SUCM 207

UNDERGRADUATE COURSE
B.COM. - GENERAL COMMERCE

SECOND YEAR
FOURTH SEMESTER

PAPER - IX

COMPANY LAW

INSTITUTE OF DISTANCE EDUCATION

UNIVERSITY OF MADRAS
B.COM. GENERAL COMMERCE PAPER - IX
SECOND YEAR COMPANY LAW
FOURTH SEMESTER

WELCOME
Warm Greetings.

It is with a great pleasure to welcome you as a student of Institute of Distance Education,

University of Madras. It is a proud moment for the Institute of Distance education as you are
entering into a cafeteria system of learning process as envisaged by the University Grants
Commission. Yes, we have framed and introduced Choice Based Credit System(CBCS) in
Semester pattern from the academic year 2018-19. You are free to choose courses, as per the
Regulations, to attain the target of total number of credits set for each course and also each
degree programme. What is a credit? To earn one credit in a semester you have to spend 30
hours of learning process. Each course has a weightage in terms of credits. Credits are assigned
by taking into account of its level of subject content. For instance, if one particular course or
paper has 4 credits then you have to spend 120 hours of self-learning in a semester. You are
advised to plan the strategy to devote hours of self-study in the learning process. You will be
assessed periodically by means of tests, assignments and quizzes either in class room or
laboratory or field work. In the case of PG (UG), Continuous Internal Assessment for 20(25)
percentage and End Semester University Examination for 80 (75) percentage of the maximum
score for a course / paper. The theory paper in the end semester examination will bring out your
various skills: namely basic knowledge about subject, memory recall, application, analysis,
comprehension and descriptive writing. We will always have in mind while training you in
conducting experiments, analyzing the performance during laboratory work, and observing the
outcomes to bring out the truth from the experiment, and we measure these skills in the end
semester examination. You will be guided by well experienced faculty.

I invite you to join the CBCS in Semester System to gain rich knowledge leisurely at
your will and wish. Choose the right courses at right times so as to erect your flag of success.
We always encourage and enlighten to excel and empower. We are the cross bearers to make
you a torch bearer to have a bright future.

With best wishes from mind and heart,

DIRECTOR

(i)
B.COM. GENERAL COMMERCE PAPER - IX
SECOND YEAR COMPANY LAW
FOURTH SEMESTER

COURSE WRITER

Dr. A.S. Manikandeswaran

Faculty of Commerce
Asan Memorial College
Chennai - 600 100.

EDITING

Dr. R. Panchalan Dr. P. Hemavathy

Professor in Commerce Assistant Professor in Commerce (T)
Institute of Distance Education Institute of Distance Education
University of Madras, University of Madras,
Chennai - 600 005. Chennai - 600 005.

© UNIVERSITY OF MADRAS, CHENNAI 600 005.

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 B.Com., DEGREE COURSE

SECOND YEAR

FOURTH SEMESTER

Paper - IX

COMPANY LAW

SYLLABUS

UNIT I: Joint Stock Company

Meaning - Kinds of Companies (Special Provisions with respect to Private Company,

Public Company, One Person Company, Small Company, Dormant Company) - Formation -
Memorandum of Association - Contents - Restriction on “Other Objects” - Doctrine of Ultra
Vires - Articles of Association - Contents - Prospectus - Contents - Types (Statement in Lieu of
Prospectus, shelf Prospectus, Red Herring Prospectus) – Underwriting – Book Building Process
- Green Shoe Option - E-Filing - Dematerialization.

UNIT II: Share Capital and Debentures

Meaning of Shares - Kinds of Shares - Voting rights - Issue of shares at a Premium and
Discount - Partly paid shares - Bonus Shares - Rights shares - Sweat Equity Shares. Debentures
- Meaning - Types.

UNIT III: Managerial Personnel

Directors - Women Directors - Independent Directors - Director Identification Number -

Other Key Managerial Personnel - Related Party Transactions.

UNIT IV: Meetings and Resoultions

Meeting - Statutory Meeting - Annual General Meeting - Extraordinary General Meeting -

Notice of Meeting - Quorum - Proxy - Board of Directors Meeting - Committee - Types of
Committee - Audit Committee - Stake Holders Relationship Committee - Corporate Social
Responsibility Committee. Resolutions - Ordinary Resolution - Special Resolution - Resolution
requiring special notice.

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UNIT V: Winding up of Company

Modes of Winding up - Winding up by the Court - Voluntary Winding up - Types - Members

Voluntary Winding up - Creditors Voluntary Winding up. National Company Law Appllate Tribunal.

SUGGESTED READINGS

1. Kapoor, N.D., Business Laws, Sulthan Chand and Sons, New Delhi.

2. Sreenivasan,M.R. Business Laws, Margam Publications, Chennai.

3. Dhandapani, M.V. Business Laws, Sultan Chand and Sons, New Delhi.

4. Avatar Singh, Company Law, Eastern Book Company

5. Shukla, M.C. & Gulshan, S.S., Principles of Company Law

6. Badri Alam, S & Saravanavel, Company Law, Himalaya Publications

7. Gogna, P.P.S., Text Book of Company Law, S. Chand & Co.

8. Gaffor & Thothadri, Company Law, Vijay Nicole Imprints Pvt. Ltd. Chennai

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 B.Com., DEGREE COURSE

SECOND YEAR

FOURTH SEMESTER

Paper - IX

COMPANY LAW
SCHEME OF LESSONS

Sl.No. Title Page

1. Joint Stock Companies –An Introduction 001

2. Classification of Companies 011

3. Memorandum and Articles of Association 027

4. Prospectus 045

5. Underwriting and Book Building Process 054

6. Share Capital & Debentures 063

7. Directors and Key Managerial Personnel in Corporates 093

8. Meetings in the Companies 110

9. Powers of Directors 123

10. Resolutions 144

11. Corporate Social Responsibiity (CSR) 153

12. Winding up of the Company 169

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UNIT 1
JOINT STOCK COMPANIES –
AN INTRODUCTION

Learning Objectives

After studying this unit, you should be able to:

 Explain the meaning of joint stock Company

 Describe the salient features of joint stock Company

 Distinguish between public limited and private limited company

 Discuss advantages and disadvantages of joint stock Company

Structure
1.1 Meaning and Definition

1.2 Characteristics of Company

1.3 Advantages of Company

1.4 Disadvantages of Company

1.5 Difference between Public Limited Company and Private Limited Company

1.6 Summary

1.7 Key Words

1.8 Review Questions

1.1 Meaning and Definition

When a group of persons associates for a common object or purpose as business,

charity, research etc., it is called as a Company. The company is an artificial person which is
created by law. “A company is an incorporated association, which is an artificial person created
by law, having separate entity, with perpetual succession and a common seal” - Haney
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Justice Lindlay defines the Company as ‘an association of many persons who contribute
money or money’s worth to a common stock and employs it in some trade or business and who
share the profit arising there from’. Thus a Company is an artificial person, because it is created
by promoters fulfilling the requirements under the Company Law.

1.2 Characteristic Features of a Company

1. The Company is an incorporated Association.

2. It is an artificial entity endowed with legal personality.

3. It has everlasting existence.

4. The Company can purchase or sell properties in its registered name.

5. It has a common seal.

6. It has a capacity to sue.

7. The Company has professional managers.

8. Its shares belonging to members are freely transferable.

9. There is a division between ownership and control.

[1] An Incorporated Association

The term Company means an association of persons. All association of persons cannot
become a company. Unless those associations are registered under the relevant Act, they will
not be termed as Body Corporate. It is a Body Corporate in the sense that it is quire difference
from the members constituting it. Associations formed not for any profit or gain is not an illegal
association even if the membership exceeds hundred.

[2] It is an artificial entity with legal personality

A person under law is one who is capable of exercising his rights against the others and
other also capable of exercising their rights against the said person. A person can be a natural
persons or an artificial persons created by men. An artificial person becomes a legal person or
entity when such association of persons is registered under law. When once registered, it
becomes a Body Corporate. Such body corporate may be a corporation aggregate or it may be
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single individual who may present the office of the corporate unit termed as Corporation Sole.
Thus a corporation sole signifies an office or post which a person occupies a position or holding
a position.

[3] Perpetual existence: [Everlasting existence]

Members may join the company as shareholders and may leave the company by
transferring the shares to others. Even then the company would continue its existence by
carrying on its business. Therefore there is no death to a company unlike a natural person. A
company can only be dissolved according to law. According to Companies Act 2013, the date
of incorporation of a company as found the certificate of incorporation together with the
subscribers to the memorandum and all other members who have become shareholder shall
continue in the company permanently. The company irrespective of the shareholder shall
continue its existence with its common seal and with its memorandum and articles of association
holding properties with powers to dispose them.

[4] Company can own properties and dispose of properties

Since a company has legal personality quite apart from the members constituting it, the
company can act independently. Although a shareholder has a right to participate in the affairs
of the company yet he cannot be regarded as owner of the property belonging to the company.
Property belonging to the company cannot be said to the property of the shareholders.

For example compensation amount due to a company on account of fire accident which
destroyed the timber materials belonging to the company was claimed by the shareholder
since he held 90% of the shares of the company. The court held that the property destroyed by
fire belonged to the company and compensation has to be given only to the company and not
to the shareholder.

[5] It has a common seal

Company being an artificial body has to act through natural persons. There, it cannot
sign as natural person. Precisely for this reason a company has been provided with a common
seal which has to be embossed on every document which signifies the assent and approval of
4

the company duly witnessed by way of authentication by a duly appointed director. The common
seal if any shall be made out of metal or otherwise, duly engraved with the name and symbol
of the company.

The name of the company shall be engraved in legible manner on the common seal. The
Board is vested with the power to keep the common seal in its safe custody. The share certificate
issued need not as per amendment bear the common seal of the company.

[6] Company has capacity to sue

Company being an artificial person can take action either legal or commercial through
natural person namely through its Directors. In other words, it can authorize other to act on this
behalf unless the Articles specifically mention that the person to initiate action on behalf of the
company. Even a Director has no authority to file a suit on behalf of a company unless authorized
by resolution duly passed in a valid board / general meeting.

[7] Company has professional managers

In these modern days of sophisticated management the old conventional and conservative
methods are no longer in vogue. Emphasis has been laid more on specialized technical
knowledge on Marketing, Finance, Human Resources Management and Computer Operations.
The concept of Corporate Governance has gained more importance in these days of dynamic
changes that takes place in and around the company’s management and administration.
Precisely for the purpose of effectively and efficiently carrying on the company’s business, Key
Managerial Personnel [KMP] are appointed by passing a resolution in the Board Meeting.

Since the directors meet periodically depending upon exigencies of circumstances they
cannot look after the day to day daily matters of the company affairs. Hence the regular work
involving certain special attention has to be looked after by the Key Managerial Personnel.
KMP in relation to the company means the Chief Executive Officer or Managing Director or
Manager, the Company Secretary, the whole time Director, the Chief Finance Officer and such
other officers as may be prescribed.
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[8] Its shares belonging to members are freely transferable

Shares in a public limited company are freely transferable, which is one of the qualities of
a Public Limited Company. The he shares or debentures or other interest of any members in a
company are only, movable properties, transferable, in the manner prescribed by the provisions
of the Companies Act 2013.

It must be understood that the transferor shall always be presumed to be the holder /
owner of the shares held by him. Until the name of the transferee is registered and brought in
to the said transfer register, the transferor is said to be the holder of the shares. Shares are
transferable like any other movable property. Shareholder has a right to freely transfer his
shares subject to the procedure prescribed under the present Act. Apart from what is prescribed
under the Companies Act, there cannot be any condition that could be incorporated by parties
according to their personal convenience. No condition or regulation could be imposed restricting
the rights of the shareholders contrary to what is prescribed under the Companies Act of 2013.

[9] There is a division between ownership and control

Unlike a partnership, which has no existence quite apart from the members constituting
it, a company has an independent personality of its own. A company does not derive its
personality from its members. It is quite difference from the members constituting it. A member
can at the same time be a creditor of the company.

1.3 Advantages of Companies

1. Limited Liability: The major advantage of company form of organization is that, the
liability of the members of the limited company is limited to the par value of the shares
held by them. That is, the shareholders of a company have a limited or capped liability for
the debts of the business. This limit on the shareholder’s liability contrasts with the situation
prevailing with partnership firms and sole traders, here there is scope for potentially
unlimited personal liability for the debts of the business.

2. It is easy to start a company: It is now very easy to start a limited company and it can all
be done online. Gone are the days of waiting for days together for Registrar of Companies
to process the paperwork. But now you can start a limited company in just a few house.
The cost of incorporating is an allowable expense against corporation tax.
6

The Companies Act 2006, effective from 1st October 2009, has made a number of changes
making it easier to run a limited company. In the ongoing quest to promote enterprise, the
government continues to examine ways to give well run companies the freedom to get on
with business rather than thrusting administrative formalities on them.

3. It has separate legal entity: A limited company has separate legal entity. So, third parties
contract with ‘company’ and not with the individual directors and shareholders, which
means, companies survive the death of the owners and it is possible for the directors and
shareholders involved with the company to change over time. In other words, a company’s
existence will only cease, it is formally wound up, liquidated or by other order of the courts
or Registrar of Companies. Amongst other benefits, this can provide more security for
shareholders, suppliers and employees than other forms of business organization.

4. Potential credibility and prestige: The formation of a limited company can suggest that
the business has permanence and is committed to effect and responsible management.
It gives both suppliers and customers a sense of confidence and many companies,
particularly larger businesses, will not deal with an entity that is not a limited company.
Incorporating a business can therefore open up new business opportunities would not be
otherwise available.

5. Options for raising new capital: Sole traders and partnership firms generally raise new
capital from their own resources. On the other hand, Companies are able to raise capital
any time by issuing new shares. New shares can be offered to existing shareholders or
new investors, though only public limited companies can offer shares to the public. Multiple
share classes can be used to offer flexibility in rights to vote and consequently to control
the company, receive dividends and extract capital if the company is wound up.

6. Project Cost and Risk factors: For entrepreneurs going for hi-tech or high capital outlay
projects, it is always advantageous to go in for a company form of organization. Where
the financial sake involved is high, it is found that banks and financial institutions while
sanctioning financial assistance, insist on having a private limited company.

7. Exit from business easily: Where is it is proposed to sell the business as a going concern,
all that is required is to transfer the entire shareholding to the purchase and thus facilitate
 7

easy change in management and ownership. This will save time and money of the
promoters. Huge amount of stamp duty is saved.

8. Easy transferability: Shares in a company are easily transferable, subject to the

restrictions mentioned in the Articles of Association. No consent of other members is
required to such transfers. This helps the shareholders to realize their investment at any
moment.

9. Borrowing capacity: A company enjoys better avenues for borrowing of funds. It can
issue debentures, secured as well as unsecured, accept deposits from the public, etc.
Even banking and financial institutions prefer to render large financial assistance to the
company rather than partnership firms or proprietary concerns.

1.4 Disadvantages of Companies

1. High cost involved: Some people are of the opinion that the costs involved in setting up
a limited company is quite huge.

2. Accounting is a complex procedure: There are more complex and restrictive rules
governing the accounts and book keeping of limited companies than sole traders. The
company is expected to produce financial year’s accounts incorporating a double entry
format, balance sheets and other notes. With the larger nature of a limited company’s
business, this can be a time consuming and costly undertaking. But now-a-days
computerization in the field of accounting has made it simple.

3. Restricted capital raising: For private companies, there is a restriction on the raising of
capital through sale of shares. As mentioned, public limited companies can gain further
funding by the sale of shares, but this ability is list to private limited companies whose
shares are restricted.

4. Dilution of powers: Due to the nature of public limited companies, sometimes disputes
will arise between directors and shareholder as their ideas of what is best for the company
vary. Sale of shares to increase company’s fund position will further dilute the management,
as more and more people will have a say in how the company should run. There is also a
risk that a takeover might occur this way.
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1.5 Difference between Public Limited Company and

Private Limited Company
Basis Public Company Private Company

Minimum Number 7 Members 2 Members

Maximum Number No ceiling 200 Members

Number of directors

Minimum 3 Directors 2 Directors

Maximum 15 Directors 15 Directors

Restriction of A consent letter shall be No such consent letter of

appointment of filed by directors with the directors is to be filed with the
directors registrar registrar

Invitation to public It can invite public to It cannot invite public to

subscribe shares or subscribe shares
debentures

Name of the company It is optional to suffix the The name is to be suffixed by

name of company by ‘Private limited’
‘Public limited’

Issue of prospectus It is mandatory It cannot issue prospectus

Transferability of shares Shares can be transferred Restricts transferability

easily

Special privileges No such special privileges It enjoys special privileges

Quorum No. of Quorum Two members shall be personally

members present.

Below 1,000 5

1,000 - 5,000 15

Above 5,000 30
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Managerial Remuneration Not exceeding 11% of the No such restriction

net profit

Commencement of By obtaining certificate of It can start the business after

business commencement of business obtaining certificate of
it can start the business incorporation

Check Your Progress

1. Define Company

2. What do you understand by common seal?

3. What do you mean by separate legal entity?

1.6 Summary

The Companies Bill introduced on 2008 lapsed on account of the dissolution of the then
Lok Sabha. On 3rd August 2009, a New Companies Bill 2009 was formulated and tabled
before the parliament in 2011. The Companies Bill 2012 was introduced after the scrutiny of
the report by the Parliamentary Committee. Finally the Bill was passed by Lok Sabha on 18th
December 2012 and approved by Rajya Sabha on 08th August 2013. Hence it was planned to
make the entire Act to become effective by 1st April 2014.
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The characteristic features of a Company are, The Company is an incorporated

Association. It is an artificial entity endowed with legal personality. It has everlasting existence.
The Company can purchase or sell properties in its registered name. It has a common seal. It
has a capacity to sue. The Company has professional managers.

1.7 Key Words

 Disclosure

 Transparency

 Registration

 Ownership

 Association

 Liability.

1.8 Review Questions

1. Discuss the features of Companies Act 2013.

2. Explain the Characteristic features of a Company.

3. Describe the advantages and disadvantages of a company?

4. Distinguish between Public and Private limited companies.

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UNIT 2
CLASSIFICATION OF COMPANIES

Learning Objectives

After studying this unit, you should be able to:

 explain the basis for classification of companies

 describe the types of companies

 enumerate the steps involved in the formation of a company

Structure
2.1 Introduction

2.2 Classification of Companies

2.2.1 Classification of Companies on the Basis of Mode of Incorporation

2.2.2 Classification of Companies on the Basis of Number of Members

2.2.3 Classification of Companies on the Basis of Liability

2.2.4 Classification of Companies on the Basis of Control

2.2.5 Other Types of Companies

2.3 Characteristic Features of Private Company

2.4 Stages Involved in the Formation of a Company

2.5 Summary

2.6 Key Words

2.7 Review Questions

2.1 Introduction

Company is one of important business models in the business world. Compared to other
business models, companies possess a lot of special features. There are different types of
companies exist in the business. In this unit, you can learn the types of companies and the
bases for classification of companies.
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2.2 Classification of Companies

Unlike sole trading business and partnership companies can be classified on the basis of
various factors. In this section you can learn the bases for classification of companies.

[I] On the Basis of Mode of Incorporation

i. Chartered Companies

ii. Statutory Companies

iii. Registered or Incorporated Companies

[II] On the Basis of Number of Members

i. Private Company

ii. Public Company

[III] On the Basis of Liability

i. Company Limited by shares

ii. Companies Limited by Guarantee

[IV] On the Basis of Control

i. Holding and Subsidiary Companies

ii. Government and Non – Government Companies

iii. Foreign and Domestic Companies

[V] Other Type of Companies

i. One Person Company

ii. Small Company

iii. Dormant Company

2.2 .1 On the basis of mode of Incorporation

i. Chartered Companies: These are incorporated under a special charter by a monarch.
The East India Company and the Bank of England were examples of chartered companies
 13

in incorporated in England. The powers and nature of business of a chartered company

are defined by the Charted which incorporates it. A Chartered Company has wide powers.
It can deal with its property and bind itself to any contracts that any ordinary persons can.
In case the company deviates from its business as prescribed by the charted, the Sovereign
can order for closing the company. Such Companies do not exist in India.

ii. Statutory Companies: These companies are incorporated by a Special Act passed by
the Central or State Legislature. Reserve Bank of India, State Bank of India, Industrial
Finance Corporation, Unit Trust of India, State Trading Corporation and Life Insurance
Corporation are some of the examples of statutory companies. Such companies do not
have any memorandum or articles of association. They derive their powers from the Acts
constituting them and enjoy certain powers that companies incorporated under the
Companies Act have. Alternations in the powers of such companies can be brought about
by legislative amendments.

iii. Registered Or Incorporated Companies: These were formed under the Companies
Act 1956, Companies Act 2013 or the under the Companies Act passed earlier to these.
Such Companies come into existence only when they are registered under the Act and a
Certificate of Incorporation has been issued by the Registrar of Companies. This is the
most of incorporating a registered company may be a private company, or a public company.

2.2.2 On the Basis of Number of Members

i. Private Company: According to Sec 2[68] of the Indian Companies Act 2013, a ‘private
company; means a company having a minimum paid-up share capital of Rupees One
Lakh or such higher paid up share capital as may be prescribed, and which by its articles:

a. Restricts the right of transfer of shares

b. Except in case of One Person Company, limits the number of its members to two
hundred, excluding employees who are members or ex-employees who were and
continue to be members

c. Prohibits any invitation to the public to subscribe for any shares or debentures of
the company. ‘were two or more persons hold share jointly, they are treated as a
single member
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According to Section 3 of the Companies Act 2013, the minimum number of members to
form a private company is two. A private company shall suffix the word ‘Private’ with its name.

2.2.3 On the Basis of Liability

i. Companies limited by Shares - Section 2[22]: It means a company having the liability
of its members limited, by the memorandum to the amount, if any, unpaid on the shares
respectively held by them. Thus, this type of companies has a share capital and the
liability of each member is limited by the Memorandum, to the extent of face value of
shares subscribed by him. In other words, during the existence of the company or in the
event of winding up, a member can be called upon to pay the amount remaining unpaid
on the shares subscribed by him. Such a company is called company limited by shares. A
company limited by shares may be a public company or a private company. These are the
most popular types of companies.

ii. Companies Limited by Guarantee – Section 2[21]: It means a company having the
liability of its members limited by the memorandum to such amount as the members may
respectively undertake to contribute to the assets of the company in the event of liquidation
of the company. The company can use such amount for payment of the debts and liabilities
of the company. The amount promised by each member is called ‘Guarantee’. The Articles
of Association of the company state that the number of members with which the company
is to be registered. Such a company is called a company limited by guarantee. Such
companies depend for their existence on entrance and subscription fees. They may or
may not have a share capital. The liability of the member is limited to the extent of the
guarantee and the face value of the shares subscribed him, if the company has a share
capital. It has a share capital; it may be a public company or a private company.

iii. Unlimited Companies – Section 2[92]: It means a company not having any limit on the
liability of its members. An unlimited company may or may not have a share capital. If it
has a share capital, it may be a public company or a private company. If the company has
a share capital, the article shall state the amount of share capita with which the company
is to be registered. The articles of an unlimited company shall state the number of members
with which the company is to be registered.
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2.2.4 On the Basis of Control

i. Holding Company – Section 2[46]: A company is known as the holding company of
another company is it has control over the other company:

a. By holding more than fifty percent of the normal value of issued equity capital of the
company

b. By holding more than fifty percent of its voting rights

c. By securing to itself the right to appoint, the majority of the directors of the other
company, directly or indirectly.

The other company in such a case is known as ‘subsidiary company’. Though the two
companies remain separate legal entities, yet the affairs of both the company are managed
and controlled by the holding company. A holding company may have any number of subsidiaries.
The annual accounts of the holding company are required to disclose full information about its
subsidiaries.

ii. Subsidiary Companies – Section 2[87]: It means a company in which the Holding
Company:

a. Controls the composition of the Board of Directors [or]

b. Exercises or controls more than on – half of the total share capital either on its own
or together with one or more of its subsidiary companies.

iii. Government Companies – Section 2[45]: It means a company in which not less than
51% of the paid up share capital is held by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly be one or
more State Governments is known as a Government Company.It includes a subsidiary
company to a Government Company.

The share capital of a Government Company may be wholly or partly owned by the
Government, but it would not make it as the agent of the Government. The auditors of the
Government Company are appointed by the Government, on the advice of the Comptroller
and Auditor General of India. The Annual Report along with the auditor’s report is place before
both the Houses of the Parliament.
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iv. Non – Government Companies: All other companies, except the Government Companies.
They do not satisfy the characteristics of a Government Company given above.

v. Indian Companies: These companies are registered in Indian under the Indian Companies
Act, and have their registered office in India. The nationality of the members in their case
is immaterial.

vi. Foreign companies – Section 2[42]: It refers to any company or bod corporate incorporate
outside India, which:

a. Has an established place of business in India whether by itself or through an agent,

physically or through electronic mode [and]

b. Conducts any business activity in Indian in any other manner.

A company is said to have an established place of business such as an office, store

house or other premises with some visible indication of premises. Sections 379 to393 of
Companies Act 2013 contain provisions applicable to foreign companies functioning in India.

It is mandatory on the part of the foreign companies to file with the Registrar, certain
documents relating to its principal office, directors and place of business. These Companies
have to deliver copies of their financial statement to the Registrar every calendar year. Every
foreign company shall exhibit its named followed with the Country name in which it is being
incorporated, on the outside of its all places of businesses in India. The name shall be written
by using legible English characters and in the languages in general use in that particular locality.
The same shall be used in its every official communication like letter paper, notices and other
official publications.

2.2.5 Other Type of Companies

i. One Person Company [OPC] – Section 2[62]: OPC is a one shareholder corporate
entity. OPC in the legal system is a move that would encourage corporatization of business
and entrepreneurship. Several companies of today are wholly owned subsidiaries of parent
companies. The reason for having such companies is for insulating the resources, liabilities,
incomes and expenses from a segment of the business into a corporate shell.
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As per Section 2[62], OPC means a company which has only one person as a member.
The memorandum of a company shall state the last letters and word ‘OPC limited’ in the case
of One Person Limited Company. The memorandum of a OPC shall indicate the name of the
person who shall, in the event of the subscriber’s death, disability or otherwise, become the
member of the company.

The provisions pertaining to meetings, including annual general meetings are exempted
by Law itself. This type of company can have only one director, in which case director’s meetings
also become non – mandatory. The use of OPC option has been kept limited to only very small
business, as there are limits on paid up capital and turnover, beyond which an OPC will have to
convert itself into a regular company.

ii. Small Company – Section 2[85]: Small Company means a company, other than a public
company:

a. Paid – up share capital of which does not exceed fifty lakh rupees or such higher
amount as may be prescribed which shall not be more than five crore rupees [or]

b. Turnover of which as per its lst profit and loss account does not exceed two crore
rupees or such higher amount as may be prescribed which shall not be more than
twenty crore rupees.

But nothing in this clause shall apply to:

a. A holding company or a subsidiary company or

b. A company registered under Section 8 or

c. A Company or body corporate governed by any special Act.

iii. Dormant Company [Section 455]: The 2013 Act states that a company can be classified
as dormant when it is formed and registered under the 2013 Act for a future project or to
hold an asset or intellectual property and has not significant accounting transaction. Such
a company or any inactive one may apply to the Registrar of Companies [ROC] in such
manner as may be prescribed for obtaining the status of a dormant company.
18

2.3 Characteristic Features of Private Company

Private companies possess various special features. The important features of private
companies are given below:

a. Private Company restricts the right of transfer of its shares: The shares of a private
company are not freely transferable as in the case of public companies. The articles
generally state that, whenever a share holder of a Private Company wants tro transfer his
shares, he must first offer them to the existing members of the company. The price of the
shares is determined by the directors. It is done to preserve the family nature of the
company’s shareholders.

b. Private Company limits the number of members: It limits the number of its members
to two hundred, excluding members who are employees or ex – employees who were
and continue to be members. Where two or more persons hold share jointly, they are
treated as a single member. The minimum number of members to form a private company
is two.

c. Private Company cannot issue shares to the public: A private company cannot invite
the public to subscribe for its share capital or for debentures. It has to make its own
private arrangement.

iv. Public Limited Company: According to Section 2[71] of the Indian Companies Act 2013,
‘public company’ means a company which is not a private company and has a minimum
paid-up share capital of five lakh rupees or such higher paid-up capital, as may be
prescribed. A company which is a subsidiary of a company, not being a private company,
shall be deemed as public company.

2.4 Stages Involved in the Formation of Companies

Formation of a company involves four major stages. They are

(a) Promotion

(b) Incorporation

(c) Capital Subscription

(d) Commencement of business

 19

a) Promotion : This is the first stage in the formation of company. It refers to discovery of
business opportunity, organization of funds, property and managerial ability in to a business
concern for the purpose of making profit. The person who takes the step for formation of
a company is called as promoter. Promotion may be defined as, ‘the discovery of business
opportunities and the subsequent organization of funds, property and managerial ability
into a business concern for the purpose of making profits there from. Promoters are the
ones who take steps for formation of a company. Promoters are the persons, who conceive
the idea or visualize a project and then take steps to execute the idea into a reality.

b) Incorporation of a company :It refers to registration of company in the registrar of

companies. In case of private companies and public companies not having share capital
can commence the business immediately after obtaining certificate of incorporation.

c) Capital Subscription : The third step in formation of business is capital subscription.

This stage is to be undergone by a public company having share capital. The capital can
be raised from the general public by issuing shares. The following procedural steps are
required to be taken by the promoters for the incorporation of a public limited company:

a. Selecting ‘Name’ of the company and ascertaining its availability from Registrar of
Companies.

b. Drafting and Printing of Memorandum and Articles of Association.

c. Stamping and Signing of Memorandum and Articles.

d. Dating of Memorandum and Articles of Association.

e. Filing of Documents and Forms for Registration.

f. Pre – certification.

g. Registration and Filing fee.

h. Minimum Paid – up capital.

i. Scrutiny of documents and forms by Registrar.

k. Issue of Certificate of Incorporation by Registrar.

l. Certificate of Commencement of Business.

20

Capital Subscription: After the completion of the above mentioned stages, a private
company and public company not having share capital can commence its business. But a
public company having share capital has to pass through two more stages and among them is
capital subscription. During this stage, the company takes the following steps:

i. Completes the formalities to raise necessary capital

ii. Adheres strictly to the guidelines issued by the SEBI in this regard

iii. Conforms to the ‘Guidelines for Disclosure and Investor Protection’ issued by SEBI
regarding public issues of capital and the Directors have to file a copy of the prospectus
with the Registrar

iv. The Prospectus is to be circulated among the investing public in order to invite them to
subscribe to the share capital of the company

v. The company’s banker is to be appointed for collecting the applications from the investors

vi. Directors have to ensure strict adherence to the conditions for valid allotment

vii. Directors have to pass a formal resolution for making allotment

viii. Allotment letters are to be sent to the allottees

ix. Return of allotment is to filed with the Registrar

x. Share certificates are to be issued to the allottees in exchange of their allotment letters

xi. If minimum subscription is not obtained, the company cannot make any allotment.

d) Commencement of business : In case of public company having share capital can

commence its business only after obtaining certificate of commencement. Commencing
business refers not only to business for which the company was incorporated but also to
any transactions including sales or purchases.

Procedure for incorporation of public and private limited company

A) Procedure for incorporation of public limited company having share capital

i) Selecting name of the company and ascertaining its availability from registrar of
companies : The promoters are required to select at least 6 names for the proposed
company and have to apply for its availability. It is done through e-form INC 1 as prescribed
 21

under Companies Act 2013. Even after incorporating central government has the power
to direct the company to change its name under section 16 of the Companies Act 2013.

ii) Drafting and printing of Memorandum and Articles of Association : After applying for
the name availability for the proposed company Memorandum and Articles of association
is to be drafted. The drafted Memorandum and Articles of association is to be verified by
the registrar of companies for any changes before printing.

iii) Stamping and signing of Memorandum and Articles : The Memorandum and Articles
should be printed and stamped by the appropriate state authority under Indian Stamp Act.
After that it is to be signed by at least 7 subscribers and their sign is to be witnessed.

iv) Dating of Memorandum and Articles of Association : The date may be either on the
date of stamping or a date later than the date of stamping, but not a date prior to the date
of stamping

v) Filing of documents and forms for registration : E-form INC 7 is required to be filed
as an application and declaration for incorporation of a company having Memorandum
and Articles of Association and details of subscribers as attachment.(This is not applicable
for one person company, which is going to be discussed in third unit under kinds of
company)

vi) Pre-Certification : As per Companies Act 2013, Form INC 22 is required to be prepared,
signed and filed with the registrar of companies for the purpose of notice of situation or
change of situation of registered office and verification. This form is to be pre-certified by
a company secretary or charted accountant or cost accountant in whole-time practice.

vii) Registration and filing fee : The prescribed registration fee is to be remitted by the
promoter to the registrar along with the forms/ documents. The information regarding fee
is given in the Companies (Registration of Offices and Fees) Rules 2104. Fee may be
paid either electronically or as cash or as draft through electronically generated challan
on submission of the e-form.

viii) Minimum paid-up capital : Private company - One lakh rupees

Public company - Five lakh rupees.

