THE COMPANIES ACT, 2013

Unit III
 THE COMPANIES ACT 2013

• Rule based legislation

• Divided into 29 Chapters - 470 Sections - 7 Schedules (658
Sections in 1956 Act)
• Extends to WHOLE OF INDIA
• Received Presidential assent on 29 August 2013 and came into
force on 12 September 2013.
• 98 sections were notified on 12 September 2013.
• Later 184 sections became effective from 1 April 2014
• Currently 283 sections of CA 2013 are in force. Other
provisions shall come into force on such date as the Central
Govt may, by notification in the Official Gazette, appoint.
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 APPLIC ATION OF ACT

Provisions of the CA 2013 shall apply to

 Companies
 Insurance Companies (except where the provisions are
inconsistent with the Insurance Act, 1938 or IRDA Act, 1949)
 Banking Companies (except where the provisions are
inconsistent with the Banking Regulation Act, 1949)
 Companies engaged in generation or supply of electricity
(except where the provisions are inconsistent with the
Electricity Act, 2003)
 Any other company governed by any special Act for the time
being in force.
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 CHAPTERS IN C A 2013

Chapter Name
I PRELIMINARY
II INCORPORATION OF COMPANY AND MATTERS
INCIDENTAL THERETO
III PROSPECTUS AND ALLOTMENT OF SECURITIES
IV SHARE CAPITAL AND DEBENTURES
V ACCEPTANCE OF DEPOSITS BY COMPANIES
VI REGISTRATION OF CHARGES
VII MANAGEMENT AND ADMINISTRATION
VIII DECLARATION AND PAYMENT OF DIVIDEND

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 CHAPTERS IN C A 2013

Chapter Name
IX ACCOUNTS OF COMPANIES
X AUDIT AND AUDITORS
XI APPOINTMENT AND QUALIFICATIONS OF
DIRECTORS
XII MEETINGS OF BOARD AND ITS POWERS
XIII APPOINTMENT AND REMUNERATION OF
MANAGERIAL PERSONNEL
XIV INSPECTION, INQUIRY AND INVESTIGATION
XV COMPROMISES, ARRANGEMENTS AND
AMALGAMATIONS
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 CHAPTERS IN C A 2013

Chapter Name
XVI PREVENTION OF OPPRESSION AND
MISMANAGEMENT
XVII REGISTERED VALUERS
XVIII REMOVAL OF NAMES OF COMPANIES FROM THE
REGISTER OF COMPANIES
XIX REVIVAL AND REHABILITATION OF SICK COMPANIES
XX WINDING UP
XXI PART I.—Companies authorised to Register under this Act
PART II.—Winding up of unregistered companies

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 CHAPTERS IN C A 2013

Chapter Name
XXII COMPANIES INCORPORATED OUTSIDE INDIA
XXIII GOVERNMENT COMPANIES
XXIV REGISTRATION OFFICES AND FEES
XXV COMPANIES TO FURNISH INFORMATION OR
STATISTICS
XXVI NIDHIS
XXVII NATIONAL COMPANY LAW TRIBUNAL AND
APPELLATE TRIBUNAL
XXVIII SPECIAL COURTS
XXIX MISCELLANEOUS
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 DEFINITION OF A COMPANY

• Section 2(20)
• “Company” means a company incorporated under this Act or
under any previous company law.
• Etymology: Derived from the Latin words
COMPANY

COM (TOGETHER) PANI (BREAD/FOOD)

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 FEATURES OF A COMPANY

• Separate legal entity / Artificial to sue and be sued

legal person
• Separate Management (BOD)
• Limited liability • Voluntary Association
• Perpetual succession • Termination of existence by
• Separate property following the procedure of
winding up
• Transferability of shares
• Common seal, if any
(optional)
• Contractual rights & capacity

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 SEPARATE LEGAL ENTITY

FEATURE

• A Company enjoys CORPORATE STATUS

• It is considered as a separate person in the eyes of the law
which distinguishes itself from its shareholders or from any
other Company.
• Held in the case of:
 Saloman Vs Saloman & Co Ltd (1897)
 Lee Vs Lee Air Farming Co Ltd (1961)
 Indian case law: Bacha F Guzder Vs CIT

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 SALOMAN VS SALOMAN & CO LTD (1897)

LEADING
CASE

Facts of the case

Salamon was a leather merchant. He sold his business to a
company formed by him, his wife, daughter and four sons, for a
sum of £30,000.
The purchase consideration was satisfied by allotment of 20,000
shares of £1each and debentures of £10,000 pounds secured by
a floating charge on the company’s assets in favour of Salomon.
All other shareholders subscribed for £1 pound each.
Salomon was also the Managing Director of the Company.

