Chapter 1

Introduction to Companies Act 2013

1. Define companies Act 2013
The Companies Act 2013 is an Act of the Parliament of
India that regulates the incorporation, operation, and
management of companies in India.
1. 1956: The first Companies Act was enacted.
2. 2012: The Companies Bill was introduced.
3. August 29, 2013: The Companies Bill was passed.
4. April 1, 2014: The Companies Act 2013 came into force.
2. Define Company
A company is a legal entity that is formed to conduct
business, commercial, or industrial activities. It is a
voluntary association of individuals, known as
shareholders or members, who come together to achieve
a common economic goal.
3. Salient features of the Companies Act 2013:
1. One Person Company (OPC): Allows a single person to
form a company. OPC has limited liability, is easy to
manage, and can have only one director and one
shareholder.
2. Corporate Social Responsibility (CSR): Companies must
spend a certain amount of money every year (2% of their
average net profit) on activities reflecting corporate social
responsibility, such as social and environmental causes.
3. National Company Law Tribunal (NCLT): A single tribunal
to handle company law cases, replacing multiple courts.
4. Class Action Suits: A new concept, also known as class
action suits, introduced to make shareholders and other
stakeholders more informed, knowledgeable, and
conscious of their rights.
5. Cross Border Merger: Allows Indian companies to merge
with foreign companies.
6. Prohibition of Insider Trading: Strict laws to prevent
insider trading and protect investors.
7. Strict Rules for Auditors: Auditors must follow strict
guidelines to ensure accurate financial reporting.
8. Financial Year: Companies must follow the April-March
financial year.
9. Number of Members: Minimum and maximum number
of members required for different types of companies. The
maximum number of members allowed in a private
company is two hundred.
10. Provisions in Articles: Articles of Association must
include specific provisions, such as shareholder rights.
11. Duties of Directors: Directors have specific duties,
including acting in the best interest of the company.
12. Composition of Board: Boards must have a minimum
number of independent directors. At least one director
should be a person who has stayed in India for a period not
less than 182 days in the previous year. Listed companies
must have at least one-third independent directors.
13. Notice and Participation in Board Meeting: Minimum
seven days' notice to be given to all directors, whether or
not in India. Directors must receive proper notice and
participate in board meetings.
4. Characteristics of a company:
1. Voluntary Association: A company is formed by individuals
who come together voluntarily.
2. Separate Legal Entity: A company has its own identity,
separate from its members.
3. Perpetual Succession: A company continues to exist even if
its members change or die.
4. Limited Liability: Members' personal assets are protected,
and they are only liable for the company's debts up to their
investment.
5. Transferability of Shares: Company shares can be easily
bought and sold.
6. Artificial Legal Person: A company is a legal entity, but it's
not a human being and exists only in the eyes of the law.
7. Common Seal: A company has a common seal, which
serves as its official signature.
8. Capacity to Sue and be sued: A company can file lawsuits
and be taken to court, just like an individual.
9. Large Amount of Capital: Companies can raise a lot of
money by issuing shares to investors.
10. Winding Up: A company can be dissolved, or "wound up,"
if it's no longer viable or if its members decide to close it
down.
 5. Kinds of Companies
Types of Companies by Incorporation
1. Chartered Companies
Formed by a royal charter or special act of parliament.
Chartered companies are rare and usually provide essential
public services.
Examples: East India Company, Bank of England
2. Statutory Companies
Formed under a special act of parliament or statute.
Statutory companies are often financial institutions or public
utilities.
Examples: Reserve Bank of India, State Bank of India, Life
Insurance Corporation of India
3. Registered Companies
Formed by registering under the Companies Act.
These are companies formed under the Companies Act 2013
or earlier companies acts.
Registered companies are the most common type of
company in India.
Examples: Reliance Industries, Tata Consultancy Services,
Infosys Technologies
Here are the three types of companies based on liability:
Types of Companies by Liability
1. Companies Limited by Shares
- Liability of members is limited to the amount unpaid on
their shares.
- Members' personal assets are protected in case of company
debts.
- Most common type of company.
2. Companies Limited by Guarantee
- Liability of members is limited to the amount they
guarantee to pay.
- Members guarantee to pay a specific amount in case of
company debts.
- Often used for non-profit organizations or charities.
3. Unlimited Companies
- Liability of members is unlimited, meaning they are
personally responsible for company debts.
- Members' personal assets are at risk in case of company
debts.
- Rarely used due to the high level of personal risk involved.
On the Basis of Number of Members
A. Private Company
- Minimum number of members: 2
- Maximum number of members: 200
 - Restrictions on transfer of shares
B. Public Company
- Minimum number of members: 7
- No maximum limit on number of members
- No restrictions on transfer of shares
Difference between Private Company and Public Company
A private company is a closely-held company with a limited
number of members. It is not required to disclose its financial
information to the public and is exempt from many
regulatory requirements. Private companies are typically
owned and controlled by a small group of individuals, such as
family members or close associates.
A public company, on the other hand, is a widely-held
company with a large number of members. It is required to
disclose its financial information to the public and is subject
to strict regulatory requirements. Public companies are listed
on a stock exchange, and their shares can be bought and sold
by the public. This provides greater liquidity and access to
capital for the company.
C. One Person Company (OPC)
A One Person Company (OPC) is a type of company that can
be formed with only one person as its member. This type of
company was introduced in India through the Companies Act,
2013, to provide a platform for solo entrepreneurs and small
businesses to operate with the benefits of a private limited
company.
Privileges
1. Simplified compliance
2. Limited liability
3. Tax benefits
4. Easy to manage
5. Separate legal entity
Restrictions
1. Minimum capital: ₹1 lakh
2. Single membership
3. Restrictions on share transfer
4. Mandatory nominee
5. Conversion required if capital exceeds ₹50 lakh or turnover
exceeds ₹2 crore
6. Restrictions on certain businesses
On the Basis of Ownership
- Government Companies: Owned and controlled by the
government, either central or state.
- Non-Government Companies: Owned and controlled by
private individuals or organizations.
On the Basis of Control
- Holding Company: A company that controls one or more
subsidiary companies by owning a majority of their shares.
- Subsidiary Company: A company controlled by a holding
company, which owns a majority of its shares.
On the Basis of Nationality
- National Companies: Companies incorporated in India and
subject to Indian laws and regulations.
- Foreign Companies: Companies incorporated outside India
and subject to the laws and regulations of their country of
incorporation.
Here are the explanations:

Other Forms of Companies

1. Small Company
A small company is a private company with a paid-up share
capital of up to ₹50 lakhs (or up to ₹10 crores as prescribed).
This concept was introduced by the Companies Act, 2013.
2. Defunct Company
A defunct company is one that has not carried out any
business or operations for two consecutive financial years
and has not applied to become a dormant company. The
Registrar can remove such a company's name from the
register.
3. Dormant Company
A dormant company is an inactive company that is not
carrying out any business or operations.
4. Listed Company
A listed company is one that has its securities listed on a
recognized stock exchange.
5. Associate Company
An associate company is a company in which another
company has significant influence or control.
6. Producer Company
A producer company is a company engaged in the production
of primary produce such as agriculture, floriculture,
horticulture, forestry, etc.
7. Nidhi Company
A Nidhi company is a type of company that promotes savings
and thrift among its members, providing mutual benefits.
8. Association Not for Profit
Companies with charitable objects, aiming to promote social
welfare, education, or other non-profit activities.
Corporate Veil
The corporate veil refers to the legal separation between a
company and its owners. This recognition of the company as
a separate legal entity (NDT) makes it liable for its own acts
and liabilities. The corporate veil protects the personal assets
of the owners from the company's debts and obligations
Lifting of the Corporate Veil
The corporate veil can be lifted in certain situations where
the court ignores the separate legal entity of a company. This
occurs when:
- Protecting revenue: The court may disregard the corporate
entity if it's used for tax evasion.
- Preventing fraud: The court intervenes if the company is a
sham or used for fraudulent purposes.
- Determining enemy character: The court assesses whether
the company's actions align with national interests.
- Avoiding legal obligations: If a company attempts to evade
legal responsibilities, the court may lift the veil.
- Acting as agent/trustee: When a company acts on behalf of
shareholders, the court may disregard its separate identity.
- Protecting public policy: The court intervenes if the
company's actions contravene public policy.
In these situations, the court pierces the corporate veil to
ensure justice and accountability.
 Chapter 2
Formation of a company
3 stages of company formation:
1. Promotion: This is the initial stage where the idea of
forming a company is conceived, and the promoter(s)
take steps to turn the idea into reality.
2. Registration and Incorporation: In this stage, the
company's documents, such as the memorandum and
articles of association, are prepared and filed with the
registrar of companies. The company is then officially
incorporated.
3. Commencement of Business: After incorporation,
the company must obtain a certificate of
commencement of business to start its operations. This
is the final stage of company formation.
1. What is Promotion?
Promotion refers to the process of bringing a business
idea into reality. It involves discovering opportunities,
conducting research, assembling resources, and taking
necessary steps to establish a company. Promotion is
the initial stage of forming a company, where an idea is
transformed into a tangible business entity. It requires
careful planning, organization, and execution to lay the
foundation for a successful business venture.
2. Types of Promoters
1. Professional Promoters: Make promotion their
profession, forming companies and handing them over
to shareholders.
2. Occasional Promoters: Engage in promotional
activities when opportunities arise, but do not seek
them out.
3. Entrepreneur Promoters: Conceive business ideas,
establish companies, and become part of the
management.
4. Financial Promoters: Undertake promotional
activities, purchase the company's share capital, and
later sell shares for a profit.
3. Functions of a Promoter
1. Discovering business ideas
2. Conducting detailed investigations
3. Assembling resources
4. Preparing preliminary documents
5. Entering into preliminary contracts
6. Naming the company
7. Appointing bankers, brokers, and underwriter
4. Duties of Promoters
1. Preparing and registering the memorandum and
articles
2. Dealing with merchant bankers
3. Disclosing information regarding accounts and
transactions
4. Avoiding secret profits from promotional activities

