Unit III

The Companies Act 2013 with up to date amendments -Essential characteristics of a

company, types of companies, memorandum and articles of association, prospectus, shares –
kinds, allotment and transfer, debentures, essential conditions for a valid meeting, kinds of
meetings and resolutions. Directors and remuneration, Directors, Managing Directors-their
appointment, qualifications, powers and limits on their remuneration, prevention of oppression
and mismanagement, single person company and other important changes from the previous
Companies Act of 1956.

Concept of Joint Stock Company

In a partnership firm the number of partners cannot exceed 20. So there is a limit to the
contribution of capital. Secondly, even if the partners could contribute a large amount of
capital, they would hesitate to do so considering the risk involved in business and their
unlimited liability. Therefore, a company form of business organisation came into
existence. A company form of business orgnisation is known as a Joint Stock Company.
It is a voluntary association of persons who generally contribute capital to carry on a
particular type of business, which is established by law and can be dissolved only by law.
Persons who contribute capital become members of the company. This form of business
has a legal existence separate from its members, which means even if its members die,
the company remains in existence. This form of business organisation generally requires
huge capital investment, which is contributed by its members.
The companies in India are governed by the Indian Companies Act. The Act defines a
company as an artificial person created by law, having a separate legal entity, with
perpetual succession and a common seal.
According to section 2(20) of the companies Act 2013, “Company means a company
incorporated under the Act (of 2013) or under any previous company law”.

According to Haney, “Joint Stock Company is a voluntary association of individuals for

profit, having a capital divided into transferable shares. The ownership of which is the
condition of membership”.

Essential Characteristics of Joint Stock Company

1) Legal formation
No single individual or a group of individuals can start a business and call it a joint stock
company. A joint stock company comes into existence only when it has been registered
after completion of all formalities required by the Indian Companies Act..
2) Artificial person
Just like an individual, who takes birth, grows, enters into relationships and dies, a joint
stock company takes birth, grows, enters into relationships and dies. However, it is called

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 an artificial person because its birth, existence and death are regulated by law and it does
not possess physical attributes like that of a normal person.
3) Separate legal entity
Being an artificial person, a joint stock company has its own separate existence
independent of its members. It means that a joint stock company can own property, enter
into contracts and conduct any lawful business in its own name. It can sue and can be
sued by others in the court of law. The shareholders are not the owners of the property
owned by the company. Also, the shareholders cannot be held responsible for the acts of
the company.
4) Common seal
A joint stock company has a seal, which is used while dealing with others or entering into
contracts with outsiders. It is called a common seal as it can be used by any officer at any
level of the organisation working on behalf of the company. Any document, on which the
company's seal is put and is duly signed by any official of the company, becomes legal
document. For example, a purchase manager may enter into a contract for buying raw
materials from a supplier. Once the contract paper is sealed and signed by the purchase
manager, it becomes valid. The purchase manager may leave the company thereafter or
may be removed from the job or may have taken a wrong decision, yet for all purposes
the contract is valid till a new contract is made or the existing contract expires.
5) Perpetual existence
A joint stock company continues to exist as long as it fulfils the requirements of law. It is
not affected by the death, lunacy, insolvency or retirement of any of its members. For
example, in case of a private limited company having four members, if all of them die in
an accident the company will not be closed. It will continue to exist. The shares of the
company will be transferred to the legal heirs of the deceased members.
6 Limited liability
In a joint stock company, the liability of a member is limited to the extent of the value of
shares held by him. While repaying debts, for example, if a person owns 1000 shares of
Rs. 10 each, then he is liable only upto Rs 10,000 towards payment of debts. That is, even
if there is liquidation of the company, the personal property of the shareholder cannot be
attached and he will lose only his shares worth Rs. 10,000.
7) Democratic management
Joint stock companies have democratic management and control. That is, even though the
shareholders are owners of the company, all of them cannot participate in the
management of the company. Normally, the shareholders elect representatives from
among themselves known as ‘Directors’ to manage the affairs of the company.

