Notes On Law of Corporate Finance

NOTES ON
LAW OF CORPORATE FINANCE

For
10th Semester BBA LLB(Hons.)
Collaborated By on 10/11/2018
ASHWIN MENON V., ANSU SARA MATHEW, ANUSREE S.V., SRUTHI A.,
SRUTHI DAS, & AJAY RATNAN
10/5 BBA LLB(Hons.)
GOVERNMENT LAW COLLEGE, KOZHIKODE
CONTENTS
Title Page No.
MODULE 1 2-32
MODULE 2 33-49
MODULE 3 49-73
MODULE 4 74-81
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NOTES ON LAW OF CORPORATE FINANCE
MODULE 1
Sources of Corporate Finance – Equity and Preference Shares- Control Over Loan Capital –
Procedure for Raising Share Capital – Procedure for Issue and Allotment of Shares – SEBI’S
Control Over Different Types of Issues – Public Offerings – Right Issues – Private Placements.
SOURCES OF CORPORATE FINANCE
MEANING, NATURE AND SIGNIFICANCE OF BUSINESS FINANCE

According to Howard and Upton, “finance may be defined as that administrative area or set of
administrative functions in an organization which relates with the arrangement of each and
credit so that the organization may have the means to carry out the objectives as satisfactorily
as possible.
According to Guthmann & Dougall, business finance can be broadly defined as the activity
concerned with planning, raising, controlling and administering of funds used in the business.
Business finance deals with a broad spectrum of the financial activities of a business firm. It
refers to the raising and procurement of funds and their appropriate utilisation. It includes
within its scope commercial finance, industrial finance, proprietary finance corporation finance
and even agricultural finance.
Business is concerned with the production and distribution of goods and services for the
satisfaction of needs of society. For carrying out various activities, business requires money.
Finance, therefore, is called the life blood of any business. The requirements of funds by
business to carry out its various activities is called business finance. A business cannot function
unless adequate funds are made available to it. The initial capital contributed by the
entrepreneur is not always sufficient to take care of all financial requirements of the business.
A business person, therefore, has to look for different other sources from where the need for
funds can be met. A clear assessment of the financial needs and the identification of various
sources of finance, therefore, is a significant aspect of running a business organisation. The
need for funds arises from the stage when an entrepreneur decides to start a business. Some
funds are needed immediately say for the purchase of plant and machinery, furniture, and other
fixed assets. Similarly, some funds are required for day-to-day operations, say to purchase raw
materials, pay salaries to employees, etc. Also, when the business expands, it needs funds.
The financial needs of a business can be categorised as follows:
(a) Fixed capital requirements: In order to start business, funds are required to purchase fixed
assets like land and building, plant and machinery, and furniture and fixtures. This is known as
fixed capital requirements of the enterprise. The funds required in fixed assets remain
invested in the business for a long period of time. Different business units need varying amount
of fixed capital depending on various factors such as the nature of business, etc. A trading
concern for example, may require small amount of fixed capital as compared to a
manufacturing concern. Likewise, the need for fixed capital investment would be greater for a
large enterprise, as compared to that of a small enterprise.
(b) Working Capital requirements: The financial requirements of an enterprise do not end
with the procurement of fixed assets. No matter how small or large a business is, it needs funds
for its day-to-day operations. This is known as working capital of an enterprise, which is used
for holding current assets such as stock of material, bills receivables and for meeting current
Collaborated By: Ashwin Menon V., Ansu Sara Mathew, Anusree S.V., Sruthi Das, Sruthi A., &
Ajay Ratnan Page | 2
expenses like salaries, wages, taxes, and rent. The amount of working capital required varies
from one business concern to another depending on various factors. A business unit selling
goods on credit, or having a slow sales turnover, for example, would require more working
capital as compared to a concern selling its goods and services on cash basis or having a
speedier turnover. The requirement for fixed and working capital increases with the growth
and expansion of business. At times additional funds are required for upgrading the technology
employed so that the cost of production or operations can be reduced. Similarly, larger funds
may be required for building higher inventories for the festive season or to meet current debts
or expand the business or to shift to a new location. It is, therefore, important to evaluate the
different sources from where funds can be raised.
CLASSIFICATION OF SOURCES OF FUNDS
In case of proprietary and partnership concerns, the funds may be raised either from personal
sources or borrowings from banks, friends etc. In case of company form of organisation, the
different sources of business finance which are available may be categorised using different
basis viz., on the basis of the (i) period, (ii) source of generation and (iii) the ownership.
Sources of Funds
classification
On the basis of On the basis of On the basis of

Period Ownership Source of Generation
Long Term Owner’s Funds Internal Sources

*Equity Shares *Equity Shares *Equity Share Capital
*Retained Earnings *Retained Earnings *Retained Earnings
*Preference Shares
*Debentures
Borrowed Funds External Sources
*Loan from Financial
Institutions *Debentures *Financial Institutions
*Loan from Banks *Loan from Financial *Loan from Banks
Institutions *Preference Shares
Mid Term *Loan from Banks *Public Deposits
*Loan from Banks *Lease Financing *Debentures
*Public Deposits *Commercial Papers *Lease Financing
*Loan from Financial *Commercial Papers
Institutions *Trade Credit
*Lease Financing *Factoring
Short Term
*Trade Credit *Factoring *Banks *Commercial Papers
I. Period Basis On the basis of period, the different sources of funds can be categorised into
three parts. These are long-term sources, medium-term sources and short-term sources. The
long-term sources fulfil the financial requirements of an enterprise for a period exceeding 5
years and include sources such as shares and debentures, long-term borrowings and loans from
financial institutions. Such financing is generally required for the acquisition of fixed assets
such as equipment, plant, etc. Where the funds are required for a period of more than one year
but less than five years, medium-term sources of finance are used. These sources include
borrowings from commercial banks, public deposits, lease financing and loans from financial
institutions. Short-term funds are those which are required for a period not exceeding one year.
Trade credit, loans from commercial banks and commercial papers are some of the examples
of the sources that provide funds for short duration. Short-term financing is most common for
financing of current assets such as accounts receivable and inventories. Seasonal businesses
that must build inventories in anticipation of selling requirements often need short-term
financing for the interim period between seasons. Wholesalers and manufacturers with a major
portion of their assets tied up in inventories or receivables also require large amount of funds
for a short period.
II. Ownership Basis: On the basis of ownership, the sources can be classified into ‘owner’s
funds’ and ‘borrowed funds.’ Owner’s funds mean funds that are provided by the owners of an
enterprise, which may be a sole trader or partners or shareholders of a company. Apart from
capital, it also includes profits reinvested in the business. The owner’s capital remains invested
in the business for a longer duration and is not required to be refunded during the life period of
the business. Such capital forms the basis on which owners acquire their right of control of
management. Issue of equity shares and retained earnings are the two important sources from
where owner’s funds can be obtained. ‘Borrowed funds’ on the other hand, refer to the funds
raised through loans or borrowings. The sources for raising borrowed funds include loans from
commercial banks, loans from financial institutions, issue of debentures, public deposits and
trade credit. Such sources provide funds for a specified period, on certain terms and conditions
and have to be repaid after the expiry of that period. A fixed rate of interest is paid by the
borrowers on such funds. At times it puts a lot of burden on the business as payment of interest
is to be made even when the earnings are low or when loss is incurred. Generally, borrowed
funds are provided on the security of some fixed assets.
III. Source of Generation Basis: Another basis of categorising the sources of funds can be
whether the funds are generated from within the organisation or from external sources. Internal
sources of funds are those that are generated from within the business. A business, for example,
can generate funds internally by accelerating collection of receivables, disposing of surplus
inventories and ploughing back its profit. The internal sources of funds can fulfil only limited
needs of the business. External sources of funds include those sources that lie outside an
organisation, such as suppliers, lenders, and investors. When large amount of money is required
to be raised, it is generally done through the use of external sources. External funds may be
costly as compared to those raised through internal sources. In some cases, business is required
to mortgage its assets as security while obtaining funds from external sources. Issue of
debentures, borrowing from commercial banks and financial institutions and accepting public
deposits are some of the examples of external sources of funds commonly used by business
organisations.
SOURCES OF FINANCE: MERITS & DEMERITS
1.) Retained Earnings: A company generally does not distribute all its earnings amongst the
shareholders as dividends. A portion of the net earnings may be retained in the business for use
in the future. This is known as retained earnings. It is a source of internal financing or self-
financing or ‘ploughing back of profits’. The profit available for ploughing back in an
organisation depends on many factors like net profits, dividend policy and age of the
organisation.
Merits: The merits of retained earnings as a source of finance are as follows:
(i) Retained earnings is a permanent source of funds available to an organisation;
(ii) It does not involve any explicit cost in the form of interest, dividend or floatation
cost;
(iii) As the funds are generated internally, there is a greater degree of operational
freedom and flexibility;
(iv) It enhances the capacity of the business to absorb unexpected losses;
(v) It may lead to increase in the market price of the equity shares of a company.
Limitations: Retained earnings as a source of funds has the following limitations:
(i) Excessive ploughing back may cause dissatisfaction amongst the shareholders as
they would get lower dividends;
(ii) It is an uncertain source of funds as the profits of business are fluctuating;
(iii) The opportunity cost associated with these funds is not recognised by many firms.
This may lead to sub-optimal use of the funds.
2.) Trade Credit: Trade credit is the credit extended by one trader to another for the purchase
of goods and services. Trade credit facilitates the purchase of supplies without immediate
payment. Such credit appears in the records of the buyer of goods as ‘sundry creditors’ or
‘accounts payable’. Trade credit is commonly used by business organisations as a source of
short-term financing. It is granted to those customers who have reasonable amount of financial
standing and goodwill. The volume and period of credit extended depends on factors such as
reputation of the purchasing firm, financial position of the seller, volume of purchases, past
record of payment and degree of competition in the market. Terms of trade credit may vary
from one industry to another and from one person to another. A firm may also offer different
credit terms to different customers.
Merits: The important merits of trade credit are as follows:
(i) Trade credit is a convenient and continuous source of funds;
(ii) Trade credit may be readily available in case the credit worthiness of the customers
is known to the seller;
(iii) Trade credit needs to promote the sales of an organisation;
(iv) If an organisation wants to increase its inventory level in order to meet expected
rise in the sales volume in the near future, it may use trade credit to, finance the
same;
(v) It does not create any charge on the assets of the firm while providing funds.
Limitations: Trade credit as a source of funds has certain limitations, which are given as
follows:
(i) Availability of easy and flexible trade credit facilities may induce a firm to indulge
in overtrading, which may add to the risks of the firm;
(ii) Only limited amount of funds can be generated through trade credit;
(iii) It is generally a costly source of funds as compared to most other sources of raising
money.
3.) Factoring: Factoring is a financial service under which the ‘factor’ renders various services
which includes:
(a) Discounting of bills (with or without recourse) and collection of the client’s debts. Under
this, the receivables on account of sale of goods or services are sold to the factor at a certain
discount. The factor becomes responsible for all credit control and debt collection from the
buyer and provides protection against any bad debt losses to the firm. There are two methods
of factoring — recourse and non-recourse. Under recourse factoring, the client is not protected
against the risk of bad debts. On the other hand, the factor assumes the entire credit risk under
non-recourse factoring i.e., full amount of invoice is paid to the client in the event of the debt
becoming bad.
(b) Providing information about credit worthiness of prospective client’s etc., Factors hold
large amounts of information about the trading histories of the firms. This can be valuable to
those who are using factoring services and can thereby avoid doing business with customers
having poor payment record. Factors may also offer relevant consultancy services in the areas
of finance, marketing, etc. The factor charges fees for the services rendered. Factoring appeared
on the Indian financial scene only in the early nineties as a result of RBI initiatives.
Merits: The merits of factoring as a source of finance are as follows:
(i) Obtaining funds through factoring is cheaper than financing through other means
such as bank credit;
(ii) With cash flow accelerated by factoring, the client is able to meet his/her liabilities
promptly as and when these arise;
(iii) Factoring as a source of funds is flexible and ensures a definite pattern of cash
inflows from credit sales. It provides security for a debt that a firm might otherwise
be unable to obtain;
(iv) It does not create any charge on the assets of the firm;
(v) The client can concentrate on other functional areas of business as the responsibility
of credit control is shouldered by the factor.
Limitations: The limitations of factoring as a source of finance are as follows:
(i) This source is expensive when the invoices are numerous and smaller in amount;
(ii) The advance finance provided by the factor firm is generally available at a higher
interest cost than the usual rate of interest;
(iii) The factor is a third party to the customer who may not feel comfortable while
dealing with it.
4.) Lease Financing: A lease is a contractual agreement whereby one party i.e., the owner of
an asset grants the other party the right to use the asset in return for a periodic payment. In
other words, it is a renting of an asset for some specified period. The owner of the assets is
called the ‘lessor’ while the party that uses the assets is known as the ‘lessee’ (see Box A). The
lessee pays a fixed periodic amount called lease rental to the lessor for the use of the asset. The
terms and conditions regulating the lease arrangements are given in the lease contract. At the
end of the lease period, the asset goes back to the lessor. Lease finance provides an important
means of modernisation and diversification to the firm. Such type of financing is more
prevalent in the acquisition of such assets as computers and electronic equipment which
become obsolete quicker because of the fast-changing technological developments. While
making the leasing decision, the cost of leasing an asset must be compared with the cost of
owning the same.
Merits: The important merits of lease financing are as follows:
(i) It enables the lessee to acquire the asset with a lower investment;
(ii) Simple documentation makes it easier to finance assets;
(iii) Lease rentals paid by the lessee are deductible for computing taxable profits;
(iv) It provides finance without diluting the ownership or control of business;
(v) The lease agreement does not affect the debt raising capacity of an enterprise;
(vi) The risk of obsolescence is borne by the lesser. This allows greater flexibility to the
lessee to replace the asset.
Limitations: The limitations of lease financing are given as below:
(i) A lease arrangement may impose certain restrictions on the use of assets. For
example, it may not allow the lessee to make any alteration or modification in the
asset;
(ii) The normal business operations may be affected in case the lease is not renewed;
(iii) It may result in higher pay-out obligation in case the equipment is not found useful
and the lessee opts for premature termination of the lease agreement; and
(iv) The lessee never becomes the owner of the asset. It deprives him of the residual
value of the asset.
5.) Public Deposits: The deposits that are raised by organisations directly from the public are
known as public deposits. Rates of interest offered on public deposits are usually higher than
that offered on bank deposits. Any person who is interested in depositing money in an
organisation can do so by filling up a prescribed form. The organisation in return issues a
deposit receipt as acknowledgment of the debt. Public deposits can take care of both medium
and short-term financial requirements of a business. The deposits are beneficial to both the
depositor as well as to the organisation. While the depositors get higher interest rate than that
offered by banks, the cost of deposits to the company is less than the cost of borrowings from
banks. Companies generally invite public deposits for a period upto three years. The acceptance
of public deposits is regulated by the Reserve Bank of India.
Merits: The merits of public deposits are:
(i) The procedure of obtaining deposits is simple and does not contain restrictive
conditions as are generally there in a loan agreement;
(ii) Cost of public deposits is generally lower than the cost of borrowings from banks
and financial institutions;
(iii) Public deposits do not usually create any charge on the assets of the company. The
assets can be used as security for raising loans from other sources;
(iv) As the depositors do not have voting rights, the control of the company is not
diluted.
Limitations: The major limitation of public deposits are as follows:
(i) New companies generally find it difficult to raise funds through public deposits;
(ii) It is an unreliable source of finance as the public may not respond when the
company needs money;
(iii) Collection of public deposits may prove difficult, particularly when the size of
deposits required is large
6.) Commercial Paper (CP): Commercial Paper emerged as a source of short-term finance in
our country in the early nineties. Commercial paper is an unsecured promissory note issued by
a firm to raise funds for a short period, varying from 90 days to 364 days. It is issued by one
firm to other business firms, insurance companies, pension funds and banks. The amount raised
by CP is generally very large. As the debt is totally unsecured, the firms having good credit
rating can issue the CP. Its regulation comes under the purview of the Reserve Bank of India.
The merits and limitations of a Commercial Paper are as follows:
Merits: The merits of Commercial Papers are:
(i) A commercial paper is sold on an unsecured basis and does not contain any
restrictive conditions;
(ii) As it is a freely transferable instrument, it has high liquidity;
(iii) It provides more funds compared to other sources. Generally, the cost of CP to the
issuing firm is lower than the cost of commercial bank loans;
(iv) A commercial paper provides a continuous source of funds. This is because their
maturity can be tailored to suit the requirements of the issuing firm. Further,
maturing commercial paper can be repaid by selling new commercial paper;
(v) Companies can park their excess funds in commercial paper thereby earning some
good return on the same.
Limitations: The major limitation of Commercial Papers are as follows
(i) Only financially sound and highly rated firms can raise money through commercial
papers. New and moderately rated firms are not in a position to raise funds by this
method;
(ii) The size of money that can be raised through commercial paper is limited to the
excess liquidity available with the suppliers of funds at a particular time;
(iii) Commercial paper is an impersonal method of financing. As such if a firm is not in
a position to redeem its paper due to financial difficulties, extending the maturity
of a CP is not possible.
7.) Issue of Shares The capital obtained by issue of shares is known as share capital. The
capital of a company is divided into small units called shares. Each share has its nominal value.
For example, a company can issue 1,00,000 shares of Rs. 10 each for a total value of Rs.
10,00,000. The person holding the share is known as shareholder. There are two types of shares
normally issued by a company. These are equity shares and preference shares. The money
raised by issue of equity shares is called equity share capital, while the money raised by issue
of preference shares is called preference share capital.
(a) Equity Shares: Equity shares is the most important source of raising long term capital by
a company. Equity shares represent the ownership of a company and thus the capital raised by
issue of such shares is known as ownership capital or owner’s funds. Equity share capital is a
prerequisite to the creation of a company. Equity shareholders do not get a fixed dividend but
are paid on the basis of earnings by the company. They are referred to as ‘residual owners’
since they receive what is left after all other claims on the company’s income and assets have
been settled. They enjoy the reward as well as bear the risk of ownership. Their liability,
however, is limited to the extent of capital contributed by them in the company. Further,
through their right to vote, these shareholders have a right to participate in the management of
the company.
Merits: The important merits of raising funds through issuing equity shares are given as below:
(i) Equity shares are suitable for investors who are willing to assume risk for higher
returns;
(ii) Payment of dividend to the equity shareholders is not compulsory. Therefore, there
is no burden on the company in this respect;
(iii) Equity capital serves as permanent capital as it is to be repaid only at the time of
liquidation of a company. As it stands last in the list of claims, it provides a cushion
for creditors, in the event of winding up of a company;
(iv) Equity capital provides credit worthiness to the company and confidence to
prospective loan providers;
(v) Funds can be raised through equity issue without creating any charge on the assets
of the company. The assets of a company are, therefore, free to be mortgaged for
the purpose of borrowings, if the need be;
(vi) Democratic control over management of the company is assured due to voting rights
of equity shareholders.
Limitations: The major limitations of raising funds through issue of equity shares are as
follows:
(i) Investors who want steady income may not prefer equity shares as equity shares get
fluctuating returns;
(ii) The cost of equity shares is generally more as compared to the cost of raising funds
through other sources;
(iii) Issue of additional equity shares dilutes the voting power, and earnings of existing
equity shareholders;
(iv) More formalities and procedural delays are involved while raising funds through
issue of equity share.
(b) Preference Shares: The capital raised by issue of preference shares is called preference
share capital. The preference shareholders enjoy a preferential position over equity
shareholders in two ways: (i) receiving a fixed rate of dividend, out of the net profits of the
company, before any dividend is declared for equity shareholders; and (ii) receiving their
capital after the claims of the company’s creditors have been settled, at the time of liquidation.
In other words, as compared to the equity shareholders, the preference shareholders have a
preferential claim over dividend and repayment of capital. Preference shares resemble
debentures as they bear fixed rate of return. Also, as the dividend is payable only at the
discretion of the directors and only out of profit after tax, to that extent, these resemble equity
shares. Thus, preference shares have some characteristics of both equity shares and debentures.
Preference shareholders generally do not enjoy any voting rights. A company can issue
different types of preference shares.
Merits: The merits of preference shares are given as follows:
(i) Preference shares provide reasonably steady income in the form of fixed rate of
return and safety of investment;
(ii) Preference shares are useful for those investors who want fixed rate of return with
comparatively low risk;
(iii) It does not affect the control of equity shareholders over the management as
preference shareholders don’t have voting rights;
(iv) Payment of fixed rate of dividend to preference shares may enable a company to
declare higher rates of dividend for the equity shareholders in good times;
(v) Preference shareholders have a preferential right of repayment over equity
shareholders in the event of liquidation of a company;
(vi) Preference capital does not create any sort of charge against the assets of a company.
Limitations: The major limitations of preference shares as source of business finance are as
follows:
(i) Preference shares are not suitable for those investors who are willing to take risk
and are interested in higher returns;
(ii) Preference capital dilutes the claims of equity shareholders over assets of the
company;
(iii) The rate of dividend on preference shares is generally higher than the rate of interest
on debentures;
(iv) As the dividend on these shares is to be paid only when the company earns profit,
there is no assured return for the investors. Thus, these shares may not be very
attractive to the investors;
(v) The dividend paid is not deductible from profits as expense. Thus, there is no tax
saving as in the case of interest on loans.
8.) Debentures: Debentures are an important instrument for raising long term debt capital. A
company can raise funds through issue of debentures, which bear a fixed rate of interest. The
debenture issued by a company is an acknowledgment that the company has borrowed a certain
amount of money, which it promises to repay at a future date. Debenture holders are, therefore,
termed as creditors of the company. Debenture holders are paid a fixed stated amount of interest
at specified intervals say six months or one year. Public issue of debentures requires that the
issue be rated by a credit rating agency like CRISIL (Credit Rating and Information Services
of India Ltd.) on aspects like track record of the company, its profitability, debt servicing
capacity, credit worthiness and the perceived risk of lending. A company can issue different
types of debentures (see Box C and D). Issue of Zero Interest Debentures (ZID) which do not
carry any explicit rate of interest has also become popular in recent years. The difference
between the face value of the debenture and its purchase price is the return to the investor.
Merits: The merits of raising funds through debentures are given as follows:
(i) It is preferred by investors who want fixed income at lesser risk;

