CA Inter - Law - IL - 13052023 - May23 - Compressed

Corporate & Other Laws www.indigolearn.
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Corporate & Other Laws www.indigolearn.com 2
Table of Contents
The Companies Act, 2013 5
Chapter 1 - Introduction to Company Law 5
Chapter 2 - Incorporation of the Company 20
Chapter 3 - Prospectus & Allotment of Securities 39
Chapter 4 - Share capital & Debentures 58
Chapter 5 – Acceptance of Deposits 84
Chapter 6 – Registration of Charge 98
Chapter 7 – Management and Administration 107
Chapter 8 - Declaration & Payment Of Dividend 136
Chapter 9 - Accounts of the company 144
Chapter 10- Audit and Auditors 168
The Indian Contract Act, 1872 186
Unit 1 - Contracts Of Indemnity And Guarantee 186
Unit 2 - Bailment and Pledge 197
Unit 3 - Agency 206
The Negotiable Instruments Act, 1881 220
General Clause Act, 1897 239
Interpretation of Statutes 258

The Companies Act, 2013
Title The Companies Act,2013
Extent Whole of India
Applicability ● Companies Registered under this act or any

earlier Act
● Insurance/ Banking/ Electricity Companies
● Entities specified by Central Government
Chapter 1 - Introduction to Company Law
What is a Company?
Company is one of the many structures in which business can be done. Other forms of business
structures include sole proprietor, partnership, societies, etc. The benefits offered by the
company over other forms include separate ownership from management, longevity, expandability
over generations, geographies & products & limited liability of investors.
Basic Features of a Company
i. Limited Liability

ii. Separate legal entity
iii. Perpetual succession
iv. Transferability of shares
v. Separation of ownership from management
vi. Lawful purpose
vii. Can sue and be sued
viii. Can buy & sell property on its own name
Law governing Companies

Act: Companies are governed by the Companies Act 2013. It contains 470 Sections divided into 29
Chapters where in sections relating to common topics are written together. Furthermore, it
contains I to VII schedules.
Rules: Every chapter of the Companies Act has relevant Rules running parallel to it. They contain
procedures to be followed in order to implement law.
Notifications: MCA brings out amendments in the existing law and rules through notifications in
the official gazette. They must be read along with the Act. Laws are applicable from the effective
date as mentioned in such notifications.
Definition: As per Section 2(58), Notification means a notification published in the Official
Gazette and the expression “notify” shall be construed accordingly
Judicial pronouncements: Even with laws & procedures in place, there may be disputes during
or after implementation or the lack thereof. Such disputes are handled by courts. The judgements
of the different suits are also to be read along with the Act & rules to fully understand law
governing companies.
Judicial courts that handle disputes arising from Companies Act 2013 are:
NCLT NCLAT Supreme Court
(National Company (National Company Law

Law Tribunal) Appellate Tribunal)
Administration machinery under Companies Act, 2013

Merely writing the law does not ensure its compliance. Hence, there is need for regulatory bodies
to administer the compliance by companies. Such bodies include:

Ministry of Corporate Affairs: MCA is the ministry of government that regulates corporate affairs
at central level through the Companies Act, 1956, 2013 and other allied Acts, Bills and Rules. It
also protects investors and offers many important services to stakeholders.
Regional Directors: RD are in-charge of the respective regions, each region comprising a number
of States and Union Territories. They supervise the working of the offices of the Registrars of
Companies and the Official Liquidators working in their regions.
Registrar of Companies: ROC are vested with the primary duty of registering companies and LLPs,
ensuring compliance with statutory requirements, maintaining registers and records, allowing
their inspection on payment of the prescribed fee, etc. ROC’s have prescribed jurisdiction within
which their powers & functions can be exercised.
ROC
RD
ROC
ROC
MCA RD
ROC
ROC
RD
ROC
Section 1 - Short Title, Extent, Commencement and Application.
(1) This Act may be called the Companies Act, 2013.

(2) It extends to the whole of India.
(3) This section shall come into force at once and the remaining provisions of this Act shall come
into force on such date as the Central Government may, by notification in the Official Gazette,
appoint and different dates may be appointed for different provisions of this Act and any reference
in any provision to the commencement of this Act shall be construed as a reference to the coming
into force of that provision.
(4) The provisions of this Act shall apply to—

(a) Companies incorporated under this Act or under any previous company law;
(b) Insurance companies, except in so far as the said provisions are inconsistent with the
provisions of the Insurance Act, 1938 (4 of 1938) or the Insurance Regulatory and
Development Authority Act, 1999 (41 of 1999);
(c) banking companies, except in so far as the said provisions are inconsistent with the
provisions of the Banking Regulation Act, 1949 (10 of 1949);
(d) companies engaged in the generation or supply of electricity, except in so far as the
said provisions are inconsistent with the provisions of the Electricity Act, 2003 (36 of
2003);
(e) any other company governed by any special Act for the time being in force, except in
so far as the said provisions are inconsistent with the provisions of such special Act;
and
(f) Such body corporate, incorporated by any Act for the time being in force, as the Central
Government may, by notification, specify in this behalf, subject to such exceptions,
modifications or adaptation, as may be specified in the notification.
Section 2 – Definitions
Section 2 of the Companies Act, 2013 is a definition section which provides the various
terminologies used in the Act.
Key Definitions covered in Section 2 are as:

(1) Abridged prospectus means a memorandum containing such salient features of a prospectus
as may be specified by the Securities and Exchange Board by making regulations in this
behalf;
(2) Accounting standards means the standards of accounting or any addendum there to for
companies or class of companies referred to in section 133;
(3) Alter or Alteration includes the making of additions, omissions and substitutions;
(5) Articles means-
● the articles of association of a company as originally framed, or
● as altered from time to time, or
● applied in pursuance of any previous company law, or
● applied in pursuance of this Act;

(6) Associate company, in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company
having such influence and includes a joint venture company
Explanation — For the purpose of this clause, —
(a) the expression "significant influence" means control of at least twenty per cent. of total
voting power, or control of or participation in business decisions under an agreement;
(b) the expression "joint venture" means a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets of the arrangement;
(7) Auditing standards means the standards of auditing or any addendum thereto for companies
or class of companies referred to in sub-section (10) of section 133.
(8) Authorised capital or Nominal capital means such capital as is authorised by the
memorandum of a company to be the maximum amount of share capital of the company;
(10) Board of Directors or Board, in relation to a company, means the collective body of the
directors of the company;
(11) Body corporate or Corporation includes a company incorporated outside India, but does not
include —
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the
Central Government may, by notification, specify in this behalf;
(12) Book and Paper and Book or Paper include books of account, deeds, vouchers, writings,
documents, minutes and registers maintained on paper or in electronic form;
(13) Books of account includes records maintained in respect of—
(i) all sums of money received and expended by a company and matters in relation to
which the receipts and expenditure take place;
(ii) all sales and purchases of goods and services by the company;
(iii) the assets and liabilities of the company; and
(iv) the items of cost as may be prescribed under section 148 in the case of a company
which belongs to any class of companies specified under that section;
(14) Branch office, in relation to a company, means any establishment described as such by the
company;
(15) Called-up capital means such part of the capital, which has been called for payment;
(17) Chartered Accountant means a chartered accountant as defined in clause (b) of sub-section
(1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) who holds a valid
certificate of practice under sub-section (1) of section 6 of that Act;
(18) Chief Executive Officer (CEO) means an officer of a company, who has been designated as
such by it;

(19) Chief Financial Officer (CFO) means a person appointed as the Chief Financial Officer of a
company;
(20) Company means a company incorporated under this Act or under any previous company law;
(21) Company limited by guarantee means a company having the liability of its members limited
by the memorandum to such amount as the members may respectively undertake to
contribute to the assets of the company in the event of its being wound up;
(22) Company limited by shares means a company having the liability of its members limited by
the memorandum to the amount, if any, unpaid on the shares respectively held by them;
(26) Contributory means a person liable to contribute towards the assets of the company in the
event of its being wound up.
Explanation — For the purposes of this clause, it is hereby clarified that a person holding
fully paid-up shares in a company shall be considered as a contributory but shall have no
liabilities of a contributory under the Act whilst retaining rights of such a contributory;
(27) Control shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting individually or in
concert, directly or indirectly, including by virtue of their shareholding or management rights
or shareholders agreements or voting agreements or in any other manner;
It is an inclusive definition and relevant for the provisions relating to subsidiary and holding
companies. This definition is also relevant for the definition of subsidiary given under section
2(87).
(30) Debenture includes debenture stock, bonds or any other instrument of a company evidencing
a debt, whether constituting a charge on the assets of the company or not;
Provided that—
a. the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and
b. such other instrument, as may be prescribed by the Central Government in consultation
with the Reserve Bank of India, issued by a company,
shall not be treated as debenture;
(34) Director means a director appointed to the Board of a company;

(36) Document includes summons, notice, requisition, order, declaration, form and register,
whether issued, sent or kept in pursuance of this Act or under any other law for the time
being in force or otherwise, maintained on paper or in electronic form;
(37) Employees’ stock option means the option given to the directors, officers or employees of
a company or of its holding company or subsidiary company or companies, if any, which gives

such directors, officers or employees, the benefit or right to purchase, or to subscribe for,
the shares of the company at a future date at a pre-determined price;
(38) Expert includes an engineer, a valuer, a Chartered Accountant, a Company Secretary, a Cost
Accountant and any other person who has the power or authority to issue a certificate in
pursuance of any law for the time being in force;
(40) Financial statement in relation to a company, includes —
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for
profit, an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-
clause (i) to sub-clause(iv)
Provided that the financial statement, with respect to One Person Company, small company
and dormant company, may not include the cash flow statement;
Exemption: For private companies, the proviso to section 2(40) shall be read as follows:
Provided that the financial statement, with respect to one person company, small company,
dormant company and private company (if such private company is a start-up) may not
include the cash flow statement;
Explanation – For the purposes of this Act, the term “start-up‟ or “start-up company” means
a private company incorporated under the Companies Act, 2013 or the Companies Act, 1956
and recognised as start-up in accordance with the notification issued by the Department of
Industrial Policy and Promotion, Ministry of Commerce and Industry.”
(41) Financial year, in relation to any company or body corporate, means the period ending on
the 31st day of March every year, and where it has been incorporated on or after the 1st day
of January of a year, the period ending on the 31st day of March of the following year, in
respect whereof financial statement of the company or body corporate is made up:
Provided that where a company or body corporate, which is a holding company or a subsidiary
or associate company of a company incorporated outside India and is required to follow a
different financial year for consolidation of its accounts outside India, the Central
Government may, on an application made by that company or body corporate in such form
and manner as may be prescribed, allow any period as its financial year, whether or not that
period is a year:
(43) Free reserves means such reserves which, as per the latest audited balance sheet of a
company, are available for distribution as dividend:

Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise,or
(ii) any change in carrying amount of an asset or of a liability recognized in equity,
including surplus in profit and loss account on measurement of the asset or the liability
at fair value,
shall not be treated as free reserves;
(45) Government company means any company in which not less than 51% of the paid-up share
capital is held by the Central Government, or by any State Government or Governments, or
partly by the Central Government and partly by one or more State Governments, and includes
a company which is a subsidiary company of such a Government company;
Explanation.- For the purposes of this clause, the "paid up share capital" shall be construed
as "total voting power", where shares with differential voting rights have been issued.
(46) Holding company in relation to one or more other companies, means a company of which
such companies are subsidiary companies
Explanation.— For the purposes of this clause, the expression "company" includes any body
corporate.
For meaning of “subsidiary company” refer the definition given in section 2(87) of the
Companies Act, 2013.
(50) Issued capital means such capital as the company issues from time to time for subscription;
(51) Key managerial personnel, in relation to a company, means—
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii)the whole-time director;
(iv) the Chief Financial Officer;
(v) such other officer, not more than one level below the directors who is in whole-time
employment, designated as key managerial personnel by the Board; and
(vi) such other officer as may be prescribed;
(52) Listed company means a company which has any of its securities listed on any recognised
stock exchange;
Provided that such class of companies, which have listed or intend to list such class of
securities, as may be prescribed in consultation with the Securities and Exchange Board,
shall not be considered as listed companies.

Rule 2 of Companies (Specification of definitions details) Rules, 2014, provides for companies
which shall not be considered as listed companies, namely -
(a) Public companies which have not listed their equity shares on a recognized stock
exchange but have listed their –
(i) non-convertible debt securities issued on private placement basis in terms of SEBI
(Issue and Listing of Debt Securities) Regulations, 2008; or
(ii) non-convertible redeemable preference shares issued on private placement basis in
terms of SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares)
Regulations, 2013; or
(iii) both categories of (i) and (ii) above.
(b) Private companies which have listed their non-convertible debt securities on private
placement basis on a recognized stock exchange in terms of SEBI (Issue and Listing of Debt
Securities) Regulations, 2008;
(c) Public companies which have not listed their equity shares on a recognized stock
exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified
in sub - section (3) of section 23 of the Act..
(53) Manager means an individual who, subject to the superintendence, control and direction of
the Board of Directors, has the management of the whole, or substantially the whole, of the
affairs of a company, and includes a director or any other person occupying the position of
a manager, by whatever name called, whether under a contract of service or not;
(54) Managing Director means a director who, by virtue of the articles of a company or an
agreement with the company or a resolution passed in its general meeting, or by its Board
of Directors, is entrusted with substantial powers of management of the affairs of the
company and includes a director occupying the position of managing director, by whatever
name called.
Explanation.— For the purposes of this clause, the power to do administrative acts of a
routine nature when so authorised by the Board such as the power to affix the common seal
of the company to any document or to draw and endorse any cheque on the account of the
company in any bank or to draw and endorse any negotiable instrument or to sign any
certificate of share or to direct registration of transfer of any share, shall not be deemed to
be included within the substantial powers of management;
(55) Member, in relation to a company, means—
(i) the subscriber to the memorandum of the company who shall be deemed to have agreed
to become member of the company, and on its registration, shall be entered as member
in its register of members even if the subscription money has not been paid to the
company;

(ii) every other person who agrees in writing to become a member of the company and
whose name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a beneficial
owner in the records of a depository;
(56) Memorandum means the memorandum of association of a company as originally framed or
as altered from time to time in pursuance of any previous company law or of this Act;
(57) Net worth means the aggregate value of the paid-up share capital and all reserves created
out of the profits, securities premium account and debit or credit balance of profit and loss
account, after deducting the aggregate value of the accumulated losses, deferred
expenditure and miscellaneous expenditure not written off, as per the audited balance
sheet, but does not include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation;
(58) Notification means a notification published in the Official Gazette and the expression
"notify" shall be construed accordingly;
(59) Officer includes any director, manager or key managerial personnel or any person in
accordance with whose directions or instructions the Board of Directors or any one or more
of the directors is or are accustomed to act;
(60) Officer who is in default, for the purpose of any provision in this Act which enacts that an
officer of the company who is in default shall be liable to any penalty or punishment by way
of imprisonment, fine or otherwise, means any of the following officers of a company,
namely —
(i) whole-time director (WTD);
(ii) key managerial personnel (KMP);
(iii) where there is no key managerial personnel, such director or directors as specified by
the Board in this behalf and who has or have given his or their consent in writing to
the Board to such specification, or all the directors, if no director is so specified;
(iv) any person who, under the immediate authority of the Board or any key managerial
personnel, is charged with any responsibility including maintenance, filing or
distribution of accounts or records, authorises, actively participates in, knowingly
permits, or knowingly fails to take active steps to prevent, any default;
(v) any person in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act, other than a person who gives advice
to the Board in a professional capacity;
(vi) every director, in respect of a contravention of any of the provisions of this Act, who is
aware of such contravention by virtue of the receipt by him of any proceedings of the
Board or participation in such proceedings without objecting to the same, or where
such contravention had taken place with his consent or connivance;

(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents,
registrars and merchant bankers to the issue or transfer;
(62) One Person Company means a company which has only one person as a member;
(63) Ordinary or special resolution means an ordinary resolution, or as the case may be, special
resolution referred to in section 114 (Ordinary and Special Resolution);
(64) Paid-up share capital or share capital paid-up means such aggregate amount of money
credited as paid-up as is equivalent to the amount received as paid-up in respect of shares
issued and also includes any amount credited as paid-up in respect of shares of the company,
but does not include any other amount received in respect of such shares, by whatever name
called;
(65) Postal ballot means voting by post or through any electronic mode;
(66) Prescribed means prescribed by rules made under this Act;
(68) Private company means a company having a minimum paid-up share capital as may be
prescribed, and which by its articles, —
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two
hundred:
Provided that where two or more persons hold one or more shares in a company jointly,
they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be members
after the employment ceased,
shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company;
(69) Promoter means a person—
(a) who has been named as such in a prospectus or is identified by the company in the annual
return, or
(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a
professional capacity;
(70) Prospectus means any document described or issued as a prospectus and includes a red
herring prospectus or shelf prospectus or any notice, circular, advertisement or other
document inviting offers from the public for the subscription or purchase of any securities
of a body corporate;
(71) Public company means a company which—
(a) is not a private company; and
(b) has a minimum paid-up share capital as may be prescribed:
Provided that a company which is a subsidiary of a company, not being a private company,
shall be deemed to be public company for the purposes of this Act even where such subsidiary
company continues to be a private company in its articles;
(74) Register of companies means the register of companies maintained by the Registrar on paper
or in any electronic mode under this Act;
(75) Registrar means a Registrar, an Additional Registrar, a Joint Registrar, a Deputy Registrar or
an Assistant Registrar, having the duty of registering companies and discharging various
functions under this Act;
(76) Related party, with reference to a company, means—
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or
director;
(v) a public company in which a director and manager is a director and holds along with
his relatives, more than two per cent of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a
director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is
accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or
instructions given in a professional capacity;
(viii) any body corporate which is-
(A) a holding, subsidiary or an associate company of such company;
(B) a subsidiary of a holding company to which it is also a subsidiary; or

(C) an investing company or the venturer of the company;
Explanation - For the purpose of this clause, “the investing company or the venturer
of a company” means a body corporate whose investment in the company would
result in the company becoming an associate company of the body corporate.
(ix) such other person as may be prescribed;
(77) Relative, with reference to any person, means anyone who is related to another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed;
Rule 4 given in the Companies (Specification of Definitions Details) Rules,2014 provides of
the List of Relatives in terms of Clause (77) of section 2.
Accordingly, a person shall be deemed to be the relative of another, if he or she is related
to another in the following manner, namely -
(1) Father: Provided that the term “Father” includes step-father.
(2) Mother: Provided that the term “Mother” includes the step-mother.
(3) Son: Provided that the term “Son” includes the step-son.
(4) Son’s wife.
(5) Daughter.
(6) Daughter’s husband.
(7) Brother: Provided that the term “Brother” includes the step-brother;
(8) Sister: Provided that the term “Sister” includes the step-sister.
(78) Remuneration means any money or its equivalent given or passed to any person for services
rendered by him and includes perquisites as defined under the Income-tax Act, 1961 (43 of 1961);
(84) Share means a share in the share capital of a company and includes stock;
(85) Small company means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount
as may be prescribed* which shall not be more than ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding financial
year does not exceed two crore rupees or such higher amount as may be prescribed*
which shall not be more than one hundred crore rupees:

Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
*As per Companies (Specification of Definitions Details) Rules, 2014,
For the purposes of sub-clause (i) and sub-clause (ii) of clause (85) of section 2 of the Act,
paid up capital and turnover of the small company shall not exceed rupees four crores and
rupees forty crores respectively.
(86) Subscribed capital means such part of the capital which is for the time being subscribed by
the members of a company;
(87) Subsidiary company or Subsidiary, in relation to any other company (that is to say the
holding company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed.
Explanation—For the purposes of this clause, —
(a) a company shall be deemed to be a subsidiary company of the holding company even if
the control referred to in sub-clause(i) or sub-clause (ii) is of another subsidiary company of
the holding company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by
another company if that other company by exercise of some power exercisable by it at its
discretion can appoint or remove all or a majority of the directors;
(c) the expression “company” includes any body corporate;
(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;
(88) Sweat equity shares means such equity shares as are issued by a company to its directors or
employees at a discount or for consideration, other than cash, for providing their know-how or
making available rights in the nature of intellectual property rights or value additions, by
whatever name called;
(89) Total voting power, in relation to any matter, means the total number of votes which may
be cast in regard to that matter on a poll at a meeting of a company if all the members thereof

or their proxies having a right to vote on that matter are present at the meeting and cast their
votes;
(90) Tribunal means the National Company Law Tribunal constituted under section 408;
(91) Turnover means the gross amount of revenue recognised in the profit and loss account from
the sale, supply, or distribution of goods or on account of services rendered, or both, by a company
during a financial year;
(92) Unlimited company means a company not having any limit on the liability of its members;
(93) Voting right means the right of a member of a company to vote in any meeting of the
company or by means of postal ballot;

Chapter 2 - Incorporation of the Company
Section 3 -22
Incorporation of a Company means the process of registration of a company to bring it into

existence as a separate legal entity.
Promoter:
Persons who initiate promotion of a company are known as promoters. All persons who take
steps for the registration of a company e.g., those associated with the preparation of a
prospectus or in drawing up the Memorandum of Association of the company and assisting in
its registration are regarded as promoters.
The registration procedure is undertaken by ‘Promoter’ of the company. Promoters are the
founders of the company & they pitch the initial ideas for business.
Companies Act 2013 has defined the term under Sec 2(69):
A promoter is
a) Person named in prospectus or annual return as promoter or
b) has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise or
c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act.
But it does not include any person acting merely in professional capacity. (Eg: Banker,
Chartered Accountant)
Primary Documents Of A Company
Memorandum of Article of Association

Association (MoA) (AoA)
Section 4 Section 5
Section 4 - Memorandum of Association

MOA is a public document prepared in the formation and registration process of a limited
liability company to define its relationship with shareholders.
As per section 2(56) ― memorandum means the memorandum of association of a company
as originally framed or as altered from time to time in pursuance of any previous company
law or of this Act;
It is the base document for the formation of the company and along with the Articles of
Association (AOA) is regarded as the Constitution of the Company.
It contains following clauses:
Name Clause
Object Clause
MOA
Liability Clause
Capital Clause
Situation Clause
Subscription
Clause
1. Name Clause:
- Clause contains the name of the company + suitable suffix like “Pvt Ltd.”/
“Ltd.”/ “producer Co. Ltd.”/ “(OPC) Pvt. Ltd.”/other
- Name of the company should not be
● Offensive
● Identical to existing Name of another company
● Similar to existing Name of another company
● Undesirable with respect to the objects of the company
● Indicating association with Government of India (unless approved by
Government)

● Containing word “national” unless specific permission obtained from
Central Government
● Containing word “bank” unless it is involved in banking business.
Companies (Incorporation) Rules, 2014

Rules governing Name of Companies
Rule 8A. Undesirable Rule 8B. Word or

Rule 8. Names which
names Eg: Name likely expression which can
resemble too nearly
to give impression of be used only after
with name of existing
connection with obtaining previous
company
Government approval of Central
Government. Eg:
Board, Commission,
Authority,
Undertaking, national,
Central, union, etc.
- Reservation of Name :
● Application must be sent to RoC in prescribed form & Fees (Note below)
● RoC, if satisfied, may reserve the name of the company for a period of
(i) 20 days from the date of approval (in case name is being reserved for
a new company) or
(ii) 60 days from the date of approval (in case of change of name of an
existing company)
During this period, the company is required to submit other documents for
incorporation like MoA, AoA etc.
Rule 9: Reservation of Name
An application for reservation of name shall be made through the web service
available at www.mca.gov.in by using [form RUN](Reserve Unique Name)
along with fee as provided in the Companies (Registration offices and fees)
Rules, 2014, which may either be approved or rejected, as the case may be,

by the Registrar, Central Registration Centre after allowing re-submission of
such application within fifteen days for rectification of the defects, if any.
- Cancellation of name by ROC:

● Before incorporation: If wrong information is provided by applicant or if
time lapses
● After incorporation: if name is not suitable, RoC allows reasonable
opportunity to the applicant to justify, after which, RoC may,
- require the company to alter the name within 3 months by
passing Ordinary Resolution or
- Strike off the name
2. Object Clause
- It contains scope of business of the company, ie, main activity and ancillary
activities.
3. Liability Clause
This clause covers details on the liability of members of the company, whether limited
or unlimited. The clause shall also state liabilities as under -
Liability
Limited
Unlimited
by
Shares Guarrantee The shareholder agrees to have

unlimited liability in the event
of winding up of the company.
Liability of the Liability is limited

shareholder is limited to to an amount each IF the assets of the
the unpaid amount on member company are insufficient
shares subscribed by him undertakes to to meet the liabilities
contribute - *
*(A) to the assets of the company in the event of its being wound-up while he is a
member or within one year after he ceases to be a member, for payment of the
debts and liabilities of the company or of such debts and liabilities as may have
been contracted before he ceases to be a member, as the case may be; and
(B) to the costs, charges and expenses of winding-up
(C) for adjustment of the rights of the contributories among themselves

Nominee Details for OPC: In the case of One Person Company, the name of the person
who in the event of death of the subscriber shall become the member of the company
is also stated in Liability Clause.
Definition: As per Section 2(17), Contributory means a person liable to contribute
towards the assets of the company in the event of its being wound up
4. Capital Clause
- It states Authorised capital of the company & its division into types and number
of shares.
- For an OPC, name of the nominee is mentioned in this clause.
[NOTE: Authorised Capital means the maximum amount of the capital for which
shares can be issued by the Company to shareholders. It is decided prior to the
incorporation of the company and can be amended from time to time]
5. Domicile/Situation Clause
It contains State in which registered office of the company is situated.
6. Subscription Clause:
It states the purpose of the subscribers to incorporate the company wherein they
agree to take the shares in the company based on the number written in the
Memorandum. It contains signatures of such subscribers.
Doctrine of Ultra Vires

Any act done by the company which is beyond the MoA shall be void.
Act done against Act done against the MoA Act done against the AoA
the Companies Act
2013
VOID & CANNOT VOIDABLE, as it can re RATIFIED

BE RATIFIED BY by the shareholders in the
VOID & ILLEGAL general meeting by altering AoA
SHAREHOLDERS
7. Form of Memorandum
The memorandum of a company shall be in respective forms as outlined in Schedule I
of the Companies Act 2013.

Form Company
Table MOA of a company limited by shares
A
Table MOA of a company limited by guarantee and not having
B share capital
Table MOA of a company limited by guarantee and having share
C capital
Table MOA of an unlimited company and not having share capital
D
Table MOA of an unlimited company and having share capital
E
Section 5 - Articles of Association
- It contains the rules & regulations for the internal management of the company
- Model Articles have been specified in schedule I of the Act
Form Company
Table AOA of a company limited by shares
F
Table AOA of a company limited by guarantee and having share
G capital
Table AOA of a company limited by guarantee and not having share
H capital
Table I AOA of an unlimited company and having share capital
Table AOA of an unlimited company and not having share capital
J
- Company may include additional matters as per law

- Entrenchment Provision
● It is such provision in AoA that makes certain amendments more difficult to
pass, making such amendments more protective.
● Such provision is included in AOA either on formation of a company, or by an
amendment in the articles agreed to by all the members of the company, if
private company and by a special resolution in the case of a public company.
● Where the articles contain provisions for entrenchment, notice is required to
be given to the registrar of such provisions in such form and manner as may be
prescribed.

Doctrine of Constructive Notice
According to this doctrine, all persons dealing with a company are deemed (or
"construed") to have knowledge of the company's MoA and AoA. The doctrine of indoor
management is an exception to this rule.
Doctrine of Indoor Management
It means that persons dealing with the company need not inquire whether the internal
proceedings relating to the contract have been followed as long as they are satisfied that
the transaction is as per the MoA/AoA
This doctrine protects external stakeholders.
Exceptions to this Doctrine:
● Negligence on part of external party
● External party relies on a Forged document (Co. not responsible)
● External party has prior knowledge of irregularity
Comparison between the above two doctrines: Whereas the doctrine of constructive notice
protects a company against outsiders, the doctrine of indoor management protects outsiders
against the actions of a company.
Section 6 - Companies Act Overrides
MoA, AoA, Agreement executed or resolution passed by the company or board of directors.
Section 7 - Incorporation of the Company
Following documents must be filed with RoC under whose jurisdiction the company functions:
i. MoA signed by all subscribers
ii. AoA signed by all subscribers
iii. Declaration that all requirements of the act & rules have been satisfied by
● Person named in AoA : Directors, secretary, Manager and
● Persons engaged in formation of company: advocate/ CA/CS/cost accountant

iv. Declaration from subscribers to MoA & first directors stating that:
● They are not convicted of any offence in connection with formation of Company
● Not g uilty of misfeasance/breach under this or previous Companies Act
● All documents & information contained in them are correct as per their
knowledge
v. Address for correspondence till registered office is established
vi. Particulars and identity proof of subscribers to MoA
vii. Prescribed fees
RoC shall issue fresh ‘Certificate of Incorporation’ & allot unique CIN (Corporate Identity
Number)
If any person knowingly provides false information or suppresses any material facts: Liability
u/s 447 attracted. Moreover, if a company is already formed with such information,
application may be filed to tribunal. Tribunal shall give reasonable opportunity of being
heard & accordingly pass following orders:
i. Changes in MoA, AoA in the interest of the company, members, creditors & public
ii. Direct liability of members to be unlimited
iii. Remove name of company
iv. Wind up of company
v. Other order as deem fit
Simplified Proforma for Incorporating Company Electronically (SPICe)

In a step towards easy setting up of business, MCA has simplified the process of filing of forms
for incorporation of a company through Simplified Proforma for incorporating company
electronically.
Section 9 - Effect of Registration
From the date of incorporation mentioned in the certificate of incorporation, such

subscribers to the memorandum and all other persons, as may, from time to time, become
members of the company, shall be a body corporate by the name contained in the
memorandum, capable of exercising all the functions of an incorporated company under this
Act and having perpetual succession 1with power to acquire, hold and dispose of property,
both movable and immovable, tangible and intangible, to contract and to sue and be sued,
by the said name.

Section 10 - Effects of MoA, AoA registration:
Once registered, MoA & AoA shall bind the company & members. All monies payable by any
member to the company under MoA/AoA, shall be debt due to company.
Section 10A - Commencement of business, etc.
Company incorporated after the commencement of Companies (Amendment) Ordinance,

2019 and having a share capital shall not commence any business or exercise any borrowing
powers unless:
i. Declaration filed by directors within 180 days from incorporation stating that every
subscriber to the memorandum has paid the value of the shares agreed to be taken
by him. Such declaration has to be signed by a Practicing CA/CS/CMA.
ii. Company has filed verification of registered office (U/S 12) with RoC
iii. Default: Company- 50K
Officer in default- Rs. 1000/ Day (Max 1 Lakh)
iv. Where conditions in i & ii are not followed, and RoC has reasonable cause to believe
that company is not carrying on any business, it may initiate action for removal of
name of company from register under chapter XVIII.
(Section 11 Omitted)
Section 12 - Registered office of the company
i. It should be a ‘Physical Location’ (Not a P.O. Box Number)

ii. Need for a registered office:
● To receive Communication from stakeholders/RoC
● To decide jurisdiction of RoC
● To decide nationality of the company
● Determination of place for conducting Annual General meeting
● Maintenance of records / registers
iii.

Company shall
Company shall have a send verification
registered office to RoC of the
Incorporation
capable of receiving registered
communications. office.
Within 30 days New
from
incorporation
iv. Labelling:
The company’s name with registered office address shall be mentioned outside the
office, on business cards, bill head, official publications, seal (if any), business card
etc.
v. If name is changed in last 2 years, former name should be mentioned with the new
name.
vi. An OPC, must write in “One Person Company” in brackets under its name wherever it
is printed.
vii. Change of registered office:
CHANGE OF REGISTERED OFFICE COMPLIANCE NECESSARY

Within City/district/town/village Notice to RoC within 30 days + Board resolution
Outside city/district/town/village Special resolution
Outside the jurisdiction of RoC Special resolution + RD Permission
Outside one State to another state Special resolution + CG (RD) permission
Copies of SR and RD approval shall be sent to RoC.

viii. Default in complying with this section:
- Officer in default:
Penalty Rs. 1000/day (Max 1 Lakh)
ix. If RoC has reasonable cause to believe that company is not carrying on any business,
it may cause physical inspection of registered office after which it may initiate action
for removal of name of company from register under chapter XVIII

Section 13 - Alteration of MoA
Special resolution In General Meeting is required to alter any clause of MoA. Other
requirement with respect to changes in these clauses are as under:
I. Name Clause:
- Central government (RD) Approval along with
- Special Resolution in general meeting
- No approval of CG required to merely delete/add ‘Private ‘ after name of company
- No Alteration allowed [Companies (Incorporation) Rules, 2014] if:
● Annual return or financial statement not filed with RoC
● Amount due on matured Deposit, Debentures or interest due thereon not
paid
- RoC shall enter into register and issue a fresh ‘Certificate of Incorporation’
II. Registered office:
CHANGE OF REGISTERED OFFICE COMPLIANCE NECESSARY Change in MOA

Within City/district/town/village Notice to RoC
Outside city/district/town/village Special resolution
Outside the jurisdiction of RoC Special resolution + RD

Permission
Outside one State to another stateSpecial resolution + CG (RD)

permission
Other requirement for change of registered office from one state to another:
- Application must be sent to CG (RD) who shall dispose it off in 60 days
- CG (RD) shall verify that
● All debts have been discharged/provided for
● Adequate security has been provided for discharge of debts

● Consent of creditors, debenture-holders and other concerned persons
has been taken
- File with RoC (within 30 days of order)- Copy of SR & Order of approval from
CG (RD)
- RoC shall issue a fresh “Certificate of Incorporation”
III. Object Clause:

- Special Resolution in general meeting
- If the company has raised money from public through prospectus and has any
amount unutilised out of such money raised, it can change its object for which
money is raised by following all the given conditions:
● passing special resolution by postal ballot
● publishing details in 2 newspaper (English and vernacular) & on company
website
● Dissenting shareholders shall be given ‘exit opportunity’
IV. Liability/Capital Clause:
Special resolution is required
Liability of any shareholder cannot be increased without his consent
V. Documents to be filled with RoC:

- Altered copy of MoA
- Special resolution Copy
- Order of CG (RD)
Section 14 - Alteration of AoA
i. Special Resolution in General Meeting

ii. In case of conversion of company from public to private or vice versa, Central
Government permission is required. [Prior to 2 Nov 2018, tribunal permission was
required. Hence, any pending application with tribunal shall be dispensed of by
tribunal. ]
iii. File with ROC within 15 days of receipts of order:
- Special Resolution
- Order of RD/Tribunal
- Copies of Altered AoA
Section 15 - Alteration of existing MoA & AoA

- Every alteration in MoA/AoA shall be noted in every copy.
- Default: Company/Officer in default- 1000 Rs / copy
Section 16 - Rectification of Name of the company
Rectification of name of the Company
In Opinion of CG (RD): If the name is If Application is made to CG (RD) from

identical or nearly resembling an existing registered propreitor of trade mark, within
company name, then CG may order the 3 years of incorporation/change of
company to change name within 3 months name/registration, stating that name of a
by passing ordinary resolution company is identical/nearly resembling
their trademark, then CG may order the
company to change name within 3 months
by passing ordinary resolution
After Alteration of name: Notify RoC about such change along with:
- Copy of resolution
- Order of CG (RD)
Default in compliance of direction of CG (RD):
● Central Government shall allot a new name to the company in such manner as
may be prescribed and
● Registrar shall enter new name in register of companies in place of old name and
issue a fresh certificate of incorporation with new name, which the company
shall use thereafter
● Provided that it shall NOT prevent a company from subsequently changing its
name in accordance with the provisions of section 13
RoC shall issue fresh certificate of Incorporation & make suitable changes in MoA
Section 17 - Copies of MoA, AoA, agreement, resolution u/s 117 given to Members
- Any member can request on payment of fees, the above documents.

- Company must send within 7 days of request
- Default: Company/Ofiicer in default- Rs 1000 / day
- Maximum Rs. 1 lakh
Section 18 - Conversion of a registered company
Basic requirement to convert company to other class of company are:

i. Alter its MoA & AoA
ii. File an application to RoC
iii. RoC shall – verify documents submitted
-approve
-Issue fresh certificate of incorporation
iv. There shall be no effect on the debts, liabilities, obligations or contracts incurred or
entered into, by or on behalf of the company before conversion and they may be
enforced in the manner as if such registration had not been done.
Section 19 - Subsidiary Company cannot hold shares in Holding Company
- Company cannot obtain (by itself or through nominee) shares of holding company
- Holding company cannot allot/transfer shares to its subsidiary company
- Exception:
i. Shares held by subsidiary before it became subsidiary of holding (Voting: NOT
allowed)
ii. Shares held as trustee (Voting: Allowed)
iii. Shares held as legal representative of deceased member of holding company
(Voting: Allowed)
Section 20 - Service of Documents
Documents are delivered from the company to various stakeholders and vice versa to conduct
business in effective manner. The timing and mode of delivery are very crucial to avoid
disputes/confusions in future. Hence, the Act has prescribed the following modes:-
- Speed post
- Registered post
- Courier
- Physical delivery

- Electronic Mode – Any mode using electronic media which is capable of retention,
including, fax, through company’s network, other.
- Members may request the delivery through any other mode on payment of required
fees
Section 21 - Authentication of Documents/ Proceedings/ Contracts by company
Chief executive officer

(CEO)
Officer/employee authorised
by the BOD or Managing Director (MD)
Must be signed
either by
KMP Manager
(Key Managerial personnel )
defined u/s 2(51) Whole TIme Director
(WTD)
Chief Financial Officer

(CFO)
Whole time employee -

one level below directors
Definition: As per Section 2(53), Manager means an individual who, subject to the
superintendence, control and direction of the Board of Directors, has the management of
the whole, or substantially the whole, of the affairs of a company, and includes a director
or any other person occupying the position of a manager, by whatever name called, whether
under a contract of service or not.
Definition: As per Section 2(54), Managing Director means a director who, by virtue of the
articles of a company or an agreement with the company or a resolution passed in its general
meeting, or by its Board of Directors, is entrusted with substantial powers of management
of the affairs of the company and includes a director occupying the position of managing
director, by whatever name called.
Explanation — For the purposes of this clause, the power to do administrative acts of a
routine nature when so authorised by the Board such as:
● the power to affix the common seal of the company to any document or
● to draw and endorse any cheque on the account of the company in any bank or
● to draw and endorse any negotiable instrument or

● to sign any certificate of share or to direct registration of transfer of any share,
shall not be deemed to be included within the substantial powers of management
Explanation — For any individual to be called as managing director, an individual shall first
be a director duly appointed by the Company
Section 22 - Execution of Bill of exchange by company
Company having
common seal
Yes No
authorisation shall
be made by
Company may authorise
any person in writing in
India/Outside India to
use the seal for
specified matters.
2 directors or where the company has
company secretary, then
A Director + CS
Types of Companies under the Act:
Companies have been classified into different sub types under the Act to serve different
business needs.
Few types of companies are:
Private & Public Companies
Points of Difference Private Company Public Company

Sec 3
Minimum shareholders 2 7

Maximum shareholders 200 Unlimited
Minimum Directors 2 3
Maximum Directors 15 (Can be exceeded by 15 (Can be exceeded by
passing special passing special resolution)
resolution)
Transferability of Restricted Freely Transferable
shares
Acceptance of public Not allowed Allowed to Eligible public
deposit companies
Government Company
It is a company registered under the Indian Companies Act in which not less than 51% of paid
up share capital is held by the central government or any state government or partly by
central government partly by one or more state governments,
Explanation - For the purposes of this clause, the "paid up share capital" shall be construed
as "total voting power", where shares with differential voting rights have been issued.
One person Company (OPC) [Section 3]
● OPC has only one shareholder.

● Minimum number of directors in OPC is 1
● Name of an OPC ends with suffix “(OPC) Pvt. Ltd.”
● Such shareholder cannot own shares of any other OPC. However, he may own shares of
any other form of company.
● Such shareholder is required to appoint a nominee who shall become member of the
company in the event of death of the subscriber.
● Member should be:
- Natural Person
- Major (+18 age) (Minor cannot be member even through guardian)
- Indian citizen
- Whether resident in India or otherwise (Resident in India means a person who has
stayed in India for a period not less than 120 days in the immediately preceding
financial year
● Nominee:
- Must be a natural person who is a major (+18 age)

- Must be Indian Citizen
- Whether resident in India or otherwise (Resident in India means a person who has
stayed in India for a period not less than 120 days in the immediately preceding
financial year
- Cannot be nominee of any other OPC. However, he can be member of another OPC.
- If a nominee who is a member in another OPC, due to the death of the shareholder,
becomes the member in 2 OPC at the same time, he will have to leave the
membership of any one OPC in 182 days.
- is named in the Memorandum of Association (MoA)
- His consent must be filed with the RoC in prescribed form
- He may withdraw his consent at anytime
- The shareholder may change the name of the nominee any time after giving notice
to the RoC & Company.
● Business of OPC: OPC cannot enter into Non- Banking Investment activities including investing
in the shares of any other corporate
● Private company: For the purpose of the Act, OPC shall be treated as a private company.
● Minor: Minor cannot be member or nominee of OPC. He cannot hold shares even in beneficial
interest.
● Conversion of OPC: OPC may convert into Private or Public company any time after its
incorporation.
OPC cannot be incorporated or converted to Section 8 Company.
Company formed for charitable purpose [Section 8]
● Section 8 Companies are formed to serve the charitable purpose for promoting commerce,
art, science, sports, education, research, social welfare, religion, charity, protection of
environment or any such other object.
● Entire profits are to be reinvested to promote the objects
● No dividend can be paid to its members
● Any private/public company requires license from CG to operate as a Section 8 Company
● It cannot use ‘Pvt Ltd.’ Or ‘Ltd.’ after its name. Its name usually ends with words like
foundation, trust, institution etc. However, it enjoys all the privileges of a limited
company.
● Firm may be its member
● Alteration of MoA or AoA can be done with CG approval
● Reconversion into a private/public/other kind of company requires Special Resolution in
general meeting& Central Government Approval
● Prior notice for general meeting: 14 days instead of 21 days
● Revocation of Licence by CG may be done if:
- Section 8 Conditions contravened

- Licence conditions contravened
- Affairs of the company conducted fraudulently, against public policy or against the
objects.
Written notice shall be served upon the company and an opportunity to be heard shall be
allowed by RD. If the RD is satisfied, he may pass the order to:
- Wind up the company or
- Amalgamate the company with another section 8 company having similar objects
or
- Convert the company to private/public company and change its name
● Contravention of this Section:
- Company- 10L to 1 Cr
- Officer in default-
o Fine 25K to 25L
● If affairs of the company are conducted fraudulently: Section 447 shall apply
● Relaxations to Sec 8 Co.:
- Can call its general meeting by giving a clear 14 days notice instead of 21 days
- Requirement of minimum number of directors, independent
directors etc. does not apply
- Need not constitute Nomination and Remuneration Committee and Shareholders
Relationship Committee
Section 3A - Maintain minimum number of members
● If at any time the number of members of a company is reduced,

- in the case of a public company, below seven
- in the case of a private company, below two,
and the company carries on business for more than six months while the number of
members is so reduced,
● every person who is a member of the company during the time that it so carries on
business after those six months and knows it is carrying on business with less than
seven members or two members, as the case may be,
● shall be severally liable for the payment of the whole debts of the company contracted
during that time, and may be severally sued therefore
Chapter 3 - Prospectus & Allotment of Securities
Section 23-42

Section 23 - Issue of securities
Private Public Law compliances required

Company Company
Right Issue Allowed Allowed Companies Act 2013 (For listed
Companies, also the SEBI Act,
1992 & Rules & regulations
thereunder)
Bonus Issue Allowed Allowed Companies Act 2013 (For listed
Companies, also the SEBI Act,
1992 & Rules & regulations
thereunder)
Private Placement Allowed Allowed Sec 42 of the Companies Act 2013
Public Offer by issue Not- Allowed Allowed to Sec 23 - 41 of Companies Act 2013
of prospectus ‘Eligible
Companies
’
Note:
i. Right Issue: It is a group of rights offered to existing shareholders to purchase
additional stock shares in proportion to their existing holdings.
ii. Bonus Shares: It is an offer of free additional shares to existing shareholders in
proportion to their existing holdings. (also known as ‘capitalization of profits’)
iii. Private Placement: It means the sale of securities to a relatively small number of
selected investors.
iv. Public Offer: It is the offering of securities of a company or a similar corporation to
the public. In order to do that the securities are to be listed on a stock exchange.
Explanation:
"Public offer" includes initial public offer (IPO) or further public offer (FPO) of
securities to the public by a company, or an offer for sale of securities (OFS) to the
public by an existing shareholder, through issue of a prospectus.

Public offer
Further Public Offer Offer For Sale of

Initial Public Offer (FPO) securities (OFS)
(IPO)
FPO is an issue of
additional shares made by OFS is a mechanism
a company that is already where promoters/existing
Offering the stock of a publicly listed and has shareholders in a listed
company on a public stock gone through the IPO company sell
exchange for the first process. their shares directly to the
time.
public in a transparent
manner.
Note:
Securities has been defined u/s 2(81) as Securities means the securities as defined in clause
(h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).
In crux, the definition in SCRA includes shares, debentured, derivatives, Mutual Fund,
Collective investment scheme securities, Government securities, right in securities etc.
Thus, in this chapter, the word security must be construed to include allotment of all the
above types of instruments.

