.
(3) The total value of the security either by way of deposit insurance or by way of charge or by
both shall not be less than the amount of deposits accepted and the interest payable thereon.
(4) Valuation of stocks, shares, debentures, securities etc. shall be conducted by an

independent merchant banker who is registered with the SEBI or an independent chartered
accountant in practice having a minimum experience of ten years.
(5) The security for deposits shall be created in favors of a trustee for depositors on:
270
(a) specific movable property of the company, or
(b) specific immovable property of the company wherever situated. [Rule 6(2)]
Trustee for Depositors
(1) Every company referred to in section 73(2) and every eligible company
Appointment inviting secured deposits before issue a circular or advertisement appoint one
of Trustee or more deposit trustees for depositors for creating security for the deposits.
[Rule 7(1)]
(2) Consent A written consent shall be obtained from the trustee for depositors before
of deposit their appointment and a statement shall appear in the circular or advertisement
trustees with with reasonable prominence to the effect that the trustee for depositors has
respect to given their consent to the company to be so appointed. [Rule 7(1)]
their
appointment
(3) Execute The Company shall execute a deposit trust deed in Form No. DPT-2 at least 7
deposit trust days before issuing the circular or circular in the form of advertisement.
deed [Rule 7(2)]
(4) Certain No person including a company that is in the business of providing

persons not trusteeship services shall be appointed as a trustee for the deposit holders, if
to be the proposed trustee -
appointed as (a) is a director, key managerial personnel or any other officer or an employee
deposit of the company or of its holding, subsidiary or associate company or a
trustees depositor in the co.;
(b) is indebted to the company, or its subsidiary or its holding or associate
company or a subsidiary of such holding company;
(c) has any material pecuniary relationship with the company;
(d) has entered into any guarantee arrangement in respect of principal debts
secured by the deposits or interest thereon;
(e) is related to any person specified in clause (a) above. [Rule 7(3)]
(5) Removal No trustee for depositors shall be removed from office after the issue of
of Trustee circular or advertisement and before the expiry of his term except with the
for consent of all the directors present at a meeting of the board. [Rule 7(4)]
Depositors
Duties of deposit trustees

(a) ensure that the assets of the company on which charge is created together with the amount
of deposit insurance are sufficient to cover the repayment of the principal amount of secured
deposits outstanding and interest accrued thereon;
(b) satisfy himself that the circular or advertisement inviting deposits does not contain any
information which is inconsistent with the terms of the deposit scheme or with the trust deed
and is in compliance with the rules and provisions of the Act;
(c) ensure that the company does not commit any breach of covenants and provisions of the
trust deed;
(d) take such reasonable steps as may be necessary to procure a remedy for any breach of
covenants of the trust deed or the terms of invitation of deposits;
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(e) take steps to call a meeting of the holders of depositors as and when such meeting is
required to be held;
(f) supervise the implementation of the conditions regarding creation of security for deposits
and the terms of deposit insurance;
(g) do such acts as are necessary in the event the security becomes enforceable;
(h) carry out such acts as are necessary for the protection of the interest of depositors and to
resolve their grievances. [Rule 8]
Meeting of The meeting of all the depositors shall be called by the deposit trustee on-
depositors (a) requisition in writing signed by at least one-tenth of the depositors in
through value for the time being outstanding;
trustee for (b) the happening of any event, which constitutes a default or which in the
depositors opinion of the deposit trustee affects the interest of the depositors. [Rule 9]
Repayment of Deposit
Every deposit accepted by a company shall be repaid with interest in accordance with the
terms and conditions of the agreement. [Section 73(3)]
When a company fails to repay the deposit or part thereof or any interest thereon u/s 73(3), the
depositor concerned may apply to the Tribunal/CLB for an order directing the company to pay
the sum due or for any loss or damage incurred by him as a result of such non-payment and for
such other orders as the Tribunal/CLB may deem fit. [Section 73(4)]
Premature repayment of deposits

When a company makes a repayment of deposits, on the request of the depositor, after the
expiry of a period of six months from the date of such deposit but before the expiry of the
period for which such deposit was accepted, the rate of interest payable on such deposit shall
be reduced by one per cent. from the rate which the company would have paid had the deposit
been accepted for the period for which such deposit had actually run. [Rule 15]
Registers of Deposits [Rule 14]

(1) Every company accepting deposits shall, from the date of such acceptance, keep at its
registered office one or more separate registers for deposits accepted/renewed, in which there
shall be entered separately in the case of each depositor the following particulars, namely:
(a) Name, address and PAN of the depositor/s;
(b) Particulars of guardian, in case of a minor;
(c) Particulars of the nominee;
(d) Deposit receipt number;
(e) Date and amount of each deposit;
(f) Duration of the deposit and the date on which each deposit is repayable;
(g) Rate of interest;
(h) Due date(s) for payment of interest;
(i) Mandate and instructions for payment of interest;
(j) Date or dates on which payment of interest will be made;
(k) Details of deposit insurance including extent of deposit insurance;
(l) Particulars of other security/ charge created;
(m) Any other particulars relating to the deposit;
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(2) Entries in the register shall be made within 7 days from the date of issuance of the deposit
receipt and such entries shall be authenticated by a director or secretary of the company or by
any other officer authorized by the Board for this purpose.
(3) The registers shall be preserved in good order for a period of not less than 8 years from the
financial year in which the latest entry is made in the register.
Return of deposits to be filed with the Registrar [Rule 16]
Every company to which these rules apply, shall on or before the 30th day of June, of every
year, file with the Registrar, a return in Form DPT-3 along with the fee as provided in
Companies (Registration Offices and Fees) Rules, 2014 and furnish the information contained
therein as on the 31st day of March of that year duly audited by the auditor of the company.
Penal rate of interest [Rule 17]

Every company shall pay a penal rate of interest of 18% per annum for the overdue period in
case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.
Punishment for Contravention

(1) Where a company accepts or invites on its behalf any deposit in contravention of the
manner or the conditions prescribed under section 73 or section 76 or rules made thereunder or
if a company fails to repay the deposit or part thereof or any interest due thereon within the
time specified under section 73 or section 76 or rules made thereunder or such further time as
may be allowed by the Tribunal/CLB u/s 73,-
(a) the company shall, in addition to the payment of the amount of deposit and the interest due,
be punishable with fine which shall not be less than 1 crore rupees but which may extend to 10
crore rupees; and
(b) every officer of the company who is in default shall be punishable with imprisonment
which may extend to 7 years or with fine which shall not be less than 25 lakh rupees but which
may extend to 2 crore rupees, or with both.
(c) If it is proved that the officer of the company, who is in default, has contravened such
provisions knowingly or willfully with the intention to deceive the company or its shareholders
or depositors or creditors or tax authorities, he shall be liable for action. [Section 76(A)]
[Inserted wide Companies (Amendment) Act, 2015]
(2) If any company contravenes any provisions of Companies (Acceptance of Deposit) Rules,
2014 for which no punishment is provided in the Act, then the company and every officer in
default shall be punishable with fine which may extend to Rs. 5000/- and in case contravention
is continuing one, with a further fine which may extend unto Rs. 500/- per day for every day
after the first day during which the default continues. [Rule 21]
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CH. 21 ACCOUNTS AND AUDIT
Introduction The shareholders provide capital to the company for running the business.
They are in a way, the owners of the company.
But, all of them cannot take part in managing the affairs of the company as
their number is usually much more. But they have every right to know as to
how their money has been dealt with by the directors in a particular period.
Therefore, Accounts of the company are maintained.
Section 128 of the Companies Act, 2013 contains the provisions for books of
account etc. to be kept by company.
REQUIREMENT OF KEEPING BOOKS OF ACCOUNT (SECTION 128)
Maintenance of books of account would mean records maintained by the company to record
the specified financial transaction.
This section specifies the main features of proper books of account as under –
(i) The company must keep the books of account.

(ii) The books of account must show all money received and expended, sales and purchases of
goods and the assets and liabilities of the company.
(iii) The books of account must be kept on accrual basis and according to the double entry
system of accounting.
(iv) The books of account must give a true and fair view of the state of the affairs of the
company.
Place of Keeping Books of Account
Section 128(1) requires every company to prepare and keep the books of account and other
relevant books and papers and financial statements at its registered office.
However, all or any of the books of accounts may be kept at such other place in India as the
Board of directors may decide. When the Board so decides the company is required within
seven days of such decision to file with the Registrar a notice in writing giving full address of
that other place.
Such intimation to be made in Form AOC 5 to the Registrar of Companies.
Maintenance of Books of account in electronic form
The maintenance of books of account and other books and papers in electronic mode is
permitted and is optional. Such books of accounts or other relevant books or papers maintained
in electronic mode shall remain accessible in India so as to be usable for subsequent use.
Period for which books to be preserved
The books of accounts, together with vouchers relevant to any entry in such books, are
required to be preserved by the company for a period of not less than eight years immediately
preceding the relevant financial year.
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Persons responsible to maintain books
The person responsible to take all reasonable steps for the maintenance of books of accounts
etc. shall be:
(i) Managing Director,
(ii) Whole-Time Director, in charge of finance
(iii) Chief Financial Officer
(iv) Any other person of a company charged by the Board with duty of complying with
provisions of section 128.
Penalty
In case the aforementioned persons (i.e. MD, WTD, CFO etc.) fail to take reasonable steps to
secure compliance of section 128 and contravene such provisions, they shall in respect of each
offence, be punishable with imprisonment for a term which may extend to one year or with
fine which shall not be less than fifty thousand rupees but which may extend to five lakh
rupees or both.
SECTION 129: FINANCIAL STATEMENT
This Section seeks to provide that the financial statements shall give a true and fair view of the
state of affairs of the companies and shall comply with accounting standards
Definition Financial Statement is defined under Section 2 (40), to include -

of Balance Sheet
Financial Profit and Loss account or Income and Expenditure account
Statement Cash flow Statement
Statement of change in equity, if applicable any explanatory notes annexed to or
forming part of financial statements.
However, the financial statement with respect to one-person company, small

company and dormant company, may not include the cash flow statement.
True and True and Fair view in respect of financial statement means-
Fair view (a) financial statements and items contained should comply with accounting
standards notified under section 133;
(b) financial statements should be prepared for financial year and shall be in
form as per Schedule III.
(c) In case of any insurance or banking company or any company engaged in

the generation or supply of electricity, not treated to be disclosing a true
and fair view of the state of affairs of the company, merely by the reason
of the fact that they do not disclose -
─ in the case of an insurance company, any matters which are not
required to be disclosed by the Insurance Act, 1938, or the Insurance
Regulatory and Development Authority Act, 1999;
─ in the case of a banking company, any matters which are not required
to be disclosed by the Banking Regulation Act, 1949;
275
─ in the case of a company engaged in the generation or supply of
electricity, any matters which are not required to be disclosed by the
Electricity Act, 2003.
Other Requirements for financial statements
(a) Financial statements shall lay before the board of the directors in every annual general
meeting of a company.
(b) Where a company has one or more subsidiaries, in additional to financial statement
provided, it shall prepare a consolidated financial statement of the company with salient
features of financial statements of subsidiary and subsidiaries in such form as prescribed and
the same shall be laid before board in annual general meeting.
(c) Central Government may prescribe for the consolidation of accounts of companies.
(d) Where financial statements of the company do not comply with the applicable accounting
standards, the company shall disclose the following:
(i) the deviation from the accounting standards
(ii) the reason for such deviation and
(iii) financial effects arising out of such deviation
(e) Central Government may exempt any class or classes of the companies from complying
with any of the requirements of this section or the rules there under.
(f) Central Government may notify the class of companies to mandatorily file their financial
statements in Extensible Business Reporting Language (XBRL) format.
RE-OPENING OF ACCOUNTS ON COURT’S OR TRIBUNAL’S ORDERS

(This section is yet to be notified)
Section 130 provides for provisions relating to re-opening or recasting of books of accounts
of the company. Accordingly,
(i) A company shall not re-open its books of account and shall not recast its financial
statements, unless an application in this regard is made by any one or more of the following -
(a) the Central Government, or
(b) the Income-tax authorities, or
(c) the Securities and Exchange Board of India (SEBI), or
(d) any other statutory regulatory body or authority, and
(e) an order in this regard is made by a court of competent jurisdiction or the Tribunal.
(ii) The re- opening and recasting of financial statements is permitted only for the
following reasons –
(a) the relevant earlier accounts were prepared in a fraudulent manner; or
(b) the affairs of the company were mismanaged during the relevant period, casting a
doubt on the reliability of financial statements.
(iii) The Court or the Tribunal, as the case may be, shall give the notice to-
(a)the Central Government
(b) the Income-tax authorities,
(c) the Securities and Exchange Board,
276
(d) any other statutory regulatory body or authority concerned and shall take into
consideration the representations, if any, made by Central Government or the income
tax authorities, Securities and Exchange Board or the body or authority concerned
before passing any order under this section.
(iv) The accounts so revised or re-cast under this section shall be final.
VOLUNTARY REVISION OF FINANCIAL STATEMENTS OR BOARD’S REPORT

Section 131 allows the directors to prepare revised financial statement or a revised Board’s
report in respect of any of the three preceding financial years after obtaining approval of the
Tribunal, if it appears to them that the company’s financial statement or the Board’s Report do
not comply with the requirements of Section 129 or Section 134.
NATIONAL FINANCIAL REPORTING AUTHORITY (NFRA)

Through Section 132 of the Companies Act, 2013, the Central Government has introduced a
new regulatory authority as national authority for financial reporting known as National
Financial Reporting Authority (NFRA) with wide powers to recommend, enforce and monitor
the compliance of accounting and auditing standards.
NFRA shall be responsible for monitoring and enforcing compliance of auditing and
accounting standards and for that purpose, oversee the quality of professions associated with
ensuring such compliances.
The Authority shall investigate professional and other misconducts which may be committed
by Chartered Accountancy members and firms. There is also a provision for appellate
authority.
The National Financial Reporting Authority shall be a quasi – judicial body to regulate matters
related to accounting and auditing.
National Financial Reporting Authority shall give its recommendations on accounting
standards and auditing standards. It shall only recommend and it is the Central Government
who shall prescribe such standards.
Objective of NFRA
The objectives of National Financial Reporting Authority shall be as follows:

(1) Make recommendations on formulation of accounting and auditing policies and standards
for adoption by companies, or their auditors;
(2) Monitor and enforce the compliance with accounting standards, monitor and enforce the
compliance with auditing standards;
(3) Oversee the quality of service of professionals associated with ensuring compliance with
such standards and suggest measures required for improvement in quality of service, and
(4) Perform such other functions as may be prescribed in relation to aforementioned
objectives.
These objectives simply bring chartered accountants, cost accountants, management

accountants, company secretaries as well as independent directors / members audit committees
under jurisdiction of NFRA.
277
Constitution of NFRA
(i) It shall consist of a chairperson, who shall be a person of eminence & having expertise in
accountancy, auditing, finance, business administration, business law, economics or similar
disciplines, to be nominated by Central Government, and such other prescribed members not
exceeding 15.
(ii) The chairperson and all members shall make a declaration in prescribed form about no
conflict of interest or lack of independence in respect of their appointment. The chairperson
and all full – time members shall not be associated with any audit firm or related consultancy
firm during course of their appointment and two years after ceasing to hold such appointment.
(iii) The head office of National Financial Reporting Authority shall be at New Delhi and it
may, meet at such other places in India, as it deems fit.
(iv) Its accounts shall be audited by Comptroller and Auditor General of India (CAG) and such
accounts as certified by CAG, together with audit report, shall be forwarded annually to the
Central Government.
Jurisdiction, Powers of and Imposition of Penalties by NFRA
The National Financial Reporting Authority shall have jurisdiction over companies and
professional persons and misconduct committed, by any member registered under the
Chartered Accountants Act, 1949.
No other institute or body (including professional institutes) shall initiate or continue any
proceeding in such matters of misconduct where the authority has initiated an investigation
under this section.
The Authority shall have powers as are vested in a civil court under Code of Civil Procedure in
respect of following matters:
1. Discovery and production of books of accounts and other documents
2. Summoning and enforcing the attendance of persons and examining them on oath
3. Inspection of any books, registers and other documents of any person
4. Issuing commission for examination of witness or documents.
The Authority shall have powers to make an order in relation to:

(A) Imposing penalty of
(i) not less than one lakh rupees which may extend to five times of the fees received in
case of individuals &
(ii) not less than ten lakh rupees which may extend to ten times of the fees received in
case of firms.
(B) Debarring member or the firm from engaging himself or itself from practice for a period of
six months to ten years.
Appeals and Appellate Authority
Any person aggrieved by any order of the National Financial Reporting Authority may prefer
appeal to Appellate Authority, set up for this purpose.
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The Appellate Authority shall consist of a chairperson and not more than two members.
However, the Appellate Tribunal constituted under the Chartered Accountants Act, 1949 will
not act as Appellate Tribunal under this section.
SEC. 133: CENTRAL GOVERNMENT TO PRESCRIBE ACCOUNTING

STANDARDS
The Central Government may prescribe the standards of accounting, as recommended by the
Institute of Chartered Accountants of India, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority.
The Ministry has clarified that till the Standards of Accounting is prescribed by Central
Government in consultation and recommendation of the National Financial Reporting
Authority, the existing Accounting Standards notified under the Companies Act 1956 shall
continue to apply.
On 6th Feb. 2015, the Ministry of Corporate Affairs (MCA), the Central Government, in
consultation with the National Advisory Committee on Accounting Standards (NACAS),
notified the Companies (Indian Accounting Standards) Rules, 2015. These rules came into
force on 1st April 2015.
As a result of this notification, Companies (Indian Accounting Standards) Rules, 2015, there
shall be two separate sets of Accounting Standards –
1. Indian Accounting Standards (Ind AS) as specified in the Annexure to Companies (Indian
Accounting Standards) Rules, 2015.
2. Accounting standards as specified in Annexure to the Companies (Accounting Standards)
Rules,2006.
Indian Accounting Standards (Ind AS)

Indian Accounting Standards (Ind AS) are the accounting standards prescribed under Section
133 of the Companies Act, 2013.
39 Indian Accounting Standards (Ind AS) are specified in the Annexure to Companies (Indian
Accounting Standards) Rules, 2015.
Applicability under Rule 3 of the Companies (Indian Accounting Standards) Rules, 2015
1. Indian accounting Standards (Ind AS) as shall be applicable to classes of company

specified in the Annexure to Companies specified in Rule 4(1) of the Companies
(Indian Accounting Standards) Rules, (Indian Accounting Standards) Rules,
2015 2015.
2. Accounting standards as specified in shall be applicable to the companies other

Annexure to the Companies (Accounting than the classes of companies specified in
Standards) Rules, 2006. Rule 4(1) of the Companies (Indian
Accounting Standards) Rules,
2015.
279
Classes of company specified in Rule 4(1) of the Companies (Indian Accounting
Standards) Rules, 2015
(i) Ind AS Any company may comply with the Indian Accounting Standards (Ind AS)
applicable on for financial statements for accounting periods beginning on or after 1st
voluntary basis April, 2015, with the comparatives for the periods ending on 31st March,
2015, or thereafter on voluntary basis.
“Comparatives” means comparative figures for the preceding accounting
period.
(ii) Ind AS The following companies shall mandatorily comply with the Indian
applicable on Accounting Standards (Ind AS) for the accounting periods beginning on or
mandatory after 1st April, 2016, with the comparatives for the periods ending on 31st
basis for the March, 2016, or thereafter, namely: -
accounting
periods (a) Companies whose equity or debt securities are listed or are in the
beginning on process of being listed on any stock exchange in India or outside
or after 1st India and having net worth of rupees five hundred crore or more;
April, 2016 (b) Unlisted companies having net worth of rupees five hundred crore
or more;
(c) Holding, subsidiary, joint venture or associate companies of
companies covered above.
(iii) Ind AS The following companies shall comply with the Indian Accounting
applicable on Standards (Ind AS) for the accounting periods beginning on or after 1st
mandatory April, 2017, with the comparatives for the periods ending on 31st March,
basis for the 2017, or thereafter, namely: -
accounting
periods (a) Companies whose equity or debt securities are listed or are in the
beginning on process of being listed on any stock exchange in India or outside
or after 1st India and having net worth of less than rupees five hundred crore;
April, 2017 (b) Unlisted companies having net worth of rupees two hundred and
fifty crore or more but less than rupees five hundred crore.
(c) Holding, subsidiary, joint venture or associate companies of
companies covered above.
Companies exempted under Rule 5 of the Companies (Indian Accounting Standards)

Rules, 2015
The following companies are not required to apply Indian Accounting Standards (Ind AS) for
preparation of their financial statements either voluntarily or mandatorily -
(i) Insurance companies
(ii) Banking companies and
(iii) Non-banking finance companies
SECTION 134: FINANCIAL STATEMENT, BOARD'S REPORT ETC.
Section 134 deals with financial statements as well as board's report.

The Board’s Report shall contain a separate section wherein a report on the performance and
financial position of each of the subsidiaries, associates and joint venture companies. The
consolidated financial statement is approved by the Board of directors before they are signed
280
and submitted to auditors for their report. The auditor’s report is to be attached to every
financial statement.
Requirements as to financial statements
Financial statement of the company including consolidated financial statements, if applicable,

should be approved by the Board of Directors, before such statements are signed.
Financial statement should be signed on behalf of the board by at least

─ chairperson of company, duly authorized board, or
─ two directors of whom one should be the managing director, and
─ chief executive officer, if he is director, chief financial officer and company secretary.
Penal provisions
Any contravention of provisions of Section 134 is punishable to the following extent –
(a) company is punishable with fine of not less than rupees fifty thousand but which may
extend up to rupees twenty-five lakhs, and
(b) every officer in default is punishable with –
(i) imprisonment up to a term of three years, or
(ii) monetary fine from fifty thousand rupees to rupees five lakh, or
(iii) both (i) and (ii) above
SECTION 135: CORPORATE SOCIAL RESPONSIBILITY

According to Section 135(1) of the Companies Act 2013, the CSR provision will be applicable
companies which fulfills any of the following criteria during any of the three preceding
financial years:
• Companies having net worth of rupees five hundred crore or more, or
• Companies having turnover of rupees one thousand crore or more or
• Companies having a net profit of rupees five crore or more
The CSR Rules have widened the ambit for compliance obligations to include the holding and
subsidiary companies as well as foreign companies whose branches or project offices in India
which fulfills the criteria specified above.
If a company ceases to be a company covered u/s 135(1) of the Act for three consecutive
financial years shall not be required to –
(a) constitute a CSR Committee; and
(b) comply with the other provisions of section 135.
CSR Committee
Conditions Companies that fulfil any of the aforesaid conditions must constitute a
Corporate Social Responsibility Committee of the Board to formulate and
monitor the CSR policy of a company.
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Composition CSR Committee to consist of at least three directors, including at least one
independent director.
However, CSR Rules exempts unlisted public companies and private

companies that are not required to appoint an independent director from
having an independent director as a part of their CSR Committee.
CSR Rules have relaxed the requirement regarding the presence of three or
more directors on the CSR Committee of the Board. In case where a private
company has only two directors on the Board, the CSR Committee can be
constituted with these two directors.
The CSR Committee of a foreign company shall comprise of at least two

persons wherein one or more persons should be resident in India and the other
person nominated by the foreign company.
The Board's report shall disclose the composition of the Corporate Social
Responsibility Committee.
CSR Policy
CSR Policy relates to the activities to be undertaken by the company as specified in Schedule
VII to the Act and the expenditure thereon, excluding activities undertaken in pursuance of
normal course of business of a company.
The CSR Policy of the company shall specify that the surplus arising out of the CSR projects
or programs or activities shall not form part of business profit of a company.
The Board after taking into account the recommendations made by the Corporate Social
Responsibility Committee, approve the Corporate Social Responsibility Policy for the
company and disclose contents of such Policy in its report and also place it on the company's
website. The Board of every company ensures that the activities as are included in Corporate
Social Responsibility Policy of the company are undertaken by the company.
CSR Expenditure
The Board of every company shall ensure that the company spends, in every financial year, at
least two per cent of the average net profits of the company made during the three
immediately preceding financial years, in pursuance of its Corporate Social Responsibility
Policy. This amount will be CSR expenditure.
If the company fails to spend such amount, the Board shall, in its report specify the reasons for
not spending the amount.
The company shall give preference to the local area and areas around it where it operates, for
spending the amount earmarked for Corporate Social Responsibility activities.
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Expenditure incurred on specified activities that are carried out in India only will qualify as
CSR expenditure. Such expenditure includes contribution to the corpus or on projects or
programs relating to CSR activities.
Expenditure incurred in undertaking normal course of business will not form a part of the CSR
expenditure. Companies would need to clearly distinguish those activities which are
undertaken specifically in pursuance of normal course of business and those that are done
incrementally as part of the CSR initiatives.
Any surplus arising out of CSR activities will not be considered as business profit for the
spending company.
Expenditure incurred by Foreign Holding Company for CSR activities in India will qualify as
CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian
subsidiaries and if the Indian subsidiary is required to do so as per section 135 of the Act.
CSR Activities
The CSR activities shall be undertaken by the company, as per its stated CSR Policy or
activities (either new or ongoing), excluding activities undertaken in pursuance of its normal
course of business.
The Board of a company may decide to undertake its CSR activities approved by the CSR
Committee through a registered trust or a registered society or a company established under
section 8 of the Act by the company either singly or along with its holding or subsidiary or
associate company, or along with any other company or holding or subsidiary or associate
company of such other company.
A company may also collaborate with other companies for undertaking projects or programs or
CSR activities in such a manner that the CSR Committees of respective companies are in a
position to report separately on such projects or programs in accordance with these rules.
The CSR projects or programs or activities undertaken in India only shall amount to CSR
Expenditure.
The CSR projects or programs or activities that benefit only the employees of the company
and their families shall not be considered as CSR activities.
Contribution of any amount directly or indirectly to any political party under section 182 of the
Act, shall not be considered as CSR activity.
List of CSR Activities
Some activities are specified in Schedule VII as the activities which may be included by
companies in their Corporate Social Responsibility Policies.
These are activities related to:
(i) eradicating hunger, poverty and malnutrition, promoting health care including preventive
health care and sanitation including contribution to the Swach Bharat Kosh set-up by the
Central Government for the promotion of sanitation and making available safe drinking water.
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(ii) promoting education, including special education and employment enhancing vocation
skills especially among children, women, elderly and the differently abled and livelihood
enhancement projects.
(iii) promoting gender equality, empowering women, setting up homes and hostels for women
and orphans; setting up old age homes, day care centers and such other facilities for senior
citizens and measures for reducing inequalities faced by socially and economically backward
groups;
(iv) ensuring environmental sustainability, protection of flora and fauna, animal welfare,
conservation of natural resources and maintaining quality of soil, air and water including
contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of
river Ganga;
(v) protection of national heritage, art and culture including restoration of buildings and sites
of historical importance and works of art; setting up public libraries; promotion and
development of traditional arts and handicrafts;
(vi) measures for the benefit of armed forces veteran, war widows and their dependents;
(vii) training to promote rural sports nationally recognized sports and Olympic sports;
(viii) contribution to the Prime Minister's National Relief Fund or any other fund set up by the
Central Government for socio-economic development and relief and welfare of the Scheduled
Castes, the Scheduled Tribes, other backward classes, minorities and women;
(ix) contributions or funds provided to technology incubators located within academic

institutions which are approved by the Central Government;
(x) rural development projects.
However, in determining CSR activities to be undertaken, preference would need to be given

to local areas and the areas around where the company operates.
Activities which would not qualify as CSR
The following activities shall not qualify as CSR activities.
1. The CSR projects or programs or activities that benefit only the employees of the
company and their families.
2. One-off events such as marathons/awards/charitable contribution/advertisement/
sponsorships of TV programs etc.
3. Expenses incurred by companies for the fulfillment of any other Act/Statute of
regulations (such as Labor Laws, Land Acquisition Act, 2013, Apprentice Act,1961
etc.)
4. Contribution of any amount directly or indirectly to any political party.
5. Activities undertaken by the company in pursuance of its normal course of business.
6. The project or programs or activities undertaken outside India.
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Disclosure Requirements
It is mandatory for companies to disclose in Board’s Report, an annual report on CSR.

The report of the Board of Directors attached to the financial statements of the Company
would also need to include an annual report on the CSR activities of the company in the format
prescribed containing following particulars –
1. A brief outline of the company's CSR policy, including overview of projects or

programs proposed to be undertaken and a reference to the web-link to the CSR policy
and projects or programs.
2. The Composition of the CSR Committee.
3. Average net profit of the company for last three financial years
4. Prescribed CSR Expenditure
5. Details of CSR spent during the financial year.
6. In case the company has failed to spend the two per cent of the average net profit of
the last three financial years or any part thereof, the company shall provide the reasons
for not spending the amount in its Board report.
7. A responsibility statement of the CSR Committee that the implementation and
monitoring of CSR Policy, is in compliance with CSR objectives and Policy of the
company.
Important Points
1. If a company spends in excess of 2% of its average net profit of three preceding
years on CSR in a particular year, can the excess amount spent be carried
forward to the next year and be offset against the required 2% CSR expenditure
of the next year? Any excess amount spent (i.e., more than 2% as specified in Section
135) cannot be carried forward to the subsequent years and adjusted against that year’s
CSR expenditure.
2. Can the unspent amount from out of the minimum required CSR expenditure be
carried forward to the next year? The Board is free to decide whether any unspent
amount from out of the minimum required CSR expenditure is to be carried forward to
the next year. However, the carried forward amount should be over and above the next
year’s CSR allocation equivalent to at least 2% of the average net profit of the
company of the immediately preceding three years.
3. Whether government is proposing to establish any mechanism for third parties to

monitor the quality and efficacy of CSR expenditure as well as to have an impact
assessment of CSR by Companies? Government has no role to play in engaging
external experts for monitoring the quality and efficacy of CSR expenditure of
companies. Boards/CSR Committees are fully competent to engage third parties to
have an impact assessment of its CSR program to validate compliance of the CSR
provisions of the law.
4. Can CSR funds be utilized to fund Government Scheme? In principle, CSR fund of
companies should not be used as a source of funding Government Schemes. However,
under CSR provision of the Act and rules made thereunder, the Board of the eligible
company is competent to take decision on supplementing any Government Scheme
provided the scheme permits corporates participation.
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5. Who is the appropriate authority for approving and implementation of the CSR
programs/projects of a Company? What is Government’s role in this regard?
Government has no role to play in this regard. all CSR programs/projects should be
approved by the Boards on the recommendations of their CSR Committees. Changes, if
any, in the program/project should also be undertaken only with the approval of the
committee/Board.
6. Whether involvement of employees of the company in CSR project/programs of a

company can be monetized and accounted for under the head of ‘CSR
expenditure’? Contribution and involvement of employees in CSR activities of the
company will no doubt generate interest/pride in CSR work and promote
transformation from Corporate Social Responsibility (CSR) as an obligation to Socially
Responsible Corporates (SRC) in all aspects of their functioning. Companies therefore,
should be encouraged to involve their employees in CSR activities. However,
monetization of pro bono services of employees would not be counted towards CSR
expenditure.
7. What tax benefit can be availed under CSR? No specific tax exemptions have been
extended to CSR expenditure per se.
SECTION 138: INTERNAL AUDIT

Classes of companies requiring Internal Audit
Following classes of companies are required to appoint internal auditor-
An existing company covered under any of the above criteria shall comply with the requirements
of section 138 and this rule within six months of commencement of such section.
Who can be an Internal Auditor
(a) a Chartered Accountant or;

(b) a Cost Accountant or;
(c) such other professional as may be decided by the Board to conduct internal audit of the
functions and activities of the Company.
APPOINTMENT OF AUDITORS
First The Board of Directors of a company shall appoint an individual or firm as the
Auditor first auditor of a company within thirty days from the date of registration of the
company.
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The appointment of first auditor shall be ratified by members at the first annual
general meeting. The auditor so appointed shall hold the office from the
conclusion of that meeting till the conclusion of sixth annual general meeting and
thereafter till the conclusion of every sixth meeting. The appointment of auditors
shall be ratified by members at every annual general meeting.
Failure to In the case of failure of the Board to appoint the first auditor, it shall inform the
appoint members of the company, who shall within ninety days at an extraordinary
First general meeting appoint such auditor and such auditor shall hold office till the
Auditor conclusion of the first annual general meeting.
Causal Any casual vacancy (except as a result of the resignation of an auditor) in the
Vacancy office of an auditor of a company shall be filled by the Board of Directors within
thirty days.
If casual vacancy is as a result of the resignation of an auditor, the Board of
Directors shall fill the vacancy within thirty days but such appointment shall also
be approved by the company at a general meeting convened within three months
of the recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting.
Re- A retiring auditor may be re-appointed at an annual general meeting, if—

appointment (a) he is not disqualified for re-appointment;
(b) he has not given the company a notice in writing of his unwillingness to be
re-appointed; and
(c) a special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed.
If at any annual general meeting, no auditor is appointed or re-appointed, the
existing auditor shall continue to be the auditor of the company.
Disqualification of Auditor
Section 141 (3) of the Act read with Rule 10 prescribed the following persons shall not be
eligible for appointment as an auditor of a company, namely:
1. A body corporate, except LLP;
2. An officer or employee of the company;
3. Any partner of officer or employee of company;
4. A person who himself or his relative is holding any security or interest in the company, or
any company which is its holding, subsidiary, associate;
5. A person who or whose relative or partner is indebted to the company or its subsidiary or
its holding or associate company or a subsidiary of such holding company, in excess of
rupees five lakh shall not be eligible for appointment;
6. A person who or whose relative or partner has given a guarantee or provided any security
in connection with the indebtedness of any third person to the company, or its subsidiary,
or its holding or associate company or a subsidiary of such holding company, in excess of
one lakh rupees shall not be eligible for appointment;
7. A person or a firm who, whether directly or indirectly, has “business relationship” with
the company, or its subsidiary, or its holding or associate company;
8. A person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
9. A person who is in full time employment elsewhere;
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10. Person who is auditor of more than 20 companies;
11. A person who has been convicted by a court of an offence involving fraud and a period of
ten years has not elapsed from the date of such conviction;
Mandatory Rotation of Auditors Section 139 (2) and Rule 5
The Companies Act, 2013 has introduced the system of rotation of auditors which is applicable
to-
1. all listed companies;
2. all unlisted public companies having paid up share capital of rupees 10 crore or more;
3. all private limited companies having paid up share capital of rupees 20 crore or more;
4. all companies having paid up share capital of below threshold limit mentioned in (a)
and (b) above, but having public borrowings from financial institutions, banks or
public deposits of rupees 50 crore or more.
The concept of rotation of auditors shall not apply to one person companies and small
companies.
All the companies mentioned above shall not appoint or re-appoint an individual as an auditor
of the company for more than 1 term of 5 consecutive years.
An individual auditor, who has completed his term of 5 consecutive years, shall not be eligible
for re-appointment as auditor in the same company for 5 years from the date of completion.
All the companies mentioned above shall not appoint or re-appoint an audit firm as an auditor
of the company for more than 2 terms of 5 consecutive years.
An audit firm which has completed its 2 terms of 5 consecutive years shall not be eligible for
re-appointment as auditor in the same company for 5 years from the completion of such terms.
No audit firm shall be appointed as auditor of the company for a period of five years, if same
firm presently having a common partner(s) to the previous audit firm, whose tenure has
expired in a company immediately preceding the financial year.
POWERS AND DUTIES OF AUDITORS

