COMPANY LAW I

Module 1 – Nature and Forms of Business Enterprise......................................................................................1

I. History of Company Law........................................................................................................................1
II. Features of a Company...........................................................................................................................2
1. Separate Legal Personality..................................................................................................................2
1. Solomon v. Solomon, 1897 (Imp.)..................................................................................................2
2. Re Kandoli Tea Co. Ltd., 1886.......................................................................................................3
3. Lee vs. Lee Air Farming Ltd. 1961.................................................................................................3
4. Bacha F. Guzdar vs. CIT.................................................................................................................4
2. Incorporated Associations...................................................................................................................4
3. Limited Liability.................................................................................................................................5
4. Perpetual Succession...........................................................................................................................6
5. Common Seal......................................................................................................................................6
6. Transferability Of Shares In Public And Private Companies.............................................................7
1. Western Maharashtra Dev. Corp. Ltd. v. Bajaj Auto Ltd. (Bombay High Court, 2010)................7
2. Bristol Myers squibs corp case........................................................................................................8
III. Advantages of Incorporation.................................................................................................................8
1. Independent + Legal existence............................................................................................................8
2. Ltd liability..........................................................................................................................................8
3. Perpetual Succession...........................................................................................................................8
4. Transferability of shares......................................................................................................................8
5. Infinite membership............................................................................................................................9
6. Mobilisation of Huge Resources:........................................................................................................9
7. Separate Property................................................................................................................................9
8. Ease in Control and Management.......................................................................................................9
IV. Disadvantages of Incorporation............................................................................................................9
1. Formality and Expenses......................................................................................................................9
2. Loss of Privacy....................................................................................................................................9
3. Divorce of Control from Ownership...................................................................................................9
4. Detailed Winding up Procedure..........................................................................................................9
5. Control by the Few............................................................................................................................10
6. Greater Public Accountability...........................................................................................................10
7. Possibility of Fraud...........................................................................................................................10
V. Whether Company is a Citizen & Entitled to Fundamental Rights......................................................10
1. STC Ltd. v. CTO...........................................................................................................................10
2. Telco v. Bihar................................................................................................................................10
3. Bennett Coleman Co. v. UOI........................................................................................................10
4. Chiranjilal Chaudhari v. UOI........................................................................................................10
Module 2 – Corporate Personality...................................................................................................................12
I. Difference b/w corporation aggregate and corporation sole..................................................................12
1. Govind Menon v. UOI..................................................................................................................12
II. Company, Body Corporate And Corporation.......................................................................................12
III. Lifting Or Piercing Of Corporate Veil................................................................................................12
1. Cotton Corporation of India Ltd vs. GC.......................................................................................12
2. LIC v. Escorts................................................................................................................................12
3. State of Uttar Pradesh v. Renusapar..............................................................................................12
IV. Business Organisation.........................................................................................................................13
1. Introduction.......................................................................................................................................13
2. History...............................................................................................................................................13
3. Recent Trend.....................................................................................................................................13
4. Frederick Taylor – five essential principles......................................................................................14
5. Elton Mayo’s Human Relations Theory............................................................................................14
6. Joint Venture.....................................................................................................................................14
 1. New Horizons v UOI.....................................................................................................................14
7. Sole Proprietorship............................................................................................................................14
Module 3 – Kinds of Companies.....................................................................................................................15
I. Private Company- Section 2(68)............................................................................................................15
1. Chiranjilal vs. Mahabir Dhelia......................................................................................................15
2. Nagaraj v. Gopalakrishnan............................................................................................................15
II. One-Person Company...........................................................................................................................16
1. Exemptions and Privileges Given to OPCs.......................................................................................16
III. Small Companies................................................................................................................................17
IV. Holding and Subsidiary Companies....................................................................................................17
V. Public Company...................................................................................................................................18
1. Conversion of Private to Public Co...................................................................................................18
1. Ram Purshottam Mittal v. Hillcrest...............................................................................................18
2. Conversion of Public Co. to Private Co............................................................................................18
1. In Re. Diana Buildwell Limited....................................................................................................18
VI. Government Company........................................................................................................................19
1. Legal Status of Government Company:............................................................................................19
1. Heavy Mazdoor Case....................................................................................................................19
2. Andhra Pradesh State Transport Case...........................................................................................19
3. Ajay Hasia.....................................................................................................................................19
4. Mysore Mills.................................................................................................................................19
5. R.D. Shetty....................................................................................................................................19
VII. Foreign Company..............................................................................................................................20
1. Branch Office....................................................................................................................................20
2. Project Office....................................................................................................................................20
3. Liaison Office....................................................................................................................................20
4. Site Office.........................................................................................................................................20
5. Particulars:.........................................................................................................................................21
VIII. Associate Companies and Associations Not for Profit....................................................................21
1. Associate Companies........................................................................................................................21
2. Associations not for Profit.................................................................................................................21
3. Why would an association want a S.8 license?.................................................................................22
4. Revocation of license: The difference between Sections 8(7) and 8(8)............................................22
5. Benefits of getting such a license......................................................................................................22
6. What will a Section 8 Company have to do if it wishes to convert itself to another kind of
Company?................................................................................................................................................23
7. Illegal Associations...........................................................................................................................23
IX. Active, Inactive and Dormant Companies..........................................................................................23
Module 4 – Formation of a Company..............................................................................................................25
I. Promotion..............................................................................................................................................25
1. Legal Position of a Promoter.............................................................................................................26
1. Lagunas Nitrate v Lagunas Syndicate...........................................................................................26
2. Exlauger Sombero.........................................................................................................................26
3. Keller v. Baxter.............................................................................................................................26
2. Duties................................................................................................................................................26
3. Liabilities...........................................................................................................................................26
4. Remuneration....................................................................................................................................26
5. For properties-...................................................................................................................................27
Module 5 - Incorporation of a Company.........................................................................................................28
I. Pre-Incorporation Contracts:..................................................................................................................28
II. Certificate of Incorporation..................................................................................................................28
III. Company Incorporation Steps.............................................................................................................29
Module 6 – Memorandum of Association.......................................................................................................31
I. Types of Clauses in the MoA................................................................................................................31
 II. Name Clause.........................................................................................................................................31
1. CGMP Pharma Plan Co v. Regional Director...............................................................................32
2. Sholay Co Ltd v. RD.....................................................................................................................32
3. Pino Bisazza Glass Pvt Ltd v. Bisazza India Ltd (2002)...............................................................32
4. 7th Day Adventist Church Society v. 7th Day Adventist Church Company................................32
5. Atlas Cycles Haryana Ltd v. Atlas Production Ltd.......................................................................33
6. Kilburn Electricals Ltd v. Regional Director................................................................................33
7. Goenka Institute of Education and Research v. Anjani Kumar Goenka.......................................33
III. The Registered Office Clause.............................................................................................................33
IV. The Object Clause...............................................................................................................................33
1. Doctrine of Ultra Vires.....................................................................................................................34
Ashbury Railways v Riche...................................................................................................................34
8. Lakshmanswami Mudaliar v. LIC.................................................................................................34
2. Doctrine of Constructive Notice.......................................................................................................35
3. Doctrine of Indoor Management.......................................................................................................35
1. Howard v. Patent Ivory.................................................................................................................35
2. Rama Corporation v. Proof Tin & General Investment Co...........................................................36
3. Ruben v. Great Fingal Consolidated.............................................................................................36
4. Al Underwood v Bank of Liverpool.............................................................................................36
V. Change in Liability Clause...................................................................................................................36
VI. Capital Clause.....................................................................................................................................36
Module 7: Articles of Association...................................................................................................................38
I. Alteration to the AoA............................................................................................................................38
1. Breach of Contract............................................................................................................................38
2. Expulsion of Members......................................................................................................................38
1. Gowathamin Silvent Oil Mills......................................................................................................38
2. Greenhalg Arderne Cinemas.........................................................................................................38
3. Pioneer Mutual Benefit Society....................................................................................................38
4. Peveul Gold Mines Case...............................................................................................................39
5. Shuttle Worth v. Cox Bros Co......................................................................................................39
6. Georly Case...................................................................................................................................39
II. Prospectus.............................................................................................................................................39
Share Capital....................................................................................................................................................42
I. Kinds of Preference Shares....................................................................................................................42
II. Kinds of Share Capital.........................................................................................................................43
III. Book Building Process........................................................................................................................43
IV. ICDR Regulations...............................................................................................................................44
V. Issue of Shares: Process........................................................................................................................44
VI. Public Issue of Shares.........................................................................................................................45
1. Initial Public Offering.......................................................................................................................45
1. Conditions [IMP]...........................................................................................................................45
2. Understanding The Book-Building Process..................................................................................47
2. Further Public Offerings....................................................................................................................47
3. Entities Not Eligible To Make Fpos..............................................................................................47
3. Offer for sale.....................................................................................................................................48
VII. Rights Issue........................................................................................................................................48
1. ICDR.............................................................................................................................................49
4. Pvt Placement....................................................................................................................................50
5. Preferential Issue...............................................................................................................................50
VIII. Buy-Back..........................................................................................................................................50
IX. Reduction of Share Capital.................................................................................................................52
X. Global Depository Receipts..................................................................................................................53
XI. Allotment Of Shares...........................................................................................................................54
XII. Call On Shares...................................................................................................................................54
 XIII. Transfer and Transmission of Shares...............................................................................................54
1. Blank Transfer...................................................................................................................................55
2. Forged Transfer.................................................................................................................................56
XIV. Surrender of Shares..........................................................................................................................56
Dividend and Debentures.................................................................................................................................57
I. Dividends...............................................................................................................................................57
1. CIT v. Danthardas.........................................................................................................................57
II. Debenture.............................................................................................................................................59
1. Characteristics...................................................................................................................................59
2. Diff b/w debenture holders and share holders...................................................................................60
3. Kinds of Debentures..........................................................................................................................60
4. Debenture Trust Deed.......................................................................................................................61
 Module 1 – Nature and Forms of Business Enterprise

I. HISTORY OF COMPANY LAW

4.7.19
 1850 Act (1844 Eng Act)
 Joint stock companies (the present form of company)- many shareholders, their liability is unlimited.
- Have to pay the debts of the company as and when arises
- Unlimited liability isn’t that you have to keep contributing
 It was recognized that the companies are separate and distinct from the members constituting it.
Different personality, company stands as one person in the eyes of law

 1857 Act (1856 Eng Act)

 Removed the unlimited liability of the members of the company but it didn’t apply to banking
companies
 In 1858 an Act was introduced that removed the unlimited liability of the banking companies

 1882 Act
 dealt w winding up, incorporation and registration of trading companies (buying and selling)

 1913 Companies Act was a major act, prime before 1956, regulated business for many years

 The govt of India formed a Company Law Amendment company under HC Bhava (he was part of
the first cabinet of independent India, representing commerce, chairman of Oriental Insurance
Committee)
- Called for development and trade
- Keep the Indian law at pace w the developments
- Revamp the company law
- Resulted in the Companies Act of 1956 (Act 1 of 1956)

 Depositories Act, 1996

- Because of the enactment of this Act, Companies Act amended to harmonize it w it

 In 1991 amended to encourage FDI and FII

 FDI is a long term strategy and FII is more short term
 FDI is not just giving of capital but also infrastructure. Contribute by providing their own assets and
resources. FII will only give funds, they are only interested in the financial markets (the shares,
securities, receipts)- investing money and getting money.
 Foreign Portfolio Investors Regulations, 2014 (FII, etc comes under this- a much broader category)

 In 2000 there were several amendments- reform in capital market, ease of doing business, govt
policies such that privatization, etc. Tilted towards having a more open market and economy.
 In 2001, amendments to buyback of securities
 In 2002 the concept of producer companies were introduced. These are in the form of cooperatives
and they intend to share the profit from the business among themselves in stead of sharing dividend
w a large number of shareholders.
 In 2006, concept of Director Identification Number was introduced
- No qualification needed to be a director
- Certain grounds of disqualifications are there
- The natural person has to apply to the Central Registry for a unique identity number
- There is a database maintained by the central govt

 In 2013 there was a plethora of amendments and it totally revamped the 1956 Act (Act 18 of 2013)
- The total number of sections drastically reduced
 - Removed bulky sections and in the form of circulars, as and when required keep introducing
amendments. There are several Rules being passed for the minor chapters.
- Instead of sections, there are rules and these are easier to amend. They can be updated by a
notification in the Gazette
- Introduced concepts like one person company, CSR

 2015 focused on removing min share capital, common seal, etc.

 2017 amendments specifically targeted the ease of doing business and for that several things were
made clear (eg: CSR was an ambiguous concept in the 2013 Act and wasn’t clear enough and this
was made more clear).

 2018 amendment focused on decriminalizing certain offences wrt companies

II. FEATURES OF A COMPANY

5.7.19
 Who owns a company? Is it correct to say that shareowners own the company?
- In the Companies Act, nowhere has shareholders been mentioned as owners of a company. They are
members of the company.
- It is not necessary that someone has to own a company.

 “Company” is derived from “com” and “panis”. Originated from people who used to take meals
together, originated when the merchants used to meet over meals and discuss imp matters together
(now it is a voluntary association of people who come together and undertake an activity to earn
profit).
 S 2(20) :
- 2013 Ac t recognizes that if a company has been incorporated under any of the Company Act, it
would come under the defn of company for the purpose of the 2013 Act
- But this doesn’t give the defn
- Thus we do not come to know what exactly a company is, for this certain characteristics/features
have to be seen.
 Characteristics:

1. Separate Legal Personality

 A company is an entity different from its members. It is a separate legal personality.
1. Solomon v. Solomon, 1897 (Imp.)
 Most famous case
 Solomon Co. Ltd was floated; it was a public co (7 members reqd for a legal public co). These 7
were his family members. Solomon was one of the members
 This co issued shares and debentures.
 Subscribing to a debenture makes you a creditor. Secured creditors are those, which have some
collateral, which they can sell and recover in case the co goes into liquidation. A charge on the co.
Unsecured creditors are lower in ranking, if there is nothing left when it goes into liquidation then
they wont get anything.
- Charge signifies your right, title and interest in the property
 A debenture owner lends some money to the co w a redemption period for it be to paid back
 Solomon was a member, as he owned shares and a creditor as he subscribed to debentures. There
were other creditors as well.
 Solomon was a secured debenture holder and there were others who were unsecured debenture
holders.
 The co went into liquidation. There is a priority of payment (a ranking). Secured creditors came first.
  The problem arose as there were unsecured creditors and Solomon (several 3 rd party unsecured
creditors).
- They contended that it was his co and he will get all the money upon liquidation and the UC were
bona fide creditors and so they deserve the money first.
 Held that their argument was invalid as a co is a separate legal personality. The co is neither an agent
of Solomon but vice versa is true (it was not clear then how to treat this different legal personalities).
The UC was told that that if there was anything left only then they would get it.
2. Re Kandoli Tea Co. Ltd., 1886
 First case.
 Three people owned property and floated a tea company w the above name and transferred the
property to the tea company. There are no other members. Transferred all property and assets
 There was an ad valorem duty when you are transferring a real estate asset.
 A company is a diff person so this duty is imposed on the value of a transaction of transferring the
asset to the company
 The three people said they wont pay this duty, as they and the co were the same person, things were
going from their own property to themselves so they wont pay this duty.
 The Ct for the first time held that a co is a personality that is distinct. Co in the eyes of law is a
separate legal entity. It is a transfer to a fourth person in this case.

6.7.19- Shubha

Note: One Person Co. à MoA is signed by one person. It acts as a private company. OPCs and small
companies have certain privileges and exemptions.
BEPS: Base Erosion and Profit Shifting
Fiat Currency and Cryptocurrency; ICO- Initial Coin Offering
Tax haven: Example-Mauritius
Irish Sandwich 
3. Lee vs. Lee Air Farming Ltd. 1961
  There was an individual Lee, his wife and a limited liability company, Lee Air Farming Co.
 The Co. had 3000 shares, Lee being the owner of 2999 shares. Lee, along with being the major
shareholder, is also the sole director of the company and an employee of the company (pilot).
   [Note: 2(59) of Act: A director is officer of the company (key managerial personnel). He is not an
employee; Qualification shares: minimum shares to be subscribed by a person to become a director;
if the person has qualification shares, he will have a stake in the company and will work in the best
interests of the company. However, there are various classes of shares and it is not possible for the
qualification shares to cover all classes proportionately and therefore there would occur dilution of
control.]
 The company would be governed by the Workmen Compensation Act: death of employee during
course of employment- compensation from the employer. In this case, company is the employer.
 Lee died in an air crash. Wife filed a suit arguing that because Lee died during course of
employment, he is entitled to compensation.
 It was contended that he is the major shareholder and he has employed himself and was one and the
same as the co.
 Even though Lee was the major shareholder, he cannot be considered as the employer as the co is a
separate legal entity and the widow is thus entitled to compensation.

2 concepts:
1. Agricultural Income:
 S. 10 of Income Tax Act- 100% tax exemption in case of agricultural income. Rationale- we are an
agrarian economy and we need to address issues of people who depend entirely on agriculture.
  However, in certain cases the government may grant only a certain percentage of exemption; for
example: in case of mechanical process being applied to change the quality of the agricultural to
make it marketable.
2. Application and Diversion of Income:
 Application of Income: Once a person has earned income and has received the amount in his
account, irrespective of the way he spends the money, tax will be charged. For instance: When
alimony is given to wife as per court order, the husband would still be liable to pay tax because he
earns the money in the first instance and only subsequently the amount of alimony is applied.
- not use of income.
- When taxed for the money you have, application of income
 Diversion of Income: In this case, the income is never earned. It does not come in your account at all.
For instance, a partnership comprising a man (P), his 2 sons and his wife. Partnership deed: all the
profits will be distributed among the partners but after the death of P, the 2 sons can continue the
partnership business, provided 20% of the profit is given to the widow. This implies that even before
the profit is treated as the firm’s income, 20% is to be given to the widow.
- never got this money, didn’t get credited to your account
- something that you haven’t received and has gotten diverted to someone else (valid logically, legally
and equitably)

8.7.19
4. Bacha F. Guzdar vs. CIT
 There was an agricultural land, tea co and Mrs. Guzdar (a shareholder in the tea co)
 Undisputed fact that there was only agricultural activity on the land. The co is getting some inc from
A. Mrs. G is also receiving inc as she is shareholder of the co.
- Getting inc in the form of dividends for the shares subscribed
 Mrs. Guzdar said the co is receiving inc from agricultural source. Whatever inc she received from tea
co should also be treated as agri inc (at that time, 60% would be exempt and 40% taxed for inc from
tea)
 The ct agreed that whatever the tea co is getting is definitely agri inc (agri activity/ renting out land
for agri activity).
- Mrs G was receiving inc only as shareholder, not as a major contributor to the agricultural activity.
 Have to be directly related to the agri activity to be treated as an income. So no exemption in this
case.
 Because she was taxed on the amt received as dividend and as no exemption, this is a case of
application of income.
1. Agricultural inc is the major issue that is there for co law
2. Shareholders are not owners of the co
3. Application and diversion of inc
 If the co wasn’t a separate legal entity, there wouldn’t be a different recognition b/w Mrs G and the
co. The co is the middle source for inc to Mrs G and is a totally separate legal personality.

