LEGAL ASPECTS OF BUSINESS

Narsee Monjee Institute of Management Studies MBA Banking Management Trimester I

WORD REPORT ON COMPANY LAW

Submitted to: Prof. Prasen Naithani Submitted by: Shrikant Abhyankar Prachi Bhandari Anurag Bohra Sagnik Chakraborty Rohan Prakash Dhara Sanghvi Monisha Sharma Aakanksha Singh Abhijit Srivastava A001 A012 A014 A015 A044 A050 A055 A058 A061

CONTENTS

HISTORY
The history of Indian company law began with the companies act of 1850, modeled on British companies act of 1844.after which there were many amendments made between 1850 to 1882.the act was in force till 1912.the company act was again rebuilt in 1913 on the basis of British companies act of 1908.It was then amended in 1914, 1915, 1920, 1926, 1930, 1932 and 1936. After independence it was found that the company law should again be amended and that is when The Conpanies Act,1956 was passed and it came into force on 1st April 1956.

Company
Company as per under the companies act of 1956 company refers to as : Section 2(10)-a company means a company as defined U/S 3 Section 3(1) (i)- company means a company formed and registered under this act or an existing company Section 3(1) (ii)-existing company means a company formed and registered under any of the previous companies law

Characteristics of company : Voluntary Association: It is a voluntary association of person. Separate Legal Entity: Under Incorporation law, a company becomes a separate legal entity as compared to its members. The company is distinct and different from its members in law. It has its own seal and its own name, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, and borrowing money, employing people, having a bank account, entering into contracts and suing and being sued separately.

Case study: Salomon v Salomon & Co Ltd (1897) Mr. Salomon had a boot manufacturing business which he decided to incorporate into a private limited company. He sold his business to the newly formed company, A Salomon & Co Ltd, and took his payment by shares and a debenture or debt of 10,000. Mr Salomon owned 20,000 1 shares, and his wife and five children owned one share each. Some years later the company went into liquidation, and 3

Mr Salomon claimed to be entitled to be paid first as a secured debenture holder. The liquidator and the other creditors objected to this, claiming that it was unfair for the person who formed and ran the company to get paid first. However, the House of Lords held that the company was a different legal person from the shareholders, and thus Mr Salomon, as a shareholder and creditor, was totally separate in law from the company A Salomon & Co Ltd. The result was that Mr Salomon was entitled to be repaid the debt as the first secured creditor. In this case, Mr Salomon was the major shareholder, a director, an employee and a creditor of the company he created. It is quite common in Ireland for one person to have such a variety of roles and still be a different legal entity from the company. Lee v Lees Air Farming Ltd (1961) In this case, Mr. Lee formed his crop spraying business into a limited company in which he was director, shareholder and employee. When he was killed in a flying accident, his widow sought social welfare compensation from the State, arguing that Mr. Lee was a worker under the law. The State argued that Mr. Lee was self-employed and thus not covered by the legislation. The court held that Mr. Lee and the company he had formed were separate entities, and it was possible for Mr. Lee to be employed by Lees Air Farming. Limited Liability: The liability of the members of the company is limited to contribution to the assets of the company upto the face value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him. If the assets of the firm are not sufficient to pay the liabilities of the firm, the creditors can force the partners to make good the deficit from their personal assets. This cannot be done in the case of a company once the members have paid all their dues towards the shares held by them in the company. Perpetual Succession: A company does not cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Insolvency or Death of member does not affect the existence of the company. Separate Property: A company is a distinct legal entity. The company's property is its own. A member cannot claim to be owner of the company's property during the existence of the company. Transferability of Shares: Shares in a company are freely transferable, subject to certain conditions, such that no share-holder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares. 4

Common Seal: A company is an artificial person and does not have a physical presence. Thus, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force.

Capacity to sue and being sued: A company can sue or be sued in its own name as distinct from its members.

Separate Management: A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company.

One Share-One Vote: The principle of voting in a company is one share-one vote i.e. if a person has 10 shares, he has 10 votes in the company. This is in direct distinction to the voting principle of a co-operative society where the "One Member - One Vote" principle applies i.e. irrespective of the number of shares held, one member has only one vote.

TYPES OF COMPANIES
On the basis of number of members:

Private company: Sec 3(1)(iii)

A private company means a company which has a minimum paid up capital of one lakh rupees or such higher capital as may be prescribed, and which by articles : Restricts the right to transfer its shares, if any (Ex: transfer only to the existing shareholders) Limits the number of its members to fifty not including: persons who are in the employment of the company and persons who have formerly been in the employment of the company, have been members while in that employment and have continued to be members after that employment ceased Prohibits any invitation to the public to subscribe to any share in or any debenture of the company. Prohibits invitation or acceptance of deposits from persons other than its members, directors or their relatives.

Public company: Sec 3(i)(iv)

A public company means a company which is not a private company Has a minimum paid up capital of five lakh rupees or such higher paid up capital as may be prescribed Is a private company, which is a subsidiary of a public company.

Difference between a public company and a private company

S. No 1 2 3 4 Basis Minimum no. Maximum no. Minimum no. of directors restriction invitation subscribe shares on to to Public company 7 members No restriction 3 No restriction Private company 2 members 50 members 2 Prohibted

5 6 7

Transfer shares Quorum Managerial remuneration ceiling

of

Freely transferable 5 Yes

Restricted 2 Not applicable

Commencement of business

After obtaining certificate of commencement of business Compulsory

After obtaining Certificate of incorporation

9 10

Statutory meeting Retirement directors rotation Minimum up capital of by paid

Not applicable Not applicable

Two thirds

11 12

5 lakhs Only public company can issue share warrant

1 lakhs Private company cannot issue Share warrant

Share warrant

Companies On the basis of incorporation:

Foreign companies: Sec. 591: It is a company incorporated outside India, which has an established place of business in India. Investment company: Sec. 372 : It is a company whose principal business is the acquisition of the shares, stock, debenture or other securities. Association not for profit: Sec. 25: section 25 permits the registration, under a license from the central government, of an association not for profit, with limited liability, without being required to use the word limited or the words private limited to their name. The central government may grant such a license if It is intended to form a company for promoting a commerce, art, religion, charity or any other useful object The company prohibits payment of any dividend to its members.

On the basis of liability:

Companies limited by shares: Sec 12 (2)(a) : It is a company where the liability of its members is limited by its MoA to the amount unpaid on the shares. Companies limited by guarantee: Sec 12 (2)(b) : It is a company where the liability of its members is limited by its MoA to such an amount which the members undertake to contribute to the assets of the company in the event of its wound up. Unlimited company: Sec 12 (2)(c): It is a company without limited liability wherein every member is liable for the debts of the company as in any ordinary partnership, but only in proportion to their interest in the company.

On the basis of control:

Holding companies sec 4(4) and subsidiary companies sec 4(1) The above are relative terms. A company shall be deemed to be a subsidiary of another company, if and only if That other company controls the composition of its Board of Directors; or That other company, holds more than half in the nominal value of its equity share capital ; or That first mentioned company is a subsidiary of any company, which is that other companys subsidiary

On the basis of ownership:

Government companies: sec. 617 : A government company is a company in which not less than 51% of the paid up share capital is held By the central government By the state government Partly by the central government and partly by the one or more state government Non government companies: These are the companies other than government companies.

Other types of companies:

Foreign companies: Sec. 591 : It is a company incorporated outside India, which has an established place of business in India. Investment company: Sec. 372 : It is a company whose principal business is the acquisition of the shares, stock, debenture or other securities. Association not for profit: Sec. 25: section 25 permits the registration, under a license from the central government, of an association not for profit, with limited liability, without being required to use the word limited or the words private limited to their name. The central government may grant such a license if It is intended to form a company for promoting a commerce, art, religion, charity or any other useful object 8

The company prohibits payment of any dividend to its members.

Conversion:
Conversion of a private company into public company : sec 44 : The conversion is done by altering the article in such a manner that they no longer contain the restrictions of sec 3(1)(iii). On approval of alteration of AoA by the shareholder, form 23 together with certified copy of special resolution should be filed with RoC A prospectus or statement in lieu of prospectus has to be filed with RoC. Conversion of a public company into private company : A public company can become a private company by Alteration in article Central govt. approval Special resolution of shareholder in general meeting.

INCORPORATION OF A COMPANY
The Companies Act of 1956 sets down rules for the establishment of both public and private companies. They strictly have to be followed for the incorporation of any company in India. The foremost important step in starting a company is selection of the type of company. According to the objectives of the company, proposed scale of operations & activities, capital involved, etc. the promoters have to decide exactly and precisely the type of company as the private company, public company, non-profit making company, etc. Any person who intends to be a director in any company needs to compulsory have a Director Identification Number (DIN). The concept of a DIN has been introduced for the first time with the insertion of sections 266A to 266G of Companies (Amendment) Act, 2006. As such, all the existing and intending Directors have to obtain DIN within the prescribed time-frame as notified. DIN means an identification number allotted by the Government to- Any individual intending to be appointed as a director. One can apply for DIN by filing application Form DIN-1 online from the Ministry of Corporate Affair (MCA). A provisional DIN is immediately issued. The applicant is then required to take a print-out of Form DIN-1 (containing provisional DIN generated online). Fill the Service Request Number (SRN) of the fee paid. Sign the DIN application form manually and paste a good resolution photograph in the space earmarked. Attach the photocopies of the 'Proof of Identity' and the 'Proof of Residence' with DIN application form and tick the relevant checkbox against the document name. Get the photograph and the attached supporting documents attested from an approved authority as specified in form DIN-1. The certifying authority must mention its particulars such as Name, COP No. etc, and affix its seal/stamp. Complete set of documents is required to be sent to MCA DIN Cell at Noida, by post, courier or hand delivery, as per convenience, within 60 days from the date of generation of provisional DIN online. Next the company needs to check for the availability of name. Most important is to reserve the company name online with the Registrar of Companies (ROC). The Registrar of Companies is responsible for the approval and reservation of company names. If one wishes to change the name of their existing company, they also need to apply to reserve the new company name. Company name approval must be done electronically. Under e-filing for name approval, the applicant can check the availability of the desired company name on the MCA 21 web site. Maximum 6 suggested names may be submitted. In case of private company (Pvt Ltd.) and for public company (Ltd.) is compulsory. After being cleared by the junior officer, the name requests are sent to the senior officer for approval. Once approved, the selected name appears on the website. Applicants need to keep consulting the website to confirm that one of their submitted names was approved. In practice, it takes 2 days for obtaining a clearance of the name if the proposed name is available. Drafting of the Memorandum of Association (M.O.A) and Articles of the Association (A.O.A), is the very next step after getting confirmation of name by the Registrar. These two documents are of the paramount importance as these contain ultimate objectives and ideal rules & regulations of the company. MOA contains all the details of the company regarding its powers, objectives, external relationship and share capital. It is for the outsiders, understanding the company. It is the basic details of the company. It talks about the object of formation of the company. It contains: 10

Name clause
The Name (identity) of the company should be clearly mentioned as approved by the registrar of companies. The company whether Public limited or Private limited should be mentioned.

