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CHAPTER 1 – INTRODUCTION TO COMPANY LAW

DOCTRINE OF ULTRA VIRES

Ultra vires is a Latin term made up of two words “ultra” which means beyond and “vires”
meaning power or authority. Ultra vires acts are any acts that lie beyond the authority of a
company to perform.
Ultra vires activities can be divided into the following three divisions:
- Ultra Vires the Company
- Ultra Vires the Memorandum of Association
- Ultra Vires the Articles of Association

Ultra Vires the Company

Any act done contrary to or in excess of the scope of activity of the Companies Act will be
ultra vires the Companies Act. Such an act is void and cannot be ratified even by unanimous
resolution of all the shareholders.

Ultra Vires the Memorandum of Association

The memorandum of association of a company restrict the powers of the company while
defining the object of the company. A company cannot do anything, which is beyond the
purview of the object clause. Any act done in contrary to the object clause of the memorandum
of association will be ultra vires the memorandum of association.
As a result, an act which is ultra vires is void, and does not bind the company. Neither the
company nor the contracting party can sue on it. Such an act is void and cannot be ratified
even by unanimous resolution of all the shareholders.

Ultra Vires the Articles of Association:

If a company acts which are ultra vires the Articles of Association but intra virus the
memorandum of association will be ultra vires the Articles of Association. These acts are also
void, but the company in general meeting may alter the Articles by a special resolution and
ratify the unauthorized acts.
An act which is intra vires the company but outside the authority of the directors may be
ratified by the company in proper form. If the act is ultra vires (beyond the powers of) the
directors only, the shareholders can ratify it. If it is ultra vires the Articles of Association, the
company can alter its articles in the proper way and thereby such acts can be duly ratified

LOANS, BORROWINGS, GUARANTEES AND ULTRA VIRES RULE

In a case, a company had accepted deposits from outsiders which was outside the scope of
the Memorandum. When the company was ordered to be wound up, a question was raised
whether the depositors were creditors of the company and whether the contributories could be
asked to contribute towards payment of deposits.
The Court held that the relationship between the company and the depositors was not that of
debtor and creditor. But if the lender had lent the amount for discharging lawful expenses, he
may recover the amount.

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EFFECTS OF ULTRA VIRES TRANSACTIONS

1. Void ab initio – The ultra vires acts are null and void ab initio. The company is not bound by
these acts. Even the company cannot sue or be sued upon.
2. Injunction - The members can get an injunction to restrain a company wherein ultra vires act
has been or is about to be undertaken.
3. Personal liability of Directors - It is one of the duties of directors to ensure that the corporate
capital is used only for the legitimate business of the company and hence if such capital is diverted
to purposes alien to the company’s memorandum, the directors will be personally liable
to replace it.
4. Where a company’s money has been used ultra vires to acquire some property, the company’s
right over such property is held secure and the company will be the right party to protect the
property.
5. Ultra vires torts - A company will not be liable for torts committed outside its objects.
6. Ultra vires grants and guarantees - Directors cannot make an unauthorized grant unless
object is to promote prosperity of the company or the grant is incidental to carrying out of
the object of the company.

DOCTRINE OF INDOOR MANAGEMENT

While the doctrine of, ‘constructive notice” seeks to protect the company against the outsiders,
the principal of ‘indoor management’ operates to protect the outsiders against the company.
This doctrine emphasizes on the concept that an outsider whose actions are in good faith and
has entered into a transaction with a company can have a presumption that there are no
irregularities internally and all the procedural requirements have been complied with by the
company.

In Royal British Bank v. Turquand, the directors of a banking company were authorized by
the articles to borrow on bonds such sums of money as should from time to time, by resolution
of the company in general meeting, be authorized to borrow. The directors gave a bond to
Turquand without the authority of any such resolution. It was held that Turquand could sue
the company on the strength of the bond, as he was entitled to assume that the necessary
resolution had been passed. Lord Hatherly observed: “Outsiders are bound to know the external
position of the company but are not bound to know its indoor management”.
The object of the section is to protect persons dealing with the company - outsiders as well
as members by providing that the acts of a person acting as director will be treated as valid
although it may afterwards be discovered that his appointment was invalid or that it had
terminated under any provision of this Act or the Articles of the company [Ram Raghubir Lal
v. United Refineries (Burma) Ltd].
Example of Indoor Management:
Question: Planet Limited received a cheque from Earth Limited. The Articles of Association of
Earth Limited provided that cheques issued by the company need to be signed by two directors
and countersigned by the secretary. The directors nor the secretary who signed the cheque was
appointed properly and thus the cheque issued was not valid. Planet Limited sued the company

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for the irregularities in the procedure. Is Planet Limited liable for relief?
Answer: Planet Limited is entitled to relief and the company has to pay the amount of the
cheque since the appointment of directors is a part of the internal management of the company
and a person dealing with the company is not required to enquire about it.
Exceptions to the Doctrine of Indoor Management
In these cases, relief on the ground of indoor management cannot be claimed by an outsider
dealing with the company:
1. Where the outsider had knowledge of irregularity - A person knowing fully well that the
directors do not have the authority to make the transaction but still enters into it, cannot
seek protection under the rule of indoor management.
2. No knowledge of Memorandum and Articles – The rule cannot be invoked in favour of a
person who did not consult the memorandum and articles and thus did not rely on them.
3. Forgery - In the case of forgery it is not that there is absence of free consent but there is
no consent at all. The person whose signatures have been forged is not even aware of the
transaction and the question of his consent being free or otherwise does not arise. Consequently,
it is not that the title of the person is defective but there is no title at all.
4. Negligence – The doctrine of indoor management, in no way, rewards those who behave
negligently. Thus, where an officer of a company does something which shall not ordinarily be
within his powers, the person dealing with him must make proper enquiries and satisfy himself
as to the officer’s authority. If he fails to make an enquiry, he is estopped from relying on the
Rule.
5. Agency - The doctrine of indoor management does not apply where the question is in regard
to the very existence of an agency.
6. Ultra Vires Acts - The act done is not merely ultra vires the directors/ officers but ultra vires
the company itself.
Illustration:
Question: Butterfly Limited receives a share certificate of Flower Limited issued under the seal
of the company. The company secretary issues the certificate after affixing the seal and forging
the signature of the two directors. Butterfly Limited files a lawsuit claiming that the forging
of signatures is a part of the internal management of the company. Is the claim by Butterfly
Limited valid and is liable to get relief?
Answer: According to the exceptions to the doctrine of indoor management, a transaction
involving forgery is null and void. Since the document issued to Butterfly Limited is null and
void, the claim made by him is not valid. Thus, he is not entitled to any relief.
DOCTRINE OF CONSTRUCTIVE NOTICE

1. Doctrine of constructive notice is a doctrine where all persons dealing with a company are
deemed (or “construed”) to have knowledge of the company’s Articles of Association and
Memorandum of Association. The Memorandum and Articles, when registered, become public
documents and can be inspected by anyone on payment of nominal fee.
2. Therefore, every person who contemplates entering into a contract with a company has the
means of ascertaining and is consequently presumed to know, not only the exact powers of
the company but also the extent to which these powers have been delegated to the directors,

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and of any limitations placed upon the exercise of these powers.

3. The doctrine of indoor management protects third parties who are entitled to an assurance
that all the procedural aspects of a transaction are carried out.
DOCTRINE OF ALTER EGO

1. The term “Alter Ego” is a Latin word. Literally translated, it means the “Other I”.
2. It is a common tenet that a company is a separate legal entity from its shareholders and
directors. This common law principle grants immunity to the shareholders and directors from
being held liable for the debts as well as criminal liabilities of the corporation.
3. The doctrine of alter ego, however, provides for an exception to this presumption in law.
4. Alter ego is the doctrine which prevents the stakeholders of the corporation, i.e., shareholders
and directors from taking the refuge of doctrine of separate legal entity. Hence, the Doctrine
of alter ego is based on lifting of the corporate veil between the directors/ shareholders and
the corporation and treating both as one entity.
5. The doctrine of alter ego is based on the assumption that the company as well as the
shareholders and the managing directors are the alter egos of each other, i.e., one is the
shadow or reflection of the other or can be understood as two sides of the same coin.
6. It is used by the courts to ignore the status of shareholders, officers, and directors of a
company in reference to their liability in their respective capacity so that they may be held
personally liable for their actions when they have acted fraudulently or unjustly.
DOCTRINE OF LIFTING OF OR PIERCING THE CORPORATE VEIL

The separate personality of a company is a statutory privilege and it must be used for legitimate
business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. The
Court will break through the corporate shell and apply the principle/doctrine of what is called
as lifting of or piercing the corporate veil. The Court will look behind the corporate entity and
take action as though no entity separate from the members existed and make the members
or the controlling persons liable for debts and obligations of the company.
However, the shareholders cannot ask for the lifting of the veil for their purposes.
CASE EXAMPLE

a) Gilford Motor Co v/s Horne

Where the corporate veil has been used for commission of fraud or improper conduct
Where the corporate veil has been used for commission of fraud or improper conduct, Courts
have lifted the veil and looked at the realities of the situation. A former employee of a company
made a covenant not to solicit its customers. He formed a company which undertook solicitation.
The company was restrained by the Court.
b) R. G. Films Ltd.
Where a corporate facade is really only an agency instrumentality
In the said case, an American company produced a film in India through a British company.
In this British company, 90% of the capital was held by the President of the American
Company which financed the making of the film. Lifting the corporate veil, BOT refused to
register the film as American companies were not allowed to produce film in India and the

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British company was an instrument of the American company,

c) Connors Bros. v/s. Connors
Where the conduct conflicts with public policy
In the given case, a company whose affairs were de facto with the persons, residents of
Germany was at war with England. The corporate veil of the company was lifted & the alien
company was not allowed to proceed with the action as it was against public policy.
d) Sir Dinshaw Maneckjee Petit
Evasion of taxes
In the above mentioned case, the assesse formed four private companies and agreed to hold a
block of investment as an agent for it. The dividend & interest income received on such
investment was further given to Sir Dinshaw as a pre handed loan. This way his income was
divided in four parts which in turn reduced his tax liability lifting the corporate veil, it was
seen that these companies did not do any business and were just the means to evade tax.
e) The workmen Employed in Associated Rubber Industries Limited, Bhavnagar v/s. The
Associated Rubber Industries Ltd. Bhavnagar
Avoidance of welfare legislation
In this case, the principal company was liable to pay bonus to its employee as a percent of its
Gross Profits under the Bonus Act or any other applicable law. In order to reduce its liability
the Principal company formed a new company which had no business or income of its own
except receiving dividends from the shares transferred to it by the principal company.
The SC held that the new Company was formed to reduce the gross profits & thereby reduce
the amount to be paid by way of bonus to workmen.
VODAFONE CASE
One of the landmark case of the Supreme Court, is its decision in the case of Vodafone
International Holdings B.V. v. Union of India & Another [S.L.P. (C) No. 26529 of 2010]. In
judgment, the Supreme Court set aside the Bombay High Court’s judgment directing Vodafone
International Holdings BV (“Vodafone”), to pay INR 110 billion, as withholding tax in a
transaction that took place off-shore.
The facts, as briefly put, are that in May 2007, Vodafone, incorporated in the Netherlands,
acquired from Hong Kong based Hutchison Group, the entire share capital of CGP Investments
(Holdings) Limited (“CGP”), a company incorporated in the Cayman Islands, which in turn
controlled a 67% interest in Hutchison-Essar Limited (“HEL”), Hutchison’s Indian mobile
business. The Indian income tax authorities contended that capital gains were made by
Hutchison in India and that Vodafone was therefore liable to pay withholding tax thereon,
amounting to approximately INR 110 billion (the sale price being USD 11.2 billion).
Vodafone challenged the tax demand in the Bombay High Court, which ruled in favour of the
income tax authorities, holding that the essence of the transaction was a change in the
controlling interest in HEL, which constituted a source of income in India. Vodafone appealed
to the Supreme Court, which overruled the High Court and held that the transaction fell outside
India’s territorial tax jurisdiction and was hence not taxable.
The judgment was not only important in the context of taxation, but also covers other issues
of corporate law. One of these are in the context of the principle of the corporate veil, and the
circumstances under which it may be lifted, particularly in the context of commercial crossborder
transactions and tax avoidance.

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The Court recognised the fundamental principle of the corporate veil by noting that, “The
approach of both the corporate and tax laws, particularly in the matter of corporate taxation,
generally is founded on the abovementioned separate entity principle, i.e., treat a company as
a separate person. The Indian Income Tax Act, 1961, in the matter of corporate taxation, is
founded on the principle of the independence of companies and other entities subject to
income-tax.” It observed in the context of parent / subsidiary relationships, that it is generally
accepted that the group parent company would give guidance to group subsidiaries, but that
by itself would not justify piercing the veil or imply that the subsidiaries are to be deemed
residents of the State in which the parent company resides, and that “a subsidiary and its
parent are totally distinct tax payers”.
Six factors that may be considered to determine whether the transaction is a bogus and
whether in a specific case, the corporate veil may be lifted, are: “(i) the concept of participation
in investment, (ii) the duration of time during which the Holding Structure exists; (iii) the
period of business operations in India; (iv) the generation of taxable revenues in India; (v) the
timing of the exit; and (vi) the continuity of business on such exit.”
In the final analysis, the Supreme Court decided against lifting the corporate veil in Vodafone,
as the tax authorities failed to establish that the transaction was a bogus or tax avoidance
scheme.
USE OF CORPORATE VEIL FOR HIDING CRIMINAL ACTIVITIES

Where the defendant used the corporate structure as a device or façade to conceal his criminal
activities (evasion of customs and excise duties payable by the company), the Court could lift
the corporate veil and treat the assets of the company as the realizable property of the
shareholder.
E-GOVERNANCE: THE SOLUTION

A solution to all the above-mentioned difficulties cannot be found within the framework of
the current manual filing system. Hence, the need for e-Governance. Realizing the need for e-
Governance, the Ministry of Corporate Affairs has embarked on an ambitious e-Governance
project. The MCA has launched a new portal MCA 21 on 20th February, 2006. The MCA
deserves to be complimented for this bold initiative, in a couple of months from the launch,
physical filing of documents under the Companies Act, 1956 has been discontinued and e-Filing
of documents through the new portal is made compulsory.
E-governance is the application of information technology to the government functioning in
order to bring about simple, moral, accountable, responsive and transparent (SMART)
Governance. The system aims at moving from paper based to nearly paperless environment. It
is based on the Government’s vision of National e-governance in the country.
ADVANTAGES OF E-FILLING

The advantages this system offers to corporate and professionals are:

➢ Filing of documents without visiting the ROC office, sitting in the comfort of one’s office or
home.
➢ No need to stand in long queues for filing documents or paying filing fees.
➢ Filing will be open on a 24 X 7 basis. This affords one the flexibility to do this work at one’s

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convenience.
➢ Pre-scrutiny of forms filed will be filed will be done in the portals itself at the point of filing.
So, once the form is filed, a need to interact with ROC personnel to rectify deficiencies in
filings will be minimized to a great extent.
➢ Filing fees can be paid from the comforts of one’s office/home using credit card/internet
banking.
➢ To the public, the portal offers inspection of documents filed by companies on a 24 X 7 basis
from the comforts of one’s home/office.
THE ADVANTAGES FLOWING TO THE GOVERNMENT ARE TREMENDOUS

➢ Better utilization of existing staff and space resources.

➢ Time and energy spend in mundane tasks of accepting documents, filing them, corresponding
with companies will be drastically reduced and channelized towards taking action against errant
corporate.
➢ The DIN-Director’s Identification Number (which is compulsory for all existing and prospective
directors to obtain) will help enforce accountability of directors.
SERVICES AVAILABLE ON MCA21

The following services will be available under the MCA21 Project:

➢ Registration and incorporation of new companies
➢ Filing of Annual Returns and Balance Sheets
➢ Filing of forms for change of names/address/Director’s details
➢ Registration and verification of charges
➢ Inspection of documents
➢ Applications for various statutory services from MCA
➢ Investor grievance redressed
ORGANIZATION OF ROC OFFICE UNDER MCA

The ROC office working from its present address will virtually become the Back Office of the
Ministry. Since number of companies/entities may find it difficult to switch over to e-Filing at
the initial stage, Facilitation Centres known as Physical Front Offices (PFOs) have been setup
throughout the country to provide requisite comfort for e-Filing to such companies.
Front Office (FO) - The Front Office represents the interface of the corporate and public
user with the MCA21 system. This comprises of Virtual Front Office and Physical Front Office.
Virtual Front Office - merely represents a computer facility for filing of digitally signed e-
Forms by accessing the My MCA portal through Internet. It also pre-supposes availability of
related facilities to convert documents into PDF format and scanning of documents whenever
required.
Virtual Front Office facilitates online filing of the e-Forms using Internet. The system
automatically does pre scrutiny of the e-Forms filed and indicates error messages in case of
incomplete or invalid particulars. Upon successful submission, a Service Request Number (SRN)
will be generated by the system for the user, which will be used for future correspondence
with MCA.
When a company or user does not have these computer facilities, it can avail of these facilities

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at the designated facilitation centres, known as the Physical Front Offices.

Back Office - Back Office represents the offices of Registrar of Companies, Regional Directors
and Headquarters and takes care of internal processing of the forms filed by the corporate
user as per MCA norms and guidelines. The e- forms are routed dynamically to the concerned
authority for processing depending upon the assigned role. All the e-forms along with
attachments are stored in the electronic depository, which the staff of MCA can view depending
upon the access rights.
Certified Filing Centre (CFC) - In order to provide the Companies to do their e Filing,
Professional Institutes (ICSI, ICAI, ICAI-cost), their Regional Councils/ Local chapters,
individual practicing members and firms of professionals were authorised to create and set-up
the required facilities for facilitating the e Filing process. The Certified Filing Centres, thus
set-up by the Professionals are over and above the 53 Registrar’s Front Office set-up by the
Ministry under the programme. While the services available from the Facilitation Centers setup
by the Ministry are without any charge, the services provided by these Certified Filing
Centres entail payment of service charges.
IMPORTANT TERMS RELATING TO E-FILING

Pre-fill: Pre-fill is a functionality in an e-Form that is used for filling automatically, the
requisite data from the system without repeatedly entering the same. For example, by entering
the CIN of the company, the name and registered office address of the company shall
automatically be pre-filled by the system without any fresh entry.
Attachment: An attachment refers to a document that is sent as an enclosure with an e-
Form by means of an attached file. The objective of the attachment is to provide details
relevant to the e- Form for processing. While some attachments are optional some are
mandatory in nature.
Check form: By clicking “check form”, the user will be in a position to find out whether the
mandatory fields in an e-form are duly filled-in. For example, if the user enters alphabets in
“Date of appointment of Director” field, he/she will be asked to correct the entered information.
If the size of e-Form including attachment is of bigger size then the attachment may be filed
through an addendum. If the size of attachment is even bigger in size then the details may
be submitted in a floppy or compact disc at the ROC office.
Modify: once the user has done ‘Check Form’, the form gets locked and it cannot be edited.
If the user wishes to make any alteration, the form can be over written by clicking “modify”
button. If the user wants to modify the form after pre-scrutiny failure, that user can get the
e-form and whichever fields have to be changed only those may be modified by using the
‘Modify’ button.
Radio Button: Frequent use of radio buttons has been done in the e-Form. While filling the
e-Form one is required to select applicable option out of two or more radio buttons given
against each point.
Check Box: Applicable Check box is required to ticked out of the two or more boxes wherever
it appears in the e-Form.
Drop Down Box: Drop down box is a box wherein at the end, a downward arrow is provided.
On clicking the arrow various applicable choices appear. One is required to highlight the
applicable choice and that will be filled in the box.
Text Box: Text box is meant to provide details on the relevant point by the person filling the

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e-form. Space provided is generally adequate for the text to be written.

Country Code: Sometimes the applicant is required to fill up the country code in the e-Form.
This is available in the instruction kit.
Stock Exchange Code: All the stock exchanges of the country have been divided into two
categories A and B. Listed companies are required to mention the stock exchange where the
shares are listed with the help of the code.
Pre scrutiny: Pre-scrutiny is a functionality that is used for checking whether certain core
aspects are properly filled the-e-Form. The user has to make the necessary attachments, in
PDF format before submitting the e-Form for pre-scrutiny.
Service Request Number: Each transaction under e-filing is uniquely identified by a Service
Request Number (SRN). On filing of an e-form, the system will generate and provide a Service
Request Number (SRN). A user can check the status of the document/ transaction, by entering
the SRN.
Pre-certification of e forms: Apart from authentication of e-forms by authorized signatories
using digital signatures, some e-forms are also required to be pre-certified by practising
professionals. Pre-certification means certification of correctness of any document by a
professional before the same is filed with the Registrar.
This pre-certification is to be carried out by, Company Secretaries, Chartered Accountants, Cost
Accountants, in whole-time practice.
Addendum to the e-forms: The user may have to submit some additional supporting documents
that are not submitted during the e-Form (application) filing but are required for the processing
of the e-Form. The user can initiate this on their own by checking the track transaction status
on MyMCA portal or on being notified by MCA through email. Payment of fees is not required
for filing an addendum.

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CHAPTER 2 – LEGAL STATUS & TYPES OF COMPANIES

MEANING & DEFINITION OF COMPANY [SECTION 2(20)]

A Company means a company incorporated under this Act or under any previous company law.
In common law, a company is a “legal person” or “legal entity” separate from its members. A
company continues to exist even after its members have left or died. An association formed
not for profit also acquires a corporate character and becomes a company by reason of a licence
issued under Section 8(1) of the Act.
An incorporated company owes its existence either to a special Act of Parliament or to company
law. Public corporations like Life Insurance Corporation of India, SBI etc., have been brought
into existence through special Acts of Parliament, whereas companies like Tata Steel Ltd.,
Reliance Industries Limited have been formed under the Company Law i.e. Companies Act, 1956
which is being replaced by the Companies Act, 2013.

PRIVATE COMPANY [SECTION 2(68)]

“Private company” means a company having such 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 definition, be treated as a single member;
Provided further that the following persons shall not be included in the number of members:
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, and
C) Prohibits any invitation to the public to subscribe for any securities of the company;
It must be noted that it is only the number of members that is limited to two hundred. A
private company may issue debentures to any number of persons, the only condition being that
an invitation to the public to subscribe for debentures is prohibited.
The words “Private Limited” must be added at the end of its name by a private limited
company.
As per section 3(7), a private company may be formed for any lawful purpose by two or more
persons, by subscribing their names to a memorandum and complying with the requirements
of the Act in respect of registration. Section 149(1) further lays down that a private company
shall have a minimum number of two directors. The only two members may also be the two
directors of the private company.
Some examples of Private Limited Companies in India:
Life Style International Private Limited
Life Style International Pvt Ltd was founded in the year 1999 and is headquartered in Bengaluru,
Karnataka. The company retails clothing and accessories online.

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Malabar Gold Private Limited

Malabar Gold and Diamonds is a BIS-certified Indian jewelry group headquartered in Kozhikode,
Kerala, India. The company operates as jewellery stores.
Can number of Debenture Holders exceed the limit of 200?
It may be noted that it is only the number of members that is limited to two hundred. Private
Company may route for and issue debentures to any number of persons, the only condition
A) being that an invitation to the public to subscribe for debentures cannot be made.

PUBLIC COMPANY [SECTION 2(71]

A public company means a company which:
a. Is not a private company;
b. Has such paid up 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 a public company, even where such subsidiary company continues to be
a private company in its articles.
As per section 3(1) (a), a public company may be formed for any lawful purpose by seven or
more persons, by subscribing their names or his name to a memorandum and complying with
the requirements of this Act in respect of registration.
The word ‘Limited’ must be added at the end of its name by a private limited company.
Some examples of Public Limited Companies In India:
- Bharat Heavy Electricals Ltd. (BHEL)
- Bharat Petroleum Corporation Ltd. (BPCL)
- Coal India Ltd.
- Steel Authority of India Ltd.
- Oil and Natural gas Corporation Ltd. (ONGC)
ONE PERSON COMPANY (OPC) [SECTION 2(62)]
As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company
which has only one person as a member.
A One person company shall have a minimum of one director. Therefore, a One Person Company
will be registered as a private company with one member and one director.
By virtue of section 3(2), an OPC may be formed either as a company limited by shares or a
company limited by guarantee; or an unlimited liability company. A private company requires a
minimum of 2 members. In other words, a One Person Company is a kind of private company
having only one member.
Where a natural person, being member in One Person Company becomes a member in any
other OPC by virtue of his being a nominee in that One Person Company, such person shall
meet the eligibility criteria within a period of one hundred and eighty days.
Only a natural person who is an Indian citizen and WHETHER resident in India OR OTHERWISE
a. Shall be eligible to incorporate a One Person Company.
b. Shall be a nominee for the sole member of a One Person Company.
No person shall be eligible to incorporate more than One Person Company or become nominee
in more than one such company.
The term resident in India means a person who has stayed in India for a period of not less

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than 120 days during the immediately preceding financial year.

No minor shall become member or nominee of the One Person Company or can hold share with
beneficial interest.
The name of the person nominated shall be mentioned in the memorandum of One Person
Company and such nomination in Form No.lNC-32 (SPICe) along with consent of such nominee
obtained in Form No.lNC-3 and fee shall be filed with the Registrar at the time of incorporation
of the company along with its memorandum and articles.
Such company cannot be incorporated or converted into a company under section 8 of the Act.
It can be converted into any other kind of company only if a period of 2 years has expired
from the date of its incorporation unless threshold limit of paid up share capital is increased
beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two
crore rupees.
Benefits of One Person Company
It gives the individual entrepreneurs all the benefits of a company, which means they will get
credit, bank loans, and access to market, limited liability, and legal protection available to
companies. One Person Company (OPC) would provide tremendous opportunities for small
businessmen and traders, including those working in areas like handloom, handicrafts and
pottery. The amount of compliance by a one person company is much lesser in terms of filing
returns, balance sheets, audit etc.
SMALL COMPANY [SECTION 2(85)]
Small company means a company, other than a public company,—
(i) paid-up share capital of which does not exceed 4 crore rupees or such higher amount as
may be prescribed which shall not be more than 10 crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding financial
year does not exceed 40 crore rupees or such higher amount as may be prescribed which shall
not be more than 100 crore rupees:
Exceptions
(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.
GOVERNMENT COMPANIES [SECTION 2(45)]
“Government Company” means any company in which not less than fifty one per cent, 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.
A Government Company is neither a Government department nor a Government establishment.
Since employees of Government companies are not Government servants, they have no legal
right to claim that the Government should pay their salary or that the additional expenditure
incurred on account of revision of their pay scales should be met by the Government. It is

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the responsibility of the company to pay them the salaries.

Audit of such government companies is done by Comptroller and Auditor General of India
(CAG). CAG appoints auditors for various government companies and they submit their audit
report with CAG. CAG presents the audit report before parliament/state legislative assembly,
as the case may be, along with a supplement audit report, if required.
The name of all Government Companies shall end with the word “Limited”, be it Public or
a Private Company. The word“STATE” is allowed in name.