Section 143(1) provided that every auditor can access at all times to the books of accounts,
vouchers and seek such information and explanation from the company and enquire such
matters as he considers necessary, including the matters specified in sub-Clauses (a) to (f).
(a) Loans Auditor shall inquire into “whether loans and advances made by the company
and on the basis of security have been properly secured and whether the terms on
Advances which they have been made are not prejudicial to the interest of the company
made by the or its members”.
Company
(b) Auditor is required to inquire “whether the transactions of the company which
Transactions are represented merely by book entries are not prejudicial to the interests of
represented the company”.
by book
entries
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(c) Sale of Auditor should inquire, “whether the assets of the company have been sold at
investments a price less than that at which they were purchased by the company”.
(d) Loans Auditor must verify “whether loans and advances made by the company have
and been shown as deposits”. The auditor must inquire in respect of all the
Advances deposits shown by the company and satisfy himself that the loans and
shown as advances have not been shown as deposits.
deposits
(e) Charging Auditor should inquire as to “whether personal expenses have been charged
of Personal to revenue account”.
expenses to
revenue
account
(f) Allotment Auditor should inquire as to “whether cash has actually been received in
of shares for respect of shares stated to have been allotted for cash and if no cash has
cash actually been so received, whether the position as stated in the account books
and balance sheet is correct, regular and not misleading”.
AUDIT REPORT
Section 143 (2) prescribed that auditor shall make a report to the members of the company on
the accounts examined by him and on every financial statement which is required to be laid in
the general meeting of the company.
The Audit report should state that to the best of his information and knowledge, the said
accounts and financial statements give a true and fair view of the state of the company’s affair.
Section 143 (3) laid down that auditor’s report shall also state other details which are as under:
(a) whether he has sought and obtained all the information and explanations which were
necessary and if not, the details thereof and the effect of such information on the financial
statements;
(b) whether, in his opinion, proper books of account as required by law have been kept by the
company and proper returns adequate for the purposes of his audit have been received from
branches not visited by him;
(c) whether the branch audit report prepared by a person other than the company’s auditor has
been sent to him;
(d) whether the company’s balance sheet and profit and loss account dealt with in the report
are in agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which
have any adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director under section 164
(2);
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(h) any qualification, reservation or adverse remark relating to the maintenance of accounts;
(i) whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls;
(j) Rule 11 prescribed that Auditor’s Report shall also include their views and comments on
the following matters, namely: -
(i) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement;
(ii) whether the company has made provision for material foreseeable losses, if any;
(iii) whether there has been any delay in transferring amounts, required to be transferred,
to the Investor Education and Protection Fund by the company.
SIGNING OF AUDIT REPORTS - Section 145
Auditor shall sign the auditor’s report of the company. Any qualifications, observations or
comments on financial transactions matters, which have any adverse effect on the functioning
of the company mentioned in the auditor’s report shall be read before the company in general
meeting and shall be open to inspection by any member of the company.
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CH. 22 DIVISIBLE PROFITS AND DIVIDENDS
Meaning A share of the after-tax profit of a company, distributed to its shareholders

according to the number and class of shares held by them is called dividend.
Decided The amount and timing of the dividend is decided by the board of directors, who
by BODs also determine whether it is paid out of current earnings or the past earnings kept
as reserve.
Power to The power to pay dividend is inherent in a company and is not derived from the
pay Companies Act, 2013 or the Memorandum or Articles of Association although
dividend the Act and the Articles regulate the manner in which dividends are to be
declared.
Right to Right to claim dividend will only arise after a dividend is declared by the
dividend company in general meeting and until it is so declared, the shareholder has no
claim against the company in respect of it.
The right to participation in the profits exists independent of any declaration by the company
with only difference that the enjoyment of profits is postponed until dividends are declared.
[Bacha F Guzdar (Mrs.) v. CIT]
Final Dividend is said to be a final dividend if it is declared at the annual general

dividend meeting of the company.
Final dividend once declared becomes a debt enforceable against the company.
Final Dividend can be declared only if it is recommended by the Board of
Directors of the Company.
Interim Dividend is said to be an interim dividend, if it is declared by the Board of

dividend Directors between two annual general meetings of the company. All the
provisions relating to the payment of dividend shall be applicable on the interim
dividend also.
Declaration of Dividend (Section 123)

1. Sources of Section 123(1) of Companies Act 2013 provides that no dividend shall be
declaration of declared or paid by a company for any financial year except—
dividend (a) (i) out of the profits of the company for that year arrived at after
providing for depreciation;
(ii) out of the profits of the company for any previous financial year
or years arrived at after providing for depreciation;
(iii) out of both;
Or
(b) out of money provided by the Central Government or a State
Government for the payment of dividend by the company in pursuance
of a guarantee given by that Government.
2. Transfer of A company may, before the declaration of any dividend in any financial
profits to year, transfer such percentage of its profits for that financial year as it may
reserves consider appropriate to the reserves of the company.
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3. Dividend in Owing to inadequacy or absence of profits in any financial year, any
case of company proposes to declare dividend out of the accumulated profits earned
absence or by it in previous years and transferred by the company to the reserves, such
inadequacy of declaration of dividend shall not be made except in accordance with such
profits rules as may be prescribed in this behalf.
Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014 provides that in the
event of adequacy or absence of profits in any year, a company may declare dividend out of
surplus subject to the fulfillment of the following conditions, namely: -
Conditions
(1) The rate of dividend declared shall not exceed the average of the rates at which dividend
was declared by it in the three years immediately preceding that year.
Provided that this sub rule shall not apply to a company which has not declared any dividend
in each of preceding 3 financial years.
(2) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of
the sum of its paid-up share capital and free reserves as appearing in the latest audited
financial statement.
(3) The amount so drawn shall first be utilized to set off the losses incurred in the financial
year in which dividend is declared before any dividend in respect of equity shares is declared.
(a) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its
paid up share capital as appearing in the latest audited financial statement.
(b) No company shall declare dividend unless carried over previous losses and depreciation
not provided in previous year are set off against profit of the company of the current year.
4. Dividend to No dividend shall be declared or paid by a company from its reserves other
be declared than free reserves.
from free Free reserves mean such reserves which, as per the latest audited balance
reserves only sheet of a company, are available for distribution as dividend.
5. Declaration Board of Directors of a company may declare interim dividend during any
of interim financial year out of the surplus in the Profit and Loss Account as well as
dividend profit of the financial year in which the interim dividend is sought to be
declared.
When the company has incurred any loss during the current financial year up
to the end of the quarter immediately preceding the date of declaration of
interim dividend, such interim dividend shall not be declared at a rate higher
than the average dividends declared by the company during the immediately
preceding the three financial years.
6. Dividend to The amount of the dividend, including interim dividend, shall be deposited in
be deposited a scheduled bank in a separate account within five days from the date of
in Bank declaration of such dividend.
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7. Dividend No dividend shall be paid by a company in respect of any share therein
only to except to the registered shareholder of such share or to his order or to his
registered banker and shall not be payable except in cash.
shareholder
8. Sec 123 does not prohibit the capitalization of profits or reserves of a
Capitalization company for the purpose of issuing fully paid-up bonus shares or paying up
of Profits any amount for the time being unpaid on any shares held by the members of
the company.
9. Mode of The dividend shall be paid in cash. If any dividend is payable, it may be paid
payment by cheque or in an electronic mode to the shareholder entitled to the payment
of the dividend.
10. Failure of A company which fails to repay deposits etc. shall not, so long as such
repayment of failure continues, declare any dividend on its equity shares.
deposits
UNPAID DIVIDEND ACCOUNT (Section 124) Not yet enforced
Section 124(1) states that when a dividend has been declared by a company but has not been
paid or claimed within thirty days from the date of the declaration to any shareholder entitled
to the payment of the dividend, the company shall, within seven days from the date of expiry
of the said period of thirty days, transfer the total amount of dividend which remains unpaid or
unclaimed to a special account to be opened by the company in that behalf in any scheduled
bank to be called the Unpaid Dividend Account.
1. Application Section 124(4) states that any person claiming to be entitled to any money
to Co. transferred under sub-section (1) to the Unpaid Dividend Account of the
company may apply to the company for payment of the money claimed.
2. Details of Section 124 (2) provides that the company shall, within a period of ninety
unpaid days of making any transfer of an amount under Section 124(1) to the
dividend to be Unpaid Dividend Account, prepare a statement containing the names, their
placed at the last known addresses and the unpaid dividend to be paid to each person and
website place it on the website of the company.
3. Effect of Section 124(3) provides that if any default is made in transferring the total
Non-Transfer amount referred to in sub-section (1) or any part thereof to the Unpaid
of the Dividend Account of the company, it shall pay, from the date of such
Dividend default, interest on so much of the amount as has not been transferred to the
said account, at the rate of twelve percent per annum and the interest
accruing on such amount shall ensure to the benefit of the members of the
company in proportion to the amount remaining unpaid to them.
4. Transfer to Section 124 (5) states that any money transferred to the Unpaid Dividend
investor Account of a company which remains unpaid or unclaimed for a period of
education and seven years from the date of such transfer shall be transferred by the
protection company along with interest accrued, if any, thereon to the Investor
fund Education and Protection Fund.
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5. Shares in Section 124(6) provides that all shares in respect of which dividend has not
respect of been paid or claimed for seven consecutive years or more shall be transferred
unpaid by the company in the name of Investor Education and Protection Fund
dividend also along with a statement containing such details as may be prescribed. (As per
to be the Companies Amendment Act, 2015)
transferred to It is also clarified in the Companies Amendment Act, 2015 that in case any
IEPF dividend is paid or claimed for any year during the said period of seven
consecutive years, the share shall not be transferred to Investor Education
and Protection Fund.
6. Offence & Section 124(7) provides that if a company fails to comply with any of the
penalty requirements of this section, the company shall be punishable with fine
which shall not be less than five lakh rupees but which may extend to
twenty-five lakh rupees and every officer of the company who is in default
shall be punishable with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees.
Investor
Investor Education and Protection Fund (Section 125) (Not yet Enforced)
The Central Government shall establish a Fund to be called the Investor Education and
Protection Fund.
Section 125(2) prescribes that the following shall be credited to the Fund—
(1) the amount given by the Central Government by way of grants after due appropriation
made by Parliament;
(2) donations given to the Fund by the Central Government, State Governments, companies or
any other institution for the purposes of the Fund;
(3) the amount in the Unpaid Dividend Account of companies transferred to the Fund u/s
124(5);
(4) the amount lying in the Investor Education and Protection Fund under section 205C of the
Companies Act, 1956;
(5) the interest or other income received out of investments made from the Fund.
(6) matured deposits with companies other than banking companies;
(7) matured debentures with companies;
(8) redemption amount of preference shares remaining unpaid or unclaimed for seven or more
years;
(9) And such other amount as may be prescribed.
UTILISATION OF INVESTOR EDUCATION AND PROTECTION FUND (Not yet

Enforced)
Section 125 (3) provides the Fund shall be utilized for—
(a) the refund in respect of unclaimed dividends, matured deposits, matured debentures, the
application money due for refund and interest thereon;
(b) promotion of investors’ education, awareness and protection;
(c) distribution of any disgorged (expelled, ejected, emptied, erupted, pour out) amount among
eligible and identifiable applicants for shares or debentures, shareholders, debenture-holders or
depositors who have suffered losses due to wrong actions by any person, in accordance with
the orders made by the Court which had ordered disgorgement;
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(d) reimbursement of legal expenses incurred in pursuing class action suits by members,
debenture-holders or depositors as may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto, in accordance with such rules as may be prescribed.
PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS
Section 127 of Companies Act 2013 provides that when a dividend has been declared by a
company but has not been paid within thirty days from the date of declaration to any
shareholder entitled to the payment of the dividend, every director of the company shall, if he
is knowingly a party to the default, be punishable with imprisonment which may extend to two
years and with fine which shall not be less than one thousand rupees for every day during
which such default continues and the company shall be liable to pay simple interest at the rate
of eighteen percent per annum during the period for which such default continues.
Exceptions: Proviso to section 127 has provided a list where no offence under this section
shall be deemed to have been committed: -
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of the
dividend and those directions cannot be complied with and the same has been communicated
to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due to it
from the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant within the
period under this section was not due to any default on the part of the company.
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CH. 23 BOARD’S REPORT AND DISCLOSURES
The Board’s Report is an important means of communication by the Board of Directors to its
stakeholders about the performance and prospects of the company, relevant changes in
management, capital structure, major policies, recommendations as to the distribution of
profits, future programs of expansion, modernization and diversification, capitalization of
reserves, further issue of capital, etc.
BOARD’S REPORT – SECTION 134(3)
The matters to be included in the Board’s Report have been specified in Section 134(3) of the
Companies Act, 2013.
A report by Board of Directors shall be attached with the financial statement laid before a
company in general meeting which shall include following:
(a)the extract of the annual return as provided under Section 92(3). Rule 12(1) of Companies
(Management and Administration) Rules 2014 states that the extract of annual return to be
attached with the board’s Report shall be in Form No. MGT 9.
(b) number of meetings of the Board;
(c) Directors’ Responsibility Statement;

(ca) details in respect of frauds reported by auditors. [Inserted by Companies (Amendment)
Act,2015];
(d) a statement on declaration given by independent directors under section 149(6);
(e) Under section 178, company’s policy on directors’ appointment and remuneration including
criteria for determining qualifications, positive attributes.
[This clause does not apply to government companies (As per exemption notification dated
5th June, 2015)];
(f) explanations or comments by the Board on every reservation or adverse remark made
(i) by the auditor in his report; and
(ii) by the company secretary in practice in his secretarial audit report;
(g) particulars of loans, guarantees or investments under section 186;
(h) particulars of contracts or arrangements with related parties referred to in section 188;
(i) the state of the company’s affairs;
(j) the amounts, if any, which it proposes to carry to any reserves;
(k) the amount, if any, which it recommends should be paid by way of dividend.
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(l) material changes affecting the financial position of the company which have occurred
between the end of the financial year of the company to which the financial statements relate
and the date of the report;
(m) the conservation of energy, technology absorption, foreign exchange earnings and outgo;
(n) a statement indicating development and implementation of a risk management policy for the
company including identification therein of elements of risk, if any, which in the opinion of the
Board may threaten the existence of the company.
(o) the details about the policy developed and implemented by the company on corporate social
responsibility initiatives taken during the year.
(p) in case of a listed company and every other public company having such paid-up share
capital as may be prescribed, a statement indicating the manner in which formal annual
evaluation has been made by the Board of its own performance and that of its committees and
individual directors;
In case of Government companies this clause (p) shall not apply in case the directors are
evaluated by the Ministry or Department of the Central Government [As per exemption
notification dated 5th June, 2015.]
DIRECTORS’ RESPONSIBILITY STATEMENT
According to Section 134, Directors’ Responsibility Statement shall state that—

(a) in the preparation of the annual accounts, the applicable accounting standards had been
followed along with proper explanation relating to material departures;
(b) the directors had selected such accounting policies and applied them consistently so as to
give a true and fair view of the state of affairs of the company at the end of the financial year;
(c) the directors had taken sufficient care for the maintenance of adequate accounting records
for safeguarding the assets of the company;
(d) the directors had prepared the annual accounts on a going concern basis;
(e) the directors, in the case of a listed company, had laid down internal financial controls to be
followed by the company and that such internal financial controls are adequate and were
operating effectively;
(f) the directors had devised proper systems to ensure compliance with the provisions of all
applicable laws and that such systems were adequate and operating effectively.
Penal Provisions Under the Companies Act, 2013
Punishments for not complying with section 134 (Directors’ Responsibility Statement) of the
Act
(i) For company: -
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Fine (a) Minimum – Rs. 50,000; and
(b) Maximum – Rs. 25,00,000.
(ii) For employees, who is in default:

(a) Imprisonment for maximum up to 3 years; or
(b) Fine Minimum Rs. 50,000 and Maximum Up to Rs. 5,00,000
OTHER DISCLOSURES UNDER THE COMPANIES ACT, 2013
Independent Re-appointment of an Independent Director shall be disclosed in the Board’s

Director Report.
Audit Board’s Report shall disclose the composition of audit committee under
Committee section 177(8) and also disclose the recommendation of the audit committee
which is not accepted by the board along with reason thereof.
Remuneration The Board’s Report shall disclose Remuneration Policy of directors.

of Directors
Secretarial According to section 204(1) every listed company and other prescribed
Audit Report companies in Rule 9 Companies (Appointment & Remuneration of
Managerial Personnel) Rules 2014 shall annex the secretarial audit report
given by a Company Secretary in practice with Board’s Report.
Establishment The disclosure in board’s report includes the detail of establishment of vigil
of Vigil mechanism under section 177(9).
Mechanism Vigil mechanism shall provide for adequate safeguards against victimization
of persons who use such mechanism and make provision for direct access to
the Chairperson of the Audit Committee.
Vigil It is the whistle blowing provision which is a mandatory

Mechanism requirement under section 177(9). This mechanism would
enable a company to evolve a process to encourage ethical
corporate behavior. Every listed company and the class of
the company as prescribed shall establish a Vigil
mechanism for their Directors and Employees to report their
genuine concern or grievances.
DISCLOSURES UNDER VARIOUS RULES MADE UNDER COMPANIES ACT, 2013
Matters to be included in Board’s Report

I. As per Rule 8 of Companies(Accounts) Rules 2014
II. Disclosure under Companies (Share Capital and Debenture) Rules, 2014
III. Rule 5 of Companies (Appointment & Remuneration of Managerial Personnel) Rules
2014
IV. Rule 8 of Companies (Corporate Social Responsibility Policy) Rules,2014
I. As per Rule 8 of Companies(Accounts) Rules 2014
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(1) The Board’s Report shall contain a separate section wherein a report on the financial
performance of each of the subsidiaries, associates and joint venture companies included.
(2) The Board’s Report shall contain the particulars of contracts or arrangements with related
parties.
(3) The report of the Board shall contain the following information:
(A) (i) the steps taken or impact on conservation of energy;

Conservation (ii) the steps taken by the company for utilizing alternate sources of
of energy energy;
(iii) the capital investment on energy conservation equipment;
(B) (i) the efforts made towards technology absorption;

Technology (ii) the benefits derived like product improvement, cost reduction or
absorption import substitution;
(iii) in case of imported technology
(a) the details of technology imported;
(b) the year of import;
(c) whether the technology been fully absorbed; and
(d) if not fully absorbed, areas where absorption has not taken
place, and the reasons thereof.
(C) Foreign The Foreign Exchange earned in terms of actual inflows and
exchange outflows.
earnings and
outgo
(4) The Board’s Report shall include, a statement indicating the manner in which formal annual
evaluation has been made by the Board of its own performance and that of its committees
and individual directors.
This provision is applicable for every listed company and every other public company
having a paid up share capital of twenty-five crore rupees or more.
(5) Board’s Report shall also contain –

(i) the financial summary or highlights;
(ii) the change in the nature of business, if any;
(iii)the details of directors or key managerial personnel.
(iv) the names of companies which have become or ceased to be its Subsidiaries, joint
ventures or Associate companies during the year;
(v) the details of deposits which are not in compliance with the requirements of the
Act;
(vi) the details of material orders passed by the regulators or tribunals
impacting the going concern status and company’s operations in future
(6) Board's report shall disclose the composition of the Corporate Social Responsibility
Committee.
II. Disclosure under Companies (Share Capital and Debenture) Rules, 2014
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(a) Disclosure in relation to issue of shares with Differential rights
The Board of Directors shall disclose in the Board’s Report for the financial year in which the
issue of equity shares with differential rights was completed, the following details, namely: -
(a) the total number of shares allotted with differential rights.

(b) the details of the differential rights relating to voting rights and dividends.
(c) the percentage of the shares with differential rights to the total post issue equity share
capital.
(d) the price at which such shares have been issued.
(e) the particulars of promoters, directors or KMP to whom such shares are issued.
(f) the change in control, if any, in the company consequent to the issue of equity shares with
differential voting rights.
(g) the diluted Earning Per Share pursuant to the issue of each class of shares.
(b) Disclosure in relation to Issue of Sweat Equity Shares

Board of Directors shall disclose in the Directors’ Report for the year in which such shares are
issued, the following details of issue of sweat equity shares namely: -
(a) the class of director or employee to whom sweat equity shares were issued.
(b) the number of sweat equity shares issued to the directors, KMP or other employees.
(c) the reasons or justification for the issue.
(d) the principal terms and conditions for issue of sweat equity shares, including pricing
formula.
(e) the total number of shares arising as a result of issue of sweat equity shares.
(f) the percentage of the sweat equity shares of the total post issued and paid up share
capital.
III. Rule 5 of Companies (Appointment & Remuneration of Managerial Personnel)

Rules 2014
Rule 5(1) of Companies (Appointment & Remuneration of Managerial Personnel) Rules,2014

provides the following disclosure by the listed companies in the Board’s Report: -
(i) the ratio of the remuneration of each director to the median remuneration of the employees
of the co.
(ii) the percentage increase in remuneration of each director, Chief Financial Officer, Chief
Executive Officer, Company Secretary or Manager, if any, in the financial year;
(iii) the percentage increase in the median remuneration of employees in the financial year;
(iv) the number of permanent employees on the rolls of company;
(v) the explanation on the relationship between average increase in remuneration and company
performance;
(vi) comparison of the remuneration of the KMP against the performance of the company;
IV. Rule 8 of Companies (Corporate Social Responsibility Policy) Rules,2014
Section 135 provides that the Board's report shall disclose the composition of the Corporate
Social Responsibility Committee.
SIGNING OF THE BOARD’S REPORT
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The Board’s report shall be signed by its Chairperson of the company if he is authorized by the
Board and where he is not so authorized, shall be signed by at least two directors, one of whom
shall be a managing director, or by the director where there is one director.
COPY OF FINANCIAL STATEMENT ALONG WITH BOARD’S REPORT TO BE

FILED WITH REGISTRAR
Section 137 provides that after the financial statement have been laid before the company at an
annual general meeting, a copy of the financial statement along with all documents required to
be attached thereto should be filed with the Registrar of Companies within 30 days, along with
the prescribed fees. The Board’s Report has to be attached to the balance sheet.
RIGHT OF THE MEMBERS TO COPIES OF BOARD’S REPORT AND OTHER

DOCUMENTS
Section 136(1) provides that a copy of the financial statement, Board’s Report and Auditor’s
Report, which are to be laid before a company in its general meeting, should be sent to every
member, trustee for the debenture-holders, and all the other specified person at least 21 days
before the date of the annual general meeting.
Penalty for Non- compliance
Section 136(3) states that If any default is made in complying with the provisions of this
section, the company shall be liable to a penalty of twenty-five thousand rupees and every
officer of the company who is in default shall be liable to a penalty of five thousand rupees.
DISCLOSURES TO BE MADE IN ANNUAL REPORT AS REQUIRED UNDER

LISTING REGULATION
As per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the
Annual Report of the company shall have the following disclosures in addition to the
disclosures specified in Companies Act, 2013.
1. audited financial statements i.e. balance sheets, profit and loss accounts etc.;
2. consolidated financial statements audited by its statutory auditors;
3. cash flow statement
4. directors report;
5. management discussion and analysis report - either as a part of directors’ report or addition
thereto;
for the top five hundred listed entities based on market capitalization (calculated as on March
31 of every financial year), Business Responsibility Report describing the initiatives taken by
them from an environmental, social and governance perspective, in the format as specified by
the Board.
Schedule V of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015,

refers the following additional Disclosures
Related All listed entities are required to make disclosures in compliance with the
Party Accounting Standard on “Related Party Disclosures”.
Disclosure The disclosure shall contain the information on the following:
S. In the Disclosures of amounts at the year end and the

No. Accounts maximum amount of loans/ advances/Investments
of outstanding during the year
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1. Holding Loans and advances in the nature of loans to subsidiaries by
Company name and amount.
Loans and advances in the nature of loans to associates by
name and amount.
Loans and advances in the nature of loans to
firms/companies in which directors are interested by name
and amount
2. Subsidiary Same disclosures as applicable to the parent company in the
accounts of subsidiary company.
Management SEBI (Listing Obligations and Disclosure Requirements) Regulations,2015
Discussion provides that the Annual Report shall have the directors’ report or as an
and Analysis addition thereto, a Management Discussion and Analysis Report (MDAR).
This Management Discussion & Analysis Report should include discussion on

the following matters
(a) Industry structure and developments.
(b) Opportunities and Threats.
(c) Segment–wise or product-wise performance.
(d) Outlook
(e) Risks and concerns.
(f) Internal control systems and their adequacy.
(g) Discussion on financial performance with respect to operational
performance.
(h) Industrial Relations front, including number of people employed.
Disclosure of Where in the preparation of financial statements, a treatment different from that
Accounting prescribed in an Accounting Standard has been followed, the fact shall be
Treatment disclosed in the financial statements, together with the management’s
explanation as to why it believes such alternative treatment is more
representative of the true and fair view of the underlying business transaction.
Corporate Governance Report
The following disclosures shall be made in the section on the Corporate Governance of the
Annual Report.
(1) Code of A brief statement on listed entity’s philosophy on code of governance.

Governance
(2) Board of (a) composition and category of directors (e.g. promoter, executive, non-
directors executive, independent non-executive, nominee director - institution
represented and whether as lender or as equity investor);
(b) attendance of each director at the meeting of the board of directors and
the last annual general meeting;
(c) number of other board of directors or committees in which a director is a
member or chairperson;
(d) number of meetings of the board of directors held and dates on which
held;
(e) disclosure of relationships between directors inter-se;
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(f) number of shares and convertible instruments held by non-executive
directors;
(3) Audit (a) brief description of terms of reference;

committee (b) composition, name of members and chairperson;
(c) meetings and attendance during the year.
(4) Nomination (a) brief description of terms of reference;

and (b) composition, name of members and chairperson;
Remuneration (c) meeting and attendance during the year;
Committee (d) performance evaluation criteria for independent directors.
(5) (a) all pecuniary relationship or transactions of the non-executive directors
Remuneration vis-à-vis the listed entity shall be disclosed in the annual report;
of Directors (b) criteria of making payments to non-executive directors. alternatively;
(c) disclosures with respect to remuneration: in addition to disclosures
required under the Companies Act, 2013, the following disclosures shall be
made:
(i) all elements of remuneration package of individual directors
summarized under major groups, such as salary, benefits, bonuses, stock
options, pension etc.;
(ii) details of fixed component and performance linked incentives, along
with the performance criteria;
(iii) service contracts, notice period, severance fees
(6) (a) name of non-executive director heading the committee;

Stakeholders' (b) name and designation of compliance officer;
grievance (c) number of shareholders’ complaints received so far;
committee (d) number not solved to the satisfaction of shareholders;
(e) number of pending complaints.
(7) General (a) location and time, where last three annual general meetings held;
body meetings (b) whether any special resolutions passed in the previous three annual
general meetings;
(c) whether any special resolution passed last year through postal ballot;
(d) person who conducted the postal ballot exercise;
(e) whether any special resolution is proposed to be conducted through
postal ballot;
(f) procedure for postal ballot.
(8) Means of (a) quarterly results;

communication (b) newspapers wherein result normally published;
(c) any website, where displayed;
(d) whether it also displays official news releases; and
(e) presentations made to institutional investors.
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Ch. 24 REGISTERS, FORMS AND RETURNS
Statutory Books/Registers
The Companies Act, 2013 lays down that every company must maintain and keep books,
registers and copies of returns, documents etc. at its registered office. These books are known
as Statutory Books.
Some of the statutory registers are required to be kept open by the company for inspection by
directors, members, creditors of the company and by other persons.
The company is also required to allow extracts to be taken from certain documents, registers,
returns etc. and furnish copies of certain documents on demand by a member or by any other
person on payment of specified fees.
BOOKS TO BE MAINTAINED
Every company incorporated under the Act is required to keep at its registered office, inter alia,
the following statutory books and registers –
S. Name Section No. Rule

No.
1. Register of securities bought Section 68(9) Rule 17(12) of companies (Share Capital
back. and Debenture) Rules, 2014
2. Register of deposits Section 73 Rule 14 Companies (Acceptance of

Deposits) Rules, 2014
3. Register of charges Section 85 Rule 7 of Companies (Registration of

Charges) Rules 2014
4. Register of members Section 88(1) Rule 3(1) of Companies (Management

and Administration) Rules 2014]
5. Index of members Sections Rule 6 of Companies (Management and

88(2) Administration) Rules, 2014
6. Register of debenture holders Section 88 (1)
7. Index of debenture holders Section 88 (2)
8. Register and index of Section 88 (3)
beneficial owners
9. Foreign register Section 88 (4)
10. Register of Renewed and Rule 6 of the Companies (Share Capital
Duplicate Share Certificates and Debenture) Rules, 2014
11. Register of sweat equity Section 54 Rule 8 (14) of Companies (Share Capital
shares and Debenture) Rules, 2014
12. Annual Return Section 92 Rule 11 of The Companies (Management
and Administration) Rules 2014
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13. Register of Postal Ballot Section 110 Rule 22 of the Companies (Management
and Administration) Rules, 2014
14. Minutes Book (General Section 118
Meeting Board Meeting)
15. Books of accounts Section 128
16. Register of Directors/ KMP Section 170
17. Register of investments in Section 18 Rule 14 of Companies (Meetings of
securities not held in co.’s Board and its Powers) Rules, 2014
name
18. Register of loans, guarantees Section 186 Rule 12 Companies Meetings of Boards
given and security provided and its Powers Rules 2014
Closure of Register of Members etc.
According to Section 91, a company may close its Register of members or Register of
Debenture holders or Register of other security holders for a period not exceeding forty-five
days in a year. However, the Register cannot be closed for more than thirty days at any one
time. A company closing the register of members or the register of debenture holders or the
register of other security holders shall give at least seven days’ previous notice or such lesser
period and in such manner, as may be specified by Securities and Exchange Board, if such
company is a listed company or companies intends to get its securities listed.
Persons responsible to maintain books of accounts
The person responsible to take all reasonable steps to secure compliance by the company with
the requirement of maintenance of books of accounts etc. shall be:
(i) Managing Director,
(ii) Whole-Time Director, in charge of finance
(iii) Chief Financial Officer
(iv) Any other person of a company charged by the Board with duty of complying laws
Penalty
In case the aforementioned persons (i.e. MD, WTD, CFO etc.) fail to take reasonable steps to
secure compliance of this section and thus, contravene such provisions, they shall in respect of
each offence, be punishable with imprisonment for a term which may extend to one year or
with fine which shall not be less than fifty thousand rupees but which may extend to five lakh
rupees or both.
Annual Return [Section 92]

According to section 92 of the Act, every company shall prepare a return in E-form MGT 7
containing the required particulars as they stood on the close of the financial year and signed by
a director and the company secretary.
The Annual Return shall contain the following particulars:
(a) its registered office, principal business activities, particulars of its holding, subsidiary and
associate companies;
(b) its shares, debentures and other securities and shareholding pattern;
(c) its indebtedness;
(d) its members and debenture-holders along with changes therein since the close of the
previous financial year;
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(e) its promoters, directors, KMP along with changes therein since the close of the previous
financial year;
(f) meetings of members or a class thereof, Board and its various committees along with
attendance details;
(g) remuneration of directors and key managerial personnel;
(h) penalty or punishment imposed on the company, its directors or officers and details of
compounding of offences and appeals made against such penalty or punishment;
(i) matters relating to certification of compliances, disclosures as may be prescribed;
(j) details, as may be prescribed, in respect of shares held by the Foreign Institutional Investors
indicating their names, addresses, countries of incorporation, registration and percentage of
shareholding held by them; and
(k) such other matters as may be prescribed.
The annual return, filed by a listed company or, by a company having paid-up capital of ten
crore rupees or more or turnover of fifty crore rupees or more, shall be certified by a company
secretary in practice, stating that the annual return discloses the facts correctly and adequately
and that the company has complied with all the provisions of this Act.
Preservation of Register & Records of Members and Annual Return [Rule 15 of the
Companies (Management and Administration) Rules, 2014]
The provisions with regard to preservation of records are contained in Rule 15
— The register of members along with the index shall be preserved permanently and shall be
kept in the custody of the company secretary of the company or any other person authorized by
the Board for such purpose.
— The register of debenture holders or any other security holders along with the index shall be
preserved for a period of 8 years from the date of redemption of debentures or securities, as the
case may be, and shall be kept in the custody of the company secretary of the company or any
other person authorized by the Board for such purpose.
— Copies of all annual returns prepared under section 92 and copies of all certificates and
documents required to be annexed thereto shall be preserved for a period of 8 years from the
date of filing with the Registrar.
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CH. 25 INSPECTION & INVESTIGATION
The broad regulatory framework relating to companies covers various aspects such as: -
Powers of Registrar/ C. Govt. to call for information, to inspect books and papers etc. and to
conduct enquiry,
Powers of Registrar in the course of inspection and the duties of officers to provide information
in the course of inspection, search/seizure,
Powers the C. Govt. to order an investigation into the affairs of the company,
Constitution of Serious Fraud Investigation Office (SFIO),
Investigation into the affairs of the company by SFIO.
INSPECTION
Section 206 of the Companies Act 2013 deals with power to call information, inspection of
documents, books and papers of any company and conduct inquiries.
The section empowers the Registrar or Inspectors appointed by Central Government to conduct
inspection in order to ascertain that all the transactions have been properly recorded in
appropriate books and all applicable laws and rules have been complied by the company.
Purpose of Conducting Inspection