22

ix) Scrutiny of Documents and Forms by Registrar : The registrar of companies will
scrutinize the documents and forms submitted. If it is found complete in all respects the
registrar will register the company and generate a Corporate Identity Number (CIN).

x) Issue of Certificate of Incorporation by Registrar : After the registration of company

the registrar will send the Certificate of Incorporation through post or print out can be
taken from online using CIN.

xi) Certificate of Commencement of Business : In case of private companies and public

companies not having share capital can commence the business immediately after
obtaining certificate of incorporation, whereas in case of public company having share
capital can commence its business only after obtaining certificate of commencement.

A) Procedure for incorporation of private limited company having share capital

The procedure is same that of a public limited company with the following exceptions

i) Minimum paid up capital of one lakh

ii) At least 2 subscribers must sign the Memorandum

iii) Registration of Articles of Association is compulsory

Documents to be submitted for registration

Registration of companies is an important function at the time of formation of companies.

A lot of documents have to be enclosed. The important ones are given below:

a) Memorandum and Articles of Association : A hard copy of the printed memorandum

and articles of association duly stamped, signed and dated is to be submitted separately
with the registrar of companies.

Public Limited Company - Registration of Articles of Association is optional.

Private Limited Company - Registration of Articles of Association is compulsory.

b) Agreements : The Company on incorporation proposes to enter into an agreement with

any person for appointment as its managing director or whole-time director or manager is
to be submitted as an attachment.
 23

c) Copy of Power of Attorney : General Power of Attorney on a stamped paper signed by

all subscribers must be submitted to Registrar of Companies for registration.

Capital Subscription ‘

The third step in formation of business is capital subscription. This stage is to be undergone
by a public company having share capital. The capital can be raised from the general public by
issuing shares. The following steps are taken by company for subscribing capital

(a) Completes the formalities to raise necessary capital

(b) Follows the guidelines issued by SEBI

(c) Conforms to the “Guidelines for disclosure and investor protection” issued by SEBI
regarding public issue of capital.

(d) A copy of prospectus to be filed with the registrar by the directors.

(e) The prospectus is to be circulated

(f) The company’s banker is to be appointed for collecting the applications for the investors.

(g) Conditions for valid allotment must be strictly ensured by the directors.

(h) Directors have to pass a formal resolution for making allotment.

(i) Allotment letters are to be sent to the allottees.

(j) Return of allotment is to be filed with the registrar.

(k) Share certificates are to be issued to the allottees in exchange of their allotment letters.

(l) If minimum subscription is not obtained, the company cannot make any allotment.

Commencement of Business

As per Section 11 of the Act, a company having share capital shall not commence business,
or exercise any borrowing powers, unless a declaration is filed with registrar, by a director,
verified in the manner as may be prescribed. It shall state that

i) Every subscriber to the Memorandum has paid the value of shares agreed to be taken by
him
24

ii) Minimum paid up capital for, Private company - One lakh rupees and Public company -
Five lakh rupees and the company has filed with the registrar the verification of its registered
office.

Procedure for commencement of business:

a) Issuing the prospectus.

b) obtaining the minimum subscription.

c) Minimum subscription amount mentioned in the prospectus should have been received in
cash.

d) Each party that is a company and allotted must have an actual demand on the other for
present payment.

e) Declaration regarding the payment of cash for application and allotment money on shares
applied by the directors must be in same proportion as others.

f) The shares are to be quoted on the stock exchange and approval obtained within the
prescribed time.

g) Shares issued for cash to the public should be allotted.

h) Declaration form is to be filed electronically as well as physically. It is to be obtained on

stamp paper of requisite value as required by the stamp act.

i) To obtain the certificate for commencement of business from the Registrar.

Check Your Progress

1. Define statutory company.
 25

2. What do you understand by company limited by guarantee?

3. What is holding company?

2.5 Summary

Company is one of the important business models. There are different types of companies
doing business in the world. Companies can be classified on different basis mode of
incorporation, number of members; nature of liability, basis of control, etc. are the important
bases for classification companies. On the basis of incorporation, companies, statutory
companies and registered companies. On the basis of number of members, companies can be
classified as private companies and public companies. On the basis of liability, companies can
be classified as company limited by shares and company limited by guarantee. Holding and
subsidiary company, Government and non government company, foreign and domestic
companies are types of companies coming under the classification of basis of control. One
Person Company, small company and dormant company are another types of companies
promotion, incorporation, capital subscription and commencement of business are the important
steps involved in the formation of company.

2.6 Key Words

 Statutory

 Incorporation

 Guarantee
26

 Liability

 Minimum Subscription.

2.7 Review Questions

1. Explain the various types of companies.

2. How would you classify the companies on the basis of Control?

3. Write short notes on:

i. One Person Company

ii. Dormant Company

4. Explain the features of Company Limited by Shares and Company Limited by Guarantee

5. What are the major steps involved in the incorporation of a Company? Explain them.
 27

UNIT 3
MEMORANDUM AND ARTICLES OF
ASSOCIATION

Learning Objectives
After studying this unit, you should be able to:

 explain the meaning of Memorandum and Articles of Association

 describe the contents and importance of the Memorandum of Association

 explain how articles of association of company is important to the company.

 discuss the procedure for Alteration of Memorandum and Articles Association.

 explain the Doctrine of Constructive and Indoor Management.

Structure
3.1 Introduction

3.2 Requirements of Memorandum of Association

3.3 Procedure for Amending the Clauses in Memorandum

3.4 Doctrine of Ultra Vires

3.5 Meaning of Articles of Association

3.6 Contents of Articles of Association

3.7 Alteration of Articles of Association

3.8 Restrictions Imposed on Alterations of Articles of a Company

3.9 Difference between Memorandum and Articles of Association

3.10 Doctrine of Constructive Notice

3.11 Doctrine of Ultra Vires and Indoor Management

3.12 Exceptions to the Doctrine of Indoor Management

28

3.13 Duties of Company Secretary in the Formation and Incorporation of Company

3.14 Summary

3.15 Key Words

3.16 Review Questions

3.1 Introduction

Memorandum of Association is a basic document which contains the entire constitution

of the company. It defines and confined the scope and limitation of the powers of the Company.
Everyone who have dealings with the company is expected to be aware of the contents of the
Memorandum of Association [MoA].

3.2 Requirements of the Memorandum of Association

[Section [4] [1] under the Companies Act 2013
i. Registered Office or domicile clause – Section 12[1]: The state in which the registered
office is situated must be disclosed in the memorandum. This must be intimated to the
Registrar of Companies within 15 days from the date of its incorporation.

ii. Objects Clause – Section 13[9]:Object for which the company is proposed to be
incorporated and any other matter relevant in furtherance thereof under the present Act
must be mentioned in the memorandum. Under the present Act no mention is made
regarding classification division of main object and other object clause. The purpose of
the object clause is to enable the subscribers to the Memorandum, to know the uses to
which their money may be put and to disclose the creditors and persons dealing with the
company to know what its permitted range of activities.

iii. Liability Clause:

a. When a company is one with limited liability or unlimited, the said liability of the
members is limited to the amount unpaid if any on the shares held by them.

b. In the case of a company limited by guarantee, the liability of the member shall be
the amount which each member undertakes to contribute to the assets of the
company in the event of its being wound up while he is a member or within one year
 29

after a person ceases to be a member for payments of debts and liabilities as he

may have been contracted before he ceases to be a member.

c. The cost charges and expenses of winding up and adjustments of the contributories
should be settled among themselves.

iv. Capital Clause: Memorandum must also disclose the total share capital of the company
and the number of shares with which it is has been registered. The number of shares to
which the capital has been divided must be indicated. The number of shares that each
subscriber to the memorandum intends to take shall be indicated opposite to his name.
The formation of the company is based on the undertaking given by the members who
associate for the growth and development of the company. This clause signifies the number
of shares agreed to be taken by the first directors. It is important that the directors must
have some stake in the company in which they happen to function as directors.

In the case of One Person Company [OPC] the name of the person who shall be a
member of the company must be indicated. In case of his death the name of his successor
as subscriber must also be disclosed. However as per fifth provision under section 3[1] of
2013 Act change of name of such person will not be considered as alteration.

v. Association Clause: This clause discloses the names of the persons who have agreed
to form the company, their addresses and the number of shares in the capital accepted to
be taken up by them. These persons are known as subscribers each subscriber has to
take atleast one share. The Memorandum shall be signed by 7 subscribers in the case of
a public limited company, and atleast by 2 in the case of a private company, by one in the
case of One Person Company. The signature of each subscriber shall be attested by
atleast one witness. A subscriber cannot be a witness for another subscriber.

vi. Name Clause: Name of the company signified not only the identity of the company but
also its reputation in business. As per Companies Act the name of a company must contain
the word ‘Limited’ or ‘Private Limited’ at the end. Exemption from the provision is given
only to licensed companies form under section 8 of 2013 Act.

It must be understood that a government company formed by changing its characteristic

features of a private company can delete the word private from its name. Many Government
30

companies are formed as private companies with two shareholders, one president /
governor and other nominee of central / state government who is usually the secretary of
administrative ministry. Only one share is held by the nominee, which is jointly held with
the Government of India. All the balance shares are completely held by the government.
However such company can put the name as limited instead of private limited. No
permission or resolution is necessary to delete the word private from the name of the
company. Only incorporated companies can use the word with ‘limited or private ltd’. If
anyone misuses the word, the said person shall be punished.

3.3 Procedure for Amending the Clauses in Memorandum

Change of Name – [Section 13(2)]: A company may change its name by special
resolution with the approval of the Central Government in writing. However, no such approval
shall be required, where the only change in the name of the company is the addition thereto or
the deletion there from, of the word ‘Private’, consequent on the conversion of a public company
into a private company or that of a private company into a public company.

Registration of change of name – Section 13(3): The change in the name of the
company shall be reported to the Registrar within fifteen days from the date of change. The
Registrar shall enter the new name in the Register of Companies in place of the former name
and shall issue a fresh certificate of incorporation with the necessary alterations. The change
of name shall be complete and effective only on the issue of such certificate. The Registrar
shall also make the necessary alteration in the company’s memorandum of association. The
change of name shall not affect any right or obligations of the company or render defective any
legal proceeding by or against it.

i. Change of Registered Office – Section 13[4]: This may involve:

[a] Change of Registered office from one place to another place in the same city, town
or village: In this case, a notice is to be given within fifteen days after the date of change,
to the Registrar who shall record the same.

[b] Change of Registered office from one town to another town in the same state: In
this case, a special resolution is required to be passed a general meeting of the
 31

shareholders and a copy of it is to be filed with the Registrar. A notice has to be given to
the Registrar of the new location of the office.

[c] Change of Registered Office from one state to another state: For affecting this change
a special resolution must be passed and a copy thereof must be filed with the Registrar
within thirty days. Special resolution must be passed in a duly convened meeting. An
application in the prescribed form and prescribed manner shall be made to the Central
Government for approval of such change in the place of registered office of the company.

The alteration shall not take effect unless the resolution is confirmed by the Central
Government. The Central Government before confirming or refusing to confirm the change will
consider primarily the interests of the company, and its shareholders and whether the change
is bonafide and not against the public interest. The Central Government may then issue the
confirmation order on such terms and conditions as it may think fit.

After obtaining approval from the Central Government for change of registered office, a
certified copy of approval order shall be submitted to the Registrar of each of states within the
prescribed time. The Registrar of the Sate where the registered office is being shifted to shall
issue a fresh certificate of incorporation, indicating the alteration.

ii. Alteration of the Object Clause – Section 13[8]: A company which has raised money
from the public through prospectus, and still has any unutilized money so raised, shall not
change its objects for which it has raised the money unless a special resolution is passed
in this regard.

Alteration in the case of company limited by guarantee – Section 13 [11]: Any provision
in the memorandum or articles, in the case of a company limited by guarantee and not having
a share capital, purporting to give any person a right to participate in the divisible profits of the
company, otherwise than as a member shall be void.

Effect of non-Registration with Registrar – Section 13 [10]: Any alteration, if not

registered shall have no effect. If the documents required to be filed with the Registrar are not
filed within one month, such alteration and the order of the Central Government and all
proceedings connected therewith shall a the expiry of such period become void and inoperative.
32

iii. Alteration of Capital Clause: The procedure for the alteration of share capital and the
power to make such alteration are generally provided in the Articles of Association. A
Limited Company having a share capital, may, if so authorized by its articles, alter its
memorandum in its general meeting.

iv. Alteration of Liability Clause: Ordinarily the liability clause cannot be altered to make
the liability of members unlimited. This is because the liability of the members cannot be
increased without their consent. A company limited by shares or guarantee cannot change
its memorandum as to impose any additional liability on the members or to compel them
to take additional shares of the company. The Act lays down that, a member cannot, by
changing the memorandum or articles, be made to take more shares or to pay more for
the shares already taken, unless he agrees to do so in writing either, before or after the
change.

S.No. Clause in Memorandum Procedure for Amending the Clause

1. Name Clause Special Resolution to be passed with the

approval of the Central Government. Power is
delegated to the Registrar of Companies.

2. Registration of Office Special resolution and approval of the Central

Government are required if the registered office
has to be shifted from one state to another state.
Board resolution is need for the change of the
office, in the same city or town. However if the
office has to be shifted to a difference district
special resolution may be passed. In the second
and third cases no alteration is required in
Memorandum since the state in which the office
is situated in the same state.

3. Object Clause Special resolution supported by Board resolution

to be passed.

4. Liability Clause For alteration from unlimited to limited N

 33

3.4 Doctrine of Ultravires

The term Ultra means beyond and Vires means powers. This would mean that a company
cannot carry on activities beyond what has been provided and authorized in the object clause of
the company as business to be carried out.

This doctrine was propounded in the famous British case, ‘Ashbury Railway Carriage
and Iron Company Vs Richie [1975]’. In this case Ashbury Railway Company in its object
clause authorized the company to manufacture rolling railway wagons, spare parts and other
components.

The Company entered into a contract with a Belgium Entrepreneur for laying down railway
tracks. Some of the shareholders object to the company entering into a contract for laying
down railway tracks which had not been authorized under the object clause.

However, the company passed a special resolution which had approved such activities
considered to be beyond the powers authorized under the object clause. When a suit was filed
questioning this activity, it was contended on behalf of the company that the majority of the
shareholders of the company had already approved the ultra Vires act. Therefore there is no
question of the company acting beyond its powers. Finally the court held that any act done by
the company found beyond its powers given to it in its memorandum is unlawful.

Even majority of the shareholders, cannot approve such act not found in the object clause
of the company. Hence the act of laying down tracts was beyond the power of the company as
it was not found in the object clause of the company. Hence the act has been considered as
unlawful. Doctrine of ultra vires has been upheld in Dr. Lakshmanaswami Mudaliar Vs LIC [AIR
1963 S.C.1185]

Check Your Progress- A

1. Define of memorandum of association.
34

2. What do you mean by Doctrine of Ultravires?

3. Write a short note on ‘capital clause’.

3.5 Meaning of Articles of Association

A company’s Articles of Association (AOA) is a primary declaration of the company’s

nature, purpose and ends which, along with the Memorandum of Association, forms together
the company’s constitution. These must be submitted at the time of application for incorporation.
They define clearly the responsibilities of the directors, the kind of business to be undertaken,
and the means by which the shareholders exert control over the board of directors.

Articles of association are written rules which set out how a company should be run and
governed. They are agreed upon by a company’s shareholders, directors and secretary.

Articles of association outline the rules for running, governing and owning the corporation;
including the responsibilities and powers of the directors, and how much
influence shareholders have over the board of directors.

This is important as it can prevent disputes within the company and gives shareholders
confidence in the directors. For example, articles of association can ensure that directors do
take certain actions without the approval of the shareholders, and that shareholders cannot
make unreasonable demands of the directors.
 35

3.6 Content of Articles of Association

The Articles of Association (AoA) or the Articles, contain rules for the internal management
of a company. It is a legal document prepared by a company to explicitly state the purpose of
a company, the procedure to conduct its internal affairs and most importantly the responsibility
and authority of the directors, members and other stakeholder. The Articles have to be submitted
to the Registrar of Companies during formation of a company in Form INC-34 along with the
Memorandum of Association in in Form INC-33.

While the Memorandum deals with the external affairs of a company, the Articles essentially
deal with the internal working of a company. Table F to J of Schedule 1 of the Companies Act,
2013 contain the model articles that companies can refer to. Companies may adopt wholly or
in part these tables i.e. tailor their articles depending upon specific requirements.

Some of the common affairs mentioned in the Articles of a company are:

1. Share Capital

2. Alteration of Capital

3. Calls on

4. Rights of shareholders

5. Variation of shareholders’ right

6. Issue of preference shares

7. Lien on shares

8. General Meetings

9. Proxy

10. Board of Directors and their responsibilities

11. Dividend distribution

12. Buy back of shares

13. Transmission of Shares

36

14. Dematerialization

15. Winding up

16. Accounts and Auditing

17. Company Seal

18. Borrowing powers

19. Company’s Key Managerial Personnel - Whole-time director, manager, secretary

3.7 Alteration of Articles of Association

Articles can be altered according to Section 14 of the Companies Act. The entrenchment
provision for Articles of a company protects the interest of minority shareholders by allowing
amendment in the articles after getting required prior approval of the shareholders. In cases of
any conflict, the Memorandum supersedes the Articles and the Companies Act supersedes
both Memorandum and Articles of a company.

The following are the provisions to alter the articles as given in Section 14 of the Companies
Act, 2013;

i. Conversion of a private company into a public company or a public company into private
company is permitted.

ii. Such conversion shall comply with the provisions of the Act and conditions in its
memorandum.

iii. A special resolution shall be passed for such conversion.

iv. The Act requires certain restrictions and limitations to be included in the articles of a
private company. Where a private company alters its articles in such a manner that they
no longer include such restrictions imposed by the act, then the company shall cease to
be a private company from the date of such alterations.

v. Approval shall be obtained from the tribunal for converting public company into a private
company.
 37

vi. Every alteration in the articles and copy of the tribunal’s approval for conversion of public
company into private company shall be filed with the Registrar, together with a printed
copy of the altered articles, within a period of fifteen days in such a manner as may be
prescribed.

3.8 Restrictions Imposed on Alterations of Articles

of a company
i. No company can alter the Memorandum or the Articles of a Company inconsistent with
the order of National Company Law Tribunal [NCLT].

ii. Articles cannot be framed so as to convert a Public Company into a Private Company
without the approval of NCLT.

iii. Articles cannot be amended so as to contravene the provisions of the MoA of the
Companies Act or any other law, Articles should not be opposed to public policy.

iv. Listed Companies cannot amend their Articles which would be opposed to the norms of
listing agreements.

v. Retrospective amendment will be permissible as long as:

[a] Vested rights are not adversely affected. Vested interest signifies a right over some
property not subject to any condition which will arise on the completion of the prior
interest.

[b] Articles should not be prejudicial to the interest of the public dealings with the
company.

[c] Amendment must be bonafide and in the interest of the company.

[d] An amendment that a company will have a lien on shares of the company even in
respect of debts incurred before the amendment was held valid.

vi. Any step taken by the company to amend article must be bonafide and that too in the
interest of the company. An amendment which gives the power to the majority member’s
to compulsorily acquire the shares of the minority shareholders is not for the benefit of the
company as a whole, but it is only for benefit of the majority shareholders. Hence the
court held the amendment to be invalid.
38

vii. Any article which gives room for committing breach of contract either between the company
and third parties or between the company and members, officers and other personnel

cannot be justified.

viii. The provisions in the article cannot be made for expelling a member from the company. In

the case of listed companies such provision shall not be valid. However, this clause may

be valid in the case of Non – Profit companies.

ix. The amendment in the Articles should be framed so as to constitute fraud on minority

shareholders. In one case, it so happened that members of one company happen tro be
members of another company. Such of those members happened to be the majority of

the latter company also. It was found that the loan borrowed by the former from the latter

company was delayed and ultimately evaded. Since the members of the former company
happened to be members in majority of the latter, they passed a resolution that the loan

borrowed by the former company need not be repaid. The minority members, of the latter

company who were aggrieved by this, went to the court which held the resolution to be
invalid and the amount to tyranny of the majority on the minority. Finally the court held that

the loan borrowed by the former company must be returned to be latter company with

interest forthwith.

x. The statutory of the company to amend that Articles cannot be curtailed. Further a company
cannot enter into a contract contrary to its Articles unless the Articles permits the company

to enter into a contact to the contrary.

xi. When the NCLT has ordered for amendment of Articles and / or Memorandum of the

company it is mandatory and automatic for the company concerned to alter the Articles

and Memorandum as the case may be.

xii. Whenever the NCLT passes an order sanctioning amalgamation / arrangement / merger

then the Memorandum and Articles stand automatically get amended.

 39

3.9 Differences between Memorandum and Articles of

Association

Memorandum of Association Articles of Association

Memorandum of Association is a An article of Association of the company

document which regulates the internal is document which regulates the internal
charter of the company and defines management of the company.
the scope of its activities.

It defines the relation of the company
with the rights of the members of the
company and establishes the
relationship of the company with the
members
These are the rules made by the company for
carrying out the objects of the company as set
out in the memorandum.

Memorandum of Association cannot The articles being only the by-laws of the
be altered except in the manner and company can be altered by a special resolution.
to the extent provided by the Act.

Memorandum is a supreme document Articles are subordinate to the memorandum.

of the company They cannot altered or control the
memorandum.

A company cannot depart from the Anything done against the provisions of articles,
provisions contained in its memorandum, but which is intra-vires the memorandum, can
if it does, it would be ultra-vires the be ratified.
company.

3.10 Doctrine of Constructive Notice

The Memorandum and Articles, on registration, assume the character of public documents.

The office of the Registrar is a public office and documents registered there are open and
accessible to the public at large. Therefore, every outsider dealing with the company is deemed
to have notice of the contents of the Memorandum and Articles. This is known as Constructive
Notice of Memorandum and Articles.

Under the doctrine of ‘constructive notice’, every person dealing or proposing to enter
into a contract with the company is deemed to have constructive notice of the contents of its
40

Memorandum and Articles. Whether he actually reads them or not, it is presumed that he has
read these documents and has ascertained the exact powers of the company to enter into
contract, the extent to which these powers have been delegated to the directors and the
limitations to such powers. He is presumed not only to have read them, but to have understood
them properly. Consequently, if a person enters into a contract which is ultra
vires the Memorandum, or beyond the authority of the directors conferred by the Articles, then
the contract becomes invalid and he cannot enforce it, not-withstanding the fact that he acted
in good faith and money was applied for the purposes of the company.

3.11 Doctrine of Ultra Vires and Indoor Management

The doctrine of indoor management follows from the doctrine of ‘constructive notice’ laid
down in various judicial decisions. The hardships caused to outsiders dealing with a company
by the rule of ‘constructive notice’ have been sought to be softened under the principle of
‘indoor management’. It affords some protection to the outsiders against the company.

According to this doctrine, after satisfying themselves that the proposed transaction is
intra vires the memorandum and articles, persons dealing with the company are not bound to
enquire whether the internal proceedings were correctly followed. They are entitled to assume
that the internal proceedings relating to the contract are regular as per the memorandum and
articles. When an outsider enters into a contract with the company, he is presumed to have
knowledge of the provisions of memorandum and articles as per the doctrine of constructive
notice. But he is not required to go beyond that and to enquire whether the internal proceedings
required by these documents have been regularly followed by the company. They need not
enquire whether the necessary meeting was convened and held properly or whether necessary
resolution was passed properly. They are entitled to take it for granted that the company had
gone through all these proceedings in a regular manner. This is known as the Doctrine of
Indoor Management.

The doctrine of indoor management was  first  propounded  by  Lord  Hatherlyin  the

celebrated case Royal British Bank vs. Turquand. The directors of the Bank had issued a bond
to Turquand. The company  was empowered by its Articles to issue such bonds provided it
 41

was authorized by a resolution of the company in general meeting. In this case no such resolution
had been passed. It was held that Turquand could recover the amount of bond from the company
on the ground that he was entitled to assume that the necessary resolution had been passed
by the company.

3.12 Exceptions to the Doctrine of Indoor Management

No benefit under the doctrine of indoor management can  be  claimed  by  a  person
under the following circumstances:

 Where a person dealing with the company has actual or constructive notice of any
irregularity in the internal proceedings of the company.

 Where a person did not in fact consult the Memorandum and Articles of the company
and consequently did not act on knowledge of these documents.

 Where a person dealing with the company was negligent and, had he not been negligent,
could have discovered the irregularity by proper enquiries.

 Where a person dealing with the company relies upon a forged document or the act done
by the company is void.

 Where a person enters into a contract with an agent or officer of the company and the act
of the agent/officer is beyond the authority granted to him.

3.13 Duties of Company Secretary in the Formation and

Incorporation of Company

Company Secretary Appointment and his Rights and Obligations needs to understand
the definitions and as per sec. 2(24) of Companies Act 2013, Company Secretary means a
Company Secretary define in sec. 2(1)(c) of the Company Secretaries Act 1980. As per this
clause, Company Secretary means a person who is a member of Institute of Company Secretary
of India.

The company secretary plays an important role in the formation and incorporation of a
company. He acts as an advisor to the promoters to carry on their functions in compliance with
the legal provisions at this stage.
42

Duties at the formation stage

a) To arrange the meetings of the promoters from time to time

b) To attend the meetings of the promoters, record the proceedings and keep the minutes of
these meetings.

c) To ascertain from ROC [Registrar of Company] if the proposed name of the company is
available for registration.

d) To make an application to the ROC of the state where the registered office is to be situated,
specifying the name and place of Registered Office, along with prescribed fee.

e) To obtain a letter of No Objection from the Registrar for the Approval of name of the
company.

f) To arrange for registration of new company within a period of three months from the date
of letter of No Objection.

g) To assist promoters in the finalization of various preliminary contracts with vendors,

underwrites, bankers, auditors and solicitors.

h) To prepare the draft of Memorandum and Articles of Association.

i) To get informal prior clearance from the ROC for the documents of the company to be
submitted for registration.

j) To get the memorandum and articles printed and stamped as per the Stamp Act and
singed by the required number of subscribers.

Duties at the Incorporation Stage

a) To file the application for registration with the Registrar of Companies along with the
prescribed documents and to pay the necessary stamp duty, filing fees and registration
charges.

b) To ensure the compliance with the provisions of the Companies Act, 2013.

c) To get a letter of authority from the subscribers to the Memorandum to collect the Certificate
of Incorporation.

d) To obtain the Certificate of Incorporation from the Registrar of Companies.

 43

Check Your Progress - B

1. What is Articles of Association?

2. What do you mean by ‘Lien on Shares’?

3. Define proxy.

3.14 Summary

Memorandum of association is one of the important documents to be prepared and

maintained by a company. It is like a constitution of the company. It is like a constitution of the
company. Memorandum of association shows the scope, powers and limitations of the company.
A person who deals with the company is expected to have knowledge on its memorandum of
association. Registered office, object clause, name clause, liability clause and capital clause
are the important contents of memorandum of association. A company cannot easily alter the
memorandum. The procedures for alternation must be strictly followed for making alternation
in the memorandum of association.

Articles of Association, the second important document of a company, contain rules,

regulations and bye-laws for the internal administration of the company. The articles regulate
the internal management of the company. Articles define the powers of the directors and other
officers of the company. Articles also govern the relationship between the company and its
44

constituent members by prescribing the rights and obligations of the members of the company.
Section 2(2) of the Companies Act defines articles of association as follows:

“Articles mean the articles of association as originally framed or as altered from time to
time in pursuance of any previous company’s law or of this Act.” Company Secretary is
managerial personnel in a private sector company and in a public sector company; a Company
Secretary is a person who can represent his company before any quasi-judicial body in relation
to any legal dispute and other legal litigation.

3.15 Key Words

 Ultravires

 Indoor Management

 Rights of Shareholders

 Meetings

 Proxy

 Lien

 Shares.

3.16 Review Questions

1. What are the contents of the Memorandum of Association?

2. How can be the contents of Memorandum of Association be altered?

3. Explain the procedures to be followed for making alternation in the memorandum of

association.

4. Describe the importance of memorandum of association.

5. What is Articles of Association? Explain the contents of it.

6. Discuss the steps involved in the alteration of Articles of Association.

7. What is Doctrine of Indoor Management?

8. Distinguish between Memorandum and Articles of Association.

9. Explain the duties of a company secretary relating to the formation and incorporation of
company.
 45

UNIT 4
PROSPECTUS

Learning Objectives
After studying this unit, you should be able to:

 Understand the concept of Prospectus

 Examine the matters to be stated in the prospectus

 Review civil and criminal liability for miss statement of prospectus

Structures
4.1 Introduction

4.2 Meaning

4.3 Definition

4.4 Features of Prospectus

4.5 Contents of Prospectus

4.6 Legal Requirements Regarding Issue of Prospectus

4.7 Role of Secretary in the Issue of Prospectus

4.8 Red Herring Prospectus

4.9 Civil and Criminal Liability as to Prospectus

4.10 Categories of Prospectus (Including Statement in lieu of Prospectus)

4.11 Summary

4.12 KeyWords

4.13 Review Questions

4.1 Introduction

A prospectus is  a  legal  document  issued  by  companies  that  are offering securities

for sale. Mutual funds also provide a prospectus to potential clients, which include a description
of the fund’s strategies, the manager’s background, the fund’s fee structure and a fund’s financial
statements.
46

4.2 Meaning

“A prospectus means any documents described or issued as a prospectus and includes

any notices, circular, advertisement, or other documents inviting deposit for the public or
documents inviting offer from the public for the subscription of shares or debentures in a
company.” A prospectus also includes shelf prospectus and red herring prospectus. A prospectus
is not merely an advertisement.

A document shall be called a prospectus if it satisfy two things:

1) It invites subscription to shares or debentures or invites deposits.

2) The aforesaid invitation is made to the public.

4.3 Definition
Section 2(70) of the Companies Act, 2013 defines a prospectus as “any document issued
as a prospectus and includes any notice, circular, advertisement or other document inviting
deposits from the public or inviting offers from the public for the subscription or purchase of any
share in, or debentures of a body corporate.”

It is a document which invites deposits from the public or invites offers from the public for
the subscription of shares in, or debentures of, a company. The words “inviting deposits from
the public” were added by the Companies (Amendment) Act.

First prospectus is a notice, circular, or communication or advertisement to the interested

investing public inviting them to contribute their funds towards purchase of shares in a company.
The funds that are invested by the public may be in the form of Debentures or Deposits.

Secondly a prospectus is an importance document containing all the relevant information

about the company’s activities pertaining to its function, financial soundness and managerial
personnel of the company.

Thirdly such prospectus must be in writing, registered and authenticated that the
information contained in the prospectus are genuine and true.

Fourthly, it is issued strictly as per guidelines prescribed by SEBI so that the public should
not be misled or misguided by the information contained in the prospectus.
 47

4.4 Features of Prospectus

i. It is a document issued as a prospectus;

ii. It is an invitation to the member of the public;

iii. The public is invited to subscribe to the shares or debentures of the company;

iv. It includes any notice, circular, advertisement inviting deposits from the public;

v. It is a document by which the company procures its share capital needed to carry on its
activities.

