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Business Law

Prospectus

October 17, 2009 I.B.A. 1


Prospectus
Section2(36) denies a prospectus as “any document
described or issued as a prospectus that include any
notice ,circular,advertisement or other document
inviting deposits from the public or the subscription or
purchase of any shares in or debentures of a body
corporate”

October 17, 2009 I.B.A. 2


Red Herring Prospectus
• "Red Herring Prospectus" is a prospectus which
does not have details of either price or number
of shares being offered or the amount of issue.

October 17, 2009 I.B.A. 3


Why Is it called so?
• The reason it is called a red herring is due to a
disclosure statement printed in red ink on the
cover which explicitly states that the issuing
company is not attempting to sell its shares.

October 17, 2009 I.B.A. 4


The following ingredients may be said to
constitute a ‘prospectus’

(a) There must be an invitation to the public


(b) The invitations must be made “by or on behalf of
the company or in relation to an intended
company.
(c) The invitation must be “to subscribe or purchase”
(d) The invitation must refer to shares or debentures
or such other instrument.

October 17, 2009 I.B.A. 5


When Prospectus is not required to be
issued-
(a) Where the shares or debentures are not offered to
public, [section 56(3)]
(b) Where a person is a bonafied invitee to enter into
an underwriting agreement with regard to share or
debenture [section 56(3)]
(c) Where the shares or debentures are offered to the
existing holders of shares or debentures
respectively. [section 56(5)]

October 17, 2009 I.B.A. 6


Dating and Registration of
Prospectus
• (1) Prospectus must be dated-Section 55 of the
Act
• (2) A copy of prospectus must be filled with the
register on or before its publication- The experts
consent ,a copy of every contract under clause
16 .of Schedule II and adjustment under Clause
32 of the said schedule should must be attached
to the prospectus.

October 17, 2009 I.B.A. 7


Dating and Registration of
Prospectus
• The Prospectus must be issued within 90 days
of the date on which a copy thereof is delivered
for registration. If a Prospectus is not issued
within this period , it is deemed to be a
Prospectus , a copy of which has not been
delivered to the Registrar.

October 17, 2009 I.B.A. 8


The following documents must be attached to
the copy of prospectus filed with the registrar:

(a) The consent of the expert mentioned in the


prospectus ,if his report is included in the
prospectus;
(b) A copy of every contract relating to the
appointment or remuneration of a managing
director or manager.
(c) A copy of every material contract not being a
contract entered into in the ordinary course of
business of the company entered into within two
years of the issue of the prospectus.
October 17, 2009 I.B.A. 9
(d) A written statement relating to the adjustments ,if
any,in respect of figures of any profits or losses ,and
assets and liabilities.
(e) The consent in writing of the person, of any,named in
the prospectus as the auditor ,legal
advisor,attorney,solicitor,issue house,banker
managers to the issue or broker of the company to act
in the capacity.
(f) The consent of directors under section 266 in respect
of new directors ,if any,named therein;
(g) A copy of the underwriting ;agreement if any,should
also be filed as required by section 76(1) (b) (v)

October 17, 2009 I.B.A. 10


(h) The prospects must contain a statement that a copy has
been delivered for registration ,also indicating the requisite
documents(giving names) delivered with it.

(i) The consent of the expert should be obtained :If the


prospectus includes a statement purporting to be made by an
expert ;a consent in writing of that expert should be obtained
and this fact be stated in the prospectus.It should also state
that the consent given has not been withdrawn.

(j) The company and every person who knowingly issue a


prospectus without delivering a copy thereof to the Register
for the registration shall be punished with fine upto Rs.5000.

October 17, 2009 I.B.A. 11


When Registrar must Refuse
Registration
Section 60(3) provides that the Registrar shall not register
a prospectus if:
(a) It is not dated-Section 55
(b) It does not comply with the requirement of section 56
as to the matter and reports to be set out in it.
(c) It does not contain statements or reports of experts
engaged or interested in the formation or promotion or
management of the company-section 57

October 17, 2009 I.B.A. 12


(d) It includes a statement purported to be made by an
expert without a statement that he has given and has
not withdrawn his consent to the manner of its
inclusion therein.
(e) It does not contain in writing of directors a copy of the
documents mentioned in section 60(1) has been filed
or does not comply with regard to the fact that a copy
of it has been filed with Registrar;
(f) It is not accompanied by the consent in writing of the
auditor ,legal advisor ,attorney,solicitor,issue
house,banker managers to the issue or broker,if
named in prospectus to act in that capacity-section
60(3).

