Company Law Comprehensive Notes

UNIT I: DEFINITION AND DIFFERENT TYPES OF COMPANIES
“company” refers to a body incorporated in accordance with the provisions of a specified Act, viewed to
be a person created by law – a juridical person. Its legal entity is distinct from its members and
independent of even its promoters who give birth to it.
Sec 3(1) “A company means a company formed & registered under this Act or an existing company.”
A company can be simply defined as, “It is an incorporated association which is an artificial person,
created by law, having a separate entity, with a common seal and a perpetual succession with capital
divisible into parts known as shares and with a limited liability.”
Lord Justice Lindley defined a Joint Stock Company as, “A company is a voluntary association or
organization of many persons who contribute money or money’s worth to a common stock and employ
it in some trade or business and who share the profit and loss arising there from”.
Features:
1. An incorporated association
2. Separate legal entity (Salomon Vs Salomon & Co. Ltd 1897)
3. An artificial person
4. Perpetual Succession- Continuity of Life
5. Common Seal
6. Limited Liability
7. Large number of members
8. Distribution of risk & loss
9. Large capital
10. Lower tax liability
11. Perpetual Succession
12. Transferability of shares
13. Capacity to sue
MEMORANDUM OF ASSOCIATION (MOA): defines the constitution and the scope of powers of
the company. In simple words, the MOA is the foundation on which the company is built. [Sec 2(28)]:
document which contains the rules regarding constitution and activities or objects of the company. It
defines the extent and powers of the company. A “constitution” or “charter” of a company.
Object of registering a Memorandum of Association or MOA

1. Contains the object for which the company is formed. It identifies the scope of its operations and
determines the boundaries it cannot cross.
2. Public document according to Section 399 of the Companies Act, 2013. Hence, any person who enters
into a contract with the company is expected to have knowledge of the MOA.
3. Contains details about the powers and rights of the company.
4. Under no circumstance can the company depart from the provisions specified in the memorandum. If it
does so, then it would be ultra vires the company and void.
Format of Memorandum of Association (MOA): According to Section 4 of the Companies Act, 2013,
companies must draw the MOA in the form given in Tables A-E in Schedule I of the Act.
1. Table A: Form for the memorandum of association of a company limited by shares.
2. Table B: Form for the memorandum of association of a company limited by guarantee and not having a
share capital.
3. Table C: Form for the memorandum of association of a company limited by guarantee and having a
share capital.
4. Table D: Form for the memorandum of association of an unlimited company.
5. Table E: Form for the memorandum of association of an unlimited company and having share capital.
Content of the MOA: Contents [Section 13] [6 clauses]

Name Clause : Name of the company {words ltd for public , private}
Registered Office Clause : Registered office of the company {statutory post and records are kept}
Object Clause : Objects of the company {most important}
Liability Clause : Liability of the members {declaration of liability of members if limited by shares or
guarantee}
Capital Clause : Details of share capital of the company {number of shares, types of shares}
Association Clause : Subscription or Association Clause {a declaration saying a group of people want
to form a company, they “desire” to form a company, they are ready to take the shares placed against
their respective names, public : 7}
I. Name Clause
1. For a public limited company, the name of the company must have the word ‘Limited’ as the last
word
2. For the private limited company, the name of the company must have the words ‘Private
Limited’ as the last words.
This is not applicable to companies formed under Section 8 of the Act who must include one of the
following words, as applicable:
1. Foundation
2. Forum
3. Association
4. Federation
5. Chambers
6. Confederation
7. Council
8. Electoral Trust, etc.
II. Registered Office Clause: Must specify state in which registered office of the company will
be situated.
III. Object Clause: It must specify the objects for which the company is being incorporated.
Further, if a company changes its activities which are not reflected in its name, then it can
change its name within six months of changing its activities. The company must comply with
all name-change provisions.
IV. Liability Clause: Should specify liability of members of the company, whether limited or
unlimited.
1. For a company limited by shares – it should specify if the liability of its members is limited to
any unpaid amount on the shares that they hold.
2. For a company limited by guarantee – it should specify the amount undertaken by each
member to contribute to:
i. The assets of the company when it winds-up. This is provided that he is a member of the
company when it winds-up or the winding-up happens within one year of him ceasing to
be a member. In the latter case, the debts and liabilities considered would be those
contracted before he ceases to be a member.
ii. The costs, charges, and expenses of winding up and the adjustment of the rights of the
contributors among themselves.
V. Capital Clause: Only for companies having share capital. Must specify the amount of
authorized capital divided into shares of fixed amounts, names of each member and number
of shares against their names.
VI. Subscription Clause: The MOA must clearly specify the desire of the subscriber to form a
company. It includes the signatories. This is the last clause.
ARTICLES OF ASSOCIATION: document which prescribes the rules and bye-laws for the general
management of the company and for the attainment of its object as given in the memorandum of
association of the company. Set to define the Company’s purpose as an organization and the tasks it's
supposed to accomplish internally; ie. handling official financial records; handling company meetings
along with defining the role and the powers of the Directors of the Company.
1. Originally framed or as altered from time to time in pursuance of any previous companies law or
of this Act, including so far as they apply to the company, the regulations contained, as the case
may, be in Table A to Schedule I of this Act. [Section 2(2)]
2. Contain rules and regulations for the internal management of the company subject to provisions
of the Companies Act. Table A of Schedule I gives the Proforma form of Articles
3. Public company may have its own Articles or it may adopt Table A in Schedule I to the Act [Sec
26]
Contents of Articles of Association: Section 5(1) and section 5(2) of the Companies Act, 2013 provide
for the contents of the articles of association.[4]
1. Share capital including sub-division, rights of various shareholders, the relationship of these
rights, payment of commission, share certificates.
2. Lien of shares: To retain possession of shares in case a member fails to repay his debt to the
company.
3. Calls on shares: Calls on shares include the whole or part remaining unpaid on each share which
has to be paid by the shareholders on the company’s demand.
4. Transfer of shares: The procedure for the transfer of shares by the shareholder to the transferee.
5. Transmission of shares: Transmission includes devolution of title by death, succession, marriage,
insolvency, etc. It is not voluntary but is in fact brought about by operation of law.
6. Forfeiture of shares: The articles of association provide for the forfeiture of shares if the
purchase requirements such as paying any allotment or call money, are not met with.
7. Surrender of shares: When the shareholders voluntarily return the shares they own to the
company.
8. Share conversion: Companies can convert shares into stock by an ordinary resolution general
meeting.
9. Share warrant: bearer document relating to the title of shares and cannot be issued by private
companies; only public limited companies can issue a share warrant.
10. Alteration of capital: Increase, decrease or rearrangement of capital must be done as the articles
of association provide.
11. General meetings and proceedings: All the provisions relating to the general meetings and the
manner in which they are to be conducted are to be contained in the articles of association.
12. Voting rights of members, voting by poll, proxies: The members right to vote on certain
company matters and the manner in which voting can be done is provided in the articles of
association.
13. Directors, their appointment, remuneration, qualifications, powers and proceedings of the boards
of directors meetings.
14. Dividends and reserves: the distribution of dividend to the shareholders.
15. Accounts and Audits: shall be done subject to provisions of the articles of association of the
company.
16. Borrowing powers: must be done according to the articles of association of the company.
17. Winding up: finds mention in articles of association of the company and must be done
accordingly.
Alteration in Articles of Association

1. A company by passing a special resolution alter regulations continued in its Articles anytime
2. A copy of every special resolution altering the Articles shall be filed with the Registrar within 30 days of
its passing
3. Any alteration so made in the Articles shall be as valid as if originally contained in the Articles [Sec 31]
4. AoA : Act ultra vires the Articles but intra vires the AoA can be confirmed by the shareholders
Difference between memorandum of association and articles of association

Memorandum of association [ Section 2 (56) ] Articles of association [ Section 2 (5) ]
1 Charter of company – Scope of company activity Regulation for internal management and carrying out
objects
2 Subordinate to the Companies Act (supreme doc) subordinate to the memorandum. (subordinate doc)
3 A memorandum must contain six clauses. can be drafted as per the choice of the company.
4 Strict restriction on alteration Altered by special resolution
5 Obligatory for all companies Public companies limited by shares can adopt Table A in
place of articles.
6 Defines relation between company and outsider. Regulates the relationship between company and its
members and also between the members
Supervision and Regulating authorities under the Companies Act ( MCA, ROC, Tribunal )
MCA: The Ministry is primarily concerned with administration of the Companies Act 2013, the
Companies Act 1956, the Limited Liability Partnership Act, 2008 & other allied Acts and rules.
Regulations framed there-under mainly for regulating the functioning of the corporate sector in
accordance with law. The Ministry is also responsible for administering the Competition Act, 2002 to
prevent practices having adverse effect on competition, to promote and sustain competition in markets,
to protect the interests of consumers through the commission set up under the Act. Besides, it exercises
supervision over the three professional bodies, namely, Institute of Chartered Accountants of
India (ICAI), Institute of Company Secretaries of India (ICSI) and the Institute of Cost
Accountants of India (ICAI) which are constituted under three separate Acts of the Parliament for
proper and orderly growth of the professions concerned. The Ministry also has the responsibility of
carrying out the functions of the Central Government relating to administration of Partnership Act,
1932, the Companies (Donations to National Funds) Act, 1951 and Societies Registration
Act, 1980.
Registrar Of Companies(ROC): Appointed under Section 609 of the Companies Act covering the
various States and Union Territories are vested with the primary duty of registering companies and
LLPs floated in the respective states and the Union Territories and ensuring that such companies and
LLPs comply with statutory requirements under the Act. These offices function as a registry of records,
relating to the companies registered with them, which are available for inspection by members of the
public on payment of the prescribed fee. The Central Government exercises administrative control
over these offices through the respective Regional Directors.
National Company Law Tribunal (NCLT): Quasi-judicial body which was set up to resolve the
disputes which are arising in Indian Companies. It is the successor to the Company Law Board. It is
governed by the rules framed by the Central Government. NCLT is a special court where cases relating
to civil court have been barred from the jurisdiction. Before the establishment of the NCLT and National
Company Law Appellate Tribunal the powers and functions of the Companies were discharged by the
Company law board and Board for Industrial and Financial Corporation. The Central government
constituted NCLT under Section 408 of Companies Act, 2013. It commenced on June 1, 2016, and it
was set up on the basis of the recommendations of the Justice Eradi Committee
Mode of forming in company (Sec. 12)

Before a company is formed, certain preliminary decisions are necessary. All these decisions are taken
by persons known as promoters. Any seven or more persons {public} or where the company to be
formed will be a private company by two or more persons associated for any lawful purpose may be by
subscribing their names o a memorandum of association and otherwise complying with the requirements
of this Act in respect of registration form an incorporated company with or without limited liability.
Such company either:
1. Company limited by shares
2. Company limited by guarantee
3. An unlimited company
Steps in Incorporation of a Company

1. A group of seven or more people can come together to form a public company whereas only two are
needed to form a private company.
2. Ascertaining Availability of Name: The first step in the incorporation of any company is to choose an
appropriate name. A company is identified through the name it registers. The name of the company is
stated in the memorandum of association of the company. The company’s name must end with
‘Limited’ if it’s a public company and ‘Private Limited’ if it's a private company. To check whether the
chosen name is available for adoption, the promoters have to write an application to the Registrar of
Companies of the State. A 500 rupee is paid with the application. The Registrar then allows the
company to adopt the name given they fulfill all legal documentation formalities within a period of three
months.
3. Preparation of Memorandum & AoA
4. Printing, Signing and Stamping, Vetting of Memorandum and Articles: The Registrar of Companies
often helps promoters to draw up, draft and vet the memorandum and articles of association. Above all,
with promoters who have no previous experience in drafting the memorandum and articles. The
memorandum and articles are consequently printed and divided into paragraphs and arranged
chronologically. The articles have to be individually signed by each subscriber or their representative
in the presence of a witness, otherwise, it will not be valid.
5. Power of Attorney: To fulfill the legal and complex documentation formalities of incorporation of a
company, the promoter may then employ an attorney who will have the authority to act on behalf of the
company and its promoters. The attorney will have the authority to make changes in the memorandum
and articles and moreover, other documents that have been filed with the registrar.
6. Other Documents to be Filed with the Registrar of Companies:

The First – e-Form No.32 – Consent of directors
The Second – e-Form No.18 – Notice of Registered Address
The Third – e-Form No.32. – Particulars of Directors
7. Statutory Declaration in e-Form No.1: states that ‘All the requirements of the Companies Act and the
rules thereunder have been compiled with respect of and matters precedent and incidental thereto.’
8. Payment of Registration Fees: A prescribed fee is to be paid to the Registrar of Companies during the
course of incorporation. It depends on the nominal capital of the companies which also have share
capital.
9. Certificate of Incorporation: If the Registrar is completely satisfied that all requirements have been
fulfilled by the company that is being incorporated, then he will register the company and issue a
certificate of incorporation. As a result, the incorporation certificate provided by the Registrar is
definite proof that all requirements of the Act have been met.
Types of companies On the basis of:
1. Incorporation: Statutory ( created by special statue of legislation e.g. RBI, LIC ), Registered
2. Liability: Limited by shares [sec 12(2)(a)], Limited by guarantee [sec 12(2)(b)], Unlimited liability [sec
12(2)(c)]
3. No. of members: Private [sec 2(35)], Public [sec 3(1)(v)]
4. Control: Holding [sec 2(19)], Subsidiary [sec 2(47)]
5. Ownership: Government [sec 617)], Non-government
6. Others: Foreign [sec 592-602], Investment, Financial [clause (c) of sec 45(1) of Reserve Bank of India
Act,1943], Association not for profit [sec 25]
Prospectus:
Section 2(70) of the Companies Act, 2013 defines a prospectus as “A prospectus means Any documents
described or issued as a prospectus and includes any notices, circular, advertisement, or other documents
inviting deposit for the public or documents inviting offer from the public for the subscription of
shares or debentures in a company.” Also includes shelf prospectus and red herring prospectus.
Not merely an advertisement. A document shall be called a prospectus if it satisfy two things:
1. It invites subscription to shares or debentures or invites deposits.
2. The aforesaid invitation is made to the public.
Contents of a prospectus:
1. Address of the registered office of the company.
2. Name and address of company secretary, auditors, bankers, underwriters etc.
3. Dates of the opening and closing of the issue.
4. Declaration about the issue of allotment letters and refunds within the prescribed time.
5. A statement by the board of directors about the separate bank account where all monies received out of
shares issued are to be transferred.
6. Details about underwriting of the issue.
7. Consent of directors, auditors, bankers to the issue, expert’s opinion if any.
8. The authority for the issue and the details of the resolution passed therefore.
9. Procedure and time schedule for allotment and issue of securities.
10. Capital structure of the company.
11. Main objects and present business of the company and its location.
12. Main object of public offer and terms of the present issue.
13. Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.
14. Details of directors including their appointment and remuneration.
15. Disclosure about sources of promoter’s contribution.
16. Particulars related to management perception of risk factors specific to the project, gestation period of
the project, extent of progress made in the project and deadlines for completion of the project.
Statement in lieu of Prospectus: A public company, which does not raise its capital by public issue,
need not issue a prospectus. In such a case a statement in lieu of prospectus must be filed with the
Registrar 3 days before the allotment of shares or debentures is made. It should be dated and signed by
each director or proposed director and should contain the same particulars as are required in case of
prospectus proper.
Misleading Prospectus or Mis-statement in prospectus: prospectus said to be misleading or untrue if
1. A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in
the form and context in which it is included.
2. Omission from prospectus of any matter to mislead the investors.
CAPITAL STRUCTURE AKA DEBT-TO-EQUITY RATIO

