Issue of shares at discount A company may issue shares at a discount i.

e at a value
below its par value. The following conditions must be satisfied in connection with the
issue of shares at a discount :-The shares must be of a class already issuedIssue of
the shares at discount must be authorised by resolution passed in the general
meeting of company and sanctioned by the company law board.The resolution must
also specify the maximum rate of discount at which the shares are to be issuedNot
less than one year has elapsed from the date on which the company was entitled to
commence the business.The shares to be issued at discount must issued within 2
months after the date on which issue is sanctioned by the company law board or
within extended as may be allowed by the Company Law Board.The discount must
not exceed 10 percent unless the Company Law Board is of the opinion that the
higher percentage of discount may be allowed in special circumstances of case.
Buy-back of shares is opposite to the issue of shares by a company. Here instead of
giving shares, the company offers to take back its own shares, which are owned by
the investors, at a specified price, which is usually at a premium over the current
market price.
Buy-backs have gained considerable importance in the past 25 years or so all over
the world. In India, the Buy-back of Securities Regulation, passed in 1999, brought
about a spate of announcements in this area. Companies such as Crisil Ltd and
Piramal Healthcare Ltd have been in the news for offering buy back schemes to
investors.
Why companies buy back shares
Surplus cash: When the company has a significant amount of cash and there are
not many viable projects on its table and it is also not interested in disbursing cash
to the shareholders in the form of dividends, the way out for most of the
managements is buying back its own shares.
Internal difference: Sometime shareholders have a contrasting view from the
company management. If they are in a majority, they may create an obstacle to the
companys growth. Buy back is a way out for enhancing the controlling stake for the
management within the company. The shares bought under this scheme does not
go to the promoters, but are held by the company as treasury stock that could be
later resold or even used for employees stock option schemes.
What is Sweat Equity Share?
Soubhagya February 27, 2013 Tax, What is No comments
Sweat Equity Shares are the equity shares issued by the company to its employees or
directors at a discount or for a consideration other than cash for providing know how or
making available rights in the nature of intellectual property rights (IPR) or value additions,
by whatever name called. Section79A of the Companies Act, 1956 permits a company to
issue sweat equity shares of a company subject to the guidelines to be issued in this regard.
Sweat equity shares are basically given to a companys employees on favourable terms, in
recognition of their work. It usually takes the form of giving options to employees to buy
shares of the company, so they become part owners and participate in the profits, apart from
salary. Basically when a startup company forms it engages the best talent/employees, who
bring in their IPR and know-how, skills and expertise with them, which eventually makes
value addition for the company. Such employees are awarded with Sweat Equity as an
incentive to join and stick to the company.
It doesnt not matter whether a companys shares are listed in the stock exchange or not, it
can still issue such shares.
1. In the case of a company whose equity shares are not listed on any recognised stock
exchange, sweat equity shares can be issued in accordance with certain guidelines.
2. In the case of unlisted companies, sweat equity shares cannot be issued before one year
of commencement of operations. Moreover, such companies cannot issue more than 15
percent of the paid-up capital in a year or shares with a value of more than Rs 5 crores
whichever is higher except with the prior approval of the central government.
Section 79A of the Companies Act stipulates that
1. The issue of sweat equity shares should be authorized by a special resolution of the
GeneralMeeting.
2. The number of shares to be issued, its current market rate, consideration, if any and the
class of persons to whom it is proposed to be issued.
3. At the time of issue, the company ought to have completed at least one year of is
commencement of business.
4. The shares issued of a company whose shares are listed in the stock exchange should
adhere to the norms of the SEBI.
In other words, Sweat equity shares are no different from employee stock options (ESOPs)
with a one year vesting period. It is essential when a company is formed, to assure the
financial investors that the knowhow providers will stay on, or for a start-up with limited
resources to attract highly-qualified professionals to join the team as long-term stakeholders.
But still there are fine lines between ESOPs & Sweat Equity Shares. Let us see what these
gaps are



