This is the Companies Act, 2013

(Act No. 18 of 2013)

COMPANY LAW – name of your subject

Meaning of a Company
The word “Company” is the combination of two words “Com” and “Panies”. The word Com
means with or together and the word panies means bread.

The word Company can be referred as an association of persons who took their meals together. It
is an association of persons for some common objects. In simple terms Company may be
described to means voluntary association of persons who come together for carrying on some
business and sharing of profits there from. A Company in the broad sense may mean an
association of individuals formed for some purpose.

As per Section 2 (20) of the Companies Act, 2013, a Company means a Company incorporated
under this Act or under any previous Company Law. – V V IMP.

There are some few definitions of Company given by some different authorities:

A Company is an association of many persons who contribute money or monies worth to a

common stock and employed in some trade or business and who share the profit and loss arising
there from. The common stock so contributed is the share capital of the Company. (Lord Justice
Lindley)

A Company is an artificial person created by Law, having separate entity, with perpetual
succession and common seal. (Prof. Haney)

A Company to which the Companies Act applies comes into existence only when it is registered
under the Act. On registration, a Company becomes a body corporate i.e. it acquires a legal
personality in its own, separate and distinct from its members. A registered Company if therefore
created by Law and Law alone can regulate, modify or dissolve it.

Brief history of Company Law in India

The Company law in India has been motivated from the English Company Law. The first
Companies Act was passed in India in 1850 after the enactment of Joint Stock Companies Act,
1844 in England. Later, the Companies Act has undergone many changes by various amendments
after the amendments in English Company Law.

Finally, the Companies Act, 1956 was enacted with a view to consolidate and amend the earlier
laws relating to Companies and certain other associations. The Act came into force on 01st April
1956 (Act No. 1 of 1956) and based largely on the recommendations of the Company Law
Committee (Bhabha Committee). The Companies Act is the longest Act of legislation ever passed
by our parliament consists of Approx. 878 Sections and 16 Schedules.

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The Companies Act, 1956 has undergone many changes by amendments in the years from 1960 to
2002 (Second Amendment). But in the recent past, the Companies Act, 1956, have been amended
drastically. By the Companies (Amendment) Act, 1999, which was made effective retrospectively
31.10.1998, among other changes, first time, the provision for buy-back of shares were introduced
in the Companies Act.

By the Companies (Amendment) Act, 2000, w.e.f. 13.12.2000, there were several changes were
made in the Companies Act. However, provision (Section 17A) related to change of registered
office come into force w.e.f. 01.03.2001, whereas provisions (Section 192A) related to postal
ballot came into force w.e.f. 15.06.2001. The provision related to buy-back of shares were further
amended by the Companies (Third Amendment) Act, 2001, with retrospective effect from
23.10.2001. Provisions related to deemed public Companies (Section 43A) became inoperative.
Definition of Private and Public Limited Companies changed as to have minimum paid up capital
of Rupees one lakh and five lakh respectively.

The Companies Act, 1956 has been further amended by the Companies (Amendment) Act, 2002
and Companies (Second Amendment) Act, 2002. However, the President has given the assent to
the Amendment Acts in the January 2003. But, the Companies (Amendment) Act, 2002, related to
the ‘producer company’ has come into force w.e.f. 06.02.2003 (vide Notification No. S.O. 135 (E)
dated 05.02.2003). However, only section 2 (related to definitions) and section 6 (related to the
constitution of National Company Law Tribunal ‘NCLT’) of the Companies (Second Amendment)
Act. 2002, has come into force w.e.f. 01.04.2003 (vide Notification No. S.O. 344 (E) dated
31.03.2003).

The Amendment Act, 2002 has introduced a new Chapter in the Companies Act related to Produce
Companies (Section 581A to 581ZT). The Second Amendment Act, 2002 has made many major
changes in the Companies Act, 1956. By the Amendment Act, the Company Law Board is
proposed to be dissolved and proposed to set up National Company Law Tribunal (Tribunal) and
National Company Law Appellate Tribunal (Appellate Tribunal). The power under various
sections, which were earlier vested either with Company Law Board, Central Government, Court
or High Court have been transferred to the Tribunal. Similarly, certain powers, which were earlier,
vested with the Company Law Board, High Court, Supreme Court has now been transferred to the
Central Government. Therefore, there are consequential changes have been made in many sections
for transfer of power to the Tribunal or to the Central Government.

The Amendment Act, 2006, inserted new Section 266A to 266G after Section 266 of the
Companies Act, 1956 regarding Director Identification Number (DIN).

Finally, the Companies Act, 2013 was enacted with a view to consolidate and amend the earlier
laws relating to Companies and certain other associations. The Companies Bill was passed by the
Lok Sabha on December 18, 2012 and by the Rajya Sabha on August 08, 2013 and the same was
published in the Official Gazette of India on August 30, 2013.

The Act came into force on 30th August, 2013 (Act No. 18 of 2013). The Companies Act, 2013
divided into 29 Chapters, 470 Sections and 7 Schedules.

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 APPLICABILITY OF COMPANIES ACT, 2013 AND KEY CONCEPTS

According to Section 1 of the Companies Act, 2013, the Act extends to whole of India and the
provisions of the Act shall apply to the following:-

(a) companies incorporated under this Act or under any previous company law;
(b) insurance companies, except in so far as the said provisions are inconsistent with the
provisions of the Insurance Act, 1938 (4 of 1938) or the Insurance Regulatory and
Development Authority Act, 1999 (41 of 1999);
(c) banking companies, except in so far as the said provisions are inconsistent with the
provisions of the Banking Regulation Act, 1949 (10 of 1949);
(d) companies engaged in the generation or supply of electricity, except in so far as the said
provisions are inconsistent with the provisions of the Electricity Act, 2003 (36 of 2003);
(e) any other company governed by any special Act for the time being in force, except in so
far as the said provisions are inconsistent with the provisions of such special Act; and
(f) such body corporate, incorporated by any Act for the time being in force, as the Central
Government may, by notification, specify in this behalf, subject to such exceptions,
modifications or adaptation, as may be specified in the notification.

Companies Act, 2013 is not applicable to unincorporated companies. An unincorporated

company, association or partnership consisting of large number of persons has been declared
illegal (Section 464 - explained in details below).

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 WHAT IS COMPANY? [SECTION 2 (20)]
As discussed earlier “Company means a Company incorporated under this Act or under any
previous Company Law”.

A Company may be an incorporated Company or Corporation or an unincorporated Company. An

incorporated Company is a Company, which is registered under Companies Act having corporate
personality distinct from its members. An unincorporated Company is a Company, which is not
registered under Companies act like Partnership firm and is mere collection of individuals.

CHARACTERISTICS / ADVANTGAES OF/ FEATURES A COMPANY

1. Separate Legal Entity / Separate Management

The Company by incorporation under the Act is vested with a corporate personality different
from its members. After becoming a separate legal entity it bears its own name and has a seal
of its own. A Company is capable of owning property, enter into contracts, having a separate
bank account and can sue and be sued in its own name like individuals. The principle of
Separate Legal Entity is well established under the case of Saloman V. Saloman and Co.
Ltd.

Case: Saloman V. Saloman and Co. Ltd.

In this case, Salomon had, for some years, carried on a prosperous business as leather
merchant and boot manufacturer. He formed a limited company consisting of himself, his
wife, his daughter and his four sons as the shareholders, all of whom subscribed for 1 share
each so that the actual cash paid as capital was £ 7. Salomon was the managing director and
two of his sons were other directors.

Salomon sold his business (which was perfectly solvent at that time), to the Company for the
sum of £ 38,782. He got the amount in the following manner:

Secured Debentures £10,000

20000 fully paid up shares of £1 £20,000
Cash £8,782

The company soon ran into difficulties and the debenture holders appointed a receiver and the
company went into liquidation. The total assets of the company amounted to £6050, its
liabilities were £10,000 secured by debentures, £8,000 owning to unsecured trade creditors,
who claimed the whole of the company’s assets, viz., £6,050, on the ground that, as the
company was a mere ‘alias’ or agent for Salomon, they were entitled to payment of their debts
in priority to debentures.

The House of Lords rejected the contentions and held that on registration, the company comes
into existence and attains maturity on its birth and has its own existence or personality separate
and distinct from its members and, as a result, a shareholder cannot be held liable for its acts
even though he holds virtually the entire share capital.

Thus, the case also established the legality of what is known as “one-man company”. The case
also recognized that subscribers do not have to be independent or strangers to one another. The

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 case also recognized the principle of limited liability. It also established that a person can be at
the same time a member, a creditor and an employee of the company, as well as its director.

One man Company: One man Company is a Company in which entire share capital of a
Company is being held by one person. The famous case Saloman V. Saloman and Co. Ltd.,
has clearly established the concept.

Under the law, an incorporated company is a distinct entity, and although all the shares may be
practically controlled by one person, in law a company is a distinct entity and it is not
permissible or relevant to enquire whether the directors belonged to the same family or
whether it is compendiously described a one-man company.”

2. Limited Liability
Limited liability is one of the principal advantages of being Company. Being the separate
legal entity and distinct from its members the liability of members as shareholders is up to the
nominal value of unpaid shares held by them to contribute to the assets of the Company. If the
members have paid the full value of their shares then they cannot be asked to contribute
anything even if the liabilities of the Company far exceeds its assets.

