After College Classroom Handout

LIST OF SUBJECTIVE TOPICS

COMPANIES ACT, 2013

INTRODUCTION

The Companies Act 2013-

• an Act of the Parliament of India

• enacted with a view to consolidate and amend the law relating to companies
• Regulates incorporation of a company, responsibilities of a company, directors, dissolution of a company,
etc.
• replaced the erstwhile Companies Act, 1956

• obtained the assent of the President of India on August 29, 2013

• Came into force on September 12, 2013 with only 98 provisions of the Act notified.

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• got its assent in the Lok Sabha on December 18, 2012 and in the Rajya Sabha on August 08, 2013

• A total of another 184 sections came into force from 1 April 2014
• Consists of 29 chapters containing 470 sections and has 7 schedules.
(The erstwhile Companies Act, 1956 had 13 Parts, 658 Sections and 16 Schedules)

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SPECIAL FEATURES OF THE COMPANIES ACT, 2013

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1.

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Special Features of the Companies Act, 2013

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One Person Company [Section 2(62)]

2.

3.
Expert [Section 2(38)]

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Inclusive definition of Financial Statement [Section 2(40)]

4.

5.
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Entrenchment Provisions in Articles of Association (Section 5)

Public Offer and Private Placement

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company (Section 23)
0S0P deals with issue of securities by a public and a private

6. Class Action Suits (Section 37)

7. E-governance in all company processes (Section 120)

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8. Corporate Social Responsibility - 2% of average net profits of the company made during the
three immediately preceding financial year or where the company has not completed the
period of three financial years since its incorporation, during such immediately preceding
financial years (Section 135)

9. Mandatory Internal Audit for4Cprescribed

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10. Mandatory Rotation of auditors for listed companies and other prescribed classes of
companies after 1 term of 5 consecutive years in case of individual auditor and after 2
terms of 5consecutive years for audit firm (Section 139)

11. 5-year tenure for auditor appointed at AGM of company (other than Government Company/
Government controlled Company) instead of annual appointment/ reappointment

12. Limited Liability Partnership eligible to be appointed as Auditor of Company (Section 141)
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 13. Auditor not to render certain services (Section 144)

14. Independent Directors [Section 149] 1/3rd of the total number of directors as independent
directors- listed public companies

15. Inclusion of at least one-woman director on board (Section 149)

16. Every company shall have at least one director who has stayed in India for a total period of
not less than one hundred and eighty-two days during the financial year (Section149 (3))- if
newly incorporated company it shall apply proportionately at the end of the financial year
in which it is incorporated

17. Nomination and Remuneration committee [Section 178(1)]

18. Stakeholders’ relationship committee [Section 178(5)]

19. Key Managerial Personnel [Section 2(51) and Section 203

20.

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Key managerial personnel (KMP) to include Manager or Managing Director (MD) or Chief
Executive Officer (CEO), Whole time director, Chief Financial Officer (CFO) and Company
Secretary (CS).

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21.

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Insider Trading of Securities Prohibited (Section 195) (Omitted by the Companies
(Amendment)Act,2017)

22.

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Statutory Status to the Serious Fraud Investigation Office (SFIO) (Section 211)

23.

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Specific framework for Merger and Acquisitions of companies. Single forum for approval of

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mergers and acquisitions (Section 233)

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Merger or Amalgamation of a Company with Foreign Company (Section 234)

25.

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Protection to minority shareholders, Class Action Suits for prevention of oppression (S141-
146)

26.

27.

28.
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Definition of a company and mismanagement [Section 245]

Registered Valuers (Section0S

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247)
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Interim administrators or Company administrators [Section 259]

29. Mediation and Conciliation Panel (Section 442) 28. Punishment for Fraud (Section 447)
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30. Punishment for Fraud (Section 447)

History
The concept of a company traces its roots to ancient civilizations where trade and commerce necessitated
collective efforts. Early historical records show rudimentary forms of business associations in Ancient Rome
and Greece, such as partnerships and joint-stock 0E ventures. However, the modern corporation began to take
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shape during the late Middle Ages tr-6Aand Renaissance in Europe, notably with chartered companies like the Dutch
East India Company and the British East India Company, granted monopoly rights by their respective
governments for trade expeditions. The Industrial Revolution in the 18th and 19th centuries brought about
significant changes, fostering the emergence of corporations as we recognize them today. Legal reforms and the
enactment of laws like the Companies Act in various countries laid the foundation for the establishment,
regulation, and governance of modern companies, enabling them to grow into pivotal entities driving
economies worldwide.

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 CHARACTERISTICS OF A COMPANY:

S. No. Feature Explanation

An incorporated entity in a company essentially means that the
business has undergone the process of incorporation through legal
registration. This process establishes the company as a separate legal
1. Incorporated entity entity from its owners, providing advantages like limited liability and
allowing the business to conduct its affairs independently from its
shareholders.

It refers to a legal entity created by law that is treated as if it were a

natural person. Corporations, companies, and other entities formed
under the law are considered artificial persons. They possess certain
legal rights, such as the ability to own property, enter contracts, sue,
2. Artificial Person
and be sued, much like natural persons do. This concept allows these
entities to function and operate within the legal framework, granting
them legal standing and the capacity to conduct various activities.

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A separate legal entity refers to the distinct and independent existence
of an organization or business in the eyes of the law. When a company
is recognized as a separate legal entity, it means that legally, it is
considered distinct from its owners, shareholders, directors, and
3. Separate Legal Entity

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employees. This separation implies that the company can own

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property, enter contracts, sue, and be sued in its own name.
Importantly, it also implies limited liability, meaning the owners or

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shareholders typically are not personally liable for the company's debts
or legal obligations beyond their investment in the company.

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Perpetual succession is a characteristic of certain legal entities, like
corporations, where the entity continues to exist regardless of changes

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in its ownership or membership. This means that the organization
4. Perpetual Succession

p rpersists uninterrupted even if its shareholders, directors, or members

change due to death, transfer of shares, or other reasons. The entity

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remains operational and retains its rights and obligations, ensuring
continuity in its operations and existence over time.

5.
T A common seal is an official stamp or embossed device used by a
company or organization to endorse or authenticate its documents. It
typically
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Common Seal
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contains the company's name and may include its logo or
other specific details. The common seal is used to validate important
documents like contracts, deeds, or agreements, signifying that they
have been officially approved by the company's authorized
representatives. While its significance has diminished in some
jurisdictions due to electronic signatures, it still holds legal importance
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in certain transactions, especially
tr-6L2Q1Sin traditional corporate procedures.

Separate management in a business context refers to the distinction

between the ownership of a company and its day-to-day operational
control. In many corporate structures, shareholders or owners appoint
a board of directors or managers to oversee the company's operations,
Separate strategic decisions, and policies. This separation allows for specialized
6. 1K5K4C0K0E expertise and the implementation of decisions that may
management tr-6A2Gmanagement
not directly involve the owners/shareholders. It also ensures a level of
professional management oversight, distinct from the ownership
interests, for the efficient functioning and growth of the company.

Transferable shares refer to the ownership units or portions of a

Transferable shares company that can be bought, sold, or otherwise transferred from one
7.
individual or entity to another. In a company with transferable shares,
shareholders can usually sell or transfer their ownership stake to other

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 parties, subject to any restrictions or regulations outlined in the
company's articles of association, shareholder agreements, or relevant
laws. This transferability provides liquidity to shareholders, allowing
them to enter or exit ownership in the company by selling or
transferring their shares to interested parties.

Separate property" typically refers to assets or holdings that belong

exclusively to the company itself, distinct from the personal assets of
its owners, shareholders, or directors. These assets are owned by the
company as a separate legal entity and are not considered the personal
8.
Separate property property of individuals associated with the company. They can include
tangible assets like real estate, equipment, or inventory, as well as
intangible assets like intellectual property, trademarks, or patents that
are solely owned and used by the company in its operations.

Limited liability of members refers to a legal concept in which the

financial liability of individuals within a company or corporation is
restricted to the extent of their investment or ownership in that entity.

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In a business structure that offers limited liability, such as a
corporation or a limited liability company (LLC), the personal assets of

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Limited Liability of
shareholders or members are generally safeguarded from the
9. members

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company's debts, losses, or legal obligations. This means that if the

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company faces financial distress or legal action, the personal assets of

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the members are typically not at risk beyond the amount they have
invested in the company, offering a protective barrier between personal

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and business liabilities.

Whether Company is considered a citizen?

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In India, a company is not considered a citizen in the same way as an individual person. Under Indian law, a

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company is a separate legal entity distinct from its members or shareholders. It has its own rights and

to citizenship in the traditional sense.

