Introduction to Company Law

II SEM BCOM
COMPANY LAW
UNIT 01
INTRODUCTION TO COMPANY
Industrial has revolution led to the emergence of large scale business organizations. These
organization require big investments and the risk involved is very high. Limited resources
and unlimited liability of partners are two important limitations of partnerships of
partnerships in undertaking big business.
Joint Stock Company form of business organization has become extremely popular as it
provides a solution to overcome the limitations of partnership business. The Multinational
companies like Coca-Cola and, General Motors have their investors and customers spread
throughout the world. The giant Indian Companies may include the names like Reliance,
Talco Bajaj Auto, Infosys Technologies, Hindustan Lever Ltd., Ranbaxy Laboratories Ltd.,
and Larsen and Turbo etc.
MEANING OF COMPANY
Section 3 (1) (i) of the Companies Act, 1956 defines a company as a company formed and
registered under this Act or an existing company.
Another comprehensive and clear definition of a company is given by Lord Justice Lindley,
A company is meant an association of many persons who contribute money or moneys
worth to a common stock and employs it in some trade or business, and who share the profit
and loss (as the case may be) arising there from.
According to Haney, Joint Stock Company is a voluntary association of individuals for
profit, having a capital divided into transferable shares. The ownership of which is the
condition of membership.
CHARACTERISTICS / FEATURES OF A COMPANY
The main characteristics of a company are :
1. Incorporated association. A company is created when it is registered under the
Companies Act. It comes into being from the date mentioned in the certificate of
incorporation.
It may be noted in this connection that Section 11 provides that an association of more than
ten persons carrying on business in banking or an association or more than twenty persons
carrying on any other type of business must be registered under the Companies Act and is
deemed to be an illegal association, if it is not so registered.
For forming a public company at least seven persons and for a private company at least two
persons are persons are required. These persons will subscribe their names to the
NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA
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Memorandum of association and also comply with other legal requirements of the Act in
respect of registration to form and incorporate a company, with or without limited liability
[Sec 12 (1)]
2. Artificial legal person. A company is an artificial person. Negatively speaking, it is not a
natural person. It exists in the eyes of the law and cannot act on its own. It has to act through
a board of directors elected by shareholders.
3. Separate Legal Entity : A company has a legal distinct entity and is independent of its
members. The creditors of the company can recover their money only from the company and
the property of the company. They cannot sue individual members. Similarly, the company
is not in any way liable for the individual debts of its members.
Case: The principal of separate of legal entity was explained and emphasized in the
famous case of Salomon v Salomon & Co. Ltd.
The facts of the case are as follows :
Mr. Saloman, the owner of a very prosperous shoe business, sold his business for the sum of
$ 39,000 to Saloman and Co. Ltd. which consisted of Saloman himself, his wife, his daughter
and his four sons. The purchase consideration was paid by the company by allotment of &
20,000 shares and $ 10,000 debentures and the balance in cash to Mr. Saloman. The
debentures carried a floating charge on the assets of the company. One share of $ 1 each
was subscribed by the remaining six members of his family. Saloman and his two sons
became the directors of this company. Saloman was the managing Director. After a short
duration, the company went into liquidation. At that time the statement of affairs was like
this: Assets: $ 6000, liabilities; Saloman as debenture holder $ 10,000 and unsecured
creditors $ 7,000. Thus its assets were running short of its liabilities b $11,000
The unsecured creditors claimed a priority over the debenture holder on the ground that
company and Saloman was one and the same person. But the House of Lords held that the
existence of a company is quite independent and distinct from its members and that the
assets of the company must be utilized in payment of the debentures first in priority to
unsecured creditors.
Salomans case established beyond doubt that in law a registered company is an entity
distinct from its members, even if the person hold all the shares in the company. There is no
difference in principle between a company consisting of only two shareholders and a
company consisting of two hundred members. In each case the company is a separate legal
entity.
4. Perpetual Existence. A company is a stable form of business organization. Its life does
not depend upon the death, insolvency or retirement of any or all shareholder (s) or director
(s). Law creates it and law alone can dissolve it. Members may come and go but the
company can go on forever.
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5. Common Seal. As was pointed out earlier, a company being an artificial person has no
body similar to natural person and as such it cannot sign documents for itself. It acts through
natural person who are called its directors.
6. Limited Liability : A company may be company limited by shares or a company limited
by guarantee. In company limited by shares, the liability of members is limited to the unpaid
value of the shares. For example, if the face value of a share in a company is Rs. 10 and a
member has already paid Rs. 7 per share, he can be called upon to pay not more than Rs. 3
per share during the lifetime of the company. In a company limited by guarantee the liability
of members is limited to such amount as the member may undertake to contribute to the
assets of the company in the event of its being wound up.
7. Transferable Shares. In a public company, the shares are freely transferable. The right to
transfer shares is a statutory right and it cannot be taken away by a provision in the articles.
However, the articles shall prescribe the manner in which such transfer of shares will be
made and it may also contain bona fide and reasonable restrictions on the right of members
to transfer their shares.
8. Separate Property : As a company is a legal person distinct from its members, it is
capable of owning, enjoying and disposing of property in its own name. Although its capital
and assets are contributed by its shareholders, they are not the private and joint owners of its
property. The company is the real person in which all its property is vested and by which it is
controlled, managed and disposed of.
9. Delegated Management : A joint stock company is an autonomous, selfgoverning and
self-controlling organization. Since it has a large number of members, all of them cannot
take part in the management of the affairs of the company. Actual control and management
is, therefore, delegated by the shareholders to their elected representatives, know as directors.
TYPES OF COMPANY
Joint stock company can be of various types. The following are the important types of
company:
I. Classification of Companies by Mode of Incorporation Depending on the mode of
incorporation, there are three classes of joint stock companies.
A. Chartered companies. These are incorporated under a special charter by a monarch. The
East India Company and The Bank of England are examples of chartered incorporated in
England. The powers and nature of business of a chartered company are defined by the
charter which incorporates it. A chartered company has wide powers. It can deal with its
property and bind itself to any contracts that any ordinary person can. In case the company
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deviates from its business as prescribed by the charted, the Sovereign can annul the latter and
close the company. Such companies do not exist in India.
B. Statutory Companies. These companies are incorporated by a Special Act passed by the
Central or State legislature. Reserve Bank of India, State Bank of India, Industrial Finance
Corporation, Unit Trust of India, State Trading corporation and Life Insurance Corporation
are some of the examples of statutory companies. Such companies do not have any
memorandum or articles of association. They derive their powers from the Acts constituting
them and enjoy certain powers that companies incorporated under the Companies Act have.
Alternations in the powers of such companies can be brought about by legislative
amendments.
C. Registered or incorporated companies. These are formed under the Companies Act,
1956 or under the Companies Act passed earlier to this. Such companies come into existence
only when they are registered under the Act and a certificate of incorporation has been issued
by the Registrar of Companies. This is the most popular mode of incorporating a company.
Registered companies may further be divided into three categories of the following.
i) Companies limited by Shares : These types of companies have a share capital and the
liability of each member or the company is limited by the Memorandum to the extent of face
value of share subscribed by him. In other words, during the existence of the company or in
the event of winding up, a member can be called upon to pay the amount remaining unpaid
on the shares subscribed by him. Such a company is called company limited by shares. A
company limited by shares may be a public company or a private company. These are the
most popular types of companies.
ii) Companies Limited by Guarantee : These types of companies may or may not have a
share capital. Each member promises to pay a fixed sum of money specified in the
Memorandum in the event of liquidation of the company for payment of the debts and
liabilities of the company [Sec 13(3)] This amount promised by him is called Guarantee.
iii) Unlimited Companies : Section 12 gives choice to the promoters to form a company
with or without limited liability. A company not having any limit on the liability of its
members is called an unlimited company [Sec 12(c)]. An unlimited company may or may
not have a share capital. If it has a share capital it may be a public company or a private
company. If the company has a share capital, the article shall state the amount of share
capital with which the company is to be registered [Sec 27 (1)]
The articles of an unlimited company shall state the number of member with which the
company is to be registered.
II. On the Basis of Number of Members
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On the basis of number of members, a company may be :

(1) Private Company, and (2) Public Company.
A. Private Company
According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is that
company which by its articles of association :
i) limits the number of its members to fifty, excluding employees who are members or exemployees who were and continue to be members;
ii) Restricts the right of transfer of shares, if any;
iii) Prohibits any invitation to the public to subscribe for any shares or debentures of the
company.
Where two or more persons hold share jointly, they are treated as a single member.
According to Sec 12 of the Companies Act, the minimum number of members to form a
private company is two. A private company must use the word Pvt after its name.
Characteristics or Features of a Private Company.
The main features of a private of a private company are as follows :
i) A private company restricts the right of transfer of its shares. The shares of a private
company are not as freely transferable as those of public companies. The articles generally
state that whenever a shareholder of a Private Company wants to transfer his shares, he must
first offer them to the existing members of the existing members of the company. The price
of the shares is determined by the directors. It is done so as to preserve the family nature of
the companys shareholders.
ii) It limits the number of its members to fifty excluding members who are employees or exemployees who were and continue to be the member. Where two or more persons hold share
jointly they are treated as a single member. The minimum number of members to form a
private company is two.
iii) A private company cannot invite the public to subscribe for its capital or shares of
debentures. It has to make its own private arrangement.
B. Public company
According to Section 3 (1) (iv) of Indian Companies Act. 1956 A public company which is
not a Private Company, If we explain the definition of Indian Companies Act. 1956 in
regard to the public company, we note the following :
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i) The articles do not restrict the transfer of shares of the company

ii) It imposes no restriction no restriction on the maximum number of the members on the
company.
iii) It invites the general public to purchase the shares and debentures of the companies
Differences between a Public Company and a Private company
1. Minimum number : The minimum number of persons required to form a public company
is 7. It is 2 in case of a private company.
2. Maximum number : There is no restriction on maximum number of members in a public
company, whereas the maximum number cannot exceed 50 in a private company
3. Number of directors. A public company must have at least 3 directors whereas a private
company must have at least 2 directors (Sec. 252)
4. Restriction on appointment of directors. In the case of a public company, the directors
must file with the Register a consent to act as directors or sign an undertaking for their
qualification shares. The directors or a private company need not do so (Sec 266)
5. Restriction on invitation to subscribe for shares. A public company invites the general
public to subscribe for shares. A public company invites the general public to subscribe for
the shares or the debentures of the company. A private company by its Articles prohibits
invitation to public to subscribe for its shares.
6. Name of the Company : In a private company, the words Private Limited shall be
added at the end of its name.
7. Public subscription : A private company cannot invite the public to purchase its shares or
debentures. A public company may do so.
8. Issue of prospectus : Unlike a public company a private company is not expected to issue
a prospectus or file a statement in lieu of prospectus with the Registrar before allotting
shares.
9. Transferability of Shares. In a public company, the shares are freely transferable (Sec.
82). In a private company the right to transfer shares is restricted by Articles.
10. Special Privileges. A private company enjoys some special privileges. A public
company enjoys no such privileges.
11. Quorum. If the Articles of a company do not provide for a larger quorum. 5 members
personally present in the case of a public company are quorum for a meeting of the company.
It is 2 in the case of a private company (Sec. 174)
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12. Managerial remuneration. Total managerial remuneration in a public company cannot

exceed 11 per cent of the net profits (Sec. 198). No such restriction applies to a private
company.
13. Commencement of business. A private company may commence its business
immediately after obtaining a certificate of incorporation. A public company cannot
commence its business until it is granted a Certificate of Commencement of business.
When a Private company becomes a Public company
A private company shall become a public company in following cases :
i) By default: When it fails to comply with the essential requirements of a private company
provided under Section 3 (1) (iii) Default in complying with the said three provisions shall
disentitle a private company to enjoy certain privileges (Sec. 43).
ii) A private company which is a subsidiary of another public company shall be deemed to be
a public company.
iii) By provisions of law - Section 43-A.
Section 43-A
a) Where not less than 25% of the paid-up share capital of a private company is held by one
or more bodies corporate such a private company shall become a public company from the
data in which such 25% is held by body corporate [Sec. 43-A (1)]
b) Where the average annual turnover of a private company is not less than Rs. 10 crores
during the relevant period, such a private company shall become a public company after the
expiry of the period of three months from the last day of the relevant period when the
accounts show the said average annual turnover [Sec. 43 A (1 A)].
c) When a private company holds not less than 25% of the paid up share capital of a public
company the private company shall become a public company from the date on which the
private company holds such 25% [Sec. 43A (IB)].
d) Where a private company accepts, after an invitation is made by an advertisement of
receiving deposits from the public other than its members, directors or their relatives, such
private company shall become a public company [Sec. 43A (IC)].
iv) By Conversion : When the private company converts itself into a public company by
altering its Articles in such a manner that they no longer include essential requirements of a
private company under Section 3 (1) (iii). On the data of such alternations, it shall cease to
be private company. It shall comply with the procedure of converting itself into a public
company [Sec. 44].
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The Articles of Association of such a public company may continue to have the three
restrictions and may continue to have two directors and less than seven members Within 3
months of such a conversion. Registrar of Companies shall be intimated. The Registrar shall
delete the word Private before the words Limited in the name of the company and shall
also make necessary alternations in the certificate of incorporation.
III. On the basis of Control
On the basis of control, a company may be classified into :
1. Holding companies, and
2. Subsidiary Company
1. Holding Company [Sec. 4(4)]. A company is known as the holding company of another
company if it has control over the other company. According to Sec 4(4) a company is
deemed to be the holding company of another if, but only if that other is its subsidiary.
A company may become a holding company of another company in either of the following
three ways:a) By holding more than fifty per cent of the normal value of issued equity capital of the
company; or
b) By holding more than fifty per cent of its voting rights; or
c) By securing to itself the right to appoint, the majority of the directors of the other
company , directly or indirectly.
The other company in such a case is known as a Subsidiary company. Though the two
companies remain separate legal entities, yet the affairs of both the companies are managed
and controlled by the holding company. A holding company may have any number of
subsidiaries. The annual accounts of the holding company are required to disclose full
information about the subsidiaries.
2. Subsidiary Company. [Sec. 4 (I)]. A company is know as a subsidiary of another
company when its control is exercised by the latter (called holding company) over the former
called a subsidiary company. Where a company (company S) is subsidiary of another
company (say Company H), the former (Company S) becomes the subsidiary of the
controlling company (company H).
IV. On the basis of Ownership of companies
a) Government Companies. A Company of which not less than 51% of the paid up capital
is held by the Central Government of by State Government or Government singly or jointly
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is known as a Government Company. It includes a company subsidiary to a government