Types of Companies

1) Private Limited Company- (Under section 2(58)

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 These companies can be formed by at least two individuals having minimum paid up
capital of not less than Rs. one lakh. As per the Companies Act, the total membership of
these companies cannot exceed 200. The shares allotted to its members are also not freely
transferable between them. These companies are not allowed to raise money from the
public through open invitation. They are required to use “Private Limited” after their
names.
2) Public Limited Company- (Under section 2(71)
A minimum of seven members are required to form a public limited company. It must
have minimum paid–up capital of Rs 5 lakhs. There is no restriction on maximum
number of members. The shares allotted to the members are freely transferable. These
companies can raise funds from general public through open invitations by selling its
shares or accepting fixed deposits. These companies are required to write Limited or Ltd.
in abbreviation form.
3) Government Company- (Under section 2(45)
In these companies the Government (either state or central government or both) holds a
majority share capital i.e., not less than 51%. However, companies having less than 51%
share holding by the government can also be called Government companies provided
control and management lies with the government. Examples of government companies
are :Mahanagar Telephone Nigam Limited, Bharat Heavy Electricals Limited.
4) Foreign Company- (Under section 2(42)
A foreign company is a company incorporated outside India which,

a. has a place of business in India whether by itself or through an agent, physically or

through electronic mode; and
b. conducts any business activity in India in any other manner.

5) Registered or incorporated companies (sec 2)

These are formed under the Companies Act, Such companies come into existence only
when they are registered under the Act and a certificate of incorporation has been issued
by the Registrar of Companies. This is the most popular mode of incorporating a
company. Registered companies may further be divided into three categories.
a) Company limited by guarantee
b) Companies limited by shares
c) Unlimited company
a) Company limited by guarantee-A company limited by guarantee may or may not
have a share capital. It is widely used for charities, clubs, community enterprises and
some co-operatives.
A company limited by guarantee is registered at Companies House, has articles of
association, directors, etc., and is subject to all the requirements of the Companies
Acts (except those relating to shares). Such a company does have members, who meet
and control the company through general meetings. A company limited by guarantee

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 confers limited liability as effectively as a company limited by shares. The articles
state that the members guarantee to pay its debts, but only up to a fixed amount each
and no member can be liable for more than that amount if the company fails.
b) Companies limited by shares-A company limited by shares can be a
private or public company. An identifiable trait of companies limited by shares is the
word “limited”, which is used in their names to warn creditors that the company has
limited liability. In short, the shareholder’s liability is limited by the value of their
shares and the amount they have paid or due to pay. So the individual puts money
into the company, and in return, the company gives him or her a percentage of
ownership, which will be in the form of shares.

c)Unlimited liability company- An unlimited company presents

higher risk than a limited company. Unlimited liability is quite the opposite of limited liability,
and the liability of the owners or investors are not limited to the amount that they have
contributed. This means that there is no limit to the losses that might have to be borne by the
investors or owners.

6) Companies with charitable objects- Where it is proved to the satisfaction of the

Central Government that a person or an association of persons proposed to be registered under
this Act as a limited company—

a. has in its objects the promotion of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment or any such
other object;
b. intends to apply its profits, if any, or other income in promoting its objects; and
c. intends to prohibit the payment of any dividend to its members,

Such companies may be registered without the words: Limited or private limited as the
case may be.

7) One Person Company Section 2(62)-The revolutionary new concept of 'One Person
Company' (OPC) has been introduced by the Companies Act, 2013. 'One Person Company
means a company which has only one member'

It shall also be important to note that Section 3 classifies OPC as a Private Company for all the
legal purposes with only one member. All the provisions related to the private company are
applicable to an OPC

 An OPC can be formed under any of below categories :

o Company limited by guarantee.
o Company limited by shares
o

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An OPC is required to give a legal identity by specifying a name under which the activities of the
business could be carried on. The words 'One Person Company' should be mentioned below the
name of the company, wherever the name is affixed, used or engraved.

(Long question for examination point)

One Person Company: One Person Company is a new of concept of business that is recognized by
Companies Act 2013 in comparison to Private Company. One Person Company (OPC), as a name suggest,
can be registered with a single person as a member. Only one Director cum shareholder required for
formation of One Person Company. One person company provide more advantages such as Limited
Liability, legal Status and Corporate Identity, Quick Decision Making, Flexible in Management, easy bank
operation, reduced taxation burdens.