Employee Stock Option Plan (ESOP), is a plan through which a company awards Stock
Options to the employees based on their performance. Under an ESOP, the employees have
right to buy the shares of the company on a predetermined date at a predetermined price.
The objective of ESOP is to motivate the employees to perform better and improve
shareholders' value. Apart from giving financial gains to the employees, ESOP also creates
a sense of belonging and ownership amongst the employees.
Different terms used in an ESOP
Grant date - The date on which the company grants an option to its employee.
Option price - The price at which such shares in a scheme are offered. It is also known as
the strike price or grant price. Normally such option price would be below the market
value/ fair value of the shares on the date of grant.
Vesting date - An ESOP would provide for a date on which an option is vested with
employees and time frame over which the stock option would vest with employees (Vesting
period).
Exercise period - The employees would be given a time period, called exercise period,
within which they are required to exercise the option. The date on which employees exercise
this option is known as exercise date.
There are two ways in which a company can set up an ESOP.
(a) Create a Trust (Special Purpose Vehicle) - Depending on the number of options to be
given to the employees, the company will issue shares or options to the trust. The trust
would need funds to buy these shares. For this, the company can either give soft loans from
its own funds or the trust can raise loans through other sources to meet its financial
requirement. The company can act as a guarantee to the lender to the trust. With the funds
so raised, the trust then acquires shares/options required. The trust repays its loans as and
when the employees purchase the options offered and when they exercise their options by
paying the exercise price.
(b) Give options directly to employees - The selection of the employees can be based on
performance of the employee, indicated by the annual performance appraisal, minimum
period of service, present and potential contribution of the employees, and such other
factors deemed to be relevant for the success of the company. Number of options per
employee can be determined taking into consideration, the grade, level, years of service,
salary, etc. These selections would entirely depend upon the objective of the company for
setting up the ESOP.
The real advantage of ESOPs is that, the exercise price remains fixed over the term of the
option. So, the employee would exercise his option when the market price of the shares
goes substantially high and he would gain on the difference between the market price and
exercise price.
Different types of ESOPs
ESOP can be a one-time plan or an ongoing scheme depending upon the objectives that the
company wants to achieve. ESOPs can be in the form of ESOS (Employee Stock Option
Schemes), ESPP (Employee Stock Purchase Plans), Compensation Plans, Incentive Plans,
SAR/Phantom ESOPs etc.
Employee Stock Option Scheme (ESOS) - Under this scheme, the company grants an option
to its employees to acquire shares at a future date at a pre-determined price. Eligible
employees are free to acquire shares on vesting within the exercise period. Employees are
free to dispose of the shares subject to lock-in-period if any. Generally exercise price is
lower than the prevalent market price.
Employee Stock Purchase Plan (ESPP) - This is generally used in listed companies, wherein
the employees are given the right to acquire shares of the company immediately, not at a
future date as in ESOS, at a price lower than the prevailing market price. Shares issued by
listed companies under ESPP will be subject to lock-in-period, as a result, the employee
cannot sell the shares and/or the employee has to continue with the employer for a certain
number of years.
Share Appreciation Rights (SAR)/ Phantom Shares - Under this scheme, no shares are
offered or allotted to the employee. The employee is given the appreciation in the value of
shares between two specified dates as an incentive or performance bonus, that is linked to
the performance of the company as a whole, as reflected in its share value.
Attracting, rewarding and motivating a talented employee are the main purposes of
Employee Stock Option Plans (ESOP). In order to retain the human capital,
companies in India are investing a lot of money these days. One such medium is to
motivate the employee with the help of ESOP.
Under this scheme, an alternative is given to the employee to acquire shares of the
company. These shares are known as stock options and are granted by the
employer based on the performance of the employee. Companies offer shares as an
employee benefit and as a deferred compensation.
As per the guidelines of SEBI, an employee should be a permanent employee
residing in India or outside India. It also includes the director of the company; he can
or cannot be a whole time director.
Why ESOP?
The basic idea to give employee stock options in early days was to save cash
compensations. It was a way to motivate the employee and even to save cash
reimbursements for some of the cash strapped companies. These plans are over
and above the salary of the employee but not in monetary form directly. Later, the
concept of motivation picked up and retention led to spread of ESOP across
company verticals.
Vesting period
This is basically the lock in period for the employee. It is a set date on which the
stock option can be exercised.
For example: Mr. Deepak has been given a stock option from his company for a
vesting period of 3 years in the year 2 February 2012. This means that vesting date
is 2 February 2015. The price at which 500 shares were offered to Mr Deepak
was Rs. 250 each. This price is the vesting price. This means that on 2nd February,
2015 he can exercise his right to purchase the share, depending on the conditions.
Let us say, the price of share on 2nd Feb, 2015 is 650, this will result in a gain
of Rs. 400 each, which garners a profit of Rs. 2,00,000 to the employee, if he
exercises the option after 3 years.

A rights issue is a way in which a company can sell new
shares in order to raise capital. Shares are offered to existing
shareholders in proportion to their current shareholding,
respecting their pre-emption rights. The price at which the
shares are offered is usually at a discount to the current share
price, which gives investors an incentive to buy the new
shares if they do not, the value of their holding is diluted.
Importance
(1) Right issue gives the existing shareholders an opportunity to maintain their pro-
rata share in the earning and surplus of the company and the voting power as before.

(2) The goodwill of the company increases in the eyes of existing shareholders.

(3) The cost of issue of such shares will also be lower.