Exceptions to the principle of limited liability

 Members are severally liable in certain cases- if at any time the number of members of
a company is reduced, in the case of a public company, below seven, in the case of a
private company, below two, and the company carries on business for more than six
months while the number of members is so reduced, every person who is a member of
the company during the time that it so carries on business after those six months and is
cognisant of the fact that it is carrying on business with less than seven members or
two members, as the case may be, shall be severally liable for the payment of the
whole debts of the company contracted during that time, and may be severally sued
therefor.[Section 3A]
 When the company is incorporated as an Unlimited Company under Section 3(2)(c) of
the Act
 Where a company has been got incorporated by furnishing any false or incorrect
information or representation or by suppressing any material fact or information in any
of the documents or declaration filed or made for incorporating such company or by
any fraudulent action, the Tribunal may, on an application made to it, on being satisfied
that the situation so warrants, direct that liability of the members of such company shall
be unlimited. [Section 7(7)(b)]
 Further under section 339(1), where in the course of winding up it appears that any
business of the company has been carried on with an intent to defraud creditors of the
company or any other persons or for any fraudulent purpose, the Tribunal may declare
the persons who were knowingly parties to the carrying on of the business in the
manner aforesaid as personally liable, without limitation of liability, for all or any of
the debts/liabilities of the company.[Section 339]
 Under Section 35(3), where it is proved that a prospectus has been issued with intent to
defraud the applicants for the securities of a company or any other person or for any
fraudulent purpose, every person who was a director at the time of issue of the
prospectus or has been named as a director in the prospectus or every person who has
authorised the issue of prospectus or every promoter or a person referred to as an
expert in the prospectus shall be personally responsible, without any limitation of

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 liability, for all or any of the losses or damages that may have been incurred by any
person who subscribed to the securities on the basis of such prospectus.
 As per section 75(1), where a company fails to repay the deposit or part thereof or any
interest thereon referred to in section 74 within the time specified or such further time
as may be allowed by the Tribunal and it is proved that the deposits had been accepted
with intent to defraud the depositors or for any fraudulent purpose, every officer of the
company who was responsible for the acceptance of such deposit shall, without
prejudice to other liabilities, also be personally responsible, without any limitation of
liability, for all or any of the losses or damages that may have been incurred by the
depositors.
 Section 224(5) states that where the report made by an inspector states that fraud has
taken place in a company and due to such fraud any director, key managerial
personnel, other officer of the company or any other person or entity, has taken undue
advantage or benefit, whether in the form of any asset, property or cash or in any other
manner, the Central Government may file an application before the Tribunal for
appropriate orders with regard to disgorgement of such asset, property, or cash, and
also for holding such director, key managerial personnel, officer or other person liable
personally without any limitation of liability.

3. Perpetual Succession
An incorporated Company never dies like natural person. Except it is wound up as per law.
Members may come members may go, but the Company can go forever. However, the
membership of an incorporated Company keep changing from time to time but that does not
affect its continuity.

4. Separate Property
Being a legal person and distinct from its members, the Company is capable of owning
property in its own name. No member can claim his shares in the property of the Company
during its existence or its winding up. In other words, property of the Company is not the
property of the members and the Company does not hold its property as an agent of the
members.

Case: Mrs. Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay

The Supreme Court in this case held that, though the income of a tea company is entitled to be
exempted from Income-tax up to 60% being partly agricultural, the same income when
received by a shareholder in the form of dividend cannot be regarded as agricultural income
for the assessment of income-tax. It was also observed by the Supreme Court that a
shareholder does not, as is erroneously believed by some people, become the part owner of the
company or its property; he is only given certain rights by law, e.g., to receive notice of or to
attend or vote at the meetings of the shareholders. The court refused to identify the
shareholders with the company and reiterated the distinct personality of the company.

5. Common Seal – OFFICIAL SIGNATURES OF THE CO (NOT A RUBBER STAMP)

A Company acquires a legal entity with common seal. Since the Company is an artificial
person it must act through its agents, who enter into contracts in the name of the Company
under the common seal of the Company. Common seal is of a great importance and considered
as official signatures of the Company. The name of the Company is engraved on its common
seal.

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6. Capacity to sue and be sued
Being a separate legal entity and body corporate, a Company can sue and be sued in its own
name. All the legal proceedings against the Company are to be instituted in the name of the
Company and similarly, the Company can take action against any one in its own name.

7. Limitation of Action
A Company cannot go beyond the powers mentioned in the Memorandum of Association
(MOA) of the Company. The MOA defines the limits and objects of the Company and once it
has been defined the Company cannot beyond that.

8. Transferability of shares
The capital of the Company is divided into shares and shares are said to be movable property
and easily transferable from one person to another. This provides the liquidity to the members
of the Company.

9. Contractual Rights
A company, being a separate legal entity different from its members, can enter into contracts
for the conduct of the business in its own name. A shareholder cannot enforce a contract made
by his company; he is neither a party to the contract nor entitled to the benefit of it, as a
company is not a trustee for its shareholders. Likewise, a shareholder cannot be sued on
contracts made by his company.

Similarly, a member of a company cannot sue in respect of torts committed against it, nor can
he be sued for torts committed by the company.

10. Voluntary Association for Profit

A company is a voluntary association for profit. It is formed for the accomplishment of some
public goals and whatsoever profit is gained is divided among its shareholders. A company
cannot be formed to carry on an activity against public policy and having no profit motive.

11. Termination of Existence

A company, being an artificial person, does not die a natural death. It has its existence only in
contemplation of law. It is created by law, carries on its affairs according to law throughout its
life and ultimately is effaced by law.

Generally, the existence of a company is terminated by means of winding up. However, to

avoid winding up sometimes companies change their form by means of reorganization,
reconstruction and amalgamation.

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ADVANTAGES OF COMPANY
1. Corporate Personality
2. Limited Liability
3. Perpetual Succession
4. Transferable Shares
5. Separate Property
6. Capacity to sue
All the advantages has been discussed under the hear ‘Characteristics of a Company’.
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 DISADVANTAGES OF COMPANY
1. Formalities and expenses: Incorporation of Company is coupled with many complexes and
legal formalities. Even after the Company is incorporated, it has to comply with the various
legal provisions. Various documents and returns have to be filed with various government
agencies from time to time, which lead to heavy expenditure.
2. Corporate disclosure: various corporate information has to be disclosed from time to time to
the members of the Company, hence, no secrecy.
3. Separation of control from ownership: Members of the Company do not have the control
over the Company. Although they have invested money and they the owner of the Company
but still they do not have active control over the Company.
4. Greater social responsibility: the Companies have the great impact on the society sue to this
reason the Companies are called to show greater social responsibility in their working.
5. Greater tax burden: tax burden in case of the Company is more than any other form of
business organization. A Company is liable to pay tax without any minimum taxable limit and
it has to pay tax on its whole income.
6. Detailed winding-up procedure: the Act provides for a very detailed and lengthy procedure to
wind up the Company, which is more expensive and time consuming.

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 EXPERIENCE OF SHAREHOLDERS AS EXPERIENCE OF A COMPANY – NO BUT
EXCEPTION IS – JV CO.

Generally, being a separate legal entity, experience of shareholders cannot be regarded as

experience of a Company. But in case of “New Horizons Ltd. V. Union of India” it was decided
by the Supreme Court that in case of Joint Venture Companies, the experience of the Company
can only mean the experience of the constituents of the joint venture.

As a joint venture Company is in the nature of partnership between two or more constituent
Companies and each constituent Company undertakes to contribute towards the resource of joint
venture Company.
In New Horizons Ltd. v. Union of India, the tender of the company, New Horizons Ltd., for
publication of telephone directory was not accepted by the Tender Evaluation Committee on the
ground that the company had nothing on record to show that it had the technical experience
required to be possessed to qualify for tender.

On appeal, the rejection of tender was upheld by the Delhi High Court.

The judgement of the Delhi High Court was reversed by the Supreme Court which observed as
under:

“Once it is held that NHL (New Horizons Ltd.) is a joint venture, as claimed by it in the tender,
the experience of its various constituents namely, TPI (Thomson Press India Ltd.), LMI (Living
Media India Ltd.) and WML (World Media Ltd.) as well as IIPL (Integrated Information Pvt. Ltd.)
had to be taken into consideration, if the Tender Evaluation Committee had adopted the approach
of a prudent business man.”

“Seeing through the veil covering the face of NHL, it will be found that as a result of re-
organisation in 1992 the company is functioning as a joint venture wherein the Indian group (TPI,
LMI and WML) and Mr. Aroon Purie hold 60% shares and the Singapore based company (IIPL)
hold 40% shares. Both the groups have contributed towards the resources of the joint venture in
the form of machines, equipment and expertise in the field. The company is in the nature of
partnership between the Indian group of companies and Singapore based company who have
jointly undertaken this commercial enterprise wherein they will contribute to the assets and share
the risk. In respect of such a joint venture company, the experience of the company can only mean
the experience of the constituents of the joint venture i.e. the Indian group of companies (TPI,
LMI and WML) and the Singapore based company (IIPL).

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COMPANY AS PERSON

Company is an artificial person created by law. It is not a human being but it acts only through
human beings. It is considered as a legal person, which can enter into contracts, in its own name. It
is called as an artificial person since it is invisible, intangible, existing only in the contemplation
of law. It is capable of enjoying rights and being subject to duties.

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 COMPANY AS A CITIZEN

The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the
Constitution of India.

In State Trading Corporation of India Ltd. v. Commercial Tax Officer (C.T.O.), the Supreme
Court held that the State Trading Corporation though a legal person, was not a citizen and can act
only through natural persons.

Nevertheless, it is to be noted that certain fundamental rights enshrined in the Constitution for
protection of “person”, e.g., right to equality under Article 14 etc. are available to company. A
Company cannot claim the protection of such fundamental rights as are available to Citizens only.
E.g.: “Right to Freedom” under Article 19 of the Constitution of India.

Case: Bennet Coleman Co. v. Union of India

In this case, the Supreme Court stated that: “It is now clear that the Fundamental Rights of
shareholders as citizens are not lost when they associate to form a company. When their
Fundamental Rights as shareholders are impaired by State action, their rights as shareholders are
protected. The reason is that the shareholders’ rights are equally and necessarily affected if the
rights of the company are affected.”

In R.C. Cooper v. Union of India, also known as the Bank Nationalization case, the Supreme
Court held that where shareholders’ rights are equally affected if the rights of the Company are
affected, then the Company can claim the protection of all the fundamental rights through its
Directors or shareholders, which are available to the citizens.

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NATIONALITY AND RESIDENCE OF A COMPANY

Though it is established through judicial decisions that a company cannot be a citizen, yet it has
nationality, domicile and residence.