Place clause
The place(s) where the company is actually located should be mentioned. The office address which is registered with the registrar of companies has to be mentioned. The location of Headquarter of the company and its existing branches should be clearly titled.

Object clause
The company is restricted within the objectives of itself, prescribed in MOA. The company should mention its Main objectives, Incidental or Ancillary objectives and other objectives. The main objects enlist the core purposes of the company. The Ancillary objects enlist the objects that determine the attainment of the main objects. The Other object enlists the subsidiary objects or the objects for which the company will be incorporated in future.

Liability clause
The Liability of the company whether limited or unlimited to its members, to its shareholders, to the Board of directors should be mentioned.

Capital clause
The Authorised Capital of the company including the value of all Assets(acquired or to be acquired by the company in future) should be mentioned in the MOA. The types of shares into which the capital would be divided and treatment of those shares in case of Capital Appreciation or Depreciation. It should be clearly mentioned here the exact figures of Authorised capital and Paid-up capital.

Association clause
The company in its Association clause enlists its initial member. The Names, Addresses & Descriptions of the subscribers to its shares(Equity only),Number of equity shares held by each of them and the Signatures of the respective Shareholders. It ensures the Bond between the company and its owners. A company shall not alter the conditions contained in its memorandum except in the cases, in the mode, and to the extent for which express provision is made in this Act. Through the different provisions in the Act, there can be alterations in all the clauses of MOA except the Association clause. Alteration of each clause is looked in by different provisions. But, Association clause holds the name of the initial members and that cannot be changed at any point of time. AOA states the arrangement between the members of a company. It regulates the rights, duties and obligations between the members and between the members and the company. It regulates the companys internal affairs. It talks about the internal rules and regulations of the company. Directions 11

for the company with respect to shares, capital, meetings, directors, auditors and others are included in the AOA. It includes: The share capital of the company with the classes of shares to be issued, and the rights attached to each class of share, the transmission of the shares on death or bankruptcy etc. The name of directors, their powers and duties, rotation of directors and their removal. The meetings of the company i.e. how the meeting (which can either be annual, extra-ordinary or statutory) shall be convened and the issue of notice of meeting and also rules relating to proceedings at meetings, such as who shall preside and how voting shall be carried out. The seal of the company which can either be common seal or official seal. How dividends are to be paid to shareholders of the company. The appointment and removal of auditors. Winding up provisions containing how assets are to be distributed and indemnity of members.

Subject to the provisions of this Act and to the conditions contained in its memorandum a company may, by special resolution, alter its articles: Provided that no alteration made in the articles under this sub-section which has the effect of converting a public company into a private company, shall have effect unless such alteration has been approved by the Central Government. Any alteration so made shall, subject to the provisions of this Act, be as valid as if originally contained in the articles and be subject in like manner to alteration by special resolution. Where any alteration such as is referred to in the proviso to sub-section (1) has been approved by the Central Government, a printed copy of the articles as altered shall be filed by the company with the Registrar within one month of the date of receipt of the order of approval. The power of altering articles under this section shall, in the case of any company formed and registered under Act No. 19 of 1857 and Act No. 7 of 1860 or either of them, extend to altering any provisions in Table B annexed to Act 19 of 1857, and shall also, in the case of an unlimited company formed and registered under the said Acts or either of them, extend to altering any regulations relating to the amount of capital or its distribution into shares, notwithstanding that those regulations are contained in the memorandum. The major differences between MOA and AOA are: 1. Purpose: MOA lays down the charter of the company. AOA provides the rules and regulations for the internal administration of the company 2. Scope: MOA states the objects and powers of the company. AOA states the way to achieve the objectives stated in the Memorandum of Association 3. Status: MOA is the basic document of the company.AOA is the supplementary document or secondary document of the company. 4. Relationship: MOA defines the relationship of the company with outside world. AOA mainly guides the relationship between the company and its shareholders. 5. Whether compulsory or not: Memorandum of Association is compulsory document. Every company should have its Memorandum of Association. A public limited company can opt for the 12

model set of Articles given as Table A of the Companies Act. They need not have separate Articles of Association.(after 1st October 2009.) 6. Legal effect: MOA acts done beyond the scope of memorandum are void, or the company cannot ratify such acts. AOA acts done beyond the scope the Articles can be ratified. 7. Alteration: Alteration of Memorandum is a lengthy process. Alteration of Articles of Association is relatively easier Anonymous From 1st October 2009 completely new documents came into effect. The traditional memorandum of association was abolished, so that all the constitutional provisions are now contained in the articles. Nearly all companies set up after that date will not have a statement of objects or an authorised share capital as these are no longer statutory requirements. The new articles will be based on a new standard document called the Model Articles. Ordinary commercial companies registered under the new Act will have articles based on the new Model Articles. They set out the rules for running the company and are a contract between the company and its shareholders, broadly the equivalent of a partnership agreement. Because it contains the shareholders' rights in the company, it is essential that they contain the right provisions for this particular company. A company registered before that date will have memorandum and articles until such time as it decides to adopt new articles. The memorandum will contain the company's name, situation of registered office, objects, a statement of limited liability and authorised share capital. Statements of objects and authorised capital are no longer required, but a company with a memorandum will still be bound by these statements until it alters the documents to remove them. The company can continue to operate under its old memorandum and articles, but the references to Companies Acts before 2006 will be to now outdated provisions, and there will often be provisions in the memorandum and articles that are now contrary to the current statutory rules. The company documents need to be stamped next at the State Treasury (State) or authorized bank (Private). The request for stamping the incorporation documents should be accompanied by unsigned copies of the Memorandum and Articles of Association, and the payment receipt. The company must ensure that the copies submitted to the Superintendent of Stamps or to the authorized bank for stamping are unsigned and that no promoter or subscriber has written anything on it by hand. The Superintendent returns the copies, one of which is duly stamped, signed, and embossed, showing payment of the requisite stamp duty. Once the memorandum and articles of association have been stamped, they must be signed and dated by the company promoters, including the company name and the description of its activities and purpose, father-"s name, address, occupation, and the number of shares subscribed. This information must be in the applicants handwriting and duly witnessed. Digitally signing and e-filing of various documents with the Registrar. For the incorporation of company the documents submitted to the Registrar along with the mandatory registration fees, may include Memorandum and Articles of the Association, Declaration in e-Form1, Power of Attorney, e-Form 18, eForm 32, and copies of any other agreements. Form 1 : Declaration of compliance, Form 18: Details of registered office address, Form 32 : Details of Directors. Payment of Fees.The registration fees vary depending upon the authorized capital of the proposed company, which can be effortlessly calculated from the Ministry of Companies Affairs portal. The payment of fees can be made: 13

Offline: one can upload all incorporation documents and generate the payment challan. Against this challan, the applicant must obtain a demand draft for filing fees amount in favour of -" the Pay and Accounts Office, Ministry of Corporate Affairs, New Delhi" and this demand draft is payable in Mumbai. The applicant must make the payment at specified branches of certain banks. It takes around one week for clearance of payment. Only after the clearance of payment does the ROC accept the documents for verification and approvals; Online: the applicant makes the payment by credit card and the system accepts the documents immediately. Obtain Certificate of Incorporation (COI) For incorporating a company in India, an application for registration should be submitted to the registrar of companies with the following documents: 1. Memorandum of Association; 2. Articles of Association; 3.a declaration signed by a person named in the articles of the proposed company as a director, manager, or secretary of the company, or by an advocate of the Supreme Court or High Court, or by an attorney entitled to appear before the High Court, or by a chartered accountant practicing in India stating that all the requirements of the Companies Act 1956 and the applicable rules with respect to the registration and other matters have been complied with; 4.a list of persons who have consented to act as directors of the company. 5. if the proposed company is a public company, consent of very person prepared to act as a director must be submitted in a prescribed form; 6. information about directors, managing directors and managers must be submitted in a prescribed form; 7. information about the registered office in a prescribed form; 8. power of attorney in favor of one of the promoters or any other person, authorizing him/her to make corrections in the documents submitted to the registrar of the companies, if it becomes necessary; and 9. applicable registration fee payable to the registrar of the companies. After the censorious observation of the documents specified in sections 33(1) and 33(2) from the company side, the Registrar registers the memorandum and articles of the association and issues a certificate of incorporation within a period of 7 days of receipt of the documents, as per the section 34(1).

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The date of incorporation of a company may not be the date of commencement of business. A private company and a public limited company not having share capital are not required to comply with any other formalities and may commence its business activities immediately after obtaining the certificate of incorporation from the concerned Registrar of Companies. A public limited company having share capital cannot commence business until it has obtained the certificate of Commencement Of Business (COB) from the concerned Registrar of Companies. Normally a new company will comply with the required formalities and obtain the COB from the Registrar as soon as possible after formation because it cannot commence any business activities or exercise its borrowing powers without it. For obtaining a certificate to commence business, the following actions are required to be taken (i) the company shall file with the Registrar a statement in lieu of prospectus (SLP) (signed by each director) electronically at the MCA portal in the form given in Schedule III to Act together with the EFORM 62 and shall pay the prescribed fee by online or offline as per Schedule X of the Companies Act, 1956. (ii) the directors should pay the value of the shares to the extent money is payable in cash with application/allotment; (iii) a duly certified declaration shall be filed electronically at the MCA portal in the E FORM 20 and a stamped copy shall be simultaneously filed with the Registrar signed by a director/secretary or by secretary in practise where there is no secretary, to the effect that the requirements of section 149(2) have been complied with. (iv) the company shall not allot any share or debenture at least for three days after filing of statement in lieu of prospectus with the Registrar. [Section 70(1)]; (v) the company shall pay the prescribed filing fee by online or offline under Schedule X on SLP and on eForm 20 to the Registrar of Companies. In order to obtain COB, a public company shall file the following documents with the Registrar of Companies as desired by section 149: (1) A prospectus/statement in lieu of prospectus as the case may be along with following documents: (a) list of the members of the company with their shareholdings; (b) confirmation for paid up share capital to the extent of Rs. 5,00,000 and proof thereof, viz copy of bank statement etc. (c) list of Directors, Manager, Auditors and changes among them, if any; (d) consent of the Auditors to include their name in the Prospectus/Statement in lieu of Prospectus; (e) copy of the agreements for appointment of Managing Director, Underwriters, contracts entered into by the promoters before incorporation of the company, etc. if any; (f) printed and certified copy of the Memorandum and Articles of Association of the company; (g) details of the preliminary expenses incurred by the company; (h) power of attorney to make corrections in the Prospectus/Statement in lieu of prospectus and to obtain certificate for commencement of business from the Registrar of Companies; (i) certified copy of the resolution passed by the Board for approval of prospectus /statement in lieu of prospectus for filing with the Registrar.