(4) The financial management is relived of the botheration of selling the shares.
(5) If right shares are offered by the shareholders enthusiastically, it proves that
financial position of the company is sufficiently good, and the company can obtain more
loans at lower rate of interest.
Disadvantages
there is a limit to how much can be raised through this method as existing shareholders are
only willing to invest so much. A rough rule of thumb is that a rights issue could raise up to
25% of the existing equity value of the firm.
If shareholders do not take up their rights, then their shareholding will be diluted.
The shareholder's options with a rights issue are to:
(1)take up his rights by buying the specified proportion at the price offered
(2)renounce his rights and sell them in the market
(3)renounce part of his rights and take up the remainder
(4)do nothing

A share certificate is a certificate issued by a company certifying that on the
date the certificate is issued a certain person is the registered owner of shares
in the company.
The key information contained in the share certificate is:
the name and address of the shareholder
the number of shares held
the class of shares
the amount paid (or treated as paid) on those shares
quity shares or stocks are the only investment that comes to our mind when the stock market is
doing well. However, there are other means like warrants which can help us reap benefits from rising
stock markets. Warrants are not only the other way of participating in companies good performance
but they are also more cost efficient in terms of overall returns.

In simple terms, a warrant is like an option issued by a company that gives the holder the right to buy
stock from the company at a specified price within a certain designated time period. Generally
speaking, warrants are issued by the company whose stock underlies the warrant and when an
investor exercises a warrant, he or she buys stock from the company. A stock warrant is a way for a
company to raise money through equity (stocks). A stock warrant is a smart way to own shares of a
company because a warrant usually is offered at a price lower than that of a stock option. ^1

Like an option, a warrant does not represent actual ownership in the stock of the company and it is
simply the right (but not the obligation) to buy shares at a certain price in the future.

The main difference between warrants and call options is that warrants are issued and guaranteed
by the company, whereas options are exchange instruments and are not issued by the company.
Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is
measured in months.
Meaning: A share warrant is a bearer document of title to shares and can be issued only by public
limited companies and that to against fully paid up shares only.

A share warrant cannot be issued by a private company, because the share warrant states that its
bearer is entitled to a number of shares mentioned there in. It is a negotiable document and is easily
transferable by mere delivery to another person. The holder of the share warrant is entitled to receive
dividend as decided by the company.

A share warrant is accompanied by attached coupons for the payment of future dividends.

There are three parts of a share warrant:
(1) The counter foil.
(2) Share Warrant proper.
(3) The dividend coupons.

Conditions for the issue of a share warrant:

(1) Only public limited companies: Share warrant can be issued by the public limited companies. It
cannot be issued by private companies.

(2) Against share certificate of fully paid up shares: A share warrant is only issued against share
certificate of fully paid up shares.

(3) Provision in the Articles: There must be a provision in the Articles of Association regarding the
issue of share warrant. If there is a provision, the company can issue a share warrant. If there is no
provision in the Articles, the company cannot issue a share warrant.

(4) Permission of the Central Government: Prior permission from the Central Government is
necessary for the issue of share warrant.

(5) Share warrant not issued originally: Share warrant are not issued originally at the time of
initial issue.

(6) AT the request of the share holder: A share warrant is issued at the request of the
Shareholders / member and not by the company at its own initiative.


In simple terms, a warrant is like an option issued by a company that gives the holder the right to buy stock from the
company at a specified price within a certain designated time period. Generally speaking, warrants are issued by the
company whose stock underlies the warrant and when an investor exercises a warrant, he or she buys stock from the
company. A stock warrant is a way for a company to raise money through equity (stocks). A stock warrant is a smart
way to own shares of a company because a warrant usually is offered at a price lower than that of a stock option. ^1

Like an option, a warrant does not represent actual ownership in the stock of the company and it is simply the right
(but not the obligation) to buy shares at a certain price in the future.

The main difference between warrants and call options is that warrants are issued and guaranteed by the company,
whereas options are exchange instruments and are not issued by the company. Also, the lifetime of a warrant is often
measured in years, while the lifetime of a typical option is measured in months

DISTINCTION BETWEEN SHARE CERTIFICATE AND SHARE WARRANT-


1)The holder of a share certificate is a registered member of the
company,while the bearer of a share warrant is not.



2)The issue of a share certificate does not require the approval of the central
government while share warrant can be issue only if the articles authorize its
issue and the central government has accorded its previous approval.



3)Both public and private company must issue share certificates but share
warrants can be issued only by public companies.



4)A share certificate is issued in respect of partly or fully paid shares,whereas
a share warrant can be issued only in respect of fully-paid shares.



5)A share warrant is a negotiable instrument,but a share certificate is not
negotiable.



6)The holder of the share warrant is not qualified as a director of a company
(where qualification shares are prescribed) but the holders of share certificate
is so qualified.



7)The holder of a share certificate can present a petition for winding up,but the
holder of a share warrant cannot do so.