In Gasque v. Inland Revenue Commissioners, it was held that a limited company is capable of
having a domicile and its domicile is the place of its registration and that domicile clings to it
throughout its existence.

In Tulika v. Parry and Co., it was held:

“A joint stock company resides where its place of incorporation is, where the meetings of the
whole company or those who represent it are held and where its governing body meets in bodily
presence for the purposes of the company and exercises the powers conferred upon it by statute
and by the Articles of Association.”

Residence is an important connecting factor between a company and the governing legal system. It
is on this basis that liability of a company to pay income-tax is determined. Though the place of
incorporation is considered as the primary evidence of residence of a company, it is by no means

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the conclusive test. So, an alternative test is applied to bring a company within the purview of a
legal system in which it operates business and earns a fabulous income.

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DISTINCTION BETWEEN COMPANY AND CORPORATION / BODY CORPORATE

Generally speaking, an association of persons incorporated according to the relevant law and
clothed with legal personality separate from the persons constituting it is known as a corporation.

The word ‘corporation’ or words ‘body corporate’ is/are both used in the Companies Act, 2013.
Definition of the same which is reproduced below is contained in Clause (11) of Section 2 of the
Act:

“Body corporate” or “corporation” includes a company incorporated outside India but does not
include—

(a) a co-operative society registered under any law relating to co-operative societies; and
(b) any other body corporate (not being a company as defined in this Act), which the Central
Government may, by notification in the Official Gazette, specify in this behalf.”-
SPECIAL ACT OF PARLIAMENT LIKE: ICSI, ICAI, RB, LIC SEBI

The expression “corporation” or “body corporate” is wider than the word ‘company’.

A society registered under the Societies Registration Act has been held by the Supreme Court in
Board of Trustees v. State of Delhi, not to come within the term ‘body corporate’ under the
Companies Act, though it is a legal person capable of holding property and becoming a member of
a company. IMP.

Body Corporate not only includes a Company incorporated in India, but also includes a Foreign
Company. It also includes a corporation formed under any special statue / special act of parliament
e.g.: Public Financial Institution u/s 2(72) of the Act, Nationalized Bank. Food Corporation of
India, Airports Authority of India etc. Every incorporated Company is a Body Corporate but every
Body Corporate is not a incorporated Company.

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BODY CORPOARTE IS A WIDER TERM THAN COMPANY. IN THE TERM BODY

CORPORATE THE CO. IS INCLUDED BUT IN THE CO. THE BODY COPRORATE IS
NOT INCLI\UDED.

IN CASE OF COMPANY – WE USE LIMITED OR PRIVATELIMITED

IN CASE OF BODY CORPORATE : WHICH IS GOVERNED BY ANY OTHER LAW
THEN THAT ALW HAS TO BE SEEN.
e.g.: ICSI
RBI SEBI

BUT THERE ARE FEW PROVATE SECTORS BANKS LIKE KOTAK MAHINDRA
BANK, ICICI BANK LIMITED……………….THRSE BANK ARE COS AND BODY

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CORPORATES GOVERNED BY BANKING REGULATION ACT AS WELL AS COS
ACT.

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 CORPORATE VEIL/LIFTING OF CORPORATE VEIL OR PIERCING THE
CORPORATE VEIL

- Corporate Veil means separate legal entity.

- Lifting the veil means looking behind the company as a legal person that means disregarding
the corporate entity concept.

The chief advantage of incorporation is the separate legal entity of the Company. It may, therefore
happen that the corporate personality of the Company is used to commit frauds or improper or
illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent, the
facade of corporate personality might have to be removed to identify the persons who are the
really guilty. This is known as the “lifting of corporate veil”. It is in the interest of the members in
general and in public interest to identify and punish the persons who misuse the medium of
corporate personality.

The separate personality of the Company is a statutory privilege and must be used for legitimate
business purpose only. If fraudulent and dishonest use is made of legal entity, the individuals
concerned will not be allowed to take the shelter behind the corporate personality. The court will
break the corporate shell and apply the principle known as Lifting of corporate veil.

In the following cases the corporate veil can be lifted:

a) To determine the true character of the company [Daimler Co. Ltd. versus Continental Tyre
& Rubber Co.,] i.e. whether a company is enemy company. A Company may assume a
character of enemy company when persons in de facto control of its affairs are residents in an
enemy country. or, wherever they may be, are acting under instructions from or on behalf of
the enemy.

b) Where corporate entity is used to evade or circumvent tax [Sir Dinshaw Manakjee Petit].

The facts of the case are that the assessee was a wealthy man enjoying large dividend and
interest income. He formed four private companies and agreed with each to hold a block of
investment as an agent for it. Income received was credited in the accounts of the company but
the company handed back the amount to him as a pretended loan. This way he divided his
income in four parts in a bid to reduce his tax liability.

But it was held “the company was formed by the assessee purely and simply as a means of
avoiding tax and the company was nothing more than the assessee himself. It did no business,
but was created simply as a legal entity to ostensibly receive the dividends and interests and to
hand them over to the assessee as pretended loans”. The Court decided to disregard the
corporate entity as it was being used for tax evasion.

c) When Company acting as an agent or trusty of the Shareholders [R.G. Films Ltd.].

An American company produced a film in India technically in the name of a British Company,
90% of whose capital was held by the President of the American company which financed the
production of the film. Board of Trade refused to register the film as a British film which
stated that English company acted merely as the nominee of the American corporation.

d) For the prevention of fraud or improper conduct or legal obligation like defrauding creditors or
fraudulent purpose or when a company is a sham or a cloak [Gilford Motors Co., V. Horne].

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 Horne, a former employee of Gilford Motors made a covenant not to solicit its customers. He
formed a company which undertook solicitation. The company was restrained by the Court.

e) When a company was formed to avoid welfare legislation. [The Workmen Employed in
Associated Rubber Industries Limited, Bhavnagar versus The Associated Rubber
Industries Ltd., Bhavnagar & others).

The facts of the case were that a new company was created wholly by the principal company
with no assets of its own except those transferred to it by the principal company, with no
business or income of its own except receiving dividends from shares transferred to it by the
principal company i.e. only for the purpose of splitting the profits into two hands and thereby
reducing the obligation to pay bonus. The Supreme Court of India held that the new company
was formed as a device to reduce the gross profits of the principal company and thereby
reduce the amount to be paid by way of bonus to workmen. The amount of dividends received
by the new company should, therefore, be taken into account as assessing the gross profit of
the principal company.

f) To protect public policy.

Lifting the Corporate Veil of Small Scale Industry

Where small scale industries were given certain exemptions and the company owning an industry
was controlled by some group of persons or companies, it was held that it was permissible to lift
the veil of the company to see whether it was the subsidiary of another company and, therefore,
not entitled to the proposed exemptions. [Inalsa Ltd. v. Union of India.]

Use of Corporate Veil for Hiding Criminal Activities

Where the defendant used the corporate structure as a device or facade to conceal his criminal
activities (evasion of customs and excise duties payable by the company), the Court could lift the
corporate veil and treat the assets of the company as the realisable property of the shareholder.

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 PROHIBITION OF ASSOCIATION OR PARTNERSHIP OF PERSONS EXCEEDING
CERTAIN NUMBER – ILLEGAL ASSOCIATION

As per section 464 (1) No association or partnership consisting of more than such number of
persons as may be prescribed shall be formed for the purpose of carrying on any business that has
for its object the acquisition of gain by the association or partnership or by the individual members
thereof, unless it is registered as a company under this Act or is formed under any other law for
the time being in force:

Provided that the number of persons which may be prescribed under this sub-section shall not
exceed one hundred.

As per Rule 10 of the Companies (Miscellaneous) Rules, 2014, no association or partnership

shall be formed, consisting of more than fifty persons (50 persons) for the purpose of carrying
on any business that has for its objects the acquisition of gain by the association or partnership or
by individual members thereof, unless it is registered as a company under the Act or is formed
under any other law for the time being in force.

Nothing in sub-section (1) shall apply to—

(a) a Hindu undivided family carrying on any business; or
(b) an association or partnership, if it is formed by professionals who are governed by special
Acts.

Effect of Non-registration
 A illegal association has no existence in the eyes of law.
 The law does not recognize it so much, so no relief can be granted either to the association
or to any of its members, as the contractual relationship on which it is founded is illegal.

Since, the law does not recognize it, an illegal association:

(i) Cannot enter into any contract;
(ii) Cannot sue any member, or outsider, not even if the company is subsequently
registered;
(iii) Cannot be sued by a member, or an outsider for, it cannot contract any debts;
(iv) Cannot be wound up by order of Court. In fact, the Court cannot entertain a petition for
its winding up as an unregistered company, for if it did, it would be indirectly according
recognition to the illegal association

However, an illegal association is liable for tax.

Penalty: Every member of an association or partnership carrying on business in contravention of

sub-section (1) shall be punishable with fine which may extend to one lakh rupees and shall also
be personally liable for all liabilities incurred in such business.

*************

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 KINDS OF COMPANIES

Basically, there are three types of Companies under Companies Act, 2013:
1. Private Company
2. Small Company
3. Public Company
4. Producer Company
5. One Person Company: The 2013 Act introduces a new type of entity to the existing list i.e.
apart from forming a public or private limited company, the Act enables the formation of a
new entity a ‘one-person company’ (OPC). An OPC means a company with only one
person as its member (section 3(1)).

These Companies may be incorporated either as limited liability Companies or as unlimited

liability Companies.

