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COMPANY LAW (Guideline Answers)

INTERMEDIATE EXAMINATION

DECEMBER 2003

Time allowed: 3 hours Maximum marks: 100

NOTE : Answer SIX questions including Question No. 1 which is COMPULSORY.

Question 1

Explain the following :

i. Common seal and its affixation.

ii. A company as a partner.
iii. Interim dividend.
iv. Corporate identity number (CIN)
v. Investors education and protection fund. (4 marks each)

Answer 1(i)

Common seal and its affixation

On incorporation, a company acquires legal entity with perpetual succession and a

common seal. The company must act through its agents as it has no physical existence
and generally all acts entered into by its agents are authenticated under the company’s
seal, which acts as the official signature of the company. In terms of Section 34(2) of
the Companies Act, 1956, the provision of a common seal is a statutory requirement
for a company. The name of the company is engraved on its common seal and the seal
is impressed upon a document as evidence of authenticity or attestation. In the case of
a company or other body corporate, the presence of corporate seal on any document
executed by it, is evidence that it was duly executed by authority of that corporate
body. The purpose is to supplement the signature of corporate officers and thereby
authenticate the document. Under the Companies Act, 1956, it is required to be used
on share certificates and may be used on bonds, debentures, formal contracts, power of
attorney etc. to authenticate them. It is to be affixed strictly in the manner prescribed
in the Articles of Association of the company concerned.

Answer 1(ii)

A company as a partner

A company being a juristic person is capable of contracting in its own name. Since
partnership is a contractual relationship between persons, there should be no objection
to a partnership being created with or by a company. However, Department of
Company Affairs in this regard has opined that the Objects clause of Memorandum of
Association of a company must contain a power enabling the company to enter into
partnership with any person or company. Such partner company can act through its
authorized officials. Thus, there may not be any operational difficulty in case of a
company becoming a partner in a firm.

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[Note : Companies Act, 1956 indirectly recognises that a company can be a partner in
a partnership firm under Schedule VI to the Act, as under “Loans and Advances”
Loans and Advances to a partnership firm in which the company or any of its
subsidiaries is a partner has to be disclosed separately].

Answer 1(iii)

Interim Dividend

Section 2(14A) of Companies Act, 1956, defines ‘Dividend’ to include interim

dividend. Interim dividend is a dividend paid between two Annual General Meetings
(AGMs) of a company i.e. a part of profits which is distributed before the accounts are
finally passed and before declaration of dividend is sanctioned in AGM. Prior to
enforcement of Companies (Amendment) Act, 2000 only Regulation 86 of Table A of
Schedule I of Companies Act, 1956 dealt with interim dividend by providing that:

‘The Board may from time to time pay to the members such interim dividends as
appear to be justified by the profits of the company’.

However, Section 205 [amended by Companies (Amendment) Act, 2000] empowers

the Board of Directors to declare interim dividend. Section 205 has been amended to
provide for the following:

l The Board may declare interim dividend and the amount thereof shall be
deposited in a separate bank account within five days from the date of
declaration of such dividend.
l The amount of dividend including interim dividend so deposited above shall be
used for payment of dividend.
l The provisions contained in Sections 205, 205A, 205C, 206, 206A and 207, as
far as may be, also apply to any interim dividend. In other words, interim
dividend stands on the same footing as that of final dividend and both interim
and final dividend when declared become debt and are payable within 30 days
of declaration.

Before declaring the interim dividend it should be ensured by the Board that the profit
upto the point of time practicable before the declaration the profits earned by the
company is adequate to accommodate the interim dividend after providing for full
years depreciation, creation of requisite reserve and meeting of tax liability.

Answer 1(iv)

Corporate identity number (CIN)

Corporate identity number (CIN) is a 21 digit number designed to help easily identify
companies belonging to a state, industry, ownership or age and allocated to all
companies registered on or after November 1, 2000. The CIN assigned to a company
indicates the following: listing status, economic activity (Industry), State, year of
incorporation, ownership, sequential number assigned by ROCs.

The first digit of the CIN represents the listing status of a company. If the company is
unlisted, the alphabet entered is ‘U’ and in case the company is listed the alphabet
entered is ‘L’.

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The second five digits represent the economic activity of the company. The next two
places represent the State in which the company’s registered office is located. All
States are represented by a twoalphabet code.

The next four places indicate the year in which the company was incorporated. Next,
the ownership code is indicated through a threealphabet code.