2. Incorporated Associations
 s.3
 Process of incorporation enunciated in the Act. Have to follow this process to get the co in existence
under the eyes of law.
 If trying to incorporate public then >/7, if pvt then >/2, if OPC then 1
 J.J. Irani: if given an incentive to form a co then they will be more organized and if corporatized then
more effective than not. If there would be no benefit, forming a co is really expensive, cumbersome
and formal. Suggested sole proprietorship, etc., in order to provide this incentive.
- Formality and expense will be reduced. Relax the defn of co but still brought under the defn of co
and thereafter they may be taxed as well.
 If unincorporated association (not formed under any Company Law) but it has no identity under the
law. May call it ‘company’ as a matter of custom but it is not so under the law
  Incorporation is taking all steps to register and form this co either under the previous or the current
Companies Act.
 An OPC is a sub-classification of a pvt co. The section gives the scope of anther classification of co.
OPC or small co cannot be treated as a public co for the purpose of legal compliances. Disclosures
and compliances are more for mass shareholders (distinct reqs that you need to fulfill, larger public
interest is involved, strict legal compliances, conditions to follow before listing).
- if OPC should have less compliance, regulations, etc., it means that we never intend to classify it as
a public co. Can form OPC in form of pvt co. In MoU for a public co, 7 or more will sign saying
they are becoming members of their choice w/o force or compulsion. For OPC: it is written private
company and then in brackets “One Person Company”.
- Nominee clause is also present in the event of death of the person and can change this when still
alive.

9.7.19
 Why is the term ‘incorporation’ used?
- registration, etc., are a part of incorporation (one of the formalities)
- better to use a wider term
- it is a wider term that encompasses all the formalities like registration within itself.
 Advantages of incorporation?

3. Limited Liability
 Have option of limitation of liability. A co ltd by shares (on valid call, s 2(22)), guarantees (wop, s
2)21_) and shares + guarantees and unlimited liability (s 2(22))
 A limited liability co is ltd by the first 3 of the above
- if ltd by shares, it is clear that it has a share capital
o balance amt on the share only will have to be paid by the shareholders
o if taken Rs. 100 shares in a co ltd by shares, a co doesn’t call all the money on the share at
once (wont have to pay the Rs. 100 at once), will keep on making calls for the amt within a
particular time period (will become a member even if paid only a part of the share amt but
will become full owner after paying the whole amount). As and when the co requires the amt
they will make the official call for shares. The co will forfeit your share or have a lien on
your share if you don’t do this.
o The share’s residuary amt that you haven’t paid, at the max, that is your liability.
- Ltd by guarantees
o No share capital so no initial contribution by the members
o This means that if the co is getting wound up (non-profitable co) due to some crisis or
liquidation, whatever amt the guarantors have said they will contribute, that much they will
contribute.
o There is no profit incentive for the members (unless the co earns profit and distr this to the
guarantors as agreed by the articles of association)
o This guarantee of paying the amt will have to be given to become a member of a co
o They will be members but no share capital, member is a wider term.
o Rationale: they could save the co in the end even if they are not getting any income.
o In UK these are known as community interest co. Social benefit.
- Ltd by shares & guarantees
o There is a share capital as some of the capital is contributed by shareholders and it also has a
guarantee
o These shareholders are subscribing to the share and paying a part of the amt and have also
agreed to pay an amount in case the co is wound up.
- Unltd liability:
o The liability of the members is unltd.
o The debt and liability of a co is an x amt. The members are aware that in the worst case the
liability will be this amt. Will not be extended w/o consent of the members
 o The co can ask any one member the x amt and the other members would pay that one
member. If not, there can be a legal action against them.
o In partnership one can proceed against the partners directly but here co is recognized as a
separate entity, any grievance has to be through the channel of the co.

10.7.19
[Members are subscribers to the MoA who shall have deemed to have been agreed to be members and on
registration shall be entered in the register as members and on registration of memorandum, shall be deemed
to have become members.
- there are some initial members, some can be added later as members as well
- all shareholders of the co will also be considered as members]
 There are exceptional circumstances where the members, directors, etc., can be made unltdly liable
for any fraudulent act, etc. (s339). Liable for any amt due to the party to be compensated and not just
the share amount.

4. Perpetual Succession
 In a company if all three members die, in the eyes of law the co will continue to exist as an entity.
The co has an identity in the eyes of law and so it will be considered as continuing to be in existence
 Only if applying to tribunal in s302 for dissolution (procure a dissolution order). From the day of the
order, the co will not be in existence in the eyes of the law. If this appl isn’t made, the co will
continue to be in existence irrespective of death of members.
11.7.19

5. Common Seal
[defn of co: a co is a co incorporated under any previous co law or the Companies Act, 2013]
[owner of a co: nobody (even if a shareholder owns most or all of the shares, they are not the owner of the
co]
 Common seal: s22
 Common seal: substantial proof of the organization and the attestation in the name of the company
 It is usually round in shape, but no specific prohibition for the same.
 It is recommended that the seal contains at least the name of the co, date of incorporation and
registered office.
 On all the docs executed (bonds, debentures, share cert), there will be a common seal of the co that
this doc is a valid doc executed on behalf of the co
 The 2015 amendment act has made common seal optional for companies. But if there is a common
seal, it has to provide for its safe custody (allowed to take it out as a director for the purpose for any
official document).
- Done away with common seal for the ease of doing business. If multiple people are going to a
different city or country to sign a contract then it would be hard for all of them to carry the common
seal as it is not feasible to have multiple common seals
 How will one attest if common seal isn’t there?
- s21: the key managerial personnel (KMP), any other officer or employee has the power to execute a
contract or any other document provided they are authorized to do so by all the board of directors

 power of attorney can authorize someone to execute P note etc so as to bind the co
 The common seal shall not be used in any other manner as has not been authorized by the board of
directors. Eg: if the common seal is to be used by affixing it along with certain people’s signatures
then this would be in the articles of association and it would be binding
 If no common seal, then to execute contract then at least two directors need to sign that they are
entering into a contract on behalf of the co

 Method 1: when using the common seal is optional, power of attorney is given to someone to execute
docs on the co’s behalf
  Method 2: co doesn’t have a common seal and the 2 directors have to sign
 Method 3: when there is CS, it is adviced that one director and one CS should sign to bind
 Otherwise KMP or any other authorized personnel. How to show authorization:
a. Approved by the board by a board resolution that has to be passed. A proposal is made to make
the due authorization and the majority/all are agreeing to it, then it becomes a resolution. Thus
authorization is in the form of a board resolution, passed during a board meeting.
(if appt of director is found to be invalid or he is disqualified, as an outsider entering into the contract, one is
not supposed to know that. It is a matter of internal management.)

12.7.19 (Sukanya)

6. Transferability Of Shares In Public And Private Companies

 Transferability of public shares is relatively easier than private shares. This difference exists because of
the difference in objectives sought to be achieved.
 In a public company, you are not threatened about by the composition of the company. In a private
company, however, you are concerned about ensuring that the composition remains the same.
 Section 44.
 This principle was expounded in the case of:
1. Western Maharashtra Dev. Corp. Ltd. v. Bajaj Auto Ltd. (Bombay High Court, 2010).
– The Court differentiated between private and public companies on the basis of the objective with
which they were made.
– Public companies cater to public demand and interests.
– Sections 56, 57 and 58 of the Act, along with SEBI guidelines, safeguards the interests of the
shareholders in a public company.
– In private companies, usually, the owners don’t want to dissolve their equity (ownership of shares
representing your stake in the company) by gathering more shareholders. If mobilisation is required,
they do so by transferring shares among themselves.
– Moreover, in private companies, transfer has to take place in accordance with the Articles of the
company. As a consequence, the transferability of shares is not as wide as it is in a public company.
In public co it is wide as they want people to invest.

 Right of First Offer (ROFO)

– Articles in private companies almost always have this clause.
– If A, a shareholder in company X, wishes to sell his shares, he must first offer them to B, who is
another shareholder in the same company. However, if B refuses to buy the shares and it is only
after all the existing shareholders have refused to purchase the shares at the desired rate, that A can
approach C, a third-party to sell his shares.
– Usually, however, an existing shareholder will not refuse to purchase the shares, even if they are
slightly expensive.
– May be present in public co but it is a rare situation, articles of association would have to be seen.

 Right of First Refusal (ROFR)

– This concept is used for bargaining / negotiating.
– Only in two circumstances the person would be interested:
1) Will quote a price so exorbitant that the existing shareholder will not be able to match it.
2) Will get an entry route into the company

 Drag Along Rights

– This is a right given to majority shareholders.
– The majority shareholders tell the minority shareholders to sell their shares, since they are doing the
same. Assume that shareholders owning 80% shares wish to sell their shares to company A. They
direct the remaining shareholders to sell their shares to company A itself and promise to pay them
any amount that a third-party offers to them.
 – If it’s a merger, it is desirable to get 100% ownership in the other company.
– Bristal Myers Squibb Corporation.

 Tag Along Rights

– This is a right given to minority shareholders. They don’t wish for the majority shareholders to
receive all the benefits.
– There must be a clause in the contract of the minority shareholders allowing for them to tag along
with the majority shareholders. Every minority shareholder may not have a tag-along right.
– Because majority is selling w T&C, the minorities wouldn’t want to be left behind, they also would
sell it at the same terms and price.

(Shradha)
  Right of first offer (ROFO)- 
o   usually private companies Articles 
o   If A and B are existing members and A wants to sell his shares, he will first offer B the shares, who will
either accept, or decline or quote a lower price, A can then offer the shares to C who is a third party, and if C
quotes a price higher than what B did then A can sell it to C. 
o   this is a preemptive right.

 Right of first Refusal (ROFR)- 

o   This is negotiating or bargaining power 
o   Third party investors don’t quote the money, since they know the transaction won’t take place, therefore,
they quote a lesser price.
o   A and B are existing members, A will first go to C to dissolve equities and will ask C to quote a price,
after that A will go to B, who can counter C’s amount. 

 Drag Along Rights- 

o   The majority shareholders tell the minority shareholders, to sell their shares collectively to the third party,
with the same rights and same money, this is majorly for the benefit of the majority shareholders. 
 In case of a merger, they would want to sell each and every share to the buyer to get the money and so
that the minority doesn’t block the sale. 
5. Bristol Myers squibs corp case
79 billion 
Bristol Myers- 69%
Celgene corp.- 31% 
Even if every majority and minority doesn’t want to, the minority is dragged. 

 Tag along rights- 

o   Given to the minority shareholder 
o   They don’t want majority shareholders to get all the benefits 
o   They therefore, wish to sell their shares along with the majority shareholders. 
o   Further, this needs to be mentioned in the contract of the minority shareholders. 

15.7.19
III. ADVANTAGES OF INCORPORATION

1. Independent + Legal existence

- (any personal misfortune would not be faced by the members)
- Have to first proceed against the company

7. Ltd liability
- The person will only be liable according to shares or guarantees and not any amount
 8. Perpetual Succession
- Company will continue to exist no matter what unless you apply for a resolution u/s. 302

9. Transferability of shares
- All shares etc (any life instrument) are transferable (s44)
- It is moveable property (shares are goods)
- Mvmt restr in pvt co but not in public co.
- There is a lock-in clause in pvt and public cos that will say that certain promoters cannot transfer
their shares until the expiry of 5 years (when you are becoming an initial member, have to remain
one for a few years)
(in a public co, 25% shares has to be with the public)

10. Infinite membership

- Infinite in case of public companies, while it cannot be 200 or more (minus present and past
employees and qualified institutional buyer [accredited investors]) in case of private members.

11. Mobilisation of Huge Resources:

Public companies have access to infinite people and hence access to huge funds. Even private companies
can gather huge resources through QIBs.

12. Separate Property

13. Ease in Control and Management

- Directors have the power of management. By virtue of holding shares, shareholders have control but
they don’t have to manage the day to day affairs.
16.7.19
IV. DISADVANTAGES OF INCORPORATION

1. Formality and Expenses

- Lot of legal and administrative formalities
- Lot of time and money in complying with all the requirements

14. Loss of Privacy

- Have to inform SEBI and other Regulatory authorities (IRDA, Competition Commission of India,
etc.) for any small restructuring (2013 Act)
- Ask the authorities if they have any objection to the restructuring and to make a representation if yes.
- Disclosure needs to be made to the shareholders, who can question the same
- Sometimes info gets leaked by the media (present when announcing restructuring, etc. or even
otherwise, sometimes they are invited by the company, itself).
- This is not the case with partnership firms since the matters stay between the partners. Media is only
invited when they want some information to go out.

15. Divorce of Control from Ownership

- co is managed by the people competent enough to handle it
- The amt of shares owned by a person will only determine the stake in the co
- Sometimes the person owning the shares and exercising control may be the same but it is not
necessary
- Here ‘ownership’ is not in the literal legal sense (shareowners only own shares in the co, they are not
owners of the company itself)

16. Detailed Winding up Procedure

- Member, contributory, creditors and directors are the four type of people in a co
 - For voluntary winding up, the company is solvent but the purpose for which the co was formed is
over and so now want to wind up the company.
- But this isn’t part of Company Law anymore, it is governed by the IBC.
- Winding up procedure: the steps taken to liquidate and dissolute. First thing is filing petition for
winding up.
o Once you have started winding up procedure, then comes liquidation where you put the co in
liquidation (start paying back your creditors)
o After all the formalities complied with, then apply to NCLT for dissolution.
o If you follow winding up and then liquidation but don’t apply for dissolution then the
company will continue
o NCLT will issue an order and from that order, the co will cease to exist.
- Insolvency is when your assets are less than your liabilities. Bankruptcy is (?).
- By the IBC, for any insolvent entity, a resolution plan is come up with. How the co is brought into
its normal functioning so that the co isn’t forced into liquidation. Imp that the co should exist and
keep on doing healthy business. IBC prescribes 270 days for a resolution plan to be given to the
NCLT
o If cant do this within 270 days and continue to be a growing concern, timely liquidation is
imp
o The creditors to get the maximum out of their assets
o Finally apply to NCLT as the adjudicating authority
o Then discharge or dissolution order

17. Control by the Few

- Not everyone in the company want to be involved in the daily functioning of the company
- An aspect of divorce of control from ownership

18. Greater Public Accountability

- Have to be transparent, greater disclosure involved
- Everything has to be in the public domain
- Greater public interest is involved

19. Possibility of Fraud

- Not in a posn to understand how the co functions and even if you do get involved, the involvement
is ltd.
- The people who are actually managing are different from the shareowners and so the possibility of
fraud increases.
17.7.19
V. WHETHER COMPANY IS A CITIZEN & ENTITLED TO FUNDAMENTAL RIGHTS
 What is citizenship, domicile and nationality?
- Nationality: imp when you talk about in the intl law context. It is your legal relationship as an
individual with your State (country) pertinent in the intl law context. Becomes imp to determine
your rights. Will give recognition in the global context and all rights given to the national of a
particular state will be given to you
- Citizens are given particular rights like FR, which are meant specifically for the citizens (not aliens).
Civil and political rights of the State. Citizenship Act + Constitution elaborate on these rights of the
citizens.
- Domicile attributes to your permanent home. Domicile is within the State.

 2(f) of Citizenship Act- does not include association of persons etc ‘whether incorporated or not’
 In the Const., in part III in some places it is mentioned ‘person’ and in some places ‘citizens’. Intention
was to draw a distinction and grant different rights to them.
 1. STC Ltd. v. CTO
6. Telco v. Bihar
7. Bennett Coleman Co. v. UOI
8. Chiranjilal Chaudhari v. UOI
All 4 cases state
 Companies are not citizens because neither the Const not the Cit. Act intend to give citizenship rights
to companies
 The co. will be granted all those FRs where the word ‘person’ has been used
 Can a co claim rights under the ambit of being an aggregate of citizen – even if there is an aggregate
of citizens, the Co. shall not become an Indian citizen for the purpose of being entitled to the FR.
 An Indian citizen w FR who forms a co doesn’t lose his FRs in his personal capacity (co is a separate
entity). In the capacity of being a shareholder, you only get the rights, which the company may get
 Module 2 – Corporate Personality

I. DIFFERENCE B/W CORPORATION AGGREGATE AND CORPORATION SOLE

- Eg: University is corporation aggregate and president is corporation sole
- Corporation sole is nothing but a human sitting and working in the capacity of that post.
- Corporation aggregate is an association of persons and no one individual is responsible for forming
this. It is an aggregation of individuals who have come together for a particular purpose. Will have
perpetual succession even if no individual member exists.
1. Govind Menon v. UOI
(difference b/w the two has been explained well)
VI. COMPANY, BODY CORPORATE AND CORPORATION
Section 2(11)
Body Corporate:
 “Company incorporated outside India” like LIC, SBI, etc.
 “Law relating to cooperative societies” Society Registration Act and Cooperative Society Act
(cooperative societies cannot be body corporates)
 “Not being a company as defined in this Act” body corporate generally includes companies.

 Body Corporate is a wider term. It includes companies given the status of body corporate by a
notification in the Official Gazette, foreign companies, public financial institutions and nationalised
banks- defined under Banking Companies (Acquisition and Transfer of Undertakings) Act
 Body corporate can be incorporated under any Act, not just Companies Act.
 Body corporate has more autonomy and flexibility than companies.
 Role of Central Government in relation to Body Corporate:
1. A company (registered under Company Law) can be given the status of a body corporate by the
Central Government by a notification in this behalf
2. A body (never registered as a company) can be made a body corporate by virtue of a notification
in the Official Gazette
3. A notification by the Central Government specifying that a particular body shall not be
considered as a body corporate.
VII. LIFTING OR PIERCING OF CORPORATE VEIL
 There is also a concept known as “Reverse Piercing of Corporate Veil”. However, this is not
recognised in India.
 If a competent court feels it justified, it can lift the corporate veil. There is no straight jacket formula.
 Company does not have a mind and will of its own, it is a juristic person and therefore need natural
persons to run it. At the same time a company is a separate person as has been held in a plethora of
cases including Solomon vs. Solomon and Re Kandoli Tea Co. case. These are 2 striking features
 It is not a matter of rule to pierce the corporate veil to know who did a particular act. Only under
certain special circumstances and on the basis of certain grounds, corporate veil can be lifted.
 Earlier Approach of Courts: did not recognize the doctrine of lifting of corporate veil and
emphasised the separate legal status of companies.
1. Cotton Corporation of India Ltd vs. GC
 Lifting of corporate veil cannot be a permissible rule until and unless the statute provides for
it.
9. LIC v. Escorts
10. State of Uttar Pradesh v. Renusapar
[till here for CA 1]
 VIII. BUSINESS ORGANISATION

1. Introduction
 The term business organization describes how businesses are structured and how their structure helps
them meet their goals.
 In genere, businesses are designed to focus on either generating profit or improving society.
 No matter how a BO is organized, it takes on certain risks as it operates. Credit and debt becomes an
inevitable part of the company.
 One way ti minimise risk id for business to use assets and investments wisely. More the efficient use
of business, more will be the monetary benefit.
 BO affects how a business is operated under law.

