GOBIND KUMAR JHA 9874411552

Unit – I
Introduction to Company

Highlights of Companies Act, 2013:

The Companies Act, 2013:

Has been accepted in Lok Sabha 18th December, 2012
Has been accepted in Rajya Sabha 8th August, 2013
President put his signature 29th August, 2013
Total number of Sections 470
Total number of Chapters 29
Total number of Schedules 7

Meaning of the term ‘Company’:

The term ‘Company’ was originally derived from 2 Latin words: -

 Com (means together)
 Panis (means bread/meal)
According to Lord Justice Lindley “By a company is meant an association of many persons who contribute
money or money’s worth to a common stock and employ it in some trade or business, and who share the
profits and loss as the case may be arising there from. The common stock so contributed is denoted in
money and is the capital of the company and the persons who contribute it, or to whom it belongs, are
called as members.

Definition of a Company:

According to Section 2(20) of the Companies Act, 2013, company means a company incorporated (formed
and registered) under this Act or under any of the previous companies laws.

From the above definitions the following point emerges:

 Company is an association of persons;
 It is registered under the Indian Companies Act, 2013 or under any of the previous companies laws;
 Such shares are transferable;
 It has a separate entity, with a perpetual succession.

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Characteristics of a Company:

a) Corporate Personality: Being an artificial person, a company has a legal entity different and separate
from its promoters, members, directors, and other stake holders. It has its own corporate name and
work under that name. it –
 Can hold its assets in its own name;
 Can sue or be sued in its own name;
 Can borrow/lend funds, open bank accounts, enter into contracts in its own name.
Any of its shareholders or directors or other officers cannot be held liable for the acts of the company
even if he/it holds the entire share capital. Further, the shareholders or individual directors are not the
agents of the company and so they cannot bind company by their personal acts. Company means a
company incorporated under this Act or under any of the previous companies laws (like Companies
Act, 1956).

b) Artificial Person: Unlike a human being a company is created by law and dissolved only by law. It is
intangible and does not have the physical attributes of a natural person. However, it exercises the
same rights, as are exercised by human beings and may be fined for the contravention of the
provisions of the Companies Act. Thus like a natural person a company can exercise all the rights and
duties, which are legally in force in the country where it is incorporated, but it cannot do certain things
like marrying, eating, running and driving, which a natural person can.

c) Separate Legal Entity: A company has an entity separate from its members. It has the right to own
property and transfer the title to the property to anyone it likes. None of its members owns the assets
of the company. The company can sue and be sued in its own name by its members and the outsiders.
The creditors of the company cannot sue individual members of the company for non-payment of
dues. For non-payment they can sue only the company.

d) Perpetual Succession: Perpetual succession means existence forever. According to section 9, from the
date of incorporation mentioned in the certificate of incorporation, every company has perpetual
succession. A company is an artificial person created by law, therefore it can be dissolved or wind up
by law. In other words, members may come and go but company can go forever.

e) Limited Liability: The liability of a member of a company is limited, that is, the liability of the member
for the debts of the company is limited to the amount unpaid on his/her shares.

f) Transferability of Shares: According to Section 44 of the Companies Act, 2013, the shares or
debentures or other interest of any member in a company shall be movable property, transferable in
the manner provided by the articles of the company.

g) Capacity to sue and be sued: A company is separate legal entity having its own corporate name.
Therefore, according to section 9, company may sue or may be sued in its own name (not in the name
of its directors or members).

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h) Contractual Rights: A company is an artificial person created by law. Therefore like natural person, it
can enter into contract in its own name through its agent (directors or other auctioned persons).

i) Demutualization: It means separation of management and ownership. Under company form of

business, management (directors) is different from owners (members). Members of the company do
not get engaged into day-to-day business of the company. Members appoint directors who run
company on their behalf. Such directors may or may not be members of the company.

j) Separate Management: A company is administered and managed by its managerial personnel i.e. the
Board of Directors. The shareholders are simply the holders of the shares in the company and need not
be necessarily the managers of the company.

k) One Share – One Vote: The principle of voting in a company is one share – one vote i.e. if a person has
10 shares, he has 10 votes in the company. This is in direct distinction to the voting principle of a co-
operative society where the “One Member – One Vote” principle applies i.e. irrespective of the
number of shares held, one member has only one vote.

l) Common Seal: One incorporation, a company may have a common seal. Since a company has no
physical existence, therefore it has to act through its agents only. To put restriction on the misuse of
the powers of those agents, contracts entered into by anyone on behalf of the company may be under
the common seal of the company. Thus common seal acts as official signature of the company.

Difference between a Company and a Partnership Firm:

Basis of Difference Company Partnership Firm

1) Act applicable A company is governed by the A partnership firm is governed by
Companies Act, 2013. the Partnership Act, 1932.
2) Registration It is mandatory for a company to be A partnership firm may or may not
registered. be registered.
3) Minimum number of There must be a minimum of 2 There must be a minimum of 2
members members in a private company and a partners in a partnership firm.
minimum of 7 members in a public
company.
4) Maximum number of There cannot be more than 200 In a banking firm, there cannot be
members members in a private company but more than 10 partners and in a
there is no limit on membership for a non-banking firm there cannot be
public company. more than 20 partners.
5) Liability The liability of the members is limited The liability is unlimited, therefore
to the amount unpaid on their shares. each partner is personally liable
for the debts of the firm.

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6) Management Not all the members have a right to All partners have a right to take
take part in the management of the part in the management of the
company. It is only the board of firm.
directors who can manage the
company.
7) Transfer of interest In case of a private company a A partner cannot transfer his/her
member can transfer his/her interest interest to a third party without
(shares) only with the prior the consent of all the partners.
permission of the board of directors,
whereas in case of a public company,
a member can transfer his/her
interest (shares) freely without any
restriction.
8) Dissolution A company has a perpetual existence, If all but one partner dies, retires
therefore the death, retirement or or becomes insolvent, the firm
insolvency of a member cannot lead gets dissolved.
to the dissolution of a company.

Kinds of Companies:

A. On the basis of Statutory Company or Corporation

Incorporation Registered Company

B. On the basis of Company limited by shares

Liability Company limited by guarantee
Unlimited company

C. On the basis of Number Private company

Company of member Public company
One person company (OPC)

Holding company
D. On the basis of Control Subsidiary company
Associate company

E. On the basis of Size Small company

F. On the basis of activity Dormant company

Foreign Company
Nidhi Company
G. Other Companies
Producer Company
Government Company
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A. On the basis of Incorporation:

a) Statutory Company or Corporation: It is formed by a special Act passed either by the central or the
state legislature. Such companies are governed by the provisions of their special Acts. These companies
are usually formed to carry out some special public undertakings.

Relevant Points:
i) Statutory company is formed by the Special Act passed either by the central or the state
legislature.
ii) These companies are usually formed to carry out some special public undertakings.
iii) The objects of such companies are as such not to earn profits but to serve people.
iv) The audit of such companies is conducted under the supervision, control and guidance of the
Comptroller and Auditor General of India.
v) Examples of such companies are Reserve Bank of India, State Bank of India, Life Insurance
Corporation of India, Industrial Finance Corporation, etc.

b) Registered Company: Company which is registered under the Indian Companies Act is known as
Registered Company. These companies are governed and regulated by the provisions of the Indian
Companies Act, 2013. They may be limited by shares or limited by guarantee or unlimited companies.

Relevant Points:
i) These companies are registered under the Indian Companies Act.
ii) These are governed and regulated by the provisions of the Indian Companies Act, 2013.
iii) These may be limited by shares or limited by guarantee or unlimited companies.

B. On the basis of Liability:

a) Company limited by Shares: As per sec. 2(22) of the Companies Act, 2013, company limited by shares
means a company having the liability of its members by the memorandum to the amount, if any,
unpaid on the shares respectively held by them.

Relevant Points:
i) Company limited by shares is defined under section 2(22) of the Companies Act, 2013.
ii) The liability of the members is limited by the memorandum.
iii) The liability is limited to the unpaid amount of the face value of shares held by the shareholders
of the company.
iv) When the shareholders pay the entire amount of face value of the shares, their liability will come
to an end.
v) In India a large majority of companies are registered under this category.
vi) The last word of the name of such company is ‘limited’ (Ltd. in short).

b) Company limited by Guarantee: As per section 2(21) of the Companies Act, 2013, company limited by
guarantee means a company having the liability of its members limited by the memorandum to such

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an amount as the members may respectively undertake to contribute to the asset of the company in
the event of being wound up.

Relevant Points:
i) Company limited by guarantee is stated in section 2(21) of the Companies Act, 2013.
ii) The liability of its members is limited by the memorandum.
iii) Only in the event of being wound up the members may undertake to contribute to the assets of
the company.
iv) The members of a guarantee company are, in effect, placed in the position of guarantors of the
company’s debts up to the agreed amount.
v) The amount guaranteed by each member is in the nature of Reserve Capital.
vi) No charge can be created on the guarantee of the members.
vii) These companies may or may not have share capital.

c) Unlimited Company: As per section 2(92) of the Companies Act, 2013 unlimited company means a
company not having any limit on the liability of its members. In this type of company unlimited
company means a company not having any limit on the liability of its members and their liability is
unlimited. Unlimited companies may or may not have share capital.

Relevant Points:
i) Unlimited company is defined in section 2(92) of the Companies Act, 2013.
ii) Unlimited company means a company not having any limit on the liability of its members.
iii) Such companies may or may not have share capital.
iv) No charge can be created on the personal liability of the members.
v) This type of company may be private or public company.

C. On the basis of Number of Members:

a) Private Company: As per section 2(68) of the Companies Act, 2013, a private company must have the
following characteristics:
i) It must have a minimum share capital.
ii) The minimum number of members is 2 and except in case of One Person Company (OPC), the
maximum number of members is 200.
iii) Regarding the number of members where 2 or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this definition, be treated as a single member.
iv) As per the articled the private company cannot transfer its shares.
v) Private company prohibits any invitation to the public to subscribe for any securities of the
company.