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liabilities, conducts business, and can sue or be sued in its own name. However, this legal status does not equate

To
Citizenship in India is a status granted to individuals under the Citizenship Act, and it confers specific rights and
responsibilities to those individuals, including voting rights, access to certain government benefits, and the duty
to abide by the country's laws. While companies in India have legal recognition and rights, they do not possess
citizenship as individuals do. They function as separate entities under corporate law, subject to regulations and
governance specific to their legal structure and activities.
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 CHAPTER 1:
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO – (SEC. 3-22)

3. Formation of Company
(1) A company may be formed for any lawful purpose by—
(a) Seven or more persons, where the company to be formed is to be a public company;
(b) Two or more persons, where the company to be formed is to be a private company; or
(c) One person, where the company to be formed is to be One Person Company that is to say, a private
company,

* For OPC, the MOA shall indicate the name of the other person, with his prior written consent in the
prescribed form, who shall, in the event of the subscriber’s death or his incapacity to contract become the
member of the company and the written consent of such person shall also be filed with the Registrar at the
time of incorporation of the One Person Company.

TYPES OF COMPANIES

1. Based on Liability

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2. Based on Membership
3. Based on Control
4.
5.
Based on domicile
Special companies

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1. BASED ON LIABILITY
a) Limited by shares: A company where members' liability is limited to the amount unpaid on their shares,
offering protection of personal assets.

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b) Limited by guarantee: A company where members' liability is limited to a predetermined sum, usually
used by nonprofits or charities.

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c) Unlimited liability: A company where members are liable for all debts and obligations, risking personal
assets beyond their investment.

2. BASED ON MEMBERSHIP

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a) Public company:
(i)

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Minimum 7 members are required
(ii) No maximum limit
(iii) Minimum directors required is 3 0S
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(iv) It can offer its securities
and0P 1/3 of them must be independent directors (S 149)
(shares, debentures) to the general public
(v) Name of the company must have suffix either as Public Ltd. or Ltd.
(vi) Regulatory compliance is more than private companies or One person company
(vii) The subsidiary company of any public company irrespective of its nature as a private or public
company shall be deemed to be a public company. 5M4O0S0P
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B) Private Company
(i) Minimum members required is 2 and the maximum can be 200
(ii) Maximum members is 200 (increased from 50)
(iii) Minimum directors is 2
(iv) Name of the Company must have suffix as “Private Ltd.”
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 TYPES OF PRIVATE COMPANIES

1. One Person Company- A company where there is only one member. S 2(62)

2. Small Company-
• It has paid up share capital of not more than 50 lakhs or such higher amount as may be prescribed
which shall not be more than 10 crores.
• It has annual turnover of not more than 2 crores or such higher amount as may be prescribed which
shall not be more than 100 crores. S. 2(85)
• A company shall not be a small company, if
i. It is a public company; or
ii. It is a holding company of any company; or
iii. It is a subsidiary company of any company
iv. It is a company registered under section 8 (i.e., non-profit company); or
v. It is a company or a body corporate governed by any special Act

3. BASED ON CONTROL

✓ Government Company- A company where the majority stake i.e. at least 51% is held by any

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government (central or state or both). It also includes any subsidiary of a government company. S. 2(45)

✓ Holding Company- in relation to one or more other companies, means a company of which such

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companies are subsidiary companies; S 2(46). Generally, a holding company is an entity that controls
the board of another company (known as a subsidiary) either by owning more than half of its shares or
having the power to appoint a majority of its board members. It's a company that exercises significant

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influence or control over the policies and decisions of its subsidiaries.

the holding company), means a company in which the holding company

(i) controls the composition of the Board of Directors; or

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✓ Subsidiary Company- As defined under S. 2(87) in relation to any other company (that is to say

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(ii) exercises or controls more than one-half of the [total voting power] either at its own or together

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with one or more of its subsidiary companies:

✓ Associate company- As defined under S. 2 (6) in relation to another company, means a company in

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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. 12[
Explanation. —
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 5M4O0S0Pmeans a joint arrangement whereby the parties that have
venture"
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joint control of the arrangement have rights to the net assets of the arrangement;]

4. BASED ON DOMICILE –
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✓ Indian Company- Companies registered in India tr-6L2Q1S5M4O
✓ Foreign Company- A company or body corporate registered outside India which
(i) Has a place of business in India whether itself or through an agent, physically or through electronic mode
(ii) Or conducts business in any other manner

5. SPECIAL COMPANIES

✓ Section 8 Companies -tr-6A Section

2G1K5K8 companies
4C0K 0E are entities formed with the principal objective of
promoting charity, arts, education, science, sports, research, social welfare, religion, environment
protection, or other similar objectives, without the intent of earning profits. These companies must apply
their income and profits solely towards the furtherance of their objectives, and any dividends or returns
to members are prohibited. Additionally, the profits generated by these companies cannot be distributed
among its members and are instead utilized for the organization's social or charitable purposes. Such
companies require a "no objection" from the government and typically operate as non-profit
organizations. These companies can be permitted by the Central government to not write any suffix (Ltd,
Pvt. Ltd.) in their names.

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 ✓ Nidhi Companies - Nidhi companies, governed by Section 406 of the Companies Act 2013, are a type of
non-banking financial institution that belongs to the category of mutual benefit societies. These entities
primarily function to cultivate the habit of savings and thrift among their members. Nidhi companies
essentially operate as mutual benefit societies and encourage their members to contribute and receive
funds, primarily in the form of recurring deposits or fixed deposits. Their operations are limited to
borrowing and lending activities within their member base, offering loans to members while upholding
the principle of mutual benefit and cooperative effort. These companies are also known for their
regulated structure, designed to protect the interests of their members.

✓ Dormant Companies- Where a company is formed and registered under this Act for a future project or
to hold an asset or intellectual property and has no significant accounting transaction. or the purposes of
this section,—
(i) “inactive company” means a company which has not been carrying on any business or operation, or
has not made any significant accounting transaction during the last two financial years, or has not
filed financial statements and annual returns during the last two financial years;
(ii) “significant accounting transaction”

✓ Public Financial Institutions

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(i) the Life Insurance Corporation of India, established under section 3 of the Life Insurance
Corporation Act, 1956 (31 of 1956);

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(ii) the Infrastructure Development Finance Company Limited, referred to in clause (vi) of sub-section

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(1) of section 4A of the Companies Act, 1956 (1 of 1956) so repealed under section 465 of this Act;

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(iii) specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act,

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2002 (58 of 2002);
(iv) institutions notified by the Central Government under sub-section (2) of section 4A of the Companies

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Act, 1956 (1 of 1956) so repealed under section 465 of this Act;
(v) such other institution as may be notified by the Central Government in consultation with the Reserve
Bank of India:

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SECTION - 3A MEMBERS SEVERALLY LIABLE IN CERTAIN CASES

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Inserted in Companies Act, 2013 to clarify that:
✓ if number of members falls below specified number, and if business is carried out for more than six
months,

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✓ every member who was cognizant of the fact will be severally liable for payment of whole debts of the
company contracted during that time.

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Note: (LLP Act, 2008 has similar section i.e. S. 6)

SECTION 4- MEMORANDUM tr-6LOF 5M4O0S0P

2Q1SASSOCIATION
The Memorandum of Association (MoA) serves as the company's foundational document, outlining its
constitution and scope of activities. It includes details regarding the company's name, location, objectives,
and the types of activities it can undertake. The MoA is fundamental for company formation, as it defines the
company's legal structure and activities it is authorized to perform.
Important clauses are: tr-6L2Q1S5M4O
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✓ Name clause
✓ Object clause
✓ Registered address
✓ Capital clause
✓ Liability clause
✓ Subscription clause
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(Also refer Schedule 1 of the Act to understand the types of forms of MoA based on the type of
company)

SECTION 5 – ARTICLES OF ASSOCIATION

The Articles of Association (AoA) detail the internal regulations for governing a company's operations and
management. It sets out rules for shareholder rights, director responsibilities, meetings, and other
administrative procedures. Essentially, the AoA works in conjunction with the Memorandum of Association to
establish the company's structure and governance framework.
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 (Also refer Schedule 1 of the Act to understand the types of forms of AoA based on the type of
company)

SECTION – 5 ENTRENCHMENT PROVISIONS

✓ The articles may contain provisions for entrenchment (to protect something) to the effect that specified
provisions of the articles may be altered only if conditions or procedures as that are more restrictive than
those applicable in the case of a special resolution, are met or complied with.

✓ Manner of inclusion of the entrenchment provision: The provisions for entrenchment shall only be made
either:

(a) on formation of a company, or

(b) 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.

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SECTION 6: ACT TO OVERRIDE MEMORANDUM, ARTICLES etc.,-

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The provisions of this Act shall have overriding effect on provisions contained in memorandum or articles or

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in an agreement or in resolution passed by the company in the general meeting or by its board of directors,

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whether they are registered, executed or passed before or after the commencement of this Act.  Any

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provision contained in any of the above-mentioned document, shall be void, to the extent to which it is
inconsistent to the provisions of this Act.

SECTION 7: INCORPORATION OF A COMPANY:

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Documents required to be filed with the Registrar of Company (RoC) at the time of registration of company
1. MoA and AoA
2. Declaration
3. Address of Registered Office
4. Particulars of Subscribers
5. Particulars of first Directors

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(Refer above)
To
6. Particulars of Interest of first Directors

SECTION 8- FORMATION OF COMPANIES WITH CHARITABLE OBJECTS ETC.