20. History
 Industrial Revolution: labour replaced with machinery
 1776: Scottish economist Adam Smith published An Inquiry into the Nature and Causes of the
Wealth of the Nations. which highlighted division of labour in production. Manufacturers understood
that they increased a business’ efficiency and productivity by assigning workers simple, machine-
based tasks.
 Charles Babbage also studied division of labour and Scientific Management concept.
 Principles of Scientific Management:
 Given by Frederick Taylor. He gave 5 principles:
1. Shifting Responsibility within organization from worker to manager
2. Using scientific methods to gain max efficiency in the prodn of goods
3. Choosing the best and most qualified person to perform each job
4. Workers must be trained efficiently
5. Worker performance must be monitored so that procedures could be followed and the desired
financial results achieved
 Human Relations Theory
 Emerged in the aftermath of WWII.
 Elton Mayo- Hawthorne Experiment
 He found that there was great deal of discontent among 30,000 workers in the
Hawthorne plants in Chicago in the early 20s. he therefore insisted on motivating the
workers and boosting their morale. Value must be given to their sentiments.

21. Recent Trend

 Customer service has grown to be one of the key ways in which a business can differentiate itself
from its competitors.
 It is the term for building a relationship with customers and making this relationship a high priority
for the business.
 Businesses conduct market research to find out about the needs and wants of the customers.
 Once customer priorities are determined, these priorities are integrated into the company mission,
communicated to the managers and employees and reinforced into the company goals.

The term business organisation describes how businesses are structures and how their structure helps them
meet their goals. In general, businesses are designed to focus on either generating profit or improving
society. When a business focuses on generating profits, it is known as a for-profit organisation.

No matter how a business is organised, it takes on certain risks as it operates. One way to minimise risk is
for a business to use its assets and investments wisely, whether these are equipment, knowledge, property or
relationships. The more efficiently a business uses its assets, the greater the chance that it will make a
monetary profit.
 22. Frederick Taylor – five essential principles.
 Shifting of responsibility within a business organisation from the worker to the manager.
 Using scientific methods to gain maximum efficiency in the prod of goods.
 Choose the best and most qualified person to perform each job.
 Workers must be trained efficiently.
 Workers’ performance must be monitored so that procedures could be followed and the desired financial
results achieved.

23. Elton Mayo’s Human Relations Theory.

He posited that the workers’ mindset changed and they started working better if appeal was made to their
sentiment.

Customer Service has grown to be one of the key ways in which a business can differentiate itself from its
competitors. It is the term for building a relationship with customers and making this relationship a high
priority for the business. In order to develop a strong customer focus, businesses often conduct market
research to find out what their customers want and need.

24. Joint Venture

A Joint Venture is a business arrangement in which two or more parties agree to pool their resources for
the purpose of accomplishing a specific task. This task can be a new project or any other business activity.
In a JV, each of the participants is responsible for profits, losses and costs associated with it. However, the
venture is its own entity. Motive is synergy. Eg: Vistara Airlines is a JV between Singapore Airlines and
TATA.

Strategic Alliance. Mutual help. Trying to achieve synergy.

25.7.19
1. New Horizons v UOI
 A lot of people had applied for a tender for telephone lines across the city, NHI appl was rejected as
it was a JV and the JV itself had no experience but the cos who formed the JV did have the
experience
 The SC said that this cannot be done. Have to see beyond the corporate veil, take into consideration
the candidature of NHI based on its associates and consider application again

25. Sole Proprietorship

[REFER TO PPT SENT]
 Module 3 – Kinds of Companies

I. PRIVATE COMPANY- SECTION 2(68)

"private company" means a company having a minimum paid-up share capital as may be prescribed, and
which by its articles
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the
purposes of this clause, be treated as a single member:
Provided further that-
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the
company while in that employment and have continued to be members after the employment
ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company
 Example: ASC (Authorised Share Capital) = Rs. 100 practically, no company issues the entire
share capital at once because they don’t want unused capital in the company, it is issues as and when
requirement arises; ISC (Issued Share Capital) = Rs. 70; SC (Subscribed) = Rs. 50 [Unsubscribed =
20]; CUC (Called-up Capital) = Rs. 35; UCC (Uncalled Capital) = 15; Paid-up Capital = 20 (35-15);
Unpaid = 15.
1. Minimum Paid Up share capital
 Minimum paid up capital: Usually contributed by promoters The requirement of minimum paid up
capital of Rs. 1 lakh has been done away with by virtue of the 2015 Amendment, for the purposes of
Ease of Doing Business. 2(68) provides for minimum paid-up share capital “as may be prescribed”.

2. Transfer of Shares
 Restriction on transfer of shares private company is a close-knitted company and doesn’t wish to
dilute its control. [ROFO and ROFR]. There may be extra restrictions imposed, however, they need
to be mentioned
1. Chiranjilal vs. Mahabir Dhelia
 Absolute restriction on transfer of shares cannot be allowed even in private companies (premptive
restrictions).
 Assets can be alienated by way of transfer subject to the ROFO and ROFR clauses.

 Shares of private companies are not treated as marketable securities as per the Securities Contract
Regulation Act
 Restrictions on transferability have to be applied uniformly within a class of shareholders.
11. Nagaraj v. Gopalakrishnan
(handout)

3. Maximum 200 members

 According to Rule 14 of Prospectus and Allotment of Securities Rules and Section 42 of Companies
Act the maximum number of members that a private company can have is 200. These 200 people are
not the present employees. For instance,
(1) employees who have subscribed according to the ESOP or have simply subscribed to the shares
of the company;
(2) past employees; and
(3) QIB- Qualified Institutional Buyers (defined in ICDR Regulations, 2018- big investors [who are
less concerned about risks) are not counted within the 200 mark. [Private companies go for private
subscription of shares. Those to whom it is not offered, would not be able to subscribe to the shares
(S.42). The QIBs have been defined in the ICDR Rules, 2018. Mutual funds, public financial
institutions, etc., (criteria that have been defined in the Rules) are included within the ambit of
Qualified Institutional Buyers.
 (4) Joint Stock Holders; [All the joint stock holders, are counted as one member]

4. Prohibits invitation to the public

 Private companies usually never issue prospectus.
 They issue a “Statement in lieu of Prospectus” wherein the regulations of issuing prospectus under
Section 26 of the Act need not be complied with.
• Section 26 would be inapplicable in case of statements in lieu of prospectus. The public companies
have to mandatorily comply with the requirements of prospectus, because of there being inherently
high thresholds of transparency in case of public company.
• This means that misstatements in the prospectus cannot per se hold the private company liable. As a
sole factor, it would not create liability in the company for fraud. Additional factors such as reliance
on this prospectus, would have to be proved.

5. A Private Company Does not have Independent Directors (s. 149):

 While nominee directors are watchdogs, and would look over how the funds given by all the sources
are being used.
 Private companies do not need to have independent directors, while it is a requirement for public
companies to have directors.

NOTE: DIPP website- Ease of doing business strategies

IX. ONE-PERSON COMPANY
 OPCs and small companies have not been given any specific classification under the Income Tax
Act, and form a part of private companies for this purpose.  
 In case of OPCs, the nominee as per the nomination clause has to sign two forms: INC.2 and INC.3.
For taking unto himself the liabilities of the company, the person has to sign the forms. The nominee
can withdraw his nomination, and the one person in the company can always withdraw the
nomination.  
 As per Company Incorporation Rules, it is clear that an OPC can only be formed by a person who is
a natural person and who is resident in India.   
 The introduction of OPCs can be seen in the J.J. Irani Report. 
 Reason for the introduction of the concept of OPCs:
1. Greater control over sole proprietors.
2. Promotion of entrepreneurship,
3. Bring the people running these OPCs within the ambit of governmental schemes.  
 OPCs do not have CSR responsibilities.  

1. Exemptions and Privileges Given to OPCs 

1. OPCs do not need to prepare cash flow statements; 
Note: Cash flow statements essentially measures the cash inflow and outflow in the company. OPCs do not
need to prepare a cash flow statement, while other financial statements are to be prepared. Cash flow
statements record investment activities, as well as operational activities.  
2. Annual returns of the company;  
3. OPCs do not need to hold an annual general meeting;  
Note: An annual general meeting is a meeting with the shareholders and directors, wherein the future of the
company is discussed. An AGM only involves the directors and shareholders. In a board meeting, it is the
board of directors. There has to be thirty days' notice given to shareholders for an AGM, and an agenda has
to be prepared. A board meeting requires seven days' notice. An OPC requires at least two board meetings
in a year, and the difference between these two meetings cannot be less than ninety days. 
Note 2: A private or public company not being an OPC, needs to have four board meetings in a year.   

Q. How can one person meet himself?  

 4. OPCs cannot be formed for non-economic purposes; [Certain institutions are not about
profits, and are about furthering their cause. OPCs cannot be formed for non-economic
objects] 
5. A minor can never be the one person in an OPC;  
Note: Transfer refers to the exchange that takes place due to contract, on the payment of consideration, or
voluntarily. Transmission however, refers to the situation wherein the exchange takes place either due to
inheritance, or because of devolution [e.g., Succession of property] 
6. If at any point of time during the relevant period, the paid up share capital of the OPC
exceeds Rs. 50 lakh, and the average annual turnover of the OPC exceeds Rs. 2 crore, then
the OPC has to mandatorily, within six months, turn into a private company.  
Note: Turnover depends on market fluctuations, and therefore paid up share capital, which is a relatively
more stable number, are conjunctively taken into account. Turnover is defined under S.2(91) of the
Companies Act.  
7. If a company is incorporated as an OPC, then it cannot voluntarily convert into a private
company  before the passing of two years from the date of incorporation [The legislative
intent of promoting entrepreneurship was coupled with the intent to ensure that these OPCs
become stable before they decide to convert into private companies] 
X. SMALL COMPANIES
 A small company does not have much share capital, and turnover.  
 Under S.2(85) of the Companies Act, the paid up share capital has to be less than 50 lakh. By
legislative amendment, this 50 lakh limit cannot be extended beyond 10 crore, and the turnover has
to be less than 2 crore in order to qualify as a small company. However, by legislative amendment,
this amount cannot be extended beyond 100 crore.  
XI. HOLDING AND SUBSIDIARY COMPANIES
 Alphabet as a subsidiary of Google, or Kolkata Knight Riders and Imagica as subsidiaries of Red
Chillies Entertainment Pvt. Ltd., are real time examples of holding-subsidiary company
relationships.   
 Holding a stake, as opposed to being a holding or subsidiary company, means that there is a certain
percentage of share capital that is owned in another company.  
 There are some thresholds which can be used to distinguish a stake from a holding-subsidiary
relationship in this respect, voting rights, share capital  and Board of Directors.  
 S.2(87) - Subsidiary company: This means a company in which:  
i. This company has control over the composition of the Board of Directors of another
company;  
The meaning of 'control' has been given under Explanation (b) of this section, and it refers to
the power to appoint or remove a majority of the Board of Directors.  
The word 'consent' or 'concurrence' has been used in this respect by several judgments,
referring to how the holding company is able to appoint or remove the members of the Board
of Directors without consent or concurrence.  
ii. If the holding company controls more than half of the total voting power of the company;  
iii. If the holding company holds a third company, and the subsidiary company is a subsidiary of
this third company, then this subsidiary company is also said to be a subsidiary of the initial
holding company.  
 
 
A                              B                              C

If T is a subsidiary of H,  and S is a subsidiary of T Then, S is a subsidiary of T 

This point has been provided for, under Explanation (a) to this particular section.  
Note: Equity shares grant voting rights, but preference shares do not guarantee voting rights. The preference
shares did not grant any real power in the functioning of the company, hence the requirement under S.2(87)
was changed from half of the total share capital, to half of the total voting power (vide 2017
amendment) [Read point (2) of abovementioned Note 2].  In this case, it was held that no subsidiary
company could do what its holding company could not do. The corporate veil was pierced here to find out
the holding-subsidiary nature of the company.  
 The proviso to S.2(87) provides that there can only be a certain level of layers as the government
may prescribe from time to time. The number of layers has been capped at two, in order to prevent
money laundering and tax evasion. The rules in this regard are the Companies (Restriction on
Number of Layers) Rules, 2017.  There is one exception to this however, and that is if the first layer
is a wholly owned subsidiary. Thus in essence, this would be layer zero. This has been done because
it would be easy to trace the layer zero transactions.  
 
NORMAL COMPANY              COMPANY WHICH HAS A WHOLLY OWNED SUBSIDIARY  
 
 
      A                                                                        A  
 
                   LAYER 1                                                                                LAYER 0 
 
 
      B                                                                      B 
 
                  LAYER 2                                                                                 LAYER 1 
 
 
      C                                                                         C 
 
  
                                                                                                                  LAYER 2 
 
                                                                                 D

XII. PUBLIC COMPANY

 Section 2(71)
 No requirement as to the minimum paid up share capital as of now.
 A subsidiary (private company) of a public company, will be treated as a public company for the
purpose of law. However, in terms of internal management it can function as a private company.
 Conversion of Private Company to Public Company Special resolution to amend the AoA for
increase in membership, directors, providing free transferability of shares, etc.
- Most of the alterations has to be filed with the Registrar of Companies Form INC 27. No approval
is sought from the Registrar.
- The only requirement for functioning like a public company is consensus in the special resolution.
- Amendments have to be made at all those place where the AoA has been filed.
 Conversion of Private Company to Public Company
- Change in membership: the company may provide exit option to the shareholders.
- Change the name of the company.
- Requirement of approval from the Tribunal.
- Once the Tribunal gives order sanctioning the conversion, the order has to be filed with the
Registrar of Companies, along with the amendments to AoA.
 1. Conversion of Private to Public Co.
1. Ram Purshottam Mittal v. Hillcrest
(handout)

26. Conversion of Public Co. to Private Co.

1. In Re. Diana Buildwell Limited
(handout)
XIII. GOVERNMENT COMPANY
 Section 2(45)
 It is a company in which the central government, state government or partly central government and
partly state government hold minimum 51% of the paid up share capital.
 Subsidiary of a government company will also be treated as a government company in the eyes of
law.
 Difference between Government Company and Statutory Company
 Any company incorporated under a special Act is a Statutory Company for the purposes of
Company Law. For e.g. LIC, RBI. These companies can be subjected to the Company Law
only to the extent that it does not contradict the Special Act.
 There no separate Act that establishes a government company. It is governed by Company
Law.

1. Legal Status of Government Company:

1. Heavy Mazdoor Case
 a govt. company as a juristic person is different from the members constituting it. Despite the fact
that the government has minimum 51% stake in the company, it is not equal to government or a
government
12. Andhra Pradesh State Transport Case
 Company wholly owned by the government: even this company will be treated a s a separate entity.
It will not be equivalent to government in spite of deep and pervasive control, instrumentality aspect,
etc.

DUOMATIC PRINCIPLE IN INDIA [Presentation]

 Essentials
1. Informal agreement = Formal Decision
2. Unanimous Decision
3. Board of Members
4. Knowledge of the matter
 Man of Kyle Co.- no longer existed but registered member. They failed to update the register.
Dissolved company still had 25% shares. Directors are agents of the company in the transactions that
they carry out, however, they are not agents of the shareholders. Contractual liability: fair and
reasonable diligence in carrying out activities
R.K. Dalmia & Ors. vs. Delhi Administration
Pentos vs. Martyr

2.8.19
 If the govt company does something wrong, have to find out the culprit, but in company law do not
do it directly. Have to do it through piercing the corporate veil.
 If the govt is using a company to do something wrong (the govt co is a mere sham or cloak to do
something indirectly which the govt cannot do directly), pierce the corporate veil and find out the
actual person behind this
 13. Ajay Hasia
(handout)
14. Mysore Mills
15. R.D. Shetty
(handout)

 Govt co per se is never equal to State.

 Can hold, after proving by the several factors that the co. is equal to the State
 2(41) says that FY ends on 31 March
XIV. FOREIGN COMPANY
 S.2(42) defines a foreign company as a company which is incorporated abroad, which has a place of
business in India.  

 While earlier this meant that a physical place of business was required in India for this definition to
apply, the 2013 Act recognized the cyber space. 'Place of business', can accordingly be said to have
been modified to 'conducting business' in India.  
 The Companies (Specification of Definition Details) Rules, 2014 defines "electronic mode" is for the
purpose of interpretation of 'foreign company'. Also, Rule 3 of the Companies (Registration Offices
and Fees) Rules, 2014 also defines "business activity" in this context. Additionally, the Companies
(Registration of Foreign Companies) Rules, 2014 also defines "electronic mode" under Rule 2(c).  
 All these definitions provided that the place of origin of the electronic model is irrelevant for this
purpose. Transactions in electronic mode may be of two types:  
a. Business to business (B2B): If transactions are carried on from a business to a business
(supplier - retailer, manufacturer - retailer, manufacturer - supplier, etc.) are transactions on a
B2B basis. For this purpose, a website like Airbnb which allows users to register their own
houses as Airbnb residencies, would qualify as a 'foreign company' having a place of business
in India, even if they have no physical presence in India.  
b. Business to consumer (B2C): If transactions are made directly to consumer, then these are
transactions on a B2C basis (Amazon making deliveries to consumers).   
 For the purpose of 'foreign companies', the FEMA Regulations talk about how all four types of
offices have to be considered as places of business in India.  

6.8.19
place of business- any foreign co having a branch office or a project office here would be coming within the
defn of a foreign company.

1. Branch Office
 A unit that carries out the same business as the main company in a particular place. It would reflect the
prime business.
(is a place of business)

27. Project Office

 Office established for a specific project.
(is a place of business)

28. Liaison Office

 3 reasons for establishing a liaison office: (usually before a foreign company has an office in India
they will open a liaison office, which will just be a communication link, may open the LO even after
setting up the place of business. As per tax this is known as a business connection.)
1. Reliability
 - Own people
2. Cost reduction
3. Easy access to info, dont have to run after someone else
 A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it
can act as a channel of communication between Head Office abroad and parties in India.
 It is not allowed to undertake any business activity in India and cannot earn any income in
India (from RBI Office). 

29. Site Office

A very small unit (a narrow term), to carry out a project at a particular site (not much relevance).
- Only a place of shelter, not doing any business unless specifically mentioned that site office would
be a place of business

30. Particulars:
S380: Foreign Companies must furnish the following to the ROC within 30 days
1. Charters, articles and memorandum of association, any other document or particulars signed for
formation of co have to be submitted to the RoC and if not in english have to translate it
2. Have to give the name and address and any other reqd info of any one person residing in India for
not less than 182 days. Have to declare if any notice etc is served on this person, declare that it is
equivalent to being served on the company.
3. Registered office of the company and the principle office’s address and details
4. Details of opening and closing of business in the places of business
5. Declaration that none of the director, etc., have not been debarred in India for the management of any
co under any law
6. Approval needs to be submitted to the RoC which states that you are permitted to carry out business
in this area (some activities need permission from the RBI, etc.). Have to inform about the alteration
or opening and closing of businesses (closed one site and opened another)

1. Display name and country and incorporation. The country has to be in square brackets. [s.382].
2. If the members in FC have a ltd liability on every letter head, prospectus and adv issued, will
mention that the liability of the co is ltd. FC has to be assured of the fact that on every letter head,
etc., have to mention that liability of the members is ltd.
- Why is mentioning this imp? Beyond the members’ debts any other liability, it is the company’s.
Seen as a problem by people from outside as they will have to pay off their own liabilities
3. Balance sheet and profit loss account to be submitted to RoC but CG may exempt in certain cases,
but this is not a very practical situation where they will do this. [s.381]
4. If there is an FC incorporated in any co and not less than 50% of paid up share capital is held by
Indian citizens or body corporates registered in India, in that case have to comply with all provs of
companies act and rules and regs as if it is an Indian and not a FC (because it will indirectly affect
the Indian mkt
). [s.379].
XV. ASSOCIATE COMPANIES AND ASSOCIATIONS NOT FOR PROFIT

1. Associate Companies
 On the basis of holding, there is Associate Companies, in addition to holding and subsidiary
companies.  
 Section 2(6) of the Companies Act defines such a company. A significant amendment to associate
companies took place in 2017.  
 'Y' company will be an associate company of 'X' company, if X Co. exercises more than 20% voting
power in Y, or controls business decisions under an agreement in Y Co. These two factors are known
as the significant influence factors.  
 Earlier, it was 20% of the share capital, in order to make the distinction between equity and
preference shares. Therefore, the change from the share capital to voting power was made to this
clause, at the same time and with the same rationale as the amendment to Section 2(86).  
 Herein, a question arises as to what would qualify as business decisions for the purposes of
determining an associate company relationship.  