October 17, 2009 I.B.A. 13


Matters to be stated & Reports to
be set out in Prospectus
• Sec .56 lays down that every prospectus issued
by (a) by or behalf of a company,or (b) by or on
behalf of any person engaged or interested in the
formation of a company,shall
(1) State the matters specified in Part 1 of Schedule
II ,and
(2) Set out the reports specified in Part II Of
Schedule II

October 17, 2009 I.B.A. 14


Part 1 of Schedule II
• General Information
• Capital structure of the Company
• Terms of the present issue
• Particulars of the issue
• Company,management and Project
• Particulars in regard to the company and other
listed companies under the same management.

October 17, 2009 I.B.A. 15


Part 1 of Schedule II

• Outstanding Litigation
• Management Perception of Risk Factors

October 17, 2009 I.B.A. 16


Part 2 of Schedule II

• General Information
• Financial Information
• Statutory and other information

October 17, 2009 I.B.A. 17


Part 3 of Schedule II-applying to
Parts I & II of Schedule II

• 1. Every person shall,for the purposes of this


Schedule,be deemed to be a vendor who has
entered into any contract,absolute or
conditional,for the sale or purchase of any
property to be acquired by the company ,in any
case where-(a) the purchase money is to be
paid at the date of the issue of prospectus;

October 17, 2009 I.B.A. 18


Part 3 of Schedule II-applying to
Parts I & II of Schedule II
• (b) the purchase money is to be paid or
satisfied,wholly or in part,out of the proceeds of
the issue offered for subscription by the
prospectus;
• (c) the contract depends on its validity or
fulfillment on the result of that issue

October 17, 2009 I.B.A. 19


Part 3 of Schedule II-applying to
Parts I & II of Schedule II
• 2.In the case of a company which has been carrying
on business for less than 5 financial years means
reference to that number of financial years for which
business has been carried on.
• 3.Reasonable time & place at which copies of all
balance sheets & profit & loss accounts on which
the report of the auditors is based,and material
contracts & other documents may be inspected.
• 4.Term ‘year’ means the financial year.

October 17, 2009 I.B.A. 20


Deemed Prospectus-Offer of Sale
of Existing Shares
Under section 64(2) it will be presumed unless the contrary is
provided ,that an allotment of shares or debentures was
made a view to the being offered for sale to the public if,
(a) The offer to the public (by the issue house) was made
within 6 months of allotment or agreement to allot(to the
issue house);or
(b) The whole consideration was not recovered to be inserted
in prospectus it should also state the net amount of
consideration received by the company on the shares or
debentures to which the offer relates ;and state the place
and time at which the relevant contract may be inspected.
[section 62(3)]

October 17, 2009 I.B.A. 21


October 17, 2009 I.B.A. 22
Civil Liability
1. Remedies against the company
Rescission of the contract

 The statement must be a material


misrepresentation of fact.
 The statement must have induced the
shareholder to take the shares.
 The statement must be untrue.
 The deceived shareholder is an allottee and he
must have reited on the statement in the
prospectus.

October 17, 2009 I.B.A. 23


Civil Liability
 The omission of material fact must be misleading
before rescission is granted.
 The proceedings for recession must be started as
soon as the allottee comes to know of a
misleading statement in the prospectus.
 Damages for deceit

October 17, 2009 I.B.A. 24


Civil Liability
2. Remedies against the directors,promoters and
experts.
(1) Liability for damages for misstatement in
prospectus(Sec.62)
 Withdrawal of consent
 Absence of consent
 Ignorance of untrue statement
 Reasonable ground for belief
 Statement of expert.