(ii) Debentures are fixed charge funds and do not participate in profits of the company;
(iii) The issue of debentures is suitable in the situation when the sales and earnings are
relatively stable;
(iv) As debentures do not carry voting rights, financing through debentures does not
dilute control of equity shareholders on management;
(v) Financing through debentures is less costly as compared to cost of preference or
equity capital as the interest payment on debentures is tax deductible.
Limitations: Debentures as source of funds has certain limitations. These are given as follows:
(i) As fixed charge instruments, debentures put a permanent burden on the earnings of
a company. There is a greater risk when earnings of the company fluctuate;
(ii) In case of redeemable debentures, the company has to make provisions for
repayment on the specified date, even during periods of financial difficulty;
(iii) Each company has certain borrowing capacity. With the issue of debentures, the
capacity of a company to further borrow funds reduces.
9.) Commercial Banks
Commercial banks occupy a vital position as they provide funds for different purposes as well
as for different time periods. Banks extend loans to firms of all sizes and in many ways, like,
cash credits, overdrafts, term loans, purchase/discounting of bills, and issue of letter of credit.
The rate of interest charged by banks depends on various factors such as the characteristics of
the firm and the level of interest rates in the economy. The loan is repaid either in lump sum or
in instalments. Bank credit is not a permanent source of funds. Though banks have started
extending loans for longer periods, generally such loans are used for medium to short periods.
The borrower is required to provide some security or create a charge on the assets of the firm
before a loan is sanctioned by a commercial bank.
Merits: The merits of raising funds from a commercial bank are as follows:
(i) Banks provide timely assistance to business by providing funds as and when needed
by it.
(ii) Secrecy of business can be maintained as the information supplied to the bank by
the borrowers is kept confidential;
(iii) Formalities such as issue of prospectus and underwriting are not required for raising
loans from a bank. This, therefore, is an easier source of funds;
(iv) Loan from a bank is a flexible source of finance as the loan amount can be increased
according to business needs and can be repaid in advance when funds are not
needed.
Limitations: The major limitations of commercial banks as a source of finance are as follows:
(i) Funds are generally available for short periods and its extension or renewal is
uncertain and difficult;
(ii) Banks make detailed investigation of the company’s affairs, financial structure etc.,
and may also ask for security of assets and personal sureties. This makes the
procedure of obtaining funds slightly difficult;
(iii) In some cases, difficult terms and conditions are imposed by banks. for the grant of
loan. For example, restrictions may be imposed on the sale of mortgaged goods,
thus making normal business working difficult.
10.) Financial Institutions: The government has established a number of financial institutions
all over the country to provide finance to business organisations. These institutions are
established by the central as well as state governments. They provide both owned capital and
loan capital for long- and medium-term requirements and supplement the traditional financial
agencies like commercial banks. As these institutions aim at promoting the industrial
development of a country, these are also called ‘development banks’. In addition to providing
financial assistance, these institutions also conduct market surveys and provide technical
assistance and managerial services to people who run the enterprises. This source of financing
is considered suitable when large funds for longer duration are required for expansion,
reorganisation and modernisation of an enterprise.
Merits: The merits of raising funds through financial institutions are as follows:
(i) Financial institutions provide long-term finance, which are not provided by
commercial banks;
(ii) Besides providing funds, many of these institutions provide financial, managerial
and technical advice and consultancy to business firms;
(iii) Obtaining loan from financial institutions increases the goodwill of the borrowing
company in the capital market. Consequently, such a company can raise funds
easily from other sources as well;
(iv) As repayment of loan can be made in easy instalments, it does not prove to be much
of a burden on the business;
(v) The funds are made available even during periods of depression, when other sources
of finance are not available.
Limitations: The major limitations of raising funds from financial institutions are as given
below:
(i) Financial institutions follow rigid criteria for grant of loans. Too many formalities
make the procedure time consuming and expensive;
(ii) Certain restrictions such as restriction on dividend payment are imposed on the
powers of the borrowing company by the financial institutions;
(iii) Financial institutions may have their nominees on the Board of Directors of the
borrowing company thereby restricting the powers of the company.
Inter Corporate Deposits (ICD)
Inter Corporate Deposits are unsecured short-term deposits made by a company with another
company. ICD market is used for short-term cash management of a large corporate. As per the
RBI guidelines, the minimum period of ICDs is 7 days which can be extended to one year. The
three types of Inter Corporate Deposits are: (i) Three months deposits; (ii) Six months deposits;
(iii) Call deposits. Interest rate on ICDs may remain fixed or may be floating. The rate of
interest on these deposits is higher than that of banks. These deposits are usually considered by
the borrower company to solve problems of short-term funds insufficiency.
INTERNATIONAL FINANCING
In addition to the sources discussed above, there are various avenues for organisations to raise
funds internationally. With the opening up of an economy and the operations of the business
organisations becoming global, Indian companies have an access to funds in global capital
market. Various international sources from where funds may be generated include:
(i) Commercial Banks: Commercial banks all over the world extend foreign currency loans
for business purposes. They are an important source of financing non-trade international
operations. The types of loans and services provided by banks vary from country to country.
For example, Standard Chartered emerged as a major source of foreign currency loans to the
Indian industry.
(ii) International Agencies and Development Banks: A number of international agencies and
development banks have emerged over the years to finance international trade and business.
These bodies provide long and medium-term loans and grants to promote the development of
economically backward areas in the world. These bodies were set up by the Governments of
developed countries of the world at national, regional and international levels for funding
various projects. The more notable among them include International Finance Corporation
(IFC), EXIM Bank and Asian Development Bank.
(iii) International Capital Markets: Modern organisations including multinational
companies depend upon sizeable borrowings in rupees as well as in foreign currency.
Prominent financial instruments used for this purpose are:
(a) Global Depository Receipts (GDR’s): The local currency shares of a company are
delivered to the depository bank. The depository bank issues depository receipts against these
shares. Such depository receipts denominated in US dollars are known as Global Depository
Receipts (GDR). GDR is a negotiable instrument and can be traded freely like any other
security. In the Indian context, a GDR is an instrument issued abroad by an Indian company to
raise funds in some foreign currency and is listed and traded on a foreign stock exchange. A
holder of GDR can at any time convert it into the number of shares it represents. The holders
of GDRs do not carry any voting rights but only dividends and capital appreciation. Many
Indian companies such as Infosys, Reliance, Wipro and ICICI have raised money through issue
of GDRs (see Box F).
(b) American Depository Receipts (ADRs): The depository receipts issued by a company in
the USA are known as American Depository Receipts. ADRs are bought and sold in American
markets, like regular stocks. It is similar to a GDR except that it can be issued only to American
citizens and can be listed and traded on a stock exchange of USA.
(c) Indian Depository Receipt (IDRs): An Indian Depository Receipt is a financial instrument
denominated in Indian Rupees in the form of a Depository Receipt. It is created by an Indian
Depository to enable a foreign company to raise funds from the Indian securities market. The
IDR is a specific Indian version of the similar global depository receipts. The foreign company
issuing IDR deposits shares to an Indian Depository (custodian of securities registered with the
Securities and Exchange Board of India). In turn, the depository issues receipts to investors in
India against these shares. The benefits of the underlying shares (like bonus, dividends, etc.)
accrue to the IDR holders in India.
According to SEBI guidelines, IDRs are issued to Indian residents in the same way as domestic
shares are issued. The issuer company makes a public offer in India, and residents can bid in
exactly the same format and method as they bid for Indian shares. ‘Standard Chartered PLC’
was the first company that issued Indian Depository Receipt in Indian securities market in June
2010.
(d) Foreign Currency Convertible Bonds (FCCBs): Foreign currency convertible bonds are
equity linked debt securities that are to be converted into equity or depository receipts after a
specific period. Thus, a holder of FCCB has the option of either converting them into equity
shares at a predetermined price or exchange rate, or retaining the bonds. The FCCB’s are issued
in a foreign currency and carry a fixed interest rate which is lower than the rate of any other
similar nonconvertible debt instrument. FCCB’s are listed and traded in foreign stock
exchanges. FCCB’s are very similar to the convertible debentures issued in India.
EQUITY AND PREFERENCE SHARES
Share is the share in the share capital of the company. The capital of a company is divided into
certain indivisible units of a fixed amount and such units are called shares. The shares of a
member in a company shall be movable property.
Types of shares
The company’s act 2013 authorises the issue of two types of shares. They are
(i) Preference Shares
(ii) Equity Shares
Preference Shares: are those shares which enjoy preferential right with respect to dividend
and repayment of capital on the winding up of the company. They may be of the following
types:
1. Cumulative preference shares: The holders of these shares have a right to claim fixed
dividend in all years. If in a particular year, there is no profit, the preference shareholder can
claim that year’s profit out of the next year’s profit. The dividend payable on these shares
goes on accumulating till it is fully paid off.
2. Non - Cumulative preference shares: These shareholders are entitled to get a fixed
dividend out of current year’s profit. If in a particular year, there is no profit, they cannot
claim the dividend in the next year.
3. Participating Preference shares
The holders of participating preference shares are not only entitled to fixed rate of dividend
but also to shares in the surplus of profit which remain after the claim of the equity
shareholders are met.
4. Non- Participating preference shares: The holders of non-participating preference shares
are entitled to a fixed rate of dividend. They do not share in the surplus profit of the company
along with equity shareholders.
5. Convertible Preference Shares: The holders of these shares have a right to convert them
into equity shares within a certain period.
6. Non-Convertible preference shares: The holders of these shares have no right to convert
shares into equity.
Equity Shares; Equity shares are those shares which are not preference shares. These shares
do not carry any preferential right. It may be with voting rights or with differential rights as to
dividend or voting.
Sweat Equity Shares: Sec 2(88) of the companies Act 2013, defines Sweat Equity shares, it
means equity shares issued by the company to its employees or directors at a discount or for
consideration other than cash for providing know how or making available rights in the nature
of intellectual property rights.
By Sec 54 of the Act, Sweat Equity Shares can be issued only on satisfying the following
conditions.
a) The issue of sweat equity shares is to be authorised by a special resolution
passed by the company in the general meeting.
b) The resolution should specify the number of shares, current market price, and
consideration, if any and the class or classes of directors or employees to whom
such equity shares are to be issued.
c) Not less than one year should have been elapsed since the company had
commenced its business.
The rights, limitations, restrictions, and provisions as are applicable equity
shares shall be applicable to the sweat equity shares. The holders of such shares
shall rank pari passu (equal) with other equity share holder.
CAPITAL
The term “Capital” has variety of meanings. It may mean one thing to an economist, one to an
accountant, while another to a businessman or a lawyer. A layman views capital as the money,
which a company has raised by issue of its shares. It uses this money to meet its requirements
by way of acquiring business premises and stock-in-trade, which are called the fixed capital
and the circulating capital respectively.
In Company Law, the “Capital” is the share capital of a company, which is classified as:
(a) Nominal, Authorised or Registered Capital: As per section 2(8), “authorised capital” or
“nominal capital” means such capital as is authorised by the memorandum of a company to be
the maximum amount of share capital of the company.
(b) Issued Capital: As per section 2(50), “issued capital” means such capital as the company
issues from time to time for subscription. It is that part of the authorised or nominal capital
which the company issues for the time being for public subscription and allotment. This is
computed at the face or nominal value.
(c) Subscribed Capital: According to Section 2(86), “subscribed capital” means such part of
the capital which is for the time being subscribed by the members of a company. It is that
portion of the issued capital at face value which has been subscribed for or taken up by the
subscribers of shares in the company. It is clear that the entire issued capital may or may not
be subscribed.
(d) Called up Capital: As per section 2(15), “called-up capital” means such part of the capital,
which has been called for payment. It is that portion of the subscribed capital which has been
called up or demanded on the shares by the company
(e) Paid-up Share Capital: As per section 2(64), “paid-up share capital” or “share capital
paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the
amount received as paid-up in respect of shares issued and also includes any amount credited
as paid-up in respect of shares of the company, but does not include any other amount received
in respect of such shares, by whatever name called.
(g) Preference and Equity Share Capital: As per explanation to Section 43
‘‘equity share capital’’, with reference to any company limited by shares, means all share
capital which is not preference share capital;
‘‘preference share capital’’, with reference to any company limited by shares, means that part
of the issued share capital of the company which carries or would carry a preferential right with
respect to—
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate,
which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share
capital paid-up or deemed to have been paid-up, whether or not, there is a preferential
right to the payment of any fixed premium or premium on any fixed scale, specified in
the memorandum or articles of the company;
Equity share capital may be with similar rights or equity shares with different voting rights as
described in Rule 4 of Companies (Share Capital and Debentures) Rules, 2014. A preference
share has a preference in regard to payment of fixed amount of dividend or fixed rate of
dividend and preferential right of the repayment of capital in the event of winding up of
company.
Meaning and Nature of a Share
Section 2(84) of the Act defines a share as “a share in the share capital of a company, and
includes stock except where a distinction between stock and shares is expressed or implied.
Section 43 of the Companies Act, 2013 permits a company limited by shares to issue two
classes of shares, namely: (a) Equity share capital—
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules
as may be prescribed.
(b) Preference Share Capital.
RAISING OF CAPITAL
(A). Raising of Capital from Promoters

When a company has been registered and has received the Certificate of Incorporation from
the Registrar of Companies, it is ready to raise capital sufficient to commence business and to
carry on its business satisfactorily.
A company raises its share capital in the first instance by issuing shares. Initially it is mostly
raised from the promoters/directors of the company and their friends/ relatives. It may repeat
this process of raising capital as many times as required during its existence and for expansion
of its business. A private company obtains the necessary capital from promoters, friends and
relatives by private placements/ arrangement as public at large cannot be invited to subscribe
to its share capital but where, large amount of capital is needed to run an enterprise, a public
company is formed and the promoters normally intend to approach the general public for a
greater part of the capital required by the company. It is no doubt possible for a public company
also to raise the necessary capital by Private Placement (not made to more than forty-nine
persons at a time) without inviting the general public to subscribe to its share capital. But public
companies raise major portion of their capital from the public at large on account of its various
advantages.
(B). Raising of Capital from Public
Broadly speaking, there are three methods by which a company can raise capital from the
public:
(a) By issuing a prospectus: This is the most obvious method by which a company seeks
to raise capital from the public. It invites offers from members of the public to subscribe
for its shares or debentures, through the prospectus. An investor studies the prospectus
and, if convinced, about the prospects of the company, applies for shares.
(b) By an offer for sale or by deemed prospectus: Here the company offers or agrees to
allocate shares or debentures at a price to a financial institution or an Issue House for sale
to the public. The Issuing House publishes a document called an ‘Offer For Sale’ with an
application form attached offering to the public shares or debentures for sale at a price
higher than what its holder(s) had paid for them or at par. This document is deemed to be
prospectus in law [Section 64(1)]. On receipt of applications from the public, the Issue
House renounces the allotment of the number of shares mentioned in the application in
favour of the applicant purchaser who becomes a direct holder of the shares.
(c) By private placement of Shares: A private limited company is prohibited by the Act
and the Articles from inviting the public for subscription of shares or debentures. It also
need not file a statement in lieu of prospectus. Its shares are issued privately to a small
number of persons known/related to the promoters. A public company can also raise
capital by private placement whereby a broker or an underwriter finds persons, normally
his clients, who wish to buy the shares. He acts merely as an agent and his function is
simply to procure buyers for the shares, i.e. to ―place‖ them. Since no public offer is made,
there is no need to issue any prospectus in this case.
(C). Raising Capital from Existing Shareholders: The capital is also raised by issue of rights
shares (Section 81) to the existing shareholders. In this case the shares are allotted to the
existing equity shareholders in proportion to their original shareholding, e.g., two shares
against every lot of five shares held by a member. For this purpose, the companies are required
to issue letter of offer as per provisions of the Act and SEBI Guidelines.
PROCEDURE FOR ISSUE AND ALLOTMENT OF SHARES
Provisions relating to Issue of Securities (Section 23)

(A). Issue of securities by a public company. A public company may issue securities:
(a) To public through prospectus (“public offer”) by complying with the provisions of Part I
of Chapter III of theAct; or
(b) Through private placement by complying with the provisions of Part II of Chapter III of
theAct; or
(c) Through a rights issue or a bonus issue in accordance with the provisions of this Act and
in case of a listed company or a company which intends to get its securities listed also with the
provisions of the SEBI Act, 1992 and the rules and regulations made thereunder.
In the case of a Public Company, which is a listed entity or is desirous of listing its securities
on a recognized stock exchange in India, the issue of securities is governed by the Companies
Act, Securities Contract Regulation Act, 1956, the SEBI Act, 1992 and the Issue of Capital and
Disclosure Requirements (Regulations), 2009. –
B.) Issue of securities by a private company – For a private company the section provides
that a private company may issue securities
(a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or
(b) through private placement by complying with the provisions of Part II Chapter III of the
Act. – In the case of all issues by Private Companies, the same is governed by the Companies
Act, 2013 and the power of administration is exercised by the Central Government, the
Tribunal or the Registrar of Companies as the case may be.
Dematerialization Section 29 of the Act provides that every company making public offer of
any security, shall issue the securities only in dematerialized form by complying with the
provisions of Depositories Act, 1996 and the regulations made thereunder. According to Rule
9 of Companies (Prospectus and Allotment of Securities) Rules, 2014 made under Chapter III
of the Act, the promoters of every public company making a public offer of any convertible
securities may hold such securities only in dematerialized form.
Securities include – (i) shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or other body
corporate;
PROSPECTUS
In general parlance prospectus refers to an information booklet or offer document on the basis
of which an investor invests in the securities of an issuer company. The prospectus has been
defined under section 2(70) so as to mean any document described or issued as a prospectus
and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to
in section 31 or any notice, circular, advertisement or other document inviting offers from the
public for the subscription or purchase of any securities of a body corporate.
Red herring Prospectus under explanation to section 32 has been defined as a prospectus
which does not include complete particulars of the quantum or price of the securities included
therein. In simple terms a red herring prospectus contains most of the information pertaining
to the company’s operations and prospects, but does not include key details of the issue such
as its price and the number of shares offered. A red herring prospectus shall carry the same
obligations as are applicable to a prospectus and any variation between the red herring
prospectus and a prospectus shall be highlighted as variations in the prospectus.
Shelf Prospectus under explanation to section 31 has been defined as a prospectus in respect
of which the securities or class of securities included therein are issued for subscription in one
or more issues over a certain period without the issue of a further prospectus. In simple terms
Shelf Prospectus is a single prospectus for multiple public. Issuer is permitted to offer and sell
securities to the public without a separate prospectus for each act of offering for a certain
period. Such prospectus is to be submitted at the stage of the first offer of securities which shall
indicate a period not exceeding one year as the period of validity of such prospectus. The
validity period shall commence from the date of opening of the first offer of securities under
that prospectus, and in respect of a second or subsequent offer of such securities issued during
the period of validity of that prospectus, no further prospectus is required.
Deemed Prospectus According to section 25(1) of the Companies Act, 2013, when a company
allots or agrees to allot any securities of the company with a view to all or any of those securities
being offered for sale to the public, any document by which the offer for sale to the public is
made, shall, for all purposes, be deemed to be a prospectus issued by the company. Section
25(2) provides that unless the contrary is proved, it shall be the evidence that an allotment of,
or an agreement to allot, securities was made with a view to securities being offered for sale to
the public if it is shown: -
(A) that an offer of securities or of any of them for sale to the public was made within
six months after the allotment or agreement to allot, or
(B) that at the date when the offer was made, the whole consideration to be received
by the company in respect of the securities had not been received by it.
Abridged Prospectus According to section 2(1) of the Act “abridged prospectus” means a
memorandum containing such salient features of a prospectus as may be specified by the
Securities and Exchange Board by making regulations in this behalf. Section 33 of the Act
provides that no form of application for the purchase of any of the securities of a company shall
be issued unless such form is accompanied by an abridged prospectus.
EQUITY SHARES WITH DIFFERENTIAL VOTING RIGHT
An equity share with differential rights is like an ordinary equity share, but it provides fewer
voting rights to the shareholder. The difference in the voting rights can be achieved by reducing
the degree of voting power. Companies issue equity share with differential rights for prevention
of a hostile takeover and dilution of voting rights. It also helps strategic investors who do not
want control, but are looking at a reasonably big investment in a company.
Section 43 provides that the share capital of a company limited by shares shall of two kinds,
namely: -
(a) Equity share capital –
(i) With voting rights; or
(ii) With differential rights as to dividend, voting or otherwise in accordance with such
rules as may be prescribed.
(b) preference share capital
Section 43 shall not apply to a Specified IFSC public company, where memorandum of
association or articles of association of such company provides for it. [Notification Date 4th
January, 2017] Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014 provides
that no company limited by shares shall issue equity shares with differential rights as to
dividend, voting or otherwise, unless it complies with the conditions mentioned in these rules:
Procedure for Issue of Equity Shares with Differential Voting Rights