Some of the objectives of conducting such inspections are as:
1. To detect concealment of income by falsification of accounts.
2. To secure knowledge about the mismanagement of the affairs of a company and transactions
entered into with an intent to defraud creditors, shareholders.
3. To ascertain whether the statutory auditors have discharged their functions and duties in
certifying the true and fair view of a company’s accounts and their proper maintenance.
4. To enable the Government to ascertain the quantum of profits accrued but not adequately
accounted for.
5. To detect misapplication of funds leading a company to a state of perpetual financial crisis.
6. To keep a watch on performance of a company.
7. To detect misuse of fiduciary responsibilities by the company’s management.
Powers of registrar to call for information
According to Sec 206(1), if on the scrutiny of any document filed by a company or any
information received by him, the Registrar is of the opinion that any further information or
explanation or any
further document relating to the company is necessary, he may call such other information by a
written notice and require the company
(a) to furnish the information or explanation in writing; or
(b) to produce such document,
within the reasonable time as may be specified in notice.
Company’s duty to furnish required information

According to 206(2) of the Act, it is the duty of the company and of its officer concerned to
furnish such information or explanation to the best of their knowledge and power to produce
the documents as required by the registrar within the specified time mentioned in the notice
under section 206(1).
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Further notice by the registrar, if no information is provided or information provided is
inadequate.
Section 206(3) provides that where no information or explanation is furnished to the Registrar
within the time specified under section 206(1) or if the Registrar on inspection of documents
furnished finds that the information furnished is inadequate, he may, by another written notice,
call on the company to produce for his inspection such further books of account, books, papers,
and explanations as he may require at such place and at such time as he may specify in the
notice.
Powers of Registrar to call for information/explanation after informing the company of

the allegations made against it
According to Section 206(4) the registrar, on the basis of information available or furnished to
him or on a representation made to him by any person, is of the opinion that
(a) the business of a company is being carried on for a fraudulent or unlawful purpose or not in
compliance with the provisions of this Act or
(b) if the grievances of investors are not being addressed,
the Registrar may after informing the company of the allegations made against it by a written
order,
(1) call on the company to furnish in writing any information or explanation on matters
specified in the order and
(2) carry out such inquiry as he deems fit after providing the company a reasonable opportunity
of being heard.
Powers of Central Government to direct the registrar/inspector to order an enquiry
Central Government may, if it is satisfied that the circumstances so warrant, direct the Registrar
or an inspector appointed by it for the purpose to carry out the inquiry.
Punishment for non-compliance of section 206
if any company fails to furnish any information or explanation or produce any document
required under Section 206, the company and every officer of the company, who is in default
shall be punishable with a fine which may extend to one lakh rupees and in the case of a
continuing failure, with an additional fine which may extend to five hundred rupees for every
day after the first day during which the failure continues.
Conduct of inspection and inquiry
Section 207 of the Companies Act lays down the procedure to be adopted for inspection,
powers of inspectors during the course of inspection, duties of directors, officers and other
employees etc.
Duty of every director and officer of the company to render [Section 207]
Where the Registrar or inspector calls for the books of accounts and other books and papers
under section 206, of a company-
(i) It shall be the duty of every director, officer or other employee of the company to produce
all such documents to the registrar or inspector and
(ii) To furnish him with such statements, information or explanations in such form as the
Registrar or inspector may require and
(iii) To render all assistance to the registrar or inspector in connection with such inspection.
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Right of Registrar or Inspector to take copies of books of account [Section 207(2)]
Registrar or Inspector to have the powers of civil court [Section 207(3)]
Registrar or inspector making an inspection or inquiry shall have all the powers as are vested in
a civil court under the Code of Civil Procedure, 1908, while trying a suit in respect of the
following matters, namely: —
(a) The discovery and production of books of account and other documents, at such place and
time as may be specified by Registrar or inspector making the inspection or inquiry;
(b) Summoning and enforcing the attendance of persons and examining them on oath; and
(c) Inspection of any books, registers and other documents of the company at any place.
Punishment for the disobedience [Section 207(4)]
If any director or officer of the company disobeys the direction issued by the Registrar or the
inspector, such director or officer shall be punishable with imprisonment which may extend to
one year and with fine which shall not be less than 25,000 rupees but which may extend to
1,00,000 rupees.
Submission of report of inspection to Central Government [Section 208]
Registrar or inspector shall, after the inspection of the books of account or an inquiry under
section 206 and other books and papers of the company under section 207, submit a report in
writing to the Central Government.
Search and seizure by the registrar or inspector
Section 209 provides for search and seizure of documents by the Registrar with the permission
of special court. The section provides that, where Registrar or inspector has reasonable ground
to believe that the books and papers of a company, or relating to the key managerial personnel
or any director or auditor or company secretary, are likely to be destroyed, or falsified, he may,
after obtaining an order from the Special Court for the seizure of such books and papers seize
such books and papers as he considers necessary.
INVESTIGATIONS
Central Government has certain powers to investigate the affairs of the company where there
was reason to believe that the business of the company was being conducted with the intent to
defraud its creditors or members or for a fraudulent or unlawful purpose, or in any manner
oppressive of any of its members.
Sections 210 to 229 of the Companies Act, 2013, contain provisions relating to investigation of
the affairs of company.
Investigation is a fact finding exercise. The main object of investigation is to collect evidence
and to see if any illegal acts or offences are disclosed and then decide the action to be taken.
KINDS OF INVESTIGATION
The Companies Act, 2013 provides for carrying out the following kinds of investigation:
1. Investigation of the affairs of the company in public interest (Section 210);
2. Investigation by Serious Fraud Investigation Office directed by C. Govt. (Section 212)
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3. Investigation on the order of Tribunal. (Section 213 – Not yet enforced)
4. Investigation about the ownership of a Company (Section 216)
5. Investigation of the affairs of related companies (Section 219);
6. Investigation of foreign companies (Section 228)
1. Investigation of the affairs of the company in public interest (Section 210)
Section 210 of the companies Act provides that

1. When the Central Government is of the opinion, that it is necessary to investigate into the
affairs of a company, —
a) on the receipt of a report of the Registrar or inspector under section 208;
b) on intimation of a special resolution passed by a company that the affairs of the
company ought to be investigated; or
c) in public interest,
it may order an investigation into the affairs of the company.
2. When an order is passed by a court or the Tribunal in any proceedings before it that the
affairs of a company ought to be investigated, the Central Government shall order an
investigation into the affairs of that company.
2. Investigation by Serious Fraud Investigation Office (SFIO) (Section 212)

When the Central Government is of the opinion, that it is necessary to investigate into the
affairs of a company by the Serious Fraud Investigation Office—
(a) on receipt of a report of the Registrar or inspector under section 208;
(b) on intimation of a special resolution passed by a company that its affairs are required to be
investigated;
(c) in the public interest; or
(d) on request from any Department of the Central Government or a State Government,
the Central Government may, by order, assign the investigation into the affairs of the said
company to the Serious Fraud Investigation Office and The Director of SFIO may designate
such number of inspectors, as he may consider necessary for the purpose of such investigation.
Directions by Central Government after receiving report
On receipt of the investigation report, the Central Government may, after examination of the
report, direct the Serious Fraud Investigation Office to initiate prosecution against the company
and its officers or employees, who are or have been in employment of the company or any other
person directly or indirectly connected with the affairs of the company.
NOTE:
Where any case has been assigned by the Central Government to the Serious Fraud
Investigation Office for investigation under this Act, no other investigating agency of Central
Government or any State Government shall proceed with investigation in such case in respect
of any offence under this Act and in case any such investigation has already been initiated, it
shall not be proceeded further with and the concerned agency shall transfer the relevant
documents and records in respect of such offences under this Act to Serious Fraud Investigation
Office.
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3. TRIBUNAL’S ORDER FOR INVESTIGATION [Section 213]
(This section is not notified)
The Tribunal may
(a) On an application made by:
(i) not less than one hundred members or members holding not less than one-tenth of the total
voting power in the case of a company having share capital; or
(ii) not less than one-fifth of the persons on the company’s register of members in case the
company has no share capital.
and supported by such evidence as may be necessary to show that the applicants have good
reasons for seeking an order for conducting an investigation into the affairs of the company
Or
(b) on an application made to it by other persons or otherwise
If it is satisfied that there are circumstances suggesting that:
(i) the business of the company is being conducted with intent to defraud its creditors, members
or any other person or otherwise for a fraudulent or unlawful purpose or in a manner oppressive
to any of its members or that the company was formed for any fraudulent or unlawful purpose.
(ii) Persons engaged in the formation of company or management of its affairs have been guilty
of fraud, misfeasance or other misconduct towards the company or any of its members,
order, after giving reasonable opportunity of being heard to the parties concerned that the
affairs of the company ought to be investigated by inspector appointed by the Central
Government.
Punishment
If after investigation it is proved that:
(i) the business of the company is being conducted with intent to defraud creditors, members or
any other person or that the company was formed for any fraudulent or unlawful purpose; or
(ii) any person connected with formation or management of company has been guilty of fraud.
Then every officer of the company who is in default or persons concerned in its formation or
management shall be punishable for fraud under Section 447.
4. Investigation of ownership of company [Section 216]
The Central Government may if it has reason to believe or shall upon the direction of the
Tribunal that the affairs of the company ought to be investigated as regards membership of
company, appoint one or more inspectors to investigate and report on matters relating to the
company and its membership for determining the true persons:
(a) who are or have been financially interested in the success or failure of the company; or
(b) who are or have been able to control or materially able to influence the policy of the
company.
Central Government shall appoint one or more inspectors if the Tribunal, in the course of any
proceedings before it, directs by an order that the affairs of the company ought to be
investigated.
Powers of inspectors [section 217]
The inspector, being an officer of the Central Government, making an investigation, shall have
all the powers as are vested in a civil court under the Code of Civil Procedure, 1908, while
trying a suit in respect of the following matters, namely: —
311
(a) the discovery and production of books of account and other documents, at such place and
time as may be specified by such person;
(b) summoning and enforcing the attendance of persons and examining them on oath; and
(c) inspection of any books, registers and other documents of the company at any place.
Appeal to Appellate Tribunal [section 218]
If the company, other body corporate or person concerned is dissatisfied with the objection
raised by the Tribunal, it may, within a period of 30 days of the receipt of the notice of the
objection, prefer an appeal to the Appellate Tribunal in such manner and on payment of such
fees as may be prescribed.
Decision of Appellate Tribunal
The decision of the Appellate Tribunal on such appeal shall be final and binding on the
Tribunal and on the company or person concerned.
PREPARATION BY A COMPANY SECRETARY TO FACE INVESTIGATION

Before an inspector commences investigation into the affairs of a company, it is advisable for
the Secretary to prepare a report touching upon various aspects of the activities of his company
particularly those transactions in respect of which fraud or misfeasance or mismanagement is
alleged. This exercise will enable the secretary to handle the investigation into the affairs of his
company with confidence.
The aspects which should be considered by the secretary include:
1. Basic Name of the company; date of incorporation; location of the registered office,
information branches, factories and other offices; status of the company—public or
about the private; objects of the company—capital structure; voting rights attached to
company the shares; shareholding pattern of the company.
2. Business Nature of existing business, licensed and installed capacities, expansion

activities program and sources of finance, whether the company belongs to a particular
group; if so the names of other companies falling within the same group.
3. Borrowings Debentures, bank finance and deposits
4. Brief history of past management set up; existing management set up;
Management composition
of Board of Directors; whether the terms and conditions of the appointment
of managerial personnel are being adhered to; details regarding appointment
of directors.
5.Working General assessment of working of the company, evaluation of the level of

results and performance and efficiency of the management, a review of the profits of the
financial company, performance data, financial position of the company in the context
position of its working results for the last three years.
6.Compliances Compliance by the company and its officers with the provisions of the
Companies Act.
312
7.Loans Whether the loans taken and loans advanced to Directors, the firms in which
they are partners or companies in which they are Directors are in accordance
with the provisions of the Act.
8.Maintenance Whether all the statutory registers including minute’s books are being
of Registers maintained up-to-date or not.
etc.
9. Instance of oppression of minority shareholders, allegations of non-receipt of
Shareholders dividend, notices of meetings, accounts, share certificates, etc.; illegal
forfeiture of shares, etc. and steps taken to redress Investors, complaints.
10. Acquisition/disposal of substantial assets.

11. The investments made by the company.
12. Complaints, if any, against the company and its management and steps taken to redress
them.
13. Instance of mismanagement and other irregularities.
14. Brief particulars of the litigations against the company and the reasons thereof.
313
CH. 26 MAJORITY RULE AND MINORITY RIGHTS
NOTE: Companies Act 2013 (Section 241-246) and the rules made there under, covering
the aspects of oppression and mismanagement are yet to be notified and the provisions of
Companies Act 1956 in this regard would continue to apply and accordingly the
provisions of Companies Act, 1956 are dealt in this Chapter.
1. SHAREHOLDERS' DEMOCRACY
Democracy means the rule of people, by people and for people.
In this context the shareholder’s democracy means the rule of shareholders, by the
shareholders, and for the shareholders in the corporate enterprise, to which the shareholders
belong.
The concept of shareholders’ democracy denotes the shareholders’ supremacy in the

governance of the business and affairs of corporate sector either directly or through their
elected representatives.
Under the Companies Act the powers have been divided between two segments: one is the
Board of Directors and the other is of shareholders.
The directors exercise their powers through meetings of Board of directors and shareholders
exercise their powers through General Meetings.
Although all the acts relating to the company can be performed in General Meetings but most
of the powers in regard thereto are delegated to the Board of directors by virtue of the
documents of the company viz. the Memorandum of Association and Articles of Association.
Under Section 291 of the Companies Act, a general power has been conferred on the Board of
directors. This section provides that the Board of directors of a company shall be entitled to
exercise all such powers and to do all such acts and things, as the company is authorized to
exercise and do.
Proviso to this section restricts the power of the Board of directors to do things which are
specifically required to be done by shareholders in the General Meetings under the provisions
of Companies Act or Memorandum of Association or the Articles of Association.
2. MAJORITY POWERS AND MINORITY RIGHTS

Supremacy of Majority
Every member of a company, which is limited by shares, holding any equity shares shall have a
right to vote in respect of such capital on every resolution placed before the company.
Member’s right to vote is recognized as right of property. This means shareholder can do
whatever he wants in relation to managing the affairs of the company.
This rule is modified by the Act in certain cases. A special resolution, for instance, requires a
majority of 3/4ths of those voting at the meeting and therefore, where the Act or the articles
require a special resolution for any purpose, a three-fourth majority is necessary and a simple
majority is not enough. [Edwards vs. Halliwell]
The resolution of a majority of shareholders, passed at a duly convened and held general
meeting, upon any question with which the company is legally competent to deal, is binding
upon the minority and consequently upon the company.
314
[North-West Transportation Co. vs. Beatty]
Thus, the majority of the members enjoy the supreme authority to exercise the powers of the
company and generally to control its affairs. But this is subject to two very important
limitations.
Firstly, the powers of the majority of members is subject to the provisions of the Company’s
memorandum and articles of association.
A company cannot legally authorize or ratify any act which being outside the ambit of the
memorandum, is ultra vires of the company. [Ashbury Rly. Carriage and Iron Co. vs.
Riche.]
Secondly, the resolution of a majority must not be inconsistent with the provisions of the Act or
constitute a fraud on minority depriving it of its legitimate rights.
The Principle of Non-interference (Rule in Foss vs. Harbottle)

Since the majority of the members are in an advantageous position to run the company
according to their command, the minorities of shareholders are often oppressed.
The company law provides for adequate protection for the minority shareholders when their
rights are crushed by the majority.
But the protection of the minority is not generally available when the majority does anything in
the exercise of their powers in the management of the company. The court will not usually
interfere with the management of a company by its directors so long they are acting within the
powers conferred on them under the articles of the company.
The basic principle of non-interference with the internal management of company by the court
is laid down in a celebrated case of Foss vs. Harbottle that no action can be brought by a
member against the directors in respect of a wrong alleged to be committed to a company. The
company itself is the proper party of such an action.
Foss vs. Harbottle

Two shareholders, Foss and Turton brought an action on behalf of themselves and all other
shareholders against the directors and solicitor of the company alleging that by their concerted
and illegal transactions they had caused the company’s property to be lost. It was also alleged
that there was no qualified Board. Foss and Turton claimed damages to be paid by the
defendants to the company.
It was held by the court that the action could not be brought by the minority shareholders
although there was nothing to prevent the company itself, acting through the majority of its
shareholders, bringing action. The wrong done to the company was not which could be ratified
by the majority of members. The company (i.e. the majority) is the proper plaintiff for wrong
done to the company, so the majority of members are competent to decide whether to
commence proceedings against the directors.
In the Indian context, in Rajahmundry Electric Supply Co. vs. Nageshwara Rao, the
Supreme Court observed that:
“The courts will not, in general, intervene at the instance of shareholders in matters of internal
administration, and will not interfere with the management of the company by its directors so
long as they are acting within the powers conferred on them under articles of the company.
Moreover, if the directors are supported by the majority shareholders in what they do, the
minority shareholders can, in general do nothing about it.”
315
From the above it follows then that a company being a separate legal person from the members
who compose it, the company is the proper person to bring an action.
In Pavlides vs. Jensen, a minority shareholder brought an action for damages against three
directors and against the company itself on the ground that they have been negligent in selling a
mine owned by the company for £ 82,000, whereas its real value was about £ 10,00,000.
It was held that the action was not maintainable. The judge observed, “It was open to the
company, on the resolution of a majority of the shareholders to sell the mine at a price decided
by the company in that manner, and it was open to the company by a vote of majority to decide
that if the directors by their negligence or error of judgement has sold the company’s mine at an
undervalue, proceedings should not be taken against the directors”.
Justification and Advantages of the Rule in Foss vs. Harbottle
The justification for the rule laid down in Foss vs. Harbottle is that the will of the majority
prevails. On becoming a member of a company, a shareholder agrees to submit to the will of
the majority. The rule really preserves the right of the majority to decide how the company’s
affairs shall be conducted. If any wrong is done to the company, it is only the company itself,
acting, as it must always act, through its majority, that can seek to redress and not an individual
shareholder.
Where there is a corporate body capable of filing a suit for itself to recover property either from
its directors or officers or from any other person then that corporate body is the proper plaintiff
and the only proper plaintiff. [Gray vs. Lewis]
The main advantages that flow from the Rule in Foss vs. Harbottle are:
1. If a company has suffered some injury, and not the individual members, it is
Recognition the company itself that should seek to redress.
of the
separate
legal
personality
2. Need to The principle in Foss vs. Harbottle preserves the right of majority to decide
preserve how the affairs of the company shall be conducted. It is fair that the wishes of
right of the majority should prevail.
majority to
decide
3. If every individual member were permitted to sue anyone who had injured the
Multiplicity company through a breach of duty, there could be as many suits as there are
of futile suits shareholders. Legal proceedings would never cease, and there would be
avoided enormous wastage of time and money.
4. Litigation If the irregularity complained of is one which can be subsequently ratified by

at suit of a the majority, it is futile to have litigation about it except with the consent of the
minority majority in a general meeting.
futile if
majority In Mac Dougall vs. Gardiner, the articles empowered the chairman, with the
does not wish consent of the meeting, to adjourn a meeting and also provided for taking a
it poll if demanded by the shareholders. The adjournment was moved, and
declared by the chairman to be carried; a poll was then demanded and refused
316
by the chairman. A shareholder brought an action for a declaration that the
chairman’s conduct was illegal. Held, the action could not be brought by the
shareholder; if the chairman was wrong, the company alone could sue.
Application of Foss v. Harbottle Rule in Indian context
The Delhi High Court in ICICI vs. Parasrampuria Synthetic Ltd. has held that an automatic
application of Foss v. Harbottle Rule to the Indian corporate realities would be improper. Here
the Indian corporate sector does not involve a large number of small individual investors but
predominantly financial institutions funding at least 80% of the finance. It is these financial
institutions which provide entire funds for the continuous existence and corporate activities.
Though they hold only a small percentage of shares, it is these financial institutions which have
really provided the finance for the company’s existence and, therefore, to exclude them or to
render them voiceless on an application of the principles of Foss vs. Harbottle Rule would be
unjust and unfair.
Exceptions to the Rule in Foss vs. Harbottle — Protection of Minority Rights and
shareholders’ remedies
The rule in Foss vs. Harbottle is not absolute but is subject to certain exceptions. In other
words, the rule of supremacy of the majority is subject to certain exceptions and thus, minority
shareholders are not left helpless, but they are protected by:
(a) the common law; and
(b) the provisions of the Companies Act,
Actions by Shareholders in Common Law
The cases in which the majority rule does not prevail are commonly known as exceptions to the
rule in Foss vs. Harbottle and are available to the minority. In all these cases an individual
member may sue for declaration that the resolution complained of is void, or for an injunction
to restrain the company from passing it.
The said rule will not apply in the following cases.
(1) Ultra Vires Where the directors representing the majority of shareholders perform an
Acts illegal or ultra vires act for the company, an individual shareholder has
right to bring an action. The majority of shareholders have no right to
confirm an illegal or ultra vires transaction of the company. In such case a
shareholder has the right to restrain the company by an order or injunction
of the court from carrying out an ultra vires act.
In Bharat Insurance Ltd. vs. Kanhya Lal, the plaintiff was a shareholder
of the Bharat Insurance Company. One of the objects of the company was:
“To advance money at interest on the security of land, houses, machinery
and other property situated in India...” The plaintiff complained that
“several investments had been made by the company without adequate
security and contrary to the provisions of the memorandum and therefore,
prayed for perpetual injunction to restrain it from making such
investments”.
The Court observed:
“As directors are acting ultra vires in the application of the funds of the
company, a single member can maintain a suit”.
317
It means that the rule in Foss v. Harbottle will operate in full force only
when the majority of shareholders through their elected directors act within
the extent of the powers of the company.
(2) Fraud on Where an act done by the majority amounts to a fraud on the minority; an
Minority action can be brought by an individual shareholder.
In Menier vs. Hooper’s Telegraph Works, it was observed that it would
be a shocking thing if the majority of shareholders are allowed to put
something into their pockets at the expenses of the minority.
In this case, the majority of members of company 'A' were also members of
company 'B', and at a meeting of company 'A' they passed a resolution to
compromise an action against company 'B', in a manner alleged to be
favorable to company 'B', but unfavorable to company 'A'. Held, the
minority shareholders of company 'A' could bring an action to have the
compromise set aside.
(3) Wrongdoers If the wrongdoers are in control of the company, the minority shareholders’
in Control representative action for fraud on the minority will be entertained by the
court [Birch vs. Sullivan].
The reason for it is that if the minority shareholders are denied the right of
action, their grievances in such case would never reach the court, for the
wrongdoers themselves, being in control, will never allow the company to
sue. [Edwards vs. Halliwell]
In Glass vs. Atkin, a company was controlled equally by the two

defendants and the two plaintiff. The plaintiff brought an action against
defendants alleging that they had fraudulently converted the assets of the
company for their own private use. The Court allowed the action and
observed: “While the general principle was for the company itself to bring
an action, where it had an interest, since the two defendants controlled the
company in the sense that they would prevent the company from taking
action.”
(4) Resolution A shareholder can sue if an act requires a special majority but is passed by
requiring a simple majority.
Special [Baillie vs. Oriental Telephone and Electric Co. Ltd.]
Majority but is
passed by a
simple majority
(5) Personal Individual membership rights cannot be invaded by the majority of
Actions shareholders. He is entitled to all the rights and privileges appertaining to
his status as a member. An individual shareholder can insist on the strict
compliance with the legal rules, statutory provisions.
In Nagappa Chettiar vs. Madras Race Club, it was observed by the

Court that “An individual shareholder is entitled to enforce his individual
rights against the company, such as, his right to vote, the right to have his
vote recorded, or his right to stand as a director of a company at an election.
318
Where the candidature of a shareholder for directorship is rejected by the
Chairman, it is an individual wrong in respect of which a suit is
maintainable. [Joseph vs. Jos]
(6) Breach of The minority shareholder may bring an action against the company, where
Duty although there is no fraud, there is a breach of duty by directors and
majority shareholders to the detriment of the company.
In Daniels vs. Daniels, the plaintiff, who were minority shareholders of a
company, brought an action against the two directors of the company and
the company itself. They alleged that the company, on the instruction of the
two directors who were majority shareholders, sold the company’s land to
one of the directors (who was the wife of the other) for £ 4,250 and the
directors knew or ought to have known that the sale was at an under value.
Four years after the sale, she sold the same land for £ 1,20,000.
It was held that the exception to the rule in Foss vs. Harbottle enabling a
minority of shareholders to bring an action against a company for fraud
where no other remedy was available should include cases where, although
there was no fraud alleged, there was a breach of duty by directors and
majority shareholders to the detriment of the company and the benefit to the
directors; accordingly, on the facts alleged, the minority shareholders had a
cause of action.
(7) Prevention The minority shareholders are empowered to bring action with a view to
of Oppression preventing the majority from oppression and mismanagement. These are
and the statutory rights of the minority shareholders.
Mismanagement
In Bennet Coleman & Co. and Others. vs. Union of India, the Bombay
High Court held that Sections 397 and 398 of the Companies Act, 1956 are
intended to avoid winding up of the company if possible and keep it going
while at the same time relieving the minority shareholders from acts of
oppression and mismanagement or preventing its affairs from being
conducted in a manner prejudicial to public interest.
Thus, the Court has wide powers to supplant the entire corporate
management by appointing an administrator or a special officer or a
committee of advisers etc., who will be in charge of the affairs of the
company.
Statutory Remedies (under the Companies Act)

The Companies Act, extends protection to minority by granting various rights to minority
shareholders which are discussed as below:
(a) The The rights attached to the shares of any class can be varied under Section
variation of 106 of the Act with the consent in writing of the holder of not less than
class rights three-fourths of the issued shares of that class or with the sanction of a
special resolution passed at a separate meeting of the holders of the issued
shares of that class.
319
(b) Schemes of The minority is accorded protection in cases where they dissent to the
reconstruction scheme of reconstruction or amalgamation.
and
amalgamation
(c) Oppression The principle of majority rule does not apply to cases where Sections 397
and and 398 are applicable for prevention of oppression and mismanagement. A
mismanagement member, who complains that the affairs of the company are being
conducted, in a manner oppressive to some of the members including
himself, or against public interest, he may apply to the Company Law
Board.
(d) Under Section 235 of the Act the Central Government may appoint one or
Investigation by more competent persons as inspectors to investigate the affairs of any
the Government company and to report thereon in such manner as the Central Government
may direct.
2. PREVENTION OF OPPRESSION AND MISMANAGEMENT
Prevention of Section 397 provides that any member of a company who complain that the
Oppression affairs of the company are being conducted in a manner prejudicial to
(Section 397) public interest or in a manner oppressive to any member(s) may make an
application to the Company Law Board by way of petition for relief.
Following requirements must be satisfied for seeking a relief under Section
397:
(i) That the affairs of the company are being conducted: (a) in a manner
prejudicial to public interest; or (b) oppressive to any members.
(ii) That the fact justified the compulsory winding up order on the ground that
it is just and equitable that the company should be wound up.
(iii) That to wind up the company would unfairly prejudice the petitioners
[Ramji Lal Baiswala vs. Britain Cable Ltd.]
On being satisfied about the above requirements, the Tribunal/Court may

make the necessary orders for ending the matters complained of.
Meaning of An attempt to force new and riskier objects upon an unwilling minority may
Oppression in circumstances amount to oppression.
CASE
This was held in Re. Hindustan Co-operative Insurance Society Ltd.,
wherein the life insurance business of a company was acquired in 1956 by the
Life Insurance Corporation of India on payment of compensation. The
directors, who had the majority voting power, refused to distribute this
amount among shareholders, rather they passed a special resolution changing
the objects of the company to utilize the compensation money for the new
objects.
This was held to be an “Oppression”.
The court observed: “The majority exercised their authority wrongfully, in

a manner burdensome, harsh and wrongful. They attempted to force the
minority shareholders to invest their money in different kind of business
against their will. The minority had invested their money in a life insurance
320
business with all its safeguards and statutory protections. But they were being
forced to invest where there would be no such protections or safeguards”.
Minor acts of mismanagement, however, are not to be regarded as oppression.

For example, in Lalita Rajya Lakshmi v. Indian Motor Co., the petitioner alleged that the
Board of directors were guilty of certain acts detrimental to the minority of the shareholders.
The allegations were that the income of the company was deliberately shown less by excessive
expenditure; that passengers travelling without ticket on the company’s buses were not
checked; that petrol consumption was not properly checked; that second hand buses of the
company had been disposed of at low price, that dividends were being declared at too low a
figure.
It was held that even if each of these allegations were proved to the satisfaction of the court,
there would have been no oppression.
The legal representatives of a deceased member whose name is still on the register of members
are entitled to file a petition under Sections 397 and 398 of the Companies Act, 1956, for relief
against oppression or mismanagement.
[Worldwide Agencies Pvt. Ltd. and Another v. Mrs. Margaret T. Desor and Others]
Oppression must be of a Continuous Nature
“Oppression must be a continuous process. This is suggested by the words, 'are being
conducted in a manner...’ used in Section 397. Hence isolated acts of oppression or
mismanagement will not give rise to an action under Section 397 of the Act.
However, in Tea Brokers P. Ltd. vs. Hemendra Prosad Barooah, and in Ramshankar
Prasad vs. Sindu Iron Foundry (P) Ltd., was held that a petition under Section 397, would be
maintainable even if the oppression was of a short duration and of a singular conduct if its
effects persisted indefinitely [followed in Maharashtra Power Development Corporation.
Ltd. vs. Dabhol Power Co. Ltd.]
Past acts of oppression will not entitle a plaintiff to seek the remedy under Section 397. The
purpose of this section is not so much to take up the past as to redeem the future. A catalogue of
charges of the past alleged misdeeds will not attract the section.
[Thakur Prem Singh vs. Thakur Hotel (Simla) Co. (P) Ltd.]
[Raghunath Swarup Mathur vs. Har Swarup Mathur]
Prevention of Mismanagement (Section 398)
For a petition under this section to succeed, it must be established that the affairs of the
company are being conducted in a manner prejudicial to the interest of the company or public
interest, or that, by reason of any change in the management or control of the company, it is
likely that the affairs of the company will be conducted in that manner. If the court is so
convinced, it may, with a view to bringing to an end or preventing the matter complained of,
make such order as it thinks fit.
321
The case of Rajahmundry Electric Supply Corporation vss. A. Nageswara Rao, reveals
mismanagement. In this case, a petition was brought against a company by certain shareholders
on the ground of mismanagement by directors. The court found that the vice chairman grossly
mismanaged the affairs of the company and had drawn considerable amounts for his personal
purpose, that large amounts were due to the Government for charges for supply of electricity,
and machinery was in a state of disrepair, that the directors had assumed so much of powers
and that the shareholders outside the group of the chairman were powerless to set matters right.
This was held to be sufficient evidence of mismanagement. The Court accordingly appointed
two administrators for the management of the company for a period of six months vesting in
them all the powers of the directors.
There should be present and continuing mismanagement. The charges of mismanagement in the
past, even if proved, are not enough to establish an existing injury to the interest of the
company or public interest. [R.S. Mathur v. H.S. Mathur]
Important Points for the applicability of Sec 398
Relief against mismanagement runs in favor of the company and not to any particular member
or members.
It is not necessary for the court to find a case for winding up in cases of mismanagement in
order to grant relief.
Proof of prejudice to the public interest or to the company is enough.
The court shall take into consideration outside interest affected by corporate operation.
Calcutta High Court refused to order the winding up of a grossly mismanaged company and
appointed a special officer to manage it because the company was engaged in special industries
necessary for the implementation of the country’s plans. [Richardson & Cruddas Ltd. vs.
Haridas Mundra].
Persons Entitled to Apply u/s 397/398
The number of members required to make application under Sections 397 and 398 (i.e., who
must sign the application) is given in Section 399. It provides that where the company has a
share capital, the application must be signed by at least 100 members of the company or by
one-tenth of the total number of the members, whichever is less; or by any member or members
holding not less than one-tenth of the issued share capital of the company. If the company has
no share capital, the application has to be signed by at least one-fifth of the total number of its
members.
The Central Government may, however, allow any member or members to apply, if in its
opinion, circumstances exist which make it just and equitable to do so.
Joint holders of any share or shares are counted as one member. To be entitled to make the
application, the members must have paid all the calls and other sums due on their shares.
Once the consent has been given by the requisite number of members by signing the
application, the application may be made by one or more of them on behalf and for the benefit
of all of them.
It has been held by the Supreme Court in Rajahmundry Electric Supply Co. vs. Nageshwara
Rao, that if some of the consenting members have, subsequent to the presentation of the
322
application, withdrawn their consent, it would not affect the right of the applicant to proceed
with the application.
Obtaining of consent is a condition precedent to the making of the application and hence a
consent obtained subsequent to the application is ineffective. Makhan Lal Jain vs. The Amrit
Banaspati Co. Ltd.
The scope of this section was very precisely enunciated by the Supreme Court in Shanti
Prasad Jain vs. Kalinga Tubes Ltd. where it observed that
"It is not enough to show that there is just and equitable cause for winding up of the company
though that must be shown as a preliminary to the application under Section 397.
It must further be shown that the conduct of majority shareholders was oppressive to the
minority as members and this requires that events have to be considered not in isolation but as a
part of consecutive story.
There must be continuous acts on the part of the majority shareholders continuing to the date of
petition, showing that the affairs of the company were being conducted in a manner oppressive
to some members. The conduct must be burdensome, harsh and wrongful.
Mere lack of confidence between the majority shareholders and the minority shareholders
would not be enough unless lack of confidence springs from oppression of minority by the
majority in the management of the company's affairs and such oppression must involve at least
an element of lack of fair dealing to a member in the matter of his right as a shareholder."
"Mere unwise, inefficient or careless conduct of a director in the performance of his duties may
not be ground for relief under this section".
[Needle Industries (India) Ltd. vs. Needle Industries Newey (India) Holding Ltd.]
4. POWERS OF TRIBUNAL /COURT (SECTION 402)
Section 402 defines the powers of the Tribunal /Court to make order under Section 397 or 398.
These powers are as:
1.To regulate Tribunal /Court has the power to regulate the conduct of the company’s affairs
the affairs of in future.
the company For example, in Richardson & Cruddas Ltd. vs. Hardas Mundra, the court
appointed a special officer with an advisory board to the total exclusion of the
shareholders of a company to function subject to the terms and condition laid
down in the order.
2.To The purchase of the shares or interests of any member of the company by other
purchase the members or by the company. This relief was provided in Mohan Lal vs. The
interest of Punjab Co. Ltd.,
any member
3.To reduce Tribunal /Court can issue order for the purchase of its shares by the company
share capital and the consequent reduction of its share capital.
4.Agreement The termination, setting aside or modification of agreement between the

with Co. and company and managing director, or any other director, and the manager.
BOD, MD or
Manager
5.Agreement The termination, setting aside or modification of any agreement with any
of Co. with person, provided due notice has been given to him and his consent obtained.
other persons
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6.Just & Any other matter for which, in the opinion of the court, it is just and equitable
Equitable that provision should be made.
Mrs. Gajarbai vs. Patny Transport (P) Ltd., The fact of just & equitable is
evinced from the decision of Andhra Pradesh High Court.
The facts were that one of the directors died leaving behind a will bequeathing
the shares in the company to his second wife and sons who were already the
shareholders of the company and the petitioner. The directors on account to
their private dispute with the petitioners, acting, in a high-handed manner and
unreasonably refused to transfer a part of the shares bequeathed under the Will
while transferring some shares in favour of themselves as provided under the
Will. The petitioners applied under Sections 397 and 398 of the Companies
Act for removal of one of the director from the Board, and for the appointment
of committee of shareholders to manage the affairs of the company. But the
court held that “the proper order to make, in the circumstances, is to direct the
directors to transfer the shares to the petitioners in accordance with the terms
of the Will.
5. POWERS OF THE CENTRAL GOVERNMENT TO PREVENT OPPRESSION OR

