Company Law II

Thursday, January 4, 2024 2:18 PM

4th January 2023

Project:
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- Bluebook Citations

Prospectus:
Section 26 & 27

5th January 2023

Prospectus
Background:
Three ways of financing;
- Debt Financing (debenture)
- Equity Financing (shares)
- Characteristics of both (convertible debentures)

*Initially the convertible debenture functions like a normal debenture, and once it reaches its
maturity period, it gets converted into equity shares.

Primary Market --> Secondary Market:

The company, in the primary market, through private placement, can issue shares, debentures,
etc. only after a specific list is issued due to which the company has autonomy with respect to
whom the shares are issued. On the other hand, in the secondary market, the company does not
have any autonomy and shares are issued to the general public. The entire process is known as
public issue process.

Ministry of Corporate Affairs is the principle operator under the Companies Act. Post the LPG
reforms, market manipulation (Harshad Mehta Scam) was at its peak and therefore a specific act
was brought in to establish SEBI as a regulator. Now, for the money market, the regulator was
RBI while on the other hand for the securities market, the regulator was SEBI.
The only way a company can operate in the securities market is by - initial public offering and
further public offering. On the other hand, when a listed company is going through private
placement in the primary market, the secondary market is not affected and thus the regulator is
RBI.

Section 23 allows a company to go for public issue by raising equity financing. It also states that
the companies act will not be applicable in public issue process.
Section 24 specifies that SEBI is the regulator in such cases.

If a company is not present in the secondary market, is there any way a layman would know
about the private company?
Therefore, to allow informed decision making, the idea of prospectus was developed.

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Therefore, to allow informed decision making, the idea of prospectus was developed.

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

Section 2(70) defines prospectus as a document which might be named as;

- Offer document
- Offer for sale
- Draft offer document

The nomenclature differences does not change the fact that these documents are regarded as
prospectus.
The common linking factor in all three documents is information about the company. So, any
document that provides information about the company enabling the prospective shareholders
regarding their investment in the company and subscription of shares is called prospectus.

Structure
Section 26 discusses the matters to be stated in prospectus. Legally speaking, it will be as
determined by the board (SEBI).

Elements of Section 26, 31, 32.

ICDR Regulations , Sample Prospectus
Red Hearing Prospectus and Shelf Prospectus

8th January 2023

Purpose
While a company goes for public issue, three kinds of investors are sought-
- Qualified investors (banks, corporates)
- Institutional investors (high net individual)
- Retail investors

The intent of prospectus is let these retail investors to know about the company.

Section 26(1) discusses the board structure, financial position of the company, detailed
investment (specific project or general purpose - objectives similar to object clause), etc.

Prospectus compiles all this information that is otherwise available on public domain to ensure a
clear picture ensuring the position of company, reasons of raising capital and lastly feasibility of
the company.

Section 26: Matters to be stated in Prospectus

1. (a) Name of the registered officers/ details of the registered officers

Underwriters
Underwriters are someone called intermediaries.
SEBI ICDR Regulations 2018 & SEBI Intermediary Regulations

In the entire process of public issue, there is a risk factor involved. If the company does not
make a good impression on the prospective shareholders, and is not able to garner enough
subscribers that meet the requirement of a minimum 90%, the issue fails. In order to avoid
such a situation, the concept of underwriters was developed.

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 such a situation, the concept of underwriters was developed.

If, for example 85% is achieved, then the underwriters come into picture who undertake to
subscribe additional shares to ensure the success of the issue process. These are agents of
the issuers who make sure that the company reaches the threshold if the company fails to
get a few shares.

What is these underwriters are used to inflate the number of subscribed shares?
In order to avoid such a situation, the company has to inform the public that they have
underwriters in the very beginning in the prospectus itself. It is indicated by way of a gap.
The positive aspect is that it would give the market an assurance that the issue process will
be successful. The negative aspect could be oversubscription. If the shares are not
performing well, then it would create a false perception that people are actually subscribing
to the shares. The company might create false demand for its shares.