5. Liabilities of Promoters
1. Promoters are liable for false statements.
2. Promoters are responsible for losses due to
negligence.
3. Promoters must not keep secret profits.
4. Promoters must follow all laws and rules.
5. Promoters can be personally responsible for
company debts.

6. Remuneration of Promoters
- Promoters have no inherent right to compensation
unless specified in a contract.
- Even with a contract, promoters may not have a
contractual right to sue the company.
 - Promoters can be rewarded through various
means, such as:
o Remuneration for services rendered
o Profits from transactions
o Selling property for fully paid shares
o Options to buy further shares
o Commissions on shares sold
7. Legal Position of a Promoter
- A promoter is neither a trustee nor an agent of the
company.
- Under Indian company law, promoters have a
relationship with the company and its future
shareholders.
- Promoters are accountable to the company.
- Promoters must disclose all relevant information
to the company.
- Directors can require promoters to fulfill contracts
entered into during promotion.
- Promoters cannot be held personally liable for the
company's actions.
- Promoters must act in the best interests of the
company, like agents and trustees.
2. Registration or Incorporation
- A company can be formed for any lawful purpose by:
- 7 or more persons (public company)
- 2 or more persons (private company)
- 1 person (one Person Company)
- A company can be one of the following types:
- Company limited by shares (most popular)
- Company limited by guarantee
- Unlimited company
- To register a company, the promoters must:
- Get at least the required number of persons to
subscribe to the memorandum of association
- Decide on a name for the company, which must:
- End with "Limited" (public company) or "Private
Limited" (private company)
- Not be undesirable or prohibited
- Not be identical to an existing company's name
- For a one person company, the memorandum
must indicate the name of another person who
will become a member in case of the subscriber's
death or incapacity.
Difference between Preliminary or pre incorporation Contracts and
provisional contracts
Preliminary Contracts
1. Made by promoters on behalf of the company before its
incorporation.
2. Promoters are personally liable for these contracts.
3. Relate to property or other matters the promoters wish to secure
for the company.
4. Example: A promoter signs a lease agreement for office space
before the company is incorporated.
Provisional Contracts
1. Entered into by the company after its incorporation but before it
receives the certificate of commencement of business.
2. Become regular and enforceable automatically once the company
receives the certificate.
3. Relate to business operations, such as purchasing equipment or
hiring employees.
4. Example: A company signs a contract to purchase software after
incorporation but before receiving the certificate of commencement.
the importance of understanding the contractual obligations and
liabilities at different stages of a company's formation.
What is capital subscription?
After registration and getting the certificate of incorporation the
company is ready to flotation that is to say it can go ahead with the
raising capital subscription to commence business and to carry it on
satisfactory. A public company may issue securities to public through
prospectus or through private placement or through a right issue or a
bonus issue. Ah this is called capital subscription.
A Certificate of Incorporation
It is a legal document issued by the Registrar of Companies,
confirming that a company has been incorporated and is a registered
entity under the Companies Act. It serves as proof of the company's
existence and is required to open a bank account, obtain licenses,
and conduct business.
Documents of the Company
Memorandum of Association
The first step in the formation of a company is to prepare the
Memorandum of Association (MOA). It is the most important
document for the registration or incorporation of a company and
contains the fundamental conditions upon which the company is
registered.
Meaning of Memorandum of Association
The MOA is a critical document that outlines the essential
characteristics of a company. It contains the fundamental conditions
upon which the company is registered and is a mandatory document
for incorporation.
Requirements of Memorandum of Association
1. Name of the Company
2. State of Registered Office
3. Objects of the Company: The main objectives of the company.
4. Liability of Members: The liability of the members of the company.
5. Amount of Share Capital: The amount of share capital with which
the company is to be registered.
 Contents of Memorandum of Association
Name Clause
The Name Clause specifies the name of the company, which must be
unique and comply with the Companies Act.
Situation or Registered Office Clause
The Situation or Registered Office Clause states the address of the
company's registered office.
Object Clause
The Object Clause describes the purpose and objectives of the
company.
Liability Clause
The Liability Clause specifies the extent of liability of the company's
members.
Capital Clause
The Capital Clause states the authorized share capital of the
company.
Association Clause
The Association Clause contains the signatures of the subscribers to
the MOA, who must agree to form the company and take at least
one share each.
Alteration of Memorandum
The Memorandum of Association is the charter of the company and
it cannot be altered easily. The Company's Act restricts its alteration,
but it creates a number of difficulties. The Company's Act allows the
alteration in exceptional cases.
Alteration of Name Clause
When any change in the name of a company is made, the Registrar
shall:
1. Enter the new name in the Register of Companies in place of the
old name.
2. Issue a fresh Certificate of Incorporation with the new name.
The change in name shall be complete and effective only on the issue
of such a certificate.
Alteration of Registered Office
A company can shift its registered office to a new location, and this
change must be notified to the Registrar.
Notice of every change in the situation of the registered office,
verified in the prescribed manner, shall be given to the Registrar
within 15 days of the change.
Alteration of Object Clause
The Object Clause is the most important and sensitive clause in the
Memorandum of Association of a company.
Changing the Object Clause
If a company wants to change its objects, it must:
1. Pass a special resolution through a postal ballot.
2. Provide notice of the resolution, which must contain the following
particulars:
- Total money received
- Money utilized for the objects
- Unutilized amount out of the money received
3. Place the notice on the company's website.
Alteration of Capital Clause
The Capital Clause of the Memorandum of Association can be
altered:
1. By passing a special resolution.
2. After complying with the procedure specified in the Companies
Act.
3. After obtaining the necessary approvals and complying with the
provisions of its Memorandum.
Alteration of Subscription Clause
The Subscription Clause of the Memorandum of Association cannot
be altered.
Articles of Association
The Articles of Association is the second important document
required to be filed with the Registrar for the registration of the
company.
Purpose of Articles of Association
The Articles of Association is a document regulating:
1. The rights of members of the company among themselves.
2. The manner in which the business of the company shall be
conducted.
Contents of Articles of Association
The Articles of Association contain the rules and by-laws framed by
the company for its own working. The main contents of Articles of
Association typically include:
1. Execution or adoption of preliminary contracts
2. Share capital and division into classes of shares
3. Rights of different classes of shareholders and variation of rights
4. Payment of underwriting commission
5. Lien on shares
6. Calls on shares
7. Transfer of shares
8. Transmission of shares
9. Forfeiture of shares
10. Alteration of capital
11. Conversion of shares into stock
12. Capitalisation of profits
13. Buy-back of shares
14. General meetings and proceedings
15. Adjournment of meetings
16. Voting rights of members
17. Proxy and their appointment
18. Board of directors
19. Proceedings of the Board
20. Appointment, terms, and remuneration of executives
21. Seal of the company
22. Dividend and reserves
23. Books of account and audit
24. Winding up of the company
25. Indemnity of officers (protection against liability incurred while
defending proceedings)
Restrictions on the Alteration of Articles
1. The alteration must not exceed the powers given by the
memorandum or be in conflict with any provision of the
memorandum
2. The alteration must not be inconsistent with provision of
Companies Act or any other statute.
3. The altered articles must not include anything which is illegal or
opposed to public policy or unlawful.
4. The alteration must be bonafide for the benefit of the company as
a whole.
5. The alteration must not constitute a fraud on the minority by a
majority.
6. Companies registered with chartable objects shall not alter the
articles except with the previous approval of the Central
Government.
7. A company cannot avoid contractual liability by altering its articles.
Doctrine of Ultra Vires
"Ultra" means beyond and "vires" means powers. So, "ultra vires"
refers to acts that are beyond the legal power and authority of a
company. Generally, a company has the power to do all acts that are
authorized to be done by the Company's Act, its Memorandum, and
Articles of Association. So, any activity done contrary to or in excess
of these will be considered ultra vires.
Types of Ultra Vires Activities
- Ultra Vires the Company's Act: Any act done contrary to or in excess
of the scope of activities of the Company's Act is considered ultra
vires the Company's Act. Such an act is absolutely void and cannot be
rectified.
- Ultra Vires the Memorandum of Association: As the Memorandum
of Association mentions the objectives of the company, any act done
contrary to the objects clause of the Memorandum of Association is
void and cannot be rectified.
- Ultra Vires the Articles of Association: The Articles of Association
explain the rules and regulations. In such cases, the company in a
general meeting may alter the Articles by special resolution and
rectify such unauthorized acts, which are ultra vires the Articles of
Association.
However, if an act is ultra vires the Memorandum of Association, it
will also be ultra vires the Articles of Association. In such cases, the
company in a general meeting may alter the Articles by special
resolution and rectify such unauthorized acts.
Constructive Notice of Articles and Memorandum
Constructive notice is a legal doctrine that assumes a person has
knowledge of a company's Memorandum and Articles of Association,
even if they haven't actually read or been informed of them.
Example:
If a company's Articles of Association require contracts to be signed
by two directors, and you sign a contract with only one director, you
can't claim against the company if they don't fulfill the contract.
This is because you are assumed to have constructive notice of the
company's internal rules, even if you didn't actually know about
them.
Doctrine of Indoor Management
The Doctrine of Indoor Management is an exemption to the Doctrine
of Constructive Notice. It states that outsiders dealing with a
company can assume that the company's internal proceedings are
regular and in accordance with its Articles of Association.
When dealing with a company, outsiders don't need to investigate
the company's internal workings. They can assume that everything
has been done properly.
Exemptions to the Doctrine:
1. Knowledge of Irregularity: If an outsider knows of an irregularity,
they cannot rely on the Doctrine.
2. Negligence: Outsiders must exercise reasonable care and
diligence.
3. Forgery: The Doctrine does not apply if a document is forged.
4. Agent Acting Outside Authority: If an agent acts beyond their
authority, the Doctrine does not apply.
What is a Prospectus?
A Prospectus is a document issued by a public company to invite the
general public to subscribe to its shares or debentures.
Definition:
A Prospectus is an invitation to the public to offer to subscribe for
shares or debentures in a company.
It is issued after the company obtains its Certificate of Incorporation,
and its purpose is to raise necessary capital from the public.
Rules regarding the issue of prospectus:
1. Prospectus must be dated.
2. A copy of prospectus must be signed by every director.
3. Prospectus must be registered with Registrar.
4. Application for registration must be combined with required
documents.
5. Copies of prospectus must be filed with Stock Exchange.
Different types of prospectus and their explanations:
Deemed Prospectus
A document that offers securities for sale to the public is considered
a deemed prospectus, even if it's not issued by the company directly.
This can happen when a company issues shares to an intermediary
(called an Issuing House) which then offers the shares to the public.
Advertisement of Prospectus
An advertisement of a prospectus must include essential details from
the company's Memorandum, such as:
- Objects of the company
- Liability of members
- Share capital
- Names of directors, etc.
Shelf Prospectus
A shelf prospectus is a prospectus that allows a company to issue
securities over a period without issuing a new prospectus each time.
Red Herring Prospectus
A red herring prospectus is a preliminary prospectus that doesn't
contain complete information, such as the price and quantum of
securities offered.
Abridged Prospectus
An abridged prospectus is a condensed version of the prospectus,
containing essential details specified by the Securities and Exchange
Board.
Contents of Prospectus
A prospectus must include:
- Company details (name, address, etc.)
- Issue details (dates, subscription, etc.)
- Financial information (capital structure, etc.)
- Business details (objects, location, etc.)
- Management details (directors, auditors, etc.)
Misstatement in Prospectus
A misstatement in a prospectus occurs when the prospectus contains
false or misleading information about the company. This can include
omitting material facts, misrepresenting facts, or concealing facts. As
a prospectus constitutes the basis of the contract between the
company and its shareholders, it must disclose all material facts
relating to the company accurately. Any misstatement can
improperly influence and mislead prospective investors into
becoming members and potentially incur losses.
Liabilities for Misstatement in Prospectus
There are two types of liabilities:
1. Civil Liability: This means liability to pay damages or
compensation. It arises when there is a misstatement or omission of
a material fact in the prospectus.
2. Criminal Liability: This refers to liability for criminal offenses, which
can result in fines or imprisonment. It arises when there is
intentional or reckless misstatement or omission in the prospectus.
In both cases, the liabilities aim to hold companies accountable for
providing accurate and complete information to investors.
Statement in Lieu of Prospectus
A Statement in Lieu of Prospectus is a document similar to a
prospectus, but without an invitation to the public to subscribe to
the company's shares.
It's used when a company issues shares through private placement,
rather than a public offering.
The Statement in Lieu of Prospectus is prepared for record-keeping
purposes and must be filed with the Registrar of Companies before
the allotment of shares.
 Chapter 3
Shares and Share capital

