EXECUTIVE PROGRAMME

COMPANY LAW AND PRACTICE

MODULE 1
PAPER 2

“Every time you think of closing this book, just remember the journey which made
you open the book.”

Author
Sai Kumar D
S.no. Chapter Page no.
PART – A (60 MARKS)
1 Introduction to Company Law 1.1-1.16
2 Legal Status and Types of Registered Companies 2.1-2.35
3 Memorandum and Articles of Associations and its Alteration 3.1-3.35
4 Share and Share Capital - Concepts 4.1-4.58
5 Members and Shareholders 5.1-5.35
6 Debt Instruments - Concepts 6.1-6.43
7 Charges 7.1-7.29
8 Distribution of Profits 8.1-8.32
9 Accounts and Auditors 9.1-9.41
10 Compromise, Arrangement and Amalgamations - Concepts 10.1-10.34
11 Dormant Company 11.1-11.6
12 Inspection, Inquiry and Investigation 12.1-12.28
PART -B (40 MARKS)

13 General Meetings 13.1-13.43

14 Directors 14.1-14.32
15 Board Composition and Powers of the Board 15.1-15.35
16 Meetings of Board and its Committees 16.1-16.22
17 Corporate Social Responsibility - Concepts 17.1-17.21
18 Annual Report - Concepts 18.1-18.19
19 Key Managerial Personnel (KMP’s) and their Remuneration 19.1-19.40
 Lesson 1
INTRODUCTION TO COMPANY LAW
INTRODUCTION

Company Law in India, is the cherished child of the English parents. Our various Companies Acts have
been modelled on the English Acts. Following the enactment of the Joint Stock Companies Act, 1844
in England, the first Companies Act was passed in India in 1850.
The Indian Companies Act, 1866, the Indian Companies Act, 1882, the Companies Act, 1913, and the
Companies Act, 1956 was earlier law passed in India. The Companies Act, 2013 received the assent of
the President on August 29, 2013 and was notified in the Gazette of India on August 30, 2013. Every
Companies Act introduced new concepts. Like, before notifying the Companies Act, 2013 there were
no concepts regarding Corporate Social Responsibility, One Person Company and internal/secretarial
audit based on threshold limits etc

HISTORY AND DEVELOPMENT OF THE CONCEPT OF COMPANY LAW IN INDIA

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 REFORMS BROUGHT UNDER THE COMPANIES ACT, 2013 FOR EASE OF DOING BUSINESS

1) Business friendly corporate regulation/pro-business initiatives

2) Protection for minority shareholders and investor protection and activism
3) Stricter enforcement and audit accountability
4) Enhanced accountability of management
5) Enhanced disclosure norms
6) Corporate Social Responsibility and better framework for insolvency regulation and
institutional structure
7) Good corporate governance

In the series the Companies Act, 2013 has also been amended to extend relief to the business entities
governed under the Companies Act, 2013. The amendments were brought through the Companies
(Amendment) Act, 2015, the Insolvency and Bankruptcy Code, 2016, the Companies (Amendment)
Act, 2017, and the Companies (Amendment) Act, 2019 and the Companies (Amendment) Act, 2020.

The Companies Act, 2013

1) Introduction
• The Companies Act, 2013 received the assent of the President on August 29, 2013 and was
notified in the Gazette of India on August 30,2013. It empowers the Central Government to bring
into force various sections from such date(s) as may be notified in the Official Gazette
• The Companies Act, 2013 has undergone amendments five times so far. The Companies
(Amendment) Act, 2015, The Insolvency and Bankruptcy Code, 2016, The Companies
(Amendment) Act, 2017, and The Companies (Amendment) Act, 2019 and The Companies
(Amendment) Act, 2020 amended The Companies Act, 2013. So far Ministry has come out with
several circulars, notifications, Orders and various amendment rules to facilitate better and
smooth implementation of the Act.
• The Companies Act 2013 introduced new concepts supporting enhanced disclosure,
accountability, better board governance, better facilitation of business and so on. It includes
associate company, one person company, small company, dormant company, independent
director, women director, resident director, special court, secretarial standards, secretarial audit,
class action, registered valuers, rotation of auditors, vigil mechanism, corporate social
responsibility, E-voting etc.

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 2) Reading Methodology of the Companies Act, 2013 and its legal aura
• The Companies Act, 2013 is not a standalone piece of legislation but a complete ecosystem. It
contains Orders, Rules, Notifications and Circulars. One should read each Section of the Act, with
relevant Rule, Notification and Circular.
• The Act is a superior authority in law passed by the Legislature.
• Notifications and Rules are notified by the Executive under the powers derived from the Act
itself.
• Structure of Companies Act and the manner of identifying complementary legislations.
a) The Principal Legislation/Statute = The Companies Act, 2013 is principal legislation.
b) Schedules = It is appended (#attached) to an Act, to form part of it. They are generally added to
avoid encumbering the statutes with matter of excessive details.
c) Delegated Legislations = Delegated legislation (subordinate legislation) is a legislation made
under powers conferred by an Act of Parliament (an enabling statute, often called the parent Act).
Here Parent Act is The Companies Act and the delegated legislations are Rules notified by Ministry
of Corporate Affairs
d) Sections, rules and schedules to be read together = For example Section 135 (Relating to
Corporate Social Responsibility) is to be read with the Companies (Corporate Social Responsibility
Policy) Rules 2014, Schedule VII (Activities relating to Corporate Social Responsibility) and
circulars/clarifications issued by Ministry of Corporate Affairs on Section 135& Rules made
thereunder.

3) Interpretations of some standard words and Phrases used in Statutes

a) “Proviso”- A clause, as in a document or statute, that begins with the words “Provided that” is
called ‘proviso’. The term ‘proviso’ is defined as a clause making some condition or stipulation; It
is well settled that “the effect of an excepting or qualifying proviso, according to the ordinary rules
of construction, is to except out of the preceding portion of the enactment, or to qualify something
enacted therein, which but for the proviso would be within it.
Example: 2 (68) "private company" means a 8 [company having a minimum paid-up share capital
4 [Omitted] as may be prescribed, and which by its articles],—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred
Provided that where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the employment
ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company;

b) “Notwithstanding anything contained”

A provision in a statute beginning with the words ‘Notwithstanding anything contained’ is called
a ‘non-obstante’ provision and is generally used in a statute to give an overriding effect to a
particular section or the statute as a whole.
Example: Prohibitions and Restrictions Regarding Political Contributions. Section 182(1)

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 Notwithstanding anything contained in any other provision of this Act, a company, other than a
Government company and a company which has been in existence for less than three financial
years, may contribute any amount directly or indirectly to any political party:

c) “Subject to”- The ordinary meaning of the phrase ‘subject to’ is being dependent upon;
conditional upon; subordinate to. It is used to express the intention that when while complying
with one statutory provision, another provision relating to the subject matter also must be
complied with.
Example: Alteration of Memorandum: Section 13(2) Any change in the name of a company shall
be subject to the provisions of sub-sections (2) and (3) of section 4 and shall not have effect except
with the approval of the Central Government. (2) & (3) talks about: Things to be kept in mind
while selecting the name of company

d) “Nothing contained in this section” shall apply

“Nothing contained in this section shall apply”, is frequently used in legislative drafting. Literally,
it means anything contained in the preceding part of the section would not apply in the situation
stated in the provision that begins with this phrase.

Example: Sec 173 7 174 [Meeting of BOD & Quorum]: Provided that nothing contained in this
subsection and in section 174 shall apply to One Person Company in which there is only one
director on its Board of Directors

e) “Without prejudice to the provisions contained in this Act/any other Act

The phrase ‘without prejudice’ means without damaging, or otherwise affecting; without
detriment; harm. So when one provision says ‘without prejudice to any other provision’, it means
that no other provision is affected by that provision or that other provisions remain unaffected.
This is a qualifying phrase used in statutory drafting in a provision to protect the operation of
another provision which it refers to. In other words, both the provisions operate independently

Example: Sec 129. Financial Statement. (1) The financial statements shall give a true and fair view
of the state of affairs of the company or companies, comply with the accounting standards. (5)
Without prejudice to sub-section (1), where the financial statements of a company do not comply
with the accounting standards referred to in sub-section (1), the company shall disclose in its
financial statements, the deviation from the accounting standards, the reasons for such deviation
and the financial effects, if any, arising out of such deviation

f) “For the purposes of this section/provision/definition” It has limited applicability; it apples to

only the relevant section / provision/ definition but applies to the whole of it.

g) “Shall”-When used in a statute, the presumption is that its use is mandatory and not directory.
h) “May” is either permissive or directory. (Optional)

DOCTRINEs discussed in chapter 3

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APPLICABILITY OF COMPANIES ACT,2013

Companies
incorporated under
this act or any other
previous company
law
Such body corporate Insurance companies
as prescribed by except in so far
central govt subject to provisions are
exceptions as inconsistent with
specified in the Insurance act,1938
notifications or IRDA act ,1999

Banking companies
Companies goverened except in so far the said
under special act,except provisions are
so far the said provisions inconsistent with
are inconsistent with Banking Regulation
provisions of special act act,1949

Companies engaged in
generation of
electricity,except so far
it is inconsistent with
Electricity Act,2003

Key concepts

1) Sec 2(20) “Company” means a company incorporated under this Act or under any previous
company law.
2) Sec 2(21) “Company Limited by Guarantee” means a company having the liability of its members
limited by the memorandum to such amount as the members may respectively undertake to
contribute to the assets of the company in the event of its being wound up
3) Sec 2(22) “Company Limited by Shares” means a company having the liability of its members
limited by the memorandum to the amount, if any, unpaid on the shares respectively held by
them.
4) Sec 2(52) “Listed Company” means a company which has any of its securities listed on any
recognised stock exchange;
Provided that such class of companies, which have listed or intend to list such class of securities, as
may be prescribed in consultation with the Securities and Exchange Board, shall not be considered as
listed companies.
Companies not to be considered as listed companies [Rule 2A of the Companies (Specification of
definitions details) Rules, 2014].
The following classes of companies shall not be considered as listed companies, namely:-

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a) Public companies which have not listed their equity shares on a recognized stock exchange but
have listed their –
(i) non-convertible debt securities issued on private placement basis in terms of SEBI (Issue and
Listing of Debt Securities) Regulations, 2008; or
(ii) non-convertible redeemable preference shares issued on private placement basis in terms of SEBI
(Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013; or
(iii) both categories of (i) and (ii) above.
b) Private companies which have listed their non-convertible debt securities on private placement
basis on a recognized stock exchange in terms of SEBI (Issue and Listing of Debt Securities)
Regulations, 2008.
c) Public companies which have not listed their equity shares on a recognized stock exchange but
whose equity shares are listed on a stock exchange in a jurisdiction as specified in section 23(3) of the
Companies Act, 2013.

5) Sec 2(68)- Private Company” means a company having a minimum paid-up share capital as may
be prescribed, and which by its articles,
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall,
for the purposes of this clause, be treated as a single member
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the employment
ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company.

#Questionable point: Debenture holders are not included in the definition, hence it can be issued
to more than 200 people.

6) Sec 2(71) “Public Company” means a company which –

(a) is not a private company.
(b) has a minimum paid-up share capital, as may be prescribed
Provided that a company which is a subsidiary of a public company, shall be deemed to be public
company for the purposes of this Act even where such subsidiary company continues to be a private
company in its articles.

#Illustration:
Tony Pvt. Ltd. is wholly owned subsidiary of Captain America Ltd., a public company incorporated
under the Companies Act, 2013. Tony Pvt. Ltd. wanted to avail exemptions as provided to private
companies. In this case, since Tony Pvt. Ltd. is subsidiary of Captain America Ltd., which is a public
company, therefore Tony Pvt. Ltd. will be deemed to be a public company and will be not allowed
to avail exemptions provided to a private company.

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7) Sec 2(87) “Subsidiary Company”, means a company in which the holding company –
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or together
with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers
of subsidiaries beyond such numbers as may be prescribed.
Explanation.—For the purposes of this clause,—
(a) a company shall be deemed to be a subsidiary company of the holding company even if the
control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the
holding company;

8) Sec 2(6) “Associate Company”, in relation to another company, means a company in which that
other company has a significant influence, but which is not a subsidiary company of the company
having such influence and includes a joint venture company.
(a) the expression “significant influence” means control of at least twenty per cent. of total voting
power, or control of or participation in business decisions under an agreement.

9) Sec 2 (45) “Government Company” means any company in which not less than 51% of the paidup
share capital is held by the Central Government, or by any State Government or Governments, or
partly by the Central Government and partly by one or more State Governments, and includes a
company which is a subsidiary company of such a Government company.

10) Nidhi company: Nidhi Company means a company which has been incorporated as a Nidhi 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.(section 406)

11) Dormant company: A company formed and registered under this 2013 for a future project or to
hold an asset or intellectual property and has no significant accounting transaction such a
company or an inactive company may make an application to the Registrar for obtaining the status
of a dormant company. (Section 455)

12) Section 2(85)- “Small Company” A small company has been defined as a company, other than a
public company.
(i) paid-up share capital of which does not exceed 4 Crore rupees or such higher amount as may be
prescribed which shall not be more than 10 crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding financial year does
not exceed 40 crore rupees or such higher amount as may be prescribed which shall not be more than
100 crore rupees: Provided that nothing in this clause shall apply to –
(a) a holding company or a subsidiary company;
(b) a company registered under section 8; or
(c) a company or body corporate governed by any special Act; [section 2(85)

Previous Year Questions

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Q: What would be the status of AV Pvt. Ltd. under the Companies Act, 2013, if TV Ltd. has appointed
six (6) out of ten (10) directors on the Board of AV Pvt. Ltd. by exercising some powers at its
discretion? (JUNE 2022) (3M)

ANS: As per section 2(87) of the Companies Act, 2013, "subsidiary company" in relation
to any other company (that is to say the holding company), means a company in which the holding
company:
• controls the composition of the Board of directors; or
• exercise or controls more than one-half of the total voting power either at its own or together with
one or more of its subsidiaries. The composition of company's Board of directors shall be deemed to
be controlled by another company if that other company by exercise of some power exercisable by it
at its discretion can appoint or remove all or a majority of director.
In the given case AV Pvt. Ltd is deemed to be subsidiary company of TV Ltd. as it controls the
composition of board of directors of AV Pvt. Ltd. Further, subsidiary of a public company is deemed to
be considered as a public company. Therefore, AV Pvt. LTD is consider as a public company

E-GOVERNANACE AND MCA-21

With the advent of Information and Communication Technology in all sectors today, Governments
across the globe including the Government of India are taking major initiatives to integrate IT in all
their processes. Electronic Governance (e-Governance) is the application of Information Technology
to the Government functioning in order to bring about Simple, Moral, Accountable, Responsive and
Transparent (SMART) Governance. e-Governance is a highly complex process requiring provision of
hardware, software, networking and re-engineering of the procedures for better delivery of services.
Earlier the businessmen and professionals had to visit MCA offices to file the statutory forms, to
review public documents or to fulfil any compliance in physical mode. It was very hectic and time
consuming. People had to stand in long queue which often led to inadvertent missing of filing of
statutory e-forms leading to Noncompliance and levy of fine or imprisonment.
So keeping in tune with the e-Governance initiatives the world over, Ministry of Corporate Affairs
(MCA), Government of India, has initiated the MCA-21 project, to enable an easy and secure access
to MCA services in a manner that best suits the corporate entities and professionals besides the
public.

MCA-21 is an ambitious e-Governance initiative of Government of India that builds on the

Government’s vision of National e-Governance in the country. As part of the Government’s focus on
governance norms to meet the expectations arising from globalization, MCA project was launched as
a flagship initiative of Ministry of Corporate Affairs (MCA). MCA-21 has resulted in improved
procedures for better delivery of services by the MCA. This reform of administration has not only
improved efficiency and transparency in the government operations but has also enabled the Ministry
to concentrate more on policy matters. The portal is designed to fully automate all processes related
to enforcement and compliance of legal requirements under the Companies Act, 2013, Limited
Liability Partnership Act, 2008 & other allied Acts and rules & regulations framed there-under mainly
for regulating the functioning of the corporate sector in accordance with law.

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 From March 08, 2022 all the LLP e-filing services were upgraded and migrated to MCA V3 portal.
Nine company forms (CHG-1, CHG-4, CHG-6, CHG-8, CHG-9, DIR-3 KYC, DIR-3 KYC WEB, DPT3 and
DPT-4) are available live from 01.09.2022. Remaining company forms programmed to be launched
in two different lots, i.e., on 09.01.2023 and 23.01.2023. Other modules like e-Adjudication,
Compliance Management System are also scheduled to be deployed shortly.

AGENCIES UNDER MCA-21

a) The Ministry of Corporate Affairs (MCA): is primarily concerned with administration of the
Companies Act 2013, the Limited Liability Partnership Act, 2008 & other allied Acts and rules &
regulations
Besides, it exercises supervision over the three professional bodies, namely, Institute of Chartered
Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI) and the Institute of Cost
Accountants of India which are constituted under three separate Acts of the Parliament for proper
and orderly growth of the professions concerned. The Ministry also has the responsibility of carrying
out the functions of the Central Government relating to administration of Partnership Act, 1932, the
Companies (Donations to National Funds) Act, 1951 and Societies Registration Act, 1980 etc.
b) Registrar of Companies (ROC) as defined under Section 2 (75) of the Companies Act, 2013 means
a Registrar, an Additional Registrar, a Joint Registrar, a Deputy Registrar or an Assistant Registrar,
having the duty of registering companies and discharging various functions under this Act
Registrars of Companies (ROC) appointed in the various States and Union Territories are vested with
the primary duty of registering companies and LLPs floated in the respective states and the Union
Territories and ensuring that such companies and LLPs comply with statutory requirements under
the Act. These offices function as registry of records, relating to the companies registered with
them, which are available for inspection by members of public on payment of the prescribed fee.
The Central Government exercises administrative control over these offices through the
respective Regional Directors.

c) Regional Director (RD) is in-charge of the respective region, each region comprising a number of
States and Union Territories. They supervise the working of the offices of the Registrars of
Companies and the Official Liquidators working in their regions. They also maintain liaison with the
respective State Governments and the Central Government in matters relating to the administration
of the Companies Act and LLP Act. Certain powers of the Central Government under the Act have
been delegated to the Regional Directors. They have also been declared as heads of Department.

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d) Official Liquidators (OL) means an Official Liquidator appointed under sub-section (1) of section
359 of the Companies Act, 2013
As per Section 359 (1) of the Companies Act, 2013, for the purposes of this Act, so far as it relates to
the winding up of companies by the Tribunal, the Central Government may appoint as many Official
Liquidators, Joint, Deputy or Assistant Official Liquidators as it may consider necessary to discharge
the functions of the Official Liquidator. The liquidators appointed shall be whole-time officers of the
Central Government. The salary and other allowances of the Official Liquidator, Joint Official
Liquidator, Deputy Official Liquidator and Assistant Official Liquidator shall be paid by the Central
Government.

e) Serious Fraud Investigation Office (SFIO)- The Government in the backdrop of major failure of
non-banking financial institutions, phenomenon of vanishing companies, plantation companies and
the recent stock market scam had decided to set up Serious Fraud Investigation Office.
(SFIO), a multi-disciplinary organization to investigate corporate frauds. The Organization has been
established and it has started functioning since 1st October, 2003. The SFIO is expected to be a multi-
disciplinary organisation consisting of experts in the field of accountancy, forensic auditing, law,
information technology, investigation, company law, capital market and taxation for detecting and
prosecuting or recommending for prosecution white collar crimes/frauds

f) National Company Law Tribunal/National Company Law Appellate Tribunal (NCLT/NCLAT) - The
setting up of the NCLT and NCLAT are part of the efforts to move to a regime of faster resolution of
corporate disputes, thus improving the ease of doing business in India. The Ministry of Company
Affairs (MCA) on 1st June, 2016 notified the Constitution of National Company Law Tribunal (NCLT) &
The National Company Law Appellate Tribunal (NCLAT) in exercise of powers conferred under section
408 and 410 of the Companies Act, 2013. The constitution of NCLT & NCLAT was a step towards
improving and easing all the judicial matters relating to the Company law under one roof.

IMPORTANT ASPECTS OF MCA-21

Front Office :The major components involved in this comprehensive e-governance project are front
office and back office. Front Office represents the interface of the corporate and public users with
the MCA-21 system. This comprises of Virtual Front Office and Registrar’s Front Office.

Virtual front office: Virtual front office is one of the various channels available to stakeholders
(companies and the professionals) to enable them to do the statutory filing with ROC Offices across
the Country. It merely represents a computer facility for filing of digitally signed e-forms by accessing
the MCA portal through internet (www.mca.gov.in). It also pre- supposes availability of related
facilities to convert documents into PDF format and scanning of documents wherever required.

Registrar’s Front Office (RFO): To facilitate the change over from Physical Document Filing to Digital
Document Filing, the Ministry started offices known as the Registrar Front Office. It is one of the
various channels available to stakeholders to enable them to do the statutory filing with ROC Offices
across the Country. Registrar’s Front Offices are managed and operated by the operator RFO has all
facilities which are required for online filing like trained manpower, broadband connectivity, scanner,
printer and related computer accessories.

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Back Office: Back Office represents the offices of Registrar of Companies, Regional Directors and
Headquarters and takes care of internal processing of the forms filed by the corporate user as per
MCA norms and guidelines. The e-forms are routed dynamically to the concerned authority for
processing depending upon the assigned role. All the e-forms along with attachments are stored in
the electronic depository, which the staff of MCA can view depending upon the access rights.

Certified Filing Centre (CFC): In order to provide the Companies to do their e Filing, Professional
Institutes (ICSI, ICAI, ICAI-cost), their Regional Councils/Local chapters, individual practicing
members and firms of professionals were authorised to create and set-up the required facilities for
facilitating the e Filing process. The Certified Filing Centres, thus set-up by the Professionals are over
and above the Registrar’s Front Office set-up by the Ministry under the programme. While the
services available from the Facilitation Centres set-up by the Ministry are without any charge, the
services provided these Certified Filing Centres entail payment of service charges

SUBSTANTINAL BENEFITS OF MCA21

Elimination of interface with the offices of ROCs, RDs and the MCA
MCA-21 has been designed virtually to eliminate the physical interface between the companies and
the offices of ROCs, RDs and even MCA. It has not only saved time and energy of the company
representatives but also enabled them to focus on other creative tasks. Time consuming works of
professionals i.e. the tasks of incorporation of new companies, conducting searches of important
documents, obtaining certificates of creation, modification and satisfaction of charges, filing of
statutory forms and returns etc. have now become very quick and easy.

Effective use of database

With the help of database collected, the vital information has been collected, segregated in such a
way that it can be used by various stakeholders for various purposes. It will help in transparency in
operations and benefits to players in stock markets as well as easy and prominent exposure of
defaulters
The following websites are created:

a) Website for Investor Education and Protection Fund: http://iepf.gov.in

It would provide information about IEPF and the various activities that have been undertaken/funded
by it. It would also provide information relevant for investors, including about various instruments for
investment, regulatory system and grievance redressal mechanism.

b) Awareness to Investors – www.watchoutinvestors.com

It is a national web-based registry covering entities including companies and intermediaries and,
wherever available the persons associated with such entities, who have been indicted for an
economic default and/or for non-compliance of laws/guidelines and/or who are no longer in the
specified activity.

c) CSR portal-https://www.csr.gov.in/
The National Corporate Social Responsibility Data Portal is an initiative by Ministry of Corporate
Affairs, Government of India to establish a platform to disseminate Corporate Social Responsibility
related data and information filed by the companies registered with it

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d) Security Clearance Online Portal: https://esahajmcaservices.nic.in/
Security Clearance is a pre-requisite for granting permission to individuals who are citizens of
countries sharing land borders with India and intending to apply for issuance of Director
Identification Number (DIN)/appointment of director in new/existing company.
E-Sahaj Seva offers online service for security clearance of applications seeking issuance of Director
Identification Number (DIN)/appointment of Director in new/existing company from MCA

3.Better supervision and monitoring of compliance

MCA-21 has ensured better supervision and control of the MCA over Companies with regard to
compliance with the provisions of the Companies Act. Thus, enforcement of law has become easier
and will ultimately benefit the investors, the stakeholders and the concerned Regulatory bodies

Mutually beneficial system

The focus of the MCA-21 program is on bringing about a fine balance between trade facilitation on
one hand and enforcement requirements on the other.
Speed, transparency and efficiency
MCA-21 project aims to bring speed, transparency and efficiency in the delivery of the services
rendered by the MCA to all the stakeholders through a set of pre-defined service levels
Effective due diligence
Banks and Financial Institutions can conduct a thorough scrutiny of the documents filed by the
company before advancing loan(s) and other financial assistance to such a company
 Efficient services by professionals
Professionals will be able to offer efficient services to their client companies
 Environment Friendly
Professionals will be able to offer efficient services to their client companies

MCA SERVICES

The MCA-21 application is designed to fully automate all processes related to the proactive
enforcement and compliance of the legal requirements under the Companies Act, 2013 and Limited
Liability Partnership Act, 2008. This helps the business community to meet their statutory obligations.

(1) Register Digital Signature Certificate - The Information Technology Act, 2000 has provisions for
use of Digital Signatures on the documents submitted in electronic form in order to ensure the
security and authenticity of the documents filed electronically. This is secure and authentic way to
submit a document electronically. As such, all filings done by the companies/LLPs under MCA-21 e-
Governance programme are required to be filed using Digital Signatures by the person authorised to
sign the documents. An user can register DSC and update particulars of the DSC through the MCA
Portal.
(2) Apply for Director Identification Number (DIN) - The concept of a Director Identification Number
(DIN) was introduced for the first time with the insertion of Sections 266A to 266G of Companies
(Amendment) Act, 2006, since then the system has evolved and Companies Act, 2013 also makes a
provision for obtaining DIN.

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(3) View Master details of any Company/LLP registered with Registrar of Companies - A facility has
been made available to the general public to view master details of any company/LLP registered with
Registrar of Companies. This facility may be availed by clicking “View Company Master Data”. A user
can view Master Data of a Company or an LLP, signatory details of a particular company, details of
companies and directors under prosecution, details of Companies and LLP’s registered in the last 30
days, master data of directors specifying the name of Companies/LLP’s they are director/partner in,
director/designated partner’s details, etc.

(4) Index of Charges - A similar facility has also been made available in respect of the ‘Register of
Charges’ for the Companies/LLPs by clicking on to the ‘View Index of Charges’ and for the viewing the
details of the signatories of any company/LLP by clicking on ‘View Signatory Details’.

(5) LLP Services - A user can check LLP name, find LLPIN (Limited Liability Partnership Identification
Number), avail services related to incorporation of an LLP, services related to annual e-Filing for an
LLP, services related to change in LLP information and services related to closure of an LLP

(6) E-Filing – to be used if the user wants to avail LLP e-filing services. LLP e-filing services are available
in the V3 system.

(7) Company Services - A user can check company name, find CIN (Corporate Identity Number),
services related to incorporation of a company, avail services related to compliance filing of a
company, services related to change in company information, services related to charge
management, informational services and services related to closure of a company

(8) Complaints - A user can raise service related complaints, track the complaints created, create
investor/ serious complaint, track the status of complaints created as ‘investor/serious complaint’,
give feedback or suggestions to MCA-21 and raise employee grievances.

(9) Document Related Services - A user can get certified copies of forms and documents of a
company, view forms and documents online etc

(10) Fee and Payment Services - A user can avail services through Enquire Fees, pay later, link NEFT
payment, pay miscellaneous fee, pay stamp duty and track the payment status.

(11) Public Search of Trademark - A user can search whether trademark has been registered or
applied for a particular name by a company

(12) Investor Services - A user can search amount unclaimed/unpaid amount due to be transferred
to the Investor Education and Protection Fund (IEPF), upload investor details, confirm uploaded files

(13) Track SRN/Transaction Status - A user can track the transaction status of the uploaded forms
i.e., whether they are approved or pending for approval or required for resubmission or are rejected.

MCA-21 Version 3.0

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Besides above-mentioned services, to align with global best practices and aided by emerging
technologies such as AI, MCA-21 Version 3.0 is envisioned to transform the corporate regulatory
environment in India. The key components of MCA-21 are.

1. e-Scrutiny: MCA is in process of setting up a Central Scrutiny Cell which will scrutinise certain
Straight Through Process (STP) forms filed by the corporates on the MCA-21 registry and flag the
companies for more in depth scrutiny.
2. e-adjudication: E-adjudication module, has been conceptualised to manage the increased
volume of adjudication proceedings by Registrar of Companies (RoC) and Regional Directors (RD)
and will facilitate end to end digitisation of the process of adjudication, for the ease of users. It
will provide a platform for conducting online hearings with stakeholders and end to end
adjudication electronically.
3. e-Consultation: To automate and enhance the current process of public consultation on
proposed amendments and draft rules etc., e-consultation module of MCA-21 V 3.0 will provide
an online platform wherein, proposed amendments/draft legislations will be posted on MCA’s
website for external users/ comments and suggestions pertaining to the same in a structured
digital format. Further, the system will also facilitate AI driven sentiment analysis, consolidation
and categorization of stakeholders’ inputs and creation of reports on the basis thereof, for
reference of MCA.
4. Compliance Management System (CMS): CMS will assist MCA in identifying non-compliant
companies/ LLPs, issuing e-notices to the said defaulting companies/LLPs, generating alerts for
internal users of MCA. CMS will serve as a technology platform/solution for conducting rule based
compliance checks and undertaking enforcement drives of MCA wherein e-notices will be issued
by MCA for effective administration of corporates.
5. MCA Lab: As part of MCA21 V 3.0, a MCA LAB is being set up, which will consist of corporate law
experts. The primary function of MCA Lab will be to evaluate the effectiveness of Compliance
Management System, e-consultation module, enforcement module, etc. and suggest
enhancements to the same on an on-going basis. The Lab will help MCA in ensuring the
correctness of results produced by these key modules in view of the dynamic corporate
ecosystem.

E-FORMS

An e-form is only a re-engineered conventional form notified and represents a document in electronic
format for filing with MCA authorities through the Internet. This may be either a form filed for
compliance or information purpose or an application seeking approval from the MCA. Due to
technical updates, these forms updates regularly, even though their user interface may not change.
User always uses latest e-forms from the MCA Portal
Filling and filing of forms is an important part of the secretarial function of a Company Secretary.
Normally, where Company appoints a Company Secretary, he is designated as the officer responsible
for compliance under the Companies Act and other allied legislations. Therefore, for any lapse in
complying with the various provisions of the Companies Act or such other legislations, for the

1.14 | P a g e
compliance of which the Company Secretary has been made responsible, he becomes liable as
“officer in default”.
Filling and filing of forms, returns and applications under various provisions demand intimate
knowledge of substantive as well as procedural law. The Registrar of Companies (RoC) registers the
documents filed with them within the prescribed time, if found in order. Often, a large number of
documents filed with the RoC are not taken on record due to technical lapses which result in avoidable
correspondence and frequent visits to the office of RoC. In order to avoid such errors, every care
should be taken to ensure that the forms are properly filled and adequate documents are attached
to them before filing. Company Secretaries, under electronic filing system are required to be familiar
with computer, internet, MCA-21 electronic filing system, pdf files and using digital signatures.

PREREQUISITES FOR E-FILING ON MCA-21

Digital Signature certificate (DSC) of either Class 2 and Class 3 signing certificate category issued by a
licensed Certifying Authority (CA) needs to be obtained for e-Filing on the MCA Portal. Digital
Signatures are legally admissible in a Court of Law, as provided under the provisions of IT Act, 2000.
The Certifying Authorities are authorized to issue a Digital Signature Certificate with a validity of one
or two years.
Hardware and Software Requirements under e-filing
The minimum system requirements for e-filing on MCA-21 are as under:
1 Any computer or laptop.
2 An efficient operating system.
3 Latest Browser;
4 Adobe Reader from version 11 or later.
5 Scanner (above 200 DPI) for converting the attachments in the PDF format; and
6 Java Runtime Environment (JRE) updated version.

Necessity of Pre-certification of E-Forms

 Introduction of pre-certification by an independent professional in the e-form aimed at

reducing the workload of the Registrar of Companies. Once an e-form has been pre-certified by
a professional towards its authenticity based on the particulars contained in the books of
accounts and records of the company, ROC is entitled to take on record the e-form.
 Professionals are responsible for submitting/certifying documents (to be signed digitally by
them) and system would accept most of these documents online without approval by Registrar
of Companies or other officers of the Ministry.
 If a professional gives a false certificate or omits any material information knowingly, he is liable
to punishment under Section 447 and 448 of the Companies Act, 2013 besides disciplinary
action by the Institute which issued the Certificate of Practice
Fees: The documents required to be submitted, filed, registered or recorded or any factor information
required or authorized to be registered under the Act shall be submitted, filed, registered or recorded
on payment of the fee or on payment of the fee or on payment of such additional fee as applicable,
as mentioned in Table annexed to Rule 12 of The Companies (Registration Offices and Fees) Rules,
2014. For the purpose of filing the documents or applications for which no e-form is prescribed under
the various rules prescribed under the Act, the document or application shall be filled through Form

1.15 | P a g e
No.GNL.1 or GNL.2 along with fee as applicable and in case a single form is prescribed for multiple
purposes, the fee shall be paid for each of the purpose contained in the single form. For the purpose
of filing information to sub- clause (60) of Section 2 of the Act, such information shall be filed in Form
No. GNL.3 along with fee as applicable.
Mode of payment: The fees, charges or other sums payable for filing any application, form, return or
any other document in pursuance of the Act or any rule made there under shall be paid by means of
credit card; or internet banking; or remittance at the counter of the authorized banks or any other
mode as approved by the Central Government.

MCQ QUESTIONS :
1) M/s SFPL Pvt. Ltd. has issued NCDs for Rs. 20 Crores on private placement basis in terms of SEBI
(Issue and Listing of Debt Securities) Regulations, 2008 and got them registered on stock exchange.
Suggest the correct option:
a) M/s SFPL Pvt. Ltd. is listed company b) It will be treated as unlisted company
c) M/s SFPL Pvt. Ltd. is government company d) None of the above

2) The Articles of Association of M/s ZXY Limited states that all the company documents needs to be
signed by the managing director, Company secretary and the executive director on behalf of the
company. A mortgage deed was executed by the secretary and the executive director. Choose the
correct answer
a) Such mortgage is valid
b) Such mortgage is invalid
c) It can be valid by passing Board Resolution
d) It is valid if the funds are utilized for the purpose of company

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 Lesson 2
LEGAL STATUS AND TYPES OF REGISTERED COMPANIES

WHAT IS A COMPANY?

The word company is derived from latin word

COM= WITH OR TOGETHER
PANIS=BREAD

In the leisurely past, merchants took advantage of festive gatherings, to discuss business matters.
Nowadays, the company form of organization has assumed great importance. When they forms their
business relations they form a company. In popular parlance, a company denotes an association of
likeminded persons formed for the purpose of carrying on some business or undertaking. A company
under law is a corporate body and a legal person having status and personality distinct and separate
from the members constituting it
It is called a body corporate because the persons composing it are made into one body by
incorporating it according to the law and clothing it with legal personality. The word ‘corporation’ is
derived from the Latin term ‘corpus’ which means ‘body’. Accordingly, ‘corporation’ is a legal person
created by a process other than natural birth. As a legal person, a corporate is capable of enjoying
many rights and incurring many liabilities of a natural person.

Extra knowledge
An incorporated company owes its existence either to a Special Act of Parliament or to Company
Law. Public corporations like Life Insurance Corporation of India, SBI etc., have been brought into
existence through special Acts of Parliament, whereas companies like Tata Steel Ltd., Reliance
Industries Limited have been formed under the Company law

Definition of a Company
In terms of the Companies Act, 2013 a “company” means a company incorporated under this Act or
under any previous company law [Section 2(20)].

In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving
beyond the lives of its members. A company is rather a legal device for the attainment of social and
economic end.
It is, therefore, a combined political, social, economic and legal institution. Thus, the term company
has been described in many ways. “It is a means of cooperation and organisation in the conduct of an
enterprise”. It is “an intricate, centralised, economic and administrative structure run by professional
managers who hire capital from the investor(s)”.
These definitions clearly bring out the meaning of company. A company comes into existence only
when it is registered under the Act. When it is registered, it has a legal personality of its own, separate
and distinct from its members. An unregistered company has no such separate legal existence. A
company is created by law and law alone can dissolve it.

CASELAW

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 In Re G.V. Pratap Reddy Through G.P.A. TSR Research Pvt. Ltd. vs. K.V.V.S.N. Associates and
others [2016] (SC), the Supreme Court of India held that, where notice inviting tender by State of
Telangana required that bidder must be an individual/company, word company in notice inviting
tender could only mean a company as understood under Companies Act and cannot be read to
include a firm and, therefore, bid of respondent which was neither an individual nor a company
but a firm was rightly rejected by State.

LEGAL STATUS OF REGISTERED COMPANIES:

Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an artificial
juridical person (i.e. created by law) and it is clothed with many rights, obligations, powers and duties
prescribed by law. It can, however, do everything what a natural person can do except certain acts
which require personal execution. Thus, a company cannot marry or divorce; it cannot vote in an
election. On incorporation, the company acquires a separate legal entity status distinct from and
independent of its members. Unlike a partnership, which has no separate existence from its partners,
a company has a separate corporate existence. It is different from the members who constitute it.

THE MOST STRIKING CHARACTERISTICS OF A COMPANY ARE DISCUSSED BELOW

1) CORPORATE PERSONALITY

A company incorporated under the Act is vested with a corporate personality.

1.It bears its own name and act acts thereunder:
2.Its assets are separate and distinct from those of its members
3.It is a different “person” from the members who compose it
4.It can incur debts, borrow money, have a bank account, employ people, enter into contract and
can sue or be sued
5. It is capable of owning property

Its shareholders are its notional owners and do not own anything in it except ownership of shares
issued and they can be its creditors simultaneously. A shareholder cannot be held liable for the acts
of the company even if he holds virtually the entire share capital.
The shareholders are not the agents of the company and so they cannot bind it by their acts. The
company does not hold its property as an agent or trustee for its members and they cannot sue to
enforce its rights, nor can they be sued in respect of its liabilities. Thus, ‘incorporation’ is the act of
forming a legal corporation as a juristic person. A juristic person is in law also conferred with rights
and obligations and is dealt in accordance with law. In other words, the entity acts like a natural
person but only through a designated person, whose acts are processed within the ambit of law
[Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass AIR 2000 SCW 139]

CASELAW
The case of Salomon v. Salomon and Co. Ltd., (1897) A.C. 22
The above case has clearly established the principle that once a company has been validly
constituted under the Companies Act, it becomes a legal person distinct from its members and for
this purpose it is immaterial whether any member holds a large or small proportion of the shares,

2.2 | P a g e
 and whether he holds those shares as beneficially or as a mere trustee.
In the case, Salomon had, for some years, carried on a prosperous business as a leather merchant
and boot manufacturer. He formed a limited company consisting of himself, his wife, his daughter
and his four sons as the shareholders, all of whom subscribed to 1 share each so that the actual
cash paid as capital was £7. Salomon sold his business (which was perfectly solvent at that time),
to the Company formed by him for the sum of £38,782. The company’s nominal capital was £40,000
in £1 shares. In part payment of the purchase money for the business sold to the company,
debentures of the amount of £10,000 secured by a floating charge on the company’s assets were
issued to Salomon, who also applied for and received an allotment of 20,000 £ 1 fully paid shares.
The remaining amount of £8,782 was paid to Salomon in cash. Salomon was the managing director
and two of his sons were other directors
The company soon ran into difficulties and the debenture holders appointed a receiver and the
company went into liquidation. The total assets of the company amounted to £6050, its liabilities
were £10,000 secured by debentures, £8,000 owing to unsecured trade creditors, who claimed the
whole of the company’s assets, viz., £6,050, on the ground that, as the company was a mere ‘alias’
or agent for Salomon, they were entitled to payment of their debts in priority to debentures. They
further pleaded that Salomon, as a principal beneficiary, was ultimately responsible for the debts
incurred by his agent or trustee on his behalf
Their Lordships of the House of Lords observed:
“…the company is a different person altogether from the subscribers of the memorandum; and
though it may be that after incorporation the business is precisely the same as before, the same
persons are managers, and the same hands receive the profits, the company is not, in law, their
agent or trustee. The statute enacts nothing as to the extent or degree of interest, which may, be
held by each of the seven or as to the proportion of interest, or influence possessed by one or
majority of the shareholders over others. There is nothing in the Act requiring that the subscribers
to the memorandum should be independent or unconnected, or that they or any of them should
take a substantial interest in the undertakings, or that they should have a mind or will of their own,
or that there should be anything like a balance of power in the constitution of company.

CASELAW
Lee v. Lee’s Air Farming Ltd. (1961) A.C. 12 (P.C.)
The above case illustrates the application of the principles established in Salomon’s case (supra).
In this case, a company was formed for the purpose of aerial top-dressing. Lee, a qualified pilot,
held all but one of the shares in the company. He voted himself the managing director and got
himself appointed by the articles as chief pilot at a salary. He was killed in an air crash while working
for the company. His widow claimed compensation for the death of her husband in the course of
his employment. The company opposed the claim on the ground that Lee was not a worker as the
same person could not be the employer and the employee. The Privy Council held that Lee and his
company were distinct legal persons which had entered into contractual relationships under which
he became the chief pilot, a servant of the company. In his capacity of managing director he could,
on behalf of the company, give himself orders in his other capacity of pilot, and the relationship
between himself, as pilot and the company, was that of servant and master. Lee was a separate
person from the company he formed and his widow was held entitled to get the compensation. In
effect the magic of corporate personality enabled him (Lee) to be the master and servant at the
same time and enjoy the advantages of both.
The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43, recognised
the principle of separate legal entity even much earlier than the decision in Salomon v. Salomon &
Co. Ltd. case. Certain persons transferred a Tea Estate to a company and claimed exemptions from
ad valorem duty on the ground that since they themselves were also the shareholders in the

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 company, it was nothing but a transfer from them in one name to themselves under another name.
While rejecting this Calcutta High Court observed:
“The company was a separate person, a separate body altogether from the shareholders and the
transfer was as much a conveyance, a transfer of the property, as if the shareholders had been
totally different persons.”

2) COMPANY AS AN ARTIFICIAL PERSON

An artificial person means a juridical person; it has a legal name and has certain rights, protections,
privileges, responsibilities, and liabilities in law, similar to those of a natural person
A Company is an artificial person created by law. It is not a human being but it acts through human
beings. It is considered as a legal person who can enter into contracts, possess properties in its own
name, sue and can be sued by others etc. It is called an artificial person since it is:
1. Invisible
2. Intangible
3. Existing only in the contemplation of law
4. It is capable of enjoying rights and being subject to duties.

CASELAW
Union Bank of India v. Khader International Construction and Other [(2001) 42 CLA 296 SC]
In this case, the question which arose before the Court was whether a company is entitled to sue
as an indigent (poor) person under Order 33, Rule 1 of the Civil Procedure Code, 1908. The
aforesaid Order permits persons to file suits under the Code as pauper/indigent persons if they are
unable to bear the cost of litigation.
The appellant in this case had objected to the contention of the company which had sought
permission to sue as an indigent person. The point of contention was that, the appellant being a
public limited company, it was not a ‘person’ within the purview of Order 33, Rule 1 of the Code
and the ‘person’ referred to only a natural person and not to other juristic persons. The Supreme
Court held that the word ‘person’ mentioned in Order 33, Rule 1 of the Civil Procedure Code, 1908,
included any company as association or body of individuals, whether incorporated or not. The
Court observed that the word ‘person’ had to be given its meaning in the context in which it was
used and being a benevolent provision, it was to be given an extended meaning. Thus a company
may also file a suit as an indigent person

3) PERPETUAL SUCCESSION

Perpetual Succession means that the membership of the company may change from time to time,
but this does not affect its continuity. An incorporated company never dies, except when it is wound
up as per law.
A Compnay being a separate legal person is unaffected by death / insolvency / retirement or departure
of any member or director,
It remains the same entity, despite total change in the membership.

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According to section 9 of the Companies Act, 2013, from the date of incorporation mentioned in the
certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from
time to time, become members of the company, shall be a body corporate by the name contained in
the memorandum, capable of exercising all the functions of an incorporated company under this Act
and having perpetual succession with power to acquire, hold and dispose of property, both movable
and immovable, tangible and intangible, to contract and to sue and be sued, by the said name

The membership of an incorporated company may change either because one shareholder has sold/
transferred his shares to another or his shares devolve on his legal representatives on his death or he
ceases to be a member under some other provisions of the Companies Act. Thus, perpetual
succession denotes the ability of a company to maintain its existence by the succession of new
individuals who step into the shoes of those who cease to be members of the company. Professor
L.C.B. Gower rightly mentions, “Members may come and go, but the company can go on forever.
During the war all the members of one private company, while in general meeting, were killed by a
bomb, but the company survived — not even a hydrogen bomb could have destroyed it”

CASELAW
In Gopalpur Tea Company Ltd. v. Peshok Tea Co. Ltd. and others (1982) 52 Comp Cas 239, the
whole Company was taken over by an Act which purportedly ceased the right to take action against
the Company, the Court held that neither the company was extinguished, nor was anyone’s right
to take action against it. Therefore, until and unless a Company is liquidated legally, a Company
will have perpetual succession and its existence will not be affected by the financial status and lives
of its shareholders

llustration:
M/s ABC Pvt. Ltd. has three directors and all the three directors are also the shareholders of the
company. All the directors died in the car accident while going for a meeting. In this case, principle
of perpetual succession applies and even if all the directors of M/s ABC Pvt. Ltd. died, the company
will continue to have existence and the successors of directors can take over the affairs of the
company.

4) SEPARATE PROPERTY

A company being a legal person and entirely distinct from its members, is capable of owing, enjoying
and disposing off property on its own name

CASELAW
Mrs. Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay, A.I.R. 1955 S.C. 74
The Supreme Court in this case held that, though the income of a tea company is entitled to be
exempted from Income-tax up to 60% being partly agricultural, the same income when received
by a shareholder in the form of dividend cannot be regarded as agricultural income for the
assessment of income-tax. It was also observed by the Supreme Court that a shareholder does not,
as is erroneously believed by some people, become the part owner of the company or its property;
he is only given certain rights by law, e.g., to receive notice of or to attend or vote at the meetings
of the shareholders. The court refused to identify the shareholders with the company and
reiterated the distinct personality of the company.

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 As a corporate entity, the company is entitled to own and hold property in its own name or to
dispose the same. No member can claim ownership of any item of the company’s assets. As a
company is a legal person it is capable of holding and disposing the property in its name through
authorized representative

illustration:
Mr. Amit incorporated a company in the name of ABC Public Ltd., the company provides catering
services. Mr. Amit decides to purchase a new building and a company van. As an ABC Public Ltd.,
the company can legally purchase property under the business’s information. Mr. Amit do not have
to purchase the property under his personal information.
Mr. Amit can begin the property purchase process using his business’s name and banking
information. On completion of the paperwork, the deed to the property is under the business’s
name

CASELAW
n Re Chiranjilal Chuadhari Vs. Union of India (1951) 21 Comp. Cas. 33 (SC)
In this case, the Supreme Court of India stated that a company has a fundamental right to own
property and in event of infringement of such right, the company can bring an action and not the
its shareholder. It was observed that, it is settled law that in order to redress a wrong done to the
company, the action should prima facie be brought by the company itself. Although the
shareholders of the company, may in a sense, be interested to observe that the company of which
he is a shareholder is not deprived of its property, he cannot be heard as a complainant in his own
name and on his own behalf for the infringement of the fundamental right to property of the
company

CASELAW
H.C. Shastri v. Dolphin Canpack Pvt. Ltd. (1998)
In this case the shareholder of the company has tried to use the assets of the company for paying
off his personal loans. The Delhi High Court held that
“…As noticed earlier, neither a shareholder nor a Director has any right in the property and assets
of the company, which is a separate juristic entity distinct from the shareholders. The shareholder
who buys shares does not buy an interest in the property of the company which is a juristic person,
entirely distinct from the shareholder. The shareholder as an investor becomes entitled to
participate in the profits of the company, and have a say in the management as per law. He can
claim the left over assets of the company in case the company is wound up. …”.

CASELAW
In the case of R.T. Perumal v. John Deavin And Anr. AIR 1960 Mad 43, it was stated that no
member should claim ownership of any company’s property during the association’s existence or
dissolution. A company cannot even have an insurable interest in the company’s property.

5) TRANSFERABILITY OF SHARES
1.The capital of a company is divided into parts called as shares
2. the shares are said to be movable property
3.the shares are subject to certain conditions levied by law on free transferability

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4. no shareholders is permanently or necessary wedded to a company.

Transferability of Shares of a Private Limited Company

However there are restrictions with respect to transferability of shares of a Private Limited Company.
Even if share of a Private Limited Company is in demat form, restrictions by the Articles of the
company shall apply. The concept of free transferability of shares in a public and private company is
discussed in the case of Western Maharashtra Development Corporation Ltd. Vs. Bajaj Auto Ltd 2010
154 com cases 593 Bom. In the case, the court held that the Company Act makes a clear distinction
regarding the transferability of shares relating to private and public companies. By its definition, a
‘private company’ is a company, which restricts the right to transfer its shares. In the case of a public
company, the Act provides that the shares or debentures and any interest of the company are freely
transferable

Question. In case of any shareholders’ agreement amongst the shareholders with specific
restriction like right of first refusal or pre-emptive right given to any shareholders, whether such
restrictions are enforceable or not if the same are not part of the articles of association?.
Answer. As as per the decision of Supreme Court in V.B. Rangaraj v. V.B Gopalakrishnan and other
AIR 1992 SC 453, it was held that the clause of shareholders agreement shall be enforceable
provided the same are main part of the article of association.

6) CAPACITY TO SUE OR BE SUED

To sue, means to institute legal proceedings against (a person) or to bring a suit in a court of law. All
legal proceedings against the company are to be instituted in its name. Similarly, the company may
bring an action against anyone in its own name. A company’s right to sue arises when some loss is
caused to the company, i.e. to the property or the personality of the company. Hence, the company
is entitled to sue for damages in libel or slander as the case may be [Floating Services Ltd. v. MV San
Fransceco Dipaloa (2004) 52 SCL 762 (Guj)]. A company, as a person distinct from its members, may
even sue one of its own members.

CASELAW
In Rajendra Nath Dutta Vs. Shibendra Nath Mukherjee (1982) 52 Comp. Cas. 293 (Cal.)
In the above mentioned case, it was held that for any wrong done, the company must sue or be
sued in its own name. It was observed that as the company is a distinct legal personality, distinct
from its shareholders and/or directors, the company if aggrieved by some wrong done to it by any
person, it must sue or contrarily be sued in the name of the company itself. In the referred case, a
lease deed was executed by the director of the company without seal of the company.
Subsequently, a suit was filed by the directors and not the company to avoid lease on ground that
a new term had been fraudulently included in the lease deed by the defendants. It was held that a
director of the Board of Directors or a managing director could not file a suit, unless it was by the
company, in order to avoid the any deed which admittedly was executed by one of the directors
and admittedly also the company received the rent. The case as made out in the pliant was not
made by the company but some of the directors of the company and the company was not even a
plaintiff. It the company was aggrieved, it was the company which was to file the suit and not the
directors. Therefore, the suit was not maintainable in the eyes of court

Illustration:

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 Suppose there is a company Antriksh Limited. Antriksh Limited can file a defamation case against
a defamatory article that was published against it. It can also file police complaints for various
offences. It can basically undertake all sorts of litigations through an Authorized Representative.
It is pertinent to note that an Authorized Representative of a Company can be changed during the
course of the litigation and doing so would not hamper the pending case before the Courts /
Authorities.

7) COMPANY IS NOT A CITIZEN

The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the
Constitution of India.
The reason as to why a company cannot be treated as a citizen is that, citizenship is available to
individuals or natural persons only and not to juristic persons.

CASELAW
In R.C. Cooper v. Union of India, AIR 1970 SC 564
In this case, the Supreme Court held that where the legislative measures directly touch the
company of which the petitioner is a shareholder, he can petition on behalf of the company, if by
the impugned action, his rights are also infringed. In that case, the court entertained the petition
under Article 32 of the Constitution at the instance of a director as shareholder of a company and
granted relief. It is, therefore, to be noted that an individual’s right is not lost by reason of the fact
that he is a shareholder of the company

CASELAW
Bennet Coleman Co. v. Union of India, AIR 1973 SC 106
In this case, the Supreme Court stated that:
“It is now clear that the Fundamental Rights of shareholders as citizens are not lost when they
associate to form a company. When their Fundamental Rights as shareholders are impaired by
State action, their rights as shareholders are protected. The reason is that the shareholders’ rights
are equally and necessarily affected if the rights of the company are affected.

8) Company has Nationality and Residence

Though it is established through judicial decisions that a company cannot be a citizen, yet it has
nationality, domicile and residence. In Gasque v. Inland Revenue Commissioners, (1940) 2 K.B. 88,
Macnaghten. J. held that a limited company is capable of having a domicile and its domicile is the
place of its registration and that domicile clings to it throughout its existence. He observed in this case
“It was suggested that a body corporate has no domicile. It is quite true that a body corporate cannot
have a domicile in the same sense as an individual. But by analogy with a natural person the attributes
of residence, domicile and nationality can be given to a body corporate

CASELAW
In Tulika v. Parry and Co., (1903) I.L.R. 27 Mad. 315, Kelly C.B. observed

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 “A joint stock company resides where its place of incorporation is, where the meetings of the whole
company or those who represent it are held and where its governing body meets in bodily presence
for the purposes of the company and exercises the powers conferred upon it by statute and by the
Articles of Association

Previous Year Questions

Q: Explain in brief: A company though a legal person is not a citizen? (JUNE 2022) (3M)

ANS: The Statement is correct.

A company though a legal person, is not a citizen under the:

• Constitution of India; or

• Citizenship Act, 1955

However, company has "nationality", domicile and "residence".

In the matter of State Trading Corporation of India ltd. vs. C.T.O., the Supreme Court has held that
State Trading Corporation though a legal person, was not a citizen and can act only through natural
persons. Nevertheless, it is to be noted that certain fundamental rights enshrined in the Constitution
for protection of “person”, e.g., right to equality (Article 14) etc. are also available to company. Section
2(f) of Citizenship Act, 1955 expressly excludes a company or association or body of individuals from
citizenship.

9) LIMITED LIABILITY

“The privilege of limited liability for business debts is one of the principal advantages of doing
business under the corporate form of organisation.” The company, being a separate person, is the
owner of its assets and bound by its liabilities.
Members, even as a whole, are neither the owners of the company’s undertakings, nor liable for its
debts. In other words, a shareholder is liable to pay the balance, if any, due on the shares held by
him, when called upon to pay and nothing more, even if the liabilities of the company far exceed its
assets. This means that the liability of a member is limited.

For example, if A holds shares of the total nominal value of 1,000 and has already paid Rs.500/- (or
50% of the value) as part payment at the time of allotment, he cannot be called upon to pay more
than Rs. 500/-, the amount remaining unpaid on his shares. If he holds fully-paid shares, he has no
further liability to pay even if the company is declared insolvent. In the case of a company limited
by guarantee, the liability of members is limited to a specified amount of the guarantee mentioned
in the memorandum

EXCEPTIONS TO THE PRINCIPLE OF LIMITED LIABILITY

1. Members are severally liable in certain cases- The following are the prerequisites for attracting the
provisions of Section 3A:-
a. The number of members of the Company is reduced to below seven in case of public
company or below two in case of private company;

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 b. The company carries on business for more than six months with such less number of
members
c. The members are cognizant of fact that the company is carrying business with such less
number of members.
In such case the remaining members so continuing in the company shall be liable for the payment of
whole debts of the company contracted during that time
2. When the company is incorporated as an Unlimited Company under Section 3(2)(c) of the Act
3. Where a company has been got incorporated by furnishing any false or incorrect information or
representation or by suppressing any material fact or information in any of the documents or
declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal
may, on an application made to it, on being satisfied that the situation so warrants, direct that liability
of the members of such company shall be unlimited. [Section 7(7)(b)]
4. Further under section 339(1), where in the course of winding up it appears that any business of the
company has been carried on with an intent to defraud creditors of the company or any other persons
or for any fraudulent purpose, the Tribunal may declare the persons who were knowingly parties to
the carrying on of the business in the manner aforesaid as personally liable, without limitation of
liability, for all or any of the debts/liabilities of the company.[Section 339]
5. Under Section 35(3), where it is proved that a prospectus has been issued with intent to defraud
the applicants for the securities of a company or any other person or for any fraudulent purpose,
every person who was a director at the time of issue of the prospectus or has been named as a
director in the prospectus or every person who has authorised the issue of prospectus or every
promoter or a person referred to as an expert in the prospectus shall be personally responsible,
without any limitation of liability, for all or any of the losses or damages that may have been incurred
by any person who subscribed to the securities on the basis of such prospectus.

6. As per section 75(1), where a company fails to repay the deposit or part thereof or any interest
thereon referred to in section 74 within the time specified or such further time as may be allowed by
the Tribunal and it is proved that the deposits had been accepted with intent to defraud the
depositors or for any fraudulent purpose, every officer of the company who was responsible for the
acceptance of such deposit shall, without prejudice to other liabilities, also be personally responsible,
without any limitation of liability, for all or any of the losses or damages that may have been incurred
by the depositors.
7. Section 224(5) states that where the report made by an inspector states that fraud has taken
place in a company and due to such fraud any director, key managerial personnel, other officer of the
company or any other person or entity, has taken undue advantage or benefit, whether in the form
of any asset, property or cash or in any other manner, the Central Government may file an
application before the Tribunal for appropriate orders with regard to disgorgement of such asset,
property, or cash, and also for holding such director, key managerial personnel, officer or other
person liable personally without any limitation of liability.

Previous Year Questions

Q) A public limited company has only seven shareholders. Being all the shares paid in full, one such
shareholder purchased all the shares of another shareholder in a private settlement between them
reducing the no. of shareholders to six. The company continues to carry on its business thereafter.
Discuss with reference to the Companies Act, 2013 the implications of this transaction on the
functioning of the company (JUNE 2019) (5M)

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Ans: Section 3A of the Companies Act, 2013 provides that if at any time the number of members of a
company is reduced, in the case of a public company, below seven or in the case of a private company,
below two, and the company carries on business for more than six months while the number of
members is so reduced, every person who is a member of the company during the time that it so
carries on business after those six months and is cognizant of the fact that it is carrying on business
with less than seven members or two members, as the case may be, shall be severally liable for the
payment of the whole debts of the company contracted during that time, and may be severally sued
th9ere for.
In view of the above provision, if the company continued to carry on the business with that reduced
membership (i.e. 6) beyond six months period, only those members who are cognisant of the fact that
it is carrying on business with less than seven members shall be severally liable for the payment of the
whole of debts of the company contracted during that time, and may be severally sued therefor.

CONTRACTUAL RIGHTS

A company, being a legal entity different from its members, can enter into contracts for the conduct
of the business in its own name. A shareholder cannot enforce a contract made by his company; he
is neither a party to the contract, nor be entitled to the benefit derived from it, as a company is not a
trustee for its shareholders. Likewise, a shareholder cannot be sued on contracts made by his
company. Thus, if a director fails to disclose a breach of his duties towards his company, and in
consequence a shareholder is induced to enter into a contract with the director on behalf of the
company which he would not have entered into had there been disclosure, the shareholder cannot
rescind the contract.

DOCTRINE OF LIFTING OF OR PIERCING THE CORPORATE VEIL

• The separate personality of a company is a statutory privilege and it must be used for legitimate
business purposes only.
• Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will
not be allowed to take shelter behind the corporate personality.
• The Court will break through the corporate shell and apply the principle/doctrine of what is called
as “lifting of or piercing the corporate veil”

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• The Court will look behind the corporate entity and take action as though no entity separate from
the members existed and make the members or the controlling persons liable for debts and
obligations of the company.
• The Companies Act, 2013 itself contains some provisions[Sections 7(7), 251(1) and 339] which lift
the corporate veil to reach the real forces of action.

LIFTING OF CORPORATE VEIL UNDER JUDICIAL INTERPRETATION

a) Where the corporate veil has been used for commission of fraud or improper conduct.
Jones v. Lipman, (1962)
A agreed to sell certain land to B. Pending completion of formalities of the said deal, A sold and
transferred the land to a company which he had incorporated with a nominal capital of £100 and of
which he and a clerk were the only shareholders and directors. This was done in order to escape a
decree for specific performance in a suit brought by B. The Court held that the company was the
creature of A and a mask to avoid recognition and A must complete the contract.

b) Where a corporate facade is only an agency instrumentality.

Merchandise Transport Limited vs. British Transport Commission (1982)
a transport company wanted to obtain licences for its vehicles, but could not do so if applied in its
own name. It, therefore, formed a subsidiary company, and the application for licence was made in
the name of the subsidiary. The vehicles were to be transferred to the subsidiary company. Held, the
parent and the subsidiary were one commercial unit and the application for licences was rejected.

c) Where the conduct conflicts with public policy, courts lifted the corporate veil for protecting the
public policy.
d) Further, In Daimler Co. Ltd. v. Continental Tyre & Rubber Co., (1916) 2 A.C. 307, it was held that
a company will be regarded as having enemy character, if the persons having de facto control of its
affairs are resident in an enemy country or, wherever they may be, are acting under instructions from
or on behalf of the enemy.

e) The company was formed to evade taxes

Re. Sir Dinshaw Maneckjee Petit,

The facts of the case are that the assesses was a wealthy man enjoying large dividend and interest
income. He formed four private companies and agreed with each to hold a block of investment as an
agent for it. Income received was credited in the accounts of the company but the company handed
back the amount to him as a pretended loan. This way he divided his income in four parts in a bid to
reduce his tax liability. The Court decided to disregard the corporate entity as it was being used for
tax evasion

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 Vodafone case law
One of the landmark case of the Supreme Court, is its decision in the case of Vodafone
International Holdings B.V. v. Union of India & Another [S.L.P. (C) No. 26529 of 2010].In judgment,
the Supreme Court set aside the Bombay High Court’s judgment directing Vodafone International
Holdings BV (“Vodafone”), to pay INR 110 billion, as withholding tax in a transaction that took
place off-shore.
The facts, as briefly put, are that in May 2007, Vodafone, incorporated in the Netherlands,
acquired from Hong Kong based Hutchison Group, the entire share capital of CGP Investments
(Holdings) Limited (“CGP”), a company incorporated in the Cayman Islands, which in turn
controlled a 67% interest in Hutchison-Essar Limited (“HEL”), Hutchison’s Indian mobile business.
The Indian income taxauthorities contended that capital gains were made by Hutchison in India
and that Vodafone was therefore liable to pay withholding tax thereon, amounting to
approximately INR 110 billion (the saleprice being USD 11.2 billion).
Vodafone challenged the tax demand in the Bombay High Court, which ruled in favour of the
income tax authorities, holding that the essence of the transaction was a change in the
controlling interest inHEL, which constituted a source of income in India. Vodafone appealed to
the Supreme Court, which overruled the High Court and held that the transaction fell outside
India’s territorial tax jurisdiction and was hence not taxable.
The judgment was not only important in the context of taxation, but also covers other issues of
corporate law. One of these are in the context of the principle of the corporate veil, and the
circumstances under which it may be lifted, particularly in the context of commercial cross-
border transactions and tax avoidance.
The Court recognised the fundamental principle of the corporate veil by noting that, “The
approach of both the corporate and tax laws, particularly in the matter of corporate taxation,
generally is founded on the abovementioned separate entity principle, i.e., treat a company as a
separate person.The Indian Income Tax Act, 1961, in the matter of corporate taxation, is founded
on the principle of the independence of companies and other entities subject to income-tax.” It
observed in the context of parent / subsidiary relationships, that it is generally accepted that the
group parent company wouldgive guidance to group subsidiaries, but that by itself would not
justify piercing the veil or imply that the subsidiaries are to be deemed residents of the State in
which the parent company resides, and that “a subsidiary and its parent are totally distinct
taxpayers”.

Six factors that may be considered to determine whether the transaction is a bogus and whether
in a specific case, the corporate veil may be lifted, are: “(i) the concept of participation in
investment, (ii) the duration of time during which the Holding Structure exists; (iii) the period of
business operations in India; (iv) the generation of taxable revenues in India; (v) the timing of the
exit; and (vi) the continuity of business on such exit.”
Judgement: In the final analysis, the Supreme Court decided against lifting the corporate veil in
Vodafone, as the tax authorities failed to establish that the transaction was a bogus or tax
avoidance scheme.

(f) Avoidance of welfare legislation is as common as avoidance of taxation and the approach in
considering problems arising out of such avoidance has necessarily to be the same and, therefore,
where it was found that the sole purpose for the formation of the new company was to use it as a
device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the
piercing of the veil to look at the real transaction

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(h) Where it is found that a company has abused its corporate personality for an unjust and
inequitable purpose, the court would not hesitate to lift the corporate veil. Further, the corporate
veil could be lifted when acts of a corporation are allegedly opposed to justice, convenience and
interests of revenue or workmen or are against public interest.

Previous Year Questions

Q: The Companies Act, 2013 does not provide statutory recognition to the doctrine of lifting of
corporate veil. Only judicial interpretations disregard the concept of separate personality.
Comment
(DEC 2019) (5M)

Disadvantages of Registered Companies

1. Formality and Expense: Registration of a company involves a lot of statutory formalities and the
consequent expense. The affairs and working of a company have to be conducted strictly in
accordance with the applicable legal provisions, non-compliance of which entails penal consequence.
Other forms of business organization are comparatively relieved from various legal compulsions and
formalities

2. Privacy Loss: Another form of disadvantage of a company of loss of privacy. Various returns,
resolutions and documents are to be uploaded and filed with the Registrar of Companies. The office
of Registrar of Companies is a public office and accessible to public on payment of prescribed fees for
inspection of any document filed by company to Registrar.

3.Diversified Control: The members of the company cannot have as effective control over the
workings of company as in sole proprietorship and partnership business models. Normally, the
shareholders of the company are very in high in numbers and its acts through the representatives of
he shareholders in the name of-the Directors/ KMPs.

4. Public Accountability: The Company cannot work in contravention to public interest, because as
and when the public interest will come in conflict with corporate working, intervention by regulatory
authorities will be triggered.

5. Fraud Possibilities: The company operates through control of economic resources in a few hands,
there is a possibility that the other people who have contributed funds to the company either as
shareholder or debenture holder or creditor or lender, those few hands may defraud by diverting
funds of the company to their private channels. By the time it comes to notice of regulatory
authorities the damage is already done

TYPES OF REGISTERED COMPANIES

A company is nothing but a group of persons who have come together or who have contributed
money for some common purpose and who have incorporated themselves as a separate legal entity

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in the form of a company for that purpose.
A company’s liability may be limited by shares, in which case the liability of the company’s members
is limited to the amount of the shares held by them, or it may be limited by guarantee, in which case
the liability is limited to a predetermined amount to which the company’s members have agreed to
contribute if the company is dissolved with outstanding liabilities.
(1) A company may be formed for any lawful purpose by–
(a) seven or more persons, where the company to be formed is a public company;
(b) two or more persons, where the company to be formed is a private company; or
(c) one person, where the company to be formed is a One Person Company that is to say, a private
limited company, by subscribing their names or his name to a memorandum and complying with the
requirements of the act in respect of registration.

CLASSIFICATION OF COMPANIES

Some of the basic forms of classification of companies are mentioned as below:

(i) Classification on the basis of Incorporation: Companies may be incorporated under the following
categories:
a. Registered Companies: The companies which are incorporated under the Companies Act,
2013 or under any previous company law and registered with the Registrar of Companies, fall
under this category.
b. Statutory Companies: These are constituted by a Special Act of Parliament or State
Legislature. The provisions of the Companies Act, 2013 do not apply to them.
c. For examples: Life Insurance Corporation of India.

(ii) Classification on the basis of Liability: Under this category there are three types of companies: -

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 (a)Companies limited by shares: A company that has the liability of its members limited by
the liability clause in the memorandum to the amount, if any, unpaid on the shares
respectively held by them is termed as a company limited by shares. Section 2(22) of the
Companies Act, 2013 provides that “Company limited by shares” means a company having
the liability of its members limited by the memorandum to the amount, if any, unpaid on the
shares respectively held by them.

For example, a shareholder who has paid Rs.75 on a share of face value Rupees 100 can be called
upon to pay the balance of Rupees.25 only. Companies limited by shares are by far the most
common and it may be either public or private.
(b) Companies limited by guarantee: Section 2(21) of the Companies Act, 2013 provides that
a company that has the liability of its members limited to such amount as the members may
respectively undertake, by the memorandum, to contribute to the assets of the company in
the event of its being wound-up, is known as a company limited by guarantee. 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. The members is liable to the company and to any other
person.

(c) Unlimited Companies: In this type of company, the liability of members of the company
is unlimited, Section 2(92) of the Companies Act, 2013 provides that unlimited company
means a company not having any limit on the liability of its members, such companies may
or may not have share capital. They may be either a public company or a private company.
The members is liable to the company and to any other person.

(iii) Other Forms of Companies

(a) Section 8 Company/Non-Profit Oriented Company: A company whose sole objective is to

promote commerce, art, science, sports education, research, social welfare, religion, charity,
protection of environment or any other useful purpose and not having any profit motive will be
termed as a not for profit company. Such a company must apply its profits or other incomes in
promoting its objects.

(b) Government Companies: As per section 2(45) of the Companies Act, 2013 the “Government
Company” means any company in which not less than fifty-one per cent of the paid-up share capital
is held by the Central Government, or by any State Government or Governments, or partly by the
Central Government and partly by one or more State Governments, and includes a company which is
a subsidiary company of such a Government company
Explanation- For the purposes of this clause, the “paid up share capital” shall be construed as “total
voting power”, where shares with differential voting rights have been issued.

(c) Holding and Subsidiary Companies: As per section 2(46) of the Companies Act, 2013, the “holding
company”, in relation to one or more other companies, means a company of which such companies
are subsidiary companies and the expression “company” includes any body corporate.
As per section 2(87) of the Companies Act, 2013 “subsidiary company” or “subsidiary”, in relation to
any other company (that is to say the holding company), means a company in which the holding
company –
a. controls the composition of the Board of Directors; or

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 b. 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:
Provided that such class or classes of holding companies as may be prescribed shall not have layers
of subsidiaries beyond such numbers as may be prescribed.
Explanation. - For the purposes of this clause, –
(i) a company shall be deemed to be a subsidiary company of the holding company even if the control
referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding
company.
(ii) the composition of a company’s Board of Directors shall be deemed to be controlled by another
company if that other company by exercise of some power exercisable by it at its discretion can
appoint or remove all or a majority of the directors.
(iii) the expression “company” includes anybody corporate.
(iv) “layer” in relation to a holding company means its subsidiary or subsidiaries

As per section 2(11) of the Companies Act, 2013, the “body corporate” or “corporation” includes a
company incorporated outside India, but does not include –
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the Central
Government may, by notification, specify in this behalf

(d) Associate Companies/ Joint Venture Company: As per section 2(6) of the Companies Act, 2013
the “associate company”, in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company having
such influence and includes a joint venture company.
Explanation. - For the purpose of this clause, –
(i) the expression “significant influence” means control of at least twenty per cent. of total voting
power, or control of or participation in business decisions under an agreement;
(ii) the expression “joint venture” means a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement.

(e) Dormant Companies covered under Section 455 of the Companies Act, 2013 and includes a
company which is formed and registered under the Act for a future project or to hold an asset or
intellectual property and which has not been carrying on any business or operation, or has not made
any significant accounting transaction during the last two financial years, or has not filed financial
statements and annual returns during the last two financial years

(f) Small Company: The MCA for the Ease of doing Business has revised the definition of Small
companies by increasing their threshold limits for paid up capital from “not exceeding Rs. 2 Crore” to
“not exceeding Rs. 4 Crore” and turnover from “not exceeding Rs. 20 Crore” to “not exceeding Rs. 40
Crore”. Thus, the definition of small company under Section 2(85) read with Rule 2(1)(t) of the
Companies (Specification of definitions Details) Rules, 2014 with effect from September 15, 2022 is
hereunder: “Small company” means a company, other than a public company, —
1. paid-up share capital of which does not exceed four crores rupees or such higher amount as
may be prescribed which shall not be more than ten crore rupees; and
2. turnover of which as per profit and loss account for the immediately preceding financial year
does not exceed forty crore rupees or such higher amount as may be prescribed which shall

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 not be more than one hundred crore rupees
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under Section 8; or
(C) a company or body corporate governed by any special Act.

g) Domestic Company: A domestic company is a company that conducts its affairs in its home country.
It should be registered under the provisions of the Companies Act, 2013 or earlier law applicable in
India. The domestic company shall have registered office in India. As per Section 2(22A) of the Income-
tax Act, 1961, Domestic Company means an Indian Company, or any other Company which, in respect
of its income liable to tax under this Act, has made the prescribed arrangements for the declaration
and payment, within India, of the dividends (including dividends on preference shares) payable out
of such income.

Previous Year Questions

Q: Articles of Association of a company limited by guarantee provides that entire income of

company shall be applied towards promotion of the objects of the company? (June 2022) (3M)

Ans: A company limited by guarantee is primarily used for non-profit purposes and the profits are
reinvested and used for promoting its non-profit activities. Although the Companies Act, 2013, does
not specifically prohibit distribution of dividend in such companies; however, the Articles of
Association of such companies usually provides that all the income of the company shall be applied
solely towards the promotion of the objects of the company and that no portion shall be paid or
transferred directly or indirectly by way of dividend or bonus or by way of profit to its members.
Therefore, the statement is correct. Articles of Association of the company limited by guarantee may
provide that all the income of company shall be applied towards promotion of the objects of company.

PRIVATE COMPANY

As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a
minimum paidup share capital as may be prescribed, and which by its articles:–
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall,
for the purposes of this clause, be treated as a single member:
Provided further that –
(a) persons who are in the employment of the company; and
(b) persons who, having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the employment
ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company
The words ‘Private Limited’ must be added at the end of its name by a private limited company..

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Characteristics of Private Limited Company:

1.Limit on Members: To start a company, minimum number of 2 members is required and a

maximum number of 200 members as per the provisions of the Companies Act, 2013.

2: Limited Liability structure

3: Perpetual succession:

4: Index of members: An index of the names entered in the respective registers of members and the
index shall, in respect of each folio, contain sufficient indication to enable the entries relating to that
folio in the register to be readily found. The maintenance of index of members is not necessary in
case the number of members of the company is less than fifty. Which is a privilege to a private
company wherein number of members is less than fifty.

5: A number of directors: When it comes to directors, a private company needs to have minimum
two directors. With the existence of 2 directors, a private company can come into existence and can
start with its operations.

6: Paid up capital: There is no minimum capital requirement in case of private limited companies.

7: Prospectus: Prospectus is a detailed statement of the company affairs which is issued by a

company for its public. However, in the case of private limited company, the act prohibits any
invitation to the public to subscribe for any securities of the company. There is no such need to issue
a prospectus because in this type of companies, public is not invited to subscribe for the shares of the
company.

8: Commencement of Business: A company incorporated after the commencement of the Companies

(Amendment) Act, 2019 (w.e.f. 02/11/2018)and having a share capital cannot commence any
business or exercise any borrowing powers unless
(a) A declaration is filed by a director within a period of one hundred and eighty days of the date of
incorporation of the company, with the Registrar that every subscriber to the memorandum has paid
the value of the shares agreed to be taken by him on the date of making of such declaration; and
(b) The company has filed with the Registrar a verification of its registered office

9: Name: It is mandatory for all the private companies to use the word “private limited” after its name

Privileges and Exemptions of Private Company

1: Easy to Form: Under the Companies Act, 2013, a private limited company is relatively easier to
form than a public limited company. A mere two persons can form a private company as opposed to
the requirement of seven or more persons for a Public limited company. There is no requirement of
minimum paid up share capital even for a private limited company.

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2: Provisions for Alteration of Articles of the Company: Articles of Association of Private Limited
Company may contain provisions for Entrenchment to the effect that specified provisions may be
altered only if conditions or procedures as that are more restrictive than those applicable in case of
special resolution are met or complies with.
Entrenchment clause in Article of a private company leads to give additional legal safeguard by placing
the clause in a very strong position, that cannot be changed easily or addition of provision which
makes certain amendments either more difficult or cumbersome by way of procedure, checks and
safeguards. All the members of the Private Company is required to agree to the Entrenchment clause
in the Articles.

3: Lesser Compliance for Issue of Shares: A Private Company, while issuing further capital, is not
required to make a prospectus or submit a statement in lieu of this prospectus to the Registrar of
companies. A prospectus and Registrar’s permission is requisite for a public company which can make
public offers to larger number of potential investors. Since a private company does not have the
capability of making a public offer, it is exempted from this requirement.
Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014 pertaining to
Dematerialization of Shares requires every unlisted public company to Issue the securities only in
dematerialized form; and to facilitate dematerialization of all its existing securities. However, such
compliance is not required for Private Company

4: Closure of Register of Members or Debenture Holders or Other Security Holders: Section 91 read
with Rule 10 of the Companies (Management and Administration) Rules, 2014, provides that a
company closing the register of members or the register of debenture holders shall give at least seven
days previous notice and in such manner, as may be specified by Securities and Exchange Board of
India, if such company is a listed company or intends to get its securities listed, by advertisement at
least once in 2 newspapers, once in a vernacular newspaper in the principal vernacular language of
the district and at least once in English language in an English newspaper circulating in that district
and having wide circulation in the place where the registered office of the company is situated and
publish the notice on the website as may be notified by the Central Government and on the website,
if any, of the Company.
This requirement is not applicable to a private company provided that the notice has been served on
all members of the private company not less than seven days prior to closure of the register of
members or debenture holders or other security holders

5: Lesser Compliances related to Directors of Private Companies: : A Private Company has the
privilege of having as less as two directors as opposed to the requirement of three directors for a
Public Company. Further, at every annual general meeting of a public company, one-third of such of
the directors for the time being as are liable to retire by rotation. However, directors of Private
Companies are not liable to retire by rotation

6: Appointment of Woman Director: Private Companies are exempted from appointing such women
director.

7: Appointment of Independent Director: Private Companies are exempted from appointing such
Independent Directors.

8: Vacation of office of Director: Private companies may by its AOA, provide any other ground for the

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vacation of the office of a director in addition to those specified in Section 167

9: Vigil Mechanism: Vigil mechanism is applicable to a Private Company only if it has borrowed money
from banks and public financial institutions in excess of fifty crore rupees.

10: Internal Audit: Section 138 provides that only private companies having: turnover of two hundred
crore rupees or more during the preceding financial year; or outstanding loans or borrowings from
banks or public financial institutions exceeding one hundred crore rupees or more at any point of
time during the preceding financial year shall be required to appoint an internal auditor.

11: Corporate Social Responsibility Committee: Section 135 read with CSR Rules provides that a
private company having only two directors on its Board is required to constitute its CSR Committee
with two such directors only.

EXAMPLES OF PRIVATE COMPANY:

CASELAW
The concept of free transferability of shares in public and private companies is very succinctly
discussed in the case of Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Ltd. [2010]
154 Com Cases 593 (Bom). It was held that the Companies Act, makes a clear distinction in regard
to the transferability of shares relating to private and public companies.
By definition, a “private company” is a company which restricts the right to transfer its shares. In
the case of a public company, the Act provides that the shares or debentures and any interest
therein, of a company, shall be freely transferable.
 Life style international private limited
 Malabar gold private limited

PUBLIC COMPANY
By virtue of Section 2(71), a public company means a company which:
(a) Is not a private company.
(b) Has a minimum paid up share captial as may be prescribed
(c) Subsidiary of a public company shall be deemend to be public company.