SECTION 9 - EFFECT OF REGISTRATION

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From the date of incorporation as mentioned in the certificate of incorporation, the subscribers to the
Memorandum and all other persons, as may from time to time become members of the company, shall
• Become a body corporate
• Perpetual succession
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• power to acquire, hold and dispose of property, both movable and
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• to contract and to sue and be sued by the said name

SECTION 10-A- COMMENCEMENT OF BUSINESS etc.

A company incorporated after the commencement of the Companies (Amendment) Ordinance, 2018 and
having a share capital shall commence any business or exercise any borrowing powers only:
• when a declaration is filed 5K4C0K0E
by2Ga1Kdirector
tr-6A within a period of 180 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
• the company has filed with the Registrar a verification of its registered office as provided in section 12
(2).
• Where no declaration has been filed and the Registrar has reasonable cause to believe that the company
is not carrying on any business or operations, he may initiate action for the removal of the name of the
company from the register of companies. (Chapter 18)

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 SECTION 12- REGISTERED OFFICE OF THE COMPANY

• Company shall, within 30 days of its incorporation, have a registered office communications and notices.
• every company to: paint or affix its name and address of its registered office on the outside of every office
• such display must be in a conspicuous position

Note: The domicile and the nationality of a company is determined by the place of its registered office.
This is also important for determining the jurisdiction of the Court governing it.

SECTION 13: ALTERATION OF MEMORANDUM

• a company may, by special resolution, and after complying with the procedure specified in this section
alter the provisions of its Memorandum.
• Name of the company cannot be changed without the approval of Central govt.

SECTION 14- ALTERATION OF ARTICLES

• Subject to the provisions of the Companies Act and the MoA of the company; a company may, by special

•
•
resolution, alter its Articles.
File SR Copy within 30 days to RoC along with altered AoA.

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Any alteration having the effect of conversion of a public company into a private company shall not be
valid unless it is approved by an order of the Central Government.

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•

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Any application pending before the Tribunal, as on the date of commencement of the Companies
(Amendment) Ordinance, 2018, shall be disposed of by the Tribunal.

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SECTION 15- ALTERATION OF MEMORANDUM & ARTICLES

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To be noted in every copy of the memorandum or articles, as the case may be.
•

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Default: by company and every officer- penalty of one thousand rupees for every copy of the
memorandum or articles issued without such alteration.

SECTION 17- COPIES OF MEMORANDUM, ARTICLES, ETC., TO BE GIVEN TO MEMBERS

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Company on a request being made by aa member; send within 7 days of request and subject to the payment
of such fees as may be prescribed, a copy of:
✓ MoA
✓ AoA

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✓ Every agreement and resolution referred to in section 117(1), if and in so far as they have not been
embodied in the memorandum or articles.
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SECTION 18: CONVERSION OF COMPANIES ALREADY REGISTERED

✓ A company may convert itself in some other class of company by altering its memorandum and articles of
association.
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✓ The Registrar shall on an application made by the company and on being satisfied that the provisions
applicable for registration of companies have been complied with, close the former registration of the
company and after registering the document, issue a certificate of incorporation in the same manner as
its first registration.

SECTION 19- SUBSIDIARY COMPANY NOT TO HOLD SHARES IN ITS HOLDING COMPANY

A subsidiary company cannot:tr-6A2G1K5K4C0K0E

• either by itself or through its nominees hold any shares in its holding company and
• no holding company shall allot or transfer its shares to any subsidiary companies.
(Any such allotment or transfer of shares in a company to its subsidiary is void.)

Exception: The section however does not apply where:

• the subsidiary company holds shares in its holding company as the legal representative of a deceased
member of the holding company, or
• the subsidiary company holds such shares as a trustee, or the subsidiary company was a shareholder in
the holding company even before it became its subsidiary.
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 CHAPTER III - PROSPECTUS & ALLOTMENT OF SECURITIES
(S. 23-42)

Types of capital issues

A. Public issue
❖ Initial Public offering (IPO)
❖ Further Public offer (FPO)

B. Private placement
❖ Preferential issue
❖ Qualified Institutional placement (QIPs)
❖ Institutional Placement Programme (IPPs)

C. Other Issues
❖ Rights Issue
❖ Bonus Issue

SECTION 23- PUBLIC OFFER AND PRIVATE PLACEMENT

bonus issue.
❖ Same for Private company except public offer

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❖ A public company may issue securities by making a public offer, private placement, rights issue and

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SECTION 24: POWERS OF SEBI TO REGULATE ISSUE OF SECURITIES

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SEBI has been empowered to regulate the matters relating to:
❖ issue and transfer of securities and

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❖ non-payment of dividend by listed companies or those companies which intend to get their securities

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❖ forward dealing and insider trading for listed companies or the companies which intend to get their

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securities listed on any recognised stock exchange

regulate matters relating to

❖ prospectus,

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Central Government, the NCLT or the Registrar of Companies as the case may be, will have the power to

❖ return of allotment,

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❖ redemption of preference shares

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❖ any other matter specifically provided in the Act

SECTION 25: DOCUMENT CONTAINING OFFER OF SECURITIES FOR SALE TO BE DEEMED PROSPECTUS
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This section states that when a company allocates or agrees to allocate securities for sale to the public, the
document used for the sale is considered a prospectus. All rules and liabilities regarding prospectuses apply.
It's deemed a public offering if the sale offer is made within six months after allocation or if the full
consideration hasn't been received. Certain modifications are applied to the prospectus requirements,
including additional information on the consideration and details about
tr-6L2Q where
1S5M4O 0S0P the contract for allotment can
be inspected. The document must be signed by two Directors of the company or at least half of the partners in
the case of a firm.

SECTION 26: MATTERS TO BE STATED IN PROSPECTUS

Prospectus:
✓ refers to an informationtr-booklet
6A2G1K5K or4Coffer
0K0E document on the basis of which an investor invests in the
securities of an issuer company.
✓ it contains all the relevant information about the company, promoters, projects, financial details, objects
of raising the money, terms of the issue, etc. and is used for inviting subscription to the issue being made
by the issuer.

Prospectus should include the following details:

✓ Be dated and signed, and include financial information and other details specified by SEBI and Central
Government.
✓ Declaration about compliance with the Act and other relevant rules;
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 ✓ Be signed by every director/proposed director of the company;
✓ Be filed with the Registrar;
✓ Is valid for 90 days from date of delivery to Registrar;
✓ Contravention by company or person party to it- fine of Rs.50,000- Rs.3 Lakh

SECTION 27: VARIATION IN TERMS OF CONTRACT OR OBJECTS IN PROSPECTUS

✓ Any change in the terms or purpose of prospectus to be approved in general meeting by way of special
resolution;
✓ Dissenting shareholders to be given an exit offer by promoters or controlling shareholders
✓ Resolution to be published in the newspapers (one in English and one in vernacular language) in the city
where the registered office of the company

SECTION 29- PUBLIC OFFER OF SECURITIES IN DEMATERIALIZED FORM

✓ Company making an offer is mandated to issue securities in dematerialised form only.

✓ Government inserted a new Rule 9A to the Companies (Prospectus and Allotment of Securities) Rules,
2014 with effect from 2nd October 2018, according to which unlisted public companies are also required

m
to:
✓ issue new securities in dematerialized form only facilitate dematerialization of all its existing securities
(in accordance with provisions of the Depositories Act, 1996)

UNDERSTANDING CONCEPTS

.c o
rs
DEMAT –

e
Meaning
• Process by which the physical share certificates of an investor are taken back by the Company and an

investor.
k
equivalent number of securities are credited in his account in electronic form at the request of the

n
• An investor will have to first open an account with a Depository Participant (DP) and then request for the

a
dematerialization of his share certificates through the DP so that the dematerialized holdings can be
credited into that account.

p r
• This is very similar to opening a Bank Account

Process of Demat

To
i. Investor opens demat account with DP
ii. Submit duly filled Dematerialization Request Form (DRF) with share certificates to DP
iii. DP intimates Depository
iv. Depository intimates Registrar & Transfer Agent (RTA)/Issuer
v. DP sends DRF and share certificates
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2Q1S5M4O0Sto RTA/Issuer
vi. RTA/Issuer confirms demat to Depository
vii. Depository credits investor’s demat account

Depository and Depository Participant (DP)

• A depository is an organization which holds securitiestr-(like 5M4O0S0P
shares,
6L2Q1S debentures, bonds, government
securities, mutual fund units etc.) of investors in electronic form (i.e., dematerialized form) through a
registered Depository Participant (DP).
• A depository should be a company formed under the Companies Act, 2013 and should have been granted
a certificate of registration under the SEBI Act, 1992.
• There can be various entities providing depository services. Presently, there are two depositories
registered with SEBI, namely NSDL and CDSL
4C 0K0E
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ISIN
• ISIN stands for International Securities Identification Number
• It is a code that uniquely identifies a specific security, which is allocated at the time of admitting the same
in the depository system.
• In India it is a 12-digit alpha-numeric number staring with ‘IN’ where ‘IN’ indicates the country code of
India.