Some features of One Person Company form of business are: 1. Only one shareholder required for
formation of One person Company. However this one person must be a natural person with Indian
citizenship.

2. Only one Director required for formation of One person Company. One Person Company (OPC) can
have maximum 15 Directors.

3. Shareholder and Director can be same person.

4. Appointment of Nominee through Memorandum is must.

5, Such nominee shall give his/her consent before being appointed as Nominee.

6. Only a natural person, who is an Indian citizen and resident in India shall be a nominee for the sole
member of a One Person Company.

7. One Person Company (OPC) cannot convert voluntarily into any kind of company unless two years
have expired from the date of incorporation of One Person Company. 8. However in case paid up share
capital is increased beyond Rs.50 Lakhs or average annual turnover exceeds Rs.2 Crores, then the One
Person Company (OPC) shall ceased to be a One Person Company and has to initiate the process for
conversion in to a Private or Public Company, with in a period of Six Months.

Procedure for conversion of the Private company into a One Person Company:

The procedure for conversion of the private company into a One Person company is regulated by Rule 7
of companies incorporation rules, 2014.

1. A private company other than a company registered under Section 8 companies Act 2013, who
has a share capital of 50 lakhs rupees or those having an average annual turnover is 2 crore rupees
during the relevant period, may convert their private company into one person company.

2. The company shall obtain a NO objection in writing from existing members and creditors when
passing a special resolution in the general meeting.

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3. The company is required to file Special Resolution passed by shareholders for Conversion of Private
Company into One Person Company (OPC) with concerned Registrar of Companies. Hence, file form
MGT.14 within 30 days of the passing of Special Resolution with the concerned Registrar of Companies
with the documents.

4. The following documents should be attached along with fees:

• The directors of the company shall give a declaration by way of affidavit duly sworn in
confirming that all members and creditors of the company have given their consent for conversion, the
paid up share capital company is fifty lakhs rupees or less or average annual turnover is less than two
crores rupees, as the case may be;

• The list of members and list of creditors;

• The latest Audited Balance Sheet and the Profit and Loss Account; and

• The copy of No Objection letter of secured creditors.

5. Concerned Registrar of Companies (ROC) will check the forms and attached documents filed by the
Company for Conversion of Private Company into One Person Company (OPC). On being satisfied that
Company has complied with prescribed requirements the Registrar of Companies (ROC) shall issue the
Certificate to the effect of Conversion of Private Company into One Person Company (OPC).

This Conversion shall be in accordance with Rule 7 of Companies (Incorporation) Rules, 2014.

Formation of Joint Stock Company

Formation of a joint stock company involves a lengthy legal procedure. Its registration
with the Registrar of Companies is obligatory, before it can commence its business. The
following stages are involved in the formation of a Joint Stock Company.
Stage –I Promotion
Stage- II Incorporation
Stage- III Raising of Capital
Stage- IV Commencement of Business
Stage-I Promotion