Shares

Krish Talkz Institution Total 100 shares each

rupees 1000
Worth of 1,00,000

What is share capital?

The share capital of a company is divided into small and equal parts.
Each unit is called a share.
What is Shares?
A person who buys a share is called a shareholder, or member, or
owner of the company.
It is apportion of ownership in a company.
A company's capital is divided into individual units of fixed amount,
known as shares.
Definition of Shares
According to Section 2, Subsection 84 of the Companies Act 2013, "A
share is a share in the share capital of a company and includes
stock."
What is Stock?
Since the definition of shares includes stock, understanding stock is
important. Piece of ownership .Stock is simply a set of shares put
together in a bundle.
Differences between Shares and Stocks:
1. Shares can be issued directly, whereas Stock cannot be issued
directly.
2. A share has a nominal value, whereas A stock has no nominal
value.
3. Share can be fully or partly paid up, whereas Stock is always fully
paid up.
4. A share has a distinctive number, whereas Stock bears no
distinctive number.
5. A share is transferred only in multiple of one, whereas Stock can
be transferred in fractions.
6. All the shares of a class are equal denominations, whereas Stock
may be of different denominations.
Types of shares
1. Registered/Authorized/Nominal Capital
The amount of capital specified in the Authorized Capital: ₹1 lakh
Memorandum of Association. (100 shares each 1000)
2. Issued Capital
The part of authorized capital offered to Issued Capital: ₹80,000 (out
the public for subscription. of ₹1 lakh authorized
capital) 1000 rs *80 shares
v

3. Subscribed Capital
Subscribed Capital:
The part of issued capital for which ₹50,000 (out of
applications are received from the public. ₹80,000 issued
capital)1000 rs *50
4. Called-up Capital
Called-up Capital:
The part of subscribed capital for which
₹40,000 (out of
the company demands payment.
₹50,000
Uncalled Capital: ₹10,000 (balance subscribed capital)
amount)
5. Paid-up Share Capital
The part of called-up capital for which Paid-up Share
payment is received from shareholders. Capital: ₹40,000
(assuming full
payment is
received)

6. Reserve Capital
The amount of capital not called up by the Reserve Capital:
company except in the event of winding ₹10,000
up. (assuming this
amount is not
called up)