MISMANAGEMENT [Section 408]
Extraordinary The Act not only confers special powers upon the Tribunal /Court to prevent
powers oppression or mismanagement, but also confers extraordinary powers upon
the Central Government to attain the same end.
Appointing The Central Government may appoint such number of persons specified in
BODs writing to hold office as directors thereof as is necessary to effectively
safeguard the interests of the company, its shareholders or the public interest,
for such period, not exceeding 3 years on any one occasion as it may think fit.
No Any directors appointed by the Central Government shall not be liable to

Retirement by retirement by rotation.
Rotation
No change in No change in the Board of directors made after a person is appointed or

the Board of directed to hold office as a director or additional director under Section 408
directors shall, so long as such director or additional director holds office, have effect
unless confirmed by the Tribunal /Court.
Direction Central Government may issue such directions to the company as it may
given consider necessary or appropriate in regard to its affairs. Such directions may
include directions to remove an auditor already appointed and to appoint
another auditor in his place or to alter the articles of the company.
Reporting Central Government may require the persons appointed as directors or

additional directors to report to the Government from time to time with regard
to the affairs of the company.
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CH. 27 MERGER, DE-MERGER, AMALGAMATION,
COMPROMISE AND ARRANGEMENTS – AN OVERVIEW
Regulatory Framework for Merger/Amalgamation
The Regulatory Framework of Mergers and Amalgamations (M&A) covers

1. The Companies Act, 2013 (Provisions regarding M & A yet to be enforced)
2. Rules Made under Companies Act 2013 (Rules yet to be notified)
3. Provisions of Companies Act, 1956 on M & A (still in force)
4. Income Tax Act, 1961
5. Listing (Obligation & Disclosure Requirements) Regulations, 2015
6. The Indian Stamp Act, 1899
7. Competition Act, 2002
Compromise The term compromise means a settlement of dispute or controversy by the

method of making mutual concessions. Compromise implies that the parties
agree not to fight out but to settle it in between themselves by a give and take
method. As in the case of individuals, companies also enter into compromises
with their creditors or members and the settlement arrived at is termed as
Compromise.
Arrangement The term arrangement is of wider connotation because rights and liabilities may
be rearranged even when there is no dispute. Thus, the term arrangement includes
all modes of reorganizing the share capital, i.e., consolidation of shares of
different classes or division of shares into shares of different classes.
Merger Where Assets and Liabilities of one company are transferred to another and the
first company loses its existence. The first company is said to be merged with the
second company.
Amalgamation Where two or more companies merge into a third new company and the existing
cos lose their existence.
In general, the resulting firm is likely to have a name derived from its composite
firms.
Demerger A demerger is a form of corporate restructuring in which the entity's business
operations are segregated into one or more components. It is the converse of a
merger or acquisition.
Cross Border As the word suggest, cross border includes activities that take place between two
Merger & different countries. Therefore, the cross border merger and acquisitions are
Acquisition basically those transactions wherein the target firm and the acquirer firm are of
different home countries. This deal is such in which the assets and processes of
the firms in different countries are combined to form a new legitimate entity.
Cross border merger and acquisitions are of two types Inward and Outward.
Inward cross border M&A’s involve an inward capital movement due to the sale
of a domestic firm to a foreign investor conversely outward cross border M&A’s
involves outward capital movement due to purchase of a foreign firm.
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CH. 28 PRODUCER COMPANY
GENESIS
Producer Companies are still governed by the Companies Act, 1956.
Meaning
According to Section 581A(l) of the Companies Act, 1956, "Producer Company" means a body
corporate having objects or activities specified in section 581B and registered as Producer
Company under this Act.
The membership of producer companies is open to such people who themselves are the
primary producers, which is an activity by which some agricultural produce is produced by
such primary producers.
The concept of Producer Company in India was introduced to allow cooperatives to function
as a corporate entity under the Ministry of Corporate Affairs.
OBJECTS OF PRODUCER COMPANY
Objects of Producer Company (Section 581B (1) of the Companies Act, 1956)
(1) The objects of the Producer Company shall relate to all or any of the following matters,
namely:
(a) production, harvesting, procurement, grading, pooling, handling, marketing, selling, export
of primary produce of the Members or import of goods or services for their benefit
(b) processing including preserving, drying, distilling, brewing, and packaging of produce of its
Members;
(c) manufacture, sale or supply of machinery, equipment or consumables mainly to its
Members; (d) providing education on the mutual assistance principles to its Members and
others;
(e) rendering technical services, consultancy services, training, research and development and
all other activities for the promotion of the interests of its Members;
(f) generation, transmission and distribution of power, revitalisation of land and water
resources, their use, conservation and communications relatable to primary produce;
(g) insurance of producers or their primary produce;
(h) promoting techniques of mutuality and mutual assistance;
(i) welfare measures or facilities for the benefit of Members as may be decided by the Board;
(j) any other activity or incidental to any of the activities referred to in clauses (a) to (i)
(k) financing of procurement, processing, marketing or other activities specified in clauses (a)
to (j) which include extending of credit facilities or any other financial services to its Members.
Section 581 B (2) Every Producer Company shall deal primarily with the produce of its active
Members for carrying out any of its objects specified in this section.
FORMATION OF PRODUCER COMPANY AND ITS REGISTRATION
Any ten or more individuals, each of them being a producer or any two or more producer
institutions, or a combination of ten or more individuals and producer institutions, desirous of
forming a Producer Company having its objects specified in section 581B and complying with
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the provisions of this Act in respect of registration, may form an incorporated Company as a
Producer Company under this Act.
‘Producer institution’ means a Producer Company or any other institution having only producer
or producers or Producer Company or Producer Companies as its member, having any of the
objects referred to in Section 581B.
The Registrar on being satisfied that all requirements relating to registration and incidental
matters have been complied with, shall register the memorandum, articles and other documents
and issue a certificate of incorporation within 30 days of the receipt of the documents for
registration.
On registration, the Producer Company shall be deemed to be a private company limited by
shares without any limit on the number of members.
MEMBERSHIP AND VOTING RIGHTS OF MEMBERS OF PRODUCER COMPANY
Voting Section 581D of the Act provides that unless the membership of the Producer
Rights Company consists of a Producer institution only, every member shall have a
single vote irrespective of the number of shares held.
In case, where the membership consists solely of Producer Institutions, the

voting rights of such Producer institutions shall be determined on their previous
year’s participation in the business of the company.
However, during the first year of its regulation, the voting rights in a Producer
Company shall be determined on the basis of shareholding by producer
institutions.
Where the membership of Producer Company consists of a combination of

individuals and Producer Institutions, every member shall exercise a single vote.
The Articles may however, authorize the Producer Company to restrict the
voting rights to active members only.
Member’s No person, who has any business interest which conflicts with the business of
interest in Producer Company, shall become a member of that Producer Company and if
conflict subsequently a member acquires any business interest which is in conflict with
with the business of the Producer Company, he shall cease to be a member.
Producer
Company
BENEFITS TO MEMBERS
Receipt of Section 581E states that, initially every member shall receive only such value of
goods the produce supplied as is determined by the Board of Producer Company and
supplied the withheld price may be disbursed later in cash or in kind or by allotment of
equity shares.
Every such member shall be entitled to receive a limited return and may be
allotted bonus shares.
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Withheld Withheld price means part of the price due and payable for goods
price supplied by any member to the Producer Company, and as withheld
by the Producer Company for payment on a subsequent date.
Patronage Patronage bonus may be disbursed proportionately, if any, surplus remains after
Bonus making provision for limited return and reserves.
Patronage bonus refers to the payment by Producer Company out of its surplus
income to the members in proportion to their respective patronage.
The approval of Board of directors is necessary for disbursing ‘withheld price’ whereas for
disbursing the ‘patronage bonus’, either in cash or by way of allotment of equity shares or both,
the approval of members at the general meeting is required.
MEMORANDUM OF ASSOCIATION & ARTICLES OF ASSOCIATION
The Memorandum of Association and the Articles of Association of the Producer Company,
duly signed by the subscribers are required to be presented to the Registrar of the state where
the Company’s registered office is proposed to be set up.
The Memorandum and Articles shall contain the disclosures as provided under the provisions
of Sections 581F and 581G respectively and are as under:
Contents of Memorandum of Producer Company u/s 581F
the Memorandum of Association of every Producer Company shall state the following:
(a) the name of the company with “Producer Company Limited” as the last words of the name
of such Company;
(b) the State in which the registered office of the Producer Company is to situate;
(c) the main objects of the Producer Company shall be one or more of the objects specified in
Section 581B;
(d) the names and addresses of the persons who have subscribed to the memorandum;
(e) the amount of share capital with which the Producer Company is to be registered and
division thereof into shares of a fixed amount;
(f) the names, addresses and occupations of the subscribers being producers, who shall act as
the first directors;
(g) that the liability of its members is limited;
(h) opposite to the subscriber’s name the number of shares each subscriber takes:
NOTE (i) No subscriber shall take less than one share;

(ii) In case the objects of the Producer Company are not confined to one State, the States
to whose territories the objects extend.
Contents of Articles of Association u/s 581G
According to Section 581G of the Act, the contents of the Articles of a Producer Company shall
contain (1) Mutual Assistance Principles and (2) other provisions, which are as under:
1.Mutual The articles shall contain the following mutual assistance principles, namely:
Assistance (a) the membership shall be voluntary and available to all eligible persons who
Principles avail of the facilities or services of the Producer Company, and are willing to
accept the duties of membership;
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(b) each Member shall have only a single vote irrespective of the shareholding;
(c) the Producer Company shall be administered by a Board consisting of
persons elected or appointed as directors;
(d) there shall be limited return on share capital;
(e) the surplus arising out of the operations of the Producer Company shall be
distributed in an equitable manner by:
(i) providing for the development of the business of the Producer
Company;
(ii) providing for common facilities; and
(iii) distributing amongst the Members, as may be admissible in proportion
to their respective participation in the business;
(f) provision shall be made for the education of Members;
(g) the Producer Company shall actively co-operate with other Producer
Companies at local, national or international level so as to best serve the interest
of their members and the communities.
2.Other The Articles shall also contain the following provisions, namely:
Provisions (a) the qualifications for membership, the conditions for continuance or
relating tocancellation of membership and the terms, conditions and procedure for transfer
Contents ofof shares;
Articles of(b) the manner of ascertaining the patronage and voting right based on
Producer patronage;
Company (c)the manner of constitution of the Board, its powers and duties, the minimum
and maximum number of directors, manner of election and appointment of
directors and retirement, qualifications for being elected.
(d) the election of the Chairman, term of office of the Chairman, manner of
voting at the general or special meetings of Members.
(e) the circumstances under which, and the manner in which, the withheld price
is to be determined and distributed;
(f) the manner of disbursement of patronage bonus in cash or by issue of equity
shares, or both;
(g) the matters relating to issue of bonus shares out of general reserves;
(h) the basis and manner of allotment of equity shares of the Producer Company
in lieu of the whole or part of the sale proceeds of produce or products supplied
by the Members;
(i) the credit, loans or advances which may be granted to a Member and the
conditions for the grant of the same;
(j) the right of any Member to obtain information relating to general business of
the company;
Amendment to Memorandum and Articles
Amendment in the Memorandum can be done by way of passing a Special Resolution, whereas,
the amendment in the Articles is required to be proposed by not less than two-third of the
elected directors or by not less than one-third of the members and adopted by passing a Special
Resolution in the general meeting.
A copy of the amended Memorandum or Articles along with a duly certified copy of Special
Resolution thereof are to be filed with the Registrar of Companies within thirty days from the
date of its adoption at the general meeting.
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OPTION OF INTER-STATE CO-OPERATIVE SOCIETIES TO BECOME
PRODUCER COMPANIES
Meaning An ‘Inter-State Co-operative Society’ means a Multi-State Co-operative Society
formed under Multi-State Co-operative Societies Act, 2002 and includes any co-
operative society registered under law in force and which has after its formation,
extended any of its objects to more than one State.
Conversion Section 581J of the Act provides that any Inter-State Co-operative Society whose
objects are not confined to one state may submit an application together with the
prescribed documents to the Registrar for registration as Producer Company.
The Registrar on being satisfied, that all the requirements relating to registration
have been complied with, shall within 30 days of receipt of the application, issue
a certificate of incorporation and the words “Producer Company Limited” shall
form part of its name to explain its identity.
Any Inter-State Cooperative Society willing to register itself as a Producer Company shall
submit an application to ROC along with following documents:
1. a copy of the Special Resolution passed with 2/3rd majority of the members;
2. a statement showing names, addresses and occupation of the directors and the chief
executive;
3. a list of the members;
4. a statement indicating that the Inter-State Cooperative Society is engaged in any one or more
of the objects specified in Section 581-B;
5. a declaration by two or more directors certifying that the particulars given as per Para (1) to
(4) above are correct.
The ‘Inter-State Co-operative Society’ shall, upon registration stand transformed into a
Producer Company, and shall be governed by the provisions of the Companies Act, 1956.
All properties, assets, movable or immovable, and all rights, debts, liabilities, interests,
privileges and obligations of the Inter-State Co-operative Society shall vest in the Producer
Company with effect from the transformation/registration date.
Any pending suit, arbitration, appeal or other legal proceeding, of whatever nature, by or
against, the Inter- State Co-operative Society on transformation date may be continued,
prosecuted and enforced by or against the Producer Company.
NUMBER OF DIRECTORS OF PRODUCER COMPANY
Every Producer Company shall have minimum five and not more than fifteen directors.
However, in the case of an Inter-State Co-operative Society as a Producer Company, such
company may have more than fifteen directors for a period of one year from the date of its
incorporation as a Producer Company.
APPOINTMENT OF DIRECTORS
The subscribers of the Memorandum and Articles may designate or nominate therein, the Board
of directors consisting of not less than five, who shall govern the affairs of Producer Company
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until directors are elected. However, such designation shall remain effective for a period of 90
days only.
The election of directors shall be conducted within a period of ninety days of registration of
Producer Company. However, in the case of an Inter-State Co-operative Society, which has
been registered as a Producer Company, election of directors should be conducted within a
period of three hundred and sixty-five days.
TENURE OF DIRECTORS
A director shall hold office as such for not less than one year but not exceeding five years and
every director who retires shall be eligible for re-appointment. The tenure of such directors
shall not exceed such period as may be specified in the Articles.
VACATION OF OFFICE BY DIRECTORS
The office of director of a Producer Company shall become vacant under the following
circumstances:
(a) if he is convicted by a court of any offence involving moral turpitude and sentenced in
respect thereto with imprisonment for not less than six months;
(b) if the Producer Company, in which he is a director, has made a default in repayment of any
advances or loans taken from any company or institution or any other person and such default
continues for ninety days;
(c) if he has made a default in repayment of any advances or loans taken from the Producer
Company in which he is a director;
(d) if the Producer Company, in which he is a director:
(i) has not filed the annual accounts and annual return for any continuous three financial
years; or
(ii) has failed to, repay its deposit or withheld price or patronage bonus or interest
thereon on due date, or pay dividend and such failure continues for one year or more;
(e) if default is made in holding election for the office of director, in the Producer company in
which he is a director, in accordance with the provisions of the Companies Act;
(f) if the annual general meeting or extraordinary general meeting of the Producer Company, in
which he is a director, is not called in accordance with the provisions of the Act except due to
natural calamity or such other reasons.
POWERS AND FUNCTIONS OF BOARD
The Board of Directors may exercise the following powers:

(a) determination of the dividend payable;
(b) determination of the quantum of withheld price;
(c) admission of new Members;
(d) pursue and formulate the organizational policy;
(e) appointment of a Chief Executive and such other officers of the Producer Company;
(f) exercise superintendence, direction and control over Chief Executive and other officers
appointed by it;
(g) cause proper books of account to be maintained; prepare annual accounts to be placed
before the annual general meeting with the auditor’s report;
(h) acquisition or disposal of property of the Producer Company in its ordinary course of
business;
331
(i) investment of the funds of the Producer Company in the ordinary course of its business;
(j) sanction any loan or advance, in connection with the business activities of the Producer
Company to any Member, not being a director or his relative.
MATTERS TO BE TRANSACTED AT THE GENERAL MEETING
The following powers shall be exercised by the Board of directors on behalf of the company
only by means of passing of resolutions at the annual general meeting of the company:
(a) approval of budget and adoption of annual accounts;
(b) approval of patronage bonus;
(c) issue of bonus shares;
(d) declaration of limited return and decision on the distribution of patronage;
(e) specify the conditions and limits of loans that may be given by the Board to any director;
and
(f) approval of any transaction of the nature as is to be reserved in the Articles for approval by
the Members.
LIABILITY OF DIRECTORS
Anything done by the directors, whether by way of voting on a resolution or approving by any
other means, anything, in contravention of the provisions of this Act or its Articles, shall make
them jointly and severally liable towards the Producer Company to make good the loss or
damage suffered by such company.
Where as a result of the above, such director has made any profit, the Producer Company shall
have the right to recover an amount equal to said profits from such director.
COMMITTEE OF DIRECTORS
Board may constitute such number of committees as it may deem fit for the purposes of
assisting the Board in efficient discharge of its functions.
However, the Board of directors shall not delegate any of its powers or assign the powers of the
Chief Executive, to any committee of directors.
Every such committee shall function under general superintendence, direction and control of
the Board as may be specified.
MEETINGS OF THE BOARD AND QUORUM
Board meeting of a Producer Company shall be held at least once in every three months and at
least four such meetings shall be held in every year.
The Chief Executive shall give notice to every director for the time being in India, and at his
usual address in India to every other director at least seven days prior to the date of meeting.
However, a Board meeting may also be called at a shorter notice after recording reasons thereof
in writing.
The quorum for the meeting shall be one-third of the total strength of directors, subject to a
minimum of three.
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SECRETARY OF PRODUCER COMPANY
Every Producer Company having an average annual turnover exceeding five crore rupees in
each of three consecutive financial years shall appoint a member of the Institute of Company
Secretaries of India as a whole-time Secretary of the company.
If a Producer Company fails to appoint Company Secretary, the company and every officer of
the company who is in default, shall be punishable with fine which may extend to five hundred
rupees for every day during which the default continues.
QUORUM OF THE GENERAL MEETING
Unless Articles of Association require a larger number, one-fourth of the total membership
shall constitute the quorum at a general meeting.
VOTING RIGHTS
Every member of the Producer Company shall have one vote irrespective of the number of
shares hold by him. In the case of equality of votes, the Chairman or the person presiding over
the meeting shall have a casting vote.
ANNUAL GENERAL MEETINGS

First AGM Every Producer Company shall hold its first Annual General Meeting (AGM)
within a period of ninety days from the date of its incorporation.
Gap Not more than fifteen months shall elapse between the date of one AGM of the
between Producer Company and that of the next AGM.
Two AGMs
Extension The Registrar may, for any special reason, permit the extension of time for
holding of an AGM (not being the first AGM) by a period not exceeding three
months.
Notice along Notice in writing indicating date, time and place of the meeting shall be given
with at least fourteen days before the meeting and shall also be accompanied by the
documents following documents which shall be sent to every member and auditor of the
company:
(a) agenda of the meeting;
(b) minutes of the previous AGM or extraordinary general meeting;
(c) names and qualifications of candidates for election of directors;
(d) audited balance sheet, profit and loss account and Board’s report of the co.;
(e) draft resolution for appointment of auditors;
(f) draft resolution for proposed amendment, if any, in memorandum or articles.
Place & The Annual General Meeting shall be held during business hours, on a day not
Timings of being a public holiday at the registered office of the company or at any other
AGM place within the city, town or village where the registered office of the company
is situated.
Quorum Unless the Articles provide for a larger number, the quorum of the general
meeting shall be one-fourth of the total number of members.
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Documents Within sixty days from the date of the annual general meeting, the company is
to be filed required to file the proceedings of the meeting, the audited balance sheet, the
with ROC profit and loss account and the Director’s report together with an annual return
along with the filing fees with the Registrar.
EGM On the requisition made in writing and duly signed by not less than one-third of
the members, the Board of directors shall call an Extraordinary General
Meeting (EGM).
SHARE CAPITAL
Producer Company’s share capital shall consist of equity shares only.
Transferability A member of the Producer Company may, transfer whole or part of his
of shares shares along with any special rights, to an active member at par value only
but after obtaining the previous approval of the Board.
Special rights for this purpose means any rights relating to supply of
additional produce by the active member.
Surrender of If the Board of a Producer Company is satisfied that any member has ceased
shares to be a primary member, or he has failed to retain his qualifications,
necessary to enable him to remain the member of the Producer Company,
then Board may direct him to surrender his shares to the company together
with Special Rights, if any, attached therewith, at the value determined by
the Board.
Issue of Bonus A Producer company may, after

Shares — the recommendation of the Board, and
— passing of a resolution in General Meeting,
issue bonus shares to its members in proportion to the shares held by them,
on the date of the issuance of such shares, by capitalizing the amounts from
its general reserves.
STRIKING OFF NAME OF PRODUCER COMPANY
Registrar can after making an inquiry strike off the name of a company where the company:
(i) has failed to commence its business within one year of its registration;
(ii) ceases to transact business;
(iii) is no longer carrying on its objectives;
(iv) is not following the mutual assistance principles.
The Registrar shall, before passing the order issue a show cause notice to the company with a
copy to the directors and give a reasonable opportunity of being heard. Any member of the
Producer Company aggrieved by an order may appeal to CLB within sixty days of passing an
order.
RE-CONVERSION OF PRODUCER COMPANY TO INTER-STATE CO-OPERATIVE

SOCIETY
Any Producer Company may make an application, after a resolution has been passed in the
general meeting by not less than two-third of its members present and voting or on request by
its creditors representing three fourth of its value of creditors, to the High Court for its re-
conversion to Inter-State Co-operative Society.
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CH. 29 LIMITED LIABILITY PARTNERSHIP ACT, 2008
Meaning A Limited Liability Partnership (LLP) is a body corporate, with a distinct legal
entity separate from that of its partners. It has perpetual succession and a common
seal.
Nature A LLP, which is a separate legal person, will be liable to the third parties
independent of the other partners.
Any change in its partners, will not affect the existence, rights or liabilities of the
limited liability partnership.
Like a company, a limited liability partnership can do all the things an individual or
company can do. It can make contracts, sue or be sued, hold property in its name
etc.
A LLP combines the advantages of both the Company and Partnership into a single
form of organization.
Effective The Limited Liability Partnership form of business organization was introduced in
from India by way of Limited Liability Partnership Act, 2008 (LLP Act 2008) which
came into effect by way of notification dated 31st March 2009.
FEATURES OF LIMITED LIABILITY PARTNERSHIP
1. No. of Every LLP shall have at least two partners and shall also have at least two
Partners individuals as designated partners, of whom at least one shall be resident in
India.
There is no maximum limit on the number of partners in LLP. [sec 6(1)].
2. Business The important requirement for forming LLP is carry on a lawful business with
for Profit a view to earn profit. Thus, LLP cannot be formed for charitable or non-
Only economic purpose.
3. LLP The rights and duties of the partners are governed by an agreement between
Agreement partners. The LLP Act, 2008. If partners do not have an agreement as per their
choice, then, the mutual rights and duties shall be governed by the provisions
of LLP Act, 2008.
4. Body A LLP is formed by the registration of an incorporation document with the

Corporate Registrar of Companies of a state in which the registered office of the LLP is to
[Sec. 3(1)] be situated.
A LLP is a body corporate formed and incorporated under the LLP Act 2008.
5. Separate A LLP is a legal entity separate from its partners. It can own property such as
Legal Entity movable, immovable assets in its own name.
[Sec. 3(2)] All the assets and liabilities of the LLP are assets and liabilities of LLP alone.
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No partner can claim any proprietary right in the property or assets of the LLP
during its continuance or at the time of winding up. Similarly, the creditors
cannot bring any action against the partners personally.
6. Artificial A LLP is an artificial legal person because it is created by a legal process and is
Legal Person clothed with business rights of an individual. In relation to lawful business, it
can do every act which any natural person can do. Since it is created by law, it
has no soul, body and mind of human being, but still law considers it equal to a
person, therefore, LLP is treated as an artificial person.
7. Perpetual LLP enjoys a perpetual succession. LLP is a registered entity which is created
Succession by a legal process and can be dissolved through a legal process only. Death,
insanity, retirement or insolvency of the partner(s) shall not have any impact on
the existence of LLP. The partners may join or leave but the existence of LLP
continues forever.
8. Common A LLP being an artificial person is not bestowed with a body of natural being.
Seal Therefore, it acts through its partners and designated partners.
LLP may have a common seal, if it decides to have one [Sec. 14(c)]. Thus, it is
not mandatory for a LLP to have a common seal. The common seal of the LLP
shall have name engraved along with the place and date of its incorporation.
It shall remain under the custody of some responsible official and it shall be
affixed in the presence of at least 2 designated partners of the LLP.
9. Limited Every partner of a LLP is, for the purpose of the business of LLP, is the agent
Liability of the LLP, but not of other partners. The liability of the partners will be
[Sec. 26] limited to their agreed contribution in the LLP.
However, the liabilities of the LLP and partners who are found to have acted
with intent to defraud creditors or for any fraudulent purpose shall be unlimited
for all or any of the debts or other liabilities of the LLP.
The liabilities of the LLP shall be met out of the property of the LLP [Sec.
27(4)].
10. The partners in the LLP are entitled to manage the business of LLP. But only
Management the designated partners are responsible for legal compliances.
of Business
11. No There is no mutual agency in case of LLP. Thus, no partner would be liable for
Mutual the unauthorized actions of other partners or their misconduct.
Agency
12. Annual Every LLP shall be under an obligation to maintain annual accounts reflecting
Accounts true and fair view of its state of affairs. A statement of accounts and solvency
and Audits shall be filed by every LLP with the Registrar every year.
According to Rule 24 of LLP Rules, 2009, every LLP is required to get its
accounts audited by chartered accountant whose annual turnover exceeds Rs.
40 lakhs or the contribution exceeds Rs. 25 lakhs.
13. Foreign Foreign limited liability partnership is a limited liability partnership

LLPs. [Sec incorporated, outside India which has a place of business within India. Foreign
2(1)(m)] LLP can become a partner in an Indian LLP
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14. E-Filing Every document required to be filed shall be in electronic format with digital
of signature.
Documents
15. The The LLP Act, 2008 confers powers on the Central Government to apply
Companies provisions of the Companies Act, 2013, by notification with such changes or
Act, 2013 modifications as deemed necessary.
16. Non- The Partnership Act, 1932 shall not be applicable to LLPs.
Applicability
of
Partnership
Act, 1932
17. Taxation The LLP Act, 2008 does not provide any provision relating to taxation of LLP.
of LLP The Income-tax Act, 1961 was amended and the Finance Act, 2010 to provide
for tax framework of LLP. Hence, the provisions of Income-tax Act, 1961,
shall apply in all issues relating to taxation of LLP.
18. A firm, private company or an unlisted public company would be allowed to be

Conversion converted into LLP in accordance with the provisions of LLP Act, 2008.
into LLP
19. The Central Government shall have powers to investigate the affairs of an LLP
Investigation by appointment of competent inspector for the purpose.
20. Winding The winding up of the LLP 'may be either voluntary or by the Tribunal to be
up of LLP established under the Companies Act, 2013. Till the Tribunal gets established,
the power of winding up is given to the High Court.
Comparison between traditional Partnership and LLP

Distinction
Basis Traditional Partnership Limited Liability Partnership
Personal Unlimited personal liability of each No personal liability of partner,

liability partner for dues of the partnership except in case of fraud.
firm. Personal property of each
partner is also liable.
Requirement Written agreement not essential. Incorporation document essential.
Mandatory Partnership can be registered under LLP is incorporated under LLP Act.
Partnership Act. Registration is not Incorporation is mandatory.
mandatory.
Legal entity Partnership is not a legal entity It is a legal entity separate from its
separate from its partners. partners, having perpetual
succession
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Agreement vs. Partnership deed/agreement is Incorporation Document is required
Incorporation executed. Even verbal agreement is to be executed. In addition, LLP
valid. Agreement is required in almost all
cases, though such LLP agreement is
not mandatory.
Administrating Documents are required to be filed Registrar of Companies (ROC) is the

authority with Registrar of Firms (of administrating authority.
respective State)
Death Death of partner dissolves a firm, in Death of partner does not dissolve
absence of agreement. LLP.
Min. & Max Minimum two and maximum twenty Minimum two partners. No limit on
members partners maximum number of partners.
Participation Each partner can take part in Each partner can take part in
business of firm. business of firm, but LLP
Agreement can provide to the
contrary.
Statutory All partners are liable for statutory Only designated partners are liable
compliances compliances under Partnership Act for statutory compliances as are
required under LLP Act (not
necessarily in respect of other Acts).
Partner Partner cannot enter into business Partner of LLP can enter into
business with with firm, though he can give loan business with LLP. He can also give
firm to firm. loans to LLP.
Agent Every partner of firm is agent of Every partner of LLP is agent of

firm and also of other partners. He LLP but not of other partners. Thus,
can bind partnership firm as well as he can bind LLP by his acts but not
other partners by his acts. other partners. However, LLP
agreement can restrict powers of
individual partner.
Filing of Filing of accounts, statement of Filing of accounts, statement of

documents solvency and annual return not solvency and annual return required
required to be filed with Registrar of to be filed with ROC.
Firms.
Dissolution of Partnership can be at will, i.e. any Individual partner can resign but
firm partner can resign or dissolve firm. cannot dissolve the LLP.
Consequence of Death of partner dissolves Death of partner does not dissolve

death partnership unless there is contract LLP.
to contrary.
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Public notice Public notice is required for Filing of return of retirement of
retirement of a partner. partner with ROC is required, but no
provision for public notice of
retirement of partner.
Admission of Minor can be admitted to benefit of There is no specific provision to

minor partnership. admit minor to benefit of
partnership. It is doubtful if this can
be done.
Distinction between Company and LLP
Basis Company under Companies Limited Liability Partnership

Act, 2013
Document to be Memorandum is to be filed with Incorporation Document is required to
filed ROC. be filed.
Name of state Memorandum should contain Incorporation Document is not required

State in which co. is incorporated. to contain the name of State in which it
is incorporated. Thus, registered office
can be changed to any place in India
just by informing ROC subject to
prescribed conditions.
Suffix Name to contain Limited or Name to contain Limited Liability

Private Limited as suffix. Partnership or LLP as suffix.
Articles of Articles are to be filed at the time LLP Agreement is required to be filed
Association to of incorporation. Private later. In absence of LLP Agreement,
be filed company must have Articles. In mutual rights and duties will be as
case of public company, specified in first schedule to LLP Act,
provisions of Table A apply if 2008. Thus, practically, each LLP must
there are no Articles. have LLP Agreement, though not
mandatory.
Managing Managing Director and Whole- Designated Partner to look after

affairs time Director to look after day to statutory compliances. Otherwise, all
day administration. partners can look into affairs of the
LLP. However, LLP can delegate
powers to some partners who may be
designated as Managing Partner, or
Executive Partner or any other name.
Authority in Individual director or member Every partner has authority to
conduct of does not have authority in conduct business of LLP, unless the
business conduct of business of company. LLP Agreement provides to contrary.
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Remuneration Restrictions on remuneration to No restriction on remuneration to
director as per Companies Act. partner. Remuneration should be
provided in LLP agreement.
Resignation/ Notice of change of director is to A partner who has resigned from LLP
change be given by company. can himself file notice of his
resignation to ROC.
Requirement of Share, share certificate, Register There is no requirement of share and

shares etc. of members, Register of transfer share certificate. Hence, no question of
of shares etc. are required. its issue, allotment, transfer,
rectification of register etc.
Meetings Board meetings, general meetings No provision for regular meeting of

are required. members. Partners can decide when
and how to meet, delegation of powers
etc.
Registration of Charges are required to be No provision for registration of

charges registered. charges.
Maintenance of Elaborate records and registers No records and registers have been
records are required to be maintained. prescribed.
Requirement of Disclosures required of contracts No requirement of disclosures required

disclosures where directors are interested. of contracts where partners are
interested, unless specified in LLP
Agreement.
Procedure for Complicated procedure for Simple procedure to change registered

change of change of registered office, office of LLP anywhere in India just by
registered office particularly when change is to informing ROC and following
other State. prescribed conditions.
Oppression and Elaborate provision relating to No provision relating to redressal in

mismanagement redressal in case of oppression case of oppression and
and mismanagement. mismanagement.
Distinction
Basis LLP Producer Company
Formed by Formed by professional like CAs, Formed by primary producers
CSs.
Minimum No. of Two Ten
members
Liability Limited to LLP agreement Limited to amount of shares held
Managed by Designated Partners Min. 5 directors and Max 15 directors
Shares Capital contribution is governed The share capital is divided into equity
by LLP agreement. shares.
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Conversion LLP may convert into other form No conversion clause exists.
of businesses.
Name The word “LLP” would form part The word “Producer Company
of the name. Limited” would form part of the name.
FORMATION AND INCORPORATION OF LLP
Pre-requisites for incorporating a LLP

In order to incorporate a LLP, we need to have the following:
1. Minimum two partners (Individual or body corporate).
2. Minimum two designated partners who are individuals and at least one of them should be
resident in India.
3. Digital signature certificate
4. LLP Name
5. LLP Agreement
6. Registered office
INCORPORATION OF NEW LLP
The incorporation of a LLP involves in general six steps which are as follow:
Step 1. • A LLP can be incorporated with a minimum of two persons who should be
Deciding the individuals or body corporate through their nominees.
Partners and • Apart from partners two designated partners are also required who can be
Designated individuals and at least one of them shall be resident in India.
Partners • A person or nominees of a body corporate intending to be appointed as
[Sec. 6(1)] designated partner of LLP should hold a Designated Partner Identification
Number (DPIN) allotted by the Ministry of Corporate Affairs (MCA).
Step 2. Section 7(6) of the LLP Act, 2008 provides that every designated partner must
Obtaining obtain a DPIN from the Central Government.
DPIN and DPIN. It is an eight-digit number allotted by the Central Government in order
Digital to identify a particular person. It can be obtained by making on line
Signature application in e-form 7 to Central Government and submitting the physical
Certificate application along with necessary identity and address proof of the person
applying with filing fee of Rs. 100 as prescribed fees.
Digital Signature Certificate (DSC)