(1) Check whether the Articles of Association of the company authorizes issue of equity
shares with differential rights and if not, then amend the Articles of Association of the
company.
(2) Hold the Board meeting to issue the notice of general meeting for issuance of equity share
with differential rights along with the explanatory statement u/s 102 of the Act.
(3) Before issuing equity shares with differential rights as to dividend, voting or otherwise,
ensure the following:
(i) the shares with differential rights shall not exceed twenty-six percent of the total post-
issue paid up equity share capital including equity shares with differential rights issued
at any point of time;
(ii) the company has consistent track record of distributable profits for the last three
years;
(iii)the company has not defaulted in filing financial statements and annual returns for
three financial years immediately preceding the financial year in which it is decided to
issue such shares;
(iv) the company has no subsisting default in the payment of a declared dividend to its
shareholders or repayment of its matured deposits or redemption of its preference shares
or debentures that have become due for redemption or payment of interest on such
deposits or debentures or payment of dividend;
(v) the company has not defaulted in payment of the dividend on preference shares or
repayment of any term loan from a public financial institution or State level financial
institution or scheduled Bank that has become repayable or interest payable thereon or
dues with respect to statutory payments relating to its employees to any authority or
default in crediting the amount in Investor
(vi) the company has not been penalized by Court or Tribunal during the last three
years of any offence under the Reserve Bank of India Act, 1934, the Securities and
Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the
Foreign Exchange Management Act, 1999 or any other special Act, under which such
companies being regulated by sectoral regulators.
(4) If the company is listed with any of the recognized stock exchange, then within 15 minutes
of the closure of the aforesaid Board Meeting intimate to the concerned Stock Exchange
about the decision taken at the Board Meeting.
(5) Pass the ordinary resolution in the general meeting.
(6) If the company is listed or if the number of members are more than 200 then ensure it
obtains the approval of its shareholders through postal ballot as per rule 22 of the Companies
(Management and administration) Rules, 2014.
(7) Once the company makes any allotment, then its shall, within 30 days thereafter, file with
the Registrar a return allotment in Form PAS-3, along with the fees as specified in the
Companies (Registration Offices and Fees) Rules, 2014.
(8) The company shall not convert its existing equity share capital with voting rights into
equity share capital carrying differential voting rights and vice–versa.
(9) In case of listed company, send copies of the notice and a copy of the proceedings of the
general meeting to the stock exchange within 24 hours of the occurrence of event. [Regulation
30(6) of SEBI (Listing Obligations and Disclosure Requirements), 2015]
(10) Complete all other proceedings for the issue of certificate of shares with differential voting
rights making necessary entries in various registers. In case of a company whose shares are
dematerialized form, inform the depositories about the same for credit to the respective
accounts.
(11) Intimate the details of allotment of shares to the Depository immediately on allotment of
such shares.
(12) Maintain the Register of Members under section 88 containing all the relevant particulars
of the shares so issued along with details of the shareholders.
ISSUE OF SHARES AT DISCOUNT
Section 53 of the Companies Act, 2013, prohibits a company to issue shares at discount except
in the case of issue of sweat equity shares. Any shares issued by a Company at a discount price
shall be void. A company may issue shares at a discount to its creditors when its debt is
converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme
Where a company contravenes the provisions of section 53, the company shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees
and every officer in default shall be punishable with imprisonment for a term of which may
extend to six months or with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees, or with both.
ISSUE OF SWEAT EQUITY SHARES
According to Section 2(88) of the Companies Act, 2013, sweat Equity Shares means such
equity shares issued by a company to its directors or employees at a discount or for
consideration, other than cash, for their providing know- how or making available rights in the
nature of intellectual property rights or value additions, by whatever name called.
Sweat equity shares are different from shares issued by a company under Employee Stock
Option Scheme (ESOS) and Employee Stock Purchase Scheme (ESPS).
The rights, limitations, restrictions and provisions applicable to equity shares shall be
applicable to sweat equity shares and holders of such shares shall rank pari- passu with other
equity shareholders.
Conditions for issuance of Sweat Equity Shares
Section 54 provides that, a company may issue sweat equity shares of a class of shares already
issued, if the following conditions are fulfilled, namely: -
(i) The issue is authorized by a special resolution passed by the company;
(ii) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to whom
such equity shares are to be issued;
(iii) Not less than one year has, at the date of such issue, elapsed since the date on which
the company had commenced business; and [Not applicable to Specified IFSC
public and private company]
(iv) Where the equity shares of the company are listed on a recognized stock exchange,
the sweat equity shares are issued in accordance with the regulations made by SEBI
in this behalf and if they are not so listed, the sweat equity shares are issued in
accordance with such rules made under the Chapter IV of the Companies Act, 2013.
ISSUE OF SHARES AT A PREMIUM
The word ‘premium’ implies something more than normal. With reference to shares and
securities issued by a company, premium means a sum over and above the face or par value of
a security. It is the amount which is excess of the issue price of a share over its face value (or
par value) and is referred to as ‘share premium’. When shares are issued by a company at a
price above their face value (or par value) then the shares are said to have been issued at a
‘premium’. It is the difference between the price at which a company issues a share and the
face value of a share.
Application of Securities Premium Account
Section 52 of the Companies Act, 2013 deals with the application of premium received on issue
of shares. In accordance with sub-section (1) of section 52, where a company issues shares at
a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the
premium on those shares shall be transferred to an account, to be called, “securities premium
account” and the provisions of this Act relating to reduction of share capital of a company shall,
except as provided in this section, apply as if the securities premium account were the paid-up
share capital of the company.
FURTHER ISSUE OF SHARES CAPITAL
Section 62 of the Companies Act contains provisions relating to further issue of share capital
through
(a) Rights issue of shares [Section 62(1)(a)]
(b) Issue of shares through Employee Stock Option [Section 62(1)(b)]
(c) Issue of shares on Preferential Basis [Section 62(1)(c)]
(A) Right issues
It is also known as Pre-emptive right of shareholders.Sec.62 of the companies Act, 2013,
deals with pre-emptive rights of shareholders. If a company proposes to increase the subscribed
capital by allotment of further shares, such shares shall be offered to the existing equity
shareholders in the ratio of shares held by them. The right of shareholders to be offered new
shares to them, before they are offered to the public is known as shareholders right of pre-
emption. The preferential right of the shareholders is otherwise known as “rights issue”.
The offer for new shares shall be made by notice specifying the number of shares offered. The
notices shall give a minimum fifteen and maximum thirty days’ time to accept the offer. If the
offer is not accepted within the time the shares may be sold to the public.
A company can offer the new shares to the public without offering it to the existing
shareholders if a special resolution is passed by the company in its general meeting authorising
the directors to allot shares to out siders.
(B) Employee Stock Option
Section 62(1)(b) of the Companies Act, 2013 provides that where at any time, a company
having a share capital proposes to increase its subscribed capital by the issue of further shares,
such shares shall be offered to employees under a scheme of employees’ stock option, subject
to special resolution passed by company and subject to such conditions as may be prescribed.
“Employees’ Stock Option” means the option given to the directors, officers or employees of
a company or of its holding company or subsidiary company or companies, if any, which gives
such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the
shares of the company at a future date at a pre-determined price [Section 2(37)]
Section 42(2) of the Companies Act, 2013 provides that the offer of securities or invitation to
subscribe securities, shall be made to such number of persons not exceeding fifty or such higher
number as may be prescribed [200 persons in the aggregate in a financial year as per Rule 14
of the Companies (Prospectus and Allotment of Securities) Rules, 2014], (excluding qualified
institutional buyers, and employees of the company being offered securities under a scheme
of employees stock option as per provisions of clause (b) of sub-section (1) of section 62), in a
financial year and on such conditions (including the form and manner of private placement) as
may be prescribed.
Explanation to Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 also
provides that ‘Preferential Offer’ means an issue of shares or other securities, by a company to
any select person or group of persons on a preferential basis and does not include shares or
other securities offered through employee stock option scheme, employee stock purchase
scheme.
Section 197(7) of the Companies Act, 2013 provides that notwithstanding anything contained
in any other provision of this Act but subject to the provisions of this section, an independent
director shall not be entitled to any stock option and may receive remuneration by way of fees
provided under sub-section (5), reimbursement of expenses for participation in the Board and
other meetings and profit related commission as may be approved by the members
(C) Issue of Shares on Preferential Basis

Section 62(1)(c) of the Companies Act 2013 read with Rule 13 of Companies (Share Capital
and Debentures) Rules 2014 enables issue of shares to persons other than the existing
shareholders/employees as specified in Section 62(1)(a) and Section 62(1)(b), provided if the
same is approved by special resolution and subject to the conditions stated in the said Rule 13.
Procedure for issue of shares on Preferential basis
(a) Check whether the issue is authorize by Articles. If not make necessary amendments to alter
the articles of association, through special resolution passed at the shareholders’ meeting.
(b) Convene a Board Meeting to approve the notice of General Meeting and necessary special
Resolution/s along with explanatory statements as required.
It is to be noted that preferential issue of share are required to comply with section 42 also
which relates to private placement. However, in case of preferential offer to one or more
existing members the aspects relating to letter offer as stated in rule 14(1) and proviso to rule
14(3) of Companies (Prospectus & Allotment of Securities) Rules, 2014 shall not apply.
(c) The company shall make the following disclosures in the explanatory statement to be
annexed to the notice of the general meeting pursuant to section 102 of the Act:
(i) The objects of the issue;
(ii) The total number of shares or other securities to be issued;
(iii) The price or price band at/within which the allotment is proposed;
(iv) Basis on which the price has been arrived at along with report of the registered
valuer;
(v) Relevant date with reference to which the price has been arrived at;
(vi) The class or classes of persons to whom the allotment is proposed to be made;
(vii) Intention of promoters, directors or key managerial personnel to subscribe to the
offer;
(viii) The proposed time within which the allotment shall be completed;
(ix) The names of the proposed allottees and the percentage of post preferential offer
capital that may be held by them;
(x) The change in control, if any, in the company that would occur consequent to the
preferential offer;
(xi) The number of persons to whom allotment on preferential basis have already been
made during the year, in terms of number of securities as well as price;
(xii) The justification for the allotment proposed to be made for consideration other than
cash together with valuation report of the registered valuer.
(xiii) The pre-issue and post issue shareholding pattern of the company in the prescribed
format
(d) Convene General Meeting and pass necessary Special Resolution/s.
(e) Ensure to file Form MGT-14 with Registrar of Companies within 30 days of passing the
Resolution.
(f) the allotment of securities on a preferential basis made pursuant to the special resolution
passed pursuant to sub-rule (2)(b) shall be completed within a period of 12 months from the
date of passing of the special resolution. If the allotment of securities is not completed within
12 months from the date of passing of the special resolution, another special resolution shall
be passed for the company to complete such allotment thereafter.
(g) the price of the shares or other securities to be issued on a preferential basis, either for cash
or for consideration other than cash, shall be determined on the basis of valuation report of a
registered valuer; and when convertible securities are offered on a preferential basis with an
option to apply for and get equity shares allotted, the price of the resultant shares pursuant to
conversion shall be determined:
(i) either upfront at the time when the offer of convertible securities is made on the basis
of valuation report of the registered valuer given at the stage of such offer, or
(ii) at the time, which shall not be earlier than thirty days to the date when the holder of
convertible security becomes entitled to apply for shares, on the basis of valuation
report of the registered valuer given not earlier than sixty days of the date when the
holder of convertible security becomes entitled to apply for shares.
The company shall take a decision on the above clause (i) and (ii) at the time of offer of
convertible security itself and make such disclosure in the explanatory statement to be annexed
to the notice.
(h) Where shares or other securities are to be allotted for consideration other than cash, the
valuation of such consideration shall be done by a registered valuer who shall submit a
valuation report to the company giving justification for the valuation;
(i) Where the preferential offer of shares is made for a non-cash consideration, such non-cash
consideration shall be treated in the following manner in the books of account of the company-
(i) Where the non-cash consideration takes the form of a depreciable or amortizable
asset, it shall be carried to the balance sheet of the company in accordance with the
accounting standards; or
(ii) Where clause (i) is not applicable, it shall be expensed as provided in the
accounting standards.
(j) Once the allotment is made, the company shall within 30 days of allotment, file with the
Registrar a return of allotment in Form PAS.3, along with the fee as specified in Companies
(Registration of Offices and Fees) Rules, 2014.
(k) Deliver the share certificates of allotted shares within a period of 2 months from the date
of allotment.
(l) Intimate the details of allotment of shares to the Depository immediately on allotment of
such shares
ISSUE OF BONUS SHARE
Companies issue bonus shares to encourage retail participation and increase their equity base.
When price per share of a company is high, it becomes difficult for new investors to buy shares
of that particular company. Increase in the number of shares reduces the price per share. But
the overall capital remains the same even if bonus shares are declared.
Sources of Bonus share: Section 63 provides that a company may issue fully paid-up bonus
shares to its members, in any manner whatsoever, out of –
(i) Its free reserves;
(ii) The securities premium account; or
(iii) The capital redemption reserve account.
No issue of bonus shares shall be made by capitalizing reserves created by the revaluation of
assets. The bonus shares shall not be issued in lieu of dividend.
Conditions for issue of Bonus Share
The following conditions must be satisfied before issuing bonus shares:
(a) It is authorized by its articles;
(b) It has, on the recommendation of the Board, been authorized in the general
meeting of the company;
(c) It has not defaulted in payment of interest or principal in respect of fixed

deposits or debt securities issued by it;
(d) It has not defaulted in respect of the payment of statutory dues of the employees,
such as, contribution to provident fund, gratuity and bonus;
(e) The partly paid-up shares, if any outstanding on the date of allotment, are made
fully paid-up;
(f) It complies with such conditions as may be prescribed. (Conditions prescribed
under rule 4 of Companies (Share Capital and Debentures) Rules, 2014)
Restrictions on withdrawal of Bonus Issue: Rule 14 of the Companies (Share Capital and
Debentures) Rules, 2014 provides that the company which has once announced the decision of
its Board recommending a bonus issue shall not subsequently withdraw the same.
PROCEDURE FOR ISSUE AND ALLOTMENT OF SHARES
A private company can start business as soon as it gets the certificate of incorporation. It is
prohibited by law to issue any prospectus, inviting the general public to subscribe towards its
share capital. The shares are taken up privately by the promoters and their relatives and friends.
But in case of public company, a proper procedure has been laid down in the Companies Act
for the issue and allotment of shares. The following are the main provisions of the Companies
Act relating to the issue and allotment of shares.
Provisions of companies act relating to issue and allotment of shares
1. A public company must file a prospectus or statement in lieu of prospectus, inviting offers
from the public for the purchase of shares in the company.
2. After studying the prospectus, the public applies for shares of the company in the printed
prescribed forms. The company can ask for the issue price of the share to be paid in full
along with the application or it can be payable in instalments as share application money,
share allotment money, share first call, share second call and so on. The amount payable
as application money must be at least 5 percent of the nominal amount of the share.
3. No allotment of shares can be made unless the ‘Minimum Subscription’ as given in the
prospectus had been subscribed or applied for. Minimum Subscription is the minimum
amount which, in the estimate of the directors, is required to run the business. It has to be
stated in the prospectus.
4. The amount of share application money must be deposited in a bank. It can be operated by
the company only after getting the certificate of commencement.
5. If the minimum subscription amount of 90% of the issue was not achieved by the company
within 60 days from the date of closure of the issue, the company has to refund the entire
subscription amount immediately. For any delay beyond 78 days, the company has to pay
an interest of 6% per annum.
After allotment, the directors can call upon the shareholders to pay the full amount due on
shares in one or more instalments as mentioned in the prospectus. The articles of a company
usually contain provisions regarding calls. If there is no such provision in the Articles, the
following provisions shall apply:
(i) No call shall be for more than 25% of the nominal value of each share.
(ii) Interval between any two calls should not be less than one month.
(iii) At least 14 days’ notice must be given to each member for a call specifying the
amount, date and place of payment.
(iv) Call should be made on a uniform basis on the entire body of shareholders falling
under the same class.
In India, Companies Act, 2013 discusses the procedure of allotment of shares and it is read
with Companies (Prospectus and Allotment of Securities) Rules, 2014.Section 23 of the
Companies Act, 2013 discusses the option to issue shares. In order to issue share the company
needs to be a registered company. There are four ways in which shares can be issued:
(i) Public issue (includes Initial Public Offering and Further Public Offering)
(ii) Private Placement
(iii) Rights issue
(iv) Bonus issue
Where a Public company can issue shares through Public Issue, Private Placement, Rights issue
or Bonus issue, a Private Company may issue shares by way of Rights issue or Bonus issue
and Private Placement.
In case of a Public issue the procedure is as follows:
1.) Issuing the prospectus: Section 26(1) deals with procedure of matter should be stated in
the prospectus. A prospectus bears an open invitation to public to buy shares of the company.
SEBI (Securities Exchange Board of India) is the regulator and thus a copy of the company’s
prospectus needs to be submitted before the publication date. The prospectus gives brief
information about the company, like:
(i) Name of the directors

(ii) Past Performance (including Reports of the company)
(iii) Terms of issue
(iv) Type of investment (for raising capital)
Apart from these details opening and closing dates of share issue, application form, application
fees, allotment and call-on dates, minimum shares for application and bank details for deposit
are provided in prospectus. The Registrar after ensuring compliance will register the
prospectus.
2.) Application of shares: After invitation, application can be submitted through prescribed
form along with application fee before closing date mentioned in prospectus. Allotment of
shares is done with the selected applicants and rest of applicants receive regret letters. Share
certificates are issued after the allotment is done.
3.) Call on shares: Call on shares is a way to collect remaining shares after application and
allotment as per the provisions of the prospectus. There’s first call, second call, etc. depending
on the number of instalments.
In case of a Private Placement the procedure is as follows: A Private Placement Offer Letter
is issued. Section 42 of Companies Act, 2013 discusses this provision and it should be read
with Rules. Number of allotments of shares is limited and rules are laid down for the same. No
company offering securities shall release any public advertisements or utilise any marketing
agents, etc. to inform the public at large about the offer. Return of allotment has to be filed
which should include a complete list of all security-holders.
General Principles Regarding Allotment
“Allotment” of shares means the act of appropriation by the Board of directors of the company
out of the previously un-appropriated capital of a company of a certain number of shares to
persons who have made applications for shares (In Re Calcutta Stock Exchange Association,
AIR 1957 Cal. 438). It is on allotment that shares come into existence. The following general
principles should be observed with regard to allotment of securities:
(1) The allotment should be made by proper authority. The proper authority may be the
Board Directors of the company, or a committee authorised to allot securities on behalf of
the Board.
(2) Allotment of securities must be made within a reasonable time (As per Section 6 of the
Indian Contract Act, 1872, an offer must be accepted within a reasonable time). What is
reasonable time is a question of fact in each case. An applicant may refuse to take securities
if the allotment is made after a long time. (As per Section 56 within a period of two months
from the date of allotment in the case of allotment of any of its shares.) 40 EP-CL
(3) The allotment should be absolute and unconditional. Securities must be allotted on
same terms on which they were applied for and as they are stated in the application for
securities. Allotment of securities subject to certain conditions is also not valid. Similarly,
if the number of securities allotted is less than those applied for, it cannot be termed as
absolute allotment.
(4) The allotment must be communicated. As mentioned earlier posting of letter of
allotment or allotment advice will be taken as a valid communication even if the letter is
lost in transit.
(5) Allotment against application only. Section 2(55) of the Act requires that a person should
agree in writing to become a member. (6) Allotment should not be in contravention of any
other law. If securities are allotted on an application of a minor, the allotment will be void
PUBLIC OFFERINGS
A public offering is the offering of securities of a company or a similar corporation to the