4.5 Contents of Prospectus

(Matters to be stated in the Prospectus)
a. Address of the registered office of the company.

b. Name and address of company secretary, auditors, bankers, underwriters etc.

c. Dates of the opening and closing of the issue.

d. Declaration about the issue of allotment letters and refunds within the prescribed time.

e. A statement by the board of directors about the separate bank account where all monies
received out of shares issued are to be transferred.

f. Details about underwriting of the issue.

g. Consent of directors, auditors, and bankers to the issue, expert’s opinion if any.

h. The authority for the issue and the details of the resolution passed therefore.

i. Procedure and time schedule for allotment and issue of securities.

j. Capital structure of the company.

k. Main objects and present business of the company and its location.

l. Main object of public offer and terms of the present issue.

m. Minimum subscription, amount payable by way of premium, issue of shares otherwise

than on cash.

n. Details of directors including their appointment and remuneration.

48

o. Disclosure about sources of promoter’s contribution.

p. Particulars relation to management perception of risk factors specific to the project,

gestation period of the project, extent of progress made in the project and deadlines for
completion of the project.

4.6 Legal Requirements Regarding the Issue of Prospectus :

( Sec. 26 of the Companies Act, 2013)

The Companies Act has defined some legal requirements about the issue and registration
of a prospectus. The issue of the prospectus would be deemed to be legal only if the requirements
are met.

1) Issue after the incorporation: As a rule, the prospectus of a company can only be
issued after its incorporation. A prospectus issued by, or on behalf of a company, or in
relation to an intended company, shall be dated, and that date shall be taken as the date
of publication of the prospectus.

2) Registration of prospectus: it is mandatory to get the prospectus registered with the

Registrar of Companies before it is issued to the public. The procedure of getting the
prospectus registered is as under:

A. A copy of the prospectus, duly signed by every person who is named therein as a
director or a proposed director of the company must be filed with Registrar of Companies
before the prospectus is issued to the public.

B. The following document must be attached thereto:

i)  Consent to the issue of the prospectus required under any person as an expert confirming
his written consent to the issue thereof, and that he has not withdrawn his consent as
aforesaid appears in the prospectus.

ii)  Copies of all contracts entered into with respect to the appointment of the managing
director, directors and other officers of the company must also be filed with Registrar.

iii)  If the auditor or accountant of the company has made any adjustments in the company’s
account, the said adjustments and the reasons thereof must be filed with the documents.
 49

iv)  There must be a copy of the application which is to be filled for the issue of the company’s
shares and debentures attached with the prospectus.

v)  The prospectus must have the written consent of all the persons who have been named
as auditors, solicitors, bankers, brokers, etc.

C.  Every prospectus must have, on the face of it, a statement that:

i)  A copy of the prospectus has been delivered to the Registrar for registration.

ii)  Specifies that any documents required to be endorsed by this section have been delivered
to the Registrar.

D.  A copy of the prospectus must be filed with the Registrar of Companies.

E.  According to the Section 26, no prospectus shall be issued more than ninety days after
the date on which a copy thereof is delivered for registration.

If a prospectus issued in contravention of the above –stated provisions, then the company
and every person who knows a party to the issue of the prospectus shall be punishable with a
fine.

4.7 Role of Company Secretary in the issue of Prospectus

 To ensure that there is full, frank, and honest disclosure of all material facts with scrupulous
accuracy in the prospectus.

 To ensure that the information contained in the prospectus is strictly as per the provisions
laid down in section 26 of the companies Act, 2013.

 To check that no false or misleading statement is contained in the prospectus.

 To prepare the draft of prospectus or statement in lieu of prospectus.

 To get the prospectus or statement in lieu of prospectus.

 To see that the prospectus is dated and duly signed by the authorized signatories.

 To file the prospectus with the registrar and arrange to issue the prospectus to the public.
50

4.8 Red Herring Prospectus

“Red Herring Prospectus” means  a  prospectus  which  does  not  include  complete

particulars of the quantum or price of the securities included therein.

Section 32 of the Act deals with Red Herring Prospectus. It provides that”

i. As per this section, a company proposing to make an offer of securities may issue a red
herring prospectus prior to the issue of a prospectus.

ii. A company proposing to issue a red herring prospectus shall file it with the Registrar at
least three days prior to the opening of the subscription list and the offer.

iii. A red herring prospectus shall carry the same obligations as are applicable to a prospectus.
Any variation between the red herring prospectus and a prospectus shall be highlighted
as variations in the prospectus.

iv. Upon the closing of the offer of securities, the prospectus stating therein the total capital
raised, whether by way of debt or share capital, and the closing price of the securities and
any other details as are not included in the red herring prospectus shall be filed with the
Registrar and the Securities and Exchange Board.

Red herring prospectus is issued during book building process. Red herring prospectus
contains either the floor price of securities offered or a price band along with the range within
which the Bids can move. The applicants bid for the shares quoting the price and the quantity
that they would like to bid at. SEBI (ICDR) Regulations prescribe certain disclosures to be
made in the red-herring prospectus.

Once the offer for securities is closed, a final prospectus stating therein the total capital
raised whether by way of debt or share capital, the closing price of the securities and any other
details which are not complete in the red-herring prospectus shall be filed with SEBI in the case
of listed public company and in any other case with the Registrar of companies only.

4.9 Civil and Criminal Liability for Misstatement of Prospectus

A prospectus is said to be misleading or untrue in two following cases:

 51

a. A statement included in a prospectus shall be deemed to be untrue, if the statement is

misleading in the form and context in which it is included.

b. Omission from prospectus of any matter to mislead the investors.

Criminal Liability for Mis-Statement In Prospectus (Section 34)

Where a prospectus, issued, circulated or distributed:

1) includes any statement which is untrue or misleading in form or context in which it is

included; or

2) where any inclusion or omission of any matter is likely to mislead;

3) Every person who authorizes the issue of such prospectus shall be liable under section
447 i.e. fraud.

Defenses available in this section are:

a. Person proves that statement or omission was immaterial;

b. Person has reasonable ground to believe and did believe that statement was true; or

c. Person has reasonable ground to believe and did believe that the inclusion or omission
was necessary.

Civil Liability for Mis-Statements in Prospectus (Section 35):

Where a person has subscribed for securities of a company acting upon any misleading
statement, inclusion or omission and has sustained any loss or damage as its consequence,
the company and every person who:

1) is a director at the time of the issue of prospectus;

2) has named as director or as proposed director with his consent;

3) is a promoter of the company;

4) has authorized the issue of the prospectus; and

5) is an expert; shall be liable to pay compensation to effected person. This civil liability shall
be in addition to the criminal liability under section 36. Where it is proved that a prospectus
52

has been issued with intent to defraud the applicants for the securities of a company or
any other person or for any fraudulent purpose, every person shall be personally
responsible, without any limitation of liability, for all or any of the losses or damages that
may have been incurred by any person who subscribed to the securities on the basis of
such prospectus.

Defenses under this section are:

a. he has withdrawn his consent or never give his consent;

b. the prospectus was issued without his knowledge or consent and when he became aware,
gave a reasonable public notice that prospectus was issued without his knowledge or
consent.

4.10 Categories of Prospectus

1) Statement in lieu of Prospectus: A public company, which does not raise its capital by
public issue, need not issue a prospectus. In such a case a statement in lieu of prospectus
must be filed with the Registrar 3 days before the allotment of shares or debentures is
made. It should be dated and signed by each director or proposed director and should
contain the same particulars as are required in case of prospectus proper.

2) Deemed Prospectus: Section 25 of the companies Act, 2013 provides that all documents
containing offer of shares or debentures for sale shall be included within the definition of
the term prospectus and shall be deemed as prospectus by implication of law.

Unless the contrary is proved an allotment of or an agreement to allot shares or debentures

shall be deemed to have been made with a view to the shares or debentures being offered for
sale to the public if it is shown

a.  That the offer of the shares or debentures of or any of them for sale to the public was
made within 6 month after the allotment or agreement to allot; or

b.  That at the date when the offer was made the whole consideration to be received by the
company in respect of the shares or debentures had not been received by it.

All enactments and rules of law as to the contents of prospectus shall apply to deemed
prospectus.
 53

3) Abridged Prospectus [Sec. 2(1)]: Abridged prospectus means a memorandum containing

such salient features of a prospectus as may be specified by the SEBI by making
regulations in this behalf. No form of application for the purchase of any of the securities
of a company shall be issued unless such form is accompanied by an abridged prospectus.
A copy of the prospectus shall, on a request being made by any person before the closing
of the subscription list and the offer, be furnished to him.

4.11 Summary

A prospectus is a legal document issued by companies that are offering securities for
sale. Mutual funds also provide a prospectus to potential clients, which include a description of
the fund’s strategies, the manager’s background, the fund’s fee structure and a fund’s financial
statements.

4.12 Key Words

 Minimum Subscription

 Under Writing

 Commission

 Criminal Liability

4.13 Review Questions

1. What do you understand by ‘Prospectus’?

2. What are the contents of Prospectus?

3. Explain the various classification of Prospectus?

4. Outline the legal requirements required for the issue of Prospectus.

5. Write a note on ‘Statement in lieu of Prospectus’.

54

UNIT 5
UNDERWRITING AND
BOOK BUILDING PROCESS

Learning Objectives
After studying this unit, you should be able to:

 define underwriting

 explain the types of underwriting

 state the meaning of Book Building Process

 explain what is Green Shoe Option

 describe the E-filing

 discuss Dematerialization

Structure
5.1 Meaning of Underwriting

5.2 Types of Underwriting Agreement

5.3 Meaning of Book Building

5.4 Book Building Process

5.5 Green Shoe Option

5.6 E-filing

5.7 Dematerialization

5.8 Summary

5.9 Key Words

5.10 Review Questions

5.1 Meaning of Underwriting

When a company wants to raise funds by the issue of shares or debentures, it should
raise at least 90% of the issue within a time limit of 120 days from the date of opening the
 55

issue. In order to avoid that risk, the public companies enter into underwriting arrangements.
Underwriting means guaranteeing to subscribe to an agreed number of shares or debentures
for a certain consideration. In other words, the company will pay anyone a certain percentage
of commission on all shares or debentures issued to the public if the person guarantees that he
will take the remaining shares, which are not taken up by the public.

As such, the person or institution who underwrites the issue is called as “underwriters”
and the commission so paid is called as “underwriting commission”. In our country, underwriting
is done by the Industrial Development Bank of India (IDBI), Industrial Financing Corporation of
India (IFCI), Life Insurance Corporation of India (LIC), The Industrial Credit and Investment
Corporation of India (ICICI), Commercial Banks, Investment Trusts, etc.

Contents of Underwriting Agreements:

 The underwriters must agree to underwrite a certain number of shares or debentures.

 All the shares are to be offered to the public according to the specified prospectus of the
company.

 The underwriting agreement must also contain an authority for the company to allot
balance of the shares, which are not taken up by the public.

 It is an undertaking on the part of the company to pay the commission to the underwriters.

5.2 Types of Underwriting Agreement

There are two types are available. They are as follows:

1. Pure Underwriting (or) Conditional Underwriting: In this underwriting, the

underwriters undertake to subscribe for shares to a certain limit only when the offer,
which is made to the public is not fully subscribed for, (i.e.), the balance of shares to be
taken over by them.

2. Firm Underwriting: In this type of underwriting, the underwriters agree to make an

outright purchase of shares. Therefore, under this type, the underwriters stipulate that
they must be allowed a given number of shares whether the issue is oversubscribed or
not. Of course, if there is any oversubscription of shares, they will get the priority over the
general public regarding allotment of shares.
56

5.3 Meaning of Book Building

Book building may be defined as a process used by companies raising capital through
Public Offerings-both Initial Public Offers and Follow-on Public Offers to aid price and demand
discovery. It is a mechanism where, during the period for which the book for the offer is open,
the bids are collected from investors at various prices, which are within the price band specified
by the issuer. The process is directed toward both the institutional investors as well as the retail
investors. The issue price is determined after the bid closure based on the demand generated
in the process.

5.4 Book Building Process

The book building process is undertaken basically to determine investor appetite for a
share at a particular price. It is undertaken before making a public offer and it helps determine
the issue price and the number of shares to be issued. The following are the important points
in book building process:

 The issuer who is planning an offer nominates lead merchant bankers as “book runners”

 The number of securities to be issued and the price band for the bids are specified by the
issuer.

 The issuer appoints syndicate member with whom orders are to be placed by the investors.

 The syndicate members put the orders into an “electronic book”. This process is called
“bidding”.

 Normally for a period of 5 days the books remains opened

 Bids have to be entered within the specified price band.

 Bids can be revised by the bidders before the book closes.

 The book runners evaluate the bids on the basis of the demand at various price levels.

 The book runners decide the final issue price of the securities.
 57

 Generally, the number of shares is fixed; the issue size gets frozen based on the final
price per share.

 Allocation of securities is made to the successful bidders. The rest bidders get refund
orders.

If the price quoted by an investor is less than the final price, he will not get allotment. If
the price quoted is higher, the amount in excess of the final price is refunded if he gets allotment.
If the allotment is not made, full money is refunded within 15 days after the final allotment is
made. If the amount is not refunded within the specified time, he can demand interest at 15%
p.a. on the amount due.

5.5 Green Shoe Option

It is a special provision in an Initial Public Offer prospectus, which allows underwriters to

sell investors more shares than originally planned by the issuer. This would normally be done
if the demand for a security issue proves higher than expected. A green shoe option allows
underwriters to short sell shares in a registered securities offering at the offering price. (Normally
not more than 15% of the original number of shares offered)

In a company prospectus, the legal term for the green shoe is “over-allotment option”,
because in addition to the shares originally offered, shares are set aside for underwriters. This
type of option is the only means permitted by the Securities and Exchange Commission (SEC)
for an underwriter to legally stabilize the price of a new issue after the offering price has been
determined. The price stabilization under green shoe option works as following:

 The underwriter works as a liaison (like a dealer), finding buyers for the shares that their
client is offering

 A price for the shares is determined by the sellers and the buyers (Sellers - Company
owners and directors; Buyers - Underwriters and clients)

 Once the price is determined, these shares are not to be traded below the offering price.
It is to be ensured by the underwriter.
58

If the underwriter finds there is a possibility of the shares trading below the offering price,
they can exercise the green shoe option. In order to keep the price under control, the underwriter
oversells or shorts up to 15% more shares than initially offered by the company.

Green shoe option allows the underwriters to have buying power in order to cover their
short position when a stock price falls, without the risk of having to buy stock if the price rises.
In return, this helps keep the share price stable, which positively affects both the issuers and
investors.

5.6 E-Filing

The process of electronically filing income tax returns through the internet is known as e-
filing or electronic filing of return. There are two ways to file income tax returns.

 Traditional way (offline way)

 E-filing

Provisions relating to E-filing of Return under Income Tax Act (Sec 139D)

Sec. 139D empowers the Central Board of Direct Taxes to make rules regarding E-filing
of return by various persons. It states that the Board may make rules providing for:

 The class of persons who shall be required to furnish the return in electronic form;

 The form and the manner in which the return in electronic form may be furnished;

 The documents, statements, receipts, certificates, or audit reports which may not be
furnished along with the return in electronic form but shall be produced before the
Assessing Officer on demand;

 The computer resource or the electronic record to which the return in electronic form
may be transmitted.

As per Rule 12(3) of Income Tax Rules, 1962 companies in all the cases should furnish
their return of income only electronically under digital signature. For companies it is mandatory
to use digital signature while filing tax return using E-filing.
 59

5.7 Dematerialization

Investments in shares and debentures can be held in electronic or dematerialized form in

a depository. Depository is an entity, which holds securities of investors in electronic form at
the request of the investors. Dematerialization is comparable to keeping money in a bank
account. In de-mat form, physical share certificates are replaced by electronic book entries;
purchase of shares are reflected as credits in demat account and sales are reflected as debits.
Dematerialization is said to be a process by means of which the shares instead of being
possessed in paper from are converted in the form an electronic account. It is maintained by a
bank in respect of money deposited under a savings bank account.

Advantages of Dematerialization

i. Shares cannot be lost, stolen or mutilated

ii. There is no need to doubt the genuineness of shares as to whether they are forged or
faked

iii. Share transactions like transfer, transmission and splitting of shares fan be effected
expeditiously without delay

iv. Cost of the transaction involving the above activities is considered to be lower than the
expenses incurred through post and courier

v. There is no possibility of risk or delivery of goods in bad shape

vi. Bonus / rights shares that are allotted to the shareholder will be automatically credited to
his / her account without delay

vii. Prompt periodical statement of accounts disclosing the shareholdings and connected
transactions are communicated to the investors with speed and perfection

viii. The investor can directly clarify his / her doubts either with regard to his shareholdings
including future plans

ix. The Depository system also acts as collateral security for raising loans from any financial
institution.
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Procedure with regard to Dematerialization of shares

When a depositor desires to invest his shares in electronic form, he should approach a
Depository Participant [DP], who is an agent legally authorized to open and maintain accounts
on shares in electronic form. For this purpose, the investor should surrender the share certificates
in the physical form to the DP agent.

On receipt of the share certificates, the DP will arrange to forward them to the company
for the purpose of verification and confirmation of records. The company thereafter will credit
the investors’ account with an equivalent number of shares converting them into electronic
form. This process of converting the shares of the investor into electronic form from paper form
is known as dematerialization.

Transmission of the transaction by the broker

The DP agent has to be requested to debit or credit the investor’s account pertaining to
the transaction. Accordingly, the DP agent will immediately arrange to complete the transaction
by updating the investors’ account. There is no need to communicate to the company in order
to register the transfer because of the improved technology of electronic communication.

Grievance Redressal

Occasions may arise when the investor may have grievances against the company in
which the shares are held. Such grievances may pertain to non – receipt of share certificate,
allotment letter, transfer or transmission of shares, non – receipt of dividend, interest warrant,
refund order including non – receipt of accounts. In such cases, the DP has to be approached
as he is the agent who will follow the established procedures of the company and get the
problem solved. The DP may also guide the investor on the further course of action he has to
take depending upon the circumstances of the case.

A depository participant is an agent of the depository through which investors maintain

and operate their de-mat account; the depository participant provides the interface between
investors and the depository. Just as banking services can be availed through a branch,
depository services can be availed through a depository participant. Any financial service provider
 61

including, financial institutions, banks, state financial corporations, etc., complying with SEBI’s
norms can be register and function as a depository participant.

Advantages of De-mat Form

 Allotment of shares in public issue is credited to de-mat account.

 There is no scope of loss of share certificates in transit.

 There is no scope for bad delivery or fake shares.

 There is no scope for delay in transfer of shares.

 There is considerable reduction in paperwork and transaction cost in de-mat mode.

 Investors can view all their investments in single account.

 All the corporate benefits are received directly in to de-mat account and dividend in to
bank account registered in the de-mat account

Check Your Progress

1. What do you mean by Underwriting?

2. What is E-filing?
62

3. What do you mean by green shoe option?

5.8 Summary

Guaranteeing to subscribe to an agreed number of shares or debentures for a certain

consideration, the person or an institution who underwrites the issue is called as underwriting
and the commission so paid is called underwriting commission. Underwriters undertake to
subscribe for shares to a certain limit only when the shares are not fully subscribed by the
public. The underwriters agreed to make an outright purchase of shares. It is a process used
by the company raising capital through initial offers and follow on public offers to avoid price
and demand discovery It is a special provision in an initial public offer prospectus, which allows
underwriters to sell investors more shares than originally planned by the issuer (normally not
more than 15% of the original number of shares offered).Filing income tax returns electronically.
Investments in shares and debentures can be held in electronic or dematerialized from in a
depositary. It is comparable to keeping money in a bank account.

5.9 Key Words

 Documentation

 Green Shoe Option

 E-Filing

 Dematerialization

5.10 Review Questions

1. What are the types of underwriting?

2. List out the contents of underwriting

3. Explain in detail about the Book building process

4. Elucidate the legal provisions related to dematerialization

5. Enumerate the provisions related to E-filing

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UNIT 6
SHARE CAPITAL & DEBENTURES

Learning Objectives
After studying this unit, you should be able to:

 Explain different kinds of share capital

 Discuss the Procedure for Alteration of share capital

 Explain the rules and regulations relating to the issue of share capital

Structure
6.1 Introduction

6.2 Types of Share Capital

6.3 Mobilization of Capital

6.4 Kinds of Shares

6.5 Alteration of Share Capital

6.6 Issue of Further Capital

6.7 Right Issue

6.8 Bonus Issue

6.9 Private Placement and Preferential Allotment

6.10 SEBI Guidelines Relating to Issue of Shares

6.11 Debentures

6.12 Unsecured Loan from Director and his Relatives

6.13 Summary

6.14 Key Words

6.15 Review Questions

6.16 Answers to Check Your Progress

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6.1 Introduction

We know that the company required by the company for its business activities is raised
(collected) by it from the public. The money so raised is called the capital of the company which
is usually divided into different units of a fixed amount. These units are called the ‘shares’. The
person who hold the shares of a company are called the members or shareholders of the
company.

6.2 Types of Capital

Capital means the money being invested to start a new business or to buy the existing
business from others. In case of a joint stock company, the term ‘share capital’ refers to the
amount of capital raised, or to be raised, by way of issue of shares by the company. Under the
companies Act, the various terms pertaining to Capital of a company denote to the following:

a. Authorized Capital: This is also known as nominal capital or registered capital. This is
the maximum amount of capital which a company is authorized to raise by way of issue of
shares. The amount of authorized capital is stated in the memorandum of the company. The
Authorized Capital signifies the sum total of the aggregate capital funds divided intro units of
shares authorized for issue to the public. When once capita is authorized to be used for business,
it is termed as authorized capital.

Norms required for Authorized Capital:

 Raising capital will be sanctioned, on satisfaction of certain features regarding the type
of securities such equity and preference shared and the ratio of debt, equity which must
be1:2 and the need for Directors of the company to take part in the capital as per guidelines
under SEBI guidelines.

 Now it is not required by law that the Public Limited Company must have a minimum of
not less than five lakhs as capital and Private company not less than one lakhs of rupees
as paid up capital.

 The Registrar will register the Authorized Capital of the shares are listed through Stock
Exchange of the state concerned in which the company desired to raise its capital.
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b. Issued Capital: It is customary in joint stock companies to issue only a part of the
authorized capital for subscription. A part of the authorized capital which is offered to the
public for subscription is called the ‘issued capital’. It also includes the share subscribed
by the signatories to the memorandum. Since capita is a scarce resource, it has to be
economically used. It is not advisable to exhaust the entire authorized capital, since
capital must be used frugally depending upon its utility and the return it fetches.

Un Issued Capital: The balance that remains as authorized capita after a portion of it
has been distributed to the public is known as unissued capital. This unissued capital has
to be issued further as and when the already issued capital has become fully subscribed
and paid up capital. The unissued capital forming part of the authorized capital may be
issued further as and when further capital is required.

c. Subscribed Capital: This refers to that part of issued capital of a company which has
been taken up or subscribed by the public. In case of reputed companies, the entire
issued capital may be subscribed by the public whereas in less reputed companies, the
subscribed capital may be less than the issued capital. It can also be defined as that part
of the issued capital which has been agreed to be taken up by the public in return for
subscription.

Unsubscribed Capital: It must be remembered that the entire capital may not be taken
up for contributing subscription. There may be still the unsubscribed portion of the issued
capital which has to be made as fully subscribed. As per SEBI guidelines an underwriting
contract becomes necessary to make the unsubscribed shares as fully subscribed. As
underwriting contract is one where a party fully guarantees for undertaking the
responsibility of making the unsubscribed portion of the issued shares tro be fully
subscribed for which he is paid commission under the statute.

d. Called up Capital: Generally, the joint stock companies do not collect the share money
in full at a time. Instead, it will be collected in parts, such as the time of received application,
at allotment and remaining during different calls subsequently. Called up capital is that
part of issued capital which has been called up by the company. Uncalled capital is that
part of issued capital which has not been called up by the company.
66

Need for Called up Capital: Collection of entire capital from the allottees of shares is
not a prudent method of planning capital. Capital being a scarce resource they should be
collected as and when circumstances warrant for requirement of capital. Thrift on the usage of
capital is so essential that in Financial Management capital budgeting forms an integral part of
Financial Management. It is up to the company to carefully plan for the collection of funds at
the appropriate stages depending upon the necessity of funds.

Uncalled Capital: It represents that part of the face value of the shares which has not
been called up by the Board of Directors as per Articles of the Company. This uncalled capita
may be converted into Reserve Capital which is different from Capital Reserve. The sum
constituting the reserve capital can be called up only by the Liquidator at the time of winding up
of the company. This is made with a view to lend additional support to the creditors by way of
security who has advanced loans to the company.

e. Paid up Capital: This is the amount, which has actually been paid up by the shareholder
or which is credited as paid up on the shares. Often shareholders fail to pay the calls made on
them and the amount thus owing is known as ’calls-in-arrears’ or ‘calls unpaid’.

f. Reserved Capital: Reserve capital can only be created under Section 65 which stated
that a limited company may, by special resolution, determine that any portion of its uncalled
share capital shall not e capable of being called up except in the event of winding up. This is
done so with an intention to give additional security to the creditors. Reserve capital cannot be
turned into ordinary capital without leave of the Court nor can it be cancelled in reduction of
capital. This type of share capital is also known as the ‘reserve liability’ of the shareholders.
This is because it is that portion of the value of each share, which cannot be called up except
in the case of winding up of the company.

6.3 Mobilization of Capital

Share Capita are said to be own funds of the company. Share capital can be raised in
the following manners:

i. Private Placement: A Public Company under section 23 [2] [b] if authorized by special
resolution can approach friends and relatives of promoters and directors, requesting them
to purchase the shares of the company.
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ii. Public Issue: The Company can invite the public to contribute towards share capital
through prospectus. Public offer can be [a] Initial Public Offer [IPO], [b] by further public
offer of the securities of the company and [c] By offer for sale of securities by an existing
share holder through issue of prospectus.

iii. Rights Issue: According tro Section 23[1][c], a public company 23 [2] [a] aprivate company
can ask its existing members to take up new shares in proportion totheir existing share
holdings.

iv. The company can grant sweat equity shares to its employees, directors and promoters.

v. ESOP and ESOS on passing of special resolution: Shares may be issued to others for
consideration of cash or other than cash.

vi. Issuing fully paid up bonus shares.

6.4 Kinds of Shares

The capital of a company is divided into small units and each such unit is known as a
share. Section2 (84) of the Companies Act defines a share “as a share in the share capital of
a company, and includes tock, except when distinction between stock and share is expressed
or implied”. The following are the features of shares:

 A share is a fractional part of the capital of the company.

 It forms the basis of ownership of certain rights and interests of a subscriber in the
company.

 It is not a sum of money but an interest or right measured ina sum of money to participate
in the profits made by a company while it is a going concern or in the assets of the
company when it is wound up.

 It is a movable property and they can be transferred in the manner specified in the Articles.

Stock

Stock in a company means “ a bundle of fully paid shares put together for convenience,
so that it may be divided into any amount and transferred into a any fractions and sub divisions
without regard to the original face value of the share”.
68

A company cannot issue stock originally and the stock can only be obtained by conversion
provided shares are fully paid up and the Articles empower the company to convert shares into
stock. For conversion of the shares into stock, an ordinary resolution shall be passed by the
members. A stockholder enjoys the same rights and privileges as that of a shareholder.

Conversion of share into stock shall be duly informed to the Registrar by way of filing
notice within 30 days of such conversion. On receipt of such notice, the Registrar shall register
the same and make necessary alterations in the company’s memorandum.

There may be different kinds of shares in any company with varying rights as to dividend
and voting. Different kinds of shares are discussed here under:

I. Preference shares

The shares which enjoy preferential right as to;

 The payment of dividend at a fixed rate during the life of the company;

 Return of capital on winding up of the company.

Preference shareholders enjoy preferential right over equity shareholders and thus will
get their fixed rate of dividend before anydividend is distributed among the other class of
shareholders.

Voting rights of Preference Shareholders

The preference shareholders do not enjoy normal voting rights like the equity shareholders.

They are, however, entitled to vote in the following two cases;

 When any resolution directly affecting their rights is to be passed, That is, any resolution
for winding up of the company or for the repayment or reduction of its share capital is to
be regarded as a resolution directly affecting the rights of the preference shareholders
and therefore they are entitled to vote on such resolution.

 When the dividend due on their preference share or part thereof has remained unpaid:
 69

a. In the case of cumulative preference shares, for an aggregate period of not less
than two years preceding the date of the meeting; and

b. In the case of non-cumulative preference shares, either for a period of two

consecutive years or for an aggregate period not less than three years comprised
in the six years ending with the expiry of the financial year immediately preceding
the date of the meeting.

When the dividend due on their preference shares has remained unpaid for periods
specified above, the preference shareholders are entitled to vote on every resolution placed
before the company at any general meeting.

Kinds of Preference Shares

There may be different kinds of preference shares depending upon the terms of issue
which are either defined in the Articles or in the prospectus of the company. The following are
the various types of preference shares:

a. Cumulative Preference Shares: In case dividend is not declared, because of inadequate

profit, the right to dividend for that year does not lapse in the case of cumulative preference
shares. Dividends not declared and paid get accumulated so that they may be paid out of
profits of subsequent years as arrears of dividend before any dividend is paid to equity
shareholders. Preference shares are always cumulative, unless the contrary is expressly
stated in the Articles of Association.

b. Non-Cumulative Preference Shares: In the case of non-cumulative preference shares

if dividend is not paid in any particular year, it lapses. Dividend is not allowed to accumulate
and such unpaid dividend will not be paid in subsequent years even though sufficient
profits are earned.

c. Participating Preference Shares: In addition to the fixed rate of dividend, these shares
carry a further right to participate with the equity shareholders in the surplus profits which
remain after paying a certain rate of dividend to equity shareholders. Thus they get two
kinds of dividend, one fixed rate and the other changing every year depending on the
level of excess profits. Similarly such preference shares have a right to participate in the
70

surplus assets of the company on its winding up after paying in full the preference and
equity share capital.

The right to participate in the surplus profits or surplus assets at the time of winding up is
available to preference shareholders only if it is specifically expressed in the articles. In
other words preference shares are presumed to be nonparticipating unless specifically
stated otherwise in the articles.

d. Non-Participating Preference Shares: These shares are entitled to only a fixed rate of
dividend. They do not participate either in the surplus or in the surplus assets. In such a
case, the entire surplus goes to equity shareholders.

If the articles are silent with regard to this right to participate in the surplus profit or surplus
assets, the preference shares will be considered to be only of nonparticipating type.

e. Convertible Preference Shares: Where preference shares entitle their shareholders to

convert their preference shares into equity shares within a specified period, they are
known as Convertible Preference Shares.

f. Non-Convertible Preference Shares: Where preference shares cannot be converted

into equity shares, they are called non-convertible preference shares. Once issued as
preference shares, they continue to be only preference shares throughout the life time of
the company without any change in their characteristics. If the Articles are silent regarding
this right to convert, the preference shares will be considered to be only Non-Convertible
Preference Shares.

g. Redeemable Preference Shares: If the Articles of Association authorize, a company

can issue redeemable preference shares. It means, that the capital raised by means of
these shares can be returned after a specified period or at any time at its options after
giving notices per terms of issue. These shares can be redeemed either out of profits or
out of the proceeds of a fresh issue of shares. Redeemable preference shares can be
redeemed if they are fully paid-up. A company cannot convert existing preference shares
into redeemable preference shares.

h. Irredeemable Preference Shares: Any preference share that cannot be redeemed during
the lifetime of the company is known as irredeemable preference Shares.
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II. Equity Shares

Equity shares are those, which are not preference shares. They were also known as
ordinary shares. They are entitled to get dividend only after the fixed rate of dividend is paid to
preference shareholders. Similarly at the time of winding up of the company, only after returning
preference share capital in full, and if there is any surplus, it will be paid to equity shareholders.
The rate of dividend varies from year to year depending on the profits earned by the company.

The larger the profits the higher may be the dividend for equity shareholders. In the case
of reputed companies, rate of dividend paid to equity shareholders is far higher than the fixed
rate paid to preference shareholders. However, when there is no profit in any year, equity
shareholders’ dividend for that year will not be paid as arrears of dividend in subsequent years
even though profits may be very large. Equity shareholders are entitled to vote on all resolutions.

III Deferred Shares

These shares are also known as “founders’ shares”, since they are often held by the
promoters of the company. These shares, being ordinary shares get only a fixed dividend like
preference shares. After paying dividends on all other kinds of shares, such shares are the last
to receive both dividends and repayment of capital. They carry disproportionate voting rights.