Partner /Designated Partner of the proposed LLP, whose signature are to be
affixed on the e-forms, is required to obtain DSC from the certifying authority
(CA).
As all the documents and forms required for incorporation of an LLP in India
are to be filled electronically and under the signature of designated partners,
thus at least one designated partner must obtain the DSC from authorized
certifying authority.
Step 3. The next step is to select the name of the proposed LLP. Ideally the name of
Checking the the LLP should be such which represents the business or activity intended to
Availability be carried on by the promoters of LLP.
of Name
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However, the name of the proposed LLP must be subject to the guidelines
provided-by MCA. The application can be made in e-form 1 for reservation of
the desired name.
The partner may select name of the proposed LLP (up to 6 choices can be
indicated).
Any partner / designated partner may submit e-form 1 along with a filing fee
of Rs. 200.
The MCA vide Circular no.2/2014 dated 11th February, 2014 clarified that no
company should be allowed to be registered with the word “National” as part
of its title unless it is a government company and the Central / State
government(s) has a stake in it.
Similarly, the word ‘Bank' may be allowed in the name of an entity only when
such entity produces a `No Objection Certificate' from the RBI in this regard.
The word, “Stock Exchange" or "Exchange" should be allowed in name of a
company only where No Objection Certificate from SEBI in this regard is
produced by the promoters.
Step 4. LLP Agreement [Sec. 2(1)(0)]

Drafting of It means any written agreement between the partners of the limited liability
LLP partnership or between the limited liability partnership and its partners which
Agreement determines the mutual rights and duties of the partners and their rights and
duties in relation to that limited liability partnership.
Contents of LLP Agreement

• Name of LLP.
• Name and address of partners and designated partners.
• Form of contribution and interest on contributions.
• Profit sharing ratio.
• Remuneration of partners.
• Rights and duties of partners in case of admission, resignation, retirement,
cessation and expulsion.
• Proposed business.
• Rules for governing the LLP.
Notes: (i) If no agreement is framed, the rights and duties as prescribed under
Schedule I to the LLP Act, 2008 shall be applicable.
(ii) LLP agreement must be duly stamped as per relevant Stamp Act of the
State.
Step 5. The next step is the filing of the following documents electronically with the
Electronic registrar of LLP for incorporation of the LLP on payment of prescribed fees.
Filing of The fees is based on the monetary value of contribution of the partners in the
Some proposed LLP.
Documents
Documents Required to be Filed:
e-form 1. Application for availability of name.
e-form 2. Incorporation document and subscriber's statement.
e-form 3. Details of LLP agreement and changes if any made therein.
e-form 4. Details of partners.
e-form 7. Application for DPIN.
Proof of address of Registered Office (RO)
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e-form 2: The Incorporation Document. Once the name is reserved by the
registrar, after this, two or more persons associated for carrying on lawful
business with a view to profit are required to subscribe their names to an
incorporation document.
The incorporation document is required to be filed in e-form 2 (Part A) along

with prescribed registration fees as per the slab given in the LLP Rules, 2009.
The partners are also required to file along with the incorporation document, a
statement in the e-Form 2 (Part B) made by either an advocate, or a company
secretary or a chartered accountant or a cost accountant, who is engaged in the
formation of LLP and by anyone that all the requirements of this Act and the
rules made there under have been complied with, in respect of incorporation.
Note. The digital signatures are required to be affixed on the statement in the
e-form.
Thus the incorporation document provides for the details of LLP, such as
name, proposed business and address of registered office, name and address of
partners and designated partners along with their amount of contribution and
consent for forming a LLP to carry on a lawful business with profit motive. It
also contains declaration regarding all legal compliances regarding
incorporation.
e-form 3: Details of LLP Agreement. It is not mandatory to file LLP

agreement at the time of incorporation and the same can be filed within 30
days of incorporation or within 30 days of subsequent changes.
e-form 4: Details of Partners. Details of partners such as consent of each

partner to become a partner of LLP along with their address and identity proof
is required to be filed with the registrar of companies within a period of 30
days of incorporation.
Proof of Address of Registered Office (RO). The registered office of LLP is

the place where all correspondence related to LLP would be sent.
Step 6. Issue After the registrar is satisfied that all the formalities with respect to the
of Certificate incorporation have been complied with, he will register the documents and
of issue a certificate of incorporation in Form-16 within a period of 14 days from
Incorporation the date of filing of Form 2. The certificate issued shall be signed by the
by ROC [Sec. registrar and authenticated by his official seal.
12] Conclusive Evidence
The certificate of incorporation shall be the conclusive evidence that the
limited liability partnership is incorporated.
LLPIN: ROC assigns a Limited Liability Partnership Identification Number
(LLPIN) for every LLP which is registered.
Incorporation Document (Sec. 11)

Section 11(1)(c) provides that a statement is required to be filed in the
prescribed form along with the incorporation document. This statement shall
be made by an advocate/chartered accountant/chartered secretary / cost
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accountant engaged in the formation of LLP as to legal cornpliance regarding
incorporation.
Penalty. Section 11(3) provides for penalties for making statement by any
person,
(i) knowing it to be false, or
(ii) not believing it be true,
which shall not be less than Rs. 10,000 and may extend to Rs. 5,00,000 and
also for imprisonment for a term which may extend to 2 years.
EFFECT OF REGISTRATION [SEC. 14]
On getting the certificate of registration from the registrar of companies, the LLP enjoys the
status of body corporate and becomes a legal entity separate from its members. Such LLP is
entitled to exercise the following rights:
(a) It can sue and be sued by others in its own name.
(b) It can acquire, own, hold, develop or dispose of property (movable or immovable).
(c) It may have a common seal. Thus it is not mandatory for LLP to have a common seal.
(d) It can do and suffer such other acts and things as bodies corporate may lawfully do and
suffer.
REGISTERED OFFICE OF LLP AND CHANGE THEREIN (SEC. 13)
Registered Every LLP shall have a registered office to which all communications and
Office notices may be addressed and where they shall be received.
Change of A LLP may change the place of its registered office and file the notice of such
Registered change with the registrar in form 15 and subject to such conditions as may be
Office prescribed and any such change shall take effect only upon such filing.
Note 1. Where the LLP does not provide for manner or conditions for change of registered
office, consent of all partners shall be required for changing the place of registered office of
limited liability partnership to another place.
Note 2: Where the change in the place of registered office is from one state to another state,
the limited liability partnership having creditors shall also obtain consent of secured creditors.
In such a case, LLP shall also publish a general notice, not less than 21 days before filing any
notice with registrar, in a daily newspaper published in English and in principal language of the
district in which Registered Office of LLP is situated and circulating in that district giving
notice of change of Registered Office.
Penalty for Contravention [Sec. 13(4)] If the LLP contravenes any provisions of this section,
the limited liability partnership and its every partner shall be punishable with fine which
shall not be less than Rs. 2000 but which may extend to Rs 25,000.
NAME OF LLP AND CHANGES THEREIN
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Last Words Every LLP shall have either the words "limited liability partnership" or the
affixed to acronym “LLP" affixed to the last words of its approved name.
Approved No limited liability shall be registered by a name which in the opinion of
Name the Central Government is undesirable.
[Sec. 15(1)]
Guidelines Regarding Name for Proposed LLP
Ideally the name of the LLP must be related to the business or activity intended to be carried on
by the LLP. Name must be finalized subject to the guidelines of Ministry of Corporate Affairs
(MCA). Guidelines are as follow:
(i) LLP with The proposed name of the LLP can be identical to the existing company /LLP
Identical provided no objection certificate has been obtained from the exiting company
Name /LLP.
(ii) MCA has prescribed certain words which should not form part of the name of
Prohibited proposed LLP. Such words are prohibited under the Emblems and Names
Words (Prevention of Improper Use) Act, 1950. E.g., Ashoka Chakra, Parliament of
India, State Legislative Assembly, Mahatma Gandhi etc.
Reservation of Name [Sec. 16]
1. A person may apply in Form I along with Rs. 200 as prescribed fee to the
Application registrar for the reservation of a name set out in the application. The name may
be reserved relating to the name of a proposed LLP or the name to which a
limited liability partnership proposes to change its existing name. In case of
new LLP, such application can be made to the registrar having jurisdiction
where registered office of LLP is to be situated.
2. The registrar will inform to the applicant for the reservation or non-reservation
Reservation of the changed name in the above mentioned cases within seven days of the
for 3 Months receipt of the application. Such name shall be available for a period of 3
months from the date of intimation by the registrar.
3.Reservation A foreign LLP or a foreign company may apply in Form 25 with specified fee
of Name of of Rs. 10,000 to the registrar for reserving its existing name by which it is
Foreign LLP registered in the country of its regulation or incorporation. Such reservation
shall be valid for 3 years but may be renewed on a fresh application in Form
25 along with payment of fee of Rs.5000.
Penalty for Improper Use of Words "Limited Liability Partnership" or LLP [Sec. 20]
In case, any person carries on business using the words 'Limited Liability Partnership' or LLP
without getting incorporated as LLP, he shall be punishable with fine which shall not be less
than Rs. 50,000 but which may extend to Rs. 5,00,000.
Publication of Name and Limited Liability [Sec. 21]
Every LLP is required to publish the following on its invoices, official correspondence and
publications:
345
(a) The name, address of registered office and registration number of the LLP, and
(b) A statement that it is registered with limited liability.
Penalty for Contravention. A limited liability partnership which contravenes the above stated
provisions shall be punishable with fine which shall not be less than Rs. 2000 but which may
extend to Rs. 25,000.
PARTNERS AND THEIR RELATIONS IN LLP
Definition of The term "Partner" means any person who has become a partner in the LLP
Partner in accordance with the LLP agreement.
[Sec. 2(1)(q)]
Who can Any individual or body corporate may be a partner in a LLP.
become a
partner in LLP? Definition of Body corporate means a company formed and
[Sec. 5] Body incorporated under the Companies Act, 2013 and
Corporate includes a LLP registered under this Act or a LLP
[Sec. 2(1)(d)] incorporated outside India or a company incorporated
outside India.
Thus, the following can become a partner in a LLP:

(a) An individual;
(b) An Indian company (private or public)
(c) A LLP registered in India;
(d) A LLP registered outside India; and
(e) A Foreign company.
Who is eligible The following are eligible to be a partner in a LLP:

to be a partner (a) The persons who have subscribed their names to incorporation
in a LLP? [Sec. document on the incorporation of a limited liability partnership.
22] (b) Any other person may become a partner of the limited liability
partnership by and in accordance with the limited liability partnership
agreement:
Disqualifications The following person shall not be capable of becoming a partner of a LLP,
of becoming a if:
partner [Sec. 5] (a) he has been found to be of unsound mind by a court.
(b) he has applied to be adjudicated as an insolvent and his application is
pending in the court.
Minimum and Every limited liability partnership shall have at least two partners. The Act
Maximum is silent about the maximum number of partners in a LLP.
Number of
Partners [Sec. 6]
Reduction of In case the number of partners of a LLP is reduced below two, and the LLP
Number of carries on business with sole partner for more than six months after such
Partners Below reduction, and such sole partner despite of knowledge of such a situation,
Statutory Limit
346
carries on the business then he shall be personally liable for all obligations
incurred by the LLP during that period.
Designated Partners [Sec. 2(1)(j)]
1.Definition The term "designated partner" means any partner designated as such
pursuant to Sec. 7 of the Act.
2. Number of (l) Every LLP can have at least 2 designated partners who are
Designated individuals and at least 1 of them must be a resident of India.
Partners (Secs. 7
and LLP Rules, Note. The term "resident in India" means a person who has stayed in India
2009) for a minimum period of 182 days during the immediately preceding 1
year
(2) In case of body corporate partners in LLP, their nominees (only
individuals) can act as designated partners.
3. Prior Consent Every designated partner shall intimate his consent to become a designated
to Act as partner to the LLP in Form 9 and manner as may be prescribed.
Designated
Partner
4. Filing of Every LLP shall file with the registrar the particulars of every individual
Particulars with who has given his consent to act as designated partner in Form 4 and in
the Registrar the prescribed manner within 30 days of his appointment.
5. Eligibility Rule 9 of LLP Rules, 2009 lays down that a person shall not be capable of
Conditions for being appointed as a designated partner of a LLP if he:
the Appointment (a) Has at any time within the preceding 5 years been adjudged insolvent;
of Designated or
Partners (b) Suspends, or has at any time within the preceding 5 years suspended
payment to his creditors and has not at any time within the preceding 5
years made a composition with them; or
(c) Has been convicted by a court for any offence involving moral
turpitude and sentenced in respect thereof imprisonment for not less than 6
months; or
(d) Has been convicted by a court for an offence involving Sec. 30 of the
Act.
6. Obtaining Every individual or nominee of a body corporate, who is intending to be

DPIN [Sec. 7(6)] appointed as designated partner shall obtain designated partner
identification number (DPIN)from the Central Government.
The DPIN allotted is valid for the lifetime for the applicant and shall not be
allotted to any other person in any case.
7. Role of The management and ownership is divided in a company. But in case of

Designated LLP, the management lies with ordinary partners and designated partners
Partners who are authorized by LLP agreement. However, designated partners are
also accountable for ensuring the compliances of all applicable laws.
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8. Liabilities of A designated partner shall be:
Designated (a) Responsible for doing of all acts, matters and things as are required to
Partners [Sec. 8] be done by LLP in respect of compliance of the provisions of this Act
including filing of any document, return, statement, report etc. as may be
specified in the Act or in the LLP agreement.
(b) Liable to all penalties imposed on the LLP for non-compliance of
provisions of the Act or LLP agreement. Thus, designated partner's
responsibilities are similar to company secretary or director in case of
private limited liability company.
9. Changes in This section provides for 30 days’ period for filling up of a vacancy of a
Designated designated partner.
Partners [Sec. 9]
10. Penalty for (i) Penalty of Contravention of Sec. 7(1).
Contravention of The LLP and its every partner shall be punishable with fine, which shall
Secs. 7,8 and 9 not be less than Rs. 10,000 but which may extend to Rs. 5,00,000.
(ii) Penalty for Sec. Sec. 8 or Sec. 9.
The LLP and its every partner shall be punishable with fine, which shall
not less than Rs. 10,000 but which may extend to Rs. 1,00,000.
CONTRIBUTION (SECS. 32 AND 33)

Meaning With reference to LLP, the term contribution refers to as, what a partner
intends to contribute towards the LLP for running of his business.
Contribution in case of LLP is similar to share capital in case of company.
No The LLP Act is silent about the minimum capital contribution for a LLP.
Requirement of However, the registration cost of a LLP is determined on the basis of
Minimum amount of contribution.
Contribution
Obligation to 1. The obligation of a partner to contribute for a LLP shall be in
Contribute accordance with the partnership agreement.
[Sec. 33] 2. In the absence of any provision to contrary, all partners are entitled
to share equally in the capital, profits and losses of LLP.
3. Contribution can be increased by amendment in the agreement.
4. Partners can withdraw their contribution like drawings in case of
partnership. But the terms and conditions for such withdrawal shall
be provided in the LLP agreement.
FINANCIAL DISCLOSURES OF LLP
Introduction
The LLP Act lays down the specific rules for maintenance of books of account in order to
maintain transparency of accounts. A statement of account and solvency has to be prepared
within a period of 6 months from the end of financial year and has to be filed with ROC. LLP
is also required to get its accounts audited.
Financial Disclosure
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The financial disclosures in LLP have been discussed under the following four heads:
1. Maintenance of books of account [sec. 34]
Obligation to Every LLP is required to maintain proper books of account relating to its
maintain affair for each year of its existence.
proper books
Financial Every LLP has to maintain uniform financial year ending on 31st March of a
Year year.
Basis of It is mandatory for the LLP to follow double entry system of accounting.
Accounting
Period of The books of account of LLP shall be preserved at the registered office for a
Preservation period of 8 years from the date of their preparation.
of Accounts
2. Statement of account and solvency (SAS) [Sec34]
Obligation Every LLP is required to prepare a 'Statement of Account and Solvency' every
to prepare year and to file the same with the registrar of companies (ROC).
SAS
Time Every LLP is required to prepare a statement of account and solvency within a
Period for period of 6 months from the end of Financial Year
Preparation
Time Every LLP is required to file the statement of account and solvency in form 8
Period for along with the prescribed fees of Rs. 1000. with the registrar within a period of
Filing 60 days (as against 30 days earlier) from the end of 6 months of the financial year
to which such statement relates [Rule 24, LLP (Amendment) Rules, 2011].
Form and A statement of account and solvency must be filed in Form 8. The statement is
Contents divided into two parts:
Part A. Statement of Solvency Part B. Statement of Account
It consists of a declaration by the It consists of a detailed summary of financial

designated partners as to state of position of LLP. It consists of the following
solvency of LLP i.e., ability of two statements:
the LLP to pay its debts. (i) A statement of Assets and Liabilities and
(ii) A statement of Income and Expenditure
These two statements are prepared to report

the figures of the two financial years - Current
financial year and the preceding financial
year.
Digital The statement of account and solvency must be digitally signed by the designated
Signature partner of LLP.
3. Auditing of accounts of LLP [Sec. 34]
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Rules This section lays down that the accounts of a LLP shall be audited in accordance
Prescribed with such rules as may be prescribed. However, the Central Government may, by
notification in the official Gazette, exempt any class or classes of LLPs from the
aforementioned requirement.
Audit not LLP whose turnover does not exceed, in any financial year, Rs. 60 lakhs or
Mandatory contribution does not exceed Rs.25 lakhs, is exempted from getting its accounts
audited. But such LLPs who are exempted from mandatory audit may also get
their accounts audited as per the LLP Rules, 2009.
4. Annual Return [Sec. 35]
Filing with Every LLP must file an annual return duly authenticated with the registrar
the Registrar within 60 days of closure of its financial year i.e., by 30th May in Form 11
along with the prescribed fees. A penalty of Rs. 100 per day is applicable for
late filing of returns.
Contents of 1. The name and address of registered office of LLP for service of documents.
Annual 2. Date of closure of financial year.
Return 3. Details of business classification (trade/profession/service).
4. Principal business activities of the LLP.
5. The summary of partners and designated partners and DPIN of designated
partners.
6. Number of individual(s) as partners and number of bodies corporate as
partners.
7. Obligation of the partners to contribute
8. Particulars of penalties imposed on the LLP /partners/ designated partners.
Other compliances
Penalty for In case any LLP fails to comply with the provisions stated under Section 34
Non- or 35, such LLP shall be punishable with fine which shall not be less than Rs.
Compliances 25,000 but which may extend to Rs. 5,00,000 and every designated partner of
Under Section such LLP shall be punishable with fine which shall not be less than Rs. 10,000
34 or Under but which may extend to Rs. 1,00,000.
Section 35
Inspection of (a) The incorporation document, names of partners and changes, if any, made
Documents therein, statement of account and solvency and annual return filed by each LLP
[Sec. 36] with the registrar shall be available for inspection by any person.
(b) In case a person wants to obtain a copy or extract of any of aforementioned
documents to be certified by the registrar, he will have to pay Rs. 5 per page.
Penalty for If in any return, statement or other document required by or for the purposes of
false any of the provisions of this Act, any person makes a statement:
statement (a) which is false in any material particular, knowing it to be false; or
[Sec. 37] (b) which omits any materials fact knowing it to be material,
He shall be punishable with imprisonment for a term which may extend to
2 years and shall also be liable to fine which may extend to Rs. 5,00,000 but
which shall not be less than Rs. 1,00,000.
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Power of the For purposes of carrying out the provisions of the Act, the ROC may require
Registrar to any person including my present partner/ former partner/designated
obtain partner/employee of a LLP to answer any question/make any
information declaration/supply any detail/ particulars in writing to him within a reasonable
[Sec. 38] period.
Non-compliance with any summons or requisition of the registrar by a person

shall be punishable with fine which shall not be less than Rs. 2000 but which
may extend to Rs. 25,000.
Compounding The Central Government may compound any offence under this Act which is
of Offences punishable with fine only provided such person has paid the amount of the
[Sec. 39] maximum fine prescribed for the offence.
Winding Up and Dissolution of LLP
Introduction LLP is a body corporate and an artificial person which is created by a legal
process called 'Incorporation' and its existence comes to an end by another legal
process called 'Dissolution'. On the dissolution of LLP, its name is struck off
from the records of ROC and the fact is published in the official Gazette.
KEY DEFINITIONS
LLP LLP liquidator" means a liquidator appointed in connection with voluntary
Liquidator winding up of LLP from the panel maintained by the Central Government.
Officer "Officer" includes any designated partner, partner employee of the LLP and any
person in accordance with whose directions or instructions the partners of the
LLP have been accustomed to act.
Tribunal "Tribunal" means the National Company Law Tribunal which has so far not
been constituted under Companies Act, 2013. Provided that until the tribunal is
constituted under the aforementioned Act, the word "Tribunal" shall be
substituted with the words "High Court".
Winding up Winding up is a process, where all the assets of the business are disposed of by
the LLP liquidator to meet the liabilities of the LLP and surplus if any, is
distributed amongst the partners of LLP.
Distinction between WINDING UP & DISSOLUTION
Basis WINDING UP DISSOLUTION

Meaning Winding up is the process, which Dissolution is the last stage of
brings an end to the life of LLP and liquidation. After many legal
creditors are paid off out of the compliances the liquidator applies to
proceeds realized from the sale of the court for dissolution order of
assets. LLP and then the LLP is dissolved.
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Legal Entity Winding up is a long process. After, On dissolution, LLP ceases to exist
winding up and prior to dissolution the and its name is struck off from the
legal existence of the LLP continues records of ROC and the fact is
and it can be sued by others in a court notified in the official gazette.
of law.
MODES OF WINDING UP
Section 63 of the LLP Act lays down that a limited liability partnership may
be wound up in the following two ways:
I. Voluntary winding up
II. Compulsory winding up i.e., by Tribunal
Steps for Voluntary Winding Up
1. Passing of A LLP can be wound up voluntarily if the LLP passes a resolution with the
Resolution approval of at least 3/4th (in number) of the total number of partners, requiring
the LLP to be wound up voluntarily.
(ii) If the LLP has creditors, whether secured or unsecured, then such winding
up shall not take place unless such creditors approve winding up.
(iii) A copy of the resolution shall be filed with the registrar within 30 days of
passing of such resolution.
(iv) A voluntary winding up shall be deemed to commence on the date of
passing of the resolution for voluntary winding up.
2. Declaration (i) The majority of the designated partners (not less than 2) shall make a
of Solvency by declaration in form 2 verified by an affidavit that LLP has no debts or it will be
Designated able to pay off its debts in full from the proceeds realized from the sale of
Partners assets in winding up within such period not exceeding 1year from the date of
its commencement.
(ii) The declaration is required to be registered with the ROC in Form 3 within
15 days of passing of the resolution for winding up of LLP
(iii) The following documents need to be enclosed with the declaration:
(a) A statement of assets and liabilities prepared in Form 4.
(b) A report of the valuation of assets of the LLP prepared by a valuer.
3. Approval of (i) For seeking approval of creditors, LLP shall forward by registered post or
Creditors any other electronic mean like email or website a copy of declaration, the
estimated amount of the claims due to each of the creditors and an offer for
creditors to accept such claims.
(ii) The creditors would be given 30 days’ time to give LLP their approval in
respect of voluntary winding up proposed by the LLP or acceptance of the
offer made to them.
(iii) Consent of at least 2/3rd in value of creditors is required for winding up.
(iv) Notice of any decision of the creditors shall be given by the LLP to the
Registrar in Form 5 within 15 days from the date of receipt of the consent of
the creditors.
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4. Publication Where a LLP has resolved for voluntary winding up and the consent of the
of Resolution creditors is received, it shall within 14 days of the receipt of the creditor's
consent give notice of the resolution by advertisement in some newspaper
circulating in the district where R/O or principal office of the LLP is situated.
5. (i) LLP is required to appoint an administrator for winding up, known as LLP
Appointment liquidator, with the consent of majority of partners within 30 days of filing of
of Liquidator consent of creditors or resolution (where LLP has no creditor).
(Rule 10). (ii) Such liquidator should be from the panel maintained by the Central
Government.
(iii) Appointment of the liquidator shall result in cessation of the powers of
designated partners/other partners.
(iv) A notice should be given to the Registrar in Form 10 within 10 days of
the appointment of the liquidator by the LLPs.
6. The liquidator shall perform various duties prescribed under the rules and
Performance discharge the liabilities of the LLP as per the provisions prescribed under the
of Duties and LLP Act, 2008/ LLP (Winding up and Dissolution) Rules, 2012.
Discharge of
Liabilities
7. Convening The liquidator shall convene general meeting and report quarterly (quarters
of General ending on 31st March, 30th June, 30th September and 31st December) on the
Meeting and progress of winding up of the LLP in Form 8 to the partners or creditors, as
reporting to the case may be, which shall be made before the end of the following quarter.
the Partner The accounts of the LLP liquidator shall be audited.
/Creditors
8. Preparation (i) As soon as the affairs of LLP are fully wound up, the LLP liquidator shall
of Final prepare a final report regarding winding up accounts and explanation in Form
Report by the 9.
Liquidator (ii) At least 2/3rd in number of the partners or 2/3rd in value creditors as the
case may be, shall approve the aforementioned report, accounts of winding up
and explanations by passing a resolution within 30 days of receipt of report.
(iii) In case of disapproval by the requisite number of partners/ value of
creditors, the matter shall be referred to the Tribunal to determine the issue
under rule 23 for an order and this order shall be binding on all the parties.
9. Filing of The LLP liquidator shall file all above mentioned documents with ROC within
Documents 15 days of their approval by the partners/creditors along with the minutes of
with the ROC the meeting in Form 10.
10. Passing of (i) After receiving all required documents, if the Tribunal is satisfied that the
Dissolution process of winding up has been duly followed, the dissolution order of the LLP
Order shall be passed
by the Tribunal within 60 days of the receipt of application.
(ii) The liquidator shall file a final copy of order for the dissolution of LLP
with the Registrar within 30 days in Form 11.
(iii) The registrar, on receiving the copy of the order passed by the Tribunal
shall forth with publish a notice in the Official Gazette that the LLP stands
dissolved.
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WINDING UP BY THE TRIBUNAL (COMPULSORY WINDING UP)
According to Sec. 64 of the Act, A LLP may be wound up compulsorily by the tribunal in the
following circumstances:
(1) Petition by If the LLP decides that the LLP be wound up by the tribunal.
LLP
(2) Number If for a period of more than 6 months, the number of partners of the LLP is
below reduced below 2.
minimum
(3) Inability to If a LLP is unable to pay its debts, it shall be wound up by the tribunal. A
Pay its Debts LLP shall be unable to pay its debts in the following 3 cases:
(a) If a LLP owes an amount exceeding Rs. 1,00,000 to a creditor and
fails to pay such amount within a period of 21 days after the receipt of
the demand made by the creditor or his assignee.
(b) If a decree has been issued by the tribunal in favor of a creditor and
the LLP has failed to satisfy it in whole or in part.
(c) If it is proved to the satisfaction of the Tribunal that LLP is unable to
pay its debts and in order to determine the inability of the LLP to pay
its debts, the Tribunal shall take into account the contingent and
prospective liabilities of the LLP.
(4) Acting If the LLP has acted against the interests of the sovereignty and integrity of
against the India, the security of the state or public order.
National
Interest
(5) Default If the LLP has made a default in filing SAS or Annual Return for any 5
consecutive financial year(s).
(6) Just and If the Tribunal is of the opinion that it is just and equitable that the LLP be
Equitable wound up. For example, Dead lock in management, loss of substratum i.e.;
LLP has failed to achieve its object, Bubble LLP i.e., LLP without real
business or property.
PETITION FOR WINDING UP - WHO MAY FILE?

An application to the Tribunal for winding up is known as a petition.
According to Rule 26 of LLP (Winding up and Dissolution) Rules, 2012, petition for the
winding up of the LLP by the Tribunal can be presented by any of the following:
(a) By the LLP or any of its partner or partners,

(b) By any secured creditor or creditors,
(c) By the Registrar,
(d) By any person authorized by the Central Government in that behalf,
(e) By the Central Government,
(f) By the State Government.
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COMMENCEMENT OF WINDING UP
The winding up of a LLP, by the Tribunal, shall be deemed to commence from the time of
presentation of the petition for winding up. But in case of voluntary winding up, it shall be
deemed to have commenced from the time of the passing of the resolution.
FOREIGN LIMITED LIABILITY PARTNERSHIP

As per rule 34(1) of the LLP Rules, a foreign limited liability partnership shall, within thirty
days of establishing a place of business in India, file with the Registrar in Form 27 —
(a) a copy of the certificate of incorporation or registration and other instrument(s)
constituting or defining the constitution of the limited liability partnership;
(b) the full address of the registered or principal office of the limited liability partnership in
the country of its incorporation;
(c) the full address of the office of the limited liability partnership in India which is to be
deemed as its principal place of business in India; and
(d) list of partners and designated partners, if any, and the names and addresses of two or
more persons resident in India, authorized to accept on behalf of the limited liability
partnership, service of process and any notices or other documents required to be served
on the limited liability partnership.
FOREIGN DIRECT INVESTMENT (FDI) IN LIMITED LIABILITY PARTNERSHIPS

(LLPs)
FDI is allowed in LLPs. The department of Industrial Policy and Promotion vide its press note
dated May 20 2011, amending Consolidated FDI Policy allows LLPs to have FDI.
Salient Features
1. FDI in LLPs is allowed, through the government route only for LLPs operating in
sectors/activities where 100% FDI is allowed through automatic route. There are no FDI
linked performance related conditions (Such as ‘Development of townships, housing,
built-up infrastructure and Construction-development projects’ etc.)
2. FDI in LLP is not allowed at all even through government route in those sectors where
100% FDI is not allowed under automatic route.
3. LLPs with FDI is not eligible to make any downstream investments.
4. An Indian Company, having FDI is permitted to make downstream investment in an
LLP only if both the company as well as LLP are operating in sectors where 100% FDI
is allowed through the automatic route and there are no FDI linked performance related
conditions.
5. LLP with FDI is not allowed to operate in agricultural/plantation activity, print media or
real estate business.
6. LLPs cannot avail External Commercial Borrowings.
7. Foreign Capital participation in the capital structure of LLPs is allowed only by way of
cash consideration, received by inward remittance, through normal banking channels.
8. Investment in LLPs by Foreign Institutional Investors (FIls) and Foreign Venture Capital
Investors (FVCIs) is not permitted.
9. Conversion of a company with FDI, into an LLP, is allowed only if the conditions
stipulated for LLP regarding FDI are complied with.
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10. For LLPs with FDI, the designated partner "resident in India", as defined under the
'Explanation' to Section 7(1) of the LLP Act, 2008, would also have to satisfy the
definition of "person resident in India", as prescribed under Section 2(v)(i) of the Foreign
Exchange Management Act, 1999.
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CH. 30 APPLICATION OF COMPANY LAW TO DIFFERENT
SECTORS
Introduction Companies Act 2013 is applicable on other forms of businesses such as Banking
Sector, Insurance Sector, Companies engaged in supply of electricity etc., which
are also governed by Special Act of Parliament, as far as there is no
inconsistency.
Applicability
Section 1(4) of the Companies Act 2013 states that the provisions of this Act shall apply to—
(a) companies incorporated under this Act or under any previous company law;
(b) insurance companies, except in so far as the said provisions are inconsistent with the
provisions of the Insurance Act, 1938 or the Insurance Regulatory and Development Authority
Act, 1999;
(c) banking companies, except in so far as the said provisions are inconsistent with the
provisions of the Banking Regulation Act, 1949;
(d) companies engaged in the generation or supply of electricity, except in so far as the said
provisions are inconsistent with the provisions of the Electricity Act, 2003;
(e) any other company governed by any special Act, except in so far as the said provisions are
inconsistent with the provisions of such special Act; and
(f) such body corporate, incorporated by any Act, as the Central Government may, by
notification, specify in this behalf.
EXCEPTIONS PROVIDED UNDER COMPANIES ACT 2013 TO SPECIFIC SECTORS
The following are the important sections that exclude certain sectors from the applicability of
that particular section in Companies Act 2013.
1. Section Section 67 (2) states that no public company shall give, whether directly or
67(3)- indirectly and whether by means of a loan, guarantee, the provision of security or
Financial otherwise, any financial assistance for the purpose of, or in connection with, a
assistances purchase or subscription made or to be made, by any person of or for any shares
for in the company or in its holding company.
purchase
of shares Section 67 (3) states that nothing in Section 67 (2) shall apply to the lending of
money by a banking company in the ordinary course of its business;
2. Proviso Section 73(1) states that no company shall invite, accept or renew deposits under
to Section this Act from the public except in a manner provided under this Chapter.
73(1)-
Prohibition Proviso to Section 73(1) states that nothing in this sub-section shall apply to a
on banking company.
Acceptance
357
of Deposits
from
Public
3. Proviso Section 129 (1) states that the financial statements shall give a true and fair view
to Section of the state of affairs of the company, comply with the accounting standards
129(1)- notified under section 133 and shall be in the form as may be provided for
Financial different class or classes of companies.
Statement The proviso to Section 129(1) states that nothing contained in this 129(1) shall
apply to any insurance or banking company or any company engaged in the
generation or supply of electricity.
4. Proviso Section 179(3) states that the Board of Directors of a company shall exercise
to Section certain powers specified in the section on behalf of the company by means of
179(3) & resolutions passed at meetings of the Board.
proviso to
section The proviso to Section 179(3) states that the acceptance by a banking company in
180(1)(c) - the ordinary course of its business of deposits of money from the public repayable
Powers of on demand or otherwise or the placing of monies on deposit by a banking
the Board company with another banking company on such conditions as the Board may
to borrow prescribe, shall not be deemed to be a borrowing of monies.
5. Section Section 186 prescribes limits up to which a company shall give any loan
186- Loan /guarantee/ provide security in connection with a loan to any other body
and corporate. This section also mandates certain disclosures, maintenance of registers
investment etc.,
by
company Section 186 (11) states that nothing contained in Section 186, shall apply to a loan
made, guarantee given or security provided by a banking company or an insurance
company or a housing finance company in the ordinary course of its business or a
company engaged in the business of financing of companies or of providing
infrastructural facilities.
6. Section Section 189 (1) states that every company shall keep one or more registers giving
189 – separately the particulars of all contracts (Contract in which director is interested)
Register of or (Related Party transactions).
Contracts Section 189(5) (b) states that nothing contained in section 189(1) shall apply to
any contract by a banking company for the collection of bills in the ordinary
course of its business.
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CH. 31 OFFENCES, PENALTIES AND THEIR COMPOUNDING
Section 2(60) – Officer in default
An officer of the company who is in default shall be liable to any penalty or punishment by way
of imprisonment, fine or otherwise, means any of the following officers of a company, namely:
—
(i) whole-time director;
(ii) key managerial personnel;
(iii) where there are no key managerial personnel, such director or directors as specified by the
Board in this behalf and who has or have given his or their consent in writing to the Board to
such specification, or all the directors, if no director is so specified;
(iv) any person who, under the immediate authority of the Board or any key managerial
personnel, is charged with any responsibility including maintenance, filing or distribution of
accounts or records, authorizes, actively participates in, knowingly permits, or knowingly fails to
take active steps to prevent, any default;
(v) any person in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act, other than a person who gives advice to the
Board in a professional capacity;
(vi) every director, in respect of a contravention of any of the provisions of this Act, who is
aware of such contravention;
(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents,
registrars and merchant bankers to the issue or transfer.
ESTABLISHMENT OF SPECIAL COURT (SECTIONS 435 TO 438)
The Central Government may for the purpose of providing speedy trial of offences punishable
under this Act with imprisonment of two years or more, by notification establish or designate
Special Courts.
All other offences shall be tried by a Metropolitan Magistrate or a judicial Magistrate of the First
Class.
The Special Court may exercise the same power which a Magistrate having may exercise under
the Code of Criminal Procedure, 1973 in relation to an accused person who has been forwarded
to him.
A Special Court may upon perusal of the police report of the facts constituting an offence under
this Act or upon a complaint, take cognizance of the offence without the accused being
committed to it for trial.
All offence under the Companies Act shall be only by the Special Court for the area in which the
registered office of the company in relation to which the offence is committed. The provisions of
the Code of Criminal Procedure, 1973 shall apply to the proceedings before a Special Court.
OFFENCES TO BE NON– COGNIZABLE (SECTION 439)
Every offence under this Act except the offences that deals with investigation of offences by
SFIO, shall be deemed to be non – cognizable.
No court shall take cognizance of any offence under this Act except on the complaint of –
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(a) the Registrar in writing,
(b) a shareholder of the company,
(c) a person authorized by the Central Government.
The court may take cognizance of offences relating to issue and transfer of securities and non –
payment of dividend on complaint in writing by a person authorized by the Securities and
Exchange Board of India.
COMPOUNDING OF OFFENCES (Section 441)
Meaning Compoundable offences: Where the complainant agrees to enter into compromise
and drop the charges against accused i.e., the offences which are eligible to
compromise are compoundable. The offences are not of serious nature.
Any offence punishable (whether committed by a company or any officer thereof) with fine only
and where the maximum amount of fine which may be imposed for such offence does not
exceed five lakh rupees, may, be compounded by the Regional Director;
Any offence punishable under this Act (whether committed by a company or any officer thereof)
with fine only and where the maximum amount of fine which may be imposed for such offence
exceeds five lakh rupees, may, be compounded by the Tribunal;
The offences which are punishable with Fine or Imprisonment; fine or Imprisonment or with
both may be compoundable with the permission of Special Court.
Any offence which is punishable under this Act with imprisonment only or with imprisonment
and also with fine shall not be compoundable.
APPOINTMENT OF COMPANY PROSECUTORS (SECTION 443-SECTION 445)