public. Generally, the securities are to be listed on a stock exchange. In most jurisdictions, a
public offering requires the issuing company to publish a prospectus detailing the terms and
rights attached to the offered security, as well as information on the company itself and its
finances. Many other regulatory requirements surround any public offering and they vary
according to jurisdiction.
Initial public offering (IPO) is one type of public offering. Not all public offerings are IPOs.
An IPO occurs only when a company offers its shares (not other securities) for the first time
for public ownership and trading, an act making it a public company. However, public offerings
are also made by already-listed companies. The company issues additional securities to the
public, adding to those currently being traded. For example, a listed company with 8
million shares outstanding can offer to the public another 2 million shares. This is a public
offering but not an IPO. Once the transaction is complete, the company will have 10 million
shares outstanding. Non-initial public offering of equity is also called seasoned equity offering.
A shelf prospectus is often used by companies in exactly that situation. Instead of drafting one
before each public offering, the company can file a single prospectus detailing the terms of
many different securities it might offer in the next several years. Shortly before the offering (if
any) actually takes place, the company informs the public of material changes in its finances
and outlook since the publication of the shelf prospectus.
Other types of securities, besides shares, can be offered publicly. Bonds, warrants, capital
notes and many other kinds of debt and equity vehicles are offered, issued and traded in public
capital markets. A private company, with no shares listed publicly, can still issue other
securities to the public and have them traded on an exchange. A public company may also offer
and list other securities alongside its shares.
Most public offerings are in the primary market, that is, the issuing company itself is the offerer
of securities to the public. The offered securities are then issued (allocated, allotted) to the new
owners. If it is an offering of shares, this means that the company's outstanding capital grows.
If it is an offering of other securities, this entails the creation or expansion of a series (of bonds,
warrants, etc.). However, more rarely, public offerings take place in the secondary market. This
is called a secondary market offering: existing security holders offer to sell their stake to other,
new owners, through the stock exchange. The offerer is different from the issuer (the company).
A secondary market offering is still a public offering with much the same requirements,
including a prospectus.
The services of an underwriter are often used to conduct a public offering.
PRIVATE PLACEMENT
Under the private placement, the offer of securities or invitation to subscribe securities, shall
be made to such number of persons not exceeding fifty or such higher number as may be
prescribed, (excluding qualified institutional buyers, and employees of the company being
offered securities under a scheme of employee stock option), in a financial year and on such
conditions as may be specified under Rule 14(2) of Companies (Prospectus and Allotment of
Securities) Rules, 2014. Rule 14(2) prescribes that such offer or invitation shall be made to not
more than 200 persons in aggregate in a Financial Year.
According to section 42(4) any offer or invitation not in compliance with the provisions of
section 42 shall be treated as public offer and all provisions of this Act, and Securities Contracts
(Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall
required to be complied with.
Offer Made only to Specified Persons: Section 42(7) states that private placement shall be
made only to such persons whose names are recorded by the company prior to the invitation to
subscribe, and that such person shall receive the offer by name, and that a complete record of
such offers shall be kept by the company in such manner as may be prescribed and complete
information about such offer shall be filed with the registrar within a period of 30 days of
circulation of the relevant private placement offer letter. Section 42(7) is not applicable to
Specified IFSC private and public company
Allotment of Securities : According to subsection (6) of section 42, the company shall allot
its securities within 60 days from the date of receipt of application money, if it does not allot
within 60 days then the application money shall be repaid within 15 days after the expiry of 60
days and if company does not pay money after the aforesaid period, the company is liable to
repay the money with interest @ 12% per annum from the expiry of 60 days.
However, the Specified IFSC public and private company shall allot its securities within 90
days from the date of receipt of application money, if it does not allot within 90 days then the
application money shall be repaid within 15 days after the expiry of 90 days and if company
does not pay money after the aforesaid period, the company is liable to repay the money with
interest @ 12% per annum from the expiry of 90 days.
Monies to be kept in separate bank account: The monies received shall be kept in separate
bank account with a scheduled bank and shall not be utilized for any purpose other than –
(a) For adjustment against allotment of securities
(b) For the repayment of monies where the company is unable to allot securities.
Exemption to NBFC and HFC
Sub rule 5 of Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
provides that the criteria of offer or invitation to 200 persons in aggregate in a financial year
and minimum investment size of twenty thousand rupees of face value shall not be applicable
to Non-banking Financial Companies registered with the Reserve bank of India and Housing
Finance Companies registered with the National Housing Bank, if they are complying with the
regulations made by RBI or NHB in respect of offer or invitation to be issued on private
placement basis.
SEBI’S ROLE IN AN ISSUE
Any company making a public issue or a rights issue of securities of value more than ` fifty
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 Banker handling the
issue has 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, Controller of Capital Issues used to decide about entry of company
in the market and also about the price at which securities should be offered to public. However,
following the introduction of disclosure-based regime under the aegis of SEBI, companies can
now determine 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 (Disclosures and Investor
protection) guidelines. SEBI framed its DIP guidelines in 1992. The SEBI DIP Guidelines over
the years have gone through many amendments in keeping pace with the dynamic market
scenario. It provides a comprehensive framework for issuing of 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 (DIP)
Guidelines, 2000. The Merchant Banker are those specialized intermediaries registered with
SEBI, who perform the due diligence process and ensures compliance with DIP guidelines
before the document is filed with SEBI.
(d) Officials of SEBI at various levels examine the compliance with DIP guidelines and ensure
that all necessary material information is disclosed in the draft offer documents.
Still there are certain mis-conceptions prevailing in the mind of investors about the role of
SEBI which are clarified here in under:
It should be distinctly understood that SEBI does not recommend any issue nor does it take any
responsibility either for the financial soundness of any scheme or the project for which the
issue is proposed to be made.
Submission of offer document to SEBI should not in any way be deemed or construed that the
same has been cleared or approved by SEBI. The Lead manager certifies that the disclosures
made in the offer document are generally adequate and are in conformity with SEBI guidelines
for disclosures and investor protection in force for the time being. This requirement is to
facilitate investors to take an informed decision for making investment in the proposed issue.
The investors should make an informed decision purely by themselves based on the contents
disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and
should in no way be construed as a guarantee for the funds that the investor proposes to invest
through the issue. However, the investors are generally advised to study all the material facts
pertaining to the issue including the risk factors before considering any investment.
MODULE 2
Loan- Capital- Meaning – Debentures and Loans – Mortgage and Charges – Registration of
Charges - Acceptance of Deposits
LOAN CAPITAL
Capital held by a business that has been borrowed, through a long-term loan or sale of stock
shares. Loan capital must be repaid in within a set period regardless of the financial status of
the firm also called borrowed capital.
Long-term capital employed from sources other than common stock or savings. That is, loan
capital is what a company has borrowed or issued in preferred stock. Loan capital or debt
capital is the money employed in a company that has been borrowed from external sources for
fixed interests financial securities such as debentures. The providers of loan capital do not
normally share in the profits of the company but are rewarded by means of regular interest
payments which must be paid up under the terms of the loan contract. Loan capital carries a
fixed liability for a company. Lenders take precedence over shareholders for receipt of interest
payment out of profits and the repayment of the capital sums subscribed in the event of
company insolvency.
Loans carry various degree of risk if the borrower defaults on the loan. Least risky are
debentures, secured by means of a ‘fixed’ charge on a specific company asset such as a
particular machine which the lender could claim in the event of default. Next come debentures
secured by means of a floating charge against all company assets in the event of default.
Increasing degrees of risk are reflected in the interest rates paid to lenders.
Loan capital is a part of a business’ capital used that is
1) Not equity capital
2) Earns a fixed rate of interest instead of dividends
3) Must be repaid within a specific period, regardless of the business’ financial position
It is that part of company’s capital structure which is raised by loans. It may be obtained
from a bank or finance company as long-term loans, or from debt equity investors in
the form of debentures or preferred stock, and is usually secured by a fixed and/or
floating charge on the firm’s assets. Loan capital is a commodity whose value is it’s
ability to earn income in the form of interest. Unlike debt capital, it does not include
short-term loans (such as overdraft).
BORROWING
In order to run a business effectively/successfully, adequate amount of capital is necessary. In

some cases, capital arranged through internal resources i.e. by way of issuing equity share
capital or using accumulated profit is not adequate and the organisation is resorted to external
resources of arranging capital i.e. External Commercial borrowing (ECB), Debentures, Bank
Loan, Public Fixed Deposits etc. Thus, borrowing is a mechanism used whereby the money is
arranged through external resources with an implied or expressed intention of returning money.
Power of Company to Borrow: The power of the company to borrow is exercised by its
directors, who cannot borrow more than the sum authorized. The powers to borrow money and
to issue debentures whether in or outside India can only be exercised by the Directors at a duly
convened meeting. Pursuant to Section 179(3) (c) & (d) directors have to pass resolution at a
duly convened Board Meeting to borrow money. The power to issue debentures cannot be
delegated by the Board of directors. However, the power to borrow monies can, be delegated
by a resolution passed at a duly convened meeting of the directors to a committee of directors,
managing director, manager or any other principal officer of the company.
The resolution must specify the total amount up to which the moneys may be borrowed by the
delegates. Often the power of the company to borrow is unrestricted, but the authority of the
directors acting as its agents is limited to a certain extent. For example, Section 180(1)(c) of
the Act prohibits the Board of directors of a company from borrowing a sum which together
with the monies already borrowed exceeds the aggregate of the paid-up share capital of the
company and its free reserves apart from temporary loans obtained from the company’s bankers
in the ordinary course of business unless they have received the prior sanction of the company
by a special resolution in general meeting.
Explanation to section 180(1)(c) provides that the expression “temporary loans” means loans
repayable on demand or within six months from the date of the loan such as short-term, cash
credit arrangements, the discounting of bills and the issue of other short-term loans of a
seasonal character, but does not include loans raised for the purpose of financial expenditure
of a capital nature.
It is further provided in proviso to Section 180(1)(c) that the acceptance by a banking company,
in the ordinary course of its business, of deposits of money from the public, repayable on
demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be
deemed to be borrowing of monies by the banking company within the meaning of clause (c)
of Sub-section (1) of Section 180. It is important at this stage to distinguish between, borrowing
which is ultra vires the company and borrowing which is intra vires the company but outside
the scope of the director’s authority.
The provisions of Sub-section (5) of Section 180 clearly lay down that debts incurred in excess
of the limit fixed by clause (c) of Sub-section (1) shall not be valid unless the lender proves
that he lent his money in good faith and without knowledge of the limit imposed by Sub-section
(1) being exceeded.
With recent exemption notification no 464(E) private companies have been exempted to
comply the entire provisions of Section 180 of the Companies Act 2013, resultantly special
resolution is not required to exercise powers under section 180 for private companies.
Unauthorized or Ultra Vires Borrowing: Where a company borrows without the authority
conferred on it by the articles or beyond the amount set out in the Articles, it is an ultra vires
borrowing. Any act which is ultra vires the company is void. In such a case the contract is void
and the lender cannot sue the company for the return of the loan. The securities given for such
ultra-vires borrowing are also void and inoperative. Ultra vires borrowings cannot even be
ratified by a resolution passed by the company in general meeting. However, equity assists the
lender where the common law fails to do so. If the lender has parted with his money to the
company under an ultra vires borrowing, and is, therefore, unable to sue for its return, or
enforce any security granted to him, he nevertheless has, in equity, the following remedies:
(A) Injunction and Recovery: Under the equitable doctrine of restitution he can obtain an
injunction provided he can trace and identify the money lent, and any property which the
company has bought with it. Even if the monies advanced by the lender cannot be traced, the
lender can claim repayment if it can be proved that the company has been benefited thereby.
(B) Subrogation: Where the money of an ultra vires borrowing has been used to pay off lawful
debts of the company, he would be subrogated to the position of the creditor paid off and to
that extent would have the right to recover his loan from the company. Subrogation is allowed
for the simple reason that when a lawful debt has been paid off with an ultra vires loan, the
total indebtedness of the company remains the same. By subrogating the ultra vires lender, the
Court is able to protect him from loss, while debt burden of the company is in no way increased.
(C) Suit against Directors: In case of ultra vires borrowing, the lender may be able to sue the
directors for breach of warranty of authority, especially if the directors deliberately
misrepresented their authority.
TYPES OF BORROWINGS
A company uses various kinds of borrowing to finance its operations. The various types of
borrowings can generally be categorized into: 1) Long term/short term borrowing, 2)
Secured/unsecured borrowing, 3) Syndicated/ Bilateral borrowing, 4) Private/Public
borrowing.
1A. Long Terms Borrowings - Funds borrowed for a period ranging for five years or more
are termed as long-term borrowings. A long-term borrowing is made for getting a new project
financed or for making big capital investment etc. Generally Long-term borrowing is made
against charge on fixed Assets of the company.
1B. Short Term Borrowings - Funds needed to be borrowed for a short period say for a period
up to one year or so are termed as short-term borrowings. This is made to meet the working
capital need of the company. Short term borrowing is generally made on hypothecation of stock
and debtors.
1C. Medium Term Borrowings - Where the funds to be borrowed are for a period ranging
from two to five years, such borrowings are termed as medium-term borrowings. The
commercial banks normally finance purchase of land, machinery, vehicles etc.
2A Secured/unsecured borrowing – A debt obligation is considered secured, if creditors have
recourse to the assets of the company on a proprietary basis or otherwise ahead of general
claims against the company.
2B Unsecured debts comprise financial obligations, where creditors do not have recourse to
the assets of the company to satisfy their claims.
3A Syndicated borrowing – if a borrower requires a large or sophisticated borrowing facility
this is commonly provided by a group of lenders known as a syndicate under a syndicated loan
agreement. The borrower uses one agreement covering the whole group of banks and different
types of facility rather than entering into a series of separate loans, each with different terms
and conditions.
3B Bilateral borrowing refers to a borrowing made by a company from a particular

bank/financial institution. In this type of borrowing, there is a single contract between the
company and the borrower.
4A Private borrowing comprises bank-loan type obligations whereby the company takes loan
from a bank/financial Institution.
4B Public borrowing is a general definition covering all financial instruments that are freely
tradable on a public exchange or over the counter, with few if any restrictions i.e. Debentures,
Bonds etc.
DEBENTURES
According to Section 2(30) of Companies Act, 2013, “debenture” includes debenture stock,
bonds or any other instrument of a company evidencing a debt, whether constituting a charge
on the assets of the company or not.
Further it is provided that—
(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934;
and
(b) such other instrument, as may be prescribed by the Central Government in consultation
with the Reserve Bank of India, issued by a company,
shall not be treated as debenture.
Kinds of Debentures
Debentures are generally classified into different categories on the basis of:
I. On the basis of Convertibility of Instrument
(A) Non-Convertible Debentures (NCD): These instruments retain the debt character and
cannot be converted into equity shares.
(B) Partly Convertible Debentures (PCD): A part of these instruments are converted into
Equity shares in the future at notice of the issuer. The issuer decides the ratio for conversion.
This is normally decided at the time of subscription.
(C) Fully convertible Debentures (FCD): These are fully convertible into Equity shares at
the issuer's notice. The ratio of conversion is decided by the issuer. Upon conversion the
investors enjoy the same status as ordinary shareholders of the company.
(D) Optionally Convertible Debentures (OCD): The investor has the option to either convert
these debentures into shares at price decided by the issuer/agreed upon at the time of issue.
II. On the basis of Security of Instrument
(A) Secured Debentures: These instruments are secured by a charge on the fixed assets of the
issuer company. So, if the issuer fails on payment of the principal or interest amount, his assets
can be sold to repay the liability to the investors. Section 71(3) of the Companies Act, 2013
provides that secured debentures may be issued by a company subject to such terms and
conditions as may be prescribed by the Central Government through rules.
(B) Unsecured Debentures: These instruments are unsecured in the sense that if the issuer
defaults on payment of the interest or principal amount, the investor has to be along with other
unsecured creditors of the company, they are also said to be naked debentures.
III. On the basis of Redemption ability
(A) Redeemable Debentures: It refers to the debentures which are issued with a condition that
the debentures will be redeemed at a fixed date or upon demand, or after notice, or under a
system of periodical drawings. Debentures are generally redeemable and on redemption these
can be reissued or cancelled. The person who has been re-issued the debentures shall have the
same rights and priorities as if the debentures had never been redeemed.
(B) Perpetual or Irredeemable Debentures: A Debenture, in which no time is fixed for the
company to pay back the money, is an irredeemable debenture. The debenture holder cannot
demand payment as long as the company is a going concern and does not make default in
making payment of the interest. But all debentures, whether redeemable or irredeemable
become payable on the company going into liquidation. However, after the commencement of
the Companies Act, 2013, now a company cannot issue perpetual or irredeemable debentures.
IV. On the basis of Registration of Instrument
(A) Registered Debentures: Registered debentures are made out in the name of a particular
person; whose name appears on the debenture certificate and who is registered by the company
as holder on the Register of debenture holders. Such debentures are transferable in the same
manner as shares by means of a proper instrument of transfer duly stamped and executed and
satisfying the other requirements specified in Section 56 of the Companies Act, 2013.
(B) Bearer debentures: Bearer debentures on the other hand, are made out to bearer, and are
negotiable instruments, and so transferable by mere delivery like share warrants. The person to
whom a bearer debenture is transferred become a “holder in due course” and unless contrary is
shown, is entitled to receive and recover the principal and the interest accrued thereon.
Debenture & Loan
A company treats debentures just as it treats bank loans availed by it and together, they
constitute the debt liability of the company. These are debts that need to be repaid by the
company. The major difference between bank loans and the loans lent by general public is that
debentures are unsecured loans that do not carry any collateral and the company only
acknowledges these loans in the form of certificates issued by the company to debenture
holders. Another notable difference is the fact that loans are non-transferable whereas a person
can transfer debentures in the name of another person, so they are transferable.
Debenture Loan
Lending partner Public Bank/other financial
institutions
Collateral No physical asset as Banks and other
collateral from the firm institutions require
collateral
transferability Transferable Non-transferable
CHARGE
DEFINITION OF A CHARGE: A charge is a security given for securing loans or debentures

by way of a mortgage on the assets of the company. A company, like a natural person, can offer
security for its borrowings. Normally, the debentures and other borrowings of the company are
secured by a charge on the assets of the company. Where property, both existing and future, is
agreed to be made available as a security for the repayment of debt and creditors have a present
right to have it made available, there is a charge created. The legal right of the creditor can only
be enforced at some future date if certain conditions governing the loan are not met. The
creditor gets no legal right either absolute or special to the property charged. He only gets the
right to have the security made available / enforced by an order of the Court.
According to Section 2(16) of the Act, “charge” means an interest or lien created on the
property or assets of a company or any of its undertakings or both as security and includes a
mortgage. Charge also includes a lien and an equitable charge whether created by an instrument
in writing or by the deposit of title deed
Charge is defined in the Transfer of Property Act, 1882 also where Section 100 says that an
immovable property of one person is by act of parties or operation of law made security for the
payment of money to another and the transaction does not amount to a mortgage, the latter
person is said to have a charge on that particular property.
The Charge here has the following essential features:
(a) There are minimum two parties to the transaction, the creator of the charge and the
charge- holder.
(b) The subject- matter of charge may be on current or future assets and properties of the
borrower.
(c) The intention of the borrower to offer one or more of its specific asset or properties as
security for repayment of the borrowed money together with payment of interest at the
agreed rate etc should manifest from an agreement entered by him in favour of the
lender, written or otherwise.
Kinds of Charges: A charge on the property of the company as security for debts may be of
the following kinds, namely:
A. On the basis of the nature of charge:
(i) Fixed or specific charge;
(ii) Floating charge.
(i) Fixed or Specific Charge: A charge is called fixed or specific when it is created to cover
assets which are ascertained and definite or are capable of being ascertained and defined, at the
time of creating the charge e.g., land, building, or plant and machinery.
A fixed charge, therefore, is a security in terms of certain specific property, and the company
gives up its right to dispose off that property until the charge is satisfied. In other words, the
company can deal with such property, subject to the charge so that the charge holder’s interest
in the property is not affected and the charge holder gets priority over all subsequent transferees
except a bona fide transferee for consideration without notice of the earlier charge. In the
winding-up of the company, a debenture holder secured by a specific charge will be placed in
the highest-ranking class of creditors.
(ii) Floating Charge: A floating charge, as a type of security, is peculiar to companies as
borrowers. A floating charge is not attached to any definite property but covers property of a
fluctuating type e.g., stock-in-trade and is thus necessarily equitable. A floating charge is a
charge on a class of assets present and future which in the ordinary course of business is
changing from time to time and leaves the company free to deal with the property as it sees fit
until the holders of charge take steps to enforce their security. “
The essence of a floating charge is that the security remains dormant until it is fixed or
crystallised”. But a floating security is not a future security. It is a present security, which
presently affects all the assets of the company expressed to be included in it. On the other hand,
it is not a specific security; the holder of such charge cannot affirm that the assets are
specifically mortgaged to him. The assets are mortgaged in such a way that the mortgagor i.e.
the company can deal with them without the concurrence of the mortgagee.
The advantage of a floating charge is that the company may continue to deal in any way with
the property which has been charged. The company may sell, mortgage or lease such property
in the ordinary course of its business if it is authorised by its memorandum of association.
B. On the basis on the conditions of the charge
1. pari-passu charge- Under, this the charge is shared by more than one lender in the
ratio of their outstanding amount. The prior consent of the existing charge holder is
required by the company.
2. Exclusive charge- The security under the exclusive charge is provided to a particular
lender only.
3. Further charge- With the consent on the first charge holder, the particular assets on
which charge is already created may be provided to other lenders as second charge. In
case of liquidation of assets, the first charge holder has the right to recover his dues and
the balance is recovered by the second charge holder followed by others.
CRYSTALLISATION OF FLOATING CHARGE
A floating charge attaches to the company’s property generally and remains dormant till it
crystallizes or becomes fixed. The company has a right to carry on its business with the help
of assets over which a floating charge has been created till the happening of some event which
determines this right.
A floating charge crystallises and the security becomes fixed in the following cases:
(a) when the company goes into liquidation;
(b) when the company ceases to carry on its business;
(c) when the creditors or the debenture holders take steps to enforce their security e.g. by
appointing receiver to take possession of the property charged;
(d) on the happening of the event specified in the deed.
In the aforesaid circumstances, the floating charge is said to become fixed or to have
crystallised. Until the charge crystallises or attaches or becomes fixed, the company can deal
with the property so charged in any manner it likes. Although a floating charge is a present
security, yet it leaves the company free to create a specific mortgage on its property having
priority over the floating charge.
In Government Stock Investment Co. Ltd. v. Manila Railway Co. Ltd., (1897) A.C. 81,the
debentures were secured by a floating charge. Three months’ interest became due but the
debenture holders took no steps and so the charge did not crystallize but remained floating. The
company then made a mortgage of a specific part of its property. Held, the mortgagee had
priority. The security for the debentures remained merely a floating security as the debenture
holders had taken no steps to enforce their security.
Effect of Crystallisation of a Floating Charge: On crystallization, the floating charge
converts itself into a fixed charge on the property of the company. It has priority over any
subsequent equitable charge and other unsecured creditors. But preferential creditors who have
priority for payment over secured creditors in the winding-up get priority over the claims of
the debenture holders having floating charge.
MORTGAGE & CHARGE- DIFFERENCE
A mortgage is the transfer of an interest in specific immoveable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan, an existing or
future debt or the performance of an agreement which may give rise to pecuniary liability.
SL. MORTGAGE CHARGE
No.
1 A mortgage is created by the act of the A charge may be created either through
parties the act of parties or by operation of law
2 A mortgage requires registration under A charge created by operation of law does
the Transfer of Property Act, 1882 not require registration. But a charge
created by act of parties requires
registration.
3 A mortgage is for a fixed term. The charge may be in perpetuity.
4 A mortgage is a transfer of an interest in A charge only gives a right to receive

specific immovable property. payment out of a particular property
5 A mortgage is good against subsequent A charge is good against subsequent
transfers mortgage is good against transferees with notice.
subsequent transferees.
6 A simple mortgage carries personal In case of charge, no personal liability is
liability unless excluded by express created. However, where a charge is the
contract. result of a contract, there may be a
personal remedy.
7 A mortgage is a transfer of an interest in a There is no such transfer of interest in the
specific immovable property. case of a charge. Charge does not operate
as transfer of an interest in the property
and a transferee of the property gets the
property free from the charge provided, he
purchases it for value without notice of
the charge.
REGISTRATION OF CHARGES
Section 77: (1) Any charge created

(a) within or outside India,
(b) on its property or assets or any of its undertakings,
(c) whether tangible or otherwise, and situated in or outside India
Shall be registered.
(i) Particulars of charges that is being filed with Registrar of Companies is to be signed
by the company creating the charge and the charge holder in Form No. CHG-1 (for
other than Debentures) or Form CHG-9 (for debentures) as the case may be.
(ii) The Charge has to be registered within 30 days of its creation. It may be registered
on an application by the company to the registrar beyond 30 days but before 300
days on payment of additional fees.
Particulars of Charges – Features of a Charge

The following details are required to be filed with the Registrar:
(a) date and description of the instrument creating charge;
(b) total amount secured by the charge;
(c) date of the resolution authorising the creation of the charge;
(d) general description of the property charged;