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 SALOMAN VS SALOMAN & CO LTD (1897)

LEADING
CASE
The company almost immediately ran into difficulties and
became insolvent and winding up proceedings commenced.
At the time of winding up the Total Assets of the company
amounted to £6,050 while the liabilities were £10,000 pounds
Secured Debentures issued to Salomon and £8,000 pounds
owing to Unsecured Trade Creditors.
The unsecured creditors claimed the whole of the company’s
assets i.e. £6,050 on the ground that the company was a mere
alias or agent for Salomon.

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 SALOMAN VS SALOMAN & CO LTD (1897)

LEADING
CASE
Judgment
The contention of the Trade Creditors could not be maintained,
because the company being in law a person quite distinct from
its members, could not be regarded as an “alias” or agent or
trustee for Salomon.
Also the company’s assets must be applied in payment of the
debentures as a secured creditor is entitled to payment out of
the assets on which his debt is secured in priority to unsecured
creditors.

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 LEE VS LEE AIR FARMING LTD

LEADING
CASE

Facts of the case

Lee was a qualified pilot who held all but one share of the
company, Lee Air Farming Ltd. By articles of the company, Lee was
appointed Governing Director and Chief Pilot.
Lee was killed while piloting the plane on duty. Mrs. Lee claimed
compensation under the Workmen Compensation Act.
The company opposed the claim on the ground that Lee was not
a “worker” as the same person could not be employer and
employee.

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 LEE VS LEE AIR FARMING LTD

LEADING
CASE
Judgment
There was a valid contract of service between Lee and the
company and Lee was a worker and Mrs. Lee is entitled to
compensation.

15
 BACHHA F GUZDER VS CIT, BOMBAY

LEADING
CASE
Facts of the case
Mrs Guzder received dividend in respect of shares held by her in
a tea company.
Under Income Tax Act, Agricultural Income is exempt from
Income Tax. 60% income of the tea company is treated as
agricultural and 40% from manufacture and sale.
The plaintiff Mrs Guzder claimed 60% of dividend as exempt from
tax representing Agricultural Income, as in the case of the tea
company, because dividends received by shareholders
represented the income of the company.

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 BACHHA F GUZDER VS CIT, BOMBAY

LEADING
CASE
Judgment
The Supreme Court held that while the income in the hands of
the company was partly agricultural, the same income when
received by Mrs Guzder as dividend could not be regarded as
Agricultural Income.

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 DOCTRINE OF THE
LIFTING THE CORPORATE VEIL

• The act of disregarding the corporate status of a company is known

as “Lifting The Corporate Veil” or “Piercing The Corporate
Veil”
• When the law disregards the corporate entity and instead pays
regard to the individual members behind the legal façade, it is known
as lifting the veil of corporate personality
• When the corporate entity is being abused for an unjust and
inequitable purpose, the Courts have lifted the veil of corporate
personality and looked into the realities and have held the persons
behind the company, guilty and liable.

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 CIRCUMSTANCES FOR
LIFTING THE CORPORATE VEIL

Judicial Circumstances
1) For the purpose of protection of revenue of Govt
2) In case of avoidance of labour welfare legislation
3) Where the company is a “mere sham”
4) Where the company acts as an agent of shareholders
5) For the purpose of determination of enemy character of
company

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 CIRCUMSTANCES FOR
LIFTING THE CORPORATE VEIL

Statutory Circumstances
1) Mis-description of name, address of Registered Office, etc. -
every officer of the company who is in default is punishable
(Section 12)
2) Mis-statements in prospectus – all delinquent officers are
held liable (Sections 34 & 35)
3) Failure to refund money on shares not allotted - Directors
of the company are held liable (Section 39)

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 COMPANY FORMED FOR FRAUDULENT
PURPOSE IS A “SHAM”

LEADING
CASE
Delhi Development Authority vs Skipper Construction Co Pvt Ltd
Facts of the case
Skipper Construction Company failed to pay the full purchase price
of the plot to DDA. The company started construction and sold
flats to various persons.
The two sons of the directors who had business in their own names
claimed that they had separated from the father and the companies
they were running had nothing to do with the properties of the
parents.
But no satisfactory proof could be produced to substantiate this.

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 COMPANY FORMED FOR FRAUDULENT
PURPOSE IS A “SHAM”

LEADING
CASE

DDA vs Skipper Construction Co Private Ltd

Judgment
Held that the transfer of shareholding between father and the
sons must also be treated as a sham.
The fact that the director and members of his family had created
several corporate bodies, did not prevent the Court from
treating all of them as one entity belonging to and controlled by
the director and his family.