What is Dividend?
Dividend is a portion of a company's profit distributed to its
shareholders.
Equity Share Capital
Equity share capital refers to the amount of money raised by a
company through the issuance of ordinary shares, also known as
equity shares. These shares do not carry any preferential rights in
respect of dividend or repayment of capital. Dividend on equity
shares is paid after the payment of a fixed rate dividend to
preference shareholders.
Merits
1. Provides permanent capital to the company.
2. No obligation to pay dividends.
3. Enhances company's creditworthiness.
4. Strengthens company's financial base.
5. Encourages entrepreneurship and risk-taking.
Demerits
1. High risk for investors.
2. Uncertain returns on investment.
3. Dilutes ownership and control.
4. High cost of raising capital.
Preference Share Capital
Preference share capital refers to the amount of money raised by a
company through the issuance of preference shares. These shares
carry a fixed rate of dividend and have priority over equity shares in
terms of dividend payment and repayment of capital.
Merits:
1. Attracts investors seeking regular income.
2. Provides stable source of capital.
3. Reduces financial risk for companies.
4. Enhances company's credibility.
5. Offers flexibility in dividend payments.
Demerits:
1. Increases company's financial burden.
2. Reduces retained earnings.
3. Limits flexibility in capital structure.
4. May decrease share price.
5. Adds complexity to accounting and reporting.
Types of Preference Share Capital
1. Cumulative Preference Share Capital: If dividend is not paid in any
year, it will be carried forward and paid in subsequent years.
2. Non-Cumulative Preference Share Capital: Dividends do not
accumulate and are paid only in the year they are declared.
3. Participating Preference Share Capital: Shareholders participate in
surplus profits beyond a certain level.
4. Non-Participating Preference Share Capital: Shareholders do not
participate in surplus profits.
5. Convertible Preference Share Capital: Can be converted into
equity shares.
6. Non-Convertible Preference Share Capital: Cannot be converted
into equity shares.
7. Redeemable Preference Share Capital: Can be redeemed by the
company.
8. Irredeemable Preference Share Capital: Cannot be redeemed by
the company.
Difference between Equity Shares and Preference Shares
1. Dividend Rate: Fixed for preference shares, variable for equity
shares.
2. Priority: Preference shareholders have priority over equity
shareholders.
3. Participation in Management: Equity shareholders have full
participation, preference shareholders have limited participation.
4. Redeemability: Preference shares are redeemable, equity shares
are not.
5. Voting Rights: Equity shareholders enjoy voting rights, preference
shareholders do not.
What is a Prospectus?
A prospectus is a detailed document issued by a company to raise
capital, containing information about the company and the issue. It
provides investors with accurate information to help them make
informed investment decisions. Raising of Capital or Issue of Shares
Companies limited by shares issue shares to raise capital. There are
three ways to issue shares:
1. Private Placement of Shares
Private placement means offering securities to a select group of
people through a private placement letter.
2. Allotment to Issue House
An issue house is an intermediary that helps companies raise capital.
The company allots shares to the issue house, which then sells them
to investors.
3. Public Issue of Shares
A public issue of shares is made through a prospectus, which invites
the public to subscribe for shares.
Procedures Required for Public Issue of Shares
1. Approval and Filing of Prospectus: A draft copy of the prospectus is
approved by the directors and filed with the Registrar.
2. Publicity and Issue of Prospectus: The prospectus is issued to the
public within 90 days of delivery to the Registrar.
3. Receiving of Application: Investors send their applications with at
least 5% of the nominal amount.
4. Scrutiny of Application: Applications are scrutinized for
completeness and accuracy.
5. Sorting of Applications: Applications are sorted and prioritized.
6. Closure of Application List: The application list is closed, and no
more applications are accepted.
7. Recording of Application: Applications are recorded, and allotment
is made.
SEBI Guidelines for Public Issue
1. Prospectus must be attached with every application.
2. Risk factors must be highlighted in the prospectus.
3. Objectives of the issue and project cost must be mentioned.
4. Public issue prospectus must be filed with the ROC (registrar of
companies) after 21 days.
5. Justification for premium must be provided in case of premium
issue.
6. Collection agents cannot collect application money in cash.
7. Prospectus must contain details of underwriting arrangements.
8. Prospectus must disclose the promoter's contribution.
9. Prospectus must contain a statement about the company's
financial health.
10. Prospectus must be evaluate by SEBI before issue.
Employees Stock Option Plan (ESOP)
An ESOP is a benefit plan that grants employees the right to purchase
a certain number of company shares at a predetermined price,
known as the "strike price" or "exercise price," allowing them to
share in the company's growth and success [4).
Types of ESOPs
1. Employee Stock Option Scheme (ESOS): A scheme that grants
employees the right to purchase shares at a predetermined price.
Employees can exercise this option after a specified period.
2. Employee Stock Purchase Plan (ESPP): A plan that allows
employees to purchase shares at a discounted price. Employees can
purchase shares through payroll deductions.
3. Share Appreciation Rights (SAR): A right granted to employees to
receive cash or shares based on the appreciation in share value.
What is Book Building?
Book building is a method of pricing securities, where investors bid
for shares within a specified price range, and the final price is
determined based on the bids received.
What is underwriting?
Underwriting is an agreement where an organization guarantees the
sale of a certain minimum amount of shares issued by a public
limited company. The underwriter must subscribe to the shares up to
the agreed limit if the public does not subscribe to the full amount.
What is Underwriting Commission?
Underwriting commission is a fee paid to the underwriter for
guaranteeing the sale of shares.
What is Brokerage?
Brokerage is a fee paid to a broker for acting as an intermediary
between the buyer and seller of securities.
Issue Price of Shares
1. Issue of Shares at Par
Issue of shares at par means issuing shares at their face value or
nominal value. The issue price is equal to the face value of the share.
This is the most common method of issuing shares.
2. Issue of Shares at a Premium
Issue of shares at a premium means issuing shares at a price higher
than their face value. The difference between the issue price and
face value is called the premium. This method is used when the
company's shares are in high demand.
3. Issue of Shares at a Discount
Issue of shares at a discount means issuing shares at a price lower
than their face value. This method is not commonly used, as it can
lead to financial losses for the company.
Punishment for Issue of Shares at a Discount
If a company issues shares at a discount, it shall be punishable with a
fine of at least ₹1 lakh but not exceeding ₹5 lakh. Every officer in
default shall be punishable with imprisonment for up to 6 months.
Listing of Securities
Listing of securities is the process of registering a company's shares
on a stock exchange. This allows the public to buy and sell the
company's shares. To get listed, a company must meet the
exchange's requirements, such as having a minimum number of
shareholders, a minimum amount of capital, and a proven track
record of financial performance.
Objectives of Listing
1. Mobilization of capital: Listing helps companies raise capital from
the public.
2. Liquidity: Listing provides a platform for shareholders to buy and
sell shares easily.
3. Transparency: Listing requires companies to disclose their financial
information regularly, promoting transparency.
4. Regulatory oversight: Listing subjects companies to regulatory
oversight, ensuring they comply with laws and regulations.
Advantages:
1. Increased liquidity: Listing provides a platform for shareholders to
buy and sell shares easily.
2. Access to capital: Listing helps companies raise capital from the
public.
3. Transparency: Listing requires companies to disclose their financial
information regularly.
4. Regulatory oversight: Listing subjects companies to regulatory
oversight.
Limitations:
1. High listing fees: Companies must pay significant fees to get listed.
2. Disclosure requirements: Companies must disclose sensitive
information, which can be a disadvantage.
3. Regulatory compliance: Companies must comply with exchange
regulations, which can be time-consuming and costly.
Sweat Equity Shares
Sweat equity shares are shares issued by a company to its employees
or directors as a form of compensation, rather than for cash. This is a
way for companies to reward their employees for their hard work
and contributions.
Bonus Shares
Bonus shares are additional shares issued by a company to its
existing shareholders, free of cost. This is a way for companies to
reward their shareholders and increase the company's share capital.
Calls on Shares
Calls on shares refer to the payments made by shareholders to the
company when they purchase shares. The company may require
shareholders to make installment payments, known as calls, to pay
for their shares.
Surrender of Shares
Surrender of shares refers to the voluntary return of shares by a
shareholder to the company. This can happen when a shareholder is
no longer interested in holding the shares or when the company is
facing financial difficulties.
Forfeiture of Shares
Forfeiture of shares refers to the cancellation of shares by the
company when a shareholder fails to pay calls on shares. The
company can forfeit the shares and reissue them to other investors.
Certificate of Shares
A certificate of shares is a document issued by a company to its
shareholders, confirming their ownership of shares. The certificate
typically includes the shareholder's name, the number of shares
owned, and the share certificate number.
Share Warrant
A share warrant is a document that gives the holder the right to
purchase shares at a specified price. Share warrants are often used
as a form of compensation for employees or as a way to raise capital.
Transfer of Shares
Transfer of shares refers to the process of transferring ownership of
shares from one person to another. This can happen when a
shareholder sells their shares to another investor or when a
shareholder gifts their shares to someone else.
Forged Transfer
A forged transfer refers to a transfer of shares made with a forged
signature or document. This is a serious offense and can result in
legal consequences.
Blank Transfer
A blank transfer is a transfer form that is not filled in, allowing the
transferee to fill in their own details. This can be convenient for
shareholders who want to transfer their shares quickly. A blank