Section 24 - Power of securities and exchange board to regulate issue and transfer
of securities
Authority to exercise Power related to
SEBI Central government
Issue & transfer of shares, &, In any other case

Non payment of dividend
Listed Companies, &

Companies that intend to get
listed
PROSPECTUS
Definition of Prospectus u/s 2 (70):

● Any document described or issued as a prospectus and
● includes a red herring prospectus referred to in section 32 or
● shelf prospectus referred to in section 31
● or any notice, circular, advertisement or other document inviting offers from the
public for the subscription or purchase of any securities of a body corporate

Section 26 - Matters to include in Prospectus
Following are the requirements w.r.t. prospectus issued by public company:
● It should be dated. The date indicated in the prospectus shall be deemed to be the
date of its publication.
● It should be Signed by every person who is named therein as a director or proposed
director of the company or by his duly authorised attorney.
● It should state such information and set out such reports on financial information as
may be specified by the SEBI in consultation with the CG
● Declaration of Compliance: It should contain declaration stating that nothing in the
prospectus is contrary to the provisions of this Act, the Securities Contracts
(Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 and
the rules and regulations made thereunder
● Section 26(1) Not applicable:
- to the issue to existing members or debenture-holders of a company, whether

an applicant has a right to renounce (Eg: Right Shares)
- to the issue of a prospectus or form of application relating to shares or
debentures which are, or are to be, in all respects uniform with shares or
debentures previously issued and for the time being dealt in or quoted on a
recognised stock exchange (Eg: Bonus issue)
● Delivery of copy to ROC: On or before the date of its publication, Copy of prospectus
should be delivered to the Registrar for filing.
● On the face of the prospectus —

- it should be stated that a copy has been delivered for filing to the ROC and
- Mention list of all documents attached with prospectus
● Expert Statement shall be included in prospectus only if:

- He is engaged or interested in the formation or promotion or management, of
the company
- has given his written consent to the issue of the prospectus and
- has not withdrawn such consent before the delivery of a copy of the prospectus
to the Registrar for filing
● Validity of prospectus: Upto 90 days from the date on which a copy thereof is delivered
to the Registrar
● Contravention: If a prospectus is issued in contravention of the provisions of this

section, the company shall be punishable with fine which shall not be less than
₹ 50,000 but which may extend to ₹ 3,00,000 and every person who is knowingly

a party to the issue of such prospectus shall be punishable with fine which shall
not be less than ₹ 50,000 but which may extend to ₹ 3,00,000.
● Definition of “Expert” in Sec 2(38): "Expert" includes an engineer, a valuer, a

chartered accountant, a company secretary, a cost accountant and any other person
who has the power or authority to issue a certificate in pursuance of any law for the
time being in force
Section 29 - Public Offer of securities to be in a dematerialized form
Provisions from the Section
1) Notwithstanding anything contained in any other provisions of this Act,—

(a) every company making public offer; and
(b) such other class or classes of companies as may be prescribed,
shall issue the securities only in dematerialized form by complying with the provisions of
the Depositories Act, 1996 and the regulations made thereunder.
(1A) In case of such class or classes of unlisted companies as may be prescribed, the securities
shall be held or transferred only in dematerialised form in the manner laid down in the
Depositories Act, 1996 and the regulations made thereunder.
2) Any company, other than a company mentioned in sub-section (1), may convert its
securities into dematerialised form or issue its securities in physical form in accordance with
the provisions of this Act or in dematerialised form in accordance with the provisions of the
Depositories Act, 1996 and the regulations made thereunder.
Rule 9 Dematerialisation of securities - Companies (Prospectus and allotment of

securities) Rules, 2014
● The promoters of every public company making a public offer of any convertible
securities may hold such securities only in dematerialised form:
● Provided that the entire holding of convertible securities of the company by the
promoters held in physical form up to the date of the initial public offer shall be
converted into dematerialised form before such offer is made and thereafter such
promoter shareholding shall be held in dematerialized form only.
Rule 9A. Issue of securities in dematerialised form by unlisted public companies -

Companies (Prospectus and allotment of securities) Rules, 2014

1. Every unlisted public company shall –
a) Issue the securities only in dematerialised form; and
b) Facilitate dematerialisation of all its existing securities in accordance with provisions
of the Depositories Act, 1996 and regulations made there under
2. Every unlisted public company making any offer for issue of any securities or buyback of
securities or issue of bonus shares or rights offer shall ensure that before making such
offer, entire holding of securities of its promoters, directors, key managerial personnel
has been dematerialised in accordance with provisions of the Depositories Act 1996 and
regulations made there under.
3. Every holder of securities of an unlisted public company,

(a) who intends to transfer such securities on or after 2nd October, 2018, shall get such
securities dematerialised before the transfer; or
(b) who subscribes to any securities of an unlisted public company (whether by way of
private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall
ensure that all his existing securities are held in dematerialized form before such
subscription.
4. Every unlisted public company shall facilitate dematerialisation of all its existing securities
by making necessary application to a depository as defined in clause (e) of sub-section (1)
of section 2 of the Depositories Act, 1996 and shall secure International security
Identification Number (ISIN) for each type of security and shall in-form all its existing
security holders about such facility.
5. Every unlisted public company shall ensure that –

(a) it makes timely payment of fees (admission as well as annual) to the depository and
registrar to an issue and share transfer agent in accordance with the agreement executed
between the parties;
(b) it maintains security deposit at all times, of not less than two years, fees with the
depository and registrar to an issue and share transfer agent in such form as may be agreed
between the parties; and
(c) it complies with the regulations or directions or guidelines or circulars, if any, issued
by the securities and Exchange Board or Depository from time to time with respect to
dematerialisation of shares of unlisted public companies and matters incidental or related
thereto.
Note: Registrar’s and Share transfer agents are the authorised bodies who are responsible
for keeping the financial equilibrium by maintain accurate records of transactions made
by the investor.

6. No unlisted public company which has defaulted in sub-rule (5) shall make offer of any
securities or buyback its securities or issue any bonus or right shares till the payments to
depositories or registrar to an issue and share transfer agent are made.
7. Except as provided in sub-rule (8), the provisions of the Depositories Act 1996 the
securities and Exchange Board of India (Depositories and participants) Regulations, 2018
and the securities and Exchange Board of India (Registrars to an Issue and share Transfer
Agents) Regulations, 1993 shall apply mutatis mutandis to dematerialisation of securities
of unlisted public companies.
8. Every unlisted public company governed by this rule shall submit Form PAS-6 to the
Registrar with such fee as provided in Companies (Registration Offices and Fees)
Rules,2014 within sixty days from the conclusion.of each half year duly certified by a
Company secretary in practice or chartered accountant in practice.
(8A) The company shall immediately bring to the notice of the depositories any difference
observed in its issued capital and the capital held in dematerialised form.
9. The grievances, if any, of security holders of unlisted public companies under this rule
shall be filed before the Investor Education and protection Fund Authority.
10. The Investor Education and protection Fund Authority shall initiate any action against a
depository or participant or registrar to an issue and share transfer agent after prior
consultation with the securities and Exchange Board of India
11. This rule shall not apply to an unlisted public company which is:-
(a) a Nidhi
(b) a Government company or
(c) a wholly owned subsidiary.

Sec 29 &
Rules
Company making public offer and Class of unlisted companies Other company [Sec
prescribed companies [Sec 29(1)] as may be prescribed [Sec 29(2)]
29(1A)]
Issue shares Rule 9: issuing demat shares or
in Rule 9A: Securities Converting physical
Promoters to
Dematerialis Unlisted to be held shares to demat
ensure
ed form + public or (Optional)
securities are
comply compani transferred
held in
Depositories es in
dematerialsed
Act 1996 form demateriali comply Depositories Act
sed form 1996
Section 30 - Advertisement of prospectus
Wherever there is advertisement of prospectus published, it must contain following details

● Share capital of company
● Liability of shareholders
● Object stated in memorandum
● Details of signatories to MoA& their share subscribed
● Capital structure
Section 31 - Shelf Prospectus
⮚ Meaning: It is the prospectus with the shelf life, ie, a validity period. In this type of
public offering, company is allowed to offer and sell securities to the public without
a separate prospectus for each act of offering.
⮚ Max Period of validity: 1 year
⮚ Information memorandum: Every subsequent offer requires issuing an ‘information
memorandum’ containing the details of changes that took place from the previous
issue.
o Financial changed
o New charges created
o Other material facts
⮚ If Advance is received for further shares before the issue of Information
memorandum: then,

o Company must intimate the investor of all changes using Info. Memo. and
o Give an ‘Exit Option’ (Investor may withdraw his money. The refund shall be
processed in 15 days.
Section 32 - Red Herring Prospectus
⮚ Meaning: In this kind of public offering, the Price and quantity of shares to be allotted
are not included in prospectus. Thus the prospectus is incomplete.
⮚ Filling with RoC: Red herring prospectus must be filled with RoC at least 3 days prior
to issuing to public.
⮚ After closing of the offer: Upon closing of the offer, the prospectus stating the total
capital raised (by debt/share capital) and closing price of securities along with other
prescribed details, shall be filled with RoC and SEBI.
Section 33 - Abridged Prospectus
⮚ Meaning: It is a memorandum containing salient features of the prospectus as

specified by SEBI.
⮚ This summarized prospectus shall be attached with every application form for
purchase of securities.
Section 25 - Offer for sale of securities (OFS)
⮚ Meaning: Shares of existing shareholder are sold off in public to new shareholders. It
does not involve issue of new securities.
⮚ Objective: To dilute promotors’ holding or provide exit route to venture capitalists.
⮚ The document inviting public to purchase such shares shall be deemed prospectus and
all provisions applicable to normal prospectus would apply.
⮚ All details u/s 26 shall be included in prospectus
⮚ Deemed OFS:
o If offer to sell securities to public is made within 6 months from original
allotment or
o At the time of making offer to public, the whole consideration has not been
received on securities

Hence, all requirement of issue of prospectus & this section must be followed.
⮚ Additional Matters to be disclosed:
o Consideration received/to be received in respect of securities offered
o Time and place at which the allotment contract can be inspected
Section 28 - OFS for certain members of company
⮚ Members may offer whole or part of their shareholding for sale to public provided BoD
approves.
⮚ Document offered to public inviting subscription shall be Deemed Prospectus. All
provisions applicable to normal prospectus shall apply.
⮚ Individuals/Body corporates whose shares are being OFS, shall
o authorize company to do the same
o reimburse company of all related expenses
Rule 8 of PAS Rules: Offer of Sale by Members
(1) The provisions of Part I of Chapter III namely "Prospectus and Allotment of Securities" and
rules made there under shall be applicable to an offer of sale referred to in section 28 except
for the following, namely:-
(a) the provisions relating to minimum subscription;
(b) the provisions for minimum application value;
(c) the provisions requiring any statement to be made by the Board of directors in respect
of the utilization of money; and
(d) any other provision or information which cannot be compiled or gathered by the
offeror, with detailed justifications for not being able to comply with such provisions.
(2) The prospectus issued under section 28 shall disclose the name of the person or persons
or entity bearing the cost of making the offer of sale along with reasons.
Section 27 - Variation in terms of contract/objects in prospectus
Company may vary terms in the prospectus only by

⮚ passing SR in general Meeting (via Postal Ballot)
⮚ Notice in 2 Newspapers (English and vernacular) in the city where the registered office
of the company is situated indicating clearly the justification for such variation
⮚ giving ‘exit option’ to dissenting shareholders

⮚ such company shall not use any amount raised by it through prospectus for buying,
trading or otherwise dealing in equity shares of any other listed company.
Rule 7 Variation in Terms of Contracts Referred to in the Prospectus or Objects for

Which Prospectus was Issued
(1) Where the company has raised money from public through prospectus and has any
unutilized amount out of the money so raised, it shall not vary the terms of contracts referred
to in the prospectus or objects for which the prospectus was issued except by passing a
special resolution through postal ballot and the notice of the proposed special resolution
shall contain the following particulars, namely:-
(a) the original purpose or object of the Issue;
(b) the total money raised;
(c) the money utilised for the objects of the company stated in the prospectus;
(d) the extent of achievement of proposed objects(that is fifty percent, sixty percent,
etc);
(e) the unutilised amount out of the money so raised through prospectus,
(f) the particulars of the proposed variation in the terms of contracts referred to in the
prospectus or objects for which prospectus was issued;
(g) the reason and justification for seeking variation;
(h) the proposed time limit within which the proposed varied objects would be achieved;
(i) the clause-wise details as specified in sub-rule (3) of rule 3 as was required with
respect to the originally proposed objects of the issue;
(j) the risk factors pertaining to the new objects; and
(k) the other relevant information which is necessary for the members to take an
informed decision on the proposed resolution.
(2) The advertisement of the notice for getting the resolution passed for varying the terms
of any contract referred to in the prospectus or altering the objects for which the prospectus
was issued, shall be in Form PAS-1 and such advertisement shall be published simultaneously
with dispatch of Postal Ballot Notices to Shareholders.
(3) The notice shall also be placed on the web-site of the company, if any.
Section 40 - Securities to be dealt with in Stock exchange
I. Listing of securities
⮚ Before any public offer, the companies must apply to SEBI & Recognized stock
exchanges for listing. Public offer cannot be made without listing.
⮚ Prospectus must contain details of stock exchange on which securities shall be listed
⮚ Separate bank A/c must be maintained by the company to receive monies from offer
and adjust refunds (Not company’s general bank account).

⮚ Nothing can be written in the prospectus to waive this section.
⮚ Default in compliance:
o Company: 5L-50L
o Officer in default:
▪ Fine 50K – 3 L
II. Underwriting Commission:
⮚ Meaning: Underwriting is the process through which an individual or institution takes
on financial risk for a fee. In this case, such institutions agree to take over the un-
subscribed portion of securities offered to public to meet minimum subscription.
⮚ Conditions for underwriting a public offer:
▪ AOA Authorizes
▪ Underwriting Commission is paid out of
o profit or
o proceeds of issue of securities
▪ Maximum Rate of commission
For shares For Debentures

Rate mentioned in AoA or Rate mentioned in AoA or
5 % of price at which shares are issued
2.5 % of price at which debentures are issued
Whichever is less Whichever is less
⮚ Disclosure in the Prospectus:

o Name of underwriter
o Rate of commission
o Number of securities undertaken
⮚ Commission cannot be paid if it is not a public offer
⮚ Contract of payment of commission must be submitted with RoC
Section 39 - Allotment of Securities
Meaning: when the ownership of shared is given in the name of shareholder and entry is
made in the register of members. It brings shares into existence.
Conditions prescribed for allotment of securities by company:
i. Minimum subscription amount stated in the prospectus and application money is
received
ii. Amount payable on application is not less than 5% of nominal value of securities.
iii. If application money and minimum subscription is not received within 30 days of issue
of prospectus (or longer period prescribed by SEBI), all moneys received must be
refunded.

iv. After allotment, Return of Allotment must be filed with RoC
v. Default in refunding money or filing Return of Allotment:
Company/officer in default: Rs 1000/day (Max 1 Lakh)
Rule 11: Refund of application money
If the stated minimum amount has not been subscribed and the sum payable on application
is not received within the period specified therein,
● then the application money shall be repaid within a period of fifteen days from the
closure of the issue and
● if any such money is not so repaid within such period, the directors of the company
who are officers in default shall jointly and severally be liable to repay that money
with interest at the rate of 15% p.a.
The application money to be refunded shall be credited only to the bank account from which
the subscription was remitted.
Rule 12: Return of Allotment
(1) Whenever a company having a share capital makes any allotment of its securities, the
company shall, within thirty days thereafter, file with the Registrar a return of allotment
in Form PAS-3, along with the prescribed fee.
(2) There shall be attached to the Form PAS-3 a list of allottees stating their names, address,
occupation, if any, and number of securities allotted to each of the allottees and the list
shall be certified by the signatory of the Form PAS-3 as being complete and correct as per
the records of the company.
(3) In the case of securities (not being bonus shares) allotted as fully or partly paid up for
consideration other than cash, there shall be attached to the Form PAS-3 a copy of the
contract, duly stamped, pursuant to which the securities have been allotted together with
any contract of sale if relating to a property or an asset, or a contract for services or other
consideration.
(4) Where a contract referred to in sub-rule (3) is not reduced to writing, the company shall
furnish along with the Form PAS-3 complete 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 stamp duty payable thereon be adjudicated under section 31 of the Indian
Stamp Act, 1899.
(5) A report of a registered valuer in respect of valuation of the consideration shall also be
attached along with the contract as mentioned in sub-rule (3) and sub-rule (4).
(6) In the case of issue of bonus shares, a copy of the resolution passed in the general
meeting authorizing the issue of such shares shall be attached to the Form PAS-3.
(7) In case the shares have been issued in pursuance of clause (c) of sub-section (1) of section
62 by a company other than a listed company whose equity shares or convertible preference
shares are listed on any recognised stock exchange, there shall be attached to Form PAS-3,
the valuation report of the registered valuer.

Section 34, 35 - Mis-Statement in Prospectus
Meaning: Stating false/inaccurate details in the prospectus, willfully or by mistake. This may
lead wrong decision made by the investors thereby leading to their financial/other losses.
Liability for Mis-statement in prospectus
Criminal Liability (Section 34): Civil Liability (Section 35):

Involves Mens Rea (guilty mind) and It arises out of dispute between two
loss caused to the other party due to a parties & loss caused to either of
crime/fraud conducted on purpose by them thereby claiming
another party. reimbursement for damages
Every person responsible for the Liability of the following persons:

issue of prospectus shall be Liable -Director/Named director in
u/s 447 prospectus
-Promotor
-other person who authorised
Exception: issue of prospectus
- Immaterial -Expert refered u/s 26
Mistatement
-Reasonable grounds Exception:
to believe that the Liability: -consent is withdran before issue of
statment was -pay damages prospectus+ it was issued without his
true/ommission was for loss caused authority.
necessary -penalty u/s 36 -it was published without his knowledge, &
he published notice in newspaper on being
aware of it after issue.
-person relied on a competent expert's
statement included in prospectus
-

Section 36 - Punishment for fraudulently inducing person to invest money
Any person
Knowingly/recklessly
Promises/conceals deliberately/ misleads
Another person to enter into
Acquiring or underwriting securities
Enter into any agreement based on
security price fluctuation to gain profit
Get credit from bank or financial
institute
Liable
u/s 447
Section 37 - Action by Affected Persons
Any person aggrieved u/s 34, 35, 36 may file a

● Normal suit
● Class action suit [A group of parties having common grievance against another party,
may file a single case together. In such case, representative of such group may attend
the hearings and follow up with legal proceedings]
Section 38 - Punishment for personating for acquiring shares/securities

Any person applying to the company to purchase its securities
by Giving many giving fictitious name

using fictitious Name applications with for registering transfer
different names of shares
Liable U/s 447

and
Court may order Disorgement
of Gains
⮚ Company must state the provisions and penalties specified u/s 38 in the prospectus
⮚ Amount received through disgorgement of gain shall be credit to IEPF Account
[Investor Education & Protection Fund]
⮚ Disgorgement of gain means recovering gains made unfairly by seizure/disposal of
such securities.
Section 41 - Global Depository Receipt [GDR]
Meaning: These are instrument issued to the foreign investors to raise more capital. The
share capital of the company is packed into depository receipts with suitable denomination
and value to fit the needs of the foreign investor and market.
Relevant Rules: Companies (Issue of Global Depository Receipts) Rules, 2014
Conditions:
✔ Company is eligible as per FEMA Rules
✔ BoD Resolution in board meeting
✔ Special Resolution in general Meeting
✔ RBI regulations must be complied
✔ Domestic depository holds the original securities, which are issued in the name of
international depositories
✔ BoD shall appoint a Practicing CA/CS/Cost accountant to oversee issue and
compliances
✔ Listing of GDR: on international stock exchange

✔ They may be offered to public or private placement
✔ Backing/original securities may be fresh issue of securities or OFS of existing shares
✔ Right to vote by GDR Holder:
o Depends on the agreement between GDR Holder, Company and depository.
o In the absence of any contract, GDR holder cannot vote unless GDR are
converted to shares. Till then, the international depository votes on behalf of
GDR holder.
✔ Proceeds of the issue may be collected by
o Bank Account in India
o Indian Bank operating in such country
o Foreign Bank (Scheduled by RBI)
✔ Sections related to register of members, issue of shares and debentures and issue of
prospectus are not applicable to GDR
Section 42 - Private Placement
Meaning: Issuing securities to a selected group of people

Relevant Rules: Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014
Conditions for private placement:
✔ ‘Private Placement offer cum application letter’ must be issued. Such offer letter
does not contain right to renunciation. (i.e., no other person is entitled to buy
securities using such offer letter other than the person named in it) 🡪 Form PAS – 4
sent in writing or electronic form to offeree within 30 days of recording their names.
✔ Resolution in general meeting
o Previous Special resolution for each private placement offer in one Financial
Year (FY)
o In case of Offer /invitation to qualified institutional Buyers 🡪 Previous Special
Resolution only in a year for all allotments to such buyers during the year is
sufficient
o Offer/invitation for non convertible debentures within limits u/s 180(1)(c) 🡪
Board resolution sufficient
o Offer/invitation for non convertible debentures beyond limits u/s 180(1)(c) 🡪
Previous Special Resolution only in a year for all allotments to such buyers
during the year is sufficient
✔ Details to be mentioned in explanatory statement annexed to notice for shareholders’
approval:
o Particular of offer, including Date of Board resolution
o Kinds of securities offered
o Price at which securities offered
o Basis / Justification of price
o Name and address of valuer

o Total amount to be raised by company
o Other material terms and conditions
✔ Offer can be made to maximum 200 persons in aggregate in a FY
Above limit Excludes:
- Employees offered securities under ESOP (Employee stock option plan)
- Securities issue to Qualified Institutional Buyers
Above limit does not apply to
- NBFC registered with RBI
- Housing Finance Companies registered with National Housing Bank
✔ Company must maintain record of subscribers Bank Accounts (to adjust
refund/allotment of security) 🡪 Form PAS-5
✔ No offer or invitation of any securities under this rule shall be made to a body
corporate incorporated in, or a national of, a country which shares a land border
with India,
● unless such body corporate or the national, as the case may be,
● have obtained Government approval under the Foreign Exchange
Management (Non-debt Instruments) Rules, 2019 and
● attached same with private placement offer cum application letter
✔ No fresh offer/invitation can be made unless previous offers have been

complied/withdrawn/abandoned
✔ Any offer made without complying this section shall be ‘deemed public offer’ and
relevant provisions of the act, SEBI Act 1992 shall apply.
✔ Monies shall be received via
o Cheque
o Demand Draft
o Other Banking Channel
o NOT IN CASH
✔ Allotment shall be made within 60 days of receipt of application money. Otherwise,
Refund within 15 days otherwise Interest 12% p.a. from the end of 60th day.
✔ Separate bank account must be opened by company to process such refund/allotment
monies
✔ Details of private placement must be filed with RoC within 30 days circulation of offer
letter.
✔ Public advertisement of the offer is NOT allowed.
✔ Return Of allotment shall be filed with RoC within 15 days of allotment. Company
cannot use the monies raised by private placement unless such return is filed. 🡪 Form
PAS-3
✔ Default in filing Return of allotment
o Company/Promoters/directors: Rs. 1000/ day (max 25L)
✔ Default :

o Company/Promoters/directors:
o Fine lower of
▪ Amount involved in offer of invitation or
▪ Rs. 2 crore
o Company shall refund monies in 30 days of order imposing penalty

Chapter 4 - Share capital & Debentures
Section 43-72
Relevant Rules: Companies (Share Capital & Debentures) Rules, 2014
Sec 2(84) ‘Shares’:
⮚ Shares in share capital of the company

⮚ Includes stocks
Sec: 43 Types of Share Capital
Share Capital
Equity Shares Preference Shares:

Shares having preferential rights
over dividend and repayment of
Plain Vanilla With Differential
capital at winding up.
voting rights
With similar with respect to
voting rights dividend, voting
or otherwise.
Rule: 4 Conditions for issuing equity shares with differential Rights

● AoA should authorise
● Ordinary resolution (for listed companies- postal ballot mandatory)
● Differential right equity shares <= 74% of total voting power post issue
● In last 3 financial years:
⮚ No default in filing annual return & financial statement
⮚ Not penalized under/by
- Court
- NCLT
- RBI Act
- SCRA
- SEBI Act
- FEMA
- Other Acts prescribed
● No subsisting default in paying
⮚ Dividend declared
⮚ Matured debentures/deposits/preference shares
⮚ Interest due on debentures/deposits
● In the last 5 years, there is no default in paying
⮚ Preference Share dividend
⮚ Term loan amount due to public/State Financial Institute/Scheduled Bank
⮚ Statutory dues of Employees
⮚ Sum due to be credited in IEPF
● Other provisions
⮚ Company cannot convert existing equity shares to differential voting right
shares
⮚ Differential voting right shares have other rights common, i.e., bonus shares,
right shares, etc.
⮚ Register of members under Section 88 must be kept
Sec 45 & 46 - Basic requirements for issuing Share Certificate
● Physical Share Certificate:

⮚ It is the prima facie evidence of ownership of shares
⮚ Such share certificate should be
- Numbered
- Issued under common seal
- Signed by – 2 Directors or 1 director & 1 Company secretary

- Company may issue duplicate share certificate on request from the
shareholder if the original is lost/in bad condition
● D-Mat shares: Provisions of share certificate not applicable on D-Mat Shares. The
register of beneficiary owners maintained by depository is prima facie evidence of
ownership in such shares.
● Default: Sec 447 attracted if share certificates issued are not as per above provisions
● Case: A obtains share certificate by forgery & transfers it to B who purchases it in
good faith. Company refuses to register those in name of B. Is company correct as per
Co. Act?
Solution: Forgery is nullity in law. Hence share certificate of A itself is invalid.
Company is correct in not registering such transfer. A will have criminal liability &
liability to compensate B.
Section 47 - Voting Rights
Preference Shares:
Equity Shares: Allowed to vote only if:
-get right to vote in GM. -Resolution directly affects them
-In Poll- the vote is -Winding up resolution
proportion to the paid
up share capital value. -Repayment/reduction of Preference
share capital
In above cases, voting in proportion to
paid up capital.
If both vote in GM, then - If dividend remains unpaid for 2 or
the same proportion more years then they CAN VOTE on all
vote as to paid up capital resolutions.
allowed.
Private company can modify AoA/MoA to change above rights as it likes.

Sec 48 - Variation of Shareholders’ Rights
Conditions:
1) AOA must authorise variation (else, alter AoA u/s 14). It is not necessary to alter AoA if
contract for the issue of shared authorise for variation of rights.
2) Special Resolution in Class Meeting of such shareholders whose rights are being affected.
3) Even after SR is passed, dissenting shareholders can apply to NCLT within 21 days of SR.
Minimum shares required to be held by applicants : 10% of such amount of shares
4) NCLT’s order must be followed by the company & filed with RoC within 30 days.
(Note: Section is applicable on all types of shares: Preference & Equity)
Sec 49 to 51 - Calls & Incidental Matters
If the shares of the company are partly paid up, then the company may call for the
remaining amount due on such shares at any time. This is known as “calls” on shares.
Section 49 Company must make calls uniformly to all shareholders in one class of shares.
(It cannot call for different amount of calls from different shareholders in the same class
of shares)
For the purposes of this section, shares of the same nominal value on which different
amounts have been paid-up shall not be deemed to fall under the same class.
Section 50 Shareholder can make advance payment for money due on calls/ subscription
only if it is so authorised by AoA. However, no additional rights are allowed to such
shareholder.
Section 51 Dividend must be paid based on number of shares. However, it may be paid
proportional to paid up value if AoA authorise.

Sec 52 to 55 - Issue of Shares at discount or premium
The purpose for giving discount or premium on shares is to fairly price the shares based
on its demand & supply.
Section 52 - Security premium
● Whenever shares are issued at a premium, such access amount must be transferred
to ‘Security Premium A/c’
● This section N/A on Debentures & bonds.
● Such ‘Security Premium A/c’ must be used only for the following purposes
i. Issuing bonus shares
ii. Buy back of shares
iii. Writing off preliminary expenses
iv. Writing off discount on issue of shares/ debentures
v. Providing for premium on redemption of preference shares/debentures
vi. Writing off commission paid on issue of shares/debentures
Section 53 - Issuing shares at discount
Issuing shares at discount is STRICTLY PROHIBITTED EXCEPT

o Sweat equity shares u/s 54
o Discounted shares issued to creditors when its debt is converted to shares under
‘statutory resolution plan’ or ‘debt restructuring scheme’ as per RBI
Note: There is no such restriction on issue of debentures & bonds.
Default:
o Company/officer in default :Penalty equal to amount raised through the issue of
shares at discount or Rs 5 lakh } whichever is less
o Company shall be liable to refund all the monies received with interest 12% p.a.
from date of issue of shares
Section 54 - Sweat Equity shares
Sec 2(88) defines Sweat Equity Shares as such

● equity shares issued by a company
● to its directors or employees

● at a discount or for consideration, other than cash,
● For providing their know-how or making available rights in the nature of
intellectual property rights or value additions, by whatever name called.
Such shares are issued with the purpose of motivating employees & to keep them
engaged with the company for longer period.
Conditions for issue: Issue for existing class of shares only

● Special resolution passed in general meeting
● SR must specify
- 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
● Listed companies to follow relevant SEBI guidelines and unlisted companies must
follow Rule 8 of Companies (Share Capital and Debentures) Rules, 2014
Rights, limitations, restrictions and provisions as are for the time being applicable to
equity shares shall be applicable to the sweat equity shares and the holders of such
shares shall rank pari passu with other equity shareholders. [Sec 54 (2)]
Rule 8: Conditions for Issue of Sweat Equity Shares
Meaning of Employee: ‘‘Employee’’ means-

(a) a permanent employee of the company who has been working in India or outside
India, or
(b) a director of the company, whether a whole time director or not; or
(c) an employee or a director as defined in sub-clauses (a) or (b) above of a
subsidiary, in India or outside India, or of a holding company of the company;
Meaning of ‘Value additions’: The expression ‘Value additions’ means

● actual or anticipated economic benefits derived or to be derived by the company
from an expert or a professional for providing know-how or making available rights
in the nature of intellectual property rights, by such person to whom sweat equity
is being issued for which the consideration is not paid or included in the normal
remuneration payable under the contract of employment, in the case of an
employee.

Validity of Special Resolution [Rule 8(3)]: The special resolution authorising the issue
of sweat equity shares shall be valid for making the allotment within a period of not more
than twelve months from the date of passing of the special resolution.
Limit on issue of Sweat Equity Shares [Rule 8(4)]: The company shall not issue sweat
equity shares for more than fifteen percent of the existing paid up equity share capital
in a year or shares of the issue value of rupees five crores, whichever is higher:
Provided that the issuance of sweat equity shares in the Company shall not exceed twenty
five percent, of the paid up equity capital of the Company at any time.
Provided further that a startup company, may issue sweat equity shares not exceeding
fifty percent of its paid up capital upto ten years from the date of its incorporation or
registration.
Lock-in Period [Rule 8 (5)]: The sweat equity shares issued to directors or employees
shall be locked in/non transferable for a period of three years from the date of allotment
and the fact that the share certificates are under lock-in and the period of expiry of lock
in shall be stamped in bold or mentioned in any other prominent manner on the share
certificate.
Valuation of Sweat Equity Shares [Rule 8 (6)]: The sweat equity shares to be issued shall
be valued at a price determined by a registered valuer as the fair price giving justification
for such valuation.
Valuation of IPR [Rule 8 (7)]: The valuation of intellectual property rights or of know
how or value additions for which sweat equity shares are to be issued, shall be carried
out by a registered valuer, who shall provide a proper report addressed to the Board of
directors with justification for such valuation.
Treatment of non-cash consideration [Rule 8 (9)]: Where sweat equity shares are issued
for a non-cash consideration on the basis of a valuation report in respect thereof
obtained from the registered valuer, such non-cash consideration shall be treated in the
following manner in the books of account of the company-
(a) where the non-cash consideration takes the form of a depreciable or amortizable
asset, it shall be carried to the balance sheet of the company in accordance with the
accounting standards; or
(b) where clause (a) is not applicable, it shall be expensed as provided in the
accounting standards.
Disclosure in the Directors’ Report [Rule 8(13)]: The Board of Directors shall, inter alia,
disclose in the Directors’ Report for the year in which such shares are issued, the specified
details of issue of sweat equity shares.

Maintenance of Register [Rule 8(14)]: The company shall maintain a Register of Sweat
Equity Shares in Form No. SH.3 and shall forthwith enter therein the particulars of Sweat
Equity Shares issued under section 54. It shall be maintained at the registered office of
the company or such other place as the Board may decide.
Section 55 - Preference Shares: Issue & Redemption
Types of preference shareholders
On the basis of convertibility of On the basis of redeemability

On the basis of dividend payout shares
redeemable
cumulative convertible
Participatory
Non convertible irredeemable

Non cumulative Non participatory
Conditions for issue /redemption of preference shares:

1. Irredeemable preference shares are not allowed to be issued
2. The issue of such shares has been authorized by passing a special resolution in the
general meeting of the company. Further there should not be any subsisting default
in the redemption of preference shares (Rule 9)
3. Maximum Tenure for issue of PS- 20 Years Whichever is less
- term specified in AoA
Exception: Infrastructure Projects (specified in Scheduled VI have a maximum tenure
of 30 years provided they redeem 10% beginning in 21 st year at the option of the
preference shareholders.
4. Source of redemption:
Proceeds of a fresh issue of shares made
Free profits
for the purpose of such redeption
5. Redemption cannot be done unless preference shares are fully paid up.
6. If the redemption is out of profits, then after redemption, company must transfer
nominal value of shares redeemed to Capital Redemption Reserve A/c (used to issue
bonus shares only)

7. Deemed Redemption: If preference shares have matured but the company is unable
to redeem them it may Issue further Preference shares in place of existing.
Procedure:
● Consent of 3/4th of such class of preference shares,
● NCLT Approval and
● NCLT may pass order to redeem shares of dissenting shareholders
Section 56 to 59 - Transfer & Transmission of Securities & allied Provisions
Section 44 - Nature of shares or debentures
Shares/debentures/other interest of the member are movable property transferable as per

AoA.
Section 56 - Transfer & transmission of securities between parties
● Requirement to register transfer of securities:

- Mandatory
- Proper instrument of transfer required between parties (Except if
dematerialised shares are traded on stock exchange)
● Procedure & timeline: Within 60 days from execution of deed, following documents
must be delivered to the company by transferor/transferee:
- Transfer deed
- Original letter of allotment or certificate of securities
● Instrument lost/not delivered in prescribed time: Company may allow to register the
transfer on BoD decided terms to indemnify if found guilty of misrepresentation.
● Transfer of partly paid securities: If notice of transfer is given by transferor alone,
and relates to partly paid shares, then
- company shall notify the transferee in form SH-5 &
- transferee to give no objection within 2 weeks of receipt of notice for
registration of transfer of securities.
● Certificate of securities:

Company must deliver certificate of security within:
2 months of 1 month of receipt of

6 months of
allotment of instrument of
allotment of
shares/incorporation 'transfer' for 'other
'debentures'
of company securities'
● Transfer of shares of deceased shareholder: Allowed by legal representative

● Default: Company- 50K
Officer in default- 50K
Depository- Section 447 shall be attracted + Liability under Depositories Act’
1996
● Transfer Vs Transmission
Sec 56 applies to both transfer and transmission of securities. Differences between
the two terms are:
Basis Transfer of Shares Transmission of Shares
Nature of transfer Voluntary act between parties Operational by law
of title in shares
Example A decides to sell shares to B for In case of Insolvency, lunacy, death, or
20000 Rs. They execute a inheritance, if shares were held by the
transfer deed for the same and owner who became insolvent, lunatic or
pay stand duty on the deed. Both died respectively, then the title of
parties sign and thus transfer of shares automatically passes in the
title in shares takes place. hands of official assignee or receiver or
administrator or legal representative.
Consideration Present Not applicable
between parties
● Transmission of shares can happen in 3 ways

1. Death of original shareholder 🡪 Shares are transmitted to legal representative
2. Insolvency of original shareholder 🡪 Shares are transmitted to Official receiver
3. Lunacy of original shareholder 🡪 Shares are transmitted to Administrator
appointed by court
● Forged Transfer

- Meaning of Forged transfer: When signature of transferor is forged in the transfer
deed effecting transfer between parties.
- Effect:
o Forged transfer is nullity in law. It is not legally binding. Transferee as per such
instrument does not acquire any ownership of the shares and the transferor
remains the real owner of the shares. Company shall continue the name of the
original shareholder in the register of members. Any change can be challenged
by the transferor.
o If the transferee of the forged transfer, further transfers the shares to another
buyer who does not know about the forgery and company also registers such
transfer original owner can challenge it and require the company to restore
his name in the register. The new buyer shall not gain title of shares, however
he may claim damages from the company. The company may claim indemnity
for such damages paid, from the transferor of the shares who causes forgery.
Section 57 - Punishment for personating shareholders
It means use of fake identity to obtain shares/warrants/other rights from the company.
Punishment:
Imprisonment 1 year -3 year
AND
Fine 1L – 5L

Section 58 - Refusal of registration & appeal against refusal
● Private Company Refuses registration of transfer/transmission of securities:
Within 30 days from receipt of instrument of transfer, the Pvt

Company must send notice to the parties about refusal
The parties may file an appeal with the tribunal within 30

days of receipts of refusal OR if there is no refural, then 60
days from the date on which transfer of securities was
intimated to company.
● Public Company refuses registration of transfer/transmission of securities for
insufficient reasons:
Within 30 days from receipt of instrument of transfer, the

Public Company must send notice to the parties about refusal
The parties may file an appeal with the tribunal within 60

days of receipts of refusal OR if there is no refural, then 90
days from the date on which transfer of securities was
intimated to company.
● Tribunal shall:
- Hear both parties
- Mass suitable order Directing company to
o Register transfer/transmission of securities within 10 days of order
o Pay damages to affected parties
o Rectify register of security holders
Contravention of order of the Tribunal:
o Imprisonment 1 Year – 3 Year

And
o Fine 1L – 5L
Section 59 - Rectification of register of members

- Where the members name is not entered, incorrectly entered or there is delay in
entering in the register of members then,
- Company/member/Legal representative of deceased member may apply to
NCLT/competent court outside India.
- Tribunal shall hear both parties & pass following orders:
o Register the name/rectify the register within 10 days of order
o Company may be ordered to pay damages to aggrieved parties
o If transfer is in contravention of SEBI/SCRA/other laws, tribunal may order to
rectify such contraventions
- Member may transfer such shares anytime. However, the tribunal may hold its voting
rights till the order is passed
Section 60 - Publication of authorised, Subscribed & Paid up capital
If the company is stating ‘Authorised Capital’ anywhere in notice/ad/business letters/bill

heads, etc. then it MUST also clearly state its ‘paid up capital’ & ‘subscribed capital’.
Default:
● Company – 10K every default
● Officer in default- 5k every default
Section 61 - Alteration of share capital
Alteration of share capital
Change Consolidate or Convert fully Sub devide

Authorised paid shares to shares into more Cancel the
devide existing
Share Capital stock or vice number of shares unsubscribed
shares (without
versa (paid unpaid shares
changing voting
proportion (Reduction of
rights unless
remaining same) share capital)
allowed by
tribunal)
AoA must authorise before any alteration. RoC must be intimated within 30 days of
alteration.
Section 62 - Right Issue/Preferential Allotment

Meaning: Additional securities are issued to existing group of shareholders in proportion to
their paid up capital
Conditions:
● Special resolution in general meeting
● Notice/offer letter must be sent at least 3 days before opening of the offer by speed
post/courier/e-mode
● Issue can be made only to existing shareholders in proportion to paid up value
● Offer letter must be sent to all such members.
● Offer must be open for minimum 15 days or such lesser number of days as may be
prescribed* and maximum 30 days
* Rule 12A prescribes time period within which the offer shall be made for acceptance
shall be not less than 7 days from the date of offer
● Private company may allow lesser time than 7 days provided 90% of such members
consent in writing or via e-mode
● Right to renounce: Allowed if AoA do not restrict it & details are mentioned in the
Notice and offer letter
● Disposing shares that are not taken: If right to purchase shares is not exercised nor
renounced by the members within time, then BoD may dispose off the shares in such
manner which is not dis-advantageous to shareholders and company to
o Employees under a scheme of employees stock option plan (ESOP) provided
prior Special Resolution must be passed in GM (Ordinary resolution for private
companies)
▪ Listed company to follow the provisions of SEBI (Share Based Employee
Benefits) Regulations, 2014
▪ Unlisted company to follow Rule 12 (Details below)
o To any person provided prior Special Resolution must be passed in GM
o Consideration may be in cash or kind
o Sale price of shares must be as per valuation repost of a registered valuer
● Section shall not apply to Conversion of Preference share/Debentures into shares
● Conversion of Debentures/Loan by government: If debentures have been issued to
government/loan was taken from government and the government orders to convert
it into shares in public interest then,
- Company may oppose it by applying to tribunal within 60 days of such order
- Tribunal shall hear both parties and pass suitable order
- In case of conversion, the fresh issue of shares shall be deemed increase in
‘authorised share capital’ of the company. Accordingly, MoA shall be altered.
- Notice must be sent to RoC within 30 days of order.
Note: As per Section 2(37), the term ‘employees’ stock option’ means the option given to
the directors, officers or employees of a company or of its holding company or subsidiary

company or companies, if any, which give such directors, officers or employees, the benefit
or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-
determined price.
Rule 12: Issue of Employee Stock Options
Unlisted company issuing shares under ESOP Scheme must follow Rule 12 of the Companies
(Shares and Debentures) Rules, 2014. Some of the important provisions are as under:
Rule 12 (1): Issue of Employees’ Stock Option Scheme has been approved by the shareholders
of the company by passing a special resolution.
The term ‘Employee’ means:
(a) a permanent employee of the company who has been working in India or outside India; or
(b) a director of the company, whether a whole-time director or not but excluding an
independent director; or
(c) an employee as defined in clause (a) or (b) of a subsidiary, in India or outside India, or of
a holding company of the company; but does not include-
(i) an employee who is a promoter or a person belonging to the promoter group; or
(ii) a director who either himself or through his relative or through anybody corporate,
directly or indirectly, holds more than ten per cent of the outstanding equity shares
of the company:
Provided that in case of a startup company, the conditions mentioned in sub-clauses
(i) and (ii) shall not apply up to ten years from the date of its incorporation or
registration.
Rule 12 (2): Company shall make the specified disclosures in the explanatory statement
annexed to the notice for passing of the resolution.
Rule 12 (3): Companies granting option to its employees pursuant to Employees Stock Option
Scheme will have the freedom to determine the exercise price in conformity with the
applicable accounting policies, if any.
Rule 12 (6):
(a) There shall be a minimum period of one year between the grant of options and vesting
of option:
Provided that in a case where options are granted by a company under its ESOP
Scheme in lieu of options held by the same person under an ESOP Scheme in another
company, which has merged or amalgamated with the first mentioned company, the
period during which the options granted by the merging or amalgamating company

were held by him shall be adjusted against the minimum vesting period required under
this clause;
(b) The company shall have the freedom to specify the lock-in period for the shares issued
pursuant to exercise of option.
(c) The Employees shall not have right to receive any dividend or to vote or in any manner
enjoy the benefits of a shareholder in respect of option granted to them, till shares
are issued on exercise of option.
Rule 12 (8):
(a) The option granted to employees shall not be transferable to any other person.
(b) The option granted to the employees shall not be pledged, hypothecated, mortgaged
or otherwise encumbered or alienated in any other manner.
(c) Subject to clause (d), no person other than the employees to whom the option is
granted shall be entitled to exercise the option.
(d) In the event of the death of employee while in employment, all the options granted
to him till such date shall vest in the legal heirs or nominees of the deceased
employee.
(e) In case the employee suffers a permanent incapacity while in employment, all the
options granted to him as on the date of permanent incapacitation, shall vest in him
on that day.
(f) In the event of resignation or termination of employment, all options not vested in
the employee as on that day shall expire. However, the employee can exercise the
options granted to him which are vested within the period specified in this behalf,
subject to the terms and conditions under the scheme granting such options as
approved by the Board.
Section 63 - Bonus Shares
● Meaning: It means issue of shares for FREE to the existing shareholders in proportion
to their share capital.
● Source: Company may issue Bonus shares out of its
- Free Reserve
- Secured Premium A/c
- Capital Redemption Reserve A/c
Prohibition: Revaluation reserve cannot be used
● Other conditions:
- AoA must authorise the issue
- BoD approval in board meeting
- Ordinary resolution in General Meeting

- Company has not defaulted in payment of
o Interest & principal of fixed deposits/debt securities
o Statutory dues of employees
- Partly paid shares have been made fully paid
- Bonus shares cannot be issued in lieu of dividend
- Other prescribed conditions
Section 64 - Notice to RoC about Alteration of Share Capital
● Notice must be sent to RoC within 30 days of:

- Alteration of Share capital u/s 61
- CG or Tribunal order u/s 62
- Redemption of Preference Shares
● Default:
● company and every officer who is in default shall be liable to a penalty of ₹ 500
for each day during which such default continues, subject to a maximum of ₹
5,00,000 in case of a company and ₹ 1,00,000 in case of an officer who is in
default
Section 65 - Reserve Capital
If an unlimited company having share capital converts itself into a limited company then it
shall maintain reserve capital in any of the following ways:
Company must maintain reserve capital in any of the following ways
Increase nominal value of the shares that can be Hold some part of uncalled capital in reserve to
called up only at the time of winding up. be called only at the time of winding up.
Section 66 - Reduction of Share Capital

Reduction of share capital
Extinguishment of share capital: Cancellation of paid up capital: Amount

Cancellation of Uncalled capital (Not received on share capital may be repaid (if it is
required in business) excess of requirement)
Conditions:
● Applicability of this section: Company limited by shares or company limited by
guarantee but having share capital
● AoA must authorise
● Special resolution in General Meeting
● NCLT permission required
● Company should not have any due & payable Interest & principle on deposits
● Tribunal notifies CG, Creditors & SEBI who may send recommendations/objections in
this regards. Within 3 months, tribunal passes order as deem fit.
● Company must file with RoC within 30 days of Order: A copy of order & Copy of SR.
● NCLT Order must be published in newspaper
● If Officer conceals/ misrepresents names of creditors to NCLT then : Section 44 shall
be attracted
Section 67 - Restriction on purchase by the company or giving loans by it for
purchase of its shares
● Any company having share capital cannot buy its own shares or shares of its holding
Company (Exception: reduction of share capital as per Companies Act)
● Any public company cannot lend money/give financial assistance to any person to
purchase its own shares/ shares of its holding company
● Exception to above:
- Banking Companies
- Scheme approved by special resolution for employees
- Loan to employees for purchase of shares of company up to 6 months of their
annual salary 🡪 Disclosure in board report must be made if such employees have
not exercised voting rights.
● Section 67 shall not apply to a private company
a. in whose share capital no other body corporate has invested any money;

b. if the borrowings of such a company from banks or financial institutions or any
body corporate is less than twice its paid up share capital or fifty crore
rupees,whichever is lower; and
c. such a company is not in default in repayment of such borrowings subsisting at
the time of making transactions under this section
● Default:
Company- Fine 1L – 25L
Officer in default- Imprisonment up to 3 years and Fine 1L – 25L
Section 68-70 Buy Back
Section 68 - Buy Back
Conditions:
● Sources of Buy back:
- Free profits/reserves
- Security premium Account
- Proceeds of fresh issue (not the same class of shares)
● AoA must authorise
● Special resolution must be passed in general meeting
Exception: If buy Back is up to 10% of paid up share capital and free reserves & BoD
resolution is passed to approve it
● Maximum Buy Back in a financial year: 25% of aggregate Paid up share capital & Free
Reserve
● Maximum Buy Back of Equity shares in a financial year: 25% of total equity Paid up
share capital
● Post Buy Back
(Secured Debts + unsecured Debts)
Less than 2
Paid up share capita + free reserve
● Share must be fully paid up
● Listed companies must follow SEBI regulations
● Notice of the General meeting must include explanatory statement containing
material details like
- Need for Buy Back of shares
- Class of shares being BB
- Amount
- Time limit for completion
- Other material facts