The Central Government may appoint generally or for any specified class of cases in any local
area, one or more persons as Company Prosecutors for the conduct of prosecution arising out of
this Act.
The Central Government may, in any case arising out of the Companies Act, direct any
Company Prosecutor or authorize any other person to present an appeal from an order, other
than High Court.
PUNISHMENT FOR FRAUD (SECTION 447)
“Fraud” in relation to affairs of a company includes any act, omission, concealment of any fact
or abuse of position committed by any person or any other person with the connivance in any
manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the
company or its shareholders or its creditors.
Any person who is found guilty of fraud is punishable with imprisonment for a term of not less
than six months but it may extend to ten years. The liability towards fine is not less than the
amount involved in the fraud but it may extend to three times the amount. Where the fraud
involves public interest, the imprisonment shall not be less than three years.
PUNISHMENT FOR FALSE STATEMENT (SECTION 448)
360
Any person making a statement which is false in any material particulars knowing it to be false,
in relation to any return, report, certificate, financial statement, prospectus statement or other
document, the punishment is same as applicable for fraud under Section 447.
PUNISHMENT FOR FALSE EVIDENCE (SECTION 449)

Any person intentionally gives false evidence upon any examination on oath about the winding
up of any company, he shall be punishable with imprisonment for a term which shall not be less
than three years but it may extend to seven years and with fine which may extend to rupees ten
lakh.
PUNISHMENT WHERE NO SPECIFIC PENALTY OR PUNISHMENT IS PROVIDED

(SEC. 450)
If a company or any officer of the company or any other person contravenes any of the
provisions of Act or the rules thereunder, for which no penalty or punishment is provided
elsewhere, then the company and every officer, who is in default or such other person is
punishable with fine extending it to rupees ten thousand and where the contravention is a
continuing offence, with a further fine extending it to rupees one thousand for every day during
which the contravention continues.
PUNISHMENT IN CASE OF REPEATED DEFAULT (SECTION 451)
In the case of repeated default committed for the second or subsequent occasions within a period
of three years, then the company and every officer thereof who is in default is punishable with
twice the amount of fine for such offence, in addition to any imprisonment for the same.
PUNISHMENT FOR WRONGFULLY WITHHOLDING OF PROPERTY (SECTION

452)
If any officer or employee of a company wrongfully obtains possession of any property
including cash or knowingly applies it for the purpose other than expressed or directed in the
articles and authorized by this Act, then he shall, on the complaint of the company or any
member or creditor or contributory thereof, be punishable with fine of not less than rupees one
lakh but it may extend to rupees five lakh.
The court trying an offence may also order restoration of property and in default thereof, the
person is punishable with imprisonment for a period of two years.
PUNISHMENT FOR IMPROPER USE OF THE WORD “LIMITED” OR “PRIVATE

LIMITED” (SECTION 453)
If any person carries on trade or business under the name or title of which the word “limited” or
the words “private limited”, unless duly incorporated with limited liability or as a private
company with limited liability, as the case may be, is punishable with fine of not less than
rupees five hundred but it may extend to rupees two thousand for every day during which that
name or title has been used.
ADJUDICATION OF PENALTIES (SECTION 454)

The Central Government may, by an order published in the Official Gazette, appoint as many
officers of the Central Government, not below the rank of Registrar, as adjudicating officers for
adjudging penalty under the provisions of this Act.
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The adjudicating officer may, by an order impose the penalty on the company and the officer
who is in default stating any non-compliance or default under the relevant provision of the Act.
The adjudicating officer shall, before imposing any penalty, give a reasonable opportunity of
being heard to such company and the officer who is in default.
Any person aggrieved by an order made by the adjudicating officer may prefer an appeal in
Form No. ADJ to the Regional Director having jurisdiction in the matter. Every appeal shall be
filed within sixty days from the date on which the copy of the order made by the adjudicating
officer is received by the aggrieved person.
The Regional Director may, after giving the parties to the appeal an opportunity of being heard,
pass such order as he thinks fit, confirming, modifying or setting aside the order appealed
against.
When the company does not pay the penalty imposed by the adjudicating officer or the
Regional Director within a period of ninety days from the date of the receipt of the copy of the
order, the company shall be punishable with fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees.
When an officer of a company who is in default does not pay the penalty within a period of
ninety days from the date of the receipt of the copy of the order, such officer shall be punishable
with imprisonment which may extend to six months or with fine which shall not be less than
twenty-five thousand rupees but which may extend to one lakh rupees, or with both.
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CH. 32 WINDING UP-CONCEPT AND MODES
Meaning Winding-up of a company is a process of putting an end to the life of a company. It

is a way through which a company is dissolved. In this process, the assets of the
company are sold off. Liabilities are paid off. If any surplus is left, it is distributed
among the members in accordance with their rights.
At the end of the winding up, it will, therefore, be simply a formal step for it to be
dissolved, that is, for its legal personality as a corporation to be brought to an end.
On dissolution the company ceases to exist as a separate entity. Thus in between the
winding up and dissolution, the legal status of the company continues and it can be
sued in the court of law.
The entire procedure for bringing about a lawful end to the life of a company is divided into two
stages – ‘winding up’ and ‘dissolution’.
Difference between Winding Up and Dissolution
WINDING UP DISSOLUTION
Winding up is the first stage in the process Dissolution is the final stage whereby the
whereby assets are realized, liabilities are paid existence of the company is withdrawn by the
off and the surplus, if any, distributed among its law.
members.
The liquidator appointed by the company or the But the order for dissolution can be passed by
Court carries out the winding up proceedings. the Court only.
The liquidator can represent the company in the Once the Court passes dissolution orders the
process of winding up. This can be done till the liquidator can no longer represent the
order of dissolution is passed by the Court. company.
Creditors can prove their debts in the winding Creditors cannot prove their debts on
up. dissolution of co.
MODES OF WINDING UP
A company registered under the Companies Act, 1956 may be wound up by any of the following
modes:
1. By the Court i.e. compulsory winding up;
2. Voluntary winding up, which may be either:
(a) Members’ voluntary winding up; or
(b) Creditor’s voluntary winding up;
3. Winding up subject to the supervision of the Court. (omitted and the same is yet to be notified)
In every winding up, a liquidator or liquidators is or are appointed to administer the property of
the company and he or they must apply the assets of the company, first, in the payment of the
creditors in their proper order, and then, in distributing the residue among the members according
to their rights.
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WINDING UP BY THE COURT
Winding up by the Court or compulsory winding up is initiated by an application by way of

petition to the appropriate Court for a winding up order.
A winding up petition has to be resorted to only when other means of healing an ailing company
are of absolutely no avail.
The extreme step of winding up must be resorted to only in very compelling circumstances.
[Daulat Makanmal Luthrid vs. Solatire Hotels]
Temporary difficulty cannot be ground for liquidating company when company is on path of
revival. [D. Ashokan vs. S.T. Reddiar & Sons]
It is primarily the High Court which has the jurisdiction to wind up companies under Section 10
of the Companies Act, 1956 in relation to the place at which registered office of the company
concerned is situated.
Grounds on which a Company may be wound up by the Court
A company under Section 433 may be wound up by the Court if

(a) the company has passed a special resolution of its being wound up by the Court; or
(b) default is made in delivering the statutory report to the Registrar; or
(c) it does not commence business within a year from its incorporation or suspends business for a
whole year; or
(d) the number of its members in the case of a public company is reduced below seven and in the
case of a private company, below two; or
(e) it is unable to pay its debts; or
(f) the Court is of the opinion that it is just and equitable that it should be wound up;
(g) the company has made a default in filing with the registrar its balance sheet and profit and
loss account or annual returns for any five consecutive financial years;
(h) the company has acted against the interests of the sovereignty and integrity of India, the
security of the State, friendly relations with foreign States, public order, decency or morality.
VOLUNTARY WINDING UP
In voluntary winding up the company and its creditors are left to settle their affairs without going
to a Court, although they may apply to the Court for directions or orders, as and when necessary.
One or more liquidators are to be appointed by the company in general meeting for the purpose of
winding up the affairs and distributing the assets of the company.
The remuneration of the liquidators is also required to be fixed by the company in general
meeting. Unless the remuneration as aforesaid is fixed the liquidators shall not take charge of
his/their offices (Section 490).
Circumstances for Voluntary Winding Up
The circumstances in which a company may be wound up voluntarily are:
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(a) when the period fixed for the duration of the company as mentioned in its articles has expired;
or the event, on the happening of which the articles provide that the company is to be dissolved
has occurred; and the company passes a resolution in general meeting requiring the company to
be wound up voluntarily;
(b) if the company passes a special resolution that the company be wound up voluntarily.
Passing of Resolution & Public Circulation

The resolution (whether ordinary or special), when passed, must be advertised within 14 days of
the passing of the resolution in the Official Gazette and also in some newspaper circulating in the
district where the registered office of the company is situated.
A default in complying with the above requirements renders the company and every officer of
the company, who is in default, liable to a penalty which may extend to five hundred rupees for
every day during which the default continues.
A liquidator of the company is deemed to an officer of the company for the purposes of the above
requirements.
Start of Winding up
A voluntary winding up commences from the date of the passing of the resolution for voluntary
winding up.
This is so even when after passing a resolution for voluntary winding up, a petition is presented
for winding up by the Court.
The effect of the voluntary winding up is that the company ceases to carry on its business except
so far as may be required for the beneficial winding up thereof.
The corporate status and the powers of the company, however, continue until it is dissolved.
Types of Voluntary Winding Up

Section 488 divides voluntary winding up into two kinds:
(i) Members’ voluntary winding up; and
(ii) Creditors’ voluntary winding up.
Members’ Voluntary Winding Up

When the company is solvent and is able to pay its liabilities in full, it need not consult the
creditors or call their meeting. The majority of its directors may, at a meeting of the Board, make
a declaration of solvency verified by an affidavit and declare the voluntary winding up.
In Shri Raja Mohan Manucha v. Lakshminath Saigal, it was held that where the declaration of
solvency is not made in accordance with the law, the resolution for winding up and all subsequent
proceedings will be null and void.
Such a declaration must be made within five weeks immediately preceding the date of the passing
of the resolution for winding up the company and be delivered to the Registrar for registration
before that date.
The declaration must be accompanied by a copy of auditor’s report on the balance sheet and
profit & loss account as at the latest practicable date before the making of the declaration and also
embody a statement of the company’s assets and liabilities as at that date.
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Any director making a declaration without having reasonable grounds for the aforesaid opinion,
shall be punishable with imprisonment extending up to six months or with fine extending up to
Rs. 50,000 or with both.
Creditors’ Voluntary Winding Up
Where a declaration of solvency of the company is not made and delivered to the Registrar in a
voluntary winding up it is a case of creditor’s voluntary winding up.
Distinction between Members’ and Creditors’ Voluntary Winding Up
Members’ Voluntary Winding Up Creditors’ Voluntary Winding Up
The majority of the directors file with the A creditors’ voluntary winding up is one where
Registrar a statutory declaration of solvency. no such declaration is filed.
In a member’s voluntary winding up, the In a creditors’ voluntary winding up, the
creditors do not participate directly in the company is deemed to be insolvent and,
control of the liquidation, as the company is therefore, the control of liquidation remains in the
deemed to be solvent. hands of the creditors.
There is no meeting of creditors in a in a creditors’ voluntary winding up, meetings of

members’ voluntary winding up and the creditors have to be called at the beginning and
liquidator is appointed by the company. subsequently the liquidator is appointed by the
creditors.
In a members’ voluntary winding up the In a creditors’ voluntary winding up he can do so

liquidator can exercise some of his powers with the sanction of the Court or the Committee
with the sanction of a special resolution of of Inspection or of a meeting of creditors.
the company.
Powers of the Court to Intervene in Voluntary Winding Up
In voluntary winding up it is left to the company, the contributories and the creditors to settle
their affairs without intervention of the Court as far as possible. However, the Companies Act,
1956, contains certain provisions which provide a means of access to the Court with a view to
speed up the liquidation proceedings and to overcome the difficulties that may arise in the course
of liquidation. The Court will intervene in the voluntary winding up whenever it is satisfied that
such an intervention will be just and beneficial.
In appropriate cases the Court can be approached for compulsory winding up (Section 440) or
winding up being conducted under the supervision of the Court (Section 522).
The Court is vested with the following powers in voluntary winding up:
(i) To appoint the Official Liquidator.
(ii) To remove the liquidator and appoint the Official Liquidator.
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(iii) To determine the remunerations of liquidator when the Official Liquidator is appointed as a
liquidator.
(iv) To amend, vary, confirm or set aside the arrangement entered into between a co. and its
creditors on an appeal being made by any creditor or contributory within 3 weeks of the
completion of the arrangement.
(v) On an application of the Liquidator or contributory or creditor:

(a) to determine any question arising in the winding up of a company;
(b) to exercise, the staying of suits or other legal proceedings, all or any of the powers
which the Court might exercise if the company were being wound up by the Court.
(vi) To order public examination of any person connected with promotion or formation of a
company or any officer connected with the affairs of the company. Such an examination can be
ordered on a report of the liquidator where he is of the opinion that a fraud has been committed
by the persons aforesaid in the formation or promotion of the company or in the conduct of its
affairs.
MODES OF WINDING UP UNDER COMPANIES ACT 2013
Under Companies Act 2013, the Company may be wound up in any of the following modes:
1. By National Company Law Tribunal (Tribunal);
2. Voluntary winding up.
WINDING UP BY THE TRIBUNAL
Grounds on which a Company may be wound up by the Tribunal

A company under Section 271(1) may be wound up by the tribunal if
(a) the company is unable to pay its debts;
(b) the company has, by special resolution, resolved that the company be wound up by the
Tribunal;
(c) the company has acted against the interests of the sovereignty and integrity of India, the
security
of the State, friendly relations with foreign States, public order, decency or morality;
(d) the Tribunal has ordered the winding up of the company under (Revival and Rehabilitation of
Sick Companies);
(e) if on an application made by the Registrar or any other person authorized by the Central
Government by notification under this Act, the Tribunal is of the opinion that the affairs of the
company have been conducted in a fraudulent manner or the company was formed for fraudulent
and unlawful purpose;
(f) if the company has made a default in filing with the Registrar its financial statements or
annual returns for immediately preceding five consecutive financial years; or
(g) if the Tribunal is of the opinion that it is just and equitable that the company should be wound
up.
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Inability A company shall be deemed to be unable to pay its debts,
to pay (a) if a creditor, to whom the company is indebted for an amount exceeding one lakh
debts rupees, has served on the company a demand requiring the company to pay the
(Section amount so due and the company has failed to pay the sum within twenty-one days
271(2) after the receipt of such demand.
(b) if any execution issued on a decree in favor of a creditor of the company is
returned unsatisfied in whole or in part.
Who may file Petition for the Winding up?
An application for the winding up of a company has to be made by way of petition to the Court.
A petition may be presented under Section 272 by any of the following persons:
(a) the company; or
(b) any creditor or creditors;
(c) any contributory or contributories;
(d) all or any of the parties specified above in clauses (a), (b), (c) together
(e) the Registrar;
(f) any person authorized by the Central Government in that behalf;
(g) by the Central Government or State Government in case of company acting against the
interest of the sovereignty and integrity of India.
Petition by The company may make a petition through its directors with the authority of a
the special resolution passed at a general meeting. The petition to be accompanied
Company by the statement of affairs, stating the facts upto a date which not 15 days prior
to making the statement.
Petition by A creditor or creditors may make petition before the tribunal for winding up
Creditor order on such petition if the creditor proves that the claims are undisputed debt.
Petition by Section 2(26) defines “contributory” means a person liable to contribute towards
Contributory the assets of the company in the event of its being wound up.
For the purposes of this clause, it is hereby clarified that a person holding fully
paid-up shares in a company shall be considered as a contributory.
Petition by Registrar can present a petition on the following grounds.
Registrar 1. if the company is unable to pay its debts;
2. if the company has acted against the interests of the sovereignty and integrity
of India, the security of the State, friendly relations with foreign States, public
order, decency or morality;
3. if on an application made by the Registrar, the Tribunal is of the opinion that
the affairs of the company have been conducted in a fraudulent manner or the
company was formed for fraudulent and unlawful purpose or the persons
concerned in the formation or management of its affairs have been guilty of
fraud, or misconduct and that it is proper that the company be wound up;
4. if the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive
financial years.
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CH. 33 STRIKING OFF NAME OF COMPANIES
Section 560 of the Companies Act, 1956 prescribes the procedure for striking off the name of
defunct companies which are not carrying on any business, from the register of companies
maintained by the Registrar. This is an alternative to winding up of a company.
The provisions of Companies Act, 2013 relating to striking off are yet to be notified.
The Companies Act, 1956 will continue to apply for striking off names.
The provisions relating to dormant companies have been notified.
A company comes into existence by registration in the office of the Registrar of Companies. On
registration of a company, the Registrar issues a certificate called Certificate of Incorporation,
which certifies that the company is incorporated. The validity of the incorporation cannot be
challenged thereafter.
Regulation 21 of the Companies Regulations, 1956 provides that in the office of each Registrar,
there shall be maintained a “Register of Companies” in which the names of the companies shall
be entered in the order in which they are registered. Every company so registered shall be
assigned a number in one consecutive series. (Corporate Identity Number)
‘Striking-off’ implies removal. A company registered under the Act cannot be removed from the
Register of Companies maintained by the Registrar nor can the Certificate of Incorporation be
cancelled unless the company is dissolved by the process of law, either as a result of its winding-
up or its amalgamation with another company.
However, the Companies Act provides a short-cut to the dissolution, namely striking it off the
Register of Companies by the Registrar of Companies under Section 560, in case the company is
a defunct company.
The expression “defunct company” for the purposes of Section 560, means a company which is
no longer in operation or functioning, not carrying on any business.
Section 560 of the Act prescribes the procedure which Registrar is required to follow in striking
off the name of the company.
Where the Registrar has reasonable cause to believe that a company is not carrying on business or
in operation, the Registrar can, on his own, exercise the power conferred upon him by Section
560 and remove the company from his Register of Companies by following the procedure laid
down.
Despite the striking-off, the liability, if any, of every director, manager or other officer who was
exercising any power of management, and of every member of the company, shall continue and
may be enforced as if the company had not been dissolved.
PROCEDURE FOR STRIKING OFF A COMPANY
The striking off a company may be effected by following two ways:
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(A) Where the Registrar has reasonable cause to believe that a company is not carrying
Striking- on business or in operation, he shall send to the company by post a letter inquiring
off by whether the company is carrying on business or in operation.
Registrar If the Registrar does not receive any answer to the letter sent by him within one
of his own month, he shall send a second letter, within 14 days after the expiry of the month,
motion to the company referring the first one and stating that no answer has been received
to the first letter and if an answer to the second letter is not received within one
month from the date thereof, a notice for striking off the name of the company will
be published in the Official Gazette.
(B) When an application is received by Registrar from the company for striking it off
Striking- on the ground that it is a defunct company, i.e. it is not carrying on business or in
off on operation. After the receipt of application from the company, the Registrar may
company’s proceed to strike its name off the register, and shall publish notice thereof in the
application Official Gazette.
In a petition under section 560 of the Act, the company sought restoration of its name in the
register of companies. It was contended, inter alia, that the firm of chartered accountants engaged
by it to perform the task of filing the returns with the office of the Registrar of Companies had
failed to do so. No objection certificates of the directors as well of the shareholders for restoration
of the name of the company in the register were also placed on record.
The court held that the company was a running concern and had filed the petition within the
limitation period. The petition was to be allowed and the name of the company, its director and
member was to be restored to the register of companies as if it had not been struck off.
In the case of Sitaram Singh Construction (P) Ltd. v. Union of India [2010], the issue was
whether the Registrar can strike off a company without publishing a gazette notification in this
regard?
In this case, the Registrar of Companies had neither published the notice in the Official Gazette
nor sent the notice to the company by registered post as required under section 560(3) of the
Companies Act, 1956. On the other hand, the company was continuously carrying on business.
It was held that although, there was a serious omission on the part of the company in not filing its
annual returns, the mandatory requirement under section 560(3) of the Act was not complied with
by the Registrar. Therefore, the notice issued under section 560(5) of the Act was to be quashed
and the name of the company was to be restored.
FAST TRACK EXIT (FTE) MODE BY MINISTRY OF CORPORATE AFFAIRS
As per section 560 of the Companies Act, 1956, Registrar of Companies may strike off the name
of companies on satisfying the conditions therein. In order to give an opportunity for fast track
exit by a defunct company, for getting its name struck off from the register of companies, the
MCA modified the existing route through e-form - 61 and prescribed the new Guidelines vide
circular no. 36/2011 dated June 07, 2011.
MCA guidelines 2011 on Fast Exit Scheme
For Fast Track Exit mode (FTE), it is stated as under: -
(a) Any company will be called as “defunct company” for the purpose of these guidelines,
which has nil asset and liability and
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(i) has not commenced any business activity or operation since incorporation; or
(ii) is not carrying over any business activity or operation for last one year before making
application under FTE.
(b) Any defunct company may apply for getting its name strike off from the Register of
Companies;
(c) Any defunct company which is a Government Company shall submit ‘No Objection
Certificate’ issued by the concerned Ministry or Department or State Government along with the
application;
(d) the decision of the ROC in respect of striking off the name of company shall be final.
(e) The fast track exit mode is not being extended to the following companies namely: -
(i) listed companies;
(ii) companies that have been de-listed due to non-compliance of Listing Agreement or
any other statutory Laws;
(iii) companies registered under section 25 of the Companies Act, 1956; (Now Sec-8)
(iv) vanishing companies;
(v) companies where inspection or investigation is ordered and being carried out or
where completed, prosecutions arising out of such inspection or investigation are pending
in the court;
(vi) companies against which prosecution for a non-compoundable offence is pending in
court;
(vii) companies accepted public deposits which are either outstanding or the company is
in default in repayment of the same;
(viii) company having secured loan;
(ix) company having management dispute;
(x) company in respect of which filing of documents have been stayed by court or CLB
or Central Government or any other competent authority;
(xi) company having dues towards income tax or sales tax or central excise or banks and
financial institutions or any other Central Government or State Government Departments
or authorities or any local authorities.
Important Points
The company shall disclose pending litigations if any, involving the company while applying
under FTE;
The company shall make an application in the Form FTE, annexed electronically on the Ministry
of Corporate Affairs portal namely www.mca.gov.in accompanied by filing fee of Rs. 5,000/-;
The Form FTE shall be accompanied by an affidavit, to the effect that the company has not
carried on any business since incorporation or that the company did some business for a period
up to a date (which should be specified) and then discontinued its operations, as the case may be.
Form FTE shall further be accompanied by an Indemnity Bond to be given by every director
individually or collectively, to the effect that any losses, claim and liabilities on the company,
will be met in full by every director individually or collectively, even after the name of the
company is struck off the register of Companies.
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RESTORATION OF THE COMPANIES U/S 560(6) OF THE COMPANIES ACT 1956
As per Section 560 if a company, or any member or creditor thereof, feels aggrieved by the
company having been struck off the register, the Tribunal (i.e. court at present), on an application
made by the company, member or creditor before the expiry of twenty years from the
publication in the Official Gazette of the notice aforesaid, may, if satisfied that the company
was, at the time of the striking off, carrying on business or in operation or otherwise that it is just
that the company be restored to the register, order the name of the company to be restored to the
register; and the court may, by the order, give such directions and make such provisions as seem
just for placing the company and all other persons in the same position as nearly as may be as if
the name of the company had not been struck off.
The Court may order the name of the company to be restored to the register, if it is satisfied that
-the company was, at the time of the striking off, carrying on business or in operation; or
-otherwise that it is just that the company be restored to the register.
The company must file electronically with the Registrar a certified true copy of the order passed
by the Court, along with e-form No. 21. Upon a certified copy of the order being delivered to the
Registrar for registration, the company shall be deemed to have continued in existence as if its
name had not been struck off.
EFFECT OF RESTORATION ORDER
Where the Court orders for restoration of name of company, the effect of an order is to place the
company whose name was struck off by the Registrar in the same position as if the name of the
company had never been struck off during the interregnum (interval, pause, lapse, wait,
interruption). If a court directs restoration of the name of the company, it shall be deemed to have
continued throughout.
WHO CAN APPLY FOR RESTORATION OF NAME?
An application for restoration can only be made by the company, member or creditor.
A third party unless he is a creditor has no locus standi (Signifies a right to be heard) to apply.
PROVISIONS OF COMPANIES ACT 2013 RELATING TO DORMANT COMPANIES

Meaning of Section 455(1) of the Act defines that when a company is formed and
Dormant registered under this act for a future project or to hold an asset or intellectual
Company property and has no significant accounting transaction, such a company or
an inactive company may make an application to the Registrar in such
manner as may be prescribed in Form No. MSC-1.
Meaning of “Inactive company” means a company which has not been carrying on any
Inactive business or operation, or has not made any significant accounting transaction
Company during the last two financial years, or has not filed financial statements and
annual returns during the last two financial years.
Meaning of Significant Accounting Transaction -means any transaction other than

Significant (a) payment of fees by a company to the Registrar;
Accounting (b) payment made by it to fulfill the requirements of this Act or any other
Transaction law;
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(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.
Meaning of Vanishing company means a company, registered under the Companies Act
Vanishing and listed with Stock Exchange which, has failed to file its returns with
Company Registered of Companies and Stock Exchange for a consecutive period of
two years, and is not maintaining its registered office at the address notified
with the Registrar of Companies or Stock Exchange and none of its
Directors are traceable.
Rule 3 of Companies (Miscellaneous)Rules 2014
Application for obtaining status of dormant company (Section 455)
A company may make an application in Form MSC-1 along with such fee as provided in the
Companies (Registration Offices and Fees) Rules, 2014 to the Registrar for obtaining the
status of a Dormant Company, after passing a special resolution to this effect in the general
meeting of the company or after issuing a notice to all the shareholders of the company for this
purpose and obtaining consent of at least 3/4th shareholders.
Provided that a company shall be eligible to apply under this rule only, if-
(i) no inspection or inquiry has been ordered or taken up or carried out against the
company;
(ii) no prosecution has been initiated and pending against the company under any law;
(iii) the company is neither having any public deposits which are outstanding nor the
company is in default in payment thereof or interest thereon;
(iv) the company is not having any outstanding loan, whether secured or unsecured;
(v) there is no dispute in the management or ownership of the company and a certificate
in this regard is enclosed with Form MSC-1;
(vi) the company does not have any outstanding statutory taxes, dues, duties etc. payable
to the Central Government or any State Government or local authorities etc.;
(vii) the company has not defaulted in the payment of workmen’s dues;
(viii) the securities of the company are not listed on any stock exchange within or outside
India.
ROLE & POWER OF THE REGISTRAR IN CASE OF DORMANT COMPANY
Registrar, on satisfaction of the application, shall allow the status of a dormant company to the
applicant and issue a certificate in such form as may be prescribed to that effect.
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Registrar shall maintain a register of dormant companies in such form as may be prescribed in
Rule 5 under Companies (Miscellaneous) Rules, 2014.
In case of a company which has not filed financial statements or annual returns for two financial
years consecutively, the Registrar shall issue a notice to that company and enter the name of such
company in the register maintained for dormant companies.
The Registrar shall, after considering the application filed in Form MSC-1, issue a certificate in
Form No. MSC-2 allowing the status of a Dormant Company to the applicant.
Section 455(5) provides that a dormant company shall have such minimum number of directors,
file such documents and pay such annual fee as may be prescribed in Rule 6 & 9 under
Companies (Miscellaneous) Rules, 2014 to the Registrar to retain its dormant status in the
register and may become an active company on an application made in this behalf accompanied
by such documents and requisite fee as may be prescribed.
Section 455(6) provides that the Registrar shall strike off the name of a dormant company from
the register of dormant companies, which has failed to comply with the requirements of this
section.
MINIMUM NO. OF DIRECTORS IN DORMANT COMPANY
Rule 6 of Companies (Miscellaneous) Rules,2014 provides the Dormant Company shall have the
minimum number of directors as under–
Public company – 3 directors
Private company – 2 directors
OPC – 1 director
Register of dormant companies- Rule 5 of Companies (Miscellaneous) Rules 2014

The Register maintained under the portal maintained by the MCA on its web-site
www.mca.gov.in or any other website notified by the Central Government, shall be the register
for dormant companies.
Return of dormant companies- Rule 7 of Companies (Miscellaneous) Rules 2014

A dormant company shall file a “Return of Dormant Company” annually, inter-alia, indicating
financial position duly audited by a chartered accountant in practice in Form MSC- 3 along with
such annual fee as provided in the Companies (Registration Offices and Fees) Rules, 2014
within a period of thirty days from the end of each financial year.
Application for seeking status of an active company - Rule 8 of Companies (Miscellaneous)

Rules 2014
(1) An application for obtaining the status of an active company shall be made in Form MSC-4
along with fees as provided in the Companies (Registration Offices and Fees) Rules, 2014 and
shall be accompanied by a return in Form MSC-3 in respect of the financial year in which the
application for obtaining the status of an active company is being filed. The Registrar shall
initiate the process of striking off the name of the company if the company remains as a dormant
company for a period of consecutive five years.
(2) The Registrar shall, after considering the application filed, issue a certificate in Form MSC-5
allowing the status of an active company to the applicant.
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(3) Where a dormant company does or omits to do any act mentioned in the Grounds of
application in Form MSC-1 submitted to Registrar for obtaining the status of dormant company,
affecting its status of dormant company, the directors shall within seven days from such event,
file an application, for obtaining the status of an active company.
(4) Where the Registrar has reasonable cause to believe that any company registered as ‘dormant
company’ under his jurisdiction has been functioning in any manner, directly or indirectly, he
may initiate the proceedings for enquiry under section 206 of the Act and if, after giving a
reasonable opportunity of being heard to the company in this regard, it is found that the company
has actually been functioning, the Registrar may remove the name of such company from register
of dormant companies and treat it as an active company.
PROVISIONS OF COMPANIES ACT 2013 RELATING TO STRIKING OFF NAMES

(YET TO BE NOTIFIED)
POWER OF REGISTRAR TO REMOVE THE NAMES
Section 248(1) of the Act provides that when the registrar has reason to believe that: -
(a) A company has failed to commence its business within one year of its incorporation or;
(b) A company is not carrying on any business or operation for a period of two immediately
preceding financial years and has not made any application within such period for obtaining the
status of a dormant company under section 455.
COMPANIES WHICH CAN’T BE REMOVED BY REGISTRAR

(i) Listed companies;
(ii) Companies that have been delisted due to non-compliance of listing agreement or any other
laws;
(iii) Vanishing companies;
(iv) Companies where investigation is ordered and being carried out or to be taken up or where
completed prosecutions arising out of such investigation or pending in the Court;
(v) Companies where notice under section 206(Power to call for information, inspect books and
conduct inquiries) has been issued by the Registrar and reply thereto is pending;
(vi) Companies against which prosecution for non- compoundable offence is pending in Court;
(vii) Companies accepted Public Deposits which are either outstanding or the company is in
default in repayment of the same;
(viii) Company having secured loan.
CIRCUMSTANCES WHERE COMPANY APPLY FOR THE REMOVAL OF NAME

Section 248(2) provides that a company may, after extinguishing all its liabilities, by a special
resolution or consent of seventy-five percent members in terms of paid-up share capital, file an
application in the prescribed manner to the Registrar for removing the name of the company from
the register of companies on all or any of the grounds specified in section 248 (1) and the
Registrar shall, on receipt of such application, cause a public notice to be issued in the prescribed
manner.
NOTE: Section 248(1) & (2) doesn’t applies on Section 8 companies.
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CH. 34 E-GOVERNANCE AND XBRL
Introduction
MCA-21 stands for e-governance initiative of Ministry of Corporate Affairs (MCA) of the 21st
Century. The project is named MCA-21 as it aims to fulfill the Government’s vision of
National e-governance in the country.
E-governance
E-governance or Electronic Governance is the application of Information Technology to the

Government functioning in order to bring about Simple, Moral, Accountable, Responsive and
Transparent (SMART) Governance.
This project of MCA aims at moving from paper based to nearly paperless environment.
Scope The scope of MCA-21 project covers only the offices of ROCs, Regional Directors,
and the Headquarters at New Delhi at present. It does not include other offices of
MCA like Official Liquidators, Company Law Board/Tribunal and Courts.
ORGANISATION OF ROC OFFICES UNDER MCA-21
The major components involved in this comprehensive e-governance project are front office
and back office.
Front Office
The Front Office represents the interface of the corporate with the MCA21 system. This
comprises of (i) Virtual Front Office and (ii) Physical Front Office.
(i) Virtual front office is way available to stakeholders (companies and the
Virtual professionals) to enable them to do the statutory filing with ROC Offices across the
front country.
office Virtual Front Office facilitates online filing of the e-Forms using Internet. It merely
represents a computer facility for filing of digitally signed eForms by accessing the
MCA portal through Internet.
(ii) To facilitate the change over from Physical Document Filing to Digital Document
Physical Filing, the Ministry of Corporate Affairs had established 53 Physical Front Offices
Front known as facilitation centers for a initial period of three years.
Office PFOs have all facilities which will be required for online filing of e-forms
(PFO) including trained manpower, broadband connectivity, scanner, printer and related
computer accessories.
All the services for scanning and uploading of eForms are available free of cost at
these Physical Front Offices.
Back Office
Back Office represents the offices of Registrar of Companies, Regional Directors and
Headquarters’ and takes care of internal processing of the forms filed by the corporate users.
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All the e-forms along with attachments are stored in the electronic depository, which the staff
of MCA can view depending upon the access rights.
E-form
An e-form is the electronic equivalent of the paper form. The e-governance initiative of the
Ministry of Corporate Affairs, MCA 21 envisages that all company related documents would be
filed electronically.
Digital Signature Certificates (DSC)
Digital Signature Certificates (DSC) are the digital equivalent (that is electronic format) of
physical or paper certificates. Examples of physical certificates are drivers' licenses, passports
or membership cards.
Certificates serve as proof of identity of an individual for a certain purpose; for example, a
driver's license identifies someone who can legally drive in a particular country. Likewise, a
digital certificate can be presented electronically to prove your identity, to access information
or services on the Internet or to sign certain documents digitally. Physical documents are signed
manually, similarly, electronic documents, for example e-forms are required to be signed
digitally using a Digital Signature Certificate.
Corporate Identity Number (CIN) based Search of Companies
Every company has been allocated a Corporate Identity Number (CIN). CIN can be found from
the MCA 21 portal through search based on:
— ROC Registration No.
— Existing Company Name
— Old Name of Company (in case of change of name)
Foreign Company Registration Number (FCRN)
Every foreign company has been allocated a Foreign Company Registration Number (FCRN).
Corporate Identity Number (CIN), works as a unique identifier of an Indian company. Foreign
Company Registration Number (FCRN) is a unique identifier in the case of a Foreign
Company.
REVIEW QUESTIONS
Under the MCA-21 system the following four types of users are identified as users of Digital
Signatures and are required to obtain digital signature certificate:
1. MCA (Government) Employees.