31. Associations not for Profit

 Section 8 of the Companies Act, 2013 deals with associations not for profit. In the erstwhile
Act, Section 25 used to deal with these kinds of associations.  
 However, there is no difference in the applicability of these two provisions.  
 e.g., There is an association of persons (natural or juristic) who wants to procure a license under the
Companies Act. This kind of association does not need to incorporate itself, and it is already in
existence. However, such an association is not a company.  
 Under Section 8, these are the above associations who have procured a license to work as limited
liability companies [LLCs]. To apply for a license, you would:  
- You would have to show to the government that you are engaging in the promotion of art, culture,
etc., with no intention of profit.  
- The Central Government would have to be satisfied that no profits would be given to the members
in the form of dividends, and;  
- Any windfall gains or profits would be used in furthering the interests of the company, by
reinvesting.  

 The reasons for getting a license could be:  

- Tax exemptions;  

1. Under Rules 19 to 22 of the Companies (Incorporation) Rules, requires such a company to fill out
certain forms:  
a. Application Form - INC.12 
b. Memorandum of Association – INC.13 
c. Declaration by an Advocate, Company Secretary, Cost Accountant – INC.14 
2. The association not for profit would have to give an estimate as to what the income and expenditure
for the association would be, at least for the next three years.  
3. The association would also have to submit a board report, and audit reports for two years.  
4. A statement of assets and a resolution of the board must be submitted along with the application to
get a license.  
5. The report that a license has been applied for under S.8, has to be given in an English newspaper, as
also in one newspaper of a vernacular language. This is done to ensure the symmetry of information,
and to ensure that if they have any objections or grievances, it can be adequately raised. If within 30
days of this notice, if any objections are received, they would be entertained in a like manner.  
6. If within 30 days no such objection is filed, this association gets a license. If after getting the license,
the association engages in any activity going against the spirit of S.8, then the association could have
its license revoked, possibly by lifting of its corporate veil.  

32. Why would an association want a S.8 license?  

The exemptions that are given to such companies, once they get a license, are:  
a. Even though it would work as an LLC once licensed, it does not need to write 'Ltd.';  
b. Government will take you into consideration for providing subsidized land;  
c. More credible recognition in the eyes of law, as a legitimate association;  

33. Revocation of license: The difference between Sections 8(7) and 8(8) 
 A scheme of arrangement entails reorganization of shares, assets and liabilities. This arrangement
may be taken in the form of consolidation and division of shares. While consolidation implies a
merger, division implied a demerger.  
  The govt could direct that the company be amalgamated with another company having similar
objects and interests after revocation of license
 Under the Companies Act, a merger is of two types:  
a. If two companies A and B come together to form a company 'C';  
b. A and B merged to continue to run as either company 'A' or company 'B'. This is known as
a merger by absorption. This is used where one company is more well-known in the market;  
 The essential difference between Ss. 8(7) and 8(8) is that S.8(7) talks about the first type of merger,
and S.8(8) talks about the second type of merger.    

34. Benefits of getting such a license

 Privileges and concessions
 Land and immovable property can be owned by the entity
 Donations and bequests
 Corporatised Structure

35. What will a Section 8 Company have to do if it wishes to convert itself to another kind of Company?
Yes, they can convert. The Process is complex and extremely procedural.
Suppose I acquired a piece of land at a subsidised rate, once I convert the company, the rest of the amount
will have to be paid. Any benefits or exemptions I had taken, will have to be filled in. The differences in
amount will have to be paid.

Section 464

36. Illegal Associations

Neither acting under any special Act (such as RBI, Food Corporation of India, LIC) , not under Companies
Act or Partnership Act.
An association of persons who wish to make profits or gain (Section 8 and 25 companies will not come
within the ambit of this Section directly) having more than the number of persons prescribed [fifty persons
as of now] not registered under any Act or under a Statute taking part in a ‘business activity’
XVI. ACTIVE, INACTIVE AND DORMANT COMPANIES
 Active Company: A company engaging in business for which it was incorporated and the functions
of a company are carried out in a full-fledged manner. 
 Inactive Company: A company not been carrying on any business or operation, or has not made any
significant accounting transaction during the last two financial years, or has not filed financial
statements and annual returns during the last two financial years. Within two years, either give valid
reasons for inactivity to the Registrar or apply for dormant status. 
 Dormant Company [Section 455]: Assets are contributed by other companies. Formed and
registered under the Act: 
a. For a future project or to hold an asset or intellectual property 
b. Has no significant accounting transaction, and 
c. Has not filed financial statements or annual returns for 2 financial years consecutively. 

 Rules 3 to 8 of Companies (Miscellaneous) Rules.  

 Form MSC 1 [form for dormant status]: Application to Registrar, payment of fees, special resolution
in the general meeting.  
 The certificate that you get from Registrar, granting the status, would be in Form MSC 2. 
 One can apply to get the status of a dormant company. A company becomes dormant if: 
a. Inspection inquiry is pending 
b. Prosecution initiated or pending 
c. Statutory or govt. dues pending 
d. Dispute in the management 
e. Dispute as to ownership of assets 
f. Workmen dues are pending 
 g. Outstanding loans 
h. Not in default of deposits 
 If such a company remains dormant for more than 5 years, its name will be struck down as a dormant
company and will be made an inactive company 

 Rule 8 – Application for seeking status of an inactive company:  Form MSC 4. Certificate received
from Registrar in Form MSC 5. 
 Whenever a dormant company is sued, it has to apply for active status within 7 days of filing of the
suit. 
 If the Registrar has reasonable cause to believe that you have been active or have performed any
active function, the Registrar will strike of your name as dormant company and issue a certificate
granting active status. 

 Section 455-Dormant Companies

 Rule 3 to Rule 8 of Company the (Miscellaneous) rules, 2014.

Dormant Company

to hold assets or IP AND No

for future projects
significant A/C
(OR) (OR) transactions found
 Section 12 of the 2019 Amendment- if the company does not commence business within 2 years of
incorporation, the ROC can strike the name of the company off the Register.
 A separate Register of dormant companies is maintained by the ROC.

 If some loan is outstanding- there are two things you can do to apply for dormant status:
a. Pay off the loan OR
b. Take a concurrence certificate from the Creditor (secured or unsecured)

 A Company gets this dormant company status for a period of five years.

 Difference between dormant and inactive company:

1. Inactive company, defined in Explanation (i) to Section 455.
2. The difference is that a dormant company was always made with the objective of doing this, say
holding assets or waiting for a future project; whereas inactive company is an active company that
has not made a financial transaction in the last two years.

 Note: The five-year period is consecutive, this means that if a Company that has been inactive for
two years applies for a dormant company status, it has three more years
 Module 4 – Formation of a Company

I. PROMOTION
 When you start a company, the three steps taken first: Promotion, Registration and Commencement
 Promotion starts when you have an idea and take the first step in pursuance of that idea
 All steps (taken after the initial idea) necessary in order to float a company
 In promotion stage do all the necessary things and after this apply for Registration, for the different
licenses, etc.

 1958 Act had two kinds of certificates: Incorporation and Commencement of Business
- RoC will give certificate saying you are incorporated as a company
 2013 Act says when you have the certificate for incorporation of business, it means that you have
commenced business, you may commence business the next second, thus do not need a certificate to
commence business and so now companies only need one certificate to begin the business.
 2019 Amendment s10A
- ‘Declaration’ of commencement of business (have to declare that within 180 days all the persons
who has share capital has paid up the same). This is not the same as certificate of commencement,
which is give by the RoC
- Thus 2019 is not talking about a certificate of commencement of business, just a declaration of
commencement that everyone has paid up their share capital.
(Initially, a certificate of incorporation wasn’t enough, needed a certificate of commencement too)

 Commencement is when you actually start the business

 Promotion means and includes all the necessary and preliminary steps required in order to start a
company.
- Includes arranging for suppliers of goods, etc.
 Promotion doesn’t necessarily mean one is a promoter from the very beginning – at every stage if a
new person is getting added, they are promoters (not helping in their mere professional capacity – eg
when a promoters asks a lawyer to do some task and he does this in his professional capacity, he is
simply a lawyer doing a task, he has no conception of forming a company, he is not a promoter. A
person employed by a promoter is not a promoter himself. The same lawyer does something, not in
his professional capacity towards starting the business, becomes a promoter)

 S2(69) defines who a promoter is

- doesn’t have to be an individual person only
- if a co refers to a person as a promoter, even if the person has not taken any particular steps or not
participated at all, he will be considered a promoter in the eyes of law.
 S92 – annual returns (every detail about the co is filed to the Registrar at the close of every financial
year in the form of an updated document) – also will decipher who is a promoter by reading this
 2nd category of 2(69) also lays down if one has direct or indirect control over the affairs of the co.,
they too will be a promoter
- Control is right to apt majority of directors, remove, take major policy decns, not just by cvirtue of
voting rights held or amt of share capital held. May be pursuant to any other kind of agreement w
the co to give you the right to take these decisions. Thus not just about share holding, any other
agreement can also give this rights. Est control over the co.
 3rd category of 2(69) – de facto director or shadow director. The person remains behind the scene.
They advise the board of directors who work on his directions. If such person is identified by the co
and he has no other post, he would be referred to as promoter in order to fix the liability. The Board
of Directors accustomed to acting on the advise and direction of this person

[MID TERM SYLLABUS: TILL PROMOTER (MAY ADD IF ANYTHING ELSE IS DONE)]

19.8.19
 1. Legal Position of a Promoter
 Agency has to be in existence for an agency-principal relation to exist, but here there are no
principals as there is no company in existence at the moment so promoter is not an agent.
 No legal reference or position of promoter in the Companies Act but there is a sense of fiduciary
duty caste on them so as to not defraud the company:
1. Lagunas Nitrate v Lagunas Syndicate
16. Exlauger Sombero
17. Keller v. Baxter 
 The promoter is not a trustee, as there have to be the beneficiaries, the trustees and the owners of the
trust itself.  

37. Duties
S102: regarding notice
- Have a duty to disclose as a promoter, any kind of financial interest in a transaction in the notice
itself so that the shareholders who come for the meeting are informed of the fact that if they are to
discuss a certain transaction, can know how much interest the person has and so can make an
informed decisions

S167
- When all directors leave the company or retire, meaning no director is there in the place to act as a
director. In that case duty of the promoter to appt director for mgmt. of the company.
- Till the new directors are appt, the liability of the company will be on the promoters

S284
- Winding up is happening and official liquidator appt then any kind of cooperation needed by the
official liquidator and any kind if documents etc., then the promoter is to cooperate to provide all
these docs (there in the IBC as well)
- With the IRP: cooperate and coordinate for all the processes reqd for liquidation

 Promotion begins when you take first step and end as soon as the first directors of the company take
charge. These may be appt on an interim basis and then proper appt of director is done. What is imp
is that someone of the designation of director takes over the company. Their role as promoter for
fixing liability ends when director takes over mgmt. of the company
- S2(69) definition, we try to fix the liability. When directors aren’t there, it is the promoter who is
managing the company and know the affairs of the co. This provision tells us that the promoters are
also those who control the affairs and the mgmt. of the company and directors act on their advice.
- Thus if they can be brought within the ambit of fixing the liability, liability will be fixed at any point
of time

38. Liabilities
S26: all the matters to be included within a prospectus
- Any kind of omission attracts s31(civil) and s34 (criminal)
- S34: will have to pay damages to the person who has relied on the misstatement
- Criminal liability is imposed then the person may be imprisoned along with fine
- How to prevent criminal liability, have to prove not done w knowledge, not concerted w it, not doe
w your knowledge and if you knew it did your best to stop it, exercised all due diligence to stop it.
Otherwise, there will be liability attracting civil or criminal penalties

39. Remuneration
 There is no provision in the Act talking about remuneration to promoters. The Articles of
Association talk about the remuneration of promoters.  
  No remuneration can be paid until it is disclosed to the shareholders and investors, but it has to be
stated in the prospectus itself.  
 As a matter of practice, remuneration is paid in the capacity of:  
 Remuneration is not provided for under the Companies Act.
 It is generally mentioned in the Articles of Association. Has to be in the AoA.
 Once the company is formed there can also be a contract between the promoter and the company
ratified by the general body of shareholders.
- Can also be a private contract but will be between two persons.

Even in prospectus it must be shown that such and such people are promoters and this much will be paid out
to them after incorporation. [Disclosure of amount and way of remuneration must be clear].

Remuneration

Commission
Property Shares Lumpsum
(On shares sold)

40. For properties-

After you start promoting the company can you sell property to the company at a profit?
2 situations:
1. You have your own property about ten years old, and you want to sell it. Promotion starts afterwards,
and you sell it to the company. [Here, you are allowed to sell it at a profit].
2. After becoming a promoter, the promoter acquires a company and sells it to the Company. [already
owed a fiduciary duty, so if you make any profit, you must mandatorily disclose it, because
otherwise, it will count as secret profit].
Contract between company and promoters
 Module 5 - Incorporation of a Company

I. PRE-INCORPORATION CONTRACTS:
 Certain contracts are executed on behalf of the Company, though the Company is not party to it.
Here, one party is not in existence, so it cannot consent and therefore, the promoters enter into
contracts.
 The Company is not bound by what the promoters have entered into, as the onerous profuse
obligations that may have been stated.
 This posed a challenge, as people did not want to enter into contracts with the promoter. The
promoters also did not want

Mode 1: Company is bound when the company ratifies or novates the contract, otherwise it’s a personal
contract between the promoter and the third party. Here, the personal responsibility of the promoter shifts to
the Company.
Mode 2: Otherwise, it remains a personal contract between the promoter and the third party.
Cases: Kelner v. Baxter, and Phonogram Ltd. v. Ling.

 Specific Relief Act, 1963: Two recourse: Section 15(h) and Section 19.
Section 15(h): it gave the right to the company to enforce any contract against third parties, if the company
has adopted the contract and it is ‘warranted by the terms of incorporation’. This means that the contract
must be consistent with the Objects clause.
Section 19: third party enforcing contract against the third party.

 If the promoters entered into a contract while the person suffers a loss for relying on the words of the
contractor.
- If the company is denying this, then the third party can say that the promoters entered into a contract
with us and it is warranted by the terms of incorporation of the company and must be enforced.

Prime Contracts

PIC don't bind

companies, there must
S. 15(h)- Promoter S.19- Company
be two consenting
'warranted' by adopted
parties (Kelva v.
Barter)
XVII. CERTIFICATE OF INCORPORATION
 Order
 Fees
 Register of Companies- name of company must be entered here
Section-3 Kind of company, and no. of subscribers
Section 4, 7, 12.
Company Incorporation Rules 2013
 Choose the name of the Company, atleast six names in order of preference
 Activity type
 Check for domain names and trademarks
  Reservation of name – or RUN, it reserves your name for sixty days when you are trying to
incorporate your Company
 Get the MOA and AOA drafted- a solicitor, CA etc. required for the same. – must be signed by
subscribers in the presence of atleast one witness.
 MOA in respective form- A to E [Tables]
 Model form of AIO- Table F to J
 For formalities- Promoters execute a POA in favour of one of them or in favour of a lawyer
 List of Directors along with consent-
 By virtue of S 152 there have to be some first directors. Their particulars need to be noted.
Undertaking to pay qualification shares if stated in the AOA. Must acquire a Director Identification
Number [DIN].
- Now, as opposed to the earlier process, upto 3 people can apply for allotment of DIN in this
integrated simplified form itself.
XVIII. COMPANY INCORPORATION STEPS
 Particulars of Managers, Secretary etc. may be filed with ROC
 Affidavit by subscribers to MOA and First Directors- not convicted of any offence in connection
with promotion, formation, or management of the company.
 Address for communication till the registered office is acquired
[S 12- to have an RO within 15 days and verification in 30 days]
 Statutory Declaration and other licenses and approvals-
 For instance, licenses from RBI, SEBI, IRDA, EIAs
 File these documents stated above along with an application to the CRC [Central Registry Center,
ROC Delhi is the head of CRC].
 Simplified Performa for Integrated Process of Incorporation

INC 32- SPICe Form – Integrated Process, now there is no more INC 29

 The following documents must be filled with SPICe Form INC 32 for incorporation of the company
1. Digital signature certificate is required- Acquired DSC- apply to the certifying authorities which
issue a digital certificate for applying to the NIC- valid for one or two years generally
Digital Signature- I.T. Act
2. Each company gets a CIN [Company Identification Number] after the Certificate of Incorporation is
submitted.
(The Certificate of Incorporation is not however, proof of validity of the documents that are submitted.
Earlier, Certificate of Incorporation and Certificate of Commencement of Business was required- 1957,
Now, Companies Act, 2013 along with the Amendment of 2015 provides that only the Certificate of
Incorporation is required)

(Email)

Steps to incorporate:
1. Decide on whether registration is being done as a public company, private company, OPC;  
2. Read Sections 3, 4, 7, 12 of the Companies Act, 2013, along with the Company Incorporation Rules,
2014.  
3. Decide the type of company, obtain that many members;  
4. Get the name approved by the Registrar of Companies ["ROC"] - CRC - Form INC1. Names may be
prohibited under the Emblems Act, etc.   Equivalent to getting your username approved on
Instagram. Fresh application can be made under a different name, if the name is not approved.
Additionally, the name has to indicate the activity type, as per the website.  Reservation of
Name ["RUN"] can be done for a period of sixty days.  
5. The Memorandum of Association and Articles of Association are to be prepared - these documents
are to be signed by subscribers in the presence of at least witness (thumb impression if the person is
illiterate), and they shall likewise attest the document.  For the Memorandum of
 Association ["MoA"], usually solicitors, Chartered Accountants, etc., are hired. The forms for the
Memorandum of Association are specified in Tables A, B, C, D, E in Schedule I of the Companies
Act, 2013.  
- The Articles of Association ["AoA"] are specific to the company. Therefore, there is no strict forms.
The model forms for the Articles of Association have been given under Tables F. G, H, I and J in
Schedule I to the Companies Act, 2013.  
- For formalities - The company may hire promoters to execute, by giving a power of
attorney ["PoA"] in favour of the Advocate, solicitor, Company Secretary, Chartered Accountants,
etc.  
- List of directors along with the consent - Directors have to be mentioned, and after 2013 a Director
Identification Number ["DIN"] is a mandatory requirement. A director may direct multiple
companies, but he has a single DIN. Apart from DIN, the requirements are that it can only be a
person and not a company, and also that the legislature has left discretion to the company to
determine as to whether there are any qualification shares as stated in the AoA. There are two
schools of thought, who have divergent opinions on whether qualification shares must be a
requirement. Most companies today however, maintain the requirement of having qualification
shares.  
6. Particulars of Managers, Secretaries etc., must be filed with the ROC. 
7. Affidavits have to be given by the subscribers to the MoA and the First Directors - This would state
that they have not been convicted of any offence in relation with promotion, formation or
management of a company.  
8. Address for communication has to be given, till the registered office is acquired. Within 15 days of
incorporation, a registered office must be acquired. At the first instance, a communication address is
to be given. Within 30 days of the acquisition of a registered office, a verification of the same must
be sent to the office of the ROC. The utility bills along with the agreement, must be shown to the
ROC.  
9. Statutory declaration and licenses and approvals - Clearances from the RBI, SEBI, IRDA, any
environmental forms if required, must be taken.  
10. The documents stated above, must be filed along with the application with the CRC.  
11. Acquire a Digital Signature through a Digital Signature Certificate ["DSC"].  
 