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(2) A duly verified declaration on stamp paper that provisions of section 149 of the Act have been complied with, by one of the directors or secretary or, where there is no secretary, by a secretary in whole time practice, in e-Form 19/20 as the case may be. The Registrar, on perusal of the declaration in e-Form 20 and the statement in lieu of prospectus, as may be applicable, shall certify that the company is entitled to commence business and to exercise borrowing powers. The certificate shall be the conclusive evidence that the company is entitled to commence its business. Only after obtaining the certificate of incorporation a public company can enter into binding contracts. After obtaining certificate of incorporation but before obtaining certificate for commencement of business, the company may, however,enter into provisional contracts subject to the condition that they will be binding only after the company has obtained the COB.

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NATURE OF SHARES
Nature of [shares or debentures].The 1[shares or debentures] other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company. Comments: The shareholders cannot among themselves enter into an agreement which is contrary to or inconsistent with the articles of association of the company. A private agreement where under there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs is not binding either on the shareholders or on the company; V.B. Rengaraj v. V.B. Gopala Krishnan, JT 1991 (4) SC 430: (1992) 1 SCC 160: AIR 1992 SC 453.

Equity shares
[79A. Issue of sweat equity shares.(1) Notwithstanding anything contained in section 79, a company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled, namely: (a) the issue of sweat equity shares is authorised by a special resolution passed by the company in the general meeting; (b) the resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued; (c) not less than one year has, at the date of the issue, elapsed since the date on which the company was entitled to commence business; (d) the sweat equity shares of a company, whose equity shares are listed on a recognised stock exchange, are issued in accordance with the regulations made by the Securities and Exchange Board of India in this behalf: Provided that in the case of a company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed. Explanation I.For the purposes of this sub-section, the expression a company means the company incorporated, formed and registered under this Act and includes its subsidiary company incorporated in a country outside India. Explanation II.For the purposes of this Act, the expression sweat equity shares means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

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(2) All the limitations, restrictions and provisions relating to equity shares shall be applicable to such sweat equity shares issued under sub-section (1).]

Preference shares
[80. Power to issue redeemable preference shares. (1) Subject to the provisions of this section, a company limited by shares may, if so authorised by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed: Provided that (a) no such shares shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption; (b) no such shares shall be redeemed unless they are fully paid; (c) the premium, if any payable on redemption shall have been provided for out of the profits of the company or out of the companys [security premium account], before the shares are redeemed; (d) where any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall, out of profits which would otherwise have been available for dividend, be transferred to a reserve fund, to be called [the capital redemption reserve account], a sum equal to the nominal amount of the shares redeemed; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if [the capital redemption reserve account] were paidup share capital of the company. (2) Subject to the provisions of this section, the redemption of preference shares thereunder may be effected on such terms and in such manner as may be provided by the articles of the company. (3) The redemption of preference shares under this section by a company shall not be taken as reducing the amount of its authorised share capital. (4) Where in pursuance of this section, a company has redeemed or is about to redeem any preference shares, it shall have power to issue shares up to the nominal amount of the shares redeemed or to be redeemed as if those shares had never been issued; and accordingly the share capital of the company shall not, for the purpose of calculating the fees payable under [section 611], be deemed to be increased by the issue of shares in pursuance of this sub-section: Provided that, where new shares are issued before the redemption of the old shares, the new shares shall not, so far as relates to stamp duty, be deemed to have been issued in pursuance of this subsection unless the old shares are redeemed within one months after the issue of the new shares. (5) [The capital redemption reserve account] may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

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[(5A) Notwithstanding anything contained in this Act, no company limited by shares shall, after the commencement of the Companies (Amendment) Act, 1996, issue any preference share which is irredeemable or is redeemable after the expiry of a period of twenty years from the date of its issue.] (6) If a company fails to comply with the provisions of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to [ten thousand rupees].

Certification of shares
[(1)] A certificate, under the common seal of the company, specifying any shares held by any member, shall be prima facie evidence of the title of the member to such shares. [(2) A certificate may be renewed or a duplicate of a certificate may be issued if such certificate (a) is proved to have been lost or destroyed, or (b) having been defected or mutilated or torn is surrendered to the company. (3) If a company with intent to defraud renews a certificate or issues a duplicate thereof, the company shall be punishable with fine which may extend to ten thousand rupees and every officer 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 may extend to [one lakh rupees], or with both. (4) Notwithstanding anything contained in the articles of association of a company, the manner of issue or renewal of a certificate or issue of a duplicate thereof, the form of a certificate (original or renewed) or of a duplicate thereof, the particulars to be entered in the register of members or in the register of renewed or duplicate certificates, the form of such registers, the fee on payment of which, the terms and conditions if any (including terms and conditions as to evidence and indemnity and the payment of out-of-pocket expenses incurred by a company in investigating evidence) on which a certificate may be renewed or a duplicate thereof may be issued, shall be such as may be prescribed.]

Two Kinds of Share Capital

(1) Preference share capital means, with reference to any company limited by shares, whether formed before or after the commencement of this Act, that part of the share capital of the company which fulfils both the following requirements, namely: (a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax; and (b) that as respects capital, it carries or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely:

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(i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding up or repayment of capital; and (ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company. Explanation.Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either of both of the following rights, namely: (i) that, as respects dividends, in addition to the preferential right to the amount specified in clause (a), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid; (ii) that, as respects capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in clause (b); it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid. (2) Equity share capital means, with reference to any such company, all share capital which is not preference share capital. (3) The expressions preference share and equity share shall be construed accordingly.

Power of limited company to alter share capital

(1) A limited company having a share capital, may, if so authorised by its articles, after the conditions of its memorandum as follows, that is to say, it may (a) increase its share capital by such amount as it thinks expedient by issuing new shares; (b) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; (c) convert all or any of its fully paid up shares into stock, and re-convert that stock into fully paid up shares of any denomination; (d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived; (e) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled. (2) The powers conferred by this section shall be exercised by the company in general meeting and shall not require to be confined by the Court. 20

(3) A cancellation of shares in pursuance of this section shall not be deemed to be a reduction of share capital within the meaning of this Act. Comments: Directors of a company are within their powers to issue shares at par even if their market value is above par. These are matters of administrative policy and discretion. The discretionary power however being in the nature of fiduciary powers, must for that reason be exercised in good faith. Mala fides vitiate the exercise of such discretion; Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd., (1981) 51 Comp. Cas. 743: AIR 1981 SC 1298.

Effect of conversion of share into stock

Where a company having a share capital has converted any of its shares into stock, and given notice of the conversion to the Registrar, all the provisions of this Act which are applicable to shares only, shall cease to reply as to so much of the share capital as is converted into stock.

Restriction on transfer of shares

108B. Restriction on transfer of shares.(1) Every body corporate or bodies corporate under the same management, holding, whether singly or in the aggregate, ten per cent or more of the nominal value of the subscribed equity share capital of any other company shall, before transferring one or more such shares, give to the Central Government an intimation of its or their proposal to transfer such share, and every such intimation shall include a statement as to the particulars of the share proposed to be transferred, the name and address of the person to whom the share is proposed to be transferred, and share holding, if any, of the proposed transferee, in the concerned company and such other particulars as may be prescribed. (2) Where, on receipt of an intimation given under sub-section (1) or otherwise, the Central Government is satisfied that as a result of such transfer, a change in the composition of the Board of directors of the company is likely to take place and that such change would be prejudicial to the interests of the company or to the public interest it may, by order, direct that (a) no such share shall be transferred to the proposed transferee: Provided that no such order shall preclude the body corporate or bodies corporate from intimating, in accordance with the provisions of sub-section (1), to the Central Government its or their proposal or transfer the share to any other person, or (b) where such share is held in a company engaged in any industry specified in Schedule XV, such share shall be transferred to the Central Government or to such corporation owned or controlled by that Government as may be specified in the direction. (3) Where a direction is made by the Central Government under clause (b) of sub-section (2), the share referred to in such direction shall stand transferred to the Central Government or to the corporation specified therein, and the Central Government or the specified corporation, as the case may be shall 21

pay, in cash, to the body corporate or bodies corporate from which such share stands transferred, an amount equal to the market value of such share, within the time specified in sub-section (4). Explanation.In this sub-section, market value means, in the case of share which is quoted on any recognized stock exchange, the value quoted at such stock exchange on the date immediately preceding the date on which the direction is made, and, in any other case, such value as may be mutually agreed upon between the holder of the share and the Central Government or the specified corporation, as the case may be, or in the absence of such agreement, as may be determined by the Court. (4) The market value referred to in sub-section (3) shall be given forthwith, where there is no dispute as to such value or where such value has been mutually agreed upon, but where there is a dispute as to the market value, such value as is estimated by the Central Government or the corporation, as the case may be, shall be given forthwith and the balance, if any, shall be given within thirty days from the date when the market value is determined by the Court. (5) If the Central Government does not make any direction under sub-section (2) within sixty days from the date of receipt by it of the intimation given under sub-section (1), the provisions contained in subsection (2) with regard to the transfer of such share shall not apply.]

Nomination of shares
[109A. Nomination of shares.(1) Every holder of shares in, or holder of debentures of, a company may, at any time, nominate, in the prescribed manner, a person to whom his shares in, or debentures of, the company shall vest in the event of his death. (2) Where the shares in, or debentures of, a company are held by more than one person jointly, the joint-holders may together nominate, in the prescribed manner, a person to whom all the rights in the shares or debentures of the company shall vest in the event of death of all the joint-holders. (3) Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of such shares in, or debentures of, the company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the shares in, or debentures of, the company, the nominee shall, on the death of the shareholder or holder of debentures of, the company or, as the case may be, on the death of the joint-holders become entitled to all the rights in the shares or debentures of the company or, as the case may be, all the joint-holders, in relation to such shares in, or debentures of the company to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner. (4) Where the nominee is a minor, it shall be lawful for the holder of the shares, or holder of debentures, to make the nomination to appoint, in the prescribed manner, any person to become entitled to shares in, or debentures of, the company, in the event of his death, during the minority.]