FOREIGN COMPANIES [SECTION 2(42)]

A ‘foreign company’ means any company or body corporate incorporated outside India which:-
a. Has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
b. Conducts any business activity in India in any other manner.
The Act lays down that every foreign company which establishes a place of business in India
must, within 30 days of the establishment of such place of business, file with the Registrar
of Companies for registration.
HOLDING, SUBSIDIARY COMPANIES & ASSOCIATE COMPANIES
Holding Company
As per Section 2(46), holding company, in relation to one or more other companies, means a
company of which such companies are subsidiary companies.
Examples of a Holding Company
- Alphabet Inc.
- Sony Corporation
- JP Morgan Chase & Co.
- Johnson & Johnson
Types of holding companies
Pure holding: formed for the sole purpose of owning stock in other companies
Intermediate holding: firm that is both a holding company of another entity and a subsidiary
of a larger corporation
Mixed holding: not only controls another firm but also engages in its own operations
Immediate holding: is one that retains voting control of another company, inspite of the fact
that the company itself is controlled by another entity.
Advantages of a holding company
Greater control for a smarter investment
Tax effects
Independent entities
Management continuity
Disadvantages of holding company
Over capitalization
Exploitation of subsidiaries
Manipulation
Concentration of economic power
Monopoly

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Subsidiary Company
Section 2 (87) provides that 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, shall not have layers of subsidiaries
beyond the prescribed limit.
For the above purpose:
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;
Illustration
Where more than one-half of the total voting power of a company (including body corporate),
Z Ltd., is controlled by another company (holding company), Y Ltd., either directly (on its
own) or together with its one or more subsidiaries, then such company (or body corporate), Z
Ltd., is said to be subsidiary of the other company, Y Ltd. Such control can be through any
one or more subsidiary / subsidiaries of the holding company.
What Is a Wholly Owned Subsidiary Company?
A wholly owned subsidiary company is a company that is incorporated under the provisions of
the Companies Act, 2013 and in which holds hundred percent share capital of such company.
In other words, a wholly owned subsidiary company can be defined as an entity whose entire
share capital is held by another Indian or foreign company.
Example
Starbucks company Japan is a wholly-owned subsidiary of the Starbucks group.
Reliance Industrial Investment and Holdings Limited (RIIHL), is a wholly owned susbidiary of
the Reliance Group of Company.
MEANING OF CONTROL [SECTION 2(27)]
According to section 2(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.
Subsidiary company not to hold shares in its holding company [Section 19]
ASSOCIATE COMPANY [SECTION 2(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 to section 2(6) provides that “significant influence” means control of at least

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twenty per cent of total voting power, or control of, or of business decisions under an agreement.
LIMITED COMPANY
As per section 3(2), a company formed under this Act may be either (a) a company limited
by shares; or (b) a company limited by guarantee or (c) an unlimited company.
Company Limited by Shares
As per section 2(21), ‘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. Accordingly, no member of a company limited by shares, can be called upon to
pay more than the nominal value of the shares held by him.
Company Limited by Guarantee
As per section 2(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
Clubs, trade associations and societies for promoting different objects are examples of such a
company. A company limited by guarantee having share capital share capital on incorporation
and it receives the guaranteed amount from its members on liquidation. A company limited by
guarantee not having share capital receives the guaranteed amount from its members on
liquidation.
Unlimited Companies
In this type of company, the liability of members of the company is unlimited, Section 2(92)
of the Companies Act, 2013 provides that unlimited company means a company not having any
limit on the liability of its members, such companies may or may not have share capital. They
may be either a public company or a private company. The members is liable to the company
and to any other person.
ASSOCIATION NOT FOR PROFIT [SECTION 8]
The Central Government may grant such a licence if:
i) It is intended to form a company for promoting commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment or any such other object;
and
ii) The company prohibits payment of any dividend to its members but intends to apply its profits
or other income in promotion of its object.
The company is registered without paying any stamp duty on its Memorandum of Articles.
A company, which has been granted license under Section 8 cannot alter the provisions of its
Memorandum or articles except with the previous approval of the Central Government.
As per Section 4(1), the memorandum of a company shall state the name of the company
with the last word “Limited” in the case of a public limited company, or the last words “Private
Limited” in the case of a private limited company. However, Section 8(1) permits the
registration, under a licence granted by the Central Government, of associations not for profit
with limited liability without being required to use the word “Limited” or the words “Private
Limited” after their names. This is of great value to companies not engaged in business like
bodies pursuing charitable, educational or other purposes of great utility.
A firm may be a member of the company registered under this section.
The Central Government may by order at any time revoke the licence whereupon the word

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“Limited” or “Private Limited” as the case may be, shall have to be used as part of its name
and the company will lose the exemptions that might have been granted by the Central
Government. However, the Central Government can do so only after providing such association
an opportunity to be heard.
PUBLIC FINANCIAL INSTITUTIONS
According to Section 2(72) “Public Financial Institution” means
1. The Life Insurance Corporation of India,
2. The Infrastructure Development Finance Company Limited.
3. Specified company referred to in the Unit Trust of India, (Transfer of Undertaking and Repeal)
Act, 2002.
4. Institutions notified by the Central Government under sub-section (2) of section 4A of the
Companies Act, 1956.
5. Such other institution as may be notified by the Central Government in consultation with the
Reserve Bank of India.
BODY CORPORATE [SECTION 2(11)]
As per Section 2 (11) of the Companies Act, 2013, a Body Corporate or Corporation includes
a Company incorporated outside India, but does not includei.
A co-operative society registered under any law relating to co-operative societies; and
ii. Any other body corporate (not being a company defined in this act), which the Central
Government may by notification specify in this behalf.
DOMESTIC COMPANY
A domestic company is a company that conducts its affairs in its home country. It should be
registered under the provisions of the Companies Act, 2013 or earlier law applicable in India.
The domestic company shall have registered office in India. As per Section 2(22A) of the
Income-tax Act, 1961, Domestic Company means an Indian Company, or any other Company
which, in respect of its income liable to tax under this Act, has made the prescribed
arrangements for the declaration and payment, within India, of the dividends (including
dividends on preference shares) payable out of such income.
DORMANT COMPANY
A company formed and registered under this 2013 for a future project or to hold an asset or
intellectual property and has no significant accounting transaction such a company or an
inactive company may make an application to the Registrar for obtaining the status of a
dormant company.(Section 455)
NIDHI COMPANY
Means a company which has been incorporated as a Nidhi with the object of cultivating the
habit of thrift and savings amongst its members, receiving deposits from, and lending to, its
member only, for their mutual benefit, and which complies with such rules as are prescribed
by the Central Government for regulation of such class of companies. (Section 406).
REGISTERED COMPANIES

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The companies which are incorporated under the Companies Act, 2013 or under any previous
company law and registered with the Registrar of Companies, fall under this category.
STATUTORY COMPANIES
These are constituted by a Special Act of Parliament or State Legislature. The provisions of
the Companies Act, 2013 do not apply to them.
LISTED COMPANY [SECTION 2(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.]
Companies not to be considered as listed companies –
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 Section
23(3) of the Companies Act, 2013.
NATURE AND CHARACTERISTICS OF A COMPANY
1. Corporate Personality
A company incorporated under the Act is vested with a corporate personality which bears its
own name, acts under that name, has a seal of its own and its assets are separate and distinct
from those of its members. It is a different person from the members who compose it.
Therefore it is capable of owning property, incurring debts, borrowing money, having a bank
account, employing people, entering into contracts and suing or being sued in the same manner
as an individual. Its members are its owners however they can be its creditors simultaneously.
In effect of corporate personality, a member can be the master and servant at the same time
and enjoy the advantages of both [Ref. Lee v/s Lee’s Air Farming Ltd.]. A shareholder cannot
be held liable for the acts of the company even if he holds virtually the entire share capital.
The shareholders are not the agents of the company and so they cannot bind it by their acts.
Case on Corporate Personality - Salomon v/s. Salomon and Co. Ltd
Salomon carried on a prosperous business as leather merchant & boot manufacturer. But soon
he formed a limited company consisting of himself, his wife, his daughter & his four sons,
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each of whom subscribed to 1 share making the actual cash paid as capital of the company as
Pound 7. He sold the business to the company for Pound 38,782. The Company’s nominal
capital was Pound 40,000 in Pound 1 share. Salomon was holding debentures secured by a
floating charge of Pound 10,000 & 20,000 Pound 1 fully paid shares. The remaining amount of
Pound 8,782 was paid to him in cash.
The company went into liquidation due to some difficulties and the total assets amounted to
Pound 6050, liabilities were Pound 10,000 secured by debentures, Pound 8,000 owing to
unsecured trade creditors. The trade creditors claimed the whole of the assets viz. pound 6050
on the grounds that the company was a mere agent of Salomon & thus they were entitled to
payment in priority to the debenture holders who was Salomon itself.
Pronouncement: Lordships of the House of Lords observed
“The company is a different person altogether from the subscribers of memorandum. Thus
even if after incorporation, the same persons are the managers and receive the profits from
the company, it is not their agent or trustee”.
2. Limited Liability
The privilege of limited liability for business debts is one of the principal advantages of doing
business under the corporate form of organization.” The company, being a separate person, is
the owner of its assets and bound by its liabilities. The liability of a member as shareholder
extends to the contribution to the capital of the company up to the nominal value of the
shares held and not paid by him. For example, if A holds shares of the total nominal value of
Rs. 1,000 and has already paid Rs. 500/- (or 50% of the value) as part payment at the time
of allotment, he cannot be called upon to pay more than Rs. 500/-, the amount remaining
unpaid on his shares. If he holds fully-paid shares, he has no further liability to pay even if
the company is declared insolvent. In the case of a company limited by guarantee, the liability
of members is limited to a specified amount of the guarantee mentioned in the memorandum.
Exceptions to the Principle of Limited Liability
➢ Where a company has been incorporated by furnishing any false or incorrect information or
representation or by suppressing any material fact or information in any of the documents or
declaration filed or made for incorporating such company or by any fraudulent action.
➢ Where in the course of winding up it appears that any business of the company has been
carried on with intent to defraud creditors of the company or any other persons or for any
fraudulent purpose.
➢ When the company is incorporated as an Unlimited Company under Section 3(2) of the Act.
➢ Where it is proved that a prospectus has been issued with intent to defraud the applicants for
the securities of a company.
➢ Where a company fails to repay the deposit or part thereof or any interest thereon referred to
in section 74 within the time specified or such further time as may be allowed by the Tribunal
and it is proved that the deposits had been accepted with intent to defraud the depositors or
for any fraudulent purpose.
3. Perpetual Succession
An incorporated company never dies, except when it is wound up as per law. A company, being
a separate legal person is unaffected by death or departure of any member and it remains the
same entity, despite total change in the membership. Members may come and go, but the
company can go on forever.
4. Separate Property

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A company being a legal person and entirely distinct from its members, is capable of owning,
enjoying and disposing of property in its own name. The company is the real person in which
all its property is vested, and by which it is controlled, managed and disposed off. As per a
decided case, dividend received from a company engaged in agricultural business is not exempt
from tan in the hands of the shareholder. Only the company enjoys certain exemptions in
taxation.
5. Transferability of Shares
The capital of a company is divided into parts, called shares. The shares are said to be movable
property and, subject to certain conditions, freely transferable, so that no shareholder is
permanently or necessarily wedded to a company.
6. Common Seal
Upon incorporation, a company becomes a legal entity with perpetual succession and a common
seal. Since the company has no physical existence, it must act through its agents and all
contracts entered into by its agents must be under the seal of the company. The Common
Seal acts as the official signature of a company. The name of the company must be engraved
on its common seal.
However, based upon the amendments introduced by Companies (Amendments) Act, 2015, it
has been provided that maintaining a common seal is now optional for any company. A
company not maintaining a common seal shall get the documents attested by an authorized
person or the company secretary.
7. Capacity to sue and be sued
A company being a body corporate, can sue and be sued in its own name. To sue, means to
institute legal proceedings against (a person) or to bring a suit in a court of law. All legal
proceedings against the company are to be instituted in its name. Similarly, the company may
bring an action against anyone in its own name.
8. Contractual Rights
A company, being a legal entity different from its members, can enter into contracts for the
conduct of the business in its own name. A shareholder cannot enforce a contract made by
his company; he is neither a party to the contract, nor is entitled to the benefit derived from
of it, as a company is not a trustee for its shareholders. Likewise, a shareholder cannot be
sued on contracts made by his company.
9. Limitation of Action
A company cannot go beyond the power stated in its Memorandum of Association. They do
not have effective and intimate control over its working and they elect their representatives as
Directors on the Board of Directors of the company to conduct corporate functions through
managerial personnel employed by them. In other words, the company is administered and
managed by its managerial personnel.
10. Voluntary Association for Profit
A company is a voluntary association for profit. It is formed for the accomplishment of some
stated goals and whatsoever profit is gained is divided among its shareholders or saved for the
future expansion of the company. Only a Section 8 company can be formed with no profit
motive.
11. Termination of Existence
A company, being an artificial juridical person, does not die a natural death. It is created by

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law, carries on its affairs according to law throughout its life and ultimately is effaced by law.
The existence of a company is terminated by means of winding up.
COMPANY AS A PERSON
A company is an artificial person created by law. It is not a human being but it acts through
human beings. It is considered as a legal person which can enter into contracts, possess
properties in its own name, sue and can be sued by others etc. it is called an artificial person
since it is invisible, intangible, existing only in the contemplation of law. It is capable of
enjoying rights and being subject to duties & under a given case law it was decided that a
company may also be a suit as an indigent person.
CORPORATIONS AS CITIZENS
Although it is generally accepted that corporations are not citizens in the same way that “real”
citizens are – they cannot hold passports or vote in elections, for example – it has been
recognized that they do share in some of the same or similar practices, such as paying taxes,
engaging in free speech, and expecting certain protections from the state. There is concern,
however, that extending the scope of citizenship to incorporated corporations may infringe upon
democracy and equality given their access to substantial power and resources.
IS COMPANY A CITIZEN?
The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the
Constitution of India. In State Trading Corporation of India Ltd. V/s. C.T.O. A.I.R. 1963 S.C.
1811, the Supreme Court held that the State Trading Corporation though a legal person, was
not a citizen and can act only through natural persons. Nevertheless, it is to be noted that
certain fundamental rights enshrined in the Constitution for protection of “person”, e.g. right
to equality (Article 14) etc. are also available to company. Section 2(f) of Citizenship Act,
1955 expressly excludes a company or association or body of individuals from citizenship.
NATIONALITY AND RESIDENCE OF A COMPANY
Though it is established through judicial decisions that a company cannot be a citizen, yet it
has nationality, domicile and residence. Its domicile is the place of its registration and that
domicile clings to it throughout its existence. He observed in this case.
“It was suggested that a body corporate has no domicile, it is quite true that a body corporate
cannot have a domicile in the same sense as an individual. But by analogy with a natural
person the attributes of residence, domicile and nationality can be given to a body corporate.”
ILLEGAL ASSOCIATION
In order to prevent the mischief arising from large trading undertakings being carried on by
large fluctuating bodies so that persons dealing with them did not know with whom they were
contracting, the law has put a ceiling on the number of persons constituting an association or
partnership. An unincorporated company, association or partnership consisting of large number
of persons has been declared illegal. Rule 10 of Companies (Miscellaneous) Rules, 2014
prescribes in this regards the number of persons in such case as 50.

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By virtue of section 464 of the Companies Act, 2013, no association or partnership consisting
of more than such number of persons as may be prescribed shall be formed for the purpose
of carrying on any business unless it is registered as a company under this Act or is formed
under any other for the time being in force. The number of person which may be prescribed
under this section shall not exceed 100.
Since, the law does not recognize it, an illegal association :
i) Cannot enter into any contract;
ii) Cannot sue any member, or outsider, not even if the company is subsequently registered;
iii) Cannot be sued by a member, or an outsider for recovery of any debts;
iv) Cannot be wound up by an order of the Court. In fact, the Court cannot entertain a petition
for its winding up as an unregistered company, for if it did, it would be indirectly according
recognition to the illegal association (Raghubar Dayal v/s Sarala Chamber A.I.R. 1954 All. 555)

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CHAPTER 3 – MEMORANDUM & ARTICLES OF ASSOCIATION

MEMORANDUM OF ASSOCIATION
1. According to Section 2(56) of the Act “memorandum” means the memorandum of association
of a company as originally framed and altered, from time to time, in pursuance of any previous
company law or this Act.
2. Memorandum of Association is a legal document which describes the purpose for which the
company is formed and therefore identified the possible scope of its operations beyond which
its action cannot go. It defines as well as confines the powers of the company.
3. A company may be formed for any lawful purpose:
- by seven or more persons, where the company to be formed is a public company;
- two or more persons, where the company to be formed is a private company; or
- one person, where the company to be formed is a One Person Company by subscribing their
names or his name to a memorandum.
Question: Do all the companies require MoA?
Answer: Yes, it is mandatory for every company to have a MoA as it defines the scope of its
operations. The entire structure of the company is detailed in the MoA. It is a public document,
and any person can view the MoA of the company by paying the required fees to the MCA.
FORM OF MEMORANDUM OF ASSOCIATION
Tables Company
Table A Companies limited by shares
Table B Companies limited by guarantee not having a share capital
Table C Companies limited by guarantee having a share capital
Table D Unlimited companies not having a share capital
Table E Unlimited companies having a share capital
A company shall adopt any of the model Forms of the memorandum of association mentioned
above, as may be applicable to it. The memorandum should be printed, numbered and divided
into paragraphs. It should also be signed by the subscribers of the company.
CONTENTS OF MEMORANDUM (SECTION 4)
The memorandum of a limited company must state the following:
1. Name Clause - the name of the company with “Limited” as its last word in the case of a
public company; and “Private Limited” as its last words in the case of a private company. This
shall not apply in case of companies registered under section 8. Similarly, in case of government
companies the name of the company need not end with the words “Limited” or “Private
Limited”.
2. Situation Clause - the State in which the registered office of the company is to be situated.
3. Objects Clause - the objects for which the company is proposed to be incorporated and any
matter considered necessary.
4. Liability Clause - the liability of members of the company may be limited by shares or by
guarantee or unlimited.

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5. Capital Clause - in the case of a company having a share capital, —the amount of share
capital with which the company is to be registered and the division thereof into shares of a
fixed amount;
6. Subscription Clause - the number of shares which the subscribers to the memorandum agree
to subscribe which shall not be less than one share and the number of shares each subscriber
to the memorandum intends to take, indicated opposite his name. In the case of a One Person
Company, the name of the person who, in the event of the death of the subscriber, shall
become the member of the company.
It is to be noted that the Companies Act, 2013 shall override the provisions in the Memorandum
and Articles of a company, if the latter contains anything contrary to the provisions in the
Act (Section 6).
NAME CLAUSE
This clause defines the name of the company. The name of the company should not be identical
or resemble too nearly to any existing company. The name stated in the memorandum shall
not –
a. be identical with or resemble too nearly to the name of an existing company registered under
this Act or any previous company law; or
b. be such that its use by the company –
- will constitute an offence under any law for the time being in force; or
- is undesirable in the opinion of the Central Government.
A company shall not be registered with a name which contains –
a. any word or expression which is likely to give the impression that the company is in any way
connected with the Central Government, any State Government, or any local authority,
corporation or body constituted by the Central Government or any State Government under any
law for the time being in force; or
b. such word or expression, unless the previous approval of the Central Government has been
obtained for the use of any such word or expression.
As per section 4(4) a person may make an application for reservation of name by using web
service SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus: INC-32),
and for change of name by using web service RUN (Reserve Unique Name), in prescribed
manner and accompanied by prescribed fee to the Registrar for the reservation of a name as–
(a) the name of the proposed company; or
(b) the name to which the company proposes to change its name.
The Registrar may, on the basis of application, reserve the name for a period of twenty days
from the date of the application. In case of an application for reservation of name or for
change of its name by an existing company, the Registrar may reserve the name for a period
of sixty days from the date of approval. The object is to prevent the use of a name which is
likely to mislead the public. For example, a company is not allowed to use a name which is
prohibited under the Emblems and Names (Prevention of Improper Use) Act, 1950, or suggestive
of any connection with Government or of State patronage where there is none.
SITUATION CLAUSE (SECTION 12)
1. This clause connotes the name of the State in which the registered office of the company is

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situated.
2. This helps to determine the jurisdiction of the Registrar of Companies (RoC).
3. The company is required to inform the location of the registered office to the Registrar of
Companies within 30 days from the date of incorporation of the company and all time
thereafter, the company must have a registered office to which all communications and notices
may be sent.
Publication of Name and Address of the Company:
Every company is required to display its name and address in legible letters in conspicuous
position and in all its business letters, bill heads, letter papers. Accordingly, the company shall:
1. Paint or affix its name, and the address of its registered office, and keep the same painted
or affixed, on the outside of every office or place in which its business is carried on, in a
conspicuous position, in legible letters, and if the characters employed therefore are not those
of the language or of one of the languages in general use in that locality, also in the characters
of that language or of one of those languages;
2. Have its name engraved in legible characters on its seal;
3. Get its name, address of its registered office and the Corporate Identity Number along with
telephone number, fax number, e-mail and website addresses, if any, printed in all its business
letters, billheads, letter papers and in all its notices and other official publications; and
4. Have its name printed on negotiable instruments such as hundies, promissory notes, bills of
exchange and such other document as may be prescribed.
5. Every company which has a website for conducting online business or otherwise, shall
disclose/publish its name, address of its registered office, the Corporate Identity Number,
Telephone number, fax number if any, email and the name of the person who may be contacted
in case of any queries or grievances on the landing/home page of the said website.
6. Where a company has changed its name or names during the last two years, it shall paint or
affix or print, as the case may be, along with its name, the former name or names so changed
during the last two years.
7. Further, in case of One Person Company, the words ‘‘One Person Company’’ shall be mentioned
in brackets below the name of such company, wherever its name is printed, affixed or engraved.
8. MCA has clarified that display of its name in English in addition to the display in the local
language will be a sufficient compliance with the requirements of the section.
OBJECT CLAUSE (SECTION 4)
1. All companies must state in their memorandum the objects for which the company is proposed
to be incorporated and any matter considered necessary.
2. It states affirmatively the ambit and extent of powers of the company and, stated negatively,
that nothing should be done beyond that ambit and that no attempt shall be made to use the
company for any other purpose than that which is specified.
3. Although express powers are necessary, a company may do anything which is incidental to and
consequential upon the powers specified, and the act will not be ultra vires [Attorney General
v. G.E. Rly. Co.]. Thus, a trading company has an implied power to borrow money, draw and
accept bills of exchange in the ordinary form, but a railway company cannot issue bills although
it may borrow money.
LIABILITY CLAUSE

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1. In case of an unlimited company, the liability of the members is unlimited.

2. In case of a company limited by shares, the liability of the members is restricted by the
amount unpaid on their shares.
3. For a company limited by guarantee, the liability of the members is restricted by the amount
each member has agreed to contribute at the time of incorporation.
CAPITAL CLAUSE
1. This clause specifies the maximum capital that a company can raise which is also called the
authorized/ nominal capital of the company.
2. The usual way to state the capital in the memorandum is: “The capital of the company is
10,00,000 rupees divided into 1,00,000 equity shares of 10 rupees each”.
3. If there are both equity and preference shares, then the division of the capital is to be shown
under these two heads.
4. A company is not authorized to issue capital beyond its authorized/nominal/registered capital.
SUBSCRIPTION CLAUSE
1. The Subscription Clause defines who are signing the memorandum of company. Each subscriber
must state the number of shares he is subscribing to.
2. The subscribers have to sign the memorandum in the presence of two witnesses. Each
subscriber must subscribe to at least one share.
3. The subscribers to the memorandum declare: “We, the several persons whose names and
addresses are subscribed below, are desirous of being formed into a company in pursuance of
this memorandum of association, and we respectively agree to take the number of shares in
the capital of the company set opposite our respective names”.
4. Then follow the names, addresses, description, occupations of the subscribers, and the number
of shares each subscriber has agreed to take and their signatures attested by a witness.
ALTERATION OF MEMORANDUM OF ASSOCIATION (MOA)
ALTERATION OF MOA DUE TO CHANGE IN NAME CLAUSE [SECTION 13 (2) & (3)]
1. The name of the company can be altered by a special resolution and with the approval of the
Central Government in writing. Approval of the Central Government is not required, in case
where the change in the name of the company relates to the addition/deletion of the word
Private’ to the name of the company consequent to the conversion of a company into a public
company and vice versa.
2. If through inadvertence or otherwise, a company has been registered with a name which, in
the opinion of the Central Government, is identical with or too closely resemble the name of
an existing company, the company may change its name within a period of three months from
the issue of such direction by passing an ordinary resolution and obtain the approval of the
Central Government in writing.
3. When any change in the name of a company is made, the Registrar shall enter the new name
in the register of companies in place of the old name and issue a fresh certificate of
incorporation with the new name and such change in the name shall be complete and effective
only on the issue of such a certificate.
4. The change of name shall not be allowed to a company which has not filed annual returns or
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financial statements due for filing with the Registrar or which has failed to pay or repay
matured deposits or debentures or interest thereon. Provided that the change of name shall be
allowed upon filing necessary documents or payment or repayment of matured deposits or
debentures or interest.
5. An application shall be filed in Form No. INC-24 along with the fee for change in the name
of the company and a new certificate of incorporation in Form No. INC-25 shall be issued to
the company upon change of name.
PROCEDURE FOR ALTERATION IN NAME CLAUSE OF MEMORANDUM
1. Calling of Board Meeting - Issue notice for convening a meeting of the Board of Directors for
changing name of the company and get its approval by passing a Board resolution authorizing
the Company Secretary/ Director to make the required application to the Registrar of Companies.
2. Seeking name availability – An application for the reservation/availability of name shall be in
RUN along with prescribed fee of Rs. 1,000/-, which may either be approved or rejected, by the
Registrar, Central Registration Centre.
3. Obtaining ROC Approval and Name Availability Letter - After approval of name, ROC will
issue a name availability letter. The Registrar may reserve the name for a period of twenty
days from the date of approval. In case of an application for reservation of name or for change
of its name by an existing company, the Registrar may reserve the name for a period of sixty
days from the date of approval. On receipt of approval of name, the Company Secretary/Director
shall convene another Board meeting:
a. To take note of the name approval received from ROC.
b. To fix date, time and place for holding Extra-ordinary General meeting (EGM) to get approval
of shareholders, by way of Special Resolution.
c. To approve notice of EGM along with agenda and explanatory statement
d. To authorize the Director or Company Secretary to issue Notice of EGM.
4. Issue Notice of EGM - Issue Notice of the EGM to all the Members, Legal Representatives of
any deceased member or assignee of an insolvent member, Directors and the Auditors of the
company.
5. Holding of EGM - Hold the EGM and pass the necessary Special Resolution for change in the
Name clause.
6. ROC filings - The Company is required to file Special Resolution passed by shareholders with
concerned ROC and file Form MGT -14 within 30 days of passing the resolution with prescribed
fees. Also, the application for the fresh certificate of incorporation in the new name of the
company be made in form INC-24 to the Registrar within the 30 days along with the prescribed
fees.
7. After scrutiny of the documents filed, the ROC shall issue a fresh certificate of incorporation
digitally signed in Form INC-25.
8. Intimate all concerned persons/authorities about the changed name of the Company, particularly
the Stock Exchanges, National Securities Depository Ltd., Central Depository Services (India)
Ltd., statutory and other authorities like Inspector of Factories, Regional Provident Fund
Commissioner, suppliers of raw materials, customers, banks etc.
9. Arrange for a new Common Seal and have the same adopted at a meeting of the Board of
directors and keep it under safe custody and get stationery printed with the new name and/or
affix rubber stamp of the new name on all the existing documents.

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10. Get the new name of the Company painted on all the signboards or name boards wherever
they are displayed.
11. Correct all records, registers including the Register of Members, every copy of Memorandum
and Articles of Association, other books and documents pertaining to the company’s business
and affairs to display the new name.
12. In every document, the company shall paint, affix or print as the may be the former name or
names so changed during the period of last two years.
EFFECT OF CHANGE IN NAME CLAUSE
The change of name shall not affect any rights or obligations of the company or render
defective any legal proceeding against it, and any legal proceedings which might have been
continued or commenced by or against the company in its former name may be continued by
or against the company in its new name.
ALTERATION OF SITUATION/REGISTERED OFFICE CLAUSE [SECTION 13(4)(5) AND (7)]
CHANGE WITHIN THE LOCAL LIMITS OF SAME TOWN
1. A company by passing Board Resolution can change the situation of its registered office within
the limits of same city, town or village.
2. An intimation of the change of registered office and verification of registered address shall be
given to the Registrar.
3. E-Form INC-22 is required to be filed within 30 days of such change.
4. This does not involve alteration of memorandum.
CHANGE OUTSIDE THE LOCAL LIMITS OF ANY CITY, TOWN OR VILLAGE BUT WITHIN SAME
ROC
1. No company shall change its registered office outside the local limits of any city, town or
village where such office is situated without passing a special resolution passed by the company.
2. In case the company is eligible for conducting business through postal ballot, any change in
place of registered office outside the local limits shall be transacted only by means of voting
through Postal Ballot.
CHANGE WITHIN THE SAME STATE FROM THE JURISDICTION OF ONE ROC TO ANOTHER
ROC
1. No company shall change the place of its registered office from the jurisdiction of one Registrar
to the jurisdiction of another Registrar within the same State unless such change is confirmed
by the Regional Director, which shall be made in Form INC 23 alongwith necessary fee.
2. Regional Director, after hearing the parties shall pass necessary orders within a period of thirty
days from the date of the receipt of the application.
3. Thereafter, the company concerned shall file a copy of the said order with the Registrar of
Companies (ROC) within a period of sixty days from the date of the confirmation order by
Regional Director.
4. The said ROC shall record the ordered changes in its records.

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5. The ROC of the state where the registered office of the company was previously situated, shall
transfer all the documents and papers to the new ROC.
6. The certified copy of order of the Regional Director, approving the alternation of memorandum
for transfer of registered office of the company within the same State, shall be filed in Form
INC-28 along with fee with the Registrar of State within thirty days from the date of receipt
of certified copy of the order.
CHANGE OF REGISTERED OFFICE FROM ONE STATE TO ANOTHER
1. The change of registered office from one State to another State involves alteration of
memorandum, and the change can be effected by a special resolution passed by the company
which must be confirmed by the Central Government on an application made to it.
2. The Central Government shall dispose of the application within a period of sixty days and
before passing its order may satisfy itself that the alteration has the consent of the creditors,
debenture-holders and other persons concerned with the company or that a sufficient provision
has been made by the company either for the due discharge of all its debts and obligations or
that adequate security has been provided for such discharge.
3. A company shall file with the Registrar the special resolution passed by it in MGT-14.
4. A certified copy of the order of the Central Government approving the alteration shall be filed
by the company with the Registrar of each of the States within 30 days’ time from the receipt
of the certified copy of the order and in INC-28, who shall register the same, and the Registrar
of the State where the registered office is being shifted to, shall issue a fresh certificate of
incorporation indicating the alteration.
Procedure:
1. Send notice of Board Meeting at least seven days before the date of Board Meeting.
2. In case of Listed Company, at least 7 days before of the Board Meeting, publish notice of the
board meeting in the newspaper. Simultaneously, send the copies of said publication to the
Stock exchanges.
3. Hold the Board Meeting and approve the :
a. Resolution Shifting of Registered office from one state to another state.
b. Notice for Calling of EGM for passing special resolution for shifting of registered office.
c. Authorization to Director/ Company Secretary to sign the documents.
d. Engagement of Company Secretary to represent the company before RD.
4. Intimate the Stock Exchanges about passing of resolution in the board meeting at the earliest
within 24 hours of the occurrence of such event or information and in case of any delay the
disclosure should be made along with an explanation for such delay.
5. Send Notice of the EGM at least 21 days clear days before to the members of the company.
Send copies of the notice to the stock exchanges simultaneously.
6. Publish the notice of EGM in newspaper and send the copy of such publication to the stock
Exchanges.
7. Hold EGM of the company and pass the special resolution for shifting of registered office from
one state to another.
8. Intimate about the proceedings of the EGM and the amendments to the memorandum and
articles of association to the stock exchanges at the earliest within 24 hours of the conclusion
of such extraordinary general meeting.
9. File e-form MGT-14 with ROC for registering special resolution passed in the EGM within 30

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days from the date of passing such resolution.

10. Prepare the application for shifting of registered office to be filed to RD. File a copy of the
application along with all annexures to ROC in form INC-23.
11. The company shall, not more than thirty days before the date of filing the application in
Form INC-23 –
a. advertise in the Form No.INC-26 in the vernacular newspaper and in an English newspaper
with the widest circulation.
b. serve, by registered post with acknowledgement due, individual notice, on each debentureholder
and creditor of the company; and
c. serve, by registered post, a notice together with the copy of the application to the Registrar
and to SEBI, in the case of listed companies and to the regulatory body, if the company is
regulated under any special Act.
12. A duly authenticated copy of the advertisement and notices shall be attached to the application.
13. There no objection has been received from any person in response to the advertisement or
notice, the application may be put up for orders without hearing and the order either approving
or rejecting the application shall be passed within fifteen days of the receipt of the application.
14. Where an objection has been received, the Central Government shall hold a hearing and direct
the company to file an affidavit to record the consensus reached at the hearing, upon executing
which, the Central Government shall pass an order approving the shifting, within sixty days of
filing the application.
15. The change of address of the registered office shall be effective from the date of issue of
registration certificate by the ROC of the State to which the registered office is shifted.
16. Once the order is passed by the RD, approving shifting of the registered office, file form INC-
22 with the ROC.
17. If the documents are in order, Registrars of both states will approve the forms and the change
in registered office will be updated in register of companies with the Registrar and new
Certificate of Incorporation will be issued by the Registrar of the State within 30 days, where
the company’s registered office is going to be shifted.
18. The certified copy of the order of the Central Government, approving the alteration shall be
filed in Form No.INC-28 along with the fee as with the Registrar of the State within thirty
days from the date of receipt of certified copy of the order.
ALTERATION OF MOA DUE TO CHANGE IN OBJECT CLAUSE [SECTION 13 (8) AND (9)]
1. A company can change its objects by passing a special resolution.
2. Registrar shall register any alteration of the memorandum with respect to the objects of the
company and certify the registration within a period of thirty days from the date of filing of
the special resolution. Further, in case the company is eligible for conducting business through
postal ballot any alteration in the objects clause shall implement the same through Postal
Ballot.
3. A company, which has raised money from public through prospectus and has any unutilised
amount out of the money so raised, shall not change its objects for which it raised the money
through prospectus unless a special resolution is passed by the company and the details in
respect of such resolution shall be published in one English and one vernacular language
newspaper and shall also be placed on the website indicating there in the justification for such
change. The dissenting shareholders shall be given an opportunity to exit by the promoters and

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shareholders having control in accordance with SEBI regulations.