All these officers come under the category of 'officer in default.'

There is no set limit as to how much the underwriter can push, it always remains a matter
of risk.
There is no specific limit as to how many underwriters a company can have.
After the allotment, these underwriters return the shares to the company. Since the
company cannot hold shares in its own name as per section 67 of the companies act.

Their primary motive is to ensure the success of the issue.

At what position will the underwriters be coming in?

The company mentions the following two things in the underwriting agreement, as per the
ICDR Regulations;
- At what stage the underwriters would be employed
The company has to ensure that the percentage is way too low.
- How many shares the underwriters will be purchasing.
This is because there can be multiple underwriters.

(b) Dates of the opening and closing of the issue and declaration on prescribed time.
It is a time sensitive process. The offer period is very short which is why the company has
to be clear on the timelines.

9th January 2024

© Financial Information
General public may not understand this. This is majorly for qualified investors and
institutional investors so that they can make informed decisions.

There are two categories here;

- About the Company;
This will include the financial details in the memorandum, shareholding clause,
shareholding pattern, category of shares, annual report of the preceding three years and
accounting statements, etc.
These are required to know about the financial status of the company.

- About the issue;

This will include-
: Details of the Issue and Legal eligibility of the company
The detail about the issue: if you are going for a specific project, what details would the

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The detail about the issue: if you are going for a specific project, what details would the
public want? Details about the project, duration of the project, people involved, are you
allowed to carry the project under object clause (because it will go ultra vires and company
will not be liable, the liability will be of individual level because there is no existence of
the company)

: Purpose or objective behind the issue

The object clause is drafted in such a way that is legally viable, commercially feasible and
gives the company freedom to operate.

: Kind of shares and number of shares

It could be equity shares, debentures, convertible debentures and convertible instruments.
Initially, superior right shares were introduced and therefore, it was problematic.

: Offer Period
This will include start date, end date and number of days.

: Price of Shares
Two processes are followed here:
Fixed Price Issue: The price of the share is already fixed. It’s a safe bed when a lot of
demand is not expected and the probability of loss is mitigated. This works when the shares
are actually not giving a lot of profit. But there remains a possibility when the shares could
have actually done better.
Book Building Issue: It includes floor price (the lowest price), issue price, cap price (the
highest). A sort of range is provided and the issue price is somewhere is decided based on
the median decided by the merchant banker.

*Convertible Instruments: There is no specific origin point but in the end, it gets converted
to equity share.

10th January 2023

11th January 2023

12th January 2023

CRE

15th January 2023

Directors
Background
Whenever a company is formed, the promoters carry out the entire incorporation process.
Once the company is formulated, we create few agents who work on behalf of the company
to further the goals and objectives for which the company is formed. These agents are
regarded as directors.

It is a principal- agent relationship. The promoters can't become the face of the company.
These people are regarded as directors who operate as agents.

The company is owned by the shareholders. But in the instance when the company has
been newly formed, how can shareholders appoint the directors?
This is where the concept of First Directors come in. These people, dodging the normal

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 This is where the concept of First Directors come in. These people, dodging the normal
process of appointment, are selected. Either the appointment is carried out by the promoters
or the promoters themselves become the directors.

Post this, the company starts issuing and allocating shares, and function normally.

First directors operate as executive directors.

To ascertain the liability;

Section 2(59) designates the position of directors as officers read with section 166 that
talks about the duties of the directors. If any particular officer who can be regarded as
director is not working as per required procedure,

In case something goes wrong, a model code of conduct is put, so that every single person
in that position of directorship has to follow. If this legitimate expectation is breached, it
leads to a fiduciary breach of trust. This fiduciary aspect is connected with the legal aspect
under 2(60) read with other relevant provisions. It is the liability provision. 166 is the
fulcrum when discussing directors and their relationship. It establishes the fiduciary
relationship which gives rise to the legal obligation. It provides the duty which should
match the conduct as well which would otherwise result in liability.
Duty ---> Conduct ---> Liability
166 188 2(60)

Before 2013, the entire notion of fiduciary relationship and directorial duties was not
present in the act. It was usually derived from the common law principle which was
uncodified. There were difficulties in interpreting duties of the directors.