The last six places in the CIN are the sequential number assigned to every company by
the concerned ROC office of the State. There is no space, hyphen, oblique sign, etc.,
between the various code components.

Answer 1(v)

Investors education and protection fund

Pursuant to Section 205C of the Companies Act, 1956, as inserted by the Amendment
Act of 1999, an Investors Education and Protection Fund (IEPF) (the Fund) has been
established by the Central Government. To the IEPF, the amounts in unpaid dividend
accounts, unpaid refund of application money received by companies for allotment of
securities, unpaid matured deposits and debentures, interest accrued thereon, grants
and donations of the Government to the Fund and the interest/income from the
investments of the IEPF are to be credited. However, all except the interest/income
thereon, shall not form part of the IEPF unless such amounts have remained unclaimed
and unpaid for a period of seven years from the date they became due for payment.
The IEPF shall be used in accordance with the Investors Education and Protection
Fund (Awareness and Protection of Investors) Rules, 2001 and the amounts therein
shall be utilised for conducting investors education and awareness programmes,
seminars etc. and protection of the interests of investors.

Question 2

(a) What are the features of a corporate form of business

(8 marks)
enterprise ?
(b) What is the ‘doctrine of constructive notice’ ? Explain with
(4 marks)
case law.
(c) What do you mean by ‘lifting of corporate veil’ ? (4 marks)

Answer 2(a)

Business enterprises can be broadly divided into two broad categories, namely, one
which is noncorporate and the other which has a corporate character i.e. companies
and cooperative undertakings. The basic difference between the corporate and the
noncorporate form of organisation is that while a noncorporate form of business can
be started without registration, corporate bodies cannot be set up without registration
under the laws which govern their functioning. Corporate bodies have perpetual
existence while noncorporate bodies do not have such perpetual existence.

Corporate Form of Business Enterprises

The Cooperative Organisation

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Cooperative organisation is a voluntary association with unrestricted membership and

collectively owned funds, organised on democratic principle of equality by persons of
moderate means and incomes, who join together to supply their needs and wants
through mutual action, in which the motive of production and distribution is service
rather than profit. Besides being a form of ownership, cooperative organisations are a
means of protecting the interests of the relatively weaker sections of society against
exploitation by big businesses operating for the maximisation of profits. A cooperative
society is required to be registered under the Cooperative Societies Act, 1912. The
cooperative societies receive a number of special concessions from the Government.

Company

This type of organisation is characterised by the fact that its ownership and
management are separate. The capital of the company is provided by a group of people
called shareholders who entrust the management of the company in the hands of
persons known as the Board of directors. A company is an artificial legal person
registered under the Companies Act, 1956 created by process of law which makes it an
entity separate and distinct from its members who constitute it. As a natural
consequence of incorporation and transferability of shares, the company has perpetual
existence, separate corporate personality, and capacity to sue, be sued and enter into
contracts.

Answer 2(b)

Doctrine of constructive notice

The memorandum and articles of association of a company, when registered, become

public documents and can be inspected by anyone on payment of nominal fee to the
Registrar of Companies. Therefore, every person who contemplates entering into a
contract with a company has the means of ascertaining and is consequently presumed
to know, not only the exact powers of the company but also the extent to which these
powers could be delegated to the directors, and of any limitations placed upon the
exercise of these powers. In other words, every person dealing with the company is
deemed to have a “constructive notice” of the contents of its memorandum and
articles. In fact, he is regarded not only as having read those documents but also as
having understood them according to their proper meaning [Griffith v. Paget, (1877)
Ch. D. 517]. For example, if the articles provide that a bill of exchange to be effective
must be signed by two directors, a person dealing with the company must see that it so
signed, otherwise he cannot claim under it. Consequently, if a person enters into a
contract which is beyond the powers of the company, as defined in the memorandum
or outside the limits set on the authority of the directors, he cannot as a general rule
acquire any rights under the contract against the company [Mohony v. East Holyfrod
Mining Co. (1875) L.R7HL 869].