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The stage of conceiving an idea and its working up is termed as promotion. This involves
ascertaining as to whether all the basic requirements such as land, building, raw material,
machine, equipments etc. are available or not.
Stage-II Incorporation
A sole proprietorship or partnership firm can be formed to carry out its business even
without any registration. But a company cannot be formed or permitted to run its business
without registration. In fact, a company comes into existence only when it is registered
with the Registrar of Companies. For this purpose the promoter has to take the following
steps:
(a) Approval of name
It has to be ensured that the name selected for the company does not match with the name
of any other company. For this, the promoter has to fill in a “Name Availability Form”
and submit it to the Registrar of Companies along with necessary fees. The name must
include the word ‘Limited’ or ‘Private limited’ at the end. Once it is approved, the
promoter can proceed with other formalities for the incorporation of the Company.
(b) Filing of documents
After getting the name approved the promoter makes an application to the Registrar of
Companies of the State in which the Registered Office of the company is to be situated
for registration of the company. The application for registration must be accompanied by
the following documents.
i) Memorandum of association (MOA)
The Memorandum of Association is the principal document in the formation of a
company. It is called the Charter of the company. It contains the fundamental conditions
upon which the company is allowed to be incorporated or registered. It defines the
limitations and the powers of the company.
The Memorandum of Association usually contains the following six clauses:
Name Clause: It contains the name by which the company will be established. The
approval of the proposed name is taken in advance from the Registrar of the companies.
Situation Clause: It contains the name of the state in which the registered office of the
company will be situated. The exact address of the company’s registered office may be
communicated within 30 days of its incorporation to the Registrar of Companies.
Objects Clause: It contains detailed description of the objects and rights of the company,
for which it is being established. A company can undertake only those activities which
are mentioned in the objects clause of its memorandum.
Liability Clause: It contains financial limit upto which the shareholders are liable to pay
off to the outsiders on the event of the company being dissolved or closed down.
Capital Clause: It contains the proposed authorised capital of the company. It gives the
classification of the authorised capital into various types of shares, (like equity and
preference shares) with their numbers and nominal value. A company is not allowed to
raise more capital than the amount mentioned as its authorised capital. However, the

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company is permitted to alter this clause as per the guidelines prescribed by the
companies Act.
Subscription Clause: It contains the name and address of at least seven members in case
of public limited company and two members in case of a private limited company, who
agree to associate or join hands to get the undertaking registered as a company.
ii) Articles of association (AOA)
The Articles of Association of a company contains the various rules and regulations for
the day to day management of the company. It covers various rights and powers of its
members, duties of the management and the manner in which they can be changed. It
defines the relationship between the company and its members and also among the
members themselves. The rules given in the AOA must be in conformity with the
Memorandum of Association.
Articles of Association of a company generally contain rules and regulations with regard
to the following matters:
Preliminary contracts
Use and custody of common seal
Allotment, calls on shares
Transfer and transmission of shares
Forfeiture and re-issue of shares
Alteration of share capital
Issue of share certificates and share warrants
Conversion of shares into stock
Procedure of holding and conducting company meetings
Voting rights
Qualification, appointment, remuneration and power of Directors
Borrowing powers and methods of raising loans
Payment of dividends and creation of reserves
A company can register its own Articles of Association or adopt Table A, which contains
a model set of rules as given in the Schedule I of the Companies Act.
iii) Payment of filing and registration fees
Along with the above documents, necessary filing fees and registration fees at the
prescribed rates are also to be paid. The Registrar will scrutinise all the documents and if
he finds them in order, he will issue a Certificate of Incorporation. The moment the
certificate is issued, the company comes into existence. So this certificate may be called
as the Birth Certificate of a Joint Stock Company.
Stage-III Raising of capital or subscription of capital
After the company is incorporated, the next stage is to raise the necessary capital. In case
of a private limited company, funds are raised from the members or through arrangement
from banks and other sources. In case of a public limited company the share capital has to
be raised from the public. This involves the following:

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 (a) Preparation of a draft prospectus and get it inspected by SEBI to ensure that all
information given in the prospectus fully complies with the guidelines laid down by SEBI
in this regard.
(b) Filing a copy of the prospectus with the Registrar of Companies.
(c) Issue of prospectus to the public and inviting the public to apply for shares as
prescribed in the prospectus.

(d) If the minimum subscription has been received, shares should be allotted to the applicants
as per SEBI guidelines and file a return of allotment with the Registrar of Companies.

(e) Listing of shares in a recognised stock exchange so that the shares can be traded there.
Preferably, consent of a stock exchange for listing should be obtained before issue of the
prospectus to the public.
Before commencing the business, every public limited company must show that adequate
funds have been raised from the public. So when the company gives the offer to the
public to subscribe its shares, it must ensure that a minimum number of shares must be
subscribed by the investors. This is called minimum subscription, which is 90% of the
total number of shares offered to the public. If the application money received is less than
the minimum subscription, then the company must return all the application money to the
investors. To avoid this risk, the share issuing company may appoint underwriters, who
undertake to buy the shares if these are not subscribed by the public.
Stage IV-Comencement of business
In case of a private limited company, it can immediately start its business as soon as it is
registered. However, in case of public limited company a certificate, known as
‘Certificate of Commencement of Business’, must be obtained from the Registrar of
Companies before starting its operation. For this purpose it has to file a statement with
the following declarations to the Registrar of Companies.
(a) That a prospectus has been filed with the Registrar of Companies.
(b) That the shares have been allotted upto the amount of the minimum subscription.
(c) That the Directors have taken up or purchased the minimum number of shares
required to qualify themselves to be Director.
(d) That no money is liable to become refundable to the applicants by reason of failure to
obtain permission for shares to be traded in a recognised stock exchange.
(e) A statutory declaration by a Director or the Secretary of the company stating that the
requirements relating to the commencement of business have been duly complied with.