company. The share capital of a government company may be wholly or partly owned by the
government, but it would not make it the agent of the government . The auditors of the
government company are appointed by the government on the advice of the Comptroller and
Auditor General of India. The Annual Report along with the auditors report are placed
before both the House of the parliament. Some of the examples of government companies
are - Mahanagar Telephone Corporation Ltd., National Thermal Power Corporation Ltd.,
State Trading Corporation Ltd. Hydroelectric Power Corporation Ltd. Bharat Heavy
Electricals Ltd. Hindustan Machine Tools Ltd. etc.
b) Non-Government Companies. All other companies, except the Government Companies,
are called non-government companies. They do not satisfy the characteristics of a
government company as given above.
V. On the basis of Nationality of the Company
a) Indian Companies : These companies are registered in India under the Companies Act.
1956 and have their registered office in India. Nationality of the members in their case is
immaterial.
b) Foreign Companies : It means any company incorporated outside India which has an
established place of business in India [Sec. 591 (I)]. A company has an established place of
business in India if it has a specified place at which it carries on business such as an office,
store house or other premises with some visible indication premises. Section 592 to 602 of
Companies Act, 1956 contain provisions applicable to foreign companies functioning in
India.
Corporate Personality
Corporate Personality is the creation of law. Legal personality of corporation is recognized
both in English and Indian law. A corporation is an artificial person enjoying in law capacity
to have rights and duties and holding property.
A corporation is distinguished by reference to different kinds of things which the law selects
for personification. The individuals forming the corpus of corporation are called its
members. The juristic personality of corporations pre-supposes the existence of three
conditions:
(1) There must be a group or body of human beings associated for a certain purpose.
(2) There must be organs through which the corporation functions, and
(3) The corporation is attributed will by legal fiction. A corporation is distinct from its
individual members.
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It has the legal personality of its own and it can sue and can be sued in its own name. It does
not come to end with the death of its individual members and therefore, has a perpetual
existence. However, unlike natural persons, a corporation can act only through its agents.
Law provides procedure for winding up of a corporate body. Besides, corporations the banks,
railways, universities, colleges, church, temple, hospitals etc. are also conferred legal
personality. Union of India and States are also recognized as legal or juristic persons.
In certain cases, the corpus of the legal person shall be some fund or estate which reserved
certain special uses. For instance, a trust estate or the estate of an insolvent, a charitable
fund etc..; are included within the term legal personality.
Corporate veil
The term "corporate veil" refers to the concept that a publicly traded company's shareholders
are shielded from liability connected to that company's actions. If the company incurs
corporate debts or breaks laws, the corporate veil concept dictates that shareholders should
not be held liable for those errors.
A legal concept that separates the personality of a corporation from the personalities of its
shareholders, and protects them from being personally liable for the company's debts and
other obligations. This protection is not ironclad or impenetrable. Where a court determines
that a company's business was not conducted in accordance with the provisions of corporate
legislation (or that it was just a faade for illegal activities) it may hold the shareholders
personally liable for the company's obligations under the legal concept of lifting the
corporate veil.
Lifting of corporate veil
Incorporation by registration was introduced in 1844 and the doctrine of limited liability
followed in 1855.Subsequently in 1897 in Solomon v. Solomon & Company the House of
Lords effected these enactments and cemented into English law the twin concepts of
corporate entity and limited liability. In that case the apex court simply laid down that a
When the veil is lifted:
1.Fraud The courts have been more that prepared to pierce the corporate veil when it fells
that fraud is or could be perpetrated behind the veil. The courts will not allow the Solomon
principal to be used as an engine of fraud. The two classic cases of the fraud exception are
Gilford motor company ltd v. Horne and Jones v. Lipman .
In the first case, Mr. Horne was an ex-employee of The Gilford motor company and his
employment contract provided that he could not solicit the customers of the company. In
order to defeat this he incorporated a limited company in his wife's name and solicited the
customers of the company. The company brought an action against him. The Court of appeal
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was of the view that "the company was formed as a device, a stratagem, in order to mask the
effective carrying on of business of Mr. Horne" in this case it was clear that the main
purpose of incorporating the new company was to perpetrate fraud. Thus the court of appeal
regarded it as a mere sham to cloak his wrongdoings
In the second case of Jones v. Lipman a man contracted to sell his land and thereafter
changed his mind in order to avoid an order of specific performance he transferred his
property to a company. russel judge specifically referred to the judgments in Gilford v.
Horne and held that the company here was " a mask which (Mr. Lipman) holds before his
face in an attempt to avoid recognition by the eye of equity" he awarded specific
performance both against Mr.Lipman and the company. Under no circumstances will the
court allow the ant form of abuse of the corporate form and when such abuse occurs the
courts will step in and Jennifer Payne in her article lists three aspects of fraud, which needs
to be looked at before the corporate veil can be lifted which are
A) What are the motives of the fraudulent person relevantWhether some level of deception is necessary needs to be determined. In the case of Hilton
v.plustile ltd the plaintiff and the defendant agreed to use a medium of a company in a
tenancy arrangement in order to evade the application of the rent act 1977.The court of
Appeal held that the plaintiff was not entitled to lift the veil since he had full knowledge of
the matter at all times. However another interesting question that arises is what is the effect
of deception on the other party. The issue came up for discussion in the case of Adams
V.Cape industries plc.In considering whether the corporate form has been used in such a way
as to justify the lifting of the corporate veil, the court stated that the correct test in relation to
groups of companies was whether the company had been used as a "mere faade concealing
the true facts" applying this test Slade J. said that the "motives of the perpetrator may be
highly material" in both the classic cases intention to deceive the plaintiff was very much
present how ever it was not so in Adams V.Cape industries. So the point that needs to be
determined is whether motive is necessary for the fraud exemption to exist. However to get
any answer it is also important to find out the nature of legal right that is being denied to the
plaintiff
b) Is the character of the legal obligation being evaded relevant?
What the court wants is to prevent limited companies from using the corporate form to evade
a contractual or legal obligation. However one needs to question whether the nature of this
obligation will affect the ability of the court to lift the corporate veil. In the classic cases the
defendants sought to avoid the legal obligations that existed prior to their incorporation, the
main motive of incorporation was to avoid the performance of the legal obligation in Adams
v. Cape there was some discussion about the need to allow the veil to be lifted in order to
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prevent Cape avoiding publicity as to its involvement in the sale of asbestos to America and
to prevent cape from having any practical benefit of the group's asbestos trade in the states
without the attendant risks of tortuous liability. However the tortuous liability was purely
speculative. For the fraud exception to exist the defendant must deny the plaintiff some
preexisting legal right. In case no legal right is existent the intention on part of the defendant
to deceive the plaintiff must be speculative and hence less substantial in nature. if the legal
right crystallizes before the incorporation of the company then the mental element is satisfied
if however the reverse then question arises if whether in such circumstances the mental
element can be satisfied. A suitable answer to this is if the legal right crystallizes after the
incorporation but before the use of the corporate form to evade the legal right, the fraud
exception should be satisfied
C) Is the timing of the incorporation of the device company relevant?
In Creasey v. Breachwood Motors Limited, the reason for the failure of the fraud exception
was the timing of incorporation of the sham company. Here Mr. Creasey brought an action
against wrongful dismissal against his employers BW. BW served a defence but four months
later he was served a notice saying that the company was insolvent .BM took over all the
business except the plaintiff's claim. The plaintiff obtained an order for damages and interest
however before he received anything BW went was dissolved without going into liquidation.
The plaintiff sought an order substituting BM for BW on the grounds of justice. In this case
the facts may look similar to Adams v. Cape Industries however Richard Southwell sitting as
distinguished Gilford and Horne and Jones v. Lipman on the basis that in those cases the
sham companies are had been formed with the view to carry out the fraud .in the present case
the device company BM was already in business and caring on it's own business. This a very
controversial case and should have been decided on the basis of the classic cases as it should
not matter whether device companies were created to avoid the legal obligation or whether
they were in existence. Creasey should have been otherwise decided maybe on the grounds
of justice.
2. Group Enterprises Sometimes in the case of group of enterprises the Solomon principal
may not be adhered to and the court may lift the veil in order to look at the economic
realities of the group itself. In the case of D.H.N.food products Ltd. V. Tower Hamlets it has
been said that the courts may disregard Solomon's case whenever it is just and equitable to
do so. In the above-mentioned case the court of appeal thought that the present case where it
was one suitable for lifting the corporate veil. Here the three subsidiary companies were
treated as a part of the same economic entity or group and were entitled to compensation.
3. Agency In the case of Bodrip v. Solomon Justice Vaughan Williams expressed that the
company was nothing but an agent of Solomon " That this business was Mr. Solomon's
business and no one else's; that he chose to employ as agent a limited company; that he is
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bound to indemnify that agent the company and that this agent, the company has lien on the
assets" however on appeal to the house of lords it was held that a company did not
automatically become an agent of the shareholder even if it was a one man company and
they other shareholders were dummies.
4. Trust The courts may pierce the corporate veil to look at the characteristics of the
shareholders. In the case of Abbey and Planning the court lifted the corporate veil. In this
case a school was run life a company but the shares were held by trustees on educational
charitable trusts. They pierced the veil in order to look into the terms on which the trustee
held the shares.
5. Tort Usually the English courts have not lifted the veil on the ground of tort it is a
phenomenon not witnessed in most common law jurisdictions apart from Canada
6. Enemy character- In times of war the court is prepared to lift the corporate veil and
determine the nature of shareholding as it did in the Daimler case where germen shareholders
held the shares of an English company during the time of world war 1.
7. Tax- At times tax legislations warrant the lifting of the corporate veil. The courts are
prepared to disregard the separate legal personality of companies in case of tax evasions or
liberal schemes of tax avoidance without any necessary legislative authority.
Statutory support of lifting the veil ( English law)
1) Reduction of number of members
Under section 24 of the companies act if a public company carries on business for more than
six months may become liable jointly and severally with the company for the payment of
debts the right that this section confers on creditors is limited. it is only that member who
remains after 6 months that can be sued. The anomaly of this section is that the liability
attaches to a member and not a director unless the director also happens to be a director as
well. This section has very little practical utility because of the limitation.
2) Fraudulent or wrongful trading: a) Criminal liability: - If any business of a company is carried on with the intend to defraud
creditors of the company or creditors of any other person or for any fraudulent purpose who
was knowingly a party to the carrying on of the business in that manner is liable to
imprisonment or fine or both This applies whether or not the company has been or is in the
course of being wound up. The civil liability for the same offence in now a part of the
Insolvency Act
b) Sections 213NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA
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(1) If in the course of winding up of a company it appears that any business of the company
has been carried on with the intend to defraud creditors of the company or creditors of any
other person or for any fraudulent purpose...then
(2) The court on application of the liquidator may declare that person in who were
knowingly parties to the carrying on of business in that manner are liable to make such
contributions (if any) as the court thinks proper.
c) Abuse of company names or employment of disqualified directors Section 216 of the
Insolvency Act now makes it an offence for anyone who was a director or a shadow director
of the original company at any time during the 12 months preceding its going into insolvent
liquidation to be in any way concerned (except with leave of court) during the next five years
in the formation, management, of a company or business with a name by which the original
company was known or one so similar as to suggest an association with that company.
d) Misdescription of the company Section 349(4) of the companies act provides that if any
officer of the company or other person acting on its behalf Signs or authorizes to be signed
on behalf of the company any bill of exchange, promissory note, endorsement, cheque or
order for money or goods in which the companies name is not mentioned in legible
letters..He is liable to a fine and he is personally liable to the holder of such as mentioned
above.
e) Premature trading. Another example of personal liability is section 117 (8). Under this
section a public limited company newly incorporated as such must not "do business or
exercise any borrowing power" until it has obtained from the registrar of companies a
certificate that has complied with the provisions of the act relating to the raising of the
prescribed share capital or until it has re-registered as a private company. if it enters into any
transaction contrary to this provision not only are the company and it's officers in default
,liable to pay fines but it the company fails to comply with its obligations in that connection
within 21 days of being called upon to do so, the directors of the company are jointly and
severally liable to indemnify the other party in respect of any loss or damage suffered by
reason of the company's failure.
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UNIT 02
FORMATION OF COMPANY
Formation of a joint stock company as it involves a lengthy legal procedure. Its registration
with the Registrar of Companies is obligatory, before it can commence its business. In this
lesson you shall learn about the various stages involved in the formation of a Joint Stock
Company and have an idea about the important documents that regulate its functioning.
STAGES IN THE FORMATION OF A JOINT STOCK COMPANY
It is very easy to establish a sole proprietorship business or a partnership firm as there are a
few regulations to meet. But for the establishment of a company, a lot of formalities are to be
complied with. The registration of the company is mandatory before starting its operation.
The formation of a company, right from the origin of idea to establish a company goes
through four different stages, like:
Stage I Promotion
Stage- II Incorporation
Stage- III Raising of Capital
Stage- IV Commencement of Business
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STAGE I PROMOTION
Promotion of a business simply refers to all those activities that are required to be undertaken
to establish a new business unit for manufacturing or distribution of any product or provide
any service to the people. It starts with conceiving an idea of business or discover an
opportunity for doing a business, assess its feasibility and then take the necessary steps to
launch the business unit. This involves ascertaining as to whether all the basic requirements
such as land, building, raw material, machine, equipments etc. are available or not. If they
are available one can assemble them, arrange the necessary funds and set up the business unit
to give shape to the initial idea of establishing the business. The whole process is called
business promotion and the person who does it is called the promoter.
ROLE AND IMPORTANCE OF PROMOTER
A promoter can be defined as a person or group of persons who conceive the idea of setting
up a new business, assess its feasibility and take necessary steps to arrange the basic
requirements and establish a business unit say, a Company and put into operation. Promoter
plays a pivotal role in the promotion of a company. He conceives the idea of business
enterprise, analyses its prospects, works out a tentative scheme of organisation, brings
together the requisite men, material, machines and money and starts the enterprise.
Characteristics of a Promoter:
1. A promoter conceives an idea for the setting-up a business.
2. He makes preliminary investigations and ensures about the future prospects of the
business.
3. He brings together various persons who agree to associate with him and share the business
responsibilities.
4. He prepares various documents and gets the company incorporated.
5. He raises the required finances and gets the company going.
Functions of a Promoter
1. Promotion of an Idea: It is the promoter who has to conceive the idea of forming a
company. This is the first step towards the formation of a company.
2. Detailed Investigation: The promoter, after forming an idea should make a thorough and
detailed investigation of the prospects of the business. It should be done with reference to the
sources of supply, nature of demand, extent of competition, capital requirements of the
present and future etc. He can also take the help of technical experts.
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3. Verification: The promoter should also verify whether the advises or comments or reports
made by the experts are free from bias. He should also consult with other impartial and
disinterested experts and should see whether the idea is commercially viable.
4. Assembling: After verification of the idea, the promoter should go ahead with the
promotion of the projected company. He should find out the first directors and the
subscribers to the Memorandum.
5. Financing the Proposition: The promoter, at this stage, has to prepare a plan setting out
the mode of getting the necessary finance. He should arrange for finance to meet the
preliminary expenses. He should negotiate with the vendors if it proposes to buy an existing
business. He should also arrange for underwriting contracts. He should estimate the required
capital and the availability of bank loan etc., and also the cost of raising the capital.
6. Presentation of the Proposition: Finally, after making necessary arrangements and
modes of raising finance, he gets the necessary documents such as Memorandum etc.
printed, filed with the Registrar and then arranges for their publication. He should take the
aid of legal experts in preparing the documents and should see that the documents are strictly
in accordance with the provisions of the Companies Act.
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Duties of Promoter
The promoters occupy an important position and have wide powers relating to the formation
of a company. It is, however, interesting to note that so far as the legal position is concerned,
he is neither an agent nor a trustee of the proposed company. But it does not mean that the
promoter does not have any legal relationship with the proposed company. The promoters
stand in a fiduciary relation to the company they promote and to those persons, whom they
induce to become shareholders in it.
Following are the major Duties of the promoter:
1.Duty to disclose secret profits A promoter is not forbidden to make profit but to make
secret profits. He may make a profit out of promotion with the consent of the company, in
the same way as an agent may retain a profit obtained through his agency with his principles
consent.
A promoter is allowed to make a profit out of a promotion but with the consent of the
company.
2. Duty of disclosure of interest In addition to his duty for declaration of secret profits, a
promoter must disclose to the company any interest he has in a transaction entered into by it.
This is so even where a promoter sells property of his own to the company, but does not have
to account for the profit he makes from the sale because he bought the property before the
promotion began. Disclosure must be made in the same way as though the promoter was
seeking the companys consent to his retaining a profit for which he is accountable.
3. Promoters duties under the Indian Contract Act Promoters duties to the company
under the Indian Contract Act have not been dealt with by the courts in any detail. They
cannot depend on contract, because at the time the promotion begins, the company is not
incorporated, and so cannot contract with its promoters. It seems, therefore, that the
promoters duties must be the same as those or a person, who acts on behalf of another
without a contract of employment, namely, to shun from deception and to exercise
reasonable skill and care. Thus, where a promoter negligently allows the company to
purchase property, including his own, for more than its worth, he is liable to the company for
the loss it suffers. Similarly, a promoter who is responsible for making misrepresentations in
a prospectus may be held guilty of fraud under section 17, of the Indian Contract Act and
consequently liable for damages under section 19 of the Act.
4.Termination of Promoters Duties A promoters duties do not come to an end on the
incorporation of the company, or even when a Board of directors in appointed. They
continue until the company has acquired the property or business which it was formed to
manage and has raised its initial share capital and the Board of directors has taken over the
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management of the companys affairs from the promoters. When these things have been
done, the promoters fiduciary and contractual duties cease.
5. Remedies available to the company against the promoter for breach of his duties
Since a promoter owes a duty of disclosure to the company, the primary remedy in the event
of breach is for the company to bring proceedings for rescission of any contract with him or
for the recovery of any secret profits which he has made.
Liabilities on Promoter
A promoter is subjected to liabilities under the various provisions of the Companies Act.
Section 26 of the Companies Act, 2013 lay down matters to be stated in a prospectus.
A promoter may be held liable for non-compliance of the provisions of the section.
Under section 34 and 35, a promoter may be held liable for any untrue statement in the
prospectus to a person who subscribes for shares or debentures in the faith of such
prospectus. However, the liability of the promoter in such a case shall be limited to the
original allottee of shares and would not extend to the subsequent allotters.
According to section 300, a promoter may be liable to examination like any other
director or officer of the company if the court so directs on a liquidators report
alleging fraud in the promotion or formation of the company.
A company may proceed against a promoter on action for deceit or breach of duty
under section 340, where the promoter has misapplied or retained any property of the
company or is guilty of misfeasance or breach of trust in relation to the company.
TYPES OF PROMOTERS
The task of business promotion may be carried out by an individual, a firm, a body corporate
or a banker. Based on the nature of their operation the promoters can be classified into the
following categories.
(a) Professional Promoters: These promoters are specialists in promoting new business
ventures. They do it on a whole time basis as their occupation or profession. They initiate all
the steps in establishing new enterprises and find out the persons who can finance it.
(b) Financial Promoters: These promoters float companies only during favorable
conditions in the securities market. They have the financial capacity and look forward to
opportunities for new investment.
(c) Technical Promoters: These promoters are technical experts in different fields. They
make use of their specialised knowledge, experience and training in promoting new business.
They generally charge fees for their services.
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(d) Entrepreneurial Promoters: They are the people who conceive new ideas of business,
take necessary steps to set up the business unit to give it a shape and ultimately control and
manage it. Most promoters in India (like Tata, Birla, Ambanies) fall in this category.
(e) Specialised Institutions: There are certain financial institutions which provide financial
assistance and guidance in launching new ventures and often collaborate with new
entrepreneurs to promote new business. They also provide management and technical
expertise to the existing enterprises.
(f) Government: Both the central and state governments also act as promoters in most cases
where the new business is floated either in public sector or joint sector which involve huge
amount of capital and risk. HMT, ONGC, SAIL, BHEL are glaring examples of units set up
by the government.
STEPS INVOLVED IN PROMOTION OF A COMPANY
The task of promotion usually involves the following four steps or phases.
1. Discovery of a business idea
2. Investigation and Verification
3. Assembling
4. Financing the Proposition
(1) Discovery of a Business Idea The process of business promotion begins with
conception of an idea of business opportunity.
The idea may come from non-availability of any product to satisfy the existing need of
people or inability of an existing product to satisfy the changing need of the people or a new
invention that can create a new product. For example, during early 1940s there was no
Walkman. The marketing executive of an electronic company found people busy in
hearing music holding a big radio on their shoulders while travelling. This particular scene
perturbed the marketing executive and he thought how nice would it be if the radio could be
reduced to a very small size which can be kept in pocket and a wire be connected to the ear.
This idea gave birth to the new product Walkman.
(2) Investigation and Verification Once the idea has been conceived, a thorough
investigation is made to establish the soundness of the proposition, taking into consideration
its technical feasibility and commercial viability. As in the case of Walkman if there was
no technology by which the size of the radio could be reduced to small size or no technology
to transmit the sound from the radio to the ear through earphone, the proposition of
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producing the Walkman would have been impossible. Similarly, if technology is available
but the cost involved in making a Walkman would be so high that no customer could be
able to purchase it; or the demand is too limited and the return on investment is low, the idea
is not considered as commercially viable.
All these investigations on technical feasibility, commercial viability and profitability are
presented in a report called project report or feasibility report. This feasibility report is
the primary or basic document that helps in procuring licenses and arrange the necessary
finance from financial institutions and other investors.
(3) Assembling Once the promoter is convinced of the feasibility and profitability of the
proposition, he takes steps in assembling or making arrangements for all the necessary
requirements such as land, building, machinery, tools, capital, etc. Decision is also to be
made regarding size, location and layout etc. for the plant, and make contracts with suppliers
for raw materials, enter into agreement with the dealers to purchase equipments, make
agreement with bankers to finance and take initial steps for the setting up of a Company.
(4) Financing the Proposition At this stage, financial plans are prepared with respect to the
amount of capital required, the nature of capital structure i.e., the proportion of capital to be
raised from owners fund and that from borrowing from banks and others, and how and when
to raise the share capital from the general public. Agreements are made with merchant
bankers, underwriters and stock brokers who are to assist the capital issue and so on.
INCORPORATION
A sole proprietorship or partnership firm can be formed to carry out its business even
without any registration. But a company can not be formed or permitted to run its business
without registration. Infact, a company comes into existence only when it is registered with
the Registrar of Companies. For this purpose the promoter has to take the following steps:
(a) Approval of Name It has to be ensured that the name selected for the company does not
match with the name of any other company. For this, the promoter has to fill in a Name
Availability Form and submit it to the Registrar of Companies along with necessary fees.
The name must include the words(s) Limited or Private limited at the end. Once it is
approved, the promoter can proceed with other formalities for the incorporation of the
Company.
(b) Filing of Documents After getting the name approved the promoter makes an
application to the Registrar of Companies of the State in which the Registered Office of the
company is to be situated for registration of the company. The application for registration
must be accompanied by the following documents.
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(i) Memorandum of Association (MOA): It defines the objectives of the company and states
about the range of activities or operation. It must be duly stamped, signed and witnessed.
(ii) Articles of Association (AOA). It contains the rules and regulations regarding the internal
management of the company. It must be properly stamped, duly signed by the signatories to
the Memorandum of Association and witnessed.
(iii) A list of persons who have agreed to become Directors with their addresses etc.
(iv) Written consent of the proposed Directors to act in that capacity, duly signed by each
Director.
(v) The notice about the exact address of the Registered Office of the company. It may,
however, be filed within 30 days of incorporation or registration.
(vi) A copy of the name approval letter received from the Registrar of Companies.
(vii) A statutory declaration that all the legal requirements of the Companies Act in regard to
incorporation have been complied with.
(c) Payment of Filing and Registration Fees : Along with the above documents, necessary
filing fees and registration fees at the prescribed rates are also to be paid.
The Registrar will scrutinise all the documents and if he finds them in order, he will issue a
Certificate of Incorporation. The moment the certificate is issued, the company comes into
existence. So this certificate may be called as the Birth Certificate of a Joint Stock Company.
RAISING CAPITAL OR SUBSCRIPTION OF CAPITAL
After the company is incorporated, the next stage is to raise the necessary capital. In case of
a private limited company, funds are raised from the members or through arrangement from
banks and other sources. In case of a public limited company the share capital has to be
raised from the public. This involves the following:
(a) Preparation of a draft prospectus and get it inspected (vetted) by SEBI to ensure that all
information given in the prospectus fully complies with the guidelines laid down by SEBI in
this regard.
(b) Filing a copy of the prospectus with the Registrar of Companies.
(c) Issue of prospectus to the public by notifying in a newspaper and inviting the public to
apply for shares as prescribed in the prospectus.
(d) If the minimum subscription has been received, shares should be allotted to the applicants
as per SEBI guidelines and file a return of allotment with the Registrar of Companies.
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(e) Listing of shares in a recognised stock exchange so that the shares can be traded there.
Preferably, consent of a stock exchange for listing should be obtained before issue of the
prospectus to the public.
Before commencing the business, every public limited company must have to show that
adequate funds have been raised from the public. So when the company gives the offer to the
public to subscribe its shares, it must ensure that a minimum number of shares must be
subscribed by the investors. This is called minimum subscription, which is 90% of the total
number of shares offered to the public. If the application money received is less than the
minimum subscription, then the company must return all the application money of the
investors and it cannot start its operation. To avoid this risk, the share issuing company may
appoint underwriters, who undertake to buy the shares if these are not subscribed by the
public. The underwriters perform their job on commission basis. This process of appointing
underwriters to ensure the minimum subscription of capital is known as Underwriting.
COMMENCEMENT OF BUSINESS
In case of a private limited company, it can immediately start its business as soon as it is
registered. However, in case of public limited company a certificate, known as certificate of
commencement of business, must be obtained from the Registrar of Companies before
starting its operation. For this purpose it has to file a statement with the following
declarations to the Registrar of Companies.
(a) That a prospectus has been filed with the Registrar of Companies.
(b) That the shares have been allotted upto the amount of the minimum subscription.
(c) That the Directors have taken up or purchased the minimum number of shares required to
qualify themselves to be Director.
(d) That no money is liable to become refundable to the applicants by reason of failure to
obtain permission for shares to be traded in a recognized stock exchange.
(e) A statutory declaration by a Director or the Secretary of the company stating that the
requirements relating to the commencement of business have been duly complied with.
The Registrar of Companies will scrutinize all these documents and if he is satisfied that the
process of securing the minimum prescribed capital has been done honestly and efficiently
and the minimum prescribed capital has been obtained from the public, then he shall issue a
Certificate of Commencement of Business.
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Corporate social responsibility (CSR)