6.5 Alteration of Share Capital

The capital of the company is mentioned in the capital clause of its memorandum of
association. The company may later its share capital by altering the capital clause of its
memorandum of association. However, the company may do so only if it is authorized by its
articles of association. However, the company may do so only if it is authorized by its articles of
association. The company may alter its share capital on any one of the following ways [section
61(1)]:

1. Increase its authorized share capital by issuing new shares.

2. Consolidate and divide the whole or any part of its share capital into shares of larger
amount, e.g. consolidation of 1,000 shares of Rs.10 each into 500 shares of Rs.20 each.
However, where such consolidation and division of share capital results in change in the
72

voting percentage of shareholder, then it can be done only with the prior approval of the
Tribunal [Section 61 (1)(b), proviso]. It is a new proviso, which was not there in earlier
Section 94 of the Companies Act,

3. Sub-divide the whole or any part of its share capital into shares of smaller amount e.g.,
subdivision of 1,000 shares of Rs.10 each into 2,000 shares of 5 each.

4. Convert all or any of its fully paid-up shares into stock, or reconvert the stock into fully
paid up shares of any denomination.

5. Cancel those shares which have not been taken up by any person and thereby diminish
the amount of its share capital accordingly. Such cancellation of shares does not amount
to reduction of capital as only such shares are cancelled which were not taken by any
person.

The alteration of share capital as stated above may be made by the company by passing
an ordinary resolution at a general meeting. Such Alteration does not require any confirmation
of the Tribunal. However, within 30 days of the alteration (i.e. passing of the resolution of
alteration), the company must give notice, of such alteration, to the Registrar of Companies.
On receipt of the notice, the Registrar shall record the same and make necessary alteration in
company’s memorandum or articles of association [Section 64].

To sum up, the legal requirements for the alteration of share capital of the company may
be stated as under:

(a) The ‘articles of association’ of the company must contain a clause authorizing the company
to alter its share capital. If the articles contain no such clause, then the articles must first
be mended by a special resolution before the power to alter share capital is exercised by
the company [Re Patent Invert Sugar Co., (1885) 31 Ch.D.166].

(b) The company should pass an ordinary resolution at its general meeting to alter the share
capital.

(c) The power to alter share capital should be exercised in bona fide manner and in the
interest of the company as a whole and not for the benefit of any particular group.
 73

6.6 Issue of Further Capital

A company may require additional funds for financing its expanding business and for this
purpose it may decide to make a subsequent or further issue of shares under one of the
following two conditions:

 When the share capital already issued is less than the authorized capital of the company
and the proposed further issue of shares is within the limits of the authorized capital.

 When the share capital already issued is equal to the authorized capital of the company
and the intended further issue of shares is therefore, beyond the limits of the authorized
capital.

Under both the conditions, further issue of shares is possible only if the company is
authorized by its articles to do so. If the Articles do not provide for it, then the Articles must first
be altered to that effect by passing a special resolution. In addition to this alteration, Board of
directors’ resolution is required when the proposed further issue is within the limits of authorized
capital. If the further issue exceeds the limit of authorized capital, sanction of the shareholders
by means of an ordinary resolution must be obtained for increasing the authorized capital after
the Board’s resolution. It must be noted that if the Articles provide that a special resolution
would be required, the company must pass a special resolution instead of an ordinary resolution.

6.7 Right Issue [Section 62]

According to Section 62 of the Companies Act, if a public company wants to increase its
subscribed capital by allotment of further shares after two years from the date of its formation
or one year from the date of its first allotment, whichever is earlier, should offer share at first to
the existing shareholders in proportion to the shares held by them at the time of offer. Such an
issue is called the ‘Right Issue’.

The shareholders have no legal binding to accept the offer and they have the right to
renounce the offer in favour of any person. Shares of this type are called right shares. According
to Section 62, the company has to satisfy certain conditions to make right issue which are as
follows:
74

 Right shares must be offered to the equity shareholders in proportion to the capital paid
on those shares.

 A notice should be issued to specify the number of shares issued.

 The time given to accept the right offer should not be less than 15 days and not exceeding
30 days from the date of offer,

 The notice also should state the right of the shareholders to renounce the offer in favour
of others.

 After the expiry of the time given in the notice, the Board of Directors has the right to
dispose the unsubscribed shares in such a manner, s they think most beneficial to the
company.

6.8 Bonus Issue [Section 63]

A company may be following a policy of not distributing all the profits every year. It may
accumulate large reserves over time. If the Articles so permit, it may convert a part of these
reserves into share capital by issuing fully paid bonus shares to the existing shareholders.
‘Bonus is something given in addition to what is usually or strictly due. It is distributed among
the shareholders, in addition to dividend, by making partly paid shares fully paid free of cost.
Thus, the issue of bonus shares helps the company to capitalize its undistributed profits paving
way for increased resources and earning capacity of the company.

The company Act, 2013 has introduced provisions enabling use of Bonus Shares to the
members, in any manner out of:

 Its free reserves [The term ‘free reserves’ should not include any change in carrying
amount of an asset or of a liability recognized in equity];

 The Security Premium Account; or

 The capital. Redemption reserve account.

The following conditions are to be compiled with for the issue of bonus shares:

 The issue of bonus shares must be authorized by the Articles of the company.
 75

 It must be recommended by a Board resolution and then approved by the shareholders

in general meeting.

 It must be in accordance with the guidelines issued by SEBI.

SEBI Guidelines relating to Issue of Shares:

a. First issue of new companies:

 A new company is one which has not completed 12 months of commercial operations
and it is audited operative results are not available

 They permit to issue shares to public only at par.

 Where a new company is set up by existing companies with a 5 year track record if
consistent profitability.

 The participation of such promoting companies should not be less than 50 percent of the
equity of such new company.

 The issue price should e made applicable to all new investors uniformly.

 A draft prospectus containing the disclosures will be vetted by SEBI before a public issue
is made.

 The shares of the above companies can be listed on either over the counter exchange of
India or any other stock exchanges.

b. First issue by existing private/closely held companies:

 Companies with a 3 year track record of consistent profitability shall be permitted to

freely price the issue and list their securities on the stock exchanges.

 Not less than 20 percent of the equity should be offered.

 The draft prospectus will be vetted by SEBI to ensure adequacy of disclosures.

 The price would be determined by the issuer.

c. Public issue by existing Listed Companies:

76

 These companies will be allowed to raise fresh capital by freely pricing their further issues.

 The issue price will be determined by the issuer in consultation with the lead managers to
the issue.

 High and low price of the shares for the last 2 years.

Difference between Shares and Debentures:

S. No Shares Debentures

1. The share of a company provides They are creditors of a company who

ownership to the shareholders. provide loan to the company.

2. Person holding share is known Person holding debenture is known as

as shareholder debenture holder.

3. No certainty of return in case of Debenture holder receives the interest even

loss for the shareholder. if there is no profit.

4. Shares cannot be converted into Debentures can be converted into shares.

debentures.

5. Shareholders have the right to Debenture holders do not possess any

participate and vote in company’s voting right and cannot participate in
meeting. meeting.

6.9 Private Placement and Preferential Allotment

Private Placement

The private placement implies selling of securities, i.e. debentures or equity shares, to
private investors, with the aim of raising funds for the company. According to section 429(2) of
the Companies Act 2013, the private placement is one in which a company makes an offer to
selected persons such as mutual funds or insurance companies by issuing a Private Placement
Offer Letter and satisfying the conditions thereon.
 77

The 2013 Act requires that certain specified conditions are complied with, in order to
make an offer or invitation of offer by way of private placement or through the issue of prospectus.

 The allotment with respect to any earlier offer or invitation may have been completed.

 All the money payable towards the subscription of securities shall be paid through cheque,
demand draft or any other banking channels but not by cash.

 The offers shall be made only to such persons whose names are recorded by the company
prior to the invitation to subscribe, and that such persons shall receive the offer by name.

 The company offering securities shall not release any advertisements or utilize any media,
marketing or distribution channels, or gents to inform the public at large about such an
offer [Section 42 of 2013 Act].

Preferential Allotment

Preferential Allotment is used to mean the issue of specified securities by a company

listed on a recognized stock exchange, to any select person or group of persons, on preferential
basis. The offer is subject to the rules and regulations made by Securities and Exchange
Board of India, in this regard. However, when an unlisted company goes for preferential allotment
the rules of the Companies Act, 2013 will apply.

The offer can be made to any person whether they are equity shareholders and employees
of the company or not. Following regulations must be complied with, in relation to preferential
allotment:

 The allotment is authorized by the company’s articles of association.

 The company’s members must pass a special resolution, or it is approved by Central

Government.

 The securities issued through preferential allotment should be fully paid, when the issue
is made.

 As per SEBI takeover code, a preferential allotment exceeding 25% of equity constitutes
an open offer to the existing shareholders.
78

 Shares issued to promoters as preferential allotment are subject to a lock in period of

three years, and so they cannot transfer such shares. Nevertheless, the securities issued
to other investors are subject to lock-in period of one year only.

6.10 SEBI Guidelines Relating to Issue of Shares

First issue of new companies

a. A new company is one;

 Which has not completed 12 months of commercial operations and its audited operative
results are not available; and

 Where it is set up by the entrepreneurs without a track of record and permitted to issue
shares to public only at par.

b. Where a new company is set up by existing companies with a 4 year trace record of
consistent profitability, i t will be free to price its issue.

c. The participation of such promoting companies should not be less than 50 per cent of the
equity of such new company.

d. The issue price should be made applicable to all new investors uniformly.

e. A draft prospectus containing the disclosures will be vetted (subject to expert appraisal)
by SEBI before a public issue is made.

f. NO private placement of the promoters shall be made by solicitation of share contribution

from un-related investors through any kind of market intermediaries.

First issue by existing private/closely held companies

a. Companies with three-year track record of consistent profitability shall be permitted to
freely price the issue and list their securities on the stock exchange.

b. Not less than 20 percent of the equity should be offered.

c. The draft prospectus will be vetted by SEBI to ensure adequacy of disclosures.

 79

Public issue by existing Listed Companies

a. These companies will be allowed to raise fresh capital by freely price their further issues.

b. Pricing – The issue price will be determined by the issuer in consultation with the lead
managers to the issue

c. Disclosures –

 The draft prospectus will be vetted by SEBI to ensure adequacy of disclosures.

 The prospectus or offer documents shall contain the net asset value of the company
and a justification for the price of the issue.

 High and low price of the shares for the last 2 years.

These guidelines have been amended form time to time to meet the requirements of the
Law as and when mended.

Difference between Equity Shares and Preference Shares

Basis for Shares Debentures

comparison

1. Meaning The shares are the owned The debentures are the
funds of the company. borrowed funds of the company.

2. What is it? Shares represent the capital Debentures represent the debt
of the company. of the company.

3. Holder The holder of shares is known The holder of debentures is

as shareholder. known as debenture holder.

4. Status of Holders Share holders are Owners Debenture holders are not
and members of a company members but they are Creditors

5. Form of Return Shareholders get the Debenture holders get the

dividend. interest.
80

6. Payment of return Dividend can be paid to Interest can be paid to

shareholders only out of debenture holders even if there
profits. is no profit.

7. Allowable deduction Dividend is an appropriation Interest is a business expense

of profit and so it is not and so it is allowed as deduction
allowed as deduction. from profit.

8. Security for payment They have no floating charge They have a floating charge on
on the whole of the assets of the whole of the assets of the
the company company

9. Voting Rights The holders of shares have The holders of debentures do

voting rights. not have any voting rights.

10. Conversion Shares can never be converted Debentures can be converted

into debentures. into shares.

11. Repayment in the Shares are repaid after the Debentures get priority over
event of winding up payment of all the liabilities. shares, and so they are repaid
before shares.

12. Quantum Dividend on shares is an Interest on debentures is a

appropriation of profit. charge against profit.

13. Trust Deed No trust deed is executed in When the debentures are issued
case of shares. to the public, trust deed must be
executed.

Issue of New Shares

When a company wishes to issue shares to the public, there is a procedure and rules that it
must follow as prescribed by the Companies Act 2013. The money to be paid by subscribers can
even be collected by the company in instalments if it wishes. Let us take a look at the steps and the
procedure of issue of new shares.
 81

Procedure of Issue of New Shares

i. Issue of Prospectus : Before the issue of shares, comes the issue of the prospectus.
The prospectus is like an invitation to the public to subscribe to shares of the company. A
prospectus contains all the information of the company, its financial structure, previous
year balance sheets and profit and Loss statements etc.

It also states the manner in which the capital collected will be spent. When inviting deposits
from the public at large it is compulsory for a company to issue a prospectus or a document
in lieu of a prospectus.

ii. Receiving Applications : When the prospectus is issued, prospective investors can now
apply for shares. They must fill out an application and deposit the requisite application
money in the schedule bank mentioned in the prospectus. The application process can
stay open a maximum of 120 days. If in these 120 days minimum subscription has not
been reached, then this issue of shares will be cancelled. The application money must be
refunded to the investors within 130 days since issuing of the prospectus.

iii. Allotment of Shares : Once the minimum subscription has been reached, the shares
can be allotted. Generally, there is always oversubscription of shares, so the allotment is
done on pro-rata bases. Letters of Allotment are sent to those who have been allotted
their shares. This results in a valid contract between the company and the applicant, who
will now be a part owner of the company.

If any applications were rejected, letters of regret are sent to the applicants. After the allotment,
the company can collect the share capital as it wishes, in one go or in instalments

Private Placement of securities

As per Section 42 of the Companies Act 2013, “Private Placement” means any offer of
securities or invitation to subscribe or issue of securities to select group of persons who have
been identified by the Board of the company (other than by public offer) through private placement
offer letter and which satisfies the conditions as stipulated in this section.

For private placement of securities, the company should issue private placement offer
letter to select persons identified by the Board of the company and those persons should
82

submit the application form to the company and pay the application money either by cheque or
demand draft or any other mode except through cash. The company is required to file necessary
forms in this regard and also to keep the application money in a separate bank account which
should not be utilized unless allotment of shares is made and the return of allotment is filed for
the same.

Preferential Allotment

Preferential allotment of shares is made as per provisions of Section 62 (1)(c) and Rule
13 of Companies (Share Capital and Debentures) Rules 2014. “Preferential offer” means an
issue of shares or other securities by a company to a select person or group of persons on
preferential basis. The preferential issue does not include shares issued by way of private
placement, rights issue, bonus issue, employee stock option or the like.

Equity shares, fully convertible debentures, partly convertible debentures and any other
securities convertible into equity shares at a later date can be issued on a preferential basis.
The preferential allotment can be made for cash or a consideration other than cash. A company
can issue shares on preferential basis to its promoters, other companies, venture capitalists,
angel investors, etc. for raising funds as required by it.

Sweat Equity Shares

Private companies having scarce funds or start-ups can issue sweat equity shares, as
per Section 54 of the Companies Act, 2013, to its directors or employees for consideration
other than cash in lieu of the services or the know-how given by such employees or directors to
the company. The issue of sweat equity shares is a win-win situation both for the company and
the Employees as the company would not have part with major funds for availing value addition
services or know-how and the employees would be inclined to work austerely for a company in
which they have a stake.

6.11 Debentures
Meaning of Debentures

A debenture is a name applied to an instrument issued by company evidencing an

indebtedness which is normally but not necessarily, secured by a charge over company’s
 83

property. Debentures are instrument in return of borrowed funds. These are generally secured
upon the company’s specific property or a floating charge on the assets of the undertaking. It
include debenture stock. It can be issued at par, at a premium or at a discount in accordance
with the provisions contained in the Articles of the company.

Section 2(30) of the Companies Act, 2013 defines ‘Debentures’ as securities which include
debenture stock, bonds or any other instrument of a company which evidences a debt of the
company whether constituting a charge on its assets or not.

A company can issue debentures with an option to convert such debentures into shares
either wholly or partly at the time of redemption of debentures. A company can issue both
secured and unsecured debentures; however, no debentures shall have voting rights. Secured
debentures can be issued upon fulfilling following conditions:

 The date of debenture redemption should not be more than 10 years from the date of
issue;

 The company has to create charge a value which is sufficient for the due repayment of
the number of debentures and interest thereon, on the properties or assets of the company;

 A debenture trustee should be appointed before the issue of prospectus or letter of offer
for subscription of debentures but not later than 60 days after the allotment of the
debentures;

 execute a debenture trust deed to protect the interest of the debenture holders;

 Debenture Redemption Reserve should be formed by the company for the redemption of
debentures.

Debentures are an excellent tool to raise finance by way of debt however in case of
convertible debentures, the private company should ensure that at no point in time the number
of members exceeds 200.

Characteristic Features of a Debenture

In the light of this definition, the characteristic features of a debenture are as follows:

1. It is issued by a company and is usually in the form of a certificate which is an

acknowledgement of indebtedness.

2. It is issued under the company’s seal. It need not, however, be necessarily under the
company’s seal.
84

3. It is one of a series issued to a number of lenders. But a single debenture is also not
uncommon. Thus a mortgage of a company’s property to a single individual as security
for a loan is a debenture within the definition given earlier.

4. It usually specifies a particular period or date as the date of repayment. It also provides
for the payment of specified principal and interest at the specified date. But a company is
not debarred from issuing perpetual or irredeemable debentures.

5. It generally creates a charge on the undertaking of the company or some parts of its
property; but there may be debentures without any such charge.

6. A debenture holder does not have any right to vote in the company meetings.

Nature of Debenture

The debentures of a company are a movable property, transferable in the manner provided
by the Articles.

Pre-requisites at the time of issuing debentures

 A company may issue debentures with an option to convert it into shares, wholly or partly
on the condition that it shall be approved by passing a special resolution at the general
meeting.

 No company shall issue any debentures carrying any voting rights.

 A debenture trustee shall be appointed before the issue of prospectus or letter of offer for
subscription of debentures and within a period of 60 days from the date of allotment, a
debenture trust deed is made to protect the rights and interest of debenture holders.

 Where debentures are issued by a company, it shall constitute a Debenture Redemption

Reserve account out of the profits of the company available for payment of dividend and
the amount credited to such account shall not be used by the company except for the
redemption of debentures.

 No company shall issue a prospectus or make an offer or an invitation to the public or to

its members exceeding 500 members for the subscription of its debentures, unless the
 85

company has, before such issue or offer, chosen one or more debenture trustees and
the conditions governing the appointment of such trustees as may be prescribed by the
act.

Kinds of Debentures

Debentures may be of the following kinds:

1. Bearer debentures : These debentures, also known as unregistered debentures, are

payable to its bearer. These are regarded as negotiable instruments and are transferable
by delivery, an a bona fide transferee for value is not affected by the defect in the title of
the prior holder.

2. Registered Debentures : These are debentures which are payable to the registered
holders. A holder is one whose name appears both on the debenture certificate and in the
company’s register of debentures. The registered holder of the debentures can transfer
them like shares Sec(108), but a transfer to be complete has to be registered with the
company. It should further be noted that these debentures are transferable in the manner
specified in the conditions endorsed thereon. Registered debentures are not negotiable
instruments.

3. Secured Debentures : Debentures which create some charge on the property of the
company are known as secured debentures. The charge may be a fixed charge or a
floating charge.

4. Unsecured Debentures : Debentures which do not create any charge on the assets of
the company are known as unsecured or naked debentures. The holders of these
debentures like ordinary unsecured creditors may sue the company for recovery of the
debt.

5. Redeemable Debentures : Debentures are usually issued on the condition that they
shall be redeemed after a certain period. Such debentures are known as redeemable
debentures. They may be re-issued after redemption in accordance with the provisions of
Sec.121.

6. Irredeemable or Perpetual Debentures : When debentures are irredeemable, they are

called perpetual debentures. A debenture will be treated as irredeemable where either
86

there is no period fixed for repayment of the principal amount or repayment of it is made
conditional on the happening of an event which may not happen for an indefinite period or
may happen only in certain specified and contingent events, e.g., the winding up of the
company. They are not invalid because of the- condition that they are made irredeemable
or redeemable only on the happening of some contingency, or on the expiration of a
period, however long, say, 100 years after the issue of debentures (Sec. 120).

7. Convertible Debentures : These debentures give an optional to the holders to convert

them into preference or equity shares at stated rates of exchange, after a certain period.
If the holders exercise the right of conversion, they cease to be lenders to the company
and become members instead.

The convertible debentures may be fully convertible or partly convertible.

8. Non-Convertible Debentures : These debentures do not give any option to their holders
to convert them into preference or equity shares. They are to be duly paid as and when
they mature.

9. Pari-passu Debentures : Debentures with pari-passu clause are entitled to share the
proceeds of the securities of the company equally amongst themselves irrespective of
the time when these debentures were issued.

10. Ranked Debentures : Debentures without pari-passu clause rank according to the date
of issue or serial number of debentures.

Debentures with voting rights not to be issued (Sec.117)

A company cannot issue any debentures carrying voting rights at any meeting of the
company, whether generally or in respect of particular classes of business. This has been
done in view of the secured position of the debentures-holders and in order to keep them off
from influencing the policy of the general body of the shareholders.

Issue of Debentures at a discount

Debentures can be issued at a discount, unless the Articles provide otherwise. No

formalities, like the ones in case of issue of shares, have to be gone through, the reason being
that the debentures do not form part of the capital of a company. But particulars of such discount
 87

or any allowance or commission in relation to the issue of the debentures are to be filed with
the Registrar for registration (Sec. 129). Again, interest payable on debentures may be paid
out of capital. It should, however, be noted that convertible debentures cannot be issued at a
discount entitling the holders to exchange them for shares of par value, as this would be an
indirect method of issuing shares at a discount. If convertible debentures are to be issued at a
discount, compliance with Sec.79 would be necessary.

Remedies of Debenture-Holders

The remedies of a debenture-holder of a company vary according to whether he is secured

or unsecured. An unsecured debentures holder is in exactly the same position as an ordinary
trade creditor. Like any other unsecured creditor, he has two remedies:

1. He may sue for his principal and interest,

2. He may, if he wishes, petition under Sec. 439 for the winding up of the company by the
Court on the ground specified in Sec.433(e), namely, that the company is unable to pay
its debts.

A secured debenture-holder has both the above remedies; but in addition he has also the
following courses open to him:

1. Debenture-holders’ action : He may sue on behalf of himself and all other debenture-
holders of the same class to obtain payment and enforce his security by sale. This is
known as debenture-holders’ action, and if several debenture-holders sue separately, the
Court can consolidate their suits into one.

2. Appointment of receiver : He may appoint a receiver if the conditions which give him
power to do so are fulfilled or apply to the Court in a debenture-holders’ action to appoint
one. On the appointment of a receiver, the assets become specifically charged in favour
of the debenture-holders, and the powers of the company to deal in them in the ordinary
course of business cease although the company continues to exist until it is wound up

3. Foreclosure : He may apply to the Court for foreclosure of the company’s right to redeem
the debentures. Foreclosure is a process by which the mortgagor, failing to repay the
money lent on the security of a property, is compelled to forefeet his right to redeem the
property.
88

4. Sale : He may sell the property charged as security if an express power to do so is

contained in the terms of issue of debentures. He may also have the property sold through
trustees if such power is given by the debenture trust deed.

5. Proof for the balance : If the company is insolvent and his security is insufficient, he may
value his security and prove for the balance. In the alternative, he may surrender his
security and prove for the whole amount of his debt.

Procedure to Issue Debentures under the Companies Act, 2013

 Call and hold Board meeting and decide which types of the debenture will be issued by
the company.

 If the Company decides to issue secured debenture the company has to comply with the
condition prescribed in the Rule 18 of the Companies (Share Capital & Debentures)
Rules, 2014.

 In case of appointment of Debenture Trustee, consent shall be obtained from a SEBI

registered Debenture Trustee, who is proposed to be appointed. If debentures to be
issued are Secured Debentures, a Debenture Trust Deed in Form No. SH-12 or as near
thereto as possible shall be executed by the Company in favour of Debenture Trustees
within sixty days of allotment of Debentures.

 In the Board meeting pass resolutions for i. Approval of Offer letter for private placement
in Form No. PAS-4 and Application Forms (in case of Private plavement of debentures);
ii. Approval of Form No.PAS-5 (In case of private placement of debentures); iii. Approval
of Debenture Trustee Agreement and appointment of a Debenture Trustee (In case of
Secured Debentures only); iv. Appointment of an expert for valuation (in Case of private
placement of debentures); v. Approval of increase of borrowing powers, if required; vi. To
authorize for creation of charge on the assets of the company; vii. To fix day, date and
time for the extraordinary general meeting of shareholders.

 Prepare the draft of

i. Debenture Subscription Agreement

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ii. Offer Letter for private placement in Form No. PAS – 4 and Application Forms

iii. Records of a private placement offer in Form No.PAS-5

iv. Debenture Trustee Agreement

v. Mortgage Agreement for creation of charge on assets of the company.

 Issue notices of extraordinary general meeting along with the explanatory statement.

 Hold extraordinary general meeting and pass special resolution to issue convertible
secured debentures and increase borrowing powers of the company an dto authorize the
Board to create charge on the assets of the company.

 File Form No.PAS-4 and PAS-5 in Form No. GNL-2 with the Registrar of Companies.

 File Offer Letter in Form No. MGT-14 with the Registrar of the Companies.

 File copy of Board resolutions, Special Resolution, Debenture Subscription Agreement,

Debenture Trustee Agreement etc in Form No. MGT-14 with the Registrar of Companies.

 File Form No.PAS-3 (Return of Allotment) with the Registrar of Companies after making
allotment of debentures.

 File Form No CHG-9 for creation of charge on assets of the Company.

Issue of Debentures, whether redeemable or convertible involves compliance with the

substantive and procedural aspects of law, therefore, documentation becomes very important.

Differences between Shares and Debenture

The following are the major differences between shares and debentures;

1. The holder of shares is known as a shareholder while the holder of debentures is known
as debenture holder.

2. Share is the capital of the company, but Debenture is the debts of the company.

3. The shares represent ownership of the shareholders in the company. On the other hand,
debentures represent indebtedness of the company.
90

4. The income earned on shares is the dividend, but the income earned on debentures is
interest.

5. The payment o dividend can be made only out of current profits of the business and not
otherwise. Unlike the interest on debentures which has to be paid by the company to
debenture holders, no matter company has earned profit or not.

6. Dividend is not a business expense and so is not allowed as deduction. On the contrary,
interest on debentures is a expense and so allowed as a deduction.

7. In the event of winding up, debentures get priority of payment over shares.

8. Shares cannot be converted as opposed to debentures are convertible.

9. There is no security charge created for payment of shares. Conversely, security charge is
created for the payment of debentures.

10. A trust deed is not executed in case of shares whereas trust deed is executed when the
debentures are issued to the public.

11. Unlike debenture holders, shareholders have voting rights.\

12. Shares are issued at a discount subject to some legal compliance. Debentures can be
issued at a discount without any legal compliance.

6.12 Unsecured Loan from Director and his Relatives

A company can accept unsecured loans from a director and their relatives with or without
interest. For a private company, there is no limit on the amount that can be borrowed by a
company from its directors or their relatives. However, at the time of giving the loan to the
company, the director is required to submit a declaration to the company that the amount of
loan given by him is from his own funds and is not being given out from the funds borrowed by
him by way of loan or deposit from others. The company is required to mention in its Board’s
report the amount of unsecured loan taken from a director and his relatives.

The Promoters of a company can also provide an unsecured loan to the company if it
fulfils three conditions:
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 If the loan is brought in due to the condition imposed by a bank or any lending institution
for promoters to bring in funds by way of loan;

 Loan is provided either by promoters themselves or by their relatives or by both; and

 This loan shall subsist only till there is an outstanding loan from such bank or lending
institution and needs to be repaid after the bank or financial institutional loan has been
repaid.

Check Your Progress

A. State True or false

i. Preference shareholders are having the voting rights in a company.

ii. In a private company, there is a restriction to transfer the shares of the company.

iii. The equity shareholders can redeem their shares.

B. Fill in the blanks

i. The capital of a company is divided into certain indivisible units of a fixed amount is called
______________________________

ii. The shares can be classified into __________________ and _________________

iii. ______________________are the members of a company.

6.13 Summary

Share Capital plays a very important role in the structure of a limited company. Each
company, with share capital, has both authorized and issued shares, which can be used to
raise finance, determine ownership and transfer ownership from one party to another.

A share itself is a unit of ownership in a company, which has an accumulation of rights,

interests and obligations. Owning a share does not necessarily mean that you have direct
control over the day to day operations of a business, particularly if you only hold a small
percentage of the issued share capital, however it does entitle you to an equal distribution of
any profits declared in the form of a dividend. Debenture holders are the creditors of the firm.
92

6.14 Key Words

 Minimum Capital

 Maximum Capital

 Right Issue

 Owner Share

 Secured Loan

 Unsecured loan

6.15 Review Questions

1. What is meant by share capital? Explain various kinds of shares.

2. What are the duties of the company Secretary with regard to issue of bonus shares?

3. What are the guidelines issued by SEBI with regard to issue of shares?

4. Write a note on Private Placement and Preferential Allotment.

5. Explain the steps involved in Bonus Issue and Right Issue.

6. What are the kinds of debentures?

6.16 Answers to Check Your Progress

A. State true or false

(i) False

(ii) True

(iii) False

B. Fill in the Blanks

(i) Share

(ii) Equity and Preference

(iii) Equity Shareholders

 93

UNIT 7
DIRECTORS AND KEY MANAGERIAL
PERSONNEL IN CORPORATES

Learning Objectives

After reading this unit, you should be able to:

 Who is called as a director, women director and independent director?

 explain related party transactions

 explain the roles and responsibilities of KMP

 describe the appointment of Key Managerial Personnel

 describe the procedure for remuneration payable to KMP

 explain the code of conduct for KMP

Structure
7.1 Introduction

7.2 Women and Independent Directors

7.3 Director Identification Number

7.4 Related Party Transaction

7.5 Key Managerial Personnel (KMP)

7.6 Roles and Responsibilities of KMP

7.7 Appointment of KMP

7.8 Managerial Remuneration

7.9 Code of Conduct of KMP

7.10 Summary
94

7.11 Key Words

7.12 Review Questions

7.13 Answers to Check Your Progress - B

7.1 Introduction

According to section 2(34) of the Companies Act, “Director” means a director

appointed to the Board of a company based on the functions performed by him, a director may
be defined as “a person who directs, conducts, manages and supervises the affairs of a
company”. It is very difficult to define the exact legal position of the directors of a company.
Directors are sometimes as agents, sometimes as trustees and sometimes as managing
partners. But each of these expressions is used not as exhaustive o their power and
responsibilities, but as indicating useful points of view from which they may or the moment and
for particular purpose be considered.

7.2 Women and Independent Directors

Section 149 provides that the class or classes of companies as may be prescribed in
Rule 3 of Company (Appointment and Qualification of Directors) Rules, 2014, shall have at
least one women director.

Section 149(6) gives the definition of independent director, in relation to a company,

means a director other than a managing director or a whole time director or a nominee director.

 Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise
and experience.

 Who is not a promoter of the company.

 Who has no relationship with the company, its holding, subsidiary or associate company
during the current financial year.

 None of whose relatives has pecuniary relationship or transaction with the company, its
holding, subsidiary or associate company.
 95

 Who, neither himself nor any of his relatives.

 Who possesses such other qualifications as may be prescribed.

1. Number of Independent Directors: Sec.149(4) denotes that every listed public company
shall have atleast one-third of the total number of directors as independent directors and
the Central Government may prescribe the minimum number of independent directors in
case of any class of public companies. It provides that the following class of companies
shall have atleast two directors as independent directors.

2. Qualification of Independent Directors: Rule 5 of Companies (Appointment and

Qualification of Directors) Rules, 2014 provides that an independent director shall possess
appropriate skills, experience, knowledge in one or more fields of finance, law,
management, sales, marketing, administration, research, corporate government, technical
operations or other disciplines related to the company’s business.

3. Selection of an Independent Director: According to sec.150(1) of the Act, independent

directors may be selected from a data bank of eligible and willing persons maintained by
the agency authorized by the Central Government. Such agency shall put data bank of
independent directors on the website of Ministry of Corporate Affairs or any other notified
website. Company must exercise due diligence before selecting a person from the data
bank referred to above as an independent director.

4. Declaration by Independent Director: Sec.149 (7) provides that every independent

director shall at the first meeting of the Board in which he participates as a director and
thereafter at the first meeting of the Board in every financial year or whenever there is any
change in the circumstances, which may affect the status as an independent director,
give a declaration that he meets the criteria of independence as provided in Sec.149(6).