Answer 2(c)

A company, being an artificial person, cannot act on its own, it can only act through
natural persons. In other words, a corporation is clothed with a distinct personality.
But as the separate personality of the company is a statutory privilege, it must be used
be for legitimate business purposes only. Where a fraudulent and dishonest use is
made of the legal entity, the individuals concerned are not allowed to take shelter
behind the corporate personality. The Courts in such cases breakthrough the corporate
shell and apply the principle of “lifting or piercing the corporate veil”. The Courts

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look behind the corporate entity and take action as though no entity separate from the
members existed and make the members or the controlling persons liable for debts and
obligations of the company. The corporate veil is lifted when in defence proceedings,
such as for the evasion of tax, an entity relies on its corporate personality as a shield to
cover its wrong doings. [BSN (UK) Ltd. v. Janardan Mohandas Rajan Pillai (1996) 86
Comp. Cas. 371 (Bom).], etc.

Question 3

a. State the modes of acquiring membership in a company. (4 marks)

b. Can a member be expelled from a company ? Discuss with reference to a case law. (4 marks)
c. What securities are eligible for dematerialisation ? (4 marks)
d. Briefly state the manner of surrender of shares (4 marks)
Answer 3(a)

Modes of Acquiring Membership

As per Section 41 of the Companies Act, 1956 a person may acquire the membership
of a company:

a. by subscribing to the Memorandum of Association (deemed agreement); or

b. by agreeing in writing to become a member:

i. by making an application to the company for allotment of shares; or

ii. by executing an instrument of transfer of shares as transferee; or
iii. by consenting to the transfer of shares of a deceased member in his name and on
his name being entered in the register of members of company; or
iv. by acquiescence or estoppel.

c. by acquiring shares in the company in the depository mode and thereby getting
entered as a beneficial owner in the records of a depository (Under the
Depositories Act, 1996).

Answer 3(b)

The Department of Company Affairs following the judgement in Bajaj Auto Ltd. v.
N.K. Firodia [1971] 41Comp.Cas 338 clarified that an article for expulsion of a
member is opposed to the fundamental principles of the Company Jurisprudence and
is ultra vires the company, the reason being that such a provision militates against the
provisions of the Companies Act relating to the rights of a member in a company, the
powers of the Central Government as an appellate authority under Section 111 of the
Act and the powers of the Court under Sections 107, 395 and 397 of the Companies
Act.

According to Section 9 of the Companies Act, 1956, the Act overrides the
Memorandum and Articles of Association and any provision contained in these
documents repugnant to the provisions of the Companies Act, is void. The Department
of Company Affairs has clarified that any assumption of the powers by the Board of
Directors to expel a member by alteration of Articles of Association shall be illegal
and void (Circular No. 32/75 dated November 1, 1975).

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Also, in Gothami Solvent Oils Ltd. and another v. Smt. Mallina Bharathi Rao (2001) 3
Comp LJ 127, the articles were subsequently amended to provide for cancellation of
membership and a member was compulsorily required to transfer his shares to others
on the ground that the complaints and activities of the member were tarnishing the
image of the company. It was held that cancellation of membership will achieve no
benefit to the company as a whole and the same must be held to be illegal.

It will be open to the expelled member to seek relief through court and it cannot be
contended that expulsion is a mere matter of internal management, as it deprives a
member of his personal rights [Sidebottom v. Kershaw Leese & Co. (1920) 1 Ch 154].

Answer 3(c)

Securities eligible for dematerialisation: Following securities are eligible for being
held in dematerialized form in a depository:

a. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable

securities of a like nature in or of any incorporated company or other body
corporate;

b. units of mutual funds, rights under collective investment schemes and venture
capital funds, commercial paper, deposit certificates, securities debt, money
market instruments, Government securities and unlisted securities. [Regulation
28 of SEBI (Depositories and Participants) Regulations, 1996].

Answer 3(d)

Surrender of shares

The phrase ‘surrender of shares’ means the voluntary return of shares to the company
on the part of the registered holder of shares for cancellation. Where shares are
surrendered to the company, whether by way of settlement of a dispute or for any
other reason, it will have the same effect as a transfer in favour of the company and
amount to a reduction of capital. But if, under any arrangement, such shares, instead of
being surrendered to the company, are transferred to a nominee of the company then
there will be no reduction of capital [Collector of Moradabad v. Equity Insurance Co.
Ltd., (1948) 18 Com Cases 309: AIR 1948 Oudh 197]. A surrender can be accepted in
parallel circumstances of forfeiture, difference being that instead of resorting to all the
formalities, the company accepts shares on good faith and in its own interest. Since
shares can be surrendered only where their forfeiture is justified, a company can
accept surrender of partly paid up shares only except when an exchange for new
shares of the same nominal value but different rights are involved.