Corporate social responsibility (CSR) is the way a corporation achieves a balance among its
economic, social, and environmental responsibilities in its operations so as to address
shareholder and other stakeholder expectations.
Corporate Social Responsibility (CSR) focuses on the idea that a business has social
obligations above and beyond making profit and follows from a decision by management to
expand traditional governance arrangements to include accountability to the full range of
stakeholders.
CSR is the continuing commitment by business to behave ethically and contribute to
economic development while improving the quality of the life of the workforce and their
families as well as of the local community and society at large.
The Scope of Corporate Social Responsibility
The Group strives to contribute to social advancement while achieving continuing existence
by implementing CSR management. The vision of the Groups CSR management has been
developed along four themes in our mid-term plan based on corporate philosophy and charter
of behavior: internal control, human resource management, environment management, and
social contribution. We believe that working from these four viewpoints will allow us to
build on our relationship based on trust with our stakeholders by further expanding activities
in a wide range of areas.
Internal control
Corporate Governance Enhancing internal control by proactively undertaking activities to
advance compliance and risk management and we are expanding/strengthening the
management oversight functions of our board of directors and the audit functions of our
corporate auditors. These steps will enable us to construct a transparent corporate
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governance system worthy of the trust of shareholders and other stakeholders and fulfill our
corporate social responsibilities, and will help us improve our corporate value through
sustained growth.
Compliance By achieving thoroughgoing commitment to compliance with domestic and
foreign laws, our articles of incorporation, internal regulations and corporate ethics and
through open and fair corporate activities, we aim to be a company that international society
relies on.
Risk Management Enables business continuity by analyzing various risks surrounding
management, accurately handling losses of business resources that have a great negative
impact on the ease of our business operations, ensuring the safety of our shareholders,
customers and officers, and reducing and preventing losses of business resources.
Human resource management Every employee and to value a corporate culture that
enables its diverse human resources to fully display their knowledge and capabilities.
Environmental management We conduct the environmental load reduction activity with all
concerned people, aim Harmony with nature by reducing the bad effect on global
environment generated in our business operation and fulfill the role as sustainable company.
Social contribution Aim to contribute to local communities by taking advantage of our
unique corporate characteristics, including our capacity to improve living environments and
to offer opportunities for personal development. We take part in and support groups involved
in activities of this nature. We also undertake our own community projects across the globe,
tailoring them to local cultures and customs, and earning the trust of the international
community.
Benefits to Business
A commitment to corporate social responsibility is one practical way of dealing with a lack
of trust in business.
When trust is promoted through corporate citizenship, businesses may enjoy reduced risk
relating to projects, crises escalation, shareholder activism, lawsuits and social issues.
The improved trust driven by a commitment to corporate social responsibility also can
enhance the reputation or brand value of companies.
More tangible benefits can arise through corporate citizenship when it is integrated in all
aspects of a business. Engagement with communities and environmental groups can spark
innovations in products and production processes that generate new or expanded markets.
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Applicability of CSR
Section 135 of the Companies Act, 2013 is applicable to every company registered
under the Act, and any other previous Companies Law, with a net worth of Rs 500 crore or
more, or a turnover of over Rs 1,000 crore or a net profit exceeding Rs 5 crore in any
financial year. The circular further explains that any financial year implies any of the three
preceding financial years.
No role for government in CSR monitoring
The Circular emphasizes that the government has no role in monitoring CSR
activities; it lays the onus on the board of the company to ensure the quality and efficacy of a
CSR project.
The circular states that the government has no role in appointing an appropriate
authority for approving and implementing CSR programmes of a company or in engaging
external experts in monitoring the efficacy of CSR expenditure of companies such as for
impact assessments.
Companies boards will decide all aspects of CSR
The board of the company takes a call on the CSR expenditure and qualifying
activities as CSR.
CSR projects (and any changes thereof) and their monitoring are subject to the
approval of the companys board on recommendations of its CSR committee.
Boards or committees are fully competent to engage third parties to have an impact
assessment of CSR programmes to validate compliance of the CSR provisions of the law.
Current tax exemptions valid for CSR spend

No specific tax exemptions are extended to CSR expenditure. However, certain activities
such as contribution to Prime Ministers National Relief Fund (Section 80G), scientific
research (Sections 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(2AA)), rural development projects
(Section 35AC), skill development projects (Section 35CCD), agricultural extension projects
(Section 35CCC), etc. aligned to Schedule VII already enjoy exemptions under different
sections as indicated under the Income Tax Act, 1961. Further, the Finance Act 2014
clarifies that the CSR expenditure does not form part of business expenditure.
No carry forward for CSR spend
The Circular provides clarification that in case of CSR spend greater than the
prescribed CSR spend (2% of average net profit of three preceding financial years), then the
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excess cannot be carried forward to the subsequent years against that years prescribed CSR
spend.
For any unspent amount of the prescribed CSR spend, the board can chose to carry
forward to the subsequent years, provided it is over and above that years prescribed CSR
spend.
CSR policy and reporting must for all qualifying companies
The Circular confirms that the contents of the board-approved CSR Policy must be
disclosed in the board of directors report and on the companys website.
All qualifying companies must report in the format provided by the Companies (CSR
Policy) Rules, 2014 on the annual report on CSR.
Further, a foreign company unless otherwise exempted by the central government,
should attach a report on its CSR activity as an annexure to the balance sheet document that
it submits to the Registrar of Companies every calendar year.
Investing in government schemes as CSR
The Circular states that the objective of the CSR Law is to promote innovative ideas
and corporates enhanced management skills in discharging social responsibility that results
in greater efficiency and better outcomes. Therefore, CSR should not be interpreted as a
source of financing the resource gaps in government schemes.
The board may decide to supplement government schemes should it be deemed to
qualify under the CSR provisions of the law.
Employee volunteering and in-kind donations
The Circular states that while companies should be encouraged to involve employees
in their CSR activities, monetisation of the pro-bono services provided by employees will
not be counted towards CSR expenditure.
Contribution in kind cannot be monetised to be shown as CSR expenditure unless the
company spends the amount as per Section 135 of the Companies Act 2013.
The Circular reiterates that those activities that benefit only the employees or their families,
one-off events, expenses towards fulfilment of regulatory statutes, contribution to political
parties, activities as part of normal course of business or those undertaken outside of India do
not qualify as CSR expenses. It also reiterates that the contribution to corpus of a trust/
society/ Section 8 companies etc. will qualify as CSR expenditure as long as the entity is
created exclusively for undertaking CSR activities or where the corpus is created exclusively
for a purpose directly relatable to a Schedule VII item.
Constitution of CSR Committee
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In terms of section 135 of the Companies Act, 2013 and the Rules made there under, Board
of Directors of the Company at its meeting held on 29th May, 2014 has constituted a CSR
Committee and the following are its members;
Name
Status
Designation
1 Mr. G V Sanjay Reddy
Vice Chairman
Chairman
2 Mr. Ch. G Krishna Murthy
Independent Director
Member
3 Mr. K Balarama Reddi
Independent Director
Member
The CSR Committee to, inter alia, carry out the following functions;
a. To formulate and recommend to the Board, a Corporate Social Responsibility Policy
which shall indicate the activities to be undertaken by the Company as specified in Schedule
VII of the Companies Act, 2013 and the rules made there under.
b. To recommend the amount of expenditure to be incurred on the CSR activities.
c. To monitor the implementation of framework of CSR Policy.
d. To carry out any other function as mandated by the Board from time to time and / or
enforced by any statutory notification, amendment or modification, as may be applicable,
necessary or appropriate for performance of its duties.
CSR Expenditure shall mean all CSR expenditure as recommended by the
CSR Committee and approved by Board of Directors including the following;
i) Contributions to CSR activities which shall be implemented and / or executed by the
Company.
ii) Contributions to CSR activities which shall be implemented through GVK Foundation,
GVK Airport Foundation and GVK EMRI or any other Trust / Society / Section 8
Companies / Agencies established / registered to carry on the CSR activities as defined under
the Rules.
iii) Contribution to the Corpus of a Trust / Society / Section 8 Companies etc., as long as
they are created exclusively for undertaking CSR activities or where the corpus is created
exclusively for the purpose directly relatable to a subject covered in Schedule VII of the Act.
iv) Any other contributions covered under Schedule VII to the Act.
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UNIT 03
IMPORTANT DOCUMENTS PREPARED WHILE FORMING A COMPANY
There are three basic documents, which are prepared and filed with the Registrar during the
formation of a company. These are:
(1) Memorandum of Association (MOA)
(2) Articles of Association (AOA)
(3) Prospectus
Out of these three documents, MOA and AOA are filed with the Registrar of Companies
before the registration along with other supporting documents while asking for certificate
of incorporation. The prospectus is issued to the public at the time of subscription to
capital. Of course, a copy of the prospectus is submitted to the Registrar also. Let us now
have a brief idea about these documents.
1. MEMORANDUM OF ASSOCIATION (MOA)
The Memorandum of Association is the principal document in the formation of a company.
It is called the charter of the company. It contains the fundamental conditions upon which the
company is allowed to be incorporated or registered. It defines the limitations of the powers
of the company. The purpose of memorandum is to enable the shareholders, creditors and
those who deal with the company to know what is its permitted range of activities or
operations. It defines the relationship of the company with the outside world.
The Memorandum of Association usually contains the following six clauses:
(a) Name Clause: It contains the name by which the company will be established. As you
know, the approval of the proposed name is taken in advance from the Registrar of the
companies.
(b) Situation Clause: It contains the name of the state in which the registered office of the
company is or will be situated. The exact address of the companys registered office may be
communicated within 30 days of its incorporation to the Registrar of Companies.
(c) Objects Clause: It contains detailed description of the objects and rights of the company,
for which it is being established. A company can undertake only those activities which are
mentioned in the objects clause of its memorandum.
(d) Liability Clause: It contains financial limit upto which the shareholders are liable to pay
off to the outsiders on the event of the company being dissolved or closed down.
(e) Capital Clause: It contains the proposed authorised capital of the company. It gives the
classification of the authorised capital into various types of shares, (like equity and
preference shares) with their numbers and nominal value. A company is not allowed to raise
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more capital than the amount mentioned as its authorised capital. However, the company is
permitted to alter this clause as per the guidelines prescribed by the companies Act.
(f) Subscription Clause: It contains the name and address of at least seven members in case
of public limited company and two members in case of a private limited company, who agree
to associate or join hands to get the undertaking registered as a company. It contains a
declaration by persons who are desirous of being formed into and agree to subscribe to the
number of shares mentioned against their names.
Section 13: Alteration of memorandum.
Memorandum of association contains following clauses:
(a) Name of the Company,
(b) State of India where registered office of the company is situated,
(c) Main objects of the Company and matters considered necessary in furtherance thereof,
(d) Liability of members of the company; and
(e) Authorised share capital of the company.
Special resolution: [section 13 (1) and (6)] For alteration of any of the clauses [as aforesaid,
except (e)] of memorandum of association, consent of members by way of special resolution
is required. However, in case of alteration of authorised share capital (as stated in (e) above),
consent of members by way of ordinary resolution as stated in section 61 is required.
The company is required to file special resolution passed by shareholders for alteration of
memorandum of association with the Registrar of Companies [section 13(6)].
Change of name clause of memorandum: [section 13 (2) and (3)] For change of name of
the company, which is part of memorandum of association of the company, written approval
of the Central Government is required and provisions of section 4 (2) and (3) of the Act shall
be complied with.
However, in case of conversion of status of a company from one class to another, procedure
prescribed for conversion shall be followed and consequential addition or deletion of word
Private in name of the company shall not require approval under section 13. [provision to
section 13(2)].
(1), change of name shall not be allowed by Central Government in following cases:
(a) Company which has defaulted in filing any document or annual return or financial
statement, as required to be filed under the Act, with the Registrar of Companies,
(b) Company which has defaulted on repayment of matured deposits, matured debentures or
interest due on deposits or debentures.
The company is required to file with the Registrar of Companies, approval of the Central
Government for change of name of the Company. [section 13(6)].
Change of name shall be take effect only upon Registrar of Companies issuing fresh
certificate of incorporation. [section 13 (3)].
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Change of registered office clause of memorandum: [section 13 (4), (5), (7)] For shifting
of registered office from one State to another State of India, prior approval of Central
Government is required. For this purpose application in form no. 2.28 shall be made to the
Central Government and a copy thereof shall also be filed with the Chief Secretary of the
State [Rule 2.27 (1) and (5)].
The Central Government shall dispose application within a period of 60 days [section 13
(5)].
Shifting of registered office shall not be allowed where any inquiry, inspection or
investigation has been initiated under the Act against the company or any prosecution under
the Act is pending against the company. [proviso to rule 2.27 (10)].
An application shall be accompanied with several documents including list of creditors and
debenture holders, if any. Said list shall be prepared as on latest practical date which shall
not be older than 30 days.
Further, an affidavit verifying the said list shall be given by Company Secretary, if any and
atleast two of the directors of the Company, one of whom shall be managing director, if any.
[rule 2.27(2)].
An affidavit from directors is also required to be submitted, along with the application,
stating that no employees shall be retrenched as a consequence of shifting of registered
office. [rule 2.27(3)].
To dispose of application, hearing shall take place. The company shall atleast 14 days before
the date of hearing, [rule 2.27(6)]:
(i) give advertisement (about date, time and venue of hearing) in newspapers in vernacular
and English language, in vernacular and English newspapers, respectively, circulating in the
district where registered office of the applicant company is situated at time of application;
(ii) serve notice of hearing (about date, time and venue of hearing) by registered post
acknowledgement due
(a) individually to all creditors and debenture holders,
(b) to Registrar of Companies; and
(c) along with copy of application to SEBI, in case of listed company, and to other regulatory
body if the company is regulated by any special law.
Objections, if any, received by the applicant company shall be forwarded to the Central
Government on or before the date of hearing. [rule 2.27 (7)].
Where no objections are received, an application may be disposed of without hearing. [rule
2.27 (8)].
The Central Government shall ensure that the applicant company either obtains consent of
objecting creditors or satisfies debt or secures the debt of objecting creditors. [rule 2.27 (9)
and section 13 (5)].
Central Government may put terms and conditions while granting the approval, including
order as to costs. [rule 2.27 (10)].
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Within 30 days of receipt of order of the Central Government approving the alteration of
registered office clause of memorandum of association, the Company shall file file the
certified true copy of the order in Form no. 2.29 with the Registrar of Companies of each of
the States. The Registrar of Companies shall register the same. Further, the Registrar of
the State where the registered office is being shifted to, shall issue a fresh certificate of
incorporation indicating the alteration. [section 13 (7) and rule 2.28].
Change of object clause of memorandum: [section 13 (8), (9)] Where money is raised by a
company from public by issue of prospectus and still has got those money unutilised then for
change of object clause of memorandum of association, the company would require consent
of members by way of special resolution with specific prescribed disclosures.
While section 13 (8) speaks generally of change of object clause where money is raised from
public by issue of prospectus and remaining unutilised, draft rule 2.29 prescribes procedure
only when there is a change in the objects as stated in prospectus, stating which the money
was raised.
Postal ballot and contents of notice: [rule 2.29 (1)] Consent of members by special
resolution shall be obtained by way of postal ballot. The notice to members shall contain
the following:
(a) total money received (from public by issue of prospectus which remained untilised at
time of seeking consent for change of object);
(b) total money utilized for the objects stated in the prospectus;
(c) unutilized amount out of the money so raised through prospectus,
(d) particulars of the proposed alteration/ change in the objects;
(e) justification for the alteration/change in the objects;
(f) amount proposed to be utilized for the new objects;
(g) estimated financial impact of the proposed alteration on the earnings and cash flow of the
company;
(h) other relevant information which is necessary for the members to take an informed
decision on the proposed resolution;
(i) place from where any interested person may obtain a copy of the notice of resolution to be
passed.
Newspaper advertisement [section 13 (8)(i) and rule 2.29 (2)] The details of such resolution
shall also be published in the newspapers (one in English and one in vernacular language)
which is in circulation at the place where the registered office of the company is situated and
shall also be placed on the website of the company, if any, indicating therein the justification
for such change.
Advertisement shall be in form no. 2.30 which shall be published simultaneously with the
dispatch of postal ballot notices to shareholders.
The notice shall also be placed on the website of the company, if any. [rule 2.29 (3)].
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Dissenting shareholders [section 13 (8)(ii)] The dissenting shareholders shall be given an