If everything is in order, then the ROC would register the company. The certificate of incorporation would
contain a unique incorporation number, the name, members, date of incorporation of the company.  
If later found that the company had forged the documents that led to its incorporation, then it could lead to
severe penalties and imprisonment.  
 
This is the Simplified Proforma for Integrated Process of Incorporation [w.e.f. October 2, 2016] 
 
The requirements of separate form for name, director registration, etc., have been done away with. The
major clubbing of these procedures in the same form, is the change that has come in as a result of the 2013
Act.
 Module 6 – Memorandum of Association

 Section 2(5) of the Act, defines 'Articles of Association' ["AoA"]. Section 2(56) of the Act,
defines 'Memorandum of Association' ["MoA"]. However, these definitions do not provide any
substantive idea as to what these documents are.  
 Under S.2(56), the MoA is defined such: "Memorandum" means the memorandum of association of
a company as originally framed or as altered from time to time in pursuance of any previous
company law or of this Act;  
 Both these documents have to be filed with the Registrar of Companies, at the time of incorporation.
Thereby, due to the dynamics of business, certain provisions in the Articles or Memorandum would
need to be changed. These alterations also form a part of the MoA or AoA, as per the definition
provided under these sub-clauses.  
 These documents have an important relationship, which is that both these documents are part of the
constitutional documents of the company. However, the MoA would tell you the scope of the
company, the business carried out, etc. The AoA by contrast, talks about the internal structure and
corporate governance in the company.  
 The MoA would be the same for all the companies, as they have a mandated structure under the Act.
The AoA does not have as stringent a regulation, in terms of a prescribed format. The
MoA cannot  in contravention with the Companies Act, 2013.  
 The subject and object clause of the company's MoA expresses what the company can or cannot do.
If a dispute arises as to whether a company can carry out a particular type of business, this clause
would be interpreted. This clause should give the power to the company, explicitly or implicitly, to
carry out the business of the company.  
 The AoA is a further subordinate document as compared to the MoA. No internal rule in the AoA,
can be in contravention with the MoA. Accordingly, the AoA indirectly has to comply with the
provision of the Companies Act. Therefore, the Companies Act supersedes both, the MoA and
AoA.  
I. TYPES OF CLAUSES IN THE MOA
1. Name Clause: The company cannot have any name that is prohibited under S.3 of the Emblems Act.
It cannot have a name which is close to any existing company's name, or the name of any other
company directly. It cannot have any name which indicates governmental patronage. The problem
comes when the name of the company is similar to the name of an already existing company. The
name clause should also contain the adequate suffix in the form of 'Ltd.', 'Pvt. Ltd.', [OPC], as the
case may be.  
2. Registered Office Clause: The name of the office is not required in full detail at first instance, and
the name of the city or State would suffice, if the registered office has not been decided at that
instance.  
3. Capital Clause: This would mention the share capital of the company, and the equity/preference
share division. Only authorized capital may be mentioned. It does not have to, in the capital clause,
mention the issued capital.  
4. Liability Clause: This mentions the members and their liabilities, the share capital nature of the
company, etc.  
5. Association Clause/Subscription Clause: Here, the subscription clause refers to the subscription to
the MoA, and not to the subscription of share capital. There is a standard clause in italics, which is to
be signed. The initial members have to sign this clause.  
6. Nomination Clause: This refers to nomination by the one person in an OPC, in the event of his death
or incapacitation.  
XIX. NAME CLAUSE 
 The Fifth Amendment to the Companies (Incorporation) Rules, clarifies the point pertaining to use of
the same name. This refers to what the factors have to be, when granting the new company to use a
similar name. For instance:  
a. The use of a plural form would not distinguish the companies.  E.g., Green Technologies
Ltd., would be considered similar to Greens Technology Ltd.  
 b. The way you would write the company name would also make the companies similar.  E.g.,
ABC Ltd., written as A.B.C. Ltd., or A B C Ltd., would not be allowed.  
c. Addition of symbols would also not be allowed.  E.g., Teamworks Ltd., cannot become
Team@works Ltd.  
d. If the name is 'Bee Kay Ltd.', then even 'B.K. Ltd.', 'Bee K Ltd.', and other such names would
not be permitted.  
e. Adding a suffix would still not make a difference. E.g., Ultrasonic Ltd., changed to
Ultrasonic Inc. Ltd., would still be disallowed.  
f. Adding a whole new word, would be different. E.g., SM Computers, would not be similar to
SMS Computers.  
g. Translations would not make different companies. E.g., Shoe Inc., and Joota Inc., would not
be different for this purpose.  
h. Geographical names, if in reference to different contexts, would be allowed. E.g., Manipal
Housing, and Manipal Technologies, can both coexist.  
 Under Section 12 of the Companies Act, the Company is supposed to indicate its name outside its
offices, and on all documents, negotiable instruments, etc. 
 Under the Act, the company can change its name. Alterations are allowed in different clauses of the
MoA, and the process for altering the same is very stringent.  
 Section 13 of the Act talks about how the name clause can be altered.  
a. The company by itself, decides to change the name;  
For this, a special resolution with 75% majority would have to be passed. Then an application
to the Regional Director would be filed, it would then be approved and filed with the ROC. A
fresh certificate of incorporation would then be issued, with the new name of the company.
From the date this certificate is received, then the name of the company changes.  
b. The central government decides to change the name of the company;  
By Statutory Order, the ROC and the Regional Director ["RD"] have been entrusted on part
of the Central Government ["the CenGov"], for this purpose. If because of inadvertence or
otherwise, a name prohibited due to any reason of law or protection of IPR, a direction can be
issued to change the name of the company within three months. If the CenGov later finds out
such, such an order will be passed. Within three years of the company being formed, if a
company alleges a trademark offence, directions would be issued to change the name within
six months from the date of notice.  
1. CGMP Pharma Plan Co v. Regional Director 
There was a company, NME Pharma Plan, which existed for a long time prior to CGMP Pharma Plan,
because they had used the term 'pharma plan' because it is too similar. The RD and the HC found that the
differentiability is not that high and people could be deceived by the same, and accordingly CGMP had to
change its name.  
18. Sholay Co Ltd v. RD 
There was a use of the term 'Sholay' by two companies. The old company wanted the new company to
change its name, given how it could be associated with the old Sholay. Here, the RD issued an order without
giving an opportunity to be heard.  
19. Pino Bisazza Glass Pvt Ltd v. Bisazza India Ltd (2002) 
This case is relevant in how it states that a reasoned order for the change of name is necessary, given how
civil penalties may be issues. Non-speaking orders cannot be there.  
20. 7th Day Adventist Church Society v. 7th Day Adventist Church Company 
In this case, the society was unincorporated. A few members of the society, which was formed prior to the
company, formed the defendant company and engaged in promotion of vegetarianism. The society had a
problem with this, and argued that an association would be drawn between the company and the society. The
RD agreed, and the company was not allowed to use the name. Upon appeal, the HC held that there is a  test
of undesirability  that has to be looked into, while looking into the similarity of names. This test was:  
c. It has been reserved prior;  
 d. It contravenes an enactment;  
e. It is too identical to a company's name; [Deception and confusion] 
f. In the opinion of the ROC, it is offensive;  
These are the points that have to be taken into consideration, while considering applications for similar
names. The HC allowed the company to carry out the business.  
21. Atlas Cycles Haryana Ltd v. Atlas Production Ltd  
Atlas Cycles raised a case after eight years of Atlas Production being incorporated. Atlas Cycles raised a
case after eight years of Atlas Production being incorporated. The Court herein stated that Atlas Products
Ltd could not use the name, in spite of the doctrine of acquiescence possibly being applicable. However,
since Atlas was able to prove that Atlas cycles was a huge brand and could prove that their brand was
acknowledged widely in India, Atlas Production Ltd.  
22. Kilburn Electricals Ltd v. Regional Director 
An authorization letter was given by the plaintiff, which was a Calcutta-based company, to a Madras-based
company to use the name 'Kilburn'. This company floated two more companies, A and B, which used the
name 'Kilburn'. Here, the plaintiff's contention was upheld, wherein he objected to the use of Kilburn by A
and B, since no express authorization was given in this regard.  
23. Goenka Institute of Education and Research v. Anjani Kumar Goenka 
This pertains to Section 12 of the Trademarks Act. This Section states that the Registrar can use the same
trademark if there is honest and concurrent grounds for doing so. This is the 'honest and concurrent use' test.
These two institutes were in different locations, and the plaintiffs contended that there was a trademark
violation. The court had three issues:  
a. Whether there was any 'honest and concurrent use' by the defendant? They had been in
business for eight years, and only then was the plaintiff objecting to the same.  
b. Did the use of the word 'Goenka' by the defendant, dilute the distinctiveness of the Goenka
brand as had already been used by the plaintiff?  The court held that there was no dilution of
distinctiveness. However, there had to be maintained a certain degree of distinctiveness.
Here, both education institutes had to mention more particulars in order to allow students or
other stakeholders to distinguish the two institutes.  
c. Application of the Publici juris element? A surname like Goenka is in publici juris. On the
ground of publici juris, there is no right to gain trademarks on a name.  
XX. THE REGISTERED OFFICE CLAUSE 
 Books of accounts, notice, etc., have to be sent to the registered office.  
 Can a company change its registered office? 
 The registered office can be changed in three ways:  
a. Changing the premise within the same city;  
This merely requires a Board resolution. This needs notification in the normal newspaper, and the ROC has
to be informed within thirty days of changing the registered office.  
b. Change to another city in the same state;  
There are usually two ROCs in one state, and the superseding officer is the RD. For this, a special
Resolution has to be passed and after this, the RD's approval has to be sought as per Form INC-23. The
special approval has to be filed with the ROC who will approve the same within 30 days. If any civil or
criminal proceedings have been instituted against the company, then until the proceedings have been
completed, the company cannot change its name.  
c. Change to another state; 

Missing: 2.9.19
XXI. THE OBJECT CLAUSE 
Note: Difference between Retail Banking, Corporate Banking and Investment Banking 
1. Retail Banking: Banking dealing with direct consumers. The normal functioning of banks
that is seen usually is retail banking;  
 2. Corporate Banking: When specifically, banks are dealing with corporate clients and helping
them in furtherance of their business.  
3. Investment Banking: In investment banking, the banks provide financial advice to
governments, corporate houses, etc., with respect to certain objects undertaken. Investment
banks usually act as underwriters,  
5.9.19

1. Doctrine of Ultra Vires

A company cannot go beyond the objects listed in its object clause, and upon doing so, this doctrine would
be attracted and the actions would be void ab initio.  These days, wide object clauses are drafted. There is a
wide problem that there is a lot of object clause alteration, and how far a company will come towards
going ultra vires  to their objects clause.  

 If the directors have done something ultra vires their power, the co can:
1. ratify the act and even if the director has gone beyond his power, the co can choose to continue
with the Act. For an act ultra vires the director, the CA doesn’t say how many votes are reqd to
ratify it, it is a matter of internal management of the company
- the co might restrict the sphere of activity. Then the votes of the shareholders may be required,
based on majority

Most famous case for doctrine of ultra vires:

Ashbury Railways v Riche
Here, the company's name was 'Mechanical Engineers and General Contractors'. Their object was "to make
and sell on land or hire, railway carriages". This company engaged into a contract with Riche to finance
railway carriages in Belgium. Financing was not in the object clause. At some point, the plaintiff repudiated
the contract and they were sued by Riche. The plaintiff stated that it was not in their object clause, and they
were not compelled to do that. The Court stated that it was not in the object of the company to do so. The
Court read general contractors in the context of mechanical engineers, and not to mean any kind of general
contracting. Based on this, the contract was validly repudiated and accordingly, no damages were to be
paid.  
 Mechanical Engineers and General Contract Clause
 Object clause : (?)
 Ashbury entered into a contract beyond their object clause. Financing the construction of a railway in
Belgium
 Later, the co realised they couldn’t go ahead with this because it was not in their contract clause
 Riche sued because breach of contract
 Ashbury says no breach as they couldn’t enter into the contract due to being beyond the object clause
 If you give general contractor wide interpretation, it would come within object clause
 Ct held that if the engineers and general contractor are not read in isolation then the interpretation
would be too wide and a general contract would include anything and everything

Doctrine of ultra vires is almost fading away in modern jurisprudence. The evolution of legislation of co in
UK and USA, many problems faced in drafting the object clause. Problem occurs when the object clause is
very wide and problem also if it is too restricted.
These days, cos are CCPing their object clauses
24. Lakshmanswami Mudaliar v. LIC
 July 1, 1956 – LIC Act enacted (acquisition of business of the insurance units, for going ahead with
anything, require LIC’s approval)
 In an economy x no of independent businesses are involved in insurance
 When the LIC Act was passed, the x units of insurance can only do controlled business activities and
beyond that approval of LIC would be required
  In this case, the cos object clause had anything ‘charitable, benevolent or..’. Donated Rs 2 lakh to
promote business and technical education. If interpreted strictly, what charity done as they are into
business and only giving out business education, which only very few people can understand and
take advantage of and they would reap the benefits of educating the people as they could employ
them. But the co said that the fund was for the education of general public, no control over who
would come and obtain the education
 LIC said that pursuant July 1, the donation made should have been made as the business is now
LIC’s and the controlled business didn’t include the donation
 Held in favour of LIC, shouldn’t have given the donation.
 If no business, then no the question of interpretation of object clause

 Many things cannot be implied

 If wanting to enter into similar business as your own. When you want to gift, donate, none of this can
be an implied objective in the object clause, has to be mentioned specifically in the object clause

 If co acquires property and acquisition of property not within the object clause (will not happen now
unless really badly drafted object clause). Dispute raised that how could they acquire property as not
within object clause. Can co protect its title, it not being within the object clause?
- Acquisition of property is an ultra vires act but the money of the investors (bona fide investors and
shareholders) and the money belongs to them, so title protection would be allowed.
9.9.19

41. Doctrine of Constructive Notice

This is not actual notice. By virtue of S.399, the documents such as the AoA and MoA are public, and
anyone can access the same upon payment of a nominal fee. Since it is in public domain, everyone is
presumed to have read them. This doctrine casts a burden on the outsiders to know the actions of the
company, and to know whether the company can engage in the activity. It is an extension of ignorantia juris
non excusat.   

S3
S17 + Rule 35 Co Inc Rules (MoA, AoA, every agreement/reso)
 All docs of a co are in the MoA, AoA, etc
 If any member asks a co for MoA, AoA or any resolution entered into, if the same isn’t explicitly
visible then they can apply and within 7 days, has to deliver it to that person. If he doesn’t, the
officer in charge gets a penalty. Certain docs like MoA are already lying in the public domain.
 Co not delivering any actual notice, constructive notice that so and so info is there, so this doctrine
casts a responsibility on a third person

42. Doctrine of Indoor Management

To save time and to protect third parties, this doctrine suggests that if a person is transacting with another
member of a company, then it is assumed that this person has the authority to conclude that transaction.  

 Embarrassing situation to ask whether a person has authority or not. To save the outsiders from any
kind of embarrassment part of internal reg of the co, the doctrine of indoor mgmt. protects them
(protects the outsider against the co.)

Doctrine of CN casts responsibility of third person and protects the co (the third person had constructive
notice, everything available in public domain why didn’t you notice.
Doctrine of IM isn’t supposed to know what are the internal decisions taken, how was the internal decision
taken, etc. Responsibility on co and protects third part

Exceptions in Doctrine of IM (cases where the third party wont be protected):

 1. Knowledge
 The amt of power of each director, each knows.
1. Howard v. Patent Ivory
A director issued debenture and he wasn’t authorised to issue that much of an amount (allowed Rs 1000, he
issued 3500). He had no power to do this and didn’t even take approval for the same. He was a director and
had knowledge of the extent of the power of a director. You know this, being a part of the internal
committee. Must insist on approvals and resolutions. Cannot depend on IM. You are a part of co, minimal or
integral part. Had an opportunity to know, personal liability of the director (if it wasn’t a director and was
some third person then the ratio would not apply).
25. Rama Corporation v. Proof Tin & General Investment Co.
 Suppose no knowledge of the co’s working. Transaction with a director but didn’t read the articles.
The director later said no to the contract. Rama Corp brought a case saying the director was acting on
behalf of the co., convinced that they acted thinking he was a director
 But they didn’t argue that they acted on reading of the articles
 The articles had stated that the director could represent the co and make the co liable
 But since they didn’t argue that they relied on the articles then they cannot rely on the doctrine of
IM.
 If proved in ct that didn’t read the articles and didn’t rely on them then IM will not protect you.

10.9.19
2. Forgery
26. Ruben v. Great Fingal Consolidated
 2 directors and 1 CS the latter forged the signature f the first to and gave share certs to outsiders and
the outsiders alleged that they should be registered as member and they aren’t supposed to be aware
of the fact as to whether the signature is correct or forged as it is an IM
 But in case of forgery, there is no question of free consent. No presence of consent of the person’s
whose signature is forged.
 If Doctrine of IM protects forgery – lot of absurdity would arise. Case of forgery is cases of strict
application and no protection by doctrine of IM.
 There was no consent of the co in making those people members

3. Negligence
 Additional responsibility of a bank to be diligent
27. Al Underwood v Bank of Liverpool
 There was a person who was a director took certain cheques in the name of the co and be transferred
to his personal as he was representing the co and was authorised to do this (not practical, the bank
should have contacted some other director to check whether he was indeed to authorised to do this)
 No IM defence available to the Bank, they should’ve been more diligent. The bank had acted
negligently and should’ve made satisfactory inquiries that the director has the authority to get all
cheques of the co into his own account.
XXII. CHANGE IN LIABILITY CLAUSE
 Anything that increases the liability of a member is by virtue of a contract and when he gives consent
that he can increase the liability. Cannot be done unilaterally by the co.
 S18: conversion of unltd liability co to ltd liability co.
- conditions and procedures
- This is a separate provision for conversion (reso passed, conveying to shareholder, board reso etc)
 Any other increase in liability: individually with members, different contracts with him, nothing else
helps you alter this liability clause
 XXIII. CAPITAL CLAUSE
Increase in authorised/nominal/registered share capital
- co usually states that it would register itself with an x amt of share capital (have to pay proportionate
fees to the share capital registered)
- By paying that fees gets the share cap reg in your name
 If at any point the co needs the amt of share capital from the public, it can get that amt infused
 Co usually do not go for issuing the entire share capital at one go
 Pursuant to as and when they need, they raise funds. Do not use the maximum to raise funds
 Can increase authorised SC by making appl to RoC. The additional fees (difference amt) will have to
be paid by the co

Consolidate/divide
 Into denominations of smaller or larger amt
 When consolidating shares it means that if there are 10 shares of Rs 10 then can consolidate it into
one share of Rs 100 (division is reverse)

Fully paid share into stock

 The main difference b/w share and stock: Stock is in terms of money (if no of shares is 10 and price
is 10, stock is Rs 100). The prefix word ‘worth’ is always used for stock. Every stock cannot be
stock, only fully paid up shares can be stock.