● Declaration of Solvency, signed by 2 Directors (including 1 Managing Director) must be
filed with RoC & SEBI before making BB ( Stating that company shall be able to fulfil
its liabilities in the coming financial year after BB)
● Maximum time of completion of BB: 12 months from SR/BoD Resolution
● BB can be done from :
- Existing Shareholders
- Open Market or
- Employees
● Bought back shares must be extinguished within 7 days of completion of Buy Back
● Cooling Period: Further issue of same class of shares cannot be made till 6 months
from BB (Except: Bonus shares or conversion of debentures or preference shares )
● Company must maintain a register for Buy Back
● BB Return must be filed with RoC & SEBI within 30 days of completion of BB
● Default:
o Company – Fine 1L-3L
o Officer in default –
▪ Fine 1L – 3L
Note: For the purpose of this section “Free reserve” include securities premium
Section 69 - Transfer of certain sums to Capital Redemption Reserve Account
● Where the company has bought back its own shares out of free reserve or securities
premium account, then Nominal value of such shares bought back must be transferred
to CRR A/c.
● Not Applicable: if proceeds of fresh issues are used for BB
● CRR is used only to issue Bonus shares
Section 70 - Prohibition for Buy Back in certain circumstances
Company cannot purchase directly/indirectly its own shares/securities

i. through
- its subsidiary companies
- investment companies
ii. If the company has made default in preceding 3 financial years in repayment of
- Interest or principal on deposits & the Default is
- Redemption of preference shares/debentures not made good
- Term loan/interest due thereon
from bank/financial institutions

iii. If the company has defaulted in complying with the following sections
- Annual return (Section 92)
- Declaration of dividend (Section 123)
- Failure to pay Dividend (Section 127)
- Financial statement ((Section 129)
Section 71 – Debentures
Section 2 (30) Summarized points from Definition:
“Debenture” includes debenture stock, bonds or any other instrument of a company

evidencing a debt, whether constituting a charge on the assets of the company or not;
provided that following shall not be treated as debentures
a) The instrument referred to in Chapter III-D of the Reserve Bank of India Act, 1934 and
b) Such other instrument as prescribed
Types of Debentures
On the basis of convertibility

On the basis of On the basis of
security redeemability
convertible Non
convertible
secured
redeemable
Mandatory or partially
optionally convertible or
Unsecured convertible fully convertible
irredeemable
● Convertible debentures can be issued by passing special resolution in General Meeting
● At the time of issue of debentures, the company must create a ‘Debenture
Redemption Reserve A/c’ out of the free profits of the company that can be used only
for redemption of debentures.
● Debentures with voting rights cannot be issued
● To issue secured debentures the company must follow conditions prescribed in
Companies (Share capital & Debenture) Rules, 2014
● Sec 71(5): If company issues debentures to more than 500 subscribers, it can do so
only after appointing a Debenture trustee as per prescribed rules.
● Sec 71(15): After issue of debentures 🡪 Companies shall file Return of allotment
(Form No PAS-3) with RoC within 30 days of allotment

● Debenture Trustee:
o He protects the interest of the debenture-holders & resolves their grievances
o Liability: Any provision contained in a trust deed shall be void in so far as it
would have the effect of exempting a trustee thereof from, or indemnifying
him against, any liability for breach of trust, where he fails to show the degree
of care and due diligence required of him as a trustee, having regard to the
provisions of the trust deed conferring on him any power, authority or
discretion:
Provided that the liability of the debenture trustee shall be subject to such
exemptions as may be agreed upon by a majority of debenture-holders holding
not less than three-fourths in value of the total debentures at a meeting held
for the purpose
o He can file a petition with the tribunal if
- He comes to the conclusion that assets of the company are insufficient
to meet its debts.
- NCLT may pass an order restricting the company from incurring any
further liabilities
● Failure to redeem Debentures
Where a company fails to redeem the debentures on the date of their maturity or fails
to pay interest on the debentures when it is due, the Tribunal may, on the application
of any or all of the debenture-holders, or debenture trustee and, after hearing the
parties concerned, direct, by order, the company to redeem the debentures forthwith
on payment of principal and interest due thereon.
● A contract with the company to take up and pay for any debentures of the company
may be enforced by a decree for specific performance
Rule 18 of Companies (Share Capital and Debentures) Rules, 2014
Type of Company Mode of Issue of Debenture How much Investment

DRR? till 30th
April of each
FY
All India Financial Public issue/ Private Placement N/A N/A
Institutions and
Banking Company
Other Financial Public issue/ Private Placement Same as of
Institution u/s 2(72) NBFC
Companies Act 2013 (i.e. N/A)

Listed companies Public issue of debentures by N/A 15% of
except 1 (i) NBFC registered with RBI & outstanding
(ii) Housing finance Companies Debenture**
reg. with National housing
bank)
(iii) Other Listed Co.
Or Private placement of N/A N/A

debentures by above companies
Unlisted Companies Private placement of Debentures by N/A N/A

except 1 (i) NBFC registered with RBI &
Housing finance Companies
registered with National housing
bank
Other Unlisted Companies 10% of 15% of
outstanding outstanding
debentures Debenture**
**Note:
Provided that the amount remaining invested or deposited shall not any time fall below fifteen
percent. of the amount of the debentures maturing during the year ending on 31st day of March
of that year
Allowed Investments:
(A) in deposits with any scheduled bank, free from any charge or lien
(B) in unencumbered securities of the Central Government or any State Government;
(C) in unencumbered securities mentioned in sub-clause (a) to (d) and (ee) of section 20
of the Indian Trusts Act, 1882;
(D) in unencumbered bonds issued by any other company which is notified under sub-
clause (f) of section 20 of the Indian Trusts Act, 1882
Use of DRR and Investments 🡪 Only for the redemption of Debentures
Rule 18(1): The company shall not issue secured debentures, unless it complies with the
following conditions, namely:-

(a) An issue of secured debentures may be made, provided the date of its redemption shall
not exceed ten years from the date of issue.
Provided that the following classes of companies may issue secured debentures for a
period exceeding ten years but not exceeding thirty years,
(i) Companies engaged in setting up of infrastructure projects;
(ii) Infrastructure Finance Companies
(iii) Infrastructure Debt Fund Non-Banking Financial Companies
(iv) Companies permitted by a Ministry or Department of the Central Government oi by
Reserve Bank of India or by the National Housing Bank or by any other statutory
authority to issue debentures for a period exceeding ten years.
(b) Debentures shall be secured by creation of a charge on the properties or assets of the
company/ its subsidiaries/ its holding company/ associate companies. Such assets or
properties shall be of value which is sufficient for the due repayment of the amount of
debentures and interest thereon.
(c) The company shall appoint a debenture trustee before issuing prospectus or letter of
offer for subscription.
d) Within 90 days of closure of the issue or offer, company shall execute a debenture trust
deed in Form SH-12 to protect the interest of the debenture holders.
Conditions for appointment of Debenture Trustee [Rule 18(2)]

The company shall appoint debenture trustee u/s 71(5), after complying with the following
conditions given in the rule:
● The names of debenture trustee shall be stated in the letter of offer and in all
subsequent notices/other communications sent to debenture holders.
● Before appointment, a written consent shall be obtained from such proposed
debenture trustees.
● Disqualifications to be appointed as a debenture trustee –
(1) Beneficially holds shares in the company,
(2) Is a promoter, director, or KMP, or any other officer or employee of the
company/holding/subsidiary/associate company,
(3) Beneficially entitled to moneys which are to be paid by the company otherwise
than as remuneration payable to the debenture trustee,
(4) Indebted to the company/holding/subsidiary/associate/subsidiary of such holding
company,
(5) Furnished any guarantee for debts secured by debentures/ interest thereon,
(6) Pecuniary relationship with company amounting to-
🡺 2% or more of its gross turnover, or Total income, or
🡺 ₹ 50 lakhs, or such higher amount as prescribed,

Whichever is lower, during the 2 immediately preceding F.Y. or during current
F.Y.
(7) Relative of promoter/ any person in employment as director/KMP of the company.
● Casual vacancy in the office of the debenture trustee may be filled by the BOD.
However, while such vacancy continues, remaining trustee or trustees, if any, may
act.
● Where the casual vacancy is caused by the resignation of the debenture trustee, the
vacancy shall only be filled with the written consent of the majority of debenture
holders.
● Removal of debenture trustee from office before the expiry of his term – Only if it is
approved by the holders of not less than 3/4th in value of the debentures outstanding,
at their meeting.
Convening of meetings of debenture holders to protect their interests [Rule 18(4)]

The meeting of all the debenture holders shall be convened by the debenture trustee on –
a) Requisition in writing signed by debenture holders having at least 1/10th in value of the
debentures for the time being outstanding.
b) The happening of any event which constitutes a breach, default or which affects the
interest of the debenture holders.
Procedure to be prescribed by the CG [Section 71(13)]
The CG may prescribe the procedure –
● For securing the issue of debentures,
● For the form of debenture trust deed,
● For inspection of the trust deed by the debenture holders and to obtain copies thereof,
● For the quantum of DRR required to be created, and
● Such other matters.
Limit on Borrowing through Debentures* [Section 71(14)]
● Limit: Borrowings by issue of debentures together with the amount already borrowed
shall not exceed the aggregate of company's paid-up share capital, free reserves and
securities premium account.
● Exceeding the limit: Approval of shareholders through SR is required.
● Temporary loans: Obtained from the company's bankers in the ordinary course of
business are not to be included in the borrowings
*Not applicable to a Private Company

Section 72 - Power to Nominate
● Every holder of securities shall have right to nominate successor.

● In the event of death of the security holder, the nominated person shall be the
deemed owner of the security (irrespective of any other law in force/Will).
● In case of Joint Holders, they must mutually nominate the successor. Such nominated
person shall have right to own the shares in case of death of all the joint holders.
{What if the joint holders do not agree on one nominee name? 🡪 Procedure mentioned
in AoA shall apply}
● In case the nominee is a Minor, then the security holder may appoint another person
to replace such nominee in case of his death during minority.

Chapter 5 – Acceptance of Deposits
Section 73-76A
Relevant Rules: Companies (Acceptance of Deposits) Rules, 2014
Deposits u/s 2(31):
includes any receipt of money by way but does not include such categories
of deposit or loan or in any other of amount as may be prescribed in
form, by a company consultation with the RBI
Deposits can
be Amounts not considered deposits as per Companies
(Acceptance of Deposits) Rules, 2014:
Secured Unsecured
(against
mortgage/pledg
e of a property)
AMOUNTS NOT CONSIDERED AS DEPOSIT

Following categories of amounts are not considered as deposit [Rule 2 (1) (c)]:
(i) any amount received from the Central Government or a state Government, or from
any other source whose repayment is guaranteed by the Central Government or a
State Government, or any amount received from a local authority, or any amount
received from a statutory authority constituted under an Act of Parliament or a
State Legislature;
(ii) any amount received from foreign Governments, foreign or international banks,
multilateral financial institutions etc. subject to the provisions of Foreign Exchange
Management Act, 1999 and rules and regulations made thereunder;
(iii) any amount received as a loan or facility from any banking company or from State

Bank of India or its subsidiary banks or from a notified baking institution or from
any co-operative bank;
(iv) any amount received as a loan or financial assistance from Public Financial
Institutions;
(v) any amount received against issue of commercial paper or any other instruments
issued in accordance with the guidelines or notification issued by the Reserve Bank
of India;
(vi) any amount received by a company from any other company;
(vii) any amount received and held pursuant to an offer made in accordance with the
provisions of the Act towards subscription to any securities (including share
application money or advance towards allotment of securities, pending allotment),
so long as such amount is appropriated only against the amount due on allotment
of the securities applied for;
It is clarified by way of Explanation that if the securities for which application
money or advance for such securities was received cannot be allotted within 60
days from the date of receipt of the application money or advance for such
securities and such application money or advance is not refunded to the subscribers
within 15 days from the date of completion of 60 days, such amount shall be treated
as a deposit under these rules.
However, unless otherwise required under the Companies Act, 1956 or the
Securities and Exchange Board of India Act, 1992 or rules or regulations made
thereunder to allot any share, stock, bond, or debenture within a specified period,
if a company had received any amount by way of subscriptions to any shares, stock,
bonds or debentures before the 1st April, 2014 and disclosed in the balance sheet
for the financial year ending on or before the 31st March, 2014 against which the
allotment is pending on the 31st March, 2015, the company shall, by the 1st June,
2015, either return such amounts to the persons from whom these were received
or allot shares, stock, bonds or debentures or comply with these rules.
Further, it is clarified that any adjustment of the amount for any other purpose
shall not be treated as refund.
(viii) any amount received from a person who, at the time of the receipt of the amount,
was a director of the company or a relative of the director of the private company;
However, the director of the company or relative of the director of the private
company, as the case may be, from whom money is received, is required to furnish
to the company at the time of giving the money, a declaration in writing to the
effect that the amount is not being given out of funds acquired by him by borrowing
or accepting loans or deposits from others and the company shall disclose the
details of money so accepted in the Board's report;
(ix) any amount raised by the issue of bonds or debentures secured by a first charge or
a charge ranking pari passu with the first charge on any assets referred to in
Schedule III
1 of the Act excluding intangible assets of the company or bonds or

debentures compulsorily convertible into shares of the company within 10 years;
However, if such bonds or debentures are secured by the charge of any assets
referred to in Schedule III of the Act, excluding intangible assets, the amount of
such bonds or debentures shall not exceed the market value of such assets as
assessed by a registered valuer.
(a) any amount raised by issue of non-convertible debenture not constituting a
charge on the assets of the company and listed on a recognized stock
exchange as per applicable regulations made by Securities and Exchange Board of
India;
(x) any amount received from an employee of the company not exceeding his annual
salary under a contract of employment with the company in the nature of non-
interest bearing security deposit;
(xi) any non-interest bearing amount received or held in trust;
(xii) any amount received in the course of, or for the purposes of, the business of the
company–
(a) as an advance for the supply of goods or provision of services accounted for in
any manner whatsoever provided that such advance is appropriated against supply
of goods or provision of services within a period of three hundred and sixty five
days from the date of acceptance of such advance:
However, in case of any advance which is subject matter of any legal proceedings
before any court of law, the said time limit of three hundred and sixty five days
shall not apply.
(b) as advance, accounted for in any manner whatsoever, received in connection with
consideration for an immovable property under an agreement or arrangement,
provided that such advance is adjusted against such property in accordance
with the terms of agreement or arrangement;
(c) as security deposit for the performance of the contract for supply of goods or
provision of services;
(d) as advance received under long term projects for supply of capital goods except
those covered under item (b) above;
(e) as an advance towards consideration for providing future services in the form of
a warranty or maintenance contract as per written agreement or arrangement, if
the period for providing such services does not exceed the period prevalent as per
common business practice or five years, from the date of acceptance of such
service whichever is less;
(f) as an advance received and as allowed by any sectoral regulator or in accordance
with directions of Central or State Government;
(g) as an advance for subscription towards publication, whether in print or in
electronic to be adjusted against receipt of such publications;
However, it is clarified that if the amount received under items (a), (b) and (d) above
becomes refundable (with or without interest) due to the reasons that the

company accepting the money does not have necessary permission or approval,
wherever required, to deal in the goods or properties or services for which the
money is taken, then the amount received shall be deemed to be a deposit under
these rules.
Further, by way of Explanation it is clarified that for the purposes of this sub- clause the
amount shall be deemed to be deposits on the expiry of fifteen days from the date
they become due for refund.
(xiii) any amount brought in by the promoters of the company by way of unsecured loan in
pursuance of the stipulation of any lending financial institution or a bank subject to the
fulfilment of following conditions:
(a) the loan is brought because of the stipulation imposed by the lending institutions on the
promoters to contribute such finance;
(b) the loan is provided by the promoters themselves or by their relatives or by both; and
(c) Such exemption shall be available only till the loans of financial institution or bank are
repaid and not thereafter.
(xiv) any amount accepted by a Nidhi company in accordance with the rules made under section
406 of the Act;
(xv) any amount received by way of subscription in respect of a chit under the Chit Fund Act,
1982;
(xvi) any amount received by the company under any collective investment scheme in
compliance with regulations framed by the Securities and Exchange Board of India;
(xvii) an amount of twenty five lakh rupees or more received by a start-up company, by way of
a convertible note (convertible into equity shares or repayable within a period not
exceeding ten years from the date of issue) in a single tranche, from a person;
(xviii) any amount received by a company from Alternate Investment Funds, Domestic Venture
2
Capital Funds, Infrastructure Investment Trusts, Real Estate Investment Trusts and
Mutual Funds registered with the Securities and Exchange Board of India in accordance
with regulations made by it.

Meaning of Depositor
Section 73 Section 76
member of the company who any person who has made a deposit
has made a deposit with the with a public company u/s 76 of the
company u/s 73 Act 🡪 ‘Eligible Company’
'Eligible Company' u/s 76(1):

Public Co. having
-Turnover 500 crore or more or
- Networth 100 crore or more
Eligible Company: Definition as per Rule 2 of Companies (Acceptance of deposits) Rules,

2014
● "Eligible company" means a public company as referred to in sub-section (1) of section
76, having a net worth of not less than one hundred crore rupees or a turnover of not
less than five hundred crore rupees and which has obtained the prior consent of the
company in general meeting by means of a special resolution and also filed the said
resolution with the Registrar of Companies before making any invitation to the Public
for acceptance of deposits:
Provided that an eligible company, which is accepting deposits within the limits
specified under clause (c) of sub-section (1) of section 180, may accept deposits by
means of an ordinary resolution;
Depositor: Definition as per Rule 2 of Companies (Acceptance of deposits) Rules, 2014)

● ‘‘Depositor’’ means,
(i) any member of the company who has made a deposit with the company in
accordance with the provisions of sub-section (2) of section 73 of the Act, or
(ii) any person who has made a deposit with a public company in accordance with
the provisions of section 76 of the Act;

Section 73 - Prohibition from acceptance of Deposit on public
Any company may raise deposit from its members provided following conditions along
with prescribed rules are satisfied.
No company shall invite, accept or renew deposits under this Act from the public except
in a manner provided under this Chapter
Exceptions:
-Banking Co.
-NBFC (non- banking financial company)
-Registered Housing Finance Co.
-Other companies prescribed by government
Conditions:
1. Resolution at GM
2. RBI/CG regulations shall be followed
3. Circular must be sent to members stating-
✔ financial position of company,
✔ credit rating,
✔ Number of depositors
✔ Amount due to be paid to earlier depositors
✔ Other prescribed details
4. Circular must be filed with RoC within 30 days before the date of issue of circular
5. ‘Deposit Repayment Reserve A/c’ must be opened in a separate scheduled bank and
20% of deposits maturing in a FY and next FY shall be deposited in it. It shall not be
used by the company for any purpose other than repayment of deposits.
6. Security shall be provided on deposits raise. Otherwise such deposits shall be mentioned
as ‘unsecured deposits’ in the circular.
7. Company must certify that the company has not committed any default in the
repayment of deposits accepted either before or after the commencement of this Act
or payment of interest on such deposits and where a default had occurred, the company
made good the default and a period of five years had lapsed since the date of making
good the default.
Above points N/A- Private Company if deposits raised are up to the [paid up capital +
free reserve] of the company
8. Relevant rules must be complied with 🡪 Companies (Acceptance of deposit) Rules, 2014

9. Application to Tribunal: Where a company fails to repay the deposit or part thereof
or any interest thereon, the depositor concerned may apply to the Tribunal for an
order directing the company to pay the sum due or for any loss or damage incurred by
him as a result of such non-payment and for such other orders as the Tribunal may
deem fit.
10. Repayment of deposit: Every deposit accepted by a company shall be repaid with
interest in accordance with the terms and conditions of the agreement.
Section 76 - Acceptance of deposit from public by certain companies
✔ Only “eligible public companies” are allowed to accept deposits from public along
with members (refer definition is chart on earlier pages)
✔ Conditions :
o Compliance of conditions u/s 73
o Compliance of prescribed rule🡪 Companies (Acceptance of deposit) Rules, 2014
o Obtain credit rating from recognised credit rating agency at the time of invitation of
deposits from the public which ensures adequate safety and the rating shall be obtained
for every year during the tenure of deposits
o Within 30 days of acceptance of deposit 🡪 charge must be created on assets of the
company (value of security shall not be less than the amount of deposit accepted)
o Other conditions same as on any other deposit (remaining chapter applies mutatis
mutandis)
Other conditions as per Companies (Acceptance of Deposits) Rules, 2014:

Terms & conditions for acceptance of deposit by companies [Rule 3]
1. Period
A company cannot accept the following deposit
● Demand deposit
● Deposits payable within 6 months or after 36 months from the date of acceptance.
Exception- Provided that a company may, for the purpose of meeting any of its
short-term requirements of funds, accept or renew such deposits for repayment
earlier than six months from the date of deposit or renewal, as the case may be,
subject to the condition that-
(a) such deposits shall not exceed ten per cent. of the aggregate of the Paid-up
share capital, free Reserves and securities premium account of the company,
and
(b) such deposits are repayable not earlier than three months from the date of such
deposits or renewal thereof

2. Joint Depositor
Deposits may be accepted in joint name but not more than 3 joint depositors.
3. Limits of amounts companies can accept as deposits (sub rule 3, 4 & 5)
Particulars Pvt Companies Public Companies Eligible Companies
Sources From Directors & From Directors & From Directors & Members
Members Members & Public
Director No Limit, No Limit, declaration No Limit, declaration

declaration required required
required
Members 100% of (Paid up 35% of (Paid up capital + 10% of (Paid up capital +

capital + free free reserves.+ security free reserves.+ security
reserves.+ security premium) Compliance premium) Compliance of
premium) of section 73(2) section 73(2) & 76
Compliance of
section 73(2) *Specified IFSC Public
companies may accept
100% of (Paid up capital
+ free reserves.+
security premium)
Public Not allowed Not allowed Non-Government Eligible

Companies:
Upto 25% of (Paid up
capital + free reserves.+
security premium).
Compliance of section
73(2)
Govt. eligible companies:
Upto 35% of (Paid up
capital + free reserves.+
security premium).

Note:
Maximum limit in respect of deposits to be accepted from members shall not apply to
following classes of private companies, namely:-
(i) a private company which is a start-up, for ten years from the date of its
incorporation;
(ii) a private company which fulfils all of the following conditions, namely:-
(a) which is not an associate or a subsidiary company of any other company;
(b) the borrowings of such a company from banks or financial institutions or any
body corporate is less than twice of its paid up share capital or fifty crore
rupees, whichever is less; and
(c) such a company has not defaulted in the repayment of such borrowings
subsisting at the time of accepting deposits under section 73:
Provided also that all the companies accepting deposits shall file the details of monies
so accepted to the Registrar in Form DPT-3.
4. Ceiling on rate of Interest & Brokerage

Interest rate on deposits & Brokerage shall not exceed the maximum rate on which a
NBFC can pay on their deposits.
5. Other points
● Where depositors so desire, deposits may be accepted in joint names not
exceeding three, with or without any of the clauses, namely, "Jointly", "Either
or Survivor", "First named or Survivor", "Anyone or Survivor"
● Alter Terms of Contract

The company shall not reserve to itself either directly or indirectly a right to
alter, to the prejudice or disadvantage of the depositor, any of the terms and
conditions of the deposit, deposit trust deed and deposit insurance contract after
circular or circular in the form of advertisement is issued and deposits are
accepted.
● Credit rating
(a) Every eligible company shall obtain, at least once in a year, credit rating for
deposits accepted by it and a copy of the rating shall be sent to the Registrar
of Companies along with the return of deposits in Form DPT-3.
(b) The credit rating referred to in clause (a) shall not be below the minimum
investment grade rating or other specified credit rating for fixed deposits,
from any one of the approved credit rating agencies as specified for Non-

Banking Financial Companies in the Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 1998, issued by the
Reserve Bank of India, as amended from time to time.
Form of Advertisement & Circular [Rule 4 ]

Companies Other than Eligible companies
Such kind of companies intending to invite deposits from its members must issue a
circular in form of an advertisement
● Registered post, or
● Speed post, or
● Electronic Mode
In form No DPT-1.
Circular must also be published in
● English language in an English News paper
● Vernacular language in a vernacular news paper
Having its wide range of circulation in the state in which the registered office of
the company is situated.
For Eligible companies

For eligible companies everything will be the same as above it is to be noted that
● It will be issued to the person from which the deposit is invited.
● Additional requirement for eligible companies 🡪 they have to upload the circular
on their website.
Validity of Circular: A circular or circular in the form of advertisement issued shall
be valid until the expiry of six months from the date of closure of the financial
year in which it is issued or until the date on which the financial statement is laid
before the company in annual general meeting or, where the annual general
meeting for any year has not been held, the latest day on which that meeting
should have been held in accordance with the provisions of the Act, whichever is
earlier, and a fresh circular or circular in the form of advertisement shall be issued,
in each succeeding financial year, for inviting deposits during that financial year.
Security [Rule 6]
After acceptance of deposit, every company within 30 days from such acceptance must
provide a security either by way of Charge or by way of Mortgage. The amount of
security must not be less than the amount of Unsecured Deposits.
Trustee [Rule 7]
● Companies accepting deposits must appoint one or more trustees at least 7 days
before issuing of circular.

● Written consent of the trustee must be before their appointment & a statement
shall appear in the circular or circular in the form of advertisement with reasonable
prominence to the effect that the trustees for depositors have given their consent
to the company to be so appointed.
● The company shall execute a deposit trust deed in Form DPT-2 at least seven days
before issuing the circular or circular in the form of advertisement
● Disqualification of Trustee:
No person including a company that is in the business of providing trusteeship
services shall be appointed as a trustee for the depositors, if the proposed trustee
(a) is a director, key managerial personnel or any other officer or an employee of
the company or of its holding, subsidiary or associate company or a depositor
in the company;
(b) is indebted to the company, or its subsidiary or its holding or associate company
or a subsidiary of such holding company;
(c) has any material pecuniary relationship with the company;
(d) has entered into any guarantee arrangement in respect of principal debts
secured by the deposits or interest thereon;
(e) is related to any person specified in clause (a) above
● Removal of Trustee:
No trustee for depositors shall be removed from office after the issue of circular
or advertisement and before the expiry of his term except with the consent of all
the directors present at a meeting of the board. Provided that in case the company
is required to have independent directors, at least one independent director shall
be present in such meeting of the Board
Duties of trustee [Rule 8]

It shall be the duty of every trustee for depositors to-
(a) ensure that the assets of the company on which charge is created together with
the amount of deposit insurance are sufficient to cover the repayment of the
principal amount of secured deposits outstanding and interest accrued thereon;
(b) satisfy himself that the circular or advertisement inviting deposits does not
contain any information which is inconsistent with the terms of the deposit
scheme or with the trust deed and is in compliance with the rules and provisions
of the Act;
(c) ensure that the company does not commit any breach of covenants and
provisions of the trust deed;
(d) take such reasonable steps as may be necessary to procure a remedy for any
breach of covenants of the trust deed or the terms of invitation of deposits;

(e) take steps to call a meeting of the holders of depositors as and when such
meeting is required to be held;
(f) supervise the implementation of the conditions regarding creation of security
for deposits and the terms of deposit insurance;
(g) do such acts as are necessary in the event the security becomes enforceable;
(h) carry out such acts as are necessary for the protection of the interest of
depositors and to resolve their grievances.
Powers to Nominate [Rule 11]

Every depositor may, at any time, nominate any person to whom his deposits shall vest
in the event of his death and the provisions of section 72 shall, as far as may be, apply to
the nomination made under this rule.
Receipt of Deposit [Rule 12]

A receipt of acceptance of the deposit from the depositor must be issued, by the officer
of the company duly authorized by board, within 21 days of such receipt.
Receipt must contain the following
● Date of Deposit
● Name & Address of depositor
● Amount received
● Interest rate
● Date on which it will become due for repayment
Maintenance of Liquid Assets [Rule 13]

For the purpose of this rule following conditions must be complied
● Deposit 20% of the total deposit maturing during the following financial year,
● The amount should be kept in a scheduled bank,
● The account will be called ‘Deposit Repayment Reserve Account’
● The amount shall be deposit up to 30th of April every year
● The amount cannot be used for any purpose other than repayment of deposits.
Register of Depositors [Rule 14]

Every company accepting deposits shall maintain at its registered office one or more
separate registers for deposits accepted or renewed, in which there shall be entered
separately in the case of each depositor the following particulars, namely:-
(a) name, address and PAN of the depositor/s;
(b) particulars of guardian, in case of a minor;
(c) particulars of the nominee;
(d) deposit receipt number;
(e) date and the amount of each deposit;
(f) duration of the deposit and the date on which each deposit is repayable;

(g) rate of interest or such deposits to be payable to the depositor;
(h) due date for payment of interest;
(i) mandate and instructions for payment of interest and for non-deduction of tax at
source, if any;
(j) date or dates on which the payment of interest shall be made;
(k) particulars of security or charge created for repayment of deposits;
(l) omitted
(m) a
ny other relevant particulars;
Time for making entry: The shall be made within seven days from the date of issuance
of the receipt duly authenticated by a director or secretary of the company or by any
other officer authorised by the Board for this purpose.
Preservation of Register: The register shall be preserved in good order for a period of
not less than eight years from the financial year in which the latest entry is made in
the register.
Premature Payment [Rule 15]

Where a company makes a repayment of deposits, on the request of the depositor,
after the expiry of a period of six months from the date of such deposit but before the
expiry of the period for which such deposit was accepted, the rate of interest payable
on such deposit shall be reduced by one per cent. from the rate which the company
would have paid had the deposit been accepted for the period for which such deposit
had actually run and the company shall not pay interest at any rate higher than the
rate so reduced.
Return of Deposit [Rule 16]

● Return of deposit shall be filed in form no. DPT-3,
● Return shall be filed up to 30th June of every year,
● Details of deposits as on 31st march shall be filed in the form
● Return to be duly audited and declaration to that effect shall be submitted by the
auditor in Form DPT-3
Penal interest [Rule 17]

If company makes default in repayment of principal amount of deposits or interest
thereof then the company shall be liable to pay Penalty Interest @18% for the overdue
period on the overdue amount.

Section 76A Contravention of Section 73 or 76
I. Repayment of Principle + Interest due
II. Penalty:
a. Company 🡪 Fine
● Minimum: 1Crore or twice the amount of deposit accepted 🡪 whichever is lower
● Maximum: up to 10 crore
b. Officer in default 🡪
● Imprisonment up to 7 years AND
● Fine 25L to 2 crores
III. In case of wilful default 🡪 officer in default shall be liable u/s 447
Section 74 & 75 Applicable before commencement of the Act
Section 74 - Repayment of deposit accepted before the commencement of the Act
If deposits are accepted before the commencement of the Act,
✔ Company shall File with RoC🡪Within 3 months from commencement of Act/payment

becomes due🡪 a statement of all the deposits accepted by the company and sums
remaining unpaid with interest due thereon
✔ Co. shall REPAY 🡪 Within 3 year from commencement of Act/payment becomes due 🡪
such deposits may be renewed as per rules (amended 15/8/18)
✔ Tribunal may allow further time (on sufficient grounds) Default in complying with this
section:
I. Company shall repay the (principal + interest)
II. Following penalty shall be applicable:
● Company 🡪 1Cr -10Cr
● Officer in default 🡪
o Fine 25L- 2 Crore (or)
o Imprisonment up to 7 years (or)
o Both
Section 75 - Damage for fraud
If there is Default in paying deposit amount u/s 74 in allowed time & intent to fraud is
proved then
✔ Penalty mentioned u/s 74 applicable +

✔ Penalty u/s 447 +

✔ Officer in default shall be personally liable to compensate for the losses or damages
caused to affected parties +
✔ Aggrieved parties may file a case with tribunal
Chapter 6 – Registration of Charge
(Section 77 to 87)
Introduction:
Section 2(16) - “Charges”:
-an interest or lien

- created on property or assets
-of company or its undertaking or both
-as security
-and includes mortgage
Meaning: In order for the company to take loan from any financial institute/bank, it may be
required to keep any of its asset as security. Fetching a loan on basis of the property is
termed as “creating a charge on asset”. This gives protection to the financial institute/bank.
If the loan is not paid in due time, they have the right to sell the asset and recover the
amount due.
Types of Charges

BASIS FOR
FIXED CHARGE FLOATING CHARGE
COMPARISON
Meaning Fixed charge refers to a charge thatFloating charge refers to a charge that
can be ascertained with a specific is created on the assets of circulatory
asset, while creating it. nature.
Nature Static Dynamic
Registration Compulsory
of Compulsory
charge
What is it? A legal charge. An equitable charge.
Preference First Second
Asset type Non-Current Asset Current Asset
Dealing in asset The company has no right to deal The company can use or deal with asset,
with the property, but subject to until crystallization.
certain exceptions.

Some basic terms
Modification of Satisfaction of Registration of

Creation of charge
charge charge charge
Changes in Repayment or Getting the details of

Attaching a property as Charge
security for the repayment of settlement of debt charge recorded
creation due against which with the RoC for
debt due. The date of agreement.
entering such agreement is charge was created. public record.
called creation of charge.
Registration of Charge:
Meaning: Getting the details of charge recorded with the RoC for public record.
Need:
-At the time of winding up of the company, the creditor is treated as secured only
if the charge is registered. Otherwise, they are clubbed with unsecured creditors.
- It creates public record of loans taken on any asset of the company
- Binds parties to contract
- States rights and obligation of parties.
Note: At the time of repayment of loan, the date of creation of charge is relevant to
determine which creditor has first charge. The date of registration of charge is not to be
considered unless it’s winding up.

Parties involved
Chargeholder RoC
Company
It lends the company It is the administrative

It takes the debt from against security athority which maintains
chargeholder and interest. public record of all the
attaches its property as charges of the companies
security for repayment. in its jurisdiction.
Registration Procedure

Sec: 77 - Registration of charge:
Charge created
Register Charge within 30 days of creation with instument of charge, charge particulars signed by both
company and chargeholder & prescribed fees paid by company.
NO
Yes
Charge created before 2/11/2018: RoC may allow Charge created after 2/11/2018: RoC may
extended period of 300 days from creation of allow extended period of 60 days from
charge, on payment of additional fees. creation of charge, on payment of additional
fees.
No NO Yes
Yes
Further extention may be allowed upto 6

RoC may allow a further period of
months from 2/11/2018 on payment of
60 days from payment of
additional fees.
advalorem fees.
● it is mandatory for every company to register charge on Asset
Asset
Intangibl Outside
Tangible In India
e India
● Its companies’ responsibility to register, hence all cost & fees are to be borne by
company.
Note:
1. Registration date does not affect rights of parties prior to registration.

2. On registration, Roc issues “Certificate of Registration of Charge” in the name of
the Charge holder. (Copy is given to company.)
3. Section not applicable on charges prescribed in consultation with RBI.
4. Documents submitted with application for registration:
● Copy of document of Charge creation
● Certificate of verification signed by director/CS/Charge holder/Common
seal verifying the existence of asset on charge.
● Fees prescribed
● particulars of charge in the prescribed form: Form CHG-1 or Form CHG-9
(in case of debentures)
5. Exception to Registration of Creation or Modification of Charge – Any charge
required to be created or modified by a banking company under section 77 in
favour of the Reserve Bank of India when any loan or advance has been made to it
under sub-clause (d) of clause (4) of section 17 of the Reserve Bank of India Act,
1934 (2 of 1934)
Sec: 79 - Modification of Charges
Meaning: Variation in the terms of the charge creation agreement. Eg: Change of interest
rate or repayment schedule, inclusion of second or third charge on the asset, partial release
of charge, etc.
Modification required mandatory registration by the company as per section 77 provision
(mutatis mutandis). “Certificate of registration for Modification of charge” is issued by RoC.
Sec:80 - Person Acquiring Charged Property
Person acquiring charged property where such charge is registered with the RoC, shall be
deemed to have knowledge of the charge from the date of registration of charge.

Sec: 78 - Application for Registration of Charge (Amended 7/5/18)
If the company fails to register charge within 30 days of creation, the chargeholder can apply to RoC with instrument of charge
in prescribed form & fees.
Roc Shall intimate company and give a 14 day period to either register the charge by themselves or object against registration by
chargeholder.
Within 14 days
Objects registration
NO reply
Company may
Register charge by
themself
RoC shall register the charge. Chargeholder shall be
entitled to recover any fees payable for registration
from the company.
Register of Charges
Sec: 81 - Register of Charges maintained by RoC
● RoC maintains register of charges for every company containing details of charges on
each asset, date of creation, amount, charge holder’s details etc.
● Register is open for inspection by anyone on payment of fees.
● M.C.A.’s online site contains register of charges (Deemed RoC’s register)
Sec: 85 - Register of Charge maintained by company
● Every company shall maintain Register of Charges

● Kept at registered office
● In format as per Form No. CHG-7
● Particulars maintained:
⮚ Creation of charge
⮚ Modification of charge
⮚ Satisfaction of charge

⮚ Properties acquired subject to charge
● Entries in Register to be authenticated by:
⮚ Director or
⮚ Secretary or
⮚ Person authorised by BoD
● Preservation of
⮚ Register: Permanently
⮚ Instrument of creation/modification of charge: 8 years from satisfaction.
● Inspection of Register:
⮚ Allowed during business hours
⮚ For Members/Creditors: NO fees
⮚ For Other person: Fees may be applicable
Satisfaction of Charge
Sec: 82 - Reporting the Satisfaction of Charge
Meaning: Where is the secured debt due is paid off/settled and thus the asset no longer is
subject to charge.
Procedure: Sec: 83 - Power of RoC to enter in the Register about Satisfaction of
Charges
If the company has not informed the satisfaction of charge to the RoC & RoC receives
evidence of satisfaction of charge from other source.
RoC will enter in the Register of Charges himself as a memorandum and within 30 days,
intimate affected parties.
Other Provisions
Sec: 84 - Intimation of Appointment of Receiver/Manager
Meaning of Receiver/Manager: Person appointed to manage companies’ asset and liabilities.

At the time of Appointment:
⮚ Intimation to : RoC & Company

⮚ Intimation By: Person appointing Receiver/Manager or person authorised to appoint
them
⮚ When: within 30 days of appointment
⮚ Accordingly the RoC shall record such facts in register of charges.
At the time of cessation of appointment:
⮚ Intimation to : RoC & Company
⮚ Intimation By: Person so appointed whose appointment is ceasing
⮚ Accordingly the RoC shall record such facts in register of charges.
Sec: 86 - Contravention of Chapter VI
⮚ Company: Fine – 5L
⮚ Officer in default:
▪ Fine - 50K
⮚ Wilfully furnishing incorrect information/ knowingly suppresses material facts
required u/s 77, shall be liable u/s 447
Sec 87 - Rectification in Register of Charges by CG
If there is
⮚ Omission or delay to intimate payment/satisfaction of charge
⮚ Omission or misstatement in filing particulars of registration/
modification/satisfaction of charge
Due to
⮚ Accidental/ Inadvertent mistake
⮚ Not to prejudice the position of creditors/shareholders
⮚ Sufficient cause
Then the company/other interested person may apply to CG for rectification of error or
extension of time for intimation of satisfaction. CG may allow if it deems fit. This shall not
affect the rights of the parties.
Rule 13 {Newly Inserted}

SIGNING OF CHARGE E-FORMS FOR COMPANIES UNDER RESOLUTION OR LIQUIDATION
• Form No. CHG-1, CHG-4, CHG-8 and CHG-9

• shall be signed by
o Insolvency resolution professional or

o resolution professional or
o liquidator
for companies under resolution or liquidation, as the case may be and
• filed with the Registrar
List of Forms to be filled with RoC
S.No. E-Form Purpose
1. CHG-1 Creating or Modifying charge (for other than Debentures)
2. CHG-2 Certificate of Registration of charge.
3. CHG-3 Certificate of Modification of charge.
4. CHG-4 Intimation of the satisfaction to the Registrar.
5. CHG-5 Memorandum of satisfaction of charge.
6. CHG-6 Notice of appointment or cessation or receiver or manager.
7. CHG-7 Register of charges.
8. CHG-8 Application for condonation of delay shall be filed the Central

Government.
9. CHG-9 Creating or modifying the charge in (for debentures including

rectification)
10. CHG-10 Application for delay to the registrar.

Chapter 7 – Management and Administration
Section 96-122
Synopsis of the chapter
After Meeting
During Meeting
Meetings Before meeting Sec 118- Minutes of
Sec 103- Quorum
Sec 96- AGM Sec 101- Notice GM
Sec 104- Chairman
Sec 97-99- Sec 102- Sec 119-122- Misc
Default in Explanatory Sec 105- Proxies topics
holding meeting Statement Sec 106-110 - Voting
Sec 100- EGM Methods
Sec 111-117-
Resolution related
concepts
Types of meetings in a company
Board Meeting General meetings Class meetings

Meeting of Board of Meeting of equity Meeting of class of
Directors shareholders stakeholders
Who can call a General Meeting (AGM/EGM)?

