CHAPTER 2

INCORPORATION OF
COMPANY AND
MATTERS
INCIDENTAL
THERETO
LEARNING OUTCOMES

At the end of this chapter, you will be able to:

 Explain the Formation & Incorporation of company (Private Limited/
Public Limited), One person company (OPC) and the formation of Not
for Profit Organization (Section 8 Company).
 Identify the need for Memorandum of Association (MOA) and Articles
of Association (AOA) and changes incidental thereto.
 Know the effect of registration.
 Explain and identify the concepts related to registered office of
company.
 Know how the Service of documents is effected.
 Know about Authentication of documents, proceedings and contracts and
Execution of bills of exchange, etc.

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 2.2 CORPORATE AND OTHER LAWS

Incorporation of company
and related matters

Memorandum and
Incorporation Documents Other Provisions
Articles

Minimum
Memorandum Have Regd Office
members & OPC Service (Sec 20)
(MOA) (Sec 4) (Sec 12)
(Sec 3 & 3A)

Commence
Documents Article (AOA) Authentication
Business
required (Sec 7) (Sec 5) (Sec 21)
(Sec 10A)

Act is superior
Not for profit Rectify Name
than MOA/AOA Execution (Sec 22)
company (Sec 8) (Sec 16)
(Sec 6)

Effect of Changes in
Convert Company
registration Memorandum
(Sec 18)
(Sec 9) (Sec 13)

Subsidiary Can't
Changes in Article
hold shares in
(Sec 14)
holding (Sec 19)

Updation of changes to be noted in

every copy of MOA/AOA (Sec 15)

Give copy of MOA/AOA

to members (Sec 17)

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 INCORPORATION OF COMPANY & MATTERS
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1. INTRODUCTION TO INCORPORATION OF
COMPANIES
A company is a separate legal entity with perpetual succession for lawful purpose.
Development of this concept is equally significant in economic terms as invention
of steam engine is for the industrial revolution.
Persons who initiate promotion of a company are known as promoters. All persons
who take steps for the registration of a company e.g., those associated with the
preparation of a prospectus or in drawing up the Memorandum of Association of
the company and assisting in its registration are regarded as promoters.
The Companies Act, 2013 defines the term “Promoter” under section 2(69) which
means a person—
(a) who has been named as such in a prospectus or is identified by the company
in the annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether
as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act.
However, a person who is acting merely in a professional Capacity, shall not be
regarded as promoter [under (c)], e.g., the solicitor, banker, accountant etc. are not
regarded as promoters.

2. FORMATION OF COMPANY (SECTION 3)

Companies are broadly of below types:

Company

Private (Including One Person

Public
Company)

Ltd. by Ltd. by Ltd. by

Unlimited Ltd. by Shares Unlimited
Shares Guarantee Guarantee

with capital with capital with captial with captial

without without without without

capital capital capital capital

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 2.4 CORPORATE AND OTHER LAWS

As you can observe in above chart that companies could be with limited liability
(by shares or guarantee) or with unlimited liability. 1&2
Note: For Government Companies, suffix “Pvt. Ltd / Ltd.” not required
(Notification dated 5th June 2015). This exception shall be applicable to a
government company which has not committed a default in filing its financial
statements under section 137 or annual return under section 92 with the Registrar
of companies [Notification dated 13th June 2017].
Section 3 of the Companies Act, 2013 deals with the basic requirement with respect
to the constitution of the company. In the case of a public company with or without
limited liability, any 7 or more persons (i.e. minimum number of shareholders) can
form a company for any lawful purpose by subscribing their names to
memorandum and complying with the requirements of this Act in respect of
registration. In exactly the same way, 2 or more persons can form a private company
and 1 person where company to be formed is one person company (OPC).
However, that one person company (OPC) need to specify the name of one
nominee in the Memorandum of Association (MOA) who would take his place in
case of his death or his incapacity to contract. The nominee could be changed as
per the process and this will not attract process for alteration of the Memorandum
of Association.
Formation of Company [Section 3]
(1) A company may be formed for any lawful purpose by—
(a) 7 or more persons, where the company to be formed is to be a public
company;
(b) 2 or more persons, where the company to be formed is to be a private
company; or
(c) 1 person, where the company to be formed is to be One Person Company
that is to say, a private company,
by subscribing their names or his name to a memorandum and complying with the
requirements of this Act in respect of registration.

1
Provided that a Specified IFSC public or Specified IFSC Private company shall be formed only
as a company limited by shares.
2
IFSC company means a company incorporated in any International Financial Services Center in
India, like in Gujarat International Finance Tec-City.

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 INCORPORATION OF COMPANY & MATTERS
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Public Company Private Company One Person Company

7 or more 2 or more 1
Persons Persons Person
The memorandum of One Person Company shall indicate the name of the other
person (i.e. Nominee), with his prior written consent in the prescribed form, who
shall, in the event of the subscriber's death or his incapacity to contract become
the member of the company and the written consent of such person shall also be
filed with the Registrar at the time of incorporation of the One Person Company
along with its memorandum and articles.
However, such other person may withdraw his consent in such manner as may be
prescribed.
The member of One Person Company (OPC) may at any time change the name of
Nominee by giving notice in such manner as may be prescribed.
It shall be the duty of the member of One Person Company (OPC) to intimate the
company the change, if any, in the name of the other person nominated by him by
indicating in the memorandum or otherwise within such time and in such
manner as may be prescribed, and the company shall intimate the Registrar any
such change within such time and in such manner as may be prescribed.
However, any such change in the name of the person shall not be deemed to be an
alteration of the memorandum.
(2) A company formed under sub-section (1) may be either—
(a) a company limited by shares; or
(b) a company limited by guarantee; or
(c) an unlimited company.
Members severally liable in certain cases [Section 3A]
• If at any time the number of members of a company is reduced,
 in the case of a public company, below 7,
 in the case of a private company, below 2,
and the company carries on business for more than six months while the
number of members is so reduced, then

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 2.6 CORPORATE AND OTHER LAWS

• every person who is a member of the company during the time that it so
carries on business after those six months and is cognizant (aware) 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 (after six months) and may be severally sued
therefore.

3. INCORPORATION OF COMPANY [SECTION 7]

I. INCORPORATION OF COMPANY: Section 7 of the Companies Act, 2013
provides for the procedure to be followed for incorporation of a company.

•STEPS FOR INCORPORATION

•Reservation of name by filing e- apllication

1.

•Drafting & signing of MOA & AOA and its submission to ROC. These
2. documents have to be e-filed and e-stamped

•Consent of persons nominated as directors to act as directors to be

3. submittted electronically

•Submission of statutory declaration of compliances and other

4. declarations

•Pay fees & amount of stamp duty electonically

5.

•Obtain certificate of incorporation digitally signed by ROC

6.

7. •File declaration about address of Registered office

Note: New requirement of submitting declaration that all subscribers have paid
the value of shares agreed to be taken by him and verification of Registered office
has been filed. This requirement is needed to be complied with before the
commencement of business.

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 INCORPORATION OF COMPANY & MATTERS
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(1) Filing of the documents and information with the registrar: For the
registration of the company following documents and information are required to
be filed with the registrar within whose jurisdiction the registered office of the
company is proposed to be situated—
♦ the memorandum of association and articles of association of the company
duly signed by all the subscribers to the memorandum.
♦ a declaration by person who is engaged in the formation of the company (an
advocate, a chartered accountant, cost accountant or company secretary in
practice) and by a person named in the articles (director, manager or
secretary of the company), that all the requirements of this act and the rules
made thereunder in respect of registration and matters precedent or
incidental thereto have been complied with.
♦ a declaration from each of the subscribers to the memorandum and from
persons named as the first directors, if any, in the articles stating that—
 he is not convicted of any offence in connection with the promotion,
formation or management of any company, or
 he has not been found guilty of any fraud or misfeasance or of any
breach of duty to any company under this Act or any previous company
law during the last five years,
 and that all the documents filed with the Registrar for registration of
the company contain information that is correct and complete and true
to the best of his knowledge and belief;
♦ the address for correspondence till its registered office is established;
♦ the particulars (names, including surnames or family names, residential
address, nationality) of every subscriber to the memorandum along with
proof of identity, and in the case of a subscriber being a body corporate, such
particulars as may be prescribed.
♦ the particulars (name, including surname or family name, the Director
Identification Number (DIN), residential address, nationality) of the persons
mentioned in the articles as the first directors and such other particulars
including proof of identity as may be prescribed; and
♦ the particulars of the interests of the persons mentioned in the articles as the first
directors of the company in other firms or bodies corporate along with their
consent to act as directors of the company in such form and manner as may be
prescribed.

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 2.8 CORPORATE AND OTHER LAWS

(2) Issue of certificate of incorporation on registration: The Registrar on the

basis of documents and information filed, shall register all the documents and
information in the register and issue a certificate of incorporation in the prescribed
form to the effect that the proposed company is incorporated under this Act.
(3) Allotment of Corporate Identity Number (CIN): On and from the date
mentioned in the certificate of incorporation, the Registrar shall allot to the
company a corporate identity number, which shall be a distinct identity for the
company and which shall also be included in the certificate.
(4) Maintenance of copies of all documents and information: The company
shall maintain and preserve at its registered office copies of all documents and
information as originally filed, till its dissolution under this Act.
(5) Furnishing of false or incorrect information or suppression of material
fact at the time of incorporation (i.e. during incorporation process): If any
person furnishes any false or incorrect particulars of any information or suppresses
any material information, of which he is aware in any of the documents filed with
the Registrar in relation to the registration of a company, he shall be liable for
action for fraud under section 447.
(6) Company already incorporated by furnishing any false or incorrect
information or representation or by suppressing any material fact (i.e. post
Incorporation): Where, at any time after the incorporation of a company, it is proved
that the 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 promoters, the persons named as the first directors of
the company and the persons making declaration under this section shall each be
liable for action for fraud under section 447.
(7) Order of the Tribunal 3 : Where a company has been got incorporated by
furnishing 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—

3
“Tribunal” means the National Company Law Tribunal (NCLT) constituted under section 408
of the Companies Act, 2013. The NCLT is a quasi- judicial body in India that adjudicates issues
relating to companies in India. The NCLT was established under the Companies Act, 2013 and
was constituted on 1st June, 2016.

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 INCORPORATION OF COMPANY & MATTERS
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(a) pass such orders, as it may think fit, for regulation of the management of the
company including changes, if any, in its memorandum and articles, in public
interest or in the interest of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit:

Name Removal

Winding up

Tribunal may order one of

the following Unlimited Liability

Change MOA/AOA

Other Orders

Provided that before making any order,—

♦ the company shall be given a reasonable opportunity of being heard in the
matter; and
♦ the Tribunal shall take into consideration the transactions entered into
by the company, including the obligations, if any, contracted or payment of
any liability.
Simplified Proforma for Incorporating Company Electronically (SPICe)
The Ministry of Corporate Affairs has taken various initiatives for ease of business.
In a step towards easy setting up of business, MCA has simplified the process of
filing of forms for incorporation of a company through Simplified Proforma for
incorporating company electronically.

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 2.10 CORPORATE AND OTHER LAWS

4. INCORPORATION OF ONE PERSON

COMPANY
OPC

encourages procedural Separate

One Private Limited
entrepreneurship requirements Legal
member Company Liabilty
and are simplified Entity
Company in nature
corporatization through
of business exemptions

Law with respect to formation of OPC provides that—

♦ The memorandum of OPC shall indicate the name of the other person
(nominee), who shall, in the event of the subscriber’s death or his incapacity
to contract, become the member of the company.
♦ The other person (nominee) whose name is given in the memorandum shall
give his prior written consent in prescribed form and the
same shall be filed with Registrar of companies at the time
of incorporation along with its Memorandum of
Association and Articles of Association.
♦ Such other person (nominee) may be given the right to withdraw his consent.
♦ The member of OPC may at any time change the name of such other person
(nominee) by giving notice to the company and the company shall intimate
the same to the Registrar.
♦ Any such change in the name of the person shall not be deemed to be an
alteration of the memorandum.
♦ Only a natural person who is an Indian citizen 4whether resident in India or
otherwise-
(a) shall be eligible to incorporate One Person Company (OPC);
(b) shall be a nominee for the sole member of One Person Company (OPC).

4
The Central Government has amended the Companies (Incorporation) Rules, 2014, by the
Companies (Incorporation) Second Amendment Rules, 2021 (Notification G.S.R. 91(E) dated 1st
February, 2021) [w.e.f. 1st April, 2021]

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 INCORPORATION OF COMPANY & MATTERS
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Explanation I - For the purposes of this rule, the term "resident in India"
means a person who has stayed in India for a period of not less than 120
days during the immediately preceding financial year.
♦ A natural person shall not be a member of more than one OPC at any point
of time and the said person shall not be a nominee of more than one OPC.
♦ Where a natural person being member in OPC becomes member in another
such company by virtue of his being a nominee in that OPC, such person shall
meet eligibility criteria (as given in point above) within a period of 180 days.
♦ No minor shall become member or nominee of the OPC or can hold share
with beneficial interest.
♦ Such Company cannot be incorporated or converted into a company under
section 8 of the Act. Though it may be converted to private or public
companies in certain cases. The procedure of conversion is given in the rules
6 & 7 of Chapter II of the Companies Act, 2013.
♦ Such Company cannot carry out Non-Banking Financial Investment activities
including investment in securities of anybody corporate.
Example 1: Rajesh has formed a ‘One Person Company (OPC)’ with his wife Roopali
as nominee. For the last two years, his wife Roopali is suffering from terminal illness
and due to this hard fact he wants to change her as nominee. He has a trusted and
experienced friend Ramnivas who could be made nominee or his (Rajesh) son
Rakshak who is of seventeen years of age. In the instant case, Rajesh can appoint
his friend Ramnivas as nominee in his OPC and not Rakshak because Rakshak is a
minor.

5. FORMATION OF COMPANIES WITH

CHARITABLE OBJECTS, ETC. [SECTION 8]
1. 5
Object of formation of Section 8 Company : Section 8 of the Companies
Act, 2013 deals with the formation of companies which are formed to promote the
charitable objects of commerce, art, science, sports, education, research, social

5
The power of Central Government to register a Section 8 company has been delegated to
ROC [S.O. 1353(E), dated 21st May, 2014]. Under the said notification, the Central Government
has delegated to the Registrar of Companies, the power and functions vested in it under the
said section of the said Act, subject to the condition that the Central Government may revoke
such delegation of powers or may itself exercise the powers and functions under the said
sections, if in its opinion, such a course of action is necessary in the public interest.

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 2.12 CORPORATE AND OTHER LAWS

welfare, religion, charity, protection of environment etc. Such company intends to

apply its profit in promoting its objects and prohibiting the payment of any
dividend to its members.

Not for Profit Company

Object to Profit Dividend

Promote (If any)
is not
Commerce Art distributed
is used in
Science Sports promotion
of its
objects only
Education Research

Social Charity
Welfare

Religion Protection of Environment

etc.

2. Power of Central government to issue the license: This section allows the
Central Government to register such person or association of persons as a
company with limited liability without the addition of words ‘Limited’ or
‘Private limited’ to its name, by issuing licence on such conditions as it deems
fit. The registrar shall on application register such person or association of
persons as a company under this section.
Where it is proved to the satisfaction of the Central Government 6 that a
limited company registered under this Act or under any previous company
law has been formed with any of the objects and with the restrictions and
prohibitions it may, by licence, allow the company to be registered under
section 8 subject to such conditions as the Central Government deems fit and
to change its name by omitting the word ―’Limited’, or as the case may be,
the words ―’Private Limited’ from its name and thereupon the Registrar shall,
on application, in the prescribed form, register such company under this
section and all the provisions of this section shall apply to that company.

6
Power of Central Government has been delegated to ROC [S.O. 1353(E), dated 21st May, 2014].

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 INCORPORATION OF COMPANY & MATTERS
INCIDENTAL THERETO 2.13

3. Privileges of limited Company: On registration, the company shall enjoy

same privileges and obligations as of a limited company.
4. A firm may be a member of the company registered under section 8.
5. Alteration of Memorandum and Articles: A company registered under this
section shall not alter the provisions of its memorandum or articles except
with the previous approval of the Central Government 7. 8
6. Conversion into any other kind of Company: A company registered under
this section may convert itself into company of any other kind only after
complying with such conditions as may be prescribed.
A company registered under section 8 which intends to convert itself into a
company of any other kind shall pass a special resolution at a general meeting
for approving such conversion.
7. Revocation of license
(i) The 9Central Government may by order revoke the licence of the company
where the company contravenes any of the requirements or the conditions
of this sections subject to which a licence is issued or where the affairs of
the company are conducted fraudulently, or in violation of the objects of
the company or prejudicial to public interest, and on revocation, the
Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s
name in the register. But before such revocation, the Central Government
must give it a written notice of its intention to revoke the licence and
opportunity to be heard in the matter.
(ii) 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.
However, no such order shall be made unless the company is given a
reasonable opportunity of being heard.
(iii) Where a licence is revoked and where the Central Government is
satisfied that it is essential in the public interest that the company
registered under this section should be amalgamated with another
company registered under this section and having similar objects, then,

7
Power delegated to Regional Director [S.O. 4090(E), dated 19th December, 2016]
8
Power has been delegated to ROC, except for alteration of memorandum in case of conversion
into another kind of company [S.O. 1353(E), dated 21st May, 2014.]
9
Power deleted to Regional Director [S.O. 4090(E), dated 19th December, 2016]

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 2.14 CORPORATE AND OTHER LAWS

notwithstanding anything to the contrary contained in this Act, the

Central Government may, by order, provide for such amalgamation to
form a single company with such constitution, properties, powers,
rights, interest, authorities and privileges and with such liabilities, duties
and obligations as may be specified in the order.
(iv) If on the winding up or dissolution of a company registered under this
section, there remains, after the satisfaction of its debts and liabilities,
any asset, they may be transferred to another company registered
under this section and having similar objects, subject to such conditions
as the Tribunal may impose, or may be sold and proceeds thereof
credited to the Insolvency and Bankruptcy Fund formed under section
224 of the Insolvency and Bankruptcy Code, 2016.
(v) A company registered under this section shall amalgamate only with
another company registered under this section and having similar
objects.
8. Penalty/ punishment in contravention: If a company makes any default in
complying with any of the requirements laid down in this section, the
company shall, be punishable with fine varying from ten lakh rupees to one
crore rupees and the directors and every officer of the company who is in
default shall be punishable with fine varying from twenty-five thousand
rupees to twenty-five lakh rupees 10.
And where it is proved that the affairs of the company were conducted
fraudulently, every officer in default shall be liable for action under section 447.

Contravention

Licence Revoke Punishment

Winding up.
Convert to Amalgamate Company:
Surplus transfer
Ltd./Pvt. Ltd. with similar co. 10L to 1Cr.
to:

Insolvency &
Similar co. Officer: 25k to 25L
Bankruptcy Fund
(Fraud u/s 447)

10
The Central Government has amended Section 8 of the Companies Act, 2013, through
the Companies (Amendment) Act, 2020. 9 S.O. 4646(E) dated 21st December, 2020) [w.e.f.
21st December, 2020]

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 INCORPORATION OF COMPANY & MATTERS
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9. Exceptions:
(i) Can call its general meeting by giving a clear 14 days notice instead of
21 days.
(ii) Requirement of minimum number of directors, independent directors
etc. does not apply.
(iii) Need not constitute Nomination and Remuneration Committee and
Shareholders Relationship Committee.

Formation
•To promote Charitable objects

Application of profits
•To promote its objectives
•No payment of dividends out of profits

Type of Co.
•Limited Liabilty
•Without the addition of words "Ltd." or "Pvt Ltd."

How status is granted

•The CG can grant such status
•However, CG has delegated the power to grant licence to ROC

Revocation of licence
•CG may revoke licence
•If conditions of section 8 are contravened, or
•affairs of the company are conducted fraudulently, or prejudicial to
public interest

Effect of revocation of licence

•Co. has to use words "Ltd." or "Pvt Ltd."

6. EFFECT OF REGISTRATION [SECTION 9]

Section 9 of the Companies Act, 2013 provides for the effect of registration of a
company.
According to section 9, from the date of incorporation (mentioned in the certificate
of incorporation), the subscribers to the memorandum and all other persons, who
may from time to time become members of the company, shall be a body corporate
by the name contained in the memorandum. Such a registered company shall be

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 2.16 CORPORATE AND OTHER LAWS

capable of exercising all the functions of an incorporated company under this Act
and having perpetual succession with power to acquire, hold and dispose of
property, both movable and immovable, tangible and intangible, to contract and
to sue and be sued, by the said name.
From the date of incorporation mentioned in the certificate, the company becomes
a legal person separate from the incorporators; and there comes into existence a
binding contract between the company and its members as evidenced by the
Memorandum and Articles of Association [Hari Nagar Sugar Mills Ltd. vs. S.S.
Jhunjhunwala]. It has perpetual existence until it is dissolved by liquidation or struck
out of the register. A shareholder who buys shares, does not buy any interest in the
property of the company but in certain cases a writ petition will be maintainable by
a company or its shareholders.
A legal personality emerges from the moment of registration of a company and
from that moment the persons subscribing to the MOA and other persons joining
as members are regarded as a body corporate or a corporation in aggregate and
the legal person begins to function as an entity. A company on registration acquires
a separate existence and the law recognizes it as a legal person separate and
distinct from its members [State Trading Corporation of India vs. Commercial Tax
Officer].
It may be noted that under the provisions of the Act, a company may purchase
shares of another company and thus become a controlling company. However,
merely because a company purchases all shares of another company, it will not
serve as a means of putting an end to the corporate character of another company
and each company is a separate juristic entity [Spencer & Co. Ltd. Madras vs. CWT
Madras].
As stated above, the law recognizes such a company as a juristic person separate
and distinct from its members. The mere fact that the entire share capital has been
contributed by the Central Government and all its shares are held by the President
of India and other officers of the Central Government does not make any difference
in the position of registered company and it does not make a company an agent
either of the President or the Central Government [Heavy Electrical Union vs. State
of Bihar].

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7. MEMORANDUM OF ASSOCIATION – MOA

[SECTION 4]
As per section 2(56) ― memorandum means the memorandum of association
(MOA) of a company as originally framed or as altered from time to time in
pursuance of any previous company law or of this Act;
It is the base document for the formation of the company and along with, the
Articles of Association (AOA) is regarded as the Constitution of the Company.
The MOA and AOA, similar to other company agreements and resolutions is subject
to the Companies Act, 2013 (Section 6) and the law of the land and therefore all its
contents need to be in compliance of the Companies Act, 2013 and other applicable
legislations.
Section 4 of the Companies Act, 2013 seeks to provide for the requirements with
respect to memorandum of a company.
I. Object of registering a memorandum of association:
♦ It contains the object for which the company is formed and therefore
identifies the possible scope of its operations beyond which its actions cannot
go.
♦ It enables shareholders, creditors and all those who deal with company to
know what its powers are and what activities it can engage in.
♦ A memorandum is a public document under Section 399 of the Companies
Act, 2013. Consequently, every person entering into a contract with the
company is presumed to have the knowledge of the conditions contained
therein.
♦ The shareholders must know the purposes for which his money can be used
by the company and what risks he is taking in making the investment.
A company cannot depart from the provisions contained in the memorandum
however imperative may be the necessity for the departure. It cannot enter into a
contract or engage in any trade or business, which is beyond the power confessed
on it by the memorandum. If it does so, it would be ultra vires the company and
void.

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 2.18 CORPORATE AND OTHER LAWS

II. The memorandum of a company shall state—

(a) In relation to the name clause- the name of the company with the last word
“Limited” in the case of a public limited company, or the last words “Private
Limited” in the case of a private limited company. 11
Exception: This clause is not applicable on the companies formed under
section 8 of the Act.
(b) In relation to the Registered Office Clause- the State in which the
registered office of the company is to be situated;
(c) In relation to the Object Clause- the objects for which the company is
proposed to be incorporated and any matter considered necessary in
furtherance thereof; 12
III. Liability / Capital Clause:
(a) This clause covers details on the liability of members of the company, whether
limited or unlimited, and also state—
 in the case of a company limited by shares, that the liability of its
members is limited to the amount unpaid, if any, on the shares held by
them; and
 in the case of a company limited by guarantee, the amount up to
which each member undertakes to contribute—
• to the assets of the company in the event of its being wound-up
while he is a member or within one year after he ceases to be a
member, for payment of the debts and liabilities of the company
or of such debts and liabilities as may have been contracted before
he ceases to be a member, as the case may be; and
• to the costs, charges and expenses of winding-up and
• for adjustment of the rights of the contributories among
themselves;

11
In case of Specified IFSC Public Company and IFSC Private Company, name shall have the
suffix, “International Financial Service company” or “IFSC” as a part of its name.
12
Specified IFSC Public Company & IFSC Private company shall state its objects to do financial
services activities as permitted under the Special Economic Zones Act, 2005 read with SEZ Rules,
2006 and any matter considered necessary in furtherance thereof in accordance with license to
operate, from International Financial Services Centre located in an approved multi services
Special Economic Zone, granted by the Reserve Bank of India or the Securities and Exchange
Board of India or the Insurance Regulatory and Development Authority of India.

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(b) in the case of a company having a share capital—

 the amount of share capital with which the company is to be registered
and the division thereof into shares of a fixed amount and the number
of shares which the subscribers to the memorandum agree to subscribe
which shall not be less than one share; and
 the number of shares each subscriber to the memorandum intends to
take, indicated opposite his name;
The clause, in the case of One Person Company, covers the name of the
person (nominee) who, in the event of death of the subscriber, shall become
the member of the company.
IV. Name Clause
Applying for the name of the company: The name stated in the memorandum
shall not—

(a) be identical with or resemble too nearly to the name of an existing company
registered under this Act or any previous company law; or

(b) be such that it’s use by the company—

 will constitute an offence under any law for the time being in force; or
 is undesirable in the opinion of the Central Government 13.
(c) Undesirable Names: A company shall not be registered with a name which
contains—
(i) any word or expression which is likely to give the impression that the
company is in any way connected with, or having the patronage of, the
Central Government, any State Government, or any local authority,
corporation or body constituted by the Central Government or any
State Government under any law for the time being in force; or
(ii) such word or expression, as may be prescribed, unless the previous
approval of the Central Government has been obtained for the use of
any such word or expression.
As per rule 8B of Companies (Incorporation) Rules, 2014, the following words
and combinations thereof shall not be used in the name of a company in
English or any of the languages depicting the same meaning unless the

Power of Central Government has been delegated to ROC [S.O. 1353(E), dated 21st May, 2014].
13

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previous approval of the Central Government has been obtained for the use
of any such word or expression-
 Board;
 Commission;
 Authority;
 Undertaking;
 National;
 Union;
 Central;
 Federal;
 Republic;
 President
 Rashtrapati;
 Small Scale Industries;
 Khadi and Village Industries Corporation;
 Financial Corporation and the like;
 Municipal;
 Panchayat;
 Development Authority;
 Prime Minister or Chief Minister;
 Minister;
 Nation;
 Forest corporation;
 Development Scheme;
 Statute or Statutory;
 Court or Judiciary;
 Governor;

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 the use of word Scheme with the name of Government (s), State, India,
Bharat or any Government authority or in any manner resembling with
the schemes launched by Central, State or local Governments and
authorities; and
 Bureau
If the proposed name include words such as ‘Insurance’, ‘Bank’, ‘Stock
Exchange’, ‘Venture Capital’, ‘Asset Management’, ‘Nidhi’, ‘Mutual fund’ etc.,
unless a declaration is submitted by the applicant that the requirements
mandated by the respective regulator, such as IRDA, RBI, SEBI, MCA etc. have
been complied with by the applicant;
(d) Reservation of name:
14

Applying for name: A person may make an application, in such form and
manner and accompanied by such fee, as may be prescribed, to the Registrar
for the reservation of a name set out in the application as—
(i) the name of the proposed company; or
(ii) the name to which the company proposes to change its name.
Reserving the name: Upon receipt of an application under sub-section (4),
the Registrar may, on the basis of information and documents furnished
along with the application, reserve the name for a period of twenty days from
the date of approval or such other period as may be prescribed.
Provided that in case of an application for reservation of name or for change
of its name by an existing company, the Registrar may reserve the name for
a period of sixty days from the date of approval.
Cancelling name: Where after reservation of name, it is found that name was
applied by furnishing wrong or incorrect information, then—

Rule 9: Reservation of name or change of name

14

An application for reservation of name shall be made through the web service available at
www.mca.gov.in by using web service SPICe+ (Simplified Proforma for Incorporating Company
Electronically Plus: INC-32), and for change of name by using web service RUN (Reserve Unique
Name) along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014,
which may either be approved or rejected, as the case may be, by the Registrar, Central
Registration Centre after allowing re-submission of such web form within fifteen days for
rectification of the defects, if any, with effect from the 23rd February, 2020. (Notification G.S.R.
128(E) dated 18th February, 2020)[w.e.f. 23rd February, 2020]

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(i) if the company has not been incorporated, the reserved name shall be
cancelled and the person who has made the application shall be liable
to a penalty which may extend to one lakh rupees;
(ii) if the company has been incorporated, the Registrar may, after giving
the company an opportunity of being heard—
(1) either direct the company to change its name within a period of
3 months, after passing an ordinary resolution;
(2) take action for striking off the name of the company from the
register of companies; or
(3) make a petition for winding up of the company.
Example 2: Mr. Anil Desai, has applied for reservation of company name with a
prefix “Sanwariya”. He claimed that the Prefix “Sanwariya” is registered trademark
in his name. Later on, it is found that the said prefix is not registered with Mr. Anil
Desai, however, he has formed company by giving incorrect documents/
information while applying the name of the company.
In such case, the Registrar shall take action as per the provisions of the act after
giving opportunity of being heard.
Circular: As per the General Circular No. 29/2014, dated 11th of July, 2014,
Government directed that while allotting names to Companies/Limited Liability
Partnerships, the Registrar of Companies concerned should exercise due care to
ensure that the names are not in contravention of the provisions of the Emblems
and Names (Prevention of Improper Use) Act, 1950. It is necessary that Registrars
are fully familiar with the provisions of the said Act.
Note: Rule 8–Names which resemble too nearly with name of existing company
and Rule 8A- Undesirable names of the Companies (Incorporation) Rules, 2014,
determines whether a proposed name is identical with another or other rules which
may be kept in mind while dealing with the Name clause of the MOA.
V. Domicile Clause
The name of federal state is mentioned where the registered office is to be situated.
Registered office is the permanent address of the company. It is residence of company.
VI. Objects Clause
Covers the objects for which the company is proposed to be incorporated and any
matter considered necessary in furtherance thereof.

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Doctrine of Ultra Vires

In the case of a company, whatever is not stated in the memorandum as the objects or
powers is prohibited by the doctrine of ultra vires. As a result, an act which is ultra vires
is void, and does not bind the company. Neither the company nor the contracting party
can sue on it. The company cannot make it valid, even if every member assents to it.
The general rule is that an act which is ultra vires the company is incapable of ratification.
An act which is intra vires the company but outside the authority of the directors may
be ratified by the company in proper form [Rajendra Nath Dutta v. Shilendra Nath
Mukherjee, (1982) 52 Com Cases 293 (Cal.)].
If the act is ultra vires (beyond the powers of) the directors only, the shareholders can
ratify it. If it is ultra vires the articles of association, the company can alter its articles in
the proper way.
The rule is meant to protect shareholders and the creditors of the company. The doctrine
of ultra vires was first enunciated by the House of Lords in a classic case, Ashbury Railway
Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653. The memorandum of the
company in the said case defined its objects thus: “The objects for which the company
is established are to make and sell, or lend or hire, railway plants to carry on the business
of mechanical engineers and general contractors…….”.
The company entered into a contract with M/s. Riche, a firm of railway contractors to
finance the construction of a railway line in Belgium. On subsequent repudiation of this
contract by the company on the ground of its being ultra vires, Riche brought a case for
damages on the ground of breach of contract, as according to him the words “general
contractors” in the objects clause gave power to the company to enter into such a
contract and, therefore, it was within the powers of the company. More so because the
contract was ratified by a majority of shareholders.
The House of Lords held that the contract was ultra vires the company and, therefore,
null and void. The term “general contractor” was interpreted to indicate as the making
generally of such contracts as are connected with the business of mechanical engineers.
The Court held that if every shareholder of the company had been in the room and had
said, “That is a contract which we desire to make, which we authorise the directors to
make”, still it would be ultra vires. The shareholders cannot ratify such a contract, as the
contract was ultra vires the objects clause, which by Act of Parliament, they were
prohibited from doing.
The purpose of doctrine of ultravires has been defeated as now the object clause can be
easily altered, by passing just a special resolution by the shareholders.

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VII. Subscription Clause:

According to section 7(1)(a) there shall be filed with the Registrar within whose
jurisdiction the registered office of a company is proposed to be situated, the
memorandum and articles of the company duly signed by all the subscribers to the
memorandum in such manner as may be prescribed in Rule 13 of the Companies
(Incorporation) Rules, 2014.
VIII. Forms and schedule related to Memorandum:
The memorandum of a company shall be in respective forms specified in Tables A,
B, C, D and E in Schedule I as may be applicable to such company.
The MOA and AOA shall be in respective forms as provided in Schedule I to the
Companies Act, 2013:
TABLE –A
• MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY SHARES
TABLE –B
• MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY GUARANTEE AND
NOT HAVING A SHARE CAPITAL
TABLE -C
• MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY GUARANTEE AND
HAVING A SHARE CAPITAL
TABLE -D
• MEMORANDUM OF ASSOCIATION OF AN UNLIMITED COMPANY AND NOT
HAVING SHARE CAPITAL
TABLE -E
• MEMORANDUM OF ASSOCIATION OF AN UNLIMITED COMPANY AND HAVING
SHARE CAPITAL
TABLE -F
• ARTICLES OF ASSOCIATION OF A COMPANY LIMITED BY SHARES
TABLE – G
• ARTICLES OF ASSOCIATION OF A COMPANY LIMITED BY GUARANTEE AND HAVING
A SHARE CAPITAL
TABLE - H
• ARTICLES OF ASSOCIATION OF A COMPANY LIMITED BY GUARANTEE AND NOT
HAVING SHARE CAPITAL
TABLE – I
• ARTICLES OF ASSOCIATION OF AN UNLIMITED COMPANY AND HAVING A SHARE
CAPITAL
TABLE - J
• ARTICLES OF ASSOCIATION OF AN UNLIMITED COMPANY AND NOT HAVING
SHARE CAPITAL

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IX. Any provision in the memorandum or articles, in the case of a company

limited by guarantee and not having a share capital, shall not give any person a
right to participate in the divisible profits of the company otherwise than as a
member. If the contrary is done, it shall be void.

8. ARTICLES OF ASSOCIATION – AOA [SECTION 5]

As per Section 2(5) ―articles means the articles of association of a company as
originally framed or as altered from time to time or applied in pursuance of any
previous company law or of this Act.
Actually, article of association of a company contains internal rules and regulations
of the company.
Section 5 of the Companies Act, 2013 seeks to provide the contents and model of
articles of association. The section lays the following law—
(1) Contains regulations: The articles of a company shall contain the regulations
for management of the company.
(2) Inclusion of matters: The articles shall also contain such matters, as are
prescribed under the rules. However, a company may also include such
additional matters in its articles as may be considered necessary for its
management.
(3) Entrenchment: Usually an article of association may be altered by passing
special resolution but entrenchment makes it more difficult to change it. So,
entrenchment means making something more protective.
Contain provisions for entrenchment: The articles may contain provisions
for entrenchment to the effect that specified provisions of the articles may be
altered only if conditions or procedures as that are more restrictive than those
applicable in the case of a special resolution, are met or complied with.
Manner of inclusion of the entrenchment provision: The provisions for
entrenchment shall only be made either on formation of a company, or by an
amendment in the articles agreed to by all the members of the company in
the case of a private company and by a special resolution in the case of a
public company.
Notice to the registrar of the entrenchment provision: Where the articles
contain provisions for entrenchment, whether made on formation or by
amendment, the company shall give notice to the Registrar of such provisions
in such form and manner as may be prescribed.

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 2.26 CORPORATE AND OTHER LAWS

At Formation Pvt. Co. : All members

Time of
Entrenchment
Later
Pub. Co. : Special Resolution

(4) Forms of articles: The articles of a company shall be in respective forms

specified in Tables, F, G, H, I and J in Schedule I as may be applicable to such
company.
(5) Model articles: A company may adopt all or any of the regulations contained
in the model articles applicable to such company.
(6) Company registered after the commencement of this Act: In case of any
company, which is registered after the commencement of this Act, in so far
as the registered articles of such company do not exclude or modify the
regulations contained in the model articles applicable to such company, those
regulations shall, so far as applicable, be the regulations of that company in
the same manner and to the extent as if they were contained in the duly
registered articles of the company.
(7) Section not apply on company registered under any previous company
law: Nothing in this section shall apply to the articles of a company registered
under any previous company law, unless amended under this Act.

Doctrine of Indoor Management

According to this doctrine, persons dealing with the company cannot be assumed
to have knowledge of internal problems of the company. He can simply assume
that all the required things were get done properly in the company.
Stakeholders need not enquire whether the necessary meeting was convened and
held properly or whether necessary resolution was passed properly. They are
entitled to take it for granted that the company had gone through all these
proceedings in a regular manner.
The doctrine helps protect external members from the company and states that the
people are entitled to presume that internal proceedings are as per documents
submitted with the Registrar of Companies.

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The doctrine of indoor management evolved around 150 years ago in the context
of the doctrine of constructive notice. The role of doctrine of indoor management
is opposed to the role of doctrine of constructive notice. Whereas the doctrine of
constructive notice protects a company against outsiders, the doctrine of indoor
management protects outsiders against the actions of a company. This doctrine
also is a possible safeguard against the possibility of abusing the doctrine of
constructive notice.
Basis for Doctrine of Indoor Management
1. What happens internal to a company is not a matter of public knowledge. An
outsider can only presume the intentions of a company, but not know the
information he/she is not privy to.
2. If not for the doctrine, the company could escape creditors by denying the
authority of officials to act on its behalf.
Exceptions to Doctrine of Indoor Management (Applicability of doctrine of
constructive notice)
Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of
irregularity within the company, the benefit under the rule of indoor management
would no longer be available. In fact, he/she may well be considered part of the
irregularity.
Negligence: If with a minimum of effort, the irregularities within a company could
be discovered, the benefit of the rule of indoor management would not apply. The
protection of the rule is also not available where the circumstances surrounding
the contract are so suspicious as to invite inquiry, and the outsider dealing with the
company does not make proper inquiry.
Forgery: The rule does not apply where a person relies upon a document that turns
out to be forged since nothing can validate forgery. A company can never be held
bound for forgeries committed by its officers.

9. ACT TO OVERRIDE MEMORANDUM,

ARTICLES, ETC. [SECTION 6]
According to section 6 of the Act,
‘Save as otherwise expressly provided in this Act—
(a) the provisions of this Act shall have effect notwithstanding anything to the
contrary contained in the memorandum or articles of a company, or in any

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agreement executed by it, or in any resolution passed by the company in

general meeting or by its Board of Directors, whether the same be registered,
executed or passed, as the case may be, before or after the commencement
of this Act; and
(b) any provision contained in the memorandum, articles, agreement or
resolution shall, to the extent to which it is repugnant (in conflict) to the
provisions of this Act, become or be void, as the case may be.’
In simple words, the provisions of this Act shall have overriding effect. But keep in mind
that this section starts with “Save as otherwise ….”. It means that if any other section of
the Act says that article is superior then we will treat it accordingly.
Example 4: Section 47 of the Act deals with voting power of members. And a
notification dated 5th June, 2015 says that section 47 is applicable to a private company
subject to its Article of Association (AOA). Now if AOA of a private company says that
section 47 is not applicable to it then, in this case AOA will become superior and
section 47 of the Act will not be applicable.

10. EFFECT OF MEMORANDUM AND ARTICLES

[SECTION 10]
(1) Subject to the provisions of this Act, the memorandum and articles shall,
when registered, bind the company and the members thereof to the same
extent as if they respectively had been signed by the company and by each
member, and contained covenants on its and his part to observe all the
provisions of the memorandum and of the articles.
It means that, on the basis of MOA and AOA:
(a) Company is liable to members
(b) Members are liable to company
(c) But normally members are not liable to each other
(2) All monies payable by any member to the company under the memorandum
or articles shall be a debt due from him to the company. [For example, a
company can recover calls in arrear from a member as forcefully as it is
recovering loan due.]

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11. ALTERATION OF MEMORANDUM [SECTION 13]

As per Section 2(3), alter or alteration includes the making of additions, omissions
and substitutions.
I. Procedure of alteration of memorandum: Section 13 of the Companies Act,
2013 provides the provisions that deals with the alteration of the
memorandum. The provision says that—
(1) Alteration by special resolution: Company may alter the provisions of its
memorandum with the approval of the members by a special resolution.
(2) Name change of the company: Any change in the name of a company shall
be effected only with the approval of the Central Government 15 in writing.
However, no such approval shall be necessary where the change in the name
of the company is only the addition/deletion of the word “Private”, on the
conversion of any one class of companies to another class in accordance with
the provisions of the Act.
According to the Companies (Incorporation) Rules, 2014:
The change of name shall not be allowed to a company which has not filed
annual returns or financial statements due for filing with the Registrar or
which has failed to pay or repay matured deposits or debentures or interest
thereon.
The change of name shall be allowed upon filing necessary documents or
payment or repayment of matured deposits or debentures or interest thereon
as the case may be.
(3) Entry in register of companies: On any change in the name of a company,
the Registrar shall enter the new name in the register of companies in place
of the old name and issue a fresh certificate of incorporation with the new
name and the change in the name shall be complete and effective only on
the issue of such a certificate.
(4) Change in the registered office: The alteration of the memorandum relating
to the place of the registered office from one State to another shall not have

15
Notification S.O. 1353(E), dated 21st May, 2014. In exercise of powers conferred by Section
458 of the Companies Act, 2013 the Central Government hereby delegates to the ROC the
power & functions vested in it under this section [i.e. section 13(2)] of the said Act, subject to
the condition that the Central Government may revoke such delegation of powers or may itself
exercise the powers & functions under the said sections, if in its opinion, such course of action
is necessary in the public interest.

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any effect unless it is approved by the Central Government 16 on an application

in such form and manner as may be prescribed.
(5) Dispose of the application of change of place of the registered office:
The 17Central Government shall dispose of the application of change of place
of the registered office within a period of 60 days.
Before passing of order, Central Government may satisfy itself that-
 the alteration has the consent of the creditors, debenture-holders and
other persons concerned with the company, or
 the sufficient provision has been made by the company either for the
due discharge of all its debts and obligations, or
 adequate security has been provided for such discharge.
(6) Filing with Registrar: A company shall, in relation to any alteration of its
memorandum, file with the Registrar—
 the special resolution passed by the company under sub-section (1);
 the approval of the Central Government under sub-section (2), if the
alteration involves any change in the name of the company.
(7) Filing of the certified copy of the order with the registrar of the states:
Where an alteration of the memorandum results in the transfer of the
registered office of a company from one State to another, a certified copy of
the order of the Central Government approving the alteration shall be filed
by the company with the Registrar of each of the States within such time and
in such manner as may be prescribed, who shall register the same.
(8) Issue of fresh certificate of incorporation: The Registrar of the State where the
registered office is being shifted to, shall issue a fresh certificate of incorporation
indicating the alteration.
(9) Change in the object of the company: A company, which has raised money
from public through prospectus and still has any unutilized amount out of the
money so raised, shall not change its objects for which it raised the money
through prospectus unless a special resolution through postal ballot is passed
by the company and—

16
Power deleted to Regional Director [S.O. 4090(E), dated 19th December, 2016]
17
Power deleted to Regional Director [S.O. 4090(E), dated 19th December, 2016]

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 the details, in respect of such resolution shall also be published in the

newspapers (one in English and one in vernacular language) which is in
circulation at the place where the registered office of the company is
situated and shall also be placed on the website of the company, if any,
indicating there in the justification for such change;
 the dissenting shareholders shall be given an opportunity to exit by the
promoters and shareholders having control in accordance with
regulations to be specified by the Securities and Exchange Board of
India.
(10) Registrar to certify the registration on the alteration of the objects: The
Registrar shall register any alteration of the memorandum with respect to the
objects of the company and certify the registration within a period of 30 days
from the date of filing of the special resolution.
(11) Alteration to be registered: No alteration made under this section shall have
any effect until it has been registered in accordance with the provisions of
this section.
(12) Only member have a right to participate in the divisible profits of the
company: Any alteration of the memorandum, in the case of a company
limited by guarantee and not having a share capital, intending to give any
person a right to participate in the divisible profits of the company otherwise
than as a member, shall be void.
II. Alteration noted in every copy: Every alteration made in the memorandum
or articles of a company shall be noted in every copy of the memorandum or
articles, as the case may be. If a company makes any default in complying with the
stated provisions, the company and every officer who is in default shall be liable to
a penalty of one thousand rupees for every copy of the memorandum or articles
issued without such alteration. [Section 15]
MOA Members’ External Outcome Applicability
clause Resolution approvals
Name Special Approval of New incorporation Not applicable
Clause Resolution Central certificate issued by ROC where only
Government word “Private”
and subject to is added or
Section 16 deleted on
company class
conversion

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Domicile Special Approval of The Central Government

Clause resolution Central shall dispose of the
Government application within a period of
required only sixty days and before passing
when its order may satisfy itself
registered that the consent of the
office is creditors, debenture-holders
changed from and other persons concerned
one state to or that the sufficient
another provision has been made for
the due discharge or that
adequate security has been
provided for discharge of
obligations.
Objects Special - A company, which has raised
Clause resolution money from public through
prospectus and still has any
unutilised amount out of the
money so raised, shall not
change its objects for which
it raised the money through
prospectus unless a special
resolution is passed by the
company and—
(i) the details, as may be
prescribed, in respect of such
resolution shall also be
published in the newspapers
(one in English and one in
vernacular language) which
is in circulation at the place
where the registered office of
the company is situated and
shall also be placed on the
website of the company, if
any, indicating therein the
justification for such change;
(ii) the dissenting
shareholders shall be given
an opportunity to exit by the
promoters and shareholders
having control in accordance

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with regulations to be
specified by the Securities
and Exchange Board.
Liability Special – Any alteration of the
/Capital resolution memorandum, in the case of
Clause a company limited by
guarantee and not having a
share capital, purporting to
give any person a right to
participate in the divisible
profits of the company
otherwise than as a member,
shall be void.

12. ALTERATION OF ARTICLES [SECTION 14]

I. Section 14 of the Companies Act, 2013, vests companies with power to alter
or add to its articles. A company cannot divest itself of these powers [Andrews vs.
Gas Meter Co. [1897] 1 Ch. 161]. Matters as to which the memorandum is silent can
be dealt with by the alteration of article. Section 14 of the Companies Act, 2013
vests companies with power to alter or add to its articles. The law with respect to
alteration of articles is as follows:
(1) Alteration by special resolution: Subject to the provisions of this Act and
the conditions contained in its memorandum, if any, a company may, by a special
resolution alter its articles.
(2) Alteration to include conversion of companies: Alteration of articles
include alterations having the effect of conversion of—
(a) a private company into a public company; or
(b) a public company into a private company.
Even where a company being a private company alters its articles in such a manner
that they no longer include the restrictions and limitations which are required to
be included in the articles of a private company under this Act, then such company
shall, as from the date of such alteration, cease to be a private company.
Provided further that any alteration having the effect of conversion of a public
company into a private company shall not be valid unless it is approved by an order
of the Central Government on an application made in such form and manner as
may be prescribed.

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 2.34 CORPORATE AND OTHER LAWS

Provided also that any application pending before the Tribunal, as on the date of
commencement of the Companies (Amendment) Ordinance, 2019, shall be
disposed of by the Tribunal in accordance with the provisions applicable to it before
such commencement.
(3) Filing of alteration with the registrar: Every alteration of the articles and a
copy of the order of the Central Government approving the alteration, shall be filed
with the Registrar, together with a printed copy of the altered articles, within a
period of fifteen days in such manner as may be prescribed, who shall register the
same.
(4) Any alteration made shall be valid: Any alteration of the articles registered
as above shall, subject to the provisions of this Act, be valid as if it were originally
contained in the articles.
II. Alteration noted in every copy: Every alteration made in articles of a
company shall be noted in every copy of the articles, as the case may be. If a
company makes any default in complying with the stated provisions, the company
and every officer who is in default shall be liable to a penalty of one thousand
rupees for every copy of the articles issued without such alteration. [Section 15]

13. COPIES OF MEMORANDUM, ARTICLES, ETC.,

TO BE GIVEN TO MEMBERS [SECTION 17]
According to section 17, every company on being so requested by a member, shall
send copies of the following documents within seven days of the request on the
payment of fees—
(a) the memorandum;
(b) the articles; and
(c) every agreement and every resolution referred in section 117 (Resolutions
and agreements to be filed), if and in so far as they have not been embodied
in the memorandum and articles.
In case of default, the company and every officer who is in default shall be liable
for each default, to a penalty of one thousand rupees for each day during which
such default continues or one lakh rupees, whichever is less.

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14. REGISTERED OFFICE OF COMPANY [SECTION 12]

A company is considered to be a separate legal entity from the members. Once a
company gets incorporated, it is required to maintain a registered office. This is a
physical office where the corporation will receive service of legal documents from
ROC or in case of a lawsuit, etc. This address cannot be a P.O. box but must be a
physical location where someone is present, to receive service of legal documents
during normal business hours. It could be different from a Head Office or Corporate
office.
Section 12 of the Companies Act, 2013 seeks to provide for the registered office of
the companies for the communication and serving of necessary documents,
notices, letters etc. The domicile and the nationality of a company is determined by
the place of its registered officer. This is also important for determining the
jurisdiction of the court.
(1) Registered office: A company shall, within thirty days of its incorporation
and at all times thereafter, have a registered office capable of receiving and
acknowledging all communications and notices as may be addressed to it. 18
(2) Verification of registered office: The company shall furnish to the Registrar
verification of its registered office within a period of thirty days of its
incorporation. 19
(3) Labeling of company: Every company shall—
 paint or affix its name, and the address of its registered office, and keep
the same painted or affixed, on the outside of every office or place in
which its business is carried on, in a conspicuous position, in legible
letters, and if the characters employed are not those of the language/s
in general use in that locality, then also in the characters of that
language/s.
 have its name engraved in legible characters on its seal, if any;
 get its name, address of its registered office and the Corporate Identity
Number along with telephone number, fax number, if any, e-mail and

18
With the respected specified IFSC public & IFSC private companies, they shall have its
registered office at the IFSC located in the approved multiservice SEZ set up under the SEZ
Act, 2005 read with SEZ Rules, 2006.
19
In case of specified IFSC public & IFSC private company word “thirty days” will be read as
“sixty days”.

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website addresses, if any, printed in all its business letters, billheads,

letter papers and in all its notices and other official publications; and
 have its name printed on hundies, promissory notes, bills of exchange
and such other documents as may be prescribed:
(4) Name change by the company: Where a company has changed its name/s
during the last two years, it shall paint or affix or print, along with its name,
the former name or names so changed during the last two years.
(5) In case of OPC: The words ‘‘One Person Company’’ shall be mentioned in
brackets below the name of such company, wherever its name is printed,
affixed or engraved.
(6) Notice of change to registrar: Notice of every change of the situation of the
registered office, verified in the manner prescribed, after the date of
incorporation of the company, shall be given to the Registrar within 30 days
of the change, who shall record the same. 20
(7) Change by passing of special resolution: The registered office of the
company shall be changed only by passing of special resolution by a
company, outside the local limits of any city, town or village where such office
is situated or where it may be situated later by virtue of a special resolution
passed by the company.
(8) Change of registered office outside the jurisdiction of registrar: Where a
company changes the place of its registered office from the jurisdiction of
one Registrar to the jurisdiction of another Registrar within the same State,
there such change is to be confirmed by the Regional Director on an
application made by the company.
(9) Communication and filing of confirmation: The confirmation of change of
registered office from jurisdiction of one registrar to another registrar within
the same state, shall be–
 communicated within 30 days from the date of receipt of application by
the Regional Director to the company, and
 the company shall file the confirmation with the Registrar within a
period of 60 days of the date of confirmation who shall register the
same, and

20
In the case of specified IFSC public & IFSC private companies for the word “30 days” read as
“60 days”.

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 certify the registration within a period of thirty days from the date of
filing of such confirmation.

Change in Place of
Registered office

Within a From One State to

Within a state Within a State Another
city (from one (From one ROC (Change in Place
city to to another) Clause
another) Section 13(4),(5),(6)

Board Resolution Special Resolution Special Resolution Special resolution

Permission of
Notice to ROC Notice to ROC Regional Approval of
(30 days) (30 days) Director Central
Government

30/60/30
RD/Co./ROC 60/30
CG/CO.
Conclusive Fresh Certificate of
Evidence Incorporation

(10) Certificate, a conclusive evidence of compliance of requirements of this

Act: The certificate shall be conclusive evidence that all the requirements of
this Act with respect to change of registered office have been complied with
and the change shall take effect from the date of the certificate.
(11) In case of default: If any default is made in complying with the requirements
of this section, the company and every officer who is in default shall be liable
to a penalty of one thousand rupees for every day during which the default
continues but not exceeding one lakh rupees. [Sub- section (8)]
(12) If the Registrar has reasonable cause to believe that the company is not
carrying on any business or operations, he may cause a physical verification
of the registered office of the company in such manner as may be prescribed
and if any default is found to be made in complying with the requirements of
sub-section (1), he may without prejudice to the provisions of sub-section (8),
initiate action for the removal of the name of the company from the register
of companies under Chapter XVIII.

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15. COMMENCEMENT OF BUSINESS ETC.

[SECTION 10A]
(1) A company incorporated after the commencement of the Companies
(Amendment) Ordinance, 2019 and having a share capital shall not commence any
business or exercise any borrowing powers unless—
(a) a declaration is filed by a director within a period of 180 days of the date of
incorporation of the company in such form and verified in such manner as
may be prescribed, with the Registrar that every subscriber to the
memorandum has paid the value of the shares agreed to be taken by him on
the date of making of such declaration; and
(b) The company has filed with the Registrar a verification of its registered office
as provided in sub-section (2) of section 12.
(2) If any default is made in complying with the requirements of this section, the
company shall be liable to a penalty of fifty thousand rupees and every officer who
is in default shall be liable to a penalty of one thousand rupees for each day during
which such default continues but not exceeding an amount of one lakh rupees.
(3) Where no declaration has been filed with the Registrar under clause (a) of
sub-section (1) within a period of one hundred and eighty days of the date of
incorporation of the company and the Registrar has reasonable cause to believe
that the company is not carrying on any business or operations, he may, without
prejudice to the provisions of sub-section (2), initiate action for the removal of the
name of the company from the register of companies under Chapter XVIII.
As per Rule 23A [Declaration at the time of commencement of business] of the
Companies (Incorporation) Rules, 2014, the declaration under section 10A by a
director shall be in prescribed form with prescribed fees and the contents of the
said form shall be verified by a Company Secretary or a Chartered Accountant or a
Cost Accountant, in practice.
In the case of a company pursuing objects requiring registration or approval from
any sectoral regulators such as the Reserve Bank of India, Securities and Exchange
Board of India, etc., the registration or approval, as the case may be from such
regulator shall also be obtained and attached with the declaration.

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16. RECTIFICATION OF NAME OF COMPANY

[SECTION 16]
According to Section 16
(1) If, through inadvertence or otherwise, a company on its first registration or
on its registration by a new name, is registered by a name which, —
(a) in the opinion of the Central Government 21, is identical with or too nearly
resembles the name by which a company in existence had been previously
registered, whether under this Act or any previous company law, it may direct
the company to change its name and the company shall change its name or
new name, as the case may be, within a period of three months from the issue
of such direction, after adopting an ordinary resolution for the purpose;
(b) on an application by a registered proprietor of a trade mark that the name is
identical with or too nearly resembles to a registered trade mark of such
proprietor under the Trade Marks Act, 1999, made to the 22Central
Government within 3 years of incorporation or registration or change of name
of the company, whether under this Act or any previous company law, in the
opinion of the 23Central Government, is identical with or too nearly resembles
to an existing trade mark, it may direct the company to change its name and
the company shall change its name or new name, as the case may be, within
a period of 6 months from the issue of such direction, after adopting an
ordinary resolution for the purpose.
(2) Where a company changes its name or obtains a new name under sub-section
(1), it shall within a period of 15 days from the date of such change, give
notice of the change to the Registrar along with the order of the 24Central
Government, who shall carry out necessary changes in the certificate of
incorporation and the memorandum.
(3) If a company makes default in complying with any direction—

Liable person Penalty/punishment

Company Fine of 1,000 rupees for every
day during which the default continues

21
Power delegated to Regional Director [S.O. 4090(E), dated 19th December, 2016]
22
Power delegated to Regional Director [S.O. 4090(E), dated 19th December, 2016]
23
Power delegated to Regional Director [S.O. 4090(E), dated 19th December, 2016]
24
Power delegated to Regional Director [S.O. 4090(E), dated 19th December, 2016]

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Every Officer who is in Fine varying from 5,000 rupees to 1 lakh rupees.
default

17. CONVERSION OF COMPANIES ALREADY

REGISTERED [SECTION 18]
According to Section 18 of the Companies Act, 2013, a company may convert itself
in some other class of company by altering its memorandum and articles of
association. Following is the law with respect to the conversion of the companies
already registered.
1. By alteration of memorandum and articles: A company of any class
registered under this Act may convert itself as a company of other class under this
Act by alteration of memorandum and articles of the company in accordance with
the provisions of this Chapter.
2. File an application to the Registrar: Wherever such conversion of
companies is required to be done, the company shall file an application to the
Registrar, who shall after satisfying himself that the provisions applicable for
registration of companies have been complied with, close the former registration
of the company.
3. Issue a certificate of incorporation: After registering the required documents,
issue a certificate of incorporation in the same manner as its first registration.
4. No effect on the debts, liabilities etc. incurred before conversion: The
registration of a company under this section shall not affect any debts, liabilities,
obligations or contracts incurred or entered into, by or on behalf of the company
before conversion and such debts, liabilities, obligations and contracts may be
enforced in the manner as if such registration had not been done.

18. SUBSIDIARY COMPANY NOT TO HOLD

SHARES IN ITS HOLDING COMPANY
[SECTION 19]
As per Section 19 of the Companies Act, 2013,
(1) No company shall, either by itself or through its nominees, hold any shares in
its holding company and no holding company shall allot or transfer its shares to
any of its subsidiary companies and any such allotment or transfer of shares of a
company to its subsidiary company shall be void.

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Provided that nothing in this sub-section shall apply to a case—

(a) where the subsidiary company holds such shares as the legal representative
of a deceased member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) where the subsidiary company is a shareholder even before it became a
subsidiary company of the holding company:
However, the subsidiary company referred to in the preceding proviso shall have a
right to vote at a meeting of the holding company only in respect of the shares
held by it as a legal representative or as a trustee, as referred to in clause (a) or
clause (b) of the said proviso.
(2) The reference in this section to the shares of a holding company which is a
company limited by guarantee or an unlimited company, not having a share capital,
shall be construed as a reference to the interest of its members, whatever be the
form of interest.
Example 5: RPIP Ltd. has invested 51% in the shares of SSP Pvt. Ltd. on 31st March
2019. SSP Pvt. Ltd. have been holding 2% equity of RPIP Ltd. since 2013. SSP Pvt.
Ltd. cannot increase its equity beyond that 2% on or after 31st March 2019.
However, it could continue to hold or reduce its initial 2% stake.

19. SERVICE OF DOCUMENTS [SECTION 20]

Section 20 of the Companies Act, 2013, provides the mode in which documents
may be served on the company, on the members and also on the registrars.
Law with respect to the service of documents is as follows—
(1) Serving of document to company: A document may be served on a
company or an officer thereof by sending it to the company or the officer at
the registered office of the company by-
 registered post, or
 speed post, or
 courier service, or
 leaving it at its registered office, or
 means of such electronic or other mode as may be prescribed.

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However, where securities are held with a depository, the records of the
beneficial ownership may be served by such depository on the company by
means of electronic or other mode.
(2) Serving of document to registrar or member: Save as provided in this
Act or the rules made thereunder for filing of documents with the Registrar
in electronic mode, a document may be served on Registrar or any member
by sending it to him by—
 Post, or
 registered post, or
 speed post, or
 courier, or
 by delivering at his office or address, or
 by such electronic or other mode as may be prescribed.
However, a member may request for delivery of any document through a
particular mode, for which he shall pay such fees as may be determined by
the company in its annual general meeting.
Explanation—For the purposes of this section, the term “courier” means a
person or agency which delivers the document and provides proof of its
delivery.
Exemption-Section 20 (2) shall apply to a Nidhi Company, subject to the
modification that in the case of a Nidhi, the document may be served only on
members who hold shares of more than ` 1,000 in face value or more than
1% of the total paid-up share capital of the Nidhis whichever is less.
For other shareholders, document may be served by a public notice in
newspaper circulated in the district where the Registered Office of the Nidhi
is situated; and publication of the same on the notice board of the Nidhi.
[Notification dated 5th June, 2015.]
As per the Rule 35 (Service of Documents) of Companies (Incorporation) Rules,
2014,
1. The term “electronic transmission” means a communication that creates
a record that is capable of retention, retrieval (recovery) and review, and
which may thereafter be rendered into clearly legible tangible form. It
may be made by—

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• facsimile telecommunication (fax) or electronic mail (email), which

the company or the officer has provided from time to time for
sending communications,
• posting of an electronic message board or network that the
Registrar or the member has designated for those
communications, and which transmission shall be validly delivered
upon the posting, or
• other means of electronic communication, in respect of which the
company or the officer has put in place reasonable systems to
verify that the sender is the person purporting to send the
transmission.
2. In case of delivery by post, such service shall be deemed to have been
effected—
(i) in the case of a notice of a meeting, at the expiration of 48 hours
after the letter containing the same is posted; and
(ii) in any other case, at the time at which the letter would be
delivered in the ordinary course of post.

20. AUTHENTICATION OF DOCUMENTS,

PROCEEDINGS AND CONTRACTS [SECTION 21]
As per section 21 of the Companies Act, 2013, a document or proceeding requiring
authentication by a company or contracts made by or on behalf of a company may
be signed by–
(i) any key managerial personnel, or

(ii) an officer or employee of the company duly authorized by the Board in this
behalf. 25

In the case of specified IFSC public company and IFSC private company, for the word “An
25

officer” read as “An officer or any other person”.

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As per Sec. 2(51) ―Key managerial

personnel, in relation to a company, means—
Authentication of (i) the CEO or the MD or the manager;
documents, proceedings
(ii) the company secretary;
and contracts
(iii) the whole-time director;
(iv) the CFO;
As per Sec. 21 these may be
signed by any "key (v) such other officer, not more than one
managerial personnel" or an level below the directors who is in
officer or employee of the whole-time employment, designated
company duly authorised by as key managerial personnel by the
the Board in this behalf. Board; and
(vi) such other officer as may be
prescribed;

21. EXECUTION OF BILLS OF EXCHANGE, ETC.

[SECTION 22]
(1) A bill of exchange, hundi or promissory note shall be deemed to have been
made, accepted, drawn or endorsed on behalf of a company if made,
accepted, drawn, or endorsed in the name of, or on behalf of or on account
of, the company by any person acting under its authority, express or implied.
(2) A company may, by writing under its common seal, if any, authorize any
person, either generally or in respect of any specified matters, as its attorney
to execute other deeds on its behalf in any place either in or outside India.
However, in case a company does not have a common seal, the above
authorization shall be made by 2 directors or by a director and the Company
Secretary, wherever the company has appointed a Company Secretary.
(3) A deed signed by such an attorney on behalf of the company and under his
seal shall bind the company.

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Co. having
common seal

Yes No

*In writing authorise any person

(generally or in respect of any Authorisation shall
specified matters) as attorney be made by:

Where the Co. has

In India, or 2 directors, or a Company
Secretary

A director +
outside India. Company
Secretary

*It can be observed from above that a company may or may not have a common
seal. If company decides to have a common seal then it has to affix the same for
specified matters, execution of deeds on behalf of the company.

SUMMARY
♦ A company can be defined as an “artificial person”, invisible, intangible,
created by or under law, with a distinct legal personality and perpetual
succession. It is not affected by the death, insanity, or insolvency of an
individual member.
♦ The memorandum of association (MOA) is the document that sets up the
company and the articles of association (AOA) set out how the company is
run, governed and owned.
♦ Once an association becomes incorporated it acquires a new legal status – it
becomes a legal entity in its own right, separate from the individual members.
♦ A company of any class may convert itself as a company of other class by
alteration of its MOA and AOA.

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TEST YOUR KNOWLEDGE

Question 1
XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For better
administrative conveniences the company wants to shift its registered office from
Mumbai to Pune (within the State of Maharashtra, but from Mumbai ROC to Pune
ROC). What formalities the company has to comply with under the provisions of the
Companies Act, 2013 for shifting its registered office as stated above? Explain.
Answer
The Companies Act, 2013 under section 13 provides for the process of altering the
Memorandum of a company. Since the location or Registered Office clause in the
Memorandum only names the state in which its registered office is situated, a change
in address from Mumbai to Pune, does not result in the alteration of the Memorandum
and hence the provisions of section 13 (and its sub sections) do not apply in this case.
However, under section 12 (5) of the Act which deals with the registered office of
company, the change in registered office from one town or city to another in the
same state, must be approved by a special resolution of the company. Further,
registered office is shifted from one ROC to another, therefore company will have
to seek approval of Regional director.
Question 2
The persons (not being members) dealing with the company are always protected by
the doctrine of indoor management. Explain. Also, explain when doctrine of
Constructive Notice will apply.
Answer
Doctrine of Indoor Management
According to this doctrine, persons dealing with the company need not inquire
whether internal proceedings relating to the contract are followed correctly, once
they are satisfied that the transaction is in accordance with the memorandum and
articles of association.
Stakeholders need not enquire whether the necessary meeting was convened and
held properly or whether necessary resolution was passed properly. They are
entitled to take it for granted that the company had gone through all these
proceedings in a regular manner.

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The doctrine helps to protect external members from the company and states that
the people are entitled to presume that internal proceedings are as per documents
submitted with the Registrar of Companies.
The doctrine of indoor management is opposite to the doctrine of constructive
notice. Whereas the doctrine of constructive notice protects a company against
outsiders, the doctrine of indoor management protects outsiders against the
actions of a company. This doctrine also is a safeguard against the possibility of
abusing the doctrine of constructive notice.
Exceptions to Doctrine of Indoor Management (Applicability of doctrine of
constructive notice)
(i) Knowledge of irregularity: In case an ‘outsider’ has actual knowledge of
irregularity within the company, the benefit under the rule of indoor
management would no longer be available. In fact, he/she may well be
considered part of the irregularity.
(ii) Negligence: If with a minimum of effort, the irregularities within a company
could be discovered, the benefit of the rule of indoor management would not
apply. The protection of the rule is also not available where the circumstances
surrounding the contract are so suspicious as to invite inquiry, and the
outsider dealing with the company does not make proper inquiry.
(iii) Forgery: The rule does not apply where a person relies upon a document that
turns out to be forged since nothing can validate forgery. A company can
never be held bound for forgeries committed by its officers.
Question 3
Alfa school started imparting education on 1st April, 2010, with the sole objective of
providing education to children of weaker society either free of cost or at a very
nominal fee depending upon the financial condition of their parents. However, on
30th March 2020, it came to the knowledge of the Central Government that the said
school was operating by violating the objects of its objective clause due to which it
was granted the status of a section 8 company under the Companies Act, 2013.
Describe what powers can be exercised by the Central Government against the Alfa
School, in such a case?
Answer
Section 8 of the Companies Act, 2013 deals with the formation of companies which
are formed to promote the charitable objects of commerce, art, science, education,
sports etc. Such company intends to apply its profit in promoting its objects.