Subdivide shares into small amt

 A co has shares of Rs 10 each and co decides to divide the no of shares into 2 of Rs 5 each
 It’s a further process of division after the division explained above

Diminution of share capital (will be done with share capital with Reduction)

11.9.19 – Missing
 Module 7: Articles of Association

Missing (11.9.19)
I. ALTERATION TO THE AOA
Missing 11.9.19

1. Breach of Contract
 Can the AoA be altered to breach the contract?
- Breach like this may be done but the co will have to prove that the alteration is for the benefit of the
co as a whole and that nothing arbitrary or discriminatory has been decided.
- Must apply uniformly to all
- The advantage or burden will apply to anyone, not making discrimination (only then right to breach
a contract)
- Contract principle says if you do not perform your side of obligation then have to pay damages, this
will apply

43. Expulsion of Members

 Dicey because the MCA had issued circular in 2011
 If no clause in AoA about expulsion of members then can alter the AoA to expel members later,
whether justified?
- Depends on interpretation of judiciary
o Judiciary feels diff from DCA
o In a case where a member was having a rival business, the co found out and felt that the
member will go against the interest of the co and felt they must expel the member. They
amended the AoA to expel if it is in the interest of the co. The member argued how could tis
alteration be made since he wasn’t aware of the change when he signed. Rule in favour of
co. as the member was carrying out a rival business which might affect the business
- Depends on dept of co affairs
o Any alteration which leads to expulsion of a member of a co isn’t justified
o Because, it is not felt that when a person invests in co, becomes member, develops
contractual rel, no grounds exists where member will be expelled

Halsbury Laws of England vol VII has given various cases relating to AoA and has summarised it:
1. Should be bona fide alteration
2. To be for the benefit of the co as a whole.
3. Any provision or alteration should apply to everyone in a like manner
1. Gowathamin Silvent Oil Mills
 4. If alteration is disadvantageous for a few but can be proved that the co as a whole is being
benefitted then the alteration will be valid

In the first instance if a shareholder says that alteration cannot be there, it cannot be accepted (flexibility is
to be there)
- flexibility in the rule has to be provided
- Settled that cannot do any arbitrary alterations, only on justified ground. (the following case)
28. Greenhalg Arderne Cinemas

The following cases reiterate the above 4 points related to AoA

29. Pioneer Mutual Benefit Society

 Contrary to law
 30. Peveul Gold Mines Case
31. Shuttle Worth v. Cox Bros Co.
32. Georly Case

 Member has right to everything in the AoA

 Members get bound to the co (if you do not pay for the shares, co will have lien on the shares)
 Member-member relationship: members and members haven’t signed individual contract but as
everyone has signed AoA, they have this one unified document, which binds them. If mentioned in
AoA that if someone wants to sell shares of a pvt co, the other members will have to purchase these
shares

 Whether AoA binds outsiders?

- it doesn’t
- if dual capacity as employee and member. If in AoA it is written that if apt a solicitor, he will be
there for 5 years but as solicitor haven’t signed the AoA, just an employee, an outsider as far as
AoA and MoA is concerned. But removed before 5 years. Can the solicitor rely on the Articles? In
such a case, the person has not signed or relied on the Articles and so the solicitor cannot rely on it.
XXIV. PROSPECTUS
 Prospectus is issued for securities.  
 Section 2(h) of the Securities Contracts Regulation Act defines "securities". Section 2(70) of the
Companies Act, 2013 defines "prospectus".  
 Newspaper advertisements are prospectuses. However, there are charges for the column, depending
on the space required. S. 26 talks about the content of prospectuses. A normal prospectus is usually 60-
70 pages. Because a lot of expense would have to be incurred in putting forward such prospectuses via
advertisements, it was suggested that the Companies Act, remove advertisements from the ambit of
prospectuses.  
 The Department of Companies looked at larger public interest as a wider consideration as compared
to onerousness for companies.  
 
KINDS OF PROSPECTUS 
 
1. Red Herring Prospectus: It is called a DRHP, a Draft Red Herring Prospectus. The significance of
this prospectus. This is defined under Section 32 of the Act, and does not mention the price of the shares
of the company. A different process would be undertaken to determine the price of the prospectus. A
book-building process is the process to elicit demand for securities from the general public, and in order
to determine the prices of the shares that are issued. Bankers will be involved in this process.  
Say X Co wants to issue 3000 shares. The lead manager who would be assessing, would look at market
conditions, the company prospects, financial statements. On this basis, say they suggest a price band of
Rs. 20-24. They found that at Rs. 24, they only got subscriptions for 500 shares, so they didn't go with
this. At Rs. 23, they found that only 1000 shares were sold.  
However, X Co realizes that by issuing 500 shares @24 rupees, 1000 shares @23 rupees, 1000 shares
@22 rupees, and 500 shares @21 rupees, then all the shares are sold at variable prices. So rather than
selling all 3000 shares at Rs. 20 [see  Column (E)], they could take a cumulative effect of the shares sold
at the higher prices [see Columns (A-D)].  
 
Sr. No.  Shares Price of Issuance (in Rs.) 
Sold 
A  500  24 
B  1000  23 
 C  1000  22 
D  500  21 
E  3000  20 
 
After the prices are fixed, a final prospectus is issued by the company, containing the share prices along with
the number of shares being issued. The Companies Act requires that 90% shares be subscribed to, at the time
of forming the company. The process to determine the price as described above, is the book-building
process.  
 
CAN NOT STATING THE WHOLE TRUTH IN THE PROSPECTUS LEAD TO LIABILITY? 
 
Case: Rex v. Kylsant 
The company herein issued a prospectus containing all the details, and all the facts mentioned were correct.
The only thing was that seven years prior to the prospectus, they had not given out dividends at all. Investor
protection has to be protected, and this forms the basis of prospectus issuance itself. When such questions
come before the Court, a reasonable man's perspective and ordinary prudence is taken into consideration. If
there is hiding of facts which results in the true facts being rendered false by context, then this materially
causes harm to investors. Given this, the company was liable.  
 
LIABILITY FOR MISSTATEMENTS IN PROSPECTUS 
 
Sections 34 and 35 talk about civil and criminal liability for misstatements in prospectus, respectively.  
Section 36 talks about 'inducing to invest'. This could be done by impersonation, misrepresentation, etc., to
the effect that the person is induced  into investing in the shares of the company.  
Section 38 talk about people who the allotment of fictitious shares. Here, by impersonation, one investor is
trying to fool outsiders. Six to ten months of imprisonment are imposed as punishment, and three times the
fraudulent amount would have to be paid

GREEN SHOE OPTION

 Prospectus involving debentures usually provide for a green shoe option
 In the special resolution as well, this option is discussed with the shareholders
 ‘Green Shoe Co.’ is an American company, now known as Stride Night.
 It can be set at 15% maximum.
 Supposes there are 100 shares, 20 for promoters and pre-existing shareholders and 80 for investors.
[80+15= 95]
 Stabilising agent is appointed who watches the stock market everyday and floats more shares in the
market to meet the cap of 95
 [Read up on this]
DEFINITION OF PROSPECTUS
 Section 2(70): "prospectus" means any document described or issued as a prospectus and includes a red
herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice,
circular, advertisement or other document inviting offers from the public for the subscription or purchase
of any securities of a body corporate.
 It is an issue to the public. It has strict compliance.
 Newspaper advertisements are included in the definition of prospectus.
 Section 26- contents of a prospectus
 Section 42(4)- invitation to the public

Missing

Section 36- inducing to invest money

Section 38- Punishment for personation for acquisition, etc., of securities.
Missing notes (23,24,25??)

1.10.19
 s36: inducing to invest money
 s38: fictitious application
- Buy a number of shares and then with a different identity, buy more shares [doing it yourself and/or
inducing others to do it]
 Share Capital
3.2.19

 A share is a part of the share capital of a country (individual unit into which the share capital is
divided)
 Not only dividends, it accrues certain rights and corresponding liabilities (not just about investment)
 Share certificate: The person X son of Y hold A no of shares of Rs. B from the date C. Agreed to be
part of the company, acquisition of shares, free consent basically
- share is transferred, only way you can sell your share.
- Share cert is evidence that you hold these shares and later if you have to prove that prima facie you
have these many shares
- Usually shares have a serial no. The co makes an endeavour to issue a continuous series of shares

Difference b/w share and stock:

Share Stock
1. can be originally used 1. cannot be originally used
2. Shares may be fully paid up or partially paid up 2. Stock is always fully paid up (stock can only exist
if the shares are fully paid up, it is the money
conversion of shares)
3. Share can only be transferred as a whole 3. Stock can be transferred as a whole
4. 4. Stock bears no such no

[[A co cannot issue only preference and no equity shares]]

 Share capital is divided into equity and preference share. Equity: get voting rights in the co +
preference: get preference in payment at the time of dividend and also at the time of winding up
 Can a person be an equity share holder w/o voting rights
- differential voting rights: equity shares can be issued w/o voting rights. Instead of one share one
vote, can make it 10 shares, one vote
- Equity shares can thus be there w/o voting rights (s43).
- Incentive to obtain these shares: higher dividend than other equity share holders
 Are preference share holders always devoid of the right to vote:
- It is interest specific. Preference share holders vote on all resolutions that concern them.
- If they haven’t paid dividend for 2 years continuously then they may vote on certain matters when
the co is winding up or on liquidation of the co as part of the general body of shareholders; so
cannot say that they are completely devoid of the right to vote.
 If it is distributable profit, the first one to receive div is the preference share holder. But after they
have received dividend, they cannot ask for any more even if the co earns immense profits in the
year. Equity share holders can ask for dividend any no of times in a year and not just once.

 Dividend is given if there is profit,

- Profit is kept as Retained Earnings. Retaining that portion of the profit as they want to invest in core
activity or any diversified ventures.
- And then there is Distributable Profit which is the remaining amount, which is given as dividend
 Suppose no declaration of profit, can the co distribute dividend then: dividend has to be declared,
general protocol and practice that has to be followed
- whether done in board meeting reso or AGM, declaration is reqd and after this you have to give
dividend, it becomes a debt on you so cannot back out. Financial debt so insolvency will be
triggered.
I. KINDS OF PREFERENCE SHARES
1. Cumulative/Non-cumulative preference shares
- Unless expressly mentioned, all preference shares are cumulative
 - Suppose in a financial ear, not given dividend. Next year not got. Third year there is distributable
profit
- Holder of cumulative pref shares, in the third year will be entitled to get what you have not gotten in
the previous years + the current year (5% each year so in the final year 15% of the profits)
- Non cumu: very uncommon, unless the share cert specifically says then they’re by default cumu
shares

2. Redeemable Preference Shares

- After some point of time the co will take the share from you and redeem the money
- All preference shares are redeemable preference shares unless expressly mentioned that it isn’t
- 20 year period is the period within which the shares have to be redeemed.
- After the co takes back the shares the do not get dividend
- Exception: infrastructure project shares. Redeemable shares for a period of 30 years (so not
redeemable in 20 years). There is a condition that from the first year onwards, 10% of the preference
shares you have to keep redeeming

3. Participating and Non-participating preference shares

- It may be written in the Articles or Terms of issue that if there is a surplus (after payment to the
shareholders), equity shareholders are generally entitled to it. But if anyone has participating
preference share, then he will have a right to the surplus. It entitles you as a preference shareholder
to any percentage of money left as a surplus. It will be divided on a proportionate basis to the equity
and the participating preference shareholders.

5.10.19
XXV. KINDS OF SHARE CAPITAL
1. Authorised Share Capital
- The amt that they go for issuing

2. Issued Share Capital

3. Subscribed Share Capital

- actual amt subscribed to

4. Unsubscribed
- issued subtracted from subscribed

5. Called up Capital

6. Uncalled capital

7. Paid up capital
- Not all called up capital is paid up capital
XXVI. BOOK BUILDING PROCESS
 Draft red herring prospectus
 Process to ascertain at what price securities must be sold and how the bidding will take place
- Price brand cannot be arbitrary (merchant banks, etc., help you to ascertain the price of the security,
lot of factots like growth performance, dividend paid in previous years, etc., are all taken into acc. If
sector of boom then price of sec may be higher, etc.)
- Have a band (max and min)
 The ceiling price cannot be more than 20% of the floor price (cannot have arbitrary disparity b/w the
price change)

 For example 20% of Rs 24(highest price) is the lowest price

  Target of 3k shares to be sold
 At higher prices the no of shares being solf is not meeting the target so reduce the price
 22 is the cut off price. 21 is floor price and 24 is ceiling price
XXVII. ICDR REGULATIONS
 11 Sept, 2018

 Kinds of investors that subscribe to shares and securities:

1. Anchor Investors
- Qualified Institutional Buyer
- This is not an individual
- Value of appl at least 10cr (min investment)
- For anchor investors the subscription opens one day before
- If high level investors invest in the securities one day prior

2. Institutional Investor
- QIB
- Net worth >500cr as per latest audited balance sheets
- Not an individual (QIB, family trusts)
- Institutional Trading Platform: platform for start ups. They can list and try to raise money. Only
have to lock in for 6 months not 1 year like a normal IPU. Less disclosure requirements as well

3. Non-institutional investors
-
4. Retail inst investor are those investors who have invested not more than 2 lakh in the specified
security
- lot of safety net arrangements made to protect these retail institutional investors

QIB: Reg 2(a)(ff)

HNI/UHNWI: Ultra High Net Worth Individuals

- not defined anywhere
[missing some parts here]
XXVIII. ISSUE OF SHARES: PROCESS
Three methods of subscribing to the shares of a co:
1. Public Issue
- given to the public at large
a. IPO and FPO
 IPO happens when there is a co not listed yet and is a public co. The public co wants to get itself
listed. Once listed it can issue its securities to the public. IPO happens when an issuer for the first
time has gotten listed and is issuing securities [Initial Public Offering].
 FPO is once the issuer has gotten listed and then is further issuing securities [Further Public
Offering]. All rules and regs will be the same
 When the shares come in the mkt, 20% is for promoters

b. Offer for Sale

 Done in order to dilute the shares of the promoter
 in every public listed co, there has to be a min 25% public shareholding: ICDR Regulations
 Suppose 80% holding with promoters, within a year attempt to reduce it down to 75% holding to
meet the above regulation
 It becomes too technical and taxing and expensive to conduct an IPO. So they use the method of
Offer for Sale.
7.10.19
2. Rights Issue
- Pre emptive rights of existing shareholders
- If any further share has to be offered, wants more money doesn’t want to compromise w the
shareholding, any further issue will be offered to the shareholders first

3. Private Placement
- When you issue securities to more than 200 persons in a financial year it becomes a pvt placement
a. Pvt Placement (Unlisted Co)
- no drafting of prospectus and draft an offer letter
- Pvt co doing pvt placement

b. Preferential Issue (for Listed Co)

- Listed co do not need to take out money from public holding
- May decide that they don’t want securities offered in a financial year, need 4-5 people from whom
they can raise money
- Not the case that a Listed Co will always release a public issue, they do not need to issue securities
every now and then
- If a Listed Co wants to issue shares to pvt persons whom they want to contract then it is preferential
issue for a listed co
- Listed Co is a co listed on a stock exchange. Public co doesn’t become listed automatically, has to
list themselves in the stock exchange
- (otherwise only pvt cos do pvt placement)

c. QIP (for QIBs-Listed Co)

- QIBs are institutions like MFs, AIFs, Venture Capitals, Scheduled Commercial banks, etc
- Whenever listed cos are only going to make an issue to only QIBs then it is called QI Placement
- Only for bidding by QIBs
- Qualifying this placement of share by the condition that it is only open for QIBs.

[Sometimes, in the terms of issue of debenture, it might state that on default, the debenture may be
converted into an equity share.]
XXIX. PUBLIC ISSUE OF SHARES

1. Initial Public Offering

- specific securities (do not mention it as shares, debentures, etc., it is securities, ma’am will cut
marks)
- unlisted issuer
- to the public
- for subscription and includes an offer foe sale of specified securities to the public
- by existing holder of such specified securities
- in an unlisted issuer
[no need to produce it word by word]
 An IPO is a risky investment
- It is because it is a first time investment. Don’t have historical data to analyse the investment
1. Conditions [IMP]
- reg 6 in ICDR, 2018

6(1)a
- Net tangible assets of at least 3 cr rupees calculated on restated and consolidated basis
- In each of the preceding three full years of 12 months each
- Of which not more than 50% are held in monetary assets
Proviso
- If more than 50% of NTA held in monetary asset (MA)
- Issuer has utilised or made firm commitments to utilise excess MA in its business or project

Net tangible asset is tangible asset subtracted from the liability of the co [100 tangible asset and 50
liability]
 Suppose there is value Rs 20 goodwill and IPR (these are intangible assets). Subtract this too. So
now NTA is 30
NTA = A – (L +ITA)

 Restatement: in financial terms, it means an inaccuracy that has been corrected (suppose calculation
of depn was wrong in previous year and corrected this year)
 Consolidated means taking into consideration all your subsidies as well
 2017, 16 and 15 if it is issued in 2018
 The assets cannot be in liquid form. So that there can be inappropriate use of it. Cannot easily sell as
not liquid, so the chance of manipulation isn’t less.
 Do not rely on an issuer’s worth that is relying on liquid cash

Proviso:
 Do not utilise the liquid cash for any other activity or project than for which you are investing in

b)
- Avg OP of at least 15cr
- Calc on R and C basis
- During preceding 3 yrs of 12 months each
- W OP in each of these preceding 3 years

 Condition is always for 3 years

 Operating Profit? And why is it imp?
- OP: earnings before interest and taxation
- After I and T, P will reduce
- If OP is more then first criteria to show the co is profitable. It shows a clear pic as you are able to
ascertain indi performance of co just by profits

c)
- net worth of at least Rs 1 cr
- in each of preceding 3 full yrs
- calc on R and C basis

Net worth is asset minus liabilities (the details will be done in Co Law II)

d)
- Changed its name within the last 1 yr
- At least 50% of the revenue
- Calc on R and C basify is for preceding 1 full yr
- Has been earned by it from the activity indicated by its new name

 Before doing IPO has been able to earn 50% of profit taken up under its new name

The solution to all the conditions lies in 6(2)

- Issuer not satisfying cond
- Can make IPO only through book building process
 - And undertakes to allot at least 75% of net offer to QIBs and to refund the full subscr money if it
fails to do so

 If issue size is Rs 100, public will have only Rs 80 (for all types of investors). 20 is for promoters
 So the net offer to public is Rs 80. Therefore 6(2) talks of 75% of 80. Therefore 60 is to be given to
QIBs.
 If you don’t satisfy the conditions under 6(1), you are not credible enough for SEBI and so give the
risk to the QIB. Don’t target normal investors due to investor protection
6(1) 6(2)
1. Not less than 35% to retain indi investors 1. Not more than 10% to retain indi investors (RII)
2. Not less than 15% to non insti inv (NII) (everyone 2. Not more than 15% to NII
except RII and QIB)
3. Not more than 50% to QIB, 5% of which shall be 3. Not less than 75% to QIB, 5% of which shall be
allocated to MFs allocated to MFs
4. In addition to 5% allocation available in terms of 4. In addition to 5% allocation available in terms of
clause c, MFs shall be eligible for allocation under clause c, MFs shall be eligible for allocation under
balance available for QIB the balance available for QIB

Note: Benefit of calculating NTA: Return on asset (ROA)/ Return on investment

 If a bank is said to be inefficient in financial growth, one of the factors is ROA
 If 2 people are given money. One given 1000 and other 10000. Both are to get him maximum profit.
Both will buy one asset which will generate inc for you
 A gives income of 800 (so 80% of investment | B gets income of 1200 (so 12% of investment)
 So A is more efficient.
 ROA shows how efficient an investment is
 Tells us the financial decn making and efficiency of a co

9.10.19

33. Understanding The Book-Building Process 

 
 Suppose the issue size is Rs. 200 crore. How much can be given to QIBs, under Regulations
6(1) and 6(2)?  
If the allocation is done as per Regulation 6(1), then Rs. 100 crore is the maximum that can be
allocated to QIBs.  
 However, if the allocation is done as per Regulation 6(2), then a minimum of Rs. 150 crore
has to be allocated to QIBs, under Regulation 6(2).  
 Anchor investors are a kind of QIBs, to whom investment opens a day earlier. As per
Schedule XIII and Regulation 32 of ICDR, 60% of the QIB investment has to be given to anchor
investors. Accordingly in the above case, if allocation is done under Reg. 6(1), then 60 crore is to
be given to Anchor Investors. If allocation done under Reg. 6(2), then Rs. 90 crore is to be given to
anchor investors.  
 