Minimum Number of member Two [if it is one person company in that case
minimum number will be one]
Maximum number of member 200 [which does not include previous or present
employee of the company]

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Transferability of shares The private company cannot transfer its shares.
Certificate of incorporation It is not required to have Certificate of
incorporation in case of private company.
Minimum number of director Two
Maximum number of director 15 out of which one should be a resident
director
Number of directorship A person cannot hold directorship in more than
20 companies
Capital contribution Members will contribute required amount of
capital and if the company does require capital,
then it may use Private Placement method of
financing.

b) Public Company: As per section 2(71) of the Companies (Amendments) Act, 2017, public company
means a company which:
 Is not a private company; and
 Has a minimum paid-up share capital as may be prescribed.

Minimum number of members 7

Maximum number of members Unlimited
Transferability of shares The public company can transfer its shares.
Certificate of incorporation It is required to have Certificate of Incorporation
in case of public company
Minimum number of director 3
Maximum number of director 15 out of which at least 1 must be a woman
director in case of a listed company. It may
appoint more than 15 directors by passing
special resolution
Number of directorship A person cannot hold directorship in more than
10 companies
Capital contribution Members will contribute required amount of
capital and company can issue securities to
public for raising capital. Its securities can
traded on stock exchanges.

c) One Person Company (OPC): As per section 2(62), One Person Company means a company which has
only one person as a member. In other words, a One Person Company is a kind of private company
having only one member.

Number of member 1
Maximum number of member 1
Type of member Only a natural person who is an Indian citizen
and resident in India shall be eligible to
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incorporate a One Person Company.
Nature of company Private company
Formed as Limited by shares or a company limited by
guarantee or an unlimited liability company
Minimum number of director At least 1
Maximum number of director 15
Position of minor Minor cannot be the member
Matter related to name The words “One Person Company” must be
mentioned in brackets below the name of the
company
Restriction of doing other business OPC cannot carry out Non-Banking Financial
Investment activities including investment in
securities of anybody corporate.

Who can incorporate an OPC?

Any naturally born Indian who is also a resident of India (i.e. have stayed in India for at least 182 days
during the immediately preceding financial year). However, one of such person cannot form more than
one OPC.

Restriction on Incorporation of an OPC:

OPC cannot be incorporated or converted into Section 8 Company (i.e. company with charitable
objects, etc.) or carry out non-banking financial activities, including investment in securities of any
body corporate.

Types of OPCs can be incorporated under the Act:

There can be five types of OPCs that can be incorporated under the new Act, viz.
a) OPC Limited by Shares;
b) OPC Limited by Guarantee with Share Capital;
c) OPC Limited by Guarantee without Share Capital;
d) Unlimited OPC with Share Capital, and
e) Unlimited OPC with Share Capital.

Nominee in an OPC:

An OPC must mention one person as ‘Nominee’ in the event of death, incapacity, etc. who will: -
a) become a member of OPC;
b) be entitled to all shares of the OPC; and
c) bear all liabilities of OPC.

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D. On the basis of Control:

a) Holding Company: A company which controls another company is known as holding company. As per
section 2(46), holding company, in relation to one or more other companies, means a company of
which such companies are subsidiary companies.

b) Subsidiary Company: If a company is controlled by other company, the prior company is termed as
subsidiary company. As per section 2(87) of Indian Companies (Amendments) Act, 2017 a company
shall be deemed to control another company in each of the following:
i) If it controls the majority composition of the Board of Directors of another company. The
composition of other company’s Board of Directors shall be deemed to be controlled if it can, at
its direction appoint or remove the holders of all or a majority of the directorship.
ii) If it exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies.
iii) A company shall be deemed to be the holding company of another company if another company
is a subsidiary of the first mentioned company’s subsidiary (i.e., subsidiary of the subsidiary).

c) Associate Company: The concept of Associate Company has been introduced in the Indian Companies
Act, 2013. As per section 2(6) of the Indian Companies (Amendment) Act, 2017, “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.

E. On the basis of Size:

Small Company: As per section 2(85) of the Indian Companies (Amendment) Act, 2017, a small
company has been defined as a company other than a public company.
The following conditions are to be complied with in order to consider a company as small
company:
i) Paid – up share capital of which does not exceed Rs. 50 lakhs or such higher amount as may be
prescribed which shall not be more than Rs. 10 crore, and
ii) As per profit and loss account for the immediately preceding financial year the turnover will not
exceed Rs. 2 crore or such higher amount as may be prescribed which shall not be more than
Rs. 100 crore.

F. On the basis of Activity:

Dormant Company: The Companies Act, 2013 introduces a concept of a dormant company within its
ambit. It is the first time that such a concept is thought of, i.e. company which is not active. There is no
definition of what constitutes a dormant company under the definition clause. A definition appears in
section 455 of the Act and here also the concept is defined in a very roundabout manner.

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G. Other Companies:

a) Foreign Company: As per section 2(42) of the Indian Companies Act, 2013, a foreign company is any
company or body corporate incorporated outside India which: -
i) Has a place of business in India whether by itself or through an agent, physically or through
electronic more; and
ii) Conducts any business activity in India in any other manner.
From the above definition the following points emerge:
i) Foreign company is a company or body corporate incorporated outside India,
ii) Such entity has a place of business in India,
iii) Such place of business has physical presence or electronic mode,
iv) Such place is obtained by itself or agent,
v) Such entity carries out business operation in India.

b) Nidhi Company: Nidhi company is a special class of companies under the Companies Act, 2013. As per
section 406(1), ‘Nidhi Company’ means a company which has been incorporated as a Nidhi Company
with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits
from and lending to, its members only, for their mutual benefit and which complies with such rules as
are prescribed by the Central Government for regulation of such class of companies.

c) Producer Company: The Companies Act defines Producer as any person engaged in any activity
connected with or relatable to any primary produce. A producer company is thus a body corporate
having an object that is one or all of the following:
 Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of
primary produce of the members or import of goods or services for their benefit.

d) Government Company: A “Government Company” is defined under Section 2(45) of the Companies
Act, 2013 as “any company in which not less than 51% of the paid up share capital is held by the
Central Government, or by any State Government or Governments, partly by the central government
and partly by one or more state government, and includes a company which is a subsidiary company of
such a Government Company”.

e) Not for Profit Company: Companies Act, 2013 provisions related to non-profit making company are
given in Section 8 read with Rule 19 and 20 of Companies (Incorporation) Rules, 2014. There may be 3-
4 forms of a Charitable Organisation in India and such organization can be formed or registered as
trusts, societies or as a non-profit company incorporated under Section 8 of the Companies Act, 2013.

A Non-Profit making Company is a Company which:

a) Has in its objects the promotion of commerce, 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.

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Doctrine of Lifting the Corporate Veil:

As per the judicial point of view, a company is a separate legal entity different from its members. When
there are cases of dishonesty and fraudulence in incorporation, the law lifts the veil. This veil is a fictional
veil and not a wall between the company and its members. Lifting the corporate veil may be defined as
looking behind the company as a legal person and identifying the persons who are behind the scene and are
responsible for the preparation of fraud. According to the definition of Black Law Dictionary, “the piercing
the corporate veil is the judicial act of imposing liability on otherwise immune corporate officers, directors
and shareholders for the corporation’s wrongful acts”.

Circumstances when the court may lift the corporate veil:

The circumstances under which the court may lift the corporate veil may be broadly divided into following
two heads:
1. Judicial Interpretation
2. Statutory Provision

1. Judicial Interpretation: Following are the cases under which the court has lifted the corporate veil:
a) Avoidance of welfare legislation: Where the device of incorporation is used for reducing the amount
to be paid by way of bonus to the workmen, the Supreme Court can upheld the lifting of the veil to
look at the real transactions.
b) Protection of Revenue: Where the medium of the company has been used for tax evasion or to
circumvent tax obligation, courts have lifted the veil and looked at the realities of situation.
c) Where company is a sham: When the court finds that company is a mere cloak or sham and is used
for some illegal or improper purpose, it may lift veil.
d) Where the company is acting as the agent of the shareholders: Where a company is devised to act
as an agent of its shareholders or of another company it will be responsible for its acts. However, it
will be a question of facts every case whether the company is acting as agent for its shareholders.
e) Determination of character: Test of control is adopted in the cases when the trade is conducted with
enemy country. In such cases the court will lift the veil at the times of war to see whether a company
is controlled by enemy aliens.
f) Provision of fraud or improper conduct: The court will disregard the separate existence of the
company, where it is shown the company is formed for evading contractual and statutory obligation.

2. Statutory Provision: Cases are as follows:

a) Number of member below statutory minimum: When at any time the number of member of a
company is reduced below two in case of a private company or below seven in case of a public
company, in that case the concept of separate entity is not accepted and the advantage of
incorporation is withdrawn.
b) Misrepresentation in prospectus: As per section 34 and 35 if any wrong information is included in
the Prospectus and if it is found that is promoter, director or any other person who are engaged in
distribution of prospectus, in that case these persons will be held responsible to those who would
buy shares based on the information given in the prospectus.

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c) Failure to refund application money: In case of issue of shares by a company to the public, if the
company is unable to receive minimum subscription within 30 days from the first issue of the
prospectus or the time as decided by SEBI, than all money received from application shall have to be
returned. If the amount is not refunded, then the company and its officers who are in charge in such
activities will be liable to pay penalty Rs. 1,000 per day for the rest of the days or total Rs. 1,00,000
whichever is lower.
d) Fraudulent trading: On the winding up procedure of the company, if it is found that any business of
the company has been carried on to defraud creditors, the court shall declare those persons
personally liable for the debts and other liabilities of the company.
e) Group accounts: Where the holding company has subsidiaries and group accounts than the principle
of separate legal entity may be disregarded. Along with the own profit and loss account and balance
sheet, subsidiaries and group accounts have also to be laid down. Whether these are in proper order
or not, lifting of corporate veil is necessary.
f) Mis-description of name: Using the name of the company if any director and other persons of the
company enter into a contract with the outsiders, in that case such persons will be personally held
responsible and lifting of corporate veil is necessary in that case.
Thus, these are the circumstances where the veil can be lifted.