2. Professionals (Company Secretaries, Chartered Accountants, Cost Accountants and Lawyers)
who interact with MCA and companies in the context of Companies Act.
3. Authorized signatories of the Company including MD, Directors, Manager or Secretary.
4. Representatives of Banks and Financial Institutions.
Mode of payment of statutory fee under Companies Act
Ministry of Corporate Affairs vide its Circular dated 9th March, 2011 has decided to accept
payments of value up to Rs. 50,000, for MCA 21 services, only in electronic mode w.e.f. 27th
March, 2011.
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For the payments of value above Rs. 50,000, stakeholders have the option to either make the
payment in electronic mode or paper challan.
Important Terms
Service Request Number (SRN)

Each transaction under e-filing is uniquely identified by a Service Request Number (SRN). On
filing of an e-form, the system will generate and provide a Service Request Number (SRN). A
user can check the status of the document/ transaction, by entering the SRN.
Pre-fill
Pre-fill is a functionality in an e-Form that is used for filling automatically the requisite data
from the system without repeatedly entering the same.
Pre-Scrutiny
It is a functionality that is used for checking whether certain core aspects are properly filled in
the e-Form. Before submitting the e-Form for pre-security, the user has to make the necessary
attachments in PDF format.
Check Form
By Clicking CHECK FORM, the user will be in a position to find out whether the mandatory
fields in an e-Form are duly filled-in or not.
For example, if the user enters alphabets in “DATE OF APPOINTMENT” field, he will be
asked to correct that.
Attachment
An attachment refers to a document that is sent as an enclosure with an e-Form by means of an
attached file. The objective of the attachment is to provide important details to the e-Form for
processing. Some attachments are optional as well as mandatory.
PRE-CERTIFICATION OF E-FORMS
Apart from authentication of e-forms by authorized signatories using digital signatures, some e-
forms are also required to be pre-certified by practicing professionals.
Pre-certification means certification of correctness of any document by a professional before
the same is filed with the Registrar.
This pre-certification is to be carried out by inter-alia, Company Secretaries, Chartered
Accountants, Cost Accountants, & Advocates at some place.
Addendum to e-Form
The user may have to submit some additional supporting documents that are not submitted
during the e- Form (application) filing but are required for the processing of the e-Form. MCA
may also ask the applicant to provide some additional documents in support of the e-Form
already filed so as to expedite the processing of the same.
KEY BENEFITS OF MCA 21 PROJECT
The key benefits of MCA 21 project are as follows:

1. On-line incorporation of companies.
2. Simplified and easy mode of filing of Forms/Returns.
3. Registration as well as verification of charges anytime and from anywhere.
4. Inspection of public documents of companies anytime from anywhere.
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5. Building up a centralized database repository of corporates operating in India.
6. Enhanced service level fulfillment.
7. Total transparency through e-Governance.
8. Timely redressal of investor grievances.
FEATURES OF E-FORM AND E-FILING PROCESS
Features of e-form and e-filing process are as follow:
1.The e-Form contains a number of mandatory fields which are required to be filled-in. Certain
other fields are non-mandatory in nature which may or may not be filled.
2. An instruction kit is available for each e-Form, which contains details of the instructions for
properly filling the e-Form.
3.An e-Form may be filled in either online or offline. Online filling implies that the e-Form is
filled while being still connected to MCA portal through the Internet. Offline filling denotes
that the e-Form is downloaded into the user’s computer and filled later without being connected
to the Internet.
4.An e-Form may require certain mandatory attachments to be filed along with it.
5. Next to attachment, there is a declaration that is sought from the person filing the e-Form to
the effect that the information given in the e-Form and the attachments is correct and complete.
6. Most of the e-Forms require the digital signature of the Managing Director or Director,
Manager or Secretary of the company for successful filing/ submission.
7. Further, the digital signature of a third party may also be required in certain cases. In the case
of an e-Form for creation or modification of charges, such digital signature is also required
from the Bank or Financial Institution.
8. In certain cases, certification from the Chartered Accountant or Cost Accountant or

Company Secretary in whole-time practice is also required to authenticate the particulars
contained in the e- Form. For example, this requirement is mandatory in the case of an e-Form
for creation or modification of charges.
9. There are built-in facilities to check the filled-in e-Form for requisite validations, and to
modify the e-Form when the same is required to be re-submitted.
10. When the “Submitted” button is pressed; the e-Form gets uploaded into the MCA central
document repository.
11. Thereafter, the requisite fees as applicable for the e-Form should be paid either on-line or
off-line.
12. Once the e-Form has been accepted and payment of fees has been acknowledged, a work
item is created and assigned to the appropriate MCA employee based on pre-defined
assignment rules as part of MCA back office workflow automation.
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13. After the processing of the e-Form is completed, an acknowledgement email is sent to the
user regarding its approval/rejection.
XBRL
XBRL (Extensible Business Reporting Language) is a language for the electronic
communication of business and financial data.
It provides major benefits in the preparation, analysis and communication of business
information. It offers cost savings, greater efficiency and improved accuracy and reliability to
all those involved in supplying or using financial data.
It is an open standard, free of license fees, being developed by a non-profit making
international consortium.
XBRL is a data-rich language of XML (Extensible Markup Language), the universally

preferred language for transmitting information via the Internet.
It was developed specifically to communicate information between businesses and other users
of financial information, such as analysts, investors and regulators.
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AMENDMENT RULES/CIRCULARS/NOTIFICATIONS/ORDERS
(From 1stJanuary, 2016 to 30thJune, 2016)
I. INCORPORATION OF COMPANY AND RELATED MATTERS
Title- Amendment Rules/Circulars/Notifications/Orders
LLP According to section 5 of the LLP Act, 2008, only an individual or body corporate
Circular No may be a partner in a LLP.
2/2016 dated A HUF cannot be treated as a body corporate for the purposes of LLP Act, 2008.
15thJanuary, Therefore, a HUF or its karta cannot become partner or designated partner in LLP.
2016
Central MCA has established Central Registration Centre which has territorial
Registration jurisdiction all over India, for carrying out the function of processing and disposal
Centre of applications for reservation of names under the provisions of the Companies
Notification Act, 2013.
No 218(E) The Central Registration Centre shall exercise functional jurisdiction of processing
under section and disposal of e-forms and all related matters pertaining to registration of
396 of companies under section 7, 8 and 366 of the Companies Act, 2013.
Companies The CRC shall process forms pertaining to registration of companies i.e. e-forms
Act, 2013 (INC-2, INC-7 and INC-29 along with linked forms INC-22, DIR-12 and URC-1.
dated 22nd
January,2016
Undesirable The changes in the principal rules have been briefed out as follows:
Names
Rule 8-
MCA vide
notification i. Rule 8 of the principal rules provides for the names which are to be considered
dated January undesirable for incorporating a company. Vide this amendment notification, the
22, 2016, government has omitted the following conditions from the list of undesirability:
issued the
Companies a. The name which is not in consonance with the principal objects of the
(Incorporation) company as set out in the memorandum of association;
Amendment b. The proposed name is vague or an abbreviated name such as 'ABC limited'
Rules, 2016, or '23K limited' or abbreviated name based on the name of the promoters;
wherein rule 8, c. The name which is intended or likely to produce a misleading impression
rule 9 and rule regarding the scope or scale of its activities which would be beyond the
36 of resources at its disposal.
Companies Accordingly, now application for name can be made in case the proposed
(Incorporation) name is in the manner mentioned above.
Rules, 2014 ii. Also, apart from the above, the government has further amended the
(hereinafter principal rules wherein:
referred to as
the principal a. If any company has changed its activities, which are not reflected in its
rules), have name, shall not be required to change its name in line with its activities.
been amended.
Prior to this amendment, on change of its activities, the company was
required to change its name within a period of six months from the change
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of activities and comply with all the provisions as applicable to change of
name;
b. Prior to amendment, if the key word used in the name proposed was the
name of a person other than the name(s) of the promoters or their close
blood relatives, No objection from such other person(s) was required with
the application for name.
Post this notification, the above clause has been omitted, thereby removing
the obstructions of using the name of persons other than promoters or their
close blood relatives.
Reservation of Rule 9:
Names
As per the amended rule 9, an application for the reservation of a name shall be
made in Form No. INC-1, which may be approved or rejected by the Registrar of
Central Registration Centre (CRC). The CRC, having territorial jurisdiction all
over India, has been established by the Central Government, to discharge and
carry out the function of processing and disposal of application for reservation of
names.
Prior to this amendment, the processing of application was done by the respective
offices of Registrar of Companies (ROCs) according to the jurisdiction they have.
It shall be noted that the processing and approval of name or names proposed
in e-form no. INC-29, shall continue to be done by the respective ROCs having
jurisdiction over incorporation of companies under the Companies Act, 2013.
Integrated Rule 36:
Process of
Incorporation Rule 36 was introduced vide Companies (Incorporation) Amendment Rules, 2015,
for the purpose of simplifying the filing of forms for incorporation of a company
in integrated process, via e-form INC-29, with effect from 01.05.2015.
According to sub-rule 12 of rule 36, the Registrar, on examining e-form INC-29,

shall give intimation to the applicant to remove the defects and resubmit the e-
form within fifteen days from the date of such intimation given by the Registrar.
After the resubmission of the document, if the registrar still finds that the
document is defective or incomplete in any respect, he shall give one more
opportunity of fifteen days to remove such defects or deficiencies.
Based on the above sub-rule, this amended notification has inserted a new sub-
clause wherein, after resubmission on second opportunity, if the registrar still finds
that the document is defective or incomplete, he shall give third opportunity to
remove such defects or deficiencies.
Therefore, only after giving three opportunities, if the Registrar is of the opinion
that the document is defective or incomplete in any respect, he shall reject the e-
form INC-29.
In sub-clause (c), for the words ‘two opportunities’, the words ‘three
opportunities’ has been substituted.
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II. SHARE CAPITAL AND DEBENTURES
Buy Back In Rule 17 of (Share Capital and Debentures) Rules, 2016, the following
Companies proviso has been inserted, namely:-
(Share Capital “Provided that where the audited accounts are more than six months old, the
and Debentures) calculations with reference to buy back shall be on the basis of un-audited
Amendment accounts not older than six months from the date of offer document which are
Rules, 2016 dated subjected to limited review by the auditors of the company.”
10th March, 2016
Companies Amendment Rules, 2016, after sub-rule (5), the following proviso has been
(Share Capital inserted, namely: -
and Debentures) “Provided that where all members of a company agree, the offer for buy-back
2nd Amendment may remain open for a period less than fifteen days.’’
Rules, dated 29th
March, 2016
III. ACCEPTANCE OF DEPOSITS BY COMPANIES

DEPOSITS In rule 2, 3, 4 & 5 of (Acceptance of Deposits) Amendment Rules,
Companies (Acceptance of 2016 several substitutions and insertions have been made
Deposits) Amendment Rules, incorporated.
2016 dated 29.05.16
IV. DECLARATION AND PAYMENT OF DIVIDEND

Notification No. The provisions of sub-section (5), sub-section (6) [except with respect to the
S.O. 125(E) dated manner of administration of the Investor Education and Protection Fund] and
13th January, 2016 sub-section (7) of section 125 of the said Act was enforced.
V. ACCOUNTS OF COMPANIES
Circular No Section 135 of the Companies Act, 2013 schedule VII of the Act and Companies
01/2016 dated CSR policy Rules, 2014 read with General Circular dated 18.06.2014 provide that
12.06.2016 the broad is required to formulate their CSR policies including activities to be
FAQ on CSR undertaken and implement the same in the right earnest. While complying with
under Section CSR provisions Board of the eligible companies are empowered to appraise and
135 of the approve their CSR policy including CSR projects or programs or activities to be
Companies undertaken.
Act,2013
Circular In Continuation to the Ministry’s General Circular 01 of 2016 dated 12.01.2016, it
No.05/2016 is clarified that Companies, while undertaking CSR activities shall not contravene
dated any other prevailing laws of the land including Cigarettes and other Tobacco
16.05.2016 on Products Act (COTPA), 2003.
CSR u/s135
Companies The Board of a company may decide to undertake its CSR activities approved by
(Corporate the CSR Committee, through
Social (a) a company established under section 8 of the Act or a registered trust or a
Responsibility registered society, established by the company, either singly or along with any
Policy) other company, or
Amendment
Rules, 2016
383
dated 23rd (b) a company established under section 8 of the Act or a registered trust or a
May,2016 registered society, established by the Central Government or State Government or
any entity established under an Act of Parliament or a State legislature:
Provided that- if, the Board of a company decides to undertake its CSR activities
through a company established under section 8 of the Act or a registered trust or a
registered society, other than those specified in this sub-rule, such company or trust
or society shall have an established track record of three years in undertaking
similar programs or projects; and the company has specified the projects or
programs to be undertaken, the modalities of utilization of funds of such projects
and programs and the monitoring and reporting mechanism.
VI. AUDIT AND AUDITORS

NFRA The National Financial Reporting Authority is constituted under section 132 of the
MCA order Companies Act, 2013 (18 of 2013), the Central Government may prescribe the
NoS.O.1227(E) standards of accounting or any addendum thereto, as recommended by the
dated 29th Institute of Chartered Accountants of India in consultation with and after
March, 2016 examination of the recommendations made by National Advisory Committee on
Accounting Standards constituted under section 210 A of the Companies Act,
1956”.
VII. APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL

Companies In the Companies (Appointment and Remuneration of Managerial Personnel) Rules'
(Appointment 2014'
and In rule 3 of (Appointment and Remuneration of Managerial Personnel) Rules, 2014
Remuneration the expression "Chief Executive Officer (CEO), Company Secretary and Chief
of Managerial Financial Officer (CFO)" has been omitted. (Pg. 225)
Personnel)
Amendment In rule 5 of the principal rules,-( Pg.300)
Rules, 2016 (a) in sub-rule (l), "clauses (v), (vi), (vii) and (ix) to (xi)" has been omitted'.
dated 30th NOW the new rule has only the following sub-rule
June, 2016. 1) Every listed company shall disclose in the Board’s report-
i) The ratio of the remuneration of each director to the median remuneration of the
employees of the company for the financial year;
ii) The percentage increase in remuneration of each director, Chief Financial
Officer, Chief Executive Officer, Company Secretary or Manager, if any, in the
financial year;
iii) The percentage increase in the median remuneration of employees in the
financial year;
iv) The number of permanent employees on the rolls of company;
viii) Average percentile increase already made in the salaries of employees other
than the managerial personnel in the last financial year and its comparison with the
percentile increase in the managerial remuneration and justification thereof and
point out if there are any exceptional circumstances for increase in the managerial
remuneration;
384
(x) The key parameters for any variable component of remuneration availed by the
directors;
(xii) Affirmation that the remuneration is as per the remuneration policy of the
company.
Explanation.- For the purposes of this rule.-

(i) the expression “median” means the numerical value separating the higher half of
a population from the lower half and the median of a finite list of numbers may be
found by arranging all the observations from lowest value to highest value and
picking the middle one;
(ii) If there is an even number of observations, the median shall be the average of
the two middle values. Page 300
(b) In sub-rule (2),- Original Text
Rule 5(2) of Companies (Appointment and Remuneration of Managerial Personnel)

Rules,2014 provides the following disclosure on particulars of employees:-
The board’s report shall include a statement showing the name of every employee
of the company, who-
(i) if employed throughout the financial year, was in receipt of remuneration for that
year which, in the aggregate, was not less than sixty lakh rupees;
(ii) if employed for a part of the financial year, was in receipt of remuneration for
any part of that year, at a rate which, in the aggregate, was not less than five lakh
rupees per month;
(iii) if employed throughout the financial year or part thereof, was in receipt of
remuneration in that year
which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is
in excess of that drawn by the managing director or whole-time director or manager
and holds by himself or along with his spouse and dependent children, not less than
two percent of the equity shares of the company.
AMENDED
(a) For the words " the name of every employee of the company, who-"' the words
the names of the top ten employees in terms of remuneration drawn and the name of
every employee, who-" has been substituted.
The amended rule shall be read as under-

The board’s report shall include a statement showing the names of the top ten
employees in terms of remuneration drawn and the name of every employee.
(b) In sub-clause (i) for the words "sixty lakh rupees", the words "one crore and two
lakh rupees" has been substituted.
if employed throughout the financial year, was in receipt of remuneration for that
year which, in the aggregate, was not less than one crore and two lakh rupees;
(c) In sub-clause (ii) for the words "five lakh rupees per month"' the words " eight
lakh and fifty thousand rupees per month" has been substituted.
385
if employed for a part of the financial year, was in receipt of remuneration for any
part of that year, at a rate which, in the aggregate, was not less than eight lakh and
fifty thousand rupees per month"
VIII. NATIONAL COMPANY LAW TRIBUNAL AND APPELLATE TRIBUNAL

MCA The Central Government constitutes the National Company Law Tribunal to
Notification No. exercise and discharge the powers and functions as are, or may be, conferred on
S.O. 1932(E) it by or under Act with effect from the 1st day of June, 2016.
dated 01.06.2016
MCA The Central Government constitutes the National Company Law Appellate
Notification No. Tribunal for hearing appeals against the orders of the National Company Law
S.O. 1933 (E) Tribunal
dated 01.06.2016
MCA The Central Government transferred all matters or proceedings or cases pending
Notification No. before the Board of Company Law Administration (Company Law Board) to the
S.O. 1936(E) National Company Law Tribunal and it shall dispose of such matters or
dated 1st June, proceedings or cases in accordance with the provisions of the Companies Act,
2016 2013 or the Companies Act, 1956.
IX. SPECIAL COURTS
MCA The following section under Companies Act, 2013 relating to Special Court
Notification No. shall come into force from 18th May, 2016-
S.O.1795 (E) Section 2(29) (iv)
dated 18.05.2016 Sections 435 to 438 and
Section 440
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FREQUENTLY ASKED QUESTIONS ON CORPORATE SOCIAL
RESPONSIBILITIES
1. Whether CSR provisions of the Companies Act, 2013 is applicable to all companies?
CSR provisions of the Companies Act, 2013 is applicable to every company registered under
the Companies Act, 2013 and any other previous Companies law having
Net worth of rupees five hundred crore or more, or
Turnover of rupees one thousand crore or more, or
A net profit of rupees five crore or more
during any financial year
2. What is meaning of `any financial year’ mentioned above?
“Any Financial year” referred under Sub-section (1) of Section 135 of the Act read with Rule
3(2) of Companies CSR Rule, 2014 implies any of the three preceding financial years
3.Whether CSR expenditure of a company can be claimed as a business expenditure?
The amount spent by a company towards CSR cannot be claimed as a business expenditure.
The Finance Act, 2014 provides that any expenditure incurred by an assesse on the activities
relating to Corporate Social Responsibility referred to in section 135 of the Companies Act,
2013 shall not be deemed to be an expenditure incurred by the assesse for the purposes of the
business or profession.
4.Whether the ‘average net profit’ criteria for section 135(5) is Net profit before tax or Net
profit after tax?
Computation of net profit for section 135 is as per section 198 of the Companies Act, 2013
which is primarily PROFIT BEFORE TAX (BT).
5.Can the CSR expenditure be spent on the activities beyond Schedule VII?
General Circular No. 21/2014 dated June 18, 2014 of MCA has clarified that the statutory
provision and provisions of CSR Rules, 2014, is to ensure that activities undertaken in
pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act, 2013.
The entries in the said Schedule VII must be interpreted liberally. The items enlisted in the
Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities.
The General Circular also provides an illustrative list of activities that can be covered under
CSR. In a similar way, many more can be covered. It is for the Board of the company to take
note on this.
6.What tax benefit can be availed under CSR?
No specific tax exemptions have been extended to CSR Expenditure per se. The Finance Act,
2014 also clarifies that expenditure on CSR does not form part of business expenditure. While
no specific tax exemption has been extended to expenditure incurred on CSR, spending on
several activities like contributions to Prime Minister’s Relief Fund, scientific research, rural
development projects, skill development projects, agricultural extension projects, etc., which
find place in Schedule VII, already enjoy exemptions under different sections of the Income
Tax Act, 1961.
7. Which activities would not qualify as CSR?
a) The CSR projects or programs or activities that benefit only the employees of the
company and their families.
b) One-off events such as marathons/awards/charitable contribution/advertisement/
sponsorships of TV programs etc.
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c) Expenses incurred by companies for the fulfillment of any other Act/Statute of
regulations (such as Labour Laws, Land Acquisition Act, 2013, Apprentice Act, 1961
etc.)
d) Contribution of any amount directly or indirectly to any political party.
e) Activities undertaken by the company in pursuance of its normal course of business.
f) The project or programs or activities undertaken outside India.
8. Whether a holding or subsidiary of a company which fulfils the criteria under section
135(1) has to comply with section 135, even if the holding and subsidiary itself does
not fulfill the criteria.
Holding or subsidiary of a company does not have to comply with section 135(1) unless the
holding or subsidiary itself fulfills the criteria.
9.Whether provisions of CSR are applicable on Section 8 company, if it fulfills the
criteria of section 135(1) of the Act.
Section 135 of the Act reads “Every company……”, i.e. no specific exemption is given to
section 8 companies with regard to applicability of section 135, hence section 8 companies are
required to follow CSR provisions.
10. Can contribution of money to a trust/Society/Section 8 Companies by a company be
treated as CSR expenditure of the company?
General Circular No. 21/2014 Of MCA Dated June 18, 2014 Clarifies That
Contribution to Corpus of a Trust/Society/Section 8 Companies Etc. will qualify as CSR
Expenditure as long as:
(a) The Trust/Society/Section 8 company etc. is created exclusively for undertaking CSR
activities or
(b) Where the corpus is created exclusively for a purpose directly relatable to a subject covered
in Schedule VII of the Act.
11. Whether display of CSR policy of a company on website of the company is mandatory
or not?
As per section 135(4) the Board of Directors of the company shall, after taking into account
the recommendations of CSR Committee, approves the CSR policy for the company and
disclose contents of such policy in its report and the same shall be displayed on the company’s
website, if any (refer Rule 8 & 9 of CSR Policy, Rules 2014).
12.Whether reporting of CSR is mandatory in Board’s Report?
The Board’s Report of a company qualifying under section 135(1) pertaining to a financial year
commencing on or after the 1st day of April, 2014 shall include an annual report on CSR
containing particulars specified in Annexure. (refer Rule 9 of CSR Policy, Rules 2014).
13.Whether it is mandatory for Foreign Company to give report on CSR activity?
In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-section (1) of
section 381 shall contain an Annexure regarding report on CSR.
14. Whether contribution in kind can be monetized to be shown as CSR expenditure?
Section 135 prescribes “…shall ensure that company spends …..”. The company has to spend
the amount.
15. If a company spends in excess of 2% of its average net profit of three preceding years
on CSR in a particular year, can the excess amount spent be carried forward to the next
year and be offset against the required 2% CSR expenditure of the next year?
Any excess amount spent (i.e., more than 2% as specified in Section 135) cannot be carried
forward to the subsequent years and adjusted against that year’s CSR expenditure.
388
16. Can the unspent amount from out of the minimum required CSR expenditure be
carried forward to the next year?
The Board is free to decide whether any unspent amount from out of the minimum required
CSR expenditure is to be carried forward to the next year. However, the carried forward amount
should be over and above the next year’s CSR allocation equivalent to at least 2% of the
average net profit of the company of the immediately preceding three years.
17. What is the role of Government in monitoring implementation of CSR by companies
under the provision of the Companies Act, 2013?
The main thrust and spirit of the law is not to monitor but to generate conducive environment
for enabling the corporates to conduct themselves in a socially responsible manner, while
contributing towards human development goals of the country.
The existing legal provisions like mandatory disclosures, accountability of the CSR Committee
and the Board, provisions for audit of the accounts of the company etc., provide sufficient
safeguards in this regard. Government has no role to play in monitoring implementation of
CSR by companies.
18. Whether government is proposing to establish any mechanism for third parties to
monitor the quality and efficacy of CSR expenditure as well as to have an impact
assessment of CSR by Companies?
Government has no role to play in engaging external experts for monitoring the quality and
efficacy of CSR expenditure of companies. Boards/CSR Committees are fully competent to
engage third parties to have an impact assessment of its CSR program to validate compliance
of the CSR provisions of the law.
19. Can CSR funds be utilized to fund Government Scheme?
The objective of this provision is indeed to involve the corporates in discharging their social
responsibility with their innovative ideas and management skills and with greater efficiency
and better outcomes. Therefore, CSR should not be interpreted as a source of financing the
resource gaps in Government Scheme. Use of corporate innovations and management skills in
the delivery of ‘public goods’ is at the core of CSR implementation by the companies. In-
principle, CSR fund of companies should not be used as a source of funding Government
Schemes. CSR projects should have a larger multiplier effect than that under the Government
schemes.
However, under CSR provision of the Act and rules made there under, the Board of the eligible
company is competent to take decision on supplementing any Government Scheme provided
the scheme permits corporates participation and all provisions of Section 135 of the Act and
rules there under are complied by the company.
20. Who is the appropriate authority for approving and implementation of the CSR
programs/projects of a Company? What is Government’s role in this regard?
Government has no role to play in this regard. Section 135 of the Act, Schedule VII and
Companies CSR Policy Rules, 2014 read with General Circular dated 18.06.2014 issued by the
Ministry of Corporate Affairs, provide the broad of eligible companies are required to
formulate their CSR policies including activities to be undertaken and implement the same in
the right earnest. Therefore, all CSR programs/projects should be approved by the Boards on
the recommendations of their CSR Committees. Changes, if any, in the program/project should
also be undertaken only with the approval of the committee/Board.
21.How can companies with small CSR funds take up CSR activities in a project/program
mode?
A well-designed CSR project or program can be managed with even small fund. Further, there
is a provision in the CSR Policy Rules, 2014 that such companies can combine their CSR
programs with other similar companies by way of pooling their CSR resources. (Refer Rule 4
in Companies (CSR Policy) Rules, 2014).
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22. Whether involvement of employees of the company in CSR project/programs of a
company can be monetized and accounted for under the head of ‘CSR expenditure’?
Contribution and involvement of employees in CSR activities of the company will no doubt
generate interest/pride in CSR work and promote transformation from Corporate Social
Responsibility (CSR) as an obligation to Socially Responsible Corporates (SRC) in all aspects
of their functioning. Companies therefore, should be encouraged to involve their employees in
CSR activities. However, monetization of pro bono services (professional work undertaken
voluntarily and without payment) of employees would not be counted towards CSR
expenditure.
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Dec 2014 C. Law
NOTE : 1. Answer ALL Questions.
2. All references to sections relate to the Companies Act, 2013 unless stated otherwise.
1. Comment with reasons on the following:
(a) Piercing through corporate veil.
(b) Acts done outside the limits of memorandum are ultra vires.
(c) 'Reserve capital' and 'capital reserve' are one and the same.
(d) Minutes of the company can be maintained in loose leaf form. (5 marks each)
Attempt all parts of either Q. No. 2 or Q. No. 2A
2. Distinguish between the following:
(a) 'Winding-up' and 'dissolution'.
(b) 'Oppression' and 'mismanagement'.
(c) 'Transfer of shares' and 'transmission of shares'.
(d) 'Interim dividend' and 'final dividend'. (4 marks each)
OR (Alternate question to Q. No. 2)
2A. (i) In an annual general meeting of Amar (Pvt.) Ltd., all the shareholders were killed in a
bomb blast. State, whether the company is still in existence. If so, how? (4 marks)
(ii) A housing company has sold a flat to its Managing Director by accepting 50% in cash and
balance in installments. Decide whether this transaction attracts the provisions pertaining to
loan to directors under section 185. If so, validate the transaction. (4 marks)
(iii) "Limited liability partnership is the best suited form of entity for professionals."
Elaborate. (4 marks)
(iv) Shortcut Ltd. has allotted shares to investors of the company without filing prospectus
with the Registrar of Companies, Mumbai. Explain the remedies available to the investors in
this regard. (4 marks)
Attempt all parts of either Q.No. 3 or Q.No. 3A
3. (a) A, B, C and D developed a business plan. To implement the plan, it was decided that A
and B will incorporate a company and C, a Chartered Accountant, will provide them his
professional services for the same. It was also decided that D will provided loan to the
company. The loan to be provided by D was essential to start the business of the company.
Advise, out of C and D, who shall be regarded as a promoter of the company. (4 marks)
(b) Abha Ltd. was incorporated on 15th March, 2012. A company with identical name and
similar objects was incorporated on 5th August, 2013. On account of similarity of name,
Abha Ltd., i.e., the company which was previously registered, filed a petition on 15th April,
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2014 with the Central Government seeking issue of direction for change of name by the later
company so that its business interest is protected. On 16th August, 2014, the Central
Government sent an order to the later company to change its name. Examine the aforesaid
case and the validity of the order of the Central Government. (4 marks)
(c) Rose Ltd. raised a loan from a State financial institution by creating hypothecation of
book debts and also future debts of the company. Incidentally, the charge was not registered
with the Registrar of Companies concerned. State financial institution demanded a certificate
of registration of charge for the amount of loan so granted by it. The directors of the company
replied to the State financial institution that the charge need not be registered for
hypothecation of book debts. Is the action of the directors valid? Give reasons. (4 marks)
(d) In Evergreen Ltd., the Board of directors declared an interim dividend but could not
distribute the dividend due to objections of audit committee that the accounts considered by
the Board were false; and true financial results were inflated by not incorporating outstanding
liabilities and over-valuation of inventories. A shareholder filed a suit for non-payment of
dividend. One of the directors contended that he never attended the Board meeting where the
issue relating to payment of interim dividend was declared on the basis of false accounts.
Discuss about the validity of contention of the director. (4 marks)
3A. Write notes on the following :
(i) A forged transfer of shares is a nullity
(ii) Officer-in-default
(iii) Issue of sweat equity shares
(iv) Red-herring prospectus. (4 marks each)
4. (a) In a public limited company, certain directors who guaranteed the company's debts
retired and new directors were appointed in their places and they also signed the guarantee
bonds. There was no agreement to show that the earlier guarantee had ceased to be operative.
The bank who is the beneficiary, exercised its option and demanded the repayment. The
retired directors contended that they have already retired and they are not liable to the bank
on the strength of bond. Is the contention valid? Decide the case with regard to the provisions
of the Companies Act, 2013. (4 marks)
(b) On receipt of 85% of the minimum subscription stated in the prospectus, Little Stars Ltd.
allotted 200 shares to Ranjit and the money was deposited in a scheduled bank. Later on, it
was revealed that 40% of the amount withdrawn was for acquisition of fixed assets for the
company. Ranjit, knowing these facts, refused to accept the allotment contending that the
allotment was irregular under the provisions of the Companies Act, 2013. As an expert on
company law advise Ranjit. (4 marks)
(c) Pioneers Ltd. convened a Board meeting on 1st September, 2013. During the course of
meeting, the date of next annual general meeting was discussed but no decision was taken.
However, the Company Secretary issued the notice for annual general meeting without any
specific authorisation from the Board of directors. Decide the validity of notice of annual
general meeting. (4 marks)
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(d) Agile Ltd. called its annual general meeting on 28th September, 2013. The notice of the
meeting was posted on 6th September, 2013. With reference to the provisions of the
Companies Act, 2013, examine whether the notice given by the company was valid.
(4 marks)
5. (a) In a limited company, the Managing Director terminated an employee on the charge of
various misconducts. The aggrieved employee filed a writ petition before the High Court
challenging the dismissal contending that the Managing Director had no power to do so and
the proper authority was the Board of directors. During the pendency of writ, the Board of
directors passed a resolution ratifying the action of the Managing Director. The High Court
while setting aside the Managing Director's dismissal order, allowed the writ petition.
Managing Director appealed to the Supreme Court. Decide the case having regard to the
judicial pronouncements in the matter.
(b) Sun-beam Ltd. failed to pay interest on repayment of deposits. One depositor approached
the consumer forum with the request to issue order against the company for payment of
interest on deposits. The company contended that the consumer forum was not a proper
authority to issue such directions. Advise the company suitably. (8 marks each)
6. (a) Heal Ltd. owns a chain of hospitals in Mumbai. Dr. Aman, a practicing surgeon, has
been appointed by the company as its non-executive ordinary director and wants to pay him
fees on case-to-case basis for surgeries performed by him on patients at hospital. Advise the
company, whether payment of such fees to him would amount to payment of managerial
remuneration to a director under the Companies Act, 2013.
(b) Introduction of Secretarial Standards by the Institute of Company Secretaries of India
(ICSI) is a unique and pioneering effort towards attainment of good Corporate Governance.
Do you agree? Explain briefly.
(c) Mention the importance of 'notes on accounts'. Will it convey any meaning to
stakeholders?
(d) Narrate briefly the importance of Corporate Governance Report and also state who can
certify such report. (4 marks each)
JUNE 2015
NOTE :
1. Answer ALL Questions.
1. Comment on the following:
(a) In no circumstances a company can issue redeemable preference shares with a redemption
period beyond 20 years.
(b) Powers of the directors of a company are co-extensive with those of the company.
(c) One-person company shall be formed only as a company limited by shares.
393
(d) The gap between two annual general meetings can never exceed 15 months. (5 marks
each)
(a) 'Independent director' and 'non-executive director'.
(b) 'Inspection' and 'investigation'.
(c) 'Limited liability partnership' and 'body corporate'.
(d) 'ESOP' and 'sweat equity shares'. (4 marks each)
2A. (i) To consider a body corporate as a foreign company, a place of business in India is to
be established. State the activities that do not constitute carrying of business in India.
(ii) Masons (Pvt.) Ltd. is a private limited company as per the articles of association of the
company. However, a public company acquired shares in Masons (Pvt.) Ltd. thereby making
the company, Masons (Pvt.) Ltd., a subsidiary of that public company. State the impact of
such acquisition of shares by a public company on Masons (Pvt.) Ltd.
(iii) "Financial statements shall be signed only by the Chairperson of the company.'' Explain.
(iv) Alok, the Managing Director of Yellow Ltd., borrowed a large sum of money and
misappropriated the same. Later, when the lender demanded his money, the company refused
to repay, contending that the money borrowed by Managing Director was misappropriated by
him and the company is not liable for repayment. Decide, giving reasons, whether the lender
would succeed in recovering the money from the company. (4 marks each)
Attempt all parts of either Q.No. 3 or Q.No. 3A
3. (a) Mahesh is a creditor of an unlimited company. The company was wound-up. Mahesh,
therefore, wants to sue the members of the company to recover the dues. Advise Mahesh
regarding the remedy available to him.
(b) An employee of a company purchased certain shares of his company through a member of
a stock exchange and lodged with the company an application for transfer of shares in his
(employee's) name. The company refused to execute the transfer on the suspicion that the
employee, if admitted as a member of the company, will create nuisance in general meetings
and seek access to the records of the company. Decide giving reasons-
(i) Whether the company's contention shall be tenable; and
(ii) What is the remedy available to the employee in the given case?
(c) In what way does the Companies Act, 2013 regulate the payment made by companies
towards contribution to political parties for political purposes? Explain.
(d) Explain the meaning of the term 'key managerial personnel' in relation to a company as
introduced by the Companies Act, 2013 and also state the manner in which they are
appointed. (4 marks each)
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3A. (i) In what way does the Companies Act, 2013 and Rules made thereunder regulate the
appointment of woman director in a company? Explain.
(ii) Referring to the provisions of the Companies Act, 2013, state the conditions required to
be fulfilled before a company can issue bonus shares to shareholders of the company.
(iii) The Board of directors of Vedic Ltd. desirous of transacting certain matters through
video conferencing, seek your advice on the matters which cannot be dealt with through
video conferencing. Advise the Board.
(iv) A petition signed by 100 members of a company has been moved to Company Law
Board (CLB) for prevention of mismanagement. Later on, half of the members (signatories)
withdrew their consent after filing the petition. Examine whether the remaining applicant’s
petitioners/signatories) to the petition would be successful in their complaint to CLB.
(4 marks each)
4. (a) Vir is a director in DJA Ltd. (the company). The company holds 75% shares of MRN
Ltd. Vir wants to inspect the books of MRN Ltd. Examining the provisions of the Companies
Act, 2013 advise whether Vir, the director of DJA Ltd. can be allowed to inspect the books of
MRN Ltd. (4 marks)
(b) Explain the provisions of the Companies Act, 2013 relating to 'secretarial audit'. State
whether 'secretarial audit' is mandatory for all companies. (4 marks)
(c) PQR Ltd. is an unlisted company and has 400 shareholders in all. The shareholders of the
company propose voting by electronic mode. Chairman of the company rejected the
shareholders' proposal. Explaining the provisions of the Companies Act, 2013, examine the
validity of rejection of the shareholders' proposal by the Chairman. (4 marks)
(d) Board of directors of Joy Ltd., by a resolution passed at its meeting, decide to provide a
loan of 50 crore to Happy Ltd. The paid-up share capital of Joy Ltd. on the date of resolution
was 100 crore and the aggregate balance in the free reserves and securities premium account
stood at 40 crore. Examining the provisions of the Companies Act, 2013, decide whether the
Board's resolution to provide a loan of 50 crore to Happy Ltd. is valid? (4 marks)
5. (a) Explain the provisions of the Companies Act, 2013 relating to the constitution of an
audit committee. What role does the audit committee play in the management of a company?
(4 marks)
(b) Based on the information given in the memorandum of association, Smart Ltd. was
incorporated and the certificate of incorporation was issued by the Registrar of Companies,
New Delhi. The memorandum of association was duly signed, except that X, Y and Z signed
it on behalf of five minors. Examine the validity of the certificate of incorporation issued by
the Registrar of Companies. (4 marks)
(c) DEF Ltd., a company listed at Bombay Stock Exchange, failed to file its report on the
annual general meeting for the financial year ended 31st March, 2013 with the Registrar of
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Companies, Mumbai. The company further abstained from filing the said report for another
two years, viz. financial years ended 31st March, 2014 and 2015 respectively.
Examining the provisions of the Companies Act, 2013, state whether the default committed
by the company amounts to an offence. If so, to what extent it is possible to get the offence(s)
compounded. (4 marks)
(d) Answer the following by explaining the provisions of the Companies Act, 2013 relating to
'internal audit':
(i) Whether a private company is mandatorily required to appoint an internal auditor?
(ii) Who may be appointed as an internal auditor? Whether a Practicing Company Secretary
(PCS) can be appointed as an internal auditor? (2 marks each)
6. (a) Brave Ltd. is listed at Bombay Stock Exchange and has a net worth of over 600 crore.
The company has constituted a corporate social responsibility (CSR) committee with Jay and
Vijay as its members. Both Jay and Vijay are directors of the company, Jay being an
independent director. Explaining the provisions of the Companies Act, 2013 relating to
'corporate social responsibility', examine whether the company has complied with the
provisions of the Act in this regard.
(b) The Board of directors of Charming Ltd. seek your advice on the matters to be included in
the directors' responsibility statement forming part of the company's annual report to
shareholders. As the Company Secretary of Charming Ltd., advise the Board.
(c) What transactions are considered as 'related party transactions' under the provisions of the
Companies Act, 2013? Explain.
(d) Due to inadequacy of profits, the Board of directors of Rise Ltd. decided not to
recommend any dividend for the financial year ended 31st March, 2015. Certain shareholders
of the company complained to the Company Law Board/Tribunal regarding mismanagement
of the affairs of the company, since the Board of the company did not recommend any
dividend. Explaining the provisions of the Companies Act, 2013, examine whether the
contention of the shareholders is tenable. (4 marks each)
C. Law Dec 2015