paper that allows the person to fill in the details of the share transfer
themselves
Transmission of Shares
Transmission of shares refers to the transfer of ownership of shares
due to the death, bankruptcy, or insanity of the shareholder. This can
happen when a shareholder passes away and their shares are
transferred to their heirs.
Distinction between Transfer and Transmission of Shares
The main difference between transfer and transmission of shares is
that transfer is voluntary, while transmission is involuntary. Transfer
requires a transfer form to be executed and delivered to the
company, while transmission occurs automatically due to the death,
bankruptcy, or insanity of the shareholder.
Lien on Shares
A lien on shares refers to the right of a company to retain possession
of shares until a debt is paid. This can happen when a shareholder
owes money to the company and the company places a lien on their
shares. A lien on shares means a company has a right to retain
possession of shares until a debt is paid.
Dematerialisation and Rematerialisation of Shares
Dematerialisation refers to the conversion of physical shares into
electronic form. Rematerialisation refers to the conversion of
electronic shares back into physical form.
Advantages:
1. Convenient and easy to manage
2. Reduces risk of losing share certificates
3. Faster transactions
4. Increased efficiency
5. Transparent record-keeping
6. Cost-effective
7. Increases liquidity
Disadvantages:
1. Technical issues can occur
2. Requires reliable internet and technology
3. Vulnerable to cyber-attacks
4. Fees and charges apply
5. Limited access for some investors
6. Dependence on depository participants
7. Regulatory risks apply
Capitalisation of Profit
Capitalisation of profit refers to the process of converting a
company's profits into shares, which are then distributed to existing
shareholders as bonus shares. This increases the company's share
capital.
Dematting of Shares
Dematting of shares refers to the process of converting physical
share certificates into electronic form, which are then stored in a
dematerialized account. This eliminates the need for physical share
certificates.
Process of Dematting of Shares
1. Open a demat account: Investors open a demat account with a
depository participant (DP).
2. Submit share certificates: Investors submit their physical share
certificates to the DP.
3. Verification: The DP verifies the share certificates and updates the
investor's demat account.
4. Electronic credits: The shares are credited to the investor's demat
account in electronic form.
Splitting of Shares
Splitting of shares refers to the process of dividing existing shares
into a larger number of shares with a lower face value. This makes
the shares more affordable for investors.
Renunciation of Allotment
Renunciation of allotment refers to the process of giving up or
renouncing the allotment of shares. This can happen when an
investor decides not to accept the allotted shares, usually within a
specified timeframe. Rejecting allotted shares.
 Chapter 4
Management of Companies
# Management of Companies
The management of companies involves planning, organizing, and
controlling resources to achieve goals. It encompasses various
functions, including finance, marketing, and operations, to ensure
the organization runs efficiently and effectively.
# Board and Governance
The board of directors guides the company, making key decisions
and ensuring effective management. Governance refers to the
system of rules and practices that direct and control the
organization, ensuring it is managed responsibly and ethically.
# Director
A director is a person appointed to the board of a company,
responsible for overseeing and making decisions on behalf of the
organization. According to Section 2(34) of the Companies Act, 2013,
a director is defined as a person appointed to the board of a
company. Directors play a crucial role in guiding the company's
strategy, making key decisions, and ensuring effective management.
They are accountable for the company's actions and are responsible
for ensuring that the organization is managed in a responsible and
ethical manner.
# Qualifications of a Director under the Indian Companies Act, 2013
1. The Act doesn't prescribe specific qualifications for a director.
2. Directors may be required to hold qualification shares as per the
articles of association.
3. The nominal value of these shares must not exceed Rs. 5,000.
4. If each share's value exceeds Rs. 5,000, only one share is needed.
5. Directors can only hold shares, not share warrants.
6. They must acquire qualification shares within two months of
appointment.
7. Failure to acquire shares results in cessation of directorship and a
fine of up to Rs. 500 per day.
Disqualifications of Directors
1. A person is of unsound mind.
2. They are an undischarged insolvent.
3. They have applied for insolvency.
4. They have been convicted of a serious crime.
5. They have been disqualified by a court.
6. They haven't paid for their company shares.
7. They have been convicted of a related party transaction offense.
8. They don't have a Director Identification Number.
The Legal Position of Directors
The legal position of directors in a company is complex and
multifaceted. It is difficult to define their exact role, as they have
been described in various ways by judges and legal scholars.
However, their position can be understood by examining their roles
as agents, trustees, managing partners, and employees.
Directors as Agents
Directors act on behalf of the company, making decisions and taking
actions that bind the company. As agents, they have a fiduciary duty
to act in the best interests of the company. The company is the
principal, and the directors are the agents who carry out its business.
Directors as Trustees
Directors are also considered trustees of the company's assets and
resources. They have a duty to manage these assets and resources
for the benefit of the company and its stakeholders. As trustees, they
must act with care, skill, and diligence.
Directors as Managing Partners
In some cases, directors are viewed as managing partners of the
company. They are responsible for overseeing the company's
operations and making strategic decisions. As managing partners,
they work closely with other stakeholders to achieve the company's
goals.
Directors as Employees
Directors can also be considered employees of the company,
particularly if they are executive directors. As employees, they are
entitled to certain benefits and protections under employment law.
However, their role as directors takes precedence over their role as
employees.
Appointment of Directors
Directors are the key decision-makers of a company, and their
appointment is a crucial aspect of company management.
Appointment of First Directors
The first directors of a company can be appointed in two ways:
1. By Articles of the Company: The articles of association may specify
the first directors of the company.
2. By Subscribers to the Memorandum of Association: The
subscribers to the memorandum of association may also appoint the
first directors.
Appointment of Subsequent Directors
Subsequent directors can be appointed in the following ways:
1. By the Company in General Meeting: Shareholders can appoint
directors at a general meeting.
2. By the Board of Directors: The board of directors can appoint
additional directors.
3. By Third Parties: In some cases, third parties, such as investors or
lenders, may appoint directors.
4. By the Principle of Proportional Representation: Directors can be
appointed based on the principle of proportional representation.
5. By the Tribunal: In certain circumstances, a tribunal may appoint
directors.
Woman director
According to Rule 3 of the Companies (Appointment and
Qualification of Directors) Rules, 2014, certain companies are
required to appoint at least one woman director on their board.
1. Every listed company
2. Every public company with a paid-up share capital of ₹100 crore or
more
The company must comply within six months of incorporation. If a
vacancy arises, it should be filled within the next board meeting or
three months, whichever is later.
The purpose is to promote diversity and gender representation on
corporate boards, bringing different perspectives and enhancing
decision-making.
Independent Directors according to Section 149 of the Companies
Act, 2013:
- Every listed public company must have at least 1/3rd of total
directors as Independent Directors.
- Independent Directors are non-executive directors with no
material relationship with the company.
- Is not related to the company's management or promoters.
- - Has no financial interest in the company (except sitting fees).
- - Brings outside expertise and objectivity to the board.
- - Helps ensure fair decision-making and good governance.
- Think of them as impartial advisors who bring a fresh
perspective to the company's board.
Number of Directorships under Section 165:
Number of directorships refers to the total number of companies in
which an individual holds a directorship position. In other words, it
counts how many companies a person is a director of.
 - Maximum directorships allowed: 20 (including alternate
directorships)
- Maximum directorships in public companies: 10
- Members can restrict the limit further by passing a special
resolution
Retirement of Directors under Section 152(6):
Retirement Provisions
- Articles may provide for retirement of all directors
- If not, at least 2/3 of total directors (excluding independent
directors) in a public company retire by rotation
- 1/3 of directors liable to retire by rotation retire at every AGM
Retirement and Re-appointment
- Company may fill vacancy by appointing retiring director or
new person
- If vacancy not filled, meeting conducted and retiring director
deemed re-appointed unless specific conditions apply
- - Retirement: Directors may retire at the end of their term,
typically at the Annual General Meeting (AGM).
- - Reappointment: Retiring directors can be reappointed by
shareholders through a resolution at the AGM.
- - Eligibility: Reappointment is subject to the director's eligibility,
performance, and compliance with regulatory requirements.
- - Process: The Company’s board and shareholders follow a
formal process for reappointment, including nomination,
approval, and voting.
Removal of Directors
By Shareholders
Shareholders can remove directors through a special resolution
passed in a general meeting. The company must inform the Registrar
within 30 days. Directors have the right to defend themselves.
By Tribunal
The Tribunal can remove directors if they are found guilty of
misconduct or breach of duty. The removal is based on a petition
filed by the company or shareholders. The Tribunal's decision is final.
By Central Government
The Central Government can remove directors if it is in the public
interest or company's interest. The government can initiate action
based on a complaint .
Resignation of Directors
- A director can resign by giving written notice to the company.
- The company must inform the Registrar within 30 days and post the
information on its website.
- The director must also send a copy of the resignation with reasons