The same duties are applicable on the board which is the office/ institution responsible for
decision making.

Section 149:
"9. Company to have Board of Directors.— (1) Every company shall have a Board of
Directors consisting of individuals as directors and shall have—
(a) a minimum number of three directors in the case of a public company, two directors in
the case of a private company, and one director in the case of a One Person Company; and

Public Company-
Minimum 3 directors
Min Members - 7

Private Company-
Members: 2 to 200
Directors: 2

Why do public companies have 3 directors while the private ones have only 2?
The most reasonable logic behind having a minimum of 2 directors in a private limited
company, is that the drafters of the Act wanted to segregate the control of affairs of the
company at multiple levels. This was facilitated, mainly to prevent fraudulent activities that
may possibly take place by handing over the entire management to a single independent
director.

16th January 2024

Directors are officers who may or may not be involved in the daily affairs.

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Directors are officers who may or may not be involved in the daily affairs.
This particular position of directors is predominantly fiduciary in nature. This is because
directors while taking decisions act as agents. They are responsible for maintaining the daily
affairs of the company delegated by the advisors. The director appoint CFOs, CEOs, etc. and
delineate the functions of each.

Shareholders through their collective will establish the company. They delegate a part of their
ownership (Decision making) to some people- known as directors who become the face of the
management. It is their responsibility to run the company as per the collective will.

These obligations will squarely fall under section 166. These duties prior to 2013 had a common
law basis meaning uncodified practices. Section 166 codified the common law principles and
laid down the fundamental duties that the directors are expected to perform. These duties
effectively become the ground for liability.

Composition of Board:
The primary reason as to why the 2013 act restrengthen the ideals and procedures adopted to
undertake decision making process of the company which is called corporate governance. The
governance has to be done in the interest of the company. A company is an economic unit and
the fundamental goals of the company include-
- Profit maximization
To ensure constant cashflow. The company would adopt aggressive decision making.
- Consolidation of position in the market- wealth maximization
Here focus shifts from profit maximization to wealth maximization. Pure financial
decisions will not help in wealth maximization. The company has to maintain reputation
and operate within the society.

As per the Narayan Murthy Committee Report, the financial interest cannot be defined on a
standalone basis. It has to interact with other aspects of the society like consumers. Therefore, to
meet the standards of society, the company should evolve from a purely economic entity to a
socially economic nature.

Board should comprise a progressive lot. So, the composition was tri-furcated into three different
parts;
- Board Inclusivity
The concept of women directors was introduced in this regard. It started from a social
perspective. This is done to allow people from different walks, and genders so that the
decision and function of the company become more inclusive.

- Board Efficacy
It takes financial interest to the next step. The concepts of profit and wealth maximization
are very different in approach with respect to primary objectives, inclusion of capital and
risk taking. In case there is clash between the shareholders and the owners of the
committee, it could affect the decision making capacity of the company.
JJ Irani Committee report specified that there could be insiders as well as outsiders on the
board to maintain the interest of both. Two functional distinctions were provided:
Executive and non-Executive directors. The committee advised that the outsiders (non-
executive) will be getting a fresh perspective and neutral stance while the executive
directors will get better knowledge of the company. Non-executive directors will come into
picture when the decisions affecting the rights of the shareholders are taken.

- Board Sustainability
It includes additional duties under section 166 along with other relevant provisions.

Through these facets, we are trying to make the company an inclusive part of the society.

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Through these facets, we are trying to make the company an inclusive part of the society.