Capital structure means the arrangement of capital from different sources so that the long-term funds
needed for the business are raised. Refers to the proportions or combinations of equity share capital,
preference share capital, debentures, long-term loans, retained earnings and other long-term sources of
funds in the total amount of capital which a firm should raise to run its business. Financial structure
consists of short-term debt, long-term debt and shareholders' fund i.e., the entire left hand side of the
company’s Balance Sheet. But capital structure consists of long-term debt and shareholders’ funds.
Purpose of the capital structure is to provide an overview of the level of the company’s risk. Higher
proportion of debt financing a company has, the higher its exposure to risk will be.
Types of Capital Structure

When a company finances its operations by opening up or increasing capital to an investor (preferred
shares, common shares, or retained earnings), it avoids debt risk, thus reducing the potential that it will
go bankrupt. Moreover, the owner may choose debt funding and maintain control over the company,
increasing returns on the operations. A company that is 70% debt-financed and 30% equity-financed has
a debt-to-equity ratio of 70%; this is the leverage. It is very important for a company to manage its debt
and equity financing because a favorable ratio will be attractive to potential investors in the business.
Different Methods of Raising Capital for a Company

Methods of raising capital depend on the needs of a company considering the nature and size of the
business. Also depends on the sources from which funds may be available. The business forms of sole
proprietor and partnership have limited opportunities and methods of raising capital. But a company
limited by share or private limited company has different methods of raising capital.
1. Issue of Shares: It is the most important method. The liability of shareholders is limited to the face
value of shares, and they are also easily transferable. A private company cannot invite the general public
to subscribe for its share capital and its shares are also not freely transferable. But for public limited
companies, there are no such restrictions.
A. Equity shares: The rate of dividend on these shares depends on the profits available and the discretion
of directors. Hence, there is no fixed burden on the company. Each share carries one vote.
B. Preference shares: The dividend is payable on these shares at a fixed rate and is payable only if there
are profits. Hence, no compulsory burden on the company's finances. do not give voting rights.
2. Issue of Debentures: The rate of interest payable on debentures is fixed at the time of issue and is
recovered by a charge on the property or assets of the company, which provide the necessary security for
payment. Company is liable to pay interest even if there are no profits. Debentures are mostly issued to
finance the long-term requirements of business and do not carry any voting rights.
3. Loans from Financial Institutions: Long-term and medium-term loans can be secured by companies
from financial institutions, State level Industrial Development Corporations, etc. institutions grant loans
for a maximum period of 25 years against approved schemes or projects. Loans sanctioned must be
covered by securities by way of mortgage of company’s property, assignment of stocks, shares, gold,
etc.
4. Loans from Commercial Banks: Medium-term loans can be raised by companies from commercial
banks against the security of properties and assets. Funds required for modernization and renovation of
assets can be borrowed from banks. This method of financing does not require any legal formality
except that of creating a mortgage on the assets.
5. Public Deposits: Companies often raise funds by inviting their shareholders, employees and the
general public to deposit their savings with the company. The Companies Act permits such deposits to
be received for a period of up to 3 years at a time. Public deposits can be raised by companies to meet
their medium-term as well as short-term financial needs. increasing popularity due to:-
1. The rate of interest the companies have to pay on them is lower than the interest on bank loans.
2. These are easier methods of mobilizing funds than banks, especially during periods of a credit squeeze.
3. They are unsecured.
4. Unlike commercial banks, the company does not need to satisfy credit-worthiness for securing loans.
6. Reinvestment of Profits: Profitable companies do not generally distribute the whole amount of
profits as dividends but transfer a certain proportion to reserves. This may be regarded as reinvestment
of profits or plowing back of profits. As these retained profits belong to the shareholders of the
company, these are treated as a part of ownership capital. Retention of profits is a sort of self-financing
of business. The reserves built up over the years by plowing back of profits may be utilized by the
company for the following purposes:-
1. Expansion of the undertaking
2. Replacement of obsolete assets and modernization.
3. Meeting a permanent or special working capital requirement.
4. Redemption of old debts.
The advantages of this source of finance to the company are:-
1. It reduces the dependence on external sources of finance.
2. It increases the creditworthiness of the company.
3. It enables the company to withstand difficult situations.
4. It enables the company to adopt a stable dividend policy.
To Finance Short-Term Capital: There are also short term methods used by companies for raising
capital. These are usually for a shorter period which may be of six months or one year.
7. Trade Credit: Companies buy raw materials, components, stores and spare parts on credit from
different suppliers. Generally, suppliers grant credit for a period of 3 to 6 months and thus provide
short-term finance to the company. The availability of this type of finance is connected with the volume
of business. When the production and sale of goods increase, there is an automatic increase in the
volume of purchases, and more trade credit is available.
8. Factoring: The amounts due to a company from customers, on account of credit sale generally
remain outstanding during the period of credit allowed i.e. till the dues are collected from the debtors.
The book debts may be assigned to a bank and cash realized in advance from the bank. Thus, the
responsibility of collecting the debtors’ balance is taken over by the bank on payment of specified
charges by the company. This method of raising capital on a short term basis is known as factoring. The
bank charges payable for the purpose is treated as the cost of raising funds.
9. Discounting Bills of Exchange: This method is widely used by companies for raising short-term
finance. When the goods are sold on credit, bills of exchange are generally drawn for acceptance
by the buyers of goods. Instead of holding the bills till the date of maturity, companies can discount
them with commercial banks on payment of a charge known as bank discount. The amount of discount
is deducted from the value of bills at the time of discounting. The cost of raising finance by this method
is the discount charged by the bank.
10. Bank Overdraft and Cash Credit: Cash credit refers to an arrangement whereby the commercial
bank allows money to be drawn as advances from time to time within a specified limit. This facility is
granted against the security of goods in stock, or promissory notes bearing a second signature, or
other marketable instruments like Government bonds. Overdraft is a temporary arrangement with
the bank which permits the company to overdraw from its current deposit account with the bank up to
a certain limit. The overdraft facility is also granted against securities. The rate of interest charged on
cash credit and overdraft is relatively much higher than the rate of interest on bank deposits.
Optimal Capital Structure: Perfect mix of debt and equity financing that helps in maximising the
value of a company in the market while at the same time minimises its cost of capital.
Capital structure varies across industries. For a company involved in mining or petroleum and oil
extraction, a high debt ratio is not suitable, but some industries like insurance or banking have a high
amount of debt as part of their capital structure
Equity Capital: Money owned by the shareholders or owners. It consists of two different types
a) Retained earnings: Retained earnings are part of the profit that has been kept separately by the
organisation and which will help in strengthening the business.
b) Contributed Capital: Contributed capital is the amount of money which the company owners have
invested at the time of opening the company or received from shareholders as a price for ownership of
the company.
Debt Capital: Borrowed money that is utilised in business. There are different forms of debt capital.
1. Long Term Bonds: Considered the safest of the debts as they have an extended repayment period, and
only interest needs to be repaid while the principal needs to be paid at maturity.
2. Short Term Commercial Paper: Short term debt instrument to raise capital for short time
Financial Leverage: proportion of debt which is part of the total capital of the firm. aka capital
gearing. High level of debt = highly levered firm, firm having a lower ratio of debt = low levered firm.
Importance of Capital Structure: Determines the overall stability of a firm.

1. Increase in value of the firm: helps to increase the market price of shares and securities which, in
turn, lead to increase in the value of the firm.
2. Utilisation of available funds: A properly designed capital structure ensures the determination of the
financial requirements of the firm and raises the funds in such proportions from various sources for their
best possible utilisation. protects enterprise from over-capitalisation and under-capitalisation.
3. Maximisation of return: enables management to increase the profits of a company in the form of
higher return to the equity shareholders i.e., increase in earnings per share. This can be done by the
mechanism of trading on equity i.e., it refers to increase in the proportion of debt capital in the capital
structure which is the cheapest source of capital. If the rate of return on capital employed (i.e.,
shareholders’ fund + long term borrowings) exceeds the fixed rate of interest paid to debt-holders, the
company is said to be trading on equity.
4. Minimisation of cost of capital: maximises shareholders’ wealth through minimisation of the overall
cost of capital. Can also be done by incorporating long-term debt capital in the capital structure as the
cost of debt capital is lower than the cost of equity or preference share capital since the interest on debt
is tax deductible.
5. Solvency or liquidity position: never allows a business enterprise to go for too much raising of debt
capital because, at the time of poor earning,
6. Flexibility: provides room for expansion or reduction of debt capital so that according to changing
conditions, adjustment of capital can be made.
7. Undisturbed controlling: does not allow the equity shareholders control on business to be diluted.
8. Minimisation of financial risk: If debt component increases in the capital structure of a company,
the financial risk (i.e., payment of fixed interest charges and repayment of principal amount of debt in
time) will also increase. Protects a business enterprise from such financial risk through a judicious mix
of debt and equity in the capital structure.
Factors Determining Capital Structure

1. Cost of capital: Incurred in raising capital from different fund sources. A firm or a business should
generate sufficient revenue so that the cost of capital can be met and growth can be financed.
2. Degree of Control: Equity shareholders have more rights than the preference shareholders or debenture
shareholders. Capital structure determined by type of shareholders and the limit of their voting rights.
3. Trading on Equity: For a firm which uses more equity as a source of finance to borrow new funds to
increase returns. Trading on equity is said to occur when the rate of return on total capital is more than
the rate of interest paid on debentures or rate of interest on the new debt borrowed.
4. Government Policies: The capital structure is also impacted by the rules and policies set by the
government. Changes in monetary and fiscal policies bring changes in capital structure decisions.
Unit II Different methods of raising capital: Owned Capital Vs Borrowed Capital

Shares : share capital of a company and includes stock except where a distinction between stock and
share is expressed or implied [S.2(46)]. The share capital of a company is divided into a number of
indivisible units of a specified amount. Each of such units is called a ‘share’. If the share capital of the
company is RS 500,000 divided into 50,00 0 units of Rs 10 each, a unit of Rs 10 shall of the company.
Share Capital: capital usually means a particular amount of money a business is started with. In Indian
Companies Act, it has been used in different senses in various parts of the Act, but in general it means
the money subscribed pursuant to Memorandum of Association and Articles of Association of the
Company. Capital, in fact, represents the assets with which the undertaking is carried on. The sum total
of nominal value of shares of a company is known as its share capital. In the case of companies, the
terms ‘capital’ and ‘share capital’ have been held to be synonymous. Nature of Shares: The shares of
company are movable property and are transferable in the manner provided in the Articles of
Association. It is incorporeal in nature and it consists merely of a bundle of rights and obligations.
Classes of Shares
Equity Share Capital: with reference to a company limited by shares, all share capital which is not
preference share capital (S.85(2))
a) Equity Share Capital
(i) With voting rights
(ii) With differential rights as to dividends, voting or otherwise in accordance with rules as may be
prescribed holders of equity shares having voting rights in proportion to paid up equity capital of the
company [S.87(1)]
b) Preference Share Capital
A preference share is one which carries the following rights, over holders of equity shares (i) a
preferential right in respect of dividends at a fixed amount or at a fixed rate and (ii) a preferential right in
regard to repayment of capital on winding up [Sec.85(1)]
1. Participating & Non-participating Preference Share
2. Cumulative and Non cumulative Preference shares
3. Redeemable and Irredeemable Preference Shares
4. Convertible and Non convertible Preference Shares
Types of Share Capital:

(i) Authorized, registered or nominal capital: Capital with which the company intends to get itself
registered and is authorized to issue. Nominal capital is divided into shares of a fixed amount. It must
be set out in the memorandum of association. It can be increased or decreased by following the
prescribed procedure. Authorized capital is always equal to/more than issued and subscribed capital.
(ii) Issued capital: Part of the nominal capital which is actually issued by the company for public
subscription. A company need not issue the entire authorized capital at once. It goes on raising the
capital as and when the need for additional funds is felt. The difference between the nominal and the
issued capital is known as ‘unissued capital’, which can be issued to the public at a later date. Issued
capital includes the shares allotted to the public, vendors, signatories to memorandum of association etc.
(iii) Subscribed capital: Part of the nominal capital which has actually been taken up by shareholders
who have agreed to give consideration in kind or in cash for shares issued to them. That part of issued
capital which is not subscribed by the public is called ‘Unsubscribed Capital’. Subscribed capital cannot
be more than issued capital.
Example: A company was incorporated with capital of 9, 00,000 divided into Rs.90,000 equity shares
of Rs. 10 each. It issued 70,000 shares to the public. The public subscribed for: (a) 50,000 shares (b)
70,000 shares (c) 75,000 shares. Apart from the above 5,000 shares are issued to vendors as fully paid.
What will be the amount of different capitals?
Solution:
Authorized Capital Since the company is incorporated i.e. registered with capital of Rs.9,00,000 divided
into shares of Rs.10 each. Therefore, the authorized capital is Rs. 9,00,000 (90,000 shares of Rs .10
each).
Issued Capital: The company issued 70,000 shares of Rs. 10 each to the public which means Capital of
Rs. 7, 00,000 (i.e. 70,000 shares x 10 each). It also issued 5,000 shares of Rs. 10 each fully paid to the
vendor which means capital of Rs .50, 000. Total Issued capital = Rs. 7, 50,000
Unissued Capital: It is that part of authorized capital which has not been issued. In this case out of total
authorized capital of Rs. 9, 00,000, Rs 7, 50,000 capital has been issued. The balance left Rs 1, 50,000 is
unissued capital.
Subscribed capital: (a) Public has subscribed for 50,000 shares of Rs 10 each. Therefore, subscribed
capital is Rs. 5, 00,000.
Unsubscribed Capital: In this case it will be the difference between the shares issued to the public and
shares subscribed by the public. This difference is Rs 2,00,000 i.e. Rs 7,00,000— Rs 5,00,000, it is
unsubscribed capital. (b) Public has subscribed for 70,000 shares of Rs 10 each. Therefore, subscribed
capital is Rs 7, 00,000 since subscribed capital is equivalent to issued capital, therefore, there is No
unsubscribed capital. (c) In this case public has subscribed for 75,000 shares of Rs 10 each. It is
important to note that subscribed capital cannot be more than the issued capital. Hence, the subscribed
capital in this case will be equivalent to issued capital of Rs 7,00,000. There is no unsubscribed capital
in this case.
(iv) Called up capital: Amount due on the shares subscribed may be collected from the shareholders in
instalments at different intervals. Called up capital is that amount of the nominal value of shares
subscribed for which the company has asked its shareholders to pay by means of calls or otherwise.
If 10,000 shares of Rs 100 each have been subscribed by the public, and the company has asked the
shareholders to pay Rs 10 on application, Rs. 20 on allotment and Rs 30 on first call, then the called-up
capital of the company would be Rs. 6, 00,000 (i.e. 10,000 x 60). The remaining amount i.e. Rs. 40 per
share on 10,000 shares (i.e. Rs 4, 00,000) would be the uncalled capital of the company.
(v) Paid up capital: That part of the called-up capital which is actually paid up by the members is
known as the paid-up capital. In other words, paid up capital represents the total payments made by the
shareholders to the company in response to the calls made by the company. Paid up capital of the
company is calculated by deducting the calls in arrears from the called-up capital. Paid up capital =
Called up capital Less Calls-in-arrears. If in the above example, out of 10,000 shares of Rs 100 each,
on which Rs 60 has been called by the company from the shareholders, one shareholder, holding 100
shares, fails to pay the first call of Rs 30 per share on his shares, the paid-up capital of the company
would be Rs 6, 00,000— Rs 3,000 i.e., Rs 5, 97,000.
DEBENTURES- MEANING, TYPES AND CHARGES