A board of directors is a group of persons elected by the shareholders of a corporation to govern and
manage the affairs of the company. Directors are either named in the articles of incorporation or
appointed by the incorporator on formation of the corporation. The duties and makeup of the board
varies by company. They may or may not be employed by the company. Often the board of directors
of large corporations are independent and hold other important positions in business and academia.
The board typically hires a CEO, president, and other officers to run the day-to-day operations of the
company, subject to the board's oversight. Boards are involved often involved in central issues of
ownership, strategy, financing, and mergers and acquisitions. The board has a fiduciary duty to act in
the best interest of the shareholders.
Every company being an artificial person needs a group of people known as Board of Directors to carry
on the activities of the Company. As per Section 2 (13) of the Companies Act 1956, di rector means any
person occupying the position of a director by whatever name called. The Directors are either named
in the articles of association of the company or appointed by the Board or shareholders in general
meetings.
The Directors so appointed are having a fiduciary duty towards the company and collectively are
referred as the Board of Directors, their role is more than that of a trustee, and they may be deemed
as agents of the Company also.
Meaning of Director as per the Companies Act, 1956
A company is a legal entity and does not have any physical existence. It can act only
through natural persons to run its affairs. The person, acting on its behalf, is called
Director. A Director is any person, occupying the position of Director, by whatever
name called. They are professional men, hired by the company to direct its affairs.
But, they are not the servants of the company. They are rather the officers of the
company.
The definition of Director given in this clause is an inclusive definition. It includes
any person who occupies the position of a director is known as Director whether or
not designated as Director. It is not the name by which a person is called but the
position he occupies and the functions and duties which he discharges that determine
whether in fact he is a Director or not. So long as a person is duly, appointed by the
company to control the company's business and, authorized by the Articles to contract
in the company's name and, on its behalf, he functions as a Director.
The Articles of a company may, therefore, designate its Directors as governors,
members of the governing council or, the board of management, or give them any
other title, but so far as the law is concerned, they are simple Directors.
Duties of a Director
There is no exhaustive list defining the duties of the Board of Directors towards the
company and shareholders. But based on the analysis of the provisions of the
Companies Act, 1956 with regards to a director, some general duties of a Director are
mentioned herein:
To file return of allotments: a company must file with the Registrar, within a period of
30 days, a return of the allotments, stating the specified particulars. Failure to file such
return shall make the Directors liable as 'officer in default'. A fine, up to Rs.500 per
day, till the default continues may be levied.
Not to issue irredeemable preference shares or shares, redeemable after 20 years: A
company cannot issue irredeemable preference shares or preference shares,
redeemable beyond 20 years. Directors, making any such issue, may be held liable as
'officer in default' and, may be subject to a fine, up to Rs.1, 000.
To disclose interest: A Director, who is interested in a transaction of the company,
must disclose his interest to the Board. The disclosure must be made at the first
meeting of the Board, held after he has become interested. This is because a Director
stands in a fiduciary capacity with the company and, therefore, he must not place
himself in a position in which his personal interest conflicts with his duty.
A company is not debarred from entering into a contract in which a Director is
interested. It only requires that such interest be disclosed. An interested Director
should not take part in the discussion on the matter of his interest. His presence shall
not be counted for the purpose of quorum for that item. He shall not vote on that
matter. If he does vote, his vote shall be void. Non-disclosure of interest makes the
contract avoidable and not void. However, the concerned Director may be subjected to
fine, up to Rs. 5,000.
Duty to attend Board meetings - A number of powers of the company are exercised by
the Board of Directors in their meetings, held from time to time. Although, a Director
may not be able to attend all the meetings, but, if he fails to attend three consecutive
meetings or, all meetings for a period of three months, whichever is longer, without
permission of the Board, his office shall, automatically, fall vacant.
A Director's duties also include the following:
To convene Statutory, Annual General Meeting (AGM) and also Extraordinary
General Meetings;
To prepare and place at the AGM, along with the balance sheet and, profit and loss
account, a report on the company's affairs, including the report of the Board of
Directors;
To authenticate and approve annual financial statement;
To appoint first auditor of the company;
To appoint cost auditor of the company;
To make a declaration of solvency in the case of a Members' voluntary winding up;
It is difficult to describe the duty of directors in general terms, whether by way of
analogy or otherwise. The nature of duties of director would depend not only on the
nature of the company's business but also on the manner in which the work of the
company is distributed between directors and other officials. A director need not
exhibit in the performance of his duties a greater degree of skill than may reasonably
be expected from a person of his knowledge and experience.
In case of a Non Executive Director : A director is not bound to give continuous
attention to the affairs of his company. His duties are of an intermittent nature to be
performed at periodical board meetings, and at meetings of any committee of the
board upon which he happens to be placed. He is not, however, bound to attend all
such meetings, though he ought to attend whenever, in the circumstances, he is
reasonably able to do so. However an Executive Director needs to give constant
attention and take active interest in the affairs of the Company.
In respect of all duties that, having regard to the exigencies of business, and the
articles of association, may properly be left to some other official, a director, is in the
absence if grounds for suspicion justified in trusting that officer to perform such
duties honestly. A director must of necessity trust the officials of the company to
perform properly and honestly the duties allocated to those officials.
When presenting their annual reports and balance sheet to their shareholders and when
recommending the declaration of a dividend, directors ought not to be satisfied as to
the value of their company's assets merely by the assurances neither of their chairman,
nor with the experience or the belief of the auditor howsoever competent and trust
worthy he is. All in all, there is no difference between legal and equitable duties of
directors. If the directors act within their power with such care as is reasonably to be
expected from them, having regard to their knowledge and experience, and if they act
honestly for the benefit of the company. They discharge both their legal as well as
equitable duty to the company. The directors are not liable for all mistakes they make,
although if they had taken more care they might have avoided them.
What are the Liabilities of the Directors of a company towards the company?
The liability of a Director to the company may arise from:
Breach of fiduciary duty: Where a Director acts dishonestly to the interest of the
company, he will be held liable for breach of fiduciary duty. Most of the powers of
Directors are powers in trust and, therefore, should be exercised in the interest of the
company and, not in the interest of the Directors or, any section of members. Thus, in
a case where the Directors, in order to forestall a take-over bid, transferred the
unissued shares of the company to trustees, to be held for the benefit of the
employees, and an interest-free loan from the company was advanced to the trustees
to enable them to pay for the shares, it was held to be a wrongful exercise of the
fiduciary powers of the Directors.
Ultra vires acts: Directors are supposed to act within the parameters of the provisions
of the Companies Act, Memorandum and Articles of Association, since these lay
down the limits to the activities of the company and, consequently, to the powers of
the Board of Directors. Further, the powers of the Directors may be limited in terms of
specific restrictions, contained in the Articles of Association. The Directors shall be
held, personally, liable for acts beyond the aforesaid limits, being ultra vires the
company or the Directors. Thus, where the Directors pay dividends or interest out of
capital, they will be liable to indemnify the company for any loss or damage, suffered
due to such act.
Negligence: As long as the Directors act within their powers with reasonable skill and
care, as expected of them as prudent businessmen, they discharge their duties to the
company. But, where they fail to exercise reasonable care, skill and diligence, they
shall be deemed to have acted, negligently, in discharge of their duties and,
consequently, shall be liable for any loss or damage, resulting there from. However,
error of judgment will not be deemed as negligence. The Directors cannot be absolved
of their liability for negligence by any provisions in the Articles of Association.
Mala fide acts: Directors are the trustees for the money and property of the company,
handled by them, as well as for exercise of the powers, vested in them. If they
dishonestly or in a mala fide manner, exercise their powers and perform their duties,
they will be liable for breach of trust and, may be required to make good the loss or
damage, suffered by the company by reason of such mala fide acts. They are also
accountable to the company for any secret profits they might have made in course of
their performance of duties on behalf of the company. Directors can also be held
liable for their acts of 'misfeasance', i.e., misconduct or willful misuse of powers.
However, misconduct, which is not willful, shall not amount to 'misfeasance'.
Where a Director misapplies or misappropriates the money or properties of the
company or, has been guilty of breach of trust or misfeasance, the Court may order
him to repay the money or, restore the property or, to pay compensation.
Position Of Directors
It is not easy to explain the position that a director holds in a corporate enterprise. A
director is not a servant of any master. He is the controller of the companys affairs.
Director of a company is neither an employee nor a servant to the company. They are
professional people who were hired by the company to direct its affairs.