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Section 8 companies are registered by the Registrar only when a license is issued
by the Central Government to them. Since, Alfa School was a Section 8 company
and it had started violating the objects of its objective clause, hence in such a
situation the following powers can be exercised by the Central Government:
(i) The Central Government may by order revoke the licence of the company
where the company contravenes any of the requirements or the conditions of
this sections subject to which a licence is issued or where the affairs of the
company are conducted fraudulently, or violative of the objects of the
company or prejudicial to public interest, and on revocation the Registrar
shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the
register. But before such revocation, the Central Government must give it a
written notice of its intention to revoke the licence and opportunity to be
heard in the matter.
(ii) 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.
However, no such order shall be made unless the company is given a
reasonable opportunity of being heard.
(iii) Where a licence is revoked and where the Central Government is satisfied that
it is essential in the public interest that the company registered under this
section should be amalgamated with another company registered under this
section and having similar objects, then, notwithstanding anything to the
contrary contained in this Act, the Central Government may, by order, provide
for such amalgamation to form a single company with such constitution,
properties, powers, rights, interest, authorities and privileges and with such
liabilities, duties and obligations as may be specified in the order.
Question 4
The object clause of the Memorandum of Vivek Industries Limited., empowers it to
carry on real-estate business and any other business that is allied to it. Due to a
downward trend in real-estate business, the management of the company has
decided to take up the business of Food processing activity. The company wants to
alter its Memorandum, so as to include the Food Processing Business in its objects
clause. Examine whether the company can make such change as per the provisions
of the Companies Act, 2013?

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Answer
Alteration of Objects Clause of Memorandum
The Companies Act, 2013 has made alteration of the memorandum simpler and
more flexible. Under section 13(1) of the Act, a company may, by a special
resolution after complying with the procedure specified in this section, alter the
provisions of its Memorandum.
In the case of alteration to the objects clause, section 13(6) requires the filing of
the Special Resolution by the company with the Registrar. Section 13 (9) states that
the Registrar shall register any alteration to the Memorandum with respect to the
objects of the company and certify the registration within a period of thirty days
from the date of filing of the special resolution by the company. Section 13 (10)
further stipulates that no alteration in the Memorandum shall take effect unless it
has been registered with the Registrar as above.
Hence, the Companies Act, 2013 permits any alteration to the objects clause with
ease. Vivek Industries Limited can make the required changes in the object clause
of its Memorandum of Association.
Question 5
Explain in the light of the provisions of the Companies Act, 2013, the circumstances
under which a subsidiary company can become a member of its holding company.
Answer
In accordance with the provisions of Section 19 of the Companies Act, 2013, a
subsidiary company cannot either by itself or through its nominees hold any shares
in its holding company and no holding company shall allot or transfer its shares to
any subsidiary companies. Any such allotment or transfer of shares in a company
to its subsidiary is void. The section however does not apply where:
(1) the subsidiary company holds shares in its holding company as the legal
representative of a deceased member of the holding company,
(2) the subsidiary company holds such shares as a trustee, or
(3) the subsidiary company was a shareholder in the holding company even
before it became its subsidiary.
Question 6
Explain the provisions of the Companies Act, 2013 relating to the ‘Service of
Documents’ on a company and the members of the company.

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Answer
Under section 20 of the Companies Act, 2013 a document may be served on a
company or an officer thereof by sending it to the company or the officer at the
registered office of the company by registered post or by speed post or by courier
service or by leaving it at its registered office or by means of such electronic or
other mode as may be prescribed. However, in case where securities are held with
a depository, the records of the beneficial ownership may be served by such
depository on the company by means of electronic or other mode.
Under section 20 (2), save as provided in the Act or the rule thereunder for filing of
documents with the registrar in electronic mode, a document may be served on
Registrar or any member by sending it to him by post or by registered post or by
speed post or by courier or by delivering at his office or address, or by such
electronic or other mode as may be prescribed. However, a member may request
for delivery of any document through a particular mode, for which he shall pay such
fees as may be determined by the company in its annual general meeting.
Question 7
Yadav dairy products Private limited has registered its articles along with memorandum
at the time of registration of company in December, 2019. Now directors of the company
are of the view that provisions of articles regarding forfeiture of shares should not be
changed except by a resolution of 90% majority. While as per section 14 of the
Companies Act, 2013 articles may be changed by passing a special resolution only. One
of the directors said that they cannot make a provision against the Companies Act. You
are required to advise the company on this matter.
Answer
As per section 5 of the Companies Act, 2013 the article may contain provisions for
entrenchment to the effect that specified provisions of the articles may be altered
only if more restrictive conditions than a special resolution, are met.
The provisions for entrenchment shall only be made either on formation of a
company, or by an amendment in the articles agreed to by all the members of the
company in the case of a private company and by a special resolution in the case
of a public company.
Where the articles contain provisions for entrenchment, whether made on
formation or by amendment, the company shall give notice to the Registrar of such
provisions in prescribed manner.

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 INCORPORATION OF COMPANY & MATTERS
INCIDENTAL THERETO 2.51

In the present case, Yadav dairy products Private Limited is a private company and
wants to protect provisions of articles regarding forfeiture of shares. It means it
wants to make entrenchment of articles, which is allowed. But the company will
have to pass a resolution taking permission of all the members and it should also
give notice to ROC regarding entrenchment of articles.
Question 8
Anushka security equipments limited is a manufacturer of CCTV cameras. It has raised
` 100 crores through public issue of its equity shares for starting one more unit of CCTV
camera manufacturing. It has utilized 10 crores rupees and then it realized that its
existing business has no potential for expansion because government has reduced
customs duty on import of CCTV camera hence imported cameras from China are
cheaper than its own manufacturing. Now it wants to utilize remaining amount in mobile
app development business by adding a new object in its memorandum of association.
Does the Companies Act allow such change of object? If not, then what advise will
you give to company. If yes, then give steps to be followed.
Answer
According to section 13 of the Companies Act, 2013 a company, which has raised
money from public through prospectus and still has any unutilised amount out of
the money so raised, shall not change its objects for which it raised the money
through prospectus unless a special resolution is passed by the company and—
(i) the details in respect of such resolution shall also be published in the
newspapers (one in English and one in vernacular language) which is in
circulation at the place where the registered office of the company is situated
and shall also be placed on the website of the company, if any, indicating
therein the justification for such change;
(ii) the dissenting shareholders shall be given an opportunity to exit by the promoters
and shareholders having control in accordance with SEBI regulations.
Company will have to file copy of special resolution with ROC and he will certify the
registration within a period of thirty days. Alteration will be effective only after this
certificate by ROC.
Looking at the above provision we can say that company can add the object of
mobile app development in its memorandum and divert public money into that
business. But for that it will have to comply with above requirements.

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Question 9
Manglu and friends got registered a company in the name of Taxmann advisory
private limited. Taxmann is a registered trademark. After 5 years when the owner of
trademark came to know about the same, it filed an application with relevant
authority. Can the company be compelled to change its name by the owner of
trademark? Can the owner of registered trademark request the company and then
company changes its name at its discretion?
Answer
According to section 16 of the Companies Act, 2013 if a company is registered by
a name which,—
♦ in the opinion of the Central Government, is identical with the name by which
a company had been previously registered, it may direct the company to
change its name. Then the company shall by passing an ordinary resolution
change its name within 3 months.
♦ is identical with a registered trade mark and owner of that trade mark apply to the
Central Government within three years of incorporation of registration of the
company, it may direct the company to change its name. Then the company shall
change its name by passing an ordinary resolution within 6 months.
Company shall give notice to ROC along with the order of Central Government
within 15 days of change. In case of default company and defaulting officer are
punishable.
In the given case, owner of registered trade- mark is filing objection after 5 years of
registration of company with a wrong name. While it should have filed the same
within 3 years. Therefore, the company cannot be compelled to change its name.
As per section 13, company can anytime change its name by passing a special
resolution and taking approval of Central Government. Therefore, if owner of
registered trademark request the company for change of its name and the company
accepts the same then it can change its name voluntarily by following the
provisions of section 13.
Question 10
Shri Laxmi Electricals Ltd. (S) is a company in which Hanuman power suppliers
Limited (H) is holding 60% of its paid up share capital. One of the shareholder of H
made a charitable trust and donated his 10% shares in H and ` 50 crores to the trust.
He appoint S as the trustee. All the assets of the trust are held in the name of S. Can
a subsidiary hold shares in its holding company in this way?

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 INCORPORATION OF COMPANY & MATTERS
INCIDENTAL THERETO 2.53

Answer
According to section 19 of the Companies Act, 2013 a company shall not hold any shares
in its holding company either by itself or through its nominees. Also, holding company
shall not allot or transfer its shares to any of its subsidiary companies and any such
allotment or transfer of shares of a company to its subsidiary company shall be void.
Following are the exceptions to the above rule—
(a) where the subsidiary company holds such shares as the legal representative
of a deceased member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
where the subsidiary company is a shareholder even before it became a subsidiary
company of the holding company but in this case, it will not have a right to vote in
the meeting of holding company.
In the given case, one of the shareholders of holding company has transferred his
shares in the holding company to a trust where the shares will be held by subsidiary
company. It means now subsidiary will hold shares in the holding company. But it
will hold shares in the capacity of a trustee. Therefore, we can conclude that in the
given situation S can hold shares in H.
Question 11
Parag Constructions Limited is a leading infrastructure company. One of the directors of the
company Mr. Parag has been signing all construction contracts on behalf of company for
many years. All the parties who ever deal with the company know Mr. Parag very well.
Company has got a very important construction contract from a renowned software
company. Parag constructions will do construction for this site in partnership with a local
contractor Firozbhai. Mr. Parag signed partnership deed with Firozbhai on behalf of company
because he has an implied authority. Later in a dispute company denied to accept liability
as a partner. Can the company deny its liability as a partner?
Answer
As per section 22 of the Companies Act, 2013 a company may authorise any person
as its attorney to execute deeds on its behalf in any place either in or outside India.
But common seal should be affixed on his authority letter or the authority letter
should be signed by two directors of the company or it should be signed by one
director and secretary. This authority may be either general for any deeds or it may
be for any specific deed.
A deed signed by such an attorney on behalf of the company and under his seal
shall bind the company as if it were made under its common seal.

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 2.54 CORPORATE AND OTHER LAWS

In the present case company has not neither given any written authority not affixed
common seal of the authority letter. It means that Mr. Parag is not legally entitled
to execute deeds on behalf of the company. Therefore, deeds executed by him are
not binding on the company. Therefore, company can deny its liability as a partner.
Question 12
Ashok, a director of Gama Electricals Ltd. gave in writing to the company that the
notice for any general meeting and of the Board of Directors' meeting be sent to him
only by registered post at his residential address at Kanpur for which he deposited
sufficient money. The company sent notice to him by ordinary mail under certificate
of posting. Ashok did not receive this notice and could not attend the meeting and
contended that the notice was improper.
Decide:
(i) Whether the contention of Ashok is valid.
(ii) Will your answer be the same if Ashok remains in U.S.A. for one month during
the notice of the meeting and the meeting held?
Answer
According to section 20(2) of the Companies Act, 2013, a document may be served
on Registrar or any member by sending it to him by post or by registered post or
by speed post or by courier or by delivering at his office or address, or by such
electronic or other mode as may be prescribed.
Provided that a member may request for delivery of any document through a
particular mode, for which he shall pay such fees as may be determined by the
company in its annual general meeting.
Thus, if a member wants the notice to be served on him only by registered post at
his residential address at Kanpur for which he has deposited sufficient money, the
notice must be served accordingly, otherwise service will not be deemed to have
been effected.
Accordingly, the questions as asked may be answered as under:
(i) The contention of Ashok shall be tenable, for the reason that the notice was
not properly served.
(ii) In the given circumstances, the company is bound to serve a valid notice to
Ashok by registered post at his residential address at Kanpur and not outside
India.

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 INCORPORATION OF COMPANY & MATTERS
INCIDENTAL THERETO 2.55

Question 13
A group of individuals intend to form a club namely 'Budding Pilots Flying Club' as
limited liability company to impart class room teaching and aircraft flight training to
trainee pilots. It was decided to form a limited liability company for charitable
purpose under Section 8 of the Companies Act, 2013 for a period of ten years and
thereafter the club will be dissolved and the surplus of assets over the liabilities, if
any, will be distributed amongst the members as a usual procedure allowed under
the Companies Act.
Examine the feasibility of the proposal and advise the promoters considering the
provisions of the Companies Act, 2013.
Answers
According to section 8(1) of the Companies Act, 2013, where it is proved to the
satisfaction of the Central Government that a person or an association of persons
proposed to be registered under this Act as a limited company—
(a) 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) intends to apply its profits, if any, or other income in promoting its objects;
and
(c) intends to prohibit the payment of any dividend to its members;
the Central Government may, by issue of licence, allow that person or association
of persons to be registered as a limited liability company.
In the instant case, the decision of the group of individuals to form a limited liability
company for charitable purpose under section 8 for a period of ten years and
thereafter to dissolve the club and to distribute the surplus of assets over the
liabilities, if any, amongst the members will not hold good, since there is a
restriction as pointed out in point (b) above regarding application of its profits or
other income only in promoting its objects. Further, there is restriction in the
application of the surplus assets of such a company in the event of winding up or
dissolution of the company as provided in sub-section (9) of Section 8 of the
Companies Act, 2013. Therefore, the proposal is not feasible.

© The Institute of Chartered Accountants of India

CHAPTER 3

PROSPECTUS AND
ALLOTMENT OF
SECURITIES

LEARNING OUTCOMES

At the end of this chapter, you will be able to:

 Define prospectus
 Understand various types of prospectus
 Explain the procedure for issue of prospectus and other
related concepts
 Know about the criminal and civil liability for mis- statements
in prospectus and punishment for fraudulently inducing
persons to invest money
 Understand the procedure for allotment of securities by
companies
 Know the procedure of private placement of securities

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 3.2 CORPORATE AND OTHER LAWS

This Chapter is based on the Chapter III of the Companies Act, 2013 (in short ‘the
Act’) consisting of sections 23 to 42 dealing with the prospectus and allotment of
securities. The Act provides the manner in which securities can be issued by both
public and private companies. Chapter III of the Act covers the issue of securities
under two headings as under:
Part I - It contains provisions for the issue of securities through public offer;
Part II - It contains provisions for the issue of securities through private placement.
Following diagram depicts the various sections:

Issue of Prospectus and related

matters [Sec. 23, 26, 29, 31, 32,
25, 28, 27 & 40]

Allotment of securities [Sec. 39]

Prospectus and Allotment of
securities [Sec. 23-42]

Penalties [Sec. 34, 35, 36, 37 &

447*]
In a Public In a Private
company company
Private Placement [Sec. 42]

* Section 447 contains provisions relating to ‘punishment for fraud’.

1. INTRODUCTION
One of the advantages of floating a company is raising of capital from the public
at large or from a defined group or inner circle (pre-known select group of
persons). When the capital is raised from public at large, it is undertaken through
the medium of ‘Public Offer’ and when it is raised from a defined group of persons
it is carried out through ‘Private Placement of securities’. Acquisition of capital is
inflow of funds for the issuer and needs advertisement which should be in

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.3

accordance with the relevant legal provisions so that no investor is defrauded or

cheated. On successful closure of the application process, securities are allotted
to the investors which could then be listed on an appropriate segment of a
recognised stock exchange after fulfilling due formalities.
As already mentioned, the provisions relating to raising of capital such as issue of
prospectus, allotment of securities etc., and other matters incidental thereto are
contained in Chapter III of the Act. This Chapter is divided into two parts:
Part I relates to ‘Public Offer’ (sections 23 to 41); and
Part II relates to ‘Private Placement’ (section 42).
The provisions contained in Part I and part II are supplemented by the Companies
(Prospectus and Allotment of Securities) Rules, 2014. A number of amendments
have been made from time to time in the Rules.

2. PUBLIC OFFER AND PRIVATE PLACEMENT

Various modes of issue of securities by a public company or a private company
are depicted in the following diagram:

IPO

Prospectus/Public Offer FPO

Private Placement OFS

Public Company
Issue of securities

Right Issue

Bonus Issue

Private Placement

Private Company Right Issue

Bonus Issue

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 3.4 CORPORATE AND OTHER LAWS

As per Section 23 (1), a public company may issue securities—

(a) to public through prospectus (herein referred to as “public offer”) by
complying with the provisions of Part I; or
(b) through private placement by complying with the provisions of Part II; or
(c) through a rights issue or a bonus issue in accordance with the provisions of
the Act and in case of a listed company or a company which intends to get
its securities listed also with the provisions of the Securities and Exchange
Board of India Act, 1992 (SEBI) and the rules and regulations made
thereunder.
As per Section 23(2), a private company may issue securities—
(a) by way of rights issue or bonus issue in accordance with the provisions of
the Act; or
(b) through private placement by complying with the provisions of Part II.
By way of Explanation it is provided that, “public offer” includes initial public offer
(IPO) or further public offer (FPO) of securities to the public by a company, or an
offer for sale of securities (OFS) to the public by an existing shareholder, through
issue of a prospectus.
Meaning of Securities
As per section 2 (81), the term ‘securities’ means the securities as defined in
clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 [SCRA].
The definition given by section 2 (h) of SCRA is as under:
“Securities” include—
(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate;
(ia) derivative;
(ib) units or any other instrument issued by any collective investment scheme to
the investors in such schemes;
(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.5

(id) units or any other such instrument issued to the investors under any mutual
fund scheme.
Explanation: For the removal of doubts, it is hereby declared that “Securities”
shall not include any unit linked insurance policy or scrips or any such
instrument or unit, by whatever name called, which provides a combined
benefit risk on the life of the persons and investment by such persons and
issued by an insurer referred to in clause (9) of section 2 of the Insurance
Act, 1938.
(ie) any certificate or instrument (by whatever name called), issued to an investor
by any issuer being a special purpose distinct entity which possesses any
debt or receivable, including mortgage debt, assigned to such entity, and
acknowledging beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case may be;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be
securities; and
(iii) rights or interests in securities.
The provisions of Section 23 are tabulated below:

Public Company Private Company

Public Offer (including IPO, Yes No
FPO or OFS)
Private Placement Yes Yes
Rights issue / Bonus Issue Yes Yes
Compliance with SEBI rules Yes (for a listed company or a No
and regulations company proposed to be
listed)

3. PROSPECTUS
(I) Meaning of Prospectus
As per the definition given in section 2 (70), prospectus means any document
described or issued as a prospectus and includes a red herring prospectus
referred to in section 32 or shelf prospectus referred to in section 31 or any

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 3.6 CORPORATE AND OTHER LAWS

notice, circular, advertisement or other document inviting offers from the

public for the subscription or purchase of any securities of a body corporate.
According to the above definition, following points emerge in relation to
prospectus:
(i) Prospectus is any document described or issued as a prospectus. Thus,
any document which is described as a prospectus or issued as a
prospectus is to called prospectus.
(ii) A prospectus shall include a red herring prospectus or shelf
prospectus.
(iii) A prospectus shall also include any notice, circular, advertisement or
other document which intends to invite offers from the public for the
subscription of any securities or purchase of any securities of a body
corporate.
Following diagram, in nutshell, describes prospectus:

Any Document Includes Red

described as herring
Prospectus Prospectus

PROSPECTUS

Includes Shelf
Includes any Prospectus
Notice/Circular
/advertisement
/other
document
inviting offers
from PUBLIC

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.7

(II) Matters to be stated in prospectus

•Date indiacted on Prospectus is deemed to be the date of prospectus

•Prospectus NOT to be issued unless copy has been filed with the
REGISTRAR for registration

•It is to be signed by every person NAMED THEREIN as DIRECTOR or

PROPOSED DIRECTOR

•Registrar NOT to register unless all compliances are over and all
PERSONS named in prospectus have filed their CONSENT in WRITING

Section 26 mentions the various matters which are to be stated in a

prospectus. They are as under:
(1) Prospectus to be dated and signed and to state specified
information, etc.: Every prospectus issued by or on behalf of a public
company either with reference to its formation or subsequently, or by
or on behalf of any person who is or has been engaged or interested
in the formation of a public company, shall be dated and signed and
shall state such information and set out such reports on financial
information as may be specified by the Securities and Exchange Board
in consultation with the Central Government.
However, until the Securities and Exchange Board specifies the
information and reports on financial information under this sub-
section, the regulations made by the Securities and Exchange Board
under the Securities and Exchange Board of India Act, 1992, in respect
of such financial information or reports on financial information shall
apply.
1
(c) prospectus shall make a declaration about the compliance of the
provisions of the Companies Act, 2013 and a statement to the effect
that nothing in the prospectus is contrary to the provisions of this Act,
the Securities Contracts (Regulation) Act, 1956 and the Securities and

clauses (a), (b) and (d) to sub-section (1) omitted by the Companies (Amendment) Act, 2017,
1

w.e.f. 07-05-2018.

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 3.8 CORPORATE AND OTHER LAWS

Exchange Board of India Act, 1992 and the rules and regulations made
thereunder. [Sub-section 1 and Proviso]
(2) Exceptions: Nothing in sub-section (1) shall apply—
(a) to the issue to existing members or debenture-holders of a
company, of a prospectus or form of application relating to
shares in or debentures of the company, whether an applicant
has a right to renounce the shares or not under sub-clause (ii) of
clause (a) of sub-section (1) of section 62 in favour of any other
person; or
(b) to the issue of a prospectus or form of application relating to
shares or debentures which are, or are to be, in all respects
uniform with shares or debentures previously issued and for the
time being dealt in or quoted on a recognised stock exchange.
[Sub- section (2)]
(3) Application of sub-section (1) to prospectus or to a form of
application: Subject to sub-section (2), the provisions of sub-section
(1) shall apply to a prospectus or a form of application, whether issued
on or with reference to the formation of a company or subsequently.
As per the Explanation, the date indicated in the prospectus shall be
deemed to be the date of its publication. [Sub-section (3)]
(4) Prospectus to be issued after delivery to Registrar for filing: No
prospectus shall be issued by or on behalf of a company or in relation
to an intended company unless on or before the date of its publication,
there has been delivered to the Registrar for filing, a copy thereof
signed by every person who is named therein as a director or proposed
director of the company or by his duly authorised attorney. [Sub-
section (4)]

(5) Prospectus not to include Experts’ statement under certain

circumstances: A prospectus issued under sub-section (1) shall not
include a statement purporting to be made by an expert unless the
expert is a person who is not, and has not been, engaged or interested
in the formation or promotion or management, of the company and
has given his written consent to the issue of the prospectus and has
not withdrawn such consent before the delivery of a copy of the

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.9

prospectus to the Registrar for filing and a statement to that effect

shall be included in the prospectus. [Sub- section (5)]
Note: As per Section 2(38) ‘expert’ includes an engineer, a valuer, a
Chartered Accountant, a Company Secretary, a Cost Accountant and
any other person who has the power or authority to issue a certificate
in pursuance of any law for the time being in force.
(6) Prospectus to mention compliances of certain formalities on its
face: Every prospectus issued under sub-section (1) shall, on the face
of it—
(a) state that a copy has been delivered for filing to the Registrar as
required under sub-section (4); and
(b) specify any documents required by this section to be attached to
the copy so delivered or refer to statements included in the
prospectus which specify these documents.

(7) Prospectus to be issued within specified time: No prospectus shall

be valid if it is issued more than ninety days after the date on which a
copy thereof is delivered to the Registrar under sub-section (4). [Sub-
section (8)]
(8) Punishment if ‘issued prospectus’ contravenes applicable
provisions: If a prospectus is issued in contravention of the provisions
of section 26, the company shall be punishable with fine which shall

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 3.10 CORPORATE AND OTHER LAWS

not be less than fifty thousand rupees but which may extend to three
lakh rupees and every person who is knowingly a party to the issue of
such prospectus shall be punishable with fine which shall not be less
than fifty thousand rupees but which may extend to three lakh rupees.
[Sub- section (9)]
Punishment for issuing prospectus
in contravention of section 26

Company
Fine
Any person knowingly ( ` 50 thousand - 3 lacs)
a party to issue of such
prospectus

Example 1: The Board of Directors of Dr. Sunny Pharmaceutical Limited has

allotted shares to the investors at large without issuing a prospectus with
the Registrar of Companies, Mumbai. In this regard, it is to be noted that a
public company can issue securities to the public only by issuing a
prospectus (Section 23).
Section 26 (1) lays down the matters required to be disclosed and included
in a prospectus and requires the filing of the prospectus with the Registrar
before it is issued.
In the given case, the company has violated the above provisions of the
Companies Act, 2013 and hence the allotment made by it is void. The
company will have to refund the entire moneys received and will also be
punishable under section 26 (9) of the Act.
Note: With the deletion of 2Rules 3, 4, 5 and 6 of the Companies (Prospectus
and Allotment of Securities) Rules, 2014, substantial disclosure requirements,
being duplicate in nature, have been dispensed with. Henceforth, a company

2
Deleted by the Companies (Prospectus and Allotment of Securities) Amendment Rules,
2018, w.e.f. 07-05-2018.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.11

needs to follow applicable SEBI Regulations till SEBI specifies the information
and reports on financial information to be stated in a prospectus under sub-
section (1).
(III) Public Offer of Securities to be in Dematerialised Form
Section 29 along with Companies (Prospectus and Allotment of Securities)
Rules, 2014 [PAS Rules] contain provisions which require public offer of
securities to be in dematerialised form. Further, prescribed class or classes
of companies shall issue the securities only in the dematerialised form.
(1) Every company making public offer and such other class or classes of
companies as may be prescribed shall issue the securities only in
dematerialised form by complying with the provisions of the
Depositories Act, 1996 and the regulations made thereunder.
Dematerialisation of Securities: As per Rule 9 of PAS Rules, the
promoters of every public company making a public offer of any
convertible securities may hold such securities only in dematerialised
form.
It is provided that the entire holding of convertible securities of the
company by the promoters held in physical form up to the date of the
initial public offer shall be converted into dematerialised form before
such offer is made and thereafter such promoter shareholding shall be
held in dematerialised form only.
3
(1A) In case of such class or classes of unlisted companies as may be
prescribed, the securities shall be held or transferred only in
dematerialised form in the manner laid down in the Depositories Act,
1996 and the regulations made thereunder.
Rule 9A of PAS Rules mentions about issue of securities in
dematerialised form by unlisted public companies. The provisions are
as under:
Issue of securities in dematerialised form by unlisted public
companies: According to Rule 9A (1), every unlisted public company
(excluding a Nidhi, a Government company and a wholly owned
subsidiary 4) shall issue the securities only in dematerialised form and

3
Sub-section (1A) of Section 29 inserted by the Companies (Amendment) Act, 2019, w.e.f.
15-08-2019.
4
As per Rule 9A (11).

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 3.12 CORPORATE AND OTHER LAWS

also facilitate dematerialisation of all its existing securities in

accordance with provisions of the Depositories Act, 1996 and
regulations made there under.
Conversion of securities in dematerialised form: Rule 9A (2) states
that every unlisted public company making any offer for issue of any
securities or buyback of securities or issue of bonus shares or rights
offer shall ensure that before making such offer, entire holding of
securities of its promoters, directors, key managerial personnel has
been dematerialised in accordance with provisions of the Depositories
Act, 1996 and regulations made there under.
Responsibility of every holder of securities of an unlisted public
company: According to Rule 9A (3), every holder of securities of an
unlisted public company:
(a) who intends to transfer such securities on or after 2nd October,
2018, shall get such securities dematerialised before the transfer;
or
(b) who subscribes to any securities of an unlisted public company
(whether by way of private placement or bonus shares or rights
offer) on or after 2nd October, 2018
shall ensure that all his existing securities are held in dematerialized
form before such subscription.
Application to the depository: As per Rule 9A (4), every unlisted
public company shall facilitate dematerialisation of all its existing
securities by making necessary application to a depository as defined
in section 2 (1) (e) of the Depositories Act, 1996 and shall secure
International Security Identification Number (ISIN) for each type of
security and shall inform all its existing security holders about such
facility.
Obligations of every unlisted public company: According to Rule 9A
(5), every unlisted public company shall ensure that -
(a) it makes timely payment of fees (admission as well as annual) to the
depository and registrar to an issue and share transfer agent in
accordance with the agreement executed between the parties;

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.13

(b) it maintains security deposit, at all times, of not less than two years’
fees with the depository and registrar to an issue and share transfer
agent, in such form as may be agreed between the parties; and
(c) it complies with the regulations or directions or guidelines or
circulars, if any, issued by the Securities and Exchange Board or
Depository from time to time with respect to dematerialisation of
shares of unlisted public companies and matters incidental or
related thereto.
Prohibition on defaulting unlisted public company: Rule 9A (6)
states that no unlisted public company which has defaulted in sub-rule
(5) shall make offer of any securities or buyback its securities or issue
any bonus or right shares till the payments to depositories or registrar
to an issue and share transfer agent are made.
Application of certain provisions: According to Rule 9A (7), except
as provided in sub-rule (8), the provisions of the Depositories Act,
1996, the Securities and Exchange Board of India (Depositories and
Participants) Regulations, 2018 and the Securities and Exchange Board
of India (Registrars to an Issue and Share Transfer Agents) Regulations,
1993 shall apply mutatis mutandis to dematerialisation of securities of
unlisted public companies.
Filing with the Registrar: Rules 9A (8) prescribes that every unlisted
public company governed by Rule 9A shall submit Form PAS-6 to the
Registrar with such fee as provided in the Companies (Registration
Offices and Fees) Rules, 2014 within 60 days from the conclusion of
each half year duly certified by a company secretary in practice or
chartered accountant in practice.
Reporting of difference: As per Rule 9A (8A), the company shall
immediately bring to the notice of the depositories any difference
observed in its issued capital and the capital held in dematerialised
form.
Grievances redressal mechanism: According to Rule 9A (9), the
grievances, if any, of security holders of unlisted public companies
under Rule 9A shall be filed before the Investor Education and
Protection Fund Authority (IEPF).
Initiation of action by IEPF Authority: Rule 9A (10) states that the
Investor Education and Protection Fund Authority shall initiate any

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 3.14 CORPORATE AND OTHER LAWS

action against a depository or participant or registrar to an issue and

share transfer agent after prior consultation with the Securities and
Exchange Board of India.
(2) Any company, other than a company mentioned in sub-section (1),
may convert its securities into dematerialised form or issue its
securities in physical form in accordance with the provisions of this Act
or in dematerialised form in accordance with the provisions of the
Depositories Act, 1996 and the regulations made thereunder.
(IV) Advertisement of Prospectus
According to Section 30, where an advertisement of any prospectus of a
company is published in any manner, it shall be necessary to specify therein
the contents of its memorandum as regards the following:
(i) the objects,
(ii) the liability of members and the amount of share capital of the
company,
(iii) the names of the signatories to the memorandum,
(iv) the number of shares subscribed for by the signatories, and
(v) the capital structure of the company.
(V) Shelf Prospectus, Red Herring Prospectus and Abridged Prospectus
These are described as under:
(A) Shelf Prospectus
Section 31 contains provisions relating to Shelf Prospectus. These provisions
play a significant role in facilitating commercial and logistical consideration
involved in the funds raising cycle.
We may consider a situation where the issuer company issues debentures
frequently and has to file a prospectus every time it issues a new series of
debentures. Here, the concept of shelf prospectus comes into play. Literally,
it means a prospectus with a given shelf life. Any number of issues could be
made during the tenure of the shelf prospectus. The only caveat is to
supplement the shelf prospectus by an “information memorandum”
containing key updates or changes.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.15

The provisions of Section 31 are stated below:

Meaning of Shelf Prospectus: The expression “shelf prospectus” means a
prospectus in respect of which the securities or class of securities included
therein are issued for subscription in one or more issues over a certain period
without the issue of a further prospectus. [Explanation to Section 31]
(1) Filing of shelf prospectus with the Registrar: Any class or classes of
companies, as the Securities and Exchange Board may provide by
regulations in this behalf, may file a shelf prospectus with the Registrar
at the stage-
(i) of the first offer of securities included therein which shall indicate
a period not exceeding one year as the period of validity of such
prospectus which shall commence from the date of opening of the
first offer of securities under that prospectus, and
(ii) in respect of a second or subsequent offer of such securities
issued during the period of validity of that prospectus,
no further prospectus is required. [Sub-section (1)]
(2) Filing of ‘Information Memorandum’ with the Shelf Prospectus: A
company filing a shelf prospectus shall be required to file an
information memorandum containing all material facts relating to new
charges created, changes in the financial position of the company as
have occurred between the first offer of securities or the previous offer
of securities and the succeeding offer of securities and such other
changes as may be prescribed, with the Registrar within the prescribed
time, prior to the issue of a second or subsequent offer of securities
under the shelf prospectus.
It is provided that where a company or any other person has received
applications for the allotment of securities along with advance
payments of subscription before the making of any such change, the
company or other person shall intimate the changes to such applicants
and if they express a desire to withdraw their application, the company
or other person shall refund all the monies received as subscription
within fifteen days thereof. [Sub-section (2) and Proviso]
According to Rule 10 of the Companies (Prospectus and Allotment of
securities) Rules, 2014, the information memorandum shall be prepared
in Form PAS-2 and filed with the Registrar along with the fee as
provided in the Companies (Registration Offices and Fees) Rules, 2014

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 3.16 CORPORATE AND OTHER LAWS

within one month prior to the issue of a second or subsequent offer of

securities under the shelf prospectus.
(3) Information Memorandum together with Shelf Prospectus is
deemed Prospectus: Where an information memorandum is filed,
every time an offer of securities is made under sub-section (2), such
memorandum together with the shelf prospectus shall be deemed to
be a prospectus. [Sub-section (3)]
(B) Red Herring Prospectus
Section 32 contains provisions relating to Red-herring Prospectus.
Developments taking place in the financial markets from time to time allow
innovative methods of raising funds so as to avail the most of favourable
market conditions. Timing the issue and book building of issue are facilitated
by the concept of red herring prospectus whereby the price per security and
number of securities are left open to be decided post closure of the issue.
The provisions of Section 32 are sated as below:
Meaning of Red Herring Prospectus: The expression “red herring
prospectus” means a prospectus which does not include complete particulars
of the quantum or price of the securities included therein. [Explanation to
Section 32]
(1) Red Herring Prospectus is issued prior to issue of Prospectus: A
company proposing to make an offer of securities may issue a red
herring prospectus prior to the issue of a prospectus.
(2) Filing with the registrar: A company proposing to issue a red herring
prospectus shall file it with the Registrar at least three days prior to the
opening of the subscription list and the offer.
(3) Obligations under Red Herring Prospectus vis-à-vis Prospectus: A
red herring prospectus shall carry the same obligations as are
applicable to a prospectus and any variation between the red herring
prospectus and a prospectus shall be highlighted as variations in the
prospectus.
(4) Filing of Red Herring Prospectus with Registrar and SEBI upon
closing of Offer: Upon the closing of the offer of securities under this
section, the prospectus stating therein the total capital raised, whether
by way of debt or share capital, and the closing price of the securities

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.17

and any other details as are not included in the red herring prospectus
shall be filed with the Registrar and the Securities and Exchange Board.
(C) Abridged Prospectus
The term ‘Abridged Prospectus’ has been defined by Section 2 (1). According
to it, ‘Abridged Prospectus’ means a memorandum containing such salient
features of a prospectus as may be specified by the Securities and Exchange
Board by making regulations in this behalf. In fact, ‘Abridged Prospectus’ is
a summarised form of actual prospectus.
(VI) Document containing Offer of Securities for Sale to be Deemed
Prospectus
Section 25 provides that a document by which offer of securities for sale to
the public is made, shall be a deemed prospectus. The provisions of Section
25 are mentioned as under:
(1) Documents which are deemed to be a Prospectus: Where a
company allots or agrees to allot any securities of the company with a
view to all or any of those securities being offered for sale to the public,
any document by which the offer for sale to the public is made shall,
for all purposes, be deemed to be a prospectus issued by the company;
and all enactments and rules of law as to the contents of prospectus
and as to liability in respect of mis-statements, in and omissions from,
prospectus, or otherwise relating to prospectus, shall apply with the
modifications specified in sub-sections (3) and (4) and shall have effect
accordingly, as if the securities had been offered to the public for
subscription and as if persons accepting the offer in respect of any
securities were subscribers for those securities, but without prejudice
to the liability, if any, of the persons by whom the offer is made in
respect of mis-statements contained in the document or otherwise in
respect thereof. [Sub-section (1)]
(2) Securities offered for sale to the public: For the purposes of the
Companies Act, 2013, it shall, unless the contrary is proved, be
evidence that an allotment of, or an agreement to allot, securities was
made with a view to the securities being offered for sale to the public
if it is shown—
(a) that an offer of the securities or of any of them for sale to the
public was made within six months after the allotment or
agreement to allot; or

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 3.18 CORPORATE AND OTHER LAWS

(b) that at the date when the offer was made, the whole
consideration to be received by the company in respect of the
securities had not been received by it. [Sub-section (2)]
(3) Effect of section 26: Section 26 as applied by section 25 shall have
effect as if —
(i) it required a prospectus to state in addition to the matters
required by that section to be stated in a prospectus—
(a) the net amount of the consideration received or to be
received by the company in respect of the securities to
which the offer relates; and
(b) the time and place at which the contract where under the
said securities have been or are to be allotted may be
inspected;
(ii) the persons making the offer were persons named in a
prospectus as directors of a company. [Sub-section (3)]
(4) Signing of Document in case of a company or a firm: Where a
person making an offer to which this section relates is a company or a
firm, it shall be sufficient if the document referred to in sub-section (1)
is signed on behalf of the company or firm by two directors of the
company or by not less than one-half of the partners in the firm, as the
case may be. [Sub-section (4)]

Has the allottee sold shares

to Public within 6 months
after allotment
No
Yes
Y Yes
Has the allottee paid full Not a
consideration to company Deemed
before offer for sale to Public

No
Deemed prospectus

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.19

It is to be noted that all applicable provisions relating to prospectus

viz., mis-statements, contents, civil and criminal liability etc., are
applicable to the deemed prospectus. There is no dilution of liability
for the persons making the offer which is in addition to liability of the
company whose securities are offered for sale. Additionally, below
mentioned information needs to be disclosed as well in the deemed
prospectus:
• the net amount of the consideration received or to be received
by the company in respect of the securities to which the offer
relates; and
• the time and place at which the contract where under the said
securities have been or are to be allotted may be inspected;
The purpose of deeming provision is to protect gullible investors from
various fraudulent practices.
(VII) Offer of Sale of Shares by Certain Members of Company
Sections 28 contains the provisions which regulate the offer for sale of
securities by certain members of company. These provisions are stated as
under:
(1) Offering of shares to public by certain members permitted: Where
certain members of a company propose, in consultation with the Board
of Directors to offer, in accordance with the provisions of any law for
the time being in force, whole or part of their holding of shares to the
public, they may do so in accordance with such procedure as may be
prescribed. [Sub-section (1)]
(2) Document offering sale to public is deemed to be a prospectus:
Any document by which the offer of sale to the public is made shall,
for all purposes, be deemed to be a prospectus issued by the company
and all laws and rules made thereunder as to the contents of the
prospectus and as to liability in respect of mis-statements in and
omission from prospectus or otherwise relating to prospectus shall
apply as if this is a prospectus issued by the company. [Sub-section (2)]
(3) Collective Authorisation and reimbursement of expenses to
company: The members, whether individuals or bodies corporate or
both, whose shares are proposed to be offered to the public, shall
collectively authorise the company, whose shares are offered for sale
to the public, to take all actions in respect of offer of sale for and on

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 3.20 CORPORATE AND OTHER LAWS

their behalf and they shall reimburse the company all expenses
incurred by it on this matter. [Sub-section (3)]
As regards offer of sale of shares by certain members of the company
Rule 8 of the Companies (Prospectus and Allotment of Securities) Rules,
2014, contains guiding provisions which are stated as under:
Exceptions to certain Matters: According to Rule 8 (1), the provisions of
Part I of Chapter III namely “Prospectus and Allotment of Securities” and
rules made thereunder shall be applicable to an offer of sale referred to
in section 28 except for the following, namely:-
(a) the provisions relating to minimum subscription;
(b) the provisions for minimum application value;
(c) the provisions requiring any statement to be made by the Board
of directors in respect of the utilization of money; and
(d) any other provision or information which cannot be compiled or
gathered by the offeror, with detailed justifications for not being
able to comply with such provisions.
Disclosure: As per Rules 8 (2), the prospectus issued under section 28
shall disclose the name of the person or persons or entity bearing the cost
of making the offer of sale along with reasons.
(VIII) Variation in terms of contract or objects in prospectus
Section 27 contains provisions relating to variation in terms of contract or
objects in prospectus. Once funds are raised through a given prospectus, the
principle of “doctrine of ultra vires” (mutatis mutandis) comes into play i.e.,
the company has to use the funds strictly in accordance with the prospectus.
Deviations are required to be pre-approved by the investors and ‘recall
option’ needs to be given to the dissenting investors. Deviation regarding
use of proceeds of issue for buying, trading or otherwise dealing in equity
shares of any other listed company is not permitted.
The provisions of Section 27 are stated as under:
(1) Variation on approval in general meeting by passing of SR: A
company shall not, at any time, vary the terms of a contract referred to
in the prospectus or objects for which the prospectus was issued,
except subject to the approval of, or except subject to an authority

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.21

given by the company in general meeting by way of special resolution

(SR).
It is provided that the details, as may be prescribed, of the notice in
respect of such resolution to shareholders, shall also be published in
the newspapers (one in English and one in vernacular language) in the
city where the registered office of the company is situated indicating
clearly the justification for such variation.
It is further provided that such company shall not use any amount
raised by it through prospectus for buying, trading or otherwise
dealing in equity shares of any other listed company. [Sub-section (1)
and Provisos]
In respect of variation in terms of contracts referred to in the prospectus
or objects for which prospectus was issued, Rule 7 of the Companies
(Prospectus and allotment of Securities) Rules, 2014, states as under:
Special Resolution to be passed through Postal Ballot and
Contents of Notice: According to Sub-rule (1), where the company
has raised money from public through prospectus and has any
unutilized amount out of the money so raised, it shall not vary the
terms of contracts referred to in the prospectus or objects for which
the prospectus was issued except by passing a special resolution
through postal ballot and the notice of the proposed special resolution
shall contain the following particulars, namely:—
(a) the original purpose or object of the Issue;
(b) the total money raised;
(c) the money utilised for the objects of the company stated in the
prospectus;
(d) the extent of achievement of proposed objects (that is fifty
percent, sixty percent, etc.);
(e) the unutilised amount out of the money so raised through
prospectus,
(f) the particulars of the proposed variation in the terms of contracts
referred to in the prospectus or objects for which prospectus was
issued;
(g) the reason and justification for seeking variation;

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 3.22 CORPORATE AND OTHER LAWS

(h) the proposed time limit within which the proposed varied objects
would be achieved;
(i) the clause-wise details as specified in sub-rule (3) of rule 3 as was
required with respect to the originally proposed objects of the
issue;
(j) the risk factors pertaining to the new objects; and
(k) the other relevant information which is necessary for the
members to take an informed decision on the proposed
resolution.
Advertisement to be in Specified Form: According to Sub-rule (2),
the advertisement of the notice for getting the resolution passed for
varying the terms of any contract referred to in the prospectus or
altering the objects for which the prospectus was issued, shall be in
Form PAS-1 and such advertisement shall be published simultaneously
with dispatch of Postal Ballot Notices to Shareholders.
Placing of Notice on Web-site: According to Sub-rule (3), the notice
shall also be placed on the web-site of the company, if any.
(2) Exit offer to dissenting shareholders: The dissenting shareholders
being those shareholders who have not agreed to the proposal to vary
the terms of contracts or objects referred to in the prospectus, shall be
given an exit offer by promoters or controlling shareholders at such
exit price, and in such manner and conditions as may be specified by
the Securities and Exchange Board by making regulations in this behalf.
[Sub-section (2)]

4. SECURITIES TO BE DEALT WITH IN STOCK

EXCHANGES
Section 40 contains following provisions in respect of securities which are to be
dealt with in the recognised stock exchanges.
(1) Filing of an application with recognised stock exchange: Every company
making public offer shall, before making such offer, make an application to
one or more recognised stock exchange or exchanges and obtain permission
for the securities to be dealt with in such stock exchange or exchanges.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.23

(2) Prospectus to state name of stock exchange: Where a prospectus states

that an application has been made, such prospectus shall also state the name
or names of the stock exchange in which the securities shall be dealt with.
(3) Maintaining of separate bank account: All monies received on application
from the public for subscription to the securities shall be kept in a separate
bank account in a scheduled bank and shall not be utilised for any purpose
other than—
(a) for adjustment against allotment of securities where the securities have
been permitted to be dealt with in the stock exchange or stock
exchanges specified in the prospectus; or
(b) for the repayment of monies within the time specified by the Securities
and Exchange Board, received from applicants in pursuance of the
prospectus, where the company is for any other reason unable to allot
securities.
(4) Condition purporting to waive compliance shall be void: Any condition
purporting to require or bind any applicant for securities to waive
compliance with any of the requirements of this section shall be void.
(5) Default in complying with provisions: If a default is made in complying
with the provisions of this section, the company shall be punishable with a
fine which shall not be less than five lakh rupees but which may extend to
fifty lakh rupees and every officer of the company who is in default shall be
punishable with fine which shall not be less than fifty thousand rupees but
which may extend to three lakh rupees.

• Minimum: ` 5 Lakhs
Company • Maximum: ` 50 Lakhs

• Minimum: ` 50,000
Defaulting Officer • Maximum: ` 3 Lakhs

(6) Payment of commission: A company may pay commission to any person in

connection with the subscription to its securities subject to the prescribed
conditions.
Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
prescribes the following conditions for the payment of commission:

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 3.24 CORPORATE AND OTHER LAWS

(a) the payment of such commission shall be authorized in the company’s

articles of association;
(b) the commission may be paid out of proceeds of the issue or the profit
of the company or both;
(c) Rate of commission: Following are the rates of commission-

in case of shares in case of debentures

shall not exceed 5% of the shall not exceed 2.5% of the

price at which the shares are price at which the
issued, or debentures are issued, or
a rate authorised by the as specified in the
articles, company’s articles,

whichever is less whichever is less

(d) Disclosure of the particulars in prospectus: The prospectus of the

company shall disclose the following particulars -
(i) the name of the underwriters;
(ii) the rate and amount of the commission payable to the underwriter;
and
(iii) the number of securities which is to be underwritten or
subscribed by the underwriter absolutely or conditionally.
(e) When no commission is to be paid: There shall not be paid
commission to any underwriter on securities which are not offered to
the public for subscription;
(f) Copy of payment of commission to be delivered to Registrar: A
copy of the contract for the payment of commission is delivered to the
Registrar at the time of delivery of the prospectus for registration.
Example 2: A public limited company which wanted to raise funds through public
issue of shares had applied for listing of its shares in three recognised Stock
Exchanges. However, only two exchanges had given permission for listing. Can the
company proceed with the public offer?
Answer: According to Section 40 (1) of the Companies Act, 2013, every company
making a public offer of shares shall, before making such offer, make an

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.25

application to one or more recognised stock exchange or exchanges and obtain

permission for the securities to be dealt with in such stock exchange or exchanges.
As per Section 40 (2), where a prospectus states that an application has been
made, such prospectus shall also state the name or names of the stock exchange
in which the securities shall be dealt with.
From the above it is clear that not only the company has to apply for listing of the
securities at a recognized stock exchange but also obtain permission thereof
before making the public offer.
In view of the above provisions, the company cannot proceed with the public offer
of shares before obtaining the necessary approval from the stock exchanges.
Example 3: The Board of Directors of a company decide to pay 5% of the issue
price of shares as underwriting commission to the underwriters. However, the
Articles of Association of the company permit only 3% commission. The Board of
Directors further decide to pay the commission out of the proceeds of the share
capital. Are the decisions taken by the Board of Directors valid under the
Companies Act, 2013?
Answer: Under Rule 13 of the Companies (Prospectus and Allotment of Securities)
Rules, 2014 the rate of commission paid or agreed to be paid shall not exceed, in
case of shares, five percent (5%) of the price at which the shares are issued or a
rate authorised by the articles, whichever is less.
The same rule allows the commission to be paid out of proceeds of the issue or
the profit of the company or both.
Therefore, the decision of the Board of Directors to pay 5% commission to the
underwriters is invalid since the same cannot exceed the rate which is permitted
by the Articles. However, the decision to pay commission out of the proceeds of
the share issue is valid provided it is paid at the rate authorised by the Articles.

5. ALLOTMENT OF SECURITIES BY COMPANY

Meaning of Allotment
“Allotment” means the appropriation out of previously un-appropriated capital of
a company, of a certain number of shares to a person. Till the allotment, as such the
shares do not exist. It is on allotment that the shares come into existence. In fact,
with the sending of allotment letters, the company starts the process of allotment
and it is nothing but acceptance of offer made by the applicants of securities.

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 3.26 CORPORATE AND OTHER LAWS

Legal Provisions governing Allotment

Section 39 contains provisions in respect of allotment of securities when there is
a public offer. Further, the Companies (Prospectus and Allotment of Securities)
Rules, 2014 [PAS Rules] have also been issued.
(1) Receipt of Minimum Amount is a must: No allotment of any securities of
a company offered to the public for subscription shall be made unless the amount
stated in the prospectus as the minimum amount has been subscribed and the
sums payable on application for the amount so stated have been paid to and
received by the company by cheque or other instrument.
The prospectus must state the minimum amount to be subscribed. Such minimum
amount must be received from the subscribers or investors at the time of making
application.
(2) Quantum of Amount Payable on Application: The amount payable on
application on every security shall not be less than five per cent of the nominal
amount of the security or such other percentage or amount, as may be specified
by the Securities and Exchange Board by making regulations in this behalf.
(3) Consequences if minimum amount is not subscribed: If the stated
minimum amount has not been subscribed and the sum payable on application is
not received within a period of thirty days from the date of issue of the prospectus,
or such other period as may be specified by the Securities and Exchange Board,
the amount received under sub-section (1) shall be returned within such time and
manner as may be prescribed.
Refund of Application Money: Rule 11 (1) of the PAS Rules mentions that if the
stated minimum amount has not been subscribed and the sum payable on
application is not received within the period specified therein, then the application
money shall be repaid within a period of fifteen days from the closure of the issue
and if any such money is not so repaid within such period, the directors of the
company who are officers in default shall jointly and severally be liable to repay
that money with interest at the rate of fifteen percent per annum.
Which Account to be used for Refund: According to Rule 11 (2), the application
money to be refunded shall be credited only to the bank account from which the
subscription was remitted.
(4) Return of Allotment: Whenever a company having a share capital makes
any allotment of securities, it shall file with the Registrar a return of allotment in
such manner as may be prescribed.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.27

Time Limit for filing Return of Allotment: According to Rule 12 (1) of PAS Rules,
whenever a company having a share capital makes any allotment of its securities,
the company shall, within thirty days thereafter, file with the Registrar a return of
allotment in Form PAS-3, along with the fee as specified in the Companies
(Registration Offices and Fees) Rules, 2014.
Details to be attached with PAS-3: Rule 12 (2) states that there shall be attached
to the Form PAS-3 a list of allottees stating their names, address, occupation, if
any, and number of securities allotted to each of the allottees and the list shall be
certified by the signatory of the Form PAS-3 as being complete and correct as per
the records of the company.
Attachments with PAS-3 when Securities are issued for consideration other
than cash: According to Rule 12 (3), in the case of securities (not being bonus
shares) allotted as fully or partly paid up for consideration other than cash, there
shall be attached to the Form PAS-3 a copy of the contract, duly stamped, pursuant
to which the securities have been allotted together with any contract of sale if
relating to a property or an asset, or a contract for services or other consideration.
Attachments with PAS-3 when Contract is not Reduced to Writing: Rule 12 (4)
states that where a contract referred to in sub-rule (3) is not reduced to writing, the
company shall furnish along with the Form PAS-3 complete particulars of the
contract stamped with the same stamp duty as would have been payable if the
contract had been reduced to writing and those particulars shall be deemed to be
an instrument within the meaning of the Indian Stamp Act, 1899, and the Registrar
may, as a condition of filing the particulars, require that the stamp duty payable
thereon be adjudicated under section 31 of the Indian Stamp Act, 1899.
Attachment of Report of a Registered Valuer: According to Rule 12 (5), a report
of a registered valuer in respect of valuation of the consideration shall also be
attached along with the contract as mentioned in sub-rule (3) and sub-rule (4).
Attachment of Resolution in case of Bonus Shares: Rule 12 (6) states that in the
case of issue of bonus shares, a copy of the resolution passed in the general
meeting authorizing the issue of such shares shall be attached to the Form PAS-3.
Attachment of Valuation Report of the Registered Valuer when shares have
been issued in pursuance of Section 62 (1) (c): Rule 12 (7) states that in case
the shares have been issued in pursuance of clause (c) of sub-section (1) of section
62 by a company other than a listed company whose equity shares or convertible
preference shares are listed on any recognised stock exchange, there shall be
attached to Form PAS-3, the valuation report of the registered valuer.

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(5) Punishment for Default: In case of any default under sub-section (3) or
sub-section (4), the company and its officer who is in default shall be liable to a
penalty, for each default, of one thousand rupees for each day during which such
default continues or one lakh rupees, whichever is less.

Allotment of securities
application money shall not
application money have
Minimum amount be less than 5% or such
been paid and received by
subscribed, and other percentage or
the company
amount as specified by SEBI

Minimum amount not subscribed and application money not received

within 30 days from date of issue of
Such other period as specified by SEBI
prospectus, or

amount recieved shall be returned within 15 days from the closure of issue

Where company makes an allotment of securities

shall file a return of allotment within 30 days with the registrar

In case of default
Company shall pay penalty of
` 1000 for each day during which ` 1 lac whichever is less
such default continues, or

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.29

Once securities are issued and subscribed for, these needs to be allotted according
to the conditions given below:
♦ Minimum subscription to be received within 30 days of issue of prospectus.
In case minimum subscription is not received, the issue is considered as
failed. To take care of such an eventuality, the merchant bankers in case of
public offer resort to underwriting, suitable pricing, bringing in anchor
investors etc., among other things. In case of a failed issue, the entire issue
proceeds need to be refunded along with applicable interest.
♦ Application money need to be minimum 5% of the nominal amount and such
amount must be sufficient to cover the minimum amount stated in the
prospectus.
♦ Return of allotment needs to be filed with the ROC within the specified time
after the allotment of securities.
Example 4: After having received 80% of the minimum subscription as stated in
the prospectus, Raksha Detective Instruments Limited, before finalisation of the
allotment, withdrew 50% of the said amount from the bank for the purchase of
certain assets. Thereafter, it started allotting the shares to the subscribers. Rashmi,
one of the subscribers, was allotted 1000 equity shares. She, however, refused to
accept the allotment on the ground that such allotment was violative of the
provisions of the Companies Act, 2013.
Answer: According to the above example, Raksha Detective Instruments Limited
has received only 80% of the minimum subscription as stated in the prospectus.
Since minimum amount has not been received in full, the allotment is in
contravention of section 39 (1) of the Companies Act, 2013 which prohibits a
company from making any allotment of securities until it has received the amount
of minimum subscription stated in the prospectus. Further, under section 39 (3),
such company is required to refund the application money received (i.e. 80% of
the minimum subscription) to the applicants.
Therefore, in the present case, Rashmi is within her rights to refuse the allotment
of shares which has been illegally made by the company.

6. MIS-STATEMENTS IN PROSPECTUS
In common parlance, mis-statement is the act of stating something that is false or
not accurate. It could either be due to commission or omission or both.

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Mis-statement of prospectus is a serious offence which attracts the provisions of

section 34 and / or section 35. Liabilities can be classified under two headings:

• Loss or damage is an essential condition

Civil Liability • Civil Procedure Code, 1908 applicable
• Offence against the counterparty

• Mens rea (guilty mind) is an essential condition

• Criminal Procedure Code, 1973 applicable
Criminal Liability
• Offence is regarded as being committed against
the state

CRIMINAL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS

The provision of Section 34 which mentions criminal liability for mis-statements in
a prospectus are stated as under:
Where a prospectus, issued, circulated or distributed under Chapter III, includes any
statement which is untrue or misleading in form or context in which it is included or
where any inclusion or omission of any matter is likely to mislead, every person who
authorises the issue of such prospectus shall be liable under section 447.
Exception: It is provided that nothing in this section shall apply to a person if he
proves that such statement or omission was immaterial or that he had reasonable
grounds to believe, and did up to the time of issue of the prospectus believe, that
the statement was true or the inclusion or omission was necessary.
Note: The provisions of section 447 are given later in the chapter.
CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS
Section 35 contains the provisions relating to civil liability for mis-statements in a
prospectus. They are stated as under:
(1) Liabilities of Persons involved: Where a person has subscribed for
securities of a company acting on any statement included, or the inclusion or
omission of any matter, in the prospectus which is misleading and has sustained
any loss or damage as a consequence thereof, the company and every person
who—
(a) is a director of the company at the time of the issue of the prospectus;

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.31

(b) has authorised himself to be named and is named in the prospectus as a

director of the company, or has agreed to become such director, either
immediately or after an interval of time;
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred to in sub-section (5) of section 26,
shall, without prejudice to any punishment to which any person may be liable
under section 36, be liable to pay compensation to every person who has sustained
such loss or damage. [Sub-section (1)]
(2) Exceptions: No person shall be liable under Sub-section (1) if he proves—
(a) that, having consented to become a director of the company, he
withdrew his consent before the issue of the prospectus, and that it
was issued without his authority or consent; or
(b) that the prospectus was issued without his knowledge or consent, and
that on becoming aware of its issue, he forthwith gave a reasonable
public notice that it was issued without his knowledge or consent.
(c) that, as regards every misleading statement purported to be made by
an expert or contained in what purports to be a copy of or an extract
from a report or valuation of an expert, it was a correct and fair
representation of the statement, or a correct copy of, or a correct and
fair extract from, the report or valuation; and he had reasonable
ground to believe and did up to the time of the issue of the prospectus
believe, that the person making the statement was competent to make
it and that the said person had given the consent required by sub-
section (5) of section 26 to the issue of the prospectus and had not
withdrawn that consent before filing of a copy of the prospectus with
the Registrar or, to the defendant's knowledge, before allotment
thereunder. [Sub-section (2)]
(3) Unlimited Liability when prospectus issued with intent to defraud:
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 referred to in subsection (1) shall be personally responsible,
without any limitation of 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. [Sub-section (3)]

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Example 5: An allottee of shares in a company brought action against a director

in respect of false statements made in the prospectus. The director contended that
the statements were prepared by the promoters and he simply relied on them. Is
the director liable under the circumstances?
Answer: Yes, the Director shall be held liable for the false statements made in the
prospectus under sections 34 and 35 of the Companies Act, 2013. Whereas section
34 imposes a criminal punishment on every person who authorises the issue of
such prospectus, section 35 more particularly includes a director of the company
in the imposition of liability for such mis-statements.
Certain situations when a director will not incur any liability for mis-statements in
a prospectus are covered under exceptions provided by Section 35 (2) but no such
exception specifies that relying on the statements prepared the promoters of the
company is a valid ground for a director to escape liability for mis-statement.

Example 6: All the statements contained in a prospectus issued by a company

were literally true. It was also stated in the prospectus that the company had paid
dividends for a number of years but there was no disclosure regarding the fact
that the dividends were paid out of realised capital profits and not out of trading
profits. An allottee of shares wants to avoid the contract on the ground that the
prospectus was false in material particulars.
Answer: The non-disclosure of the fact that dividends were paid out of capital
profits is a concealment of material fact as a company is normally required to
distribute dividend only from trading or revenue profits and under exceptional
circumstances it can pay dividend out of capital profits. Hence, a material
misrepresentation has been made.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.33

Accordingly, in the given case the allottee can avoid the contract of allotment of
shares.
Example 7: A prospectus issued by a company contained certain mis-statements.
On becoming aware of the fact regarding mis-statements in the prospectus, one
of the experts Anilesh who had earlier given his consent, forthwith gave a
reasonable public notice stating that the prospectus was issued without his
knowledge and consent. Is it possible for Anilesh to escape liability for mis-
statement in the prospectus?
Answer: Section 35 (2) of the Companies Act, 2013 states that no person shall be
liable under Sub-section (1) if he proves that the prospectus was issued without
his knowledge or consent, and that on becoming aware of its issue, he forthwith
gave a reasonable public notice that it was issued without his knowledge or
consent.
The case of Anilesh is covered under the above exception provided by Sub-section
(2) and therefore, he will escape liability for mis-statement in the prospectus.

7. PUNISHMENT FOR FRAUDULENTLY

INDUCING PERSONS TO INVEST MONEY
Section 36 prescribes punishment for fraudulently inducing persons to invest
money. The provision is stated as under:
Any person who, either knowingly or recklessly makes any statement, promise or
forecast which is false, deceptive or misleading, or deliberately conceals any
material facts, to induce another person to enter into, or to offer to enter into,-
(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for,
or underwriting securities; or
(b) any agreement, the purpose or the pretended purpose of which is to secure
a profit to any of the parties from the yield of securities or by reference to
fluctuations in the value of securities; or
(c) any agreement for, or with a view to obtaining credit facilities from any bank
or financial institution,
shall be liable for action under section 447.
Note: The provisions of section 447 are given later in the chapter.

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 3.34 CORPORATE AND OTHER LAWS

8. ACTION BY AFFECTED PERSONS

According to Section 37, a suit may be filed or any other action may be taken
under section 34 or section 35 or section 36 by any person, group of persons or
any association of persons affected by any misleading statement or the inclusion
or omission of any matter in the prospectus.
Section 37 has paved way for class action.
Class Actions – Gift of the Companies Act, 2013
Class action suit is for a group of people filing a suit against a defendant who has
caused common harm to the entire group or class. This is not like a common
litigation method where one defendant files a case against another defendant
while both the parties are available in court. In the case of class action suit, the
class or the group of people filing the case need not be present in the court and
can be represented by one petitioner. The benefit of these type of suits is that if
several people have been injured by one defendant, each of the injured person
need not file a case separately but all of the people can file one single case
together against the defendant.
The need for these types of suits was first felt in the context of securities market
during the time of Satyam Scam, where a large group of persons was cheated and
all such persons had to lose their hard-earned money invested in the stock market.
During that time, it was felt that it was not at all viable and cost effective for a
small stakeholder to file a case independently against the defendants. Millions of
cheated investors during that time formed a large group and filed the case against
the company, but since there was no available legal remedy or law which could
actually support this type of litigation initiated by a group, it became tough for
those investors to take a recourse or gain advantage from the Indian Judicial
System. Class action suits in India were so far filed under the guise of public
interest litigations. Courts were free to dismiss them. These shareholders ran pillar
to post right from the National Consumer Disputes Redressal Commission up to
the extent of Supreme Court and ultimately had their claims rejected.
Example 8: M applies for equity shares of a company on the basis of a prospectus
which contains mis–statement. The shares are allotted to him, who afterwards
transfers them to N. Whether N can bring an action for a rescission on the ground
of mis-statement under section 37 of the Companies Act, 2013?

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.35

Answer: No. N cannot bring an action for rescission of the contract for buying
shares from M on the ground of mis-statement made in the prospectus. Section
37 of the Companies Act, 2013 does not become applicable in such a situation.
It is noteworthy that according to Section 37, a suit may be filed or any other
action may be taken under section 34 or section 35 or section 36 only by any
person, group of persons or any association of persons affected by any misleading
statement or the inclusion or omission of any matter in the prospectus. Therefore,
only M is eligible to file a suit.

9. PUNISHMENT FOR FRAUD [SECTION 447]

Section 447 describes punishment for fraud. According to it, any person who is
found to be guilty of fraud involving an amount of at least ten lakh rupees or one
per cent of the turnover of the company, whichever is lower shall be punishable
with imprisonment for a term which shall not be less than six months but which
may extend to ten years and shall also be liable to fine which shall not be less than
the amount involved in the fraud, but which may extend to three times the amount
involved in the fraud.
It is provided that where the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
It is provided further that where the fraud involves an amount less than ten lakh
rupees or one per cent. of the turnover of the company, whichever is lower, and
does not involve public interest, any person guilty of such fraud shall be
punishable with imprisonment for a term which may extend to five years or with
fine which may extend to fifty lakh rupees or with both.
Meaning of Certain Terms 5
Fraud: The term ‘fraud’ in relation to affairs of a company or any body corporate,
includes-
♦ any act,
♦ omission,
♦ concealment of any fact, or
♦ abuse of position
committed by any person, or any other person with the connivance in any manner,
with intent to deceive, to gain undue advantage from, or to injure the interests of,

5
As per Explanation to Section 447.

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 3.36 CORPORATE AND OTHER LAWS

the company or its shareholders or its creditors or any other person, whether or
not there is any wrongful gain or wrongful loss;
Wrongful Gain: The term ‘wrongful gain’ means the gain by unlawful means of
property to which the person gaining is not legally entitled;
Wrongful Loss: The term ‘wrongful loss’ means the loss by unlawful means of
property to which the person losing is legally entitled.

Fine Imprisonment
(i) Fraud involving less Up to ` 50 lakhs 6 or/and Up to 5 years
than 10 lakh rupees or 1%
of turnover, whichever is
lower (public interest not
involved)
(ii) Fraud involving at Minimum fine equal to and Minimum 6
least 10 lakh rupees or 1% amount of fraud; and months; and
of turnover, whichever is Maximum fine three
lower (public interest not times of amount of Maximum 10
involved) fraud Years
(iii) Fraud at (ii) involves Minimum fine equal to and Minimum 3
public interest amount of fraud; and years; and
Maximum fine three
times of amount of Maximum 10
fraud Years

10. PRIVATE PLACEMENT

Provisions relating to the ‘private placement’ are contained in Part II of Chapter III
of the Act.
Private Placement

A private placement is a way of raising capital that involves the issue

of securities to a relatively small number of select investors.

A private placement is different from a public issue in which securities are

made available for issue or sale on the open market to any type of investor.

6
Substituted for ‘twenty lakh rupees’ by the Companies (Amendment) Act, 2019, w.r.e.f. 02-11-2018.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.37

Issue of Shares on Private Placement Basis

According to Section 42 7, following provisions are applicable when shares are
issued on private placement basis. They are also supplemented by Rule 14 8 the
Companies (Prospectus and Allotment of Securities) Rules, 2014 [PAS Rules].
(1) Applicability: A company may, subject to the provisions of section 42, make
a private placement of securities.
(2) Offer to be made only to a Select Group of Persons: A private placement
shall be made only to a select group of persons who have been identified by the
Board (herein referred to as "identified persons"), whose number shall not exceed fifty
or such higher number as may be prescribed [excluding the qualified institutional
buyers and employees of the company being offered securities under a scheme of
employees stock option in terms of provisions of clause (b) of sub-section (1) of
section 62], in a financial year subject to such conditions as may be prescribed.
According to Rule 14 (2) of the PAS Rules, an offer or invitation to subscribe
securities under private placement shall not be made to persons more than two
hundred in the aggregate in a financial year.
It is provided that any offer or invitation made to qualified institutional buyers, or
to employees of the company under a scheme of employees’ stock option as per
provisions of clause (b) of sub-section (1) of section 62 shall not be considered
while calculating the limit of two hundred persons.
As per Explanation given in this Rule, it is clarified that the restrictions aforesaid
would be reckoned individually for each kind of security that is equity share,
preference share or debenture.
Non-applicability of Sub-rule (2): The provisions of sub-rule (2) shall not be
applicable to -
(a) non-banking financial companies (NBFCs) which are registered with the
Reserve Bank of India; and
(b) housing finance companies (HFCs) which are registered with the National
Housing Bank;
if they are complying with regulations made by the Reserve Bank of India or the National
Housing Bank in respect of offer or invitation to be issued on private placement basis.