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Unit – II
Formation of a Company

Steps in formation of a Company: Steps in formation of a company involve three important stages and
these are:
A. Promotion stage,
B. Incorporation stage, and
C. Subscription stage.

A. Promotion Stage:

Promotion stage is a stage of conceiving an idea of forming a company to do a business working on that
idea. The persons who are involved in the process of doing such task is termed as promoter.

Definition of Promoter: Promotion is the primary stage in any business in which an individual or a group
of people conceive an idea is put into practice with the help of his or their own resources, influence and
skill. The term generally refers to the sum total of all the activities connected with the formation of a
company. The person who undertakes all these activities is known as the promoter. Hence a promoter is
a person who does all necessary preliminary work, incidental to the formation or promotion of the
company.

Types of Promoter: The promoters may be professional, occasional, financial or managing promoters.

a) Professional Promoters: Professional promoters are those who handover the company to the
shareholders when the company starts. Unfortunately, such promoters are very scarce in the
developing countries.
b) Occasional promoters: Occasional promoters are those whose main interest is the floating of
companies. They are not in promotion work on regular basis but take up promotion of some
companies and then go to their earlier profession. For example, engineers, lawyers, etc.
c) Financial promoters: Financial promoters do the task of promoting the financial institutions. They
gradually take up this work when financial environment is favourable at the time. Managing
promoters played a significant role in promoting new companies and then got their managing
agency rights.

B. Incorporation Stage:

Incorporation: Incorporation involves drafting legal documents that list the primary purpose of the
business, its name and its location, and the number of shares and class of stocks being issued, if any.
Incorporation also involves jurisdiction specific registration information and fees.
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Steps for the incorporation of new company in India: Before a company is to be incorporated or
registered certain important steps have to be taken into consideration and these are as under:

Step – 1: Filing the proposed name of company for approval to the Registrar of Companies (ROC):

The company is known by its name. as per section 4(2) a company cannot be registered with a name
identical with or resemble too nearly to the name of an existing company registered under this Act or
any previous company law.

Step – 2: Obtain Digital Signature:

Now a days various document prescribed under the Companies Act, 2013, are required to be filed with
the digital signature of the Managing Director or Director or Manager or Secretary of the Company.
Therefore, it is compulsorily required to obtain a Digital Signature Certificate (DSC) from a licensed
Certifying Authority (CA) for at least one director to sign the E-forms related to incorporation like form
INC 1 and other documents.

Step – 3: Obtain Director Identification Number:

As per section 153 of the Companies Act, 2013, every individual intending to be appointed as director of
a company shall make an application for allotment of Director Identification Number in form DIR3 to the
Central Government in such form and manner and along with such fees as may be prescribed.

Step – 4: The company must have to select name of persons who will act as director. Under section
149(1)(a) of the Companies Act, 2013 the name of the directors (at least 3 names for Public Company
and 2 for Private Company) will have to be selected.

Step – 5: Drafting of Memorandum of Association (MoA):

The Memorandum of Association is the constitution of the company which must contain all the
fundamental information of the company. Memorandum of Association defined the relationship of the
Company with its shareholder. Therefore, it is important to draft the Memorandum of Association very
carefully withy properly incorporating clauses carefully.

Step – 6: Drafting of Articles of Association (AoA):

Articles of Association is an important document which explains the operation of the company, purpose
for which company is incorporated along with the information for the process of appointment of
directors and also management of the financial record of the company.

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Step – 7: Registered Office:

As per section 12 of the Companies (Amendment) Act, 2017, the company on and from the 30 days of its
incorporation and at all times thereafter, must have a registered office capable of receiving and
acknowledging all communications and notices as may be adsressed to it.

Step – 8: Application for Incorporation of Company:

According to section 7 of the Companies Act, 2013, an application shall be filed with the registrar within
whose jurisdiction the registered office of a company is proposed to be d=situated in Form no. INC 2 (for
One Person Company) and Form No. INC 7 (other than One Person Company) along with the fee as
provided in the Companies (Registration offices and fees) Rules, 2014 for registration of a company.

Step – 9: Issue of Certificate of Incorporation:

The Registrar, on the basis of documents and information filed, shall register the name of the company
and issue a certificate of incorporation in the prescribed form (Form No. INC – 11) to the effect that the
proposed company is incorporated under this Act.

Director Identification Number (DIN):

The Director Identification Number (DIN) is a unique identification number allotted to a person who is a
Director in his/her current role or can be appointed as a Director subsequently. This generally contains the
personal information and a unique code as identifier. DIN can into existence for the first time in India due to
the introduction of section 266A to 266G in Companies Amendment Act, 2006.

Memorandum of Association (MoA):

It is the supreme public document which contains all those information that are required for the company at
the time of incorporation. It can also be said that a company cannot be incorporated without memorandum
of association. At the time of registration of the company, it needs to be registered with the Registrar of
Companies (ROC). The MoA contains the objects, powers and scope of the company beyond which a
company is not allowed to work i.e. it limits the range of activities of the company. Hence, Memorandum of
Association is called the Charter of the company.

Contents of Memorandum of Association:

The Memorandum of a company shall contain the following:

1. Name Clause: 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.
2. Situation Clause: The state in which the registered office of the company is to be situated.
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3. Object Clause: The objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof.
4. Liability Clause: The liability of members of the company, whether limited or unlimited, and also state:
i) In the case of a company limited by shares – liability of its members is limited to the amount unpaid,
if any, on the shares held by them; and
ii) In the case of a company limited by guarantee – the amount up to which each member undertakes to
contribute:
a) To the assets of the company in the event of its being wound up while he is a member of within
one year after he ceases to be a member, for payment of the debts and liabilities of the company
or of such debts and liabilities as may have been contracted before he ceases to be a member, as
the case may be; and
b) To the costs, charges and expenses of winding-up and for adjustment of the rights of the
contributories among themselves.
5. Capital Clause:
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;
In 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.
6. Subscription Clause: The memorandum has to be signed by each subscriber in presence of at least one
witness. Each subscriber must written number of shares he shall take. At least one share should taken by
each subscriber.

Doctrine of Ultra Vires:

One of the most important clause is object clause which is contained in the memorandum of association.
The object clause of the memorandum of the company contains the object for which the company is
formed. An act of the company must not be beyond the object clause otherwise it will be ultra vires and
therefore, void and cannot be ratified even if all the member wish to ratify. This is called the doctrine of
ultra vires. The expression ‘ultra vires’ consists of two words: ‘ultra’ and ‘vires’. ‘Ultra’ means beyond and
‘Vires’ means powers. Thus, the expression ultra vires means an act of the company, which is beyond the
powers conferred on the company by the objects clause of its memorandum. An ultra vires act is void and
cannot be ratified even if all the directors wish to ratify it.

Articles of Association (AoA):

It is a secondary document which prescribes the rules and bye-laws for the general management of the
company and for the attainment of its object as given in the memorandum of association of the company.

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Contents of Articles of Association:

Section 5(1) and section 5(2) of the Companies Act, 2013, provide for the contents of the articles of
association. The articles must contain the regulations for the management of the company along with the
matters prescribed by the Central Government. Further, the articles of association must also contain the
following:
1. Share capital including sub-division, rights of various shareholders, the relationship of these rights,
payment of commission, share certificates.
2. Lien of shares: Lien of shares means to retain possession of shares in case the member is unable to
pay his debt to the company.
3. Calls on shares: Calls on shares include the whole or part remaining unpaid on each share which has
to be paid by the shareholders on the company’s demand.
4. Transfer of shares: The articles of association include the procedure for the transfer of shares by the
shareholder to the transferee.
5. Transmission of shares: It includes devolution of title by death, succession, marriage, insolvency, etc.
It is not voluntary but is in fact brought about by operation by law.
6. Forfeiture of shares: The articles of association provide for the forfeiture of shares if the purchase
requirements such as paying any allotment or call money, are not met with.
7. Surrender of shares: Surrender of shares is when the shareholders voluntary return the shares they
own to the company.
8. Conversion of shares in stock: In consonance with the articles of association, the company can
convert the shares into stock by an ordinary resolution in a general meeting.
9. Share warrant: A share warrant is a bearer document relating to the title of shares and cannot be
issued by private companies, only public limited companies can issue a share warrant.
10. Alteration of capital: Increase, decrease or rearrangement of capital must be done as the articles of
association provide.
11. General meetings and proceedings: All the provisions relating to the general meetings and the
manner in which they are to be conducted are to be contained in the articles of association.
12. Voting rights of members, voting by poll, proxies: The members right to vote on certain company
matters and the manner in which voting can be done is provided in the articles of association.
13. Directors, their appointment, remuneration, qualifications, powers and proceedings of the boards of
directors meetings.
14. Dividends and reserves: The articles of association of a company also provide for the distributions of
dividend to the shareholders.
15. Accounts and Audits: The auditing of a company shall be done subject to the provisions of the
articles of association of the company.

Difference between Memorandum and Articles of Association:

Basis Memorandum of Association (MoA) Articles of Association (AoA)

1. Section deals with MoA is defined in section 2(56) of the AoA is defined in section 2(5) of the
Companies Act, 2013. Companies Act, 2013.