Following companies are required to pass special resolution for alteration of Object clause of
Memorandum of Association by means of Postal Ballot only:
1. All Companies having more than 200 members.
2. Company which has raised money from public through prospectus and still has any unutilized
amount out of the money so raised.
PROCEDURE IS TO BE FOLLOWED FOR ALTERATION OF OBJECTS CLAUSE OF MOA
1. Issue not less than 7 days’ notice to every director of the company.
2. Hold a meeting of Board of Directors:
a. To pass the Board Resolution for approving the proposed amendments to the objects clause.
b. To delegate authority to any one director to sign, certify and file the requisite forms with ROC.
c. To fix day, date, time and venue for holding the general meeting for passing a special resolution.
d. To approve the draft notice of general meeting along with explanatory statement.
e. To authorize the Director or Company Secretary to sign and issue notice of the general meeting.
3. Send notice of the General meeting to all the shareholders, directors, auditors and other persons
entitled to receive it, by giving not less than clear 21 days’ notice.
4. Hold a shareholders meeting on the date for the meeting and pass the Special Resolution for
altering the object clause.
5. Follow the procedure prescribed for preparing, signing and compiling of minutes of General
Meeting.
6. After passing special resolution, file a certified copy of special resolution with the Registrar in
form MGT- 14 within 30 days.
7. Every Alteration made shall be noted in every copy of the Memorandum of Association.
ALTERATION OF LIABILITY CLAUSE (SECTION 13)
A company can change the liability clause of its memorandum of association by passing a
special resolution. Further a company shall, in relation to any alteration of its memorandum,
file with the Registrar the special resolution passed by the company through E-Form MGT-14.
ALTERATION OF CAPITAL CLAUSE IN MOA [SECTION 61 READ WITH SECTION 64]
Types of alteration of capital clause in the general meeting of a company limited by shares as
per section 61 (1) of the Companies Act, 2013 can be enumerated as below: -
a. increase its authorised share capital by such amount;
b. consolidate and divide all or any of its share capital into shares of a larger amount than its
existing shares.
c. convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully
paid-up shares of any denomination;
d. sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the
memorandum;
e. cancel shares which, at the date of the passing of the resolution in that behalf, have not been
taken or agreed to be taken by any person, and diminish the amount of its share capital by
the amount of the shares so cancelled.
PROCEDURE FOR INCREASING THE AUTHORISED CAPITAL (SECTION 61 AND 64)
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1. Check for Authorization in Articles: If there is no such provision then the company has to
take steps for alteration of its Articles of Association.
2. Calling of Board Meeting: Issue notice for convening a meeting of the Board of Directors.
3. Notice of EGM: Issue Notice of the EGM to all members, legal representative of deceased
member, assignee of an insolvent member if any, directors and the auditors of the company.
4. Holding of general meeting: To hold the EGM on fixed date and pass the necessary ordinary
resolution for increase in the authorized share capital of the Company.
5. ROC Form filing: File Form SH-7 within 30 days of passing of Ordinary Resolution with the
concerned ROC, with prescribed fees.
6. Concerned ROC will check the e-form and attached documents and will approve the increase
in authorize share capital.
7. The company shall file a notice in the prescribed form with the Registrar within a period of
30 days of alteration to its share capital along with a copy of altered Memorandum.
8. No need to pass Special Resolution for increase in authorised share capital. However, in case
the alteration of capital clause of the MOA requires the alteration of the AOA of the company
then, the special resolution for the alteration of AOA be passed and form MGT-14 should also
be filed with the concerned Registrar within 30 days along with the prescribed fees.
ARTICLES OF ASSOCIATION
1. According to Section 2(5) of the Companies Act, 2013, ‘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 of this Act.
2. It also includes the regulations contained in Table A in Schedule I of the Act, in so far as
they apply to the company.
3. The articles of a company shall contain the regulations for management of the company.
4. The articles of association of a company are its bye-laws or rules and regulations that govern
the management of its internal affairs and the conduct of its business.
5. They are subordinate to and are controlled by the memorandum of association.
REGISTRATION OF ARTICLES
1. The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in
Schedule I as may be applicable to such company either in totality or otherwise..
2. A company may adopt all or any of the regulations contained in the model articles applicable
to such company.
3. In terms of Section 5 of the Companies Act, 2013, a public company limited by shares may at
its option register its articles of association signed by the same subscribers as to the
memorandum, or alternatively it may adopt all or any of the regulations contained in Table F
of First Schedule of the Act.
4. If articles are not registered, automatically Table F in Schedule I would apply, and if registered,
Table F in Schedule I would apply except in so far as it is excluded or modified by the articles.
To avoid any confusion, normally every public company delivers its articles along with the
memorandum for registration. Further, it will be specifically stated therein that Table ‘F’ will
not apply.
5. The articles of a private company must contain the three restrictions as contained in Section
2(68).

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ENTRENCHMENT PROVISIONS (SECTION 5)

1. Entrenchment provisions allow for certain clauses in the articles to be amended upon
satisfaction of certain conditions or restrictions greater than those prescribed under the Act
(such as obtaining 100% consent).
2. This provision acts as a protection to the minority shareholders and is of specific interest to
the investment community. This shall empower the enforcement of any pre-agreed rights and
provide greater certainty to investors, especially in joint ventures.
3. The provisions for entrenchment shall be made either on formation of a company, or by an
amendment in the articles agreed to by all the members of the company in the case of a
private company and by a special resolution in the case of a public company.
4. Where the articles contain the provisions for entrenchment, the company shall give notice to
the Registrar of such provisions in SPICe+ along with the fee at the time of incorporation of
the company or in case of existing companies, the same shall be filed in Form No.MGT.14
within thirty days from the date of entrenchment of the articles, along with the fee.
LEGAL EFFECT OF THE MEMORANDUM AND ARTICLES
Members Bound to the Company
The memorandum and articles constitute a contract binding on the members of the company.
Each member must, therefore, observe the provisions of the memorandum and articles. Each
member is bound by the covenants of the Memorandum as originally made and as altered from
time to time.
Company Bound to the Members
Since the articles constitute a contract binding the company to its members in their capacity
as members, a member can bring an action against the company for infringement by it of the
memorandum or articles. Further, the company is bound to individual members in respect of
their ordinary rights as members, e.g. the right to receive share certificate in respect of shares
allotted to them, or to receive notice of general meeting, etc.
Member bound to Member
As between the members inter se each member is bound by the articles to the other members
but that does not mean the memorandum and articles create an express contract among the
members of the company. Thus, a member of a company has no right to bring a suit to enforce
the articles in his own name against any other member or members. It is the company alone
which can sue the offender so as to protect the aggrieved member. It is in this way that the
rights of members inter se are regulated.
Company not bound to Outsiders
The term outsider signifies a person who is not a member of the company even if he is a
director of or solicitor to the company. Even in regard to members, the articles bind the
company to them in their capacity as members. As between outsiders and the company, neither
the memorandum nor the articles would give any contractual rights to outsiders against the
company or its members even though the names of outsiders are mentioned in those documents
in connection with the arrangements that the company might have contemplated for carrying
on its business.
PROCEDURE FOR ALTERATION OF AOA (SECTION 14)

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1. Meeting of Board of Directors: Issue not less than 7 days notice to every director of the
company.
2. Hold a meeting of Board of Directors:
a. To consider and decide the articles required to be changed/altered.
b. To pass the necessary Board Resolution for approving alteration of articles of association.
c. To delegate authority to any one director of the company to sign, certify and file the requisite
forms with Registrar of Companies.
d. To fix day, date, time and venue for holding general meeting of the Company.
e. To approve the draft notice of general meeting along with Explanatory Statement.
f. To authorize the Director or Company Secretary to sign and issue notice of the general meeting.
3. General Meeting of the company: Send notice of the General meeting proposing the special
resolution to all the shareholders, directors, auditors and other persons entitled to receive it,
by giving not less than clear 21 days’ notice.
4. Hold a shareholders meeting on the date fixed for the meeting and pass the Special Resolution
for altering the Articles of Association.
5. File a certified copy of special resolution with the Registrar in Form MGT- 14 within 30 days
of passing Special Resolution.
6. Make necessary amendments in all the copies of Articles of association of the Company.
7. Compliance with Companies Act, 2013 and Memorandum of Association: The alteration to
AOA should conform to the provisions of the Companies Act, 2013. The alteration of the articles
should not violate the memorandum of association of the company.
8. Stamp duty on alteration of articles: The company need not pay any stamp duty on the
alteration of articles. Stamp duty has to be paid only at the time of incorporation of a company.
Note:
Where a private company alters its articles in such a manner that they no longer include the
restrictions and limitations which are required to be included in the articles of a private
company under this Act, the company shall, as from the date of such alteration, cease to be
a private company.
Any alteration having the effect of conversion of a public company into a private company
shall not take effect except with the approval of the Tribunal which shall make such order as
it may deem fit.
For effecting the conversion of a private company into a public company or vice versa, company
shall file the application in Form No.INC -27 along with the prescribed fee.
A company registered under section 8 shall not alter the provisions of its memorandum or
articles except with the previous approval of the Central Government.
INCORPORATION CONTRACTS AND AGREEMENTS
There are various types of pre-incorporation contracts that can be made according to their
need before incorporation, such as a lease agreement, employment agreement, founder’s
agreement, shareholder agreement, etc. There are two situations as discussed below in which
contracts are made:
a. Contracts made on behalf of the company before its incorporation—preliminary or
preincorporation
contracts.
b. Contracts made after the incorporation.

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PRE-INCORPORATION CONTRACTS
The promoters may enter into contracts on behalf of proposed company, like purchase of land,
ordering machinery, employing key personnel, investment tie up etc. and also incur expenses
relating to incorporation of the company. These must be ratified on the incorporation of the
company. The Articles must authorize the directors to pay the expenses relating to registration
of the company. The directors do not have any implied power to incur pre-incorporation
expenses.
PROMOTER’S LIABILITY
1. During execution, the promoters enter into the contracts on behalf of the company. Although,
the promoters act as company’s agent to represent their interest, the principal is not in existence
while registration.
2. The contracts entered into by the promoters are therefore not binding on the company or third
parties.
3. As per section 15 of Specific Relief Act, 1963, if promoters have made a contract before
incorporation of a company for the purpose of the proposed company, and if the contract is
warranted by the terms of incorporation, the company may adopt and enforce the contract.
4. As per section 19 of Specific Relief Act, 1963, if the pre-incorporation contract is adopted or
accepted by the company after its incorporation and if it is within the terms of incorporation,
the other party can also enforce the contract, if such acceptance was communicated to other
party to the contract.
5. However, pre-incorporation contracts are not binding upon the company, if these are not
adopted
or accepted by the company after its incorporation. A Board resolution should be passed for
adoption of pre-incorporation contracts at the first Board meeting of the company. On passing
such resolution, the contract shall be binding on the company.
The procedure for ratification of pre-incorporation contract is as under:-
1. Ensure that the power to enter and adopt pre-incorporation contracts is given in the objects,
incidental or ancillary to the attainment of the main objects clause of the memorandum of
the company.
2. Ensure that the articles also give power to the directors to adopt such pre-incorporation
contracts in the board meeting.
3. Prepare a statement of the pre-incorporation contracts giving the amount involved in the each
contract separately.
4. Convene the first board meeting after giving notice to all the directors of the company.
5. The statement should be initialed by the Chairman of the Board meeting and then pass a
resolution adopting the pre-incorporation contract.

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CHAPTER 4 - SHARE CAPITAL

CAPITAL – MEANING
Capital means the money raised by the company by issuing various securities, shares, debentures,
deposits etc. Broadly, capital consists of two components namely share capital and debt
capital.
In particular, share capital comprise of equity as well as preference share capital vis-à-vis debt
capital comprises of debentures, deposits, bonds etc.
KINDS OF SHARE CAPITAL
1) Authorised or Registered Capital: The sum stated in the memorandum of association of the
company & which is the maximum share capital of the company.
2) Issued Capital: That part of nominal capital which is issued to the public for subscription
and allotment.
3) Subscribed Capital: Such part of the capital which is for the time being subscribed by the
members of the company.
4) Called-up Capital: That part of the capital which has been called up for payment.
5) Paid-up Share Capital: That part of the capital of the company which has been paid by
shareholders.
6) Preference & Equity Share Capital: Preference share capital is case of a company limited
by shares means that part of the issued capital, which carries a preferential right with respect
to:
a) Payment of dividend during the life-time of company.
b) Repayment of capital at the time of winding-up.
Equity share capital of the company means that capital which is not preference share capital.
PUBLICATION OF AUTHORISED, SUBSCRIBED AND PAID UP SHARE CAPITAL
Under section 60 where any notice, advertisement or other official publication, or
any business letter of a company contains a statement of the amount of the authorised capital
of the company, then such document shall also contain a statement the amount of the
capital which has been subscribed and the amount paid-up.
MEANING AND NATURE OF SHARE [SECTION 2(84)]
Section 2(84) of the Act defines a share, as a share in the share capital of the company &
includes stock.
1) A share gives the right to participate in the profits of the company while it is a going concern.
2) In India, shares are regarded as goods.
3) Shares issued by the company have distinctive numbers.
4) Any amount raised by way of shares constitutes share capital.
5) Equity capital is also known as “Common Stock” or common share capital that represents
ownership in a company.
Share capital is of two kinds- Preference and equity share capital

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ISSUE OF SECURITIES AT A PREMIUM [SECTION 52]

As such the provisions of the Companies Act does not restrict issue of securities at a premium
i.e. a company can raise money with any amount of premium, however, there are certain
conditions with respect to the utilization of the amount of premium collected on such securities,
which are as follows :
1. For issuing fully paid-up bonus shares.
2. Writing off the balance of preliminary expenses.
3. Writing off commission paid or discount allowed on issue of shares or debentures.
4. For providing premium payable on redemption of redeemable preference shares or debentures.
5. For buying back securities of the company.
Any amount received by way of premium shall be transferred to Securities Premium Account.
Any premium paid does not give the shareholder any preferential rights in case of a winding
up. Monies in the securities premium account cannot be treated as free reserves, as they are
in the nature of capital reserve [See Departmental Circular No. 3/77 dated 15.4.1977].
Where a company issues shares at a premium, even though the consideration may be other
than cash, a sum equal to the amount or value of the premium must be transferred to the
securities premium account. [Head (Henry) & Co. Ltd. v. Ropner Holding Ltd.]
ISSUE OF SHARES AT DISCOUNT [SECTION. 53]
Except in case of sweat equity shares, company cannot issue shares at a discount. Any share
issued by a company at a discounted price shall be VOID.
A company may issue shares at a discount to its creditors when its debt is converted into
shares as per any statutory resolution plan or debt restructuring scheme.
When a company contravenes the provisions of this section, the company shall be punishable
with penalty which shall not be less than one lakh rupees but which may extend to five lakh
rupees and every officer who is in default shall be punishable with imprisonment for a term
which may extend to six months or with penalty which shall not be less than one lakh rupees
but which may extend to five lakh rupees, or with both.
ISSUE OF SHARES WITH DIFFERENTIAL VOTING RIGHTS (SECTION 43)
No company shall issue equity with differential rights as to dividend or voting unless it complies
with the following conditions:
1) It is authorized by its Articles of Association.
2) The issue is authorized by an ordinary resolution. In case of listed companies, it shall be
passed through postal ballot
3) Shares with differential rights shall not exceed seventy four percent of total voting power
including voting power in respect of equity shares with differential rights issued at any point of
time.
4) The Company has not defaulted in filing financial statements and annual returns in the last
3 preceding financial years.
5) The company has not defaulted in payment of declared dividend to its shareholders or
redemption
or payment of interest on deposits or debentures or any bank loan.
6) The company has not been penalized by any court or tribunal during the last 3 years for any

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offence under RBI Act, SEBI Act, SCRA or FEMA.

Provided that a company may issue equity shares with differential rights upon expiry of five
years from the end of the financial year in which such default was made good.
Points to remember
- The company shall not convert its existing equity share capital with voting rights into equity
share capital carrying differential voting rights and vice versa.
- The Board of Directors are required to disclose the details of the issue of equity shares with
differential rights in the Board’s Report for the financial year in which was completed.
- The holders of the equity shares with differential rights enjoys all other rights such as bonus
shares, rights shares etc., which the holders of equity shares are entitled to, subject to the
differential rights with which such shares have been issued.
- When a company issues equity shares with differential rights, the Register of Members shall
contain all the particulars of the shares so issued along with details of the shareholders.
PROCEDURE FOR ISSUE OF EQUITY SHARES WITH DIFFERENTIAL VOTING RIGHTS
1. Check whether the Articles of Association of the company authorizes issue of equity shares
with differential rights.
2. Hold the Board meeting to issue the notice of general meeting of issuance of equity share
with differential rights.
3. If the company is listed with any of the recognized stock exchange, then within 30 minutes
of the completion of the Board Meeting, intimate to the Stock Exchange about the decision
whether the board approved such issue or not.
4. Pass the ordinary resolution in the general meeting or through Postal Ballot.
5. Once the company makes any allotment, then it shall within 30 days file with the Registrar a
return allotment in Form PAS-3.
6. In case of listed company, send copies of the notice and a copy of the proceedings of the
general meeting to the stock exchange within 24 hours of the event.
7. Make necessary entries in the register of members. In case of issue of shares in demat form,
inform the depositories about the same for credit to the respective accounts.
ISSUE OF SWEAT EQUITY SHARES [SECTION. 54]
Meaning
Sweat Equity shares means equity shares issued by a company to its directors or employees at
a discount or for consideration other than cash for providing know-how or making available
rights in the nature of intellectual property rights or value additions, by whatever name called.
‘‘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 of a subsidiary, in India or outside India, or of a holding company
of the company;
Conditions
The following conditions are required to be fulfilled for issue of sweat equity shares namely:
1. It shall be authorized by a special resolution in the General Meeting.
2. Explanatory statement is required to be attached to the notice of such meeting.

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3. The special resolution passed for sweat equity shall be valid for a period of 12 months from
the date of special resolution.
4. Issue of such equity shares shall not exceed 15% of the existing paid up equity share capital
in a year or the shares of the issue value of Rs. 5 crores, whichever is higher & 25% of the
paid up equity capital of the company at anytime.
Provided further that a start-up company, as defined in notification number GSR 180(E) dated
17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of
Commerce and Industry, Government of India, may issue sweat equity shares not exceeding
fifty per cent of its paid up capital upto five ten years from the date of its incorporation or
registration.
5. The price of sweat equity shall be determined by a registered valuer.
6. The company shall maintain the register in Form SH3.
7. Depending upon whether company is listed or an unlisted company it shall comply with SEBI
rules or company rules as the case may be.
8. The holders of such shares shall rank pari passu with other equity shareholders.
9. The sweat equity shares issued to directors or employees shall be locked in for a period of
three years from the date of allotment.
ISSUE & REDEMPTION OF PREFERENCE SHARES [SECTION 55]
1. A company, if so authorized by its articles shall issue preference shares which are liable to be
redeemed within a period not exceeding 20 years from the date of issue.
2. In case of infrastructure companies, preference shares can be issued for a period of 20 years
but not exceeding 30 years, subject to redemption of minimum of 10% of such preference
shares per year beginning from 21st year on a proportionate basis.
3. Preference shares shall be redeemed only when they are fully paid.
4. It shall be redeemed either out of the profits of the company or proceeds of fresh issue of
shares made for such purpose.
5. A sum equivalent to the nominal value of shares so redeemed shall be transferred to Capital
Redemption Reserve Account.
6. Premium on such shares, if any, shall be paid out of securities premium account.
7. In case, if the company is not able to redeem the preference shares, it shall with the permission
of shareholders holding 3/4th in value of such shares and with the approval of the tribunal
issue equal amount of redeemable preference shares. On such issue, the unredeemed preference
shares shall be deemed to have been redeemed.
8. Such issue requires permission of the shareholders by way of a special resolution.
9. When a company issues preference shares, entries in the Register of Members shall contain
the particulars in respect of such preference shareholders.
PROCEDURE FOR ISSUE AND REDEMPTION OF PREFERENCE SHARES
1. The articles of the company should authorize for it, if not then amendment in the articles of
the company is required. Also ensure that there is no subsisting defaults in redemption of
preference shares earlier or in payment of dividend due on any preference shares.
2. Issue the notice of general meeting along with the explanatory statement. In the case of listed
entity, intimate the stock exchange at least two working days in advance of the date of board

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meeting.
3. Pass special resolution and file with the registrar Form MGT-14 within 30 days of passing the
resolution.
4. Within 30 days of allotment file with the registrar the Return of allotment in Form PAS-3.
5. Update the register of members.
6. Deliver the share certificates of allotted shares within a period of 2 months from the date of
allotment.
7. Intimate the details of allotment of shares to the Depository immediately on allotment of such
shares.
8. The company may redeem the preference shares only on the terms on which they were issued
or as varied.
9. The preference shares may be redeemed as given below:
a. At affixed time or happening of a particular event
b. Any time at the company’s option
c. Any time at the shareholders option
10. The notice of redemption of preference shares shall be filed by the company with the Registrar
in Form SH-7 along with altered MOA within 30 days of redemption of preference shares.
FURTHER ISSUE OF SHARES/RIGHTS ISSUE OF SHARES (SECTION 62)
1. If at any time, a company proposes to increase its subscribed capital by issue of further shares,
such shares would be offered first to the existing shareholders on proportionate basis. Such
issue of shares is known as rights issue of shares.
2. A letter of offer is required to be sent to such shareholders at least 3 days before the issue
opens.
3. Right issue shall remain open for a minimum period of 7 15 days and for a maximum period of
30 days, in which shareholders shall decide whether they wish to subscribe to the shares or
not. However, if 90% of the members of a private limited company have given their consent
either in writing or through electronic mode, time limit for acceptance of offer by existing
shareholders may be less than 15 days.
4. The shareholders may either accept, refuse or renounce the offer made to them provided the
same is warranted by the terms of the articles. In case of no reply, the offer shall be treated
as declined.
5. If the offer is given to some other persons other than the existing shareholders, following
conditions are required to be met.
i) A special resolution in the general meeting shall be passed to that effect.
ii) The company has obtained a valuation report from the registered valuer to determine the value
of such shares.
6. The provisions of section 62 are applicable to all types of companies except the Nidhi companies
Exceptions
i) The above provisions are not applicable in case of conversion of loans or debentures into share
of the company.
ii) In the public interest, if government has issued directions for the conversions of debentures or
loans obtained from any government into the shares.

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PROCEDURE FOR RIGHTS ISSUE

1. Check whether the rights issue results in increase of authorized capital.
2. If so call a board meeting to approve the notice of General meeting to pass necessary special
resolutions at the general meeting to amend Memorandum/Articles of Association.
3. Convene the general Meeting and obtain shareholders’ approval through Special Resolution.
4. This notice shall be dispatched through Registered post or speed post or through electronic
mode to all the existing shareholders atleast three days before the opening of the issue.
However, in case of private companies in case 90% of members have given their consent in
writing or in electronic mode, the lesser period than the specified period shall apply.
5. The offer must be accepted within 7 days and not exceeding 30 days from the date of the
offer.
6. Check the copy of form SH7, MGT14 filed with ROC.
7. The shares declined by the existing shareholder can be disposed off by the company in manner
which is not disadvantageous to the shareholders and the company.
8. Once the allotment is made, the company shall within 30 days of allotment, file with the
Registrar return of allotment in Form PAS3.
9. Deliver the share certificates of allotted shares within a period of 2 months from the date of
allotment.
10. Intimate the details of allotment of shares to the Depository immediately on allotment of such
Shares
BONUS ISSUE OF SHARES [SECTION 63]
1. A company may, if its Articles provide, capitalize its profits by issuing fully-paid bonus shares.
2. When a company is prosperous and accumulates large distributable profits, it converts these
accumulated profits into capital and divides the capital among the existing members in proportion
to their entitlements.
3. Members do not have to pay any amount for such shares. They are given free. The bonus
shares allotted to the members do not represent taxable income in their hands.
Advantages of Issuing Bonus Shares
1. Fund flow is not affected adversely.
2. Market value of the Company’s shares comes down to their nominal value by issue of bonus
shares.
3. Market value of the members’ shareholdings increases with the increase in number of shares
in the company.
4. Bonus shares is not an income. Hence it is not a taxable income.
5. Paid-up share capital increases with the issue of bonus shares.
Sources for issue of Bonus shares
According to section 63(1), a company may issue fully paid-up bonus shares to its members,
in any manner whatsoever, out of—
i) its free reserves;
ii) the securities premium account; or
iii) the capital redemption reserve account.
Conditions for issue of Bonus Shares
In terms of section 63(2), no company shall capitalise its profits or reserves for the purpose

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of issuing fully paid-up bonus shares, unless—

a) it is authorised by its articles;
b) it has, on the recommendation of the Board, been authorised in the general meeting of the
company;
c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it;
d) it has not defaulted in respect of the payment of statutory dues of the employees, such as,
contribution to provident fund, gratuity and bonus;
e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paidup;
f) the bonus shares shall not be issued in lieu of dividend.
g) the company which has once announced the decision of its Board recommending a bonus issue,
shall not subsequently withdraw the same.
PROCEDURE FOR ISSUE OF BONUS SHARES
1. Check whether the Article of Association authorizes issue of bonus share. If not, the name
and the Articles of Association of the company by passing the Special Resolution.
2. Check whether the Bonus issue results in increase of authorized capital. If so, make necessary
alterations in the Memorandum/Articles of Association by passing Special Resolution.
3. In the case of listed entity, give prior intimation to the stock exchange at least two working
days in advance of the date of Board Meeting excluding the date of intimation and the date
of the meeting
4. Hold the Board Meeting and get the following proposal to be approved by the Board:
(i) To recommend the bonus issue;
(ii) To approve the resolution to be passed at a general meeting;
(a) To authorize the Bonus issue
(b) To approve requisite resolution for increase of the capital and consequential alteration of the
Memorandum of Association/Articles of Association (if necessary)
(c) To enable the Articles to authorize the issue, if necessary.
5. Ensure that bonus issue has been made out of free reserves built out of the profits or securities
premium or capital redemption reserve account.
6. Ensure that reserves created by revaluation of assets are not capitalized.
7. Ensure that the company has not defaulted in repayment of debts or statutory dues.
8. Ensure that the bonus issue is not made in lieu of dividend.
9. The company which has once announced the decision of its Board recommending a bonus issue
shall not subsequently withdraw the same.
10. If there are any partly paid-up shares, ensure that these are made fully paid-up before the
bonus issue is recommended by the Board of directors.
11. Hold the general meeting and get the resolution/s for issue of bonus shares passed by the
members.
12. Once Special Resolution is passed file Form MGT-14 with the Registrar within 30 days of
passing of the resolution along with the altered article of association.
13. Within 30 days of allotment file with the registrar the Return of allotment in Form PAS-3.
14. All share certificates shall be delivered to the shareholders within two months from the date
of allotment.
15. Intimate the details of allotment of shares to the Depository immediately on allotment of

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suchshares.
16. In case of listed companies, the company shall comply with SEBI Regulations.
EMPLOYEES STOCK OPTION SCHEME (ESOP) [SECTION 62 (1) (b)]
As per sec. 2(37) of the Companies Act, 2013, ESOP means right or an option given to the
directors, officers or employees of a company or of its holding company or subsidiary company
or companies, which gives such director, officers or employees, the benefit or right to purchase
or to subscribe for the shares of the company in future at a pre-determined price.
Eligibility
1. A permanent employee working in or outside India.
2. A director whether whole time or not but excluding an independent director.
3. An employee of a subsidiary, in India or outside India, or of a holding company of the company
but does not include any employee who is a promoter or part of the promoter group or a
director who either himself or through his relative or through any body corporate holds more
than 10% of the total equity share capital of the company.
“Provided that in case of a startup company, as defined in notification number GSR 180(E)
dated 17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry
of Commerce and Industry Government of India, Government of India, the conditions
mentioned in sub-clause (i) and (ii) shall not apply up to ten years from the date of its
incorporation or registration
Requirements
1. Any ESOP issue done by the company shall be approved by the company in general meeting
by passing a special resolution.
2. For any variation or change in the ESOP scheme, the same shall also require sanction of the
shareholders by way of a special resolution.
3. If the issue (ESOP) exceeds 1% of the issued capital of the company in any year, it shall also
require permission of shareholders by way of special resolution.
4. In case of ESOP, company is free to specify any lock-in period.
5. In case of ESOP, a certificate from the Auditors is to be placed at the AGM stating that the
scheme has been implemented as per the guidelines and in accordance with the special resolution
passed. In the case of ESPS, no such certificate is required.
6. Directors’ Report: Directors’ report shall contain the following disclosures about ESOP Scheme:
i) The total number of shares covered by ESOP as approved by the shareholders;
ii) The pricing formula;
iii) Options granted, options vested, options exercised, options forfeited, etc.,
iv) Fully diluted earnings per share (EPS) computed in accordance with International Accounting
Standards.
Important Considerations
1. Grant Date:
Grant date is the date on which list of eligible employees or directors is determined and an
offer is given to all of them.
2. Vesting Date:
On this date, all those eligible persons who were being offered ESOPs, have a right to reply
and the company accordingly vests the said number of stock options in their favour.
3. Exercise Date:

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All the options which are vested, are now due for exercise on this particular date i.e. the
employees have a right to exercise the options granted to them.
Lock in period
There has to be a minimum gap of 1 year between grant date and vesting date. However, for
lock in, the company is free to decide the lock in period on the shares, issued pursuing to
exercise of options.
No options shall carry right of dividend or interest till the time they are converted into shares.
Listed companies are bound to comply with SEBI regulations.
Transfer of options granted
The option granted to employees shall not be transferable to any other person. The same shall
not be pledged, hypothecated, mortgaged. No person other than the employees to whom the
option is granted shall be entitled to exercise the option.
Death, permanent incapacity or resignation of an employee
In case of death of employee while in employment, all the options granted to him till such
date shall vest in the legal heirs or its nominees. 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. 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.
Maintenance of Register
A company issuing ESOPs is required to maintain a register under form SH-6 which shall be
kept at the registered office of the company and be authenticated by an authorised person.
PROCEDURE FOR ESOP
1. Convene a Board Meeting to approve the notice of the General meeting to be approved by the
shareholders through special resolution. In case of private company, it is sufficient that they
obtain ordinary resolution.
2. The approval of shareholders by way of separate resolution shall be obtained by the company
in case of-
(a) Grant of option to employees of subsidiary or holding company; or
(b) Grant of option to identified employees, during any one year, equal to or exceeding one per
cent
of the issued capital of the company.
3. There shall be a minimum period of one year between the grant of options and vesting of
option.
4. The option granted to employees shall not be transferable to any other person.
5. The details to be disclosed in Board of directors should be ensured.
6. The company shall maintain a Register of Employee Stock Options in Form No. SH.6 and shall
enter therein the particulars of option. Such registrar shall be maintained at the registered
office of the company or such other place as the Board may decide.
7. Once the allotment is made, the company shall within 30 days of allotment, file with the
Registrar a return of allotment in Form PAS3.
8. Deliver the share certificates of allotted shares within a period of 2 months from the date of

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allotment.
9. Intimate the details of allotment of shares to the Depository immediately on allotment of such
shares.
10. In case of a listed company, Employees Stock Option Scheme shall be issued in accordance
with the regulations made by SEBI.
ISSUE OF SHARES ON PREFERENTIAL BASIS [SECTION 62 (1) (C)]
Meaning of Preferential Allotment of Shares
‘Preferential Offer’ means an issue of shares or other securities, by a company to any select
person or group of persons on a preferential basis and does not include shares or other securities
offered through a public issue, rights issue etc
Conditions for Preferential Issue
A listed issuer may make a preferential issue of specified securities, if:
a) The issue is authorised by the articles of association of the company;
b) A special resolution has been passed by its shareholders;
c) All the equity shares, if any, held by the proposed allottees in the issuer are in dematerialized
form;
d) The issuer is in compliance with the conditions for continuous listing of equity shares as
specified in the listing agreement with the recognized stock exchange where the equity share
of the issuer are listed; and
e) The issuer has obtained the Permanent Account Number of the proposed allottees.
f) the allotment of securities on a preferential basis shall be completed within a period of twelve
months from the date of passing of the special resolution. If the allotment of securities is not
completed within twelve months from the date of passing of the special resolution, another
special resolution shall be passed for the company to complete such allotment thereafter.
g) The price of the shares or other securities to be issued on a preferential basis, either for cash
or for consideration other than cash, shall be determined on the basis of valuation report of a
registered valuer;
h) Where shares or other securities are to be allotted for consideration other than cash, the
valuation of such consideration shall be done by a registered valuer who shall submit a valuation
report to the company giving justification for the valuation;
Procedure for preferential issue of shares
(a) Check whether the issue is authorized by Articles. If not make necessary amendments to alter
the articles of association, through special resolution passed at the shareholders’ meeting.
(b) Convene a Board Meeting to approve the notice of General Meeting.
(c) Convene General Meeting and pass necessary Special Resolution.
(d) Ensure to file Form MGT-14 with Registrar of Companies within 30 days of passing the
Resolution.
(e) The allotment of securities on a preferential made pursuant to the special resolution passed
shall be completed within a period of 12 months from the date of passing of the special
resolution.
(f) the price of the shares or other securities to be issued on a preferential basis, either for cash
or for consideration other than cash, shall be determined on the basis of valuation report of a
registered valuer;
(g) Once the allotment is made, the company shall within 30 days of allotment, file with the

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Registrar a return of allotment in Form PAS3.