The borrowed funds for business needs are known as debt financing. The debenture issued by a
company is an acknowledgment that the company has borrowed a certain amount of money which it
promised to repay at a future date. Debenture holders are termed as creditors of the company. Debenture
is an “instrument” in writing for a “fixed period” given by a company acknowledging the liability for
total amount received as a result of issue of debenture and agreeing thereby to pay the money raised
after the expiry of stipulated period at a certain rate of interest per annum.Debentures are also known as
a bond which serves as an IOU between issuers and purchasers.
Features of Debentures
1. Borrowed Fund: as debenture holders are considered as the creditors of the company
2. Fixed Rate of Interest: The rate of interest is decided on the annual general meeting of the company
3. Compulsory Payment of Interest: Company has to pay interest irrespective of its profit earning capacity
4. Security : Most of the time debentures are issued against the charge of some fixed assets of the company
5. Redeemable: Debentures are always redeemed or paid back on expiry of a fixed period of time
6. No voting rights: No say in the management as they are never granted voting rights in the company
Types of Debentures
1. Secured Debentures: secured by a charge on the immovable property of the company. In case of
default by the company, debenture holders can recover money from the mortgaged property
2. Unsecured Debentures: unsecured and do not carry a charge on the fixed assets of the company. In Case
of default, they can file a case in the court but cannot recover by selling an asset of the company
3. Convertible Debentures: gets converted into equity shares on expiry of a fixed period time
4. Non-convertible: don’t get converted into equity shares are known as non-convertible debentures
5. Redeemable Debentures: Repayable after a stated period of time are called redeemable debentures
6. Non-redeemable debenture: not redeemed in the lifetime of the company. Such debentures are paid back
only with company goes into liquidation
7. Registered debentures: payable to the registered holders. The names of the holders of these debentures
appear both on the debenture certificate and in the company’s register of debenture holders
8. Bearer Debentures: payable to the bearer. Names of the denture holders are not recorded in the register
of debenture holders. Treated as negotiable instruments and they are transferable by mere delivery.
Advantages
1. Investors who want fixed income at lesser risk prefer them.
2. As a debenture does not carry voting rights, financing through them does not dilute control
3. of equity shareholders in management.
4. Financing through them is less costly as compared to the cost of preference or equity capital
5. as the interest payment on debentures is tax deductible.
6. The company does not involve its profits in a debenture.
7. The issue of debentures is appropriate in the situation when the sales and earnings are
8. relatively stable
Disadvantages
1. Each company has a certain borrowing capacity. With the issue of debentures, the capacity of
2. a company to further borrow funds reduces.
3. With redeemable debenture, the company has to make provisions for repayment on the
4. specified date, even during periods of financial strain on the company.
5. Debenture puts a permanent burden on the earnings of a company. Therefore, there is a
6. greater risk when the earnings of the company fluctuate.
Shares Debentures
The holder of shares is known as a shareholder. The holder of debentures is known as debenture
(Owner) holder. (Creditor)
Shareholders get the dividend only out of profits get the interest even if there is no profit.
Dividend can be paid to shareholders Interest can be paid to debenture holders
Dividend is an appropriation of profit and so it is Interest is a business expense and so it is allowed

not allowed as deduction. as deduction from profit. charge against profit.
The holders of shares have voting rights. The holders of debentures have no voting rights.
Shares can never be converted into debentures. Debentures can be converted into shares.
Shares are repaid after the payment of all the Debentures get priority over shares, and so they
liabilities. (Last Claim) are repaid before shares. (First Claim)
No charge on asset of the company Charge created on asset of company
Public Deposits Provisions: Deposits have been an important source of funding for the corporates in
India. Under the Companies Act, 1956 regime, provisions related to deposits were less stringent as
compared to under its successor. Companies Act, 2013, initially laid down a kind of prohibition for
acceptance of deposit which was later relaxed through various amendments and providing crucial
exemptions to private companies. Private Companies can now accept deposits from its members with
minimum regulatory compliances.
Definition of Deposit:
Deposit has been defined under Section 2(31) of the Companies Act, 2013 further expanded under the
Deposit Rules, 2014. As per Section 2(31), “deposit” includes any receipt of money by way of
deposit or loan or in any other form by a company, but does not include such categories of
amount as may be prescribed in consultation with the Reserve Bank of India.
Accordingly, Rule 2(1)(c) of Companies (Acceptance of Deposit) Rules, 2014, excludes the following
amount received by a Company from the ambit of Deposit and shall not be considered as deposits –
i. any amount received from the Central Government or a State Government or local authority or
statutory authority, or any amount Whose repayment is guaranteed by the Central Government or a State
Government;
ii. any amount received from foreign Governments, foreign or international banks, foreign bodies
corporate and foreign citizens, foreign authorities or persons resident outside India;
iii.Loans or facility from banks;
iv. Loans from Public Financial Institutions/ Insurance Companies;
v. any amount received against issue of commercial paper or any other instruments;
vi. any amount received by a company from any other company;
vii. Any amount received through Public offer. However, if securities not allotted within 60 days and
refund not made within 15 days then such amount will be treated as Deposit;
viii. Any amount received from the director of the company and in case of private company also from
the relative of the director of the company subject to the condition that the amount has been given from
own’s fund and not from borrowings.
ix. Any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking
pari passu with the first charge, compulsorily convertible within 10 years;
x. Any amount raised by issue of Unsecured Non-convertible debentures;
xi. Non-interest-bearing security deposit from employee of the company under the contract of
employment to the extent not exceeding his annual salary;
xii. Any non-interest bearing amount received and held in trust;
xiii. Any amount received in the course of business –
(a) As advance for supply of good or services provided that such goods or services are supplied within
365 days of the receipt of advance;
(b) As advance in connection with consideration for an immovable property provided such advance is
adjusted against such property in accordance with the terms of the agreement;
(c) As security deposit for the performance of the contract;
(d) As advance under long term projects for supply of capital goods;
Provided that if the amount received under (a), (b) & (d) becomes refundable due to lack of necessary
permission or approval to deal in the concerned goods or services, then the amount received shall be
deemed as deposit on the expiry of 15 days from the date they become due for refund.
(e) As advance towards consideration for future warranty or maintenance contract;
(f) As advance received which is allowed by any sectoral regulator;
(g) As advance for subscription towards publication;
xiv. Any amount of unsecured loan brought in by the promoters subject to the fulfilment of the
following conditions:
(a) the loan is brought in pursuance of the stipulation imposed by the lending institutions on the
promoters to contribute such finance;
(b) the loan is provided by the promoters themselves or by their relatives or by both; and
(c) the exemption under this sub-clause shall be available only till the loans of financial institution or
bank are repaid and not thereafter;
xv. Any amount accepted by a Nidhi Company;
xvi. Any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982;
xvii. Any amount received by the company under any collective investment scheme;
xviii. An amount of 25 lakh rupees or more received by a start-up company, by way of a convertible
note (convertible into equity shares or repayable within a period not exceeding five years from the date
of issue) in a single tranche, from a person;
xix. Any amount received by a company from registered Alternative Investment Funds, Domestic
Venture Capital Funds, Infrastructure Investment Trusts and Mutual Funds.
Provisions of Deposits covered under following sections under the Companies Act, 2013 –
1. Section 73 – Prohibition on Acceptance of Deposit from Public.
2. Section 74 – Repayment of deposits etc. accepted before Commencement of CA, 2013

3. Section 75 – Damages for Fraud
4. Section 76 – Acceptance of deposit from public by certain Companies
5. Section 76A – Punishment for contravention of Section 73 or Section 76.
On a very first note, Section 73 prohibits every company (except banking company, NBFCs) from
inviting, accepting or renewing deposits from the public. However, such companies can accept deposits
from its members subject to the conditions specified under the Act.
However, Section 76 allows Specified Public Companies to accept deposits from public subject to
certain conditions which has been discussed later.
Public Deposits:
A Public Company having a net worth of not less than 100 crore rupees OR a turnover of not less
than 500 Crore rupees AND which has obtained the prior consent of shareholders through Special
Resolution AND such resolution has been filed with the registrar before inviting deposits.
However, if the company is accepting deposits within the limit of Section 180(1)(c) i.e. if the total
borrowing of the Company doesn’t exceed the aggregate of its paid-up share capital, free reserves and
securities premium account, then the consent of shareholders through Ordinary Resolution will suffice.
Conditions on accepting deposits from Public or renewing deposits by Aforementioned Companies:

● No deposits which are repayable on demand shall be accepted or renewed.
● No deposits which are repayable on notice within a period of 6 months or more than 36 months shall be
accepted or renewed.
● A company may accept deposits repayable earlier than 6 months but not earlier than 3 months, to meet
its short-term fund requirements provided that such deposits doesn’t exceed 10% of the paid-up share
capital, free reserves and securities premium account of the company.
● Companies intending to invite deposits shall issue a circular in the form of advertisement in form DPT-
1.
● If the deposit to be accepted from public along with other deposits excluding the deposits from its
members, outstanding on the date of acceptance or renewal exceeds 25% (35% in case of Government
Company) of the aggregate of its paid-up share capital, free reserves and securities premium account of
the company, then such company shall not accept such deposits.
● No deposit shall be invited or renewed wherein the rate of interest or brokerage fee exceeds the
maximum rate of interest or brokerage prescribed by the RBI for acceptance of deposits by NBFCs.
● Every such company shall obtain credit rating at the time of invitation of deposits and once in a year for
deposits accepted by it.
● Copy of credit rating obtained shall be furnished to ROC along with return of deposits in form DPT-3.
● Every Company having outstanding deposits shall deposit atleast 20% of the amount of its deposits
maturing during the following financial year, on or before 30th April of each year and such amount shall
be kept in a separate bank account to be called deposit repayment reserve account.
Deposits from its members by Public Company:
A Public Company can accept the deposits from its members if it fulfils the following conditions:
● Obtaining the approval of Shareholders in General Meeting through Ordinary Resolution.
● Issuance of circular for inviting deposits to all its members in form DPT-1 after delivering the circular to
ROC atleast 30 days prior to the date of issue of circular to members.
its short-term fund requirements provided that such deposits doesn’t exceeds 10% of the paid-up share
● If the deposit to be accepted from its members along with other deposits, outstanding on the date of
acceptance or renewal exceeds 35% (100% for Specified IFSC Public Company) of the aggregate of its
paid-up share capital, free reserves and securities premium account of the company, then such company
shall not accept such deposits.
● No deposit shall be invited or renewed wherein the rate of interest or brokerage fee exceeds the
● Every Company having outstanding deposits shall deposit atleast 20% of the amount of its deposits
maturing during the following financial year, on or before 30th April of each year and such amount shall
be kept in a separate bank account to be called deposit repayment reserve account.
● Every Company inviting deposits must certify that the Company has not defaulted in the repayment of
deposit or interest in the past and if default had occurred then the default was made good and 5 years had
lapsed from the date of making the default good.
● Every Company shall file return of such accepted deposits with ROC in form DPT-3.
Deposits from its members by Private Companies:
A private Company may accept deposits from its members after obtaining the approval of the members
in General Meeting through Ordinary Resolution and subject to fulfilling the following conditions:
its short-term fund requirements provided that such deposits doesn’t exceed 10% of the paid-up share
● Amount of deposit to be accepted doesn’t exceed 100% of the aggregate of paid-up share capital, free
reserves and securities premium account.
● Files returns of such accepted deposits with ROC in form DPT-3.
However, the maximum limit for acceptance of deposit from its members shall not be applicable on the
following classes of Private Companies:
1. Private Company which is a start-up, for 5 years from the date of its incorporation;
2. Private Company which fulfils the following conditions:
a) It is not an associate or a subsidiary of any other company;
b) Its borrowings from banks or financial institutions or any body corporate is less the twice of its paid-
up share capital or 50 crore rupees, whichever is less; and
c) It has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits.
3. No deposit shall be invited or renewed wherein the rate of interest or brokerage fee exceeds the
The Deposit provision bifurcates the deposit accepting companies into following class:
● Specified Public Company accepting deposits from public;
● Public Company accepting deposits form its members;

● Private Company accepting deposits from its members.
It is to be noted that any amount received from Director of the Company has been excluded from the
definition of deposit and thus doesn’t attract the provisions of deposit. In case of Private Limited
Company, any amount received from a relative of the director also shall not be considered as deposit.
What is the Issue of Shares?