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2. Meaning MoA is the supreme public document Articles of Association is a document
which contains all those information containing all the rules and regulations
that are required for the company at that governs the company.
the time of incorporation.
3. Status It is subordinate to the Companies Act. It is subordinate to the memorandum.
4. Type of Powers and objects of the company Rules of the company are to be
information are written in the document. mentioned in this document.
contained
5. Contents A memorandum must contain six The articles can be drafted as per the
clauses. choice of the company.
6. Obligatory It is obligatory for all companies to A public company limited by shares can
prepare MoA. adopt Table A in place of articles.
7. Retrospective The memorandum of association of The articles of association can be
effect the company cannot be amended amended retrospectively.
retrospectively.
8. Compulsory filing It is required to have a compulsory Compulsory filing of AoA is not required
at the time of filing of MoA at the time of at all the time of registration.
registration registration.
9. Relation This document defines the relation AoA regulates the relationship between
between company and outsider. company and its members.
10. Alteration Alteration can be done after passing Alteration can be done in the Articles of
Special Resolution in Annual General Association by passing Special
Meeting (AGM) and previous approval Resolution (SR) at Annual General
of Central Government or Company Meeting.
Law Board is required.

Doctrine of Constructive Notice:

It is the legal fiction that signifies that a person or entity should have known, as a reasonable person would
have, even if they have no actual knowledge of it. In companies law the doctrine of constructive notice is a
doctrine where all persons dealing with a company are deemed (or “construed”) to have knowledge of the
company’s articles of association and memorandum of association.
In this connection it may be stated that, if a person enters into a contract which is ultra vires the
Memorandum or beyond the authority of the directors conferred by the Articles the the contract becomes
invalid and he cannot enforce it, not withstanding the fact that he acted in good faith and money was
applied for the purposes of the company.

Doctrine of Indoor Management:

The doctrine of Indoor Management, popularly known as the Turquand’s rule initially arose some 150 years
ago in the context of the doctrine of constructive notice. The rule of Doctrine of Indoor Management is

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conflicting to that of the principle of Constructive Notice. The latter seeks to protect the company against
outsiders; the former operates to protect outsiders against the company. The rule of constructive notice is
confined to the external position of the company and therefore, it follows that there is no notice as to how
the company’s internal machinery is handled by its officers. If the contract is consistent with the public
document, the person contracting will not be prejudiced by irregularities that may beset the indoor work of
the company.

C. Subscription Stage:

Prospectus:

a) It is an invitation to the public for subscription or purchase of any securities of a body corporate;
b) Single private communication to friends and relative does not amount to issued to public;
c) It is a kind of document and it may be a notice, circular, advertisement or other document;
d) It includes a red herring prospectus or shelf prospectus.

Types of Prospectus:

1) Red Herring Prospectus: As per section 32 of the Companies Act, 2013, if a company prospering to
make an offer of securities for acquiring fund, it may issue a red herring prospectus prior to the issue
of a prospectus. Red Herring Prospectus means a prospectus which does not include complete
particulars of the quantum or price of the securities included therein. Such company shall file it with
the Registrar at least 3 days prior to the opening of the subscription list and the offer. A red herring
prospectus shall carry the same obligations as are applicable to a prospectus and any variation
between the red herring prospectus and a prospectus shall be highlighted as variations in the
prospectus.
2) Shelf Prospectus: As per section 31 of the Companies Act, 2013, “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 issued over a certain period without the issue of a further prospectus.
3) Deemed Prospectus: As per section 25 of the Companies Act, 2013, where a company allots or
agreed to allot any securities of the company with a view to all or any of those securities being
offered for sale to the public, any document by which the offer for sale to the public is made shall be
deemed to be a prospectus issued by the company.
4) Abridged Prospectus: As per section 33 of the Companies Act, 2013, no form of application for the
purchase of any of the securities of a company shall be issued unless such form is accompanied by an
abridged prospectus. Therefore, every application form for a security shall be accompanied by an
abridged prospectus.

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Unit – 3
Company Administration

Introduction:

An effective administrator is an asset to an organization. He or she is the link between an organisation’s

various departments and ensures the smooth flow of information from one part to the other. Thus without
an effective administration, an organization would not run professionally and smoothly.
In case of a company form of business director occupies a distinctive position as the most important
part of administration. Company directors are responsible for the management of their companies. They
must act in a way most likely to promote the success of the business and benefit its shareholders. They also
have responsibilities to the company’s employees, its trading partners, and the state.

Director:

Company is established to achieve various objectives. In order to achieve the objects that are stated in the
Memorandum of Association, the company has to depend up on agency called “Board of Directors”. The
Members of Board of Directors of a company are called its Directors.

Types of Directors:

1) Managing Director: Managing Director is a director who has substantial powers of management of the
affairs of the company subject to the superintendence, control and direction of the Board in question.
2) Whole-time Director: Whole-time Director includes a director who is in the whole-time employment of
the company, devotes his whole-time of working hours to the company in question and has a significant
personal interest in the company as his source of income.
3) First Directors: Subject to any regulations in the Articles of a company, the subscribers to the
Memorandum of Association, or the company’s charter or constitution, shall be deemed to be the
Directors of the company, until such time when directors are duly appointed in the annual general
meeting.
4) Casual Vacancies: When a director appointed at the AGM vacates office before his or her term of office
expires in the normal course, the resulting vacancy may, subject to the articles, be filled by the Board.
Such person so appointed shall hold office up to the time which the director who vacated office would
have held office if he or she had not so vacated such office.
5) Additional Directors: If the Articles specifically so provide or enable, the Board has the discretion, where
it feels it necessary and expedient, to appoint Additional Directors who will hold office until the next

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AGM. However, the number of Directors and Additional Directors together shall not exceed the
maximum strength fixed in the Articles for the Board.
6) Alternate Director: If so authorized by the Articles or by a resolution passed by the company in general
meeting, the Board may appoint an Alternate Director to act for a Director (Original Director), who is
absent for whatever reason for a minimum period of three months from the State in which the meetings
of the Board are ordinarily held. Such Alternative Director will hold office until such period that the
Original Director would have held his or her office. However, any provision for automatic re-appointment
of retiring directors applies to the original director and not to the alternate director.
7) ‘Shadow’ Director: A person, who is not appointed to the Board, but on whose directions the board is
accustomed to act, is liable as a director of the company, unless he or she is giving advice in his or her
professional capacity. Thus, such a ‘shadow’ director may be treated as an ‘officer in default’ under the
Companies Act.
8) De facto Director: Where a person who is not actually appointed as a director but acts as a director and
is held out by the company as such, such person is considered as a de facto director. Unlike a ‘shadow’
director, a de facto director purports to act, and is seen to the outside world as acting as a director of the
company. Such a de facto director is liable as a director under the Companies Act.
9) Rotational Director: At least two-thirds of the directors of a public company or of a private company
subsidiary of a public company have to retire by rotation and the term “rotational director” refers to
such directors who have to retire (and may, subject to the Articles, be eligible for re-appointment) at the
end of his or her tenure.
10) Nominee Directors: they can be appointed by certain shareholders, third parties through contracts,
lending public financial institutions or banks, or by the Central Government in case of oppression or
mismanagement. The extent of a nominee director’s rights and the scope of supervision by the
shareholders, is contained in the contract that enables such appointments, or the relevant statutes
applicable to such public financial institution or bank. However, nominee director must be particularly
careful not to act only in the interests of their nominators, but must act in the best interests of the
company and its shareholders as a whole.
11) Independent Director: Section 149(6) contains that an 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) Who is or was not a promoter of the company or 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;

12) Women Director: As per section 149(1)(a) requires that certain categories of companies must have at
least one Woman Director on the board. Such companies are any listed company, and any public
company having:
a) Paid up capital of Rs. 100 crore or more; or
b) Turnover of Rs. 300 crore or more.

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Number of Directors:

The number of directors is not same for all the companies. From the following table it will be easier to
understand the same:
Nature of Company Minimum number of directors Maximum number of directors
Public Company 3 15
Private Company 2 15
One Person Company 1 15
However the company may appoint more than 15 Directors after passing a special resolution.

Number of Directorships:

The maximum number of directorships a person can hold is 20. Further, in that 20 companies the person
cannot be a directors for more than 10 public companies/private companies that are either holding or
subsidiary of a public company.

Director Identification Number (DIN):

No company can appoint or re-appoint any individual as a director of the company unless he has been
allotted a specific number which is known as Director Identification Number (DIN). Section 153 to 159 of the
Companies Act, 2013, deal with the DIN. Rule 2(d) of the Companies (Appointment and Qualification of
Directors) Rules, 2014 defines DIN as an identification number allotted by the Central Government to any
individual, intending to be appointed as Director or to any existing director of a company for the purposes of
identifying as a director of a company.

Relevant information regarding appointment of directors:

1) Appointment of first directors: The first directors of a company are appointed by the promoters as per
guidelines laid down in the Articles of Association of the company. In case of One Person Company an
individual being member shall be deemed to be the first director of the company.
2) Tenure of office of first directors: The first director can hold office only till the first annual general
meeting of the company when they are replaced by the directors appointed by the company at this
meeting.
3) Appointment of subsequent directors: Every director other than first directors of company shall be
appointed in general meeting as per section 152(2).
a) Rotational director: As per section 152(6)(a) unless the articles provide for the retirement of all the
directors at every annual general meeting, at least 2/3rd of the total number of directors of a public
company are liable to be retired by rotation and must be appointed by the shareholders in general
meeting. So the directors, who will retire by rotation are called Rotational Director.
b) Non Rotational Director: Non Rotational Directors are those directors whose period of office is not
liable to retire by rotation. They are generally appointed by Articles of Association of the company.

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They are generally appointed for a fixed term or permanent in nature or otherwise. That is why they
are also known as non-retiring/permanent directors.
c) As per section 152(6)(c) it is stated that out of 2/3rd directors subject to retirement by rotation, 1/3rd
or nearest to 1/3rd of the directors must retire at the annual general meeting every year. Those who
are longest in office shall retire first.

4) Reappointment of Retiring Director: As per section 152(7), if at the adjourned meeting also the
vacancies are not filled up, the retiring director shall be deemed to have been re-appointed
automatically except in the following cases:
i) A resolution for his appointment was put before the meeting, but was lost; or
ii) The retiring director has in writing expressed his unwillingness to continue; or
iii) When he has been disqualified; or
iv) A special or ordinary resolution is necessary for his appointment or re-appointment by virtue of
any provisions of the Companies Act; or
v) Section 162 is applicable to such case i.e., filling two or more vacancies by a single resolution.