opportunity to exit by the promoters and shareholders having control in accordance with
regulations to be specified by the SEBI. SEBI is yet to notify regulation for the same.
While money is received from public by the company, exit opportunity shall be given by
promoters and shareholders having control.
Above procedure of postal ballot, newspaper advertisement and exit opportunity to
dissenting shareholders shall not apply
(a) where money is raised by a company from public by issue of prospectus and has got
those money fully utilised; and
(b) where the company has not raised any money from public.
The Registrar shall register any alteration of the memorandum with respect to the
objects of the company and certify the registration within a period of thirty days from the
date of filing of the special resolution. [section 13 (9)].
Change of liability clause of memorandum: [Section 13(11)]
In the case of a company limited by guarantee and not having a share capital, any alteration
of the memorandum made in order to give or has effect of giving any person (except
member) a right to participate in the divisible profits of the company otherwise than as a
member, shall be void.
Penalty:
Since no specific penalty or punishment is prescribed for contravention of section 13, general
penalty prescribed under section 450 of the Act is applicable. Accordingly, the company as
well as its officer who is in default or such other person shall be punishable with fine upto
Rs.10,000/-. For continuing offence, they are punishable with further fine upto Rs.1,000/- for
every day after the first during which contravention continues.
It may be noted that for second or subsequent contravention of the provision of this section,
if made within a period of three years, then the company as well as its officer who is in
default shall be punishable under section 451 with twice the amount of fine.
Adjudication:
Under Section 454, the officer appointed by the Central Government, not below the rank of
Registrar of Companies, may adjudicate and impose monetary penalty for violation of this
section, where it decides that no prosecution be launched. However, before imposing
penalty, an opportunity of hearing shall be given to the Company and its officers.
2. ARTICLES OF ASSOCIATION (AOA)
The Articles of Association of a company contains the various rules and regulations for the
day to day management of the company. These rules are also called the bye-laws. It covers
various rights and powers of its members, duties of the management and the manner in
which they can be changed. It defines the relationship between the company and its members
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and also among the members themselves. The rules given in the AOA must be in conformity
with the Memorandum of Association.
Articles of Association of a company generally contain rules and regulations with regard to
the following matters:
(a) Preliminary contracts
(b) Use and custody of common seal
(c) Allotment, calls and lien on shares
(d) Transfer and transmission of shares
(e) Forfeiture and re-issue of shares
(f) Alteration of share capital
(g) Issue of share certificates and share warrants
(h) Conversion of shares into stock
(i) Procedure of holding and conducting company meetings
(j) Voting rights and proxies of members
(k) Qualification, appointment, remuneration and power of Directors
(l) Borrowing powers and methods of raising loans
(m) Payment of dividends and creation of reserves
(n) Accounts and audit
(o) Winding up.
A company can register its own Articles of Association or adopt Table A, which contains a
model set of rules as given in the Schedule I of the Companies Act.
After knowing about the meaning and the contents of Memorandum of Association and
Articles of Association you must be thinking, how these two documents are different from
each other. Let us have a comparison between these two.
ALTERATION OF ARTICLES OF ASSOCIATION OF A COMPANY
Section 14 of the Companies Act, 2013 lays down that subject to the provisions of the Act
and to the conditions contained in its memorandum, a company may, by a special resolution,
alter its articles. Every alteration of articles shall be filed with the Registrar together with a
printed copy of the altered articles within a period of fifteen days. [Section 14(2)] Any
alteration of the articles so registered, shall be valid as if it were originally in the articles. A
company may alter its articles in accordance with the above provisions in any of the manners
mentioned below:
(i) by adoption of new set of articles;
(ii) by addition/insertion of a new article;
(iii) by deletion of an article;
(iv) by amendment of a specific article; or
(v) by substitution of a specific article.
Procedure for Altering Articles of Association
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A company which proposes to alter its articles of association has to follow the procedure
detailed below:
1. Convene and hold a Board meeting to (i) Consider and decide which of the articles are to be altered and pass a formal resolution in
this respect.
(ii) Fix time, date and venue for holding a general meeting of the company for passing a
special resolution as required by Section 14 of the Companies Act, 2013.
(iii) Approve notice, agenda and explanatory statement to be annexed to the notice of the
general meeting as per 102 of the Act.
(iv) Authorise the Company Secretary or any other competent officer of the company to
issue notice of the general meeting as approved by the Board.
2. On the conclusion of the Board meeting, send to the stock exchanges, where the
securities of the company are listed, particulars of the proposed alteration of the
articles of association of the company.
3. Issue notice of the general meeting along with the explanatory statement, to all
the members, directors and the auditor of the company.
4. Also forward three copies of the notice of the general meeting to the concerned
stock exchanges as per the Listing Agreement.
5. Hold the general meeting and have the special resolution passed.
Note: If the company is a listed company and the alteration of articles of association relates
to insertion of the provisions defining a private company then ensure that the Special
Resolution as aforesaid is passed only through postal ballot.
6. Forward a copy of the proceedings of the general meeting to the concerned stock
exchanges as per the Listing Agreement.
7. File with the ROC, Form MGT 14 along with a certified copy of the special resolution
and the explanatory statement annexed to the notice of the general meeting at which the
resolution was passed and a copy of the Articles of Association, within fifteen days of the
passing of the resolution along with the prescribed filing fee.
8. Make necessary changes in all the copies of the articles of association of the company
lying in the office of the company.
EFFECT OF ALTERATION OF ARTICLES
Articles cannot be altered, if the alteration is repugnant to, or inconsistent with, any statute or
general law or it is such as to defeat the provisions of any law. The articles cannot be altered
to enable a company to carry on an illegal scheme (lottery business). (Pioneer Mutual
Benefit Society v. Asst. Registrar, (1933) 3 Com Cases 37, 40 : AIR 1933 Mad 129.
All members become bound by a valid alteration whether they voted for or against it
A provision of the Articles which has the effect of limiting the companys share capital to a
fixed amount would have no effect being contrary to the Act. [Muheer Hemant Mafatlal v.
Mafatlal Industries Ltd., (1987) 89 Bom LR 86(Bom).
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Stringent provisions can be made in the Articles so long as they are not contrary to the
provisions of the Act.
Where the Act provides for an ordinary resolution for transacting a particular business, the
articles may provide for a special resolution.
Likewise, a public company which is required to give 21 days notice for a general meeting
may provide in its articles to give 30 days notice. Such a public company cannot, however
provide for giving less than 21 days notice.
DIFFERENCE BETWEEN MOA AND AOA
Differences based on
Memorandum of Association Articles of Association
(a) Subject Matter
It contains aims and objectives Articles of Associations contain
of the company.
rules for implementation of the
aims and objectives contained in
the Memorandum of Association.
(b) Relationship
(c) Amendment
(d) Limitations
(e) Obligation
It defines the relationship

between the company and
outsiders.
It is very difficult to amend the
aims and other provisions of the
Memorandum of Association.
The provision given in the
Memorandum of Association
cannot be outside the scope of
Companies Act.
It is obligatory for a company
to prepare and submit this
document to the Registrar of
Companies.
Articles defines the relationship

between the company and its
members.
The rules given in the articles can
be easily amended by a special
resolution.
The rules given in the Articles of
Association can neither be outside
the scope of companies Act nor of
the Memorandum of Association.
It is not obligatory to submit this
document
to
Registrar
of
Companies. The company may
adopt Table A of the companies
Act.
PROSPECTUS
After getting the Certificate of Incorporation or Registration a public limited company
invites the public to subscribe to its shares. This is done by issuing a document called
Prospectus.
Under the Companies Act, a prospectus has been defined as any document described or
issued as a prospectus and includes any notice, circular, advertisement or other document,
inviting deposits from the public or inviting offers from the public for the subscription or
purchase of shares or debentures of a company or body corporate.
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Objectives:
Prospectus is issued with the following broad objectives:
It informs the company about the formation of a new company.

It serves as a written evidence about the terms and conditions of issue of shares or
debentures of a company.
It induces the investors to invest in the shares and debentures of the company.
It describes the nature, extent and future prospectus of the company.
It maintains all authentic records on the issue and make the directors liable for the
misstatement in the prospectus.
Contents:
The following important matter are included in the prospectus:
The prospectus contains the main objectives of the company, the name and addresses
of the signatories of the memorandum of association and the number of shares held by them.
The name, addresses and occupation of directors and managing directors.
The number and classes of shares and debentures issued.
The qualification share of directors and the interest of directors for the promotion of
company.
The number, description and the document of shares or debentures which within the
two preceding years have been agreed to be issed other than cash.
The name and addresses of the vendors of any property acquired by the company and
the amount paid or to be paid.
particulars about the directors, secretaries and the treasures and their remuneration.
The amount for the minimum subscription.
If the company carrying on business, the length of time of such businesses.
The estimated amount of preliminary expenses.
Name and address of the auditors, bankers and solicitors of the company.
Time and place where copies of balance sheets, profits and loss account and the
auditors report may be inspected.
The auditors report so submitted must deal with the profit and loss of the company for
each year of five financial years immediately preceding the issue of prospectus.
If any profit or reserve has been capitalized, the particulars of such capitalization will
be stated in the prospectus.
Registration of prospectus.
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(1) No person shall issue, circulate or distribute in India any prospectus offering for
subscription shares in or debentures of a company incorporated or to be incorporated outside
India, whether the company has or has not established, or when formed will or will not
establish, a place of business in India, unless before the issue, circulation or distribution of
the prospectus in India, a copy thereof certified by the chairman and two other directors of
the company as having been approved by resolution of the managing body has been
delivered for registration to the Registrar and the prospectus states on the face of it that a
copy has been so delivered, and there is endorsed on or attached to the copy
(a) Any consent to the issue of the prospectus required by section 604;
(b) a copy of any contract required by clause 16 of Schedule II to be stated in the prospectus
or, in the case of a contract not reduced into writing, a memorandum giving full particulars
thereof; and
(c) Where the persons making any report required by Part II of Schedule II have made
therein, or have, without giving the reasons, indicated therein, any such adjustments as are
mentioned in clause 32 of that Schedule, a written statement signed by those persons setting
out the adjustments and giving the reasons therefor.
(2) The references in clause (b) of sub-section (1) to the copy of a contract required thereby
to be endorsed on or attached to a copy of the prospectus shall, in the case of a contract
wholly or partly in a language other than English, be taken as references to a copy of a
translation of the contract in English or a copy embodying a translation in English of the
parts which are not in English, as the case may be, being a translation certified in the
prescribed manner to be a correct translation.
MISSTATEMENT OF PROSPECTUS
As per Sec-65, a statement included in a prospectus shall be deemed to be untrue if the
statement is misleading in the form and context in which it is included. Where there is any
omission of a matter from the prospectus and this is made to mislead, the prospectus is
deemed to be called as a prospectus in which an untrue statement is included. Not only in
prospectus, but a statement can be said to mislead even if it is present in any report or
memorandum by reference incorporated therein or issued therewith. The liability accrues
where any person subscribes for any shares or debentures on the faith of the prospectus for
any loss or damage he may have sustained by reason of untrue statement included therein.
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CASE: DERRY vs. PEEK The directors of a tramway company issued a prospectus stating
that they had the right to run tram cars with steam power instead of with horses as before.
The Act incorporating the company provided that such power might be used with the
sanction of the Board of Trade. But, the Board of Trade refused to give permission and the
company had to be wound up. One of the shareholders sued the directors for damages for
fraud. Now, the House of Lords held that the directors were not liable in fraud because they
honestly believed what they said in the prospectus to be true. Lord Herschel in this case
observed that Fraud is proved when it is shown that false representation has been made (a)
knowingly, (b) without belief in its truth, or, (c) recklessly, carelessly whether it be false or
true.
CIVIL LIABILITY FOR MISSTATEMENT:
Section 62 of the Companies Act, 1956 makes certain person liable to pay compensation to
every person who subscribes for any shares of debentures on the faith of the prospectus for
any loss or damage he may have suffered due to any untrue statement made in the
prospectus. These would include Directors of the company, Promoters, or even the company.
Thus, this section deals with the cases of misstatements of facts in a prospectus. It is
immaterial for the purpose of this section whether the Director sees the prospectus or not; it
is enough that he authorizes its issue.
The provision of the section is to protect the rights of the deceived shareholders who acted
upon the wrong statement given in the prospectus. This tightens up the duties of the directors
and others who are related to the issue of the prospectus. So this section provides for the
statutory civil liability for untrue statement.
Conditions for invoking Section 62:
1)
The company had issued a prospectus inviting persons to subscribe for its shares or
debentures.
2)
An untrue statement was included in the prospectus.
3)
The person who is claiming for the compensation had subscribed for the shares or
debentures offered by the prospectus.
4)
Such person has subscribed for the shares or debentures relying upon the untrue
statement contained in the prospectus.
5)
Such person has sustained a loss or damage after having subscribed for the shares or
debentures.
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Persons liable under Sec- 62:

Every person who is a director of the company at the time of the issue of the prospectus;
every person who has authorised himself to be named and is named in the prospectus as the
director or agreed to become a director, either immediately or after an interval of time; every
person who is a promoter of the company; every person who has authorised the issue of the
prospectus
CASE: Edington vs. Fitzmaurice
A company issued a prospectus inviting subscriptions for debentures. The prospectus
contained a statement that the objects of the issue of debentures are (a) to complete
alterations in the buildings of the co., (b) to purchase horses and vans and, (c) to develop the
trade of the co." However, the real object raised by debenture was to payoff the liabilities.
Relying upon the statement in the prospectus, a person advanced money to the co. and
purchased its debentures. The co. became insolvent, and that person filed a suit against the
directors for fraud . It was held that the directors were liable for fraud. Here, the statement
made was of existing fact as the director has misrepresented their state of mind and the
statement made in the prospectus was material to the contract of purchasing debentures.
Here, the Court is right in judging the case as the object of the debentures mentioned
in the prospectus is totally contradictory to the actual purpose. The company is rightly liable
for fraud.
CRIMINAL LIABILITY:
Sec-63 incorporates the provision for the criminal liability for misstatement in the
prospectus. According to this section every person who has authorised the issue of the
prospectus shall be punishable with imprisonment for a term which may extend to two years,
or with fine which may extend to fifty thousand rupees, or with both. The offence is
compoundable under sec 621A. It has to be noted that under such cases, once the prosecution
establishes the falsity of statement in a prospectus signed by a director, etc., the onus is
shifted to the defendant of proving either that the statement was immaterial or that he
believed it to be true. An expert who has given the consent will not be deemed to be ipso
facto a person who authorized the issue of prospectus.
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UNIT-IV
Concept of Capital
Share Capital: Its Meaning and Types
Meaning:
The Joint Stock Company is a big form of business organization. The amount required by the
company for its business activities is raised by the issue of shares. The amount so raised is
called Share Capital (or capital) of the company. It may be noted that a company limited by
shares will have share capital. A company limited by guarantee or an unlimited company
may not have any share capital. The persons who buy the shares of company are called
Shareholders.
Types of Share Capital:
(i) Authorized, registered or nominal capital:
This is the amount of capital with which the company intends to get itself registered. This is
the amount of share capital which a company is authorized to issue. Nominal capital is
divided into shares of a fixed amount. It must be set out in the memorandum of association.
It can be increased or decreased by following the prescribed procedure.
(ii) Issued capital:
It is that part of the nominal capital which is actually issued by the company for public
subscription. A company need not issue the entire authorized capital at once. It goes on
raising the capital as and when the need for additional funds is felt.
The difference between the nominal and the issued capital is known as unissued capital,
which can be issued to the public at a later date. Where the whole of authorized capital is
offered to the public, the authorized and issued capital will be the same. Issued Capital
cannot be more than the authorized capital. Issued capital includes the shares allotted to
public, vendors, signatories to memorandum of association etc.
(iii) Subscribed capital:
It is that amount of the nominal value of shares which have actually been taken up by the
public. It is that part of the nominal capital which has actually been taken up by shareholders
who have agreed to give consideration in kind or in cash for shares issued to them. Where
shares issued for subscription are wholly subscribed for, issued capital would mean the same
thing as subscribed capital. That part of issued capital which is not subscribed by the public
is called Unsubscribed Capital. Subscribed capital cannot be more than issued capital.
(iv) Called up capital:
The amount due on the shares subscribed may be collected from the shareholders in
installments at different intervals. Called up capital is that amount of the nominal value of
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shares subscribed for which the company has asked its shareholders to pay by means of calls
or otherwise.
(v) Paid up capital:
That part of the called up capital which is actually paid up by the members is known as the
paid up capital. In other words, paid up capital represents the total payments made by the
shareholders to the company in response to the calls made by the company. Paid up capital
of the company is calculated by deducting the calls in arrears from the called up capital.
Paid up capital = Called up capital Less Calls-in-arrears
Classes of Shares Shares, refer to the units into which the total share capital of a company
is divided. Thus, a share is a fractional part of the share capital and forms the basis of
ownership interest in a company. The persons who contribute money through shares are
called shareholders.
The amount of authorised capital, together with the number of shares in which it is divided,
is stated in the Memorandum of Association but the classes of shares in which the
companys capital is to be divided, along with their respective rights and obligations, are
prescribed by the Articles of Association of the company. As per Section 86 of The
Companies Act, a company can issue two types of shares
(1) Preference shares, and
(2) Equity shares (also called ordinary shares).
1 Preference Shares According to Section 85 of The Companies Act, 1956, a preference
share is one, which fulfils the following conditions :
(a) That it carries a preferential right to dividend to be paid either as a fixed amount payable
to preference shareholders or an amount calculated by a fixed rate of the nominal value of
each share before any dividend is paid to the equity shareholders.
(b) That with respect to capital it carries or will carry, on the winding up of the company, the
preferential right to the repayment of capital before anything is paid to equity shareholders.
However, notwithstanding the above two conditions, a holder of the preference share may
have a right to participate fully or to a limited extent in the surpluses of the company as
specified in the Memorandum or Articles of the company. Thus, the preference shares can be
participating and non-participating. Similarly, these shares can be cumulative or noncumulative, and redeemable or irredeemable.
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2 Equity Shares According to Section 85 of The Companies Act, 1956, an equity share is a
share which is not a preference share. In other words, shares which do not enjoy any
preferential right in the payment of dividend or repayment of capital, are termed as
equity/ordinary shares. The equity shareholders are entitled to share the distributable profits
of the company after satisfying the dividend rights of the preference share holders. The
dividend on equity shares is not fixed and it may vary from year to year depending upon the
amount of profits available for distribution. The equity share capital may be (i) with voting
rights; or (ii) with differential rights as to voting, dividend or otherwise in accordance with
such rules and subject to such conditions as may be prescribed.
Distinction between Equity Share and Preference Share
Basic
Equity Share
Preference Share
1. Refund of
On Winding up, the equity share On winding up, the preference Share
Capital.
capital is paid after the preference capital is paid before the Equity share
share capital is paid or equity capital is paid or preference
shareholder received residual shareholder have preference to get
amount
refund of capital over Equity
shareholders
2. Right of
Dividend is paid on Equity shares Dividend is paid on preference share
Dividend
after payment of dividend on before payment of dividend on Equity
preference shares.
shares.
3. Right of
No fixed rate of dividend. It is Fixed rate of dividend prescribed on
Dividend
decided by board of directors the face of preference shares e.g. 9%
every year and vary periodically. Preference same in this case rate of
dividend is 9%.
4. Right to
Equity shareholders have the right In normal course of business,
Vote
to vote in meeting of shareholders preference shareholders do not enjoy
and they elect director for the right to vote in the meetings of
managing the company.
shareholders. But they have it only in
special circumstances.
5. Redemption Equity share are not redeemable, Preference
share
are
always
however, a company may buy redeemable, now a company cannot
back its equity shares as condition issue irredeemable preference shares.
prescribed in section 68 of the
Companies Act, 2013
Types OR Classes of Preference Shares
(a) With Reference to Dividend:
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(i) Cumulative Preference shares: Cumulative preference shares are these preference
shares, the holders of which are entitled to receive arrears of dividend before any dividend is
paid on equity shares.
(ii) Non-cumulative Preference shares: Non-cumulative preference shares are those
preference share, the holders of which do not have the right to receive arrear of divided. If no
dividend is declared in any year due to any reason. Such shareholders get nothing, nor they
can claim unpaid dividend in any subsequent years.
(b) With Reference to Participation
(i) Participating preference shares: such shares, in addition to the fixed preference
dividend, carry a right to participate in the surplus profit, if any, after providing dividend at a
stipulated rate to equity shareholders.
(ii) Non-Participating preference shares: Such shares get only a fixed rate of dividend
every year and do not have a right to participate in the surplus profit.
(c) With Reference to Convertibility
(i) Convertible preference shares: are those preference shares which have the right/option
to be converted into equity shares.
(ii) Non-convertible preference shares: are those preference shares which do not have the
right/option to be converted into Equity shares.
(d) With Reference to Redemption
(i) Redeemable preference shares : are those preference shares the amount of which can be
redeemed by the company at the time specified for their repayment or earlier.
(ii) Irredeemable preference shares: are those preference shares the amount of which
cannot be refunded by the company unless the company is wound up. Now a company
cannot issue irredeemable preference shares.
EQUITY SHARES WITH DIFFERENTIAL RIGHTS
According to Section 43 of the Companies Act, 2013 as we have already discussed in detail
here, Equity share capital may be Equity Share Capital with voting right or Equity Share
Capital with differential right as to dividend, voting or otherwise.
Rule 4 of the Companies (Share Capital and Debentures) Rules 2014 deals with equity
shares with differential rights.
Which Company may issue:
A company limited by shares shall issue equity shares with differential rights as to dividend,
voting or otherwise, when it complies with the following conditions, namely:(a) The articles of association of the company authorize the issue of shares with differential
rights.
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(b) The issue of shares is authorized by an ordinary resolution passed at a general meeting of
the shareholders. Where the equity shares of a company are listed on a recognized stock
exchange, the issue of such shares shall be approved by the shareholders through postal
ballot.
(c) The shares with differential rights shall not exceed twenty-six percent of the total postissue paid up equity share capital including equity shares with differential rights issued at
any point of time.
(d) The company having consistent track record of distributable profits for the last three
years;
(e) The company has not defaulted in filing financial statements and annual returns for three
financial years immediately preceding the financial year in which it is decided to issue such
shares.
(f) The company has no subsisting default in the payment of a declared dividend to its
shareholders or repayment of its matured deposits or redemption of its preference shares or
debentures that have become due for redemption or payment of interest on such deposits or
debentures or payment of dividend.
(g) The company has not defaulted in payment of the dividend on preference shares or
repayment of any term loan from a public financial institution or State level financial
institution or scheduled Bank that has become repayable or interest payable thereon or dues
with respect to statutory payments relating to its employees to any authority or default in
crediting the amount in Investor Education and Protection Fund to the Central Government.
(h) The company has not been penalized by Court or Tribunal during the last three years of
any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board
of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange
Management Act, 1999 or any other special Act, under which such companies being
regulated by sectoral regulators.
Modes of issue of shares:
A company can issue shares in two ways:
For cash.
For consideration other than cash.
Issue of shares for cash: When the shares are issued by the company in consideration for
cash such issue of shares is known as issue of share for cash. In such a case shares can be
issued at par or at a premium or at a discount. Such issue price may be payable either in lump
sum along with application or in installments at different stages (e.g. partly on application,
partly on allotment, partly on call).
Issue of shares at par: Shares are said to be issued at par when they are issued at a price
equal to the face value. For example, if a share of Rs. 10 is issued at Rs. 10, it is said that the
share has been issued at par. Issue of shares at premium: When shares are issued at an
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amount more than the face value of share, they are said to be issued at premium. For
example, if a share of Rs. 10 is issued at Rs. 15; such a condition of issue is known as issue
of shares at premium. The difference between the issue price and the face value [i.e. Rs. 5
(Rs.15 Rs.10)] of the shares is called premium. It is a capital profit for the company and
will show credit balance; hence it will be shown in the liability side of the Balance Sheet
under the heading Reserves and Surplus in a separate account called Security Premium
Account. Shares of those companies can be issued at premium which offer attractive rate of
dividend on their existing shares, having a good profit track for last few years and whose
shares are in demand. The amount of premium depends upon the profitability and demand of
shares of such company.
Note: The Company may collect the amount of security premium in lump sum or in
instalments. Premium on shares may be collected by the company either with application
money or with the allotment money or even with one of the calls. In absence of any
information, the amount of the premium is to be recorded with allotment.
Issue of shares at discount: Shares are said to be issued at a discount when they are issued
at a price lower than the face value. For example if a share of Rs. 10 is issued at Rs. 9, it is
said that the share has been issued at discount. The excess of the face value over the issue
price [i.e. Re.1 (Rs. 10 Rs. 9)] is called as the amount of discount. Share discount account
showing a debit balance denotes a loss to the company which is in the nature of capital loss.
Therefore, it is desirable, but not compulsory, to write it off against any Capital Profit
available or Profit and Loss Account as soon as possible, and the unwritten off part of it is
shown in the asset side of the Balance Sheet under the heading of Miscellaneous
Expenditure in a separate account called Discount on issue of Shares Account.
Conditions for issue of shares at discount: For issue of shares a discount the company has
to satisfy the following conditions given in section 79 of the Companies Act 1956:
(i) At least one year must have elapsed since the company became entitled to commence
business. It means that a new company cannot issue shares at a discount at the very
beginning.
(ii) The company has already issued such types of shares.
(iii) An ordinary resolution to issue the shares at a discount has been passed by the company
in the General Meeting of shareholders and sanction of the Company Law Tribunal has been
obtained.
(iv) The resolution must specify the maximum rate of discount at which the shares are to be
issued but the rate of discount must not exceed 10% of the face value of the shares. For more
than this limit, sanction of the Company Law Tribunal is necessary.
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(v) The issue must be made within two months from the date of receiving the sanction of the
Company Law Tribunal or within such extended time as the Company Law Tribunal may
allow.
Issues of Shares At Premium : It is issue of share at more than face value.
This premium can be utilized for : (Section 52)
1. Issue of fully paid bonus shares to the shareholders.
2. Write off preliminary expenses of the company.
3. Writing off securities issue expenses commission paid discount on issue of securities.
4. For providing the premium payable on redemption of Redeemable preference shares or
debentures of the company.
5. For Buy back of its own shares as per Section 68
Forfeiture of shares:
When any company allots share to the applicants, it is done on the basis of a legal contract
between the company and the applicant, which makes it binding upon the shareholders to
pay the amount of allotment and calls whenever they are due. Now if any shareholder fails to
pay the allotment and or call money due to him, the shareholder violates the contract and the
company is entitled to take its share back, which is known as forfeiture of shares. The
company can forfeit such shares if authorised by the Articles of Association. Forfeiture of
share can be done according to the rules laid sown in the Articles and if no rules are given in
Articles, the provisions of Table A, regarding forfeiture will apply. Forfeiture of shares
means cancellation of allotment to defaulting shareholders and to treat the amount already
received on such shares is not returnable to him it is forfeited.
Procedure for forfeited shares:
The usual procedure is that the defaulting shareholder must be given a minimum 14 days
notice requiring him to pay the amount due on his shares along with interest on it stating that
if he fails to pay the amount and the interest on it, the shares will be forfeited. Inspite of this
notice, the shareholder does not pay the unpaid amount. The directors after passing a
resolution will forfeit the shares and information will be given to the defaulting shareholder
about the forfeiture his shares.
Effect of forfeiture of shares:
1.
Termination of membership: The membership of the defaulting will be terminated
and they lose all the rights and interest on those shares i.e. ceases to be the member /
shareholder / owner of the company and his name will be removed from the Register of
Members
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2.
Seizure of money paid:The amount already paid on the forfeited shares by the
defaulting shareholders will be seized by the company and in no case will be refunded back
to the shareholder.
3.
Non payment of dividend:When shares are forfeited the shareholder remains no
longer the member of the company therefore he loses the right to receive future dividend.
4.
Reduction of share capital: Forfeiture of shares result in the reduction of share
capital to the extent of amount called up on such shares.
Surrender of shares:
When a shareholder feels that he cannot pay further calls; he may himself surrender the
shares to the company. These shares are then cancelled. Surrender of shares is a voluntary
return of shares for the purposes of cancellation. The directors can accept the surrender of
shares only when the Articles of Association authorise them to do so. Surrender is lawful
only in two cases viz.
(a) Where it is done as a short cut to forfeiture to avoid the formalities for a valid forfeiture
and
(b) Where shares are surrendered in exchange for new shares of the same nominal value. A
surrender will be void if it amounts to purchase of the shares by the company or if it is
accepted for the purpose of relieving a member from his liabilities. Entries are passed just
like forfeiture of shares.
Thus, surrender of shares is at the instance of shareholder whereas forfeiture of shares at the
instance of company.
Re-issue of Forfeited of shares:
Shares forfeited becomes the property of the company and the directors of a company have
an authority to re-issue the shares once forfeited by them in accordance with the provisions
contained in Articles of Association. Table A provides that A forfeited shares may be sold
or otherwise disposed off on such terms and in such manner as the Board thinks fit. They
can re-issue the forfeited shares at par, at premium or at discount. However, if the shares are
re-issued at discount, the amount of the discount does not exceed the amount paid on such
shares by the original shareholder but in case of shares originally issued at a discount, the
maximum permissible discount will be amount paid on such shares by the original
shareholder plus the amount of original discount.
Over subscription of issue:
When the application received from the public are more than the shares issued by the
company, this situation is called as over subscription of issue. The Board of Directors cannot
allot shares more than that offered to the public, in such a condition the Directors of the
company make the allotment of shares on the basis of reasonable criteria. Any allotment to
be made by the company in case of over subscription should be according to the scheme,
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which is finalized with the consultation of Security and Exchange Board of India (S.E.B.I.)
The journal entry for application money will be passed for all the shares applied for, but
while transferring the application money to share capital account, only the application money
on shares issued will be considered.
Under subscription of issue:
Shares are said to be under-subscribed when the number of shares applied for is less than the
number of shares offered, but at least minimum subscription (According to the guidelines
issued by S.E.B.I. minimum subscription means If the company does not receive a
minimum subscription of 90% of the issued amount within 60 days from the date of closure
of the issue, the company shall forthwith refund the entire subscription amount) is received.
For example, in case has offered 5,000 shares to public but the public applied for 4,500
shares only, it is called a case of under-subscription. Journal entries are passed on the basis
of shares applied for.
Private placement of shares:
According to Section 81 (1A) of the Companies Act, 1956 private placement of shares
implies issue and allotment of shares to a selected group of persons such U.T.I., L.I.C. etc. in
other words; an issue which is not a public issue but offered to a select group of persons is
called Private Placement of shares.
What are the changes that have been introduced to the Private Placement of Shares?
The changes that are introduced are as follows:
1. Initially the rules related to Private Placement were applicable only to the Private
Companies, but according to the provisions of the Companies Act, 2013 some rules
also applies to both public and private companies as well.
2. Earlier the shares could be issued to any person or authority automatically by the
directors of the private company without taking any approval from the shareholders.
But according to the new act, it has now become mandatory to seek approval of the
shareholders for the same. Rule 14(2)(a).
3. Earlier the limit was restricted up to 49 investors which have now been relaxed to 200
investors.
What are the Restrictions that are imposed on Private Placement Securities?
1. A Private Placement offer must be prepared.
2. Offer should not be made to more than 200 people.
3. It authorizes to issue only one kind of securities at a time.
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4. The amount of subscription in either case should not be less than Rs. 20,000.
5. The valuation of securities should be done by a registered merchant or Chartered
Accountant with at least 10 years of practise.
One thing must be noted that according to Section 42(10), if the directors or promoters of the
company dont comply with the provisions then they may be fined with an equal amount
involved in the offer or Rs. 2 crores whichever is higher.
What steps can be taken by companies to comply with the new provisions of the
Companies Act, 2013 to issue securities through Private Placement?
Step 1: Identification of the persons to whom the offer is to be made
As per Section 42(7) of the Act, all offers shall be made only to those persons whose names
are already recorded by the company prior to the invitation to the subscription is made.
Step 2: Preparation of the Offer letter
As per the requirements of Form No. PAS 4 the offer letter should be made. Rule 14 (1)(a)
Step 3: Approval of the shareholders shall be taken regarding the offer.
By passing a special resolution, the shareholders may approve the offer of securities. The
offer shall be made within a period of 12 months from passing the resolution. Rule 14 (2)(a).
Step 4: Maintenance of records
A complete record of private placements offers in the Form PAS- 5, offer letter in Form
PAS-4 along with the name of the persons who are identified as prospective offerees had to
be filed with the Registrar of Companies within 30 days. Rule 14(3).
Step 5: Separate Account must be opened for keeping the Subscription amount.
It is covered under Section 42(6) of the Act.
Step 6: Allotment of Securities and Issue of the Share certificates.
As per Section 42(6), the allotment should be made within 60 days on receipt of the
application money. In case of failure, the company must repay the collected amount within
15 days from the end of 60 day period. An interest of 12% will be charged from the 60 th day
if the company fails to repay the money.
Step 7: Filing of return of allotment with the Registrar. As per Rule 14 (4), a return of
allotment of securities must be filed with the Registrar within 30 days of allotment in the
Form PAS-3, with the relevant fees with a complete list of security holders containing:
Full name, address, PAN and E-mail Id of such Security Holders.

Class of security held.
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Date of becoming security holder.

Number of securities held, nominal value and amount paid up on such securities and
particulars of consideration received.
Since as per the new provisions of the Act, the raising of funds have become more complex
and strict as per the Private placement, so for the companies, the burden to increase the funds
have increased as it involves a lot of steps and procedures to be followed.
Preferential allotment:
A preferential allotment is one that is made at a pre-determined price to the preidentified
people who wish to take a strategic stake in the company such as promoters, venture
capitalists, financial institutions, buyers of companies products ore its suppliers. In other
such a case, the allottees will not sell their securities in the open market for a minimum
period of three years from the date of allotment. This period is known as the lock-in-period.
The preferential allotment can take place only if three-fourths of the shareholders agree to
the issue on preferential basis. S.E.B.I. has prescribed that the minimum price of such an
issue has to be an average of highs and lows of the 26 week preceding the date on which the
board resolves to make the preferential allotment.
Employee stock option plan:
In order to retain high caliber employees or to give them a sense of belonging, companies
may offer their equity shares to be purchased at their will. Such scheme is called Employee
stock option plan (ESOP). Following are the characteristics of this scheme:
1) ESOP implies the right, but not an obligation.
2) The employee has a right to exercise the option of purchase of shares within the vesting
period, i.e., the time period during which the scheme remains in operation.
3) Any share issued under the scheme of ESOP shall be locked-in for a minimum period of
one year from the date of allotment.
Bonus Shares Issue
Bonus shares are shares issued to shareholders of a company free of any cost. Bonus issue is
also known as scrip issue and scrip dividends.
Section 63 of the Act 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
(iii) The capital redemption reserve account:
The section specifically clarifies that no issue of bonus shares shall be made by capitalising
reserves created by the revaluation of assets. The bonus shares shall not be issued in lieu of
dividend.
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Conditions for issue: No company shall issue fully paid-up bonus shares unless
(a) it is authorised by its articles;
(b) it has, on the recommendation of the Board, been authorised in the general meeting of the
company;
(c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the employees, such as,
contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paidup;
(f) it complies with such conditions as may be prescribed.
Under the rules no company which has once announced the decision of its Board
recommending a bonus issue, can subsequently withdraw the same.
Buy-back of shares:
The term buy-back of share implies the act of purchasing its own shares by a company either
from free reserves, securities premium or proceeds of any shares or securities. According to
Section 77A of the Companies Act 1956, a company can buy its own shares either from the:
a) Existing equity shareholders on a proportionate basis.
b) Open market
c) Odd lot shareholders
d) Employees of the company pursuant to a scheme of stock option or sweat equity.
Right shares:
Under Section 81 of the Companies Act, the existing shareholders have a right to subscribe,
in their existing proportion, to the fresh issue of capital or to reject the offer, or sell their
rights. The existing shareholders can authorize the company by passing a special resolution
to offer such shares to the public.
Right Shares: Meaning
Sec. 81(1) of the Companies Act, 1956, states that right shares are those shares which are
issued after the original issue of shares but having an inherent right of the existing
shareholders to subscribe to these shares in proportion to their holding. Such shares must be
offered to the existing equity shareholders on pro rata basis.
The offer of this type of shares shall be made in the form of a notice giving the particulars of
shares offered and within a time not less than 15 days from the date of the offer for
acceptance of such offer. These shares can also be issued to the new members when the
existing shareholders do not accept the offer within a period of 15 days or more.
Usually, these shares are issued among the existing shareholders at a concessional rate.
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Sec. 81(1) further states the provision regarding issue of Right Shares as:
(a) Such new shares shall be offered to the persons who, at the date of the offer, are holders
of the equity shares of the company in proportion, as nearly as circumstances admit, to the
Capital paid-up on those shares at that date.
(b) The offeree aforesaid shall be intimated by notice specifying the number of shares
offered and limiting a time not being less that 15 days from the date of offer within which
the offer, if not accepted, will be deemed to have been declined.
(c) The offers of the shares may renounce the offers in favour of any of the persons unless
the Articles of the company provide otherwise.
(d) After the expiry of the time specified in the notice aforesaid or on receipt of earlier
intimations from the person to whom such notice is given that he declines to accept the
shares offered, the Board of Directors may dispose of them in such manner as they think
most beneficial to the company. Shares issued under this section are called Right shares.
But before issuing such shares the public company must follow the SEBI Guidelines in the
regard.
Exceptions [Sec. 81(1A)]:
As per above section, under certain circumstances the company may offer further issue to
persons other than the existing shareholders.
Under the circumstances, the company must follow either of the following procedures:
(i) If a special resolution is passed by the company in the general meeting;
(ii) If no special resolution is passed, then
(a) A proposal contained in the resolution is passed by a vote of majority members, and
(b) It is approved by the Board of Directors on that behalf. The Central Government has to
be satisfied before approving the proposal that it is the most beneficial to the company.
Sec. 81(3) provides that the rules contained in Sec. 81(1) shall not apply:
(i) To a private company; or
(ii) Where the subscribed Capital of a Public Company is increased due to the debentureholders or creditors who gave an option to convert the debenture or loans into share of the
company. It must be remembered that a right is an option and not an obligation to the
existing shareholders to purchase shares at the specified price.
However, a shareholder has four following options regarding Right Issues:
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(i) To exercise the Right;

(ii) To sell their Rights;
(iii) To hold the Rights until they expire; and
(iv) To sell existing shares and, at the same time, to purchase new shares.
A Case Study:
Tata Steel Limited Rights Issue Allotment Status (Extract):
Decisions about Issuing Right Shares:

While issuing Right Shares the financial manager must consider the following points
since issue of Right Shares involves some complication:
a. Offer Price:
Usually, the offer price must be lower than the prevailing market price, otherwise, the
shareholders will not be interested to subscribe for the shares, The difference between the
market price and the offer price is nothing but right to earn profit. Needless to say that offer
price is determined on the basis of some factors; viz., expected earnings/return, market
sensitivity to offering etc.
b. Right ratio:
Since the total requirements of the funds are known, number of right shares to be issued can
be determined by dividing the total required funds by the offer price. Right ratio is
commuted after comparing the new shares to be issued and the existing shares.
Purpose of Issuing Right Shares:
Right shares are issued for the following purposes:
(i) Right shares are issued for the purpose of controlling interest of the existing shareholders.
On the contrary, if the shares are offered among the outsiders, controlling power of the
existing shareholders will be adversely affected.
(ii) Due to the dilution of the value of shares, Right shares prevent loss which may arise to
the existing shareholders.
Advantages of Right Shares:
Right shares has the following advantages:
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(a) Issuing of Right Share is less expensive than the public offering as no brokerage, no
commission is paid.
(b) This is a real savings to the firms. A public offering is comparatively costly.
(c) The cost of issuing Right share is lower than the total cost of public issue.
(d) Since the Right shares are offered to the existing shareholders on pro rata basis,
ownership and control remain in the hands of the same group.
(e) Existing shareholders enjoy the inherent right to acquire the Right share.
(f) Existing shareholders may exercise their right or sell their rights if they want to do so.
SWEAT EQUITY SHARES
Sweat equity shares are such equity shares, which are issued by a Company to its directors
or employees at a discount or for consideration, other than cash, for providing their knowhow or making available rights in the nature of intellectual property rights or value additions,
by whatever name called
Issue of Sweat Equity Shares for a private limited company used to be regulated by Section
79A and Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003 under Companies
Act, 1956 which under the Companies Act, 2013 is governed by Section 54 read with
Companies (Share Capital and Debentures) Rules, 2014 under Chapter IV to the Act whereas
the listed companies shall adhere to the SEBI (Issue of Sweat Equity) Regulations, 2002 laid
down by the Securities Exchange Board of India (SEBI).
This section is a sole exception to Section 53 of the Companies Act, 2013 which imposes the
restrictions on issue of shares at a discount.
Conditions for the Issue:
Conditions for the issue of Sweat Equity under Rule 8 of Companies (Shares and
Debentures) Rules, 2014:
1.
The special resolution authorising the issue of sweat equity shares shall be valid for
making the allotment within a period of not more than twelve months from the date of
passing of the special resolution.
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2.
The company shall not issue sweat equity shares for more than Fifteen percent of the
existing paid up equity share capital in a year or shares of the issue value of Rupees Five
Crores, whichever is higher. However the issuance of sweat equity shares in the Company
shall not exceed 25% of the paid up capital of the company at any time.
3.
The sweat equity shares issued to directors or employees shall be locked in/non
transferable for a period of three years from the date of allotment and the fact that the share
certificates are under lock-in and the period of expiry of lock in shall be stamped in bold or
mentioned in any other prominent manner on the share certificate.
4.
The sweat equity shares to be issued shall be valued at a price determined by a

registered valuer as the fair price giving justification for such valuation.
5.
The valuation of intellectual property rights or of know how or value additions for
which sweat equity shares are to be issued, shall be carried out by a registered valuer, who
shall provide a proper report addressed to the Board of directors with justification for such
valuation.
6.
Where sweat equity shares are issued for a non-cash consideration on the basis of a
valuation report in respect thereof obtained from the registered valuer, such non-cash
consideration shall be treated in the following manner in the books of account of the
company
7.
where the non-cash consideration takes the form of a depreciable or amortizable asset,
it shall be carried to the balance sheet of the company in accordance with the accounting
standards; or
8.
where (a) above is not applicable, it shall be expensed as provided in the accounting
standards.
9.
The amount of sweat equity shares issued shall be treated as part of managerial
remuneration for the purposes of sections 197 and 198 of the Act, if the following conditions
are fulfilled, namely
10.
the sweat equity shares are issued to any director or manager; and
11.
they are issued for consideration other than cash, which does not take the form of an
asset which can be carried to the balance sheet of the company in accordance with the
applicable accounting standards.
12.
In respect of sweat equity shares issued during an accounting period, the accounting
value of sweat equity shares shall be treated as a form of compensation to the employee or
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the director in the financial statements of the company, if the sweat equity shares are not
issued pursuant to acquisition of an asset.
13.
If the shares are issued pursuant to acquisition of an asset, the value of the asset, as
determined by the valuation report, shall be carried in the balance sheet as per the
Accounting Standards and such amount of the accounting value of the sweat equity shares
that is in excess of the value of the asset acquired, as per the valuation report, shall be treated
as a form of compensation to the employee or the director in the financial statements of the
company.
14.
The company on issue and allotment of sweat equity shall inter allia disclose in its
Boards Report every year the following details:
15.
the class of director or employee to whom sweat equity shares were issued;
16.
the class of shares issued as Sweat Equity Shares;
17.
the number of sweat equity shares issued to the directors, key managerial personnel or
other employees showing separately the number of such shares issued to them , if any, for
consideration other than cash and the individual names of allottees holding one percent or
more of the issued share capital;
18.
the principal terms and conditions for issue of sweat equity shares, including pricing
formula;
19.
the total number of shares arising as a result of issue of sweat equity shares;
20.
the percentage of the sweat equity shares of the total post issued and paid up share
capital;
21.
the consideration (including consideration other than cash) received or benefit accrued
to the company from the issue of sweat equity shares;
22.
the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.
Steps for the Issue:
The issue should be authorised by a special resolution passed at the general meeting held by
the company.
1.
Director to call meeting of Board of Directors with atleast 7 days notice to propose
and consider the issue of sweat equity shares and issue notice for the general meeting;
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2.
Unlisted public companies shall issue notice for the general meeting atleast 21 days
before the meeting which may be called at a shorter notice with the consent of 95% of the
Shareholders, whereas the private companies subject to the exemption notification issued by
MCA on 05.06.2015 may issue notice pursuant to the provisions of the Articles of
Association;
1.
The explanatory statement to the notice pursuant to the provisions of Section 102 shall
contain the following particulars namely:
the date of the Board meeting at which the proposal for issue of sweat equity shares
was approved;
the reasons or justification for the issue;
the class of shares under which sweat equity shares are intended to be issued;
the total number of shares to be issued as sweat equity;
the class or classes of directors or employees to whom such equity shares are to be
issued;
the principal terms and conditions on which sweat equity shares are to be issued,
including basis of valuation;
the time period of association of such person with the company;

the names of the directors or employees to whom the sweat equity shares will be
issued and their relationship with the promoter or/and Key Managerial Personnel;
the price at which the sweat equity shares are proposed to be issued;
the consideration including consideration other than cash, if any to be received for the
sweat equity;
the ceiling on managerial remuneration, if any, be breached by issuance of such sweat

equity and how it is proposed to be dealt with;
a statement to the effect that the company shall conform to the applicable accounting
standards; and
diluted Earning Per Share pursuant to the issue of sweat equity shares , calculated in
accordance with the applicable accounting standards;
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and a copy of the gist along with the critical elements of valuation report obtained with
from the registered valuer towards the valuation of the shares for determining the price of
shares at which sweat equity shall be issued and the valuation report for issuing the sweat
equity against the intellectual property rights or know how or value additions shall be sent
with the notice of the general meeting.
1.
At the General meeting the members shall pass the special resolution for issue of
sweat equity shares which shall mandatorily specify the number of shares, the current market
price if the shares of the company are listed, consideration of the issue, if any, and the class
or classes of directors or employees to whom such equity shares are to be issued;
2.
On passing of the special resolution file the resolution with MCA in Form MGT-14
within 30 days of passing the same for intimating the registrar for passing the resolution;
3.
Once the resolution is filed with the registrar in Form MGT-14, on approval of the
same the Board shall call for the Board meeting with due notice to allot the sweat equity;
4.
Once the resolution is passed at the meeting of the Board for allotment of the shares
the company shall file Form PAS-3 within 30 days of passing of the Board resolution for
allotting of sweat equity;
5.
On allotment the company shall maintain the Register of Sweat Equity in Form SH-3
and enter the particulars of Sweat Equity Shares issued under this section and shall be
maintained at the registered office of the company or such other places as the Board may
decide;
6.
The entries in the register shall be authenticated by the Company Secretary of the
company or such other person as authorised by the Board of Directors of the Company.
PROSPECTUS: DEFINITION
A prospectus is a brief, legal document formulated in a simple style and used to present to
potential investors all important information about a given company (issue of securities,
investment offering, etc) in relation to its .
This document must be prepared by the company which files it with and gets it approved by
the securities commission before the company may issue shares or debt to the public. The
company sets out in its prospectus the securities offered for sale, the unit and total issue
price, its management, its operations, how it intends to use the raised funds, and all relevant
technical and financial information (underwriting agreement, dividend policy, capitalization,
etc). A typical prospectus must contain all material information that would allow investors to
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make an informed decision as to whether to purchase the securities of the company that
constitute the offer.
SHELF PROSPECTUS (SECTION 31):
Any class of company may file a shelf prospectus with the Registrar of Companies at the
stage of first offer of securities.
Shelf prospectus means a prospectus in respect of which the securities or class of securities
included therein are issued for subscription in one or more issues over a certain period
without the issue of a further prospectus.
The shelf prospectus shall indicate that validate period of the shelf prospectus is a period not
exceeding one year from the date of first offer of securities under that prospectus. Once, a
shelf prospectus has been issued, there will be no requirement of any further prospectus for
any subsequent offer of these securities issued during this validity period.
For any subsequent issue, company shall file an Information Memorandum. This
information memorandum shall contain all material facts relating to (i) new charges created;
and (ii) changes in financial position of the company from first/previous offer to this
second/subsequent offer under this Shelf Prospectus.
It may be possible that a company or any other person has received an application and
advance payment of subscription before any material changes like new charges or financial
position. In these cases, the company or that other person shall intimate these changes to the
applicants. If they express a desire to withdraw their application, the company or other
person shall refund all the money received as share application money for subscription
within fifteen days.
When an offer of securities is made on shelf prospectus, the information memorandum
together with shelf prospectus shall be deemed to be a prospectus.
RED HERRING PROSPECTUS (SECTION 32):
A company may issue a red herring prospectus before the issue of a prospectus.
Red herring prospectus means a prospectus which does not include complete particulars of
the quantum or price of the securities included therein.
The company shall file red herring prospectus with Registrar of companies at least three days
before the opening of the subscription list and the offer.
A red herring prospectus shall carry the same obligation as are applicable to a prospectus. In
case there is any variation between red herring prospectus and a prospectus shall be
highlighted as variation in the prospectus.
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Upon the closing of the offer of securities, the prospectus shall be filed with the Registrar
and the Securities and Exchange Board of India. This prospectus shall state (a) total capital
raised, (b) whether debt capital or share capital, (c) closing price of the securities and (d) any
other details not included in red herring prospectus.
ABRIDGED PROSPECTUS (SECTION 33)
According to section 2(1) of the Act abridged prospectus means a memorandum
containing such salient features of a prospectus as may be specified by the Securities and
Exchange Board by making regulations in this behalf. Section 33 of the Act provides that no
form of application for the purchase of any of the securities of a company shall be issued
unless such form is accompanied by an abridged prospectus.
ISSUE OF APPLICATION FORMS AND ABRIDGE PROSPECTUS:
Every application form for the purchase of the securities of a company shall be issued unless
the form is accompanied by an Abridge Prospectus.
There is no need for abridge prospectus in case of:
a) Underwriting Agreement; and
b) Private placement.
Any person may make a request for a copy of the prospectus before closing of the
subscription list and the offer. The company shall furnish a copy to him.
Any default in under this section, company shall be liable to a penalty of fifty thousand
rupees for each default.
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UNIT 05
MEMBERSHIP OF A COMPANY
A company is composed of members, though it has its own separate legal entity. The
members of a company are the persons who, for the time being, constitute the company, as a
corporate entity.
For example, companies limited by guarantee or unlimited companies having no share
capital will have only mem-bers but no shareholders. Contrarily, a holder of a share warrant
is a shareholder but not a member as his name is removed from the register of members
immediately after the issue of such share warrant. Similarly, a transferee or the legal
representative of the deceased may be a shareholder but he may not be member until he gets
his name entered in the register of members. On the other hand, the transferor or the
deceased person is a member so long as his name is on the register of members whereas he
cannot be termed a share-holder.
According to Section 2(55) of the Companies Act, 2013:
(1) The subscribers to the memorandum of a company, who shall be deemed to have agreed
to become members of the company, and on its registration, shall be entered as members in
its register of members;
(2) Every other person who agrees in writing to become a member of a company and whose
name is entered in its register of members shall, be a member of the company;
(3) Every person holding shares of a company and whose name is entered as a beneficial
owner in the records of a depository shall be deemed to be a member of the concerned
company.
Methods to attain membership :
A person may become a member in a company in any of the following ways:
(1) By allotment :
Ordinarily a person becomes a member of the company by applying for the shares in writing
and securing the allotment thereof directly from the company.
(2) By subscribing to the memorandum :
Section 41 of the Act provides thatThe subscribers of the memorandum of a company
shall be deemed to have agreed to become members of the company, and on its registration
shall be entered as members in its register of members. Thus, the signatories to the
memorandum become members of the company, simply by reason of their having signed the
memorandum. Neither application form nor allotment of shares is necessary for becoming a
member in their case. Even entry in the register of members is not necessary to confer upon
them the rights and liabilities of membership (Official Liquidator vs. Suleman Bhai).
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(3) By agreeing to purchase qualification shares :

As per the provisions of Section 266(2), all such persons who have signed an undertaking to
take and pay for their qualification shares, for acting as a director of the company and
delivered it to the Registrar, are also in the same position as subscribers to the memorandum.
As such they are also deemed to have become members automatically on the registration of
the company.
It must, however, be noted that this method of becoming a member is only possible in public
companies having a share capital because Section 266 does not apply to: (a) a company not
having a share capital; (b) a private company; or (c) a company which was a private
company before becoming a public company [Sec. 266(5)].
(4) By transfer :
A person may also become a member of the company by purchasing shares in the open
market and then getting them registered in his name.
(5) By transmission or succession :
A person may become a shareholder by transmission of shares through death , lunacy or
insolvency of a member. Transmission is different from transfer. It is an involuntary transfer.
It takes place by operation of law, to a person who is entitled under the law to succeed to the
estate of the deceased or lunatic automatically and does not require an instrument of transfer.
(6) By principle of estoppel :
If a persons name is improperly placed on the register of members and he knows and assents
to it, that is, agrees in writing to become member or attends company meetings or/and
accepts dividend, he shall be deemed to be a member (In Re. M.F.R.D. Cruz). Under the
principle of estoppel if a person holds himself out being in a position of membership which
is not true, he will then be estopped from denying that he is a member.
It is important to note that such a person whose name has been wrongly entered in the
Register of Members, does not become liable as a member unless either he agrees in writing
to become a member of the company or he has in fact accepted the position and acted as a
member. A person cannot be deemed to have become a member by means of estoppel
simply because his name is entered wrongly in the Register.
RIGHTS AND PREVILEGES OF MEMBERS
When once a person becomes a member he is entitled to exercise all the rights of a member
until he ceases to be a member in accordance with the provisions of the Act. The
appointment of a receiver, the attachment of the shares, the pledge of the shares or taking
over of the management of a company which is holding shares in another company under
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Section 18A of the Industries (Development & Regulation) Act, 1951 will not alter the
position.
Individual Rights
Members of a company enjoy certain rights in their individual capacity, which they can
enforce individually.
These rights are contractual rights and cannot be taken away except with the written consent
of the member concerned. These rights can be categorised as under:
(1) Right to receive copies of the following documents from the company:
(i) Abridged financial statement and auditors report in the case of a listed company (Section
136).
(ii) Report of the Cost Auditor, if so directed by the Government.
(iii) Notices of the general meetings of the company (Sections 101-102).
(2) Right to inspect statutory registers/returns and get copies thereof without payment on
any fee or on payment of prescribed fee.
The members have been given right to inspect the following registers etc.:
(i) Debenture trust deed (Section 71);
(ii) Register of Charges and instrument of charges (Section 85 & 87);
(iii) Copies of contract of employment with Managing or Whole-time directors);
(iv) Shareholders Minutes Book (Section 119);
(v) Register of Contracts, Companies and Firms in which directors are interested (Section
189);
(vi) Register of directors and key managerial personnel and their shareholding (Section
170);
(3) Right to attend meetings of the shareholders and exercise voting rights at these meetings
either personally or through proxy (Sections 96, 100, 105 and 107).
(4) Other rights.
Over and above the rights enumerated at Item Nos. 1 to 3 above, the members have the
following rights:
(i) To transfer shares (Sections 44 and 56 and Articles of Association of the company).
(iii) To resist and safeguard against increase in his liability without his written consent.
(iv) To receive dividend when declared.
(v) To have rights shares (Section 62).
(vi) To appoint directors (Section 152).
(vii) To share the surplus assets on winding up (Section 320).
(viii) Right of dissentient shareholders to apply to Tribunal (Section 48).
(ix) Right to be exercised collectively by passing a special resolution and intimating the
same to the Central Government for investigation of the affairs of the company (Section
210).
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(x) Right to make application collectively to the Tribunal for relief in cases of oppression
and mismanagement (Sections 241).
(xi) Right to file class action suits before the Tribunal (Section 245)
(xi) Right of Nomination. (Section 72)
(xii) Right to file a suit or take any other action in case of any misleading statement or the
inclusion or omission of any matter in the prospectus. (Section 37)
Collective Membership Rights
Members of a company have certain rights which can be exercised by members collectively
by means of democratic process, i.e. by majority of members usually unless otherwise
prescribed. This involves the principle of submission by all members to the will of the
majority, provided that the will is exercised in accordance with the law and the
Memorandum and Articles of Association of the company. Thus, the shareholders in
majority determine the policy of the company and exercise control over the management of
the company.
Voting Rights of Members
The right of attending shareholders meetings and voting thereat is the most important right
of a member of a company, as shareholders meetings play a very important role in the
companys life. Directors are appointed by the shareholders, who direct the affairs of the
company, formulate short-term plans and long-term policies of the company, appoint
management personnel to constitute organisation to implement their plans and policies in
order to achieve the objects of the company.
(1) Every company limited by shares shall from the date of its registration maintain a
register of its members in Form No. MGT.1.
In the case of existing companies, registered under the Companies Act, 1956, particulars
shall be compiled within six months from the date of commencement of these rules.
(2) In the case of a company not having share capital, the register of members shall contain
the following particulars, in respect of each member, namely:(a) name of the member; address (registered office address in case the member is a body
corporate); e-mail address; Permanent Account Number or CIN; Unique Identification
Number, if any; Fathers/Mothers/Spouses name; Occupation; Status; Nationality; in case
member is a minor, name of the guardian and the date of birth of the member; name and
address of nominee;
(b) date of becoming member;
(c) date of cessation;
(d) amount of guarantee, if any;
(e) any other interest if any; and
(f) instructions, if any, given by the member with regard to sending of notices etc:
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In the case of existing companies, registered under the Companies Act, 1956, particulars
shall be compiled within six months from the date of commencement of these rules.
Every company shall maintain the registers under clauses (a), (b) and (c) of sub-section
(1) of section 88 in the following manner namely:(1) The entries in the registers maintained under section 88 shall be made within seven days
after the Board of Directors or its duly constituted committee approves the allotment or
transfer of shares, debentures or any other securities, as the case may be.
(2) The registers shall be maintained at the registered office of the company unless a special
resolution is passed in a general meeting authorising the keeping of the register at any other
place within the city, town or village in which the registered office is situated or any other
place in India in which more than one-tenth of the total members entered in the register of
members reside.
(3) Consequent upon any forfeiture, buy-back, reduction, sub-division, consolidation or
cancellation of shares, issue of sweat equity shares, transmission of shares, shares issued
under any scheme of arrangements, mergers, reconstitution or employees stock option
scheme or any of such scheme provided under this Act or by issue of duplicate or new share
certificates or new debenture or other security certificates, entry shall be made within seven
days after approval by the Board or committee, in the register of members or in the
respective registers, as the case may be.
(4) If any change occurs in the status of a member or debenture holder or any other security
holder whether due to death or insolvency or change of name or due to transfer to Investor
Education Protection Fund or due to any other reason, entries thereof explaining the change
shall be made in the respective register.
(5) If any rectification is made in the register maintained under section 88 by the company
pursuant to any order passed by the competent authority under the Act, the necessary
reference of such order shall be indicated in the respective register.
(6) If any order is passed by any judicial or revenue authority or by Security and Exchange
Board of India (SEBI) or Tribunal attaching the shares, debentures or other securities and
giving directions for remittance of dividend or interest, the necessary reference of such order
shall be indicated in the respective register.
(7) In case of companies whose securities are listed on a stock exchange in or outside India,
the particulars of any pledge, charge, lien or hypothecation created by the promoters in
respect of any securities of the company held by the promoter including the names of
pledgee/pawnee and any revocation therein shall be entered in the register within fifteen days
from such an event.
(8) If promoters of any listed company, which has formed a joint venture company with
another company have pledged or hypthoticated or created charge or lien in respect of any
security of the listed company in connection with such joint venture company, the particulars
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of such pledge, hypothecation, charge and lien shall be entered in the register members of the
listed company within fifteen days from such an event.
Foreign Register
Section 88(4) of the Companies Act, 2013 empowers companies to keep foreign registers of
members or debenture-holders, other security holders or beneficial owners residing outside
India. It states: A company may, if so authorised by its articles, keep in any country outside
India, in such manner as may be prescribed, a part of the register referred to in sub-section
(1), called foreign register containing the names and particulars of the members,
debentureholders, other security holders or beneficial owners residing outside India.
If a company does not maintain foreign register of members or debenture-holders or other
security holders or fails to maintain them in accordance with the provisions of section 88(1)
or section 88(2), the company and every officer of the company who is in default shall be
punishable with fine which shall not be less than fifty thousand rupees but which may extend
to three lakh rupees and where the failure is a continuing one, with a further fine which may
extend to one thousand rupees for every day, after the first during which the failure
continues. [Section 88(5)]
A foreign register is deemed to be a part of the companys principal register and it should be
kept in the same manner as the principal register and be likewise open to inspection.
A duplicate of such register should be maintained at the registered office in India and all
entries made in the foreign register should be made in the duplicate register at the registered
office as soon as possible.
A company may discontinue a foreign register at any time but all the entries made in it must
be transferred to the principal register.
The decision of a competent Court in the State or Country in which a foreign register is kept,
with regard to its rectification, shall be as effective as if it were a decision of a competent
Court in India, if the Central Government, by notification in the Official Gazette, so directs.
Shares of a Company
The share capital is the most important requirement of a business. It is divided into a
number of indivisible units of a fixed amount. These units are known as shares. According
to Section 2 (46) of the Companies Act, 1956, a share is a share in the share capital of a
company, and includes stock except where a distinction stock and shares is expressed or
implied.
The person who is the owner of the shares is called Shareholder and the return he gets on
his investment is called Dividend.
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Difference between Equity Shares and Debentures

