DOCTRINE OF INDOOR MANAGEMENT

In simple words, the doctrine of indoor management says that if any outsider is entering into any
contract, then it is his/her duty to be aware of the external position of the company. But outsiders
are not liable to know the internal management of the company.

Example-

if an outsider A is entering in contract with the company B. company B gives loan only for
education and career and not for business or startup. He did not check the for the Memorandum of
Association and the Articles of Association and other documents that are open to public. Every
requirement was performed from his side to get loan but later company refused to give loan for his
startup. Here, company B is not liable to enter in the contract because it is the duty of the outsider A
to check MoA, AoA and public documents of the company.

But if this contract got failed due to some internal irregularities of the company, then company
would be liable for this.

Section 399- This outsider can go to the MCA website and check for the Memorandum of
Association and the Articles of Association and other documents that are filed with the Registrar and
are public. These documents can be accessed by paying the prescribed fee.

DOCTRINE OF CONSTRUCTIVE NOTICE

It can be said that this doctrine is somewhere related to the doctrine of caveat emptor.

This doctrine says that a company is a public institution and there are some documents related to
companies that are available to the general public. Therefore, it is assumed that the outsider who is
entering in the business with the company is aware of these documents. This assumption is called
the doctrine of constructive notice.

Exceptions to the Doctrine

This doctrine won’t be applicable, if-

1)when the outsider has knowledge of the irregularities and still, he has entered into the contract

2)if the outsider is suspicious of any mismanagement, then he should make an inquiry before
entering the contract.

3)in case of any forgery on behalf of the company.

There is no specific provision relating to the doctrine of indoor management under the Companies
Act, 2013. However, the courts in India have recognised this doctrine in various cases and thus
followed in India.

DOCTRINE OF ULTRA VIRES

Ultra vires means “beyond the power of something/ someone”. Any transaction or activities beyond
the scope of the company or the authority endowed upon the custodian of the company will come
under the scope of the doctrine of ultra vires and can be criticized accordingly .

The doctrine was originated from the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche. In
this case the company agreed to fund the construction of railway track under a contract. But the
Board of Directors annulled the contract because it was ultra-vires of the company’s memorandum.

Even, all shareholders have allowed funding for the railway’s track in the shareholder meeting, but
board of directors was not giving permission for that. Later, the court conveyed that if something is
ultra vires to the MOA of the Company, then it can’t be rectified or altered.

But there are some clauses in the MOA that can be rectified. Those clauses are name clause,
registered office clause, capital clause and objective clause. But liability clause and subscription
clause cannot be altered.

CONCEPT OF ROFO AND ROFR

Rofo- For instance, if there are two shareholders in a private company, say, A and B, with a Rofo in
favour of B granted by A, and A decides to sell his shares, then A must first offer his shares to B. Only
if B refuses to purchase A’s shares, or if A can obtain a higher price for his shares from a third party
than that offered by B, can A sell his share to a third party.

Rofr-  if there is a Rofr in favour of B, then A is first required to offer his share to third parties and
obtain a price from them for this. A is then required to approach B with the price offered by third
parties. If B can match or better the price offered by third parties, A must sell his share to B.

Reasons for preferring Rofo over Rofr by the investors

For an investor seeking to exit a company, a Rofo in favour of the promoters will be the preferred
option. This is because a Rofo provides the investor a price with which to begin negotiations with
third parties and the process of price discovery remains in the investor’s hands.
However, if there is a Rofr in favor of the promoters, no third party would be interested in the
investor’s shares as even after an extensive and expensive diligence process by the third party to
discover the price for the investor’s shares, there remains a possibility that no sale will occur if the
promoter trumps the price offered by the third party. Promoters would also vie for a Rofr as it will
give them an opportunity to buy the investor shares by only matching or slightly bettering the price.

CONCEPT OF DRAG ALONG RIGHT AND TAG ALONG RIGHT-

Tag along right- where one small party or shareholder tags itself along with the big party having
more shares or the promotor or any shareholder for exit, this is known as tag-along right.
In simple words,  “if you sell, I will have the right to sell along with you".

Drag along right- Generally promoters agree to provide an exit for the investors on
predetermined terms. Where the promoters have failed to provide the investor with the agreed exit
from the company, “drag" provisions in favour of the investor are useful. In such cases, the investor
will have the right to force the promoters to sell their shares along with it on the same terms and to
the same person to whom the investor is selling for its exit from the company. 
In simple words, “if I sell, you will be required to sell with me".

AUTHORITY AND POWERS OF SEBI

Chapter iv of the Securities Exchange Board of India Act talks about the authority and powers of
SEBI.

1) Quasi- legislative powers- it includes drafting of legislation with respect to the capital
markets. SEBI can create guidelines for the security of interest of investors. Few rules and
regulations made by SEBI are disclosure requirements, trading regulation and listing
obligation.

2) Quasi-Executive powers- Implementing legislation also comes under SEBI. It can examine
book of accounts or other documents whatever it requires for the purpose of investigation
and to gather evidences in case of violation.

3) Quasi- judicial powers- in case of frauds or unethical practices pertaining to securities

market, SEBI can pass judgements . this power is given to maintain transparency,
accountability and fairness in the securities markets.

DIFFERENCE BETWEEN PREFERENCE SHARES AND ORDINARY SHARES-

Preference shares- those are the shares that rank above other shares in getting dividends or
capital. But they have no voting power because they are not giving any risk on the preference share
holders. They get fixed returns irrespective of profit or loss, hence does not play any important role
in decision making of company.

Ordinary Shares- those shares gives equity ownership to the holders. These shares have
additional rights compared to preferred shares but are paid last in the case of liquidation and
dividend distribution. Ordinary shares may be fully or partly paid.
Ordinary shares allow investors to vote at meetings and receive dividends from the company's
earnings. Voting rights give you a voice in issues like pay and company strategy.
SWEAT EQUITY SHARES-
When a company issues equity shares to the director or emplyees of the company at discount or for
consideration other than money such as intellectual property or value additions, this is known as
sweat equity shares.

Those sweat equity shares can be given to the permanent emplyees or director of the company
working in India or abroad or to the permanent emplyees or director of the holding or subsidiary
company working in India or abroad.

For issuing sweat equity shares by a listed company, it needs to abide by SEBI Regulations on sweat
equity shares and for company other than listed, the company needs to abide by the Companies Act,
20013.