5) Appointment of a Director other than Retiring Director: A person who is not a retiring director in terms
of section 152 shall, subject to the provisions of this Act, be eligible for appointment to the office of a
director at any general meeting. In this connection a 14 days written notice must be given to the
company before the general meeting either by the person seeking appointment as director or by the
person proposing his name.

Position of Directors:

Directors are appointed or elected member of the board of directors of a company. Section 2(34) of the
Companies Act, 2013 defines a director as – “director” means a director appointed to the Board of a
company. There are certain important issues arising relating to directors and these are as under:
 Directors have the responsibility for determining and implementing the company’s policy;
 A company director need not be a shareholder or an employee and may hold only the office of
director under the provisions of the Act.
 Directors derive their powers emanating from board resolutions.
 Unlike shareholders, directors cannot participate through proxy.
 Unlike employees, cannot absolve themselves of their responsibility for the delegated duties.

Rights of Directors:

The directors enjoy the following rights as per the Companies Act:
a) To attend meeting: If the directors are not otherwise disqualified, they have the right to attend the
meeting of the Board of Directors.
b) To participate in the management: Qualified directors can participate in the day to day activities relating
to management of the company.
c) Remuneration: As per Companies Act the directors are eligible to get remuneration.

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d) To get compensation: Without any reasonable cause if the company removes the whole time director or
managing director of the company, in that case such directors are eligible to get compensation.

Duties of Directors:

The duties of the directors are as under:

1) A director must act in accordance with the Articles of Association of the company.
2) A director may pursue the best interests of the stake holders of the company, in good faith and to
promote the objects of the company.
3) A director shall use independent judgement to exercise his duties with due and reasonable care, skill and
diligence.
4) A director should always be aware of conflict of interest situations and should try and avoid such
conflicts for the interest of the company.
5) Before approving related party transactions the Director must ensure that adequate deliberations are
held and such transactions are in the interest of the company.
6) To ensure vigil mechanism of the company and the users are not prejudicially affected in account of such
use.
7) Confidentially of sensitive proprietary information, commercial secrets, technologies, unpublished price
to be maintained and should not be disclosed unless approved by the board or required by law.
8) A director of a company shall not assign his office and any assignment so made shall be void.
9) 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.

Power of Directors (section 179):

The board shall exercise following powers only by means of resolution passed in its meeting:
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 and the Board’s report;
8. to diversify the business of the company;
9. to approve amalgamation, merger or reconstruction;
10. to take over a company or acquire a controlling or substantial stake in another company;
11. any other matter which may be prescribed;
12. to appoint or remove key managerial personnel (KMP);
13. to take note of appointment(s) or removal(s) of one level below the Key Management Personnel;
14. to appoint internal auditors and secretarial auditors;
15. to take note of the disclosure of director’s interest and shareholding;

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16. to buy, sell investments by the company (other than trade investments), constituting 5% or more of
the paid-up share capital and from reserves of the investee company;
17. to invite or accept or renew public deposits and related matters;
18. to review or change the terms and conditions of public deposit;
19. to approve quarterly, half yearly and annual financial statements or financial results as the case may
be.

Resignation of Directors (Section 168):

1. The Director intending to resign shall send notice in writing to the company. The resignation of a director
shall take effect 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.

2. The director who has resigned shall be liable even after his resignation for the offences which occurred
during his tenure.

3. The law has caste duty upon the director resigning, to File Form DIR – II (Company shall file form DIR 12)
and
 Mention therein the Reason for Resigning.
 Enclose the copy of Notice sent to the Company.
 Enclose proof of Dispatch.
 File the said form within 30 days of registration along with the prescribed filing fees.

Duty of company in case of resignation by Director as per Section 168(1):

A director may resign his office by giving a notice in writing to the company and the Board. The company
shall on receipt of such notice:
 Take note of the same by passing a board resolution to that effect, and
 As per Rule 15 of Companies (Amendment and Qualification of Directors) Rules, 2014, the company
shall intimate the Registrar through filing of form DIR12 within 30 days from the effective date of
registration on its website, if any.
 Company is also required to place the fact of such registration in the Report of Directors laid in the
immediately following general meeting by the company.

Duty of Resigning Director in case of Registration:

A director shall also forward a copy of his resignation along with detailed reasons for the resignation to the
Registrar within 30 (Thirty) days of resignation through filing of Form DIR 11 under his Digital Signature. It
means it will be mandatory for all directors to have Digital Signature under Companies Act, 2013.

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Liabilities of Directors:

i) Liability to the Company:

a) Breach of Fiduciary duty: Whenever a director works dishonestly to the interest of company, he will
be held liable for breach of fiduciary duty.
b) Ultra vires acts: Everybody in the company are supposed to work within the prescribed limits or the
provisions of Companies Act, Memorandum and Articles of Association since these lay down the
limits to the activities of the company and consequently to the power of Board of Directors.
c) Negligence: As long as the directors act within their powers, and exercise their duty with reasonable
care and skill as every prudent businessman is expected to take care of, they will not be made liable.
But where they fail to exercise reasonable care, skill and diligence, they shall be deemed to have
acted negligently in discharge of their duties and consequently shall be liable for any loss or damage
resulting therefrom.
d) Mala fide acts: Directors are the trustees of the assets of the company including money, property
and also exercise power over them. And if they exercise such power dishonestly or perform their
duties in a malafide manner, they will be held liable for the breach of trust and would be asked to
reimburse the company of whatever the loss company has suffered of such malafide act.

ii) Liability to the Outsiders: The directors would be personally liable to outsiders or third parties in the
following circumstances:
a) Prospectus: In case of any omission to state any particulars as per the requirement of the Companies
Act or mis-statement of facts in prospectus renders a director personally liable for damages to the
third party.
b) With regard to allotment: If any director of a company knowing contravenes or willfully authorizes
or permits the contravention of any of the provisions of the Companies Act with respect to all
allotment, that is to say, if he allots the share even before minimum subscription is received or
before filing a copy of the statement in lieu of prospectus, he shall be liable to compensate not only
to the company but also to the allottee respectively for any loss, damages or costs which the
company or the allottee may have sustained or incurred thereby.
c) Fraudulent trading: If the directors have been found guilty of fraudulent trading during the course of
business, they may also be made personally liable for the debts or liabilities of a company.
d) Liability for breach of warranty: Directors are supposed to function within the scope of their
authority as given in Articles of Association of the company and the Companies Act.

iii) Criminal Liability:

It is basically defined as the liability of a person authorized by the company, and the liability is such that
the provisions of the Indian Panel Code can be actually applied for the illegal act he committed. There
are various provisions in the Companies Act under which directors shall be criminally liable. The directors
can also be held criminally liable for fraud, misapplication and embezzlement of the company’s fund
under the provision of the Indian Penal Code.

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Removal of Directors:

i) Removal by Shareholders: The power to remove a director is in the hands of the shareholders. All
the directors are responsible to the shareholders. They can remove the director even before his
tenure is completed unless they are appointed by the Tribunal for the prevention of oppression and
mismanagement or a director appointed proportional representation.
ii) Removal by tribunal: On an application made to it for prevention of oppression and mismanagement
under section 241, the tribunal can order the removal of the Managing Director, Manager or any of
the Directors of the company. The Tribunal may make an order for the recovery of undue gains made
by the directors mentioned above during the period of their appointments, which may either be
transferred to identifiable victims or to the Investor Education and Protection Fund.

Key Managerial Person (KMP):

As per section 2(51) of the Act, KMP means the following person(s), of appointed in a company, whether
under a legal obligation under the Act [i.e. under section 203(1) of the Act] or otherwise:
a) The Chief Executive Officer (CEO) or the Managing Director (MD) or the manager;
b) The company secretary (CS);
c) The whole-time director (WTD);
d) The Chief Financial Officer (CFO); and
e) Such other officer as may be prescribed.

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Unit – IV
Share Capital and Debenture

Share:

Capital of a company is termed as share capital which is divided into units. Each unit is called a share. So
share is a share in the share capital of a company.

Nature of Shares:

a) A share is a right to a specified amount of the share capital of a company.

b) A share is the interest of a shareholder in the company measured by a sum of money.
c) A share is a right to participate in the profits made by a company.
d) 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.
e) A share or other interest of any member in a company is a movable property transferable in the
manner provided by the articles of the company.
f) In India, a share is regarded as goods. According to the Sale of Goods Act, 1930, “Goods” means any
kind of movable property other than actionable claim and money and include stock and shares.
g) Every share in a company having a share capital shall be distinguished by its distinctive number.

Types of Share Capital:

a) Equity Share; and

b) Preference Share.

Difference between Equity Share and Preference Share:

Basis of Difference Equity Share Preference Share

Meaning Equity shares are the ordinary shares Preference shares are the shares that
of the company representing the part carry preferential rights on the
ownership of the shareholder in the matters of payment of dividend and
company. repayment of capital.
Payment of dividend The dividend is paid after the Priority in payment of dividend over
payment of all liabilities. equity shareholders.
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Repayment of capital In the event of winding up of the In the event of winding up of the
company, equity shares are repaid at company, preference shares are
the end. repaid before equity shares.
Rate of dividend It is fluctuating It is fixed in nature
Redemption Equity shares cannot be redeemed. Preference shares must be
redeemed.
Voting rights Equity shares carry voting rights. Normally, preference shares do not
carry voting rights. However, in
special circumstances, they get
voting rights.
Convertibility Equity shares can never be converted Preference shares can be converted
into equity shares.
Arrears of dividend Equity shareholders have no rights to Preference shareholders generally
get arrears of the dividend for the get the arrears of dividend along
previous years. with the present year’s dividend, if
not paid in the last previous year,
except in the case of non-cumulative
preference shares.