7
As substituted by the Companies (Amendment) Act, 2017, w.e.f. 07-08-2018.
8
As substituted by the Companies (Prospectus and Allotment of Securities) Rules, 2018, w.e.f.
07-08-2018.

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 3.38 CORPORATE AND OTHER LAWS

It is provided that such companies shall comply with sub-rule (2) in case the
Reserve Bank of India or the National Housing Bank have not specified similar
regulations.
(3) Manner of Issuing Private Placement Offer and Application: A company
making private placement shall issue private placement offer and application in such form
and manner as may be prescribed to identified persons, whose names and addresses are
recorded by the company in such manner as may be prescribed.
It is provided that the private placement offer and application shall not carry any
right of renunciation.
Meaning of ‘Private Placement’: As per Explanation I, the term "private
placement" means any offer or invitation to subscribe or issue of securities to a
select group of persons by a company (other than by way of public offer) through
private placement offer-cum-application, which satisfies the conditions specified
in section 42.
Meaning of ‘Qualified Institutional Buyer’: As per Explanation II, the term
"qualified institutional buyer" means the qualified institutional buyer as defined in
the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009, as amended from time to time, made under the
Securities and Exchange Board of India Act, 1992.
When a Private Placement shall be deemed to be an Offer to the Public: As
per Explanation III, if a company, listed or unlisted, makes an offer to allot or
invites subscription, or allots, or enters into an agreement to allot, securities to
more than the prescribed number of persons, whether the payment for the
securities has been received or not or whether the company intends to list its
securities or not on any recognised stock exchange in or outside India, the same
shall be deemed to be an offer to the public and shall accordingly be governed by
the provisions of Part I of Chapter III.
Requirement of Special resolution: According to Rule 14 (1) of the PAS Rules,
for the purposes of sub-section (2) and sub-section (3) of section 42, a company
shall not make an offer or invitation to subscribe to securities through private
placement unless the proposal has been previously approved by the shareholders
of the company, by a special resolution for each of the offers or invitations.
In the explanatory statement annexed to the notice for shareholders' approval, the
following disclosure shall be made:-
(a) particulars of the offer including date of passing of Board resolution;

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(b) kinds of securities offered and the price at which security is being offered;
(c) basis or justification for the price (including premium, if any) at which the
offer or invitation is being made;
(d) name and address of valuer who performed valuation;
(e) amount which the company intends to raise by way of such securities;
(f) material terms of raising such securities, proposed time schedule, purposes
or objects of offer, contribution being made by the promoters or directors
either as part of the offer or separately in furtherance of objects; principle
terms of assets charged as securities.
As per the second Proviso to Rule 14 (1), sub-rule (1) shall not apply in case of offer
or invitation for non-convertible debentures, where the proposed amount to be
raised through such offer or invitation does not exceed the limit as specified in
clause (c) of sub section (1) of section 180 and in such cases relevant Board
resolution under clause (c) of sub-section (3) of section 179 would be adequate.
As per the third Proviso to Rule 14 (1), in case of offer or invitation for non-
convertible debentures, where the proposed amount to be raised through such
offer or invitation exceeds the limit as specified in clause (c) of sub-section (1) of
section 180, it shall be sufficient if the company passes a previous special
resolution only once in a year for all the offers or invitations for such debentures
during the year.
As per the fourth proviso to Rule 14(1), in case of offer or invitation of any
securities to qualified institutional buyers, it shall be sufficient if the company
passes a previous special resolution only in a year for all the allotments to such
buyers during the year.
Applicable Application Form: According to Rule 14 (3) of the PAS Rules, a private
placement offer cum application letter shall be in the form of an application in
Form PAS-4 serially numbered and addressed specifically to the person to whom
the offer is made and shall be sent to him, either in writing or in electronic mode,
within thirty days of recording the name of such person pursuant to section 42 (3).
It is provided that no person other than the person so addressed in the private
placement offer cum application letter shall be allowed to apply through such
application form and any application not conforming to this condition shall be
treated as invalid.
Maintaining of Complete Record: According to Rule 14 (4) of the PAS Rules, the
company shall maintain a complete record of private placement offers in Form PAS-5.

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Timing of issue of private placement offer cum application letter: According to

Rule 14 (8) of the PAS Rules, a company shall issue private placement offer cum
application letter only after the relevant special resolution or Board resolution has
been filed in the Registry.
It is provided that private companies shall file with the Registry copy of the Board
resolution or special resolution with respect to approval under clause (c) of sub-
section (3) of section 179.
(4) Manner of Subscribing to the Private Placement Issue: Every identified
person willing to subscribe to the private placement issue shall apply in the private
placement and application issued to such person along with subscription money
paid either by cheque or demand draft or other banking channel and not by cash.
It is provided that a company shall not utilise monies raised through private
placement unless allotment is made and the return of allotment is filed with the
Registrar in accordance with sub-section (8) of Section 42.
Utilisation of Bank account: Supplementing the above sub-section (4), Rule 14
(5) of the PAS Rules provides that the payment to be made for subscription to
securities shall be made from the bank account of the person subscribing to such
securities and the company shall keep the record of the bank account from where
such payment for subscription has been received.
In case of joint holders, it is provided 9 that monies payable on subscription to
securities to be held by joint holders shall be paid from the bank account of the
person whose name appears first in the application.
It is further provided 10 that the provisions of sub-rule (5) shall not apply in case of
issue of shares for consideration other than cash.
Example 9: Ruhi and her younger brother Sohit were offered jointly 1000 equity
shares of ` 100 each by Soumya Software Private Limited under the issue of shares
on private placement basis. From whose account the company is required to take
subscription money for 1000 equity shares?
Answer: According to the first Proviso of Rule 14 (5) of the PAS Rules, monies
payable on subscription to securities to be held by joint holders shall be paid from
the bank account of the person whose name appears first in the application. It is
presumed that Ruhi’s name appears first in the application and therefore, the
subscription of ` 1,00,000 shall be payable by her from her account. It is obligatory

9
First Proviso to Rule 14 (5).
10
Second Proviso to Rule 14 (5).

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for the company to ensure that the money is paid from her bank account and not
from the bank account of her younger brother Sohit.
(5) Limit on Fresh Offer: No fresh offer or invitation under this section shall be
made unless the allotments with respect to any offer or invitation made earlier
have been completed or that offer or invitation has been withdrawn or abandoned
by the company.
It is provided that subject to the maximum number of identified persons under
sub-section (2) of section 42, a company may, at any time, make more than one
issue of securities to such class of identified persons as may be prescribed.
(6) Time Limit for Allotment of Securities: A company making an offer or
invitation under this section shall allot its securities within sixty days from the date of
receipt of the application money for such securities and if the company is not able to
allot the securities within that period, it shall repay the application money to the
subscribers within fifteen days from the expiry of sixty days and if the company fails
to repay the application money within the aforesaid period, it shall be liable to repay
that money with interest at the rate of twelve per cent per annum from the expiry of
the sixtieth day.
It is provided that the monies received on application under this section shall be
kept in a separate bank account in a scheduled bank and shall not be utilised for
any purpose other than—
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities.
(7) Prohibition on Public Advertisement: No company issuing securities
under this section shall release any public advertisements or utilise any media,
marketing or distribution channels or agents to inform the public at large about
such an issue.
(8) Filing of Return of Allotment: A company making any allotment of
securities under this section, shall file with the Registrar a return of allotment
within fifteen days from the date of the allotment in such manner as may be
prescribed, including a complete list of all allottees, with their full names,
addresses, number of securities allotted and such other relevant information as
may be prescribed.
As regards Return of Allotment, Rule 14 (6) of the PAS Rules states that a return
of allotment of securities under section 42 shall be filed with the Registrar within
fifteen days of allotment in Form PAS-3 and with the fee as provided in the
Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of

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all the allottees containing-

(i) the full name, address, Permanent Account Number and E-mail ID of such
security holder;
(ii) the class of security held;
(iii) the date of allotment of security;
(iv) the number of securities held, nominal value and amount paid on such
securities, and particulars of consideration received if the securities were
issued for consideration other than cash.
(9) Default in Filing the Return of Allotment: If a company defaults in filing
the return of allotment within the period prescribed under sub-section (8), the
company, its promoters and directors shall be liable to a penalty for each default
of one thousand rupees for each day during which such default continues but not
exceeding twenty-five lakh rupees.
(10) Punishment for Contravening the Private Placement Provisions: Subject
to sub-section (11), if a company makes an offer or accepts monies in
contravention of section 42, the company, its promoters and directors shall be
liable for a penalty which may extend to the amount raised through the private
placement or two crore rupees, whichever is lower, and the company shall also
refund all monies with interest as specified in sub-section (6) to subscribers within
a period of thirty days of the order imposing the penalty.
(11) Deemed Public Offer: Notwithstanding anything contained in sub-section
(9) and sub-section (10), any private placement issue not made in compliance of
the provisions of sub-section (2) shall be deemed to be a public offer and all the
provisions of this Act and the Securities Contracts (Regulation) Act, 1956 and the
Securities and Exchange Board of India Act, 1992 shall be applicable.

SUMMARY
♦ Securities can be offered to public at large (public offer) or through private
placement. However, a private company is prohibited from resorting to
public offer.
♦ Prospectus, deemed prospectus, abridged prospectus, red-herring prospectus,
shelf prospectus, information memorandum need to comply with the minimum
information requirements as prescribed in the Companies Act, 2013 and the
applicable Rules.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.43

♦ Fraudulent omission or commission in the prospectus attracts civil as well as

criminal liability.
♦ SEBI has power to deal with matters relating to listed or proposed to be
listed securities. Central Government (through MCA represented by Regional
Directors and ROCs) has power to deal with matters relating to unlisted
securities.
♦ Issue of securities (shares, debentures or hybrid securities) through public
offer is to be made only in demat form by the companies which are not
exempted.
♦ Existing holders of securities could offload their stake through required
compliances for an offer for sale of securities to the public (OFS route).
♦ Provision related to timelines, pre-requisites for allotment and listing
wherever applicable needs to strictly adhered to avoid any penal provision.
♦ Private placements have somewhat diluted disclosure requirements as public
exposure is not there.

TEST YOUR KNOWLEDGE

Question 1
Explain various instances which make the allotment of securities as irregular
allotment under the Companies Act, 2013.
Answer
Irregular allotment: The Companies Act, 2013 does not specifically provide for
the term “Irregular Allotment” of securities. Hence, we have to examine the
requirements of a proper issue of securities and consider the consequences of
non- fulfillment of those requirements.
In broad terms an allotment of shares is deemed to be irregular when it has been
made by a company in violation of Sections 23, 26, 39 or 40. Irregular allotment
therefore arises in the following instances:
1. Where a company does not issue a prospectus in a public offer as required
by section 23; or
2. Where the prospectus issued by the company does not include any of the
matters required to be included therein under section 26 (1), or the
information given is misleading, faulty and incorrect; or

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 3.44 CORPORATE AND OTHER LAWS

3. Where the prospectus has not been filed with the Registrar for filing under
section 26 (4); or
4. The minimum subscription as specified in the prospectus has not been
received in terms of section 39; or
5. The minimum amount receivable on application is less than 5% of the
nominal value of the securities offered or lower than the amount prescribed
by SEBI in this behalf; or
6. In case of a public issue, approval for listing has not been obtained from one
or more of the recognized stock exchanges under section 40 of the
Companies Act, 2013.
Question 2
What is a Shelf-Prospectus? State the important provisions relating to the issuance
of Shelf-Prospectus under the provisions of the Companies Act, 2013 and the
Companies (Prospectus and Allotment of securities) Rules, 2014.
Answer
Shelf prospectus – As per the Explanation given in Section 31 of the Companies
Act, 2013, the expression “shelf prospectus” means a prospectus in respect of
which the securities or class of securities included therein are issued for
subscription in one or more issues over a certain period without the issue of a
further prospectus.
Provisions relating to the issue of Shelf-prospectus are as under:
(1) Filing of shelf prospectus with the Registrar: According to section 31 (1),
any class or classes of companies, as the Securities and Exchange Board may
provide by regulations in this behalf, may file a shelf prospectus with the
Registrar at the stage-
(i) of the first offer of securities included therein which shall indicate a
period not exceeding one year as the period of validity of such
prospectus which shall commence from the date of opening of the first
offer of securities under that prospectus, and
(ii) in respect of a second or subsequent offer of such securities issued
during the period of validity of that prospectus, no further prospectus
is required.
(2) Filing of Information Memorandum with the Shelf Prospectus:
According to Section 31 (2), a company filing a shelf prospectus shall be

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.45

required to file an information memorandum containing all material facts

relating to new charges created, changes in the financial position of the
company as have occurred between the first offer of securities or the
previous offer of securities and the succeeding offer of securities and such
other changes as may be prescribed, with the Registrar within the prescribed
time, prior to the issue of a second or subsequent offer of securities under
the shelf prospectus.
(3) Intimation of Changes: According to Proviso to Section 31 (2), where a
company or any other person has received applications for the allotment of
securities along with advance payments of subscription before the making
of any such change, the company or other person shall intimate the changes
to such applicants and if they express a desire to withdraw their application,
the company or other person shall refund all the monies received as
subscription within fifteen days thereof.
According to Rule 10 of the Companies (Prospectus and Allotment of
securities) Rules, 2014, the information memorandum shall be prepared in
Form PAS-2 and filed with the Registrar along with the fee as provided in the
Companies (Registration Offices and Fees) Rules, 2014 within one month prior
to the issue of a second or subsequent offer of securities under the shelf
prospectus.
(4) Information Memorandum together with the Shelf Prospectus is
deemed Prospectus: According to Section 31 (3), where an information
memorandum is filed, every time an offer of securities is made under sub-
section (2), such memorandum together with the shelf prospectus shall be
deemed to be a prospectus.
Question 3
The Board of Directors of Chandra Mechanical Toys Limited proposes to issue a
prospectus inviting offers from the public for subscribing to the equity shares of the
Company. State the reports which shall be included in the prospectus for the
purposes of providing financial information under the provisions of the Companies
Act, 2013.
Answer
As per section 26(1) of the Companies Act, 2013, every prospectus issued by or on
behalf of a public company either with reference to its formation or subsequently,
or by or on behalf of any person who is or has been engaged or interested in the
formation of a public company, shall be dated and signed and shall state such

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information and set out such reports on financial information as may be specified
by the Securities and Exchange Board in consultation with the Central Government.
It is provided that until the Securities and Exchange Board specifies the
information and reports on financial information under this sub-section, the
regulations made by the Securities and Exchange Board under the Securities and
Exchange Board of India Act, 1992, in respect of such financial information or
reports on financial information shall apply.
According to clause (c) of Section 26 (1), the prospectus shall make a declaration
about the compliance of the provisions of the Companies Act, 2013 and a
statement to the effect that nothing in the prospectus is contrary to the provisions
of this Act, the Securities Contracts (Regulation) Act, 1956 and the Securities and
Exchange Board of India Act, 1992 and the rules and regulations made thereunder.
Accordingly, the Board of Directors of Chandra Mechanical Toys Limited which
proposes to issue the prospectus shall provide such reports on financial
information as may be specified by the Securities and Exchange Board in
consultation with the Central Government to comply with the above stated
provisions and make a declaration about such compliance.
Question 4
Unique Builders Limited decides to pay 2.5 percent of the value of debentures as
underwriting commission to the underwriters but the Articles of the company
authorize only 2.0 percent underwriting commission on debentures. The company
further decides to pay the underwriting commission in the form of flats. Examine the
validity of the above arrangements under the provisions of the Companies Act, 2013.
Answer
Section 40 (6) of the Companies Act 2013, provides that a company may pay
commission to any person in connection with the subscription to its securities,
subject to a number of conditions which are prescribed under the Companies
(Prospectus and Allotment of Securities) Rules, 2014. In relation to the case given,
the conditions applicable under the above Rules are as under:
(a) The payment of such commission shall be authorized in the company’s
articles of association;
(b) The commission may be paid out of proceeds of the issue or the profit of
the company or both;

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(c) The rate of commission in case of debentures, shall not exceed two and a
half per cent (2.5%) of the price at which the debentures are issued, or as
specified in the company’s articles, whichever is less.
Thus, the underwriting commission in case of debentures is limited to 2.5%.
In view of the above, the decision of Unique Builders Limited to pay underwriting
commission exceeding 2% as prescribed in the Articles is invalid.
The company may pay the underwriting commission in the form of flats as both
the Companies Act and the Rules do not impose any restriction on the mode of
payment though the source has been restricted to either the proceeds of the issue
or profits of the company.
Question 5
PQR Bakers Limited wants to raise funds for its upcoming project. Accordingly, it has
issued private placement offer letters for issuing equity shares to 55 persons, of
which four are qualified institutional buyers and remaining are individuals. Before
the completion of allotment of equity shares under this offer letter, company issued
another private placement offer letter to another 155 persons in their individual
names for issue of its debentures.
Being a public company is it possible for PQR Bakers Limited to issue securities under
a private placement offer? By doing so, whether the company is in compliance with
provisions relating to private placement or should these offers be treated as public
offers? What if the offer for debentures is given after allotment of equity shares but
within the same financial year?
Answer
According to section 42 of the Companies Act, 2013 any private or public company
may make private placement through issue of a private placement offer letter.
However, the offer shall be made to the persons not exceeding fifty or such higher
number as may be prescribed, in a financial year. For counting number of persons,
Qualified Institutional Buyers (QIBs) and employees of the company being offered
securities under a scheme of employees’ stock option will not be considered.
Further, Rule 14 (2) of the Companies (Prospectus and Allotment of Securities) Rules,
2014 prescribes maximum of 200 persons who can be offered securities under the
private placement in a financial year, though this limit should be counted
separately for each type of security.

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 3.48 CORPORATE AND OTHER LAWS

It is to be noted that if a company makes an offer or invitation to more than the

prescribed number of persons, it shall be deemed to be an offer to the public and
accordingly, it shall be governed by the provisions relating to prospectus.
Also, a company is not permitted to make fresh offer under this section if the
allotment with respect to any offer made earlier has not been completed or
otherwise, that offer has been withdrawn or abandoned by the company. This
provision is applicable even if the issue is of different kind of security.
Any offer or invitation not in compliance with the provisions of this section shall
be treated as a public offer and all provisions will apply accordingly.
In the given case PQR Bakers Limited, though a public company but the private
placement provisions allow even a public company to raise funds through this
route. The company has given offer to 55 persons out of which 4 are qualified
institutional buyers and hence, the offer is given effectively to only 51 persons
which is well within the limit of 200 persons. From this point of view, the company
complies the private placement provisions.
However, as per the question, the company has given another private placement
offer of debentures before completing the allotment in respect of first offer and
therefore, the second offer does not comply with the provisions of section 42.
Hence, the offers given by the company will be treated as public offer.
In case the company gives offer for debentures in the same financial year after
allotment of equity shares is complete then both the offers can well be treated as
private placement offers.
Question 6
How does the Companies Act, 2013 regulate and restrict the following matters in
respect of a company going for public issue of shares:
(i) Minimum Amount stated in the Prospectus; and
(ii) Application Money payable on shares.
Answer
The Companies Act, 2013 by virtue of the provisions as contained in Section 39 (1)
and (2) regulates and restricts the minimum amount stated in the prospectus and
the application money payable in a public issue of shares as under:
Minimum amount stated in a prospectus [Section 39 (1)]
No Allotment shall be made of any securities of a company offered to the public
for subscription; unless; -

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(i) the amount stated in the prospectus as the minimum amount has been
subscribed; and
(ii) the sums payable on application for such amount has been paid to and
received by the company.
Application money: Section 39 (2) provides that the amount payable on
application on each security shall not be less than 5% of the nominal amount of
such security or such amount as SEBI may prescribe by making any regulations in
this behalf.
Further section 39 (3) provides that if the stated minimum amount is not received
by the company within 30 days of the date of issue of the prospectus or such time
as prescribed by SEBI, the company will be required to refund the application
money received within such time and manner as may be prescribed.
Rule 11 (1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
mentions that if the stated minimum amount has not been subscribed and the
sum payable on application is not received within the period specified therein,
then the application money shall be repaid within a period of fifteen days from
the closure of the issue and if any such money is not so repaid within such period,
the directors of the company who are officers in default shall jointly and severally
be liable to repay that money with interest at the rate of fifteen percent per annum.
In case of any default, the company and its officer who is in default shall be liable
to a penalty, for each default, of one thousand rupees for each day during which
such default continues or one lakh rupees, whichever is less.
Section 40 (3) provides that all moneys received on application from the public for
subscription to the securities shall be kept in a separate bank account maintained
with a scheduled bank.
Question 7
The Board of Directors of Reckless Investments Limited, having registered office at
Mumbai, has allotted equity shares to the 550 investors of the company without
issuing a prospectus. As no prospectus was issued, nothing was delivered to the
Registrar of Companies, Mumbai for filing. Explain the remedy available to the
investors in this regard.
Answer
According to Section 23 of the Companies Act, 2013, a public company can issue
securities to the public only by issuing a prospectus. Further, where the limit
crosses 200 investors the issue shall be deemed to be a public offer, as provided
by Section 42. Section 26 (1) lays down the matters required to be disclosed and

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included in a prospectus and requires the delivery of the prospectus to the

Registrar for filing before its issue.
In the given case, the company has violated the above provisions and therefore,
the allotment made by it is void. The company will be required to refund the entire
moneys received and will also be punishable under section 26 (9).
Question 8
An allottee of shares in a company brought action against a director in respect of
false statements made in the prospectus. The director contended that the statements
were prepared by the promoters and he simply relied on them. Is the director liable
under these circumstances? Decide referring to the provisions of the Companies Act,
2013.
Answer
Yes, the Director shall be held liable for the false statements made in the
prospectus under sections 34 and 35 of the Companies Act, 2013. Whereas section
34 imposes a criminal punishment on every person who authorises the issue of
such prospectus, section 35 more particularly includes a director of the company
in the imposition of liability for such mis-statements.
The only situations when a director will not incur any liability for mis-statements
in a prospectus are as under:
(a) No criminal liability under section 34 shall apply to a person if he proves that
such statement or omission was immaterial or that he had reasonable
grounds to believe, and did up to the time of issue of the prospectus believe,
that the statement was true or the inclusion or omission was necessary.
(b) No civil liability for any mis-statement under section 35 shall apply to a
person if he proves that:
(1) having consented to become a director of the company, he withdrew
his consent before the issue of the prospectus, and that it was issued
without his authority or consent; or
(2) the prospectus was issued without his knowledge or consent, and that
on becoming aware of its issue, he forthwith gave a reasonable public
notice that it was issued without his knowledge or consent.
Therefore, in the present case the director cannot escape the liability by stating
that he had relied on the promoters for making correct statements in the
prospectus. He will be liable for mis-statements in the prospectus.

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 PROSPECTUS AND ALLOTMENT OF SECURITIES 3.51

Question 9
Sudarshan Exports Limited was dealing in export of rubber to specified foreign countries.
The company was willing to purchase rubber trees in A.P. State. The prospectus issued
by the company contained some important extracts of the expert’s report and number
of trees in A.P. State. The report was found untrue. Mr. Alok purchased the shares of
Sudarshan Exports Limited on the basis of the expert’s report published in the
prospectus. Will Mr. Alok have any remedy against the company? State also the
circumstances where an expert is not liable under the Companies Act, 2013.
Answer
Under section 35 (1) of the Companies Act 2013, where a person has subscribed
for securities of a company acting on any statement included in the prospectus
which is misleading and has sustained any loss or damage as a consequence
thereof, the company and every person including an expert shall be liable to pay
compensation to the person who has sustained such loss or damage.
In the present case, Mr. Alok purchased the shares of Sudarshan Exports Limited
on the basis of the expert’s report published in the prospectus. Mr. Alok can claim
compensation for any loss or damage that he might have sustained from the
purchase of shares, which has not been mentioned in the given case. Further,
Section 35 also mentions punishment prescribed by section 36 i.e. punishment for
fraud under section 447.
Circumstances when an expert is not liable: An expert will not be liable for any
mis-statement in a prospectus under the following situations:
(i) Under Section 26 (5): It states that having given his consent, the expert
withdrew it in writing before delivery of the copy of prospectus for filing, or
(ii) Under section 35 (2) (b): It states that the prospectus was issued without his
knowledge/consent and that on becoming aware of it, he forthwith gave a
reasonable public notice that it was issued without his knowledge or
consent;
(iii) An expert will not be liable in respect of any statement not made by him in
the capacity of an expert and included in the prospectus as such;
(iv) Under Section 35 (2) (c): It states that, as regards every misleading statement
purported to be made by an expert or contained in what purports to be a
copy of or an extract from a report or valuation of an expert, it was a correct
and fair representation of the statement, or a correct copy of, or a correct
and fair extract from, the report or valuation; and he had reasonable ground
to believe and did up to the time of the issue of the prospectus believe, that

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the person making the statement was competent to make it and that the
said person had given the consent required by section 26(5) to the issue of
the prospectus and had not withdrawn that consent before filing of a copy
of the prospectus with the Registrar or, to the defendant's knowledge,
before allotment thereunder.
Question 10
Examine the validity of the following statement with reference to the provisions of
the Companies Act, 2013.
"The Articles of Association of X Limited contain a provision that the underwriting
commission may be paid up to 4% of the issue price of the shares. However, the
Board of Directors have decided to pay the underwriting commission of 5% to Deal
& Co., the underwriters."
Answer
Section 40 (6) of the Companies Act 2013, provides that a company may pay
commission to any person in connection with the subscription to its securities,
subject to the conditions prescribed under the Companies (Prospectus and
Allotment of Securities) Rules, 2014. Rule 13 states that the rate of commission paid
or agreed to be paid shall not exceed, in case of shares, five percent (5%) of the
price at which the shares are issued or a rate authorised by the articles, whichever
is less.
In the given problem, the articles of X Ltd. have prescribed 4% underwriting
commission but the directors decided to pay 5% underwriting commission.
Therefore, the decision of the Board of Directors to pay 5% underwriting
commission to the underwriters (i.e. Deal & Co.) is invalid.

© The Institute of Chartered Accountants of India

CHAPTER 4

SHARE CAPITAL
AND DEBENTURES

LEARNING OUTCOMES
At the end of this chapter, you will be able to:
 Know about the Kinds of Share Capital
 Explain the basic requirements for issue of Share Certificates, Voting Rights and Variation of
Shareholders’ Rights
 Explain Calls on Unpaid Shares
 Know about the Time Period permitted for delivery of Certificates of Securities
 Understand the application of Securities Premium Amount
 Identify prohibition on issue of Shares at a Discount
 Understand the issue of Sweat Equity Shares, Issue and Redemption of Preference Shares
and creation of Capital Redemption Reserve Account
 Know about the Transfer and Transmission of Securities, Refusal to Register and Appeal
against Refusal
 Explain the concepts relating to the Alteration of Share Capital and Notice to Registrar
thereof
 Understand the concept relating to Further issue of Share Capital
 Know about the issue of Bonus Shares, Reduction of Share Capital, Buy-Back of Shares and
applicable restrictions thereon
 Know about issue of Debentures and creation of Debenture Redemption Reserve Account
 Identify the Punishments and penalties for various offences including impersonation.

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 4.2 CORPORATE AND OTHER LAWS

CHAPTER OVERVIEW

Share Capital and Debentures (Sections 43-72*)

Concepts relating to Shares

Concepts relating to Debentures
(Sections 43-70 [excluding sections
(Section 71)
44, 45, 60 and 65])

*Sections 44, 45, 60, 65 and 72 are not applicable for students.

1. INTRODUCTION
Finance, the lifeblood for running the affairs of a company, can be raised, inter-
alia, by issuing shares and debentures. In fact, shares and debentures are
financial instruments which help in arranging funds for the company. Under the
Companies Act, 2013, they are jointly referred to as “securities”.
Shares represent ownership interest in a company with entrepreneurial risks and
rewards whereas debentures depict lenders’ interest in the company with limited
risks and returns.
Sometimes, after the issue of capital, a company may either alter or reduce the
share capital depending upon the exigencies of the situation. The company has to
follow the requisite provisions for alteration or reduction of share capital.
Both the shares and debentures are presented in the Balance Sheet on the
liabilities side of the issuer company and on the assets side of the investor and
lender respectively.
Legal provisions relating to these instruments are covered under Chapter IV of
the Companies Act, 2013 (comprising sections 43 to 72) and the Companies
(Share Capital & Debentures) Rules, 2014 as amended from time to time along
with endorsement in the company formation documents or approved at the
suitable company forum, wherever necessary.

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 SHARE CAPITAL AND DEBENTURES 4.3

2. SHARE CAPITAL-TYPES [SECTION 43 1]

(1) Definition of Share and Stock: Section 2(84) defines share as a share in the
share capital of a company and includes stock.

The share capital of a company is divided into small units having a certain face
value. Each such unit is termed as share.
Example 1: Sun Bakers Limited has authorised share capital of ` 50.00 lacs. The
face value of each unit of capital or ‘share’ is ` 10. In this case, it can be said that
the company has 5.00 lacs shares of ` 10 each. When these shares (either in part
or whole) are allotted to various persons, they, on the date of allotment, become
shareholders of the company.
The definition of ‘share’ states that the term ‘share’ includes ‘stock’. If a company
undertakes to aggregate the fully paid up shares of various members as per their
requests and merge those shares into one fund, then such fund is called ‘stock’. In
simple words we can say that ‘stock’ is a collection or bundle of fully paid-up
shares. According to Section 61 (1) (c), a limited company having a share capital,
after completing certain formalities, can convert all or any of its fully paid-up
shares into stock, and reconvert that stock into fully paid-up shares of any
denomination. Stock is stated in lump sum whereas a ‘share’ being the smallest
unit is having face value. Originally shares are issued to the shareholders while in
case of stock, the fully paid-up shares of the members are converted into ‘stock’
afterwards. Thus ‘stock’ is not issued originally but is obtained by conversion of
fully paid-up shares.

1
Section 43 shall not apply to a:
(a) private company, where memorandum or articles of association of the private company so
provides. However, the exemption shall be applicable to a private company which has not
committed a default in filing its financial statements under section 137 or annual return under
section 92 with the Registrar. (Notification No. GSR 464 (E), dated 5th June, 2015 as amended
by Notification No. GSR 583 (E), dated 13th June, 2017.)
(b) Specified IFSC Public Company, where memorandum of association or articles of
association of such company provides for it. - (Notification No. GSR 8 (E), dated 4th January,
2017.)

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 4.4 CORPORATE AND OTHER LAWS

Following diagram depicts kinds of share capital:

with voting rights

Equity share
capital
with differential rights as to
Kinds of share dividend, voting or otherwise
capital
carries w.r.t. payment of dividend
Preference
preferential and repayment of capital
share capital
right at time of winding up

(2) Two Kinds of Share Capital: Broadly, there are two kinds of share capital of
a company limited by shares:
♦ Equity share capital
♦ Preference share capital.
The Act defines preference share capital as instruments which have preferential
right to dividend payment (absolute/fixed or ad-valorem/ %) and preferential
repayment during winding up of the company. These shareholders can also
participate in equity pool post the preferential entitlements.
Shares which are not preference shares are termed as equity shares.
Equity shares are further classified as plain vanilla (same voting rights) or
differential equity shares (differential with respect to dividend or voting rights or
otherwise).
According to Section 43, the share capital of a company limited by shares shall
be of two kinds, namely:—
(a) equity share capital—
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in
accordance with such rules as may be prescribed 2; and
(b) preference share capital

Refer Rule 4 of the Companies (Share capital and Debenture) Rules, 2014.
2

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 SHARE CAPITAL AND DEBENTURES 4.5

Note: Nothing contained in this Act shall affect the rights of the preference
shareholders who are entitled to participate in the proceeds of winding up
before the commencement of this Act.
Explanation—For the purposes Section 43,—
(i) "equity share capital", with reference to any company limited by shares,
means all share capital which is not preference share capital;
(ii) "preference share capital", with reference to any company limited by
shares, means that part of the issued share capital of the company which carries
or would carry a preferential right with respect to—
(a) payment of dividend, either as a fixed amount or an amount calculated at
a fixed rate, which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the
amount of the share capital paid-up or deemed to have been paid-up,
whether or not, there is a preferential right to the payment of any fixed
premium or premium on any fixed scale, specified in the memorandum or
articles of the company;
(iii) capital shall be deemed to be preference capital, notwithstanding that it is
entitled to either or both of the following rights, namely:—
(a) that in respect of dividends, in addition to the preferential rights to the
amounts specified in sub-clause (a) of clause (ii), it has a right to
participate, whether fully or to a limited extent, with capital not entitled to
the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the
repayment, on a winding up, of the amounts specified in sub-clause (b) of
clause (ii), it has a right to participate, whether fully or to a limited extent,
with capital not entitled to that preferential right in any surplus which may
remain after the entire capital has been repaid.
(3) Equity Shares with Differential Rights
Rule 4 of the Companies (Share capital and Debenture) Rules, 2014 contains
provisions which need to be followed while issuing equity shares with
differential rights. These are stated as under:
(i) Conditions for the issue of equity shares with differential rights:
According to Rule 4 (1), a company limited by shares may issue equity shares
with differential rights as to dividend, voting or otherwise, if it complies with the

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following conditions, namely:

(a) the articles of association of the company authorizes the issue of shares
with differential rights;
(b) the issue of shares is authorized by an ordinary resolution passed at a
general meeting of the shareholders.
Where the equity shares of a company are listed on a recognized stock
exchange, the issue of such shares shall be approved by the shareholders
through postal ballot;
(c) 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;
(d) Omitted;
(e) the company has not defaulted in filing financial statements and annual
returns for three financial years immediately preceding the financial year in
which it is decided to issue such shares;
(f) the company has no subsisting default in the payment of a declared
dividend to its shareholders or repayment of its matured deposits or
redemption of its preference shares or debentures that have become due
for redemption or payment of interest on such deposits or debentures or
payment of dividend;
(g) 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;
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.
(h) 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 (RBI),
the Securities and Exchange Board of India Act, 1992 (SEBI), the Securities

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 SHARE CAPITAL AND DEBENTURES 4.7

Contracts Regulation Act, 1956 (SCRA), the Foreign Exchange Management

Act, 1999 (FEMA) or any other special Act, under which such companies
being regulated by sectoral regulators.
(ii) Contents of Explanatory statement: Rule 4 (2) states that the explanatory
statement to the annexed to the notice of the general meeting or of a postal
ballot shall contain various matters like particulars of the issue including its size,
details of differential rights, etc.
(iii) Restriction on conversion of equity share capital with voting rights into
equity share capital carrying differential voting rights: Rule 4 (3) specifies 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.
(iv) Disclosure in the Board’s Report: According to Rule 4 (4), the Board of
Directors shall, inter-alia, disclose the specified particulars in the Board’s Report for
the financial year in which the issue of equity shares with differential rights was
completed.
(v) Rights to the holders of the equity shares with differential 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.
(vi) Particulars of shares to be maintained in the register of members:
Rule 4 (6) provides that where 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.

3. CERTIFICATE OF SHARES [SECTION 46]

A certificate of shares is required when shares are issued in physical form. Section
46 contains provisions which regulate certificate of shares. They are stated as
under:
(1) Share Certificate is prima facie evidence of title: According to section 46
(1), a certificate, issued under the common seal 3, if any, of the company or signed

3
Now it is optional for a company to have a common seal in terms of Proviso (inserted
by the Companies (Amendment) Act, 2015, w.e.f. 29-05-2015) to Section 22 (2).

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 4.8 CORPORATE AND OTHER LAWS

by two directors or by a director and the Company Secretary, wherever the

company has appointed a Company Secretary, specifying the shares held by any
person, shall be prima facie evidence of the title of the person to such shares.
(2) Issue of Duplicate Certificate: Section 46 (2) states that a duplicate
certificate of shares may be issued, if such certificate —
(a) is proved to have been lost or destroyed; or
(b) has been defaced, mutilated or torn and is surrendered to the company.
(3) Manner of Issue of Certificates/Duplicate certificates: According to
section 46 (3), notwithstanding anything contained in the articles of a company,
the manner of issue of a certificate of shares or the duplicate thereof, the form of
such certificate, the particulars to be entered in the register of members and
other matters shall be such as may be prescribed 4.
(4) Shares held in Depository Form: According to Section 46 (4), where a
share is held in depository form, the record of the depository is the prima
facie evidence of the interest of the beneficial owner.
(5) Punishment for issuing Duplicate Certificate of Shares with intent to
Defraud: As per Section 46 (5), if a company with intent to defraud issues a
duplicate certificate of shares, the punishment shall be as under:
• the company shall be punishable with fine which shall not be less than five
times the face value of the shares involved in the issue of the duplicate
certificate but which may extend to ten times the face value of such shares
or rupees ten crores whichever is higher; and
• every officer of the company who is in default shall be liable for action
under section 447 5.
Physical entitlement to a particular portion of share capital is prima facie
evidenced by way of a share certificate which has to be:
• distinctively numbered; and

4
Refer Rules 5, 6 and 7 of the Companies (Shares and Debentures) Rules, 2014 in this respect.
5
The provisions contained in Section 447 which describe ‘punishment for fraud’ are stated in
the earlier Chapter 3 relating to ‘Prospectus and Allotment of Securities’.

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 SHARE CAPITAL AND DEBENTURES 4.9

• issued under common seal 6 of the company or signed by two directors or

by a director and the Company Secretary, wherever the company has
appointed a Company Secretary.
In case the company is required to issue duplicate certificates, it can do so after
following the procedure prescribed in Rule 6 of the Companies (Shares and
Debentures) Rules, 2014.
The aforesaid requirements are not applicable in case of dematerialised shares or
shares held in electronic form with any depository. In such a case, records of the
depository will be treated as prima facie evidence of the interest of the beneficial
owner.
Dematerialisation (in short ‘Demat’) of Securities: After the depositories
started functioning in India, the listed shares are required to be held in electronic
form. Even banks and financial institutions insist for demat of securities for
creation of charge. Now, Rule 9A (inserted w.e.f. 2-10-2018 7) of the Companies
(Prospectus and Allotment of Securities) Rules, 2014, requires every unlisted public
company to issue the securities only in dematerialised form and also facilitate
dematerialisation of all its existing securities.
According to Rule 9A (3), every holder of securities of an unlisted public
company,-
(a) who intends to transfer such securities on or after 2nd October, 2018, shall
get such securities dematerialised before the transfer; or
(b) who subscribes to any securities of an unlisted public company (whether by
way of private placement or bonus shares or rights offer) on or after 2nd
October, 2018 shall ensure that all his existing securities are held in
dematerialized form before such subscription.
Rule 9A (11) states that Rule 9A shall not apply to an unlisted public company
which is:
(a) a Nidhi;
(b) a Government company; or

6
Now it is optional for a company to have a common seal in terms of Proviso (inserted by the
Companies (Amendment) Act, 2015, w.e.f. 29-05-2015) to Section 22 (2).
7
Inserted by the Companies (Prospectus and Allotment of Securities) Third Amendment Rules,
2018, w.e.f. 2-10-2018.

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 4.10 CORPORATE AND OTHER LAWS

(c) a wholly owned subsidiary.

It is to be noted that only unlisted public companies (subject to exceptions) are
covered by Rule 9A and therefore, it is not necessary for a private limited
company to get its securities dematerialised.
At present, there are two depositories available in India i.e. NSDL and CDSL.
Various depository participants (DPs) are linked to them. Dematerialised securities
are held by the investors in their respective accounts with the DP which keeps a
track of transfer, transmission, charge creation etc. There are necessary enabling
legal enactments to facilitate all such procedures.
It is noteworthy to observe that the share certificates issued by a company are
comparable with the currency notes issued by the Central Bank i.e. Reserve Bank
of India. Therefore, strict penal provisions are in existence against fraudulent
activities. In such cases, the wrong-doer company and every officer who is in
default are punishable under Section 447 8.

4. VOTING RIGHTS AND VARIATION OF

SHAREHOLDERS’ RIGHTS [SECTION 47 & 48]
Voting Rights [Section 47 9]

Voting rights Voting rights

of members of members
Proportion of
holding holding
voting rights
equity share preference
capital share capital

Section 47 governs the voting rights of the members of a company. The

provisions of Section 47 are stated as under:
(i) Voting Rights of Members holding Equity Share Capital: Section 47 (1)
states that subject to the provisions of section 43, section 50 (2) and section 188 (1)-

8
The provisions contained in Section 447 which describe ‘punishment for fraud’ are stated in
the earlier Chapter 3 relating to ‘Prospectus and Allotment of Securities’.
9
Section 47 shall not apply to a Specified IFSC Public Company, where memorandum of
association or articles of association of such company provides for it. - (Notification No.
GSR 8 (E), dated 4th January, 2017.)

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 SHARE CAPITAL AND DEBENTURES 4.11

(a) every member of a company limited by shares and holding equity share
capital therein, shall have a right to vote on every resolution placed before
the company; and
10
(b) his voting right on a poll shall be in proportion to his share in the paid-up
equity share capital of the company.
(ii) Voting Rights of Members holding Preference Share Capital: According
to Section 47 (2), every member of a company limited by shares who is holding
any preference share capital 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
♦ a right to vote on 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.
(iii) Proportion of Voting Rights: According to First Proviso to Section 47 (2),
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.
(iv) Consequences when Dividends are not paid to Preference Shareholders:
According to Second Proviso to Section 47 (2), where the dividend in respect of a
class of preference shares has not been paid for a period of two years or more,
then such class of preference shareholders shall have a right to vote on all the
resolutions placed before the company.
From the above provisions, it is clear that in case of equity shares other than
equity shares with differential voting rights, each shareholder is entitled to vote
on any resolution placed before the company i.e., in the Annual General Meeting
(AGM) or Extra-ordinary General Meeting (EGM) of the members of the company.
The voting right shall be proportionate to the paid-up capital of the class of
shares involved.

10
In case of Nidhis, Section 47 (1) (b) shall apply, subject to the modification that no
member shall exercise voting rights on poll in excess of five per cent, of total voting
rights of equity shareholders. (Notification No. GSR 465 (E), dated 5th June, 2015.)

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 4.12 CORPORATE AND OTHER LAWS

Though the preference shareholders have limited voting rights but they shall have
a right to vote on all the resolutions placed before the company if the dividend
has not been paid to them for a period of two years or more. Similarly, they have
a right to vote on any resolution for the winding up of the company or for the
repayment or reduction of company’s equity or preference share capital.

Voting Rights

Equity Shares Preference Shares

On every resolution
In proportion of
placed before the
paid-up capital
company

Dividend not paid

Equity shares having
Normal for 2 years or
Differential Rights
more

As defined in
In proportion of
Articles/ Terms of Winding up
paid-up capital
issue

Directly affecting
interest

Exemption to a Private Company 11- Section 47 shall not apply to a private

company, where memorandum or articles of association of the private company so
provides. However, the exemption shall be applicable to a private company which
has not committed a default in filing its financial statements under section 137 or
annual return under section 92 with the Registrar.
Thus, Private company could be more innovative in terms of voting rights if
permitted by their Articles of Association.

As per Notification No. GSR 464 (E), dated 5th June, 2015 as amended by Notification No.
11

GSR 583 (E), dated 13th June, 2017.

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 SHARE CAPITAL AND DEBENTURES 4.13

Variations of Shareholders’ Rights [Section 48]

In case share capital of a company is divided into different classes of shares, it
may sometimes be necessary for it to amend the rights attached to one or more
classes of shares. Section 48 deals with such a situation and regulates the
variations of shareholders’ rights as under:
(1) Variation in Rights of Shareholders with Consent: According to Section
48 (1), where a share capital of the company is divided into different classes of
shares, the rights attached to the shares of any class may be varied with the
consent in writing of the holders of not less than three-fourths of the issued
shares of that class or by means of a special resolution passed at a separate
meeting of the holders of the issued shares of that class,—
(a) if provision with respect to such variation is contained in the memorandum
or articles of the company; or
(b) in the absence of any such provision in the memorandum or articles, if such
variation is not prohibited by the terms of issue of the shares of that class.
It is provided that if variation by one class of shareholders affects the rights of
any other class of shareholders, the consent of three-fourths of such other class
of shareholders shall also be obtained and the provisions of this section shall
apply to such variation.
(2) No Consent given for Variation: According to Section 48 (2), where the
holders of not less than ten per cent of the issued shares of a class did not
consent to such variation or vote in favour of the special resolution for the
variation, they may apply to the Tribunal to have the variation cancelled, and
where any such application is made, the variation shall not have effect unless and
until it is confirmed by the Tribunal.
(3) Application to Tribunal: Proviso to Section 48 (2) states that an application
under this section shall be made within twenty-one days after the date on which
the consent was given or the resolution was passed, as the case may be, and may
be made on behalf of the shareholders entitled to make the application by such
one or more of their number as they may appoint in writing for the purpose.
(4) Decision of Tribunal: According to Section 48 (3), the decision of the
Tribunal on any application under sub-section (2) shall be binding on the
shareholders.

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 4.14 CORPORATE AND OTHER LAWS

(5) Filing of copy of order with Registrar: 48 (4) states that the company shall,
within thirty days of the date of the order of the Tribunal, file a copy thereof with the
Registrar.

5. CALLS, CALLS-IN-ADVANCE AND

INCIDENTAL MATTERS [SECTION 49 TO
SECTION 51]
When the shares are partly paid-up, the company issuing them can make calls,
asking the shareholders to pay the amount ‘called up’ in respect of such partly
paid-up shares.
As per Section 49, these calls have to be uniformly made and there should be no
differentiation for a given class of shareholders.
As per Explanation to Section 49, shares of the same nominal value on which
different amounts have been paid-up shall not be deemed to fall under the same
class (i.e. the provision is not applicable in case where different amounts are paid
for a same class of shares).
Calls-in-Advance
As per Section 50, a company may, if so authorised by its articles, accept from
any member, the whole or a part of the amount remaining unpaid on any shares
held by him, even if no part of that amount has been called up (i.e. if authorised
by the articles, a company is permitted to keep advance subscription or call
money received in advance).
However, a member of a company limited by shares shall have no voting right in
respect of the ‘advance amount’ paid by him on ‘calls’ till the amount is duly called up.
According to Section 51, the company is permitted to pay dividends in
proportion to the amount paid-up on each share, if so authorised by the articles.
In other words, advance payment will not lead to increased voting rights but
delayed payment of call money could be the reason of decreased voting rights.
Example 2: Moon Star Machineries Limited is authorised by its articles to accept
the whole or any part of the amount of remaining unpaid calls from any member
even if no part of that amount has been called up by it. ‘Anand’, a shareholder,
deposits in advance the remaining amount due on his partly paid-up shares
without any calls being made by the company.

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 SHARE CAPITAL AND DEBENTURES 4.15

In view of the authorisation given by the Articles, Moon Star Machineries Limited
is permitted to accept the advance amount received on unpaid calls from Anand.
In other words, this is a valid transaction.
Example 3: Coriander Masale Limited has issued 10,00,000 equity shares of ` 10
each on which ` 6 per share has been called till allotment and the first and final
call of ` 4 is yet to be made. Reena holds 10,000 shares on which she has paid
whole of ` 10 per share. In the upcoming extra-ordinary general meeting of the
company she wants to exercise her voting rights as the owner of fully paid-up
shares. However, the company cannot permit her as she does not have voting
right in respect of the ‘advance amount’ paid by her in respect of first and final
call. The restriction will continue till the amount is duly called up by the company.

6. ISSUE OF SHARES AT A PREMIUM OR

DISCOUNT [SECTION 52 TO SECTION 55]
Under the concepts of financial management, fair value of a share may be equal
to, less than or more than its face value. If a share is issued to the new investors
at a price lower than the fair value then the existing shareholders are likely to
make an objection. Also, issuing a share at a value more than or less than the fair
value may have adverse consequences under the Income Tax Act or under the
Foreign Exchange Management Act (FEMA).
When a company issues shares at a price higher than their face value, the shares
are said to be issued at premium and the differential amount is termed as
premium.
Example 4: A share having face value of ` 10 is issued at a price of ` 14. The
amount over and above the face value of ` 10 is called premium.
Where the issue price is lower than the face value of the shares, such issue of
shares is regarded as being issued at discount and the differential amount is
known as discount.
Example 5: A share having face value of ` 5 is issued at a lower price of ` 4. The
differential amount of ` 1 is known as discount which is being allowed by the
company.
There are precautionary provisions covered in Sections 52 and 53 for both these
scenarios (i.e. premium or discount) to safeguard the issuer company and its
stakeholders.

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 4.16 CORPORATE AND OTHER LAWS

Application of Premiums received on Issue of Shares [Section 52]

Where a company issues shares at a premium, whether for cash or otherwise, a
sum equal to the aggregate amount of the premium received on those shares
shall be transferred to a “securities premium account”. Further, the provisions of
the Companies Act, 2013 relating to reduction of share capital (which are very
stringent) of a company shall, except as provided in this section, apply as if the
securities premium account were the paid-up share capital of the company.
Application of Securities Premium Account: The securities premium account
may be applied by the company—
(a) towards the issue of unissued shares of the company to the members of the
company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed
on, any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.
Prescribed Class of Companies are permitted to apply Securities Premium
Account: The securities premium account may be applied by such class of
companies, as may be prescribed and whose financial statement comply with the
accounting standards prescribed for such class of companies under Section 133:
(a) in paying up unissued equity shares of the company to be issued to
members of the company as fully paid bonus shares; or
(b) in writing off the expenses of or the commission paid or discount allowed
on any issue of equity shares of the company; or
(c) for the purchase of its own shares or other securities under section 68.
Prohibition on Issue of Shares at Discount [Section 53]
A company is prohibited from issuing shares at a discount if it does not follow the
provisions of Section 53.
1. According to Section 53 (1), a company shall not issue shares at a discount,
except as provided in Section 54.
Note: Section 54 contains provisions for the issue of ‘Sweat Equity Shares’.

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 SHARE CAPITAL AND DEBENTURES 4.17

2. Section 53 (2) states that any share issued by a company at a discount shall
be void.
3. Exception: Section 53 (2A) states that 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.
4. According to Section 53 (3), where any company fails to comply with the
provisions of Section 53, such company and every officer who is in default shall be
liable to a penalty which may extend to an amount equal to the amount raised through
the issue of shares at a 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 twelve per
cent per annum from the date of issue of such shares to the persons to whom such
shares have been issued.
It is to be noted that the restrictions mentioned in Sections 52 and 53 apply only
in respect of issue of shares (either equity or preference shares) but not to the
issue of any debt related products like bonds or debentures whose pricing is
mostly governed by YTM (yield to maturity) considerations.
Issue of Sweat Equity Shares [Section 54]
Sweat equity shares are issued to keep the employees of a company motivated by
making them partner in the growth of the company.
Meaning of ‘sweat equity shares’: As per Section 2 (88), the term ‘sweat equity
shares’ means such equity shares as are issued by a company to its directors or
employees at a discount or for consideration, other than cash, for providing their
know-how or making available rights in the nature of intellectual property rights
or value additions, by whatever name called.
Issue of ‘sweat equity shares’: Section 54 mentions the provisions which need to
be adhered to by a company if it desires to issue sweat equity shares.
Conditions: According to Section 54 (1), a company may issue sweat equity shares of
a class of shares already issued, if the following conditions are fulfilled, namely—
(a) the issue is authorised by a special resolution passed by the company;
(b) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to whom
such equity shares are to be issued;

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 4.18 CORPORATE AND OTHER LAWS

12
(d) where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the regulations
made by the Securities and Exchange Board in this behalf and if they are not so
listed, the sweat equity shares are issued in accordance with Rule 8 of the
Companies (Share and Debentures) Rules, 2014.
Some of the important provisions contained in Rule 8 of the Companies (Share and
Debentures) Rules, 2014, are stated as under:
Meaning of Employee 13: ‘‘Employee’’ means-
(a) a permanent employee of the company who has been working in India or
outside India; or
(b) a director of the company, whether a whole- time director or not; or
(c) an employee or a director as defined in sub-clauses (a) or (b) above of a
subsidiary, in India or outside India, or of a holding company of the company;
Meaning of ‘Value additions’ 14: The expression ‘Value additions’ means actual
or anticipated economic benefits derived or to be derived by the company from
an expert or a professional for providing know-how or making available rights in
the nature of intellectual property rights, by such person to whom sweat equity is
being issued for which the consideration is not paid or included in the normal
remuneration payable under the contract of employment, in the case of an
employee.
Validity of Special Resolution: According to Rule 8 (3), the special resolution
authorising the issue of sweat equity shares shall be valid for making the allotment
within a period of not more than twelve months from the date of passing of the
special resolution.
Limit on issue of Sweat Equity Shares: According to Rule 8 (4), a company shall not
issue sweat equity shares for more than fifteen per cent of the existing paid up equity
share capital in a year or shares of the issue value of rupees five crores, whichever is
higher.
Provided that the issuance of sweat equity shares in the Company shall not exceed
twenty five percent, of the paid up equity capital of the Company at any time.

12
Clause (c) of Section 54 (1) omitted by the Companies (Amendment) Act, 2017, w.e.f.
7-05- 2018.
13
Explanation (i) to Rule 8 (1).
14
Explanation (ii) to Rule 8 (1).

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 SHARE CAPITAL AND DEBENTURES 4.19

Provided further that a startup company, as defined in notification number G.S.R.

127(E), dated the 19th February, 2019 issued by the Department for Promotion of
Industry and Internal Trade, Ministry of Commerce and Industry, Government of
lndia, may issue sweat equity shares not exceeding fifty percent of its paid up
capital upto ten years from the date of its incorporation or registration.
Lock-in Period: Rule 8 (5) states that the sweat equity shares issued to directors
or employees shall be locked in/non-transferable for a period of three years from
the date of allotment.
Valuation of Sweat Equity Shares: Rule 8 (6) mentions that the sweat equity
shares to be issued shall be valued at a price determined by a registered valuer as
the fair price giving justification for such valuation.
Valuation of IPR/know-how/value additions to be done by a Registered Valuer:
According to Rule 8 (7), the valuation of intellectual property rights or of know how
or value additions for which sweat equity shares are to be issued, shall be carried out
by a registered valuer, who shall provide a proper report addressed to the Board of
directors with justification for such valuation.
Treatment of non-cash consideration: According to Rule 8 (9), where the sweat
equity shares are issued for a non-cash consideration on the basis of a valuation
report in respect thereof obtained from the registered valuer, such non-cash
consideration shall be treated in the following manner in the books of account of the
company:
(a) where the non-cash consideration takes the form of a depreciable or
amortizable asset, it shall be carried to the balance sheet of the company in
accordance with the accounting standards; or
(b) where clause (a) is not applicable, it shall be expensed as provided in the
accounting standards.
Disclosure in the Directors’ Report: Rule 8 (13) states that the Board of Directors
shall, inter alia, disclose in the Directors' Report for the year in which such shares are
issued, the specified details of issue of sweat equity shares.
Maintenance of Register: According to Rule 8 (14), the company shall maintain a
Register of Sweat Equity Shares in Form No. SH. 3. It shall be maintained at the
registered office of the company or such other place as the Board may decide.
Sweat equity shareholders to rank pari passu with other equity shareholders:
According to Section 54 (2), the rights, limitations, restrictions and provisions as are

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 4.20 CORPORATE AND OTHER LAWS

for the time being applicable to equity shares shall be applicable to the sweat equity
shares issued under Section 54 and the holders of such shares shall rank pari passu
with other equity shareholders.
Preference Shares - Issue and Redemption [Section 55]
Following diagram depicts the types of preference shares:

Types of Preference Shares

On the basis of
On the basis of On the basis of
convertibility to
Dividend payout redeemability
shares

Cumulative Redeemable
Convertible
(mandatorily or
optionally; partially or
fully)
Non-cumulative
Irredeemable
(cannot be
issued)
Non-convertible
Participatory

Non-
participatory

Section 55 contains provisions for regulation of issue and redemption of

preference shares. These are stated as under:
(i) Company to issue only Redeemable Preference Shares: A company
limited by shares shall not issue any preference shares which are irredeemable.
(ii) Time Period within which Preference Shares are to be redeemed: A
company limited by shares may, if so authorised 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 are prescribed in

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 SHARE CAPITAL AND DEBENTURES 4.21

Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014. These
conditions are mentioned as under:
Requirement of Special Resolution and Condition of no Default: According to
Rule 9 (1), the issue of preference shares has to be authorized by passing a
special resolution in the general meeting of the company. Further, at the time of
such issue of preference shares, the company should not have 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.
Maintenance of Register: Rule 9 (4) requires that if a company issues preference
shares, the Register of Members maintained under Section 88 shall contain the
particulars in respect of such preference shareholder(s).
(iii) Exceptional case where period may exceed twenty years 15: A company
may issue preference shares for a period exceeding twenty years (but not
exceeding thirty years 16) for infrastructure projects 17, subject to the 18redemption
of 10% of such preference shares beginning 21st year onwards or earlier, on
proportionate basis, at the option of such preferential shareholders.
(iv) Preference Shares to be redeemed out of the Profits only 19: No such
shares shall be redeemed except out of the profits of the company which would
otherwise be available for dividend or out of the proceeds of a fresh issue of
shares made for the purposes of such redemption.
(v) Only fully paid Preference Shares are to be redeemed 20: No such shares
shall be redeemed unless they are fully paid.
(vi) Transfer to CRR Account 21: Where such shares are proposed to be
redeemed out of the profits of the company, there shall, out of such profits, be
transferred, a sum equal to the nominal amount of the shares to be redeemed, to
a reserve, to be called the Capital Redemption Reserve (CRR) Account, and the

15
As per First Proviso to Section 55 (2).
16
As per Rule 10 of the Companies (Share Capital and Debentures) Rules, 2014.
17
Explanation to Section 55 states that ‘Infrastructure Projects’ are as specified in Schedule VI
to the Companies Act, 2013.
18
As per Rule 10 of the Companies (Share Capital and Debentures) Rules, 2014.
19
As per Clause (a) of Second Proviso to Section 55 (2).
20
As per Clause (b) of Second Proviso to Section 55 (2).
21
As per Clause (c) of Second Proviso to Section 55 (2).

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 4.22 CORPORATE AND OTHER LAWS

provisions of this Act relating to reduction of share capital of a company shall,

except as provided in this section, apply as if the Capital Redemption Reserve
Account were paid-up share capital of the company.
Example 6: During the current financial year, the Board of Directors of Vintee
Lifestyles Garments Limited is to undertake redemption of 20,000 preference
shares of ` 100 each at a premium of ` 20 per share. It is made out by the
Accounts Department that the profits are sufficient to meet the ensuing liability
arising out of redemption of preference shares at premium.
In this case, the amount that needs to be transferred to Capital Redemption
Reserve (CRR) account, if preference shares are redeemed at a premium out of
profits which are otherwise available for dividend, is ` 20,00,000 being the sum
equal to the nominal amount of the preference shares to be redeemed. There is
no need to transfer to CRR account any amount paid towards premium.
(vii) Payment of Premium in case of prescribed Class of Companies 22: In case
of such class of companies, as may be prescribed and whose financial statement
comply with the accounting standards prescribed for such class of companies
under section 133, the premium, if any, payable on redemption shall be provided
for out of the profits of the company, before the shares are redeemed.
The premium, if any, payable on redemption of any preference shares issued on
or before the commencement of this Act by any such company shall be provided
for out of the profits of the company or out of the company‘s securities premium
account, before such shares are redeemed.
In a case not meeting above criteria, the premium, if any, payable on redemption
shall be provided for out of the profits of the company or out of the company’s
securities premium account, before such shares are redeemed.
(viii) Issue of further Redeemable Preference Shares if a Company is unable
to redeem existing preference shares or pay dividend: According to Section 55
(3), where 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

As per Clause (d) (i) and (ii) of Second Proviso to Section 55 (2).
22

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 SHARE CAPITAL AND DEBENTURES 4.23

 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.
It is provided that the Tribunal shall, while giving approval under this sub-section,
order the redemption forthwith of preference shares held by such persons who
have not consented to the issue of further redeemable preference shares.

• Unable to redeem preference shares/pay Dividend

• Take consent of 3/4th majority

• Seek approval of Tribunal

• Issue further preference shares

• Forthwith pay to dissenting shareholders

Note: According to the Explanation given, the issue of further redeemable

preference shares or the redemption of preference shares under this section shall
not be deemed to be an increase or, as the case may be, a reduction, in the share
capital of the company.
Utilisation of CRR Account: According to Section 55 (4), the capital redemption
reserve account may be applied by the company in paying up unissued shares of
the company to be issued to members of the company as fully paid bonus shares.

7. TRANSFER AND TRANSMISSION OF

SECURITIES AND THE ALLIED PROVISIONS
[SECTION 56 TO SECTION 59]
Section 56 deals with the transfer and transmission of securities or interest of a
member in the company.
Requirement for Registering the Transfer of Securities: According to Section
56(1), a company shall not register a transfer of securities of the company, or the

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 4.24 CORPORATE AND OTHER LAWS

interest of a member in the company in the case of a company having no share

capital, unless a proper instrument of transfer in the prescribed form 23, duly
stamped, dated and executed by or on behalf of the transferor and the transferee
(except where the transfer is between persons both of whose names are entered as
holders of beneficial interest in the records of a depository), specifying the name,
address and occupation, if any, of the transferee, has been delivered to the
company by the transferor or the transferee within a period of 60 days from the
date of execution, along with the certificate relating to the securities, or if no such
certificate is in existence, along with the letter of allotment of securities.
Where Instrument of Transfer lost/not delivered: First proviso to section 56(1)
states that where the instrument of transfer has been lost or the instrument of
transfer has not been delivered within the prescribed period, the company may
register the transfer on such terms as to indemnity as the Board may think fit.

Intrument of transfer in proper

form, dated & stamped

Signed by transferor & transferee

Name, address, occupation of

transferee

Delivered to company in 60 days

With share certificate/letter of

allotment

Lost instrument of transfer or

delayed delivery - Give indemnity
24
[Instrument of Transfer not required in case of Bonds issued by a
Government Company – It is provided that the provisions of this sub-section [i.e.
section 56(1)], in so far as it requires a proper instrument of transfer, to be duly

As per Rule 11 (1), Form No. SH-4 is to be used, in case securities are held in physical form.
23

24
In terms of Notification No. GSR 463 (E), dated 5th June, 2015 as amended by Notification
No. GSR 582 (E), dated 13th June, 2017 and Notification No. GSR 802 (E), dated 23rd February,
2018.

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 SHARE CAPITAL AND DEBENTURES 4.25

stamped and executed by or on behalf of the transferor and by or on behalf of

the transferee, shall not apply with respect to bonds issued by a Government
company, provided that an intimation by the transferee specifying his name,
address and occupation, if any, has been delivered to the company along with the
certificate relating to the bond; and if no such certificate is in existence, along
with the letter of allotment of the bond.
Further, the provisions of section 56 (1) shall not apply to a Government Company
in respect of securities held by nominees of the Government.
Note: The above exceptions are applicable to a Government Company, which has
not committed a default in filing its financial statements under section 137 or
Annual Return under section 92 with the Registrar.]
Power of Company to Register Transmission of Shares not affected by
section 56 (1): According to section 56 (2), the power of company to register
shall not be affected by the provision contained in Section 56 (1). Accordingly, the
company is empowered to register, if it receives an intimation of transmission of
any right to securities by operation of law from any person to whom such right
has been transmitted. In other words, there is no need for submission of
instrument of transfer in case of transmission of shares.
Procedure for Transfer of partly paid Shares on an application of transferor
alone: According to Section 56 (3), where an application is made by the transferor
alone and relates to partly paid shares, the transfer shall not be registered, unless
the company gives the notice of the application, in such manner as may be
prescribed, to the transferee and the transferee gives no objection to the transfer
within two weeks from the receipt of notice.
Subscribing the above position, Rule 11 (3) of the Companies (Share Capital and
Debentures) Rules, 2014, states that a company shall not register a transfer of
partly paid shares, unless the company has given a notice in Form No. SH-5 to the
transferee and the transferee has given no objection to the transfer within two
weeks from the date of receipt of notice.
Example 7: Himanshu has received a notice from Chaitanya Progressive Books
Private Limited on 7th August, 2019 intimating that Shefali has submitted a
transfer deed duly signed by her for transfer of 500 partly paid shares (` 6 paid-
up out of Face Value of ` 10 per share) in his name. Himanshu as transferee must
raise his objection to the proposed transfer of partly paid shares latest by
21st August, 2019.

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 4.26 CORPORATE AND OTHER LAWS

Time Period for Delivery of certificates: Section 56 (4) states the time period
for delivery of certificates. Accordingly, every company shall, unless prohibited by
any provision of law or any order of Court, Tribunal or other authority, deliver the
certificates of all securities allotted, transferred or transmitted—

Particulars Time Period for delivering the

Certificates of all Securities allotted,
transferred or transmitted

In the case of subscribers to the Within 2 months from the date of

memorandum. incorporation.

In the case of any allotment of any Within a period of two months from the
of its shares by a company. date of allotment.

In the case of a transfer or Within a period of one month from the

transmission of securities. date of receipt by the company of the
instrument of transfer or the intimation of
transmission

In the case of any allotment of Within a period of six months from the
debenture. date of allotment.

Securities dealt with in a Depository: According to the Proviso to Section 56 (4),

where the securities are dealt with in a depository, the company shall intimate the
details of allotment of securities to depository immediately on allotment of such
securities. 25
Transfer of Security of the Deceased Person by his Legal Representative:
According to Section 56 (5), the transfer of any security or other interest of a
deceased person in a company made by his legal representative shall, even if the
legal representative is not a holder thereof, be valid as if he had been the holder
at the time of the execution of the instrument of transfer.