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 Difference between Transfer of securities and transmission of securities

Transfer arises due to trading in securities i.e., when securities are bought or sold. Transmission refers to
process by which ownership of securities is transferred to a legal heir or to some other person by operation
of law.

Basic Services Demat Account (BSDA)

A demat account that provides limited services at reduced costs to retail investors. SEBI vide its circular
dated December 11, 2015 advised the DPs to convert all the eligible demat accounts into BSDA unless such
Beneficial Owners specifically opt to continue to avail the facilities of a regular demat account.

SECTION 31: SHELF PROSPECTUS

A prospectus which enables an issuer to make a series of issues within a period of 1 year without the need of
filing a fresh prospectus every time. At the time of subsequent issues, the company can file an information
memorandum with Registrar containing all material facts relating to new charges created, changes in the
financial position of the company

SECTION 32- RED HERRING PROSPECTUS-

• issued before a prospectus

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•

•
that of price or number of shares being offered.
It is filed with RoC at least 3 days before the issue opens

rs .
It is an offer document used in case of a book built public issue. It contains all the relevant details except

e
• Upon the closing of the offer of securities, 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

SECTION 33- ABRIDGED PROSPECTUS

an k
included in the red herring prospectus shall be filed with the Registrar and SEBI.

p r
Section 33 requires that an abridged version of offer document in public offer be issued along with the
application form of a public issue. It contains all the salient features from the prospectus. Abridged
prospectus would not be required if application form is given for underwriting agreement or in relation to

To
securities not offered to public. In case of non-compliance, penalty of Rs.50,000 will be applicable.

SECTION 34- CRIMINAL LIABILITY

• Default event - When prospectus includes

context, tr-6L2Q1S5M4O
0S0P
any statement which is untrue or misleading in form or

• Who is liable - every person who authorizes the issue of Prospectus

• Liability –U/S 447
• Exceptions – if a person proves that such statement or omission was immaterial or that he had
reasonable grounds to believe that it was true 0S0P
tr-6L2Q1S5M4O
SECTION 35- CIVIL LIABILITY

• Default event – when a person suffers loss/damage by subscribing to the securities acting on any
statement included/omitted from prospectus
• Who is liable – Company and every person who is Promoter, Director, proposed director as mentioned in
prospectus, authorized the issue of Prospectus, an expert mentioned in the Act
5K4C0K0E
• Liability – pay compensation to1K
tr-6A2G every person who has sustained such loss or damage
• Exceptions – if a person proves that prospectus was issued without his consent or he gave reasonable
public notice upon becoming aware of the issue or he withdrew his consent before issue of prospectus.

SECTION 36- PUNISHMENT FOR FRAUDULENTLY INDUCING PERSONS TO INVEST MONEY

• Default event - Any person who, either knowingly or recklessly makes any statement, promise or
forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce
another person to invest in securities or any agreement to obtain credit from a bank/NBFC.
• Liability - U/S 447
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 SECTION 38- PUNISHMENT FOR PERSONATION (MAKING AN APPLICATION IN A FICTITIOUS NAME)
• Default event - Any person who makes or abets making of an application in a fictitious name or makes
multiple applications in different combinations of his name, to a company for acquiring, or subscribing
for, its securities;
• Liability - U/S 447 If a person has acquired securities in fictitious name and made any gain, the court
may order disgorgement of gain and such gain will be credited to the Investor Education and Protection
Fund
(NOTE: -Section 447: Punishment for Fraud)
• fraud involving an amount of at least 10 lakh rupees or 1% of the turnover of the company, whichever is
lower:
✓ be punishable with imprisonment for a term not less than 6 months extendable to 10 years;
✓ and also be liable to fine of not less than the amount involved in the fraud, but which may extend to 3
times the amount involved in the fraud.
✓ but if the fraud in question involves public interest, the term of imprisonment be not less than 3 years.
• fraud involving an amount less than 10 lakh rupees or 1% of the turnover of the company, whichever is
lower, and does not involve public interest:
✓ be punishable with imprisonment for a term which may extend to 5 years or with fine which may extend

•
to 50 lakh rupees or with both.

o m
Section 37 allows any person, group of persons or any association of persons affected by any misleading

c
statement or the inclusion or omission of any matter in the prospectus, to file a suit or take any other
action section 34 or section 35 or section 36
SECTION 39- ALLOTMENT OF SECURITIES

rs .
This section ensures that a company offering securities to the public can only allot them once the minimum

e
subscription amount stated in the prospectus has been met. If this minimum isn't achieved within a specified
time, the company must refund the received payments. Failure to do so and non-filing of the return of
allotment with the Registrar attract penalties.

k
n
SECTION 40- SECURITIES TO BE DEALT WITH IN STOCK EXCHANGES

a
✓ Application to stock exchange required before public offer.

r
✓ Prospectus must specify stock exchange names.

p
✓ Funds from public subscription in a separate bank account.
✓ Void conditions demanding waiver of compliance.

o
✓ Default leads to company and officer fines.
✓ Commission payment allowed under prescribed conditions.

T
SECTION 41. - GLOBAL DEPOSITORY RECEIPT
A company may, after passing a special resolution in its general meeting, issue depository receipts in any
foreign country in such manner, and subject
0P
to such conditions, as may be prescribed.
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0S
MEANING OF GDR- Global Depository Receipts (GDRs) are financial instruments representing ownership of a
quantity of a company's shares, issued outside the company's home country. These receipts are issued by
international depository banks, facilitating companies to raise funds globally. GDRs are traded on
international stock exchanges, denominated in foreign currencies, making it simpler for investors to hold
stakes in foreign companies without dealing directly in the company's home0Smarket.
0P
tr-6L2Q1S5M4O
EXAMPLE- Apple Inc. might issue GDRs on the London Stock Exchange, denominated in British pounds.
These GDRs would represent Apple's shares held by a depository bank in London. Investors buying these
GDRs would essentially own Apple shares, but in a form traded in the London market, allowing foreign
investors to invest in Apple without directly trading on the U.S. stock exchange where Apple's primary shares
are listed.
SECTION 42- Offer or Invitation for Subscription of Securities on Private Placement.
Private placement means: tr-6A2G1K5K4C0K0E
✓ 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 following conditions:
- select group of persons should have been identified by the Board and not to exceed 50 or such higher
number as may be prescribed (upper limit of 200 persons in aggregate in a financial year has been
prescribed) in a financial year, excluding QIBs and employees
Note: The limit of 200 in aggregate shall be reckoned individually for each kind of security viz. equity share,
preference share and debentures etc.
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 CHAPTER 4: SHARE CAPITAL AND DEBENTURES

INTRODUCTION
• Shares and Debentures are financial instruments for raising funds for a company. Jointly these two are
referred to as securities.
• Share represents ownership interest in the company with entrepreneurial risks and returns while
debenture represents lender’s interest in the company with limited risks and returns.
• Both will appear on the liabilities side of the company (shares as equity capital under shareholders’
funds and debentures as borrowings). For the investor, both will be assets.
• Section 2(84) 'Share' means a share in the share capital of a company and includes stock
• Section 2(30) ‘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.
• Section 44: The shares or debenture or other interest of any member in a company is movable property
transferable in the manner provided by the Articles of the company.

SECTION 43- KINDS OF SHARE CAPITAL

1. Equity Share Capital

(a) With voting rights-

o m
• Every equity share holder has voting right in proportion to his share in the paid-up equity share capital of
the company

c
• Has a right to vote on every resolution placed before the company.

(b) With differential voting rights (DVR)

rs .
k e
• The voting power in respect of DVR shares shall not exceed 74% of total voting power including voting
power in respect of equity shares with differential rights issued at any point of time

2.
-
-
Preference Share Capital
Caries preferential right

r an
With respect to payment of dividend and repayment of capital at the time of winding up

o p
{Note: A company can raise capital from following sources:
• From Promoters – initial capital is contributed by promoters/directors and their relatives
• From other investors/public – by public offer (through prospectus or offer of sale) or private placement

Tata Motors Ltd

T
• From existing shareholders – through rights issue}

Dive Deeper: Case Study

tr-6L2Q1S5M4O
0S0P

• Tata Motors Ltd has two types of equity shares listed on the stock exchanges in India: 1. Tata Motors Ltd
(NSE Code – TATAMOTORS) 2. Tata Motors DVR (NSE Code – TATAMTRDVR)
0S0P
tr-6L2Q1S5M4O
• If you check the share price of the two on NSE or any stock exchange, Tata Motors share price will always
be more than that of Tata Motors DVR. When both the shares belong to same company then why the price
difference?? The answer is one is an equity share with voting rights and the other is an equity share with
DVR. Tata Motors in 2008 had introduced equity shares with differential voting rights called ‘A’ equity
shares in its rights issue. In the issue, every 10 ‘A’ equity shares carried only one voting right (i.e. 1/10th
voting right) but would get 5% more dividend than that declared on each of the ordinary shares. Since ‘A’
equity share did not carry the similar 0Kvoting
0E rights, it was being traded at discount to other common
6A2G1K5K4C
shares having full voting. tr-
Other companies which have issued equity shares with differential voting rights
(popularly called DVRs) are Future Enterprises, Jain Irrigation, Gujarat NRE Coke among others.