Redemption of Preference Shares:

Company limited by shares can’t issue any preference shares which are irredeemable. 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 20 years from the date of their issue subject to such condition as may be prescribed.

Source of Redemption of Preference Shares:

 Preference shares can be redeemed only out of the profits available for distribution to its
shareholders as Dividend.
 Preference shares can be redeemed only out of preference shares can be redeemed only fresh
proceeds of shares issued solely for the purpose of funding the redemption of the preference shares.

Condition for Redemption of Preference Shares:

 Fully paid – up preference shares can only be redeemed.

 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

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c) Any time at the shareholder’s option.

Capital Redemption Reserve:

Where the redemption of preference shares are redeemed out of the profits available for distribution, a sum
equivalent to the nominal amount of shares being redeemed shall be transferred to the Capital Redemption
Reserve.
The CRR shall be treated as the paid up share capital of the company for all purposes and can also be
utilized for bonus issue of shares.

Process for Redemption of Preference Shares:

Call Meeting of Board Director:

 Issue notice of board meeting to all the directors of company at least 7 days before the date of Board
Meeting.
 Attach agenda of Board Meeting along with notice.
Hold the Board Meeting:
 Check the quorum of Board Meeting.
 Pass Board Resolution for approval of redemption of Preference Shares.
 Present letter for redemption of Preference Shares before the members of the meeting.
File Form with Registrar:
File SH-7 with Registrar within 30 days of passing of resolution attaching certified true copy of
resolution and minutes of meeting.

Allotment of Shares:

Offer of shares is made on application forms supplied by the company. Generally, the offer is to accept a
certain number of shares or such less number of shares as may be allotted and that offer is accepted by the
allotment, either of the total number mentioned in the offer or a lesser number, to be taken by the person
who made the offer. When an application money is accepted, it amounts to an allotment. This constitutes a
binding contract to make that number according to the offer and acceptance. So an allotment of shares is an
acceptance by the company of the offer to take shares. The communication of acceptance of this offer by an
allotment letter or notice gives rise to a valid contract between the company and the shareholder.

General principles of Allotment of Shares:

i) In order to make the allotment valid, it should be made by the Board of Directors of the company or by
a committee authorized to allot shares on behalf of the directors.

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ii) Allotment must be made within a reasonable period of time otherwise application lapses. What is
reasonable time is a question of fact in each case.
iii) Allotment must be absolute, unconditional and must conform to the terms and conditions of the
application otherwise the applicant will not be bound by the allotment.
iv) Allotment is the acceptance of the offer and therefore, its acceptance must be communicated to the
other party. Posting of a properly addressed and stamped letter of allotment is a sufficient
communication, even if the letter is delayed or lost in the course of post. A person cannot be accepted
as shareholder unless a notice of allotment has been sent to the concerned shareholder.
v) An allotment in contravention of any other law is valid.

Statutory provisions of Allotment of Shares:

The following are the statutory conditions which need to be fulfilled:

i) Valid offer and acceptance: There should be a valid offer and acceptance for the allotment to be a
valid one. Here the company is the offertory and the acceptors are the general public. If there is no
company to offer then there would be no public to accept.
ii) Unconditional Allotment: The allotment must be absolute and unconditional and also as per the
terms and conditions mentioned in the application. The allotment should be unbiased, and not
according to the case, creed, and religion. It is not that rich shareholders pay more on the shares and
the poor shareholders pay less on the shares. All have to pay the same price on the shares.
iii) Collection of minimum subscription amount and Receipt of application: The amount payable on
application on every security shall not be less than 5% of the nominal amount of the security or such
other percentage or amount, as may be specified by the Securities and Exchange Board by making
regulations in this behalf. If the stated minimum amount has not been subscribed and the sum
payable on application is not received within a period of 30 days from the date of issue of the
prospectus, or such other period as may be specified by the Securities and Exchange Board, the
amount received under section 39(1) shall be returned within such time and manner as may be
prescribed.
iv) Deposition of application of money in a scheduled bank: All application money received along with
the applications must be deposited in a scheduled bank. It cannot be withdrawn until the company
gets trading certificate or where such certificate is already received or till the minimum subscription
amount is received.
v) Filing of prospectus with the registrar: A copy of the prospectus or statement in lieu of prospectus
has been duly filed with the registrar and at least three days have elapsed after such filing before the
allotment is taken up.
vi) Proper communication: The allotment must be duly communicated to the applicant through post i.e.
registered post with necessary details.
vii) Allotment strictly as per documents issued: The Board of Directors have to make the allotment of
shares strictly as per the documents issued which include the prospectus and the application form.
The provisions made in the Memorandum of Association and the Articles of Association must also be
given due consideration.

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viii) SEBI nominee: If the issue is over subscribed, the shares are allotted on a proportionate basis. SEBI’s
nominee is associated while finalizing the basis of allotment. The purpose is to see that the allotment
is done on a fair and just basis. The allotment also needs to be approved by a leading stock exchange.
ix) Appointment of allotment committee: The secretary informs the Board, that the share applications
are received and are ready for allotment. If the issue is just subscribed or under subscribed, the
Board will do the allotment of shares, but if the issue is over subscribed, the Board appoints an
allotment committee to do the allotment work. The allotment committee will study the problem,
prepare a report and submit to the Board.
x) Board meeting for finalization of allotment formula: A meeting of the board of Directors will be
called to finalise the allotment formula, which is being prepared by the allotment committee. If the
shares are listed, the allotment formula is to be finalized with the approval of the concerned Stock
Exchange Authorities.
xi) SEBI’s association with allotment work: A representative of SEBI need to be associated while
finalizing the allotment formula. For this, the company has to request SEBI to nominate a public
representation for allotment work. SEBI’s nominee is necessary when the issue is over subscribed.

Calls on Shares:

A call may be defined as a demand made by the company on its shareholders to pay a part or the
whole of the unpaid balance within a specified time. As soon as a call is made, the call amount shall become
a debt due from the shareholders to the company.

Requisites of Valid Call:

Following points need to be maintained for valid calls:

a) The meeting of the Board of Directors is to be convened and the resolution making the call is to be
adopted.
b) Where any calls for further share capital are made on the shares of a class, such calls shall be made on a
uniform basis on all shares falling under that class. For the purposes of this section, shares of the same
nominal value on which different amounts have been paid-up shall not be deemed to fall under the same
class.
c) The calls must conform to the provisions of the Articles of Association. But if articles remain silent about
this issue then Regulation 13 of Table F shall apply
i) The Board may, from time to time, make calls upon the members in respect of any monies unpaid
on their shares (whether on account of the nominal value of the shares or by way of premium),
provided that no call shall exceed ¼ th of the nominal value of the share or be payable at less than
1 month from the date fixed for the payment of the last preceding call.
ii) Each member shall, subject to receiving at least 14 days’ notice specifying the time or times and
place of payment, pay to the company, at the time or times and place so specified, the amount
called on his shares.
iii) A call may be revoked or postponed at the discretion of the Board.

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Forfeiture of Shares:

When a company issues shares, normally the shareholders are not required to pay the amount at once.
Some part of the money is paid to the company initially on application of shares, another part on being
allotted the shares and the remaining amount in or more instlaments called as ‘calls’. The company makes
these calls as and when it requires capital. If a shareholder fails to pay the called up capital then his/her
shares may be taken back from him/her by the company as a penalty. This is known as forfeiture of shares.
Shares of a member cannot be forfeited unless articles confer such a power on the directors. Companies
normally adopt Regulations 28 to 34 of Table F with regard to forfeiture of shares as per Indian Companies
Act, 2013. Forfeiture of share does not amount to reduction of capital as the company is under an obligation
to dispose them off and cannot retain the same.

Employees Stock Option Plan (ESOP):

Section 62(1)(b) of the Companies Act, 2013, provides that where at any time, a company having a share
capital proposes to increase its subscribed capital by the issue of further shares, such be shares shall offered
to employees under a scheme of employees’ stock option, subject to special resolution passed by company
and subject to such conditions as may be prescribed.
As per section 2(37) of the Companies Act, “Employees Stock Option” means the option given to the
directors, officers or employees of a 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.

Buyback of Shares:

Buyback of shares means the purchase by the company of its own shares. Buyback of equity shares is an
imperative mode of capital restructuring. It is a corporate financial strategy which involves capital
restructuring and is prevalent globally with the underlying objectives of increasing earnings per share,
averting hostile takeovers, improving returns to the stakeholders and realigning the capital structure. But
Back is an alternative way of Reduction of Capital. Section 68 of the Indian Companies Act, 2013, deals with
buy back of shares.

Advantages of buy back:

The following are the advantages of buy back of shares:

1. It is an alternative mode of reduction in capital without requiring approval of the Court/Company Law
Board (NCLT).
2. To improve the earnings per share;
3. To improve return on capital, return on net worth and to enhance the long-term shareholders value;
4. To provide an additional exit route to shareholders when shares are undervalued or thinly traded;
5. To enhance consolidation of stake in the company;
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6. To prevent unwelcome takeover bids;
7. To return surplus cash to shareholders;
8. To achieve optimum capital structure;
9. To support share price during periods of sluggish market condition;
10. To serve the equity more efficiently.

Sweat Equity Shares:

It refers to equity shares given to the company’s employees on favourable terms, in recognisation of their
work. Sweat equity shares is one of the modes of making share based payments to employees of the
company. The issue of sweat equity shares allows the company to retain the employees by rewarding them
for their services, sweat equity share rewards the beneficiaries by giving them incentives in lieu of their
contribution towards the development of the company. Further, sweat equity shares enables greater
employee stake and interest in the growth of an organization as it encourages the employees to contribute
more towards the company in which they feel they have a stake.

Bonus Share:

Bonus shares are additional shares given to the current shareholders without any additional cost, based
upon the number of shares that a shareholder owns. These are company’s accumulated earnings which are
not given out in the form of dividends, but are converted into free shares.
1. Bonus shares is a book keeping transaction (because no cash changes hands), it capitalizes a part of
reserves (retained earnings) to bring:
i) Share capital more in line with the assets employed; and
ii) A high share price back to a more manageable amount, thus enhancing its market ability.