October 17, 2009 I.B.A. 25


Civil Liability

• (2) Liability for damages for non-compliance with


Sec.56
• (3) Liability under the general Law

October 17, 2009 I.B.A. 26


Criminal Liability
• Where a prospectus contains any untrue
statement,every person who authorised the issue
of the prospectus is punishable with
imprisonment which may extend to 2 years ,or
with fine which may extend to Rs. 5000 or with
both.He will not be liable if he proves either.-
(1) That the statement was immaterial,or
(2) That he had reasonable ground to believe that
the statement was true.

October 17, 2009 I.B.A. 27


Who can be sued
1) The company
2) Every director
3) Every person whose name appeared in the
prospectus as a proposed director
4) Every promoter
5) Every person who has authorised the issue of
the prospectus

October 17, 2009 I.B.A. 28


Onus for proof of mis-
statement
 The misrepresentation was of fact
 It was in respect of a material fact
 He acted on the mis-representation;and
 He has suffered damages on consequence.

October 17, 2009 I.B.A. 29


Issue & allotment of shares in
fictitious names [Sec. 68-A]
• A person shall be punishable with imprisonment
for a term which may extend to 5 years if he,
(1) Makes in a fictitious name an application to a
company for acquiring ,or subscribing for ,any
shares therein,or
(2) Otherwise induces a company to allot,or register
any transfer of shares therein to him,or any other
person in a fictitious name.

October 17, 2009 I.B.A. 30


Statement in Lieu of Prospectus
• Where a company does not invite public to
subscribe for its share , but arranges to
get money from private sources , it need
not issue a prospectus to the public .In
such a case the promoters are required to
prepare a draft prospectus known as a
‘statement in lieu of prospectus’, which
should contain the information required to
be disclosed by Schedule III of the Act.
October 17, 2009 I.B.A. 31
Business Law

Membership

October 17, 2009 I.B.A. 32


MEMBERSHIP

The ‘members’ or ‘shareholders’ of a


company are the persons who
collectively constitute the company as
a corporate entity.

October 17, 2009 I.B.A. 33


Difference b/w Shareholder and a
Member
• A registered shareholder is a member but a
registered member may not be a shareholder
because the company may not have the share
capital.
• A person who owns a bearer share warrant is a
shareholder but he is not a member as his name
is struck off the register of members.
• A legal representative of a deceased member is
not a member until he applies for registration. He
is, however, a shareholder even though his
name does not appear in the register of
members.
October 17, 2009 I.B.A. 34
Who can become a member?
• Any person who is competent to contract
(sec.11of the Indian Contract Act, 1872)
may become a member of a company.

October 17, 2009 I.B.A. 35


How to becoma a member?
• Membership by subscription.
• Membership by application and registration.
(i) By application and allotment
(ii) By transfer
(iii) By succession
(iv) Agreement to be in writing.
• Membership by beneficial ownership
• Membership by qualification shares.

October 17, 2009 I.B.A. 36


Cessation Of Membership
• Act of the parties
• Operation of law

October 17, 2009 I.B.A. 37


Rights and Liabilities of Members
Rights of members
• Statutory Rights
• Documentary Rights
• Legal Rights
Liability of members
• Company with unlimited liability
• Company limited by shares
• Company limited by guarantee
October 17, 2009 I.B.A. 38
Register and Index of members
• Register of members (Sec.150)
• Index of members ( sec. 151)
• Place of keeping register and inspection of
registers and returns (Sec.163)
• Power to close register (sec.154)
• Register to be prima facie evidence
( Sec.164)
• Power to rectify register ( Sec.111)
October 17, 2009 I.B.A. 39
Business Law

Share Capital

October 17, 2009 I.B.A. 40


Share capital
• Share capital means capital raised by a company by the issues of shares.

• The word capital can be used in several senses:

1. Authorized Capital or Nominal Capital.


2. Issued capital & Subscribed capital.
3. Called-up Capital.
4. Paid-up Capital.
5. Uncalled Capital.
6. Reserve Capital.

October 17, 2009 I.B.A. 41


KINDS OF SHARE CAPITAL
• The Share capital of a company shall be of two
kinds only:
(a) Equity Share capital.
1. With voting Rights.
2. With differential Rights as to dividend, voting or
rules and subject to such condition may be
prescribed.
(a). Preference share capital.
1. Sec 86 as substituted by the companies
Amendment Act ,2000.
October 17, 2009 I.B.A. 42
ALTERATION OF CAPITAL
• (Sec.94). is used to Alter Share Capital.