 IPO GRADING: The issuer may obtain grading for its initial public offer from one or more
credit rating agencies registered with the Board (Regulation 39, ICDR Rules).  
Working of Credit Rating Agencies: Suppose a credit rating agency, ABC Co., is tasked with
ratings  company. Then, this company would demand certain documents from the company. Say its
overall rating is AA, meaning very stable. Say the shares rating is BB, meaning it is stable.
Debentures are BBB, meaning partially stable. All other factors have been rated as C, meaning that
it is unstable. These ratings form part of their outlook. The problem is that these credit rating
agencies rely on the documents submitted to them by the company. These companies usually state
 that they are not responsible for any reliance placed on their ratings, since these ratings have to be
supplemented with the investor's own due diligence.  
 

44. Further Public Offerings 

 
 The qualifications for FPOs are largely similar to that of IPOs.  
 
34. Entities Not Eligible To Make Fpos 
 
 This is provided under Regulation 102 of the ICDR Rules. This provides that an issuer shall
not be eligible to make an FPO if:  
 (a) If the issuer, any of the promoters, promoter group or directors, selling shareholders are
debarred from accessing the capital market by the Board;  
 (b) If any of the promoters or directors of the issuer is a promoter or director of a company
which is debarred;  
 READ THE PROVISION 
 

45. Offer for sale 

 The minimum offer size is 25 crores - can be less also if it is done to achieve compliance with
and maintain minimum public shareholding in the company of 25%;  
 OFS is an easier process as compared to IPOs. IPOs go on for ten days, but OFS ends in three
days. OFS is easier, you have an offer letter, you invite bids and within three days your bid is
allocated and the process is complete.  
 Why would promoters opt for OFS: It helps promoters dilute their shareholding in a listed
company in a transparent manner - Stock exchange based platform.  
 Benefit to investors: Company law bars issue of shares at discounts. One of the advantages of
OFS however, is that investors get shares at a discount. QIBs, HUFs, FIIs are investors in the OFS
process.  
 OFS is backed by 100% margin. This means that the entire amount of the application money
would have to be paid at the time of buying - this would directly be paid through the trading
account. In other IPOs, investors are only required to pay 25% of the application money at the time
of investing. Thus, the margin requirement is 25% for IPOs.  
 If 'T' is the dare of opening of issue - then investors receive shares directly in their D-Mat
account on a "T+2" days basis. 'T' day is generally known as the trading day. If the bidding is done
today, then the shares have to be allotted with by day after tomorrow;  
 If there is no allocation, then funds are released on a "T+1" days basis;  
 There is no restriction on the number of bids from a single buyer;  
 The bidder can modify or cancel the bid, but only during the last 30 minutes of the offer.  

10.10.19

Reg 141: Minimum subscription

(1) – at least 90% of the offer through the document
- except in case of offer for sale of specified securities
(2) – in case of non receipt, all appl monies received shall be refunded to the applicants
- but not later than 15 days from the closure of the issue
XXX. RIGHTS ISSUE
S62 of the Co Act

 This is a pre-emptive right

  If a co needs to do a further issue of shares, this first has to be done to existing shareholders (it is
their right and so is called as rights issue)
 Need to have an offer letter regarding the offer, specifying the no of shares issued
- The no of shares offered is in proportion to the existing shares held by the shareholder
- Diff b/w this and bonus shares: bonus shares is given free of cost
 Time of acceptance: not less than 15 days and not exceeding 30 days

Rights Issue Bonus Issue

1. Through issued to existing shareholders at 1. Given to existing shareholders free of cost
discount still price has to be paid
2. Right to renounce 2. No such right
3. May be partially paid 3. Always fully paid
4. Min 90% subscription – else refund the entire 4. No such requirement
money received

 Bonus issue:
2 for every 1 share
4:1
[[in bonus issue, the co pays an entire amt of share and the share is added to the name of the shareholder w/o
paying anything]]

B/S
ESC (equity 50 150
share capital) 100
RSS 50 50
30 3040
Through the money can give either bonus shares or dividend

Money may have money to divide but it still wont. [why will the co not convert the entire free reserve as
dividend although the co will get good publicity and people will want to buy their share]
- Because throughout its functioning it will not be able to maintain this free reserve
- Suppose profits are increasing every year and then one year the profit reduces and the investor gets
much less dividend. The investor has already spread that the co is doing well and could purchase lots
of goods but now when it falls drastically, will have judgment against that co and will have a
negative impression

 S63
 Bonus share is never given in lieu of divided.
 Bonus shares is adding to the share capital on which the investors can rely
 Many times the co goes for partial distribution of dividend and partial bonus shares
 Always given either from free reserves (reserves w/o any liability, can use the fund as it wants)
 Can be given from the Securities Premium Account (money paid as premium on the shares)
- this is a statutory and non-distributable reserve acc. This means that this cannot be used to pay
dividend to the shareholders unlike the free reserves
 Capital Redemption Reserve Acc: Redeeming the redeemable preference shares. This will affect the
share structure of the co. and so there is a specific account for the same so that it doesn’t affect the
capital structure of the co

 Right to renounce:

 Co will always pay the full amount of the share

 1. ICDR
2(z)(xx): Defn
- of a specified securities
- by a listed shareholders of the issuer

3: Applicability of regs
(b) a rights issue by listed

68- Chapter III iCDR- Part III: Record Date

[firs thing that needs to be done is to identify the shareholders who are eligible to get the shares, when you
identify and offer, that date is called the record date]
If a record date has been announced, cannot withdraw from that rights issue.

46. Pvt Placement

S42
- invitation to offer and actual offer both comes under ambit of pvt placement
- offering to less than 200 persons it is pvt placement (excluding QIB and employees)

 Make pvt placement offer leter (different from prospectus)

 Payment paid from the bank acc of the co
 Name appearing first will be entitled to all correspondence
 No fresh allotment until earlier one is complete
 Allotment to be done within 60 days- else refund within 15 days from 60 days else penalty of 12%
p.a. from expiry of the 60th day
 Return to be filed with ROC (issue size, people inducted ito the pvt co, who have you allotted share
and how much price)

2(z)(ff): Definition
qualified inst placement

47. Preferential Issue

2(z)-nm
- Listed co going for pvt placement
(certain exceptions given)

14.10.19
XXXI. BUY-BACK
 Co issues securities (shares) to people and after a while will purchase back their securities
 Why should cos go for it? Why should there be a scope for buy back? What will happen if buy back
is there?

 Suppose there are too many hares in the mkt and rumours spread about the co and price fluctuated to
a great extent and now say Rs 1000 shares traded at Rs 100. The co feels that due to the news the
price has fallen so should they allow the shares to remain in the mkt?
- what happens when the price is too less: suppose there was buyer who wasn’t able to buy due to high
price now will buy due to the low price. When the high price, there is news, this will have immediate
effect on the buying and selling of shares. Immediate stimulus and so if there is a sea fall then the
stock mkt is shut for 15 mins. So the rivals now will buy the shares at the extremely low price. 1) So
there is chances of hostile take over
3) the mkt is letting you security trade at a steep low price and you don’t want this. Normal
reaction of seller: will not sell for the sake of selling, belief that it would be sold off or they are
in a posn to keep it and dont need to sell it at a lower price.
So buy-back when the mkt conds have let the shares and securities come down to a very low price.
  Will show that they don’t need investors to buy at such low price, have confidence in their shares

Green-mail

The Co can buy-back from the mkt but there will be huge loss, what will the co do (they will do this in order
to prevent other people who are willing to buy the shares at any price and do a hostile take over)?
- Will try to leak news about itself which isn’t very good [eg: deadlock in mgmt., fight among board
members, prods not meeting standards]
- Now nobody wants to buy and so the price will fall and now they will buy-back

 If have money can 1) give dividend, 2)bonus shares and 3) dividend from free reserve
 If you can buy-back or give dividend: first buy-back, retain their co and then give dividend

 Financial ratios achieved by buy-backs:

1. Return on Assets = Net Income Divided by Total assets

ROA Scenario 1 – NI = INR 100 and asset INR 50 = (ROA=2)

ROA Scenario 1 after buy back- NI = INR 100 and assets INR 40 (because on buy back assets get reduced)
= [ROA= 2.5]

2. Return on Equity – Net Income divided by Avg Shareholders Equity

ROA Scenario 1 – NI= 100 and SE = 80 = [ROE= 1.25]
ROA Scenario 1 after buy back – NI = 100 and SE =60 [because on buy back SE gets reduced but ROE
increases] = [ROE=1.66]

3. Earnings Per Share = Net Income – (Preferential Dividends divided by End of Period Common
Shares Outstanding)

Case 1 – NI-Preferred Stock = INR 100 and shares outstanding are 50; then EPS=100/50=2
Case 1 (after buy back) – NI Preferred Stock = 100 and shares outstanding are 40; then EPS=100/40=2.5

s.68: Power of Co to Purchase its own Securities

(2) gives certain conditions [a. authorised by articles, b. special resolution has been passed]
proviso: i) buy back is 10% or less of the total paid up equity and free reserves [have to calc how much of
free reserves and paid up share cap is there. Suppose there is 100 each, but if buy back is 10% or less of the
total]
ii) auth by Board by means of reso [then it is fine, can go for it]

c) 25% or less of AP-UC and FR of Co

d) agg of sec and unsec debt not more than twice the paid up cap and FR
e) share for buy back is fully paid up
f)
g)
proviso: no off of bb made within 1 yr reckoned from the date of the closure of the preceding offer of buy
back, if any [min period of 1 year b/w the closure of 1 buy back and offer of the 2 nd] [logic is to avoud
recurrent buy-backs]

(6) when a co wants to buy back have to file with SEBI a decl of solvency signed by at least 2 dirs
(7) when buy back it shall extinguish and physically destroy [after the completion of buy back, within a
week of the buy back being complete overall, have to physically destroy the shares]

SEBI Regulations
Definitions
1. Buy-back period

15.10.19
- marketable: which can be sold easily
- T(trading day) + 7 : chart will be there and will decide which are the shares and securities that are the
least traded.
Odd Lot shareholders: ? [SEBI Guidelines, see what voluminous trading and those that are not doing it
approach them because they are the ones least affected, no point approaching the ones who are actively
involved in trading of shares and securities]

From the open mkt will only buy 15% as it affects the general public. The addl 5% from the existing
employees

Small Shareholder
- in the Co Act, those shareholders are considered so who are not holding shares and sec more than Rs
20k
- In SEBI Regs: do not take value into consideration [shareholder who shares etc whose mkt value on
basis of closing value…highest trading vol is not more than Rs 2 lakh
Highest volume trading principle
- See which shares have the HVT (what kind of shares) and then see that those should not be worth
more than Rs 2 lakh keeping in mind the closing value
- What happens is that you determine the record date and on that date on the basis of closing price,
particular price at which the shares and secs are locked (say Rs 2 and then multiply by 100 shares
and so it is less that 2 lakh so small shareholder).

Tender Offer:
(?)
XXXII. REDUCTION OF SHARE CAPITAL
 There is a problem when you try to reduce the share capital and have to take permission of NCLT in
certain cases when doing reduction (not doing this in buy back)
- why permission
- when shareholders come and pay the capital is means that there is no default by shareholders and that
they have faith in the co as they are paying the share capital . Therefore paid up capital shows how
dependable the co is. As a prospective shareholder and creditor will rely on the paid up share capital
before they invest. If the co subsequently reduces the capital on which they were relying, it would
lead to negative feeling among the shareholders as it was the security on which they were relying,
from which they would be paid back

Methods of Reduction:
1. The Rs 5 supposed to be paid for a share of Rs 10, the co says that no need to pay the Rs 5 and it is
considered fully paid up
2. Rs 10 share and shareholder has already paid Rs 10, give back to the shareholder the money by
which you are trying to reduce the price of the share

Why the co doesn’t ask for the entire amt of the share capital at one go:
Co doesn’t call for Rs 10 in the beginning all at once. The money will be lying with the co., wont be able to
invest it all and will be have to give Rs 10 dividend as dividend is calculated on the percentage of money
paid for the share. So if you have paid less (because the co has not called up the entire share capital), the co
will pay less amt of dividend.

When reducing share capital, no need to keep aside more for dividend and so more is kept in reserve (earlier
had to keep aside more as more proportion of profits). If you keep increasing the reserves can give
intermediate (?) dividend and bonus shares and then eventually increase dividend.
 - Thus causes shareholder maximisation
- Negative: creditors are affected by this reduction

Why should a co go for reduction:

- Capital redemption Reserve (CRR): transfer money to it (comes from the co’s earnings and not the
share capital of the co) because would need to redeem preference share in the future and so in stead
of taking from share capital take it from the reserve.
- Suppose 50 share capital and 20 to the CRR. When buying Rs 20 preference share, spending the
CRR money and not from the share capital. So the share capital is still Rs 50 but there are now two
less share are you are redeeming two preference shares.
- Thus the share capital does not match the actual amt of assets
- 2 methods to resolve this:
1. Issue two additional fully paid up bonus shares (this has a lot of formalities and have
to go through different mechanisms)
2. Reduce the Rs 50 to Rs 30 by taking permission of NCLT. Reducing share capital as
no asset to represent the share capital that you have. (problematic as NCLT generally
doesn’t allow)
- first have to sp reso passed (Have to tell shareholder why this reduction is being made and the
provisions that will be made for the existing shareholders. So have to get theor consent and only then
can the special provision be passed.)
- then appl to NCLT
- NCLT will send notice to SEBI, ROC etc.

Have to show proper accounting has been done.

Reduction w/o sanction of tribunal:

1. Any buy back u/s68
2. For feature of shares (shares forfeited by co as penalty) || Either you go and pay or surrender or the
share cancelled and fresh issue to someone else
3. Diminution of share capital

16.10.19

 Significance of reducing share capital:  

In reduction, the shareholders are not being reduced. They would have to distribute lesser dividend, and
it would accumulate the amounts in its treasury. This would allow for larger distributable reserves. It
also achieves shareholder wealth maximization, as earnings per share increases and in the future, due to
the increase in distributable reserves, it allows for increase in reserves in surplus and allows for increase
in profits.  
 What should the NCLT look into when looking at applications for reduction of shares?:
Even if there is expertise in this, it is difficult to assess whether the reduction is proper. 2013 Act solves
this problem by requiring that companies sign an undertaking to the effect that the accounting has been
done properly. If the company feels that it is in their best interest to reduce share capital, the NCLT
should approve it so that companies are enabled to carry out their own company affairs (similar to party
autonomy in arbitration).  
 
Forfeiture Of Shares: 
 It should be mentioned in the AoA, that if there is a default in share payments as and when called by
the company, the company has the right to forfeit the shares of that member and the shares would be
cancelled.  
 Upon forfeiture, the shareholder could choose to pay up, or the company could choose to re-issue
those shares to the public or to private investors as the case may be.  
 