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 LIMITED LIABILITY

FEATURE
• The liability of shareholder is limited to the extent of shares
held or guarantees undertaken - depending upon whether the
company is limited by share or limited by guarantee.
 Company limited by Guarantee [Sec. 2(21)] means a company
having the liability of its members limited by the memorandum to
such amount as members may respectively undertake to contribute
to the assets of the company in the event of its being wound up.
 Company limited by Shares [Sec. 2(22)] means a company
having the liability of its members limited by the memorandum to
the amount, if any, unpaid on the shares respectively held by them.

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 PERPETUAL SUCCESSION

FEATURE
• A company is an artificial legal person and does not have an
allotted span of life.
• Death, insolvency or retirement of its members, leaves the
company unaffected.
• Members may come and go but the company goes on for ever.

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 SEPARATE PROPERTY

FEATURE

• Property of the company is not the property of shareholders

although shareholders are the owners of the company.
• Held in the case of Macaure Vs Northern Assurance Co Ltd
that no person shall have insurable interest in the property of
the company; the property shall belong to the company itself.

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 MAC AURE VS. NORTHERN ASSURANCE
CO. LTD

LEADING
CASE

Facts of the case

Macaure held all except one share of a timber company. He
advanced substantial amount to the company and also insured
the company’s timber in his personal name.
The timber was destroyed by fire. He claimed the loss from the
insurance company against his policy.
The claim was rejected by the insurance company.

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 MAC AURE VS. NORTHERN ASSURANCE CO.
LTD

LEADING
CASE

Judgment
The court applying the principle of separate legal entity held that
‘Macaure’ being only a shareholder was not the owner of
property of the company.
Hence, he has no insurable interest.
The insurance company was, therefore, not liable to pay the
claim.

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 TRANSFERABILITY OF SHARES

FEATURE

• Shares of a company are transferable in the manner provided in

the Articles of the company.
• In the case of a private company, there are some restrictions
placed on such transfer.

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 COMMON SEAL

FEATURE

• Common seal represents the official signature of the company.

• Metal engraving. It is colourless.
• Maintaining of common seal is optional to the company.

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 C APACITY TO SUE AND BE SUED

FEATURE

• A company being a corporate body can be sued in its own

name or can sue.
• Held in the case of Rajendranath Dutta Vs Shibendranath
Mukherjee (1982)

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 RAJENDRANTH DUTTA VS
SHIBENDRANATH MUKHERJEE (1982)

LEADING
CASE
Facts of the case
A lease deed was executed by the directors of the company
without the seal of the company.
Later a suit was filed by the directors (not by the company) to
avoid the lease - on the ground that a new term had been
fraudulently included in the lease deed by the defendants.

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 RAJENDRANTH DUTTA VS
SHIBENDRANATH MUKHERJEE (1982)

LEADING
CASE

Judgment
Held that a director or managing director in their personal
capacity could not file a suit, unless it was by the company, in
order to avoid any deed, which admittedly was executed by one
of the directors and the company also accepted the rent.
The case was not made out by the company and, in the case
made out, the company is not even the plaintiff.
If the aggrieved party was the company, it was for the company,
and not the directors, to file the suit.
The suit is therefore, not maintainable.
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 OTHER FEATURES

FEATURE

• Separate management: Although shareholders are the

owners of the company, the day to day affairs of the company is
entrusted to separate management known as Board of
Directors.
• Voluntary association: It is a voluntary association of
persons.
• Termination of existence: The existence of a company can
be terminated by following the provisions of winding up or
liquidation.

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 CLASSIFICATION OF COMPANIES

Company

By Liability By Type By Listing Status

Limited Unlimited One Private Public Listed Unlisted

Small Not Small

Company Company

By By
SHARES GUARANTEE
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 CLASSIFIC ATION OF COMPANIES ON THE
B ASIS OF LIABILITY

• An unlimited company is a company not having any limit on the

liability of its members.
• The members are liable, in the event of its being wound up, to
the full extent of their fortunes to meet the obligations of the
company.

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 CLASSIFIC ATION OF COMPANIES ON THE
B ASIS OF LIABILITY

• Company limited by Guarantee [Sec. 2(21)] means a

company having the liability of its members limited by the
memorandum to such amount as members may respectively
undertake to contribute to the assets of the company in the
event of its being wound up.
• Company limited by Shares [Sec. 2(22)] means a
company having the liability of its members limited by the
memorandum to the amount, if any, unpaid on the shares
respectively held by them.
• Company limited by shares and guarantee (Combination of
above)

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 CLASSIFIC ATION OF COMPANIES ON THE
B ASIS OF TYPE

• One Person Company

• Private Company
• Public Company

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 ONE PERSON COMPANY (OPC)

• Defined by Sec. 2(62) “OPC” means a company which has

only one person as a member.
• Incorporation: Anyone who is a citizen of India and is
present in the country for 182 days can form an OPC. The Act
permits registration of 5 OPCs by a single person.
• Memorandum: Name of Nominee with consent must be
stated, so that in the event of death the nominee will become
the owner of the company.