7.3 Director Identification Number

If the Articles of the company permit, the Board can appoint anyone of the managerial
personnel, (i.e), Managing Director or Manager for administration of day-to-day affairs of the
company. Either Managing Director or Manager can be appointed and both of them cannot be
appointed simultaneously. But a whole time director can be appointed in the absence of the
above personnel.
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Every individual intending to be appointed as director of a company shall make an

application for allotment of Director Identification Number to the Central Government in a
prescribed form along with certain fee as may be prescribed. The Central Government shall,
within one month from the receipt of the application allot a Director Identification Number to the
applicant. No individual shall be permitted to apply for, obtain or possess more than one director
identification number.

7.4 Related Party Transactions

Related party transactions are business dealings or arrangements between two parties
who are connected by a special relationship prior to the deal. Related party transactions are
significant and too widespread to be ignored. Under the old act, the scope and coverage of
related party transactions was limited. Many companies and their directors have been under
the scanner for related party deals. The term “related party” has been defined u/s 2(76) of the
Act to include following persons:

i) a director or his relative;

ii) a key managerial personnel or his relative;

iii) a firm, in which a director, manager or his relative is a partner;

iv) a private company in which a director or manager is a member or director;

v) a public company in which a director or manager is a director or holds along with his
relatives, more than 2% of its paid-up share capital;

vi) any body corporate whose Board of Director, managing director or manager is accustomed
to act in accordance with the advice, directions or instructions of a director or manager;

vii) any person on whose advice, directions or instructions a director or manager is accustomed
to act;

viii) any company which is

 a holding, subsidiary or an associate company of such company; or

 a subsidiary of a holding company to which it is also a subsidiary;

ix) Such other person as may be prescribed;

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Sec. 188 of the Companies Act, 2013 has clubbed the provisions regulating contracts
and office or place of profit. It has thoroughly revised the ambit and conditions for entering into
contracts and agreements with related parties. Following are the transactions, which are set
out in Sec. 188 (1)

a) sale, purchase or supply of any goods or materials.

b) selling or otherwise disposing of, or buying, property of any kind.

c) leasing property of any kind.

d) availing or rendering of any services.

e) appointment of any agents for purchase or sale of goods, materials, services or property.

f) such related party’s appointment to any office or place or profit in the company, its subsidiary
company or associate company.

g) underwriting the subscription of any securities or derivatives of a company.

The expression “office of place of profit” means any office or place-

 where such office or place is held by a director, if the director holding it receives from the
company anything by way of remuneration over and above the remuneration to which he
is entitled as director.

 where such office or place is held by an individual other than a director or by any firm,
private company or body corporate holding it receives from the company anything by
way of remuneration.

Every contract or arrangement entered in to u/s 188 (1) shall be referred to in the Board’s
report to the shareholders along with the justification for entering in to such contract or
arrangement [Sec. 188(2)]

Where any contract or arrangement is entered into by a director or any other employee,
without obtaining the consent of the Board or approval by a resolution in the general meeting u/
s 188(1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a
meeting within 3 months from the date on which such contract or arrangement was entered in
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to, such contract or arrangement shall be voidable at the option of the Board or, as the case
may, of the shareholders. Further, if the contract or arrangement is with a related party to any
director, or is authorized by any other director, the directors concerned shall indemnify the
company against any loss incurred by it Sec.188(3)

Without prejudice to anything contained in Sec. 188 (3), it shall be opened to the company
to proceed against a director or any other employee who had entered in to such contract of the
provisions of this section for recovery of any loss sustained by it as a result of such contract
Sec. 188(4).

Any director or any other employee of a company, who had entered in to or authorized
the contract or arrangement in violation of the provisions of this Section [Sec. 188(5)] shall

 in case of listed company, be punishable with imprisonment for a term which may extend
to one year or with fine which shall not be less than Rs.25,000 but which may extend to
Rs.5,00,000, or with both, and

 in case of any other company, be punishable with fine which shall not be less than
Rs.25,000 but which may extend up to Rs.50,00,000

Check Your Progress - A

1. Who is a Women director?

2. What do you mean by Director Identification Number?

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3. Who is an independent director?

7.5 Key Managerial Personnel (KMP)

The Board of Directors of a company is responsible for governing a company, but do not
necessarily involve in the day-to-day management. They often meet periodically in Board
Meetings to  set  the management goals. The Key Managerial  Personnel are  the  ones who
actually run the company to achieve the set goals. Key Managerial Personnel (KMP) is a group
of persons who are responsible for managing the operations of a company.

As per Section 203 of the Companies Act, 2013 read with the Companies (Appointment
and Remuneration of Managerial Personnel) Rules, 2014, the following class of Companies
shall have the key managerial personnel, namely

 Every listed company, and

 Every other public company having paid up share capital of Rs. 10 Crores or more.

Under Section 2(51) of the Companies Act, 2013, Key Management Personnel in relation to a
company means:

 Chief Executive Officer or the Managing Director or the Manager;

 Company Secretary;

 Whole-time director;

 Chief Financial Officer; and

 Other officer as may be prescribed.

Further, as per recently notified Rule 8A of the Companies (Appointment and Remuneration
of Managerial Personnel) Rules, 2014, a company other than a company which is required to
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appoint a whole time key managerial personnel as discussed above and which is having paid
up share capital of Rs. 5 Crores or more shall have a whole time Company Secretary.

7.6 Roles and Responsibilities of Key Managerial Personnel

Key Managerial Personnel take a huge responsibility of being liable for any non-compliance
with the provisions of the Companies Act, 2013. The management function of implementing
important decisions are under the responsibilities of Key Managerial Personnel. Some of their
main roles and responsibilities are discussed below:

 The details of securities held by Key Managerial Personnel in the company or its holding,
subsidiary, a subsidiary of company or associate companies should be disclosed and
recorded in the Registrar of the Books (Sec 170).

 Key Management Personnel has a right to be heard in the meetings of the Audit Committee
in view of the auditor’s report.

 Key Management Personnel should disclose to the company, within 30 days of

appointment, relating to their concern or interest in the other associations, which are
required to be included in the register [Section 189(2)].

7.7 Appointment of Key Managerial Personnel

Section 203 of the Companies Act, 2013 read with Rule 8 mandates the appointment of
Key Managerial Personnel and makes it obligatory for a listed company and every other public
company having a paid-up share capital of rupees ten Crores or more, to appoint whole-time
Key managerial personnel

Further, Rule 8A of the KMP Rules provides that a company other than a company covered
under rule 8 which has a paid-up capital of five crore rupee or more shall have a whole time
Company Secretary. A company not covered under section 203(1) can, therefore, voluntarily
appoint any or all KMP.

Further in terms of section 203 of the Act, a whole-time KMP is required to be appointed
in a board meeting by means of a resolution containing the terms and conditions of appointment,
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including remuneration. Section 179 (3) of the Act read with the Companies (Meetings of Board
and its Powers) Rules, 2014 provides that the business related to appointment or removal of
KMP shall be transacted by the Board at its meeting.

Section 196(4) of the Companies Act, 2013 provides that subject to the provisions of
section 197 and Schedule V, a managing director, whole-time director or manager shall be
appointed and the terms and conditions of such appointment and remuneration payable be
approved by the Board of Directors at a meeting which shall be subject to approval by a resolution
at the next general meeting of the company and by the Central Government in case such
appointment is at variance to the conditions specified in Schedule V. Approval of the Central
Government is not necessary if the appointment is made in accordance with the conditions
specified in Part I of Schedule V to the Act.

The appointment of a managing director or whole-time director or manager and the

terms and conditions of such appointment and remuneration payable thereon must be first
approved by the Board of directors at a meeting and then by an ordinary resolution passed at
a general meeting of the company.

Exemption is given to the private companies for Section 196(4) which deals with
appointment of Managing Director/Whole time director /manager /approval of Central
Government as the case may be and Section 196(5) deals with validating actions of Managing/
Whole time Director/manager, if the appointment is not approved by a company in general
meeting. Therefore a private company may appoint managing director, Whole time Director or
Manager in the manner prescribed in its Articles of Association.

Procedure to appoint Key Managerial Personnel

1. A company shall hold the Board meeting and pass the Board resolution containing the
terms and conditions of the appointment of key managerial personnel.

2. A whole time key managerial personnel shall not hold office in more than one company
except in its subsidiary at the same time.

3. A company may appoint or employ a person as its managing director, if he is the managing
director or manager of one, and of not more than one, other company and such appointment
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or employment is made or approved by a resolution passed at a meeting of the Board

with the consent of all the directors present at the meeting and of which meeting, and of
the resolution to be moved thereat, specific notice has been given to all the directors then
in India.

4. On vacation of the office of a whole time Key Managerial Personnel, the resulting vacancy
shall be filled up by the Board at a meeting of the Board within a period of 6 months.

5. File with the Registrar a return of appointment of a managing director, whole time director
or manager in Form MR-1 (Return of appointment of Managing Director, Whole Time
Director and Manager).

6. File DIR-12 (Particulars of appointment of Directors and the Key Managerial Personnel
and changes among them) along with the fee prescribed in Companies (Registration of
Offices and Fees) Rules, 2014

Restrictions on appointment of KMP:

Section 203 of the Act draws out the following requirements with respect to appointment
of person holding office as whole time KMP in another company:

• A whole time KMP shall not hold office in more than one company except in its subsidiary
company at the same time;

 A whole time KMP can be appointed as director (non-executive) in any other company
with the permission of the Board of directors of the company where he is appointed as
whole time KMP; and

• A whole time KMP holding office in more than one company as on the date of
commencement of the Act shall within a period of six months from such commencement,
choose one company in which he wishes to continue to hold the office as KMP.

Register of ‘Key Managerial Personnel’ [Sec 170 (1)]

Every company shall keep at its registered office a register containing details of its directors
and key managerial personnel as may be prescribed, which shall include the details of securities
held by each of them in company or its holding, subsidiary, subsidiary of company’s holding
company or associate companies.
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Vacation in office [Sec. 203 (4)]

If the office of the whole time key managerial personnel is vacated, the resulting vacancy
shall be appointed by the board within a period of six months from the date of such vacancy.

A return of every appointment and change in KMP has to be filed with the Registrar of
Companies (ROC) within 30 days of appointment or change as the case may be.

Penalty for contravention [Sec. 203(5)]:

If a company contravenes the provisions of Sec. 203 (5), the company shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to find which shall
not be less than one lakh rupees but which may extend to five lakh rupees and every director
and key managerial personnel of the company who is in default shall be punishable with fine
which may extend to fifty thousand rupees and where the contravention is a continuous one,
with a further find which may extend to one thousand rupees for every day of continuous
default.

7.8 Managerial Remuneration

Managerial remuneration shall be payable to a person appointed within the meaning of

196 of the Companies Act, 2013. Under the Act, the provisions of payment of managerial
remuneration are governed by 197, 198, 199 and Schedule V.

Managerial remuneration is the remuneration paid to managerial personnel. Managerial

personnel include managing director and whole-time director, and manager. Section 197 of the
Companies Act, 2013 prescribed the maximum ceiling for payment of managerial remuneration
by a public company to its managing director whole-time director and manager which shall not
exceed 11% of the net profit of the company in that financial year computed in accordance with
section 198 except that the remuneration of the directors shall not be deducted from the gross
profits.

Further, the company in general meeting may, with the approval of the Central Government,
authorize the payment of remuneration exceeding 11% of the net profits of the company, subject
104

to the provisions of Schedule V. The net profits for the purposes of this section shall be computed
in the manner referred to in section 198.

The remuneration payable to any one managing director or whole time director or manager
shall not exceed 5% of the net profits of the company and if there is more than one such
director remuneration shall not exceed 10% of the net profits to all such directors and manager.
Except with the approval of the company in general meeting, the remuneration payable to
directors who are neither managing directors nor whole-time directors shall not exceed 1% of
the net profits of the company, if there is a managing or whole-time director or manager, then
3% of the net profits in any other case.

Remuneration by a Company having no profit or inadequate profit

In any financial year, if a company has no profits or its profits are inadequate, the company
shall not pay to its directors, including managing or whole time director or manager, any
remuneration exclusive of any fees payable to directors except in accordance with the provisions
of Schedule V and if it is not able to comply with Schedule V, with the previous approval of the
Central Government.

In cases, where Schedule V is applicable on grounds of no profits or inadequate profits,

any provision relating to the remuneration of any director which purports to increase or has the
effect of increasing the amount thereof, shall not have any effect unless such increase is in
accordance with the conditions specified in that Schedule and if such conditions are not being
complied, the approval of the Central Government had been obtained.

7.9 Code of Conduct for KMP

The Board Members and Key Managerial Personnel shall observe the highest standards
of ethical conduct and integrity and shall work to the best of their ability and judgment.

Compliance with Applicable Laws

The Directors and key Managerial Personnel shall comply with all applicable laws, rules,
regulations and guidelines, in all areas and geographies where the Company operates. It is
 105

therefore desirable that Directors and Key managerial personnel acquire appropriate knowledge
of the legal requirements relating to their roles and duties to enable them to be in compliance
thereof.

Honest and Ethical Conduct

Directors and key Managerial Personnel are expected to act in accordance with the
highest standards of personal and professional integrity, honesty and ethical conduct.

Conflict of Interest
a) Directors and key managerial personnel must avoid situations where in financial or personal
considerations tend to compromise the exercise of professional judgments in discharge
of their duties.

b) In addition to mandatory disclosures, key managerial personnel shall disclose their

association with any other company which, in their judgment, may lead to conflict of
interest with the Company.

c) Key managerial personnel are advised to avoid conducting the Company’s business with
a Relative, or with a business in which a Relative is associated in any significant role.

d) key managerial personnel shall as far as practicable, protect the Company’s assets from
loss, damage, misuse or theft and ensure that the assets are only used for business
purposes and other purposes specifically approved by management and must never be
used for unauthorized purposes.

e) Unpublished Price Sensitive Information about the Company should be kept in strict
confidence until publicly released in accordance with the applicable legal requirements
and the Regulations. Key managerial personnel shall not derive any personal benefit or
assist others to derive benefit by giving advice of such nature.

Privacy and Confidentiality

Key Managerial Personnel must maintain the confidentiality of information entrusted to

them in carrying out their duties and responsibilities, except where disclosure is approved by
the Company. The Company’s confidential information shall not be inappropriately disclosed
106

or used for the personal gain. Key Managerial Personnel shall not give unfair advantage to the
Company’s employees, customers, suppliers, or competitors through manipulation,
concealment, abuse of privileged information, misrepresentation of material facts, or any other
unfair-dealing practice. No discrimination shall be done on the basis of caste, religion, sex,
nationality or disability of any kind towards any employee, customer, supplier or any business
partner.

Health, Safety and Environment

Key Managerial Personnel shall ensure compliance with all applicable environmental,
safety and health laws and regulations and internal policies.

Annual review

Key Managerial Personnel shall confirm compliance with the Code on an annual basis.
The Corporate Governance Report of the Company shall contain a declaration to this effect
signed by the Chief Executive Officer of the Company.

Amendment

The Board shall have power to amend any of the provisions of the Code, substitute any
of the provisions with a new provision according to subsequent amendment(s) to the Regulations.

Check Your Progress -B

(A) State whether each of the following statement is ‘True’ or ‘False’.

(i) A whole time KMP shall hold office in more than one company except in its subsidiary
company at the same time.

(ii) Central Government approval is not necessary when the appointment of key managerial
personnel is made in accordance with Part I of Schedule V to the Act.

(iii) Section 196(4) relating to appointment of key managerial personnel applies to both public
and private companies
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(B) Select the most appropriate answer.

(i) The total managerial remuneration to the directors and the manager in respect of any financial
year must not exceed _________percent of the net profit.

(a) One

(b) Three

(c) eleven

(d) ten

(ii) The remuneration payable to any one managing director or whole time director or manager
shall not exceed ________ of the net profits of the company

(a) 1% (b) 5% (c) 10% (d) 11%

(iii) In case office of whole time Key Managerial Personnel is vacated, the resulting vacancy
shall be filled up by the Board within a period of _______.

(a) 1 month.

(b) 3 months

(c) 6 months

(d) 12 months

(iv) Every listed company and every other public company having a paid-up share capital of
__________ or more should appoint whole time key managerial personnel.

(a) Rs. 1 Crores

(b) Rs. 2 Crores

(c) Rs. 5 Crores

(d) Rs. 10 Crores

7.10 Summary

A director is other than a managing director or a whole time director or nominee director.
Every listed public company shall have at least 1/3rd of the total number of directors as
108

independent directors. It is very difficult to define the exact legal position of the directors of a
company. Directors are sometimes as agents, sometimes as trustees and sometimes as
managing partners. The individuals intending to be appointed as director of a company shall
make an application for allotment of directors identification number to the Central Government.
Related party transactions are business dealings or arrangements between two parties who
are connected by a special relationship prior to the deal. The Companies Act, 2013 (Act) has
brought with it many new concepts; one amongst them is key managerial personnel (KMP).
The concept of KMP is bringing together a group of persons under one title. The word ‘personnel’
refers to a group of persons rather than one person. Key Management Personnel are those
persons who have the authority and responsibility for planning, directing and controlling the
activities of the reporting enterprise. They are the decision-makers in a company and are
accountable for the errors in the company’s operations. The Key Managerial Personnel of the
Company shall act within the authority conferred upon them, in the best interests of the Company.
Under Section 2(51) of the Companies Act, 2013, Key Management Personnel means the
Chief Executive Officer or the Managing Director or the Manager, Company Secretary, Whole-
time director, Chief Financial Officer and other officers as prescribed by the Act. A company is
required to appoint whole-time KMP in a board meeting by means of a resolution (Section
203) containing the terms and conditions of appointment, including remuneration. Every listed
company and every other public company having a paid-up share capital of rupees ten Crores
or more should appoint whole-time Key managerial personnel (Rule 8 of KMP Rules). Further,
a company other than a company covered under rule 8 which has a paid-up capital of five crore
rupee or more shall have a whole time Company Secretary (Rule 8A).

Key Managerial Personnel shall comply with all applicable laws, rules, regulations and
guidelines where the Company operates. It is therefore desirable that Key Managerial Personnel
to acquire appropriate knowledge of the legal requirements relating to their roles and duties to
enable them to be in compliance thereof.

7.11 Key Words

 Personnel

 Chief executive officer/ Managing director

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 Company secretary

 Whole Time Director

 Chief Financial Officer

 Managerial remuneration

7.12 Review Questions

1. What are the legal provisions governing Independent directors?

2. Explain in detail about related party transactions

3.. Elucidate about the role of Key managerial Personnel in the company

4. What are the provisions in the companies act related to women directors?

5. What do you mean by key managerial personnel?

6. Explain the provision of the Companies Act, 2013 relating to appointment of KMP.

7. Enumerate the Roles and Responsibilities of Key Managerial Personnel.

8. What are the provisions on punishment for the contravention of section 203 of the
companies Act 2013?

9. Write a note on ‘Managerial Remuneration’

10. Discuss in detail the code of conduct of Key Managerial Personnel.

7.13 Answers to Check Your Progress -B

A. (i) False (ii) True (iii) False

B. (i)c (ii) b (iii) c (iv) d

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UNIT 8
MEETINGS IN THE COMPANIES

Learning Objectives
After reading this unit, you should be able to:

 Define company meetings

 Explain the various types of company meetings

 Describe the terms notice, quorum and proxy

Structure
8.1 Meaning and Definition of Company Meetings

8.2 Types of Company Meetings

8.3 Notice, Quorum, and Proxy

8.4 Board Meeting

8.5 Notice of the Board Meeting

8.6 Quorum for the Board Meeting

8.7 Procedure at a Meeting

8.8 Passing of Resolution

8.9 Minutes of the Meeting

8.10 Board Committee

8.11 Summary

8.12 Key Words

8.13 Review Questions

8.14 Answers to Check Your Progress - B

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8.1 Meaning and Definition of Company Meetings

A company meeting may be generally defined as a gathering or assembling or getting

together of a number of persons for transacting any lawful business. However, every gathering
or assembly does not constitute a meeting. A company meeting may also be defined as an

assembly of people for a lawful purpose or the coming together of at least a quorum of members

in order to transact either the ordinary or special business of the company.

8.2Types of Company Meetings

There are different types of company meetings. These are disucssed below :

1. Statutory Meeting: It has been made mandatory for the public companies to conduct
statutory meeting in order to enable the members to know about the affairs and prospects

of any new ventures of the company. A statutory report is to be prepared and issued to a

shareholder which contains essential information to members. It is the duty of directors to

issue the statutory report to the shareholders within specified time and failing to hold such

meeting will result in imposing of highest penalty on the company.

2. Annual General Meeting: The annual general meetings are held periodically to enable

the members to exercise an ultimate control over the affairs and management of the
company. Greater power of the company can be wielded by the directors only through

general meetings of members. Here, the directors are bound to submit the annual report

and accounts every year to the annual general meeting for approval.

3. Extra-ordinary General Meeting: These meetings are required to secure sanction from

members on important and urgent matters. Special matters which cannot be postponed
to the next annual general meeting must be presented in the extraordinary general meeting.

These meetings must be called by the directors of the company.

4. Board Meeting: The meetings of the directors are required for a framing the general

business policy and over-all supervision of management. Matters regarding the policies

of the company are discussed at this meeting. These meetings are held periodically like
112

once in a fortnight or once in a month. The Board may delegate certain powers to a select
committee, provided the same is permitted by the Articles, which is formed from time to

time for such specific purposes.

5. Committee Meeting: In a large size organization, management by committee is a

supplementary device. The Board may appoint such committees either for expert advice

or for exercising certain powers of management. The meeting of such committees will be
organized by the Board in a prescribed manner.

6. Class Meeting: A meeting by a particular class of shareholders is called class meeting.

Such meetings may be held for securing the consent of a particular class of shareholders

for altering their rights and privileges or for conversion of one class into another. There

may be a meeting of the preference shareholders for reducing their rate of dividends.

7. Creditors’ Meeting: If a company suffers from any financial difficulty, it can convene the
meeting of cre3ditors and debenture holders in order to secure their support in effecting

some scheme of compromise which seeks certain voluntary sacrifice on the part of creditors

and debenture holders.

8.3 Notice, Quorum and Proxy

According to sec.102, all business transacted at an extraordinary general meeting shall

be deemed to be of special business. So, the notice of the meeting must specify the special
business to be transacted and must be accompanied by an explanatory statement. The notice

for an extraordinary general meeting is 21 clear days.

Another requirement of a valid meeting is that a quorum of members must be present at

the meeting. Quorum is the minimum number of members required to be present for validly
transacting the business of the meeting.
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Quorum for General Meeting: In case of a public company

Number of Members Quorum (No. of members must be present)

Below 1000 members 05

Above1000 but below 5000 15

Above 5000 30

In case of a private company two members shall be personally present for the quorum.

If no quorum is not present in a general meeting, the proceedings will become invalid.
The quorum for general meeting is required to be present when the meeting proceeds to do
business.

Quorum for Board Meeting: Quorum for the board meeting may be stated by the Articles.
It may be prescribed by the directors. If the number of interested directors exceeds or is equal
to two-thirds of the total strength of the Board of Directors, the number of directors who are not
interested directors and present at the meeting, being not less than two, shall be the quorum
during such time.

Proxy

A member entitled to attend and vote at a meeting, may vote either in person or by proxy.
A proxy is an authority to represent and vote for another person at a meeting. It is also an
instrument appointing a person as proxy. The person so appointed is also called as a proxy. A
proxy does not have any right to speak at the meeting.

Statutory provisions relating to proxies:

 Any member of a company entitled to attend and vote at a meeting may appoint another
person as his proxy to attend and vote in his place.

 The proxy must be in writing and it must be duly signed and stamped.

 A proxy need not be a member.

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 A member of a company not having a share capital cannot, unless the Articles otherwise
provide, appoint a proxy.

 A proxy can vote only on a poll.

 A member of a private company cannot appoint more than one proxy.

 A member of a public company can appoint any number of proxies.

 A proxy must be lodged at the company’s office 48 hours before the general meeting.

 A body corporate who is a member of a company, can appoint a representative or proxy

by a resolution of the Board of Directors.

 A proxy is revocable.

Check Your Progress - A

1. What is Committee Meeting?

2. What is a Creditors Meeting?

3. What is a statutory Meeting?

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8.4 Board Meeting (Sec 173)

A board meeting is a formal meeting of top executives or directors of the company called
to discuss certain issues and problems and to make decisions. The meetings are held at
definite times and at definite places. Board meetings require more  planning and  detailed
preparation than the usual corporate events as attended by the top corporate executives and
leaders of the company.

8.4.1 Calling a Board Meeting

A Board meeting is called by the directors of the committee. The company directors
exercise their powers collectively at a Board Meeting. As per the old Companies Act, 1956, a
board meeting had to be held once in three months with at least four meetings in a year. Under
Section 285 of the Companies Act, 2013, every company must hold a board meeting at least
once in every three months and at least four such meetings should be held every year.

8.4.2 First Meeting - Sec. 173 (1)

The first meeting should be held within 30 days from the date of incorporation with minimum
of 120 days’ gap between two board meetings. The meeting can be held in person or through
video conferencing.

As per companies act 2013, every company shall hold meeting through video conferencing
or other audio visual means. Video conferencing means audio-video electronic communication
facility enables all the persons participating at a meeting to communicate concurrently with
each other without effectively participate in the meeting.

8.4.3 Subsequent meetings

The subsequent meetings can be conducted as follows:

There must be at least 4 meetings every year and the gap between two meetings shall
be 120 days. In the case of small companies or one person company, at least two meetings must
be conducted, one in each half of the financial year. The gap between the two meetings must be at
least 90 days. In a situation where the meeting is held at a short notice, at least one independent
director must attend the meeting.
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8.5 Notice of the Board Meeting

The Act requires that not less than seven days’ notice in writing shall be given to every
director at the registered address as available with the company. The notice can be given by
hand delivery or by post or by electronic means.

When the Board meeting is called at shorter notice, at least one independent director
shall be present at the meeting. If he is not present, then decision of the meeting shall be
circulated to all directors and it shall be final only after ratification of decision by at least one
Independent Director.

8.6 Quorum for the Board Meeting

The quorum refers to the minimum number of members of the Board to conduct a valid
Board Meeting. According to Section 174 of Companies Act, 2013, the minimum number of members
of the board required for a meeting is 1/3rd of a total number of directors. At any rate, a minimum of
two directors must be present. However, in the case of One Person Company, the rules of Section 174,
do not apply.

In case of interested directors exceeding two-third, the number of directors not interested
shall be the quorum subject to at least two persons present in meeting (Sec.174 (3))

The meeting shall be adjourned due to want of quorum, unless the articles provide shall
be held to the same day at the same time and place in the next week or if the day is National
Holiday, the next working day at the same time and place (Sec 174 (4)).

8.7 Procedure at a Meeting

The procedure directed by the Chairperson at a meeting shall be as follows:

 Any discussion will not be allowed until there is a motion before the meeting

 The discussions which are held must be relevant to the matter before the meeting, either
is it a motion or any amendment or any point of order or any explanation needed to be
given personally.
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 The speakers who are present at the meeting shall rise up and address to the Chair
person.

 The chair person at any time can rise up to address the meeting or to address any
person who is then speaking and after that shall resume his or her seat.

 Any person shall not speak more than one time to a motion except any proposer of
substantive motion who is given the right to reply.

 Any previous speaker to the motion can speak again on an amendment or for the debate,
on any point or order and by seeking the permission of the chair person.

 The chairperson will take decision that which speaker will be given the priority if the
meeting is made by resolution and he will also decide which person will or will not be
heard, and a motion will be moved to that effect and not debated.

 In the meeting the speaker who will not be heard will be decided by resolution.

 The chair person in the meeting will be impartial but in case of small formal meeting but
in case of small informal meeting he or she might take part in the discussion of meeting
and may also move any second motion or amendment. The person will not need to
vacate or leave the chair. In case of formal meetings to preserve the impartiality, the
chair person should take no part in formulating the motion.

 The business of the meeting should be done according to the order of the agenda, until
and unless the meeting decides to take things in some other order.

 In the meeting the voting will take place according to the articles or constitution or by the
laws.

 The motion is the chair person declares either lost or won.

After the end of one meeting, the chairperson will again discuss and arrange for the next
meeting if it thinks it to be appropriate. The chairperson declares the meeting either to be
adjourned till the next meeting or closed.
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8.8 Passing of Resolution (Sec. 175)

A company may pass the resolutions through circulation. The resolution shall be circulated
in draft form together with the necessary papers to the directors or members of committee at
their address registered with the company in India or through electronic means. The resolution
must be passed by majority of directors or members entitled to vote. If more than one third of
directors require that the resolution must be decided at the meeting, the chairperson shall put
the resolution to be decided at the meeting. The resolution passed through circulation shall be
noted at a subsequent meeting and made part of the minutes of such meeting.

8.8.1 Resolution in Adjourned Meeting (Sec 116)

When resolution is passed at adjourned meeting of the Board of Directors of a company, the
resolution shall be treated as having been passed on the date on which it was in fact passed.

8.9 Minutes of the Meeting (Sec 118)

The minutes shall be prepared by the chairman of the meeting after summarizing the
discussions thereof. The minutes shall contain a summary of the proceedings of the meeting.
The minutes should be entered in the minute’s book within 30 days from the date of conclusion
of the meeting. Minutes shall be signed by the chairman of the meeting and shall be circulated
to all the directors within 15 days after these minutes are signed.

If minutes are once entered in minutes books and signed by the chairman shall not be
altered for any reason. Any alteration in the minutes shall be made only by way of express
approval of the board at its subsequent meeting in which such minutes are sought to be altered.

8.10 Board Committee

The Board may establish Committees as it considers necessary to assist it in carrying

out its responsibilities. They can be established on a short-term or temporary basis, or they can
be formed as a permanent body for ongoing work. A Board can either delegate some of its
powers to the committee, enabling it to act directly, or can require the recommendations of the
committee to be approved by the Board. The Board will normally depend heavily on the findings
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and recommendations of its committees, although final decisions to accept or reject these
recommendations will be made by the Board. The Board shall establish the following Committees
and shall approve and adopt mandate and working rules governing the purpose, roles and
responsibilities, composition, authority and operation of those Committees:

8.10.1 Types of Committee

 Audit Committee: The primary task of the audit committee is to oversee the relationship
with external auditors to ensure the quality of the company’s financial statements.

 Nomination and Remuneration Committee: The nomination committee is responsible for

leading the board appointment process, considering the requirements of the company
and making recommendations to the board. This responsibility covers both executive
and non-executive directors. Remuneration committee’s responsibility is to decide and
approve the terms and conditions for appointment of executive directors or whole time
directors and remuneration payable to other Directors and matters related thereto.

 Stakeholders Relationship Committee: The responsibility of the committee is to supervise

and ensure efficient share transfer and share transmission, to approve allotment, transfer,
transmission, consolidation, split, name deletion and issue of duplicate share certificate
of equity shares of the company, to redress shareholder and depositor complaints like
non-receipt of balance sheet and non-receipt of declared dividend.

 Corporate Social Responsibility Committee: The committee’s responsibility includes

formulating and recommending to the board a CSR policy which will define the focus
areas and indicate the activities to be undertaken by the company. It monitors the budget
under the CSR activities of the company and also recommend to the board necessary
amendments in the CSR policy from time to time.

Check Your Progress - B

(A) State whether each of the following statement is ‘True’ or ‘False’.

i. The minutes of the meeting shall be prepared by the chairman of the meeting

ii. The first meeting should be held within 30 days from the date of incorporation
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iii. Suspension of meeting to another time, or place is known as Board Meeting

iv. In case the Board meeting is called at shorter notice, at least one independent director
shall be present at the meeting

(B) Select the most appropriate answer.

i.The minimum number of members of the board required for a meeting is ———of total number
directors.

(a) 1/3rd

(b) 2/3 rd

(c) ¾ th

(d) ¼ th

ii. A————— is a formal meeting of top executives or directors of the company called to
discuss and to make decisions.