Question 4

In a private limited company, there are only two directors on the Board. A
Board meeting convened was adjourned for want of quorum. At the adjourned
meeting, inspite of quorum not being present, the resolutions were passed as per
the agenda. Discuss the validity of resolutions so passed. (4 marks)
Anubhav Ltd. held four Board meetings in a calendar year with an interval of
more than 3 months in between two Board meetings. Comment. (4 marks)

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Manoj was the chairman of a company and he had borrowed Rs.5 lakh from
State Bank of India, Patna under a promissory note. A suit was filed for the
recovery of the debts on the basis of the pronote executed by the chairman. The
company refused to accept the liability on the plea that the chairman had
borrowed funds without authorisation from the company. Will the company
succeed ? Explain. (4 marks)
Whether a chairman of the Board can be removed by shareholders in a general
meeting ? (4 marks)

Answer 4(a)

Quorum is the minimum number of directors required to be present to validly transact

any business. Section 287(2) stipulates the quorum for a Board meeting, as, onethird
of the total strength of the Board (fraction being rounded off as one) or two directors
whichever is higher. If the number of interested directors exceeds or is equal to
twothirds of the total strength, the number of remaining directors (not being less than
two) shall be the quorum for such meeting. The directors cannot proceed with the
meeting unless the required quorum is present. Any decision taken by lesser number
than the quorum is void [Alma Spinning Co. In Re (1880) 16 Ch. 681; Needle
Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981) 50
Comp.Case 743 (SC)].

Where the articles of association of a company provided that the quorum for a Board
Meeting shall be two directors and meeting called for was adjourned for want of
quorum and in the adjourned meeting only one director was present, it was held that
the resolution passed in that meeting was void [Maharani Yogeshware Kumari v. Lake
Shore Palace Hotel (1996) 21 CLA 107(Raj)].

Therefore, assuming that quorum was not complete due to a single director being
present the resolutions passed cannot be held valid as he cannot meet himself and
there must be two persons to constitute a meeting.

Answer 4(b)

Section 285 of the Companies Act, 1956 prescribes that in the case of every company,
a meeting of the Board of directors shall be held atleast once in every 3 months and
atleast 4 such meetings shall be held in every year. However, the Department of
Company Affairs has clarified that, so long as four board meetings are held in calendar
year, one in each quarter, the interval between two meetings may be more that three
months. However, as per Clause 49 of listing agreement, the listed companies are
require to hold atleast 4 Board meetings in a year with a maximum gap of 4 months
between any two meetings. Therefore no apparent violation can be concluded on the
company’s part.

Answer 4(c)

In Krishnan Kumar Rohatgi and Others v. State Bank of India and Others (1980) 50
Comp.Cas.722, the company borrowed an amount of Rs. 5 lakhs from the State Bank
of India under a promissory note guaranteeing the repayment by executing a guarantee
in favour of the company. The pronote was renewed from time to time. In the suit for
recovery, the company contended that the pronote was executed by the Chairman
without Board resolution authorizing him to execute as required under Section 292(1)

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(c) of the Companies Act. The Patna High Court held that in cases where the directors
borrow funds without proper authorization from the company and the amount
borrowed was utilized for the benefit of the company, the company cannot then
repudiate its liability to repay, since general law implies a promise to be paid by the
principal, when the money so borrowed by an agent had gone into the coffers of the
principal. Here the principal, had taken the benefit of the amount borrowed. Hence, the
company’s contention was rejected by the Patna Court. If the same fact of benefit been
taken is assumed, the decision shall apply to the case in question mutatis mutandis.

Answer 4(d)

The Chairman of the Board is appointed by the Board of Directors under the authority
given to it by the Articles of Association or pursuant to the Regulation 76 of Table A
(Schedule I of Companies Act, 1956) where Table A is adopted. There is no specific
provision in the Companies Act, 1956 for the removal of Chairman of the Board. If the
resolution appointing a Chairman does not specify the tenure of office, the Chairman
can hold office until he ceases to be a director or until the Board decides to appoint
another director in his place. A shareholder can proceed not with removal of Chairman
but with removal of director, as the Chairman’s office ipso facto comes to an end on
ceasing to be a director. The Calcutta High Court in Kashinath Tapuriah v. Incab
Industries Ltd. has held that the Board of Directors had a right to remove the
Chairman appointed by it if he has lost its confidence. The usual procedure would be
for a member to propose a vote of no confidence in the chair and this move should be
seconded by another member. The Chairman could make a representation against the
removal. The matter should be put to vote. If he loses the vote, he should relinquish
the chair. A Chairman who has been elected by the meeting can be removed by the
meeting. [Booth v. Arnold (1895) 1QB571]. The Chairman appointed by the Board
can only be removed by the Board and where the appointment is under the provisions
of articles, that appointment being not made by the members, the members cannot
remove him unless it is due to bad faith, partiality or abuse of authority. (4 marks)