• A Limited company having a share Capital may, has a


Right to Alter his capital.

• IT may follows as
(a). Increase nominal share capital by issuing new shares.
(b) Consolidate & divide all or any part of its share capital
into shares of larger amount.

October 17, 2009 I.B.A. 43


Contd…

(c). Convert fully paid-up share into stock or vice


versa.

(d). Sub divides its shares or any of them into


shares of smaller amount.

(e). Cancels shares which have not been taken up


and diminish the amount.

October 17, 2009 I.B.A. 44


BUSINESS LAW

SHARES

October 17, 2009 I.B.A. 45


Definition
• A share is the interest of a shareholder in a
company.

• “An interest having a money value and made


up of diverse rights specified under the AoA”

October 17, 2009 I.B.A. 46


Types of Shares
Preference Shares

Equity Shares

October 17, 2009 I.B.A. 47


Preference shares [Sec.85(1)]
• With reference to any company limited by shares
:

 They have a preferential right to be paid


dividend during the lifetime of the company.

 They have a preferential right to the return of


capital when the company goes into liquidation.

October 17, 2009 I.B.A. 48


Equity Shares [Sec.85(2)]
• With reference to any company limited by shares
are those which are not preference shares.

• Sweat equity shares [ Sec.79 –A ]


 These are Equity shares issued at a discount
or for consideration other than cash for providing
know-how or making available rights in the
nature of intellectual property rights or value
additions.

October 17, 2009 I.B.A. 49


Kinds of Preference Shares
• 1. Cumulative preference shares

These are the shares on which dividends


goes on accumulating till it is fully paid off.
The company is bound to pay dividend
only if it has sufficient profits available for
distribution.

October 17, 2009 I.B.A. 50


Cumulative preference shares
• If the company goes into liquidation,
arrears of dividends are payable –
if the Articles contain express provision to
this effect.
The Articles, upon their true construction,
give the preference shareholders a clear
right to the dividends.

October 17, 2009 I.B.A. 51


Kinds of Preference Shares
• 2. Non-cumulative preference shares

Shares on which dividend does not goes on accumulating.


If there are no profits/ inadequate profits in any year, these shares
get no dividend or get a partial dividend.
They cannot claim arrears of dividends of any year/years out of
the profits of the subsequent years.

October 17, 2009 I.B.A. 52


Kinds of Preference Shares
• 3. Participating preference shares

These shares are entitled to a fixed rate of


dividend and a share in the surplus profits
which remain after the claims of the equity
shareholders have been met.
 The surplus profits are distributed in
certain agreed ratio.
October 17, 2009 I.B.A. 53
Kinds of Preference Shares
• 4. Non-participating

 Shares entitled only to a fixed rate of


dividend.
 Holders do not share in the surplus
profits which go to equity shareholders.

October 17, 2009 I.B.A. 54


Kinds of Preference Shares
• 5. Convertible

Shares which entitle their holders to convert


them into equity shares within a certain period.

6. Non- convertible

 Shares which do not confer on their holders a


right of conversion into equity shares.
October 17, 2009 I.B.A. 55
Kinds of Preference Shares
• 7.Redeemable preference shares [Sec.80]
A company limited by shares may, if so authorized
by its Articles, issue preference shares which are to
be redeemed.

Conditions:-
Shares to be redeemed must be fully paid-up.
Shares can be redeemed only out of –
a) profits of the company which would otherwise
be available for dividends
b) the proceeds of a fresh issue of shares made
for the purpose of redemption.
October 17, 2009 I.B.A. 56
Kinds of Preference Shares
• 7.Redeemable preference shares [Sec.80]

 Any premium payable on redemption must have been provided for


out of the profits or out of the company’s share premium a/c before
the shares are redeemed.

 When redemption is made out of profits, a sum equivalent to the


nominal value of the shares redeemed must be transferred to the
‘capital redemption reserve a/c.