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Buyback of shares
[77A. Power of company to purchase its own securities.(1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2) of this section and section 77B, a company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of (i) its free reserves; or (ii) the securities premium account; or (iii) the proceeds of any shares or other specified securities: Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. (2) No company shall purchase its own shares or other specified securities under sub-section (1), unless (a) the buy-back is authorised by its articles; (b) a special resolution has been passed in general meeting of the company authorising the buy-back: [Provided that nothing contained in this clause shall apply in any case where (A) the buy-back is or less than ten per cent. of the total paid-up equity capital and free reserves of the company; and (B) such buy-back has been authorised by the Board by means of a resolution passed at its meeting: Provided further that no offer of buy-back shall be made within a period of three hundred and sixty-five days recokned from the date of the preceding offer of buy-back, if any. Explanation.For the purposes of this clause, the expression offer of buy-back means the offer of such buy-back made in pursuance of the resolution of the Board referred to in the first proviso;] (c) the buy-back is or less than twenty-five per cent of the total paid-up capital and free reserves of the company: Provided that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year; (d) the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back: Provided that the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies.

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Explanation.For the purposes of this clause, the expression debt includes all amounts of unsecured and secured debts; (e) all the shares or other specified securities for buy-back are fully paid-up; (f) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; (g) the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with the guidelines as may be prescribed. (3) The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating (a) a full and complete disclosure of all material facts; (b) the necessity for the buy-back; (c) the class of security intended to be purchased under the buy-back; (d) the amount to be invested under the buy-back; and (e) the time limit for completion of buy-back. (4) Every buy-back shall be completed within twelve months from the date of passing the [special resolution or a resolution passed by the Board] under clause (b) of sub-section (2). (5) The buy-back under sub-section (1) may be (a) from the existing security holders on a proportionate basis; or (b) from the open market; or (c) from odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognised stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or (d) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. (6) Where a company has passed a special resolution under clause (b) of sub-section (2) [or the Board has passed a resolution under the first proviso to clause (b) of that sub-section] to buy-back its own shares or other securities under this section, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any: 24

Provided that no declaration of solvency shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognised stock exchange. (7) Where a company buy-back its own securities, it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back. (8) Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make further issue of the same kind of shares (including allotment of further shares under clause (a) of sub-section (1) of section 81) or other specified securities [within a period of six months] except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares. (9) Where a company buy-back its securities under this section, it shall maintain a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of extinguishing and physically destroying of securities and such other particulars as may be prescribed. (10) A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed: Provided that no return shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognised stock exchange. (11) If a company makes default in complying with the provisions of this section or any rules made thereunder, or any regulations made under clause (f) of sub-section (2), the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both. Explanation.For the purposes of this section, (a) specified securities includes employees stock option or other securities as may be notified by the Central Government from time to time; (b) free reserves shall have the meaning assigned to it in clause (b) of Explanation to section 372A.]

Right shares
[206A. Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer of shares. Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company, it shall notwithstanding anything contained in any other provision of this Act,

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(a) transfer the dividend in relation to such shares to the special account referred to in section 205A unless the company is authorised by the registered holder of such share in writing to pay such dividend to the transferee specified in such instrument of transfer; and (b) keep in abeyance in relation to such shares any offer of rights shares under clause (a) of sub-section (1) of section 81 and any issue of fully paid-up bonus shares in pursuance of sub-section (3) of section 205.]

Forfeiture
(1) Whenever a company having a share capital makes any allotment of its shares, the company shall, within [thirty days] thereafter, (a) file with the Registrar a return of the allotments, stating the number and nominal amount of the shares comprised in the allotment, the names, addresses and occupations of the allotees, and the amount, if any, paid or due and payable on each share: [Provided that the company shall not show in such return any shares as having been allotted for cash if cash has not actually been received in respect of such allotment;] (b) in the case of shares (not being bonus shares) allotted as fully or partly paid up otherwise than in cash, produce for the inspection and examination of the Registrar a contract in writing constituting the title of the allottee to the allotment together with any contract of sale, or a contract for services or other consideration in respect of which that allotment was made, such contracts being duly stamped, and file with the Registrar copies verified in the prescribed manner of all such contracts and a return stating the number and nominal amount of shares so allotted the extent to which they are to be treated as paid up, and the consideration for which they have been allotted; and [(c) file with the Registrar (i) in the case of bonus shares, a return stating the number and nominal amount of such shares comprised in the allotment and the names, addresses and occupations of the allottees and a copy of the resolution authorising the issue of such shares; (ii) in the case of issue of shares at a discount a copy of the resolution passed by the company authorising such issue together with a copy of the order of the [Tribunal] sanctioning the issue and where the maximum rate of discount exceeds ten per cent, a copy of the orders of the Central Government permitting the issue at the higher percentage.] (2) Where a contract such as is mentioned in clause (b) of sub-section (1) is not reduced to writing, the company shall, within 5[thirty days] after the allotment, file with the Registrar the prescribed particulars of the contract stamped with the same stamp duty as would have been payable if the contract had been reduced to writing; and those particulars shall be deemed to be an instrument within the meaning of the Indian Stamp Act, 1899 (2 of 1899), and the Registrar may, as a condition of filing the particulars, require that the duty payable thereon be adjudicated under section 31 of that Act. (3) If the Registrar is satisfied that in the circumstances of any particular case the period of [thirty days] specified in sub-sections (1) and (2) for compliance with the requirements of this section [is or was 26

inadequate, he may on application made in that behalf by the company, whether before or after the expiry of the said period, extend that period as he thinks fit]; and if he does so, the provisions of subsections (1) and (2) shall have effect in that particular case as if for the said period of 3[thirty days] the extended period allowed by the Registrar were substituted. (4) If default is made in complying with this section, every officer of the company who is in default shall be punishable with fine which may extend to [five thousand rupees] for every day during which the default continues: [Provided that in case of contravention of the proviso to clause (a) of sub-section (1), every such officer, and every promoter of the company who is guilty of the contravention shall be punishable with fine which may extend to [fifty thousand rupees].] (5) Nothing in this section shall apply to the issue and allotment by a company of shares which under the provisions of its articles were forfeited for non-payment of calls.

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MEMBER
(1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members. (2) Every other person who [agrees in writing] to become a member of a company and whose name is entered in its register of members, shall be a member of the company. (3) Every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company.]

Membership of holding company

(1) Except in the cases mentioned in this section, a body corporate cannot be a member of a company which is its holding company and any allotment or transfer of shares in a company to its subsidiary shall be void. (2) Nothing in this section shall apply (a) where the subsidiary is concerned as the legal representative of a deceased member of the holding company; or (b) where the subsidiary is concerned as trustee, unless the holding company or a subsidiary thereof is beneficially interested under the trust and is not so interested only by way of security for the purposes of a transaction entered into by it in the ordinary course of a business which includes the lending of money. (3) This section shall not prevent a subsidiary from continuing to be a member of its holding company if it was a member thereof either at the commencement of this Act or before becoming a subsidiary of the holding company, but, except in the cases referred to in sub-section (2), the subsidiary shall have no right to vote at meetings of the holding company or of any class of members thereof. (4) Subject to sub-section (2), sub-sections (1) and (3) shall apply in relation to a nominee for a body corporate which is a subsidiary, as if references in the said sub-sections (1) and (3) to such a body corporate included references to a nominee for it. (5) In relation to a holding company which is either a company limited by guarantee or an unlimited company, the reference in this section to shares shall, whether or not the company has a share capital, be construed as including a reference to the interest of its members as such, whatever the form of that interest. A company is considered a separate legal entity, although it has no physical existence and works through a human agency. The individuals who form and run a company are known as its members. The terms shareholder and member of a company can be used interchangeably, except for an unlimited company or company limited by guarantee which may not have a share capital. The laws of forming and running a company in India are governed by the Companies Act, 1956. 28

The Companies Act: Who Can Become a Member of a Company?

Any individual who can enter into a contract under the Indian Contract Act, 1872 may be eligible to become a member of a company. However, this is subject to the provisions under the Memorandum and the Articles of the company. The Articles may restrict particular persons or organizations from becoming a member of a company. A person can become a member of a company provided he fulfills certain conditions:

Minor: A minor is not qualified to become a member of a company, because a contract with a minor is not valid. However, a minor can become a member if a written agreement is signed by his legal guardian. Insolvent: A bankrupt person may be considered a member of a company and is entitled to vote, as long as his name is there on the register of members. Partnership Firm: A partnership firm may own shares in a business. The shares are allotted on the names of partners. As per Section 25 of the Companies Act, 1956, a firm is allowed to become a member of a company that is licensed under Sec. 25. Foreigner: A foreigner is eligible to become a member of a company. His rights as a member would be suspended if at any point of time he becomes an alien foe. Company: A company may become a member of any other company if granted by its Articles. However, under Sec. 77 (1), of the Companies Act, 1956, a company cannot become its own member. It is considered illegal if it buys its own shares.

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PROSPECTUS
Any communication inviting offers from the public is a prospectus. Section 56 and Schedule II of the Companies Act provide the format for preparing a prospectus. The prospectus is to be structured in three parts- Part I,II and III. The prospectus provides detailed information on the company and the issue. Some main headings in the table of contents- The Offer, Financial Information, General Information, Capital Structure, Business, History and Corporate Matters, Promoters and Group Companies, Regulations and Policies, Government Approvals, Dividend Policy, Statement of Tax Benefits, Declaration. Some of the information in the prospectus includes the following: 1) The company has to apply to at least one stock exchange for the listing of the shares of the issue. The prospectus gives the names of all the exchanges where the company has applied for the listing of the shares. 2) Date of opening and closing of the issue. 3) Size of the issue, including the price of the shares and the total number of shares. 4) Objects for which the capital is being raised, project cost and means of financing the project. Section 60 requires that a prospectus must be registered with the Registrar of Companies before it is issued. Thus, after receiving comments from the SEBI, the prospectus is finalised and registered with the Registrar of Companies. Section 56(3) requires that an application for shares should also contain the prescribed salient features of the prospectus. This is called an abridged prospectus. In the book building process, the total capital to be raised is declared. However, the price of each share and the number of shares subscribed would be known only after the process of seeking offers from the public is complete. Thus, a prospectus, complete in all respects, can be registered only after soliciting offers from the public. Section 60 B of the Companies Act recognizes this. In the book building process, the company submits to the SEBI, a prospectus containing all the information required, other than the price structure of the issue. This document is called the Information Memorandum. The Memorandum is put to the notice of the public. At least three days before the opening of the offer, the company has to submit a red-herring prospectus to the Registrar of Companies. The red-herring prospectus has all the information required in a prospectus, other than the price of the shares and the number of the shares. Section 60 provides that the Information Memorandum and the red-herring prospectus carry the same obligations as a prospectus. If any change is made in the Information Memorandum to prepare the red-herring prospectus, it has to be highlighted by the company while submitting the red-herring prospectus. The changes also have to be brought to the notice of the persons invited to subscribe. On the closing of the offer, a final prospectus stating the total capital raised and the closing price of the shares is submitted with the SEBI and the Registrar of Companies. Sections 57,58 and 59 require that the opinion of an expert can be included in a prospectus only if the expert is not engaged or interested in the formation of the company. Further the expert must give his consent in writing on the inclusion of his statement in the prospectus. An expert includes an engineer 30

and accountant. An untrue statement in the prospectus attracts civil as well as criminal liability. Under Section 62, persons responsible for an untrue statement have to pay compensation to the subscriber for the loss suffered due to the untrue statement. Section 63 provides for imprisonment up to two years and a fine of up to Rupees fifty thousand for an untrue statement in a prospectus. STATEMENT IN LIEU OF A PROSPECTUS A public limited company, (1) which has not issued a prospectus, or (2) which has issued a prospectus, but has not proceeded to allot any of the shares , offered to the public for subscription, is required to deliver to the Registrar a Statement in lieu of Prospectus for registration, at least three days before the allotment of shares or debentures. Schedule III contains the details of the particulars to be furnished. In case of private company becoming a public company, statement in lieu of the prospectus can be filed. Schedule IV contains the details of the particulars to be furnished for the same. Such a statement is required to be signed by every person, who is named therein as a director or a proposed director, of the company, or by his agent authorized in writing. If allotment of shares or debenture is made without filing statements in lieu of prospectus, the allottee may avoid it within two months after the statutory meeting, or where no such meeting is to be held, within two months of the allotment. Contravention also renders the company and every director liable to a fine up to rupees ten thousand.