Limited liability Companies may be:

(i) Company limited by shares
(ii) Company limited by guarantee
(iii) Company limited by guarantee as well as shares

Companies can also be classified as:

 Statutory Companies: These are constituted by special Act of Parliament or State Legislature.
Such companies are usually formed to carry on the work of some special public importance
and for which the undertaking requires extraordinary powers, sanctions and privileges. A
major objective for incorporating statutory corporations is to serve public interest. Such
companies do not use the word “limited” as part of their names. The provisions of the
Companies Act, 2013 do not apply to them. Examples of these types of companies are Reserve
Bank of India, Life Insurance Corporation of India, etc.
 Registered Companies: The Companies which are registered under the Companies Act, 2013
 Associations not for profit (Section 8 of the Act)
 Government Companies
 Dormant company: A company formed and registered under this 2013 for a future project or to
hold an asset or intellectual property and has no significant accounting transaction such a
company or an inactive company may make an application to the Registrar for obtaining the
status of a dormant company.(Section 455)
 Nidhi company: Nidhi Company means a company which has been incorporated as a Nidhi
with the object of cultivating the habit of thrift and savings amongst its members, receiving
deposits from, and lending to, its members only, for their mutual benefit, and which complies
with such rules as are prescribed by the Central Government for regulation of such class of
companies. (Section 406)
 Foreign Companies
 Holding and subsidiary Companies
 Investment Companies: An investment company is a company, the principal business of which
consists in acquiring, holding and dealing in shares and securities.
 Finance Companies
 Associate Company

***********

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 PRIVATE COMPANY -SECTION 2 (68)

"Private Company" means a company having a minimum paid-up share capital (of Rs. 1 Lac or
such higher paid-up share capital – Omitted by the Companies (Amendment) Act, 2015
as notified on 26.05.2015) as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) Except in case of One Person Company, limits the number of its members (Not
Debenture Holders) to two hundred (Max. 200 Members):
Provided that where two or more persons hold one or more shares in a company
jointly, they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased,
shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company;

Note: where two or more persons hold shares jointly, they shall be counted as single member.

"Relative": With reference to any person, means anyone who is related to another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed;

As per Rule 4 of Companies (Specification of definitions details) Rules, 2014:

A person shall be deemed to be the relative of another, if he or she is related to another in the
following manner, namely:-

(1) Father (including step-father);

(2) Mother (including step-mother);
(3) Son (including step-son);
(4) Son’s wife;
(5) Daughter;
(6) Daughter’s husband;
(7) Brother (including step-brother);
(8) Sister (including step-sister).

There must be at least two persons to form a private Company. As per section 3(1)(b) of the Act,
for forming a Private Company, two or more persons are required to subscribe their names to
Memorandum of Association.

The word ‘Private Limited’ must be added at the end of the name of a private limited Company.

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 ONE PERSON COMPANY – SECTION 2 (62)
WITH ONE MENBER ONLY BUT CAAN HAVE MORE THAN 1 DIRECTOR

One Person Company means a company which has only one person as a member.

As per section 3(1)(c), One person Company is considered as a private company. In terms of Rule
3 of the Companies (Incorporation) Rules, 2014, only a natural person who is an Indian citizen
and resident in India is eligible to incorporate OPC.

Many relaxations have been granted to OPC in compliances and procedural aspects. For example,
OPC is not required to hold AGM. Relaxation with regard to holding board meetings, preparation
of financial statements (cash flow exempted), signing of annual return etc.

SMALL COMPANY – SECTION 2(85)

SHALL BE A PRIVATE CO…….CRITERIA WOULD BE PIAD UP CAPITAL AND
TURNOVER.
Small Company’’ means a company, other than a public company having:
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as
may be prescribed which shall not be more than ten crores rupees (increased from five
crores to ten crores vide the Companies (Amendment) Act, 2017 notified on
09.02.2018); and
(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or
such higher amount as may be prescribed which shall not be more than one hundred crored
rupees (increased from twenty crores to one hundred crores vide the Companies
(Amendment) Act, 2017 notified on 09.02.2018):

Provided that nothing in this clause shall apply to: SMALL CO SHALL NOT BE:
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;

New form of company is recognized which is a private company which is subject to certain
relaxations in terms of compliances.

Further, a holding company or a subsidiary company, a company registered under section 8, or a

company or body corporate governed by any special Act cannot be a small company even if it
fulfills the criteria of paid up capital or turnover. Merger or amalgamation between two or more
small companies has been simplified without the requirement of court process.

PUBLIC COMPANY – SECTION 2 (71)

Public Company means a Company which:
(a) is not a private Company and;
(b) has a minimum paid up capital (of Rs. 5 Lacs or such higher paid up capital - Omitted by
the Companies (Amendment) Act, 2015 as notified on 26.05.2015) as may be prescribed;

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Provided that a company which is a subsidiary of a company, not being a private company, shall
be deemed to be public company for the purposes of this Act even where such subsidiary company
continues to be a private company in its articles.

A public Company must have a minimum seven numbers of members and unlike Private
Company a public Company can issue shares to public, accept deposits from public. Also, shares
and debentures of a public Company can be dealt at the Stock Exchanges. There is no restriction
on maximum numbers of members in case of a public Company.

PRODUCER COMPANY FOR PRIMARY PRODUCERS

IS A SEPARTAE LKIMD OF CO. WHICH IS NOT A PVT CO AND PUB
CO.
FOR THE PURPOSE OF THE ACT, IT IS TRAETED LIKE A PRIVATE
CO.
Producer Company means a Company which having objects or activities specified in section 581B
and registered as Producer Company under the Companies Act, 1956 under Part IXA to the At.
The membership of the Producer Companies is available to such people who themselves are the
primary producers, which is an activity by which some agricultural produce is produced by such
primary producers. Every producer Company shall deal with the produce of its active member for
carrying out its objects.

Objects under section 581B of the Act:

1. Production, harvesting, grading, drying, pooling, handling, marketing, selling, export of
primary produce of the members or import of goods or services for their benefits.
2. Processing including preserving, drying, canning, and packaging of the produce of its
members.
3. Manufacturing, sale or supply of machinery, equipments mainly to its members.
4. Providing education to its member and others.
5. Insurance of the producers.
6. Welfare for the benefits of the members.
7. Financing.

Further, under Section 581B(2) it has also been clarified that every producer company shall deal primarily
with the produce of its active members for carrying out any of its objects specified above.

COMPANY LIMITED BY SHARES – SECTION 3 (2) (a)

A Company having the liability of its members limited to the amount if any unpaid on the shares
held by them is termed as a Company limited by shares. Such a Company commonly called as
limited liability Company although the liability of the Company is never limited, it is the liability
of the members, which is limited. If the shares of the Company are fully paid up then the members
has nothing more to pay.

COMPANY LIMITED BY GUARANTEE – SECTION 3(2) (b)

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A Company limited by guarantee may be defined as a Company having liability of its members
limited by the Memorandum of Association (MOA) to such amount as the members may
respectively undertake by the MOA to contribute to the assets of the Company in the event of its
being wound up. In this type of the Company the liability to pay the guaranteed amount arises
only in case of the Company being wound up. If the Company is going concern then the members
don’t have any liability to pay.

The MOA of the Company must state the amount of guarantee. Clubs, trade associations and
societies for promoting of different objects are examples of such Company.

UNLIMITED COMPANY – SECTION 3 (2) (c)

A Company having no limit on the liability of its members is an unlimited Company. The liability
of each member extends to the whole amount of the Company’s debts and liabilities. However the
members are not directly liable to the creditors of the Company. Company being a separate legal
entity, the claims can be enforced only against the Company. At the time of Company being
wound up official liquidator is appointed and he may call upon the members to discharge the debts
and liabilities of the Company without limit.

Am unlimited Company may or may not have a share capital. An unlimited Company can be
converted into limited Company, but the all the debts and liabilities incurred by and on behalf of
the unlimited Company before such conversion will not be affected by such conversion.

ASSOCIATION NOT FOR PROFIT – SECTION 8

As it is clear from the words that an Association not for profit is an association, which is formed
not for profit making. Such Company can be registered under the Act after obtaining the licence
from the Central Government (CG).

As per the Act every Company should have last words as private limited and limited in case of
Private limited and public limited Company. However, section 8 of the Act permits the
registration under a licence granted by the CG of all ‘association not for profit’ with limited
liability without required to use the word limited or the words private limited at the end of
their names.
 The person shall make an application in Form No.INC.12 along with the fee as provided
in the Companies (Registration offices and fees) Rules, 2014 to the Registrar for a license
under sub-section (1) of section 8.
 The memorandum of association of the proposed company shall be in Form No.INC.13.
 The application shall be accompanied by the following documents, namely;

(a) the draft memorandum and articles of association of the proposed company;
(b) the declaration in Form No.INC.14 by an Advocate, a Chartered Accountant, Cost
Accountant or Company Secretary in practice, that the draft memorandum and articles
of association have been drawn up in conformity with the provisions of section 8 and
rules made there under and that all the requirements of the Act and the rules made there

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 under relating to registration of the company under section 8 and matters incidental or
supplemental thereto have been complied with;
(c) an estimate of the future annual income and expenditure of the company for next three
years, specifying the sources of the income and the objects of the expenditure;
(d) the declaration by each of the persons making the application in Form No. INC.15.

Conditions to be satisfied:
(a) The Company has in its objects the promotion of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment or any such other
object;
(b) The Company intends to apply its profits, if any, or other income in promoting its objects;
and
(c) The Company intends to prohibit the payment of any dividend to its members,

If the above conditions are satisfied then the CG may by licence direct that the association may be
registered as a Company with limited liability without using the words limited or private limited.

Such Company cannot alter its MOA with respect to its objects without the previous approval of
the CG. CG can any time revoke the licence granted. However, before revoking the licence the CG
shall give notice to the association and give the opportunity of being heard.

Where a licence is revoked, the Central Government may, by order, if it is satisfied that it is
essential in the public interest, direct that the company be wound up under this Act or
amalgamated with another company registered under this section.

Provided that no such order shall be made unless the company is given a reasonable opportunity of
being heard.

As per Section 8 (10), a company registered under this section shall amalgamate only with another
company registered under this section and having similar objects.

GOVERNMENT COMPANIES – SECTION 2 (45)

As per section 2 (45) of the Act a government Company to mean a Company in which not less
than 51% of the paid up share capital (Equity & Preference both) is held by:
(i) the central government;
(ii) any state govt. or govts;
(iii) partly by central govt. and partly by one or more state govts.

A subsidiary of a Govt. Company is also treated as Govt. Company.