25
In case of Specified IFSC Public or Specified IFSC Private Company, after the proviso to
Section 56 (4), the following proviso shall be inserted, namely:-
“Provided further that a Specified IFSC public company/Specified IFSC Private
Company shall deliver the certificates of all securities to subscribers after incorporation,
allotment, transfer or transmission within a period of sixty days." (Vide Notification No.
GSR 9 (E), dated 4th January, 2017)

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 SHARE CAPITAL AND DEBENTURES 4.27

Example 8: Richa Daniel, after having obtained succession certificate, succeeded

to 7,000 shares of ` 100 each allotted to her late father Alexender Daniel by
Speed Software Limited. To pay off the debt of her cousin Stesley, she wants to
transfer whole of the 7,000 shares to her on the basis of a duly stamped
instrument of transfer which has been signed by her as well as Stesley.
Accordingly, she has delivered the required documents to the company for
transfer of shares.
In terms of Section 56 (5), the company, on receipt of duly stamped instrument of
transfer along with requisite share certificates and succession certificate, shall
transfer the shares in favour of Stesley. Thus, even though Richa Daniel, the legal
representative of Alexender Daniel, is not a holder of 7,000 shares as per the
Register of Members of the company, the transfer effected by her in favour of her
cousin Stesley is a valid transfer as if she had been the holder of securities at the
time of executing the transfer deed.
Note: As an alternative, Richa Daniel may choose to get herself registered as
holder of the 7,000 shares in which case, she will make an application to Speed
Software Limited. Such application shall be accompanied with share certificates
and succession certificate. There is no need to submit instrument of transfer or
transfer deed in such a case of transmission. This is so because transfer deed
cannot be signed by the deceased person as transferor.
On receipt of these documents, the company will scrutinize them and if found in
order, it shall proceed to enter the name of Richa Daniel in the Register of
Members. Consequently, the name of the deceased person i.e. Alexender Daniel
shall be deleted. Further, new share certificates will be issued in the name of Richa
Daniel, the legal representative of Alexender Daniel.
Cases of Transmission: In the following cases, transmission of shares shall take
place:
(a) Death: When a shareholder expires, his shares need to be transmitted to his
legal representative.
(b) Insolvency: When a shareholder becomes insolvent, his shares are to be
transmitted to his Official Receiver.
(c) Lunacy: When a shareholder becomes lunatic, his shares are to be
transmitted to his administrator appointed by the Court.
Punishment for Default in compliance with the provisions: As per Section 56
(6), where any default is made in complying with the provisions of sub-

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 4.28 CORPORATE AND OTHER LAWS

sections (1) to (5), the company and every officer of the company who is in
default shall be liable to a penalty of fifty thousand rupees.
Liability of Depository: Section 56 (7) states that where any depository or
depository participant, with an intention to defraud a person, has transferred
shares, it shall be liable under Section 447 26 along with the liability mentioned
under the Depositories Act, 1996.
Forged Transfer: A forged transfer is a ‘nullity’ and is not legally binding. Forged
transfer takes place when a company effects transfer of shares on the basis of an
instrument of transfer containing forged signatures of transferor. Is it possible for
a transferee of ‘forged transfer’ to acquire ownership of shares contained in the
instrument of transfer? The answer is ‘NO’. At the same time, the transferor who is
the real owner continues to be the shareholder and accordingly, the company can
be forced by him to delete the name of the transferee and to restore his name as
owner of shares in the Register of Members.
What will happen if the transferee of ‘forged transfer’ transfers the shares to
another buyer who does not know about the forgery and the company also
registers the transfer in the name of new buyer and endorses the share
certificates. In fact, the company cannot deny the ownership rights of new
genuine buyer but it can also not deny the ownership rights of original
shareholder because ‘forged transfer’ is void ab-initio and therefore, the company
has to restore his name. While restoring the name of the original shareholder, the
company may be asked to compensate the new genuine buyer who exercised
good faith in purchasing the shares. As a remedy, the company may get itself
indemnified by the first transferee who used the forged instrument of transfer to
get the shares transferred in his name.
Note: With the dematerialisation process becoming a necessity in case of unlisted
public companies i.e. they are required to dematerialise all of their securities as
per Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules,
2014, the chances of forgery are very thin or almost negligible. Though private
companies are not required to dematerialise their securities but due to the limited
number of shareholders, the company can exercise caution and easily detect the
forgery, if at all it is going to happen.

26
The provisions contained in Section 447 which describe ‘punishment for fraud’ are
stated in the earlier Chapter 3 relating to ‘Prospectus and Allotment of Securities’.

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 SHARE CAPITAL AND DEBENTURES 4.29

Punishment for Personation of Shareholder [Section 57]

Section 57 contains provisions relating to punishment for personation of a
shareholder.
If any person deceitfully personates—
♦ as an owner of any security or interest in a company, or
♦ as an owner of any share warrant or coupon issued in pursuance of the
Companies Act, 2013, and
thereby obtains or attempts to obtain any such security or interest or any such share
warrant or coupon, or receives or attempts to receive any money due to any such
owner, such person shall be punishable with imprisonment for a term which shall not
be less than one year but which may extend to three years and with fine which shall
not be less than one lakh rupees but which may extend to five lakh rupees.
Refusal of Registration and Appeal against Refusal [Section 58]
It is possible that a company may refuse registration of transfer or transmission.
According to Section 2 (68) (i), a private company is required to restrict the right
to transfer its shares by providing so in its Articles. However, this right to prohibit
transfer is not absolute but it should be reasonable so that it is in the interest of
the company.
Section 58 contains the procedure which needs to be followed by a company while
refusing to register the transfer of securities. It also contains process of filing appeal
against such refusal. The provisions of Section 58 are stated as under:
(i) Notice of Refusal to be sent: According to Section 58 (1), if a private
company limited by shares refuses to register the transfer of, or the transmission
by operation of law of the right to any securities or interest of a member in the
company, then the company shall send notice of refusal to the transferor and the
transferee or to the person giving intimation of such transmission, within a period
of thirty days from the date on which the instrument of transfer, or the intimation
of such transmission, was delivered to the company.
(ii) Securities/other interest a Public Company: As per Section 58 (2), the
securities or other interest of any member in a public company are freely
transferable.
It is provided that any contract or arrangement between two or more persons in
respect of transfer of securities shall be enforceable as a contract.

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 4.30 CORPORATE AND OTHER LAWS

(iii) Appeal to Tribunal against Refusal: According to Section 58 (3), the

transferee may appeal to the Tribunal against the refusal within a period of thirty
days from the date of receipt of the notice or in case no notice has been sent by
the company, within a period of sixty days from the date on which the instrument
of transfer or the intimation of transmission, was delivered to the company.
(iv) Appeal to Tribunal against Refusal by a Public Company without
sufficient cause: Section 58 (4) states that if a public company without sufficient
cause refuses to register the transfer of securities within a period of thirty days
from the date on which the instrument of transfer or the intimation of
transmission, is delivered to the company, the transferee may, within a period of
sixty days of such refusal or where no intimation has been received from the
company, within ninety days of the delivery of the instrument of transfer or
intimation of transmission, appeal to the Tribunal.
(v) Order of Tribunal: According to Section 58 (5), the Tribunal, while dealing
with an appeal may, after hearing the parties, either dismiss the appeal, or by
order—
(a) direct that the transfer or transmission shall be registered by the company
and the company shall comply with such order within a period of ten days
of the receipt of the order; or
(b) direct rectification of the register and also direct the company to pay
damages, if any, sustained by any party aggrieved.
(vi) Contravention of the Order of the Tribunal: As per Section 58 (6), if a
person contravenes the order of the Tribunal, he shall be punishable with
imprisonment for a term not less than one year but may extend to three years
and with fine not less than one lakh rupees which may extend to five lakh rupees.

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 SHARE CAPITAL AND DEBENTURES 4.31

Rectification of Register of Members [Section 59]

Section 59 provides the procedure for the rectification of register of members.
These provisions are stated as under:
(i) Appeal by Aggrieved Person: According to Section 59 (1), if the name of
any person is, without sufficient cause,
• entered in the register of members of a company, or
• after having been entered in the register, is, omitted therefrom, or
• if a default is made, or unnecessary delay takes place in entering in the
register, the fact of any person having become or ceased to be a member,
then the person aggrieved, or any member of the company, or the company may
appeal in such form as may be prescribed, to the Tribunal, or to a competent
court outside India, specified by the Central Government by notification, in
respect of foreign members or debenture holders residing outside India, for
rectification of the register.
(ii) Order of the Tribunal: Section 59 (2) states that the Tribunal may, after
hearing the parties to the appeal by order,
• either dismiss the appeal, or
• direct that the transfer or transmission shall be registered by the company
within a period of ten days of the receipt of the order, or
• direct rectification of the records of the depository or the register and in the
latter case, direct the company to pay damages, if any, sustained by the
party aggrieved.
(iii) Entitlement to Voting Rights: Section 59 (3) states that the provisions of
Section 59 shall not restrict the right of a holder of securities, to transfer such
securities. Further, any person acquiring such securities shall be entitled to voting
rights unless the voting rights have been suspended by an order of the Tribunal.
(iv) Transfer of Securities contravenes certain Acts and Direction of
Tribunal: According to Section 59 (4), where the transfer of securities is in
contravention of any of the provisions of the Securities Contracts (Regulation)
Act, 1956 (SCRA), the Securities and Exchange Board of India Act, 1992 (SEBI) or
the Companies Act, 2013 or any other law for the time being in force, the Tribunal
may, on an application made by the depository, company, depository participant,
the holder of the securities or the Securities and Exchange Board, direct any

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 4.32 CORPORATE AND OTHER LAWS

company or a depository to set right the contravention and rectify its register or
records concerned.

8. ALTERATION OF SHARE CAPITAL

[SECTIONS 61-68]
Before proceeding further, we may look at the following definitions:
Definition of Authorised Capital or Nominal Capital: Section 2(8) defines the
term authorised capital or nominal capital to mean such capital as is authorised
by the memorandum of a company to be the maximum amount of share capital
of the company.
Definition of Called-up Capital: Section 2(15) states that the term called-up
capital means such part of the capital, which has been called for payment.

Power to limited
companies
(section 61)
Buy back Rights Issue
(Section 68) (section 62)
Alteration of
Share Capital

Reduction Bonus Issue

(section 66) (section 63)

Power of Limited Company to Alter its Share Capital [Section 61]

According to Section 61, a limited company having a share capital is empowered
to alter its capital clause of the Memorandum of Association. The provisions are
as under:
(1) Section 61 (1) states that a limited company having a share capital may, if so
authorised by its articles, alter its memorandum in its general meeting to—
(a) increase its authorised share capital by such amount as it thinks expedient;
(b) consolidate and divide all or any of its share capital into shares of a larger
amount than its existing shares,

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 SHARE CAPITAL AND DEBENTURES 4.33

However, no consolidation and division which results in changes in the

voting percentage of shareholders shall take effect unless it is approved by
the Tribunal on an application made in the prescribed manner;
(c) convert all or any of its fully paid-up shares into stock, and reconvert that
stock into fully paid-up shares of any denomination;
(d) sub-divide its shares, or any of them, into shares of smaller amount than is
fixed by the memorandum, so, however, that in the sub-division the
proportion between the amount paid and the amount, if any, unpaid on
each reduced share shall be the same as it was in the case of the share from
which the reduced share is derived.
(e) cancel shares which, at the date of the passing of the resolution in that behalf,
have not been taken or agreed to be taken by any person, and diminish the
amount of its share capital by the amount of the shares so cancelled.
(2) Section 61 (2) provides that the cancellation of shares shall not be deemed
to be a reduction of share capital.
Note: Section 64 states that a company shall, within 30 days of its share capital
having been altered in the manner provided in Section 61 (1), give notice to the
Registrar in the prescribed form 27 along with an altered memorandum.
Further issue of share capital – Rights Issue; Preferential Allotment
[Section 62] 28
A rights issue involves pre-emptive subscription rights to buy additional securities
in a company offered to the company’s existing security holders. It is a non-
dilutive pro rata way to raise capital.

27
Form No. SH-7 is to be used as per Rule 15 of the Companies (Share Capital and
Debentures) Rules, 2014.
Rule 15: Where a company alters its share capital in any manner specified in sub-section (1)
of section 61, or an order is passed by the Government increasing the authorized capital of
the company in pursuance of sub-section (4) read with sub-section (6) of section 62 or a
company redeems any redeemable preference shares or a company not having share capital
increases number of its members, the notice of such alteration, increase or redemption shall
be filed by the company with the Registrar in Form No. SH.7 along with the fee.
28
In case of Nidhis, Section 62 shall not apply. While complying with such exception, the
Nidhis shall ensure that the interests of their shareholders are protected. (Notification No.
GSR 465 (E), dated 5th June, 2015).

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 4.34 CORPORATE AND OTHER LAWS

Example 9: If a company announces ‘1:10 rights issue’, it means an existing

shareholder can buy one extra share for every ten shares held by him/her. Usually
the price at which the new shares are issued by way of rights issue is less than the
prevailing market price of the stock to encourage subscription.
A public company may issue securities through a rights issue or a bonus issue in
accordance with the provisions of this Act and in case of a listed company or a
company which intends to get its securities listed also with the provisions of the
Securities and Exchange Board of India Act, 1992 and the rules and regulations
made thereunder as per section 23(1)(c) of the Companies Act, 2013.
A private company may issue securities by way of rights issue or bonus issue in
accordance with the provisions of this Act as per the section 23(2)(a).
Section 62 deals with further issue of share capital. The provisions ensure
equitable distribution of such shares to the existing shareholders. These are
mentioned in the following paragraphs:
(1) Offering of issue of further Shares: According to Section 62 (1), where at
any time, a company having a share capital proposes to increase its subscribed
capital by the issue of further shares, such shares shall be offered—
29
(a) to persons who, at the date of the offer, are holders of equity shares of the
company in proportion, to the paid-up share capital on those shares by
sending a letter of offer subject to the following conditions, namely:—
(i)
30
the offer shall be made by notice specifying the number of shares
offered and limiting a time not being less than fifteen days or such

29
Insertion of Proviso in clause (a) of sub-section (1) of Section 62:
“Provided that notwithstanding anything contained in sub-clause (i), in case of a Specified
IFSC Public Company, the periods lesser than those specified in the said sub-clause shall
apply if ninety per cent of the members have given their consent in writing or in electronic
mode.” (Notification No. GSR 8 (E), dated 4th January, 2017)
30
In case of private companies, Section 62 (1)(a)(i) and Section 62 (2) shall apply with
following modification:
In clause (a), in sub-clause (i), the following proviso shall be inserted:
“Provided that that notwithstanding anything contained in this sub-clause and sub-
section (2) of Section 62, in case ninety percent of the members of a private company
have given their consent in writing or in electronic mode, the periods lesser than those
specified in the said sub-clause or sub-section (2), shall apply”. (Notification No. GSR 464
(E), dated 05-06-2015).

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 SHARE CAPITAL AND DEBENTURES 4.35

lesser number of days as may be prescribed and not exceeding thirty

days from the date of the offer within which the offer, if not accepted,
shall be deemed to have been declined;
(ii) unless the articles of the company otherwise provide, the offer
aforesaid shall be deemed to include a right exercisable by the person
concerned to renounce the shares offered to him or any of them in
favour of any other person; and the notice referred to in clause (i) shall
contain a statement of this right;
(iii) after the expiry of the time specified in the notice aforesaid, or on
receipt of earlier intimation from the person to whom such notice is
given that he declines to accept the shares offered, the Board of
Directors may dispose of them in such manner which is not dis-
advantageous to the shareholders and the company.
(b) to employees under a scheme of employees’ stock option, subject to
special resolution 31 passed by company and subject to the conditions as
may be prescribed 32; or
(c) to any persons, if it is authorised by a special resolution, whether or not
those persons include the persons referred to in clause (a) or clause (b),
either for cash or for a consideration other than cash, if the price of such
shares is determined by the valuation report of a registered valuer, subject
to the compliance with the applicable provisions of Chapter III and any
other conditions as may be prescribed 33.
This clause authorises company to issue shares to persons other than its
existing shareholders and to employees under ESOP. However, the process

31
(a) In case of private company - In clause (b) of Sub-section (1) of Section 62 for the words
"special resolution", the words "ordinary resolution" shall be substituted. However, this is
applicable to a private company which has not defaulted in filing its financial statements
under Section 137 or Annual Return under Section 92. (Notification No. GSR 464 (E), dated 5th
June, 2015 as amended by Notification No. GSR 583 (E), dated 13th June, 2017.)
(b) In case of Specified IFSC Public Company - Clause (b) of Sub- section (1) of section 62: for
the words “special resolution” read as “ordinary resolution”. - Notification No. GSR 8 (E), dated
4th January, 2017.
32
Refer Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. In case of a
listed company, SEBI (Share Based Employee Benefits) Regulations, 2014 are to be referred.
33
Refer Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014. In case of a
listed company, SEBI (Share Based Employee Benefits) Regulations, 2014 are to be referred.

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 4.36 CORPORATE AND OTHER LAWS

to issue those shares is provided under section 42 of the Act (Private

Placement).
Note: As per Section 2(37), the term ‘employees’ stock option’ means the
option given to the directors, officers or employees of a company or of its
holding company or subsidiary company or companies, if any, which gives
such directors, officers or employees, the benefit or right to purchase, or to
subscribe for, the shares of the company at a future date at a pre-
determined price.
In case an unlisted company 34 desires to issue shares under ESOP Scheme to its
directors, officers or employees, Rule 12 of the Companies (Shares and
Debentures) Rules, 2014 requires certain conditions to be fulfilled. Some of the
important provisions are as under:
(i) According to Rule 12 (1), the issue of Employees’ Stock Option Scheme has
been approved by the shareholders of the company by passing a special
resolution.
The term ‘Employee’ means:
(a) a permanent employee of the company who has been working in India or
outside India; or
(b) a director of the company, whether a whole-time director or not but
excluding an independent director; or
(c) an employee as defined in clause (a) or (b) of a subsidiary, in India or
outside India, or of a holding company of the company
but does not include-
(i) an employee who is a promoter or a person belonging to the
promoter group; or
(ii) a director who either himself or through his relative or through any
body corporate, directly or indirectly, holds more than ten per cent of
the outstanding equity shares of the company:

A listed company while issuing shares under ESOP Scheme shall follow the provisions of
34

SEBI (Share Based Employee Benefits) Regulations, 2014.

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 SHARE CAPITAL AND DEBENTURES 4.37

Provided that in case of a startup company 35, the conditions mentioned in

sub-clauses (i) and (ii) shall not apply up to ten years from the date of its
incorporation or registration.
(ii) According to Rule 12 (2), the company shall make the specified disclosures in
the explanatory statement annexed to the notice for passing of the resolution.
(iii) According to Rule 12 (3), the companies granting option to its employees
pursuant to Employees Stock Option Scheme will have the freedom to determine the
exercise price in conformity with the applicable accounting policies, if any.
(iv) According to Rule 12 (6):
(a) There shall be a minimum period of one year between the grant of options
and vesting of option:
It is provided that in a case where options are granted by a company under
its Employees Stock Option Scheme in lieu of options held by the same
person under an Employees Stock Option Scheme in another company,
which has merged or amalgamated with the first mentioned company, the
period during which the options granted by the merging or amalgamating
company were held by him shall be adjusted against the minimum vesting
period required under this clause;
(b) The company shall have the freedom to specify the lock-in period for the
shares issued pursuant to exercise of option.
(c) The Employees shall not have right to receive any dividend or to vote or in
any manner enjoy the benefits of a shareholder in respect of option granted
to them, till shares are issued on exercise of option.
(v) According to Rule 12 (8):
(a) The option granted to employees shall not be transferable to any other
person.
(b) The option granted to the employees shall not be pledged, hypothecated,
mortgaged or otherwise encumbered or alienated in any other manner.

35
As defined in notification number GSR 127(E), dated 19th February, 2019 issued by the
Department for Promotion of Industry and Internal Trade, Ministry of Commerce and
Industry, Government of India.

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 4.38 CORPORATE AND OTHER LAWS

(c) Subject to clause (d), no person other than the employees to whom the
option is granted shall be entitled to exercise the option.
(d) In the event of the death of employee while in employment, all the options
granted to him till such date shall vest in the legal heirs or nominees of the
deceased employee.
(e) In case the employee suffers a permanent incapacity while in employment,
all the options granted to him as on the date of permanent incapacitation,
shall vest in him on that day.
(f) In the event of resignation or termination of employment, all options not
vested in the employee as on that day shall expire. However, the employee
can exercise the options granted to him which are vested within the period
specified in this behalf, subject to the terms and conditions under the
scheme granting such options as approved by the Board.
(2) Dispatch of Notice to the existing Shareholders: Section 62 (2) requires
that the notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be
dispatched through registered post or speed post or through electronic mode or
courier or any other mode having proof of delivery to all the existing shareholders
at least three days before the opening of the issue.
(3) Exception: According to Section 62 (3), Section 62 shall not apply to the
increase of the subscribed capital of a company caused by the exercise of an
option attached to the debentures issued or loan raised by the company to
convert such debentures or loans into shares in the company.
It is provided that the terms of issue of such debentures or loan containing such
an option have been approved before the issue of such debentures or the raising
of loan by a special resolution passed by the company in general meeting.
(4) Conversion of Debentures/Loan into Shares: According to Section 62 (4),
where any debentures have been issued, or loan has been obtained from any
Government by a company, and if that Government considers it necessary in the
public interest so to do, it may, by order, direct that such debentures or loans or
any part thereof shall be converted into shares in the company on such terms and
conditions as appear to the Government to be reasonable in the circumstances of
the case even if terms of the issue of such debentures or the raising of such loans
do not include a term for providing for an option for such conversion.
Term of Conversion not acceptable to the Company: It is provided that where
the terms and conditions of such conversion are not acceptable to the company,

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 SHARE CAPITAL AND DEBENTURES 4.39

it may, within sixty days from the date of communication of such order, appeal to
the Tribunal which shall after hearing the company and the Government pass
such order as it deems fit.
(5) Consideration of Terms and Conditions of Conversion by the
Government: Section 62 (5) requires that in determining the terms and
conditions of conversion, the Government shall have due regard to the financial
position of the company, the terms of issue of debentures or loans, as the case
may be, the rate of interest payable on such debentures or loans and such other
matters as it may consider necessary.
(6) If required, Memorandum needs to be Altered to accommodate
increased Share Capital: According to Section 62 (6), where the Government has,
by an order made under sub-section (4), directed that any debenture or loan or
any part thereof shall be converted into shares in a company and where no
appeal has been preferred to the Tribunal or where such appeal has been
dismissed, the memorandum of such company shall, where such order has the
effect of increasing the authorised share capital of the company, stand altered
and the authorised share capital of such company shall stand increased by an
amount equal to the amount of the value of shares which such debentures or
loans or part thereof has been converted into.
Example 10: A company, listed at Bombay Stock Exchange, intends to offer its
new shares to the non-members. The existing members of the company consider
such offer as invalid in view of the provisions contained in Section 62 (1) (a).
However, the company is not prohibited in absolute terms while offering new
shares to the non-members. It can do so after fulfilling the conditions given in
Section 62 (1) (c). Thus, new shares of a company limited by shares may be issued
to non-members under certain circumstances.
Issue of Bonus Shares [Section 63]
Bonus shares are shares issued proportionately by a company to its current
shareholders as fully paid-up shares free of cost.
Section 63 prescribes the condition and the manner of issue of fully paid-up
bonus shares by a company to its members. The provisions are as under:
(1) According to Section 63 (1), a company may issue fully paid-up bonus
shares to its members, in any manner whatsoever, out of—
(i) its free reserves;

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 4.40 CORPORATE AND OTHER LAWS

(ii) the securities premium account; or

(iii) the capital redemption reserve account.
However, no issue of bonus shares shall be made by capitalising reserves created
by the revaluation of assets. In other words, a company cannot issue bonus shares
out of reserves created by the revaluation of assets.

Bonus shares may

be issued from

Not from
Free Securities
CRR Revaluation
Reserves Premium
Reserve

(2) Section 63 (2) states that no company shall capitalise its profits or reserves
for the purpose of issuing fully paid-up bonus shares, unless—
(a) it is authorised by its articles;
(b) it has on the recommendation of the Board, been authorised in the general
meeting of the company;
(c) it has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are
made fully paid-up;
(f) it complies with such conditions as prescribed by Rule 14 (given below).
According to Rule 14 of the Companies (Share capital and debenture) Rules, 2014,
a company which has once announced the decision of its Board recommending a
bonus issue, shall not subsequently withdraw the same.
(3) According to Section 63 (3), the bonus shares shall not be issued in lieu of
dividend.
It is noteworthy that the fully paid-up bonus shares can only be issued if the articles
of the company contain authorisation in this respect. Bonus shares are issued out of

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 SHARE CAPITAL AND DEBENTURES 4.41

profits which are otherwise available for distribution among the members. Such
profits are not distributed among them in cash but the shareholders are allotted
further shares in the form of bonus shares. Free reserves, share premium amount and
amount lying in capital redemption reserve account can be used for the purpose of
issuing fully paid-up bonus shares.
Note: According to the proviso to Section 123(5) of the Companies Act, 2013, it is
permissible for a company to capitalise its profits or reserves for the purpose of
issuing fully paid up bonus shares or paying up any amount for the time being
unpaid on any shares held by the members of the company.
Example 11: XYZ Limited declares bonus shares in the ratio of 1:5. It means an
existing shareholder of the company, say Mr. ‘R’, will get one bonus share free of
cost for every five shares already held by him. The larger the holding of any
shareholder, the more bonus shares he will get in comparison to others.
Notice to be given to Registrar for alteration of Share Capital
[Section 64]
As and when, there is an alteration of share capital, the company concerned shall
notify the registrar. The provisions in this respect are contained in Section 64.
(1) Filing of Prescribed Notice: According to Section 64 (1), where–
• a company alters its share capital in any manner specified in
section 61 (1),
• an order made by the Government under section 62(4) read with
62(6) has the effect of increasing authorised capital of a company; or
• a company redeems any redeemable preference shares,
the company shall file a notice in the prescribed form 36 with the Registrar within a
period of thirty days of such alteration or increase or redemption, as the case may
be, along with an altered memorandum.
(2) Default in Filing of Notice: Section 64 (2) states that where any company fails to
comply with the provisions of sub-section (1), such company and every officer who is in
default shall be liable to a penalty of five hundred rupees for each day during which
such default continues, subject to a maximum of five lakh rupees in case of a
company and one lakh rupees in case of an officer who is in default .

Form No. SH-7 is to be used as per Rule 15 of the Companies (Share Capital and
36

Debentures) Rules, 2014.

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 4.42 CORPORATE AND OTHER LAWS

Reduction of Share Capital [Section 66]

As a principle of sound financial management, a company is required to keep its
capital intact. At times, however, it may become necessary for the company to
bring about a reduction in its capital. Accumulated business losses, assets of
reduced or doubtful value like unsound investments proving bad or having paid-
up capital in excess of the requirements of the company or surplus capital which
cannot be employed gainfully, require corrective measures to be taken to keep
the financial health of the company in a reasonably well position. Accordingly, the
company may find it necessary to reduce its share capital.
Section 66 deals with the reduction of share capital. The provisions are stated as
under:
(1) Reduction of Share Capital by Special Resolution to be confirmed by
Tribunal: Section 66 (1) provides that subject to confirmation by the Tribunal on
an application by the company, a company limited by shares or limited by
guarantee and having a share capital may, by a special resolution, reduce the
share capital in any manner and in particular, may—
(a) extinguish or reduce the liability on any of its shares in respect of the share
capital not paid-up;
Example 12: In respect of a share of ` 10, a company has called only ` 7 per
share and the same has been paid by all the shareholders. The company
decides not to call remaining ` 3 per share and reduces its shareholders’
liability. If done, the company is said to have reduced its share of ` 10 to ` 7
as fully paid-up share.
(b) either with or without extinguishing or reducing liability on any of its shares,—
(i) cancel any paid-up share capital which is lost or is unrepresented by
available assets; or
(ii) pay off any paid-up share capital which is in excess of the wants of the
company,
The company shall also alter its memorandum by reducing the amount of its
share capital and of its shares accordingly.
Reduction not permitted: Section 66 (1) further Provides that no such reduction
shall be made if the company is in arrears in the repayment of any deposits
accepted by it, either before or after the commencement of this Act, or the
interest payable thereon.

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 SHARE CAPITAL AND DEBENTURES 4.43

(2) Issue of Notice by the Tribunal : According to Section 66 (2), the Tribunal
shall give notice of every application made to it under sub-section (1) to the
Central Government 37, Registrar and to the Securities and Exchange Board, in the
case of listed companies, and the creditors of the company and shall take into
consideration the representations, if any, made to it by that Government,
Registrar, the Securities and Exchange Board and the creditors within a period of
three months from the date of receipt of the notice.
Where no representation has been received from the Central Government,
Registrar, the Securities and Exchange Board or the creditors within the said
period, it shall be presumed that they have no objection to the reduction.
(3) Order of Tribunal: According to Section 66 (3), the Tribunal may, if it is
satisfied that the debt or claim of every creditor of the company has been
discharged or determined or has been secured or his consent is obtained, make
an order confirming the reduction of share capital on such terms and conditions
as it deems fit.
It is provided that no application for reduction of share capital shall be sanctioned
by the Tribunal unless the accounting treatment, proposed by the company for
such reduction is in conformity with the accounting standards specified in Section
133 or any other provision of this Act and a certificate to that effect by the
company’s auditor has been filed with the Tribunal.
(4) Publication of Order of Confirmation of Tribunal: Section 66 (4) states
that the order of confirmation of the reduction of share capital by the Tribunal
under sub-section (3) shall be published by the company in such manner as the
Tribunal may direct.
(5) Delivery of Certified Copy of Order of Tribunal to Registrar: Section 66
(5) requires that the company shall deliver a certified copy of the order of the
Tribunal under sub-section (3) and of a minute approved by the Tribunal
showing—
(a) the amount of share capital;
(b) the number of shares into which it is to be divided;
(c) the amount of each share; and

The powers of Central Government stand delegated to Regional Directors. (Notification No.
37

SO 2938 (E), dated 6th September, 2017.

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 4.44 CORPORATE AND OTHER LAWS

(d) the amount, if any, at the date of registration deemed to be paid-up on

each share,
to the Registrar within thirty days of the receipt of the copy of the order, who
shall register the same and issue a certificate to that effect.
(6) Exemption to Buy-Back: According to Section 66 (6), nothing in this
section shall apply to buy-back of its own securities by a company under
Section 68.
(7) No Liability of Members: Section 66 (7) states that a member of the
company, past or present, shall not be liable to any call or contribution in
respect of any share held by him exceeding the amount of difference, if any,
between the amount paid on the share, or reduced amount, if any, which is to
be deemed to have been paid thereon, as the case may be, and the amount of
the share as fixed by the order of reduction.
(8) In case where Creditor is entitled to object but was not included in the
list of Creditors: According to Section 66 (8), where the name of any creditor
entitled to object to the reduction of share capital under this section is, by
reason of his ignorance of the proceedings for reduction or of their nature and
effect with respect to his debt or claim, not entered on the list of creditors, and
after such reduction, the company commits a default, within the meaning of
section 6 of the Insolvency and Bankruptcy Code, 2016, in respect of the amount
of his debt or claim-
(a) every person, who was a member of the company on the date of the
registration of the order for reduction by the Registrar, shall be liable to
contribute to the payment of that debt or claim, an amount not exceeding
the amount which he would have been liable to contribute if the company
had commenced winding up on the day immediately before the said date;
and
(b) if the company is wound up, the Tribunal may, on the application of any
such creditor and proof of his ignorance as aforesaid, if it thinks fit, settle
a list of persons so liable to contribute, and make and enforce calls and
orders on the contributories settled on the list, as if they were ordinary
contributories in a winding up.

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 SHARE CAPITAL AND DEBENTURES 4.45

(9) Rights of Contributories not affected: Section 66 (9) provides that

nothing in sub-section (8) shall affect the rights of the contributories
among themselves.
(10) Liability of Officers: Section 66 (10) deals with the liability of defaulting
officers. Accordingly, if any officer of the company—
(a) knowingly conceals the name of any creditor entitled to object to the
reduction;
(b) knowingly misrepresents the nature or amount of the debt or claim
of any creditor; or
(c) abets or is privy to any such concealment or misrepresentation as
aforesaid,
he shall be liable under Section 447 38.
Restriction on Purchase by Company or giving of Loans by it for
Purchase of its Shares [ 39Section 67 40]
As a fundamental principle, a company cannot buy its own shares because in that
case it will involve reduction of share capital affecting the creditors. However, this
restriction is not absolute. If the prescribed procedure as laid by Section 67 is
followed, the company is permitted to buy its own shares and the prohibition
shall not apply. The provisions of Section 67 are mentioned below:

38
The provisions contained in Section 447 which describe ‘punishment for fraud’ are stated in
the earlier Chapter 3 relating to ‘Prospectus and Allotment of Securities’.
39
Private companies: Section 67 shall not apply to private companies-
(a) in whose share capital no other body corporate has invested any money;
(b) if the borrowings of such a company from banks or financial institutions or any body corporate
is less than twice its paid-up share capital or fifty crore rupees, whichever is lower; and
(c) such a company is not in default in repayment of such borrowings subsisting at the time of
making transactions under this section. However, the exemption is applicable if the private
company has not defaulted in filing its financial statements under Section 137 and Annual Return
under Section 92. (Notification No. GSR 464 (E), dated 5th June, 2015 as amended by Notification
No. GSR 583 (E), dated 13th June, 2017).
40
Specified IFSC Public Company - Section 67 Shall not apply to a Specified IFSC public company-
(a) in whose share capital no other body corporate has invested any money;
(b) if the borrowings of such company from banks or financial institutions or any body corporate is
less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and
(c) such a company is not in default in repayment of such borrowings subsisting at the time of
making transactions under this section. (Notification No. GSR 8 (E), dated 4th January, 2017).

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 4.46 CORPORATE AND OTHER LAWS

(1) Reduction according to the applicable Provisions: Section 67(1) 41 lays

down that no company limited by shares or by guarantee and having a share
capital shall have power to buy its own shares unless the consequent reduction of
share capital is effected under the provisions of this Act.
(2) Restriction on giving Loan, Guarantee or provision of Security, etc.:
According to Section 67 (2), no public company shall give, whether directly or
indirectly and whether by means of a loan, guarantee, the provision of security or
otherwise, any financial assistance for the purpose of, or in connection with, a
purchase or subscription made or to be made, by any person of or for any shares
in the company or in its holding company.
(3) Exceptions: As per Section 66(3), there are, however, certain exceptions
where a company may provide the financial assistance, namely:
(a) the lending of money by a banking company in the ordinary course of its
business;
(b) the provision is made by a company for lending of money in accordance
with any scheme approved by company through special resolution with
such requirements as may be prescribed 42, for the purchase of, or
subscription for, fully paid up shares in the company or its holding
company, if the purchase of, or the subscription for, the shares held by
trustees for the benefit of the employees or such shares held by the
employee of the company;
(c) the giving of loans by a company to persons in the employment of the
company other than its directors or key managerial personnel, for an amount
not exceeding their salary or wages for a period of six months with a view to
enabling them to purchase or subscribe for fully paid-up shares in the company
or its holding company to be held by them by way of beneficial ownership.
However, disclosures in respect of voting rights not exercised directly by the
employees in respect of shares to which the scheme relates shall be made in the
Board’s report in such manner as may be prescribed.

41
In case of Nidhis, Section 67 (1) shall not apply, when shares are purchased by the
company from a member on his ceasing to be a depositor or borrower and it shall not be
considered as reduction of capital under Section 66 of the Companies Act, 2013. While
complying with such exception, the Nidhis shall ensure that the interests of their
shareholders are protected. (Notification No. GSR 465 (E), dated 5th June, 2015)
42
Refer Rule 16 of the Companies (Share Capital and Debentures) Rules, 2014.

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 SHARE CAPITAL AND DEBENTURES 4.47

(4) Redemption of Preference Shares Permitted: According to Section 67 (4),

nothing in Section 67 shall affect the right of a company to redeem any
preference shares issued under this Act or under any previous company law.
(5) Punishment for Contravention: Section 67 (5) states that if a company
contravenes the provisions of this section, the punishment shall be as under:
• Company: It shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to twenty-five lakh rupees;
• Every officer of the company who is in default: He shall be punishable
with imprisonment for a term which may extend to three years and with fine
which shall not be less than one lakh rupees but which may extend to
twenty-five lakh rupees.
BUY BACK OF SECURITIES [Sections 68-70]
Buy back is the re-acquisition by a company of its own securities. It is a way of
returning money to its investors. Section 68 to Section 70 contain provisions for
buy back of securities by the issuer company. They are stated as under:
Power of Company to Purchase its Own Securities [Section 68]
Section 68 contains provisions which describe the power a company to purchase
its own securities subject to the applicable conditions.
(1) Sources of Funds for Buy-Back of Shares: According to Section 68 (1), a
company may purchase its own shares or other specified securities. The purchase
should be made out of:
(i) its free reserves; or
(ii) the securities premium account; or
(iii) the proceeds of the issue of any shares or other specified securities.
However, buy-back of any kind of shares or other specified securities cannot be
made out of the proceeds of an earlier issue of the same kind of shares or same
kind of other specified securities.
“Specified securities” includes employees’ stock option or other securities as may
be notified by the Central Government from time to time 43.

43
As per Explanation I to Section 68.

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 4.48 CORPORATE AND OTHER LAWS

(2) Conditions for Buy-Back: According to Section 68 (2), the company shall
not purchase its own shares or other specified securities unless:
(a) the buy-back is authorised by its articles;
(b) a special resolution authorising the buy-back is passed in general meeting
of the company;
Exception: A special resolution is not necessary where:
(i) the buy-back is, ten per cent or less of the total paid-up equity capital
and free reserves of the company; and
(ii) such buy-back has been authorised by the Board by means of a
resolution passed at its meeting;
(c) the buy-back is 25% or less of the aggregate of paid-up capital and free
reserves of the company;
It is provided that the buy-back of equity shares in any financial year shall
not exceed 25% of its total paid up equity capital in that financial year.
(d) the ratio of the aggregate debts (secured and unsecured) owed by the
company after buy back is not more than twice the paid up capital and its
free reserves;
It is provided that the Central Government may prescribe a higher ratio of
the debt to capital and free reserves for a class or classes of companies;
The expression “free reserves” includes securities premium account44.
(e) all the shares or other specified securities for buy-back are fully paid-up;
(f) the buy-back of the shares or other specified securities listed on any
recognised stock exchange is in accordance with the regulations made by
SEBI in this behalf;
(g) the buy-back in respect of shares or other specified securities other than
those specified in Clause (f) is in accordance with rules as may be
prescribed. [Sections 68(2)]
Provided that no offer of buy-back, shall be made within a period of one year
from the date of the closure of the preceding offer of buy-back, if any.

44
As per Explanation II to Section 68.

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 SHARE CAPITAL AND DEBENTURES 4.49

(3) Procedure before Buy-Back: According to Section 68 (3) 45, the notice of
the meeting at which special resolution is proposed to be passed shall be
accompanied by an explanatory statement stating -
(a) a full and complete disclosure of all the material facts;
(b) the necessity for the buy-back;
(c) the class of shares or securities intended to be purchased under the buy
back;
(d) the amount to be invested under the buy-back; and
(e) the time limit for completion of buy-back.
(4) Time limit for Completion of Buy-Back: Section 68(4) states that every
buy-back shall be completed within twelve months from the date of passing the
special resolution or a resolution passed by the Board at general meeting
authorising the buy-back.
(5) Whose Securities are to be Purchased under ‘Buy-Back’: According to
Section 68 (5), the buy-back under sub-section (1) may be—
(a) from the existing shareholders or security holders on a proportionate basis;
or
(b) from the open market; or
(c) by purchasing the securities issued to employees of the company pursuant
to a scheme of stock option or sweat equity.
(6) Declaration of Solvency: According to Section 68 (6), where a company
has passed a special resolution under clause (b) of sub-section (2) or the Board
has passed a resolution under item (ii) of the proviso to clause (b) of sub-section
(2) to buy-back its own shares or other securities, it shall, before making such
buy-back, file with the Registrar and the SEBI, a declaration of solvency in the
form as may be prescribed 46 and verified by an affidavit to the effect that the
Board has made a full inquiry into the affairs of the company as a result of which
they have formed an opinion that it is capable of meeting its liabilities and will

45
Rule 17 (1) of the Companies (Share Capital and Debentures), Rules, 2014 details out
the matters to be included in the ‘explanatory statement’.
46
Form No. SH-9 to be used as per Rule 17 (3) of the Companies (Share Capital and
Debentures), Rules, 2014.

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 4.50 CORPORATE AND OTHER LAWS

not be rendered insolvent within a period of one year from the date of
declaration of solvency adopted by the Board. The declaration shall be signed by
at least two directors of the company, one of whom shall be the managing
director, if any;
Provided that no declaration of solvency shall be filed with the SEBI by a company
whose shares are not listed on any recognised stock exchange.
(7) Extinguishment of Securities: Section 68 (7) requires that where a
company buys back its own securities or other specified securities, it shall
extinguish and physically destroy the shares or securities so bought-back within
seven days of the last date of completion of buy-back.
(8) Cooling Period: Section 68 (8) casts an obligation that where a company
completes a buy-back of its shares or other specified securities under this section,
it shall not make further issue of same kind of shares including allotment of
further shares under Section 62 (1) (a) or other specified securities within a period
of six months except by way of bonus issue or in the discharge of subsisting
obligations such as conversion of warrants, stock option schemes, sweat equity or
conversion of preference shares or debentures into equity shares.
(9) Register of Buy Back: Section 68 (9) requires that where a company buys-
back its shares or other specified securities under this section, it shall maintain a
register 47 of the shares or securities so bought, the consideration paid for the
shares or securities bought-back, the date of cancellation of shares or securities,
the date of extinguishing and physically destroying the shares or securities and
such other particulars as may be prescribed.
(10) Filing of Return of Buy-back: According to Section 68 (10), a company
shall, after completion of the buy-back under this section, file with the Registrar
and the SEBI, a return 48 containing such particulars relating to the buy-back within
thirty days of such completion, as may be prescribed.
However, no return shall be filed with the SEBI by a company whose shares are
not listed on any recognised stock exchange.

47
To be maintained in Form No. SH-10 as per Rule 17 (12)(a) of the Companies (Share Capital
and Debentures), Rules, 2014.
48
To be filed in Form No. SH-11 as per Rule 17 (13) of the Companies (Share Capital and
Debentures), Rules, 2014.

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 SHARE CAPITAL AND DEBENTURES 4.51

(11) Penalty for Default: Section 68 (11) states that if a company makes default
in complying with the provisions of this section or any regulations made by SEBI,
for the purposes (f) of sub-section (2), the punishment shall be as under:
• Company: It shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to three lakh rupees; and
• Every officer of the company who is in default: He shall be punishable
with fine which shall not be less than one lakh rupees but which may extend
to three lakh rupees.
Transfer of certain Sums to Capital Redemption Reserve Account
[Section 69]
Section 69 requires certain amount to be transferred to the capital redemption
reserve account in case a company buys back its own shares. The provisions are
as under:
(1) Amount to be transferred to CRR Account: Section 69 (1) prescribes that
where a company purchases its own shares out of free reserves or securities
premium account, then a sum equal to the nominal value of the share so
purchased shall be transferred to the capital redemption reserve account and
details of such transfer shall be disclosed in the balance sheet.
(2) Application of CRR Account: Section 69 (2) states that the capital
redemption reserve account may be applied by the company, in paying up
unissued shares of the company to be issued to members of the company as fully
paid bonus shares.
Prohibition for Buy-Back in Certain Circumstances [Section 70]
Section 70 prohibits a company to buy back its own securities in certain
circumstances. The provisions are as under:
(1) No company shall directly or indirectly purchase its own shares or other
specified securities-
(a) through any subsidiary company including its own subsidiary
companies; or
(b) through any investment company or group of investment companies;
or

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 4.52 CORPORATE AND OTHER LAWS

(c) if a default, is made by the company, in repayment of deposits,

interest payment thereon, redemption of debentures or preference
shares or payment of dividend to any shareholder or repayment of
any term loan or interest payable thereon to any financial institutions
or banking company;
It is provided that where the default is remedied and a period of three years
has lapsed after such default ceased to subsist, such buy-back is not
prohibited.
(2) No company shall directly or indirectly purchase its own shares or other
specified securities in case such company has not complied with provisions of:
• Section 92 (Annual Report),
• Section 123 (Declaration and Payment of Dividend),
• Section 127 (Punishment for failure to distribute dividends), and
• Section 129 (Financial Statement).
DEBENTURES [SECTION 71]
Before taking up the provisions of Section 71, we may look into the definition of
debenture as given below:
Definition of Debenture

As per Section 2(30), debenture includes debenture stock, bonds or any other
instrument of a company evidencing a debt, whether constituting a charge on the
assets of the company or not:
Provided that—
(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act,
1934; and

(b) such other instrument, as may be prescribed by the Central Government in

consultation with the Reserve Bank of India, issued by a company,
shall not be treated as debenture.
Features of Debentures
• A debenture is the smallest unit of a sizeable amount of loan.

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 SHARE CAPITAL AND DEBENTURES 4.53

• When debentures are issued, the applicants are given certificates

representing the money they have lent to the company.
• A debenture certificate is issued by the company under its common seal, if
any, or under the signatures of two directors or a director and the company
secretary, if he has been appointed.
• The company pays periodic interest on the amount raised by issuing
debentures till they are fully redeemed.
• A debenture is generally pre-fixed with the rate of interest which the
company intends to pay.
Example 13: The name ‘10% Debentures’ indicates that the company shall
pay interest at the rate of 10% on the outstanding amount till maturity of
such debentures.
• Voting rights are not available in case of debentures since Section 71 (2)
clearly states that no company shall issue any debentures carrying any
voting rights.
• A debenture is in the nature of movable property which is transferable as
per the provisions contained in the Articles of the company issuing the
debentures49.
• A debenture may be secured or unsecured. In case of secured debentures, a
charge is created on the assets of the company in favour of debenture
trustee.
• As per the terms of the issue of debentures, they may be redeemed (i.e.
repaid) at the end of full term or in installments, say yearly or bi-yearly or
any other period like in two installments.
• The terms of issue may also provide for conversion of debentures at
maturity into equity shares at the option of the debenture holders.
• The debenture certificates are required to be delivered within a period of six
months 50 from the date of allotment of debentures, unless the company is
prohibited by any provision of law or any order of Court, Tribunal or any
other authority.

49
As per Section 44.
50
As per Section 56 (4) (d).

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 4.54 CORPORATE AND OTHER LAWS

Example 14: Sigma Computers Limited desires to borrow ` 50,00,000 from the
public by issuing 7% Debentures. It is intended that each unit of debenture shall
be of ` 100. Thus, it can issue 50,000 debentures of ` 100 each carrying 7% rate of
interest which can be paid at the end of every quarter. If such debentures
(secured by a charge on the assets of the company) are issued for six-year
duration, the principal amount shall be repaid by the end of sixth year. The terms
of issue may even allow repayment of principal amount in equal yearly
instalments, in which case a portion of debentures shall be redeemed on yearly
basis and the company shall be required to pay interest only on the outstanding
amount. The debenture holders may also be given the option of converting their
debentures into equity shares at the time of maturity.

Thus, Sigma Computers Limited is able to borrow a large sum of money from
different borrowers with the help of debentures and it is not required to approach
a single borrower for such a big amount. In other words, ‘issue of debentures’ is
the most convenient way of borrowing large sums of money and at the same time
the debenture holders do not exert any influence over the ownership and working
of the company unless their interest is jeopardized by certain decisions.

Type of Debentures

On the basis of
On the basis of On the basis of
convertibility to
security redeemability
shares

Convertible
Secured (mandatorily or Redeemable
optionally;
partially or fully)

Un-secured Irredeemable
Non-convertible

Section 71 provides the manner in which a company may issue debentures. These
provisions are stated as under:
(1) Issue of Debentures with an Option to Convert: According to Section 71
(1), a company may issue debentures with an option to convert such debentures
into shares, either wholly or partly at the time of redemption.

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 SHARE CAPITAL AND DEBENTURES 4.55

As a pre-condition, it is provided that the issue of debentures with an option to

convert such debentures into shares, wholly or partly, shall be approved by a
special resolution passed at a general meeting.
(2) No Voting Rights: Section 71 (2) states that no company shall issue any
debentures carrying any voting rights.
(3) Issue of Secured Debentures: According to Section 71 (3), secured
debentures may be issued by a company subject to such terms and conditions as are
prescribed in Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014.
According to Rule 18 (1), an issue of secured debentures may be made, provided
the date of its redemption shall not exceed ten years from the date of issue.
Provided that the following classes of companies may issue secured debentures
for a period exceeding ten years but not exceeding thirty years,
(i) Companies engaged in setting up of infrastructure projects;
(ii) Infrastructure Finance Companies as defined in clause (viia) of sub direction
(1) of direction 2 of Non-Banking Financial (Non-deposit accepting or
holding) Companies Prudential Norms (Reserve Bank) Directions, 2007;
(iii) Infrastructure Debt Fund Non-Banking Financial Companies’ as defined in
clause (b) of direction 3 of Infrastructure Debt Fund Non-Banking Financial
Companies (Reserve Bank) Directions, 2011;
(iv) Companies permitted by a Ministry or Department of the Central Government
or by Reserve Bank of India or by the National Housing Bank or by any other
statutory authority to issue debentures for a period exceeding ten years.
Creation of Charge: Such an issue of debentures shall be secured by the creation
of a charge on the properties or assets of the company or its subsidiaries or its
holding company or its associates companies. Such assets or properties shall be
of value which is sufficient for the due repayment of the amount of debentures
and interest thereon.
Appointment of Debenture Trustee: The company shall appoint a debenture
trustee before the issue of prospectus or letter of offer for subscription of its
debentures. Further, not later than sixty days after the allotment of the
debentures, it shall execute a debenture trust deed 51 to protect the interest of the
debenture holders.

51
Form No. SH-12 is to be used for execution of Trust Deed [refer Rule 18 (5)].

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 4.56 CORPORATE AND OTHER LAWS

Security: The security for the debentures by way of a charge or mortgage shall
be created by the company in favour of the debenture trustee.
(4) Creation of Debenture Redemption Reserve (DRR) Account: Section 71
(4) requires that where debentures are issued by a company under section 71, the
company shall create a debenture redemption reserve account out of the profits
of the company available for payment of dividend and the amount credited to
such account shall not be utilised by the company except for the redemption of
debentures. In this respect Rule 18 (7) is relevant which is mentioned below:
Rule 18 (7) 52 specifies that the company shall comply with the requirements with
regard to Debenture Redemption Reserve (DRR) and investment or deposit of
sum in respect of debentures maturing during the year ending on the 31st day of
March of next year, in accordance with the conditions given below:-
(a) Debenture Redemption Reserve shall be created out of profits of the
company available for payment of dividend;
(b) The limits with respect to adequacy of Debenture Redemption Reserve and
Investment or deposits, as the case may be, shall be as under:-
(i) Debenture Redemption Reserve is not required for debentures issued
by All India Financial Institutions regulated by Reserve Bank of India
and Banking Companies for both public as well as privately placed
debentures;
(ii) For other Financial Institutions within the meaning of clause (72) of
section 2 of the Companies Act, 2013, Debenture Redemption Reserve
shall be as applicable to Non-Banking Finance Companies registered
with Reserve Bank of India.
(iii) For listed companies [other than All India financial Institutions and
Banking Companies as specified in sub-clause (i)], Debenture
Redemption Reserve is not required in the following cases -
(A) in case of public issue of debentures
A. for NBFCs registered with Reserve Bank of India under
section 45-1A of the RBI Act, 1934 and for Housing Finance
Companies registered with National Housing Bank;

As substituted by the Companies (Share Capital and Debentures) Amendment Rules, 2019,
52

w.e.f. 16-08-2019.

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 SHARE CAPITAL AND DEBENTURES 4.57

B. for other listed companies;

(B) in case of privately placed debentures, for companies specified
in sub-items A and B,
(iv) for unlisted companies, [other than All India Financial Institutions and
Banking Companies as specified in sub-clause (i)] -
(A) for NBFCs registered with RBI under section 45-IA of the Reserve
Bank of India Act, 1934 and for Housing Finance Companies
registered with National Housing Bank, Debenture Redemption
Reserve is not required in case of privately placed debentures.
(B) for other unlisted companies, the adequacy of Debenture
Redemption Reserve shall be 10 percent, of the value of the
outstanding debentures;
53
(v) In case a company is covered in item item (A) of sub-clause (iii) of
clause (b) or item (B) of sub-clause (iv) of clause (b), it shall on or
before the 30th day of April in each year, in respect of debentures
issued by such a company, invest or deposit, as the case may be, a
sum which shall not be less than fifteen percent., of the amount of its
debentures maturing during the year, ending on the 31st day of
March of the next year in any one or more methods of investments or
deposits as provided in sub-clause (vi):
Provided that the amount remaining invested or deposited, as the
case may be, shall not any time fall below fifteen percent. of the
amount of the debentures maturing during the year ending on 31st
day of March of that year.

53
With effect from 5-6-2020, sub-clause (v) of Rule 18 (7) (b) stands substituted as under vide
the Companies (Shares and Debentures) Amendment Rules, 2020:
“(v) In case a company is covered in item (A) of sub-clause (iii) of clause (b) or item (B) of sub-
clause (iv) of clause (b), it shall on or before the 30th day of April in each year, in respect of
debentures issued by such a company, invest or deposit, as the case may be, a sum which
shall not be less than fifteen percent., of the amount of its debentures maturing during the
year, ending on the 3 I st day of March of the next year in any one or more methods of
investments or deposits as provided in sub-clause (vi):
Provided that the amount remaining invested or deposited, as the case may be, shall not any
time fall below fifteen percent. of the amount of the debentures maturing during the year
ending on 31st day of March of that year”.

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 4.58 CORPORATE AND OTHER LAWS

(vi) for the purpose of sub clause (v), the methods of deposits or
investments, as the case may be, are as follows: -
(A) in deposits with any scheduled bank, free from any charge or
lien;
(B) in unencumbered securities of the Central Government or any
State Government;
(C) in unencumbered securities mentioned in sub-clause (a) to (d)
and (ee) of section 20 of the Indian Trusts Act, 1882;
(D) in unencumbered bonds issued by any other company which is
notified under sub-clause (f) of section 20 of the Indian trusts
Act, 1882:
Provided that the amount invested or deposited as above shall
not be used for any purpose other than for redemption of
debentures maturing during the year referred above.
(c) in case of partly convertible debentures, Debenture Redemption Reserve
shall be created in respect of non-convertible portion of debenture issue in
accordance with this sub-rule,
(d) the amount credited to Debenture Redemption Reserve shall not be utilized
by the company except for the purpose of redemption of debentures.
(5) Limitation on the Issue of Prospectus/Offer/Invitation to the public:
According to Section 71 (5), no company shall issue a prospectus or make an offer
or invitation to the public or to its members exceeding five hundred for the
subscription of its debentures, unless the company has, before such issue or offer,
appointed one or more debenture trustees and the conditions governing the
appointment of such trustees shall be such as are prescribed in Rule 18 (2) of the
Companies (Share Capital and Debentures) Rules, 2014.
The provisions of Rule 18 (2) are as under:
The company shall appoint debenture trustees under sub-section (5) of section
71, after complying with the following conditions, namely:—
(a) the names of the debenture trustees shall be stated in letter of offer inviting
subscription for debentures and also in all the subsequent notices or other
communications sent to the debenture holders;

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 SHARE CAPITAL AND DEBENTURES 4.59

(b) before the appointment of debenture trustee or trustees, a written consent

shall be obtained from such debenture trustee or trustees proposed to be
appointed and a statement to that effect shall appear in the letter of offer
issued for inviting the subscription of the debentures;
(c) A person shall not be appointed as a debenture trustee, if he—
(i) beneficially holds shares in the company;
(ii) is a promoter, director or key managerial personnel or any other
officer or an employee of the company or its holding, subsidiary or
associate company;
(iii) is beneficially entitled to moneys which are to be paid by the company
otherwise than as remuneration payable to the debenture trustee;
(iv) is indebted to the company, or its subsidiary or its holding or
associate company or a subsidiary of such holding company;
(v) has furnished any guarantee in respect of the principal debts secured
by the debentures or interest thereon;
(vi) has any pecuniary relationship with the company amounting to two
per cent or more of its gross turnover or total income or fifty lakh
rupees or such higher amount as may be prescribed, whichever is
lower, during the two immediately preceding financial years or during
the current financial year;
(vii) is relative of any promoter or any person who is in the employment of
the company as a director or key managerial personnel.
(d) the Board may fill any casual vacancy in the office of the trustee but while
any such vacancy continues, the remaining trustee or trustees, if any, may
act.
It is provided that where such vacancy is caused by the resignation of the
debenture trustee, the vacancy shall only be filled with the written consent
of the majority of the debenture holders.
(e) any debenture trustee may be removed from office before the expiry of his
term only if it is approved by the holders of not less than three fourth in
value of the debentures outstanding, at their meeting.
(6) Debenture Trustee to protect Interest of Debenture Holders: Section 71
(6) requires that a debenture trustee shall take steps to protect the interests of

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the debenture-holders and redress their grievances in accordance with such rules
as may be prescribed.
In order to protect the interest of debenture holders, Rule 18 (4) provides for the
convening of the meeting of debenture-holders. Accordingly, the meeting of all
the debenture holders shall be convened by the debenture trustee on:
(a) requisition in writing signed by debenture holders holding at least one-
tenth in value of the debentures for the time being outstanding;
(b) the happening of any event, which constitutes a breach, default or which in
the opinion of the debenture trustees affects the interest of the debenture
holders.
(7) Liability of Debenture Trustee: According to Section 71 (7), any provision
contained in a trust deed for securing the issue of debentures, or in any contract
with the debenture-holders secured by a trust deed, shall be void in so far as it
would have the effect of exempting a trustee thereof from, or indemnifying him
against, any liability for breach of trust, where he fails to show the degree of care
and due diligence required of him as a trustee, having regard to the provisions of
the trust deed conferring on him any power, authority or discretion.
It is provided that the liability of the debenture trustee shall be subject to such
exemptions as may be agreed upon by a majority of debenture-holders holding
not less than three-fourths in value of the total debentures at a meeting held for
the purpose.
(8) To pay Interest and Redeem Debentures: Section 71 (8) requires that a
company shall pay interest and redeem the debentures in accordance with the
terms and conditions of their issue.
(9) Filing of Petition before Tribunal by Debenture Trustee: Section 71 (9)
states that where at any time the debenture trustee comes to a conclusion that
the assets of the company are insufficient or are likely to become insufficient to
discharge the principal amount as and when it becomes due, the debenture
trustee may file a petition before the Tribunal and the Tribunal may, after hearing
the company and any other person interested in the matter, by order, impose
such restrictions on the incurring of any further liabilities by the company as the
Tribunal may consider necessary in the interests of the debenture-holders.
(10) Order of Tribunal on Failure to Redeem Debentures/Pay Interest:
According to Section 71 (10), where a company fails to redeem the debentures on
the date of their maturity or fails to pay interest on the debentures when it is due,

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the Tribunal may, on the application of any or all of the debenture-holders, or

debenture trustee and, after hearing the parties concerned, direct, by order, the
company to redeem the debentures forthwith on payment of principal and
interest due thereon.
(11) Specific Performance of the Contract: Section 71 (12) states that a
contract with the company to take up and pay for any debentures of the company
may be enforced by a decree for specific performance.
(12) Procedure to be prescribed by Central Government 54: According to
Section 71 (13), the Central Government may prescribe the procedure, for
securing the issue of debentures, the form of debenture trust deed, the procedure
for the debenture-holders to inspect the trust deed and to obtain copies thereof,
quantum of debenture redemption reserve required to be created and such other
matters.
(13) Limit on Borrowings through Debentures 55: Before the issue of
debentures, the Board of Directors of the company shall obtain approval of the
shareholders through special resolution if the borrowings by issuing debentures
together with the amount already borrowed exceed the aggregate of company’s
paid-up share capital, free reserves and securities premium amount. Temporary
loans obtained from the company’s bankers in the ordinary course of business are
not to be included in the borrowings.
(14) Return of Allotment 56: If a company having share capital makes allotment
of any debentures (falls within the definition of ‘securities’), it is required to file
with the jurisdictional Registrar a Return of Allotment (Form No. PAS-3) within
thirty days of such allotment.

SUMMARY
♦ There are two kinds of long-term capital to run a business viz., owners’
capital and lender’s capital.
♦ Each type of capital is denominated by different securities with applicable
rights which can be varied by following the legal procedure.

54
Refer Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014.
55
As per Section 180 (1) (c) [not applicable to a private company vide Notification No. GSR
464 (E), dated 5-6-2015.]
56
As per Rule 12 (1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

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 4.62 CORPORATE AND OTHER LAWS

♦ Most of the requirements applicable to a company are to be in accordance

with its Articles of Association and Memorandum of Association or with the
decisions taken by the shareholders at the general meetings but they must
be legally valid as per the provisions of the Companies Act.
♦ There are mandated provisions relating to the application securities
premium amount.
♦ Companies are not permitted to issue shares at a discount except when
such shares are issued as sweat equity.
♦ No company can issue irredeemable preference shares.
♦ Only fully paid-up preference shares are eligible for redemption.
♦ When preference shares are redeemed out of profits, the company is
required to create Capital Redemption Reserve Account.
♦ Capital Redemption Reserve Account may be applied for issuing fully paid
bonus shares.
♦ Power to alter share capital by a limited company having a share capital is
envisaged under Section 61.
♦ Companies can issue rights shares to their existing shareholders in
accordance with Section 62.
♦ Issue of bonus shares is governed by Section 63.
♦ After following the prescribed legal procedure, a company is permitted to
bring about reduction in its share capital.
♦ A company is restricted to purchase or give loans for purchase of its shares
except where buy-back is resorted to in accordance the applicable
provisions.
♦ Buy-back of shares is prohibited under certain circumstances.
♦ Debenture Redemption Reserve A/c is created to ring fence funds
requirement for redemption of Debentures.

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TEST YOUR KNOWLEDGE

Question 1
VRS Company Ltd. is holding 45% of total equity shares in SV Company Ltd. The
Board of Directors of SV Company Ltd. (incorporated on January 1, 2019) decided to
raise the share capital by issuing further equity shares. The Board of Directors
resolved not to offer any shares to VRS Company Ltd., on the ground that it was
already holding a high percentage of the total number of shares issued by SV
Company Ltd. The Articles of Association of SV Company Ltd. provide that the new
shares should first be offered to the existing shareholders of the company. On
March 1, 2019 SV Company Ltd. offered new equity shares to all the shareholders
except VRS Company Ltd.
Referring to the provisions of the Companies Act, 2013 examine the validity of the
decision of the Board of Directors of SV Company Ltd. of not offering any further
shares to VRS Company Limited.
Answer
The legal issues involved herein are covered under Section 62 (1) of the
Companies Act, 2013.
Section 62 (1) (a) of the Companies Act, 2013 provides that if, at any time, a
company having a share capital proposes to increase its subscribed capital by
issue of further shares, such shares should first be offered to the existing equity
shareholders of the company as at the date of the offer, in proportion to the
paid-up capital on those shares. Hence, the company cannot ignore a section of
the existing shareholders and must offer the shares to the existing equity
shareholders in proportion of their holdings.
As per facts of the case, the Articles of SV Company Ltd. provide that the new
shares should first be offered to the existing shareholders. However, the company
offered new shares to all shareholders excepting VRS Company Ltd., which held a
major portion of its equity shares. It is to be noted that under the Companies Act,
2013, SV Company Ltd. did not have any legal authority to do so.
Therefore, in the given case, decision of the Board of Directors of SV Company
Ltd. not to offer any further equity shares to VRS Company Ltd. on the ground
that VRS Company Ltd. already held a high percentage of shareholding in SV
Company Ltd. is not valid. Such a decision violates the provisions of Section 62 (1)
(a) as well as Articles of the issuing company.

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Question 2
The Directors of Mars Motors India Ltd. desire to alter Capital Clause of the
Memorandum of Association of their company. Advise them about the ways in
which the said clause may be altered under the provisions of the Companies Act,
2013.
Answer
Alteration of Capital: Under section 61 (1) a limited company having a share
capital may, if authorised by its Articles, alter its Memorandum in its general
meeting to:
(i) increase its authorized share capital by such amount as it thinks expedient;
(ii) consolidate and divide all or any of its share capital into shares of a
larger amount than its existing shares;
However, no consolidation and division which results in changes in the
voting percentage of shareholders shall take effect unless it is approved by
the Tribunal on an application made in the prescribed manner.
(iii) convert all or any of its paid- up shares into stock and reconvert that stock
into fully paid shares of any denomination.
(iv) sub-divide its shares, or any of them, into shares of smaller amount than is
fixed by the Memorandum;
(v) cancel shares which, at the date of the passing of the resolution in that
behalf, have not been taken or agreed to be taken by any person, and
diminish the amount of its share capital by the amount of the shares so
cancelled.
Further, under section 64 where a company alters its share capital in any of the
above-mentioned ways, the company shall file a notice in the prescribed form
with the Registrar within a period of thirty days of such alteration, along with an
altered memorandum. The capital clause of memorandum, if authorised by the
articles, shall be altered by passing an ordinary resolution as per Section 61 (1) of
the Companies Act, 2013.
Question 3
Ramesh, a resident of New Delhi, sent a transfer deed duly signed by him as
transferee and his brother Suresh as transferor, for registration of transfer of shares
to Ryan Entertainment Private Limited at its Registered Office in Mumbai. He did

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not receive the transferred shares certificates even after the expiry of four months
from the date of dispatch of transfer deed. He lodged a criminal complaint in the
Court at New Delhi. Decide, under the provisions of the Companies Act, 2013,
whether the Court at New Delhi is competent to act in the said matter?
Answer
Jurisdiction of Court, now Tribunal under the Companies Act, 2013:
According to Section 56 (4) of the Companies Act, 2013 every company, unless
prohibited by any provision of law or of any order of court, Tribunal or other
authority, shall deliver the certificates of all shares transferred within a period of
one month from the date of receipt by the company of the instrument of transfer.
Further, as per Section 56 (6), where any default is made in complying with the
provisions of sub-sections (1) to (5), the company and every officer of the
company who is in default shall be liable to a penalty of fifty thousand rupees.
In this case, the jurisdiction binding on the company is that of the State in which
the registered office of the company is situated i.e. Mumbai. Hence, the Court at
Delhi is not competent to act in the matter.
Question 4
Due to insufficient profits, Silver Robotics Limited is unable to redeem its existing
preference shares amounting to ` 10,00,000 (10,000 preference shares of ` 100
each) though as per the terms of issue they need to be redeemed within next two
months. It did not, however, default in payment of dividend as and when it became
due. What is the remedy available to the company in respect of outstanding
preference shares as per the Companies Act, 2013?
Answer
According to Section 55(3) of the Companies Act, 2013, where 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

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 4.66 CORPORATE AND OTHER LAWS

issue of such further redeemable preference shares, the unredeemed preference

shares shall be deemed to have been redeemed.
Provided that the Tribunal shall, while giving approval under this sub-section,
order the redemption forthwith of preference shares held by such persons who
have not consented to the issue of further redeemable preference shares.
In view of the provisions of Section 55 (3), Silver Robotics Limited can initiate
steps for the issue of further redeemable preference shares equal to the amount
due i.e. ` 10,00,000. For this purpose, it shall obtain the consent of the holders of
three-fourths in value of such preference shares and also seek approval of the
Tribunal by making a petition. In case, there are certain preference shareholders
who have not accorded their consent for the proposal of issuing further
redeemable preference shares, the Tribunal may order the company to redeem
forthwith such preference shares. Accordingly, Silver Robotics Limited must be
ready with sufficient funds for the redemption of preference shares held by those
who have not consented.
On the issue of such further redeemable preference shares by the company, the
unredeemed preference shares shall be deemed to have been redeemed.
Question 5
Trisha Data Security Limited was incorporated on 1st August, 2019 with a paid- up
share capital of ` 200 crores. Within such a small period of about one year in
operation, it has earned sizeable profits and has topped the charts for its high
employee-friendly environment. The company wants to issue sweat equity to its
employees. A close friend of the CEO of the company has told him that the
company cannot issue sweat equity shares as minimum 2 years have not elapsed
since the time company commenced its business. The CEO of the company has
approached you to advise about the essential conditions to be fulfilled before the
issue of sweat equity shares especially since their company is just about a year old.
Answer
Sweat equity shares of a class of shares already issued.
According to section 54 of the Companies Act, 2013, a company may issue sweat
equity shares of a class of shares already issued, if the following conditions are
fulfilled, namely—
(i) the issue is authorised by a special resolution passed by the company;

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 SHARE CAPITAL AND DEBENTURES 4.67

(ii) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to
whom such equity shares are to be issued;
(iii) where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the
regulations made by the Securities and Exchange Board in this behalf and if
they are not so listed, the sweat equity shares are issued in accordance with
such rules as prescribed under Rule 8 of the Companies (Share and
Debentures) Rules, 2014,
The rights, limitations, restrictions and provisions as are for the time being
applicable to equity shares shall be applicable to the sweat equity shares issued
under Section 54 and the holders of such shares shall rank pari passu with other
equity shareholders.
Trisha Data Security Limited can issue Sweat equity shares by following the
conditions as mentioned above. It does not make a difference that the company
is just about a year old because no such minimum time limit of 2 years in
operations is specified under Section 54.
Question 6
Walnut Foods Limited has an authorized share capital of 2,00,000 equity shares of
` 100 per share and an amount of ` 2 crores in its Securities Premium Account as
on 31-3-2020. The Board of Directors seeks your advice about the application of
securities premium account for its business purposes. Please give your advice.
Answer
Amount lying to the credit of Securities Premium Account is required to be
utilised for certain prescribed purposes.
According to section 52 of the Companies Act, 2013, where a company issues
shares at a premium, whether for cash or otherwise, a sum equal to the aggregate
amount of the premium received on those shares shall be transferred to a
"securities premium account" and the provisions of this Act relating to reduction
of share capital of a company shall, except as provided in this Section, apply as if
the securities premium account were the paid-up share capital of the company.
The securities premium account may be applied by the company—
(a) towards the issue of unissued shares of the company to the members of the
company as fully paid bonus shares;

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 4.68 CORPORATE AND OTHER LAWS

(b) in writing off the preliminary expenses of the company;

(c) in writing off the expenses of, or the commission paid or discount allowed
on, any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.
The securities premium account may be applied by such class of companies, as
may be prescribed and whose financial statement comply with the accounting
standards prescribed for such class of companies under section 133,—
(a) in paying up unissued equity shares of the company to be issued to
members of the company as fully paid bonus shares; or
(b) in writing off the expenses of or the commission paid or discount allowed
on any issue of equity shares of the company; or
(c) for the purchase of its own shares or other securities under section 68.
Keeping the above points in view Walnut Foods Limited should proceed to utilise
the amount of Securities Premium Account.
Question 7
OLAF Limited, a subsidiary of PQR Limited, decides to give a loan of ` 4,00,000 to
its Human Resource Manager Mr. Surya Nayan, who does not fall in the category of
Key Managerial Personnel and draws a salary of ` 40,000 per month, to buy 500
partly paid-up equity shares of ` 1000 each in OLAF Limited. Examine the validity
of company's decision under the provisions of the Companies Act, 2013.
Answer
Restrictions on purchase by company or giving of loans by it for purchase of
its share: As per section 67 (3) of the Companies Act, 2013 a company is allowed
to give a loan to its employees subject to the following limitations:
(a) The employee must not be a director or Key Managerial Personnel;
(b) The amount of such loan shall not exceed an amount equal to six months’
salary of the employee.
(c) The loan must be extended for subscribing fully paid-up shares.