(In a box)

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 DIVE DEEPER
Authorized Capital

• also known as Nominal or registered capital

• Section 2(8) of the Companies Act, 2013. - “Authorized capital” or “Nominal capital” means such capital
as is authorized by the memorandum of a company to be the maximum amount of share capital of the
company.
• If a company needs to raise more capital in future which can go beyond the authorized capital, then it will
have to first increase the authorized share capital by altering its memorandum of association (in general
meeting). At no point, the issued capital can be more than the authorized capital.

Issued capital

• Section 2(50) of the Companies Act, 2013 defines “issued capital” which means such capital as the
company issues from time to time for subscription
• It is that part of authorized capital which is offered by the company for subscription and includes the
shares allotted for consideration other than cash.

Subscribed capital

o m
Section 2(86) of the Companies Act, 2013 defines “subscribed capital” as such part of the capital which is

c
for the time being subscribed or taken up by the public/investors Called-up capital
•

rs .
Section 2(15) of the Companies Act, 2013 defines “called-up capital” as such part of the capital, which has
been called for payment on the shares issued. For example, for a share with face value of Rs.10, the
company may call for payment of Rs.7 now and Rs.3 at a later time. As such, Rs.7 will be the called-up

•
capital while Rs.3 represents the un-called capital.

k e
Note – if a shareholder chooses to pay the un-called part of the capital, the company can accept that, if
allowed by the articles of association; however, the voting right with respect to the un-called capital will
not accrue to such paying shareholder

Called-up capital

r an
•

o p
Section 2(15) of the Companies Act, 2013 defines “called-up capital” as such part of the capital, which has
been called for payment on the shares issued. For example, for a share with face value of Rs.10, the
company may call for payment of Rs.7 now and Rs.3 at a later time. As such, Rs.7 will be the called-up

T
capital while Rs.3 represents the un-called capital.
Note – if a shareholder chooses to pay the un-called part of the capital, the company can accept that, if
allowed by the articles of association; however, the voting right with respect to the un-called capital will
not accrue to such paying shareholder.

Paid- up capital
1S5M4O0S0P
tr-6L2Q

• Section 2 (64) - paid-up share capital” or “share capital paid-up” means such aggregate amount of
money received as paid-up in respect of shares issued. • It is equal0Sto
0P called up capital less calls in
tr-6L2Q1S5M4O
arrears.

Reserve Capital
• It is that part of the un-called capital which the company will never call for until winding up of the
company. It is NOT mandatory. It cannot be used to write-off any capital losses either.
• Note reserve capital is different from ‘Capital Reserve’. Capital reserve is a reserve created out of profits
of the company and is part of the5K Reserves
0K0E & Surplus of the company. It is disclosed and can be used to
6A2G1K 4C
write-off capital losses ortr-issue of bonus shares.

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 ISSUANCE OF SHARES AT PREMIUM OR DISCOUNT
(Ss. 52, 53 AND 54)

SECTION 52- APPLICATION OF PREMIUMS RECEIVED ON ISSUE OF SHARES.

• Security Premium means the amount over and above the face or par value of the security. For example, if
a share of face value Rs.10 is issued at Rs.100 per share, then the Securities Premium is Rs.90 per share.

• As per Section 52, when a company issues 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”

• Securities Premium can be used for:

(a) issue of fully paid bonus shares o to write off preliminary expenses
(b) write-off commission paid/discount on issue of shares or debentures
(c) for premium payable on redemption o for buy-back of own shares or securities

SECTION 53- PROHIBITION ON ISSUE OF SHARES AT DISCOUNT

o m
Issuance of shares at discount is prohibited except if the debt owed to any creditor is converted into
shares in pursuance of a debt restructuring plan (RBI guidelines) or a statutory resolution plan (IBC).

c
•

rs .
In case of failure to comply with this section, penalty would be levied which may extend to an amount
equal to the amount raised through the issue of shares at a discount or five lakh rupees, whichever is less,
and the company shall also be liable to refund all monies received with interest at the rate of twelve per
cent. Per annum.

SECTION 54- ISSUE OF SWEAT EQUITY SHARES

k e
Meaning

an
• Shares issued to the directors or employees of the company

r
• At a discount or for consideration other than cash
• For providing their know how or intellectual property rights or value additions

Special resolution

o p
• S.R is valid for 12 months and it needs to specify the following contents:
- Number of shares

T
- Current market price
- Consideration
- Class of directors/ employees

Limit on Sweat Equity

to whom sweat shares are issued
1S5M4O0S0P
tr-6L2Q

• Only 15% of the existing paid up share capital or share value of Rs. 5 crores whichever is higher can be
issued as Sweat shares in a year
• Maximum 25% of the total paid up equity capital of the company 0S0P
tr-6L2Q1S5M4O
• In case of start-up, maximum 50% of the paid-up capital (up to 10 years of incorporation).

Other Conditions
• Lock-in period is for 3 years
• Issue price has to be determined by a registered valuer.
• If the shares are listed on a recognised stock exchange, then approval of SEBI is also mandatory.
4C 0K0E
tr-6A2G1K5K
SECTION 55- ISSUE AND REDEMPTION OF PREFERENCE SHARES
• Be authorized by special resolution
• Mention in the resolution,
- the nature of such shares (cumulative or non–cumulative, participating or non–participating, convertible
or non-convertible)
- voting rights,
- redemption

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 • A company limited by shares:
- Cannot issue irredeemable preference shares
- can issue preference shares redeemable within a period up to 20 years (if authorized by articles)
- can issue preference shares for more than 20 years and up to 30 years for infrastructure projects
(provided redemption of a minimum 10% of such preference shares per year from the 21st year onwards
or earlier).

REDEMPTION
• Redemption out of:
- profits of the company which would otherwise be available for dividend or
- proceeds of a fresh issue of shares made for the purposes of such redemption
• can be redeemed only if fully paid Create Capital Redemption Reserve equal to face value of preference
shares out of profits
• If company unable to redeem or pay dividend, then issue new redeemable share of that value, after
approval from: -
- at least 3/4th shareholders of such shares
- NCLT

SECTION 61 POWER OF LIMITED COMPANY TO ALTER ITS SHARE CAPITAL

o m
Limited Company having share capital, if authorized by its articles, alter its memorandum in general
meeting by an ordinary resolution to:

c
-
-
Increase authorized share capital

shareholders’ approval of Tribunal required

rs .
Consolidate shares in larger amount than the existing shares, If changes in the voting percentage of

•
•
•
Sub-division of shares into shares of smaller amount
Conversion fully paid-up shares into stock and vice versa
Cancel shares not taken up by any person

k e
an
Note: Cancellation shall not be deemed to be reduction of share capital

SECTION 62- FURTHER ISSUE OF CAPITAL

r
•

o p
It is also known as Rights Issue and it is

-
-
-
-
-
An invitation

T
To existing shareholders
To purchase additional new shares in the company
At a discount to the market price4O0S0P
On a stated future datetr-6L2Q
1S5M

• Offered to existing shareholders as per record date

• Issue open period = 7 days to 30 days from date of offer
• Notice of offer to be sent at least 3 days before opening of issue 1S5M4O0S0P
tr-6L2Q
• Offer to include right to renounce in favour of another person
• If the existing shareholder declines the offer, then Board may dispose off in a manner beneficial to the
company

Note: Right to renounce in favour of another person means that the existing shareholders may not always
choose to buy the rights shares and have the right to ignore or sell the ‘right to apply’ to someone else. They
may choose any of the following: 4C0K0E
tr-6A2G1K5K
• These are the shares which are offered to the existing members and the right of the members to get these
shares is called as Right of Pre-emption.
• In a rights issue, a cut-off date is fixed known as “Record Date

SECTION 63: BONUS SHARES

1) A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of—
(i) its free reserves;
(ii) the securities premium account; or

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 (iii) the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation
of assets.

DIVE DEEPER

Free Reserves – The profits and the retained profits

Securities Premium Account – the amount accumulated by selling the shares at a premium
Capital Redemption Reserve Account – the amount of funds to be kept in a separate reserve to maintain
the capital base.

Conditions for Bonus Issue:

• Authorization by Articles of Association
• On recommendation of the board and subject to the approval of shareholders by an ordinary resolution
in a general meeting of the company
• Company has not defaulted in payment of
- interest or principle of any of its fixed obligations.
- statutory dues to its employees like salary, gratuity, etc.