As per section 3(1)(a), a public company may be said to be an association consisting of not less than
7 members, which is registered under the Act. In principle, any member of the public who is willing
to pay the price may acquire shares in or debentures of it. The securities of a public company may be
quoted on a Stock Exchange. The number of members is not limited to two hundred.

The provision contained in the law for the free transferability of shares in a public company is founded
on the principle that members of the public must have the freedom to purchase and, every
shareholder should have the freedom to transfer. The incorporation of a company in the public, as
distinguished from the private, realm leads to specific consequences and the imposition of obligations
envisaged in law. Those who promote and manage public companies assume those obligations.
Corresponding to those obligations there are some rights, which the law recognizes as inherent in the

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members of the public who subscribe to shares of the company.

Characteristics of Public Limited Company:

1: Board of Directors: The Board of the Public company comprises of a minimum number of three
directors and a maximum of 15. The company may appoint more than 15 directors after passing a
special resolution. They act as the representatives of the shareholders in the management of the
company. Public limited companies are headed by a board of directors and Key Managerial Personnel
of the Company. Composition of the board of directors is set out in the company’s articles of
association and the applicable rules and regulations..

2: Limited Liability:
3: Number of Members: A public limited company have a minimum number of seven shareholders
or members and no maximum limit of members. It can have as many shareholders as its share capital
can accommodate.

4: Transferable shares: Shares of a public limited company are bought and sold by the shareholders,
however, in case of listed company the shares are traded on a stock exchange where the shares of
the company are listed. They are freely transferable between its members and people trading in the
stock exchange.

5: Life Span: A public limited company is not affected by death of one of its shareholders, but the
shares are transferred to the next kin or legal heir of such deceased shareholder and the company
continues to run its business as usual. In the case of a director’s death, the Board is empowered to fill
the resulting casual vacancy that may be filled by Board of Directors at Board meeting which shall be
subsequently approved by members in the immediate next general meeting.

6: Financial Privacy: Public limited companies are strictly regulated and are required by law to publish
their complete financial statements annually. This ensures that they reveal their true financial
position to their owners and to potential investors so that they can determine the true worth of its
shares.

7: Capital: Public limited companies enjoy an increased ability to raise capital since they can issue
shares to the public through the stock market. They can also raise additional capital by issuing
debentures and bonds through the same market from the public. Debentures and bonds are in the
form of secured or unsecured debts issued to a company on the strength of its integrity and financial
performance by the general public or its members etc.

ADVANTAGES OF PUBLIC COMPANY.

1.Raising capital through public issue of shares
2.Prestigious profile and confidence
3.Growth and expansion opportunities
4.widening the shareholders base and spreading risk
5.transferabillity of shares

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 DISADVANTAGES OF PUBLIC COMPANY
1.lack of confidentiality
2.Ownership and control issue
3.higher levels of transparency required
4.more vulnerable to takeover
5.incresed government and regulatory scrutiny

SMALL COMPANY
For the first time in India, the concept of Small Company was introduced in the Companies Act, 2013.
This is a new step towards the de-regulation of entities through providing some exemptions,
privileges and liberation with lesser compliances burden on the entities which are smaller in size and
operations.

Extra knowledge
Ministry of Corporate Affairs (MCA), time to time amending the definition of Small Company to
provide many advantages to Corporates. This move of MCA is expected to lighten the compliance
burden of small companies in India. The move is motivated to get more companies under the
‘small’ category and benefit them in terms of the compliance requirements. As due to this move,
many Companies will get exemptions of so many compliances of Companies Act, 2013. This move
would benefit Start-ups in India. Therefore, we can state that the decision to amend the definition
of small company is a pragmatic and growth-oriented step of the government.

New Definition of a Small Company

The MCA for the Ease of doing Business has revised the definition of Small companies by increasing
their threshold limits for paid up capital from “not exceeding Rs. 2 Crore” to “not exceeding Rs. 4
Crore” and turnover from “not exceeding Rs. 20 Crore” to “not exceeding Rs. 40 Crore”

“Small company” means a company, other than a public company,

(i) Paid up share captial of which does not exceed 4cr or such higher amount as may be
prescibed which shall not be more than 10cr
(ii) Turnover of which as per profit and loss account for the immediately preceding financial
year does not exceed 40cr or such higher amount as may be prescibed which shall not
be more than 100cr

Provided that nothing in this clause shall apply to

(A) a holding company or a subsidiary company;
(B) a company registered under Section 8; or (
C) a company or body corporate governed by any special Act.

Advantages of a Small Company

1. Filing of annual return: The annual return of a private limited company classified as a small
company, can be signed by a Company Secretary, or where there is no company secretary, by a

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director of that company.

2. Board’s Report: As per Section 134(3A) of the Companies Act, 2013, the Central Government has
prescribed an abridged form of Board’s report for a small company. Rule 8A of the Companies
(Accounts) Rules, 2014 has been notified for small companies which includes the following
disclosures:
(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been
placed
(b) number of meetings of the Board;
(c) Directors’ Responsibility Statement as referred to in sub-section (5) of section 134;
(d) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than
those which are reportable to the Central Government;
(e) explanations or comments by the Board on every qualification, reservation or adverse remark or
disclaimer made by the auditor in his report;
(f) the state of the company’s affairs;
(g) the particulars of contracts or arrangements with related parties referred to in sub-section (1) of
section 188 in the Form AOC-2;
(h) the financial summary or highlights;
(i) material changes from the date of closure of the financial year in the nature of business and their
effect on the financial position of the company;
(j) the details of directors who were appointed or have resigned during the year;
(k) the details of significant and material orders passed by the regulators or courts or tribunals
impacting the going concern status and company’s operations in future

3. Board Meeting: It is sufficient for a small company to conduct only two Board Meetings in a
calendar year, one in every half calendar year with a gap of not less than 90 days between these two
meetings

4. Cash Flow Statement: A private limited company classified as a small company need not prepare
cash flow statement as a part of the financial statements

5. Reduced Penalties for non-compliance: If penalty is payable for non-compliance of any of the
provisions of this Act by a small company or by any of its officer in default, or any other person in
respect of such company, then such company, its officer in default or any other person, as the case
may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in
such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees
in case of an officer who is in default or any other person, as the case may be. This provision has
overriding effect on any other contradictory provisions of the Act

Examples of small company:

1. Local Auto Repairs companies
2. Food Services in form of small eateries

HOLDING COMPANY or PARENT COMPANY

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As per the Company law, a company controlled by another company is called a subsidiary company
and the controlling company is called a holding company. Thus “control” is used as the benchmark in
Company Law to determine holding company’s status. The control can be through control of
management or through ownership of shares

By definition, a holding company is a company organized with the intention of acquiring equity
ownership in other companies. Holding companies are popular in India, mainly in two forms –
(1) corporate groups running multiple and varied business and
(2) private equity fund looking to create platform to consolidate multiple assets within specified
sector or vertical in which there are not the companies of the required size and scale.

Some examples of holding company:

1.Alphabet inc
2.sony corporation
3.jp morgan chase & co.

Thus, a holding company allows for structural leverage due to its ability to control the business of its
subsidiaries by holding majority (just over 50% shareholding), but at the same time allowing for fresh
external investment for the balance stake

Types of holding company

Clause (46) of section 2 of the Companies Act, 2013 states as under:
A “holding company” in relation to one or more other companies, means a company of which such
companies are subsidiary companies.
Explanation: For the purpose of this clause, the expression “Company” includes anybody corporate
1.pure holding: a holding company is described as pure if it was formed for the sole purpose of owing
stocks in other companies.

2.mixed holding: a mixed holding company not only control another firm but also engages in its own
operations

3.immediate holding: an immediate holding company is one that retains voting stocks or control of
another company in spite of the fact that the company itself is already controlled by another entity.

4.intermediate holding: an intermediate holding is a firm that is both holding company of another
entity and a subsidiary of a large corporation.

Benefits of holding company

1.greater control for a smaller investment: it gives the holding company owner a controlling interest
in another with out having to invest much
2.independent entities: if a holding company exercises control over several companies each of the
subsidiaries is considered an independent legal entity.
3.management continuity: when ever a parent company acquires other subsidiaries it almost always
retains the management.

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4. Tax effect: holding companies generally reap tax benefit by filing consolidated tax returns.

Provisions in the Companies Act, 2013 relating to holding company:

1. Financial Statements of Holding Company. The Consolidated Financial Statement of holding

company is required to disclose prescribed details about subsidiary companies, associate companies
and joint ventures.

2. If Holding Company has more than one subsidiary: If a Company has one or more subsidiaries,
associate companies and joint ventures, it shall, prepare a consolidated financial statement of the
company and of all the subsidiaries, associate companies and joint venture in the same form and
manner as that of its own

3. Separate financial statement of Holding Company. This Statement is in addition to the separate
financial statement of the holding company. The consolidated financial statement shall also be placed
before the annual general meeting of the holding company along with the laying of its own financial
statement.

4. Disclosure in balance Sheet of Holding Company: Balance sheet of holding company shall
specifically disclose investments in the subsidiaries

5. Disclosure in Profit and Loss account of Holding Company. Profit and Loss account of Holding
company shall disclose:
(a) Dividends from subsidiary Companies
(b) Provisions for losses of subsidiary Companies

DISADVANTAGES OF HOLDING COMPANY

1. Over capitalization: Since capital of holding company and its subsidiaries companies may be
pooled together, it may result in over capitalization. Shareholders would get not get a fair
return on their invested capital
2. Exploitation of subsidiaries: The subsidiaries companies might face challenging situation
where they are compelled to buy goods from the holding at high prices and vice versa.
3. Manipulation: Information about subsidiaries may be used for personal gains. For example
information of the financial performance of subsidiary companies may be misused to indulge
in speculative activities.
4. Concentration of economic power: There is concentration of economic power in the hands
of those who manage the holding company.
5. Monopoly: Holding companies, by absorbing more and more subsidiaries companies, may
also create conglomerates and a monopolistic market if they may own multiple companies in
the same industry.

SUBSIDIARY COMPANY

As per Section 2(87), a “subsidiary company” or “subsidiary”, in relation to any other company (that

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is to say the holding company), means a company in which the holding company
(i) controls the composition of the board of directors or
(ii) exercises or controls more than one half of the total voting power either at its own or together
with one or more of its subsidiary companies

Illustration:
Where the composition of the Board of Directors of a company (including body corporate), say S
Ltd., is controlled by another company (holding company), say H Ltd., either directly (on its own)
or together with its one or more subsidiaries, then such company (or body corporate) [S Ltd.] is
said to be subsidiary of the other company, H Ltd. Such control can also be through any subsidiary
of the holding company, H Ltd. The composition of a company’s Board of Directors shall be deemed
to be controlled by another company, even if the same is not actually so controlled, if that other
company by exercise of some power exercisable by it at its discretion can appoint or remove all or
a majority of the directors .

CASELAW
In Re Oriental Industrial Investments Corporation Ltd vs. Union of India (1981) 51 Comp. Cas 487
Delhi Control over the composition of a subsidiary company’s Board of Directors can arise from
provisions in subsidiary’s memorandum or articles or from a contract with subsidiary empowering
holding company to appoint directors to subsidiary’s Board

Provided that such class or classes of holding companies as may be prescribed shall not have layers
of subsidiaries beyond such numbers as may be prescribed. The said proviso got notified with effect
from 20th September, 2017 by issue of the Companies (Restriction on Number of Layers) Rules, 2017.
Under Rule 2 of the said Rules, no company, other than a company belonging to a class specified in
sub-rule (2) of the said Rules shall have more than two layers of subsidiaries.
The following classes of companies are exempt from restriction on number of layers
1. A banking company
2. A non-banking financial company which is registered with the Reserve Bank of India and considered
as systematically important non-banking financial company by the Reserve Bank of India;
3. An insurance company being a company which carries on the business of insurance; and
4. A Government company.

The first proviso to Rule 2 of the Companies (Restriction on Number of Layers) Rules, 2017 provides
exemption to a Company from acquiring a company incorporated in a country outside India with
subsidiaries beyond two layers as per the laws of such country.
The obvious intent of this carve-out is that Indian law cannot extend its sweep beyond the territorial
jurisdiction, and when it comes to propagation of subsidiaries in offshore jurisdictions, India will have
to rely on the regulations in the relevant country. In case of off-shore subsidiaries, it is quite a
commonplace practice to have multiple layers of subsidiaries based on the need of specific countries
to have a business incorporated in the country of jurisdiction, while at the same time, to direct the
FDI into that country from a location of choice

What Is a Wholly Owned Subsidiary Company?

A wholly owned subsidiary company is a company that is incorporated under the provisions of the

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 Companies Act, 2013 and in which holds hundred percent share capital of such company. In other
words, a wholly owned subsidiary company can be defined as an entity whose entire share capital
is held by another Indian or foreign company.
Example
Starbucks company Japan is a wholly-owned subsidiary of the Starbucks group.
Reliance Industrial Investment and Holdings Limited (RIIHL), is a wholly owned susbidiary of the
Reliance Group of Company

BENEFITS OF A SUBSIDIARY COMPANY INCLUDE

a) limited financial liability for the bigger holding company containing potential losses with the
subsidiary company
b) subsidiaries focusing on specific product or technology development can strengthen the
company as a whole.
c) specfic brand or product as subsidiaries own legal entity to maintain independence
d) maintian an acquired company’s independence whilst exerting managerial control
e) Favorable tax rates.

ASSOCIATE COMPANY

Under section 2(6) of the Companies Act, 2013, “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
Below is the explanation for the purpose of this clause –
(a) the expression “significant influence” means control of at least twenty per cent of total voting
power, or control of or participation in business decisions under an agreement;
(b) the expression “joint venture” means a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement.
For the purpose of “significant Influence”, the following conditions need to be fulfilled:
(i) Control of at least 20% of total voting power but less than 50% of Share Capital by another
company.
(ii) Control of business decisions under an agreement

There is a company ABC Limited and below are the list of shareholders: List of shareholders:
S.NO NAME OF SHARE HOLDER % OF SHARES HELD
1 Y LIMITED 21
2 Z LIMITED 18
3 X LIMITED 17
Y limited is the associate company of ABC Limited, because it is holding 21% shares of ABC Limited

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ADVANTAGES OF ASSOCIATE COMPANY
1.investing in associate companies allows larger companies to expand their operations or enter new
market
2. both the parent and associate companies can take advantage of stable financial support research
and technology advancements and improved production capabilities
3.companies that are looking to purchase a majority stake in another business.
4.an associate company helps boost the parent company’s profitability and over all value

Difference between Associate and Subsidiary Company

Associate Company Subsidiary Company

The parent company holds a minimum of 20% Parent company holds more than 50% of the
but less than 50% of the total voting power total voting power
The parent company has significant influence, The Parent company has controlling power over
that is, the power to participate in the financial the financial and operating decisions of the
and operating decisions of the Associate subsidiary company
company
There may be presence of certain number of The parent company controls the management
common promoters/directors of the subsidiary company

DORMANT COMPANY/ INACTIVE COMPANY - DISCUSSED IN DETAIL IN CHAPTER 11

GOVERNMENT COMPANY

Section 2(45) of the Companies Act, 2013 contains the definition of Government Company. According
to the said sub section, “Government company” means any company in which not less than fifty-one
per cent of the paid-up share capital is held by the Central Government, or by any State Government
or Governments, or partly by the Central Government and partly by one or more State Governments,
and includes a company which is a subsidiary company of such a Government company

This is explained for the purposes of this clause, that the “paid up share capital” shall be construed as
“total voting power”, where shares with differential voting rights have been issued.
Government Companies are subject to all provisions of the Act unless specified otherwise (i.e., by
way of exemptions granted by the Central Government). A Government Company may be formed as
a Private Limited Company or Public Limited Company.

SUMMARY OF THE EXEMPTIONS IS GIVEN BELOW.

1. Name. The name of all Government Companies shall end with the word “Limited”, be it Public
or a Private Company. The word “STATE” is allowed in name.

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2. Transfer of Shares: Provisions of Sub Section 1 of Section 56 (Transfer of Shares) are not
applicable on Government Company in respect of Securities held by nominees of the
Government. The requirement of execution of an instrument of transfer (SH-4) and delivering
the same to the company has also been done away with in case of transfer of securities held
between nominees of the Government.

3. Declaration of dividends out of accumulated profits of previous year: The second proviso to
sub-section (1) of section 123 do not apply to the company in which the entire paid up share
capital is held by the Central Government, or by any Stale Government or Governments or by
the Central Government and one or more State Governments

4. Deposit of dividend in a scheduled bank within five days from the date of declaration: Sub-
section (4) of section 123 shall not apply to the company in which the entire paid up share capital
is held by the Central Government, or by any Stale Government or Governments or by the Central
Government and one or more State Governments or by one or more Government Company.

5. Appointment of more than 15 Directors: As per the exemption in respect of Section 149(1) (b)
and first proviso to Section 149(1), a Government Company can have more than 15 directors.
Such a company is now no longer required to pass a special resolution for appointing more than
15 directors.

6. Place of Annual General Meeting: Every Annual General Meeting shall be called during business
hours, 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 as the Central Government may approve in this behalf.
(IMP)

7. Appointment of Director (sub-section 5 of section 152)

The requirement of seeking consent from a Director to hold office of director and filing the same
within 30 days of appointment to ROC is relaxed where appointment of such Director is done by the
Central Government or State Government as the case may be.

8. Retirement of directors by rotation and filing of vacancy (sub-section (6) and (7) of section
152

These sub-sections are not applicable to:

(a) a Government company, which is not a listed company, in which not less than fifty-one per cent
of paid up share capital is held- by- the Central Government, or by any State Government or
Governments or by the Central Government and one or more State Governments;
(b) a subsidiary of a Government company, referred to in (a) above

9. Right of persons other than retiring directors to stand for directorship (Section 160)

The section is not applicable to –

(i) A Government Company, in which the entire paid up share capital is held by the Central

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government, or by any State Government(s) or by the Central Government and one or more State
Governments;
(ii) A subsidiary of a government Company referred to in (i) above, in which the entire paid up share
capital is held by that Government Company.
Appointment of directors to be voted individually (section 162) and option to adopt principle of
proportional representation for appointment of directors (section 163)
These sections are not applicable to
(i) A Government Company, in which the entire paid up share capital is held by the Central
government, or by any State Government(s) or by the Central Government and one or more State
Governments
(ii) A subsidiary of a government Company referred to in (i) above, in which the entire paid up share
capital is held by that Government Company

10. Register of Directors, KMP and their shareholding & its inspection: (sections 170 and 171)

Section 170 (Maintenance of Register of Directors and KMPs and their shareholding) and 171
(Members right to inspect – Register of directors and KMP and their shareholding) shall not apply to
a Government Company in which the entire paid up share capital is held by the Central Government,
or by the State Government or Governments or by the Central Government and one or more State
Governments.
For Section 177 Audit committee to recommend for appointment, remuneration and terms of
appointment of the Auditors of the Company. in case of Government Cos., the clause to be read as
Audit Committee to recommend for remuneration of the Auditors of the Company.
For Nomination and Remuneration committee and Stakeholders Relationship Committee, changes
effected vide notification relating to sub-sections (2) (3) and (4) of section 178 related to role and
terms of reference of Nomination & Remuneration Committee -- to identify persons to be appointed
as directors and senior management, Independence of Director, etc. Shall not apply to Government
company except with regard to appointment of ‘senior management’ and other employees

11. Loan and Investment by Company (Section 186)

The requirement of seeking member’s approval by means of a Special Resolution for making
loan/investments or giving guarantee/security in excess of the threshold limits specified in Section
186 has been relaxed for Government Companies

12. Related Party Transaction (Section 188)

Exemptions to Government Companies under Section 188 of the Companies Act, 2013 vide
notification no: G.S.R. 151(E), dated 02nd March, 2020.
First and Second proviso to sub-section (1) of section 188 shall not apply to
(a) a Government company in respect of contracts or arrangements entered into by it with any other
Government company, or with Central Government or any State Government or any combination
thereof;

(b) a Government company, other than a listed company, in respect of contracts or arrangements

2.31 | P a g e
other than those referred to in clause (a), in case such company obtains approval of the Ministry or
Department of the Central Government which is administratively in charge of the company, or, as the
case may be, the State Government before entering into such contract or arrangement.

Before this amendment the contracts or arrangements with any other Government Company is only
exempted, with this amendment the exemption is also extended to the contracts or arrangements
with the Central Government or any State Government or any combination thereof

13. Appointment of Managerial Personnel (Section 196)

The following provisions of Section 196(2), (4) and (5) shall not apply to Government Companies:
 Requirement of Appointment/Re-appointment of MD/WTD/Manager for a term not
exceeding 5 years at a time.
 Requirement of seeking approval of Board and Members at a meeting for appointment of
Managerial Personnel and also of Central Government where such appointment/
remuneration of Managerial Personnel is not in accordance with provisions of Schedule V.
 Requirement that notice convening the Board or General Meeting for considering such
appointment shall include the terms and conditions of such appointment, remuneration
payable and such other matters including, interest, of a Director or Directors, in such
appointment, if any.
 Requirement of filing return of appointment of Managerial Personnel within 60 days with the
ROC in Form MR-1
 Provision that where an appointment of a Managing Director, Whole Time Director or
Manager is not approved by the Company at a General Meeting, any act done by him before
such approval shall not be deemed to be invalid.

14. Provisions relating to Auditor discussed in chapter 9

15. Annual Report of Government Company (Section 394

In terms of Section 394, where the Central Government is a member of a Government company, the
Central Government shall cause an annual report on the working and affairs of that company to be
a) prepared within three months of its annual general meeting before which the comments given by
the Comptroller and Auditor-General of India and the audit report is placed under the proviso to sub-
section (6) of section 143; and
(b) as soon as may be after such preparation, laid before both Houses of Parliament together with a
copy of the audit report and comments upon or supplement to the audit report, made by the
Comptroller and Auditor General of India.
Where in addition to the Central Government, any State Government is also a member of a
Government company, that State Government shall cause a copy of the annual report prepared under
sub-section (1) to be laid before the House or both Houses of the State Legislature together with a
copy of the audit report and the comments upon or supplement to the audit report referred above

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MCQS:

1. Jalsa Pvt Ltd was incorporated on 15th June 2000, thereafter due to working capital requirements
the company has taken Loan from Kuber Bank. In which form the company needs to attach Consent
of the lender if any loan is outstanding with for the purpose of Application to ROC for obtaining the
status of dormant company ?
a. Form MSC-1;
b. Form MSC-2;
c. Form MSC-3;
d. Form MSC -4

2. Examine the following and say whether they are correct or wrong
a. A company being an artificial person cannot own property and cannot sue or be sued.
b. Members are the owners of the company’s undertaking.
c. The term “body corporate” connotes a wider meaning than the term “Company”.
d. Every member of an illegal association shall be personally liable for all liabilities incurred in
carrying on the business.
e. A company is a juristic legal person.

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 LESSON 3
MEMORANDUM AND ARTICLES OF ASSOCIATION
AND ITS ALTERATION

MEMORANDUM OF ASSOCIATION

Introduction:
A company is formed and registered when a number of people come together for achieving a specific
purpose. This specific purpose is usually commercial in nature. Companies are generally formed to
earn profit from business activities. To register a company, an application form has to be filed with
the Registrar of Companies (ROC). This application form is required to be submitted with a certain
number of specified documents. One of the fundamental documents that are required to be
submitted with the application form for incorporation of company is the Memorandum of Association
(MoA).

What is Memorandum of Association?

1: Memorandum of Association is a legal document which describes the purpose for which the
company is formed and therefore identified the possible scope of its operations beyond which its
action cannot go. It defines as well as confines the powers of the company. If anything is done beyond
these powers that will be ultra vires (beyond the powers) of the company and so void.
2: The first step in the formation of a company is to prepare a document called the memorandum of
association. In fact, memorandum is one of the most essential pre-requisites for incorporating any
form of company under the Companies Act, 2013 (hereinafter referred to as ‘Act’)

“The Memorandum of Association”, as observed by Palmer, “is a document of great importance in

relation to the proposed company”

The requirement of memorandum is evidenced in Section 3 of the Act, which provides the mode
of incorporation of a company and states that a company may be formed for any lawful purpose:
1: by seven or more persons, where the company to be formed is a public company;
2: two or more persons, where the company to be formed is a private company; or
3: one person, where the company to be formed is a One Person Company

Definition and provisions pertaining to Memorandum under the Companies Act, 2013
According to Section 2(56) of the Act “memorandum” means the memorandum of association of a
company as originally framed and altered, from time to time, in pursuance of any previous company
law or this Act.

MEMORUANDUM OF ASSOCIATION?
1.The contents of memorandum which is the charter of the company
2.The memorandum of association of a company contains objectives of the company which it shall
pursue.
3.It not only shows the objective of formation of the company but also determines the scope of its

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operations beyond which its actions cannot go.
Memorandum enables shareholders, creditors and all those who have business terms with company
to know what its powers are and what is the range of its activities. An intending shareholder can find
out the purposes for which his money is going to be used by the company and what type of risk he is
taking by investing the company. In same manner, anyone dealing with the company, viz. supplier of
goods, will know whether the transaction he intends to make with the company is within the objects
of the company and not ultra vires its objects

CASELAW
In the celebrated case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche, (1875) L.R. 7 H.L. 653,
Lord Cairn observed: “The memorandum of association of a company is its charter and defines the
limitations of the powers of the company. It contains the both which is affirmative and that which
is negative. It states affirmatively the ambit and extent of vitality and powers which by law are
given to the corporation, and it states negatively, if it is necessary to state, that nothing shall be
done beyond that ambit” [Egyptian Salt and Soda Co. Ltd. v. Port Said Salt Association Ltd. (1931)
A.C. 677]
In Re Attorney General Vs. Great Eastern Railway (1880) 5 AC 473, It was held that the court will
consider ancillary/incidental objectives along with main objects of the company

Question: Do all the companies require MoA?

Answer: Yes, it is mandatory for every company to have a MoA as it defines the scope of its
operations. The entire structure of the company is detailed in the MoA. It is to be submitted to the
Registrar of Companies. It is a public document, and any person can view the MoA of the company
by paying the required fees to the Ministry of Corporate Affairs (MCA)

CONTENTS OF MEMORANDUM [SECTION 4 READ WITH SCHEDULE I

1. Name clause
2. Registerd office clause
3. Object clause
4. Liability clause
5. Captial clause
6. Subscription clause

1) NAME CLAUSE

The name of the company is a symbol of its independent corporate existence. According to section
4(2), the name stated in the memorandum shall not –
(a) be identical with or resemble too nearly to the name of an existing company registered under this
Act or any previous company law; or
(b) be such that its use by the company –
(i) will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the Central Government.

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Section 4(3) of the Act provides that without prejudice to the provisions of section 4(2), a company
shall not be registered with a name which contains –
(a) any word or expression which is likely to give the impression that the company is in any way
connected with, the Central Government, any State Government, or any local authority, corporation
or body constituted by the Central Government or any State Government under any law for the time
being in force; or
(b) such word or expression, as prescribed in rule 8 of the Companies (Incorporation) Rules, 2014,
unless the previous approval of the Central Government has been obtained for the use of any such
word or expression.

As per section 4(4) a person may make an application for reservation of name shall be made by using
web service SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus: INC-32), and
for change of name by using web service RUN (Reserve Unique Name), in prescribed manner and
accompanied by prescribed fee to the Registrar for the reservation of a name set out in the
application as –
(a) the name of the proposed company; or
(b) the name to which the company proposes to change its name.
Section 4(5)(i) lays down that upon receipt of an application under sub-section (4), the Registrar may,
on the basis of information and documents furnished along with the application, reserve the name
for a period of twenty days from the date of the application. Provided that in case of an application
for reservation of name or for change of its name by an existing company, the Registrar may reserve
the name for a period of sixty days from the date of approval.

CASELAW
In the case of Atlas Cycles (Haryana) Ltd. v. Atlas Products Pvt. Ltd [146 (2008) DLT 274 (DB)], use
of the brand name as corporate name was settled. Both the plaintiff and the defendant companies
belong to the same family. The Appellant-plaintiff was the proprietor of the trade mark in the name
“Atlas”. The Respondent- defendant company containing the name “Atlas” in its corporate name
started dealing in bicycles. The plaintiff objected to the use of the name “Atlas” by the defendant
company. The Defendants were restrained from using the word ‘Atlas’ in their corporate/trade
name in respect of bicycles and bicycle parts

CASELAW
Where a company is directed to change the name, the court cannot directly tell the Registrar to
effect the change in the name of the company. The Court can only direct the company to do so.
The company cannot simply file the Court order regarding the change, but it will have to follow the
prescribed procedure. [Halifax Plc v. Halifax Repossessions Ltd. (2004) 2 BCLC 455 (CA)].

CASELAW
The rule will apply also to foreign companies or traders, whose goods are imported into the
country, as it was applied in the case of La Societe Anonyme Panchard at Levessor v. Panchard
Levessor Motor Co. Ltd., (1901) The plaintiffs were a French company carrying on business in Paris
as motor car manufacturers and were using the name “Panchard” in connection with motors of
their manufacture. They objected to the use of the word “Panchard” in the name of the defendant

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 company on the ground that the principal object of the defendants wasto injure wrongfully and
fraudulently the plaintiffs’ business by passing off their goods as those of the plaintiffs’
manufacture and succeed even though they had no agencies in England but had a market for their
goods there

CASELAW
K.G. Khosla Compressors Ltd. v. Khosla Extractions Ltd A person cannot be permitted to name a
company even after his personal name if that name resembles the name of an existing company.

2) SITUATION CLAUSE

1. Meaning:
1.The name of the State in which the registered office of the company is to be situated
2. According to section 12 of the Act within thirty (30) days of company’s incorporation, and at all
times thereafter, the company must have a registered office to which all communications and notices
may be sent
3. The company must also furnish to the Registrar verification of its registered office within a period
of thirty days of its incorporation in such manner as may be prescribed. (e-form INC-22)]

2: Publication of name and address of the company

According to Section 12(3) of the Act, the company shall –

1. Paint or affix its name, and the address of its registered office, and keep the same painted or
affixed, on the outside of every office, in a conspicuous position, in legible letters, and if the characters
employed therefor are not those of the language or of one of the languages in general use in that
locality, also in the characters of that language or of one of those languages.
2. Have its name engraved in legible characters on its seal, if any;
3. get its name, address of its registered office and the Corporate Identity Number along with
telephone number, fax number, if any, e-mail and website addresses, if any, printed in all its business
letters, billheads, letter papers and in all its notices and other official publications; and
4. have its name printed on negotiable instruments such as hundies, promissory notes, bills of
exchange and such other document as may be prescribed.

However, where a company has changed its name or names during the last two years, it shall paint
or affix or print, as the case may be, along with its name, the former name or names so changed
during the last 2 year

3) Object clause

1. It indicates the purpose for which the company has been set up and its actual capability, besides
its sphere of activities. It states affirmatively the ambit and extent of powers of the company and,
stated negatively, that nothing should be done beyond that ambit and that no attempt shall be made
to use the company for any other purpose than that which is specified.

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2. The purpose of the objects clause is to enable the persons dealing with the company to know its
permitted range of activities. The acts beyond this ambit are ultra vires and hence void. Even the
entire body of shareholders cannot ratify such acts. [Case Law: Ashbury Railway Carriage & Iron Co.
Ltd. v. Riche]
3. Ultra vires means an act or transaction of a company, which though it may not be illegal, is beyond
the company’s powers by reason of not being within the objects of the memorandum of association.
4. Implied Powers

The powers exercisable by a company are to be confined to the objects specified in the
memorandum. While the objects are to be specified, the powers exercisable in respect of them may
be express or implied and need not be specified.
Every company may necessarily possess certain powers which are implied, such as, a power to
appoint and act through agents, and where it is a trading company, a power to borrow and give
security for the purposes of its business, and also a power to sell. Such powers are incidental and
can be inferred from the powers expressed in the memorandum. [Oakbank Oil Co. v. Crum (1882) 8
App Cas 65]. The principle underlying the exercise of such powers is that a company, in carrying on
the business for which it is constituted, must be able to pursue those things which may be regarded
as incidental to or consequential upon that business. [Egyptian Salt and Soda Co. v. Port Said Salt
Association].

5. Powers which are not implied

The following powers have been held not to be implied and it is, therefore, prudent to include them
expressly in the objects clauses:
1. acquiring any business similar to the company’s own business. [Ernest v. Nicholls, (1857) 6 HLC
40];
2. entering into an agreement with other persons or companies for carrying on business in
partnership or for sharing profit, joint venture or other arrangements. Very clear powers are
necessary to justify such transactions [Re. European Society Arbitration Act (1878) 8 Ch 679];
3. taking shares in other companies having similar objects. [Re. Barned’s Banking Co., ex parte and
The Contract Corporation (1867) 3 Ch. App. 105. Re. William Thomas & Co. Ltd. (1915) 1 Ch 325];
4. Taking shares of other companies where such investment authorizes the doing indirectly that
which will not be intra vires if done directly
5. promoting other companies or helping them financially [Joint Stock Discount Co. v. Brown, (1869)
LR 8 EQ 381];
6. a power to sell and dispose of the whole of a company’s undertaking.
7. a power to use funds for political purposes;
8. a power to give gifts and make donations or contribution for charities not relating to the objects
stated in the memorandum.
9. acting as a surety or as a guarantor

Previous Year Questions

Q) State any six powers which are prudent to be included in the object clause of the Memorandum
of Association of a Company as general and ancillary objects. (DEC 2018) (4 M)

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Ans: The following powers have been held not to be implied and it is, therefore, prudent to include
them expressly in the object clauses of Memorandum of Association of a Company:
1. Acquiring any business similar to the company's own business. [Ernest v, nicholls, (1857) 6 HLC 40]
2. Entering into an agreement with other persons or companies for carrying on business in
partnership or for sharing profit, joint venture or other arrangements. Very clear powers are
necessary to justify such transactions [Re European Society Arbitration Act (1878) 8 Ch 679]
3. Taking shares in other companies having similar objects. [Re Barned's Banking Co., ex parte and
The Contract Corporation (1867) 3 Ch. App. 105. Re William Thomas & Co, Ltd. (1915) 1 Ch 325]
4. Taking shares of other companies where such investment authorizes the doing indirectly that which
will not be intra virus if done directly;
5. Promoting other companies or helping them financially [Jointly Stock Discount Co. v. Brown, (1869)
LR 8 EQ 381]
6. A power to sell and dispose of the whole of a company's undertaking;
7. A power to use funds for political purposes;
8. A power to give gifts and make donations or contributions for charities not relating to the objects
stated in the memorandum;
9. Acting as a surety or as a guarantor.

DOCTRINE OF ULTRA VIRES

Ultra vires is a Latin term made up of two words “ultra” which means beyond and “vires”
meaning power or authority. Ultra vires acts are any acts that lie beyond the authority of a
company to perform

The power of a company is derived from the law governing it. Section 6 of the Companies Act, 2013
expressly provides that the provisions of the Companies Act, 2013 shall prevail notwithstanding
anything to the contrary contained in the memorandum or articles of a company, or in any agreement
executed by it, or in any resolution passed by the company in general meeting or by its Board of
Directors, whether the same be registered, executed or passed, as the case may be, before or after
the commencement of this Act
Any act done contrary to or in excess of the scope of activity of the Companies Act will be ultra vires
the Companies Act. Such an act is void and cannot be ratified even by unanimous resolution of all the
shareholders

For Example, If board members are appointed or removed without following statutory provisions;
payment of dividend out of capital or reduced the share capital of the company without complying
with the legal formalities.

It also declares a provision contained in the memorandum, articles, agreement or resolution

void if it’s repugnant to any of the provisions in the Act.

Effects of ultra vires Transactions

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 (i) Void ab initio – The ultra vires acts are null and void ab initio. The company is not bound by
these acts. Even the company cannot sue or be sued upon [Ashbury Railway Carriage and Iron
Company v. Riche]. Ultra vires contracts are void ab initio and hence cannot become intra vires by
reason of estoppel or ratification.
(ii) Injunction: The members can get an injunction to restrain a company wherein ultra vires act
has been or is about to be undertaken [Attorney General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473].
(iii) Personal liability of Directors: It is one of the duties of directors to ensure that the corporate
capital is used only for the legitimate business of the company and hence if such capital is diverted
to purposes alien to the company’s memorandum, the directors will be personally liable to replace
it. In Jehangir R. Modi v. Shamji Ladha, [(1866-67) 4 Bom. HCR (1855)], the Bombay High Court held,
“A shareholder can maintain an action against the directors to compel them to restore to the
company the funds of the company that have by them been employed in transactions that they
have no authority to enter into, without making the company a party to the suit”.
In case of deliberate misapplication, criminal action can also be taken for fraud. However, a
distinction must be drawn between transactions which are ultra vires the company and the
transactions which are ultra vires the directors. Where the directors exceed their authority the
same may be ratified by passing the resolution in the general body meeting of the shareholders.
Provided the company has the capacity to do that transaction as per its memorandum of
association.
(iv) Where a company’s money has been used ultra vires to acquire some property, the company’s
right over such property is held secure and the company will be the right party to protect the
property. This is because, though the property has been acquired for some ultra vires object, it
represents the money of the company.
(v) Ultra vires borrowing does not create the relationship of creditor and debtor [In Re. Madras
Native Permanent Fund Ltd., (1931) 1 Com Cases 256 (Mad.)]

(vi) Ultra vires torts: A company will not be liable for torts committed outside its objects
In order to make the company liable for the torts/crime of its employees, it will have to be proved
that:
i) the tort was committed in the course of an activity which is in the purview
company’s memorandum, and
ii) it was committed by the employee within the course of his employment
(vii) Ultra vires grants and guarantees: Directors cannot make an unauthorized grant unless
object is to promote prosperity of the company or the grant is incidental to carrying out of the
object of the company. [In Re LEE Behrens & Co., (1932) 2 Comp Cas 588 (Ch. D).]
A Guarantee for the payment of dividends, which enables the guarantee to bring an action against
the company for reimbursement even when there are no profit, is ultra vires and void. [In Re
Walter’s Deed of Guarantee, (1933) 3 Comp Cas 308 (CD)].

Exceptions to the Doctrine of Ultra Vires

1. Any act which is performed irregularly, but otherwise it is intra-vires the company, can be

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 validated by the shareholders of the company by giving their consent in general meeting
2.If any act is deemed to be within the authority of the co. by the companies act,2013, then they
will not be considered as Ultra vires even if they are not expressly stated in the MOA
3. Any incidental or consequential effect of the ultra vires act will not be invalid unless the
companies act 2013 expressly prohibits such act
4. Any act which is outside the authority of the directors of the company but otherwise it is intra-
vires the company can be ratified by the shareholder of the company.

Ultra Vires the Memorandum of Association

What is Memorandum of Association?

The Memorandum of Association (MOA) is a document listing out the constitution of a company,
essentially represents the foundation stone on which the structure of the company is built. It
contains clauses detailing the boundaries of the company’s activities and its relations with the
outside world.
The important attribute of the MOA is considered to be its “objects clause”. Section 4(1)(c) of the
Companies Act, 2013 requires every company to state in their MOA, the objects for which the
company is proposed to be incorporated and any matter considered necessary in furtherance thereof.

The memorandum of association of a company restricts the powers of the company while defining
the object of the company. A company cannot do anything, which is beyond the purview of the
object clause. Any act done in contrary to the object clause of the memorandum of association
will be ultra vires the memorandum of association.

In the case of a company whatever is not stated in the memorandum as the objects or powers is
prohibited by the doctrine of ultra vires. As a result, an act which is ultra vires is void, and does not
bind the company. Neither the company nor the contracting party can sue on it. Such an act is void
and cannot be ratified even by unanimous resolution of all the shareholders.

DOCTRINE OF INDOOR MANAGEMENT

While the doctrine of, ‘constructive notice” seeks to protect the company against the outsiders, the
principal of ‘indoor management’ operates to protect the outsiders against the company. This
doctrine emphasizes on the concept that an outsider whose actions are in good faith and has entered
into a transaction with a company can have a presumption that there are no irregularities internally
and all the procedural requirements have been complied with by the company.
The doctrine of indoor management, also known as the Turquand rule is an around one fifty years old
concept, which protects outsiders against the actions done by the company.

CASELAW:
In Royal British Bank v. Turquand, the directors of a banking company were authorized by the
articles to borrow on bonds such sums of money as should from time to time, by resolution of the

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 company in general meeting, be authorized to borrow. The directors gave a bond to Turquand
without the authority of any such resolution. It was held that Turquand could sue the company on
the strength of the bond, as he was entitled to assume that the necessary resolution had been
passed. Lord Hatherly observed: “Outsiders are bound to know the external position of the
company but are not bound to know its indoor management

Section 176 of the Companies Act, 2013 provides for the Validity of Acts of Directors - No act done by
a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed
that his appointment was invalid by reason of any defect or disqualification or had terminated by
virtue of any provision contained in this Act or in the Articles of the company:
Provided that nothing in this section shall be deemed to give validity to any act done by the director
after his appointment has been noticed by the company to be invalid or have been terminated.
The object of the section is to protect persons dealing with the company - outsiders as well as
members by providing that the acts of a person acting as director will be treated as valid although it
may afterwards be discovered that his appointment was invalid or that it had terminated under any
provision of this Act or the Articles of the company [Ram Raghubir Lal v. United Refineries (Burma)
Ltd., (1932) 2 Com Cases 359; AIR 1931 Rang 139]

Example of Indoor Management:

Question: Planet Limited received a cheque from Earth Limited. The Articles of Association of Earth
Limited provided that cheques issued by the company need to be signed by two directors and
countersigned by the secretary. The directors nor the secretary who signed the cheque was appointed
properly and thus the cheque issued was not valid. Planet Limited sued the company for the
irregularities in the procedure. Is Planet Limited liable for relief?
Answer: Planet Limited is entitled to relief and the company has to pay the amount of the
cheque since the appointment of directors is a part of the internal management of the company
and a person dealing with the company is not required to enquire about it

Exceptions to the Doctrine of Indoor Management

The above noted ‘doctrine of indoor management’ is, however, subject to certain exceptions. In other
words, relief on the ground of ‘indoor management’ cannot be claimed by an outsider dealing with
the company in the following circumstances.
1. Where the outsider had knowledge of irregularity – The rule does not protect any person who has
actual or even an implied notice of the lack of authority of the person acting on behalf of the company.
Thus, a person knowing fully well that the directors do not have the authority to make the transaction
but still enters into it, cannot seek protection under the rule of indoor management. In Howard v.
Patent Ivory Co. (38 Ch. D 156), the articles of a company empowered the directors to borrow upto
one thousand pounds only. They could, however, exceed the limit of one thousand pounds with the
consent of the company in general meeting. Without such consent having been obtained, they
borrowed 3,500 pounds from one of the directors who took debentures. The company refused to pay
the amount. Held that, the debentures were good to the extent of one thousand pounds only because
the director had notice or was deemed to have the notice of the internal irregularity

2. No knowledge of Memorandum and Articles – Again, the rule cannot be invoked in favour of a
person who did not consult the memorandum and articles and thus did not rely on them. In Rama
Corporation v. Proved Tin & General Investment Co. (1952) 1All. ER 554, T was a director in the

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company. He, purporting to act on behalf of the company, entered into a contract with the Rama
Corporation and took a cheque from the latter. The articles of the company did provide that the
directors could delegate their powers to one of them. But Rama Corporation people had never read
the articles. Later, it was found that the directors of the company did not delegate their powers to T.
The Plaintiff relied on the rule of indoor management. Held, they could not because they even did
not know that power could be delegated

3. Forgery – The rule of indoor management does not extend to transactions involving forgery or to
transactions which are otherwise void or illegal ab initio. In the case of forgery it is not that there is
absence of free consent but there is no consent at all. The person whose signatures have been forged
is not even aware of the transaction, and the question of his consent being free or otherwise does
not arise. Consequently, it is not that the title of the person is defective but there is no title at all.
Therefore, howsoever clever the forgery might have been, the personates acquire no rights at all.
Thus, where the secretary of a company forged signatures of two of the directors required under the
articles on a share certificate and issued certificate without authority, the applicants were refused
registration as members of the company. The certificate was held to be nullity and the holder of the
certificate was not allowed to take advantage of the doctrine of indoor management [Rouben v. Great
Fingal Consolidated (1906) AC 439]
Forgery, in the case of a company, can take place in different forms. It may, besides forgery of the
signatures of the authorized officials, include the execution of a document towards the personal
discharge of an official’s liability instead of the liability of the company. Thus, a bill of exchange signed
by the manager of a company with his own signature under words stating that he signed on behalf of
the company, was held to be forgery when the bill was drawn in favour of a payee to whom the
manager was personally indebted [Kreditbank Cassel v. Schenkers Ltd. (1927) 1 KB 826]. The bill in
this case was held to be forged because it purported to be a different document from what it was in
fact; it purported to be issued on behalf of the company in payment of its debt when in fact it was
issued in payment of the manager’s own debt.

4. Negligence – The ‘doctrine of indoor management’, in no way, rewards those who behave
negligently. Thus, where an officer of a company does something which shall not ordinarily be within
his powers, the person dealing with him must make proper enquiries and satisfy himself as to the
officer’s authority. If he fails to make an enquiry, he is estopped from relying on the Rule. In the case
of Underwood v. Benkof Liverpool (1924) 1 KB 775, a person who was a sole director and principal
shareholder of a company deposited into his own account cheques drawn in favour of the company.
Held, that, the bank should have made inquiries as to the power of the director. The bank was put
upon an enquiry and was accordingly not entitled to rely upon the ostensible authority of director
Similarly, in the case of Anand Behari Lal v. Dinshaw & Co. (Bankers) Ltd. AIR 1942 Oudh 417, an
accountant of a company transferred some property of a company in favour of Anand Behari. On an
action brought by him for breach of contract, the Court held that the transfer to be void. It was
observed that the power of transferring immovable property of the company could not be considered
within the apparent authority of an accountant.

5. Again, the doctrine of indoor management does not apply where the question is in regard to the
very existence of an agency. In Varkey Souriar v. Keraleeya Banking Co. Ltd. (1957) 27 Com Cases 591
(Ker.), the Hon’ble Kerala High Court held that the ‘doctrine of indoor management’ cannot apply
where the question is not one as to scope of the power exercised by an apparent agent of a company
but is with regard to the very existence of the agency.

6. This Doctrine is also not applicable where a pre-condition is required to be fulfilled before

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company itself can exercise a particular power. In other words, the act done is not merely ultra vires
the directors/ officers but ultra vires the company itself – Pacific Coast Coal Mines v. Arbuthnot
(1917) AC 607.
In the end, it is worthwhile to mention that section 6 of the Companies Act, 2013 gives overriding
force and effect to the provisions of the Act, notwithstanding anything to the contrary contained in
the memorandum or articles of a company or in any agreement executed by it or for that matter in
any resolution of the company in general meeting or of its board of directors. A provision contained
in the memorandum, articles, agreement or resolution to the extent to which it is repugnant to the
provisions of the Act, will be regarded as void. A corporation, organization or other entity set up to
provide a legal shield for the person actually controlling the operation.

Question: Butterfly Limited receives a share certificate of Flower Limited issued under the seal of
the company. The company secretary issues the certificate after affixing the seal and forging the
signature of the two directors. Butterfly Limited files a lawsuit claiming that the forging of
signatures is a part of the internal management of the company. Is the claim by Butterfly Limited
valid and is liable to get relief?
Answer: According to the exceptions to the doctrine of indoor management, a transaction
involving forgery is null and void. Since the document issued to Butterfly Limited is null and void,
the claim made by him is not valid. Thus, he is not entitled to any relief.

DOCTRINE OF CONSTRUCTIVE NOTICE

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.

The Memorandum and Articles, when registered, become public documents and can be inspected
by anyone on payment of nominal fee. Therefore, every person who contemplates entering into a
contract with a company has the means of ascertaining and is consequently presumed to know, not
only the exact powers of the company but also the extent to which these powers have been delegated
to the directors, and of any limitations placed upon the exercise of these powers. In other words,
every person dealing with the company is deemed to have a “constructive notice” of the contents
of its memorandum and articles. In fact, he is regarded not only as having read those documents
but also as having understood them according to their proper meaning [Griffith v. Paget, (1877) Ch.
D. 517]. Consequently, if a person enters into a contract which is beyond the powers of the company,
as defined in the memorandum, or outside the limits set on the authority of the directors, he cannot,
as a general rule, acquire any rights under the contract against the company [Mohony v. East Holyfrod
Mining Co., (1875) L.R. 7 H.L. 869]. For example, if the articles provide that a bill of exchange to be
effective must be signed by two directors, a person dealing with the company must see that it is so
signed; otherwise he cannot claim under it.

A common example of Constructive Notice is when a court is unable to directly reach someone and
publishes summons in the public newspaper and it is assumed that everybody has read it.

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In another case, the articles required that all documents should be signed by the managing director,
secretary and the working director on behalf of the company. A deed of mortgage was executed by
the secretary and the working director only and the Court held that no claim would lie under such a
deed. The Court said that the mortgagee should have consulted the articles before the deed was
executed. Therefore, even though the mortgagee may have acted in good faith and the money
borrowed applied for the purpose of the company, the mortgage was nevertheless invalid [Kotla
Venkataswamy v. Rammurthy, AIR 1934 Mad 579]. The doctrine of indoor management protects
third parties who are entitled to an assurance that all the procedural aspects of a transaction are
carried out. Outsiders dealing with incorporated bodies are bound to take notice of limits imposed
on the corporation by the memorandum or other documents of constitution. Nevertheless, they are
entitled to assume that the directors or other persons exercising authority on behalf of the company
are doing so in accordance with the internal regulations as set out in the Memorandum & Articles of
Association.
The impact of this doctrine on practical relations is thus stated in HALSBURY: “A company is subject
to the rule that, where the conduct of a party charged with a notice shows that he had suspicions of
a state of facts the knowledge of which would affect his legal rights, but that he deliberately refrained
from making inquiries, he will be treated as having had notice, though he is not entitled to claim for
his own advantage,” [Jones v. Smith, (1841) 1 Hare 43]

Previous Year Questions

Q) Arup entered into a transaction with Brilliant Merchandise Ltd. for a contract worth ` 51 lakh.
The Articles of Association of the company stipulate that a contract above ` 25 lakh should be
approved by a meeting of the Board of directors. Anjaan, Deputy General Manager (Commercial)
produces a forged document which shows a resolution approving the contract having been passed
in a Board Meeting. Later, the forgery is discovered. Arup pleads that his contract with the company
is protected by the Doctrine of Indoor Management. Will Arup succeed ? (DEC 2020) (3 m)

Ans: The doctrine of Constructive Notice protects a company from outsiders. The doctrine provides
that an outsider must read the Memorandum and Articles of the Company and satisfy himself that the
contract he is seeking to enter into with the company is within its powers.

As far as internal procedures are concerned, an outsider is entitled to presume that everything has
been according to the procedures laid down and there is no irregularity. An outsider cannot find out
what is going on inside the doors as the doors of management are closed. This is known as the doctrine
of Indoor Management [also known as rule in Royal British Bank v. Turquand (1856) CI & B 327].

However, in certain exceptional situations the doctrine of indoor management is not applicable and
one of them is when a person relies on a forged document. Nothing can validate forgery. A company
cannot be held liable for forgery committed by its officers. This has been established in the case Ruben
v. Great Fingall Consolidated case [1906] 1 AC 439.

In the instant case Arup has relied on a forged document. Therefore he will not be protected and he
will not succeed in his pleading.

DOCTRINE OF ALTER EGO

The term “Alter Ego” is a Latin word. Literally translated, it means the “Other I”. More idiomatic it can
be understood as the identical copy or a person’s clone. It is a common tenet that a company is a

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separate legal entity from its shareholders and directors. This common law principle grants immunity
to the shareholders and directors from being held liable for the debts as well as criminal liabilities of
the corporation. The doctrine of alter ego, however, provides for an exception to this presumption in
law. Alter ego is the doctrine which prevents the stakeholders of the corporation, i.e., shareholders
and directors from taking the refuge of doctrine of separate legal entity. Hence, the Doctrine of alter
ego is based on lifting of the corporate veil between the directors/ shareholders and the corporation
and treating both as one entity.
The doctrine of alter ego is based on the assumption that the company as well as the shareholders
and the managing directors are the alter egos of each other, i.e., one is the shadow or reflection of
the other or can be understood as two sides of the same coin. Hence, the courts can rely on alter ego
doctrine when they find that there is a very thin line of distinction between the shareholders/
directors and the corporation or a limited liability corporation.
It is used by the courts to ignore the status of shareholders, officers, and directors of a company in
reference to their liability in their respective capacity so that they may be held personally liable for
their actions when they have acted fraudulently or unjustly.
In Lennards Carying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] AC 705, Viscount Haldane
propounded the “alter ego” theory and distinguished it from vicarious liability. The House of Lords
stated that the default of the managing director who is the “directing mind and will” of the company,
would be attributed to him and he be held for the wrong doing of the company.

CASELAW
The Supreme Court of India, in the judgment of Sunil Bharti Mittal v. Central Bureau of Investigation
AIR 2015 SC 923, clarified the law of "alter ego". In the instant case the Special Judge had
summoned and proceeded against the Directors of the Company. The Special Judge, had held "On
the other hand, the reason for summoning these persons and proceeding against them are
specifically ascribed in this para which, prima facie, are:
i) These persons were/are in the control of affairs of the respective companies.
ii) Because of their controlling position, they represent the directing mind and will of each
company.
iii) State of mind of these persons is the state of mind of the companies. Thus, they are described
as "alter ego" of their respective companies.
The Apex Court while overruling the decision of the Special Judge, observed that while the Special
Judge had applied the principle of alter ego, it had done so in reverse. The criminal mens rea had
been attributed to the directors on the assumption that they are the directing minds behind the
acts of the Company. The Supreme Court observed that the Special Judge had ignored the fact that
such an interpretation of the alter ego doctrine would go against the position of law that there is
no vicarious liability in criminal law, unless expressly provided in the statute.

4) Liability clause – section 4

It is provided that the liability of member may either be limited or unlimited, further it shall also state
that, –
(i) in the case of a company limited by shares, the 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

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to contribute –
(A) to the assets of the company in the event of its being wound-up while he is a member or 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

1. This clause shall state the amount of the capital with which the company is registered. The shares
into which the capital is divided must be of fixed value, which is commonly known as the nominal
value of the share. The capital is variously described as “nominal”, “authorized” or “registered”.
2. This amount lays down the maximum limit beyond which the company cannot issue shares without
altering the memorandum as provided by Section 61 of the Companies Act, 2013.
3. According to Section 60 of the Act, if the amount of the authorized capital of the company is stated
in any notice, advertisement, official publication, business letter, bill head or letter paper, it shall also
contain a statement in an equally prominent position and in equally conspicuous terms the amount
of capital which has been subscribed and the amount paid-up.

6) Declaration for subscription

The subscribers to the memorandum declare: “We, the several persons whose names and addresses
are subscribed below, are desirous of being formed into a company in pursuance of this
memorandum of association, and we respectively agree to take the number of shares in the capital
of the company set opposite our respective names”. Then follow the names, addresses, description,
occupations of the subscribers, and the number of shares each subscriber has agreed to take and
their signatures attested by a witness.
The statutory requirements regarding subscription of memorandum are that.
1.Each subscriber must take at least one share
2. Each subscriber must write opposite his name the number of shares which he agrees to take.

Alteration of memorandum of association

1.Alteration of name clause

2.Alteration of object clause
3.Alteration of registered office clause
4.Alteration of captial clause
5.Alteration of liability clause

A. ALTERATION OF MOA DUE TO CHANGE IN NAME CLAUSE [SECTION 13(2) &(3)

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Change in name clause due to
(a)change of name at the instance of the company
(b)change of name on a direction from the central government.

 The name of the company can be altered by a special resolution and with the approval of the
Central Government in writing. Approval of the Central Government is not required, in case
where the change in the name of the company relates to the addition/deletion of the word
‘Private’ to the name of the company consequent to the conversion of a company into a
public company and vice versa [Section 13 (2)].
 If through inadvertence or otherwise, a company on its first registration or on its registration
by a new name has been registered with a name which, in the opinion of the Central
Government, is identical with or too closely resemble the name of an existing company, the
company may change its name within a period of three months from the issue of such
direction by passing an ordinary resolution and by obtain the approval of the Central
Government in writing. (Section 16)
 When any change in the name of a company is made under section 13(2), the Registrar shall
enter the new name in the register of companies in place of the old name and issue a fresh
certificate of incorporation with the new name and such change in the name shall be
complete and effective only on the issue of such a certificate [Section 13(3)]
According to Rule 29 of Companies (Incorporation) Rules, 2014, the change of name shall not be
allowed to a company which has not filed annual returns or financial statements due for filing with
the Registrar or which has failed to pay or repay matured deposits or debentures or interest thereon.
Provided that the change of name shall be allowed upon filing necessary documents or payment or
repayment of matured deposits or debentures or interest thereon as the case may be.
An application shall be filed in Form No. INC-24 along with the fee for change in the name of the
company and a new certificate of incorporation in Form No. INC-25 shall be issued to the company
consequent upon change of name.

CASELAW
In Re cGMP Pharmaplan (Pvt) Ltd. Vs. Regional Director, Ministry of Corporate Affairs (2011)
105 SCL 67
NNE Pharmaplan Ltd. filed a representation before the office of Regional Director of MCA under
section 16 (the then section 22) seeking a direction that the petitioner company incorporated
on later date with the name cGMP Pharmaplan (Pvt) Ltd, it should change its name. Regional
Director of the MCA concluded that the use of name by petitioner of the word ‘pharmaplan” in
its name would have a misleading effect in the minds of general public and it was fit case for
issue of direction under section 16 {the then section 22(i)(b)} and directed petitioner to delete
the word ‘pharmaplan” from its existing name and change its name to some other name. The
Hon’ble Delhi High Court held that since the names of both the companies structurally and
phonetically too nearly resembled each other, Regional Director of MCA was right in directing
the petitioner to change it name.

Procedure for Alteration in Name Clause of Memorandum:

1. Calling of Board Meeting

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 (a) Issue notice in accordance with the provisions of section 173(3) of the Companies Act, 2013, for
convening a meeting of the Board of Directors to consider the reason for changing name of the
company and get its approval for change in name of the Company.
(b) Pass a Board resolution authorizing the Company Secretary/ Director to make the required
application to the Registrar of Companies

2. Seeking name availability for proposed new name from the ROC
As per section 4(4) of the Act read with Rule-9 of Companies (Incorporation) Rules, 2014, application
for the reservation/availability of name shall be in RUN along with prescribed fee of Rs. 1,000/- .
In selection of a Company name, it should be in accordance with name guidelines given in Rule-8 of
Companies (Incorporation) Rules, 2014. However, as per the Rule-9 substituted by the Companies
(Incorporation) Amendment Rules, 2014, An application for reservation of name shall be made
through the web service available at www.mca.gov. in by using RUN (Reserve Unique Name) along
with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014, which may either
be approved or rejected, as the case may be, by the Registrar, Central Registration Centre.

3. Obtaining ROC Approval and Name Availability Letter

(a) To take note of the name approval received from ROC.
(b) To fix date, time and place for holding Extra-ordinary General meeting (EGM) to get approval of
shareholders, by way of Special Resolution, for amendment in Name clause of Memorandum. This
amendment in Name clause of Memorandum shall be in accordance with the requirement of
section 13 of the Companies Act, 2013
(c) To approve notice of EGM along with agenda and explanatory statement pursuant to section 102
of the Companies Act, 2013 to be annexed to the notice of General Meeting as per section 102(1)
of the Companies Act, 2013.
(d) To authorize the Director or Company Secretary to issue Notice of the Extra-ordinary General
meeting (EGM) as approved by the board.

4. Issue of Notice of Extra-ordinary General Meeting (EGM)

Issue Notice of the EGM to all the Members, Legal Representatives of any deceased member or
assignee of an insolvent member, Directors and the Auditors of the company in accordance with the
provisions of Section 101 of the Companies Act, 2013.

5. Holding of Extra ordinary General Meeting

Hold the Extra-ordinary General meeting on the fixed date and pass the necessary Special Resolution
under section 13(1) of the Companies Act, 2013, for change in the Name clause of Memorandum.

6. ROC filings

7. After scrutiny of the documents filed, the ROC shall issue a fresh certificate of incorporation digitally
signed in Form INC-25.

8. Intimate all concerned persons/authorities about the changed name of the Company, particularly
the Stock Exchanges, National Securities Depository Ltd., Central Depository Services (India) Ltd.,
statutory and other authorities like Inspector of Factories, Regional Provident Fund Commissioner,

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 suppliers of raw materials, customers, banks etc

9. Arrange for a new Common Seal and have the same adopted at a meeting of the Board of directors
and keep it under safe custody and get stationery printed with the new name and/or affix rubber
stamp of the new name on all the existing documents. However, it is also to be noted that having the
common seal is no longer mandatory requirement

10. Get the new name of the Company painted on all the signboards or name boards wherever they
are displayed

11. Correct all records, registers including the Register of Members, every copy of Memorandum and
Articles of Association, other books and documents pertaining to the company’s business and affairs
to display the new name.

12. It is also to be noted that in every document as above-mentioned the company shall paint, affix
or print as the may be the former name or names so changed during the period of last two years.
(First proviso to Section 12(3)).

Name change requirement under regulation 45 of the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015

All listed companies which decide to change their names shall be required to comply with the
following conditions:
1. A time period of at least 1 year should have elapsed from the last name change
2. At least 50% of its total revenue in the preceding 1year period should have been accounted for by
the new activity suggested by the new name; or
3. The amount invested in the new activity/project (Fixed Assets + Advances + Work in Progress +
Inventories + Investments+ Trade Receivables + Cash & Cash equivalents) is at least 50% of the assets
of the company. The ‘advances’ shall include only those extended to contractors and suppliers
towards execution of project, specific to new activity as reflected in the new name;
4. To confirm the compliance, the company would have to submit auditor’s certificate to the stock
exchange;
5. The new name along with the old name shall be disclosed through the web sites of the respective
stock exchange/s where the company is listed for a continuous period of one year, from the date of
the last name change (Regulation 46)
If any listed entity has changed its activities which are not reflected in its name, it shall change its
name in line with the activities within a period of six months from the change of activities in
compliance of provisions as prescribed in the Companies Act, 2013 (Regulation 45).

Effect of change in name clause

1.the change of name shall not affect any right or obligation of the company or render defective any
legal proceedings by or against it, and any legal proceedings which might have been continued or
commenced by or against the company in its former name maybe continued by or against the
company in its new name

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2. by change of name, constitution of company does not change the only thing changes is its name all
the rights and obligfations under the law of old company pass to the new name.

Methods of changing name:

1. Conversion of private limited company into public limited company and therebby change in
the name from private to public.
2. Conversion of public limited into private limited company and thereby change in the name
from public to private.
3. Change of name from ABC limited to XYZ limted.

2) ALTERATION OF SITUATION OF REGISTERED OFFICE CLAUSE IN THE MOA [SECTION 13 (4) (5)
AND (7)

(a) Change within the local limits of same town

• The change of registered office of the company within the local limits can be implemented by the
Board of Directors.
• A company by passing Board Resolution can change the situation of its registered office within the
limits of same city, town or village. An intimation of the change of registered office and verification
of registered address shall be given to the registrar in e-form INC-22, within 15 days of such change.
• This does not involve alteration of memorandum.

(b) Change outside the local limits of any city, town or village
According to Section 12(5) of the Act except on the authority of a special resolution passed by a
company, the registered office of the company shall not be changed, –
(i) in the case of an existing company, outside the local limits of any city, town or village where such
office is situated at the commencement of this Act or where it may be situated later by virtue of a
special resolution passed by the company; and (ii)in the case of any other company, outside the local
limits of any city, town or village where such office is first situated or where it may be situated later
by virtue of a special resolution passed by the company. In case the company is eligible for conducting
business through postal ballot any change in place of registered office outside the local limits of any
city, town or village the same shall be transacted only by means of voting through a Postal Ballot [Rule
22 of Companies (Management and Administration) Rules, 2014.

(c) Change within the same State from the jurisdiction of one Registrar of Companies to the
jurisdiction of another Registrar of Companies
 No company shall change the place of its registered office from the jurisdiction of one
Registrar to the jurisdiction of another Registrar within the same State unless such change is
confirmed by the Regional Director. {Proviso to Section 12(5)}
 Section 12(6) states that the Regional Director, after hearing the parties shall pass necessary
orders within a period of thirty days from the date of the receipt of the application.
 Thereafter, the company concerned shall file a copy of the said order with the Registrar of
Companies (ROC) within a period of sixty days from the date of the confirmation order by
Regional Director.
 The said ROC shall record the ordered changes in its records
 The ROC of the state where the registered office of the company was previously situated,

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 shall transfer all the documents and papers to the new ROC.
(a) Board Resolution for shifting of registered office;
(b) Special Resolution of the members of the company approving the shifting of registered office;
(c) a declaration given by the Key Managerial Personnel or any two directors authorised by the Board,
that the company has not defaulted in payment of dues to its workmen and has either the consent
of its creditors for the proposed shifting or has made necessary provision for the payment thereof ;
(d) a declaration not to seek change in the jurisdiction of the Court where cases for prosecution are
pending;
(e) acknowledged copy of intimation to the Chief Secretary of the state as to the proposed shifting
and that the employees interest is not adversely affected consequent to proposed shifting

(d) Change of Registered office from one State to another

 The change of registered office from one State to another State involves alteration of
memorandum, and the change can be effected by a special resolution passed by the company
which must be confirmed by the Central Government on an application made to it [Section
13(4)]
 The Central Government shall dispose of the application under sub-section (4) within a period
of sixty days and before passing its order may satisfy itself that the alteration has the consent
of the creditors, debenture-holders and other persons concerned with the company or that
a sufficient provision has been made by the company either for the due discharge of all its
debts and obligations or that adequate security has been provided for such discharge.
[Section 13(5)]
 A company shall, in relation to any alteration of its memorandum involving change of
registered office from one State to another, file with the Registrar the special resolution
passed by it in MGT14 [Section 13(6)].
 Where an alteration of the memorandum results in the shifting of the registered office of a
company from one State to another, a certified copy of the order of the Central Government
approving the alteration shall be filed by the company with the Registrar of each of the States
within 30 days’ time from the receipt of the certified copy of the order and in INC-28, who
shall register the same, and the Registrar of the State where the registered office is being
shifted to, shall issue a fresh certificate of incorporation indicating the alteration. [Section
13(7) read with Rule 31 of the Companies (Incorporation) Rules, 2014].

Procedure to be followed as laid down in Rule 30 of the Companies (Incorporation) Rules, 2014 (as
amended from time to time) are enumerated below.
1. Send notice of Board Meeting at least seven days before the date of Board Meeting for
2. In Case of Listed Company, at least 7 days before of the Board Meeting, publish notice of the board
meeting in the newspaper. Simultaneously, send the copies of said publication to the Stock
exchanges.
3. Hold the Board Meeting
4. Intimate the Stock Exchanges about passing of resolution in the board meeting at the earliest within
24 hours of the occurrence of such event or information and in case of any delay the disclosure should
be made along with an explanation for such delay [Regulation 30(6) of the SEBI (LODR) Regulations,
2015
5. Send Notice of the EGM to at least 21 days clear days before the members of the company. Send
copies of the notice to the stock exchanges simultaneously. Also, an intimation to be sent to the

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concerned stock exchanges that the notice of the extra-ordinary general meeting was sent to the
shareholders of the company at the earliest within 24 hours of the occurrence of such event or
information and in case of any delay the disclosure should be made along with an explanation for
such delay. [Regulation 30(6) of SEBI (LODR) Regulations, 2015]
6. Publish the notice of EGM in newspaper and send the copy of such publication to the stock
exchanges
7. Hold EGM of the company and pass the special resolution for shifting of registered office from one
state to another state and authorize Director/ Company Secretary to sign/ file/ deal with department.
8. Intimate about the proceedings of the EGM and the amendments to the memorandum and articles
of association to the stock exchanges at the earliest within 24 hours of the conclusion of such
extraordinary general meeting and in case of any delay the disclosure should be made along with an
explanation for such delay. [Regulation 30(6) of SEBI (LODR) Regulations, 2015].
9. File e-form MGT-14 with ROC for registering special resolution passed in the EGM within 30 days
from the date of passing such resolution

Steps after obtaining new certificate from ROC:

 Make alteration in the MOA with respect to the state in every copy of Memorandum.
 Each stationery, banner, signboard, bills, invoice etc. should show the new address and necessary
advice should be sent to shareholders, debenture holders, and other concerned parties.
 Necessary changes are required to be made in the letter heads, books, records etc. of the
company. The necessary changes are required to be made in PAN, TAN or various returns under
the GST etc and inform all the Government departments, banks, customers and others wherever
required

SOME DECIDED CASE LAWS

1) Bharat Commerce and Industries Ltd., Re, (1973) it was held that employees’ union, which
was a registered body and which represented quite a number of the employees at the
registered office of the company, would have the legal standing to appear before the court
and oppose the application on the ground that their interests are likely to be prejudicially
affected if the resolution for shifting the registered office of the company from one state to
another is confirmed by the court. However, it was held that the employees’ union cannot
oppose on the ground that there would be loss of revenue or unemployment in the State or
that the meeting at which the special resolution was passed was itself not valid.
2) Satya Shree Balaji Wires & Cables (P) Ltd., No notice of the petition is required to be served
on the State, Central Government may direct notice to be served on the State if it is of the
view that the interest of the State will be affected by the alteration. Where the alteration is
affected by changing the registered office from one State to another State, the loss of revenue
in one State would be accompanied by increase in revenue in the other and in such a case the
interest of a particular State ought not to be considered but it is the interest of the country as
a whole which should be considered. The decision to shift the registered office of the company
to another state being a domestic matter rests with shareholders and the company is the best
judge of how to run its business more economically, efficiently or conveniently, even though
it would result in loss of revenue to the State

3) Metal Box India Ltd. Re, (2000), it was held that where the shifting of the registered office
was in accordance with a scheme approved by the BIFR, it was held that the workers had no

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 right of objection because their continuation in the company’s employment was ensured
unless, of course, a worker preferred voluntary retirement.

4) Usha Beltron Re, A company was allowed to shift its registered office from Bihar to West
Bengal in spite of the fact that Bihar Government had granted lease of land for the company’s
factory on the condition that it would not shift its registered office. The CLB also held that
interest free loans, sales tax, electricity and other subsidies would have no bearing on the
shifting

Previous Year Questions

Q) X, an employee of BG Ltd., is aggrieved by the decision of shifting of the registered office of the
Company from the state of Uttar Pradesh to Haryana. He has filed a Public Interest Litigation (PIL)
regarding the same, considering that the business of the company will be severely affected by the
said decision of shifting of registered office. In the light of decided case laws, examine the strength
of argument raised in the PIL. (DEC 2019) (4 marks )

ANS: : The Public Interest Litigation (PIL) of X, an employee of BG Ltd. regarding shifting of registered
office is not tenable.
The facts are similar to the case of Bharat Commerce and Industries Ltd., Re, (1973) 43 Com Cases
162 (Cal.), where it was held that employees’ union, which was a registered body and which
represented quite a number of the employees at the registered office of the company, would have
the legal standing to appear before the court and oppose the application on the ground that their
interests are likely to be prejudicially affected if the resolution for shifting the registered office of the
company from one State to another is confirmed by the court. However, it was held that the
employees’ union cannot oppose on the ground that there would be loss of revenue or
unemployment in the State or that the meeting at which the special resolution was passed was itself
not valid.

So long as interest of none of the employee at the registered office is prejudiced by retrenchment or
otherwise, the argument of X is not tenable.

3) ALTERATION OF MOA DUE TO CHANGE IN OBJECT CLAUSE [SECTION 13 (8) AND (9)]

1) Pursuant to Section 13(1) a company can change its objects clause by passing a special resolution.
Further, in case the company is eligible for conducting business through postal ballot any alteration
in the objects clause of the Memorandum of Association, shall implement the same through Postal
Ballot in terms of section 110 read with Rule 22 of the Companies (Management & Administration)
Rules, 2014.

2) UNUTILISED MONEY: Further, section 13(8) lays down that a company, which has raised money
from public through prospectus and has any unutilised amount out of the money so raised, shall not
change its objects for which it raised the money through prospectus unless following procedure is
followed:

(a) Pass special resolution for alteration of Object clause of Memorandum of Association by means of

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Postal Ballot only.
(b) Notice of the resolution for altering the objects shall contain the following particulars: total money
received;
- total money utilized for the objects stated in the prospectus;
- unutilized amount out of the money so raised through prospectus,
- particulars of proposed alteration/ change in the objects;
- justification for the alteration/change;
- amount proposed to be utilized for the new objects
- estimated financial impact of the proposed alteration on the earnings and cash flow of the company;
- other relevant information which is necessary for the members to take an informed decision on the
proposed resolution;
- Place from where any interested person may obtain a copy of the notice of the resolution to be
passed.

(c) Publish an advertisement, giving above mentioned details of special resolution to be passed, which
shall be published simultaneously with the dispatch of postal ballot notices to shareholder at least
once in a vernacular newspaper in the principal vernacular language and in English language in an
English newspaper circulating at the place where the registered office of the company is situated and
place it on the website of the Company if any, along with the justification for such change.
(d) Give an opportunity to the dissenting shareholders to exit by the promoters and shareholders
having control in accordance with regulations to be specified by the Securities and Exchange Board.

Postal Ballot is Mandatory for alteration of Object clause of MOA: (IMP)

- All Companies having more than 200 members.
- Company which has raised money from public through prospectus and still has any unutilized
amount out of the money so raised.

4) ALTERATION OF LIABILITY CLAUSE

According to section 13(1) of the Act, a company may, by a special resolution and after complying
with the procedure specified in this section, alter the provisions of its memorandum. It means that a
company can change the liability clause of its memorandum of association by passing a special
resolution. Further section 13(6)(a) provides that a company shall, in relation to any alteration of its
memorandum, file with the Registrar the special resolution passed by the company under section
13(1)

5) ALTERATION OF CAPITAL CLAUSE IN MOA [SECTION 61 READ WITH SECTION 64]

(a) increase its authorised share capital by such amount as it thinks expedient
(b) consolidate and divide all or any of its share capital into shares of a larger amount than its existing
shares

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Provided that no consolidation and division which results in changes in the voting percentage of
shareholders shall take effect unless it is approved by the Tribunal on an application made in the
prescribed manner;
(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up
shares of any denomination;
(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the
memorandum, so, however, that in the sub-division the proportion between the amount paid and
the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share
from which the reduced share is derived;
(e) cancel shares which, at the date of the passing of the resolution in that behalf, have not been
taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount
of the shares so cancelled.
All the above alterations do not require the confirmation by the Tribunal except that alteration
relating to consolidation and division which results in changes in the voting percentage of
shareholders shall not take effect unless it is approved by the Tribunal on an application made in the
prescribed manner
These alterations are, however, required to be notified and a copy of the resolution should be filed
with the Registrar within 30 days of the passing of the resolution along with an altered memorandum.
[Section 64(1)

Previous Year Questions

Q2) ‘Alteration of Capital Clause in Memorandum of Association is a precondition to restructuring

the Capital structure of the Company’ — Elaborate the statement mentioning relevant provisions of
the Companies Act, 2013 on types of alterations of Capital Clause. (DEC 2019) (4 M)

Ans: Section 61(1) of the Companies Act, 2013 provides for, the types of alteration of capital clause in
the general meeting of a company limited by shares through alteration of its memorandum in the
following ways :

(a) increase its authorised share capital by such amount as it thinks expedient;

(b) consolidate and divide all or any of its share capital into shares of a larger amount than its existing
shares:

Provided that no consolidation and division which results in changes in the voting percentage of
shareholders shall take effect unless it is approved by the Tribunal on an application made in the
prescribed manner;

(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up
shares of any denomination;

(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the
memorandum, so, however, that in the sub-division the proportion between the amount paid and the
amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from
which the reduced share is derived;

(e) cancel shares which, at the date of the passing of the resolution in that behalf, have not been
taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount
of the shares so cancelled.

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All the above alterations do not require the confirmation by the Tribunal except that alteration relating
to consolidation and division which results in changes in the voting percentage of shareholders shall
not take effect unless it is approved by the Tribunal on an application made in the prescribed manner.

These alterations are, however, required to be notified and a copy of the resolution should be filed
with the Registrar within 30 days of the passing of the resolution along with an altered memorandum.
[Section 64(1)]

Hence, according to section 61(1) of the Companies Act, 2013, alteration of memorandum of
association is a precursor to the change in capital structure of the company.

ARTICLES OF ASSOCIATION

 Articles of association form a document that specifies the regulations for a company’s
operations and defines the company’s purpose.
 The document can be thought of as a user’s manual for a company, defining its purpose and
outlining the methodology for accomplishing necessary day-to-day tasks.
 Articles of association lays out how tasks are to be accomplished within the organization,
including the process for appointing directors and the handling of financial records.

1) ARTICLES SUBORDINATE TO MEMORANDUM

 The articles of a company are subordinate to and subject to the memorandum of
association and the Act. Any clause in the Articles going beyond the memorandum will be
ultra vires
 But the articles are only internal regulations, over which the members of the company
have full control and may alter them according to what they think fit
 Articles that go beyond the company’s sphere of action are inoperative, and anything done
under the authority of such article is void and incapable of ratification.
2) REGISTRATION OF ARTICLES - Section 7(1)
 That at the time of incorporation of a company, it shall file with the Registrar within whose
jurisdiction the registered office of a company is proposed to be situated, the
memorandum and articles of the company duly signed by all the subscribers to the
memorandum
 The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in
Schedule I as may be applicable to such company either in totality or otherwise
 A company may adopt all or any of the regulations contained in the model articles
applicable to such company
 The articles of a private company must contain the three restrictions as contained in
Section 2(68).
3) ENTRENCHMENT PROVISIONS
The Companies Act 2013, recognizes an interesting concept of entrenchment. Essentially, the
entrenchment provisions allow for certain clauses in the articles to be amended upon satisfaction
of certain conditions or restrictions greater than those prescribed under the Act (such as obtaining
100% consent).

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 The provisions for entrenchment shall be made either on formation of a company, or by an
amendment in the articles agreed to by all the members of the company in the case of a private
company and by a special resolution in the case of a public company.
4) CONTENTS OF ARTICLES
The articles should contain generally the following matters:
1. Exclusion wholly or in part of Table F.
2. Adoption of preliminary contracts.
3. Share Capital, variation of rights, Number and value of shares.
4. Issue of preference shares.
5. Allotment of shares. 6. Calls on shares.
7. Lien on shares.
8. Transfer and transmission of shares.
9. Nomination.
10. Forfeiture of shares.
11. Alteration of capital.
12. Buy back
13. Share certificates.
14. Dematerialization.
15. Conversion of shares into stock.
16. Voting rights and proxies.
17. Meetings and rules regarding committees of the Board.
18. Directors, their appointment and delegations of powers.
19. Nominee directors. 20. Issue of Debentures and stocks.
21. Audit committee.
22. Managing director, Whole-time director, Manager, Secretary, Chief Executive Officer and Chief
Financial Officer.
23. Additional directors.
24. Common Seal.
25. Remuneration of directors
26. General meetings, proceedings at general meetings, adjournment of meeting.
27. Board of Directors, Proceedings of the Board meetings.
28. Borrowing powers.
29. Dividends and reserves.
30. Accounts and audit.

Ultra Vires the Articles of Association

What is Articles of Association:

In terms of Section 5(1) of the Companies Act 2013, the Articles of Association (AOA) of a company
shall contain the byelaws and regulations for the management of the internal affairs of the company.