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 SHARE CAPITAL AND DEBENTURES 4.69

In the given instance, Human Resource Manager Mr. Surya Nayan is not a Key
Managerial Personnel of the OLAF Limited. Further, he is drawing a salary of
` 40,000 per month and wants to avail loan for purchasing 500 partly paid-up
equity shares of ` 1000 each of OLAF Limited in which he is employed.
Keeping the above facts and legal provisions in view, the decision of OLAF
Limited in granting a loan of ` 4,00,000 for purchase of its partly paid-up shares
to Human Resource Manager is invalid due to the following reasons:
i. The amount of loan is more than 6 months’ salary of Mr. Surya Nayan, the
HR Manager. It should have been restricted to ` 2,40,000 only.
ii. The loan to be given by OLAF Limited to its HR Manager Mr. Surya Nayan is
meant for purchase of partly paid shares.
Question 8
Shilpi Developers India Limited owed to Sunil ` 10,000. On becoming this debt
payable, the company offered Sunil 100 shares of ` 100 each in full settlement of
the debt. The said shares were allotted to Sunil as fully paid-up in lieu of his debt.
Examine the validity of this allotment in the light of the provisions of the
Companies Act, 2013
Answer
Under Section 62 (1) (c) of the Companies Act, 2013 where at any time, a
company having a share capital proposes to increase its subscribed capital by the
issue of further shares, either for cash or for a consideration other than cash, such
shares may be offered to any persons, if it is authorised by a special resolution
and if the price of such shares is determined by a empowered to allot the shares
to Sunil in settlement of its debt to him. This valuation report of a registered
valuer, subject to the compliance with the applicable provisions of Chapter III and
any other conditions as may be prescribed.

In the present case, Shilpi Developers India Limited’s allotment, to be classified as

shares issued for consideration other than cash, must be approved by the
members by a special resolution. Further, the valuation of the shares must be
done by a registered valuer, subject to the compliance with the applicable
provisions of Chapter III and any other conditions as may be prescribed.

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Question 9
What are the provisions of the Companies Act, 2013 relating to the appointment of
‘Debenture Trustee’ by a company? Whether the following can be appointed as
‘Debenture Trustee’:
(i) A shareholder who has no beneficial interest.
(ii) A creditor whom the company owes ` 499 only.
(iii) A person who has given a guarantee for repayment of amount of debentures
issued by the company?
Answer
Appointment of Debenture Trustee: Under section 71 (5) of the Companies Act,
2013, no company shall issue a prospectus or make an offer or invitation to the
public or to its members exceeding five hundred for the subscription of its
debentures, unless the company has, before such issue or offer, appointed one or
more debenture trustees and the conditions governing the appointment of such
trustees shall be such as may be prescribed.
Rule 18 (2) of the Companies (Share Capital and Debentures) Rules, 2014, framed
under the Companies Act for the issue of secured debentures provide that before
the appointment of debenture trustee or trustees, a written consent shall be
obtained from such debenture trustee or trustees proposed to be appointed and
a statement to that effect shall appear in the letter of offer issued for inviting the
subscription of the debentures.
Further according to the rules, no person shall be appointed as a debenture
trustee, if he-
(i) beneficially holds shares in the company;
(ii) is a promoter, director or key managerial personnel or any other officer or
an employee of the company or its holding, subsidiary or associate
company;
(iii) is beneficially entitled to moneys which are to be paid by the company
otherwise than as remuneration payable to the debenture trustee;
(iv) is indebted to the company, or its subsidiary or its holding or associate
company or a subsidiary of such holding company;

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 SHARE CAPITAL AND DEBENTURES 4.71

(v) has furnished any guarantee in respect of the principal debts secured by the
debentures or interest thereon;
(vi) Has any pecuniary relationship with the company amounting to two
percent. or more of its gross turnover or total income or fifty lakh rupees or
such higher amount as may be prescribed, whichever is lower, during the
two immediately preceding financial years or during the current financial
year;
(vii) is a relative of any promoter or any person who is in the employment of the
company as a director or key managerial personnel;
Thus, based on the above provisions answers to the given questions are as
follows:
(i) A shareholder who has no beneficial interest, can be appointed as a
debenture trustee.
(ii) A creditor whom company owes ` 499 cannot be appointed as a debenture
trustee. The amount owed is immaterial.
(iii) A person who has given guarantee for repayment of principal and interest
thereon in respect of debentures also cannot be appointed as a debenture
trustee.
Question 10
Mr. Nilesh has transferred 1000 equity shares of Perfect Vision Private Limited to
his sister Ms. Mukta. The company did not register the transfer of shares and also
did not send a notice of refusal to Mr. Nilesh or Ms. Mukta within the prescribed
period. Discuss as per the provisions of the Companies Act, 2013, whether aggrieved
party has any right(s) against the company?
Answer
The problem given in the question is governed by Section 58 of the Companies
Act, 2013 dealing with the refusal to register transfer and appeal against such
refusal.
In the present case, the company has committed the wrongful act of not sending
the notice of refusal to register the transfer of shares.
Under section 58 (1), if a private company limited by shares refuses to register the
transfer of, or the transmission by operation of law of the right to any securities or
interest of a member in the company, then the company shall send notice of refusal

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 4.72 CORPORATE AND OTHER LAWS

to the transferor and the transferee or to the person giving intimation of such
transmission, within a period of thirty days from the date on which the instrument of
transfer, or the intimation of such transmission, was delivered to the company.
According to Section 58 (3), the transferee may appeal to the Tribunal against the
refusal within a period of thirty days from the date of receipt of the notice or in case
no notice has been sent by the company, within a period of sixty days from the date
on which the instrument of transfer or the intimation of transmission, was delivered
to the company.
In this case, as the company has not sent even a notice of refusal, Ms. Mukta
being transferee can file an appeal before the Tribunal within a period of sixty days
from the date on which the instrument of transfer was delivered to the company.
Question 11
Shankar Portland Cement Limited is engaged in the manufacture of different types
of cements and has got a good brand value. Over the years, it has built a good
reputation and its Balance Sheet as at March 31, 2020 showed the following
position:
1. Authorized Share Capital (25,00,000 equity shares of ` 10/- each)
` 2,50,00,000
2. Issued, subscribed and paid-up Share Capital (10,00,000 equity shares of
` 10/- each, fully paid-up) ` 1,00,00,000
3. Free Reserves ` 3,00,00,000
The Board of Directors are proposing to declare a bonus issue of 1 share for every 2
shares held by the existing shareholders. The Board wants to know the conditions
and the manner of issuing bonus shares under the provisions of the Companies Act,
2013.
Answer
According to Section 63 of the Companies Act, 2013, a company may issue fully
paid-up bonus shares to its members, in any manner whatsoever, out of -
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account.

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 SHARE CAPITAL AND DEBENTURES 4.73

Provided that no issue of bonus shares shall be made by capitalising reserves

created by the revaluation of assets.
Conditions for issue of Bonus Shares: No company shall capitalise its profits or
reserves for the purpose of issuing fully paid-up bonus shares, unless—
(i) it is authorised by its Articles;
(ii) it has, on the recommendation of the Board, been authorised in the general
meeting of the company;
(iii) it has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
(iv) it has not defaulted in respect of payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus;
(v) the partly paid-up shares, if any, outstanding on the date of allotment, are
made fully paid-up;
(vi) it complies with such conditions as are prescribed by Rule 14 of the
Companies (Share Capital and debentures) Rules, 2014 which states that the
company which has once announced the decision of its Board
recommending a bonus issue, shall not subsequently withdraw the same.
Further, the company has to ensure that the bonus shares shall not be issued in
lieu of dividend.
For the issue of bonus shares Shankar Portland Cement Limited will require
reserves of ` 50,00,000 (i.e. half of ` 1,00,00,000 being the paid-up share capital),
which is readily available with the company. Hence, after following the above
conditions relating to the issue of bonus shares, the company may proceed for a
bonus issue of 1 share for every 2 shares held by the existing shareholders.
Question 12
State the legal provisions in respect of ‘Declaration of Solvency’, which an unlisted
public company needs to adhere to while taking steps to buy-back its own shares.
Answer
According to Section 68 (6), where an unlisted public company has passed a
special resolution under Section 68 (2) (b) or the Board has passed a resolution
under item (ii) of the proviso to Section 68 (2) (b) to buy-back its own shares, it
shall, before making such buy-back, file with the Registrar a ‘Declaration of
Solvency’ in Form SH-9.

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 4.74 CORPORATE AND OTHER LAWS

The declaration shall be verified by an affidavit to the effect that the Board has
made a full inquiry into the affairs of the company as a result of which they have
formed an opinion that it is capable of meeting its liabilities and will not be
rendered insolvent within a period of one year from the date of declaration of
solvency adopted by the Board. The declaration shall be signed by at least two
directors of the company, one of whom shall be the managing director, if any.

© The Institute of Chartered Accountants of India

CHAPTER 5

ACCEPTANCE OF
DEPOSITS BY
COMPANIES
LEARNING OUTCOMES
After studying this unit, you would be able to:
 Understand the meaning of the term ‘Deposit’.
 Know the requirements for and restrictions on acceptance of
deposits from members and public.
 Know about the ‘eligible companies’ which can accept
deposits from public in addition to their members.
 Know the punishment for contravention of the provisions
related to acceptance of deposits by companies.

Acceptance of deposits

Acceptance of
Prohibition on Repayment of
deposits from Punishment
acceptance [Sec. deposits
public [Sec. 76A]
73] [Sec. 74]
[Sec. 76]

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 5.2 CORPORATE AND OTHER LAWS

1. INTRODUCTION
Acceptance of deposits from the members as well as public at large is an important
source of finance for the corporate sector. It is, therefore, necessary to control the
companies which invite deposits in order to safeguard the general and wider
interest of all those persons who offer deposits out of their precious savings. The
statutory provisions as contained in sections 73 to 76A of the Companies Act, 2013
(hereinafter referred to as ‘the Act’) and the Companies (Acceptance of Deposits)
Rules, 2014 (hereinafter referred to as ‘the Rules’) govern the acceptance of
deposits and also renewal thereof.

2. CERTAIN IMPORTANT TERMS EXPLAINED

A. DEPOSIT

Definition: According to section 2 (31) of the Act, the term ‘deposit’

includes any receipt of money by way of deposit or loan or in any
other form, by a company, but does not include such categories of
amount as may be prescribed in consultation with the Reserve bank
of India.
(i) The above definition of ‘deposit’ is inclusive one.
(ii) It includes any money received by way of:
• deposit; or
• loan; or
• in any other form.
(iii) Repayment of ‘deposit’ is time-bound.
(iv) It can be secured or unsecured.
(v) It does not include prescribed categories of amounts (given under the Rules).
(vi) A private company can accept deposits from its members only.
(vii) A public company can accept deposits from its members and also from the
public if it fulfills certain parameters.

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.3

Types of Deposits

Secured deposits
Unsecured deposits
(secured by creating charge
(no security available)
on tangible assets)

B. AMOUNTS NOT CONSIDERED AS DEPOSIT

Following categories of amounts are not considered as deposit [Rule 2 (1) (c)]:
(i) any amount received from the Central Government or a state Government, or
from any other source whose repayment is guaranteed by the Central
Government or a State Government, or any amount received from a local
authority, or any amount received from a statutory authority constituted
under an Act of Parliament or a State Legislature;
(ii) any amount received from foreign Governments, foreign or international
banks, multilateral financial institutions etc. subject to the provisions of
Foreign Exchange Management Act, 1999 and rules and regulations made
thereunder;
(iii) any amount received as a loan or facility from any banking company or from
State Bank of India or its subsidiary banks or from a notified baking institution
or from any co-operative bank;
(iv) any amount received as a loan or financial assistance from Public Financial
Institutions;
(v) any amount received against issue of commercial paper or any other
instruments issued in accordance with the guidelines or notification issued by
the Reserve Bank of India;
(vi) any amount received by a company from any other company;
(vii) any amount received and held pursuant to an offer made in accordance with
the provisions of the Act towards subscription to any securities (including
share application money or advance towards allotment of securities, pending
allotment), so long as such amount is appropriated only against the amount
due on allotment of the securities applied for;
Explanation: (a) It is clarified by way of Explanation that if the securities for
which application money or advance for such securities was received cannot
be allotted within 60 days from the date of receipt of the application money

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 5.4 CORPORATE AND OTHER LAWS

or advance for such securities and such application money or advance is not
refunded to the subscribers within 15 days from the date of completion of 60
days, such amount shall be treated as a deposit under these rules.
However, unless otherwise required under the Companies Act, 1956 or the
Securities and Exchange Board of India Act, 1992 or rules or regulations made
thereunder to allot any share, stock, bond, or debenture within a specified
period, if a company had received any amount by way of subscriptions to any
shares, stock, bonds or debentures before the 1st April, 2014 and disclosed
in the balance sheet for the financial year ending on or before the 31st March,
2014 against which the allotment is pending on the 31st March, 2015, the
company shall, by the 1st June, 2015, either return such amounts to the
persons from whom these were received or allot shares, stock, bonds or
debentures or comply with these rules.
(b) Further, it is clarified that any adjustment of the amount for any other
purpose shall not be treated as refund.
(viii) any amount received from a person who, at the time of the receipt of the
amount, was a director of the company or a relative of the director of the
private company;
However, the director of the company or relative of the director of the private
company, as the case may be, from whom money is received, is required to
furnish to the company at the time of giving the money, a declaration in writing
to the effect that the amount is not being given out of funds acquired by him
by borrowing or accepting loans or deposits from others and the company shall
disclose the details of money so accepted in the Board's report;
(ix) any amount raised by the issue of bonds or debentures secured by a first
charge or a charge ranking pari passu with the first charge on any assets
referred to in Schedule III 1 of the Act excluding intangible assets of the
company or bonds or debentures compulsorily convertible into shares of the
company within 10 years;
However, if such bonds or debentures are secured by the charge of any assets
referred to in Schedule III of the Act, excluding intangible assets, the amount
of such bonds or debentures shall not exceed the market value of such assets
as assessed by a registered valuer.

1
Schedule III contains format of Balance Sheet.

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.5

(ixa) any amount raised by issue of non-convertible debenture not constituting a

charge on the assets of the company and listed on a recognised stock
exchange as per applicable regulations made by Securities and Exchange
Board of India;
Example 1: Soorya Ltd. has raised ` 2,00,000 through issue of non-
convertible debenture not constituting a charge on the assets of the company
and listed on a recognised stock exchange as per applicable regulations made
by Securities and Exchange Board of India. The said amount will not be
considered as deposit in terms of the rule stated above [Sub-clause (ixa)]
(x) any amount received from an employee of the company not exceeding his
annual salary under a contract of employment with the company in the nature
of non-interest bearing security deposit;
Example 2: ` 2,50,000 received from Mr. Raghu, an employee of the company
who is drawing annual salary of ` 2,00,000 under a contract of employment
with the company in the nature of non-interest bearing security deposit. This
amount received by company from employee, Mr. Raghu will be considered
as deposit in terms of sub-clause (x) of the said rule, as amount received is
more than his annual salary under a contract of employment with the
company in the nature of non-interest bearing security deposit.
(xi) any non-interest bearing amount received or held in trust;
(xii) any amount received in the course of, or for the purposes of, the business of
the company–
(a) as an advance for the supply of goods or provision of services
accounted for in any manner whatsoever provided that such advance is
appropriated against supply of goods or provision of services within a
period of three hundred and sixty five days from the date of acceptance
of such advance:
However, in case of any advance which is subject matter of any legal
proceedings before any court of law, the said time limit of three
hundred and sixty five days shall not apply.
(b) as advance, accounted for in any manner whatsoever, received in
connection with consideration for an immovable property under an
agreement or arrangement, provided that such advance is
adjusted against such property in accordance with the terms of
agreement or arrangement;

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 5.6 CORPORATE AND OTHER LAWS

(c) as security deposit for the performance of the contract for supply of
goods or provision of services;
(d) as advance received under long term projects for supply of capital
goods except those covered under item (b) above;
(e) as an advance towards consideration for providing future services in the
form of a warranty or maintenance contract as per written agreement
or arrangement, if the period for providing such services does not
exceed the period prevalent as per common business practice or five
years, from the date of acceptance of such service whichever is less;
(f) as an advance received and as allowed by any sectoral regulator or in
accordance with directions of Central or State Government;
(g) as an advance for subscription towards publication, whether in print or
in electronic to be adjusted against receipt of such publications;
However, it is clarified that if the amount received under items (a), (b) and (d)
above becomes refundable (with or without interest) due to the reasons that
the company accepting the money does not have necessary permission or
approval, wherever required, to deal in the goods or properties or services
for which the money is taken, then the amount received shall be deemed to
be a deposit under these rules.
Further, by way of Explanation it is clarified that for the purposes of this sub-
clause the amount shall be deemed to be deposits on the expiry of fifteen
days from the date they become due for refund.
(xiii) any amount brought in by the promoters of the company by way of
unsecured loan in pursuance of the stipulation of any lending financial
institution or a bank subject to the fulfillment of following conditions:
(a) the loan is brought because of the stipulation imposed by the lending
institutions on the promoters to contribute such finance;
(b) the loan is provided by the promoters themselves or by their relatives
or by both; and
(c) such exemption shall be available only till the loans of financial
institution or bank are repaid and not thereafter.
(xiv) any amount accepted by a Nidhi company in accordance with the rules made
under section 406 of the Act;

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.7

(xv) any amount received by way of subscription in respect of a chit under the
Chit Fund Act, 1982;
(xvi) any amount received by the company under any collective investment
scheme in compliance with regulations framed by the Securities and
Exchange Board of India;
(xvii) an amount of twenty-five lakh rupees or more received by a start-up
company, by way of a convertible note (convertible into equity shares or
repayable within a period not exceeding ten years from the date of issue) in
a single tranche, from a person;
By way of Explanation it is clarified that:
1. ‘‘Start-up company” means a private company incorporated under the
Companies Act, 2013 or Companies Act, 1956 and recognised as such
in accordance with Notification Number G.S.R. 127 (E), dated 19-02-
2019 issued by the Department for Promotion of Industry and Internal
Trade ;
2. ‘‘Convertible note” means an instrument evidencing receipt of money
initially as a debt, which is repayable at the option of the holder, or
which is convertible into such number of equity shares of the start-up
company upon occurrence of specified events and as per the other
terms and conditions agreed to and indicated in the instrument.
(xviii) any amount received by a company from Alternate Investment Funds,
Domestic Venture Capital Funds, Infrastructure Investment Trusts, Real Estate
Investment Trusts 2 and Mutual Funds registered with the Securities and
Exchange Board of India in accordance with regulations made by it.
Note: Clarification regarding amounts received by private companies from
their members, directors or their relatives before 1st April, 2014 – whether to
be considered as deposits or not under the Companies Act, 2013 (General
Circular No. 5/2015, dated 30-03-2015)
It is clarified that such amounts received by private companies prior to 1st
April, 2014 shall not be treated as ‘deposits’ subject to the condition that
relevant private company shall disclose in the notes to its financial statement
the figure of such amounts and the accounting head in which such amounts
have been shown.

2
The words ‘Real Estate Investment Trusts’ have been inserted vide the Companies (Acceptance
of Deposits) Amendment Rules, 2019 w.e.f. 22-01-2019.

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 5.8 CORPORATE AND OTHER LAWS

However, any renewal or acceptance of fresh deposits on or after 1st April, 2014
shall be in accordance with the Companies Act, 2013 and the rules made
thereunder.
C. DEPOSITOR
Definition:
As per Rule 2 (1) (d), the term ‘Depositor’ means:
(i) any member of the company who has made a deposit with
the company in accordance with the provisions of sub-
section (2) of section 73 of the Act, or
(ii) any person who has made a deposit with a public company
in accordance with the provisions of section 76 of the Act.
In other words:
• any member of a private or public company who has deposited money with
his company is a ‘depositor’.
• any person (even if not a member of the company) who has deposited money
with a public company is also a ‘depositor’.
D. ELIGIBLE COMPANY
Definition:

As per Rule 2 (1) (e) the term “eligible company” means a public company as
referred to in section 76 (1), having a net worth of not less than one hundred crore
rupees or a turnover of not less than five hundred crore rupees and which has
obtained the prior consent in general meeting by means of a special resolution and
also filed the said resolution with the Registrar of Companies before making any
invitation to the public for acceptance of deposits:
However, an eligible company, which is accepting deposits within the limits
specified under section 180 (1) (c), may accept deposits by means of an ordinary
resolution.
A public company is ‘eligible’ to accept deposits from the public at large only if it
meets the above-mentioned criteria. Accordingly,
• It should be a public company.
• It should have net worth of minimum ` 100 crores or a turnover of minimum
` 500 crores.

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.9

• It has obtained the prior consent by means of a special resolution passed in

general meeting.
• The special resolution has been filed with the Registrar of Companies.
• An ordinary resolution is sufficient if an eligible company is accepting
deposits within the limits specified under section 180 (1) (c).

3. PROHIBITIVE PROVISIONS AND EXEMPTED

COMPANIES
A. Prohibitive Provisions
According to section 73 (1) of the Act, no company can accept or renew deposits
from public unless it follows the manner provided under Chapter V (contains
provisions regarding acceptance of deposits by companies) of the Act for acceptance
or renewal of deposits from public. Manner of acceptance of deposits from public
is explained later in the Chapter.
B. Exempted Companies
Extract of Act:
According to the Section 73 (1), on and after the commencement of this Act, no
company shall invite, accept or renew deposits under this Act from the public
except in a manner provided under this Chapter:
Provided that nothing in this sub-section shall apply to a banking company and
non-banking financial company as defined in the Reserve Bank of India Act, 1934
and to such other company as the Central Government may, after consultation with
the Reserve Bank of India, specify in this behalf.
This brings out the fact that ‘deposit provisions’ as contained in the Companies Act,
2013 are meant to regulate acceptance of deposits by non-banking non-financial
companies (i.e. manufacturing, trading companies, etc.) only.

non- banking financial housing finance

company (NBFC) company (HFC)

other companies as specified by

banking
Exempted the Central Government, in
company
Companies consultation with RBI

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 5.10 CORPORATE AND OTHER LAWS

4. PROVISIONS REGARDING ACCEPTANCE OF

DEPOSITS FROM MEMBERS
Any company may accept or renew deposits from its members by following the
provisions as set out below:
(1) Passing of a Resolution: A company is required to pass a resolution in
general meeting for acceptance of deposits from its members [Section 73 (2)].
(2) Issuance of a Circular containing Statement: The company is required to
issue a circular to its members including therein a statement showing the
financial position of the company, the credit rating obtained, the total
number of depositors and the amount due towards deposits in respect of any
previous deposits accepted by the company and such other particulars in the
prescribed form and manner. [Section 73 (2) (a)]
According to Rule 4, the company shall issue such circular to all its members
by registered post with acknowledgement due or speed post or by electronic
mode in Form DPT-1.
Further, the circular may be published in English language in an English
newspaper and in vernacular language in a vernacular newspaper having wide
circulation in the State in which the registered office of the company is situated.
In addition, a certificate of the statutory auditor of the company shall be
attached in Form DPT-1, stating that the company has not committed default
in the repayment of deposits or in the payment of interest on such deposits
accepted either before or after payment of interest on such deposits accepted
either before or after the commencement of the Act. In case a company had
committed a default in the repayment of deposits accepted either before or
after the commencement of the Act or in the payment of interest on such
deposits, a certificate of the statutory auditor of the company shall be
attached in Form DPT-1, stating that the company had made good the default
and a period of five years has lapsed since the date of making good the
default as the case may be.
Such Circular shall be issued on the authority and in the name of Board of
Directors of the company.
The advertisement shall remain valid till the earliest of the following dates:
(a) up to six months from the closure of the financial year in which it is
issued; or

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.11

(b) the date on which the financial statements are laid before the company
at the Annual General Meeting (AGM), or in case no AGM has been held,
the latest day on which the AGM should have been held as per the
relevant statutory provisions.
A fresh circular shall be issued, in each succeeding financial year, for inviting
deposits during that financial year.
(3) Filing of Circular: The company is required to file a copy of the circular
containing the statement with the Registrar within 30 days before the date of
issue of the circular. [Section 73 (2) (b)]
(4) Requirement of Deposit Repayment Reserve Account: The company is
required to deposit, on or before 30th of April each year, at least 20% of the
amount of its deposits maturing during the following financial year and kept
in a scheduled bank in a separate bank account to be called deposit
repayment reserve account. [Section 73 (2) (c)]
According to Rule 13 (Maintenance of Liquid Assets and Creation of Deposit
Repayment Reserve Account), every company referred to in sub-section (2)
of section 73 and every eligible company shall on or before the 30th day of
April of each year deposit the sum as specified in clause (c) of the said sub-
section with any scheduled bank and the amount so deposited shall not be
utilised for any purpose other than for the repayment of deposits:
Provided that the amount remaining deposited shall not at any time fall below
twenty per cent. of the amount of deposits maturing during the financial year.
3
(5) Certification as to No default in Repayment: The company needs to certify
that it has not committed any default in the repayment of deposits accepted
either before or after the commencement of this Act or payment of interest
on such deposits.
In case a default had occurred, the company made good the default and a
period of five years had lapsed since the date of making good the default.
[Section 73 (2) (e)]
(6) Provision of Security: The company may provide security, if any, for the due
repayment of the amount of deposit or the interest thereon. Further, if
security is provided, the company shall take steps for the creation of charge
on the property or assets of the company.

3
Clause (d) relating to ‘deposit insurance’ has been omitted vide the Companies (Amendment)
Act, 2017 w.e.f. 15th August, 2018.

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 5.12 CORPORATE AND OTHER LAWS

It may be noted that in case a company does not secure the deposits or
secures such deposits partially, then, the deposits shall be termed as
‘‘unsecured deposits’’. Accordingly, it shall be so quoted in every circular,
form, advertisement or in any document related to invitation or acceptance
of deposits. [Section 73 (2) (f)]
Exemption to certain private companies 4:
Clauses (a) to (c) and (e) of sub-section (2) of section 73 with respect to issue of circular,
filing the copy of such circular with the Registrar, depositing of certain amount and
certification as to no default committed, shall not apply to a private company:
(A) which accepts from its members monies not exceeding one hundred
per cent. of aggregate of the paid-up share capital, free reserves and
securities premium account; or
(B) which is a start-up, for five years from the date of its incorporation; or
(C) which fulfils all of the following conditions, namely:
(a) which is not an associate or a subsidiary company of any other
company;
(b) if the borrowings of such a company from banks or financial
institutions or any body corporate is less than twice of its paid-up
share capital or fifty crore rupees, whichever is lower; and
(c) such a company has not defaulted in the repayment of such
borrowings subsisting at the time of accepting deposits under this
section.
However, such a company [as referred to in clauses (A), (B) or (C)] shall file
the details of monies accepted to the Registrar in the specified manner (i.e.
in Form DPT-3).
(7) Repayment of deposit: Every deposit accepted by a company shall be repaid
with interest in accordance with the terms and conditions of the agreement.
[Section 73 (3)]

4
In terms of Notification No. GSR 464 (E), dated 05-06-2015 as amended from time to time.
Further, in terms of Notification No. GSR 8(E), dated 04-01-2017, clauses (a) to (e) of section
73 (2) shall not apply to a Specified IFSC public company which accepts from its members,
monies not exceeding 100% of aggregate of the paid-up share capital and free reserves,
and such company shall file the details of monies so accepted with the Registrar in such
manner as may be specified (i.e. in Form DPT-3).

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.13

(8) Application to Tribunal if the Company fails to Repay: In case a company

fails to repay the deposit or part thereof or any interest thereon, the depositor
concerned may apply to the Tribunal for an order directing the company to
pay the sum due or for any loss or damage incurred by him as a result of such
non-payment and for such other orders as the Tribunal may deem fit. [Section
73 (4)]
(9) Using the Amount of Deposit Repayment Reserve Account: The deposit
repayment reserve account shall not be used by the company for any purpose
other than repayment of deposits. [Section 73 (5)]
Rule 13 also states that the amount so deposited in the account shall not be
used by the company for any purpose other than repayment of deposits.
(10) Tenure for which Deposits can be Accepted 5: A company is not permitted
to accept or renew deposits (whether secured or unsecured) which is
repayable on demand or in less than six months. Further, the maximum period
of acceptance of deposit cannot exceed thirty-six months.
Example 3: A, a member of the company has deposited ₹1,00,000 with his
company on 1st April, 2019. The earliest repayment date in this case shall be
30th September, 2019 and the latest repayment date shall be 31st March, 2022.
Thus, the tenure will range between six months and thirty-six months, as per
the policy of the company.
Exception to the rule of tenure of six months: For the purpose of meeting
any of its short-term requirements of funds, a company may accept or renew
deposits for repayment earlier than six months subject to the condition that:
(i) such deposits shall not exceed ten per cent. of the aggregate of
the paid-up share capital, free reserves and securities premium
account of the company; and
(ii) such deposits are repayable only on or after three months from the date
of such deposits or renewal.
(11) Maximum Amount of Deposits from Members 6: A company is permitted
to accept or renew any deposit from its members including other such
deposits outstanding as on the date of acceptance or renewal maximum up
to 35% of the aggregate of its paid-up share capital, free reserves and
securities premium account.

5
As per Rule 3 (1).
6
As per Rule 3 (3).

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 5.14 CORPORATE AND OTHER LAWS

However, as an exception, a Specified IFSC Public company 7 and a private

company may accept from its members monies not exceeding 100% of
aggregate of the paid-up share capital, free reserves and securities premium
account. Further, such company shall file the details of monies so accepted
with the Registrar in Form DPT-3.
In addition, the maximum limit in respect of deposits to be accepted from
members shall not apply to the following classes of private companies:
(i) a private company which is a start-up, for ten years from the date of its
incorporation;
(ii) a private company which fulfils all of the following conditions, namely:
(a) which is not an associate or a subsidiary company of any other
company;
(b) the borrowings of such a company from banks or financial
institutions or any body-corporate is less than twice of its paid-
up share capital or fifty crore rupees, whichever is less; and
(c) such a company has not defaulted in the repayment of such borrowings
subsisting at the time of accepting deposits under section 73:
Note: It may be noted that all the companies accepting deposits shall
file the details of monies so accepted with the Registrar in Form DPT-3.
(12) Appointment of Trustee for Depositors: As regards appointment of trustee,
refer provisions given under ‘Acceptance of Deposits from Public’ because
same provisions are applicable.
(13) Ceiling on Rate of Interest and Brokerage Payable on Deposits 8 : A
company is permitted to invite or accept or renew any deposit at any rate of
interest or pay any amount of brokerage but in no case, it shall exceed the
maximum rate of interest or brokerage prescribed by the Reserve Bank of
India in case of non-banking financial companies (NBFCs) for acceptance of
deposits.

7
A Specified IFSC Public company means an unlisted public company which is licensed to
operate by the Reserve Bank of India or the Securities and Exchange Board of India or the
Insurance Regulatory and Development Authority of India from the International Financial
Services Centre located in an approved multi services Special Economic Zone set-up under the
Special Economic Zones Act 2005 read with the Special Economic Zones Rules, 2006.
8
As per Rule 3 (6).

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.15

Further, no brokerage shall be paid to any person except the person who is
authorised in writing by the company to solicit deposits on its behalf and
through whom deposits are actually procured.
(14) Filling of Application Form for making Deposits 9: A company shall accept
or renew any deposit, whether secured or unsecured, only when an
application, as specified by the company, is submitted by the intending
depositor for the acceptance of deposit.
The application shall contain a declaration made by the intending depositor
to the effect that the deposit is not being made out of any money borrowed
by him from any other person.
(15) Deposits in Joint Names 10: In case the depositors so desire, deposits may
be accepted in joint names not exceeding three. A joint deposit may be
accepted with or without any of the clauses, namely, “Jointly”, “Either or
Survivor”, “First named or Survivor”, “Anyone or Survivor”. These clauses
operate on maturity.
Example 4: A, B and C have jointly deposited ` 1,00,000 in a company.
• In case of ‘Jointly’ clause the repayment of deposit on maturity shall be
made to all the three together i.e. A, B and C or the survivors.
• In case of ‘Either or Survivor’ clause, the repayment of deposit on
maturity shall be made to either of the three i.e. either A or B or C or
the survivor.
• In case of ‘First named or Survivor’ clause, the repayment of deposit on
maturity shall be made to the first named person i.e. A if he is the first
named person or the survivor.
• In case of ‘Anyone or Survivor’ clause, the repayment of deposit on
maturity shall be as in the case of ‘Either or Survivor’.
(16) Nomination 11: Every depositor may nominate any person at any time. The
nominee shall be the person to whom his deposits shall vest in the event of
his death.
(17) Deposit Receipt 12 : Within a period of twenty-one days from the date of
receipt of money or realization of cheque or date of renewal, the company is

9
As per Rule 10.
10
As per Rule 3 (2).
11
As per Rule 11.
12
As per Rule 12.

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 5.16 CORPORATE AND OTHER LAWS

required to furnish a deposit receipt to the depositor or his agent. The receipt
shall be signed by the duly authorised officer and state the date of deposit,
the name and address of the depositor, the amount of deposit, the rate of
interest and the maturity date.
(18) Register of Deposits 13 : As regards Register of Deposits, refer provisions
given under ‘Acceptance of Deposits from Public’ because same provisions
are applicable.
(19) Premature Repayment of Deposits 14: As regards premature repayment of
deposits, refer provisions given under ‘Acceptance of Deposits from Public’
because same provisions are applicable.
(20) Filing of Return of Deposits with the Registrar 15: A duly audited return of
deposits in DPT-3 (containing particulars as on 31st March of every year) shall
be filed with the Registrar of Companies along with requisite fee on or before
the 30th June of that year.
It is clarified by way of Explanation that DPT-3 shall be used to include
particulars of deposits or particulars of transactions not considered as
deposits or both by every company (other than a Government company).
(21) No Right to Alter 16: The company has no right to alter any of the terms and
conditions of the deposit, deposit trust deed and deposit insurance contract
which may prove detrimental to the interest of the depositors after circular
or circular in the form of advertisement is issued and deposits are accepted.
(22) Disclosures in Financial Statements 17: A public company shall disclose in its
financial statements by way of note about the money received from its
directors. In case of a private company it shall disclose in its financial
statements by way of note about the money received from the directors or
the relatives of directors.
As a onetime measure, every company (other than a Government company)
shall file a onetime return of outstanding receipt of money or loan by a
company not considered as deposits from 1st April 2014 till 31st March, 2019

13
As per Rule 14.
14
As per Rule 15.
15
As per Rule 16.
16
As per Rule 3 (7).
17
As per Rule 16A.

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.17

in Form DPT-3 with the Registrar of Companies within ninety days from 31st
March, 2019 along with requisite fee.
(23) Penal Rate of Interest 18: In case the company fails to repay deposits (both
secured and unsecured) on maturity, after they are claimed, it shall pay penal
rate of interest of eighteen per cent per annum for the overdue period.
(24) Punishment for Contravention 19: If any company inviting deposits or any
other person contravenes any of the ‘deposit rules’ for which no punishment
is provided in the Act, the company and every officer-in-default shall be
punishable as under:
• with fine extendable to five thousand rupees; and
• in case the contravention is a continuing one, with a further fine up to
five hundred rupees for every day during which the contravention
continues.

5. PROVISIONS REGARDING ACCEPTANCE OF

DEPOSITS FROM PUBLIC BY ELIGIBLE
COMPANIES
Only ‘eligible companies’ are permitted to accept deposits from the public, in
addition to their members.
It means not all the companies can access the public at large for raising deposits
though they can accept deposits from their members.
Section 76 of the Act and the Companies (Acceptance of Deposits) Rules, 2014 deal
with acceptance of deposits from public by eligible companies.
The acceptance of deposits from public shall be subject to compliance with section
73 (2) and the prescribed rules.
These provisions are stated as under:
(1) Net Worth/Turnover Criterion 20: A public company, having net worth of not
less than one hundred crore rupees or turnover of not less than five hundred crore
rupees, may accept deposits from persons other than its members. Such type of
public company is known as ‘eligible company’.

18
As per Rule 17.
19
As per Rule 21.
20
As per Rule 2 (1) (e).

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 5.18 CORPORATE AND OTHER LAWS

(2) Passing of Special Resolution 21: The ‘eligible company’ is required to obtain
the prior consent by means of a special resolution in general meeting and also file
the said resolution with the Registrar of Companies before making any invitation
to the public for acceptance of deposits.
However, an ‘eligible company’, which is accepting deposits within the limits
specified under section 180 (1) (c), may accept deposits by means of an ordinary
resolution.
(3) Obtaining of Credit Rating 22: The ‘eligible company’ shall be required to
obtain the rating (including its net-worth, liquidity and ability to pay its deposits
on due date) from a recognised credit rating agency. The given rating which
ensures adequate safety shall be informed to the public at the time of invitation of
deposits from the public. Further, the rating shall be obtained every year during the
tenure of deposits.
As per Rule 3 (8), copy of the credit rating which is being obtained at least once in
a year shall be sent to the Registrar of Companies along with the Return of Deposits
in Form DPT-3.
Further, the credit rating shall not be below the minimum investment grade rating
or other specified credit rating for fixed deposits. It shall be obtained from any one
of the approved credit rating agencies as specified for Non-Banking Financial
Companies in the Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 1998, as amended from time to time.
(4) Charge Creation on Assets Necessary if the Deposits are Secured 23: Every
company which accepts secured deposits from the public shall within thirty days of
such acceptance, create a charge on its assets. The amount of charge shall not be
less than the amount of deposits accepted. The charge shall be created in favour
of the deposit holders in accordance with the prescribed rules.
In respect of creation of security, Rule 6 states that the company accepting secured
deposits shall create security by way of charge on its tangible assets only.
The other notable points are:
• The company cannot create charge on intangible assets (i.e. goodwill, trade-
marks, etc.).

21
As per Rule 2 (1) (e).
22
As per first Proviso to section 76 (1).
23
As per second Proviso to section 76 (1).

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.19

• Total value of security should not be less than the amount of deposits
accepted and interest payable thereon.
• The market value of assets subject to charge shall be assessed by a registered
valuer.
• The security shall be created in favour of a trustee for the depositors on
specific movable and immovable property of the company.
(5) Tenure for which Deposits can be Accepted 24: A company is not permitted
to accept or renew deposits (whether secured or unsecured) which is repayable on
demand or in less than six months. Further, the maximum period of acceptance of
deposit cannot exceed thirty-six months.
Exception to the rule of tenure of six months: For the purpose of meeting any of its
short-term requirements of funds, a company may accept or renew deposits for
repayment earlier than six months subject to the condition that—
(i) such deposits shall not exceed ten per cent. of the aggregate of the paid-up
share capital, free reserves and securities premium account of the company;
and
(ii) such deposits are repayable only on or after three months from the date of
such deposits or renewal.
(6) Appointment of Trustee for Depositors 25
: Following provisions are
required to be observed in this respect:
• One or more trustees for depositors need to be appointed by the company
for creating security for the deposits.
• A written consent shall be obtained from the trustees before their
appointment.
• A statement shall appear in the circular or advertisement with reasonable
prominence to the effect that the trustees for depositors have given their
consent to the company for such appointment.
• The company shall execute a deposit trust deed in Form DPT-2 at least seven
days before issuing the circular or circular in the form of advertisement.

24
As per Rule 3 (1).
25
As per Rule 7.

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 5.20 CORPORATE AND OTHER LAWS

• No person including a company that is in the business of providing

trusteeship services shall be appointed as a trustee for the depositors, if the
proposed trustee:
(a) is a director, key managerial personnel or any other officer or an
employee of the company or of its holding, subsidiary or associate
company or a depositor in the company;
(b) is indebted to the company, or its subsidiary or its holding or associate
company or a subsidiary of such holding company;
(c) has any material pecuniary relationship with the company;
(d) has entered into any guarantee arrangement in respect of principal
debts secured by the deposits or interest thereon;
(e) is related to any person specified in clause (a) above.
• No trustee for depositors shall be removed from office after the issue of
circular or advertisement and before the expiry of his term except with the
consent of all the directors present at a meeting of the board. In case the
company is required to have independent directors, at least one independent
director shall be present in such meeting of the Board.
(7) Maximum Amount of Deposits 26 : An eligible company is permitted to
accept or renew deposits as under:
• From its members: The amount of such deposit together with outstanding
deposits from the members as on the date of acceptance or renewal can be
maximum ten per cent. of the aggregate of its paid-up share capital, free
reserves and securities premium account;
• From Persons other than its Members: The amount of such deposit
together with the amount of outstanding deposits (excluding deposits from
members) on the date of acceptance or renewal can be maximum twenty-
five per cent. of the aggregate of its paid-up share capital, free reserves and
securities premium account.
(8) Maximum Amount of Acceptable Deposit in case of an Eligible
Government Company 27: Such a company is permitted to accept or renew any
deposit together with the amount of other outstanding deposits as on the date of

26
As per Rule 3 (4).
27
As per Rule 3 (5).

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.21

acceptance or renewal maximum up to thirty-five per cent. of the aggregate of

its paid-up share capital, free reserves and securities premium account.
(9) Issuance of Circular in the Form of Advertisement 28: An ‘eligible company’
intending to invite deposits is required to issue a circular in the form of an
advertisement in DPT-1.
Such advertisement shall be published in English in an English newspaper and in
vernacular language in a vernacular newspaper. Both newspapers should have wide
circulation in the State in which the registered office of the company is situated.
If the company has its website, the circular shall also be placed on the website.
Such advertisement shall be issued on the authority and in the name of Board of
Directors of the company.
• Filing with the Registrar: At least thirty days before the issue of the
advertisement, its copy duly signed by a majority of the directors who
approved the advertisement or otherwise signed by their duly authorised
agents is required to be delivered to the Registrar of Companies for
registration.
• Validity of the Advertisement: The advertisement shall remain valid till the
earliest of the following dates:
(a) up to six months from the closure of the financial year in which it is
issued; or
(b) the date on which the financial statements are laid before the company
at the Annual General Meeting (AGM), or in case no AGM has been held,
the latest day on which the AGM should have been held as per the
relevant statutory provisions.
• Fresh Advertisement: A fresh advertisement shall be issued, in each
succeeding financial year, for inviting deposits during that financial year.
• Issue and Effective dates: The date on which the advertisement appeared in
the newspaper shall be taken as the date of the issue of advertisement.
Further, the effective date of issue of circular shall be the date on which the
circular was dispatched.
(10) Maintenance and Using the Amount of Deposit Repayment Reserve
Account: The company is required to deposit, on or before 30th of April each year,
at least 20% of the amount of its deposits maturing during the following financial

28
As per Rule 4.

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 5.22 CORPORATE AND OTHER LAWS

year and kept in a scheduled bank in a separate bank account to be called deposit
repayment reserve account. [Section 73 (2) (c)]
Rule 13 states that the amount so deposited in the account shall not be used by
the company for any purpose other than repayment of deposits. Further, it states
that such amount shall not at any time fall below twenty percent of the amount
of deposits maturing during the financial year.
(11) Ceiling on Rate of Interest and Brokerage Payable on Deposits 29 : An
eligible company is permitted to invite or accept or renew any deposit at any rate
of interest or pay any amount of brokerage but in no case, it shall exceed the
maximum rate of interest or brokerage prescribed by the Reserve Bank of India in
case of non-banking financial companies (NBFCs) for acceptance of deposits.
Further, no brokerage shall be paid to any person except the person who is
authorised in writing by the company to solicit deposits on its behalf and through
whom deposits are actually procured.
(12) Filling of Application Form for making Deposits 30: A company shall accept
or renew any deposit, whether secured or unsecured, only when an application, as
specified by the company, is submitted by the intending depositor for the
acceptance of deposit.
The application shall contain a declaration made by the intending depositor to the
effect that the deposit is not being made out of any money borrowed by him from
any other person.
(13) Deposits in Joint Names31: In case the depositors so desire, deposits may
be accepted in joint names not exceeding three. A joint deposit may be accepted
with or without any of the clauses, namely, “Jointly”, “Either or Survivor”, “First
named or Survivor”, “Anyone or Survivor”. These clauses operate on maturity.
(14) Nomination 32 : Every depositor may nominate any person at any time. The
nominee shall be the person to whom his deposits shall vest in the event of his death.
(15) Deposit Receipt33: Within a period of twenty-one days from the date of
receipt of money or realization of cheque or date of renewal, the company is
required to furnish a deposit receipt to the depositor or his agent. The receipt shall

29
As per Rule 3 (6).
30
As per Rule 10.
31
As per Rule 3 (2).
32
As per Rule 11.
33
As per Rule 12.

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.23

be signed by the duly authorised officer and state the date of deposit, the name
and address of the depositor, the amount of deposit, the rate of interest and the
maturity date.
(16) Register of Deposits 34:
• Every company accepting deposits shall maintain one or more separate
registers for deposits accepted or renewed at its registered office.
Following particulars shall be entered separately in the case of each
depositor:
(a) name, address and PAN of the depositor/s;
(b) particulars of the guardian, in case of a minor;
(c) particulars of the nominee;
(d) deposit receipt number;
(e) date and the amount of each deposit;
(f) duration of the deposit and the date on which each deposit is repayable;
(g) rate of interest on such deposits to be payable to the depositor;
(h) due date for payment of interest;
(i) mandate and instructions for payment of interest and for non-
deduction of tax at source, if any;
(j) date or dates on which the payment of interest shall be made;
35
(l) particulars of security or charge created for repayment of deposits;
(m) any other relevant particulars.
• The entries shall be made within seven days from the date of issuance of the
receipt duly authenticated by a director or secretary of the company or by
any other officer authorised by the Board for this purpose.
• The said register shall be preserved in good order for a period of not less than
eight years from the financial year in which the latest entry is made in the register.

34
As per Rule 14.
35
Clause (k) relating to details of deposit insurance has been omitted. [Notification No. G.S.R.
612 (E), dated 5th July, 2018]

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 5.24 CORPORATE AND OTHER LAWS

(17) Premature Repayment of Deposits 36: After the expiry of six months but
before the actual date of maturity, if a depositor requests for premature repayment,
the rate of interest payable shall be one percent less than the rate which would be
payable for the period for which the deposit has actually run.
In this respect it is to be noted that the period for which the deposit has run, if it
contains any part of the year which is less than six months then it shall be excluded;
otherwise if that part is six months or more it shall be taken as one year.
Reduction of rate of interest is not applicable in the following cases:
• Where the deposit is prematurely repaid to comply with Rule 3 i.e. premature
repayment made in order to reduce the total amount of deposits to bring it
within the permissible limits; or
• Where the deposit is prematurely repaid to provide for war risk or other
related benefits to the personnel of naval, military or air forces or to their
families during the period of emergency declared under Article 352 of the
constitution.
(18) Premature Closure of Deposit to Earn Higher Rate of Interest 37: In case a
depositor desires to avail higher rate of interest by renewing the deposit before its
actual maturity date, the company shall pay him the higher rate of interest only if
the deposit is renewed for a period longer than the unexpired period of deposit.
(19) Filing of Return of Deposits with the Registrar 38: A duly audited return of
deposits in DPT-3 (containing particulars as on 31st March of every year) shall be
filed with the Registrar of Companies along with requisite fee on or before the 30th
June of that year.
It is clarified by way of Explanation that DPT-3 shall be used to include particulars
of deposits or particulars of transactions not considered as deposits or both by
every company (other than a Government company).
(20) Disclosures in Financial Statements 39: A public company shall disclose in its
financial statement by way of note about the money received from its directors.
As a onetime measure, every company (other than a Government company) shall
file a onetime return of outstanding receipt of money or loan by a company not
considered as deposits from 1st April 2014 till 31st March, 2019 in Form DPT-3 with

36
As per Rule 15.
37
As per Rule 15 (Second Proviso).
38
As per Rule 16.
39
As per Rule 16A.

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.25

the Registrar of Companies within ninety days from 31st March, 2019 along with
requisite fee.
(21) Penal Rate of Interest 40: In case the company fails to repay deposits (both
secured and unsecured) on maturity, after they are claimed, it shall pay penal rate
of interest of eighteen per cent per annum for the overdue period.
(22) No Right to Alter 41: The company has no right to alter any of the terms and
conditions of the deposit, deposit trust deed and deposit insurance contract which
may prove detrimental to the interest of the depositors after circular or circular in
the form of advertisement is issued and deposits are accepted.
(23) Punishment for Contravention 42: If any eligible company inviting deposits
or any other person contravenes any of the ‘deposit rules’ for which no punishment
is provided in the Act, the company and every officer-in-default shall be punishable
as under:
• with fine extendable to five thousand rupees; and
• in case the contravention is a continuing one, with a further fine up to five
hundred rupees for every day during which the contravention continues.
(24) Applicability of Section 73 and 74 to Eligible Companies: As per Rule 19,
pursuant to provisions of sub-section (2) of section 76 of the Act, the provisions of
sections 73 and 74 shall, mutatis mutandis, apply to acceptance of deposits from
public by eligible companies.
Provided further that the fresh deposits by every eligible company shall have to be
in accordance with the provisions of Chapter V of the Act and these rules.
Note: Besides Rule 19, section 76 (2) of the Act states that the provisions of Chapter
V shall, mutatis mutandis, apply to the acceptance of deposits from public under
section 76.

6. PUNISHMENT FOR CONTRAVENTION OF

SECTION 73 OR SECTION 76
According to section 76A of the Act, in case a company accepts or invites or allows
any other person to accept or invite on its behalf any deposit in contravention of
the manner or the conditions prescribed under section 73 or section 76 or rules

40
As per Rule 17.
41
As per Rule 3 (7).
42
As per Rule 21.

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made thereunder or if a company fails to repay the deposit or part thereof or any
interest within the time specified under section 73 or section 76 or rules made
thereunder or such further time as may be allowed by the Tribunal under section
73, then the following consequences will follow:
(a) Punishment for the company: The company shall, in addition to the
payment of the amount of deposit or part thereof and the interest due, be
punishable with fine which shall not be less than one crore rupees or twice
the amount of deposit accepted by the company, whichever is lower but
which may extend to ten crore rupees; and
(b) Punishment for officer-in-default: Every officer of the company who is in
default shall be punishable with imprisonment which may extend to seven
years and with fine which shall not be less than twenty-five lakh rupees but
which may extend to two crore rupees.
Further, if it is proved that the officer of the company who is in default, has
contravened such provisions knowingly or wilfully with the intention to
deceive the company or its shareholders or depositors or creditors or tax
authorities, he shall be liable for action under section 447 (Punishment for
fraud).

7. REPAYMENT OF DEPOSITS ACCEPTED

BEFORE COMMENCEMENT OF THE
COMPANIES ACT, 2013
The provisions regarding repayment of deposits accepted before commencement
of the Companies Act, 2013, has been dealt with in section 74. These provisions are
explained as under:
(i) Filing of Statement of Deposits with the Registrar of Companies and
Repayment Thereafter: As per section 74 (1), in case any deposit was
accepted by a company before the commencement of this Act (i.e. before
1.4.2014), and the amount of such deposit or any interest remains unpaid as
on 1.4.2014 or becomes due at any time thereafter, the company shall take
the following steps:
(a) file, within a period of 3 months from such commencement or from the
date on which such payments are due, with the Registrar:
• a statement of all the deposits accepted by the company and
sums remaining unpaid on such amount with the interest payable

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.27

thereon along with the arrangements made for such repayment.

This is to be done notwithstanding anything contained in any
other law for the time being in force or under the terms and
conditions subject to which the deposit was accepted or any
scheme framed under any law; and
(b) repay within three years from such commencement or on or before
expiry of the period for which the deposits were accepted, whichever is
earlier.
Note 1: As per Explanation to Rule 19 if the company has been repaying such
deposits and interest thereon without any default on due dates for the
remaining period of such deposit in accordance with the terms and
conditions, point (b) above shall be deemed to have been complied with.
Note 2: It is to be noted that renewal of any such deposits shall be done in
accordance with the provisions of Chapter V and the rules made thereunder.
(ii) Extension of Time for Repayment of Deposits by the Tribunal: As per
section 74 (2), the Tribunal may, on an application made by the company,
after considering the financial condition of the company, the amount of
deposit and the interest payable thereon and such other matters, allow
further time as considered reasonable to the company to repay the deposit.
(iii) Punishment for Non-Repayment of Deposits: As per section 74 (3), if a
company fails to repay the deposit or part thereof or any interest thereon
within the time specified in section 74 (1) or such further extended time
allowed by the Tribunal under section 74 (2), the company shall, in addition
to the payment of the amount of deposit or part thereof and the interest
due, be punishable as under:
• company: with fine minimum of one crore rupees and maximum of ten
crore rupees; and
• every officer-in-default: with imprisonment extendable to seven years
or with fine minimum of twenty-five lakh rupees and maximum of two
crore rupees, or with both.

SUMMARY
 Deposit includes any receipt of money by way of deposit or loan or in any
other form by a company but does not include such categories of amount
prescribed in consultation with RBI.

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 5.28 CORPORATE AND OTHER LAWS

 Depositor means any member of the company or any other person (not being
a member of the company) who has made a deposit.
 ‘Eligible company’ is the one which can accept deposits both from the public
and its members.
 Section 73 prohibits a company to invite, accept or renew deposits from
public if they are not accepted or renewed in the prescribed manner. This
prohibition however shall not apply in case of certain exempted companies
i.e.:
 banking company;
 non- banking financial company;
 a housing finance company registered with NHB;
 such other company as the Central Government may specify.
 If a company fails to repay the deposit or part thereof or any interest thereon,
the depositor concerned may apply to the Tribunal for an order directing the
company to pay the sum due or for any loss or damage incurred by him as a
result of such non-payment and for such other orders as the Tribunal may
deem fit.
 The deposit repayment reserve account shall not be used by the company for
any purpose other than repayment of deposits.
 In case of secured deposits, the company is required to create security of
equivalent amount by way of charge on its tangible assets.
 A company shall not issue any circular or advertisement for inviting secured
deposits unless it appoints one or more trustees.
 Every company accepting deposits shall maintain at its registered office one
or more separate registers for deposits accepted or renewed.
 A public company shall disclose in its financial statements by way of note
about the money received from its directors.
 A private company shall disclose in its financial statements by way of notes,
about the money received from the directors, or relatives of directors.
 Every company shall pay a penal rate of interest of 18% p.a. for the overdue
period in case of default in repayment.
 The Return of Deposits shall be filed in Form DPT-3 with the Registrar.

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.29

 In case of default in repayment, a company is punishable with fine and every

officer-in-default shall be punishable with imprisonment and also fine. In case
of willful default committed with the intention to deceive various
stakeholders, he shall be liable for action under section 447.

TEST YOUR KNOWLEDGE

Question 1
Enumerate the amounts which when received by a company in the ordinary course
of business are not to be considered as deposits.
Answer
According to Rule 2 (1) (c) (xii), following amounts if received by a company in the
course of, or for the purposes of, the business of the company, shall not be
considered as deposits:
(a) any amount received as an advance for the supply of goods or provision of
services accounted for in any manner whatsoever to be appropriated within
a period of three hundred and sixty-five days from the date of acceptance of
such advance:
However, in case any advance is subject matter of any legal proceedings
before any court of law, the time limit of three hundred and sixty-five days
shall not apply.
(b) any amount received as advance in connection with consideration for an
immovable property under an agreement or arrangement. However, such
advance is required to be adjusted against such property in accordance with
the terms of agreement or arrangement;
(c) any amount received as security deposit for the performance of the contract
for supply of goods or provision of services;
(d) any amount received as advance under long term projects for supply of
capital goods except those covered under item (b) above;
(e) any amount received as an advance towards consideration for providing
future services in the form of a warranty or maintenance contract as per
written agreement or arrangement, if the period for providing such services
does not exceed the period prevalent as per common business practice or
five years, from the date of acceptance of such service whichever is less;

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(f) any amount received as an advance and as allowed by any sectoral regulator
or in accordance with directions of Central or State Government;
(g) any amount received as an advance for subscription towards publication,
whether in print or in electronic to be adjusted against receipt of such
publications;
However, if the amount received under items (a), (b) and (d) above becomes
refundable (with or without interest) due to the reasons that the company
accepting the money does not have necessary permission or approval, wherever
required, to deal in the goods or properties or services for which the money is
taken, then the amount received shall be deemed to be a deposit under these rules.
Further, for the purposes of this sub-clause the amount shall be deemed to be
deposits on the expiry of fifteen days from the date they become due for refund.
Question 2
State the procedure to be followed by companies for acceptance of deposits from its
members according to the Companies Act, 2013. What are the exemptions available
to a private limited company?
Answer
Acceptance of deposits by a company from its members: As per section 73 (2)
of the Companies Act, 2013, a company may, subject to the passing of a resolution
in general meeting and subject to such rules as may be prescribed in consultation
with the Reserve Bank of India, accept deposits from its members on such terms
and conditions, including the provision of security, if any, or for the repayment of
such deposits with interest, as may be agreed upon between the company and its
members, subject to the fulfilment of the following conditions, namely—
(a) Issuance of a circular to its members including therein a statement showing
the financial position of the company, the credit rating obtained, the total
number of depositors and the amount due towards deposits in respect of any
previous deposits accepted by the company and such other particulars in
such form and in such manner as may be prescribed;
(b) Filing a copy of the circular along with such statement with the Registrar
within 30 days before the date of issue of the circular;
(c) Depositing, on or before the thirtieth day of April each year, such sum which
shall not be less than twenty per cent of the amount of its deposits maturing
during the following financial year and kept in a scheduled bank in a separate
bank account to be called deposit repayment reserve account;

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.31

(d) Omitted
(e) Certifying that the company has not committed any default in the repayment
of deposits accepted either before or after the commencement of this Act or
payment of interest on such deposits and where a default had occurred, the
company made good the default and a period of five years had lapsed since
the date of making good the default; and
(f) Providing security, if any for the due repayment of the amount of deposit or
the interest thereon including the creation of such charge on the property or
assets of the company.
Every deposit accepted by a company shall be repaid with interest in accordance
with the terms and conditions of the agreement. Where a company fails to repay
the deposit or part thereof or any interest thereon, the depositor concerned may
apply to the Tribunal for an order directing the company to pay the sum due or for
any loss or damage incurred by him as a result of such non-payment and for such
other orders as the Tribunal may deem fit.
Exemption to certain private companies:
Clauses (a) to (c) and (e) of sub-section (2) of section 73 with respect to issue of
circular, filing the copy of such circular with the Registrar, depositing of certain
amount and certification as to no default committed, shall not apply to a private
company:
(A) which accepts from its members monies not exceeding one hundred per cent
of aggregate of the paid-up share capital, free reserves and securities
premium account; or
(B) which is a start-up, for five years from the date of its incorporation; or
(C) which fulfils all of the following conditions, namely:
(a) which is not an associate or a subsidiary company of any other
company;
(b) if the borrowings of such a company from banks or financial institutions
or any body corporate is less than twice of its paid-up share capital or
fifty crore rupees, whichever is lower; and
(c) such a company has not defaulted in the repayment of such borrowings
subsisting at the time of accepting deposits under this section.

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However, such a company [as referred to in clauses (A), (B) or (C)] shall file the
details of monies accepted to the Registrar in the specified manner (i.e. in
Form DPT-3).
Question 3
Explain the provisions for 'Appointment of Trustee for Depositors' under the
Companies Act, 2013 read with the ‘Acceptance of Deposits’ Rules, 2014.
Answer
Appointment of Trustee for Depositors: In this respect following provisions are
required to be observed as mentioned in Rule 7 of the Companies (Acceptance of
Deposits) Rules, 2014:
• One or more trustees for depositors need to be appointed by the company
for creating security for the deposits.
• A written consent shall be obtained from the trustees before their appointment.
• A statement shall appear in the circular or advertisement with reasonable
prominence to the effect that the trustees for depositors have given their
consent to the company for such appointment.
• The company shall execute a deposit trust deed in Form DPT-2 at least seven
days before issuing the circular or circular in the form of advertisement.
• No person including a company that is in the business of providing trusteeship
services shall be appointed as a trustee for the depositors, if the proposed trustee:
(a) is a director, key managerial personnel or any other officer or an
employee of the company or of its holding, subsidiary or associate
company or a depositor in the company;
(b) is indebted to the company, or its subsidiary or its holding or associate
company or a subsidiary of such holding company;
(c) has any material pecuniary relationship with the company;
(d) has entered into any guarantee arrangement in respect of principal
debts secured by the deposits or interest thereon;
(e) is related to any person specified in clause (a) above.
• No trustee for depositors shall be removed from office after the issue of
circular or advertisement and before the expiry of his term except with the
consent of all the directors present at a meeting of the board. In case the

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.33

company is required to have independent directors, at least one independent

director shall be present in such meeting of the Board.
Question 4
What are the provisions relating to ‘Credit Rating’ which an ‘eligible company’ must
follow if it wants to raise public deposits?
Answer
The provisions relating to obtaining of ‘Credit Rating’ to be followed by an ‘eligible
company’ are contained in Section 76 (1) of the Companies Act, 2013 and Rule 3
(8) of the Companies (Acceptance of Deposits) Rules, 2014 as amended from time
to time. Accordingly, an ‘eligible company’ which desires to raise public deposits
shall be required to obtain the rating (including its net-worth, liquidity and ability
to pay its deposits on due date) from a recognised credit rating agency. The given
rating which ensures adequate safety shall be informed to the public at the time of
invitation of deposits from the public. Further, the rating shall be obtained every year
during the tenure of deposits.
As per Rule 3 (8), copy of the credit rating which is being obtained at least once in
a year shall be sent to the Registrar of Companies along with the Return of Deposits
in Form DPT-3.
Further, the credit rating shall not be below the minimum investment grade rating
or other specified credit rating for fixed deposits. It shall be obtained from any one
of the approved credit rating agencies as specified for Non-Banking Financial
Companies in the Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 1998, as amended from time to time.
Question 5
Discuss the following situations in the light of ‘deposit provisions’ as contained in the
Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014, as
amended from time to time.
(i) Samit, one of the directors of Zarr Technology Private Limited, a start-up
company, requested his close friend Ritesh to lend to the company ` 30.00 lacs
in a single tranche by way of a convertible note repayable within a period six
years from the date of its issue. Advise whether it is a deposit or not.
(ii) Polestar Traders Limited received a loan of ` 30.00 lacs from Rachna who is
one of its directors. Advise whether it is a deposit or not.

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(iii) City Bakers Limited failed to repay deposits of ` 50.00 crores and interest due
thereon even after the extended time granted by the Tribunal. Is the company
or Swati, its officer-in-default, liable to any penalty?
(iv) Shringaar Readymade Garments Limited wants to accept deposits of ` 50.00
lacs from its members for a tenure which is less than six months. Is it a
possibility?
(v) Is it in order for the Diamond Housing Finance Limited to accept and renew
deposits from the public from time to time?
Answer
(i) In terms of Rule 2 (1) (c) (xvii) if a start-up company receives rupees twenty-
five lakh or more by way of a convertible note (convertible into equity shares
or repayable within a period not exceeding ten years from the date of issue)
in a single tranche, from a person, it shall not be treated as deposit.
In the given case, Zarr Technology Private Limited, a start-up company,
received ` 30.00 lacs from Ritesh in a single tranche by way of a convertible
note which is repayable within a period of six years from the date of its issue.
In view of Rule 2 (1) (c) (xvii) which requires a convertible note to be repayable
within a period of ten years from the date of its issue, the amount of ` 30.00
lacs shall not be considered as deposit.
(ii) In terms of Rule 2 (1) (c) (viii), any amount received from a person who is
director of the company at the time of giving loan to the company shall not
be treated as deposit if such director furnishes to the company at the time of
giving money, a written declaration to the effect that the amount is not being
given out of funds acquired by him by borrowing or accepting loans or
deposits from others and further, the company shall disclose the details of
money so accepted in the Board's report.
In the given case, it is assumed that Rachna was one of the directors of
Polestar Traders Limited when the company received a loan of ₹ 30.00 lacs
from her. Further, it is assumed that she had furnished to the company at
time of giving money, a written declaration to the effect that the amount was
not being given out of funds acquired by her by borrowing or accepting loans
or deposits from others and in addition, the company had disclosed the
details of money so accepted in the appropriate Board's report.
If these conditions are satisfied ` 30.00 lacs shall not be treated as deposit.