The issue of shares is the procedure in which enterprises allocate new shares to the shareholders.
Shareholders can be either corporations or individuals. The enterprise follows the rules stipulated by
Companies Act 2013 while circulating the shares. The Issue of Prospectus, Receiving Applications,
Allocation of Shares are 3 key fundamental steps of the process of issuing the shares.
A noticeable feature of the company’s capital is that the amount on its shares can be progressively
collected in simple instalments that are spread over a time frame relying upon its enhancing financial
obligation. The 1st instalment is collected with the application and is hence called as application
money, the 2nd is on allocation (termed as allocation or allotment of money), and the 3rd
instalment is known as a 1st call, 2nd call and so on. The word-final is suffixed to the final
instalment. This procedure, in no way, prevents an enterprise from calling the entire amount of shares
during the period of application.
The significant steps in the process of issue of shares are given below :
● Issue of Prospectus: The enterprise initially issues the prospectus to the public generally. The
prospectus is an appeal to the public that a new enterprise has come into the presence and it would
require funds for operating the trading concern. It comprises complete data regarding the enterprise and
the way in which the money is to be collected from the prospective investors.
● Receipt of Applications: When the prospectus is circulated to the public, prospective investors
contemplating to sign up and subscribe the share capital of the enterprise would make an application
along with the application money and deposit it with a scheduled bank as mentioned in the prospectus.
● Allocation of shares: Once the minimum subscription has been done, the shares can be allocated.
Normally, there is always oversubscription of shares, so the allocation is done on pro-rata ground.
Letters of Allotment are sent out to those people who have been allocated their part of shares. This
results in an authentic contract between the enterprise and the claimant, who will now be a part-owner of
the enterprise.
Q: What is a minimum subscription?
Ans: This is a minimum amount that must be raised when the shares are offered to the public during the
issue of shares. This minimum subscription is generally set by the Board of directors, but it cannot
be less than 90% of the issued capital.
So at least 90% of the issued capital must receive subscriptions or the offer will be said to have failed. In
such a case the application money received thus far must be returned within the prescribed time limit.
Types of Issue of Shares
1. Public Issue: Public issue or public offering refers to the issue of shares or convertible securities in the
primary market by the company’s promoters, so as to attract new investors for a subscription.
In a public issue, the shares are offered for sale in order to raise capital from the general public, for
which the company issues a prospectus. The investors who want to subscribe for the shares make an
application to the company, which then allots shares to them. The entity which makes an issue is called
an Issuer.
o Initial Public Offer: Otherwise called an IPO, as its name suggests it is the sale of company’s shares to
the public at large for the very first time. It is an offer in which an unlisted or privately held company
makes a fresh issue of shares or convertible securities, or an already listed company makes an issue of
existing shares or convertible securities, for the first time to the public at large.
In this way the unlisted or budding company lists its shares in the recognized stock exchange and goes
public, to raise funds for running the business. On the other hand, established entities make IPO
facilitate owners to sell some or all of their ownership to the public.
o Further Public Offer: If an already listed company, which has gone through an IPO offers new or in
better words, additional shares to the public for sale, so as to expand their equity base or pay off debts, it
is known as Follow-on Public Offer or Further Public Offer (FPO)
2. Right Issue: In a right issue, shares or convertible securities are offered to the existing shareholders at a
concessional rate, on a stipulated date, fixed by the company itself. The main aim of issuing right shares
is to raise additional funds by offering shares to the existing equity shareholders, in the proportion of
their holdings, rather than making a fresh issue.
3. Composite Issue: A composite issue is one in which an already listed company offers shares on the
public-cum-rights basis and makes concurrent allotment of the shares.
4. Bonus Issue: As the name itself suggests, it is the free additional shares distributed to the current
shareholders in the proportion of the fully paid-up equity shares held by them on a particular date. The
issue of these shares is made out of the company’s free reserves or securities premium account.
5. Private Placement: If a company offers shares to a selected group of investors which can be mutual
funds, banks, insurance companies, pension funds and so forth, to raise capital, is called private
placement.
o Preferential Issue: Preferential allotment is one in which a publicly listed enterprise allots shares to a
selected group of investors such as individuals, venture capitalists, companies on preferential basis.
o Qualified Institutional Placement (QIP): If a listed organization offers equity shares or non-
convertible securities to a qualified institutional buyer for sale to raise capital. Here qualified
institutional buyers include mutual funds, venture capital funds, public financial institutions, insurance
funds, scheduled commercial banks, pension funds, etc.
o Institutional Placement Programme (IPP): If a publicly listed company makes a follow-on offer of
equity shares or the promoters offer shares for sale, wherein the shares are allotted to the QIB’s only,
with the aim of achieving minimum public shareholding.
The company issues shares in order to raise funds from the general public, so as to apply these funds in
business operations. However, they can also be issued to serve other purposes also, as the money can be
utilized in repaying debts, funding a new project, acquiring another company.
What is SEBI’s role in an issue?

Any company making a public issue or a rights issue of securities of value more than Rs 50 lakhs is
required to file a draft offer document with SEBI for its observations. The validity period of SEBI’s
observation letter is twelve months only i.e. the company has to open its issue within the period of
twelve months starting from the date of issuing the observation letter.
There is no requirement of filing any offer document / notice to SEBI in case of preferential allotment
and Qualified Institution Placement (QIP). In QIP, Merchant Bankers handling the issue have to file the
placement document with Stock Exchanges for making the same available on their websites.
Given below are few clarifications regarding the role played by SEBI:
(a) Till the early nineties, the Controller of Capital Issues used to decide about the entry of a company in
the market and also about the price at which securities should be offered to the public.
However, following the introduction of a disclosure based regime under the aegis of SEBI, companies
can now determine the issue price of securities freely without any regulatory interference, with the
flexibility to take advantage of market forces.
(b) The primary issuances are governed by SEBI in terms of SEBI (ICDR) Regulations, 2009.
SEBI framed its Disclosures and Investor Protection (DIP) guidelines initially for public offerings
which were later converted into Regulations i.e. in 2009 by way of ICDR Regulations. The SEBI DIP
Guidelines, and subsequently ICDR Regulations, over the years have gone through many amendments
in keeping pace with the dynamic market scenario. It provides a comprehensive framework for issuing
securities by the companies.
(c) Before a company approaches the primary market to raise money by the fresh issuance of securities
it has to make sure that it is in compliance with all the requirements of SEBI (ICDR) Regulations, 2009.
The Merchant Banker are those specialised intermediaries registered with SEBI, who perform the due
diligence and ensures compliance with ICDR Regulations before the document is filed with SEBI.
(d) Officials of SEBI at various levels examine the compliance with ICDR Regulations and ensure that
all necessary material information is disclosed in the draft offer documents.
PROVISIONS OF COMPANIES ACT WITH RESPECT TO SUBSCRIPTION-ALLOTMENT,

CALLS, FORFEITURE, SURRENDER, TRANSFER AND TRANSMISSION
Meaning and Definition of Calls
A call may be defined as a demand made by the company on its shareholders to pay a part or the whole
of the unpaid balance within a specified time. Lord Lindley says that the expression “Call” denotes both
the demand for money and also the sum demanded.
The following points should be noted, in this context, so that the reader can understand what a call really
means.
1. Time for Making the Call: The call can be made at any time during the life time of the company or
during the course of winding up. During the life time, the call should be made by the Board of Directors
and during the course of winding up, it should be made by the liquidator.
2. Obligatory: Each shareholder is obliged to pay the amount of call as and when the call is made. But,
this liability arises only when the call is made and not before.
3. Debt Due: As soon as a call is made, the call amount shall become a debt due from the shareholders
to the company.
4. Consequences of Default: If a shareholder fails to pay the call amount, the company can enforce
payment of the amount together with interest or can forfeit the shares.
5. Calls and Other Payments: A call is different from other payments made by a shareholder. The
amounts paid on application and allotment are not calls. Similarly, if a company requires the
shareholders to pay the entire amount either on application or on allotment, it is not a call under this Act.
Legal Provisions Relating to the Calls

The statutory provisions relating to the making of calls can be summed up as follows:
1. Call should Bona fide: The power to make call is generally in nature of a trust and so it can be
exercised bona fide and for the benefit of the company. It should not be made for private ends. It means
the directors or the liquidator can make the call only when there is a bona fide need for funds.
2. Uniformity: The calls should be made on an uniform basis on all the shares falling under the same
class . If a call is made only on some shareholders of the same class but not on others or a greater
amount is demanded from some shareholders and a lesser amount from others of the same class, the call
is not valid.
3. Provisions of the Articles: The calls should be made strictly in accordance with the provisions of the
Articles. If this is not done, the call will be invalid.
Procedure for making Calls
Generally, the procedure for making calls is incorporated in the Articles of most companies. If a
company has its own Articles, it should follow the provisions of its Articles. If not, the regulations
specified in Table A of the Act shall apply.
The following provisions of Table A can be noted at this stage.

1. The power to make calls generally vests in the Board of Directors.
2. The calls should be made by passing a resolution at the meeting of the Board.
3. The call money should not exceed 50% of the face value of the share at one time. However,
companies may have their own Articles and raise this limit.
4. There must be at least 30 days interval between two successive calls.
5. When a call is made a letter known as “Call Letter” or “Call Notice” should be sent to all the
shareholders of the same class.
6. The notice should also specify the amount of the call, place of payment etc. and should be sent at
least 14 days before the last date for payment.
7. The Board of directors has the power to revoke or postpone a call after it is made.
8. Joint shareholders are jointly and severally liable for payment of calls.
9. If a member fails to pay call money, he is liable to pay interest not exceeding the rate specified in the
Articles or terms of issue. The directors are free to waive the payment of interest.
10. If any member desires to pay the call money in advance, the directors may at their discretion accept
and pay interest not exceeding the rate specified in the Articles.
11. A defaulting member will not have any voting right till call money is paid by him.
What is forfeiture of shares?

Forfeiture of shares is a process where the company forfeits the shares of a member or shareholder who
fails to pay the call on shares or instalments of the issue price of his shares within a certain period of
time after they fall due. In other words, when the shareholder fails to pay the full amount of shares
which he agreed to pay in instalments the company can cancel his shares.
When the shares are issued by the company, generally the shareholders are not asked to pay the whole
amount of share at once. It happens in instalments. The company makes these calls on shares when it
requires further capital.
The company may call up the unpaid money from the shareholders when it is needed from time to time.
The board of directors are required to pass a resolution for making a call on shares. The articles of the
company should contain the provisions regarding this call on shares and if nothing is mentioned in
the articles then Regulations 13-18 of table F of Schedule I of Companies Act, 2013, will apply.
Those provisions provide that
1. the amount called must be not more than one-fourth of the face value of share;
2. the dates of two consecutive calls must differ by at least a month;
3. a minimum of fourteen days’ notice must be given to members;
4. The notice has to mention the time, place and amount of the call on shares.
Generally, the company will give 14 days’ notice to the shareholder and after 14 days if the shareholder
is not willing to pay the money due to the company will forfeit the shares of that shareholder.
The relationship between shareholder and company

Now if we look at the relationship between a shareholder and the company, it is a contractual
relationship. The shareholder applies for an offer from the company and gets shares allotted. This
process is nothing but the shareholder entering into a contract with the company as the offer and
acceptance along with some consideration become a valid contract between him and the company. This
contract makes it binding upon the shareholder to pay-up the amount due on the issue price of the share
when the company calls for it through the call on shares.
So the non-payment of call on shares amounts to a breach of contract by the shareholder, and
therefore as per the terms and conditions of the issue of shares and after allowing the shareholder
prescribed time and opportunity, if he still fails to pay the money due, the company can forfeit the shares
of that shareholder. Shares which are forfeited will no longer remain the shares of that shareholder. The
money paid by that shareholder is also not refundable by the company.
What happens after the shares are forfeited?
After the shares are forfeited, they may be either disposed of or they may be reissued to some other
person. The only condition in reissuing the forfeited shares is that the price which will be fixed by
the company for reissue of the forfeited share (i.e., the price of the reissued share + amount paid
by the former owner of the share) should not be less than the face value of the share. This is done
to ensure that the shares are not allotted at a discount.
If the previous shareholder (whose shares has been forfeited) requests the company to cancel the
forfeiture, the board of directors can at any point before the reissue or disposal of such shares can cancel
the forfeiture of shares in terms as the board thinks fit. For this, the board of directors has to pass a
resolution to cancel the forfeiture.
Illustration
Pilot Ltd. has issued 1,00,000 equity shares of face value of Rs. 1000 each. The company set up its
amount on the share as Rs. 100 at the time of application, Rs. 200 at the time of allotment, Rs. 300 per
share on making the first call, and Rs. 40 on the final call.
Mr. Manoj has been allotted 400 shares by the company and while the final call of Rs. 400 is made by
the company he was unable to pay the money for that final call. The company gave a prescribed time
period and notice to Manoj and even after that he failed to pay the money.
Now the company can forfeit the shares of Manoj and he ceases to be a member of the company and
loses all rights on the shares he held.
Now Pilot Ltd. decided to reissue the forfeited shares to Mr. Rishvik and the minimum price at which
the shares can be issued should not be less than Rs. 400. This is because the amount of money paid by
Manoj (previous holder) is Rs. 600 and the face value of the share is Rs. 1000. Hence Rs.600 + Rs.400
will amount to 1000 and any amount which is less than Rs. 400 will amount to issuing the shares at a
discount which is prohibited under section 53 of Companies Act,2013.
Now if Mr. Manoj comes and pleads with the company to cancel the forfeiture of shares after the reissue
of the forfeited shares to Mr. Rishvik. This cannot happen because the board of directors has the
power to cancel the forfeiture only before the disposal or reissue of shares as per regulation 31(2)
of Table F, Schedule I of Companies Act, 2013.
Procedure for forfeiture of shares

Forfeiture of shares is a serious step since it involves depriving a person of his property as a penalty of
some act or omission. Accordingly, shares of members cannot be forfeited unless the articles of the
company confer such power on the directors. The forfeiture of a share should happen only for the non-
payment of the call on shares by the members and in accordance with articles of the company. But
forfeiture can also be made for any other reasons which are specified in the articles of the company.
Companies normally have their own rules and regulations regarding the forfeiture of shares and in case
if those provisions are not present then the Regulations 28-34 of Table F of Schedule 1 of Companies
Act, 2013 will apply.
The following is the procedure:
● In accordance with articles

Forfeiture of shares must be in accordance with the provisions contained in the articles of the company
to be treated as valid forfeiture. The power of forfeiture of shares must be exercised bona fide and in the
interest of the company. Thus, where the articles of the company authorize the directors to forfeit the
shares of a shareholder, who commences an action against the company or the directors, by making a
payment of the full amount of his shares, was held that such a clause was invalid as it was against the
rights of a shareholder [Hope v. International Finance Society (1876) 4 Ch. D. 598]
● Proper notice
A proper notice under the authority of the board must be served on the defaulting shareholder. The
notice should mention that the shareholder has to pay the amount on a day specified which would not be
earlier than fourteen days from the date of notice served. This is provided under Regulation 29 of
Table F. The notice should also mention that in the event of non-payment, the shares will be liable to be
forfeited.
The objective of sending the notice is to give the defaulting shareholder an opportunity to pay the call
money, interest and any other expenses and hence notice should disclose enough information with
particulars to the shareholder.
“A proper notice is a condition precedent to the forfeiture of shares and even the slightest defect in the
notice will invalidate the forfeiture”. [Public Passenger Services Ltd. v. M.A. Khader [1996]]
A notice sent for forfeiture by registered post was returned unserved, the forfeiture will
be held invalid” [Promiela Bansali v. Wearwell Cycle Co. Ltd. [1978] 48 Comp. Cas. 202 (Delhi).]
A notice sent to the holder of a partly paid share after his death is not a proper notice. Notice in this kind
of situation is to be sent to the legal heir [George Mathai Noorani v. Federal Bank Ltd. [2007] 76
SCL 528 (CLB).]
● Resolution for forfeiture