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It plays a vital role in governing a company’s affairs and also defines the rights of its members inter-
se.
If a company acts which are ultra vires the Articles of Association but intra virus the memorandum
of association (i.e. outside the scope of articles but within the powers conferred by the
memorandum) will be ultra vires the Articles of Association. That is, payment of interest on ‘advance
calls’ at a rate higher than allowed by articles. These acts are also void, but the company in general
meeting may alter the Articles by a special resolution and ratify the unauthorized acts.

CASELAW
In Re. South Durham Brewery Company [(1875) LR 7 HL 653], the MoA of the company was unclear
as to the classes of shares to be issued by it, but the AoA of the company gave power to issue
shares of different classes as described therein. The Hon’ble Court held that Articles can be used
to explain the ambiguity contained in the memorandum. their Lordships agree that in such cases
the two documents must be read together at all events so far as may be necessary to explain any
ambiguity appearing in the terms of the memorandum, or to supplement it upon any matter as to
which it is silent."

Also, as stated earlier, the company cannot make it valid, even if every member assents to it. The
general rule is that an act which is ultra vires the company is incapable of ratification. An act which
is intra vires the company but outside the authority of the directors may be ratified by the company
in proper form [Rajendra Nath Dutta v. Shailendra Nath Mukherjee, (1982) 52 Com Cases 293 (Cal.)].

The rule is meant to protect shareholders and the creditors of the company. If the act is ultra vires
(beyond the powers of) the directors only, the shareholders can ratify it. If it is ultra vires the Articles
of Association, the company can alter its articles in the proper way and thereby such acts can be
duly ratified

CASELAW:
The doctrine of ultra vires was first enunciated by the House of Lords in a classic case, Ashbury
Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653
The memorandum of the company in the said case defined its objects thus: “The objects for
which the company is established are to make and sell, or lend or hire, railway plants to carry on
the business of mechanical engineers and general contractors.
The company entered into a contract with M/s. Riche, a firm of railway contractors to finance
the construction of a railway line in Belgium. On subsequent repudiation of this contract by the
company on the ground of its being ultra vires, Riche brought a case for damages on the ground
of breach of contract, as according to him the words “general contractors” in the objects clause
gave power to the company to enter into such a contract and, therefore, it was within the powers
of the company. More so because the contract was ratified by a majority of shareholders.
The House of Lords held that the contract was ultra vires the company and, therefore, null and
void. The term “general contractor” was interpreted to indicate as the making generally of such
contracts as are connected with the business of mechanical engineers. The Court held that if
every shareholder of the company had been in the room and had said, “That is a contract which
we desire to make, which we authorize the directors to make”, still it would be ultra vires. The
shareholders cannot ratify such a contract, as the contract was ultra vires the objects clause,
which by Act of Parliament, they were prohibited from doing.
However, later on, the House of Lords held in other cases that the doctrine of ultra vires should be

3.26 | P a g e
 applied reasonably and unless it is expressly prohibited, a company may do an act which is
necessary for or incidental to the attainment of its objects. Section 13(1)(d) of the Companies Act,
1956 [Corresponds to section 4(1)(c) of the Companies Act, 2013] provides that the objects for
which the company is proposed to be incorporated and any matter considered necessary in
furtherance thereof be stated in the memorandum. However, even when the matters considered
necessary in furtherance of the objects are not stated, they would be allowed by the principle of
reasonable construction of the memorandum

DISTINCTION BETWEEN MEMORANDUM AND ARTICLES:

Memorandum of Association Articles of Association

Memorandum of association is the charter of Articles of association are the rules and
the company and defines the fundamental regulations framed to govern this internal
conditions and objects for which the company management of the company
is granted incorporation.
Clauses of the memorandum cannot be easily In the case of articles of association, members
altered. They can only be altered in accordance have a right to alter the articles by a special
with the mode prescribed by the Act. In some of resolution. Generally, there is no need to obtain
the cases, alteration requires the permission of the permission of the Court or the Central
the Central Government or the Court Government for alteration of the articles
Memorandum of association cannot include The articles of association are subsidiary both to
any clause contrary to the provisions of the the Companies Act and the memorandum of
Companies Act association.
The memorandum generally defines the The articles regulate the relationship between
relation between the company and the the company and its members and between the
outsiders, members inter se.
Acts done by a company beyond the scope of The acts of the directors beyond the articles can
the memorandum are absolutely void and ultra be ratified by the shareholders.
vires and cannot be ratified even by unanimous
vote of all the shareholders.

Loans, Borrowings, Guarantees and Ultra Vires Rule

CASELAW:
Justice Shah (afterwards C.J.) in the case A. Lakshmanaswami Mudaliar v. L.I.C., A.I.R. 1963 S.C.
1185, upheld the doctrine of ultra vires. In this case, the directors of the company were authorized
“to make payments towards any charitable or any benevolent object or for any general public or
useful object”. In accordance with shareholders’ resolution the directors paid Rs. 2 lacs to a trust
formed for the purpose of promoting technical and business knowledge. The company’s business
having been taken over by L.I.C., it had no business left of its own.
The Supreme Court held that the payment was ultra vires the company. Directors could not spend
company’s money on any charitable or general objects. They could spend for the promotion of
only such charitable objects as would be useful for the attainment of the company’s own objects.
It is pertinent to add that the powers vested in the Board of directors, e.g., power to borrow
money, is not an object of the company. The powers must be exercised to promote the company’s
objects. Charity is allowed only to the extent to which it is necessary in the reasonable
management of the affairs of the company. Justice Shah held: “There must be proximate

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 connection between the gift and the company’s business interest”. Thus “gifts to foster research
relevant to the company’s activities” and “payments to widows of ex-employees on the footing
that such payments encourage persons to enter the employment of the company” have been
upheld as valid and intra vires
In this regard the Act provides for bonafide charitable spending by the company. Section 181 of
the Companies Act, 2013 authorizes the Board of directors to contribute to bona fide charitable
and other funds. However, prior consent of the company in general meeting, has to be obtained
in order to contribute for any bona fide charitable or other purpose any amount exceeding five
per cent of the average net profits for the three immediately preceding financial years
In this regard the Act provides for bonafide charitable spending by the company. Section 181 of
the Companies Act, 2013 authorizes the Board of directors to contribute to bona fide charitable
and other funds. However, prior consent of the company in general meeting, has to be obtained
in order to contribute for any bona fide charitable or other purpose any amount exceeding five
per cent of the average net profits for the three immediately preceding financial years
A bank or any other person lending to a company, for purposes ultra vires the memorandum,
cannot recover [National Provincial Bank v. Introductions Ltd., (1969) 1 All. E.R. 887].
Further, in the case of Bell Houses Ltd. v. City Wall Properties Limited (1966) 36 Com Cases 779,
the objects clause included a power to “carry on any other trade or business whatsoever which
can, in the opinion of the Board of directors, be advantageously carried on by the company.” The
Court has held the same to be in order

An ultra vires borrowing does not create a relationship of a debtor and creditor. In a case, a company
had accepted deposits from outsiders which was outside the scope of the Memorandum. When the
company was ordered to be wound up, a question was raised whether the depositors were creditors
of the company and whether the contributories could be asked to contribute towards payment of
deposits. The Court held that the relationship between the company and the depositors was not
that of debtor and creditor. But if the lender had lent the amount for discharging lawful expenses,
he may recover the amount.
Whether a transaction is ultra vires the company can be decided on the basis of the following
1. if a transaction entered into by a company falls within the objects, it is not ultra vires and hence
not void;
2. if a transaction is outside the capacity (objects) of the company, it is ultra vires;
3. if a transaction is in excess or abuse of the company’s powers, it is ultra vires and such transaction
will be set aside by the shareholders or even ratification by the shareholders would not validate
the acts done beyond the authority of the company itself.

Previous Year Questions

Q2) The memorandum and articles must be read together in the event of any ambiguity. Explain the
given statement referring a suitable case law. (DEC 2021) (4 M)

Ans: The memorandum and articles must be read together in the event of any ambiguity. In Angostura
Bitters & Co. Ltd. v. Kerr, (1933) AC 550: (1934) 4 Com Cases 1; the Privy Council held, “Except in
respect of such matters as must be statutorily provided for by the conjunction with the articles, the
two documents must be read together at all events so far as may be necessary to explain any
ambiguity appearing in the terms of the memorandum or to supplement it upon any matter as to

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which it is silent"-quoted with approval by the Supreme Court in A. Lakshmanaswami Mudaliar v. LIC
of India Ltd. (1963) SC 1185.

Members Bound to the Company

The memorandum and articles constitute a contract binding on the members of the company. The
members, as members, are bound to the company. Each member must, therefore, observe the
provisions of the memorandum and articles
Each member is bound by the covenants of the Memorandum as originally made and as altered from
time to time [Malleson v. National Insurance Co.]. In another case, the shareholders could not enter
into an agreement which was contrary to or inconsistent with the articles of association of the
company [V.B. Rangaraj v. V.B. Gopalkrishnan (1992) 73 Com Cases 201 (SC)

CASELAW
In Boreland’s Trustee v. Steel Brother and Co. Ltd. (1901) 1 Ch. 279, the articles of a company
contained a clause that on the bankruptcy of a member his shares would be sold to other persons
and at a price fixed by the directors. B, a shareholder was adjudicated bankrupt. His trustee in
bankruptcy claimed that he was not bound by these provisions and should be at liberty to sell the
shares at their true value. It was held that the trustee was bound by the articles, as the shares were
purchased by B in terms of the articles

Company bound to Members

A member can bring an action against the company for infringement by it of the memorandum or
articles. For example, an individual member can sue the company for an injunction restraining it from
improper payment of dividend [Hoole v. Great Western Railway (1867) 3 Ch. D. 262]. Further, the
company is bound to individual members in respect of their ordinary rights as members, e.g. the right
to receive share certificate in respect of shares allotted to them, or to receive notice of general
meeting, etc. Normally, action for breach of articles against the company can be brought only by a
majority of the members. Individual or minority members cannot bring such a suit except when it is
intended for enforcement of personal rights of members or to prevent the company from doing any
ultra vires or illegal act, fraud, or oppression and mismanagement.

Members bound to Member

A member of a company has no right to bring a suit to enforce the articles in his own name against
any other member or members. It is the company alone which can sue the offender so as to protect
the aggrieved member. It is in this way that the rights of members inter se are regulated. A
shareholder may, however, sue in his own name to restrain another, or others from doing fraudulent
or ultra vires acts. Articles do not affect or regulate the rights arising out of a commercial contract,
with which the members have no concern, i.e., rights completely outside the company’s relationship

Company not bound to Outsiders

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As between outsiders and the company, neither the memorandum nor the articles would give any
contractual rights to outsiders against the company or its members even though the names of
outsiders are mentioned in those documents in connection with the arrangements that the company
might have contemplated for carrying on its business. The articles do not confer any contractual rights
even upon a member in a capacity other than that of a member. To succeed, the party suing must
prove a contract outside and independent of the articles [Eley v. Positive Life Insurance Co., (1876)
1 E.X.D. 88].
In this case the articles provided that the solicitor to the company would not be removed from office
except for misconduct. Eley acted as solicitor to the company and also became a member of the
company. The company discontinued his services and then he sued the company for damages for
breach of contract. It was held that he had no cause of action because the articles did not constitute
any contract between the company and himself. His action was dismissed.
This rule, however, proved to be rather harsh and so the Courts later on modified it. The modified
rule is as follows:
(i) While the articles cannot create a contract between the company and any person other than
a member in his capacity as a member, they may indicate the basis upon which contracts
may be made by the company. If such a contract is entered into whether with a member of
the company or any other person, the conditions stated in the articles will be tacitly adopted
by that contract, unless expressly stated in the negative form or varied by the contract itself.
(ii) The question sometimes arises as to whether directors are bound by whatever is contained
in the articles. In case the directors contravene the provisions in the articles, the directors
render themselves liable for an action by members. On the other hand, members can also
ratify acts of directors. If any loss is incurred by the company, directors are liable to reimburse
to the company any loss so incurred.

ALTERATION OF ARTICLES OF ASSOCIATION OF A COMPANY - Section 14

However, in spite of the power to alter its articles, a company can exercise this power subject only to
certain limitations. These are:
1. The alteration must not exceed the powers given by the memorandum. In the event of conflict
between the memorandum and the articles, it is the memorandum that will prevail.
2. The alteration must not be inconsistent with any provisions of the Companies Act or any other
statute. But can be entrenched.
3. The Articles must not include anything which is illegal or opposed to public policy.
4. The alteration must be bona fide for the benefit of the company as a whole
5. The alteration must not constitute a fraud on the minority by a majority. If the alteration is not for
the benefit of the company as a whole, but for majority of shareholders, then the alteration would
be bad.
6. Articles must not compel an existing member to take or subscribe for more shares or in any way
increase his liability to contribute to the share capital, unless he gives his consent in writing.
7. By effecting alteration in its articles, a company cannot defeat escape from its contractual
obligation with any person. The company will always be liable in such a case
8. The Articles of Association cannot be altered so as to have retrospective effects. The articles only
operate from the date of the amendment [Pyare Lal Sharma v. Managing Director, J.K. Industries Ltd.
(1989) 3 Comp LJ (SL) 70].

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9. The alteration must not be inconsistent with an order of the Court- [oppression and
mismanagement] section 241- CA, 13.

Limitation on power to alter articles

1.Articles must not exceed the power given by the MOA
2. Must not be inconsistent with provisions of companies act
3. Alteration not be inconsistent with any alteration made by the tribunal
4.Alteration must not include anything with is legal or opposed to public policy
5.Alteration must not be Bonafide for the benefit of the company.
6.Alteration must not constitute fraud on the minority
7. Alteration of articles cannot operate retrospective.

CASELAW
In Re Cyrus Investments (P.) Ltd. vs. Tata Sons Ltd. [2019] 112 taxmann.com 264 (NCLAT)
If any company decides to alter its articles having effect of conversion of a 'Private Company' into
a 'Public Company' or a 'Public Company' into a 'Private Company', it is required to pass a special
resolution and as per sub-section (2) of section 14, it requires approval by Tribunal

In Re Walker v. London Tramway Co. (1879) 12 Ch. D. 70

The right to alter the articles is so important that a company cannot in any manner, either by
express provisions in the articles or by independent contract, deprive itself of the powers to alter
its articles

Manner of Altering AOA

A Company may alter its Articles in accordance with the above provisions in any of the following
manner
(a) by adoption of new set of articles;
(b) by addition/insertion of a new Clause/s;
(c) by deletion of a Clause/s;
(d) by amendment of a specific Clause/s;
(e) by substitution of a specific Clause/s.

Procedure of alteration of AOA

1. Issue not less than 7 days’ notice and agenda of Board meeting, or a shorter notice in case of
urgent business, in writing to every director of the company at his address registered with the
company and call a Board Meeting to consider the proposal of alteration of articles of association of
a company. (Section 173(3). Also follow the procedure prescribed for issuing and signing of notice of
Board Meeting.

2. Hold a meeting of Board of Directors-

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3. Prepare and circulate draft minutes within 15 days from the date of the conclusion of the Board
Meeting, by hand/speed post/registered post/courier/e-mail to all the Directors for their comments.
Follow the procedure prescribed for preparing, circulation, signing and compiling of Board Minutes.
(Revised Secretarial Standards-1 w.e.f. 1st October, 2017).

4. Send notice of the General meeting proposing the aforementioned special resolution to all the
shareholders, directors, auditors and other persons entitled to receive it, by giving not less than clear
21 days’ notice or shorter notice, if consent for shorter notice is given by at least 95% of members
entitled to vote at such meeting, either in writing or through electronic mode in accordance with the
Section 101 of the Act. Also follow the procedure prescribed for issuing and Signing of notice and
convening of General Meeting. (Revised Secretarial Standards-2)

5. Hold a shareholders meeting on the date fixed for the meeting and pass the Special Resolution for
altering the Articles of Association by 3/4th majority or unanimously, in case of insertion of provisions
of entrenchment by a private company in accordance with Section114 (2) of the Act read with Section
5(4) and Section 14 of the Companies Act, 2013

6. After passing special resolution, file a certified copy of special resolution with the Registrar in e-
Form MGT- 14 under Section 117 of the Act within 30 days of passing Special Resolution in general
meeting along with the following attachments:
(a) Copy of Special Resolution passed along with explanatory statement
(b) Notice for convening the General Meeting of the Company along with explanatory statement
as an optional attachment.
(c) Certified True copy of the Altered Articles including the provisions of entrenchment
inserted in the articles, if any.
(d) Shorter Notice Consent Letters from at least 95% of the members in case the General Meeting
was convened at a shorter notice

7. Follow the procedure prescribed for preparing, signing and compiling of minutes of General
Meeting. (Revised Secretarial Standards-2

8. Make necessary amendments in all the copies of Articles of association of the Company. [Section
15(1)]

Note:
1. Where a private company alters its articles in such a manner that they no longer include the
restrictions and limitations which are required to be included in the articles of a private company
under this Act, the company shall, as from the date of such alteration, cease to be a private company.
[First proviso to Section 14(1)]
2. Any alteration having the effect of conversion of a public company into a private company shall not
take effect except with the approval of the Tribunal which shall make such order as it may deem fit.
[Second proviso to Section 14(1)]
3. For effecting the conversion of a private company into a public company or vice versa, company
shall file the application in Form No.INC -27 along with the prescribed fee. [Section 14 and Rule 33 )

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 Effect of Altered Articles:

The altered articles shall bind the company and the members to the same extent as if they had been
signed by the company and by each member, means the articles as originally framed, or as they may
from time to time stand altered are valid under the provisions of the Act.
 There is clear power to alter the articles, and as altered, they bind members just in the same
way as did the original articles.
 The alteration is effective only when the procedure laid down in the Companies Act and
Memorandum is followed
 The changes shall be made in all the copies of the Articles of Association.

Incorporation Contracts and Agreements

A company being an artificial person can contract only through its agents. A contract will be binding
on a company only, if it is made on its behalf by any person acting under its authority, express or
implied. The powers of the company are defined by its Memorandum of Association and any contract
made beyond the limits laid down in the Memorandum of Association, will be ultra vires to the
company and void even if all the shareholders assent to it.
There are various types of pre-incorporation contracts that can be made by a company according to
their need before incorporation, such as a lease agreement, employment agreement, founder’s
agreement, shareholder agreement, etc.

There are two situations as discussed below in the case of every company (whether public or private)
in which contracts are made:
(a) Contracts made on behalf of the company before its incorporation—preliminary or pre-
incorporation contracts.
(b) Contracts made after the incorporation.

PRE-INCORPORATION CONTRACTS:

It is likely that due to non-availability of a suitable name, lack of clarity among the promoters or for
other reasons, the formation of a company may take time. In the meanwhile, the promoters may
enter into contracts on behalf of proposed company, like purchase of land, ordering machinery,
employing key personnel, investment tie up etc. and also incur expenses relating to incorporation of
the company. These must be ratified on the incorporation of the company

The Articles must authorize the directors to pay the expenses relating to registration of the company.
The directors do not have any implied power to incur pre-incorporation expenses.

Promoter’s Liability: During execution, the promoters enter into the contracts on behalf of the
company. Although, the promoters act as company’s agent to represent their interest, the principal
is not in existence while registration. The contracts entered into by the promoters are therefore not
binding on the company or third parties.

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The procedure for ratification of pre-incorporation contract is as under:-
 Ensure that the power to enter and adopt pre-incorporation contracts is given in the objects,
incidental or ancillary to the attainment of the main objects clause of the memorandum of
the company.
 Ensure that the articles also give power to the directors to adopt such pre-incorporation
contracts in the board meeting.
 Prepare a statement of the pre-incorporation contracts giving the amount involved in the
each contract separately.
 Convene the first board meeting after giving notice to all the directors of the company as per
section 173 and place the above-mentioned statement before the board meeting.
 The statement should be initialled by the Chairman of the Board meeting and then pass a
resolution adopting the pre-incorporation contract.

CASELAW
In Weavers Mills Ltd. v. Balkies Ammal [AIR 1969 Mad 462], In this case, the promoters had agreed
to purchase some properties for and on behalf of the company which was yet to be incorporated.
After incorporation of the company, the company assumed possession of the properties and
constructed some structures on the property. It was held that even in absence of conveyance of
property by the promoter in favor of the company after its incorporation, the company’s title over
the property could not be set aside.

In Kelner v. Baxter (ibid) three persons A B and C purported to enter into a contract as agents on
behalf of a company before its incorporation for the purchase of certain goods from Kelner and
signed it : “A, B and C, Directors”. The company later obtained the certificate of incorporation but
collapsed before the money was paid for the goods which were supplied to it by Kelner. It was held
that A, B and C were personally liable on the agreement and no subsequent ratification by the
company would relieve them from that liability without the assent of Kelner.

A company cannot acquire shares prior to its incorporation. Where a company was named as the
transferee in the share transfer forms prior to its incorporation, it was held that such transfers
could not be registered. [Inlec Investment (P) Ltd. v. Dynamatic Hydraulics Ltd., (1989) 3 Comp LJ
221, 225 (CLB)

MCQ:
1.What is the time limit provided within which the details of the alteration in the Articles of
Association of the company are to be furnished to the ROC as provided under section 14 of Companies
Act, 2013
(a) 15 days
(b) 30 days
(c) 45 days
(d) 60 days.

2. The directors of M/s Rajshekar Impex Private Limited wanted to alter its Articles of Association. For
that purpose, they visited Mr. Abhay, Practicing Company Secretary for redrafting of their AOA. They
want to understand the contents of AOA. As an expert, suggest which of the following will not be

3.34 | P a g e
included in article of association?
(a) Lien of share
(b) Objective of the company
(c) Rules governing reserve and funds
(d) Issues of share.

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 Lesson 4
SHARES AND SHARE CAPITAL- CONCEPTS
PART A: MEANING AND TYPES OF SHARES CAPTIAL

MEANING AND DEFINITION OF CAPTIAL

‘Capital’ can be defined as the significant element for initiating and running the business for its day
to day operations. As well the capital is required for funding its future prospects. Its meaning may
vary from person to person. Capital can be termed as the money that can be used to make more
money. For a business or say a company can have the capital can be from two sources
 Debt: That a company owes and required to be paid back
 Equity: The amount which investors put in the company in exchange to have ownership of
the company and the same amount is not required to be paid

Example: e, share capital of a company is Rs.5,00,000 which can be divided into 50,000 shares of Rs.10
each or 5,000 shares of Rs.100 each, whichever is feasible to the company

Definition of Share: Under Section 2(84) of the Companies Act, 2013, “share” means a share in the
share capital of a company and includes stock.

DEFINING THE CLASSES OF SHARE CAPITAL UNDER THE COMPANIES ACT 2013

1.Nominal authorised or registered captial: Section 2(8) under companies act 2013: such captial as
is authorized by the memorandum of a company to be maximnum amount of shares of the company.
2. issued captail: section 2(50) uner companies act 2013: such captial as the company issues from
time to time for subscription. It is that part of authorized or nominal captial which the company
issuses for the time being for public subcription and allotment.this is computed as the face or nominal
value.
3.subscribed captail: section 2(86) under companies act 2013: such part of captial which is for the
time being subscribed by the members of the company. It is that portion of the issed captial at face
value which has been subscribed for or taken up by the subscribers of shares in the company.it is
clear that the entire issued captial may or maynot be subscribed.
4.called up captial:section 2(15) uner companies act 2013: such part of captial which has been called
for payment. It is that portion of the subscribed captial which has been called up or demanded on the
shares of the company.
5.paid up share captial:section 2(64) under companies act 2013 : such aggreate amount of money
credited as paidup as is equivalent to the amount received as paid up in reaspect of shares issued and
also included any amount credited as apid up in respect of shares of the company but does not include
any other amount received in respect of such shares,by whateever name called.

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 TYPES OF SHARE CAPTIAL

(a) Equity share capital

(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may
be prescribed; and

Equity share capital: It means all share capital which is not preference share capital. It consists of the
following features
1. Equity Shares have voting rights at all general meetings of the company. These votes have
the affect of the controlling the management of the company.
2. Equity Shares have the right to share the profits of the company in the form of dividend and
bonus shares. However, even equity shareholders cannot demand declaration of dividend by
the company which is left to the discretion of the Board of Directors
3. When the company is wound up, payment towards the equity share capital will be made to
the respective shareholders only after payment of the claims of all the creditors and the
preference share capital

(b) Preference share capital

it means that part of the issued share capital of the company which carries or would carry a
preferential right with respect to
 payment of dividend, either as a fixed amount or an amount calculated at a fixed rate,
which may either be free of or subject to income-tax; an
 repayment, in the case of a winding up or repayment of capital, of the amount of the share
capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right
to the payment of any fixed premium or premium on any fixed scale, specified in the
memorandum or articles of the company.

As per section 55 of the Companies Act, 2013, no company limited by shares shall, issue any
preference shares which are irredeemable

Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both
of the following rights, namely

(a) that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-
clause (a) of clause (ii) of section 43, it has a right to participate, whether fully or to a limited extent,
with capital not entitled to the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up,
of the amounts specified in sub-clause (b) of clause (ii) of section 43, it has a right to participate,
whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus
which may remain after the entire capital has been repaid.

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Types of preference share capital

Cumulative Preference Shares The dividends are accumulated and therefore paid
before anything paid to equity shares
Noncumulative Preference Shares If company does not pay dividend in current year, claim
of preference shareholders is lost to that extent
Convertible Preference Shares They possess an option or right to convert into an
ordinary equity share at some agreed terms and
conditions
Non-convertible Preference Shares shares do not have the option to convert but has all the
other normal characteristics of Preference shares.
Participating preference shares t has an additional benefit of participating in surplus
profit or Surplus assets of the company apart from the
preferential dividend
Non-participating preference shares They are not entitled to participate in the surplus profits
or surplus assets of the company they are entitled to
only a fixed rate of dividend
Redeemable preference share Has a maturity date on which date the company will
repay the capital amount to the preference
shareholders the paying bank of capital is called
redemption as per section 55 of the companies act
2013. Preference shares shall be redeemed within a
period not exceeding 20 years (However infrastructure
companies can issue preferential shares redeemable
with a period not exceeding 30 years)
Irredeemable preference shares They do not have any maturity date and are repayable
only at the time of winding up of the company however
as per section 55 of companies act 2013 no company
can issue irredeemable preference shares

VOTING RIGHTS OF EQUITY SHAREHOLDERS AND PREFERENCE SHAREHOLDERS

EQUITY SHARE HOLFERS:

(a) every member of a company limited by shares and holding equity share capital therein, shall have
a right to vote on every resolution placed before the company; and
(b) his voting right on a poll shall be in proportion to his share in the paid-up equity share capital of
the company

PREFERENCE SHAREHOLDERS:

a) Section 47(2) states that every member of a company limited by shares and holding any preference
share capital therein shall, in respect of such capital, have a right to vote only on resolutions placed
before the company which directly affect the rights attached to his preference shares and, any

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resolution for the winding up of the company or for the repayment or reduction of its equity or
preference share capital and his voting right on a poll shall be in proportion to his share in the paid-
up preference share capital of the company

b) Provided that the proportion of the voting rights of equity shareholders to the voting rights of the
preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity
shares bears to the paid-up capital in respect of the preference shares.

c) Provided further that where the dividend in respect of a class of preference shares has not been
paid for a period of two years or more such class of preference shareholders shall have a right to
vote on all the resolutions placed before the company.

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 PART B: BASIC TERMS RELATED TO ISSUE & ALLOTMENT OF SECURITIES

SECURITIES

Securities has been defined under section 2(81) of Companies Act, 2013 to mean the securities as
defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. The relevant
section lays that securities include:-
As per Section 2(h) of the Securities Contracts (Regulation) Act, 1956, ‘securities’ include-
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like
nature in or of any incorporated company or other body corporate;
(ia) derivative;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such
schemes;
(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002;
(id) units or any other such instrument issued to the investors under any mutual fund scheme;
(ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being
a special purpose distinct entity which possesses any debt or receivable, including mortgage debt,
assigned to such entity, and acknowledging beneficial interest of such investor in such debt or
receivable including mortgage debt, as the case may be;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interests in securities

PROSPECTUS
In general parlance prospectus refers to an information booklet or offer document on the basis of
which an investor invests in the securities of an issuer company

1.Red herring prospectus

2. Shelf prospect
3.Abridged prospectus
4.Any document described or issued as a prospectus
5.Any notice,circular,advertisement,or other document inviting offer.

1. RED HERRING PROSPECTUS.

 Meaning: Red herring Prospectus means a prospectus which does not include complete
particulars of the quantum or price of the securities included therein. Book building issue is
facilitated by the concept of red herring prospectus whereby the price per security and
number of securities are left open to be decided post closure of the issue.
 It is issued prior to issue of Prospectus: A company proposing to make an offer of securities
may issue a red herring prospectus prior to the issue of a prospectus.
 Filing with the registrar: Such company proposing to issue a red herring prospectus shall file
it with the Registrar at least 3 days prior to the opening of the subscription list and the offer.

4.5 | P a g e
  Obligations under Red Herring Prospectus: A red herring prospectus shall carry the same
obligations as are applicable to prospectus and any variation between the red herring
prospectus and a prospectus shall be highlighted as variations in the prospectus.
 Filing of Red Herring Prospectus with Registrar and SEBI upon closing of Offer: Upon the
closing of the offer of securities under this section, the prospectus stating therein the total
capital raised, whether by way of debt or share capital, and the closing price of the securities
and any other details as are not included in the red herring prospectus shall be filed with the
Registrar and the Securities and Exchange Board.

2. SHELF PROSPECTUS:
 Shelf Prospectus means a prospectus in respect of which the securities or class of securities
included therein are issued for subscription in one or more issues over a certain period
without the issue of a further prospectus. In simple terms issuer is permitted to offer and
sell securities to the public without a separate prospectus for each act of offering for a certain
period.
 Such prospectus is to be submitted at the stage of the first offer of securities which shall
indicate a period not exceeding one year as the period of validity of such prospectus. The
validity period shall commence from the date of opening of the first offer of securities under
that prospectus.
 An information memorandum in Form PAS-2 is required to be filed by a company filing a shelf
prospectus which shall contain all material facts relating to
 new charges created
 changes in the financial position of the company as have occurred between
the first offer of securities or the previous offer of securities and the succeeding
offer of securities and
 such other changes as may be prescribed
 The section also provides a benefitting provision for the investors, where a company has
received applications for the allotment of securities along with advance payments of
subscription before the making of any such change, the company or other person shall
intimate the changes to such applicants and if they express a desire to withdraw their
application, the company or other person shall refund all the monies received as
subscription within 15 days.

Illustration: XYZ Ltd intends to raise share capital by issuing equity shares in different stages over
a certain period of time. However, the company does not wish to issue prospectus each and every
time of issue of shares. What can be the way out to the company to follow to avoid repeated
issuance of prospectus?
Solution: Company can issue shelf prospectus to avoid repeated issuance of prospectus

3. ABRIDGED PROSPECTUS:
According to section 2(1) of the Act “abridged prospectus” means a memorandum containing such
salient features of a prospectus as may be specified by the Securities and Exchange Board by making
regulations in this behalf.

Abridged prospectus is not required in following cases.

(a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with

4.6 | P a g e
respect to such securities; or
(b) in relation to securities which were not offered to the public.

4. Document Containing Offer of Securities for Sale to be Deemed Prospectus/ Offer for sale/
Deemed Prospectus – Section 25.
1. Any document by which the offer or sale of shares or debentures to public is made shall for all
purposes be treated as prospectus.
2. The document “Offer for sale” is an invitation to the general public to purchase the shares of a
company through an intermediary, such as an issuing house or a merchant bank. The issue house in
turn makes an “Offer for sale” to the public.
3. All enactments and rules of law as to the contents of prospectus and as to liability in respect of mis-
statements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply to
such Offer for sale.

According to the section in order to construe “Offer for Sale” either of the following conditions needs
to be fulfilled
(a) “Offer for sale” to the public was made within 6 months after the allotment or agreement to allot;
or
(b) at the date when the offer was made, the whole consideration to be received by the company in
respect of the securities had not been received by it.

As for the signing of the Prospectus the section provides that where a person making an offer to which
this section relates is a company or a firm, it shall be sufficient if the Offer document is signed on
behalf of the company by 2 directors of the company and in case of a firm by not less than one-half
of the partners in the firm, as the case may be.

5. Offer for Sale of shares by certain members of a company – Section 28:

Definition: Public Offer or an Offer for Sale (OFS) includes of securities to the public by an existing
shareholder, through issue of a prospectus. Under section 25 of the Act where a company allots or
agrees 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, for all
purposes, be deemed to be a prospectus issued by the company. The document “Offer for Sale” is an
invitation to the general public to purchase the shares of a company through an intermediary, such
as an issuing house or a merchant bank. A company may allot or agree to allot any shares or
debentures to an “Issue house” without there being any intention on the part of the company to
make shares or debentures available directly to the public through issue of prospectus. The issue
house in turn makes an “Offer for Sale” to the public
Additional Information: All enactments and rules of law as to the contents of prospectus and as to
liability in respect of misstatements, in and omissions from, prospectus, or otherwise relating to
prospectus, shall apply to such Offer for Sale. Following additional information to the matters
required to be stated in a prospectus:
(a) the net amount of the consideration received or to be received by the company in respect of the
securities to which the offer relates; and
(b) the time and place at which the contract where under the said securities have been or are to be
allotted may be inspected.

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Conditions to be fulfilled:
(a) “Offer for Sale” to the public was made within six months after the allotment or agreement to
allot; or
(b) at the date when the offer was made, the whole consideration to be received by the company in
respect of the securities had not been received by it

Signing Authority: It shall be sufficient if the offer document is signed on behalf of the company by
two directors of the company
Offer for Sale of shares by certain members of a company: Section 28 of the Act permits certain
members of a company, in consultation with Board of Directors, to offer, in accordance with the
provisions of any law for the time being in force, the whole or a part of their holdings of shares to the
public. The document by which the offer of sale to the public is made shall, for all purposes, be
deemed to be a prospectus issued by the company

The rules in this context provide that the provisions of Part I of Chapter III namely “Prospectus and
Allotment of Securities” and rules made there under shall be applicable to an offer of sale referred to
in section 28 except for the following, namely:-
(a) the provisions relating to minimum subscription;
(b) the provisions for minimum application value;
(c) statement to be made by the Board of directors in respect of the utilization of money; and
(d) any other provision or information which cannot be compiled or gathered by the offeror, with
detailed justifications for not being able to comply with such provisions

ZOMATO IPO DETAILS

4.8 | P a g e
 SHARE CERTIFICATE

Manner of issuing share certificates/ Duplicate Share Certificates

a) Rule 5 of Companies (share capital and debentures) rules 2014.
b) Board Resolution be passed and Letter of allotment must be surrendered to company.
c) Certificate shall be issued in Form No. SH-1
 A share certificate is a certificate issued to the members by the Company, specifying the
number of shares held by him and the amount paid on each share.
 According to Section 45 of the Companies Act, 2013 each share of the share capital of
the company shall be distinguished with a distinct number for its individual identification
 Exception to distinct number: if the shares are held by a person whose name is entered
as holder of beneficial interest in such share in the records of a depository.
 In terms of Section 46(1) of the Act, a certificate under the common seal, if any, of the
company OR signed by two directors OR by a director and the company secretary,
wherever, the company has appointed a Company Secretary. In case of an One Person
Company, it shall be sufficient if the certificate is signed by a director and the CS or any
other person authorised by the Board for the purpose.
d) Particulars of shares certificates to be entered in the Register of Members

Timeline for issue of share certificates:

S. No. Event Timelines

1 Subscribers to the memorandum within a period of two months from the date of
incorporation
2 any allotment of any of its shares within a period of two months from the date of
allotment
3 Transfer or transmission of within a period of one month from the date of
securities receipt by the company of the instrument of
transfer under sub-section (1) or, as the case may
be, of the intimation of transmission under sub-
section (2)
4 Any allotment of debenture within a period of six months from the date of
allotment

NOTE: In case of Specified IFSC Public Company/Specified IFSC Private Company- It shall deliver the
certificates of all securities to subscribers after incorporation, allotment, transfer or transmission
with in a period of 60 days.- Notification dated 4th January, 2017

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Duplicate Share Certificate:
Section 46 (2) states that a duplicate certificate of shares may be issued, if such certificate —
(a) is proved to have been lost or destroyed; or
(b) has been defaced, mutilated or torn and is surrendered to the company

Difference between original share certificates and duplicate share certificates:

BASIS ORIGINAL SHARE CERTIFICATES DUPLICATE SHARECERTIFICATE

Governing Rule 5 of the Companies (Share Capital Rule 6 of the Companies (Share
Provisions and Debentures) Rules 2014 Capital and Debentures) Rules 2014
issues On allotment of shares Renewal to be made only on
surrender of old certificate
Fee No fee is chargeable in case of original Company may charge fee for
share certificates duplicate share certificate as the
Board decides but not exceeding Rs.
50 per certificate
Timeline for Subscribers to Memorandum: 2 months Listed Company: 45 days Unlisted
issue Allotment: 2 months Company: 3 months from date of
Transfer/Transmission: 1 month submission of documents
Record FORM MBP-2 (Register of Members) FORM SH-2 (Register of Renewed and
Maintenance Duplicate Share Certificates

ISSUE OF RENEWED OR DUPLICATE SHARE CERTIFICATE:

a) Duplicate Certificate may be issued, if;
• is proved to have been lost or destroyed; or
• has been defaced, mutilated or torn and is surrendered to the company.
b) Company may charge fee for duplicate share certificate not exceeding Rs. 50 per certificate.
c) Company shall issue duplicate share certificate only after consent of Board
d) If the company is listed then the duplicate share certificates shall be issued within 45 days and if
the company is unlisted it shall issue the certificates within 3 months from the date of submission of
complete documents with the company.
e) The particulars of renewed and duplicate share certificate to be entered in Register of Renewed
and Duplicate Share Certificates maintained in Form No. SH.2.
f) The register shall be kept at the registered office of the company or at such other place where the
Register of Members is kept and it shall be preserved permanently
g) On fraudulent issue the company shall be punishable with: fine which shall not be less than five
times the face value of shares involved which may extend to ten times or rupees 10 crore whichever
is higher and every officer of the company who is in default shall be liable for action under section
447, for fraud.

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Splitting of Share Certificate:
A split certificate means a separate certificate claimed by a shareholder for a portion of his holding.
The advantages of a split certificate are that the shareholder may benefit in case of a transfer by way
of sale or mortgage in small lots and the right to multiply the certificates into as many shares held by
the shareholder.

Maintenance of share certificate forms and related books and documents [Rule 7 of Companies
(Share Capital and Debenture) Rules, 2014:

(1) All blank forms to be used for issue of share certificates shall be printed and the printing shall be
done only on the authority of a resolution of the Board and the blank form shall be consecutively
machine-numbered and the forms and the blocks, engravings, facsimiles and hues relating to the
printing of such forms shall be kept in the custody of the secretary or such other person as the Board
may authorise for the purpose; and the company secretary or other person aforesaid shall be
responsible for rendering an account of these forms to the Board.

(2) The following persons shall be responsible for the maintenance, preservation and safe custody of
all books and documents relating to the issue of share certificates, including the blank forms of share
certificates referred above, namely: —
(a) the committee of the Board, if so, authorized by the Board or where the company has a CS, the
CS; or
(b) where the company has no CS, a director specifically authorised by the Board for such purpose.
(3) All books mentioned above shall be preserved in good order not less than 30 years and in case
of disputed cases, shall be preserved permanently, and all certificates surrendered to a company shall
immediately be defaced by stamping or printing the word “cancelled” in bold letters and may be
destroyed after the expiry of three years from the date on which they are surrendered, under the
authority of a resolution of the Board and in the presence of a person duly appointed by the Board in
this behalf.

Query: In case the company on registering the transfer of shares has sent certificate to another
person. Elucidate.
Solution: In that case the company should surrender the original share certificate and if the said
certificate is not so surrendered, the same should be cancelled by the company and duplicate
certificate should be issued to the real owner. It was held in BPL Sanyo Technology Ltd. vs. Rahul
Agarwal [1995] 83 Comp Cas 885 decided by the Rajasthan High Court that the bank should
surrender the original share certificate and if the said certificate is not so surrendered, the same
should be cancelled by the company and duplicate certificate should be issued to the real owner.

Whether Share Certificate an Official Publication

In terms of section 44 of the Companies Act, 2013, the shares in a company are movable property
transferable in the manner provided in the articles of the company.
Section 46 of the Companies Act, 2013 provides that a certificate under the common seal of the
company specifying any share held by any member shall be prima facie evidence of the title of the
member to such share. [With the Companies (Amendment) Act, 2015 coming into force the common

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seal is no more mandatory.
Thus, shares are movable property transferable in the manner provided in the articles of the company
and that the share certificates are certificates of title and are movable property but are not
publications in the nature of prospectus, balance sheet, profit and loss account, notice or
advertisement

Legal Effect of Share Certificate

We have already stated that a share certificate is prima facie evidence to the title of the person whose
name is entered on it. It means that the share certificate is a statement by the company that the
moment when it was issued, the person named in it was the legal owner of the shares specified in it,
and those shares were paid-up to the extent stated. It does not constitute title, but it is merely
evidence of title. It is, however, a statement of considerable importance, for it is made with the
knowledge that other persons may act upon it in the belief that it is true, and this fact brings into
operation the doctrine of estoppel. As a result, a share certificate once issued by the company binds
it in two ways, namely:
(a) by estoppel as to title, and
(b) by estoppel as to payment

Estoppel as to Title: A share certificate once issued binds the company in two ways. In the first place,
it is a declaration by the company to the entire world that the person in whose name the certificate
is made out and to whom it is given is a shareholder in the company. In other words the company is
estopped from denying his title to the shares.

Estoppel as to Payment: If the certificate states that on each of the shares full amount has been paid,
the company is estopped as against a bonafide purchaser of the shares, from alleging that they are
not fully paid.
If a person knows that the statements in a certificate are not true, he cannot claim an estoppel against
the company Barrow case (1880) 14 Ch D 432: 42LT 891CA.
Despite everything, a certificate must be issued by someone who has the authority. For example,
where the secretary forged the signature of two Directors in a company, the company had refused to
register the holder of shares as a member. Further a certificate is not evidence as to the equitable
interest in, where an individual is aware of the false statements in a certificate, he will not be entitled
to claim an estoppel.

Personation of Shareholders [Section 57]

Meaning: To ‘personate’ means to pretend to be someone else, especially for fraudulent purpose
such as casting a vote in another person’s name. Personation and impersonation imply the same
thing.
Where any person deceitfully personates as an owner of any security or interest in a company, or of
any share warrant or coupon issued in pursuance of this Act, and
(i) thereby obtains or attempts to obtain any such security or interest or any such share warrant
or coupon; or
(ii) receives or attempt to receive any money due to any such owner.
He shall be punishable with imprisonment for a term which shall not be less than 1 year but which
may extend to 3 years and with fine which shall not be less than 1 lakh rupees, but which may extend
to 5 lakh rupees.

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 PART – C ISSUE AND ALLOTMENT OF SECURITIES

Financial markets have an important relationship with economic development. A company decides
to issue securities for different reasons; the main reasons being raising capital to meet its financial
requirements may be for starting a –
 new venture;
 repaying debts
 expansion and diversification etc
Primarily, issues can be classified as a Public issue, Rights or Preferential issues (also known as private
placements). While public and rights issues involve a detailed procedure, private placements or
preferential issues are relatively simpler.

Chapter III of the Companies Act, 2013 deals with “Prospectus and allotment of securities”, the
chapter is divided into two parts.
PART 1 DEALS WITH PUBLIC OFFER
PART 2 DEALS WITH ORIVATE PLACEMENT

As per Section 23(1), a public company may issue securities:

(a) to public through prospectus (“public offer”) by complying with the provisions of Part I of Chapter
III of the Companies Act, 2013; or
(b) through private placement by complying with the provisions of Part II of Chapter III of the
Companies Act, 2013; or
(c) through a rights issue or a bonus issue in accordance with the provisions of the Companies Act,
2013 and in case of a listed company or a company which intends to get its securities listed also with
the provisions of the SEBI Act, 1992 and the rules and regulations made there under.

Public offer includes initial public offer or further public offer of securities to the public by a
company, or an offer for the sale of securities to the public by an existing shareholder, through issue
of prospectus.

For a private company, Section 23(2) provides that a private company may issue securities:

(a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or
(b) through private placement by complying with the provisions of Part II Chapter III of the Act

GOVERNING LAWS

Issue of Securities is governed in the following manner

In the case of a Public Company, which is a listed entity or is desirous of listing its securities on the
recognized stock exchange in India, the issue of securities is governed by
 The Companies Act, 2013
 Securities Contract (Regulation) Act, 1956;
 The SEBI Act, 1992; and

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  The SEBI (ICDR) Regulations, 2018.
In the case of all issues by Private Companies, the same is governed by the Companies Act and the
power of administration is exercised by the Central Government, the Tribunal or the Registrar of
Companies as the case may be.
Section 24 of the Companies Act empowers the SEBI to regulate the matters relating to issue and
transfer of security non- payment of dividend by listed companies or those companies which intend
to get their securities listed. The explanation to Section 24 provides that all powers relating to all
other matters relating to prospectus, return of allotment, redemption of preference shares and any
other matter specifically provided in the Act shall be exercised by the Central Government, the
tribunal or the Registrar of Companies as the case may be. Further the power relating to forward
dealing and insider trading has been delegated to SEBI for listed companies or the companies which
intend to get their securities listed.

KINDS OF ISSUE OF SHARES

1. Issue of Securities at a Premium:

Meaning: A company may issue securities at a premium when it is able to sell them at a price above
par or above nominal value. The Companies Act, 2013, does not stipulate any conditions or
restrictions regulating the issue of securities by a company at a premium. However, the Companies
Act does impose conditions regulating the utilization of the amount of premium collected on
securities. Share Premium to be transferred to ‘Securities Premium Account.

Share Premium to be transferred to ‘Securities Premium Account’.

when a company issue shares at a premium, whether for cash or otherwise, a sum equal to the
aggregate amount of the premium received on those shares shall be transferred to a “securities
premium account “and the provisions of this Act relating to reduction of share capital of a company
shall except as provided in this section, apply as if the securities premium account were the paid-up
share capital of the company.

UTILISATION OF SECURITIES PREMIUM

In accordance with the provisions of Section 52(2) of the Act, the securities premium can be utilised
only for
(a) issuing fully paid bonus shares to members.
(b) writing off the balance of the preliminary expenses of the company.
(c) writing off commission paid, or discount allowed, or the expenses incurred on issue of shares or
debentures of the company.
(d) for providing for the premium payable on redemption of any redeemable preference shares or
debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68 (BUYBACK)

CASELAW
Utilisation of securities premium account for selective capital reduction

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 Brillio Technologies Pvt. Ltd. (Appellant) vs. Registrar of Companies, Karnataka & Ors.
(Respondents) dated April 19, 2021
The NCLAT observed that Security Premium Account can be utilized for making payment to non-
promoter shareholders. Further, it can be held that selective reduction is permissible if the non-
promoter shareholders are being paid fair value of their shares, whose shares have been
extinguished pursuant to selective capital reduction, after obtaining prior approval of the NCLT

Points to remember.
 Firstly, the premium cannot be treated as profit and as such the amount of premium is not
available for distribution as dividend.
 Secondly, the amount of premium whether received in cash or in kind must be kept in a
separate account, known as the “Securities Premium Account”.
 Thirdly, the amount of premium is to be maintained with the same sanctity as the share
capital.
 Any premium paid does not give the shareholder any preferential rights in case of a winding
up. Monies in the securities premium account cannot be treated as free reserves, as they are
in the nature of capital reserve.

Illustration: A company ABC Limited has issued shares on security premium and the amount has
been separately kept in Security Premium Account. Now the company wants to use this amount
for the following purposes. Guide as Company Secretary of the Company
a) Writing off the balance of preliminary expenses.
b) For distribution of dividend
c) For buyback of shares
Solution: The company can use the security premium amount for purpose (a) and (c) and not for
the purpose (b

2.PROHIBITION TO ISSUE THE SHARES AT DISCOUNT

Section 53 states that except as provided in section 54 (i.e. issue of sweat equity shares), a company
shall not issue shares at a discount. Any share issued by a company at a discount shall be void.

Exception: A company may issue shares at a discount to its creditors when its debt is converted into
shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with
any guidelines or directions or regulations specified by the Reserve Bank of India under the Reserve
Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.

CONCEPT OF ALLOTMENT OF SECURITIES

Allotment
 Allotment of any securities of a company offered to the public for subscription shall be made
only when the amount stated in the prospectus as the minimum amount has been
subscribed and payable on application for the amount so stated have been paid to and
received by the company by cheque or other instrument.
 Minimum Amount of Application: The amount payable on application on every security shall
not be less than five per cent of the nominal amount of the security or such other percentage

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 or amount, as may be specified by the Securities and Exchange Board by making regulations
in this behalf.
 FORM PAS-3: Whenever a company having a share capital makes any allotment of securities,
it shall file with the Registrar a return of allotment, within thirty days thereafter, in Form PAS-
3, along with the fee as specified in the Companies (Registration Offices and Fees) Rules,
2014.
 When a contract is not reduced to writing, the company shall furnish along with the Form
PAS-3 complete particulars of the contract stamped with the same stamp duty as would have
been payable if the contract had been reduced to writing and those particulars shall be
deemed to be an instrument within the meaning of the Indian Stamp Act, 1899, and the
Registrar may, as a condition of filing the particulars, require that the stamp duty payable
thereon be adjudicated under section 31 of the Indian Stamp Act, 1899. Further a report of a
registered valuer in respect of valuation of the consideration shall also be attached along with
the contract of sale if relating to property or an asset or a contract for services, as the case
may be.
 In the case of issue of bonus shares, a copy of the resolution passed in the general meeting
authorise the issue of such shares shall be attached to the Form PAS-3.

Case laws
Related to return of allotment
(A) In case of Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange Association Ltd. 1963-(033)-Com
Cases0862-SC, the Supreme Court held that the exchange was not liable to file any return of the
forfeited shares under Section 75(1)of the Companies Act,1956 [Corresponds to section 39 of the
Companies Act, 2013] when the same were re-issued. The Court observed that when a share is
forfeited and re-issued, there is no allotment, in the sense of appropriation of shares out of the
authorised and unappropriated capital and approved the observations of Harries C.J. in S.M.
Nandy’s case that: “On such forfeiture all that happened was that the right of the particular
shareholder disappeared but the shares considered as a unit of issued capital continued to exist
and was kept in suspense until another shareholder was found for it”;
(B) In case of Alote Estate vs. R.B. Seth Hiralal Kalyanmal Kasliwal [1970] 40 Com Cases 1116 (SC),
inadequacy of consideration, the shares will be treated as not fully paid and the shareholder will
be liable to pay for them in full, unless the contract is fraudulent;
(C) Harmony and Montage Tin and Copper Mining Company; Spargo’s case (1873).
Any payment which is presently enforceable against the company such as consideration payable
for property purchased, will constitute payment in cash;
(D) In case of Chokkalingam vs. Official Liquidator AIR 1944, allotment of shares against promissory
notes shall not be valid

FORM PAS-3 AND ITS ATTACHMENTS

1.list of allottees certified by the signatory in all cases to be attached.

2. In case of fully or partly paid up for consideration other than cash

a. Contract of sale if relating to property or an assets
b. A contract for service or other consideration
c. A report of a registered valuer in respect of valuation of the consideration.

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3In case of Issue of bonus shares
a. A copy of the resolution passed in the general meeting authorizing the issue of such shares.

Refund of money:
Time to refund the application money 15 days from closure of issue
Interest to be paid in case of default in 15% p.a
repayment of application money

General Principles regarding Allotment

The following general principles should be observed with regard to allotment of securities:
(1) The allotment should be made by proper authority. The proper authority may be the Board
Directors of the company, or a committee authorised to allot securities on behalf of the
Board.
(2) Allotment of securities must be made within a reasonable time. An applicant may refuse to
take securities if the allotment is made after a long time. (As per Section 56 within a period
of two months from the date of allotment in the case of allotment of any of its shares.
(3) The allotment should be absolute and unconditional. Securities must be allotted on same
terms on which they were applied for and as they are stated in the application for securities.
Allotment of securities subject to certain conditions is also not valid.
(4) The allotment must be communicated. Allotment will be taken as a valid communication even
if the letter is lost in transit.
(5) Allotment against application only.
(6) Allotment should not be in contravention of any other law. If securities are allotted on an
application of a minor, the allotment will be void.

Case Laws:
(A) An allotment may be valid even if some defect was there in the appointment of
directors but which was subsequently discovered. (Royal British Bank v. Turquand)
(B) Grant applied for certain shares in a company, the company dispatched letter of
allotment to him which never reached him. It was held that he was liable for the
balance amount due on the shares. [Household Fire And Carriage Accident Insurance
Co. Ltd. v. Grant (1879) 4 E.D. 216]

ISSUE OF SECURITIES

1. Private placement of shares

2. Equity shares with differential voting rights
3. Issue and redemption of preference shares
4. Rights issue
5. Employee stock option scheme

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 6. Issue of shares on private basis
7. Bonus shares
8. Sweat equity shares

1.PRIVATE PLACEMENT OF SHARES – Section 42

a) Meaning:
As per Explanation I to Section 42(3), “private placement” means any offer or invitation to subscribe
or issue of securities to a select group of persons by a company (other than by way of public offer)
through private placement offer-cum-application, which satisfies the conditions specified in this
section.

b) Application to Private Placement:

As per section 42(4) states that every identified person willing to subscribe to the private placement
issue shall apply in the private placement and application issued to such person along with
subscription money paid either by cheque or demand draft or other banking channel and not by
cash. However, a company shall not utilise monies raised through private placement unless
allotment is made and the return of allotment is filed with the Registrar.

c) Time limit for allotment and payment of interest/refund of subscription money otherwise:
Section 42(6) states that a company:
 Allot the securities within 60 days from receipt of application money.
 If not allotted, Repay the application money within 15 days from the expiry of 60 days
 If not repaid, liable to pay interest @12% p.a. from the expiry of the 60th day.

d) Private Placement offer-cum-application.

Section 42(1) provides that a company may, subject to the provisions of this section, make a private
placement of securities. Section 42(3) reads, a company making private placement shall issue private
placement offer and application in Form PAS-4 serially numbered and addressed specifically to the
person to whom the offer is made and shall be sent to him, either in writing or in electronic mode
within 30 days of recording the name of such person pursuant to sub-section (3) of section 42

e) Maximum number of persons to whom offer can be made and other incidental matters:
a private placement shall be made only to a select group of persons who have been identified by the
Board, whose numbers shall not exceed 200, excluding the qualified institutional buyers and
employees of the company being offered securities under a scheme of employees stock option in
terms of provisions of clause(b) of sub-section (1) of section 62, in a financial year subject to such
conditions as may be prescribed.
f) Return of allotment

 Filing with the Registrar a return of allotment (FORM PAS-3) within fifteen days from the
date of the allotment, including a complete list of all allottees, with their full name, address,
PAN No. and e-mail id of security holder, the class of security held, the date of allotment of
security, the number of securities held, nominal value and amount paid on such securities

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 and particulars of consideration received if the securities were issued for consideration other
than cash
 Penalty for non-filing Form PAS-3: The company, its promoters and directors shall be liable
to a penalty for each default of one thousand rupees for each day during which such default
continues but not exceeding twenty-five lakh rupees

g) Subscription money to be kept in a separate bank account

Proviso to Section 42(6) states that monies received on application received by the company shall be
kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other
than-
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities.
No information to Public about issue: Section 42(7) states that no company issuing securities under
this section shall release any public advertisements or utilise any media, marketing or distribution
channels or agents to inform the public at large about such an issue.

Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the
following procedure in connection with Private Placement
1. Special resolution is required for issuing private placement
Note: Where the amount to be raised through offer or invitation for non-convertible debentures does
not exceed the limit specified in Section 180(1)(c), in such cases Board Resolution would be adequate.
2. An offer or invitation to subscribe securities under private placement shall not be made to persons
more than 200 in the aggregate in a financial year. The limit of two hundred persons shall exclude the
qualified institutional buyers and employees [ESOP]
NOTE: 1) This rule shall not apply to Non-banking financial companies and housing finance companies;
if they are complying with regulations made by the Reserve Bank of India or the National Housing
Bank respectively.
2) It is further clarified that the restrictions aforesaid would be calculated individually for each kind
of security that is equity share, preference share or debenture.
3. A private placement offer cum application letter – i.e., Form PAS-4 shall be serially numbered and
addressed specifically to the person to whom the offer is made and shall be sent to him, within 30
days of recording the name of such person.
4. Company shall maintain a complete record of private placement offers in Form PAS-5. (record of
private placement)
Penalty According to section 42(10), if a company makes an offer or accepts monies in contravention
of section 42, the company, its promoters and directors shall be liable for a penalty which may extend
to the amount raised through the private placement or two crore rupees, whichever is lower, and the
company shall also refund all monies with interest to subscribers within a period of thirty days of the
order imposing the penalty

CONDITIONS APPLICABLE TO PRIVATE PLACEMENT

1. Special Resolution of Shareholders:
The explanatory statement annexed to the notice for shareholders’ approval shall contain the
following disclosure:
(a) particulars of the offer including date of passing of Board Resolution;

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(b) kinds of securities offered and the price at which such security is being offered;
(c) basis or justification for the price (including premium, if any) at which the offer or invitation is
being made;
(d) name and address of valuer who performed valuation;
(e) amount which the company intends to raise by way of such securities;
(f) material terms of raising such securities, proposed time schedule, purposes or objects of offer,
contribution being made by the promoters or directors either as part of the offer or separately in
furtherance of objects; principle terms of assets charged as securities
2. Records to be maintained: The Company shall maintain a complete record of private placement
offers in Form PAS-5.
3. Filing with ROC:
FORM PAS-3 within 15 days of allotment.
FORM MGT-14 for filing with ROC Special Resolution/Board Resolution within 30 days.

2. EQUITY SHARES WITH DIFFERENTIAL VOTING RIGHTS

While Section 43 enables companies to issue equity shares with differential rights as to dividend,
voting rights etc.
Further, Rule 3 states that the provisions of these rules shall apply to
(i) all unlisted public companies.
(ii) all private companies; and
(iii) listed companies so far as they do not contradict or conflict with any other regulation framed in
this regard by the Securities and Exchange Board of India

Conditions for issuing shares with differential rights-Rule 4 of Companies (Share Capital and
Debentures) Rules, 2014
Only a company limited by shares can issue equity shares with differential rights asto dividend, voting
or otherwise.

Such company has to comply with the following conditions, namely: -

(a) Articles of association should authorize.
(b) Authorized by an ordinary resolution. When the equity shares of a company are listed on a
recognized stock exchange, the issue of such shares shall be approved by the shareholders through
postal ballot and to provide the facility to members to vote by electronic means under section 108.
Disclosures in the explanatory statement to the notice of the meeting:
• The total number of shares to be issued with differential rights;
• the details of the differential rights;
• the percentage of the shares with differential rights to the total post issue paid up equity
share capital including equity shares with differential rights issued at any point of time;
• the reasons for the issue;
• the price at which such shares are proposed to be issued either at par or at premium;
• the basis on which the price has been arrived at;

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 • the percentage of voting right which the equity share capital with differential voting right
shall carry to the total voting right of the aggregate equity share capital;
• the change in control, if any, in the company that may occur consequent to the issue of
equity shares with differential voting rights;
• the pre and post issue shareholding pattern along with voting rights as per Regulation 31 of
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
(c) the voting power in respect of shares with differential rights of the company shall not exceed
seventy four percent of total voting power including voting power in respect of equity shares with
differential rights issued at any point of time;
(d) the company has not defaulted in filing financial statements and annual returns for three
immediately preceding financial years.
(e) the company has no subsisting default in the payment of a declared dividend or repayment of its
matured deposits or redemption of its preference shares or debentures or payment of interest. (f)
the company has not defaulted in payment any term loan from a public financial institution or State
level financial institution or scheduled Bank or dues with respect to statutory payments relating to its
employees to any authority or default in crediting the amount in Investor Education and Protection
Fund to the Central Government.
NOTE: A company may issue equity shares with differential rights upon expiry of five years from the
end of the financial year in which such default was made good.
(g) the company has not been penalized by Court or Tribunal during the last three years of any offence
under the RBI Act, 1934, the SEBI Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign
Exchange Management Act, 1999 or any other special Act, under which such companies being
regulated by sectoral regulators.

Disclosures in the Boards’ Report

The Board of Directors are required to disclose the details of the issue of equity shares with
differential rights in the Board’s Report for the financial year in which was completed.
(a) the total number of shares allotted with differential rights;
(b) the details of the differential rights relating to voting rights and dividends;
(c) the percentage of the shares with differential rights to the total post issue equity share capital
with differential rights issued at any point of time and percentage of voting rights which the equity
share capital with differential voting right shall carry to the total voting right of the aggregate equity
share capital;
(d) the price at which such shares have been issued;
e) the particulars of promoters, directors or key managerial personnel to whom such shares are
issued;
(f) the change in control, if any, in the company consequent to the issue of equity shares with
differential voting rights;
(g) the diluted Earning Per Share pursuant to the issue of each class of shares, calculated in
accordance with the applicable accounting standards;
(h) the pre and post issue shareholding pattern along with voting rights in the format specified under
subrule (2) of rule 4.

NOTE: 1. The company shall not convert its existing equity share capital with voting rights into
equity share capital carrying differential voting rights and vice versa.
2. The holders of the equity shares with differential rights enjoys all other rights such as bonus shares,

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rights shares etc., which the holders of equity shares are entitled to, subject to the differential rights
with which such shares have been issued.
3. Register of Members to contain the details of equity shareholders having differential voting rights

Procedure for Issue of Equity Shares with Differential Voting Rights:

1. If articles doesn’t authorize, the Articles of Association needs to be altered.
2. Hold the Board meeting to issue the notice of general meeting for issuance of equity share with
differential rights.
3. If the company is listed, then intimate within 30 minutes of the closure Board Meeting concerned
Stock Exchange about the decision taken at the Board Meeting.
4. Pass the ordinary resolution in the general meeting or through Postal Ballot under section 110 of
the Act.
5. Within 30 days of allotment, file with the Registrar Form PAS-3
6. In case of listed company, send copies of the notice and a copy of the proceedings of the general
meeting to the stock exchange within 24 hours of the occurrence of event.
7. Complete all other proceedings for the issue of certificate of shares with differential voting rights
making necessary entries in various registers
8. Intimate the details of allotment of shares to the Depository immediately on allotment of such
shares.

Previous Year Questions

Q) Which of the following companies is eligible to issue shares with Differential voting rights(DVRs)
during the financial year 2022-20203? (June 2022) (3M)

TYPE OF COMPANY Nature of default Whether AOA of the company

authorised to issue shares
with DVR
A.ltd-unlisted company Company has made default in yes
filing annual return for the
financial years 2018-19 &
2019-20. Default was made
good during the financial year
2020-2021
B.pvt ltd ………….. no

ANS: Section 43 of the Companies Act, 2013 read with Rule 4 of Companies (Share Capital and
Debentures) Rules, 2014 provides that company can issue shares with Differential Voting Rights
(DVRs) if company's Articles authorise it to issue differential voting right shares. Shares with DVRs can
be issued by company limited by shares only
Company cannot issue shares with DVRs if company has defaulted in filing financial statements and
annual returns for three financial years immediately preceding the financial year in which it is decided
to issue such shares. The provisions of section 43 of the Companies Act, 2013 are applicable to public

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as well as private company.
In light of the above provisions:
• A Ltd. can issue shares with DVRs. Company would be ineligible to issue shares with s if it has
defaulted in filing financial statements and annual returns for three financial years immediately
preceding the financial year which it is proposed to be issued. A Ltd. has made default during financial
year 2018-19 & 2019- 20 only in respect of filing annual return, which was made good during the
financial year 2020-2021. Articles of Association of A Ltd. also authorise the company to issue shares
with DVRs
. • B Pvt. Ltd. cannot issue shares with DVRs unless it alters its Articles of Association in such a manner
so as to authorise it to issue shares with DVRs.

3.ISSUE AND REDEMPTION OF PREFERENCE SHARES:

Section 55 - Company cannot issue irredeemable preference shares or redeemable preference shares
with the redemption period beyond 20 years.
Exceptions.
 issue and redemption of preference shares by company in infrastructure projects
 A company engaged in infrastructural projects may issue preference shares for a period
exceeding twenty years but not exceeding thirty years
subject to the redemption of a minimum ten percent of such preference shares per year from the
twenty first year onwards or earlier, on proportionate basis, at the option of the preference
shareholders.
Proviso to Section 55(2) states that
(a) Preference Shares shall be redeemed out of the profits of the company available for dividend or
out of the proceeds of a fresh issue of shares made for the purposes of such redemption;
(b) Such shares shall be redeemed only if they are fully paid;
(c) where such shares are proposed to be redeemed out of the profits of the company, a sum equal
to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital
Redemption Reserve Account.
(d) Premium, if any, payable on redemption of any preference shares issued on or before the
commencement of this Act by any such company shall be provided for out of the profits of the
company or out of the company’s securities premium account

NOTE: In case of Unredeemed preference shares, including the dividend thereon, it may,
• with the consent of the holders of three-fourths in value of such preference shares and
• with the approval of the Tribunal,
• issue further redeemable preference shares equal to the amount due. On such issue of the
unredeemed preference shares shall be deemed to have been redeemed.

Prescriptions under Companies (Share Capital and Debentures) Rules, 2014 with regard to issue and
redemption of Preference shares (Rule 9)
 Conditions for issue:

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 • authorised by its articles
• authorized by passing a special resolution (Explanatory Statement required)
• no subsisting default in the redemption of preference shares issued earlier/ dividend

➢ Resolution authorising preference shares to set out certain particulars

(a) the priority with respect to payment of dividend or repayment of capital vis-a-vis equity shares;
(b) the participation in surplus fund;
(c) the participation in surplus assets and profits, on winding-up which may remain after the entire
capital has been repaid;
(d) the payment of dividend on cumulative or non-cumulative basis.
(e) the conversion of preference shares into equity shares.
(f) the voting rights;
(g) the redemption of preference shares.

 Procedure to issue Preference Shares

1) Issue the notice of general meeting along with the explanatory statement, to provide the required
details.
2) In the case of listed entity, intimate the stock exchange at least two working days in advance of the
date of board meeting (Refer Regulation 29 of Listing Regulations)
3) Pass special resolution and file with the registrar Form MGT-14 within 30 days of passing the
resolution
4) Note: in case of One Person Company for the purpose of passing of ordinary and special resolution,
it shall be sufficient if the resolution is communicated by the member to the company and entered in
the minutes book and signed and dated by the member and such date shall be deemed to be the date
of meeting for all purpose under this act.
5) Within 30 days of allotment file with the registrar the Return of allotment in Form PAS-3.
6) Update the register of members maintained under section 88 after issue of preference shares.
7) Deliver the share certificates within a period of 2 months from the date of allotment. 8) Intimate
the details of allotment of shares to the Depository immediately on allotment of such shares

 Redemption of preference shares

A company may redeem its preference shares only on the terms on which they were issued or
(a) at a fixed time or on the happening of a particular event;
(b) any time at the company’s option; or
(c) any time at the shareholder’s option The notice of redemption of preference shares shall be filed
by the company with the Registrar in Form SH-7 along with altered MOA within 30 days of redemption
of preference shares

Remedies available for Preference shareholders in relation to redemption of preference shares

The National Company Law Appellate Tribunal (NCLAT) in the matter of Bank of Baroda (Appellant)
vs. Aban Offshore Limited (Respondent), Company Appeal (AT) No.35 of 2019, held that intention
of the legislature while promulgating Section 55 of the Companies Act, 2013 was to compulsorily

4.24 | P a g e
 provide for redemption of preference shares by doing away with the issue of or redeemable
preference shares. Therefore, even though there is no specific provision stipulated under the
Companies Act, 2013 through which relief can be sought by preference shareholders in case of
non- redemption by the company or consequent non-filing of petition under Section 55 of the said
Act, the intention of the legislature being clear and absolute, Tribunal’s inherent power can be
invoked to get an appropriate relief by an aggrieved preference shareholder(s).

4. FURTHER ISSUE OF SHARE CAPTIAL -

1. Rights issue
2. Employees stock option scheme
3. Issue on prefererntial basis

Further issue of share capital – Section 62

Where at any time, a company having a share capital proposes to increase its subscribed capital by
the issue of further shares, such shares shall be offered to-

EXISTING EMPLOYEES [u/s ANY PERSONS [u/s Government to

SHAREHOLDERS [u/s 62(1)(b)] 62(1)(c)] convert its debt-to-
62(1)(a)] ESOP PREFERENTIAL OFFER equity
RIGHTS ISSUE 62(4)
Who, at the date of Under a Scheme Of Whether or not those Government may, by
the offer, are holders Employees’ Stock persons include the an order under
of equity shares of the Option persons referred to in section 62(4), direct
company. Subject to special Clause (a) or (b) that any debenture or
In proportion to the resolution passed by If it is authorised by a loan shall be
paid-up share capital company (Ordinary special resolution converted into shares
on those shares Resolution in Private in a company and no
Either for cash or for a
Company) appeal has been
By sending a letter of consideration other
preferred to the
offer Subject to such Subject to such than cash, if the price
Tribunal such appeal
conditions as may be conditions as may be of such shares is
has been dismissed,
prescribed. prescribed. determined by the
the memorandum of
valuation report of a
such company shall,
registered valuer
shall stand increased
Subject to such
by an amount equal to
conditions as may be
the amount of the
prescribed
value of shares which
such debentures or
loans or part thereof
has been converted
into.

1. RIGHTS ISSUE:
The offer shall be made by notice:
• specifying the number of shares offered and

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• limiting a time not being less than 15 days or such lesser number of days as may be prescribed
and not more than 30 days from the date of the offer within which the offer, if not accepted, shall
be deemed to have been declined
The Companies (Share Capital and Debentures) Rules 2014, rule 12A For the purposes of sub-clause
(i) of clause (a) of sub-section (1) of section 62, the time period within which the offer shall be made
for acceptance shall be not less than 7 days from the date of offer.
• The offer shall be deemed to include right of renunciation, unless the articles of the company
otherwise provide; and
• The said notice shall be sent to all the existing shareholders at least three days before the opening
of the issue.
 If the offer is rejected by the equity shareholders after the expiry of the time specified in the
notice aforesaid; or
 on receipt of earlier intimation from the person to whom such notice is given that he declines
to accept the shares offered;
 the Board of Directors may dispose of them in such manner which is not dis-advantageous to
the shareholders and the company.
Right to renounce the offer: Unless the articles of the company otherwise provide, the Directors must
state in the notice of offer of rights shares the fact that the shareholder has also the right to renounce
the offer in whole or in part, in favour of some other persons. However, in case of a private company
case ninety percent of the members of a private company have given their consent in writing or in
electronic mode, the periods lesser than those specified in the said sub-clause or sub- section shall
apply.

Restrictions: The restrictions contained in Section 62 of the Act regarding issue of further shares do
not apply to:-
(a) Increase of the subscribed capital of a company caused by the exercise of an option as a term
attached to the debentures issued or loans raised by the company to convert such debentures or
loans into shares in the company [Section 62(3)].
The terms of issue of such debentures or loan containing such an option have been approved before
the issue of such debentures or the raising of loans by a special resolution passed by the company in
the general meeting.
(b) conversion of part or whole of the debentures issued to or loans obtained from any Government
in shares of the company in pursuance of a direction issued by that Government in public interest on
such terms and conditions as appear to be fair and reasonable to the Government even if the terms
of issue of such debentures or loans do not contain a term providing for an option for such conversion
[Section 62(4)]

NOTE: However, in case of a private company, if 90% of the members give their consent the periods
lesser than those above shall apply
Procedure: Is same as share issue. SH-7 (Increase in authorised share capital if needed), MGT-14,
PAS – 3.
.

CASE LAW

Related to further issue of shares by a company

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 (1) Nanalal Zaver vs. Bombay Life Assurance Co. Ltd., AIR 1950 SC 172: (1950): Section 81
(Corresponding to section 62 of the Companies Act, 2013) is intended to cover cases where the
Directors decide to increase the capital by issuing further shares within the authorised limit,
because it is within that limit that the Directors can decide to issue further shares, unless, of course,
they are precluded from doing that by the Articles of Association of the company. Accordingly, the
section becomes applicable only when the Directors decide to increase the capital within the
authorised limit, by issue of further shares.

The above judgement was followed by the Supreme Court in Needle Industries (India) Ltd. vs.
Needle Industries Newey (India) Holding Ltd.(1981). The Court pointed out that the Directors of a
company must exercise their powers for the benefit of the company. The Directors are in a fiduciary
position and if they does not exercise powers for the benefit of the company but simply and solely
for personal aggrandisement and to the detriment of the company, the Court will interfere and
prevent the Directors from doing so;

(2) Needle Industries (India) Ltd. vs. Needle Industries Newey (India) Holding Ltd.: The power to
issue shares need not be used only when there is a need to raise additional capital. The power can
be used to create a sufficient number of shareholders to enable a company to exercise statutory
powers or to enable it to comply with statutory requirements.

The Department of Company Affairs, now Ministry of Corporate Affairs has clarified that ‘one year’
specified in the section is to be counted from the date on which the company has allotted any share
for the first time;

(3) Balkrishan Gupta vs. Swadeshi Polytex Ltd. (1985): Although the term ‘holders of the equity
shares’ is used in Sub-section (1)(a) and ‘members’ in Sub-section (1A)(b) of Section 81
(Corresponding to section 62 of the Companies Act, 2013), the two terms are synonymous and
mean persons whose names are entered in the register of members;

(4) In Worldwide Agencies (P) Ltd. vs. Margaret T. Desor, (1990), it was held that persons who have
become entitled to the shares of a deceased member can exercise all the membership rights of the
deceased irrespective of the fact whether their name is in the register of members or not;
(5) Mathalone (R) vs. Bombay Life Assurance Co. Ltd. AIR 1953 SC 385: (1954): The Court held that
the transferor could not be compelled by the transferee to take up on his behalf the rights shares
offered to the transferor and all that he could require the transferor to do was to renounce the
rights issue in the transferee’s favour

2.EMPLOYEE STOCK OPTION SCHEME.

ESOP gives its employees right to purchase, or to subscribe for, the shares of the company at a future
date at a pre-determined price.

Who is an Employee?

(a) a permanent employee of the company who has been working in India or outside India; or
(b) a director of the company, whether a whole-time director or not but excluding an independent
director; or
(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding

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company of the company but does not include-
(i) an employee who is a promoter or a person belonging to the promoter group; or
(ii) a director who either himself or through his relative or through anybody corporate, directly or
indirectly, holds more than ten percent of the outstanding equity shares of the company.
NOTE: Startup company are exempted from (i) and (ii) provisions up to 10 years from date of its
incorporation

(a)Details in Explanatory statement:

(a) total number of stock options to be granted;
(b) identification of classes of employees entitled to participate in the Employees Stock Option
Scheme.
(c) the appraisal process for determining the eligibility of employees to the Employees Stock Option
Scheme.
(d) the requirements of vesting and period of vesting.
(e) the exercise period and process of exercise.
(f) the Lock-in period, if any.
(g) the maximum number of options to be granted per employee and in aggregate.
(h) the conditions under which option vested in employees may lapse e.g., in case of termination of
employment for misconduct.
(i) the specified time period within which the employee shall exercise the vested options in the event
of a proposed termination of employment or resignation of employee; and
(j) a statement to the effect that the company shall comply with the applicable accounting standards.

(b)Varying the terms of ESOP requires special resolution

Rule 12(5) states that the company may by special resolution, vary the terms of Employees Stock
Option Scheme not yet exercised by the employees provided such variation is not prejudicial to the
interests of the option holders. The notice shall disclose full of the variation, the rationale therefor,
and the details of the employees who are beneficiaries of such

(c) Minimum one year vesting period

there shall be a minimum period of one year between the grant of options and vesting of option. In
a case where options are granted by a company under its Employees Stock Option Scheme in lieu of
options held by the same person under an Employees Stock Option Scheme in another company,
which has merged or amalgamated with the first mentioned company,

Death/Permanent disability/Resignation of employees who were granted with options.

In case the employee suffers a permanent incapacity while in employment, all the options granted
to him as on the date of permanent incapacitation, shall vest in him on that day.
In the event of resignation or termination of employment, all options not vested in the employee as
on that day shall expire. However, the employee can exercise the options granted to him which are
vested within the period specified in this behalf, subject to the terms and conditions under the
scheme granting such options as approved by the Board.

(d) Company has freedom to specify lock-in period

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the company shall have the freedom to specify the lock-in period for the shares issued pursuant to
exercise of option.

(e) No right of dividend or voting till exercise of option

the Employees shall not have right to receive any dividend or to vote or in any manner enjoy the
benefits of a shareholder in respect of option granted to them, till shares are issued on exercise of
option

(f) Board of directors shall disclose in the Directors’ Report for the year, the details of the Employees
Stock Option Scheme issued during the year.
(g) Company shall maintain a Register of Employee Stock Options in Form No. SH.6 about option
granted

PROCEDURE
1) Board Resolution
2) Special Resolution- (Exception: In case of Private company ordinary resolution shall be sufficient)
3) The company may by special resolution, vary the terms of Employees Stock Option Scheme not yet
exercised by the employees provided such variation is not prejudicial to the interests of the option
holders.
4) There shall be a minimum period of one year between the grant of options and vesting of option.
5) Form MGT – 14 within 30 days to be filed with ROC
6) Form PAS – 3 Once the allotment is made, the company shall within 30 days of allotment.
7) Deliver the share certificates of allotted shares within a period of 2 months.
8) Update the Register of Employee Stock Options in Form No. SH.6.
9) The details to be disclosed in Board of Directors should be ensured.

3.ISSUE OF SHARES ON PREFERENTIAL BASIS.

Meaning: The expression ‘Preferential Offer’ means an issue of shares or other securities, by a
company to any select person or group of persons on a preferential basis and does not include shares
or other securities offered through a public issue, rights issue, employee stock option scheme,
employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository
receipts issued in a country outside India or foreign securities.
This section deals with issue of shares to persons other than existing shareholders either for cash or
for a consideration other than cash, if —
(a) The company in General Meeting passes a special resolution to this effect; and
(b) The price of such shares is determined by the valuation report of a registered valuer.

NOTE: Preferential issue of share is required to comply with section 42 also which relates to private
placement. However, in case of preferential offer to one or more existing members the aspects
relating to letter offer shall not apply.

RULE 13 OF COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014

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Preferential offer by unlisted companies to comply with the rules [Rule 13(2) & (3)]

The preferential offer shall be made in accordance with the provisions of the Act and rules made
hereunder and subject to compliance with the under mentioned requirements:
(a) The issue is authorized by its articles of association;
(b) The issue has been authorized by a special resolution of the members;
(c) Explanatory statement to be annexed to the notice of the general meeting
(i) The objects of the issue;
(ii) The total number of shares or other securities to be issued;
(iii) The price or price band
(iv) Basis on which the price has been arrived at along with report of the registered valuer;
(v) The class or classes of persons to whom the allotment is proposed to be made;
(vi) The proposed time within which the allotment shall be completed;
(vii) The justification for the allotment proposed to be made for consideration other than cash
together with valuation report of the registered valuer.
(viii) The pre issue and post issue shareholding pattern of the company in the prescribed
format.
(d) the preferential allotment shall be completed within a period of 12 months from the date of
passing of the special resolution if not completed within 12 months, another special resolution shall
be passed.
(e) where convertible securities are offered on a preferential basis, the price of the resultant shares
(equity) pursuant to conversion shall be determined-
(i) either upfront at the time when the offer is made, based on valuation report.
(ii) at the time, which shall not be earlier than 30 days to the date when the holder of
convertible security becomes entitled to apply forshares, on the basis of valuation report of
the registered valuer given not earlier than sixty days of the date when the holder of
convertible security becomes entitled to apply for shares:
(g) Where the preferential offer of shares is made for a non-cash consideration, such non-cash
consideration shall be treated in the following manner in the books of account of the company-
(i) Where the non-cash consideration takes the form of a depreciable or a mortizable asset,
it shall be carried to the balance sheet of the company in accordance with the accounting
standards; or
(ii) Where clause (i) is not applicable, itshall be expensed as provided in the accounting
standards.