 No company limited by shares shall, issue any preference share


which is irredeemable or is redeemable, after the expiry of a
period of 20 yrs from the date of its issue. (Companies
Amendment Act, 1996)

October 17, 2009 I.B.A. 57


Preference Shares
• Penalty
– If a company fails to comply with the provisions of Sec.80,
the company, and every officer of the company who is in
default, shall be punishable with fine (may extend to
Rs.10,000)

Notice to Registrar

Any redemption of redeemable preference shares


must be notified to the Registrar within 30 days of
the date of redemption.

October 17, 2009 I.B.A. 58


Application & Allotment of
Shares
• An ‘application’ for shares is an offer by a
prospective shareholder of a company to take
shares.

• ‘Allotment’ is the acceptance by the company of that


offer.
– The term ‘Allotment’ is not defined in the Act.
– Allotment is the appropriation to an applicant by a
resolution of the directors of a company of a certain no. of
shares in the company in response to an application.

October 17, 2009 I.B.A. 59


Application & Allotment of Shares
(Cont.....)
• Provisions of the Act applicable to ‘Application’ for & allotment of shares

– Minimum subscription [Sec.69(1)]

– Application money [Sec.69(3) to (6)]

– Effect of irregular allotment [Sec.71]

– Opening of the subscription list [Sec.72]

– Shares & Debentures to be listed on a stock exchange[Sec.73]

– Return as to allotments [Sec.75]

October 17, 2009 I.B.A. 60


Calls on Shares
• A call is a demand on its shareholders to pay the
whole/ part of the balance remaining unpaid on each
share.

• Made in pursuance of a resolution of the Board of


Directors & terms of the Articles.

• Made any time during the lifetime of the company or


during its winding up.

October 17, 2009 I.B.A. 61


Calls on Shares (Continued….)
• Legal provisions relating to calls

– Resolution of the Board [Sec.292(1)]


• A call must be made under a resolution of the Board of
directors passed at a meeting of the Board.
• In making a call, care must be taken –

– That the directors making it are duly appointed and qualified.


– The meeting of directors has been duly convened
– That the proper quorum is present
– That the resolution making the call is duly passed.

October 17, 2009 I.B.A. 62


Calls on Shares (Continued….)
• Legal provisions relating to calls
– Bona fide & for the benefit of the company
• A call should be made by the company only when it is in bona fide
need of capital.

– Uniform basis [Sec.91]


• Calls must be made on a uniform basis on all shares falling under
the same class.

• If a call is made on some shareholders but not on others or a call of


a greater amount is made on some shareholders than on others,
the call is invalid.

October 17, 2009 I.B.A. 63


Calls on Shares (Continued….)
• Legal provisions relating to calls
– In accordance with the Articles, amount, place and time of
payment.

– Calls in advance [Sec.92]


• A company may, if so authorized by its Articles, accept from
any member the whole or part of the amount remaining
unpaid on any shares held by him in advance.
• The payment of calls in advance does not give voting rights
to the member in respect of that amount until that amount
becomes presently payable.

October 17, 2009 I.B.A. 64


Share Certificate
• Every person whose name is entered as a member in the register of
members of a company has a right to receive a certificate of his
shares [Article 7 (1) of Table A, Schedule I]

• A share certificate shall be under the seal of the company, and shall
specify –
– The shares to which it relates
– The amount paid up thereon
– The name of the holder of the shares.

October 17, 2009 I.B.A. 65


Share Certificate
(Continued……)
• Limitation of time for issue of share certificate[Sec.113]
– The company shall deliver share certificates—

• Within 3 months of the allotment of shares

• Within 2 months after the application for


registration of the transfer of any such shares.

October 17, 2009 I.B.A. 66


Share Certificate
(Continued…..)
• Object of share certificate
– A share certificate is the prima facie evidence of the title of the member to the
shares specified in the certificate.

– Estoppel – A share certificate of a company creates two kinds of estoppel


against the company

• Estoppel as to title
• Estoppel as to payment

October 17, 2009 I.B.A. 67


Share Certificate
(Continued……)
• Lost or defaced certificate [Sec.84]

– A certificate may be renewed or a duplicate of a


certificate may be issued if such certificate –
 is proved to be have been lost / destroyed.
 having been defaced or mutilated or torn, is
surrendered to the company.