Question 5

a. Define ‘small shareholders’. Can a person hold office as small (4

shareholders’ director in three companies at the same time ? marks)
b. Humlog Ltd. received a letter from IDBI on 1st March, 2003 which has
financed the project requesting the company to appoint Madhavan,
General Manager (Operations), IDBI, as a director on its Board with (4
immediate effect, as per the terms of sanction. Does his appointment marks)
require any other approval ? Is he liable for
c. Explain the provisions relating to tenure of office of auditors under various (8
circumstances marks)

Answer 5(a)

According to the Explanation to subsection (1) of Section 252 of Companies Act,

1956,’small shareholder’ means a shareholder holding shares of nominal value of
Rs.20,000 or less in a public company which has a paidup capital of Rs.5 crores or
more; 1,000 or more small shareholders. The reference is to nominal value of shares
and consequently a person to be classified as a small shareholder can hold preference
shares also. Rule 7 of Companies (Appointment of the Small Shareholders’ Director)
Rules, 2001 provides that no person shall hold office at the same time as small

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shareholders’ directors in more than two companies. In other words, a person cannot
hold office as small shareholder’s director in three companies at the same time.

Answer 5(b)

Except where a statute provides for nomination of directors on the Board of a

company, nominee directors can be appointed only if a provision to that effect exists
in the Memorandum or Articles of Association. However, in case of certain statutory
financial institutions like LIC, IDBI etc. the statutes governing them override other
provisions. In this case, Madhavan’s [GM(operations)] appointment/cessation is
regulated by the IDBI appointing him i.e. it can appoint or remove the director
(nominee) at its own will. The director is also not liable for retirement by rotation and
need not hold qualification shares. The appointment is effective from the date of letter
viz. 1.3.2003, is received in the office of the company.

Answer 5(c)

Section 224(1) of Companies Act, 1956 provides that an auditor is appointed at the
annual general meeting (AGM) to hold the office from the conclusion of the AGM at
which he is appointed until the conclusion of the next AGM. In case where an AGM is
not held within the period prescribed by Section 166, the auditor will continue in
office until the next AGM is held and concluded. For any adjourned meeting, the
auditor will continue to hold office until the conclusion of the adjourned meeting. If at
an AGM, no auditors are appointed or reappointed, the Central Government may
appoint a person to fill the vacancy.

Section 224(5) requires that the first auditor(s) shall be appointed by the Board within
one month of company’s registration and the auditor(s) so appointed shall hold office
until the conclusion of the first AGM of the company. However, the company may, at
a general meting, remove any such auditor or all or any of such auditors and appoint in
his or their places any other person or persons who have been nominated for
appointment by any member of the company and of whose nomination notice has been
given to the members of the company not less than fourteen days before the date of the
meeting. If the Board fails to exercise its powers under Section 224(5), the company in
general meeting may appoint the first auditor or auditors.

Question 6

Describe the provisions of law concerning ‘compliance certificate’ to be given by

a secretary in wholetime practice. Specify eight areas covered by the prescribed
format for certification. (16 marks)

Answer 6

Compliance Certificate: The Companies (Amendment) Act, 2000 inserted a proviso to

subsection (1) of Section 383A of the Companies Act, 1956 with regard to issue of
compliance certificate. Every company not required to employ a wholetime secretary
under section 383A(1) of the Act and having a paidup capital of Rs.10 lakhs or more
shall file with the Registrar of Companies (ROC), a certificate from Secretary in
wholetime practice in such form and within such time, as may be prescribed as to
whether the company has complied with all the provisions of the Companies Act, and
a copy of such certificate shall be attached with the Board’s Report referred to in
Section 217.