(a) Board meeting

(b) Class meeting

(c) Shareholders meeting

(d) Adjourned meeting

iii.The Act requires not less than —————— notice shall be given to every director

(a) 21 days

(b) 7 days

(c) 14 days

(d) 30 days

iv. In the case of small companies or one person company, the gap between the two meetings
must be at least ——————-

(a) 60 days

(b) 90 days
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(c) 120 days

(d) 180 days

8.11 Summary

A company meeting may be generally defined as a gathering or assembling or getting

together of a number of persons for transacting any lawful business. There are different types
of company meetings. These are: Statutory Meeting, Annual General Meeting, Extraordinary
General Meeting, Board Meeting, Committee Meeting, Class Meeting, AND Creditors’ Meeting.
A Company, being a legal entity, cannot act by itself but can do so only through its Board of
Directors. The Board is entitled to exercise all such powers, and to do all such acts and things,
as the company is authorized to exercise and do, subject to the restrictions and limitations
imposed by the Act, Memorandum and Articles of Association and the company in General
Meeting. Decisions relating to the policy and operations of the company are arrived at Meetings
of the Board held periodically. Meetings of the Board enable discussions on matters placed
before them and facilitate decision making based on the collective wisdom of the Board. However,
it may not always be practical to convene a Meeting of the Board to discuss matters, which do
not warrant detailed discussions at the Meeting or, in respect of which urgent decisions are
required. In such circumstances, passing of resolution by circulation can be resorted to.
Resolutions passed by circulation are deemed to be passed at the duly convened Meetings of
the Board and have equal authority. The minutes of the meeting shall be entered in the minute’s
book and shall be signed by the chairman of the meeting to circulate to it all the directors. A
Board can set up committees with particular terms of reference when it needs assistance. A
board committee is a small working group identified by the board, consisting of board members,
for the purpose of supporting the board’s work. The Board of Directors is ultimately responsible
for the acts of the committee. A whole time KMP shall not hold office in more than one company
except in its subsidiary company at the same time but he can hold office as non-executive
director in any other company with the permission of the Board of directors of the company
where he is appointed as whole time KMP.
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8.12 Key words

 Board Meeting

 Adjourned Meeting

 Motion

8.13 Review Questions

1. Define meetings

2. Elaborate in detail about the types of meetings

3. Explain the provisions related to the proxy in the meetings

4. What are the legal provisions pertaining to quorum in the meetings

5 What do you mean by board meeting?

6 State the provisions of the companies Act, 2013 regarding quorum of a board meeting.

7 Explain the procedure prescribed by the Companies Act to conduct a board meeting.

8 State the provision of the Companies Act, 2013 regarding minutes of board meeting.

9 Explain the types of committee Meeting.

8.14 Answers to Check Your Progress - B

A. (i) True (ii) True (iii) False (iv) True

B. (i) a (ii) a (iii) b (iv) b

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UNIT 9
POWERS OF DIRECTORS

Learning Objectives

After reading this unit, you should be able to:

 explain powers and duties of directors

 describe the provisinos related to the Notice of the Board Meeting

 discuss the Electronic mode of participation of directors

 enumerate the provisions related to Minutes of the board meeting

Structure
9.1 Introduction

9.2 Powers of the Board of Directors: Sec 179

9.3 Restrictions on Powers of the Board (Section 180)

9.4 Further Powers within the Purview of Consent In General Meeting

9.5 Other Guidelines Regarding the Conduct of Directors or Board of Directors

9.6 Notice of Meeting of Board of Directors

9.7 Electronic Mode of Participation in a Meeting

9.8 Agenda of the Meeting of Board of Directors

9.9 Quorum for Board Meeting

9.10 Attendance Register

9.11 Minutes of the Board of Directors Meeting

9.12 Contents of the Minutes Book – Board of Directors Meeting

9.13 Timeline for Preparation of Minutes

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9.14 Signing the Minutes of Board Meeting

9.15 Who Can Inspect The Minutes?

9.16 Summary

9.17 Key Words

9.18 Review Question

9.19 Answers to Check Your Progress

9.1 Introduction

The efficiency of a company depends on the efficiency of the people at the helm of
affairs, particularly the directors. Though shareholders are the owners of the company, they
cannot participate in the day to day affairs of the company. As all shareholders cannot run the
business, they choose a small group who could represent their interest and could efficiently
run the business. This small group is called the board of directors. They have the responsibility
of carrying the business in an effective and efficient manner, which yields profit and wealth to
the shareholders, which is possible only when are vested with powers. Thus directors of the
company are more powerful and also held responsible. This chapter presents the powers of
the directors, powers subject to resolution passed in general meeting i.e restricted powers, the
procedural formalities with regarding conduct of board meeting.

9.2 Powers of the Board of Directors: Sec 179

The following are the Powers of the Board of Directors (Sec 179)

 The board of directors of the company can exercise all powers and can do all acts as the
company is authorised to do. Such action or power should be within the provisions of the
Companies Act, Memorandum of Association, Articles of Association and the regulations
made by the company in the general meeting.

 Regulations made by the company in its general meeting shall not invalidate any prior
act of the board.
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 Board of directors shall exercise the powers on behalf of the company by means of
resolutions passed at meeting of the board

 To make calls on unpaid shares

 To authorise buy back of securities under Section 68

 To issue securities including debentures both within and outside India

 To borrow money

 To invest the funds of the company

 To grant loans or give guarantee or provide security in respect of loans

 To approve financial statement and the board’s report

 To diversify the business of the company

 To approve the amalgamation, merger or reconstruction

 To take over a company or acquire a controlling or substantial stake in another company

Points to note

 The board may, by a resolution passed at the meeting, delegate a committee of directors,
manager or principal officer or managing director, principal officer of the branch office, to
exercise powers regarding borrowing of money, investment of funds, granting or
guaranteeing loans.

 Powers regarding borrowing of money do not refer to the normal business of a banking
company, as the very nature of a bank is accepting deposits and lending loans.

 With respect to the dealings of the company with its bankers, the powers of the board to
borrow refer to the arrangement of overdraft, cash credit or otherwise and do not include
the day-to-day operations of actual overdraft or cash credit.

 Nothing in this section shall be deemed to affect the right of the company in its general
meeting to impose restrictions and conditions on the exercise of the powers of the board.
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9.3 Restrictions on Powers of the Board (Section 180)

The board of directors shall exercise the following powers subject to the consent of the
company by a special resolution:

 To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking
of the company; if the company has more than one undertaking, whole or substantially
the whole of any of these undertakings.

 To invest the amount of compensation received for merger or amalgamation, in investment

avenues other than trust.

 To borrow money, if the amount to be borrowed along with the existing borrowings of the
company exceeds the total of paid up capital and the free reserves of the company
(excluding the temporary loans obtained from the bankers in the ordinary course of
business).

 To remit or give time for the repayment of any debt due from a director.

9.4 Further Powers within the Purview of Consent In

General Meeting

The directors of the company also have the following powers but with prior approval from
the shareholders in the general meeting of the company.

 To contribute to bonafide charitable funds, if the aggregate of such contribution exceeds

5% of its average net profits for three immediately preceding financial years.

 To donate to a political party, where the contribution doesn’t exceed 7.5% of its average
net profits, for three immediately preceding financial years.

 The above-mentioned contribution can include subscription or donations to a political

party, expenditure on advertising materials such as publications. The company should
disclose the details of the contribution in its profit and loss account. If a company contributes
contravening this provision, then the company has to pay a fine up to five times the
contribution made and every officer who is involved is punishable with a fine up to five
times the contribution and imprisonments up to six months
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9.5 Other Guidelines Regarding the Conduct of

Directors or Board of Directors

Disclosure of interest

 Every director who is interested in any contract, proposed contract or agreements which
the company is concerned shall disclose his interest to the board in the first meeting itself
and he is not supposed to attend the meeting in which the contract is discussed.

When he is said to have interest

If the director individually or in association with any other directors hold more than 2% of
the shareholding.

Promoter, manager, CEO of that body corporate, which the company intends to enter
into a contract.

Partner of a firm, owner of an entity as the case may be.

 If a contract has been entered into by the company, and thereafter the director has got
interest in such contract, then he has to disclose his interest in the next board meeting
conducted.

 If a contract has been entered into by the company without directors’ disclosure of interest
then such contract is voidable at the option of the company.

 If the director has not disclosed his interest, then he is punishable with a fine ranging
between Rs 50,000 and Rs 1,00,000, or with imprisonment up to one year or both.

Loan to directors

A company cannot directly or indirectly advance any loan to any of its directors or to any
other person in whom the director is interested or give him any guarantee or provide any
security in connection with any loan taken by him or such other person. Any other person in
whom the director is interested:
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 Director of a lending company, partner or relative of any such director

 Any firm in which the director or his relative is a partner

 Any private company in which he is a director or a member

 Anybody corporate in which any such director or directors have more than 25% of voting
powers

 Where the board or the managing director of such company would act according to the
directions and instructions of the director.

If any loan has been provided by the company in contravention of the above provision,
i.e. if any loan has been advanced to a director or his relative, then the company is punishable
with a fine ranging from Rs 5,00,000 to Rs 25,00,000. The concerned director is punishable
with a fine ranging from Rs. 5,00,000 to Rs.25,00,000; or with imprisonments up to six months
or both.

Exception
The above provision relating to loans is not applicable for the following instances:

1. Loan given to a managing or whole time director as part of service conditions.

2. Loan extended in pursuant of a scheme approved by the members in a special resolution.

3. If the company in the ordinary course of business, extends loan, gives guarantee or
security for due repayment at a interest rate less than the bank rate charged by the
Reserve Bank of India.

Loan and investment by company

A company can make investment through not more than two layers of investment
companies.

No company shall directly or indirectly give any loan to any person or other body corporate,
give guarantee, or provide security in connection with a loan, acquire by way of subscription,
the securities of any other body corporate, exceeding sixty percent of its paid up share capital,
free reserves and securities premium account,or one hundred percent of its free reserves and
securities premium whichever is more.
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If the loan amount exceeds the above amount, then a special resolution has to be passed
to approve such an investment or loan.The details of the loan given, investment made has to
be disclosed by the company in the financial statement.

No investment shall be made by the company without a resolution being passed by the
board of directors, also approved by all the directors who are present in the meeting. The
company should also get prior approval from public financial institutions, provided such
institutions are supporting the company financially. If the amount of investment does not exceed
the said limit approval from public financial institution is not required.

A company which is registered under Section 12 of SEBI Act, 1992 cannot take inter
corporate loans exceeding the prescribed limit; such companies have to furnish the detail of
loan if any in its financial statements.

A company cannot give loans at a rate of interest lesser than the government security
rate.

A company that has defaulted in repayment of deposits accepted or loan or interest

cannot give loans or give guarantee or provide security or make an acquisition till the default
exists, i.e. till the company’s liability is repaid.

The details of the loan, guarantee or security given by the company should be properly
recorded in a register, with complete details, should be kept in the registered office of the
company, with open access for inspection by members.

Default

If any company doesn’t comply with these provisions, then the company is punishable
with a fine ranging from Rs. 25,000 to Rs. 5,00,000. Every officer of the company who is in
default is punishable with a fine ranging from Rs. 25,000 to Rs. 1,00,000; and imprisonment up
to two years.

Exceptions

These provisions are not applicable to a banking company, housing finance company,
financing companies, or companies providing infrastructural facilities, Non-banking financial
company, or company whose main business is acquisition of shares.
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Investment of Company to be held in its own name (Sec 187)

All investments made by a company in any property, security or other asset shall be
made and held in its own name.

Default

If any company doesn’t comply with these provisions, then the company is punishable
with a fine ranging from Rs.25,000 to Rs. 25,00,000. Every officer of the company who is in
default is punishable with a fine ranging from Rs.25,000 to Rs. 1,00,000; or imprisonment up to
six months or both.

Exceptions
 A company can hold shares in the subsidiary company in the names of nominees, for
maintaining the minimum number of members.

 A company can deposit its shares to its banker, and the banker in its capacity as banker
to the company collects interest or dividend

 Can deposit, transfer, or hold shares in the name of State Bank of India, or any scheduled
bank, being bankers of the company, in order to facilitate transfers. (If the transfer is not
effected within six months from the original transfer, the company should take efforts to
retransfer the shares from the banker to its own name)

 Can deposit or transfer to any person for repayment of loan obtained by the company or
for providing the said assets as security for loan borrowed.

 Can hold securities in the name of depositories (the details are to be furnished in a separate
register, accessible to its members as well as to debenture holders).

Related Party Transactions (Section 188)

A company can enter into contract with related party, only with the consent of the board,
by a resolution at the meeting. Contract with the related party includes

 Sale, supply or purchase of goods, properties, leasing of properties

 Availing or rendering any service

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 Appointment of any agent for the purchase or sale of goods, materials, services or
properties

 Underwriting the subscription of any securities or derivatives, of the company

 Such related party’s appointment to any office or place of profit in the company, its subsidiary
or associate company

In case of company having a paid up share capital less than the prescribed amount, or
the transaction amount exceeding the prescribed limit, the contract with related party can be
made only with the approval of members through a special resolution in the general meeting.
Importantly in case a member is a related party, he should not be present in the meeting in
which a special resolution is to be passed.

Every contract or arrangement entered with the related party should be referred in the
Board’s report to the shareholders along with the justification for entering into such contract or
arrangement.

Default
 Any contract or arrangement with the related party is entered into by a director, without
obtaining the consent of the board or approval by a special resolution in the general
meeting, and if it is not ratified by the board or the members, as applicable, within three
months from the date of entering into agreement, such contract is voidable at the option
of the company. If any director is involved in such arrangement, either as an authorising
officer, or as person related to the related party, then he has to compensate the company
against any loss incurred by it, in this connection.

 It is up to the choice of the company to proceed against such director or directors, who
have entered into related party transactions, in contravention of the provision, for recovery
of loss incurred by the company.

 Any director or any other employee who has entered or authorised the contract or
arrangement in violation of the provisions of this section shall be liable to the extent
stated below.
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 In case of listed company, is punishable with imprisonments up to one year, or with fine
ranging from Rs. 25,000 and Rs. 5,00,000 or both.

 In case of any other company, is punishable with fine ranging from Rs. 25,000 and Rs.
5,00,000.

Contract of employment with managing or whole time directors (Sec 190)

All public limited companies should have a copy in its registered office:

 Contract of service with its managing or whole time director in writing or

 In the absence of contract, a written memorandum setting out its rules

Default

If a company fails to keep a copy as mentioned above, it is liable to pay a fine of Rs.
25,000 and every officer who is in default with a fine of Rs. 5,000 each.

9.6 Notice of Meeting of Board of Directors

The secretarial practice regarding the above-mentioned meetings and procedures is

presented in the following pages.

A notice in writing of every meeting has to be given to every director by hand or otherwise,
through speed post or registered post or email or any other electronic mode.

Notice shall be sent to the postal address or email address registered by the director with
the company or in the absence of such information, the address appearing in the DIN director
identification number of the director.

The notice shall clearly mention the venue of the meeting, date and time, serial number.
The company secretary shall maintain the proof of sending the notice and delivery of the
notice. In case of possibility of participation through electronic mode, the details regarding
such participation through electronic mode has to be mentioned in the notice. In which case,
the notice should seek confirmation from the directors regarding the mode of participation
whether physical presence or electronic participation. The notice should include the email
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address or the contact number or the postal address to which the directors have to confirm
their participation.

 The notice shall be given even if it is conducted on predetermined date and venue.

 The notice convening a meeting shall be given at least seven days before the date of
meeting, unless the articles provide for a longer period.

 If the notice is sent through speed post or registered post, then the notice has to be sent
at least before 9 days.

 The notice of the adjourned meeting shall be sent to all directors before seven days of the
adjourned meeting, if the date of the adjourned meeting is not decided in the original
meeting.

9.7 Electronic Mode of Participation in a Meeting

Any director can participate through electronic mode in a meeting, if the company provides
such a facility. “Video conferencing or other audio visual means” includes audio visual electronic
communication facility employed which enables all the persons participating in a meeting to
communicate concurrently with each other without an intermediary and to participate effectively
in the meeting. (ebook.mca.gov.in) But the Companies Act directs that the directors cannot
participate in electronic mode in the following cases:

i. Approval of annual financial statement

ii. Board’s report

iii. Prospectus

iv. Any other matters relating to amalgamation, merger, demerger, acquisition and take over.

v. Participation through electronic mode is not allowed in meeting of Audit committee for
consideration of annual financial statement, as well.

9.8 Agenda of the Meeting of Board of Directors

Agenda gives the details of the business to be discussed in the meeting. Notes on agenda
shall be given to the directors at least 7 days before the date of the meeting. Agenda and notes
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on agenda shall be sent to all directors by hand, speed post, registered post, courier, email or
other electronic mode. It shall be sent to all directors to the address registered with the company
or in the address registered in the DIN (Directors Identification Number). If any director has
requested for any specific mode of delivery of agenda or notice, then it has to be sent or
delivered in that specific mode only. If the agenda is sent through speed post, then the agenda
has to be sent before 9 days of the meeting.

Notice, agenda, notes on agenda, shall be sent to original director and also alternate
director. Notes on items of business, in the nature of unpublished price sensitive information
may be given at a shorter period of time than stated above.

 Any item which is not mentioned in the agenda, may be taken up for consideration with
the permission of the chairman and with the consent of a majority of directors present in
the meeting, including one independent director.

 Unpublished price sensitive information means any information relating to the company,
securities, directly or indirectly

 , which is not generally available, but if it’s made available to public, it would affect the
price of the securities, e.g. financial results, dividends, mergers, changes in capital
structure.

 General consent for giving price sensitive unpublished information, shall be taken up in
the first meeting of the board in each financial year.

 Each item of business that requires approval from the directors shall be supported by a
note, which specifies the details of the proposal, relevant material facts that would facilitate
better understanding by the directors, including concern or interest by any directors. In
case the company seeks to get approval for any resolution in the board meeting, then a
copy of the draft resolution should also be presented to the directors along with agenda.

Urgent business to be discussed

Notice, agenda and notes on agenda for urgent business to be discussed may be given
at shorter period of notice. It has to be approved at the meeting by independent directors or by
majority of directors. If the independent director is not present in the meeting, then the urgent
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business discussed in the meeting has to be ratified by the independent director. If the company
doesn’t have any independent director, then it has to be ratified by the majority of directors.

9.9 Quorum for Board Meeting

As we are aware, quorum is the minimum number of members to be present in a meeting.

The quorum for board meeting shall be one-third of the total number of directors or TWO
directors, whichever is higher ( if a company has 9 directors, the quorum shall be the highest of
3, i.e. one-third of nine or 2. Therefore the quorum in this case shall be THREE.)

What happens if the quorum is not there

If a meeting is cancelled because of less number of directors present, If quorum is not

there at the meeting, the meeting shall be adjourned to the same day of the next week, if that
happens to be a national holiday, then to the next day. Even in the adjourned meeting, if the
quorum is not there, then the meeting stands cancelled.

9.10 Attendance Register

Every company should maintain separate attendance register for the board meetings. Its
contents shall be

i. Serial number and date of the meeting

ii. Place and time

iii. Names of the directors and the signature of the directors present

iv. Name and signature of the company secretary and the invitees of the meeting.

v. Directors participating through electronic mode shall also be part of the attendance register.
The chairman shall confirm the attendance by taking a roll call at the commencement of
the meeting. The chairman would also request such directors to state his full name and
the place from where he participates electronically, which shall be recorded in the minutes,
and also taken as signed by the director.

Attendance register shall be maintained at the registered office, and subject to inspections
by the directors, but not the members. Entries in the attendance register shall be authenticated
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by the company secretary, or in his absence the chairman. The attendance register shall be
kept under the custody of secretary, and shall be kept for further reference for eight financial
years. Leave of absence shall be granted to a director, only when prior request from the
concerned director is received by the company secretary or the chairman. If a director is absent
for meetings continuously for a period of twelve months, his position is considered to be vacant.

9.11 Minutes of the Board of Directors Meeting

Minutes of the board meeting has to be recorded in the minutes book maintained for this
purpose. Minutes in electronic mode has to be recorded with time stamp. Pages in the minutes
book are to be numbered consecutively. Minutes book is to be maintained with care, it should
not be tampered, not pasted or attached. If its maintained in loose leaves, then it has to be
bound properly. The minutes book is to be maintained under lock and key to prevent manipulation
or removal of records or leaves from the minutes book. The minutes of the board meeting of
the company has to be kept in the registered office of the company or in the place as approved
by the board of directors, for a period of eight years from the date of the board meeting.

9.12 Contents of the Minutes Book –

Board of Directors Meeting

For ease of understanding the contents of the minutes book, the vast deliberations of
meetings are given in the general contents and elaborate details are given in specific contents.

9.12.1 General contents

 Minutes shall state the serial number and type of the meeting, name of the company, day,
date, venue of the meeting, time of commencement and conclusion of the meeting.

 Any document or report that has to be presented in the meeting to be identified by the
initials of the chairman or the company secretary.

 Minutes shall record the names of the directors present physically or through electronic
mode, company secretary and invitees.

 Minutes shall contain a record of all appointments made at the meeting, if the minutes is
maintained as per the provisions of company law, the appointment of directors, first auditors,
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key managerial persons, secretarial auditors, internal auditors, cost auditors shall be
deemed to have been approved by the board, unless the contrary is proved.

9.12.2 Specific Contents

 Record of election, of the chairman of the meeting, presence of quorum, names of the
directors who sought and were granted leave of absence, mode of attendance of every
director, whether physically present or through electronic mode, in which case, the location
and the agenda in which he participated.

 Name of the company secretary, invitees and their attendance.

 Noting of meeting of preceding minutes, meeting of committees.

 Text of resolution by circulation, passed after the previous meeting, dissent of any directors.

 The fact the interested director was not present during the discussion and did not vote.

 Views of independent directors, if chairman, is of the opinion that it is not detrimental to

the interests of any person or the company.

 If any director has participated only for the part of the meeting, the agenda items in which
he did not participate.

 Information on the name of the director who dissented a resolution, or abstained from the
voting.

 Ratification by independent directors or majority of directors, in case of meeting held at

short notice, and transacting business other than those included in agenda.

 Time of commencement and conclusion of the meeting.

9.13 Timeline for Preparation of Minutes

Within 15 days of the conclusion of the meeting, the draft minutes has to be circulated
among all directors, in the manner as the company would follow for sending agenda or notice.
The company has to maintain proof of sending the draft minutes. The directors have to send
their approval or comments within seven days. If a director fails to send his comments within
the framework of seven days, the chairman will decide whether to consider the comment. If the
138

director has signed the draft minutes without any comments, then the draft minutes is deemed
to be approved by the director. Minutes of the board has to be finalised within a period of 30
days. Minutes has to be entered with proper date by the company secretary. Minutes cannot be
altered, if required it can be done expressively in the next board meeting with the approval from
board.

9.14 Signing the Minutes of Board Meeting

Minutes of the meeting has to be signed and dated by the chairman of the meeting or
chairman of the next meeting. Normally chairman of the meeting would sign. Chairman will
initial in all pages and give his signature in the last page, giving details about the place and
date on which he signs. Any blank space has to be scored out. Minutes, if maintained in electronic
mode, has to be signed by the chairman digitally.

Copy of the signed minutes, certified by the company secretary (or any person authorized
by the chairman) has to be circulated to all directors within 15 days.

9.15 Who Can Inspect The Minutes?

 Director can inspect the minutes of board meeting held before his tenure, during his
tenure and even after he ceases to be the director.

 Company secretary, secretarial auditor, statutory auditor, cost auditor, internal auditor
can inspect the minutes of the board.

 Inspection of minutes kept both in physical form or electronic form. In either case the
company secretary should ensure the safety or safeguard the minutes from mutilation,
tampering.

 Members of the company cannot inspect the minutes.

Annual report or the annual return of the company should disclose the number and date
of the meeting of board and committee meeting held during the year.
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Check Your Progress

A. State whether the following are true or false

1. Diversification of business is within the purview of powers of board of directors.

2. Board of directors can donate 10% of average net profit for 3 previous years, to a political
party

3. Companies can advance loans to the relatives of directors.

4. Notes to the agenda, has to be given to directors before 7 days of the meeting.

5. Directors participating through electronic mode can be part of the attendance register.

B. Fill in the blanks

6. Board of directors has the power to invest the amount of compensation received for
mergers or amalgamation in investment avenues, only with the consent of the company
through ————————————

7. Fine imposed on directors for non-disclosure of interest by the director is between

—————————————

8. All investments of the company should be held in its ——— U/ S 187.

9. Public companies are required to maintain—————————— with the managing

director in writing, which gives the terms of his appointment.

10. The quorum for directors’ meeting of Company having 12 directors, ———-.

C. Choose the correct answer

11. Minutes of meetings are to be preserved by the company for

A. 8 years

B. 10 years

C. 12 years

12. After the conclusion of meeting, Draft minutes has to be prepared within

A. 7 days
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B. 10 days

C. 15 days

13. DIN refers to

A. Directors Identification Number

B. Directors Information Notice

C. Draft Information Notice.

14. In which of the following scenario, notice can be served for a short period (<7 days).

A. Discussion on board’s report

B. Unpublished price sensitive information

C. Approval of company’s prospectus

15. Who can’t inspect the minutes of board meeting

A. Directors, whose tenure is over

B. Secretary of the company

C. Members of the company

9.16 Summary

The board of directors can exercise all powers and can do all acts as the company would
do, subject to the memorandum and articles of association, and provisions of the Companies
Act 2013. The resolutions in the general meeting cannot invalidate the prior act of the board.
There are certain powers that can be exercised by the board by passing resolution in their
board meeting. There are certain powers that the directors can exercise with the consent of
shareholders passing special resolution. While certain other powers within the purview of general
meeting. A director who is either directly or indirectly having interest in any transaction or
agreements, he has to disclose such interest to the company, and shall be present in the
meeting in which such agreements will be discussed. A company cannot give directly or indirectly
to the directors. A company cannot give loan or give guarantee or provide security with respect
to loans advanced exceeding 60% of its paid up capital. While advancing loans, the company
has to pass a special resolution if the amount is exceeding the said limits. A company cannot
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give loans at rates less than the government rate. All investments made by the company should
be kept in proper register. A company can enter into contract with the related party, only with
the consent of board. Contract of employment with managing or whole time directors is required
to be maintained by all public limited companies.

Notice of board meeting has to be sent to all directors, to the address registered with the
company or the address mentioned in the DIN of the directors, and the manner as specified by
the directors whether by post, hand delivery or email. Notice of the board meeting should be
served at least seven days before the meeting, and should clearly mention the date, time and
venue of the meeting, including the details of electronic participation if any. Electronic mode of
participation is not allowed in a board meeting for approval of annual financial statements,
board’s report, prospectus, matters relating to corporate restructuring. Agenda of the board
meeting, gives the details of business to be discussed in the meeting. It shall be sent at least
seven days before the meeting. While notes on agenda on matters in the nature of unpublished
price sensitive information, can be sent in short notice. Quorum for the board meeting shall be
one third or two whichever is higher. If a board meeting is adjourned for want of quorum it shall
be convened in the same day of the next week, even in the adjourned meeting if the quorum is
not present, the board meeting stands cancelled. Every company shall maintain separate
attendance register for the board meeting. Its contents include serial number, name, signature
of the directors physically present and for those who are participating electronically, their
attendance is authenticated by the chairman. The attendance register should be kept safely by
the company secretary. A director can take leave for meeting with prior information to the
company secretary or chairman. If a director is absent for board meetings continuously for
twelve months, then his position is considered vacant. Minutes of the board meeting has to
maintain properly, either manually or electronically. It should be kept safely for a period of eight
years from the date of meeting, in the registered office of the company, under lock and key.
Minutes of the board meeting has to be prepared within 15 days of the conclusion of the
meeting. It has to be circulated among all directors for their comments, which has to be returned
to the company within 7 days. Minutes has to be signed by the chairman of the meeting,
minutes can be inspected by Company Secretary, Auditors, Directors. Members of the company
cannot inspect the minutes of board meeting.
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9.17 Key Words

 Powers of Directors

 Restricted Powers

 Related Party Transactions

 Notice

 Agenda

 Minutes of Board Meeting.

9.18 Review Questions

1. What are the powers of the directors?

2. Describe the restrictions on the Powers of board of directors.

3. What do you understand by the term Related Party transaction? Explain the provisions
regarding related party transactions.

4. What is the importance of quorum with respect to board meetings?

5. Narrate the secretarial practice relevant to board meeting.

6. What are the contents of the minutes of board meeting?

9.19 Answers to Check Your Progress

A.State whether the following are true or false

1. True

2. False, they can contribute to a political party, only up to 7.5% of the average net profits.

3. False, companies can’t give loans to directors’ relatives.

4. True

5. True
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B.Fill in the blanks

6. Special resolution

7. Rs. 50,000 to Rs. 1,00,000

8. Own name

9. Contract of service

10. 4 ( 1/3 of 12) or 2 whichever is higher.

C.Choose the correct answer

11. A 12. A 13 .A 14. B 15. C

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UNIT 10
RESOLUTIONS

Learning Objectives

After reading this unit, you should be able to:

 Explain the meaning of resolution

 Describe the types of resolution

 Discuss the minutes of the meeting

Structure
10.1 Introduction

10.2 Types of Resolutions

10.3 Resolution Passed at Adjourned Meeting, Section 116

10.4 Resolution and Agreements to be Filed, Section 117 (Secretarial Duties)

10.5 Minutes of the General Meeting / Share Holders’ Meeting

10.6 Inspection of the Minutes Book of General Meeting, Sect 119

10.7 Maintenance and Inspection of Documents in Electronic Form, Section 120

10.8 Report on Annual General Meeting, Section 121

10.9 Summary

10.10Key Words

10.11 Review Question

10.12Answers to Check Your Progress

10.1 Introduction

The shareholders or the board of directors of the company may present a proposal for
discussion in a meeting by means of resolution. The decisions cannot be taken independently
by any person, therefore it has to be presented in the meeting, discussions are to apprehended
 145

and only then the decision is to be implemented. This chapter will introduce the various matters
that have to be approved in an ordinary resolution, special resolution and resolutions requiring
a special notice. A proposal placed for discussion and decision by means of a resolution is
called motion. It may be amended or retained in the original form when it is finally decided. It
must be in writing and signed by the mover and out to vote at the meeting. A proposal placed
for discussion and decision by means of a resolution is called motion. It may be amended or
retained in the original form when it is finally decided. It must be in writing and signed by the
mover and out to vote at the meeting. A motion which is properly approved in a meeting becomes
a resolution.

10.2 Types of Resolutions

A motion which is properly approved in a meeting becomes a resolution. There are three
types of resolutions, namely, ordinary, special and resolution requiring special notice.

10.2.1 Ordinary Resolution, Section 114

A resolution shall be an ordinary resolution if the notice required under the act has been
duly given and is required to be passed by the votes cast (whether on show of hands, proxy,
postal ballot, electronic voting or poll on demand) including the casting of chairman’s vote in
favour of the resolution exceed the votes cast against the resolution. The following require
ordinary resolution:

 Alteration of the share capital of the company

 Appointment of auditors

 Approval of audited annual accounts and balance sheet

 Declaration of dividend

 Acceptance of deposits from members/public

 Conversion of shares into stock and vice versa

 Appointment of a director other than a retiring director

 Increase or decrease the number of directors within the limits prescribed

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 Appointment of managing director or whole time director and manager

 Approval of the remuneration of director

 Inter-corporate investments within the prescribed limits

 Approval of voluntary winding up if the articles authorise

10.2.2 Special Resolution

The intention to propose a special resolution has been duly specified in the notice calling
the general meeting or other intimation given to the members. Further, notice required under
this act has been duly given. Votes cast in favour of the resolution should be three times the
votes cast against the resolution (whether on show of hands, proxy, postal ballot, electronic
voting or poll on demand).

10.2.3 Matters Requiring Special Resolution

 To alter the articles of association

 To convert a public company into a private one and vice versa

 To issue preference shares

 To buy back its shares

 To reduce the share capital of the company subject to the confirmation of the tribunal

 To vary the rights of different classes of shareholders

 If the company has resolved that it would be wound up by the tribunal

 To keep registers and returns in a place other than the city, town or village in which the
registered office of the company is situated

 To borrow money in excess of its paid up share capital and free reserves of the company

 Issue of convertible debentures

 Appointment of directors in excess of 15

 Investigation of the affairs of the company by the central government

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Resolution Requiring Special Notice, Section 115

If a special notice is required of any resolution as per the provisions of the Companies
Act 2013 or as per the articles of association, then a notice of intention to move such a resolution
is given by members having voting right of not less than 1% or holding shares on which aggregate
sum not exceeding Rs. 500,000. The company shall give its members notice of the resolution
in such manner as may be prescribed.