KISAN MEHTA v. UNIVERSAL LUGGAGE MANUFACTURING COMPANY LIMITED Kisan Mehta , in a public spirited legal action, had a complaint against the prospectus issued by the Universal Luggage Manufacturing Company Limited. The specific complaints against the company were that they have issued their prospectus and public statements whereby they have given a very rosy picture of their company. In effect, they have shown various items which are, in fact, liabilities, but in the prospectus and in the statement, these have been described as profits. According to them, though the statements show that the company has made profits of Rs. 2.02 crores for the year ending May, 1985, in effect, it is really a loss of Rs. 1.15 crores on proper adjustments being made as required under the law. The case was filed as a public interest litigation, seeking to protect the general interests of the public. Section 62 of the Companies Act provides for civil liabilities for misrepresentation in the prospectus. Several persons responsible for the contents and issuing of the prospectus become liable to pay compensation. However, the liability is only to every person who subscribes not to the public at large

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DIRECTOR
Need of Director
The main needs to have directors in a company: 1) Company is separate legal entity. Though it is artificial person but it cannot operate on its own. It needs some form of human agency. Directors are representatives of members (owners of the company). Directors are actually managaing affairs of the company. 2) We discussed about human agency. Though members are owners if the company but they cannot manage the affairs of the company mainly due to : a. Members have no inherent right to participate in management of the company b. They lack expertise c. They are dispersed d. Sometimes numbers run in lakhs 3) As per Sec 252 private companies require to have 2 directors and public companies to have 3 directors.

Meaning of Director
The definition is actually function based. As per section 2(13), Any person occupying the position of a director by whatever name called . So a person is determined by the function he performs. As decided in Re, Forest of Dean Coal Mining Co, main criteria to determine is nature of office, functions performed and duties discharged by an individual. Further as per Sec 303, any person with whose directions or instructions the board is accustomed to act is also deemed to be director.

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Executive director and Non executive director

Differentiation Points Employment Executive Directors Employees of the Company Non - Executive Directors Not employees of the Company

Types

Whole Time Directors & Managing Directors

Nominee Directors & Independent Directors

Company involvement

In depth knowledge of affairs of Have diverse experience and Company background and not involved in day to day activities Policy formulation & involved in Attend the board meetings and day to day activities give their unbiased views on working of the Company.

Functions

Legal position of Directors

Directors as Agents The relationship between company and director is that of principal and agent. The general rule of agency applies to them. Thus where any directors contract in name of the company, it is the company which is liable on it and not the company. Directors as Trustees Office of the director is office of trust. Director stands in a fiduciary position. Directors act as trustees of the money and property of the company and powers entrusted upon them. Directors as Officers of the Company As per Sec 2(30), director is officer of the company. Whether he is in employment or not, he is always consider as an officer of the company. Directors as Officers in Default WTD & MD always is covered under this definition. If not mentioned, then director specified by the board or if not specified, then all directors

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Directors as Employee As such director is not employee of the Company. But where besides being director, is also in employment or service, he shall be treated as employee of the company

Qualifications of the Director

Companies Act has not prescribed academic or professional qualifications for directors. Neither any age limit for retirement is prescribed. But articles usually provide for a minimum share qualification. As per Sec.270 a director should : a. Should purchase within 2 months of appointment b. Nominal value < Rs.5,000 or 1 share where nominal value > Rs.5,000 c. Share warrants not considered

Disqualifications
A person shall not be capable of being appointed director of a company, if(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force; (b) he is an undischarged insolvent; (c) he has applied to be adjudicated as an insolvent and his application is pending; (d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less to six months, and a period of five years has not elapsed from the date of expiry of the sentence; (e) he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or (f) an order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section. 2[(g) such person is already a director of a public company which,(A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first date of April, 1999; or (B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on done date or pay dividend and such failure continues for one year or more :

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Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (a) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (b).] (2) The Central Government may, by notification in the Official Gazette, remove(a) the disqualification incurred by any person in virtue of clause (d) of sub section (1), either generally or in relation to any company or companies specified in the notification; or (b) the disqualification incurred by any person in virtue of clause (e) of subsection (1). (3) A private company which is not a subsidiary of a public company may, by its articles, provide that a Person shall be disqualified for appointment as a director on any grounds in addition to those specified in subsection (1).

Appointment of Directors
1) Appointment of first directors Names of such directors are provided are usually provided in articles of association. When the names are not provided, then subscribers to memorandum are considered as directors. Such directors hold office till new directors are appointed u/s 255. 2) Appointment at general meeting In case of public companies, 2/3rd of directors are eligible for eligible for rotation. Sec 256 provides that 1/3rd of those who are eligible for rotation must retire at AGM. In case of private companies if articles are silent, then directors are appointed at AGM only. 3) Appointment by the Board of directors Board of directors can exercise the power to appoint directors in following three cases: Additional directors (Sec 260) Filling up the casual vacancy (Sec 262) Alternate directors (Sec 313) 4) Appointment by third parties Nominee directors are example of directora appointed by third parties. This usually happens when directors are appointed by Government, foreign collaborators, holding companies, financial institutions or other lenders 5) Appointment by Central Government Company Law Board can appoint directors on order of Central Government or when it receives application of not less than 100 members or 1/10th of total voting power. Usually such 35

appointment is done when affairs of company are done which are prejudicial to interests of company and public at large.

Number of Directors (Sec.252)

Minimum number of directors a) Public Company : 3 b) Private Company : 2 There is no maximum limit set by the act. However the articles of the company can set limits for both minimum and maximum directors. For purpose of calculating maximum number of directors following are excluded: a) b) c) d) Director appointed u/s 408 by Central Government Appointed by CLB u/s 397 or 398 Nominee directors appointed by public financial institutions Special directors appointed by SICA (Sick Industrial Companies Act)

Number of Directorships
As per Sec. 275, maximum number of companies in which a person can hold directorships is 15. However, u/s 278 following directorships are excluded: a) b) c) d) a private company which is neither a subsidiary nor a holding company of a public company an unlimited company an association not carrying on business for profit or which prohibits the payment of a dividend a company in which such person is only an alternate director

DUTIES
1. Statutory Duties:
(A) To file return of allotment: Section 75 of the Companies Act, 1956 requires a company to file with the Registrar, within a period of 30 days, a return of the allotments stating the specified particulars. Failure to file such return shall make the directors liable as officer in default. A fine up to Rs. 5000/- per day till the default continues may be levied. (B) Not to issue irredeemable preference share or shares or share redeemable after 20 years: 36

Section 80, as amended by Amendment Act, 1996, forbids a company to issue irredeemable preference shares or preference shares redeemable beyond 20 years. Directors making any such issue may be held liable as officer in default and may be subject to fine up to Rs. 10,000/-. (C) To disclose interest (Section 299-300): In respect of contracts with director, Section 299 casts an obligation on a director to disclose the nature of his concern or interest (direct or indirect), if any, at a meeting of the Board of directors. The said Section provides that in case of a proposed contract or arrangement, the required disclosure shall be made at the meeting of the Board at which the question of entering into the contract or agreement is first taken into consideration. In the case of any other contract or arrangement, the disclosure shall be made at the first meeting of the Board held after the director become interested in the contract or arrangement. Every director who fails to comply with the aforesaid requirements as to disclosure of concern or interest shall be punishable with fine, which may extend to Rs. 50,000/-. (D) To disclose receipt from transfer of property (sec. 319): Any money received by the directors from the transferee in connection with the transfer of the companys property or undertaking must be disclosed to the members of the company and approved by the company in general meeting. Otherwise, the amount shall be held by the directors in trust for the company. This money may be in the nature of compensation for loss of office but in essence may be on account of transfer of control of the company. But if it is bona fide payment of damages for the breach of contract, then it is protected by sec. 321(3). Even no director other than the managing director or whole time director can receive any such payment from the company itself. (E) To disclose receipt of compensation from transferee of shares (Sec.320): If the loss of office results from the transfer (under certain conditions) of all or any of the shares of the company, its directors would not receive any compensation from the transferee unless the same has been approved by the company in general meeting before the transfer takes place. If the approval is not sought or the proposal is not approved, any money received by the directors shall be held in trust for the shareholders, who have sold their shares. Any such director, who fails to take reasonable steps as aforesaid, shall be punishable with fine, which may extend up to Rs. 2500/-. (F) Duty to attend Board meetings: A number of powers of the company are exercised by the Board of directors in their meetings held from time to time. Although a director may not be able to attend all the meetings but if he fails to attend three consecutive meetings or all meetings for a period of three months whichever is longer, without permission of the Board, his office shall automatically fall vacant [Section 283(1)(g)]. (G) To convene statutory, Annual General meeting (AGM) and also extraordinary general meetings [ Section 165,166 &169] (H) To prepare and place at the AGM along with the balance sheet and profit & loss account a report on the companys affairs including the report of the Board of Directors (Section 173, 210 & 217). 37

(I) To authenticate and approve annual financial statement (Section 215). (J) To appoint first auditor of the company (Section 224). (K) To appoint cost auditor of the company (Section 233B). (L) To make a declaration of solvency in the case of Members voluntary winding up (Section 488).