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The Companies (Compliance Certificate) Rules, 2001 provide that every company to
which these Rules apply is required to file, in respect of each financial year, with the
ROC, the compliance certificate within 30 days of the Annual General Meeting
(AGM). In case the AGM is not held or adjourned, the compliance certificate should
be filed with the ROC within 30 days from the date on which that meeting should have
been held or the date on which such adjourned meeting was held provided such
adjourned meeting is held within the statutory limit. Such certificate shall be laid at the
company’s AGM. The proviso to subsection (1) of Section 383A of the Act provides
that the Compliance Certificate shall be attached with the Board’s Report referred to in
Section 217. It is also necessary for the company to attach a copy of the Compliance
Certificate with the Board’s Report while forwarding the same to members etc. under
Section 219 of the Act. If a company fails to comply with the requirement of filing the
Compliance Certificate with the ROC or attaching a copy of such certificate with the
Board’s Report then in terms of subsection (1A) of Section 383A, the company and
every officer in default, shall be punishable with fine which may extend to Rs. 500 for
every day during which the default continues.

Eight areas covered by the prescribed format of certification are:

1. proper compliance of Section 154 and closure of Register of Members and/or

Debenture holders;
2. convening of AGM after giving due notice to the members and recording of
resolutions passed therein in the minutes;
3. advancing of loans under Section 295 after complying with the provisions of the
Act;
4. entering into contracts under Section 297;
5. obtaining necessary approvals from Board, members, Government, etc. under
Section 314;
6. appointment of sole selling agents in accordance with the provisions of the Act;
7. disclosure of interest by Directors to the Board;
8. buyback of shares.

(Note : This list is illustrative).

Question 7

a. What are the provisions of the Companies (Acceptance of Deposits)

Rules, 1975 for premature repayment of deposits ? (6 marks)
b. Enumerate the steps involved in issue of bonus shares by a listed (10
company marks)

Answer 7(a)

Rule 8 of the Companies (Acceptance of Deposits) Rules, 1975 provides that if a

company makes repayment of deposit after the expiry of the period of six months from
the date of such deposit but before the expiry of the period for which such deposits
were accepted by the company, the rate of interest payable on such deposits shall be
reduced by one percent from the rate which the company would have paid, had the
deposit been accepted for the period for which the deposits had run. The company
shall not pay interest at any rate higher than the rate so reduced.

Where the period for which the deposit had run contains any part of a year, then, if

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such part is less than six months it shall be excluded. If such part is six months or
more, it shall be reckoned as one year for this purpose.

However, this rule shall not apply for premature repayment if it is made solely for the
purpose of complying with provisions of NBFC (Reserve Bank) Directions, 1966,
complying with Rule 3 of Companies (Acceptance of Deposit) Rules, 1975,
converting with the consent of depositors, into secured debentures, and providing for
war or related risk benefits to specified persons during the period of emergency
declared under Article 352 of the Constitution.

Answer 7(b)

1. The bonus issue should be made pursuant to a provision in the Articles of

Association and out of free reserves built out of genuine profits or securities
premium collected in cash only and that reserves created by revaluation of fixed
assets should not be capitalized.
2. The articles of association should be altered if there is no such provision
permitting bonus issue. Also, all partly paid shares if any, are to be made fully
paid up before the issue is recommended by the Board.
3. Take steps to increase the authorized capital if the consequent increased capital
is not within the limit.
4. Fix date for Board Meeting to consider and authorize all incidental and allied
matters connected thereto.
5. The date of the Board Meeting to be notified to the Stock Exchange where the
shares are listed.
6. Hold the Board Meeting and General Meeting and approve resolutions.
7. Intimate the Stock Exchange of the outcome of Board Meeting, send 3 copies of
notice along with a copy of the proceedings, and in consultation, fix the date for
closure of Register of members or record date and get the same approved by the
Board, issue general notice under Section 154 in two newspapers, one in
English and other in regional language of the registered office location.
8. Give the requisite notice to Stock Exchanges before the date of book
closure/record date.
9. After the record date, process the transfers received and prepare list of eligible
members and get it approved by the Board as the allotment list.
10. File return of allotment with ROC within 30 days and ensure that allotment is
made within 6 months of Board’s approval for the issue.
11. Get the share certificates printed and issued to the allottees as per provisions of
Companies (Issue of Share Certificates) Rules, 1960.
12. Submit an application to the Stock Exchanges concerned for listing the bonus
shares allotted.