(h) Deliver the share certificates of allotted shares within a period of 2 months from the date of
allotment.
(i) Intimate the details of allotment of shares to the Depository immediately on allotment of such
Shares
PRIVATE PLACEMENT OF SECURITIES [SECTION 42]
1) Private placement means offer to a select group of persons, to subscribe to the securities of
the company for making an invitation, who have been identified by the Board (herein
referred to as "IDENTIFIED PERSONS"),
2) The number of persons to whom such offer shall be made cannot go beyond 50 in numbers
which excludes Qualified Institutional Buyers & employees who are allotted shares under ESOP
scheme in a FINANCIAL YEAR.
3) Private Placement Offer letter shall be made to IDENTIFIED PERSONS accompanied by an
application form serially numbered & addressed either physically or in electronic form within
30 days of recording of names of such invitees. The private placement offer and application
shall NOT carry any right of RENUNCIATION.
4) The company is not allowed to advertise such issue in any form or in any form of print media.
It is strictly given on private basis.
5) The company has to pass a special resolution in general meeting for such issue. The MCA vide
its notification dated October 16, 2020 has provided relaxation to QIBs also along with the
existing relaxation available in case of offer or invitation for Non-convertible debentures. It
now states that in case of offer or invitation of any securities to qualified institutional buyers,
it shall be sufficient if the company passes a previous special resolution only once in a year
for all the allotments to such buyers during the year.
6) All the monies collected shall be kept in a separate bank account & can only be collected by
way of cheques and not in cash.
7) Offer Letter under such issue shall be filed in Form PAS-4 with ROC within 30 days from the
date of circulation of private placement offer letter.
8) All the records of such offer shall be maintained by the company in Form PAS-5.
9) Allotment shall be made within a period of 60 days from the receipt of the application. If
not, money received shall be repaid within 15 days after the expiry of 60 days. If the company
fails to repay the application money within the aforesaid period, it shall be liable to repay
that money with interest at the rate of 12% per annum from the expiry of the 60 th day.
10) Return of Allotment is required to be filed in Form PAS-3 with the ROC along with prescribed
fee within 15 days of allotment. A company shall not utilise monies raised through private
placement unless allotment is made and the return of allotment is filed with the Registrar.
11) The above mentioned provisions are not applicable to a Non Banking Financial Company and
Housing Finance Company.
12) In case of debt issue, if the amount to be raised through such offer or invitation does not
exceed the limit specified in Section 180(1)(c), in such cases relevant Board Resolution under
Section 179(3)(c) would be adequate.
13) In case of offer or invitation for non-convertible debentures, where the proposed amount to be
raised through such offer or invitation exceeds the limit specified in Section 180(1)(c),it shall
be sufficient if the company passes a previous special resolution only once in a year for all the

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offers or invitations for such debentures during the year.

14) Sub-rule (2) to Rule 14 provides that an offer or invitation to subscribe securities under private
placement shall not be made to persons more than two hundred in the aggregate in a financial
year. The limit of two hundred persons shall exclude the qualified institutional buyers and
employees of the company being offered securities under a scheme of employees stock option.
It is further clarified that the restrictions aforesaid would be reckoned individually for each
kind of security that is equity share, preference share or debenture.
15) MCA has inserted a new proviso stating that no offer or invitation to securities shall be made
to the nationals of or entities incorporated in a country sharing border with India until and
unless they have obtained Government approval under the Foreign Exchange Management
(Nondebt
Instruments) Rules, 2019 and attach the same with the private placement offer cum
application letter and the relevant modification to be made in Form PAS-4.
CANCELLATION OF SHARE CAPITAL
1. Diminution of Share Capital is the cancellation of unsubscribed part of issued capital which
can be done by ordinary resolution. Diminution of capital is not reduction of share capital.
2. Redemption of Redeemable preference shares.
3. Purchase of shares of a member by the company on an order of the Tribunal.
4. Buy Back of shares
5. Surrender of shares
6. Forfeiture of shares
SURRENDER OF SHARES
As such, Companies Act, 2013 does not contain a provision on surrender of shares. At the same
time, there is no restriction also on such surrender of shares. It all depends upon the
articles of association of the company whether shares can be surrendered or not. Surrender
of shares shall tantamount to cancellation of share capital.
REDUCTION OF SHARE CAPITAL [SECTION 66]
1. For effective reduction, a special resolution in the General Meeting and an order of the tribunal
shall be obtained.
2. The Tribunal shall give notice of such application for reduction to Central Government, ROC,
Auditors, and SEBI in case of listed companies. The said authorities shall within a period of
3 months from the date of such notice send their representations, if any.
3. Tribunal once satisfied that, the debt or claim of every creditor of the company has been
discharged or a no objection certificate has been obtained from them, it shall issue such order
for reduction of share capital.
4. The order of confirmation of reduction shall be published by the company in such a manner
as the Tribunal may direct.
5. The certified copy of the order of the tribunal shall be filed with the Registrar within 30 days
of its receipt. Registrar shall issue necessary certificate to that effect which shall be a conclusive
proof that the capital of the company stands redirect.
MODES OF REDUCTION OF SHARE CAPITAL UNDER COMPANIES ACT, 2013
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1. Reduce or extinguish the liability on any of its shares in respect of share capital not paid up
e.g., where the shares are of Rs 100 each with Rs 75 paid-up reduce them to Rs 75 fully paidup
shares and thus relieve the shareholders from liability on the uncalled capital of Rs 25 per
share;
2. Either with or without extinguishing or reducing liability on any of its shares, pay of any paid
up share capital which is in excess of the wants of the company where the shares are fully
paid-up, reduce them to Rs 75 each and pay back, Rs 25 per share, and
3. By writing off or cancelling the capital which has been lost or is under represented by the
available assets e.g. a share of Rs. 100 fully paid-up is represented by Rs. 75 worth of assets.
BUY BACK OF SECURITIES (SECTION 68)
Meaning
Buy back of securities means the company buys its own shares and extinguishes the same
before the name of the company is entered in its register of members.
Advantages of buy back
1. It is an alternative mode of reduction in capital without requiring approval of the Court/NCLT,
2. to improve the earnings per share;
3. to improve return on capital, return on net worth and to enhance the long-term shareholders
value;
4. to provide an additional exit route to shareholders when shares are undervalued or thinly
traded;
5. to enhance consolidation of stake in the company;
6. to prevent unwelcome takeover bids;
7. to return surplus cash to shareholders;
8. to achieve optimum capital structure;
9. to support share price during periods of sluggish market condition;
10. to serve the equity more efficiently.
Sources of buy back
A company may purchase its own securities out of:
i) its free reserves; or
ii) the securities premium account; or
iii) the proceeds of any shares or other specified securities.
Authority
1. Buy back of securities shall be primarily authorised by the articles of association of the
company.
2. Buy-back can be made with the approval of the Board of directors at a board meeting and/or
by a special resolution passed by shareholders in a general meeting, depending on the quantum
of buy back.
3. In case of a listed company, approval of shareholders shall be obtained only by postal ballot.
Quantum of Buy Back
a) Board of directors can approve buy-back up to 10% of the total paid-up equity capital and
free reserves of the company.
b) Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up
capital and free reserves of the company. However, in case of buy back of equity shares the
limit of 25% of paid up capital shall be construed as 25% of Equity paid up capital.

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c) In respect of any financial year, the shareholders can approve by special resolution upto 25%
of total equity capital in that year.
Conditions for Buy Back
1. Debt equity ratio post buy back of securities shall be 2:1. However, in case of government
company carrying out a Non-Banking Finance Institution activities and Housing Finance Activities
may maintain such ratio upto 6:1.
2. Securities bought back shall only be fully paid securities.
3. A declaration of solvency signed by at least two directors of the company, one of whom shall
be the managing director, if any, in Form No. SH.9 and verified by an affidavit to the effect
that the Board of Directors of the company has made a full inquiry into the affairs of the
company as a result of which they have formed an opinion that it is capable of meeting its
liabilities and will not be rendered insolvent within a period of one year from the date of
declaration adopted by the Board.
Filing of letter of offer
1. The company which has been authorized by a special resolution shall, before the buy-back of
shares, file with the Registrar of Companies a letter of offer in Form No SH 8, along with the
fee as prescribed.
2. Such letter of offer shall be dated and signed on behalf of the Board of directors of the
company by not less than two directors of the company, one of whom shall be the managing
director, where there is one.
Dispatch of letter of offer
The letter of offer shall be dispatched to the shareholders or security holders immediately after
filing the same with the Registrar of Companies but not later than 21 days from its filing with
the Registrar of Companies.
Time period for buy back offer
1. The offer for buy-back shall remain open for a period of minimum period of 15 days and for a
maximum period of 30 days from the date of dispatch of the letter of offer.
2. Buy back shall be completed within a period of one year from the date of its approval the
shareholders or board of directors of the company, as the case may be.
3. Where all members of a company agree, the offer for buy-back may remain open for a period
less than fifteen days.
Methods of buy back
a) from the existing shareholders or security holders on a proportionate basis;
b) from the open market;
c) by purchasing the securities issued to employees of the company pursuant to a scheme of
stock option or sweat equity.
Extinguishment of securities bought back
Securities bought back shall be extinguished within a period of 7 days from the date of
completion of buy back.
Prohibition on further issue of securities
Once the securities are bought back, it shall not issue securities of the same kind within 6
months except by way of bonus issue.
Register of buy back
When a company buys back its securities, it shall maintain a register of securities, the consideration

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paid for the shares or securities bought back, the date of cancellation of shares or
securities, the date of extinguishing and physically destroying the shares or securities and such
other particulars as may be prescribed.
Return of buy back
A company shall, file with the Registrar and SEBI, a return of buy-back within thirty days of
such completion in Form No. SH.11, a certificate in Form No SH.15 signed by two directors of
the company including the managing director.
Prohibition on buy back
No company shall directly or indirectly purchase its own shares or other specified securities—
➢ through any subsidiary company including its own subsidiary companies;
➢ through any investment company or group of investment companies;
Consideration of financial statements for buy back
Normally, last audited financial statements were taken into consideration for calculating the
limits under buy back done by a company. However, with this addition, if the audited accounts
are more than six months old, the calculations with reference to buy back shall be on the
basis of un-audited accounts not older than six months from the date of offer document which
are subjected to limited review by the auditors of the company.
MEANING OF PROSPECTUS [SECTION 2(70)]
Section 2(70) of the Companies Act, 2013 defines a prospectus as any document described or
issued as a prospectus and includes a red herring prospectus, shelf prospectus or any notice,
circular, advertisement or other document involving offers from the public for the subscription
or purchase of any securities of a body corporate.
For any document to be called as a prospectus, it must fulfill the following :
1. There must be an invitation to the public.
2. The invitation must be made by or on behalf of the company.
3. The invitation must be to subscribe for any securities of the company.
A document is deemed to be issued to the public if the invitation to subscribe is open to
anyone. However, an issue if directed to specified person or group of persons shall not constitute
public.
CONTENTS OF PROSPECTUS (SECTION 26)
No prospectus shall be issued by or on behalf of a company or in relation to an intended
company unless on or before the date of its publication, there has been delivered to the
Registrar for registration filing a copy thereof signed by every person who is named therein as
a director or proposed director of the company or by his duly authorized attorney.
A prospectus issued under sub-section (1) shall not include a statement purporting to be made
by an expert unless the expert is a person who is not, and has not been, engaged or interested
in the formation or promotion or management, of the company and 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 registration filing and a statement to that
effect shall be included in the prospectus.
Every prospectus issued shall, on the face of it,—
(a) state that a copy has been delivered for registration filing to the Registrar as required

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under sub-section (4); and

(b) Specify any documents required by this section to be attached to the copy so delivered or
refer to statements included in the prospectus which specify these documents.
RED-HERRING PROSPECTUS [SECTION. 32]
1) Red-herring prospectus means a prospectus which does not include complete details with
respect
to price or quantum of securities.
2) A company in case of public issue, through book building process issues red-herring prospectus.
3) It shall be filed with the registrar atleast 3 days prior to the opening of the subscription list.
4) It shall carry the same obligations as that of the prospectus.
ABRIDGED PROSPECTUS [SECTION. 33]
1) Red-herring prospectus means a prospectus which does not include complete details with
respect
to price or quantum of securities.
2) A company in case of public issue, through book building process issues red-herring prospectus.
3) It shall be filed with the registrar atleast 3 days prior to the opening of the subscription list.
4) It shall carry the same obligations as that of the prospectus.
ABRIDGED PROSPECTUS [SECTION. 33]
) Abridged prospectus means a prospectus which contains such information as specified by SEBI.
2) Such prospectus shall be attached with the application form for purchase of securities of the
company.
3) In following cases, abridged prospectus is not required to be issued :-
i) Where the offer is not made to the public
ii) In case of underwriting agreements.
iii) Where offer is made to the existing debenture holders or members of the company.
iv) In case of further public offers.
SHELF PROSPECTUS [SECTION. 31]
1. Shelf Prospectus means a prospectus, which when issued once, the company is not required to
issue any other offer document for one or more issues for a certain period.
2. A shelf prospectus may be filed with the registrar at the time of first offer of securities, whose
validity shall not be more than 1 year from the date of opening of the 1st offer of securities.
3. In case of any issue during the said period, a company is just required to file an information
memorandum intimating the changes that have happened since the last issue.
4. Information memorandum shall be filed in form PAS-2 within one month prior to the issue of
a second or subsequent offer of securities.
5. Such prospectus is applicable to banking companies and financial institutions.
OFFER FOR SALE
Public Offer includes an offer for sale (OFS) of securities to the public by an existing shareholder,
through issue of a prospectus.

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- The document Offer for sale is an invitation to the general public to purchase the shares of a
company through an intermediary, such as an issuing house or a merchant bank. A company
may allot shares or debentures to an Issue house and the issue house in turn makes an Offer
for sale to the public.
- All rules and disclosures as applicable to a prospectus shall apply in the same way to an offer
for sale also.
- For it be an Offer for Sale it must fulfill either of the following conditions:
(a) “Offer for sale” to the public was made within six months after the allotment or agreement
to allot; or
(b) at the date when the offer was made, the whole consideration to be received by the company
in respect of the securities had not been received by it.
As for the signing of the Prospectus the section provides that where a person making an offer
is a company or a firm, the Offer document is signed on behalf of the company by two
directors of the company and in case of a firm by not less than one-half of the partners in
the firm.
OFFER FOR SALE BY CERTAIN MEMBERS OF A COMPANY (SECTION 28)
Members of a company, in consultation with Board of directors, can offer the whole or a part
of their holdings of shares to the public.
- The document by which the offer of sale to the public is made shall be deemed to be a
prospectus issued by the company.
- All laws and rules in this case as to the contents of the prospectus shall apply as if this is a
prospectus issued by the company.
- The section lays that the members, whether individuals or bodies corporate or both, whose
shares are proposed to be offered to the public, shall collectively authorise the company, whose
share were offered for sale to the public, to take all actions in respect of offer of sale for and
on their behalf and they shall reimburse the company all expenses incurred by it on this
matter.
CONCEPT OF ISSUE AND ALLOTMENT
Section 23 of the Companies Act, 2013 provides that a company whether public or private may
issue securities:
- to public through prospectus called as public offer (applicable only to a public company) or
- through private placement or
- through a rights issue or a bonus issue
According to 2(81) of Companies Act, 2013 “securities” means the securities as defined in
clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. As per section
2(h) of Securities Contracts (Regulation) Act, 1956,‘Securities’ includes the following:
➢ Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a
like nature in any incorporated company or other body corporate.
➢ Derivative.
➢ Units or any other instrument issued by any collective investment scheme.
➢ Government securities.
➢ Security receipt as defined in SARFAESI Act, 2002.

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➢ Such other instruments as may be declared by the Central Government.

➢ Rights or interests in securities.
➢ Units or any other such instrument issued under any mutual fund scheme.
➢ Any certificate or instrument (by whatever name called), issued to an investor by any issuer
being a special purpose distinct entity which possesses any debt or receivable, including mortgage
debt.
CONDITIONS OF ALLOTMENT
1. It should be made by proper authority ie it can only be done by board of directors or a
committee on behalf of the board.
2. It should be made within reasonable time. Once allotted, securities must be issued within a
period of 2 months from the date of allotment.
3. Allotment should be absolute and unconditional.
4. It must be communicated. Posting of letter of allotment or allotment advice will be taken as
a valid communication.
5. Allotment should always be against the application.
6. It should not be in contravention of any law.
7. No allotment shall be made, until minimum subscription has been received on such share
applications. Minimum subscription shall be atleast 90% of the total issue size.
8. The application money shall be at least 5% of nominal value of the amount of security.
9. It must be received within a period of 30 days from the issue of prospectus or such other date
as may be prescribed by SEBI.
10. If the money is not received within the stipulated period, it shall be returned within 15 days
from the closure of issue or else it shall attract payment of interest @ 15% p.a.
11. A return of allotment is required to be submitted in Form PAS-3 within 30 days of such
allotment.
12. Further, in the case of securities (not being bonus shares) allotted as fully or partly paid up
for consideration other than cash, 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 shall be attached to the Form PAS-3.
13. When a contract 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, require that the stamp duty payable be adjudicated. Further a report of a
registered valuer in respect of valuation of the consideration shall also be attached along with
the contract of sale if relating to property or an asset or a contract for services.
ISSUE OF SHARE CERTIFICATES
1. A share certificate is a certificate issued to the members of the company under its common
seal specifying the number of shares held by him and the amount paid per share.
2. Each share issued shall have a distinctive number of its own.
3. For issue of share certificates, a board resolution is required to be passed.
4. Such share certificate is issued in Form SH-1 which shall bear the name of the member.

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5. It must be issued under the common seal of the company.

6. It must be signed by at least two directors of the company, or by a director and the company
secretary, wherever the company has appointed company secretary.
7. In case of a One Person Company, every share certificate shall be issued under its seal shall
be signed by one director and authenticated by either a company secretary or by a person
authorized by the Board.
8. A director shall be deemed to have signed the share certificate if his signature is printed
thereon as a facsimile signature by means of any machine, equipment or other mechanical
means or digitally signed, but not by means of a rubber stamp.
9. Particulars of such share certificate shall be entered in the register of member.
ISSUE OF DUPLICATE SHARE CERTIFICATE
1. A duplicate share certificate may be issued, if the original certificate lost or destroyed or has
been defaced, mutilated or torn and is surrendered to the company.
2. The company shall issue duplicate share certificate with the prior consent of board of directors
of the company.
3. The applicant is required to submit with the company, the following documents:
i) Copy of a First Information Report for loss of such share certificate
ii) Indemnity Bond
iii) Affidavit confirming that the statements made in the Indemnity are true and correct
iv) Copy of newspaper advertisement indicating loss of such certificates, if it is provided by the
articles of association.
v) An application in writing, requesting the company to issue such duplicate share certificate.
4. The company may charge a fee not exceeding Rs 50 for issue of such duplicate share certificate.
5. If the company is listed then the duplicate share certificate shall be issued within a period of
45 days. However, in case of unlisted companies, the time period is 3 months.
6. The said issue can be done by either the board of directors or by a committee thereof.
7. A register of duplicate share certificates shall be maintained in Form SH2 by the company at
its registered office or at such other place where the Register of Members is kept and it shall
be preserved permanently and shall be kept in the custody of the company secretary of the
company or any other authorized person.
8. The new certificate shall bear the following mark duplicate share certificate issued in lieu of
original certificate.
9. If a company with intent to defraud issues a duplicate certificate of shares, the company shall
be punishable with fine which shall not be less than five times the face value of the shares
involved in the issue of the duplicate certificate but which may extend to ten times the face
value of such shares or rupees ten crores whichever is higher and every officer of the company
who is in default shall be liable for action under section 447, for fraud.
TIME FOR ISSUE OF SECURITY CERTIFICATES
Subscription
Within 2 months
from the date of
the incorporation
and subscription

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thereof
Allotment
Within 2 months
from the date of
allotment
Transfer/Transmission
of shares
Within 30 days from
the date of receipt
of application
Allotment of debentures
Within 6 months from
the date of allotment
SIGNIFICANCE OF SHARE CERTIFICATE
1. A certificate of shares is evidence that the allottee is holding a certain number of shares of
the company showing their nominal and paid-up value and distinctive numbers.
2. This certificate is a prime facie evidence of title to the shares in the possession of shareholders.
3. Moreover, when the company issues a certificate, it holds out to the world that the facts
contained therein are true.
4. Any person acting on the faith of the share certificate of the company, can compel the
company to pay compensation for any damage caused by reason of any misstatement in the
share certificate as the company is bound by any statements made in the certificate.
5. Share certificate is the only documentary evidence of title and that the share certificate is a
declaration by the company that the person in whose name the certificate is issued is a
shareholder in the company.
SPLIT CERTIFICATE
A split certificate means a separate certificate claimed by a shareholder for a portion of his
holding. The advantages of a split certificate are that the shareholder may benefit in case of
a transfer by way of sale or mortgage in small lots and the right to multiply the certificates
into as many shares held by the shareholder.
WHETHER SHARE CERTIFICATE IS AN OFFICIAL PUBLICATION?
The Department has clarified that shares in a company are movable property transferable in
the manner provided in the articles of the company. The Act further provides that a certificate
signifies ownership of shares to a member.
Thus, shares are transferable movable property and that the share certificates are certificates
of title and are movable property but are not publications in the nature of prospectus, balance
sheet, profit and loss account, notice or advertisement. The conclusion reached, therefore, is
that the share certificate is not an official publication
LEGAL EFFECTS OF A SHARE CERTIFICATE
Estoppel as to Title
No one apart from the one whose name
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is mentioned on the share certificate

shall claim ownership of those shares
Estoppel as to Payment
Once the share is fully paid up, the
company cannot claim further money
from those shares
PUNISHMENT FOR PERSONATION OF SHAREHOLDERS
Where any person deceitfully personates an owner of any share and obtains such shares or
receives or attempt to receive any money due to any such owner, he shall be punishable with
imprisonment for a term which shall not be less than one year but which may extend to 3
years and with fine which shall not be less than one lakh rupees but which may extend to 5
lakh rupees.
TRANSFER OF SHARES
1. An application in form SH – 4, along with the share certificate shall be made to the company
for transfer of securities.
2. Such form shall be duly stamped, signed, executed & dated by the transferor &the transferee
& within 60 days from the date of execution, delivered to the company.
3. In case of partly paid shares, the company shall give notice in Form SH – 5, to the transferee
& obtain a no objection certificate within 2 weeks from the date of application of transfer,
without which the same shall not be registered.
4. Every company shall deliver the certificates of all securities allotted, transferred or transmitted,
within a period of one month from the date of receipt by the company of the instrument of
transfer.
5. A declaration has to be made by the transferee prior to share transfer in Form No. SH-4
regarding whether he/she is required to obtain Government approval under the Foreign Exchange
Management (Non-debt Instruments) Rules, 2019. Earlier no such declaration was required to
be made by the transferee
Case Law on Refusal of Transfer
Bajaj Auto Ltd V/s N.K. Firodia
In the leading case of Bajaj Auto Ltd. v. N.K. Firodia, the Supreme Court held that even where
the Articles give directors absolute and uncontrolled discretion to register or decline registration
of shares, the directors will act bona fide for the paramount interest of the company and in
the general interests of the shareholders because they are in a fiduciary position both towards
the company and towards every shareholder. In all such cases, the following three points have
to be considered:-
a) Whether the directors have acted in the interests of the company?
b) Whether they acted on a wrong principle?
c) Whether they acted with an oblique motive for a collateral purpose?
Such refusal must be conveyed in writing to the transferor and the transferee, within the
stipulated time period from the date on which the instrument was deposited with the company,
giving reasons for refusal. Therefore, the directors cannot exercise their discretion to refuse

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transfer of shares without disclosing reasons for refusal even after they act bona fide in the
interest of the Company.
The transferor or transferee is entitled to appeal to the Tribunal against any refusal of the
company to register the transfer. An appeal herein shall be made within two months of the
receipt of the notice of such refusal or in case no notice has been sent by the company, then
within four months from the date on which the instrument of transfer was delivered to the
Company.
RECTIFICATION OF REGISTER OF MEMBERS (SECTION 59)
1. The act provides that if the name of any person is wrongly entered or is omitted from the
register of members the person aggrieved, or any member of the company, or the company
may appeal in prescribed form, to the Tribunal, or to a competent court outside India, specified
by the Central Government by notification, in respect of foreign members or debenture holders
residing outside India, for rectification of the register.
2. The Tribunal may, after hearing the parties to the appeal, by order, either dismiss the appeal
or direct that the transfer or transmission shall be registered by the company within 10 days
of the receipt of the order or direct rectification of the records of the depository or the register.
STAMP DUTY ON TRANSFER OF SHARES AND DEBENTURES
1. A company cannot register the transfer of securities unless a proper instrument of transfer
duly stamped, dated & executed by or on behalf of the transferor and the transferee has been
delivered to the company along with the certificate.
2. As per Indian Stamp Act, 1899 the stamp duty @ the rate of 0.25% on Rs 100 shall be
Payable
3. On transfer of debentures while calculating the stamp duty, the rate at the higher of the two
shall be paid.
a) The place where the instrument of transfer has been executed
OR
b) The place where the Registered Office of the company is situated.
4. Any stamp affixed on such transfer deed shall not be considered as duly stamped unless such
stamps have been cancelled.
5. If the instrument is not sufficiently stamped or it is not properly cancelled, the company shall
be under no obligation to transfer such securities.
TRANSFER OF SHARES OF A PRIVATE LIMITED COMPANY
Transfer of shares means transfer of ownership from one person to another. It happens inter
vivo i.e. between two living persons.
The section 2(68) of the Companies Act 2013 restricts the right to transfer shares but does
not prohibit the right to transfer shares.
The right to transfer may be subjected to restrictions contained in the articles and there
cannot be total prohibition or ban on transferability of shares. However, only permissible
restriction on transferability may be contained in the Articles of association.
Restriction on right to transfer shares is generally placed by using following two methods:
(a) Right of pre-emption: If a member wishes to sell some or all of his shares, such shares shall

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first be offered to other existing members of the company at a price determined by the
directors or by the auditor of the company or by the use of formula set out in the articles. If
no existing member is determined to acquire shares, then shares can be transferred by the
transferor to the proposed transferee. Articles of Association of private company provide that
the shares are to be sold under pre-emption clause at a fair price determined by the directors
or the auditor of the company. It may also be provided that the fair price would be certified
by the auditor of the company.
(b) Powers of directors to refuse registration of transfer of shares: The Powers of directors to
refuse registration of transfer of shares are specified in the articles of association of the
company. This power is to be exercised by the Board of directors in good faith.
TRANSMISSION OF SHARES (SECURITIES)
1. Transmission of securities takes place when the registered holder of securities dies or is
adjudicated
as an insolvent or if it is a company, it goes into liquidation.
2. In case of death of the member, the shares go to his legal heirs or the nominee, if appointed.
3. On the insolvency of a shareholder, his shares vest in the Official Assignee or Receiver, who
may get himself registered as holder of these shares, or dispose them off. He can also disclaim
partly – paid shares or fully – paid shares which are subject to mortgage or other encumbrance.
4. For transmission of securities, no document is required to be executed as it takes effect by
the operation of law and it largely depends upon its provisions in memorandum and articles of
association.
5. A succession certificate or a letter of probate is a sufficient proof for transmission of shares.
TRANSFER OF SHARES TO A MINOR
1. As per the Indian Contract Act, 1872, a person who has attained the age of majority is only
competent to contract.
2. Since a minor cannot enter into a contract or agreement except through a guardian, it follows
that his name cannot be entered in the Register of Members and therefore, he cannot become
a member of a company.
3. However, there is no objection in law to the guardian of a minor entering into a contract on
behalf of a minor.
4. Since Section 56 of the Companies Act, 2013, the transfer deed can be executed by a minor
through his natural guardian as transferee.
TIME FOR POINTING OUT INSUFFICIENCY OF STAMPS
Where a company by mistake or otherwise registers a transfer which should have been refused
because of insufficient or unconcealed stamps, or because of the instrument being unstamped,
it should point out the error to the transferee within one year from the date of execution.
BLANK TRANSFERS
1. When the transferor signs the transfer form without filling in the name of the transferee and
the date of execution and hands over such transfer deed along with the share certificate to
the transferee to let him deal with those shares, it is called as a blank transfer.