General Duties:
(A) Duty of good faith: The directors must act in the best interest of the company. Interest of the company implies the interest of the present and future members of the company on the footing that company would be continued as going concern. (B) Duty of care: A director must display care in performance of work assigned to him. He is, however, not expected to display an extraordinary care but that much care which a man of ordinary prudence would take in his own case. Any provision in the companys Articles or in any agreement that excludes the liability of the directors for negligence, default, misfeasance, breach of duty or breach of trust, is void. The company cannot even indemnify the directors against such liability. (C) Duty not to delegate: Director being an agent is bound by the maxim delegatus non potest delegare which means a delegatee cannot further delegate. Thus, a director must perform his functions personally. However, he may delegate his in certain condition.

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MEETINGS
A company is an association of several persons. Decisions are made according to the view of the majority. Various matters have to be discussed and decided upon. These discussions take place at the various meetings which take place between members and between the directors. Needless to say, the importance of meetings cannot be under-emphasised in case of companies. The Companies Act, 1956 contains several provisions regarding meetings. These provisions have to be understood and followed. For a meeting, there must be at least 2 persons attending the meeting. One member cannot constitute a company meeting even if he holds proxies for other members.

I. Meetings of Members
These are meetings where the members / shareholders of the company meet and discuss various matters. Members meetings are of the following types :A. Statutory Meeting: A public company limited by shares or a guarantee company having share capital is required to hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the company. Such a meeting must be held within a period of not less than one month or within a period not more than six months from the date on which it is entitled to commence business i.e. it obtains certificate of commencement of business. In a statutory meeting, the following matters only can be discussed :a. Floatation of shares / debentures by the company b. Modification to contracts mentioned in the prospectus The purpose of the meeting is to enable members to know all important matters pertaining to the formation of the company and its initial life history. The matters discussed include which shares have been taken up, what money has been received, what contracts have been entered into, what sums have been spent on preliminary expenses, etc. The members of the company present at the meeting may discuss any other matter relating to the formation of the Company or arising out of the statutory report also, even if no prior notice has been given for such other discussions but no resolution can be passed of which notice have not been given in accordance with the provisions of the Act. A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company. A statutory meeting may be adjourned from time to time by the members present at the meeting. The Board of Directors must prepare and send to every member a report called the "Statutory Report" at least 21 days before the day on which the meeting is to be held. But if all the members entitled to 39

attend and vote at the meeting agree, the report could be forwarded later also. The report should be certified as correct by at least two directors, one of whom must be the managing director, where there is one, and must also be certified as correct by the auditors of the company with respect to the shares allotted by the company, the cash received in respect of such shares and the receipts and payments of the company. A certified copy of the report must be sent to the Registrar for registration immediately after copies have been sent to the members of the company. A list of members showing their names, addresses and occupations together with the number shares held by each member must be kept in readiness and produced at the commencement of the meeting and kept open for inspection during the meeting. If default is made in complying with the above provisions, every director or other officer of the company who is in default shall be punishable with fine uptoRs. 500. The Registrar or a contributory may file a petition for the winding up of the company if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting on or after 14 days after the last date on which the statutory meeting ought to have been held. Contents of Statutory Report must provide the following particulars:(a)The total number of shares allotted, distinguishing those fully or partly paid-up, otherwise than in cash, the extent to which partly paid shares are paid-up, and in both cases the consideration for which they were allotted. (b) The total amount of cash received by the company in respect of all shares allotted, distinguishing as aforesaid. (c) An abstract of the receipts and payments upto a date within 7 days of the date of the report and the balance of cash and bank accounts in hand, and an account of preliminary expenses. (d) Any commission or discount paid or to be paid on the issue or sale of shares or debentures must be separately shown in the aforesaid abstract. (e) The names, addresses and occupations of directors, auditors, manager and secretary, if any, of the company and the changes which have taken place in the names, addresses and occupations of the above since the date of incorporation. (f) Particulars of any contracts to be submitted to the meeting for approval and modifications done or proposed. (g) If the company has entered into any underwriting contracts, the extent, if any, to which they have not been carried out and the reasons for the failure. (h) The arrears, if any, due on calls from every director and from the manager. (i) The particulars of any commission or brokerage paid or to be paid, in connection with the issue or sale of shares or debentures to any director or to the manager.

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The auditors have to certify that all information regarding calls and allotment of shares are correct. B. Annual General Meeting: Must be held by every type of company, public or private, limited by shares or by guarantee, with or without share capital or unlimited company, once a year. Every company must in each year hold an annual general meeting. Not more than 15 months must elapse between two annual general meetings. However, a company may hold its first annual general meeting within 18 months from the date of its incorporation. In such a case, it need not hold any annual general meeting in the year of its incorporation as well as in the following year only. In the case there is any difficulty in holding any annual general meeting (except the first annual meeting), the Registrar may, for any special reasons shown, grant an extension of time for holding the meeting by a period not exceeding 3 months provided the application for the purpose is made before the due date of the annual general meeting. However, generally delay in the completion of the audit of the annual accounts of the company is not treated as "special reason" for granting extension of time for holding its annual general meeting. Generally, in such circumstances, an AGM is convened and held at the proper time .all matters other than the accounts are discussed. All other resolutions are passed and the meeting is adjourned to a later date for discussing the final accounts of the company. However, the adjourned meeting must be held before the last day of holding the AGM. A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company. The notice must state that the meeting is an annual general meeting. The time, date and place of the meeting must be mentioned in the notice. The notice of the meeting must be accompanied by a copy of the annual accounts of the company, directors report on the position of the company for the year and auditors report on the accounts. Companies having share capital should also state in the notice that a member is entitled to attend and vote at the meeting and is also entitled to appoint proxies in his absence. A proxy need not be a member of that company. A proxy form should be enclosed with the notice. The proxy forms are required to be submitted to the company at least 48 hours before the meeting. The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated. The Central Government may, however, exempt any class of companies from the above provisions. If any day is declared by the Central government to be a public holiday after the issue of the notice convening such meeting, such a day will be traeted as a working day. A company may, by appropriate provisions in its its articles, fix the time for its annual general meeting and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings. Companies licensed under Section 25 are exempt from the above provisions provided that the time, date and place of each annual general meeting are decided upon beforehand by the Board of Directors having regard to the directions, if any, given in this regard by the company in general meeting. In case of default in holding an annual general meeting, the following are the consequences :1. Any member of the company may apply to the Company Law Board. The Company Law Board may call, or direct the calling of the meeting, and give such ancillary or consequential directions as it 41

may consider expedient in relation to the calling, holding and conducting of the meeting. The Company Law Board may direct that one member present in person or by proxy shall be deemed to constitute the meeting. A meeting held in pursuance of this order will be deemed to be an annual general meeting of the company. An application by a member of the company for this purpose must be made to the concerned Regional Bench of the Company Law Board by way of petition in Form No. 1 in Annexure II to the CLB Regulations with a fee of rupees fifty accompanied by (i) affidavit verifying the petition, (ii) bank draft for payment of application fee. 2. Fine which may extend to Rs. 5,000 on the company and every officer of the company who is in default may be levied and for continuing default, a further fine of Rs. 250 per day during which the default continues may be levied. Business to be Transacted at Annual General Meeting: At every AGM, the following matters must be discussed and decided. Since such matters are discussed at every AGM, they are known as ordinary business. All other matters and business to be discussed at the AGM are specila business. The following matters constitute ordinary business at an AGM :a. b. c. d. Consideration of annual accounts, directors report and the auditors report Declaration of dividend Appointment of directors in the place of those retiring Appointment of and the fixing of the remuneration of the statutory auditors.

In case any other business ( special business ) has to be discussed and decided upon, an explanatory statement of the special business must also accompany the notice calling the meeting. The notice must should also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person. In case approval of any document has to be done by the members at the meeting, the notice must also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings. C. Extraordinary General Meeting: Every general meeting (i.e. meeting of members of the company) other than the statutory meeting and the annual general meeting or any adjournment thereof, is an extraordinary general meeting. Such meeting is usually called by the Board of Directors for some urgent business which cannot wait to be decided till the next AGM. Every business transacted at such a meeting is special business. An explanatory statement of the special business must also accompany the notice calling the meeting. The notice must should also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person. In case approval of any document has to be done by the members at the meeting, the notice mus also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings. The Articles of Association of a Company may contain provisions for convening an extraordinary general meeting. Eg. It may provide that "the board may, whenever it thinks fit, call an extraordinary general meeting" or it may provide that "if at any time there are not within India, directors capable of acting who are sufficient in number to form a quorum, any director or any two members of the company may call an extraordinary general meeting". 42

Extraordinary General Meeting on Requisition: The members of a company have the right to require the calling of an extraordinary general meeting by the directors. The board of directors of a company must call an extraordinary general meeting if required to do so by the following number of members :a. members of the company holding at the date of making the demand for an EGM not less than onetenth of such of the voting rights in regard to the matter to be discussed at the meeting ; or b. if the company has no share capital, the members representing not less than one-tenth of the total voting rights at that date in regard to the said matter. The requisition must state the objects of the meetings and must be signed by the requisitioning members. The requisition must be deposited at the company's registered office. When the requisition is deposited at the registered office of the company, the directors should within 21 days, move to call a meeting and the meeting should be actually be held within 45 days from the date of the lodgement of the requisition. If the directors fail to call and hold the meeting as aforesaid, the requisitionists or any of them meeting the requirements at (a) or (b) above, as the case may be, may themselves proceed to call meeting within 3 months from the date of the requisition, and claim the necessary expenses from the company. The company can make good this sum from the directors in default. At such an EGM, any business which is not covered by the agenda mentioned in the notice of the meeting cannot be voted upon. Power of Company Law Board to Order Calling of Extraordinary General Meeting : If for any reason, it is impracticable to call a meeting of a company, other than an annual general meeting, or to hold or conduct the meeting of the company, the Company Law Board may, either i) on its own motion, or ii) on the application of any director of the company, or of any member of the company, who would be entitled to vote at the meeting, order a meeting to be called and conducted as the Company Law Board thinks fit, and may also give such other ancillary and consequential directions as it thinks fit expedient. A meeting so called and conducted shall be deemed to be a meeting of the company duly called and conducted. Procedure for Application under Section 186: An application by a director or a member of a company for this purpose is required to be made to the Regional Bench of the Company Law Board before whom the petition is to be made in Form No 1 specified in Annexure II to the CLB Regulations with a fee of Rs200. The petition must be accompanied with the following documents a. b. c. d. Evidence in proof of status of the applicant. Affidavit verifying the petition. Bank draft evidencing payment of application fee. Memorandum of appearance with copy of the Board's resolution or executed vakalatnama, as the case may be.