2. No company shall capitalize its profits or reserves for the purpose of issuing fully paid up bonus shares
unless:
a) It is authorized by its articles;
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 nor 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;
f) It complies with such conditions as may be prescribed.
3. The bonus shares shall not be issued in lieu of dividend.

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Right Share:

As per section 62(1) of the Companies Act, 2013 if the company decides to issue fresh issued, these should
be offered to existing shareholders in proportion to existing persons who are holders of equity shares.
Right Issue means offering shares to existing members in proportion to their existing share holding.
The object is, of course, to ensure equitable distribution of shares and the proportion of voting rights is not
affected by issue of Fresh shares.

Capital Reduction:

The Reduction of Share Capital means reduction of issued, subscribed and paid up share capital of the
company. A company may want to reduce its share capital in order to eliminate losses, return surplus capital
to shareholders, assist a buyback or redemption of shares, or distribute assets to shareholders. Generally,
eliminating losses is the main reason why a company reduces its share capital.

Share Certificate:

The share capital is the major source of fund for a Company apart from other sources such as dentures,
loans, etc. A share certificate is a documentary evidence of a number of shares held by an individual in the
organization issuing such shares. A share certificate is a document issued by company evidencing that the
person named in the certificate is owner of number shares of company as specified in the certificate.
As per section 46 of the Companies Act, 2013, Certificate of Shares means a certificate issued under
the seal, if any, of the company, specifying the shares held by any person, shall be prima facie evidence of
the title of the person to such shares.
Where a share is held in depository form, the record of the depository is the prima facie evidence of the
interest of the beneficial owner.

Time limit for Issuance of Share Certificates:

As per section 56(4), every company shall, unless prohibited by any provision of law or any order of Court,
Tribunal or other authority, deliver the certificates if all securities allotted, transferred or transmitted within
the time lines mentioned below: -
On incorporation – to subscribers to Memorandum Within a period of 2 months from the date of
incorporation
On allotment – to allottee Within 2 months from the date of allotment
On transfer or transmission of securities Within a period of 1 month from the date of
receipt by the company of the instrument of
transfer
Duplicate share certificate Within 3 months of submissions of complete
documents and details with the company

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Penalty for fraudulent issue of Share Certificate:

As per section 46(5) of the Companies Act, 2013, if a company with interest to defraud issues a duplicate
certificate of shares, the company shall be punishable with fine which shall not be less than five times the
face value of the shares involved in the issue of the duplicate certificate but which may extend to ten times
the face value of such shares or rupees ten crores whichever is higher and every officer of the company who
is in default shall be liable for action under section 447.

Demat System:

Demat is nothing but a dematerialised account. If one has to save money or make cheque payments, then
he/she needs to open a bank account. Similarly, one needs to open a Demat account if he/she wants to buy
or sell stocks. Thus, Demat account is similar to a bank account where in the actual money is being replaced
by shares. In order to open a Demat account, one needs to approach the Depository Participants (DPs).
In India, a demat account is a type of banking account that dematerializes paper-based physical stock
shares. The Demat account is used to avoid holding of physical shares: the shares are bought as well as sold
through a stock broker. In this case, the advantage is that one does not need any physical evidence for
possessing these shares. All the things are taken care of by the Depository Participants. This account is very
popular in India. Physically only 500 shares can be treated as per the provision given by SEBI. From April
2006, it has become mandatory for any person holding a Demat account to possess a Permanent Account
Number (PAN).

Benefits of demat:

a) A safe, secure and convenient way for holding securities;

b) Immediate transfer of securities;
c) No stamp duty on the transfer of securities;
d) Elimination of risks that are associated with physical certificates like bad delivery, fake securities,
thefts, delays, etc.
e) Reduction in paperwork;
f) Reduction in transaction cost;
g) No odd lot problem (even one share can be sold);
h) Nomination facility;

Debenture:

Debenture is most important instrument and method of rising the loan capital by the company. A debenture
is like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified
amount with interest and although the money raised by the debentures becomes a part of the company’s
capital structure, it does not become share capital. As per sec. 2(30) of the Companies Act, 2013,
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“Debenture” includes debenture stock, bonds or any other instrument of the company evidencing a debt,
whether constituting a charge on the assets of the company or not.

Types of Debentures:

 On the basis of security:

i) Secured or Mortgage Debentures: These are the debentures that are secured by a charge on the
assets of the company. These are also called mortgage debentures.; the holders of secured
debentures have the right to recover their principal amount with the unpaid amount of interest on
such debentures out of the assets mortgaged by the company. In India, debentures must be secured.
Secured debentures can be of two types:
a) First mortgage debentures: The holders of such debentures have a first claim on the assets
charged.
b) Second mortgage debentures: The holders of such debentures have a second claim on the assets
charge.

 On the basis of redemption:

i) Redeemable debentures: these are the debentures which are issued for a fixed period. The principal
amount of such debentures is paid off to the debenture holders on the expiry of such period. These
can be redeemed by annual drawings or by purchasing from the open market.
ii) Non – redeemable debentures: These are the debentures which are not redeemed in the life time of
the company. Such debentures are paid back only when the company goes into liquidation.

 On the basis of records:

i) Registered debentures: These are the debentures that are registered with the company. The amount
of such debentures is payable only to those debenture holders whose name appears in the register
of the company.
ii) Bearer debentures: These are the debentures which are not recorded in a register of the company.
Such debentures are transferrable merely by delivery. Holder of these debentures is entitled to get
the interest.

 On the basis of convertibility:

i) Convertible debentures: These are the debentures that can be converted into shares of the company
on the expiry of pre-decided period. The term and conditions of conversion are generally announced
at the time of issue of debentures.
ii) Non-convertible debentures: The debenture holders of such debentures cannot convert their
debentures into shares of the company.

 On the basis of priority:

i) First debentures: These debentures are redeemed before other debentures.
ii) Second debentures: These debentures are redeemed after the redemption of first debentures.

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Unit – V
Corporate Meeting

Corporate Meeting:

A meeting is an event in which a group of people come together to discuss things or make decisions.
Corporate meeting means meeting of the shareholders or members and board of directors. Meetings of the
shareholders or members are called general meetings which are to be held from time to time. General
meetings are of two types and these are:

 Annual general Meeting; and

 Extraordinary General Meeting.

Annual General Meeting (AGM):

It is a meeting of the general members of an organization. In case of company form of business it is a

meeting of the shareholders or members of the company. Annual General Meeting is a statutory
requirement for Private Limited Company and Limited Company in India. Every company whether, is
required to hold an AGM every year. Annual General Meeting public or private, limited by shares or
guarantee, with or without share capital or unlimited company is an annual meeting conducted by the
shareholders and Directors of the Company. Even a company that has no activity is required to conduct a
annual general meeting.

Time of holding AGM:

Every annual general meeting shall be called during business hours, that is, between 9 a.m. and 6 p.m. on
any day that is not a National Holiday and shall be held either at the registered office of the company or at
some other place within the city, town or village in which the registered office of the company is situate.

Place of Meeting:

It shall be held either at the registered office of the company or at some other place within the city, town or
village in which the registered office of the company is situated. Annual general meeting of an unlisted
company may be held at any place in India if consent is given in writing or by electronic mode by all the
members in advance.

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First AGM:

Section 96(1) of the Companies Act, 2013, states that the first annual general meeting should be held within
9 months from the date of closing of the first financial year of the company.
Subsequent annual general meeting of the company should be held within 6 months from the closing
of the financial year.
If a company holds its first annual general meeting as aforesaid, it shall not be necessary for the company to
hold any annual general meeting in the year of its incorporation.

Extension of validity period of AGM:

In case, it is not possible for a company to hold an annual general meeting within the prescribed time, the
Registrar may, for any special reason, extend the time within which any annual general meeting shall be
held. Such extension can be for 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.

Business to be transacted in AGM:

As per section 102(2) of the Companies Act, 2013, the following business may be transacted during AGM:
1. Ordinary Business [Section 102(2)],
a) Confirmation of financial statements and reports of Board of Directors and Auditors;
b) Declaration of any dividend;
c) Appointment of directors in place of retiring one;
d) Appointment of and Fixation of the remuneration of the auditors.
2. Special Business [Section 102(b)]: Apart from the above business, the rest are deemed to be a Special
business, transacted during the AGM.

Power of Tribunal to call AGM:

As per section 97 of the Indian Companies Act, 2013, if any default is made in holding the annual general
meeting of a company as per section 96, the Tribunal may call an annual general meeting of the company
after receiving the applications of any member of the company to convene the same.

Defaulting in holding AGM:

Section 99 provides that if any default is made in complying or holding a meeting of the company, the
company and every officer of the company who is in default shall be punishable with fine which may extend
to Rs. 1 lakh and in case of continuing default, with a further fine which may extend to Rs. 5,000 for each day
during which =such default continues.
If any default is made in holding the annual general meeting of a company, any member of the
company may make an application to the Tribunal to call or direct the calling of, an annual general meeting
of the company and give such ancillary or consequential 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.
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Notice of Meeting:

As per section 101, a general meeting of a company may be called:

 By giving not less than clear 21 days’ notice either in writing or through electronic mode in such
manner as may be prescribed.
 A general meeting may be called after giving a shorter notice if consent is given in writing or by
electronic mode by not less than 95% of the members entitled to vote at such meeting.
 Every notice of a meeting shall specify the place, date, day and the hour of the meeting and shall
contain statement of the business to be transacted at such meeting.
 The notice of every meeting of the company shall be given to:
a) Every member of the company, legal representatives of any deceased member or the assignee of
an insolvent member;
b) The auditor or auditors of the company; and
c) Every director of the company.
 Any accidental omission to give notice to, or the non-receipt of such notice by any member or other
person who is entitled to such notice for any meeting, shall not invalidate the proceedings of the
meeting.