The Registrar of Companies will scrutinise all these documents and if he is satisfied that
the process of securing the minimum prescribed capital has been done honestly and
efficiently and the minimum prescribed capital has been obtained from the public, then he
shall issue a Certificate of Commencement of Business.

Memorandum of Association and articles of association-Difference

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 Memorandum of Association: Memorandum is the fundamental charter of a company.
It has primary importance in the formation of company.

Article of Association: Articles are subsidiary to the charter. It has a secondary

importance in the formation of company.

CONSTITUTION
Memorandum of Association: It is a constitution of the company.
Article of Association : It contains rules which govern the administration of the
company.

3. OBJECTS
Memorandum of Association: It lays down the objects of the company.
Article of Association: It contains the procedure of achieving objects.

4.ALTERNATE
Memorandum of Association: It is not alterable but it can be amended by special resolution
and sanction of the court or central Govt.
Article of Association: Article of association can be altered by a special resolution.

5. RELATION
Memorandum of Association : Its nature is like the contract between the company and
outsiders like bankers and creditors.
Article of Association : It maintains relation between the company and the persons inside the
company.

6. Working area
Memorandum of Association: It has definite area.
Article of Association : It has no definite working area. It is used in other purposes also.

Prospectus

A prospectus means any document described or issued as 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 shares in or debentures of a body
corporate. ”Hence any advertisement that intends to offer to the public shares or debentures of
the company for sale is a prospectus.

Objectives:

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  It informs about the formation of a new company.
 It serves as written evidence about the terms and conditions of issue of shares or
debentures of a company.
 It induces the investors to invest in the shares and debentures of the company.
 It describes the nature, extent and future prospectus of the company.
 It maintains all authentic records on the issue and makes the directors liable for the
misstatement in the prospectus.

Contents of a prospectus

A prospectus must contain the necessary information to enable the public to decide whether or
not to subscribe for its shares or debentures. Every prospectus shall state the particulars specified
in part I and II of schedule II.

Part I of schedule II- matters to be specified

1.General information like name and address of the registered office of the company, the main
objects of the company, capital structure of the company, Rating from CRISIL or any rating
agency for the issue of shares/debentures

2. The number and classes of shares and the nature and extent of the interests of the holders in
the property and profits of the company.

3. The number of redeemable preference shares to be issued and the details of such shares.

4. The number of shares fixed by the articles as the qualification shares for the director.

5. Names, descriptions and addresses of directors, or proposed directors or managing directors or

the managers.

6. Where shares are offered to the public, the particulars as to

a. The minimum amount which in the opinion of the directors must be raised by the issue of
shares, and

b. The amount to be provided from other sources.

7. The time of the opening of the subscription list.

8. The amount payable on application and allotment,

9. Particulars of the premium paid or payable on shares.

10. If any such issue is underwritten, names of the underwriters and the opinion of the directors
as to the financial position of the underwriters.

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11. The names and addresses of the vendors of any property acquired or to be acquired by the
company which is to be paid for out of the proceeds of the issue.

12. The amount or rate of the brokerage or underwriting commission paid.

13. Preliminary expenses and the person by whom it is paid or payable.

14. The names and addresses of the auditors of the company.

15. Full particulars of the nature and extent of interest of the directors or promoters in the
promotion of the company or in the property acquired by the company.

16. Voting rights of different classes of shareholders.

17. If any reserves or profits of the company have been capitalized, the particulars of the same.

Part II of schedule II – Reports to be set out.