17th January 2024

18th January 2024

Board Efficacy
Multiple changes in this regard were made in the companies act, but the most significant was
with reference to the independent directors and non-executive directors.
The possibility of the resolution being rejected by the shareholders or going against the
principles of shareholders will be minimized. A trend seen within developed countries'
companies is that there exists a two tier structure of decision making to ensure efficacy. The
board of directors is appointed by the ______. The people are appointed purely on the basis of
their professional capacity. They are completely independent.

Indian companies majorly follow single tier mechanism. Since most of the companies are family
run businesses, the promoter will be the patriarch of the family and the first directors will be
family members. The shares will be issued to the insiders of the company. This process remains
the same for almost 20 years. When the company decides to go for wealth maximization, it will
go for initial public offering. The composition of the company now is public shareholders. There
will be some shareholders who are insiders of the company, and the rest who have had no
existing interest in the company.
The public shareholders would want the company to function in a manner that losses are reduced
and wealth is maximized. On the other hand, existing shareholders would want to proceed with
the profit maximization and aggressive functioning. These are directors who also have shares.
There is a conflict of interest. The interest with respect to the public shareholder is different from
that of the insiders. The insiders take the daily decisions and the shareholders will not have a say
in those. If the decisions are not in the interest of the public shareholders. There remained a void
in the 1956 act. The court did not rule adversely by citing 'business judgement'. For company, as
a whole, it can decide for itself. Unless and until there is outright violation of law, the court will
not question the decisions of the company in respect of commercial decisions.

From the early 2000s, a need was felt to revisit the company's decision making. But there should
be some legitimate framework as to how the decisions are taken. Leaving aside the subjective
apart, there should be some objective criterion. The judgement should be reasoned, efficacious
and not arbitrary.

So, the Narayan Murthi Committee, there should be some trasnsparency in the decision making.
There should be reasoned decision. The process and basis of the decision was
We are looking at procedural proprity rather than substantive aspect.

Then the next element, professionalism was discussed and a very rudimentary understanding of
stakeholder approach was developed. Stakeholder approach finds its roots in the Interest Theory
under the sociological school.

We have to agree that there will be conflicting interest in the company and the decision cannot
be taken by considering the company as one single unit. We have to look at the macroscopinc
perspective and find out various different as well as conflicting interest within the company.

This was later discussed in the JJ Irani Committee report which was the basis of the Companies
Bill 2011 and 2013. Business judgement rule will prevail no matter what. But some level of
distinction of approaching this decision is to be brought. Different entities and stakeholders have
different interests in the company - insiders and outsiders. The interpretation of collective will
was not taking into effect the interest of the shareholders. The decision should be taken in a
manner that these decision were realligned. One way of changing this was by chnaging the
composition of the board. The decision making would be more efficient and would reduce the

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composition of the board. The decision making would be more efficient and would reduce the
chances of conflict. The introduction of independent directors was done. The independent
director would be an agent of the company, in a fiduciary relationship and would have the same
responsibity as the other directors. It became the qualifying criterion that he will not have any
preconcieved notion or pre existing interest in the company.

149 (4) and (6) , 150 (3)

Companies directors Asppointment and Disqualification Rule 4
Listing oblifgation and disclosure requirements regulations 2015

19th January 2024

23rd January 2024

24th January 2024

The major concerns include

- The independent is not merely a position, but rather a qualifying criterion which was
predominantly based on familial and financial relation.
There was no standardized procedure in terms of qualification.

Professional Standards: For qualification criterion based on relationship, section 149 was there.
For financial, section 150 was there which said that a repository had to be maintained for the
position of independent directors. This roaster of independent directors was created through an
examination conducted by Indian Institute of Corporate Affairs under the aegis of MCA. Once
one falls under this roaster, they were eligible for a position of independent director. With this,
section 149(4) would come into picture to scrutinize as per the standards.