(e) a copy of the deed/instrument containing the charge duly certified or if there is no such
deed, any other document evidencing the creation of the charge to be enclosed;
(f) list of the terms and conditions of the loan; and
(g) name and address of the charge holder.
Section 77 in fact also says that the additional period can extend to 300 days (30 days in
addition with 270 additional days). If the form is filed after 30 days of the usual registration
period, it has to be paid with an additional fee. An application has to be filed in CHG- 10 from
the CS (Company Secretary) or Director of the company that this late filing will not adversely
affect any of the creditors involved in this.
The duty of registration of the charge: According to Section 77, it is the duty of the company
to register charge.
According to Section 78, if the company for any reason fails to register for the charge, the
person in whose favour the charge is being created will form for a file of charge. The person
has the right to recover the registration fee from the company. However, the person filing for
the charge has to give a notice of 14 days to the company.
Extension of time for Registration: The proviso to Section 77(1) of the Act provides for
extension of time for filing particulars for registration of charge. It is stated therein, that the
Registrar of Companies may allow such registration to be made within a period of three
hundred days of such creation on payment of additional fees. Rule 4 provides that the
application for delay shall be made in Form No.CHG-1 and supported by a declaration from
the company signed by its secretary or director that such belated filing shall not adversely affect
the rights of any other intervening creditors of the company.
However, if registration is not made within a period of three hundred days of such creation, the
company shall seek extension of time for filing of the particulars or for the registration of the
charge from the Central Government (in eForm CHG-8) in accordance with Rule 12 and
Section 87 of the Act. The eForm CHG-1 for registration of charge, will be processed by the
Registrar of Companies office after the order of Central Government for approval for
condonation of delay (in eForm INC 28) has been filed with the Registrar of Companies. The
Central Government can provide for extension of time on the ground that the omission to file
with the Registrar of Companies, the particulars of any charge or, the omission to register such
charge, was accidental or due to inadvertence or some other sufficient cause or it is not of a
nature to prejudice the position of creditors or shareholders of the company, or any other
grounds, it is just and equitable to grant relief.
In the case of Tristar Container Service (Asia) P. Ltd. v. WW Shipping Agencies P. Ltd.,
an application for extension of time was filed by a creditor. The petitioners were under the
impression that respondents have filed the particulars of charges, but on a search conducted
into records of the Registrar of Companies, it was found that the particulars of charges were
not filed. However, in spite of the petitioners requesting the respondents to cause registration
of the charges, the respondents did not effect the registration of the charges and therefore, the
petitioners filed the said petition, which, if allowed would not cause prejudice to any
stakeholder or the respondents, including the creditors. It was held that, in these circumstances
the delay in filing of the particulars of the charges be condoned and time be extended for filing
such particulars, with direction to the respondents to sign Form No. 8 as well for its registration.
In the said case the petitioners showed that the delay was due to a sufficient cause and therefore,
extension of time was granted for filing particulars of the charge.
Modification of charge: Provisions regarding the modification are same as the creation of
charge. After filing the form for the modification of charge, ROC will issue the certificate for
modification of charge in form CHG-3.
Satisfaction of charge: A charge is typically created as the security for loans or debentures or
as some kind of a security. If the amount of that particular loan is repaid or debentures have
been fully paid or the primary purpose is fulfilled, there is no need of that charge. This is known
as the satisfaction of charge. Section 82 states that form for the satisfaction of charge will be
filed in form CHG-4.
Particular Charges where filing with the ROC is not required
• Guarantee;
• Due to the operation of law;
• Hundi which is a Negotiable Instrument is not required to be registered; and
• Pledge with an exception of companies being required to register pledge over shares.
Effect of registration of this charge
Register of Charge by ROC: According to Section 81, the ROC has to maintain a register of
charges with regards to all the companies containing all the particulars regarding the charge.
The register is open for inspection by any person on the payment of some prescribed fee.
Deemed Notice: Any person who is thinking of lending money or who has lent money to a
company can know which of the company’s assets are charged and the extent of this charge.
Effect of non-registration of charge
According to Section 77, If the charge is not registered with the ROC, the charge will not be
taken into account by the liquidator or any other creditor. This is only the case when the
company is winding up, the company is obligated to repay the money even if the charge was
not registered. The penalty for contravening any provision of the CA, 2013 are that the
company shall be punishable with a fine which will not be less than Rs. 1 Lakh and may extend
to Rs. 10 Lakhs and every officer shall be punishable with fine which will not be less than Rs.
25000 which may also extend to Rs. 1 Lakh or with an imprisonment of a term which may
extend to six months or both.
Consequences of Non-Registration of Charge
According to Section 77 of the Companies Act, 2013, all types of charges created by a company
are to be registered by the ROC, where they are non-compliant and are are not filed with the
Registrar of Companies for registration, it shall be void as against the liquidator and any other
creditor of the company. In the case of ONGC Ltd v. Official Liquidators of Ambica Mills Co
Ltd (2006), the ONGC had not been able to point out whether the so-called charge, on the basis
of which it was claiming preference as a secured creditor, was registered or not. It was held
that in the light of this failure, ONCG could not be treated as a secured creditor in view of
specific provisions of section 125 and the statutory requirement under the said section. This
does not, however, mean that the charge is altogether void and the debt is not recoverable. So
long as the company does not go into liquidation, the charge is good and may be enforced.
Void against the liquidator means that the liquidator on winding up of the company can
ignore the charge and can treat the concerned creditor as unsecured creditor. The property will
be treated as free of charge i.e. the creditor cannot sell the property to recover its dues.
Void against any creditor of the company means that if any subsequent charge is created on
the same property and the earlier charge is not registered, the earlier charge would have no
consequence and the latter charge if registered would enjoy priority. In other words, the latter
charge holder can have the property sold in order to recover its money.
Thus, non-filing of particulars of a charge does not invalidate the charge against the company
as a going concern. It is void only against the liquidator and the creditors at the time of
liquidation. The company itself cannot have a cause of action arising out of non-registration
[Independent Automatic Sales Ltd. vs. Knowles & Foster (1962) 32 Comp Cas]
Register of Charge by Company
1. Every company is expected to maintain at their registered office, a register of charge in
the form CHG-7.
2. Copy of the instrument creating the charge has to be kept at the registered office of the
company along with the register of charge.
3. The entry in the register has to be authenticated by a director or secretary of the
company or any other authorised person.
4. The company has to maintain this register for the lifetime of the company and the
instrument creating this charge is expected to be kept for a period of 8 years from the
date of satisfaction of the charge by the company.
5. Inspection: Register of charge and copy of the instrument is open for inspection to the
members and creditors at the registered office of the company without any fees. The
register is also open to inspection by any other person on payment of the some
prescribed fees. The register and copies of the instrument will be opened during
business hours of the company.
ACCEPTANCE OF DEPOSIT – SECTION 73 TO 76 SIMPLIFIED
The companies Act 2013 by way of Section 73 to 76 has bought many changes in respect of
Acceptance of deposits by company and the changes are applicable are on Private Limited
Companies also. To understand the ambit of Section 73 to 76 we first need to know the
definition of Deposits under old Companies Act wiz a wiz to new Companies Act,2013.
The companies Act 2013 by way of Section 73 to 76 has bought many changes in respect of
Acceptance of deposits by company and the changes are applicable are on Private Limited
Companies also.
As per Section 2(31) of Companies Act, 2013,”deposit” includes any receipt of money by way
of depositor 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.
As per Rule 2(1) (c) of Companies (Acceptance of Deposits) Rules, 2014, “deposit” includes
any receipt of money by way of deposit or loan or in any other form, by a company, but does
not include –
(i) any amount received from the Central Government or a State Government, or any
amount received from any other source whose repayment is guaranteed by the Central
Government or a State Government, or any amount received from a local authority, or any
amount received from a statutory authority constituted under an Act of Parliament or a State
Legislature;
(ii) any amount received from foreign Governments, foreign or international banks,
multilateral financial institutions
(iii) any amount received as a loan or facility from any banking company or from the
State Bank of India or any of its subsidiary banks or from a banking institution
(iv) any amount received as a loan or financial assistance from Public Financial
Institutions notified by the Central Government
(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 and held pursuant to an offer made in accordance with the provisions
of the Act towards subscription to any securities
(viii) Any amount received from a person who, at the time of the receipt of the amount, was a
director of the company:
Provided that the director from whom money is received, furnishes to the company at the time
of giving the money, a declaration in writing to the effect that the amount is not being given
out of funds acquired by him by borrowing or accepting loans or deposits from others;
(ix) any amount raised by the issue of bonds or debentures secured by a first charge or a charge
ranking pari passu with the first charge on any assets
(x) Any amount received from an employee of the company not exceeding his annual salary
under a contract of employment with the company in the nature of non-interest bearing security
deposit;
(xi) Any non-interest bearing amount received or held in trust;
(xii) Any amount received in the course of, or for the purposes of, the business of the company,-
(a) as an advance for the supply of goods or provision of services accounted for in any
manner whatsoever provided that such advance is appropriated against supply of goods
or provision of services within a period of three hundred and sixty five days from the
date of acceptance of such advance:
Provided that in case of any advance which is subject matter of any legal proceedings
before any court of law, the said time limit of three hundred and sixty five days shall
not apply:
(b) As advance, accounted for in any manner whatsoever, received in connection with
consideration for property under an agreement or arrangement, provided that such
advance is adjusted against the property in accordance with the terms of agreement or
arrangement;
(c) As security deposit for the performance of the contract for supply of goods or
provision of services;
(d) As advance received under long term projects for supply of capital goods except those
covered under item (b) above:
Provided that if the amount received under items (a), (b) and (d) above becomes refundable
(with or without interest) due to the reasons that the company accepting the money does not
have necessary permission or approval, wherever required, to deal in the goods or properties
or services for which the money is taken, then the amount received shall be deemed to be a
deposit under these rules:
(xiii) any amount brought in by the promoters of the company by way of unsecured loan in
pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment
of the following conditions, namely:-
(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;
(xiv) Any amount accepted by a Nidhi company in accordance with the rules made under
section 406 of the Act.
Company eligible for this purpose: -
As per Rule 2(1)(e) of Companies (Acceptance of Deposits) Rules, 2014, a public company as
referred to in sub-section (1) of section 76, having a net worth of not less than one hundred
crore rupees or a turnover of not less than five hundred crore rupees and which has obtained
the prior consent of the company in general meeting by means of a special resolution and also
filed the said resolution with the Registrar of Companies before making any invitation to the
Public for acceptance of deposits:
Provided that an eligible company, which is accepting deposits within the limits specified
under clause (c) of sub-section (1) of section 180, may accept deposits by means of an ordinary
resolution.
What is the prohibition on acceptance of deposits from public? :As per Section 73(1) of
Companies Act, 2013, No Company shall invite, accept or renew deposits under this act from
the public except in a manner provided:
Provided that nothing in this sub-section shall apply to a banking company and nonbanking
financial company as defined in the Reserve Bank of India Act, 1934 and to such other
company as the Central Government may, after consultation with the Reserve Bank of India,
specify in this behalf.
Can a Company accept deposits from its members?: As per Section 73(2) of Companies
Act, 2013, A company may, subject to the passing of a resolution in general meeting and
subject to such rules as may be prescribed in consultation with the Reserve Bank of India,
accept deposits from its members on such terms and conditions, including the provision of
security, if any, or for the repayment of such deposits with interest, as may be agreed upon
between the company and its members, subject to the fulfilment of the following conditions,
namely:—
(a) issuance of a circular to its members including therein a statement showing the financial
position of the company, the credit rating obtained, the total number of depositors and the
amount due towards deposits in respect of any previous deposits accepted by the company and
such other particulars in such form and in such manner as may be prescribed;
(b) Filing a copy of the circular along with such statement with the Registrar within thirty
days before the date of issue of the circular;
(c) Depositing such sum which shall not be less than fifteen per cent. of the amount of its
deposits maturing during a financial year and the financial year next following, and kept in a
scheduled bank in a separate bank account to be called as deposit repayment reserve account;
(d) Providing such deposit insurance in such manner and to such extent as may be prescribed;
(e) Certifying that the company has not committed any default in the repayment of deposits
accepted either before or after the commencement of this Act or payment of interest on such
deposits; and
(f) Providing security, if any for the due repayment of the amount of deposit or the interest
thereon including the creation of such charge on the property or assets of the company:
Provided that in case where a company does not secure the deposits or secures such deposits
partially, then, the deposits shall be termed as ‘‘unsecured deposits’’ and shall be so quoted in
every circular, form, advertisement or in any document related to invitation or acceptance of
deposits.
As per Rule 4(1) of Companies (Acceptance of Deposits) Rules, 2014,
⇒ Shall issue a circular to all its members by registered post with acknowledgement due
or speed post or by electronic mode in Form DPT-1:
Provided that in addition to issue of such circular to all members in the manner specified above,
the circular may be published in English language in an English newspaper and in vernacular
language in a vernacular newspaper having wide circulation in the State in which the registered
office of the company is situated.
Provisions regarding acceptance of Deposits by ‘eligible company’
As per Section 76 of Companies Act, 2013, An eligible company may accept deposits from
persons (other than its members) subject to compliance with the requirements provided in sub-
section (2) of section 73 and subject to such rules as the Central Government may, in
consultation with the Reserve Bank of India, prescribe:
Provided that such a company shall be required to obtain the rating (including its net worth,
liquidity and ability to pay its deposits on due date) from a recognized credit rating agency for
informing the public the rating given to the company at the time of invitation of deposits from
the public which ensures adequate safety and the rating shall be obtained for every year during
the tenure of deposits:
Provided further that every company accepting secured deposits from the public shall within
thirty days of such acceptance, create a charge on its assets of an amount not less than the
amount of deposits accepted in favour of the deposit holders in accordance with such rules as
may be prescribed.
(2) The provisions of this Chapter shall, mutatis mutandis, apply to the acceptance of deposits
from public under this section.
As per Rule 4(2) & 4(3) of Companies (Acceptance of Deposits) Rules, 2014,
⇒ Shall issue a circular in the form of advertisement in Form DPT-1 for the purpose in English
language in an English newspaper and in vernacular language in one vernacular newspaper
having wide circulation in the State in which the registered office of the company is situated.
⇒ Upload a copy of the circular on its website, if any.
Who can be a “depositor”?
As per Rule 2(1) (d) of Companies (Acceptance of Deposits) Rules, 2014,”depositor” means-
i) Any member of the company who has made a deposit with the company in
accordance with the provisions of Section 73(2) of the Act, or
ii) Any person who has made a deposit with a public company in accordance
with the provisions of Section 76 of the act.
Explain the concept of deposit insurance.
As per Rule 5 of Companies (Acceptance of Deposits) Rules, 2014,
(1) Every company referred to in sub-section (2) of section 73 and every other eligible company
inviting deposits shall enter into a contract for providing deposit insurance at least thirty days
before the issue of circular or advertisement or at least thirty days before the date of renewal,
as the case may be. Explanation- For the purposes of this sub-rule, the amount as specified in
the deposit insurance contract shall be deemed to be the amount in respect of both principal
amount and interest due thereon.
(2) The deposit insurance contract shall specifically provide that in case the company defaults
in repayment of principal amount and interest thereon, the depositor shall be entitled to the
repayment of principal amount of deposits and the interest thereon by the insurer up to the
aggregate monetary ceiling as specified in the contract:
Provided that in the case of any deposit and interest not exceeding twenty thousand rupees, the
deposit insurance contract shall provide for payment of the full amount of the deposit and
interest and in the case of any deposit and the interest thereon in excess of twenty thousand
rupees, the deposit insurance contract shall provide for payment of an amount not less than
twenty thousand rupees for each depositor.
(3) The amount of insurance premium paid on the insurance of such deposits shall be borne by
the company itself and shall not be recovered from the depositors by deducting the same from
the principal amount or interest payable thereon.
(4) If any default is made by the company in complying with the terms and conditions of the
deposit insurance contract which makes the insurance cover ineffective, the company shall
either rectify the default immediately or enter into a fresh contract within thirty days and in
case of non-compliance, the amount of deposits covered under the deposit insurance contract
and interest payable thereon shall be repaid within the next fifteen days and if such a company
does not repay the amount of deposits within said fifteen days it shall pay fifteen per cent.
interest per annum for the period of delay and shall be treated as having defaulted and shall be
liable to be punished in accordance with the provisions of the Act.
MODULE 3
Protection of Investors – Regulation by Disclosure, Audit, Accounts and Annual Returns –

Budgetary Controls.
PROTECTION OF INVESTORS
Various provisions have been enumerated under the Companies Act, 2013 for the protection of
the Investors. Since the Companies Bill, 2012 received assent of the President of India on the
29th August, 2013, and published in the Gazette on 30th August, 2013, the Companies Act,
2013 came into force from 30th August, 2013. Thus, the Companies Act, 1956 is overridden
by the Companies Act, 2013 and thus the provisions under the Companies Act, 2013 shall be
applicable to all the Companies.
Investors’ protection
Protection of investors means safeguard and enforcement of the rights and claims of a person
in his role as an investor. The capital of a company may be divided into Equity capital and Debt
capital. The persons who contribute to the equity capital of a company are called investors.
Investors have the voting rights in every matter of the company and are entitled to get dividend.
It is different from the creditors who contribute to the debt capital of the company, who in turn
get fixed rate of interest on the money so lent. Moreover, creditors have limited voting rights
only with respect to those matters which directly affect their interest such as reduction of
capital, winding up of company etc.
Investors are the insiders of the company. They are known as shareholders or members of the
company. It is to be noted that all members may not be shareholders, but all shareholders are
the members of the company. Section 41 of the Companies Act, 1956 provides that “member”
includes the subscribers of the memorandum of a company, every other person who agrees in
writing to become a member of a company and whose name is entered in its register of
members, and every person holding equity share capital of company and whose name is entered
as beneficial owner in the records of the depository. Section 2(55) of the Companies Act,
2013 provides for the definition of „member‟ which is same as that given under S. 41 of the
Companies Act, 1956.
Various provisions incorporated for the protection of investors under Companies Act, 1956 and
the Companies Act, 2013 are-
(1) Civil Liability for Misstatement in Prospectus.
Section 62 of the Companies Act, 1956 lays down civil liability for misstatement in
prospectus. Where a prospectus invites persons to subscribe for shares in or debentures of a
company, the director, promoter (i.e. party to the preparation of prospectus) and person who
has authorized the issue of the prospectus, shall be liable to pay compensation to every person
who subscribes for any shares or debentures on the faith of the prospectus for any loss or
damage he may have sustained by reason of any untrue statement included therein.
Any person who has subscribed for shares against public issue and sustained loss or damage
due to such misstatement is entitled to relief under this section.
Section 35 of the Companies Act, 2013 provides for the civil liability for misstatement in
prospectus. Where a person has subscribed for securities of a company acting on any statement
included, or the inclusion or omission of any matter, in the prospectus which is misleading and
has sustained any loss or damage as a consequence thereof, the company and the following
persons given below shall be liable to pay compensation to every person who has sustained
such loss or damage. The persons liable, along with the Company are-
a) Director of the company at the time of the issue of the prospectus;
b) Has authorized himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director, either immediately or after an interval
of time;
c) Promoter of the company;
d) Has authorized the issue of the prospectus; and
e) An expert who is not, and has not been, engaged or interested in the formation or
promotion or management, of the company and has given his written consent to the
issue of the prospectus and has not withdrawn such consent before the delivery of a
copy of the prospectus to the Registrar for registration and a statement to that effect
shall be included in the prospectus.
The measure of damages for the loss suffered by reason of the untrue statement, omission etc.
is the difference between the value which the shares would have had but for such statement or
omission and the true value of the shares at the time of allotment. In applying the correct
measure of damages to be awarded to compensate a person who has been fraudulently induced
to purchase shares, the crucial criterion is the difference between the purchase price and their
actual value. It may be appropriate to use the subsequent market price of the shares after the
fraud has come to light and the market has settled. The period prescribed for a suit for damage
by shareholder is 3 years as per Article 113 of the Limitation Act, 1963.
In R. v. Lord Kylsant, a table was set out in the prospectus showing that the company had
paid dividends varying from 8 to 10 percent in the preceding years, except for two years where
no dividend was paid. The statement showed that the company was in a sound financial position
but the truth was that the company had substantial trading loss during the seven years preceding
the date of prospectus and the dividends had been paid, not out of the current earnings, but out
of the funds which had been earned during the abnormal period of war. The prospectus was
held to be untrue due to the omission of the fact which was necessary to appreciate the
statements made in the prospectus.
(2) Criminal Liability for Misrepresentation in Prospectus
Section 63 of the Companies Act, 1956 lays down criminal liability for misrepresentation in
prospectus. Every person who has authorized the issue of the prospectus containing any untrue
statement shall be punishable with the imprisonment which may extend to two years, or with
fine which may extend to Rs 50,000 or both.
Section 34 of the Companies Act, 2013 provides that where a prospectus contains any
statement which is untrue or misleading in form or context in which it is included or where any
inclusion or omission of any matter is likely to mislead, then every person who authorizes the
issue of such prospectus shall be punishable with imprisonment for a term which shall not be
less than 6 months but which may extend to 10 years and shall also be liable to fine which shall
not be less than the amount involved in the fraud, but which may extend to three times the
amount involved in the fraud.
Thus, the imposition of liability on the persons involved in the preparation of a prospectus is a
measure to regulate the Initial Public Offering. This regulation is necessary to ensure accuracy,
adequacy and timeliness of the material information in relation to both the prospectus and the
concerned issuing company.
(3) Advertisement of prospectus.
Section 58A of the companies Act, 1956, as inserted by Companies Amendment Act, 1974,
states that deposits should not be invited without issuing an advertisement. There should be an
advertisement, including therein a statement showing the financial position of the company and
that the company is not in default in the repayment of any deposit or the interest charged with
respect to such deposit.
Section 30 of the Companies Act, 2013 lays down the provision for advertisement of
prospectus. Where an advertisement of any prospectus of a company is published in any
manner, it shall be necessary to specify therein the contents of its memorandum as regards the
objects, the liability of members and the amount of share capital of the company, and the names
of the signatories to the memorandum and the number of shares subscribed for by them, and
its capital structure.
(4) Investor Education and Protection Fund
Section 205C of the companies Act, 1956 provides for the establishment of Investor Education
and Protection Fund by the Central Government. It is a mandatory duty on the
Government. The amounts that shall be credited to the Fund are –
(a) Amounts in the unpaid dividend accounts of companies;
(b) The application moneys received by companies for allotment of any securities and
due for refund;
(c) Matured deposits with companies;
(d) Matured debentures with companies;
(e) The interest accrued on the amounts referred to in clauses (a) to (d);
(f) Grants and donations given to the Fund by the Central Government, State
Governments, companies or any other institutions for the purposes of the Fund; and
(g) The interest or other income received out of the investments made from the Fund.
Provided that no such amounts referred to in clauses (a) to (d) shall form part of the Fund unless
such amounts have remained unclaimed and unpaid for a period of 7 years from the date they
became due for payment.
Section 205C (3) of the Companies Act, 1956 provides that the Fund shall be utilized for
promotion of investors’ awareness and protection of the interests of investors in accordance
with such rules as may be prescribed.
Section 125 of the Companies Act, 2013 provides that Investor Education and Protection
Fund (“Fund”) shall be established by the Central Government. The following amounts shall
be credited to the Fund-
(a) The amount given by the Central Government by way of grants after due appropriation
made by Parliament by law in this behalf for being utilized for the purposes of the Fund.
(b) Donations given to the Fund by the Central Government, State Governments,
companies or any other institution for the purposes of the Fund.
(c) The amount in the Unpaid Dividend Account of companies transferred to the Fund
under sub-section (5) of section 124. Section 124 provides for the Unpaid Dividend
Account. Section 124(1) states that where a dividend has been declared by a company
but has not been paid or claimed within 30 days from the date of the declaration to any
shareholder entitled to the payment of the dividend, the company shall, within 7 days
from the date of expiry of the said period of thirty days, transfer the total amount of
dividend which remains unpaid or unclaimed to a special account to be opened by the
company in that behalf in any scheduled bank to be called the Unpaid Dividend
Account.
Section 124(5) provides that where any money so 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 accrued,
if any, to the Investor Education and Protection Fund established under section 125 (1).
(d) The amount in the general revenue account of the Central Government which had been
transferred to that account under sub-section (5) of section 205A of the Companies Act,
1956, as it stood immediately before the commencement of the Companies
(Amendment) Act, 1999, and remaining unpaid or unclaimed on the commencement of
this Act.
Section 205A (5) of the Companies Act, 1956 prior to the abovementioned Amendment
provided that- Any money transferred to the unpaid dividend account of a company which
remained unpaid or unclaimed for a period of 3 years from the date of such transfer, shall be
transferred by the company to the general revenue account of the Central Government.
(a) The amount lying in the Investor Education and Protection Fund under section 205C of
the Companies Act, 1956.
(b) The interest or other income received out of investments made from the Fund.
(c) The amount received under sub-section (4) of section 38. Section 38 of the Companies
Act, 2013 provides that any person who makes or abets-
(i) making of an application in a fictitious name to a company for acquiring or
subscribing for its securities, or
(ii) makes or abets making of multiple applications to a company in different names
or in different combinations of his name or surname for acquiring or subscribing
for its securities or
(iii)otherwise induces directly or indirectly a company to allot, or register any
transfer of, securities to him, or to any other person in a fictitious name shall be
liable under Section 447 i.e. shall be punishable with imprisonment for a term
which shall not be less than 6 months but which may extend to 10 years and
shall also be liable to fine which shall not be less than the amount involved in
the fraud, but which may extend to three times the amount involved in the fraud.
Where a person has been convicted under this section, the Court may also order disgorgement
of gain, if any, made by, and seizure and disposal of the securities in possession of, such person.
The amount so received through disgorgement or disposal of securities shall be credited to the
Investor Education and Protection Fund.
(h) The application money received by companies for allotment of any securities and due
for refund
(i) Matured deposits with companies other than banking companies
(j) Matured debentures with companies
(k) Interest accrued on the amounts referred to in clauses (h) to (j)
(l) Sale proceeds of fractional shares arising out of issuance of bonus shares, merger and
amalgamation for seven or more years
(m) Redemption amount of preference shares remaining unpaid or unclaimed for seven or
more years; and
(n) Such other amount as may be prescribed
The proviso to this section provides that the amount referred to in clauses (h) to (j) shall not
form part of the Fund unless such amount has remained unclaimed and unpaid for a period of
7 years from the date it became due for payment.
Class Action
Section 245 of CA 2013 provides for class action to be instituted against the company as well
as the auditors of the company. The Draft Companies Rules allow for this class action to be
filed by the minority shareholders under Clause 16.1 of Chapter-XVI (Number of members
who can file an application for class action). On close reading of Section 245 of the Companies
Act, 2013, it can be seen that the intent of the section is not only to empower the minority
shareholder and/or members of the company but also the depositors. Unlike Section 399 of CA
1956 which provides for protection to only shareholder/members of the company, Section 245
of CA 2013 also extends this protection to the class of depositors as well. However, in the
current scenario, the provision of representation of a class of members or depositors by a
particular member or depositor lacks clarity.
Sub-section (1) of Section 245 provides, “such number of member or members, depositor or
depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if
they are of the opinion that the management or conduct of the affairs of the company are being
conducted in a manner prejudicial to the interests of the company or its members or depositors,
file an application before the Tribunal on behalf of the members or depositors for seeking all
or any of the following orders …”. Besides, there being a typographical error in this sub-
section (1) with respect to indicating sub-section (2) instead of sub-section (3) which provides
for the minimum number of members who can apply for class action there is also some
confusion as to the class on whose behalf such class action can be instituted. While ‘member
has been defined in the CA 2013 as including the subscriber to the memorandum of the
company, shareholders and person whose name is entered in the register of members; definition
for depositor is not provided under CA 2013.
Further, section 245 does not empower the Tribunal with discretionary power to admit/allow
any class suit wherein class of members or depositors are unable to comply with the minimum
number of members/depositors requirement to be laid down in the Companies Rules. Also, on
a close reading of Section 241 and Section 245 of the Companies Act, 2013, we can find
duplication in protection provided to the members in case affairs of the company are conducted
in a manner prejudicial to the interest of the company/members.
Rights of majority shareholder (Corporate membership rights)