Explanation inserted by the notification dated 2nd March, 2020

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Explanation: For the purposes of this clause, the “paid-up share capital” shall be construed as
“total voting power”, where shares with differential voting rights have been issued; {Section
2(45)}

Audit of Government Companies – Section 139 (5)

As per Section 139 (5) of the Act, the auditors of a Government Company or any other company
owned or controlled, directly or indirectly, by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly by one or more
State Governments, shall be appointed or re-appointed by Comptroller and Auditor General of
India (C & AG of India). The auditors of the Govt. Company shall submit their report to C & AG
of India.

The auditor shall be appointed within a period of 180 from the commencement of the financial
year, who shall hold office till the conclusion of the annual general meeting.

The C & AG has the power to direct the manner in which the accounts are to be audited and to
give instructions to the auditor in regard to any matter relating to the performance of his function.
The C. & A.G. may also conduct a supplementary test audit by persons authorised by him.

Annual Report of the Government Companies – 394 & 395

In case of Government Companies, the Central Government must prepare an annual report on the
working and affairs of each Government company within three months of its annual general
meeting together with a copy of the audit report and any comments upon or supplement to such
report made by the Comptroller and Auditor General of India. Where a State Government is a
member of a Government company, the annual report is likewise to be placed before the State
Legislature.

1. In Hindustan Steel Works Construction Ltd. v. State of Kerala, it was held that inspite of
all the control of the Government, the company is neither a Government department nor a
Government establishment, it is just an agency of the Government.

2. The employees of a Government Company are not the employees of the Central or State
Government. A Government Company may, in fact, be wound up like any other company
registered under the Companies Act. It may become insolvent or be unable to pay its debts.
That does not mean that the Government holding the shares, viz, Central or State, as the case
may be, has become bankrupt.

**********

FOREIGN COMPANIES – SECTION 2(42)

A foreign Company means any company or body corporate incorporated outside India
which:
 has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
 conducts any business activity in India in any other manner.

As per the rule 2 (1)(h) of Company (Specification of Definition Details) Rules, 2014 for the
purposes of clause (42) of section 2 of the Act, the phrase ‘electronic mode’ means carrying out
electronically based, whether the main server is installed in India or not, but not limited to:

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 i. business to business and business to consumer transactions, data interchange and other
digital supply transactions;
ii. offering to accept deposits or subscriptions in India or from citizens of India;
iii. financial settlements, web based marketing, advisory and transactional services database
services and products, supply chain management;
iv. online services such as telemarketing, telecommuting, telemedicine, education and
information research; and
v. all related data communication services, whether conducted by e-mail, mobile devices, social
media, cloud computing, document management, voice or data transmission or otherwise.

With this, the companies doing business through electronic mode are also termed as foreign
company and need to comply with the specified provisions

As per section 380 of the act a foreign Company has to furnish to the Registrar of Companies the
following documents within 30 days of the establishment of the business in India:
(a) a certified copy of the charter or MOA & AOA of the Company or other instruments
defining the constitution of the Company
(b) particulars of the registered office of the Company
(c) a list of its directors and secretary of the Company along with their address, nationality of
origin and occupations
(d) name and address of the persons resident in India who are authorised to accept services of
any notices on the Company
(e) full address of the principal place of business in India

Every foreign Company must conspicuously exhibit on the outside of its every office or place of
business in India its name and the country of its incorporation in English as well as in the local
language.

Section 376 of the Companies Act, 2013 provides further that when a foreign company, which has
been carrying on business in India, ceases to carry on such business in India, it may be wound up
as an unregistered company under Sections 375 to 378 of the Act, even though the company has
been dissolved or ceased to exist under the laws of the country in which it was incorporated.

Section 381 requires a Foreign Company to maintain books of Account and file a copy of balance
sheet and profit and loss account in prescribed form with ROC every calendar year. These
accounts should be accompanied by list of place of business established by the foreign company in
India.

Section 379 provides that where not less than 50% of the paid-up share capital (whether equity or
preference or partly equity and partly preference) of a company incorporated outside India having
an established place of business in India, is held by:

 one or more citizens of India or

 by one or more bodies corporate incorporated in India, whether singly or in the aggregate,

such company shall comply with such of the provisions of this Act, as may be prescribed by the
Central Government with regard to the business carried on by it in India, as if it were a company
incorporated in India.

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In a certain case, it was held that mere holding of property cannot amount to having a place of
business. A representative of a foreign company in India was merely receiving orders from
customers [P.J. Johnson v. Astrofiel Armadorn], it was held that it was not a “place of
business”.

As per Section 386(c), having a share transfer office or share registration office will constitute a
place of business.

The following activities are held as not constituting “carrying on of business”:

(1) carrying small transactions
(2) conducting meetings of shareholders or even directors
(3) operating bank accounts
(4) transferring of shares or other securities
(5) operating through independent contractors
(6) procuring orders
(7) creating or financing of debts, charges, etc. on property
(8) securing or collecting debts or enforcing claims to property of any kind.

As regards the applicability of the provisions of the Companies Act, 2013 to foreign companies
the following provisions of section 384 are to be noted:
(i) The provisions of section 71 relating to Debentures shall apply mutatis mutandis to a
foreign company.
(ii) The provisions of Section 92 regarding (filing of annual returns) shall, subject to such
exceptions, modifications or adaptations as may be made therein by the rules made under
the Act, apply to a foreign company as they apply to a company incorporated in India.
(iii) The provisions of Section 128 relating to the (to the extent of requiring it to maintain at its
principal place of business in India books of account with respect to moneys received and
spent, sales and purchase made and assets and liabilities, in the course of or in relation to
its business in India), Section 209A (inspection of accounts), Section 233A (Special audit),
Section 233B (audit of cost accounts), Section 234-246 (investigations), so far as may be,
apply only to the Indian business of a foreign company having an established place of
business in India as they apply to a company incorporated in India.
(iv) The provisions of Chapter VI (Registration of Charges) shall apply mutatis mutandis to
charges on properties which are created or acquired by any foreign company.
(v) The provisions of Chapter XIV (Inspection, Inquiry and Investigation) shall apply mutatis
mutandis to the Indian business of a foreign company as they apply to a company
incorporated in India.

BRANCH OFFICE:
Foreign companies, as they grow, seek to expand their business over the globe. The establishment
of branch offices, herein referred to as BOs, achieves this strategic growth.

Branch Offices help companies with an easier management of their businesses in the particular
areas. A BO is an extension of the Parent Company.

Section 2(42) of the Companies Act, 2013, defines a foreign company as a company or a body
corporate incorporated outside India and which has a place of business whether by itself or
through an agent, in this country.

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This definition includes a Branch Office; all the provisions of the Act applying to the company
will also apply to the BO. India sets up several rules under the RBI (Reserve Bank of India) and
FEMA, 1999.The establishment of a BO is regulated as per Section 6(6) of FEMA, 1999 read
along with notification no FEMA 22/2000-RB dated May 3, 2000. Under Section 11 of the afore-
mentioned Act, RBI issues directions to the authorized persons regarding the regulations to be
followed when conducting foreign exchange business with the customers or constituents.

The BOs that were established in the pre-FEMA period are now required to regularize their offices
under FEMA through the RBI, as per the recent regulations.

Initial Procedure
RBI Master Circular Jan 2016:
 A BO can be established by a body incorporated outside India, including a firm or
association of persons, involved in manufacturing or trading activities.
 The process of setting up is an easy one with minimal compliance requirements.
 The permission to set-up a BO has to be obtained by the RBI under the FEMA, 1999
provisions.
 RBI provides guidelines to be followed for establishing a BO; the former also reserves the
right to reject an application on the non-fulfilment of the same.
 The Applications are to be made in form FNC and are considered by the RBI under two
routes determined by the degree of Foreign Direct Investment (FDI):
o The Reserve Bank Route: taken when the principal business of the foreign
company falls under sectors where 100% FDI is permissible.
o The Government Route: when the sectors do not permit 100% FDI investment.
The RBI considers applications under this in consultation with the Ministry of
Finance of India.

The RBI has a few other considerations:

 Track Record: For a BO a company will require a profit making track record in the in the
immediately preceding five financial years in the home country.
 Net Worth: “a total of paid-up capital and free reserves, less intangible assets as per the
latest Audited Balance Sheet or Account Statement Certified by a Certified Public
Accountant or any Registered Accounts Practitioner”.
 The net worth has to be equal to or more than USD 100,000.
 The application by the foreign company has to be made through a designated AD
Category-I bank to the General Manager of the Foreign Exchange Department of RBI.
Some prescribed documents have to be attached with the application.
 The RBI Master Circular of 2016 provides two of the documents that have to be attached:

1. English version of the Certificate of Incorporation / Registration or Memorandum &

Articles of Association attested by Indian Embassy / Notary Public in the Country of
Registration.
2. Latest Audited Balance Sheet of the applicant entity.”

Even if applications do not satisfy the criteria if an agent files them on behalf of a parent company,
that parent company ought to satisfy the criteria. The AD-I Category bank involved in the process
will conduct due diligence on the Applicant in the following areas- “background, antecedents of
the promoter, nature and location of activity, sources of funds, etc.”, along with compliance of the
Know Your Customer (KYC) norms.

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The BO hence, once approved by the RBI, will be allotted a Unique Identification Number (UIN).
Once the offices have been set up, the BO must also obtain a Permanent Account Number (PAN)
from the Income Tax Authorities. This should be reported in the Annual Activity Certificate
(AAC) that the BO is required to present at the end of each ear to show that the activities are
undertaking in the permitted categories only.

Section 382 of the Companies Act, 2013, states that the company has to ‘conspicuously’ exhibit
outside the office, the company’s name and the specify country it was incorporated in.

The name must be in English Language and in the local language of the area where the office is
set-up. If the members of the company have limited liability, then the same has to be specified
with the name of the company outside the office and also mentioned in all the broachers,
prospectus and any other circulars generated by the company. The Act also provides for the
registration of the prospectus of the company with the registrar before it circulates and spreads any
information about the issuance of securities by the company.

Funding of the BO by the Foreign Company:

Equity Share Capital: in the usual way Indian companies are financed.