Diminishing Of Shares: 
 There is a difference between diminishing of share capital, and reduction of share capital.  
 When the paid-up share capital is reduced, it is reduction of share capital. If 100 was the authorized
share capital of which 70 was the issued share capital. Of this 70, 50 was the subscribed share capital
and 20 was the subscribed share capital. Suppose of the 50 subscribed shares, 40 are paid. A reduction in
these 40 shares would be reduction of share capital. However, the reduction of unsubscribed share
capital, i.e. the reduction of the 20 unsubscribed shares, is diminishing share capital. Upon this
diminishing of share capital, this would be added to the authorized share capital. The remaining portion
of the authorized share capital, which was previously 30 (100-70 [Total Authorized share capital - Issued
Share Capital]), and these unsubscribed shares will be added to the remaining ASC, which will now be
50.  
 Diminishing of shares only requires an ordinary resolution passed by the Board of Directors.  
XXXIII. GLOBAL DEPOSITORY RECEIPTS
 The Companies Act, under S.41, read with the GDR Rules, 2014 allow for the issue of GDRs.  
 For this purpose, it has to comply with RBI Guidelines, Listing guidelines, investment guidelines,
etc.  
 Technically in a GDR, suppose there is ABC Co., in India.  
o As per S.41, if it wants to issue GDRs which are like shares but are not shares, This aims at
expanding the capital base beyond the jurisdiction where it is registered. It is however, only one way
to go about this purpose.  
o ABC Co. would have to pass a special resolution and appoint a domestic custodian bank, to
safely keep the shares of the Indian Co. It has no legal ownership of the shares.  
o An Overseas Depository Bank [ODB] has to be appointed in the other country, and this is the
bank who has actual legal ownership of the shares and securities kept by the Indian Co., in that
country.  
o The ODB would now issue depository receipts to overseas investors, which is a process akin
to subscribing to the shares of an Indian Co. The stock exchange is usually involved in this process.
The company in India has authorized it to issue these depository receipts.  
o The dividends of these GDRs shall be passed by the Depository Bank to the investors. The
ODB receives a contract fee, as well as a certain percentage of the dividends, as charge for their
services.  
 Why would investors be interested in acquiring GDRs? What is the significance of GDRs? :
GDRs offer opportunities to invest in foreign products. Where shares and stocks in their country are
underperforming, then by subscribing to GDRs, investors can buy the shares of companies from other
profitable jurisdictions.  
 Suppose other companies want to invest in India, these would be IDRs (Indian Depository Receipts).
The trading in GDRs in India are IDRs. American Depository Receipts are ADRs.   
XXXIV. ALLOTMENT OF SHARES  
 Issuance takes place first, after which allotment takes place. The technical difference between
these terms is how after the issuance of particular shares, the shares are allotted to you.  
 The principles as regards allotment are such:  
a. The allotment should be made by a proper authority;  
b. The allotment must be made within a reasonable time (akin to S.6 of the Indian
Contract Act); 
c. Allotment must be absolute and unconditional; [They must be allotted on the same
terms on which they were supplied, and as they are stated in the application for securities.
Similarly, if the number of securities is less than those applied for, it cannot be termed as
absolute allotment] 
d. The allotment must be communicated;  
e. The allotment must be against the application only; [S.2(55) of the Act requires that a
person should agree in writing to become a member] 
f. Allotment should not be in contravention of any other law;  
 
  Conditions for allotment of securities:  
a. Minimum application money (S.39(2)):  
b. Money to be returned if minimum application money is not received;  
c. Company is to file return of allotment;  
XXXV. CALL ON SHARES 
 Since the company is not in need of all of the money at one point, the company makes calls
on shares, and asks for the money in instalments.  
 The principles in this regard are:  
a. The BoD is to make the call(s) on shares;  
b. The calls are to be made in the bona fide interest of the company;  
c. Calls must be made on a uniform basis; [If you are all holders of the same class of
shares, then you must call each of the shareholders to call on shares. Proportionate amounts
have to be taken from all shareholders] 
d. Notice of calls;  
e. The outstanding subscription money has to be called within twelve months from the
date of allotment of issue;  
f. A member is generally made liable to pay interest on calls made but not paid;  

17.10.19
XXXVI. TRANSFER AND TRANSMISSION OF SHARES
 Transfer is the voluntary act of the parties
 Transmission: no act done by a person to transfer but by virtue of law it gets transferred [say
succession certificate]. It is transfer only but n legal terms we call it transmission
- Eg: an adjudicated insolvent - official receiver, bankruptcy trustee is appt and then the power to owe
thr assets as power of mgmt. get entrusted in the official receiver
S:

 Proper transfer deed reqd if the shares and securities are being transferred in the legal form
- when physical transfer od share was there, this transfer deed was imp (the date mentioned is the date
of execution b/w the two parties)
 Format No SH4 (for securities held in physical form)

 Should partly paid-up shares be allowed to be transferred: whenever a partly paid up share is being
transferred, before registering the co gives notice to the party that these are partly paid up share and
if not replying within the stipulated period, they will have to pay the balance.

 Time for delivery of certificates: during what time there should be an allotment – within 2 moths
from date of incorporation ofr subscribers to the memorandum
- within 2 months in the case of allotment of shares
- whenever a transfer or transmission is taking place and deposited instrument of transfer then should
et securities within 1 month in their name

 Depository record is maintained and there is some change: co should try to inform the depository that
share is held by different person

 By transmission if legal heir is getting the share, they are not the owner of the share in the eyes of the
law. Should these people be allowed to transfer the share if they want: a legal representative or
nominee of a person who is dead (if insolvent then it is vested in the official receiver), incapacity to
contract (person mentioned in instrument earlier); s56(5) says these legal representatives, heirs etc
are not holders per se of the security but they can transfer it
 Posn of transferor wrt transfer of shares and sec and co not registered the same. Suppose the shares
have been transferred in bona fide co and the ci has not yet registered/is considering registering it.
The co has the power to deny the transfer ‘in the best interest of the co’
- suppose someone gave money to a transferor and it is not getting registered, so what will be the posn
of the transferor
- The actual transferor will act as a trustee to the transferee and give all benefits to the transferee. But
the latter cannot force trustee into any financial obligation. For eg, if bonus issue of shares, the
transferee cannot say that you get more shares, will only act as a trustee and not do anything beyond
that
 All grounds of refusing transfer should be maintained in the AoA
- But because the power cannot be exercised arbitrarily, the ground for rejection of transfer should be
mentioned explicitly
- Everyone should know the grounds on which it will be refused
- If curtailed or giving power, it has to be given in AoA

1. Blank Transfer
 There’s an application form to transfer shares and securities, and not writing name of transferee
 Done this: because effective trade and shares and securities can take place (can keep transferring to
earn money from each transfer)
- The real owner in the eyes of the co is the first person
- The final transferee who registers, the share will be in that person’s name
 Benefit is that many people can earn money
 Disadvantage is that there is loss to exchequer due to tax avoidance. Every transfer is accompanied
by taxation (stamp duty imposed on transfer taking place). When doing the blank transfer, nobody is
paying the stamp duty
 This is allowed nevertheless as facilitating trading in shares and securities

48. Forged Transfer

 Not possible in electronic form, only in physical form
 The signature doesn’t match
 Get in touch to the transferee to confirm that you are the person who has paid the money
 Suppose this is taken to the Board of Directors and there is a doubt as to whether it is forged and not
a bona fide mistake, will tell the transferor that the shares have come and that someone is trying to
register the share in their name. Will do over e mail, avoid telephonic convo (email sent to the
registered email ID of the person(. If there is no objection, the transfer might get registered
 Later if the forged transfer is actually registered, the transferor cannot impose liability on the co for
not informing but the shares will restored
 The transferee in forged transferor never gets ownership rights
 Any innocent purchaser after a forged transfer, cannot get an ownership certificate and will pay
compensation to the innocent purchaser, they will make the person who did the forged transfer
indemnify for loss to the innocent person
XXXVII. SURRENDER OF SHARES
 Surrender and forfeiture
 Surrender is an act by will and forfeiture is an act by the co
 Forfeiture grounds will be mentioned in the AoA and the powers of the BoD will be mentioned that
on whatever grounds they have the right to forfeit the shares
 forfeiture happens due to default on payment of the shares . Now it becomes property of co, cant
trade or receive dividends from it

 Surrender: if the person feels they can no loner be a member of the co., cant take part in meetings,
etc (genuine reason), and so ask for surrender of shares
 - however this does result in reduction of capital but don’t need the permission of the Tribunal like
was earlier done in exception
- Even forfeiture results in reduction

 Suppose someone’s shares have been forfeited, Rs 10 shares were there and Rs 3 is already paid.
After forfeiture, this amt will be left. The capital would be now reduced, detrimental for the co so
will go for re-issue of the shares
- The Rs 3 paid will be put in the securities premium account and will issue the share at Rs 10
- But in Naresh Chandra case, it was said it isn’t correct to keep in securities premium account w/o it
being mentioned in the articles. And it should go back to the original depositor
Settled Posn:
Can keep in SPA but mention in AoA and if mentioned then it need not go to defaulter but if it is not
mentioned has to go back to the defaultee
 Dividend and Debentures

I. DIVIDENDS
1. CIT v. Danthardas
Dividends comprise not only a percentage of profit which is returned to the shareholders as a return on
investment, but also when the assets are liquidated in the event of winding up, the proceeds distributed
among the shareholders are also dividends.
Section 2(35)- the definition just provides that ‘dividends’ also includes ‘interim dividend.’
A dividend is declared at annual general meeting of the company, out of the profits of the company. Interim
dividend- in between two annual general meetings. Any rules applicable to dividends will also be applicable
to interim dividends by virtue of the definition under Section 2(35).
Section 123- Procedure to distribute dividends

Profits
The net increase gained with respect to an asset is profit. All liabilities are settled and the portion available
for distribution is the profit.
Profit available for distribution and profit available for dividends are different. Let’s say, profit for
distribution is Rs. 100. 2013 Act has removed the requirement of maintaining a ‘general reserve’ in which
some portion of the profits is to be stored. Many a times, companies do maintain free reserves for meeting
future contingencies. After storing a portion in general reserve, what is left is profit available for dividens.

Sources
1.      Current Profit
2.      Past Reserves- conditions for paying div out of past reserves- Companies (Declaration and Payment of
Dividend) Rules, 2014.
2.1 5%- 2018 [2017- 5, 2016- 5, 2015- 5]
3.      Central Government/ State Government

Depreciation: Straight down method and write-down value method

Dividend in cash: Dividend cannot be paid in anything but case- strict mandate

Dividend is paid only to registered shareholders and no one else. If there is any doubt or dispute regarding
who should get the divided, then the company will deposit that amount in the ‘unpaid dividend account.’
Transferor gets it who assumes the position of a trustee.

Can dividends be paid out of Capital? 

No, only out of profit. Revenue profit- earned in normal and ordinary course of business- day to day
activities.

Time
 Within 5 days of declaration they will make a separate account and deposit all the amount in that
account.
 Within 30 days (5 + 25) of declaration they have to ensure that it is given to the registered
shareholders. Address of reg shareholder is maintained with the Company and therefore, there should
not be any issue on part of the company. Any act of payment is fine enough
(i) Operation of law

Investor Education and Protection Fund

- Special method
- Set off
- No default

Dividend Warrant and Dividend Mandate- can be analogously used.

Company orders the Banker of SBI to pay x (the shareholder or anyone who bears the doc) a certain amount
of money. Dividend mandate/ Dividend warrant provides that the amount will get credited directly to the
shareholder’s account 
After 30 days, within 7 days of expiry unpaid dividend account in a scheduled commercial bank.
Until 7 years if no one claims the amount, after 7 years this amount will go to IEPF under Section 125. It
comprises unpaid dividend, grants, etc. 
A person can claim the dividends after 7 years also, through an application before the IEPF authorities
(SEBI Guidelines).

19.10.19

Two measures to calculate depreciation (schedule 2 of Companies Act):

1) Straight Line Method
2) Write-down value Method

Have to calculate depn before giving dividend

 Dividend has to be in cash (strict mandate)

 Bonus shares are not issued in the lieu of dividend, rather they are like an addition to the dividend
 Dividend is only payable to registered share holders and nobody else
- Eg: transfer of share to X, although X is now the valid transferee if the co has not registered, the
dividend will still go to the original share holder (if any doubt as to who is the correct owner and
who it should be given to then the co will deposit the money in an account called the Unpaid
Dividend Account)
 Can dividend be paid out of capital: no, dividend is out of the profit (realised profit is distributed as
distributed profit as dividend)
- Capital profits can be used. A revenue profit is made in the normal curse if business in day to day
activity. Capital profit is unexpected, sell of asset and the money you earn from this sale
 Create separate acc from dividend and deposit the declared amt in that acc within 5 days of decl.
Within 30 days of decl have to pay to the shareholders. Has to be paid to the shareholder and any act
of payment should be undertaken
- If the cheque has been posted within 30 days, would it attract liability: any act of payment within 30
days which may result in effective payment is also valid
 Certain conditions where even if non-payment in 30 days will not make you liable: (1) due to any
operation of law not able to pay off divided
(2) the shareholder wants a specific mode of payment fir example NEFT and only before Diwali,
then if the co is depositing at that time and not within 30 days then the co will not be liable. If the co
find that the co isn’t able to adhere with that sp method then they wont be liable if cannot comply
(3) If a shareholder has obligation to pay to the co and the co has declared dividend, then the money
will be set off (set off is allowed)
 Dividend Warrant/Dividend Mandate: A dividend mandate will order the co to pay the registered
shareholder in his acc (to the bank acc) and not to him
 Investor Education Protection Fund: If the dividend was declared and nobody came to claim the
dividend. In this case, if a week after the 30 days period, the co will transfer it to an Unpaid Dividend
Account (UDA). This will be in a scheduled commercial bank. It will be like a savings bank acc with
interest. If nobody claims up till 7 years from the date of depositing, after this, the amt will go to
Investor Education and Protection Fund (s.125 (?)). There are proper auditors for this.
- educate investors, protection (those that aren’t rich can be helped to initiate a class action suit)
- If someone wants to claim the money after 7 years, then they can make an appl to the govt and the
money can be returned
(make bullet points and learn s125, no need to mug up)

Note: For End Terms

Don’t do promoters
Focus on kinds of co
Initial readings isn’t necessary

22.10.19
XXXVIII. DEBENTURE
Study only this :
1. What are debentures
2. Characs of debenture
3. Diff b/w debenture and share holders
4. Kinds
5. How is it issued
6. Debenture Stock (1-2 lines about what it is)
7. Debenture trustee (make all the powers etc into a very short format)
8. Debenture trust deed

 A debenture includes a bond, debenture stock, etc., acknowledging a debt

 Debenture is a debt on a co
 It raises money from the public or pvt player through debentures or through shares
 In both cases, the co is getting money
 There is a prospectus or offer let issued calling subscription to debentures of the co
 Paying interest in instalment over principle and at the time of redemption will pay the entire amt
 The interest is an earning o your part as a creditor of the co – creditor because not a member of the
co (which would make you member of the co)
 Diff b/w bonds and debentures
- In some cases bonds and unsecured instr and in some cases debentures are
- If the co defaults have to go for specific performance, no charge on the co
- Usually bonds are secured financially and debentures are unsecured
- Although globally, bond is a wider term, debentures is a wider term (due to the wording of the
section + no section on bond)

1. Characteristics
1. Movable
 Will be entitled to get the money if assigning rights to someone else

2. Certificate of indebtedness
 Looks like this

3. Date of redemption
 Cannot be greater than 10 years
 After 10 years, the co will definitely have to redeem the debenture

4. Creates a charge on the assets of the co

 If secured they create a charge on the assets and the undertaking of the co (debentures can be secured
or unsecured)
- A going concern business: undertaking (has business, assets, property, liquidity, cash, etc.)

5. Pari pasu
 If Rs 5 debentures given and subscribe to 10
 If you want to transfer it how will you do it: if some debenture has to be given will give either 102 or
all 10. But cannot give debentures worth Rs 335 can’t be anything in between whole numbers
  The loan fund comprises X amt (say 100 debentures of Rs 10 and 100 of Rs 20). If a creditor
contributes Rs 200 to the co. She wants to transfer 170 to somebody, can this be done: it can be done
as it is evidencing the portion of money you have with you. What you cant do is transfer a fraction of
the amount (for example here can transfer Rs 175)
 Pari pasu:

49. Diff b/w debenture holders and share holders

Shareholder Debenture-holder
1. Share: member of the co, getting voting right, 1. As debenture holder only creditor of the co if the
enrolled in reg of voter, etc co doesn’t pay can file for specific performance
2. On liquidation, lower pedestal 2. On liquidation, debenture holder given upper
pedestal

S71: debenture can be issued with the option to convert

 Option to convert: at the date od redemption or default on co of paying you can convert debenture
into share of the co. Why is this benefit given?
- Asymmetry of info b/w debenture holder and co. But debenture holders don’t know that. Meetings
aren’t always called w them. Because of this asymmetry they don’t know how the co is functioning,
if they become one they can take decns etc
 No Voting Rights: Only holders of equity shares with voting rights
 Secured Debentures: If co defaults has the right to sell or dispose off asset on which you gave charge
to recover money
 Debenture Redemption Reserve (DRR): Created only with the purpose of paying the debenture
holders in 3 years and get the debenture back
 Debenture Trustee
 Prospectus/Offer Letter
 Interest: Ges paid principle and interest
 At any point of debenture trustee feels the co’s assets have gotten reduced and will not be able to
honour the debenture holders. The debenture trustee acting for the benefit of debenture holders will
apply to the NCLT to not make any more payments etc so that the debenture holders are not affected
 If the debenture holder doesn’t get amt, then the debenture trustee will apply to the NCLT for
specific performance and the co will have to pay interest and principal amount
 No matter if profit or not debenture holders must get interest

23.10.19

50. Kinds of Debentures

1. Registered
- The one person whose name is there would be getting principle and interest, any other person in
possession of it cannot claim interest

2. Bearer
- Could easily be transferred from one person to another. So in stead of taking loan

3. Unsecured
- No charge been created by the co., no charge or collateral on the asset.
- No recourse
- Will have to file suit for specific performance in case nothing else works (2 remedies: ?)

4. Perpetual/Redeemable
- Debentures for 10 years (exceptional case 30 years)
- Cos cannot issue debentures that are irredeemable
 5. Convertible
- Converted into shares (whether equity or preference depending upon choice or terms and conds pre-
decided in the terms of issue)
Full Convertible
- entire debenture amt can be converted into shares
Non Convertible
- will only be entitled to the interest and cannot convert
Partly Convertible
- debentures issued in a serial no, the first say 10 are fully convertible and 10- 15 not convertible
- Or may be the case that there is a debenture of Rs 100 and share of 10 or 20 each, co can say that
max upto Rs 50 can convert to shares rest will be kept as credit

51. Debenture Trust Deed

 If there are say 20-30 debenture holders and enough assets to create charge on everyone of those
people as the people are few but if there are 1000 people then wont be able to create charge on each
of them (usually happens if public offer of debentures)
 The co., in stead of creating indi charges of everyone on co’s assets, will create pool of assets of the
co. Will create fixed (on capital tangible or intangible assets- permanent in nature and legal
ownership in favour of whose foxed charge s created, w/o permission cannot dispose off the charge)
or fluctuating (value keeps fluctuating – this gives equitable rights – when debt crystallised after 3
years can ask co on which asset giving charge and before that the co can use the asset in whichever
manner it likes) asset.
 The co will try to pool the assets as if they keep with themselves, it may be mis-utilised. These assets
which are on charge of specific debenture holder if kept w the co may be shown to other debentures
to get credit. SO create a trust for these assets and create a debenture trustee in charge of these assets.
The beneficiaries are the debenture holders. The DT prime task is to act as a channel of
communication and to ensure the co doesn’t do anything that is negative to the interests of the
debenture holder
- Has the power to mortgage and sell in favour of debenture holder as a last option after giving co the
opportunity to pay
 DT appt by the co and within 60 days of issue of debenture
 If there is casual vacancy (death, incapacity to contract, etc.) have to take permission of debenture
holder who should be apt next
- W/o consent nobody will be acting as debenture trustee
- Can appt as may DTs as they deem fit

Note: There are 22-23 duties listed but only mention 7-10. Eg: (1) may call for performance utilisation
report from the co (periodical reports may be called for); (2) The co defaults on 2 interest payments
consecutively and the DT may apt a nominal director on the Board to check what the co is doing, what funds
are being utilised and what steps are being taken

Remedies:
1) Appt of Nominal Director
2) If assets not sufficient can ask for order from NCLT to incur any further financial obligation (if DT
sees the co is trying to incur these financial obligations)
3) When co isn’t paying the debenture when supposed to be done: can get order from NCLT to order co
to pay the debenture holder the principle and the interest

[if finds any issue letter as prejudicial to the interests of the debenture holder then will ask to change it]]

 All debenture holder who has given at least Rs 25 must ask for meeting of debenture holder then DT
will call this meeting
  If co doesn’t anything against debenture holder then meeting may be called for right course of action
against the co

Form SH12: how debenture trust deed should be there, duty of DT (how he should act), etc., all this is given
in this form
- This form says that max adherence must be made to this
- If violation of SH12 then decn made on the basis of whether the debenture holder is benefitted or it is
prejudicial to the debenture holder
- SH12 is guideline