However there is no restriction under the Act, that a director cannot be an employee to
the company. In Lee v. Lees Air Farming Ltd2, it was held that, a director may,
however, work as an employee in different capacity. There is no definite definition for
director under the Companies Act, 1956. Director includes any person who is occupying
the position of a director, whatever name called3. So in order to understand the
position of a director in a company we have to look in to various decided cases.

In Judhah v. Rampada Gupta4, it was held that, director of a company registered under
this Act5 are persons duly appointed by the company to direct and manage the
business of the company. A director is sometimes described as agents, trustees,
managing partners etc. But each of these expressions is used not as exhaustive of their
powers and responsibilities, but as indicating useful points of view from which they may
for the moment and for the particular purpose be considered.

Director As Agents
In Ferguson v. Wilson6, the court clearly recognised that directors are in the eyes of
law, agents of the company. It was held that, the company has no person; it can act
only through directors and the case is, as regards those directors, merely the ordinary
case of a principal and agent. When the directors contract in the name, and on behalf of
the company, it is the company which is liable on it and not the directors.

In Elkington & Co. v. Hurter7, where the plaintiff supplied certain goods to a company
through its chairman, who promised to issue him a debenture for the price, but never
did so and company went into liquidation, he was held not liable to the plaintiff.
Similarly, a director was held to be personally not liable in a suit against a private chit
fund company. Attachment of the property of the director was held to be not
permissible8.

Like agents, directors have to disclose their personal interest, if any, in any transaction
of the company. In Ray Cylinders & Containers v. Hindustan General Industries Ltd9,
held that, the directors are the agents of the institution and not of its individual
members, except when that relationship arises due to the special facts of the case. Also
granted permission to file a suit against a company was not allowed to be treated as
permission against directors as well.