Preferred Share Capital: such convertible preference shares, compulsorily convertible into
equity shares are regarded as Foreign Direct Investment (FDI).

Debentures and Borrowings: there can be redeemable, convertible or non-convertible.

Companies can issue debentures, bonds and other debt securities. These also, when convertible
into equity shares, are treated as FDI.

Activities:
These BOs represent the parent company and usually undertake the same activities as the latter.
The profits from these are easily remittable from India, subject to the taxes applicable. They are
permitted by the RBI to undertake the following activities, as listed in the Master Circular:
1. Export / Import of goods.
2. Rendering professional or consultancy services.
3. Carrying out research work, in areas in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parent or
5. Overseas group company.
6. Representing the parent company in India and acting as buying / selling agent in India.
7. Rendering services in information technology and development of software in India.
8. Rendering technical support to the products supplied by parent/group companies.
9. Foreign airline / shipping company.

A branch office is not allowed to undertake any Retail Trading Activities. Manufacturing or
Processing activities, undertaken directly or indirectly, are also barred.

The RBI has given general permission to foreign companies to set up branch offices in Special
Economic Zones (SEZs) subject to the following conditions:

1. such units are functioning in those sectors where 100 per cent FDI is permitted;

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 2. such units comply with part XI of the Companies Act,1956 (Section 592 to 602);
3. Such units function on a stand-alone basis.

Every Branch Office within thirty days of its establishment has to deliver certain documents to the
Registrar as specified in Section 380 of the Companies Act, 2013.

***********

HOLDING COMPANY [SECTION 2(46)]:

“Holding Company”, in relation to one or more other companies, means a company of which such
companies are subsidiary companies”

Explanation: For the purposes of this clause the expression “company” includes any body corporate.
(Explanation added vide the Companies (Amendment) Act, 2017 notified on 09.02.2018)

SUBSIDIARY COMPANY [SECTION 2 (87)]:

“Subsidiary Company” or “Subsidiary”, in relation to any other company (that is to say the
holding company), means a company in which the holding company:

i. controls the composition of the Board of Directors; or

ii. exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies: (The words total voting power
replaced the words total share capital vide the Companies (Amendment), Act 2017
notified on 07.05.2018).

Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed. (This proviso not notified)

Explanation: For the purposes of this clause:

(a) a company shall be deemed to be a subsidiary company of the holding company even if the
control referred to in sub-clause i or sub-clause ii is of another subsidiary company of the
holding company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by
another company if that other company by exercise of some power exercisable by it at its
discretion can appoint or remove all or a majority of the directors;
(c) the expression “company” includes anybody corporate;
(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;

MCA clarification no. No.1/1212013-cl-v dated December 27, 2013:

Subject: Clarification with regard to holding of shares or exercising power in a fiduciary capacity -
Holding and Subsidiary relationship under Section 2(87) of the Companies Act, 2013.

“This Ministry has received a number of representations consequent upon notifying section 2(87)
of the Companies Act, 2013 which defines “subsidiary company” or “subsidiary”. The

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stakeholders have requested this Ministry to clarify whether shares held or power exercisable by a
company in a ‘fiduciary capacity’ will be excluded while determining if a particular company is a
subsidiary of another company. The stakeholders have further pointed out that in terms of section
4(3) of the Companies Act, 1956, such shares or powers were excluded from the purview of
holding-subsidiary relationship.

The matter has been examined in the Ministry and it is hereby clarified that the shares held by a
company or power exercisable by it in another company in a ‘fiduciary capacity’ shall not be
counted for the purpose of determining the holding-subsidiary relationship in terms of the
provision of section 2(87) of the Companies Act, 2013.”

*********

MEMBERSHIP OF HOLDING COMPANY [SECTION 19]

A subsidiary company cannot be a member of its holding company either itself or through it
nominee. Any allotment or transfer of share by a company to its subsidiary company shall be void
[Section 19].

Where subsidiary company was the member of holding company before becoming the subsidiary
of that company can continue be a member of its holding company. However, in this case
subsidiary company shall have no right to vote at the meeting of the holding company.

A subsidiary company can be the member of holding company and vote in its meeting in the
following cases:
- Where the subsidiary is concerned as a legal representative of the deceased member of
the holding company.
- Where the subsidiary is concerned as a trustee.

************

ASSOCIATE COMPANY – SECTION 2(6)

“Associate Company”, in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company
having such influence and includes a joint venture company.

Explanation (as amended by the Companies (Amendment) Act, 2017 notified on 07.05.2018)
For the purposes of this clause:

 “significant influence” means control of at least 20% of total voting power, or control of
or participation in business decision under an agreement;
 “Joint venture” means a joint arrangement whereby the parties that have joint control of
the arrangement have rights to the net assets of the arrangement.

The term ‘control’ includes:

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- the right to appoint majority of the directors; or
- to control the management or policy decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly.

It will have the following impact on various provisions of the Act as under:
(a) A company will now be required to lay, along with the financial statement, the consolidated
financial statements of its subsidiaries. The word subsidiary will include associate company
and joint venture.
(b) Annual return of every company shall contain the particulars of associate companies. Register
of directors and key managerial personnel kept under section 170 is required to include the
details of securities held by each of them in company or its holding, subsidiary, subsidiary of
company’s holding company or associate companies.
(c) The auditor cannot provide certain specified non-audit services to the associate companies.
(d) Prohibition on forward dealings in securities of company by director or key managerial
personnel under section 194 applies to associate company also.
(e) The associate companies are to be considered as ‘related parties’ under section 188.

****************

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 CONCEPT OF CAPITAL – capital is a wider term includes share capital loan capital

In relation to a Company limited by shares the word capital means the share capital. The MOA of
a Company must state the amount of its share capital and its division into various types, number
and value of shares.
(a) Nominal or authorised or registered capital – Section 2(8): It is the sum stated in the
memorandum as the capital of the Company with which the Company is registered. It is
the maximum amount, which can be raised by the Company by issuing shares. Whenever
there is an increase in the authorised share capital, the fees on such increase has to be paid
to ROC as per Rules. THE AUTH CAPITAL OF THE CO. IS 500000 DIVIDED INTO
50000 EQUITY SHARES OF RS. 10/- EACH. OR 500000 DIVIDED INTO 500000
SHARES OF Re. 1 each. Or 5000 shares of rs. 100/- each
(b) Issued capital – Section 2(50): It is that part of authorised capital, which is offered by the
company for subscription and includes the shares allotted for consideration other than cash.
(c) Subscribed capital – Section 2 (86): It is that portion of the issued capital at face value,
which has been subscribed for or taken by the public.
(d) Called-up capital – Section 2 (15): It is the total amount called up on the shares issued.
(e) Uncalled capital: It is the amount, which has not been called up by the Company yet.
(f) Paid-up capital – Section 2 (64): It is the total amount paid or credited as paid up on
shares issued. It is equal to called-up capital less calls in arrears. This paid up capital is
the part of the BS of the co.
(g) Unpaid capital: it is that portion of called up capital, which has been unpaid.
(h) Reserve capital: This is that part of the uncalled capital of the company, which can be
called up only in the event of company being wound up. The reserve capital can be created
by a limited company, by a special resolution. It is the portion of the uncalled capital that is
determine by the company that it shall be called up only-
(i) in the event of winding up,
(ii) for the purposes of winding up.
(i) Capital reserve: Capital reserve is created out of the profits of the Company and is not
for the purpose of distribution to shareholders. The expression “capital reserve” does
not include any amount regarded as free for distribution through the profit and loss
account. Statutory Capital Reserves are the “securities premium account” and “the capital
redemption reserve account”. Non-Statutory Capital Reserve may arise in many ways, e.g.,
where a fund is set aside out of the profits to replace assets which are wearing out, such as
heavy machinery, or where reserve is created out of profits made on sale or revaluation of
assets. Reserve created out of revaluation of assets is also known as capital reserve. Any
reserve other than a capital reserve shall be “revenue reserve”
(j) Preference Share Capital and Equity share capital
(k) Fixed and Circulating Capital: Fixed capital comprises of that part of capital which is
invested in fixed assets acquired for retention and use, e.g., land, buildings, plant and
machinery, whereas circulating or floating capital is that part of capital which is invested in
acquiring current assets like stock of goods, bills of exchange, cash, etc. It is required for
use in the day-to-day business operations and keeps on circulating.
(l) Working Capital: Working Capital is represented by the excess of current assets over
current liabilities.
(m) Loan or Debenture Capital: It is the capital raised by a company by the issue of
debentures. It is a borrowing and not a capital in the true sense of the term. It is the money
borrowed and so is a debt due by the company. The debenture holders are, therefore, the
creditors of the company and not shareholders.

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 ************

Share [Section 2(84)]

Share means share in the share capital of a company, and includes stock except where a distinction
between stock and shares is expressed or implied. A share is an interest of a shareholder in the
Company measured in terms of money made up of diverse rights conferred on its holders by the
AOA, which constitute between him and the Company.

The Supreme Court in the case of Bacha Guzdar V CIT defined the shares as a right to
participate in the profits of the Company while it is going concern and declares the dividend and in
the assets of the Company when it is wound up. A share represents the bundle of rights and
liabilities, which are regulated by the AOA of the Company.

In India a share is regarded as ‘goods’. According to section 2(7) of the Sale of Goods Act,
1930 goods mean any kind of movable property other than actionable claims and money and
include stock and shares. A share is not a negotiable instrument and according to section 44 of the
Act a share in a Company is a movable property and transferable in the manner provided by AOA
of the Company.

According to Section 45 of the Companies Act, 2013 every share in a company having a share
capital shall be distinguished by its distinctive number but this provision shall not apply to a share
held by a person whose name is entered as holder of beneficial interest in such share in the records
of a depository.

Share capital of the company can be of two kinds: [Section 43]

(Note: this section does not applicable a Private Company where MOA & AOA so provides.
Which means If anything else mentioned in MOA & AOA, then MOA & AOA prevail over
the section 43. Vide notification dated 05.06.2015).