PROCEDURE:

1) Authorized by Articles
2) Board meeting
3) Special resolution – MGT-14
4) Complete allotment within 12 months of SR.
5) PAS-3 within 30 days of allotment

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 6) Share certificates – within 2 months of allotment.

PRIVATE PLACEMENT OF SHARES – Section 42

As per Explanation I to Section 42(3), “private placement” means any offer or invitation to subscribe
or issue of securities to a select group of persons by a company (other than by way of public offer)
through private placement offer-cum-application, which satisfies the conditions specified in this
section.

1. A company making private placement shall issue private placement offer and application in
such form to identified persons, whose names and addresses are recorded by the company.
The private placement offer and application shall not carry any right of renunciation.
2. Private placement shall be made only to “identified persons”, whose number shall not
exceed fifty or such higher number as may be prescribed* excluding the qualified
institutional buyers and employees of the company [ESOP] in a financial year.
Note: Where a company, listed or unlisted, makes an offer to more than the prescribed
number of persons, whether the payment for the securities has been received or not or
whether the company intends to list its securities or not, the same shall be deemed to be the
public offer and shall be accordingly dealt.
3. Every identified person willing to subscribe shall apply along with subscription money paid
either by cheque or demand draft or other banking channel and not by cash.
4. A company shall not utilise monies raised through private placement unless allotment is
made and the return of allotment is filed with the Registrar.
5. No fresh private placement offer shall be made unlessthe allotments with respect to any offer
or invitation made earlier have been completed or withdrawn.
6. A company shall allot its securities within 60 days from the date of receipt of the application
money for such securities and if the company is not able to allot, it shall repay the application
money within 15 days from the expiry of 60 days and if the company fails to repay, it shall
repay that money with interest at 12 % per annum from the expiry of the 60th day.
7. Subscription money to be kept in a separate bank account and shall not be utilised for any
purpose other than; (a) for adjustment against allotment of securities; or (b) for the
repayment of monies where the company is unable to allot securities.
8. Offer to be made specifically addressing persons i.e., it shall not release any public
advertisements or utilise any media, marketing or distribution channels or agents to inform
the public
9. Penalty: if a company makes an offer or accepts monies in contravention of this section, the
company, its promoters and directors shall be liable for a penalty which may extend to the
amount raised through the private placement or two crore rupees, whichever is lower, and
the company shall also refund all monies with interest to subscribers within a period of thirty
days of the order imposing the penalty.

Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the
following procedure in connection with Private Placement
1. Special resolution isrequired for issuing private placement*
Note: Where the amount to be raised through offer or invitation for non-convertible debentures
does not exceed the limit specified in Section 180(1)(c), in such cases Board Resolution would be

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adequate.
2. An offer or invitation to subscribe securities under private placement shall not be made to persons
more than 200 in the aggregate in a financial year. The limit of two hundred persons shall exclude
the qualified institutional buyers and employees [ESOP]
NOTE:
1) This rule shall not apply to Non-banking financial companies and housing finance
companies; if they are complying with regulations made by the Reserve Bank of India or the
National Housing Bank respectively.
2) It is further clarified that the restrictions aforesaid would be calculated individually for
each kind of security that is equity share, preference share or debenture.

3. A private placement offer cum application letter – i.e., Form PAS-4 shall be serially numbered and
addressed specifically to the person to whom the offer is made and shall be sent to him, within 30
days of recording the name of such person.
4. Company shall maintain a complete record of private placement offers in Form PAS-5.

BONUS SHARES – Section 63

 A company may, if its Articles provide, capitalize its profits by issuing fully-paid bonus shares.
 A company converts the large accumulated profits into capital and divides the capital among the
existing members in proportion to their entitlements.
 Members do not have to pay any amount for such shares. They are given free.

Advantages of Issuing Bonus Shares:

1. Fund flow is not affected adversely.

2. Market value of the company’s shares comes down to their nominal value by issue of bonus shares.
3. Market value of the members’ shareholdings increases with the increase in number of shares in
the company.
4. ‘Bonus shares’ is not an income. Hence, it is not a taxable income.
5. Paid-up share capital increases with the issue of bonus shares.

Sources for issue of Bonus shares

(i) its free reserves;

(ii) the securities premium account; or
(iii) the capital redemption reserve account.

NOTE: No issue of bonus shares shall be made by capitalising reserves created by the revaluation of
assets.

Conditions & Procedure:

Bonus shares shall not be used, unless—

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a. it is authorised by its articles;
b. it has, on the recommendation of the Board, been authorised in the general meeting of the
company;
c. it has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it;
d. it has not defaulted in respect of the payment of statutory dues of the employees, such as,
contribution to provident fund, gratuity and bonus;
e. the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up.
f. The bonus shares shall not be issued in lieu of dividend.
g. the company which has once announced the decision of its Board recommending a bonus issue,
shall not subsequently withdraw the same.
h. Procedure:
• Articles should authorize
• Authorised in the general meeting of the company
• MGT-14 – on passing special resolution
• PAS – 3
• Issue share certificates within 60 days.

Previous Year Questions

Q:) The Board of Directors of Aakash Ltd., a listed company, in its meeting held on 1st April, 2021
announced a proposal for issue of bonus shares to all equity shareholders of the company in the
ratio of 1: 1. On 1st May, 2021, the directors at another meeting passed a resolution to reverse the
proposal of bonus issue announced on 1st April, 2021. Discuss the validity of the resolutions?

(Dec 2021) (3m)

ANS: A listed company is required to comply with the requirements of the Companies Act, 2013, rules
made thereunder and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 for issue
of bonus shares.

In terms of section 63(2) of the Companies Act, 2013, no company shall capitalise its profits or
reserves for the purpose of issuing fully paid-up bonus shares, unless it has, on the recommendation
of the Board, been authorised in the general meeting of the company.

Further, as per Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014, a company
which has once announced the decision of its Board recommending a bonus issue, shall not
subsequently withdraw the same.

Also, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 provides that a bonus
issue, once announced, shall not be withdrawn.

In view of the above provisions, the Board of Directors of Aakash Limited once announced the issue
of bonus share on 1st April 2021 to all equity shareholders of the company in the ratio of 1:1 cannot
subsequently reverse the proposal of such issue in another board meeting. Hence, the first board
resolution proposing the bonus share is valid but second board resolution for reversal is not valid

SWEAT EQUITY SHARES

What are Sweat Equity Shares?

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sweat equity shares means such equity shares issued by a company to its directors or employees at a
discount or for consideration, other than cash for providing their know-how or making available rights
in the nature of intellectual property rights or value additions, by whatever name called.

What are Value additions?

It means actual or anticipated economic benefits derived or to be by the company from an expert or
a professional for providing know-how or making available rights in the nature of intellectual property
rights, by such person to whom sweat equity is being issued for which the consideration is not paid or
included in the normal remuneration payable under the contract of employment, in the case of an
employee.

Who are Employees?

(i) the expressions ‘‘Employee’’ means-
(a) a permanent employee of the company who has been working in India or outside India.
(b) a director of the company, whether a whole-time director or not; or
(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or
outside India, or of a holding company of the company.
Conditions for Issue of Sweat Equity Shares

1. Authorisation by Special Resolution

2. Matters to be stated in Special Resolution:

The following are clearly specified in there solution:
(a) number of shares; (b) current market price; (c) consideration, if any; and (d) class or classes of
directors or employees to whom such equity shares are to be issued.

3. Compliance with SEBI Regulations: Where shares are listed on a recognized stock exchange, the
company issuing sweat equity shares should comply with the regulations made in this behalf by SEBI.

4. Sweat Equity Shares have the same rights and limitations as that of Equity Shares: Section 54(2)
provides that the rights, limitations, restrictions and provisions as are for the time being applicable to
equity shares shall be applicable to the sweat equity shares issued under this section and the holders
of such shares shall rank pari passu with other equity shareholders.

5.limits: The company shall not issue sweat equity shares for more than 15% of the existing paid up
equity share capital in a year OR shares of the issue value of rupees five crores, whichever is higher.
- The issuance of sweat equity shares in the company shall not exceed 25% of the paid-up equity
capital of the company at any time

Provided further that a startup company may issue sweat equity shares not exceeding 50% of its paid-
up capital up to 10 years from the date of its incorporation or registration.

Note: A startup company, as defined by Ministry of Commerce and Industry, Government of India,
may issue sweat equity shares not exceeding fifty percent of its paid-up capital up to ten years from
the date of its incorporation or registration

6. Lock In- The sweat equity shares shall be locked in a period of 3 years from the date of allotment
and that shall be stamped in bold or mentioned in any other prominent manner on the share
certificate.

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7. Special Resolution remains valid for not more than 12 months: Rule 8(3) states the special
resolution authorising the issue of sweat equity shares shall be valid for making the allotment within
a period of not more than twelve months from the date of passing of the special resolution.

8. Sweat equity shares for non-cash consideration: The non-cash consideration shall be treated in the
following manner in the books of account of the company
a) where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall
be carried to the balance sheet of the company in accordance with the accounting standards; or
(b) where clause (a) is not applicable, it shall be expensed as provided in the accounting standard

9. Sweat equity shares forming part of managerial remuneration: The amount of sweat equity shares
issued shall be treated as part of managerial remuneration for the purposes of sections 197 and 198
of the Act, if the following conditions are fulfilled, namely –
(a) the sweat equity shares are issued to any director or manager; and
(b) they are issued for consideration other than cash, which does not take the form of an asset
which can be carried to the balance sheet of the company in accordance with the applicable
accounting standards.

10. Sweat equity shares and compensation aspects

If the sweat equity shares are not issued pursuant to acquisition of an asset
Rule 8(11) states that in respect of sweat equity shares issued during an accounting period, the
accounting value of sweat equity shares (i.e., fair value by Registered valuer shall be treated as a form
of compensation to the employee or the director in the financial statements of the company.
If the shares are issued pursuant to acquisition of an asset
Rule 8(12) states that if the shares are issued pursuant to acquisition of an asset, the value of the
asset, as determined by the valuation report, shall be carried in the balance sheet as per the
Accounting Standards and such amount to the accounting value of the sweat equity shares that is in
excess value of the asset acquired, as per the valuation report, shall be treated as a form of
compensation to the employee or the director in the financial statements of the company

11.Maintenance of Register.
Register of Sweat Equity Shares in Form No. SH.3 and shall forthwith enter therein the particulars of
Sweat Equity Shares issued under section 54. The Register of Sweat Equity Shares shall be maintained
at the registered office of the company or such other place as the Board may decide.

Illustration: The share capital of the company ABC Pvt. Ltd. is `20 Crore. Mr. Raj is appointed as
Managing Director of the company, the company wants to compensate him by issue of shares
for supplying technical know-how without any cost. What can be the quantum of the shares
that can be allotted?

Solution: the paid-up capital of the company is `20 crore. Hence he can be allotted with 15% of
existing equity i.e. (15% of `20 crore up to `3 Crore) value of shares or ` 5 crore whichever is
higher

Difference between Private Placement and Preferential Allotment

Particulars private Placement Preferential Allotment

Governing Section 42 Section 62(1)(c)

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 Meaning Offer or invitation made to a Issue of shares to any persons
select group of persons whether or not they include
members and employees
Securities to be issued Any security including Equity, Only Equity and other
Preference and Debenture securities convertible into
Equity can be issued
Shareholders’ Approval Required Required
Allottees Any person as identified by the To members, employees or
Board any other persons
Disclosures in Explanatory Only a few as per Rule 14 of the Detailed disclosures as per
Statement Companies (Prospectus and Rule 13 of the Companies
Allotment of Securities) Rules, (Share Capital and
2014 Debentures) Rules, 2014
Offer Letter In prescribed format (PAS-4) No format prescribed
Mode of payment Through any banking channel but Either for cash or
not cash consideration other than cash
time limit for allotment Within 60 days of receipt of Within 12 months from the
subscription money date of passing Special
Resolution
Authorisation in Articles Not Required Required
Bank Account Separate Bank account is No such requirement.
required

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 PART D: ALTERATION IN SHARE CAPTIAL, BUYBACK AND REDUCTION OF SHARE CAPTIAL

ALTERATION OF SHARE CAPITAL (SECTION 61)

(a) Increase its authorised share capital

(b) Consolidate and divide, all or any of its existing shares into a larger denomination than of its existing
shares e.g., by consolidating ten shares of Rs. 10/- each into one share of Rs. 100/- each.
Note: No consolidation and division which results in changes in the voting percentage of shareholders
shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner.
(c) Convert all or any of its fully paid-up shares into stock or reconvert that stock into fully paid-up
shares of any denomination.
(d) Sub-divide its existing shares or any of them, into shares of smaller amount than is fixed by the
Memorandum, so however, that in the sub-division the proportion between the amount paid and the
amount, if any, unpaid on each reduced shall be the same as it was in the case of the share from which
the reduced share is derived.
(e) Cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken
up or agreed to be taken by any person and diminish the amount of the share capital by the amount
of the shares so cancelled.

NOTE.
1.The cancellation of shares shall not be deemed to be a reduction of share capital.
2. In order to alter its capital clause in the Memorandum, the company requires authority in its articles.
But if the articles give no power to this effect, the articles must be amended by a special resolution
before the power to alter the capital clause can be exercised by the company [Re. Patent Invert Sugar
Co. (1885) 31 Ch. D. 166].
3.Any amendment in Articles of Association will require the filing of Form MGT-14 with ROC within 30
days of passing the special resolution.
4.An ordinary resolution will be enough for altering capital clause in the Memorandum of Association.

BUY BACK OF SECUTITIES (SECTION 68)

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 Conditions for Buy Back

1. Authorisation by AOA: The primary requirement is that the articles of association of the
company should authorise buy-back. In case, such a provision is not available, it would be
necessary to alter the articles of association to authorise buy-back. Buy-back can be made
with the approval of the Board of Directors at a Board meeting and/or by a special resolution
passed by shareholders in a general meeting, depending on the quantum of buy-back.

2. Approval:

Board of Directors can approve buy-back up to 10% of the total paid-up equity capital and
free reserves of the company and authorize such buy-back by means of a resolution passed
at the meeting.
Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up
capital and free reserves of the company, in respect of any financial year

3. Quantum: The buy-back is twenty-five per cent. or less of the aggregate of paid-up capital
and free reserves of the company. In respect of buy-back of equity shares in any financial year
the reserve of 25% shall be construed with respect to its paid-up equity capital in that financial
year.
4. Debt Equity Ratio after Buy Back The ratio of the aggregate of secured and unsecured
debts owed by the company after buy-back is not more than twice the paid-up capital and its
free reserves. However, the Central Government may, by order, notify a higher ratio of the
debt to capital and free reserves for a class or classes of companies

5. Fully paid up shares: all the shares or other specified securities for buy-back are fully paid-
up
6. Time Gap between two Buy Back: No offer of buyback under this sub-section shall be made
within a period of one year reckoned from the date of the closure of the preceding offer of
buy-back, if any

7. Completion of Buy Back: Every buy-back shall be completed within a period of one year
from the date of passing of the special resolution, or as the case may be, the resolution passed
by the Board.

8. Methods of Buy Back: The buy-back may be— (a) from the existing shareholders or security
holders on a proportionate basis; (b) from the open market; (c) by purchasing the securities
issued to employees of the company pursuant to a scheme of stock option or sweat equity.

9. Extinguishment of shares: When a company buys-back its own shares or other specified
securities, it shall extinguish and physically destroy the shares or securities so bought back
within seven days of the last date of completion of buy-back.

10. Prohibition of further issue of shares: Where a company completes a buy-back of its
shares or other specified securities under this section, it shall not make a further issue of the

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same kind of shares or other securities including allotment of new shares under clause (a) of
sub-section (1) of section 62 or other specified securities within a period of six months except
by way of a bonus issue or in the discharge of subsisting obligations such as conversion of
warrants, stock option schemes, sweat equity or conversion of preference shares or
debentures into equity shares.

11. Period of offer for buy-back: The offer for buy-back shall remain open for a period of not
less than 15 days and not exceeding 30 days from the date of dispatch of the letter of offer.
Provided that where all members of a company agree, the offer for buy-back may remain
open for a period less than fifteen days.

12. Register of Buy Back: When a company buys-back its shares or other specified securities
under this section, it shall maintain a register of the shares or securities so bought in Form
No. SH-10, the consideration paid for the shares or securities bought back, the date of
cancellation of shares or securities, the date of extinguishing and physically destroying the
shares or securities and other particulars.

The said register shall be maintained at the registered office of the company and shall be kept
in the custody of Secretary of the company or any other person authorized by the Board in
this behalf. The entries in the register shall be authenticated by the Secretary of the company
or any other person authorized by the Board in this behalf.

13. Dispatch of letter of offer to shareholders: The letter of offer shall be dispatched to the
shareholders or security holders immediately after filing the same with the Registrar of
Companies but not later than 21 days from its filing with the Registrar of Companies.

14. Filing with ROC:

 Filing of Special Resolution (Form MGT-14): Within 30 days of passing special
resolution for buy back
 Letter of Offer (Form No. SH-8): The company which has been authorized by a special
resolution shall, before the buy-back of shares, file with the Registrar of Companies a
letter of offer in Form No. SH.8, along with the fee. Such letter of offer shall be dated
and signed on behalf of the Board of directors of the company by not less than two
directors of the company, one of whom shall be the managing director, where there
is one.
 Declaration of Solvency (Form No. SH-9): The company shall file with the Registrar,
along with the letter of offer, and in case of a listed company with the Registrar and
the Securities and Exchange Board, a declaration of solvency in Form No. SH.9 along
with the fee and signed by at least two directors of the company, one of whom shall
be the managing director, if any, and by an affidavit to the effect that the Board of
Directors of the company has made a full inquiry into the affairs of the company as a
result of which they have formed an opinion that it is capable of meeting its liabilities
and will not be rendered insolvent with in a period of one year from the date of
declaration adopted by the Board.
 Return (Form No. SH-11): The company, after the completion of the buy-back shall
file with the Registrar, and in case of a listed company with the Registrar and the
Securities and Exchange Board of India, a return in the Form No. SH.11 along with the

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 fee and a certificate in Form No. SH.15 signed by two directors of the company
including the managing director, if any, certifying that the buy-back of securities has
been made in compliance with the provisions of the Act and the rules made
thereunder.
15. Completion of verification of offers: The company shall complete the verifications of the
offers received within fifteen days from the date of closure of the offer and the shares or
other securities lodged shall be deemed to be accepted unless a communication of rejection
is made within twenty-one days from the date of closure of the offer.

16. Opening of Bank Account: The company shall immediately after the date of closure of the
offer, open a separate bank account and deposit therein, such sum, as would make up the
entire sum due and payable as consideration for the shares tendered for buy-back in terms
of these rules. The company shall within seven days of the time specified in sub-rule (7)-
(a) make payment of consideration in cash to those shareholders or security holders whose
securities have been accepted; or
(b) return the share certificates to the shareholders or security holders whose securities have
not been accepted at all or the balance of securities in case of part acceptance.

17. Other Points to be considered: In case the number of shares or other specified securities
offered by the shareholders or security holders is more than the total number of shares or
securities to be bought back by the company, the acceptance per shareholder shall be on
proportionate basis out of the total shares offered for being bought back.

Penalty

If a company makes any default in complying with the provisions of Section 68 or any
regulation made by the Securities and Exchange Board, in case of listed companies, the
company shall be punishable with fine which shall not be less than one lakh rupees but which
may extend to three lakh rupees and every officer of the company who is in default shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to
three lakh rupees.

Advantages of buy back

1. It is an alternative mode of reduction in capital without requiring approval of the Court/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.
6. to prevent 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

Circumstances prohibiting buy-back [Section 70(1)]

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No company shall directly or indirectly purchase its own shares or other specified securities—

• through any subsidiary company including its own subsidiary companies

• through any investment company or group of investment companies; or
• if a default, is made by the company, in the repayment of deposits accepted either before or after
the commencement of this Act, interest payment thereon, redemption of debentures or preference
shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable
thereon to any financial institution or banking company: However, the buy-back is not prohibited, if
the default is remedied and a period of three years has lapsed after such default ceased to subsist.
[Proviso to Section 70(1)]
• No company shall, directly or indirectly, purchase its own shares or other specified securities in case
such company has not complied with the provisions of
- sections 92 (Annual Return),
- section 123 (Declaration of Dividend),
- section 127 (punishment for failure to distribute dividend) and
- section 129 (Financial Statement).

Illustration:
PQR Limited has the following:
Equity Share Capital: Rs. 800 crores of Rs. 10 each
General Reserve: Rs. 500 crores
Security Premium Account: Rs. 200 crores
Secured Loans: Rs. 100 Crore
Advise the maximum quantum up to the company can buy back its shares with Board Approval and
Shareholders’ approval.

Solution:
Maximum Quantum with Board Approval: (800 +500)*10 % = 130 crore i.e. 13 crore shares can be
bought back with Board Approval Maximum Quantum with Shareholders’ Approval: (800 +500)*25
% = 325 crore i.e. 32.5 crore shares can be bought back with Shareholders’ Approval

Previous Year Questions

Q: Monika Ltd. wants to purchase its own 5,00,000 equity shares @ `10/- each out of the following:
`lakh

(a) Unsecured Loans 25

(b) Balance of Free Reserves 15

(c) Securities Premium Account 10

Examine the legality of the above transactions for the buy-back of securities of the company under
the provisions of the Companies Act, 2013. (JUNE 2021) (3M)

ANS: According to Section 68(1) of the Companies Act, 2013 a company may purchase its own shares
or other specified securities (known as "buy-back") out of:
(i) its free reserves; or

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 (ii) the securities premium account; or
(iii) the proceeds of the issue of any shares or other specified securities.

However, no buy-back of any kind of shares or other specified securities shall be made out of the
proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. Thus,
in given case Monika Ltd. can purchase its own 5,00,000 equity shares @10 each out of free reserves
and from the securities premium account in accordance with the provisions of the Companies Act, 2013
But it cannot do buy-back from the amount of Unsecured Loan as it will be contravention of the
provisions of Section 68 of the Companies Act, 2013.

REDUCTION OF SHARE CAPTIAL (SECTION 66)

• The need of reducing share capital may arise in case of accumulated business losses, assets of
reduced or doubtful value or having paid up capital in excess of wants of the Company etc.
• As a result, the original capital may either have become lost or a company may find that it has more
resources that it can profitably employ. In either of these cases, the need may arise to reduce the
share capital.

Conditions for reduction of share capital

1. Approval of members by passing Special Resolution: It is required to get the matter for
reduction in share capital to get it approved with member’s approval by special resolution.

2. Filing of Form MGT-14 with ROC: Special resolution passed for reduction of share capital
is required to be filed with ROC within 30 days.

3. Confirmation by Tribunal: Subject to confirmation by the Tribunal on an application by the

company, a company limited by shares or limited by guarantee and having a share capital
may, by a special resolution, reduce the share capital in any manner and in particular.

4. Methods for reduction of share capital:

(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up, or
Example: Where the shares are of face value of `100 each with `65 has been paid, the company may
reduce them to `65 fully paid-up shares and thus relieve the shareholders from liability on the
uncalled capital of `35 per share

(b) either with or without extinguishing or reducing liability on any of its shares,
(i) cancel any paid-up share capital which is lost or is unrepresented by available assets, or
Example: Where the shares of face value of `100 each fully paid-up is represented by `65 worth of
assets. In such a case, reduction of share capital may be effected by cancelling `35 per share and
writing off similar amount of assets.

(ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its
memorandum by reducing the amount of its share capital and of its shares accordingly:
Example: Shares of face value of `100 each fully paid-up can be reduced to face value of `75 each
by paying back `25 per share.

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5. Notice by Tribunal: The Tribunal shall give notice of every application made to it under sub-
section (1) to:
1. central government ( power have been delegated to RD )
2. registrar
3.The securities and exchange board in the case of listed companies
4. The creditors of the company

6. The claims of every creditor of the company must be discharged: The Tribunal may, if it is
satisfied that the debt or claim of every creditor of the company has been discharged or
determined or has been secured or his consent is obtained, make an order confirming the
reduction of share capital on such terms and conditions as it deems fit.

7. The Accounting Treatment for the company must be in compliance with accounting
standards: Proviso to Section 66(3) provides that no application for reduction of share capital
shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the
company for such reduction is in conformity with the accounting standards specified in
section 133 or any other provision of this Act and a certificate to that effect by the company’s
auditor has been filed with the Tribunal.

8. Filing of the certificate by company’s auditor with Tribunal: A certificate to that fact that
the accounting treatment, proposed by the company for such reduction is in conformity with
the accounting standards specified in section 133 or any other provision of this Act by the
company’s auditor has been filed with the Tribunal.

9. Publication of the order of the Tribunal: The order of confirmation of the reduction of
share capital by the Tribunal under Section 66(3) shall be published by the company in such
manner as the Tribunal may direct.

10. Deliver a copy of the Tribunal to Registrar: The company shall deliver a certified copy of
the order of the Tribunal under sub-section (3) and of a minute (which means document
submitted to Tribunal detailing the reduction and approved by the tribunal. Here the word
minute has different meaning from the word minutes used for proceedings) approved by the
Tribunal showing –
(i) the amount of share capital;
(ii) the number of shares into which it is to be divided;
(iii) the amount of each share; and
(iv) the amount, if any, at the date of registration deemed to be paid-up on each share, to the
Registrar within thirty days of the receipt of the copy of the order, who shall register the same
and issue a certificate to that effect

No liability of member

A member of the company, past or present, shall not be liable to any call or contribution in
respect of any share held by him exceeding the amount of difference, if any, between the
amount paid on the share, or reduced amount, if any, which is to be deemed to have been

4.43 | P a g e
paid thereon, as the case may be, and the amount of the share as fixed by the order of
reduction

Action under Section 447 i.e. Punishment for Fraud

If any officer of the company:

 knowingly conceals the name of any creditor entitled to object to the reduction;
 knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
 abets or is privy to any such concealment or misrepresentation as aforesaid; He shall
be liable under section 447.

CASE LAWS
1) Birla Global Finance Ltd. Company Petition No. 228 of 2002 Connected With C.A. No.
149 of 2002, in re: In this case the court held that the redemption of preference shares is
nothing but repayment of the preference capital and amounts to reduction of share capital.

2) Sandvik Asia Ltd. v. Bharat Kumar Padamsi (2009 (3) Bom CR 57): Here the court held
that once it is established that non-promoter shareholders are being paid fair value of their
shares, and an overwhelming majority of them have voted in favour of resolution for
reduction of share capital, the court will not be justified in withholding the sanction to the
resolution.

3) Elpro International Ltd. (2009 4 Comp LJ 406 (Bom): The Bombay High Court while
dealing with a special resolution passed in favour of reduction of capital, held that a
company can reduce the share capital of any shareholder in any way so long as the
procedure is fair and gets the approval of the majority shareholders.

4) Indian National Press (Indore) Ltd., In re, (1989) 66 Com Cases 387, 392 (MP)- The need
for reducing capital may arise in various ways, for example, trading losses, heavy capital
expenses, and assets of reduced or doubtful value. As a result, the original capital may
either have become lost or a company may find that it has more resources than it can
profitably employ. In either case, the need may arise to adjust the relation between capital
and assets.

In the matter of Josco Jewellers Private Limited Vs. RoC, Kerala CP/06/KOB/2020: The
Petitioner Company had filed a petition under Section 66 of the Companies Act, 2013
against the Registrar of Companies, Kerela seeking reduction of its share capital from Rs.
120 crores to Rs. 1 crore. After a review of the capital structure, the Board of Directors of
the Petitioner Company observed that the company’s paid up capital was more than the
required amount for the existing business of the company and that it would be beneficial
for the company to remit back its excess capital by way of reduction of share capital. The
NCLT, Kochi Bench held that since all the requisite statutory procedures have been fulfilled
and no objections has been received from any shareholders, the company petition filed for
reduction of its share capital is hereby allowed.

DIMINUTION OF SHARE CAPITAL IS NOT A REDUCTION OF CAPITAL

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In the following cases, the diminution of share capital is not to be treated as reduction of the capital.
(i) Where the company cancels shares which have not been taken or agreed to be taken by any person
[Section 61(1)(e) Companies Act, 2013];
(ii) Where redeemable preference shares are redeemed in accordance with the provisions of Section
55 [Explanation to section 55(3) of the Companies Act, 2013];
(iii) Where any shares are forfeited for non-payment of calls and such forfeiture amounts to reduction
of capital.
(iv) Where the company buys-back its own shares under Section 68 of the Act [Section 66(6)].
(v) Where the reduction of share capital is effected in pursuance of the order of the Tribunal
sanctioning any compromise or arrangement under section 230

Points to remember: The above cases do not require the approval or sanction of Tribunal as well
as the procedure for reduction of capital as laid down in Section 66 is not attracted

CASELAWS

(A) SIEL Ltd., In re. [(2008) 144 Com Cases 469 (Del)], the view was that reduction of the share capital
of a company is a domestic concern of the company and the decision of the majority would prevail. If
the majority by special resolution decides to reduce the share capital of the company, it has the right
to decide to reduce the share capital of the company and it has the right to decide how this reduction
should be affected. A selective reduction is permissible within the framework of law for any
company limited by shares.

(B) Elpro International Ltd., In re [(2009) 149 Com Cases 646 (Bom.)], a company proposed to
extinguish and cancel 8, 89,169 shares held by shareholders constituting 25 per cent of the issued and
paid up share capital and return capital to such shareholders at Rs. 183 per equity share of Rs. 10 each
so cancelled and extinguished in accordance with Section 100 of the Act (corresponds to section 66 of
the Companies Act, 2013). According to the scheme as approved by the shareholders, the reducing of
25 percent of the issued and paid up capital was to take place from amongst 3,835 shareholders which
included 112 shareholders who voted for the resolution, and 3,723 shareholders who did not object
to the resolution. It was held that a selective reduction of share capital is legally permissible. The
shareholders who did not cast their votes were those who had abstained from voting at the
meeting. Moreover, there was no objection from any of the shareholders to the proposed reduction.

(C) British and American Trustee Corpn. v. Couper, (1894) (ibid) When exercising its discretion, the
Court must ensure that the reduction is fair and equitable. In short the Court shall consider the
following, while sanctioning the reduction:
(i) The interests of creditors must be safeguarded;
(ii) The interests of shareholders must be considered; and
(iii) Lastly, the public interest must be considered as well.

(D) Marwari Stores Ltd. v. Gouri Shanker Goenka, (1936) 6 Com Cases 285. Equal Reduction of Shares
of One Class: Where there is only one class of shares, prima facie, the same percentage should be paid
off or cancelled or reduced in respect of each share, but where different amounts are paid-up on
shares of the same class, the reduction can be effected by equalising the amount so paid-up. The same
principle is to be followed where there are different classes of shares [Bannatyne v. Direct Spanish
Telegraph Co., (1886) 34 Ch D 287]

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 REDUCTION OF SHARE CAPITAL WITHOUT SANCTION OF THE TRIBUNAL

The following are cases which amount to reduction of share capital and where no confirmation by the
Tribunal is necessary.
(a) Surrender of shares-means the surrender to the company on the part of the registered holder of
shares already issued. Where shares are surrendered to the company, whether by way of settlement
of a dispute or for any other reason, it will have the same effect as a transfer in favour of the company
and amount to a reduction of capital. But if, under any arrangement, such shares, instead of being
surrendered to the company, are transferred to a nominee of the company then there will be no
reduction of capital.

The Companies Act contains no provision for surrender of shares. Thus, surrender of shares is valid
only when Articles of Association provide for the same.

(b) Forfeiture of shares — A company may if authorised by its articles, forfeit shares for non-payment
of calls and the same will not require confirmation of the Tribunal.
Where power is given in the articles, it must be exercised strictly in accordance with the regulations
regarding notice, procedure and manner stated therein, otherwise the forfeiture will be void.
Forfeiture will be affected by means of Board resolution.

NOTE: Both forfeiture and surrender lead to termination of membership. But in the former case, it is
at the initiative of company and in the latter case at the initiative of member or shareholder.

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 PART E: TRANSFERABILITY OF SHARES

DISTINCTION BETWEEN TRANSFER AND TRANSMISSION

S.NO Transfer of Securities Transmission of securities

1 Transfer takes place by a voluntary or Transmission is the result of the
deliberate act of the parties by way of a operation of law. For example,
contract due to death,
2 An instrument of transfer is required in case ofNo instrument of transfer is
transfer required in case of
transmission.
3 transfer is a normal course of transferring Transmission takes place on
property. death or insolvency of a holder
of securities
4 Transfer of securities is generally made for Transmission of securities is
some consideration. generally made without any
consideration.
5 Stamp duty is payable on transfer of securities No stamp duty is payable on
by a holder of securities transmission of securities.

Transferability of securities

In case of Private company In case of Public Company

 Shares of a private company are not marketable securities due As per section 58(2), the securities
to restriction on right to transfer. Such shares by their very or other interest of any member in
nature are not freely transferable in the market. The objective a public company shall be freely
behind the right of restriction on the transfer of shares is to transferable. The Board of
preserve the composition of the shareholding. Directors of a company or the
 The section 2(68) of the Companies Act, 2013 restricts the right concerned depository has no
to transfer shares but does not prohibit the right to transfer discretion to refuse or withhold
shares. transfer of any security. The
 The right to transfer may be subjected to restrictions contained transfer has to be effected by the
in the articles and there cannot be total prohibition or ban on company/depository
transferability of shares. automatically and immediately.
 Restriction on right to transfer shares is generally placed by However, proviso to section 58(2)
using following two methods: provides that any contract or
a. Right of pre-emption: If a member wishes to sell some or all arrangement between two or
of his shares, such shares shall first be offered to other more persons in respect of
existing members of the company at a price determined by transfer of securities shall be
the directors or by the auditor of the company or by the use enforceable as a contract. It is
of formula set out in the articles. now possible to contractually
b. Valuation of Shares under Preemption clause: AOA may agree on terms such as right of
provide that a fair price determined by the directors or the first refusal, right of first offer,
auditor of the company. the Court is not in a position to tag along, call option, put option,
enquire into the correctness of valuation, unless there is etc. in the shareholder
evidence that valuation was not correctly mad agreements/ investment
agreements, in the case of a

4.47 | P a g e
 public company as well. These
terms would now be binding on
the investors.

Procedure

1.Instruments of transfer to be presented to the company

According to Section 56(1) a company, shall not register a transfer of securities of, the company, unless
a proper instrument of transfer duly stamped, dated and executed by or on behalf of the transferor
and the transferee has been delivered to the company by the transferor or transferee within a period
of 60 days (irrespective of the nature of the company, whether listed or unlisted) from the date of
execution along with the certificate relating to the securities, or if no such certificate is in existence,
then along with the related certificate or letter of allotment of securities. In case of loss of the
instrument, the company may register the transfer on terms as to indemnity.
Such instrument of transfer of securities held in physical form shall be in Form No. SH.4. Where a
company not having share capital, the instrument of transfer herein should also be in Form No. SH.4
and other conditions be complied where the references therein to securities were references instead
to the interest of the member in the company.
However, nothing in section 56(1) shall prejudice any power of the company to register, on
receipt of an intimation of transmission of any right to securities by operation of law from any
person to whom such right has been transmitted [Section56(2)].

1. Stamp duty
Under Section 56(1), a company cannot register the transfer of securities unless a instrument of
transfer duly stamped, dated and executed by or on behalf of the transferor and the transferee has
been delivered to the company along with the certificate relating to the securities in question.
duly stamped

S.No. Type of transfer Rate of Stamp

Duty
1 Transfer and Re-issue of debenture .0001%
2 Transfer of security other than debenture on delivery basis 0.015%
3 Transfer of security other than debenture on non-delivery 0.003%
basis
a. whoever affixes an adhesive stamp to an instrument which has been executed by any
person shall, when affixing such stamp, cancel the same so that it cannot be used
again. An adhesive stamp which has not been cancelled shall be deemed to be
unstamped.
b. the value of the consideration paid for a transfer must be determined as a part of the
agreement because in the absence ofsuch valuation it would not be possible to know
whether stamp duty has been paid according to the value or not. A transfer form
which does not indicate the value of the shares purposes of transfer would be void
and not capable of being accepted.

2. Registration of partly paid up shares – Notice to the transferee

According to section 56(3), where an application is made by the transferor alone and relates
to partly paid shares, the transfer shall not be registered, unless the company gives the notice
in Form No. SH.5 to the transferee and the transferee gives ‘no objection’ to the transfer
within two weeks from the receipt of the notice.

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 3. Time Limit for Delivery of certificates
Every company, unless prohibited by any provision of law or any order of Court, Tribunal or
other authority, deliver the certificates fall securities transferred or transmitted within a
period of one month in case of transfer or transmission of securities.
4. Intimation to depository
Proviso to Section 56(4) states that where the securities are dealt with in a depository, the company
shall intimate the details of allotment of securities to depository immediately on allotment of such
securities. No transfer deed is required for transfer of shares, where the shares are held in
dematerialized form.

5. Transfer of securities by legal representative

Section 56(5) of the Act provides that in case of death of holder of any security, the transfer of such
security by the legal representative of the deceased shall be validEven though the legal representative
is not the holder of such security; As if the legal representatives were the holder of such security.

6. Penalties
According to 56(6), where any default is made in complying with the provisions of sub-sections (1) to
(5) of Section 56, the company and every officer of the company who is in default shall be liable to a
penalty of fifty thousand rupees.

SPECIAL CASES

1. Transfer of shares to a minor

 In India, a minor is not competent to enter into any contract.

 There is, however, no objection in law to the guardian of a minor entering into a contract on
behalf of a minor, by virtue of the statutory right conferred on the guardian of a minor under
Section 8 read with Section 4 to 6 of the Hindu Minority and Guardianship Act, 1956.
 Since Section 56 of the Companies Act, 2013 enables execution of transfer deed by or on behalf
of the transferor or the transferee, the transfer deed can be executed by a minor through his
natural guardian as transferee, and the contract so entered into by a minor through his natural
guardian is a binding and valid contract under Section 8 of the Hindu Minority and Guardianship
Act, 1956
 The articles of association of a company cannot impose a blanket ban prohibiting transfer of
shares in favour of a minor, as such a restriction is unreasonable and not sustainable. Section 44
of the Companies Act, 2013 provides that shares in a company are movable property and are
transferable in the manner provided by the Articles.

2. Transfer of shares to partnership firm

A firm is not a person and as such is not entitled to apply for membership.

3. Transfer of securities to a body corporate

An incorporated body being a legal person can acquire securities in its own name.

4. Transfer of Shares in Depository Mode :-

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 Depository system maintains the ownership records of securities in the book entry form while in
physical mode every share transfer is required to be accompanied by physical movement of share
certificates to, and registration with the company concerned.
 The process of physical movement of share certificates often involves long delays and a significant
portion of transactions end up as bad deliveries due to the faulty completion of paperwork, or
signature differences with the specimens on record with the companies, or for other procedural
lapses.

5. Death of transferor or transferee before registration of transfer

 Where the transferor dies and the company has no notice of his death the company would
obviously register the transfer. But if the company has notice of his death, the proper course is
not to register until the legal representative of the transferor has been referred to.
 Where the transferee dies and company has notice of his death, a transfer of shares cannot be
registered in the name of the deceased. With the consent of the transferor and the legal
representatives of the transferee, the transfer may be registered in the names of the later. But if
there is a dispute, an order of Court will have to be insisted upon.

6. Forged transfer

In order to avoid the consequences which will follow a forged transfer, companies normally write to
the transferor about the lodgement of the transfer instrument so that he can object if he wishes. The
company informs him that if no objection is made by him before a day specified in the notice, it would
register the transfer. The consequences of a forged transfer are detailed hereunder:
a. A forged transfer is a nullity and void; therefore, the original owner of the shares continues to be
the shareholder and the company is bound to restore his name on the register of members
[People’s Ins. Co. v. Wood and Co., 1961 (31) Com Cases 61]. A forged document never has any
legal effect. It can never move ownership from one person to another, however, genuine it may
appear. If a company registers a forged transfer, the true owner can apply so as to be replaced
on the register and his name will be restored.
b. However, if the company issues a share certificate to the transferee and he sells the shares to an
innocent purchaser, the company is liable to compensate such a purchaser, if it refuses to register
him as a member, or if his name has to be removed on the application of the true owner.
c. If the company is put to loss by reason of the forged transfer, as it may have paid damages to an
innocent purchaser, it may recover the same independently from the person who lodged the
forged transfer.

7. TRANSPOSITION OF NAME
 In the case of joint-shareholders, one or more of them may require the company to alter or
rearrange the serial order of their names in the register of members of the company. In this
process, there will be need for effecting consequential changes in the share certificates issued to
them. If the company provides in its articles that the senior-most among the joint-holders will be
recognised for all purposes like service of notice, a copy of balance sheet, profit and loss account,
voting at a meeting etc., the request of transposition may be duly considered and approved by
the Board or other authorised officer of the company.
 Since no transfer of any interest in the shares take place on such transposition, the question
of insisting on filling transfer deed with the company, may not arise. Transposition does not
also require stamp duty.

8. Death of transferor or transferee before registration of transfer

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Where the transferor dies and the company has no notice of his death the company would obviously
register the transfer. But if the company has notice of his death, the proper course is not to register
until the legal representative of the transferor has been referred to
Where the transferee dies and company has notice of his death, a transfer of shares cannot be
registered in the name of the deceased. With the consent of the transferor and the legal
representatives of the transferee, the transfer may be registered in the names of the later. But if there
is a dispute, an order of Court will have to be insisted upon.
In KillickNixon Ltd. vs. Dhanraj Mills Ltd., it was held that the company is not bound to enquire into
the capability of the transferee to enter into a contract. The company has to act on the basis of what
is presented in the transfer deed.

Proof in a transfer by representative

Where a transfer is executed by a person in a representative capacity such as an officer of a body

corporate or by an attorney, proof of the authority and the Board resolution authorizing the
representative to execute the transfer on behalf of body corporate must be produced, before the
transfer can be registered

Relationship between Transferor and Transferee

Pending registration, the transferee has only an equitable right to the shares transferred to him. He
does not become the legal owner until his name is entered on the Register of Members in respect of
the shares. But as between the transferor and the transferee, immediately after the transfer is made,
the contract of transfer will subsist and the transferee becomes the beneficial owner of the shares so
transferred to him. A relation of trustee (transferor) and beneficiary (transferee) is thereby established
between them. The transferor is under obligation to comply with all reasonable directions of the
transferee. The transferee should, however, take prompt steps to get himself registered as a member.

Section 126 of the Companies Act, 2013 provides that where the transferor gives a mandate to pay
the dividend to the transferee pending registration of transfer, the same should be paid to the
transferee, otherwise the dividend in relation to such shares should be transferred to the Unpaid
Dividend Account mentioned in Section 124. It is further provided that in the case of offer of rights
shares or fully paid bonus shares, the same should be kept in abeyance till the title to the shares is
decided.

NOTE:

 Transferee’s right to Dividends, Bonus and Rights Shares - Where the transferor, by reason of
the shares standing in his name, has received after the transfer, any dividend on shares, bonus
or other benefit accruing in respect thereof, the transferee being the person lawfully entitled
thereto, can recover the same from the transferor, provided that he has not allowed his claim
to become time barred under the provisions of the Limitation Act. [Chunnilal Khushaldas Patel
v. H.K. Adhyaru, (1956) 26 Com Cases 168 : AIR 1956 SC 655].

RIGHTS OF TRANSFEROR
Transferor’s right to indemnity for calls - Where a transferor has paid for calls to the company after
the shares are transferred, there arises an implied promise by the transferee to indemnify the
transferor. Such a promise to indemnify can be implied even in the case of blank transfers [Ashworth
Partington & Co.,(1925)1K].

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Transferee’s right to Dividends, Bonus and Rights Shares - Where the transferor, by reason of the
shares standing in his name, has received after the transfer, any dividend on shares, bonus or other
benefit accruing in respect thereof, the transferee being the person lawfully entitled thereto, can
recover the same from the transferor, provided that he has not allowed his claim to become time
barred under the provisions of the Limitation Act. [Chunnilal Khushaldas Patel vs. H.K. Adhyaru, (1956)
26 Com Cases 168 : AIR 1956 SC 655].

Dividend to transferee after transfer - In one case the transfer was registered and dividends paid to
the transferee. Later, the register was rectified by removing the transferee’s name from the register
on the ground of a technical nature, like inadequacy of stamps, it was held that the transferee was not
bound to hand over the dividend amount to the transferor. [Kothari Industrial Corpn. Ltd. vs. Lazor
Detergents P. Ltd., (1994)1 Comp LJ 178 (CLB-Mad)]. However the Madras High Court held that the
company should not be allowed to rectify the register on a technical ground after transferring the
shares.

Position under the Securities Contracts (Regulation) Act, 1956 - As regards the position of a transferor
after transfer, Section 27 of the Securities Contracts (Regulation) Act, 1956 may also be noted. It
provides as follows:

EFFECTS OF TRANSFER

Once a transfer form has been executed, the transfer is complete as between the transferor and the
transferee and the transferee acquires the right to have his name entered in the register of members.
No further application is necessary for having the name of the transferee entered in the register of
members and the transferee perfects his title to the share after the entry in the Register of Members.
Once the transferee becomes a member of the company, a contractual relationship arises with the
company, [Killick Nixon Ltd. vs. Dhanraj Mills Pvt. Ltd., (1983) 54 Com Cases 432 (DB)(Bom)].

A company cannot refuse to register a transfer on the ground that the transfer was without
consideration or that there was a collusion and connivance between the transferor and transferee.
Any objection about inadequate consideration can be raised only by the transferor himself and not by
the company particularly where the shares are fully paid.

Where the transfer is in a spot delivery contract, Section 108 [Corresponds to section 56 of the
Companies Act, 2013] is not applicable. [Sanatan Investment Co. Pvt. Ltd. vs. Prem Chand Jute Mills
Ltd. (1983) 54 Com Cases 186(Cal)].

Case Law
The National Company Law Appellate Tribunal (NCLAT) held that the Company has to register the
transfer of 60,000 shares in the name of legal heirs of one of its deceased shareholders which were
due to him on right basis as Letter of Administration for succession has been submitted by legal
heirs, so company could not insist for production of affidavit and indemnity bond in the matter of
DLF Ltd. & Anr. vs. Satya Bhushan Kaura & Anr., dated January 13, 2020.

CHECKLIST FOR COMPANY SECRETARY

A company secretary is required to put up before the Board or the Share Transfer Committee of the
company for consideration and approval, only those cases of registration of share transfers, which
have been checked up by him and have been found to be strictly in accordance with the provisions of
section 56 and other applicable provisions of the Companies Act, 2013 and the articles of association

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 of the company. If the Instrument received is deficient in any respect, the same should be returned to
the person who had lodged the same with the company for making good the deficiency. The following
checklist has been designed to help a company secretary in his work of processing of cases of share
transfers:
I. Each column of transfer deed (SH-4) is properly and adequately filled in.
II. Date of execution is to be filled up properly.
III. Name of the company and its Corporate Identification Number (CIN) is correctly given.
IV. Names of the recognized stock exchange, If listed.
V. Description of shares, viz., equity, preference etc. is correctly given. amount called up and
amount paid up, number of securities being transferred (both in figures and words) and
consideration received (both in figures and words) are to be mentioned clearly.
VI. Distinctive numbers of the shares mentioned in the share certificate(s) are to be mentioned
in the deed.
VII. Folio number of the transferor as given in the enclosed share certificate(s) is to be correctly
entered in the transfer deed.
VIII. Name and address of the witness to the signature(s) of the transferor(s) are legibly written in
the transfer deed and the witness has signed the transfer deed.
IX. Signature(s) of the transferor(s) must tally with the specimen signature available with the
company.
X. In case of joint shareholdings, form shall be signed by all joint transferors.
XI. Particulars of transferee viz. Name, Father’s name, address, E-mail Id, occupation and existing
folio number are to be correctly entered in the transfer deed.
XII. The transferee(s) or the buyer(s) has/have signed the Instrument.
XIII. Relevant certificate(s) of shares or debentures or other securities is/are to be enclosed.
XIV. If certificate was not issued, letter of allotment is to be enclosed.
XV. Share Transfer Stamps of appropriate value have been affixed on the Instrument and they
have been properly cancelled by a rubber stamp or defaced otherwise.
At present the stamp duty on Transfer of shares is at the rate of twenty-five paise for every
hundred rupees of value of the shares on the date of sale, or part thereof.
XVI. Whether the transferor(s) and/or transferee(s) is/are non-resident Indians and if so, whether
the transfer is permitted under the Foreign Exchange Management Act, 1999, and if not,
whether specific permission of the Reserve Bank of India has been obtained.
XVII. Where the transferor is a body corporate, whether board resolution of the transferor is passed
to this effect and proper authority has been given by the Board of directors to the person
signing as the transferor on behalf of the company.
XVIII. In case of listed company, comply with the formalities of SEBI (LODR) Reg, 2015 and other SEBI
Guidelines.
XIX. According to this amendment a declaration has to be made by the transferee prior to share
transfer in Form No. SH-4 regarding whether he/she is required to obtain Government
approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
Earlier no such declaration was required to be made by the transferee.

TRANSMISSION OF SECURITIES

Transmission of securities takes place when the registered holder of securities

 Dies or
 is adjudicated as an insolvent, or
 if the holder of securities is a company, it goes into liquidation.

Special Cases of transmission

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The legal representatives are entitled to the shares held by deceased member and the company must
accept the evidence of succession e.g., a succession certificate or letter of administrations or
probate or any other evidence properly required by the Board of directors.
The Board of directors also have the same right to decline registration as they would have had in the
case of transfer of shares before death. But if the company unduly refuses to accept a transmission,
the same remedies are available to the legal representative as in the case of a transfer namely, an
appeal to the Tribunal under Section 58.

 Transmission in Case of Sole Owner

 On the death of a sole owner of shares, vesting of rights and liabilities goes in favor of the
legal heirs.
 But the legal heirs do not by itself become members of the company. The company cannot
register them as members without their consent.
 A company cannot compel them to become member nor it is a duty to do so.

 Transmission of shares to widow

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

 Transmission of joint holdings

In case some shares are registered in joint names and the articles of the company provide that
the survivor shall be the only person to be recognised by the company as having any title to
the shares, the company is justified in refusing to register the transmission of title by
operation of law in favour of the son of the deceased holder even though he may obtain
succession certificate from the Court.

LEGAL FRAMEWORK FOR DEPOSITORY SYSTEMS

 In the depository system, share certificates belonging to the investors are dematerialised and
their names are entered in the records of depository as beneficial owners. Consequent to
these changes, the investors’ names in the companies register are replaced by the name of
depository as the registered owner of the securities.

 The beneficial owner continues to enjoy all the rights and benefits and be subject to all the
liabilities in respect of the securities held by a depository. Shares in the depository mode are
fungible and do not have distinctive numbers. The ownership changes in the depository are
done automatically on the basis of delivery payment.

 The companies which enter into an agreement with the depository will give an option to the
holders of eligible securities to avail the services of the depository through participants.

Dematerialisation of Shares

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  Dematerialisation of securities means holding of securities in electronic form in lieu of
physical certificates.

 Dematerialisation is comparable to keeping your money in a bank account. In demat form,

physical share certificates are replaced by electronic book entries; purchase of shares are
reflected as credits in demat account and sales are reflected as debits.

 The risk associated with physical share certificates such as loss, replacement, theft, damage,
etc. are overcome in the share certificates held in Dematerialisation form which are totally
risk free.
o Dematerialisation of shares of a company is regulated by the Depositories Act, 1996.
o According to the Depositories Act, 1996, an investor has the option to hold securities
either in physical or electronic form. However, SEBI has notified that settlement of
market trades in listed securities should take place only in the demat mode.

 Section 29 of the Companies Act, 2013 provides that every company MAKING PUBLIC OFFER;
and such other prescribed companies shall issue the securities only in dematerialised form.

 Further, SEBI (Issue of Capital and Disclosure Requirements), 2009 has made it mandatory for
a company to make a public or rights issue or an offer for sale of securities in a dematerialized
form but allows an option to be given to shareholders to receive the security certificates or
hold securities in dematerialized form with a depository.

 Currently, there are two depositories registered with SEBI and are licensed to operate in India:
o NSDL (National Securities Depository Ltd.)
o CDSL (Central Depository Services (India) Ltd.)

 FUNGIBLE: Section 9 of the Depositories Act, 1996 clarifies that all the securities held by a
depository shall be dematerialised and shall be in a fungible form that is, they do not bear any
notable feature like distinctive number, folio number or certificate number. Once shares get
dematerialized, they lose their identity in terms of share certificate, distinctive numbers and
folio numbers.

 Every depository shall maintain a register and an index of beneficial owners in the manner
provided in Section 88 of the Companies Act, 2013. [Section 11]

 The procedure for sale of shares held in demat form is as under:-

o Sale shall be made through a broker who is a member of Stock Exchange;
o Shareholder, i.e., the beneficial owner (BO) will give delivery instruction through
Delivery Instruction Slip (DIS) to depository participant (DP) to debit his account and
credit the broker’s account
o The broker shall give instructions to his DP for delivery to clearing corporation of the
concerned stock;
o exchange and receive payment from clearing corporation.

 The procedure for purchases of securities held in demat form is as under –

o broker will receive the securities in his account on the payout day;
o broker will give instruction to its depository participant to debit his account and credit
beneficial owner’s account;

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 o BO will give ‘Receipt Instruction’ to DP for receiving credit by filling appropriate form.
However, BO can give standing instruction for credit to his account that will obviate
the need of giving Receipt Instruction every time.

o Pledge or hypothecation of dematerialised shares

 A beneficial owner may, with the prior approval of the depository, pledge or hypothecate
his shares held in a depository
 Both the pledger and pledgee must have a depository account.
 The procedure for pledge or hypothecation of shares held in demat form is as under: -

I. Investor shall submit the details of pledge to the DP in the prescribed format.
II. DP shall verify the records and on being satisfied that the shares are available for
pledge, make a note in the records and forward the application to the Depository for
approval.
III. Depository shall obtain confirmation from pledgee and record the pledge within 15
days of application.
IV. Depository shall send intimation to the DP of both the pledger and pledgee who will
inform the pledger and pledgee respectively.
V. The pledgee may invoke the pledge in accordance with the terms of pledge and on
such invocation the name of pledgee is entered in the Register of Beneficial Owners
by the Depository.
VI. During the period the pledge is in force, the DP shall not give effect to transfer of any
security without the concurrence of the pledgee.
VII. On closure of the loan, the pledger shall request the DP to close the pledge. The
pledgee, on getting payment, shall make a request for closure of pledge to his DP.

PROCEDURE FOR DEMATERIALISATION

File Dematerialisation
Open Demat A/c Request Form and share DP intimates Depository
certificate with DP

Depository intimates
Registrar/Issuer and DP
Registrar/Issuer confirms Depository credits
sends DRF and Share
demat to Depository Investors Demat A/c
certificate to
Registrar/Issuer

PROCEDURE FOR REMATERIALISATION

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 DP intimates to
Client submits
DP enters the request in Depository and
Rematerialisation
its system which blocks simultaneously,DP sends
Request Form (RRF) to
the clients holdings the RRF to
DP
Registrar/Issuer

Registrar/Issuer prints Registrar/Issuer

Clients account with DP
certificates and dispatch electronically confirms
debited
to the clients remat to Depository

Rule 9A of The Companies (Prospectus and Allotment of Securities) Rules, 2014 – Issue of securities
in dematerialised form by unlisted public companies. –

1.Every unlisted public company shall –

 Issue the securities only in dematerialised form; and
 Facilitate dematerialisation of all its existing securities
1.Every unlisted public company making any offer for issue of any securities or buyback of
securities or issue of bonus shares or rights offer shall ensure that before making such offer, entire
holding of securities of its promoters, directors, key managerial personnel has been
dematerialised in accordance with provisions of the Depositories Act, 1996 and regulations made
there under.
Every holder of securities of an unlisted public company,
 who intends to transfer such securities on or after 2nd October, 2018, shall get such
securities dematerialised before the transfer; or
 who subscribes to any securities of an unlisted public company (whether by way of
private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall
ensure that all his existing securities are herd in dematerialized form before such
subscription.
Every unlisted public company shall ensure that –
 it makes timely payment of fees (admission as well as annual) to the depository and
registrar.
 it maintains security deposit at all times, of not less than two years, fees with the
depository and registrar to an issue and share transfer agent.

it complies with the regulations or directions or guidelines or circulars, if any, issued by the securities
and Exchange Board or Depository from time to time with respect to dematerialisation of shares of
unlisted public companies and matters incidental or related thereto.

Every unlisted public company governed by this rule shall submit Form PAS-6 to the Registrar with
such fee as provided in Companies (Registration Offices and Fees) Rules, 2014 within sixty days from

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the conclusion of each half year duly certified by a company secretary in practice or chartered
accountant in practice.

The grievances, if any, of security holders of unlisted public companies under this rule shall be filed
before the Investor Education and protection Fund Authority.
The Investor Education and protection Fund Authority shall initiate any action against a depository or
participant or registrar to an issue and share transfer agent after prior consultation with the securities
and Exchange Board of India
This rule shall not apply to an unlisted public company which is:-
 a Nidhi.
 a government company or
 a wholly owned subsidiary.

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 Lesson 5
MEMBERS AND SHAREHOLDERS

INTRODUCTION - WHO ARE MEMBERS?

 In the case of a company limited by shares, the shareholders are the members. The terms
“members” and “shareholders” are usually used interchangeably, being synonymous, as there can
be no membership except through the medium of shareholding.
 Thus, generally speaking every shareholder is a member and every member is a shareholder.
However, there may be exceptions to this statement, e.g., a person may be a holder of share(s)
by transfer but will not become its member until the transfer is registered in the books of the
company in his favour and his name is entered in the register of members.
 In a company limited by guarantee, the persons who are liable under the guarantee clause in its
Memorandum of Association are members of the company.
 In an unlimited company, the members are the persons who are liable to the company, each in
proportion to the extent of their interests in the company, to contribute the sums necessary to
discharge in full, the debts and liabilities of the company, in the event of its being wound-up.

DIFFERENCE BETWEEN MEMBERS AND SHAREHOLDERS

MEMBERS SHAREHOLDERS
Section 2(55) of the Companies Act, 2013 On the other hand, the meaning of
specifies the meaning of ‘member’ ‘shareholder’ is not defined under the
Companies Act, 2013
A shareholder becomes a member of a The person who has ownership of shares of a
company, once his name is entered into the company is known as shareholder. Further, in
company’s register of members or if he is a case of companies limited by guarantee do not
subscriber to the incorporation of the company have a share capital, and consequently, their
members are not shareholders
The person who signs the memorandum of After signing the memorandum, a person may
association with the company becomes a become shareholder only when the shares are
member allotted to him

The bearer of a share warrant is not a member Whereas, the holder of a share warrant is a
shareholder

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 MEMBERS

Definition of ‘Member’ Modes of acquiring Membership

According to Section 2(55) of the Companies Act,
2013,
member, in relation to a company, means,
(1) The subscribers to the memorandum of a
company who shall be deemed to have agreed
to become members of the company, and on its
registration, shall be entered as members in its
register of members;

(2) Every other person who agrees in writing to (i) by making an application to the company for
become a member of a company and whose allotment of shares; or
name is entered in its register of members; (ii) by executing an instrument of transfer of
How? shares as transferee; or
(iii) by consenting to the transfer of share of a
deceased member in his name; or
(iv) by acquiescence or estoppel
(3) Every person holding shares of a company
and whose name is entered as a beneficial
owner in the records of a depository shall be
deemed to be a member

WAYS TO ACQUIRE MEMBERSHIP OF THE COMPANY

(a) Subscribers to the Memorandum
In the case of a subscriber, no application or allotment is necessary to become a member. By virtue
of his subscribing to the memorandum, he is deemed to have agreed to become a member and he
becomes ipso facto member on the incorporation of the company and is liable for the shares he has
subscribed.
Further, a subscriber to the memorandum must pay for his shares in cash even if the promoters
have promised him the shares for services rendered in connection with the promotion of the
company. Again, he must take the shares directly from the company, and not through transfer from
other member(s).

(b) Agreement in Writing

(i) By an application and allotment A person who applies for shares becomes a member when
shares are allotted to him, a notice of allotment is issued to him and his name is entered on the
register of members. The general law of contract applies to this transaction. There is an offer to
take shares and acceptance of this offer when the shares are allotted

(ii) By transfer of shares: Shares in a company are movable property as provided in Section 44 of
the Act and are transferable in the manner as provided in the articles of the company and as
provided in Section 56 of the Companies Act, 2013. A person can become a member by acquiring
shares from an existing member and by having the transfer of shares registered in the books of
the company, i.e. by getting his name entered in the register of members of the company

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 (ii) By transmission of shares A person may become a member of a company by operation of law
i.e. if he succeeds to the estate of a deceased member. On the death of a member, his executor or
the person who is entitled under the law to succeed to his estate, gets the right to have the shares
transmitted and registered in his name in the company’s register of members. No instrument of
transfer is necessary in this case.
If the legal representative of deceased member desires to be registered as a member in place of
the deceased member, the company shall do so or in the alternative he may request the company
to transfer the shares in the name of another person of his choice. The Official Assignee or Official
Receiver is likewise entitled to be a member in place of the shareholder, who has been adjudged
insolvent.

(iii) By acquiescence or estoppels

A person is deemed to be a member of a company if he allows his name, without sufficient cause,
to be on the register of members of the company or otherwise holds himself out or allows himself
to be held out as a member. In such a case, he is estopped from denying his membership. He can,
however, escape his liability by taking prompt action for having his name removed from the register
of members on permissible grounds.

Who may become a member

a) Partnership firm as a member: It cannot become a member.

b) Limited Liability Partnership, being an incorporated body under Limited Liability Partnership
Act, 2008 can become a member of a company.

c) Section 8 company: A non-profit making company licensed under Section 8 of the Act , can
become a member of another company if it is authorised by its Memorandum of Association to
invest into shares of the other company.

d) Foreigners as members: A foreigner may take shares in an Indian company and become a
member subject to the provisions of the Foreign Exchange Management Act, 1999, but in the
event of war with his country, he becomes an alien enemy and his power of voting and his rights
to receive notices are suspended.

e) Minor as member: A member who is not sui juris e.g., a minor, is wholly incompetent to enter
into a contract and as such cannot become a member of a company. Consequently, an
agreement by a minor to take shares is void ab-initio.
For a minor to become a member may be signed on behalf of the minor by his lawful guardian
• After attaining majority, the minor, if he does not want to be a member, must repudiate his
liability on the shares on ground of minority.
• If shares are transferred to a minor, the transferor will remain liable for all future calls on such
shares so long as they are held by the minor even if the transferor was ignorant of his minority. If
the company knows of his minority it may refuse to register the transfer, unless the transfer was
made through the guardian.

f) Insolvent as member: An insolvent may be a member of a company as long as he is on the

register of members. He is entitled to vote, but he loses all beneficial interest in the shares and
company will pay dividend on his shares to the Official Assignee or Receiver

g) HUF as member: There is no legal bar on HUF to invest its money in shares and securities and

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 the Companies Act does not prohibit membership of HUF. In case of an HUF, the shares can be
registered in the name of Karta of HUF.

h) Pawnee: A pawnee cannot be treated as the holder of the shares pledged in his favour, and the
pawner continues to be a member and can exercise the rights of a member

i) Receiver: A receiver whose name is not entered in the register of members cannot exercise any
of the membership rights attached to a share unless in a proceeding to which company is a party
and an order is made therein

j) Society as a member -Department’s Clarification dated 24.11.1962 has clarified that “a society
registered under the Societies Registration Act, 1860 should not be deemed to be a ‘body corporate’
within the meaning of the aforesaid provisions [Refer to Section 2(7) (i) of the Companies Act, 1956
(currently refer section sub clause (i) of clause 11 of section 2 of the Companies Act ,2013).

#In Short: Society Can become a member

k) Persons taking shares in fictitious names: A person who takes shares in the name of a fictious
person, becomes liable, wherein punishment is provided for commission of fraud. As per section
447 of the Companies Act, 2013, without prejudice to any liability including repayment of any debt
under this Act or any other law for the time being in force, any person who is found to be guilty of
fraud involving an amount of at least ten lakh rupees or one per cent. of the turnover of the
company, whichever is lower shall be punishable with imprisonment for a term which shall not be
less than six months but which may extend to ten years and shall also be liable to fine which shall
not be less than the amount involved in the fraud, but which may extend to three times the amount
involved in the fraud.
Provided that where the fraud in question involves public interest, the term of imprisonment shall
not be less than three years.
Provided further that where the fraud involves an amount less than ten lakh rupees or one percent.
of the turnover of the company, whichever is lower, and does not involve public interest, any person
guilty of such fraud shall be punishable with imprisonment for a term which may extend to five
years or with fine which may extend to fifty lakh rupees or with both.

l) Trade Union as member: A trade union registered under the Trade Union Act, can be
registered as a member and can hold shares in a company.

m) Clarification regarding status of a holder of Global Depository Receipts (GDRs).

It is clarified by the MCA, vide Circular No.1/2009 No.17/67/2009 CL-V dated 16/6/2009 that:
A holder of Global Depository Receipts may become a member of the company only on transfer/
redemption of the GDR into underlying equity shares after following the procedure provided in the
“Scheme”/ provisions of the Companies Act. Therefore, a holder of Global Depository Receipts
cannot be called a member of the company.

# Point to remember: The moment the shares were allotted and share certificate signed and
the name entered in the register of members, the allottee became the shareholder,
irrespective of whether the allottee received the shares or not.

Special cases:
n) Status of a Global Depository Receipts holder [Clarification by MCA, vide Circular No.1/2009
No.17/67/2009 CL-V dated 16/6/2009

5.4 | P a g e
 • As per Section 41(3) of the Companies Act, 1956, [Corresponds to section 2(55) (iii) of the
Companies Act, 2013] a person holding a share capital of the company and whose name is entered
as beneficial owner in the records of the depository, is deemed to be a member of the company.
Since the Overseas Depository Bank as referred in the ‘Scheme’ is neither the Depository as defined
in the Companies Act, 1956 and the Depository Act, 1996 nor holding the share capital, therefore,
it cannot be deemed to be a member of the company.
• A holder of GDR may become a member of the company only on transfer/ redemption of the GDR
into underlying equity shares.
• Since the underlying shares are allotted in the name of Overseas Depository Bank, the name of
such Overseas Depository Bank is to be entered in the Register of Members of the issuing company.

o) Joint Members

• If more than one person apply for shares in a company and shares are allotted to them, each one
of such applicant becomes a member (Narandas v. India Mfg. Co., A.I.R. 1953 Bom. 433].
• Unless the Articles of the company otherwise provide, joint members can insist on having their
names registered in any order they may require.
• They may also have their holding split into several joint holdings with their names in different
orders so that all of them may have a right to vote.

#Previously asked Ques (JUNE 2019) (5M)

The Articles of Association of a company cannot impose a blanket ban prohibiting transfer of shares
in favour of a minor. Such a restriction is unreasonable and not sustainable. Comment.

Ans : The Articles of Association of a company cannot impose a blanket ban prohibiting transfer of
shares in favour of a minor, as such a restriction is unreasonable and not sustainable. Section 44 of
the Companies Act, 2013 provides that shares in a company are movable property and are transferable
in the manner provided by the Articles.

The expression “in the manner provided by the articles of association the company” can only be
interpreted to mean the procedure to be opted for transfer and impose restrictions, which are
meaningful and reasonable. In case, the restriction imposed on transfer to a minor is accepted, it
would mean that the shares of a deceased member can never be inherited by the legal heir who might
be a minor. This would lead to a highly unjust situation and cannot be accepted as tenable.
Accordingly, if the shares can be transmitted in favour of a minor, there is no reason why the shares
which are fully paid -up and in respect of which no financial liability devolves on the minor are to be
held as not transferable merely because of the ban imposed in the Article of Association [Saroj v.
Britannia Industries Ltd., Appeal No.5/80 decided 14.12.81 by CLB]

CESSATION OF MEMBERSHIP

Cessation of membership of the company means discontinuation of membership.

A person ceases to be a member of a company when his name is removed from its register of
members, which may occur in any of the following situations

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(a) Transfer: He transfers his shares to another person, the transfer is registered by the company and
his name is removed from the register of members;

(b) Forfeiture: His shares are forfeited;

(c) Sale: His shares are sold by the company to enforce a lien;

(d) Death: He dies (his estate, however, remains liable for calls);

(e) Insolvency: He is adjudged insolvent and the Official Assignee disclaims his shares;

(f) Redemption: His redeemable preference shares are redeemed;

(g) Cancellation: He rescinds the contract of membership on the ground of fraud or misrepresentation
or a genuine mistake;

(h) Purchase by another member/ by company itself: His shares are purchased either by another
member or by the company itself under an order of the Tribunal under Section 242 of the Companies
Act, 2013;

(i) Winding up: The member is a company which is being wound-up in India, and the liquidator
disclaims the shares;

(j) The company is wound up.

Though one ceases to be a member, he remains liable as a contributory and is also entitled to share
in the surplus, if any

EXPULSION OF A MEMBER

#Questionable point: A controversy had arisen as to whether a public limited company had powers
to insert an article in its Articles of Association relating to expulsion of a member by the Board of
Directors of the company where the directors were of the view that the activities or conduct of such
a member was detrimental to the interests of the company?

Conclusion: As, under Article 141 of the Constitution, the law declared by the Supreme Court is
binding on all courts within the territory of India, any provision pertaining to the expulsion of a
member by the management of a company which is against the law as laid down by the Supreme
Court will be illegal and ultra vires. In the light of the aforesaid position, it is clarified that assumption
by the Board of Directors of a company of any power to expel a member by amending its articles of
association is illegal and void [Circular: Letter No. 32/75, dated 1.11.1975].

Accordingly, as per Section 6 of the Companies Act, 2013, the Act overrides the Memorandum and
Articles of Association and any provision contained in these documents repugnant to the provisions
of the Companies Act, is void.

REGISTER OF MEMBERS

5.6 | P a g e
 REGISTER OF MEMBERS ETC. – Section 88

(1) Every company shall keep and maintain the following registers in such form and in such manner
as may be prescribed, namely:—
(a) register of members indicating separately for each class of equity and preference shares
held
by each member residing in or outside India;
(b) register of debenture-holders; and
(c) register of any other security holders.

(2) Every register maintained under sub-section (1) of section 88 of the Act shall include an index
of the names included therein.

(3) The register and index of beneficial owners maintained by a depository shall be deemed to be
the corresponding register and index for the purposes of this Act.

(4) A company may, if so authorised by its articles, keep in any country outside India, in such manner
as may be prescribed, a part of the register referred to in sub-section (1) of section 88 of the Act,
called “foreign register” containing the names and particulars of the members, debenture holders,
other security holders or beneficial owners residing outside India.

(5) Penalty: If a company does not maintain a register of members or debenture-holders or other
security holders or fails to maintain them in accordance with the provisions of sub-section (1) or
sub-section (2) of Section 88 of the Companies Act, 2013, the company shall be liable to a penalty
of three lakh rupees and every officer of the company who is in default shall be liable to a penalty
of fifty thousand rupees.
FOREIGN REGISTER

Section 88(4) of the Companies Act, 2013 empowers companies to keep foreign registers of
members or debenture-holders, other security holders or beneficial owners residing outside
India. It states:
• “A company may, if so authorised by its articles, keep in any country outside India, in such
manner as may be prescribed, a part of the register referred to in sub-section (1), called “foreign
register” containing the names and particulars of the members, debenture-holders, other
security holders or beneficial owners residing outside India.”
• A foreign register is deemed to be a part of the company’s principal register and it should be
kept in the same manner as the principal register and be likewise open to inspection.
• All entries made in the foreign register should be made in the duplicate register maintained at
the registered office in India within 15 days after the entry is made.
• A company may discontinue a foreign register at any time but all the entries made in it must be
transferred to the principal register.
• The decision of a competent Court in the State or Country in which a foreign register is kept,
with regard to its rectification, shall be as effective as if it were a decision of a competent Court
in India, if the Central Government, by notification in the Official Gazette, so directs.

Rule 7 of Companies (Management and Administration) Rules,2014 deals with maintenance of

foreign register:

1. The company shall, within thirty days from the date of the opening of any foreign register, file
with the Registrar notice of the situation of the office in Form No.MGT.3.

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 2. in the event of any change in the situation of such office or of its discontinuance, shall, within
Thirty days file notice in Form No.MGT.3.

3. A foreign register shall be open to inspection and may be closed, and extracts may be taken
there from and copies thereof may be required, in the same manner, mutatis mutandis, as is
applicable to the principal register, except that the advertisement before closing the register shall
be inserted in at least two newspapers circulating in the place wherein the foreign register is
kept.
CONTENTS OF REGISTER OF MEMBERS IN CASE COMPANY NOT HAVING SHARE CAPITAL

In the case of a company not having share capital, the register of members shall contain the
following particulars, in respect of each member, namely:-
(a) name of the member; address (registered office address in case the member is a body
corporate); e-mail address; Permanent Account Number or CIN; Unique Identification Number, if
any; Father’s/ Mother’s/ Spouse’s name; Occupation; Status; Nationality; in case member is a
minor, name of the guardian and the date of birth of the member; name and address of nominee;
(b) date of becoming member;
(c) date of cessation;
(d) amount of guarantee, if any;
(e) any other interest if any; and
(f) instructions, if any, given by the member with regard to sending of notices etc.

Format
It is provided that every company limited by shares shall from the date of its registration maintain
a register of its members in Form No. MGT-1.

Index of Members

Every register maintained under sub-section (1) of section 88 of the Act, shall include an index of
the names entered in the respective registers and the index shall, in respect of each folio, contain
sufficient indication to enable the entries relating to that folio in the register to be readily found.

#Questionable point: The maintenance of index is not necessary, in case, the number of members is
less than 50.

The company shall make the necessary entries in the index simultaneously with the entry for
allotment or transfer of any security in such Register.
Inspection must be allowed of the Index in the same manner as applicable to the register of members

Closing of Register of Members- Section 91 /Record date

(1)A company may close the register of members or the register of debenture-holders or the
register of other security holders for any period or periods not exceeding in the aggregate 45 days in
each year, but not exceeding 30 days at any one time, subject to giving of previous notice of atleast
7 days or such lesser period as may be specified by Securities and Exchange Board for listed companies
or the companies which intend to get their securities listed, in the
prescribed manner.

(2) If the register of members or of debenture-holders or of other security holders is closed without
giving the notice as provided above, or after giving shorter notice than that so provided, or for a
continuous or an aggregate period in excess of the limits specified in that sub-section,

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 Penalty: the company and every officer of the company who is in default shall be liable to a
penalty of 5000 rupees for every day subject to a maximum of 1 lakh rupees during which
the register is kept closed.

(3) The closure of the register is cloaked with the right to refuse the transfer of shares/debentures.
Record date is an alternate for closing the registers. The purpose of closing the registers is to get the
registers updated and to fix a cut-off date for the purpose of payment of dividend or issue of rights
and bonus shares.

(4) Further Rule 10 of the Companies (Management and Administration) Rules, 2014 in relation to
Closure of register of members or debenture holders or other security holders provides that
shall give at least 7 days previous notice and in such manner, as may be specified by SEBI, if
such company is a listed company or intends to get its securities listed, by advertisement atleast once
in a vernacular newspaper in the principal vernacular language of the district in the place where the
registered office of the company is situated, and at least once in English language in an English
newspaper circulating in that district and having wide circulation in the place where the registered
office of the company is situated and publish the notice on the website as may be notified by the Central
Government and on the website, if any, of the Company

Note: The Newspaper advertisement is not required in case of Private company, provided that the
notice has been served on all members of the private company not less than 7 days prior to closure
i.e., even a email notification is sufficient.
Authentication of the Register

Rule 8 of the Companies (Management and Administration) Rules, 2014

The entries in the registers maintained under section 88 and index included therein shall be
authenticated by the

- company secretary of the company or

- by any other person authorised by the Board for the purpose, and the date of the board resolution
authorising the same shall be mentioned.

The entries in the foreign register shall be authenticated by the company secretary of the
company or person authorised by the Board by appending his signature to each entry

Place of keeping and inspection of the Registers – Section 94

The registers shall be maintained at the registered office of the company unless special resolution is
passed in a general meeting authorising the keeping of the register at any other place within the city,
town or village in which the registered office is situated or any other place in India in which more
than one-tenth of the total members entered in the register of members reside.

Inspection of Registers – section 94

According to section 94 with Rule 14 of the Companies (Management & Administration) Rules,
2014

1) The registers and their indices, except when they are closed under the provisions of this Act,
and the copies of all the returns shall be open for inspection

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 • by any member, debenture-holder, other security holder or beneficial owner,
- during business hours
- without payment of any fees and
• by any other person on payment of such fees as may be specified in the articles of association
of the company but not exceeding Rs. 50 for each inspection.

2) Any such member, debenture-holder, other security holder or beneficial owner or any other
person may–
(a) take extracts from any register, or index or return without payment of any fee; or
(b) require a copy of any such register or entries therein or return on payment of such fees as may
be specified in the Articles of Association of the company but not exceeding Rs 10 for each
page. Such copy or entries or return shall be supplied within 7 days of deposit of such fee.

3) The registers and indices maintained pursuant to section 88 and copies of returns prepared
pursuant to section 92 of the Act, shall be open for inspection during business hours, at such
reasonable time on every working day as the board may decide
Explanation: For the purposes of this sub-rule, reasonable time of not less than 2 hours on
every working day shall be considered by the company.
Further it is provided that any such member, debenture holder, security holder or beneficial owner
or any other person may require a copy of any such register or entries therein or return on payment.

#Amendment Dec 2022

“Notwithstanding anything contained in sub-rules (1) and (2), the following particulars of the
register or index or return in respect of the members of accompany shall not be made available
for any inspection under sub-section (2) or for taking extracts or copies under sub-section (3) of
section 94, namely
-address or
-registered address (in case of a body corporate);
- e-mail ID;
- Unique Identification Number;
- PAN Number.”
Preservation of Registers

1) Rule 15 of the Companies (Management and Administration) Rules, 2014 provides that the
register of members along with the index shall be preserved permanently and shall be kept in
the custody of the Company Secretary of the company or any other person authorized by the
Board for such purpose

2) The register of debenture holders or any other security holders along with the index shall be
preserved for a period of 8 years from the date of redemption of debentures or securities, as
the case may be, and shall be kept in the custody of the company secretary of the company or
any other person authorized by the Board for such purpose.

3) The foreign register of members shall be preserved permanently, unless it is discontinued and
all the entries are transferred to any other foreign register or to the principal register. Foreign
register of debenture holders or any other security holders shall be preserved for a period of 8
years from the date of redemption of such debentures or securities. The foreign register shall
be kept in the custody of the company secretary or person authorised by the Board.