D. Class Meeting: Class meetings are meetings which are held by holders of a particular class of shares, e.g., preference shareholders. Such meetings are normally called when it is proposed to vary the rights of that particular class of shares. At such meetings, these members dicuss the pros and cons of the proposal and vote accordingly. (See provisions on variations of shareholders rights). Class meetings are held to pass resolution which will bind only the members of the class concerned, and only members of that class can attend and vote.

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Unless the articles of the company or a contract binding on the persons concerned otherwise provides, all provisions pertaining to calling of a general meeting and its conduct apply to class meetings in like manner as they apply with respect to general meetings of the company.

II. Meetings of the Board of Directors

- Meeting of the Board of Directors - Meeting of a Committee of the Board

III. Other Meetings

A. Meeting of debenture holders: A company issuing debentures may provide for the holding of meetings of the debentureholders. At such meetings, generally nmmatters pertaining to the variation in terms of security or to alteration of their rights are discussed. All matters connected with the holding, conduct and proceedings of the meetings of the debentureholders are normally specified in the Debenture Trust Deed. The decisions at the meeting made by the prescribed majority are valid and lawful and binding upon the minority. B. Meeting of creditors: Sometimes, a company, either as a running concern or in the event of winding up, has to make certain arrangements with its creditors. Meetings of creditors may be called for this purpose. Eg U/s 393, a company may enter into arrangements with creditors with the sanction of the Court for reconstruction or any arrangement with its creditors. The court, on application, may order the holding of a creditors' s meeting. If the scheme of arrangement is agreed to by majority in number of holding debts to value of the three-fourth of the total value of the debts, the court may sanction the scheme. A certified copy of the court's order is then filed with the Registrar and it is binding on all the creditors and the company only after it is filed with Registrar. Similarly, in case of winding up of a company, a meeting of creditors and of contributories is held to ascertain the total amount due by the company and also to appoint a liquidator to wind up the affairs of the company. Requisites of a Valid Meetings: The following conditions must be satisfied for a meeting to be called a valid meeting :1. It must be properly convened. The persons calling the meeting must be authorised to do so. 2. Proper and adequate notice must have been given to all those entitled to attend. 3. The meeting must be legally constituted. There maust be a chairperson. The rules of quorum must be maintained and the provisions of the Companies Act, 1956 and the articles must be complied with. 4. The business at the meeting must be validly transacted.. The meeting must be conducted in accordance with the regulations governing the meetings. Notice of General Meeting: A meeting cannot be held unless a proper notice has been given to all persons entitled to attend the meeting at the proper time, containing the necessary information. A notice convening a general meeting must be given at least 21 clear days prior to the date of meeting. However, an annual general meeting may be called and held with a shorter notice, if it is consented to 44

by all the members entitled to vote at the meeting. In respect of any other meeting, it may be called and held with a shorter notice, if at least members holding 95 percent of the total voting power of the Company consent to a shorter notice. Notice of every meeting of company must be sent to all members entitled to attend and vote at the meeting. Notice of the AGM must be given to the statutory auditor of the company. Accidental omission to give notice to, or the non-receipt of notice by, any member or any other person on whom it should be given will not invalidate the proceedings of the meeting. The notice may be given to any member either personally or by sending it by post to him at his registered address, or if there is none in India, to any address within India supplied by him for the purpose. Where notice is sent by post, service is effected by properly addressing, pre-paying and posting the notice. A notice may be given to joint holders by giving it to the jointholder first named in the register of members. A notice of meeting may also be given by advertising the same in a newspaper circulating in the neighbourhood of the registered office of the company and it shall be deemed to be served on every member who has to registered address in India for the giving of notices to him. A notice calling a meeting must state the place, day and hour of the meeting and must contain the agenda of the meeting. If the meeting is a statutory or annual general meeting, notice must describe it as such. Where any items of special business are to be transacted at the meeting, an explanatory statement setting out all materials facts concerning each item of the special business including the concern or interest, if any, therein of every director and manager, is any, must be annexed to the notice. If it is intended to propose any resolution as a special resolution, such intention should be specified. A notice convening an AGM must be accompanied by the annual accounts of the company, the directors report and the auditors report. The copies of these documents could, however, be sent less than 21 days before of the date of the meeting if agreed to by all members entitled to vote at the meeting.

Proxy
In case of a company having a share capital and in the case of any other company, if the articles so authorise, any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a member or not) as his proxy to attend and vote instead of himself. Every notice calling a meeting of the company must contain a statement that a member entitled to attend and vote is entitled to appoint one proxy in the case of a private company and one or more proxies in the case of a public company and that the proxy need not be member of the company. A member may appoint another person to attend and vote at a meeting on his behalf. Such other person is known as "Proxy". A member may appoint one or more proxies to vote in respect of the different shares held by him, or he may appoint one or more proxies in the alternative, so that if the first named proxy fails to vote, the second one may do so, and so on. The member appointing a proxy must deposit with the company a proxy form at the time of the meeting or prior to it giving details of the proxy appointed. However, any provision in the articles which requires a period longer than forty eight hours before the meeting for depositing with the company any proxy form appointing a proxy, shall have the effect as if a period of 48 hours had been specified in such provision. 45

A company cannot issue an invitation at its expense asking any member to appoint a particular person as proxy. If the company does so, every officer in default shall be liable to fine up to Rs1,000. But if a proxy form is sent at the request of a member, the officer shall not be liable. Every member entitled to vote at a meeting of the company, during the period beginning 24 hours before the date fixed for the meeting and ending with the conclusion of the meeting may inspect proxy forms at any time during business hours by giving 3 days notice to the company of his intention to do so. The proxy form must be in writing and be signed by the member or his authorised attorney duly authorised in writing or if the appointer is a company, the proxy form must be under its seal or be signed by an officer or an attorney duly authorised by it. The proxy can be revoked by the member at any time, and is automatically revoked by the death or insolvency of the member. The member may revoke the proxy by voting himself before the proxy has voted, but once the proxy has exercised the vote, the member cannot retract his vote. Where two proxy forms by the same shareholder are lodged in respect of the same votes, the last proxy form will be treated as the correct proxy form. A proxy is not entitled to vote except on a poll. Therefore, a proxy cannot vote on show of hands.

Quorum
Quorum refers to the minimum number of members who must be present at a meeting in order to constitute a valid meeting. A meeting without the minimum quorum is invalid and decisions taken at such a meeting are not binding. The articles of a company may provide for a quorum without which a meeting will be construed to be invalid. Unless the articles of a company provide for larger quorum, 5 members personally present (not by proxy) in the case of a public company and 2 members personally present (not by proxy) in the case of a private company shall be the quorum for a general meeting of a company. It has been held by Courts that unless the articles otherwise provide, a quorum need to be present only when the meeting commenced, and it was immaterial that there was no quorum at the time when the vote was taken. Further, unless the articles otherwise provide, if within half an hour from the time appointed for holding a meeting of the company, a quorum is not present in the person, the meeting :a. if called upon the requisition of members, shall stand dissolved; b. in any other case, it shall stand adjourned to the same day in the next week, at the same time and place, or to such other day and time as the Board of Directors may determine. If at the adjourned meeting also, the quorum is not present within half an hour from the time appointed for holding the meeting, the members present shall a quorum. In case the Company Law Board calls or directs the calling of a meeting of the company, when default is made in holding an annual general meeting, the government may give directions regarding the quorum including a direction that even one member of the company present in person, or by proxy shall be deemed to constitute a meeting. Similarly the Company Law Board may, direct a meeting of the company (other than an annual general meeting) to be called and held where for any reason it is impracticable to call a meeting and direct that even one member present in person or by proxy shall be deemed to constitute a meeting. 46

Chairman
The chairman is the head of the meeting. Generally, the chairman of the Board of Directors is the Chairman of the meeting. Unless the articles otherwise provide, the members present in person at the meeting elect one of themselves to be the chairman thereof on a show of the hands. If there is no Chairman or he is not present within 15 minutes after the appointed time of the meeting or is unwilling to act as chairman of the meeting, the directors present may elect one among themselves to be the chairman of the meeting. If, however no director is willing to act as chairman or if no director is present within 15 minutes after the appointed time of the meeting, the members present should choose one among themselves to be chairman of the meeting. If, after the election of a chairman on a show of hands, poll is demanded and taken and a different person is elected as chairman, then that person will be the chairman for the rest of the meeting. Duties of the chairman: Without a chairman, a meeting is incomplete. The chairman is the regulator of the meeting. His duties include the following:1. He must ensure that the meeting is properly convened and constituted i.e. that proper notice has been given, that the required quorum is present, etc. 2. He must ensure that the provisions of the act and the articles in regard to the meeting and its procedures are observed. 3. He must ensure that business is taken in the order set out in agenda and no business which is not mentioned in the agenda is taken up unless agreed to by the members. 4. He must impartially regulate the proceedings of the meeting and maintain discipline at the meeting. 5. He may exercise his powers of adjournment of the meeting, should he in good faith feel that such a step is necessary. The chairman has the power to adjourn the meeting in case of indiscipline at the meeting. A chairman however does not have the power to stop or adjourn the meeting at his own will and pleasure. If he adjourns the meeting prematurely, the members present may decide to continue the meeting and elect another chairman and proceed with the business for which it was convened. 6. He must exercise his power to order a poll correctly and must order it to be taken when demanded properly. 7. He must exercise his casting vote bonafide in the interest of the company. Voting and Demand for Poll: Generally, initially matters are decided at a general meeting by a show of hands. If the majority of the hands raise their hands in favour of a particular resolution, then unless a poll is demanded, it is taken as passed. Voting by a show of hands operates on the principle of "One Member-One Vote". However, since the fundamental voting principle in a company is "One Share-One Vote", if a poll is demanded, voting takes place by a poll. Before or on declaration of the result of the voting on any resolution on a show of hands, the chairman may order suomotu(of his own motion) that a poll be taken. However, when a demand for poll is made, he must order the poll be taken. The chairman may order a poll when a resolution proposed by the Board is lost on the show of hands or if he is of the opinion that the decision taken on the show of hands is likely to be reversed by poll. When a poll is taken, The decision arrived by poll is final and the decision on the show of hands has no effect. A poll is allowed only if the prescribed number of members demand a poll. A poll must be ordered by the chairman if it is demanded:-

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a. in the case of a public company having a share capital, by any member or members present in person or by proxy and holding shares in the companyi. ii. which confer a power to vote on the resolution not being less than one-tenth of the total voting power in respect of the resolution, or on which an aggregate sum of not less than fifty thousand rupees has been paid up.

b. in the case of a private company having a share capital, by one member having the right to vote on the resolution and present in person or by proxy if not more than seven such members are personally present, and by two such members present in person or by proxy, if more than seven such members are personally present. c. in the case of any other, by any member or members present in person or by proxy and having not less than one-tenth of the total voting power in respect of the resolution.