As per section 149(6) the person should be a person of integrity and possesses relevant expertise
and experience. This is the subjective qualification.

The objective qualification is then mentioned.

This creates a two tier evaluation mechanism which contained a standardized professional
requirement criterion.
Post this, we come to company specific assessment.
Standards are divided into two parts;
- Focussing on familial or interpersonal relationship of the person proposed with respect to
the various stakeholders of the company at the top managerial level (promoter, director,
KMP)
But some degrees of relationship are becoming much more relevant and influential.

Horizontal: Family or Finance

Vertical: Interpersonal Relationship

Primary Degree Secondar

y Degree
i. Absolute: Promoter
: Director
ii. Relative: Key Managerial Personnel (Since the position is not as
pronounced and directors. ) They are only appointed for
commercial or financial purposes. There could be a possible
interest but they have a very minimum role to play.
The disqualification will exist but this will be limited in scope. The

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 The disqualification will exist but this will be limited in scope. The
person can be qualified after serving for 2 years. The qualifying
period is 2 years. Resignation of KMP -- 2 years passed -- then
eligible.
The companies act says 2 years while the LODR Regulations say 3
years. In case of listed companies, the LODR regulations would be
prevailing because it is lex specialis.
Why is the amount of period in LODR higher?
Companies Act and Companies Rule.

Structure of the objective disqualification entails multiple things. 149(6) b and c talk about
interpersonal relationship. This becomes the horizontal classification.

1. Horizontal Classification
A. Interpersonal
B. Financial

2. Vertical
A. Primary Degree of Relationship
B. Secondary Degree

Primary Degree (Primary) Secondary Degree (Relatives/ Related

Parties)
Interpersonal Absolute:
(Relative) 149 6 (b) I
One should not be a promoter/
deemed as a promoter in the
annual report, or prospectus etc.
You should also not be a person
under whose advise/ direction the
board has functioned. It only
talks about promoter.

149 6(b) ii talks about the

relationship of the individual
related to any of the promoters or
directors. If this is the case, it has
to be interpreted as per 2(77) -
that is 'related'
Financial 149 6c
(Related Parties) It talks about pecuniary
relationship with the corporate
group, promoters or directors of
corporate group. We are talking
about an institutional relationship
with the person. The financial
interest is very substantia and
huge.
Independence is construed in absolute terms. The decision of the person should not be anyway

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 Independence is construed in absolute terms. The decision of the person should not be anyway
influenced.

Distinction between relative and related party because

29th January 2024

Rule 4 of Companies Appointment and Qualification of Directors Rules, 2014 state that
Any public company satisfying the following criteria;
- Paid Up share capital of 10 cr. Or more
- Turnover 100 cr. Or more
- Outstanding Debt exceeding 50 Cr.

Shall have at least two independent directors.

There are categories of public companies, that do not operate in the secondary market: public
unlisted companies.
There could be public unlisted companies that fall in the above mentioned.

Therefore, some regulations mention 2 and others mention three to cater to both these
categories - listed as well as unlisted.
As a regulator, we cannot impose regulations which are unnecessary.
This is also the reason why interpersonal aspect is left untouched.

While operating in the primary market, there is autonomy.

149(6) talks about two categories of disqualification;

The board will be forming the opinion on the appointment, which would require a shareholder
resolution having a special majority. Why?
This is because it is a subjective criterion, and the board is in the best position to make the first
assessment of an individual.

Post this, one becomes eligible to be the independent director passing which the shareholder
carry out the appointment.

Relatives v related parties

Related parties would function primarily in the financial
Relatives: Followed by individual positions
Related: followed by abstract terms - held both by individual as well as juridical entity.

149- a, b, c: Substantial interest having a direct implication on the decision making power
The position is of such a nature that no resemblance of independence can be assumed.