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(iii) By not repaying the deposit of ` 50.00 crores and the interest due thereon
even after the extended time granted by the Tribunal, City Bakers Limited has
contravened the conditions prescribed under Section 73 of the Act.
Accordingly, following penalty is leviable:
• Punishment for the company: City Bakers Limited shall, in addition to
the payment of the amount of deposit and the interest due thereon, be
punishable with fine which shall not be less than rupees one crore or
twice the amount of deposit accepted by the company, whichever is
lower but which may extend to rupees ten crores.
• Punishment for officer-in-default: Swati, being the officer-in-default,
shall be punishable with imprisonment which may extend to seven years
and with fine which shall not be less than rupees twenty-five lakhs but
which may extend to rupees two crores.
Further, if it is proved that Swati had contravened such provisions knowingly
or wilfully with the intention to deceive the company or its shareholders or
depositors or creditors or tax authorities, she will be liable for action
under section 447 (Punishment for fraud).
(iv) According to Rule 3 (1), a company is not permitted to accept or renew deposits
(whether secured or unsecured) which is repayable on demand or in less than six
months. Further, the maximum period of acceptance of deposit cannot exceed thirty
six months.
However, as an exception to this rule, for the purpose of meeting any of its
short-term requirements of funds, a company is permitted to accept or renew
deposits for repayment earlier than six months subject to the conditions that:
(i) such deposits shall not exceed ten per cent. of the aggregate of
the paid-up share capital, free reserves and securities premium
account of the company; and
(ii) such deposits are repayable only on or after three months from the date
of such deposits or renewal.
In the given case of Shringaar Readymade Garments Limited, it wants to
accept deposits of ` 50.00 lacs from its members for a tenure which is less
than six months. It can do so if it justifies that the deposits are required for
the purpose of meeting any of its short-term requirements of funds but in no
case such deposits shall exceed 10% ten per cent of the aggregate of its paid-
up share capital, free reserves and securities premium account and further,

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such deposits shall be repayable only on or after three months from the date
of such deposits.
(v) According to section 73 (1) of the Act, no company can accept or renew
deposits from public unless it follows the manner provided under Chapter V
of the Act (contains provisions regarding acceptance of deposits by companies)
for acceptance or renewal of deposits from public. However, Proviso to
Section 73 (1) states that such prohibition with respect to the acceptance or
renewal of deposit from public, inter-alia, shall not apply to a housing finance
company registered with the National Housing Bank established under the
National Housing Bank Act, 1987.
In the given case, it is assumed that Diamond Housing Finance Limited is
registered with the National Housing Bank and therefore the prohibition
contained in section 73 (1) of the Act with respect to the acceptance renewal
of deposit from public shall not apply to it. In other words, it being an
exempted company, can accept deposits from the public from time to time
without following the prescribed manner.
Question 6
ABC Limited having a net worth of ` 120 crores wants to accept deposit from its
members. The directors of the company have approached you to advise them as to
what special care has to be taken while accepting such deposit from the members in
case their company falls within the category of an ‘eligible company’.
Answer
According to section 76 (1) of the Act, an “eligible company” means a public
company, having a net worth of not less than one hundred crore rupees or a
turnover of not less than five hundred crore rupees and which has obtained the
prior consent of the company in general meeting by means of a special resolution
and also filed the said resolution with the Registrar of Companies before making
any invitation to the public for acceptance of deposits.
However, an ‘eligible company’, which is accepting deposits within the limits
specified under section 180 (1) (c), may accept deposits by means of an ordinary
resolution.
According to Rule 4 (a), an ‘eligible company’ shall accept or renew any deposit
from its members, if the amount of such deposit together with the amount of
deposits outstanding as on the date of acceptance or renewal of such deposits from
members does not exceed ten per cent. of the aggregate of the paid-up share
capital, free reserves and securities premium account of the company.

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.37

ABC Limited is having a net worth of 120 crore rupees. Hence, it falls in the category
of ‘eligible company’.
Thus, ABC Limited has to ensure that acceptance of deposits from its members
together with the amount of deposits outstanding as on the date of acceptance or
renewal of such deposits from the members, in no case, exceeds 10% of the
aggregate of the paid-up share capital, free reserves and securities premium
account of the company.
Question 7
Define the term 'deposit' under the provisions of the Companies Act, 2013 and
comment quoting relevant provisions whether the following amounts received by a
company will be considered as deposits or not:
(i) ` 5,00,000 raised by Rishi Confectionaries Limited through issue of non-
convertible debentures not constituting a charge on the assets of the company
and listed on a recognised stock exchange as per the applicable regulations
made by the Securities and Exchange Board of India.
(ii) ` 2,00,000 received by Raja Yarns Limited from its employee Mr. T, who draws
an annual salary of ` 1,50,000, as a non-interest bearing security deposit under
a contract of employment.
(iii) ` 3,00,000 received by a private company from one of the relatives of a
Director. The said relative has furnished a declaration that the amount was
received by him from his mother as a gift.
Answer

Deposit: According to Section 2 (31) of the Companies Act, 2013, the term ‘deposit’
includes any receipt of money by way of deposit or loan or in any other form, by a
company, but does not include such categories of amount as may be prescribed in
consultation with the Reserve bank of India.
Rule 2 (1) (c) of the Companies (Acceptance of Deposit) Rules, 2014 states various
amounts received by a company which will not be considered as deposits. In terms
of this Rule the answers to the given situations shall be as under:
(i) ` 5,00,000 raised by Rishi Confectionaries Limited through issue of non-
convertible debentures not constituting a charge on the assets of the
company and listed on recognised stock exchange as per the applicable
regulations made by the SEBI, will not be considered as deposit in terms of
sub-clause (ixa) of Rule 2 (1) (c).

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 5.38 CORPORATE AND OTHER LAWS

(ii) ` 2,00,000 received by Raja Yarns Limited from its employee Mr. T, who draws
an annual salary of ` 1,50,000, as a non-interest bearing security deposit
under a contract of employment will be considered as deposit in terms of
sub-clause (x) of Rule 2 (1) (c), for the amount received is more than his annual
salary of ` 1,50,000.
(iii) ` 3,00,000 received by a private company from one of the relatives of a
Director. When the relative furnishes a declaration that the said amount was
received by him from his mother as a gift, then it will not be considered as
deposit in terms of sub-clause (viii) of Rule 2 (1) (c). In fact, the preceding
sub-clause requires that any amount given by a relative of a director of a
private company shall not be considered as deposit if the relative furnishes a
declaration in writing to the effect that the amount is not being given out of
funds acquired by him by borrowing or accepting loans or deposits from
others. Thus, the amount given to the private company out of gifted money
by one of the relatives of a director is not a ‘deposit’.
As an additional requirement, the company shall disclose the details of money
so accepted in the Board’s report.
Question 8
State, with reasons, whether the following statements are ‘True or False’?
(i) ABC Private Limited may accept deposits from its members to the extent of
` 50.00 lakhs, if the aggregate of its paid-up capital, free reserves and security
premium account is ` 50.00 lakhs.
(ii) A Government Company, which is eligible to accept deposits under Section 76
of the Companies Act, 2013, cannot accept deposits from public exceeding 25%
of the aggregate of its paid-up capital, free reserves and security premium
account.
Answer
(i) As per the provisions of Section 73 (2) of the Companies Act, 2013 read with
Rule 3 (3) of the Companies (Acceptance of Deposits) Rules, 2014, as amended
from time to time, a company shall accept any deposit from its members,
together with the amount of other deposits outstanding as on the date of
acceptance of such deposits not exceeding thirty five per cent of the
aggregate of the paid-up share capital, free reserves and securities premium
account of the company. It is provided that a private company may accept
from its members monies not exceeding one hundred per cent of aggregate
of the paid-up share capital, free reserves and securities premium account

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 ACCEPTANCE OF DEPOSITS BY COMPANIES 5.39

and such company shall file the details of monies so accepted to the Registrar
in Form DPT-3.
Therefore, the given statement where ABC Private Limited is accepting
deposits from its members to the extent of ` 50.00 lakh is ‘true’.
(ii) As per Rule 3 (5) of the Companies (Acceptance of Deposits) Rules 2014, a
Government Company is not eligible to accept or renew deposits
under section 76, if the amount of such deposits together with the amount of
other deposits outstanding as on the date of acceptance or renewal exceeds
thirty five per cent of the aggregate of its paid-up share capital, free reserves
and securities premium account.
Therefore, the given statement where the limit of 25% has been stated for
acceptance of deposits is ‘false’.

© The Institute of Chartered Accountants of India

CHAPTER 6

REGISTRATION OF
CHARGES

LEARNING OUTCOMES

At the end of this chapter, you will be able to know and

understand:
 the meaning of Charge
 the difference between a Floating Charge and a Fixed Charge
 the steps involved in Registration of Charges
 the consequences of non-registration of a charge the steps
to be followed for registering satisfaction of charge
 the penal provisions in case of default

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 6.2 CORPORATE AND OTHER LAWS

Meaning of Charge [Sec. 2 (16)]

Duty to Register Charge [Sec. 77]

Application for registration of Charge [Sec. 78]

CHARGE

Date of Notice of Charge [Sec. 80]

Satisfaction of Charge [Sec. 82 & 83]

Punishment and Rectification in Register of Charges [Sec. 86 & Sec. 87]

1. INTRODUCTION
The law with respect to the registration of charges has been dealt in Chapter VI of
the Companies Act, 2013 consisting of sections 77 to 87 as well as the Companies
(Registration of Charges) Rules, 2014.
Definition of Charge

Section 2(16) of the Companies Act, 2013 defines “charge” as an interest or lien
created on the property or assets of a company or any of its undertakings or both
as security and includes a mortgage.

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 REGISTRATION OF CHARGES 6.3

Whenever a company borrows money by way of loans including term loans or

working capital loans from financial institutions or banks or any other persons, by
offering its property or assets, as security a charge is created on such property or
assets in favour of the lender. Such a charge is compulsorily registrable under the
provisions of the Companies Act, 2013 in accordance with Chapter VI and the rules
made in this regard.
Registration of Charge to act as Constructive Notice (Section 80)
All charges registered with the registrar are public documents. This means that any
person who wishes to lend money to the company against the security of such
property or buy it can refer to the MCA Portal and find out if there is any charge
created on that asset.
Please remember that any document filed with the registrar for registration acts as
Constructive Notice. Constructive means “deemed”. Notice means “knowledge”. So
Constructive notice means deemed knowledge. This means even though the third
party has not referred to the public document he would still be considered or
deemed to have seen it. This is because a deeming provision creates a legal fiction.
This principle is contained in section 80 which states that “where any charge is
registered under section 77, any person acquiring such property, assets,
undertakings or part thereof or any share or interest therein shall be deemed to
have notice of the charge from the date of such registration.
Thus, every person proposing to deal with a company should verify whether the
asset has any charge by going through the record of charges maintained at the
office of registrar of companies before entering into the transaction.
In case he enters into the transaction without making any enquiry and later on
suffers loss because of charge, he cannot claim the loss from the company for it
shall be deemed that he had notice of charge.
You will appreciate that compulsory registration of charges also acts as a method
of preventing a company from offering the same assets as security to borrow funds
fraudulently from a different lender.
Example 1: Vishnu Marketing Limited obtained a term loan of rupees fifty lacs from
Beta Commercial Bank Limited by creating a charge on one of its office buildings
and the charge was duly registered. Later on, if the building is sold to Neeraj, he is
deemed to have notice of such charge. In other words, it is presumed that Neeraj
knew beforehand that the building was mortgaged to the bank for obtaining a loan.
He cannot plead against such presumption by contending that he did not know
about the charge if he suffers any loss at a later date because of the mortgage.

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 6.4 CORPORATE AND OTHER LAWS

Types of Charge
A charge may be either fixed or floating.
Fixed Charge:
A ‘FIXED CHARGE’ is a charge on Specific assets of the borrowing company. These
assets are of permanent nature like land and building, office premises, machinery
installed by the company and the like. Further, these assets are identified at the
time of creation of charge. A fixed charge is usually created by way of mortgage or
deposit of title deeds.
When a charge is created on such assets, the charge remains ‘fixed’ and the
borrowing company is not permitted to sell such assets though it may use them.
Assets under fixed charge can be sold only with the permission or consent of the
charge-holder.
A fixed charge is vacated when the money borrowed against the assets subject to
fixed charge is repaid in full.
Floating Charge:
A ‘Floating Charge’ is created on assets or a class of assets which are of fluctuating
nature or changing in nature like raw material, stock-in-trade, debtors, and the like.
The assets under floating charge keep on changing because the borrowing
company is permitted to use them for trading or producing final goods for sale.
Example 2: A retail showroom will contain numerous articles kept for sale. The
owner of the showroom might have borrowed against the security of all those
goods in the showroom. But he may still sell or otherwise deal with them in the
ordinary course of business. The buyer will get it free of the charge.
Example 3: In case of a company which manufactures leather goods, the raw
material in the form of leather, which is subject matter of floating charge, may be
used to manufacture leather goods without seeking any permission from the
lender.
Thus, unlike a fixed charge, the assets offered as security by the company can be
dealt with by the company in the ordinary course of business. The buyer of the
asset will get it free of charge.
When the creditor enforces the security or the company goes into liquidation, the
floating charge will become a fixed charge on all the assets available on that date
and which may come into existence thereafter.
This is called crystallization of a floating charge.

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 REGISTRATION OF CHARGES 6.5

A floating charge remains dormant until it becomes fixed or crystallises. On

crystallisation, the security (i.e. raw material, stock-in-trade, etc.) becomes fixed and
is available for realization so that borrowed money is repaid. Crystallisation of
floating charge may occur when the terms and conditions of floating charge are
violated or the company ceases to continue its business or the company goes into
liquidation or the creditors enforce the security covered by the floating charge.

2. DUTY TO REGISTER CHARGES, ETC.

[SECTION 77]
Section 77 of the Companies Act, 2013 contains provisions regarding registration
of charges with the Registrar of Companies.
A. Registration of Charges
Registration by the company creating a charge: It shall be duty of the company
creating a charge within or outside India, on its property or assets or any of its
undertakings, whether tangible or otherwise and situated in or outside India, to
register the particulars of the charge.
Thus, charge may be created within India or outside India. The subject-matter of
the charge i.e. the property or assets or any of the company’s undertakings, may
be situated within India or outside India.
The property or asset charged may be a tangible asset such as land and building.
It may be otherwise, i.e. it may be a financial asset like a share or debenture which
may be pledged. It may also be an intangible asset such as patent, copyright or
trademark.
Note: The word otherwise when used in a section would have the effect of widening
the scope and operation of the provision.
A charge is created by deposit of title deeds (normally banks agree for this mode
of charge instead of proper mortgage) is also registrable by the borrowing
company. 1
Registration by the charge-holder: Section 78 (explained later) provides that in
case the company creating a charge fails to register the charge within the
prescribed period of 30 days, the person in whose favour the charge is created can
get the charge registered.

1
As per Section 58 (f) of the Transfer of Property Act, 1882.

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 6.6 CORPORATE AND OTHER LAWS

Registration by the purchaser: Section 79 (explained later) covers another case of

registration of charge where a company purchased some property in whose case a
charge was already registered. In this case also, the company purchasing the
property shall get the charge registered in its name in place of seller in the records
of Registrar.
B. How to Register Charge 2
The particulars of the charge in the prescribed form 3 together with a copy of the
instrument, if any, creating the charge duly signed by the company and the charge
holder, shall be filed with the Registrar within 30 days of creation of charge along
with the prescribed fee.
C. Verification of Instrument of Charge 4
A copy of every instrument creating (or modifying) any charge and required to be
filed with the Registrar, shall be verified as follows:
(a) Where the instrument or deed relates solely to the property situated
outside India, the copy shall be verified by a certificate issued either-
♦ under the seal, if any, of the company, or
♦ under the hand of any director or company secretary of the company, or an
authorised officer of the charge holder, or
♦ under the hand of some person other than the company who is interested in
the mortgage or charge;
(b) Where the instrument or deed relates to the property situated in India
(whether wholly or partly), the copy shall be verified by a certificate issued under
the hand of any director or company secretary of the company or an authorised
officer of the charge holder.
Thus, in case the instrument or deed relates solely to a property situated outside
India, the copy may also be additionally verified by a certificate issued under the
hand of some person other than the company who is interested in the mortgage
or charge. This type of verification is not possible when the instrument or deed
relates to the property situated in India, whether wholly or partly.

2
As per Section 77 (1) and Rule 3 (1) of the Companies (Registration of Charges)
Rules, 2014.
3
As per Rule 3, Form CHG-1 or Form CHG-9 (in case of debentures) is to be filled.
4
As per Rule 3 (4).

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 REGISTRATION OF CHARGES 6.7

D. Extension of Time Limit

The original period within which a charge needs to be registered is 30 days from
the date of creation of charge. The Companies (Amendment) Second Ordinance,
2019 (w.r.e.f. 02-11-2018) has amended the provisions relating to extension of time
limit as under:
(i) Charges created before 02-11-2018 (i.e. before the commencement of the
Companies (Amendment) Second Ordinance, 2019) 5: In such cases, where charge
was created before 02-11-2018 but was not registered within the original period of
30 days, the Registrar may, on an application by the company, allow such
registration to be made within a period of 300 days of such creation.
Further, if the charge is not registered within the extended period of 300 days, it
shall be done within six months from 02-11-2018 on payment of prescribed
additional fees. It is provided that different fees may be prescribed for different
classes of companies.

Charge Created before 02-11-2018

Register charge within 30 days of creation

If not registered in 30 days

Register within 300 days of creation on payment

of additional fees

If not registered in 300 days

Register within six months from 02-11-2018 with additional fees.

Different fees for different classes of companies.

(ii) Charges created on or after 02-11-2018 (i.e. on or after the commencement of

the Companies (Amendment) Second Ordinance, 2019) 6: In such cases (i.e. where the
charge was created on or after 02-11-2018 but the registration of charge was not

5
As per Clause (a) of First Proviso and also Clause (a) of Second Proviso to Section 77 (1).
6
As per Clause (b) of First Proviso and also Clause (b) of Second Proviso to Section 77 (1).

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 6.8 CORPORATE AND OTHER LAWS

effected within the original period of 30 days), the Registrar may, on an application
by the company, allow such registration to be made within a period of 60 days of
such creation (i.e. a grace period of another 30 days is granted after the expiry of
the original 30 days), on payment of additional fees as prescribed.
If the charge is not registered within the extended period as above, the company
shall make an application and the Registrar is empowered to allow such registration
to be made within a further period of sixty days after payment of prescribed ad
valorem 7 fees.

Charge Created on or after 02-11-2018

Within 30 days

Register Charge

If not registered in 30 days

Register in next 30 days (i.e. within 60 days from creation) with

additional fees

If not registered in next 30 days

Register within a further period of sixty days with ad valorem fees

Procedure for Extension of Time Limit 8: The company is required to make an

application to the Registrar in the prescribed form 9 for seeking extension of time.
It should be supported by a declaration from the company signed by its company
secretary or a director that such belated filing shall not adversely affect the rights
of any other intervening creditors of the company.
The Registrar on receiving an application for extension of time as aforesaid shall be
satisfied that the company had sufficient cause for not filing the particulars and
instrument of charge, if any within the original period of thirty days. Only then shall

7
ad valorem means in proportion to the estimated value of the transaction concerned. In
this case it will be based on value of the charge i.e. the amount of loan advanced against
security of the property.
8
As per Rule 4.
9
As per Rule 4 (2) Form CHG-1 or CHG-9 (in case of debentures) is to be used.

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 REGISTRATION OF CHARGES 6.9

he allow registration of charge within the extended period. Further, requisite

additional fee or ad valorem fee, as applicable, must also be paid.
E. Issue of Certificate of Registration 10
Where a charge or Modification is duly registered by the Registrar, a certificate of
Registration/ Modification shall be issued by the Registrar in the prescribed form 11.
The certificate so issued by the Registrar shall be conclusive evidence that the
requirements of Chapter VI of the Act and the rules made thereunder as to
registration of creation of charge have been complied with.
F. Section 77 not to apply to certain charges
The application of Section 77 shall not be made to certain charges which are
prescribed in consultation with the Reserve Bank of India. 12

3. CONSEQUENCE OF NON-REGISTRATION OF
CHARGE [SECTION 77 (3) & (4)]
No charge created by a company shall be taken into account by the liquidator
appointed under the Companies Act, 2013 or the Insolvency and Bankruptcy Code,
2016 or any other creditor unless it is duly registered and a certificate of registration
of such charge is given by the Registrar. 13
This means that the charge will become void against the liquidator and other
creditors of the company. That is to say, at the time of winding up, the creditor
whose charge has not been registered will be reduced to the level of an unsecured
creditor. Neither the liquidator nor any other creditor will give legal recognition to
a charge that is not registered.
But this shall not prejudice any contract or obligation for the repayment of the
money secured by a charge. 14 This means that the debt is valid and may be
enforced against the company through the courts by filing a suit, but the security
is lost.

10
As per Section 77 (2) and Rule 6 (1).
11
Form No. CHG 2 for fresh registration and in Form No. CHG 3 for modification.
12
As per Fourth Proviso to Section 77 (1) Inserted by The Companies (Amendment)Act,2017
- Amendment Effective from 7th May 2018
13
As per Section 77 (3)
14
As per Section 77 (4)

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 6.10 CORPORATE AND OTHER LAWS

Further, it may be noted that failure to register charge shall not absolve a company
from its liability in respect of any offence under this Chapter.
Another important consequence of non-registration is that the charge-holder loses
priority. Any subsequent registration of a charge (i.e. even if it is registered within
the extended period instead of original thirty days) shall not prejudice any right
acquired in respect of any property before the charge is actually registered. 15.
Example 4: Bank A has advanced Rs. One Crore to Akash Limited against the
security of the company’s land and building at Mulund. The charge was created by
deposit of title deeds on 1st June 2019. The company did not register the charge
within 30 days. Subsequently, the charge was registered on 13th August 2019 after
payment of ad valorem fees and proving sufficient cause.
In the meantime, Bank B has advanced Rs. Two Crore to Akash Limited against the
security of the same property on 20th June 2019. This charge was duly registered
on 27th June 2019.
Subsequently, Akash Limited goes into liquidation and the property realises only
Rs. Two crores.
Now, Bank B will receive its loan back fully, but Bank A will not realise anything.
Because the subsequent registration of the charge in favour of Bank A will not
prejudice the right of Bank B which obtained its right before the charge in favour
of Bank A was actually registered. Thus, Bank B gets priority over Bank A even
though its charge was created later.

4. APPLICATION FOR REGISTRATION OF

CHARGE BY CHARGE-HOLDER [SECTION 78]
It can be seen from the foregoing discussion that non-registration or delayed
registration would seriously affect the charge-holder’s interest. Therefore, the law
gives the charge-holder a concession. Section 78 of the Companies Act, 2013,
empowers the holder of charge to get the charge registered in case the company
creating the charge on its property fails to do so.

15
As per Third Proviso to Section 77 (1)

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 REGISTRATION OF CHARGES 6.11

The charge-holder The Registrar shall

If objection is
may apply to the give a notice to the
received
Registrar company

If company registers by itself

If company fails to If no objection is or sufficient cause why such
received charge should NOT be
do so within 30 days
registered is provided

Register within a
Company must period of 14 days Registrar shall not
register charge after giving notice to allow registration
the company

Accordingly, if a charge is created but the company primarily responsible for

registering the charge fails to do so within the prescribed period of 30 days [as
provided in section 77 (1)], the person in whose favour the charge is created (i.e.
charge-holder) may apply to the Registrar for registration of the charge along with
the instrument of charge within the prescribed time, form and manner.
On receipt of application from the charge-holder, the Registrar shall give a notice to
the company and if no objection is received, allow such registration within a period
of 14 days after giving notice to the company on payment of the prescribed fees.
However, the Registrar shall not allow such registration by the charge-holder, if the
company itself registers the charge or shows sufficient cause why such charge
should not be registered.
Recovery of fees: In case, registration is effected on application made by the
holder of charge, such person shall be entitled to recover from the company the
amount of any fees or additional fees paid by him to the Registrar for the purpose
of registration of charge.

5. ACQUISITION OF PROPERTY SUBJECT TO

CHARGE AND MODIFICATION OF CHARGE
[SECTION 79]
Two situations are contemplated.
a. Acquisition by a company of any property that is already subject to charge.
b. Modification in the terms and conditions or modification in the extent or
operation of any charge already registered.

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 6.12 CORPORATE AND OTHER LAWS

The provisions contained in section 77 relating to registration of charge shall as far

as may be apply in both the above situations.
A. Company acquiring any Property subject to Charge [Section 79 (a)]
In case of a property where charge is already registered and if it is sold with the
permission of the holder of charge, it shall be the duty of the company acquiring it
to get the charge registered in accordance with Section 77. In other words, the
earlier charge should get vacated and, in its place, new charge should get registered
by the company which has acquired it.
B. Modification of Charge when there is Change in Terms and Conditions,
etc. [Section 79 (b)]
Section 79 (b) requires any modification in charge (i.e. change in terms and
conditions or change in extent or operation of any charge, etc.) to be registered by
the company in accordance with Section 77.
‘Modification’ includes variation in any of the terms and conditions of the
agreement including change in rate of interest which may be by mutual agreement
or by operation of law. Variation in extent or operation of any charge is also a kind
of modification. Even if the rights of a charge holder are assigned to a third party,
it will be regarded as a modification.
Some other examples of ‘modification’ are as under:
1. where the charge is modified by varying any terms and conditions of the
existing charge through an agreement;
2. where the modification is in pursuance of an agreement for enhancing or
decreasing the limits;
3. where the modification is by ceding a pari passu 16 charge;
4. where there is change in rate of interest (other than bank rate);
5. where there is change in repayment schedule of loan; (not applicable in case
of working loans which are repayable on demand); and
6. where there is partial release of the charge on a particular asset or property.

16
A pari passu charge-holder is entitled to a proportionate share in the property mortgaged.
When this ceded the charge-holder will become a second charge-holder and as such his right
entitlement will be subject to full satisfaction of the First Charge-holders claim.

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 REGISTRATION OF CHARGES 6.13

C. Issue of Certificate of Modification

As per Rule 6, where the particulars of modification of charge is registered under
section 79, the Registrar shall issue a certificate of modification of charge in Form
CHG-3.
The certificate so issued by the Registrar shall be conclusive evidence that the
requirements of Chapter VI of the Act and the rules made thereunder as to
registration of modification of charge have been complied with.

6. COMPANY TO REPORT SATISFACTION OF

CHARGE [SECTION 82]
1. Intimation regarding Satisfaction of Charge
Section 82 of the Companies Act, 2013, requires a company to give intimation
of payment or satisfaction 17 in full of any charge earlier registered, to the
Registrar in the prescribed form 18. The intimation needs to be given within a
period of 30 days from the date of such payment or satisfaction. 19
Extended period of intimation: Proviso to Section 82 (1) 20 extends the
period of intimation from thirty days to three hundred days. Accordingly, it is
provided that the Registrar may, on an application by the company or the
charge holder, allow such intimation of payment or satisfaction to be made
within a period of three hundred days of such payment or satisfaction on
payment of prescribed additional fees 21.

17
Satisfaction happens when the amount is not repaid but an asset of equal value is offered
in the place of the property being released from charge.
18
As per Rule 8, Form CHG-4 is to be used.
19
(1) In case of a specified IFSC public company, the Registrar may, on an application by the
company, allow such registration to be made within a period of three hundred days of such
creation on payment of such additional fees as may be prescribed (vide Notification No. GSR 8
(E), dated 04-01-2017).
(2) In case of a specified IFSC private company, the Registrar may, on an application by the
company, allow such registration to be made within a period of three hundred days of such
creation on payment of such additional fees as may be prescribed (vide Notification No. GSR 9
(E), dated 04-01-2017).
20
Proviso inserted vide the Companies (Amendment) Act, 2017.
21
Rule 8 (1) has been substituted vide the Companies (Registration of Charges),
Amendment Rules, 2018 (w.e.f. 05-07-2018) to provide for giving of intimation within three
hundred days instead of thirty days.

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 6.14 CORPORATE AND OTHER LAWS

2. Notice to the Holder of Charge by the Registrar 22

On receipt of intimation, the Registrar shall cause a notice to be sent to the
holder of the charge calling upon him to show cause within such time as
specified in the notice but not exceeding 14 days, as to why payment or
satisfaction in full should not be recorded.
If no cause is shown by the charge-holder, the Registrar shall order
entering of a memorandum of satisfaction in the register of charges kept by
him and accordingly, he shall inform the company of having done so.
However, no notice is required to be sent, in case the intimation to the Registrar
in this regard is in the specified form 23 and signed by the holder of charge.
If any cause is shown by the charge-holder, the Registrar shall record a
note to that effect in the register of charges and inform the company.
3. Issue of Certificate
As per Rule 8 (2), in case the Registrar enters a memorandum of satisfaction
of charge in full, he shall issue a certificate of registration of satisfaction of
charge in Form No. CHG-5.
4. Preservation of Records
The instrument creating a charge or modification thereon shall be preserved
for a period of eight years from the date of satisfaction of charge by the
company.

7. POWER OF REGISTRAR TO MAKE ENTRIES OF

SATISFACTION AND RELEASE IN ABSENCE OF
INTIMATION FROM COMPANY [SECTION 83]
Section 83 of the Act of 2013 empowers the Registrar to make entries with respect
to the satisfaction and release of charges even if no intimation has been received
by him from the company.
This situation would arise where the property subject to a charge is sold to a third-
party and neither the company nor the charge-holder has intimated the Registrar
regarding satisfaction of the earlier charge.

22
As per Section 82 (2).
23
As per Rule 8, Form CHG-4 is required to be filled for this purpose.

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 REGISTRATION OF CHARGES 6.15

Accordingly, with respect to any registered charge if evidence is shown to the

satisfaction of Registrar that the debt secured by charge has been paid or satisfied
wholly or in part or that the part of the property or undertaking charged has been
released from the charge or has ceased to form part of the company’s property or
undertaking, then he may enter in the register of charges a memorandum of
satisfaction that:
♦ the debt has been satisfied in whole or in part; or
♦ part of the property or undertaking has been released from the charge or has
ceased to form part of the company’s property or undertaking.
This power can be exercised by the Registrar despite the fact that no intimation has
been received by him from the company.
According to Section 82 (4), Section 82 shall not be deemed to affect the powers
of the Registrar to make an entry in the register of charges under section 83
otherwise than on receipt of an intimation from the company i.e. even if no
intimation is received by him from the company.
Information to affected parties: The Registrar shall inform the affected parties
within 30 days of making the entry in the register of charges.
Issue of Certificate: As per Rule 8 (2), in case the Registrar enters a memorandum
of satisfaction of charge in full, he shall issue a certificate of registration of
satisfaction of charge in Form No. CHG-5.

8. INTIMATION OF APPOINTMENT OF
RECEIVER OR MANAGER [SECTION 84]
Section 84 of the Act of 2013 deals with the appointment of a receiver or manager
and of giving intimation thereof to the company and the Registrar.
Accordingly,
♦ if any person obtains an order for the appointment of a receiver or a person
to manage the property which is subject to a charge, or
♦ if any person appoints such receiver or person under any power contained in
any instrument,
he shall give notice of such appointment to the company and the Registrar along
with a copy of the order or instrument within 30 days from the passing of the order
or making of the appointment.

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 6.16 CORPORATE AND OTHER LAWS

In turn, the Registrar shall, on payment of the prescribed fees, register particulars
of the receiver, person or instrument in the register of charges.
On ceasing to hold such appointment 24, the person appointed as above shall give
a notice to that effect to the company and the Registrar. In turn, the Registrar shall
register such notice.

9. PUNISHMENT FOR CONTRAVENTION

[SECTION 86]
(i) According to section 86 (1) of the Act of 2013, if any company is in default
in complying with any of the provisions of this Chapter, the company shall be
liable to a penalty of five lakh rupees and every officer of the company who is
in default shall be liable to a penalty of fifty thousand rupees.
(ii) With the insertion of sub-section (2) 25, section 447 relating to ‘punishment
for fraud’ also becomes applicable in certain cases. Accordingly, if any person
wilfully furnishes:
♦ any false or incorrect information; or
♦ knowingly suppresses any material information;
which is required to be registered under section 77, he shall be liable for action
under section 447.

10. RECTIFICATION BY CENTRAL GOVERNMENT

IN REGISTER OF CHARGES [SECTION 87]
Rectification in Register of Charges
Section 87 26 of the Act of 2013 and Rule 12 27 empowers the Central Government 28

24
As per Rule 9, the notice of appointment or cessation shall be filed with the Registrar in
Form No. CHG-6.
25
Sub-section (2) of section 86 inserted vide the Companies (Amendment) Second
Ordinance, 2019 w.e.f. 02-11-2018.
26
As substituted by the Companies (Amendment) Second Ordinance, 2019 w.r.e.f.
02-11-2018.
27
As substituted by the Companies (Registration of Charges) Amendment Rules, 2019 w.e.f.
30-04-2019
28
Vide Notification No. S.O. 4090 (E), dated 19-12-2016, powers of the Central Government
with respect to Section 87 stand delegated to the Regional Directors.

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 REGISTRATION OF CHARGES 6.17

to order rectification of Register of Charges in the following cases of default:

(i) when there was omission in giving intimation to the Registrar with respect to
payment or satisfaction of charge within the specified time;
(ii) when there was omission or mis-statement of any particulars in any filing
previously made to the Registrar. Such filing may relate to any charge or any
modification of charge or with respect to any memorandum of satisfaction or
other entry made under Section 82 (Company to report satisfaction of charge)
or Section 83 (Power of Registrar to make entries of satisfaction and release).
Before directing that the ‘time for giving the intimation of payment or satisfaction
shall be extended’ or the ‘omission or mis-statement shall be rectified’, the Central
Government needs to be satisfied that such default was accidental or due to
inadvertence or because of some other sufficient cause or it did not prejudice the
position of creditors or shareholders.
The application in Form CHG-8 shall be filed by the company or any interested
person.
The order of rectification shall be made by the Central Government on such terms
and conditions as it deems just and expedient.
“According to Rule 12 of the Companies (Registration of Charges) Rules, 2014:
The Central Government may on an application filed in Form No. CHG-8 in
accordance with section 87-
(a) direct rectification of the omission or misstatement of any particulars, in any
filing, previously recorded with the Registrar with respect to any charge or
modification thereof, or with respect to any memorandum of satisfaction
or other entry made in pursuance of section 82 or section 83,
(b) direct extension of time for satisfaction of charge, if such filing is not made within
a period of three hundred days from the date of such payment or satisfaction.”

SUMMARY
♦ “Charge” means an interest or lien created on the property or assets of a
company or any of its undertakings or both as security and includes a
mortgage.
♦ A charge created by a company is required to be registered with Registrar
within 30 days of its creation.

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 6.18 CORPORATE AND OTHER LAWS

♦ In case a charge was created before 02-11-2018 but was not registered
within 30 days, the Registrar may, on an application by the company, allow
registration of charge within 300 days of such creation. In case registration is
not made within the extended period, it shall be made within six months from
02-11-2018 on payment of prescribed additional fees. Different fees may be
prescribed for different classes of companies.
♦ In case a charge was created on or after 02-11-2018 but was not registered
within 30 days, the Registrar may, on an application by the company, allow
registration of charge within 60 days of such creation on payment of
prescribed additional fees. If the registration is not made within the extended
period, the Registrar may, on an application, allow such registration to be
made within a further period of sixty days after payment of prescribed
advalorem fees.
♦ If a company fails to register the charge, the charge-holder can make an
application for registration of charge and can also recover the amount of any
fees or additional fees paid by him from the company.
♦ Modification in the terms and conditions, etc. of charge also requires
registration of charge afresh. On recording the particulars of modification of
charge, the Registrar shall issue a certificate of modification of charge.
♦ Any person acquiring a property which is subject to charge shall be deemed
to have notice of the charge from the date of such registration.
♦ The company shall give intimation to Registrar of payment or satisfaction in
full of any charge within a period of 30 days from the date of such payment
or satisfaction. If no intimation is given within 30 days, the Registrar may allow
such intimation to be made within 300 days of such payment or satisfaction
on payment of prescribed additional fees.
♦ On receipt of intimation, the registrar shall issue a notice to the holder of
charge calling upon him to show cause within such time not exceeding 14
days as to why payment or satisfaction in full should not be recorded as
intimated to the Registrar. If no cause is shown, the Registrar shall order
recording of memorandum of satisfaction.
♦ In case intimation of payment or satisfaction in full of charge is in prescribed form
and signed by the holder of charge no notice as mentioned above shall be sent.
♦ In case, the company fails to send intimation of satisfaction of charge to the
Registrar, the Registrar may enter in the register of charges memorandum of
satisfaction on receipt of evidence to his satisfaction regarding the same.

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 REGISTRATION OF CHARGES 6.19

♦ Where Registrar enters a memorandum of satisfaction of charge in full, he

shall issue a certificate of registration of satisfaction of charge.
♦ If a company contravenes any provision relating to the registration of charges
or modification or satisfaction of charges, the company and every defaulting
officer is punishable.
♦ The Central Government is empowered to order rectification of Register of
Charges in certain cases of default.

TEST YOUR KNOWLEDGE

Question 1
How will a copy of an instrument evidencing creation of charge and required to be
filed with the Registrar be verified?
Answer
A copy of every instrument evidencing any creation or modification of charge and
required to be filed with the Registrar shall be verified as follows:
(a) in case property is situated outside India: where the instrument or deed
relates solely to the property situated outside India, the copy shall be verified
by a certificate issued either under the seal, if any, of the company, or under
the hand of any director or company secretary of the company or an
authorised officer of the charge holder or under the hand of some person
other than the company who is interested in the mortgage or charge;
(b) in case property is situated in India (whether wholly or partly): where the
instrument or deed relates to the property situated in India (whether wholly
or partly), the copy shall be verified by a certificate issued under the hand of
any director or company secretary of the company or an authorised officer of
the charge holder.
Question 2
Briefly explain the provisions enforced by the Companies (Amendment) Second
Ordinance, 2019 when a charge created before 02-11-2018 is not registered within
the prescribed period of thirty days as provided in Section 77 (1).
Answer
As per Section 77 (1) of the Companies Act, 2013 every company creating a charge:
a. within or outside India,

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 6.20 CORPORATE AND OTHER LAWS

b. on its property or assets or any of its undertakings,

c. whether tangible or otherwise, and
d. situated in or outside India,
is required to register the particulars of the charge with the Registrar within thirty
days of its creation.
In case the charge was created before 02-11-2018 and it was not registered within
the prescribed period of thirty of its creation, clause (a) of the first Proviso to
Section 77 (1) states that the Registrar may, on an application by the company,
allow such registration to be made within a period of 300 days of such creation.
According to clause (a) of the Second Proviso to Section 77 (1), if the registration
is not made within the extended period of 300 days, it shall be made within six
months from 02-11-2018 on payment of prescribed additional fees. It is provided
that different fees may be prescribed for different classes of companies.
Note: The Companies (Amendment) Second Ordinance, 2019 stands enforced w.e.f.
02-11-2018.
Question 3
Define the term “charge” and also explain what is the punishment for default with
respect to registration of charge as per the provisions of the Companies Act, 2013.
Answer
The term charge has been defined in section 2 (16) of the Companies Act, 2013 as
‘an interest or lien created on the property or assets of a company or any of its
undertakings or both as security and includes a mortgage’.
Punishment for contravention – According to section 86 of the Companies Act,
2013, if any company is in default in complying with any of the provisions of this
Chapter, the company shall be liable to a penalty of five lakh rupees and every
officer of the company who is in default shall be liable to a penalty of fifty thousand
rupees.
Further, if any person willfully furnishes any false or incorrect information or
knowingly suppresses any material information which is required to be registered
under section 77, he shall be liable for action under section 447 (punishment for
fraud).

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 REGISTRATION OF CHARGES 6.21

Question 4
Renuka Soaps and Detergents Limited realised on 2nd May, 2019 that particulars of
charge created on 12th March, 2019 in favour of a Bank were not registered with the
Registrar of Companies. What procedure should the company follow to get the charge
registered? Would the procedure be different if the company realised its mistake of
not registering the charge on 7th June, 2019 instead of 2nd May, 2019? Explain with
reference to the relevant provisions of the Companies Act, 2013.
Answer
The charge in the present case was created after 02-11-2018 (i.e. the date of
commencement of the Companies (Amendment) Second Ordinance, 2019) to which
another set of provisions is applicable. These provisions are different from a case
where the charge was created before 02-11-2018.
Initially, the prescribed particulars of the charge together with the instrument, if
any, by which the charge is created or evidenced, or a copy thereof, duly verified
by a certificate, are to be filed with the Registrar within 30 days of its creation.
[Section 77 (1)]. In this case particulars of charge were not filed within the
prescribed period of 30 days.
However, the Registrar is empowered under clause (b) of first proviso to section 77
(1) to extend the period of 30 days by another 30 days (i.e. sixty days from the date
of creation) on payment of prescribed additional fee. Taking advantage of this
provision, Renuka Soaps and Detergents Limited should immediately file the
particulars of charge with the Registrar after satisfying him through making an
application that it had sufficient cause for not filing the particulars of charge within
30 days of its creation.
If the company realises its mistake of not registering the charge on 7th June, 2019
instead of 2nd May, 2019, it shall be noted that a period of sixty days has already
expired from the date of creation of charge. However, Clause (b) of Second Proviso
to Section 77 (1) provides another opportunity for registration of charge by
granting a further period of sixty days but the company is required to pay ad
valorem fees. Since the first sixty days from creation of charge have expired on 11th
May, 2019, Renuka Soaps and Detergents Limited can still get the charge registered
within a further period of sixty days from 11th May, 2019 after paying the prescribed
ad valorem fees. The company is required to make an application to the Registrar
in this respect giving sufficient cause for non-registration of charge.

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 6.22 CORPORATE AND OTHER LAWS

Question 5
Mr. Antriksh purchased a commercial property in Delhi belonging to NRT Limited
after entering into an agreement with the company. At the time of registration,
Mr. Antriksh comes to know that the title deed of the company is not free and the
company expresses its inability to get the title deed transferred in his name
contending that he ought to have the knowledge of charge created on the property
of the company. Explain, whether the contention of NRT Limited is correct?
Answer
According to section 80 of the Companies Act, 2013, where any charge on any
property or assets of a company or any of its undertakings is registered under
section 77 of the Companies Act, 2013, any person acquiring such property, assets,
undertakings or part thereof or any share or interest therein shall be deemed to
have notice of the charge from the date of such registration.
Thus, Section 80 clarifies that if any person acquires a property, assets or
undertaking in respect of which a charge is already registered, it would be deemed
that he has complete knowledge of charge from the date of its registration. Mr.
Antriksh, therefore, ought to have been careful while purchasing property and
should have verified beforehand that NRT Limited had already created a charge on
the property.
In view of above, the contention of NRT Limited is correct.
Question 6
ABC Limited created a charge in favour of OK Bank. The charge was duly registered.
Later, the Bank enhanced the facility by another Rs. 20 crores. Due to inadvertence
this modification in the original charge was not registered. Advise the company as to
the course of action to be pursued in this regard.
Answer
The company is advised to immediately file an application for rectification of the
Register of Charges in Form No CHG- 8 to the Central Government under Section
87 of the Companies Act, 2013.
Section 87 of the Act of 2013 and Rule 12 empowers the Central Government to
order rectification of Register of Charges in the following cases of default:
(i) when there was omission in giving intimation to the Registrar with respect to
payment or satisfaction of charge within the specified time;

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 REGISTRATION OF CHARGES 6.23

(ii) when there was omission or mis-statement of any particulars in any filing
previously made to the Registrar. Such filing may relate to any charge or any
modification of charge or with respect to any memorandum of satisfaction or
other entry made under Section 82 (Company to report satisfaction of charge)
or Section 83 (Power of Registrar to make entries of satisfaction and release).
Before directing that the ‘time for giving the intimation of payment or satisfaction
shall be extended’ or the ‘omission or mis-statement shall be rectified’, the Central
Government needs to be satisfied that such default was accidental or due to
inadvertence or because of some other sufficient cause or it did not prejudice the
position of creditors or shareholders.
The application in Form CHG-8 shall be filed by the company or any interested
person. Therefore, OK Bank can also proceed under Section 87 as aforesaid.
The order of rectification shall be made by the Central Government on such terms
and conditions as it deems just and expedient.
Question 7
Ranjit acquired a property from ABC Limited which was mortgaged to OK Bank. He
settled the dues to Ok Bank in full and the same was registered with the sub-registrar
who has noted that the mortgage has been settled. But neither the company nor OK
Bank has filed particulars of satisfaction of charge with the Registrar of Companies.
Can Mr. Ranjit approach the Registrar and seek any relief in this regard? Discuss this
matter in the light of provisions of the Companies Act, 2013.
Answer
Section 83 of the Act of 2013 empowers the Registrar to make entries with respect
to the satisfaction and release of charges even if no intimation has been received
by him from the company. Accordingly, with respect to any registered charge if an
evidence is shown to the satisfaction of Registrar that the debt secured by charge
has been paid or satisfied in whole or in part or that the part of the property or
undertaking charged has been released from the charge or has ceased to form part
of the company’s property or undertaking, then he may enter in the register of
charges a memorandum of satisfaction that:
♦ the debt has been satisfied in whole or in part; or
♦ the part of the property or undertaking has been released from the charge or
has ceased to form part of the company’s property or undertaking.
This power can be exercised by the Registrar despite the fact that no intimation has
been received by him from the company.

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 6.24 CORPORATE AND OTHER LAWS

Information to affected parties: The Registrar shall inform the affected parties
within 30 days of making the entry in the register of charges.
Issue of Certificate: As per Rule 8 (2), in case the Registrar enters a memorandum
of satisfaction of charge in full, he shall issue a certificate of registration of
satisfaction of charge in Form No. CHG-5.
Therefore, Ranjit can approach the Registrar and show evidence to his satisfaction
that the charge has been duly settled and satisfied and request the Registrar to
enter a memorandum of satisfaction noting the release of charge.

© The Institute of Chartered Accountants of India

CHAPTER 7

MANAGEMENT &
ADMINISTRATION

LEARNING OUTCOMES
At the end of this chapter, you will be able to:
 State the meaning, need and importance of management &
administration of company.
 Learn about the maintenance of registers and other
documentation required to be kept by a company.
 Know about meeting for conduct of the business.
 Explain the requirements for convening of a valid meeting.

1. CHAPTER OVERVIEW & INTRODUCTION

A company is an artificial legal entity distinct from its members, thus, the affairs of
the company are managed by the members and Director through resolutions
passed at validly held Meetings. The Board of Directors in carrying out the day-to-
day affairs of the company has to perform the role within the power which is
granted to them. Certain powers can be exercised by the board on their own and
some with the consent of the company at the general meeting. The shareholders
as owners of the company ratify the actions of the board at the general meetings
of the company. The meetings of the shareholders serve as the focal point for the
shareholders to converge and give their decisions on the actions taken by the
directors.

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 7.2 CORPORATE AND OTHER LAWS

Registers

Annual Return

Companies
(Management &
Meetings
Management & Administration)
Administration Rules, 2014
Pre-requisites of
Section 88 - 122 -
meeting -
Companies Act, 2013
Quorum, Chairman,
voting

Resolutions

Meetings

To begin with, let us understand the structure of this chapter of Companies Act,
2013 which deals with the provisions related to management & administration of
companies. It runs from Section 88 to 122 and is divided under the following
headings–

Registers Annual Return

Section 88 - 91 & 95 Section 92 - 94
Management & Administration
Section 88 - 122 of Act read with Companies
(Management & Administration) Rules, 2014

Meetings
Requisites of Convening a
Section 96 - 102 & 121 Meeting Section 103 - 120

Thus, to initiate, it is imperative that we streamline the understanding of this

chapter so as to link it with the essential concepts along with their procedures
which can be found in the respective rules, i.e. Companies (Management &
Administration) Rules, 2014.

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 MANAGEMENT & ADMINISTRATION 7.3

This chapter applies to all the companies, public and private, and has special
provisions applicable to One Person Company (OPC), which is enumerated in
section 122 of the Act and is discussed later in this chapter.

2. REGISTERS
The provisions relating to maintaining the various registers as per the Companies
Act, 2013 are contained in Sections 88 – 91. Along with these provisions, the
Companies (Management & Administration) Rules, 2014 are also applicable to the
maintenance of registers by a Company. Relevant provisions related to
maintenance of register is as follows:

- Register of members - Rule 3; Form MGT - 1

- Register of debenture-holders/any other
security-holder - Rule 4; Form MGT - 2
- Maintenance of Registers of members etc.-
Section 88 - Register of Rule 5
Members
- Index of names of members - Rule 6
- Foreign Register - Rule 7

Section 89 - Rule 9 - Form MGT-4,

Declaration i.r.o. MGT- 5, MGT-6
Registers

beneficial interest in
any share

Section 90 -
Register of significant
beneficial owners
Rule 10 - Procedure for
Section 91 - Power to closing the register of
close register of members, debenture-
members or debenture holders and other
holders or other security holders
security holders

REGISTER OF MEMBERS, ETC. [SECTION 88]

Section 88(1) of the Companies Act, 2013 seeks to provide that every company
shall keep and maintain the register of members, register of debenture-holders
(DH) and register of any other security holders (OSH).

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 7.4 CORPORATE AND OTHER LAWS

♦ Maintenance of Register of members: Section 88(1)(a) requires a register

of members to be maintained and that the holding of each class of equity
and preference shares by each member residing in or outside India will have
to be shown separately in the register of members. The form and manner in
which these registers are to be maintained, is contained in Rule 3 of the
Companies (Management & Administration) Rules, 2014; whereas Rule 5
provides for the maintenance of the register of members.
♦ Time period for entries in register: As per Rule 5, entries have to be made
in the Register within 7 days of the date of approval by the Board or
Committee thereof by approving the allotment or transfer of shares,
debentures or any other securities, as the case may be.
♦ Place where register shall be maintained: According to Rule 5 also, the
registers shall be maintained at the registered office of the company unless a
special resolution is passed in a general meeting authorising the keeping of
the register at any other place within the city, town or village in which the
registered office is situated or any other place in India in which more than
1/10th of the total members entered in the register of members reside.
♦ Other informations also to be referred in register: Any order passed by the
competent authority attaching the shares or relating to dividends is also
required to be referred in the register of members. The particulars of any
charge, lien, pledge or hypothecation of any securities of the company is also
required to be entered in the register of members as per Rule 5(7) and 5(8).
♦ Particular in register: Rule 3 provides that every company limited by shares,
shall, from the date of its registration, maintain a register of its members in
Form MGT–1. In case of a company not having share capital, the register shall
contain the following particulars, in respect of each member–
• Name of the member, address (registered office address in case the
member is a body corporate); email address; Permanent Account
Number or Corporate Identity Number (‘CIN’); Nationality; in case
member is a minor – name of his guardian and the date of birth of the
member, name and address of the nominee;
• Date of becoming the member;
• Date of cessation;
• Amount of guarantee, if any;
• Any other interest, if any; and

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 MANAGEMENT & ADMINISTRATION 7.5

• Instructions, if any, given by the member with regard to sending of

notices, etc.
♦ Maintenance of register of debenture holders (DH): Section 88(1) (b) of
the Act refers to the form and manner of maintenance of Register of DH,
which corresponds to Rule 4 which states that every company which issues or
allots debentures or any other security shall maintain a separate register for
debenture holder or security holder in Form MGT-2.
♦ Updating of change in status of members: Rule 5 states that if any change
occurs in the status of a member or debenture-holder or any other security
holder whether due to death or insolvency or change of name or due to
transfer to Investor Education Protection Fund (IEPF) or due to any other
reason, entries thereof explaining the change shall be made in the respective
registers.
♦ Index of names: Section 88(2) provides that every register maintained under
section 88(1) shall include an index of names included therein. However,
according to Rule 6 of the Companies (Management & Administration) Rules,
2014 the maintenance of index is not necessary where the number of
members is less than 50. Rule 6 also provides that the company shall make
the necessary entries in the index simultaneously with the entry for allotment
or transfer of any security in such Register.
♦ Register index of beneficial owner to be maintained of a depository:
Section 88(3) is an enabling provision, which sets out that the register and
index of beneficial owners maintained by a depository under section 11 of
the Depositories Act, 1996, shall be deemed to be the corresponding register
and index for the purposes of this Act.
FOREIGN REGISTER – SECTION 88(4) READ WITH RULE 7:
♦ Maintenance of foreign register: Section 88(4) read with Rule 7 provides
that a company which has share capital or which has issued debentures or
any other security may, if so authorised by its articles, keep in any country
outside India, a part of the register of members or as the case may be, of
debenture holders or of any other security holders or of beneficial owners,
resident in that country. The register may be referred as “Foreign Register”.
♦ Compliances: The Foreign Register is optional. Once company decides to
keep, it shall comply to the following–
• The company shall, within 30 days from the date of the opening of any
foreign register, file with the Registrar of Companies (‘RoC’) notice of

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 7.6 CORPORATE AND OTHER LAWS

the situation of the office in the prescribed Form No. MGT – 3 along with
the fee where such register is kept; and in the event of any change in the
situation of such office or of its discontinuance, shall, within 30 days
from the date of such change or discontinuance, as the case may be, file
notice in Form No. MGT.3 with the RoC of such change or
discontinuance.
• A foreign register shall be deemed to be part of the company’s register
(‘principal register’) of members or of debenture-holders or of any other
security holders or beneficial owners, as the case may be.
• The foreign register shall be maintained in the same format as the
principal register.
• A foreign register shall be open to inspection and may be closed, and
extracts may be taken therefrom and copies thereof may be required,
in the same manner, as is applicable to the principal register, except
that the advertisement before closing the register shall be inserted in
at least two newspapers circulating in the place wherein the foreign
register is kept.
• If a foreign register is kept by a company in any country outside India,
the decision of the appropriate competent authority in regard to the
rectification of the register shall be binding.
• Entries in the foreign register maintained under section 88(4) shall be
made after the Board of Directors or its duly constituted committee
approves the allotment or transfer of shares, debentures or any other
securities, as the case may be.
• The company shall –
 Transmit to its registered office in India, a copy of every entry in
any foreign register within 15 days after the entry is made; and
 Keep at such office a duplicate register of every foreign register
duly updated from time to time and it shall be deemed to part of
the principal register.
 No transaction with respect to any shares, debentures, or any
other security, registered in a foreign register shall, during the
continuance of such foreign register, be registered in any other
register.

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 MANAGEMENT & ADMINISTRATION 7.7

• The company may discontinue the keeping of any foreign register, and
thereupon all entries in that register shall be transferred to some other
foreign register kept by the company outside India or to the principal
register.
♦ Penalty for failure to maintain register in accordance with the provisions
of Section 88(1) and 88(2) of the Act: If a company does not maintain a
register of members or debenture-holders or other security holders or
fails to maintain them in accordance with the provisions of sub-section
(1) or sub-section (2), the company shall be liable to a penalty of three
lakh rupees and every officer of the company who is in default shall be
liable to a penalty of fifty thousand rupees.
♦ Nature of offence: The offence under this section is a compoundable offence
under section 441 of the Act.
♦ Details of Nominations in the register: It is important to note here that
Form MGT – 1 and MGT – 2 require details of nomination as referred to in
section 72 of the Act, read with Rule 19 of the Companies (Share Capital and
Debentures) Rules, 2014 to be entered in the Register of members and
register of debenture-holders or other security holders as the case may be.
♦ Authentication of entries (Rule 8):
• The entries in the registers maintained under section 88 and index
included therein shall be authenticated by the company secretary of the
company or by any other person authorised by the Board for the
purpose, and the date of the board resolution authorising the same shall
be mentioned.
• The entries in the foreign register shall be authenticated by the company
secretary of the company or person authorised by the Board by
appending his signature to each entry.
Example 1
Mr. Zoey purchased the shares of Luxy Hairstyles Private Limited, at market price, in
the name of his daughter, Mila, who is 4 years old. Mr. Joe, the Director of the
Company, has approached you to advise him on the updation of said change in the
register of members, since Mila, being a minor is incompetent to contract in her
capacity.
Answer: Since, the minors are not competent to enter into any contract, thus their
names cannot be entered in the register of members. Therefore, Mr. Joe is advised

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 7.8 CORPORATE AND OTHER LAWS

that while filing MGT – 1 and MGT – 2, the names of the minor can only be entered
only if the details of the guardian are present. Thus, Zoey’s name shall appear in
the register of members of Luxy Hairstyles Private Limited since Mila is a minor.
Example 2
Mrs. And Mr. Taneja, recently got married and jointly purchased the shares of New
Hopes India Private Limited on 14th August 2018. Mr. Taneja intimated the company
that only the name of his wife should appear in the records of the company, for the
shares purchased by them. The secretary of the company is not sure whether this is
possible, given that the shares are held in the names of both the persons.
Answer: Joint holders of shares may request the company to enter their names on
the register in a certain order, or execute transfers to have their holding split, with
the result that part of the holding is entered showing the name of one holder and
part showing the name of another. However, the condition of Mr. Taneja that only
the name of his wife should appear in the register as a member cannot be catered
to, although the names can be entered in the order such that the name of his wife
appears first. The reason for this is that the articles of most companies provide that,
in the case of exclusion of the other joint holders, and for this purpose, seniority
shall be determined by the order in which the names stand in the register of
members.
DECLARATION IN RESPECT OF BENEFICIAL INTEREST IN ANY SHARE
[SECTION 89]

Any Person holding

beneficial interest in
the shares [Section
89(2)]
Member not holding
beneficial interest in Any Changes in the
the company [Section beneficial interest
89(1)] [Section 89(3)]
Shall file a
declaration of
beneficial interest
within 30 days and
company file a
return to ROC in
30 days

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 MANAGEMENT & ADMINISTRATION 7.9

♦ Declaration by registered holder of shares: A person whose name is

entered in the register of members of a company as the holder of shares in
that company but who does not hold the beneficial interest in such shares
(hereinafter referred to as “the registered owner”), shall file with the company,
a declaration to that effect in Form No. MGT. 4, specifying the name and other
particulars of the person who holds the beneficial interest in such shares,
within a period of thirty days from the date on which his name is entered in
the register of members of such company.
♦ Declaration by person holding beneficial interest in shares: Every person
who holds or acquires a beneficial interest in share of a company shall make
a declaration to the company in form MGT-5, within 30 days after acquiring
such beneficial interest, specifying the nature of his interest, particulars of the
person in whose name the shares stand registered in the books of the
company and such other particulars as may be prescribed.
♦ Declaration in case of change in beneficial interest: Where any change
occurs in the beneficial interest in any shares in respect of which a declaration
has been filed u/s 89 (1) and (2), then, within 30 days of such change, a
declaration is to be made to the company.
♦ Filling of return by the company with the registrar: Where any declaration
under this section is made to a company, the company shall make a note of
such declaration in the register concerned and shall file, within thirty days
from the date of receipt of declaration by it, a return in Form No. MGT.6 with
the Registrar in respect of such declaration with fee.
♦ Consequence of non-filling of declaration: where a declaration required
u/s 89 is not filed by the beneficial owner, then, any right with respect to such
shares shall not be enforceable by the beneficial owner or by any person
claiming through him.
♦ Exemption: Trust which is created, to set up a Mutual Fund or Venture Capital
Fund or such other fund as may be approved by SEBI. These entities need not
file the declarations as envisaged under this section.
♦ Duty of the Company to pay dividend not affected: Nothing contained in
this section shall be deemed to prejudice the obligation of a company to pay
dividend to its members under this Act and the said obligation shall, on such
payment, stand discharged
♦ Meaning of beneficial interest: For the purposes of this section and section
90, beneficial interest in a share includes, directly or indirectly, through any

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 7.10 CORPORATE AND OTHER LAWS

contract, arrangement or otherwise, the right or entitlement of a person alone

or together with any other person to—
(i) exercise or cause to be exercised any or all of the rights attached to
such share; or
(ii) receive or participate in any dividend or other distribution in respect of
such share. [Section 89(10)]
Exemption from following the provisions of section 89 [Section 89(11)]
The Central Government may, by notification, exempt any class or classes of
persons from complying with any of the requirements of this section, except
sub-section (10), if it is considered necessary to grant such exemption in the
public interest and any such exemption may be granted either unconditionally
or subject to such conditions as may be specified in the notification.
Penalty for default under section 89(5) & 89(7) –
Two kinds of penal provisions are included under section 89 –
♦ Related to persons required to make a declaration [Section 89(5)]- If any
person fails to make a declaration as required under sub-section (1) or
sub-section (2) or sub-section (3), he shall be liable to a penalty of fifty
thousand rupees and in case of continuing failure, with a further penalty
of two hundred rupees for each day after the first during which such
failure continues, subject to a maximum of five lakh rupees.
Related to company [Section 89(7)]- If a company, required to file a
return under sub-section (6), fails to do so before the expiry of the time
specified therein, the company and every officer of the company who is
in default shall be liable to a penalty of one thousand rupees for each
day during which such failure continues, subject to a maximum of five
lakh rupees in the case of a company and two lakh rupees in case of an
officer who is in default.
Exemption to Government Company- In case of Government Company - Section
89 shall not apply - Notification dated 5th June, 2015.
The above mentioned exemption shall be applicable to a government company
which has not committed a default in filing its financial statements under section
137 or annual return under section 92 with the Registrar- Notification dated
13th June, 2017.

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 MANAGEMENT & ADMINISTRATION 7.11

REGISTER OF SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY

[SECTION 90]
As per Section 90 of the Act, every Significant Beneficial Owner “SBO” is required
to disclose the nature of his interest and other particulars within the prescribed
period of time to the Company, which in turn will inform the same to the Registrar
of Companies. In the said connection, MCA has issued Companies (Significant
Beneficial Owners) Rules, 2018 (“SBO”), which deals with identification and
reporting in connection with SBO.
Definition of Significant Beneficial Owner: The term 'significant beneficial owner'
“SBO” has been defined in section 90 of the Act as every individual, who acting
alone or together, or through one or more persons or trust, including a trust and
persons resident outside India, holds beneficial interests, of not less than twenty-
five per cent. or such other percentage as may be prescribed, in shares of a
company or the right to exercise, or the actual exercising of significant influence or
control as defined in clause (27) of section 2, over the company (herein referred to
as "significant beneficial owner").
However, Companies (Significant Beneficial Owners) Amendment Rules, 2019
("Amendment Rules") has amended the definition of the term SBO. In terms of Rule
2(1) (h) of the SBO Rules, the term ‘Significant Beneficial Owner’ (SBO) is defined as
an individual who—
i. acting alone or together, or
ii. through one or more persons or trust,
Possess one or more of the following rights or entitlements in the Reporting
Company (i.e. the company in respect of which SBO declaration is required to be
filed):
i. holds indirectly, or together with any direct holdings, not less than 10% of
the shares;
ii. holds indirectly, or together with any direct holdings, not less than 10% of
the voting rights in the shares;
iii. has the right to receive or participate in not less than 10% of the total
distributable dividend, or any other distribution, in a financial year through
indirect holdings alone, or together with any direct holdings;
iv Has the right to exercise, or actually exercises, significant influence or control,
in any manner other than through direct holdings alone.

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 7.12 CORPORATE AND OTHER LAWS

In simple terms, SBO is an individual who either alone or together with other
individuals or trust, exercises rights or entitlements in the Reporting Company by
way of holding 10% shares or 10% voting rights or right to receive 10% or more
dividend, both indirect and direct holdings or right taken together or such
individual exercise significant influence or control, indirectly or along with direct
holding in the Reporting Company. The amended Rules further explain that if an
individual does not hold any indirect right or entitlement as mentioned in i., ii. or
iii. above, he will not be considered to be a 'significant beneficial owner'.
Significant influence: The term “significant influence” was previously not defined
specifically for the rules, and hence, to provide clarity, the following definition has
been inserted through SBO rules: “Significant influence” means the power to
participate, directly or indirectly, in the financial and operating policy decisions of
the reporting company but is not control or joint control of those policies.
Majority stake: The Amendment Rules inserted a new term, “Majority Stake,” which
means
i. holding more than one-half of the equity share capital in the body corporate;
or
ii. holding more than one-half of the voting rights in the body corporate; or
iii. Having the right to receive or participate in more than one-half of the
distributable dividend or any other distribution by the body corporate.
Direct and Indirect shareholding: The Amendment Rules provide that when an
individual holds any rights or entitlement directly in the reporting company, the
said individual shall not be considered as SBO. An individual will be considered to
hold a right or entitlement directly in the Relevant Company, if he satisfies any of
the following criteria:

a. the shares in the Relevant Company representing such right or entitlement

are held in the name of such individual;
b. the individual holds or acquires a beneficial interest in the shares of the
Relevant Company under section 89(2) of the CA 2013, and has made a
declaration in this regard to the Relevant Company.
Indirect shareholding is, when a shareholder is a (a) Body corporate; (b) Hindu
Undivided Family; (c) Partnership; (d) Trust; (e) Pooled investment vehicle.
Onus on the reporting company: The duty is on the reporting company to identify
a SBO and cause such SBO to make a declaration in the prescribed Form. As per

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 MANAGEMENT & ADMINISTRATION 7.13

the Amendment Rules, every reporting company shall give notice in the Form BEN-
4 to any person whom the company knows or has reasonable cause to believe-(a)
to be a significant beneficial owner of the company; (b) to be having knowledge of
the identity of a significant beneficial owner or another person likely to have such
knowledge; or (c) to have been a significant beneficial owner of the company at
any time during the three years immediately preceding the date on which the notice
is issued, and who is not registered as a significant beneficial owner with the
company as required under this section.
Also, according to the section 90 of the Act read with amended rules every company
shall maintain a register of significant beneficial owners in Form No. BEN-3 which
shall be open for inspection during business hours, at such reasonable time of not
less than two hours, on every working day as the board may decide, by any member
of the company on payment of such fee as may be specified by the company but
not exceeding fifty rupees for each inspection.
Application to Tribunal [Section 90 (7)]: The company shall,—

(a) Where that person fails to give the company the information required by the
notice in form no. BEN4 within 30 days of date of notice; or
(b) Where the information given is not satisfactory,
apply to the Tribunal within a period of fifteen days of the expiry of the period
specified in the notice, for an order directing that the shares in question be subject
to restrictions with regard to transfer of interest, suspension of the right to receive
dividend or any other distribution in relation to the shares in question; suspension
of voting rights in relation to the shares in question; any other restriction on all or
any of the rights attached with the shares in question.
On any application made under sub-section (7), the Tribunal may, after giving an
opportunity of being heard to the parties concerned, make such order restricting
the rights attached with the shares within a period of sixty days of receipt of
application or such other period as may be prescribed.
The company or the person aggrieved by the order of the Tribunal may make an
application to the Tribunal for relaxation or lifting of the restrictions placed within
a period of one year from the date of such order.
Provided that if no such application has been filed within a period of one year from
the date of the order such shares shall be transferred, without any restrictions, to
the authority constituted under sub-section (5) of section 125, in such manner as
may be prescribed;

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 7.14 CORPORATE AND OTHER LAWS

Declaration by SBO:

a. Every individual who is a SBO in the Reporting Company, as on the date of

commencement of the Amendment Rules, is required to file a declaration
with the Reporting Company in Form BEN-1 within 90 days from such
commencement. In turn, the Reporting Company will be required to file the
said disclosure with the Registrar within 30 days of receiving it from the SBO.
b. Any individual, who subsequently becomes a significant beneficial owner in
the Reporting Company or whose significant beneficial ownership undergoes
any change, is required to file a declaration with the Reporting Company in
Form BEN-1 within 30 days of such acquisition or change.
c. If an individual becomes a significant beneficial owner in the Reporting
Company or her significant beneficial ownership undergoes any change
within ninety days of the commencement of the Companies (Significant
Beneficial Owners) Amendment Rules, 2019, it shall be deemed that such
individual became the significant beneficial owner or any change therein
happened on the date of expiry of ninety days from the date of
commencement of said rules, and the period of thirty days for filing will be
reckoned accordingly.
NON-APPLICABILITY
The amended Rules will not be applicable where the shares of the Relevant
Company are held by:
(a) the Investor Education and Protection Fund Authority;
(b) its holding company which has complied with section 90 of CA 2013 and the
Rules, provided that the details of such holding company are reported in
Form BEN-2;
(c) the Central Government, any State Government or any local authority;
(d) an entity/ body corporate controlled wholly or partly by the Central
Government and/ or State Government(s);
(e) investment vehicles such as mutual funds, alternative investment funds (AIFs),
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts
(InVITs) registered with and regulated by the Securities and Exchange Board
of India; and

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 MANAGEMENT & ADMINISTRATION 7.15

(f) investment vehicles regulated by the Reserve Bank of India, Insurance

Regulatory and Development Authority of India or Pension Fund Regulatory
and Development Authority.
Contravention
(a) By SBO: If any person fails to make a declaration as required under sub-
section (1), he shall be liable to a penalty of fifty thousand rupees and in
case of continuing failure, with a further penalty of one thousand rupees
for each day after the first during which such failure continues, subject
to a maximum of two lakh rupees. [Section 90(10)]
(b) By Reporting Company: If a company, required to maintain register
under sub-section (2) and file the information under sub-section (4) or
required to take necessary steps under sub-section (4A), fails to do so or
denies inspection as provided therein, the company shall be liable to a
penalty of one lakh rupees and in case of continuing failure, with a
further penalty of five hundred rupees for each day, after the first during
which such failure continues, subject to a maximum of five lakh rupees
and every officer of the company who is in default shall be liable to a
penalty of twenty-five thousand rupees and in case of continuing failure,
with a further penalty of two hundred rupees for each day, after the first
during which such failure continues, subject to a maximum of one lakh
rupees. [Section 90(11)]
Contravention by Company and Officer in Default of provisions of Section 90 and
SBO Rules is compoundable.
Note: Where the SBO or the Officer in Default intentionally furnishes any false or
incorrect information or suppresses any material information, then they will be
liable for fraud under section 447.
Exemption to Government Company- In case of Government Company - Section
90 shall not apply - Notification dated 5th June, 2015.
The above mentioned exemption shall be applicable to a government company
which has not committed a default in filing its financial statements under section
137 or annual return under section 92 with the Registrar- Notification dated 13th
June, 2017.