Certain rights can be exercised only by the majority and not by single shareholder. Such rights
are known as corporate membership right. Some of the instances of such rights under the
Companies Act, 2013 are-
(i) Section 149(10) provides that an independent director shall be eligible for
reappointment only on passing of a special resolution by the company and
disclosure of such appointment in the Board’s report.
(ii) Section 139 provides that company shall place the matter relating to the
appointment of auditors for ratification by members at every annual general
meeting.
(iii) Section 169 (1) may, by ordinary resolution, remove a director, not being a director
appointed by the Tribunal under section 242 in order to prevent mismanagement or
oppression, before the expiry of the period of his office after giving him a
reasonable opportunity of being heard.
(iv) Section 180 provides for restriction on the power of Board. The Board of Directors
of a company shall exercise the certain powers only with the consent of the
company by a special resolution.
They are-
(a) sell, lease or otherwise dispose of the whole, or substantially the whole, of the
undertaking of the company;
(b) Invest, otherwise than in trust securities, the amount of compensation received by the
company as a result of any merger or amalgamation;
(c) Borrow money which exceeds the aggregate of the paid-up capital of the company and
its free reserves;
(d) To remit, or give time for the repayment of, any debt due from a director.
Principle of Majority Rule
Unlike individual right, under corporate membership rights a shareholder is not entitled to bring
an action in his own name. Majority shareholders in a general meeting control the management
of the company. If the directors are supported by majority in what they do, the minority can do
nothing.
The principle of majority rule was first established in the case Foss v. Harbottle. In this case,
the directors of the company Victoria Park Company were alleged of fraudulent acts such as
the property of the company being misapplied and certain mortgages over the property being
given. Majority shareholders at the general meeting resolved that no action should be taken
against the directors. Two of the minority shareholders brought an action against the directors
to compel them to make good the losses to the Company. The Court dismissed the action on
the ground that the wrong done to the Company was capable of being ratified or confirmed by
the majority of the shareholders and therefore the Court should not interfere. It was left to the
majority to decide what was for the benefit of the company and whether the proceedings against
the directors should be commenced or not. Thus, minority shareholders were not entitled to sue
the directors for the wrongs done to the company.
Exceptions to the Majority Rule
In certain conditions this principle is not applicable. These conditions may be treated as the
restrictions on the power of the majority. These conditions are-
(i) Ultra vires acts: Ultra vires means beyond power. The doctrine of ultra vires has been
developed to protect the investors and creditors of the Company. It prevents a Company to
employ the money of the investors for the purpose other than those stated in the object clause
of the memorandum.
If an act is ultra vires the company, no majority can sanction or confirm such an act and every
shareholder is entitled to bring an action against the company and its officers in respect of it.
In Bharat Insurance Co. v. Kanhaiya Lal, one of the objects of the company was to “advance
money at interest on security of land, houses, machinery and other property situated in India”.
One shareholder brought an action on the ground that several investments had been made by
the company without adequate security and contrary to the provisions of the memorandum.
The Court held that he could sue because as regards the ultra vires act, the majority rule does
not come into operation.
(ii) Fraud on the Minority: If the conduct of the majority shareholders constitutes fraud on
the minority shareholders, any shareholder in exercise of his individual right may apply to the
Tribunal to interfere and restrain the company from going ahead with that transaction.
In Brown v. British Abrasive Wheel Co., the articles were altered so as to enable the nine-
tenths of the shareholders to compel any shareholder to sell his shares to them at a fair value.
The resolution of altering the articles was not upheld because it was only in the interest of
majority and not in the interest of the company as a whole. The object of such resolution was
merely to enable the majority to acquire the shares of minority.
(iii) Company is in control of the wrongdoers: When the persons against whom the relief is
sought themselves hold and control the majority of shares in the company and will not permit
an action to be brought in the name of the company, then shareholders may sue in their own
name.
In Glass v. Atkin, a company was controlled equally by two defendants and two plaintiffs.
The two plaintiffs brought an action against the two defendants alleging that they had
fraudulently converted the assets of the company for their own benefit. The court allowed the
action and observed that normally it is for the company itself to bring an action where its
interest is adversely affected, but in the instant case the two plaintiffs were justified in bringing
an action on behalf of the company since the two defendants being in equal control would
easily prevent the company from suing.
(iv) Acts requiring a special resolution: Sometimes the Act or the articles of the company
require certain acts to be done only by passing a special resolution at the general meeting of
the company. If the majority shareholders purport to do any such act by passing an ordinary
resolution, then anyone can bring an action to prevent the majority to do so.
Shareholder Derivative Suit

Shareholder derivative suit refers to a lawsuit brought by a shareholder on behalf of a
corporation against a third party allegedly causing harm to the corporation. Here the third party
is often the insider of the Company.
Under traditional corporate law, management is responsible for bringing and defending the
corporation against suit. But when the defendant in the suit is someone close to the company,
like a director or an executive officer, shareholders have the right to bring suit against them for
protecting the interest of the Company.
If the suit is successful, the proceeds go to the corporation, not to the shareholder who brought
the suit.
Shareholder derivative actions provide greater accountability for shareholders, inspire investor
confidence in the financial markets, and protect companies and shareholders from further harm.
Section 245 of the Companies Act, 2013 provides for class action. A prescribed number of
members and depositors can file application against the management or the Company “if its
affairs are conducted prejudicial to their interest or the interest of the Company and may call
for specified orders in such respect.” The Companies Act, 1956 did not provide for class action.
Oppression and Mismanagement
CA 1956 provides for protection of the minority shareholders from oppression and
mismanagement by the majority under Section 397 (Application to Company Law Board for
relief in cases of oppression) and 398 (Application to Company Law Board for relief in cases
of mismanagement). Oppression as per Section 397(1) of CA 1956 has been defined as ‘when
affairs of the company are being conducted in a manner prejudicial to public interest or in a
manner oppressive to any member or members’ while the term mismanagement has been
defined under Section 398 (1) as ‘conducting the affairs of the company in a manner prejudicial
to public interest or in a manner prejudicial to the interests of the company or there has been a
material change in the management and control of the company, and by reason of such change
it is likely that affairs of the company will be conducted in a manner prejudicial to public
interest or interest of the company’. Right to apply to the Company Law Board in case of
oppression and/or mismanagement is provided under Section 399 to the minority shareholders
meeting the ten percent shareholding or hundred members or one-fifth members limit, as the
case may be. However, the Central Government is also provided with the discretionary power
to allow any number of shareholders and/or members to apply for relief under Section 397 and
398 in case the limit provided under Section 399 is not met.
On the other hand, CA 2013 provides for provisions relating to oppression and mismanagement
under Sections 241-246. Section 241 provides that an application for relief can be made to the
Tribunal in case of oppression and mismanagement. Section 244(1) provides for the right to
apply to Tribunal under Section 241, wherein the minority limit is same as that mentioned in
CA 1956. Under CA 2013, the Tribunal may also waive any or all of the requirements of
Section 244(1) and allow any number of shareholders and/or members to apply for relief. This
is a huge departure from the provisions of CA 1956 as the discretion which was provided to
the Central Government to allow any number of shareholders to be considered as minority is,
under the new CA 2013 been given to the Tribunal and therefore is more likely to be exercised.
To further briefly examine a few provisions of CA 1956 vis-à-vis the provisions of CA 2013:
1) Provision of Section 397 and 398 of CA 1956 are combined in Section 241 of CA 2013 and
accordingly applications for relief in cases of oppression, mismanagement etc. will have to
be directed to the Tribunal.
2) While the powers of the Tribunal under CA 1956 on application under Section 397 or 398
and Section 404 were limited, CA 2013 granted additional powers to the Tribunal including
to:
(a) restrictions on the transfer or allotment of the shares of the company;
(b) removal of the managing director, manager or any of the directors of the
company;
(c) recovery of undue gains made by any managing director, manager or director
during the period of his appointment as such and the manner of utilization of the
recovery including transfer to Investor Education and Protection Fund or
repayment to identifiable victims;
(d) the manner in which the managing director or manager of the company may be
appointed subsequent to an order removing the existing managing director or
manager of the company;
(e) appointment of such number of persons as directors, who may be required by
the Tribunal to report to the Tribunal on such matters as the Tribunal may direct;
and
(f) Imposition of costs as may be deemed fit by the Tribunal.
The requirement of establishing existence of ‘just and equitable’ circumstances to waive any
and all requirements of the section pertaining to the meeting the minimum minority limits and
providing ‘security’ while allowing such an application are excluded from the Companies Act,
2013.
DISCLOSURES
Transparency is a pivotal feature in the market-based monitoring of companies and is central

to shareholders’ ability to exercise their ownership rights on an informed basis, which can help
attract capital and maintain confidence in the capital markets.
Adequate disclosure also helps improve public understanding of the structure and activities of
enterprises, corporate policies and performance with respect to environmental and ethical
standards, and companies’ relationships with the communities in which they operate.
Disclosures are made both through the print media and the electronic media. Today corporates
have to disclose mandatorily under various legislations including the Companies Act, 2013,
SEBI (LODR) Regulations, 2015, Sexual Harassment (Prevention, Prohibition and Redressal)
Act, 2013 etc.
1. Annual Report The annual report is a comprehensive report provided by most public
companies to disclose their corporate activities over the past year. The report is typically issued
to shareholders and other stakeholders who use it to evaluate the firm's performance including
both operating and financial highlights.
According to Regulation 34 of SEBI (Listing Obligations and Disclosure Requirement)
Regulations, 2015 [SEBI (LODR)] a listed entity shall submit the annual report to the stock
exchange within twenty-one working days of it being approved and adopted in the annual
general meeting as per the provisions of the Companies Act, 2013.
As per recent SEBI Notification the listed entity shall submit to the stock exchange and publish
on its website-
(a) a copy of the annual report sent to the shareholders along with the notice of the annual
general meeting not later than the day of commencement of dispatch to its
shareholders;
(b) in the event of any changes to the annual report, the revised copy along with the details
of and explanation for the changes shall be sent not later than 48 hours after the annual
general meeting.” (Notified on 9th May, 2018 effective from March 31, 2019)
Such annual report shall contain the following:
(a) audited financial statements i.e. balance sheets, profit and loss accounts etc, and
Statement on Impact of Audit Qualifications, if applicable;
(b) consolidated financial statements audited by its statutory auditors;
(c) cash flow statement presented only under the indirect method as prescribed in
Accounting Standard-3 or Indian Accounting Standard 7, as applicable, specified in
Section 133 of the Companies Act, 2013 read with relevant rules framed thereunder or
as specified by the Institute of Chartered Accountants of India, whichever is applicable;
(d) directors report;
(e) management discussion and analysis report - either as a part of directors report or
addition thereto;
(f) for the top five hundred listed entities based on market capitalization (calculated as on
March 31 of every financial year), Business Responsibility Report describing the
initiatives taken by them from an environmental, social and governance perspective, in
the format as specified by the Board from time to time:
Listed entities other than top five hundred listed companies based on market capitalization and
listed entities which have listed their specified securities on SME Exchange, may include the
Business Responsibility Reports on a voluntary basis in the format as specified.
Further it is provided that the annual report shall contain any other disclosures specified in
Companies Act, 2013 along with other requirements as specified in Schedule V of above-
mentioned regulations.
As per SEBI(LODR), the annual report shall contain the following additional disclosures:
Dissemination to the shareholders. According to Reg 36 of SEBI (LODR) the listed entity
shall send the annual report in the following manner to the shareholders:
(a) Soft copies of full annual report to all those shareholder(s) who have registered their
email address(es) for the purpose;
(b) Hard copy of statement containing the salient features of all the documents, as prescribed
in Section 136 of Companies Act, 2013 or rules made thereunder to those shareholder(s)
who have not so registered;
(c) Hard copies of full annual reports to those shareholders, who request for the same. The
listed entity shall send annual report to the holders of securities, not less than twenty-one
days before the annual general meeting.
2. Board’s Report
The Board’s Report is the most important means of communication by the Board of Directors
of a company with its shareholders. It is a comprehensive document which serves to inform the
shareholders about the performance and various other aspects of the company, its major
policies, relevant changes in management, future programmes of expansion, modernization and
diversification, capitalization or reserves, etc. The Board’s Report enables not only the
shareholders but also the lenders, bankers, government and the public to make an appraisal of
the company’s performance and provides an insight into the future growth and profitability of
the company.
The Companies Act, 2013 is based on enhanced disclosures and transparency. The Board’s
Report is a document, preparation of which requires thorough understanding of the subject.
The Act requires the Board of Directors to disclose on various parameters including the risk
management, board evaluation, implementation of Corporate Social Responsibility, a
statement of declaration given by independent directors. The Secretarial Audit Report is also
required to be annexed to the Board’s Report.
It is mandatory for the Board of Directors of every company to present financial statement to
the shareholders along with its report, known as the “Board’s Report” at every annual general
meeting. Apart from giving a complete review of the performance of the company for the year
under report, material changes till the date of the report, the report highlights the significance
of various national and international developments which can have an impact on the business
and indicates the future strategy of the company. The Board’s Report enables shareholders,
lenders, bankers, government, prospective investors, all the stakeholders and the public to make
an appraisal of the company’s performance and reflects the level of corporate governance in
the company.
The matters to be included in the Board’s Report have been specified in Section 134 of the
Companies Act, 2013 and Rule 8 of the Companies (Accounts) Rules, 2014. Apart from this,
under Sections 67, 92, 129, 131, 135, 149, 160, 168, 177, 178, 188, 197, 204 of the Companies
Act, 2013, relevant information has to be disclosed in the Board’s Report. The Board’s Report
of companies whose shares are listed on a stock exchange must include additional information
as specified in the SEBI (LODR) ,2015.
Disclosures under Section 134(3)

Section 134 of the Act enjoins upon the Board a responsibility to make out its report to the
shareholders and attach the said report to financial statements laid before the shareholders at
the annual general meeting, in pursuance of Section 129 of the Act.
In terms of Sub-section (3) of Section 134, the Board’s Report shall include:
(a) the web address, if any, where annual return referred to in sub-section (3) of section 92
has been placed
(b) Number of meetings of the Board: Board Report should contain total number of Board
Meetings held in respective financial year
(c) Directors’ Responsibility Statement: Section 134(5) of the Act specifically provides that
the Directors’ Responsibility Statement shall set out the following affirmations:
(i) in the preparation of the annual accounts,
(ii) the directors had selected such accounting policies and applied them consistently
and made judgments and estimates that are reasonable and prudent so as to give a true
and fair view of the state of affairs of the company at the end of the financial year and
of the profit and loss of the company for that period;
(iv) the directors had prepared the annual accounts on a going concern basis; and
(v) the directors, in the case of a listed company, had laid down internal financial
controls to be followed by the company and that such internal financial controls are
adequate and were operating effectively; and
(vi) The directors had devised proper systems to ensure compliance with the provisions
of all applicable laws and that such systems were adequate and operating effectively.
(ca) details in respect of frauds reported by auditors under sub-section (12) of section 143 other
than those which are reportable to the Central Government
(d) a statement on declaration given by independent directors under sub-section (6) of section
149
(e) Company’s policy on directors’ appointment and remuneration including criteria for
determining qualifications, positive attributes, independence of a director and other matters
provided under subsection (3) of section 178
(f) Explanations or comments by the Board on every qualification, reservation or adverse
remark or disclaimer made—
• by the auditor in his report; and
• by the Secretarial Auditor in his secretarial audit report;
• Auditor’s report under section 143
• Cost Audit Report under section 148
• Secretarial Audit Report under Section 204(3)
(h) Particulars of contracts or arrangements with related parties referred to in sub-section (1)
of section 188 in the prescribed form;
(i) The state of the company’s affairs