149 c will always be interpreted with a and b.- the interpersonal aspect as well '

If pecuniary is connected with 149d -- the time period becomes effective

149 c will have two different implications

- Pecuniary 149d (limilited restriction)
- Positional 149 b (absolute)

30th January 2024

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30th January 2024

31st January 2024

149 © It takes into account present as well as past relationship.

Time limit is 2 years in CA and 3 years in LODR Regulations.
The time period will come into picture in the case of past relationship. This financial relationship
would entail a personal relationship. There should not be a professional basis of this financial
relationship. Not remuneration means that the no salary annulment, etc is given for the service,
there is no professional basis to that relationship.
If this is the case, it would amount to restriction.

If the financial relationship is falling with personal relationship, it can lead to two implications:
- Relative (immediate relatives)
- Related parties (commerical relationships)

Personal relationship in personal capacity -- with financial relationship --> restriction will be
triggered.

Commercial transaction will arise from transfer of services.

If relative -- absolute restriction under B ii will be applied first.

No relative -- only commercial relationship --> but the person is acting not in their commercial
capacity but personal capacity -- it will be regarded as personal relationship -- but this would not
fall under b ii. This is because the person is not an immediate relative, then financial relationship
outside perview of b ii--> timeline will come into picture.

Three years from the date of proposal names including the year itsself as per LODR regulations.

Two tests:
-- Personal (b ii)
-- Financial (restriction of 3 years)

Section 149 d
Assesed in context of both the person as well as his relative.
These arise in the ordianry course of business - no personal relation involved.
They will be based on timelines. If they fall within the timeline, then restriction will be attracted.

If there is a legal consultancy firm, there is no timeline, there is a threshold of 10% of total gross
transaction.

In case of NGO - 25% of promoters or directors share, then the members of ngo cannot be
granted this.

1st February 2024

Distinction between D and C

The basis of relationship in C excludes remuneration character while this is not the case with C.

When assessing the pecuniary relationship under clause c. The threshold to define this is 10%.
Only those pecuniary relation which are more than 10% of the total income of the person
proposed to be appointed, only then this pecuniary relationship will act as a disqualification.

If one is contributing more than 10% to the person's income, restriction will be attracted.

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Section 149 6D
[(d) none of whose relatives--

(i) is holding any security of or interest in the company, its holding, subsidiary or associate
company during the two immediately preceding financial years or during the current financial
year:

Provided that the relative may hold security or interest in the company of face value not
exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding,
subsidiary or associate company or such higher sum as may be prescribed;

Security v Interest
Security here means marketable instruments. The nature of the relationship is pecuniary.
Pecuniary interest can be interpreted in multiple ways. E.g.: security, holding interest, financial
transactions. Security can mean - equity instruments and convertible instrument- like loans, non-
convertible debentures. There is difference between security and interest because it is of a
fluctuating nature. Interest will be of a fixed nature, while the rate of return on equity might
change. Irrespective of this distinction, the end nature of these two will be of a pecuniary nature.

Scope of Pecuniary Interest

The corporate group is taken because of the presence of an element of control and influence in
decision making is there.

Timeline: 3 years as per LODR Regulations. It would include 1 year + 3 preceding years (as per
LODR)
As per companies act, 1(present) + 2 preceding years

Restriction:
If the persons security or interest amounts to either more than 50 lakh of face value, or 2% of the
paid up capital of the company. If even any one of these is not qualified, any specific higher
amount mentioned by the relevant authorities will be taken into consideration.

There will not be any qualification, but an absolute amount when this 'higher amount' comes into
picture.

(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters,
or directors, in excess of such amount as may be prescribed during the two immediately
preceding financial years or during the current financial year;

(iii) has given a guarantee or provided any security in connection with the indebtedness of any
third person to the company, its holding, subsidiary or associate company or their promoters, or
directors of such holding company, for such amount as may be prescribed during the two
immediately preceding financial years or during the current financial year; or

(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its
holding or associate company amounting to two per cent. or more of its gross turnover or total
income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii);]

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income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii);]

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