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2. Such blank transfers are usually done in the case of pledging of securities, where such shares
are kept with the lender as a form of security.
3. A blank transfer does not result into transfer of ownership till the time it is duly executed and
registered and the transferee gets a clear title of those shares only when it is registered with
the company.
FORGED TRANSFER
1. A forged transfer is a nullity (null & void) and therefore, no ownership of shares can be
transferred by way of a forged transfer.
2. In case of a forged transfer, the original owner of those shares can apply to the company and
get his name restored on the register of members.
3. However, if the company issues the share certificate to the transferee and he further sells it
to an innocent purchaser, the company is liable to compensate for such a purchase.
4. If the company suffers losses because of such damages paid to the innocent purchases the
company shall have a right to recover the same from the person who did such forged transfer
CERTIFICATION OF TRANSFER
Where a shareholder sells only a part of his shares (and not all) mentioned in the share
certificate, the procedure for registration of transfer of shares is slightly different.
In this case, the share certificate is not handed over to the buyer along with the instrument
of transfer. Both these documents are lodged by the transferor at the Company’s registered
office. The Company retains the share certificate, endorses the instrument with the words
“Certificate lodged” and returns it to the transferor. This process is known as “certification of
the transfer”.
The transferor then sends the certified instrument of transfer to the transferee who applies
to the Company for registration. The company cancels the original certificate and in its place
issues two new certificates; one to the transferor to cover the shares, which he continues to
own; and the other to the transferee for the shares he has purchased
DEATH OF TRANSFEROR OR TRANSFEREE BEFORE THE DATE OF REGISTRATION
Where the transferor dies and the company has no notice of his death the company would
obviously register the transfer. But if the company has notice of his death, the proper course
is not to register until the legal representative of the transferor has been referred to.
Where the transferee dies and company has notice of his death, a transfer of shares cannot
be registered in the name of the deceased. With the consent of the transferor and the legal
representatives of the transferee, the transfer may be registered in the names of the later.
But if there is a dispute, an order of Court will have to be insisted upon.
TRANSPOSITION OF SHARES
Changing the order of the names of the joint holders is known as transposition. It is done for
the immediate purpose of receiving dividend as dividend is declared in the order specified in
the joint holders name
TRANSMISSION OF SHARES TO A WIDOW

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If a widow applies for transmission of the shares standing in the name of her deceased husband
without producing a succession certificate and if the articles of association of the company so
authorises, the directors may dispense with the production of succession certificate, probate or
letter of administration upon such terms as to indemnity as the directors may consider necessary,
and transmit the shares to the widow of the deceased by obtaining an indemnity bond.
TRANSMISSION OF JOINT HOLDINGS
In case some shares are registered in joint names and the articles of the company provide that
the survivor shall be the only person to be recognised by the company, then the shares shall
not be issued in favor of the legal heir of the deceased member.
In the absence of such provision in the articles of the company, the legal representatives
are entitled to the shares held by deceased member and the company must accept the evidence
of succession e.g., a succession certificate or letter of administrations or probate or any other
evidence properly required by the Board of directors.
RIGHTS OF TRANSFEREE
1. Right to Dividend, Bonus and Rights shares: If even after the transfer, the transferor has
received any dividend on shares, bonus or other benefits accruing in respect thereof, the
transferee can recover the same from him.
2. Dividend to transferee after the transfer: Once the shares are transferred to the transferee,
he’s lawfully entitled to receive all the corporate benefits accruing on such shares. Come what
may, the transferor is no more entitled to such benefits.
LIEN ON SHARES
Lien means right to retain anything belonging to another until his claims are satisfied. The
articles of a company invariably provide that the company shall have a first and paramount
(supreme) lien on shares not fully paid–up or for debts due to the company. In case of fully
paid–up shares as well, the articles may provide for the company’s first and paramount lien on
them. This enables the company to secure and recover any debts due from a member. Where
such power is given by the articles, the company may sell the shares on which it has a lien
for the recovery of a debt which is presently payable after giving him fourteen days notice.
Any surplus is to be paid to the concerned members
DEPOSITORIES
Introduction
The Depositories Act, 1996 has introduced the system of depositories in India. It has come into
force with effect from 20th September, 1995.
A depository is an organization where the securities of an investor are held in the electronic
form at his request through the medium of a Depository Participant (DP). If the investor
wants to utilize the services offered by a Depository, the investor has to open a beneficiary
account with the Depository through a DP. DP is the representative or agent in the depository
system and it maintains the investor’s securities account balances and intimates to him the
status of his holding from time to time. The investor can open accounts with one or more DPs.
When a person buys any security e.g. shares and debentures already in the depository mode,
the buyer will become owner of the said security in the depository within a day of settlement
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being made / completed. The buyer is not required to apply to the company for registering the
security in his name.
Definition and Meaning of Depository
According to Section 2(e) of the Depositories Act, 1996: “Depository means a company formed
and registered under the Companies Act, 1956 and which has been granted a certificate of
registration under Section 12 (1A) of the Securities and Exchange Board of India Act, 1992”.
There are two depository players in the market i.e., National Securities Depository Limited
(NSDL) and Central Depository Service (India) Limited (CDSL).
The name of the depository shall appear in the Register of the Issuer (i.e. the company), as
the registered owner of the securities. The depository shall have the right to affect the transfer
of securities on behalf of the beneficial owner (i.e. the investor) but shall not have voting and
other rights associated with the securities.
Definition and Meaning of Depository Participant
Depository Participant (DP) is the agent of the depository and is an interface between the
depository and the investor. According to SEBI Guidelines, financial institutions, banks, custodians,
stock brokers etc. can become depository participants.
Stocking Holding Corporation of India Limited (SHCIL) is the first depository participant in
India registered with NSDL. Besides SHCIL, a number of new and private and foreign banks
like Times Bank, HDFC Bank, ICICI Bank, IDBI Bank, Hong Kong Bank, Standard Chartered
Bank provide depository services to their customers from their various branches.
ADVANTAGE OF HOLDING SECURITIES IN THE ELECTRONIC MODE
- No stamp duty on transfers.
- Faster delivery and fund settlement.
- No odd lot–trading is possible in any lot.
- Eliminates risks associated with physical deliveries such as loss, theft, forgery etc.
- Eliminates handling of large volumes of paper.
- Facilitates pledge and hypothecation
OPENING A BENEFICIARY ACCOUNT
The procedure for opening a beneficiary account is as under:
i) Fill up account opening form and submits photographs of each signatory.
ii) PAN number to be provided by the investor.
iii) Signs agreement with DP.
iv) DP intimates Account No.
v) The Account number has to be quoted by the investor, every time that he corresponds with
the DP.
DEMATERIALIZATION (CONVERSION OF PHYSICAL SHARES INTO ELECTRONIC SHARES)
The procedure for dematerialization is as under:-
i) Submit dematerialization request form (DRF) along with the share certificates (transferred in
the name of the investor).
ii) Deface share certificates as “surrendered for dematerialization”.
iii) DP electronically transmits DRF to the depository.

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iv) DP sends the share certificates and physical DRF to the RTA/ Company.
v) Depository electronically transmits the demat request and confirms to Depository Participant.
vi) RTA/ Company checks authenticity of request and confirms to Depository.
vii) Depository confirms dematerialization request to DP.
viii) Investor’s account with DP is credited.
ix) DP sends Statement of Transaction to the investor
REMATERIALISATION (CONVERSION OF ELECTRONIC SHARES INTO PHYSICAL SHARES)
The procedure for rematerialisation of securities is a follows:-
i) The beneficial owner sends the request in rematerialisation request form (RRF) to DP.
ii) DP intimates the Depository of such request electronically.
iii) Depository confirms the rematerialisation request to the RTA/ Company.
iv) RTA/ Company updates account and prints certificates and confirm the Depository.
v) Depository updates account and downloads the details to DP.
vi) RTA/ Company dispatches the certificates to the holder thereof.
vii) DP also sends the intimation about rematerialisation to its client.
PLEDGE OR HYPOTHECATION OF SECURITIES
If a beneficial owner intends to create a pledge/hypothecation on a security owned by him, he
shall make an application to the Depository through his Depository Participant.
The Depository, after confirmation from the pledge (Pawnee) that the securities are available
for pledge with the pawner, shall, within 15 days of the receipt of application, create and record
the pledge and send the intimation of the same to the Depository Participants of the pledgor
and the pledgee. On receipt of intimation, the Depository Participants of both the pledgor and
the pledgee shall inform the pledgor and the pledgee respectively of the entry of creation of
pledge/hypothecation.
The entry of pledge/ hypothecation made may be cancelled by the Depository if the pledgor or
pledge makes an application to the Depository through their Depository Participants. It may be
noted that if the application for cancellation of the entry of pledge has been made by the
pledge, then it shall be cancelled by Depository only with the prior concurrence of the pledge.
ISSUE OF SECURITIES IN DEMATERIALISED FORM BY UNLISTED PUBLIC COMPANIES
[Amended by The Companies (Amendment) Act, 2019- Effective From 15th August 2019]
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 public companies as may be prescribed, shall issue the securities
only in dematerialised 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. (NEWLY INSERTED).
RECONCILIATION OF SHARE CAPITAL AUDIT REPORT (HALF-YEARLY)
Every unlisted public company to which the provisions of issue of securities in dematerialised
form are applicable is required to submit E-Form PAS-6 w.r.t. Reconciliation of Share Capital
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Audit Report on a Half-Yearly basis to the Registrar of Companies with such fee as prescribed
within sixty days from the conclusion of each half year duly certified by a company secretary
in practice or chartered accountant in practice.

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CHAPTER 5 - MEMBERS AND SHAREHOLDERS

CONCEPT OF MEMBERSHIP
In the case of a company limited by shares, the shareholders are the members. The terms
“members” and “shareholders” are usually used interchangeably, as there can be no
membership except through the medium of shareholding. Thus, every shareholder is a member
and every member is a shareholder. However, there may be exceptions to this statement, e.g.,
a person may be a holder of share(s) by transfer but will not become its member until the
transfer is registered in the books of the company in his favour and his name is entered in
the register of members. Similarly, a member who has transferred his shares, though he does
not hold any shares yet he continues to be member of the company until the transfer is
registered and his name is removed from the register of members maintained by the company.
Meaning
According to Section 2(55) of the Companies Act, 2013:
1) The subscribers to the memorandum of a company who shall be deemed to have agreed to
become members of the company, and on its registration, shall be entered as members in its
register of members;
2) Every other person who agrees in writing to become a member of a company and whose name
is entered in its register of members shall, be a member of the company;
3) Every person holding shares of a company and whose name is entered as a beneficial owner in
the records of a depository shall be deemed to be a member of the concerned company.
The person desirous of becoming a member of a company must have the legal capacity of
entering into an agreement in accordance with the provisions of the Indian Contract Act, 1872.
MODES OF ACQUISITION OF MEMBERSHIP[SECTION 2(55]
1. By subscribing to the memorandum:
In the case of a subscriber, no application or allotment is necessary to become a member. By
virtue of his subscribing to the memorandum, he is deemed to have agreed to become a
member, and he become ipso facto member on the incorporation of the company and is liable
for the shares he has subscribed.
A subscriber to the memorandum cannot rescind the contract for the purchase of shares; even
on the ground of fraud by the promoters [Metal Constituents Company Case].
2. By an application and allotment:
A person who applies for shares becomes a member when shares are allotted to him, a notice
of allotment is issued to him and his name is entered in the register of members.
3. By transfer of shares :
A person can become a member by acquiring shares from an existing members and by having
the transfer of shares registered in the books of the company, i.e. by getting his name entered
in the register of members of the company.
4. By transmission of shares:
A person may become a member of a company by operation of law, e.g. if he succeeds to the
estate of a deceased member. On the death of a member, his executor or the person who is
entitled under the law to succeed to his estate gets the rights to have the shares transmitted

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and registered in his name in the company’s register of members.

5. By acquiescence (accept without protest) or estoppel :
A person is deemed to be a member of a company if he allows his name, without sufficient
cause, to be in the register of members of the company or otherwise holds himself out or
allows himself to be held out as a member. In such a case, he is estopped from denying his
membership.
6. By holding shares as beneficial owner in the records of a depository:
A person holding equity share capital of a company whose name is entered in the records of
the depository shall deemed to be a member of the concerned company.
WHO CAN BE A MEMBER
1. Company as a member of another company:
A company is a legal person and so is competent to enter into a contract. Therefore, it can
become a member of any other company. However, it must be authorized by its memorandum
of association to invest in the shares of that company or any other company.
It may be noted that Section 42 provides that a subsidiary company cannot become a member
of its holding company. However, there are certain exceptions to this rule enumerated below:-
i. Where a subsidiary company acts as the legal representative of a deceased member of the
holding company;
ii. Where the subsidiary company acts as a trustee for some shareholder of the holding company;
and
iii. Where it was its member before becoming subsidiary. But in this case, the subsidiary company
cannot exercise any right of vote at any meeting of the holding company.
2. Partnership firm as a member:
A partnership firm is not a legal person and so much it cannot, in its own name, become
member of a company. However, it can become a member of Section 25 Company.
3. Foreigners as members:
A foreigner may take shares in an Indian company and become a member with the general or
special permission of the RBI under FEMA, 1999, but in the event of war with his country of
residence, he becomes an alien enemy and his power of voting and his right to receive notice
is suspended.
4. Minor as Member:
A minor cannot become a member of a company since he is not competent to enter into a
contract. Consequently, an agreement by a minor to take shares is void ab–initio. But the
Company Law Board in Miss Nandita Jain v. Benett Coleman & Co. Ltd. has held that a minor
applying through his natural guardian for being registered as a member was entitled to be so
registered, if the shares are fully paid – up.
5. Pawnee:
A Pawnee has no right of foreclosure since he never had the absolute ownership at law and
his equitable title cannot exceed what is specifically granted by law. In this sense, a pledge
differs from a mortgage. In view of this, a Pawnee cannot be treated as the holder of the
shares pledged in his favour, and the pawner continues to be a member and can exercise the
rights of a member.
6. Receiver:

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A receiver whose name is not entered in the register of members cannot exercise any of the
membership rights attached to a share unless in a proceeding to which company is a party, an
order is made therein. Mere appointment of a receiver in respect of certain shares of a company
without more (rights) cannot, deprive the holder of the shares, whose name is entered in the
register of members of the company, of the right to vote at the meeting of the company.
7. Insolvent:
An insolvent may be a member of a company as long as he is on the register of members.
He is entitled to vote, but he loses all beneficial interest in the shares and company will pay
dividend on his shares to the Official Assignee or Receiver [Morgan v. Gray, (1953) All E.R.
213].
8. Trade Union:
A trade union, registered under the Trade Union Act, can be registered as a member and can
hold shares in the company in its own corporate name.
9. Limited liability Partnership (LLP):
An LLP is a body corporate and becomes a separate legal entity entitled to hold shares in its
own name.
10. Section 8 Company:
A section 8 company can acquire membership in a company if it is made permissible by its
memorandum and articles of association. As such, Companies Act, 2013 does not lay a
restriction on such companies to hold shares.
11. Persons taking shares in fictitious names:
A person who takes shares in the name of a fictitious person, becomes liable as a member
besides incurring criminal liability wherein punishment is provided for commission of fraud
under section 447.
GLOBAL DEPOSITORY RECEIPTS [GDRS] AS PER DEPOSITORY RECEIPTS SCHEME, 2014’
Meaning
Any instrument in the form of a depository receipt by whatever name called created by a
foreign depository outside India and authorized by an Indian Company making such issue of
DR’s.
The depository receipts can be issued by way of public offering or private placement or in any
other manner prevalent in the concerned jurisdiction and may be listed or traded on the listing
or trading platform in the concerned jurisdiction.
The proceeds of the issue of depository receipts maybe remitted in an International Financial
Services Centre Banking Unit (IBU) and utilized in accordance with the instructions issued by
the RBI from time to time.
Membership rights
Since, holder of Global Depository Receipts is neither the subscriber to the Memorandum nor
a holder of the shares, his name cannot be entered in the Register of Members. Therefore, a
holder of Global Depository Receipts cannot be called a member of the company.
1. As per section 2(55) a person holding a share capital of the company and whose name is
entered as beneficial owner in the records of the depository, is deemed to be a member of the
company.
2. A holder of Global Depository Receipts may become a member of the company only on

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conversion of GDRs into underlying equity shares.

3. Since the underlying shares are allotted in the name of Overseas Depository Bank foreign
depository, the name of such Overseas Depository Bank foreign depository is to be entered in
the Register of Members of the issuing company.
JOINT MEMBERSHIP
The members of the company are allowed to hold shares in the joint names provided such
number does not exceed 3.
SHARES IN THE NAME OF PUBLIC OFFICE
In case of the Central Government, shares are held in the name of President of India while in
case of State Government, they are held in the name of the Governor of the respective state.
CESSATION OF MEMBERSHIP
(a) He transfers his shares to another person;
(b) His shares are forfeited;
(c) His shares are sold by the company to enforce a lien;
(d) He dies; (his estate, however, remains liable for calls);
(e) He is adjudged insolvent and the Official Assignee disclaims his shares;
(f) His redeemable preference shares are redeemed;
(g) He rescinds the contract of membership on the ground of fraud or misrepresentation;
(h) His shares are purchased either by another member or by the company itself under an order
of the Tribunal under Section 242 of the Companies Act, 2013;
(i) The member is a company which is being wound-up in India;
(j) The company is wound up;
EXPULSION OF A MEMBER
According to Section 6 of the Companies Act, 2013, the Act overrides the Memorandum and
Articles of Association and any provision contained in these documents as against the provisions
of the Companies Act, is void.
The Department of Company Affairs (now MCA) has, therefore, clarified that any assumption
of the powers by the Board of Directors to expel a member by alteration of Articles of
Association shall be illegal and void
NUMBER OF MEMBERS
Private Limited Company: Min 2; Max 200
Public Limited Company: Min 7; Max Unlimited
One Person Company: Min and Max 1
REGISTER OF MEMBERS (SECTION. 88)
1. Every company limited by shares shall maintain a register of members in form MGT – 1.
2. Such registers or copies of return may also be kept at any other place in India in which more
than one-tenth of the total number of members entered in the register of members reside, if
approved by a special resolution passed at a general meeting of the company. A copy of the

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proposed special resolution in advance to be filed with the registrar, at least one day before
the date of general meeting of the company in Form No.MGT.14
3. Entries in such register shall be made within 7 days from the date of approval for transfer
approved by the Board or allotment done by the Board of Committee.
4. An index of members may be maintained by the company if the number of members are more
than 50.
5. It shall include the following materials as follows:
Name, Address, Occupation, Status, Nationality, Father, Mother or Spouse’s Name, Date of
becoming member, Date of Cessation, other interests if any.
6. Such register is open for inspection to any member, debenture holder or beneficial owner during
business hours without payment of any fee and by any other person on payment of such fee,
as may be provided by the articles, not exceeding Rs. 50.
7. A copy of the extracts of such register may be taken by any member, debenture holder or
beneficial owner or any other person without any fee or such other fee as may be provided but
not exceeding RS. 10.
8. The entries in the registers shall be authenticated by the company secretary of the company
or by any other authorised person of the Board.
9. It is a permanent register of the company, maintained during its entire life.
10. MCA has inserted a new rule to restrict the inspection of register or index or return in respect
of the members of accompany. Accordingly, particulars of the register or index or return in
respect of the members of a Company related to Address or Registered Address (in case of a
body corporate); e-mail ID; Unique Identification Number; PAN Number, shall not be made
available for any inspection or for taking extracts or copies.
FOREIGN REGISTER [SECTION 88(4)]
1. A company may, if so authorized by its articles, maintain a register anywhere outside India
containing the names and particulars of beneficial owners holding shares outside India.
2. Within 30 days from the opening of such register, the company shall file with the registrar in
Form MGT – 3, notice of situation of such register.
3. Such foreign resister shall be deemed to be the part of companies register and be maintained
in the same format as that of the principle register.
4. Entries in such register shall be made simultaneously after the board of directors approves the
allotment and transfer of shares.
5. The company shall transmit to its Registered Office in India, copy of every entry in the Foreign
Register within 15 days from the date of making of such entry.
CLOSURE OF REGISTER OF MEMBERS (SECTION. 91)
1. A company may close its register of members, debenture holders, security holders for a period
not exceeding 30 days at one time and not exceeding 45 days in a year.
2. A newspaper advertisement in English and vernacular language newspapers shall be published
at least 7 days before the date of such closure.
3. No securities shall be allowed to be transferred during the period of closure.
4. Record date is an alternate for closing the registers. The purpose of closing the registers is to
get the registers updated and to fix a cut-off date for the purpose of payment of dividend or
issue of rights and bonus shares. This purpose can also be achieved by fixing a record date for

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a day.
5. In a decided case law it was held that the provisions of section 91 of the Companies Act, 2013
are permissive and not mandatory. The section has application only when a company desires
to close its register of members and in such a situation, the requirements of the section are
to be complied with. Talyar Tea Co. v. Union of India.
6. The above mentioned provisions shall not be applicable to a private company provided that the
notice has been served on all members of the private company not less than seven days prior
to closure of the register of members or debenture holders or other security holders.
RIGHTS OF MEMBERS
Individual rights of a member are as follows
Members of a company enjoy certain rights in their individual capacity, which they can enforce
individually. These rights are contractual rights and cannot be taken away except with the
written consent of the member concerned. These rights can be categorised as under :
1) Right to receive copies of the following documents from the company :
i) Abridged financial statement and auditor’s report in the case of listed company [section 136].
ii) Report of the Cost Auditor, if so directed by the Government.
iii) Notices of the general meetings of the company [Sections 101-102].
2) Right to inspect statutory registers/returns and get copies thereof without payment on any fee
or on payment of prescribed fee.
The members have been given right to inspect the following registers etc. :
i) Debenture trust deed [section 71];
ii) Register of Charges and instrument of charges [section 85 & 87];
iii) Copies of contract of employment with Managing or Whole-time directors];
iv) Shareholders’ Minutes Book [Section 119];
v) Register of Contracts, Companies and Firms in which directors are interested [section 189];
vi) Register of directors and key managerial personal and their shareholding [Section 170];
3) Right to attend meetings of the shareholders and exercise voting rights at these meetings
either personally or through proxy [Sections 96, 100, 105 and 107].
4) Other rights.
Over and above the rights enumerated at item Nos. 1 to 3 above, the members have the
following rights
i) To transfer shares [Sections 44 and 56 and Articles of Association of the company).
ii) To resist and safeguard against increase in his liability without his written consent.
iii) To receive dividend when declared.
iv) To have rights shares [Section 62].
v) To appoint directors [Section 152].
vi) To share the surplus assets on winding up [Section 320].
vii) Right of dissentient shareholders to apply to Tribunal [section 48].
viii) Right to be exercised collectively by passing a special resolution and intimating the same to
the Central Government for investigation of the affairs of the company [Section 210].
ix) Right to make application collectively to the Tribunal for relief in cases of oppression and
mismanagement [Section 241].
x) Right to file class action suits before the Tribunal [Section 245].
xi) Right of Nomination [Section 72].

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xii) Right to file a suit or take any other action in case of any misleading statement or the
inclusion or omission of any matter in the prospectus [Section 37].
VARIATION OF MEMBERS RIGHTS
It is allowed only with the prior permission of shareholders by way of a special resolution. At
the same time, it shall also be made permissible by the memorandum and articles of association
of the company.
LIABILITY OF MEMBERS
In case of a company limited by shares, the liability of the members shall be limited to the
extent of shares held by them. Irrespective of the accumulated losses of the company, the
members in such cases as such do not hold any liability against the company.
NOMINATION BY SHAREHOLDERS [SECTION. 72]
1. A shareholder during his lifetime is allowed to nominate a person as a shareholder after his
death.
2. Such nomination shall be made in form SH - 13, be submitted with the company.
3. On receipt of such nomination, an entry in the register of security holders shall be made by
the company, within 2 months
4. In case of joint shareholders, nomination shall be made by all the shareholders jointly.
5. When the nominee is a minor, it shall be lawful for the holder of the securities to appoint any
person to become entitled to the securities of the company, in the event of the death of the
nominee during his minority.
6. In the event of death of the holder of securities, the person nominated may upon the production
of such evidence, elect, either to register himself as holder of the securities or transfer the
securities.
7. If the person being a nominee, so becoming entitled, elects to be registered as holder of the
securities himself, he shall deliver or send to the company a notice in writing signed by him
stating that he so elects and such notice shall be accompanied with the death certificate of
the deceased share or debenture holder(s).
8. A person, being a nominee, becoming entitled to any securities by reason of the death of the
holder shall be entitled to the same dividends or interests and other advantages to which he
would have been entitled to if he were the registered holder of the securities.
9. The Board may give notice requiring any such person to elect either to be registered himself
or to transfer the securities, and if the notice is not complied with within ninety days, the
Board may thereafter withhold payment of all dividends or interests, bonuses or other moneys
payable in respect of the securities, as the case may be, until the requirements of the notice
have been complied with.
10. A nomination may be cancelled, or varied by nominating any other person in place of the
present nominee, by the holder of securities who has made the nomination, by giving a notice
of such cancellation or variation, to the company in Form No. SH.14.
11. The cancellation or variation shall take effect from the date on which the notice of such
variation or cancellation is received by the company.
12. When the nominee is a minor, the holder of the securities, making the nomination, may appoint

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a person in Form No. SH.13, who shall become entitled to the securities of the company, in
the event of death of the nominee during his minority
VETO POWER
As per the provisions of the Companies Act, 2013, board has powers to take certain decisions,
while there are some instances where the consent of the shareholders is mandatory. Such
power of shareholders is called as the veto power or veto right of shareholders.
For example, in case of related-party transactions, promoters, who are majority shareholders,
cannot vote in special resolutions in cases of related-party transactions.
VETO POWER AND CASTING VOTE
Veto power is different than casting vote of Chairman. Casting vote is applicable on in case
of equality of votes in favour and against. In case of equality, the Chairman may give vote
either in favour or against the resolution and it can be carried accordingly. Veto power has
not been defined in Companies Act. However, dictionary meaning of veto power is: "to refuse
to admit or approve; specifically: to refuse assent to (a legislative bill) so as to prevent
enactment or cause reconsideration."
DECLARATION BY PERSONS NOT HOLDING BENEFICIAL INTEREST IN ANY SHARE (SEC 89)
Beneficial interest in shares, includes, directly or indirectly, through any contract, arrangement
or otherwise, the right or entitlement of a person alone or together with any other person to—
(i) exercise or cause to be exercised any or all of the rights attached to such share; or
(ii) receive or participate in any dividend or other distribution in respect of such share.
Section 89 (1) of the Companies Act, 2013 makes it obligatory on the part of a person, whose
name is entered in the register of members of a company as the holder of a shares in that
company but who does not hold beneficial interest in such shares to make a declaration to the
company specifying the name and other particulars of the person who holds the beneficial
interest in such shares.
Section 89 (2) of the Companies Act, 2013 further obligates any person who, holds or acquires
beneficial interest in a share of a company to make a declaration to the company specifying
the nature of his interest, the particulars of the person in whose name the shares stand
registered in the books of the company and such other particulars as may be prescribed.
Where any change occurs in the beneficial interest in such shares, the person referred in subsection
(1), and the beneficial owner specified under sub-section (2) shall make a declaration
within thirty days, from the date of such change to the company in the prescribed Form
containing the prescribed particulars. [sub section (3)]
If any person fails, to make a declaration as required under sub-section (1) or sub-section (2)
or sub-section (3), without any reasonable cause, he shall be punishable with fine which may
extend to fifty thousand rupees and where the failure is a continuing one, with a further fine
which may extend to one thousand rupees for every day after the first during which the failure
continues.
Sub-section (6) makes it obligatory on the part of the company to make a note of such a
declaration in the register concerned and to file within thirty days from the date of receipt of
declaration by it, with the Registrar of Companies, a return in the prescribed form with regard

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to such a declaration.
If a company, required to file a return under sub-section (6), fails to do so before the expiry
of the time specified therein i.e. thirty days from the date of receipt of declaration by the
company, then the company and every officer of the company who is in default shall be
punishable with fine which shall not be less than five hundred rupees but which may extend
to one thousand rupees and where the failure is a continuing one, with a further fine which
may extend to one thousand rupees for every day after the first during which the failure
continues. [Sub-section (7)]
A new sub-section 11 has been inserted which enables the Central Government to exempt any
class or classes of persons from complying with any of the requirements of this section
pertaining to Declaration in Respect of Beneficial Interest in any Share, except Section 89(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.
STEPS
(1) A person whose name is entered in the register of members of a company as the holder of
shares in that company but who does not hold the beneficial interest in such shares
(hereinafter referred to as “the registered owner”), shall file with the company, a declaration
to that effect in Form No. MGT4, within a period of thirty days from the date on which his
name is entered in the register of members of such company. When any change occurs in the
beneficial interest in such shares, the registered owner shall, within a period of thirty days
from the date of such change, make a declaration of such change to the company.
(2) Every person holding and exempted from furnishing declaration or acquiring a beneficial
interest
in shares of a company not registered in his name (hereinafter referred to as “the beneficial
owner”) shall file with the company, a declaration disclosing such interest in Form No. MGT
5, within thirty days after acquiring such beneficial interest in the shares of the company.
Where any change occurs in the beneficial interest in such shares, the beneficial owner shall,
within a period of thirty days from the date of such change, make a declaration of such change
to the company in Form No. MGT 5.
(3) Where any declaration under section 89 is received by the company, the company shall make
a note of such declaration in the register of members and shall file, within a period of thirty
days from the date of receipt of declaration by it, a return in Form No. MGT. 6 with the
Registrar in respect of such declaration with fee. Nothing contained in this rule shall apply in
relation to a trust which is created, to set up a Mutual Fund or Venture Capital Fund or such
other fund as may be approved by SEBI.
SIGNIFICANT BENEFICIAL OWNERSHIP (SECTION 90)
As amended by the Companies (Significant Beneficial Owners) Amendment Rules, 2019
Section 90 of the Act provides that every individual, who acting alone or together, or through
one or more persons or trust, including a trust and persons resident outside India, holds
beneficial interests, of not less than twenty-five per cent. or such other percentage as may be
prescribed, in shares of a company or the right to exercise, or the actual exercising of significant
influence or control as defined in clause (27) of section 2 of the Act, over the company
(herein referred to as “significant beneficial owner”), shall make a declaration to the company,

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specifying the nature of his interest and other particulars, in such manner and within such
period of acquisition of the beneficial interest or rights and any change thereof, as may be
prescribed.
Companies (Significant Beneficial Owners) Rules, 2018 as amended by the Companies
(Significant Beneficial Owners) Amendment Rules, 2019
Meaning of Significant Beneficial Owner
“significant beneficial owner” in relation to a reporting company means an individual referred
to in sub-section (1) of section 90, who acting alone or together, or through one or more
persons or trust, possesses one or more of the following rights or entitlements in such reporting
company, namely:
(i) holds indirectly, or together with any direct holdings, not less than ten percent of the
shares;
(ii) holds indirectly, or together with any direct holdings, not less than ten percent of the
voting rights in the shares;
(iii) has right to receive or participate in not less than ten percent of the total distributable
dividend, or any other distribution, in a financial year through indirect holding alone, or together
with any direct holdings;
(iv) has right to exercise, or actually exercises, significant influence or control, in any manner
other than through direct holdings alone.
Rule 2A of Companies (Significant Beneficial Owners) Rules, 2018 provides for Duty of
Reporting Company:
(1) Every reporting company shall take necessary steps to find out if there is any individual who
is a significant beneficial owner, as defined in clause (h) of rule 2, in relation to that
reporting company, and if so, identify him and cause such individual to make a declaration
in Form No. BEN-1.
(2) Every reporting company shall in all cases where its member (other than an individual), holds
not less than ten per cent of its shares, or voting rights, or right to receive or participate in
the dividend or any other distribution payable in a financial year, give notice to such member,
seeking information in accordance with subsection (5) of section 90, in Form No. BEN-4
Rule 3 of Companies (Significant Beneficial Owners) Rules, 2018 provides for Declaration
of significant beneficial ownership under section 90
On the date of commencement of the Companies (Significant Beneficial Owners) Amendment
Rules, 2019, i.e.08.02.2019, every individual who is a significant beneficial owner in a reporting
company, shall file a declaration in Form No. BEN-1 to the reporting company within ninety
days from such commencement.
Every individual, who subsequently becomes a significant beneficial owner, or where his
significant beneficial ownership undergoes any change shall file a declaration in Form No. BEN-
1 to the reporting company, within thirty days of acquiring such significant beneficial ownership
or any change therein.
Where an individual becomes a significant beneficial owner, or where his significant beneficial
ownership undergoes any change, within ninety days of the commencement of the Companies
(Significant Beneficial Owners) Amendment Rules, 2019, i.e. 08.02.2019, it shall be deemed
that such individual became the significant beneficial owner or any change therein happened
on the date of expiry of ninety days from the date of commencement of said rules, i.e.