1. Board of directors:
BOD can call EGM as per section 100 & AGM as per section 96.
Individual director or secretary cannot call EGM/AGM without BOD authorisation.
2. Members: Members who fulfil requirement of Section 100 may call EGM
3. Tribunal: Tribunal may call AGM u/s 97 & EGM u/s 98

Section 101 - Notice of the Meeting
When: Notice must be sent at least
⮚ All other companies: 21 clear days prior to GM

⮚ Section 8 Company: 14 clear days prior to GM (General Meeting)
Note: (1) “Clear days” does not include
- Date of GM
- Notice serving date to the members (Dispatch Date from the company)
- 2 days for transmission when the notice is sent by post
(2) AoA cannot reduce this time
(3) ‘Shorter Notice’ is allowed if it is ratified by
✔ For AGM: 95% of the members entitled to vote in that meeting in writing or
by electronic mode.
✔ Other Meeting:
Company having share capital: majority in number + representing 95% shares
having voting rights
Company NOT having share capital: members representing 95% voting rights
To:
⮚ Members
⮚ Their legal heirs/ legal representatives
⮚ Assignees of insolvent member
⮚ Auditor
⮚ Directors
Failure to send: Proceedings of GM shall be INVALID Except if it is an unintentional mistake
and company proves the same.
Content of a Notice:
⮚ Date, time, place of GM
⮚ Agenda
⮚ Right to appoint proxy
⮚ Explanatory statement may be attached if special business will be conducted
Mode: It must be in Writing and sent via
⮚ Post (Speed/registered)
⮚ Courier
⮚ Hand delivery
⮚ Electronic Mode (A notice may be sent through e-mail as a text or as an attachment
to e-mail or as a notification providing electronic link or Uniform Resource Locator for
accessing such notice)
Note: For the purpose of this section, the expression ‘‘electronic mode’’ shall mean
any communication sent by a company through its authorized and secured computer
programme which is capable of producing confirmation and keeping record of such

communication addressed to the person entitled to receive such communication at
the last electronic mail address provided by the member.
Provided: Such notice is placed on the website AND advance opportunity is given to
members to update their email ids every FY.
Section 102 - Explanatory Statement
Types of business to be conducted in GM
ORDINARY BUSINESS SPECIAL BUSINESS
These business are compulsorily dealt with in the AGM. Any business other than
They include: ordinary business is called
1. Considering FS 'Special Business'.
2. Declaration of dividend (NOTE: It may require OR/
3. Appointment and retirement of Directors SR depending on the
provisions of Co. Act 2013)
4. Appointment & fixing remuneration of Auditors
Where any special business is to be transacted at the company’s general meeting, then an
‘Explanatory Statement’ should be annexed to the notice calling such general meeting, which
must specify
⮚ nature of concern/interest of every director/manager/KMP and their relatives.
⮚ relevant & material information and facts related to such business
⮚ where any item of special business to be transacted at a meeting of the company
relates to or affects any other company, the extent of shareholding interest in that
other company of every promoter, director, manager, if any, and of every other key
managerial personnel of the first mentioned company shall, if the extent of such
shareholding is not less than 2% of the paid-up share capital of that company, also be
set out in the statement
⮚ Where any item of business refers to any document, which is to be considered at the
meeting, the time and place where such document can be inspected shall be specified

Insufficient disclosure: any benefit which accrues to such promoter, director, manager or
other key managerial personnel or their relatives, either directly or indirectly, the promoter,
director, manager or other key managerial personnel, as the case may be, shall hold such
benefit in trust for the company, and shall, without prejudice to any other action being taken
against him under this Act or under any other law for the time being in force, be liable to
compensate the company to the extent of the benefit received by him.
Contravention of sec 102: Every promoter, director, manager, or other key managerial
personnel or other officer in default:
⮚ Fine 50,000 or Whichever is Lower
⮚ 5 times of benefits accruing to them
Section 103 Quorum

⮚ Meaning: It is the minimum number of members that must be present in the meeting
for it to be valid in the eyes of law.
⮚ Quorum u/s 103 for any GM
Company Quorum
Private company Minimum 2 members
Public Company having
Upto 1000 member 5 members personally present
1001-5000 members 15 members personally present
More than 5000 members 30 members personally present
⮚ AoA may mention a higher quorum

⮚ In case of a private company, quorum mentioned in AoA will prevail over the provisions
of Companies Act.
⮚ Quorum must be present within 30 minutes of commencement of GM, otherwise the
meeting shall stand adjourned for the next week, same time and place or such other
time/place as decided by the BoD.
⮚ At Adjourned meeting: If quorum is not present within half an hour🡪 members present
shall form the quorum. If only one member present🡪 Meeting cancelled
⮚ Notice for Adjourned meeting🡪 not less than 3 days’ notice before GM mandatory
⮚ Meeting by Requisition u/s 100: If quorum is not present 🡪 meeting is deemed
cancelled

⮚ Who shall be considered for Quorum?
o Proxies 🡪 Not counted
o Authorised representative of company🡪 Counted
o Joint holders🡪 Counted as 1
o Person in dual capacity🡪 Counted more than 1
Section 104 – Chairman
⮚ Election of Chairman:
o AoA may specify, otherwise
o members, personally present, shall elect the Chairman among themselves by
show of hands
⮚ If a poll is demanded on the election of the Chairman, it shall be taken forthwith
in accordance with the provisions of this Act and the Chairman elected on a show
of hands under sub-section (1) shall continue to be the Chairman of the meeting
until some other person is elected as Chairman as a result of the poll, and such
other person shall be the Chairman for the rest of the meeting.
⮚ Powers and functions of chairman:
o Manages GM
o Must be impartial and fair
o Maintains decorum of the GM
o Has the power of Casting vote in board meeting and GM if so allowed in AoA.If
not mentioned in AoA, then ordinary resolution on which there is equality of
votes is deemed to be dropped.
{Meaning: in event of the equality of vote on a particular business being
transacted at the meeting, the Chairman shall have a right to cast a second
vote.}
o Can demand a poll under Section 109
Section 105 – Proxies
⮚ Meaning: Any member of a company who is entitled to attend and vote at a meeting
of the company shall be entitled to appoint another person as a proxy to attend and
vote at the meeting on his behalf in case he is unable to attend.
⮚ Role of Proxy
o Cannot participate in discussion in GM
o Cannot vote other than vote by poll
o Is not counted for quorum
o can demand a poll
o can act as proxy for more than one member provided it is not more than

▪ 50 members or
Whichever less
▪ 10% of total voting power
▪ If one of the member has more than 10% voting rights, then proxy
cannot act as proxy of any other member except such member.
⮚ Procedure to appoint proxy:
o every notice calling a meeting of a company shall state right of every
member to appoint a proxy along with Form MGT- 11. Form shall be duly
signed by the member appointing proxy.
o Such form of proxy shall be received 48 hours before the meeting will be
valid
o Such proxy shall be valid for adjourned meetings unless changed by member
o Where more than 1 proxy form is submitted by the member to the
company 🡪 Proxy submitted later shall be considered by the company
provided it is received 48 hours before the meeting.
⮚ Inspection of proxies:
o Allowed to any member
o In the meeting/within 24 hours prior to meeting
o During business hours
o 3 days notice prior to inspection need to be given to the co. by member
⮚ Who can be proxy?
o Generally 🡪Non Member/Member of Co.
o For Sec 8 Co. 🡪 Only Member of Co.
⮚ If member attends GM himself🡪 Proxy is cancelled/revoked
⮚ Proxy is valid even if the member dies/becomes insolvent
⮚ If for the purpose of any meeting of a company, invitations to appoint as proxy a
person or one of a number of persons specified in the invitations are issued at the
company's expense to any member entitled to have a notice of the meeting sent to
him and to vote thereat by proxy, every officer of the company who issues the
invitation as aforesaid or authorises or permits their issue, shall be liable to a penalty
of ₹ 50,000/
- Provided that an officer shall not be liable by reason only of the issue to a
member at his request in writing of a form of appointment naming the proxy,
or of a list of persons willing to act as proxies, if the form or list is available on
request in writing to every member entitled to vote at the meeting by proxy.
⮚ Contravention of this section:
o Failure to state in notice of meeting that a member is entitled to appoint
proxy🡪 Fine of 5K applicable on officer in default

Section 106-110 Methods of Voting
Section 106 Section 107 Section 108 Section 109 Section 110
Restriction on
Voting Show of hands Electronic Mode Poll Postal Ballot
Section 106 - Restriction on Voting
▪ AoA may provide that no member shall exercise any voting right in respect of any share
registered in his name on which
o any amount due and payable from him on calls or
o other sums payable or
o company has exercised the right of lien.
Such member can’t sign a requisition for an extraordinary general meeting.
▪ Company cannot restrict right to vote other than as specified above. Therefore, express
provision is required in the Articles of the company to provide such restrictions.
▪ In Poll 🡪Member may use his votes as he likes
▪ Joint holders 🡪
o Must vote in consensus
o Otherwise, procedure stated in AoA shall apply
o In absence of any such procedure, order of seniority is determined on the basis of
the order in which their names appear in the register of members/ shareholders
Section 107 - Show of hands
⮚ Unless the voting is demanded by way of poll (u/s 109) or by electronic means (u/s
108), the voting should be by way of show of hands in the first instance.
⮚ Declaration by Chairman in the minutes books 🡪 conclusive evidence that the
resolution is passed.
Section 108 - Voting by E-Mode
⮚ Rule 20 of the Companies (Management & Administration) Rules, 2014: Mandatory

option of E-voting must be given to members by following companies:
o Every company which has listed its equity shares on a recognised stock
exchange and

o every company having not less than one thousand members
Exception: Provided that a Nidhi, or an enterprise or institutional investor referred to
in Chapter XB or Chapter XC of the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009 is not required to provide the
facility to vote by electronic means
⮚ Procedure/Steps:
i. Notice of GM:
▪ Must contain the usual details and sent as per section 101
▪ Must be placed on Co. website and 2 newspapers (vernacular and English)
▪ Additional disclosure:
o Details about the option to vote via e-mode like time schedule, id, password
generation method, procedure
o ‘the members who have cast their vote by remote c-voting prior to the meeting
may also attend the meeting but shall not be entitled to cast their vote again’
o Grievance redressal information of the Co. like email address/ phone number
o Details of web address of co. where copy of notice can be found
ii. Time limit for E-voting:
▪ Must be open for minimum 3 days

▪ Must close at 5 pm preceding the date of GM
iii. Who can vote?
▪ Member having physical shares or Dematerialised shares

iv. Scrutinizer:
▪ Appointed by BoD after E-Voting

▪ Can be 1 or more
▪ Practising CA/CS/ Cost Accountant/Advocate
▪ Should NOT BE EMPLOYEE OF Co.
▪ His function is to count the votes in a fair manner and prepare its report
v. After Voting at GM:
▪ Chairman along with the scrutinizer shall count all those members who are present
at the general meeting but have not cast their votes by availing the remote e-
voting facility. Such members shall be allowed to vote at GM
▪ The scrutinizer shall Count all the votes in the presence of at least 2 witnesses.
Witness shall not be employee of company.
▪ He must prepare report within 3 days.
▪ Results shall be posted on the Co. Website. And sent to relevant stock exchanges
▪ scrutiniser shall maintain a register either manually or electronically to record the
assent or dissent received with details of member

▪ register and all other papers shall remain in the safe custody of the scrutiniser
until minutes are prepared
▪ Date of resolution shall be 🡪 date of General Meeting
Section 109 - Demand for Poll
⮚ Meaning: A polling paper is circulated among the members present in the GM wherein
they cast their votes. The voting is based on the % of share capital having voting rights
held by the member
⮚ Who can demand a poll?
o Chairman or
o For Company having share capital
▪ Member/their proxies holding not less than 1/10th of the total voting
power or
▪ Member/their proxies holding shares on which an aggregate sum of not
less than Rs. 5L or such higher amount as may be prescribed has been
paid – up
o For Company not having share capital
▪ Member/their proxies holding not less than 1/10th of the total voting
power
⮚ Person demanding poll can withdraw the same at any time before it commences
⮚ Time of demanding Poll:
o Before declaration of result of voting by show of hands or
o On declaration of such result
⮚ Scrutinizer:
o Appointed by Chairman
o Can be 1 or more
o Should NOT BE EMPLOYEE OF Co.
o His function
▪ ensure proper conduct of the polling process;
▪ maintain proper records
▪ submit a report to the Chairman of the meeting 🡪 containing details of
votes cast in the favour and against the resolution;
▪ ensure compliance of section 109 and Rules
⮚ Procedure of Voting (Rule 21):
o Scrutinizers are provided with the Register of Members, specimen signatures of the
members, Attendance Register and Register of Proxies, other documents
o He shall arrange for Polling papers and distribute them to the members and proxies
present. Prescribed form for Polling paper is Form No. MGT-12.

o Votes shall be collected in a locked and sealed empty polling box. Such box shall
be open only after voting is complete by the scrutinizer in presence of 2 witness
(not employees)
o If a member who has appointed a proxy has voted in person, the proxy’s vote shall
be disregarded.
o In case of ambiguity about the validity of a proxy, the Scrutinizers shall decide the
validity in consultation with the Chairman.
o Scrutinizers shall count the votes and prepare a report addressed to the Chairman.
Chairman shall counter sign such report. Prescribed form for Report is Form No.
MGT-13.
o Voting shall include any E-Votes if any & company shall provide all the necessary
support, technical and otherwise, to the Scrutinizers for purpose of counting such
votes
o Chairman shall declare the result of Voting on poll in the meeting or within 7 days
o Poll must be conducted within 48 hours of demand
Section 110 - Postal Ballot
⮚ Meaning: A post is sent to every member of the company along with the notice wherein
the shareholder has the option to cast its vote and send the same back to the company
within prescribed time. If the vote is casted through post, such member shall not be
allowed to vote in GM.
⮚ Section 2(65) of the Act defines: "Postal ballot" means voting by post or through any
electronic mode
⮚ Mandatory Postal Ballot instead of conducting business at GM:
(a) alteration of the objects clause of the memorandum and in the case of the
company in existence immediately before the commencement of the Act,
alteration of the main objects of the memorandum;
(b) alteration of articles of association in relation to insertion or removal of
provisions which, under sub-section (68) of section 2, are required to be
included in the articles of a company in order to constitute it a private
company;
(c) change in place of registered office outside the local limits of any city, town or
village as specified in sub-section (5) of section 12;
(d) change in objects for which a company has raised money from public through
prospectus and still has any unutilized amount out of the money so raised under
sub-section (8) of section 13;
(e) issue of shares with differential rights as to voting or dividend or otherwise
under sub-clause (ii) of clause (a) of section 43;
(f) variation in the rights attached to a class of shares or debentures or
other securities as specified under section 48;

(g) buy-back of shares by a company under sub-section (1) of section 68;
(h) election of a director under section 151 of the Act;
(i) sale of the whole or substantially the whole of an undertaking of a company
as specified under sub-clause (a) of sub-section (1) of section 180;
(j) giving loans or extending guarantee or providing security in excess of the limit
specified under sub-section (3) of section 186 :
⮚ Postal Ballot cannot be used for:
o Ordinary Business and
o Any business in respect of which directors or auditors have a right to be heard at the
meeting.
⮚ Postal ballot may be used by companies at their option except above mentioned
resolutions.
⮚ Companies that have to mandatorily provide the option of voting by E-Mode, may conduct
the above business in GM instead of postal ballot
⮚ Following Companies not required to transact any business through postal ballot
o One Person Company
o other companies having members up to 200
⮚ Procedure:
✔ Co. shall send Notice to Shareholders stating
o Right to vote via postal ballot
o Procedure to vote
o Time limit of sending votes🡪 Votes must be cast within 30 days of dispatch of
the notice
o Procedure to obtain copy of form if misplaced
✔ Advertisement should be published in 2 newspapers (English, Vernacular) stating the
following matters, namely:-
(a) a statement 🡪 business is to be transacted by postal ballot which includes voting
by electronic means;
(b) the date of completion of dispatch of notices;
(c) the date of commencement of voting;
(d) the date of end of voting;
(e) the statement 🡪 postal ballot received from the member beyond the said date
will not be valid
(f) details on how to obtain a duplicate thereof; and
(g) contact details of the person responsible to address the grievances.
✔ Same shall be published on Co. Website
✔ Scrutinizer:
o Appointed by BoD
o Can be 1 or more
o Suitably qualified
o Should NOT BE EMPLOYEE OF Co.

o His function is to count the votes in a fair manner and prepare its report
o Vote counting 🡪 after the meeting in presence of 2 witness (not employees)
o Report shall be prepared and submitted🡪 to the BoD 🡪 within 7 days of close of
voting
o Shall hold relevant document/records till minutes are prepared
o maintains register of accent/dissent
✔ Result of voting 🡪 declared on Co. Website
Section 111-117 Matters related to Resolutions
Section 112 - Representation Of The President & Governors In Meeting Of

Companies To Which They Are Member
President of India or the Governor of a State if he is a member of a company🡪 may appoint

his representative at any meeting. Such Representative shall have all rights and powers of
member
Section 113 - Representations Of Corporations in Meeting Of Companies And

Creditors
Any Body Corporates who are members/creditor of a company🡪 may appoint their
representative at any meeting by resolution of its directors or other governing body. Such
Representative shall have all rights and powers of member. Such representative shall be
appointed by resolution of the board of directors or of the governing body of such
corporation.
Section 111 - Circulation Of Member’s Resolutions
Members may request any resolution to be considered in an Annual general meeting. The
company shall be bound to give notice to members of details of such resolution and consider
the same at the GM.
Conditions:
⮚ Minimum eligibility criteria for requisitions:

o For Company not having share capital: Members holding 1/10thor more of the total
voting power in the company may submit the request

o For Company having share capital: Members holding 1/10thor more of the paid up
equity share capital of the company may submit the request
⮚ written request with signatures of members shall be submitted at Registered office
⮚ a sum reasonably sufficient to meet the company’s expenses must be submitted
⮚ Time of submission:
(i) in the case of a requisition requiring notice of a resolution, not less than six weeks
before the meeting;
(ii) in the case of any other requisition, not less than two weeks before the meeting;
Exception (No need for the company to circulate such notice):
▪ Application is submitted to CG by the company or other person aggrieved, AND

▪ CG, by order, declares that the rights conferred are being abused to secure needless
publicity for defamatory matter.
▪ Then No need to circulate notice + cost incurred by the company shall be paid to the
company by the requisitionists
Default in Complying with Section:

Company/Officer in default= Fine 25K
Difference between Motion & Resolution
Motion Resolution
Oral opinion or recommendation/proposals Actual
of votes in favour and against are cast
resolution to be passed. to adopt a motion.
No need of quorum Quorum is mandatory
No types Types : OR/SR
Eg: fixing a date of adjournment of GM Eg: Appointing Auditor/Director: OR
required

Section 114 Resolutions
Ordinary Resolution Special Resolution

passed by simple majority, passed by three times majority, i.e. 75% or
more
i.e. more than 50%
Including casting vote of chairman and Notice must specify that SR is required for the
proxies' votes particular business.
Note: For Section 114, votes may be cast by way of show of hands, poll. E mode, or postal
ballot. Votes of proxy (in case of poll) and members present in person shall both be
considered.
Section 115 - Resolutions requiring special notice
⮚ Meaning: In order to consider certain types of resolutions as mentioned under this section
or AoA🡪special notice may be required to be given by the company to all shareholders in
prescribed manner.
⮚ u/s 115 Special notice is required to pass following resolutions:
▪ To appoint as auditor a person other than a retiring auditor – Section 140;
▪ Providing expressly that a retiring auditor shall not be re-appointed – Section 140;
▪ To remove a director under section 169(2) or
▪ To appoint a person to fill the vacancy caused by the dismissal of a director under
section 169 at the same meeting.
▪ Other resolutions company may specify in its AoA
⮚ Application to consider such resolution shall be made to the company
▪ Signed by a minimum:
o members holding not less than 1% of the total voting power or
o holding shares on which such aggregate sum not exceeding ` 5,00,000, has been
paid-up
▪ When:
o At least 14 days prior to the GM
o Maximum 3 months prior to the GM
o Excluding date of GM and notice given
⮚ On receipt of Application 🡪
o the company shall give its members, notice of the resolution 🡪 at least 7 days

before the meeting (exclusive of the day of dispatch of notice and day of the
meeting)
o Where it is not practicable to give the notice in the same manner🡪 Notice in 2
Newspapers (vernacular + English)+ Company Website {7 days prior to GM}
Section 116 - Resolutions passed at adjourned meeting
Date of resolution passed at an adjourned meeting (Gm/BoD Meeting/Class Meeting)🡪 date

on which it is actually passed and not an earlier date
Section 117 - Resolutions and agreements to be filed
✔ Every Resolutions and agreements shall be filed with the RoC, together with the
explanatory statement, within 30 days of its passing🡪 Form MGT- 14
✔ Any resolution/agreement that causes alteration of AoA🡪 shall be annexed to every copy
of AoA
▪ Special resolution
▪ Unanimous resolutions
▪ Board Resolution for appointment/ reappointment of MD
▪ Resolution of class of shareholders
▪ Resolution u/s 180
▪ Winding up resolution
▪ Resolution u/s 179(3)* (see below)
▪ Other prescribed resolution/agreements
*Provided no person shall be entitled under section 399 to inspect or obtain copies of such
resolutions.
Provided further that nothing shall apply in respect of a resolution passed to grant loans,
or give guarantee or provide security in respect of loans under section 179(3)(f) in the
ordinary course of its business by, —
(a) a banking company;
(b) any class of NBFC registered under Chapter IIIB of the Reserve Bank of India Act, 1934,
as may be prescribed in consultation with the RBI;
(c) any class of HFC registered under the National Housing Bank Act, 1987, as may be
prescribed in consultation with the NHB; and

Default:
● Company
▪ Fine- ₹ 10,000
▪ Continuing default – Further penalty of 100/day
▪ Subject to max 2L
● Officer in default
▪ Fine - ₹ 10,000
▪ Continuing default - Further penalty of 100/day
▪ Subject to max 50K
Section 96 - Annual General Meeting (AGM)
⮚ Every company must have 1 AGM every FY

⮚ Section N/A on🡪 OPC
⮚ Time Limits for holding AGM:
o First AGM must be held 🡪 within 9 months from end of FY
o Subsequent AGM Must be held 🡪 within 6 months from end of FY
o Maximum gap between 2 AGM🡪 15 months
o Extension 🡪 Maximum 3 months extension may be allowed on application to RoC
by showing sufficient cause (N/A to first AGM)
o GM cannot be held on National Holidays ( 15 Aug, 26 Jan, 2 Oct, other declared
public holidays)
o Held during business hours between 9a.m.and 6p.m.
⮚ Place of Holding (amended 13/6/18):
Listed Co:
Registered office of company or
o
Any other place in the same city where Registered office is located
o
Unlisted
Co.
Any place in India provided prior consent is obtained from ALL the members 🡪
o
in writing or electronically
⮚ CG may exempt any class of companies from above section.
Section 97 - Default is made in holding the AGM
⮚ Application may be sent by any member of the company to 🡪 NCLT

⮚ NCLT may call or direct an AGM and give such ancillary or consequential directions as
it thinks fit.

Section 98 - Default is made in holding the EGM
If for any reason, it is impracticable to call an EGM🡪 NCLT may call so 🡪 on application of any
director/member of the company/Suo Moto
Section 99 - Punishment for default in complying with the provisions of section

96-98
● Company/Officer in default:
▪ Fine 🡪 up to 1L
▪ Continuous default 🡪 5K/day
Section 121 - Report on Annual General Meeting
A Report on AGM is mandatory to be filed
⮚ by Listed Public Company

⮚ to the RoC
⮚ In form MGT -15
⮚ within 30 days of AGM
Default (amended 2/11/18):
⮚ Company : Fine minimum 1L - Maximum 500/day up to max 5L
⮚ Officer in default : Fine minimum 25K -maximum 500/day up to max 1L
Section 100 - Extra-ordinary General Meetings
Who can call an EGM?

▪ BoD or
▪ Requisition from members holding at least 1/10th of total voting power
Place of holding (amended 9/2/2018):
▪ Generally for all Companies covered under Co. Act 2013🡪 Any place in India
▪ Wholly owned subsidiary of a company incorporated outside India🡪 In/Outside India
Requisition by members
▪ Should set out all the matters for consideration at EGM
▪ Signed by all requisitionists
▪ sent to the registered office of the company

▪ Reasonable expenses incurred shall be reimbursed by the requisitionist. In case of
default in holding meeting, the same expenses shall be deducted from salaries of
directors in default.
Default in holding EGM
▪ If the Board does not call a meeting within 21 days from the date of receipt of valid
requisition (to be held not later than 45 days from receipt of requisition), then the
requisitionists may themselves call a meeting within a period of 3 months from the
date of requisition.
Section 122 Applicability OF This Chapter To One Person Company

Sec 98, 100-111 🡪 Not applicable to OPC
Sections related to holding board meeting 🡪 Not applicable to OPC
Section 118 Minutes of the Meeting
Meaning: It is the summary of the proceedings of the meetings conducted.

Scope of this section: Proceedings of
o GM
o Meeting of class of Shareholders
o Meeting of class of Creditors
o Board Meeting
o Meetings of Committee of Board
o Resolution cast by postal ballot
Time of preparation: within 30 days of GM/resolution
Contents:
Fair and correct summary of business transacted in GM
Consecutively numbered
Each page shall be initialled or signed and Last page should be Dated and signed
All appointments made shall be included
If in opinion of chairman🡪Matters are defamatory of any person, irrelevant or immaterial to
the proceedings, detrimental to the interests of the company🡪 may not be included in
minutes

matter to be included or excluded in the minutes of the meetings shall be at the absolute
discretion of the Chairman
Every company shall observe Secretarial Standards with respect to general and Board
meetings, specified by ICSI
Minutes kept in accordance with the provisions shall serve as the evidence of the proceedings
therein.
Signature by:
Chairman of the Meeting. OR
In the Event of Death or Inability of that Chairman: By any Director who was present in the
Meeting and (+) duly authorized by the Board for the purpose, within 30 days of General
Meeting
Place of keeping: Registered office
Preservation: Permanently { kept in the custody of the company secretary or any director
duly authorised by the board}
Default:
● Company
- Fine of Rs 25000
- Fine of Rs 5000
Penalty for tampering with minutes 🡪 Imprisonment up to 2 years + Fine 25K-1L
Section 119 - Inspection Of Minute-Books Of General Meeting
Allowed to 🡪 only members

Inspection at the registered office is allowed Without fees🡪During business hours
(Minimum 2 hours per day should be allowed in AoA)
Member may request a copy of any minutes from Co.+ pay prescribed fees🡪 shall be
furnished within 7 working days of request.
Default:
Company 🡪 25K/each refusal
Officer in default 🡪 5K/each refusal

Section 120 - Maintenance and inspection of documents in electronic mode
⮚ Without prejudice to any other provisions of this Act, any document, record, register,
minutes, etc.,—
(a) required to be kept by a company; or
(b) allowed to be inspected or copies to be given to any person by a company under
this Act, may be kept or inspected or copies given, as the case may be, in
electronic form in such form and manner as may be prescribed.
⮚ Section refers to Rules w.r.t maintaining and inspecting document, record, register or
minute in electronic form
⮚ {Rule 27} Mandatory for following companies to maintain document in E-format
o Listed Co. or
o Co. having 1000 or more security holders (debenture-holders/
shareholders/etc.)
⮚ {Rule 28} Persons responsible for maintaining:
o MD
o CS
o Other director/officer authorised by BoD
⮚ {Rule 29} Company shall have the same responsibilities to make those records
available for inspection or to provide copies of the whole/ part of those records.
Section 92 - Annual return (AR)
⮚ Relevant rules: Companies (Management & Administration) Rules, 2014

⮚ Meaning: This is a form containing details of major occurrences during the Financial
Year that must be filed by every company with the RoC.
⮚ Form No. : MGT 7
⮚ Particulars contained:
▪ Details of registration
▪ Particulars of the company’s registered office
▪ Principal business activities pursued by the company
▪ Particulars of Holding, Subsidiary and Associate Companies
▪ Particulars of the shares, debentures and other securities of the company
▪ Particulars of turnover and net worth of the company
▪ Details of shareholding pattern.

▪ Details of members, debenture holders and other securities holder
▪ Details of shares/Debenture transfers of the particular financial year
▪ Particulars of promoters
▪ Particulars of directors
▪ Particulars Key Managerial Personnel
▪ Details of meetings of members/class of members/Board/Committees of the
Board of Directors
▪ Remuneration of directors
▪ Remuneration of Key Managerial Personnel
▪ Details on penalties/punishment/compounding of offences on company,
directors and other officers in default
▪ Details of matters pertaining to certification of compliances and disclosure
▪ Details in respect of shares held by or on behalf of the Foreign Institutional
Investor (FII)
▪ Details of other pertinent disclosures
⮚ Time of filing AR with ROC: Within 60 days from the

o AGM or
o Last date of holding AGM (with reasons for not holding an AGM)
⮚ Signing of AR:
o 1 Director +
o CS of the company or Practising Company secretary (PCS)
OPC/Start-up Co. : If there is not CS, then 2 directors may sign
⮚ Central Government may prescribe abridged form of annual return for OPC, small
company and such other class or classes of companies as may be prescribed.
o Rule 11 prescribes Abridged annual return Form MGT 7A for OPC and small
company from the financial year 2020-2021 onwards
⮚ Preservation of AR & related documents: 8 years from the date of filing it with RoC
⮚ Every company shall place a copy of the annual return on the website of the
company, if any, and the web-link of such annual return shall be disclosed in the
Board's report
⮚ Certification of AR:
Following companies need to certify the AR filed (MGT-7) from another PCS in FORM
MGT-8 and file with RoC:
▪ Listed Company
▪ Other companies having
o Paid up share capital not less than 10 crore or
o Turnover not less than 50 crore
Note: the PCS who certifies MGT 8 should not be the same who certifies MGT-7
⮚ Contravention of this section:
o Company/Officer in default:
Penalty 10K

Continuing Failure – Further penalty Rs 100/day up
Subject to maximum 2L (company) & 50K (Officer in Default)
o Company Secretary in practice who certifies AR without confirming to
this section: Penalty 2L
[Section 93: OMITTED]
Registers [Section 88-91, 94, 95]
Section 94 - Place of keeping Register, return, etc.
Place of keeping Register, return, etc.
Registered office
Other place In India
Provided:
SR passed at GM +
1/10th or more of members
reside in that place in India
⮚ Inspection:
o Allowed to interested parties (debenture-holders, deposit holders,
shareholders etc.)
o During business hours
o On payment of fees
o BoD may fix a few hours of the day for inspection (NOT less than 2 Hrs/day)
o Photocopies can be taken
o Certain prescribed particulars of registers/ returns shall be not be available for
inspection/taking copies
o Following particulars of the register/index/return in respect of the members
of a company shall not be made available for any inspection under S. 94(2) or
for taking extracts or copies under S.94(3) :
▪ address or registered address (in case of a body corporate);
▪ e-mail ID
▪ Unique Identification Number

▪ PAN Number
⮚ Default in allowing inspection:
o Company/Every officer in default:

▪ Rs. 1000/day
▪ Max 1L
⮚ CG (RD) may order immediate inspection of documents/extracts to be given to any
person.
⮚ Preservation of registers:
Preservation of registers (custody of CS/other person authorised by BoD)
Register of Copies of Annual

Register of Members Debenture/other Foreign register
return/ other
Permanently security holders permanently unless its
document filed
8 years from the discontinued
with RoC
date of 8 years from the
redemption date of filing
with RoC
Section 95 - Registers, etc. to be evidence
All the registers. returns and its copies shall be allowed as prime facie evidence in the court
of law.
Section 88 – Registers
Registers covered under secion 88
Register of Members Register of Debenture Register of other security holders

holders

❖ Register of Members
▪ Form No. MGT-1
▪ Contains following details
o Members details: name, address, nationality, PAN, DOB, nominee details,
email, joint holder name, if it is a minor then details of guardian
o Shareholding details: Amount, share type (Equity/preference), details of
hypothecation/pledge, court order related
o Date of purchase
o Date of cessation
o Guarantee amount (if company limited by guarantee)
o Notice relating to instruction given by shareholder
o Any changed in above
▪ Preservation: Permanently
❖ Register of Debenture-holder/ other security Holders:

▪ Form: MGT- 2
▪ Mandatory for every company that issued debenture/ other security to maintain.
▪ Details contained
o Security holders details: name, address, nationality, PAN, DOB, nominee
details, email, joint holder name, if it is a minor then details of guardian
o Investment details: Amount, security type, details of hypothecation/pledge,
court order related
o Date of purchase
o Date of cessation
o Notice relating to instruction given by shareholder
o Any changed in above
▪ Preservation: 8 years from redemption
❖ Register Index of Beneficial owners:

Beneficial owners mean the investor who purchase dematerialised shares from stock
exchange.

Company Depository Beneficial
owners
Issues all the It holds shares on behalf of the
shares in the They purchase
beneficiary owners.
name of the shares in demat
there are 2 depositories in
depository India: NSDL (National Securities form.
Depository Limited) and CDSL They are actual
(Central Depository Services owners of the
(India) Ltd) securities
they maintain electronic
record of all securities, security
holders and transations
Register maintained by the Depository is “deemed register” and in compliance with section
88.
❖ Foreign Registers
o Meaning: Separate Register maintained outside India to record the transactions of
foreign security holders.
o It’s is deemed part of the principal register.
o Company may maintain such register provided following conditions followed:
Opening foreign register
▪ AoA must authorise (else alter AoA)
▪ Open Foreign register and send a copy to registered office in home country
▪ Within 30 days of receipt of register in home country, RoC must be informed
in form No. MGT 3-
o address where foreign register is maintained
o change in address
o discontinuance details
Discontinuing foreign register
▪ Form MGT – 3 must be filed with Roc

▪ Such facts of closing must be published before closing in 2 newspapers
circulating in the place where foreign register is maintained
▪ All entries fo foreign register must be merged in principal register
Procedure for New entry in foreign register

▪ Entries must made within 15 days from the date on which BOD has
authorised the allotment of securities
▪ Copy of the entries must be sent to Indian registered office
❖ Default in complying with section 88

▪ Company: Penalty – ₹3 lakh
Compoundable offence
▪ Office in default: Penalty – ₹50,000
Section 89 - Declaration in respect of Beneficial Interest in any shares
⮚ Beneficial Interest {meaning for section 89 & 90}

o Right of the person
o directly / indirectly
o Alone or with others
o Through contract/ arrangement/ otherwise
o Right or entitlement of a person alone or together
with any other person
o To 🡪 receive dividend/bonus shares/right shares/ exercise other rights attached
to such shares
{Crux: the ultimate benefits of ownership of the shares are directed towards
such individual}
⮚ Name entered in Register but not holding beneficial interest: File MGT 4 to company
within 30 days from date of entry in register
⮚ Any changes in above: registered owner shall File MGT 4 to company within 30 days
from date of change
⮚ Person acquiring/already holding beneficial interest but not required to file
declaration above: File MGT 5 to company within 30 days from date of acquiring
beneficial interest
⮚ Any changes in above: Person acquiring/already holding beneficial interest shall File
MGT 4 to company within 30 days from date of change
⮚ Company shall
o maintain register of such declaration received and
o file details of such declaration to RoC within 30 days of receiving them with fee
in form MGT- 6

⮚ Nothing in this section shall be deemed to prejudice the obligation of a company to
pay dividend to its members under this Act and the said obligation shall, on such
payment, stand discharged
⮚ Central Government may, by notification, exempt any class (es) of persons from
complying with any of the requirements of this section, except sub-section (10), if it
is considered necessary to grant such exemption in the public interest and any such
exemption may be granted either unconditionally or subject to such conditions as may
be specified in the notification.
⮚ Default:
Person required to file declaration:
o Penalty - 50K
o Continuing failure: Rs 200/day after first day during which failure continues
o Subject to Maximum: 5L
o Rights relating to shares shall not be enforceable unless declaration filed
(Exception: Dividend payment is not effected. CO. shall pay dividend
irrespective)
Company/Officer in default:
o Penalty of ₹1,000 for each day during which such failure continues
o Subject to max. of
₹5L - in case of company
₹2L - in case of officer in default
Section 90 - Investigation of beneficial ownership of shares in certain cases
⮚ Declaration to Company:
o Any individual (alone/with other person or trust 🡪 In/outside India)
o having beneficial interest in shares of company of not less than 25% or such
percentage as may be prescribed /significant influence or control over the
company
o must file declaration
▪ Form BEN-1 to company
▪ within 30 days of acquiring interest
▪ Content of declaration: nature of interest, amount, date of creation etc.
▪ CG may exempt certain class of person
Duty of Companies
⮚ Register of declarations of beneficial interest
o shall be maintained by Co.
o Contents : name, address, DoB,, details of ownership, other prescribed details
o Inspection: allowed to members on payment of prescribed fees
⮚ Return with RoC:

o Return of significant beneficial owners shall be filed by Co. to RoC
o Form BEN-2 + fees
o within 30 days from receipt of declaration
⮚ Every company shall take necessary steps to identify an individual who is a
significant beneficial owner in relation to the company and require him to
comply with the provisions of this section.
⮚ Notice to unregistered significant beneficial owners in form BEN-4:

o Company must send notice to
All those who have not registered ▪ significant beneficial owners
themselves with the company as ▪ those having knowledge of Identity of significant
significant beneficial owners beneficial owners
▪ significant beneficial owners in 3 PFY
Such person shall send his details to the company within 30 days of date of notice
If such information is not received in allowed time/received but is not satisfactory then,
company may apply to tribunal within 15 days of above time.
Within 60 days of application, Tribunal shall give opportunity of being heard to parities
concerned & pass order restricting rights attached with shares
Person aggrieved by order can apply to tribunal within 1 year requesting to relax the restrictions.
Otherwise, after 1 year shares are transferred to IEPF (U/s 125){Investor Education and
Protection Fund)
o CG may make rules for the purpose of this section
⮚ Penalty:

o Company fails to maintain register/file information with RoC/allow
inspection/take necessary steps to identify significant beneficial owners
shall be liable to
- Company Compoundable offence
● Penalty – 1L
● If failure continues, further penalty of Rs. 200/day
● Subject to maximum of 5L
- Officer in default
● Penalty – 25K
● If failure continues, further penalty of Rs. 200/day
● Subject to maximum of 1L
o Person required to make declaration fails to do so:
▪ Penalty - 50K
▪ If failure continues, further penalty of Rs. 1000/day
▪ Subject to maximum of 2L
o Any person wilfully furnishing wrong information/suppressing facts🡪 Section
447
Section 91 - Power to Close Register
Company can close the register of members/debenture-holder/ other security holders

provided following conditions are followed:
● Prior Notice of 7 days must be
o published in 2 newspapers (English & vernacular) having wide circulation
in the place where registered office of the company is situated
o sent to every members/debenture-holder/ other security holders and
o published on website (if it’s a listed company)
● Maximum period for closing register:
o 30 days at a stretch and
o 45 days in full financial year
● Contravention by company/ officer in default :
o Fine Rs 5000/day (Max 1Lakh) Compoundable offence

Chapter 8 - Declaration & Payment Of Dividend
Section 123-127
Relevant Rules: Companies (Declaration & Payment of Dividend) Rules, 2014
Dividend:
⮚ Section 2(35) of the Companies Act, 2013, simply states that “dividend” includes any
interim dividend.
⮚ A dividend is a payment made by a company to its shareholders, usually as a
distribution of profits
Types of Dividend:
a) Based on time of declaration
Interim Dividend Final Dividend

Dividend declared between two annual Dividend is declared at the annual
general meetings of the company general meeting (AGM) of the company
Declared by BoD Declared by passing OR at AGM

It can be revoked with the consent of all It can be revoked with the consent of all
shareholders shareholders
It is declared only when the articles It is declared only when the articles
specifically permits the declaration. specifically permits the declaration.
All the provisions covered in this chapter are applicable on both types of dividends
b) Based on nature of shares
Equity Dividend Preference Dividend

Paid after preference dividend Paid before equity dividend
Paid to equity shareholders Paid to preference shareholders
Fluctuating every year🡪 Fixed 🡪 based on agreement

depends on dividend policy and
availability of profits & is
declared either by BoD or in GM
N.A. Types:
(1) Cumulative: dividend on these shares
accumulates & is paid from future profits
unless it is paid in full
(2) Non- Cumulative: In case no dividend is
declared in a year due to any reason, the
right to receive such dividend on such
shares for that year expires. Shareholder
is not entitled to arrears of dividend in
future
Section 123 - Declaration of dividend
Following conditions must be followed to declared dividend:

I. Source of Dividend:
a) profits of the company for that year arrived at after providing for depreciation
b) profits of the company for any previous financial years arrived at after
providing for depreciation
c) out of both (a) and (b); or
d) money provided by the Central Government or a State Government for the
payment of dividend
Note:
- Depreciation and brought forward business loss must be set off from profits of
current and previous years before payment of dividend.
- Above profits do not include
● Notional profits
● Revaluation profits
● Unrealised gains
● Capital profits
- If depreciation is not provided for there will be two consequences:
i. The value of the asset will be overstated in Balance Sheet
ii. The profits of the current year will be overstated.
II. Transfer of Profits to Reserve before payment of dividend:
▪ Allowed (not mandatory)
▪ % of profits to be transferred is decided at the discretion of the company (by
BoD)

III. Only Free Reserves can be used to declare dividend (NOT dedicated reserves Eg:
Securities premium, capital reserves, CRR, DRR, other)
IV. Interim dividend:
✔ Declared by BoD
● during the FY or
● period between close of FY and holding of AGM
✔ Source :
● Out of profits generated in the FY for which interim dividend declared
or
● Out of profits of FY till quarter preceding date of declaration of interim
dividend
🡪 if company has losses till such quarter, then dividend rate cannot be
more than average rate of 3 PFY
V. Declaration of dividend out of accumulated/previous years’ profits/Free Reserves:
In case of inadequacy or absence of profits in any financial year,

- if dividend is declared out of the accumulated profits of previous years
maintained as reserves 🡪 conditions stated in Companies (Declaration of
Dividend) Rules, 2014 must be followed.
- Exemption 🡪 100% shares held by CG/SG/Both
Conditions stated in Companies (Declaration of Dividend) Rules, 2014
a) Rate of Dividend not more than🡪 (RD1 +RD2 + RD3)/3
Where, RD1, RD2, RD3 are rates at which dividend was declared by it in the 3 years
immediately preceding that year.
[Not apply 🡪 if a company has not declared any dividend in each of the 3 preceding
financial years.]
b) Total amount that can be drawn

from accumulated profits
- not more than 🡪 1/10 of (Paid up
share capital+ Free
reserves)
c) Amount so drawn shall first be utilised to set off the losses incurred in the financial
year in which dividend is declared

d) Balance of reserves after such withdrawal 🡪 not less than 15% of its paid up share
capital in latest audited financial statement.
VI. Depositing of amount of dividend: It shall be deposited in a scheduled bank in a

separate account within 5 days from the date of declaration
[Not apply 🡪 if a company has not declared any dividend in each of the 3 preceding
financial years.]
VII. Payment of dividend:

a. Mode:
✔ Cash
✔ Cheque
✔ Warrant
✔ Electronic Mode
Not Allowed:
🗶 In kind
🗶 Postdated cheques
🗶 Capitalization of profits (Eg: issue of bonus shares in lieu of dividend
or converting partly paid shares to fully paid in lieu of dividend)
b. Paid to:
✔ Registered shareholder
✔ Order of registered shareholder
✔ His banker
VIII. Failure to comply with Sec 73 & 74:

Where the co. has failed to comply with Sec 73 or 74 of Co. Act 2013, 🡪 shall not
declare any dividend on its equity shares so long as such failure continues.
[Section 73 - Prohibition on acceptance of deposits from public
Section 74 - Repayment of deposits, etc., accepted before the commencement of this

Act]
IX. Section 8 Company🡪 cannot pay/declare dividend to its members. Their profits are
intended to be applied only in promoting the objects of the company.

Section 124 - Unpaid Dividend Account
S: 123 Dividend
Declared Dividend shall be deposited in a
scheduled bank in a
separate bank account
30 Days within 5 days from
declaration
Dividend Not Paid/ Claimed
7 Days
Deposit the unpaid/ Unclaimed If not done Pay Interest @ 12%

dividend amount in Bank (Called
p.a. (from the date of
Unpaid Dividend Account)
default)
90 Days
Prepare Statement (Name, Last known

address, unpaid dividend account)
Put on
Website of Website approved by
Co. Govt for this purpose
Seven years
Transfer to IEPF (Unpaid/Unclaimed

Dividend + interest )
Contravention of this section:

● Company
- Penalty: 1L
- Continuing failure: Further penalty of ₹500/day
- Subject to maximum: 10L

- Penalty: 25K
- Continuing failure: Further penalty of ₹100/day
- Subject to maximum: 2L
Section 125 - Investor Education and Protection Fund (IEPF)

⮚ Established by 🡪 CG
⮚ Credit of amount to the Fund 🡪
o Amount given/donations by the Central Government
o Amount of Unpaid Dividend Account
o Amount transferred from IEPF A/c of government under Co. Act 1956
o income received out of investments made from the Fund;
o Application money received by companies which is due for refund but remains
unclaimed for 7 years
o Unclaimed Matured deposits for 7 years
o Unclaimed Matured debentures for 7 years
o Interest accrued on unclaimed amounts mentioned above
o redemption amount of preference shares remaining unpaid or unclaimed for 7 or
more years
o Other Sums {Rule 3(2) of Investor Education and Protection Fund Authority
(Accounting, Audit, Transfer and Refund) Rules, 2016}:
▪ Amounts mentioned above
▪ All shares u/s 124
▪ all the resultant benefits arising out of shares held by the Authority above
▪ all grants, fees and charges received by the Authority under these rules
▪ all sums received by the Authority from such other sources as may be decided
upon by the Central Government
▪ all income earned by the Authority in any year
▪ all shares held by the Authority in accordance with proviso under section
90(9) of the Act and all the resultant benefits arising out of such shares,
without any restrictions
▪ all other sums of money collected by the Authority as envisaged in the Act.
▪ all amounts payable as mentioned in section 10B(3) of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970, section 10B of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980,
Section 38A(3) of the State Bank of India Act,1955, and section 40A of the
State Bank of India (Subsidiary Bank) Act, 1959
⮚ Utilization of the Fund:
o refund to investors 🡪 unclaimed dividends, matured deposits, matured
debentures, the application money due for refund
o promotion of investors’ education, awareness and protection
o distribution of any disgorged amount among eligible and identifiable applicants

who have suffered losses due to wrong actions by any person, in accordance
with the orders made by the Court
o reimbursement of legal expenses incurred in pursuing class action suits
o other purpose
⮚ Authority to manage IEPF
o CG has set up an authority under this section by notification
o Purpose 🡪 administration of the Fund
o Composition 🡪 a chairperson + such other members, not exceeding seven + a CEO
🡪 as appointed by CG
⮚ Rules prescribed [Education and Protection Fund Authority (Appointment of Chairperson
and Members, holding of meetings and provision for offices and officers) Rules, 2016 ]
state about procedures to
▪ administration of the Fund,
▪ appointment of chairperson, members and chief executive officer,
▪ holding of meetings
⮚ Other Points:
▪ CG appoints required no. of officers and employees to handle the fund
▪ Separate Accounts are required to be maintained for the fund
▪ Accounts are annually audited by auditor appointed by CAG.
▪ Audit Report along with Annual report is forwarded to CG and laid in both houses
of parliament.
Section 126 - Right Of 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 then
Such transferor may authorise in writing to the In absense of such request, such Dividend shall be
company to transfer such Dividend declared to transfered to to the Unpaid Dividend Account u/s
transferee 124. ,
• Bonus shares & right shares w.r.t such unregistered transfer of shares 🡪 shall be
kept in abeyance (on hold till the transfer is registered).