In many respects a debenture is like a share. It can be purchased or sold in the stock-market.
Like shares, the market value of a debenture can be used by the holders as collateral security
to temporary loans. There are however, important points of difference between a debentureholder and a shareholder.
Equity Shares
Debentures
1. Status
Shares are ownership securities. The Debentures are creditorship securities.
holders of shares are the owners of a Debenture holders are creditors of a
company.
company.
2. Return on Dividend is paid on shares by the Interest is paid on debentures at a
Investment
company. The rate of dividend is not fixed rate.
fixed.
3. Repayment
4. Right
Participate
Equity shares capital is not to be The amount of debentures is paid

returned back except in the case of back to debenture-holders after a
liquidation.
fixed time.
to Shareholders have a right to Debenture holders cant participate in

participate in the affairs of the the affairs of the company.
company.
5. Liquidation
Equity shares get the refund only Debenture holders get payment in
when all liabilities have been paid priority as compared to all the
off.
creditors.
6. Security
Shareholders being owners, have to Debentures are usually secured by a

bear maximum risk.
fixed or floating charge.
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UNIT 06
Company Meetings
A company is an association of several persons. Decisions are made according to the view of
the majority. Various matters have to be discussed and decided upon. These discussions take
place at the various meetings which take place between members and between the directors.
Needless to say, the importance of meetings cannot be under-emphasised in case of
companies. The Companies Act, 1956 contains several provisions regarding meetings. These
provisions have to be understood and followed.
For a meeting, there must be at least 2 persons attending the meeting. One member cannot
constitute a company meeting even if he holds proxies for other members.
Kinds of Company Meetings :
Broadly, meetings in a company are of the following types :-
I. Meetings of Members :
These are meetings where the members / shareholders of the company meet and discuss
various matters. Members meetings are of the following types :A. Statutory Meeting :
A public company limited by shares or a guarantee company having share capital is required
to hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the
company. Such a meeting must be held within a period of not less than one month or within
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a period not more than six months from the date on which it is entitled to commence
business i.e. it obtains certificate of commencement of business. In a statutory meeting, the
following matters only can be discussed : Floatation of shares / debentures by the company
Modification to contracts mentioned in the prospectus
The purpose of the meeting is to enable members to know all important matters pertaining
to the formation of the company and its initial life history. The matters discussed include
which shares have been taken up, what money has been received, what contracts have been
entered into, what sums have been spent on preliminary expenses, etc. The members of the
company present at the meeting may discuss any other matter relating to the formation of the
Company or arising out of the statutory report also, even if no prior notice has been given for
such other discussions but no resolution can be passed of which notice have not been given
in accordance with the provisions of the Act.
A notice of at least 21 days before the meeting must be given to members unless
consent is accorded to a shorter notice by members, holding not less than 95% of
voting rights in the company.
A statutory meeting may be adjourned from time to time by the members present at
the meeting.
The Board of Directors must prepare and send to every member a report called the "Statutory
Report" at least 21 days before the day on which the meeting is to be held. But if all the
members entitled to attend and vote at the meeting agree, the report could be forwarded later
also. The report should be certified as correct by at least two directors, one of whom must be
the managing director, where there is one, and must also be certified as correct by the
auditors of the company with respect to the shares allotted by the company, the cash received
in respect of such shares and the receipts and payments of the company. A certified copy of
the report must be sent to the Registrar for registration immediately after copies have been
sent to the members of the company.
A list of members showing their names, addresses and occupations together with the number
shares held by each member must be kept in readiness and produced at the commencement
of the meeting and kept open for inspection during the meeting.
If default is made in complying with the above provisions, every director or other officer of
the company who is in default shall be punishable with fine upto Rs. 500. The Registrar or a
contributory may file a petition for the winding up of the company if default is made in
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delivering the statutory report to the Registrar or in holding the statutory meeting on or after
14 days after the last date on which the statutory meeting ought to have been held.
Contents of Statutory Report must provide the following particulars:(a)The total number of shares allotted, distinguishing those fully or partly paid-up, otherwise
than in cash, the extent to which partly paid shares are paid-up, and in both cases the
consideration for which they were allotted.
(b) The total amount of cash received by the company in respect of all shares allotted,
distinguishing as aforesaid.
(c) An abstract of the receipts and payments upto a date within 7 days of the date of the
report and the balance of cash and bank accounts in hand, and an account of preliminary
expenses.
(d) Any commission or discount paid or to be paid on the issue or sale of shares or
debentures must be separately shown in the aforesaid abstract.
(e) The names, addresses and occupations of directors, auditors, manager and secretary, if
any, of the company and the changes which have taken place in the names, addresses and
occupations of the above since the date of incorporation.
(f) Particulars of any contracts to be submitted to the meeting for approval and modifications
done or proposed.
(g) If the company has entered into any underwriting contracts, the extent, if any, to which
they have not been carried out and the reasons for the failure.
(h) The arrears, if any, due on calls from every director and from the manager.
(i) The particulars of any commission or brokerage paid or to be paid, in connection with the
issue or sale of shares or debentures to any director or to the manager.
The auditors have to certify that all information regarding calls and allotment of shares are
correct.
B. Annual General Meeting
Must be held by every type of company, public or private, limited by shares or by guarantee,
with or without share capital or unlimited company, once a year. Every company must in
each year hold an annual general meeting.
Not more than 15 months must elapse between two annual general meetings. However, a
company may hold its first annual general meeting within 18 months from the date of its
incorporation. In such a case, it need not hold any annual general meeting in the year of its
incorporation as well as in the following year only.
In the case there is any difficulty in holding any annual general meeting (except the first
annual meeting), the Registrar may, for any special reasons shown, grant an extension of
time for holding the meeting by a period not exceeding 3 months provided the application for
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the purpose is made before the due date of the annual general meeting. However, generally
delay in the completion of the audit of the annual accounts of the company is not treated as
"special reason" for granting extension of time for holding its annual general meeting.
Generally, in such circumstances, an AGM is convened and held at the proper time . all
matters other than the accounts are discussed. All other resolutions are passed and the
meeting is adjourned to a later date for discussing the final accounts of the company.
However, the adjourned meeting must be held before the last day of holding the AGM.
A notice of at least 21 days before the meeting must be given to members unless consent is
accorded to a shorter notice by members, holding not less than 95% of voting rights in the
company. The notice must state that the meeting is an annual general meeting. The time, date
and place of the meeting must be mentioned in the notice. The notice of the meeting must be
accompanied by a copy of the annual accounts of the company, directors report on the
position of the company for the year and auditors report on the accounts. Companies having
share capital should also state in the notice that a member is entitled to attend and vote at the
meeting and is also entitled to appoint proxies in his absence.
A proxy need not be a member of that company. A proxy form should be enclosed with the
notice. The proxy forms are required to be submitted to the company at least 48 hours before
the meeting.
The AGM must be held on a working day during business hours at the registered office of
the company or at some other place within the city, town or village in which the registered
office of the company is situated. The Central Government may, however, exempt any class
of companies from the above provisions. If any day is declared by the Central government to
be a public holiday after the issue of the notice convening such meeting, such a day will be
treated as a working day.
A company may, by appropriate provisions in its its articles, fix the time for its annual
general meeting and may also by a resolution passed in one annual general meeting fix the
time for its subsequent annual general meetings.
Companies licensed under Section 25 are exempt from the above provisions provided that
the time, date and place of each annual general meeting are decided upon beforehand by the
Board of Directors having regard to the directions, if any, given in this regard by the
company in general meeting.
In case of default in holding an annual general meeting, the following are the
consequences:NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA
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Any member of the company may apply to the Company Law Board. The Company Law
Board may call, or direct the calling of the meeting, and give such ancillary or consequential
directions as it may consider expedient in relation to the calling, holding and conducting of
the meeting. The Company Law Board may direct that one member present in person or by
proxy shall be deemed to constitute the meeting. A meeting held in pursuance of this order
will be deemed to be an annual general meeting of the company. An application by a
member of the company for this purpose must be made to the concerned Regional Bench of
the Company Law Board by way of petition in Form No. 1 in Annexure II to the CLB
Regulations with a fee of rupees fifty accompanied by (i) affidavit verifying the petition, (ii)
bank draft for payment of application fee.
Fine which may extend to Rs. 5,000 on the company and every officer of the company who
is in default may be levied and for continuing default, a further fine of Rs. 250 per day
during which the default continues may be levied.
Business to be Transacted at Annual General Meeting :
At every AGM, the following matters must be discussed and decided. Since such matters are
discussed at every AGM, they are known as ordinary business. All other matters and
business to be discussed at the AGM are specila business.
The following matters constitute ordinary business at an AGM : Consideration of annual accounts, directors report and the auditors report
Declaration of dividend
Appointment of directors in the place of those retiring
Appointment of and the fixing of the remuneration of the statutory auditors.
C. Extraordinary General Meeting
Every general meeting (i.e. meeting of members of the company) other than the statutory
meeting and the annual general meeting or any adjournment thereof, is an extraordinary
general meeting. Such meeting is usually called by the Board of Directors for some urgent
business which cannot wait to be decided till the next AGM. Every business transacted at
such a meeting is special business. An explanatory statement of the special business must
also accompany the notice calling the meeting. The notice must should also give the nature
and extent of the interest of the directors or manager in the special business, as also the
extent of the shareholding interest in the company of every such person. In case approval of
any document has to be done by the members at the meeting, the notice mus also state that
the document would be available for inspection at the Registered Office of the company
during the specified dates and timings.
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The Articles of Association of a Company may contain provisions for convening an

extraordinary general meeting. Eg. It may provide that "the board may, whenever it thinks
fit, call an extraordinary general meeting" or it may provide that "if at any time there are not
within India, directors capable of acting who are sufficient in number to form a quorum, any
director or any two members of the company may call an extraordinary general meeting".
Extraordinary General Meeting on Requisition :
The members of a company have the right to require the calling of an extraordinary general
meeting by the directors. The board of directors of a company must call an extraordinary
general meeting if required to do so by the following number of members :members of the company holding at the date of making the demand for an EGM not less than
one-tenth of such of the voting rights in regard to the matter to be discussed at the meeting ;
or
if the company has no share capital, the members representing not less than one-tenth of the
total voting rights at that date in regard to the said matter.
The requisition must state the objects of the meetings and must be signed by the
requisitioning members. The requisition must be deposited at the company's registered
office. When the requisition is deposited at the registered office of the company, the directors
should within 21 days, move to call a meeting and the meeting should be actually be held
within 45 days from the date of the lodgement of the requisition. If the directors fail to call
and hold the meeting as aforesaid, the requisitionists or any of them meeting the
requirements at (a) or (b) above, as the case may be, may themselves proceed to call meeting
within 3 months from the date of the requisition, and claim the necessary expenses from the
company. The company can make good this sum from the directors in default. At such an
EGM, any business which is not covered by the agenda mentioned in the notice of the
meeting cannot be voted upon.
Power of Company Law Board to Order Calling of Extraordinary General Meeting :
If for any reason, it is impracticable to call a meeting of a company, other than an annual
general meeting, or to hold or conduct the meeting of the company, the Company Law Board
may, either i) on its own motion, or ii) on the application of any director of the company, or
of any member of the company, who would be entitled to vote at the meeting, order a
meeting to be called and conducted as the Company Law Board thinks fit, and may also give
such other ancillary and consequential directions as it thinks fit expedient. A meeting so
called and conducted shall be deemed to be a meeting of the company duly called and
conducted.
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Procedure for Application under Section 186 :

An application by a director or a member of a company for this purpose is required to be
made to the Regional Bench of the Company Law Board before whom the petition is to be
made in Form No 1 specified in Annexure II to the CLB Regulations with a fee of Rs200.
The petition must be accompanied with the following documents
Evidence in proof of status of the applicant.

Affidavit verifying the petition.
Bank draft evidencing payment of application fee.
Memorandum of appearance with copy of the Board's resolution or executed vakalat
nama, as the case may be.
D. Class Meeting
Class meetings are meetings which are held by holders of a particular class of shares, e.g.,
preference shareholders. Such meetings are normally called when it is proposed to vary the
rights of that particular class of shares. At such meetings, these members discuss the pros
and cons of the proposal and vote accordingly. (See provisions on variations of shareholders
rights). Class meetings are held to pass resolution which will bind only the members of the
class concerned, and only members of that class can attend and vote.
Unless the articles of the company or a contract binding on the persons concerned otherwise
provides, all provisions pertaining to calling of a general meeting and its conduct apply to
class meetings in like manner as they apply with respect to general meetings of the company.
II. Meetings of the Board of Directors
- Meeting of the Board of Directors
- Meeting of a Committee of the Board
III. Other Meetings
A. Meeting of debenture holders
A company issuing debentures may provide for the holding of meetings of the
debentureholders. At such meetings, generally nmmatters pertaining to the variation in terms
of security or to alteration of their rights are discussed. All matters connected with the
holding, conduct and proceedings of the meetings of the debentureholders are normally
specified in the Debenture Trust Deed. The decisions at the meeting made by the prescribed
majority are valid and lawful and binding upon the minority.
B. Meeting of creditors
Sometimes, a company, either as a running concern or in the event of winding up, has to
make certain arrangements with its creditors. Meetings of creditors may be called for this
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purpose. Eg U/s 393, a company may enter into arrangements with creditors with the
sanction of the Court for reconstruction or any arrangement with its creditors. The court, on
application, may order the holding of a creditors' s meeting. If the scheme of arrangement is
agreed to by majority in number of holding debts to value of the three-fourth of the total
value of the debts, the court may sanction the scheme. A certified copy of the court's order is
then filed with the Registrar and it is binding on all the creditors and the company only after
it is filed with Registrar.
Similarly, in case of winding up of a company, a meeting of creditors and of contributories is
held to ascertain the total amount due by the company and also to appoint a liquidator to
wind up the affairs of the company.
Requisites of a Valid Meetings
The following conditions must be satisfied for a meeting to be called a valid meeting : It must be properly convened. The persons calling the meeting must be authorised to
do so.
Proper and adequate notice must have been given to all those entitled to attend.
The meeting must be legally constituted. There maust be a chairperson. The rules of
quorum must be maintained and the provisions of the Companies Act, 1956 and the
articles must be complied with.
The business at the meeting must be validly transacted.. The meeting must be
conducted in accordance with the regulations governing the meetings.
Notice of General Meeting
A meeting cannot be held unless a proper notice has been given to all persons entitled to
attend the meeting at the proper time, containing the necessary information. A notice
convening a general meeting must be given at least 21 clear days prior to the date of meeting.
However, an annual general meeting may be called and held with a shorter notice, if it is
consented to by all the members entitled to vote at the meeting. In respect of any other
meeting, it may be called and held with a shorter notice, if at least members holding 95
percent of the total voting power of the Company consent to a shorter notice.
Notice of every meeting of company must be sent to all members entitled to attend and vote
at the meeting. Notice of the AGM must be given to the statutory auditor of the company.
Accidental omission to give notice to, or the non-receipt of notice by, any member or any
other person on whom it should be given will not invalidate the proceedings of the meeting.
The notice may be given to any member either personally or by sending it by post to him at
his registered address, or if there is none in India, to any address within India supplied by
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him for the purpose. Where notice is sent by post, service is effected by properly addressing,
pre-paying and posting the notice. A notice may be given to joint holders by giving it to the
jointholder first named in the register of members. A notice of meeting may also be given by
advertising the same in a newspaper circulating in the neighbourhood of the registered office
of the company and it shall be deemed to be served on every member who has to registered
address in India for the giving of notices to him.
A notice calling a meeting must state the place, day and hour of the meeting and must
contain the agenda of the meeting. If the meeting is a statutory or annual general meeting,
notice must describe it as such. Where any items of special business are to be transacted at
the meeting, an explanatory statement setting out all materials facts concerning each item of
the special business including the concern or interest, if any, therein of every director and
manager, is any, must be annexed to the notice. If it is intended to propose any resolution as
a special resolution, such intention should be specified.
A notice convening an AGM must be accompanied by the annual accounts of the company,
the directors report and the auditors report. The copies of these documents could, however,
be sent less than 21 days before of the date of the meeting if agreed to by all members
entitled to vote at the meeting.
Proxy
In case of a company having a share capital and in the case of any other company, if the
articles so authorise, any member of a company entitled to attend and vote at a meeting of
the company shall be entitled to appoint another person (whether a member or not) as his
proxy to attend and vote instead of himself. Every notice calling a meeting of the company
must contain a statement that a member entitled to attend and vote is entitled to appoint one
proxy in the case of a private company and one or more proxies in the case of a public
company and that the proxy need not be member of the company.
A member may appoint another person to attend and vote at a meeting on his behalf. Such
other person is known as "Proxy". A member may appoint one or more proxies to vote in
respect of the different shares held by him, or he may appoint one or more proxies in the
alternative, so that if the first named proxy fails to vote, the second one may do so, and so
on.
The member appointing a proxy must deposit with the company a proxy form at the time of
the meeting or prior to it giving details of the proxy appointed. However, any provision in
the articles which requires a period longer than forty eight hours before the meeting for
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depositing with the company any proxy form appointing a proxy, shall have the effect as if a
period of 48 hours had been specified in such provision.
A company cannot issue an invitation at its expense asking any member to appoint a
particular person as proxy. If the company does so, every officer in default shall be liable to
fine up to Rs1,000. But if a proxy form is sent at the request of a member, the officer shall
not be liable. Every member entitled to vote at a meeting of the company, during the period
beginning 24 hours before the date fixed for the meeting and ending with the conclusion of
the meeting may inspect proxy forms at any time during business hours by giving 3 days
notice to the company of his intention to do so.
The proxy form must be in writing and be signed by the member or his authorised attorney
duly authorised in writing or if the appointer is a company, the proxy form must be under its
seal or be signed by an officer or an attorney duly authorised by it.
The proxy can be revoked by the member at any time, and is automatically revoked by the
death or insolvency of the member. The member may revoke the proxy by voting himself
before the proxy has voted, but once the proxy has exercised the vote, the member cannot
retract his vote. Where two proxy forms by the same shareholder are lodged in respect of the
same votes, the last proxy form will be treated as the correct proxy form.
A proxy is not entitled to vote except on a poll. Therefore, a proxy cannot vote on show of
hands.
Quorum
Quorum refers to the minimum number of members who must be present at a meeting in
order to constitute a valid meeting. A meeting without the minimum quorum is invalid and
decisions taken at such a meeting are not binding. The articles of a company may provide for
a quorum without which a meeting will be construed to be invalid. Unless the articles of a
company provide for larger quorum, 5 members personally present (not by proxy) in the case
of a public company and 2 members personally present (not by proxy) in the case of a
private company shall be the quorum for a general meeting of a company.
It has been held by Courts that unless the articles otherwise provide, a quorum need to be
present only when the meeting commenced, and it was immaterial that there was no quorum
at the time when the vote was taken. Further, unless the articles otherwise provide, if within
half an hour from the time appointed for holding a meeting of the company, a quorum is not
present in the person, the meeting :NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA
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if called upon the requisition of members, shall stand dissolved;