5.10 | P a g e
 Register an evidence

Section 95 of the Companies Act, 2013 provides that the registers, their indices and copies of annual
returns maintained under sections 88 and 94 shall be prima facie evidence of any matter directed or
authorised to be inserted therein by or under this Act.

A register of members is prima facie evidence of the truth of its contents. Accordingly, if a person’s
name, to his knowledge, is there in the register of members of a company, he shall be deemed to be a
member and onus lies on him to prove that he is not a member. He must promptly appeal to the
Tribunal or a competent Court outside India specified by the Central Government by notification, in
respect of foreign members or debenture holder residing outside India for rectification of the register
under Section 59 of the Act to take his name off the register, failing which the doctrine of holding out
will apply.

#Illustration:
In Re. M.F.R.D. Cruz, A.I.R. 1939 Madras 803, the plaintiff applied for 4,000 shares in a company but
no allotment was made to him. Subsequently 4,000 shares were transferred to him without his
request and his name was entered in the register of members. The plaintiff knew it but took no steps
for rectification of the register of members. The company went into liquidation and he was held liable
as a contributory. The Court held “when a person knows that his name is included in the register of
shareholders and he stands by and allows his name to remain, he is holding out to the public that he
is a shareholder and thereby he loses his right to have his name removed”.

In, Suhas Chakma vs. South Asia Human Rights Documentation Centre Pvt. Ltd., thecontention of the
petitioner is that he never executed any instrument of transfer of his shareholdings to the 2nd
respondent, and that he came to know that he was not a shareholder of the 1st respondentcompany by
virtue of inspection of the Annual Return and that in relation to the illegal and fraudulent transfer of
his shares, he came to know about the same only upon perusal of the AnnualReturns. The NCLT, New
Delhi Bench observed that, in view of the wordings used in section 164of the Companies Act, 1956 (now
Section 95 under the Companies Act,2013) to the effect that registers, returns and documents shall be
only prima facie evidence and hence subject to rebuttal, and therefore, cannot be treated as conclusive
evidence and in absence of share transfer forms andspecified share certificates/letter of allotment in
question, transfer of equity shares of Petitioner byRespondents were fraudulent and sham and declare
it to be illegal and void

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 Rectification of a Register of Members – Section 59

Background

• Any person, whose name is entered in the register of members of a company, considered to be
its member, although he may not own the shares which are shown in his name in the register of
members. On the contrary, a person, whose name is not entered in the register of members is
not considered as member of the company even though he may have done everything to entitle
him to be put on the register of members. Injustice may, therefore, result from such omission
or commission.

Section 59 of the Companies Act, 2013 confers powers on the Tribunal or a competent court
outside India specified by the Central Government by notification in respect of foreign members or
debenture-holders residing outside India to order rectification of register of members of a
company if an appeal is made by the aggrieved person or by any member of the company or the
company on any of the following grounds:

(a) where the name of a person is without sufficient cause, entered in the register of members of
a company;
(b)where his name, after having been entered in the register, is omitted without sufficient cause;or
(c) where default is made or unnecessary delay takes place in entering in the register of members
the fact of any person having become, or ceased to be, a member of the company.

This may happen where a person has transferred his shares according to law and the company
either refuses or delays registration of transfer in the transferee’s name.

The Tribunal may, after hearing the parties to the appeal for rectification of register of members
either
- dismiss the appeal or
- direct that the transfer or transmission shall be registered by the company within 10 days
of the receipt of the order or
- direct for rectification of records of the depository or the register and in the latter case
- also direct the company to pay damages if any, sustained by the party aggrieved.

The provisions of this section shall not restrict the right of a holder of securities, to transfer such
securities and any person acquiring such securities shall be entitled to voting rights unless the voting
rights have been suspended by an order of the Tribunal [Section 59(3)].

Where the transfer of securities is in contravention of any of the provisions of the Securities
Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992 or this Act
or any other law for the time being in force, the Tribunal may, on an application made by the
depository, company, depository participant, the holder of the securities or the Securities and
Exchange Board, direct any company or a depository to set right the contravention and rectify its
register or records concerned. [Section 59(4)]

5.12 | P a g e
 Important Points

Rule 5 of the Companies (Management and Administration) Rules, 2014 provides that:
• The entries in the registers, shall be made within 7 days after the Board of Directors or its duly
constituted committee approves the allotment or transfer of shares, debentures or any
other securities, as the case may be.
• Consequent upon any forfeiture, buy-back, reduction, sub-division, consolidation or cancellation of
shares, issue of sweat equity shares, transmission of shares, shares issued under any scheme of
arrangements, mergers, reconstitution or employees stock option scheme or any of such scheme
provided under this Act or by issue of duplicate or new share certificates or new debenture or other
security certificates, entry shall be made within seven days after approval by the Board or committee,
in the register of members or in the respective registers, as the case may be.
• If any change occurs in the status of a member or debenture holder or any other security holder
whether due to death or insolvency or change of name or due to transfer to Investor Education
Protection Fund or due to any other reason, entries thereof explaining the change shall be made in the
respective register.
• If any rectification is made in the register by the company pursuant to any order passed by
the competent authority under the Act, the necessary reference of such order shall be
indicated in the respective register.
• In case of companies whose securities are listed on a stock exchange in or outside India, the
particulars of any pledge, charge, lien or hypothecation created by the PROMOTERS in respect of any
securities of the company held by the promoter including the names of pledgee/pawnee and any
revocation therein shall be entered in the register within 15 days from such an event.
• If PROMOTERS of any listed company, which has formed a joint venture company with another
company have pledged or hypothecated or created charge or lien in respect of any security of the
listed company in connection with such joint venture company, the particulars ofsuch pledge,
hypothecation, charge and lien shall be entered in the register members of the
listed company within 15 days from such an event.

# Previous Year Ques: (June 2021) (3m)

Q1) Company Secretary of Pumpkin Ltd. has made following entries into Register of members,
debenture holders and other security holders on happening of certain events.

Event Date of event Date on which entry was made

th
Allotment of debentures 11 November 2021 20th November 2021
th
Forfeiture of shares 15 November 2021 20th November 2021
Issue of duplicate share 10th november 2021 24th November 2021
certificates
Decide on the validity of the entries made by the Company Secretary in light of the provisions of the
Companies Act, 2013.

Ans: Following are the relevant provisions regarding entries in the register of members, debenture
holders and other security holders as contained in Rule 5 of the Companies (Management and
Administration) Rules, 2014:

 The entries in register of members shall be made within seven (7) days of approval of allotment or
transfer of shares, debenture or other securities
 Entry shall be made within seven (7) days in case of forfeiture or issue of duplicate or new share
certificates after the approval of board or committee

5.13 | P a g e
Applying the above rules, it can be said that entries related to allotment of debentures, issue of
duplicate share certificates and forfeiture of shares shall be made within period of seven (7) days.

In the present case, the entries for allotment of debentures and issue of duplicate shares are made
beyond the period of seven (7) days and hence not in order. Whereas the entry related to forfeiture of
shares is made within seven (7) days and the same is in order.

Q2: Ram Singh is a shareholder of Alexandra India Ltd. The Board of directors of the company are
of the view that the conduct of Ram Singh has been detrimental to the interest of the company.
Further, the Board also noted that Ram Singh is director in a company which is a competitor
company of Alexandra India Ltd. The Articles of Association of Alexandra India Ltd. permit expulsion
of members. The Board unanimously decided to expel Ram Singh from the company. Discuss the
relevant provisions of Companies Act, 2013 in this regard. If Ram Singh files a case against the Board
whether he will win the case? (DEC 2019) (5M)

Ans: The Department of Company Affairs (now, Ministry of Corporate Affairs) clarified that an article
for expulsion of a member is opposed to the fundamental principles of the Company Jurisprudence
and is ultra vires the company, the reason being that such a provision will be against the provisions of
the Companies Act relating to the rights of a member in a company, the powers of the Central
Government as an appellate authority under Section 111 of the Act and the powers of the Court under
Sections 107, 395 and 397 of the Companies Act, 1956.

Further, according to Section 6 of the Companies Act, 2013, the Act shall override the Memorandum
and Articles of Association and any provisions contained in these documents repugnant to the
provisions of the Companies Act, 2013 shall be void.

Therefore, any assumption of the powers by the Board of Directors to expel a member by alteration
of Articles of Association shall be illegal and void.

The Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Com Cases 1 has laid down
the law as to the conditions on the basis of which directors could refuse a person to be admitted as a
member of the company. The principles laid down by the Supreme Court in this case, even though
pertain to the refusal by a company to the admission of a person as a member of the company, are
applicable even with greater force to a case of expulsion of an existing member. As, under Article 141
of the Constitution, the law declared by the Supreme Court is binding on all courts within the territory
of India, any provision pertaining to the expulsion of a member by the management of a company which
is against the law as laid down by the Supreme Court will be illegal and ultra vires. In the light of the
aforesaid position, it is clarified that assumption by the Board of directors of a company of any power
to expel a member by amending its articles of association is illegal and void.

If Ram Singh a files a suit against the company or the directors he will certainly win the case, as expulsion
of a member is illegal and void as per the Companies Act 2013.

5.14 | P a g e
and such other particulars as may be prescribed.

Section 89(3) of the Act, states that where any change occurs in the beneficial interest in such shares,
the person referred in sub-section (1) and the beneficial owner specified under sub-section (2) of
Section 89 of the Act, shall make a declaration within thirty days, from the date of such change to the
company in the prescribed Form containing the prescribed particulars.

Section 89(4) of the Act, states that the Central Government may make rules to provide forthe manner
of holding and disclosing beneficial interest and beneficial ownership under this section.

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Section 89(5) of the Act, provides that if any person fails to make a declaration as required under
subsection (1) or sub-section (2) or sub-section (3) of Section 89, he shall be liable to a penalty of fifty
thousand rupees and in case of continuing failure, with a further penalty of two hundred rupees for
each day after the first during which such failure continues, subject to a maximum of five lakh rupees.

Section 89(6) of the Act, makes it obligatory on the part of the company to make a note of such a
declaration in the register concerned and to file within thirty days from the date of receipt of
declaration by it, with the Registrar of Companies, a return in the prescribed form with regard to such
a declaration with such fees or additional fees as may be prescribed.

In case of Specified IFSC Public Company/ Specified IFSC Private Company, in Section 89(6) the word
“30 days” is substituted as “60 days”. Notification dated 4th January, 2017.

Section 89(7) of the Act, says if a company, required to file a return under sub-section (6), fails to do
so before the expiry of the time specified therein, the company and every officer of the company who
is in default shall be liable to a penalty of one thousand rupees for each day during which such failure
continues, subject to a maximum of five lakh rupees in the case of a company and two lakh rupees in
case of an officer who is in default.

Section 89(8) of the Act, says no right in relation to any share in respect of which a declaration is
required to be made under this section but not made by the beneficial owner, shall be enforceable by
him or by any person claiming through him.

Section 89(9) of the Act, says that nothing in this section shall be deemed to prejudice the obligation
of a company to pay dividend to its members under this Act and the said obligation shall, on such
payment, stand discharged.

Section 89(10) of the Act, provides that for the purposes of this section and section 90, beneficial
interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the
right or entitlement of a person alone or together with any other person to:

• exercise or cause to be exercised any or all of the rights attached to such share; or
• receive or participate in any dividend or other distribution in respect of such share.

Section 89(11) of the Act, provides that the Central Government may, by notification, exempt any class
or classes of persons from complying with any of the requirements of this section, except sub-section
(10), if it is considered necessary to grant such exemption in the public interest and any such
exemption may be granted either unconditionally or subject to such conditions as may be specified in
the notification

Note: Refer notes for procedure.

SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY [SECTION 90 R/W THE COMPANIES

(SIGNIFICANT BENEFICIAL OWNERS) RULES, 2018]

Note: Refer notes for procedure.

Explanation: Direct Holding of Right and Entitlement

An individual shall be considered to hold a right or entitlement directly in the reporting company, if

5.16 | P a g e
he satisfies any of the following criteria, namely

(i) the shares in the reporting company representing such right or entitlement are held in the name of

the individual;

(iii) the individual holds or acquires a beneficial interest in the share of the reporting company under

Section 89(2), and has made a declaration in this regard to the reporting company.

Explanation: Indirect Holding of Right and Entitlement

An individual shall be considered to hold a right or entitlement indirectly in the reporting company, if

he satisfies any of the following criteria, in respect of a member of the reporting company, namely:

Meaning of Key Terms:

1) Acting together means-: If any individual, or individuals acting through any person or trust, act with
a common intent or purpose of exercising any rights or entitlements, or exercising control or
significant influence, over a reporting company, pursuant to an agreement or understanding, formal
or informal, such individual, or individuals, acting through any person or trust, as the case may be,
shall be deemed to be ‘acting together’.

2) Shares: For the purpose of calculation of 10% of beneficial interest in shares, Shares includes
instrument in form of:

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• Global Depository Receipts,

• Compulsorily Convertible Preference Shares, or

• Compulsory convertible debentures.

3) Reporting Company - As per Rule 2(f) of SBO Rules, 2018, Reporting Company means a company as
defined in clause (20) of section 2 of the Companies Act, 2013 required to comply with the
requirements of section 90 of the Companies Act, 2013

4) Partnership entity means a partnership firm registered under the Indian Partnership Act, 1932 (9
of 1,932) or a limited liability partnership registered under the Limited Liability Partnership Act, 2008

5) Majority stake means;-

(i) holding more than one-half of the equity share capital in the body corporate; or

(ii) holding more than one-half of the voting rights in the body corporate; or

(iii) having the right to receive or participate in more than one-half of the distributable dividend or any
other distribution by the body corporate.

6) Significant Influence means the power to participate, directly or indirectly, in the financial and
operating policy decisions of the reporting company but is not control or joint control of those policies.

Declarations to be made by Significant Beneficial Owner

Initial Disclosure: On the date of commencement of the Companies (Significant Beneficial Owners)
Amendment Rules, 2019, every individual who is a significant beneficial owner in a reporting company,
was required to file a declaration in Form No. BEN-1 to the reporting company within ninety days from
such commencement i.e., February 08, 2019. 

Continual Disclosure: Every individual, who subsequently becomes a SBO or where his significant
beneficial ownership undergoes any change shall file a declaration in Form No. BEN-1 to the reporting
company, within 30 days of acquiring such significant beneficial ownership or any change therein

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 Obligations of the Reporting Company

Filing of Returns with ROC:

Upon receipt of a declaration from the Significant Beneficial Owner of the company and changes
therein, the reporting company shall file a return in Form No. BEN-2 with the Registrar in respect of
such declaration, within a period of 30 days from the date of receipt of such declaration, along with
the prescribed fees. 

Notice to the Significant Beneficial Owner :

It should be noted that, the obligation of the individual to self-declare his significant beneficial
holdings, and the obligation of the company to send notice seeking information from members in
terms of Rule 2A of the Companies (Significant Beneficial Owners) Rules, 2018, are independent
obligations. As per Rule 2A(1) of the Companies (Significant Beneficial Owners) Rules, 2018, every
reporting company shall take necessary steps to find out if there is any individual who is a significant
beneficial owner, as defined in rule 2(h) of the Companies (Significant Beneficial Owners) Rules, 2018,
in relation to that reporting company, and if so, identify him and cause such individual to make a
declaration in Form No. BEN-1

Further, according to Section 90(5) a company shall give notice, in the prescribed manner, to any
person (whether or not a member of the company) whom the company knows or has reasonable
cause to believe-

(a) to be a significant beneficial owner of the company;

(b) to be having knowledge of the identity of a significant beneficial owner or another person likely
to have such knowledge; or

(c) to have been a significant beneficial owner of the company at any time during the three years
immediately preceding the date on which the notice is issued, and who is not registered as a
significant beneficial owner with the company as required under this section.

The above mentioned particulars should be submitted in writing to the registered address of the
company by concerned person not later than 30 days of the date of this notice.

Consequences of Non-Reporting under Section 90 (5)

As per Rule 7 of The Companies (Significant Beneficial Owners) Rules, 2018, the reporting company
shall apply to the Tribunal within a period of 15 days of the expiry of the period specified in BEN-4,

(i) where any person fails to give the information required by the notice in Form No. BEN-4, within the
time specified therein; or

(ii) where the information given is not satisfactory

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In accordance with section 90(7) of the Companies Act, 2013, for order directing that the shares in
question be subject to restrictions, including

(a) restrictions on the transfer of interest attached to the shares in question;

(b) suspension of the right to receive dividend or any other distribution in relation to the shares in
question;

(c) suspension of voting rights in relation to the shares in question;

(d) any other restriction on all or any of the rights attached with the shares in question.

5.20 | P a g e
 Illustration 1: Capital Structure of Company ABC limited is as following: Equity Share Capital of
Rs. 2,000 CCD’s of Rs. 3000 CCP’s of Rs. 1000 TOTAL Rs. 6,000 Mr. A beneficially holds Rs. 520
equity shares in the Company. Whether Mr. A beneficially required to give disclosure under SBO?

Solution: For the purpose of SBO Rules share capital includes (CCD’s and CCP’s). Therefore total
share capital of the Company is Rs. 6,000/-. Mr. A beneficially holds Share capital of Rs. 520/-. His
percentage of holding is 520/6000= 8.667%. As holding of Mr. A beneficially is less than 10%
therefore no need to give disclosures u/s 90 of SBO Provisions.

Illustration 2: If an Individual (‘A’) holding shares in any Company (Exp. Mr. A Holding 60%
shareholding of ABC Pvt. Ltd. and his name entered into register of member) Whether provisions
of SBO shall be applicable on Mr. A or Not?

Solution “Significant Beneficial Owner”: means beneficial owner holding ultimate beneficial interest
not less than 10% and whose name not entered in the register of members of a Company.
Therefore, one can opine that SBO provision applicable on person who is holding beneficial interest
and whose name not entered into register of members. In above mentioned example individual
holding shares directly in the company in his name therefore provision of SBO not applicable on
such individual.

Illustration 3: If an Individual (“A’’) holding shares in any Company, (Exp. Mr. A Holding 7%
shareholding of ABC Pvt. Ltd. and his name not entered into register of member). On behalf of
Mr. A name of Mr. B entered into register of Members. Whether provisions of SBO shall be
applicable on Mr. A or Not?

Solution: Significant Beneficial Owner means beneficial owner holding ultimate beneficial interest
not less than 10% and whose name not entered in the register of members of a Company. In the
above mentioned question, shareholding is less than 10% therefore question of SBO doesn’t arise.
No need to made compliances as per SBO.

Illustration 4: If in the question B; Mr. A Holding 18% shareholding of ABC Pvt. Ltd. and his name
not entered into register of member). On behalf of Mr. A name of Mr. B entered into register of
Members. Whether provisions of SBO shall be applicable on Mr. A or Not?

Solution: Mr. A is beneficial owner and Mr. B is registered owner. Mr. B holding shares on behalf of
Mr. A which is more than 10%. As per SBO provisions, Mr. A fall under conditions of Section 90.
Therefore, have to comply with the provisions of Section 90.

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 Practical Scenarios for determining SBOs:

(i)S holds directly 10% of equity in A Ltd. and he holds 55% of equity in H Ltd. which holds 1%
equity in A Ltd.
S holds directly 10% of equity in A Ltd. and he holds 55% of equity in H Ltd. which holds 1% equity
in A Ltd. - S is a Significant Beneficial Owner since he holds 11% totally through indirect and direct
holdings.

(ii) S holds 8% of equity while M holds 7% of equity in A Ltd. and they are deemed to act together.
S holds 8% of equity while Mr. M holds 7% of equity in A Ltd. and they are deemed to act together
- S and M are not Significant Beneficial Owner, as there is no indirect holding and their acting
together is irrelevant.

(iii) S holds 8% of equity in A Ltd. directly. S is also the Karta of a HUF that holds 7% equity in A
Ltd.
S holds 8% of equity in A Ltd. directly.Mr. S is also the Karta of a HUF that holds 7% of equity in A
Ltd. S is a Significant Beneficial Owner since he holds total 15% equity through indirect and direct
holdings.

(iv) S holds 8% of equity in A Ltd. directly. S is also the trustee of a discretionary trust that holds
3% equity in A Ltd.
S holds 8% of equity in A Ltd. directly. Mr S is also the trustee of a discretionary trust that holds 3%
equity in A Ltd. He is a Significant Beneficial Owner since he holds total 11% equity in A Ltd. through
indirect and direct holdings. Holding by way of being a trustee of a discretionary trust is considered
to be indirect holding.

Non-Applicability

As Per Rule 8 of the Companies (Significant Beneficial Owners) Rules, 2018 shall not be made
applicable to the extent the share of the reporting company is held by:
• IEPF Authority
• It’s holding reporting company; however, the details of such holding reporting company shall be
reported in Form No. BEN-2
• The Central Government, State Government or any local Authority
• Reporting co; or a body corporate; or an entity, controlled by the Central Government or by any
State Government or partially by the Central Government and partly by one or more State
Governments
• SEBI registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real
Estate Investment Trusts (REITs), Infrastructure Investment Trust (InVITs) regulated by SEBI
Investment Vehicles regulated by RBI, or IRDA, or Pension Fund Regulatory and Development
Authority

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 #Previosuly Asked Question- June 2021- 4marks

Question: Harsh Private Ltd. holds 50% of total shares of Spandan Ltd. A, B, and C holds 10%, 20%
and 30% shares of Harsh Private Ltd. Discuss the procedural formalities required to be complied
with by A, B and C with respect to their beneficial ownership.

Solution: As per Section 90 of the Companies Act, 2013 read with Rule 2(1)(h) of the Companies
(Significant Beneficial Owners) Rules, 2018, Significant Beneficial Owner (SBO) in relation to a
reporting company means an individual referred to in Section 90(1), who acting alone or together,
or through one or more persons or trust, possesses one or more of the following rights or
entitlements in such reporting company, namely:-
(i) holds indirectly, or together with any direct holdings, not less than 10% of the shares;
(ii) holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in
the shares;
(iii) has right to receive or participate in not less than 10% of the total distributable dividend, or any
other distribution, in a financial year through indirect holdings alone, or together with any direct
holdings;
(iv) has right to exercise, or actually exercises, significant influence or control, in any manner other
than through direct-holdings alone.
Further, Explanation III to above referred Rule 2(1)(h), for the purpose of definition of SBO, where
the member of the reporting company is a body corporate (whether incorporated or registered in
India or abroad), other than a limited liability partnership, then, an individual shall be considered to
hold a right or entitlement indirectly in the reporting company, only if he holds a majority stake.
Further, as per Rule 2(1)(d) of the SBO Rules, 2018 referred above, "majority stake" (as referred
in Explanation III above) means;
(i) holding more than one-half of the equity share capital in the body corporate; or
(ii) holding more than one-half of the voting rights in the body corporate; or
(iii) having the right to receive or participate in more than one-half of the distributable dividend or
any other distribution by the body corporate. Accordingly, in respect of the shares of Spandan Ltd. is
indirectly held by A, B and C (through Harsh Private Ltd), the SBO will be such individual who will
meet at least one of the two criteria referred hereinafter:
Criteria to be verified Status
Whether any Individual is holding majority NO, since neither of A, B or C is holding more
stake in Harsh Pvt. Ltd. (Being the body than one-half of the Equity share capital or
corporate, which is the member of Reporting more than one-half of the voting rights of
Company i.e., Harsh Pvt. Ltd
Whether any Individual is holding majority NO, since Harsh Ltd doesn’t appears to be
stake in the Ultimate holding company of Harsh having any holding or ultimate holding co, in
Pvt. Ltd (Being the body corporate, which is the view of the following points:
member of Reporting Company i.e., Spandan (i)Since 60% of the shares of Harsh Pvt Ltd. are
Ltd.) held by Individuals, therefore Harsh Pvt. Ltd.
cannot be a subsidiary of any other co under
Section 2(87)(ii) of the Cos Act, 2013.
(ii) Further, assuming that no other body
corporate controls the composition of Board of
Directors of Harsh Pvt. Ltd., it can be said that
Harsh Pvt. Ltd. Is not a subsidiary of any other
body corporate under Sec 2(87)(i) as well.

5.23 | P a g e
 Rights of Members

When once a person becomes a member, he is entitled to exercise all the rights of a member until he
ceases to be a member in accordance with the provisions of the Act.

I. Individual Rights

II. Collective Membership Rights

• The appointment of a receiver, the attachment of the shares, the pledge of the shares or taking

over of the management of a company which is holding shares in another company will not alter

the position.

• So long a person’s name stands registered in the books as a member, even if he hassold the share

and has given the share certificates and the blank transfer deed duly signed, he alone is entitled to

exercise the rights of membership.

Individual Rights

(1)Right to receive copies of the following documents from the company:

(i) A copy of the financial statements, including consolidated financial statements, if any, auditor’s
report and other document attached to the financial statements (Section 136)

(ii) Abridged financial statement and auditor’s report in the case of a listed company (Section 136).

(iii) Report of the Cost Auditor, if so directed by the Government.

(iv) Notices of the general meetings of the company (Sections 101-102). –

(2) Right to inspect statutory registers/returns and get copies thereof without payment on any fee
or on payment of prescribed fee.

The members have been given right to inspect the following registers etc.:

(i) Debenture trust deed (Section 71);

(ii) Register of Charges and instrument of charges (Section 85 & 87); -- [Chap 7]

(iii) Copies of contract of employment with Managing or Whole-time directors);

(iv) Shareholders’ Minutes Book (Section 119);

(v) Register of Contracts, Companies and Firms in which directors are interested (Section 189);

(vi) Register of directors and key managerial personnel and their shareholding (Section 170);

(3) Right to attend meetings of the shareholders and exercise voting rights at these meetings either

5.24 | P a g e
personally or through proxy (Sections 96, 100, 105 and 107).

(4) Other rights.

(i) To transfer shares.

(ii) To resist against increase in his liability without his written consent.

(iii) To receive dividend when declared.

(iv) To have rights shares (Section 62).

(v) To appoint directors (Section 152).

(vi) To share the surplus assets on winding up (Section 320).

(vii) Right to file class action suits before the Tribunal (Section 245)

(viii) Right of Nomination. (Section 72)

(ix) Right to file a suit or take any other action in case of any misleading statement or the inclusion
or omission of any matter in the prospectus. (Section 37)

Collective Membership Rights

1. The shareholders in majority determine the policy of the company and exercise control over the
management of the company.

• However, if and when the majority becomes oppressive or is accused of mismanagement of the
affairs of the company, Section 241 read with section 244 of the Act, confers right, to not less than
one hundred members of a company or not less than one-tenth of the total number of its members
whichever is less or any member or members holding not less than one-tenth of the issued share
capital of the company (but they must have paid all calls and others sums due on their shares) and in
the case of a company not having a share capital, not less than one-fifth of the total number of its
members, to apply to Board under Section 241 for relief in cases of oppression or for relief in cases of
mismanagement respectively.

2. Section 100 of the Companies Act, 2013 confers on members, holding not less than one-tenth of
the paid-up share capital of a company, right to make a requisition to the Board of directors to call an
extraordinary general meeting of the company. – [Chap 19]

Shareholders’ Pre-emptive Rights with regard to further issue of share capital (Right Shares)

To preserve the shareholders’ proportionate dividend, liquidation and voting rights, pre-emptive
rights are often recognised, but their existence and scope can be effected by provisions in the articles.
However, Section 62 (1) (a) of the Companies Act, 2013 secures shareholders’ pre-emptive rights with
regard to the further issue of share capital by the company.

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 Variation of shareholders rights (Rights of Dissenting Shareholders)

Section 48 (1) of the Companies Act, 2013 lays down that where a share capital of the company is
divided into different classes of shares, the rights attached to the shares of any class can be varied
with the consent in writing of the holders of not less than three-fourths of the issued shares of that
class or with a special resolution passed at a separate meeting of the holders of the issued shares of
that class. Further, the variation of rights of shareholders can be effected only:

(i) if provision with respect to such variation is contained in the Memorandum or Articles of association
of the company;

Note: However, if variation by one class of shareholders affects the rights of any other class of
shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained
and the provisions of this section shall apply to such variation.

Section 48(2) of the Companies Act, 2013 confers certain rights upon the dissenting shareholders.
According to section 48(2), where the rights of any class of shares are varied, the holders of not less
than 10% of the issued shares of that class, being persons who did not consent to such variation or
vote in favour of the special resolution for the variation, can apply to the Tribunal to have the
variation cancelled. Where any such application is made to the Tribunal, the variation will not be
effective unless and until it is confirmed by the Tribunal.

The above application shall be made within twenty-one days after the date on which the consent was
given or the resolution was passed, as the case may be, and may be made on behalf of the
shareholders entitled to make the application by such one or more of their number as they may
appoint in writing for the purpose.

Voting Rights of Members

 The right of attending shareholders’ meetings and voting thereat is the most important right of a
member of a company, as shareholders’ meetings play a very important role in the company’s life.
 Section 47 of the Act, provides that every member of a company limited by shares and holding
equity share capital therein, shall have right to vote on every resolution placed before the
company and his voting right on a poll shall be in proportion to his share in the paidup equity share
capital of the company.
 Preference shareholders ordinarily vote only on matters directly affecting the rights attached to
preference share capital and on any resolution for winding up of the company or for the
repayment or reduction of the equity or preference share capital. The voting right of a preference
shareholder on poll shall be in proportion to his share in the paid-up preference share capital of
the company. In respect of a resolution on a matter affecting both equity shareholders and
preference shareholders, the proportion of the voting rights of equity shareholders to the voting
rights of the preference shareholders shall be in the same proportion as the paid-up capital in
respect of the equity shares bears to the paid-up capital in respect of the preference shares.
However, where the dividend in respect of a class of preference shares has not been paid for a

5.26 | P a g e
 period of two years or more, such class of preference shareholders shall have a right to vote on
all the resolutions placed before the company (Section 47).
 Calls in advance: Section 50 of the Act lays down that a company may, if authorised by its articles,
accept from any member the whole or a part of the amount remaining unpaid on any shares held
by him although no part of that amount has been called up. Such advance payment, however,
shall not confer on the member concerned any voting rights.

Nomination by Security holders (including members) (Section 72)

• Section 72(1) of the Act, states that every holder of securities of a company may, at any time,
nominate, any person to whom his securities shall vest in the event of his death.

• Section 72(2) of the Act, states that when the securities are held jointly, the joint holders may
together nominate, any person to whom all the rights in the securities shall vest in the event of
death of all the joint holders.

• Section 72(3) The nominee shall, on the death of the holder of securities or, as the case may be,
on the death of the joint holders, become entitled to all the rights in the securities, of the holder
in relation to such securities.

• Section 72(4) of the Act, states that when the nominee is a minor, it shall be lawful for the holder
of the securities, making the nomination to appoint, in the prescribed manner, any person to
become entitled to the securities of the company, in the event of the death of the nominee
during his minority.

Note: Rule 19 of the Companies (Share Capital and debentures) Rules, 2014
1. Any holder of securities of a company may, at any time, nominate, in Form No. SH.13, any
person as his nominee in whom the securities shall vest in the event of his death.

2. On the receipt of the nomination form, a corresponding entry shall forthwith be made in the
relevant register of securities holders, maintained under section 88 of the Act.

3. The request for nomination should be recorded by the Company within a period of 2 months
from the date of receipt of the duly filled and signed nomination form.

4. A nomination may be cancelled, or varied by nominating any other person, by giving a notice
of such cancellation or variation, to the company in Form No. SH.14.

LIABILITY OF MEMBERS

• If the company is registered with unlimited liability, every member is liable in full for all the debts
of the company contracted during the period of his membership.

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• Where the company is limited by guarantee, each member will be bound to contribute in the
event of winding up a sum specified in the liability clause of the memorandum of association.

• In case of company limited by shares, each member is bound to contribute the full nominal value
of shares and his liability ends there.

• Where a company has been incorporated by furnishing any false or incorrect information, the
Tribunal may, on an application made to it, direct that liability of the members shall be unlimited.

• If a member ceased to be member of a company within one year prior to the commencement of
the winding up of the company he is liable to pay on the shares which he held to the extent of the
amount unpaid thereon, if:

(i)On the winding up, debts exist which were incurred while he was a member, and
(ii) it appears to the Tribunal that the present members are not able to satisfy the contribution

SHAREHOLDERS’ DEMOCRACY

• Democracy means the rule of people, by people and for people. In that context the shareholders
democracy means the rule of shareholders, by the shareholders, and for the shareholders in the
corporate enterprise, to which the shareholders belong.

• Precisely it is a right to speak, congregate, communicate with co-shareholders and to learn about
what is going on in the company.

• Under the Companies Act the powers have been divided between two segments: one is the
Board of Directors and the other is of shareholders. The directors exercise their powers through
meetings of Board of directors and shareholders exercise their powers through General Meetings.
Although constitutionally all the acts relating to the company can be performed in General
Meetings but most of the powers in regard thereto are delegated to the Board of directors by
virtue of the constitutional documents of the company viz. the Memorandum of Association and
Articles of Association.

Under Section 179 of the Companies Act 2013 a general power has been conferred on the Board of
directors. The section provides that “Subject to the provisions of this Act, 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 authorised to exercise and do.”

Proviso to this section restricts the power of the Board of directors to do things which are specifically
required to be done by shareholders in the General Meetings under the provisions of Companies Act
or Memorandum of Association or the Articles of Association.

Few businesses which are required to be transacted by shareholders

1. Alteration of Memorandum of Association and Articles of Association. –(Chap 4)

5.28 | P a g e
2. Further issue of share capital. – [Chap 4]
3. To reduce the share capital of the company. – [Chap 4]
4. To shift the registered office of the company outside the local limits of any city, town or village
where the registered office is situated. – [Chap 3]

5. To decide a place other than the registered office of the company where the statutory books,
required to be maintained.

6. To approach Central Government for investigation into the affairs of the company.
7. Any contract or arrangement with related party, above the threshold limits.
8. To make loans, to extend guarantee or provide security to other companies or make investment
beyond the limit specified.

9. To borrow money and to charge out the assets of the company to secure the borrowed money
where the sums to be borrowed along with money already borrowed exceeds the paid-up capital
of the company and its free reserves

10. To appoint directors.

11. To increase or reduce the number of directors within the limits laid down in Articles of Association.

12. To cancel, redeem debentures etc.

13. To make contribution to funds not related to the business of the company.
Note: In view of the rights conferred on shareholders to be exercised at General Meetings, the Act
casts an obligation on the directors to send notices for convening general meetings or else the
meetings shall be declared to be void as also all proceedings transacted thereat.

The courts have determined two broad duties to be performed by a director:

1. Duty of utmost care and skill in managing the affairs of the company or else be liable for damages.

2. Fiduciary duty to act bona fide in the interest of the company, not to exercise powers for collateral
benefit and not to earn profit from the position as a director.

Shareholders Agreement

• There are numerous situations where such agreements are entered into – family companies, JV
companies, venture capital investments, private equity investments, strategic alliances, and so on.

• Shareholders’ agreement is a contractual arrangement between the shareholders of a company

describing how the company should be operated and the defining inter-se shareholders’ rights
and obligations.

• Such agreements are specifically drafted to provide specific rights, impose definite restrictions
over and above those provided by the Companies Act. SHA creates personal obligation between

5.29 | P a g e
 the members signing such agreement however, such agreements do not become a regulation of
the company in the way the provisions of Articles are.

Enforceability of the Shareholder’s Agreement

In India courts have either refused to recognize clauses in shareholders agreements or, even when
consistent with company legislation, enforced such clauses only if they have been incorporated in the
articles of association of the company.

There is a series of rulings where the courts have upheld that in case of any conflict between the
Articles and the SHA, the former (AOA) will always prevail. Some of these are:

1. V.B. Rangaraj v. V.B. Gopalakrishnan (AIR 1992 SC 453)

The Supreme Court held that a restriction which is not specified in the articles of association is
not binding either on the company or on the shareholders.

2. Western Maharashtra Development Corporation Ltd. v. Bajaj Auto Ltd [(2010), it was held that
such clauses are to hamper the free transferability of shares and in violation of the Companies
Act, and hence, are not enforceable.

3. Subsequently in the case of Messer Holdings Limited Vs. Shyam Madanmohan Ruia the Division
Bench of Bombay High Court overruled its judgement in Western Maharashtra Development
Corporation Ltd and provided a more liberal interpretation and recognised the rights inter se
among shareholders in case of restrictions on transfer of shares.

In Indian context, while the landmark decision of the Supreme Court in V.B. Rangaraj case mentioned
above is often cited in the context of shareholders’ agreements, most other decisions have been
rendered by the High Courts in various states especially the Bombay High Court. The decisions on
shareholders’ agreements are not uniformly inclined in a direction. The High Court decisions are
limited in their applicability as they are susceptible to disagreements by other High Courts, thereby
conferring limited precedential value. It is difficult to come to clear and crisp answers as to
enforceability of shareholders’ agreements.

VETO POWER

• A veto – Latin word for “I forbid” – is the power to unilaterally stop an official action, especially
the enactment of legislation. A veto may give power only to stop changes, thus allowing its
holder to protect the status quo.

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• As per the Companies Act, 1956, shareholders who hold the majority of shares, rule the
company. This majority principle is recognised in a land mark case Foss vs. Harbottle (1843). The
decision taken by the majority shareholders was binding on the minority.

• Now this principal has been replaced and minority shareholders have been given greater power
under Companies Act, 2013.

• As per the provisions of the Companies Act, 2013 there are some resemblance where the
management can take decisions on their own, by virtue of law. However, there are some
instances where the consent of the shareholders is mandatory to approve any decision or
transaction which is said to be as the veto power or veto right of shareholders of the company.
For instance in case of related-party transactions, promoters, who are majority shareholders,
cannot vote in resolutions in cases of related-party transactions (however a company in which
ninety percent or more members, in number are relatives of promoters or are related parties
can vote in resolutions in cases of related-party transactions).

Casting Vote

Veto power is different than casting vote of Chairman. Casting vote is applicable in case of equality
of votes in favour and against. In case of equality the Chairman may give vote either in favour or
against the resolution and it can be carried accordingly.

Shareholders Agreement and Articles of Association of a company may provide for certain rights to
the minority shareholder who has invested funds in the company. Such powers may include power
to refuse capital expenditure over certain specified limit. In case the representative of the minority
group is not in favour of the capital expenditure proposed by the company, he can exercise his right
under the Articles which in common terminology is referred to as “veto powers”.

ASSIGNMENT OF SHARES IN A COMPANY = TRANSFER OF SHARES – [Chap 4]

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 Sample Resolution of Board Meeting for Transfer of Shares

CERTIFIED TRUE COPY OF THE RESOLUTION PASSED AT THE MEETING OF THE BOARD OF DIRECTORS
OF [Name of Company], HELD ON [Date], AT [Address].

The Director Mr./Mrs. [Name of Director], informs to the board that they are in receipt of some share
transfer application along with share certificates, share transfer deed, and other relevant documents
duly signed, stamped and authenticated, for the approval of the company and to record the details of
share transfer in the registers of members maintained by the company.

“RESOLVED THAT pursuant to the provision of section 56 of the Companies Act 2013 and other
relevant provisions as amended from time to time, the consent of the board of directors is hereby
accorded to record the transfer of share in the register of members maintained by the company as
per details given below:-

Date Name of Name of Transferee Number of shares Share Distinctive

Transferor Certificate no.
no.

FURTHER RESOLVED THAT Mr./Mrs. [Name of Director] director of the company is hereby
authorised to endorse the relevant share certificate and to enter the name of the transferee as a
member in the register of members and make entries in the register of share transfer and to do all
other necessary acts, deeds and things as may be required to give effect to the above resolution.”

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Specimen Shareholder’s Agreement

THIS AGREEMENT made the ................... day of ..................., 20..... BETWEEN MR. A residing at
...................(hereinafter referred to as “A”) (which expression shall, unless repugnant to the context
or meaning hereof, mean and include his heirs, executors, administrators and assigns) of the First
Part.
And
MR. B residing at .......................(hereinafter referred to as “B”) (which expression shall, unless
repugnant to the context or meaning hereof, mean and include his heirs executors, administrators
and assigns) of the Second Part.
And
................. (P) LTD., a Company incorporated under the Companies Act, 2013 and having its
registered office at................ herein represented by its. .................... (hereinafter referred to as “XYZ
Pvt. Ltd.”) which expression shall, unless repugnant to the context or meaning hereof, include its
successors and assigns) of the Third Part; WHEREAS:
(A) A and B hereto have agreed to jointly manage a company in India named “XYZ Pvt Ltd.”;
(B) A and B have agreed to become Equity Partners by investing in the shares of the Company subject
to the condition that they shall enter into a Shareholders Agreement in terms of these presents;
(C) The Company “XYZ PVT. LTD. “ has been requested to, and has agreed to, join in the execution of
these presents and to take this Agreement on record so that it is aware of the rights and obligations
of A and B, the parties hereto and ensure that they comply with the same;
(D) The parties hereto are desirous of recording the terms and conditions of their Agreement in
writing.
NOW IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS:-
1. (a) A and B shall jointly invest in the Company which is an existing company limited by shares under
the Companies Act, 2013 and known as “XYZ PVT LTD”.
(b) The registered office of the Company shall be situated at, or at such other places as may be
mutually agreed upon between the parties in writing.
(c) The Company shall carry on the business of running and managing restaurants and
(Description of the business and complete address), either by itself or through other agencies or
company industries and may carry on any other business as may be decided by B hereto and shall
ensure that no other business activity is undertaken by the Company at any time without the consent
of A hereto.
2. The authorised share capital of the Company is Rs. /- (Rupees only) consisting of ( ) equity shares of
Rs.10/- (Rupees ten) each.
3. The subscription by A hereto to the aforesaid authorised share capital of the Company shall be
1,00,000 (One lakh) equity shares of Rs.10/- (Rupees ten only) and the subscription by B to the
aforesaid authorised share capital of the Company shall be 1,00,000 (One lakh) equity shares of
Rs.10/-(Rupees ten only).
4. There shall be no further issue of capital without the consent of both the parties hereto, and unless
otherwise agreed upon in writing further investment shall be as mutually decided by both parties.
5. (a) The Board of Directors of the Company shall consist of A and B.

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 (b) A shall have the right to nominate two (2) Additional Directors onto the Board and B shall
have the right to nominate three or more Additional Directors on the Board. Both parties shall
be entitled at any time to remove any of the representatives on the Board by written notice to the
other party and to appoint another or other/s in their place.
(c) The day to day management of the Company shall be looked after by a Managing Director
to be appointed with the consent of B hereto. Any major acquisition of property, substantial
expansion of business activities or diversification or matters of policy shall be with the prior
consent of B.
(d) It is agreed as between the parties hereto that the position of Chairperson of the Company
shall be held by B or a nominee of B. The Chairman of the Board shall also be the Chairman of all
general meetings of the Company.
6. A and B hereto jointly and severally shall vote and act as members of the Company and with
respect to the shares of the Company held by them, so as to ensure that Directors of the Company
are at all times appointed and maintained in office in conformity with the provisions of this
Agreement. If at any time the provisions of this Agreement are not fully complied with, A and B
jointly and severally agree to promptly take all necessary steps to ensure that the provisions of
this Agreement hereof are fully implemented in letter and spirit.
7. (a) The Auditors of the Company shall be M/s.
(b) The Auditors of the Company shall not be changed without the prior written consent of both A
and B.
8. Any sale or transfer of shares in the Company by either party shall be as provided in Clause B.
9. If at any time during the continuance of this Agreement either A or B, desire to sell or transfer all
or any of their respective shares held by them in the Company, they shall do so strictly in
accordance with the provisions hereinafter written.
10. If either A or B desires at any time to sell the whole or part of their shares in the Company, he
shall first offer such shares in writing to the other. If the other does not accept in writing the offer
within 15 days of receipt of the offer, the first party shall then be at liberty within 30 days thereafter
to sell the shares so offered to any other persons of its choice at the same price and on the same
terms and conditions as contained in its written offer to the other party hereto in the first instance,
failing which the procedure contained in this sub-clause will have to be repeated by a party desiring
to sell his shares.
11.A and B agree and undertake not to disclose or divulge directly or indirectly to any third party any
trade or business secret or other secret or confidential information pertaining to the business, affairs
or transactions of each other or of the Company or of their clients or customers, that may have been
disclosed, imparted to or acquired by either of them from the other or from the Company.
12.A and B jointly and severally undertake:-
a) that they shall ensure that they, their representatives, proxies and agents representing them at
general meetings of the shareholders of the Company shall at all times exercise their votes in such
manner so as to comply with, and to fully and effectually implement, the provisions of this
Agreement.
b) that if any resolution is proposed contrary to the terms of this Agreement, the parties, their
representatives, proxies and agents representing them shall vote against it. If for any reason such
a resolution is passed, the parties will, if necessary, join together and convene an extraordinary,
general meeting of the Company in pursuance of section 100 of the Companies Act, 2013 for
implementing the terms of this Agreement.

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13.If either A or B shall commit a breach of any of the terms or provisions of this Agreement and shall
fail to rectify such breach within Sixty (60) days from the receipt of written notice from the party
complaining of the breach, then the latter shall be entitled, without prejudice to its other rights and
remedies under this Agreement or at law, to terminate the Agreement recorded herein by written
notice.
14. No modification of alteration of this Agreement or any of its terms or provisions shall be valid
or binding on A and/or B unless made in writing duly signed by both.
15. This Agreement is personal to A and B and shall not be transferred or assigned in whole or in part
by either party without the prior written consent of the other.
16. If any dispute or difference shall at any time arise between A and B as to any terms, provisions or
matters contained herein on as to their respective rights, claims, duties or liabilities hereunder or
otherwise, howsoever in relation to or arising out of or concerning this Agreement, such dispute or
difference shall be referred to the arbitration. The venue of such arbitration shall be in Bangalore
unless otherwise agreed in writing. Such arbitration shall be held under and in accordance with the
provisions of the Arbitration and Conciliation Act, 1996.
IN WITNESS WHEREOF the parties hereto have executed these presents the day and year first
hereinabove written.

SIGNED AND DELIVERED by MR. A Witness

SIGNED AND DELIVERD by MR.B Witness

SIGNED AND DELIVERED for and on behalf of XYZ by its SHAREHOLDERS AND AUTHORISED DIRECTORS
MR. A & MR. B in the presence of.

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 Lesson 6
Debt Instruments Concepts
Part A
Borrowing

In order to run a business effectively/successfully, adequate amount of capital is necessary. In some

cases capital arranged through internal resources i.e. by way of issuing equity share capital or using
accumulated profit is not adequate and the organisation is resorted to external resources of
arranging capital i.e., Bank Loan, Term Loan, Working Capital Loan, Overdraft facility from Bank,
Debentures, Public Fixed Deposits, External Commercial borrowing (ECB) etc.

What is Loan ?

A loan is a sum of money that one or more individuals or companies borrow from banks or other
financial institutions so as to financially manage planned or unplanned events. In doing so, the
borrower incurs a debt, which he has to pay back with interest and within a given period of time

Debts vs. Loans

Loan and debt are terms often used interchangeably due to the reason that they both primarily mean
borrowing money. However, there is a small difference between the two. A loan is money borrowed
from a lender. The lender can be a bank or a financial institution. Moreover, a loan is more structured
in terms of payment, and the principal amount is paid back to the borrower in instalments over a
period of time.

The term debt connotes that debt is the money that the company raises through the issuance of bonds
and debentures. Governments, companies, trusts, or corporations can issue bonds and debentures to
fund their business, and the lender, in this case, will be the investor. The investor will receive interest
payment regularly until the bond or debenture matures. Also, upon maturity, the investor gets back
the entire principal amount in lump sum.

Powers & Restrictions of Board u/s 179 and 180 of the Companies Act, 2013

1 The power of the company to borrow is exercised by its directors within the scope.
2 The powers to borrow money and to issue debentures whether in or outside India can only be
exercised by the Directors at a duly convened meeting.

3 Often the power of the company to borrow is unrestricted, but the authority of the directors is
limited to a certain extent.

4 Section 180(1)(c) of the Act prohibits the Board of directors of a company from borrowing a sum
which

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 - together with the monies already borrowed exceeds the aggregate of the paid-up share
capital of the company, its free reserves and securities premium APART FROM TEMPORARY
LOANS.

“temporary loans” means loans repayable on demand or within 6 months from the date of the loan
such as short-term, cash credit arrangements, but does not include loans raised for the purpose of
financial expenditure of a capital nature.

Note:
1. Banking company is not included in this provision.
2. Private companies are exempted from this provision.

It is important at this stage to distinguish between, borrowing which is ultra vires the company and
borrowing which is intra vires the company but outside the scope of the director’s authority

Unauthorized or Ultra Vires Borrowing

- Where a company borrows without the authority as per its articles it is an ultra vires borrowing.
- Any act which is ultra vires the company is void.
- In such a case the lender cannot sue the company for the return of the loan.
- Ultra vires borrowings cannot even be ratified by a resolution passed by the company in general
meeting.
- Lender unable to sue for return, or enforce any security granted to him, nevertheless has, in
“Equitable Doctrine”

Consequences of Ultra vires Borrowing :-

 Void ab initio: The ultra-vires acts are null and void ab initio. These acts are not binding on the
company. Neither the company can sue, nor it can be sued for such acts. [Ashbury Railway
Carriage and Iron Company v. Riche ]. L
 Estoppel: Estoppel or ratification cannot convert an ultra-vires act into an intra-vires act.
 Injunction: the lender has been given authority under law to restrain the company for using the
money lent. ‘The members can restrain it from doing so by getting an injunction from the court”.
[Attorney General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473]
 Subrogation: Where the money of an ultra-vires borrowing has been used to pay off lawful debts
of the company, he would be subrogated to the position of the creditor paid off and to that extent
would have the right to recover his loan from the company. Subrogation is allowed for the simple
reason that when a lawful debt has been paid off with an ultra-vires loan, the total indebtedness

6.2 | P a g e
 of the company remains the same. By subrogating the ultra-vires lender, the Court is able to
protect him from loss, while debt burden of the company is in no way increased.
 Liability of directors: In case of ultra-vires borrowing, the lender may be able to sue the directors
for breach of warranty of authority, especially if the directors deliberately misrepresented their
authority.

Intra vires Borrowing but outside the Scope of Agents’ Authority

Where the directors borrowed money beyond their authority but the borrowing is not ultra vires
of the company, such borrowing is called Intra vires borrowing but outside the Scope of Agents’
Authority.

E.g. where the articles provide that the directors shall have the power only up to Rs. 100 lakhs and
prior approval of the shareholders would be required to borrow beyond Rs. 100 lacs; any borrowing
beyond Rs.100 lakhs without shareholders approval i.e. intra vires borrowing by the company but
outside the authority of directors.

a If Company Ratifies: it MAY be ratified by the company, then it becomes binding on the
company. The company would be liable, particularly if the money has been used for the
benefit of the company.

b If Company does not Ratify: the company MAY refuse to ratify the agent’s act. Here the
normal principles of agency apply. The doctrine of Indoor Management (also known as rule
in Royal British Bank v. Turquand) shall protect the lender, provided he can establish that he
advanced the money in good faith.

- However, A third-party who deals with an agent knowing that the agent is exceeding his
authority has no right of action against the principal.

- Bearing in mind that the memorandum and articles are public documents, the contents
of which the third-party is deemed to know, he will obviously have no right of action
against the company if the agent’s lack of authority is obvious from reading them.

- But a third-party is not effected by secret restrictions on the agent’s authority.

Case Laws

1 If the borrowing by the directors is ultra vires their powers, the directors may, in certain
circumstances, be personally liable for damages to the lender, on the ground of the implied
warranty given by them, that they had power to borrow [Firbank’s Executors v. Humphreys,
(1886) 18 QBD 54; Garrard v. James, 1925 Ch. 616].

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 2 Sometimes it happens that a power to borrow exists but is restricted to a stated amount, in
such a case if by a single transaction an amount in excess is borrowed, only the excess would
be ultra vires and not the whole transaction [Deonarayan Prasad Bhadani v. Bank of Baroda,
(1957) 27 Com Cases 223 (Bom)].

3 In V.K.R.S.T Firm v. Oriental Investment Trust Ltd., under the authority of the company, its
managing director borrowed large sums of money and misappropriated it. The company was
held liable stating that where the borrowing is within the powers of the company, the lender
will not be prejudiced simply because its officer have applied the loan to unauthorised
activities provided the lender had no knowledge of the intended misuse.

Types of Borrowing

1A) Long Term Borrowing - Funds borrowed for a period ranging for 5 years or more are termed as
long-term borrowings. A long term borrowing is made for getting a new project financed or for
making big capital investment like purchase of property, plant, equipment and other fixed assets
etc. Generally Long term borrowing is made against charge on fixed Assets of the company.

1B) Short Term Borrowing - Funds needed to be borrowed for a short period say for a period up to
one year or so are termed as short term borrowings. This is made to meet the working capital need
of the company. Short term borrowing is generally made on hypothecation of stock and debtors.

1C) Medium Term Borrowing - Where the funds to be borrowed are for a period ranging from 1 to
5 years, such borrowings are termed as medium term borrowings. The commercial banks normally
finance purchase of land, machinery, vehicles etc.

2A) Secured Borrowing – A debt obligation is considered secured, if creditors have recourse to the
assets of the company on a proprietary basis or otherwise ahead of general claims against the
company.

2B) Unsecured Borrowing - comprise financial obligations, where creditors do not have recourse to
the assets of the company to satisfy their claims.

3A) Syndicated borrowing – if a borrower requires a large borrowing facility this is commonly
provided by a group of lenders known as a syndicate under a syndicated loan agreement. The
borrower uses one agreement covering the whole group of banks and different types of facility rather
than entering into a series of separate loans, each with different terms and conditions.

3B) Bilateral borrowing - refers to a borrowing made by a company from a particular bank/financial
institution. In this type of borrowing, there is a single contract between the company and the lender.

6.4 | P a g e
4A) Private borrowing - comprises bank-loan type obligations whereby the company takes loan from
a bank/financial Institution.
4B) Public borrowing - is a general definition covering all financial instruments that are freely
tradable on a public exchange or over the counter, with few, if any, restrictions i.e. Debentures,
Bonds etc.

How Companies execute funding?

Companies can fulfil their financial requirements by issuing equity or debt, borrowing funds through
financial institutions. Unlike equity, debt has a specified interest rate and a schedule of dates when
interest is to be paid and all the principal fully repaid. Equity is money the company already has in its
coffers or can raise from investors.

Many companies would prefer to use debt to support their growth, rather than equity, as it is less
expensive form of financing but there must still be sufficient operating cash flow generated by the
Company to meet the debt’s interest and principal payment obligations.

In every corporate organization engaged in doing business or involved in manufacturing activity or

industry providing services etc., there is always requirement of finances and funds. In order to run a
business effectively and successfully, adequate amount of capital is necessary. In some cases it is
capital is arranged by way of issuing equity share capital or using accumulated profit. But, Equity
funds most of the times when not adequate to meet the financial demand of the company for long
run, the organization is resorted to external resources for arranging capital i.e. External Commercial
Borrowing (ECB), Debentures, Bank Loan, Public Fixed Deposits etc.

The finances raised through debentures are generally long-term debt. Since debentures have no
collateral backing, they must rely on the creditworthiness and reputation of the issuer for support.
Both corporations and governments frequently issue debentures to raise capital or funds.

Debentures & Bonds

Meaning of Debentures

The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to borrow. Debenture
is a written instrument acknowledging a debt. It contains a contract for repayment of principal after a
specified period or at intervals or at the option of the company and for payment of interest at a fixed
rate payable usually either half-yearly or yearly on fixed dates.

Definitions

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 defines the following terms:

Regulation 2(1)(j)

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“Convertible debt instrument” means an instrument which creates or acknowledges indebtedness
and is convertible into equity shares of the issuer at a later date at or without the option of the holder
of the instrument, whether constituting a charge on the assets of the issuer or not.

Regulation 2(1)(k)

“Convertible security” means a security which is convertible into or exchangeable with equity shares
of the issuer at a later date, with or without the option of the holder of such security and includes
convertible debt instrument and convertible preference shares.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 defines the following
terms:

Regulation 2(1)(zl)

“Specified securities” means ‘equity shares’ and ‘convertible securities’ as defined under clause
28[(eee)] of sub-regulation (1) of regulation 2 of the 29[Securities and Exchange Board of India (Issue
of Capital and Disclosure Requirements) Regulations, 2018.

Regulation 2(1)(t)

“Non-convertible debt securities” means ‘debt securities’ as defined under the Securities and
Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021.
SEBI (Issue And Listing Of Non-Convertible Securities) Regulations, 2021 defines debenture under
the definition of “Debt securities” and related terms

Regulation 2(1)(k)

“Debt securities” means non-convertible debt securities with a fixed maturity period which create or
acknowledge indebtedness and includes debentures, bonds or any other security whether
constituting a charge on the assets/ properties or not, but excludes security receipts, securitized debt
instruments, money market instruments regulated by the Reserve Bank of India, and bonds issued by
the Government or such other bodies as may be specified by the Board.

Regulation 2(1)(x)

“Non-convertible securities” means debt securities, non-convertible redeemable preference shares,

perpetual non-cumulative preference shares, perpetual debt instruments and any other securities as
specified by the Board.

Regulation 2(1)(hh)(ii)

“Secured debt securities” shall mean such debt securities which are secured by creation of a charge
on the properties or assets of the issuer or its subsidiaries or its holding companies or its associate
companies having a value which is sufficient for the due repayment of principal and payment of
interest thereon.

Under the Companies Act, 2013

Section 2(30)

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“Debenture” includes debenture stock, bonds or any other instrument of a company evidencing a
debt, whether constituting a charge on the assets of the company or not. Provided that–

(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and

(b) such other instrument, as may be prescribed by the Central Government in consultation
with the Reserve Bank of India, issued by a company,

shall not be treated as debenture;

Difference between Bonds and Debentures

Basis of Difference Debentures Bonds

Nature Debentures are debt financial Bonds are debt financial
instruments issued by private / public
instruments issued by large
companies, for raising capital from corporations, financial institutions
the investors and government agencies for
raising additional fund from the
public.
Security Debentures can be secured as well as Bonds are secured in nature.
unsecured.

Owner The owner of a debenture is called a The owner of a bond is called a

debenture holder. bondholder.

Collateral Debentures do not get secured by the Bonds get secured by the collateral
collateral or physical assets of the or physical assets of the issuing
issuing company. Lenders purchase company
these instruments solely based on
the reputation of the issuing
company
Tenure Debentures are generally short to Bonds are long term investments
medium term investments and their and their tenure is generally higher
tenure is usually lower than bonds. than debentures

Convertibility Issuing company can convert only Bonds cannot be converted into
convertible and also partially equity shares of the company.
convertible debentures into shares
on the expiry as specified in the
clause.

Rate of Interest The debentures carry a fixed or The bonds carry a fixed or floating
floating interest rate that is generally interest rate that is generally lower
higher than bonds because they are than debentures because they are
less stable in terms of repayment, more stable in terms of repayment,
and they are also not backed by and they get backed by collateral of
collateral. the issuing company.

6.7 | P a g e
 Kinds of Debentures

1. On the basis of Convertibility of Instrument

(A) Non Convertible Debentures (NCD): These instruments retain the debt character and cannot
be converted into equity shares.

(B) Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity
shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally
decided at the time of subscription.

(C) Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the
issuer’s notice.

(D) Optionally Convertible Debentures (OCD): The INVESTOR has the option to either convert
these debentures into shares at price decided by the issuer/agreed upon at the time of issue.

2. On the basis of Security of Instrument

(A) Secured Debentures: These instruments are secured by a charge on the fixed assets of the
issuer company. So if the issuer fails on payment, his assets can be sold to repay the liability to the
investors.

(B) Unsecured Debentures/ Naked Debentures: These instruments are unsecured in the sense
that if the issuer defaults on payment of the interest or principal amount, the investor has to be
along with other unsecured creditors of the company.

3. On the basis of Redemption ability

(A) Redeemable Debentures: It refers to the debentures which are issued with a condition that
the debentures will be redeemed at a fixed date or upon demand, or after notice, or under a system
of periodical drawings.
(B) Perpetual or Irredeemable Debentures: A Debenture, in which no time is fixed for the
company to pay back the money, is an irredeemable debenture. However, after the commencement
of the Companies Act, 2013, now a company cannot issue perpetual or irredeemable debentures.

4. On the basis of Registration of Instrument

(A)Registered Debentures: Registered debentures are made out in the name of a particular person,
whose name appears on the debenture certificate and who is registered by the company as holder
on the Register of debenture holders. Such debentures are transferable in the same manner as

6.8 | P a g e
shares by means of a proper instrument of transfer duly stamped and executed and satisfying the
other requirements specified in Section 56 of the Companies Act, 2013.

(B)Bearer debentures: Bearer debentures on the other hand, are made out to bearer, and are
negotiable instruments, and so transferable by mere delivery like share warrants. The person to
whom a bearer debenture is transferred become a “holder in due course” and unless contrary is
shown, is entitled to receive and recover the principal and the interest accrued thereon. [Calcutta
Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat (1971) 41 Com Cases 1063].

Debentures and transferability

As per the provisions Section 56, securities will be transferable vide Form SH-4. Transferability is
governed by the provisions of the Articles of Association.

Pari Passu Clause in case of Debentures

 When it is said that existing debentures shall be issued pari passu clause, it implies that no
difference will be made between the old and new debentures.
 If the words pari passu are not used, the debentures will be payable according to the date of
issue, and if they are all issued on the same day, they will be payable accordingly to their
numerical order. However, a company cannot issue a new series of debentures so as to rank pari
passu with prior series, unless the power to do so is expressly reserved and contained in the
debentures of the previous series.

Debenture Stock

 Accordingly, a debenture stock is a borrowed capital consolidated into one mass for the sake of
convenience.
 Instead of each lender having a separate bond or mortgage, he has a certificate entitling him to
a certain sum being a portion of one large loan.
 It is generally secured by a trust deed
 Debenture stock must be fully paid, while debenture may or may not be fully paid.

CREATION OF SECURITY

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 Creation of security means mortgaging the property in favour of Debenture Trustee for the
benefit of debenture holders.
 The debenture holders are beneficiaries and they have no access to mortgaged property.
 The Debenture Trustee holds the secured property for benefit of debenture holders.
 In the event of default by the issuer of security, the Debenture Trustee will have the power to
sale the Property and the proceeds of sale will have to be applied to redeem the debentures

Issue And Redemption Of Debt Securities

Section 71(1) states that a company may issue debentures with an option to convert such
debentures into shares, either wholly or partly at the time of redemption. The issue of debentures
with an option to convert such debentures into shares, wholly or partly, shall be approved by a
special resolution passed at a general meeting.

Section 71(2) states that no company shall issue any debentures carrying any voting rights.

Section 71(3) read with Rule 18(1) of Companies (Share Capital and Debentures) Rules, 2014 provides
that the SECURED DEBENTURES MAY BE ISSUED only when the following conditions are compiled
with: -

(A) Redemption Clause : An issue of secured debentures may be made, provided the date of its
redemption shall not exceed 10 years from the date of issue.

Note: A following companies may ISSUE SECURED DEBENTURES for a period exceeding 10 years but
not exceeding 30 years;

(i) Companies engaged in setting up of infrastructure projects;

(ii) ‘Infrastructure Finance Companies’

(iii) Infrastructure Debt Fund Non-Banking Financial Companies’

(iv) Companies permitted by a Ministry or Department of the Central Government by Reserve

Bank of India or by the National Housing Bank or by any other statutory authority to issue
debentures for a period exceeding ten years.

(B)Creation of Security: Such an issue of debentures shall be secured by the creation of a charge on
the properties or assets of the company or its subsidiaries or its holding company or its associates
companies, having a value which is sufficient for the due repayment of the amount of debentures
and interest thereon.

(C) Appointment of Debenture Trustee & execution of Debenture Trust deed : The company shall
appoint a DEBENTURE TRUSTEE before the issue of prospectus or letter of offer for subscription of

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its debentures and not later than 60 days after the allotment of the debentures, EXECUTE A
DEBENTURE TRUST DEED to protect the interest of the debenture holders; and

(D)the security for the debentures by way of a charge or mortgage shall be treated in favour of the
debenture trustee on –

Note: Further in case of any issue of debentures by a Government company which is fully secured
by the guarantee given by the Central Government or State Government there is no requirement
for creation of charge.
Section 71(4), when debentures are issued by a company, the COMPANY SHALL CREATE A
DEBENTURE REDEMPTION RESERVE ACCOUNT (DRR) out of the profits of the company available for
payment of dividend.

Such amount shall not be utilised by the company except for the redemption of debentures

Conversion of Debentures into shares

Section 71(1) of the Act states that the issue of debentures with an option to convert such debentures
into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting.

As per section 71 (1) of the Companies Act 2013, a company has the power to issue debentures with
an option of Conversion of Debentures into Shares wholly or partly. However, the same shall be
approved by a special resolution passed at a general meeting. There being no prescribed rule under
the Companies Act 2013 governing the procedure for the same, hence the provisions of section 42
and 62 of the Companies Act 2013 read with applicable rules governing the provisions for issue of
shares / security must be taken into consideration.

Debenture Redemption Reserve (DRR)

Meaning of DRR:

Debenture Redemption Reserve (DRR) is a fund maintained by companies who have issued
debentures. Its purpose is to minimize the risk of default on repayment of debentures. The DRR
ensures availability of funds for meeting obligations towards debenture holders on maturity. Purpose
and Uniqueness:

The primary reasons for default on maturity are a lack of profitability and a lack of liquidity. To address
both these concerns, the concept of a DRR provides for two requirements: 

 Annually, a portion of the profit is ‘earmarked’ for transfer to the DRR. Such earmarked amount
cannot be used until repayment of the debentures is made. The effect of this strategy is that the
dividend available to shareholders is reduced. When dividends are lowered, enough funds are

6.11 | P a g e
 retained in the company to enable a future settlement to debenture-holders. Thus, the chance
that the company may make a default due to profitability related issues is minimized.

 Every year, investments are purchased for an amount equal to the transfer made to the DRR. Only
securities approved by the government can be purchased for investments. The investments
cannot be sold for any purpose other than meeting the liability toward the debenture holders.
The effect of this strategy is that a part of the company’s assets is reserved for repaying the
debenture liability. Thus, the chance that the company may make a default due to profitability
related issues is minimized.

Quantum of Debenture Redemption Reserve

Section 71(4) of the Companies Act 2013 states that where debentures are issued by a company, the
company shall create a debenture redemption reserve account out of the profits of the company
available for payment of dividend and the amount credited to such account shall not be utilized by the
company except for the redemption of debentures.

Rule 18(7) of the Companies (Share Capital and Debenture) Rules, 2014 states that the company shall
comply with the requirements with regard to Debenture Redemption Reserve (DRR) and investment
or deposit of sum in respect of debentures maturing during the year ending on the 31st day of March
of next year.

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 Creation of Debenture Redemption Fund (DRF)

Every listed company (including listed NBFCs and Housing Finance Companies) and other unlisted
company (other than unlisted NBFCs and Housing Finance Companies) shall on or before the 30th day
of April in each year, in respect of debentures issued by the above mentioned companies is required
to deposit at least 15 % of the amount of its debentures maturing during the year ending on 31st day
of March of next year. The company may choose any of the below given methods:

(i) in deposits with any scheduled bank;

(ii) in unencumbered securities of the Government or any State Government;

(iii)in unencumbered securities mentioned in sub-clauses(a) to (d) and (ee) ofsection 20 of the Indian
Trusts Act, 1882;

(iv) in unencumbered bonds issued by any other company which is notified under sub-clause (f) of
section 20 of the Indian Trusts Act, 1882;

The amount invested or deposited as above shall not be used for any purpose other than for
redemption of debentures maturing during the year referred above.

Creation of Debenture Redemption Reserve in case of partly convertible debentures:

Debenture Redemption Reserve shall be created in respect of non-convertible portion of debenture

issue.

Utilization :

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The amount invested or deposited as above shall not be used for any purpose other than for
redemption of debentures maturing during the year referred above.

The amount credited to Debenture Redemption Reserve shall not be utilized by the company except
for the purpose of redemption of debentures.

Disclosure in Directors Report:

The amount which is transferred as Debenture Redemption Reserve is to be disclosed in Directors’

Report.

(1)The Regional Director has filed an affidavit on behalf of the central government in which two
observations have been made. The first observation of the Regional Director is that at the meeting
of the shareholders of the petitioner company, nine shareholders together holding 527 equity
shares voted against the scheme. The second observation of the Regional Director is that in terms
of section 117C(1) of the Companies Act, 1956 where a company issues debentures, it has to create
a debenture redemption reserve for redemption of such debentures to which adequate amount
has to be credited from out of its profits every year until such debentures are redeemed. [Britannia
Industries ltd vs. Unknown(2010)]

(2) The apex court has considered as to whether the debenture redemption reserve is a reserve
within the meaning of the Companies Act. The Supreme Court has held in the said case that any
amount set apart in the accounts of the company to redeem the debentures must be treated as
monies set apart to meet a known liability. The debentures will have to be shown in the company’s
balance sheet of the year as liability. Merely because the debentures are not redeemable during
the accounting period, the liability of redeemed debenture does not cease to exist. The Supreme
Court further held that the debenture redemption Reserve must be regarded as a provision made
by the assessee-company to enable it to redeem the said debentures when they become due for
redemption. The Supreme Court further stated that the amounts set apart for redemption of
debentures are not in the nature of charge against profit but are merely appropriation of profits.
The said debenture redemption reserve account cannot be held to be a reserve on that ground
itself. [Rayon Corpn. Ltd. (supra)]

(3) The mere fact that a Debenture Redemption Reserve is labeled as a reserve will not render it
as a reserve in the true sense or meaning of that concept. An amount which is retained by way of
providing for a known liability is not a reserve. Consequently, the Tribunal was correct in holding
that the amount which was set apart as a Debenture Redemption Reserve is not a reserve within
the meaning of Explanation (b) to Section 115JA of the Income Tax Act, 1961. [Alembic Limited,
Baroda vs. Dy.Cit.,Circle-1(1)(2016)

Appointment of Debenture Trustees

Section 71(5) read with Rule 18(2) of aforesaid rules, provide that a company before making issue of
prospectus or an offer or inviting public or members to more than 500 persons, shall appoint one or
more debenture trustees.

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The names of the debenture trustees shall be stated in letter of offer inviting subscription for
debentures and also in all the subsequent notices or other communications sent to the debenture
holders. Before the appointment of debenture trustee or trustees, a written consent shall be
obtained from such debenture trustee or trustees proposed to be appointed and a statement to that
effect shall appear in the letter of offer issued for inviting the subscription of the debentures.

The disqualifications for debenture trustees are as under:

(a) beneficially holds shares in the company;

(b) is promoter, director or key managerial personnel or any other officer or an employee of the
company or its holding, subsidiary or associate company;
(c) is beneficially entitled to moneys paid by the company otherwise than as remuneration payable
to the debenture trustee;

(d) is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary
of such holding company;
(e) has furnished any guarantee in respect of the principal debts secured by the debentures or
interest thereon;
(f) has any pecuniary relationship with the company amounting to 2% or more of its gross turnover
or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is
lower, during the 2 immediately preceding financial years or during the current financial year;

(g) is relative of any promoter or director or key managerial personnel.

Debenture Trustees

1)Duties of Debenture Trustees

It shall be the duty of every debenture trustee to –

a. satisfy himself that the letter of offer does not contain any matter which is inconsistent with the
terms of the issue of debentures or with the trust deed;

b. satisfy himself that the conditions in the trust deed are not prejudicial to debenture holders;
c. call for periodical status or performance reports from the company;
d. communicate to debenture holders defaults, if any, with regard to payment of interest or
redemption of debentures and action taken by the trustee therefor;

e. appoint a nominee director on the Board of the company in the event of- 2 consecutive year

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  default in payment of interest to the debenture holders; or
 default in creation of security for debentures; or
 default in redemption of debentures.
f. ensure the implementation of the conditions regarding creation of security for the debentures,
if any, and debenture redemption reserve;

g. ensure that the assets of the company are sufficient to discharge the interest and principal
amount at all times and that such assets are free from any other encumbrances except those
which are specifically agreed to by the debenture holders;
h. call for reports on the utilization of funds raised by the issue of debentures;
i. take steps to convene a meeting of the holders of debentures as and when required;
j. ensure that the debentures have been converted or redeemed in accordance with the terms of
the issue of debentures;

2) Meeting of the Debenture Holders

The meeting of all the debenture holders shall be convened by the debenture trustee on:
a. requisition in writing signed by debenture holders holding at least one-tenth in value of the
debentures for the time being outstanding;

b. the happening of any event, which constitutes a breach, default or which in the opinion of the
debenture trustees affect the interest of the debenture holders.

3)Casual Vacancy in Office of Debenture Trustee

The Board may fill any casual vacancy in the office of the trustee but while any such vacancy
continues, the remaining trustee or trustees, if any, may act.

However, where such vacancy is caused by the resignation of the debenture trustee, the vacancy
shall only be filled with the written consent of the majority of the debenture holders.

3) Removal of Debenture Trustee

The debenture trustee may be removed from office before the expiry of his term only if it is approved
by the holders of not less than three fourth in value of the debentures outstanding, at their meeting.

Previously asked question:

Can a debenture trustee be exempted from his liability if specified in the debentures deed?

Debenture Trust deed

• Debenture Trust deed is a written instrument legally conveying property to a trustee often for
the purpose of securing a loan or mortgage.

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• A trust deed in Form No. SH. 12 or as near there to as possible shall be executed by the company
issuing debentures in favour of the debenture trustees
• It will usually contain the names of the trustees, the identity of the beneficiaries and the nature
of the trust property, as well as the powers and duties of the trustees.

• It constitutes trustees charged with the duty of looking after the rights and interests of the
debenture holders.

• As per section 71(7), any provision contained in a trust deed, shall be void in so far as it would
have the effect of exempting a trustee thereof from, or indemnifying him against, any liability
for breach of trust, where he fails to show the degree of care and due diligence required of him
as a trustee, having regard to the provisions of the trust deed conferring on him any power,
authority or discretion:

#Liability can be exempted: Provided that the liability of the debenture trustee shall be subject
to such exemptions as may be agreed upon by debenture-holders holding not less than three-
fourths in value of the total debentures at a meeting held for the purpose.

• A trust deed shall be open for inspection to any member or debenture holder of the company,
in the same manner, to the same extent and on the payment of the same fees, as if it were the
register of members of the company.

Penal Provision

1. Section 71(9), provides that where at any time the debenture trustee comes to a conclusion
that the assets of the company are insufficient or are likely to become insufficient to discharge
the principal amount as and when it becomes due, the debenture trustee may file a petition
before the Tribunal (NCLT). Tribunal may, after hearing the company and any other person
interested in the matter, by order, impose such restrictions on the incurring of any further
liabilities by the company.

2. Further the Section 71(10) provides that where a company fails to redeem the debentures on
the date of their maturity or fails to pay interest on the debentures when it is due, the Tribunal
may, on the application of any or all of the debenture-holders, or debenture trustee and, after
hearing the parties concerned, direct, by order, the company to redeem the debentures
forthwith on payment of principal and interest due thereon.

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 CASE STUDY

(Held, the Hon’ble SAT in the case of The canning Industries Cochin Ltd. (CAICO) v. SEBI dated
28.01.2020 Appeal No. 115 of 2019)

The present appeal has been filed against the order dated 18th March, 2019 passed by the Whole
Time Member (WTM), Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’)
issuing various directions under section 11, 11(4), 11A, 11B and 19 of the Securities and Exchange
Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’).
The contention of the appellant is, that Section 42 of the Companies Act is not applicable in the
instant case and that the issue of the share capital is under Section 62(3) of the Companies Act,
2013 which has not been considered.

The contention of the learned senior counsel for SEBI is, that since the offer of FCDs was for more
than 200 persons, the said offer is a deemed public offer and therefore part one of the Chapter 1
of the Companies Act is required to be followed.

Judgment:

The Tribunal held that, as per Section 71(5) of the Companies Act, 2013- No company shall issue a
prospectus or make an offer or invitation to the public or to its members exceeding five hundred
for the subscription of its debentures, unless the company has, before such issue or offer, appointed
one or more debenture trustees and the conditions governing the appointment of such trustees
shall be such as may be prescribed.
A perusal of the aforesaid provision indicates that no offer can be made to its members exceeding
500 for the subscription of its dentures unless the Company, before such offer or issue has
appointed a trustee. Thus, the restriction is that debentures could be issued to only 500 persons if
there is no trustee appointed by the Company.

However the restriction of 500 persons is done away if a trustee was appointed by the Company.
In the instant case, it is an admitted fact that a trustee was appointed. Thus there was no restriction
to the number of shareholders to whom the debentures would be issued. In the light of the
aforesaid, the impugned order passed by the Whole Time Member cannot be sustained. The interim
order as well as the impugned order and the directions so issued are all quashed. The appeal is
allowed.

6.18 | P a g e
 Part B – DEPOSITS

OVERVIEW OF COMPANY DEPOSITS

Companies have always been attracted towards financing through deposits and, at times, problems
have arisen in the context of such deposits. In order to control the malpractices, the Companies Act,
2013 has introduced strict provisions under the deposit regime.

Sections 73 to 76 of the Companies Act 2013 read with the Companies (Acceptance of Deposits) Rules,
2014 made under Chapter V of Companies Act, 2013 regulate the receipt of money not to be
considered as deposit, invitation, acceptance and repayment of deposits by Companies

Meaning of Deposits:

Section 2(31) of the Companies Act, 2013 read with Rule 2(1)(c) of Companies (Acceptance of
Deposits) Rules, 2014, ‘deposit’ includes any receipt of money by way of deposit or loan or in any other
form by a company, but does not include the followings –

(i) Any amount received from the

• Central or state Government, or

• from any other source whose repayment is guaranteed by the Central or State Government,
or
• any amount received from a local authority, or
• any amount received from a statutory authority

(ii) Any amount received from

• foreign Governments,
• foreign international banks,
• multilateral financial institutions etc. subject to the provisions of Foreign Exchange
Management Act, 1999

(iii)Loan received from any banking company.

(iv)Loan or financial assistance from Public Financial Institutions

(v)Amount received against issue of commercial paper or any other instruments issued in accordance
with RBI guidelines;

(vi)Any amount received by a company from any other company;

6.19 | P a g e
(vii)Amount received and held towards subscription to any securities (including share application
money or advance towards allotment of securities, pending allotment).

Explanation:

• If the securities for which application money or advance for such securities was received
cannot be allotted within 60 days from the date of receipt of the application money or
advance for such securities and such application money or advance is not refunded to the
subscribers within 15 days from the date of completion of 60 days, such amount shall be
treated as a deposit under these rules.

• Any adjustment of the amount for any other purpose shall not be treated as refund.

(viii) Any amount received from a director of the company or a relative of the director of the
Private company.

Provided that the director or a relative of the director gives a declaration in writing to the effect
that the amount is not being given out of funds acquired by him by borrowing or accepting loans
or deposits from others and the company shall disclose the details of money so accepted in the
Board’s report;

(ix) Amount raised by the issue of bonds or secured debentures if -

• They are secured by a first charge or rank pari passu; and

• Such charge is created on any assets referred to in Schedule III of the Act excluding
intangible assets of the company or
• bonds or debentures compulsorily convertible into shares of the company within 10
years; and
• the amount of such bonds or debentures shall not exceed the market value of such assets
as assessed by a registered valuer;

(x) Any amount raised by issue of non-convertible debenture not constituting a charge on the
assets of the company and listed on a recognised stock exchange as per applicable regulations
made by SEBI. (x) Amount received from an employee of the company not exceeding his annual
salary under a contract of employment with the company in the nature of non- interest bearing
security deposit;

(xi) Any non-interest bearing amount received or held in trust

(xii) Any amount received in the course of or for the purposes of the business of the company:

(a) as an advance for the supply of goods or services, provided that such advance is
appropriated against such supply within a period of 365 days from the date of acceptance of such
advance.