October 17, 2009 I.B.A. 68


Share Warrant [ Secs. 114 &
115]
• Issue of share warrants to bearer [Sec. 114]

– A share warrant is a document issued by a public


company stating that its bearer is entitled to the shares
specified therein.
– It is transferable by mere delivery and is a substitute for
the share certificate.
– A public company limited by shares may convert its fully
paid-up shares into share warrants.
– Registration of the transfer of shares with the company
is not necessary.
October 17, 2009 I.B.A. 69
Share Warrant [ Secs. 114 &
115]
• Conditions for issue of Share warrants

– The shares shall be fully paid up


– The Articles shall authorize the issue of share
warrants
– Prior approval of the Central Government shall be
obtained
– The share warrants shall be issued under the
common seal of the company.

October 17, 2009 I.B.A. 70


Distinction btw Share Warrant &
Share certificate
• Share warrant • Share certificate

– Can be issued only by – Issued by all


public companies. companies (public or
private)
– Can be issued by a
public company only if it
– There is a statuary
is empowered to do so
by its AoA & has obligation on every
obtained prior approval company issuing
of the Central shares to issue a
government. Share certificate.
October 17, 2009 I.B.A. 71
Distinction btw Share Warrant &
Share certificate (Cont…..)
• Share warrant • Share certificate

– It can be issued only with – It is to be issued even


respect to fully paid-up where the shares are
shares. -partly paid-up.
– A holder of share warrant – A holder of share
is not a member of the certificate is the member
company unless the of the company.
Articles otherwise provide.
– It can be transferred by
– Shares are transferred by
mere delivery.
a transfer deed.

October 17, 2009 I.B.A. 72


Distinction btw Share Warrant &
Share certificate (Cont…..)
• Share warrant • Share certificate

– The holder of it cannot – The holder of it can


present a petition for present a petition for
the winding up of the the winding up of the
company. company.
– No stamp duty is – Stamp duty is payable
payable on transfer of on transfer of the
a share warrant. shares specified in
share certificate.

October 17, 2009 I.B.A. 73


Transfer of Shares
• The shares of member in a company are
movable property, transferable in the manner
prescribed in the Act & the Articles of the
company [Sec.82]

October 17, 2009 I.B.A. 74


Transfer of Shares (Cont……)
• Provisions of the Act relating to transfer:
– Secs. 108 to 112 deal with the transfer of shares.

– 1. Transfer not to be registered except on production of transfer deed [Sec. 108]


• Transfer deed
• Prescribed form

– 2. Transfer by legal representatives [Sec. 109]


– 3. Application for transfer [Sec. 110]

October 17, 2009 I.B.A. 75


Transfer of Shares (Cont……)
• Provisions of the Act relating to transfer:
– 4. Power to refuse registration & appeal against refusal
[Sec. 111]

– Forged transfer
– An instrument of transfer of shares on which the
signature of the transferor is forged is called a forged
instrument & any transfer of shares effected on such
instrument is called a ‘Forged transfer’.

– Blank transfer
October 17, 2009 I.B.A. 76
Lien on Shares
• A lien is an equitable charge.
• It gives company such rights as it would have had under the general law
if the shares had been expressly charged.

• Loss of lien:-
– A company loses lien if –
– It registers a transfer of shares subject to the lien of the transferee
– A member pledges his shares to a third party as security for a loan &
the company has notice thereof, & then incurs a liability to the
company.

October 17, 2009 I.B.A. 77


Surrender of Shares
• When a shareholder of a company voluntarily
gives up his shares in favor of the company.

• The Companies Act does not contain any


provision relating to the surrender of shares.

• Table A gives no power to the company to


accept a surrender.

October 17, 2009 I.B.A. 78


Surrender of Shares (Cont…..)
• The surrender of shares by a member to
the company is valid in the following
cases:

– In case of partly paid shares where forfeiture


is called for.
– In case of fully paid shares, where they are
exchanged for new shares.

October 17, 2009 I.B.A. 79


Forfeiture of Shares
• If a shareholder, having been called upon
to pay any call on his shares, fails to pay
the call, the company has to remedies :

• It may sue him for the amount due.

• It may ‘forfeit’ his shares.

October 17, 2009 I.B.A. 80


Forfeiture of Shares (Cont…..)
• Forfeiture means depriving a person of his
property as a penalty for some act or
omission.