to the Registrar within 30 days.
Director Identification Number (DIN)
- A unique 8-digit number allotted to individuals intending to
become directors.
- Lifetime validity.
- Required for every director.
Powers of Directors
- Call shareholders for funds.
- Authorize share buyback.
- Issue securities.
- Borrow money.
- Invest company funds.
- Grant loans.
- Approve financial statements.
- Diversify business.
- Approve amalgamations.
Statutory Duties
- Ensure proper handling of share application money.
- Maintain register of members and mortgages/charges.
- Other duties:
- Comply with Companies Act and other laws.
- Act in company's best interest.
- Maintain confidentiality.
Liabilities of Directors
- Liability to Outsiders:
Directors can be held personally liable for acts done as an agent,
such as misleading prospectuses or unauthorized actions.
- Liability to the Company:
- Ultra vires act: Acting beyond the company's authorized
powers.
- Breach of fiduciary duty: Failing to act in the company's best
interests.
- Negligence: Failing to exercise reasonable care and skill.
- Malafide acts: Engaging in wrongful or dishonest acts that harm
the company.
- Criminal Liability: Directors can be held criminally liable for violating
laws or regulations.
Restrictions on Directors
- Age Limit: No age limit prescribed for becoming a director.
- Number of Directorships: Maximum 20 directorships (including
alternate directorships).
- Assignment of Office: Directors cannot assign or transfer their
office to another person.
- Disclosure of Interest: Directors must disclose any personal
interest in contracts or transactions with the company.
 - Loans to Directors: Strictly regulated; loans, guarantees, and
security provisions to directors are prohibited or restricted.
Key Managerial Personnel
Managing Director
A Managing Director is the head of the company, responsible for
overseeing its overall management and operations. They play a
crucial role in implementing the company's strategies and policies.
Rights and Duties of Managing Director
- Assists the board in decision-making and implements board
decisions.
- Provides leadership and guidance to the organization.
- Motivates and directs employees to achieve company goals.
Whole-Time Director
A Whole-Time Director is a director in the whole-time employment
of the company, essentially an employee-director. They may not
have substantial powers of management.
Differences between Managing Director and Whole-Time Director
- Managing Director has substantial powers of management, while a
Whole-Time Director does not.
- Managing Directors have more strategic and decision-making roles,
while Whole-Time Directors focus on operational management.
Substantial Powers: MD has substantial powers of management,
while WTD may not.
Role: MD is responsible for overall strategy and direction, while WTD
focuses on operational management.
Employment: Both are whole-time employees, but MD has more
strategic responsibilities.
Liability: Both are liable for their actions, but MD may bear more
responsibility due to their overarching role.
Appointment: Both require board and shareholder approval, but
MD's appointment may involve more formalities.
Authority: MD typically has more authority and decision-making
power than WTD.
Manager
A Manager is an individual who works under the control and
direction of the board of directors, responsible for managing specific
areas or departments within the company.
Chief Executive Officer (CEO)
A CEO is an officer designated by the company to oversee its overall
management and operations.
Chief Financial Officer (CFO)
A CFO is responsible for managing the company's financial affairs,
including financial planning, reporting, and risk management.
Company Secretary
A Company Secretary is a key official responsible for ensuring the
company's compliance with statutory and regulatory requirements,
maintaining records, and facilitating communication between the
board, shareholders, and other stakeholders.
Corporate Governance
Meaning
- Corporate governance refers to the system of rules, practices,
and processes that direct and control a company to achieve its
objectives.
- It aligns the interests of investors and management.
- Another meaning: Corporate governance ensures
accountability, transparency, and fairness in a company's
relationship with its stakeholders.
Definition
Corporate governance is a set of systems, processes, and principles
that ensure a company is governed in the best interest of all
stakeholders.
Key Points
- Ensures accountability and transparency
- Protects stakeholders' interests
- Promotes fair and ethical business practices
- Enhances company reputation and credibility
Need and Importance
1. Changing Ownership Structure: Ensures accountability in
companies with dispersed ownership.
2. Growing Number of Scams: Prevents corporate fraud and
misconduct.
3. Separation of Ownership from Management: Aligns management's
interests with those of shareholders.
4. Social Responsibility: Encourages companies to contribute to
society.
5. Globalisation: Globalization is a mantra of the day. There is flow of
foreign investors and customers in the home market and many of
companies are selling their goods in the global market. Without
corporate governance it is impossible to endure survive and exceed
in the global market
6. Takeover and Mergers: Ensures transparency and fairness in
dealings.
7. SEBI Rules: Complies with regulatory requirements.
Principles of Corporate Governance
1. Fairness: Treats all stakeholders fairly and justly.
2. Responsibility: Ensures responsible decision-making and actions.
3. Transparency: Provides clear and timely disclosure of information.
4. Accountability: Holds individuals and the company accountable for
their actions.
Corporate Social Responsibility (CSR)
Corporate Social Responsibility (CSR) refers to a company's voluntary
efforts to improve social, environmental, and economic impacts by
giving back to society, promoting sustainability, and operating
ethically, ultimately contributing positively to the community and the
environment.
- Companies take resources from society and give back through
CSR activities.
- CSR is a commitment to behave ethically and contribute to
economic development.
CSR Activities
- Education and healthcare initiatives
- Environmental conservation and sustainability
- Community development programs
 - Supporting local businesses and entrepreneurship
- Promoting arts and culture
CSR aims to improve the quality of life for employees, their families,
and the local community, while contributing to the company's long-
term success.
Securities and Exchange Board of India (SEBI)
Evolution of SEBI
SEBI was initially established in 1988 as a non-statutory body to
regulate the securities market. Later, the Securities and Exchange
Board of India Act, 1992, was enacted to provide statutory powers to
SEBI. This empowered SEBI to regulate, supervise, and control the
securities market, protecting investors' interests and promoting
market development .
Members of SEBI
- SEBI consists of nine members:
- A Chairman
- Two members from the Ministry of Finance, Government of
India
- One member from the Reserve Bank of India (RBI)
- Five other members, with at least three whole-time members
Reasons to Form SEBI
SEBI was formed to address issues such as:
- Manipulation of security prices
- Insider trading
- Lack of fair dealings
- Protection of investors
- Lack of control over brokers
Functions of SEBI
- Regulating Stock Exchanges: Overseeing the functioning of
stock exchanges
- Registering and Regulating Intermediaries: Registering and
regulating brokers, sub-brokers, merchant bankers, and other
intermediaries
- Promoting Investor Education: Promoting investor education
and training
- Prohibiting Unfair Practices: Prohibiting fraudulent and unfair
trade practices
- Conducting Research: Conducting research for market
development
- Levying Fees: Levying fees or other charges for services
- Regulating Collective Investment Schemes: Regulating mutual
funds and other collective investment schemes
- Inspecting and Investigating: Inspecting and investigating
market participants
- Enforcing Securities Laws: Enforcing securities laws and
regulations
- Granting Recognition: Granting recognition to stock exchanges
Objectives of SEBI
1. Protecting Investors: Protecting the interests of investors in the
securities market
2. Regulating the Securities Market: Regulating the securities market
to ensure fair practices
3. Promoting Efficient Services: Promoting efficient services by
brokers, merchant bankers, and other intermediaries
Powers of SEBI
- Calling for Information: Calling for periodical returns from stock
exchanges
 - Directing Stock Exchanges: Giving directions to stock exchanges
- Suspending Business: Suspending the business of a recognized
stock exchange
- Granting Recognition: Granting recognition to stock exchanges
- Withdrawing Recognition: Withdrawing recognition from stock
exchanges
- Prohibiting Contractors: Prohibiting contractors from accessing
the securities market
- Attaching Bank Accounts: Attaching bank accounts or other
property of market participants
- Imposing Penalties: Imposing penalties on market participants
for violating securities laws and regulations
Securities Appellate Tribunal (SAT)
The Securities Appellate Tribunal (SAT) is a statutory body
established under the Securities and Exchange Board of India (SEBI)
Act, 1992. SAT was formed to hear appeals against orders passed by
SEBI or an adjudicating officer under the SEBI Act. Located in
Mumbai, SAT ensures accountability and provides a platform for
aggrieved parties to challenge SEBI's decisions.
Composition of SAT
- Presiding Officer: Appointed by the Central Government in
consultation with the Chief Justice of India or their nominee.
The Presiding Officer should be a retired or sitting judge of the
Supreme Court or High Court with at least seven years of
service.
- Judicial Members: Appointed by the Central Government
- Technical Members: Appointed by the Central Government,
Technical Members should have special knowledge and
professional experience of not less than 15 years in the
financial sector, including securities market, pension funds,
commodity derivatives, or insurance
Powers of SAT
- 1. SAT has the power to modify, set aside, or uphold SEBI's
orders.
- 2. SAT's decisions can be appealed against in the Supreme
Court of India.
- 3. SAT plays a crucial role in regulating the securities market
and protecting investor interests.
- 4. SAT's orders help to establish consistency and predictability
in the application of securities laws.
- 5. SAT's role is essential in maintaining investor confidence in
the securities market.
For Example- If Rahul receives a punishment from SEBI, he can
appeal to the Securities Appellate Tribunal (SAT) in Mumbai. SAT will
review SEBI's decision and provide a fair hearing to Rahul. If Rahul is
not satisfied with SAT's decision, he can further appeal to the
Supreme Court of India.
If SAT removes the punishment imposed by SEBI, SEBI may either
accept SAT’s decision or withdraw the punishment, or SEBI may
appeal SAT's decision to the Supreme Court of India, challenging the
removal of the punishment.
 Chapter 5