NOTE : 1. Answer ALL Questions.
(a) A company incorporated under the Companies Act, 2013, being an artificial person, is not
entitled to sue a natural person or to sue another company incorporated under the same Act.
(b) A company incorporated under the Companies Act, 2013 does not have the right to reduce
its share capital on selective basis.
396
(c) A public limited company incorporated under the Companies Act, 2013 may amend its
articles of association so as to confer upon it power to forfeit the shares of those members
who have defaulted in the payment of calls made by the company.
(d) A company incorporated under the Companies Act, 2013 never dies except when it is
wound-up as per the law. (5 marks each)
(a) 'Company' and 'limited liability partnership'.
(b) 'Preference shares' and 'equity shares'.
(c) 'Memorandum of association' and 'articles of association'.
(d) 'Red-herring prospectus' and 'abridged prospectus'. (4 marks each)
2A. (i) Explain clearly the meaning of 'lifting of corporate veil' in relation to a company
incorporated under the Companies Act, 2013. Examining the judicial decisions, state whether
'corporate veil' can be lifted in the following cases:
(a) Where the corporate veil has been used for improper conduct; and
(b) Where the acts of a company are opposed to workmen? (4 marks)
(ii) As the Company Secretary of Joy Ltd., what steps would you take in case the scheduled
Board meeting could not complete the agenda slated thereat. The items of business left
untransacted are of extreme importance for the company's growth and the same cannot be
deferred until the next Board meeting because of urgency. Advise the Board about the steps
to be taken to get the untransacted items passed. (4 marks)
(iii) ABC Ltd. is a company incorporated under the Companies Act, 2013. The paid-up share
capital of the company is held as under :
— Government of India 20%
— Government of Andhra Pradesh 20%
— Government of Tamil Nadu 10%
— Government of Maharashtra 10%
Explaining the provisions of the Companies Act, 2013, state whether the said company be
called a 'Government company' and also state whether the employees of a Government
company can claim their salaries from the Government of India. (4 marks)
(iv) Reliable Ltd. holds 75% of the paid-up share capital in Trust Ltd. Board of directors of
Trust Ltd. decides and resolves to hold 10% of the paid-up share capital in Reliable Ltd. The
Board's proposal was also approved by Trust Ltd. in its general meeting. However, certain
members of Trust Ltd. objected to the decision on the ground that both the Board's proposal
397
and the resolution of the general meeting are in violation of the provisions of the Companies
Act, 2013. Examine. (4 marks)
3. (a) Referring to the provisions of the Companies Act, 2013, state as to when shall a
company incorporated outside India be considered as a 'foreign company' within the meaning
of the Companies Act, 2013. Also examining the provisions of the Act, state whether in the
following cases, the company shall be considered as a 'foreign company’:
(i) A company incorporated outside India has a representative in India, who on behalf of the
company merely receives orders from the customers.
(ii) A company incorporated outside India holds its Board meetings and general meetings in
India. (4 marks)
(b) Net profits of PQR Ltd. during the following years as disclosed in the statement of profit
and loss are as under:
Financial year ended Net profits ( in crore)
31st March, 2013 10
31st March, 2014 12
31st March, 2015 08
The Board of directors of the company at its meeting decides to contribute to a charitable
organization, for charitable purposes, a sum of 3 crore out of the net profits of the financial
year ended 31st March, 2015. This contribution has been made by the Board without seeking
approval of shareholders in general meeting. In the light of the provisions of the Companies
Act, 2013, examine the validity of the contribution made by the company. What shall be your
answer in case the Board decides to contribute 1 crore only? (4 marks)
(c) A group of persons wants to form a company for a future project and acquire the status of
a 'dormant company'. The group seeks your advice about the procedure and the conditions to
be complied with. State the privileges and exemptions available to such a company under the
provisions of the Companies Act, 2013. (4 marks)
(d) Manohar, the auditor of Belle Ltd. appointed by the company in its last general meeting
has resigned from the office of auditor of the company for some personal reasons. Referring
to the provisions of the Companies Act, 2013, answer the following:
(i) Who is the competent authority to accept and approve the resignation?
(ii) State the manner in which the vacancy caused by Manohar's resignation shall be filled in.
(4 marks)
3A. (i) Board of directors of Divine Ltd. decides to enter into a contract whereby Manish, a
director of the company shall acquire certain assets from the company for consideration other
than cash, without seeking approval of the company in its general meeting. Certain
398
shareholders of the company object to the said decision of the Board. Referring to the
provisions of the Companies Act, 2013, examine the validity of the Board's decision and state
whether the contention of the shareholders shall be tenable. (4 marks)
(ii) Surprise Ltd. was incorporated under the Companies Act, 2013. The memorandum of
association of the company in its objects clause stated that the company was established to
make and sell or to carry on the business of mechanical engineers and general contractors.
The company entered into a contract with Prominent Ltd., a firm of railway contractors to
finance the construction of a railway line in Mumbai. The contract was ratified by the
shareholders in general meeting. Subsequently, the contract was repudiated by the company
on the ground that the contract was ultra vires the objects clause. Prominent Ltd. filed a suit
claiming damages for the breach of contract. Explaining the meaning of doctrine of ultra
vires, decide whether Prominent Ltd. will succeed. (4 marks)
(iii) Explain the provisions of the Companies Act, 2013 relating to shifting of the registered
office of a company from one State to another. (4 marks)
(iv) Adorable Ltd., incorporated under the Companies Act, 2013 has on its Board, 5 directors
and a Managing Director. The company has also appointed a Company Secretary. The
financial statements of the company, viz., balance sheet and statement of profit and loss for
the year ended 31st March, 2015, were authenticated under signatures of one director and the
Company Secretary. Referring to the provisions of the Companies Act, 2013, examine the
validity of authentication. What shall be your answer in case the company in question is a
'one person company'? (4 marks)
4. (a) In view of the provisions of the Companies Act, 2013 relating to 'securities premium',
state whether the amount lying in securities premium account of a company can be used:
(i) For issuance of bonus shares; and
(ii) For payment of dividend declared by the company at its general meeting. (4 marks)
(b) Board of directors of Pious Ltd. gives you the following information extracted from the
company's financial statements as at 31st March, 2015:
Authorized equity share capital .... 10 crore (1 crore shares of 10 each)
Paid-up equity share capital .... 5 crore
General reserve .... 5 crore
Debenture redemption reserve .... 2 crore
Board of directors by a resolution passed at its meeting decides to go for buy-back of shares
to the extent of 20% of the company's paid-up share capital and free reserves. Examine the
validity of the Board's resolution with reference to the provisions of the Companies Act,
2013. (4 marks)
(c) Explain clearly the meaning of the terms 'fixed charge' and 'floating charge'. State the
circumstances under which a 'floating charge' automatically becomes 'fixed'. (4 marks)
(d) Examine the validity of transfer and transmission of shares in favor of a minor under the
provisions of the Companies Act, 2013. (4 marks)
399
5. (a) In Bright Ltd., vacancy of a director is caused by the death of Mohan, a director of the
company, after three months of his joining the company as director. The Board of the
company, therefore, appointed Sumit in his place but did not seek approval of the company in
general meeting. Referring to the provisions of the Companies Act, 2013, examine the
validity of Sumit's appointment. (4 marks)
(b) Johnson, a director in Disha Ltd. proceeds on leave for 8 months to France for personal
reasons. Board of directors at a meeting appoints Peter for a period of two months, as an
alternate director. Articles of association of the company do not confer upon the Board of
directors any such power to appoint anyone as alternate director. Referring to the provisions
of the Companies Act, 2013, examine the validity of the above appointment. What shall be
your answer in case the Board appoints Peter for the entire period of Johnson's leave? (4
marks)
(c) Examining the provisions of the Companies Act, 2013, relating to the constitution of a
'Nomination and Remuneration Committee' and 'Stakeholders Relationship Committee',
answer the following:
(i) Is it mandatory for a listed company to constitute such committees? Also state whether it
is mandatory for a non-listed public company having paid-up share capital of 5 crore to
constitute such committees?
(ii) What shall be the composition of the committees in case the company is required to
constitute such committees?
(d) In terms of the provisions of the Companies Act, 2013, answer the following:
(i) Which companies are required to have independent directors?
(ii) What is the tenure of independent directors and the number of terms for which such a
director can be appointed? Are independent directors required to hold meetings of their own
without the presence of non-independent directors? (4 marks)
6. (a) Explain with reference to the provisions of the Companies Act, 2013, the meaning and
importance of 'secretarial audit'. Which companies are required to get the 'secretarial audit'
conducted? (4 marks)
(b) Who are key managerial personnel (KMPs)? State the manner in which they can be
appointed in a company. (4 marks)
(c) Ms. Jyoti is the Managing Director of Wise (India) Ltd., incorporated under the
Companies Act, 2013. Board of directors of the company presents the following financial
data extracted from the company's financial statements as at 31st March, 2015:
Particulars (in crore)
Authorised equity share capital .. 60
Paid-up equity share capital .. 10
Debenture redemption reserve .. 10
Securities premium account .. 20
400
Profit and loss (loss) .. (10)
Revaluation reserve .. 20
Due to losses in the financial year 2014-15, the company is not in a position to pay any
remuneration to Ms. Jyoti, Managing Director of the company. As per the agreement of
service between Ms. Jyoti and the company, in case of losses or inadequacy of profits in any
financial year, she is to be paid remuneration on the basis of 'effective capital' of the
company. Based on the provisions of the Companies Act, 2013, decide the maximum
remuneration payable to Ms. Jyoti for the financial year 2014-15 without the approval of the
Central Government. (4 marks)
(d) Referring to the provisions of the Companies Act, 2013, state the grounds on which the
Registrar of Companies can file a petition for winding-up of a company. (4 marks)
Paper June 2016 C. Law
Answer ALL Questions.

1. Comment on the following
(a) It is mandatory for every director of company to disclose his interest or nature of his
concern in other companies in which he is a director.
(b) There are certain circumstances under which investigation into affairs of a LLP is
conducted under LLP Act, 2008.
(c) The time gap between the date of approval of financial statements by the Board of
directors of a company and the date of notice of annual general meeting should be 45 days.
(d) Three Singapore nationals who have never been to India have decided to be the
shareholders holding 100% equity shares and the only directors of a private company in India
in the year 2015 which is' not a subsidiary of a public company.
(5 marks each)

(a) Appointment of directors by nomination' and 'appointment of directors against casual
vacancy'.
(b) Informational services and approval services (Registrar of Companies)' for categories of
e-forms.
(c) Notice of a charge and satisfaction of a charge'.
(d) Small company' and 'inactive company'. (4 marks each)

2A. (i) Sanjay, a Chartered Accountant, is the financial controller of Sonik Industries (Pvt.)
Ltd. for the last five years. The company now wants to appoint him as the statutory auditor of
the company. Examining the provisions of the Companies Act, 2013, advise whether the
company can appoint Sanjay as its statutory auditor.
401
(ii) Board of directors of Ash Ltd. having its registered office at New Delhi decides to hold its
next meeting at New York, USA since all the directors of the company are going to attend a
sales exhibition to be held at New York. Examining the provisions of the Companies Act,
2013, advise the Board about the validity of its decision to hold the Board meeting at New
York.
(iii) Prism Ltd. has accepted Rs. 10 lakh as advance towards the supply of goods to certain
parties. As per the agreement, the company will supply the goods after two years from the
date of deposit. Later on, internal auditors qualified their report on the ground that the
company has violated the provisions of the Companies Act, 2013. Directors explained that
this is required to complete the order. Examining the relevant provisions of the Companies
Act, 2013 state whether the explanation given by the directors is justified.
(iv) Virat, a person of 21 years of age is pursuing MBA (Finance) course at a reputed
recognized business school. He is not a shareholder of Grow (Pvt.) Ltd. He wishes to inspect
the register of investments in securities not held in company's name and annual return of
Grow (Pvt.) Ltd. He also wants to take copies thereof. Examining the relevant provisions of
the Companies Act, 2013, advise Virat whether he would be successful in this regard.
(4 marks each)

3. (a) Prudent General Insurance Company Ltd. is engaged in the general insurance business.
The company is not listed in any stock exchange in India but is a subsidiary of Reliable
General Insurance Company Ltd., listed at Bombay Stock Exchange. The turnover of Prudent
General Insurance Company Ltd. is Rs.330 crores. Examining the provisions of the
Companies Act, 2013, state whether the company is required to file XBRL enabled balance
sheet.
(b) Sweet (Pvt.) Ltd. has committed a default which is in violation of the provisions of the
Companies Act, 2013. No specific penalty or punishment is provided in the Act for the said
default. Decide the quantum of punishment for contravention where no specific penalty or
punishment is provided under the Companies Act, 2013.
(c) Sun & Moon LLP, Trademark and Patent Attorneys, seeks your advice as to the
circumstances which would require their accounts to be audited. They have also asked you
whether foreign direct investment is allowed in limited liability partnership. Examining the
provisions of the Limited Liability Partnership Act, 2008 and the rules thereof, advise
whether they can avail external commercial' borrowings.
(d) Paras, a director of Spike (Pvt.) Ltd. resigns from the office of director. He has forwarded
a copy of resignation to the company and the Registrar of Companies (ROC) in time. The
company, however, has not filed relevant form to the ROC. Explaining the provisions of the
Companies Act, 2013 in this regard, decide the status of Paras. (4 marks
each)
OR (Alternate 'question to Q. No. 3)
3A. Write notes on the following: (4 marks each)
402
(i) Public financial institutions
(ii) Corporate social responsibility
(iii) Resident director
(iv) Punishment for failure to distribute dividend and exceptions.
4. (a)Aman, Raman and Shraman are three brothers. They are in the process of subscribing to
the memorandum of association of a proposed new company, Glamour (Pvt.) Ltd. They have
been asked. to file an affidavit in this regard. Stating the contents of the affidavit decide
whether the affidavit has to be filed individually or jointly.
(b)Bright Products Ltd. wishes to sell one of its undertakings for which it decides to call an
extra-ordinary general meeting (EGM) and to pass a resolution thereat. State the material
facts to be set out in the explanatory statement to be annexed to the notice of the EGM on this
special business to be transacted at the meeting.
(c) The paid-up equity share capital of Strong Foundry Ltd. is-Rs. 45lakh. President (Finance)
of the company seeks your advice whether it is possible to re-open its books of account and
recast the company's financial statements of the previous year. You being the Secretary of the
company, advise the President (Finance) by preparing a note in this regard.
(d) Pioneer Fisheries Ltd. has borrowed an· amount of Rs. 50 crore from a financial
institution. The annual general meeting of the company was held on 1st September, 2015.
Examining the provisions of the Companies Act, 2013, state as to who will sign and certify
the annual return while filing the same with the Registrar of Companies after the annual
general meeting. (4 marks each)
.
5. (a) Board of directors of Acute (Pvt.) Ltd., incorporated under the Companies Act, 2013,
decides to convert the company into a one-person company (OPC). ·Explain the procedure as
provided under the Companies Act, 2013 to be followed in this regard. (8 marks)
(b) Board of directors of Desire Ltd. decides to go for creditors' winding-up of the company.
For this purpose, the Board decides to call an extra-ordinary general meeting on 30th June,
2016. Draft a notice along with explanatory statement for convening the meeting. Assume
facts. (8 marks)
6. (a)Explaining the provisions of the Companies Act, 2013, state the duties of Nomination
and Remuneration Committee.
(b) Krugen Holdings Ltd. promoted Ms. Bhavna and designated her as the Director
(Administration). Examine the validity of such a designation under the provisions of the
Companies Act, 2013.
(c) Board of directors of Green Field Ltd. decides to accept deposits from the public at a
compound interest rate of 11%per annum. Examining the provisions of the Companies Act,
2013, advise whether the Board can go ahead with its proposal.
(d) Referring to the provisions of the Companies Act, 2013, explain whether the Company
Secretary being a Chief Financial Officer of the company can be held liable for maintenance
of books of account of the company. (4 marks each)
403
Paper Company Law Dec 2016
All references to sections relate to the Companies Act, 2013 unless stated otherwise.
(a) A director insists that his note of dissent be recorded in the minutes of the Board meeting
which he attended and did not agree to some of the points of the agenda.
(b) A member of a company has statutory right to appoint proxy for attending the general
meeting of the company. Similarly, a director can also appoint his proxy for attending
the meetings of Board of directors of the company.
(c) Issue of unsecured debentures by a company to another company, where the debentures
have an option for compulsory conversion into equity shares within seven years, cannot
be termed as deposits.
(d) A meeting of the Board of directors was scheduled to take place at the factory premises
of a company and not at the registered office. At the scheduled date and time, the
required quorum was not present. The Chairman of the meeting announced that the
meeting is dissolved. (5 marks each)
2 Distinguish between the following:
(a) 'Annual general meeting' and 'extraordinary general meeting'.
(b) 'Associate company' and 'subsidiary company'.
(c) 'Mortgage' and 'charge'.
(d) 'Transfer of shares' and 'transmission of shares'. (4 marks each)

2A. (i) It has been found that Mrs. Shweta, director of a company, has drawn remuneration
in excess of the prescribed limits. The Chief Financial Officer of the company has sought
your advice in the matter. As the Secretary of the company, advise the Chief Financial
Officer, the course of action that may be taken in this regard. (4 marks)
(ii) There are seven shareholders in a private limited company having registered office in
Chennai. Six shareholders are French nationals and belong to the same family holding
an aggregate of 95% voting rights. These shareholders are unable to come down to
Chennai and wish to hold the company's annual general meeting in Paris. Advise whether
the meeting can be held in Paris. (4 marks)
(iii) Kamal, the promoter of Desire Ltd., has incurred ~1 lakh for formation of the company.
The company refuses to pay all the expenses so incurred by Kamal since the company
does not have any provision in the Articles of Association for such payment. Advise
Kamal regarding the remedy available to him for his claim. (4 marks)
(iv) Divine Industries (Pvt.) Ltd. has a turnover of ~350 crore during the financial year
2014-15. The bankers of the company have advised the company to compulsorily appoint
a woman director in the company as required under the Companies Act, 2013. Referring
to the provisions of the Act, examine the validity of the banker's advice. What would
be your answer in case the company in question is a public limited company? (4 marks)
3. (a) Peculiar Ltd., an unlisted company, did not prepare its financial statements for the year
ended on " March, 2016 in conformity with some of the mandatory accounting standards.
With reference to the provisions of the Companies Act, 2013, state the responsibilities
of the directors and statutory auditors of the company in this regard.
(b) A three-year old producer company wants to donate some amount. Advise the company
as to how and for what purposes such donation can be made. What are the monetary
restrictions in this regard? In this context you are also informed that the net profit
of the producer company for the last accounting year was Rs.12 lakh.
404
(c) At the annual general meeting of Soya Ltd., a matter was to be transacted by passing
a special resolution. Out of 40 members present, 20 voted in favour of the resolution,
5 voted against it and 5 votes were found invalid. The remaining 10 members abstained
from voting. The Chairman of the meeting declared the resolution as passed. Referring
to the provisions of the Companies Act, 2013, examine the validity of the Chairman's
declaration.
(d) Suresh, a member of Ruchi Ltd., wants to inspect the register of deposits maintained
by the company as required under the provisions of the Companies Act, 2013. The
company refused to provide the register for inspection without assigning any reason.
Referring to the provisions of the Act, examine the validity of the company's refusal.
What shall be your answer if the same Register is demanded by the statutory auditors
of the company for inspection and for their audit ? (4 marks each)
OR (Alternate question to Q.No. 3)
3A. (i) Novel LLP, Trademark & Patent Attorneys; have been successfully running their
business for the last five years. They have fixed assets in the form of intangibles (software)
worth Rs.75 lakh in their balance sheet. Advise as to whether their accounts are to be
audited.
(ii) Out of 9 directors in Rooftop Ltd., 5 are Indian nationals, 3 are foreign residents and
one is a person of Indian origin. The articles of the company stipulate that quorum
for a Board meeting shall be 5 directors of which at least one director shall be a foreign
resident. Referring to the provisions of the Companies Act, 2013, examine the validity
of the above provision in the articles.
(iii) Board of directors of KM Ltd. proposes to transfer 11.33% of the net profits of the
company for the financial year 2015-16 to general reserves. Examining the provisions
of the Companies Act, 2013, advise the Board whether it can go ahead with its proposal.
(iv) Priya, a nominee director on the Board of Aroma Ltd., a listed company, informed the
Board of directors during a Board meeting that the next annual report of the company
shall contain a 'Management Discussion and Analysis Report'. You being the Company
Secretary have been asked by the Board to prepare the said report. State the matters
you would include in the report. (4 marks each)
4. (a) Ria Technologies Ltd. was incorporated 10 years back. The Board of directors now wants
to change its name to Ria Systems Ltd. Draft a notice and the explanatory statement
for calling an extraordinary general meeting of the company for change of its name,
assuming relevant data.
(b) Barkha Ltd. has four directors on its Board. A Board meeting was convened which
was attended by only two directors, where Rekha was appointed as an additional director.
Rekha is related to both the directors. Referring to the provisions of the Companies
Act, 2013, examine the validity of the appointment.
(c) Rise Ltd., a company with diversified interests, has constituted Investor Education and
Protection Fund as required under the provisions of the Companies Act, 2013. The
company has so far not deposited any amount to the fund. The President (Finance) has
. asked you, the Company Secretary, to submit a note on amounts payable to the credit
of the fund and the period within which amount shall be paid. Prepare the said note.
(d) Six persons are the only members of Tab (Pvt.) Ltd. All of them went to USA on
a pleasure trip by aeroplane. On the way, the plane crashed and all the six members
died. Does Tab (Pvt.) Ltd. still exist? Decide. (4 marks each)
405
5. (a) Board of directors of Progressive Ltd. decides to issue equity shares of the company
with differential voting rights. Examining the provisions of the Companies Act, 2013,
state the conditions to be complied with by the company in this regard. (8 marks)
(b) Define the term 'deposits' and list out the receipts of money which are not considered
as deposits. . (8 marks)
6. (a) Mrs. Rukmini is the statutory auditor of Energies Ltd. Free reserves of the company
are four times more than the paid-up share capital. The company has Rohit, as secretarial
auditor. There is a cost auditor, Amit, and an internal auditor, Sunil. Examining the
provisions of the Companies Act, 2013 read with the secretarial standards, advise the
company as to who is/are required to be present at the forthcoming annual general meeting
of the company. (4 marks)
(b) Referring to the provisions of the Companies Act, 2013 relating to 'corporate social
responsibility' (CSR), answer the following:
(i) Which activities would not qualify as CSR?
(ii) Whether the average net profit criteria for CSR is before tax or after tax? (4 marks)
(c) Five Board meetings were held in Asha Ltd. during the period from January to June
in the calendar year 2016. Rajeev, an additional director, attended none of these meetings.
For the first two meetings he sought leave of absence from the Board but did not inform
the Board for the remaining three meetings. Examining the provisions of the Companies
Act, 2013, decide whether he is disqualified to act as a director. (4 marks)
(d) Examining the provisions of the Companies Act, 2013, explain the powers of the Central
Government to order amalgamation of companies in public interest. (4 marks)
406

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1 Introduction-Companies Act, 2013

Companies Act, 2013 notified in the Official Gazette of India 30-8-2013

Total 281 Sections Commencement for one section (Sec. 1) 30-8-2013

Notification for the applicability of 183 1-4-2014

Drafting of Companies Bill, 2012

Placed before Standing Committee of

Approved by Lok Sabha

Approved by Rajya Sabha

Signed by President of India,

Notified in Official Gazette of India

History of Company Legislation

Introduction to Companies Act, 2013

Definition “Company” means a company incorporated under Companies Act, 2013 or

Company as an artificial person

COMPANY – ITS CHARACTERISTICS

1. Separate Independent Legal Entity

Effect of It can open a bank account in its own name.

A shareholder received dividend income from a company carrying on agricultural business.

The liability of members in different types of companies is explained below: -

Exceptions to the principle of limited liability

3.Unlimited When the company is incorporated as an Unlimited Company under Section

3. Perpetual Succession (permanent existence)

7.Capacity to Sue and Be Sued

10. Termination of Existence

Why it is called a Body Corporate?

Incorporation Thus, ‘incorporation’ is the act of forming a legal corporation as a juristic

Doctrine of Lifting of or Piercing the Corporate Veil

Meaning of lifting up or piercing the corporate veil

Prem lata Bhatia v. Union of India

Cases falling under Judicial Interpretation

(4) Formation of In Merchandise Transport Limited v. British Transport Commission, a

In Re. R.G. Films, a subsidiary company (in Britain) was incorporated by

Kapila Hingorani v. State of Bihar

6. In case of Santanu Ray v. Union of India

Lifting the Inalsa Ltd. v. Union of India

Decision of the court

Experience of Re. New Horizons Limited (NHL)Facts of the Case

Cases falling under provisions of Companies Act, 2013

Company vis-a-vis Body Corporate

Corporation A corporation aggregate consists of a group of persons associated so that they

Society Society is not a body corporate or a company.

Nationality and Residence of a Company

Gasque v. Though it is established through judicial decisions that a company cannot be a

Illegal Association Meaning [Sec 464]

Partnership According to Partnership Act,1932 [section 4] Partnership is a contractual

Distinction between Company and Partnership

Distinction between company and Limited Liability Partnership (LLP)

Distinction between Company and Hindu Joint Family Business

Can a partnership firm acquire the shares of a company?

Union Bank of India v. Khader International Construction and Other

Having Share Capital Not Having Share

Associate Co. Investment Producer Co. Dormant Co.

STATUTORY COMPANIES / CORPORATIONS

Characteristics of Statutory Companies / Corporations

(i) Owned: It is owned by the State

A company formed under sub-section (1) may be either—

Company A company limited by shares may be defined as a “registered company” whether

The name of an unlimited company is written as