1. Report of the auditors of the company with respect to :

a. Profits and losses and assets and liabilities of the company;

b. The dividend paid by the company in each of the five years preceding the prospectus.

c. The profits and losses of the subsidiary company, if any.

2. A report of the profits and loss and assets and liabilities for each of the five financial years
preceding the issue of the prospectus of any business intended to be purchased with the proceeds
of this issue.

3. If the proceeds of the issue are to be applied in the acquisition of shares in another company, a
report about such company.

When prospectus is not required to be issued

1. When shares or debentures are offered to existing shareholders or debenture holders.

2. When the issue relates to shares or debentures uniform in all respects with shares or
debentures previously issued and dealt in or quoted in a recognized stock exchange.

3. Where shares or debentures are not offered to the public.

Misstatement in prospectus

As per Sec-65, a statement included in a prospectus shall be deemed to be untrue if the statement
is misleading in the form and context in which it is included. Where there is any omission of a

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matter from the prospectus and this is made to mislead, the prospectus is deemed to be called as
a prospectus in which an untrue statement is included. The liability accrues where any person
subscribes for any shares or debentures on the faith of the prospectus and he suffers any loss or
damage by reason of untrue statement included therein. If there is any misstatement in
prospectus, there may arise-

1) Civil liability
2) Criminal liability

1) Civil liability

Section 62 of the Companies Act makes certain person liable to pay compensation to every
person who subscribes for any shares of debentures on the faith of the prospectus for any loss or
damage he may have suffered due to any untrue statement made in the prospectus. These would
include Directors of the company, Promoters, or even the company. Thus, this section deals with
the cases of misstatements of facts in a prospectus.

The provision of the section is to protect the rights of the deceived shareholders who acted upon
the wrong statement given in the prospectus. This tightens up the duties of the directors and
others who are related to the issue of the prospectus. So this section provides for the statutory
civil liability for untrue statement.

Conditions for invoking Section 62:

1)      The company had issued a prospectus inviting persons to subscribe for its shares or
debentures.

2)      An untrue statement was included in the prospectus.

3)      The person who is claiming for the compensation had subscribed for the shares or
debentures offered by the prospectus.

4)      Such person has subscribed for the shares or debentures relying upon the untrue statement
contained in the prospectus.

5)      Such person has sustained a loss or damage after having subscribed for the shares or
debentures.

Persons liable under Sec- 62:

 every person who is a director of the company at the time of the issue of the prospectus;
 every person who has authorised himself to be named and is named in the prospectus
either as a director, or as having agreed to become a director, either immediately or after
an interval of time;
 every person who is a promoter of the company;
 every person who has authorised the issue of the prospectus;

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 2) Criminal liability

Sec-63 incorporates the provision for the criminal liability for misstatement in the prospectus.
According to this section every person who has authorised the issue of the prospectus shall be
punishable with imprisonment for a term which may extend to two years, or with fine which may
extend to five thousand rupees, or with both.

Defenses

Defences available to director or any other person

A director or other person responsible for the prospectus shall not incur any liability if he
puts up the following defences.

(a) as regards any matter not disclosed, he proves that he had no knowledge thereof.
(b) he proves that the prospectus was issued without his knowledge or consent.
(c ) that after the issue of the prospectus and before allotment there under, he on becoming
aware of any untrue statement therein, withdrew his consent to the prospectus and gave
reasonable public notice of the withdrawal.

Defense available to an expert

An expert who has given his consent under Section 58 of the Act shall not be liable if he
proves:
(a) that, having given his consent under section 58 to the issue of the prospectus, he withdrew
it in writing before delivery of a copy of the prospectus for registration;
(b) that, after delivery of a copy of the prospectus for registration and before allotment there
under, he on becoming aware of the untrue statement, withdrew his consent in writing and
gave reasonable public notice of the withdrawal
(c) that he was competent to make the statement and that he had reasonable ground to believe
that the statement was true.

Difference between a public company and a private company

1. Minimum number of members

The minimum number of persons required to form a public company is seven, whereas in a
private company this number is only two.