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 7.16 CORPORATE AND OTHER LAWS

POWER TO CLOSE REGISTER OF MEMBERS OR DEBENTURE-HOLDERS OR

OTHER SECURITY HOLDERS [SECTION 91]
♦ The said section is divided into two parts – sub-section (1) deals with the time
limits for which the register of members is allowed to be closed and sub-
section (2) mentions the penalty for contravention of the provisions of sub-
section (1).
♦ According to Section 91(1) a company may close the register of members,
debenture-holders and other security holders by giving minimum 7 days’
notice or such lesser period as specified by Securities Exchange Board of India
(‘SEBI’).
♦ Section 91(1) further states that the registers may be closed for any period
not exceeding 30 days at any one time and for an aggregate period of 45
days in one year.
♦ Section 91(2) sets out that if the registers is closed without giving the notice
as prescribed in sub-section (1), or after giving a shorter notice than that so
provided, or for a continuous period or an aggregate period in excess of the
limits specified in that sub-section, the company and every officer of the
company who is in default shall be liable to a penalty of ` 5,000 per day
subject to a maximum of ` 1,00,000 during which the register is kept closed.
However, the offence is a compoundable offence under section 441 of the
Companies Act, 2013.
♦ According to Rule 10 of the Companies (Management & Administration) Rules,
2014, a company closing the register of members or the register of debenture
holders or the register of other security holders shall give at least seven days
previous notice, if such company is a listed company or intends to get its
securities listed, by advertisement at least once in a vernacular newspaper in
the principal vernacular language of the district and having a wide circulation
in the place where the registered office of the company is situated, and at
least once in English language in an English newspaper circulating in that
district and having wide circulation in the place where the registered office of
the company is situated and publish the notice on the website as may be
notified by the Central Government and on the website, if any, of the
Company. [Sub rule (1)]

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 MANAGEMENT & ADMINISTRATION 7.17

♦ It is important to note here that the private companies have been exempted
from issuing public notice in newspapers, provided it issues 7 days’ notice to
its members before effecting closure of the registers. [Rule 10 (2), Companies
(Management & Administration) Rules, 2014]

3. ANNUAL RETURN [SECTION 92, 94]

Provisions with regard to Annual Return are contained in section 92 and Rules 11
and 12 of the Companies (Management & Administration) Rules, 2014. As per Rule
11, every company shall file its annual return in Form No.MGT-7 except One
Person Company (OPC) and Small Company. One Person Company and Small
Company shall file annual return from the financial year 2020-2021 onwards
in Form No.MGT-7A.
♦ According to section 92(1),
Every company shall prepare a return (hereinafter referred to as the annual
return in this section) in the prescribed form containing the particulars as
they stood on the close of the financial year regarding—
(a) its registered office, principal business activities, particulars of its
holding, subsidiary and associate companies;
(b) its shares, debentures and other securities and shareholding pattern;
1
(d) its members and debenture-holders along with changes therein since
the close of the previous financial year;
(e) its promoters, directors, key managerial personnel along with changes
therein since the close of the previous financial year;
(f) meetings of members or a class thereof, Board and its various
committees along with attendance details;
2
(g) remuneration of directors and key managerial personnel;

1 Clause (c) of section 92(1), has been omitted through the Companies (Amendment) Act,
2017, w.e.f. 5th March, 2021
2
”In case of Private Company – Clause (g) of Sub-Section (1) of Section 92 shall apply to
private companies namely:-
“(g) “aggregate amount of remuneration drawn by directors;”. - Notification Dated 13th
June, 2017”.

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 7.18 CORPORATE AND OTHER LAWS

(h) penalty or punishment imposed on the company, its directors or

officers and details of compounding of offences and appeals made
against such penalty or punishment;
(i) matters relating to certification of compliances, disclosures as may be
prescribed;
(j) details, as may be prescribed, in respect of shares held by or on behalf
of the Foreign Institutional Investors; and
(k) such other matters as may be prescribed,
♦ The afore-mentioned annual return has to be signed by a director of the
company and the company secretary; and in case, there is no company
secretary, by a company secretary in practice.
However, in relation to 3One Person Company and small company, the annual
return shall be signed by the company secretary, or where there is no
company secretary, by the director of the company.
Provided further that the Central Government may prescribe abridged
form of annual return for "One Person Company, small company and
such other class or classes of companies as may be prescribed".
♦ Sub section 2 of section 92 read with Rule 11(2) of the Companies
(Management & Administration) Rules, 2014, provides that the annual return,
filed by a listed company or a company having paid-up share capital of ` 10
crore or more; or a turnover of ` 50 crore or more, shall be certified by a
Company Secretary in practice and the certificate shall be in Form MGT – 8.
It must state that the annual return discloses the facts correctly and
adequately and that the company has complied with all the provisions of the
Act.

3
In case of Private Company - proviso to sub-section (1) of Section 92 for the proviso the
following proviso shall be substituted, namely:-
"Provided that in relation to One Person Company, small company and private company (if
such private company is a start-up), the annual return shall be signed by the company
secretary, or where there is no company secretary, by the director of the company.".
The above exceptions/ modifications/ adaptations shall be applicable to a private company
which has not committed a default in filing its financial statements under section 137 or
annual return under section 92 with Registrar. Notification Dated 13th June, 2017

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 MANAGEMENT & ADMINISTRATION 7.19

♦ 4
Every company shall place a copy of the annual return on the website of the
company, if any, and the web-link of such annual return shall be disclosed in
the Board's report.
♦ A copy of annual return shall be filed with the RoC within 60 days from the
date on which the Annual General Meeting (‘AGM’) is held or where no annual
general meeting is held in any year within 60 days from the date on which
the annual general meeting should have been held, along with the reasons
for not holding the AGM.
Penalty for contravention–
♦ Section 92(5) of the Act specifies that if any company fails to file its annual return
under sub-section (4), before the expiry of the period specified therein, such
company and its every officer who is in default shall be liable to a penalty of ten
thousand rupees and in case of continuing failure, with further penalty of one
hundred rupees for each day during which such failure continues, subject to a
maximum of two lakh rupees in case of a company and fifty thousand
rupees in case of an officer who is in default.
♦ If a company secretary in practice, certifies the annual return otherwise than in
accordance with this section and the rules made thereunder, he shall be liable
to a penalty of two lakh rupees.
Example 3
Big Fox Private Limited called it’s Annual General Meeting on 30th September, 2019
for laying down the financial statement for approval of its shareholders for the
financial year ended 31st March 2019. However, due to want of quorum, the meeting
could not take place and was cancelled. The company has not filed the annual
financial statements or the annual return for the year ending March 2019, with the
RoC till date. The director is of the view that since the annual general meeting did
not take place, the period of 60 days for filing of annual return is not applicable and
thus, there is no contravention of section 92. Discuss.
Answer: The director is incorrect in holding that there no contravention of the
provisions of the Companies Act, 2013. Section 92 states that every company has
to file an annual return with the RoC within 60 days of date on which annual general
meeting was held or the date when it must have been held. In the above case, the
annual general meeting of Big Fox Private Limited should have been held by 30th

4
In case of Specified IFSC Public Company and Specified IFSC Private Company - Sub-
section (3) of section 92 shall not apply. - Notification Date 4th January, 2017

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 7.20 CORPORATE AND OTHER LAWS

September 2019, but it did not take place. Thus, the company has contravened the
provisions of section 92 of the Companies Act, 2013 and shall be liable for a penalty
as specified in Section 92(5) of the Act.
PLACE OF KEEPING AND INSPECTION OF REGISTERS, RETURNS, ETC.
[SECTION 94] 5

Registered Office
Place of keeping registers
and returns - Section 94 Can also be kept at a place in India, other registered
office, where more than 1/10th of total members
reside; if approved by SPECIAL RESOLUTION

Extract of Section 94(1)

“The registers required to be kept and maintained by a company under section
88 and copies of the annual return filed under section 92 shall be kept at the
registered office of the company.
Such registers or copies of return may also be kept at any other place in India in
which more than one-tenth of the total number of members entered in the register
of members reside, if approved by a special resolution passed at a general meeting
of the company.
Provided further that the period for which the registers, returns and records are
required to be kept shall be such as may be prescribed.”
♦ As per Rule 14(1), the registers and indices maintained pursuant to section 88
and copies of returns prepared pursuant to section 92, shall be open for
inspection during business hours, at such reasonable time on every working day
as the board may decide, by any member, debenture holder, other security
holder or beneficial owner without payment of fee and by any other person on
payment of such fee as may be specified in the articles of association of the
company but not exceeding fifty rupees for each inspection.
Explanation.- For the purposes of this sub-rule, reasonable time of not less
than two hours on every working day shall be considered by the company.

5Section 93 of the Companies Act, 2013 has been omitted by the Companies (Amendment)
Act, 2017 -Amendment Effective from 13th June 2018

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 MANAGEMENT & ADMINISTRATION 7.21

♦ According to Section 94(3) read with Rule 14(2), any member, debenture-
holder or security holder or beneficial owner can take the extracts during any
business without payment of any fee or can also get copies thereof with
payment of fee not exceeding ` 10 for each page. Such copies or entries or
return shall be supplied within 7 days of deposit of fee.
Provided that such particulars of the register or index or return as may be
prescribed shall not be available for inspection under sub-section (2) or for taking
extracts or copies under this sub-section.

Preservation of register of members etc. and annual return–

♦ Preservation of register of members: Rule 15 of the Companies
(Management & Administration) Rules, 2014 states that the register of
members along with the index shall be preserved permanently and shall be
kept in the custody of company preservation of register of members secretary
of the company or any other person authorised by the Board for such
purpose; and
♦ Preservation of register of debenture holders/ other security holders:
The register of debenture-holder or any other security holder along with the
index shall be preserved for a period of 8 years from the date of redemption
of debentures or securities, as the case may be, and shall be kept in the
custody of the company secretary of the company or any other person
authorized by the Board for such purpose.
♦ Copies of documents filled with ROC to be preserved: Copies of all annual
returns prepared under section 92 and copies of all certificates and
documents required to be annexed thereto shall be preserved for a period of
8 years from the date of filing with the RoC.
♦ Preservation of foreign register: shall be preserved permanently, unless it
is discontinued and all the entries are transferred to any other foreign register
or to the principal register. Foreign register of debenture-holder or any other
security holder shall be preserved for a period of 8 years from the date of
redemption of debenture or securities.
Penalty for refusing the inspection or making any extract or copy required –
♦ If any inspection or the making of any extract or copy required under this
section is refused, the company and every officer of the company who is in
default shall be liable for each such default, to a penalty of ` 1, 000 for every

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 7.22 CORPORATE AND OTHER LAWS

day subject to a maximum of ` 1, 00,000 during which the refusal or default

continues. [Section 94(4)]
♦ The Central Government may also, by order, direct an immediate inspection
of the document, or directs that the extract required shall forthwith be
allowed to be taken by the person requiring it. [Section 94(5)]
REGISTERS, ETC. TO BE EVIDENCE [SECTION 95]
It provides that the registers, indices and copies of annual return shall be prima facie
evidence of any matter directed or authorised to be inserted therein by or under this Act.

4. PRE-REQUISITES OF A MEETING
Before we move on to our next concept of types of meetings and the procedure to
convene them, as per the Companies Act, 2013, let us take a turn and swot the
terms which are important to know for convening the meeting.

•- Notice of
meeting - During Meeting • Minutes of
Section 101 Meeting -
Section 118, 119
- Explanatory
Statement to be •Quorum for meeting •Maintenance &
annexed with - Section 103 inspection of
notice - Section •Chairman of documents -
102 meetings - Section Section 120
104
Before Meeting •Proxies - Section 105 Post - Meeting
•Voting - Section 106
- 110
•Resolutions -
Sections 111, 114 -
117

Key terms:
(a) General meeting is the meeting of a company's shareholders as per the
provisions of the Act. The general meeting can be an annual general meeting
(AGM) or an Extraordinary General meeting (EGM). An annual general
meeting (AGM) is a mandatory yearly gathering of a company's interested
shareholders. The objective of holding an AGM is to provide an opportunity

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 MANAGEMENT & ADMINISTRATION 7.23

to members to discuss the functioning of the company and take steps to

protect their interests. They can discuss any matter relating to the conduct of
the affairs of the company. An Extraordinary General Meeting (an EGM) can
be defined as a meeting of shareholders which is not an AGM. The objective
of holding an EGM is to discuss any matter of urgent importance which
cannot be postponed till the next Annual General Meeting.
(b) Board Meeting, is the meeting of the board of directors of the company
(c) Class meeting is the meeting of special class of persons, like, creditors,
preference shareholders, etc.
The pre-requisites of the meetings are, in general applicable to all kinds of
meetings, although the time limits may differ and there might be a specific mention
of a certain type of meeting in that section.
NOTICE OF A MEETING 6[ SECTION 101]
Section 101 of the Companies Act, 2013 states that to properly call a general
meeting notice of at least 21 clear days’ 7 , before the meeting, should be given to
all the members, legal representative of any deceased member or the assignee of
insolvent members, the auditors and directors, in writing or electronic mode or
other prescribed mode.
Mode of sending the notice:
As per Rule 18 of the Companies (Management & Administration) Rules, 2014,
sending of notices through electronic mode has been statutorily recognized.
For the purpose of this rule, the expression ‘‘electronic mode’’ shall mean any
communication sent by a company through its authorized and secured computer
programme which is capable of producing confirmation and keeping record of such
communication addressed to the person entitled to receive such communication at
the last electronic mail address provided by the member.

6
In case of Specified IFSC Public Company - Section 101 shall apply in case of a Specified
IFSC public company, unless otherwise specified in the articles of the
company. Notification Dated 4th January, 2017
7
In case of section 8 company, in clause (1) of Sub-section (1) of Section 101 for the words "21
days", the words "14 days" shall be substituted. Notification dated 5th June, 2015.
The above mentioned exception shall be applicable to a section 8 company which has not
committed a default in filing of its financial statements under section 137 or annual return
under section 92 with the Registrar. Notification dated 13 th June, 2017.

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 7.24 CORPORATE AND OTHER LAWS

♦ The said rule mentions that a notice may be sent through e-mail as a–
• Text; or
• As an attachment to e-mail; or
• As a notification providing electronic link; or
• Uniform Resource Locator for accessing such notice.
♦ The e-mail shall be addressed to the person entitled to receive such e-mail
as per the records of the company as provided by the depository. Also, the
company shall provide an advance opportunity at least once in a financial
year, to the member to register his e-mail address and the changes therein
and such request may be made by only those members who have not got
their email id recorded or to update a fresh email id and not from the
members whose email ids are already registered.
♦ The subject line in e-mail shall state the name of the company, notice of the
type of meeting, place and the date on which the meeting is scheduled.
♦ The notice shall be placed simultaneously on the website of the Company, if
any, and on the website as may be notified by Central Government.
♦ Where a notice of GM is sent by post, it shall be deemed to be served at the
expiration of 48 hours after the letter containing the same is posted (Rule
35(6) of the Companies Incorporation Rule, 2014)
Meaning of 21 clear days:
21 clear days mean that the date on which notice is served and the date of meeting
are excluded for sending the notice. A company cannot curtail the requirement of
21 clear days through its Articles.
Who is entitled to receive the notice of the general meeting? (Section 101(3))

* Members
* Legal representative of the deceased member
Notice should be
* Assignee of the insolvent member
served to
* Auditor/auditors of the company
* Director

According To Section 101(4) any accidental omission to give notice to or the non-
receipt of such notice by, any member or other person who is entitled to such

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 MANAGEMENT & ADMINISTRATION 7.25

notice for any meeting shall not invalidate the proceedings of the meeting. The
onus is on the company to prove that the omission was not deliberate.
Example 4
Mr. Abeer filed a complaint against the company, Elixir Private Limited since it did
not serve the notice to him for attending the annual general meeting. The company,
in turn, provided the proof that they had sent the notice, by way of an email to Mr.
Abeer, inviting him to attend the annual general meeting of the company. Abeer
alleges that he never received the email. State whether the company is liable as guilty
for contravening the provisions of section 101 of the Companies Act, 2013 read with
rules.
Answer: As per Rule 18(3) of the Companies (Management & Administration) Rules,
2014, the company’s obligation shall be satisfied when it transmits the e-mail and
the company shall not be held responsible for a failure in transmission beyond its
control. Also, if the member entitled to receive the notice fails to provide or update
relevant e-mail address to the company, or to the depository participant as the case
may be, the company shall not be in default for not delivering notice via e-mail.
Meetings held at shorter notice–
Generally, general meetings need to be called by giving at least a notice of 21 clear
days.
However, a general meeting may be called after giving shorter notice than that
specified in this sub-section if consent, in writing or by electronic mode, is accorded
thereto—
(i) in the case of an annual general meeting, by not less than ninety-five per cent.
of the members entitled to vote thereat; and
(ii) in the case of any other general meeting, by members of the company—
(a) holding, if the company has a share capital, majority in number of
members entitled to vote and who represent not less than ninety-five per
cent. of such part of the paid-up share capital of the company as gives a
right to vote at the meeting; or
(b) having, if the company has no share capital, not less than ninety-five per
cent. of the total voting power exercisable at that meeting.
Where any member of a company is entitled to vote only on some resolution or
resolutions to be moved at a meeting and not on the others, those members shall

© The Institute of Chartered Accountants of India

 7.26 CORPORATE AND OTHER LAWS

be taken into account for the purposes of this sub section in respect of the former
resolution or resolutions and not in respect of the latter.
Contents of the Notice – Section 101(2):
A valid notice must state the day, date, hour, place of the meeting and shall contain
a statement of business to be transacted in that meeting.
Authority to call a GM

A general meeting (AGM, EGM) has to be called by the Board. An individual director
does not have an authority to call a GM. Any notice of GM given without the
sanction of the Board is invalid; however, the same can be ratified by the Board.

EXPLANATORY STATEMENT TO BE ANNEXED TO NOTICE [SECTION 102] 8

Section 102 of the Companies Act, 2013 mentions that where any special business is
to be transacted at the company’s general meeting, then an ‘Explanatory Statement’
should be annexed to the notice calling such general meeting, which must specify,
(a) the nature of concern or interest, financial or otherwise, if any, in respect of
each items of—
(i) every director and the manager, if any;
(ii) every other key managerial personnel; and
(iii) relatives of the persons mentioned in sub-clauses (i) and (ii);
(b) any other information and facts that may enable members to understand the
meaning, scope and implications of the items of business and to take decision
thereon.
Ordinary business and Special business: Companies Act, 2013 sets out the two
types of businesses transacted in general meetings, which are –
♦ Ordinary business (OB)
♦ Special business. (SB)
Ordinary business are the following business which are transacted at the annual
general meeting of the company–

8
In case of Specified IFSC Public Company - Section 102 shall apply in case of a Specified IFSC public
company, unless otherwise specified in the articles of the company. Notification Date 4th January, 2017.

© The Institute of Chartered Accountants of India

 MANAGEMENT & ADMINISTRATION 7.27

1. Consideration of
financial statement and
the reports of the Board of
Directors and auditors

4. Appointment
of, and fixing of Ordinary 2.
the business Declaration of
remuneration of Section 102(2) any dividend
the auditors

3. Appointment of
Directors in place
of those retiring

♦ In the case of AGM, all business to be transacted thereat except the ones
stated above are special business. At the EGM, every business transacted is a
special business. Explanatory statement is not required for transacting OB.
♦ Proviso to section 102(2) sets out that if special business relates to, or affects,
any other company, the extent of shareholding in that other company of
every promoter, director, manager and every other KMP shall be disclosed, if
the extent of shareholding is 2% or more of the paid up share capital of that
other company.
♦ In case any item of business refers to any document which is to be considered
at the meeting, then the time and place where such document can be
inspected should also be specified in the explanatory statement.
♦ Effect of non-disclosure [Section 102(4)]: If as a result non-disclosure or
insufficient disclosure in explanatory statement, any benefit accrues to a
promoter, director, manager, other key managerial personnel or their
relatives, such person shall hold such benefit in trust for the company, and
shall, without prejudice to any other action being taken against him under
this Act or under any other law for the time being in force, be liable to
compensate the company to the extent of the benefit received by him.
Penalty for contravention of the provisions of this section–
Without prejudice to the provisions of sub-section (4), if any default is made in
complying with the provisions of this section, every promoter, director, manager or
other key managerial personnel of the company who is in default shall be liable to
a penalty of fifty thousand rupees or five times the amount of benefit accruing to
the promoter, director, manager or other key managerial personnel or any of his
relatives, whichever is higher. [Section 102(5)]

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 7.28 CORPORATE AND OTHER LAWS

9
QUORUM FOR MEETINGS [SECTION 103] 10
Quorum means the minimum number of members who must be present in order to
constitute a valid meeting. Section 103 of the Act states that unless the articles of the
company provide for a larger number, the quorum for the meeting shall be as follows–

Public Company - Private Company -

If number of members is not more than Quorum - 2 members personally present

1000, quorum shall be 5 members
personally present

if the number of members is more than

1000 but upto 5000, then the quorum shall
be 15 members personally present
If the number of members exceed 5000,
then quorum shall be 30 members
personally present.

♦ The term ‘members personally present’ as mentioned above refers to the

members entitled to vote in respect of the items of business on the agenda
of the meeting.
Adjourned Meeting due to want of Quorum–
If the quorum is not present within half-an-hour from the time appointed for
holding a meeting of the company—

9
The following points have been prescribed by Secretarial Standard – 2:
1. Quorum shall be present not only at the time of commencement of the Meeting but also
while transacting business.
2. Members who have voted by Remote e-voting have the right to attend the General Meeting
and accordingly their presence shall be counted for the purpose of Quorum.
3. A Member who is not entitled to vote on any particular item of business being a related
party, if present, shall be counted for the purpose of Quorum.
4. The stipulation regarding the presence of a Quorum does not apply with respect to items of
business transacted through postal ballot.
10
In case of Specified IFSC Public Company - Section 103 shall apply in case of a Specified
IFSC public company, unless otherwise specified in the articles of the
company. Notification Date 4th January, 2017.

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 MANAGEMENT & ADMINISTRATION 7.29

(a) the meeting shall stand adjourned to the same day in the next week at the
same time and place, or to such other date and such other time and place as
the Board may determine; or
(b) the meeting, if called by requisitionists under section 100, shall stand
cancelled:
Provided that in case of an adjourned meeting or of a change of day, time or place
of meeting under clause (a), the company shall give not less than three days notice
to the members either individually or by publishing an advertisement in the
newspapers (one in English and one in vernacular language) which is in circulation
at the place where the registered office of the company is situated.
♦ Where quorum is not present in the adjourned meeting also within half an
hour, then the members present shall form the quorum.
Example 5
There are 54 members of Dicey Private Limited. The company held its annual general
meeting on 1st July 2019 at 2:00 p.m. and 28 members were present till 2:30 p.m. The
Chairman of the meeting proceeded to initiate the meeting and passed the
resolutions as discussed in the meeting. Comment whether the meeting took place as
per the provisions of Companies Act, 2013.
Answer: As per the provisions of Section 103 of the Companies Act, 2013, the
quorum for a Private Limited Company shall be two members personally present,
within half-an-hour from the time appointed for holding a meeting of the company
Thus, the quorum for the annual general meeting of Dicey Private Limited was
complied with and the company is not in contravention with any of the provisions
of the Companies Act, 2013.
Example 6
Abbey Limited has 2300 members and the annual general meeting of the company
is to be held on 23rd February 2019 at 10.30 a.m. On the day of the meeting, 18
members were personally present by 11.00 a.m. and the Chairman proceeded to
initiate the chronicles of the meeting. There were 5 special businesses to be discussed
at the said meeting and by 2.30 p.m. Agenda 1 to 3 had been discussed and
appropriate resolutions were passed. However, due to some emergency, 4 of the
members had to leave around 3 p.m. The Chairman granted them the permission and
proceeded to discuss Agenda 4 & 5 and accordingly passed resolution as per the
consent of the remaining members. Comment whether the meeting is a properly
convened meeting as per the provisions of section 103 of the Companies Act, 2013.

© The Institute of Chartered Accountants of India

 7.30 CORPORATE AND OTHER LAWS

Answer: In the above case, while the appropriate quorum was present at the time
when the meeting started as per section 103 of the Companies Act, 2013, the
quorum was not present at the time of deciding Agenda 4 & 5. It has been held
that where at the time of transacting business, the number of members is less than
the quorum fixed for the meeting, the business cannot be transacted and shall be
a nullity.
CHAIRMAN OF MEETING [SECTION 104] 11
Election of chairman by members: Section 104 of the Companies Act, 2013 seeks
to provide that unless the articles of association of the Company otherwise provide,
the members, personally present, shall elect among themselves to be the Chairman
by show of hands.
Demand of poll: The section further provides that if a poll is demanded on the election
of the Chairman, the Chairman elected by show of hands shall continue to be the
Chairman of the meeting until some other person is elected as Chairman as a result of
poll, and such other elected person shall be the Chairman for rest of the meeting.
Powers of chairman: Chairman of the meeting is the person who manages the
meetings and ensures that the required decorum of the meeting is maintained at
all times, till the meeting is concluded and post that, executes the minutes of the
meeting. The Chairman has prima facie authority to decide all questions which arise
at a meeting and which require decision at the time. In order to fulfil his duty
properly, he must observe strict impartiality.
Right to cast casting vote: The Chairman has a casting vote in Board Meetings
and general meetings, if specifically empowered by the articles of the Company. A
casting vote means that in event of the equality of vote on a particular business
being transacted at the meeting, the Chairman of the meeting shall have a right to
cast a second vote. If there is no provision in the articles for a casting vote, an
ordinary resolution on which there is equality of votes is deemed to be dropped.
Exemption to Private Company- In case of private company - Section 104 shall
apply, unless otherwise specified in respective sections or the articles of the
company provide otherwise. - Notification dated 5th June, 2015.

11
In case of Specified IFSC Public Company - Section 104 shall apply in case of a Specified
IFSC public company, unless otherwise specified in the articles of the
company. Notification Dated 4th January, 2017.

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 MANAGEMENT & ADMINISTRATION 7.31

This exception shall be applicable to a private company which has not committed
a default in filing its financial statements under section 137 or annual return under
section 92 of the Act, with the Registrar. Notification dated 13th June 2017.

5. PROXIES [SECTION 105] 12

The section provides following laws related to proxy:
♦ Appointment of a proxy is an important right of a member of the company.
Sub-section (1) provides that any member of a company who is entitled to
attend and vote at a meeting of the company shall be entitled to appoint
another person as a proxy to attend and vote at the meeting on his behalf.
However, a proxy shall not have the right to speak at such meeting and shall
not be entitled to vote except on a poll.
Applicability of the sub-section (1) - Unless the articles of a company
otherwise provide, this sub-section shall not apply to a company not having
a share capital. CG may also prescribe a class or classes of companies whose
members shall not be entitled to appoint another person as a proxy.
♦ According to Rule 19 of the Companies (Management & Administration) Rules,
2014, a member of a company registered under section 8 shall not be entitled
to appoint any other person as his proxy unless such other person is also a
member of such company.
♦ A person appointed as proxy shall act on behalf of such member or number
of members not exceeding fifty and holding in aggregate not more than 10
per cent of the total share capital of the company carrying voting rights.
However, a member who is holding more than 10 per cent of the total share
capital of the Company carrying voting rights may appoint a single person as
a proxy and such person shall not act as a proxy for any other person or
shareholder.
♦ The instrument appointing a proxy must be in Form No. MGT. 11 [Rule 19(3) of
the Companies (Management & Administration) Rules, 2014].
♦ It needs to be in writing and signed by the appointer or his attorney duly
authorised in writing. If the appointer is a body corporate, the instrument

12
In case of Specified IFSC Public Company - Section 105 shall apply in case of a Specified
IFSC public company, unless otherwise specified in the articles of the
company. Notification Date 4th January, 2017.

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 7.32 CORPORATE AND OTHER LAWS

should be under its seal or be signed by an officer or an attorney duly

authorised by the body corporate. For execution of proxy, the Articles of
Association of a company cannot specify any special requirement to be
complied with. [Section 105 (6)].
♦ As a compliance requirement, every notice calling a meeting of a company
which has a share capital, or the articles of which provide for voting by proxy
at the meeting, there shall appear with reasonable prominence a statement
that a member entitled to attend and vote is entitled to appoint a proxy, or,
where that is allowed, one or more proxies, to attend and vote instead of
himself, and that a proxy need not be a member. [Sub- section (2)]
♦ Section 105(4) of the Act provides that a proxy received 48 hours before the
meeting will be valid even if the articles provide for a longer period.
♦ Section 105(8) provides that every member entitled to vote at a meeting of
the company, or on any resolution to be moved thereat, shall be entitled
during the period beginning twenty-four hours before the time fixed for the
commencement of the meeting and ending with the conclusion of the
meeting, to inspect the proxies lodged, at any time during the business hours
of the company, provided not less than three days' notice in writing of the
intention so to inspect is given to the company.
♦ Penalty for default–
• If default is made in complying with sub-section (2), every officer of the
company who is in default shall be liable to penalty of five thousand rupees.
• If for the purpose of any meeting of a company, invitations to appoint
as proxy a person or one of a number of persons specified in the
invitations are issued at the company's expense to any member entitled
to have a notice of the meeting sent to him and to vote thereat by proxy,
every officer of the company who issues the invitation as aforesaid
or authorises or permits their issue, shall be liable to a penalty of
fifty thousand rupees. [Section 105(5)]
• Provided that an officer shall not be liable under this sub-section by
reason only of the issue to a member at his request in writing of a form
of appointment naming the proxy, or of a list of persons willing to act
as proxies, if the form or list is available on request in writing to every
member entitled to vote at the meeting by proxy.

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 MANAGEMENT & ADMINISTRATION 7.33

6. VOTING [SECTION 106-109]

The votes cast by the shareholders play decisive role in the business proposed in
General Meetings of a Company. An equity shareholder has the right to vote for
every motion. However, as per the Section 47 of the Companies Act, 2013
preference shareholder is entitled to vote only for a resolution pertaining to his
rights. The companies Act provides for various modes through which a shareholder
can cast his vote. These include–
♦ Voting by show of hands – (section 107);
♦ Voting by electronic means – (section 108);
♦ Voting by demand of poll – (section 109);
♦ Voting by Postal Ballot – (section 110).

Voting by
show of hands
(Section 107)
Voting by
electronic
means (Section
108)

Voting
Voting by Poll
(Section 109)

Voting by
Postal Ballot
(Section 110)

The right to vote is a personal right of a shareholder and he may use it as he likes
it. He may split its vote for and against the resolution.

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 7.34 CORPORATE AND OTHER LAWS

RESTRICTION ON VOTING RIGHTS [SECTION – 106] 13

The section overrules the whole of the Companies Act, 2013 and provides that
the articles of association of a company may provide that no member shall exercise
any voting right in respect of any share registered in his name on which any amount
is due from him on calls or any other sums payable to the company, or in regard to
which the company has exercised the right of lien. [Sub section (1)]
Section – 106 (2) also suggests that a company shall not prohibit any member from
exercising his voting rights on any other ground except the grounds mentioned in (1).
On a poll taken at a meeting of a company, a member entitled to more than one
vote, or his proxy, where allowed, or other person entitled to vote for him, as the
case may be, need not, if he votes, use all his votes or cast in the same way all the
votes he uses. [Sub section (3)]
Also, such member can’t sign a requisition for an extraordinary general meeting.
Note: Where the articles of the company do not contain any provision restricting
the exercise of voting right of member, a member cannot be prevented from voting,
even though, calls or other sum payable by him have not been paid or the company
has exercised any right of lien over his shares. But, where the articles contain any
such provision, and the shares forfeited for non-payment of calls have been re-
allotted, the new allottee being liable for the balance remained unpaid on the
shares will not be entitled to vote so long as any calls presently payable on the
shares remain unpaid.
Example 7
What happens in case of voting by joint shareholders?
Suppose that Mr. & Mrs. Iyer are joint shareholders of Goal Private Limited and
they hold 500 shares of the company. Regarding a particular special business being
transacted at the extra-ordinary general meeting of the company, Mr. Iyer is in the
favour of the decision, whereas Mrs. Iyer is against the resolution. Decide how
should the vote be casted in case of this situation?
Join shareholders must concur in voting unless the articles provide to the contrary.
The voting in case of joint shareholders is done in the order of seniority, which is
determined on the basis of the order in which their names appear in the register of

13
In case of Specified IFSC Public Company - Section 106 shall apply in case of a Specified
IFSC public company, unless otherwise specified in the articles of the
company. Notification Date 4th January, 2017.

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 MANAGEMENT & ADMINISTRATION 7.35

members/ shareholders. The joint-holders have a right to instruct the company as

to the order in which their names are to appear in the register.
Example 8
Consider a situation where directors are also the shareholders of the company.
Directors, who are also the shareholders of the company, stand in a fiduciary
relationship with the company in their capacity as directors. However, a director
should vote as a common shareholder would vote in a general meeting, and need
not be influenced by the fact of his being a director.
VOTING BY SHOW OF HANDS [SECTION 107] 14
♦ According to section 107 of the Companies Act, 2013, unless the voting is
demanded by way of poll or by electronic means, the voting should be done
by way of show of hands in the first instance.
♦ Also, section 107(2) states that the declaration by the Chairman of the
meeting in the minutes books shall be the conclusive evidence that the
resolution is passed.
Example 9
Can an insolvent shareholder vote at the meeting by show of hands?
Yes. Notwithstanding that he has no longer any beneficial interest in the shares and
the dividends are payable only to his trustee in bankruptcy, an insolvent
shareholder so long as he remains in the register of the company as a member, is
entitled to exercise his votes which are attributed to his status as member.
VOTING THROUGH ELECTRONIC MEANS [SECTION 108]
E- Voting has been introduced under Section 108 read with the Companies
(Management and Administration) Rules, 2014 and provides that a member in the
prescribed class of companies may exercise his right to vote by electronic means.
Rule 20 of the Companies (Management & Administration) Rules, 2014 provides a
detailed procedure for electronic voting, which states as follows –
“Voting through electronic means” shall apply in respect of the general meetings
for which notices are issued on or after the date of commencement of this rule.

14
In case of Specified IFSC Public Company - Section 107 shall apply in case of a Specified
IFSC public company, unless otherwise specified in the articles of the
company. Notification Date 4th January, 2017.

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 7.36 CORPORATE AND OTHER LAWS

Companies providing its members to exercise right to vote by electronic

means: Every company which has listed its equity shares on a recognised stock
exchange and company having not less than one thousand members shall provide
to its members facility to exercise their right to vote on resolutions proposed to be
considered at a general meeting by electronic means.
A Nidhi, or an enterprise or institutional investor referred to in Chapter XB or
Chapter XC of the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009 is not required to provide the facility
to vote by electronic means.
Explanation-I- For the purpose of this sub-rule, “Nidhi” 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.
Explanation-II.- For the purposes of this rule, the expression-
 cut-off date' means a date not earlier than seven days before the date of
general meeting for determining the eligibility to vote by electronic
means or in the general meeting. [Explanation II(ii) to Rule 20(2)]
 'electronic voting system' means a secured system based process of
display of electronic ballots, recording of votes of the members and the
number of votes polled in favour or against, in such a manner that the
entire voting exercised by way of electronic means gets registered and
counted in an electronic registry in a centralised server with adequate
cyber security. [Explanation II(iv) to Rule 20(2)]
 'remote e-voting' means the facility of casting votes by a member using
an electronic voting system from a place other than venue of general
meeting. [Explanation II(v) to Rule 20(2)]
 'voting by electronic mean' includes "remote e-voting and voting" at the
general meeting through an electronic voting system which may be the
same as used for remote e-voting. [Explanation II(vii) to Rule 20(2)]
Exercise of right by a member: A member may exercise his right to vote through
voting by electronic means on resolutions and the company shall pass such
resolutions in accordance with the provisions of this rule.

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 MANAGEMENT & ADMINISTRATION 7.37

Procedure: A company which provides the facility to its members to exercise voting
by electronic means shall comply with the following procedure, namely:-
(i) Notice of meeting: The notice of the meeting shall be sent to all the
members, directors and auditors of the company either-
(a) by registered post or speed post; or
(b) through electronic means, namely, registered e-mail ID of the recipient;
or
(c) by courier service;
(ii) Notice to be hosted on website: the notice shall also be placed on the
website, if any, of the company and of the agency forthwith after it is sent to
the members;
(iii) Notice containing the particular: the notice of the meeting shall clearly
state -
(a) that the company is providing facility for voting by electronic means
and the business may be transacted through such voting;
(b) that the facility for voting, either through electronic voting system or
ballot or polling paper shall also be made available at the meeting and
members attending the meeting who have not already cast their vote
by remote e-voting shall be able to exercise their right at the meeting;
(c) that the members who have cast their vote by remote c-voting prior to
the meeting may also attend the meeting but shall not been titled to
cast their vote again;
(iv) the notice shall:
(a) indicate the process and manner for voting by electronic means;
(b) indicate the time schedule including the time period during which the
votes may be cast by remote e-voting;
(c) provide the details about the login ID;
(d) specify the process and manner for generating or receiving the
password and for casting of vote in a secure manner.
(v) Publication of notice: the company shall cause a public notice by way of an
advertisement to be published, immediately on completion of dispatch of
notices for the meeting under clause (i) of sub-rule (4) but at least twenty-
one days before the date of general meeting, at least once in a vernacular

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 7.38 CORPORATE AND OTHER LAWS

newspaper in the principal vernacular language of the district in which the

registered office of the company is situated, and having a wide circulation in
that district, and at least once in English language in an English newspaper
having country-wide circulation, and specifying in the said advertisement,
inter alia, the following matters, namely:-
(a) statement that the business may be transacted through voting by
electronic means;
(b) the date and time of commencement of remote e-voting;
(c) the date and time of end of remote e-voting;
(d) cut-off date;
(e) The manner in which persons who have acquired shares and become
members of the company after the dispatch of notice may obtain the
login ID and password;
(f) the statement that-
(A) remote e-voting shall not be allowed beyond the said date and
time;
(B) the manner in which the company shall provide for voting by
members present at the meeting; and
(C) a member may participate in the general meeting even after
exercising his right to vote through remote e-voting but shall not
be allowed to vote again in the meeting; and
(D) a person whose name is recorded in the register of members or
in the register of beneficial owners maintained by the depositories
as on the cut-off date only shall be entitled to avail the facility of
remote e-voting as well as voting in the general meeting;
(g) website address of the company, if any, and of the agency where notice
of the meeting is displayed; and
(h) name, designation, address, email id and phone number of the person
responsible to address the grievances connected with facility for voting
by electronic means:
Provided that the public notice shall be placed on the website of the
company, if any, and of the agency;

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(vi) Time for opening of e-voting: the facility for remote e-voting shall remain
open for not less than three days and shall close at 5.00 p.m. on the date
preceding the date of the general meeting;
(vii) Option for remote e-voting: During the period when facility for remote e-
voting is provided, the members of the company, holding shares either in
physical form or in dematerialized form, as on the cut-off date, may opt for
remote e-voting.
Provided that once the vote on a resolution is cast by the member, he shall
not be allowed to change it subsequently or cast the vote again:
Provided further that a member may participate in the general meeting even
after exercising his right to vote through remote e-voting but shall not be
allowed to vote again;
(viii) At the end of the remote e-voting period, the facility shall forthwith be
blocked:
Provided that if a company opts to provide the same electronic voting system
as used during remote e-voting during the general meeting, the said facility
shall be in operation till all the resolutions are considered and voted upon in
the meeting and may be used for voting only by the members attending the
meeting and who have not exercised their right to vote through remote e­
voting.
(ix) Appointment of scrutinizer: The Board of Directors shall appoint one or
more scrutinizer, who may be Chartered Accountant in practice, Cost
Accountant in practice, or Company Secretary in practice or an Advocate, or
any other person who is not in employment of the company and is a person
of repute who, in the opinion of the Board can scrutinize the voting and
remote e-voting process in a fair and transparent manner.
Provided that the scrutinizer so appointed may take assistance of a person
who is not in employment of the company and who is well-versed with the
electronic voting system;
(x) Function of scrutinizer: the scrutinizer shall be willing to be appointed and
be available for the purpose of ascertaining the requisite majority;
(xi) Role of Chairman: The Chairman shall, at the general meeting, at the end of
discussion on the resolutions on which voting is to be held, allow voting, as
provided in clauses (a) to (h) of sub-rule (1) of rule 21, as applicable, with the
assistance of scrutinizer, by use of ballot or polling paper or by using an

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electronic voting system for all those members who are present at the general
meeting but have not cast their votes by availing the remote e-voting facility.
(xii) Counting of votes: The scrutinizer shall, immediately after the conclusion of
voting at the general meeting, first count the votes cast at the meeting,
thereafter unblock the votes cast through remote e-voting in the presence of
at least two witnesses not in the employment of the company and make, not
later than three days of conclusion of the meeting, a consolidated
scrutinizer’s report of the total votes cast in favour or against, if any, to the
Chairman or a person authorized by him in writing who shall countersign the
same:
Provided that the Chairman or a person authorized by him in writing shall
declare the result of the voting forthwith;
Explanation: It is hereby clarified that the manner in which members have cast
their votes, that is, affirming or negating the resolution, shall remain secret
and not available to the Chairman, Scrutiniser or any other person till the
votes are cast in the meeting.
(xiii) Access to details: For the purpose of ensuring that members who have cast
their votes through remote e-voting do not vote again at the general
meeting, the scrutiniser shall have access, after the closure of period for
remote e-voting and before the start of general meeting, to details relating
to members, such as their names, folios, number of shares held and such
other information that the scrutiniser may require, who have cast votes
through remote e-voting but not the manner in which they have cast their
votes:
(xiv) Maintenance of Register: The scrutiniser shall maintain a register either
manually or electronically to record the assent or dissent received,
mentioning the particulars of name, address, folio number or client ID of the
members, number of shares held by them, nominal value of such shares and
whether the shares have differential voting rights;
(xv) Safe Custody of register: The register and all other papers relating to voting
by electronic means shall remain in the safe custody of the scrutiniser until
the Chairman considers, approves and signs the minutes and thereafter, the
scrutiniser shall hand over the register and other related papers to the
company.
(xvi) Result on websites: The results declared along with the report of the
scrutiniser shall be placed on the website of the company, if any, and on the

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website of the agency immediately after the result is declared by the

Chairman:
Provided that in case of companies whose equity shares are listed on a
recognised stock exchange, the company shall, simultaneously, forward the
results to the concerned stock exchange or exchanges where its equity shares
are listed and such stock exchange or exchanges shall place the results on its
or their website.
(xvii)Passing of date of resolution: Subject to receipt of requisite number of
votes, the resolution shall be deemed to be passed on the date of the relevant
general meeting.
Explanation: For the purposes of this clause, the requisite number of votes
shall be the votes required to pass the resolution as the ‘ordinary resolution’
or the ‘special resolution’, as the case may be, under section 114 of the Act.
(xviii) Resolution not to be withdrawn: a resolution proposed to be considered
through voting by electronic means shall not be withdrawn.
DEMAND FOR POLL [SECTION 109] 15
♦ Section 109 provides that before or on declaration of result of the voting on
any resolution by a show of hands, the Chairman of the meeting on his own,
or on demand made by the ‘specified’ members in that behalf.
Members who can demand for poll –
• In case of a company having a share capital, by the members present in
person or proxy, where allowed, and having not less than 1/10th of the
total voting power or holding shares on which an aggregate sum of not
less than ` 5,00,000 or such higher amount has been prescribed has been
paid – up.
• In the case of any other company, by any member or members present
in person or by proxy, where allowed, and having not less than 1/10th
of the total voting power.
♦ Withdrawal of demand for poll: the demand for poll may be withdrawn by
the persons who made the demand, at any time.

15
In case of Specified IFSC Public Company - Section 109 shall apply in case of a Specified
IFSC public company, unless otherwise specified in the articles of the
company. Notification Date 4th January, 2017

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 7.42 CORPORATE AND OTHER LAWS

♦ A poll demanded for adjournment of the meeting or appointment of

Chairman of the meeting shall be taken forthwith.
♦ A poll demanded on any question other than adjournment of the meeting or
appointment of Chairman shall be taken at such time, not being later than 48
hours from the time when the demand was made, as the Chairman of the
meeting may direct.
♦ Where a poll is to be taken, the Chairman of the meeting shall appoint a
scrutinizer for observing the poll process and votes given on poll and to
report thereon.
♦ The duties of a scrutinizer shall be as follows–
• To ensure proper conduct of the polling process;
• To maintain proper records of the poll;
• To submit a report to the Chairman of the meeting which shall contain
the details of votes cast in the favour and against the resolution; and
• To ensure that the compliance of the provisions of section 109 and
Rule 21.
♦ The Chairman shall regulate the manner in which the poll shall be taken at
the meeting and appoint such number of scrutinizers as may be necessary.
Rule 21 lays down the procedure describing the manner in which the
Chairman shall get the poll process scrutinized-
• The Chairman of the meeting shall ensure that –
 The Scrutinizers are provided with the Register of Members,
specimen signatures of the members, Attendance Register and
Register of Proxies.
 The Scrutinizers are provided with all the documents received by
the Company pursuant to sections 105, 112 and section 113.
 The Scrutinizers shall arrange for Polling papers and distribute
them to the members and proxies present at the meeting; in case
of joint shareholders, the polling paper shall be given to the first
named holder or in his absence to the joint holder attending the
meeting as appearing in the chronological order in the folio and
the Polling paper shall be in Form No. MGT.12.

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 The Scrutinizers shall keep a record of the polling papers received

in response to poll, by initialling it.
 The Scrutinizers shall lock and seal an empty polling box in the
presence of the members and proxies.
 The Scrutinizers shall open the Polling box in the presence of two
persons as witnesses after the voting process is over.
 In case of ambiguity about the validity of a proxy, the Scrutinizers
shall decide the validity in consultation with the Chairman.
 The Scrutinizers shall ensure that if a member who has appointed
a proxy has voted in person, the proxy’s vote shall be disregarded.
 The Scrutinizers shall count the votes cast on poll and prepare a
report thereon addressed to the Chairman.
 Where voting is conducted by electronic means under the
provisions of section 108 and rules made thereunder, the
company shall provide all the necessary support, technical and
otherwise, to the Scrutinizers in orderly conduct of the voting and
counting the result thereof.
 The Scrutinizers’ report shall state total votes cast, valid votes,
votes in favour and against the resolution including the details of
invalid polling papers and votes comprised therein.
 The Scrutinizers shall submit the Report to the Chairman who shall
counter-sign the same.
 The Chairman shall declare the result of Voting on poll. The result
may either be announced by him or a person authorized by him
in writing.
• The scrutinizers appointed for the poll, shall submit a report to the
Chairman of the meeting in Form No. MGT.13 and the report shall be
signed by the scrutinizer and, in case there is more than one scrutinizer
by all the scrutinizer, and the same shall be submitted by them to the
Chairman of the meeting within seven days from the date the poll is
taken.
• The results of the poll shall be deemed to be the decision of the meeting
on the resolution.

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 7.44 CORPORATE AND OTHER LAWS

Applicability of section 101 to 107 and 109 to Private companies- Section 101 to
107 and 109 shall apply unless otherwise specified in respective sections or the
articles of the company provide otherwise. Notification dated 5th June, 2015.
This exception shall be applicable to a private company which has not committed
a default in filing its financial statements under section 137 or annual return under
section 92 of the Act, with the Registrar. Notification dated 13th June 2017.
POSTAL BALLOT [SECTION 110]
As per section 2(65) “postal ballot” means voting by post or through any electronic
mode. The provisions relating to passing of resolution by postal ballot are
contained in Section 110 read with Rule 22 of the Companies (Management and
administration) Rules, 2014.
Extract of the Act
“(1) Notwithstanding anything contained in this Act, a company—
(a) shall, in respect of such items of business as the Central Government
may, by notification, declare to be transacted only by means of postal
ballot; and
(b) may, in respect of any item of business, other than ordinary business
and any business in respect of which directors or auditors have a right
to be heard at any meeting, transact by means of postal ballot.
In such manner as may be prescribed, instead of transacting such business at
a general meeting.
Provided that any item of business required to be transacted by means of
postal ballot under clause (a), may be transacted at a general meeting by a
company which is required to provide the facility to members to vote by
electronic means under section 108, in the manner provided in that section.
(2) If a resolution is assented to by the requisite majority of the shareholders by
means of postal ballot, it shall be deemed to have been duly passed at a
general meeting convened in that behalf.”
♦ The section seeks to provide that the Central Government may declare items
of business that can be transacted only by postal ballot and also in respect of
any item of business, other than ordinary business and any business in respect
of which directors or auditors have a right to be heard at any meeting.
♦ Only those assents/ dissents are to be considered which have been sent by
the members within 30 days as prescribed in Rule 22. Sub-section (2) of

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Section 110 makes a deeming provision that if a resolution is assented by

requisite majority of shareholders by means of postal ballot, it shall be
deemed to have been passed at a general meeting convened in that behalf.
♦ Manner in which postal ballot shall be conducted is prescribed in Rule 22 of
the Companies (Management & Administration) Rules, 2014. The same is
described as follows–
• Where a company is required or decides to pass any resolution by way
of postal ballot, it shall send a notice to all the shareholders, along with
a draft resolution explaining the reasons therefor and requesting them
to send their assent or dissent in writing on a postal ballot because
postal ballot means voting by post or through electronic means within
a period of thirty days from the date of dispatch of the notice.
• The notice shall be sent either
(a) by Registered Post or speed post, or
(b) through electronic means like registered e-mail id or
(c) through courier service for facilitating the communication of the
assent or dissent of the shareholder to the resolution within the
said period of thirty days.
• An advertisement shall be published at least once in a vernacular
newspaper in the principal vernacular language of the district in which
the registered office of the company is situated, and having a wide
circulation in that district, and at least once in English language in an
English newspaper having a wide circulation in that district, about having
dispatched the ballot papers and specifying therein, inter alia, the
following matters, namely:-
(a) a statement to the effect that the business is to be transacted by
postal ballot which includes voting by electronic means;
(b) the date of completion of dispatch of notices;
(c) the date of commencement of voting;
(d) the date of end of voting;
(e) the statement that any postal ballot received from the member
beyond the said date will not be valid and voting whether by post
or by electronic means shall not be allowed beyond the said date;

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 7.46 CORPORATE AND OTHER LAWS

(f) a statement to the effect that members, who have not received
postal ballot forms may apply to the company and obtain a
duplicate thereof; and
(g) contact details of the person responsible to address the
grievances connected with the voting by postal ballot including
voting by electronic means.
• The notice of the postal ballot shall also be placed on the website of the
company forthwith after the notice is sent to the members and such
notice shall remain on such website till the last date for receipt of the
postal ballots from the members.
• The Board of directors shall appoint one scrutinizer, who is not in
employment of the company and who, in the opinion of the Board can
conduct the postal ballot voting process in a fair and transparent
manner.
• The scrutinizer shall be willing to be appointed and be available for the
purpose of ascertaining the requisite majority.
• Postal ballot received back from the shareholders shall be kept in the
safe custody of the scrutinizer and after the receipt of assent or dissent
of the shareholder in writing on a postal ballot, no person shall deface
or destroy the ballot paper or declare the identity of the shareholder.
• The scrutinizer shall submit his report as soon as possible after the last
date of receipt of postal ballots but not later than seven days thereof;
• The scrutinizer shall maintain a register either manually or electronically
to record their assent or dissent received, mentioning the particulars of
name, address, folio number or client ID of the shareholder, number of
shares held by them, nominal value of such shares, whether the shares
have differential voting rights, if any, details of postal ballots which are
received in defaced or mutilated form and postal ballot forms which are
invalid.
• The postal ballot and all other papers relating to postal ballot including
voting by electronic means, shall be under the safe custody of the
scrutinizer till the chairman considers, approves and signs the minutes
and thereafter, the scrutinizer shall return the ballot papers and other
related papers or register to the company who shall preserve such ballot
papers and other related papers or register safely.

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• The assent or dissent received after thirty days from the date of issue of
notice shall be treated as if reply from the member has not been
received.
• The results shall be declared by placing it, along with the scrutinizer’s
report, on the website of the company.
• The provisions of rule 20 regarding voting by electronic means shall
apply, as far as applicable, mutatis mutandis to this rule in respect of the
voting by electronic means.
• pursuant to clause (a) of sub-section (1) of section 110, the following
items of business shall be transacted only by means of voting through a
postal ballot—
(a) alteration of the objects clause of the memorandum and in the
case of the company in existence immediately before the
commencement of the Act, alteration of the main objects of the
memorandum;
(b) alteration of articles of association in relation to insertion or
removal of provisions which, under sub-section (68) of section 2,
are required to be included in the articles of a company in order
to constitute it a private company;
(c) change in place of registered office outside the local limits of any
city, town or village as specified in sub-section (5) of section 12;
(d) change in objects for which a company has raised money from
public through prospectus and still has any unutilized amount out
of the money so raised under sub-section (8) of section 13;
(e) issue of shares with differential rights as to voting or dividend or
otherwise under sub-clause (ii) of clause (a) of section 43;
(f) variation in the rights attached to a class of shares or debentures
or other securities as specified under section 48;
(g) buy-back of shares by a company under sub-section (1) of section 68;
(h) election of a director under section 151 of the Act;
(i) sale of the whole or substantially the whole of an undertaking of
a company as specified under sub-clause (a) of sub-section (1) of
section 180;

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 7.48 CORPORATE AND OTHER LAWS

(j) giving loans or extending guarantee or providing security in

excess of the limit specified under sub-section (3) of section 186:
Provided that any aforesaid items of business under this sub-rule,
required to be transacted by means of postal ballot, may be transacted
at a general meeting by a company which is required to provide the
facility to members to vote by electronic means under section 108, in
the manner provided in that section.
Provided further that One Person Companies and other companies
having member’s upto two hundred are not required to transact any
business through postal ballot.
Example 10
How does the counting happen at the time of postal ballot?
It is important to know here that, a member who is voting by way of postal ballot,
has votes in proportion to his share in the paid-up share capital of the company.
And in this regard, he need not use all his votes in the same way. Therefore, 4 types
of ballots may be received from the shareholders–
(i) Ballots which contain assents;
(ii) Ballots which contain dissents;
(iii) Ballots wherein the member has voted partially assenting, partially dissenting
or using not all his shares in any particular way; and
(iv) Invalid ballots (due to absence/ mismatch of signature, overwriting, etc.)

7. CIRCULATION OF MEMBER’S RESOLUTIONS

[SECTION 111]
Circulation of members’ resolution and statements: While the board enjoys the
primacy in setting the agenda of the meetings, the members are given a right under
section 111 to propose resolutions for consideration at the general meetings. The
number of members required to make a requisition under sub-section (1) of this section
are as required to requisition a general meeting in sub-section (2) of section 100.
(1) Prerequisites of a valid Requisition: The prerequisites for a valid requisition
prescribed in sub-section (2) of section 111 are as under:
(a) Requisition must be made in writing and signed

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(i) in the case of a company having a share capital, such number of

members who hold, on the date of the receipt of the requisition,
not less than one-tenth of such of the paid-up share capital of the
company as on that date carries the right of voting;
(ii) in the case of a company not having a share capital, such number
of members who have, on the date of receipt of the requisition,
not less than one-tenth of the total voting power of all the
members having on the said date a right to vote.
(b) Two or more copies of the said requisition may contain signature of all
the requisitionists.
(c) It must be deposited at the registered office of the company not less
than six weeks before the meeting in the case of a requisition requiring
notice of a resolution. In case of other resolutions, the same is to be
deposited not less than two weeks before the meeting.
(d) A sum reasonably sufficient to meet the company’s expenses in giving
effect to proposing the resolution is deposited or tendered. When the
money is tendered, no payment is made but an unconditional offer is
made to pay money.
The proviso to sub-section (2) of section 111 provides that the time period
provided above need not be complied with in case an annual general meeting
is called on a date within six weeks after the copy has been deposited. The
copy of requisition, in such a case, shall be deemed to have been properly
deposited for the purposes thereof although not deposited within the time
required by this sub-section. The company is not duty bound to circulate the
notice of the resolution when the prerequisites are not complied with.
(2) Notice to members: As per section 111 of the Companies Act, 2013, a
company shall, on requisition in writing of such number of members, as
required in section 100 (Calling of EGM), give notice to members of any
resolution which may properly be moved and is intended to be moved at a
meeting; and circulate to members any statement with respect to the matters
referred to in proposed resolution or business to be dealt with at that
meeting.
(3) Exception from circulation of any statement: The Company shall not be
bound to circulate any statement, if on the application either on behalf of the
company or of any other person who claims to be aggrieved, then the

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Central Government, by order, declares that the rights conferred are being
16

abused to secure needless publicity for defamatory matter.

(4) Order to bear the cost: An order made may also direct that the cost incurred
by the company shall be paid to the company by the requisitionists,
notwithstanding that they are not parties to the application.
(5) Default in contravention of the provision: If any default is made in
complying with the provisions of this section, the company and every officer
of the company who is in default shall be liable to a penalty of twenty-five
thousand rupees.

8. REPRESENTATION OF THE PRESIDENT &

GOVERNORS IN MEETING OF COMPANIES TO
WHICH THEY ARE MEMBER [SECTION 112]
Section 112 of the Companies Act, 2013 provides that the President of India or the
Governor of a State, if he is a member of a company, may appoint such person as
he thinks fit to act as his representative at any meeting and such other person shall
be entitled to exercise the same rights and powers including the right to vote to
proxy and postal ballot, as the President or, as the case may be, the Governor could
exercise as a member of the company.

9. REPRESENTATIONS OF CORPORATIONS
MEETING OF COMPANIES AND CREDITORS
[SECTION 113]
Section 113 of the Companies Act, 2013 seeks to provide that where a body
corporate is a member or a creditor including a holder of debentures of the
company and it authorises any person as its representative at any meeting of the
company or any class of members of the company or at any meeting of creditors
of the company, such representative shall be entitled to exercise the same rights
and powers including right to vote by proxy and by postal ballot on behalf of the
body corporate which he represents.

The Power of the Central Government has been delegated to Regional Director. MCA
16

Notification 4090 (E) dated 19 th December, 2016.

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10. RESOLUTIONS [SECTION 114–117]

In lay man’s language, a resolution is the formal decision of an organization while
transacting a business at a meeting. A motion which has obtained the necessary
majority vote in its favour becomes a resolution. When a resolution is passed, a
company is bound by it.
Difference between Motion & Resolution—
♦ Most matters come before a meeting by way of a motion recommending that
the meeting may express approval or disapproval or take certain action or
order something to be done.
♦ A motion is a proposal, and a resolution is the adoption of a motion duly
made and seconded. But every motion need not be followed by a resolution,
as where a motion is made for the adjournment of the meeting.
♦ A motion whether it is passed for the closure of discussion or adjournment,
etc. can be passed by an ordinary resolution unless there is a specific
provision in the articles.
As per the Companies Act, 2013, resolutions are of two types–
♦ Ordinary Resolutions – which are passed by simple majority; and
♦ Special Resolutions – which are passed by 75% majority.

Resolutions

Ordinary Resolution Special resolution

- passed by simple majority, i.e. -passed by three times
more than 50% majoirity, i.e. more than 75%

SECTION 114–ORDINARY & SPECIAL RESOLUTION:

Section 114 of the Act defines an Ordinary and Special Resolution. It states that:
Ordinary Resolution—
Section 114(1) states that a resolution shall be ordinary resolution, if the notice
required under this Act has been duly given and it is required to be passed by the
votes cast, whether on a show of hands, or electronically or on a poll, as the case
may be, in favour of the resolution, including the casting vote of the Chairman, if
any, of the Chairman, by members, who, being entitled so to do, vote in person, or

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where proxies are allowed, by proxy or by postal ballot, exceed the votes, if any
cast against the resolution by members, so entitled and voting.
Simply put, the votes cast in the favour of the resolution, by any mode of voting
should exceed the votes cast against it.
Special Resolution—
As per Section 114(2) of the Act, a resolution shall be a special resolution, when–
(a) The intention to propose the resolution as a special resolution has been duly
specified in the notice calling the general meeting or other intimation given
to the members of the resolution;
(b) The notice required under this Act has been duly given; and
(c) The votes cast in favour of the resolution, whether on a show of hands, or
electronically or on a poll, as the case may be, in favour of the resolution,
including the casting vote of the Chairman, if any, of the Chairman, by
members, who, being entitled so to do, vote in person, or where proxies are
allowed, by proxy or by postal ballot, are required to be not less than 3 times
the number of the votes, if any, cast against the resolution by members so
entitled and voting.
In simple words, a resolution shall be a special resolution, when it is duly
specified in the notice, calling the general meeting and votes cast in favour is
3 times the votes cast against the resolution.
Characteristics of Special Resolution—

1. Specified Majority - 75%

2. Resolution shall be set out in the notice

3. Notice must state that resolution is to be passed as a

special resolution and omission, would invalidate the
resolution.
4. Proper notice of 21 days is given for holding the
meeting
5. Explanatory Statement should be annexed to the
notice for conducting special business

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Example 11
In the annual general meeting of Black Mango Limited, the notice contained the
agenda for 8 special businesses to be transacted. The Chairman decided to move all
the resolutions at one time in order to save time of the members present at the
meeting. Discuss whether two or more resolutions can be moved together as per the
provisions of the Companies Act, 2013.
For the sake of avoiding confusion and mixing up, the resolutions are moved
separately. However, there is nothing illegal if the Chairman of the meeting desires
that two or more resolutions should be moved together, unless any member
requires that each resolution should be put to vote separately or unless a poll is
demanded in respect of any.
The only case where a resolution should be moved separately is the one which
requires that as regards the appointment of directors at a general meeting of a
public or private company, where two or more directors may not be appointed as
directors by a single resolution.
Where notice has been given of several resolutions, each resolution must, be put
separately. However, if the meeting unanimously adopts all the resolutions, this
would not be material.
RESOLUTIONS REQUIRING SPECIAL NOTICE [SECTION 115]
Section 115 read with rule 23 of Companies (Management and
Administration) Rules, 2014 deals with resolutions requiring special notice
Section 115 of the Companies Act, 2013 states that where, by any provision
contained in this Act or in the Articles of Association of a company, special notice
is required for passing any resolution, then the notice of the intention to move such
resolution shall be given to the company by such number of members holding not
less than 1% of the total voting power, or holding shares on which such aggregate
sum not exceeding five lakh rupees, as may be prescribed, has been paid-up.
As per the Act, special notice is required in the following cases –
(a) Resolution for appointment of an auditors other the retiring auditor at an
annual general meeting [Section 140(4)].
(b) Resolution at an annual general meeting to provide that a retiring auditor
shall not be re-appointed [Section 140].
(c) Resolution to remove a director before the expiry of his period of office
[Section 169(2)]

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(d) Resolution to appoint another director in place of the removed director

[(Section 169(5)]
Further, the articles may provide for additional matters which may require special
notice.
Rule 23–Special Notice—
1. A special notice required to be given to the company shall be signed, either
individually or collectively by such number of members holding not less than
one percent of total voting power or holding shares on which an aggregate
sum of not less than 5,00,000 rupees has been paid up on the date of the
notice.
2. The afore-mentioned notice shall be sent by members to the company not
earlier than 3 months but at least 14 days before the date of meeting at which
the resolution is to be moved, exclusive of the day on which the notice is
given and the day of the meeting.
3. The company shall immediately after receipt of the notice, give its members
notice of the resolution at least seven days before the meeting, exclusive of
the day of dispatch of notice and day of the meeting, in the same manner as
it gives notice of any general meetings.
4. Where it is not practicable to give the notice in the same manner as it gives
notice of any general meetings, the notice shall be published in English
language in English newspaper and in vernacular language in a vernacular
newspaper, both having wide circulation in the State where the registered
office of the Company is situated and such notice shall also be posted on the
website, if any, of the Company.
5. The notice shall be published at least seven days before the meeting,
exclusive of the day of publication of the notice and day of the meeting.

RESOLUTIONS PASSED AT ADJOURNED MEETING [SECTION 116]

As per Section 116 where a resolution is passed at an adjourned meeting of a
company; or the holders of any class of shares in a company; or the Board of
Directors, the resolution shall be treated as passed on the day it was actually passed
and not on any earlier date.

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Example 12
The extra-ordinary general meeting of the company, Purple Banana Private Limited
was due to be held on 23rd September 2019. However, due to want of quorum, the
meeting was adjourned to a later date on 1st October 2019 and two resolutions
were passed on that date. Now, as per section 116 of the Companies Act, 2013, the
said two resolutions shall be deemed to have been passed on the original date of
meeting, i.e. 1st October 2019 and not on the earlier date.
RESOLUTIONS AND AGREEMENTS TO BE FILED [SECTION 117]
Section 117 17 18 of the Act, provides that a copy of every resolution or any
agreement, in respect of matters specified in sub-section (3) together with the
explanatory statement under section 102, if any, annexed to the notice calling the
meeting in which the resolution is proposed, shall be filed with the Registrar
within thirty days of the passing or making thereof in such manner and with such
fees as may be prescribed.
A copy of every resolution or any agreement required to be filed, together with the
explanatory statement under section 102, if any, shall be filed with the Registrar
in Form No. MGT.14 along with the fee. [Rule 24]
Provided that the copy of every resolution which has the effect of altering the
articles and the copy of every agreement referred to in sub-section (3) shall be
embodied in or annexed to every copy of the articles issued after passing of the
resolution or making of the agreement.
Resolutions and agreements to be filed with the Registrar are as under: –

♦ Special Resolutions
♦ Resolutions which have been agreed to by all the members of a company, but
which, if not so agreed to, would not have been effective for their purpose
unless they had been passed as special resolutions;
♦ Any resolution of the Board of Directors of a company or agreement executed
by a company, relating to the appointment, re-appointment or renewal of the

17
In case of Specified IFSC Public Company - Sub-section (1) of section 117, for the words
“thirty days” read as “sixty days”. Notification Dated 4th January, 2017.
18
In case of Specified IFSC Private Company - Sub-section (1) of section 117, for the words
“thirty days” read as “sixty days”. Notification Dated 4th January, 2017

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appointment, or variation of the terms of appointment, of a managing

director;
♦ Resolutions or agreements which have been agreed to by any class of
members but which, if not so agreed to, would not have been effective for
their purpose unless they had been passed by a specified majority or
otherwise in some particular manner; and all resolutions or agreements which
effectively bind such class of members though not agreed to by all those
members.
♦ Resolutions requiring a company to be wound up voluntarily passed in
pursuance of section 59 of the Insolvency and Bankruptcy Code, 2016.
♦ Resolutions passed in pursuance of sub-section (3) of section 179.
19 & 20

Provided that no person shall be entitled under section 399 to inspect or

obtain copies of such resolutions;
Provided further that nothing contained in this clause shall apply in
respect of a resolution passed to grant loans, or give guarantee or
provide security in respect of loans under clause (f) of sub-section (3) of
section 179 in the ordinary course of its business by,—
(a) a banking company;
(b) any class of non-banking financial company registered under Chapter
IIIB of the Reserve Bank of India Act, 1934, as may be prescribed in
consultation with the Reserve Bank of India;
(c) any class of housing finance company registered under the National
Housing Bank Act, 1987, as may be prescribed in consultation with the
National Housing Bank; and
♦ any other resolution or agreement as may be prescribed and placed in the
public domain.