in any other case, it shall stand adjourned to the same day in the next week, at the same time
and place, or to such other day and time as the Board of Directors may determine.
If at the adjourned meeting also, the quorum is not present within half an hour from the time
appointed for holding the meeting, the members present shall a quorum.
In case the Company Law Board calls or directs the calling of a meeting of the company,
when default is made in holding an annual general meeting, the government may give
directions regarding the quorum including a direction that even one member of the company
present in person, or by proxy shall be deemed to constitute a meeting. Similarly the
Company Law Board may, direct a meeting of the company (other than an annual general
meeting) to be called and held where for any reason it is impracticable to call a meeting and
direct that even one member present in person or by proxy shall be deemed to constitute a
meeting.
Chairman
The chairman is the head of the meeting. Generally, the chairman of the Board of Directors
is the Chairman of the meeting. Unless the articles otherwise provide, the members present
in person at the meeting elect one of themselves to be the chairman thereof on a show of the
hands. If there is no Chairman or he is not present within 15 minutes after the appointed time
of the meeting or is unwilling to act as chairman of the meeting, the directors present may
elect one among themselves to be the chairman of the meeting. If, however no director is
willing to act as chairman or if no director is present within 15 minutes after the appointed
time of the meeting, the members present should choose one among themselves to be
chairman of the meeting. If, after the election of a chairman on a show of hands, poll is
demanded and taken and a different person is elected as chairman, then that person will be
the chairman for the rest of the meeting.
Duties of the chairman
Without a chairman, a meeting is incomplete. The chairman is the regulator of the meeting.
His duties include the following : He must ensure that the meeting is properly convened and constituted i.e. that proper
notice has been given, that the required quorum is present, etc.
He must ensure that the provisions of the act and the articles in regard to the meeting
and its procedures are observed.
He must ensure that business is taken in the order set out in agenda and no business
which is not mentioned in the agenda is taken up unless agreed to by the members.
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He must impartially regulate the proceedings of the meeting and maintain discipline at
the meeting.
He may exercise his powers of adjournment of the meeting, should he in good faith
feel that such a step is necessary. The chairman has the power to adjourn the meeting
in case of indiscipline at the meeting. A chairman however does not have the power to
stop or adjourn the meeting at his own will and pleasure. If he adjourns the meeting
prematurely, the members present may decide to continue the meeting and elect
another chairman and proceed with the business for which it was convened.
He must exercise his power to order a poll correctly and must order it to be taken
when demanded properly.
He must exercise his casting vote bonafide in the interest of the company.
Voting and Demand for Poll
Generally, initially matters are decided at a general meeting by a show of hands. If the
majority of the hands raise their hands in favour of a particular resolution, then unless a poll
is demanded, it is taken as passed. Voting by a show of hands operates on the principle of
"One Member-One Vote". However, since the fundamental voting principle in a company is
"One Share-One Vote", if a poll is demanded, voting takes place by a poll. Before or on
declaration of the result of the voting on any resolution on a show of hands, the chairman
may order suo motu (of his own motion) that a poll be taken. However, when a demand for
poll is made, he must order the poll be taken. The chairman may order a poll when a
resolution proposed by the Board is lost on the show of hands or if he is of the opinion that
the decision taken on the show of hands is likely to be reversed by poll. When a poll is taken,
The decision arrived by poll is final and the decision on the show of hands has no effect.
A poll is allowed only if the prescribed number of members demand a poll. A poll must be
ordered by the chairman if it is demanded:In the case of a public company having a share capital, by any member or members present
in person or by proxy and holding shares in the companywhich confer a power to vote on the resolution not being less than one-tenth of the total
voting power in respect of the resolution, or
On which an aggregate sum of not less than fifty thousand rupees has been paid up.
in the case of a private company having a share capital, by one member having the right to
vote on the resolution and present in person or by proxy if not more than seven such
members are personally present, and by two such members present in person or by proxy, if
more than seven such members are personally present.
in the case of any other, by any member or members present in person or by proxy and
having not less than one-tenth of the total voting power in respect of the resolution.
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Motion
Motion means a proposal to be discussed at a meeting by the members. A resolution may be
passed accepting the motion, with or without modifications or a motion may be entirely
rejected. A motion, on being passed as a resolution becomes a decision. A motion must be in
writing and signed by the mover and put to the vote of the meeting by the chairman. Only
those motions which are mentioned in the agenda to the meeting can be discussed at the
meeting. However, motions incidental or ancillary to the matter under discussion may be
moved and passed. Generally, a motion is proposed by one member and seconded by another
member.
Amendment
Amendment means any modification to a motion before it is put to vote for adoption.
Amendment may be proposed by any member who has not already spoken on the main
motion or has not previously moved an amendment thereto. There can be an amendment to
an amendment motion also. A motion must be in writing and signed by the mover and put to
the vote of the meeting by the chairman. An amendment must not raise any question already
decided upon at the same meeting and must be relevant to the main motion which it seeks to
amend. The chairman has the discretion to accept or reject an amendment on various grounds
such as inconsistency, redundancy, irrelevance, etc. If the amendment is adopted on a vote
by the members, it is incorporated in the body of the main motion. The altered motion is then
discussed and put to vote and if passed, becomes a resolution.
Kinds of Resolutions
Resolutions mean decisions taken at a meeting. A motion, with or without amendments is
put to vote at a meeting. Once the motion is passed, it becomes a resolution. A valid
resolution can be passed at a properly convened meeting with the required quorum. There are
broadly three types of resolutions :1. Ordinary Resolution :
An ordinary resolution is one which can be passed by a simple majority. I.e. if the votes
(including the casting vote, if any, of the chairman), at a general meeting cast by members
entitled to vote in its favour are more than votes cast against it. Voting may be by way of a
show of hands or by a poll provided 21 days notice has been given for the meeting.
2. Special Resolution :
A special resolution is one in regard to which is passed by a 75 % majority only i.e. the
number of votes cast in favour of the resolution is at least three times the number of votes
cast against it, either by a show of hands or on a poll in person or by proxy. The intention to
propose a resolution as a special resolution must be specifically mentioned in the notice of
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the general meeting. Special resolutions are needed to decide on important matters of the
company. Examples where special resolutions are required are : To alter the domicile clause of the memorandum from one State to another or to alter
the objects clause of the memorandum.
To alter / change the name of the company with the approval of the central
government
To alter the articles of association
To change the name of the company by omitting "Limited" or "Private Limited". The
Central Government may allow a company with charitable objects to do so by special
resolution under section 25 of the Companies Act, 1956.
3. Resolution requiring Special Notice :
There are certain matters specified in the Companies Act, 1956 which may be discussed at a
general meeting only if a special notice is given regarding the proposal to discuss these
matters at a meeting. A special notice enables the members to be prepared on the matter to be
discussed and gives them time to indicate their views on the resolution. In case special notice
of resolution is required by the Companies Act, 1956 or by the articles of a company, the
intention to propose such a resolution must be notified to the company at least 14 days
before the meeting. The company must within 7 days before the meeting give the notice of
the proposed resolution to its members. Notice of the resolution is required to be given in the
same way in which notice of a meeting is given, or if that is not practicable, the company
may give notice by advertisement in a newspaper having an appropriate circulation or in any
other manner allowed by the articles, not less 7 days before the meeting.
The following matters requiring Special Notice before they are discussed before the
meeting : To appoint at an annual general meeting appointing an auditor a person other than a
retiring auditor.
To resolve at an annual general meeting that a retiring auditor shall not be reappointed.
To remove a director before the expiry of his period of office.
To appoint another director in place of removed director.
Where the articles of a company provide for the giving of a special notice for a
resolution, in respect of any specified matter or matters.
Please note that a resolution requiring special notice may be passed either as an ordinary
resolution (Simple majority) or as a special resolution (75 % majority).
Circulation of Member's Resolution
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Generally, the Board of Directors prepare the agenda of the meeting to be sent to all
members of the meeting. A member, by himself has very little say in deciding the agenda.
However, there are provisions in the Companies Act which enable members to introduce
motions at a meeting and give prior notice of their intention to do so to all other members of
the company. If members having one twentieth of the total voting rights of all members
having the right to vote on a resolution or if 100 members having the right to vote and
holding paid-up capital of Rs1,00,000 or more, require the company to do so, the company
must :Give to the members entitled to receive notice of the next annual general meeting, notice of
any resolution which may be properly moved and is intended to be moved at that meeting;
and
Circulate to members entitled to have notice of any general meeting sent to them, any
statement of not more than 1,000 words with respect to the matter referred to in any
proposed resolution, or any business to be dealt with at that meeting.
The expenses for this purpose must be borne by the requisitionists and must be tendered to
the company. The requisition, signed by all the requisitionists, must be deposited at the
registered office of the company at least 6 weeks before the meeting in the case of resolution
and not less than 2 weeks before the meeting in case of any other requisition together with a
reasonable sum to meet the expenses. However, where a copy of the requisition requiring
notice of resolution has been deposited at the registered office of the company and an annual
general meeting is called for a date six weeks or less after the requisition is deposited, the
copy though not deposited within the prescribed time is deemed to have been properly
deposited.
The company is required to serve the notice of resolution and/or the statement to the
members as far as possible in the manner and so far as practicable at the same time as the
notice of the meeting ; otherwise as soon as practicable thereafter.
However, a company need not circulate a statement if the Court, on the application either of
the company or any other aggrieved person, is satisfied that the rights so conferred are being
abused to secure needless publicity or for defamatory purposes. Secondly a banking
company need not circulate such statement, if in the opinion of its Board of directors, the
circulation will injure the interest of the company.
Registration of Resolutions and Agreements
A copy of each of the following resolutions along with the explantory statement in case of a
special business and agreements must, within 30 days after the passing or making thereof, be
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printed or typewritten and duly certified under the signature of an officer of the company and
filed with the Registrar of Companies who shall record the same : All special resolutions
All resolutions which have been unanimously agreed to by all the members but which,
if not so agreed, would not have been effective unless passed as special resolutions
All resolutions of the board of directors of a company or agreement executed by a
company, relating to the appointment, re-appointment or renewal of the appointment,
or variation of the terms of appointment, of a managing director
All resolutions or agreements which have been agreed to by all members of any class
of members but which, if not so agreed, would not have been effective unless passed
by a particular majority or in a particular manner and all resolutions or agreements
which effectively bind all members of any class of shareholders though not agreed to
by all of those members
All resolutions passed by a company conferring power upon its directors to sell or
dispose of the whole or any part of the company's undertaking; or to borrow money
beyond the limit of the paid-up share capital and free reserves of the company; or to
contribute to charities beyond Rs50000 or 5 per cent of the average net profits
All resolutions approving the appointment of sole selling agents of the company
All copies of the terms and conditions of appointment of a sole selling agent or sole
buying or purchasing agent
Resolutions for voluntary winding up of a company
Adjournment
Adjournment means suspending the proceedings of a meeting for the time being so that the
meeting may be continued at a later date and time fixed in that meeting itself at the time of
such adjournment or to decided later on. Only the business not finished at the original
meeting can be transacted at the adjourned meeting.
The majority of members at a meeting may move an adjournment motion at a meeting. If the
chairman adjourns the meeting, ignoring the views of the majority, the remaining members
can continue the meeting. The chairman cannot adjourn the meeting at his own discretion
without there being a good cause for such an adjournment. Where the chairman, acting bona
fide within his powers, adjourns the meeting as per the view of the majority, the minority
members cannot to continue with such meeting and, if they do the proceedings there will be
null and void.
An adjourned meeting is merely the continuation of the original meeting and therefore, a
fresh notice is not necessary, if the time, date and place for holding the adjourned meeting
are decided and declared at the time of adjourning it. If a meeting is adjourned without
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stipulation as to when it will be continued, fresh notice of the adjourned meeting must be
given.
Postponement
Postponement of a meeting means defering the holding of the meeting itself at a later date.
Postponement is done by the Board of Directors or by the person convening the meeting. In
case of adjournment, it is the decision of the majority of the members present at the meeting
itself.
Dissolution
Dissolution of a meeting means termination of a meeting. The meeting no longer exists once
it has been dissolved. If within half an hour after the time appointed for holding a general
meeting; the quorum is not present, the meeting shall stand dissolved if it was called on
requisition by members.
Minutes of Proceedings of Meetings
Every company must keep minutes of the proceedings of general meetings and of the
meetings of board of directors and its committees. The minutes are a record of the
discussions made at the meeting and the final decisions taken thereat.
Every company must keep minutes containing details of all proceedings at the meetings. The
pages of the minute books must be consecutively numbered and the minutes must be
recorded therein within 30 days of the meeting. They have to be written directly on the
numbered pages. Pasting or attaching of papers is not allowed. Each page of every such
minutes books must be initialed or signed and last page of the record of proceedings of each
meeting in such books must be dated and signed by :in the case of the meeting of the Board of directors or committee thereof, by the chairman of
that meeting or that of the succeeding meeting, and
in the case of a general meeting, by the chairman of the same meeting within the aforesaid 30
days or in the event of the death or inability of that chairman within the period, by a director
duly authorised by the Board of directors for the purpose.
The Company Law Board, however, may not object if minutes are maintained in loose leaf
form provided all other procedural requirements are complied with and all possible
safeguards against manipulation or interpolation of the minutes are ensured. The loose leaves
must be bound at reasonable intervals. Entering the minutes in a bound minute book by a
chemical process, which does not amount to attachment to any book by pasting or otherwise
is permissible provided on the mechanical impression of the minutes, the original signatures
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of the Chairman are given on each page. All appointments of officers made at any of the
meetings must be included in the minutes of the meeting. In the case of a meeting of the
Board of directors or its Committee, the minutes must also state the names of directors
present at the meeting and the names of directors, if any, dissenting from, or not concurring
with a resolution passed at the meeting.
The chairman may exclude from the minutes any matters which are defamatory, irrelevant or
immaterial or which are detrimental to the interests of the company. The discretion of the
Chairman with regard to the inclusion or exclusion of any matter is absolute and unfettered.
Where minutes of the proceedings of any meeting have been kept properly, they are, unless
the contrary is proved, presumed to be correct, and are valid evidence that the meeting was
duly called and held, and all proceedings thereat have actually taken place, and in particular,
all appointments of directors or liquidators made at the meeting shall be deemed to be valid.
The minute books of the proceedings of general meetings must be kept the registered office
of the company. Any member has a right to inspect, free of cost during business hours at the
registered office of the company, the minutes books containing the proceedings of the
general meetings of the company. Further, any member shall be entitled to be furnished,
within 7 days after he has made a request to the company, with a copy of any minutes on
payment of Rupee One for every hundred words or fraction thereof. If any inspection is
refused or copy not furnished within the time specified, every officer in default shall be
punishable with fine up to Rs. 500 for each offence. The Company Law Board may also by
order compel an immediate inspection or furnishing of a copy forthwith. But the minutes
books of the board meetings are not open for inspection of members
Page 86

Introduction to Company Law

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Introduction to Company Law

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II SEM BCOM

On the basis of number of members, a company may be :

i) The articles do not restrict the transfer of shares of the company

12. Managerial remuneration. Total managerial remuneration in a public company cannot

is known as a Government Company. It includes a company subsidiary to a government

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

Corporate social responsibility (CSR)

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

Current tax exemptions valid for CSR spend

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

1 Mr. G V Sanjay Reddy

2 Mr. Ch. G Krishna Murthy

3 Mr. K Balarama Reddi

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

Dissenting shareholders [section 13 (8)(ii)] The dissenting shareholders shall be given an

It defines the relationship

Articles defines the relationship

It informs the company about the formation of a new company.

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

An untrue statement was included in the prospectus.

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

Persons liable under Sec- 62:

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

Full name, address, PAN and E-mail Id of such Security Holders.

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

Date of becoming security holder.

(i) To exercise the Right;

Decisions about Issuing Right Shares:

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

The sweat equity shares to be issued shall be valued at a price determined by a

the class of shares issued as Sweat Equity Shares;

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

the reasons or justification for the issue;

the total number of shares to be issued as sweat equity;

the time period of association of such person with the company;

the ceiling on managerial remuneration, if any, be breached by issuance of such sweat

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

(3) By agreeing to purchase qualification shares :

Difference between Equity Shares and Debentures

Equity shares capital is not to be The amount of debentures is paid

to Shareholders have a right to Debenture holders cant participate in

Shareholders being owners, have to Debentures are usually secured by a

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

The Articles of Association of a Company may contain provisions for convening an

Procedure for Application under Section 186 :

Evidence in proof of status of the applicant.

if called upon the requisition of members, shall stand dissolved;

NEW ALLIANCE FIRST GRADE COLLEGE, CRPATNA

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