The company can have and can issue only two kind of share capital, namely-
(a) equity share capital-
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with the rules as
may be prescribed.
(b) preference share capital.

EQUITY SHARE CAPITAL

 Equity share capital means all share capital, which is not preference share capital.
 Equity capital is also known as “Common Stock” or common share capital that represents
ownership in a company.
 Common share capital is generally divided into units known shares. These unit holders are
called equity shareholders.
 They are the real owners of the company and policy makers of the company.
 However, they do not have access to the day to day affairs of the company.
 They appoint their representatives called board of directors to look after the affairs of the
company.

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  Equity shareholders are entitled to vote on resolutions of the company, get a return by way of
dividend if declared and take part in surplus in assets of the company at time of winding-up.

PREFERENCE SHARE CAPITAL

Preference share capital means that part of share capital, which fulfils both the following
requirements, namely-
(a) Preferential right as to dividends that dividend may be paid at fixed rate or fixed amount;
(b) Preferential right as to repayment of paid-up capital that repayment may be on the event of
winding-up or repayment of capital.

************

Share with differential rights: Section 43

While Section 43 enables companies to issue a variety of equity shares with differential rights etc.
Rule 4 of Companies (Share Capital and Debentures) Rules, 2014 states the following
conditions regarding shares with differential voting rights:

Every company limited by shares wish to issue shares with differential rights as to dividend,
voting or otherwise, have to fulfill following conditions:

1. the company has consistent track record of distributable profits for the last three years. Deleted
by the Companies (Share Capital and Debentures) Amendment Rules, 2019 dated
16.08.2019).
2. the company has not defaulted in filing financial statements and annual returns for three
financial years immediately preceding the financial year in which it was decided to issue such
share.
3. the company has not failed -
- to repay its deposits or interest thereon on due date or
- redeem its debentures or interest thereon on due date or
- redeem its preference shares or
- pay dividend.
4. the Articles of Association authorize the issue of such shares
5. the shares with differential rights shall not exceed 26% of the total post-issue paid up equity
share capital including equity shares with differential rights issued at any point of time; the
voting power in respect of shares with differential rights of the company shall not exceed
seventy four per cent. of total voting power including voting power in respect of equity
shares with differential rights issued at any point of time (Amended by the Companies
(Share Capital and Debentures) Amendment Rules, 2019 dated 16.08.2019).
6. 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 Education and Protection Fund to the Central Government;

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 Provided that a company may issue equity shares with differential rights upon expiry of five
years from the end of the financial Year in which such default was made good (inserted by
notification dated 19.07.2016).

7. 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.
8. to pass an ordinary resolution at the general meeting
9. the listed public company obtained approval of share holders through Postal Ballot

Disclosures in the explanatory statement to the notice of the meeting

Rule 4(2) of Companies (Share Capital and Debentures) Rules, 2014 states that the explanatory
statement to be annexed to the notice of the general meeting in pursuance of section 102 or of a
postal ballot in pursuance of section 110 shall contain the following particulars, namely:-

(a) the total number of shares to be issued with differential rights;

(b) the details of the differential rights ;
(c) the percentage of the shares with differential rights to the total post issue paid up equity share
capital including equity shares with differential rights issued at any point of time;
(d) the reasons or justification for the issue;
(e) the price at which such shares are proposed to be issued either at par or at premium;
(f) the basis on which the price has been arrived at;
(g) in case of private placement or preferential issue-
a. details of total number of shares proposed to be allotted to promoters, directors and key
managerial personnel;
b. details of total number of shares proposed to be allotted to persons other than promoters,
directors and key managerial personnel and their relationship if any with any promoter,
director or key managerial personnel;

(h) in case of public issue - reservation, if any, for different classes of applicants including
promoters, directors or key managerial personnel;
(i) the percentage of voting right which the equity share capital with differential voting right shall
carry to the total voting right of the aggregate equity share capital;
(j) the scale or proportion in which the voting rights of such class or type of shares shall vary;
(k) the change in control, if any, in the company that may occur consequent to the issue of equity
shares with differential voting rights;
(l) the diluted Earning Per Share pursuant to the issue of such shares, calculated in accordance
with the applicable accounting standards;
(m) the pre and post issue shareholding pattern along with voting rights as per clause 35 of the
listing agreement issued by Security Exchange Board of India from time to time.

Conversion of existing equity share capital into differential voting rights and vice-versa not
possible
Rule 4(3) states that the company shall not convert its existing equity share capital with voting
rights into equity share capital carrying differential voting rights and vice–versa.

Disclosures in the Boards’ Report

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Rule 4(4) states that the Board of Directors shall, inter alia, disclose in the Board’s Report for the
financial year in which the issue of equity shares with differential rights was completed, the
following details, namely:

(a) the total number of shares allotted with differential rights;

(b) the details of the differential rights relating to voting rights and dividends;
(c) the percentage of the shares with differential rights to the total post issue equity share capital
with differential rights issued at any point of time and percentage of voting rights which the
equity share capital with differential voting right shall carry to the total voting right of the
aggregate equity share capital;
(d) the price at which such shares have been issued;
(e) the particulars of promoters, directors or key managerial personnel to whom such shares are
issued;
(f) the change in control, if any, in the company consequent to the issue of equity shares with
differential voting rights;
(g) the diluted Earning Per Share pursuant to the issue of each class of shares, calculated in
accordance with the applicable accounting standards;
(h) the pre and post issue shareholding pattern along with voting rights in the format specified
under sub-rule (2) of rule 4.

Rights of holders of equity shares with differential voting rights

Rule 4(5) states that the holders of the equity shares with differential rights shall enjoy all other
rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to,
subject to the differential rights with which such shares have been issued.

Register of Members to contain the details of equity shareholders having differential voting rights
Rule (6) states that when a company issues equity shares with differential rights, the Register of Members
maintained under section 88 shall contain all the relevant particulars of the shares so issued along with
details of the shareholders.

*************

Kinds of Preference shares

1. Participating: Participating preference shares are those shares which are entitled to a fixed
preferential dividend and in addition they carry a right to participate in the surplus profits of
the Company along with the equity shareholders after the dividend has been paid to equity
shareholders. Further, such shareholders have further rights to participate in capital on
winding-up. The right to participate may be given either in the MOA or AOA by virtue of their
terms of issue.
2. Non-participating: Non-Participating preference shares are those shares to whom no further
rights except to get divided at fixed rate is available. Unless contrary is stated, all preference
shares are presumed to be non-participating preference shares
3. Cumulative: Cumulative preference shares are those shares, which confer a right on its holder
to claim dividend fixed at a sum or percentage for the past and the current years. In case of a
cumulative preference shares the dividend keeps on accumulating until it is fully paid. If the
company failed to pay divided on such shares, it shall be accumulated and arrears of dividend
shall be paid before any dividend is paid to equity shareholders.

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4. Non-cumulative: Non-cumulative preference shares are those shares on which if the company
failed to pay dividend in any year, it would not be carry forward but lapsed. Unless contrary is
stated, all preference shares are presumed to be cumulative preference shares.
5. Convertible: Convertible preference shares are those shares, which can be converted into
equity share at later date.
6. Non-convertible: Non-convertible preference shares are those shares, which cannot be
converted into equity shares. Unless contrary is stated, all preference shares are presumed to
be non-convertible preference shares.
7. Redeemable: Redeemable preference shares are those shares, which can be redeemed either at
a fixed date or after a certain period of time during the lifetime of the Company. Section 55(2)
further states that a company limited by shares may, if so authorized by its articles, issue
preference shares which are liable to be redeemed within a period not exceeding twenty years
from the date of their issue subject to such conditions as may be prescribed.

The Company has to fulfill the following conditions for the purpose of the issue and
redemption of redeemable preference shares as per section 55 (2) of the Act:
 AOA of the Company must provide for such issue.
 Shares may be redeemed only out of the profits available for dividend or out of the fresh
issue of the shares made for that purpose.
 If share are to be redeemed on premium, then the premium must be provided out of the
profits of the Company or out pf the Company’s securities premium account.
 Share must be fully paid up shares before redemption.
 If the share are to be redeemed other wise than out of the fresh issue, a sum equal to the
nominal amount of shares redeemed shall be transferred out of the profits of the Company
available for the dividend to the Capital Redemption Reserve Account. This fund may be
utilised for the issue of fully paid bonus shares.

Section 55 (3) when a company is not in a position to redeem any preference shares or to pay
dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter
referred to as unredeemed preference shares), it may, with the consent of the holders of three-
fourths in value of such preference shares and with the approval of the Tribunal on a petition
made by it in this behalf, issue further redeemable preference shares equal to the amount due,
including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of
such further redeemable preference shares, the unredeemed preference shares shall be deemed to
have been redeemed (This section came into force w.e.f. 01.06.2016).

It may be noted that redemption of preference shares is not to be taken as reduction in authorized
share capital of the Company. Notice of redemption of preference shares must be sent to ROC.

Provisions under Companies (Share Capital and Debentures) Rules, 2014 with regard to issue and
redemption of Preference shares

Conditions
Rule 9(1) states that a company having a share capital may, if so authorized by its articles, issue
preference shares subject to the following conditions, namely:-

(a) The issue of such shares has been authorized by passing a special resolution in the general
meeting of the company

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(b) the company, at the time of such issue of preference shares, has no subsisting default in the
redemption of preference shares issued either before or after the commencement of this Act or
in payment of dividend due on any preference shares.

Resolution authorizing preference shares to set out certain particulars

Rule 9(2) states that a company issuing preference shares shall set out in the resolution, particulars
in respect of the following matters relating to such shares, namely:-
(a) the priority with respect to payment of dividend or repayment of capital vis-a-vis equity
shares;
(b) the participation in surplus fund;
(c) the participation in surplus assets and profits, on winding-up which may remain after the entire
capital has been repaid;
(d) the payment of dividend on cumulative or non-cumulative basis.
(e) the conversion of preference shares into equity shares.
(f) the voting rights;
(g) the redemption of preference shares.