• The bonus shares shall not be issued in lieu of dividends

c o m
• Partly paid-up shares on the date of allotment must be first converted into fully paid-up shares
• Compliance with other conditions as may be prescribed

• Once a company announces the decision of the board recommending bonus issue, the same cannot be
withdrawn subsequently

SECTION 66: REDUCTION OF SHARE CAPITAL

rs .
k e
It is regarded as one of the process of decreasing company’s share capital (apart from Redemption of
preference shares and Buy Back of shares which are governed by other provisions separately).
• Reduction of Share Capital means reduction of:
✓ issued,
✓ subscribed, and
✓ paid-up share capital of the company.

r an
p
Note: Reduction is different from Diminution of shares which is regarded as cancellation of unsubscribed
share capital.

Note:
To
SECTION 68- BUY-BACK OF SHARES
Buyback is also termed as a share re-purchase wherein a company purchases its own outstanding shares to
bring down the number of shares which are available in the open market

• No buy back shall be made 1S out of 0S

tr-6L2Q 5M4O
the0P proceeds of an earlier issue of the same kind of shares or other
specified securities i.e., Buy back of equity shares is not allowed out of fresh issue of equity shares.
However, buy back is allowed out of an earlier issue of securities other than the equity shares such as
preference shares, debentures, etc. for the purpose of redemption.

• Section 69: when a company purchases its own shares out of free reserves or securities premium
0S0P
account, the company is required to: tr-6L2Q1S5M4O
- Transfer a sum equal to the nominal value of the shares purchased to Capital Redemption Reserve
Account (CRR),
- Disclose details of such transfer in the balance sheet. The CRR account can be used to issue fully paid
bonus shares by the company
Reserves which are not available as sources of Buy Back:
• Revaluation Reserve tr-6A2G1K5K
4C0K0E
• CRR
• Debenture Redemption Reserve
• Share Forfeiture Account
• Capital Reserves
Note:
• Company cannot withdraw buy-back offer, once made.
• Company cannot use borrowed funds from bank to make buyback.
• Conditions for Buy-Back:
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 - Authorization by Articles of Association;
- Special Resolution passed by general meeting authorizing the company to purchase its own shares.
However, a buy back up-to 10% of the total paid up capital and free reserves of the company can be made
simply by the Board of Directors Resolution and there is no need for the special resolution to be passed by the
general meeting.
(a) Buy back can be masde upto 25% of the total paid up capital and free reserves by value and 25% of
equity by volume.
(b) The ratio of the aggregate secured and unsecured debts owed by the company after the buyback should
not be more.

Other conditions:

• All shares for buy back should be fully paid up

• The buy-back of the shares or other specified securities listed on any recognized stock exchange must be
in accordance with the regulations made by SEBI.
• Every buy back must be completed within a period of 12 months (1 year) from the date of passing of
special resolution or the Board of Directors resolution, as the case may be.
• No new buy back can be made within one year of closing of previous buy-back offer.
•

•
•
Buy Back offer shall remain open for not less than 15 days and not more than 30 days.

c m
A company shall extinguish and physically destroy the securities so bought back within 7 days of
completion of buy back.

o
A listed company that makes a buy back has to file the details of buyback with the Registrar and SEBI

•
within 30 days of completion of buyback

rs .
No further issue of same kind of securities – when a company completes the buy-back of its shares or
other specified securities, it shall not be permitted to make a further issue of the same kind of shares
within a period of 6 months,

EXCEPT:

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▪
▪
▪
By way of bonus shares, or

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Conversion of share warrants, stock options or sweat equity shares
Conversion of preference shares or debentures into equity shares

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SECTION 70 PROHIBITION OF BUY-BACK
p
•
•
•
• T
There is prohibition on company from buying back its own shares or other specified securities:
Through any subsidiary company including its own subsidiary companies, or
Through any investment company or group of investment companies, or
If a default is made in repayment
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0Sof
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preference shares or payment of dividend or repayment of any term loan or interest thereon to any
financial institution or bank (however, if the default has been corrected and 3 years have lapsed after
such default ceased to subsist, then buy-back is allowed)
• The company cannot purchase its own shares in the following cases as well:
- If not filing of annual returns, preparation of annual accounts, or whose
0S0P accounts do not reflect a true
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and fair view
- Non-payment of dividends within 30 days of declaration
- Failure to distribute dividend
- Non- preparation of Balance Sheet and Statement of Profit and Loss as per Schedule 3 of Companies
Act, 2013

4C 0K0E
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 CHAPTER 5: ACCEPTANCE OF DEPOSITS BY COMPANIES
(Ss. 73-76A)

Meaning of Deposits
• Deposits from the public are an important mode of finance in the corporate sector. It is accordingly
necessary to control the companies’ inviting deposits from the public in order to safeguard the general
and wider interest of the public at large.
• According to the definition given under section 2(31) of the Companies Act, 2013, the term deposit
‘includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not
include such categories of amount as may be prescribed in consultation with the RBI.
As per 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
(a) Share application money
(b) Amount received from a director
(c) Supplier advances
(d) Borrowing from central or state government
(e) Loan received from any banking company
(f) Loan received from UTI, IDBI, LIC, or ICICI or any other financial institutions.

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(g) Any amount of security deposit received from an employee of the company. Amount received as security

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or as an advance from any purchasing agent, selling Agent during the course of business of the company.

accordance with the guideline or notifications issued by the RBI.

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(h) Any amount received against the issue of commercial paper or any other instruments issued in

(i) Where the company has issued any secured debentures, amount borrowed is not termed as deposits to

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the extent of security.

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SECTION 73 PROHIBITION ON ACCEPTANCE OF DEPOSITS FROM PUBLIC
No company shall invite, accept or renew deposits under this Act from the public except as provided under
this chapter.
Exceptions:

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• Banking company and Non-Banking Financial Company as defined in the Reserve Bank of India Act,

Bank of India, specify in this behalf.

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1934; and o Such other company as the Central Government may, after consultation with the Reserve

• Company may subject to rules made in consultation with the Reserve Bank of India, accept deposits from

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its members subject to the fulfillment of the following conditions:
- Deposit accepted by a company from its member shall be repaid with interest in accordance with the
terms and conditions of the agreement thereon.
- If company fails to repay the deposit or part thereof or any interest thereon, the depositor concerned
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may apply to the Tribunal for
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damage incurred by him.
• Private Companies can accept deposits from its members up to 100% of its paidup share capital, free
reserves and securities premium account without having to comply with the procedural requirements
prescribed under Section 73.
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SECTION 76- ACCEPTANCE OF DEPOSITS FROM PUBLIC BY CERTAIN COMPANIES
Only eligible companies can accept deposits from public.
• Public company having Net Worth 100 cr. or more
• Turnover 500 cr. or more
Eligible company is also required to obtain:
✓ the prior consent of the company in general meeting by special resolution;
1K5K4C0K0E
✓ file the said resolution with the
tr-6A2G Registrar before making any invitation to the Public for acceptance of
deposits;
✓ Prior credit rating and annual renewal from a recognized credit rating agency for informing the public
the rating given to the company at the time of invitation of deposits from the public.

SECTION 75- DAMAGES FOR FRAUD

In case a company fails to repay deposits intentionally or for fraudulent purposes, responsible officers are
personally liable for losses. Affected parties can take legal action for the losses incurred due to the company's
failure to repay deposits.

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 CHAPTER 7: MANAGEMENT AND ADMINISTRATION
SECTION 92 ANNUAL RETURN

• Annual Return be prepared by companies in the prescribed form containing the particulars as they stood
on the close of the financial year relating to:
✓ subsidiary company and associate companies;
✓ its shares, debenture and other securities and shareholding pattern;
✓ its members and debenture-holders along with changes therein since the close of the previous financial
year;
✓ its promoters, directors, key managerial personnel along with changes therein since the close of the
previous financial year;
✓ meetings of members or a class thereof, Board and its various committees along with attendance details;
✓ Remuneration of directors and key managerial personnel;
✓ penalty or punishment imposed on the company, its directors or officer and details of compounding of
offences and appeals made against such penalty or punishment;
✓ matters relating to certification of compliances, disclosures as may be prescribed;
✓ details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional

•
Investors; and
such other matters as may be prescribed.

One copy must be uploaded on the company’s website

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•

•
in practise.

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It must be signed by a director and a company secretary and in case there is no company secretary, a CS

In case of One person company, it must be signed by a CS and in case there is no CS, a director may sign
•
•
In case of listed companies it must be signed by CS

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The filing of Annual return with the Registrar must be done within 60 days from the date of AGM or the
date on which AGM was supposed to be held.
•
•
n
Failure to hold an AGM is not a defense for non- filing of Annual return.

a
In case of non- compliance with this section, a penalty of Rs. 10,000/- and for continuing failure, a

r
penalty of Rs. 100 for each day subject to a maximum to Rs. 2 Lakhs for a company and Rs. 50,000/- for
an officer.