Company Meetings
Meetings
When two more than two persons get together at one place
to discuss any common issue, it is called a meeting.
Company Meeting
Meetings of the shareholders or of the directors or the
debenture holders or of the contributories are called the
meeting of a company. Such meetings are vitally important in
the working of a company. These meetings enable the
company to make decisions, discuss important issues, and
take necessary actions
Characteristics of a Company Meeting
- Two or more persons must be present at the meeting.
- The assembly of persons must be for discussion and
transaction of some lawful business.
- Notice is essential and the meeting must be held at a
particular place, date, and time.
- Must be held as per provisions of the Companies Act.
Kinds of Company Meetings
1. Meeting of Directors: A meeting of the board of
directors where they discuss and make decisions on company
matters, such as strategy, policy, and operations. These
meetings of the directors are called as board meetings.
Agenda
Agenda refers to the list of items to be discussed or business
to be transacted at a meeting. It helps directors prepare and
focus on the key issues.
Quorum
Quorum is the minimum number of directors required to be
present at a meeting to make it valid. Typically, it's 1/3 of the
total directors or 2 directors, whichever is higher.
Chairperson
The Chairperson is the person who presides over the
meeting, ensuring it runs smoothly and orderly. They
facilitate discussions, maintain decorum, and ensure
decisions are made in accordance with the company's rules
and procedures.
Audit Committee
An Audit Committee is a group of directors responsible for
overseeing a company's financial reporting, auditing, and
internal controls. They ensure the company's financial
statements are accurate and transparent.
Secretary's Duties Regarding Board Meetings
Before the meeting
The secretary shall perform the following duties before a
board meeting.
1. To give a notice of the meeting to each of the director.
2. To prepare and circulate the agenda for the meeting.
3. To have available at the meeting documents, records,
correspondence etc., with reference to the agenda.
4. To make all other arrangements for the meeting.
5. To issue invitation letter to the auditors, solicitors and
other officers of the company, whose presence may be
necessary at the meeting.
At the meeting
1 To attend the meeting and assist the chairman in its
conduct
2. To secure signature of the directors present in the
attenders register
3. To ascertain the quorum and inform it to the chairman
4. To read notice of the meeting if required.
5. To note decisions taken at the meeting, and records all
proceedings of the meeting
After the meeting
1. To prepare minutes of the meeting and keep them ready
for approval at the next board meeting.
2. To take steps to carry out the instructions of the directors'
meeting.
3. If dividend is declared, issue of new shares, issue of bonus
shares, issue of right shares etc., decided and inform the
matters to stock exchange.
2. Shareholders Meetings
There are three types of meetings:
1. Annual General Meeting (AGM)
2. Extraordinary General Meeting (EGM)
3. Class Meeting
1. Annual General Meeting (AGM): A mandatory meeting
held once a year to discuss company performance, financial
statements, and other important matters.
Before the Meeting
1. Send notice of AGM to shareholders.
2. Prepare agenda for the meeting.
3. Draft resolutions to be passed.
4. Coordinate with directors and auditors.
5. Arrange venue and logistics.
6. Ensure regulatory compliance.
At the Meeting
1. Verify quorum presence.
2. Record minutes of the meeting.
3. Assist the Chairman.
4. Answer shareholder queries.
5. Ensure smooth voting process.
6. Maintain order and decorum.
After the Meeting
1. Finalize meeting minutes.
2. File necessary documents.
3. Implement AGM resolutions.
4. Update statutory registers.
5. Communicate AGM outcome.
6. Review meeting effectiveness.
2. Extraordinary General Meeting (EGM)
An EGM is a general meeting of a company, other than an
Annual General Meeting (AGM), held to discuss specific
matters of urgent importance. It can be called:
1. By Directors: Directors may call an EGM to address
company matters.
2. By Directors on Request of Shareholders: Directors may
call an EGM upon request by shareholders.
3. By Requisition of Shareholders: Shareholders can
requisition an EGM to discuss specific matters.
4. By Tribunal: A tribunal can also order the convening of an
EGM under certain circumstances
3. Class Meeting
A Class Meeting is a meeting of shareholders of a specific
class, such as preference shareholders or equity
shareholders, where the share capital of a company is
divided into different classes of shares. These meetings are
held to discuss matters affecting the interests of that
particular class of shareholders. Class Meetings enable
shareholders of a specific class to make informed decisions
regarding their shares.
3. Meeting of Debenture Holders
A Meeting of Debenture Holders is convened by the company
to obtain their approval for making changes to the terms and
conditions of the debentures. These meetings enable
debenture holders to discuss and decide on matters affecting
their interests.
4. Meeting of Creditors
A Meeting of Creditors is convened by the company to
discuss and agree on matters related to debt repayment,
insolvency, or restructuring. These meetings enable creditors
to negotiate with the company and make informed decisions
regarding their claims.
Essentials of a Valid Meeting
1. Proper Authority: The meeting should be convened by the board
of directors or authorized persons.
2. Notice of Meeting: A 21-day written notice should be given to
members, mentioning date, time, and place. The notice should be
placed on the company's website.
3. Quorum: The minimum number of members required to be
present for a valid meeting.
If Quorum is Not Fulfilled
- The meeting is adjourned or cancelled.
- No valid decisions can be made without a quorum.
- The meeting may be rescheduled for a later time when a
quorum can be achieved.
4. Chairman of the Meeting: The person presiding over the meeting,
responsible for conducting it smoothly.
Duties of the Chairman
- Maintain order and ensure the meeting is conducted according
to the agenda.
- Allow members to speak and ensure discussions stay on topic.
- Put resolutions to vote: Ensure voting is conducted fairly and
accurately.
- Maintain decorum: Keep the meeting respectful and orderly.
- Sign minutes: Authenticate the meeting's minutes.
5. Minutes of the Meeting
- A clear, accurate, and concise record of proceedings and decisions
of the meeting.
- Prepared and preserved for future reference and evidence.
 Objectives/Uses of Minutes
- Permanent record: Provides a lasting record of decisions and
discussions.
- Evidence in court: Accepted as evidence in legal proceedings.
- Inform absent members: Keeps members who were absent
informed about decisions and discussions.
- Link between meetings: Provides continuity between meetings.
- Reference for speeches: Can be used to verify speeches made
during meetings.
6. Voting
Voting Methods
- Voting by Show of Hands: Members vote by raising hands,
typically one vote per member. This method is often used for
routine matters.
- Voting by Poll:
A formal method of voting where members cast their votes in
proportion to their shareholding or as per their voting rights.
Unlike a show of hands, voting by poll accurately reflects the
weightage of members' votes.
- Voting through Electronic Means: Members vote remotely
using digital platforms. This method provides flexibility and
convenience for members.
- Postal Ballot: Members vote by mail or written means, useful
for those who can't attend meetings. This method allows
members to participate in decision-making remotely.
7. Proxy
- A person authorized to vote on behalf of a shareholder.
- Appointed through a written instrument (proxy form).
- Allows shareholders to participate in decision-making remotely.
 - Proxy holder votes as per shareholder's instructions.
- Ensures shareholders' voices are heard even if they can't attend
meetings.
- Protects shareholders' interests in company decisions.
8. Resolution
Types of Resolutions
1. Ordinary Resolution
2. Special Resolution
3. Resolution Requiring Special Notice