The following resolutions require special notice:

Appointment of an auditor other than the retiring auditor

Removal of director before the expiry of his period of office

Resolution to appoint another director in the place of the removed director

10.3 Resolution Passed At Adjourned Meeting, Section 116

Adjourned meeting is the meeting which is postponed for want of quorum or any other
reasons. A meeting is adjourned after commencement of the meeting while a meeting is
postponed before commencement of the meeting. If a meeting is adjourned, it is generally
scheduled on the same day of the subsequent week. Any resolution passed at the adjourned
meeting (whether it is adjourned meeting of the company/class meeting/board of directors
meeting) is considered to be passed on the date of the adjourned meeting and not on the date
of the original meeting.

10.4 Resolution and Agreements to Be Filed,

Section 117 (Secretarial Duties)

A copy of every resolution, agreement along with the explanatory statement, if any, annexed
to the notice calling the meeting in which the resolution is proposed shall be filed with the
registrar within 30 days of the passing of resolution, making of agreements in such a manner
with prescribed fees or within the prescribed time specified under Section 403. If the resolution
has the effect of altering the articles or agreements, then the articles issued after passing the
resolution/making of the agreement shall have the copy of such resolution or agreement attached
148

to it. If a company does not file with the registrar within 30 days of resolution or agreement: or
before the expiry of the period mentioned in Section 403 along with prescribed fees, then a
company has to pay penalty in the range of Rs. 500,000-25,00,000 and every officer of the
company is punishable with a fine of Rs.100,000-500,000.

Section 117 of the companies Act 2013, requires the company to file the following
resolution:

 Special resolution

 Resolutions agreed by all members of the company, if not agreed would have been
effective only through special resolution

 Resolution of board of directors regarding appointment, reappointment, removal of

directors and variation of terms of appointment of MD

 Resolutions or agreements which have been agreed to by any class of members if not
agreed would be effective only by passing special resolution or caused in a specified
manner

 All resolutions which effectively bind such class of members though not agreed by all
those members

 Resolutions passed by company giving consent to board of directors to exercise their

powers under Section 180(1)

 Resolutions requiring a company to be wound up voluntarily, Section 304

 Resolutions in pursuance of Section 179(3)

 Any other resolution in public domain

10.5 Minutes of the General Meeting / Share Holders’ Meeting

Every company shall maintain minutes of the proceedings of every general meeting,
class meeting of shareholders, creditors, and every committee of board. It should be signed in
such a manner as prescribed within 30 days of the conclusion of such meeting or resolution.
Minutes book shall be numbered consecutively.
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Contents of Minutes
 Fair and correct summary of the proceedings to be recorded in the minutes

 All appointments made in the meetings

 The minutes should not contain any matter which in the opinion of the chairman o Could
reasonably be recorded as defamatory of any person

o Irrelevant or immaterial to the proceedings o Detrimental to the interest of the

company

When minutes are kept as per the provisions, the meeting shall be deemed to have been
duly called and held. All proceedings, all appointments shall be deemed to be valid until the
contrary is proved. Every company shall observe the secretarial standards with respect to the
conduct of general meeting as well as the board meeting as per Section 3 of the Company
Secretaries Act failing which the company is punishable with a fine up to Rs 25,000/- and every
officer shall pay a fine of Rs 5000/-.

10.6 Inspection of the Minutes Book of General Meeting,

Sect 119

Book of minutes of proceeding of any general meeting of a company or a resolution

passed by postal ballot shall be kept in the registered office for inspection by its members free
of cost. It shall be opened for inspection during business hours. A member can request a
company for a copy of the minutes. The company shall make the copy available to the member
within 7 days of such request along with prescribed fees. If a company denies a member to
inspect the minutes book, or denies the copy of minutes to the member, then the company is
punishable with a fine of up to Rs 25,000/- and every officer with a fine of Rs 5000/- each for
such refusal. In case of refusal or default, the tribunal by order directs an immediate inspection
of the minutes book or directs that a copy to be given to the person concerned.

10.7 Maintenance and Inspection of Documents in

Electronic Form, Section 120

Without prejudice to any other provisions of the Companies Act, any document/record/
register /minutes
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 Required to be kept by a company

 Allowed to be inspected or copies to be given by the company may be kept/inspected/

copies given in electronic form.

10.8 Report on Annual General Meeting, Section 121

Every listed public company is required to prepare a report on each of its annual general
meeting including the confirmation that the meeting was convened, held and conducted as per
the provisions of the Companies Act 2013. The company shall file a report on AGM to the
registrar within 30 days of the conclusion of the meeting with such prescribed fees. The company
can also file the report with additional fees within the time specified under Section

 Any company which does not comply with the above provision is punishable with a fine
ranging from Rs 100,000 to 500,000 and every officer who is in default is punishable with
a fine ranging from Rs 25,000 to 100,000.

Check Your Progress

A.Fill in the blanks

1. A motion which is properly approved in a general meeting becomes __________________

2. A Company can declare dividend by passing an _____________________ resolution.

3. In a special resolution, the votes cast in favour of the resolution should be

________________ times the votes cast against the resolution.

4. A meeting planned to be conducted on first Wednesday of February, for want of quorum

is adjourned. The adjourned meeting be convened on_________________ of February.

5. A company has to file its report on AGM, with the registrar within _________________ of
the conclusion of the meeting.

B.State whether the following are true or false

6. There are four types of resolutions

7. Voluntary winding up of a company within the purview of Articles of Association can be

passed in an ordinary resolution.
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8. Object clause of a company can be changed by passing an ordinary resolution.

9. A director of a company cannot be removed from his office before the expiry of the term.

10. A member of a company can inspect the minutes of the general meeting by paying the
prescribed fees.

10.9 Summary

A proposal for discussion properly approved in a meeting is called resolution. There are
three types of resolutions namely ordinary, special and resolutions requiring special notice.
Ordinary resolution is one which is approved by a simple majority where the number of votes
for the decision is more than the number of votes against the decision. Special resolution is
one in which the votes for the decision is three times the votes against the decision, only then
the decision is approved. Some matters specified in this chapter requires the company to send
a special notice for the meeting in which the resolution is to be taken. Resolutions that are
passed in the adjourned meeting are considered to be passed in the date at of adjourned
meeting not the date of the original meeting. A copy of resolution, agreements approved and
all documents annexed to the notice of resolutions has to be filed with the registrar within 30
days of passing the resolution. Minutes of the meeting refers to the official record of the
proceedings of the meeting. Minutes are to be maintained properly as it is considered as a
conclusive evidence, that can be produced in the court of law. The minutes of shareholders
meeting shall be made available to the members within 7 days of their request, at free of cost.
Minutes of the meeting shall be recorded in electronic form also. Every listed company has to
prepare a report on its annual general meeting, and file the same with the registrar within 30
days of the conclusion of the meeting.

10.10 Key Words

 Resolution

 Ordinary Resolution

 Special Resolution

 Resolutions requiring special notice

 Minutes, Report on AGM.

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10.11 Review Questions

1. What is Resolution?

2. What are the types of Resolution?

3. What is Minute?

4. How to prepare minutes?

10.12 Answers to Check Your Progress

A.Fill in the blanks

1. Resolution

2. Ordinary resolution

3. 3 times

4. Second Wednesday

5. 30 days.

B.State whether the following are true or false

6. False

7. True

8. False

9. False

10. False
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UNIT 11
CORPORATE SOCIAL RESPONSIBIITY (CSR)

Learning Objectives
After studying this unit, you should be able to:

 define CSR

 explain the need and importance for CSR

 describe the different strategies of CSR

 discuss the legal background of CSR

 examine the issues and problems involved in CSR implementation

 bring out the future of CSR

Structure
11.1 Introduction

11.2 Business Strategies

11.3 Vanaprastha Stage

11.4 CSR – Meaning and Definition

11.5 Legal Background of CSR

11.6 Schedule VII of the Companies Act

11.7 Tax Benefits for Expenditure on CSR

11.8 Quantum of Net Profit Spend for CSR

11.9 Drivers for CSR, Issues and Problems in CSR Implementation

11.10 Future of CSR

11.11 Corporate Social Responsibility Committee - Sec.135

11.12 Stakeholders Relationship Committee

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11.13 Audit Committee - Sec.177

11.14 Summary

11.15 Key Words

11.16 Review Questions

11.1 Introduction

The Liberalisation, Privatisation and Globalisation (LPG) business approaches were

introduced in 1990 A.D in India. The Government of India has moved from rule based business
operations to principle based business operations. As a result the growth of corporate have
increased and as on 31.03.2017, 10, 85,872 Private Limited companies and 63,713 Public
Limited Companies were registered under the Companies Act 1956 and Companies Act 2013.A
company from the date of incorporation under the Companies Act has come into perpetual
succession and a common seal and such company has power to acquire property and to enter
into contract. These companies are carrying business activities based on objects specified in
the company’s Memorandum of Association registered with the Registrar of Companies working
under the Ministry of Corporate Affairs, Government of India. The Private and Public Sector
Companies have diversified their business with plough back of Profits earned by them. Every
five to ten years the profit earning companies are diversifying their business and enter into new
ventures and become business conglomerates over two to three decades. The economic
resources of the country and business opportunity are seized by the company for their own
profiteering and wealth maximisation.

11.2 Business Strategies

The business strategies used by the company are

(i) Penetrating existing Product with existing Market segment.

(ii) Developing new products with the existing Market segment.

(iii) Developing old Products for new market segment, and

(iv) Developing new products to new markets by diversification.

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Because of continued efforts the companies are earning profits and diversify their business
with a small start up. The companies’ population are increasing and such companies are having
surplus of funds. The beneficial stakeholders of the company are benefited in the form of
dividend to equity shareholders, salary and wage other welfare measures to employees and
workers, interest to Banks and lenders and the corporate opportunity to the promoters of the
company. The prices for the stakeholders are earned from the prospective consumers and at
social cost.

11.3 Vanaprastha Stage

The business community in general and the Coporates in particular will reach vanaprasatha
stage when they give back to society. The corporates have benefitted expansion and
diversification of business. Mr Ratan Tata who studied Architecture managed the largest
conglomerate the Tata group of Companies. Tata Steel Limited in Tata Groups ranks first in
CSR activities in 2015. In fact Government is looking for at ways of making Corporate Social
Responsibility (CSR) commitment more relevant.

In USA, the foundation for CSR was being developed by a social movements and pressures
from others, especially activists, to adopt CSR perspectives, attitudes, practices and policies.
The social environments have changed piece by piece because of activists and social
movements thus changed the social environment and the business would have to operate.

In India, Thanthai Periyar E.V.Ramasamy Social Reformer, K.Kamaraj, Former Chief

Minister of Tamil Nadu, Mother Theresa Founder of Missionaries in 123 countries and Acharya
VinobaBhave-Founder of Bhoomidan Movement were the activists for the socio economic
development of the country. August Comte is considered as father of Sociology. The term
sociology was coined by him and the credit goes to him. He was born in Montpellier. August
Comte saw himself as founder and prophet of a new “religion of humanity”. According to August
Comete, the subject matter of sociology is society. Sociology studies structure of the society
and the laws governing its functions. Sociology tries to discover those principles which help
society to stay integrated and in order.
156

The Preamble of Constitution of India embodied to secure all its Citizen Justice, social
economic and political. Dr Rajendra Prasad, President of Indian Constituent Assembly and Dr
B.R.Ambedkar, Chairman, Indian Constitution Drafting Committee had given considered
principles and ideals for the development and protection of the welfare of masses of India
under Directive Principles of State Policy.

The Government have implemented Five Year Plans and Goals to provide infrastructure
facilities for growth of Industries, Education, Health care, and Environmental protection, Regional
development of industries and also distribution of Income. Besides Individuals, Partnership
Firm, and Societies, Trust, Corporate are playing large in number in manufacturing and
Distribution of Goods and Services. The share of corporate in the economic development of
the country significant and command large resources in terms of manpower, capital, resources
and accumulation of resources and profits. The corporate resources supported by its
stakeholders. They run the business at the social cost and earn hefty profits and indulge in
diversification of the economic activity results in profiteering and wealth maximisation. The
people at large in number still live below poverty line which results in malnutrition, lack of
resources for pursuing education, lack of skills for employment, housing and lack of drinking
water and health related problems .The government has passed enough legislation for protection
of workers and environment. Despite this, majority of people not able to afford for education,
health care, drinking water housing, skill development etc. The Government resources and its
initiatives alone not sufficient to undertake 100% provision of welfare facilities to all Citizen.
Under this backdrop, there is an agenda on the Government to make inclusive growth and
financial inclusion of all Citizens. The Government is collecting Education Cess, Swatcch Bharat
cess and Krishi Kalyan Cess besides other taxes for the provision of social welfare measures
before the introduction of Goods and Services Act in July 01, 2017.

Hence, an idea was mooted on to implement Corporate Social Responsibility Activity

(CSR) by Parliamentary Standing Committee in 2011.Because of these reasons, in the
Companies Act 2013 a provision was included under section 135 for CSR activities by the
company.

The Government of India has imposed certain social responsibility on the company. This
is because the company runs its business at the social cost of the country and indulges in
 157

profiteering and wealth maximisation. Hence, Government of India expected the Corporate
has to involve in Social Responsibility activity for inclusive growth and sustainable development
of the Indian Citizen.

11.4 CSR – Meaning and Definition

Corporates utilize various scarce resources including human resource from society for
carrying out their business activities. When the resources are used excessively, the ecological
balance is affected, eventually the environment and society is adversely affected. It is their
responsibility to take various measures to protect the environment and to give something back
to the stake holders of the companies. Taking efforts to protect the environment, giving fair
return to the stakeholders of the company can be described as corporate social responsibility.
Business Dictionary defines CSR as “A company’s sense of responsibility towards the community
and environment (both ecological and social) in which it operates. Companies express this
citizenship through their (i) waste and pollution reduction processes, (ii) by contributing
educational and social programmes and (iii) by earning adequate returns on the employed
resources. CSR is also called as corporate conscience, corporate citizenship or responsible
business.

11.5 Legal Background of CSR

The National Voluntary Guidelines (NVG) on Social, Environmental and Economic

Responsibility of Business 2011 is basis for Corporate Social Responsibility and amendment
for inclusion in the Companies Act 2013. The Companies Act 2013 has a new provision to
implement Corporate Social Responsibility on certain companies which fulfils any one of the
following three conditions

1. A Company having turnover of Rs 100 Crores and more

2. A company having Net worth of Rs500 Crores and more

3. A Company having Net Profit of Rs 5 Crores and more.

A company which fulfils any one of the above conditions has to spend in every financial
year at least two percent (2%) of the average net profit of the company made during the three
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immediately preceding financial years. Further, the company should give preference to the
local area and areas around it where it operates for spending the amount earmarked for corporate
social responsibility activities. The criterion specified under the companies Act 2013 for CSR
companies is diagrammatically represented below.

Fig 1: Criteria for CSR in the Companies Act 2013

11.6 Schedule VII of the Companies Act

Activities which may be included by companies in their Corporate Social Responsibility

policies activities relating to:

(i) Eradicating hunger, poverty and malnutrition ,promoting health care including preventive
health care and sanitation and making available safe drinking water;

(ii) Promoting education, including special education and employment enhancing vocation
skills especially among children,women,elderly, and the differently abled and livelihood
enhancement projects;

(iii) Promoting gender equality, empowering women, setting up homes and hostels for women
and orphans; setting up old age homes, day care centers and such other facilities for
senior citizens and measures for reducing inequalitities faced by socially and economically
backeard groups;
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(iv) Ensuring environmental sustainability, ecological balance, protection of flora and

fauna,amimal welfare ,agro forestery, conservation of natural resources and maintaining
quality of soil, air and pollution;

(v) Protection of national heritage, art and culture including restoration of buildings and sites
of historical importance and works of art; setting up of public libraries ,promotion and
development of traditional arts and handicrafts;

(vi) Measures for the benefit of armed forces,veterans,war widows and their dependents

(vii) Training to promote rural sports, nationally recognized sports,paralympic sports and
Olympic sports;

(viii) Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the
Central Government for socio-economic development and relief and welfare of the
Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and Women;

(ix) Contributions or funds provided to technology incubators located within academic

institutions which are approved by the Central Government;

(x) Rural development projects.

11.7 Tax Benefits for Expenditure on CSR

Firms spending money on Corporate Social Responsibility (CSR), which has been made
mandatory under the new Companies Act, have more reasons to cheer. Though CSR provisions
do not offer any great tax savings, companies can claim deductions specifically allowed under
Sections 30 to 36 of the Income tax (IT) Act, 1961.

1. Section 30 of the IT Act allows deductions against expenditure incurred on repairs and
insurance in respect of machinery, plant and furniture used for CSR activities.

2. Rent, rates, taxes and repairs incurred on buildings or other assets taken on lease
earmarked for CSR activity would also qualify for deductions.

3. Deduction towards depreciation on assets used for CSR purpose can be claimed.

4. Funds spend on skill Development projects gives the assessee the benefit of claiming
150% deduction in their books.
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5. Installing water filter in schools at various places allows to claim expenditure on repairs,
maintenance, insurance, besides deduction towards depreciation if the asset is shown in
its books of account.

Activities not eligible Under Corporate Social Responsibility expenditure

(a) Contribution to political Party

(b) One-off events like awards, charitable contribution, advertisement etc

(c) The project or programmes or activities undertaken outside India

(d) The CSR activities that benefit only the employees of the company and their family

(e) Activities undertaken by the company in the normal course of business.

(f) Expenses incurred by the company for the fulfilment of any other Act and state of
regulations such as labour laws, Land Acquisition Act 2013,and other Act

The growths of corporate have increased and as on 31.03.2017, 10, 85,872 Private
Limited companies and 63,713 Public Limited Companies were registered under the Companies
Act 1956 and Companies Act 2013. The provisions of section 135 and Schedule VII of the
Companies Act 2013 is piece of Social Security Law incorporated under the Business law for
corporate. Hence a study on Corporate Social Responsibility activities is phenomenal and
worthwhile to study the Contribution of Corporate for the Sociological Development of the
Country in lines of Provisions made under the Companies Act. Corporate Social Responsibility
as provided under section 135 of Companies Act 2013 is applicable to every company
incorporated under the Companies Act 2013.

11.8 Quantum of Net Profit Spend for CSR

The company which fulfils any one of the condition has to spend at least 2% of average
Net Profit earned in the last three financial years. The companies has to spend only the activities
specified under Schedule VII of the Companies Act 2013.The company has to frame its own
corporate social responsibility policy though corporate social responsibility committe.The Board
of Directors has to approve the CSR policy of the company.
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There is a possibility for a company to concentrate only certain areas of CSR activities
leaving behind the other activities. Further the amount spend on the CSR activities is below
and above the statutory requirements and is the company focusing only in certain areas of
CSR activities. Is the company has enough monitoring mechanism for CSR activities. The
relationship between CSR activities and Ethics, Financial Performance and its social standing
and Brand value. How the CSR activities help the company to improve its Business performance
and attract best talents from the society.

11.9 Drivers for, Issues and Problems in CSR Implementation

The main drivers for CSR have been the shrinking role of government, demands for
greater disclosure, increased customer interest, growing investor pressure, competitive labour
markets and supplier relations. The companies enjoy several benefits like improved financial
performance, lower operating costs, enhanced brand image and reputation, increased sales
and customer loyalty, product safety, material recyclability, and greater use of renewable
resources etc.

Confederation of Indian Industry has made a study on the new CSR legislative impact on
the ground on PAN India basis after surveying 699 companies through Dexter consulting. The
study reveals that response is Ripple. That means in quantitative 48% were replied yes and in
Qualitative 25% were replied .The report concluded that, it was focused on the activities not on
attitudes and outcome.

Further it comes to the conclusion that the Medium and Small companies may not have
adequate CSR related resources, thus they require assistance for successful CSR in Knowledge,
Implementation, and Networking.

The study has identified the following problems at various stages of

implementing CSR.
1) Acquiring different permission from government departments for CSR activities.

2) It is always challenging to judge and undertake right CSR Project where CSR program is
actually required.
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3) Assistance in Budget Management and sector selection for CSR

4) Deciding the CSR budget for donations areas etc

5) Not getting the right skill for managing CSR Projects

6) How to identify the deserving students for the school scholarships?

7) Ideation how to help drought affected villagers.

8) How to identify the right kind of organisation for CSR Partnership

9) How to work with Government Schemes?

10) Mindset of communities and acceptance of CSR schemes by the Corporate

11) Identification of the area where the school establishment inputs are needed for CSR
implementation.

12) Lack of support from the local stakeholders for CSR activities.

Monitoring of CSR Activities

A high level committee was formed on the working of Corporate Social Responsibility of
the Business. The term of reference was:

1) Methodologies for monitoring the compliance of the provisions of section 135 of the
companies Act 2013.

2) To suggest measures to be recommended by Government for adoption by companies for

Systematic monitoring of their own CSR activities

3) Monitoring and evaluation of CSR activities of Select companies through expert Agencies

4) Monitoring of CSR undertaken by Government Companies.

11.10 Future of CSR

The concept of CSR is evolving nature.CSR International; a non-profit organisation

announced in 2009 the birth celebration of CSR International an exciting new organisation
supporting the transition from what is called the old Corporate Social Responsibility (CSR) or
CSR 1.0 to the new CSR (Corporate Sustainability & Responsibility) or CSR 2.0.
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It is expected that more than 60, 00 companies will be covered for mandatory CSR and
the estimated amount will be around Rs 20,000 Crores.Securies and Exchange Board of India
has mandated the top 100 listed companies to disclose the CSR expenditure under the Business
Responsibility Report as part of Directors Report in 2012.

ISO 26000

International Organization for Standardisation (ISO) is the world’s largest developer of

voluntary International Standards developed a proposal by the ISO’s Committee on Consumer
Policy(COPOLCO) for the drafting of an ISO standard on Social Responsibility .ISO 26000
was developed by more than 600 experts from 99 countries.ISO 26000 was published in
November 2010.ISO 26000 is a voluntary guidance standard.ISO 26000 is to encourage
organizations to go beyond legal compliance ,recognizing that compliance with law is a
fundamental duty of any organization and an essential part of their Social Responsibility.ISO
26000 is not a Management System Standard.

Seven Principles of Social Responsibility for Organizations

1) Accountability for impacts on society, the economy and the environment

2) Transparency in decisions and activities that impact on society and the environment

3) Ethical Behaviour

4) Respect, consideration and responsiveness towards stakeholders’ interests.

5) Respect for the rule of law

6) Respect for international norms of behaviour

7) Respect for human rights and recognition of their importance and universality.

ISO 26000 is not intended or appropriate for certification purposes or regulatory or

contractual use.

11.11 Corporate Social Responsibility Committee - Sec.135

Every company having net worth of rupees five hundred crores or more or a net profit of
rupees five crores or more during any financial year shall constitute a corporate social
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responsibility committee of the board consisting of three or more directors, out of which atleast
one director shall be an independent director.

Functions of CSR Committee - Sec.135(3):

There are three functions are available in CSR committee. They are as follows.

1. Formulating and recommending to the Board, a CSR policy. It shall indicate the activities
to be undertaken by the company.

2. Recommending the amount of expenditure to be incurred on the activities mentioned

above.

3. Monitor CSR policy of the company from time to time.

Approval of the Board:

The Board shall after taking into account the recommendations made by the CSR
committee approve the CSR policy for the company and disclose contents of such policy in its
report. It shall also ensure that activities included in the policy are undertaken by the company.
It shall also ensure that atleast 2% of the average net profit of the company made during the
three immediately preceding financial years spent by the company in pursuance of the policy.

Nomination and Remuneration Committee:

Every listed public company and some other companies prescribed shall constitute
nomination and remuneration committee consisting of three or more non-executive directors
out of which not less than ½ shall be independent directors. Chairperson of the company may
be a member of this committee irrespective of whether he is executive director. However, he
shall not chair the committee.

Functions of Nomination and Remuneration Committee:

There are five functions are available in nomination and remuneration committee. They
are as follows.

1. Identifying person for directorship and top management, attracting retaining and motivating
directors.
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2. Specifying the manner for effective evaluation of director performance, of the board, its
committees and individual directors.

3. Determining criteria like positive attribute, qualification and independence of a director.

4. Recommending the board for a policy for remuneration of directors, key managerial
personnel and employees.

5. Ensuring that the relationship of remuneration to performance is clear and meets

appropriate performance benchmarks.

11.12 Stakeholders Relationship Committee

There are three sections are available in this committee. They are

1. Sec.178(5): The chairperson of the committee shall be a non executive director. It may
have any number of members.

2. Sec.178(6) : The committee shall consider and resolve grievances of securities holders
of the company.

3. Sec178(7) : The chairperson or any other authorized member of committee shall attend
general meeting of the company.

11.13 Audit Committee - Sec.177

Board of Directors of all listed public companies and some other companies specified for
the purpose shall constitute an Audit Committee. Committee shall consist of atleast three
directors with majority of independent directors. Majority of directors including chairperson of
this committee should be able to read and understand financial statement.

Terms of Reference:
Sec.177(4): Monitering the end use of funds raised through public offers and related
matters.

Sec.177(6): The Audit Committee may investigate any matter in relation to these terms,
seek external professional advice and have full access to records of company.
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Sec.177(9):

 The recommendation for appointment, remuneration and terms of appointment of auditors

of the company.

 Review and monitor the auditor’s independence and performance, and effectiveness of
audit process.

 Examination of the financial statement and the auditors’ report thereon.

 Approval of transactions of the company with related parties.

 Scrutiny of inter corporate loans and investments.

 Valuation of undertakings of the company, whenever it is necessary.

 Evaluation of internal financial controls and risk management systems.

Check Your Progress

1. Define CSR.

2. List the business strategies used by the companies

3. Write a note on significance of CSR.

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4. List the conditions to be followed for implementing CSR in a particular company.

11.14 Summary

Various research studies reveal that there is a positive relationship between CSR spending
and the financial performance of the company. The companies which spend good amount on
CSR stands unique and attracts and retain the highly talented human resource. Moreover,
when a company focuses on sustainable development there wouldn’t be any interference from
the government side. However the critics of the CSR say CSR is a deviation from the original
activities of the companies. There may be certain issues in implementation of CSR. But it is
essential for creating sustainable development.

CSR is defined as a sense of responsibility towards the community and environment

(both ecological and social) in which it operates. Taking efforts to control the pollution,
contributions to educational and social programmes, providing fair returns to the stakeholders
of companies are examples for CSR activities carried out by the companies. In the past CSR
was carried out by the companies voluntarily. Companies Act 2013 made CSR as mandatory.
According to the companies Act 2013, a company having net worth of 500 Crores and more or
a company having turnover of 1000 Crores and more or a company having net profit of 5
Crores and more have to spend at least 2 percent of the average net profit of the company
made during the three immediately preceding financial year. Furthermore, the company should
give preference to the local area and areas around it where it operates for spending the amount
earmarked for corporate social responsibility activities. There are different perspectives on
CSR some say CSR is very essential for creating a sustainable development. When resources,
they should do something to protect the environment and to give something return in to the
society.
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11.15 Key Words

 Sustainability

 Environment

 Citizenship

 Ethics

 Stakeholders

 Scarce Resources

 Responsibility

11.16 Review Questions

1. Why a company should involve in CSR activities?

2. Explain the legal background of CSR.

3. Bring out the contents of Schedule VII of the Companies Act 2013

4. Discuss the need and importance of CSR.

5. Describe the issues and problems involved in the implementation of CSR.

6. “CSR leads to sustainable development comment”. Do you agree with this statement?
Substantiate your answer.
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UNIT 12
WINDING UP OF THE COMPANY

Learning Objectives
After reading this unit, you should be able to:

 Explain the meaning of Winding up

 Describe the different types of Modes of Winding up

 Winding up subject to the supervision of the Tribunal

 Legal Provisions governing the Voluntary Winding up

 Discuss in detail about the working mechanism of National Company Law Tribunal

Structure
12.1 Introduction

12.2 Meaning and Definition

12.3 Modes of Winding up

12.4 Circumstances Which the Company can Wind up by the Tribunal

12.5 Legal Provisions Applicable to the Company Wound up by the Tribunal According
To Companies Act 2013

12.6 Voluntary Winding up

12.7 Legal Provisions Applicable for Voluntary Winding up According to Companies Act
2013

12.8 Legal Provisions of Companies Act 2013 Applicable for Every Mode of Winding up
of the Company

12.9 National Company Law Appellate Tribunal

12.10Summary

12.11 Key Words

12.12 Review Questions

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12.1 Introduction

The winding up of the company is the final stage of the company. It means a proceeding
by which a company is dissolved. The assets of the company are disposed of, the debts are
paid off out of the realized assets (or from contribution from its members) and the surplus if any
is then paid off to the members in proportion to their holdings in the company.

12.2 Meaning and Definition

According to Prof. Gower, Winding up of a company is the process whereby its life is
ended and its property administered for the benefit of its creditors and members. The liquidator
is appointed and he takes control of the company, collects its assets, pays its debts and finally
distributes any surplus among the members in accordance with their rights.

“Winding up is a means by which the dissolution of a company is brought about and its
assets are realised and applied in the payment of its debts. After satisfaction of the debts, the
remaining balance, if any, is paid back to the members in proportion to the contribution made
by them to the capital of the company.”

“The liquidation or winding up of a company is the process whereby its life is ended and
its property is administered for the benefit of its creditors and members. An Administrator,
called a liquidator, is appointed and he takes control of the company, collects its assets, pays
its debts and finally distributes any surplus among the members in accordance with their rights.”

Thus, winding up ultimately leads to the dissolution of the company. In between winding
up and dissolution, the legal entity of the company remains and it can be sued in a Tribunal of
law.

12.3 Modes of Winding up

According to Companies Act 1956, the modes of the winding up may be discussed under
the following three heads, namely

Compulsory winding up by the court, Voluntary winding up without the intervention of the
court, Voluntary winding up with the intervention of the Tribunal under the supervision of the
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Tribunal. This can be undertaken either by the member’s voluntary winding up or creditors
voluntary winding up

According to Sec 270 of Companies Act 2013, the winding up of the company can be
undertaken either by the tribunal or voluntary

12.4 Circumstances Which the Company can Wind up

by the Tribunal
According Sec 272 of the Companies act 2013, the company may be wound up by the tribunal

1. When the company is unable to pay its debts

2. When the company has by special resolution resolved that the company be wound up by
the Tribunal

3. When the company has acted against the interests of the sovereignty and integrity of
India, the security of the State, friendly relations with foreign States, public order, decency
or morality

4. When the company has made a default in filing with the Registrar its financial statements
or annual returns for immediately preceding five consecutive financial years

If the Tribunal is of the opinion that it is just and equitable the company shall be wound
up. The words “just and equitable” are of the widest significance and do not limit the jurisdiction
of a court to any case.

12.5 Legal Provisions Applicable to the Company Wound up by

the Tribunal According to Companies Act 2013

Winding up of a company under the order of a tribunal is also known as compulsory

winding up. Grounds for winding up by the Tribunal: A company (public or private may be
wound up by the Tribunal in the following cases like special resolution passed by the company,
default in holding statutory meeting, failure to commence the business, reduction in the
membership, inability to pay off its debts. The legal provisions Applicable to the company wound
up by the tribunal according to the companies Act 2013 may be discussed in detail.
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a. Petition for winding up (Sec 272) : The petition to the tribunal for winding up of the
company shall be presented by company, any contributory or contributories, any secured
creditors, the registrar, any person authorized by the central Government in that behalf. A
petition presented by the company for winding up before the Tribunal shall be admitted
only if accompanied by a statement of affairs in such form and in such manner as may be
prescribed. A copy of the petition shall made shall also be filed with the registrar and the
registrar shall submit his views to the Tribunal within sixty days of receipt of such petition.

b. Power of the tribunal (Sec 273) : According to Sec 272, Companies Act 2013, the
tribunal on the receipt of the petition pertaining to the winding up of the company shall
pass the orders such as-

Dismiss it with or without the cost or make an interim order as it thinks fit, appoint a
provisional liquidator of the company till the making of winding up order, make an order
for the winding up of the company with or without costs.

The Tribunal shall give notice to the company and afford a reasonable opportunity to it to
make its representations, if any, unless for special reasons to be recorded in writing, the
Tribunal thinks fit to dispense with such notice. Provided also that the Tribunal shall not
refuse to make a winding up order on the ground only that the assets of the company
have been mortgaged for an amount equal to or in excess of those assets, or that the
company has no assets.

c. Company Liquidators and their appointments (Sec 275) : The tribunal at the time of
passing the order shall appoint an official liquidator as the company liquidator. The company
liquidator shall be appointed by the panel maintained by Central Government consisting
of names of Chartered accountants., advocates, cost accountants or firms or bodies
corporates having such chartered accountants, advocates, cost accountants as may be
notified by the Central government from a firm or a body corporate of persons having a
combination of such professionals as may be prescribed and having at least ten years
experience in company matters.