Section 127 - Punishment For Failure To Distribute Dividends
● Dividend declared but not been paid within 30 days from declaration:
o Directors knowingly part of the default 🡪 imprisonment upto 2 years + fine
1000/day
o Company 🡪 18% p.a. interest till the delay continues shall be paid to the
members
● Exceptions to above (No penalty applicable): where the dividend could not be paid to
shareholder due to
a. operation of any law;
b. shareholder has given directions to the company regarding the payment of the
dividend and those directions cannot be complied with and the same has been
communicated to him;
c. dispute regarding the right to receive the dividend;
d. dividend has been lawfully adjusted by the company against any sum due to it
from the shareholder;
e. any other reason where the failure to pay the dividend was not due to any
default on the part of the company.
Chapter 9 - Accounts of the company
Section 128-138
Section 128 - Books of Accounts, etc. to be kept by the company
● Company must keep its ‘Books of A/c’ and papers for every Financial Year
⮚ True & fair view
⮚ Double entry
⮚ Accrual basis
● Definition of ‘Books of Accounts’ u/s 2(13) can be summarised as under:
Books of Accounts
All sums of money all sales and the items of

received and purchases of goods the assets
cost
expended and services and liabilities

● ‘Books & Papers’ u/s 2(12) says “Book or Paper” include accounts, deeds, vouchers,
writings, and documents.
● Place of Keeping the BoA: Registered office of the Company.
However, the BoD may decide another place in India to keep them. Notice of such
place must be given to RoC within 7 days.
● Maintaining BoA in Electronic Form [Rule 3 of Companies (Accounts) Rules, 2014]:
Companies have the option to maintain its BOA & other papers in electronic form
provided following conditions are satisfied:
⮚ BoA accessible in India at all times.
⮚ Information contained is retained in the original format
⮚ Information is complete and accurate
⮚ It is displayed in legible form
⮚ It includes branch information
⮚ The back-up of the books of account and other books and papers of the
company maintained in electronic mode, including at a place outside
India, if any, shall be kept in servers physically located in India on a
daily basis.
⮚ Provided that for FY commencing on or after 1st day of April, 2023, every
company which uses accounting software for maintaining its books of account,
shall use only such accounting software which has a feature of recording audit
trail of each and every transaction, creating an edit log of each change made
in books of account along with the date when such changes were made and
ensuring that the audit trail cannot be disabled.
⮚ RoC is given details annually about the
(a) the name of the service provider;
(b) the internet protocol address of service provider;
(c) the location of the service provider (wherever applicable);
(d) where the books of account and other books and papers are maintained on
cloud, such address as provided by the service provider
(e)where the service provider is located outside India, the name and
address of the person in control of the books of account and other books
and papers in India.
● Branch Accounts may be maintained at the branch provided periodically summarised

return is sent to the registered office
● Inspection by Directors:
⮚ Directors can inspect BoA during business hours through agent or by self
⮚ Director cannot see books through his representative/attorney/agent
where books are maintained outside India
● Preservation of BoA: 8 years (CG may direct longer period to certain companies)

● Person responsible to maintain BoA:
⮚ Managing Director or
⮚ Whole time director in charge of Finance
⮚ Chief financial officer
⮚ Other officer authorised by BoD
● Default in complying with this section (to aforementioned persons):
⮚ Fine 50K – 5L
Section 129 - Financial Statement
● ‘Financial Statement’ Definition u/s 2(40):
Financial statement includes
balance statement of
sheet cash flow profit and loss any explanatory
changes
statement account note annexed
in equity
Financial statement, with respect to One Person

Company, small company and dormant company,
may not include the cash flow statement;
● ‘Financial Year’ Definition u/s 2(41) [In crux]:

● Period ending 31st March every year
● Where company has been incorporated on or after the 1st day of January of a
year, FY shall be the period ending on the 31st day of March of the following year
● Exception: A company which is the holding/subsidiary company of a company
incorporated outside India and is required to follow a different financial year for
consolidation of A/c, it may do so with CG permission (Delegated to RD) Prior to 2
November 2018, this power was with NCLT.
● Financial Statement should be:
● As per schedule III of the Companies Act 2013 [Not Applicable: Electricity
generating Co., Insurance Co., Banking Co. & company governed by other law]
● Should give true and fair view of the business of the company
● Laying of Financial Statement:

BoD must lay at every Annual General Meeting (AGM)

i. Financial statement of the company
ii. Consolidated financial statement of the company including financial details
of all its subsidiaries and associate companies
iii. Attach salient features of subsidiaries of the company and associate
companies (Form AOC-1)
Exception to preparing Consolidated Financial Statement (CFS):
⮚ Unlisted company (not in process of being listed- In/Outside India)
⮚ Whose ultimate/immediate holding company has filed a Consolidated
Financial Statement and
⮚ All its members have consented to not presenting a CFS
iv. CFS should be
⮚ as per Accounting Standard
⮚ Audited
⮚ CG may exempt certain companies
● Default in complying with this section:

Officer in default (MD, WTD in charge of finance, CFO, other authorised
officer):
⮚ Imprisonment up to 1 year or
⮚ Fine 50K to 5L or
⮚ Both
Section 129A – Periodical Financial Results
CG may, require such class(es) of unlisted companies, as may be prescribed,

🡺 to prepare financial results of company on such periodical basis and in such form
as may be prescribed;
🡺 to obtain approval of Board of Directors and complete audit or limited review of
such periodical financial results in such manner as may be prescribed; and
🡺 file a copy with the Registrar within a period of 30 days of completion of the
relevant period with such fees as may be prescribed.
Section 130 - Reopening of Accounts on Courts/Tribunal’s Order

Application to be
made by
(Securities &
(Central Income Tax Statutory Other prescribed
Exchange Board
Government) CG Authorities Regulatory Body bodies
of India) SEBI
Court or tribunal passes an order

that:
Application made to Court or tribunal:

(1) The earlier accounts were prepared in a fraudulent
(2) Affairs of the company are mismanaged
Notice shall be served to the applicants, Central Government, the Income-tax authorities, the
Securities and Exchange Board or any other statutory regulatory body or authority concerned or
any other person concernedtheir representation shall be considered and order shall be passed.
Note: Time Limit in respect of re-opening of books of account: No order shall be made
under sub-section (1) in respect of re-opening of books of account relating to a period
earlier than eight financial years immediately preceding the current financial year.
Provided that where a direction has been issued by the Central Government under the
proviso to sub-section (5) of section 128 for keeping of books of account for a period longer
than eight years, the books of account may be ordered to be re- opened within such longer
period
Section 131 - Voluntary revision of Financial statement or board report

If it appears to Application may Tribunal shal
the BoD of the be filed with the notify the CG and Copy of order
Co. that the tribunal to seek income tax along with
Financial approval to make authorities and revised FS and
statement or suitable changes consider there Board report
BOard report are in FS and Board representations must be filed
not in compliance report of before passing with RoC
with Section 129 Preceding 3 the order.
or 134 Financial Years
● Maximum revisions allowed in one Financial Year: One

● Detailed reasons must be specified to Tribunal
Section 132 - National Financial Reporting Authority (NFRA)
⮚ Under this section the CG has established a separate and independent regulatory body
to assist in the framing and enforcement of legislation relating to accounting &
auditing called NFRA.
⮚ Role:
▪ Makes recommendations to CG regarding Accounting and Auditing standards
and procedures to be followed by companies
▪ Monitors their compliance
▪ Oversees the quality of service provided by associated professionals
▪ Other prescribed functions
⮚ Composition:
▪ 1 Chairperson
▪ Maximum 15 members
⮚ Divisions of NFRA:
▪ NFRA shall perform its functions through such divisions as may be prescribed
▪ Each division of the National Financial Reporting Authority shall be presided
over by the Chairperson or a full-time Member authorised by the Chairperson
▪ There shall be an executive body of the National Financial Reporting Authority
consisting of the Chairperson and full-time Members of such Authority for
efficient discharge of its functions
⮚ Qualification of members/chairperson:
▪ expertise in accountancy, auditing, finance or law
▪ make a declaration to the Central Government that there is no conflict of
interest or lack of independence in their appointment

If he is a full-time member then he should not be associated with any audit firm
▪
during their term of office and 2 years after their term.
⮚ Powers of NFRA:
▪ investigate the matters of professional or other misconduct committed by a
prescribed class of CA firms or CAs- Suo Moto or by reference by CG
▪ powers as a Civil Court under the Code of Criminal Procedure, 1908:
▪ Discovery and production of books
▪ Summoning attendance
▪ examining them under oath
▪ Inspection of any registers documents of any person at any place
▪ examination of witnesses or documents
▪ Where professional or other misconduct is proved, it shall have the power to
impose the following punishment:
▪ Penalty:
▪ Individuals: fine 1L- 5 times the fees received
▪ Firms: 5L - 10 times the fees received
▪ Debarring the member/firm from practice as a member of ICAI for 6
months - 10 years for being appointed as an auditor or internal
auditor or undertaking any audit in respect of financial statements
or internal audit of the functions and activities of any company or
body corporate or performing any valuation as provided under
section 247
⮚ Head office of NFRA: New Delhi
⮚ Employees and secretaries of NFRA may be appointed by CG as required
⮚ Audit of accounts of NFRA shall be done by Controller and Auditor General of India
(CAG). Reports forwarded to CG
⮚ Annual report must be prepared and submitted by NFRA to CG
⮚ Central Government made the National Financial Reporting Authority Rules, 2018
(NFRA Rules).
⮚ As per NFRA rules, NFRA shall have power to monitor and enforce compliance with
accounting standards and auditing standards, oversee the quality of service under
sub-section (2) of section 132 or undertake investigation under sub-section (4) of
such section of the auditors of the following class of companies and bodies
corporate:
a) companies whose securities are listed on any stock exchange in India or outside
India;
b) unlisted public companies having paid-up capital of not less than rupees five
hundred crores or having annual turnover of not less than rupees one thousand
crores or having, in aggregate, outstanding loans, debentures and deposits of not

less than rupees five hundred crores as on the 31st March of immediately
preceding financial year;
c) insurance companies, banking companies, companies engaged in the generation
or supply of electricity, companies governed by any special Act for the time being
in force or bodies corporate incorporated by an Act in accordance with clauses
(b), (c), (d), (e) and (f) of section 1 (4) of the Companies Act, 2013;
Explanation- For the purpose of this clause, “banking company” includes

‘corresponding new bank’ as defined in section 2 (d) of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 and section 2(b) of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 and
‘subsidiary bank’ as defined in section 2(k) of the State Bank of India (Subsidiary
Bank) Act, 1959
d) any body corporate or company or person, or any class of bodies corporate or

companies or persons, on a reference made to the NFRA by the Central
Government in public interest; and
e) a body corporate incorporated or registered outside India, which is a subsidiary
or associate company of any company or body corporate incorporated or
registered in India as referred to in clauses (a) to (d) above, if the income or
networth of such subsidiary or associate company exceeds 20% of the
consolidated income or consolidated networth of such company or the body
corporate, as the case may be, referred to in clauses (a) to (d) above.
f) Every existing body corporate other than a company governed by these rules,
shall inform the NFRA within 30 days of the commencement of NFRA rules, in
Form NFRA-1, the particulars of the auditor as on the date of commencement of
these rules.
g) A company or a body corporate other than a company governed under NFRA Rules
shall continue to be governed by the NFRA for a period of 3 years after it ceases
to be listed or its paid-up capital or turnover or aggregate of loans, debentures
and deposits falls below the limit stated therein (i.e. mentioned in points a to e
above).
⮚ Recommending accounting standards (AS) and auditing standards (SA) - For the
purpose of recommending AS or SA for approval by the Central Government, the
NFRA -
▪ shall receive recommendations from the ICAI on proposals for new AS or SA or
for amendments to existing AS or SA
▪ may seek additional information from the ICAI on the recommendations
received under clause (a), if required
The NFRA shall consider the recommendations and additional information in

such manner as it deems fit before making recommendations to the Central
Government.
⮚ Punishment in case of non-compliance - If a company or any officer of a company
or an auditor or any other person contravenes any of the provisions of NFRA Rules,
the company and every officer of the company who is in default or the auditor or
such other person shall be punishable as per the provisions of section 450 of the
Act.
Section 133 - Central Government to prescribe Accounting Standards
The Central Government may prescribe the standards of accounting or any addendum
thereto, as recommended by the Institute of Chartered Accountants of India, constituted
under section 3 of the Chartered Accountants Act, 1949, in consultation with and after
examination of the recommendations made by the National Financial Reporting Authority.
Provided that until the National Financial Reporting Authority is constituted under section
132 of the Companies Act, 2013 (18 of 2013), the Central Government may prescribe the
standards of accounting or any addendum thereto, as recommended by the Institute of
Chartered Accountants of India, constituted under section 3 of the Chartered Accountants
Act, 1949 (38 of 1949), in consultation with and after examination of the recommendations
made by National Advisory Committee on Accounting Standards Constituted under section
210A of the Companies Act, 1956".
Section 134 - Financial Statement, Board Report etc.
I. Financial Statement
⮚ It must be attached with Audit Report, Board report and other relevant
documents.
⮚ FS must be approved by the BOD and signed by
o chairperson of the co. where he is authorised by the board or any 2
directors out of which one shall be the MD and
o CEO
o CFO
o CS
⮚ For OPC having only one director: such director must sign
II. Board Report
⮚ Prepared by the BOD
⮚ Attached with the Financial Statement

⮚ Contents:
o Web address where annual return is placed
o Number Of BOD Meetings
o Annual return extracts (Not required in case the web link of such
annual return has been disclosed in the Board's report in accordance
with Sec 92)
o Directors responsibility statement
o Details and comment on fraud reported by auditor
o Declaration of independence by independent Directors
o Company policy on directors appointment and remuneration
o Comments of BOD on opinion of Auditor and CS
o Particulars of loans, investment & Guarantees u/s 186
o State of affairs of the company
o Particular of contracts and agreement u/s 188
o Amount paid as dividend and carried to reserve
o Material changes and commitments, if any, affecting the financial
position of the company which have occurred between the end of the
financial year of the company to which the financial statements
relate and the date of the report
o CSR policy details
o Risk Management Policy
o Conservation of energy, technology absorption, foreign exchange
earnings and outgo
o Other details
o Additional Disclosure for listed/other public company: Listed/other
public company having paid up share capital 25 crore or more shall
include statement of annual evaluation of the performance of the
Board, its Committees and of individual directors has been made.
Note: Provided that where disclosures referred to above have been included in the
financial statements, such disclosures shall be referred to instead of being repeated
in the Board's report.
Provided further that company’s policy on directors’ appointment and remuneration
and CSR Policy is made available on company's website, if any, it shall be sufficient
compliance of the requirements under such clauses if the salient features of the policy
and any change therein are specified in brief in the Board's report and the web-address
is indicated therein at which the complete policy is available
Section 134(3A): The Central Government may prescribe an abridged Board's report, for
the purpose of compliance with this section by One Person Company or small company

Board’s Report in case of OPC [Section 134(4)]: In case of a OPC, the report of the Board
of Directors to be attached to the financial statement shall, mean a report containing
explanations or comments by the Board on every qualification, reservation or adverse remark
or disclaimer made by the auditor in his report.
Rule 8(5) ADDITIONAL DISCLOSURES in Board Report (N/A – OPC & small company)
In addition to the information and details specified in sub-rule (4), the report of the Board
shall also contain -
(i) the financial summary or highlights;
(ii) the change in the nature of business, if any;
(iii) the details of directors or key managerial personnel who were appointed or
have resigned during the year;
(iiia) a statement regarding opinion of the Board with regard to integrity, expertise and
experience (including the proficiency) of the independent directors appointed during the
year”
Explanation- For the purposes of this clause, the expression “proficiency” means the
proficiency of the independent director as ascertained from the online proficiency self-
assessment test conducted by the institute notified under Section 150 (1).
(iv) the names of companies which have become or ceased to be its Subsidiaries,
joint ventures or associate companies during the year;
(v) the details relating to deposits like –

(a) accepted during the year;
(b) remained unpaid or unclaimed as at the end of the year;
(c) whether there has been any default in repayment of deposits or payment of
interest thereon during the year and if so, number of such cases and the total amount
involved-
(1) at the beginning of the year;
(2) maximum during the year;
(3) at the end of the year;
(vi) the details of deposits which are not in compliance with the requirements of
Chapter V of the Act;
(vii) the details of significant and material orders passed by the regulators or courts or
tribunals impacting the going concern status and company’s operations in future;

(viii) the details in respect of adequacy of internal financial controls with reference to
the Financial Statements.
(ix) a disclosure, as to whether maintenance of cost records as specified by the Central

Government under sub-section (1) of section 148 of the Companies Act, 2013, is
required by the Company and accordingly such accounts and records are made and
maintained,
(x) a statement that the company has complied with provisions relating to the
constitution of Internal Complaints Committee under the Sexual Harassment of
Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013
(xi) details of application made or any proceeding pending under the Insolvency and
Bankruptcy Code, 2016 during the year alongwith their status as at the end of the
financial year.
(xii) details of difference between amount of the valuation done at the time of one time
settlement and the valuation done while taking loan from the Banks or Financial
Institutions along with the reasons thereof.
III. Directors Responsibility Statement

⮚ It is part of the board report
⮚ Contents: The directors take responsibility of the following :
i. Accounting Standards have been followed
ii. Accounting policies consistently applied
iii. Accounting estimates are reasonable
iv. Balance sheet and P&L account gives true & fair view
v. Accounts and Books maintained
vi. Assets are safeguarded
vii. Frauds are prevented
viii. ‘Going Concern’ has been followed
ix. Complied relevant Laws
x. Internal Financial controls are adequate
IV. Sign on Board Report:
Chairperson of the co. where he is authorised by the board or any 2 directors out of
which one shall be the MD. If there is only one director, then that director
V. Default in complying with this section:
⮚ Company
o Penalty – 3L
⮚ Officer in default-

o Penalty - 50K
Section 135 - Corporate Social Responsibility

⮚ Meaning: CSR is the mandatory requirement on the companies to spend a certain % of
their net profits every years on activities of social welfare.
⮚ Relevant Rules: Companies (CSR Policy) Rules, 2014
⮚ S.135(1): Every company having:
o Net worth of Rs 500 crore or more or In the immediately
o Turnover of Rs 1000 Crore or more or preceding financial year
o Net Profit of 5 crore or more
Shall constitute a CSR Committee and spend the prescribed percentage of Net profit for
social welfare along with other requirement of section 135.
Company having any amount in its Unspent Corporate Social Responsibility Account as
per section 135(6) shall constitute a CSR Committee and comply with the provisions
contained in Sec 135 (2) – Sec 135(6) [Proviso to Rule 3(1)]
⮚ S. 135(5): Amount of Contribution for CSR Activities:

o 2% or more of the average net profits of preceding 3 financial years
or where company has not completed period of 3 FYs since its incorporation,
during such immediately preceding FYs
⮚ Calculation of Net profit: Net profit shall be calculated as per S.198 and shall not
include:
o Profit of overseas branch
o Dividend received from other companies in India, which are already covered
under section 135
⮚ Company shall give preference to the local area and areas around it where it operates,
for spending the amount
⮚ Failure to spend above amount
o S. 135(5): Disclosure must be made in Board report of the reasons for the same
o S. 135(5): If unspent amount doesn’t relate to Ongoing Project – Transfer such
unspent amount to a Fund specified in Schedule VII, within 6 months of expiry
of FY
o S. 135(6):If unspent amount relates to Ongoing Project – Transfer amount within
30 days from the end of FY to a special account to be opened by company for
that FY in any scheduled bank to be called Unspent Corporate Social
Responsibility Account, and such amount shall be spent by company within 3
FYs from the date of such transfer, failing which, company shall transfer same
to Fund specified in Schedule VII, within 30 days from date of completion of 3 rd
FY.
⮚ Failure to comply with S.135(5) and 135(6):

o Penalty for Company
▪ Twice the amount required to be transferred to Fund specified in
Schedule VII or Unspent CSR Account, or
▪ One crore rupees
whichever is less
o Penalty for Officer in default
▪ 1/10th the amount required to be transferred to Fund specified in
Schedule VII or Unspent CSR Account, or
▪ Two lakh rupees
whichever is less
⮚ CG may give such general or special directions to a company(ies) as it considers necessary

to ensure compliance of provisions of S.135 and such company(ies) shall comply with
such directions
⮚ Where amount to be spent by a company under S.135(5) <= ₹50L, requirement for
constitution of CSR Committee shall not be applicable and functions of such Committee
can be discharged by BoD of such company
⮚ CSR Committee:
o Consists of 3 or more directors (one director shall be independent director)
▪ Provided that where a company is not required to appoint an
independent director under sub-section (4) of section 149, it shall have
in its Corporate Social Responsibility Committee 2 or more directors.
o In case of foreign company: two persons (one person as per section 380 and
another person nominated by foreign company)
⮚ Board Report must disclose CSR committee composition
⮚ Duties of CSR Committee:
o Formulate and recommend CSR policy to Board
o Recommend amount to be spent along with activities to be undertaken
o Monitor implementation of the policy
⮚ Duties of Board:
o after taking into account recommendations made by CSR Committee, approve
CSR Policy -> disclose contents of such Policy in its report -> also place it on
company's website, if any, in such manner as may be prescribed
▪ Rule 8 – Board report shall include annual report on CSR containing
particulars specified in Annexure I or Annexure II
▪ Rule 9 – BOD shall mandatorily disclose composition of CSR Committee, CSR
Policy and Projects approved by it on company website, if any, for public
access
o ensure that activities as are included in CSR Policy of the company are
undertaken by the company.
⮚ Meaning of CSR Policy and Annual Action Plan

o Rule 2 defines CSR policy as a statement containing approach and direction
given by Board, after recommendations of its CSR Committee, and includes
guiding principles for
▪ Selection, Implementation and Monitoring of activities as well as
formulation of the annual action plan.
o Rule 5(2): CSR Committee shall formulate and recommend to the Board, an
annual action plan in pursuance of its CSR policy.
▪ Contents of Annual Action Plan
▪ list of CSR projects that are approved to be undertaken in areas or
subjects specified in Schedule VII
▪ manner of execution
▪ modalities of utilisation of funds and implementation schedules
▪ monitoring and reporting mechanism
▪ details of need and impact assessment, if any.
⮚ Impact Assessment – Requirements [Rule 8]
For CSR projects having

Every company having outlays of ₹1 crore or
average CSR obligation Shall undertake impact more, and which have
of ₹10 crore or more in assessment, through an been completed not less
3 immediately preceding independent agency than 1 year before
financial years undertaking impact
study.
🡺 Impact assessment reports shall be placed before Board and shall be annexed to
the annual report on CSR.
🡺 Impact assessment expenditure may be booked towards CSR, but it shall not
exceed 2% of total CSR expenditure for that F.Y. or ₹50 lakh, whichever is higher.
⮚ Meaning of Corporate Social Responsibility (CSR)

Rule 2 of the Companies (CSR Policy) Rules, 2014 defines Corporate Social
Responsibility (CSR) which means the activities undertaken by Company in pursuance
of its statutory obligation laid down in section 135 of the Act in accordance with the
provisions contained in these rules, but shall not include the following –
● Activities undertaken in normal course of business of the company#
● Activity undertaken by company outside India except for training of Indian sports
personnel representing any State / UT at national level or India at international
level
● Contribution of any amount directly or indirectly to any political party under
section 182

● Activities benefitting employees of company as defined in Sec 2(k) of the Code on
Wages, 2019
● Activities supported by companies on sponsorship basis for deriving marketing
benefits for its products or services
● Activities carried out for fulfilment of any other statutory obligations under any
law in force in India
# Company engaged in research and development (R&D) activity of new vaccine, drugs
and medical devices in their normal course of business may undertake R &D activity of
new vaccine, drugs and medical devices related to COVID-19 for financial years 2020-
21, 2021-22, 2022-23 subject to -
(a) such activities shall be carried out in collaboration with any of the organisations
mentioned in item (ix) of Schedule VII to the Act;
(b) details of such activity shall be disclosed separately in the Annual report on CSR
included in the Board’s Report;
⮚ CSR Implementation (Rule 4)

🡺 Company can do CSR Activities
● By itself or
● Through
- Sec 8 company, or a registered public trust or a registered society, registered
under section 12A and approved under section 80G or exempted under section
10(23C) of the Income Tax Act, established by company, either singly or along
with any other company;
- Sec 8 company, or a registered public trust or a registered society, registered
under section 12A and approved under section 80G or exempted under section
10(23C) of the Income Tax Act, 1961, and having an established track record of
at least 3 years in undertaking similar activities.
- Sec 8 company or a registered trust or a registered society, established by
Central or State Government; or
- any entity established under Act of Parliament or State legislature
🡺 Every entity, who intends to undertake any CSR activity, shall register itself with
Central Government by filing form CSR-1 with Registrar, with effect from 1st April
2021
- Form CSR-1 shall be signed and submitted electronically and shall be verified
digitally by a CA / CS / Cost Accountant in practice.
- Upon submission, a unique CSR Registration Number shall be generated by system
automatically.
🡺 Company may engage international organisations for designing, monitoring and
evaluation of CSR projects as per its CSR policy as well as for capacity building of
their own personnel for CSR.

🡺 Company may collaborate with other companies for undertaking CSR activities in
such manner that CSR committees of respective companies can report separately on
such projects in accordance with these rules.
⮚ CSR Expenditure [Rule 7]

Administrative ● Shall not exceed 5% of total CSR expenditure for F.Y.
overheads
Surplus arising ● Shall not form part of business profit of
out of CSR ● Shall be
activities - Ploughed back into same project or
- Transferred to Unspent CSR Account
- Transferred to Fund specified in Schedule VII
within 6 months of expiry of F.Y.
Capital Asset ● CSR amount may be spent for creation/ acquisition of a
for CSR capital asset
● Capital asset to be held by –
(a) Sec 8 company or a Registered Public Trust or Registered
Society; or
(b) beneficiaries, in the form of self-help groups, collectives,
entities; or
(c) public authority
⮚ List of CSR Activities: Schedule VII of Act
(i) Eradicating hunger, poverty and malnutrition, promoting health care including
preventive health care and sanitation including contribution to the Swach Bharat
Kosh set-up by the Central Government for the promotion of sanitation and making
available safe drinking water.
(ii) promoting education, including special education and employment enhancing
vocation skills especially among children, women, elderly and the differently
abled and livelihood enhancement projects.
(iii) promoting gender equality, empowering women, setting up homes and hostels
for women and orphans; setting up old age homes, day care centres and such other
facilities for senior citizens and measures for reducing inequalities faced by
socially and economically backward groups.
(iv) ensuring environmental sustainability, ecological balance, protection of flora
and fauna, animal welfare, agroforestry, conservation of natural resources and
maintaining quality of soil, air and water [including contribution to the Clean
Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.

(v) protection of national heritage, art and culture including restoration of buildings
and sites of historical importance and works of art; setting up public libraries;
promotion and development of traditional art and handicrafts;
(vi) measures for the benefit of armed forces veterans, war widows and their
dependents, Central Armed Police Forces (CAPF) and Central Para Military Forces
(CPMF) veterans, and their dependents including widows
(vii) training to promote rural sports, nationally recognised sports, paralympic
sports and olympic sports
(viii) contribution to the prime minister's national relief fund or Prime Minister’s
Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)or any
other fund set up by the central govt. for socio economic development and relief
and welfare of the schedule caste, tribes, other backward classes, minorities and
women
(ix) (a) Contribution to incubators or research and development projects in the field
of science, technology, engineering and medicine, funded by the Central
Government or State Government or Public Sector Undertaking or any agency of
the Central Government or State Government; and
(b) Contributions to public funded Universities; Indian Institute of Technology
(IITs); National Laboratories and autonomous bodies established under
Department of Atomic Energy (DAE); Department of Biotechnology (DBT);
Department of Science and Technology (DST); Department of Pharmaceuticals;
Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy
(AYUSH); Ministry of Electronics and Information Technology and other bodies,
namely Defense Research and Development Organisation (DRDO); Indian Council
of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and
Council of Scientific and Industrial Research (CSIR), engaged in conducting
research in science, technology, engineering and medicine aimed at promoting
Sustainable Development Goals (SDGs).
(x) rural development projects
(xi) slum area development. [For the purposes of this item, the term `slum area'
shall mean any area declared as such by the Central Government or any State
Government or any other competent authority under any law for the time being
in force.
(xii) disaster management, including relief, rehabilitation and reconstruction
activities
MCA clarifications regarding CSR on Covid –
🡺 Keeping in view of spread of novel Corona Virus (COVID-19) in India, its declaration
as pandemic by World Health Organisation (WHO), and decision of Government of

India to treat this as a notified disaster, spending of CSR funds for COVID-19 is
eligible CSR activity.
o Funds may be spent for various activities related to COVID-19 under item nos. (i) and
(xii) of Schedule VII relating to promotion of health care, including preventive health care
and sanitation, and, disaster management.
🡺 Spending of CSR funds for carrying out awareness campaigns/ programmes or
public outreach campaigns on COVID-19 Vaccination programme is an eligible CSR
activity relating to promotion of health care, including preventive health care and
sanitization, promoting education, and disaster management.
🡺 Setting up makeshift hospitals and temporary COVID Care facilities is an eligible
CSR activity relating to promotion of health care, including preventive health care,
and disaster management.
🡺 Spending of CSR funds for ‘creating health infrastructure for COVID care’,
‘establishment of medical oxygen generation and storage plants’, ‘manufacturing
and supply of Oxygen concentrators, ventilators, cylinders and other medical
equipment for countering COVID-19’ or similar such activities are eligible CSR
activities relating to promotion of health care, including preventive health care,
and, disaster management.
Reference is also drawn to item no. (ix) of Schedule VII which permits
contribution to specified research and development projects as well as
contribution to public funded universities and certain Organisations engaged
in conducting research in science, technology, engineering, and medicine as
eligible CSR activities
🡺 Companies including Government companies may undertake activities or projects
or programmes using CSR funds, directly by themselves or in collaboration as
shared responsibility with other companies, subject to fulfillment of Companies
(CSR Policy) Rules, 2014 and the guidelines issued by Ministry from time to time
🡺 Spending of CSR funds of COVID- 19 vaccination for persons other than the
employees and their families, is an eligible CSR activity relating to promotion of
health care including preventive health care and disaster management.
🡺 Spending of CSR funds for activities related to Har Ghar Tiranga campaign, such as
mass scale production and supply of the National Flag, outreach and amplification
efforts and other related activities, are eligible CSR activities pertaining to
promotion of education relating to culture.
Section 136 - Right of the members to a copy of Audited Financial Statement

Copies of audited FS+ CFS + Audit report and other
documents
must be sent to
Any member Trustees of Other

debenture persons
holders
Atleast 21 days before General Meeting

Exception: company having share capital: If Members majority in number and holding 95% voting
power agree for a shorter period.
company not having share capital: If 95% voting power agree for a shorter period
⮚ In the case of a listed company, the provisions of this sub-section shall be

deemed to be complied with, if the copies of the documents are made available
for inspection at its registered office during working hours for a period of twenty-
one days before the date of the meeting and a statement containing the salient
features of such documents in the prescribed form or copies of the documents,
as the company may deem fit, is sent to every member of the company and to
every trustee for the holders of any debentures issued by the company not less
than twenty-one days before the date of the meeting unless the shareholders ask
for full financial statements.
⮚ Circulation of FS in electronic mode:

o Listed Companies
o Public Companies having
▪ Networth more than 1 crore and
▪ Turnover more than 10 crore
For above category of companies the financial statements may be sent-
(a) by electronic mode to such members whose shareholding is in dematerialised
format and whose email Ids are registered with Depository for communication
purposes;

(b) where Shareholding is held otherwise than by dematerialised format, to such
members who have positively consented in writing for receiving by electronic mode;
and
(c) by despatch of physical copies through any recognised mode of delivery as
specified under section 20 of the Act, in all other cases.
⮚ Accounts of Subsidiary Companies:
Provided also that every listed company having a subsidiary or subsidiaries shall
- place separate audited accounts in respect of each of subsidiary on its website, if
any
- provide a copy of separate audited or unaudited financial statements, as the case
may be, as prepared in respect of each of its subsidiary, to any member of the
company who asks for it
Provided also that a listed company which has a subsidiary incorporated outside India
(herein referred to as "foreign subsidiary")—
(a) where such foreign subsidiary is statutorily required to prepare consolidated
financial statement under any law of the country of its incorporation, the
requirement of this proviso shall be met if consolidated financial statement of such
foreign subsidiary is placed on the website of the listed company;
(b) where such foreign subsidiary is not required to get its financial statement audited
under any law of the country of its incorporation and which does not get such
financial statement audited, the holding Indian listed company may place such
unaudited financial statement on its website and where such financial statement
is in a language other than English, a translated copy of the financial statement in
English shall also be placed on the website.
⮚ Inspection: Documents must be kept open for inspection during business hours at the
registered office. A copy must also be published on the company website. Company
shall allow every member or trustee of the holder of any debentures issued by the
company to inspect.
⮚ Provided that every company having a subsidiary or subsidiaries shall provide a copy
of separate audited or unaudited financial statements, as the case may be, as
prepared in respect of each of its subsidiary to any member of the company who asks
for it.
⮚ Default :
o Company: 25K Rs.
o Officer in default: 5K Rs.

Section 138 - Internal Audit
⮚ Following companies are required to appoint internal auditor :

o Listed Company
o Unlisted public company having
▪ Paid up share capital of 50 crore or more in PFY or
▪ Turnover of 200 crore or more in PFY or
▪ Outstanding loans and borrowings from financial institutes exceeding 100
crore at any point in preceding financial year or
▪ Outstanding deposits of 25 crore or more at any point in preceding
financial year
o Every private company having
▪ Turnover of 200 crore or more in PFY or
▪ Outstanding loans and borrowings from financial institutes exceeding 100
crore at any point in preceding financial year
⮚ Audit Committee/BoD, in consultancy with Internal Auditor, frame scope,
functioning, periodicity and methodology of internal audit.
⮚ Eligibility of internal auditor:

o CA
o Cost Accountant
o Other professional as decided by BoD capable of doing internal audit
o May/May not be an employee of compan
Section 137 - Copy of FS to be filed with the RoC

AGM
Held Not Held
Copy of FS +CFS
+other documents
Company must file with RoC within 30
days from the last date on which AGM
should have been held, prescribed
documents, reasons of not holding
adopted AGM.
not adopted at
AGM/Meeting
adjourned
Filed with RoC within

30 days of AGM
Within 30 days of AGM, Provisional documents must be

submitted with RoC
Further, the adopted documents must be submitted with

RoC within 30 days of the Adjourned meeting with
additional fees
⮚ Section Not Applicable to:

Banking companies Insurance Companies
Electricity companies Non Banking Finance Companies (NBFC)
⮚ Time limit for OPC: Documents must be filed within 180 days from the closure of
Financial Year
⮚ Prescribed fees shall be payable on submission
⮚ FS must be attached with accounts of subsidiaries in/outside India
⮚ Note: In the case of a subsidiary which has been incorporated outside India which is
not required to get its financial statement audited under any law of the country of its
incorporation and which does not get such financial statement audited, holding Indian
company may file such unaudited financial statement along with a declaration to this

effect and where such financial statement is in a language other than English, along
with a translated copy of the financial statement in English
⮚ Every company shall file the financial statements with Registrar together with Form
AOC-4 and the consolidated financial statements, if any, with form AOC-4 CFS.
⮚ Every Non-Banking Financial Company (NBFC) that is required to comply with Indian
Accounting Standards (Ind AS) shall file the financial statements with Registrar
together with Form AOC-4 NBFC (Ind AS) and the consolidated financial statement, if
any, with Form AOC-4 CFS NBFC (Ind AS).
⮚ Every company covered under the provisions of Sec 135(1) shall furnish a report on
Corporate Social Responsibility in Form CSR-2 to Registrar for preceding financial year
(2020-2021) and onwards as an addendum to Form AOC-4 or AOC-4 XBRL or AOC-4
NBFC (Ind AS), as the case may be
o Provided that for preceding financial year (2020-2021), Form CSR-2 shall be
filed separately on or before 30th June 2022, after filing Form AOC-4 or AOC-4
XBRL or AOC-4 NBFC (Ind AS), as the case may be.
o Provided further that for financial year 2021-2022, Form CSR-2 shall be
filed separately on or before 31st March, 2023 after filing Form AOC-4 or
AOC-4 XBRL or AOC- 4 NBFC (Ind AS), as the case may be
⮚ Default in complying with section:

Person liable Penalty Failure continues Maximum
Company ₹10,000 Further penalty of ₹ ₹2,00,000
100 for each day
Officers – after the first ₹50,000
● MD and CFO, if any during which
● In their absence, other director failure continues.
charged by BoD with responsibility
● In its absence, all the directors
Rule 3 of Companies (Filing of Documents and Forms in Extensible Business Reporting

Language) Rules, 2015
(1) The following class of companies shall file their financial statements and other
documents under section 137 of the Act with the Registrar in e-form AOC-4 XBRL as
per Annexure-I:-
(i) companies listed with stock exchanges in India and their Indian subsidiaries;
(ii) companies having paid up capital of five crore rupees or above;
(iii) companies having turnover of one hundred crore rupees or above;

(iv) all companies which are required to prepare their financial statements in
accordance with Companies (Indian Accounting Standards) Rules, 2015
Provided further that non-banking financial companies, housing finance companies
and companies engaged in the business of banking and insurance sector are
exempted from filing of financial statements under these rules.
(2) The companies which have filed their financial statements under sub-rule (1) shall
continue to file their financial statements and other documents though they may not
fall under the class of companies specified therein in succeeding years.
(3) The companies which have filed their financial statements under the erstwhile rules,
namely the Companies (Filing of Documents and Forms in Extensible Business
Reporting Language) Rules, 2011, shall continue to file their financial statements and
other documents as prescribed in sub-rule (1) though they do not fall under the class
of companies specified therein.

Chapter 10- Audit and Auditors
Date of
Government-Sec registration
C&AG BOD Members in EGM
139(7)
First 0 Day 60 Days 90 Days 150 Days
Non- Date of
BOD Members in EGM
Government- Sec registration
139(6)
Appointment of 0 Day 30 Days 90 Days
Auditor
Date of FY C&AG
Government Sec- Commencement
139(5)
0 Day 180 Days

Subsequent
Non-Government Date of Members in AGM

Sec- 139(1) Registration
1st AGM 6th AGM
Provisions to Sec 139(1)

2nd Before appointment company shall obtain Written consent and a certificate from the auditor (Rule 4)
Prov
iso
3rd
Certificate shall indicate whether auditor has satisfied the criteria as provided u/s 141.
Prov
iso
4th
Company shall inform the auditor and ROC within 15 days of appointment in Form ADT-1
Prov
iso

Rotation of Auditors
Sec139(4) - Rules
Sec 139(2) - Appointment of auditor/frim of auditors Sec 139(3) -
by Central
for a term of 5 years and 10 years respectively Members resolve
Government
Listed and other Rotation of Audit

Unlisted Public Private Any other
prescribed partner and his
Companies Companies companies
companies team Manner of
rotation of
auditors u/s
139(2) by way of
rules (Rule-6)
Public borrowings Conduct of audit
Shall not exceed Paid up Capital ≥ Paid up Capital ≥
/ Public deposits by more than one
the above limit Rs. 10 Cr Rs. 20 Cr
> 50Cr. auditor
Provisions to Sec 139(2)

1st Proviso An individual or firm of auditors are not eligible to be re-appointed as auditors of same company,
unless 5 years have lapsed from completion of their tenure
nd
2 Proviso It shall not be eligible to appoint any Audit Firm
Having a common partner with audit firm
Whose tenure has just expired
As on date of appointment
Shall not be appointed as auditor of same company
for a period of five years
rd
3 Proviso Every Company
Existing before commencement of this Act
Shall comply with requirement of Sec. 139(2)
Within 3 years from the date of commencement of this Act.
th
4 Proviso Right of company to remove auditor
Right of auditor to resign.

Other Provisions of Sec 139
C&AG BOD
Government All reasons

0 Days 30 Days 60 Days
BOD
Sec 139(8)-Filling
of casual vacancy
Resignation
Approved in General Meeting convened in 3
0 Days months 30 Days
Non-
Government BOD
Other reasons
0 Days 30 Days
Re-appointment of Auditor (Sec 139)

Sec 139(10) Where no auditor is appointed at
AGM, Existing auditor shall
continue
Sec 139(11) Where a company is required to
constitute audit committee, all
appointments as well as filling
of
casual vacancies is done by them

Re-
appointment
at AGM if
Not No Special
Not willing to
disqualified Resolution
continue
under law passed
Expressely
Appointing
rejecting
someone else
retiring auditor
Removal, resignation of Auditor and giving of Special Notice (Sec 140)
Removal before expiry (Sec 140(1))

Application to
Opportuinity of Central Government
being heard - ADT-2
30 days 60 days
Special Resolution Convene General

of company Meeting
Filling of statement in case of resignation (Sec 140(2)&(3))
Date of Resignation
0 Days Auditor to file 30 Days

Penalty for non-compliance (Sec 140(3))
Normal Lower of Rs. 50,000 or his remuneration
Continuing default Further penalty of Rs. 500 / day
Subject to Maximum – Rs. 2,00,000
Special Notice (Sec 140(4))
Special Notice
requirement
Copy of Notice to
To pass Special
be sent to
Resolution at
concerned Copy of Notice
AGM providing
auditor and
representations
to be sent to
every person to
No re- Appointment of whom notice of
For making his AGM was served
appointment of any other person
representations
Retiring Auditor as auditor

Representation need not be sent or read out at meeting, if on application of company or other person ,
Tribunal passes order
Eligibility, Qualifications and Disqualifications of Auditor (Sec 141)
Eligibility (Sec 141(1) & (2))
Eligibility to be appointed as audiitors
Individual Firm LLP Firm
Majority of the Only partners who

Any person who is a
partners practicing are CA are authorised
Chartered Accountant
are CA to sign

Definition: As per Section 2(17), Chartered Accountant means a chartered accountant as defined in clause
(b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 who holds a valid certificate of
practice under sub-section (1) of section 6 of that Act.
Vacation of Office (Sec 141(4))
If an auditor occurs any disqualification mentioned in Sec 141(3) after his appointment then he shall vacate the office and
such vacation shall be treated as “Casual vacancy”
Persons not eligible for appointment (Sec 141(3))
(a) Body Corporate other than LLP

(b) Officer or Employee of the company
(c) Partner/Employee of Officer/Employee of the company
(d) (i) person/ relative/ partner is holding any security * or Company / subsidiary /
interest in the holding / associate, or
(ii) is indebted > 5 Lacs in the subsidiary of same holding.
(iii) has given a guarantee in
connection with indebtedness
rd
of 3 person > 1 Lac in the

* no disqualification if relative holds any security in the company of face value
upto 1 Lac.
(e) Person or firm having business relationship with Company / Subsidiary /
Holding / Associate / Subsidiary of Such Holding or Associate Company
(f) A Person whose relative is a director or is in employment of the company as a
Director or KMP.
(g) A person who is in full time employment elsewhere
Or
A person holding appointment as auditor or more than 20 companies other than OPC, dormant companies,
Small Companies and private companies having paid up capital < 100Cr.
(h) A person who has been convicted of an offence involving fraud and a period of
10 years has not elapsed.
(i) Any person who directly/indirectly renders any service u/s 144 to same company /its Holding/subsidiary.
Remuneration of Auditors (Sec 142)
Authority to fix
remuneration
In General BOD, in case first

Meeting or any auditor was
such matter as appointed by
determined them

Rights and Duties of Company Auditor (Sec 143)
Rights of Auditor
Right to
Right to access
information
From the officers of

To Books of Accounts
the company any
and vouchers at any
information regarded
time whether kept at
as necssary for
Registered office or at
performance of his
any other place
duities
Duties of Auditor
Inquire into the Propriety matters (Sec 143(1))
• Loans and advances are properly secured and terms are prejudicial
• Book entries are prejudicial
• Shares, debentures and other securities are sold at a price less than acquisition cost in case of non banking and
non investment company
• Loans and advances made are shown as deposits.
• Personal expenses charged to revenue account
• Cash has actually been received on shares allotted for cash, if not received, correct position shown in books and
balance sheet

Reporting over Accounts and Financial Statements (Sec 143(2))
• That to the best of auditor information & knowledge, the accounts & financial statements give a true and fair
view of the state of the company affairs as at the end of its financial year & profit & loss and cash flow for the
year ended
Reporting u/s 143(3)

• Obtained all necessary information for the audit.
• Proper books of accounts have been maintained.
• Branch audit report has been received and manner of dealing with it.
• Balance Sheet and P & L Account agree with the books of accounts.
• Financial statements comply with AS.
• Comments on financial transactions having any adverse effect on functioning of company
• Directors disqualified u/s 164(2).
• Qualifications w.r.t. maintenance of accounts.
• Adequacy and operative effectiveness of internal financial controls wrt FS (NA- Pvt. Co.).
• Other matters as prescribed. (Rule-11)
Rule 11
i. Disclosure of impact of pending litigations on financial position.
ii. Provisions for Material Foreseeable losses on long term contracts made
iii. Any delay in transferring amounts to IEPF
iv. Whether management has represented that, to best of its knowledge and belief, other than as disclosed
in notes to accounts,
a. no funds have been advanced/loaned/invested by company to or in any other person(s) or entity(ies),

including foreign entities (“Intermediaries”), with understanding to lend/invest in other persons or
entities or provide any guarantee, security or like
b. no funds have been received by company from any person(s) or entity(ies), including foreign entities
(“Funding Parties”), with understanding, lend/invest in other persons or entities or provide any
guarantee, security or like
c. Based on such audit procedures that auditor has considered reasonable and appropriate in
circumstances, nothing has come to their notice that has caused them to believe that above
representations contain any material mis-statement.
v. Whether dividend declared or paid during the year by company is in compliance with section 123 of the
Companies Act, 2013.
vi. Whether company, in respect of financial years commencing on or after 1st April, 2023, has used such
accounting software for maintaining its books of account which has a feature of recording audit trail (edit
log) facility and same has been operated throughout the year for all transactions recorded in software and
audit trail feature has not been tampered with and audit trail has been preserved by company as per the
statutory requirements for record retention.
Reasons for reservations (Sec 143(4))
For every matter reported with a qualification auditor shall state reasons thereof
Duties of auditors of Government companies (Sec 143(5))

● C&AG directs the auditor the manner in which accounts are to be audited
● Government Audit report shall include
i. Directions issued by CAG.
ii. Action taken thereon
iii. Its impact on Accounts and F.S.

Supplementary Audit (Sec 143(6))
Authority to order for Supplementary Audit of Financial Statements
Date of Receipt of Audit report C&AG
0 Days 60 Days
Test Audit (Sec 143(7))
C&AG may, if considers necessary, by an order, cause text audit of accounts of Government Companies
Audit of Branch Accounts (will be discussed separately) (Sec 143(8))
Branch audit
Company's Branch Branch Office outside

Office India
Accountant or any
Any other person
Company's Auditor Company's Auditor other person qualified
qualified to be Auditor
to be Auditor

Provided that the branch auditor shall prepare a report on the accounts of the branch examined by him and send it to
the auditor of the company who shall deal with it in his report
Every Auditor shall comply with Auditing Standards (Sec 143(9))

Central Government may prescribe the SA in consultation with NFRA (Sec 143(10))
Central Government may direct that auditor’s report shall include a statement on such matters as
specified in order issued by it (Sec 143(11))
Reporting Fraud (Sec 143(12))
Where fraud amount is ≤ Rs. 1 Crore

details to be disclosed in Boards
Report
Nature of Fraud Approximate Amount
involved
Parties Involved Remedial action
taken

Fraud committed
by officers or
employees
Amount ≤ Rs. 1 Amount ≥ Rs. 1 Penalty for non-compliance with Sec 143 (12)
Crore Crore
Auditor, cost accountant, or CS in practice shall
be liable to penalty of ₹5,00,000 in case of listed
company and ₹1,00,000 in case of another
company.
Reported to BOD/ Report to Central
Audit Committee Government
● Method of reporting to the Central Government (Rule 13)
Fraud reporting
BOD/AC
Auditor
0 Days Report 2 Days Await Reply 47 Days

Auditor not to render certain services (Sec 144)
Services that cannot be rendered directly or indirectly to Co, Holding or Subsidiary
Accounting & Book Keeping

Internal Audit
Design & Implementation of Financial Information System
Actuarial Services
Investment advisory
Investment Banking
Outsourced Financial
Management Services
Other Prescribed
Other services may be rendered if approved by the BOD or Audit Committee

Signing of Audit Reports (Sec 145) - Shall be in accordance with Sec 141(2)
Attending of General Meetings (Sec 146)

● All Notice & other communication of general meetings shall be forwarded to Auditor
● Unless exempted auditor shall attend either himself or through his authorized representative any general meeting,
● Auditor shall have right to be heard at such meeting on part of business which concerns him as auditor
Punishment for Contravention (Sec 147)

Over the company and officer in default (Sec 147(1))

Over the auditor (Sec 147(2))
Wilful default
Imprisonment
+ Minimum fine Maximum-Lower
which may
of the two
extend to 1 year
8 times the
Rs. 50,000 Rs. 25,00,000
remuneration
● Auditor convicted u/s 147(2) shall be liable to refund all remuneration and damages back to company.
Over the Audit Firm u/s 147(5)
🡺 In case of audit of company being conducted by an audit firm,
🡺 it is proved that partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or
colluded in any fraud by, or in relation to or by, the company or its Directors or officers, the liability, whether
civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of
the partner or partners concerned of the audit firm and of the firm jointly and severally
o In case of criminal liability of an audit firm, in respect of liability other than fine, only the partners found
guilty of fraud shall be liable.
Cost Audit (Sec 148)

⮚ CG may order 🡪
o Cost records to be maintained along with books of account
o Cost Audit

in respect of such class of companies engaged in the production of such goods or providing such services as
prescribed🡪 after consulting regulatory bodies in special acts.
(Thus, this section is not applicable on all companies. But only selected prescribed companies)
⮚ [Meaning of Cost Audit: Cost Audit ascertain the accuracy of cost accounting records to ensure that they are in
conformity with Cost Accounting principles, plans, procedures and objective. It verification of items of material,
labour, other costs.]
⮚ Who conducts Cost Audit?
o Cost Accountant in practice/Firm of cost Accountants in practice
o appointed by the BoD
o remuneration ratified by the members
Note: Where the Co. has Audit Committees, such decisions shall be recommended in consultation with Audit
Committees.
o Auditor u/s 139 cannot be cost auditor of the same company
⮚ Duties during cost audit
o Cost auditor conducting the cost audit shall comply with the cost auditing standards.
o Cost audit conducted u/s 148 shall be in addition to the Company audit conducted u/s 143.
o qualifications, disqualifications, rights, duties and obligations applicable to Company auditors 🡪 shall, so
far as may be applicable, apply to a cost auditor
o it shall be the duty of the company to give all assistance and facilities to the cost auditor
⮚ Cost Audit Report
Submitted by cost auditor to BoD
Within 30 days from receipt of a copy of the cost audit report, Co. shall furnish the same to CG along with full
information and explanation on every reservation or qualification contained therein. [e-form CRA-4]
CG may call for any further information or explanation is necessary. Company shall furnish the same within such
time as may be specified by that Government.
⮚ Default: Same as section 147 for Company and Auditor

⮚ Section 143 applicable mutatis mutandis on cost audit.