• Conditions:
– In accordance with Articles
– Notice prior to forfeiture
– Resolution of Board
– Good Faith
October 17, 2009 I.B.A. 81
Forfeiture of Shares (Cont…..)
• Effect of Forfeiture

– Cessation of Membership

– Cessation of liability

October 17, 2009 I.B.A. 82


Nomination & Transmission of Shares
[ New Secs. 109-A & 109-B, CAA,1999]

• Nomination of Shares [109-A]

– Single holder

– Joint holders

– Minor nominee

October 17, 2009 I.B.A. 83


Nomination & Transmission of
Shares
[ New Secs. 109-A & 109-B,
CAA,1999]
• Transmission of Shares [109-B]

– Right to decline

– Right of the nominee

– Dividends

– Notice by the Board

October 17, 2009 I.B.A. 84


Business Law

Debentures

October 17, 2009 I.B.A. 85


DEBENTURES
• The documents which either creates a
debt or acknowledges it

October 17, 2009 I.B.A. 86


Characteristics

• Issued in the form of a certificate.


• It may be or may not be under company seal.
• It usually specifies a particular period or date as
the date of repayment.
• A debenture holder does not have any right to
vote in the companies meetings.
• It generally creates a charge on the undertaking
of the company or some part of its property.

October 17, 2009 I.B.A. 87


Kinds Of Debentures
• Bearer debentures:- these debentures, also known as
unregistered debentures, are payable to its bearer.
• Registered debentures:-these are the debenture
which are payable to registered holders. A holder is
one whose name appears both on the debenture
certificate and in the company register of debentures.
• Secured debentures:-Debenture which create some
charge on the property of the company are known as
secured debenture.

October 17, 2009 I.B.A. 88


Contd…
• Unsecured debentures:-debenture which do not
create any charge on the assets of the company
are known as unsecured debenture
• Redeemable debenture:-debentures are usually
issued on the condition that they shall be
redeemed after a certain period.
• Irredeemable debenture:-debenture whose period
of repayment is not fixed also known as perpetual
debenture.

October 17, 2009 I.B.A. 89


Contd…
• Convertible debenture:-the debenture
gives an option to the holder to convert
them into preference or equity shares at a
stated rate of exchange, after a certain
period.
• Non-convertible debenture:-these
debenture don't gave any option to there
holder to convert them into preference or
equity shares.

October 17, 2009 I.B.A. 90


Pari passu clause
• Debentures are usually issued in a series
with pari passu clause. In this case they
are to be discharge rateably,though
issued
at different and varying times. if there is no
pari passu clause in term of issue they are
payable according to the date of issue.

October 17, 2009 I.B.A. 91


Debenture with voting right not to be
issued :-A company can’t
issue any carrying voting rights at any
meeting of the company, whether
generally or in respect of particular
classes of business.
Issued of a debentures at a discount:-
debenture can be issued at a discount.

October 17, 2009 I.B.A. 92


Remedies of debenture holder
• Unsecured debenture holder
He may sue for his principal and interest.
He may file petition under Sec.439 for winding up of the
company ,that the company is unable to pay its debts.
• Secured debenture holder
debenture holder action:- he may sue on the
behalf of himself and all other debenture holder
of the same class to obtain payment & enforce
his security by sale

October 17, 2009 I.B.A. 93


Contd…
Appointment of receiver:-he may appointed
a receiver if the conditions which gave him
power to do so are fulfilled or apply to the
tribunal in a debenture holders action to
appoint one.
Foreclosure:-he may apply to the tribunal
for foreclosure of the company’s rights to
redeem the debenture.

October 17, 2009 I.B.A. 94


Contd…
Sales:-he may sell the property charged as
security if an express power to do so is
contained in term of issue of debenture.
Proof of balance:-if the company is insolvent
and his security is in sufficient, he may
value his security and prove for the
balance.

October 17, 2009 I.B.A. 95


THANK You
Group-10 (Section-A),I.B.A.

Ajay Jha
Ajay Mahajan
Amrit Malhotra
Arijit Rakshit
Swapnil Agarwal

October 17, 2009 I.B.A. 96

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