The terms and conditions of appointment of a provisional liquidator or Company Liquidator

and the fee payable to him or it shall be specified by the Tribunal on the basis of task
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required to be performed, experience, qualification of such liquidator and size of the

company.

On appointment as provisional liquidator or Company Liquidator, as the case may be,

such liquidator shall file a declaration within seven days from the date of appointment in
the prescribed form disclosing conflict of interest or lack of independence in respect of his
appointment, if any, with the Tribunal and such obligation shall continue throughout the
term of his appointment.

d. Removal or Replacement of liquidator (Sec 276) : The Tribunal may, on a reasonable

cause being shown and for reasons to be recorded in writing, remove the provisional
liquidator or the Company Liquidator, as the case may be, as liquidator of the company
on any of the following grounds, namely:—

(a) misconduct;

(b) fraud or misfeasance;

(c) professional incompetence or failure to exercise due care and diligence in

performance of the powers and functions;

(d) inability to act as provisional liquidator or as the case may be, Company Liquidator;

(e) conflict of interest or lack of independence during the term of his appointment that
would justify removal.

In the event of death, resignation or removal of the provisional liquidator or as the case
may be, Company Liquidator, the Tribunal may transfer the work assigned to him or it to another
Company Liquidator for reasons to be recorded in writing.

e. Intimation to Company Liquidator, provisional liquidator and Registrar (Sec 277) :

Where the Tribunal an order for the appointment of Company Liquidator for the winding
up of the company, it shall within a period not exceeding seven days from the date of
passing of the order, cause intimation thereof to be sent to the Company Liquidator. On
receipt of the copy of order of appointment of provisional liquidator or winding up order,
the Registrar shall make an endorsement to that effect in his records relating to the
company and notify in the Official Gazette that such an order has been made and in the
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case of a listed company, the Registrar shall intimate about such appointment or order, as
the case may be, to the stock exchange or exchanges where the securities of the company
are listed.

The winding up order shall be deemed to be a notice of discharge to the officers, employees
and workmen of the company, except when the business of the company is continued. Within
three weeks from the date of passing of winding up order, the Company Liquidator shall make
an application to the Tribunal for constitution of a winding up committee to assist and monitor
the progress of liquidation application to the Tribunal for constitution of a winding up committee
to assist and monitor the progress of liquidation proceedings by the Company Liquidator. Winding
up Committee comprise of the following persons namely:-

1. Official Liquidator attached to the Tribunal

2. Nominee of the secured creditors

3. a professional nominated by the Tribunal

The company liquidator shall be the convener of the meetings of the winding up committee
which shall assist and monitor the liquidation proceeding in following areas of liquidation functions
namely:-

Taking over assets;

(ii) examination of the statement of affairs;

(iii) recovery of property, cash or any other assets of the company including benefits derived
there from;

(iv) review of audit reports and accounts of the company;

(v) sale of assets;

(vi) finalization of list of creditors and contributories;

(vii) compromise, abandonment and settlement of claims;

(viii) Payment of dividends, if any; and

(ix) any other function, as the Tribunal may direct from time to time.
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The Company Liquidator shall place before the Tribunal a report along with minutes of
the meetings of the committee on monthly basis duly signed by the members present in the
meeting for consideration till the final report for dissolution of the company is submitted before
the Tribunal. The Company Liquidator shall prepare the draft final report for consideration and
approval of the winding up committee. The final report so approved by the winding up committee
shall be submitted by the Company Liquidator before the Tribunal for passing of a dissolution
order in respect of the company.

f. Effect of winding up order (Sec 278): - The order for the winding up of a company shall
operate in favor of all the creditors and all contributories of the company as if it had been
made out on the joint petition of creditors and contributories.

g. Submission of report by Company Liquidator ( Sec 281): Where the Tribunal has
made a winding up order or appointed a Company Liquidator, such liquidator shall, within
sixty days from the order, submit to the Tribunal, a report containing the following particulars,
namely:—

(a) the nature and details of the assets of the company including their location and value,
stating separately the cash balance in hand and in the bank, if any, and the negotiable
securities, if any, held by the company: Provided that the valuation of the assets shall be
obtained from registered valuers for this purpose;

(b) Amount of capital issued, subscribed and paid-up;

(c) the existing and contingent liabilities of the company including names, addresses and
occupations of its creditors, stating separately the amount of secured and unsecured
debts, and in the case of secured debts, particulars of the securities given, whether by the
company or an officer thereof, their value and the dates on which they were given;

(d) The debts due to the company and the names, addresses and occupations of the persons
from whom they are due and the amount likely to be realized on account thereof;

(e) guarantees, if any, extended by the company;

(f) List of contributories and dues, if any, payable by them and details of any unpaid call;

(g) Details of trademarks and intellectual properties, if any, owned by the company;
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(h) Details of subsisting contracts, joint ventures and collaborations, if any;

(i) Details of holding and subsidiary companies, if any;

(j) Details of legal cases filed by or against the company; and

The Company Liquidator shall also make a report on the viability of the business of the
company or the steps which, in his opinion, are necessary for maximizing the value of the
assets of the company.

h. Promoters and directors to extend the full cooperation to the Company Liquidator
( Sec 284) : The promoters, directors, officers and employees, who are or have been in
employment of the company or acting or associated with the company shall extend full
cooperation to the Company Liquidator in discharge of his functions and duties. Where
any person without reasonable cause, fails to discharge his obligations shall be punishable
with imprisonment which may extend to six months or with fine which may extend to Rs.
50000 or with both.

i. Advisory Committee ( Sec 287) : The Tribunal may, while passing an order of winding
up of a company, direct that there shall be, an advisory committee to advise the Company
Liquidator and to report to the Tribunal on such matters as the Tribunal may direct. The
advisory committee appointed by the Tribunal shall consist of not more than twelve
members, being creditors and contributories of the company or such other persons in
such proportion as the Tribunal may, keeping in view the circumstances of the company
under liquidation, direct. The Company Liquidator shall convene a meeting of creditors
and contributories, as ascertained from the books and documents, of the company within
thirty days from the date of order of winding up for enabling the Tribunal to determine the
persons who may be members of the advisory committee. The advisory committee shall
have the right to inspect the books of account and other documents, assets and properties
of the company under liquidation at a reasonable time. The meeting of advisory committee
shall be chaired by the Company Liquidator.

j. Submission of periodical reports to Tribunal ( Sec 287) : The Company Liquidator

shall make periodical reports to the Tribunal and in any case make a report at the end of
each quarter with respect to the progress of the winding up of the company.
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k. Powers and duties of Company Liquidator (Sec 290) : The company liquidator in case of
winding up of the company by the tribunal shall have the power-

(a) to carry on the business of the company so far as may be necessary for the beneficial
winding up of the company;

(b) to do all acts and to execute, in the name and on behalf of the company, all deeds,
receipts and other documents, and for that purpose, to use, when necessary, the company‘s
seal;

(c) to sell the immovable and movable property and actionable claims of the company by
public auction or private contract, with power to transfer such property to any person or
body corporate, or to sell the same in parcels;

(d) to sell the whole of the undertaking of the company as a going concern;

(e) to raise any money required on the security of the assets of the company;

(f) to institute or defend any suit, prosecution or other legal proceeding, civil or criminal, in
the name and on behalf of the company;

(g) to invite and settle claim of creditors, employees or any other claimant and distribute sale
proceeds in accordance with priorities established under this Act;

(h) to inspect the records and returns of the company on the files of the Registrar or any
other authority;

(i) to prove rank and claim in the insolvency of any contributory for any balance against his
estate, and to receive dividends in the insolvency, in respect of that balance, as a separate
debt due from the insolvent, and rate ably with the other separate creditors;

(j) to draw, accept, make and endorse any negotiable instruments including cheque, bill of
exchange, hundi or promissory note in the name and on behalf of the company, with the
same effect with respect to the liability of the company as if such instruments had been
drawn, accepted, made or endorsed by or on behalf of the company in the course of its
business;

(l) to obtain any professional assistance from any person or appoint any professional, in
discharge of his duties, obligations and responsibilities and for protection of the assets of
178

the company, appoint an agent to do any business which the Company Liquidator is
unable to do himself;

(m) to take all such actions, steps, or to sign, execute and verify any paper, deed, document,
application, petition, affidavit, bond or instrument as may be necessary,—

(i) for winding up of the company;

(ii) for distribution of assets;

(iii) in discharge of his duties and obligations and functions as Company Liquidator;
and

(n) to apply to the Tribunal for such orders or directions as may be necessary for the winding
up of the company.

l. Books to be kept by Company Liquidator ( Sec 293) : The Company Liquidator shall
keep proper books in such manner, as may be prescribed, in which he shall cause entries
or minutes to be made of proceedings at meetings. Any creditor or contributory may,
subject to the control of the Tribunal, inspect any such books, personally or through his
agent.

m. Audit of Company Liquidator’s account (Sec 294) : The Company Liquidator shall
maintain proper and regular books of account including accounts of receipts and payments
made by him. The Company Liquidator shall, at such times as may be prescribed but not
less than twice in each year during his tenure of office, present to the Tribunal an account
of the receipts and payments as such liquidator in the prescribed form in duplicate, which
shall be verified by a declaration in such form and manner as may be prescribed. When
the accounts of the company have been audited, one copy thereof shall be filed by the
Company Liquidator with the Tribunal, and the other copy shall be delivered to the Registrar
which shall be open to inspection by any creditor, contributory or person interested.

n. Power of Tribunal to make calls ( Sec 296): The Tribunal may, at any time after the
passing of a winding up order, and either before or after it has ascertained the sufficiency
of the assets of the company should make calls on all or any of the contributories for the
time being on the list of the contributories, to the extent of their liability, for payment of any
money which the Tribunal considers necessary to satisfy the debts and liabilities of the
 179

company, and the costs, charges and expenses of winding up, and for the adjustment of
the rights of the contributories among themselves; and make an order for payment of any
calls so made.

o. Dissolution of company by Tribunal ( Sec 302): When the affairs of the company have
been completely wound up, the company liquidator shall make an application to the tribunal
for dissolution of such company. A copy of the order should be send within thirty days by
the company liquidator to the Registrar. In case if the company liquidator makes a default
in forwarding a copy of the order within the specified period, then the company liquidator
shall be punishable with fine which may be extended to five thousand rupees for every
day during which the default continues.

Check Your Progress - A

1. What do you mean by Winding up of the company?

2. List out the different modes of winding up of the company according to Companies Act
1956.

Previously we had discussed in detail about the winding up by the Tribunal according to
the companies act 2013, now let us discuss in detail about the voluntary winding up of the
company and the legal provisions of Companies Act 2013 applicable to every mode of the
winding up of the company is explained in detail.
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12.6 Voluntary Winding up

Voluntary winding up means winding up by the members or creditors of the company

without interference by the Tribunal. The object of a voluntary winding up is that the company
i.e, the members as well as the creditors are left free to settle their affairs without going to the
Tribunal.

A Company may be wound up voluntarily

(1) By passing an ordinary resolution in general meeting passes a resolution requiring the
company to be wound up voluntarily as a result of the expiry of the period for its duration,
if any, fixed by its articles or on the occurrence of any event in respect of which the articles
provide that the company should be dissolved; or

(b) By passing a Special Resolution: A company may at any time pass a special resolution
that it be wound up voluntarily

12.7 Legal Provisions Applicable for Voluntary Winding up

According to Companies Act 2013

The legal provisions pertaining to the voluntary winding up of the company according to
the new legal framework of companies Act 2013 was discussed in detail below

a. Declaration of Solvency incase of the proposal for voluntarily winding up ( Sec

305) Where it is proposed to wind up a company voluntarily, its director or directors, or in
case the company has more than two directors, the majority of its directors, shall, at a
meeting of the Board, make a declaration verified by an affidavit to the effect that they
have made a full inquiry into the affairs of the company and they have formed an opinion
that the company has no debt or whether it will be able to pay its debts in full from the
proceeds of assets sold in voluntary winding up.

The declaration shall be

(i) made within the five weeks immediately before the date of the passing of the resolution
for winding up the company and delivered to the registrar for the registration before that
date and
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(ii) Accompanied by a copy of the report of the auditors of the company on the profit and loss
account of the company from the date of the last profit and loss account to the latest
practicable date immediately before the declaration of solvency, the balance sheet of the
company and a statement of the company’s assets and liabilities as on the last mentioned
date

(iii) A director making a declaration of the solvency of the company without having reasonable
grounds for the opinion that the company will be able to pay its debts in full within the
period specified in the declaration shall be punishable with imprisonment up to a period of
five years or with fine up to Rs. 50000 but which may be extended to three Lakhs or with
both.

b. Meeting of creditors ( Sec 306) : The company shall call a meeting of the creditors of
the company on the day or the day next following the day, on which the resolution for
voluntary winding up is to be proposed. It shall send notices of the meeting to the creditors
by post simultaneously with the sending of the notices of the meetings of the company.
The notice of such meeting to be sent by registered post to the creditors with the notice of
the meeting of the company. The Board of Directors of the company shall— (a) cause to
be presented a full statement of the position of the affairs of the company together with a
list of creditors of the company, if any, copy of declaration under section 305 and the
estimated amount of the claims before such meeting; and (b) appoint one of the directors
to preside at the meeting. The notice of any resolution passed at a meeting of creditors in
pursuance of this section shall be given by the company to the Registrar within ten days
of the passing thereof.

The company shall be punishable with fine which shall not be less than fifty thousand
rupees but which may extend to two lakh rupees and the director of the company who is
in default shall be punishable with imprisonment for a term which may extend to six
months or with fine which shall not be less than fifty thousand rupees but which may
extend to two lakh rupees, or with both.

c. Publication of Resolution for the voluntary winding up of the company (Sec 307):
Where a company has passed a resolution for voluntary winding up and a resolution shall
be passed within fourteen days of the passing of the resolution by advertisement in Official
182

Gazette and also in newspaper which is in circulation in the district where the registered
office is situated. Every officer who is in default shall be punishable with fine which may
extend to Five thousand rupees for every day during such default continues.

d. Commencement of Voluntary Winding up (Sec 308): A voluntary winding up shall be

deemed to commence on the date of passing of the resolution for voluntary winding up
under section 304.

e. Appointment of Company Liquidator (Sec 310): The Company in its general meeting,
where a resolution of voluntary winding up is passed, shall appoint a Company Liquidator
from the panel prepared by the Central Government for the purpose of winding up its
affairs and distributing the assets of the company and recommend the fee to be paid to
the Company Liquidator. The creditor while approving the appointment of the Company
Liquidator appointed by the company or appointing the company liquidator by its own
choice, as the case may be, pass resolution with regard to the fee of the company liquidator.
On appointment of the company liquidator, such company liquidator shall file the declaration
within seven days in case of disclosing conflict of interest or lack of independence in
respect of his appointment.

f. Power to remove and fill vacancy of Company Liquidator (Sec 311): A Company
Liquidator appointed under section 310 may be removed by the company where his
appointment has been made by the company and, by the creditors, where the appointment
is approved or made by such creditors.

g. Notice of the appointment of Company Liquidator to be given the registrar ( Sec

312): The company shall give notice to the Registrar of the appointment of a Company
Liquidator along with the name and particulars of the Company Liquidator, of every vacancy
occurring in the office of Company Liquidator, and of the name of the Company Liquidator
appointed to fill every such vacancy within ten days of such appointment or the occurrence
of such vacancy.

h. Powers and duties of Company Liquidator in case of voluntary winding up ( Sec

314): The Company Liquidator shall perform such functions and discharge such duties
as may be determined from time to time by the company or the creditors, as the case may
be.
 183

(i) The Company Liquidator shall settle the list of contributories, which shall be prima facie
evidence of the liability of the persons named therein to be contributories.

(ii) The Company Liquidator shall call general meetings of the company for the purpose of
obtaining the sanction of the company by ordinary or special resolution, as the case may
require, or for any other purpose he may consider necessary.

(iii) The Company Liquidator shall maintain regular and proper books of account in such form
and in such manner as may be prescribed and the members and creditors and any officer
authorized by the Central Government may inspect such books of account.

(iv) The Company Liquidator shall prepare quarterly statement of accounts in such form and
manner as may be prescribed and file such statement of accounts duly audited within
thirty days from the close of each quarter with the Registrar, failing which the Company
Liquidator shall be punishable with fine which may extend to five thousand rupees for
every day during which the failure continues.

(v) The Company Liquidator shall pay the debts of the company and shall adjust the rights of
the contributories among themselves.

(vi) The Company Liquidator shall observe due care and diligence in the discharge of his
duties.

(vii) If the Company Liquidator fails to comply with the provisions of this section except sub-
section (5) he shall be punishable with fine which may extend to ten lakh rupees.

Appointment of committees ( Sec 315): Where there are no creditors of a company, such
company in its general meeting and, where a meeting of creditors is held under section 306,
such creditors, as the case may be, may appoint such committees as considered appropriate
to supervise the voluntary liquidation and assist the Company Liquidator in discharging his or
its functions. The company liquidator must submit the report on the progress of the winding up
of the company. ( Sec 316)

i. Final meeting and dissolution of company ( Sec 318): As soon as the affairs of the
company are fully wound up, the company liquidator shall prepare the report of the
winding up showing that property and assets of the company have been disposed of and
184

its debt fully discharged to the satisfaction of the creditors and thereafter call a general
meeting of the company for the purpose of laying the final winding up of accounts. If the
majority of the members of the company after considering the report of the company
liquidator are satisfied that the company shall be wound up, they may pass a resolution
for its dissolution. Within two weeks after the meeting, the company liquidator shall send
to the Registrar a copy of the final winding up accounts of the company and shall make a
return in respect of each meeting and the date thereof and the copies of the resolution
passed in the meetings. If the Company Liquidator fails to comply with the provisions, he
shall be punishable with fine which may extend to one lakh rupees.

j. Distribution of the property of company (Sec 320): The Assets of the company shall
be applied in the satisfaction of its liabilities pari passu and subject to such application
shall unless the articles otherwise provide, be distributed among the members according
to their rights and interests in the company.

k. Costs of voluntary winding up ( Sec 320): All costs, charges and expenses properly
incurred in the winding up, including the fee of the Company Liquidator, shall, subject to
the rights of secured creditors, if any, be payable out of the assets of the company in
priority to all other claims.

12.8 Legal Provisions of Companies Act 2013

Applicable for Every Mode of Winding up of the Company

The legal framework applicable to every mode of winding up of the company is explained
in detail.

a. Debt of all descriptions to be admitted to proof ( Sec 324) (subject, in the case of
insolvent companies, to the application in accordance with the provisions of this Act or of
the law of insolvency), all debts payable on a contingency, and all claims against the
company, present or future, certain or contingent, ascertained or sounding only in damages,
shall be admissible to proof against the company, a just estimate being made, so far as
possible, of the value of such debts or claims as may be subject to any contingency, or
may sound only in damages, or for some other reason may not bear a certain value.
 185

b. Preferential payments at the time of winding up of the company (Sec 327) : In a

winding up, subject to the provisions of section 326, there shall be paid in priority to all
other debts,—

(a) all revenues, taxes, cesses and rates due from the company to the Central Government
or a State Government or to a local authority at the relevant date, and having become due
and payable within the twelve months immediately before that date;

(b) all wages or salary including wages payable for time or piece work and salary earned
wholly or in part by way of commission of any employee in respect of services rendered to
the company and due for a period not exceeding four months within the twelve months
immediately before the relevant date, subject to the condition that the amount payable
under this clause to any workman shall not exceed such amount as may be notified; all
accrued holiday remuneration becoming payable to any employee, or in the case of his
death, to any other person claiming under him, on the termination of his employment
before, or by the winding up order, or, as the case may be, the dissolution of the company;
unless the company is being wound up voluntarily merely for the purposes of reconstruction
or amalgamation with another company, all amount due in respect of contributions payable
during the period of twelve months immediately before the relevant date by the company
as the employer of persons under the Employees‘ State Insurance Act, 1948 (34 of 1948)
or any other law for the time being in force; all sums due to any employee from the
provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the
employees, maintained by the company.

c. Effect of floating charge (Sec 332): Where a company is being wound up, a floating
charge on the undertaking or property of the company created within the twelve months
immediately preceding the commencement of the winding up, shall, unless it is proved
that the company immediately after the creation of the charge was solvent, be invalid,
except for the amount of any cash paid to the company at the time of, or subsequent to
the creation of, and in consideration for, the charge, together with interest on that amount
at the rate of five per cent. per annum or such other rate as may be notified by the Central
Government in this behalf.
186

d. Transfers, etc., after commencement of winding up to be void ( Sec 334): In the

case of a voluntary winding up, any transfer of shares in the company, not being a transfer
made to or with the sanction of the Company Liquidator, and any alteration in the status of
the members of the company, made after the commencement of the winding up, shall be
void.

e. Offences by officers of companies in liquidation( Sec 336) If any person, who is or

has been an officer of a company which, at the time of the commission of the alleged
offence, is being wound up, whether by the Tribunal or voluntarily, or which is subsequently
ordered to be wound up by the Tribunal or which subsequently passes a resolution for
voluntary winding up, does not, to the best of his knowledge and belief, fully and truly
disclose to the Company Liquidator all the property, movable and immovable, of the
company, and how and to whom and for what consideration and when the company
disposed of any part thereof, except such part as has been disposed of in the ordinary
course of the business of the company. within the twelve months immediately before the
commencement of the winding up or at any time thereafter, conceals any part of the
property of the company to the value of one thousand rupees or more, or conceals any
debt due to or from the company, fraudulently removes any part of the property of the
company to the value of one thousand rupees or more. he shall be punishable with
imprisonment for a term which shall not be less than three years but which may extend to
five years and with fine which shall not be less than one lakh rupees but which may
extend to three lakh rupees.

f. Statement that company is in liquidation ( Sec 344): Where a company is being

wound up, whether by the Tribunal or voluntarily, every invoice, order for goods or business
letter issued by or on behalf of the company or a Company Liquidator of the company, or
a receiver or manager of the property of the company, being a document on or in which
the name of the company appears, shall contain a statement that the company is being
wound up.

g. Appointment of Official Liquidator ( Sec 359): For the purposes of this Act, so far as
it relates to the winding up of companies by the Tribunal, the Central Government may
appoint as many Official Liquidators, Joint, Deputy or Assistant Official Liquidators as it
 187

may consider necessary to discharge the functions of the Official Liquidator. The liquidators
appointed shall be whole-time officers of the Central Government. The salary and other
allowances of the Official Liquidator, Joint Official Liquidator, Deputy Official Liquidator
and Assistant Official Liquidator shall be paid by the Central Government.

h. Powers and functions of Official Liquidator ( Sec 360): The Official Liquidator shall
exercise such powers and perform such duties as the Central Government may prescribe.
the Official Liquidator may exercise all or any of the powers as may be exercised by a
Company Liquidator under the provisions of this Act; and conduct inquiries or investigations,
if directed by the Tribunal or the Central Government, in respect of matters arising out of
winding up proceedings.

i. Summary procedure for liquidation ( Sec 361): The Official Liquidator shall forthwith
take into his custody or control all assets, effects and actionable claims to which the
company is or appears to be entitled. The Official Liquidator shall, within thirty days of his
appointment, submit a report to the Central Government in such manner and form, as
may be prescribed, including a report whether in his opinion, any fraud has been committed
in promotion, formation or management of the affairs of the company or not. On receipt of
the report if the Central Government is satisfied that any fraud has been committed by the
promoters, directors or any other officer of the company, it may direct further investigation
into the affairs of the company and that a report shall be submitted within such time as
may be specified.

j. Sale of assets and recovery of debts due to company (Sec 362): The Official Liquidator
shall expeditiously dispose of all the assets whether movable or immovable within sixty
days of his appointment. The Official Liquidator shall serve a notice within thirty days of
his appointment calling upon the debtors of the company or the contributories, as the
case may be, to deposit within thirty days with him the amount payable to the company.

k. Settlement of claims of creditors by Official Liquidator (Sec 363): The Official

Liquidator within thirty days of his appointment shall call upon the creditors of the company
to prove their claims in such manner as may be prescribed, within thirty days of the
receipt of such call. The Official Liquidator shall prepare a list of claims of creditors in
such manner as may be prescribed and each creditor shall be communicated of the
claims accepted or rejected along with reasons to be recorded in writing.
188

l. Appeal by creditor (Sec 364): Any creditor aggrieved by the decision of the Official
Liquidator under section 363 may file an appeal before the Central Government within
thirty days of such decision. The Central Government may after calling the report from
the Official Liquidator either dismiss the appeal or modify the decision of the Official
Liquidator. The Official Liquidator shall make payment to the creditors whose claims have
been accepted. The Central Government may, at any stage during settlement of claims,
if considers necessary, refer the matter to the Tribunal for necessary orders.

m. Order of dissolution of company(Sec 365): The Official Liquidator shall, if he is satisfied

that the company is finally wound up, submit a final report to the Central Government.
The Central Government, or as the case may be, the Tribunal on receipt of such report
shall order that the company be dissolved.

Where an order is made the Registrar shall strike off the name of the company from the
register of companies and publish a notification to this effect.

12.9 National Company Law Appellate Tribunal

The Central Government shall, by notification, constitute, by mentioning the date of its
effectiveness, a Tribunal, which is known as the National Company Law Tribunal. It consists of
a President and such number of Judicial and Technical members, as the Central Government
may deem necessary. They will be appointed by the Central Government by notification. They
exercise and discharge such powers and functions as are, or may be, conferred on it be our
under this Act or any other law for the time being in force. The president shall be a person
who is or has been a Judge of a High Court for five years. A person shall not be qualified for
appointment of a judicial member unless he is a Judge of a High Court or he is a District Judge
for at least five years or he has, for at least ten years been an advocate of a court. For the
purposes of clause (c), in computing the period during which a person has been an advocate
of a court, period if any the person, has held judicial office or the office of a member of a
tribunal or any post, under the Union or a State, requiring a special knowledge of law after he
become an advocate shall be included.
 189

A person shall not be qualified for appointment as a Technical Member unless he

 has, for at least fifteen years been a member of the Indian Corporate law Service or
Indian Legal Service and has been holding the rank of secretary to the Govt. of India (or)

 is, or has been in practice as a chartered accountant for at least fifteen years (or)

 is, or has been, in practice as a cost accountant for at least fifteen years (or)

 is, or has been, in practice as a company secretary for at least fifteen years (or)

 is a person of proven ability, integrity and standing having special knowledge and
professional experience, of not less than fifteen years (or)

 is, or has been, for at least five years, a presiding officer of a Labour Court, Tribunal
constituted under the Industrial Disputes Act, 1947.

The Central Government shall, by notification, constitute, an Appellate Tribunal to be

known as the National Company Law Appellate Tribunal from the date mentioning in the
notification as an effective date. It consist of a Chair person and such number of judicial and
technical members, not exceeding 11, as the Central Government may deem fit. They shall be
appointed by the Central Government by notification, for hearing appeals against the orders of
the Tribunal or of the National Financing Reporting Authority. The Chair Person shall be
a person who is or has been a Judge of the Supreme Court or Chief Justice of the Supreme
Court or the Chief Justice of the High Court. A Judicial Member shall be a person who is or has
been a Judge of a High Court or is a Judicial Member of a Tribunal for 5 years. A Technical
Member shall be a person of proven ability, integrity and having special knowledge and
professional experience not less than 25 years, in industrial finance, industrial management,
industrial re-construction, investment and accountancy. The President of a Tribunal and a
Chairperson and Judicial Members of the Appellate Tribunal shall be appointed after consultation
with the Chief Justice of India.

The members of the Tribunal and technical members of the appellate tribunal shall be
appointed on the recommendations of a selection committee consisting of

 Chief Justice of India or his Nominee Chairperson

 A senior Judge of the Supreme Court or a Chief Justice of High Court Member
190

 Secretary in the Ministry of Corporate Affairs Member and

 Secretary in the Ministry of Law and Justice Member.

The Secretary, Ministry of Corporate Affairs shall be the convener for the selection
committee. The selection committee shall determine its procedures for recommending persons.
No appointment of the members of the Tribunal or the Appellate Tribunal shall be invalid nearly
by reason of any vacancy or any defect in the constitution of the selection committee.

Check Your Progress - B

1. What do you mean by Voluntary winding up?

2. Who is a Company Liquidator?

3. What is the role of advisory committee in winding up of the company?

4. What is National Company Law Tribunal?

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12.10 Summary

When the company is unable to pay its debts, the company has by special resolution
resolved that the company be wound up by the Tribunal. The petition to the tribunal for winding
up of the company shall be presented by company, any contributory or contributories, any
secured creditors, the registrar, any person authorized by the central Government in that behalf.
The tribunal at the time of passing the order shall appoint an official liquidator as the company
liquidator. The promoters, directors, officers and employees, who are or have been in
employment of the company or acting or associated with the company shall extend full
cooperation to the Company Liquidator in discharge of his functions and duties. The Tribunal
may, while passing an order of winding up of a company, direct that there shall be, an advisory
committee to advise the Company Liquidator and to report to the Tribunal on such matters as
the Tribunal may direct. The Company Liquidator shall make periodical reports to the Tribunal
and in any case make a report at the end of each quarter with respect to the progress of the
winding up of the company. The Company Liquidator shall maintain proper and regular books
of account including accounts of receipts and payments made by him. Voluntary winding up
means winding up by the members or creditors of the company without interference by the
Tribunal. The company shall call a meeting of the creditors of the company on the day or the
day next following the day, on which the resolution for voluntary winding up is to be proposed.
The company shall give notice to the Registrar of the appointment of a Company Liquidator
along with the name and particulars of the Company Liquidator, of every vacancy occurring in
the office of Company Liquidator, and of the name of the Company Liquidator appointed to fill
every such vacancy within ten days of such appointment or the occurrence of such vacancy.
Even Preferential payments will be made at the time of winding up of the unit. The Central
Government shall, by notification, constitute, by mentioning the date of its effectiveness, a
Tribunal, which is known as the National Company Law Tribunal. It consists of a President and
such number of Judicial and Technical members, as the Central Government may deem
necessary.

12.11 Key Words

Statement of Affairs: a legal document listing the assets and liabilities of a company or
individual, typically produced when declaring bankruptcy
192

Liquidator: a person appointed to wind up the affairs of a company or firm.

Winding up: Ending or dissolving the business

12.12 Review Questions

1. What are the legal provisions governing the winding up of the company by the intervention
of the Tribunal?

2. What is the role of advisory committee at the time of the winding up of the company?

3. Enumerate the powers and functions of the Company Liquidator at the time of winding up

4. Highlight the legal procedure related to voluntary winding up of the company

5. Explain in detail about the preferential payments at the time of winding up of the company

6. Elucidate the legal provision governing the working mechanism of National Company
Law Tribunal
 193

Model Question Paper

BCOM - General Commerce
Second Year – Fourth Semester
Paper - IX
COMPANY LAW
Time : 3 Hours Maximum : 75 Marks

Part A – (10x2 = 20 marks)

Answer any ten questions each in 50 words.

1. Define Company.

2. What do you understand by Private Company?

3. What is one person company?

4. What is Prospectus?

5. What is Underwriting?

6. What is Book Building?

7. What is Bonus Issue?

8. What is Resolution?

9. What is Related Party Transaction?

10. What is Statement of affairs?

11. Who is a liquidator?

12. What do you mean by winding up company?

194

Part B – (5x5 = 25 marks)

Answer any five questions each in 250words

13. What are the steps involved in the incorporation of a company?

14. Distnguish between memorandum and articles of association.

15. What are the contents of Prospectus?

16. What is the difference between Shares and debentures?

17. What are the provisions in the companies act in relation to women directors?

18. Discuss about different types of Resolutions?

19. Explain the Provisions of Companies (Amendment) Act 2013 related to CSR.

Part C – (3x10 = 30 marks)

Answer any three questions each in 500 words

20. Explain the various types of companies.

21. What are the contents of Memorandum of Association?

22. Elaborate in detail about different types of meetings.

23. Discuss the duties and powers of the board of directors.

24. Explain in detail legal provides of companies Act 2013 applicable for every mode of winding
up of the company.