Note:

i. Issue of bonus shares after any public/ rights should not dilute the value or
rights of holders of debentures convertible fully or partly. It is to be ensured that
the benefit of bonus issue is extended to the holders of convertible FCDs/PCDs,
if pending, through reservation of shares in proportion to such convertible part.
ii. The bonus issue should not be made in lieu of dividend.
iii. The company should not have defaulted in payment of interest or principal in
respect of fixed deposits/debentures and redemption of securities. Further, the
company has sufficient reasons to believe that it has not defaulted in respect of
payment of statutory dues of the employees, such as contribution to Provident
Fund, gratuity, bonus etc.

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Question 8

a. Name the industries which are prohibited to appoint sole

selling agents under the Companies Act, 1956. (4 marks)
b. Discuss the law relating to intercorporate loans and
(12 marks)
guarantees.

Answer 8(a)

Section 294AA of the Companies Act, 1956 imposes restrictions on the appointment
of sole selling agents and the power vests in the Central Government to prohibit
appointment of sole selling agents where it is of opinion that the demand for goods or
services of any category is substantially in excess of the production or supply of such
goods or services and appointment of sole selling agents will not be necessary to
create a market for such goods or services.

The Central Government has prohibited the appointment of sole selling agents in
industries of sugar, vanaspati, cement, paper and “Bulk Drug”, Drugs and Formulation
as defined in the Drugs (Price Control) Order, 1979 excluding bonafide preparation
included in Ayurvedic or Unani System of medicine or Homeopathic medicine.

Answer 8(b)

Section 372A of the Companies Act, 1956 contains the consolidated provisions with
respect to intercorporate loans, investments and guarantees. Accordingly, no company
shall, directly or indirectly

a. make any loan to any other body corporate;

b. give any guarantee, or provide security, in connection with a loan made by any
other person to, or to any other person by, any body corporate; and

c. acquire, by way of subscription, purchase or otherwise the securities of any

other body corporate,

exceeding sixty per cent of its paidup share capital and free reserves, or hundred per
cent of its free reserves, whichever is more. If the aggregate of loans and investments
so far made, the amounts for which guarantee or security so far provided to or in all
bodies corporate, alongwith investments, guarantee or security proposed to be made
by the Board, exceeds the aforesaid limit, no investment or loan shall be made or
guarantee shall be given or security shall be provided unless previously authorized by
a special resolution passed in a general meeting. (through Postal Ballot where
applicable).

The Board may give guarantee, without being previously authorized by a special
resolution, if

a. a resolution is passed at a meeting of the Board authorizing to give guarantee in

accordance with the aforesaid provisions;

b. there exists exceptional circumstances which prevent the company from

obtaining previous authorization by a special resolution as aforesaid; and

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(c) the resolution of the Board under (a) above is confirmed within 12 months, in a
general meeting of the company or the annual general meeting held immediately after
passing the Board’s resolution, whichever is earlier.

The notice of the special resolution as aforesaid must indicate clearly; (i) the specific
limits; (ii) the particulars of the body corporate in which the investment is proposed,
purpose of the investment/ loan/security/guarantee, specific sources of funding etc.

No loan to any body corporate shall be made at the rate of interest lower than the
prevailing ‘bank rate’. The appropriate resolution should be passed at a meeting of the
Board with the consent of all the directors present at the meeting and where any term
loan is subsisting, the prior approval of the public financial institution referred to in
Section 4A is obtained, subject to exceptions.

Every company shall keep a register chronologically showing the following particulars
in respect of every investment or loan made, guarantee given or security provided by it
to any body corporate:

i. the name of the body corporate;

ii. the amount, terms and purpose of the investment or loan or security or
guarantee;
iii. the date on which the investment or loan has been made; and
iv. the date on which the guarantee has been given or security has been provided in
connection with a loan.

A company which has defaulted in complying with the provisions of Section 58A shall
not be permitted to give loan etc. under this section till such default is subsisting.

Nothing contained in Section 372A shall apply to any loan made, guarantee given etc.
made

a. (i) a banking company, or an insurance company, or a housing finance company

in the ordinary course of its business, or a company established with the object
of financing industrial enterprises, or of providing infrastructural facilities;

ii. ii a company whose principal business is the acquisition of shares,

stock, debentures or other securities;

iii. iii a private company, unless it is a subsidiary of a public company;

b. to investment in shares allotted in pursuance of Section 81(1)(a);

c. to any loan made by a holding company to its wholly owned subsidiary;

d. to any guarantee given or any security provided by a holding company in

respect of loan made to its wholly owned subsidiary; or

e. to acquisition by a holding company, by way of subscription, purchases or

otherwise, the securities of its wholly owned subsidiary.

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