The Indian Contract Act, 1872
Unit 1 – Contracts Of Indemnity And Guarantee
Section 124-147
Contract of Indemnity
● Definition u/s 124: “a contract by which one party promises to save the other from loss
caused to him by the conduct of the promisor himself, or by the conduct of any other
person.”
Basic Conditions:
● “existence of loss” is essential to the promise
● Such loss is caused by:
• conduct of the promisor himself or
• conduct of any other person.
Loss occasioned by the conduct accident or an act of God is not covered.
● It could be either
• Express Contract: a person expressly promises to compensate the other from
loss🡪 written/oral
• Implied Contract: it is to be inferred from the conduct of the parties or from
the circumstances of the case
• Must fulfil all the essentials of a valid contract which includes:
• Offer and acceptance
• Intention to create legal obligation
• Consideration
• Competency to contract
• Free consent
• Lawful object
• The agreement must not be expressly declared to be void- eg: an agreement
in restraint of trade/ marriage etc.
• The terms of the agreement must not be vague or uncertain
• The agreement must be capable of performance- An agreement to do an
impossible act is void.
• Legal formalities complied
Example: A asks B to beat C promising to indemnify him against the consequences. The
promise of A cannot be enforced. Suppose, B beats C and is fined ` 1000, B cannot claim
this amount from A because the object of the agreement is unlawful.
● Insurance Contracts

• Fire Insurance or Marine Insurance
⮚ Contract of indemnity
• Life Insurance
⮚ NOT a contract of indemnity
● When does the liability of an indemnifier commence? 🡪 (as per court rulings. Act is
silent)🡪
as soon as the liability of the indemnity-holder becomes:
• Absolute: 100% surety of the liability
and
• Certain: Amount is fixed/can be calculated definitely.
Example: A promises to compensate X for any loss that he may suffer by filling a suit against
Y. The court orders X to pay Y damages of Rs 10000 . As the loss has become certain, X may
claim the amount of loss from A and pass it to Y
Parties:
Indemnifier: The person who Indemnified/Indemnity Holder: The party

promises to indemnify the other who is promised to be saved against the loss
person who suffers loss
Rights of Section 125 Rights of Indemnified: Following can be recovered

Indemnifier: from the indemnifier:
Indian Contract Act (1)Damages which he may be compelled to pay in any suit
is silent about the
rights (2)Cost: which he may have been compelled to pay in bringing/
defending the suit provided:
But they are
-he did not contravene the orders of the indemnifier as per
similar to the
rights of a surety contract
under section 141 -He acted prudently to minimize losses (as he would if there
of the Indian were no indemnity contract)
Contract Act. (3)Sums: All sums which he may have paid under the terms of
any compromise of any such suit, if the compromise was not
contrary to the orders of the indemnifier
Note: these rights are not exhaustive. Indemnity holder may
claim any other liability (absolute in nature) that he has
incurred.
Example: Mr. X contracts with the Government to return to India after completing his studies

at University of Cambridge and serve the Government for a period of 5 years. If Mr. X fails
to return to India, he will have to reimburse the Government. It is a contract of indemnity.
Here Indemnifier🡪
And Indemnified 🡪
Example: X may agree to indemnify Y for any loss or damage that may occur if a tree on
Y’s neighbouring property blows over. If the tree then blows over and damages Y’s fence, X
will be liable for the cost of fixing the fence.
Example: X, a shareholder of a company lost his share certificate. He applied for the
duplicate. The company agreed to issue the same on the term that X will compensate the
company against the loss where any holder produces the original certificate. Here, there is
contract of indemnity between X and the company.
Contract of Guarantee / Suretyship
Section 126 – “Contract of guarantee”, “surety”, “principal debtor” and

“creditor”
A Contract of Guarantee:
- to perform the promise, or
- to discharge the liability
of a third person in case of his default is called a contract of guarantee. Guarantee is
a promise to pay a debt owed by a third person in case the latter does not pay. It is
a tripartite agreement between principal debtor, creditor and surety, in effect three
contracts
(i) A principal contract between the principal debtor and the creditor
(ii) A secondary contract between the creditor ad the surety.
(iii) A implied contract between the surety and the principal debtor whereby principal
debtor is under an obligation to indemnify the surety; if the surety is made to pay or
perform.
● Guarantee: An Express contract🡪 oral or written.
Parties in Guarantee contract:
1) Surety (Guarantor): The person who gives the guarantee is called the surety.
2) Creditor: The person to whom the guarantee is given is called creditor.
3) Principal Debtor: The person in respect of who’s default the guarantee is given is called

Principal Debtor.
Example 1 : When A requests B to lend ` 10,000 to C and guarantees that C will repay the
amount within the agreed time and that on C failing to do so, he (A) will himself pay to B,
there is a contract of guarantee. Here, B is the creditor, C the principal debtor and A the
surety.
Example 2 : Where ‘A’ obtains housing loan from LIC Housing and if ‘B’ promises to pay LIC
Housing in the event of ‘A’ failing to repay, it is a contract of guarantee.
Key points relating to A Guarantee

✔ existence of recoverable debt
✔ Consideration: there need be no direct consideration between the surety and the
creditor. As per Section 127 consideration received by the principal debtor is sufficient
consideration to the surety for giving the guarantee.
✔ surety must be competent to contract
✔ Even if the principal debtor is incompetent to contract, the guarantee is valid.
✔ There must be an existing liability or a promise whose performance is guaranteed.
Liability must be legally enforceable and not time barred.
✔ No misrepresentation or concealment by the creditor in obtaining guarantee.
(Guarantor must be made aware of all material facts wrt liability/promise so he can
make the right decision)
✔ It is an express contract🡪 oral or writing
✔ Joining of the other co-sureties (Section 144): Where a person gives a guarantee
upon the condition that another surety must join along with him, and no such person
joins as surety then such guarantee is not valid.
Nature and Extent of Surety’s Liability (section 128):
● At the time of making of contract of guarantee, the surety is at liberty to state the limit
of his liability
He is liable only to the extent of his stated limit on the default of the principal debtor.
● Liability of surety is of secondary nature as he is liable only on default of principal debtor
● Where a debtor cannot be held liable on account of any defect in the document, the
liability of the surety also ceases.
● In the absence of any such contract, the liability of the surety is co-extensive with that
of the principal debtor. It means that the surety is liable for what the principal debtor
is liable. However, the liability of the surety may be made less than that of the principal
debtor
● Surety’s liability continues even if the principal debtor has not been sued or is omitted
from being sued. In other words, a creditor may choose to proceed against a surety
first, unless there is an agreement to the contrary.
● Whatever the case may be, the liability of the surety is secondary and conditional that
is it arises on the default of the principal debtor.
Example : A guarantees to B the payment of a bill of exchange by C, the acceptor. The

bill is dishonoured by C. A is liable not only for the amount of the bill but also for any
interest and charges which may have become due on it.
Kinds of Guarantee:
1) Specific Guarantee: A guarantee given for a single debt/ particular transaction. The
surety’s liability comes to an end when the guaranteed debt is duly discharged or the
promise is duly performed.
2) Continuing Guarantee (Section 129): A guarantee which extends to a series of
transaction. Here, A surety’s liability continues until the revocation of the guarantee.
Difference between Indemnity and Guarantee:
Indemnity Guarantee
1) Number of Parties two parties i.e. indemnifier Three
and parties i.e. surety, creditor
indemnified. and principal debtor.
2) Number of Contracts In indemnity there is only In oneguarantee, there are three contracts
contract between indemnifier i.e.
and indemnified. - between surety and creditor
- between surety and principal debtor
- an implied contract of indemnity
between the
principal debtor and surety.
3) Type of contract expressed or Implied. Always an express contract.
4) Nature of Undertaking A contract of indemnity is ofA contract of guarantee is a
contingent nature collateral contract
5) Nature of Liability The liability of indemnifier Here the primary liability is
is Primary, Absolute, Total that of principal debtor. The
liability of surety is
secondary and conditional.
6) Commencement of LiabilityThe liability of indemnifier The liability of surety commences when
commences when the the principal debtor makes default
indemnified suffer loss
7) Objective To save the indemnified from To provide security to the creditor in
a loss which may occur respect of existing debs and liabilities
to him in the future
8) Right to sue third party Indemnifier cannot sue the third
On the default of principal debtor, the
person in his own name butsurety
he (after discharging his liability) may
may initiate the sue him in his own name because he gets
proceedings on behalf allofthe right of a creditor after discharging

indemnified the debts..
9) Competency to contractAll parties must be In the case of a contract of guarantee,

competent to contract where a minor is a principal debtor, the
contract is still valid.
Continuing Guarantee (Section 129):
A guarantee which extends to a series of transactions is called a “continuing guarantee”.

Liability of surety is revoked by:
1) By Notice: A continuing guarantee may be revoked at any time by the surety by giving
notice to the creditor but only for future transaction.
2) By Death (of surety): In the absence of any special contract, a continuing guarantee is
revoked by the death of surety but only for future transaction.
Section 132 – Liability Of Two Persons, Primarily Liable, Not Affected By

Arrangement Between Them That One Shall Be Surety On Other’s Default
Where two persons contract with a third person to undertake a certain liability, and also
contract with each other that one of them shall be liable only on the default of the other
(Guarantee), the creditor cannot sue the guarantor, even if he is aware of such second
contract because he is not party to such contract. The two debtors shall hold the same
liability as per primary contract.
Example: A and B make a joint and several promissory note to C. A makes it, in fact, as
surety for B, and C knows this at the time when the note is made. The fact that A, to the
knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon
the note.

Discharge Of A Surety
Various modes of discharge of surety are
By revocation of the By the conduct of the By the invalidation of the

contract of guarantee creditor contract of guarantee
a) By variance in terms of contract a) Guarantee obtained by

a) Revocation of (Section 133) misrepresentation invalid
continuing guarantee [Section 142]
b) By release or discharge of
by Notice (Section 130) principal debtor (Section 134) b) Guarantee obtained by
b)Revocation of concealment invalid [Section
c) Discharge of surety when 143]
continuing guarantee creditor compounds with, gives
by surety’s death time to, or agrees not to sue, c)Guarantee on contract that
(Section 131) principal debtor [Sector 135] creditor shall not act on it until
c)By novation [Section co-surety joins (Section 144)
i)Composition
62]
ii)Promise to give time
iii)Promise not to sue
d)Discharge of surety by creditor’s
act or omission impairing surety’s
eventual remedy [Section 139]
By revocation of the Contract of Guarantee
a) Revocation of continuing guarantee by Notice (Section 130):

Revoked by Notice by surety 🡪 to creditor 🡪 wrt future transactions
Revocation of specific guarantee: Revoked by Notice by surety 🡪 to creditor 🡪only if
liability to principal debtor has not accrued
Example 2: A guarantees to B, to the extent of 100,000 rupees, that C shall pay all the
bills that B shall draw upon him. B draws upon C Rs. 20000. C accepts the bill. A gives
notice of revocation. C dishonors the bill at maturity. A is liable upon his guarantee to pay
Rs. 20000.
{H.W. 🡪 examples in book}
b) Revocation of continuing guarantee by surety’s death (Section 131): death of surety

operates as a revocation of a continuing guarantee as to the future transactions taking

place after the death of surety. Exception 🡪 if there is contract contrary to that.
c) By novation [Section 62]: if fresh contract is entered into either between the same
parties or between the other parties, the consideration being the mutual discharge of the
old contract.
By conduct of the creditor
a) By variance in terms of contract (Section 133): variance in the terms of contract

between the principal debtor and creditor without surety’s consent would discharge the
surety in respect of all transactions taking place subsequent to such variance.
Note: Variation which is not substantial or material or which is beneficial to the surety
will not discharge him of his liability.
Example 1: A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards,
B and C contract, without A’s consent, that B’s salary shall be raised, and that he shall
become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw,
and the bank loses a sum of money. A is discharged from his suretyship by the variance
made without his consent, and is not liable to make good this loss.
Example 2: surety guaranteed the repayment of loan provided by the bank to the principal
debtor of only upto ` 25,000. Subsequently, since the bank was willing to provide loan
only upto ` 20,000, the principal debtor reduced the amount to `20,000 in the guarantee
form and without intimation to the surety. Since the change in condition is to the benefit
of surety, he shall not be relieved of the liability. (exception)
b) By release or discharge of principal debtor (Section 134): if the creditor

a. enters into a fresh/ new contract with principal debtor; by which the principal debtor
is released, or
b. does any act or omission, the legal consequence of which is the discharge of the
principal debtor.
Example: A contracts with B for a fixed price to build a house for B within a stipulated
time, B supplying the necessary timber. C guarantees A’s performance of the contract.
B omits to supply the timber. C is discharged from his suretyship.
c) Discharge of surety when creditor compounds with, gives time to, or agrees not to
sue, principal debtor [Sector 135]:
● Composition: variation of the original contract without consulting the surety🡪 surety
is discharged
● Promise to give time: when more time is allowed to principal debtor to repay debt
on due date🡪 surety is discharged.
Exception:- section 136🡪 Where a contract to give time to the principal debtor is
made by the creditor with a third person, and not with the principal debtor, the

surety is not discharged.--> Example: C, the holder of an overdue bill of exchange
drawn by A as surety for B, and accepted by B, contracts with M to give time to B.
A is not discharged.
● Promise not to sue: If the creditor under an agreement with the principal debtor
promises not to sue him, the surety is discharged.
Exception:- section 137🡪Mere forbearance/delay on the part of the creditor to sue
the principal debtor or to enforce any other remedy against him does not discharge
the surety (unless provision in the guarantee contract to the contrary)🡪 Example: B
owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for
a year after the debt has become payable. A is not discharged from his suretyship.
● Exception to all above: if the surety assents to above variations🡪 then he shall
continue to remain liable
d) Discharge of surety by creditor’s act or omission impairing surety’s eventual

remedy [Section 139]: If the creditor does any act/omits to do an act, which is
inconsistent with the rights of the surety🡪 the surety is discharged.
SC Case🡪 “A bank granted a loan on the security of the stock in the godown. The loan
was also guaranteed by the surety. The goods were lost from the godown on account of
the negligence of the bank officials. The surety was discharged to the extent of the value
of the stock so lost.”
Example 2: A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B
promises on his part that he will, at least once a month, see that M make up the cash.
B omits to see this done as promised, and M embezzles. A is not liable to B on his
guarantee.
By the invalidation of the contract of guarantee
a) Guarantee obtained by misrepresentation invalid [Section 142]: misrepresentation

made by the creditor, or with his knowledge and assent, concerning a material part of
the transaction🡪 invalid
b) Guarantee obtained by concealment invalid [Section 143]: keeping silence as to
material circumstances🡪 invalid
Example 1: A engages B as a clerk to collect money for him, B fails to account for some
of his receipts, and A in consequence calls upon him to furnish security for his duly
accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s
previous conduct. B afterwards makes default. The guarantee is invalid.
c) Guarantee on contract that creditor shall not act on it until co-surety joins (Section
144): Where a person gives a guarantee upon a contract that the creditor shall not act
upon it until another person has joined in it as co- surety, the guarantee is not valid if
that other person does not join.

Rights of Surety:
Surety enjoys rights against
Creditor Principal Debtor Co-sureties
Right Right of Right of Right to Liability of

Right to Right to Right to Subrogation contribution co-sureties
to set security Indemnity
security share bound in
off
reduction different
sums
Against Creditor:
1) Surety’s right to benefit of creditor’s securities [Section 141]: A surety is entitled to

the benefit of every security which the creditor has against the principal debtor at the
time of making a contract of guarantee. This is immaterial whether the surety is or is
not aware of the existence of such security. If the creditor loses, or, without the consent
of the surety, parts with such security, the surety is discharged to the extent of the
value of the security.
2) Right of Set-off: The surety is entitled (in a suit filed by the creditor against the surety)
to the benefit of any set-off for counter claim which the principal debtor might possess
against the creditor.
3) Right to share reduction: The surety has right to claim proportionate reduction in his
liability if the principal debtor becomes insolvent.
Against Principal Debtor:
1) Right of Subrogation [Section 140]: The terms subrogation may be defined as the
substitution of one person with another with same right and liabilities.
After discharging his liability on the default of principal debtor, the surety is vested with
all the rights which the creditor has against the principal debtor, for e.g.
a) Right to recover money paid from debtor
b) Right to securities (if any) held by creditor.
c) Right to initiate proceedings against the principal debtor in his own name.
2) Right to security: On repayment, surety steps into the shoes of the creditor. He has all
the rights of the creditor including the right to sell the security and recover the debt
from debtor.
3) Right to Indemnity [Section 145]: The surety is entitled to recover from the principal
debtor whatever sum he has rightfully paid under the guarantee, but not sums which he
paid wrongfully.

Example 3: A guarantees to C, to the extent of 2,00,000 rupees, payment for rice to
be supplied by C to B. C supplies to B rice to a less amount than 2,00,000 rupees, but
obtains from A payment of the sum of 2,00,000 rupees in respect of the rice supplied.
A cannot recover from B more than the price of the rice actually supplied. (Mistake of
surety. Not the fault of principal debtor)
Against Co-Sureties:
Co-sureties (meaning)🡪 When the same debt or duty is guaranteed by two or more persons,
such persons are called co-sureties
1) Co-sureties liable to contribute equally (Section 146): when two or more persons are
co-sureties for
● the same debt, or duty,
● either jointly, or severally and
● whether under the same or different contracts and
● whether with or without the knowledge of each other,
● are liable to pay each an equal share of the whole/part debt.
● Any excess paid by one of them can be recovered from other co sureties.
● Exceptions 🡪 the co-sureties have a contract to share debt in different ratios
Example 1: A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E. E
makes default in payment. A, B and C are liable, as between themselves, to pay
1,00,000 rupees each.
2) Liability of co-sureties bound in different sums (Section 147): Principal of equal

contribution is, however, subject to the maximum limit fixed by a surety to his liability.
Co-sureties who are bound in different sums are liable to pay equally but upto the
specified limit.

Unit 2 – Bailment and Pledge
Section 148-181
Bailment and Pledge

Section 148-181
Bailment (Section Pledge (Section Distinction

148-171) 172-181) between bailment
and pledge
Duties and Rights of Bailor Pawnee Rights

Duties and Rights of Bailee Pawor Rights
Finder of Goods Pledge by
General lien and particular Mercantile Agent
lien
Introduction
What is Bailment?
As per Section 148 of the Act, bailment is the delivery of goods by one person to another
for some purpose, upon a contract, that the goods shall, when the purpose is accomplished,
be returned or otherwise disposed of according to the directions of the person delivering
them.
Parties
● The person delivering the goods is called the “bailor”.
● The person to whom they are delivered is called the “bailee”.
Example : Where ‘X’ delivers his car for repair to ‘Y’, ‘X’ is the bailor and ‘Y’ is the bailee.

Essential Characteristics
✔ Bailment is based upon a contract. Sometimes it could be implied by law as it

happens in the case of finder of lost goods.
✔ delivery of goods from one person to another for some purposes
✔ Delivery involves change of possession from one person to another, and not change
of ownership
✔ only for moveable goods and never for immovable goods or money.
✔ possession of goods changes. Change of possession can happen by physical delivery
or constructive delivery (Eg: bailee is already in possession of goods but agrees to be
a bailee through a contract.).
Eg 2: servants of a master who are in custody of goods of the master do not become
bailees.
✔ Bailee is obliged to return the same goods physically to the bailor.
Eg: Deposit of money in a bank is not bailment since the money returned by the bank
would not be identical currency notes.
Eg: depositing ornaments in a bank locker is not bailment, because ornaments are
kept in a locker whose key are still with the owner and not with the bank.
Popular forms of Bailment :

(1) Delivery of goods by one person to another to be held for the bailor’s use.
(2) Goods given to a friend for his own use without any charge.
(3) Hiring of goods.
(4) Delivering goods to a creditor to serve as security for a loan.
(5) Delivering goods for repair with or without remuneration.
(6) Delivering goods for carriage.
Bailors Duties and Rights
Duties of Bailor
1. Bailor’s duty to disclose faults in goods bailed [Section 150) The bailor is bound
to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and which
materially interfere with the use of them, or expose the bailee to extraordinary risks.
If he does not make such disclosure, he is responsible for damage arising to the bailee
directly from such faults.
If the goods are bailed for hire, the bailor is responsible for such damage, whether he was
or was not aware of the existence of such faults in the goods bailed.
Example : A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and

A is injured. B is responsible to A for the injury.
2. Repayment by bailor of necessary expenses [Section 158] :
Where, by the conditions of the bailment, the goods are to be kept/carried/to have
work done upon them by the bailee for the bailor, and the bailee is to receive no
remuneration, the bailor shall repay to the bailee the necessary expenses incurred by him
for the purpose of the bailment.
3. Bailor is responsibility to bailee [Section 164] for any loss which the bailee may sustain
by reason that the bailor was not entitled to make the bailment, or to receive back the
goods or to give directions, respecting them.
4. where the bailment is gratuitous, the bailor must reimburse the bailee for any expenditure
incurred in keeping the goods.
5. the bailor should reimburse any expense which the bailee may incur by way of loss in the
process of returning the goods or complying with other directions for returning the goods.
6. the bailor must compensate the bailee for the loss or damage suffered by the bailee that
is in excess of the benefit received, where he had lent the goods gratuitously and decides
to terminate the bailment before the expiry of the period of bailment.
7. the bailor is bound to accept the goods after the purpose is accomplished. If bailor fails,
he is responsible for any loss or damage to the goods and has to reimburse for expenses
incurred by the bailee for keeping the goods safely.
Rights of Bailor :
1. Liability of bailee making unauthorised use of goods bailed [Section 154]🡪 bailee is
liable to make compensation to the bailor for any damage arising to the goods from or
during such use of them.
Example : A lends a horse to B for his own riding only. B allows C, a member of his family,
to ride the horse. C rides with care, but the horse accidentally falls and is injured. B is
liable to make compensation to A for the injury done to the horse.
2. Effect of mixture, with bailor’s consent, of his goods with bailee’s [Section 155] : If
the bailee, with the consent of the bailor, mixes the goods of the bailor with his own
goods, the bailor and the bailee shall have an interest, in proportion to their respective
shares, in the mixture thus produced.
3. Effect of mixture, without bailor’s consent, when the goods can be separated [Section
156]
a. If the goods can be separated or divided🡪 the property in the goods remains in
the parties respectively and
b. the bailee is bound to bear the expenses of separation or division, and any
damage arising from the mixture.
c. Eg: mixing balls, clothes, furniture of bailor with bailee’s.
4. Effect of mixture, without bailor’s consent, when the goods cannot be separated
[Section 157] 🡪 the bailor is entitled to be compensated by the bailee for the loss of the
goods.
Eg: mixing flour, oil of bailor with bailee’s.

5. Termination of bailment by bailee’s act inconsistent with conditions [Section 153] : A
contract of bailment is voidable at the option of the bailor, if the bailee does any act with
regard to the goods bailed, inconsistent with the conditions of the bailment.
Example : A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage.
This is, at the option of A, a termination of the bailment.
6. Bailor entitled to increase or profit from goods bailed [Section 163] : bailee is bound
to deliver to the bailor, or according to his directions, any increase or profit which may
have accrued from the goods bailed. Exception 🡪 if there is a contrary contract.
Example : A leaves a cow in the custody of B to be taken care of. The cow has a calf, B is
bound to deliver the calf as well as the cow to A.
7. Gratuitous bailment : Bailor in the case of gratuitous bailment has a right to demand the
goods back even before the expiry of the period of bailment.
If in the process, loss is caused to the bailee, bailor is bound to compensate.
[Meaning of Gratuitous bailment🡪 bailment in which the bailee receives no compensation.
If is done out of gratitude. A gratuitous bailee is liable for loss of the property only if the
loss is caused by the bailee’s gross negligence. For example, borrowing a friend’s car.]
Termination of bailment
● Act done inconsistent with the condition of bailment
● Period of bailment expires
● Demand for return of goods
● Death of bailee
Duties and rights of Bailee
Duties of Bailee
1. Care to be taken by bailee [Section 151] : In all cases of bailment, the bailee is bound
to take as much care of the goods bailed to him as a man of ordinary prudence would,
under similar circumstances, take of his own goods of the same bulk, quality and value as
the goods bailed.
Example : If X bails his ornaments to ‘Y’ and ‘Y’ keeps these ornaments in his own locker
at his house along with his own ornaments and if all the ornaments are lost/ stolen in a
riot ‘Y’ will not be responsible for the loss to ‘X’. If on the other hand ‘X’ specifically
instructs ‘Y’ to keep them in a bank, but ‘Y’ keeps them at his residence, then ‘Y’ would
be responsible for the loss [caused on account of riot].
2. Bailee when not liable for loss, etc., of thing bailed [Section 152] : The bailee, in the
absence of any special contract, is not responsible for the loss, destruction or
deterioration of the thing bailed, if he has taken the amount of care of it described in
section 151.

3. Bailee has no right to make unauthorized use of goods bailed.
4. Bailee has no right to mix the goods bailed with his own goods without the consent of
the bailor.
5. Return of goods bailed on expiration of time or accomplishment of purpose [Section
160]
6. Bailee’s responsibility when goods are not duly returned [Section 161] 🡪 bailee is
responsible to the bailor for any loss, destruction or deterioration of the goods from that
time.
7. Bailment by several joint owners [Section 165] 🡪 bailee may deliver them back to, or
according to the directions of, one joint owner without the consent of all, in the absence
of any agreement to the contrary.
8. Bailee has a duty to return any extra profit accruing from goods bailed.
Rights of bailee :
(i) to claim compensation for any loss arising from non-dislosure of known defects in the
goods.
(ii) to claim indemnification for any loss or damage as a result of defective title.
(iii) to deliver back the goods to joint bailors according to the agreement or directions.
(iv) If the bailor has no title to the goods, and the bailee, in good faith, delivers them back
to, or according to the directions of, the bailor, the bailee is not responsible to the
owner in respect of such delivery. (Section 166)
(v) to exercise his ‘right of lien’. This right of lien is a right to retain the goods and is
exercisable where charges due in respect of goods retained have not been paid. The
right of lien is a particular lien for the reason that the bailee can retain only these goods
for which the bailee has to receive his fees/remuneration.
(vi) Suit by bailor & bailee against wrong doers [Section 180] : If a third person wrongfully
deprives the bailee of the use or possession of the goods bailed, or does them any injury,
the bailee is entitled to use such remedies (file suit)as the owner might have used in
the like case if no bailment had been made; and either the bailor or the bailee may
bring a suit against a third person for such deprivation or injury.
Whatever is obtained by way of relief or compensation in any such suit shall, as between
the bailor and the bailee, be dealt with according to their respective interests (section
181).
Right Of Third Person Claiming Goods Bailed [Section 167]

If a person, other than the bailor, claims goods bailed, he may apply to the Court to stop
the delivery of the goods to the bailor, and to decide the title to the goods.
Finder Of Lost Goods

Right of finder of lost goods; may sue for specific reward offered [Section 168]:
● The finder of goods has no right to sue the owner for compensation for trouble and
expense voluntarily incurred by him to preserve the goods and to find out the owner;
● but he may retain the goods against the owner until he receives such compensation;

● and, where the owner has offered a specific reward for the return of goods lost, the
finder may sue for such reward, and may retain the goods until he receives it.
When can the finder sell the goods found [Section 169] :
● Owner cannot with reasonable diligence be found, or
● if he refuses, upon demand, to pay the lawful charges of the finder
And
● when the thing is in danger of perishing or of losing the greater part of its value, or
● lawful charges of the finder in respect of the thing found amount to two-thirds of its
value.
General Lien And Particular Lien
General lien Particular lien

It is a right to detain/retain any goods of the bailor
It is a right exercisable only on such goods in respec
for general assets/balance of account outstandingof which charges are due.
Example: Example:
X becomes insolvent. Y is appointed as the official
A delivers a rough diamond to B, a ealize, to be cu
assignee to recover value from the assets of X. Here
and polished, which is accordingly done. B is entitle
Y has general lien on all the assets of X. to retain the stone till he is paid for the services h
has rendered.
A took a loan of Rs. 5 lac from bank against A gives
a cloth to B, a tailor, to make into a coat.
promises A to deliver the coat as soon as it is finished
security worth Rs. 7 lac. On defaulting to repay the
and to give a three months’ credit for the price. B i
loan, the bank sold the security and recovered only
not entitled to retain the coat until he is paid.
4 lac from market. The Bank can now recover
remaining 1 lac from general lien on other assets of
A.
Auditor has general lien on the books of accounts if

his remuneration is not paid.
A general lien is not automatic but is applicable only
It is automatic
if so mentioned in the agreement.
Generally, It can be exercised against goods even
Generally, It comes into play only when some labou
without involvement of labour or skill. Eg: bankers
or skill is involved. Eg: bailee, agent, repairer sha
don’t use skill on the asset be using some skill on the asset

Bankers, factors, wharfingers, policy Bailee, finder of goods, pledgee, unpaid seller
brokers etc. are entitled to general lien agent, partner etc are entitled to particular lien
Bailee’s particular lien [Section 170] : Where the bailee has, in accordance with the
purpose of the bailment, rendered any service involving the exercise of labour or skill in
respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to
retain such goods until he receives due remuneration for the services he has rendered in
respect of them.
General lien of bankers, factors, wharfingers, attorneys and policy brokers [Section 171]
: Bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in the
absence of a contract to the contrary, retain, as a security for a general balance of account
any goods bailed to them; but no other persons have a right to retain, as a security for such
balance, goods bailed to them, unless there is an express contract to the effect.
Pledge
Meaning: Pledge is a variety or specie of bailment. It is bailment of goods as security for
payment of debt or performance of a promise.
In pledge, there is no change in ownership of the property. Under exceptional circumstances,
the pledgee has a right to sell the property pledged.
Essentials of contract of pledge :
● There must be bailment for security for payment of debt/ performance of a promise
● Goods must be the subject matter of the contract of pledge.
● The goods pledged must be in existence
● There must be a delivery of goods from pawnor to pawnee
Parties:
1. he person who pledges[or bails] is known as pledgor or also as pawnor.
2. the bailee is known as pledgee or also as pawnee.
Pledges asset worth Rs. 1.5Cr as security

A B
Pledgor/pawnor Pledgee/pawnee
Loan Rs. 1 crore
Pawnee’s rights :
(a) Right of retainer [Section 173] : The pawnee may retain the goods pledged, not only
for payment of the debt or the performance of the promise, but for the interest, of the
debt, and all necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged.
(b) Right to retention of subsequent debts [Section 174] : Pawnee has a right to retain
the goods pledged towards subsequent advances as well, however subject to such right

being specifically contemplated in the contract.
(c) Pawnee’s right as to extraordinary expenses Incurred [Section 175] : The pawnee is
entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged.
(d) Pawnee’s right where pawnor makes default [Section 176] : If the pawnor makes
default in payment of the debt, or performance, at the stipulated time of the promise,
in respect of which the goods were pledged, the pawnee may bring a suit against the
pawnor upon the debt or promise, and retain the goods pledged as a collateral security;
or he may sell the thing pledged on giving the pawn or reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are
greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.
(e) Pledge by person in possession under voidable contract [Section 178A] : When the
pawnor has obtained possession of the goods pledged by him under a contract voidable
under section 19 or section 19A, but the contract has not been rescinded at the time of
the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith
and without notice of the pawnor’s defect of title.
Rights of a pawnor
(a) Right to redeem [Section 177] : If a time is stipulated for the payment of the debt, or
performance of the promise, for which the pledge is made, and the pawnor makes
default in payment of the debt or performance of the promise at the stipulated time, he
may redeem the goods pledged at any subsequent time before the actual sale of them;
but he must, in that case, pay, in addition, any expenses which have arisen from his
default.
(b) Pledge where pawnor has only a limited interest [Section 179] : Where a person
pledges goods in which he has only a limited interest, the pledge is valid to the extent
of that interest.
Pledge By Mercantile Agents [Section 178]

Though generally only a owner of goods can pledge, the Act recognizes the right of certain
mercantile agents to pledge provided it is done with the consent of the owner of the goods.
Such a pledge done in the ordinary course of business is valid.

Distinction Between Bailment And Pledge
Aspects Pledge Bailment
Purpose A pledge is made for a specific A bailment can be for any purpose.
purpose as security for payment of
debt or performance of a promise.
Use of Goods A pawnee does not have the right The bailee may use the goods bailed as per the
to use the goods.
terms of the contract.
Lien Lien can be exercised even for A bailee can exercise lien on the goods bailed
non- payment of interest. only for his labour and
skill employed
Sale of Goods The pawnee can sell the goods The bailee has no right of sale.
after due notice to the pawnor.
Nature of Interest
Thein pledgee gets a special The bailee has no right of possession of the
Property property in the goods. The general goods bailed.
property remains with the
pawnor.

Unit 3 – Agency
Section 182 to 238
Introduction
An agency relationship is established when one party (agent) is authorized by another party
(principal) to act on his/ her behalf.
An agent has the potential to form contracts on behalf of the principal and in doing so, will
bind the principal.
It is a relation of trust and confidence.
What is Agency?
The Indian Contract Act,1872 does not define the word ‘Agency’.
But it does define the term ‘agent’ as “a person employed to do any act for another or to
represent another in dealings with third persons”.
The person for whom the act is done or who is so represented is called “Principal”.
[Section 182].
Test of Agency
(i) Whether the person has the capacity to bind the principal and make him answerable
to the third party 🡪 bind him in legal relationship
(ii) Whether he can establish Privity of Contract between the principal and third parties🡪
i.e, there is right to sue between principal and 3rd party
Relevant Maxim 🡪The Rule of Agency is based on the maxim “Qui facit per alium, facit per
se” i.e., he who acts through an agent is himself acting.

Appointment and Authority of Agents
Who may employ an agent [Section 183]: Who may be an agent [Section 184]:
✔ age of majority + ✔ age of majority +
✔ sound mind ✔ sound mind
Consideration not necessary [Section 185]:
✔ no consideration is necessary to create an agency
✔ acceptance of the office of an agent is sufficient consideration
Example:
P appoints Q, a minor, to sell his car for not less than ` 2,50,000. Q sells it for` 2,00,000. P
will be held bound by the transaction and further shall have no right against Q for claiming
the compensation for having not obeyed the instructions, since Q is a minor and a contract
with a minor is ‘void-ab-initio’.
Creation of Agency
Modes of Creation of Agency
Express Implied Agency by Estoppel/ Necessity

appointmen appointment ratification holding out
t
Spoken words Written words
I. Express appointment (S: 187)

Given by words, spoken or written. Eg: by deeds or orally
II. Implied Authority (S: 187):
Inferred from
● the circumstances of the case;
● things spoken or written,
● or in the ordinary course of dealing
Example 1: If a person ealizes rent and gives it to the landlord, he impliedly acts
for the landlord as an agent.
III. Agency by Estoppel [Section 237]:

when one person by representation, act or omission has intentionally caused or
permitted another person to believe that he is the agent of the principal, without the
authority of principal🡪 then he shall not be allowed to deny his previous statement
Essential features of Agency by Estoppel:
✔ the principal must have made a representation;
✔ representation 🡪 express or implied;
✔ representation must state that the agent has an authority to do certain act
although really he has no authority;
✔ principal must have induced the third person by such representation
✔ third person must have believed the representation and made the contract
IV. Agency by Necessity: Thus, where an agent is authorised to do certain act, and while
doing such an act, an emergency arises, he acquires an extra-ordinary or special
authority to prevent his principal from loss.
Example: Raja has a large farm on which Shyam is the caretaker. When Raja is in
Canada, there is a huge fire on the farm. Shyam becomes an agent of necessity for
Raja so as to save the property from being destroyed by fire. Raja (the principal) will
be liable for any expenses, Shyam (his agent of necessity) incurred to put out the fire
V. Ratification: Rights of person as to acts done for him without his authority, Effect
of ratification [Section 196]: “Ratification” means approving a previous act or
transaction. Where acts are done by one person on behalf of another, but without
his knowledge or authority he may elect to ratify it. This will make the agency valid.
Ratification may be express or implied by the conduct
Example: X who is Y’s agent has on 10th January 2019 purchases goods from Z on
credit without Y’s permission. After the purchase, on 20th January 2019, Y tells X that
he will accept responsibility to pay for the purchases although at the time of purchase
the agent had no authority to buy on credit.
Essentials of a valid Ratification
✔ may be expressed or Implied [Section 197]
Example (implied ratification): A, without authority, buys goods for B.
Afterwards B sells them to C on his own account; B’s conduct implies a
ratification of the purchase made for him by A.
Example : A, without B’s authority, lends B’s money to C. Afterwards B accepts
interests on the money from C. B’s conduct implies a ratification of the loan.
✔ Person ratifying must have knowledge of material facts [Section 198]
Example: A has an authority from P to buy certain goods at the market rate.
He buys at a higher rate but P accepts the purchase. Afterwards P comes to
know that the goods purchased by A for P belonged to A himself. The
ratification is not binding on P.
✔ The principal cannot ratify a part of the transaction which is beneficial to him
and reject the rest. Any part of transaction which is ratified🡪 is deemed
ratification of the whole transaction [Section 199]
✔ Ratification of unauthorized act cannot injure third person [Section 200]: when
the interest of third parties is detrimentally affected, the principle of
ratification does not apply. 🡪 Third party cannot be put through trouble

without prior authority of the principal. If done so, such acts cannot be
ratified by principal.
Example : A, not being authorized thereto by B, demands on behalf of B, the

delivery of a chattel, the property of B, from C, who is in possession of it. This
demand cannot be ratified by B, so as to make C liable for damages for his
refusal to deliver.
Example : A holds a lease from B, terminable on three months’ notice. C, an
unauthorized person, gives notice of termination to A. The notice cannot be
ratified by B, so as to be binding on A.
✔ Ratification within reasonable time
✔ Ratification must be communicated to the other party.
✔ Act to be ratified should not be void or illegal

Extent of Agent’s Authority
The authority of an agent means his capacity to bind the principal to third parties.
The agent can bind the principal only if he acts within the scope of his authority.
Scope of agent's authority
Under Normal Circumstances In Emergency
-lawful thing necessary for the all such acts for the purpose of
purpose of carrying out duties protecting the principal from loss as
will be done by a person of ordinary
-lawful thing justified by various prudence, even if the authority was
customs of trades not given by the principal.
Eg: Debt recovery agent can use all
legal methods to recover debt.
Conditions for valid agency during emergency:
-Agent unable to communicate with principal
-actual and definite commercial necessity to act
promptly
-Agent acts bonafide for benefit of principal
-Agent adopted the most reasonable and
practicable course under the circumstances,
-Agent must have been in possession of the
goods belonging to his principal and which are
the subject of contract
Sub Agents
Meaning 🡪 Agent of an agent, ie, person employed by, and acting under the control of, the
original agent
When agent cannot delegate [Section 190]? 🡪 For those acts which he has expressly or
impliedly undertaken to perform personally. As a general rule🡪 agent cannot delegate his
duties to other agents.--> “delegatus non potest delegare”.

Exception where an agent can appoint Sub-agent:
(i) Original appointment authorises such sub agent appointment

(ii) Customs of trade may allow sub agency
(iii) Unforeseen emergency arises
Representation of principal by sub-agent properly appointed [Section 192]:
✔ Principal is bound by the acts of sub-agent
✔ agent is responsible to the principal for the acts of the sub-agent
✔ sub-agent is responsible for his acts to the agent, but not to the principal, except
in case of fraud or willful wrong.
Agent’s responsibility for sub-agent appointed without authority [Section 193]:

✔ agent is responsible for the acts of sub-agent to both principal and 3rd parties
✔ Principal is not bound by/responsible for the acts of sub- agent
Substitute Agent
● He is selected/appointed by the agent for a particular task. His name and details are
confirmed and consented by the principal.
● He is not sub-agent.
● [Reason: such substitute agent may have better qualification/accessibility to perform
part of the business]
Relation between principal and person duly appointed by agent to act in business
of agency
[Section 194]: Where an agent, holding an express or implied authority to name another
person to act for the principal in the business of the agency, has named another person
accordingly,🡪 such person is substitute agent for the business entrusted. Principal is bound
by his actions.
Example : A directs B, his solicitor, to sell his estate by auction, and to employ an
auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-
agent, but is A’s agent for the conduct of the sale.
Agent’s duty in naming such person [Section 195]: In selecting such agent for his principal,
an agent is bound to exercise the same amount of discretion as a man of ordinary prudence.
Principal shall not be responsible in case of negligence of the agent.
Example 1: A instructs B, a merchant, to buy a ship for him. B employs a ship surveyor of
good reputation to choose a ship for A. The surveyor makes the choice negligently and the
ship turns out to be unseaworthy and is lost. B is not, but the surveyor is, responsible to A.

Difference between sub-agent and substitute agent?
S.no Sub Agent Substituted Agent

1. A sub-agent does his work under the a substituted agent works under the
control and directions of agent instructions of the principal
2. The agent not only appoints a sub-agent The agent does not delegate any part of his
but also delegates to him a part of his task to a substituted agent.
own duties
3. There is no privity of contract between Privity of contract is established between a
the principal and the sub-agent. principal and a substituted agent
4. The sub-agent is responsible to the a substituted agent is responsible to the
agent alone and is not generally principal and not to the original agent who
responsible to the principal appointed him
5. The agent is responsible to the principal The agent is not responsible to the principal
for the acts of the sub- agent for the acts of the substituted agent.
6. The sub-agent has no right of action The substituted agent can sue the principal
against the principal for remuneration for remuneration due to him
due to him
7. Sub-agents may be improperly Substituted agents can never be improperly
appointed appointed.
8. The agent remains liable for the acts of The agent’s duty ends once he has named
the sub-agent as long as the sub-agency the substituted agent.
continues.
Duties and obligations of an Agent
(i) Duty to execute mandate: Agent should perform the work which he has been
appointed to do. Otherwise he shall be liable to compensate the principal.
(ii) Duty to follow instructions or customs [section 211]: Agent must conduct business
as per the instructions of the principal. In absence of instruction, he must follow
general customs of business. Otherwise, loss sustained/undue profits made must be
compensated back by agent to principal.
Example: B, a broker, in whose business it is not the custom to sell on credit, sells
goods of an on credit to C, whose credit at the time was very high. C, before payment,
becomes insolvent. B must make good the loss to A.
(iii) Duty of Reasonable care and skill [section 212] to be used in exercising all his duties.
Moreover, he is liable to compensate the principal for his negligence/misconduct
Example 2: A, an agent for the sale of goods, having authority to sell on credit, sells
to B on credit, without making the proper and usual enquiries as to the solvency of B.
B, at the time of such sale is insolvent. A must make compensation to his principal in
respect of any loss thereby sustained.
(iv) Agent’ duty to communicate with principal [Section 214] and seeking his
instructions in case of any difficulty in execution of his duties.

(v) Duty to Avoid Conflict of interest (Duty not to deal on his own account):
a. Right of principal when agent deals, on his own account, in business of
agency without principals consent [Section 215]: If an agent deals on his own
account – without first obtaining the consent of his principal and acquainting
him with all material circumstances 🡪the principal may cancel the transaction,
if
i. material fact has been dishonestly concealed from him or
ii. Dealings have been disadvantageous to him.
Example 1: A directs B to sell A’s estate. B buys the estate for himself in the
name of C. A, on discovering that B has bought the estate for himself, may
repudiate the sale if he can show that B has dishonestly concealed any
material fact, or that the sale has been disadvantageous to him.
b. Principal’s right to benefit gained by agent dealing on his account in
business of agency [section 216]: If an agent deal on behalf of the principal
without his knowledge, the principal is entitled to claim any benefit resulting
from the transaction from the agent.
(vi) Duty not to make secret profits. Secret profit🡪 any advantage obtained by the agent
over and above his agreed remuneration and which he would not have been able to
make without his position as an agent.
(vii) Duty to render proper accounts [Section 213]🡪 Accounts supported with vouchers
must be submitted whenever demanded by principal
(viii) Duty not to Delegate [section 190] acts which he is personally responsible to fulfil
unless its required in ordinary course of trade
(ix) Agent’s duty to pay sums received for principal [Section 218]🡪 subject to deduction
of sums due to be paid to him
(x) Duty not to use any confidential information received in the course of agency
against the principal.
Rights of Agent
(i) Right of retain out of sums received on principal’s account [Section 217]: Agent
has right to retain out of any sums received on account of the principal in business,
following sums:
a. all moneys due to himself
b. expenses properly incurred by him in conducting such business
c. remuneration
(ii) Right to remuneration [Section 219]: Such Remuneration may be as per contract or

as per usual customary in business.
However an agent who is guilty of misconduct in the business of the agency is not
entitled to any remuneration in respect of that part of the [Section 220].
Example: An employs B to recover ` 1, 00,000 from C. Through B’s misconduct the
money is not recovered. B is entitled to no remuneration for his services, and must
make good the loss.
(iii) Agent’s lien on principal’s property [Section 221]: In the absence of any contract
to the contrary, an agent is entitled to retain the goods, papers and other property,
whether movable or immovable, of the principal received by him, until the amount
due to himself for commission, disbursement and services in respect of the same has
been paid or accounted for him.
Conditions:
✔ agent should be lawfully entitled to receive remuneration/commission from the
principal
✔ Property belongs to the principal
✔ Property have been received by the agent in his capacity and during the course
of his ordinary duties as agent.
✔ Agent has only a particular/specific lien (means lien can be exercised only
against a particular property and in the given transaction. Not in general for any
other transactions).
The agent’s right to lien is lost in the following cases:
🗶 Possession of the property is lost. Lien à Possession of property
🗶 Agent waives his right expressly or impliedly.
🗶 Contract does not allow lien.
(iv) Right to indemnity: ‘Indemnity’ means security or protection against a loss or other
financial burden. Principal is bound to indemnity the agent against all costs incurred
in the following situations:-
a. Right of indemnification for lawful acts [Section 222]: Loss caused even after
lawfully execution of authority (due to cancellation of contract by third
party/other unforeseen event/litigation expenses)🡪 shall be indemnified by
principal.
Example: ‘A’ of Delhi appoints ‘B’ of Mumbai as agent to sell his merchandise.
As a result ‘B’ contracts to deliver the merchandise to various parties. But A
fails to send the merchandise to B and B faces litigations for non- performance.
Here, A is bound to protect B against the litigations and all costs
b. Right of indemnification against acts done in good faith [Section 223]:
losses/damages caused even though agent acted in good faith🡪 shall be
indemnified by principal. Reimbursement cannot be claimed where the agent
has contravened any laws and penalty is levied.

Example: Where P appoints A as his agent and directs him to sell certain goods
which in fact do not belong to P. if third parties sue A for this act, A is entitled
for reimbursement
c. Non-liability of employer of agent to do a criminal act [section 224]: where
one person employs another to do an act which is criminal, the employer is not
liable to the agent.
(v) Right to compensation for injury caused by principal’s neglect [Section 225]:
principal must make compensation to his agent any loss/damage caused to him due
to principal’s neglect or want of skill.
Example: A employs B as a bricklayer in building a house, and puts up the scaffolding
himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must
make compensation to B.
Agent’s liability to third parties

Generally no personal liability of Agent incurred.
The liability remains that of the principal unless there is a contract to the contrary.
(i) Principal is liable/bound by for the Acts of the Agent as per authority given in
contract. Legal consequences and obligations born by principal as if he entered
into contract himself.[Section 226]
(ii) Principal not bound, when agent exceeds authority [Section 227]: In such situation
part of the contract which is as per authority, shall be binding on the principal.
Example: A, being owner of a ship and cargo, authorizes B to procure an insurance
for 4, 00,000 on the ship. B procures 2 policies for 400000 each. Principal is liable only
for premium payable on one such policy.
(iii) Principal is not bound when excess of agent’s authority is not separable from the
authorized part of the transaction [Section 228]. Example: A authorizes B to buy
500 sheep for him. B buys 500 sheep and 200 lambs for one sum of ` 6, 00,000. A may
repudiate the whole transaction.
(iv) Consequences of notice given to agent [Section 229]: Any notice given to agent
during course of business would be deemed notice to principal. Example: A is
employed by B to buy from C goods of which C is the apparent owner. In the course
of sale, Agent realized that C was not owner. It is deemed notice to Principal. Hence,
principal cannot set off payment due from C against such goods.
(v) Agent cannot personally enforce, nor be bound by, contracts on behalf of principal
[Section 230]: Agent can neither sue nor be sued on contracts made by him on his
principal’s behalf. Exception🡪
a. If the contract states otherwise.
b. sale or purchase of goods for a merchant resident abroad/foreign principal by
agent

c. agent does not disclose the name of his principal
d. Principal is minor/incompetent to contract/non-existent
(vi) Rights of parties to a contract made by agent not disclosed [Section 231]:
If an agent makes a contract with a person who does not knows/suspect that he is an
agent, the other contracting party has, as against the principal, the same right as he
would have had as against the agent if the agent had been the principal.
If the principal discloses himself before the contract is completed, the other
contracting party may refuse to fulfill the contract, if he can show that, if he had
known who the principal in the contract was, he would not have entered into the
contract.
(vii) Performance of contract with agent supposed to be principal [Section 232]:

Where one man makes a contract with another, neither knowing nor having reasonable
ground to suspect that the other is an agent, the principal, if he requires the
performance of the contract, can only obtain such performance subject to the rights
and obligations subsisting between the agent and the other party to the contract.
Example: A, who owes 50,000 rupees to B, sells 1, 00,000 rupees worth of rice to B.
A is acting as agent for C in the transaction, but B has no knowledge nor reasonable
ground of suspicion that such is the case. C cannot compel B to take the rice worth
1L without allowing him to set off A’s debt 50K.
(viii) Right of person dealing with agent personally liable [Section 233]:
In cases where the agent holds himself personally liable, but is acting for the principal,
a person dealing with him may hold either him or his principal, or both of them, liable.
Example: A enters into a contract with B to sell him 100 bales of cotton, and
afterwards discovers that B was acting as agent for C. A may sue either B or C, or
both, for the price of the cotton.
(ix) Consequence of inducing agent or principal to act on belief that principal or agent
will be held exclusively liable [Section 234]: When a person who has made a contract
with an agent induces the agent to act upon the belief that the principal only will be
held liable, or induces the principal to act upon the belief that the agent only will be
held liable, he cannot afterwards hold liable the agent or principal respectively.
(x) Liability of pretended agent [Section 235]: A pretended agent is a person who
represents himself to be an agent of another, when infact he has no authority from
him, whatsoever.
● If the principal ratifies his acts as agent, he has no liability.