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 ONE PERSON COMPANY (OPC)

• Compliance: OPC is regarded as a private company with

some exemptions such as:
 No Cash Flow Statement submission
 Need not hire a Company Secretary; annual returns may be
filed and signed by the Director himself.
 No AGM, except that the Director himself conducts half-
yearly meetings (No quorum required).
 Sections 98, 100-111 concerning the conduct and
administration of a private company shall not apply.
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 ONE PERSON COMPANY (OPC)

• Conversion:
 OPC cannot convert voluntarily into any kind of company
unless 2 years have expired from the date of incorporation,
except if it exceeds the threshold limits.
 Threshold Limits: Paid Up Share Capital > Rs 50 Lakh or
average annual turnover > Rs 2 crore.
 OPC shall convert itself within 6 months from crossing the
threshold limits.

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 ONE PERSON COMPANY (OPC)

• Benefits:
 Entrepreneur enjoys limited liability.
 If he was a sole proprietor, he would stand to lose
everything in the event of insolvency.

41
 PRIVATE COMPANY

• Sec. 2(68)
• Private Company means a company having a minimum paid up
share capital as may be prescribed, and which by its articles:-

R Restricts the right to transfer its shares.

L Limits the number of its members to 200.

Prohibits any invitation to the public to
P subscribe for any securities of the company.
• Minimum number of members: 2
• Maximum number of members: 200
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 PUBLIC COMPANY

• Sec. 2(71)
• Public company means a company which;
a) Is not a private company
b) Has a minimum paid up share capital as amount be
prescribed
• Private company being a subsidiary of a public company, will be
treated as a public company.
• Minimum number of members: 7
• Maximum number of members: No limit

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 SMALL COMPANY

• Sec. 2(85)
• A company, other than a public company, whose;
 Paid up share capital <= Rs 50 Lakh, AND
 Turnover <= Rs 2 crore
• Nothing in this clause shall apply to:
1) A holding or subsidiary company
2) A company registered under Sec. 8
3) A company governed by any special Act

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 SECTION 8 COMPANIES
(ASSOCIATION NOT FOR PROFIT)

• Central govt may grant license u/s 8 to form a Section 8 company

if all conditions are satisfied.
• Conditions for obtaining license u/s 8:
1) The objective of the company is to promote commerce, art,
science, sports, education, research, social welfare, religion,
charity, protection of environment, or any such other object.
2) The company shall apply its income in promoting its objects.
3) The company shall prohibit payment of dividend to its
members.

45
 NIDHI COMPANY

• Sec. 406(1)
• Nidhi means a company with the object of:
 Cultivating the habit of thrift and savings amongst its
members;
 Receiving deposits from, and lending to its members only,
for their mutual benefit; and
 Complying with such rules as prescribed by the Central
Govt for regulation of such class of companies.

46
 NIDHI COMPANY

• Requirements
 Not less than 200 members
 Net Owned Funds (Paid up capital) of Rs 10 Lakh or more
 Shall be incorporated as a Public Company
 Shall maintain unencumbered term deposits => 10% of total
outstanding deposits
 Ratio of NOF to deposits <= 1:20
 No preference shares shall be issued.

47
 INCORPORATION OF A COMPANY

• Procedure for incorporation:

1) Ensure that the minimum number of members required by the
Act are present.
2) Obtain Digital Signature Certificate (DSC) and
Director Identification Number (DIN).
3) Apply for name.
4) Documents to be filed: MOA, AOA, agreements, declaration &
affidavit, list of directors with consent, registered office address.
5) Subscribing to MOA i.e., to sign.
6) Certificate of Incorporation.
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 MEMORANDUM OF ASSOCIATION (MOA)

• MOA is the Constitution or Charter of a company.

• It is the foundation on which structure of the company is
based.
• The area of operation is framed (powers are defined).
• It deals with the external affairs of the company.
• It must be signed by the subscribers to the Memorandum i.e.,
the first members of the company.
• It must be duly attested by at least one witness.

49
 CONTENTS OF MOA

1) Name Clause
2) Situation Clause / Registered Office Clause
3) Object Clause
4) Liability Clause
5) Capital Clause
6) Association Clause (Declaration by subscribers regarding
Voluntary Association)

50
 ARTICLES OF ASSOCIATION (AOA)

• AOA contains the bye-laws or the rules & regulations of the

company.
• It deals with the internal affairs of the company.
• It must be signed by the subscribers to the Memorandum i.e.,
the first members of the company.
• It must be duly attested by at least one witness.
• AOA may contain provisions for entrenchment to the effect
that specified provisions of the articles may be altered only if
conditions or provisions which are more restrictive than a
special resolution are met or complied with.
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 DOCTRINE OF ULTRA-VIRES

• A Company has the power to carry out the objects set out in
the memorandum and also everything which is reasonably
necessary to enable it to carry out those objects.
• Activities not expressly or impliedly authorised by the
memorandum are ultra-vires (beyond the powers) to the
company.
• An act is said to be ultra-vires when it is performed which,
though legal in itself, is not authorised by the objects clause in
the MOA or the statute.
• Such an act is void ab-initio and cannot be ratified even by an
unanimous resolution of all the shareholders.