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08.02.2019 and the period of thirty days for filing will be reckoned accordingly.
Central Government may prescribe a class or classes of persons who shall not be required to
make declaration as stated above.
Further every company shall maintain a register of the interest declared by individuals stated
above and changes therein which shall include the name of individual, his date of birth, address,
details of ownership in the company and such other details as may be prescribed. The company
shall maintain a register of significant beneficial owners in Form No. BEN-3. The register shall
be open for inspection during business hours, at such reasonable time of not less than two
hours, on every working day as the board may decide, by any member of the company on
payment of such fee as may be specified by the company but not exceeding fifty rupees for
each inspection.
Every company shall file a return of significant beneficial owners of the company and changes
therein with the Registrar containing names, addresses and other details as may be prescribed
within such time, in such form and manner as may be prescribed, where any declaration under
rule 3 of The Companies (Significant Beneficial Owners) Rules, 2018 is received by the
company, it shall file a return in Form No. BEN-2 with the Registrar in respect of such
declaration, within a period of thirty days from the date of receipt of declaration by it, along
with the fees as prescribed in companies (Registration offices and fees) Rules, 2014..
Sub-section 4A of Section 90 of the Act, provides that 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.
Sub-section 5 of Section 90 of the Act, provides that a company shall give notice, in the
prescribed manner, to any person (whether or not a member of the company) whom the
company knows or has reasonable cause to believe –
(a) to be a significant beneficial owner of the company;
(b) to be having knowledge of the identity of a significant beneficial owner or another person
likely to have such knowledge; or
(c) to have been a significant beneficial owner of the company at any time during the three
years immediately preceding the date on which the notice is issued, and who is not registered
as a significant beneficial owner with the company as required under this section.
The information required by the notice under Sub-section 5 of Section 90 of the Act, shall be
given by the concerned person within a period not exceeding thirty days of the date of the
notice.
According to Sub-section 7 of Section 90 of the Act, the company shall,—
(a) where that person fails to give the company the information required by the notice within
the time specified therein; or
(b) where the information given is not satisfactory,
apply to the Tribunal within a period of fifteen days of the expiry of the period specified in
the notice, for an order directing that the shares in question be subject to restrictions with
regard to transfer of interest, suspension of all rights attached to the shares and such other
matters as may be prescribed.
According to Sub-section 8 of Section 90 of the Act, on any application made to the Tribunal,
it may, after giving an opportunity of being heard to the parties concerned, make such order
restricting the rights attached with the shares within a period of sixty days of receipt of
application or such other period as may be prescribed. The company or the person aggrieved by

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the order of the Tribunal may make an application to the Tribunal for relaxation or lifting of
the restrictions within a period of one year from the date of such order.
Provided that if no such application has been filed within a period of one year from the date
of the order under sub-section (8) of Section 90 of the Act, such shares shall be transferred,
without any restrictions to the authority constituted under sub-section (5) of section 125, in
such manner as may be prescribed. (9A) The Central Government may make rules for the
purposes of this section. (Inserted by Companies Amendment Act 2019 w.e.f 15.08.2019)
If any person fails to make a declaration as required under Section 90 (1) of the Companies
Act, 2013, he shall be liable to a penalty of ₹ 50000 and in case of continuing failure, with a
further penalty of ₹ 1000 for each day after the first during which such failure continues,
subject to a maximum of ₹ 2 Lakhs.
If a company, required to maintain register under Section 90 (2) and file the information under
Section 90(4) or required to take necessary steps under Section 90 (4A) of the Companies
Act, 2013, fails to do so or denies inspection as provided therein, the company shall be liable
to a penalty of ₹ 1 Lakh and in case of continuing failure, with a further penalty of ₹ 500
for each day, after the first during which such failure continues, subject to a maximum of ₹
5 Lakhs and every officer of the company who is in default shall be liable to a penalty of
₹25000 and in case of continuing failure, with a further penalty of ₹ 200 for each day, after
the first during which such failure continues, subject to a maximum of ₹ 1 Lakh.
If any person wilfully furnishes any false or incorrect information or suppresses any material
information of which he is aware in the declaration made under this section, he shall be liable
to action under section 447.
ILLUSTRATIONS ON SBO
Illustration 1:
Capital Structure of Company ABC limited is as following: Equity Share Capital of Rs.
2,000 CCD’s of Rs. 3000 CCP’s of Rs. 1000 TOTAL Rs. 6,000 Mr. A beneficially holds Rs.
520 equity shares in the Company. Whether Mr. A beneficially required to give disclosure
under SBO?
Solution:
For the purpose of SBO Rules share capital includes (CCD’s and CCP’s). Therefore total share
capital of the Company is Rs. 6,000/-. Mr. A beneficially holds Share capital of Rs. 520/-. His
percentage of holding is 520/6000= 8.667%. As holding of Mr. A beneficially is less than 10%
therefore no need to give disclosures u/s 90 of SBO Provisions.
Illustration 2:
If an Individual (‘A’) holding shares in any Company (Exp. Mr. A Holding 60% shareholding
of ABC Pvt. Ltd. and his name entered into register of member) Whether provisions of
SBO shall be applicable on Mr. A or Not?
Solution:
“Significant Beneficial Owner”: means beneficial owner holding ultimate beneficial interest not
less than 10% and whose name not entered in the register of members of a Company. Therefore,
one can opine that SBO provision applicable on person who is holding beneficial interest and
whose name not entered into register of members. In above mentioned example individual
holding shares directly in the company in his name therefore provision of SBO not applicable
on such individual.

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Illustration 3:
If an Individual (“A’’) holding shares in any Company, (Exp. Mr. A Holding 7% shareholding
of ABC Pvt. Ltd. and his name not entered into register of member). On behalf of Mr. A
name of Mr. B entered into register of Members. Whether provisions of SBO shall be
applicable on Mr. A or Not?
Solution:
Significant Beneficial Owner means beneficial owner holding ultimate beneficial interest not
less than 10% and whose name not entered in the register of members of a Company. In the
above mentioned question, shareholding is less than 10% therefore question of SBO doesn’t
arise. No need to made compliances as per SBO.
Illustration 4:
If in the question B; Mr. A Holding 18% shareholding of ABC Pvt. Ltd. and his name not
entered into register of member). On behalf of Mr. A name of Mr. B entered into register
of Members. Whether provisions of SBO shall be applicable on Mr. A or Not?
Solution:
Mr. A is beneficial owner and Mr. B is registered owner. Mr. B holding shares on behalf of Mr.
A which is more than 10%. As per SBO provisions, Mr. A fall under conditions of Section 90.
Therefore, have to comply with the provisions of Section 90.
PRACTICAL SCENARIOS FOR DETERMINING SBOS
(i) S holds directly 10% of equity in A Ltd. and he holds 55% of equity in H Ltd. which holds
1% equity in A Ltd.
S holds directly 10% of equity in A Ltd. and he holds 55% of equity in H Ltd. which holds
1% equity in A Ltd. - S is a Significant Beneficial Owner since he holds 11% totally through
indirect and direct holdings.
(ii) S holds 8% of equity while M holds 7% of equity in A Ltd. and they are deemed to act
together.
S holds 8% of equity while Mr. M holds 7% of equity in A Ltd. and they are deemed to act
together – S and M are not Significant Beneficial Owner, as there is no indirect holding and
their acting together is irrelevant
(iii) S holds 8% of equity in A Ltd. directly. S is also the Karta of a HUF that holds 7% equity
in A Ltd.
S holds 8% of equity in A Ltd. directly. Mr. S is also the Karta of a HUF that holds 7% of
equity in A Ltd. S is a Significant Beneficial Owner since he holds total 15% equity through
indirect and direct holdings.
(iv) S holds 8% of equity in A Ltd. directly. S is also the trustee of a discretionary trust that
holds 3% equity in A Ltd.
S holds 8% of equity in A Ltd. directly. Mr S is also the trustee of a discretionary trust that
holds 3% equity in A Ltd. He is a Significant Beneficial Owner since he holds total 11% equity
in A Ltd. Through indirect and direct holdings. Holding by way of being a trustee of a
discretionary trust is considered to be indirect holding.
SHAREHOLDERS AGREEMENTS
Shareholders’ agreement is a contractual arrangement between the shareholders of a company

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describing how the company should be operated and the defining inter-se shareholders’ rights
and obligations.
There are numerous situations where such agreements are entered into - family companies, JV
companies, venture capital investments, private equity investments, strategic alliances, and so
on.
Such agreements are specifically drafted to provide specific rights, impose definite restrictions
over and above those provided by the Companies Act. A SHA creates personal obligation between
the members signing such agreement, however, such agreements do not become a regulation
of the company in the way the provisions of Articles are.
In India courts have either refused to recognize clauses in shareholders agreements or, even
when consistent with company legislation, enforced such clauses only if they have been
incorporated in the articles of association of the company. There is a series of rulings where
the courts have upheld that in case of any conflict between the Articles and the SHA, the
former will always prevail.
The Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan held that a restriction which is
not specified in the articles of association is not binding either on the company or on the
shareholders. This decision was reiterated by the Bombay High Court in IL & FS Trust Co.
Ltd. v. Birla Perucchini Ltd.
In Western Maharashtra Development Corporation Ltd. v. Bajaj Auto Ltd, it was held that
such clauses are to hamper the free transferability of shares and in violation of the Companies
Act, and hence, are not enforceable.
Subsequently in the case of Messer Holdings Limited v. Shyam Madanmohan Ruia and Ors,
the Division Bench of Bombay High Court overruled its judgement in Western Maharashtra
Development Corporation Ltd and provided a more liberal interpretation and recognised the
rights inter se among shareholders in case of restrictions on transfer of shares.
ASSIGNMENT OF SHARES IN A COMPANY
A “share” in a company is a right to a specified amount of the share capital of the company,
carrying with it certain rights and liabilities. A company cannot refuse to transfer shares except
as provided by its articles. As between buyer (transferee) and seller (transferor) of shares,
the buyer is entitled to all dividends declared after the contract of sale, unless otherwise
agreed. Whatever may be the agreement, a transfer of shares after declaration of dividend,
does not, as against the company, carry the dividend, even though the transfer may be cumdividend.

CHAPTER 6 - DEBT INSTRUMENTS – CONCEPTS

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POWERS OF COMPANY TO BORROW

1. The borrowing powers of the company shall be warranted by the terms of its articles of
association.
2. The company has further powers to delegate a part of the authority to its board of directors.
3. If the board has done any borrowing which is within the company’s authority but beyond the
powers of the board, the same shall be ratified by the company in general meeting.
4. However, if there is any borrowing which is beyond the powers of the company and the directors
have acted upon, for such acts, directors shall be held personally liable. Such borrowings are
called, ultra virus borrowings.
REMEDIES AVAILABLE IN CASE OF ULTRA VIRES BORROWINGS
1. Injunction and Recovery: The company can institute legal proceedings against such director
for an injunction order and for the recovery of money borrowed in excess.
2. Suit against Directors: A consequent proceeding shall be brought against such Directors for
breach of warranty of authority.
3. Subrogation: The purpose for which such excess borrowings have been utilised, and the creditor
of whose debts are settled, the lender shall assume the position of such creditor whose debts
have been repaid.
4. Void ab initio: The ultra-vires acts are null and void ab initio. These acts are not binding on
the company. Neither the company can sue, nor it can be sued for such acts.
5. Estoppel: Estoppel or ratification cannot convert an ultra-vires act into an intra-vires act.
DEBTS VS LOANS
1. A loan is money borrowed from a lender. The lender can be a bank or a financial institution.
Moreover, a loan is more structured in terms of payment, and the principal amount is paid back
to the borrower in instilments over a period of time.
2. The term debt means that debt is the money that the company raises through the issuance
of bonds and debentures. Governments, companies, trusts, or corporations can issue bonds and
debentures to fund their business, and the lender, in this case, will be the investor. The investor
will receive interest payment regularly until the bond or debenture matures. Also, upon maturity,
the investor gets back the entire principal amount in lump sum.
TYPES OF BORROWINGS
1. Long Terms Borrowings –Funds borrowed for a period ranging for five years or more are termed
as long-term borrowings.
2. Short Term Borrowings - Funds needed to be borrowed for a short period ie a period up to
one year are termed as short term borrowings.
3. Medium Term Borrowings - Where the funds to be borrowed are for a period ranging from
two to five years, such borrowings are termed as medium term borrowings.
4. Secured borrowing - A debt backed against the assets of the company are secured borrowings.
5. Unsecured debts– It comprise of financial obligations, where creditors do not have recourse
to the assets of the company to satisfy their claims.

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6. Syndicated borrowing – Borrowing made from a group of lenders is known as syndicated

borrowing. It is generally done when the borrower requires larger sums of capital.
7. Bilateral borrowing refers to a borrowing made by a company from a particular bank/financial
institution ie only two parties are involved - the company and the borrower.
8. Private borrowing comprises bank-loan type obligations whereby the company takes loan from
a bank/financial Institution.
9. Public borrowing is a general definition covering all financial instruments that are freely
tradable on a stock exchange.
CHARGE ON UNCALLED CAPITAL
A company cannot impliedly create a charge on its uncalled share capital, however, the same
may be done if it is provided by the articles or memorandum.
DEFINITION AND MEANING OF DEBENTURES [SECTION 2(30)]
A debenture is a document given by a company, to the holder, under its seal as an evidence
of debt, arising out of a loan which is most commonly secured by a charge.
Section 2(30) of the Companies Act, 2013 defines a debenture as:
“Debenture includes debenture stock, bonds and any other securities of a company, whether
constituting a charge on the company’s assets or not”.
FEATURES/ CHARACTERISTICS OF DEBENTURES
The usual features of a debenture are:-
1. A debenture is usually in the form of a certificate (like a share certificate) issued under the
common seal of the company.
2. The certificate is an acknowledgement by the company of indebtedness to a holder.
3. A debenture usually provides for the payment of a specified sum at a specified date. But that
is not essential. A company may issue perpetual or irredeemable debentures with no undertaking
to repay.
4. A debenture usually provides for payment of interest until the principal sum is paid back. But
again, this is not essential. Interest may be made payable subject to contingencies of uncertain
nature.
5. A debenture is, as a rule, one of a series, although a single debenture is not uncommon. There
may be a single debenture issued to one person.
6. The debentures carry no voting rights at any meeting of the company.
7. In case of secured debenture issue, appointment of debenture trustee is mandatory where the
company issues prospectus or letter of offer. In such a case, debenture trust deed must be
executed for the appointment of debenture trustee not later than 3 months after the date of
allotment of securities.
8. Debentures can be issued for a maximum period of 10 years, while in case of infra companies
it can be issued for 30 years.
KINDS OF DEBENTURES
1. Redeemable Debentures

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Debentures are generally redeemable, which means, they are issued on the terms that the
company is bound to repay the amount of debentures, either at a fixed date, or upon demand,
or after notice, or under a system of periodical drawings. Redeemable debentures can be reissued.
2. Perpetual or Irredeemable Debentures
A debenture, which doesn’t compel the company to pay the money back, is known as a
perpetual or irredeemable debenture. The company can choose when to repay the debt.
The debenture holder cannot demand payment as long as the company is a going concern and
does not make default in making payment of the interest.
3. Registered and Bearer Debentures
Registered debentures are made in the name of a particular person, whose name appears on
the debenture certificate and who is registered by the company as holder in the register of
debenture holders. Such debentures are transferable in the same manner as shares. Bearer
debentures, on the other hand, are made out to bearer, and are negotiable instruments, and so
transferable by mere delivery like share warrants. Bearer debentures do not carry the name of
the debenture holder.
4. Secured and Unsecured or Naked Debentures
Where debentures are secured by a mortgage or a charge on the property of the company, they
are called secured debentures. Where they are not secured by any mortgage or charge on any
property of the company, they are said to be naked or unsecured.
5. Convertible Debenture
Convertible debentures are those in which an option is given to the debenture holders to
exchange a part or whole of their debentures for shares in the company under certain conditions
and limitations imposed regarding the period during which the option may be exercised. This
enables the investor to change his position from a debenture holder to a shareholder when he
finds that company is in a sound position financially and begins to make profit.
DEBENTURE STOCK
Debenture stock is a borrowed capital, consolidated into one mass for the sake of convenience.
Instead of each lender having a separate bond or mortgage, he has a certificate entitling him
to a certain sum. This sum is a portion of one large loan which the company has raised. It is
generally secured by a trust deed.
Difference between debentures, debenture stock and loan
1. Debenture is the description of an instrument
2. Debenture Stock is the description of a debt due or sum secured by an instrument.
3. A loan creates a right in the name of the creditor to demand a debt and repay the money.
APPOINTMENT OF DEBENTURE TRUSTEES
Section 71(5) provides that a company before making issue of prospectus or an offer or inviting
public or members to more than 500 persons, shall appoint one or more debenture trustees.
The names of the debenture trustees shall be stated in letter of offer inviting subscription for
debentures.
CONDITIONS FOR APPOINTMENT OF DEBENTURE TRUSTEE
Section 71(5) provides that a company before making issue of prospectus or an offer or inviting

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public or members to more than 500 persons, shall appoint one or more debenture trustees.
The names of the debenture trustees shall be stated in letter of offer inviting subscription for
debentures.
CONDITIONS FOR APPOINTMENT OF DEBENTURE TRUSTEE
➢ The company must have obtained the consent of the debenture trustee in writing.
➢ Name of the debenture trustee should be mentioned in all the offer documents.
➢ Debenture Trustee should not be the following who belongs to promoter/promoters
group/Key
Managerial Personnel, or a Director, officer or employee of the company.
➢ He should not have any pecuniary relationship with the company.
➢ He should not be indebted towards the company.
➢ He should not hold guarantees on behalf of the company.
➢ He should not hold shares of the company.
➢ He is not a relative of any Promoter/Promoter Group/Director/KMP.
➢ To remove a debenture trustee, consent of 3/4thdebenture holders is compulsory.
DUTIES OF DEBENTURE TRUSTEE
1. He must ensure that there is no misleading information in any of the offer document of the
company.
2. He must satisfy himself that contents of the Trust Deed are not prejudicial to the interest of
the debenture holders.
3. He must call for periodical status report of the company.
4. Any default in payment of interest or redemption of debentures must be communicated to the
debenture holders promptly.
5. In case, if required, he may also appoint a nominee director on the Board.
6. He must ensure that the terms of the Trust Deed, are not breached.
7. He must ensure that the value of the assets are sufficient to discharge the debts of the
Company at every point.
8. He may call for a meeting of debenture holders as and when required.
REGISTER OF DEBENTURE HOLDERS
1. Every company issuing debentures shall maintain a register of debenture holders along with an
index of debenture holders.
2. It shall be maintained by the company in the format as prescribed by the central government.
3. The register may be closed by the company by giving a 7 days notice in newspapers and be
closed for a maximum period of 45 days in a year and not exceeding 30 days at a time.
4. The said register is open for inspection by the members and debenture holders or other security
holders of the company during business hours free of cost and for outsiders on a nominal fee
as provided by the articles of association.
RULES RELATED TO TRUST DEED
1. Trust Deed is open for inspection to any member or debenture holder of the company.
2. If required, a copy of such Trust Deed must be provided to any member or debenture holder

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on request within 7 days.

MEETING OF DEBENTURE HOLDERS
1. Meeting of Debenture Holders may be called on breach of any terms of the Trust Deed or in
case of any default with respect to redemption of debentures.
2. A meeting may also be called on requisition by 1/10th in value of the debenture holders.
Trust Deed executed between the company and the debenture holder shall be in Form SH-12.
CREATION OF DEBENTURE REDEMPTION RESERVE ACCOUNT (DRR)
When debentures are issued by a company, the company shall create a debenture redemption
reserve account (DRR) out of the profits of the company available for payment of dividend.
The amount credited to such account shall not be utilised by the company except for the
redemption of debentures.
CREATION OF DEBENTURE REDEMPTION FUND (DRF)
Every listed company (including listed NBFCs and Housing Finance Companies) and other
unlisted company (other than unlisted NBFCs and Housing Finance Companies) shall on or
before the 30th day of April in each year, in respect of debentures issued by the above
mentioned companies is required to invest or deposit at least 15 % of the amount of its
debentures maturing during the year ending on 31st day of March of next year. The company
may choose any of the below given methods:
(i) in deposits with any scheduled bank, free;
(ii) in unencumbered securities of the Central methods of deposits or from any charge or lien;
Government or any State Government;
(iii) in unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of section 20
of the Indian Trusts Act, 1882;
(iv) in unencumbered bonds issued by any other company which is notified under sub-clause
(f) of section 20 of the Indian Trusts Act, 1882;
In case of partly convertible debentures, Debenture Redemption Reserve shall be created in
respect of non-convertible portion of debenture issue in accordance with this sub-rule.
REMEDIES TO DEBENTUREHOLDERS
The remedies to debenture holders vary according to whether it is secured or unsecured. If
debentures are unsecured and the principal or any interest due in respect of a debenture is in
arrears, the debenture holder may:
Sue the company according to the terms of issue as an unsecured creditor; and/or
2. Present a petition for winding up of the company and prove his debt in the winding up as an
unsecured creditor for the amount due.
3. If debentures are secured on the assets of the company and the principal or any interest due
in respect of a debenture is in arrears, the debenture holder may:
i. Sue, on behalf of himself and all other debenture holders, to obtain payment or to enforce his
security by sale. The Court will appoint a receiver and order the sale of a property;
ii. Present a petition for the winding up of the company, this is so even if the debentures are
bearer debentures;
iii. Sell the assets charged as security, if an express power to do so is contained in the issue of
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debentures;
iv. Appoint a Receiver; if the conditions of the issue of debentures give him power to do so. The
Receiver will sell the property charged and the sale proceeds will be utilized for the payment
of the debentures;
v. Apply to the Court for a foreclosure order. The effect of the order is to terminate the company’s
interest in these assets charged, the debenture holders becoming the owners of them;
vi. Have the property sold by the trustee, if the debenture trust deed permits such sale.
ISSUE AND REDEMPTION OF DEBT SECURITIES
1. Obtain a valuation report from the registered valuer with respect to the Convertible Debentures
to be issued. In case of Non-Convertible Debenture, there is no dilution of share-holding in
the share capital of the company, valuation of securities and justification of price are not
applicable.
2. Hold a meeting of Board to consider and approve issue of Debentures including the terms and
conditions of issue.
3. In case of a Public Company, a copy of Board Resolution for issue of debentures with ROC is
required to be filed in Form MGT-14 within 30 days of passing of Board Resolution.
4. Convene and hold Extra-Ordinary General Meeting to consider and approve increase in the
Borrowing power of the Board of Directors by passing Special Resolution.
5. File E-Form MGT-14 along with explanatory statement within 30 days of passing of Special
Resolution.
6. Open a separate Bank Account in a scheduled bank for keeping monies received on the
application.
7. Prepare the list of such persons to whom offer to subscribe debenture will be given in draft
offer letter under Form PAS-4.
8. Offer letter shall be accompanied by an application form serially numbered and addressed
specifically to the person to whom the offer is made.
9. Dispatch of Letter of Offer to identified persons.
10. Maintain a complete record of persons to whom offer letter is sent in Form PAS-5.
11. Receiving of Application Money through cheque or demand draft or other banking channel and
not by cash.
12. Keep the record of the bank account from where such payments for subscriptions have been
received.
13. Filing Return of Allotment in Form PAS-3 within 15 days of allotment.
14. Make necessary entries in the Register of Debenture holders in Form MGT-2.
15. Make necessary entries in the Register of Charges in Form CHG-7.
16. Issue of Debenture Certificate within 6 months from date of allotment of debentures.
17. Stamp Duty settlement as per provisions & rates of Stamp Act.

PART B - COMPANY DEPOSITS

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DEPOSITS [SECTION 2(31)]

Deposits include any receipt of money by way of deposits or loan or in other form by a company
but does not include such categories of amount as may be prescribed by Central Government
in consultation with the Reserve Bank of India.
The provisions related to deposits are covered under section 73 – 76 of the Companies Act,
2013 along with applicable rules.
Section 73(1) excludes following companies from its applicability:
a. banking Companies,
b. non-banking financial companies as defined in the Reserve Bank of India Act, 1934,
c. a housing finance company registered with National Housing Bank
d. any other company as may be specified by the government in this regard.
DEPOSITOR
Depositor means
1. Any member of the company who has made deposit with the company in accordance with
section 73 (2) of the Act, or.
2. Any person who has made a deposit in accordance with Section 76 of the Act.
Eligible company means a public company having:
a net worth of Rs. 100 crores
OR
turnover of not less than Rs. 500 crores or more and which has obtained prior consent of the
company by way of a special resolution & filed its copy with the registrar of companies and
RBI before making an invitation for acceptance of deposits.

CONDITIONS FOR ACCEPTANCE OF DEPOSITS FROM MEMBERS

1. Issuance of a circular to its members for raising money by way of deposits showing financial
position, credit rating obtained, quantum of deposits etc.
2. Filing of copy of the circular atleast 30 days before issuing such circular to the members with
the registrar of companies.
3. Creation of deposit repayment reserve account and transferring 20% of the total amount due
to be repaid at the end of each financial year.
4. Certifying that company has not defaulted in repayment of deposits before or after the
commencement of this Act.
5. Creation of charge on the assets of the company. In case of unsecured deposits, the fact
shall be mentioned in all the offer documents of the company.
6. 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,
7. The credit rating 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.

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Section 73(3) states that every deposit accepted by a company shall be repaid with interest
in accordance with the terms and conditions of the agreement.
Section 73(4) states that when a company fails to repay the deposit or part thereof or any
interest thereon under sub-section (3), 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.
DEPOSITS ACCEPTED BEFORE THE COMMENCEMENT OF THE ACT
1. File with registrar of companies status of deposits within 3 months of the applicability of the
Act or due date of payment, whichever happens earlier.
2. Repay such deposits within one year or due date, whichever happens earlier.
ACCEPTANCE OF DEPOSITS FROM PUBLIC BY CERTAIN COMPANIES
1. Every eligible company has to obtain credit rating and also obtain such rating in each financial
year during the tenure of deposits.
2. It is required to create a charge against the assets of the company within 30 days of the
acceptance of deposits from the public.
3. In case of secured deposit issue, appointment of deposit trustee is compulsory and an agreement
by way of a Registered Trust Deed is required to be executed between the company and the
trustee.
TERM OF ACCEPTANCE OF DEPOSITS
Deposits shall be accepted for a minimum period of 6 months and a maximum of 36 months.
In terms of the limit on the acceptance of deposits, following provisions shall be taken into
consideration:
1. It can be raised for a period less than 6 months but in no case the period should be less than
3 months. In case of premature payment of deposits, 1% shall be reduced from the interest
agreed to be paid.
2. Deposits can be raised in joint names but the number of holders shall not exceed 3
RAISING DEPOSITS BY A PRIVATE LIMITED COMPANY AND SPECIFIED IFSC PUBLIC
COMPANY
A Specified IFSC public company and a private company may accept from its members monies
not exceeding one hundred per cent of aggregate of the paid up share capital, free reserves
and securities premium account and such company shall file the details of monies so accepted
to the Registrar in Form DPT 3.
A Specified IFSC public company means an unlisted public company which is licenced to operate
by RBI, SEBI or IRDA from International Financial Services Centre (IFSC) located in a multi
services Special Economic Zone.
The maximum limit in respect of deposits to be accepted from members shall not apply to
following classes of private companies:
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:-

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(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:
It must be noted that an amount of ₹ 25 lakhs 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 10 years (earlier 5 years) from the date of issue] in a single tranche, from a person
won’t be considered as deposit.
RATE OF INTEREST ON SUCH DEPOSITS
Eligible company shall invite or accept or renew any deposits, carrying a rate of interest or pay
brokerage at a rate not exceeding the maximum rate of interest or brokerage prescribed by the
Reserve Bank of India for acceptance of deposits by non-banking financial companies.
WHO IS ELIGIBLE TO RECEIVE BROKERAGE ?
Any person authorized in writing by the company to receive brokerage on deposits procured.
FORM AND PARTICULARS OF ADVERTISEMENT & CIRCULARS
1. If deposits are raised from the members, a circular to all such members is issued in form DPT-
1.
2. Such circular is also required to be published in English and Vernacular Language newspapers
in Form DPT-1.
3. A copy of such circular is also required to be uploaded on the website of the company.
4. Such circular is issued upon the authority given by the board of directors of the company.
5. Copy of such advertisement is also required to be filed with the registrar of companies at least
30 days before the date of its issue.
6. Validity of such circular shall be for a period ending on 6 months from the end financial year
or due date of AGM, whichever happens earlier
APPOINTMENT OF DEPOSIT TRUSTEE
1. In case of a secured deposit issue, appointment of deposit trustee is mandatory.
2. Written consent of such trustee should be obtained.
3. Receipt of consent shall also be published in the circular and newspaper advertisement.
4. Deposit trust deed shall be executed at least 7 days before the issue of circular in Form DPT-
2.
DISQUALIFICATIONS OF DEPOSIT TRUSTEE
1. He should not be a Director, KMP, officer or employee of the company or of its holding
subsidiary or associate company.
2. He is not indebted towards the company or its holding, subsidiary or associate company.
3. He has no material pecuniary relationship with the company.
4. He is not related to any of the parties as named above.
5. He has not entered into any guarantee agreement with respect to debts of the company.

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REMOVAL OF DEPOSIT TRUSTEE

Only with the consent of ALL the Board of Directors of the Company [Only those who are
present and voted] a deposit trustee can be removed.
DUTIES OF DEPOSIT TRUSTEE
1. Ensure that value of the assets are sufficient to discharge the entire deposit issue.
2. He must ensure that there is no misleading or incorrect information in the circular or
advertisement with respect to such deposit issue.
3. He must ensure that no terms of the Trust Deed are breached by the Company.
4. He may call for the meeting of the Deposit holders if required.
5. He may also supervise the implementation of the conditions regarding creation of security for
deposits.
MEETING OF DEPOSITORS THROUGH DEPOSIT TRUSTEE
The meeting of all the depositors shall be called by the deposit trustee in the following cases:
1. On the happening of an event, requiring the calling of such meeting.
2. On the request of 1/10th in total value of deposit holders.
FORM OF APPLICATION FOR DEPOSITS
1. No allotment can be made without an application being made by the applicant.
ISSUE OF DEPOSIT RECEIPTS
1. Deposit receipts shall be issued within 21 days from the date of receipt of money or realization
of cheques.
2.The same should be signed by a duly authorized officer of the company.
MAINTENANCE OF LIQUID ASSETS OF THE COMPANY
By 30thof April every year, at least 15% the amount being matured shall be maintained by the
company in the form of liquid assets
REGISTER OF DEPOSITS
1. A register covering name, address, PAN, particulars of nominee, date and amount of deposit,
date of issue of deposit received, interest, due date for payment, details of deposit insurance
etc. shall be maintained by the company.
2. Entries in such register shall be made within 7 days of issue of deposit received by the
company.
3. Such register shall be maintained for a period not less than 8 years from the financial year in
which latest entry was made in the registers.
RETURN OF DEPOSITS
It is required to be filed with the registrar of companies by 30th June every year in Form
DPT-3.
The Companies (Acceptance of Deposits) Amendment Rules, 2015 dated 31st March, 2015

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provides that 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.
PENAL RATE OF INTEREST
In case of over dues, interest @ 18% shall be paid by way of penalties
DISCLOSURES IN THE FINANCIAL STATEMENTS
1) Every company, other than a private company, shall disclose in its financial statement, by way
of notes, about the money received from the director.
(2) Every private company shall disclose in its financial statement, by way of notes, about the
money received from the directors, or relatives of directors.
REMEDIES PROVIDED UNDER THE ACT
If there is any act, which is prejudicial to the interests of the company, members or deposit
holders, such number of deposit holders which shall not be less than one hundred depositors
or not less than such percentage of the total number of depositors as may be prescribed,
whichever is less, as may be prescribed shall make an application before the Tribunal against:-
1. The Company
2. The Directors
3. The Auditors
4. An expert or advisor or a consultant
DEFAULT IN REPAYMENT OF DEPOSITS
If a company contravenes Section 73 or Section 76 or fails to repay the deposit or part thereof
or interest due thereon within the time or time allowed by Tribunal then:
1. The Company shall be liable to pay in addition to the deposits & its interest, also liable
to pay Rs 1 Crore or twice the amount of deposit accepted by the company, whichever is
lower but which may extend to Rs 10 Cores.
2. Every officer of the Company who is in default shall be punishable with imprisonment which
may extend to 7 years or AND with the fine between 25 Lakhs and 2 Crores.
Provided that if it is proved that the officer of the company who is in default, has contravened
such provisions knowingly or wilfully with the intention to deceive the company or its
shareholders or depositors or creditors or tax authorities, he shall be liable for action under
section 447.
PROCEDURE OF ACCEPTANCE OF DEPOSITS FROM MEMBERS
1. The company intending to invite deposits shall convene a Board meeting to approve the notice
of general meeting for raising money by way of deposits.
2. Issue notice of general meeting to the members of the company.
3. Hold the general meeting and pass resolution for acceptance of deposits.
4. Comply with the Rules prescribed in consultation with RBI.
5. Issue circular to the members of the company with details as may be prescribed. The circular
shall be published at least once in english and vernacular language.