● But if the principal refuses to ratify his acts, he becomes personally liable to
third party for any loss or damage caused to him.
(xi) Person falsely contracting agent not entitled to performance [Section 236]: A
person with whom a contract has been entered into in the character of agent, is not
entitled to require the performance of it if he was in reality acting, not as agent, but
on his own account. In simple words, where the person acts as an agent although he
is actually the principal, he shall be denied from enforcing the performance later in
the capacity of the principal
(xii) Liability of principal inducing belief that agent’s unauthorized acts were authorized
[Section 237]: When an agent has, without authority, done acts or incurred obligations
to third persons on behalf of his principal, the principal is bound by such acts or
obligations, if he has by his words or conduct induced such third persons to believe that
such acts and obligations were within the scope of the agent’s authority.
Example 1: A consigns goods to B for sale, and gives him instructions not to sell under
a fixed price. C, being ignorant of B’s instructions, enters into a contract with B to buy
the goods at a price lower than the reserved price. A is bound by the contract.
(xiii) Effect, on agreement, of misrepresentation or fraud by agent [Section 238]:

Misrepresentation by agents acting in the course of their business for their principals,
have the same effect as if such misrepresentations or frauds had been made, or
committed, by the principals. Misrepresentations made, or frauds committed, by
agents, in matters which do not fall within their authority, do not affect their
principals.
Example 1: A, being B’s agent for the sale of goods, induces C to buy them by a
misrepresentation, which he was not authorized by B to make. The contract is voidable,
as between B and C, at the option of C.
Revocation of authority
Modes of Termination of Agency:

i. Revocation: Principal may revoke the authority given to his agent at any time before
the authority has been exercised so as to bind the principal [Section 203].
Principal cannot revoke the authority given to his agent after the authority has been
partly exercised so far as regards such acts and obligations as arise for acts already
done in the agency. [Section 204].
Compensation for revocation by principal, or renunciation by agent [Section 205]:
Where there is an express or implied contract that the agency should be continued for

any period of time, the principal must make compensation to the agent for any
previous revocation or renunciation of the agency without sufficient cause.
Notice of revocation or renunciation [Section 206]: Reasonable notice must be given
of such revocation or renunciation; otherwise the damage must be made good to the
one by the other
Revocation and renunciation may be expressed or implied [Section 207]: Example:
A empowers B to let A’s house. Afterwards A lets it himself. This is an implied
revocation of B’s authority.
ii. Renunciation by agent [Section 206]: An agent may renounce the business of agency.
Agency is for a fixed period, the agent would have to compensate the principal for
any premature renunciation without sufficient cause. [S. 205]
Reasonable notice of renunciation is necessary. If the agent renounces without proper
notice, he shall have to make good any damage thereby resulting to the principal. [S.
206]
iii. Completion of business between agent and principal 🡪 agency ends
iv. Death or insanity of agent or principal🡪 agency ends
v. Principal’s insolvency🡪 agency ends
vi. On expiry of time: Where an agent has been appointed for a fixed term, the
expiration of the term puts an end to the agency whether purpose fulfilled or not.
When the agency is irrevocable?

Section 202 states that where the agent has himself an interest in the property which forms
the subject matter of the agency, the agency cannot, in the absence of an express contract,
be terminated to the prejudice of such interest.
Example: A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the
debts due to him from A. A cannot revoke this authority, nor can it be terminated by his
insanity or death.
Effects of Termination [Section 208]
When termination of agent’s authority takes effect as to agent, and as to third persons
[Section 208]: The termination of the authority of an agent does not, so far as regards the
agent, take effect before it becomes known to him, or, so far as regards third persons, before
it becomes known to them.
Example 1: A directs B to sell goods for him, and agrees to give B five per cent commission
on the price fetched by the goods. A afterwards, by letter, revokes B’s authority. B, after
the letter is sent, but before he receives it sells the goods for` 1,00,000. The sale is binding
on A, and B is entitled to ` 5,000 as his commission.

Agent’s duty on termination of agency by principal’s death or insanity [Section 209]:
When an agency is terminated by the principal dying or becoming of unsound mind, the agent
is bound to take, on behalf of the representatives of his late principal, all reasonable steps
for the protection and preservation of the interests entrusted to him.
Termination of sub-agent’s authority [Section 210]: The termination of the authority of an

agent causes the termination (subject to the rules herein contained regarding the
termination of an agent’s authority) of the authority of all sub-agents appointed by him.

The Negotiable Instruments Act, 1881
Introduction
⮚ The Act was introduced on 1st March,1881.
⮚ The Law in India relating to negotiable instruments is contained in the Negotiable
Instruments Act, 1881.
⮚ Applicability :- whole of India and to all persons resident in India, whether foreigners
or Indians.
⮚ The Act was amended several times. Recent two amendments made in the
N.I. Act were the Negotiable Instruments (Amendment and Miscellaneous Provisions)
Act, 2002 and the Negotiable Instruments (Amendment) Act, 2015 and shall be
deemed to have come into force on the 15th day of June, 2015
Meaning And Characteristics Of Negotiable Instrument
Meaning: A Negotiable Instrument is a transferrable written piece of paper creating a right
of a person to receive money and a corresponding liability of a person to pay money.
Characteristics:
1. It should be in writing
2. Freely transferable.
3. It should create a right of a person to receive money and a corresponding liability of
a person to pay money.
4. Holder’s title is free from defects. A holder in due course acquires a good title
irrespective of any defect in a previous holder’s title. Conditions:
(i) for consideration
(ii) without notice as to the defect in the title of the transferor; i.e in good faith and
(iii) before maturity
5. A negotiable instrument can be transferred infinitum, i.e., can be transferred any
number of times, till its payment.
Types of N.E.: section 13 of the Act mentions only three kinds of negotiable instruments
namely,
(i) Promissory Notes
(ii) Bills of Exchange
(iii) Cheque.
Promissory Note

Meaning: As per Section 4,
● An instrument in writing
● (not being bank note or a currency note) containing an
unconditional undertaking,
● signed by the maker,
● to pay a certain sum of money
● to a certain person or to the order of a certain person.
Example “I promise to pay B ` 500 and all other sums which shall be due to
him.”
Parties to 1. Maker: The person who makes the promissory Note. He is Debtor who
Promissory Note: is liable to pay.
2. Payee: The person to whom amount is payable. He is creditor who has
a right to receive money.
Essential requirements
1. Written.
of a valid promissory
2. Promise to pay.
note. However, notice that the use of the word promise is not essential to
constitute an instrument as promissory note.
3. Definite and unconditional promise. The promise to pay must not be
conditional. Therefore, instruments payable on performance or non
performance of a particular act or on the happening or non- happening
of an event, are not promissory notes.
However, the promise to pay may be subject to a condition, which
according to the ordinary experience of mankind, is bound to happen.
4. Certain sum of money.
5. The maker and payee must be certain person. The maker and payee
of the instrument must be certain, definite and different persons. A
promissory note cannot be made payable to the bearer (Sec. 31 of RBI
Act). Only the Reserve Bank or the Central Government can make or
issue a promissory note 'payable to bearer'.
6. Signature. The promissory note must be signed by the maker,
otherwise it is incomplete and ineffective.
7. Promise in money only.
8. Stamping. A promissory note must be properly stamped in accordance
with the provisions of the Indian Stamp Act and such stamp must be
duly cancelled by maker's signatures or initials or otherwise.

Bills of Exchange
Meaning: As per Section 5,

● An instrument in writing containing an unconditional order,
● signed by the maker,
● directing a certain person
● to pay a certain sum of money
● to a certain person or to the order of a certain person or to the
bearer of the instrument.
Parties to Bill 1. ofDrawer: The maker of a bill of exchange is called the drawer.
Exchange: 2. Drawee; The person directed by the drawer to pay is called the
'drawee'
3. Acceptor: The person who accepts the bill of Exchange. Normally
acceptor and drawee are same.
4. Payee: The person named in the instrument, to whom or to whose
order the money is, by the instrument, directed to be paid, is called
the payee.
Essential requirements
1. The bill of exchange must be in writing.
of a valid Bill 2. This order must be unconditional, as the bill is payable at all events.
of Exchange.A conditional bill of exchange is invalid. However, the bill may be
subject to a condition, which according to the ordinary experience of
mankind, is bound to happen.
3. The drawer must sign the instrument..
4. The drawer, the drawee (acceptor) and the payee are the necessary
parties to a bill and are to be specified in the instrument with
reasonable certainty. All these three parties may not necessarily be
three different persons. One can play the role of two. But there must
be two distinct persons in any case.
5. The sum must be certain
6. The medium of payment must be money and money only.
Cheque
Meaning: Section 6 defines a cheque as

● a bill of exchange
● drawn on a specified banker and not expressed to be payable otherwise than on
demand.
● includes the electronic image of a truncated cheque and a cheque in the electronic
form.

Parties to Cheque:
Drawer: The person who draws a cheque i.e. makes the cheque. (Debtor)
Drawee: The specific bank on whom cheque is drawn.
Payee: The person named in the instrument, to whom or to whose order the money is, by
the instrument, directed to be paid, is called the payee.
Note 1:
Truncated Cheque Cheque in electronic
It means the cheque whose electronic image form
has been created during the course of clearing The cheque is drawn and signed
cycle, to substitute electronically by the use of digital
the further physical movement. signature.
Note 2:
● The expression “Banker” includes any person acting as a banker and any post office
saving bank [Section 3]
● “clearing house” means the clearing house managed/recognized by the Reserve Bank
of India
● expressions ”asymmetric crypto system”, “computer resource”, “digital signature”,
“electronic form” and “electronic signature” shall have the same meanings
respectively assigned to them in the Information Technology Act, 2000
Acceptance-Drawer and drawee Section 7
Meaning: The acceptance is the signature of the drawee of a bill who has signed his assent
upon the bill and delivered it.
Thus, an acceptor is the drawee who has signed his assent upon the bill and delivered it to
the holder
Essentials of 1. In writing,
valid 2. Signed by the drawee or his agent,
Acceptance: 3. On bill of exchange,
4. Completed by delivery to the holder
▪ Writing the word 'Accepted' is immaterial.
▪ An oral acceptance or writing of the word 'Accepted' without the
drawee's signature is not an acceptance.

Bill can be accepted by following people:
(a) Drawee, i.e., the person directed to pay.
(b) Where more than 1 drawees are specified, then any or all can accept it. Only those
who accept are liable to pay.
(c) Drawee in case of need: When in the bill, the name of any person is given in addition
to the drawee to be resorted to in case of need, such person is called a 'drawee in
case of need'.
(d) An acceptor for honour: When a bill of exchange has been dishonoured by non-
acceptance and any person accepts it for honour of the drawer or of any indorsers,
such person is called "an Acceptor for honour". The payment which he makes is known
as “payment for honour”
(e) Agent of any of the persons mentioned above.
(f) Acceptor by estoppels: When no drawee has been named in a bill but a person accepts
it, he may be estopped from denying his liability as an acceptor.
HOLDER, HOLDER IN DUE COURSE, PAYMENT IN DUE COURSE

(Section 8 to 10)
Holder The “holder” of a promissory note, bill of exchange or cheque means—
(Section
8) o any person
o entitled in his own name to the possession thereof, and
o to receive or recover the amount due thereon from the parties
thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person
so entitled at the time of such loss or destruction.
There may/may not be any value and consideration in return.
Holder in A holder in due course is one who receives the instrument:
due (i) for consideration
course (ii) without notice as to the defect in the title of the transferor; i.e in good
(Section faith and
9) (iii) before maturity
His rights and title are independent on the transferor
He has a right to demand and receive and also have a right to sue.
Example: On a Bill of Exchange for ` 1 lakh, X’s acceptance to the Bill is forged. ‘A’ takes
the Bill from his customer for value and in good faith before the Bill becomes payable. State
with reasons whether ‘A’ can be considered as a ‘Holder in due course’ and whether he (A)
can receive the amount of the Bill from ‘X’.
Solution: As ‘A’ in this case prima facie became a possessor of the bill for value and in good
faith before the bill became payable, he can be considered as a holder in due course.
But where a signature on the negotiable instrument is forged, it becomes a nullity. The

holder of a forged instrument cannot enforce payment thereon.
Payment ● payment in accordance with the apparent tenor of the instrument,

in due ● in good faith and without negligence to any person in possession thereof
course under circumstances,
(Section ● which do not afford a reasonable ground for believing that he is not entitled
10) to receive payment of the amount therein mentioned.
CLASSIFICATION OF INSTRUMENTS
1.Bearer Bearer Instrument:

and Order It is an instrument where the name of the payee is blank or
Instrument Where the name of payee is specified with the words “or bearer” or Where
s: the last indorsement is blank.
Such instrument can be negotiated by mere delivery.
Order Instrument:
It is an instrument which is payable to a person or
Payable to a person or his order or
Payable to order of a person or
Where the last indorsement is fill
Such instrument can be negotiated by indorsement and delivery.
2. Inland Inland Instrument:
and Any instrument drawn or made in India and
Foreign Either payable in, or drawn upon any person resident in India shall be
Instrument deemed to be an inland instrument.
s
Example
:
(i) A promissory note made in Chennai and payable in Delhi.
(Section
11 (ii) A bill drawn in Pune on a person resident in Jaipur (although it is
& 12) stated to be payable in London)
The Negotiable Instruments Act is applicable.
Foreign Instruments:
Instrument which is not an inland instrument.

3.Inchoate Inchoate Instrument (section 20):
and It means an Instrument that is incomplete in certain respects.
Ambiguous (i) The person gives a blank instrument with authority to the holder to
Instrument complete it with appropriate amount up to the stamp value of the
s instrument.
: (ii) Delivery of such a paper is essential by the signer to the
authority/holder.
(iii) The person signing and delivering the inchoate instrument is liable both
to a holder and holder in due course. However, there is a difference in
their respective rights.
● The holder of such an instrument cannot recover the amount in
excess of the amount intended to be paid by the signor.
● The holder in due course can, however, recover any amount on such
instrument provided it is covered by the stamp affixed on the
instrument.
Example, a person signed a blank acceptance and kept it in his drawer and
some person stole it and filled it up for ` 20,000 and negotiated it to an
innocent person for value, it was held that the signer to the blank
acceptance was not liable to the holder in due course because he never
delivered the instrument intending it to be used as a negotiable instrument
Holder in due course can recover the amount from person liable.
Ambiguous Instrument (Section 17):
An instrument which is vague and cannot be clearly identified either as a
bill of exchange, or as a promissory note, is an Ambiguous instrument. In
other words, such an instrument may be construed either as promissory
note, or as a bill of exchange.
Regarding such instruments, Section 17 provides that
● the holder may, at his discretion, treat it as either and
● the instrument shall thereafter be treated accordingly.
Where amount is stated differently in figures and words [Section 18] :

The amount stated in words shall be the amount undertaken or ordered to
be paid.

4. Demand Demand Instruments (Section 19):
and Time ● A promissory note or bill of exchange
Instruments: ● in which no time for payment is mentioned is payable on
demand.
Note :
● Bills and notes are payable either on demand or at a fixed
future time.
● Cheques are always payable on demand (ie, when presented for
payment b the drawee. Such date is not fixed.)
(Section 21) A bill or promissory note is payable on demand when it

is
● expressed to be payable on demand, or
● the expression "at sight" or "on presentment" are stated on it.
Time instrument (Section 22):

Instrument payable after a certain period either in ‘x’ days or ‘x’
months. Three days are allowed as days of grace. (Section 22).
Calculation of maturity [Section 23] :
Time at which Maturity period

instrument is
payable
When a note or bill is made when the period stated terminates on
payable, a stated number the day of the month which
of months after date corresponds with the day on which
the instrument is dated
When it is made payable The period terminates on the day of
after a stated number of the month which corresponds with
months after sight/ after a the day on which it is presented for
certain event acceptance or sight or noted for
non-acceptance or protested for non-
acceptance.
Note : If the month in which the period would terminate has no

corresponding day, the period shall be held to terminate on the last
day of such month.
Eg: A negotiable instrument dated 29th January, 2017, is made
payable at one month after date. The instrument is at maturity on the
third day after the 28th February, 2017.
Calculating maturity of bill or note payable so many days after date

or sight [Section 24] The day of the date, or of presentment for
acceptance or sight, or of protest for non-acceptance, or on which the
event happens, shall be excluded.
The 3 days of grace shall begin from the next day after presentment.
Example:Bharat executed a promissory note in favour of Bhushan for
` 5 crores. The said amount was payable three days after sight.
st
Bhushan, on maturity, presented the promissory note on 1 January,
th
2017 to Bharat. Bharat made the payments on 4 January, 2017.
Bhushan wants to recover interest for one day from Bharat. Advise
Bharat, in the light of provisions of the Negotiable Instruments Act,
1881, whether he is liable to pay the interest for one day?
Solution: 3 days shall be counted from 2nd. Date of presentment shall
be ignored. Bharat was required to pay only on the 4 th and interest
shall not be levied.
When day of maturity is a public holiday [Section 25]: The

instrument shall be deemed to be due on the next preceding business
day.
The expression “Public Holiday” includes Sundays and any other day
declared by the Central Government, by notification in the Official
Gazette, to be a public holiday.
NEGOTIATION OF INSTRUMENT
⮚ Meaning: According to section 14, when a negotiable instrument is transferred to any

person with a view to constitute the person holder thereof, the instrument is deemed
to have been negotiated.
⮚ Delivery [Section 46] The making, acceptance or indorsement of a promissory note,
bill of exchange or cheque is completed by delivery. Delivery can be
• actual (physical transfer of NE in real time)or
• Constructive (to authorised agent).
⮚ Modes of negotiation of instrument
A N.I. payable to bearer is negotiable by the delivery thereof (Section 47).
Exception : A N.I. delivered on condition that it is not to take effect except in a

certain event is not negotiable (except in the hands of a holder for value without
notice of the condition) unless such event happens.

A N.I. payable to order is negotiable by the holder by indorsement and delivery thereof
(Section 48)
INDORSEMENT OF INSTRUMENT (Section 15)
Meaning: When the maker or holder of a negotiable instrument signs the same otherwise
than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip
of paper annexed, he is said to indorse the same and as called the indorser.
The person to whom the instrument is indorsed is called the indorsee.
Example : X, who is the holder of a negotiable instrument writes on the back thereof
: “pay to Y or order” and signs the instrument. In such a case, X is deemed to have endorsed
the instrument to Y. If X delivers the instrument to Y, X ceases to be the holder and Y
becomes the holder.
Various Classes / Kinds of Indorsements:
1. Indorsement in Blank: Where the indorser just puts his signature without specifying
the indorsee, the indorsement is said to be in blank (Section 16). The effect of such an
indorsement is to render the instrument payable to bearer even though originally
payable to order (Section 54).
2. Indorsement in Full: Where along with indorser's signature, the name of the
indorsee is specified, the indorsement is called 'indorsement in full' (Section 16). Thus,
where the instrument states, 'Pay X or order' and is signed by A, the payee, it constitutes
'indorsement in full'.
Conversion of indorsement in blank into endorsement in full [Section 49]
The holder of a negotiable instrument endorsed in blank may—

● without signing his own name,
● by writing above the indorser’s signature a direction to pay to any other person as
endorsee,
convert the indorsement in blank into an indorsement in full; and
Note: the holder does not thereby incur the responsibility of an indorser.
Effect of indorsement [Section 50] The indorsement of a negotiable instrument followed
by delivery transfers to the indorsee the property therein with the right of further
negotiation.
Except: where the NI is endorsed to exclude right to further negotiate. Example: “pay the
contents to C only”, “pay C”.

Who may negotiate? [Section 51] Every sole maker, drawer, payee or indorsee, or all of
several joint makers, drawers, payees or indorsees, of a negotiable instrument may, indorse
and negotiate the same.
Indorser who excludes his own liability or makes it conditional [Section 52]
The indorser of a negotiable instrument may,

✔ by express words in the indorsement,
✔ exclude his own liability thereon, or
✔ make such liability or the right of the indorsee to receive the amount due thereon
depend upon the happening of a specified event, although such event may never
happen.
Where an indorser so excludes his liability and afterwards becomes the holder of the
instrument all intermediates indorsers are liable to him.
✔ Example :
-The endorser of a negotiable instrument signs his name, adding the words “without
recourse”. Upon this endorsement he incurs no liability.
-A is the payee and holder of a negotiable instrument. Excluding personal liability by
an endorsement, “without recourse”, he transfers the instrument to B, and B endorses
it to C, who endorses it to A. A is not only reinstated in his former rights, but has the
rights of an endorsee against B and C.
⮚ Instrument obtained by unlawful means or for unlawful consideration

[Section 58]
✔ When a negotiable instrument has been lost, or

✔ has been obtained from any maker, acceptor or holder thereof by means of an offence
or fraud, or for an unlawful consideration,
✔ no possessor or indorsee who claims through the person who found or so obtained the
instrument is entitled to receive the amount due thereon from such maker, acceptor
or holder, or from any party prior to such holder, unless such possessor or indorsee is a
holder thereof in due course.
Instrument acquired after dishonour or when overdue [Section 59] The negotiable
instrument, can be transferred even after dishonour or maturity but the person
obtaining it can never become holder in due course.
However if it is within understanding between parties, the endorsee may accept. He
may demand interest for the overdue period.
Instrument negotiable till payment or satisfaction [Section 60] A negotiable

instrument may be negotiated (except by the maker, drawee or acceptor after

maturity) until payment or satisfaction thereof by the maker, drawee or accepter at or
after maturity, but not after such payment or satisfaction.
Interest may be demanded for the overdue payment.
Discharge of indorser's liability (Section 40): Where the holder of a negotiable instrument,
without the consent of the indorser, destroys or impairs the indorser's remedy against a prior
party (strikes off name of any prior endorsers names), the indorser is discharged from liability
to the holder to the same extent as if the instrument had been paid at maturity. Any party
liable on the instrument may be discharged by the intentional cancellation of his signature
by the holder.
PRESENTMENT
⮚ Meaning: Presenting the bill to the drawee for payment of money on the due date.
Presentment
Promissory note Bill of exchange Cheque
only on payment on acceptance on payment on payment
● within a reasonable time after it is drawn, and

● in business hours
● on a business day.
Otherwise it shall not be deemed dishonored.
DISCHARGE FROM LIABILTY
Discharge of party of Instrument
When the liability of one/few parties When the liability of primary

ceases to exist party ceases to exist

Eg: Eg:
A->B->C->B. Here C is discharged. A->B->C. C cancels A’s name.
Eg: Then, the instrument is
A->B->C. C cancels B’s discharged.
name. Then, only B is Eg:
discharged. A->B->C->A. Here instrument
is discharged.
⮚ Modes of discharge:
One or more parties to a negotiable instrument may be discharged from liability in
either of the following ways :
1. Sec. 82 - By cancellation, Release or Payment :
By cancellation: Cancellation of acceptor’s name will discharge the instrument and
cancellation of any other party will discharge the party.
By release (waivor): Release of acceptor will discharge the instrument and release of
any other party will discharge the party.
By payment: When the amount due on the instrument is paid by the party primarily
liable on the instrument, the instrument is discharged.
2. Sec. 83 By allowing drawee more than 48 hours: If the holder of a bill of exchange
allows the drawee more than 48 hours, exclusive of public holiday(s) to consider
whether he will accept the same, all previous parties not consenting to such allowance
are discharged from liability to such holder.
3. Sec. 84 By delay in presenting cheques: If a cheque is not presented within a
reasonable time of its issue, and the bank fails and drawer suffers actual damages
through such delay, he is discharged from the liability to the holder to the extent of
such damage.
4. Sec. 85. Forgery of Indorser’s signature in case of Cheque : The Bank is discharged
by payment in due course even if the signature of indorser is forged.
Example : A cheque is drawn payable to “B or order”. It is stolen and the thief forges
B’s endorsement and endorses it to C. The banker pays the cheque in due course. Can
B recover the money from the banker ?
Answer : According to Section 85, the drawee banker is discharged when he pays a
cheque payable to order when it is purported to be endorsed by or on behalf of the
payee. Even though the endorsement of Mr. B is forged, the banker is protected and he
is discharged. The true owner, B, cannot recover the money from the drawee bank.
5. By material alteration (Sec 87).:Any material alteration of a negotiable instrument

renders the same void as against any one who is a party thereto at the time of making
such alteration and does not consent thereto, unless it was made in order to carry out
the common intention of the original parties.
NA 🡪 where alteration are not material. Eg: adding word ‘A/c payee’ ‘or order’ to NI as
it is authorised by the act 🡪 does not require authentication from previous parties.
6. Discharge of Bank: As per Section 89, bank is discharged by payment in due course in
case of alteration not apparent from records.

DISHONOUR OF BILL OF EXCHANGE/ PROMISSORY NOTE
DISHONOUR OF BILL OF EXCHANGE/ PROMISSORY NOTE
Dishonour by non acceptance (S:91) Dishonour by non payment (S:92)

(Only for bill of exchange)- (ProNote & B/E)-
Bill is not accepted/signed/assented by NI is not paid when due.
the drawee
⮚ Dishonour of bill of exchange by non-acceptance (Section 91):
In the following circumstances bill shall be considered as dishonored by non-
acceptance:
1) When the drawee does not accept it within 48 hours from the time of presentment for
acceptance.
2) When presentment for acceptance is excused and it remains unaccepted. Presentment
for acceptance is excused under the following circumstances:
(i) Where the drawee cannot, after reasonable search, be found (Section 61).
(ii) Where the drawee is a fictitious person.
(iii) Where though presentment is regular, the acceptance is refused on some other
ground.
3) Where drawee is incompetent to contract, e.g., minor or lunatic.
4) Where the acceptance is qualified/conditional.
5) Where one or more of the several drawees (not being partners) refuse to accept the
bill.
⮚ Dishonour of bill of exchange/ promissory note by non-payment (Section 92): An

instrument is dishonoured by non- payment when the party primarily liable, makes
default in payment.
⮚ Notice of dishonour (Section 93 & 94):

(i) By whom notice to be given: When an instrument is dishonoured either by non-
acceptance or by non-payment, the holder thereof or some party thereto who remains
liable thereon must give notice of dishonour.
(ii) To whom notice is to be given: Notice must be given to such parties whom the holder
proposes to charge with liability severally or jointly, e.g., the drawer and the indorsers.
Notice may be given either to the party himself or to his agent, or to his legal
representative on his death, or to the official assignee on his insolvency. It is not
necessary to give notice to the maker of a note or the drawee or acceptor of a bill or
cheque (because they dishonoured it hence they will obviously be aware of it).
(iii) Effect of non-service of notice: If a notice of dishonour is not sent to any prior party

who is entitled to such notice within a reasonable time, he is discharged from liability.
(iv) Requirements of valid notice: Notice must give an exact description of the instrument
dishonoured.
(v) Mode of service of notice : written/ oral. The notice, if written, may be given by post
at the place of business or at the residence of party for whom it is intended.
(vi) Transmission of notice of dishonour by party receiving it (Section 95): if the prior
party receives notice of dishonour otherwise than from holder, no such communication
is necessary from holder.
⮚ Notice of dishonour is not required in the following cases (Section 98):

1. When there is no intention to make prior party liable.
2. When prior party is discharged.
3. When drawer and drawee are same
4. When drawer is fictitious.
5. When the prior party has signed the indorsement ‘without recourse’.
6. When the party entitled to notice cannot, after reasonable search, be found.
7. Where the party liable to give notice is unable, without any fault of its own to give it,
e.g., death or serious illness of the holder or his agent or any other accident.
8. When the prior party is incompetent.
PAYMENT AND INTEREST

To whom payment should be made (Section 78): Payment of the amount due on a N.I.
must, in order to discharge the maker or acceptor, be made to the holder of the instrument.
If payment is made to any person other than the holder, the holder can claim payment over
again from the maker or acceptor.
DISHONOUR OF CHEQUE (V.Imp.)
⮚ Sections 138 to 142 provides for criminal penalties in the event of dishonour of cheques
for insufficiency of funds.
⮚ Dishonoured due to insufficiency of funds (Sec. 138): The drawer, under Sec. 138,
may be punished with
● imprisonment upto 2 years or
● fine up to twice the amount of the cheque or
● both.
Following conditions must be satisfied for levy of penalty:
1. The cheque should have been dishonoured due to insufficiency of funds in the account
maintained by him with a banker for payment of any amount of money to another
person from out of that account.
As per the Case laws, following are deemed dishonoured due to insufficiency of funds:
(i) stop-payment unless stop-payment can be justified.
(ii) dishonour due to closure of account

(iii) directing the payee not to present
2. The payment for which the cheque was issued should have been in discharge of a legally
enforceable debt or liability in whole or part of it.
3. The cheque should have been presented within 3 months from the date on which it is
drawn.
4. Complaint is filed by the holder in due course/payee within 1 month from expiry of
period given below
No penalty shall be levied if all these conditions are followed:
✔ Cheque presented within validity period/3 months

✔ Payee/holder in due courses notifies in writing to the drawer within 30 days of receipt
of information by him from the bank regarding dishonour and asks for payment and
✔ Drawer makes the payment within 15 days of notice
Note:
● Where a cheque is dishonoured the second time, and there was no complaint filed the
first time it was dishonoured, then the complaint cannot be filed the second time.
⮚ Presumption in favour of holder [Section 139] It shall be presumed, unless the

contrary is proved, that the holder of a cheque received the cheque of the nature
referred to in section 138 for the discharge, in whole or in part, or any debt or other
liability.
⮚ Defense which may not be allowed in any prosecution under section 138 [Section
140] It shall not be a defence in a prosecution of an offence under section 138 that the
drawer had no reason to believe when he issued the cheque that the cheque may be
dishonoured on presentment for the reasons stated in that section.
Offences by Companies (Section 141)
If the person committing an offence under section 138 is a company,every person who,
at the time the offence was committed—
✔ was in charge of, and
✔ as responsible to the company for the conduct of the business of the company,
as well as the company, shall be deemed to be guilty of the offence and shall be liable
to be proceeded against and punished accordingly.
Exception:
● if he proves that the offence was committed without his knowledge, or that he had
exercised all due diligence to prevent
● director nominated by CG or SG

Cognizance of offences [Section 142]
(1) Court shall take cognizance of any offence punishable under section 138 only if it is in
writing.
[cognizance of any offence--> means consider any case on an offence]
Time limit for filing the complaint is 1 month.
No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first
class shall try any offence punishable under section 138.
(2) Place of Jurisdiction of court for the trail of offence : The offence under section 138,
which deals with the dishonour of cheque, shall be inquired into and tried only by a court
within whose local jurisdiction,—
(a) if the cheque is delivered for collection through an account, the branch of the bank
where the payee or holder in due course, as the case may be, maintains the account, is
situated; or
(b) if the cheque is presented for payment by the payee or holder in due course, otherwise
through an account, the branch of the drawee bank where the drawer maintains the
account, is situated.
⮚ Validation for transfer of pending cases [Section 142A]

✔ All cases of cheque bouncing which were pending in any court, before the Act came
into force, will be transferred to a court with the appropriate jurisdiction.
✔ The payee has filed a complaint against the drawer in a court with the appropriate
jurisdiction, all subsequent complaints against that person regarding cheque bouncing
will be filed in the same court. This will be irrespective of the mode of presentation
of cheque.
✔ If more than one case is filed by the same payee against the same drawer before
different courts, the case will be transferred to the court with the appropriate
jurisdiction before which the first case was filed.
Power of Court to try cases summarily [Section 143]

Provided that in the case of any conviction in a summary trial under this section, it shall
be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding
one year and an amount of fine exceeding five thousand rupees.
Summary trial 🡪 means shortcut proceedings done in less time and hassle. They are
allowed if prescribed conditions apply to a particular case.
⮚ Offences to be compoundable [Section 147]

Notwithstanding anything contained in the Code of Criminal Procedure, 1973 every
offence punishable under this Act shall be compoundable.

Specimen of Promissory note
`
Lucknow April 10,
10,000 2017
Three months after date, I promise to pay Shri Ramesh (Payee) or to his order the sum of Rupees Ten
Thousand, for value received.
Stamp
Sd/- Ram
To, Shri
Ramesh,
B-20, Green Park, Mumbai.
(Maker)
Specimen of Bill of Exchange
r. A (Drawer)
8, MP Nagar, Bhopal (M.P.)

April 10, 2015
` 10,000/-
Four months after date, pay to Mr. B (Payee) a sum of Rupees Ten Thousand, for
value received.
To,
Mr. C (Drawee)
576, Arera Colony, Bhopal (M.P.)
Signature

Specimen of Cheque
ate :....................
Pay
........................................................................................................................................
......................
a sum of Rupees..................................................................................................
ABC Bank
622, Vijay Nagar, Indore (M. P.)
Signature
01212 1125864 000053 38

General Clause Act, 1897
Introduction
Enactment date - 11th March, 1897
Need/ Purpose of General Clause Act, 1897
⮚ provide general definitions which shall be applicable to all Central Acts and
Regulations where there is no definition in those Acts or regulations
⮚ shorten language used in parliamentary legislation and to avoid the repetition of the
same words
⮚ To state certain rules for the construction and interpretation of central acts.
⮚ Legal principals common for interpreting many statutes have been mentioned in this
one act
⮚ to avoid superfluity of language in statutes.
⮚ In a way it’s the “Law of all Laws”.
Example: whether “right to catch or carry fish‟ is an immovable property or movable

property???
Section 3(26) of the General Clauses Act, 1897 reads as under: -
“Immovable property” shall include land, benefits to arise out of land, and things attached
to the earth, or permanently fastened to anything attached to the earth;”
The S.3 Transfer of Property Act does not define the term except to say that immovable
property does not include standing timber, growing crops or grass.
As fish do not come under that category the definition in the General Clauses Act and as
a profit is a benefit arising out of land 🡪 it follows that it is immovable property within
the meaning of the Transfer of Property Act.”
Thus, the court construed “right to catch or carry fish‟ as an immovable property
Application of General Clause Act, 1897
✔ GCA, 1897 is used with reference to all Central legislation and also to rules and
regulations made under a Central Act, ie, :
o Acts of the Indian Parliament (central act) along with the rules and regulations

made under the central act;
o Acts of the Dominion Legislature passed between the 15th August, 1947 and
the 26th January, 1950;
o Acts passed before the commencement of the Constitution by the Governor-
General in Council or the Governor-General acting in a legislative capacity. The
Act does not define any “territorial extent” clause.
✔ Act also serves as a model for State General Clauses Act. We can say that the state
legislature shall also be interpreted with reference to this act.
Some basic terms relating to any Legislation
● Preamble: Every Act has a preamble which expresses the scope, object and purpose
of the Act. the Preamble to an Act discloses the primary intention of the legislature
but can only be brought in as an aid to construction if the language of the statute is
not clear. However, it cannot override the provisions of the enactment.
Eg: Preamble of the Companies Act, 2013 states – “An Act to consolidate and amend
the law relating to companies.”
● How is an Act passed?

A draft bill is passed by both the houses of Parliament and assented to by the
President. On getting assent from President, an Act is notified on the Official
Gazettes of India.
Eg: Companies Bill, 2012 was introduced and Passed by Lok Sabha on 18-12- 2012.
Passed by Rajya Sabha on 8-8-2013. Act received assent of President on 29- 8- 2013
as Companies Act, 2013. Notified in gazette on 30- 8- 2013.
● “Definitions”: The object of the definition clause is to avoid the necessity of

frequent repetitions in describing all the subject matter to which the word or
expression so defined is intended to apply. They are usually contained in section 2 or
3 of an act.
However, if there may be words which are not defined in the definitions of that Act,
the meaning of such words may be taken from other relevant Acts or the General
Clauses Act, 1897.
Eg: Word ‘Security’ used in the Companies Act, is not defined in the respective Act.
It has been defined under section 2(h) of the Securities Contracts (Regulations) Act,
1956.
The word ‘Affidavit’ used in section 7 during the incorporation of company, in the
Companies Act, 2013, shall derive its meaning from the word ‘Affidavit’ as defined in
the General Clauses Act, 1897.
● “Means” and/or “include”:

“Means”🡪 makes a definition exhaustive in nature, ie, no other words can be added

to the definition other than mentioned words.
Eg: Definition of ‘Company’ as given in section 2(20) of the Companies Act, 2013. It
states, “Company” means a company incorporated under this Act or under any
previous company law.
“Includes” 🡪 Some definitions use the word “include”. Such definitions are inclusive
in nature. The word defined is not restricted to the meaning assigned to it but has
extensive meaning, ie, similar terms as mentioned in the definition form part of the
scope of definition.
Eg: Word ‘debenture’ defined in section 2(30) of the Companies Act, 2013 states that
“debenture” includes debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the assets of the company or
not”. This is a definition of inclusive nature.
“means and includes”🡪 these words make the definition exhaustive. No new terms
can form part of the definition other than those mentioned therein.
“to apply to and include” 🡪 extensive definition (can include more similar items)
● “Shall” and “May”:

‘shall’ is used to raise a presumption of something which is mandatory
‘may’ is used to connote some provision is only directory or enabling or optional.
However in certain cases, ‘may’ is read as ‘shall’ and vice versa.
Eg: Section 3 of the Companies Act, 2013 states that “A company may be formed
for any lawful purpose by ”. Here the word used “may” shall
be read as “shall”.
Case: The use of word ‘shall’ with respect to one matter and use of word ‘may’ with
respect to another matter in the same section of a statute, will normally lead to the
conclusion that the word ‘shall’ imposes an obligation, whereas word ‘may ’confers
a discretionary power (Labour Commr., M.P.V. Burhanpur Tapti Mill, AIR, 1964
SC1687).

Section 1 - Preliminary
Preliminary is the introductory part of any law which generally contains Short Title,
extent, commencement, application etc. This Act may be called the General
Clauses Act, 1897.
Section 3 - Definitions
Applicability: Section 3, which is the principal section containing definitions, applies to
● the General Clauses Act itself and
● to post-1897 Central Acts and Regulations
unless
● those laws contain separate definitions of their own or
● there is something repugnant in the subject or context and hence definition given in
section 3 cannot be applied.
Sections Definitions Notes

Sec 3(2) ‘Act', used with reference to an offence or a • Includes positive act + abstaining
civil wrong, shall include a series of acts, from doing an act
and words which refer to acts done extend • Included civil wrongs +criminal
also to illegal omissions wrongs (Eg: murder/beating) +
illegal omissions (Eg: wrongfully
neglecting or refusing to supply
him with food at proper times)
• Not Include🡪 omission which is
legal
Sec 3(3) ‘Affidavit’ shall include affirmation and • Affidavit is a written statement
declaration in the case of persons by law confirmed by oath or affirmation
allowed to affirm or declare instead of for use as evidence in Court or
swearing. before any authority.
• include affirmation and
declarations
Sec 3(7) ‘Central Act’ shall mean an Act of • The date of the commencement of
Parliament, and shall include- th
the Constitution is 26 January,
(a) An Act of the Dominion Legislature or of 1950.
the Indian Legislature passed before the
commencement of the Constitution, and

An Act made before such commencement by
the Governor General in Council or the
Governor General, acting in a legislative
capacity;
Sec 3(8) ‘Central Government' shall- • Crux 🡪 CG has been divided in two
(a)In relation to anything done before the parts. Pre constitutional (before
commencement of the Constitution, mean 26 Jan 1950) and post
the Governor General in Council, as the constitution.
case may be; and shall include,- • Authorities governing
states/provinces during that times
(i) In relation to functions entrusted to the shall constitute CG.
Government of a Province, • Before 1950, states were divided
(ii)In relation to the administration of a Chief into provinces and ruled by British
Commissioner's Province, and governors & Rajpramukhs.
• After 1950, states and union
(b)In relation to anything done or to be done territories were governed by their
after the commencement of the governors & ministers. And
constitution of the Constitution, mean the president had power over all
President; and shall include ;- Indian constituencies.
(i) In relation to function entrusted under the • Thus they all form part of CG.
Constitution, to the Government of a state,
the State Government acting within the scope
of the authority given to it under that clause;
(ii) In relation to the administration before
the commencement of the Constitution,
the Chief Commissioner or the Lieutenant
Governor or the Government of a
neighbouring State or other authority
acting within the scope of the authority
given to him and In relation to the
administration of a Union territory, the
administrator thereof acting within the
scope of the authority given to him.
Sec 3(13) 'Commencement' used with reference to an • Coming into force or entry into
Act or Regulation, shall mean the say on force (also called
which the Act or Regulation comes into commencement) refers to the
force. process by which legislation;
regulations, treaties and other
legal instruments come to have
legal force and effect.
Sec 3(18) 'Document' shall include any matter written, • Must be in writing
expressed or described upon any substance

by means of letters, figures or marks or by • Includes substance on which
more than one of those means which is matter is written
intended to be used or which may be used, • Purpose: Recording matter
for the purpose or recording that matter. •
Sec 3(19) 'Enactment' shall include a Regulation or any • includes any Act (or a provision
Act ( or a provision contained therein) contained therein) made by the
made by the Union Parliament or the State Union Parliament or the State
Legislature Legislature
• Includes Rules & Regulations,
notifications (as they are enacted
by the those delegated with
power of legislature)
Sec 3(21) Financial year shall mean the year • Difference between Financial
commencing on the first day of April. Year and Calendar Year: Financial
year starts from first day of April
but Calendar Year starts from first
day of January.
Sec 3(22) A thing shall be deemed to be done in "good • anything done with due care and
faith" where it is in fact done honestly, attention, which is not malafide is
whether it is done negligently or not. presumed to have been done in
good faith
• definition of the good faith does
not apply to that enactment which
contains a special definition of the
term “good faith”
• Case: An honest purchase made
carelessly without making proper
enquiries cannot be said to have
been made in good faith so as to
convey good title.( Maung Aung Pu
Vs. Maung Si Maung)
Sec 3(23) 'Government' or 'the Government' shall • Includes 🡪 CG & SG

include both the Central Government and • Government generally connotes
State Government. three wings, the Legislature, the
Executive and the Judiciary; but
in a narrow sense it is used to
connote the Executive only
Sec 3(24) ‘Government securities' shall mean • Includes 🡪 CG & SG securities

securities of the Central Government or of

any State Government, but in any Act or • Not include 🡪 those govt.
Regulation made before the securities issued before
commencement of the Constitution. constitution was made
Sec 3(26) ‘Immovable Property' shall include: • It is an inclusive definition

i) Land, • Eg: right to build on and occupy
ii) Benefits to arise out of land, and the land, right to grow new trees
iii) Things attached to the earth, or and to get leaves from trees, Right
of way to access from one place,
Permanently fastened to anything attached to machinery fixed to the soil 🡪
the earth. Immovable property
• Where, in any enactment, the
definition of immovable property
is in the negative (stating what it
does not include), the definition
as given in the General Clauses Act
will apply
• Case: Shantabai VS State of
Bombay, the Supreme Court
pointed out that trees must be
regarded as immovable property
because they are attached to or
rooted in the earth.
Sec 3(27) Imprisonment shall mean imprisonment of • By section 53 of the Indian Penal
either description as defined in the Indian Code, the imprisonment is of two
Penal Code (45 of 1860) descriptions, namely, rigorous,
that is with hard labour and
simple.
Sec 3(29) 'Indian law' shall mean any Act, Ordinance, • Laws applicable before
Regulation, rule, order, bye law or other commencement of constitution.
instrument which before the • Not include 🡪 orders made under
commencement of the Constitution, had that law by any authorities
the force of law in any Province of India or
part thereof.
Sec 3(35) 'Month' shall mean a month reckoned • However where there is specific
according to the British calendar; definition given in any enactment,
such definition shall prevail
• Eg: The word "month” occurring in
s.271 (l)(a)(i) of the Income-tax
Act, 1961, was construed to mean
a period of thirty days and not a

month as defined in the General
Clauses Act;
Sec 3(36) 'Movable Property' shall mean property of • Eg: Debts, share, electricity are
every description, except immovable moveable property
property.
Sec 3(37) 'Oath' shall include affirmation and •
declaration in the case of persons by law
allowed to affirm or declare instead of
swearing.
Sec 3(38) 'Offence' shall mean any act or omission • Include Act or omission
made punishable by any law for the time +punishable by any law
being in force.
Sec 3(39) 'Official Gazette' or 'Gazette' shall mean: (i) • It is a public journal and an
The Gazette of India, or (ii) The Official authorised legal document of the
Gazette of a state. Government of India.
• published weekly by the
Department of Publication,
Ministry of Housing and Urban
Affairs. (Government of India
Press)
• As a public journal, the Gazette
prints official notices from the
government. It is authentic in
content, accurate and strictly in
accordance with the Government
policies and decisions.
Sec 3(42) ‘Person’ shall include: (i) any company, or (ii) •

association, or (iii) body of individuals,
whether incorporated or not
Sec 3(49) 'Registered' used with reference to a •
document, shall mean registered in India
under the law for the time being force for
the registration of documents.
Sec 3(51) 'Rule' shall mean a rule made in exercise of a •
powerconferred by any enactment, and
shall include a Regulation made as a rule
underany enactment.
Sec 3(52) 'Schedule' shall mean a schedule to the Act •
or Regulation in which the word occurs.