52
 DOCTRINE OF ULTRA-VIRES

• The doctrine of ultra vires was put in its modern form in the
famous case of Ashbury Railway Carriage & Iron Co. Ltd. v.
Riche.
• There may be certain acts which are ultra-vires the directors or
ultra-vires the articles but which are intra-vires the company.
• If an act is ultra-vires the directors only and the shareholders have
ratified it, the company would be bound by it.
• Where an act is ultra-vires the AOA, it can be ratified by altering
the articles by a special resolution.
• Further, if an act is within the powers of the company, any
irregularities can be cured by the consent of all the shareholders.
53
 EFFECT OF ULTRA-VIRES ACTS

1. A company may be restrained by an injunction to do an act if

it is ultra-vires of its objects.
2. If the money borrowed has been used to pay-off debts which
could have been enforced against the company, the lender may
sue the company being subrogated or substituted to the rights
of the creditors who were paid-off.
3. If the lender can identify his money, or other property
purchased with it, he is entitled to what is known as a ‘tracing
order’ and can recover.
4. The lender may hold the directors personally liable for
contracting an ultra-vires loan of the company. The directors
are liable for damages to the lender for the breach of the
implied warranty of authority.
54
 EFFECT OF ULTRA-VIRES ACTS:

5. If any money is unlawfully disbursed, the directors shall be

personally liable to make good the amount.
6. Where the officers of the company persuade a third party to
enter into a transaction which is ultra-vires the company, an
action may lie against them in breach of warranty of
authority.
7. An ultra-vires contract cannot become intra-vires by reason
of estoppel, lapse of time, ratification or delay.
8. A company can protect its property acquired by an ultra-
vires expenditure from outsiders.
9. A company will be liable for torts or crimes committed in
the pursuit of its stated objects.
55
 DOCTRINE OF
INDOOR MANAGEMENT

• The doctrine of constructive notice throws a burden on

people entering into contracts with the company that they are
presumed to have read the documents, though in fact, they might
not have read them.
• On the other hand, the doctrine of indoor management allows
all those who deal with the company to assume that the
provisions of the articles have been observed by the officers of
the company.
• This means that a person dealing with the company is not bound
to enquire into the regularity of internal proceedings of the
company OR an outsider is not expected to see that the company
carries out its internal regulations.

56
 DOCTRINE OF
INDOOR MANAGEMENT

Example: The Royal British Bank vs Turquand

• The directors of a company were authorised by the articles to
borrow on bond by passing a resolution in general meeting.
• The directors gave a bond to T without passing such a resolution.
The question arose whether the company was liable.
• Held: The company was liable on the bond, as T was entitled to
assume that the resolution of the company has been passed in a
general meeting.

57
 EXCEPTIONS TO THE DOCTRINE OF
INDOOR MANAGEMENT

1. Knowledge of irregularity: The rule does not protect any

person who has actual or constructive knowledge of want of
authority of the person acting on behalf of the company.

2. No knowledge of Articles: The rule will not protect a

person who did not consult the Memorandum and Articles
and therefore, did not rely on them.

3. Void or Illegal transaction: The rule does not apply to

transactions which are void or illegal ab-initio e.g. forgery.

58
 EXCEPTIONS TO THE DOCTRINE OF
INDOOR MANAGEMENT

4. Negligence: If an officer of a company does something which

would not ordinarily be within his powers, it is the duty of the
person dealing with him to make proper enquiries and satisfy
himself as to the officer’s authority. He cannot rely on the rule if he
fails to make such an enquiry.

5. Existence of agency: The doctrine cannot apply where the

question is not one as to the scope of power exercised by the
apparent agent of the company, but is in regard to the very
existence of the agency i.e. whether he was an agent of the
company.

6. Pre-condition not fulfilled: The doctrine is not applicable where

the company has to fulfil a precondition, before exercising its power.
59
 PROSPECTUS

• Sec. 2(70)
• Prospectus means any document described or issued as a
prospectus and includes a red herring prospectus referred
to in Sec 32 or shelf prospectus referred to in Sec 31 or any
notice, circular, advertisement or any other document inviting
offers from the public for the subscription or purchase of any
securities of a body corporate.