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SECTION 96- ANNUAL GENERAL MEETINGS
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Every company other than a One Person Company shall in each year hold in addition to any other meetings, a
general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it,
and not more than fifteen months shall elapse between the date of one annual general meeting of a
company and that of the next: Provided
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that in case of the first annual general meeting, it shall be held
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within a period of nine months from the date of closing of the first financial year of the company and in any
other case, within a period of six months, from the date of closing of the financial year :
Provided further that if a company holds its first annual general meeting as aforesaid, it shall not be
necessary for the company to hold any annual general meeting in the year of its incorporation:
Provided also that the Registrar may, for any special reason, extend 1Sthe time within which any annual general
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meeting, other than the first annual general meeting, shall be held, by a period not exceeding three months.

SECTION 100- EXTRAORDINARY GENERAL MEETING

• EGM can be called by:

• Board of Directors
• By requisition of eligible members5Kto4CBoard
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• By requisitionist, provided if Board fails to do
• Board shall call EGM on requisition made by:
- In case of company having share capital- shareholders holding at least 1/10th of the paid-up capital
- In case of company not having share capital- such number of members having at least 1/10th of the
total voting powers of members.
NOTE:
- BoD to call the Meeting within 21 days from date of requisition & cnduct meeting within 45 days from
requisition.

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 - If Meeting not called within 21 days or not held within 45 days
- Requsitionist can conduct the meeting themselves within 3 months from the date of requisition if BoD fail
to conduct the same.

SECTION 101- NOTICE OF MEETING

• 21 clear days
• 14 days in case of Section 8 Companies In Writing or Electronic mode
• Notice must specify the place, date, day and the hour of the meeting and A statement of the business to be
transacted at such meeting.
• Notice to be sent to
- Every member of the company,
- Legal representative of any deceased member
- Assignee of an insolvent member;
- Auditor of the company; and
- Every director of the company

SECTION 103 QUORUM FOR THE MEETING

✓ In case of a Public Company the quorum for the meeting shall be:
No. of Members Quorum
• Not more then 1000 - 5 members personally present

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• More than 1000 & up to 5000 - 15 members personally present
• More than 5000 - 30 members personally present

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-
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✓ In case of a Private Company 2 members personally present, shall be the quorum for the meeting.

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If the quorum is not present within half-an-hour from the time appointed, Meeting will be adjourned
(at least 3 days’ notice to be given for adjourned meeting);

✓
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- Cancelled – if called by requisitionists under section 100

a
Adjourned meeting – no quorum thus, the members present shall be the quorum.

SECTION 104 CHAIRMAN OF THE MEETING-

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Members personally present at the meeting shall elect one of themselves to be the Chairman thereof on a
show of hands.

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SECTION 106 RESTRICTION ON THE VOTING RIGHTS

Voting right of a member can6Lbe restricted

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0S0Pif:
- any calls or other sums payable are outstanding and not paid by such member;
- company has exercised any right of lien on his shares.

SECTION 105 PROXIES

• A member of a company entitled to attend and vote at a meeting of the
0S0Pcompany is entitled to appoint
tr-6L2Q1S5M4O
another person as a proxy to attend and vote at the meeting on his behalf;
• Proxy shall not have the right to speak at such meeting and shall not be entitled to vote except on a poll;
• Person appointed as proxy shall act on behalf of:
- such member or number of members not exceeding 50 and
- holding in aggregate not more than 10% of the total share capital of company carrying voting rights
• Proxy received 48 hours before meeting will be valid even if the articles provide for a longer period;
• Instrument appointing a proxy, shall4C
be0Kin
0Ewriting and signed by the appointer
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• For any meeting of the company invitations to appoint as proxy a person or one of a number of persons
specified in the invitations are issued at the company’s expense to any member entitled to have a notice
of the meeting sent to him and to vote thereat by proxy, every officer of the company who issues the
invitation or authorizes or permits their issue, shall be liable to a penalty of 50,000 rupees
• Member entitled to vote at a meeting of the company, or on any resolution to be moved thereat, shall be
entitled during the period beginning 24 hours before the time fixed for the commencement of the
meeting and ending with the conclusion of the meeting, to inspect the proxies lodged, at any time during
the business hours of the company, provided not less than 3 days’ notice in writing of the intention so to
inspect is given to the company.
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 SECTION 116 RESOLUTIONS PASSED AT ADJOURNED MEETING

• Where a resolution is passed at an adjourned meeting, it shall be treated as having been passed on the
date on which it was in fact passed, and shall not be deemed to have been passed on any earlier date.

SECTION 118 - MINUTES OF THE MEETING

• Minutes of proceedings of meeting to be kept within 30 days of the conclusion of every such meeting
concerned or passing of resolution by postal ballot in books.
• The Chairman of the meeting shall exercise absolute discretion in regard to the inclusion or non-
inclusion of any matter in the minutes.
• If any default is made in complying with the provisions of this section:
a. Company- Rs. 25,000/-
b. Officer- Rs. 5000/-
If a person is found guilty of tampering with the minutes of the proceedings of meeting, he shall be
punishable with:
a. imprisonment for a term which may extend to 2 years and
b. fine – Rs.25,000 to Rs.1 lakh.

SECTION 119 INSPECTION OF MINUTES BOOKS

• Minutes books to be kept at registered office.
• Be open for inspection.
• Any member can get a copy within 7 days of request by paying the required fee

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default.

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• Non-compliance can lead to penalty of:  Rs.25,000 for company and  Rs.5000 for every officer in

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 CHAPTER 8 - DECLARATION AND PAYMENT OF DIVIDEND
(Ss. 123-127)

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class
of its shareholders. A share of the after-tax profit of a company, distributed to its shareholders according to
the number and class of shares held by them is called dividend. The amount and timing of the dividend is
decided by the board of directors, who also determine whether it is paid out of current earnings or the past
earnings kept as reserve

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Final Dividend- Dividend is said to be a final dividend if it is declared at the annual general meeting of the

e
company. Final dividend once declared becomes a debt enforceable against the company.

between two annual general meetings of the company.

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Interim Dividend- Dividend is said to be an interim dividend, if it is declared by the Board of Directors

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Note:- Ss.-3(35) defines interim dividend so as to mean the Dividend declared by the Board of
Directors.

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 c o m
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According to Section 123(1) read with rule 3 of Companies (Declaration and Payment of Dividend) Rules,
2014, in case of inadequacy or absence of profits in any financial year, the Company can declare the
dividend out of Free reserves keeping in mind the following conditions:

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✓ The rate of dividend declared shall not exceed the average of the rates at which dividend was
declared by it in the preceding three years.
✓ The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of

T
its paid-up share capital and free reserves
✓ To declare dividend for Equity shareholders, the company has to first set off the losses incurred in
that financial year using free reserves.
✓ The balance of reserves after 0S
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such
0P withdrawal shall not fall below fifteen per cent of its paid- up
share capital as appearing in the latest audited financial statement.

• No Company shall declare dividend unless carried over previous losses and depreciation not provided in
previous year or years are set off against profit of the Company for the current year.
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• Manner of providing depreciation: According to Section 123(2) for the purpose of declaration of divided
by a company as per Section 123(1)(a), it shall provide depreciation in accordance with Schedule II.

Schedule I Memorandum and Articles (Section 4 and 5 )

Schedule II Depreciation (Section 123)
Schedule III Balance sheet and statement of profit & Loss (Section 129 )
Schedule IV Code of Independent
tr-6A2G1K5KDirectors (Section 149(8))
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Schedule V Appointment of managing director, whole-time director or manager (Section 196 and 197)
Schedule VI Infrastructure projects (Section 55 and 186)
Schedule VII Corporate Social Responsibility (Section 135)

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 UNPAID DIVIDEND ACCOUNT (SECTION 124)

SECTION 125- INVESTOR EDUCATION AND PROTECTION FUND (SECTION 125)

AMOUNT CREDITED TO THE FUND UTILIZATION OF FUND

• Grants by central Govt. • The refund in respect of unclaimed

•
•
Contribution by SEBI
Donations by Central Govt. state Govt.
Companies etc.

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dividends, matured deposits, matured
debentures, the application money due for
refund and interest thereon

c
.
• Amount transferred form unpaid Dividend • Promotion of investors education,

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Account of companies. awareness and protection, educational
• Matured deposits/ matured debentures, activities like seminars, training for
application money for allotment of securities investors

•
and interest thereon
Unclaimed (for> 7 years) redemption money
on preference shares

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• Distribution of any disgorged amount
among shareholders, debenture-holders or
depositors who have suffered losses due to
•

•
made from the fund

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Interest or other income from investments

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Net proceeds from sales of unclaimed
•
wrong actions by any person.
Reimbursement of legal expenses incurred
in pursuing class action suits by members,
debenture-holders or depositors as may be

p
securities
• Security deposits, amounts in investor sanctioned by the tribunal

To
protection Fund (IPF) investor Services Fund
of de-recognised stock exchanges
SECTION 127 - PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDEND
• If a company fails to pay the dividend, within a period of 30 days from the date of its declaration, to the
shareholders who are entitled to the
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0Sdividend
0P then:
• Default- Company: Interest @ 18% p.a. for the period of default.
• Every director of company: imprisonment may extend to 2 years and Rs.1000/- for every day, during
which such failure continues.
Exceptions for not paying dividend:
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✓ Where the dividend could not be paid by reason of the 2Q1S5M4O0S
operation
tr-6L of any law;  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;
✓ Where the dividend has been lawfully adjusted by the company against any sum due to it from the
shareholder; or
✓ Where, for any other reason, the failure to pay the dividend or to post the warrant within the period
under this section was not2Gdue
1K5Kto 0K0Edefault on the part of the company.
4Cany
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Can a shareholder waive his right to receive dividend?
Receipt of dividend is a right of shareholder and not an obligation. There is no provision under the Act to deal
with the waiver of dividend. Hence, such provisions may be contained in the articles of the company. Further,
such waiver can either be full or partial.