Exception of 365 days: Advance which is subject matter of any legal proceedings before any court.

6.20 | P a g e
 (b) as such advance received in connection with an immovable property, provided that such
advance is adjusted against property in accordance with the terms of agreement or arrangement.

(c) as security deposit for the performance of the contract for supply of goods or services. (d) as
advance received under long term projects or for supply of capital goods except those covered
under item (b) above.

(e) as an advance for providing future services in the form of a warranty or maintenance contract
as per written agreement or arrangement, if the period for providing such services does not exceed

• the period prevalent business practice or

• five years, from the date of acceptance of such service whichever is less.
(f) as an advance received and as allowed by any sectoral regulator.
(g) as an advance for subscription towards publication, whether in print or in electronic to be
adjusted against receipt of such publications.

Explanation: For the purpose of sub-clause the amount shall be deemed to be deposits on the expiry
of 15 days from the date they become due for refund.

(xiii)Any amount brought in by the promoters themselves or by their relatives of the company by
way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank

(xiv) Any amount accepted by a Nidhi company.

(xv) Amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982

(xvi) Amount received by the company under any collective investment scheme

(xvii)Convertible Note:

• Amount of 25 lakh rupees or more

• Received by a start-up company,
• by way of a convertible note (convertible into equity shares or repayable within a period
not exceeding five years Ten years from the date of issue)
• in a single tranche, from a person.

Explanation—For the purposes of this sub-clause,—

“Start-up company” means a private company incorporated under the Companies Act, 2013 or
Companies Act, 1956 and recognized as such by the Department for Promotion of Industry and
Internal Trade];

(xviii)Any amount received by a company from Alternate Investment Funds, Domestic Venture
Capital Funds and Mutual Funds registered with SEBI.

6.21 | P a g e
 SUMMARY
1. Government 2. Instruments 3. Advances received for
purpose of the business
- Amount received from the - commercial paper
Central or State - Amount received and held - as an advance – upto 365
Government, Local and towards subscription to any days
statutory authority securities (Including share - immovable property
- foreign Governments application [60 days]) - security deposit for the
- Secured Debenture and performance of the contract
compulsorily convertible - advance received under long
debentures term projects
- non-convertible debenture - allowed by any sectoral
by listed company regulator
- Convertible Note – 25Lakh, - For providing future services
single tranche, 10 years, - Subscription towards
startup publication
4. Financial Institutions 5. People 6. Others

- foreign international banks - Amount from employee - - amount accepted by a Nidhi

- multilateral financial not exceeding his annual company
institutions salary, non- interest bearing - collective investment
- banking company - amount brought in by the scheme
- Public Financial Institutions promoters or relatives – as a - Chit Fund Act
stipulation of any bank - Alternate Investment Funds,
- Received from a director of Domestic Venture Capital
the company or a relative – Funds and Mutual Funds
Declaration required

TEST YOUR KNOWLEDGE

Please check which of the following source of funds are coming under the definition of deposits in
case of a company.
(a) Rs.5 Crore from Government Agency,
Financial institutions, Banks or by way of
Commercial Paper.
(b) Rs.50 Lakhs by way of Share Application
money
(c) Rs.50 Lakhs from one of its director by way of
loan
(d) Rs.50 Lakhs from issue of bonds and
debentures
(e) Rs.50 Lakhs by means of inter corporate
deposit
(f) Rs.25 Lakhs from its employees.
(g) Rs.50 Lakhs as business advance from
customers
(h) Rs.50 Lakhs as advance against consideration
for an immovable property.
(i) Rs.25 Lakhs as security deposit for
performance of provision of services
(j) Rs.50 Lakhs from its promoter.

6.22 | P a g e
 (k) Rs.25 Lakhs raised by issue of non convertible
debentures. These are not constituting charge
on assets of the company.

Prohibition on Acceptance of Deposits

In terms of Section 73(1) of the Companies Act, 2013, on and after the commencement of this Act

no company shall invite, accept or renew deposits under the Companies Act,2013 from the public
except in a manner provided under Chapter V of the Act.

Non-Applicability of the Act

1.Banking company
2.Housing finance company
3.Companies specified by central government
4.Non-banking financial institution

Acceptance of Deposits

Deposits can be accepted from

(a) From members in accordance with section 73
(b) From public in accordance with section 76

MEANING OF DEPOSITOR - Rule 2 (1) (d),

‘Depositor’’ means,
(i) any member of the company who has made a deposit with the company in accordance with the
provisions of sub-section (2) of section 73 of the Act, or
(ii) any person who has made a deposit with a public company in accordance with the provisions
of section 76 of the Act.

Prohibition on Acceptance of Deposits from public

A. Prohibitive Provisions

According to section 73 (1) of the Act, no company can accept or renew deposits from public unless

it follows the manner provided under Chapter V (contains provisions regarding acceptance of deposits
by companies).

B. Exempted Companies

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According to the Proviso to Section 73 (1), the prohibition contained in sub-section (1) with respect
to the acceptance or renewal of deposit from public shall not apply to the following types of
companies:
• any banking company;
• any non-banking financial company (NBFC) as defined in the RBI Act, 1934;
• any housing finance company (HFC) registered with the National Housing Bank established
under the National Housing Bank Act, 1987; and
• such other company specified by Central Government, after consultation with the RBI.

PROVISIONS REGARDING ACCEPTANCE OF DEPOSITS FROM MEMBERS 73(2)

Any company may accept or renew deposits from its MEMBERS by following the provisions as set
out below:

(1) Passing of a Resolution: A company is required to pass a resolution in general meeting for
acceptance of deposits from its members [Section 73 (2)].

(2) Issuance of a Circular: The company is required to issue a circular to its members including therein
- a statement showing the financial position of the company,
- the credit rating obtained,
- the total number of depositors and the amount due, in respect of any previous deposits accepted
by the company and such other particulars. [Section 73 (2) (a)].
- A certificate of the statutory auditor, stating that the company has not committed default in the
repayment of deposits or in the payment of interest. In case a company had committed a default
in the repayment of deposits, a certificate of the statutory auditor shall state that the company
had made good the default and a period of 5 years has lapsed since the date of making good the
default as the case may be.
- Further, the circular may be published in English and vernacular newspaper having wide
circulation in the State in which the registered office of the company is situated.

According to Rule 4, the company shall issue such circular to all its members by registered post with
acknowledgement due or speed post or by electronic mode in Form DPT-1.

The advertisement shall remain valid till the earliest of the following dates:

(a) up to 6 months from the closure of the financial year in which it is issued; or

(b) the date of Annual General Meeting (AGM), or in case no AGM has been held, the latest day on
which the AGM should have been held as per the relevant statutory provisions.

A fresh circular shall be issued, in each succeeding financial year, for inviting deposits during that
financial year.

(3) Filing of Circular: The company is required to file a copy of the circular containing the
statement with the Registrar within 30 days before the date of issue of the circular. [Section 73 (2)
(b)]

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(4) Requirement of Deposit Repayment Reserve Account: The company is required to deposit,
on or before 30th of April each year, at least 20% of the amount of its deposits maturing during
the following financial year and kept in a scheduled bank in a separate bank account to be called
deposit repayment reserve account. [Section 73 (2) (c)].

It shall not be used for any other purpose other than repayment.
Note: Such amount shall not at any time fall below 20% of the amount of deposits maturing during
the financial year.

(5) Certification as to No default in Repayment: The company needs to certify that it has not
committed any default in the repayment of deposits accepted either before or after the
commencement of this Act or payment of interest on such deposits.

In case a default had occurred, the company made good the default and a period of 5 years had lapsed
since the date of making good the default. [Section 73 (2) (e)]

EXEMPTION

1) Exemption to certain PRIVATE COMPANIES: Clauses (a) to (e) of Section 73(2)

- issue of circular,
- filing the copy of such circular with the Registrar,
- depositing of certain amount and
- certification as to no default committed, shall not apply to a private company:

(A) which accepts from its members monies not exceeding 100% of aggregate of the paid-up share
capital, free reserves and securities premium account; or
(B) which is a start-up, for 5 years from the date of its incorporation; or
(C) which fulfils all of the following conditions, namely:

(a) which is not an associate or a subsidiary company of any other company;

(b) if the borrowings of such a company from banks or financial institutions or any body
corporate is less than twice of its paid-up share capital or 50 crore rupees, whichever
is lower; and
(c) such a company has not defaulted in the repayment of such borrowings subsisting at
the time of accepting deposits under this section.

However, such a company [as referred to in clauses (A), (B) or (C)] shall file the details of monies
accepted to the Registrar in the specified manner (i.e. in Form DPT-3).

2) Clauses (a) to (e) of section 73 (2) shall not apply to a Specified IFSC public company which
accepts from its members, monies not exceeding 100% of aggregate of the paid-up share capital
and free reserves, and such company shall file the details of monies so accepted with the Registrar
in such manner as may be specified (i.e. in Form DPT-3).

6.25 | P a g e
(6) Provision of Security: The company may provide security, for the due repayment of the amount
of deposit or the interest thereon. Further, if security is provided, the company shall take steps for
the creation of charge on the property or assets of the company.

Unsecured: It may be noted that in case a company does not secure the deposits or secures such
deposits partially, then, the deposits shall be termed as ‘‘unsecured deposits’’. Accordingly, it shall
be so quoted in every circular, form, advertisement or in any document related to invitation or
acceptance of deposits. [Section 73 (2) (f)]

(7) Application to Tribunal if the Company fails to Repay: In case a company fails to repay the deposit
or part thereof or any interest thereon, the depositor concerned may apply to the Tribunal for an
order directing the company to pay the sum due or damage incurred by him as a result of such non-
payment and for such other orders as the Tribunal may deem fit. [Section 73 (4)]

MAXIMUM AMOUNT OF DEPOSITS FROM MEMBERS

A company is permitted to accept or renew any deposit from its members including existing
deposits, maximum up to 35% of the aggregate of its paid-up share capital, free reserves and
securities premium account.

EXCEPTION

1) A Specified IFSC Public company and a private company may accept from its members monies
not exceeding 100% of aggregate of the paid-up share capital, free reserves and securities
premium account. Further, such company shall file the details of monies so accepted with the
Registrar in Form DPT-3.

2) Provided further that the maximum limit in respect of deposits to be accepted from members
shall not apply to following classes of private companies, namely:-

• a private company which is a start-up, for 10 years from the date of its
incorporation;
• a private company which fulfils all of the following conditions, namely:-
a) which is not an associate or a subsidiary company of any other
company;
b) Borrowings of such company from banks or financial institutions or any body corporate is
less than twice of its paid up share capital or 50 crore rupees, whichever is less; and
c) such a company has not defaulted in the repayment of such borrowings subsisting at the
time of accepting deposits under section 73:

Note: It may be noted that all the companies accepting deposits shall file the details of monies so
accepted with the Registrar in Form DPT-3.

PROVISIONS REGARDING ACCEPTANCE OF DEPOSITS FROM PUBLIC BY ELIGIBLE COMPANIES –

Section 76

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Only ‘eligible companies’ are permitted to accept deposits from the public, in addition to their
members.

It means not all the companies can access the public at large for raising deposits though they can
accept deposits from their members.

ELIGIBLE COMPANY - Rule 2 (1) (e)

It is a public company, having

- a net worth of not less than 100 crore rupees; OR

- a turnover of not less than 500 hundred crore rupees and
which has obtained the prior consent by means of a SPECIAL RESOLUTION and filed it with

the ROC before making any invitation to the public for acceptance of deposits:

Section 76 of the Act and the Companies (Acceptance of Deposits) Rules, 2014 deal with acceptance
of deposits from public by eligible companies.

1. Passing of Special Resolution: The ‘eligible company’ is required to obtain the prior consent by
means of a special resolution in general meeting and also file the said resolution with the
Registrar of Companies before making any invitation to the public.

Exception: However, an ‘eligible company’, which is accepting deposits within the limits specified
under section 180 (1) (c), may accept deposits by means of an ordinary resolution.

2. Obtaining of Credit Rating:

• The ‘eligible company’ shall be required to obtain the rating (including its net-worth, liquidity
and ability to pay its deposits on due date) from a recognised credit rating agency.
• The given rating which ensures adequate safety shall be informed to the public at the time of
invitation of deposits from the public.
• Further, the rating shall be obtained every year during the tenure of deposits and shall be
sent to the ROC along with the Return of Deposits in Form DPT-3, every year.
• The credit rating SHALL NOT BE BELOW

- the minimum investment grade rating or

- other specified credit rating for fixed deposits.
It shall be obtained from any one of the approved credit rating agencies as specified for NBFC.

3. Charge Creation on Assets Necessary if the Deposits are Secured

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 • Every company which accepts secured deposits from the public shall within 30 days of such
acceptance, create a charge on its assets. The amount of charge shall not be less than the
amount of deposits accepted.
• The company accepting secured deposits shall create security on its tangible assets only.
• The other notable points are:
- The company cannot create charge on intangible assets.
- Total value of security should not be less than the amount of deposits accepted and
interest payable thereon.
- The security shall be created in favour of a trustee for the depositors on specific
movable and immovable property of the company.

4. Appointment of Trustee for Depositors: Following provisions are required to be observed in this
respect:

• One or more trustees for depositors need to be appointed by the company for creating
security for the deposits.
• A written consent shall be obtained from the trustees before their appointment, which shall
also appear in the circular or advertisement with reasonable prominence.
• The company shall execute a deposit trust deed in Form DPT-2 at least 7 days before issuing
the circular or circular in the form of advertisement.
• Following people shall not be appointed as a trustee for the depositors, if the proposed
trustee:

(a) is a director, KMP or any other officer or an employee of the company or of its holding,
subsidiary or associate company or a depositor in the company;
(b) is INDEBTED to the company, or its subsidiary or its holding or associate company or a
subsidiary of such holding company;
(c) has any material pecuniary relationship with the company;
(d) has entered into any guarantee arrangement in respect of principal debts secured by
the deposits or interest thereon;
(e) is related to any person specified in clause (a) above.

• The trustee shall not be removed after the issue of circular or advertisement and before
the expiry of his term except with the consent of all the directors present at a meeting of
the board. In case the company is required to have independent directors, at least one
independent director shall be present in such meeting of the Board.

5. Issuance of Circular in the Form of Advertisement:

• An ‘eligible company’ intending to invite deposits is required to issue a circular in the form
of an advertisement in DPT-1.
• Such advertisement shall be published in English and vernacular newspaper.

• If the company has its website, the circular shall also be placed on the website.

• Filing with the Registrar: At least 30 days before the issue of the advertisement, signed by
a majority of the directors or by their duly authorised agents is required to be delivered to
the Registrar of Companies for registration.

• The advertisement shall remain valid till the earliest of the following dates:

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6.Maintenance and Using the Amount of Deposit Repayment Reserve Account: The company is
required to deposit, on or before 30th of April each year, at least 20% of the amount of its deposits
maturing during the following financial year and kept in a scheduled bank in a separate bank account
to be called deposit repayment reserve account. [Section 73 (2) (c)]

Rule 13 states that the amount so deposited in the account shall not be used by the company for any
purpose other than repayment of deposits. Further, it states that such amount shall not at any time
fall below twenty percent of the amount of deposits maturing during the financial year.

COMMON RULES APPLICABLE TO SECTION 73 AND 76

I. TENURE FOR WHICH DEPOSITS CAN BE ACCEPTED

 MINIMUM TENURE: A company is not permitted to accept or renew deposits which is
- repayable on demand or
- in less than 6 months.

 Exception to the rule of tenure of six months: For the purpose of meeting any of its
short-term requirements of funds, a company may accept or renew deposits for
repayment earlier than 6 months subject to the condition that:
(i) such deposits shall not exceed 10% of the aggregate of the paid-up share capital,
free reserves and securities premium account of the company; and

(ii) such deposits are repayable only on or after 3 months from the date of such deposits or
renewal.

 MAXIMUM TENURE: Further, the maximum period of acceptance of deposit cannot exceed 36
months.
Example 3: A, a member of the company has deposited ₹1,00,000 with his company on 1st April, 2019.
The earliest repayment date in this case shall be 30th September, 2019 and the latest repayment date
shall be 31st March, 2022. Thus, the tenure will range between six months and thirty-six months, as
per the policy of the company.

II. THE QUANTUM OF DEPOSITS

TYPE OF COMPANY MEMBERS PUBLIC

Eligible Company Up to 10% of aggregate of the paid up
Up to 25% of aggregate of the
share capital, free reserves and paid-up share capital, free
securities premium account reserves and securities premium
account
Company referred in up to 35% of aggregate of the paid up Prohibited
section 73(2) i.e. share capital, free reserves and
Non-eligible securities premium account
Companies
Government ------ Up to 35% of aggregate of the

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 Company (eligible paid up share capital, free
under section 76 reserves and securities premium
account

Refer Private company exceptions.

III. CEILING ON RATE OF INTEREST AND BROKERAGE PAYABLE ON DEPOSITS

1) A company is permitted to pay any rate of interest or pay any amount of brokerage but it
shall notexceed the maximum rate of interest or brokerage prescribed by the RBI in
case of non-bankingfinancial companies (NBFCs) for acceptance of deposits.

Further, no brokerage shall be paid to any person except the person who is authorized in
writing by the company to solicit deposits on its behalf and through whom deposits are
actually procured.

2) Filling of Application Form for making Deposits: A company shall accept or renew any
deposit, only when an application, as specified by the company, is submitted by the
intending depositor and the application shall contain a declaration made by the
intending depositor to the effect thatthe deposit is not being made out of any money
borrowed by him from any other person.

IV. DEPOSITS IN JOINT NAMES and NOMINATION

In case the depositors so desire, deposits may be accepted in joint names not exceeding three. A joint
deposit may be accepted with or without any of the clauses, namely, “Jointly”, “Either or Survivor”,
“First named or Survivor”, “Anyone or Survivor”. These clauses operate on maturity

Example: A, B and C have jointly deposited ` 1,00,000 in a company.

• In case of ‘Jointly’ clause the repayment of deposit on maturity shall be made to

all the threetogether i.e. A, B and C or the survivors.

• In case of ‘Either or Survivor’ clause, the repayment of deposit on maturity shall be

made to eitherof the three i.e. either A or B or C or the survivor.

• In case of ‘First named or Survivor’ clause, the repayment of deposit on maturity

shall be made tothe first named person i.e. A if he is the first named person or the
survivor.

• In case of ‘Anyone or Survivor’ clause, the repayment of deposit on maturity shall be

as in the case of ‘Either or Survivor’.

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 DOCUMENTS AND FILING

1. Deposit Receipt: Within 21 days from the date of receipt of money or realization of cheque or date
of renewal, the company is required to furnish a deposit receipt to the depositor or his agent.
The receipt shall be signed by the duly authorised officer and state the date of deposit, the name
and address of the depositor, the amount of deposit, the rate of interest and the maturity date.

2. Filing of Return of Deposits with the Registrar: A duly audited return of deposits in DPT-3
(containing particulars as on 31st March of every year) shall be filed with the ROC along with
requisite fee on or before the 30th June of that year.It is clarified by way of Explanation that DPT-
3 shall be used to include particulars of deposits or particulars of transactions not considered as
deposits or both by every company (other than a Government company).

3. No Right to Alter: The company has no right to alter any of the terms and conditions of the
deposit, deposit trust deed which may prove detrimental to the interest of the depositors after
circular or circular in the form of advertisement is issued and deposits are accepted.

4. Disclosures in Financial Statements: A public company shall disclose in its financial statements by
way of note about the money received from its directors. In case of a private company it shall
disclosein its financial statements by way of note about the money received from the directors or
the relativesof directors.

As a onetime measure, every company (other than a Government company) shall file a onetime
returnof outstanding receipt of money or loan by a company not considered as deposits from 1st
April 2014till 31st March, 2019 in Form DPT-3 with the Registrar of Companies within 90 days from
31st March,2019 along with requisite fee.

5. Penal Rate of Interest: In case the company fails to repay deposits on maturity, after they are
claimed, it shall pay penal rate of interest of 18% per annum for the overdue period.

6. Punishment for Contravention: If any company inviting deposits or any other person contravenes
any of the ‘deposit rules’ for which no punishment is provided in the Act, the company and every
officer-in-default shall be punishable as under:
• with fine extendable to 5000 rupees; and

• in case the contravention is a continuing one, with a further fine up to 500 hundred
rupees for everyday during which the contravention continues.

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 REGISTER OF DEPOSITS [Rule 14]

1. Every company accepting deposits shall maintain separate registers for deposits accepted or
renewed at its registered office. Following particulars shall be entered separately in the case
of each depositor:
(a) name, address and PAN of the depositor/s;
(b) particulars of the guardian, in case of a minor;
(c) particulars of the nominee;
(d) deposit receipt number;
(e) date and the amount of each deposit;
(f) duration of the deposit and the date on which each deposit is repayable;
(g) rate of interest on such deposits to be payable to the depositor;
(h) due date for payment of interest;
(i) instructions for payment of interest and for non- deduction of tax at source, if any;
(l) particulars of security or charge created for repayment of deposits;
(m) any other relevant particulars.

2. The entries shall be made within 7 days from the date of issuance of the receipt duly
authenticatedby a director or secretary of the company or by any other officer authorised by
the Board for this purpose.

3. The said register shall be preserved for a period of not less than eight years from the financial
yearin which the latest entry is made in the register.

Previous Year Questions (JUNE 2021) (5M)

(Q1) Debapriya was appointed as alternate director of Julien in Amal Housing Finance Ltd. The
company was served a demand notice by Goods & Service Tax department for `25 lakh for violation
of certain provisions of GST law. Due to cash crunch the CEO approached Debapriya for a help of `12
lakh. Debapriya borrowed `7.50 lakh from his sister’s husband and gave to the company. The
company recorded the same in its books of account

Ans: Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules 2014, provides that any
amount received from a person who, at the time of receipt of the amount, was a director of the
company shall not be regarded as deposit, if the director from whom money is received, furnishes to
the company at the time of giving the money, a declaration in writing that the amount is not being
given out of funds acquired by him by borrowing or accepting loans or deposits from others.

However, proviso to Section 73(1) read with Rule 1(3)(iii) of the Companies (Acceptance of Deposits)
Rules 2014 excludes a housing finance company registered with National Housing Bank established
under the National Housing Bank Act, 1987 from the provisions of Section 73 to 76A of the Companies
Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014.

So, the transaction of accepting money from the director recorded by Amal Housing Finance Ltd. in its
book of account is not regarded as non-compliance of the provisions of the Companies Act 2013.

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 PREMATURE REPAYMENT OF DEPOSITS [Rule15

1. After the expiry of 6 months but before the actual date of maturity, if a depositor requests
for premature repayment, the rate of interest payable shall be 1% less than the rate which would be
payable for the period for which the deposit has actually run.

It is to be noted that if the period contains any part of the year which is less than 6 months then it
shall be excluded; if that part is 6 months or more it shall be taken as one year.

2. Reduction of rate of interest is not applicable in the following cases:

• If it is prematurely repaid to comply with Rule 3 i.e. to reduce the total amount of deposits
to bring it within the permissible limits; or

• If it is prematurely repaid to provide for war risk or other related benefits to the personnel
of naval, military or air forces or to their families during the period of emergency declared
under Article 352 of the constitution.

Higher rate of Interest: In case a depositor desires to avail higher rate of interest by renewing the
deposit before its actual maturity date, the company shall pay him the higher rate of interest only if
the deposit is renewed for a period longer than the unexpired period of deposit.

VIII. DUTIES OF DEPOSIT TRUSTEES [Rule 8]

It shall be the duty of every trustee for depositor to –

Ensure that the assets of the company on which charge is created together with the amount of
deposit insurance are sufficient to cover the repayment of the principal amount of secured deposits
outstanding and interest accrued thereon;
(1) Satisfy himself that the circular or advertisement inviting deposits does not contain any
information which is inconsistent with the terms of the deposit scheme or with the rules and
provisions of the Act;
(2) Ensure that the company does not commit any breach of conditions and provisions of the trust
deed;
(3) Take such reasonable steps for any breach of covenants of the trust deed or the terms of invitation
of deposits;
(4) Take steps to call a meeting of the holders of depositors as and when such meeting is required to
be held;
(5) Supervise the implementation of the conditions regarding creation of security for deposits and
the terms of deposit insurance;
(6) Do such acts as are necessary in the event the security becomes enforceable;
(7) Carry out such acts as are necessary for the protection of the interest of depositors and to resolve

6.33 | P a g e
their grievances.

IX. MEETING OF DEPOSITORS THROUGH DEPOSIT TRUSTEE [Rule 9]

The meeting of all the depositors shall be called by the trustee for depositors on –

(1) Requisition in writing signed by at least one tenth of the depositors in value for the time
being outstanding;
(2) The happening of any event, which constitutes a default or which, in the opinion of the
trustee fordepositors, affects the interest of the depositors.

X. FURNISHING OF DEPOSIT RECEIPTS TO DEPOSITORS [Rule 12]

Every company shall, on the acceptance or renewal of a deposit, furnish a receipt for the amount
received by the company, within a period of 21 days from the date of receipt of money or realization
of cheques or date of renewal.

Deposit receipt shall be signed by an officer of the company duly authorized by the Board and shall
STATE the date of deposit, the name and address of the depositor, the amount received by the
company as deposit, the rate and periodicity of interest payable thereon and the date on which the
deposit is repayable.

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 PUNISHMENT FOR CONTRAVENTION OF SECTION 73 OR SECTION 76 [SECTION 76A]

(a) the company shall be liable to pay

- amount of deposit or part thereof and

- the interest due,
- fine
Min = 1 crore rupees or twice the amount of deposit accepted by the company, whicheveris
lower

Max = 10 crore rupees; and

(b) every officer of the company who is in default

- imprisonment which may extend to 7 years and

- Fine
Min = 25 lakh rupees

Max= 2 crore rupees

Damages for Fraud: Provided that if it is proved that the officer of the company who is in default,
has contravened such provisions knowingly or wilfully with the intention to deceive the
companyor its shareholders or depositors or creditors or tax authorities, he shall be liable for
action under section 447.

RETURN OF DEPOSITS - INCLUDES REPORTING OF ‘WHAT IS NOT A DEPOSIT’

Every Company (other than exempted companies) shall file the following returns with the
Registrar of Companies:

1. A periodic return for filing return of deposits or particulars of transactions which are not
considered as deposits as per Rule 2(1)(c) of the Rules on or before 30th June of every year
containing details as on 31st March of that year.

2. Additionally, there had been a requirement of filing a ONE- TIME RETURN within 90 days
from 31st March,2019 which will give the details of the outstanding receipt of money or loan which
have not been considered as deposits as per Rule 2(1)(c) of the Rules from 1st April, 2014 till 31st
March, 2019 which are outstanding as on the said date i.e. 31st March,2019

PROCEDURE OF ACCEPTANCE OF DEPOSITS-FROM MEMBERS AND PUBLIC

Procedure of acceptance of deposits from members and procedure of acceptance of deposits from
public (other than members.

Procedure of Acceptance of Deposits from Members

6.35 | P a g e
 A company may, subject to the passing of a resolution in general meeting and subject to such rules
as maybe prescribed in consultation with the Reserve Bank of India, accept deposits from
its

members on such terms and conditions, including the provision of security, if any, or for the
repayment of such deposits with interest, as may be agreed upon between the company and its
members.

The procedure to accept deposits from members can be summarized as under:-

1. Convene a Board meeting to Approve the proposal and accept deposits from members
and decide the day, date, time and place of the general meeting.

2. Issue notice of general meeting to the members of the company.

3. Hold the general meeting and pass resolution for acceptance of deposits.

4. Comply with the Rules Companies (Acceptance of Deposits) Rules, 2014 .

*5. Issue circular to the members of the company including therein a statement showing the
financial position of the company, the credit rating obtained, the total number of depositors and
the amount due towards depositors in respect of any previous deposits and such other particulars
as may be prescribed. These details indicate the soundness of the company or a warning about
risks involved. The circular shall be published in a leading English and in vernacular language in a
vernacular newspaper having wide circulation in the State in which the registered office of the
company is situated.

*6. File the copy of aforesaid circular in the Form DPT-1 along with such statement with the
Registrar within thirty days before the date of issue of circular.

7. A company inviting secured deposits shall provide for security by way of a charge on its assets
for the due repayment of the amount of deposit and interest thereon. The company shall submit
Form CHG-1 with Registrar for assets other than intangible assets.

8. After the expiry of 30 days of filing Form DPT-1, the circular in Form DPT-1 along with application
form is sent to all members by registered post with acknowledgement due/speed post/electronic
mail.

9. Collect duly signed application form along with money from the members.

10. Issue receipts of deposits within 21 days of the receipts of money/realization of cheque.

11. Maintain register of deposits at its registered office which shall contain the details as
prescribed under rule 14 Companies (Acceptance of Deposits) Rules, 2014 from the date of such
acceptance.

12. Pay interest as per the rate proposed on agreed terms.

6.36 | P a g e
 *14. Deposit such sum which shall not be less than 20% of the amount of its deposits maturing
during the financial year and the financial year next following and keeping it in a separate bank
account called deposit repayment reserve account.

*15. Certification that the Company has not committed any default in the repayment of deposits
accepted either before or after the commencement of this Act or payment of interest on such
deposits and where a default had occurred, the company made good the default and a period of
five years had lapsed since the date of making good the default

16. Submit return of deposits in Form DPT-3 on or before 30th June each year for information as
on 31st March of respective year.

*Exempted for private companies:

Conditions for Acceptance of Deposits from Public (Other than Members)

The procedure to accept deposits from public (other than members) can be summarized as under:-

1. Convene a Board meeting to consider and approve the business to propose and accept
deposits from public and to decide the day, date, time and place of the general meeting.
2. Hold the general meeting and pass special resolution, for acceptance of deposits.

Note: Eligible company, which is accepting deposits within the limit specified under clause
(c) of sub-section (1) of section 180 (Borrowing Powers) may accept deposits by means of
an ordinary resolution.
3. Submit Form MGT-14 with the Registrar of Companies within 30 days of passing the
resolution.

4. Approach to the credit rating agency for the grant of rating, appointment of deposit trustee
and execution of trust deed, if the deposits are secured, appointment of registered valuer,
discussion and preparation of circular for the issue of deposits may be given.
5. Circular shall be issued to its members of the company by registered post with
acknowledgement due or by speed post or by electronic mode in Form DPT-1 and in addition to such
issue of circular to publish the same in one English newspaper and one vernacular languagein
vernacular newspaper having wide circulation in the state of registered office of the company. The
eligible companies have to file a copy of the text of advertisement signed by a majority of directors
with the Registrar before 30 days of publication. They shall upload the same on their website, if any.
6. File the copy of aforesaid circular in the Form DPT-1 along with such statement with the
Registrar within thirty days before the date of issue of circular.
7. In case, a company does not secure the deposits or secures such deposit partially, then, the
deposits shall be termed as “unsecured deposits” and shall be so quoted in every circular, form,
advertisement or in any document related to invitation or acceptance of deposits.
8. The company shall execute a deposit trust deed in Form DPT-2 at least seven days before
issuing circular or circular in the form of advertisement.
9. Eligible company inviting secured deposits shall provide for security by way of a charge on its

6.37 | P a g e
 assets for the due repayment of the amount of deposit and interest thereon. The company shall
submit Form CHG-1 with Registrar for assets other than intangible assets. Secured deposits
including interest there on can in no case exceed the market value of the charged assets
assessedby the registered valuer.
10. Collect duly signed application form along with money from the members.

11. Issue receipts of deposits within 21 days of the receipts of money/realization of cheque.

12. Maintain register of deposits at its registered office which shall contain the details as
prescribed under Rule 14 Companies (Acceptance of Deposits) Rules, 2014, within 7 days from the
date of such issuance of deposit receipt.
13. Pay interest as per the rate proposed on agreed terms.

14. Deposit such sum which shall not be less than twenty percent of the amount of its deposits
maturing during the financial year and the financial year next following and keeping it in a separate
bank account called deposit repayment reserve account.
15. Submit return of deposits in Form DPT-3 on or before 30th June each year for information as
on 31st March of respective year.

CHECKLIST OF SECRETARIAL COMPLIANCE FOR ACCEPTANCE OF DEPOSITS

Whether proper Board meeting and general meeting has been held and approval of the shareholders
by means of a special or ordinary resolution has been passed.
1) Whether the said resolution has been filed with Registrar in Form MGT-14 within 30 days of
passing of such resolution.
2) Draft Circular/Form of Advertisement has been signed by majority of the directors of the
Company.
3) Whether copy of Circular/Form of Advertisement approved by the Board has been filed with the
Registrar of Companies in Form DPT-1 for registration.
4) Whether one or more deposit trustees for creating security for the secured deposits has been
appointed and the company has executed a deposit trust deed in Form DPT-2 at least seven days
before issuing circular or circular in the form of advertisement.
5) Whether the company has obtain the credit rating unless exempted
6) Whether the company has issued circular/form of advertisement after 30 days from the date of
filing of a Copy of Circular/Form of Advertisement with the Registrar.
7) Whether the circular has been issued to members by registered post with acknowledgement due
or speed post or by electronic mode or publish the circular in the form of an advertisement in
form DPT-1 and in addition to such issue of circular, the company has published the samein
one English newspaper having country wide circulation and one vernacular language invernacular
8) Whether the company has uploaded the copy of the circular on the Company’s website, if any.
9) Whether the company has issued deposit receipt in the prescribed form at and under the
signature of officer duly authorized by Board, within a period of 21 days from the date of receipt
of money or realization of cheques.
10) Whether the company has made entries in the register as per the instruction provided in the

6.38 | P a g e
 rules within seven days from the date of issuance of the deposit receipt and such entries shall be
authenticated by a director or secretary of the Company or by any other officer authorized by
the Board.
11) Whether the company has filed deposit return in Form DPT-3 by furnishing information
contained therein as on 31st day of March duly audited by auditors before 30th June every year.
12) Whether the company has prepared and filed with the Registrar the statement regarding deposits
existing as on the date of commencement of the act in Form DPT-4.

FORMS RELATED TO DEPOSITS

(1) DPT 1 - Circular or circular in the form of advertisement inviting deposits

(2) DPT 2 - Deposit Trust Deed

(3) DPT 3 - Return of Deposits

(4) DPT 4 - Statement regarding deposits existing on the commencement of the Act.

SPECIMEN RESOLUTION FOR ACCEPTANCE OF DEPOSITS FROM MEMBERS AND/OR PUBLIC

“RESOLVED THAT pursuant to the provisions of Section 73 and 76 of the Companies Act, 2013
(the Act) read with the Companies (Acceptance of Deposits) Rules, 2014 (the Rules) and other
applicable provisions, if any, and subject to such conditions, approvals, permissions, as may
be necessary, consent of the members be and is hereby accorded to the Company to
invite/accept/renew/receive money by way of unsecured/secured deposits from its members
and public.

RESOLVED FURTHER THAT Mr. C, Chairman & Managing Director, be and is here by
authorized to issue the circular or circular in the form of advertisement, which has been
approved by the Board of Directors of the company at their meeting held on the (day) of
(month), 2014 (year) and which delineates the silent features of the deposit scheme of the
company and other relevant particulars as prescribed by the Act and the Rules.

RESOLVED FURTHER THAT Mr. C, Chairman & Managing Director, be and is hereby authorized
to have the circular or circular in the form of advertisement, which has been duly signed by
the majority of directors, filed with the Registrar of Companies, NCT of Delhi & Haryana, New
Delhi, pursuant to the Rules, and to publish the same in English language in Times of India
(Delhi edition) and in Hindi in Dainik Jagran (Delhi edition).

RESOLVED FURTHER THAT for the purpose of giving effect to this Resolution, the Board of
Directors be and is hereby authorized to do such acts, deeds, matters and things as Board of
Directors may in
its absolute discretion consider necessary, proper, expedient, desirable or appropriate
for suchinvitation/acceptance/renewal/receipts as aforesaid and matters incidental thereto.

6.39 | P a g e
 Previous year Ques (DEC 2022) (5 M)

AB Ltd. whose net worth is of Rs. 51 crore and annual turnover of Rs. 400 crore as per the
latest audited financial statements intends to accept deposits from the general public. In
this scenario answer the following questions as per the provisions of the Companies Act,
2013 (the Act).
(i) How much amount of deposit could be accepted by AB Ltd. from general public ?
(ii) If AB Ltd. is an eligible company for accepting deposits, and could not pass a special
resolution of its members, what other options are available to the company to borrow
funds beyond the limit prescribed under section 180 of the Act ?
(iii) As an eligible company for accepting deposits, what are the forms need to be filed by
the company for acceptance of deposits ?

(iv) How much quantum of money should be deposited in a separate account for deposits
maturing each year ?

(v) Is there any time limit for issuance of deposit receipts for money accepted?

Ans:
(i) As per section 76(1) of the Companies Act, 2013 read with Rule 2(1)(e) of the
Companies (Acceptance of Deposit) Rules, 2014, a public company having net worth of not
less than Rs. 100 Crore or turnover of not less than Rs. 500 Crore ( Eligible Company) and
which has obtained the prior consent of the members in a general meeting by means of
special resolution and has also filed the special resolution with the Registrar of Companies
before making any invitation to the public for acceptance of deposits can obtain deposits
from public. Eligible company, which is accepting deposits within the limit specified under
clause (c) of sub-section (1) of section 180 (Borrowing Powers) may accept deposits by means
of an ordinary resolution.

(ii) AB Ltd. is not an eligible company and hence, it cannot accept deposit from general
public.If AB Ltd is an eligible company and could not pass a special resolution, there are no
other options available. Hence, it cannot accept deposits beyond the limits prescribed under
section 180.

(iii) The forms to be submitted are Form MGT-14, Form DPT-1 (Circular in the form of
advertisement inviting deposits), DPT-2 (Deposit Trust Deed), DPT-3 (Return of Deposits)
and DPT-4 (Statement regarding deposits existing on the commencement of the Act), and
CHG-1.

(iv) As per section 73(2)(c) of the Companies Act, 2013, on or before the thirtieth day of
April each year, the company to deposit such sum which shall not be less than twenty
percent of the amount of its deposits maturing during the following financial year and
keeping it in a separate bank account called Deposit Repayment Reserve Account.

(v) Yes, as per rule 12 of the Companies (Acceptance of Deposits) Rules, 2014, every
company shall, on the acceptance of a deposit, furnish to the depositor or his agent a receipt
for the amount received by the company, within a period of twenty one days from the date
of receipt of money or realisation of cheque.

6.1 | P a g e
6.2 | P a g e
 Lesson 7
CHARGES
WHAT IS A CHARGE?
 A charge is a security given for securing loans or debentures by way of a
mortgage on the assetsof the company.
 Where property, both existing and future, is agreed to be made available as a security for
the repayment of debt and creditors have a present right to have it made available, a
charge is created.
 The legal right of the creditor can only be enforced at some future date if certain
conditions governing the loan are not met. The creditor gets no legal right either absolute
or special to the property charged. He only gets the right to have the security made
available/enforced by an order of the Court.
 According to Section 2(16) of the Act, “charge” means an interest or lien created on the
property or assets of a company or any of its undertakings or both as security and
includes a mortgage.
 Meaning:
Interest: Legal share in something: all or part of a legal or equitable claim to a right in
property, right, title, and interest.
Lien: It is a right to possess and retain property until some claim attaching to it is satisfied
or discharged

 In simple terms a charge is a right created by a company i.e. “Borrower” on its assets or
propertiesor any of its undertakings present or future, in favor of a financial institution or
a bank or any otherlender, i.e. “creditor” who has agreed to extend financial assistance.

The Charge here has the following essential features:

1) There are minimum 2 parties to the transaction, the creator of the charge and
the charge- holder.
2) The subject- matter of charge may be on current or future assets and properties of the
borrower.
3) The intention of the borrower to offer one or more of its specific asset or
properties as security for repayment of the borrowed money together with
payment of interest at the agreed rate etc.should manifest from an agreement
entered by him in favour of the lender, written or otherwise.

NEED FOR CREATING A CHARGE ON COMPANY’S ASSETS

 The financial institutions/banks in order to secure their loans they resort to creating right
in the assets and properties of the borrowing companies, which is known as a charge on
assets.
This is done by executing loan agreements, hypothecation agreements, mortgage deeds
 and other similar documents, which the borrowing company is required to execute in
favour of the lending institutions/ banks, etc.
 As a matter of convenience and practice, as and when more funds are required by
companies, they approach the same institutions/banks or certain new institutions/ banks
and offer same assets as security for fresh loans.
 However, when the same assets are charged for second and subsequent times, a very
importantquestion arises as to priority in respect of the charges in favour of different
institutions.
This situation is managed by securing consent of the earlier lending institutions to the
creation ofsecond and subsequent charges on the same assets.

 With their consents, the charges of all the lending institutions ranks pari passu,
i.e., on the same footing.
 However, the earlier lending institution may not give its consent to the creation of second charge

The real question is how to ensure that the assets being offered as security for their proposed loans
are not already encumbered

Essential features of charge



Parties to the charge

There are minimum two parties to the transaction, the creator of the charge (company on whose
property the charge is created) and the charge holder (one who lends money)

2. Subject matter

There must be a subject matter for which the charge is created. The subject matter of charge may be
on current or future assets and properties of the borrower.

3.Agreement

There must be an agreement between the two parties specifying the security rendered for payment
of borrowed money, together with payment of interest at the agreed rate etc.

Departure from the Companies Act, 1956

Under the Companies Act, 1956, only 9 types of charge were required to be registered
whereas the provisions under the Companies Act, 2013 covers any kind of interest or lien
created on the propertyof the company or its assets as a security including mortgage.

The following is an indicative list of charges to be registered with the Registrar:

a. a charge created for the purpose of securing any issue of debentures or deposits;
b. a charge on any immovable property, wherever situated, or any interest therein. This
 includesmortgage by deposit of title deeds.
c. a charge on any book debt of the company. Assignment of book-debts as security is covered.
d. a charge, on any movable property of the company;
e. a floating charge on the undertaking or any property of the company including stock-in-trade
f. a charge on a ship or any share in a ship;
g. a charge on intangible assets, including goodwill, patent, a licence under a patent,
trade mark,copyright or a license under a copyright.
h. a charge or assignment on insurance policies obtained by the company.
i. all and every kind of pledge margin money, including shares, is a pledge. lien on shares
in thecompany

(e.g. company A has invested in shares of company B. The latter, through its Articles has lien
over shares including fully paid shares for any debts due from member including trade debts.
company B supplies goods to company A on credit. On such supply, lien is created and should
be registered as charge)

Protection to the Lender - Intent behind the section 77 of the Act

 It is to ensure that all encumbrances made by the company on its property or assets or
any ofits undertakings are made public.
 This is especially required to protect the interest of the lenders to ensure that the assets
beingoffered as security for their proposed facilities are not already encumbered.
 Once a charge is registered, it will be in the public domain and the lender can verify the
details of financial facilities obtained and charge created on property or assets or any of
its undertakings.
 The Government of India launched CERSAI with an objective of eliminating fraudulent
and dubious activities related to taking out loans by pledging the same asset as mortgage
to variouslenders at the same time. The CERSAI also maintain a single, centralised registry
of all equitablemortgages. The CERSAI registry essentially contains all the relevant and
necessary information regarding mortgage loans taken out on a single property.
Additionally, lenders can also find information about the party sanctioning the loan
against theproperty in question as well all the necessary information about the borrower.

Types of Charges

A. On the basis of the nature of charge:

A charge on the property of the company as security for debts may be of the following
kinds,namely:
(i) Fixed or specific charge;
(ii)Floating charge
 Difference between Fixed or Specific Charge and Floating Charge

Basis Fixed Charge Floating Charge

Nature It is a legal Charge It is an equitable Charge
Meaning Security in terms of certain specific Security remains dormant until it is fixed or
property crystallised
Scope It is created to cover assets which are It is created on variable property which keeps on
ascertained and definite or are capable changing or moving. The property or assets of the
of being ascertained and defined, at the Company cannot be specifically ascertained
time of creating the charge
Created It is created on fixed assets like land, It is created on floating assets like stock-in-trade,
on
building, or plant and machinery debtors etc.
Priority It has priority over floating Charge No such priority
Disposing The Mortgagor i.e., Company cannot The Mortgagor is free to deal with the property
of assets dispose off the property without the asit sees fit until the holders of charge take steps
consent of the charge holder to enforce their security

B. On the basis on the conditions of the charge

 Pari-passu charge- Under, this the charge is shared by more than one lender
in the ratio of their outstanding amount. The prior consent of the existing
charge holder is required by the company.
 Exclusive charge- The security under the exclusive charge is provided to a particular
lender only.
Further charge- With the consent on the first charge holder, the particular assets on which
charge is already created may be provided to other lenders as second charge. In case of
liquidation of assets, the first charge holder has the right to recover his dues and the balance
is recovered by the second charge holder followed by others.

Crystallisation of Floating Charge

The company has a right to carry on its business with the help of assets over which a floating
charge has been created till the happening of some event which determines this right. A
floating charge crystallises and the security becomes fixed in the following cases:

(a) when the company goes into liquidation;

(b) when the company ceases to carry on its business;
(c)when the creditors or the debenture holders take steps to enforce their security
e.g.byappointing receiver to take possession of the property charged;
(d) on the happening of the event specified in the deed.
Although a floating charge is a present security, yet it leaves the company free to create a
specificmortgage on its property having priority over the floating charge.

In Government Stock InvestmentCo. Ltd. v. Manila Railway Co. Ltd., (1897) A.C. 81, the
debentures were secured by a floating charge. Three months’ interest became due but the
debenture holders took no steps and so the charge did not crystallize but remained floating.
The company then made a mortgage of a specific part of its property. Held, the mortgagee
had priority. The security for the debentures remained merely a floating security as the
debenture holders had taken no steps to enforce their security.;

Maturi U. Rao v. Pendyala (A.I.R 1970 A.P 225)- In this case, it was held that when floating
charge crystallizes it becomes fixed and the assets comprised are subject to the same
restrictions as the fixed charge.

Effect of Crystallisation of a Floating Charge

On crystallization, the floating charge converts into a fixed charge on the property of the
company. It has priority over any subsequent equitable charge and other unsecured creditors.
But preferential creditors who have priority for payment over secured creditors in the
winding-up get priority over the claims of the debenture holders having floating charge.

CASELAW
In Permanent Houses (Holdings) Ltd. 1988 BCLC 563(CHD), where a company issued
debenture creating a charge in favor of a lending bank mentioning that the charge
shall crystallize on happening of an event or default in payment. When the payment
was not made on demand by bank, it was held that the charge was no longer a floating
charge at the time when receiver was appointed.
The learned Judges from an English case reported in case of Evans v. Rival Granite
Quarries Ltd. “A floating security is not a future security; it is a present security, which
possibly affects all the assets of the company expressed to be included in it.
On the other hand, it is not a specific security; the holder cannot affirm that the assets
are specifically mortgaged to him. The assets are mortgaged in such a way that the
mortgagor can deal with them without the concurrence of the mortgagee. A floating
security is not a specific mortgage of the assets, plus a license to the mortgagor to
dispose of them in the course of the business, but is a floating mortgage applying to
every item comprised in the security, but not specifically affecting any item until some
event occurs or some act on the part of the mortgagee is done which causes it to
crystallize into a fixed security.”
In Stein v Saywell (1968-1969)``Its distinguishing feature is that, the class of present
 and future assets that are charged being such as in the ordinary course of the
company’s business would be changing from time to time, the company is left at
liberty, until one of the `crystallizing’ events happens, to dispose freely, in the ordinary
course of its business, of any property to which it attaches.”

Postponement of Floating Charge

 The creation of a floating charge leaves the company free to create a legal and
equitable mortgage on the same property until the floating charge crystallises.
 Where such a mortgage is created it has priority over the floating charge which gets
postponed.The floating charge is postponed in favour of the following persons if they
act before the crystallization of the security:
(a) a landlord who distrains for rent;
(b) a creditor who obtains a garnishee order absolute;

#Extraa Gyaan: The garnishee order is an order that instructs a third party such as your
employer,bank or financial institution to redirect your wages or holdings to the creditor you
owe money to. Once a garnishee order has been issued, your employer, bank or financial
institution is legally obligated to comply with it.

(c)a judgement creditor who attaches goods of the company and gets them sold (But if the
goodsare not sold and the debenture holders take action in the meantime, the floating charge
has priority);
(d)the employees of the company, as well as other preferential creditors in the event of
winding-up of the company;
(e)the supplier of goods to the company under a hire-purchase agreement on terms that
goods are to remain the property of the seller until they are paid for in full, has priority over
the floatingcharge.

Restraint on the Power to Create Charges with Priority to a Floating Charge

As the floating charge allows wide powers to the company to deal with its property subject to
thefloating charge, it is common to insert a clause restricting the powers of the company to
create charge with priority to or pari passu with it. Thus, if the company creates a mortgage
in favour ofany person who has notice of the floating charge and restriction, such person ranks
after the floating charge. But a person who obtains a valid mortgage, and can show either

i. that he was not aware of the existence of the floating charge;

ii. that though he was aware of the charge, he was not aware of the restriction, is
entitled to priority by virtue of the legal estate

Note: Accordingly, Section 332 of the Companies Act, 2013 provides that a floating charge
which is created within 12 months immediately preceding the commencement of the
winding up of a company shall be invalid, unless it is proved that the company was solvent
immediately after the creation of the charge. But the charge will be valid to the extent of
the amount of any cash paid to the company at the time of or after the creation of, and in
consideration for the charge, together with interest on that amount at 5% per annum or such
other rate as may be notified by the Central Government.
Difference between CHARGE AND PLEDGE

S.No. Mortgage Charge

1 A mortgage is created by the act A charge may be created
of theparties. either through the act of
parties or by operation of
law.
2 A mortgage requires registration A charge created by operation of
underthe Transfer of Property Act, law does not require registration.
But a charge created by act of
1882.
parties requiresregistration.
3 A mortgage is for a fixed term The charge may be in
perpetuity.
4 A mortgage is a transfer of an A charge only gives a right
interest in specific immovable to receivepayment out of a
property. particular property.
5 A mortgage is good against A charge is good against
subsequenttransferees. subsequent transferees
with notice.
6 A simple mortgage carries In case of charge, no personal
personal liability unless excluded liability is created. However,
where a charge is the
by express contract.
result of a contract, there
may be apersonal remedy.

Difference between Mortgage and Charge

S. No. Mortgage Charge

1. A mortgage is created by the act of the A charge may be created either through
parties. the act of parties or by operation of law.
2. A mortgage requires registration under A charge created by operation of lawdoes
the Transfer of Property Act, 1882. not require registration. But a
charge created by act of parties requires
registration.
3. A mortgage is for a fixed term. The charge may be in perpetuity.
4. A mortgage is a transfer of an interest in A charge only gives a right to receive
specific immovable property. payment out of a particular property.
5. A mortgage is good against subsequent A charge is good against subsequent
transferees. transferees with notice.
6. A simple mortgage carries personal In case of charge, no personal liability is
liability unless excluded by express created. However, where a charge is the
contract. result of a contract, there may be a
personal remedy.

REGISTRATION OF CHARGE – Sec 77

1) Registration of charge

 It is the duty of every company creating or modifying a charge to register the particulars of the
charge together with the instruments, if any, creating such charge in such form, on payment of such
fees and in such manner as may be prescribed, with the Registrar.

 Registration of Charge - Rule 3(1) of the Companies (Registration of Charges) Rules, 2014 prescribes
the rule for registration of creation or modification of charges.

Where the Charge is created Within or outside India

Charge is created on property, assets or any undertakings of the company

Charge is created on
whether tangible or intangible

Property, assets or any undertakings may be located within or outside

Location of the assets
India

The particulars of the charge together with a copy of the instrument, if

Time Limit for Registration any, creating or modifying the charge shall be filed with the Registrar
within a period of 30 days of the date of creation or modification of charge

 Form No. CHG-1 (for other than debentures)

Forms for Registration of  Form No. CHG-9 (for debentures), as the case may be,
charge
With prescribed fees, Form duly signed by the Company and the
charge holder.

If the particulars of a charge are not filed within the prescribed period of 30 days, then such creation
or modification shall be filed in Form No. CHG-1 or Form No. CHG- 9 on payment of additional fee or
ad-valorem fee in a manner as prescribed below:

(a)in case of charges created or modified before the commencement of the Companies
(Amendment) Act, 2019 i.e. w.e.f. 02.11.2018, within a period of 300 days of such creation; or 6
months from 02.11.2018 as the case may be, the following additional fees is payable:
(b) in case of charges created or modified on or after the commencement of the Companies
(Amendment) Act, 2019 i.e. w.e.f. 02.11.2018, within a period of 60 days of such creation or
modification, on payment of such additional fees as prescribed or Registrar may, on an application,
allow such registration to be made within a further period of 60 days after payment of such ad-
valorem fees as prescribed:

The MCA has prescribed the following additional fees or ad valorem fees as the case may be, payable
with effect from 01.08.2019 on the charges created after 02.11.2018: -

2.Additional and Ad-valorem fee

Period of delay Small Companies and One Other than Small Companies and One
Person Company Person Company

Up to 30 days of Delay(up to 60 3 times normal fee 6 times normal fee

Days from the date of Creation
or Modification)

More than 30 days and up to 90 3 times of normal fees plusan 6 times of normal fees, plus an ad valoremfee
days delay (up to 120 days from ad valorem fee of 0.025 per of 0.05 per cent. of the amount securedby the
the date of Creation or cent. of the amount secured charge, subject to the maximum ofrupees five
Modification) by the charge,subject to the lakhs.
maximum of rupees one lakh.

After amendments in Section 77 of the Act, the provisions restricts the ability of the company to
register charge after expiry of 120 days resulting beyond 120 days the charge cannot be
registered. In such case the lendinginstitution or the company should ensure registration before 120
days otherwise the entire purpose of registration of charge to have transparent information in public
domain will be defeated. This situation also deprives genuine lenders to recover their dues. This also
gives wrong picture of charges on the property of thecompany, when third party takes search of MCA
for registration of charges.
Illustration
Moniin Ltd. having authorized and paid up capital of Rs.10 Crore has created charge of Rs.500 Crore
on its fixed assets on 01st June, 2022 in favour of Fincon Ltd., but failed to register it with the
Registrar of Companies. The Company made an application to ROC on 15th September, 2022 for
registration of charges. The fees leviable on the Company is as mentioned below:

Particulars Date Remarks

Date of creation 1st June, 2022
Amount secured Rs. 500 crores
Upto 30 days 30th June, 2022 Normal fees=Rs. 600
th th
More than 30 days and up to 30 June, 2022 to 29 July, Additional fees
60days 2022 6 times *Rs.600=Rs.3600
th th
More than 60 days and up to 29 July, 2022 to 29 Additional fees + ad valorem
120days September, 2022 fees
Ad-valorem fees= 0.05% of Rs.
500 crores = Rs. 25 lakhs or
Maximum Ad-valorem
Fees=Rs.5Lakhs
Total Fees 3600+5,00,000= Rs.5,03,600
Overseas Ltd. having authorized and paid-up capital of Rs. 10 Lakhs with its headquarter in Kolkata
had created a floating charge on its assets of Rs.1 crore on 1st June, 2022 for raising a new loan and
to continue its expansion of business smoothly. There was no filing of form CHG-1. The Company
made an application to ROC on 15th September, 2022 for registration of charges. The fees leviable
on the Company (small company) is as mentioned below:

Particulars Date Remarks

Date of creation 1st June, 2022
Amount secured Rs. 1 crore
Upto 30 days 30th June, 2022 Normal fees=Rs. 400
th th
More than 30 days and up to 30 June, 2022 to 29 July, Additional fees
60days 2022 3 times *Rs.400=Rs.1200
More than 60 days and up to 29th July, 2022 to 29th Additional fees + ad valorem
120days September, 2022 fees
Ad-valorem fees = 0.025% of Rs.
1crore = Rs. 2500 or
Maximum Ad-valorem Fees =
Rs.1Lakh
Total Fees 1200+2500= Rs.3700
 3. Verification of Instrument of Charge

A copy of every instrument creating (or modifying) any charge and required to be filed with the
Registrar, shall be verified as follows:
 Where the instrument relates solely to the property situated outside India, the copy shall
be verified by a certificate issued either-
I. under the seal, if any, of the company, or
II. under the hand of any director or company secretary of the company, or an
authorised officer of the charge holder, or

 Where the instrument relates to the property situated in India (whether wholly or partly),
the copy shall be verified by a certificate issued under the hand of any director or company
secretary of the company or an authorised officer of the charge holder.

Thus, in case the instrument or deed relates solely to a property situated outside India, the copy
may also be additionally verified by a certificate issued under the hand of some person other than
the company who is interested in the mortgage or charge.

QUESTION:

(1) XYZ Limited has an office building in London. The Company has been granted a term loan of `15
crore from a Bank. The Company wants to mortgage office building of London. Examining the
provisions of the Companies Act, 2013, answer the following:

(i)Whether the company can mortgage the above office building?

(ii)Whether a charge can be created for property situated outside India? (DEC 2021) (3 M)

Ans: In accordance with the provisions of the Companies Act, 2013 as contained in Section 77(1)
read with Rule 3 of the Companies (Registration of Charges) Rules, 2014, it shall be the duty of every
company creating a charge within or outside India, on its property or assets or any of its undertakings,
whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge
signed by the company and the charge-holder together with the instruments, if any, creating or
modifying such charge in Form No. CHG-1 (for other than Debenture) or Form No. CHG-9 (For
Debentures) as the case may be, and is required to be filed with the Registrar of Companies within a
period of 30 days of the date of creation or modification of charge along with the specified fees.

(i) In light of the above Mentioned provisions, XYZ Limited can mortgage the office building
situated in London (UK).

(ii) In light of the above mentioned provisions, a charge can be created for property situated
outside India. The e-form prescribed for the purpose of Registration of the charge is Form No. CHG-1
and it will be filled within the prescribed period.
 4) CERTIFICATE OF REGISTRATION

Where a charge or Modification is duly registered by the Registrar, a certificate of Registration/

Modification shall be issued by the Registrar in the Form. CHG 2 for fresh registration and in
Form No. CHG 3 for modification. The certificate so issued by the Registrar shall be conclusive
evidence that the requirements of Chapter VI of the Act and the rules made thereunder as to
registration of creation of charge have been complied with.

5) CONSEQUENCES OF NON-REGISTRATION OF CHARGE

1. All types of charges created by a company are to be registered by the ROC, where they are not
filed with the Registrar of Companies for registration, it shall be void as against the liquidator
and any other creditor of the company.
2. In the case of ONGC Ltd v. Official Liquidators of Ambica Mills Co Ltd, It was held that because
of failure to register, ONGC could not be treated as a secured creditor.
3. This does not, however, mean that the charge is altogether void and the debt is not
recoverable. So long as the company does not go into liquidation, the charge is good and may
be enforced.

Void against the liquidator means that the liquidator on winding up of the company can ignore the
charge and can treat the concerned creditor as unsecured creditor. The property will be treated as
free of charge i.e. the creditor cannot sell the property to recover its dues.

Void against any creditor of the company means that if any subsequent charge is created on the
same property and the earlier charge is not registered, the earlier charge would have no
consequence and the latter charge if registered would enjoy priority. In other words, the latter
charge holder can have the property sold in order to recover its money.

CASELAWS
In the case of ONGC Ltd v. Official Liquidators of Ambica Mills Co. Ltd. (2006) 132 Comp Cas 606
(Guj). The ONGC had not been able to point out whether the so called charge, on the basis of which
it was claiming preference as a secured creditor, was registered or not. It was held that in the light
of this failure, ONCG could not be treated as a secured creditor in view of specific provisions of
section 125 under the erstwhile Companies Act, 1956 and the statutory requirement under the said
section. This does not, however, mean that the charge is altogether void and the debt is not
recoverable. So long as the company does not go into liquidation, the charge is good and may be
enforced.

In the case of Antifriction Bearing Corporation Limited v. State of Maharashtra, [(1966) (1999) 20
SCL, 373 (Bom)] it was held that charges were to be void against the liquidator or creditor unless
registered. The Bombay High Court observed that filing of copy of document of charge with Registrar
is not the formality but a definite legal requirement and that non-filing creates a certain legal
impediment.

APPLICATION FOR REGISTRATION OF CHARGE (SECTION 78)

 Where a company fails to “ register the charge within the period of thirty days referred to in
sub-section (1) of section 77”, the person in whose favor the charge is created may apply to
the Registrar for registration of the charge along with the instrument created for the charge
 in Form No.CHG-1 or Form No.CHG- 9, as the case may be, within the period as specified in
Section 77 duly signed along with payment of additional fee or ad valorem fee.
 The registrar may, on such application, give notice to the company about such application.
The company may either itself register the charge or shows sufficient cause why such charge
should not be registered.
 On failure on part of the company, the Registrar may allow registration of such charge within
14 days after giving notice to the company. This does not extinguish the liability of the
company in case any offence has been committed in registration like delay to register the
charge.
 Where registration is affected on application of the person in whose favour the charge is
created, that person shall be entitled to recover from the company, the amount of any fee
or additional fees paid by him to the Registrar for the purpose of registration of charge

6) ACQUISITION OF PROPERTY SUBJECT TO CHARGE AND MODIFICATION OF CHARGE

[SECTION 79]

Two situations.

a) Acquisition by a company of any property that is already subject to charge.

b) Modification in the terms and conditions of any charge already registered.

The provisions of section 77 relating to registration of charge shall as it is apply in both the above
situations.

A. Company acquiring any Property subject to Charge [Section 79 (a)]

In case of a property where charge is already registered and if it is sold with the permission of the
holder of charge, it shall be the duty of the company acquiring it to get the charge registered in
accordance with Section 77. In other words, the earlier charge should get vacated and, in its place,
new charge should get registered by the company which has acquired it.

B. Modification of Charge when there is Change in Terms and Conditions, etc. [Section 79 (b)]

Section 79 (b) requires any modification in charge to be registered by the company in accordance
with Section 77.

Some examples of ‘modification’ are as under:

1. Where the charge is modified by varying any terms and conditions of the existing charge
through an agreement;

2. Where the modification is for enhancing or decreasing the limits;

3. Where there is change in rate of interest (other than bank rate);

C. Issue of Certificate of Modification

As per Rule 6, where the particulars of modification of charge is registered under section
 79, the Registrar shall issue a certificate of modification of charge in Form CHG-3.

7) DATE OF NOTICE OF CHARGE [SECTION 80] / Deemed notice of charge

Where any charge is created on a property, any person acquiring such property, assets, undertakings
or part thereof or any share or interest therein shall be deemed to have notice of thecharge from the
date of such registration.
All charges registered with the registrar are public documents. This means that any person who
wishes to lend money to the company against the security of such property or buy it can refer to the
MCA Portal and find out if there is any charge created on that asset.
In case anyone enters into the transaction without making any enquiry and later on suffers loss
because of charge, he cannot claim the loss from the company for it shall be deemed that he had
notice of charge.

Example: Vishnu Marketing Limited obtained a term loan of ` 50 lacs from Beta Commercial
Bank Limited by creating a charge on one of its office buildings and the charge was duly
registered. Lateron, if the building is sold to Neeraj, he is deemed to have notice of such
charge. In other words, it is presumed that Neeraj knew beforehand that the building was
mortgaged to the bank for obtaining a loan. He cannot plead against such presumption by
contending that he did not know about the charge if he suffers any loss at a later date because
of the mortgage.
Illustration:
There are two Companies ABC Ltd and XYZ td. ABC Ltd. took loan from the Bank and XYZ
Ltd. gaveguarantee on its property.

 Whether Charge will be created in ABC Ltd?

 Whether Charge will be created in XYZ Ltd?

In the above situation XYZ Ltd. is giving its assets as security to bank for loan to ABC Ltd.,
therefore assets ofthe XYZ Ltd. is involved. Charge will be created in the XYZ Ltd and not on
the property of ABC Ltd.

#Practice Questions

1. Ningyako Limited realised on 2nd May, 2019 that particulars of charge created on
12th March, 2019 in favour of a Bank were not registered with the Registrar of
Companies. What procedure should the company follow to get the charge
registered? Would the procedure be different if he company realised its mistake of
not registering the charge on 7 th June 2019 instead of 2nd May, 2019? Explain with
reference to the relevant provisions of the Companies Act, 2013.
Answer
The charge in the present case was created after 02-11-2018 (i.e. the date of
commencement of the Companies (Amendment) Second Ordinance, 2019) to which
another set of provisions is applicable. These provisions are different from a case where
the charge was created before 02-11-2018.
Initially, the prescribed particulars of the charge together with the instrument, if any, by
which thecharge is created or evidenced, or a copy thereof, duly verified by a certificate,
are to be filed with the Registrar within 30 days of its creation. [Section 77 (1)]. In this
case particulars of charge were not filed within the prescribed period of 30 days.
However, the Registrar is empowered under clause (b) of first proviso to section 77
(1)to extend the period of 30 days by another 30 days (i.e. sixty days from the date of
creation) onpayment of prescribed additional fee. Taking advantage of this provision,
Ningyako Limited should immediately file the particulars of charge with the Registrar
after satisfying him through making anapplication that it had sufficient cause for not filing
the particulars of charge within 30 days of its creation.
If the company realises its mistake of not registering the charge on 7th June, 2019 instead
of 2nd May, 2019, it shall be noted that a period of sixty days has already expired from the
date of creationof charge. However, Clause (b) of Second Proviso to Section 77 (1) provides
another opportunity forregistration of charge by granting a further period of sixty days but
the company is required to payad valorem fees. Since the first sixty days from creation of
charge have expired on 11th May, 2019, Ningyako Limited can still get the charge
registered within a further period of sixty days from 11th May, 2019 after paying the
prescribed ad valorem fees. The company is required to make an application to the
Registrar in this respect giving sufficient cause for non-registration of charge.

2.Mr. Calvin purchased a commercial property in Delhi belonging to NRT Limited after
entering into an agreement with the company. At the time of registration, Mr. Calvin
comes to know that the title deed of the company is not free and the company
expresses its inability to get the title deed transferred in his name contending that he
ought to have the knowledge of charge created on the property of the company.
Explain, whether the contention of NRT Limited is correct?

Answer
According to section 80 of the Companies Act, 2013, where any charge on any property
or assets ofa company or any of its undertakings is registered under section 77 of the
Companies Act, 2013, any person acquiring such property, assets, undertakings or part
thereof or any share or interest therein shall be deemed to have notice of the charge
from the date of such registration.
Thus, Section 80 clarifies that if any person acquires a property, assets or undertaking in
respect ofwhich a charge is already registered, it would be deemed that he has complete
knowledge of chargefrom the date of its registration. Mr. Calvin, therefore, ought to have
been careful while purchasing property and should have verified beforehand that NRT
Limited had already created a charge on the property. In view of above, the contention
of NRT Limited is correct.
 Previous Year Questions (DEC 2022) (3 M)

1.“Non-filing of particulars of a charge shall be void against the company as a going concern”
– Examine this statement in light of the provisions of the companies act 2013

Answer:
 According to Section 77 of the Companies Act, 2013, notwithstanding anything contained in
any other law for the time being in force, no charge created by a company shall be taken into
account by the liquidator [appointed under this Act or the Insolvency and Bankruptcy Code,
2016] or any other creditor unless it is duly registered under subsection (1) and a certificate of
registration of such charge is given by the Registrar under sub-section (2).

 In the case of ONGC Ltd v. Official Liquidators of Ambica Mills Co Ltd (2006) 132 Comp Cas 606
(Guj), the ONGC had not been able to point out whether the so called charge, on the basis of
which it was claiming preference as a secured creditor, was registered or not. It was held that
in the light of this failure, ONGC could not be treated as a secured creditor in view of specific
provisions of section125 and the statutory requirement under the said section. This does not,
however, mean that the charge is altogether void and the debt is not recoverable. So long as
the company does not go into liquidation, the charge is good and may be enforced.

 Void against the liquidator means that the liquidator on winding up of the company can ignore
the charge and can treat the concerned creditor as unsecured creditor. The property will be
treated as free of charge i.e. the creditor cannot sell the property to recover its dues. Void
against any creditor of the company means that if any subsequent charge is created on the
same property and the earlier charge is not registered, the earlier charge would have no
consequence and the latter charge if registered would enjoy priority. In other words, the latter
charge holder can have the property sold in order to recover its money.

 Thus, non-filing of particulars of a charge does not invalidate the charge against the company
as a going concern. It is void only against the liquidator and the creditors at the time of
liquidation. The company itself cannot have a cause of action arising out of non registration.
Hence, the statement is not correct.

SATISFACTION OF CHARGES - Section 82

1. Intimation regarding Satisfaction of Charge

Section 82 of the Act of 2013, requires a company to give intimation of payment or

satisfaction in full of any charge earlier registered, to the Registrar in the Form CHG-4. The
intimation needs to be givenwithin a period of 30 days from the date of such payment or
satisfaction.

Extended period of intimation: The Registrar may, on an application by the company or the
charge holder, allow such intimation of payment or satisfaction to be made within a period
of 300 days of such payment or satisfaction on payment of prescribed additional fees.

2. Notice to the Holder of Charge by the Registrar

 On receipt of intimation, the Registrar shall send a notice to be sent to the holder of the
charge calling upon him to show cause within 14 days, as to why payment or satisfaction
in full should not be recorded.

 If no cause is shown by the charge-holder, the Registrar shall order entering of a

memorandum of satisfaction in the register of charges kept by him and accordingly, he
shall inform the companyof having done so.

 However, no notice is required to be sent, in case the intimation to the Registrar in this
regard is inthe specified form and signed by the holder of charge.

 If any cause is shown by the charge-holder, the Registrar shall record a note to that effect
in the register of charges and inform the company.

Note: In case of a specified IFSC Public or Private company, the Registrar may, on an
application by the company, allow such registration to be made within a period of 300 days
of such creation on payment of such additional fees as may be prescribed.

3. Issue of Certificate

As per Rule 8 (2), in case the Registrar enters a memorandum of satisfaction of charge in full, he shall
issue a certificate of registration of satisfaction of charge in

Form No. CHG-5.

4. Preservation of Records

The instrument creating a charge or modification thereon shall be preserved for a period of 8 years

from the date of satisfaction of charge by the company.

POWER OF REGISTRAR TO MAKE ENTRIES OF SATISFACTION IN ABSENCE OF INTIMATION FROM

THE COMPANY – Section 83

1) This situation would arise where the property subject to a charge is sold to a third- party
and neither the company nor the charge-holder has intimated the Registrar regarding
satisfaction of the earlier charge.
2) Accordingly, with respect to any registered charge if evidence is shown to the
satisfaction ofRegistrar that

- the debt secured by charge has been paid or satisfied wholly or in part or
- that the part of the property or undertaking charged has been released from the charge
or
- has ceased to form part of the company’s property or undertaking,

Then he may enter in the register of charges a memorandum of satisfaction in this regard.
 This power can be exercised by the Registrar despite the fact that no intimation has been
received by him from the company.

3) Information to affected parties: The Registrar shall inform the affected parties within
30 days ofmaking the entry in the register of charges.

Issue of Certificate: The Registrar shall issue a certificate of registration of satisfaction of

charge in Form No. CHG-5.

INTIMATION OF APPOINTMENT OF RECEIVER OR MANAGER - Section 84

Section 84 of the Act of 2013 deals with the appointment of a receiver or manager and of
giving intimation thereof to the company and the Registrar.

Accordingly,

 if any person obtains an order for the appointment of a receiver or a person to

manage the propertywhich is subject to a charge, or
 if any person appoints such receiver or person under any power contained in any instrument,

he shall give notice of such appointment to the company and the Registrar along with a copy
of the order or instrument within 30 days from the passing of the order or making of the
appointment in Form CHG-6.

On ceasing to hold such appointment, the person appointed as above shall give a notice to
that effectto the company and the Registrar. In turn, the Registrar shall register such notice.

COMPANY’S REGISTER OF CHARGES

 Form No. CHG.7 which shall include therein all charges and floating charges affecting
anyproperty or assets of the company or any of its undertakings, indicating in each case
such particulars as may be prescribed.
 The entries in the register of charges maintained by the company shall be made
forthwith after the creation, modification or satisfaction of charge, as the case may
be.
 Such register of charges shall contain the particulars of all the charges registered with
the Registrar on any of the property, assets or undertaking of the company and the
particulars of anyproperty acquired subject to a charge as well as particulars of any
modification of a charge and satisfaction of charge.
 All the entries in the register shall be authenticated by a director or the secretary of the company
or any other person authorised by the Board for the purpose.

 The register of charges shall be preserved permanently and the instrument creating a
charge or modification thereon shall be preserved for a period of eight years from the
date of satisfaction of charge by the company.
  The following details is required to be entered in to form CHG-7 maintained by Company.
i. S.No.
ii. Charge ID
iii. Date of creation of charge or date of acquisition of property subject to charge
iv. Date of registration of creation of charge
v. Short description of the property charged
vi. Period and amount
secured by the charge vii
Names and addresses of the
charge holder
viii. Particulars of the terms and conditions of the charge
ix. Description of the instrument creating the charge
x. Date of modification of charge
xi. Date of registration of modification of charge
xii. Description of the instrument modifying the charge
xiii. Particulars of modification
xiv. Date of satisfaction
xv. Date of registration of satisfaction
xvi. Facts and date of condonation of delay, if any
xvii. Reasons for delay in filing for registration of creation, modification or
satisfaction of the charge,if any.

Inspection of Charges – Section 85(2)

The register of charges and the instrument of charges kept by the company shall be open for
inspection –
(a) by any member or creditor of the company without fees;
(b) by any other person on payment of fee subject to reasonable restriction as the
company by its articles impose. Liquidator or any other creditor take into account the
unregistered charges.

Register of Charges Maintained in ROC’s Office (Section 81)

The Registrar of Companies shall maintain a register containing particulars of the charges registered in
respect of every company in manner as stated: l

1. The particulars of charges maintained on the Ministry of Corporate Affairs portal

(www.mca.gov.in/ MCA21) shall be deemed to be the register of charges for the purposes of
section 81 of the Act. l
2. This charge register shall be open to inspection by any person on payment of fee for each
 Punishment for Contravention
If any company is in default in complying with any of the provisions of this Chapter, the
company shallbe liable to a penalty of five lakh rupees and every officer of the company who
is in default shall be liable to a penalty of fifty thousand rupees

Section 86(2) of the act provides that if any person wilfully furnishes any false or incorrect
informationor knowingly suppresses any material information, required to be registered in
accordance with the provisions of section 77, he shall be liable for action under section 447.

PROCEDURE FOR REGISTRATION OF CREATION/MODIFICATION SATISFACTION OF CHARGE

If a company has passed special resolutions under Section 180(1)(c) authorising its Board of
directorsto borrow funds for the requirements of the company and under Section 180(1)(a),
authorising its Board of directors to create charge on the assets and properties of the
company, to provide security for repayment of the borrowings in favour of the financial
institutions/banks or lenders (please note that in case of private companies, Section 180
shall not apply) and in exercise of that authority has signed the loan documents and now
proposes to have the charge created it should follow the procedure detailed below:

a. Where the special resolution as required under section 180 is passed, Form MGT-14 of
the Companies (Management and Administration) Rules, 2014 is to be filed with the
Registrar.
b. For the purpose of creating/ modifying a charge file particular of the charge with the
concerned ROC within 30 days of creating the Form No.CHG-1 (for other than
 Debentures) or Form No.CHG-9 (for debentures rectification), as the case may be.
c. If the particulars of charge cannot be filed within thirty days due to unavoidable reasons,
then it may be filed within the period specified in Section 77 after payment of such
additional fee or ad valorem fee as prescribed under Annexure ‘B’ of Companies
(Registration offices and fees) Rules,2014.
d. Such application for delay i.e. for not filing within 30 days of the date of creation of the
charge including modification thereof, to the Registrar shall be made in Form No. CHG-1
and supported by a declaration from the company signed by its secretary or director that
such belated filing shallnot adversely affect rights of any other intervening creditors of
the company.
e. Where a charge is registered Registrar will issue a certificate of registration of such
charge in Form No. CHG-2. Where the particulars of modification of charge are registered
the Registrar shall issue a certificate of modification of charge in Form No. CHG-3.
f. A company shall within a period of 30 days from the date of the payment or satisfaction
in full of any charge registered, give intimation of the same to the Registrar in Form
No.CHG-4 along withthe fee as prescribed under Annexure ‘B’ of Companies (Registration
Offices and Fees) Rules, 2014.
g. Where the Registrar enters a memorandum of satisfaction of charge in full, obtain a certificate of
registration of satisfaction of charge in Form No. CHG-5.
h. Incorporate changes in relation to creation, modification and satisfaction of charge in the
registerof charges maintained by the company in Form No. CHG.7 and enter therein
particulars of all the charges registered with the Registrar on any of the property, assets
or undertaking of the company and the particulars of any property acquired subject to a
charge as well as particulars of any modification of a charge and satisfaction of charge.
Such register is to be kept at the registered office of the company.
i. All the entries in the register shall be authenticated by a director or the secretary of the
companyor any other person authorised by the Board for the purpose.
j. The register of charges shall be preserved permanently and the instrument creating a
charge ormodification thereon shall be preserved for a period of eight years from the
date of satisfaction of charge by the company.
k. Where the satisfaction of the charge is not filed with the Registrar within thirty days from
the date on such payment of satisfaction with normal fees and within three hundred days
from the date on such payment of satisfaction with additional fees, an application for
condonation of delay shall be filed with the Central Government in Form No.CHG-8.
l. The order passed by the Central Government shall be required to be filed with the
Registrar in Form No.INC.28 along with the fee as per the conditions stipulated in the said
order.

Registration of Charges under the SARFAESI Act, 2002 by Banking Company

The Central Registry of Securitisation Asset Reconstruction and Security Interest of India
(CERSAI) is set up under section 20 of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (SARFAESI Act). At the request of the
Department of Financial Services, Ministry of Finance, the Indian Banks’ Association has taken
steps to obtain incorporation of the Central Registry of Securitisation Asset Reconstruction
and Security Interest of India (CERSAI) licensed under section 25 of the Companies Act, 1956.
The said Company shall be maintaining and operating the Central Registry for and on behalf
of the Central Government.
The Central Government has issued the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest (Central Registry) Rules, 2011 and prescribed the Forms
to be used for the purpose of filing information for registration in respect of transactions of
securitisation, asset reconstruction of financial assets and security interest over property.
The object of setting up the Registration System under Chapter IV of the SARFAESI Act is to
create a public data base about encumbrances created on properties to secure loans and
advances given by the banks and financial institutions, as also transactions of securitisation
or asset reconstruction undertaken pursuant to the provisions of the SARFAESI Act.
The registration of creation of security interest by the securitisation company or
reconstruction company or the secured creditor, as the case may be, with the Central Registry
as per the provisions of section 23 of the said Act read with Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011 as
amended, is mandatory and is an additional compliance

The following types of security interest on the CERSAI portal:

a. Particulars of creation, modification or satisfaction of security interest in immovable
property by mortgage other than mortgage by deposit of title deeds.
b. Particulars of creation, modification or satisfaction of security interest in hypothecation of
plant and machinery, stocks, debts including book debts or receivables, whether existing or
future.
c. Particulars of creation, modification or satisfaction of security interest in intangible assets,
being know how, patent, copyright, trademark, licence, franchise or any other business or
commercial right of similar nature. d. Particulars of creation, modification or satisfaction of
security interest in any ‘under construction’ residential or commercial or a part thereof by an
agreement or instrument other than mortgage.