60
 TYPES OF PROSPECTUS

• Abridged prospectus: Memorandum containing the salient

features of a prospectus as may be specified by SEBI. Every
application form for the purchase of securities shall be
accompanied by an abridged prospectus.
• Shelf prospectus: A company may file a shelf prospectus with
the ROC at the stage of the first offer of securities. It is valid for
ONE year. With a shelf prospectus, no further issue of prospectus
is required if there is a subsequent offer of securities.
• Red-herring prospectus: A prospectus which does not include
complete particulars of the quantum or price of the securities
included therein. A Red-herring prospectus may be issued prior to
the issue of the prospectus.
61
 INFORMATION TO BE DISCLOSED IN
PROSPECTUS

• General Information (Name, RO, CS, CFO, auditors, stock

brokers, merchant bankers, etc)
• Dates relating to opening and closing of issue
• Declaration from Board about issue of allotment letter
• Statement by Board about a separate bank account
• Capital structure
• Object of issue, funding plan, summary of project, risk factors,
etc
• Details of Directors
• Details of any outstanding litigation
• Non payment of Statutory dues 62
 SOURCES OF FUNDS
(EXTERNAL)

Domestic Foreign

Global Depository Receipts: Issued

GDR against shares of the company
Public
IPO
Issue American Depository Receipts: DRs
ADR taken in US and against shares of the
company
Rights Bonus
Issue Issue Foreign currency borrowings normally for
ECB ST purposes; repayable in same currencies

Private Placement Foreign Currency Convertible Bonds –

FCCB normally taken for LT purposes that can be
converted to shares

63
 GLOBAL DEPOSITORY RECEIPTS (GDR)
• Sec. 2(44)
• GDR means any instrument in the
form of a depository receipt, by
whatever name called, created by a
foreign depository outside India and
authorised by a company making an
issue of such depository receipts
• GDRs are instruments to raise or
redeem money abroad through
depositories or the related banks
• Board Resolution and Special
Resolution are required to issue GDRs
• GDRs are issued by an overseas
depository bank appointed by the
company and the underlying shares
are to be kept in the custody of a
domestic custodian bank.
• Company to comply with RBI and
SEBI regulations.
• Even unlisted companies are able to
raise capital through GDRs if they
comply with SEBI’s specific directives.
• GDRs can be offered by way of public
offering or private placement.
• Holder of GDR may become a
member with a right to vote.
64
 PRIVATE PLACEMENT

• Sec. 42
• Offer of securities or invitation to subscribe to securities
offered to a select group of persons (other than by way of
public offer) through issue of a private placement offer letter.
• Maximum number of people to whom this offer is to be made
is 200 during the financial year (except for employees and
institutional investors).
• Board resolution and Special Resolution is to be passed
• Company shall maintain a record of the private placement
offers as per Form PAS-5 which must be filed with the ROC.
65
 PROMOTER

• Sec 2(69)
• Person who has been named as such in a Prospectus or who has
been identified by the company in its Annual Return, or
• Person who has control over the affairs of the company, directly
or indirectly – whether as a shareholder/director/otherwise, or
• Person under whose advice/direction/instruction the BoD is
accustomed to act (exemption: those acting in professional
capacity)
• Promoter must disclose interests to third parties
• Role is promoter is large especially during pre-incorporation and
post-incorporation stages 66
 SHARE C APITAL

• Sec 43
• Two kinds of share capital
a. Equity share capital:
i. With voting rights
ii. With differential rights to dividend/voting/as otherwise
prescribed
b.Preferential share capital
i. With voting rights (S 470)
ii. Without voting rights
67
 SHARE

• Sec 2(84)
• Share indicates the interest of a member in the company
• Distinguished by unique numbers
• Movable and tradable properties
• Transferable according to prescriptions in AOA
• Comes with rights and liabilities
• Can be issued at premium; application of premium conditional
• Cannot be issued at discount; exception on sweat shares (conditional)
• Must be delivered within prescribed period; otherwise will attract
severe penalties
• Impersonation to ownership attracts severe penalties
68
(imprisonment+fine)
 BUY-BACK OF SHARES

• Sec 68
• Conditional/restrictive
• Proceeds must come from
 Free reserves
 Securities premium account
• Buyback must be authorised by AOA
• Special Resolution should be passed
• Process should be completed within ONE year of notice
• Prohibited to buyback through its own subsidiary/investment
companies

69
 MAINTENANCE OF BOOKS OF ACCOUNTS

• Sec 128
• All companies mandated to prepare and keep at its RO books of
account and other relevant books and papers and financial statements
for every FY
• Books to reflect true and fair view of the state of affairs of the
company
• Books to be maintained on accrual basis and according to double-
entry system of accounting
• Can be maintained in electronic format
• Records to be maintained for a period of 8 years along with
supporting documents/vouchers
• Must be available for inspection by directors during business hours 70
 FINANCIAL STATEMENTS