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 CHAPTER 9 – ACCOUNTS OF COMPANIES

❖ Section 128 Books of Account Etc., To Be Kept By Company

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❖ Section 129 Financial Statements:

• Section 2 (40) definition of financial statement:

✓ a balance sheet as at the end 4O
✓ a profit and loss tr- 6L2Q1S5M
account,
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the
0P financial year;
or in the case of a company carrying on any activity not for profit, an
income and expenditure account for the financial year;
✓ cash flow statement for the financial year;
✓ a statement of changes in equity, if applicable; and
✓ any explanatory note annexed to, or forming part of, any document referred above.
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Note: Financial statement, with respect to one person company, small company, dormant company and
private company (if such private company is a start-up) may not include the cash flow statement.
Section 129 provides that the financial statements shall

✓ give a true and fair view of the state of affairs of the company as provided under Schedule III
✓ comply with accounting standards notified under section 133 of the Act.
✓ Specific form of financial
tr-6A2G 1K5K4C0K0E
statements for Insurance companies, banking company, companies engaged
in generation/ supply of electricity or any other class of companies
✓ be laid in the annual general meeting of that financial year.
✓ prepare a consolidated financial statement of the company and of all the subsidiaries and associate
companies

The persons responsible to take all reasonable steps to secure compliance by the company with the
requirement of Section 129 are [(Section 129(7)]-
a. Managing Director

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 b. Whole-Time Director
c. CFO
d. Other person of a company charged by the Board with the duty of complying with requirements of
section 129.
e. Where any of the aforementioned officers are absent, all the directors shall be responsible and
punishable.

❖ Section 129A Periodical Financial Results

• Central Government may, require such class or classes of unlisted companies, as may be prescribed:
• to prepare the financial results of the company on such periodical basis and in such form as may be
prescribed;
• 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
• file a copy with the Registrar within a period of 30 days of completion of the relevant period with such
fees as may be prescribed.

❖ Section 130 Re-Opening of Accounts on Court's Or Tribunal's Orders

✓ Securities and Exchange Board;

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Application for re-opening of the accounts and recasting the financial statements can be made by the:

✓
✓
✓
Income-tax authorities;
Statutory regulatory body
Central Government;
SISCA

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•
✓ Any other person concerned;

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If the earlier accounts were prepared in a fraudulent manner; or the affairs of the company were

•
•

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mismanaged, casting a doubt on the reliability of financial statements.
Notice to be given by the Court/Tribunal to SISCA and taking into account their considerations.

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There can be the re-opening or re-casting of the financial statements of 8 financial years immediately
preceding the current FY. However, there are exceptions to this
•
•

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If investigation ordered by CG longer than 8 years than for such longer period.
If company in existence less than 8 years then lesser period.

or Section 134.
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Voluntary Revision of Financial Statement
Section 131 allows the directors to prepare revised financial statement or a revised Board’s report in respect
of any of the three preceding financial years after obtaining approval of the Tribunal, if it appears to them that
the company’s financial statement 5Mor the
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Board’s Report do not comply with the requirements of Section 129
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Signature of Financial Statement

✓ Chairperson of the company
✓ CEO 0S0P
✓ CFO tr-6L2Q1S5M4O
✓ CS
For One Person Company, only one director

NATIONAL FINANCIAL REPORTING AUTHORITY (NFRA)

1. NFRA is Constituted under Sec 132.
2. Following are the objectives of NFRA: 0E
✓ Make recommendations on 2G1K5K4C0K of accounting and auditing policies and standards for adoption
tr-6Aformulation
by companies, class of companies or their auditors;
✓ Monitor and enforce the compliance with accounting standards, monitor and enforce the compliance
with auditing standards;
✓ 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
✓ Perform such other functions as may be prescribed in relation to aforementioned objectives

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 MEMBERS OF NFRA
1. Chairperson + 15 members.
Chairperson shall be appointed by the CG, who shall be a person of eminence & having expertise in
accountancy, auditing, finance, business administration, business law, economics or similar disciplines
2. The head office of National Financial Reporting Authority shall be at New Delhi and it may, meet at such
other places in India, as it deems fit.
3. Its accounts shall be audited by Comptroller and Auditor General of India (CAG) and such accounts as
certified by CAG, together with audit report, shall be forwarded annually to the Central Government.

Corporate Social Responsibility

Section 135- Every company having net worth of rupees five hundred crore or more, or turnover of rupees
one thousand crore or more or a net profit of rupees five crore or more during 3[the immediately preceding
financial year] shall constitute a Corporate Social Responsibility Committee of the Board consisting of three
or more Directors, out of which at least one director shall be an independent director.
The Corporate Social Responsibility Committee shall,
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the
activities to be undertaken by the company 5[in areas or subject, specified in Schedule VII];

m
(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to time.

financial years.

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B) Minimum amount to be spent is 2% of the average Net profits made during three immediately preceding

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 CHAPTER 10 – AUDIT & AUDITORS

Appointment of auditors.

• Section 139 provides that every company shall, at the first annual general meeting, appoint an individual
or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its
sixth annual general meeting and thereafter till the conclusion of every sixth meeting
• the written consent of the auditor to such appointment, and a certificate from him stating the fulfilment
of the conditions mentioned in section 141 ,is required.

Tenure of Auditor (S. 139)

• an individual as auditor - one term of five consecutive years; and

• an audit firm - two terms of five consecutive years:

Removal of Auditor (S. 140)

The auditor may be removed from his office before the expiry of his term only by a special resolution of the

Remuneration of Auditor (S. 142)

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company, after obtaining the previous approval of the #Central Government in that behalf in the prescribed
manner:

The remuneration of the auditor of a company shall be fixed in its general meeting.

rs .
Services Not Allowed to Be Rendered By Auditor (S. 144)

✓ accounting and book keeping services;

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✓
✓
✓
✓
internal audit;

actuarial services;
investment advisory services;

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design and implementation of any financial information system;

✓
✓
✓
investment banking services;

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rendering of outsourced financial services;
management services;

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✓ any other kind of services as may be prescribed

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 CHAPTER 11 – APPOINTMENT & QUALIFICATION OF DIRECTORS

Minimum number of directors

Company No. of Directors

Public Company 3 Directors
Private Company 2 Directors
One Person Company (OPC) 1 Director

• A company can have maximum 15 directors; however, company may appoint more than 15 directors
after passing a Special Resolution.
• Every company shall have at least one director who stays in India for a total period of not less than 182
days during the financial year.
• Every listed company shall have one director elected by small shareholders.  “Small shareholder” means
a shareholder holding shares of nominal value of not more than Rs.20,000 or such other sum as may be
prescribed.
• Board of directors of the top 500 listed entities shall have at least one independent woman director by
April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one

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independent woman director by April 1, 2020;

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The board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000
listed entities (with effect from April 1, 2020) shall comprise of not less than six directors

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.
• Maximum number of directorships, including any alternate directorship, a person can hold is 20. Same
time, a person cannot be a director of more than 10 public companies

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• A person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in not
more than seven listed entities with effect from April 1, 2020. Provided that a person shall not serve as

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an independent director in more than seven listed entities. (2) Notwithstanding the above, any person
who is serving as a whole-time director / managing director in any listed entity shall serve as an
independent director in not more than three listed entities. (LODR).

DIRECTOR IDENTIFICATION NUMBER (DIN)

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As per Section 153 of the Act, every individual intending to be appointed as director in an existing

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company shall make an application electronically in Form DIR-3 for allotment of director Identification

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Number to the Central Government along with the prescribed fees
Within one month of application the Central government shall allot a Director Identification Number

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T
(DIN) to the applicant.
Section 156 stipulated that every existing director shall intimate his DIN to the company or all companies
wherein he is a director within one month of the receipt of DIN from the Central Government
Section 157 (1) provides that every0Scompany
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0P shall, within fifteen days of the receipt of intimation under
section 156, furnish the Director Identification Number of all its directors to the Registrar or any other
officer or authority as may be specified by the Central Government.

Punishment For Contravention (Section 159)

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If any individual or director of a company, contravenes any of the provisions of section 152, section 155 and
section 156, such individual or director shall be punishable with: imprisonment for a term which may extend
to six months or with fine which may extend to fifty thousand rupees and  where the contravention is a
continuing one, with a further fine which may extend to five hundred rupees for every day after the first
during which the contravention continues.

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