SEARCH AND STATUS REPORT

A Search and Status Report traces the history of a Company’s property and how it has charged
/ mortgaged its assets with various Banks/Financial Institutions/Lenders over a period of time,
before reaching the present bank that has demanded for the Search and Status Report.
The scope of Search and Status report depends upon the requirements of the Bank/Financial
Institution/Lender/ Investor concerned. A Search and Status report prepared by a Company
Secretary in Practice helps Banks/ Financial Institutions/Lenders/ Investors to take conscious
decision regarding the quantum of loan/ credit facility to be sanctioned and investment to be
made. It also helps in taking an informed and speedy decision assuring the credit- worthiness
or otherwise of the company.
A Search and Status Report as is apparent from, its name contains two aspects. The first being
‘search’ which involves physical/online inspection of documents and the second activity
‘status’ which comprises of reporting of the information as made available by the search.
It inter alia includes:
 Name of Company
 l CIN of the Company
 Registered Office Address of the Company
 Capital Structure of the Company
 Date of Incorporation
 List of Directors of the company since incorporation
 List of Shareholders of the company since incorporation
 l Secured Loans
 List of Registered Charges since incorporation etc.
(i) Charge Id
(ii) Document Date
(iii) Registration Date
(iv) Creation of Charge
(v) Modification of Charge
(vi) Details of Agreements creating charge
(vii) Details of Bank/Financial Institution/NBFC
(viii) Amount Secured
(ix) Terms & Conditions
(x) ) Rate of Interest
(xi) Margin
(xii) Repayment
Security and other particulars: (At the time of creation)
Security and other particulars: (First Modification dated)

JUDICIAL PRONOUNCEMENTS

1) Official Liquidator v. Sri Krishna Deo. The plant and machinery of a company embedded
in the earth or permanently fastened to things attached to the earth became a part of
the company’s immovable property and therefore apart from the registration under the
Companies Act, registration under the Indian Registration Act would also be necessary
to make the charge valid and effective.
2) Maturi U. Rao v. Pendyala: When the floating charge crystallizes it becomes fixed and
the assets comprised therein are subject to the same restrictions as the fixed charge
3) In Smith v. Bridgend County Borougn Council, the agreement was held to constitute a
floating charge, in so far as it allowed the employer, in various situations of default by
the contractor, to sell the contractor’s plant and equipment and apply the proceeds in
discharge of its obligations. Aright to sell an asset belonging to a debtor and appropriate
the proceeds to payment of the debt could not be anything other than a charge. It was a
floating charge because the property in question was a fluctuating body of assets which
could be consumed or removed from the site in the ordinary course of the contractor’s
business.
4) Praga Tools Ltd v. Official Liquidator, Bengal Engineering Co: Section 125 of Companies
Act 1956 (Currently Section 77) is applicable only to a charge created by a company by
a contract, and notto a charge arising by operation of law.
5) In S.T. Patil And Ors. vs Registrar Of Companies, the Hon’ble Company Law Board was of
view that“Guarantees do not require registration under Section 125 of the Act. It is in this
connection, reference may be made to the decision in Paul and Frank Ltd. v. Discount
Bank (Overseas) Ltd. and the Board of Trade [1967], wherein it has been held that
contracts of insurance, guarantee, indemnity, etc., do not require registration”).

MCQs

1. If a charge is created on 18-07-2022 but the registration is not made within the original
period of 30 days and also not made within next 30 days after the expiry of original 30 days,
then the Registrar is empowered to allow such registration to be made within a further
period of :

(a) 30 days

(b) 45 days

(c) 60 days

(d) 90 days

Answer: 60 Days

2.Any person acquiring property (on which charge is registered under section 77) shall be
deemed to have notice of the charge from:

(a) end of 30 days

(b) date of application for charge

(c) date acquiring the property

(d) date of such registration

Answer: date of such registration

7.25 | P a g e
 Lesson 8
DISTRIBUTION OF PROFITS

INTRODUCTION

 Profit or a portion of profit that can be legally distributed as a dividend to the shareholders is
known as Divisible Profit.
 The word “Dividend” has origin from the Latin word “DividendUM”. It means a thing to be divided.
 All profit of the company is not divisible and hence, profits available for dividend to shareholders
are known as divisible profits.
 A company’s dividend is decided by its board of directors and it requires the shareholders’
approval.
 If a company declares and pays a dividend in the absence of profits, the directors will have to
make good the amount to the company from their own pockets.
 SS-3 defines dividend so as to mean a distribution of any sums to Members out of profits and
wherever permitted out of free reserves available for the purpose.
 Holders of preference shares receive dividend at a predetermined fixed rate and are paid first.
 Holders of equity shares are entitled to receive any amount of dividend, based on the level of profit
and the company’s need for cash for expansion or other purposes.
 Right to claim dividend will only arise after a dividend is declared by the company in general
meeting and until and unless it is so declared, the shareholder has no claim against the company in
respect of it.

INTEREST VS. DIVIDEND

Nature of Difference Interest Dividend

Meaning Interest is the charge against the Dividend is a percentage of profit
money that is offered to the that is offered to the shareholder of
borrower a company
Nature It is a charge against profit It is appropriation of profit

Paid to The lenders, creditors and debenture Equity Shareholders and Preference
holders Shareholders
Mandatory Interest is to be paid even if there is To distribute dividend, profits are
no chance of making profit necessary
Rate Fixed Remains constant in the case of
preference shares, but fluctuates in
case of equity shares
Determines How much profit would be earned or How much money can be
how much loss a company would reinvested into the business
incur.

8.1 | P a g e
 TYPES OF DIVIDEND

Basis Final Dividend Interim Dividend

Meaning The Dividend recommended by the Dividend paid by the Company
Board of Directors and declared by the betweentwo annual general meetings
Members at an Annual General Meeting
Power to declare Recommended by the Board at the Declared by the Company’s Board of
Dividend
board meeting and declared by the Directors
Members of the Company
Meetings Declared in Annual General Meeting of Declared at the Meeting of the Board
Members
Time of It is declared after the end of the financial It is declared on the basis of
Declaration
year after the amount of distributable provincial financial statements or
profit has been computed estimates
Frequency of It can be paid only once in a financial It can be paid more than once in a
payment
year financial year

Source of Paid out of profit earned in the previous Paid:-

Payment
financial year
(i) out of surplus in the profit and
lossaccount
(ii) out of profit of the financial
year in which such interim
dividend is sought to be
declared
(iii) profits generated by the
Company till the quarter
preceding the date of
declaration of interim dividend
Quantum of Members cannot declare dividend over It shall not be declared at a rate
Dividend
and above the amount recommended by higher than the average dividends
the Board declared bythe Company during the
immediatelypreceding three financial
years

8.2 | P a g e
 A. On the basis of time

I. Final dividend

1. Dividend is said to be a final dividend if it is declared at the annual general meeting of the
company.
2. Final dividend once declared becomes a debt enforceable against the company.
3. Final Dividend can be declared only if it is recommended by the Board of Directors of the
Company.

SS-3 defines final dividend so as to mean the dividend recommended by the Board of Directors and declared
by the Members at an Annual General Meeting.

II. Interim dividend

1. Dividend is said to be an interim dividend, if it is declared by the Board of Directors between

two annual general meetings of the company.
2. All the provisions relating to the payment of dividend shall be applicable on the interim
dividend also.
3. SS-3 while clarifying the interim dividend provides that while declaring the Interim Dividend,
the Board shall consider the financial results for the period for which Interim Dividend is to be
declared and should be satisfied that the financial position of the company justifies and
supports the declaration of such Dividend. The financial results shall take into account –
• Depreciation for the full year,
• Tax on profits of the company including deferred tax for full year,
• Other anticipated losses for the financial year,
• Dividend that would be required to be paid at the fixed rate on preference shares,
• The losses incurred, if any, during the current financial year upto the end of the
quarter, immediately preceding the date of declaration of Interim Dividend.
4. Further, in case of clause (e) above, Interim Dividend shall not be declared at a rate higher
than average Dividend declared during the immediately preceding three financial years.
5. Further SS-3 provides that Interim Dividend shall be declared at a meeting of the Board. In the
event of a loss or inadequacy of profits during a financial year, no Interim Dividend shall be
declared/ paid out of Free Reserves.
6. SS-3 further provides that where a company has issued equity shares with differential rights
as to Dividend, Interim Dividend may, at the option of the Board, be declared on all or any
one or more of the classes of such shares in accordance with the terms of issue.
7. In case Interim Dividend is declared on only one class of equity shares, the Board shall ensure
that the profit as shown in the financial results is adequate to meet the Dividend that would
have to be paid on the other classes of equity shares in accordance with the terms of issue.
8. Where a company has issued equity shares with differential rights as to voting only, no
differentiation shall be made in the declaration of Interim Dividend on such shares, unless the

8.3 | P a g e
 terms of issue provide otherwise

Shain Ltd., incurred loss in business upto current quarter of financial year 2021-22. The company has declared
dividend at the rate of 12%, 15% and 18% respectively in the immediate preceding three years. Inspite of the loss,
the Board of Directors of the company have decided to declare interim dividend @15% for the current financial
year. Examine the decision of PET Ltd. stating the provisions of declaration ofinterim dividend under the Companies
Act, 2013 ?

 In the case of Maharani Lalita Rajya Lakshmi v. Indian Motor Co (Hazaribag) Ltd., it was held that
no enhancement of rate of dividend than that recommended by the Board is possible.
 In the case of Tarajan TeaCo. (P) Ltd. v. CIT, it was held that a dividend declared by the members at an
annual general meeting is a debt against the company and is recoverable by the members only
after declaration by members and not at the time of recommendation made by the board of
directors.
 In the case of J. Dalmia v. Commissioner of Income Tax, New Delhi, it was held that power to pay
interim dividend is usually vested, by the articles of association, in the directors. For paying interim
dividend a resolution of the company is not required: if the directors are authorized by the articles
of association they may pay such amount as they think proper having regard to their estimates of
the profit made by the Company. Interim dividend is therefore paid pursuant to the resolution of
the directors on some daybetween the ordinary general meetings of the company.

B. On the basis of Nature of Shares

8.4 | P a g e
 DECLARATION OF DIVIDEND (SECTION 123)

SOURCES FOR DECLARATION OF DIVIDEND

According to Section 123 (1), the dividend for any financial year shall be declared or paid from the
following sources:
(a) Profits of the CURRENT FINANCIAL YEAR- Profits arrived at after providing for depreciation.

(b) Profits of any PREVIOUS FINANCIAL YEAR OR YEARS- Profits of any previous financial year(s)
arrived at after providing for depreciation. i.e. credit balance in profit and loss account and free
reserves.

#Questionable Point:
1) It is to be noted that only free reserves and no other reserves are to be used for
declaration or payment of dividend. i.e. statutory reserves (DRR, CRR) or revaluation
reserve cannot be used.
2) In computing profits, any amount representing unrealised gains, notional gains or
revaluation of assets shall be excluded

(c) Both (a) and (b).

(d) Money provided by the Central Government or a State Government for the payment of
dividend.

Note:
1) Before declaration of any dividend, carried over (previous years) previous losses and depreciation
are required to be set off against profit of the company for the current year.
2) In computing profits any amount representing unrealised, notional gains or revaluation of assets
shall be excluded.
3) Capital profits are not same as distributable profits; and therefore, normally not available for
distribution as dividend.

Example: Shreyas Mechanics Limited owns a plot of land which was purchased long before. As the
property rates are going up, it is decided to revalue the plot at fair value which is moderately ten
times the original price, thus resulting in a revaluation profit of ` 20,00,000. The Board of Directors
is keen to utilize this ` 20,00,000 along with free reserves of ` 24,00,000 for declaration of dividend
at the forthcoming Annual General Meeting (AGM) to be held on 28th September, 2019. But
according to Proviso to Section 123 (1) (a), the amount of ` 20,00,000 cannot be considered as it
does not form part of Free Reserves as the same cannot be utilized towards declaration of dividend.

8.5 | P a g e
 TRANSFER TO RESERVES IS NOT MANDATORY

Transfer of profits to reserves for any financial year has been left to the discretion of the company.
Therefore, a company is free to transfer any portion of its profit to reserves as it may deem fit. It
may also decide not to transfer any amount to reserves.

Example: For the current year, XYZ Limited proposes to transfer more than 10% of its profits to the
reserves before declaration of dividend at the rate of 12%. Can the company do so?
Answer: The amount to be transferred to reserves out of profits for any financial year before the
declaration of dividend has been left to the discretion of the company. Therefore, XYZ Limited is
free to transfer any part of its profits to reserves as it may deem fit.

DECLARATION OF DIVIDEND WHEN THERE IS INADEQUACY OR ABSENCE OF PROFITS

(Second Proviso to Sec. 123)
Where in any year there are no adequate profits for declaring dividend, the company may declare
dividend out of the profits of any previous year transferred by it to the free reserves only in
accordance with the procedure laid down in Rule 3 of the Companies (Declaration and Payment
of Dividend) Rules, 2014.

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 CONDITION I CONDITION II CONDITION III

The rate of dividend declared The total amount to be drawn from The balance of
shall not exceed the average of such accumulated profits shall not reserves after such
the rates at which dividend was exceed = 10% of (paid up share withdrawal shall not
declared by the company in the capital + free reserves). As per latest fall below = 15 % of
immediately preceding 3 years. audited financial statement paid up share
st
Note: However, this condition Note: The amount so drawn shall 1 capital.
shall not apply if the company be utilized to set off the losses As per latest
has not declared any incurred in the financial year in which audited financial
dividend in each of the three dividend is declared. statement.
preceding financial year.
Note: 1) It may be noted that all the above 3 conditions have to be satisfied.
2) These conditions are not applicable to a Government company in which the entire paid upshare
capital is held by the Central Government, or by any Stale Government or together

#Practice Question:

1)Capricorn Industries Limited has a paid-up capital of ` 200 lakhs and accumulated Reserves of `
240 lakhs. Loss for the year ending 31st March 2020 is ` 30 Lakhs. Dividend was immediately
preceding.declared at the following rates during the 3 years
Year 1 = 9% || Year 2 = 10% || Year 3 = 12%
What is the maximum rate at which the company can declare dividend for the current year.

Answer:
In the given case, Capricorn Industries Limited has not made adequate profits during thecurrent year
ending on 31st March, 2020, but it still wants to declare dividend. Let us apply theconditions:
Condition I:
9+10+12 Average rate = 10.3%
3
Therefore, the rate of dividend shall not exceed 10.3% Paid up Capital i.e. `200 lakhs = ` 20.6 lakhs
Condition II:
Paid-up capital + Free reserves = ` (200+240) Lakhs = 440 Lakhs
10% thereof = 44 Lakhs
Less: loss for the year = 30 Lakhs
Amount available = 14 Lakhs
Hence the quantum of dividend is further restricted to ` 14 lakhs.
Condition III:
Accumulated Reserves = ` 240 Lakhs
Proposed withdrawal declaration of dividend = ` 14 Lakhs
Balance of Reserves =` 226 Lakhs
This is more than 15% of paid-up capital (i.e 15% of ` 200 Lakhs) i.e. ` 30 lakhs.
Conclusion: Thus, the company can declare a dividend of ` 14 lakhs i.e. at a rate of 7% on its paid-up
capital of ` 200 lakhs.

2)XYZ Ltd., which has inadequacy of profits, proposes to declare Dividend out of
general reserves. Following are the facts of the case:
• 17,500 preference shares of Rs. 100 each fully paid; (Dividend @ 9%)
• 7,00,000 equity shares of Rs. 10 each
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 • General reserves: Rs. 21,00,000

• Capital reserves: Rs. 3,50,000

• Securities premium: Rs. 3,50,000
• Surplus (P&L): Rs. 63,000
• Net profit for the year: Rs. 3,57,000
• Average rate of Dividend during the last three years: 15%
• Board of directors of the company wishes to declare 10% Dividend.
• Maximum amount that can be withdrawn : Rs. 10,91,300 [1/10 of (Rs. 17,50,000
o + Rs. 70,00,000 + Rs. 21,00,000+63000]
• Permissible withdrawal from the balance of Reserves : Rs. 8,50,500

Answer:

* 15% of total capital Rs. 87,50,000 to be retained in the Reserves i.e. Rs.13,12,500
* General Reserves: [Rs. 21,00,000 + 63000 (Surplus-P&L)]
* Maximum amount that can be taken from Reserves: Rs. 8,50,500 (Rs. 21,63,000 – Rs.
13,12,500)

* Available profits : Rs. 2,62,500 ( Rs. 63,000 + Rs. 3,57,000 – Rs. 1,57,500); [Rs. 1,57,500 is 9%
preference Dividend on 17,500 preference shares of Rs.100 each]

* Dividend desired to be declared by the Board of the company: Rs. 7,00,000

* Profit available for declaration of Dividend : Rs. 2,62,500
* Balance amount that can be withdrawn from Reserves: Rs. 4,37,500 (Rs. 7,00,000 – Rs.
2,62,500).
* Hence, company can declare Dividend @ 10%

3)The following summarized information is available in respect of a company for the

year ended 31st March,2022:
Equity Share Capital 10,000 shares of the face value of Rs.100 each=
Rs. 10 Lakhs Free Reserve= Rs. 2 Lakhs
Revaluation Reserve= Rs. 1 Lakh
Profit and Loss Account (Dr.)= Rs.
0.35 Lakhs Net loss for the year
2021-2022= Rs. 0.25 Lakhs
The company has paid dividends to the equity shareholders @ 8%, 10% and 12%
during the immediately preceding three financial years. Advise the Board of directors
the maximum amount they can pay this year by way of dividends

Ans:
In the instant case, the net loss for the year 2021-22 is Rs.25000.
According to Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 the
following conditions must be fulfilled:

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 (i) The rate of dividend cannot exceed the average of the rates at which dividend was declared
in the three years immediately preceding that year i.e. (8%+10%+12%)/3 = 10%, so in this case, the
amount of dividend should not exceed Rs.1 Lakh.
(ii) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of
the sum ofits paid-up share capital and free reserves as appearing in the latest audited financial
statement. Thusthe company can draw only upto Rs.1.2 lakh.
(iii) The balance of reserves after such withdrawal shall not fall below 15% of its paid up capital as
appearing in the latest audited balance sheet. Accordingly the maximum that may be
withdrawn cannot exceed Rs.50000.
However, the amount so withdrawn must be used to set-off losses of the current year i.e. Rs.25000.
Therefore, the maximum amount in this instant case that can be paid by way of dividend is Rs.25000

4)The profits of X Ltd. for F.Y. 2021-22 are inadequate and considering the different scenarios the
declaration of dividend are as under

Financial Year Dividend paid during the year

Case 1 Case 2 Case 3
2018-19 10% Nil Nil

2019-20 Nil Nil 12%

2020-21 5% Nil Nil

Maximum rate of Average rate of *The stipulation regarding Average of Dividend

dividend for the dividend 15/3= 5% average rate of Dividendis 12/3= 4%
year 2021-22 [The Company can not applicable as no
declare Dividend Dividend is declared in any
upto5% subject to of the three preceding [The Company can
the compliance of financial years. Accordingly, declare Dividend
other conditions the dividend for 2021-22 upto 4% subject to
prescribed under may be declared at any rate, the compliance of
the Rules]. subject to the compliance of other conditions
other conditions prescribed prescribed under the
under the Rules. rules.

Dividend Distribution Policy

As per Regulation 43A of SEBI (LODR) Regulations, 2015, the top 1000 listed entities based on
market capitalization (calculated as on March 31 of every financial year) shall formulate a dividend

8.9 | P a g e
 distribution policy which shall be disclosed on the website of the listed entity and a web-link shall
also be provided in their annual reports.

The dividend distribution policy shall include the following parameters:

(a)the circumstances under which the shareholders of the listed entities may or may not expect
dividend;
(b)the financial parameters that shall be considered while declaring dividend;
(c)internal and external factors that shall be considered for declaration of dividend;
(d)policy as to how the retained earnings shall be utilized; and
(e)parameters that shall be adopted with regard to various classes of shares.

If the listed entity proposes to declare dividend on the basis of parameters in addition to clauses
(a) to (e) or proposes to change such additional parameters or the dividend distribution policy
contained in any of the parameters, it shall disclose such changes along with the rationale for the
same in its annual report and on its website.

The listed entities other than those specified at sub-regulation (1) of this regulation may disclose their
dividend distribution policies on a voluntary basis on their websites and provide a web-link in their
annual reports.

PAST YEAR QUESTION

3) Which parameters shall be included in the Dividend Distribution Policy by the top 500 listed
entities as per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ?
(JUNE 2022) (5 M)

Ans: As per the Regulation 43(A) of SEBI (Listing Obligation and Disclosure Requirements)
Regulations, 2015, the Dividend Distribution Policy shall include following parameters:

a) The circumstances under which the shareholders of the listed entities mayor may not expect
dividend;

b) The financial parameters that shall be considered while declaring dividend;

c) Internal and external factors that shall be considered for declaration of dividend;

d) Policy as to how the retained earnings shall be utilized; and

e) Parameters that shall be adopted with regard to various classes of shares.

DEPOSITING OF AMOUNT OF DIVIDEND

In terms of section 123(4), the amount of the dividend (including interim dividend), shall be
deposited in a separate account maintained with a scheduled bank. This is to be done within 5
days from the date of declaration of dividend
IE
Example 9: A company declared a dividend at its (AGM) held on 24th September, 2019, the company
declared a dividend of ` 2 per share. The amount of dividend must be deposited in a
scheduled bank in a separate account latest by 29th September, 2019.

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 PAYMENT OF DIVIDEND

(a) Dividend shall be payable only to the registered shareholder or to his order or to his
banker.

 A purchaser of shares whose name is not entered in the Register of Members cannot claim
payment of dividend to him though he might have made full payment to the seller of shares.
 Where the company has received intimation of death of a member, the dividend may be paid
by the company to the nominee of the single holder, where shares are held by more than one
person jointly and any joint holder dies, to the surviving first joint holder and where shares
are held by more than one person jointly and all the joint holders die, to the nominee
appointed by all the joint holders.
 In case of insolvency of a member, the dividend may be paid to the assignee of the insolvent
member and in case of a company or body corporate which is being wound up, to the
liquidator.
 In case of administration of assets of the deceased, dividend is to be paid to the account of
administrator.
 In case of shares transfer to IEPF, dividend is to be paid to IEPF.
 When bonus shares are issued ranking pari passu with the existing equity shares, shareholders
are entitled to Dividend in respect of such bonus shares also, if the record date for the purpose
of payment of Dividend falls after the date of allotment of such bonus shares.
 Dividend will be kept in abeyance pending registration of transfer of shares, unless the
registered holder has authorized the company to pay the dividend to the purchaser.

(b) Dividends are payable in cash and not in kind. Dividends that are payable to the shareholders
in cash may also be paid by
- cheque or
- dividend warrant or
- any electronic mode.

Section 127 requires that the declared dividend must be paid to the entitled shareholders within
the prescribed time limit of 30 days from the date of declaration of dividend.
PROHIBITION ON DECLARATION OF DIVIDEND in following cases:

(i) A company which fails to comply with the provisions of section 73 (Prohibition on acceptance
of deposits from public) and section 74 (Repayment of deposits, etc., accepted before the
commencement of this Act of 2013) shall not declare until such failure continues.
(ii) Prohibition in case of Section 8 Companies: Its profits are intended to be applied only in
promoting the objects for which it is formed.

A COMPANY SHALL ALSO NOT DECLARE ANY DIVIDEND, IF IT HAS DEFAULTED IN –

(iii) Redemption of debentures / payment of interest / creation of debenture redemption reserve,

(iv) Redemption of preference shares or creation of capital redemption reserve,
(v) Payment of Dividend declared in the current or previous financial year(s), or
(vi) Repayment of any term loan to a bank or financial institution or interest thereon, till such
time the default is subsisting.
QUESTION-

Strike in the postal department could be a valid reason for delay in dispatch of dividend warrants.
(JUNE 2022) (5 M)

8.11 | P a g e
 Ans: Section 127 of the Companies Act, 2013 provides that dividend shall be paid or dividend
warrant shall be posted within period of thirty days from date of declaration of dividend; otherwise
the company and the defaulting directors will be liable for default.
However, proviso to section 127 of the Act further provides a list of situations where no offence
under this section shall be deemed to have been committed: -
(a) where the dividend could not be paid by reason of the operation of any law.
(b) where a shareholder has given directions to the company regarding the payment of the
dividend and those directions cannot be complied with and the same has been
communicated to him.
where there is a dispute regarding the right to receive the dividend.

Dividend on preference shares

Preference shares carry a preferential right as to Dividend in accordance with the terms of issue. However,
this right is subject to the availability of distributable profits and it may be noted that this right is not to receipt
of Dividend but to preferential treatment if and when Dividend is declared.
Dividend on preference shares can be paid out of free reserve subject to its declaration.
Even where Dividend is declared out of free reserves, in case of absence or inadequacy of profits, Preference
Shareholders have priority over equity Shareholders in respect of payment of Dividend.
However, when the Board declares Interim Dividend on equity shares, it is not necessary to declare Interim
Dividend on preference shares also. If there are two or more classes of preference shares, the holders of the
class which has priority are entitled to their preference Dividend before any Dividend is paid in respect of the
other class, if the terms of issue so provide.
However, if the terms of issue are silent, Dividend shall be distributed on pro-rata basis. In the case of Interim
Dividend, while Preference Shareholders need not necessarily be paid Dividend before Interim Dividend is paid
to equity Shareholders, the Board should take into account such sum as would be necessary to pay Dividend
to the Preference Shareholders before consideration of Interim Dividend.

Dividend in case of Beneficial Owner

As provided under Section 89(9) of the Companies Act, 2013, the obligation of the company of payment of
dividend is towards the member and not towards the beneficial owner. However, the dividend may be paid to
a beneficial owner where the shareholder instructs the company to do so. Since, sub-section (5) of Section
123 includes payment of dividend to registered shareholder or “to his order”, the company shall pay the
dividend according to the instruction given.
While furthering this contention for ‘deemed dividend’ under Income Tax Act, 1961, the Supreme Court has
held in the case of Rameshwar Lal Sanwarmal vs. Commissioner of Income Tax, Assam that ‘it is difficult to see
how a beneficial owner of shares whose name does not appear in the register of shareholders of the company
can be said to be “shareholder”. It is only the person whose name is entered in the register of shareholders of
the company as the holder of the shares who can be said to be a shareholder qua the company, and not the
person beneficially entitled to the shares. It is the former who is a “shareholder” within the matrix and scheme
of the company law and not the latter.
Therefore, it is only where a loan is advanced by the company to a registered shareholder and the other
conditions set out in the Income Tax Act, 1961 are satisfied that the amount of the loan would be liable to be
regarded as “deemed dividend”. This establishes the position that payments advanced directly to beneficial
owner will not assume the character of deemed dividend.

8.12 | P a g e
 The concept of Deemed Dividend is embedded in Section 2(22)(e) of the Income-tax Act, 1961, where a closely
held company extends a loan or an advance to:
a. any of its shareholders who has more than 10% voting power in the company; or
b. to any concern in which such shareholder is substantially interested; or
c. for the individual benefit of such shareholder; or
d. on behalf of such shareholder to the extent the company has accumulated profits, such payment would be
deemed as a dividend under Section 2(22).

Distribution of discount coupons to all the Shareholders shall not be treated as deemed Dividend.
Discount coupons given by the company with respect to its products or services, to all the shareholders,
should not be treated as Dividend. It is a general practice adopted by the company for promotion of its
products or services

CASE LAW
In the case of Gopal & Sons (HUF) v.CIT, Supreme Court

Is loan to HUF who is a shareholder in a closely held company chargeable to tax as deemed dividend?
Facts of the Case:
The assessee is a Hindu Undivided Family (HUF). During the previous year to the Assessment year, the
assessee had received certain advances from one M/s G.S. Fertilizers (P) Ltd. (hereinafter referred to as the
‘Company’). The Company is the manufacturer and distributor of various grades of NPK Fertilizers and
otheragricultural inputs. In the audit report and annual return for the relevant period, which was filed by
it before the Registrar of Companies (ROC), it was found that the subscribed share capital of the said
company wasRs.1,05,75,000/- (i.e. 10,57,500 shares of Rs.10/- each). Out of this, 3,92,500 number of shares
were subscribedby the assessee which represented 37.12% of the total shareholding of the Company.
From this fact, the AO concluded that the assessee was both the registered shareholder of the Company
and also the beneficial owner of shares, as it was holding more than 10% of voting power. On this basis,
afternoticing that the audited accounts of the Company was showing a balance of Rs.1,20,10,988/- as
“Reserve& Surplus” as on 31st March, 2006, this amount was included in the income of the assessee as
deemed dividend. In the appeal filed by the assessee, the aforesaid addition was affirmed by the CIT(A).
The Tribunalreversed the CIT(A). The High Court reversed the Tribunal.
Before the Supreme Court, the assessee argued that being a HUF, it was neither the beneficial shareholder
nor the registered shareholder. It was further argued that the Company had issued shares in the name of
Shri. Gopal Kumar Sanei, Karta of the HUF, and not in the name of the assessee/HUF as shares could not be
directly allotted to a HUF. On the basis, it was submitted that provisions of Section 2(22)(e) of the Act
cannotbe attracted.

Judgment
The Supreme Court held as the shares are issued in the name of the Karta, the HUF is not the ‘registered
shareholder’ and so Section 2(22)(e) will not apply to loans paid to the HUF is not correct because in the
annual returns filed with the ROC, the HUF is shown as the registered and beneficial shareholder. In any case,
the HUF is the beneficial shareholder. Even if it is assumed that the Karta is the registered shareholder and
not the HUF, as any payment to a concern (i.e. the HUF) in which shareholder (i.e., the Karta) has substantial
interest is also covered

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 Declaration of Dividend to be unconditional

All requisite approvals shall be obtained before declaration of Dividend. Dividend shall not be declared subject
to any condition such as the approval of financial institutions/ banks or foreign collaborators or compliance
with any other contractual obligation. The above paragraph pertaining to requisite approval of financial
institutions/ banks or foreign collaborators etc. is equally applicable to both Interim and Final Dividend.
Dividend should not be declared subject to any condition such as obtaining of approval from financial
institutions/banks etc. [Erstwhile Department of Company Affairs (DCA) Circular No. 2/98 dated 13.04.1998)]

Due to inadequacy of profits, the Board of directors of Rise Ltd. decided not to recommend any dividend
for the financial year ended 31st March, 2022. Certain shareholders of the company complained to the
Tribunal regarding mismanagement of the affairs of the company, since the Board of the company did not
recommend any dividend. Explaining the provisions of the Companies Act, 2013, examine whether the
contention of the shareholders is tenable ?
Section 241 of the Companies Act, 2013 provides for relief in cases of mismanagement. For a petition under
this section to succeed, it must be established that the affairs of the company are being conducted in a manner
prejudicial to the interest of the company or public interest or that, by reason of any change in the
management or control of the company, it is likely that the affairs of the company will be conducted in that
manner. If the court (Tribunal) is convinced, it may with a view to bringing to an end of preventing the matter
complained or apprehended, make such order as it thinks fit.
It was held in the case of Indowind Energy Ltd. v. ICICI Bank Ltd. [2010] 153 Com Cases 394 (CLB) that
nondeclaration of dividend would not amount to oppression and mismanagement.
Therefore, applying the above facts and precedent in the given case, it can concluded that the non-payment
of dividend does not amount to mismanagement and hence the contention of the shareholders shall not be
tenable

The legal liability for the payment of any dividend only arises after the shareholders at the annual general
meeting have decided to declare a dividend on the basis of the recommendations of the Directors or on the
basis of any modification thereof and this liability does not relate back to any earlier date on the basis of the
recommendations of the directors as the directors do not enjoy any power of declaring the dividend.

UNPAID DIVIDEND ACCOUNT [SECTION 124]/ Time line

(UDA). The UDA shall be opened by the company in any scheduled bank.

(ii) Preparing of Statement of the Unpaid Dividend- Within 90 days of transferring any amount to the
Unpaid Dividend Account, the company shall prepare a statement containing

- the names,
- last known addresses and
- the amount of unpaid dividend to be paid to each person

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 and place such statement on its web-site, if any, and also on any other web-site approved
by the Central Government for this purpose.

(iii) Payment of Interest if default is made in transferring the Amount- If any default
is made in transferring the unpaid dividend amount, the company shall pay, from the
date of such default, interest at the rate of 12% per annum. The interest accruing on
such amount shall be available to the benefit of the members of the company in
proportion to the amount remaining unpaid to them.

(iv) Apply to unpaid amount- Any person entitled to any money transferred to the
Unpaid Dividend Account may apply to the company concerned for payment of the
money so claimed.

(v) Transfer to IEPF- Any money transferred to the Unpaid Dividend Account which
remains unpaid or unclaimed for 7 years from the date of such transfer

- Such unpaid money

- Interest accrued there on
- All shares in respect of which dividend has not been paid
shall be transferred by the company to the Investor Education and Protection Fund.

Further, the company shall send a prescribed statement containing the details of such
transfer to theIEPF Authority and in turn, the Authority shall issue a receipt to the
company as evidence of such transfer.

Note: In case any dividend is paid or claimed for any year during the said period of
7 consecutive years, the share shall not be transferred to Investor Education and
Protection Fund.

(vii) Right of Owner of ‘transferred shares’ to Reclaim- Any claimant of shares so

transferred to IEPF shall be entitled to reclaim the ‘transferred shares’ from Investor
Education and Protection Fund in accordance with the prescribed procedure and on
submission of prescribed documents.

8.15 | P a g e
 INVESTOR EDUCATION AND PROTECTION FUND

 Section 125 of the Act along with various Rules framed from time to time
including IEPF Authority (Accounting, Audit, Transfer and Refund) Rules,
2016 deal with the Investor Education and Protection Fund (IEPF).
 This fund, being established by the

Central Government. The relevant

provisions are discussed below:

1. Credit of Specified Amounts to the Fund:

(a) Amount given by Central Government by way of GRANTS after appropriation made by
Parliament;
(b) DONATIONS by the Central Government, State Governments, companies or any
other institution
(c) Amount lying in UNPAID DIVIDEND ACCOUNT and transferred to the Fund under
section 124(5);
(d) Amount in the GENERAL REVENUE ACCOUNT of the Central Government-
(e) Amount in IEPF- The AMOUNT LYING IN THE IEPF under section 205C of the
Companies Act, 1956;
(f) INTEREST OR OTHER INCOME received out of investments made from the Fund;
(fa) all shares held by the Authority in accordance with proviso of subsection
(9) of section 90 of the Companies Act, 2013 and all the resultant benefits
arising out of such shares, without any restrictions;
(g) Amount received through DISGORGEMENT or disposal of Securities
Disgorgement is the legally enforced repayment of ill-gotten gains imposed
on wrongdoers by the courts. Funds that were received through illegal or
unethical business transactions are disgorged, or paid back, often with
interest and/or penalties to those affected by the action.
(h) The APPLICATION MONEY RECEIVED by companies for allotment of any
securities and due forrefund (only if such amount has remained unclaimed and
unpaid for a period of 7 years.
(i) MATURED DEPOSITS with companies other than banking companies (only
if such amount hasremained unclaimed and unpaid for a period of 7 years from
the date it became due for payment);
(j) MATURED DEBENTURES with companies (only if such amount has remained
unclaimed and unpaidfor a period of 7 years from the date it became due for
payment);

8.16 | P a g e
 Note: In case of Deposits and Debentures, due unpaid or unclaimed interest
shall be transferred tothe Fund along with the transfer of the matured amount
of such deposits & debentures.

(k) INTEREST ACCRUED on the amounts referred to in clauses (h) to (j);

(l) Amount received from SALE PROCEEDS OF FRACTIONAL SHARES arising out
of issuance of bonusshares, merger and amalgamation for seven or more years;
(m) Redemption amount of PREFERENCE SHARES remaining unpaid or unclaimed for 7 or
more years;
(n) Other Amounts- Such other amounts as prescribed in Rule 3 of the
Investor Education andProtection Fund Authority (Accounting, Audit, Transfer
and Refund) Rules, 2016. They are as under:

a) ALL SHARES in whose case dividends have not been claimed for 7 consecutive
years or more;
b) all the RESULTANT BENEFITS ARISING OUT OF SHARES held by the
Authority under clause (a)above.

c) all income earned by the Authority in any year;

2. Utilization of the Fund: According to section 125 (3) the Fund shall be utilized for:

(a) REFUND of unclaimed dividends, matured deposits, matured debentures,

the application moneydue for refund and interest thereon;
(b) PROMOTION of investors’ education, awareness and protection;
distribution of any DISGORGED AMOUNT among eligible and identifiable
applicants for shares or
( c ) debentures, shareholders, debenture-holders or depositors who
have suffered losses due to wrong action by any person
(d) reimbursement of legal expenses incurred in pursuing class action
suits under sections 37 and245 by members, debenture-holders or depositors as may
be sanctioned by the Tribunal; and
(e) any other purpose

Note: Any money transferred to the Unpaid Dividend Account of a company in

pursuance of Section 124 of the Companies Act, 2013 which remains unpaid or
unclaimed for a period of seven years fromthe date of such transfer shall be
transferred by the company along with interest accrued, if any, thereon to the
Investor Education and Protection Fund (IEPF) and the company shall send a
statementin the prescribed form of the details of such transfer to the Investor
Education and Protection Fund authority and it shall issue a receipt to the
company to the company as evidence of such transfer

8.17 | P a g e
 PROCEDURE

1) Procedure for Transfer of Unpaid or Unclaimed Dividend to the IEPF

Rule 5 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and
Refund) Rules, 2016, details the procedure for transfer of Unpaid or Unclaimed Dividend to the
IEPF. The procedure is explained as under:

(1) The amount of unclaimed or unpaid dividend required to be credited by the companies to
theFund shall be remitted online along with a statement in Form No. IEPF-1 containing details
of suchtransfer to the Authority within a period of 30 days of such amounts becoming due to
be credited to the Fund. (Rule 5(1)]
(2) On receipt of the statement, the Authority shall enter the details in a Register maintained
physically or electronically by it in respect of each company every year, and reconcile the
amountso remitted and collected, with the concerned designated bank on monthly basis.
(3) Each designated bank shall furnish an abstract (summary) of such receipts during the month
tothe Authority within 7 days after the close of every month.
(4) The company shall maintain the record filed under sub-rule 5(1) as above in the same format
along with all supporting documents and the Authority shall have the powers to inspect such
records.
(5) Every company shall within a period of 60 days after holding of the AGM or due date of
AGM every year thereafter till completion of the 7 years period, identify the unclaimed amount
as referred in sub-section (2) of section 125 of the Act, dividend, as on the date of closure of
financialyear the account of which are to be adopted in the AGM, separately furnish and upload
on its ownwebsite and also on website of Authority or any other website as may be specified
by the Government, a statement or information of unclaimed and unpaid amounts through Form
No.IEPF-
2, separately for each of the previous seven financial years, containing following
information, namely:-

(a) the names and last known addresses of the persons entitled to receive the sum;
(b) the nature of amount;
(c) the amount to which each person is entitled;
(d) the due date for transfer into the Investor Education and Protection Fund; and
(e) such other information as may be considered necessary

Note:
1) Section 124(6) of the Companies Act, 2013, provides that all shares in respect of which
dividend has not been paid or claimed for seven consecutive years or more shall be
transferred by the company in the name of IEPF along with a statement containing such
details as may be prescribed.
2) Rule 6(5) of the Investor Education and Protection Fund Authority (Accounting, Audit,
Transfer and Refund) Rules, 2016 prescribes Form IEPF-4 for this purpose.
3) The shares shall be credited to DEMAT Account of the Authority to be opened by the
Authorityfor the said purpose, within a period of thirty days of such shares becoming due
to be transferred to the Fund.

8.18 | P a g e
 4) In case the beneficial owner has encashed any dividend amount during the last 7years,
such shares shall not be required to be transferred to the Fund even though some dividend
warrantsmay not have been encashed. Transfer of shares by the companies to the Fund shall
be deemedto be transmission of shares and the procedure to be followed for transmission
of shares shall be followed by the companies while transferring the shares to the fund.

2) The company shall follow the following procedure while transferring the shares, namely
(Internal Procedure):-

Rule 6(5) of the Investor Education and Protection Fund Authority (Accounting, Audit,
Transfer and Refund) Rules, 2016:
(a) The company shall inform, at the latest available address, the shareholder concerned
regarding transfer of shares 3 months before the due date of transfer of shares and also
simultaneously publish a notice in the leading newspaper in English and regional language
havingwide circulation informing the concerned that the names of such shareholders and their
folio number or DP ID - Client ID are available on their website duly mentioning the website
address.
(b) In case, where there is a specific order of Court or Tribunal or statutory Authority
restraining any transfer of such shares and payment of dividend or where such shares are
pledged or hypothecated under the provisions of the Depositories Act, 1996 or shares already
been transferredas above, the company shall not transfer such shares to the Fund. Further,
the company shall furnish details of such shares and unpaid dividend to the Authority in Form
No. IEPF 3 within 30 days from the end of financial year.
(c) For the purposes of effecting the transfer, where the shares are dealt with in a
DEPOSITORY-
(i) the Company shall inform the depository, where the shareholders have their accounts
for transfer in favour of the Authority.
(ii) on receipt of such intimation, the depository shall effect the transfer of shares in favour
of DEMAT account of the Authority.
(d) For the purposes of effecting the transfer shares held in PHYSICAL FORM-
(i) the CS or the person authorised by the Board shall make an application, on behalf of
the concerned shareholder, to the company, for issue of a new share certificate;
(ii) on receipt of the application under clause (a), a new share certificate for each such
shareholder shall be issued and it shall be stated on the face of the certificate that “Issued
in lieu of share certificate No for the purpose of transfer to IEPF” and the same be
recorded
in the register maintained for the purpose
(iii) after issue of a new share certificate, the company shall inform the depository by way
of corporate action to convert the share certificates into DEMAT form and transfer in
favour of the Authority."
(e) The company shall make such transfers through corporate action and shall preserve
copies forits records.
(f) While effecting such transfer, the company shall send a statement to the Authority in Form
No.IEPF-4 within 30 days of the corporate action taken under clause (c) of sub-rule (3) of rule
6 containing details of such transfer and the company shall also attach a copy of the public
notice
(g) The voting rights on shares transferred to the Fund shall remain frozen until the rightful
ownerclaims the shares. Further for the purpose of the Securities and Exchange Board of India

8.19 | P a g e
 (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, the shares which have
been transferred to the Authority shall not be excluded while calculating the total voting
rights.
(h) The company shall maintain all such statements filed under sub – rule (5) in the same
format along with all supporting documents and the Authority shall have the powers to
inspect such records.
(i) All benefits accruing on such shares like bonus shares, split, consolidation, fraction shares
andthe like except right issue shall also be credited to such DEMAT account by the company
which shall send a statement to the Authority in Form No. IEPF-4 within 30 days of the
corporate action containing details of such transfer.
(j) Any amount required to be credited by the companies to the Fund as provided under sub-
rules
(10) (11) and (12) of Rule 6 of IEPF Rules, 2016 shall be remitted into the specified account
of theIEPF Authority maintained in the Punjab National Bank and the details thereof shall be
furnishedto the Authority in Form No. IEPF 7 within thirty days from the date of remittance
or within thirty days from the date of enforcement of the Rules, as the case may be.
Sub-rule 10- If the company is getting delisted, the Authority shall surrender shares on behalf
of the shareholders in accordance with the Securities and Exchange Board of India (Delisting
of EquityShares) Regulations, 2009 and the proceeds realised shall be credited to the Fund
and a separate ledger account shall be maintained for such proceeds.
Sub-rule-11- In case the company is being wound up, the Authority may surrender the
securities to receive the amount entitled on behalf of the security holder and credit the
amount to the Fundand a separate ledger account shall be maintained for such proceeds.
Sub-rule-12- Any further dividend received on such shares shall be credited to the Fund and
a separate ledger account shall be maintained for such proceeds.
(k) Authority shall furnish its report to the Central Government as and when
noncompliance of therules by companies came to its knowledge

Note: The procedure is same even for transferring the Shares under section 90 (SBO)
to IEPF.
3) Claiming shares from IEPF

Rule 7 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer
andRefund) Rules, 2016, details the procedure which may be adopted by any claimant. The
procedure is explained as under:

1) Any person whose shares, unclaimed dividend, matured deposits, matured debentures,
application money due for refund, or interest thereon, sale proceeds of fractional shares,
redemption proceeds of preference shares etc., has been transferred to the Fund, may claim
the shares under proviso to Section 124 (6) of the Companies Act, 2013 or apply for refund
under clause
(a) of Section 125(3) or under proviso to Section 125(3) of the Companies Act, 2013,
as the case may be, to the Authority by submitting an online application in Form IEPF-5
available on the website www.iepf.gov.in along with fee specified by the Authority
from time to time in consultation with the Central Government
2)Upon submission, Form No. IEPF-5 shall be transmitted online to the Nodal Officer
of the company for verification of claim

8.20 | P a g e
 3)Further, the claimant after making an application in Form No. IEPF-5, shall send
original physical share certificate, original bond, deposit certificate, debenture
certificate, as the case may be, alongwith Indemnity Bond, Advance Receipts, and any
other document as enumerated in Form No. IEPF-5, duly signed by him, to the Nodal
Officer of the concerned company at its registered office for verification of the
claim.

4) NODAL OFFICER:
Every company which is required to credit amounts or shares to the fund or has
deposited the amount or transferred the shares to the Fund shall nominate a Nodal
Officer, who shall either be a Director or CFO or CS of the company, for the purposes
of verification of claims and coordinationwith Investor Education and Protection Fund
Authority:
 Provided that a company may appoint one or more Officer as Deputy Nodal
Officer to assist the Nodal Officer
 Provided further that the Nodal Officer shall be solely liable for all actions of
any officer appointed as Deputy Nodal Officer:
 #Government is smart: Provided also that in case a company fails to appoint
Nodal Officer, every director of the company shall be deemed to be nodal
officer and be liable for any failureto comply with requirement of these rules.
 The details of the Nodal Officer and Deputy Nodal Officer duly indicating his
or her designation, postal address, telephone and mobile number and
company authorized e-mail ID shall be communicated to the Investor
Education and Protection Fund Authority in Form No. IEPF – 2 within fifteen
days from the date of publication of these rules and the company shall display
thename of Nodal Officer and his e-mail ID on its website:
 Any change in the Nodal Officer or his details shall be communicated to the Authority
through
Form No. IEPF-2 within 7 days of such change along with board resolution thereof.

 The company shall, within 30 days from the date of receipt of claim, send an
online verification report to the Authority after verification of details in
Form No. IEPF-5 in the format specified by the Authority along with all the
documents submitted by the claimant and shall attach the scanned copy of
all the original documents submitted by the claimant in physical form duly
certified by its nodal officer along with the e-verification report along with a
scanned copy of both sides of original physical share certificate or original
bond or deposit or debenture certificate/s duly cancelled and certified
 If the online verification report is not sent by the company within 30 days of
filing of claim, the company may do so by paying additional fee of Rs.50 for
every day subject to maximum of Rs.2500. Further, the company shall be
liable to maintain the original documents submitted to it by the claimant and
shall produce such documents whenever required
 In case of non-receipt of verification report along with documents by the
Authority after the expiry of 60 days from the date of filing of Form No. IEPF-
5, the Authority may reject Form No.IEPF-5, after sending a communication
to the claimant and the concerned company, on the e- mail address of the
claimant and the company, to furnish response within a period of 15 days

8.21 | P a g e
  After verification of the entitlement of the claimant, the Authority and then
Drawing and Disbursement Officer of the Authority shall present a bill to the
Pay and Accounts Office for e- payment as per the guidelines, to the shares
claimed, the Authority shall issue a refund sanction order with the approval
of the Competent Authority and shall credit the shares to the DEMAT account
of the claimant to the extent of the claimant’s entitlement

 Timeframe to dispose the claim by IEPF

An application received for refund of any claim duly verified by the concerned company shall
be disposed off by the Authority within 60 days from the date of receipt of the verification
report from the company, complete in all respects and any delay beyond 60 days shall be
recorded in writing specifying the reasons for the delay and the same shall be communicated
to the claimant in writing or by electronic means.

 INCOMPLETE OR ADDITIONAL INFORMATION

Where the Authority, on examining any application for claim, finds it necessary to call for
further information or finds such application or e-form or document to be defective or
incomplete in anyrespect, the Authority shall give intimation of such information called for or
defects or incompleteness, by e-mail on the email address of the claimant and the company,
which has filed such application or eform or document, directing him or it to furnish such
information or to rectifysuch defects or incompleteness or to re-submit such application or e-
Form or document within 15days from the date of receipt of such communication, failing
which the Authority may reject the claim or Form No. IEPF-5.
 If such information or incompleteness is called from the claimant, he shall file the
Form and shall send such documents as called for within 15 days, duly signed by him,
to the Nodal Officerof company for verification of the claim and company shall send
a revised verification report. Provided further, if any such information or
incompleteness is called from the company, the company shall file the revised
verification report and shall send such documents as called for within 30 days.
9) In case, claimant is a legal heir or successor or administrator or nominee of the registered
share holder, the claimant shall ensure to submission of self-attested scanned copy of all
prescribed documents online along with the Form No. IEPF-5. In case of loss of securities held
in physical form,he has to ensure to submission of self-attested scanned copy of additional
documents detailed in Schedule III of these rules online along with the Form No. IEPF-5:
10) Provided further that the claimant shall submit in original all these documents duly
signed by him, to the Nodal Officer of the concerned company at its registered office for
verification of the claim.
11) The company shall be liable under all circumstances whatsoever to indemnify the
Authority in case of any dispute or lawsuit that may be initiated due to any incongruity or
inconsistency or disparity in the verification report or otherwise and the Authority shall not
be liable to indemnify the security holder or Company for any liability arising out of any
discrepancy in verification reportsubmitted etc., leading to any litigation or complaint arising
thereof.
12) Any fraudulent claim by the claimant shall be liable under 447 of the Companies Act, 2013
13) If any person deceitfully personates an owner of any security or of any share warrant
or coupon issued in pursuance of this Act and thereby files any claim to obtain or attempts to
obtain any such security or interest or any such warrant or coupon due to the lawful owner,

8.22 | P a g e
 he shall be punishable under sections 57, 447 and 448 of the Act

4) Manner of transfer of shares under sub-section (9) of section 90 of the Act to the
Fund.- [Rule 6A of The Investor Education And Protection Fund Authority
(Accounting, Audit,Transfer And Refund) Rules, 2016:

(1) The shares shall be credited to DEMAT Account of the Authority to be opened by the
Authority
for the said purpose, within a period of 30 days of such shares becoming due to be
transferred tothe Fund
(1)For the purposes of effecting transfer of such shares, the Board shall authorise
the CompanySecretary or any other person to sign the necessary documents
(2)The company shall follow the following procedure while transferring the shares, namely:-
 for the purposes of effecting the transfer, where the shares are dealt with in a
DEPOSITORY-
I) the company shall inform the depository by way of corporate action, where
the shareholdershave their accounts for transfer in favour of the Authority,
2) on receipt of such intimation, the depository shall effect the transfer of
shares in favour ofDEMAT account of the Authority
(B) for the purposes of effecting the transfer of shares held in PHYSICAL FORM-
A) the Company Secretary or the person authorised by the Board shall
make an application, onbehalf of the concerned shareholder, to the
company, for issue of a new share certificate;
b)on receipt of the application under clause (a), a new share certificate for each
such shareholder shall be issued and it shall be stated on the face of the certificate
that “Issued in lieu of share certificate No for the purpose of transfer to IEPF under
subsection (9) of section
90 of the Act” and the same be recorded in the register maintained for the purpose;
c) particulars of every share certificate shall be in Form No. SH-1 as specified in the
Companies(Share Capital and Debentures) Rules, 2014;
d) after issue of a new share certificate, the company shall inform the depository by
way of corporate action to convert the share certificates into DEMAT form and
transfer in favour of theAuthority.
(3)While effecting such transfer, the company shall send a statement to the
Authority in Form No.IEPF-4 within 30 days of the corporate action taken under sub-
rule (4) of rule 6A containing details of such transfer and the company shall also
attach a copy of order of the Tribunal under sub-section
(8) of section 90 of the Act along with a declaration that no application under sub-
section (9) of section 90 of the Act has been made or is pending before the Tribunal
(6) The voting rights on shares transferred to the Fund shall remain frozen:
Provided that for the purpose of the SEBI (SAST) Regulations, 2011, the shares which
have been transferred to the Authority shall not be excluded while calculating the
total voting rights.
(7) The company shall maintain all such statements filed under sub – rule (3)

8.23 | P a g e
 in the same format along with all supporting documents and the Authority shall have
the powers to inspect such records.

(8)All benefits accruing on such shares like bonus shares, split, consolidation,
fraction shares and the like except right issue shall also be credited to such DEMAT
account [by the company which shall send a statement to the Authority in Form No.
IEPF-4 within thirty days of the corporate actioncontaining details of such transfer.]
(9) If the company is getting delisted, the Authority shall surrender shares on behalf
of the shareholders in accordance with the Securities and Exchange Board of India
(Delisting of Equity Shares) Regulations, 2009 and the proceeds realised shall be
credited to the Fund and a separate ledger account shall be maintained for such
proceeds.
(10)In case the company whose shares or securities are held by the Authority is
being wound up,the Authority may surrender the securities to receive the amount
entitled on behalf of the securityholder and credit the amount to the Fund and a
separate ledger account shall be maintained for such proceeds.
(11)Any further dividend received on such shares shall be credited to the Fund and
a separate ledger account shall be maintained for such proceeds
(12) Any amount required to be credited by the companies to the Fund as provided under
sub- rules (9),

(13) (10) and sub-rule (11) shall be remitted into the specified account of the IEPF Authority
maintained in the Punjab National Bank [and the details thereof shall be furnished to the
Authority in Form No. IEPF-7 within thirty days from the date of remittance].
Provided further that all such amounts shall be transferred to the Authority without
any restrictionsand no application shall be filed for claiming back such amounts from
the Authority

5) Recent amendments
1) The Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and
Refund) Second Amendment Rules, 2021 (Notification No: G.S.R. 785(E), dated
November 09, 2021)
The Central Government has notified the Investor Education and Protection Fund Authority
(Accounting, Audit, Transfer and Refund) Second Amendment Rules, 2021, to further amend
the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and
Refund) Rules,2016.
This amendment is a major step towards the mission and vision of Government of India of
Ease ofLiving and Ease of Doing Business, Ministry of Corporate Affairs (MCA) and has further
simplified claim settlement process through rationalization of various requirements under
Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund)
Rules, 2016.
• For claimants, requirement of Advance Receipt has been waived off;
• Requirement of Succession Certificate/ Probate of Will/ Will has been relaxed up
to Rs5,00,000 (five lakh) both for Physical & DEMAT shares;
8.24 | P a g e
 • Notarization of documents has been replaced with self-attestation and
requirements ofAffidavits and Surety relatively have been eased.
• For companies, requirement of attaching documents related to Unclaimed Suspense
Accounthas been eased and
• Companies have been given flexibility to accept transmission document viz.
SuccessionCertificate, Will etc. as per their internal approved procedures and
• Newspaper Advertisement requirement for loss of physical Share Certificate has
been
waived off up to an amount of Rs.5,00,000.

Revocation of Dividend
 Dividend once declared becomes a debt to the company and therefore cannot be revoked
once declared

 In Re: Kishinchand Chellaram v. Commissioner of Income Tax [SC] 1980 AIR 211
1981 SCC (1) 720
 Dividends – Declared dividend credited to the accounts of shareholders,
whether company later on reversed the declaration of dividend - Whether
dividend declared and credited to the accounts of the shareholders could be
reversed
 Brief facts: Though this case relate to income tax on dividends at the hands of the
shareholders, the crucialand interesting question which arose, to decide the correctness
or otherwise of the taxation, was “Whether dividend declared and credited to the
account of the shareholders could be reversed by the company by passing a resolution
to that effect later on?”
 The Appellants Kishinchand Chellaram, Shewakram Kishinchand, Lokumal Kishinchand
and Murli Tabilram were the shareholders of the company Chellsons Pvt Ltd at the
material time. The company declared dividend for the year 1941-42, 1942-43 and 1943-44
and also credited the dividend amount to the shareholders account.
On December 4, 1947, at an Extraordinary General Meeting another resolution purporting
to reverse the earlier resolutions that declared dividends was passed by the company. The
ITO considered the dividends as the income of the shareholders and assessed as such.
However, the appellants contended that the dividends were not their income as it was
reversed by the company. Being unsuccessful they carried their dispute through First
appellate authority, Tribunal,High court and ultimately it came before the Supreme Court.
Decision: Appeal dismissed.

Reason: If dividend is declared and the amount is credited or paid to the share-holders
as dividend, so thecharacter of the credit or payment cannot be altered by a subsequent
resolution so as to alter the incidenceof tax which attaches to that amount

Preservation of Dividend Cheques, Warrants and Dividend Registers

8.25 | P a g e
 Where the company has given an undertaking to the Bank for preservation or safe keeping
of paid Dividend cheques or warrants for a specified period, the said instruments shall be
preserved for such specified period or eight years from the date of the instrument,
whichever is longer.
The Dividend warrants returned to the company by the banks should be preserved by the
company for a period of eight years for the purpose of any cross reference on any request
for duplicate warrants. Even defaced, torn or decrepit Dividend warrants surrendered to
the company should be so preserved.
The Dividend warrants returned to the company undelivered, should also be preserved
for a period of eight years.
The Dividend cheques or warrants so preserved shall be destroyed only with the approval
of the Board or in accordance with the policy approved by the Board for this purpose.

Disclosures
Prior intimation in case of a listed company

As per regulation 29 of SEBI (LODR) Regulations, 2015, the listed entity shall give two
working (excluding thedate of intimation and date of the meeting) days prior intimation to
stock exchange about the meeting of the board of directors in which declaration/
recommendation of dividend is to be considered.
As per regulation 42 of SEBI (LODR) Regulations, 2015, the listed entity shall intimate the
record date to all the stock exchange(s) where it is listed at least seven working days
(excluding the date of intimation and the record date) in advance for the purpose of
declaration of dividend.
Notes to Accounts forming part of the financial statements of the Company
shall disclose the aggregateamount of Dividend proposed to be distributed to equity and
Preference Shareholders for the financial year and the related amount of Dividend per
share.
Arrears of fixed cumulative Dividend on preference shares shall also be disclosed
separately.

The Balance Sheet of the company shall also disclose under the head ‘Current Liabilities
and Provisions’, the amount lying in the Unpaid Dividend Account together with interest
accrued thereon, if any.

Disclosure in Board’s report

In accordance with clause (k) of sub-section (3) of section 134, the Board of Directors must
state in its Report the amount of dividend, if any, which it recommends for declaration.
The dividend recommended by the Board of directors in the Board’s Report must be
declared at the annual general meeting of the company before obligation to pay is
constituted. This constitutes an item of ordinary business to be transacted at every annual
general meeting.
The amount of Interim Dividend, if any, paid during the financial year and final Dividend
recommended by the Board of directors shall be disclosed in the Board’s Report
The Annual Report of the company shall disclose the total amount lying in the Unpaid
8.26 | P a g e
 Dividend Account of thecompany in respect of the last seven years and when such unpaid
Dividend is due for transfer to the Fund. Theamount of Dividend, if any, transferred by the
company to the Investor Education and Protection Fund during the year shall also be
disclosed.

RIGHT OF DIDVIDED , SHARES AND BONUS SHARES TO BE HELD IN ABEYANCE

PENDING REGISTRATION OF TRANSFER OF SHARES
According to Section 126, in case any instrument of transfer of shares has been
delivered by a shareholder for registration and the transfer of such shares has not been
registered by the company,such company shall take the following steps:

(a) Transfer the dividend in relation to such shares to the Unpaid Dividend Account
unless it is authorised by the registered holder of such share in writing to pay such
dividend to the transferee specified in the instrument of transfer; and

(b) Keep in abeyance in relation to such shares any offer of rights shares under
section 62 (1) (a) and any issue of fully paid-up bonus shares in pursuance of first proviso
to section 123 (5).

PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS WITH IN 30 DAYS

A. Time Limit for Distribution of Dividends

Where a company declares dividend, it must be paid or the dividend warrant
thereof must be postedwithin 30 days from the date of declaration of dividend to
the shareholders entitled to the same.

B.Punishment for Failure

In case a company fails to pay declared dividends or fails to post dividend warrants within
30 days
of declaration, following punishments are applicable:
(i) Every director of the company shall be punishable with imprisonment of up to 2
years, if he is knowingly a party to the default. And, he shall also be liable to pay
minimum fine of ` 1,000 for everyday during which such default continues.

(ii) The company shall be liable to pay simple interest at the rate of 18% p.a. during
the period for which such default continues.

C.Exemption from Punishment

Under the following cases, where the company has failed to pay declared dividend
8.27 | P a g e
 within 30 days of declaration, no offence shall be deemed to have been committed
and therefore, no punishment is attracted:

(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment
of the dividendand those directions cannot be complied with and the same has been
communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum
due to it fromthe shareholder;
(e) where, for any other reason, the failure to pay the dividend or to post the
warrant within theprescribed period of 30 days was not due to any default on the
part of the company.

Types of companies and provision related to payment of dividend

a. Section 8 Companies: According to Section 8(1) of the Act, the company having
license under Section 8(Formation of Companies with Charitable Objects etc.) are
prohibited from paying any dividend to its members. Their profits are intended to be
applied only in promoting the objects of theCompany.

b. Nidhi Companies: In terms of Rule 18 of Nidhi Rules, 2014, a Nidhi shall not
declare dividend exceeding 25 % or such higher amount as may be specifically
approved by the Regional Director for reasons to be recorded in writing and further
subject to the following conditions:

(i) an equal amount is transferred to General Reserve;

(ii) there has been no default in repayment of matured deposits and interest; and
(iii) it has complied with all rules as applicable to Nidhis

c. Producer Companies: In case of producer companies, dividend is termed as

‘Limited Return’ as defined in clause (d) of section 378A of the Companies Act, 2013.
It is the maximum rate of dividend as the Articles of the producer company may
specify. According to Section 378 E of the Companies Act, 2013, in producer
Companies, the surplus if any, remaining after making provision for payment of
limited return and reserves referred, may be disbursed as patronage bonus, amongst
the Members, in proportion to their participation in the business of the Producer
Company, either in cash or by way of allotment of equity shares, or both, as may be
decided by the Members at the general meeting.

8.28 | P a g e
 d. Companies Limited by Guarantee: A Company Limited by Guarantee is
primarily used for non-profitpurposes and the profits are reinvested and used for
promoting its non-profit activities. Although the Companies Act, 2013 does not
specifically prohibit distribution of dividend in such companies, however, the Articles
of such companies usually provides that all the income of the company shall be
applied solely towards the promotion of the objects of the Company and that no
portion shall be paidor transferred directly or indirectly by way of dividends or bonus
or by way of profit to its members.

PROCEDURE FOR DECLARATION AND PAYMENT OF INTERIM DIVIDENT

1. Verify from company’s Articles of Association that they authorize the directors to
declare interim dividend; if not then alter the Articles of Association accordingly

2. At the Board meeting, the Board of Directors considers in detail all the matters with
regard to the declaration and payment of an interim dividend including:

a. Before declaring an interim dividend, the directors must satisfy themselves

that the financial position of the company allows the payment of such a
dividend out of profits available for distribution. The directors may be held
personally liable in the event of wrong declaration of an interim dividend.
In case, a company is incurring loss as per financials of latest quarter,
interim dividend shall not be higher than average dividend declared by the
company during last three financial years.

b. quantum of dividend

c. entitlement

d. closure of register of members for the purpose of payment of interim

dividend or fixation ofrecord date
e. opening of a separate bank account,
f. printing of dividend warrants and posting of the dividend warrants,
g. pass a suitable resolution for declaration and payment of interim dividend on
equity shares ofthe company, and
h. Interim dividend on preference shares at a fixed rate can be paid more
than once during ayear.

3. In case of a listed company, immediately within 30 minutes of the conclusion of

the Board meeting, but only after the close of the market hours, intimate the stock
exchanges with regard to the Board’s decision about declaration and payment of
interim dividend.
4. In case of listed company: [Same shall apply to Final Dividend]
A. Publish notice of book closure in a newspaper circulating in the district in which the
8.29 | P a g e
 registered office of the company is situated at least 7 days before the date of
commencement of book closure
B. To give notice in advance of at least 7 working days (excluding the date of
intimation and the record date) or as many days as the stock exchange may
prescribe, before the closure of transfer books or record date, specifying the
purpose of Record DatE
C. The company shall recommend or declare all dividend at least five working days
(excluding the date of intimation and the record date) before the record date fixed
for the purpose.
D. Time gap between two book closures and record date would be at least 30 days.

5. Close the register of members and the share transfer register of the company

6. Round off the amount of interim dividend to the nearest rupee and where such
amount contains part of a rupee consisting of paise then if such part is fifty paise or
more, it should be increased to onerupee and if such part is less than fifty paise, it
should be ignored
7. Open the “Interim Dividend Account of. ............. Ltd.” with the bank as resolved by the
Board and
deposit the amount of dividend payable in the account within 5 days of declaration
and give a copy of the Board resolution containing instructions regarding opening of
the account and give the authority to Bank to honour the dividend warrants when
presented.

8. If the company is listed, then for payment of dividend it has to mandatorily use any
RBI (Reserve Bank of India) approved electronic mode of payment such as
Electronic Clearing Services (ECS) [LECS (Local ECS)/RECS (Regional ECS)/NECS
(National ECS)], National Electronic Fund Transfer (NEFT), etc. In order to enable
usage of electronic payment instruments, the company (or its RTI & STA) shall
maintain requisite bank details of its investors as under

(A)For investors that hold securities in demat mode, company or its RTI & STA shall
seek relevantbank details from the depositories
(B) For investors that hold physical share/debenture certificates, company or its RTI
& STA shall
take necessary steps to maintain updated bank details of the investors at its end

9. Make arrangements with the bank and other banks if required, for payment of the
Dividend Warrants.

10. Prepare a statement of dividend in respect of each shareholder containing the following
details

(a) Name and address of the shareholder with ledger folio No.
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 (b) No. of shares held.
( C) Dividend payable
11. Ensure that the dividend tax is paid to the tax authorities within the prescribed
time. [No DDT
12. NO RBI APPROVAL IS required for payment of dividend to shareholders abroad
13. Arrange for transfer of unpaid or unclaimed dividend to a special account named
“Unpaid dividend A/c within 7 days after expiry of the period of 30 days of
declaration of final dividend.

14. Confirm the interim dividend in the next Annual General Meeting.

PROCEDURE FOR DECLARATION AND PAYMENT OF FINAL DIVIDENT

The following steps are required to be taken by a company in respect of declaration

and payment of final dividend:

1. Hold Board meeting for the purpose of passing the following resolutions: [In case
of listedcompanies notify stock exchange(s) where the securities of the company are
listed, at least 2 workingdays in advance of the date of the meeting of its Board of
Directors]

(a) approving the annual accounts (balance sheet and profit and loss account of
the company forthe year ended on 31st March );

(b) recommending the quantum of final dividend to be declared at the next AGM
and the sourceof funds for the payment there of, i.e.

(c) fixing time, date and venue for holding the next AGM of the company, inter
alia, for declaration of dividend recommended by the Board

(d) approving notice for the AGM and authorizing the company secretary or any
competent person if company does not have a company secretary to issue the
notice of the AGM on behalf of the Board of directors of the company to all the
members, directors and auditors of the company and other persons entitled to
receive the same

(e) determining the date of closure of the register of members and the share
transfer register of the company as per requirements of Section 91 of the
Companies Act.

2. In case of a listed company, immediately within 30 minutes of the conclusion of the

Board meeting, intimate the stock exchanges with regard to the Board’s decision
about declaration and payment of dividend.

3. In case of a listed company, immediately within 30 minutes of the conclusion of the

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 Board meeting, intimate the stock exchanges with regard to the Board’s decision
about declaration and payment of dividend.

4. As per SEBI, the top 1000 listed entities shall formulate a dividend distribution policy
which shall be disclosed in their annual reports and on their websites. The dividend
distribution policy shall include the following parameters.

a) the circumstances under which the shareholders of the listed entities may or may not expect
dividend,
b) the financial parameters that shall be considered while declaring dividend

c) internal and external factors that shall be considered for declaration of dividend
d) policy as to how the retained earnings shall be utilized; and
e) parameters that shall be adopted with regard to various classes of shares:

5. Close the register of members and the share transfer register of the company
6. Hold a Board/committee meeting for approving registration of transfer/transmission
of the sharesof the company, which have been lodged with the company prior to the
commencement of book closure.

7. Hold the AGM and pass an ordinary resolution declaring the payment of dividend
to the shareholders of the company as per recommendation of the Board. The
shareholders cannot declare the final dividend at a rate higher than the one
recommended by the Board. However, they may declare the final dividend at a rate
lower than the one recommended by the Board. The following should be noted in
this regard:

(a) In the case of preference shares, dividend is always paid at a fixed rate.
However, in the case of equity shares, a dividend must be declared and paid
according to the amounts paid or creditedas paid on the shares, i.e., according to
the paid-up value of the shares.

(b) All dividends shall be apportioned and paid proportionately to the amounts
paid or credited as paid on the shares during any portion or portions of the period
in respect of which the dividend is paid; but if any share is issued on terms
providing that it shall rank for dividend as from a particular date such share shall
rank for dividend accordingly. [Schedule I, Table F, Article 83(3)].

8. Prepare a statement of dividend in respect of each shareholder containing the

following details
(a) Name and address of the shareholder with ledger folio no.
(b) No. of shares held.
(c) Dividend payable.

8.32 | P a g e
 9. Ensure that the dividend tax is paid to the tax authorities within the prescribed time. [No
DDT]
10. Round off the amount of interim dividend
11. Open a separate bank account for making dividend payment and credit the said
bank account with the total amount of dividend payable within five days of
declaration of dividend.

12. If the company is listed, then for payment of dividend it has to mandatorily use,
any RBI (Reserve Bank of India) approved electronic mode of payment such as
Electronic Clearing Services (ECS) [LECS (Local ECS)/ RECS (Regional ECS)/NECS
(National ECS)], National Electronic Fund Transfer (NEFT), etc.

13. To have sufficient number of dividend warrants printed in consultation with the
company’s bankerappointed for the purpose of dividend. To get approval of the RBI
for printing the warrants with MICRfacility. Get the dividend warrants filled in and
signed by the persons authorized by the Board.

14. No RBI approval required for payment of dividend to shareholders abroad, in case
of investment made on repatriation basis.
15. Dispatch dividend warrants within thirty days of the declaration of dividend. In
case of joint shareholders, dispatch the dividend warrant to the first named
shareholder.

16. Publish a Company notice in a newspaper circulating in the district in which the
registered office of the company is situated to the effect that dividend warrants have
been posted and advising thosemembers of the company who do not receive them
within a period of fifteen days, to get in touch with the company for appropriate
action (in the case of listed companies, as a good practice).

17. Publish a Company notice in a newspaper circulating in the district in which the
registered office of the company is situated to the effect that dividend warrants have
been posted and advising thosemembers of the company who do not receive them
within a period of fifteen days, to get in touch with the company for appropriate
action (in the case of listed companies, as a good practice).

18. Arrange for transfer of unpaid or unclaimed dividend to a special account named “Unpaid
dividend

A/c”within 7 days after expiry of the period of 30 days of declaration of final dividend

NOTE: Any person claiming to be entitled to any money transferred to the Unpaid
Dividend Account of the company may apply to the company for payment of the
money claimed. The person can claim this amount from company only within seven
years of its transfer to Unpaid Dividend Account. After this period not only his dividend
amount but also shares shall be transferred to the Invest or Educationand Protection
Fund (IEPf)

8.33 | P a g e
 Form Purpose of Filing Due date of filing E-
Name Form

IEPF- Statement of amount credited Within 30 days of such

1 to IEPF amount becoming due
to be credited to the
fund

IEPF- Intimating the statement of Within a period of 60

2 information regarding days after the holding
unclaimed dividend each year of AGM or the date on
on the site of the Authority, its which it should have
own website and also on been held as per the
website of Authority or any provisions of section 96
other website as may be of the Act, whichever is
specified by the Government earlier and every year
thereafter till completion
of the 7 years period

IEPF- Intimation of specific order of within 30 days from the

3 Court /Tribunal / Statutory end of financial year
Authority restraining any
transfer of such shares and
payment of dividend or where
such shares are pledged or
hypothecated or shares
already been transferred

IEPF- For transfer of shares to IEPF within 30 days of

4 shares becoming due
to be transferred to the
Fund/ within thirty days
of transfer of shares
under sub-section (9) of
section 90 of the Act to
the Fund

IEPF- Any person whose shares, Any time

5 unclaimed dividend, matured
deposits, matured debentures,
application money due for
refund, or interest thereon,
sale proceeds of fractional
shares, redemption proceeds

8.34 | P a g e
 of preference shares etc., has
been transferred to the Fund,
may claim the shares or apply
for refund

IEPF- Statement of amounts Within 30 days from the

7 credited to IEPF on account of date of remittance
shares transferred to the fund

Secretarial Standard on Dividend (SS-3)

The “Secretarial Standard on Dividend” (SS-3), formulated by the Secretarial Standards

Board (SSB) of the Institute of Company Secretaries of India (ICSI) and issued by the
Council of the ICSI, has been effective from 1st January 2018. Adherence to SS-3 is
recommendatory.
SS-3 prescribes a set of principles in relation to the declaration and payment of Dividend
and matters related thereto on equity as well as preference share capital in accordance
with the provisions of the Companies Act, 2013 and are in respect of Dividend as it relates
to a going concern. These are equally applicable to Final as well as Interim Dividend unless
otherwise stated.
The principles enunciated in this Standard are in conformity with the provisions of the
Companies Act, 2013 (Act). In addition, the provisions of the Securities Contracts
(Regulation) Act, 1956 and the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 are applicable to listed companies. Any specific provision relating to
Dividend in the Income tax Act, 1961 or under any other statute shall also be applicable.
If due to subsequent changes in the Act or other applicable laws, a particular Standard or
any part thereof becomes inconsistent with the Act or other applicable laws, the
provisions of the Act or such applicable laws shall prevail.

SS-3 shall not apply to a company limited by guarantee not having share capital and
does not deal with Dividend, if any, declared by companies under liquidation.

ANNEXURE-IV
SPECIMEN OF BOARD RESOLUTION RECOMMENDING PAYMENT OF DIVIDEND ON
EQUITY SHARES OUT OF CURRENT PROFITS

“RESOLVED THAT in accordance with the provisions of Section 123 and other
applicable provisions, if any, of the Companies Act, 2013 and the Companies
(Declaration and Payment of Dividend) Rules, 2014, the Board of directors of the
8.35 | P a g e
 Company do hereby recommend a dividend at the rate of _ per cent(Rs per equity
share) out of the current profits of the Company for the year ended on
31st March 20.. on the…................. fully paid equity shares of the company
absorbing Rs . out of the profits and that, subject to the declaration by the members
of the Company
at the ensuing Annual General Meeting, such dividend be paid to the registered
holders of the equityshares whose names would appear on the register of members
on….........20.., being the record date for payment of Dividend.”

ANNEXURE-V
SPECIMEN EXTRACTS OF MINUTES CONTAINING THE BOARD RESOLUTION FOR
RECOMMENDING

DECLARATION OF DIVIDEND OUT OF RESERVES

The Chairman informed the meeting that the profits of the current year, i.e. the
financial year ended on the 31st March, 20.. are inadequate for payment of a
reasonable amount of dividend to the members of the company.
He further informed that the free reserves of the company do, however, permit the
distribution of dividend not exceed the average of the rates at which dividend was
declared by it in the three years immediately preceding that year.

The directors considered the matter and passed the following resolution:

“RESOLVED THAT in accordance with the provisions of Section 123 and other
applicable provisions, if any, of the Companies Act, 2013 and the Companies
(Declaration and Payment of Dividend) Rules, 2014, the Board of directors of the
Company do hereby recommend to the members of the Company,the declaration
and payment of a dividend at the rate of ten per cent on all the fully paid equity shares
of the Company out of the free reserves of the Company that stood in the books of
the Company on............20.. absorbing a total of` , with due compliance of
the Companies (Declaration and
Payment of Dividend) Rules, 2014, and that, subject to the declaration by the
members at the forthcoming Annual General Meeting, to the holders of the equity
shares whose names will appear onthe register of members on...........20.. being the
record date for payment of Dividend.”

MCQS:-
1. PTC Ltd., wants to declare final dividend. The company did not earn profits in
last three years. Can thefinal dividend be declared and paid in such a situation?
Choose the provisions in this regard:
(a) PTC Ltd may declare and pay final dividend out of the free reserve, in
8.36 | P a g e
 accordance with rule 3 of the Companies (Declaration and Payment of
Dividend) Rules, 2014
(b) PTC Ltd cannot declare and pay final dividend till it earns profits
(c) PTC Ltd may declare and pay final dividend out of the free reserve, in
accordance with rule 5 of the Companies (Share Capital and Debentures)
Rules, 2014
(d) PTC Ltd can declare and pay final dividend after seeking approval from audit
committee.

2. Jagat is a debtor as well as a member of SITARA Ltd., a listed company.

The company declares a dividend of Rs. 2500 on the shares owned by
Subhash and proposes to adjust the said amount against the debt of Rs.5000
due from him. ls this adjustment valid ? Choose the correct line:
(a) the amount due from Jagat in the capacity of trade debtor will not be
adjusted and the company need to pay dividend amount to Jagat
(b) the amount due from Jagat in the capacity of trade debtor will be adjusted
and the company need not to pay dividend amount to Jagat
(c) the amount due from Jagat in the capacity of trade debtor will be adjusted
with the approvalof audit committee

8.37 | P a g e
 Lesson 9
ACCOUNTS AND AUDITORS

Definitions in this chapter

1) “Book and paper” and “Book or paper”- As per section 2(12) of the Act, “book and paper” and
“book or paper” include books of account, deeds, vouchers, writings, documents, minutes and
registers maintained on paper or in electronic form.
2) “Books of Account”- As per section 2(13) of the Act, “books of account” includes records maintained
in respect of –

(i) all sums of money received and expended by a company and matters in relation to which the
receipts and expenditure take place;

(ii) all sales and purchases of goods and services by the company;
(iii) the assets and liabilities of the company; and

(iv) the items of cost as may be prescribed under section 148 of the Act in the case of a company which
belongs to any class of companies specified under that section

3) “Financial Statement”- As per section 2(40) of the Act, financial statement in relation to a company,
includes

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an
income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause
(i) to sub- clause (iv).

4) “Financial Year”- According to 2(41) of the Act “financial year”, in relation to any company or body
corporate, means the period ending on the 31st day of March every year, and where it has been
incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March
of the following year, in respect whereof financial statement of the company or body corporate is
made up

An application may be made by a company or body corporate, which is a holding company or a

subsidiary or associate company of a company incorporated outside India and is required to follow
a different financial year for consolidation of its accounts outside India, the Central Government may,
if it is satisfied, allow any period as its financial year, whether or not that period is a year

Example: In ArisGlobal Software Pvt. Ltd CB/2016 NCLT Bengaluru Bench, it was held that proviso to
section 2(41) of the Act enable subsidiary company to have a different financial year in tune with

9.1 | P a g e
financial year of its holding company and therefore, petitioner subsidiary company was to be
permitted to follow the financial year commencing from January 01st and ending on December 31st in
tune with its holding company for purpose of consolidation of accounts

REQUIREMENT OF KEEPING BOOKS OF ACCOUNT ETC. (SECTION 128)

A. GENERAL REQUIREMENT

• Every company SHALL PREPARE books of accounts and other relevant books and records and
financial statement for every financial year.