• Company to prepare standalone FS

• Company to prepare Consolidated FS, including all
domestic/foreign subsidiaries, associates, JVs etc
• FS to include Director’s Report, Balance Sheet as of y/e date
and related schedules, the Profit & Loss Account for the year
and related schedules, and Cash Flow Statement
• Must be audited and approved by BOD and signed by
Chairperson, 2 Directors, CFO, CS, besides the Auditor
• Annual Returns to be filed with ROC along with financial
highlights, changes in business, details of directors, KMP,
new/defunct subsidiaries, deposit details, legal issues, audited FS
etc 71
 APPOINTMENT OF AUDITORS

• Sec 139
• Appointed every year with approval of members at AGM for a
maximum period of 5 years; appointment to be ratified in
successive AGMs
• Individual auditor: maximum term 5 years
• Firm: Not more than two 5-year terms
• Auditor cannot be appointed in the partner firms of the
company
• Cooling period of 5 years before re-appointment as auditor
• Only chartered accountants can be appointed as auditors – S
141(1) 72
 DIVIDENDS

• Sec 123
• Dividend to be paid out of profits of the company after providing for
depreciation in accordance with Schedule 2; Interim dividends may be
declared by BOD
• Dividend to be deposited in separate account with a scheduled bank
within 5 days of declaration; Failure to distribute dividend within 30
days of declaration will invite stringent punishment (imprisonment +
fine)
• All registered shareholders eligible to receive dividend; Unpaid
dividend to be transferred to Investor Education and Protection Fund
(IEPF) established by GOI
• Rate of dividend shall not exceed the average of the rates of 3
immediate preceding years; Total amount to be drawn from
accumulated profits shall <= 10% of paid-up share capital and free 73
reserves
 BOARD OF DIRECTORS

• Sec 2(10)
• Refers to group of persons exercising power over an
organisation
• Elected by shareholders for a period called tenure as
prescribed in the AOA
• Number of directors:
 OPC: 1
 Private company: 2
 Public company: 3
 Maximum: 15 (AOA to prescribe more if in need)
 At least 1 woman director 74
 BOARD OF DIRECTORS

• Functions
 Conduct board meetings
 Constitute executive committees such as audit, finance,
appointments etc
 Conduct AGM
 Take decisions in all matters of administration & management
• Meetings
 First board meeting: within 30 days
 Every year: minimum 4 meetings
 Gap between meeting <120 days
 7 days notice
75
 Quorum: 1/3rd or 2
 POWERS OF BOD

• Make decisions and pass resolutions • Filling of casual vacancy in BOD

at Board meetings
• Approval of JVs
• Approve annual/half-yearly/ quarterly
• Commencement of new business
FS and Board report
• Shifting of business
• Diversification/consolidation of
locations/RO/factories/etc
business
• Appointment/removal of KMP and
• Approve amalgamation/mergers/
one level below
reconstruction
• Appointment of internal auditors
• Takeover/acquisition of another
company • Adoption of company seal
• Issuance of securities • Take note of director’s disclosure
• Contribution to political parties • Selling of investments
76
 KEY MANAGEMENT PERSON (KMP)

• Sec 2(51)
• Refers to
i. CEO/MD/Manager
ii. Company Secretary
iii. Whole-time director
iv. CFO
v. Other such offices as prescribed

77
 INDEPENDENT DIRECTOR

• Sec 149
• Nature: Outside Director
• Purpose: To impart impartiality, professional competence, and
ethical edification.
• Applicability: Companies to have Independent Directors:
 Every Listed Company (at least 1/3rd should be Independent Directors)
 Unlisted Public Companies having (Rule 4 of Companies (Appointment & Qualifications
of Directors) Rules 2014:
 Paid up capital => Rs 10 crore, or
 Turnover => Rs 100 crore, or
 Aggregate of outstanding loans, debentures, and deposits > Rs 50 crore
 Minimum TWO directors
• Term of office: 5 consecutive years; maximum tenure – two 5-
year tenures; cooling period: 3 years
• Liability: Independent Director is held liable for acts of omission
or commission committed by the company with his knowledge, 78
consent or connivance, or where he had not acted diligently.
 CORPORATE SOCIAL RESPONSIBILITY
(CSR)

• Sec 135
• Companies required to constitute CSR committee and comply
with CSR provisions:
 Every company having:
 Net Worth => Rs 500 crore, or
 Turnover => Rs 1000 crore, or
 Net Profit during any of last 3 financial years => Rs 5 crore
• Amount of contribution towards CSR: At least 2% of the
average net profit (Before Tax) made during the last 3 financial
years.
• Activities include eradicating hunger, poverty; promoting
education; promoting gender equality; etc. 79
 NATIONAL COMPANY LAW TRIBUNAL
(NCLT)

• Sec 408
• Quasi-judicial body
• NCLT will have the responsibilities to
 expedite the merger and acquisition cases in the private sector;
 deal with the timely unlocking of the distressed corporate assets;
and
 take over the process of liquidation of companies.