2. Maximum number of members

There is no limit on the maximum number of member in a public company, but a private
company cannot have more than 200 members excluding past and present employees.

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3. Commencement of Business

A private company can commence its business as soon as it is incorporated. But a public
company shall not commence its business immediately unless it has been granted the certificate
of commencement of business.

4. Invitation to public

A public company by issuing a prospectus may invite public to subscribe to its shares whereas a
private company cannot extend such invitation to the public.

5. Transferability of shares

There is no restriction on the transfer of share in case of public company whereas a private
company by its articles must restrict the right of members to transfer the share.

6. Number of Directors

A public company must have at least three directors whereas a private company may have two
directors.

7. Statutory Meeting

A public company must hold a statutory meeting and file with the registrar a statutory report. But
in a private company there are no such obligations.

8. Restrictions on the appointment of Directors

A director of a public company shall file with the register a consent to act as such. He shall sign
the memorandum and enter into a contact for qualification shares. Two-thirds of the directors of
a public company must retire by rotation. These restrictions do not apply to a private company.

9. Managerial Remuneration

Total managerial remuneration in case of public company cannot exceed 11% of net profits, but
in the case of inadequacy of profit a minimum of Rs. 50, 000 can be paid. These restrictions do
not apply to a private company.

10. Name

A private company has to use words ‘private limited’ at the end of its name. But a public
company has to use only the word ‘Limited’ at the end of its name.Shares

The capital of the company can be divided into different units with definite value called shares.
Holders of these shares are called shareholders or members of the company. There are two types

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of shares which a company may issue (1) Preference Shares (2) Equity Shares.

(1) Preferences Shares

Shares which enjoy the preferential rights over the equity shares as to dividend and repayment of
capital in the event of winding up of the company are called preference shares. The holder of
preference shares get a fixed rate of dividend. Preference shares may be

(a) Cumulative Preference Shares

If the company does not earn adequate profit in any year, dividends on preferences shares may
not be paid for that year. But if the preference shares are cumulative such unpaid dividends on
these shares go on accumulating and become payable out of the profits of the company, in
subsequent years. Only after such arrears have been paid off, any dividend can be paid to the
holder of equity shares. Thus a cumulative preference shareholder is sure to receive dividend on
his shares for all the years out of the earnings of the company.

(b) Non-cumulative Preference Shares

The holders of non-cumulative preference shares no doubt will get a preferential right in getting
a fixed dividend it is distributed to equity shareholders. The fixed dividend is to be paid only out
of the divisible profits but if in a particular year there is no profit as to distribute it among the
shareholders, the non-cumulative preference shareholders, will not get any dividend for that year
and they cannot claim it in the next year during which period there might be profits. If it is not
paid, it cannot be carried forward.

(c)Irredeemable and Redeemable Preference Shares

In case of irredeemable preference shares, capital raised by issuing shares is not to be repaid to
the shareholders. But in case of redeemable preference shares capital raised through the issue of
redeemable preference shares is to be paid back to shareholders after the expiry of a stipulated
period.

(d) Participating or Non-participating Preference Shares

The preference shares which are entitled to a share in the surplus profit of the company in
addition to the fixed rate of preference dividend are known as participating preference shares.
Those preference shares which do not carry the right of share in excess profits are known as non-
participating preference shares.

(e) Convertible and non convertible preference shares

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Preferred stock that includes an option for the holder to convert the preferred shares into a fixed
number of common shares, usually anytime after a predetermined date are known as convertible
preference shares. On the other hand the shares that cannot be converted into other types of
shares are known as non convertible preference shares.

(2) Equity Shares

Equity shares get dividend and repayment of capital after meeting the claims of preference
shareholders. There will be no fixed rate of dividend to be paid to the equity shareholders and
this rate may vary from year to year. This rate of dividend is determined by directors and in case
of larger profits it may even be more than the rate attached to preference shares. Such
shareholders may go without any dividend if no profit is made. But they get a right of voting and
participating in every general meeting of the company. In fact they are the owners of the
company.

Allotment of shares

The allotment of shares is the issuing

of new shares to the public or to the

existing shareholders or to third

parties.

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