• These books of accounts should give a TRUE AND FAIR VIEW of the state of the affairs of the
company, including that of its branch office(s) and explain the transactions effected both at the
registered office and its branches.

• These books of accounts must be kept on ACCRUAL BASIS and according to the DOUBLE ENTRY
SYSTEM of accounting

#Meaning: ACCRUAL BASIS

Accrual involves recording income and expenses as they accrue; distinct from when they are
received or paid. DOUBLE ENTRY BOOK-KEEPING is a method of recording any transaction o

Case Law
In J. K. Industries Ltd. & Anr vs Union Of India & Ors [(2008) 143 Com Cases 325], the Supreme
Court explained the concept of ‘accrual accounting’ as follows:

“In the conventional sense, amounts which become receivable/recoverable are shown as income
actually received and the liabilities incurred are shown as amounts actually disbursed in a given
year. Therefore, under the aforestated system of accounting, entries are posted in the books of
accounts on the date of the transaction, i.e., on the date on which rights accrue or liabilities are
incurred, irrespective of the date of payment. In such cases, a company has to account for its income
or loss as per the above system and not otherwise, if that company has adopted mercantile system
of accounting which is also known as accrual system of accounting. However, accrual does not mean
confinement of items of revenue/expenditure to a given year. As stated above, mergers and
acquisitions are undertaken to defer revenue expenditure over future years by invoking matching
principles. Therefore, the said principle form an important part of accrual accounting.”

B. PLACE OF KEEPING BOOKS OF ACCOUNTS

Section 128(1) requires every company to prepare and keep the books of account and other relevant
books and papers and financial statements at its registered office.

#Questionable point:

- Provided all or any of the books of accounts may be kept at such other place in India as the Board
of directors may decide.

- The Board shall within 7 days of decision file with the registrar a notice in writing in form AOC-5 giving
full address of that other place.

- #Dont forget: To keep the register of members in a place other than registered office, special
resolution is required.

9.2 | P a g e
C. MANNER OF BOOKS OF ACCOUNT TO BE KEPT IN ELECTRONIC MODE - Rule 3

(1) The books of account and other relevant books and papers shall remain accessible in India, for
subsequent reference.

(2) The books of account and other relevant books and papers shall be retained completely in the
original format or in a format which shall present accurately the information generated, sent or
received and remain unaltered

(3) The information received from branch offices shall not be altered
(4) The information in the electronic record shall be in a legible form.

(5) There shall be a proper system for storage, retrieval, display or printout of the electronic records
Provided that the back-up of the books of account and other books and papers of the company
maintained in electronic mode, including at a place outside India, if any, shall be kept in servers
physically located in India on a periodic basis
(6) The company shall intimate to the Registrar on an annual basis at the time of filing of financial
statement

(6) The company shall intimate to the Registrar on an annual basis at the time of filing of financial
statement

(a) the name of the service provider.

(b) the location of the service provider (wherever applicable);

(c) where the books of account and other books and papers are maintained on cloud, such address as
provided by the service provider.

(d) the internet protocol (IP) address of service provider.

D. BOOKS OF ACCOUNT - BRANCH OFFICE

• Where a company has a branch office in or outside India, it shall be deemed to have complied with
the provisions of sub-section (1), if proper books of account relating to the transactions effected at
the branch office are kept at that office.

• The summarised returns of the books kept and maintained outside India shall be sent to the
registered office at quarterly intervals, which shall be kept and maintained at the registered office of
the company and kept open to directors for inspection.

Illustration:
ABC Company Ltd, has its registered office in Delhi and the Branch office in California. The proper
books of accounts relating to the transactions effected at the branch office in California are kept at
that office and proper summarized returns periodically (quarterly) are sent by that branch office to
the company at its registered office.

E. INSPECTION BY DIRECTORS

9.3 | P a g e
• Any director [nominee, independent, promoter or whole time] can inspect the books of account and
other books and papers of the company during business hours.

• A person can inspect the books of account of the subsidiary, only on authorisation by way of the
resolution of Board of Directors.

• The officers and other employees of the company shall give to the person making such inspection
all assistance in connection with the inspection.

F. OTHER FINANCIAL INFORMATION

• Where any other financial information MAINTAINED OUTSIDE THE COUNTRY is required by a
director, the director shall furnish a request to the company asking for details of the financial
information sought, the period for which such information is sought.
• The company shall produce it to the director within 15 days of receipt request.

• The Director can seek the information only individually and not by or through his attorney holder or
agent or representative.

G. PERIOD FOR PRESERVATION OF BOOKS [SECTION 128(5)

• The books of accounts, together with vouchers, are required to be preserved in good order for a
period of not less than 8 years immediately preceding financial year

• In case of a company incorporated less than 8 years before the financial year, it shall be preserved
accordingly.

• Where an investigation has been ordered in respect of a company, the CG may direct that the books
of account may be kept for such period longer than 8 years.

Illustration:
M/s ABC Limited is registered as a company in the year 2000. In Financial year 2021-22, it must
keep the books of accounts from FY 2012-13 to FY 2020-21.

H. PERSONS RESPONSIBLE for the maintenance of books of account etc. shall be:

(i) Managing Director,

(ii) Whole-Time Director, in charge of finance

(iii) Chief Financial Officer

(iv) Any other person of a company charged by the Board with duty of complying with provisions of
section 128.

I. PENALTY FOR CONTRAVENTION

If the managing director, the whole-time director in charge of finance, the Chief Financial Officer or
any other person of a company charged by the Board with the duty of complying with the provisions
of this section, contravenes such provisions, shall be punishable [with imprisonment for a term which

9.4 | P a g e
may extend to one year or] with fine which shall not be less than fifty thousand rupees but which may
extend to five lakh rupees [or with both]]

#Just reminding you: The Imprisonment is removed from various sections as a result of amendment
relating to Decriminalisation of offences.

FINANCIAL STATEMENT (SECTION 129)

1) TRUE AND FAIR VIEW

• The financial statements shall give a true and fair view of the state of affairs of the company

• It shall comply with the accounting standards notified under section 133 and

• It shall be in the form as provided under Schedule III.

Provided also that the financial statements shall not be treated as not disclosing a true and fair view
of the state of affairs of the company, merely by reason of the fact that they do not disclose—
(a) in the case of an insurance company, any matters which are not required to be disclosed by the
Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999;
(b) in the case of a banking company, any matters which are not required to be disclosed by the
Banking Regulation Act, 1949;
(c) in the case of a company engaged in the generation or supply of electricity, any matters which are
not required to be disclosed by the Electricity Act, 2003;
(d) in the case of a company governed by any other law for the time being in force, any matters which
are not required to be disclosed by that law.

2) LAYING OF FINANCIAL STATEMENTS [SECTION 129(2)]

At every AGM of a company, the Board of Directors of the company shall lay before such meeting
financial statements for the financial year
3) CONSOLIDATION OF FINANCIAL STATEMENTS [SECTION 129(3)]

a) Where a company has one or more subsidiaries or associate companies, it shall, in addition to
financial statements, prepare a consolidated financial statement (CFS) of the company and of all
the subsidiaries and associate companies, which shall also be laid before the AGM of the company
along with the laying of its financial statement under sub-section (2).

b) EXEMPTIONS FROM PREPARATION OF CFS: As per Companies (Accounts) Amendment Rules,

2016, preparation of CFS by a company is not required if it meets the following conditions:

(i) it is a wholly owned subsidiary, or is a partially owned subsidiary of another company and all
its other members, including those not otherwise entitled to vote, have been intimated and they
do not object to the company not presenting CFS.

(ii) Unlisted company or are not in the process of listing on any stock exchange, whether in or
outside India; and

(iii) its ultimate or any intermediate holding company files CFS with the Registrar which are in
compliance with the applicable Accounting Standards

9.5 | P a g e
 Exception: This rule shall not apply in respect of CFS by a company having subsidiary or subsidiaries
incorporated outside India commencing on or after 1st April 2014.

c) DISCLOSURE OF DEVIATION: Where the financial statements of a company do not comply with
the accounting standards referred to in sub- section (1), the company shall disclose in its financial
statements, the deviation from the accounting standards, the reasons for such deviation and the
financial effects, if any, arising out of such deviation [Section 129(5)].

5) The Central Government may, on its own or on an application, exempt any class or classes of
companies from complying with any of the requirements of this section or, if it is considered
necessary to grant such exemption in the public interest and any such exemption may be granted
either unconditionally or subject to such conditions as may be specified. [Section 129(6)].

6) PERSONS RESPONSIBLE FOR COMPLIANCE

The persons responsible to take all reasonable steps to secure compliance by the company with the
requirement of Section 129(7) of the Act, are:

 Managing Director;
 Whole-Time Director in charge of finance;
 CFO;
 Other person of a company charged by the Board with the duty of complying with the
requirements of section 129.
Where any of the aforementioned officers are absent, all the directors shall be responsible and
punishable

7) PENAL PROVISIONS [SECTION 129(7)

If a company contravenes the provisions of this section, the managing director, the whole-time
director in charge of finance, the Chief Financial Officer or any other person charged by the Board with
the duty of complying with the requirements of this section and in the absence of any of the officers
mentioned above, all the directors shall be punishable with imprisonment for a term which may
extend to one year or with fine which shall not be less than 50 thousand rupees but which may extend
to 5 lakh rupees, or with both

PERIODICAL FINANCIAL RESULTS [SECTION 129A]

The Central Government may, require such class or classes of unlisted companies, as may be
prescribed,

(a) to prepare the financial results of the company on such periodical basis and in such form as may
be prescribed;

(b)to obtain approval of the Board of Directors and complete audit or limited review of such periodical
financial results in such manner as may be prescribed; and

(c) file a copy with the Registrar within a period of thirty days of completion of the relevant period
with such fees as may be prescribed

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 RE-OPENING OF ACCOUNTS ON COURT’S OR TRIBUNAL ORDERS [SECTION 130]

(1) Apply to court fore-opening of accounts—A company shall not RE-open its books of account and
not recast its financial statements, unless an application in this regard is made by-

(a) the Central Government,

(b) the Income-tax authorities,

(c) the Securities and Exchange Board of India (SEBI),

(d) any other statutory regulatory body or authority or any person concerned and an order is
made by a court of competent jurisdiction or the Tribunal to the effect that—

(i) the relevant earlier accounts were prepared in a fraudulent manner; or

(ii) the affairs of the company were mismanaged during the relevant period, casting a doubt
on the reliability of financial statements:

Serving of notice: Provided that the Court or the Tribunal, as the case may be, shall give notice to

(a) the Central Government,

(b) the Income-tax authorities,

(c) the Securities and Exchange Board of India (SEBI),

(d) any other statutory regulatory body or authority or any person concerned

and shall take into consideration the representation , if any, made before passing any order

(2) The accounts so revised or re-casted, shall be final.

(3) Time Limit in respect ofre-opening of books of account: No order shall be made under sub-section
(1) in respect of re-opening of books of account relating to a period earlier than 8 financial years
immediately preceding the current financial year:

Provided that where a direction has been issued by the Central Government under the proviso to
subsection (5) of section 128 for keeping of books of account for a period longer than 8 years, the
books of account may be ordered to be re- opened within such longer period.

Case Law
In the matter of Hari Sankaran (Appellant) vs. Union of India & Ors. (Respondents) (The Supreme
Court of India) dated 04/06/2019
NCLAT order of allowing re-opening of books and re-casting of financial statements of IL&FS is valid
The Supreme Court of India inter-alia observed that the Tribunal may, under Section 130 of the Act,
pass an order of re-opening of accounts if it is of opinion that (i) the relevant earlier accounts were
prepared in a fraudulent manner; or (ii) the affairs of the company were mismanaged during the
relevant period casting a doubt on the reliability of the financial statements. Thus, the Tribunal
would be justified in passing the order under Section 130 of the Act upon fulfillment of either of the
said two conditions.
In view of the above referred legal position in addition to the reports of SFIO & ICAI, the specific
observations made by the learned Tribunal while passing the order under Section 241/242 of the

9.7 | P a g e
 Companies Act and considering the fact that the Central Government has entrusted the
investigation of the affairs of the company to SFIO in exercise of powers under Section 242 of the
Companies Act, the Apex Court observed that it cannot be said that the conditions precedent while
invoking the powers under Section 130 of the Act are not satisfied.
The Supreme Court of India upheld the order passed by NCLAT under Section 130 of the Companies
Act for re- opening of the books of accounts and re-casting the financial statements of the
Infrastructure Leasing & Financial Services Limited; IL&FS Financial Services Limited and IL&FS
Transportation Networks Limited for the last five years, viz. from Financial Year 2012-13 to the
Financial Year 2017-18 in larger public interest.

VOLUNTARY REVISION OF FINANCIAL STATEMENTS OR BOARD’S REPORT [Section 131]

• Section 131 of the Act, allows the directors to prepare revised financial statement or a revised
Board’s report in respect of any of the 3 preceding financial years after obtaining approval of the
Tribunal, if it appears to them that it does not comply with the requirements of Section 129 or Section
134 of the Act

• The Tribunal shall give notice to the Central Government and the Income-tax authorities and shall
take into consideration the representations.

• Such revised financial statement or report shall not be prepared or filed more than once in a financial
year
• Where copies of the previous financial statement or report have been sent out to members or
delivered to the Registrar or laid before the company in general meeting, the revisions must be
confined to—
(a) the correction in respect of which the previous financial statement or report do not comply with
the provisions of section 129 or section 134 of the Act; and

(b) the making of any necessary consequential alternation

CASELAW
It was held that in case of American Road Technology & Solutions Pvt. Ltd. vs. Central Government
CP No.43/BB/2020 NCLT Bengaluru Bench, where company filed application for revision of financial
statement in financial year 2017-2018, three preceding years for purpose of revision of financial
statements would be 2016-2017, 2015-2016 and 2014-2015 (which was one of year in which
incorrect financial reporting has been detected and in respect of which approval for revision has
been sought), since, true and fair picture of company’s finances would not emerge for financial year
2014-2015 unless financial statements for 2012- 2013 and 2013-2014 were also revised, application
for revision of financial statements for years 2012 to 2015 was allowed

SIGNING OF FINANCIAL STATEMENT [SECTION 134]

The financial statement, including consolidated financial statement, if any, shall be approved by the
Board of Directors before they are signed on behalf of the Board by the chairperson of the company

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where he is authorised by the Board or by two directors out of which one shall be managing director,
if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the
company, wherever they are appointed, or in the case of One Person Company, only by one director,
for submission to the auditor for his report thereon.

RIGHT OF MEMBERS TO COPIES OF AUDITED FINANCIAL STATEMENT - Section 136

1) WHAT TO BE SENT?

A copy of the financial statements, including consolidated financial statements, if any, auditor’s
report and every other document required by law to be annexed or attached to the financial
statements,

2) WHOM SHALL IT BE SENT TO? It shall be sent to every member, to every trustee for the debenture-
holder of any debentures, and to all other persons so entitled.

3) TIMELINES: not less than 21 days before the date of the meeting, provided that if the copies of the
documents are sent less than 21 days before the date of the meeting, they shall, be deemed to have
been duly sent if it is so agreed by members—

(a) holding, if the COMPANY HAS A SHARE CAPITAL, majority in number entitled to vote and who
represent not less than 95 % of such part of the paid-up share capital

(b) having, if the COMPANY HAS NOSHARE CAPITAL, not less than 95% of the total voting power
exercisable at the meeting:

4) LISTED COMPANY:

• According to Regulation 29 of SEBI (LODR) Regulations, 2015, the listed entity shall give prior
intimation to stock exchange about the meeting of the board of directors regarding financial results
viz. quarterly, half yearly, or annual, as the case may be.

• Intimation shall be given at least five days in advance (excluding the date of the intimation and
date of the meeting), and such intimation shall include the date of such meeting of board of directors

• A listed company shall also place its financial statements including CFS, if any, and all other
documents required to be attached thereto, on its website, which is maintained by or on behalf of
the company

• Provided also that every listed company having a subsidiary or subsidiaries shall place separate
audited accounts in respect of each of subsidiary on its website, if any: Provided also that a listed
company which has a subsidiary incorporated outside India (herein referred to as "foreign subsidiary")

(a) where such foreign subsidiary is statutorily required to prepare CFS under any law of the country
of its incorporation, the requirement of this proviso shall be met if CFS of such foreign subsidiary is
placed on the website of the listed company

(b) where such foreign subsidiary is not required to get its financial statement audited under any law
of the country of its incorporation and which does not get such financial statement audited, the
holding Indian listed company may place such unaudited financial statement on its website and where
such financial statement is in a language other than English, a translated copy of the financial
statement in English shall also be placed on the website.]

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5) INSPECTION:
A company shall allow every member or trustee of the holder of any debentures issued by the
company to inspect the financial statements and documents to be attached thereto stated under sub-
section (1) at its registered office during business hours.

Provided that every company having a subsidiary or subsidiaries shall provide a copy of separate
audited or unaudited financial statements, as the case may be, as prepared in respect of each of its
subsidiary to any member of the company who asks for it.

6) OBLIGATION OF LISTED COMPANY

In the case of a company whose shares are listed, provisions of section 136 shall be deemed to have
been complied with, if the copies of the documents are made available for inspection at its registered
office, during working hours, for a period of twenty-one days before the date of the meeting and a
statement containing the salient features of such documents in the prescribed form [Form AOC-3]
or copies of the documents, as the company may deem fit, is sent to every member of the company
and to every trustee for the holders of any debentures issued by the company not less than twenty-
one days before the date of the meeting.

The Companies which are required to comply with Companies (Indian Accounting standards) Rules,
2015 shall forward their statement in Form AOC-3A.

MANNER OF CIRCULATION OF FINANCIAL STATEMENTS IN CERTAIN CASES

In case of all listed companies and such public companies which have

- a net worth of more than 1 crore rupees and

- turnover of more than 10 crore rupees, the financial statements may be sent [Rule 11 of the
Companies (Accounts) Rules, 2014]-

(1) by electronic mode to such members whose shareholding is in dematerialized format.

(2) where shareholding is held otherwise than by dematerialized format, to such members who have
positively consented in writing for receiving by electronic mode (this may not be relevant considering
that shareholding is not held otherwise than by dematerialized form anymore); and

(3) by dispatch of physical copies through any recognised mode of delivery, in all other cases.

COPY OF FINANCIAL STATEMENT TO BE FILED WITH REGISTRAR- [SECTION 137)

• Section 137 of the Act, requires every company to file the financial statements including
consolidated financial statement together with Form AOC- 4 and AOC-4 (CFS)

• with the Registrar of Companies (RoC) within 30 days from the day on which the AGM held and
adopted the financial statements.
• If the financial statements are not adopted at the AGM or adjourned AGM, such unadopted financial
statements along with the required documents be filed with the RoC within 30 days of the date of

9.10 | P a g e
annual general meeting. The RoC shall take them in hisrecord as provisional, until the adoption at
annual general meeting.

• The OPC shall file the copy of financial statements within a period of 180 days from the closure of
financial year.

• The company shall also attach the accounts of subsidiaries incorporated outside India. In the case of
a subsidiary which has been incorporated outside India which is not required to get its financial
statement audited under any law of the country, the requirements shall be met if the holding Indian
company files such unaudited financial statement along with a declaration to this effect and where
such financial statement is in a language other than English, along with a translated copy of the
financial statement in English.

The One Person Company shall file the copy of financial statements duly adopted by its member
within a period of one hundred and eighty days from the closure of financial year

As per Rule 3 of the Companies (Filing of documents and Forms in XBRL) Rules, 2015

(1) The following class of companies shall file their financial statements and other documents under
section 137 of the Act with the Registrar in e-form AOC-4 XBRL as per Annexure-I :

(i) companies listed with stock exchanges in India and their Indian subsidiaries;

(ii) companies having paid up capital of 5 crore rupees or above;

(iii) companies having turnover of one hundred crore rupees or above;

(iv) all companies which are required to prepare their financial statements in accordance with
Companies (Indian Accounting Standards) Rules, 2015

The companies which have filed their financial statements under the erstwhile rules, namely the
Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2011,
shall continue to file their financial statements XBRL form.

• Penalty
If company fails to comply with the requirement of submission of financial statement with RoC: the
company shall be liable to a penalty of: Rs.10000 and in case of continuing failure, with a further
penalty of Rs.100 for each day during which such failure continues, subject to a maximum of Rs. 2
lakhs, and

the MD and the CFO of the company, if any, and, in their absence any other director who is charged
by the Board with the responsibility of complying with the provisions of section 137, and, in the
absence of any such director, all the directors of the company, shall be liable to a penalty of: Rs.10000
and in case of continuing failure, with further penalty of Rs.100 for each day after the first during
which such failure continues, subject to a maximum of Rs.50,000.

Note:

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1) The companies which have filed their financial statements under XBRL Rules, shall continue to file
their financial statements and other documents though they may not fall under the class of
companies specified therein in succeeding years.
2) Every Non-Banking Financial Company (NBFC) that is required to comply with Indian Accounting
Standards (Ind AS) shall file the financial statements with Registrar together with Form AOC-4 NBFC
(Ind AS) and the consolidated financial statement, if any, with Form AOC-4 CFS NBFC (Ind AS) vide
MCA Notification dated 30th January 2020.

National Financial Reporting Authority - NFRA (Section 132)

1) Meaning
Through Section 132 of the Companies Act, 2013, the Central Government has introduced a new
regulatory authority named as National Authority for Financial Reporting known as National
Financial Reporting Authority (NFRA). The erstwhile Companies Act, 1956 has empowered the
Central Government to form a Committee for recommendations on Accounting Standards which is
National Advisory Committee on Accounting Standards (NACAS). This has now been renamed with
enhanced independent oversight powers and authority as National Financial Reporting Authority
(NFRA
NFRA is responsible for monitoring and enforcing compliance of auditing and accounting
standards and for that purpose, oversee the quality of professions associated with ensuring such
compliances. The Authority has power to investigate professional and other misconducts which
may be committed by Chartered Accountancy members and firms. There is also a provision for
appellate authority.
The NFRA is a quasi – judicial body to regulate matters related to accounting and auditing. With
increasing demand of non–financial reporting, it may be referred to as a national level business
Reporting Authority to regulate standards of all kinds of reporting- financial as well as non–financial,
by the companies in future.
NFRA shall give its recommendations on accounting standards and auditing standards. It shall only
recommend, and it is the Central Government who shall prescribe such standards.
2) Objective

The objectives of National Financial Reporting Authority inter alia shall be as follows:

(1) Make recommendations to the Central Government on formulation of accounting and auditing
policies and standards for adoption by companies, class of companies or their auditors.
(2) Monitor and enforce the compliance with accounting standards, monitor and enforce the
compliance with auditing standards.
(3) Oversee the quality of service of professionals associated with ensuring compliance with such
standards and suggest measures required for improvement in quality of service, and
(4) Perform such other functions as may be prescribed in relation to objectives.
3) Constitution of NFRA
(i) It consists of a chairperson, who shall be a person of eminence & having expertise in accountancy,
auditing, finance, or law, to be nominated by Central Government, and such other prescribed
members not exceeding 15 consisting of part-time and full-time members as prescribed
(ii) Each division of the NFRA shall be presided over by the Chairperson or a full-time Member
authorised by the Chairperson.
(iii) There shall be an executive body of the National Financial Reporting Authority consisting of the
Chairperson and full-time Members of such Authority for efficient discharge of its functions under
sub-section (2) of Section 132 of the Act [other than clause (a)] and sub-section (4) of Section 132

9.12 | P a g e
 of the Act. Provided that the terms and conditions and the manner of appointment of the
chairperson and members shall be such as prescribed
(iv) The chairperson and all members shall make a declaration in prescribed form about no conflict
of interest or lack of independence in respect of their appointment. The chairperson and all full–
time members shall not be associated with any audit firm or related consultancy firm during course
of their appointment and two years after ceasing to hold such appointment.
(v) The Central Government may appoint a secretary and such other employees as it may consider
necessary for the efficient performance of functions by the NFRA under the Companies Act, 2013
and the terms and conditions of service of the secretary and employees shall be such as prescribed.
(vi) The head office of National Financial Reporting Authority is at New Delhi, and it may, meet at
such other places in India, as it deems fit.
(vii) The National Financial Reporting Authority shall meet at such times and places and shall
observe such rules of procedure in regard to the transaction of business at its meetings in such
manner as prescribed.

4) Audit of NFRA
Audit of account of NFRA
The accounts of the NFRA shall be audited by the Comptroller and Auditor-General of India at such
intervals as may be specified by him and certified accounts together with the audit report thereon
shall be forwarded annually to the Central Government.

Annual Report on working of NFRA

The NFRA shall prepare in such form and at such time for each financial year as may be prescribed
its annual report giving a full account of its activities during the financial year and forward a copy
thereof to the Central Government and the Central Government shall cause the annual report and
the audit report given by the Comptroller and Auditor-General of India to be laid before each House
of Parliament

5) Jurisdiction, Powers of and Imposition of Penalties by NFRA

(a) have the power to investigate, matters of professional or other misconduct committed by any
member or firm of chartered accountants.
(b) where professional or other misconduct is proved, have the power to make order for—
(A) imposing penalty of—
(I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of
individuals; and

(II) not less than five lakh rupees, but which may extend to ten times of the fees received, in case
of firms;
(B) debarring the member or the firm from engaging himself or itself from practice as member of
the ICAI for a minimum period of six months or for such higher period not exceeding ten years
(c) have the same powers as are vested in a civil court, namely:
(i) discovery and production of books of account and other documents, at such place and at such
time as may be specified by the NFRA;
(ii) summoning and enforcing the attendance of persons and examining them on oath;
(iii) inspection of any books, registers and other documents of any person referred to in clause (b)
at any place;
(iv) issuing commissions for examination of witnesses or documents

6) Appeals and Appellate Authority

Any person aggrieved by any order of the National Financial Reporting Authority may prefer appeal
before the Appellate Tribunal in such manner and on payment of such fee as prescribed

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 CENTRAL GOVERNMENT TO PRESCRIBE ACCOUNTING STANDARDS- [SECTION 133]

The Central Government may prescribe the standards of accounting or any addendum thereto, as
recommended by the Institute of Chartered Accountants of India, in consultation with and after
examination of the recommendations made by the NFRA.

The Ministry has subsequently clarified that till the Standards of Accounting is prescribed by Central
Government in consultation and recommendation of the National Financial Reporting Authority, the
existing Accounting Standards notified under the Companies Act 1956 shall continue to apply.

On 6th Feb. 2015 the Ministry of Corporate Affairs (MCA), the Central Government, in consultation
with the National Advisory Committee on Accounting Standards (NACAS), notified the Companies
(Indian Accounting Standards) Rules, 2015. These rules came into force on 1st April 2015.

As a result of this notification, notifying the Companies (Indian Accounting Standards) Rules, 2015,
there shall be two separate sets of Accounting Standards –

1. Indian accounting Standards (Ind AS) as specified in the Annexure to Companies (Indian Accounting
Standards) Rules, 2015

2. Accounting standards as specified in Annexure to the Companies (Accounting Standards) Rules,

2006

Applicability under Rule 3 of the Companies (Indian Accounting Standards) Rules, 2015

1. Indian accounting Standards (Ind AS) as Applicable to classes of company specified in

specified in the Annexure to Companies (Indian Rule 4(1) of the Companies (Indian Accounting
Accounting Standards) Rules, 2015 Standards) Rules, 2015
2. Accounting standards as specified in - Applicable to the companies other than the
Annexure to the Companies (Accounting classes of companies specified in Rule 4(1) of
Standards) Rules, 2006. the Companies (Indian Accounting Standards)
Rules, 2015

Applicability w.e.f.
Voluntary basis Rule 4(1)(i)- Any company and its holding, subsidiary, joint
venture or associate company may comply with the Indian
Accounting Standards (Ind AS) for financial statements for
accounting periods beginning on or after 1 st April, 2015, with
the comparatives for the periods ending on 31st March, 2015,
or thereafter.
Mandatory basis for the Rule 4(1)(ii)- The following companies shall mandatorily
accounting periods beginning on comply with Ind AS namely: -
or after April 1, 2016 with the • Companies whose equity or debt securities are listed or are
comparatives for the periods in the process of being listed on any stock exchange (except
ending on 31st March, 2016, or SMe Exchange) in India or outside India and having net worth
thereafter of rupees 500 crore or more
• Unlisted companies having net worth of rupees 500 crore or
more;
• holding, subsidiary, joint venture or associate companies of
companies covered above

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 Mandatory basis for the Rule 4(1)(iii)- The following companies shall comply Ind AS
accounting periods beginning on namely:
or after April 1, 2017, with the • Companies whose equity or debt securities are listed or are
comparatives for the periods in the process of being listed on any stock exchange (except
ending on 31st March, 2017, or SME Exchange) in India or outside India and having net worth
thereafter of less than rupees 500 crore
• Unlisted companies having net worth of rupees 250 crore or
more but less than rupees 500 crore;
• holding, subsidiary, joint venture or associate companies of
companies covered above
In case of NBFCs, for accounting Rule (4)(1)(iv)(a)The following NBFCs shall comply with the
periods beginning on or after the Ind (AS):
1st April, 2018, with comparatives (A) NBFCs having net worth of rupees 500 crore or more;
for the periods ending on 31st (B) holding, subsidiary, joint venture or associate companies of
March, 2018, or thereafter. companies covered under item (A)
In case of NBFCs, for accounting Rule (4)(1)(iv)(b)The following NBFCs shall comply with the Ind
periods beginning on or after the (AS):
1st April, 2019, with comparatives (A) NBFCs whose equity or debt securities are listed or in the
for the periods ending on 31st process of listing on any stock exchange in India or outside
March, 2019, or thereafter India and having net worth less than rupees 500 crore;
(B) NBFCs, that are unlisted companies, having net worth of
rupees 250 crore or more but less than rupees 500 crore; and
(C) holding, subsidiary, joint venture or associate companies of
companies covered under item or item (B)

Companies exempted under Rule 5 of the Companies (Indian Accounting Standards) Rules, 2015

The Companies (Indian Accounting Standards) Rules, 2015 shall not be applicable on Banking
Companies and Insurance Companies. The Banking Companies and Insurance Companies shall apply
the Ind AS as notified by the Reserve Bank of India (RBI) and Insurance Regulatory Development
Authority (IRDA) respectively. An insurer or insurance company shall however, provide Ind AS
compliant financial statement data for the purposes of preparation of consolidated financial
statements by its parent or investor or venturer, as required by the parent or investor or venturer to
comply with the requirements of these rules

The Companies(Accounting Standards) Rules, 2021 for Small and Medium sized Companies “Small and
Medium Sized Company” (SMC) means, a company-

(i) whose equity or debt securities are not listed or are not in the process of listing on any stock
exchange, whether in India or outside India

(ii) which is not a bank, financial institution or an insurance company;

(iii)whose turnover (excluding other income) does not exceed 250 crore rupees in the immediately
preceding accounting year;

(iv)which does not have borrowings (including public deposits) in excess of 50 crore rupees at any
time during the immediately preceding accounting year; and

9.15 | P a g e
(v) which is not a holding or subsidiary company of a company which is not a small and medium sized
company

Explanation - For the purposes of this clause, a company shall qualify as a Small and Medium Sized
Company, if the conditions mentioned therein are satisfied as at the end of the relevant accounting
period.

Note: An existing company, which was previously not a Small and Medium sized Company (SMC) and
subsequently becomes a SMC, shall not be qualified for exemption or relaxation in respect of
Accounting Standards available to a SMC until the company remains a SMC for two consecutive
accounting periods.

AUDIT AND AUDITORS

An auditor is a person who is authorized to review and verify the accuracy of financial records and
ensure that the companies are complying with tax laws. The Auditor protects businesses from fraud,
point out discrepancies in accounting methods and, on occasion, work on a consultancy basis, helping
organizations to spot ways to boost operational efficiency. The Auditors work in various capacities
within different industries.

Section 139 - Appointment of Auditors

1) Appointment of auditor [Section 139(1)]:

(a) Every company shall appoint an individual or a firm as an auditor of the company at the 1 st annual
general meeting (AGM).

Example: Rashail Techlabs Private Limited incorporated during the financial year 2019-20. 1st AGM of
the company held on 30.09.2020. The company appointed M/s. Rams & Associates, Chartered
Accountant firm for the period of 5 Years as a subsequent statutory auditor.

(b) The auditor shall hold office from the conclusion of 1 st AGM till the conclusion of its 6th AGM
and thereafter till the conclusion of every sixth AGM. The manner and procedure of selection of
auditors by the members of the company at AGM has been prescribed under the Companies (Audit
and Auditors) Rules, 2014

(c) Manner and procedure of selection and appointment of auditors:

(i) It competent authority shall take into consideration the qualifications and experience of the
individual or the firm proposed to be considered for appointment as auditor

(ii) It shall have regard to any order or pending proceeding relating to professional matters of
conduct against the proposed auditor before the Institute of Chartered Accountants of India
(ICAI) or any competent authority or any Court.

(iii) It may call for such other information from the proposed auditor as it may deem fit.

IF COMPNAY HAS AN AUDIT COMMITTEE

• The committee shall recommend the name of an individual or a firm as auditor to the Board for
consideration.

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• If the BOARD AGREES with the recommendation of the Audit Committee, it shall further
recommend him to the members in the AGM.

• If the BOARD DISAGREES with the recommendation of the Audit Committee, it shall refer back the
recommendation to the committee for reconsideration citing reasons for such disagreement.

• If the Audit Committee, decides not to reconsider its original recommendation, the Board shall
record reasons for its disagreement with the committee and send its own recommendation for
consideration of the members in the AGM; and if the Board agrees with the recommendations of the
Audit Committee, it shall place the matter for consideration by members in the AGM.

IF COMPANY HAS NO AUDIT COMMITTEE

• the Board shall consider and recommend an individual or a firm as auditor to the members in the
AGM for appointment.

Summary:

2) Conditions for appointment and notice to the Registrar: Along with the written consent. The
auditor appointed shall submit a certificate that–
(A) the individual or the firm is eligible for appointment and is not disqualified for appointment under
the Chartered Accountants Act, 1949

(B) the proposed appointment is as per the term provided under the Act.
(C) the proposed appointment is within the limits laid down by or under the authority of the Act.

(D) the list of proceedings against the auditor or audit firm or any partner of the audit firm pending
with respect to professional matters of conduct, as disclosed in the certificate, is true and correct

9.17 | P a g e
(E) The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141
[Section 141 provides provisions on eligibility, qualification and disqualification of Auditor which will
be discussed later] of the Companies Act, 2013
(F) Communication to Auditor and Intimate to ROC: Further the company shall inform the concerned
auditor of his or its appointment, and also file a notice (in the Form ADT-1) of such appointment with
the Registrar within 15 days of the meeting in which the auditor is appointed.

(G) Every existing body corporate other than a company governed by NFRA rules, shall inform the
National Financial Reporting Authority (NFRA) within 15 days of appointment of an auditor under sub-
section (1) of section 139, inform the NFRA in Form NFRA- 1, the particulars of the auditor.

3) TERM OF AUDITOR [SECTION 139(2)]:

I. APPLICABILITY.
(a) The listed companies and

(b) all unlisted public companies having paid up share capital of rupees 10 crores or more;
(c) all private limited companies having paid up share capital of rupees 50 crore or more;

(d) all companies, but having public borrowings from financial institutions, banks or public deposits of
rupees 50 crores or more.

The above-mentioned companies shall not appoint or re-appoint-

(1) an individual as auditor for more than ONE TERM of 5 consecutive years; and

(2) an audit firm as auditor for more than TWO TERMS of 5 consecutive years

II. COOLING PERIOD/ ROATATION OF AUDITORS

(1) An individual auditor who has completed his term (i.e. one term of five consecutive years) shall not
be eligible for re-appointment as auditor in the same company for 5 years from the completion of his
term;

(2) An audit firm which has completed its term (i.e. two terms of five consecutive years) shall not be
eligible for re- appointment as auditor in the same company for 5 years from the completion of such
term.

Example:
XYZ Ltd. which is a listed company appoints individual Mr. Raghav as an auditor in its AGM dated
29th September, 2016. Mr. Raghav will hold office of Auditor from the conclusion of this meeting
upto conclusion of sixth AGM i.e. AGM to be held in the year 2021. Now as per sub-section (2), Mr.
Raghav shall not be re-appointed as Auditor in XYZ Ltd. for further term of five years i.e. he cannot
be appointed as Auditor in XYZ Ltd. upto year 2026.

Example:

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 XYZ Ltd. which is a listed company appoints M/s Raghav & Associates as an audit firm in its AGM
dated 29th September, 2016. M/s Raghav & Associates will hold office from the conclusion of this
meeting upto conclusion of sixth AGM to be held in the year 2021. Now as per sub-section (2), M/s
Raghav & Associates can be appointed or re- appointed as auditor for one more term of five years
i.e. upto year 2026. It shall not be re-appointed as Audit firm in XYZ Ltd. for further term of five
years after year 2026 to year 2031.

4) COMMON PARTNER: As on the date of appointment, no audit firm having a common partner or
partners to the other audit firm, whose tenure has expired in a company immediately preceding the
financial year, shall be appointed as auditor of the same company for a period of 5 years.

Example:
M/s Krishna & Associates is an audit firm having 2 partners namely Mr. Krishna and Mr. Shyam. Mr.
Shyam is also a partner of another audit firm named M/s Kukreja& Associates. M/s Krishna &
Associates was appointed as the auditors in the company Golden Smith Ltd. for two consecutive
periods of 5 years i.e. from year 2016 to year 2026. Now, if Golden Smith Ltd. wants to appoint M/s
Kukreja & Associates as its audit firm, it cannot do so because Mr. Shyam is the common partner
between both the Audit firms. This prohibition is only for 5 years i.e. upto year 2031. After 5 years,
Golden Smith Ltd. may appoint M/s Kukreja & Associates or M/s. Krishna & Associates as its auditors

5) TRANSITIONAL PERIOD: Every company, existing on or before the commencement of this Act which
is required to comply with the provisions as mentioned in above mentioned points, shall comply with
those provisions within a period 3 years from the date of commencement of this Act

Note: It is also provided that nothing contained in above mentioned points shall prejudice the right of
the company to remove an auditor or the right of the auditor to resign.

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6) FIRST AUDITORS - Section 139(6)

(a) Notwithstanding anything contained in sub-section (1) of Section 139 i.e. point 2(i) mentioned
above, the first auditor of a company, other than a Government Company, shall be appointed by the
Board of directors within 30 days of the date of registration of the company and the auditor so
appointed shall hold office until the conclusion of the first AGM.

(b) If the Board fails to exercise its powers i.e. appointment of first auditor, it shall inform the members
of the company and the company may appoint the first auditor within 90 days at an extra ordinary
general meeting (EGM) and such auditor shall hold office till the conclusion of the first AGM

Example: Unicorn Steel Private Limited is incorporated as on 02.06.2020, board of directors of the
company held board meeting as on 15.06.2020 to appoint Jain Ajmera & Associates as a first
auditor of the company for a term of 5 years. As per section 139(6) of the companies act, 2013,
the board shall appoint first director within 30 days from the date of registration of the company.
State the validity of the aforesaid situation.
(a) Invalid
(b) Valid
(c) Valid after approval of shareholder in General Meeting
(d) Valid only after approval of Central Government

Answer: (a) The given situation is Invalid i.e., option (a)

Example:
Managing Director of PQR Ltd. himself wants to appoint Shri Ganpati, a practicing Chartered
Accountant, as first auditor of the company. Comment on the proposed action of the Managing
Director.

Answer:
Provisions and Explanation: Section 139(6) of the Companies Act, 2013 provides that “the first
auditor or auditors of a company shall be appointed by the Board of directors within 30 days from
the date of registration of the company”. In the instant case, the appointment of Shri Ganapati, a
practicing Chartered Accountant as first auditors by the Managing Director of PQR Ltd by himself is
in violation of Section 139(6) of the Companies Act, 2013, which requires the Board of Directors to
appoint the first auditor of the company
Conclusion: In view of the above, the Managing Director of PQR Ltd. cannot appoint the first auditor
of the company himself

7) FILLING UP CASUAL VACANCY - Section 139(8)]:

(a) The Board may fill any casual vacancy in the office of an auditor within 30 days but where such
vacancy is caused by the resignation of an auditor, such appointment shall also be approved by the
company at a general meeting convened within 3 months of the recommendation of the Board.
(b) Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next AGM.

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 Example:
Prakash Carriers Limited appointed Mr. Raman as its auditor in the Annual General Meeting held
on 30th September, 2019. Initially, he accepted the appointment. But he resigned from his office
on 31st October, 2019 for personal reasons. The Board of directors seeks advice for filling up the
vacancy by appointment of Mr. Albert as auditor.
In the present case, as the auditor has resigned, the casual vacancy so created can be filled up by
the Board appointing Mr. Albert. However, the appointment of Mr. Albert must be approved by the
company by passing of an ordinary resolution at a general meeting of the company which must be
convened by the Board within 3 months of the recommendation of the Board. Mr. Albert will be
entitled to hold office till the conclusion of the next Annual General Meeting

8) APPOINTMENT OF AUDITORS IN CASE OF GOVERNMENT COMPANY [Section 139(5), (7) & (8)

(1) CAG: In the case of a Government company, the 1 st auditor shall be appointed by the CAG within
60 days from the date of registration of the company.

(2) BOD: In case the CAG does not appoint 1st auditor within the said period, THE BOARD OF
DIRECTORS of the company shall appoint such auditor within the next 30 days.
(3) MEMBERS: Further, in the case of failure of the Board to appoint such auditor within the next 30
days, it shall inform the members of the company who shall appoint such auditor within the 60 days
at an EGM, who shall hold office till the conclusion of the first annual general meeting.

(4) CASUAL VACANCY: Company whose accounts are subject to audit by an auditor appointed by the
CAG, casual vacancy of an auditor shall be filled by the CAG within 30 days.

If CAG fails, the Board of Directors shall fill the vacancy within next 30 days.

9) RE-APPOINTMENT OF RETIRING AUDITOR - Section 139(9), (10) And (11)

(a) A retiring auditor may be re-appointed at an AGM if—

(1) he is not disqualified for re-appointment.

(2) he has not given a notice of unwillingness in writing to the company; and

(3) a Special resolution has not been passed at that meeting appointing some other auditor or
providing expressly that he shall not be re-appointed

(b) Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue
to be the auditor of the company

Past year question:

(1) Answer the following with regard to appointment of auditor:

(i) X, a practising chartered accountant holds shares in ABC Ltd. The nominal value of shares is
`50,000. Whether ABC Ltd can appoint him as auditor?

(ii) A, a practising chartered accountant has business relationship with XYZ Hotels Ltd. The hotel
used to provide services to A frequently on the same price as charged from other customers.
Whether XYZ Hotels Ltd appoint A as its auditor?

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(iii) X, a chartered accountant is working as a General Manager Accounts with ABC Ltd. Could X
be appointed as auditor in ABC Ltd? (DEC 2021) (5 M)

Ans: (i) Section 141(3) of the Companies Act, 2013 provides that a person shall not be eligible
for appointment as an auditor of a company when he himself or his relative or partner is holding any
security of or interest in the company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company.

In this case Mr. X, a practicing Chartered Accountant holding shares in ABC Ltd cannot be appointed
as Auditor of that company.

(ii) Section 141(3) of the Companies Act, 2013 read with Rule 10 of the Companies
(Audit and Auditors) Rules, 2014 provides that a person shall not be eligible for appointment as an
auditor of a company when he has business relationship with the company, or its subsidiary, or its
holding or associate company or subsidiary of such holding company or associate company.
The term business relationship shall be construed as any transaction entered into for a commercial
purpose except –

- commercial transactions which are in the nature of professional services permitted to be

rendered by an auditor or audit firm under the Act and the Chartered Accountant Act, 1949 and the
rules or the regulations made under those Act;

- commercial transactions which are in the ordinary course of business of the company at arm's
length price – like sale of products or services to the auditors, as customer, in the ordinary course
of business, by companies engaged in the business of telecommunications, airlines, hospitals,
hotels and such other similar businesses.
Since the transaction is at the arm length price so Mr. A can be appointed as an auditor of XYZ
Hotels Ltd.

(iii) As per section 141(3) of the Companies Act, 2013 provides that an officer or employee of the
company is not eligible for appointment as an auditor of a company.

In this case Mr. X, is working as a General Manager Accounts with ABC Ltd. so he cannot be
appointed as Auditor of that company

REMOVAL, RESIGNATION OF AUDITOR AND GIVING OF SPECIAL NOTICE - Section 140

Section 140 of the Companies Act, 2013 provides for removal, resignation of auditor and giving of
SPECIAL NOTICE (Section 115). According to this section:

I. REMOVAL OF AUDITOR BEFORE THE EXPIRY OF HIS TERM [Section 140(1)]:

(a) The auditor appointed under section 139 may be removed from his office before the expiry of his
term only by

- the approval of the Central Government by making an application in Form ADT-2 within 30 days of
the resolution passed by the Board.

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- Hold the general meeting within 60 days of receipt of approval of the Central Government for passing
the special resolution.

(b) Giving opportunity of being heard (Audi Alteram Partem) shall be given to the auditor before
taking in decision.

Example:
Mr. Suresh, a CA, was appointed by the Board of Directors of AB Limited as the First Auditor. The
company in General Meeting removed Mr. Suresh without seeking the approval of the Central
Government and appointed Mr. Gupta as an auditor in his place. The first auditor appointed by the
Board of Directors can be removed in accordance with the provision of Section 140(1) of the
Companies Act, 2013. Hence, the removal of the first auditor in this case is invalid. The company
contravened the provision of the Act.

II. RESIGNATION BY AUDITOR - Section 140(2) & (3)]

(a) If the Auditor has resigned from the company, he shall file a statement in the form ADT-3 with the
company and the Registrar within 30 days from the date of resignation.
(b) The auditor shall indicate the reasons and other facts for his resignation, in the statement.

(c) In case of government companies, the auditor shall file such statement with the CAG along with
the company and the Registrar indicating the reasons and other facts.

III. PENALTY FOR CONTRAVENTION

If the auditor does not comply with the provisions of sub-section (2), he or it shall be liable to a penalty
of 50 thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and
in case of continuing failure, with further penalty of 500 rupees for each day after the first during
which such failure continues, subject to a maximum of 2 lakh rupees

IV. APPOINTING AUDITOR OTHER THAN THE RETIRING AUDITOR [SECTION 140(4)]

(a) If the retiring auditor has not completed a consecutive tenure of 5 years or 10 years, as the case
may be, a special notice shall be required for a resolution at an AGM appointing as auditor a person
other than a retiring auditor, or providing expressly that a retiring auditor shall not be re- appointed

(b) On receipt of special notice, the company shall send a copy to the retiring auditor.
(c) Where notice is given and the retiring auditor makes a representation in writing to the company
and requests its notification to be sent to the members the company shall Send a copy of the
representation to every member of the company to whom notice of the meeting is sent, whether
before or after the receipt of the representation by the company.

(d) If a copy of the representation is not sent as aforesaid because it was received too late or because
of the company’s default, the auditor may require that the representation shall be read out at the
meeting.

(e) If the Tribunal is satisfied on an application either of the company or of any other aggrieved person
that the rights conferred by this sub-section are being abused by the auditor, then the copy of the
representation may not be sent and the representation need not be read out at the meeting.

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V. AUDITOR ACTS IN A FRAUDULENT MANNER OR ABETTED OR COLLUDED IN ANY FRAUD [SECTION
140(5)]

(a) The Tribunal either—

-Suo motu; or
- on an application made to it by the Central Government; or

- by any person concerned,

if it is satisfied that the auditor of a company has, acted in a fraudulent manner or abetted or colluded
in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the
company to change its auditors.
(b) Requirement for change of auditor: If the application is made by the Central Government and the
Tribunal is satisfied that any change of the auditor is required, it shall within 15 days of receipt of such
application, make an order that he shall not function as an auditor and the Central Government may
appoint another auditor in his place.
(c) Ineligibility of auditor to be appointed: An auditor, against whom final order has been passed by
the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for
a period of 5 years from the date of passing of the order and the auditor shall also be liable for action
under section 447

NOTE: It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every
partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in
relation to, the company or its director or officers.

Example:
FLP Ltd, engaged in the business of real estate and energy, defaulted on its borrowings which
amounted to thousands of crores. During the year ended 31st March 2019, a fraud was uncovered
in respect of various transactions of the company and it was observed by the Central Government
that the auditors of the company were involved in such fraud. Please suggest what can be the
course of action in this case
Answer:
The Central Government may apply to the Tribunal in respect of such matter highlighting that the
auditors miserably failed to fulfill their duties as auditors of the company. If the Tribunal issatisfied
that the auditors were involved in the fraud with the company, the Tribunal may direct the company
to change its auditors and those auditors shall not be eligible to be appointed as auditor of any
company for 5 years and also liable for action under section 447 of the Companies Act 2013

ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS - Section 141

Section 141 of the Companies Act, 2013 provides for eligibility, qualifications and disqualifications of
auditors. This section deals with:

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 i. Qualifications of an auditor [Section 141(1) & (2)]:

(a) He should be Chartered Accountant as per Chartered Accountants Act, 1949.

(b) A firm whereof majority of partners practicing in India are qualified as CA may be appointed
by its firm name to be auditor of a company.
Note: Where a firm including a LLP is appointed as an auditor of a company, only the partners who
are CA’s shall be authorized to act and sign on behalf of the firm.
ii. Disqualifications – Section 141 (3)

The following persons shall not be eligible for appointment as an auditor of a company, namely:—
(a) a body corporate other than a limited liability partnership
(b) an officer or employee of the company.
(c) a person who is a partner, or who is in the employment, of an officer or employee of the
company;
(d) a person who, or his relative or partner—
(i) is holding any security of or interest in the CASH or a subsidiary of such holding company:
Provided that the relative may hold security or interest in the company of face value not exceeding
1,00,000 rupees
(ii) is indebted to the CASH or a subsidiary of such holding company, in excess of rupees 5 Lakh:
or
(iii) has given a guarantee or provided any security in connection with the indebtedness of any
third person to the CASH or a subsidiary of such holding company, in excess of ₹ 1 Lac.
(e) a person or a firm who, whether directly or indirectly, has business relationship with the CASH
or subsidiary of such holding company or associate company.
“business relationship” shall be construed as any transaction entered into for a commercial
purpose, except–
(A) commercial transactions in the nature of professional services permitted to be rendered by an
auditor or audit firm under the Act and the Chartered Accountants Act (B) commercial transactions
which are in the ordinary course of business of the company at arm’s length price like sale of
products or services to the auditor as customer by the companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other similar businesses.
(f) a person whose relative is a director or is in the employment of the company as a director or
KMP;
(g) if such persons or partner is at the date of such appointment or reappointment holding
appointment as auditor of more than 20 companies.

Note:
1) Limit does not include Dormant company, OPC, small companies and private companies having
paid-up share capital less than 100 crores rupees.
2) As per section 141 (3)(g), this limit of 20 company audits is per person. In the case of an audit
firm having 3 partners, the overall ceiling will be 3 × 20 = 60 companies audit.
(h) a person who has been convicted by a court of an offence involving fraud and a period of 10
years has not elapsed from the date of such conviction;
(i) a person who, directly or indirectly, renders any service referred to in section 144 to the
company or its holding company or its subsidiary company.

Illustrations:

1) Mr. Anil, a Chartered accountant, is a partner of a firm and has been appointed as an auditor of
Laxman Ltd. in the Annual General Meeting of the company held in September 2018 in which he

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accepted the assignment. Subsequently, in January 2019, he offered Bharat, another Chartered
Accountant, who is the Manager Finance of Laxman Ltd., to join the firm of Anil as a partner

Answer: Provisions and Explanation: Section 141(3)(c) of the Companies Act, 2013 prescribes that any
person who is a partner or in employment of an officer or employee of the company will be
disqualified to act as an auditor of a company. Sub-section (4) of Section 141 provides that an auditor
who becomes subject, after his appointment, to any of the disqualifications specified in sub-sections
(3) of Section 141, shall be deemed to have vacated his office as an auditor.

Conclusion: In the present case, Anil is auditor of M/s Laxman Ltd. and any employee of Laxman Ltd.
cannot become the Partner of the firm where Anil is a Partner. In case that happens, he/the firm shall
be deemed to have vacated office of the auditor of M/s Laxman Ltd.

2) “Mr. Ashish”, a practicing CA, is holding securities of “XYZ Ltd.” having face value of ₹ 900/-.
Whether Mr. Ashish is qualified for appointment as an Auditor of “XYZ Ltd.”?

Answer: As per section 141 (3)(d) (i) an auditor is disqualified to be appointed as an auditor if he, or
his relative or partner holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company:
In the present case, Mr. Ashish is holding security of ₹ 900 in the XYZ Ltd, therefore he is not eligible
for appointment as an Auditor of “XYZ Ltd”

3) “Mr. P” is a practicing Chartered Accountant and “Mr. Q”, the relative of “Mr. P”, is holding
securities of “ABC Ltd.” Having face value of ₹ 90,000/-. Whether “Mr. P” is qualified for being
appointed as an auditor of “ABC Ltd.”

Answer: An auditor is disqualified to be appointed as an auditor if he, or hisrelative or partner holding

any security of or interest in the company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company. Further as per proviso to this Section, the relative of the auditor
may hold the securities or interest in the company of face value not exceeding of ₹1,00,000 In the
present case, Mr. Q. (relative of Mr. P, an auditor), is having securities of ₹90,000 face value in ABC
Ltd., which is as per requirement of proviso to section 141 (3)(d)(i). Therefore, Mr. P will not be
disqualified to be appointed as an auditor of ABC Ltd

4) “ABC & Co.” is an audit firm having partners “Mr. A”, “Mr. B” and “Mr. C”, Chartered Accountants.
“Mr. A”, “Mr. B” and “Mr. C” are holding appointment as auditors in 4, 6 and 10 companies
respectively.

(i) Provide the maximum number of audits remaining in the name of “ABC & Co.”

(ii) Provide the maximum number of audits remaining in the name of individual partner i.e. Mr. A,
Mr. B and Mr. C.

Fact of the Case: In the instant case, Mr. A is holding appointment in 4 companies, Mr. B is having
appointment in 6 companies and Mr. C is having appointment in 10 companies. In aggregate all three
partners are having 20 audits.

As per section 141 (3)(g), this limit of 20 company audits is per person. In the case of an audit firm
having 3 partners, the overall ceiling will be 3 × 20 = 60 companies’ audit. Sometimes, a CA may be a

9.26 | P a g e
partner in a number of auditing firms. In such a case, all the firms in which he is partner or proprietor
will be together entitled to 20 company audits only on his account.

Conclusion:

(i) Therefore, ABC & Co. can hold appointment as an auditor of 40 more companies: Total Number of
audits for which the firm would be eligible = 20*3 = 60 Number of audits already taken by all the
partners In their individual capacity = 4+6+10 = 20 Remaining number of audits available to the firm=
40

(ii) With reference to above provisions, an auditor can hold more appointment as auditor = ceiling
limit as per section 141(3)(g)- already holding appointments as an auditor. Hence
(1) Mr. A can hold: 20 – 4 = 16 more audits.

(2) Mr. B can hold 20 - 6 = 14 more audits and

(3) Mr. C can hold 20-10 = 10 more audits.

Powers and Duties of Auditors and Auditing Standards - Section 143

(1) Power of Auditor

a) Every auditor of a company shall have a right of access at all times to the books of account and
vouchers of the company, whether kept at the registered office of the company or at any other
place and shall be entitled to require from the officers of the company such information and
explanation.
b) auditor of a holding company shall also have the right of access to the records of all its
subsidiaries and associate companies in so far as it relates to the consolidation of its financial
statements
(2) Duties of Auditor
(a) whether loans and advances made by the company on the basis of security have been properly
secured
(b) whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company;
(c) whether loans and advances made by the company have been shown as deposits;
(d) whether personal expenses have been charged to revenue account;
(e) where it is stated in the books and documents of the company that any shares have been allotted
for cash, whether cash has actually been received in respect of such allotment, and if no cash has
actually been so received, whether the position as stated in the account books and the balance
sheet is correct, regular and not misleading
(3) The auditor shall make a report to the members of the company on the accounts examined by
him and on every financial statements and to the best of his information and knowledge, the said
accounts, financial statements give a true and fair view of the state of the company’s affairs as at
the end of its financial year and profit or loss and cash flow for the year

(4) The auditor’s report shall also state—

(a) whether he has sought and obtained all the information and explanations which to the best of
his knowledge and belief were necessary for the purpose of his audit
(b) whether, in his opinion, proper books of account as required by law have been maintained

9.27 | P a g e
 (c) whether the report on the accounts of any branch office of the company audited by a person
other than the company’s auditor has been sent to him and the manner in which he has dealt with
it in preparing his report.
(d) whether the company’s balance sheet and profit and loss account dealt with in the report are
in agreement with the books of account and returns.
(e) whether, in his opinion, the financial statements comply with the accounting standards.
(f) the observations or comments of the auditors on financial transactions or matters which have
any adverse effect on the functioning of the company.
(g) whether any director is disqualified from being appointed as a director under sub-section (2) of
section 164;
(h) whether the company has adequate internal financial controls with reference to financial
statements in place and the operating effectiveness of such controls

Section 143(3)(i) related to internal financial controls shall not apply to a private company:-
• Which is an one person company or a small company;
• Which has turnover of less than Rs. 50 crores as per the latest audited financial statement and
which has aggregate borrowings of less than Rs. 25 crores, from banks, financial institutions, or
any body corporate, at any point of time during the preceding financial year

(i) Rule 11 prescribed that Auditor’s Report shall also include their views and comments on the
following matters, namely
(i) whether the company has disclosed the impact, if any, of pending litigations on its financial
position in its financial statement.
(ii) whether the company has made provision, as required under any law or accounting standards,
for material foreseeable losses, if any, on long term contracts including derivative contracts;
(iii) whether there has been any delay in transferring amounts, required to be transferred, to the
IEPF by the company. The auditor is required to provide the reasons, where any of the matters
required to be included in the Audit Report under this Clause is answered in negative or with a
qualification. [Section 143 (4)]

(5) Audit of Government Company

• The auditor so appointed shall submit a copy of the audit report to the CAG of India
• The CAG of India shall within 60 days from the date of receipt of the audit report under sub-
section (5) have a right to,—
(a) conduct a supplementary audit of the financial statement of the company by such person or
persons as he may authorise in this behalf; and for the purposes of such audit, require information
or additional information to be furnished to any person or persons, so authorised
(b) comment upon or supplement such audit report:
(c) If CAG considers necessary, by an order, cause test audit to be conducted of the accounts of
such company.
• Comments given by the CAG of India upon, or supplement to, the audit report shall be sent by the
company to every person entitled to copies of audited financial statements AGM

(6) Reporting of frauds by auditors [Section 143(12)]

If an auditor of a company in the course of the performance of his duties as auditor, has reason to
believe that an offence of fraud, which involves or is expected to involve
(A) an amount of ` 1 crore or above, the auditor shall report the matter to the Central Government
in following manner:

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 (a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be,
immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or
observations within 45 days;
(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee) to the Central Government within 15 days from
the date of receipt of such reply or observations.
(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee
within the stipulated period of 45 days, he shall forward his report to the Central Government along
with a note containing the details of his report that was earlier forwarded to the Board or the Audit
Committee for which he has not received any reply or observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs (MCA) in a sealed cover
by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in
confirmation of the same;
(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address
and contact telephone number or mobile number and be signed by the auditor with his seal and
shall indicate his Membership Number; and (f) The report shall be in the form of a statement as
specified in Form ADT-4.

(B) In case of a fraud involving lesser than the 1 crore, the auditor shall report the matter to the
audit committee constituted under section 177 or to the Board immediately but not later than 2
days of his knowledge of fraud and he shall report the matter specifying the following:

(i) Nature of fraud with description;

(ii) Approximate amount involved; and
(iii) Parties involved.

The following details of each of the fraud reported to the Audit Committee or the Board under sub-
rule (3) of amended Rule 13 during the year shall be disclosed in the Board’s Report
(i) Nature of fraud with description;
(ii) Approximate amount involved;
(iii) Parties involved, if remedial action not taken; and
(iv) Remedial actions taken.

Note: The provision of this section shall mutatis mutandis apply to a Cost Auditor and a Secretarial
Auditor during the performance of his duties under section 148 and section 204 respectively.

(7) Audit of accounts of branch office of company [Section 143(8)]

(a) Branch office in India:
Where a company has a branch office, the accounts of that office shall be audited either by:

(A) the company’s auditor appointed under section 139, or

(B) by any other person qualified for appointment as an auditor of the company under section 139.

(b) Branch office outside India:

If the branch office is situated in a country outside India, the accounts of the branch office shall be
audited either by:

(A) the company’s auditor or

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 (B) by an accountant or
(C) by any other person duly qualified as an auditor as per laws of that country.

(c) The branch auditor shall prepare a report on the accounts of the branch examined by him and
send it to the auditor of the company who shall deal with it in his report in such manner as he
considers necessary.
(d) The provisions regarding reporting of fraud by the auditor shall also extend to such branch
auditor to the extent it relates to the concerned branch

AUDITOR NOT TO RENDER CERTAIN SERVICES [SECTION 144]

The Auditor shall not provide any of the following services (directly or indirectly to the company or its
holding company or subsidiary company), namely—

(a) accounting and book keeping services;

(b) internal audit;

(c) design and implementation of any financial information system;

(d) actuarial services;

(d) investment advisory services;

(f) investment banking services;

(g) rendering of outsourced financial services;

(h) management services; and

(i) any other kind of services as may be prescribed

COST RECORDS & AUDIT (SECTION 148)

1) Cost Records Applicability –

Section 148(1) of the Act, the Central Government may, by order, in respect of such class of
companies (Refer rules) as may be prescribed, direct that particulars relating to the utilisation of
material or labour or to other items of cost as may be prescribed shall also be included in the books
of account kept by that class of companies.
- However, the Central Government shall, before issuing such order in respect of any class of
companies regulated under a special Act, consult the regulatory body constituted or established
under such Special Ac

Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides for the Application of Cost
Record

For the purposes of sub-section (1) of section 148 of the Act. the companies, including foreign
companies engaged in the production of the goods or providing services, such as
telecommunication services,
- generation, transmission, distribution and supply of electricity,

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 - lron and Steel,
- drugs and pharmaceuticals,
- fertilisers,
having an overall turnover from all its products and services of rupees 35 crore or more during the
immediately preceding financial year, shall include cost records for such products or services in their
books of account.

Maintenance of Records (Rule 5 of the Companies (Cost Records and Audit) Rules, 2014)
1) Every company under these rules including all units and branches thereof, shall, in respect of
each of its financial year commencing on or after the 1st day of April 2014, maintain cost records
in form CRA-1.
2) The cost records shall facilitate calculation of per unit cost of
- production or cost of operations,
- cost of sales and
- margin for each of its products and activities for every financial year on monthly or quarterly or
half-yearly or annual basis
3) The cost records shall be maintained in such manner so as to enable the company to exercise, as
far as possible, control over the various operations and costs to achieve optimum economies in
utilisation of resources and these records shall also provide necessary data which is required to be
furnished under these rules

Exception to the Cost Records requirements:

A company which is classified as a micro enterprise or a small enterprise including as per the
turnover criteria under Section 7(9) of the Micro, Small and Medium Enterprises Development Act,
2006
2) Appointment & Remuneration
Section 148(3) of the Act, states that the audit under sub-section (2) shall be conducted by a Cost
Accountant who shall be appointed by the Board on such remuneration as may be determined by
the members in such manner as may be prescribed.
A. Appointment of Cost Auditor

The category of companies specified in rule 3 and the thresholds limits laid down in rule 4, shall
within 180 days of the commencement of every financial year, shall appoint a cost auditor.
Further, before such appointment is made, the written consent of the cost auditor to such
appointment, and a certificate from him or it is required to be obtained.
The cost auditor appointed shall submit a certificate that-
(a) the individual or the firm, as the case may be, is eligible for appointment and is not disqualified
for appointment under the Act, the Cost and Works Accountants Act, 1959 (23 of 1959) and the
rules or regulations made thereunder;
(b) the individual or the firm, as the case may be, satisfies the criteria provided in section 141 of
the Act, so far as may be applicable;
(c) the proposed appointment is within the limits laid down by or under the authority of the Act;
and
(d) the list of proceedings against the cost auditor or audit firm or any partner of the audit firm
pending with respect to professional matters of conduct, as disclosed in the certificate, is true and
correct.
Every company referred to in sub-rule (1) shall inform the cost auditor concerned of his or its
appointment as such and file a notice of such appointment with the Central Government within a
period of
-30 days of the Board meeting in which such appointment is made or

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 - within a period of 180 days of the commencement of the financial year, whichever is earlier,
through electronic mode, in Form CRA-2, along with the fee as specified in the Companies
(Registration Offices and Fees) Rules, 2014.

B. TENURE
Every cost auditor appointed as such shall continue in such capacity till the expiry of 180 days from
the closure of the financial year or till he submits the cost audit report, for the financial year for
which he has been appointed.

C. Remuneration of the Cost Auditor (Rule 14 of Companies (Audit & Auditors), Rules, 2014

(a) in the case of companies which are required to constitute an audit committee-
(i) the Board shall appoint an individual, who is a cost accountant, or a firm of cost accountants in
practice, as cost auditor on the recommendations of the Audit committee, which shall also
recommend remuneration for such cost auditor;
(ii) the remuneration recommended by the Audit Committee under clause (i) shall be considered
and approved by the Board of Directors and ratified subsequently by the shareholders

(b) in the case of other companies which are not required to constitute an audit committee, the
Board shall appoint an individual who is a cost accountant or a firm of cost accountants in practice
as cost auditor and the remuneration of such cost auditor shall be ratified by shareholders
subsequently.
3) Audit of cost records
Section 148(2) of the Act, states that if the Central Government is of the opinion, that it is necessary
to do so, it may, by order, direct that the audit of cost records of class of companies

A. Applicability
Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 provides for Applicability for Cost
Audit:-.
(1) Every company specified in item (A) of rule 3 of the Companies (Cost Records and Audit) Rules,
2014 i.e. Regulated Sectors shall get its cost records audited in accordance with these rules if the -
- overall annual turnover of the company from all its products and services during the immediately
preceding financial year is rupees 50 crore or more and
- the aggregate turnover of the individual product or products or services for which cost records are
required to be maintained under rule 3 is rupees 25 crore or more.

(2) Every company specified in item (B) of rule 3 of the Companies (Cost Records and Audit) Rules,
2014 i.e. Non-Regulated Sectors shall get its cost records audited in accordance with these rules if
the
- overall annual turnover of the company from all its products and services during the immediately
preceding financial year is rupees 100 crore or more and
- the aggregate turnover of the individual product or products or service or services for which cost
records are required to be maintained under rule 3 is rupees 35 crore or more.

(3) The requirement for cost audit under these rules shall not apply to a company which is covered
in rule 3, and-
(i) whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue; or
(ii) Which is operating from a special economic zone.
(iii) which is engaged in generation of electricity for captive consumption through Captive
Generating Plant.

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 B. Cost Audit Report
Every cost auditor, who conducts an audit of the cost records of a company, shall submit the cost
audit report along with his or its reservations or qualifications or observations or suggestions, if any,
in Form CRA-3.

(a) The cost auditor shall forward his duly signed report to the Board of Directors of the company
within a period of 180 days from the closure of the financial year to which the report relates and
the Board of Directors shall consider and examine such report particularly any reservation or
qualification contained therein.
(b) Every company covered under these rules shall, within a period of 30 days from the date of
receipt of a copy of the cost audit report, furnish the Central Government with such report along
with full information and explanation on every reservation or qualification contained therein, in
Form CRA-4 in Extensible Business Reporting Language format
(c) The Companies which have got extension of time of holding AGM under section 96 of the
Companies Act, 2013, may file Form CRA-4 within resultant extended period of filing financial
statements under section 137 of the Companies Act, 2013

4) Comparison to Chartered accountant provisions

a) Person appointed under section 139 as an auditor of the company shall not be appointed for
conducting the audit of cost records.
b) The auditor conducting the cost audit shall comply with the cost auditing standards. “Cost
auditing standards” mean such standards as are issued by the Institute of Cost Accountants of India,
constituted under the Cost and Works Accountants Act, 1959, with the approval of the Central
Government.
c) Section 148(4): an audit under this section shall be in addition to the audit conducted under
section 143.
d) Section 148(5): qualifications, disqualifications, rights, duties and obligations applicable to
auditors under this Chapter shall, so far as may be applicable, apply to a cost auditor. Further the
report on the audit of cost records shall be submitted by the cost accountant to the Board of
Directors of the company
e) Section 148(6) of the Act, states that a company shall within 30 days from the date of receipt of
a copy of the cost audit report prepared in pursuance of a direction under sub-section (2) of Section
148 of the Act furnish the Central Government with such report along with full information and
explanation on every reservation or qualification contained therein.
f) Section 148(7) of the Act, states that if, after considering the cost audit report referred to under
this section and the information and explanation furnished by the company under subsection (6) of
Section 148 of the Act, the Central Government is of the opinion that any further information or
explanation is necessary, it may call for such further information and explanation and the
company shall furnish the same within such time as may be specified by that Government.
g) Section 148(8) of the Act, states that if any default is made in complying with the provisions of
this section,–
- the company and every officer of the company who is in default shall be punishable in the manner
as provided in sub-section (1) of section 147;
- the cost auditor of the company who is in default shall be punishable in the manner as provided
in sub-sections (2) to (4) of section 147.

5) Removal of Cost Auditor/Casual Vacancy

- The cost auditor appointed under the Companies (Cost Records & Audit) Rules 2014, may be
removed from his office before the expiry of his term, through a board resolution after giving a

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 reasonable opportunity of being heard to the Cost Auditor and recording the reasons for such
removal in writing.
- Further Form CRA-2 is required to be filed with the Central Government for intimating
appointment of another cost auditor and the relevant Board Resolution to the effect shall be
enclosed. However, it shall not prejudice the right of the cost auditor to resign from such office of
the company.
- Any causal vacancy in the office of a cost auditor, whether due to resignation, death or removal,
shall be filled by the Board of Directors within 30days of occurrence of such vacancy and the
company shall inform the Central Government in Form CRA-2 within thirty days of such
appointments of cost auditor.

SECRETARIAL AUDIT

1) Meaning and Applicability

• Secretarial Audit is a process to check compliance with the provisions of various laws and rules/
regulations/procedures, maintenance of books, records etc., by an independent professional to
ensure that the company has complied with the legal and procedural requirements and also followed
the due process. It is essentially a mechanism to monitor compliance with the requirements of stated
laws.
• Section 204 of the Companies Act, 2013 mandates every listed company and such other class of
prescribed companies to annex a Secretarial Audit Report, given by a company secretary in practice
with its Board’s report.
As per rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules,
2014, the prescribed class of companies is as under: Every Listed Company and

(a) every public company having a paid-up share capital of 50 crore rupees or more; or
(b) every public company having a turnover of 250 crore rupees or more or

(c) every company having outstanding loans or borrowings from banks or public financial institutions
of 100 rupees or more

• The format of the Secretarial Audit Report shall be in Form No. MR.3.

The Board of Directors, in their report, shall explain in full any qualification or observation or other
remarks made in the Secretarial Audit Report.

2) The Objectives of Secretarial Audit

The objectives of Secretarial Audit may be summarized as under:-

• To check & report on compliances of applicable laws and Secretarial Standards;

• To point out non-compliances and inadequate compliances;

• To protect the interest of various stakeholders i.e. the customers, employees, society etc;

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• To avoid any unwarranted legal actions/penalties by law enforcing agencies and other persons as
well.

3) Scope of Secretarial Audit

The scope of Secretarial Audit comprises verification of the compliances under the following
enactments, rules, regulations, notifications and guidelines:

1. Companies Act, 2013

Along with Secretarial Standards

1. Maintenance of registers and records 9. Transfer and transmission of shares and other
securities and related matters
2. Filing of forms, returns and documents 10. Dividend
3. Memorandum and/or Articles of Association 11. Deposits
4. Meetings of directors/committees thereof, 12. Borrowings
shareholders and other stakeholders
5. Secretarial Standards 13. Loans, investments, guaranties and
securities
6. Directors and Key Managerial Personnel 14. Loans to directors etc. and Related party
(“KMP”) transactions
7. Disclosures 15. Charges
8. Issue of shares and other securities 16. Corporate Social responsibility

2. The Depositories Act, 1996

3. The Foreign Exchange Management Act, 1999

4. The Securities Contracts (Regulation) Act, 1956 [With special reference to listing, delisting and
continuous listing of any of the securities].

5. Securities and Exchange Board of India Act, 1992 (where applicable)

(i) The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011;

(ii) The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015;

(iii) The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018;
(iv) The SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines,
1999/ SEBI (Share Based Employee Benefits) Regulations, 2014;

(v) The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;

(vi) The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents)
Regulations, 1993 regarding the Companies Act and dealing with client;
(vii) The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009;

(viii) The Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018;

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(ix) SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015 (where applicable)
6. Other Applicable Laws as per Specific industry:

• Banks- all laws applicable to Banking Industry;

• Insurance company-all laws applicable to insurance industry;

Petroleum sectoral laws applicable to petroleum industry; pharmaceutical sector, cement industry etc

4) NEED FOR SECRETARIAL AUDIT

Broadly, the need for Secretarial Audit is:

• Effective mechanism to ensure that the legal and procedural requirements are duly complied with.
• Provides a level of confidence to the directors & Key Managerial Personnel etc.

• Directors can concentrate on important business matters as Secretarial Audit ensures legal and
procedural requirements.
• Strengthen the image and goodwill of a company in the minds of regulators and stakeholders.

• Secretarial Audit is an effective governance and compliance risk management tool.

• It helps the investor in analysing the compliance level of companies, thereby increases the
reputation

Secretarial Audit & Secretarial Compliance Report under SEBI Regulations

The Committee on Corporate Governance, constituted under the Chairmanship of Shri Uday Kotak,
in its report dated October 05, 2017, recommended the following in view of the criticality of
secretarial functions to efficient board functioning.
a) Secretarial Audit to be made compulsory for all listed entities under the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), in line with the provisions
of the Companies Act, 2013.
b) Secretarial Audit to be extended to all material unlisted Indian subsidiaries. This is in line with
the theme of strengthening group oversight and improving compliance at a group level for listed
entities.
The aforesaid recommendations were accepted by SEBI and in order to implement the same, the
SEBI (LODR) Regulations, 2015 have been amended vide Notification dated May 09, 2018 to include
Regulation 24A

Annual Secretarial Audit Report: The listed entity and its unlisted material subsidiaries shall
continue to use the same Form No. MR-3 for (secretarial audit report) as required under the
Companies Act, 2013 and the rules made thereunder for the purpose of compliance with Regulation
24A of the SEBI (LODR) Regulations, 2015 as well.
Annual Secretarial Compliance Report: While the annual secretarial audit cover a broad check on
compliance with all laws applicable to the entity, listed entities additionally, on an annual basis,
require a check by the PCS on compliance of all applicable SEBI Regulations and circulars/
guidelines issued thereunder, consequent to which, the PCS need to submit annual secretarial
compliance report to the listed entity in the format prescribed under said SEBI circular.

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 Every listed entity shall submit a secretarial compliance report in such form as specified, to stock
exchanges, within 60 days from end of each financial year.(Amended by the SEBI (Listing
Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2021 w.e.f. 5.5.2021).

The Board of Directors, in their report, shall explain in full any qualification or observation or other
remarks made in the Secretarial Audit Report.

INTERNAL AUDIT [SECTION 138]

The following class of companies shall be required to appoint an internal auditor which may be either
an individual or a partnership firm or a body corporate namely:-:-

Who can be an Internal Auditor?

(a) A Chartered Accountant or;

(b) A Cost Accountant or;

(c) Such other professional as may be decided by the Board to conduct internal audit of the functions
and activities of the Company.

QUESTION:

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 (Audit and Auditors) Rules, 2014 provides that a person shall not be eligible for appointment as
an auditor of a company when he has business relationship with the company, or its subsidiary,
or its holding or associate company or subsidiary of such holding company or associate company.
The term business relationship shall be construed as any transaction entered into for a commercial
purpose except –

- commercial transactions which are in the nature of professional services permitted to be

rendered by an auditor or audit firm under the Act and the Chartered Accountant Act, 1949 and
the rules or the regulations made under those Act;

- commercial transactions which are in the ordinary course of business of the company at arm's
length price – like sale of products or services to the auditors, as customer, in the ordinary course
of business, by companies engaged in the business of telecommunications, airlines, hospitals,
hotels and such other similar businesses.

Since the transaction is at the arm length price so Mr. A can be appointed as an auditor of XYZ
Hotels Ltd.

(iii) As per section 141(3) of the Companies Act, 2013 provides that an officer or employee of the
company is not eligible for appointment as an auditor of a company.
In this case Mr. X, is working as a General Manager Accounts with ABC Ltd. so he cannot be
appointed as Auditor of that company

Past year question

Advise whether the internal auditor is required to be appointed in the followingscenarios.
JUNE 2019 5M

Name of Status of Paid-up Turnover Outstandin

the the Company Capital g loans and
Company borrowings
Lala Ltd. Listed 49 195 99
Dilo Ltd. Unlisted public 23 200 56
Craft Ltd. Unlisted public 50 123 65
Wood Pvt. Ltd. Private 55 186 89

Can the following persons be appointed as internal auditor ?

i. President (HR)
ii. DGM (Finance).

Ans: Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies(Accounts)Rules,
2014, prescribes the following class of companies which is required to appoint an internal
auditor namely:-:

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(a) Every listed company;

(b) Every unlisted public company having:

(i) paid up share capital of Rs.50 crore or more during the preceding financialyear; or

(ii) turnover of Rs.200 crore or more during the preceding financial year; or

(iii) Outstanding loans or borrowings from banks or public financial institutionsexceeding

Rs. 100 crore or more at any point of time during the precedingfinancial year; or

(iv) Outstanding deposits of Rs. 25 crore or more at any point of time during thepreceding
financial year; and

c) Every private company having –

(i) Turnover of Rs.200 crore or more during the preceding financial year; or

(ii) Outstanding loans or borrowings from banks or public financial institutions exceeding Rs.100
crore or more at any point of time during the preceding financial year.
Accordingly, in the given case, answer is as under:

Name of the company Requirement to appoint internal auditor

Lala Ltd. Yes, since it is a listed company
Dilo Ltd. Yes, since the turnover is Rs. 200 crore
Craft Ltd. Yes, since the paid-up capital is Rs. 50 crore
Wood Pvt. Ltd. No, since the turnover or loans / borrowings does
not exceed the threshold limits
An internal auditor, shall either be a chartered accountant or a cost accountant, or such other
professional as may be decided by the Board to conduct internal audit of the functions and activities
of the company. The internal auditor may or may not be an employee of the company.

So if president (HR) and DGM (Finance) satisfying the above criteria, can be appointed as internal
auditor.

MCQ

M/s MFSL Limited is an unlisted public company with outstanding deposits of Rs. 35.00 crores. The
management is of the view that since company is unlisted, there is no requirement to appoint
internal auditor. Suggest:

a) Internal auditor is required to be appointed.

b) No requirement of internal auditor

c) Statutory auditor appointment is sufficient.

d) None of the above.

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2. Which of the following statements is/are not correct with regards to the duties of auditor?
(a) Physical verification of fixed assets is primarily the responsibility of the auditor.

(b) Auditor should ascertain that the assets are in possession of the client company.

(c) The auditor should satisfy himself that the assets have been valued in the financial statements
according to the accounting principles
(d) Ownership of fixed assets should be verified by examining the title deed by the auditor

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