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6. File the copy of the circular in Form DPT-1 with the Registrar within thirty days before the
date of issue of circular.
7. A company inviting secured deposits shall provide for security by way of a charge on its assets.
The company shall submit Form CHG-1 with Registrar for assets other than intangible assets.
8. After the expiry of 30 days of filing Form DPT-1, the circular in Form DPT-1 along with
application form is sent to all members by registered post with acknowledgement due/speed
post/electronic mail.
9. Collect duly signed application form along with money from the members.
10. Issue receipts of deposits within 21 days of the receipts of money/realization of cheque.
11. Maintain register of deposits at its registered office which shall contain the details as
prescribed.
12. Pay interest as per the rate proposed on agreed terms.
13. Deposit sum not less than twenty percent of the amount of its deposits maturing during the
financial year in a separate bank account called deposit repayment reserve account.
14. Certification that the Company has not committed any default in the repayment of principal
or interest on 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.
15. Submit return of deposits in Form DPT-3 on or before 30th June each year for information as
on 31st March of respective year.
PROCEDURE OF ACCEPTANCE OF DEPOSITS FROM PUBLIC OTHER THAN MEMBERS
1. The company intending to invite deposits shall convene a Board meeting to approve the notice
of general meeting for raising money by way of deposits.
2. Issue notice of general meeting to the members of the company.
3. Hold the general meeting and pass resolution for acceptance of deposits.
4. Comply with the Rules prescribed in consultation with RBI
5. Issue circular with details as may be prescribed. The circular shall be published at least once
in english and vernacular language.
6. File the copy of the circular in Form DPT-1 with the Registrar within thirty days before the
date of issue of circular.
7. Whether one or more deposit trustees for creating security for the secured deposits has been
appointed and the company has executed a deposit trust deed in Form DPT-2 at least seven
days before issuing circular or circular in the form of advertisement.
8. Whether the company has obtained the rating unless exempted
9. Whether the company has issued circular/form of advertisement after 30 days from the date
of filing of a Copy of Circular/Form of Advertisement with the Registrar.
10. Whether the circular has been issued to members by registered post with acknowledgement
due or speed post or by electronic mode.
11. Whether the company has issued deposit receipt in the prescribed form at and under the
signature of officer duly authorized by Board, within a period of 21 days from the date of
receipt of money or realization of cheques.
12. Maintain register of deposits at its registered office which shall contain the details as
prescribed.
13. Pay interest as per the rate proposed on agreed terms.
14. Submit return of deposits in Form DPT-3 on or before 30th June each year for information as

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on 31st March of respective year.

CHAPTER 7 - CREATION & REGISTRATION OF CHARGES

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CHARGE [SECTION 2(16)]

A charge is a security given for securing loans or debentures by way of a mortgage on the assets
of the company. A charge is a right created by a company i.e. “Borrower” on its assets or
properties or any of its undertakings present or future, in favor of a financial institution or a bank
or any other lender, i.e. “creditor” who has agreed to extend financial assistance
ESSENTIAL ELEMENTS
1. There should be at least two parties to a charge viz. creator and charge holder.
2. There should be a subject matter of such charge which may be a current or future property.
3. There should be an intention of the borrower to secure a debt against such property.
KINDS OF CHARGES
1. Fixed Charge:
A charge is said to be fixed when it is created to cover the assets which are definite and
ascertained at the time of such creation for ex. Land, building, plant and machinery etc. The
company can deal with such property, subject to the charge so that the charge holder’s interest
in the property is not affected and the charge holder gets priority over all subsequent transferees
A fixed charge is an asset, in terms of certain specific property and the company gives up a right
to dispose off such property until the charge is satisfied. In the winding-up/Liquidation of the
company, a debenture holder secured by a specific charge will be placed in the highest ranking
class of creditors.
2. Floating Charge:
A floating charge is not attached to any definite or specific property and covers property of
fluctuating nature for ex: stock in trade. The nature of a floating charge is that the security
remains dormant until it is fixed or crystallized. It is not a specific security; the holder of such
charge cannot affirm that the assets are specifically mortgaged to him. The assets are mortgaged
in such a way that the mortgagor i.e. the company can deal with them without the concurrence
of the mortgagee.
CRYSTALLISATION OF FLOATING CHARGE
1. A floating charge is attached to the company’s property and it remains dormant till it crystallizes
or becomes fixed.
2. Under following circumstances, a floating charge is crystallized.
i) When the company goes into liquidation.
ii) When the company ceases to carry on its business when the secured creditors or debentures
holders have enforced their security.
iii) On the happening of an event specified.
iv) When the creditors or the debenture holders take steps to enforce their security
TYPES OF CHARGES ON THE BASIS OF CONDITIONS OF CHARGE
Pari-passu charge

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Under this, the charge is shared by more than one lender in the ratio of their outstanding amount.
The prior consent of the existing charge holder is required by the company.
- Exclusive charge
The security under the exclusive charge is provided to a particular lender only.
- Further charge
With the consent on the first charge holder, the particular assets on which charge is already
created may be provided to other lenders as second charge. In case of liquidation of assets, the
first charge holder has the right to recover his dues and the balance is recovered by the second
charge holder followed by others.
EFFECT OF CRYSTALLISATION OF FLOATING CHARGE
1. On crystallisation, the floating charge converts itself into a fixed charge.
2. It has priority over other subsequent equitable charges and unsecured creditors.
3. However, in case of preferential creditors, they shall have a preferential right over such charge
which is crystallised.
Although a floating charge is a present security, yet it leaves the company free to create a
specific mortgage on its property having priority over the floating charge. In Government Stock
Investment Co. Ltd. v. Manila Railway Co. Ltd., (1897) A.C. 81, the debentures were secured by
a floating charge. Three months’ interest became due but the debenture holders took no steps
and so the charge did not crystallize but remained floating. The company then made a mortgage
of a specific part of its property. Held, the mortgagee had priority. The security for the debentures
remained merely a floating security as the debenture holders had taken no steps to enforce their
security.
POSTPONEMENT OF A FLOATING CHARGE
The floating charge is postponed in favour of the following persons if they act before the
crystallization of the security:
(a) a landlord who distrains for rent;
(b) a creditor who obtains a garnishee order absolute;
(c) a judgement creditor who attaches goods of the company and gets them sold (But if the goods
are not sold and the debenture holders take action in the meantime, the floating charge has
priority);
(d) the employees of the company, as well as other preferential creditors in the event of winding-
up
of the company;
(e) the supplier of goods to the company under a hire-purchase agreement on terms that goods are
to remain the property of the seller until they are paid for in full, has priority over the floating
charge, whether such hire-purchase agreement is made before or after the issue of the debentures
with a floating charge.
INVALIDITY OF FLOATING CHARGE
Section 332 of the Companies Act, 2013 provides that a floating charge on the undertakings or
property of the company, which is created within 12 months immediately preceding the
commencement of the winding up proceedings of a company shall be invalid, unless it is proved
that the company was solvent immediately after the creation of the charge. But the charge will

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be valid to the extent of the amount of any cash paid to the company at the time of or after
the creation of, and in consideration for the charge, together with interest on that amount at 5
per cent per annum or such other rate as may be notified by the Central Government.

CHARGE AND PLEDGE

According to the generally accepted definition, a ‘pledge’ is a bailment of personal property as
security for some debt or engagement, redeemable on certain terms, and with an implied power
of sale on default. It consists of a delivery of goods by a debtor to his creditor as security for a
debt or other obligation, to be held until the debt is repaid along with interest or other obligation
of the debtor is discharged, and then to be delivered back to the pledger, the title not being
changed during the continuance of the pledge.
Unlike a pledge, a ‘charge’ is not a transfer of property of one to another. It is a right created
in favour of one, referred to as “the lender” in the immovable property of another, referred to as
“the borrower”, as security for repayment of the loan and payment of interest on the terms and
conditions contained in the loan documents evidencing charge.
DUTY TO REGISTER CHARGES (SECTION 77)
The Registrar may, on an application by the company, allow such registration to be made—
(a) in case of charges created before the commencement of the Companies (Amendment)
Ordinance,
2018 ie 2 November 2018, within a period of three hundred days of such creation; or
(b) in case of charges created on or after the commencement of the Companies (Amendment)
Ordinance, 2018 ie 2 November 2018, within a period of sixty days of such creation, on payment
of such additional fees as may be prescribed.
Provided further that if the registration is not made within the period specified—
(a) in clause (a), the registration of the charge shall be made within six months from the date of
commencement of the Companies (Amendment) Ordinance, 2018 ie 2 November 2018, on
payment of such additional fees as may be prescribed and different fees may be prescribed for
different classes of companies;
(b) in clause (b), the Registrar may, on an application, allow such registration to be made within a
further period of sixty days after payment of such ad valorem fees as may be prescribed.
TIME LIMIT FOR REGISTRATION OF A CHARGE
1. A charge is required to be created or modified in Form CHG-1, with the Registrar within 30 days
of such creation or modification.
2. Specifically for debentures Form CHG – 9, is required to be submitted with the Registrar.
3. If it is not filed within a period of 30 days, application for condonation of delay is required to be
made with the Registrar upto 60 days from the date of such creation. Such application is required
to be made in Form CHG-8, with the concerned Registrar by payment of additional fees.
4. Declaration from the creator of charge is attached along with the said application that such delay
in filing the application shall not adversely affect the interest of the creditors.
5. If it is not registered within a period of 60 days, an application for condonation of delay is
required to be made with the Central Government in Form CHG- 8 by payment of ad valorem
fees.

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CERTIFICATE OF REGISTRATION OF CHARGE

1. Registrar shall issue a certificate in Form CHG-2, for creation of such charge and Form CHG-3,
for any modification.
2. Such certificate shall be a conclusive evidence that such charge has been registered.
SATISFACTION OF CHARGES
1. Intimation of satisfaction of charge shall be filed by the company or charge holder within a period
of 30 days from the date of satisfaction of charge with the Registrar in Form No. CHG-4.
However, if the same is not done within 30 days, it shall be filed within a period of 300 days
from the date of the payment or satisfaction in full of any charge registered, with the Registrar
in Form No. CHG-8 with the fee.
2. Based upon the intimation, ROC issues a show cause notice to the charge under within a period
of 14 days as to why payment or satisfaction of such charge shall not be registered.
3. If the cause is shown to the Registrar, he shall record the same by entering a memorandum for
satisfaction of such charge.
4. ROC on being satisfied, that the debt has been repaid and the company has not sent such
intimation to the Registrar for satisfaction of charge, Registrar may on his own enter in the
Registers, Memorandum of such satisfaction of charges. In such cases, a certificate of satisfaction
of charge is issued by ROC in Form CHG-5.
INTIMATION OF APPOINTMENT OF LIQUIDATOR OR RECEIVER
With respect to any property on which prior charge is created, if any liquidator or receiver has
been appointed by the court, an intimation is required to be given to the Registrar in Form CHG-
6, along with the requisite fee.
COMPANIES REGISTER OF CHARGES
1. A register of charges is required to be maintained in Form CHG-7, which shall be authenticated
by a director or the secretary of the company or any other person authorised by the Board.
2. Register of charges is a permanent register of the company. However, instrument of creating a
charge against the property of the company is required to be maintained for a period of 8 years,
from the date of satisfaction of such charge.
3. Such Register is open for inspection to the members or creditors of the company at its Registered
Office without any fee. However, for any other person, requisite fee as may be prescribed by the
Articles shall be paid by such person for carrying out inspection
RECTIFICATION BY CENTRAL GOVERNMENT IN REGISTER OF CHARGES OR CONDONATION OF
DELAY
1. The Central Government on being satisfied that —
(a) the omission to give intimation to the Registrar of the payment or satisfaction of a charge,
within
the time required; or
(b) the omission or misstatement of any particulars with respect to any such charge or modification
or with respect to any memorandum of satisfaction or other entry made in pursuance of section

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82 or section 83, was accidental or due to inadvertence or some other sufficient cause or it is
not of a nature to prejudice the position of creditors or shareholders of the company, it may, on
the application of the company or any person interested and on such terms and conditions as
the Central Government deems just and expedient, direct that the time for the giving of intimation
of payment or satisfaction shall be extended or, the omission or misstatement shall be rectified.
Order of the Central Government is required to be submitted in Form INC-28, within 30 days
from the date of its receipt.
EXEMPTION FROM REGISTRATION OF A CHARGE
Rule 3 of the Companies (Registration of Charges) Rules, 2014, casts a duty on the Company
that the particulars of the creation or modification of the charges shall be filed with the ROC in
E-form CHG-1 (for other than debentures) or Form CHG-9 (for debentures) as the case may
be.
MCA amended rule 3 stating that it shall not apply to any charge required to be created or
modified by a banking company under section 77 (Duty to register charge) in favour of the
Reserve Bank of India when any loan or advance made to it under section 17 (4) (d) of the RBI
Act, 1934.
Section 17 of the Reserve Bank of India Act, 1934 defines the manner in which the RBI can
transact business. As per section 17 (4) (d) the RBI can grant loan against the security of
promissory notes of any scheduled bank or State co-operative Bank, supported by documents of
title to goods [such documents having been transferred], assigned, or pledged to any such bank
as security for a [loan or advance made] for bona fide commercial or trade transactions, or for
the purpose of financing agricultural operations or the marketing of crops
CONSEQUENCES OF NON REGISTRATION OF CHARGE
If a charge is not duly registered, it shall stand void against the creditor or the liquidator. It
means, in case of default such creditors shall not have any preferential rights over such property
and for all means they shall be treated as unsecured creditors.
PARTICULARS OF CHARGES
1. Date and description of instrument creating charge.
2. Total amount created by such charge.
3. Date of the resolution authorizing creation of such charge.
4. General description of the property charged.
5. Terms and conditions of the loan.
6. Name and address of the charge holder.
7. Copy of the deed or agreement creating such charge.
PUNISHMENT FOR CONTRAVENTION (SECTION 86)
If any company is in default in complying with any of the provisions of Chapter VI of the
Companies Act, 2013 w.r.t. Registration of Charges, the company shall be liable to a penalty of
₹ 5 lakhs and every officer of the company who is in default shall be liable to a penalty of ₹
50000.

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PROCEDURE FOR REGISTRATION OF A CHARGE

1. Where the special resolution and Form MGT-14 is to be filed with the Registrar.
2. For the purpose of creating / modifying a charge file particulars of the charge with the
3. concerned Registrar of Companies within thirty days of creating the Form No.CHG-1 (for other
than Debentures) or Form No.CHG-9 (for debentures including rectification).
4. If the particulars of charge cannot be filed within thirty days due to unavoidable reasons, then
it may be filed within three hundred days of such creation after payment of additional fee.
5. Where a charge is registered Registrar will issue a certificate of registration of such charge in
Form CHG-2. Where the particulars of modification of charge are registered the Registrar shall
issue a certificate of modification of charge in Form No. CHG-3.
6. A company shall within a period of thirty days from the date of the payment or satisfaction in
full of any charge registered, give intimation of the same to the Registrar in Form No.CHG-4.
7. Where the Registrar enters a memorandum of satisfaction of charge in full, obtain a certificate
of registration of satisfaction of charge in Form CHG-5.
8. Incorporate changes in relation to creation, modification and satisfaction of charge in the register
of charges maintained by the company in Form No. CHG.7
9. All the entries in the register shall be authenticated by a director or the secretary of the company
or any other person authorised by the Board.
10. The register of charges shall be preserved permanently and the instrument creating a charge or
modification thereon shall be preserved for a period of eight years from the date of satisfaction
of charge by the company.
11. Where the satisfaction of the charge is not filed with the Registrar within thirty days from the
date on such payment of satisfaction, an application for condo nation of delay shall be filed with
the Central Government in Form No.CHG-8.
12. The order passed by the Central Government shall be required to be filed with the Registrar in
Form INC.28 along with the fee.
CHARGES
The following is an indicative list of charges to be registered with the Registrar:—
I. a charge created for the purpose of securing any issue of debentures or deposits;
II. a charge on uncalled share capital of the company;
III. a charge on any immovable property, wherever situate, or any interest. This includes mortgage
by deposit of title deeds.
IV. a charge on any book debt of the company. Assignment of book-debts as security is covered.
V. A lien on sub freight is a charge on book-debt of the company.
VI. a charge, on any movable property of the company;
VII. a floating charge on the undertaking or any property of the company including stock-intrade;
VIII. a charge on calls made but not paid;
IX. a charge on a ship or any share in a ship;
X. a charge on intangible assets, including goodwill, patent, a licence under a patent, trade mark,
copyright or a license under a copyright.
XI. a charge or assignment on insurance policies obtained by the company
XII. all and every kind of pledge
XIII. margin money, including shares, is a pledge.
XIV. lien on shares in the company

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PROTECTION TO THE LENDER

- preventing the company from simultaneously borrowing on the same assets without notice to
previous lender and
- providing clear information to the new lender about the status of the assets.
CALCULATION ON AMOUNT OF PENALTY IN DELAY OF CHARGE REGISTRATION
In case of charges created or modified on or after the commencement of the Companies
(Amendment) Act, 2019 i.e. w.e.f. 02.11.2018, within a period of 60 days of such creation or
modification, on payment of such additional fees as prescribed or Registrar may, on an
application, allow such registration to be made within a further period of 60 days after
payment of such ad-valorem fees as prescribed:
The MCA has prescribed the following additional fees or ad valorem fees as the case may be,
payable with effect from 01.08.2019 on the charges created after 02.11.2018: -
After amendments in Section 77 of the Act, the provisions restricts the ability of the company
to register charge after expiry of 120 days resulting beyond 120 days the charge cannot be
registered. In such case the lending institution or the company should ensure registration before
120 days otherwise the entire purpose of registration of charge to have transparent information
in public domain will be defeated. This situation also deprives genuine lenders to recover their
dues. This also gives wrong picture of charges on the property of the company, when third party
takes search of MCA for registration of charges
SATISFACTION OF CHARGES (SECTION 82)
In the case of Karnataka District Central Co-Operative Bank Ltd. vs. Murudeshwar Food & Exports
Ltd. (in liquidation), where there was no material to show that the charge is satisfied and yet
the records of the Registrar showed that the loans have been satisfied on the basis of the
statement of affair filed by the directors of the Company in liquidation, the Registrar was directed
to hold enquiry and delete the entry of satisfaction in the register of charges.
Illustration:
The Company was offered a term loan of 500 crores by a financial institution against the
security of entire fixed assets of its two factories situated in Delhi and Gurgaon. After
repayment of more than 75% of the loan amount the financial institution agreed to release
fixed assets of one of its factory from charge. State whether Company can file part
satisfaction of charge or it would amount to modification of charge.
The concept of partial satisfaction of charge is not there. Satisfaction shall be in full only. These
amounts to modification of charge and the Company will have to file particulars of modification
of charge, for registration.
EXEMPTION TO IFSC COMPANIES W.R.T. SECTION 82(1)
In case of Specified IFSC Public Company, the Registrar may, on an application by the company,
allow such registration to be made within a period of three hundred days of such creation on
payment of such additional fees as may be prescribed. - Notification Date 4th January, 2017.
In case of Specified IFSC Private Company, the Registrar may, on an application by the company,

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allow such registration to be made within a period of three hundred days of such creation on
payment of such additional fees as may be prescribed. -Notification Date 4th January, 2017.
POWER OF REGISTRAR TO MAKE ENTRIES OF SATISFACTION IN ABSENCE OF INTIMATION
FROM THE COMPANY
There may be times where a company may fail to send intimation of satisfaction of charge to
the Registrar but according to section 83 of the Act, Registrar may on receipt of satisfactory
evidence of satisfaction register memorandum of satisfaction. The evidences may be –
REGISTER OF CHARGES MAINTAINED IN ROC’S OFFICE (SECTION 81)
The Registrar of Companies shall maintain a register containing particulars of the charges
registered in respect of every company in manner as stated:
1. The particulars of charges maintained on the Ministry of Corporate Affairs portal, which shall be
deemed to be the register of charges for the purposes of section 81 of the Act.
2. This charge register shall be open to inspection by any person on payment of fee for each
inspection.
3. The MCA-21 provides the company specific details of the history of all charges created, modified
and satisfied since its incorporations. However, sometimes it may be happen that the some charge
document were not available online, which has filed in physical mode before the MCA-21, these
documents can be viewed by taking physical inspection at the Registrar office.
COMPANY’S REGISTER OF CHARGES (SECTION 85)
1. Every company shall keep at its registered office a register of charges in Form CHG-7 which shall
include all charges and floating charges registered with the Registrar.
2. The entries in the register of charges maintained by the company shall be made forthwith after
the creation, modification or satisfaction of charge.
3. All the entries in the register shall be authenticated by a director or the secretary of the company
or any other person authorised by the Board for the purpose.
4. The register of charges shall be preserved permanently and the instrument creating a charge or
modification thereon shall be preserved for a period of 8 years from the date of satisfaction of
charge by the company.
5. A copy of the instrument creating the charge shall also be kept at the registered office of the
company alongwith the register of charges.
6. The register of charges and the instrument of charges kept by the company shall be open for
inspection –
(a) by any member or creditor of the company without fees;
(b) by any other person on payment of fee subject to reasonable restriction as the company by its
articles impose.
7. The register is to be open for inspection during business hours. Such inspection shall be subject
to reasonable restrictions imposed by the company through its Articles.

CHAPTER 8 - DISTRIBUTION OF PROFITS

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DIVIDEND
Meaning
Dividend means any portion of the profit received by the shareholders from the net profits
which are available for distribution among the members. It also includes interim dividend.
The power to pay dividend is inherent in a company and is not derived from the Companies
Act, 2013 or the Memorandum or Articles of Association although the Act and the Articles
regulate the manner in which dividends are to be declared.
SS-3 clarifies that distribution of discount coupons to all the Shareholders shall not be treated
as deemed Dividend.
TYPES OF DIVIDEND
1. Final Dividend:-
Dividend when declared at the AGM of the Company is said to be final dividend. Such dividend
is recommended by the board of directors and is declared by the shareholders. Board of directors
must state in the Directors’ Report the amount of dividend, if any, which it recommends to
be paid.
2. Interim Dividend:-
Any dividend declared between two AGMs of the company is interim dividend. It may be
declared by the board of directors of the company out of the surplus profits in profit and loss
account. In case if the company has incurred any losses in the preceding quarter in which the
Board has declared interim dividend, the rate of dividend shall not be higher than the average
dividend of 3 financial years’ rate of dividend
SOURCES OF DECLARATION OF DIVIDEND [SECTION 123]
1. Out of current year’s profit after providing for depreciation. OR
2. Out of previous year’s accumulated profits after providing for depreciation. OR
3. Both OR
4. Out of money provided by Central Government or State Government in case of guarantee given
by them.
In computing profits any amount representing unrealised gains, notional gains or revaluation of
assets and any changes in carrying amount of an asset or of a liability on measurement of
the asset or the liability at fair values shall be excluded;
A company shall also not declare any Dividend, if it has defaulted in –
(a) Redemption of debentures or payment of interest thereon or creation of debenture redemption
reserve,
(b) Redemption of preference shares or creation of capital redemption reserve,
(c) Payment of Dividend declared in the current or previous financial year(s), or
(d) Repayment of any term loan to a bank or financial institution or interest thereon.
Till such time the default is subsisting.
No Dividend shall be declared by the company during the extended time, if any, granted by
the Tribunal/Court for repayment of above liabilities.

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TRANSFER OF PROFITS TO RESERVES

A company may, before the declaration of any dividend in any financial year, transfer such
percentage of its profits for that financial year as it may consider appropriate to the reserves
of the company.
DIVIDEND IN CASE OF ABSENCE OR INADEQUACY OF PROFITS [SECTION 123(1)]
The company shall in case of inadequate profits declare dividend out of accumulated profits in
previous financial year, by fulfilling the conditions as provided under Rule 3 of Companies
[Declaration &Payment of Dividend] Rules, 2014, which states as follows:
1. The rate of dividend shall not exceed the average of the rates at which the dividend was
declared by the company in last three financial years. This shall not apply to a company which
has not declared any dividend in each of preceding 3 financial years.
2. The total amount to be drawn shall not exceed 1/10th of the sum of its paid up share capital
and free reserves as appearing in the last audited Balance Sheet.
3. The amount so drawn shall be first utilized to set off the losses in the current financial year.
4. The balance of reserves after such withdrawal shall not fall below 15% of the paid up share
capital of the company.
5. No company shall declare dividend unless carried over previous losses and depreciation not
provided in previous year or years are set off against profit of the company of the current year.
DECLARATION OF INTERIM DIVIDEND [SECTION 123(3)]
The Board of Directors of a company may declare interim dividend during any financial year or
at any time during the period from closure of financial year till holding of the annual general
meeting out of the surplus in the profit and loss account or out of profits of the financial year
for which such interim dividend is sought to be declared or out of profits generated in the
financial year till the quarter preceding the date of declaration of the interim dividend.
In case the company has incurred loss during the current financial year up to the end of the
quarter immediately preceding the date of declaration of interim dividend, such interim dividend
shall not be declared at a rate higher than the average dividends declared by the company
during immediately preceding three financial years.
SS-3 while clarifying the interim dividend provides that while declaring the Interim Dividend,
the Board shall consider the financial results for the period for which Interim Dividend is to
be declared and should be satisfied that the financial position of the company justifies and
supports the declaration of such Dividend. The financial results shall take into account –
(a) depreciation for the full year,
(b) tax on profits of the company including deferred tax for full year,
(c) other anticipated losses for the financial year,
(d) Dividend that would be required to be paid at the fixed rate on preference shares.
(e) the losses incurred, if any, during the current financial year upto the end of the quarter,
immediately preceding the date of declaration of Interim Dividend.
Further, in case of clause (e) above, Interim Dividend shall not be declared at a rate higher
than average Dividend declared during the immediately preceding three financial years.
Further SS-3 provides that Interim Dividend shall be declared at a meeting of the Board. In
the event of a loss or inadequacy of profits during a financial year, no Interim Dividend shall

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be declared/ paid out of Free Reserves.

PAYMENT OF DIVIDEND [SECTION 123 & 124]
1. The amount of dividend shall be deposited in a separate bank account within 5 days from the
date of declaration of dividend.
2. Dividend shall always be paid to the registered shareholder of the Company or through his
banker.
3. Dividend may be paid in cash i.e. either through cheque or warrant or in any electronic mode.
4. In case if there is any default in repayment of deposits, the company shall not declare dividend
on its equity shares.
5. Within 30 days from the date of declaration of dividend, dividend is paid to all the registered
shareholders of the company.
6. Within 7 days from the expiry of 30 days, if there is any dividend remaining unpaid, it is
transferred to unpaid dividend account within 7 days.
7. The dividend remaining unclaimed remains in unclaimed dividend account for a period of 7 years
after which, it is transferred to Investor Education & Protection Fund (IEPF) Account
administered by the central government alongwith a statement in Form IEPF-4.
8. The Company shall within a period of 90 days of any transfer of dividend to the unpaid dividend
account, prepare a statement covering the list of the shareholders and the amount of dividend
and shall place it on the website of the company and also on any other website approved by
the Central Government for this purpose in prescribed form. Rule 5(8) prescribe form IEFF-2
for this purpose.
9. In case of any delay or default in payment of dividend, the company shall pay interest @ 12%
p.a.
PROCEDURE FOR CLAIMING SHARES FROM IEPF
The procedure is explained as under:
STEP 1: Apply for refund to the Authority by submitting an online application in Form IEPF-5.
STEP 2: Simultaneous application to the company- send IEPF Form duly signed by him along
with, requisite documents as enumerated in Form IEPF-5 to the nodal officers of the concerned
company at its registered office for verification of his claim.
STEP 3: The company shall, within 15 days from the date of receipt of claim, send a verification
report to the Authority, along with all the documents submitted by the claimant. In case of
non receipt of documents by the Authority after the expiry of ninety days from the date of
filing of Form IEPF-5, the Authority may reject Form IEPF-5, after giving an opportunity to
the claimant to furnish response within a period of thirty days.
STEP 4: After verification of the entitlement of the claimant-
(a) to the amount claimed, the Authority and then Drawing and Disbursement Officer of the
Authority shall present a bill to the Pay and Accounts Office for e- payment as per the
guidelines,
(b) to the shares claimed, the Authority shall issue a refund sanction order with the approval
of the Competent Authority and shall credit the shares to the DEMAT account of the claimant
to the extent of the claimant’s entitlement.
STEP 5: An application received for refund of any claim under this rule duly verified by the
concerned company shall be disposed off by the Authority within sixty days from the date of

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receipt of the verification report from the company, complete in all respects and any delay
beyond sixty days shall be recorded in writing specifying the reasons for the delay and the
same shall be communicated to the claimant in writing or by electronic means
STEP 6: In case, claimant is a legal heir or successor or administrator or nominee of the
registered share holder, he has to ensure that the transmission process is completed by the
company before filing any claim with the Authority.
STEP 7: In case, claimant is a legal heir or successor or administrator or nominee of any other
registered security or in cases where request of transfer or transmission of shares is received
after the transfer of shares by company to the Authority, the company shall verify all requisite
documents required for registering transfer or transmission and shall issue letter to the claimant
indicating his entitlement to the said security and furnish a copy of the same to the Authority
while verifying the claim of such claimant.
STEP 8: The claimant shall file only one consolidated claim in respect of a company in a
financial year
PENALTY
If a company fails to comply with any of the requirements of Section 124, such company shall
be liable to a penalty of one lakh rupees and in case of continuing failure, with a further
penalty of five hundred rupees for each day after the first during which such failure continues,
subject to a maximum of ten lakh rupees and every officer of the company who is in default
shall be liable to a penalty of twenty-five thousand rupees and in case of continuing failure,
with a further penalty of one hundred rupees for each day after the first during which such
failure continues, subject to a maximum of two lakh rupees.
AMOUNTS CREDITED TO IEPF
Section 125(2) prescribes the following the list which shall be credited to the Fund—
a) The amount given by the Central Government by way of grants after due appropriation made
by Parliament by law in this behalf for being utilized for the purposes of the Fund;
b) donations given to the Fund by the Central Government, State Governments, companies or any
other institution for the purposes of the Fund;
c) the amount in the Unpaid Dividend Account of companies transferred to the Fund under sub
section (5) of section 124;
d) the amount in the general revenue account of the Central Government which had been
transferred to that account under sub-section (5) of section 205A of the Companies Act,
1956, as it stood immediately before the commencement of the Companies (Amendment) Act,
1999, and remaining unpaid or unclaimed on the commencement of this Act;
e) the amount lying in the Investor Education and Protection Fund under section 205C of the
Companies Act, 1956
f) the interest or other income received out of investments made from the Fund;
fa) all shares held by the Authority in accordance with proviso of subsection (9) of section 90 of
the Companies Act, 2013 and all the resultant benefits arising out of such shares, without any
restrictions.
g) the amount received under sub-section (4) of section 38;
h) the application money received by companies for allotment of any securities and due for refund;

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i) matured deposits with companies other than banking companies;

j) matured debentures with companies;
k) interest accrued on the amounts referred to in clauses (h) to (j);
l) sale proceeds of fractional shares arising out of issuance of bonus shares, merger and
amalgamation for seven or more years;
m) redemption amount of preference shares remaining unpaid or unclaimed for seven or more
years;
and
n) such other amount as may be prescribed.
UTILISATION OF INVESTOR EDUCATION AND PROTECTION FUND
Section 125 (3) Provides the Fund shall be utilized for—
a) the refund in respect of unclaimed dividends, matured deposits, matured debentures, the
application money due for refund and interest thereon;
b) promotion of investors’ education, awareness and protection;
c) distribution of any disgorged amount among eligible and identifiable applicants for shares or
debentures, shareholders, debenture-holders or depositors who have suffered losses due to wrong
actions by any person, in accordance with the orders made by the Court which had ordered
disgorgement;
d) reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and
45 by members, debenture-holders or depositors as may be sanctioned by the Tribunal; and
e) any other purpose incidental thereto, in accordance with such rules as may be prescribed
DIVIDEND ON PREFERENCE SHARES
1. A Preference share carries a preferential right as to dividend, subject to the availability of
distributable profits.
2. The preferential right to a dividend could either be a fixed amount or an amount calculated at
a fixed rate. It may be cumulative or noncumulative.
3. Preference shares can carry dividend of a fixed amount, before any dividend is paid on the
equity shares. If there are two or more classes of preference shares, the shareholders of the
class which has priority are similarly entitled to their preferential dividend before any dividend
is paid in respect of the other class.
4. Preference shareholders are not entitled to treat the preference dividend as a debt and sue for
its payment in the first instance. However, if the articles specify
that the company’s profit shall be applied, by way of payment of the preference dividend, the
preference shareholder can sue for it even though it has not been declared [Evling v. Israel &
Oppenheimer Ltd.]
RIGHT TO DIVIDEND, RIGHTS SHARES AND BONUS SHARES TO BE HELD IN ABEYANCE
PENDING REGISTRATION OF TRANSFER OF SHARES
Section 126 provides that when any instrument of transfer of shares has been delivered to any
company for registration and the transfer of such shares has not been registered by the
company, it shall—
(a) transfer the dividend for those shares to the Unpaid Dividend Account unless the company is

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authorised by the registered holder of such shares in writing to pay such dividend to the
transferee specified in such instrument of transfer; and
(b) keep in abeyance in relation to such shares, any offer of rights shares and any issue of fully
paid-up bonus shares.
PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDEND
When dividend has been declared by a company but has not been paid or the warrant has
not been posted within thirty days from the date of declaration, every director of the company
shall, if he is knowingly a party to the default, be punishable with imprisonment which may
extend to two years and with fine which shall not be less than one thousand rupees for every
day during which such default continues and the company shall be liable to pay simple interest
at the rate of eighteen percent per annum during the period for which such default continues.
Exceptions
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a 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) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due to it from
the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant within the
period under this section was not due to any default on the part of the company.
PROCEDURE FOR DECLARATION AND PAYMENT OF INTERIM DIVIDEND
1. Verify from company’s Articles of Association that they authorize the directors to declare
interim dividend;
2. Issue notice for holding a meeting of the Board of directors of the company to consider the
matter.
3. In case of listed companies, notify Stock exchange(s) at least 2 working days in advance of
the date of the meeting of its Board of Directors.
4. At the Board meeting, the Board considers regarding availability of funds, provision for
depreciation and working expenses and the maximum rate of dividend, entitlement, closure of
register of members, newspaper advertisement, opening of bank account, printing of warrants,
postage etc.
5. In case of a listed company, immediately within 30 minutes of the conclusion of the Board
meeting, but only after the close of the market hours, intimate the stock exchanges with
regard to the Board’s decision.
6. In case of listed company, publish notice of book closure in a regional language newspaper at
least seven days before the date of commencement of book closure.
7. Close the register of members and the share transfer register of the company.
8. Open the “Interim Dividend Account of Ltd.” with the bank and deposit the amount of
dividend payable in the account within five days of declaration.
9. Make arrangements with the bank for payment of the Dividend Warrants at par.
10. Prepare a statement of dividend in respect of each shareholder containing the following details.
(a) Name and address of the shareholder with ledger folio No.
(b) No. of shares held.