If the defaulting shareholder does not pay the amount within the specified period mentioned in the notice
properly served to him, the directors of the company may pass a resolution forfeiting the shares
under regulation 30 of Table F. in the absence of such resolution the forfeiture shall be invalid unless
the notice of forfeiture incorporates the resolution of forfeiture as well. For example, the notice may
state that in the event of default the shares shall be deemed to have been forfeited.
Effects of forfeiture
Cessation of membership
A person whose shares have been forfeited ceases to be a member in respect of forfeited shares. This is
provided under regulation 32(1) of Table F of schedule 1 of Companies Act, 2013.
Cessation of liability
The liability of a person whose shares have been forfeited comes to an end when the company receives
the payment in full of all such money in respect of shares forfeited. This is provided in Regulation 32(2)
of Table F.
However, notwithstanding the forfeiture of shares, shareholder remains liable to pay to the company all
money which, at the date of forfeiture, were payable by him to the company in respect of forfeited
shares. Thus, the liability of unpaid calls remains even after the forfeiture of shares.
Liability as past member

The liability of a former shareholder remains as a liability of a past member to pay calls if
liquidation of the company takes place within one year of the forfeiture.
Forfeited shares become company’s property

The forfeited shares become the property of the company on forfeiture. Accordingly, these may be re-
issued or otherwise disposed of on such terms and in such manner which the board of directors thinks
fit. This is provided under Regulation 31(1) of Table F.
In the same Regulation clause (2) provides that at any point of time before a sale or disposal of forfeited
shares the board may cancel the forfeiture of shares in terms as they think fit.
Surrender of shares
Surrender of shares means the return of shares by the shareholder to the company for cancellation.
Holder in this case voluntarily abandons all his shares in favour of the company. A mere refusal to take
up newly issued shares, to which a shareholder is entitled to, is not a surrender of shares. The
power to accept surrender of shares cannot be exercised by a company unless expressly given by the
Articles of Association.
But no shares can, in any case, be surrendered to the company in consideration of the payment of
money or money’s worth by the company. Such a surrender shall be ultra-vires the company since it
would amount to purchase by the company of its own shares. There are only two cases where surrender
of shares will be valid provided its acceptance by the company is authorised by the Articles of
Association—
1. When shares are surrendered in exchange for the new shares of the same nominal value. There would
be no reduction of share capital in such a case;
2. When shares are surrendered as a shortcut to forfeiture of shares when all the circumstances for
forfeiture have arisen. Reduction of capital in such a case shall be valid.
Provisions in the articles, for the acceptance of surrender of shares in all other cases except the above
two, will be void.
A member validly surrendering his shares to the company can nevertheless be held liable as a list
B contributory in the event of winding up of the company within twelve months of his surrender
of shares. Court may order for the restoration of the plaintiff’s name in the Register of Members after
lapse of any number of years if the surrender of shares is proved to be illegal and provided that the
shares have not been reissued in the meantime or otherwise dealt with by the company.
Transfer of shares
Section 56(1)
For transfer of shares there shall be following conditions-
a. Proper instrument of transfer of shares in physical form shall be in Form SH-4 i.e Share Transfer
Deed.
b. shall be duly stamped;
c. Shall be dated and executed by or on behalf of the Transferor and the Transferee,
d. Share Transfer deed shall specify the name, address, occupation if, any of the transferee.
e. It shall be delivered by the Transferor to the Company along with the Share Certificate, if no Share
certificate along with the letter of allotment.
2. Proviso to Section 56(1)
In case instrument of the transfer-
a. Lost,
b. not delivered within 60 days from its execution ;
then in such a case the company may register the transfer on such terms as to indemnity the Board as
may think fit.
3. Section 56(2)
Section 56(1) not applicable in case of transmission of any right to securities by operation of law and
any person to whom such right has been transmitted.
4. Section 56(3)
In case of transfer of shares a Company shall not record the transfer of shares unless the company has
given a notice in Form No.- SH-5 to the transferee and the transferee has given NOC to the transfer
within 2 weeks from the date of receipt of Notice.
5. Section 56(4)
Delivery of share certificate-
a. Within 2 Months from Incorporation date, in case of the subscriber to the Memorandum.
b. Within 2 Months from the date of allotment, in case of allotment of any shares.
c. within a period of 1 Month from the receipt of the share transfer deed or as the case may be the
intimation of transmission of shares/Securities;
d. 6 Months from the date of allotment in case of any debentures.
In case where the securities are dealt with the depository, the company shall intimate the details of
allotment of securities to the depository immediately on allotment of such securities.
6. Section 56(5)
The legal representative of any deceased person, can transfer the securities of the deceased person, even
if the legal representative is not the holder thereof, be valid as if he had been the holder at the of
execution of the share transfer deed.
Transmission of shares
Procedure for transmission of shares
i. Article shall contain the provisions of Transmission of shares.
ii. An application by the legal heir or as the case may be by survivors in case of joint holding, shall make
an application to the Company with the following annexure;
a. Death Certificate;
b. Succession Certificate;
c. Probate, etc
iii. After receipt of application the company shall record the particulars of the death certificate and a
reference number of recording entry is given to the shareholder so as to enable him to quote such
number in all future correspondence with the company.
iv. The Company shall make proper scrutiny of the documents and if found in order, Company shall
approve the transmission and register the shares in the name of legal heir or as the case may be survivor
in case of joint holder.
v. Dividend declared before the death of the shareholder shall be payable to his legal heir.
Unit III
Board of Directors-Appointment, qualifications and disqualifications powers and duties
Meaning of Director : Section 2(34) of the Companies Act, 2013 defines a “Director” to mean a director
appointed to the Board of a company. Only an individual can be appointed as a Director Sec 149
Every individual intending to be appointed as director of a company shall make an application for
allotment of Director Identification Number to the Central Gov.
Qualification of Directors
The Companies Act has not prescribed any academic or professional qualifications for the directors.
Also the Act imposes a share qualification on the director.
A director need not be a shareholder unless he wishes to be one voluntarily.
Appointment of Director
Appointment of First Director : If articles don’t provide, then subscribers to the memorandum are
deemed to be first directors. Consent to be director has to give to the registrar within 30 days of
appointment
Appointment at General meeting

Appointment by Board of Directors
The Board of Directors can exercise the power to appoint directors in the following three case:
● Additional Directors
● Alternate Directors Nominee Directors
● Filing up the casual vacancy
4. Resident Director : stayed in India for a period of less than 182 days
5. Alternate Directors : act for a director in the period of his absence for a period of not less than 3 months
6. Nominee Director : for the purpose of law or a policy
7. Additional Director : holds office until the next annual general meeting
8. Woman Director : min 1 for ever listed company, every other company having paid up capital of not less
than 100 crore rupees or turnover of 300 crore rupees or more
9. Shadow Director : not appointed as a director but on whose directions the board is accustomed at
10. Non Executive Director : does not engage in the day to day management but involved in policy making
and planning exercises
11. Small Shareholder Director : holding shareholders of not more than Rs 20k
12. Independent Director : is a person of relevant expertise and experience
Managing Director- Section 2(54) defined MD to mean a director who by virtue of the articles of the
company or a resolution passed in its general meeting is entrusted with substantial powers of
management of affairs of the company and includes a director occupying the position of MD
The MD exercised his powers subjected to the superintendence, control and direction of the BoD
MD is thus a director who carries on the day to day business of the company
Appointment of a MD
13. By virtue of an agreement with the company
14. By virtue of a resolution passed by the company in general meeting
15. By virtue of a resolution passed by the Board of Directors
16. By virtue of articles of Association
Managerial remuneration-Provisions
A managing director may be remunerated either by way of monthly payment or as a specified % of the
net profits of the company or partly by one way and partly by the other. However such remuneration
should not exceed 5% of the net profits without the sanction of the Central Government
Where there are more than one MD the total remuneration payable to all of them must not exceed 10%
of the net profits without sanction of the Central Government
Disqualification of MD
● No company shall appoint any person as a MD who is below the age of 21 years or has attained the age of
70 years.
● Is an undischarged insolvent or has at any time been adjudged as an insolvent
● Has at any time suspended payment to his creditors or makes or has at any time made a composition with
them
● Has at any time been convicted by a court of an offence and sentenced for a period of more than 6 months
Auditor –Qualifications, appointment, rights and duties

Section 141 (1) & (2) of the Companies Act, 2013 prescribed the following eligibility and qualifications of
auditor which are as follows:
1. A person, who is a chartered accountant and holds a certificate of practice, shall be qualified to be appointed as
an auditor of a company.
2. The partners who are chartered accountants of a firm alone shall be authorized to act and sign on behalf of the
firm.
Rights and Powers of Company Auditors

According to Section 227(7) of the Companies Act, a company auditor has the following rights:
1. Right of Access Books of Accounts: As per Section 227(1) of the Companies Act every auditor of the company has
the right to access at all times to the books of accounts and vouchers of the company, whether kept at the head office of
the company or elsewhere. Under section 209(1) (d), a company auditor has the right to examine the cost records also
which are required to be maintained by certain companies relating to production sales, stores etc.
2. Right to Obtain Information and Explanations: An auditor can call for any information or explanation from
different officers of the company which he may think necessary for the performance of his duties.
Apart from the auditor’s right to obtain information and explanation it is the duty of every officer of the company to
furnish without delay the information to the company auditor. If the directors or officers of the company refuse to
supply some information on the ground that in their opinion it is not necessary to furnish it, then the auditor has the
right to mention that in his audit report.
3. Right to Receive Notices and Other Communication Relating to General Meetings and to attend them:
According to section 231, of the companies act an auditor of a company has the right to receive notices and other
communications relating to the general meetings in the same way as that of the members of the company.
Similarly an auditor also has the right to attend any annual general meeting and also to be heard at those meetings
which he attends and which concerns him as an auditor.
The auditor also has the right to make a statement or explanation with regard to the accounts he has audited. But auditor
is not expected to answer questions in the general meeting.
4. Right to Visit Branches: According to section 228 of the companies act the auditor of the company has the right to
visit the branch office or offices of the company.
He can also audit such accounts of offices of the company provided that there is not a qualified auditor to audit the
accounts of the branch office or offices of the company, in such cases, the auditor has the right to access at all times to
the books of accounts and vouchers that the company maintains at branch office or offices.
Moreover section 226 of the companies act provides that in case of the company gets the branch accounts audited by
some of the local auditors, even the auditor has access at all times to the books, accounts and vouchers of the company
and he can also visit the branches, if he feels necessary.
5. Right to Correct Any Wrong Statement: The company auditor is required to make a report to the members of the
company on the accounts examined by him of the final accounts and the related documents which are laid down before
the company in the general meeting.
6. Right to sign the Audit Report: As per section 229 of the companies act only the person appointed as auditor of the
company or where a firm is so appointed, only a partner in the firm practicing in India, may sign the audit report or
authenticate any other document of the company required by law to be signed.
7. Right to Being Indemnified: Under Section 633 of the Companies Act, an auditor is considered to be an officer of
the company and he has the right to be indemnified out of the assets of the company against any liability incurred by
him in defending himself against any civil and criminal proceedings by the company if it is proved that the auditor has
acted honestly or the judgment is delivered in his favour.
8. Right to seek Legal and Technical Advice: The company auditor has the full right to seek the opinion of the
experts and to take their legal and technical advice so as to discharge his duties efficiently.
9. Right to Receive Remuneration: As per Section 224(8) of the Companies Act, the company auditor has the right to
receive remuneration provided he has completed the work which he has undertaken to do so.
Duties and Liabilities of a Company Auditor (Section 227):

Duties towards the shareholders:
1. Report shareholders about true and fair state of affairs of the company
2. State that balance sheet and profit and loss a/c give all information required by law
3. State that balance sheet and profit and loss a/c agree with the books of account
4. State that balance sheet and profit and loss a/c agree with accounting standards
5. State that he has obtained all the necessary information
6. State whether the company has maintained all books as required by law;
7. State the reasons of qualification in his report
8. State that he has received the audit report on the branch accounts audited by other auditor and how he has dealt with
the same in preparing his report
9. Auditor shall state in his report whether:
a) The loans taken are properly secured and the terms of loans are not against the interests of the company
b) Loans given are shown as fixed deposits and the terms of loans are not against the interests of the company
10. Transactions recorded as book entry are not against the interests of the company
11. Personal expenses of directors have not been charged to revenue a/c of company;
12. The company fulfills the requirements of CARO 2003.
Duties towards Company:

1. Prospectus: According to Sec 56, the auditor is required to certify profits or losses, assets & Liabilities and dividend
paid etc in the prospectus.
2. Statutory Report: Section 165 requires that the auditor has to certify the statutory report.
3. Public Deposits: Section 58AA requires the auditor to report about whether the company has followed all rules and
guideline of RBI in regard to public deposits or not.
4. Signature on Audit Report: Section 229: It is duty of auditor to sign on his report.
5. Insolvency (Section 488): If the company wants itself to be declared insolvent, it is duty of auditor to prepare profit
and loss a/c for the current period.
Duties towards Government:

1. CARO-2003: The auditor has to report para-wise that the company has fulfilled all the requirements of CARO-2003
{Company Audit Report Order}
2. Assist the Investigation u/s 237: It is duty of auditor to assist the investigation ordered by the CG u/s 237.
Duties towards General Public:

1. His office is of confidence and faith. He must be reliable in all respects.
2. He should reveal all material information regarding the state of affairs of the company to the company as well as to
the general public.
3. While issuing prospectus u/s 56, he should see that the prospectus does not include any misleading information or
material.
Role of a Company Secretary in Company Management.
Legal Position of a Company Secretary

The legal position of a company secretary may be explained as follows:
(a) Servant of the company: The Secretary of a company is servant of the company, whose duty is to act in
accordance within the instructions given to him by directors.
(b) Agent of the company: The secretary of a company, being chief administrative officer of the company by virtue of
his office, is also an agent of the company in a restricted sense. He also ostensible authority to enter into contracts on
behalf of the company as regards matters connected with office administration.
(c) Officer of the company: As an officer of the company, the secretary may incur personal liability to statutory
penalties by reason of non-compliance with the requirements of Companies Act, 2013. Besides, he is a chief officer
under whose supervision all ministerial and administrative work at registered office of the company is carried on.
Duties of the Company Secretary
The duties of a company secretary are classified under the following heads:
1. Statutory Duties:
A. Duties towards the company: The Companies Act, 2013 imposes a number of duties on the secretary such as:
(a) To make a statutory declaration for obtaining certificate of commencement of business;
(b) To sign annual report; and
(c) To sign every balance sheet and every profit and loss account in case of non-banking companies.
B. Duties to directors: The duties of a company secretary in relation to directors are:

(a) To work according to instructions of directors;
(b) To maintain all important correspondence, files and records for reference of directors; and
(c) To draft directors report.
C. Duties to whole-time managerial authority: If a company is managed by managing directors or a manager, the
main duties of a company secretary in relation to such managerial personnel are:
(a) To organize and control head office of the company efficiently;
(b) To submit all statutory returns in time; and
(c) To draft contracts with vendors, if any, and also with underwriters and share brokers.
2. General Duties:
A. Duties towards office and staff: It is a company secretary’s duty to see that various departments are properly
organized, supervised, co-ordinated and adequately staffed. He must act as a friend, philosopher and guide to staff.
B. Other duties: The miscellaneous duties of a company secretary are:

(a) To represent the company on social functions;
(b) To act very cautiously and in the best interest of the company, in case of any emergency;
(c) To act with authority and maintain secrecy of confidential matters; and
(d) To perform his duties honestly and diligently.
Unit IV
Meaning of Meetings
The word “meetings” means a gathering or assembly of directors or shareholders or of both for taking
decisions on the agenda before them.
Notice
A meeting cannot be validly held unless a proper notice of it has been given
17. AGM can be called by giving at least 21 days’ notice in writing or by electronic mode
18. Date of issue of notice & date of meeting have to be in addition to 21 days
Shorter notice
• AGM may be called even after giving a shorter notice if consent is given in writing or by electronic
mode by not less than 95% of the of the members entitled to vote at such meeting. The consent may be
taken before or during or even after the meeting
Contents of Notice
• (a) Place, day & hour of the meeting
• (b) Business to be transacted thereat (i.e. special or an ordinary business)
Notice to Whom
• (a) Every member
• (b) Legal representatives of the deceased member
• (c) Official assignees of the insolvent member
• (d) Auditors
• (e) Directors
Quorum (Public Company)

5 members personally present if the number of members as on the date of meeting is not more than one
thousand
15 members personally present if the number of members as on the date of meeting is between one
thousand to five thousand
30 members personally present if the number of members as on the date of meeting exceeds five
thousand
Private company 2 members personally present

Agenda : It is a part of the notice of the meeting which indicates the list of business issues to be
transacted at the meeting.
Legal Provisions to hold AGM 1 st AGM

1) AGM is to be held within 9 months of closing of financial year of the company
2) If AGM is so held, there is no need to hold AGM in the year of its incorporation
In case of other AGM

1) AGM is to be held within 6 months from the date of closing of financial year.
2) AGM is to held within 15 months of last AGM.
3) Registrar may for any special reason, can grant extension up to only 3 months
Time of AGM
AGM shall be held during business hours i.e. between 9 a.m. & 6 p.m.
Day of AGM AGM is to be held on a day that is not a National Holiday
Place of AGM AGM shall be held at the registered office of the company; or Some other place within
the city, town or village in which the registered office is situated
Statutory Meeting
Every public company limited by shares or limited by guarantee & having share capital must hold a
general meeting of its members, to be called statutory meeting. It is the first meeting of the members of
the company after its incorporation.
EGM {Emergency General Meeting}

1) By the Board of directors (on its own motion or on demand of the requisitionists), or
2) By any directors or any two members, or
3) By the Requisitionists themselves, or
4) By National Company Law Tribunal (NCLT)
On receipt of a valid requisition, the Board shall within 21 days proceed to call EGM to be held not
later than 45 days from the date of deposit of requisition. It must be held within 3 months from
the deposits of requisition.
Requisites of a valid Meeting

Board Meeting Essentials of a Valid Meeting 1. Frequency of Board Meeting 2. Notice of Board
meeting 3. Quorum of a Board Meeting 4. Chairman of a Board Meeting 5. Agenda of a Board Meeting
Length & mode of notice

• The act requires that not less than 7 days’ notice in writing shall be given to every director at the
registered address as available with the company.
• The notice can be given by hand delivery or by post or by electronic means
Quorum - it shall be 1/3rd of its total strength
Due to lack of quorum the meeting shall automatically stand adjourned to the same day at the same time
& place in the next week. If that day is a national holiday till the next succeeding day, which is not a
holiday, at the same time & place
Proper quorum is required at adjourned meeting but issue of fresh notice is not required.
The 1st BM of a company shall be held within 30 days of the date of incorporation. There shall be
minimum of 4 board meeting every year at interval of maximum of 120 days.
Annual General Meeting [AGM]

• Annual General Meeting of a company, is an annual meeting of the body of the member.
• Every company whether public or private, having share capital or not, limited or unlimited must hold
this meeting.
• Gap between two AGM’s (S.96)
• First AGM:- The first AGM of a company shall be held within nine months from the date of the
closing of its financial year. No extension of time can be allowed for holding the first AGM
Subsequent AGMs
• There must be one meeting held each year.
• The gap between two AGMs must not be more than fifteen months.
• Meetings must be held not later than six months from the close of the financial year.
• The Registrar may, for special reason, extend the time within which any annual general meeting shall
be held, by a period not exceeding three months.
Day, Hour and Place of AGM

• Every general meeting shall be called during
• business hours, between 9 am and 6 pm. on any day that is not a National Holiday and
• shall be held either at the registered office of the company or
• at some place within the city, in which the registered office of the company is situate.
Business to be Transacted [S.102]
• Ordinary Business:-
• 1. the consideration of financial statement and the reports of the Board of Directors and auditors;
• 2. the declaration of any dividend;
• 3. the appointment of directors in place of those retiring;
• 4. the appointment of, and the fixing of the remuneration of, the auditors
Business to be Transacted [S.102]

• Special Business:- Where any item of business to be transacted at the meeting is deemed to be special,
there shall be annexed to the notice calling such meeting, namely :-
• The nature of concern or interest, financial or otherwise of
• 1. every director and the manager, if any;
• 2. every other key managerial personnel; and
• 3. relative of the persons mentioned in 1 and 2 above.
• The statement should also contain any other information and facts that may enable members to
understand the meaning, scope and implications of the items of business and to take decision thereon.
The company must give clear 21 days notice to

• 1. every member of the company;
• 2. the legal representative of the deceased member;
• 3. the assignee of an insolvent member;
• 4. the auditor(s) of the company;
• 5. every director of the company.
• Notice may be given either in writing or through electronic mode in such manner as may be
prescribed.
• A general meeting may be called after giving a shorter notice if consent is given in writing or by
electronic mode by not less than 95% of the members entitled to vote at such meeting.
Extraordinary General Meet

All general meetings other than the annual general meeting shall be called extraordinary general
meetings.
• An EGM is convened for transacting some special or urgent business that may arise in between two
AGMs. Eg:- change in object clause, shift of registered office etc.
• All business transacted at such meetings is called special business.
EGM may be called:- • By the Board of Directors of its own accord; • By the Directors on requisition; •
By the requisitionists themselves; • By the Tribunal
Every company must hold a minimum number of 4 meetings of its Board of Directors every year
and the gap between two Board meetings must not be more than 120 days.
1. A meeting of the Board shall be called by giving not less than 7 days notice in writing to every director
at his address registered with the company and such notice shall be sent by hand delivery or by post or
by electronic means
2. Authority to Call Meeting : • Any Director of a company • The Company Secretary • Any person
authorized by the Board in this behalf • Managing Director • Whole-time Director
3. The notice of the Board meeting must be given to every director.
4. If a director is improperly or accidentally excluded from a meeting of the Board, he may sue for
declaration of the entire proceedings of the meeting as invalid. The officer whose duty was to give
notice shall be liable to a penalty of 25 thousand rupees
5. The notice must state the date, time and place of the meeting.
6. Board meetings may be held at any place and outside the business hours according to the convenience of
the directors.
7. Notice of the Meeting, wherein the facility of participation through Electronic Mode is provided, shall
clearly mention a venue, whether registered office or otherwise, be the venue of the Meeting and it shall
be the place where all the recordings of the proceedings at the Meeting would be made.
8. The quorum for a meeting of the Board of directors shall be 1/3rd of its total strength.
9. The participation of the directors by video conferencing or by other audio visual means shall be counted
for the purpose of quorum.
10. Quorum shall be present throughout the Meeting.
11. It must be present not only at the time of commencement of the Meeting but also while transacting
business.
Kinds of Meetings:
1. Shareholder’s Meetings: Annual General Meeting, Extraordinary Meeting, Class Meetings
2. Board Meetings
3. Meetings of the committees of the board
4. Meetings of the debenture holders
5. Meetings of the creditors
6. Meetings of contributories in winding-up
Length of Notice
For a general meeting at least 21 clear days notice must be given to members. Notice can be sent by
post, courier or electronic mode as may be prescribed
Chairman of a Meeting
person who has been designated or elected to preside over and conduct the proceedings of a meeting. In
case of a company, articles of association designate the chairman of board of directors
Minutes may be defined as the written record of the business transacted at a meeting. Statutory
obligation on every company to cause minutes of the proceedings of every general meeting of any class
of shareholders or creditors and every resolution passed by postal ballot and every meeting of its board
of directors or of every committee of the board to be recorded.
Unit V
Dividend means the share of the company’s profits distributed among the members. The corporate
earnings and profits not retained in the business, and when distributed among shareholders, are known
as ‘dividend’. Profits which can legally be distributed to the shareholders of the company in the
form of dividend are called ‘divisible profits’. Divisible profits imply the profits which the directors
consider should be distributed after making provision for past losses, for transfer to reserve or for other
purposes.
Sources out of which Dividend to be Paid (S.123)

1. Current Profits
2. Past reserves created out of profits or credit balance in the profit and loss account brought forward.
3. Out of moneys provided by Central Government or a State Government.
Out of Current Profits : Dividend may be declared out of the profits of the company for the current year
after providing for depreciation as per Schedule II. The company may transfer such a percentage of its
profits for that financial year as it may consider appropriate to the reserves of the company.
Out of Past Reserves:- No dividend shall be declared or paid by a company from its reserves other than
free reserves. In case of inadequacy or absence of profit a company may declare dividend subject to
following condition (Declaration and Payment of Dividend Rules, 2014)
1. the rate of dividend declared shall not exceed the average of the rates at which dividend was
declared by it in the three years immediately preceding that year.
2. the total amount to be drawn from such profit 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.
3. the amount so drawn shall first be utilized to set off the losses incurred in the financial year in
which dividend is declared before any dividend in the respect of equity shares is declared.
4. the balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as
appearing in the latest audited financial statement.
5. no company shall declare dividend unless carried over previous losses and depreciation not provided
in previous years are set off against profit of the company of the current year.
Money by Government
A company can also declare dividends out of the money provided by the Central or State Government
for payment of such dividend in pursuance of a guarantee given by that Government.
Dividend Payable to Whom?

Section 123(5) provides that no dividend shall be paid by a company in respect of any share therein
except to the registered shareholder of such share or to his order or to his banker. Payment of dividend in
case of sale of shares:- The dividend is required to be paid to the registered shareholder
Dividend is to be paid in Cash

No dividend shall be payable except in cash [123(5)].
Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the
shareholder entitled to the payment of the dividend.
Time within which dividends to be paid : The amount of dividend, including interim dividend shall be
deposited in a scheduled bank in a separate account within 5 days from the date of declaration of such
dividend. [123(4)].
payment of dividend-interim and final dividend (meaning and difference)
Company has to pay dividend, which is declared to the shareholder entitled therein within 30 days from
its declaration
Interim Dividend : A part of profits may be distributed before the accounts are finally passed and the
declaration of the dividend sanctioned in the annual general meeting. Such dividends are called “Interim
dividends”.
Provisions to interim dividend:

1. The board of directors may declare a interim dividend during any financial year out of surplus in profit
and loss account, out of the profits of the financial yearr in which the dividend is sought to be declared
2. Amount deposited in a separate scheduled bank account within 5 days from the date of declaration
Provisions regarding unpaid, unclaimed dividend and Investor Education and Protection Fund
Unpaid Dividend : Where a dividend has been declared by a company but has not been paid or claimed
within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend
the company shall within 7 days from the expiry of the said period of 30 days transfer the total
amount of dividend which remains unpaid or unclaimed within the said period of 30 days to a special
account to be opened by the company in that behalf in any scheduled bank to be called “Unpaid
Dividend Account”
Investor Education and Protection Fund [124(5)]
Any money transferred to the Unpaid Dividend Account of a company which remains unpaid or
unclaimed for a period of 7 years from the date of such transfer shall be transferred by the company
along with interest thereon to the Fund established and the company shall send a statement in the
prescribed form of the details of such transfer to the Authority which administers the said Fund and that
Authority shall issue a receipt to the company as evidence of such transfer.
Administration of the Fund:- The Central Government shall constitute an Authority for administration of
the Fund consisting of a chairperson and such other members, not exceeding 7 and a Chief Executive
Officer. The Authority shall administer the Fund and maintain separate accounts and other relevant
records in relation to the Fund in such form as prescribed after consultation with the Comptroller and
Auditor-General of India.
Unit VI
Dematerialization is the process of converting your physical shares and securities into digital or
electronic form. The basic agenda is to smoothen the process of buying, selling, transferring and holding
shares and also about making it cost-effective and full proof. All your securities are stored in an
electronic form instead of physical certificates. Two depositories called Central Depository Services
India Limited (CDSL), and National Securities Depository Limited (NSDL) is registered with the
Securities and Exchange Board of India also known as SEBI.
Why is Dematerialization Needed?

It’s sometimes hard to keep track of all the paper-based documents. Moreover, the increasing amount
of papers day by day may lead to missing an important document. It can become the cause of the
breakdown of the Indian Share Market and any businesses associated with it. Not only that, if a share
is being transferred 0.5% is saved for stamp duty. If the original certificates are somehow misplaced it
saves time and money in obtaining duplicate certificates. Shares that are dematerialized receive credits
and bonuses right into their account hence no chances of loss in transit followed by fewer interest
charges for loans associated with Demat accounts.
Process of Dematerialization
The Dematerialization starts with opening a Demat account.
Select a depository participant (DP): Most financial institutions and brokerage service firms are
referred to as Depository Participants.
● Fill an account opening form: You need to fill an account opening form to open a Demat account. This
includes basic contact information.
● Submit documents for verification: You need to submit a copy of your income proof, identity proof,
address proof, active bank account proof and one passport-sized photograph for verification. All copies
of documents need to be duly attested.
● Sign a standardized agreement with the DP: A standardized agreement will contain the rules and
regulations, charges you will incur and the terms and conditions of the agreement between you and the
depository participant.
● Verification of documents: A staff member from the DP will verify all the documents that you have
submitted in your application.
● Demat account number and ID are generated: Once all your documents have been verified, your
Demat account number and ID will be generated. You can use this information to access your online
Demat account.
Benefits of Dematerialisation
● Easy and Convenient
A Demat account provides you the facility to carry out the transactions electronically. There is no need
for you to be physically present at the broker’s place to settle a transaction. Moreover, the investor can
have access to the Demat account using a computer or smartphone. In addition, you can convert your
physical holdings into electronic format to become the legal owner of your shares.
● Fund Transfer
By linking your Demat account with the bank account you can easily transfer funds electronically. This
saves you from the hassles of drawing a cheque or transferring the funds manually.
● Safe and Secure
Demat account is the most secure and safest way to carry out transactions by electronic means. All the
risks like theft, damage, loss of share certificates, etc. that were associated with holding shares in
physical form are completely eliminated.
● Nomination Facility
Demat account provides you the facility to grant the right to operate your Demat account to the
nominee in your absence. With this facility, you can carry out transactions in your Demat account with
the help of a nominee when you are not in a situation to do it yourself.
● Paperless
One of the main benefits of using a Demat account is that it excludes the need for paper. Since the
Demat account is about holding shares or securities in electronic form, the need for the paper is almost
zero. In addition, the Demat account has also proved to be very useful for the companies in reducing
their administrative costs and hassles. Furthermore, cutting down paper usage is also good for the
environment.
● Avail Loan Facility
The Demat account helps you in availing loans against the holdings in dematerialized form. The
securities and shares held in Demat account can be kept as collateral and loan can be taken against
them.
● Easily Traceable
With the help of a Demat account, you can monitor your portfolio from your home, office or anywhere
across the globe. The flexibility to be able to monitor the portfolio performance enhances the chances
of you making more profits because of the increase in participation and interest.
● Ease In Receiving Corporate Benefits
Demat account eases the process of receiving various corporate benefits like dividends, interest,
refunds, etc. All the benefit amount gets directly credited into the Demat account. Moreover, other
benefits like stock splits, bonus shares, rights shares, etc. get directly updated into the Demat account.
● Multiple Purposes
In the Demat account, you can not only hold shares or equities but also debt instruments. You can
even purchase, hold and sell mutual fund units through the Demat account. In fact, you can even
purchase government bonds, exchange-traded funds, etc. in the Demat account
Features of Stock Exchange:

1. Organized Market
2. Securities Market
3. Constituent of Capital Market
4. Voluntary association of persons
5. Only members can deal in
6. Members of stock exchange can buy and sell securities as brokers and on behalf of customers
7. Dealings are under a certain accepted code of conduct
Stock Exchanges play a crucial role in the consolidation of a national economy in general and in the
development of industrial sector in particular. It is the most dynamic and organised component of capital
market. The securities regulation act of 1956 defined stock exchange as an association, organization or
an individual which is established for the purpose of assigning, regulating and controlling the business in
buying, selling and dealing in securities. Especially, in developing countries like India, the stock
exchanges play a cardinal role in promoting the level of capital formation through effective mobilization
of savings and ensuring investment safety. Important Functions of Stock Exchange/Secondary
Market:
1. Effective Mobilisation of savings: Stock exchanges provide organised market for an individual as
well as institutional investors. They regulate the trading transactions with proper rules and regulations in
order to ensure investor's protection. This helps to consolidate the confidence of investors and small
savers. Thus, stock exchanges attract small savings especially from a large number of investors in the
capital market.
2. Promoting Capital formation: The funds mobilised through the capital market are provided to the
industries engaged in the production of various goods and services useful for the society. This leads to
capital formation and development of national assets. The savings mobilised are channelised into
appropriate avenues of investment.
3. Wider Avenues of investment: Stock exchanges provide a wider avenue for the investment to the
people and organisations with investible surplus. Companies from diverse industries like Information
Technology, Steel, Chemicals, Fuels and Petroleum, Cement, Fertilizers, etc. offer various kinds of
equity and debt securities to the investors. Online trading has brought the stock exchange at the
doorsteps of investors through computer network. Diverse type of securities is made available in the
stock exchanges to suit the varying objectives and notions of different classes of investor. Necessary
information from stock exchanges available from different sources guides the investors in the
effective management of their investment portfolios.
4. Liquidity of investment: Stock exchanges provide liquidity of investment to the investors. Investors
can sell out any of their investments in securities at any time during trading days and trading hours on
stock exchanges. Thus, stock exchanges provide liquidity of investment. The online trading and online
settlement of demat securities facilitates the investors to sell out their investments and realise the
proceeds within a day or two. Even investors can switch over their investment from one security to
another according to the changing scenario of capital market.
5. Investment priorities: Stock exchanges facilitate the investors to decide his investment priorities by
providing him the basket of different kinds of securities of different industries and companies. He can
sell stock of one company and buy a stock of another company through stock exchange whenever he
wants. He can manage his investment portfolio to maximise his wealth.
6. Investment safety: Stock exchanges through their by-laws, Securities and Exchange Board of India
(SEBI) guidelines, transparent procedures try to provide safety to the investment in industrial securities.
Government has established the National Stock Exchange (NSE) and Over The Counter Exchange of
India (OTCEI) for investors' safety. Exchange authorities try to curb speculative practices and minimise
the risk for common investor to preserve his confidence.
7. Wide Marketability to Securities: Online price quoting system and online buying and selling
facility have changed the nature and working of stock exchanges. Formerly, the dealings on stock
exchanges were restricted to its headquarters. The investors across the country were absolutely in dark
about the price fluctuations on stock exchanges due to the lack of information. But today due to Internet,
on line quoting facility is available at the computers of investors. As a result, they can keep track of
price fluctuations taking place on stock exchange every second during the working hours. Certain T.V.
Channels like CNBC are fully devoted to stock market information and corporate news. Even other
channels display the on line quoting of stocks. Thus, modern stock exchanges backed up by internet and
information technology provide wide marketability to securities of the industries. Demat facility has
revolutionized the procedure of transfer of securities and facilitated marketing.
8. Financial resources for public and private sectors: Stock Exchanges make available the financial
resources available to the industries in public and private sector through various kinds of securities. Due
to the assurance of liquidity, marketing support, investment safety assured through stock exchanges, the
public issues of securities by these industries receive strong public response (resulting in over
subscription of issue).
9. Funds for Development Purpose: Stock exchanges enable the government to mobilize the funds for
public utilities and public undertakings which take up the developmental activities like power projects,
shipping, railways, telecommunication, dams & roads constructions, etc. Stock exchanges provide
liquidity, marketability, price continuity and constant evaluation of government securities.
10. Indicator of Industrial Development: Stock exchanges are the symbolic indicators of industrial
development of a nation. Productivity, efficiency, economic-status, prospects of each industry and every
unit in an industry is reflected through the price fluctuation of industrial securities on stock exchanges.
Stock exchange Sensex and price fluctuations of securities of various companies tell the entire story of
changes in industrial sector.
11. Barometer of National Economy: Stock exchange is taken as a Barometer of the economy of a
country. Each economy is economically symbolized (indicators) by its most significant stock exchange.
New York Stock Exchange, London Stock Exchange, Tokyo Stock Exchange and Bombay Stock
Exchange are considered as barometers of U.S.A, United Kingdom, Japan and India respectively. At
both national and international level these stock exchanges represent the progress and conditions of their
economies.Thus, stock exchange serves the nation in several ways through its diversified economic
services which include imparting liquidity to investments, providing marketability, enabling evaluation
and ensuring price continuity of securities.
Securities and Exchange Board of India (SEBI) is an apex body for overall development and regulation
of the securities market. It was set up on April 12, 1988. To start with, SEBI was set up as a non-statutory
body. Later on it became a statutory body under the Securities Exchange Board of India Act, 1992. The Act
entrusted SEBI with comprehensive powers over practically all the aspects of capital market operations.
Functions of SEBI
1. To protect the interests of investors through proper education and guidance as regards their investment in
securities. For this, SEBI has made rules and regulation to be followed by the financial intermediaries such
as brokers, etc. SEBI looks after the complaints received from investors for fair settlement. It also issues
booklets for the guidance and protection of small investors.
2. To regulate and control the business on stock exchanges and other security markets. For this, SEBI keeps
supervision on brokers. Registration of brokers and sub-brokers is made compulsory and they are expected
to follow certain rules and regulations. Effective control is also maintained by SEBI on the working of stock
exchanges.
3. To make registration and to regulate the functioning of intermediaries such as stock brokers, sub-brokers,
share transfer agents, merchant bankers and other intermediaries operating on the securities market. In
addition, to provide suitable training to intermediaries. This function is useful for healthy atmosphere on the
stock exchange and for the protection of small investors.
4. To register and regulate the working of mutual funds including UTI (Unit Trust of India). SEBI has made
rules and regulations to be followed by mutual funds. The purpose is to maintain effective supervision on
their operations & avoid their unfair and anti-investor activities.
5. To promote self-regulatory organization of intermediaries. SEBI is given wide statutory powers. However,
self-regulation is better than external regulation. Here, the function of SEBI is to encourage intermediaries
to form their professional associations and control undesirable activities of their members. SEBI can also
use its powers when required for protection of small investors.
6. To regulate mergers, takeovers and acquisitions of companies in order to protect the interest of investors.
For this, SEBI has issued suitable guidelines so that such mergers and takeovers will not be at the cost of
small investors.
7. To prohibit fraudulent and unfair practices of intermediaries operating on securities markets. SEBI is not for
interfering in the normal working of these intermediaries. Its function is to regulate and control their
objectional practices which may harm the investors and healthy growth of capital market.
8. To issue guidelines to companies regarding capital issues. Separate guidelines are prepared for first public
issue of new companies, for public issue by existing listed companies and for first public issue by existing
private companies. SEBI is expected to conduct research and publish information useful to all market
players (i.e. all buyers and sellers).
9. To conduct inspection, inquiries & audits of stock exchanges, intermediaries and self-regulating
organizations and to take suitable remedial measures wherever necessary. This function is undertaken for
orderly working of stock exchanges & intermediaries.
10. To restrict insider trading activity through suitable measures. This function is useful for avoiding
undesirable activities of brokers and securities scams.
Accountability of SEBI
1. SEBI order may be reviewed by Securities Appellate Tribunal (SAT)/ Supreme Court
2. Review of regulations by committee on subordinate legislation
3. Returns and Reports (Annual Report Rules 1994) to Central Government
4. Audit of accounts by CAG
Unit VII:
Meaning of Winding Up:
“Winding up is a means by which the dissolution of a company is brought about and its assets are
realized and applied in the payment of its debts. After satisfaction of the debts, the remaining balance, if
any, is paid back to the members in proportion to the contribution made by them to the capital of the
company.”
1. “The liquidation or winding up of a company is the process whereby its life is ended and its property
is administered for the benefit of its creditors and members. An Administrator, called a liquidator, is
appointed and he takes control of the company, collects its assets, pays its debts and finally distributes
any surplus among the members in accordance with their rights.”
2. As per Section 2(94A) of the Companies Act, 2013, “winding up” means winding up under this Act
or liquidation under the Insolvency and Bankruptcy Code, 2016.
Thus, winding up ultimately leads to the dissolution of the company. In between winding up and
dissolution, the legal entity of the company remains and it can be sued in a Tribunal of law.
A company is said to be dissolved when it ceases to exist as a corporate entity. On dissolution, the
company’s name shall be struck off by the Registrar from the Register of Companies and he shall also
get this fact published in the Official Gazette. The dissolution thus puts an end to the existence of the
company.
Difference between Dissolution & Winding Up of a Company:

Winding Up Dissolution
1. Winding up is one of the methods by which the dissolution Dissolution is the end result of winding
of a company is brought about. up.
2. The legal entity of the company continues at the Dissolution brings about an end to the
commencement of the winding-up. legal entity of the company
3. A company may be allowed to continue its business as far it The company ceases to exist on its
is necessary for the beneficial winding up of the company dissolution.
Modes of Winding Up of a Company: 2 ways
1. Compulsory Winding Up of a Company: Winding up a company by an order of the Tribunal is

known as compulsory winding up. Who may file a Petition to the Tribunal? A petition for
compulsory winding up of a company may be filed in the Tribunal by any of the following persons.
(Sec. 272)
i. Petition by the Company – A company can file a petition to the Tribunal for its winding up when the
members of the company have resolved by passing a Special Resolution to wind up the affairs of the
company. Managing Director or the directors cannot file such a petition on their own account unless
they do it on behalf of the company and with the proper authority of the members in the General
Meeting.
ii. Petition by the Contributories – A contributory shall be entitled to present a petition for the
winding up of the company, notwithstanding that he may be the holder of fully paid-up shares or that the
company may have no assets at all, or may have no surplus assets left for distribution among the holders
after the satisfaction of its liabilities. It is no more required of a contributory making petition to have
tangible interest in the assets of the company
iii. Petition by the Registrar – Registrar may with the previous sanction of the Central Government
make petition to the Tribunal for the winding up the company only in the following cases:
(a) If the company has made a default in filing with the Registrar its financial statements or annual
returns for immediately preceding five consecutive financial years;
(b) If the company has acted against the interests of the sovereignty and integrity of India the
security of the State friendly relations with foreign States, public order, decency or morality;
(c) If on an application made by the Registrar or any other person authorized by the Central
Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company
have been conducted in a fraudulent manner or the company was formed for a fraudulent and unlawful
purpose or the persons concerned in the formation or management of its affairs have been guilty of
fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be
wound up.
iv. Petition by the Central Government or a State Government on the ground that company has
acted against the interests of the sovereignty and integrity of India, the security of the State, friendly
relations with foreign States, public order, decency or morality.
v. Any person authorized by the Central Government in that behalf.
2. Liquidation under Insolvency and Bankruptcy Code 2016: The Insolvency and Bankruptcy Code,
2016 relates to re-organization and insolvency resolution of companies, partnership firms, and
individuals in a time-bound manner. The Insolvency and Bankruptcy Code, 2016 applies to matters
relating to the insolvency and liquidation of a company where the minimum amount of the default is Rs.
1 lakh (may be increased up to Rs.1 cr by the Government, by notification). The Code lays down two
stages:
Insolvency Resolution Process – It is the stage during which financial creditors assess whether the
debtor’s business is viable to continue and the options for its re-organization and re-structuring are
suggested; and
Liquidation – In case the insolvency resolution process fails, the liquidation process shall commence in
which the assets of the company are realized to pay off the creditors.
Modes of Dissolution:
1. Through transfer of a company’s undertaking to another under a scheme of reconstruction or
amalgamation. In such a case, the transfer or company will be dissolved by an order of the Tribunal
without being wound up.
2. Through the winding up of the company, wherein assets of the company are realized and applied
towards the payment of its liabilities. The surplus, if any, is distributed to the members of the company,
in accordance with their rights.
Modes of Winding-Up of a Company (2 Methods)

Compulsory winding up by the Tribunal
Voluntary by resolution of the company in general meeting: Members winding up or Creditors
A. Compulsory Winding-Up: It takes place when a company is directed to be wound-up by an order of
the Court.
Grounds for Compulsory Winding-up (Sec. 433):
A company may be wound-up by the Court under the following cases:
(i) Special Resolution of the Company:
If the company has, by special resolution, resolved that the Company be wound-up by the Court;
(ii) Default:
If a default is made in delivering the statutory report of the Registrar of Companies or in holding the
statutory meeting of the company, the court may make a winding-up order;
(iii) Not commencing or suspending the Company:
If the company does not commence its business within a year from its incorporation, or suspends its
business for a whole year;
(iv) Reduction of Members:
If the number of members falls below seven in case of a public company or below two in case of a
private company;
(v) Inability to pay Debts:
If the company is unable to pay its debts;
(vi) The Just and Equitable Clause:
If the Court is of opinion that it is just and equitable that the company should be wound-up.
Petition: i.e., Who can apply for Winding-up? (Sec. 439) A petition for the winding-up of a
company may be presented by any one of the following entities:
(a) By the Company [Sec. 439(1) (a)];
(b) By any Creditor [Sec. 439(1) (b)];
(c) By any Contributory [Sec. 439(1) (c)];
(d) By a Registrar [Sec. 439(1)(e)]; and
(e) By any person authorized by the Central Government [Sec. 439(1) (f)].
Procedure of Winding-Up Order by the Court [Official Liquidator (Sec. 448)]:

1. Petition
2. Provisional Liquidator
3. Company Liquidator
4. Removal and Replacement of Liquidator
5. Winding up Committee
Appointment:
The Companies Act, 1956, provides that in each High Court there must be attached an officer known as
the Official Liquidator appointed by the Central Government. There may also be Deputy or Assistant
Official Liquidator. Upon the presentation of a petition for winding-up, the Court may appoint the
official liquidator as the provisional liquidator. When the winding-up order is passed, the official
liquidator becomes the liquidator of the company (Sec. 449).
B. Voluntary Winding-Up:
Circumstances:
According to Sec. 484 of the Companies Act, a company can be wound-up voluntarily under the
following circumstances:
(1) By an Ordinary Resolution (passed in a general meeting in the following cases):
(a) Where the duration of the company was fixed by the articles and the period has expired; and
(b) Where the articles provided for winding-up on the occurrence of any event and the specified event
has occurred.
(2) By a Special Resolution (passed by the members in all other cases):
When a resolution is passed for voluntary winding-up it must be notified to the public by an
advertisement in the Official Gazette and in a local newspaper (Sec. 485).
Types of Voluntary Winding-Up:
Voluntary winding-up is of two types:
(a) Members’ Voluntary Winding-up; and
(b) Creditors’ Voluntary Winding-up.
(a) Members’ Voluntary Winding-up: If the company is, at the time of winding-up, a solvent
company, i.e., able to pay its debts and the directors make a declaration to that effect; it is called a
Members’ Voluntary Winding-up. The declaration must be verified by an affidavit.
(b) Creditors’ Voluntary Winding Up: If the declaration of solvency is not made and filed with the
Registrar, it may be presumed that the company is insolvent. In that case, the company must call a
meeting of its creditors (for the day or the day next following the day fixed for the company’s general
meeting) for passing the resolution for winding-up.
Powers of the Liquidators (Sec. 457):

(1) The liquidator, in a winding-up by the Court, has power to do the following with the sanction
of the Court:
(a) To institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the name
and on behalf of company;
(b) To carry on the business of the company so far as may be necessary for the beneficial winding-up of
the company;
(c) To sell the immovable property and actionable claims of the company by public auction or private
contract, with power to transfer the whole thereof to any person or body corporate or to sell to the same
in parcels;
(d) To raise on the security of the assets of the company any money requisites;
(e) To do all such other things as may be necessary for winding-up the affairs of the company and
distributing its assets.
According to Sec. 546, the liquidator can pay any class of creditors in full, make any compromise or
arrangement with creditors; and compromise any call or liability, with the sanction of the Court.
The liquidator can disclaim any onerous property or unprofitable contract.
(2) The liquidator in a winding-up by the court has power to do the following things, without
taking special permission from the court:
(a) To do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other
documents, and for that purpose to use, when necessary, the company’s seal;
(b) To inspect the records and returns of the company on the files of the Registrar without payment of
any fee;
(c) To prove, rank and claim in the insolvency of any contributory for any balance against his estate, and
to receive dividends in the insolvency;
(d) To draw, accept make and endorse any bill of exchange, hundi or promissory note in the name and
on behalf of the company;
(e) To take out, in his official name, letters of administration to any deceased contributory and to do in
his official name any other act necessary for obtaining payment of any money due from a contributory
or his estate which cannot be conveniently done in the name of the company;
(f) To appoint an agent to do any business which the liquidator is unable to do himself.
The Court can limit or modify the exercise of any of the powers of the liquidator enumerated under (2)
above.
Shareholders’ acquisition of membership & Rights of shareholders

Modes of Acquiring Membership A person may become a member in a company in any of the following
ways :
1. Membership by Subscribing to Memorandum All the subscribers to the memorandum are deemed to
have agreed to become members of the company and on the registration of the company their names are
automatically entered as members in the company's register of members. Thus, the signatories to the
memorandum become members of the company simply by reason of their having signed the
memorandum. Neither an application form nor allotment of shares is necessary for becoming a member
in their case. A person who signs the memorandum enters into a contract with the company to take the
number of shares written opposite his name and cannot repudiate his contract on the ground of
misrepresentation. In the case of Metal Constituents Co., (1902) 1.Ch. 707, a subscriber agreed to take
350 shares. Then, he wanted to rescind the contract on the ground of misrepresentation on the part of the
promoters. Held that the subscriber by signing the Memorandum becomes liable to other members in the
company brought into existence by his own act. So he can not rescind the contract
2. Membership by Qualification shares Before a person can be appointed a director of a public company,
he must take, or sign an undertaking to take and pay for the qualification shares. He thus becomes a
member and is in the same position as a subscriber to the memorandum of the company is.
3. Membership by Application and Allotment A person may become a member of a company by an

application for shares subject to formal acceptance by the company. The ordinary law of contracts
applies to the agreement to take shares in a company. An application for shares may be absolute or
conditional. If it is absolute, a simple allotment and notice thereof to the applicant will constitute the
agreement. If it is conditional, the allotment must be made on the basis of the conditions specified.
Where there is a conditional application for shares and an unconditional allotment, there is no contract
constituted. R agreed to take shares in a company provided he was appointed local manager of the
company. Shares were allotted to him but he was not given the appointment. R refused to take the
shares. It was held that R was not a member as his application was conditional and allotment was
unconditional. [Roger's case (1868) L.R. 3Ch. 633].
4. Membership by Transfer Where a transfer of share is made and the transfer is registered with the
company, the transferee becomes entitled to be placed on the company's register of members in the place
of the transferor in respect of the shares so transferred.
5. Membership by Transmission
On the death of a member his shares rest with his legal representative. The legal representative is
entitled to be registered as the holder of the shares and to get his name entered as member in the register
of members provided there is no provision in the articles of the company and for the purpose no
instrument of transfer is required to be delivered by him to the company. If a company unduly refuses to
accept a transmission, the same remedies are available to the legal representative as in the case of
transfer. In the case of Indian Chemical Products V. State of Orissa, AIR (1967) SC 253, by devolution,
the state of Orissa had become entitled to the shares of the Maharajas. But the company refused to
register the shares in the name of state's representative. It was held that the company was bound to
register the shares in favour of the state's representative because it was a case of transmission. And the
state became entitled to the shares due to the operation of law.
6. Membership by Estoppel If a person holds himself out in writing or allows his name to be on the
register of members, he is deemed to be a member of the company. Thus if a persons's name is
improperly placed on the register of members, and he knows and assents to it, he cannot afterwards say
that he is not a member. Estoppel is simply a rule of evidence which prevents a person from denying the
legal implications of his conduct.
Duties and Liabilities of Members

Duties
It is the duty of a shareholder : (a) As a subscriber of the memorandum, to take the share written
opposite his name direct from the company and pay for them ; (b) To take shares when they are duly
allotted to him and pay for them according to the terms of issue of the shares ; (c) To pay all valid calls
as and when they are made; (d) To abide by the decisions of the majority of members unless the
majority acts vindictively, oppressively, mala fide or fraudulently; (e) To contribute to the asset of the
company when it goes into liquidation.
Liability The liability of the members of a company depends upon the nature of the company.
Company limited by shares. In the case of a company limited by shares, the liability of a member of
company is the amount, if any unpaid on his shares. If his shares are fully paid, his liability is nil for all
purposes.
Company limited by guarantee. The liability of the members of a company limited by guarantee is
limited to the amount they undertook to contribute to the assets of the company in the event of winding
up.
Company with unlimited liability. Every member of an unlimited company is liable in full for all debts
contracted by the company during the period he was a member.
Rights of Members
When a person becomes a member of a company he is entitled to exercise all the rights of a member
until he ceases to be a member in accordance with the provisions of the Act. The rights of a member can
be classified under the following heads : (A) Statutory Rights Statutory rights are those which are given
to the members by the statute, i.e. the Companies Act, 1956. No document of the company can take
away or modify such rights.
Such rights, for example, are :
1. Right to receive copies of the Balance Sheet and Profit and Loss Account of the company along with
the auditor's report.
2. Right to obtain a copy of the contract for the appointment of managing directors/managers of the
company.
3. Right to receive notice of the general meetings of the company.
4. Right to get the copies of the Memorandum and the Articles of the company on payment of the
prescribed fees.
5. Right to inspect the register of members, and debentureholders and index registers, annual returns etc.
and get copies thereof on payment of the prescribed fee.
6. Right to inspect the debenture trust deed and get copies thereof on payment of the prescribed fees.
7. Right to inspect the register of charges and get copies thereof on payment of the prescribed fees.
8. Right to receive a copy of the statutory report.
9. Right to apply to the Central Government to call the annual general meeting when default is made by
the company in holding annual general meeting (AGM)
10. Right to attend the AGM.

11. Right to appoint a proxy to attend the AGM and vote in his place and right to inspect the proxy
register.
12. Right to receive a share certificate in respect of his share holding and a certificate of stock within a
prescribed time.
13. Right to transfer shares.
14. Right to receive dividend when declared by the company.
15. Preemptive right i.e. right to have the rights shares on any further issue of shares.
16. Right of participation in the appointment the directors who are to retire by rotation by taking part in
the AGM. 17. Right of participation in appointing the auditors and fixing their remuneration.
18. Right to have a share in the surplus of assets, if any, on the winding up of the company.
19. Right of dissident shareholders to apply to the court to have any variation of their rights cancelled.
20. Right to have notice of any resolution requiring a special notice in the meeting.
21. Right to inspect the shareholders' minutes book and get copies thereof on payment of the prescribed
fees.
(B) Documentary Rights There rights are the rights given by the two basic documents i.e. memorandum
of association and articles of association. The company may also give certain rights to its members by
expressly providing for them in the memorandum or the articles of the company
(C) Legal Rights These rights are given to members under general law. For example, a person who has
taken shares of a company on the faith of a misleading prospectus can avoid the contract and claim
damages under the general law
Share certificate:
According to section 84- A share certificate is a certificate issued by the company under its common
seal specifying the share held by any member. It is an evidence of the title of the allottee or transferee of
shares. Share Certificate: The Share Certificate is a document issued by the company and is prima facie
evidence to show that the person named therein is the holder (title) of the specified number of shares
stated therein. Share certificate is issued by the company to the (share holder) allottee of shares.
Contents of Share Certificate The company has to issue within 3 months from the date of allotment. In
case of default the allottee may approach the central government.(sec.113) A certificate may be
renewed or a duplicate of a certificate may be issued if such certificate:- is proved to have been lost or
destroyed, or having been defaced or mutilated or torn and the same is surrendered to the company
(sec.84(2) )
● Name and address of the registered office of the company.
● Serial number of the share certificate.
● Day and date of issue of the share certificate.
● Name and address of the shareholder.
● Number of the shares held by the shareholder.
● Distinctive numbers of shares.
● Class of shares.
● Nominal value of each share.
● Amount paid on each share.
● Revenue stamp.
● Impression of the common seal of the company.
● Space for the signature of two directors and the secretary.
The share certificate form consists of the three parts:-

● The counterfoil for reference.
● The certificate proper, and
● The receipt to be signed by the shareholder on receiving the certificate.
The share certificate forms are consecutively numbered and invariably bound in a book form. Every
share certificate shall be issued under the common seal of the company to be affixed in the presence of
at least two directors and the secretary of the company. Also, all these persons must sign the share
certificate.
Share Warrant
The share warrant is a bearer document issued by the company under the common seal of the company
stating that the bearer is entitled to the shares mentioned therein. As share warrant is a negotiable
instrument, it is transferred by endorsement and by mere delivery like any other negotiable instrument.
Public company, limited by shares, may if authorized by its Articles, with the previous approval of the
central Government and in respect of fully paid-up shares, issue a share warrant under its common seal.
Conditions for the issue of share warrants:--

1. The shares must be fully paid up.
2. The Articles of the company must be authorized to do so.
3. The company must obtain the permission of the central Government.
4. The share Warrants must be issued under the common seal of the company.
5. Only public companies limited by shares can issue share warrants. Private companies cannot.
Contents of share warrants: -

1. Share warrants consists of three parts: Counterfoil, share warrant and dividend coupon.
2. Name of the company.
3. Address of the registered office of the company.
4. Serial number of the share warrant.
5. Number of the share held by the shareholder.
6. Distinctive number of shares.
7. Nominal value of each share.
8. Day and date of issue of the share warrant.
9. Space for the signature of two directors and the secretary

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UNIT I: DEFINITION AND DIFFERENT TYPES OF COMPANIES

Object of registering a Memorandum of Association or MOA

Content of the MOA: Contents [Section 13] [6 clauses]

Alteration in Articles of Association

Difference between memorandum of association and articles of association

4 Strict restriction on alteration Altered by special resolution

Mode of forming in company (Sec. 12)

Steps in Incorporation of a Company

3. Preparation of Memorandum & AoA

6. Other Documents to be Filed with the Registrar of Companies:

CAPITAL STRUCTURE AKA DEBT-TO-EQUITY RATIO

Types of Capital Structure

Different Methods of Raising Capital for a Company

Importance of Capital Structure: Determines the overall stability of a firm.

Factors Determining Capital Structure

Unit II Different methods of raising capital: Owned Capital Vs Borrowed Capital

Types of Share Capital:

DEBENTURES- MEANING, TYPES AND CHARGES

Dividend can be paid to shareholders Interest can be paid to debenture holders

Dividend is an appropriation of profit and so it is Interest is a business expense and so it is allowed

No charge on asset of the company Charge created on asset of company

2. Section 74 – Repayment of deposits etc. accepted before Commencement of CA, 2013

Conditions on accepting deposits from Public or renewing deposits by Aforementioned Companies:

● Public Company accepting deposits form its members;

What is the Issue of Shares?

Types of Issue of Shares

What is SEBI’s role in an issue?

PROVISIONS OF COMPANIES ACT WITH RESPECT TO SUBSCRIPTION-ALLOTMENT,

Legal Provisions Relating to the Calls

Procedure for making Calls

The following provisions of Table A can be noted at this stage.

What is forfeiture of shares?

Those provisions provide that

The relationship between shareholder and company

Procedure for forfeiture of shares

● In accordance with articles

● Resolution for forfeiture

Liability as past member

Forfeited shares become company’s property

Appointment at General meeting

Auditor –Qualifications, appointment, rights and duties

Rights and Powers of Company Auditors

Duties and Liabilities of a Company Auditor (Section 227):

Duties towards Company:

Duties towards Government:

Duties towards General Public:

Role of a Company Secretary in Company Management.

Legal Position of a Company Secretary

B. Duties to directors: The duties of a company secretary in relation to directors are:

B. Other duties: The miscellaneous duties of a company secretary are:

Quorum (Public Company)

Private company 2 members personally present

Legal Provisions to hold AGM 1 st AGM

In case of other AGM

EGM {Emergency General Meeting}

Requisites of a valid Meeting

Length & mode of notice

Annual General Meeting [AGM]

Day, Hour and Place of AGM

Business to be Transacted [S.102]

The company must give clear 21 days notice to

Extraordinary General Meet

Sources out of which Dividend to be Paid (S.123)

Dividend Payable to Whom?