Explanatory statement to special resolution to set out certain particulars

Rule 9(3) states that the explanatory statement to be annexed to the notice of the general meeting
pursuant to section 102 shall, inter-alia, provide the complete material facts concerned with and
relevant to the issue of such shares, including-
(a) the size of the issue and number of preference shares to be issued and nominal value of each
share;
(b) the nature of such shares i.e. cumulative or non - cumulative, participating or non -
participating, convertible or non – convertible
(c) the objectives of the issue;
(d) the manner of issue of shares;
(e) the price at which such shares are proposed to be issued;
(f) the basis on which the price has been arrived at;
(g) the terms of issue, including terms and rate of dividend on each share, etc.;
(h) the terms of redemption, including the tenure of redemption, redemption of shares at premium
and if the preference shares are convertible, the terms of conversion;
(i) the manner and modes of redemption;
(j) the current shareholding pattern of the company;
(k) the expected dilution in equity share capital upon conversion of preference shares.

Register of Members to contain the particulars of preference share holder(s)

Rule 9(4) states that when a company issues preference shares, the Register of Members
maintained under section 88 shall contain the particulars in respect of such preference share
holder(s).

Redemption of preference shares

Rule 9(6) states that a company may redeem its preference shares only on the terms on which they
were issued or as varied after due approval of preference shareholders under section 48 of the Act
and the preference shares may be redeemed:-
(a) at a fixed time or on the happening of a particular event;
(b) any time at the company’s option; or
(c) any time at the shareholder’s option.

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8. Non-redeemable: Non-redeemable preference shares are those shares, which cannot be
redeemed by the Company, and the company does not pay back the capital on such share
except in case of winding-up. Section 55 (1) states that no company limited by shares shall,
after the commencement of this Act, issue any preference shares which are irredeemable.

Exceptions: Issue and redemption of preference shares by company in infrastructure

projects:

Rule 10 states that a company engaged in the setting up and dealing with of infrastructural
projects may issue preference shares for a period exceeding twenty years but not exceeding
thirty years, subject to the redemption of a minimum ten percent of such preference shares per
year from the twenty first year onwards or earlier, on proportionate basis, at the option of the
preference shareholders.

9. Cumulative convertible preference shares (CCP): the share with has feature of both
cumulative and convertible preference shares. It has following salient features-
 issue for setting up new projects, expansion or diversification or modernization,
 CCPs could not exceed equity shares, the company would be offering to the public
 CCPs deemed to be equity shares for the purpose of calculating debt-equity ratio
 CCPs would be converted into equity between 3-5 years
 rate of dividend on CCPs would be 10%
 the face value of these shares will ordinarily be Rs. 100/-
 arrears of dividend are to be paid even after the conversion.

PUBLICATION OF AUTHORISED, SUBSCRIBED AND PAID-UP CAPITAL

Section 60 (1) states that when any notice, advertisement or other official publication, or any
business letter, billhead or letter paper of a company contains a statement of the amount of the
authorized capital of the company, such notice, advertisement or other official publication, or such
letter, billhead or letter paper shall also contain a statement, in an equally prominent position and
in equally conspicuous characters, of the amount of the capital which has been subscribed and the
amount paid-up.

Sub-section (2) states that any default is made in complying with the requirements of sub-section
(1), the company shall be liable to pay a penalty of ten thousand rupees and every officer of the
company who is in default shall be liable to pay a penalty of five thousand rupees, for each
default.

**********

Voting Rights of a member: [Section 47]

(Note: this section does not applicable a Private Company where MOA & AOA so provides.
Which means If anything else mentioned in MOA & AOA, then MOA & AOA prevail over
the section 43. Vide notification dated 05.06.2015).

1. Equity shareholders
Every member and holding any equity share capital shall have right to vote on every resolution
placed before the company. Voting rights on poll shall be in proportion to his in the paid-up

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 equity share capital. On the vote by show of hand, every member present in person shall have
one vote.

2. Preference shareholders
Section 47(2) states that every member of a company limited by shares and holding any
preference share capital therein shall, in respect of such capital, have a right to vote only on
resolutions placed before the company which directly affect the rights attached to his
preference shares and, any resolution for the winding up of the company or for the repayment
or reduction of its equity or preference share capital and his voting right on a poll shall be in
proportion to his share in the paid-up preference share capital of the company:

Provided that the proportion of the voting rights of equity shareholders to the voting rights of
the preference shareholders shall be in the same proportion as the paid-up capital in respect of
the equity shares bears to the paid-up capital in respect of the preference shares:

Provided further that where the dividend in respect of a class of preference shares has
not been paid for a period of two years or more, such class of preference shareholders
shall have a right to vote on all the resolutions placed before the company.

**********

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Difference between Preference Shares and Equity Shares
1. Fixed rate of dividend: Preference shares are entitled to fixed rate of dividend but dividend
on equity shares depend upon the availability of profits after paying the dividend to the
preference shares.
2. Preference w.r.t. dividend: Dividend on preference share is paid in preference to the equity
shares.
3. Preference w.r.t. payment of capital: With regard to the payment of the capital the
preference shares have preference in relation to equity shares.
4. Accumulation of dividend: If the preference shares are cumulative then the unpaid is
accumulated and until the accumulated dividend is not paid the equity shareholders are not
paid dividend.
5. Redemption: Redeemable preference shares are redeemed at a fixed date by the Company
where as equity shares cannot be redeemed.
6. Voting rights: Voting rights of preference are restricted where as equity shareholders have
right to vote on every resolution affecting the Company. Preference shareholders can vote only
on those resolution which affects their rights or if their dividend is unpaid for at least two
years.
7. Issue of right shares / bonus shares: a Company issue right shares or bonus shares only to
the Company’s existing equity shareholders not to the preference shareholders.

**********

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 ISSUE OF SHARES AT PREMIUM

Over and above the face value…………any amount of premium……………no restriction on

premium

A Company may issue share at a premium when the Company is able to sell its shares at the price
above the face value. E.g. A Company issues share of Rs. 100/- at a premium of Rs. 20/- i.e. for
Rs. 120/-. Companies Act does not impose restriction on issue of shares at premium. However, it
composes some conditions with regard to utilization of the premium amount.

Where a company issue shares at premium (whether cash or in kind), a sum equal to the amount or
value of premiums shall be transferred to the ‘securities premium account’ - Section 52 (1). The
amount collected as share premium cannot be considered as the profits of the Company and hence
cannot be distributed as dividend as it cannot be treated as free reserve as it is in the nature of
Capital Reserve. The amount of share premium must be shown in the balance sheet of the
Company as separate item.

According to section 52 (2) the ‘securities premium account’ may be applied by the
Company for the following purposes:
(a) Issue of fully paid up bonus shares
(b) Writing off the preliminary expenses
(c) Writing off the expenses, commission, discount on issue of shares / debentures
(d) Providing premium on redemption of preference shares / debentures
(e) for the purchase of its own shares or other securities under section 68.

In the Companies Act there is no bar to issue the shares at premium. As per of SEBI (ICDR),
Regulations, 2009, the companies eligible to make public issue can freely price their equity shares
or any convertible securities.

**********
ISSUE OF SHARE AT DISCOUNT: SECTION 53 - no co can issue shares at discount on
face value / nominal value ……………..except SES
Section 53 (1) states that except as provided in section 54 (i.e. issue of sweat equity shares), a
company shall not issue shares at a discount.

(2) Any share issued by a company at a Discount (the word discounted price were deleted by
the Companies (Amendment) Act, 2017) shall be void.

Section 53 (2A) – inserted by the Companies (Amendment) Act, 2017:

Notwithstanding anything contained in sub-sections (1) and (2), 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 in accordance with any guidelines or directions or
regulations specified by the Reserve Bank of India under the Reserve Bank of India Act, 1934 or
the Banking (Regulation) Act, 1949.

Section 53 (3):
When a company fails to comply with the provisions of this section, such company and every
officer who is in default shall be liable to a penalty which may extend to an amount equal ot the
amount raised through the issue of share at discount or five lakh rupees, whichever is less, and the
company shall also be liable to refund all monies received with interest at the rate of 12% per

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annum from the date of issue of such shares to the persons to who, such shares have been issued
(Substituted by the Companies (Amendment) Act, 2019 w.e.f 02nd November, 2018 i.e. from
the date of Companies (Amendment) Ordinance, 2019.)

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Ways of issuing shares:
1. privately by private placement
2. to public at large by IPO / SPO
3. further issue of shares: to existing shareholders – RIGHT ISSUE OR
4. by preferential allotment - issue shares to some known one instead of offering to
other.
5. ESOP / SES
6. BONUS SHARES

RAISING OF CAPITAL / ISSUE OF SHARES

A Company limited by shares can raise the capital in the following ways:

Raising of the Capital

Private Placement Allotment to Issue House Issue of Prospectus Issue to existing

Shareholders
Private Placement:
In case of a Private Company
A private Company limited by shares is prohibited from by the Act and by its AOA to invite
public to subscribe shares in or debentured of the Company. Even a private Company need not file
a prospectus or statement in lieu of prospectus. Its shares are issued privately to small number of
persons related to promoters.

In case of a Public Company

A public Company can also raise capital privately without inviting public. Since no public is
involved, no need to file prospectus.

Allotment to Issue House

Under this arrangement a Company allots or issue shares or debentures at a price to financial
institution or any issue house for sale to public. Issue house publish a document called an “Offer
for Sale” with application from for sale to public at a price higher than what is paid by it or at par.
This document is called Deemed Prospectus. After receiving applications the issue house
renounce the allotment in favour of the applicants who become the direct allottees of the shares or
debentures.

Issue of Prospectus
This is the most common method by which a Company seeks to raise capital from the public. The
Company invites offers from public to subscribe shares through prospectus. An investor, if
convinced by the statements in the prospectus, applies for the shares or debentures.

Issue to Existing Shareholders right issue

A Company can raise further capital by issue of right shares to existing shareholders as per section
62 of the Act. Under this shares are allotted to existing equity shareholders in proportion to their
original shareholders e.g. one share against every two shares held by a member.
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