In Sarathi Leasing Finance Ltd v. B Narayana Shetty10, the articles of association
empowered the managing director to represent the company in legal proceedings. It
was held that a further authorization was not necessary to enable him to file a
complaint for dishonor of cheque under Sec. 138 of Negotiable Instrument Act.

Directors are the agents of a company. They are acting on behalf of the company. So
the directors cannot be held personally liable for any default of the company. It was
held that, for a loan taken by a company, the directors, who had not given any personal
guarantee to the creditor, could not be made liable merely because they were directors.

Director As Trustees
Directors are the trusties of the companys money, property and their powers and such
must account for all the moneys over which they exercise control and shall refund any
moneys improperly paid away, and shall exercise their powers honestly in the interest
of the company and all the shareholders, and not their own sectional interest.

The directors of a company are trustees for the company, and for reference to their
power of applying funds of the company and for misuse of the power they could be
rendered liable as trustees and on their death, cause of action survives against their
legal representatives11. Directors are those persons selected to manage the affairs of
the company for the benefit of shareholders. It is an office of trust, which if they
undertake, it is their duty to perform fully and entirely. This peculiar nature of their
office is one of the reason why the directors been described as trusties.

In the real sense the directors are not trustees. A trustee is the legal owner of the trust
property and contracts in his own name. On the other hand, director is a paid agent or
officer of the company and contracts for the company12. In fact, the directors are
commercial men managing a trading concern for the benefit of themselves and of all
the shareholders in it.

To whom the directors are trustee? Whether to the company or to the individual
shareholders. This principle was laid down in 1902 in Percival v. Wright13, and still
holds ground as a basic proposition. In this case the court held that, directors have no
duty towards individual shareholders. From this it is very clear that, the directors are
trustees to the company and not of individual shareholders. The principle of the case
was reiterated in Peskin v. Anderson14. Ordinarily the directors are not agents or
trustees of members or shareholders and owe no fiduciary duties to them.

However we have to take the decision of Allen v. Hyatt15. It was held that, the
directors are trustees of the profit for the benefit of the shareholders. They cannot
always act under the impression that they owe no duty to the individual shareholders.
But it is of no doubt that the primary duty of the director is to the company.

But in such circumstances where the directors act as agents for the share holders, the
later would be liable to the purchasers of their shares for any fraudulent
misrepresentation made by the directors in the course of negotiations16.

Director As Organs Of Corporate Body
The organic theory of corporate life treats certain officials as organs of the company,
for whose action the company is held liable just as a natural person is for the action of
his limbs17. Thus the modern directors are more than mere agents or trustees. The
Board is also correctly recognised to be a primary organ of the company. Directors and
managers represent the directing mind or will of the company and control what it does.

The state of mind of these managers is the state of mind of the company and is treated
by law as such. The practical effects of these rules are that the directors personal fault
in the business of the company becomes the fault of the company; their reason to
believe is attributed to the company and the intention to occupy a premises as
expressed by their conduct is the intention of the company.

Conclusion
A Director is an agent of the Company for the conduct of the business of the company.
Directors of a company have fiduciary relationship with the company as well as the
shareholders when he acts as an agent or officers of a company.

The director as the Companies Act, 1956 indicates, holds an extremely important
position in the administration and management of a Company. It must be noted that
the director actually works in different capacities at different times to ensure that the
company is run in a legal and an efficient manner. The Act places immense
responsibility on the soldiers of the directors.

Directors are bound to use their fair and reasonable diligence while discharging their
duties and they shall act honestly, and with such care as may be reasonably expected
from, having regard to their knowledge and experience.

The Companies Act has also seeks to introduce an element of objectivity in the office of
a director, for this purpose the act also introduced the office of independent directors.
However, the office of independent director has not been as successful in bringing
efficient and honest corporate governance as it was expected. The Satyam scam is the
biggest example!