(j) the amounts, if any, which it proposes to carry to any reserves
(k) The amount, if any, which it recommends should be paid by way of dividend
(l) Material changes and commitments, if any, affecting the financial position of the company
which have occurred between the end of the financial year of the company to which the
financial statements relate and the date of the report
(m) The conservation of energy, technology absorption, foreign exchange earnings and outgo,
in such manner as may be prescribed
(n) A statement indicating development and implementation of a risk management policy for
the company including identification therein of elements of risk, if any, which in the opinion
of the Board may threaten the existence of the company.
(o) Details about the policy developed and implemented by the company on Corporate Social
Responsibility initiatives taken during the year
(p) Board evaluation
(q) such other matters as may be prescribed
Judicial Pronouncement
Where director is sub partner with the other party to the contract, he is deemed to have an
interest in the contract which he is bound to disclose – Pydah Venkatachalapathi v Guntur,
Jute & Pare Mills Co Ltd.
A relationship of friendliness with directors who are ‘interested’ in contract or arrangement
will not make a person an interested director. The interest or concern cannot be merely a
sentimental interest or ideological concern – Needle Industries (india) Ltd v Needle Industries
Newey (India) Holding Ltd (1981)
Offences & Penalty
Section134(8) states that if a company contravenes the provisions of this section, the company
shall be punishable with fine which shall not be less than fifty thousand rupees but which may
extend to twenty-five lakhs rupees. Every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to three years or with fine which
shall not be less than fifty thousand rupees but which may extend to five lakhs rupees, or with
both
AUDIT AND AUDITORS UNDER THE COMPANIES ACT, 2013 & RULES
Chapter X of the Companies Act, 2013 (Section 139 to 148) dealt with Audit and Auditors.
Appointment: First Auditor to be appointed in a Board Meeting within 30 days of registration
of the Company else within 90 days in an EGM. Appoint an individual or a firm as an auditor
who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual
general meeting and thereafter till the conclusion of every sixth meeting. Ratification by
members at every annual general meeting Written consent of the auditor to be obtained
The Company has to inform the auditor and file form for appointment with the Registrar within
fifteen days of the meeting in which the auditor is appointed Listed company or a company
belonging to such class or classes of companies as may be prescribed (Still has not prescribed
even in the rules), shall appoint or re-appoint—
(a) an individual as auditor for more than one term of 5 consecutive Years; and
(b) an audit firm as auditor for more than two terms of five consecutive years
3 years transition period will be given to comply this requirement. However, according to the
draft rules, period of 5 years will be calculated from retrospective effect
In case of casual vacancy caused, vacancy can be filled by the Board of Directors within thirty
days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment
shall also be approved by the company at a general meeting convened within three months of
the recommendation of the Board and he shall hold the office till the conclusion of the next
annual general meeting
Removal of Auditor: Auditor cannot be removed from the Company without Central
government approval and member’s approval by special resolution is required
The auditor who has resigned from the company shall file within a period of thirty days from
the date of resignation, a statement in the prescribed form with the company and the Registrar
indicating the reasons and other facts as may be relevant with regard to his resignation.
If the auditor does not comply with above said requirement, he or it shall be punishable with
fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees
Special notice shall be required for a resolution at an annual general meeting appointing as
auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall
not be re-appointed, except where the retiring auditor has completed a consecutive tenure of
five years or, as the case may be, ten years.
Disqualifications: The following persons shall not be eligible for appointment as an auditor of
a company, namely: —
(a) a body corporate other than a limited liability partnership registered under the Limited
Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of
the company;
(d) a person who, or his relative or partner—
is holding any security or indebtedness or guarantee or provided any security in connection
with the indebtedness of any third person to the company or its subsidiary, or of its holding or
associate company or a subsidiary of such holding company exceeding Rs.1 Lakh
(e) a person or a firm who, whether directly or indirectly, has business relationship with
the company, or its subsidiary, or its holding or associate company or subsidiary of such
holding company or associate company.
(f) a person whose relative is a director or is in the employment of the company as director
or key managerial personnel;
(g) a person who is in full time employment elsewhere or a person or a partner of a firm
holding appointment as its auditor, if such persons or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
companies;
(h) a person who has been convicted by a court of an offence involving fraud and a period
of ten years has not elapsed from the date of such conviction;
(i) any person whose subsidiary or associate company or any other form of entity, is
engaged as on the date of appointment in consulting and specialised services as
provided in section
Remuneration of auditors.
Board may fix remuneration of the first auditor appointed Remuneration of the auditor of a
company shall be fixed in its general meeting Powers and duties of auditors and auditing
standards. In case the auditor has sufficient reason and information to believe that an offence
involving fraud which is likely to materially affect the company, is being or has been committed
against the company by officers or employees of the company, he shall report the matter to the
Central Government immediately but not later than thirty days of his knowledge or
information, with a copy to the audit committee or in case the company has not constituted an
audit committee, to the Board.
Materiality shall mean:
(a) fraud(s) that is or are happening frequently; or
(b) fraud(s) where the amount involved or likely to be involved is not less than five
percent of net profit or two percent of turnover of the company for the preceding
financial year.
The auditor’s report shall also state—
(a) whether he has sought and obtained all the information and explanations;
(b) whether, in his opinion, proper books of account as required by law have been kept by
the company;
(c) whether the report on the accounts of any branch office of the company audited by a
person other than the company’s auditor has been sent to him under the proviso to that
sub-section and the manner in which he has dealt with it in preparing his report;
(d) whether the company’s balance sheet and profit and loss account dealt with in the report
are in agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which
have any adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director under sub-
section (2) of section 164;
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts
and other matters connected therewith
(i) whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls;
(j) Such other matters as may be prescribed.
Auditor to sign audit reports

Auditor shall sign the auditor’s report Any qualifications, observations or comments on
financial transactions or matters, which have any adverse effect on the functioning of the
company mentioned in the auditor’s report shall be read before the company in general meeting
and shall be open to inspection by any member of the company.
Auditors to attend general meeting All notices and other communications relating to any
general meeting shall be forwarded to the auditor of the company. Auditor shall, unless
otherwise exempted by the company, attend either by himself or through his authorised
representative, who shall also be qualified to be an auditor
Punishment for contravention: If an auditor of a company contravenes any of the provisions
of section 139, section 143, section 144 or section 145, the auditor shall be punishable with
fine which shall not be less than twenty-five thousand rupees but which may extend to five
lakh rupees. if an auditor has contravened such provisions knowingly or wilfully with the
intention to deceive the company or its shareholders or creditors or tax authorities, he shall be
punishable with imprisonment for a term which may extend to one year and with fine which
shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.
Where an auditor has been convicted under above provision, he shall be liable to—
(i) refund the remuneration received by him to the company; and

(ii) (ii) pay for damages to the company, statutory bodies or authorities or to any other
persons for loss arising out of incorrect or misleading statements of particulars made
in his audit report.
Other Penalties on Auditor

Class action suit against the Auditors U/s 245 : To protect investor interest, Section 245 of
Companies Act 2013 has introduced the concept of class action suits, through which
shareholders, depositors can initiate legal action against the company and auditors in the event
of fraudulent activity. A class of shareholders or deposit holders can now claim damages or
compensation or demand other suitable action against the auditor, including the audit firm, by
filing an application with the NCLT.
Prosecution by NFRA (National Financial Reporting Authority) U/s 132: NFRA may
investigate either suo moto or on a reference made to it by the Central Government on matters
of professional or other misconduct committed by any member or firm of chartered
accountants, registered under the Chartered Accountants Act, 1949 chartered accountants. If
professional or other misconduct is proved, NFRA has the power to make order for
(A) imposing penalty of—
(I) not less than one lakh rupees, but which may extend to five times of the fees
received, in case of individuals; and
(II) not less than ten lakh rupees, but which may extend to ten times of the
fee received, in case of firms;
(B) debarring the member or the firm from engaging himself or itself from practice as member
of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of
section 2 of the Chartered Accountants Act, 1949 for a minimum period of six months or for
such higher period not exceeding ten years as may be decided by the National Financial
Reporting Authority.
Scope of Audit: The scope of an audit is the determination of the range of the activities and
the period of records that are to be subjected to an audit examination.
The scope of an audit is;
• Legal Requirements.
• Entity Aspects.
• Reliable Information.
• Proper Communication.
• Evaluation.
• Test.
• Comparison.
• Judgments.
Audit scope are explained below; The audit report should cover all functions so that the reader
may know about all the working of a concern.
Reliable Information: The auditor should obtain reasonable assurance as to whether the
information contained in the underlying accounting records and other source data is reliable
and sufficient as the basis for preparation of the financial statements.
The auditor can use various techniques to test the validity of data. All auditors while doing the
audit work usually apply the compliance test and substance test. The auditor can show such
information in the report.
Proper Communication: The auditor should decide whether the relevant information is
properly communicated in the financial statements. Accounting is an information system so
facts and figures must be so presented that the reader can get information about the business
entity. The auditor can mention this fact in his report.
The principles of accounting can be applied to decide about the disclosure of financial
information in the statements.
Evaluation: The auditor assesses the reliability and sufficiency of the information contained
in the underlying accounting records and other source data by making a study and evaluation
of accounting system and internal controls to determine the nature, extent, and timing of other
auditing procedures.
Test: The auditing assesses the reliability and sufficiency of the information contained in the
underlying accounting records and other source data by carrying out other tests, inquiries and
other verification procedures of accounting transactions and account balances as he considers
appropriate in the particular circumstances. There are compliance test and substantive test in
order to examine the data. The vouching, verification and valuation technique is also used.
Comparison: The auditor determines whether the relevant information is properly
communicated by comparing the financial statements with the underlying accounting records
and other source data to see whether they properly summarized the transactions and events
recorded therein.
The auditor can compare the accounting records with financial statements in order to check
that the same has been processed for preparing the final accounts of a business concern.
Judgments: The auditor determines whether the relevant information is properly
communicated by considering the judgment that management has made in preparing the
financial statements, accordingly. The auditor assesses the selection and consistent application
of accounting policies, the manner in which the information has been classified and the
adequacy of disclosure.
Legal Requirements: The auditor can determine the scope of an audit of financial statements
in accordance with the requirements of legislation, regulations or relevant professional bodies.
The state can frame rules for determining the scope of audit work. In the same way, professional
bodies can make rules to conduct the audit.
Entity Aspects: The audit should be organized to cover all aspects of the entity as far as they
are relevant to the financial statements being audited.
A business entity has many areas of working. A small entity may have few functions while a
large concern has many functions. The auditor has the duty to go through all the functions of
the business.
Provisions on Books of Accounts under Companies Act 2013
Section 128 of the Companies Act, 2013 provides for Maintenance of books of accounts under
the new Companies Act. The erstwhile corresponding section 209 on Books of accounts to be
kept by company of Companies Act, 1956 dealt with the books of accounts required to be
maintained to give a true and fair view of the state of affairs of the company or branch office
and to explain its transactions and also specify the place of keeping and period for which such
books to be kept by the company
The significant changes introduce in this section are as follows:
(a) books of accounts may also be kept in electronic form
(b) a director of the Company can inspect the books of accounts of the subsidiary, only
with the authority of the Board of Directors.
Maintenance of Books of Accounts
Maintenance of books of accounts would mean records maintained by the company to record
the specified financial transaction. It has been specifically provided that –
1) Every company shall keep proper books of accounts. This clause specifies the main
features of proper books of accounts as under –
(i) The company must keep the books of accounts with respect to items specified
in clauses (i) to (iv) of sub-section 2(13) which defines “books of accounts”.
(ii) The books of accounts must show that all money received and expended,
sales and purchases of goods and the assets and liabilities of the company.
(iii) The books of accounts must be kept on accrual basis and according to the
double entry system of accounting.
(iv) The books of accounts must give a true and fair view of the state of the
affairs of the company or its branches.
2) What is required to be prepared and kept are books of accounts, other relevant books
and papers and financial statements. Books of accounts are defined in clause 2(13) ,
‘books and papers’ in clause 2(12) and ‘ financial statement’ in Clause 2(40). Both are
required to be prepared and kept.
3) Books of accounts, books and papers and financial statements should explain the
transactions effected at company’s registered office and any branch(es)
4) Records, books, papers and financial statements must relate to any specific financial
year only.
5) A company engaged in production, processing, manufacturing or mining activity, is
also required to maintain particulars relating to utilization of material, labour or other
items of cost as the Central Government may prescribe for such class of companies.
(Section 148)
6) The branches of the company, if any, in India or outside India shall also keep the books
of accounts in the same manner as specified in sub-section (1), for the transaction
effected at the branch office. Further the branch offices are required to send the proper
summarized return made up-to-date to the company at its registered office or the other
places as decided by the board.
7) Books of accounts of the company shall be kept at the registered office of the company.
8) In case of Books of accounts being maintained at any other place other than registered
office in India, as may be decided by resolution of Board of Directors, company shall
be required to intimate full address of such place to Registrar of Companies within 7
days.
9) The maintenance of books of accounts and other books and papers in electronic mode is
permitted and is optional. (Second Proviso to Clause 128(1)).
The person responsible to take all reasonable steps to secure compliance by the company with
the requirement of maintenance of books of accounts etc. shall be: (sub-section 6)
(i) Managing Director,
(ii) Whole-Time Director, in charge of finance
(iii)Chief Financial Officer
(iv) Any other person of a company charged by the Board with duty of complying with
provisions of section 128.
Penal Provision: In case the aforementioned persons referred to in sub-section (6) (i.e.
Managing Director, Whole Time Director, Chief Financial Officer etc.) fail to take reasonable
steps to secure compliance of this section and thus, contravene such provisions, they shall in
respect of each offence, be punishable with imprisonment for a term which may extend to one
year or with fine which shall not be less than fifty thousand rupees but which may extend to
five lakh rupees or both.
THE COMPANIES ACT, 2013- PROVISIONS RELATING TO ANNUAL RETURN
Annual return is an important document just like an audited Annual account designed to
provide information to members/ other stakeholders about the company, promoters, members,
meetings and remuneration of directors and key managerial persons (KMP). Its importance will
be obvious from the fact that every company has to make arrangements to make Annual returns
available for inspection by any member or debenture holder without payment of fee and to
others on payment of prescribed fee during working hours of the company (Section 94). The
certification by directors and company secretary/company secretary in practice prima facie
establish the correctness of particulars stated therein (Section 95).
Annual Return under New Act (Section 92):
The notable change is that the Annual return is to be made in the prescribed form to give the
details as they stood on the close of the financial year instead of on the Annual General
Meeting date. Certain additional information has been made mandatory. Let us now go
through the requirements under the Act, 2013 for noting the requirements as well as new
requirements incorporated in comparison to Old Act, 1956.
1. Prescribed Form to be used for giving details.
2. Details of its registered office, principal business activities(new), particulars of its holding,
subsidiary and associate companies, (new) its shares, debentures and other securities and
shareholding pattern, its indebtedness, its members and debenture-holders along with changes
therein since the close of the previous financial year.
3. Details of its promoters, directors, key managerial personnel along with changes therein
since the close of the previous financial year (Promoters and key managerial persons are added)
4. Meetings of members or a class thereof, Board and its various committees along with
attendance details (new requirement)
5. Remuneration of directors and key managerial personnel. Penalties or punishments imposed
on directors/officers or on company, steps taken for compounding or appeals made against
alleged offence. (new requirement)
6. Details of Penalty or punishment imposed on the company, its directors or officers and
details of compounding of offences and appeals made against such penalty or punishment. (new
requirement)
7. Matters relating certification of compliances, disclosures as may be prescribed. It will be
clear only after the Rules are finalized. Readers may notice that some additional information
may be added for certification by both management and Company secretary in practice.
8. Details, as may be prescribed, in respect of shares held by or on behalf of the Foreign
Institutional Investors indicating their names, addresses, countries of incorporation, registration
and percentage of shareholding held by them (new requirement)
9. Any other matters as may be prescribed. (new requirement)
10. Annual Return has to be signed by a director and the company secretary, or where there is
no company secretary by a company secretary in practice. In the case of one-person company
either by director or by company secretary, if appointed
11. In the case of a listed company or companies having such paid-up capital and turnover as
may be prescribed, the return has to be certified by a company secretary in practice confirming
that the annual return discloses the facts correctly and adequately and company has complied
with all the provisions of this Act. It appears that certain new requirements /compliances by
the company will also have to be certified.
12. The company has to annex an extract of the annual return in such form as may be prescribed
to its Directors Report {Section 134(3) (a)}
13. The time limit for filing has been the same as in the case of return under old act i.e. 60 days
from the date of AGM. In case the AGM is not held, return has to be filed within time allowed
u/s 403(270 days) with additional fee along with a statement giving the reasons for not holding
AGM.
14. Other requirements:
- As per Section 94, copies of annual return shall be kept at the registered office along with
other registers required to be kept under the Act. Annual return can be kept at other place by
passing a special resolution.
- Annual returns shall be open for inspection by any member, debenture holder, other security
holder or beneficial owner during business hours without payment of fee. Inspection is
permitted by any other person subject to payment of prescribed fee as may be notified. Extracts
can be taken without any payment of fee but copies of return can be had only on payment of
such fee as may be prescribed. If a company fails to facilitate inspection or copies, company
and every defaulting officer shall be liable for fine of 1000/- rupees for every days of default
subject to a limit of one lakh rupees during which default continues.
Retention period: Central Government may specify the period for which the Annual returns are
to be preserved.
Penalty for non-compliance of Section 92:
i) By Company: The Company shall be punishable with a fine which shall not be less than
fifty thousand rupees but which may extend to five lakh rupees.
ii) By Officers in default: Every officer of the company who is in default shall be punishable
with imprisonment for a term which may extend to six months or with fine which shall not be
less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
iii) By Company Secretary in practice: If a company secretary in practice wrongly certifies
the correctness of annual return, he shall be punishable with a fine which shall not be less than
fifty thousand rupees but which may extend to five lakh rupees.
Penalty has been substantially increased by the new Act,2013 and Company Secretary in
Practice has to certify that company has complied with all provisions of the Act. Scope of
verification by practicing Secretary is enlarged as he has to confirm compliance of provisions
of the companies Act besides the correctness of contents of Annual Return. Thus, a huge
responsibility is thrust not only on the company’s detectors and secretary of the company as
well as on the professional who signs the Annual return. Professionals will certainly hike their
fees and at the same time bound to exercise their diligence for avoiding any penalties.
BUDGETARY CONTROL
Meaning: Budgetary control is the process by which budgets are prepared for the future period
and are compared with the actual performance for finding out variances, if any. The comparison
of budgeted figures with actual figures will help the management to find out variances and take
corrective actions without any delay.
Budgetary control is a continuous process which helps in planning and co-ordination. It
provides a method of control. A budget is a means and budgetary control is the end-result.
Definitions: According to Welsch , budgetary control may be defined as “the use of budgets
and budgeting reports throughout the period to coordinate, evaluate and control day-to-day
operations in accordance with the goals specified by the budget.”
According to Brown and Howard, “Budgetary control is a system of controlling costs which
includes the preparation of budgets, coordinating the departments and establishing
responsibilities, comparing actual performance with the budgeted and acting upon results to
achieve maximum profitability.” Weldon characterizes budgetary control as planning in
advance of the various functions of a business so that the business as a whole is controlled
Fundamental Principles of Budgetary Control:
(i) Establishing Plan and Target performance to coordinate all activities of the business
(ii) Recording the Actual Performance
(iii)Continuous Comparison of actual performance with planned
(iv) Ascertainment of Variances and analysis of reasons
(v) Taking remedial action
OBJECTIVES OF BUDGETARY CONTROL
Budgetary control has the following specific objectives:
1. Planning: Budgets are the plans to be pursued during the designed period of time to attain
certain objectives in the organisation. Budgetary control will force the management at all levels
to plan various activities well in advance in the organisation.
Budgets are generally drawn on the basis of forecasts made about market forces, supply
conditions and consumer’s preferences in the organisation. This help in making and revising
business policies in the organisation.
2. Control: Budgetary control is an important instrument of managerial control in any
enterprise. Budgetary control helps in comparing the performance of various individuals and
departments with the predetermined standards laid down in various budgets.
Budgetary control reports the significant variations from the budgets to the top management in
the organisation. Since separate budgets are prepared for each department becomes easier to
determine the weak points and the sources of waste of time, money and resources.
3. Coordination: Budgetary control involves the participation of a master budget, which helps
in bringing effective coordination among different departments of a business enterprise in the
organisation. It forces the executive to make plans as a group in the organisation. Delays
involved in the red tapism and discussing matters with one another sets procedural wrangles
aside.
4. Increase in Efficiency: Budgetary controls lay down the standards of production, sales,
costs and overheads taking into consideration various internal and external factors. This
compels and stimulates every department to attain maximum efficiency over the use of men,
machine, material, methods and money.
5. Financial Planning: Budgets are generally expressed in financial terms in the organisation.
They provide the estimates of expenditures and revenues in the organisation. This helps the
management to make plans about the flow of cash in such a way that it would never run short
of working capital in the organization. Cash budget is also useful to convince the financial
institution that their loans will be paid back in time.
Benefits of Budgetary Control:
Business enterprises can obtain the following advantages from efficient system of budgetary
control:
1) Budgeting is an all-inclusive management tool. It integrates and ties together various
organisational activities in the organization right from planning to controlling.
2) Budgets provide standards against which actual performance can be measured. This helps
in taking corrective action, which is an important part of controlling.
3) Budgetary control fixes targets. Each and every department is forced to work efficiently to
reach the target. Thus, it is an effective method of controlling the activities of various
departments of a business unit.
4) It secures better co-ordination among various departments. In preparation of various
budgets, knowledge, skill and experience of many executives are combined and business
plans are reduced into concrete numerical terms in the organisation. This leads to proper
coordination of the efforts of various departments of the enterprise in the organisation
5) By promoting cost consciousness among the employees, budgetary control brings in
efficiency and economy.
6) Budgetary control helps in reducing the cost of production by eliminating the wasteful
expenditure.
7) The ultimate effect of budgeting is the thorough examination and scrutinizing the financial
aspect of the business enterprise. This helps in optimum use of financial resources of the
enterprise.
8) Budgetary control in the organisation facilities ‘control by exception’. It helps in focusing
the time and effort of the managers upon areas, which are most important for the survival of
the organisation.
9) Budgeting in the organisation is an important device for fixing the responsibility of various
positions. The persons occupying various positions can be made to understand their
responsibilities with the help of budgets
10) Budgetary control facilitates centralized control with decentralized activity
11) As everything is planned and provided in advance, it helps in smooth running of business
enterprise.
Limitations of Budgetary Control:

1. Too much emphasis on budgeting in the organization may bring about rigidity in the
enterprise. It may deprive the managers of the flexibility they require in managing their
departments.
2. Budgeted estimates in the organisation are generally based on the price level at a particular
period of time. These estimates may become useless when there is either inflation or
depression in the market.
3. It is really difficult to prepare the budgets accurately under inflationary conditions.
4. Budget involves a heavy expenditure which small business concerns cannot afford.
5. Budgets are prepared for the future period which is always uncertain. In future, conditions
may change which will upset the budgets. Thus, future uncertainties minimize the utility of
budgetary control system.
6. A budget, which allows liberal expenditure, may be used to hide inefficiency. For instance,
a department may be inefficient even though its expenses are within the budget limits in the
organisation.
7. Budgetary control in itself does not prevent deviation from appearing. It neither ensures
satisfactory results nor control automatically in the organisation. A deliberate effort has to
be made in this direction in the organisation.
8. Budgetary control in the organisation requires expenditure of time, money and effort.
Moreover, it is not easy to prepare various kinds of budgets in the organisation because of
obvious difficulties in forecasting to be used in budgeting.
9. Budgetary control is only a management tool. It cannot replace management in decision-
making because it is not a substitute for management.
10. The success of budgetary control depends upon the support of the top management. If there
is lack of support from top management, then this will fail.
Essentials of Effective Budgetary Control:
Following are requirements of a good system of budgetary control in the organisation
1. Quick Reporting: A good system of budgetary control in the organisation requires the
establishment of such procedures, which will provide reports on the performance of various
operations. The reports should reach the persons concerned with the implementation of budgets
without any delay so that quick actions may be taken wherever necessary in the organization.
2. Detailed Organization Structure: There should be a detailed organization structure with
precisely designed authorities, responsibilities and lines of communication so that everybody
in the organisation understands the significance of objectives in detail.
3. Frequent Comparison: There should be frequent comparison between budget estimates
and operating results in the organisation. Careful analysis of both operating results and budget
estimates is the essence of budgetary control in the organisation.
4. Definite Plan: There should be comprehensive planning in the enterprise. All the operations
in the organisation should be planned in clear terms. The administration of the budgets should
also be properly planned in the organisation. It must be pre-determined who is to be held
responsible for the implementation of budget in the organisation.
5. Responsibility Matched by the Authority: Those assigned with the responsibility to
implement the budgets should also be given the necessary authority to achieve the budgeted
targets in the organisation. Lack of sufficient authority will make the implementation of
budgets ineffective in the organisation.
6. Participation: The purpose of budgetary control is to achieve coordination of various
functions of the business in the organisation. Therefore, it is essential that participation up to
the lowest level in the enterprise be ensured to make the people committed to the budgets.
Everybody in the organisation should understand his role in achieving the budgeted targets.
7. Support of the Management: The top management in the organisation supports a good
system of budgetary control. Top management in the organisation should take the preparation
of budgets and their implementation seriously in order to achieve the objectives of the
enterprise.
8. Flexibility: Budgets should not be rigid, but flexible enough to allow altering or remodeling
in the light of any change in circumstances in the organization. Budgets are a means to an end.
They must be flexible to achieve the desired objectives in the organisation. A good system of
budgetary control allows sufficient flexibility to the persons concerned with the
implementation of budgets in the organisation.
MODULE 4
Reorganisation of Company’s Capital – Amalgamation – Take Over – Disclosure of Share

Holding – Protection of Minority Holding.
REORGANIZATION OF COMPANY’S CAPITAL
Reorganization is a process designed to revive a financially troubled or bankrupt firm. A

reorganization involves the restatement of assets and liabilities, as well as holding talks with
creditors in order to make arrangements for maintaining repayments. Reorganization is an
attempt to extend the life of a company facing bankruptcy through special arrangements and
restructuring in order to minimize the possibility of past situations reoccurring. Generally,
reorganization marks the change in a company's tax structure.
Reorganization can also mean a change in the structure or ownership of a company through a
merger or consolidation, spinoff acquisition, transfer, recapitalization, or change in identity or
management structure. Such an endeavour is also known as a "restructuring."
The first type of reorganization is supervised by the court and focuses on restructuring a
company's finances after a bankruptcy. During this time a company is protected from claims
by creditors. Once the bankruptcy court approves a reorganization plan, the company will repay
creditors to the best of its ability, as well as restructure its finances, operations, management
and whatever else is deemed necessary to revive it.
A reorganization is typically bad for shareholders and creditors, who may lose a significant
part or all of their investment. If the company emerges successfully from the reorganization, it
may issue new shares, which will wipe out the previous shareholders. If the reorganization is
unsuccessful, the company will liquidate and sell off any remaining assets. Shareholders will
be last in line to receive any proceeds and will usually receive nothing unless money is left
over after paying creditors, senior lenders, bondholders and preferred stock shareholders.
The second type of reorganization is more likely to be good news for shareholders in that it is
expected to improve the company’s performance. To be successful, the reorganization must
improve a company’s decision-making capabilities and execution. This type of reorganization
can take place after a company gets a new CEO.
AMALGAMATION
Amalgamation is defined as the combination of one or more companies into a new entity. It
includes:
• Two or more companies join to form a new company
• Absorption or blending of one by the other
Thereby, amalgamation includes absorption.
However, one should remember that Amalgamation as its name suggests, is nothing but two
companies becoming one. On the other hand, Absorption is the process in which the one
powerful company takes control over the weaker company.
Generally, Amalgamation is done between two or more companies engaged in the same line of
activity or has some synergy in their operations. Again, the companies may also combine for
diversification of activities or for expansion of services
Transfer or Company means the company which is amalgamated into another company; while
Transfer Company means the company into which the transfer or company is amalgamated.
Existing companies A and B are wound up and a new company C is Amalgamation

formed to take over the businesses of A and B
Existing company A takes over the business of another existing Absorption

company B which is wound up
A New Company X is formed to take over the business of an External

existing company Y which is wound up. reconstruction
Amalgamation is different from Merger because neither of the two companies under reference
exists as a legal entity. Through the process of amalgamation, a completely new entity is
formed to have combined assets and liabilities of both the companies.
Types of Amalgamation
1. Amalgamation in the nature of merger: In this type of amalgamation, not only is the
pooling of assets and liabilities is done but also of the shareholders’ interests and the
businesses of these companies. In other words, all assets and liabilities of the transferor
company become that of the transfer company. In this case, the business of the transfer or
company is intended to be carried on after the amalgamation. There are no adjustments
intended to be made to the book values. The other conditions that need to be fulfilled include
that the shareholders of the vendor company holding at least 90% face value of equity shares
become the shareholders’ of the vendee company.
2. Amalgamation in the nature of purchase:

This method is considered when the conditions for the amalgamation in the nature of merger
are not satisfied. Through this method, one company is acquired by another, and thereby the
shareholders’ of the company which is acquired normally do not continue to have
proportionate share in the equity of the combined company or the business of the company
which is acquired is generally not intended to be continued.
If the purchase consideration exceeds the net assets value then the excess amount is recorded
as the goodwill, while if it is less than the net assets value it is recorded as the capital
reserves.
Need for Amalgamation
1. To acquire cash resources
2. Eliminate competition
3. Tax savings
4. Economies of large-scale operations
5. Increase shareholders value
6. To reduce the degree of risk by diversification
7. Managerial effectiveness
8. To achieve growth and gain financially
Procedure for Amalgamation
1. The terms of amalgamation are finalized by the board of directors of the amalgamating
companies.
2. A scheme of amalgamation is prepared and submitted for approval to the respective
High Court.
3. Approval of the shareholders’ of the constituent companies is obtained followed by
approval of SEBI.
4. A new company is formed and shares are issued to the shareholders’ of the transferor
company.
5. The transferor company is then liquidated and all the assets and liabilities are taken
over by the transferee company.
Accounting of Amalgamation
Pooling of Interests Method: Through this accounting method, the assets, liabilities and
reserves of the transfer or company are recorded by the transferee company at their existing
carrying amounts.
Purchase Method: In this method, the transfer company accounts for the amalgamation either
by incorporating the assets and liabilities at their existing carrying amounts or by allocating the
consideration to individual assets and liabilities of the transfer or company on the basis of their
fair values at the date of amalgamation.
Advantages of Amalgamation
• Competition between the companies gets eliminated
• R&D facilities are increased
• Operating cost can be reduced
• Stability in the prices of the goods is maintained
Disadvantages of Amalgamation
• Amalgamation may lead to elimination of healthy competition
• Reduction of employees may take place
• There could be additional debt to pay
• Business combination could lead to monopoly in the market, which is not always
positive
• The goodwill and identity of the old company is lost
TAKE OVER
A takeover occurs when an acquiring company makes a bid in an effort to assume control of a
target company, often by purchasing a majority stake in the target firm. If the takeover goes
through, the acquiring company becomes responsible for all of the target company’s
operations, holdings, and debt. When the target is a publicly traded company, the acquiring
company makes an offer for all of the target’s outstanding shares. A welcome takeover, such
as an acquisition or merger, generally goes smoothly because both companies consider it a
positive situation. In contrast, an unwelcome or hostile takeover can be quite aggressive as one
party is not participating voluntarily. Under a hostile takeover, the acquiring firm can use
unfavorable tactics, such as a dawn raid where it buys a substantial stake in the target company
as soon as the markets open, causing the target to lose control of the company before it realizes
what is happening. The target firm’s management and board of directors may strongly resist
takeover attempts by implementing tactics such as a poison pill, which allows the target’s
shareholders purchase more shares at a discount to dilute the acquirer’s holdings and make a
takeover more expensive.
Reasons for a Takeover
A takeover is virtually the same as an acquisition, except the term "takeover" has a negative
connotation, indicating the target does not wish to be purchased. A company may act as a
bidder by seeking to increase its market share or achieve economies of scale that help it reduce
its costs and, thereby, increase its profits. Companies that make attractive takeover targets
include those that have a unique niche in a particular product or service; small companies with
viable products or services but insufficient financing; a similar company in close geographic
proximity where combining forces could improve efficiency; and otherwise viable companies
that are paying too much for debt that could be refinanced at a lower cost if a larger company
with better credit took over.
For companies listed on the STOCK MARKET this involves the acquiring firm either buying
in the open market, or bidding for the voting SHARES in the target firm. Unlike a MERGER,
which is usually arranged by mutual agreement between the two firms ‘management, a
takeover is often resisted by the target firm's management, so that the bidder must convince
shareholders that selling out to the acquirer, or taking shares in it in the case of a share
exchange, is of benefit to them. Although a 51%stake in the target company would be sufficient
to allow the acquiring company to exercise effective control, generally it would wish to take
full control so as to be free from the interference of minority interests.
Takeovers are a form of External Growth by which firms expand in a horizontal, vertical and
conglomerate direction. Conglomerate takeovers (the acquisition of a firm in an unrelated
market) are undertaken primarily as a means of spreading business risks and to enable the firm
to reorientate itself away from static or declining markets into areas offering good long-term
growth and profit potential. Vertical takeovers (the acquisition of a firm which supplies inputs
to the acquirer or which distributes its products) may enable the firm to cut its costs by, for
example, linking together a series of sequentially related input assembly operations or reducing
stockholding costs; vertical takeovers give the firm greater security of input supplies and access
to distribution channels and the potential to put non-integrated competitors at a disadvantage.
Horizontal takeovers (the acquisition of a competitor operating in the same market) may allow
the firm to reduce its costs by realizing economies of scale in production and marketing, and
by taking over the rival supplier the firm can increase its market share and perhaps exercise
some degree of monopolistic control over the market.
DISCLOSURE OF SHAREHOLDING
The intent behind the disclosure regime is not only to ensure that the target company is not
taken by surprise but also to ensure that the price discovery in the market for the shares of the
target company takes place in an informed manner, where the very fact of an interested acquirer
increasing his holding would contribute to the emergence of price at which sellers would be
willing to sell their shares in the market. Also, such price discovery has implications for the
computation of the minimum offer price in the look back period. While it is very clear what
percentage of the equity shares of a company are held by parties exceeding the thresholds, it is
not clear what that party’s effective economic interest in the company actually is, since it
includes instruments which while presently not entitling the holder to voting rights, may, in
future, lead to accrual of shares/voting rights.
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2017 controls the
disclosures of shareholding.
Types of Disclosures:
1) Disclosure of Acquisition and Disposal – Regulation 29
2) Continual Disclosures – Regulation 30
3) Disclosure of Encumbered Shares – Regulation 31
Regulation 28 deals with disclosure-related provisions.
28.(1) The disclosures under this Chapter shall be of the aggregated shareholding and
voting rights of the acquirer or promoter of the target company or every person acting
in concert with him.
(2) For the purposes of this Chapter, the acquisition and holding of any convertible
security shall also be regarded as shares, and disclosures of such acquisitions and
holdings shall be made accordingly.
(3) For the purposes of this Chapter, the term ―encumbrance‖ shall include a pledge,
lien or any such transaction, by whatever name called.
(4) Upon receipt of the disclosures required under this Chapter, the stock exchange shall
forthwith disseminate the information so received.
Regulation 29 deals with disclosure of acquisition and disposal.
29.(1)Any acquirer who acquires shares or voting rights in a target company
which taken together with shares or voting rights, if any, held by him and by
persons acting in concert with him in such target company, aggregating to five per cent
or more of the shares of such target company, shall disclose their aggregate
shareholding and voting rights in such target company in such form as may be
specified.
(2)Any person, who together with persons acting in concert with him, holds shares or
voting rights entitling them to five per cent or more of the shares or voting rights in a
target company, shall disclose the number of shares or voting rights held and change
in shareholding or voting rights, even if such change results in shareholding
falling below five per cent, if there has been change in such holdings from the last
disclosure made under sub-regulation (1) or under this sub-regulation; and such
change exceeds two per cent of total shareholding or voting rights in the target
company, in such form as may be specified.
(3) The disclosures required under sub-regulation (1) and sub-regulation (2) shall be
made within two working days of the receipt of intimation of allotment of shares, or the
acquisition of shares or voting rights in the target company to, —
(a) Every stock exchange where the shares of the target company are listed; and
(b) The target company at its registered office.
(4)For the purposes of this regulation, shares taken by way of encumbrance shall
be treated as an acquisition, shares given upon release of encumbrance shall be treated
as a disposal, and disclosures shall be made by such person accordingly in such
form as may be specified: Provided that such requirement shall not apply to a
scheduled commercial bank or public financial institution as pledge in connection
with a pledge of shares for securing indebtedness in the ordinary course of business.
Regulation 30 deals with continual disclosure
30(1) Every person, who together with persons acting in concert with him, holds shares
or voting rights entitling him to exercise twenty-five per cent or more of the voting
rights in a target company, shall disclose their aggregate shareholding and voting rights
as of the thirty-first day of March, in such target company in such form as may be
specified.
(2) The promoter of every target company shall together with persons acting in concert
with him, disclose their aggregate shareholding and voting rights as of the thirty-first
day of March, in such target company in such form as may be specified.
made within seven working days from the end of each financial year to, —
(A) Every stock exchange where the shares of the target company are
listed; and
(B) The target company at its registered office.
Regulation 31 deals with Disclosure of encumbered shares
31(1) The promoter of every target company shall disclose details of shares in such
target company encumbered by him or by persons acting in concert with him in such
form as may be specified.
(2) The promoter of every target company shall disclose details of any invocation of
such encumbrance or release of such encumbrance of shares in such form as may be
specified.
made within seven working days from the creation or invocation or release of
encumbrance, as the case may be to, —
(c) Every stock exchange where the shares of the target company are listed; and
(d) The target company at its registered office.
PROTECTION OF MINORITY HOLDINGS
The process of decision-making is an integral part of a corporate bodies functioning, the said
process is frustrated when there is a conflict of opinion between the majority and minority
shareholders whereby, the majority shareholders take decisions, not in the interests of the
company but to cater to their whims and fancies gravely prejudicing the rights of minority
shareholders.
The Rule of Majority found its firm roots in the landmark common law judgment Foss v.
Harbottle, where the court held that the “Courts will not intervene in the internal
administration of a company at the instance of a shareholder and will not interfere with the
management of a company by its directors so long as they are acting within the powers
conferred on them under the Articles of the company. Nothing related to an internal dispute
between shareholders is to be made the subject of an action by a shareholder.
The same principle was reiterated by a plethora of Indian judgments like Rajahmundry
Electric Supply Corporation v. A. Nageshwara Rao or Bagree Cereals v. Hanuman
Prasad Bagri thereby, reaffirming the principle that if a simple majority can ratify a wrong,
the court will not intervene.
Apart from the exceptions to Foss v. Harbottle that are ultra vires acts, fraud on minority acts
requiring a special majority, wrongdoers in control and individual membership rights, the
Companies Act, 2013 protects the rights of Minority Shareholders under the head Prevention
of Oppression and Mismanagement embodied in S.241-S.246 under Chapter XVI of the
Companies Act, 2013.
By S.241, the oppressed minority shareholders are empowered to move the tribunal against the
company and its statutory appointee’s, an application stating the same can be made to the
Company Law Board. The requisite number of members who must sign the application is laid
down in S.244, where the company is with share capital than by at least 100 members of the
company or 1/10th of the total number of its members, whichever is less. If the company is
without share capital, then the application mentioned above has to be signed by 1/5th of the
total number of its members. However, departing from the Companies Act, 1956 the tribunal
rather than Central Government has the discretion to allow any member or members to sue if
in its opinion circumstances exist which make it just and equitable, making it a speedy
actionable remedy.
Certain pre-requisites laid down by the S.241 need to be satisfied before an oppressed
shareholder makes an application. The grounds for the application must either pertain to the
affairs of the company being conducted in an oppressive manner which is prejudicial or
oppressive to the interests of the company or when there a material change has taken place in
the management or control of the company which shall affect the members or class of members.
Lord Cooper explained the term Oppression as the conduct complained of should at the lowest
involve a visible departure from the standards of fair dealing, and a violation of the conditions
of fair play on which every shareholder who entrusts his money to the company is entitled to
rely. Although the legislation aims to protect the minority shareholders interest, in a fit case if
the court is satisfied with the acts of oppression and mismanagement, relief can even be granted
if the application is made by a majority rendered ineffective by the wrongful acts of a minority
group. While the powers granted to the competent authority under the Companies Act, 1956
were constrained to some extent, under the Companies Act, 2013 the tribunal has been given
wider powers by S.242 placing it in a better position to protect the interests of the minor.
The Companies Act, 2013 introduces a novel concept of Class Action suit which owes its
conception to the Satyam scandal that broke out in 2009. The essential provisions to enforce
the rights of minority shareholders and investors were missing in the Companies Act, 1956.
Under S.245 of the Companies Act, 2013, the provision above has been introduced thereby
providing great impetus to minority shareholders, investors and depositors as well. By virtue
of this provision a suit may be filed against a company or its directors, auditor or expert
advisor, in the case of a company with share capital by not less than 100 members or not less
than 10% of the total number of its members or by any member or members singly or jointly
holding less than 10% of the issued share capital of the company. In the case of a company
without share capital, a suit may be filed by not less than 1/5th of the total number its members.
Similar provisos are laid down for the protection of depositors. By the said provisos the
legislation intends to protect the interests of the minority shareholders.
The Companies Act, 2013 also infuses minority shareholding protective measures during
mergers and amalgamations. Such measures have been introduced in S.235 and S.236 of the
Companies Act, 2013 by which transfer of shares or class of shares by a transferor to a
transferee company requires the approval of shareholders with a nine-tenth shareholding in
value if any dissenting shareholder then the transferee company has to serve a notice to the
same.
Under S.236 of the Companies Act, 2013, minority shareholders have the option to make an
offer to the majority shareholders to purchase the minority equity shareholding of the company
at a price as fixed below. The acquirer, person or group of persons shall offer to the minority
shareholders of the company for buying the equity shares held by such shareholders at a price
determined by valuation by a registered valuer.
In an event where the acquirer or person acting in concert thereon or a group of persons become
the registered holder of ninety percent or more of the issued share capital of a company by
amalgamation, share exchange and so on then they shall notify the company of their intention
to buy the remaining equity shares.
Under the 2013 Act, minority shareholders are also involved in corporate decision-making
whereby, in listed companies, “small” shareholders having a nominal shareholding of shares
not more than Rs 20,000 have the right to appoint a director.

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NOTES ON

LAW OF CORPORATE FINANCE

GOVERNMENT LAW COLLEGE, KOZHIKODE

SOURCES OF CORPORATE FINANCE

MEANING, NATURE AND SIGNIFICANCE OF BUSINESS FINANCE

On the basis of On the basis of On the basis of

Long Term Owner’s Funds Internal Sources

SOURCES OF FINANCE: MERITS & DEMERITS

(i) It is preferred by investors who want fixed income at lesser risk;

Inter Corporate Deposits (ICD)

EQUITY AND PREFERENCE SHARES

(g) Preference and Equity Share Capital: As per explanation to Section 43

Meaning and Nature of a Share

(A). Raising of Capital from Promoters

PROCEDURE FOR ISSUE AND ALLOTMENT OF SHARES

Provisions relating to Issue of Securities (Section 23)

Procedure for Issue of Equity Shares with Differential Voting Rights

(C) Issue of Shares on Preferential Basis

(c) It has not defaulted in payment of interest or principal in respect of fixed

PROCEDURE FOR ISSUE AND ALLOTMENT OF SHARES

(i) Name of the directors

A public offering is the offering of securities of a company or a similar corporation to the

SEBI’S ROLE IN AN ISSUE

In order to run a business effectively/successfully, adequate amount of capital is necessary. In

3B Bilateral borrowing refers to a borrowing made by a company from a particular

DEFINITION OF A CHARGE: A charge is a security given for securing loans or debentures

CRYSTALLISATION OF FLOATING CHARGE

MORTGAGE & CHARGE- DIFFERENCE

4 A mortgage is a transfer of an interest in A charge only gives a right to receive

Section 77: (1) Any charge created

Particulars of Charges – Features of a Charge

(d) general description of the property charged;

ACCEPTANCE OF DEPOSIT – SECTION 73 TO 76 SIMPLIFIED

Protection of Investors – Regulation by Disclosure, Audit, Accounts and Annual Returns –

Rights of majority shareholder (Corporate membership rights)

Shareholder Derivative Suit

Transparency is a pivotal feature in the market-based monitoring of companies and is central

Disclosures under Section 134(3)

(i) The state of the company’s affairs

Auditor to sign audit reports

(i) refund the remuneration received by him to the company; and

Other Penalties on Auditor

THE COMPANIES ACT, 2013- PROVISIONS RELATING TO ANNUAL RETURN

Limitations of Budgetary Control:

Reorganisation of Company’s Capital – Amalgamation – Take Over – Disclosure of Share

REORGANIZATION OF COMPANY’S CAPITAL

Reorganization is a process designed to revive a financially troubled or bankrupt firm. A

Existing companies A and B are wound up and a new company C is Amalgamation

Existing company A takes over the business of another existing Absorption

A New Company X is formed to take over the business of an External

2. Amalgamation in the nature of purchase:

Reasons for a Takeover

PROTECTION OF MINORITY HOLDINGS

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