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(c) Dividend payable.

11. Ensure that the dividend tax is paid to the tax authorities within the prescribed time.
12. To have sufficient number of dividend warrants printed in consultation with the company’s
banker and to get approval of the RBI for printing the warrants with MICR facility.
13. No RBI approval is required for payment of dividend to shareholders abroad, in case of
investment made on repatriation basis.
14. Where an instrument of transfer has been received by company prior to book closure but
transfer of such shares has not been registered when the dividend warrants were posted, then
keep the amount of dividend in special A/c called “Unpaid Dividend Account” opened unless
the registered holder of these shares authorizes company in writing to pay dividend to the
transferee specified in the said instrument of transfer.
15. Dispatch dividend warrants within thirty days of the declaration of dividend. In case of joint
shareholders, dispatch the dividend warrant to the first named shareholder.
16. Arrange for transfer of unpaid or unclaimed dividend to a special account named “Unpaid
dividend A/c” within 7 days after expiry of the period of 30 days of declaration of final dividend.
17. Confirm the interim dividend in the next Annual General Meeting.
PROCEDURE FOR DECLARATION AND PAYMENT OF FINAL DIVIDEND
1. Issue notice for holding a meeting of the Board of directors of the company.
2. In case of listed companies notify stock exchange, at least 2 working days in advance of the
date of the meeting of its Board of Directors.
3. Hold Board meeting for the purpose of passing the following resolutions:
(a) approving the annual accounts
(b) recommending the quantum of final dividend
(c) fixing time, date and venue for holding the next annual general meeting
(d) approving notice for the annual general meeting
(e) determining the date of closure of the register of members and the share transfer register of
the company.
4. In case of a listed company, immediately within 30 minutes of the conclusion of the Board
meeting, intimate the stock exchanges with regard to the Board’s decision.
5. Publish notice of book closure in vernacular language newspaper.
6. Close the register of members and the share transfer register of the company.
7. The amount of dividend as recommended by the Board of directors shall be shown in the
Directors’ Report as appropriation of profits for the financial year to which the Report relates.
8. Hold a Board/committee meeting for approving registration of transfer/transmission of the
shares of the company, which have been lodged with the company prior to the commencement
of book closure.
9. Hold the annual general meeting and pass an ordinary resolution declaring the payment of
dividend.
10. Prepare a statement of dividend in respect of each shareholder containing Name and address
of the shareholder with ledger folio no, No. of shares held and Dividend payable.
11. Ensure that the dividend tax is paid to the tax authorities within the prescribed time.
12. Open a separate bank account for making dividend payment and credit the said bank account
with the total amount of dividend payable within five days of declaration of dividend.

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13. If the company is listed, then for payment of dividend it has to mandatorily use, either directly
or through its Registrars to an Issue and Share Transfer Agent (RTI & STA), any RBI (Reserve
Bank of India) approved electronic mode of payment such as Electronic Clearing Services (ECS)
[LECS (Local ECS)/ RECS (Regional ECS)/NECS (National ECS)], National Electronic Fund
Transfer (NEFT), etc.
14. To have sufficient number of dividend warrants printed in consultation with the company’s
banker.
15. Dispatch dividend warrants within thirty days of the declaration of dividend.
16. Arrange for transfer of unpaid or unclaimed dividend to a special account named “Unpaid
dividend A/c” within 7 days after expiry of the period of 30 days of declaration of final dividend.
DECLARATION OF DIVIDEND OUT OF RESERVES
(1) Give notice to all the directors of the company for holding a Board meeting.
(2) Ensure that the Companies (Declaration and Payment of Dividend), Rules 2014 are complied
with.
(3) While calculating the profits of the previous years, take only the net profit after tax.
(4) Ensure that while computing the amount of profits, the amount transferred from the
Development Rebate Reserve is included and all items of capital reserves including reserves
created by revaluation of assets are excluded.
(5) In the case of listed companies, inform the Stock Exchange within 30 minutes of closure of
Board meeting.
(6) Issue notices in writing at least 21 days before the date of the Annual General Meeting.
(7) Open a separate bank account for making dividend payment and credit the said bank account
with the total amount of dividend payable within five days of declaration of dividend.
(8) Issue dividend warrants within 30 days from the date of declaration of dividend.
WAIVER OF RIGHT TO RECEIVE DIVIDEND
Receipt of dividend is a right of shareholder and not an obligation. There is no provision under
the Act to deal with the waiver of dividend. Hence, such provisions may be contained in the
articles of the company. Further, such waiver can either be full or partial.
DISTRIBUTION OF PROFITS IN OTHER TYPES OF COMPANIES
Section 8 Companies:
The company having license under Section 8 are prohibited from paying any dividend to its
members. Their profits are intended to be applied only in promoting the objects of the Company
Nidhi Companies:
A Nidhi shall not declare dividend exceeding twenty five percent or such higher amount as may
be specifically approved by the Regional Director for reasons to be recorded in writing and
further subject to the following conditions:
(i) an equal amount is transferred to General Reserve;
(ii) there has been no default in repayment of matured deposits and interest;and
(iii) it has complied with all rules as applicable to Nidhis.
Producer Companies:
In case of producer companies, dividend is termed as ‘Limited Return’ as defined in clause (c)

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of section 581A of the Companies Act, 1956 (Part IX A of Companies Act, 1956 contains
provisions relating to Producer Companies, not repealed by Companies Act, 2013). It is the
maximum rate of dividend as the Articles of the producer company may specify. According to
Section 581E of Companies Act, 1956, in producer Companies, the surplus if any, remaining
after making provision for payment of limited return and reserves referred, may be disbursed
as patronage bonus, amongst the Members, in proportion to their participation in the business
of the Producer Company, either in cash or by way of allotment of equity shares, or both, as
may be decided by the Members at the general meeting.
Companies Limited by Guarantee:
A Company Limited by Guarantee is primarily used for non-profit purposes and the profits are
reinvested and used for promoting its non-profit activities. Although the Companies Act, 2013
does not specifically prohibit distribution of dividend in such companies, however, the Articles
of such companies usually provides that all the income of the company shall be applied solely
towards the promotion of the objects of the Company and that no portion shall be paid or
transferred directly or indirectly by way of dividends or bonus or by way of profit to its
members
DIVIDEND DISTRIBUTION POLICY
The various determinants of the Dividend Policy ordinarily include:
(a) Legal and contractual restrictions: This includes the restrictions/ conditions imposed under
the applicable laws or by the financial institutions/banks in the loan agreement;
(b) Earnings of the company: Current earnings provide the best index of what a company can
pay;
(c) Cash position and liquidity: The cash position of a company is an important consideration in
paying Dividends, the greater the cash availability and overall liquidity the greater is the ability
to pay Dividend;
(d) Financial needs: There are many financial needs of a company such as meeting the cost of
capital borrowed, non-availability of external capital and making provisions for any expansion
or growth plans of the company;
(e) Tax considerations: The tax burden is a determining factor in the formulation of a Dividend
Policy. The Board should recommend the Dividend to be declared by the Members in the Annual
General Meeting on being satisfied that the company has sufficient profits to be distributed
as Dividend, i.e. sufficient profits remain after all charges against the current income (e.g.
taxation, depreciation, etc.) and after making provision for past losses, unabsorbed depreciation
for past years, transfers to reserves, if any, or for any other purposes as may be warranted
and as may be required by the Dividend Policy of the company.
PERSONS ENTITLED TO DIVIDEND
1. Dividend should be paid by the company only to its registered shareholders or to his order or
to his Banker and not to any other person. The shareholder has the option to direct the
company to pay the dividend due to him to any other person.
2. Where the company has received intimation of death of a member, the dividend may be paid
by the company to the nominee of the single holder, where shares are held by more than one
person jointly and any joint holder dies, to the surviving first joint holder and where shares are
held by more than one person jointly and all the joint holders die, to the nominee appointed

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by all the joint holders.

3. In case of insolvency of a member, the dividend may be paid to the assignee of the insolvent
member and in case of a company or body corporate which is being wound up, to the liquidator.
4. In case of administration of assets of the deceased, dividend is to be paid to the account of
administrator.
5. In case of shares transfer to IEPF, dividend is to be paid to IEPF.
6. When bonus shares are issued ranking pari passu with the existing equity shares, shareholders
are entitled to Dividend in respect of such bonus shares also, if the record date for the purpose
of payment of Dividend falls after the date of allotment of such bonus shares.
7. Dividend is payable to the shareholder whose name appears in the register of members on the
relevant date even if, prior to that date, he has sold the shares but the transfer deed in respect
thereof has not been lodged with the company.
8. Transfer of shares on cum-Dividend basis does not entitle the transferee to receive from the
company any Dividend declared before such transfer.
MODE OF PAYMENT OF DIVIDEND (SECTION 123(5))
1. Dividend can be paid in cash and not in kind. Where a company gifts to its shareholders,
shares held by it in another company under a scheme, it is nothing but payment of dividend
in kind which is expressly prohibited.
2. Dividend payable in cash may be paid through payable at par cheque or warrant or in any
electronic mode of payment approved by the Reserve Bank of India.
3. Closely held companies also use the method of purchasing demand drafts on the name of the
shareholders. In such situation dividend would be treated as paid on the date of issue of
demand draft by bank by debiting dividend account of the company.
4. The cheque or warrant shall be sent to the registered address of the Member and, in the case
of joint holders, to the registered address of the Member named first in the Register of
Members or to such person or to such address as the Member or the joint holders have directed,
in writing.
5. In order to minimize pilferage and fraudulent encashment of Dividend warrants by unauthorized
persons, companies should ascertain from the Member, his Bank Account Number and name
and address of the Bank branch where he maintains the account and indicate these details on
the face of the Dividend warrant. Moreover, companies may also introduce holograms on
Dividend warrants as a security measure.
6. When payment is made by Dividend warrant, the name of the bank and account number, if
available, shall be mentioned in the warrant after the name. In case these are not available,
address of the Member shall be printed after the name.
7. In case of payment of Dividend through warrant or cheque payable at par, if the amount of
Dividend exceeds one thousand and five hundred rupees, the company shall ensure to send such
Dividend warrant or cheque either by speed post or registered post to the concerned Member
at his registered address.
8. Initial validity of the Dividend cheque or warrant shall be for three months.
9. The Dividend cheque or warrant shall be accompanied by a statement in writing showing the
amount of Dividend paid, Folio no./DP ID and Client ID nos., number of shares held by the
concerned Member as on the record date, amount paid up on each share and the financial year

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to which the Dividend pertains.

10. Dividend shall be paid proportionately on the paid-up value of shares.
11. Nothing in this Section i.e. 123(5) of the Companies Act, 2013 shall be deemed to prohibit
the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up
bonus shares or paying up any amount for the time being unpaid on any shares held by the
members of the company.
12. No Dividend shall bear interest against the company except in case of default in payment of
Dividend warrant/cheque within the prescribed period
Illustration:
The Board of Directors of Peculiar Ltd. proposes to recommend a final dividend of Rs. 25
each to all the equity shareholders of the company. The company seeks your opinion on
the following :
(1) The company wants to deposit the dividend amount to co-operative bank.
(2) The company is a defaulter in the repayment of deposits and proposes to repay its all
deposit after the payment of dividend within 10 days.
(3) Dividend will be declared out of the capital reserves of the company
The Peculiar Ltd has to follow below procedure for recommending final dividend:
(1) Referring to section 123(4) of Companies Act, 2013, the amount of the dividend has to be
deposited in a scheduled bank. The company should first ensure that said co-operative bank is
scheduled bank from the list of scheduled bank available at RBI website, and then it may
deposit the dividend amount in the scheduled Co-operative Bank.
(2) Referring to section 123(6) of Companies Act, 2013 a company which fails to comply with the
provisions relating to acceptance and repayment of deposits shall not, so long as such failure
continues, declare any dividend on its equity shares. Hence Peculiar ltd. cannot declare dividend
till the failure persists.
(3) Referring to third proviso to Section 123(1) no dividend shall be declared or paid by a company
from its reserves other than free reserves. Hence dividend cannot be declared out of the capital
reserves of the company.
PRESERVATION OF DIVIDEND CHEQUES, WARRANTS AND DIVIDEND REGISTERS
Where the company has given an undertaking to the Bank for preservation or safe keeping of
paid Dividend cheques or warrants for a specified period, the said instruments shall be preserved
for such specified period or eight years from the date of the instrument, whichever is longer.
The Dividend warrants returned to the company by the banks should be preserved by the
company for a period of eight years for the purpose of any cross reference on any request for
duplicate warrants. Even defaced, torn Dividend warrants surrendered to the company should
be so preserved. The Dividend warrants returned to the company undelivered, should also be
preserved for a period of eight years.
The Dividend cheques or warrants so preserved shall be destroyed only with the approval of
the Board or in accordance with the policy approved by the Board for this purpose
DECLARATION OF DIVIDEND IN CASE OF LOSS OR INADEQUACY OF PROFIT
XYZ Ltd., which has inadequacy of profits, proposes to declare Dividend out of general reserves.
Following are the facts of the case:

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17,500 preference shares of Rs. 100 each fully paid; (Dividend @ 9%)
7,00,000 equity shares of Rs. 10 each
General reserves: Rs. 21,00,000
Capital reserves: Rs. 3,50,000
Securities premium: Rs. 3,50,000
Surplus (P&L): Rs. 63,000
Net profit for the year: Rs. 3,57,000
Average rate of Dividend during the last three years: 15%
Board of directors of the company wishes to declare 10% Dividend.
Maximum amount that can be withdrawn : Rs. 10,91,300 [1/10 of (Rs. 17,50,000 + Rs. 70,00,000
+ Rs. 21,00,000+63000]
Permissible withdrawal from the balance of Reserves : Rs. 8,50,500
Calculation:
15% of total capital Rs. 87,50,000 to be retained in the Reserves i.e. Rs. 13,12,500
General Reserves: [Rs. 21,00,000 + 63000 (Surplus-P&L)]
Maximum amount that can be taken from Reserves: Rs. 8,50,500 (Rs. 21,63,000 – Rs.
13,12,500)
Available profits : Rs. 2,62,500 ( Rs. 63,000 + Rs. 3,57,000 – Rs. 1,57,500); [Rs. 1,57,500 is
9% preference Dividend on 17,500 preference shares of Rs.100 each]
Dividend desired to be declared by the Board of the company: Rs. 7,00,000
Profit available for declaration of Dividend : Rs. 2,62,500
Balance amount that can be withdrawn from Reserves: Rs. 4,37,500 (Rs. 7,00,000 – Rs.
2,62,500).
Hence, company can declare Dividend @ 10%
Illustration:
The following summarized information is available in respect of a company for the year ended
31st March, 2022:
Equity Share Capital 10,000 shares of the face value of Rs.100 each= Rs. 10 Lakhs
Free Reserve= Rs. 2 Lakhs
Revaluation Reserve= Rs. 1 Lakh
Profit and Loss Account (Dr.)= Rs. 0.35 Lakhs
Net loss for the year 2021-2022= Rs. 0.25 Lakhs
The company has paid dividends to the equity shareholders @ 8%, 10% and 12% during the
immediately preceding three financial years. Advise the Board of directors the maximum amount
they can pay this year by way of dividends.
Calculation:
In the instant case, the net loss for the year 2021-22 is Rs.25000.
According to Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 the
following conditions must be fulfilled:
(i) The rate of dividend cannot exceed the average of the rates at which dividend was declared in
the three years immediately preceding that year i.e. (8%+10%+12%)/3 = 10%, so in this case,
the amount of dividend should not exceed Rs.1 Lakh.
(ii) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of
the sum of its paid-up share capital and free reserves as appearing in the latest audited
financial statement. Thus the company can draw only upto Rs.1.2 lakh.

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(iii) The balance of reserves after such withdrawal shall not fall below 15% of its paid up capital
as appearing in the latest audited balance sheet. Accordingly the maximum that may be
withdrawn cannot exceed Rs.50000.
(iv) However, the amount so withdrawn must be used to set-off losses of the current year i.e.
Rs.25000. Therefore, the maximum amount in this instant case that can be paid by way of
dividend is Rs.25000.
Illustration:
ABC Ltd. issued equity shares of Rs. 10 fully paid up and declared Dividend thereon. Mr. X and
Mr. Y, are the shareholders who paid Rs. 5 towards the call money and Rs. 5 remains unpaid
on the date of Dividend declaration.
The Company ABC Ltd. may adjust the amount of Dividend declared on such shares towards
the unpaid call money due from Mr. X and Mr. Y.
Illustration:
Following situations depict the adjustment of sum due from a Member in capacity other
than a Member:
Case (i): Mr. John is a debtor as well as Member of X Ltd., a public listed company. X Ltd.
declares Dividend of Rs. 5000 on the shares owned by Mr. John and proposes to adjust the
said amount against the debt of Rs. 10,000 due from Mr. John. In the given case, X Ltd. may
adjust the amount of Dividend only against calls in arrears or any other sums due from Mr.
John in the capacity of a Member and not otherwise. Therefore, the amount due from Mr.
John in the capacity of trade debtor will not be adjusted and the company need to pay Dividend
amount to Mr. John.
Case (ii): In the above example, if X Ltd. is an unlisted company and has adopted regulation
84 of Table F of schedule – I to the Act, then it can only adjust the amount due from Mr.
John in relation to the shares of the company and not otherwise.
Regulation 84 of Table F to the Act read as under:
The Board may deduct from any Dividend payable to any member all sums of money, if any,
presently payable by him to the company on account of calls or otherwise in relation to the
shares of the company.
Therefore, in both the above situations (i) & (ii) the Dividend amount needs to be paid to
Mr. John without any adjustment.
Case (iii): In the above example, if X Ltd. is an unlisted company and the Articles of
Association provide for adjustment of Dividend amount with the amount due from a Member
in a capacity other than that of a Member, then, the Dividend may be adjusted against the
amount due from Mr. John.
DIVIDEND ON PREFERENCE SHARES
Board of Directors of AVB Limited wants to declare dividend Rs. 15 lakh out of capital
profits for the year ended 31st March, 2022, without making a provisions for depreciation.
Referring to the provisions of the Companies Act, 2013, you being the Secretary of the
Company advise the board whether it can go ahead with its proposal?
In accordance with the provisions of the Companies Act, 2013, as contained in third proviso to
section 123(1), no dividend shall be declared or paid by a company from its reserves other
than free reserves.

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As per Companies Act, 2013, “free reserves” means such reserves which, as per the latest
audited balance sheet of a company, are available for distribution as dividend. For the purposes
of declaration of dividend by a company, depreciation shall be provided in accordance with the
provisions of Schedule II.
Therefore, in the given case, AVB Limited can neither declare dividend from capital profit and
nor it can declare dividend without making provision for depreciation.
DIVIDEND ON EQUITY SHARES WITH DIFFERENTIAL RIGHTS
Where a company issues equity shares with differential rights as to Dividend, the terms of
issue of such shares shall govern the rights of each such class of holders. Unless a shareholder
has any special right with respect to dividend entitlement, all Dividends shall be declared and
paid according to the amounts paid or credited as paid on the shares.
DIVIDEND IN CASE OF BENEFICIAL OWNER
The obligation of the company of payment of dividend is towards the member and not towards
the beneficial owner. However, the dividend may be paid to a beneficial owner where the
shareholder instructs the company to do so.
While furthering this contention for deemed dividend under Income Tax Act, 1961, the Supreme
Court has held in the case of Rameshwar Lal Sanwarmal vs. Commissioner of Income Tax,
Assam that ‘it is difficult to see how a beneficial owner of shares whose name does not
appear in the register of shareholders of the company can be said to be “shareholder”. It is
only the person whose name is entered in the register of shareholders of the company as the
holder of the shares who can be said to be a shareholder of the company, and not the person
beneficially entitled to the shares.
It is only where a loan is advanced by the company to a registered shareholder and the other
conditions set out in the Income Tax Act, 1961 are satisfied that the amount of the loan would
be liable to be regarded as “deemed dividend”. This establishes the position that payments
advanced directly to beneficial owner will not assume the character of deemed dividend.
The concept of Deemed Dividend is embedded in Section 2(22)(e) of the Income-tax Act,
1961, where a closely held company extends a loan or an advance to:
a. any of its shareholders who has more than 10% voting power in the company; or
b. to any concern in which such shareholder is substantially interested; or
c. for the individual benefit of such shareholder; or
d. on behalf of such shareholder to the extent the company has accumulated profits, such
payment would be deemed as a dividend under Section
Illustration:
ABC Pvt Ltd. is a company, the public is not substantially interested in. Mr. X is one of the
company shareholders, who hold 20% shares. The company has accumulated profits of Rs. 50
lakhs as on 31 March 2022. The company granted a loan of Rs. 100,000 to Mr. X, by way of
an account payee cheque. He repaid the amount on 5 May 2020.
In this case, even if the loan has been repaid by Hari, the loan amount granted to the extent
of accumulated profits are treated as deemed dividen
DISTRIBUTION OF DISCOUNT COUPONS TO ALL THE SHAREHOLDERS SHALL NOT BE

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TREATED AS DEEMED DIVIDEND

Discount coupons given by the company with respect to its products or services, to all the
shareholders, should not be treated as Dividend. It is a general practice adopted by the company
for promotion of its products or services.
Illustration
If the Board of Directors of XYZ Ltd. declared an Interim Dividend on 13th August 2022, then
the amount of Dividend should be deposited in a separate bank account within five days from
the date of declaration i.e. latest by 18th August 2022 irrespective of the intervening holidays.
Considering the above requirements, there may be following two scenarios:
Scenario 1: Dividend claimed within 30 days
Once a separate bank account is opened by a company for the purpose of payment of Dividend
and the entire Dividend is paid from such account and no balance stands in its credit. The
same separate bank account may be used for the purpose of deposit of Dividend declared in
future years, as long as the entire Dividend is paid / claimed from such account and nothing
is left as unpaid Dividend
Scenario 2: Dividend remains unpaid or unclaimed after 30 days
In such situation, the nomenclature of the separate account opened by a company may be
changed to “Unpaid Dividend Account” after the said period of 30 days instead of opening a
different account for transferring the unpaid Dividend. However, in this case a separate bank
account needs to be opened for future Dividend declared by the company
REMITTANCE OF DIVIDEND TO NON-RESIDENT MEMBERS
For remittance of Dividend to non-resident members, the company shall apply to authorised
dealer along with the documents as may be required by the authorized dealer for this purpose.
UNPAID DIVIDEND ACCOUNT (SECTION 124)
Illustration
The Board of Directors of XYZ Ltd. declared an Interim Dividend on 13th August 2022 and
the amount of Dividend was deposited in a separate bank account on 18th August 2022. After
a period of 30 days from the date of declaration of Dividend i.e. 12th September 2022, if any
amount remains unpaid or unclaimed in the said bank account, then such amount shall be
transferred to the ‘Unpaid Dividend Account’ within next seven days i.e. latest by 19th
September 2022.
A company declared dividend on 21st June, 2022. It reports on 22nd July, 2022 that it
could not pay dividend to 46 members as they are not traceable for last three years.
Advise the company with regard to unpaid dividend under the provisions of the Companies
Act, 2013.
According to Section 126(1) of the Companies Act, 2013 where a dividend has been declared
by a company but has not been paid or claimed within thirty days from the date of the
declaration to any shareholder entitled to the payment of the dividend, the company shall,
within seven days from the date of expiry of the said period of thirty days, transfer the total
amount of dividend which remains unpaid or unclaimed to a special account to be opened by
the company in that behalf in any scheduled bank to be called the Unpaid Dividend Ac In the given
case the company declared dividend on 21st June, 2022, the dividend remains

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unpaid after 30 days of declaration i.e. 22nd July, 2022. The company is advised to transfer
the remaining unpaid or unclaimed dividend to a special account called the Unpaid Dividend
Account in any scheduled bank within seven days from the date of expiry of the said period
of thirty days. Further any money transferred to the Unpaid Dividend Account of a company
which remains unpaid or unclaimed for a period of seven years from the date of such transfer
shall be transferred by the company along with interest accrued, if any, thereon to the Investor
Education and Protection Fund.
ENTITLEMENT OF DIVIDEND FROM UNPAID DIVIDEND ACCOUNT (SECTION 124)
Any person claiming to be entitled to any Dividend transferred to the Unpaid Dividend Account
of the company may apply to the company for payment of the Dividend. After declaration of
Dividend, the company has no beneficial interest in the amount so declared, but is merely a
custodian in the nature of a trustee until the amount is paid/transferred to a special account.
The company should enter the details of unpaid or unclaimed Dividend in a register and reconcile
the amount of Unpaid or Unclaimed Dividend Account, with the concerned bankers, periodically.
A listed company, should ensure such reconciliation through its Share Registrar and the Dividend
banker on a fortnightly basis during the initial validity of the Dividend warrants and thereafter
on a quarterly basis till transfer of funds to the Investor Education and Protection Fund.
Illustration
1) On 18th September 2018 XYZ Ltd transferred unpaid/unclaimed Dividend amounting to Rs.
1 Crore to the ‘Unpaid Dividend Account’. After settlement of various Dividend claims till
17th September 2025, Rs. 20 lakh remains unpaid / unclaimed in the said account.
The amount of Rs. 20 Lakh should be transferred to the Investor Education and Protection
Fund (IEPF) within the next 30 days i.e. latest by 17th October 2025.
2) Whether the underlying shares of unpaid or unclaimed dividends are required to be
transferred to IEPF when the amount of unpaid or unclaimed dividend is being transferred?
Under the erstwhile Act, there was no requirement to transfer the shares for which the dividend
is unpaid or unclaimed to the IEPF. However, with the enforcement of the corresponding
section, i.e. 124 (6) under the Act, 2013, every Company is mandatorily required to transfer
the underlying shares for which the dividend has remained unpaid or unclaimed for a consecutive
period of seven years. Here it is pertinent to note that the foremost condition for transfer of
shares is that the dividend on such shares shall be unpaid or unclaimed for a seven consecutive
years. Accordingly, as per section 124 (6) of the Act, 2013 the underlying shares of unpaid or
unclaimed dividend are also required to be transferred to IEPF apart from the amount of unpaid
or unclaimed dividend.
3) Within what time should the shares be transferred to the IEPF?
As per rule 6 of the IEPF Rules, the shares shall be credited to DEMAT Account opened by
the IEPF Authority within thirty days of such shares becoming due to be transferred to the
IEPF.
4) Whether one form IEPF-2 is to be filed providing details of unclaimed and unpaid amounts
pertaining to all the previous seven years or whether separate forms for each year needs
to be filed?
One form IEPF-2 is to be filed containing details of unclaimed and unpaid amounts for all the
previous seven years.
Illustration:

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Board of directors of Charming Entertainment Ltd. in its meeting held on 16th August,
2022 declared an interim dividend on its paid-up equity share capital. Now, the Board
wants to revoke the said declaration in its next Board meeting scheduled on 3rd November,
2022. You as a Company Secretary of the company, advise the Board with the relevant
provisions of the Companies Act, 2013, whether the Board of directors can do so ?
Dividend which includes interim dividend as per Section 2 (35) of Companies Act, 2013, is a
due from the company once it is properly declared. Interim dividend is declared by the Board
of Directors and once it is declared, it thus becomes due from the company. Section 123(4)
further provides that the amount of the dividend, including interim dividend, shall be deposited
in a scheduled bank in a separate account within five days from the date of declaration of
such dividend. If the articles of the company do not authorize so, it has to be amended
accordingly.
Section 127 of the Companies Act, 2013 provides for penalty to directors for any default in not
paying dividend within 30 days from the date of declaration. However, no offence under this
section shall be deemed to have been committed:
- Where the dividend could not be paid by reason of the operation of any law;
- Where a 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;
- Where there is a dispute regarding the right to receive the dividend;
- Where the dividend has been lawfully adjusted by the company against any sum due to it from
the shareholder; or
- Where, for any other reason, the failure to pay the dividend or to post the warrant within the
period under this Section was not due to any default on the part of the company.
In the given case, interim dividend has to be paid and cannot be revoked once it is declared
as the exceptions given above do not apply in the given case.

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CHAPTER 9 - ACCOUNTS & AUDITORS

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