Therefore, it can only be concluded that the Companies Act should be suitably be
amended to introduce such in built checks and balances that the office of a director
does not become an absolute, which practically is the case.
Classification of directors
A. Classification under the Companies Act
Categories of Directors
The Companies Act refers to the following two specific categories of Directors:
1. Managing Directors; and
2. Whole-time Directors.
A Managing Director is a Director who has substantial powers of management of the affairs of the
company subject to the superintendence, control and direction of the Board in question. A Whole-time
Director includes a Director who is in the whole-time employment of the company, devotes his whole-time
of working hours to the company in question and has a significant personal interest in the company as his
source of income.
Every public company and private company, which is a subsidiary of a public company, having a share
capital of more than Five Crore rupees (Rs. 5,00,00,000/-) must have a Managing or Whole-time Director
or a Manager.
Further classification of Directors
Based on the circumstances surrounding their appointment, the Companies Act recognizes the following
further types of Directors:
1. First Directors: Subject to any regulations in the Articles of a company, the subscribers to the
Memorandum of Association, or the company's charter or constitution ("Memorandum"), shall be
deemed to be the Directors of the company, until such time when Directors are duly appointed in the
annual general meeting ("AGM").
2. Casual vacancies: Where a Director appointed at the AGM vacates office before his or her term of
office expires in the normal course, the resulting vacancy may, subject to the Articles, be filled by the
Board. Such person so appointed shall hold office up to the time which the Director who vacated office
would have held office if he or she had not so vacated such office.
3. Additional Directors: If the Articles specifically so provide or enable, the Board has the discretion,
where it feels it necessary and expedient, to appoint Additional Directors who will hold office until the next
AGM. However, the number of Directors and Additional Directors together shall not exceed the maximum
strength fixed in the Articles for the Board.
4. Alternate Director: If so authorized by the Articles or by a resolution passed by the company in general
meeting, the Board may appoint an Alternate Director to act for a Director ("Original Director"), who is
absent for whatever reason for a minimum period of three months from the State in which the meetings of
the Board are ordinarily held. Such Alternate Director will hold office until such period that the Original
Director would have held his or her office. However, any provision for automatic re-appointment of retiring
Directors applies to the Original Director and not to the Alternate Director.
5. 'Shadow' Director: A person, who is not appointed to the Board, but on whose directions the Board is
accustomed to act, is liable as a Director of the company, unless he or she is giving advice in his or her
professional capacity. Thus, such a 'shadow' Director may be treated as an 'officer in default' under the
Companies Act.
6. De facto Director: Where a person who is not actually appointed as a Director, but acts as a Director
and is held out by the company as such, such person is considered as a de facto Director. Unlike a
'shadow' Director, a de facto Director purports to act, and is seen to the outside world as acting, as a
Director of the company. Such a de facto Director is liable as a Director under the Companies Act.
7. Rotational Directors: At least two-thirds of the Directors of a public company or of a private company
subsidiary of a public company have to retire by rotation and the term "rotational Director" refers to such
Directors who have to retire (and may, subject to the Articles, be eligible for re-appointment) at the end of
his or her tenure.
8. Nominee Directors: They can be appointed by certain shareholders, third parties through contracts,
lending public financial institutions or banks, or by the Central Government in case of oppression or
mismanagement. The extent of a nominee Director's rights and the scope of supervision by the
shareholders, is contained in the contract that enables such appointments, or (as appropriate) the
relevant statutes applicable to such public financial institution or bank. However, nominee Directors must
be particularly careful not to act only in the interests of their nominators, but must act in the best interests
of the company and its shareholders as a whole.The fixing of liabilities on nominee Directors in India does
not turn on the circumstances of their appointment or, indeed, who nominated them as Directors. Chapter
4 and Chapter 5 that follow set out certain duties and liabilities that apply to, or can be affixed on,
Directors in general. Whether nominee Directors are required by law to discharge such duties or bear
such liabilities will depend on the application of the legal provisions in question, the fiduciary duties
involved and whether such nominee Director is to be regarded as being in control or in charge of the
company and its activities. This determination ultimately turns on the specific facts and circumstances
involved in each case.
B. Classification under the Listing Agreement
The Securities Contracts (Regulation) Act, 1956, read with the rules and regulations made thereunder,
requires every company desirous of listing its shares on a recognized Indian stock exchange, to execute
a listing agreement ("Agreement") with such Indian stock exchange. This Agreement is in a standard
format (prescribed by the Securities Exchange Board of India ("SEBI")), as amended by SEBI from time
to time. The Agreement provides for the following further categories of Directors:
Categories under Listing Agreement
1. Executive Director;
2. Non-executive Director; and
3. Independent Director.
Executive and non-executive Directors
An Executive Director can be either a Whole-time Director of the company (i.e., one who devotes his
whole time of working hours to the company and has a significant personal interest in the company as his
source of income), or a Managing Director (i.e., one who is employed by the company as such and has
substantial powers of management over the affairs of the company subject to the superintendence,
direction and control of the Board). In contrast, a non-executive Director is a Director who is neither a
Whole-time Director nor a Managing Director. Clause 49 of the Agreement prescribes that the Board shall
have an optimum combination of executive and non-executive Directors, with not less than fifty percent
(50%) of the Board comprising non-executive Directors. Where the Chairman of the Board is a non-
executive Director, at least one-third of the Board should comprise independent Directors and in case he
is an executive Director, at least half of the Board should comprise independent Directors. Where the
non-executive Chairman is a promoter of the company or is related to any promoter or person occupying
management positions at the Board level or at one level below the Board, at least one-half of the Board of
the company shall consist of independent Directors.
Independent Directors
The Agreement defines an "Independent Director" as a non-executive Director of the company who:
a. apart from receiving Director's remuneration, does not have material pecuniary relationships or
transactions with the company, its promoters, its Directors, its senior management, or its holding
company, its subsidiaries, and associates which may affect independence of the Director;
b. is not related to promoters or persons occupying management positions at the board level or at one
level below the board;
c. has not been an executive of the company in the immediately preceding three (3) financial years;
d. is not a partner or an executive or was not a partner or an executive during the preceding three (3)
years, of any of the following:
i. the statutory audit firm or the internal audit firm that is associated with the company, and
ii. the legal firms and consulting firms that have a material association with the company;
e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may
affect the independence of the Director; or
f. he is not a substantial shareholder of the company, i.e., owning two percent (2%) or more of the block
of voting shares; and
g. he is not less than twenty-one (21) years of age.
Nominee directors appointed by an institution that has invested in, or lent money to, the company are also
treated as independent Directors.
Qualifications Required to Become
a Company Director
A person requires no formal qualifications
to become a company director. A director is
not required to be a member (shareholder) of
the company unless the articles of association
specifically so provide. Certain parties, such as
bodies corporate (i.e. companies), undischarged
bankrupts, the auditors of the company and
disqualified persons (i.e. a person disqualified
by a Court from acting as a company director)
are ineligible to act as company directors.
In addition, where a person is restricted in
acting as a director, the company must comply
with certain capital requirements before he or
she can so act. The topics of disqualification
and restriction are dealt with in detail in
Appendix B to this book.
The stock of a company is sold in units called shares. A share is a unit of
ownership, or equity, in a company or a corporation. Shares are one of the
most traded financial instruments.
If you buy a share of a company, you are buying a piece of the company.
When you own more than one share in a company or several companies,
these are called stocks, because "stock" generally refers to a portfolio of
shares.
On the stock markets, shares are also referred to as equities if you see
the term "equities trading", it is exactly the same as share trading.
The person who buys shares in a company is called a shareholder and has
a claim on part of the corporation's assets and earnings.
Companies divide their capital into equal units and sell these on the stock
market as a means of raising capital for its expansion, rather than
borrowing the funds from the banks.
Stocks and shares are traded in various stock markets all over the world.
Stock - Definition