Sec 3(54) 'Section' shall mean a section of the Act or •
Regulation in which the word occurs.
Sec 3(61) 'Sub-section' shall mean a sub-section of the •
section in which the word occurs;
Sec 3(62) ‘Swear’, with its grammatical variations and • The terms "Affidavit", "Oath" and
cognate expressions, shall include "Swear" have the same definitions
affirming and declaring in the case of in the Act.
persons by law allowed to affirm or declare
instead of swearing.
Sec 3(65) 'writing' shall be construed as including
references to printing, lithography,
photography and other modes of
representing or reproducing words in a
visible forms;
Sec 3(66) 'Year' shall mean a year reckoned according
to the British calendar.
Application to foregoing definitions to previous enactments [Section 4]-

(1) The definitions in section 3 of the following words and expressions, that is to say,
"affidavit", "barrister", "District Judge", "father", immovable property", "imprisonment",
“Magistrate", "month", "movable property", "oath", "person", "section", "son", "swear",
"will", and "year" apply also, unless there is anything repugnant in the subject or context,
to all [Central Acts] made after the third day of January, 1868, and to all Regulations
made on or after the fourteenth day of January, 1887.
(2) The definitions in the said section of the following words and expressions, that is to say,
"abet", "Chapter", "commencement", "financial year", "local authority", "master",
"offence", "part", "public nuisance", "registered", "schedule", "ship", "sign", "sub-section"
and "writing" apply also, unless there is anything repugnant in the subject or context, to
all [Central Acts] and Regulations made on or after the fourteenth day of January, 1887.
• (Note: Prior to General clause Act 1897, there were similar acts called General clause Act
1868 & General clause Act 1887)
Application of certain definitions to Indian Laws [Section 4A]~

(1) The definitions in section 3 of the expressions "British India", "Central Act", "Central
Government", "Chief Controlling Revenue Authority", "Chief Revenue Authority",
"Constitution", "Gazette", "Government", "Government securities", "High Court", "India",
"Indian law", "Indian State", "merged territories", "Official Gazette", "Part A State", "Part
B State", "Part C State", "Provincial Government", "State", and "State Government" shall
apply, unless there is anything repugnant in the subject or context, to all Indian laws.
(2) In any Indian law, references, by whatever form of words, to revenues of the Central
Government or to any State Government shall, on and from the first day of April, 1950,
be construed as references to the Consolidated Fund of India or the Consolidated Fund of
the State, as the case may be.
GENERAL RULES OF CONSTRUCTION
Section 5 – Coming into operation of enactment

I. Where any specific date of enforcement is prescribed in the Official Gazette 🡪 Act
shall into enforcement from such date. (Note: Court cannot pass any order against
such date. It can however request the government to reconsider the date of
implementation)
II. If no date of commencement is specified for any Central Act, 🡪 then it shall be
implemented from date on which it received assent from:
a.) Governor General – for Central Acts and /or
b.) President – for Act of Parliament
and published in official gazette
III. All laws shall be deemed prospective and not retrospective (having effect from a
previous date) unless specified so in the notification.
Example: The Companies Act, 2013 received assent of President of India on 29th August,
2013 and was notified in Official Gazette on 30th August, 2013 with the enforcement of
section 1 of the Act. Accordingly, the Companies Act, 2013 came into enforcement on the
date of its publication in the Official Gazette.
Example: SEBI (Issue of Capital and Disclosure Requirements) (Fifth Amendment)
Regulations, 2015 was issued by SEBI vide Notification dated 14th August, 2015 with effect
from 1 January, 2016. Here, this regulation shall come into force on 1st January, 2016
rather than the date of its notification in the gazette.
Case: In Altemeis Rein v UOI AIR 1988 SC 1768, it was held that if a sufficient time has
elapsed since an Act or any of its provisions has been passed and it has not been brought
into force (operation) by the Government, the Court through a writ can direct the
Government to consider the question as to when the same should begin to operate.
Case: In the case of State of Uttar Pradesh v. Mahesh Narain, AIR 2013 SC 1778, Supreme
Court held that effective date of Rules would be when the Rules are published vide

Gazette notification and not from date when the Rules were under preparation.
Section 6 – Effect of Repeal

⮚ ‘Repeal’ means cancel, ie, as if it never existed and it shall have no effect to
anything prior of after such cancellation. Eg: VAT is repealed. However, repealing
any Act does not change any thing done as per the act in the past when it was
prevalent.
⮚ Repealing is different from deletion. ‘Deletion’ means such provision/act exited till
the date of deletion. But does not exist on situation after deletion.
Where any Central Regulation or any regulation made after the commencement of this Act,
repeals any enactment hitherto made or hereafter to be made, then, unless a different
intention appears, the repeal shall not—
(a) revive anything not in force or existing at the time at which the repeal takes effect; or
(b) affect the previous operation of any enactment so repealed or anything duly done or
suffered thereunder; or
(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under
any enactment so repealed; or
(d) affect any penalty, forfeiture or punishment incurred in respect of any offence
committed against any enactment so repealed; or
(e) affect any investigation, legal proceeding or remedy in respect of any such right,
privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid;
and any such investigation, legal proceeding or remedy may be instituted, continued or
enforced, and any such penalty, forfeiture or punishment may be imposed as if the
repealing Act or Regulation had not been passed.
Case: In Kolhapur Canesugar Works Ltd. V, Union of India, AIR 2000, SC 811, Supreme Court
held that Section 6 only applies to repeal and not to omissions and applies when the repeal
is of a Central Act or Regulation and not of a Rule
“Repeal of Act making textual amendment in Act or Regulation” [Section 6A]

Where any [Central Act] or Regulation made after the commencement of this Act repeals
any enactment by which the text of any [Central Act] or Regulation was amended by the
express omission, insertion or substitution of any matter, then, unless a different intention
appears, the repeal shall not affect the continuance of any such amendment made by the
enactment so repealed and in operation at the time of such repeal.
“Revival of repealed enactments” [Section 7]
(1) In any Central Act or Regulation made after the commencement of this Act, it shall be

necessary, for the purpose of reviving, either wholly or partially, any enactment wholly
or partially repealed, expressly to state that purpose.
(2) This section applies also to all Central Acts made after the third day of January, 1868,
and to all Regulations made on or after the fourteenth day of January, 1887.
“Construction of references to repealed enactments” [Section 8]
(1) Where this Act, or Central Act or Regulation made after the commencement of this Act,
repeals and re-enacts, with or without modification, any provision of a former enactment,
then references in any other enactment or in any instrument to the provision so repealed
shall, unless a different intention appears, be construed as references to the provision so
re-enacted.
(2) Where before the fifteenth day of August, 1947, any Act of Parliament of the United
Kingdom repealed and re-enacted, with or without modification, any provision of a
former enactment, then references in any Central Act or in any Regulation or instrument
to the provision so repealed shall, unless a different intention appears, be construed as
references to the provision so re-enacted.
Example: In section 115 JB of the Income Tax Act, 1961, for calculation of book profits,
the Companies Act, 1956 are required to be referred. With the advent of Companies Act,
2013, the corresponding change has not been made in section 115 JB of the Income Tax
Act, 1961. On referring of section 8 of the General Clauses Act, book profits to be
calculated under section 115 JB of the Income Tax Act will be as per the Companies
Act,2013.
Case: In Gauri Shankar Gaur v. State of U.P., AIR 1994 SC 169, it was held that every Act
has its own distinction. If a later Act merely makes a reference to a former Act or existing
law, it is only by reference and all amendments, repeals new law subsequently made will
have effect unless its operation is saved by the relevant provision of the section of the
Act.
“Commencement and termination of time” [Section 9]

For the purpose of calculating time:
• First day in a series of days or any other period of time🡪 excluded
• Last day in a series of days or any other period of time 🡪 included
• This section applies also to all [Central Acts] made after the third day of
January, 1868, and to all Regulations made on or after the fourteenth day of
January, 1887.
• Example: A company declares dividend for its shareholder in its Annual General
Meeting held on 30/09/2016. Under the provisions of the Companies Act, 2013,
company is required to pay declared dividend within 30 days from the date of

declaration i.e. from 01/10/2016 to 30/10/2016. In this series of 30 days, 30/09/2016
th
will be excluded and last 30 day i.e. 30/10/2016 will be included.
“Computation of time” [Section 10]
• Where, by any legislation or regulation, any act or proceeding is directed or

allowed to be done or taken in any court or office on a certain day or within a
prescribed period, then, if the court or office is closed on that day or the last
day of the prescribed period, the act or proceedings shall be considered as done
or taken in due time if it is done or taken on the next day afterwards on which
the court or office is open.
• Case: In K. Soosalrathnam v. Div. Engineer, N.H.C. Tirunelveli, it was held by

Madras High Court that since the last date of the prescribed period was
subsequent to the date of notification, declared to be a holiday on the basis of
the principles laid down in this section the last date of prescribed period for
obtaining the tender schedules was extended to the next working day.
“Measurement of Distances” [Section 11]

In the measurement of any distance, for the purposes of any Central Act or Regulation
made after the commencement of this Act, that distance shall, unless a different
intention appears, be measured in a straight line on a horizontal plane.
“Duty to be taken pro rata in enactments” [Section 12]

Where, by any enactment now in force or hereafter to be in force, any duty of customs or
excise, or in the nature thereof, is leviable on any given quantity, by weight, measure or
value of any goods or merchandise, then a like duty is leviable according to the same rate
on any greater or less quantity.
Eg: Act says 100 Rs duty leviable on goods of value Rs. 10000. Then on value of goods equal
to Rs. 20000, duty shall be 200.
“Gender and number” [Section 13]

In all legislations and regulations, unless there is anything repugnant
in the subject or context-
● masculine gender shall be taken to include females
● singular shall include the plural and vice versa

Power and Functionaries (Sec 14-19)
“Power conferred to be exercisable from time to time” [Section 14]:

Where, by any Central Act or Regulation made after the commencement of this Act, any
power is conferred, then unless a different intention appears that power may be exercised
from time to time as occasion requires.
This section applies also to all Central Acts and Regulations made on or after the fourteenth
day of January, 1887.
“Power to appoint to include power to appoint ex-officio” [Section 15]:

Where by any legislation or regulation, a power to appoint person to fill any office or execute
any function is conferred, then, unless it is otherwise expressly provided, any such
appointment, if it is made after the commencement of this Act, may be made either by name
or by virtue of office.
Ex-officio means one post is held because of another post held by the same person.
Eg: Chairman of BoD meeting is deemed chairman of AGM (if no other person is so appointed).
So as per this section, any person who has the power to appoint chairman of BoD meeting,
shall have implied power to appoint chairman of AGM.
“Power to appoint to include power to suspend or dismiss” [Section 16]:

The authority having for the time being power to make the appointment shall also have
power to suspend or dismiss any person appointed whether by itself or any other authority
in exercise of that power.
“Substitution of functionaries” [Section 17]:

Where any persons, for the time being, are executing the functions of an office, it shall be
sufficient for them to mention the official title of the officer at present executing the
functions, or that of the officer by whom the functions are commonly executed.
This section applies also to all Central Acts made after the third day of January, 1868, and
to all Regulations made on or after the fourteenth day of January, 1887.
Eg: where minutes of general meeting are signed by the vice chairman instead of the
chairman, he shall specify his position along with his signature.
“Successors” [Section 18]:

(1) In any Central Act or Regulation made after the commencement of this Act, is shall be
sufficient, for the purpose of indicating the relation of a law to the successors of any

functionaries or of corporations having perpetual succession, to express its relation to
the functionaries or corporations.
(2) This section shall also apply to all Central Acts made after the third day of January, 1868,
and to all Regulations made on or after the fourteenth day of January, 1887.
Eg: Companies enjoy perpetual succession. Hence, the bye laws of the companies must
specify who shall succeed in case of death of existing members/management.
“Official Chiefs and subordinates” [Section 19]:

A law relative to the chief or superior of an office shall apply to the deputies or subordinates
lawfully performing the duties of that office in the place of their superior, to prescribe the
duty of the superior.
This section applies to all the Central Acts made after the third day of January, 1868, and to
all Regulations made on or after the fourteenth day of January, 1887.
Case: In K.G. Krishnayya v. State, AIR 1959 it was held that it is not essential that same
statutory authority that initiated a scheme under the Road Transport Corporation Act 1950,
should also implement it. It is open to the successor authority to implement or continue the
same.
Provisions as to order, rules etc made under enactments ( Sec 20-24)
“Construction of orders, etc., issued under enactments” [Section 20]:

Where, by any legislation or Regulation, a power to issue any notification, order, scheme,
rule, form, or bye-law is conferred, then expression used in the notification, order, scheme,
rule, form or bye-law, shall, unless there is anything repugnant in the subject or context,
have the same respective meanings as in the Act or Regulation conferring the power.
Case: In Subhash Ram Kumar v. State of Maharashtra, AIR 2003 SC 269, it was held that
‘Notification’ in common English acceptation mean and imply a formal announcement of a
legally relevant fact and “notification publish in Official Gazette” means notification
published by the authority of law. It is a formal declaration and should be in accordance with
the declared policies or statute. Notification cannot be substituted by administrative
instructions.

“Power to issue, to include power to add to, amend, vary or rescind notifications,
orders, rules or bye-laws” [Section 21]:
Where any legislations or regulations gives a power to issue notifications, orders, rules or
bye-laws, then that power, shall include power to add, to amend, vary or rescind any
notifications, orders, rules or bye laws so issued.
“Making of rules or bye-laws and issuing of orders between passing and

commencement of enactment” [Section 22]:
Where, by any Central Act or Regulation which is not to come into force immediately, on the
passing thereof, a power is conferred to make rules or bye-laws, or to issue orders with
respect to the application of the Act or Regulation, or with respect to the establishment of
any court or office or the appointment of any Judge or officer thereunder, or with respect
to the person by whom, or the time when, or the place where, or the manner in which, or
the fees for which, anything is to be done under the Act or Regulation, then that power may
be exercised at any time after the passing of the Act or Regulation; but rules, bye-laws or
orders so made or issued shall not take effect till the commencement of the Act or
Regulation.
“Provisions applicable to making of rules or bye-laws after previous publications”

[Section 23]:
Where, by any Central Act or Regulation, a power to make rules or bye¬laws is expressed to
be given subject to the condition of the rules or bye-laws being made after previous
publication, then the following provisions shall apply, namely:-
a. The authority having power to make the rules or bye-laws shall publish a draft of the
proposed rules or bye-laws for the information of persons likely to be affected thereby.
b. The publication shall be made in such manner as that authority deems to be
sufficient, or, if the condition with respect to previous publication so requires, in such
manner as the Government concerned prescribes.
c. A notice shall be published with the draft specifying a date on or after which the
draft will be taken into consideration.
d. The authority having power to make the rules or bye-laws shall consider the
objections and suggestions of the authority whose sanction, approval or concurrence is
required with respect to the draft before the date so specified.
e. The publication in the Official Gazette of a rule or bye-law shall be conclusive proof
that the rule or bye-laws has been duly made.

“Continuation of orders etc., issued under enactments repealed and re- enacted”
[Section 24]:
Where any Central Act or Regulation, is, after the commencement of this Act, repealed and
re-enacted with or without modification, then, unless it is otherwise expressly provided,
any appointment, notification, order, scheme, rule, form or bye-law, made or issued under
the repealed Act or Regulation, shall, so far as it is not inconsistent with the provisions re-
enacted, continue in force, and be deemed to have been made or issued under the
provisions so re-enacted, unless and until it is superseded by any [appointment,
notification], order, scheme, rule, form or bye-law, [made or] issued under the provisions
so re-enacted and when any Central Act or Regulation, which, by a notification under
section 5 or 5A of the Scheduled Districts Act, 1874, or any like law, has been extended to
any local area, has, by a subsequent notification, been withdrawn from re-extended to such
area or any part thereof, the provisions of such Act or Regulation shall be deemed to have
been repealed and re-enacted in such area or part within the meaning of this section.
Case: In State of Punjab v. Harnek Singh, AIR 2002 SC 1074, It was held that investigation
conducted by Inspectors of Police, under the authorization of notification issued under
Prevention of Corruption Act, of 1947 will be proper and will not be quashed under new
notification taking the above power, till the aforesaid notification is specifically superseded
or withdrawn or modified under the new notification.
Miscellaneous sections (Sec 25-30)
“Recovery of fines” [Section 25]:

Section 63 to 70 of the Indian Penal Code and the provisions of the Code of Criminal
Procedure for the time being in force in relation to the issue and the execution of warrants
for the levy of fines shall apply to all fines imposed under any Act, Regulation, rule or bye-
laws, unless the Act, Regulation, rule or bye-law contains an express provision to the
contrary.
“Provision as to offence punishable under two or more enactments” [Section 26]:

Where an act or omission constitutes an offence under two or more enactments, then the
offender shall be liable to be prosecuted and punished under either or any of those
enactments, but shall not be punished twice for the same offence.
Case: In State of M.P. v. V.R. Agnihotri, AIR 1957 SC 592 it was held that when there are
two alternative charges in the same trial, e.g., section 409 of the Indian Penal Code and

section 5(2) of the Prevention of Corruption Act, the fact that the accused is acquitted of
one of the charges will not bar his conviction on the other.
“Meaning of Service by post” [Section 27]:

Where any legislation or regulation requires any document to be served by post, then unless
a different intention appears, the service shall be deemed to be effected by:
(i) Properly addressing
(ii) Pre-paying, and
(iii) Posting by registered post
A letter containing the document to have been effected at the time at which the letter
would be delivered in the ordinary course of post.
Case: In United Commercial Bank v. Bhim Sain Makhija, AIR 1994 Del 181: A notice when
required under the statutory rules to be sent by ‘registered post acknowledgement due’ is
instead sent by ‘registered post’ only, the protection of presumption regarding serving of
notice under ‘registered post’ under this section of the Act neither tenable not based upon
sound exposition of law.
Case: In Jagdish Singh.v Natthu Singh, AIR 1992 SC 1604, it was held that where a notice is
sent to the landlord by registered post and the same is returned by the tenant with an
endorsement of refusal, it will be presumed that the notice has been served.
“Citation of enactments” [Section 3(28)]:

(1) In any Central Act or Regulation, and in any rule, bye-law, instruments or document,
made under, or with reference to any such Act or Regulation, any enactment may be
cited by reference to the title or short title (if any) conferred thereon or by reference to
the number and year thereof, and any provision in an enactment may be cited by
reference to the section or sub-section of the enactment in which the provision is
contained.
(2) In this Act and in any Central Act or Regulation made after the commencement of this
Act, a description or citation of portion of another enactment shall, unless a different
intention appears, be construed as including the word, section or other part mentioned
or referred to as forming the beginning and as forming the end of the portion comprised
in the description or citation.
Citation means referring/quoting another provision to explain the existing provision. Eg:
‘securities’ have been defined under companies act using the reference of the Securities
contracts (Regulations) Act, 1956.

“Saving for previous enactments, rules and bye laws” [Section 29]:
The provisions of this Act respecting the construction of Acts, Regulations, rules or bye-laws
made after the commencement of this Act shall not affect the construction of any Act,
Regulation, rule or bye-law made before the commencement of this Act, although the Act,
Regulation, rule or bye-law is continued or amended by an Act, Regulation, rule or bye-law
made after the commencement of this Act.
“Application of Act to Ordinances” [Section 30]:
In this Act the expression Central Act, shall be deemed to include Ordinance made and
promulgated by the Governor General under section 23 of the Indian Councils Act, 1861 or
section 72 of the Government of India Act, 1915, or section 42 of the Government of India
Act, 1935 and an Ordinance promulgated by the President under Article 123 of the
Constitution.
Ordinances are laws that are promulgated by the President of India on the recommendation
of the Union Cabinet. They can only be issued when Parliament is not in session. They enable
the Indian government to take immediate legislative action.

Interpretation of Statutes
Introduction
Meanings of some basic terms:
Statute:
● The term ‘Statute’ has been defined as the written will of the legislature solemnly
expressed according to the forms necessary to constitute it the law of the State.
Normally, the term denotes an Act enacted by the legislative authority (e.g.
Parliament of India).
● It means Written Laws and regulations
● The terms ‘law’ is defined as including any ordinance, order, bye-law, rule,
regulation, notification, and the like.
Documents:
● Section 3 of the Indian Evidence Act, 1872 states that ‘document’ means any matter
expressed or described 🡪 upon any substance 🡪 by means of letters, figures or marks
🡪 used/intended to be used for recording that matter
● Section 3(18) of the General Clauses Act, 1897 states that ‘document’ shall include
any matter written, expressed or described upon any substance by means of letters,
figures or marks, or by more than one of those means which is intended to be used, or
which may be used, for the purpose of recording this matter.
● Example: A writing is a document, any words printed, photographed are documents
● Elements of document:
o Matter: Purpose
o Record: mutual or mechanical device employed on the substance (eg: pen)
o Substance: element on which a mental or intellectual elements comes to find
a permanent form (eg: paper)
o Means: letters, any figures, marks, symbols which can be used to communicate
between two persons
Instrument:
● Formal written legal document which creates or confirms a right or records a fact. Eg:
transfer deed
● Purpose: Right/liability of parties is created, transferred, extended, extinguished,
recorded
● Example: It is a formal writing of any kind, such as an agreement, deed, charter or
record, drawn up and executed in a technical form

Deed:
● In India, it has the same meaning as ‘instrument’ above.
● The Legal Glossary defines ‘deed’ as an instrument in writing (or other legible
representation or words on parchment or paper) purporting to effect some legal
disposition. Simply stated deeds are instruments though all instruments may not be
deeds.
Interpretation:
● Process by which real meanings of act/ legal language & intention behind legislature
is ascertained.
● It is the process by which the Courts seek to ascertain the meaning of the legislature
through the medium of the authoritative forms in which it is expressed.
● Importance/Need for Interpretation:
o Through interpretation, a person is aided in arguing, contesting and
interpreting the proper significance of a section, a proviso, explanation or
schedule to an Act or any document, deed or instrument.
o Two different set of people create legislature and use/interpret it. There may
be bridge in understanding.
o Times in which legislature is prepared and interpreted may be different.
o Process of interpretation makes use of technical legal jargon and methods as
compared to common law rules
o No language is so perfect as to leave no ambiguities. It can be interpreted to
mean many things.
o True intention of law at the time of its writing need to be considered
o Social conditions are different over time leading to different interpretations vs
intention with which law was written
o Statute is enforceable at law, howsoever unreasonable it may be. Until it is
altered or modified or amended, the court has no choice but to enforce the law
as it is.
Jolowicz, in his Lectures on Jurisprudence in 1960, classified interpretation as follows:

General Classification of Interpretation
Legal Doctrinal
when there is an actual rule of law when there is no law to interpret and
which binds the Judge to place a there is need to discover ‘real’ and
certain interpretation of the statute ‘true’ meaning of the statute.
Authentic Usual Grammatical Logical

when rule of when it comes court applies only court goes
interpretation is from some other the ordinary rules beyond the
derived from the source such as of speech for words and tries
legislator himself custom or case law finding out the to discover the
meaning of the intention of the
words used in the statute in some
statute other way
According to Fitzerald, interpretation is of two kinds
Classification of Interpretation
Literal/grammatical Functional/logical
It regards conclusively the verbal It departs from the letter of the law
expression (words and language) of and seeks elsewhere for some other
the law. It does not look beyond. and more satisfactory evidence of
This method is used first. the true intention of the legislature
This method is used when literal
interpretation fails.
Where there are two constructions reasonably applicable to a provision, one of which is
mechanical and based on the rules of grammar, while the other is vibrant and more in tune
with the basic intention of the Act of Parliament, the latter shall be preferred to the former.
(Arora Vs. State of UP)

When does court consider logical interpretation instead of grammatical?
● Letter of the law is logically defective on account of ambiguity, inconsistency or
incompleteness
● Text leads to a result which is so unreasonable that it is self-evident that the
legislature could not mean what it says
Interpretation/Construction
Interpretation Construction
Where the language is simple and If such reading leads to absurdity and
unambiguous, it is to be read with the words are susceptible of another
the clear intention of the meaning, same has to be read as a
legislation🡪 giving to the words whole. Drawing of conclusion
used by the legislature their beyond the direct expression of the
ordinary, natural and grammatical text 🡪 called construction
meaning. 🡪 called interpretation
Eg: Certain words which have acquired a definite meaning over a period of time are given
that meaning for interpretation.
Case (Interpretation vs Construction): It is the duty of the courts to give effect to the
meaning of an Act when the meaning can be equitably gathered from the words used. Words
of legal import occurring in a statute which have acquired a definite and precise sense, must
be understood in that sense. (State of Madras v. Gannon Dunkerly Co. AIR 1958)
Process of Interpretation:
General Clauses Act
Statutory. illustrated by
specific definition contained
in individual Acts
Aids/tools for the
purpose of
interpretation
common law rules of
interpretation
Non-statutory-
illustrated by
case-law relating to the
interpretation of statutes

Rules of Interpretation
Over a period, certain rules of interpretation/construction have come to be well recognized.
Rules of Interpretation
Primary Rules Secondary Rules
Rule of Literal Construction

Rule of Reasonable Construction Effect of usage
Rule of Harmonious Construction Associated Words to be
Understood in Common Sense
Rule of Beneficial Construction Manner
Rule of Exceptional Construction
Rule of Ejusdem Generis
Primary Rules
1. Rule of Literal Construction:
✔ words, sentences and phrases of a statute should be read in their ordinary,
natural and grammatical meaning so that they may have effect in their widest
amplitude.
✔ A word which has a definite and clear meaning should be interpreted with that
meaning only, irrespective of its consequences.
✔ Sometimes, occasions may arise when a choice has to be made between two
interpretations – one narrower and the other wider or bolder🡪 narrower
interpretation must be considered unless it would fail to achieve the manifest
purpose of the legislation
✔ For example, when we talk of disclosure of the nature of concern or interest,
financial or otherwise’ of a director or the manager of a company in the subject
we have to interpret in its broader sense that any concern or interest containing
any information and facts that may enable members to understand the
meaning, scope and implications of the items of business and to take decision
thereon. Even facts known to family shall be disclosed frankly.

✔ Maxim ‘absoluta sententia expositore non indiget’ (which means a simple
preposition needs no expositor i.e., when you have plain words capable of only
one interpretation, no explanation to them is required)
✔ when a matter has not been provided for in a statute, it cannot be supplied by
courts as to do so would amount to legislation and would not be construction.
✔ sometimes the courts may ignore the mechanical and literal construction based
on the rules of grammar to look at the context in which the words are used and
the circumstances in which the law has come to be passed, to decide its
interpretation
✔ nothing is to be added to or taken away from a statute unless there are some
adequate grounds to justify the inference
✔ A construction should suffice all parts of statute. If it renders ineffective any
part of the language of a statute it shall be rejected.
Different headings for literal construction
a) Natural and grammatical meaning Statute are to be first understood in their natural,
ordinary, or popular sense & according to their plain, literal and grammatical
meaning. Only if it involves any absurdity, repugnancy, inconsistency, then it must be
further constructed using other principles.
If there is an inconsistency with any express intention or declared purpose of the

statute, or it involves any absurdity, repugnancy, inconsistency, the grammatical
sense must then be modified, extended or abridged only to avoid such an
inconvenience, but no further. [(State of HP v. Pawan Kumar (2005)]
In a question before the court whether the sale of betel leaves was subject to sales
tax. The Supreme Court held that betel leaves could not be given the dictionary,
technical or botanical meaning when the ordinary and natural meaning is clear and
unambiguous. Being the word of everyday use it must be understood in its popular
sense by which people are conversant with it as also the meaning which the statute
dealing with the matter would attribute to it. Therefore, the sale of betel leaves was
liable to sale tax. (Ramavtar V. Assistant Sales Tax Officer, AIR 1961 SC 1325)
b) Explanation of the Rule: Natural, ordinary or popular meaning which they have in
relation to the subject matter with reference & context in which they have been used
in the statute shall be used. Eg: Livestock can have many meanings. The meaning
most relevant to the particular act must be used.
c) Exact meaning, leading to loose meaning: As every word has a secondary meaning
too. Whichever meaning best suits the statute, shall be used in interpretation. Eg:
word ‘obtain’ may mean request to get or acquire without permission. If the second
meaning is preferred in law, it shall be construed.
d) Technical words are understood in the technical sense only Eg: ‘practice’ term
technically means functions of acting and pleading on behalf of a litigant party

2. Rule of Reasonable Construction:
✔ Maxim ‘ut res magis valeat quam pereat’ meaning thereby that words of
statute must be construed so as to lead to a sensible meaning.
✔ while interpreting a law, two meanings are possible, one making the statute
absolutely vague and meaningless and other leading to certainty and a
meaningful interpretation, in such case the later interpretation should be
followed
✔ If giving a plain meaning to the words will not be a fair or reasonable
construction, it becomes the duty of the court to depart from the dictionary
meaning and adopt the construction which will advance the remedy and
suppress the mischief. Eg: in order to determine whether a transaction is intra
vires the objects of a company, the objects clause should be reasonably
construed neither with rigidity nor with laxity.
✔ Eg: ‘plant and machinery ‘plant’ does not relate to trees. But its part of
machinery.
3. Rule of Harmonious Construction:

✔ Every statute has a purpose/object. Such purpose should be kept in mind while
interpreting all parts of a statute.
✔ Where there are two interpretations possible for any statute, the one which is
falling in alignment with the object of the statute must be used.
✔ Where there are in an enactment two or more provisions which cannot be
reconciled with each other, they should be so interpreted, wherever possible,
as to give effect to all of them.
✔ The sections and sub-sections must be read as parts of an integral whole and
being inter-dependent. Importance should not be attached to a single clause
over others.
✔ In case of inconsistency between provisions, the one enacted or amended later
in point of time must prevail.
✔ Eg: Co. Law may specify minimum quorum as 15 while AoA may state the same
as 20, then the provision that satisfies both provisions shall be followed.
✔ generalia specialibus non derogant:
o Where it is not possible to give effect to both the provisions harmoniously,
collision may be avoided by holding that one section which is in conflict
with another merely provides for an exception or a specific rule different
from the general rule contained in the other. A specific rule will override
a general rule. This principle is usually expressed by the maxim,
“generalia specialibus non derogant”.
o This rule can be adopted only when there is a real and not merely
apparent conflict between provisions, where the words of a statute, on a
reasonable construction thereof, admit of one meaning only then such
natural meaning will prevail.

✔ In some cases, the statute may give a clear indication as to which provision is
subservient and which overrides. This is done by the use of the terms “subject
to”, “notwithstanding” and “without prejudice”
o Subject to: The impact of the words “subject to” when used in a provision
is that when the same subject matter is covered by that provision and by
another provision or enactment subject to which it operates and there is
a conflict between them, then the latter will prevail over the former.
o Notwithstanding: A clause that begins with the words “notwithstanding

anything contained” is called a non-obstante clause. Unlike the “subject
to” clause, the notwithstanding clause has the effect of making the
provision prevail over others. When this term is used then the clause will
prevail over the other provision(s) mentioned therein.
A notwithstanding clause can operate at four levels.
▪ Notwithstanding any thing contained in another section or sub–
section of that statute
▪ Notwithstanding anything contained in a statute
▪ Notwithstanding anything contained in specific section(s) or sub-
section(s) or all the provisions contained in another statute
▪ Notwithstanding anything contained in any other law for the time
being in force
o Without prejudice: When certain particular provisions follow general

provisions and when it is stated that the particular provisions are without
prejudice to those general provisions the particular provisions would not
restrict or circumscribe the operation and generality of the preceding
general provisions. In other words, the particular provisions shall operate
in addition to and not in derogation of the general provisions.
4. Rule of Beneficial Construction or the Heydon’s Rule or Mischieve Rule:

✔ The rule which is also known as ‘purposive construction’ or mischieve rule, enables
consideration of four matters in construing an Act:
(1) what was the law before the making of the Act;
(2) what was the mischief or defect for which the law did not provide;
(3) what is the remedy that the Act has provided; and
(4) what is the reason for the remedy
✔ The rule then directs that the courts must adopt that construction which ‘shall
suppress the mischief prevalent in the time when law was framed and suitable
remedy should be advanced.
✔ This methos should be used as the last resort for interpretation
✔ If the object of a statute is public safety then its working must be interpreted widely
to give effect to that object

✔ Heydon’s Rule is applicable only when the plain meaning of statute in not reasonable
Eg: Where a statute requires something to be done by a person, it would generally
be sufficient compliance with it if the thing is done by another person on his behalf.
Maxim : ‘quo facit per alium facit per se’ (he who acts though another is deemed
to act in person).
Eg: Prize Competition Act, 1955 was applicable on games similar to gambling or based
on skills also? 🡪 court looked into the history of the enactment and held that Act is
applicable only to those competitions in which success does not depend on any
substantial degree of skill
5. Rule of Exceptional Construction:

Certain words in the statute are not purposeful. This rule stands for the elimination
of such words in a statute which defeat the real objective of the statute or make no
sense. If the removal of the words is not feasible, then they should be interpreted to
remove hindrances caused by them.
It also stands for construction of words ‘and’, ‘or’, ‘may’, ‘shall’ & ‘must’.
This rule has several aspects, viz. :
a) The Common Sense Rule : statute must be so construed as to give a sensible
meaning to the statute, if at all possible. ‘utres magis valeat quam pereat’
meaning thereby that it is better for a thing to have effect than to be made
void.
b) Conjunctive and Disjunctive Words ‘or’ ‘and’ : Generally, the word ‘or’ is
normally disjunctive and ‘and’ is normally conjunctive. Where the literal
reading of the words produces an unintelligible or absurd result, then ‘and’
may by read for ‘or’ and ‘or’ for ‘and’, provided that the intention of the
legislature is otherwise quite clear.
c) ‘May’, ‘must’ and ‘shall’ : certain provision are ‘mandatory’ while others
are ‘directory’. Mandatory means it must be strictly observed; whenreas
‘directory’ means it would be sufficient that it is substantially complied with.
i. ‘May’: Generally these words are directory in nature. However in some
cases, the legislature may use the word ‘may’ as a matter of pure
conventional courtesy and yet intend a mandatory force.
Eg: where a discretion is conferred upon a public authority coupled with
an obligation, the word ‘may’ should be construed to mean a command.
ii. Shall/must : Generally these words are mandatory in nature. But it is
sometimes not so interpreted if the context or intention of the
legislature otherwise demands
Following factors are considered:
✔ the nature and design of the statute,
✔ the consequence which would flow from construing it one way or the other,
✔ the impact of other provisions by resorting to which the necessity of complying

with the provision in question can be avoided,
✔ whether or not the statute provides any penalty if the provision in question is
not complied with,
✔ if the provision in question is not complied with, whether the consequences
would be trivial or serious, and
✔ most important of all, whether the object of the legislation will be defeated
or furthered.
6. Rule of Ejusdem Generis:

✔ term ‘ejusdem generis’ means ‘of the same kind or species’
✔ where specific words are used and after those specific words, some general
words are used, the general words would take their colour from the specific
words used earlier.
✔ Eg, where an Act permits keeping of dogs, cats, cows, buffaloes and other
animals, the expression ‘other animals’ would not include wild animals like
lions and tigers, but would mean only domesticated animals.
✔ When the specific words are of different categories, then the meaning of the
general words following those specific words remains unaffected
✔ This Rule Applies when:
o Statute contains an enumeration of specific words
o The subjects of enumeration constitute a class or category
o That class or category is not exhausted by the enumeration
o The general terms follow enumeration, and
o There is no indication of a different legislative intent
Secondary Rules of Interpretation
1. Effect of usage: It means old statutes and documents should be interpreted as they
would have been at the time when they were enacted/written.
Two relevant Latin maxims are:
i. ‘Optima Legum interpresest consuetudo’ (the custom is the best interpreter of the
law); and
ii. ‘Contempranea expositoest optima et fortissima in lege’ (the best way to interpret
a document is to read it as it would have been read when made).
2. expressio unius est exclusio alterius: the explicit mention of one (thing) is the
exclusion of another. When one or more things of a class are expressly mentioned
others of the same class are excluded. Eg: law allows only a natural person to me
member of OPC. So no other type of person can be.
3. contemporanea exposition: That the meaning of words in a document are to be
understood in the sense which they bore at the time of the document. Eg: the
definitions contained in section 2 of Co. Act 2013 must be used while interpreting co.
law, not the general dictionary meanings/common parlance.

4. Associated Words to be Understood in Common Sense Manner:
● When two or more words which are capable of analogous (similar or parallel)
meaning are coupled together, they are to be understood in their cognate sense
● ‘Noscitur A Sociis’ (‘it is known by its associates’), that is to say ‘the meaning
of a word is to be judged by the company it keeps’.
● A single word can have many meanings. The meaning which best fits the words
used with, shall be used. (the word can plant have many meanings. ‘plant and
machivery’ ‘plant a tree’ ‘I have a plant in my backyard.’)
● Eg: The term ‘entertainment’ would have a different meaning when used in the
expression ‘houses for public refreshment, resort and entertainment’ than its
generally understood meaning of theatrical, musical or similar performance.
● Eg: Similarly, the expression ‘place of public resort’ would have one meaning
when coupled with the expression ‘roads and streets’ and the same express
‘place of public resort’ would have quite a different meaning when coupled
with the word ‘houses’.
● Case: While dealing with a Purchase Tax Act, which used the expression
“manufactured beverages including fruit-juices and bottled waters and
syrups,” It was held that the description ‘fruit juices’ as occurring therein
should be construed in the context of the preceding words and that orange-
juice unsweetened and freshly pressed was not within the description.
(Commissioners. Vs. Savoy Hotel, (1966) 2 All. E.R. 299)
● Note: where two specific words are used🡪 noscitur a sociis is used. Where one
word is general and others are specific 🡪‘ejusdem generis’ is used

Aids/tools to interpretation/construction
Aids/tools to interpretation/construction
Internal External
These are parts of the enactment These are tools outside of the
can be used to interpret it better particular enactment, which help in
its interpretation
Types:
Long Title Types:
Preamble Historical Setting
Heading and Title of a Chapter Consolidating Statutes & Previous Law
Marginal Notes Usage
Definitional Sections/Interpretation Earlier & Later Acts and Analogous Acts
Clauses Dictionary Definitions
Illustrations Use of Foreign Decisions
Proviso
Explanation
Schedules
‘Read the Statute as a Whole
Internal Aids/tools to interpretation/construction

These tools include:
1. Long Title:
• Defines purpose of the enactment
• Impresses readers
• Provides significance of the law
2. Preamble:
• It is not part of law but it defines the objective of the particular law. Every
enactment has its preamble.
• Defines motive of law. Why it was drafted? Which problems it was trying to
solve?
• Case: Use of the word ‘may’ in section 5 of the Hindu Marriage Act, 1955
provides that “a marriage may be solemnized between two Hindus…..” has been

construed to be mandatory in the sense that both parties to the marriage must
be Hindus as defined in section 2 of the Act. It was held that a marriage
between a Christian male and a Hindu female solemnized under the Hindu
Marriage Act was void. This result was reached also having regard to the
preamble of the Act which reads: ‘An Act to amend and codify the law relating
to marriage among Hindus” [Gullipoli Sowria Raj V. Bandaru Pavani, (2009)1
SCC714]
3. Heading and Title of a Chapter & Sections:

• Co. law has 29 chapters with different headings. Each chapter has many
sections which have their own headings.
• These headings help in understanding the law better.
4. Marginal Notes :
• These are additional notes stating opinion of the law makers.
• These should be used as last resort only when other tools fail to help
5. Definitional Sections/Interpretation Clauses:
• This is the definition section. Usually section 2 or 3 is covering different
definitions in different statutes. These def. shall be used for interpreting
particular technical words used in statute. General meanings shall not be used.
• The definitions are framed by law makers keeping in mind the need and
objective of that particular enactment.
• Construction of definitions may understood under the following headings:
(i) Restrictive and extensive definitions: The definition of a word or
expression in the definition section may either be restricting of its ordinary
meaning or may be extensive of the same.
When a word is defined to ‘mean’ such and such, the definition is ‘prima
facie’ restrictive and exhaustive we must restrict the meaning of the word
to that given in the definition section.
But where the word is defined to ‘include’ such and such, the definition is
‘prima facie’ extensive: here the word defined is not restricted to the
meaning assigned to it but has extensive meaning which also includes the
meaning assigned to it in the definition section.
We may also find a word being defined as ‘means and includes’ such and
such. In this case, the definition would be exhaustive.
On the other hand, if the word is defined ‘to apply to and include’, the
definition is understood as extensive.
A definition section may also be worded as ‘is deemed to include’ which
again is an inclusive or extensive definition as such a words are used to bring
in by a legal fiction something within the word defined which according to
its ordinary meaning is not included within it.

Section 2(m) of the Consumer Protection Act, 1986 contains an inclusive
definition of ‘person’. It has been held to include a ‘company’ although it
is not specifically named therein [Karnataka Power Transmission
Corporation v. Ashok Iron Works Pvt. Ltd., (2009)3 SCC 240]
(ii) Ambiguous definitions: Sometime we may find that the definition section
may itself be ambiguous, and so it may have to be interpreted in the light
of the other provisions of the Act and having regard to the ordinary meaning
of the word defined. Such type of definition is not to be read in isolation.
It must be read in the context of the phrase which it defines.
Termination of service of a seasonal worker after the work was over does
not amount to retrenchment as per the Industrial Disputes Act, 1947. [Anil
Bapurao Karase v. Krishna Sahkari Sakhar Karkhana, AIR 1997 SC 2698]
(iii) Definitions subject to a contrary context: When a word is defined to

bear a number of inclusive meanings, the sense in which the word is used in
a particular provision must be ascertained from the context of the scheme
of the Act, the language of the provision and the object intended to be
served thereby
6. Illustrations :
• These are examples included in law to elaborate its usage.
• It is part of statute
7. Proviso :
• It starts with word ‘provided that’. These are part of the relevant sections and
mentioned after the section. Law is incomplete without them.
• They mention
• Further explanation of the section including terms and conditions or
• Exception to any section or
• the condition without which such law shall not be applicable to the
particular situation.
• Eg: FY for evey company ends on 31st march, provided that for any company
which has foreign subsidiary/holding may seek permission to change its FY
8. Explanation:
• The words most repetitively used in statute are defined in the definition
section.
• However, there are some words that are used in only a few section. Hence,
their meaning is defined under those sections by way of explanation.
• Eg: ‘Office or place of profit’ u/s 188 is defined by way of explanation under
the section.

9. Schedules:
• They are part of law. They shall be read together with provisions of law.
• Eg: formats of MoA and AoA have been specified in Schedule I. CSR Activities
have been stated in schedule VII.
10. ‘Read the Statute as a Whole:
• construction of a statute is to be made of all its parts taken together and not
of one part only
• each clause should be so interpreted as to bring them into harmony with other
provisions
• Eg: Where part of the act requires written notice, other parts of the same act
cannot be interpreted to mean that oral notice would suffice.
External Aids/tools to interpretation/construction

1. Historical Setting:
• Reason of framing a law, committee discussions, parliamentary history while
passing any bill and bill considered prior to such act provide useful insights in
interpreting current law.
2. Consolidating Statutes & Previous Law:
• Prior to any act, there may be previous laws which may be studied to find the
defects which were improvised in the current law.
• Moreover, foreign laws based on which Indian law was enacted may also be
studied. Eg: HSN system in GST
3. Usage:
• Use of language for the purpose of drafting law is relevant to interpret it.
• The interpretation of a statute that has been in practice for long time is
generally not changed by court and considered correct unless there are
cogent(strong) reasons.
4. Earlier & Later Acts and Analogous Acts:
• Where certain meanings are unclear in one act, other related acts can be used
for interpretation. Eg: Minimum number of partners is given in partnership act
but maximum partners can be derived from companies Act 2013.
5. Dictionary Definitions:
• Meanings of certain words that cannot be understood from within the statute
can be seen from dictionary.
6. Use of Foreign Decisions:
• Judicial decisions taken outside India on similar cases are sometimes used for
interpretation of Indian statute/cases.

Rules of interpretation/Construction of Deeds/document
• all the words in the document/deed concerned are to be considered in their ordinary,
natural sense
• same word cannot have two different meanings in the same document, unless the
context compels the adoption of such a rule
• Words commonly used with a specific meaning due to custom of trade shall be
considered over technical meaning.
• Parts of deeds shall be harmoniously constructed with other clauses


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Corporate & Other Laws www.indigolearn.

Corporate & Other Laws www.indigolearn.com 4

Title The Companies Act,2013

Extent Whole of India

Applicability ● Companies Registered under this act or any

Chapter 1 - Introduction to Company Law

Corporate & Other Laws www.indigolearn.com 5

Law governing Companies

NCLT NCLAT Supreme Court

(National Company (National Company Law

Administration machinery under Companies Act, 2013

Corporate & Other Laws www.indigolearn.com 6

(1) This Act may be called the Companies Act, 2013.

Corporate & Other Laws www.indigolearn.com 7

Key Definitions covered in Section 2 are as:

Corporate & Other Laws www.indigolearn.com 8

Corporate & Other Laws www.indigolearn.com 9

(34) Director means a director appointed to the Board of a company;

Corporate & Other Laws www.indigolearn.com 10

Corporate & Other Laws www.indigolearn.com 11

Corporate & Other Laws www.indigolearn.com 12

Corporate & Other Laws www.indigolearn.com 13

Corporate & Other Laws www.indigolearn.com 14

Corporate & Other Laws www.indigolearn.com 15

Corporate & Other Laws www.indigolearn.com 16

Corporate & Other Laws www.indigolearn.com 17

Corporate & Other Laws www.indigolearn.com 18

Corporate & Other Laws www.indigolearn.com 19

Incorporation of a Company means the process of registration of a company to bring it into

Primary Documents Of A Company

Memorandum of Article of Association

Section 4 - Memorandum of Association

Corporate & Other Laws www.indigolearn.com 20

Corporate & Other Laws www.indigolearn.com 21

Companies (Incorporation) Rules, 2014

Rule 8A. Undesirable Rule 8B. Word or

Corporate & Other Laws www.indigolearn.com 22

- Cancellation of name by ROC:

Shares Guarrantee The shareholder agrees to have

Liability of the Liability is limited

Corporate & Other Laws www.indigolearn.com 23

Doctrine of Ultra Vires

VOID & CANNOT VOIDABLE, as it can re RATIFIED

Corporate & Other Laws www.indigolearn.com 24

Section 5 - Articles of Association

- Company may include additional matters as per law

Corporate & Other Laws www.indigolearn.com 25

Doctrine of Indoor Management

Section 6 - Companies Act Overrides

Section 7 - Incorporation of the Company

Corporate & Other Laws www.indigolearn.com 26

Simplified Proforma for Incorporating Company Electronically (SPICe)

Section 9 - Effect of Registration

From the date of incorporation mentioned in the certificate of incorporation, such

Corporate & Other Laws www.indigolearn.com 27

Company incorporated after the commencement of Companies (Amendment) Ordinance,

i. It should be a ‘Physical Location’ (Not a P.O. Box Number)

Corporate & Other Laws www.indigolearn.com 28

CHANGE OF REGISTERED OFFICE COMPLIANCE NECESSARY

Copies of SR and RD approval shall be sent to RoC.

Corporate & Other Laws www.indigolearn.com 29

II. Registered office:

CHANGE OF REGISTERED OFFICE COMPLIANCE NECESSARY Change in MOA