Resolution Requiring Special Notice

- Certain resolutions require special notice, typically 14-21 days'
notice, before being considered at a meeting.
- Examples include:
- Removing a director
- Appointing a new director in place of one removed
- Removing an auditor
- Special notice ensures sufficient time for members to be
informed and prepare for the decision.
 - The notice must specify the intention to propose the
resolution.
Company Secretary
Definition
- Principal officer responsible for secretarial and management
tasks as per company policies and Board instructions.
- Derived from Latin word "secretarius," meaning a notary or
confidential officer.
Qualifications
- Typically, a member of a recognized professional body (e.g.,
Institute of Company Secretaries).
- Specific qualifications and certifications required by law or
regulatory bodies.
Legal Position
1. Servant of the Company: A company secretary is considered a
servant of the company, employed to perform specific duties under
the Board's direction. This role implies a master-servant relationship.
2. Agent of the Company: As an agent, a company secretary has
authority to act on behalf of the company, binding it to obligations.
This agency role enables the secretary to represent the company.
3. Officer of the Company: A company secretary is an officer, holding
a position of responsibility and trust. As an officer, they owe fiduciary
duties to the company.
Duties of Company Secretary
- Maintain company records and registers
- Organize meetings and ensure proper notice is given
- Advise Board on governance and compliance matters
- - Ensure compliance with statutory regulations
 - - Maintain company records and registers
- - Organize meetings and ensure proper notice
Rights of Company Secretary
- Access to company records and information
- Authority to sign documents on behalf of the company (as
authorized)
- Protection under the law for acts done in good faith
- - Protection under the law for acts done in good faith
- - Receive remuneration and benefits as per employment
contract
- - Participate in decision-making processes (as authorized)
- - Seek professional advice and guidance when necessary
Liabilities of Company Secretary
- Fiduciary duties to act in good faith and honesty
- Personally liable for wrongful acts or omissions
- May face criminal charges, fines, or penalties for non-
compliance or misconduct.
 Chapter 6
Winding Up of a Company
A company, being a creation of law, can only be dissolved
through legal procedures. Winding up marks the final stage
of a company's existence, where its business operations
cease, and its assets are liquidated to settle debts and
distribute remaining assets to stakeholders. This process
involves dissolving the company, terminating its legal
existence, and remove its name off the register of
companies.
Modes of Winding Up
1. Winding Up by the Tribunal (Compulsory Winding Up by
the order of the Tribunal)
2. Voluntary Winding Up
Winding Up by the Tribunal
- The company is unable to pay its debts, specifically
when:
- A creditor is owed more than ₹1 lakh and the company
fails to pay within 21 days of demand or provide
adequate security.
- The company has passed a special resolution to be
wound up by the Tribunal.
- The company has acted against the interests of India's
sovereignty and integrity.
Petition for Winding Up
- The company itself
- Any creditor(s)
- Any contributory or contributories
- The Registrar
- Any person authorized by the Central Government
Powers of the Tribunal
- Dismiss the petition with or without costs
- Make any interim order it deems fit
- Appoint a provisional liquidator until a winding-up order
is made
- Make an order for the winding up of the company with
or without costs
Company Liquidator
When a company goes into liquidation under the order of the
Tribunal, a person or persons are appointed to perform the
duties related to the winding up of the company. Such
persons, known as Official Liquidators or Liquidators, are
responsible for managing the company's affairs during the
winding-up process.
Role of Liquidator
- Realizing the company's assets
- Settling debts and liabilities
- Distributing remaining assets to stakeholders
- Ensuring the company's affairs are wound up in an
orderly manner
Removal or Replacement of Liquidator
The Tribunal may remove or replace a liquidator if:
- There is misconduct or negligence
- The liquidator is unable to perform duties
- There is a conflict of interest
Advisory Committee
An Advisory Committee is constituted by the Tribunal when
passing an order for winding up a company. This committee
advises the Company Liquidator and reports to the Tribunal
on matters as [Link] Advisory Committee consists of
up to 12 members, who may be:
- Creditors of the company
- Contributories (shareholders) of the company
- Other persons deemed fit by the Tribunal
- Provide guidance to the Company Liquidator
- Report to the Tribunal on matters as directed
- Ensure the winding-up process is conducted efficiently
and in the best interests of stakeholders.
Powers and Duties of Company Liquidator
1. Carry on business for beneficial winding up
2. Execute documents and deeds on behalf of the company
3. Sell company property (immovable, movable, and
actionable claims)
4. Sell the company's undertaking as a going concern
5. Raise money on the security of company assets
6. Institute or defend legal proceedings on behalf of the
company
Secretary's Duties in Winding Up by Tribunal
1. Assisting directors in preparing the winding-up petition
2. Filing the petition with the Registrar
3. Submitting the company's statement of affairs to the
Official Liquidator
4. Providing necessary information and assistance to the
Tribunal
5. Ensuring the company mentions "the company is under
liquidation" on all documents and correspondence after the
winding-up order.
Voluntary Winding Up
Voluntary winding up is a process where a company is wound up by
its members without the interference of the Tribunal. This type of
winding up is initiated by the company itself, and the members or
shareholders take the decision to dissolve the company. The process
is typically used when the company is solvent and can pay off its
debts.
Conditions for Voluntary Winding Up
1. Declaration of Solvency: The company must make a declaration of
solvency, stating that it can pay its debts in full within a specified
period.
2. Shareholders' Resolution: The company must pass a resolution for
voluntary winding up, which requires a special majority.
3. Meeting of Creditors: The company must convene a meeting of its
creditors to inform them of the decision to wind up.
4. Powers to Remove and Fill Vacancy of Company Liquidator: The
company has the power to remove and replace the liquidator if
necessary.
5. Notice of Appointment of Liquidator to be Given to the Registrar:
The company must notify the Registrar of the appointment of the
liquidator.
6. Cessation of Board's Powers: The board of directors' powers cease
upon the appointment of the liquidator.
7. Powers and Duties of the Company Liquidator in Voluntary
Winding Up: The liquidator's powers and duties include:
- Realizing the company's assets
- Paying off debts and liabilities
- Distributing surplus assets to shareholders
 - Keeping proper records and accounts
- Reporting to the company and the Registrar
8. Appointment of Committees: The company may appoint
committees to oversee the winding-up process.
9. Company Liquidator to Submit Report and Progress of Winding Up:
The liquidator must submit regular reports on the progress of the
winding up.
10. Report of Company Liquidator to Tribunal for Examination of
Persons: The liquidator may report to the Tribunal for examination of
persons suspected of misconduct.
11. Final Meeting and Resolution of the Company: The company
must hold a final meeting and pass a resolution for dissolution.
Secretaries' Duties in Connection with Voluntary Winding Up
- Assisting the directors in convening meetings
- Preparing and filing necessary documents
- Notifying the Registrar of key events
- Ensuring compliance with statutory requirements
Liability of Liquidators
Liquidators are responsible for carrying out their duties in good faith
and with due care. They may be liable for any losses or damages
caused by their negligence or misconduct.
Consequences of Winding Up
1. Consequences as to Shareholders: Shareholders may receive a
distribution of surplus assets after payment of debts.
2. Consequences as to Creditors: Creditors must submit claims to the
liquidator and may receive payment of debts.
3. Consequences as to Servants and Officers: Employees may be
terminated, and directors' powers cease.
4. Consequences of Proceedings Against the Company: Legal
proceedings against the company may be stayed or dismissed.
5. Consequences as to Costs: The company may be liable for costs
associated with the winding-up process.
6. Consequences as to Documents: The company's documents and
records must be properly maintained and stored during the winding-
up process.
Dissolution of a Company
Dissolution marks the final stage of a company's existence, where it
ceases to exist as a legal entity. It's similar to the death of a person,
where all activities, liabilities, and recognition come to an end. After
dissolution, the company and the liquidator's existence end, and no
further actions can be taken in the company's name.
Methods of Dissolution
There are three methods of dissolution:
1. Removal from the Register: The Registrar of Companies removes
the company's name from the register.
2. Dissolution by Order of Tribunal: The Tribunal orders the
dissolution of the company.
3. Dissolution by Liquidation: The company is dissolved after the
liquidation process is completed.
Winding Up vs. Dissolution
Winding up and dissolution are two distinct stages in the process of
ending a company's existence:
 - Winding Up: The process of selling a company's assets, paying
off debts, and distributing surplus assets to shareholders. It's
the first stage towards dissolution.
- Dissolution: The final stage where the company ceases to exist
as a legal entity.
- Winding up involves the liquidator representing the company,
while dissolution marks the end of the company's existence,
and the liquidator's role.
- Creditors can prove their debts in winding up, but not after
dissolution.
- Winding up can occur without a Tribunal order, while
dissolution typically requires a Tribunal order.
# National Company Law Tribunal (NCLT)
The National Company Law Tribunal (NCLT) is a quasi-judicial body in
India that handles corporate disputes and insolvency cases. It has the
power to:
- Hear cases related to company law, insolvency, and winding up
- Pass orders for winding up, dissolution, and other corporate
actions
- Provide a forum for resolving disputes between companies,
shareholders, and creditors
The NCLT plays a crucial role in regulating and overseeing the
corporate sector in India.
Effect of Winding Up Order
A winding-up order has significant effects, including the end of the
company's business operations, except those necessary for winding
up, and the freezing of its assets. The company's directors lose their
powers, and the liquidator takes control to realize the assets and pay
off debts.
Contributory
A contributory is a shareholder or member of a company who is
liable to contribute to the company's assets in the event of its
winding up. Their liability is typically limited to the amount unpaid on
their shares.
Preferential Payments
Preferential payments refer to certain debts that are given priority
over others in the winding-up process. These include debts owed to
employees, taxes, and other statutory dues.
Winding Up Under Supervision of Tribunal
Winding up under the supervision of the Tribunal involves the
Tribunal overseeing the winding-up process to ensure compliance
with the law. The Tribunal's role includes appointing and supervising
the liquidator, approving the liquidator's actions, and resolving
disputes.
Who Can File a Petition for Winding Up?
A petition for winding up can be filed by various parties, including
the company itself, creditors, contributories (shareholders), and the
Tribunal can also initiate the process.
Contributory's Liability
A contributory's liability is limited to the amount unpaid on their
shares. They may be required to contribute to the company's assets
to pay off debts and liabilities during the winding-up process.