An instrument that signifies an ownership position (called equity) in a corporation, and
represents a claim on its proportional share in the corporation's assets and profits.
Ownership in the company is determined by the number of shares a person owns divided
by the total number of shares outstanding. For example, if a company has 1000 shares of
stock outstanding and a person owns 50 of them, then he/she owns 5% of the company.
Most stock also provides voting rights, which give shareholders a proportional vote in
certain corporate decisions. Only a certain type of company called a corporation has stock;
other types of companies such as sole proprietorships and limited partnerships do not issue
stock. also called equity or equity securities or corporate stock.
Shares
Share is a unit issued by a company at the time of raising fund from the market. It is a
certificate issued to a person who applies for it and is given at a value predetermined by the
company. Shares can be of different types and are issued by the company in accordance
with the laws of the country in which they are issued. These shares are free to be traded on
the stock exchanges and can be bought or sold through them. A person holding the shares
of a company has the privilege of voting in the annual meetings as the part owner of the
company. Annual dividend is also received by the holder, the amount as decided by the
board of the company. Market price of the share is governed by the demand and supply
situation, it means when there are few sellers and more buyers the price of the share goes
up and vice versa. Investment in shares is a risky thing as its price is not constant and can
go below its face value when the stock market crashes incurring losses to the investor.
Stocks
Stocks in the reference of stock market are the total number of shares a person has in one
company or in many companies. Stocks and shares are commonly used terms for the
instruments issued by a company for raising funds. Stocks of a company can be defined as
total units of share that makes a person part owner in that company. A stock can be of two
types namely common stock or preferred stock. The preferred stock does not entitle voting
rights to its holder, but it entitles voting rights to the common stock holder. The preferred
stock holder receives dividend before it is given to the common stock holder. The dividend
value is usually higher in the case of preferred stock holders. These stocks investment are
always subjected to risks and investments should be done under the guidance of an expert.


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stocks/#ixzz3CSAFmJ1r
Distinction between share and share stock is as follows: Share Stock A share may
either be fully paid up or partly paid up. Shares can be issued originally. A share has
a nominal value. A share has a definite number which distinguishes it from other
shares. A share can be transferred only in its entirety or in its multiples only. Shares
can be issued by any company-public or private. Stock can never be partly paid up.
A company cannot make an original issue of stock. A shock has no nominal value.
A shock has no such number. Stock may be transferred in any fractions. Stock is
applicable only by public company limited by shares.

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172695.asp#.VAnPMTySzKQ
stinction between share and share stock is as follows: Share Stock A share may either
be fully paid up or partly paid up. Shares can be issued originally. A share has a
nominal value. A share has a definite number which distinguishes it from other
shares. A share can be transferred only in its entirety or in its multiples only. Shares
can be issued by any company-public or private. Stock can never be partly paid up.
A company cannot make an original issue of stock. A shock has no nominal value.
A shock has no such number. Stock may be transferred in any fractions. Stock is
applicable only by public company limited by shares

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172695.asp#.VAnPMTySzKQ