Extraordinary General Meeting:

It is a kind of general meeting to be converted by the Board of Directors. Such kind of meeting is to be held
between two consecutive AGMs for transacting some special or urgent business. Regulation 42 of Table F
provides that general meeting other than AGM shall be called as extraordinary general meeting of a
company. Since all the items of the meeting are special in nature, an extraordinary statement, giving all
material facts related to every item on the agenda, must be given along with the notice of the meeting
including the nature of interest, financial or otherwise, of any director, manager or KMP or relative of
director etc. in respect of each item of special business.

Who can convene an extraordinary general meeting?

Section 100 of the Indian Companies Act, 2013, provides that an EGM may be convened by the following
persons/Boards:
a) Meeting by Boards [Section 100(1)]: The board may whenever it deems fit, call an extraordinary general
meeting of the company.
b) By Board on requisition [Section 100(2)]: The board can also call an EGM at the requisition of members.
i) In the case of a company having a share capital, such number of members who hold, on the date of
the receipt of the requisition, not less than 1/10th of such of the paid up share capital of the
company as on that date carries the right of voting.
ii) In the case of a company not having a share capital, such number of members who have, on the
date of receipt of the requisition, not less than 1/10th of the total voting power of all the members
having on the said date a right to vote, call an extraordinary general meeting of the company.
c) Meeting by Requisitionists [Section 100(4)]: If the board fails to call an extraordinary general meeting
within 45 days of the deposit of valid requisition, then the meeting may be called by the requisitionists
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themselves. Such meeting may be called by the requisitionists and must be held within 3 months of the
date of deposits of the requisition.

Steps for holding an extraordinary General Meeting:

The following are the steps for holding an EGM under the Companies Act, 2013 by the board:

Step – 1: Convene Board Meeting after giving notice to all the directors to discuss besides others the
following matters.
 To propose resolutions to be passed at the Extraordinary General Meeting of shareholders
 To fix the date, time and place for convening the Extraordinary General Meeting of
shareholders.
Step – 2: Notice: Issue and dispatch notices in writing or through electronic mode giving at least 21 clear
days in such a manner as may be prescribed. The notice shall specify the place, day and hour of the
meeting and shall contain a statement of business to be transacted at such meeting. The notice of
meeting shall be given to:
a) Every member of the company, legal representatives of any deceased member or the assignee
of an insolvent member;
b) The auditor or auditors of the company; and
c) Every director of the company
Step – 3: The meeting can be held at a shorter notice if the consent is given in writing or electronically by not
less than 95% of members entitled to vote at such meeting.
Step – 4: Attach statement to the notice: The statement annexed to the notice shall contain:
a) The nature of concern or interest, financial or otherwise, if any, in respect of each items of –
i) Every director and the manager, if any;
ii) Every other key managerial personnel; and
iii) Relatives of the persons mentioned in sub-clauses (i) and (ii);
b) Any other information and facts that may enable members to understand the meaning, scope
and implications of the items of business and to take decision thereon.

Minutes of proceedings of General Meeting:

Meeting minutes are the written or recorded documentation that is used to inform attendees and non-
attendees about what was discuss and that happened during a meeting. The meeting minutes are generally
taken or recorded during the meeting so that participants have a record of what happened during the
meeting. As per section 118 of the Indian Companies Act, 2013, every company shall keep minutes of all
general meetings of any class of shareholders or creditors, and every resolution passed by postal ballot and
every meeting of its Board of Directors or of every committee of the Board in a Minutes Book. Minutes kept
in accordance with the provisions of the Act evidence the proceedings recorded therein. Minutes help in
understanding the deliberations and decisions taken at the Meeting.

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The minutes of each meeting shall contain a fair and correct summary of the proceedings there at. All
appointments made at any of the meetings aforesaid shall be included in the minutes of the meeting. There
shall not be included in the minutes, any matter which, in the option of the Chairman of the meeting –
a) Is or could reasonably be regarded as defamatory of any person; or
b) Is irrelevant or immaterial to the proceedings; or
c) Is detrimental to the interests of the company.
The Chairman shall exercise absolute discretion in regard to the inclusion or non-inclusion of any matter in
the minutes. Every company shall observe secretarial standards with respect to general and Board meetings
specified by the Institute of Company Secretaries of India constituted under section 3 of the Company
Secretaries Act, 1980 and approved as such by the Central Government.

Procedure of maintenance of minutes:

 Minutes shall be recorded in books maintained for that purpose.

 A distinct Minutes Book shall be maintained for meetings of the general meeting.
 Minutes in electronic form shall be maintained with Timestamp.
 A company may maintain its Minutes in physical or in electronic form with Timestamp.
 Every company shall however follow a uniform and consistent form of maintaining the Minutes.

Punishment for non-compliance of maintenance of minutes of proceedings:

 If any default is made in complying with the provisions of this section in respect of any meeting, the
company shall be liable to a penalty of Rs. 25,000 and every officer of the company who is in default
shall be liable to a penalty of Rs. 5,000.
 If a person is found guilty of tampering with the minutes of the proceedings of meeting, he shall be
punishable with imprisonment for a term which may extend to 2 years and with fine which shall not
be less than Rs. 25,000 but which may extend to Rs. 1,00,000.

Meeting of Board of Directors:

A board of directors is a team of people elected by a corporation’s shareholders to represent the

shareholders’ interests and ensure that the company’s management acts on their behalf. The head of the
board of directors is the chairman or chairperson of the board. Directors attend board meetings, evaluate
management performance, tend to major decisions (such as making acquisitions or selling the company),
declare dividends, create stock option policies (including approving grants to key managers) and establish
executive compensation packages. Board of directors often have several committees dedicated to specific
decision making processes. The purpose of the board of directors is to make sure management is acting in
the best interests of the shareholders.

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a) Frequency of Meeting:
i) Fist Meeting: Every company shall hold the First Meeting of Board of Directors within 30 (Thirty) days
from the date of Incorporation of the company.
ii) Subsequent Meetings: For One Person Company, Small Company and Dormant Company:
 At least one meeting of Board of Directors in each half of calendar year.
 Minimum Gap between two meetings at least 90 days.

For other companies:

 Minimum no. of 4 meetings of Board of Director in a calendar year.
 Maximum gap between two meetings should not be more than 120 days.
b) Notice Period: A meeting of the Board shall be called by giving not less than 7 days’ notice in writing to
every director at his address registered with the company and such notice shall be sent by hand delivery
or by post or by electronic means.
A meeting of the Board may be called at shorter notice to transact urgent business subject to the
condition that at least one independent director, if any, shall be present at the meeting. In case of
absence of independent directors from such a meeting of the Board, decisions taken at such a meeting
shall be circulated to all the directors and shall be final only on ratification thereof by at least one
independent director, if any.
c) Calling of Meeting: Meeting of Board of Director should be called by giving 7 days notice to Directors at
his registered address through:
 By hand delivery;
 By post;
 By electronic means.

Meeting at shorter notice: A meeting of Board of Directors can be called by shorter notice subject to the
conditions:
 If the company is require to have independent director:
 Presence of at least one Independent director is required.
 In case of absence, decision taken at such meeting shall be circulated to all the directors,
and
 Shall be final only on ratification thereof by at least one Independent Director.
 If the company doesn’t require to have independent director: The meeting can be called at a
shorter notice without any conditions to be complied with.

d) Quorum of Board Meeting:

 1/3rd of total strength or 2 (two) Directors, whichever is higher.

 Where meeting of Board could not be held for want of quorum, the meeting shall automatically
adjourn to same time, same place at next week (Not being national holiday),
 If number of directors reduced below quorum, then the remaining directors may hold the
meeting for the following purposes:
 To call a general meeting
 Increase the number of directors.

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Quorum in case of Interested Directors:
 If interested director exceed or equal to 2/3 of total strength the remaining directors not being
less than 2 (two) shall be the quorum.

e) Participation of Directors in Board Meetings: Directors may, apart from attending the meeting
physically, participate in the meeting by way of video conferencing and other audio visual means.
 Matter which can’t be dealt at a meeting held through Video conferencing:
 Approval of the annual financial statements;
 Approval of the board’s report;
 Approval of the prospectus;
 Audit Committee meetings for consideration of accounts; and
 Approval of the matter relating to amalgamation, merger, demerger, acquisition and
takeover.

f) Power exercised by Board:

 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. In exercising such power
or doing such act or thing, the board shall be subject to the provisions of this Act, or the
memorandum or articles, or regulations made by the company in general meeting:
 Powers to be exercised only at board meeting:
Under the act:
 Make calls on shareholders in respect of money unpaid on their shares;
 Authorize but back of securities under section 68;
 Issue securities, including debentures, whether in or outside India;
 Borrow monies;
 Invest the funds of the company;
 Grant loans or give guarantee or provide security in respect of loans;
 Approve financial statement and the Board’s report;
 Diversify the business of the company;
 Approve amalgamation, merger or reconstruction;
 Take over a company or acquire a controlling or substantial stake in another company;
Under Rules:
 Make political contributions;
 Appoint or remove key managerial personnel (KMP);
 Take note of appointment(s) or removal(s) of one level below the Key Managerial Personnel;
 Appoint Internal Auditors and secretarial auditor;
 Take note of the disclosure of director’s interest and shareholding;
 Buy, sell investments hold by the company (often than take investments), constituting 5% or
more of the paid up share capital and free reserves of the investee company;
 Invite or accept or renew public deposits and related matters;
 Review or change the terms and conditions of public deposit;
 Approve quarterly, half yearly and annual financial statements or financial results as the case may
be.

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g) Minutes of proceedings of meeting of Board of Directors and other meetings and resolutions passed
by postal ballot: Every company shall keep Minutes of all Board and Committee Meetings in a Minutes
Book. Minutes keep in accordance with the provisions of the Act evidence the proceedings recorded
therein. Minutes help in understanding the deliberations and decisions taken at the Meeting.

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