• Objective: To avoid multiplicity of authorities and

thus avoid or reduce litigation agencies.
80
 NATIONAL FINANCIAL REPORTING
AUTHORITY (NFRA)

• Sec 132
• Regulatory authority for auditing and financial reporting.
• NFRA has powers to monitor and enforce compliance of
auditing and accounting standards.
• Objectives:
 Make recommendations on formulation of accounting and auditing
standards.
 Monitor and enforce compliance with such standards.
 Impose heavy penalties on those who break the laws and debar
audit firms up to 10 years.
81
 SERIOUS FRAUD INVESTIGATION OFFICE
(SFIO)

• Sec 211, 212

• SFIO is an investigating agency of the MCA that looks into
major and serious fraud probes.
• Responsibilities:
 Detecting and prosecuting white collar crimes / corporate frauds.
 Investigate only such cases of substantial public interest, like that of
a scam.
• Such investigation should lead to implementation of procedures
and reform of system.

82
 ANNUAL GENERAL MEETING (AGM)

• Sec 96
• Meeting of Shareholders
• Required for every company other than OPC
• Due date of AGM (whichever is earlier):
 Time gap between 2 AGMs shall not exceed 15 months.
 Within 6 months from the close of the financial year,

83
 ANNUAL GENERAL MEETING (AGM)

• Business to be transacted at AGM:

 Ordinary Business: The following items are always considered
A Consideration of Financial Statements / Annual Accounts
D Declaration of Dividend
D Appointment of Director in place of those retiring, and
A Appointment and fixing remuneration of Auditor
 The term Ordinary Business is associated only with AGM and it
requires only an Ordinary Resolution.

84
 ANNUAL GENERAL MEETING (AGM)

• Business to be transacted at AGM:

 Special Business:
 In case of AGM, any business other than ordinary business is
treated as Special Business.
 In case of any other meeting, all business shall be deemed as
Special Business.
 Special Business may require Ordinary or Special Resolution
depending upon the item of business.
 For every item of Special Business, an explanatory statement shall
be attached to the notice.
85
 ANNUAL GENERAL MEETING (AGM)

• Penalty for contravention of provision w.r.t AGM:

 Company and every officer of the company who is in default shall
be liable with:
 Fine up to Rs 1,00,000
 Continuing default: Rs 5,000 for every day during which default
continues.

86
 EXTRA-ORDINARY GENERAL MEETING
(EGM)

• Sec 100
• Meeting of shareholders between 2 AGMs
• It can be requisitioned (called) by:
 Shareholders/Requisitionists
 BoD
 NCLT
• Minimum number of requisitionists who are entitled are the
members holding at least 1/10th of total Paid up capital / Voting
power.
• Date of EGM shall not be greater than 45 days from the date of
87
deposit of requisition.
 QUORUM

• Sec 103
• Quorum is the minimum requirement of persons who have to
attend the meeting to make it valid.
• Unless AOA provides for a larger number, the quorum required
is:
 For a Public Company
Number of members on date Quorum
of meeting
7 to 1000 members 5 members personally present
1001 to 5000 members 15 members personally present
5001 and more 30 members personally present
88
 QUORUM

• For a Private Company: 2 members personally present

• Proxy is not counted in ascertaining quorum, unless they are
representing companies or the President / Governor.

89
 RESOLUTIONS

• Ordinary and Special resolutions

• Special resolution is a resolution of the company's shareholders
which requires at least 75% of the votes cast by shareholders in favor
of it in order to pass. Eg: Removal of Auditors before expiry of term;
Appointment of more than 15 directors
• Ordinary resolution is a resolution of company’s shareholders
which requires simple majority – more than 50% – of the votes cast
when no special resolution is required. Eg: Appointment of Alternate
Director; all ordinary business transacted in an AGM; Fixing
remuneration of Cost Auditor

90
 WINDING UP

There are 2 ways of winding up:

1. Compulsory winding up under order of the Tribunal.
2. Voluntary Winding up.

91
 COMPULSORY WINDING UP

a) Default in holding statutory meeting

b) Failure to commence business
c) Reduction in members below 7.
d) Inability to pay debts
e) Any other just and equitable reason.
f) By special resolution – for any cause whatsoever to wind up
the company by the Tribunal.

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 VOLUNTARY WINDING UP

• Usually takes place when the company becomes insolvent and

is unable to discharge its liabilities.
• Special Resolution must be passed in this case.
• Meeting with creditors must be held before passing the special
resolution.

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