Motion
Motion means a proposal to be discussed at a meeting by the members. A resolution may be passed accepting the motion, with or without modifications or a motion may be entirely rejected. A motion, on being passed as a resolution becomes a decision. A motion must be in writing and signed by the mover and put to the vote of the meeting by the chairman. Only those motions which are mentioned in the agenda to the meeting can be discussed at the meeting. However, motions incidental or ancillary to the matter under discussion may be moved and passed. Generally, a motion is proposed by one member and seconded by another member.

Amendment
Amendment means any modification to a motion before it is put to vote for adoption. Amendment may be proposed by any member who has not already spoken on the main motion or has not previously moved an amendment thereto. There can be an amendment to an amendment motion also. A motion must be in writing and signed by the mover and put to the vote of the meeting by the chairman. An amendment must not raise any question already decided upon at the same meeting and must be relevant to the main motion which it seeks to amend. The chairman has the discretion to accept or reject an amendment on various grounds such as inconsistency, redundancy, irrelevance, etc. If the amendment is adopted on a vote by the members, it is incorporated in the body of the main motion. The altered motion is then discussed and put to vote and if passed, becomes a resolution.

Kinds of Resolutions
Resolutions mean decisions taken at a meeting. A motion, with or without amendments is put to vote at a meeting. Once the motion is passed, it becomes a resolution. A valid resolution can be passed at a properly convened meeting with the required quorum. There are broadly three types of resolutions :1. Ordinary Resolution : An ordinary resolution is one which can be passed by a simple majority. I.e. if the votes (including the casting vote, if any, of the chairman), at a general meeting cast by members entitled to vote in its favour are more than votes cast against it. Voting may be by way of a show of hands or by a poll provided 21 days notice has been given for the meeting.

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2. Special Resolution : A special resolution is one in regard to which is passed by a 75 % majority only i.e. the number of votes cast in favour of the resolution is at least three times the number of votes cast against it, either by a show of hands or on a poll in person or by proxy. The intention to propose a resolution as a special resolution must be specifically mentioned in the notice of the general meeting. Special resolutions are needed to decide on important matters of the company. Examples where special resolutions are required are :a. To alter the domicile clause of the memorandum from one State to another or to alter the objects clause of the memorandum. b. To alter / change the name of the company with the approval of the central government c. To alter the articles of association d. To change the name of the company by omitting "Limited" or "Private Limited". The Central Government may allow a company with charitable objects to do so by special resolution under section 25 of the Companies Act, 1956. 3. Resolution requiring Special Notice : There are certain matters specified in the Companies Act, 1956 which may be discussed at a general meeting only if a special notice is given regarding the proposal to discuss these matters at a meeting. A special notice enables the members to be prepared on the matter to be discussed and gives them time to indicate their views on the resolution. In case special notice of resolution is required by the Companies Act, 1956 or by the articles of a company, the intention to propose such a resolution must be notified to the company at least 14 days before the meeting. The company must within 7 days before the meeting give the notice of the proposed resolution to its members. Notice of the resolution is required to be given in the same way in which notice of a meeting is given, or if that is not practicable, the company may give notice by advertisement in a newspaper having an appropriate circulation or in any other manner allowed by the articles, not less 7 days before the meeting. The following matters requiring Special Notice before they are discussed before thameeting :a. To appoint at an annual general meeting appointing an auditor a person other than a retiring auditor. b. To resolve at an annual general meeting that a retiring auditor shall not be reappointed. c. To remove a director before the expiry of his period of office. d. To appoint another director in place of removed director. e. Where the articles of a company provide for the giving of a special notice for a resolution, in respect of any specified matter or matters. Please note that a resolution requiring special notice may be passed either as an ordinary resolution (Simple majority) or as a special resolution (75 % majority). Circulation of Member's Resolution Generally, the Board of Directors prepare the agenda of the meeting to be sent to all members of the meeting. A member, by himself has very little say in deciding the agenda. However, there are provisions in the Companies Act which enable members to introduce motions at a meeting and give prior notice of 49

their intention to do so to all other members of the company. If members having one twentieth of the total voting rights of all members having the right to vote on a resolution or if 100 members having the right to vote and holding paid-up capital of Rs1,00,000 or more, require the company to do so, the company must :1. Give to the members entitled to receive notice of the next annual general meeting, notice of any resolution which may be properly moved and is intended to be moved at that meeting; and 2. Circulate to members entitled to have notice of any general meeting sent to them, any statement of not more than 1,000 words with respect to the matter referred to in any proposed resolution, or any business to be dealt with at that meeting. The expenses for this purpose must be borne by the requisitionists and must be tendered to the company. The requisition, signed by all the requisitionists, must be deposited at the registered office of the company at least 6 weeks before the meeting in the case of resolution and not less than 2 weeks before the meeting in case of any other requisition together with a reasonable sum to meet the expenses. However, where a copy of the requisition requiring notice of resolution has been deposited at the registered office of the company and an annual general meeting is called for a date six weeks or less after the requisition is deposited, the copy though not deposited within the prescribed time is deemed to have been properly deposited. The company is required to serve the notice of resolution and/or the statement to the members as far as possible in the manner and so far as practicable at the same time as the notice of the meeting ; otherwise as soon as practicable thereafter. However, a company need not circulate a statement if the Court, on the application either of the company or any other aggrieved person, is satisfied that the rights so conferred are being abused to secure needless publicity or for defamatory purposes. Secondly a banking company need not circulate such statement, if in the opinion of its Board of directors, the circulation will injure the interest of the company. Registration of Resolutions and Agreements A copy of each of the following resolutions along with the explantory statement in case of a special business and agreements must, within 30 days after the passing or making thereof, be printed or typewritten and duly certified under the signature of an officer of the company and filed with the Registrar of Companies who shall record the same :1. All special resolutions 2. All resolutions which have been unanimously agreed to by all the members but which, if not so agreed, would not have been effective unless passed as special resolutions 3. All resolutions of the board of directors of a company or agreement executed by a company, relating to the appointment, re-appointment or renewal of the appointment, or variation of the terms of appointment, of a managing director 4. All resolutions or agreements which have been agreed to by all members of any class of members but which, if not so agreed, would not have been effective unless passed by a particular majority or in a particular manner and all resolutions or agreements which effectively bind all members of any class of shareholders though not agreed to by all of those members 50

5. All resolutions passed by a company conferring power upon its directors to sell or dispose of the whole or any part of the company's undertaking; or to borrow money beyond the limit of the paid-up share capital and free reserves of the company; or to contribute to charities beyond Rs50000 or 5 per cent of the average net profits 6. All resolutions approving the appointment of sole selling agents of the company 7. All copies of the terms and conditions of appointment of a sole selling agent or sole buying or purchasing agent 8. Resolutions for voluntary winding up of a company Adjournment Adjournment means suspending the proceedings of a meeting for the time being so that the meeting may be continued at a later date and time fixed in that meeting itself at the time of such adjournment or to decided later on. Only the business not finished at the original meeting can be transacted at the adjourned meeting. The majority of members at a meeting may move an adjournment motion at a meeting. If the chairman adjourns the meeting, ignoring the views of the majority, the remaining members can continue the meeting. The chairman cannot adjourn the meeting at his own discretion without there being a good cause for such an adjournment. Where the chairman, acting bona fide within his powers, adjourns the meeting as per the view of the majority, the minority members cannot to continue with such meeting and, if they do the proceedings there will be null and void. An adjourned meeting is merely the continuation of the original meeting and therefore, a fresh notice is not necessary, if the time, date and place for holding the adjourned meeting are decided and declared at the time of adjourning it. If a meeting is adjourned without stipulation as to when it will be continued, fresh notice of the adjourned meeting must be given. Postponement Postponement of a meeting means defering the holding of the meeting itself at a later date. Postponement is done by the Board of Directors or by the person convening the meeting. In case of adjournment, it is the decision of the majority of the members present at the meeting itself. Dissolution Dissolution of a meeting means termination of a meeting. The meeting no longer exists once it has been dissolved. If within half an hour after the time appointed for holding a general meeting; the quorum is not present, the meeting shall stand dissolved if it was called on requisition by members. Minutes of Proceedings of Meetings Every company must keep minutes of the proceedings of general meetings and of the meetings of board of directors and its committees. The minutes are a record of the discussions made at the meeting and the final decisions taken thereat. Every company must keep minutes containing details of all proceedings at the meetings. The pages of the minute books must be consecutively numbered and the minutes must be recorded therein within 30 days of the meeting. They have to be written directly on the numbered pages. Pasting or attaching of papers is not allowed. Each page of every such minutes books must be initialed or signed and last page of the record of proceedings of each meeting in such books must be dated and signed by :51

a. in the case of the meeting of the Board of directors or committee thereof, by the chairman of that meeting or that of the succeeding meeting, and b. in the case of a general meeting, by the chairman of the same meeting within the aforesaid 30 days or in the event of the death or inability of that chairman within the period, by a director duly authorised by the Board of directors for the purpose. The Company Law Board, however, may not object if minutes are maintained in loose leaf form provided all other procedural requirements are complied with and all possible safeguards against manipulation or interpolation of the minutes are ensured. The loose leaves must be bound at reasonable intervals. Entering the minutes in a bound minute book by a chemical process, which does not amount to attachment to any book by pasting or otherwise is permissible provided on the mechanical impression of the minutes, the original signatures of the Chairman are given on each page. All appointments of officers made at any of the meetings must be included in the minutes of the meeting. In the case of a meeting of the Board of directors or its Committee, the minutes must also state the names of directors present at the meeting and the names of directors, if any, dissenting from, or not concurring with a resolution passed at the meeting. The chairman may exclude from the minutes any matters which are defamatory, irrelevant or immaterial or which are detrimental to the interests of the company. The discretion of the Chairman with regard to the inclusion or exclusion of any matter is absolute and unfettered. Where minutes of the proceedings of any meeting have been kept properly, they are, unless the contrary is proved, presumed to be correct, and are valid evidence that the meeting was duly called and held, and all proceedings thereat have actually taken place, and in particular, all appointments of directors or liquidators made at the meeting shall be deemed to be valid. The minute books of the proceedings of general meetings must be kept the registered office of the company. Any member has a right to inspect, free of cost during business hours at the registered office of the company, the minutes books containing the proceedings of the general meetings of the company. Further, any member shall be entitled to be furnished, within 7 days after he has made a request to the company, with a copy of any minutes on payment of Rupee One for every hundred words or fraction thereof. If any inspection is refused or copy not furnished within the time specified, every officer in default shall be punishable with fine up to Rs. 500 for each offence. The Company Law Board may also by order compel an immediate inspection or furnishing of a copy forthwith. But the minutes books of the board meetings are not open for inspection of members

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