19 In case of private company - clause (g) of Sub-section 3 of Section 117 shall not apply.
Notification dated 5th June, 2015.
The above mentioned exemption shall be applicable to a private company which has not
committed a default in filing its financial statements under section 137 or annual return under
section 92 with the Registrar- Notification dated 13th June, 2017.
20
In case of Specified IFSC Public Company - Clause (g) of sub-section (3) of section 117
shall not apply. Notification Dated 4th January, 2017.

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Penalty under the Act-Section 117(2)

If any company fails to file the resolution or the agreement under sub-section
(1) before the expiry of the period specified therein, such company shall be
liable to a penalty of ten thousand rupees and in case of continuing failure,
with a further penalty of one hundred rupees for each day after the first during
which such failure continues, subject to a maximum of two lakh rupees and
every officer of the company who is in default including liquidator of the
company, if any, shall be liable to a penalty of ten thousand rupees and in
case of continuing failure, with a further penalty of one hundred rupees for
each day after the first during which such failure continues, subject to a
maximum of fifty thousand rupees.

11. MINUTES (SECTION 118)

Section 118 prescribes that every company shall prepare, sign and keep minutes of
every general meeting of any class of shareholders or creditors, including the
meeting called by the requisitionists, and every resolution passed by postal ballot
and every meeting of its Board of Directors or of every committee of the Board,
within 30 days of the conclusion of every such meeting concerned, or passing of
resolution by postal ballot in books kept for that purpose with their pages
consecutively numbered. [Sub section (1)] 21 & 22
♦ The minutes of each meeting shall contain a fair and correct summary of the
proceedings that took place at the concerned meeting.

21
In case of Specified IFSC Public Company - In Sub-section (1) of section 118, the
following proviso shall be inserted, namely:-
“Provided that in case of a Specified IFSC public company, the minutes of every meeting of
its Board of Directors or of every committee of the Board, to be prepared and signed in the
manner as may be prescribed under sub section (1) at or before the next Board
or committee meeting, as the case may be and kept in books kept for that
purpose.”.- Notification Date 4th January, 2017
22
In case of Specified IFSC Private Company - In Sub-section (1) of section 118, the
following proviso shall be inserted, namely:-
“Provided that in case of a Specified IFSC private company, the minutes of every meeting of
its Board of Directors or of every committee of the Board, to be prepared and signed in the
manner as may be prescribed under sub section (1) at or before the next Board
or committee meeting, as the case may be and kept in books kept for that
purpose.”.- Notification Date 4th January, 2017

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♦ All appointments made at any of the meetings aforesaid shall be included in

the minutes of the meeting.
♦ In the case of a Board Meeting or a meeting of a committee of the Board, the
minutes shall also contain–
• The names of the directors present at the meeting; and
• In the case of each resolution passed at the meeting, the names of the
directors, if any, dissenting from, or not concurring with the resolution.
♦ Any of the following matter shall not be included in the minutes of the
meeting, which in the opinion of the Chairman of the meeting–
• Is or could reasonably be regarded as defamatory of any person; or
• Is irrelevant or immaterial to the proceedings; or
• Is detrimental to the interests of the company.
♦ The matter to be included or excluded in the minutes of the meetings shall
be at the absolute discretion of the Chairman of the meeting.
♦ The minutes kept in accordance with the provisions shall serve as the
evidence of the proceedings therein.
♦ Where the minutes have been kept in accordance with this section, until the
contrary is proved, the meeting shall be deemed to have been duly called and
held, and all proceedings thereat to have duly taken place, and the
resolutions passed by postal ballot to have been duly passed and in particular,
all appointments of directors, key managerial personnel, auditors or company
secretary in practice, shall be deemed to be valid.
♦ No document, purporting to be a report of the proceedings of any general
meeting of a company shall be circulated or advertised at the expense of the
company, unless it includes the matters requires by this section to be
contained in the minutes of the proceedings of such meeting.
♦ Every company shall observe Secretarial Standards with respect to general and
Board meetings, specified by the Institute of Company Secretaries of India and
approved as such by the Central Government. 23 & 24 [Sub section (10)]

23
In case of Specified IFSC Public Company- Sub-section (10) of section 118 Shall not
apply. - Notification Date 4th January, 2017.
24
In case of Specified IFSC Private Company- Sub-section (10) of section 118 Shall not
apply. - Notification Date 4th January, 2017

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♦ Penalty for contravention–

• If any default is made in complying with the provisions of this section in
respect of any meeting, the company shall be liable to a penalty of
` 25,000 and every officer of the company who is in default shall be liable
to a penalty of ` 5,000.
• If a person is found guilty of tampering with the minutes of the
proceedings of the meeting, he shall be punishable with imprisonment
for a term which may extend to 2 years and with fine which shall not be
less than ` 25,000 but which may extend to ` 1,00,000.
Rule 25 of the Companies (Management & Administration) Rules, 2014 prescribes
the procedure for maintenance of minutes of proceedings of general meeting,
meeting of Board of Directors and other meetings and resolutions passed by postal
ballot as follows–
♦ A distinct minute book shall be maintained for each type of meeting namely:
(i) general meetings of the members;
(ii) meetings of the creditors
(iii) meetings of the Board; and
(iv) meetings of each of the committees of the Board.
♦ The minutes of proceedings of each meeting shall be entered in the books
maintained for that purpose along with the date of such entry within thirty
days of the conclusion of the meeting.
♦ In case of every resolution passed by postal ballot, a brief report on the postal
ballot conducted including the resolution proposed, the result of the voting
thereon and the summary of the scrutinizer’s report shall be entered in the
minutes book of general meetings along with the date of such entry within
thirty days from the date of passing of resolution.
♦ Each page of every such book shall be initialled or signed and the last page
of the record of proceedings of each meeting or each report in such books
shall be dated and signed –
(i) in the case of minutes of proceedings of a meeting of the Board or of a
committee thereof, by the chairman of the said meeting or the chairman
of the next succeeding meeting;
(ii) in the case of minutes of proceedings of a general meeting, by the
chairman of the same meeting within the aforesaid period of thirty days

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or in the event of the death or inability of that chairman within that

period, by a director duly authorised by the Board for the purpose;
(iii) In case of every resolution passed by postal ballot, by the chairman of
the Board within the aforesaid period of thirty days or in the event of
there being no chairman of the Board or the death or inability of that
chairman within that period, by a director duly authorized by the Board
for the purpose.
♦ The minute books of general meetings shall be kept at the registered office
of the company and shall be preserved permanently and kept in the custody
of the company secretary or any director duly authorised by the board.
♦ The minute books of the Board and committee meetings shall be preserved
permanently and kept in the custody of the company secretary of the
company or any director duly authorized by the Board for the purpose and
shall be kept in the registered office or such place as Board may decide.
Exemption to Section 8 companies: In case of Section 8 company - section 118
shall not apply as a whole except that minutes may be recorded within 30 days of
the conclusion of every meeting in case of companies where the articles of
association provide for confirmation of minutes by circulation - Notification dated
5th June, 2015.
The exceptions, modifications and adaptations, shall be applicable to a section 8
company which has not committed a default in filing its financial statements under
137 or Annual Return under section 92 with the Registrar. Notification dated 13th
June, 2017.

12. INSPECTION OF MINUTE-BOOKS OF GENERAL

MEETING [SECTION 119]
How shall the inspection take place?
As per section 119 of the Companies Act, 2013, the books containing the minutes
of the proceedings of any general meeting of a company shall–
♦ Be kept at the registered office of the company; and
♦ Be open for inspection, during business hours, by any member, without
charge, subject to such reasonable restrictions as specified in the articles of
the company or as imposed in the general meeting. However, at least 2 hours
in each business day shall be allowed for inspection [Sub – Section (1)].

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Any member shall be entitled to be furnished, within seven working days after he
has made a request in that behalf to the company, and on payment of such fees as
may be prescribed, with a copy of any minutes referred [Sub – Section (2)].
What is the penalty for contravention of the provisions of the Act? [Sub
section (3)]
If any inspection under sub – section (1), is refused by the company to the member,
or if the copy of minute-book is not furnished within the time specified under sub –
section (2), then the company shall be liable to a penalty of ` 25,000 and every officer
of the company who is in default shall be liable to a penalty of ` 5,000 for each such
refusal or default as the case may be.
Power of Tribunal [Sub – Section (4)]
In the case of any such refusal or default, the Tribunal may, without prejudice to
any action being taken under sub-section (3), by order, direct an immediate
inspection of the minute-books or direct that the copy required shall forthwith be
sent to the person requiring it.
Rule 26–Copy of minute book of general meeting–
Any member shall be entitled to be furnished, within seven working days after he
has made a request in that behalf to the company, with a copy of any minutes of
any general meeting, on payment of such sum as may be specified in the articles
of association of the company, but not exceeding a sum of ten rupees for each
page or part of any page:
Provided that a member who has made a request for provision of soft copy in
respect of minutes of any previous general meetings held during a period
immediately preceding three financial years shall be entitled to be furnished, with
the same free of cost.
MAINTENANCE AND INSPECTION OF DOCUMENTS IN ELECTRONIC FORM
[SECTION 120]
The said section seeks to provide that any document, record, register or minute,
etc., required to be kept by a company or allowed to be inspected or copies
given to any person by a company under this Act, may be kept or inspected or
copies given, as the case may be, in electronic form in such form and manner as
may be specified in Rule 27, 28 and 29 of the Companies (Management and
Administration) Rules, 2014.
♦ Rule 27 of the Companies (Management and Administration) Rules, 2014 states
that every listed company or a company having at least 1000 shareholders,

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debenture-holders and other security holders, may maintain its records, as

required to be maintained under the Act or rules made thereunder, in
electronic form.
♦ Rule 28 sets out that the Managing Director, Company Secretary or any other
director or officer of the company as the Board may decide shall be
responsible for the maintenance and security of electronic records.
♦ Rule 29 states that the records maintained in electronic form shall be made
available for inspection by the company in electronic form. Copies of the
records maintained in e-form, containing a clear reproduction of the whole
or part thereof, should be provided on payment of not exceeding
` 10/page.

13. MEETINGS
Now that we have understood the basic terms which are required to call, convene
and conduct the meeting properly, let us discuss the provisions related to meetings
given in the Companies Act, 2013. The Act describes two types of general meeting
to be held in a company which are–

Annual General Meeting

Section 96

General Meetings
Extra-ordinary General Meeting
Section 100
read with Rule 17 and
Explanation under Rule 18(3)

ANNUAL GENERAL MEETING (‘AGM’) [SECTION 96]

♦ Section 96(1) of the Companies Act, 2013 states that every company, whether
public or private, except One Person Company, shall hold an annual general
meeting every year and that the gap between two AGMs shall not be more
than 15 months.

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♦ The company shall specify the meeting as such [i.e. as AGM] in the notices
calling it.
♦ Holding of annual general meeting
• Annual general meeting should be held once every year.
• First annual general meeting of the company should be held within 9
months from the closing of the first financial year. Hence it shall not be
necessary for the company to hold any annual general meeting in the
year of its incorporation.
• Subsequent annual general meeting of the company should be held
within 6 months from the closing of the financial year.
• The gap between two annual general meetings should not exceed 15
months.
♦ Extension of validity period of AGM: In case, it is not possible for a
company to hold an annual general meeting within the prescribed time, the
Registrar may, for any special reason, extend the time within which any annual
general meeting shall be held. Such extension can be for a period not
exceeding 3 months. No such extension of time can be granted by the
Registrar for the holding of the first annual general meeting.
Example 13
• Abbeys Private Limited closed its financial year on 31st March 2019.
According to section 96(1) of the Act, the Company should hold its
annual general meeting for the year 2018-19 by 30th September 2019
unless an extension is granted by RoC on special reasons.
• Abbyrush Limited was incorporated on 11th December 2018. When
should the company hold its AGM?
According to section 96(1), the company’s financial year will close on
31st March 2019. The company may hold its first AGM by 31st December
2019, i.e. within 9 months of the close of its financial year.
♦ Time and place for holding an annual general meeting: Section 96(2)
states that every annual general meeting shall be called during business
hours, that is, between 9 a.m. and 6 p.m. on any day that is not a National
Holiday and shall be held either at the registered office of the company or at
some other place within the city, town or village in which the registered office
of the company is situated.

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♦ Provided that annual general meeting of an unlisted company may be held

at any place in India if consent is given in writing or by electronic mode by all
the members in advance.
The Central Government may exempt any company from the provisions of
this sub-section subject to such conditions as it may impose.
♦ Explanation—For the purposes of this sub-section, "National Holiday" means
and includes a day declared as National Holiday by the Central Government.
Exemption to Section 8 companies:
In case of Section 8 company- In Sub-section (2) of Section 96 after the proviso and
before the explanation the following proviso shall be inserted;
Provided further that the time, date and place of each annual general meeting are
decided upon before-hand by the board of directors having regard to the
directions, if any, given in this regard by the company in its general
meeting. - Notification dated 5th, June 2015.
The above mentioned exception shall be applicable to a section 8 company which has
not committed a default in filing of its financial statements under section 137 or annual
return under section 92 with the Registrar. Notification dated 13th June, 2017.
Exemption to Government companies:
In case of Government company, section 96(2) shall be read as:
‘Every annual general meeting shall be called during business hours, that is,
between 9 a.m. and 6 p.m. on any day that is not a National Holiday and shall be
held either at the registered office of the company or at such other place within the
city, town or village in which the registered office of the company is situated or
such other place as the Central Government may approve in this behalf. Notification
dated 5th June, 2015 read with Notification Dated 13th June, 2017
The above mentioned exception/ modification/ adaptation shall be applicable to
Government company which has not committed a default in filing of its financial
statements under section 137 or annual return under section 92 with the Registrar.
Notification dated 13th June, 2017’.
POWER OF TRIBUNAL TO CALL ANNUAL GENERAL MEETING [SECTION 97]
(1) If any default is made in holding the annual general meeting of a company
under section 96, the Tribunal may, notwithstanding anything contained in
this Act or the articles of the company, on the application of any member of
the company, call, or direct the calling of, an annual general meeting of the

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company and give such ancillary or consequential directions as the Tribunal

thinks expedient:
Provided that such directions may include a direction that one member of the
company present in person or by proxy shall be deemed to constitute a
meeting.
(2) A general meeting held in pursuance of sub-section (1) shall, subject to any
directions of the Tribunal, be deemed to be an annual general meeting of the
company under this Act.
POWER OF TRIBUNAL TO CALL MEETINGS OF MEMBERS, ETC. [SECTION 98]
(1) If for any reason it is impracticable to call a meeting of a company, other than
an annual general meeting, in any manner in which meetings of the company
may be called, or to hold or conduct the meeting of the company in the
manner prescribed by this Act or the articles of the company, the Tribunal
may, either suo motu or on the application of any director or member of the
company who would be entitled to vote at the meeting,—
(a) order a meeting of the company to be called, held and conducted in
such manner as the Tribunal thinks fit; and
(b) give such ancillary or consequential directions as the Tribunal thinks
expedient, including directions modifying or supplementing in relation
to the calling, holding and conducting of the meeting, the operation of
the provisions of this Act or articles of the company:
Provided that such directions may include a direction that one member of the
company present in person or by proxy shall be deemed to constitute a
meeting.
(2) Any meeting called, held and conducted in accordance with any order made
under sub-section (1) shall, for all purposes, be deemed to be a meeting of
the company duly called, held and conducted.
PUNISHMENT FOR DEFAULT IN COMPLYING WITH THE PROVISIONS OF
SECTION 96 TO 98 [SECTION 99]
This section lists out the punishment for contravention of section 96 to 98, i.e.
default in holding a meeting of the company as AGM or on the directions issued
by the Tribunal. It states that the company and every officer of the company who
is in default, shall be punishable with fine which may extend to ` 1,00,000 and in
the case of a continuing default, with a further fine which may extend to ` 5,000 for
every day during which the default continues.

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REPORT ON ANNUAL GENERAL MEETING [SECTION 121]

According to Section 121, every listed public company shall prepare a report on
each annual general meeting including the confirmation to the effect that the
meeting was convened held and conducted as per the provisions of the Act and
the rules made thereunder. A copy of the report is to be filed with the Registrar in
Form No. MGT. 15 within thirty days of the conclusion of AGM along with the
prescribed fee. According to Rule 31 of the Companies (Management and
Administration) Rules, 2014, the report shall be prepared in the following manner:
(a) the report under this section shall be prepared in addition to the minutes of
the general meeting;
(b) the report shall be signed and dated by the Chairman of the meeting or in case
of his inability to sign, by any two directors of the company, one of whom shall
be the Managing director, if there is one and company secretary of the company;
(c) the report shall contain the details in respect of the following, namely:-
(i) the day, date, hour and venue of the AGM;
(ii) confirmation with respect to appointment of Chairman of the meeting;
(iii) number of members attending the meeting;
(iv) confirmation of quorum;
(v) confirmation with respect to compliance of the Act and the Rules,
secretarial standards made there under with respect to calling,
convening and conducting the meeting;
(vi) business transacted at the meeting and result thereof;
(vii) particulars with respect to any adjournment, postponement of meeting,
change in venue; and
(viii) any other points relevant for inclusion in the report
♦ Penalty for default : If the company fails to file the report within 30 days of
conclusion of AGM, such company shall be liable to a penalty of one lakh
rupees and in case of continuing failure, with further penalty of five hundred
rupees for each day after the first during which such failure continues, subject
to a maximum of five lakh rupees and every officer of the company who is in
default shall be liable to a penalty which shall not be less than twenty-five
thousand rupees and in case of continuing failure, with further penalty of five

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hundred rupees for each day after the first during which such failure
continues, subject to a maximum of one lakh rupees.
EXTRA-ORDINARY GENERAL MEETINGS [SECTION 100]
All general meetings other than annual general meetings are called
extraordinary general meetings.
Who can call an EGM?
25 &
1. The Board may, whenever it deems fit, call an extraordinary general
26

meeting of the company.

Provided that an extraordinary general meeting of the company, other than
of the wholly owned subsidiary of a company incorporated outside India, shall
be held at a place within India.
2. The Board shall on the requisition of –
(a) In the case of company having a share capital, such number of members
who hold, on the date of receipt of requisition, at least 1/10th of such paid-
up capital of the company as on that date carries the right of voting;
(b) In the case of company not having a share capital, such number of
members who hold, on the date of receipt of requisition, at least 1/10th of
total voting power of all the members having on the said date a right to
vote.
The requisition shall set out the matters for the consideration of which the
meeting is to be called and shall be signed by the requisitionists and sent to
the registered office of the company. The Board must, within 21 days from
the date of receipt of a valid requisition, proceed to call a meeting on a day
not later than 45 days from the date of receipt of such requisition.
3. By requisitionists: Iif the Board does not, within twenty-one days from the
date of receipt of a valid requisition in regard to any matter, proceed to call

25
In case of Specified IFSC Private Company - In sub-section (1) of section 100, the
following proviso shall be inserted, namely:-
“Provided that in case of a Specified IFSC private company, the Board may subject to
the consent of all the shareholders, convene its extraordinary general meeting at any
place within or outside India.”.- Notification Dated 4th January, 2017.
26
In case of Specified IFSC Public Company- In sub-section (1), the following proviso shall
be inserted, namely:- “Provided that in case of a Specified IFSC public company, the Board
may subject to the consent of all the shareholders, convene its extraordinary general
meeting at any place within or outside India.”. Notification Dated 4th January, 2017.

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a meeting for the consideration of that matter on a day not later than forty-
five days from the date of receipt of such requisition, the meeting may be
called and held by the requisitionists themselves within a period of three
months from the date of the requisition. [Sub section (4)]
A meeting under sub-section (4) by the requisitionists shall be called and held
in the same manner in which the meeting is called and held by the Board.
Any reasonable expenses incurred by the requisitionists in calling a meeting
under sub-section (4) shall be reimbursed to the requisitionists by the
company and the sums so paid shall be deducted from any fee or other
remuneration under section 197 payable to such of the directors who were in
default in calling the meeting.
Rule 17 of the Companies (Management and Administration) Rules, 2014 provides
as under with regard to calling of EGM by requisitionists:
(1) The members may requisition convening of an extraordinary general meeting
in accordance with sub-section (4) of section 100, by providing such
requisition in writing or through electronic mode at least clear twenty-one
days prior to the proposed date of such extraordinary general meeting.
(2) The notice shall specify the place, date, day and hour of the meeting and shall
contain the business to be transacted at the meeting.-
Explanation.- For the purposes of this sub-rule, it is here by clarified that
requistionists should convene meeting at Registered office or in the same city
or town where Registered office is situated and such meeting should be
convened on any day except national holiday.
(3) If the resolution is to be proposed as a special resolution, the notice shall be
given as required by sub-section (2) of section 114.
(4) The notice shall be signed by all the requistionists or by a requistionists duly
authorised in writing by all other requistionists on their behalf or by sending
an electronic request attaching therewith a scanned copy of such duly signed
requisition.
(5) No explanatory statement as required under section 102 need be annexed to
the notice of an extraordinary general meeting convened by the requistionists
and the requistionists may disclose the reasons for the resolution(s) which
they propose to move at the meeting.
(6) The notice of the meeting shall be given to those members whose names
appear in the Register of members of the company within three days on

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which the requistionists deposit with the Company a valid requisition for
calling an extraordinary general meeting.
(7) Where the meeting is not convened, the requistionists shall have a right to
receive list of members together with their registered address and number of
shares held and the company concerned is bound to give a list of members
together with their registered address made as on twenty first day from the
date of receipt of valid requisition together with such changes, if any, before
the expiry of the forty-five days from the date of receipt of a valid requisition.
(8) The notice of the meeting shall be given by speed post or registered post or
through electronic mode. Any accidental omission to give notice to, or the
non-receipt of such notice by, any member shall not invalidate the
proceedings of the meeting.
Example 14
1. The Board of directors of Illusions Private Limited, a company registered in
New Delhi, has decided to call an EGM in Madrid, Spain on 2nd October 2018.
Discuss whether the general meeting can be convened on the said date.
No, the meeting cannot be convened in the manner as stated in the facts of
the question. As per Rule 17(2) of the Companies (Management and
Administration) Rules, 2014, the requisitionists should hold the meeting in the
registered office of the company or in the same city or town in which the
registered office is situated and it should be a working day.
2. The members of the Blumove Peacocks Private Limited, holding 1/10th voting
power of the company, requisitioned a meeting on 14th August, 2018 to the
Board of Directors. However, the directors did not pay any heed to such a
requisition and did not call an extra-ordinary meeting. Discuss the
consequences of the contravention of the same in accordance with the
Companies Act, 2013.
Where the Board, after the receipt of the requisition, does not within 21 days
call for a meeting within 45 days of the date of requisition, then the
requisitionists may themselves call and convene the meeting.

14. APPLICABILITY OF THIS CHAPTER TO ONE

PERSON COMPANY [SECTION 122]
(1) The section states that the provisions of section 98 and section 100 to 111
shall not apply to One Person Company.

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(2) The ordinary businesses as mentioned under section 102(2)(a), which a

company is required to transact at an AGM, shall be transacted in the case of
One Person Company, as provided in Sub-section (3).
(3) For the purposes of section 114, any business which is required to be
transacted at an annual general meeting or other general meeting of a
company by means of an ordinary or special resolution, it shall be sufficient
if, in case of One Person Company, the resolution is communicated by the
member to the company and entered in the minutes-book required to be
maintained under section 118 and signed and dated by the member and such
date shall be deemed to be the date of the meeting for all the purposes under
this Act.
(4) Notwithstanding anything in this Act, where there is only one director on the
Board of Director of a One Person Company, any business which is required
to be transacted at the meeting of the Board of Directors of a company, it
shall be sufficient if, in case of such One Person Company, the resolution by
such director is entered in the minutes book required to be maintained
under section 118 and signed and dated by such director and such date shall
be deemed to be the date of the meeting of the Board of Directors for all the
purposes under this Act.

SUMMARY
♦ The Chapter discusses about the registers and returns to be kept and
maintained by the company as per the provisions of the Companies Act, 2013
and the types of meetings to be held in accordance with the Act. It also
discusses the terms relevant to properly convene and conduct the meetings.
♦ Section 89 states that a person holding beneficial interest in the shares of the
company shall intimate the company about it in Form MGT–4/5, as applicable,
and thereafter the company shall intimate the RoC about the interest of
member within 30 days in Form MGT–6.
♦ Section 91 deals with the time limits within which the registers of the
company is allowed to be closed and also mentions the penalty for
contravention of the same. It states that the registers may be closed for a
maximum of 30 days at a time and 45 days in aggregate in a year.
♦ Section 92 provides every company shall file its annual return in Form
No.MGT-7 except One Person Company (OPC) and Small Company. One

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Person Company and Small Company shall file annual return from the
financial year 2020-2021 onwards in Form No.MGT-7A.
♦ Section 92 provides that annual return is to be files after the conclusion of
AGM and specifies the content to be included in the annual return.
♦ The annual return has to be signed by a director of the company and the
Company Secretary; and in case, there is no Company Secretary, by a
Company Secretary in Practice.
♦ For OPC and small company, the annual return shall be signed by the
Company Secretary, or where there is no Company Secretary, by the director
of the company.

♦ It is also provided that the Central Government may prescribe abridged form
of annual return for "One Person Company, small company and such other
class or classes of companies as may be prescribed.”

♦ Section 94 describes that the registers and returns and other documents of the
company shall be kept at the registered office of company. However, they can
also be kept at any other place where more than 1/10th of the total members
reside but the same should be approved by way of a special resolution.

♦ The Act prescribes two types of general meetings that are held within the
company – Annual General Meeting as mentioned in section 96 and Extra-
Ordinary General Meeting as per section 100.

♦ Section 96 discusses about the annual general meeting to be held in a

company every year and prescribes that the AGM shall be held within 6
months from the date of the closing of the financial year and that the gap
between two AGM shall not exceed 15 months.

♦ The AGM shall be held within the business hours and on a working day, i.e.
other than National Holidays.

♦ Listed public companies shall file a report on AGM with the RoC in MGT–15
within 30 days of the AGM.

♦ Section 100 prescribes the provisions for holding the EGM and states that
either the board of directors, or a requisition made to Board by a specific
number of members, are authorised to call an EGM.

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♦ Further the chapter discusses about the notice to be sent to members and
others for calling the meeting and sets out the length of the notice.

♦ Also, the Act describes the Chairman to be appointed for the meetings and
the proxies to be appointed by the member of the meeting.

♦ Section 121 of the Act requires a listed public company to issue a report on
the AGM to be filed with the RoC within 30 days of the conclusion of the
AGM.

TEST YOUR KNOWLEDGE

Question 1
In a General meeting of Alpha Limited, the chairman directed to exclude certain
matters detrimental to the interest of the company from the minutes, Mukesh, a
shareholder contended that the minutes of the meeting must contain fair and correct
summary of the proceedings thereat. Decide, whether the contention of Mukesh is
maintainable under the provisions of the Companies Act, 2013?
Answer
Under Section 118 (5) of the Companies Act, 2013, there shall not be included in
the Minutes of a meeting, any matter which, in the opinion of the Chairman of the
meeting:
(i) is or could reasonably be regarded as defamatory of any person;
(ii) is irrelevant or immaterial to the proceeding; or
(iii) is detrimental to the interests of the company;
Further, under section 118(6) the chairman shall exercise absolute discretion in
regard to the inclusion or non-inclusion of any matter in the Minutes on the
grounds specified in sub-section (5) above.
Hence, in view of the above, the contention of Mukesh, a shareholder of Alpha
Limited is not valid because the Chairman has absolute discretion on the inclusion
or exclusion of any matter in the minutes for aforesaid reasons.
Question 2
A General Meeting was scheduled to be held on 15th April, 2019 at 3.00 P.M. As per
the notice the members who are unable to attend a meeting in person can appoint a
proxy and the proxy forms duly filled should be sent to the company so as to reach

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at least 48 hours before the meeting. Mr. X, a member of the company appoints Mr.
Y as his proxy and the proxy form dated 10-04-2019 was deposited by Mr. Y with the
company at its registered Office on 11-04-2019. Similarly, another member Mr. W
also gives two separate proxies to two individuals named Mr. M and Mr. N. In the
case of Mr. M, the proxy dated 12-04-2019 was deposited with the company on the
same day and the proxy form in favour of Mr. N was deposited on 14-04-2019. All
the proxies viz., Y, M and N were present before the meeting.
According to the provisions of the Companies Act, 2013, who would be the persons
allowed to represent at proxies for members X and W respectively?
Answer
A Proxy is an instrument in writing executed by a shareholder authorizing another
person to attend a meeting and to vote thereat on his behalf and in his absence.
As per the provisions of Section 105 of the Companies Act, 2013, every shareholder
who is entitled to attend and vote has a statutory right to appoint another person
as his proxy. It is not necessary that the proxy be a member of the company. Further,
any provision in the articles of association of the company requiring instrument of
proxy to be lodged with the company more than 48 hours before a meeting shall
have effect as if 48 hours had been specified therein. The members have a right to
revoke the proxy’s authority by voting himself before the proxy has voted but once
the proxy has voted the member cannot retract his authority.
Where two proxy instruments by the same shareholder are lodged of in such a
manner that one is lodged before and the other after the expiry of the date fixed
for lodging proxies, the former will be counted.
Thus, in case of member X, the proxy Y will be permitted to vote on his behalf as
form for appointing proxy was submitted within the permitted time.
However, in the case of Member W, the proxy M (and not Proxy N) will be permitted
to vote as the proxy authorizing N to vote was deposited in less than 48 hours before
the meeting.
Question 3
M. H. Company Limited served a notice of general meeting upon its shareholders. The
notice stated that the issue of sweat equity shares would be considered at such
meeting. Mr. ‘A’, a shareholder of the M. H. Company Limited complains that the
issue of sweat equity shares was not specified fully in the notice. Is the notice issued
by M. H. Company Limited regarding issue of sweat equity shares valid according to
the provisions of the Companies Act, 2013? Explain in detail.

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Answer
Under section 102 (2) (b) of the Companies Act, 2013, in the case of any meeting
other than an Annual General Meeting, all business transacted thereat shall be
deemed to be special business.
Further under section 102 (1) a statement setting out the following material facts
concerning each item of special business to be transacted at a general meeting,
shall be annexed to the notice calling such meeting:
(a) the nature of concern or interest, financial or otherwise, if any, in respect of
each items, of every director and the manager, if any or every other key
managerial personnel and relatives of such persons; and
(b) any other information and facts that may enable members to understand the
meaning, scope and implications of the items of business and to take decision
thereon.
Thus, the objection of the member is valid since the complete details about the
issue of sweat equity should be sent with the notice. The notice is, therefore, not a
valid notice under Section 102 of the Companies Act, 2013.
Question 4
Tulip Ltd. maintains its Register of Members at its registered office in Mumbai. A
group of members residing in Kolkata want to keep the register of members at
Kolkata.
(i) Explain with provisions of Companies Act, 2013, whether the company can keep
the Registers and Returns at Kolkata.
(ii) Does Mr. Rich, holding 400 shares of total worth ` 4000 only, has the right to
inspect the Register of Members?
Answer
(i) Maintenance of the Register of Members etc.: As per section 94(1) of the
Companies Act, 2013, the registers required to be kept and maintained by a
company under section 88 and copies of the annual return filed under section
92 shall be kept at the registered office of the company:
Provided that such registers or copies of return may also be kept at any other
place in India in which more than one-tenth of the total number of members
entered in the register of members reside, if approved by a special resolution
passed at a general meeting of the company.

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So, Tulip Ltd. can also keep the registers and returns at Kolkata after
compliance with the above provisions, provided more than one-tenth of the
total number of members entered in the register of members reside in
Kolkata.
(ii) As per section 94(2) of the Companies Act, the registers and their indices,
except when they are closed under the provisions of this Act, and the copies
of all the returns shall be open for inspection by any member, debenture-
holder, other security holder or beneficial owner, during business hours
without payment of any fees and by any other person on payment of such
fees as may be prescribed.
Accordingly, a director Mr. Rich, who is a shareholder of the company, has a
right to inspect the Register of Members during business hours without
payment of any fees, as per the provisions of this section.
Question 5
Examine the validity of the following with reference to the relevant provisions of the
Companies Act, 2013:
The Board of Directors of Shrey Ltd. called an extraordinary general meeting upon
the requisition of members. However, the meeting was adjourned on the ground that
the quorum was not present at the meeting. Advise the company.
Answer
According to section 100 (2) of the Companies Act 2013, the Board of directors
must convene a general meeting upon requisition by the stipulated minimum
number of members.
As per Section 103 (2) (b) of the Companies Act, 2013, if the quorum is not present
within half an hour from the appointed time for holding a meeting of the company,
the meeting, if called on the requisition of members, shall stand cancelled.
Therefore, the meeting stands cancelled and the stand taken by the Board of
Directors to adjourn it, is not proper.
Question 6
Zorab Limited served a notice of General Meeting upon its members. The notice stated
that a resolution to increase the share capital of the Company would be considered
at such meeting. A shareholder complained that the amount of the proposed increase
was not specified in the notice. Is the notice valid?

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Answer
Under section 102(2)(b) in the case of any meeting other than an AGM, all business
transacted thereat shall be deemed to be special business.
Further under section 102 (1), a statement setting out the following material facts
concerning each item of special business to be transacted at a general meeting,
shall be annexed to the notice calling such meeting, namely:—
(a) the nature of concern or interest, financial or otherwise, if any, in respect of
each items, of:
(i) every director and the manager, if any;
(ii) every other key managerial personnel; and
(iii) relatives of the persons mentioned in sub-clauses (i) and (ii);
(b) any other information and facts that may enable members to understand the
meaning, scope and implications of the items of business and to take decision
thereon.
Thus, the objection of the shareholder is valid since the details on the item to be
considered are lacking. The information about the amount is a material fact with
reference to the proposed increase of share capital. The notice is, therefore, not a
valid notice under Section 102 of the Companies Act, 2013.
Question 7
Examine the validity of the following decisions of the Board of Directors with
reference of the provisions of the Companies Act, 2013.
(i) In an Annual General Meeting of a company having share capital, 80 members
present in person or by proxy holding more than 1/10th of the total voting
power, demanded for poll. The chairman of the meeting rejected the request on
the ground that only the members present in person can demand for poll.
(ii) In an annual general meeting, during the process of poll, the members who
earlier demanded for poll want to withdraw it. The chairman of the meeting
rejected the request on the ground that once poll started, it cannot be
withdrawn.
Answer
Section 109 of the Companies Act, 2013 provides for the demand of poll before or
on the declaration of the result of the voting on any resolution on show of hands.
Accordingly, law says that:-

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Before or on the declaration of the result of the voting on any resolution on show
of hands, a poll may be ordered to be taken by the Chairman of the meeting on his
own motion, and shall be ordered to be taken by him on a demand made in that
behalf:-
(a) In the case a company having a share capital, by the members present in
person or by proxy, where allowed, and having not less than one-tenth of the
total voting power or holding shares on which an aggregate sum of not less
than five lakh rupees or such higher amount as may be prescribed has been
paid-up; and
(b) in the case of any other company, by any member or members present in
person or by proxy, where allowed, and having not less than one tenth of the
total voting power.
Withdrawal of the demand: The demand for a poll may be withdrawn at any time
by the persons who made the demand.
Hence, on the basis on the above provisions of the Companies Act, 2013:
(i) The chairman cannot reject the demand for poll subject to provision in the
articles of company.
(ii) The chairman cannot reject the request of the members for withdrawing the
demand of the Poll.
Question 8
Sirhj, a shareholder, gives a notice for inspecting proxies, five days before the meeting
is scheduled and approaches the company two days before the scheduled meeting for
inspecting the same. What is the legal position relating to his actions as per the
provisions of the Companies Act, 2013?
Answer
Under section 105 (8) of the Companies Act, 2013 every member entitled to vote
at a meeting of the company, or on any resolution to be moved thereat, shall be
entitled during the period beginning twenty-four hours before the time fixed for
the commencement of the meeting and ending with the conclusion of the meeting,
to inspect the proxies lodged, at any time during the business hours of the
company, provided not less than three days’ notice in writing of the intention so to
inspect is given to the company.
In the given case, Sirhj has given proper notice.

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However, such inspection can be undertaken only during the period beginning 24
hours before the time fixed for the commencement of the meeting and ending with
the conclusion of the meeting. So, Sirhj can undertake the inspection only during
the above mentioned period and not two days prior to the meeting.
Question 9
Miraj Limited held its Annual General Meeting on September 15, 2019. The meeting
was presided over by Mr. Venkat, the Chairman of the Company’s Board of Directors.
On September 17, 2019, Mr. Venkat, the Chairman, without signing the minutes of
the meeting, left India to look after his father who fell sick in London. Referring to the
provisions of the Companies Act, 2013, examine the manner in which the minutes of
the above meeting are to be signed in the absence of Mr. Venkat and by whom.
Answer
Section 118 of the Companies Act, 2013 provides that every company shall prepare,
sign and keep minutes of proceedings of every general meeting, including the
meeting called by the requisitionists and all proceedings of meeting of any class of
shareholders or creditors or Board of Directors or committee of the Board and also
resolution passed by postal ballot within thirty days of the conclusion of every such
meeting concerned. Minutes kept shall be evidence of the proceedings recorded in
a meeting.
By virtue of Rule 25 of the Companies (Management and Administration ) Rules 2014
read with section 118 of the Companies Act, 2013 each page of every such book
shall be initialled or signed and the last page of the record of proceedings of each
meeting or each report in such books shall be dated and signed by, in the case of
minutes of proceedings of a general meeting, by the chairman of the same meeting
within the aforesaid period of thirty days or in the event of the death or inability of
that chairman within that period, by a director duly authorized by the Board for the
purpose.
Therefore, the minutes of the meeting referred to in the case given above can be
signed in the absence of Mr Venkat, by any director who is authorized by the Board.
Question 10
Infotech Ltd. was incorporated on 1.4.2018. No General Meeting of the company has
been held till 30.4.2020. Discuss the provisions of the Companies Act, 2013 regarding
the time limit for holding the first annual general meeting of the Company and the
power of the Registrar to grant extension of time for the First Annual General
Meeting.

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Answer
According to Section 96 of the Companies Act, 2013, every company shall be
required to hold its first annual general meeting within a period of 9 months from
the date of closing of its first financial year.
The first financial year of Infotech Ltd is for the period 1st April 2018 to 31st March
2019, the first annual general meeting (AGM) of the company should be held on or
before 31st December, 2019.
The section further provides that the Registrar may, for any special reason, extend
the time within which any annual general meeting, other than the first annual
general meeting, shall be held, by a period not exceeding three months.
Thus, the first AGM of Infotech should have been held on or before 31st December,
2019. Further, the Registrar does not have the power to grant extension to time limit
Question 11
The Articles of Association of DJA Ltd. require the personal presence of 7 members to
constitute quorum of General Meetings. The company has 965 members as on the
date of meeting. The following persons were present in the extra-ordinary meeting to
consider the appointment of Managing Director:
(i) A, the representative of Governor of Uttar Pradesh.
(ii) B and C, shareholders of preference shares,
(iii) D, representing Y Ltd. and Z Ltd.
(iv) E, F, G and H as proxies of shareholders.
Can it be said that the quorum was present in the meeting?
Answer
According to section 103 of the Companies Act, 2013, unless the articles of the
company provide for a larger number in case of a public company, five members
personally present if the number of members as on the date of meeting is not more
than one thousand, shall be the quorum.
In this case the quorum for holding a general meeting is 7 members to be
personally present (higher of 5 or 7). For the purpose of quorum, only those
members are counted who are entitled to vote on resolution proposed to be passed
in the meeting.

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Again, only members present in person and not by proxy are to be counted. Hence,
proxies whether they are members or not will have to be excluded for the purposes
of quorum.
If a company is a member of another company, it may authorize a person by
resolution to act as its representative at a meeting of the latter company, then such
a person shall be deemed to be a member present in person and counted for the
purpose of quorum Where two or more companies which are members of another
company, appoint a single person as their representative then each such company
will be counted as quorum at a meeting of the latter company.
Further the President of India or Governor of a State, if he is a member of a
company, may appoint such a person as he thinks fit, to act as his representative at
any meeting of the company. A person so appointed shall be deemed to be a
member of such a company and thus considered as member personally present.
In view of the above there are only three members personally present.
‘A’ will be included for the purpose of quorum. B & C have to be excluded for the
purpose of quorum because they represent the preference shares and since the
agenda being the appointment of Managing Director, their rights cannot be said
to be directly affected and therefore, they shall not have voting rights. D will have
two votes for the purpose of quorum as he represents two companies ‘Y Ltd.’ and
‘Z Ltd.’ E, F, G and H are not to be included as they are not members but
representing as proxies for the members.
Thus, it can be said that the requirements of quorum has not been met and it shall
not constitute a valid quorum for the meeting.
Question 12
What do you mean by Proxy? Explain the provisions relating to appointment of proxy
under the Companies Act, 2013.
Answer
A proxy is an instrument in writing executed by a share holder authorising another
person to attend a meeting and to vote thereat on his behalf and in his absence.
The term also applies to the person so appointed in such case a proxy is a person
appointed by a member of a company, to attend a meeting of the company and
vote thereat on his behalf.
The various provisions relating to the appointment of a proxy is contained in
section 105 of the Companies Act, 2013 are as under:

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1. Under section 105 (1) any member of a company entitled to attend and vote
at a meeting of the company shall be entitled to appoint another person as
a proxy to attend and vote at the meeting on his behalf.
2. A proxy shall not have the right to speak at such meeting and shall not be
entitled to vote except on a poll. This means that a proxy cannot vote on a
resolution by a show of hands.
3. The Central Government may prescribe a class or classes of companies whose
members shall not be entitled to appoint another person as a proxy.
4. Under section 105 (6) the instrument appointing a proxy shall be in writing;
and be signed by the appointer or his attorney duly authorised in writing or,
if the appointer is a body corporate, be under its seal or be signed by an
officer or an attorney duly authorised by it.
5. Under section 105 (7) an instrument appointing a proxy, if in the form as may
be prescribed, shall not be questioned on the ground that it fails to comply
with any special requirements specified for such instrument by the articles of
a company.
Question 13
Bazaar Limited called its AGM in order to lay down the financial statements for
Shareholders’ approval. Due to want of Quorum, the meeting was cancelled. The
directors did not file the annual returns with the Registrar. The directors were of the
idea that the time for filing of returns within 60 days from the date of AGM would
not apply, as AGM was cancelled. Has the company contravened the provisions of
Companies Act, 2013? If the company has contravened the provisions of the Act, how
will it be penalized?
Answer
According to section 92(4) of the Companies Act, 2013, every company shall file
with the Registrar a copy of the annual return, within sixty days from the date on
which the annual general meeting is held or where no annual general meeting is
held in any year within sixty days from the date on which the annual general
meeting should have been held together with the statement specifying the reasons
for not holding the annual general meeting.
Sub-section (5) of Section 92 also states that if any company fails to file its annual
return under sub-section (4), before the expiry of the period specified therein, such
company and its every officer who is in default shall be liable to a penalty of ten
thousand rupees and in case of continuing failure, with further penalty of one

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hundred rupees for each day during which such failure continues, subject to a
maximum of two lakh rupees in case of a company and fifty thousand rupees in
case of an officer who is in default.
In the instant case, the idea of the directors that since the AGM was cancelled, the
provisions requiring the company to file annual returns within 60 days from the
date of AGM would not apply, is incorrect.
In the above case, the annual general meeting of Bazaar Limited should have been
held within a period of six months, from the date of closing of the financial year
but it did not take place. Thus, the company has contravened the provisions of
section 92 of the Companies Act, 2013 for not filing the annual return and shall
attract the penal provisions along with every officer of the company who is in
default as specified in Section 92(5) of the Act.
Question 14
Madurai Ltd. issued a notice for holding of its Annual general meeting on 7th
November 2019. The notice was posted to the members on 16th October 2019. Some
members of the company allege that the company had not complied with the
provisions of the Companies Act, 2013 with regard to the period of notice and as such
the meeting was valid. Referring to the provisions of the Act, decide:
(i) Whether the meeting has been validly called?
(ii) If there is a shortfall, state and explain by how many days does the notice fall
short of the statutory requirement?
(iii) Can the delay in giving notice be condoned?
Answer
According to section 101(1) of the Companies Act, 2013, a general meeting of a
company may be called by giving not less than clear twenty-one days' notice either
in writing or through electronic mode in such manner as may be prescribed.
Also, it is to be noted that 21 clear days mean that the date on which notice is
served and the date of meeting are excluded for sending the notice.
Further, Rule 35(6) of the Companies (Incorporation) Rules, 2014, provides that in
case of delivery by post, such service shall be deemed to have been effected - in
the case of a notice of a meeting, at the expiration of forty eight hours after the
letter containing the same is posted.

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Hence, in the given question:

(i) A 21 days’ clear notice must be given. In the given question, only 19 clear
days’ notice is served (after excluding 48 hours from the time of its posting
and the day of sending and date of meeting). Therefore, the meeting was not
validly called.
(ii) As explained in (i) above, notice falls short by 2 days.
(iii) The Companies Act, 2013 does not provide anything specific regarding the
condonation of delay in giving of notice. Hence, the delay in giving the notice
calling the meeting cannot be condoned.
Question 15
KMN Ltd. scheduled its Annual General Meeting to be held on 11th March, 2020 at
11:00 A.M. The company has 900 members. On 11th March, 2020 following persons
were present by 11:30 A.M.
1. P1, P2 & P3 shareholders
2. P4 representing ABC Ltd.
3. P5 representing DEF Ltd.
4. P6 & P7 as proxies of the shareholders
(i) Examine with reference to relevant provisions of the Companies Act,
2013, whether quorum was present in the meeting.
(ii) What will be your answer if P4 representing ABC Ltd., reached in the
meeting after 11:30 A.M.?
(iii) In case lack of Quorum, discuss the provisions as applicable for an
adjourned meeting in terms of date, time & place.
What happens if there is no Quorum in the Adjourned meeting?
Answer
According to section 103 of the Companies Act, 2013, unless the articles of the
company provide for a larger number, the quorum for the meeting of a Public
Limited Company shall be 5 members personally present, if number of members is
not more than 1000.

(i) (1) P1, P2 and P3 will be counted as three members.

(2) If a company is a member of another company, it may authorize a

person by resolution to act as its representative at a meeting of the

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 7.84 CORPORATE AND OTHER LAWS

latter company, then such a person shall be deemed to be a member

present in person and counted for the purpose of quorum. Hence, P4
and P5 representing ABC Ltd. and DEF Ltd. respectively will be counted
as two members.

(3) Only members present in person and not by proxy are to be counted.
Hence, proxies whether they are members or not will have to be
excluded for the purposes of quorum. Thus, P6 and P7 shall not be
counted in quorum.

In the light of the provision of the Act and the facts of the question, it can be
concluded that the quorum for Annual General Meeting of KMN Ltd. is 5
members personally present. Total 5 members (P1, P2, P3, P4 and P5) were
present. Hence, the requirement of quorum is fulfilled.

(ii) The section further states that, if the required quorum is not present within
half an hour, the meeting shall stand adjourned for the next week at the same
time and place or such other time and place as decided by the Board of
Directors.

Since, P4 is an essential part for meeting the quorum requirement, and he

reaches after 11:30 AM (i.e. half an hour after the starting of the meeting), the
meeting will be adjourned as provided above.

(iii) In case of lack of quorum, the meeting will be adjourned as provided in

section 103.
In case of the adjourned meeting or change of day, time or place of meeting,
the company shall give not less than 3 days' notice to the members either
individually or by publishing an advertisement in the newspaper.
(iv) Where quorum is not present in the adjourned meeting also within half an
hour, then the members present shall form the quorum.

© The Institute of Chartered Accountants of India

CHAPTER 8

DECLARATION
AND PAYMENT OF
DIVIDEND

LEARNING OUTCOMES
At the end of this chapter, you will be able to:
 Understand the legal provisions relating to declaration and
payment of dividend
 Learn about the conditions which need to be fulfilled before
declaring dividend out of accumulated reserves.
 Appreciate the manner in which unpaid and unclaimed
dividend is to be dealt with.
 Understand the nature and framework of the Investor
Education and Protection Fund (IEPF).
 Appreciate the consequences for failure to distribute
dividend.

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 8.2 CORPORATE AND OTHER LAWS

Dividend

Meaning of Declaration of IEPF Punishment

Dividend Dividend [Sec. Unpaid/ [Sec. 125] for failure to
[Sec. 2(35] 123 & Unclaimed distribute
Companies Dividend dividend
Establisment
Types of (Declaration and [Sec. 124] within 30
of Fund
Dividend Payment of days [Sec.
Dividend) Rules, 127]
2014]
Interim Credits to the
Dividend Fund and Exemptions
Current Year
profits Utilization of
Final Fund
Dividend
Past Year
profits

1. MEANING OF DIVIDEND
Definition
Section 2(35) of the Companies Act, 2013, while defining the term dividend simply
states that “dividend” includes any interim dividend.
This definition, instead of explaining the term merely enlarges its scope by
including ‘interim dividend’ in its fold.
Dividend is the shareholders return on
their investment / capital in the company.
Dividend is part of the distributable profits
which has been paid out to them. In simple
words, it is a distribution of profits i.e. a
portion of profits earned and allocated as
payable to the shareholders whenever
declared.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.3

The company in general meeting may declare dividends, but no dividend shall
exceed the amount recommended by the Board. (Clause 80 of Table F in Schedule I)
Dividend is recommended by Board of Directors in the Board’s Report 1 and
approved by Shareholders at the Annual General Meeting. Dividend is not a
liability unless it is declared by the shareholders at a validly constituted general
meeting by passing an ordinary resolution 2 at the rates recommended by the
Board or such lower rates as they may decide.
Declaration of dividend by the company at a rate higher than the rate
recommended by the Board is not permitted.
Dividend is Declared as a proportion of Nominal or Face Value of a share.
Example 1: AB Ltd. has issued equity shares having face value of ` 10 per share.
The shares are currently quoting on the NSE at ` 250/- per share. The Company at
its AGM held on 27.7.20 has declared a dividend of 20%. Mr. Shekar owns 1000
shares which he purchased at ` 300/- per share. What is the amount of dividend
he will receive?
The dividend is to be calculated on Face Value i.e. ` 10/-. So dividend per share is
20% of ` 10/- = ` 2/- per share. So Mr. Shekar will receive ` 2 * 1000 shares =
` 2000/-.
Example 2: The shareholders at an annual general meeting unanimously passed a
resolution for payment of dividend at a rate higher than that recommended by
the directors. Discuss the validity of the resolution.
Articles of Association companies usually contain provisions with regard to
declaration of dividend on the pattern of regulations 80 to 85 of Table F to
Schedule I of the Companies Act, 2013. Under regulation 80, the power to declare
a dividend vests with the general meeting but not even all the shareholders have
the power to declare a dividend exceeding the amount recommended by the
Board of Directors.

1
As per Section 134 (3) (k).
2
As per section 102 (2) declaration of any dividend at the AGM is an ordinary business
requiring ordinary resolution. At any other general meeting it will be special business.

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 8.4 CORPORATE AND OTHER LAWS

2. TYPES OF DIVIDEND
I. Classification based on time i.e. when declared

Dividend

Interim Dividend Final Dividend

Interim Dividend

Section 123 (3) and also section 123 (4) contain provisions regarding interim
dividend. Following points are noteworthy:

♦ Interim dividend may be declared by the Board of Directors at any time

during the period from closure of financial year till holding of the annual
general meeting.
The declaration of interim dividend is done out of profits before the final
adoption of the accounts by the shareholders and therefore, interim
dividend is said to be declared and paid between two AGMs.
♦ The sources for declaring interim dividend include:
• Surplus in the profit and loss account; or
• Profits of the financial year in which such dividend is sought to be
declared; or
• Profits generated in the financial year till the quarter preceding the
date of declaration of the interim dividend.
♦ Declaration of interim dividend shall be ratified at the ensuing AGM by the
members.
♦ If the company has incurred loss during the current financial year up to the
end of the quarter immediately preceding the date of declaration of interim
dividend, such interim dividend shall not be declared at a rate higher than
the average (rate of) dividend declared by the company during the
immediately preceding three financial years.
Example 3: If a company declared dividend at the rate of 16% during the
immediately preceding three financial years, then in case the company

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 DECLARATION AND PAYMENT OF DIVIDEND 8.5

incurs loss in the current financial year, it is permitted to declare interim

dividend at a rate which is not higher than 16%.
♦ The amount of the dividend, including interim dividend, shall be deposited
in a separate account maintained with a scheduled bank within five days
from the date of declaration.
♦ All provisions which are applicable to the payment of dividend shall also
apply in case of interim dividend.
Final Dividend
♦ When the dividend is declared at the Annual General Meeting of the
company, it is known as ‘final dividend’.
♦ The rate of dividend recommended by the Board cannot be increased by the
members.
The table given below provides a quick summary of the above concepts of Interim
Dividend and Final Dividend.
BASIS FOR INTERIM DIVIDEND FINAL DIVIDEND
COMPARISON
Definition Interim dividend is declared Final dividend is the
and paid during an accounting dividend recommended by
year, i.e. before the finalization the board of directors, and
of accounts for the year. approved by shareholders
at the company's Annual
General Meeting, after the
close of financial year.
Announcement Announced by Board of Recommended by Board of
Directors. Directors and approved by
shareholders.
Time of Before preparation of financial After preparation of
Declaration statements. financial statements.
Revocation It can be revoked with the It cannot be revoked.
consent of all shareholders.
Provision in It is declared only when the It does not require any
Articles of articles specifically permit the specific provision in the
Association declaration. articles.

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 8.6 CORPORATE AND OTHER LAWS

II. Classification based on Nature of Shares does not require any specific
provision in the articles.
Dividend
Cumulative
accumulates
Preference
unless it is paid
Shares
in full
Preference
Shares Non-
No arrears of
cumulative
dividend in
Preference
future is payable
Shares Shares

Dividend dependent on dividend

Equity policy and the availability of
Shares profits after satisfying the rights
of preference shareholders.

Shares can be classified into two categories i.e. preference shares and equity shares.
The manner of payment of dividend is dependent upon the nature of shares.
(i) Preference Shares: According to Section 43 of the Companies Act, 2013,
shareholders holding preference shares are assured of a preferential
dividend at a fixed rate during the life of the company.
Preference dividend unless otherwise agreed is Non-cumulative in nature
and need not be paid in any year where there is deficiency of profits.
Classification of preference shares on the basis of payment of dividend is as
follows:
(a) Cumulative Preference Shares: A cumulative preference share is one
in respect of which dividend gets accumulated and any arrears of such
dividend arising due to insufficiency of profits during the current year
is payable from the profits earned in the later years. Until and unless
dividend on cumulative preference shares is paid in full, including
arrears, if any, no dividend is payable on equity shares.
(b) Non-cumulative Preference Shares: A non-cumulative preference
share is one where the dividend is payable only in a year of profit.
There is no accumulation of profit as in the case of cumulative
preference shares. In case no dividend is declared in a year due to any
reason, the right to receive such dividend for that year expires and the
holder of such a share is not entitled to be paid arrears of dividend
out of future years .

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 DECLARATION AND PAYMENT OF DIVIDEND 8.7

(ii) Equity Shares: Equity shares are those shares, which are not preference
shares. It means that they do not enjoy any preferential rights in the matter
of payment of dividend or repayment of capital. The rate of dividend on
equity shares is recommended by the Board of Directors and may vary from
year to year. Rate of dividend depends upon the dividend policy and the
availability of profits after satisfying the rights of preference shareholders.

3. PROVISIONS REGARDING DECLARATION

AND PAYMENT OF DIVIDEND
A. Sources for Declaration of Dividend
According to Section 123 (1), the dividend for any financial year shall be declared
or paid from the following sources:

(a) Profits of the current financial year- Profits arrived at after providing for
depreciation in accordance with Schedule II 3.
(b) Profits of any previous financial year or years- Profits of any previous
financial year(s) arrived at after providing for depreciation in accordance
with Schedule II and remaining undistributed i.e. credit balance in profit and
loss account and free reserves. It is to be noted that only free reserves 4 and
no other reserves are to be used for declaration or payment of dividend 5.
(c) Both (a) and (b).
(d) Provision of money by the Government- Money provided by the Central
Government or a State Government for the payment of dividend by the
company in pursuance of a guarantee given by that Government.

3
As per Section 123 (2).
4
Section 2 (43) defines the term ‘free reserves’ to mean such reserves which, as per the latest
audited balance sheet of a company, are available for distribution as dividend. However,
following items shall not be treated as free reserves:
(a) any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise; or
(b) any change in carrying amount of an asset or of a liability recognised in equity, including
surplus in profit and loss account on measurement of the asset or the liability at fair
value.
5
As per Third Proviso to Section 123 (1).

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 8.8 CORPORATE AND OTHER LAWS

Note 1: Before declaration of any dividend, carried over previous losses and
depreciation not provided in previous year or years are required to be set
off against profit of the company for the current year 6.
Note 2: In computing profits any amount representing unrealised gains,
notional gains or revaluation of assets and any change in carrying amount
of an asset or of a liability on measurement of the asset or the liability at
fair value shall be excluded 7.
Note 3: Capital profits are not same as distributable profits because they
are not earned in the normal course of business; and therefore, normally not
available for distribution as dividend.
Need for providing for depreciation out of profits before declaring
dividend
Dividend is an apportionment from revenue profits. Therefore, dividend
should never be declared out of capital. This is also the reason for
prohibition on issue of shares at a discount which you studied in the topic
Share Capital and Debentures.
"Depreciation" is a notional estimate of the reduction in the value of an
asset due to
i. wear and tear,
ii. efflux of time,
iii. improvements in technology etc.
If depreciation is not provided for there will be two consequences:
i. The value of the asset will be overstated in Balance Sheet
ii. The profits of the current year will be overstated.
Let us take a hypothetical case where a company declares all the profits
earned during any year as dividend.
At the time of winding up of the company the value of assets appearing in
the Balance-sheet would appear to be sufficient to repay the capital of the
shareholders but the actual realizable value thereof will be a paltry sum
which may not be sufficient even to meet the expenses of winding up.

6
As per Fourth Proviso to Section 123 (1).
7
As per Proviso to Section 123 (1) (a).

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 DECLARATION AND PAYMENT OF DIVIDEND 8.9

This is because the company has failed to retain the amount of wear and
tear in the value of the asset by way of provision for depreciation. In a way
the company would have declared dividend out of capital, which is
prohibited.
Hence the law mandates provision for depreciation out of profits before
declaration of dividend.
Example 4: Shreyas Mechanics Limited owns a plot of land which was
purchased long before. As the property rates are going up, it is decided to
revalue the plot at fair value which is moderately ten times the original
price, thus resulting in a revaluation profit of ` 20,00,000. The Board of
Directors is keen to utilize this ` 20,00,000 along with free reserves of
` 24,00,000 for declaration of dividend at the forthcoming Annual General
Meeting (AGM) to be held on 28th September, 2019. But according to
Proviso to Section 123 (1) (a), the amount of ` 20,00,000 cannot be
considered as it does not form part of Free Reserves as the same cannot be
utilized towards declaration of dividend.
B. Transfer to Reserves
Transfer of profits to reserves for any financial year has been left to the discretion of
the company. Therefore, a company is free to transfer any portion of its profit to
reserves as it may deem fit. It may also decide not to transfer any amount to reserves.
Example 5: For the current year, Alma Watches Limited proposes to transfer more
than 10% of its profits to the reserves before declaration of dividend at the rate of
12%. Can the company do so?
Answer: The amount to be transferred to reserves out of profits for any financial
year before the declaration of dividend has been left to the discretion of the
company. Therefore, Alma Watches Limited is free to transfer any part of its
profits to reserves as it may deem fit.
Example 6: Brix Shipyards Limited has earned a profit of ` 1,000 crores for the
financial year 2018-19. It has proposed a dividend @ 8.75%. However, it does not
intend to transfer any amount to the reserves out of the profits earned. Can the
company do so?
Answer: The amount to be transferred to reserves out of profits for any financial
year has been left to the discretion of the company. The company is free to
transfer any part of its profits to reserves as it may deem fit or it may even not
transfer any profits to reserve if it is deemed appropriate before the declaration

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 8.10 CORPORATE AND OTHER LAWS

of dividend. Thus, Brix Shipyards Limited is justified in its action if it does not
transfer any amount of profits to the reserves.
C. Declaration of Dividend when there is inadequacy or Absence of
Profits (Second Proviso to Sec. 123)

Where in any year there are no adequate profits for declaring dividend, the
company may declare dividend out of the profits of any previous year transferred
by it to the free reserves only in accordance with the procedure laid down in Rule
3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.
Free Reserves 8means such reserves which, as per the latest audited balance sheet
of a company, are available for distribution as dividend:

The following shall not be treated as free reserves;

Any amount representing unrealized gains, notional gains or revaluation of assets,

whether shown as a reserve or otherwise, or

Any change in carrying amount of an asset or of a liability recognized in equity,

including surplus in profit and loss account on measurement of the asset or the
liability at fair value.
Under Rule 3 such declaration shall be subject to the following conditions:

CONDITION I
The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by the company in the immediately preceding three years.

Rate of Dividend ≤ (RD1 +RD2 + RD3)/3

Where, RD1, RD2, RD3 are rates at which dividend was declared by the company in
the immediately preceding three years.

However, this condition shall not apply if the company has not declared any
dividend in each of the three preceding financial year.
CONDITION II
The total amount to be drawn from such accumulated profits shall not exceed 10% of
its paid-up share capital and free reserves as appearing in the latest audited financial
statement. In other words:

8
Section 2 (43)

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 DECLARATION AND PAYMENT OF DIVIDEND 8.11

Total amount that can be drawn from ≤ 10% of (paid up

accumulated profits
share capital + free reserves)

The amount so drawn shall first be utilised to set off the losses incurred in the
financial year in which dividend is declared and only thereafter, any dividend in
respect of equity shares shall be declared.
CONDITION III
The balance of reserves after such withdrawal shall not fall below 15% of its paid up
share capital as appearing in the latest audited financial statement.

Free Reserves – Amount drawn for >= 15 % of paid up share capital

payment of dividend

It may be noted that all the above three conditions have to be satisfied.
The conditions prescribed by Rule 3 are not applicable to a Government company in
which the entire paid up share capital is held by the Central Government, or by any
Stale Government or Governments or by the Central Government and one or more
State Governments (vide Notification No. 463 (E), dated 05-06-2015).
Example 7: Capricorn Industries Limited has a paid-up capital of ` 200 lakhs and
accumulated Reserves of ` 240 lakhs. Loss for the year ending 31st March 2020 is
` 30 Lakhs. Dividend was declared at the following rates during the three years
immediately preceding.
Year 1 9%
Year 2 10%
Year 3 12%
What is the maximum rate at which the company can declare dividend for the current
year?
Answer: In the given case, Capricorn Industries Limited has not made adequate
profits during the current year ending on 31st March, 2020, but it still wants to
declare dividend. Let us apply the conditions:
Condition I:
9 + 10 + 12
Average rate= 10.3%
3

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 8.12 CORPORATE AND OTHER LAWS

Therefore, the rate of dividend shall not exceed 10.3%.

i.e. 10.3% of Paid up Capital i.e. ` 200 lakhs = ` 20.6 lakhs
Condition II:
Paid-up capital + Free reserves = ` (200+240) Lakhs
(Assuming all reserves are free)= ` 440 Lakhs
10% thereof = ` 44 Lakhs
Less: loss for the year = ` 30 Lakhs
Amount available = ` 14 Lakhs
Hence the quantum of dividend is further restricted to ` 14 lakhs.
Condition III:
Accumulated Reserves ` 240 Lakhs
Proposed withdrawal declaration of dividend ` 14 Lakhs
Balance of Reserves ` 226 Lakhs
This is more than 15% of paid-up capital (i.e 15% of ` 200 Lakhs) i.e. ` 30 lakhs.
Thus, the company can declare a dividend of ` 14 lakhs i.e. at a rate of 7% on its
paid-up capital of ` 200 lakhs.
Example 8: Shipra Sugar Mills Limited has been regularly declaring dividend at the
rate of 20% on its equity shares for the past 3 years. However, the company has not
made adequate profits during the current year ending on 31st March, 2020, but it
has got adequate free reserves which can be utilized for maintaining the rate of
dividend at 20%.
Advise the company as to how it should proceed in the matter if it wants to declare
dividend at the rate of 20% for the year 2019-20, as per the provisions of the
Companies Act, 2013.
Answer: The company can declare a dividend out of its Accumulated Free Reserves
subject to satisfaction of the following conditions:
• The total amount to be drawn from free reserves shall not exceed 10% of its
paid-up share capital and free reserves as per the latest audited financial
statement.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.13

• The amount so drawn shall first be utilised to set off the losses incurred in
the current financial year and only thereafter, dividend at 20% shall be
declared.
• After such withdrawal from free reserves, the residual reserves shall not fall
below 15% of its paid-up share capital as per the latest audited financial
statement.
The company is advised to get the desired dividend recommended by the Board of
Directors and propose the same for the approval of the members at the ensuing
Annual General Meeting as the authority to declare dividend lies with the members
of the company.
D. Depositing of Amount of Dividend
In terms of section 123(4), the amount of the dividend (including interim
dividend), shall be deposited in a separate account maintained with a scheduled
bank. This is to be done within 5 days from the date of declaration of dividend 9.
Example 9: The authorised and paid-up share capital of Avantika Ayurvedic
Products Limited is ` 50.00 lacs divided into 5,00,000 equity shares of ` 10 each.
At its Annual General Meeting (AGM) held on 24th September, 2019, the company
declared a dividend of ` 2 per share by passing an ordinary resolution. The
amount of dividend must be deposited in a scheduled bank in a separate account
latest by 29th September, 2019.
E. Payment of Dividend
Section 123(5) contains provisions regarding payment of dividend. These are
stated as under:
(a) Dividend shall be payable only to the registered shareholder or to his
order or to his banker.
In case a shareholder informs the company to pay dividend to a particular
banker and if the payment is so made by the company, then it shall be
deemed to be made to the shareholder himself.
A purchaser of shares whose name is not entered in the Register of
Members cannot claim payment of dividend to him though he might have

9
In terms of Notification No. 463 (E), dated 05-06-2015, this requirement shall not apply
to a Government Company in which the entire paid up share capital is held by the Central
Government, or by any State Government or Governments or by the Central Government
and one or more State Governments or by one or more Government Company.

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 8.14 CORPORATE AND OTHER LAWS

made full payment to the seller of shares. In this regard we will, later in this
chapter, see Section 126 which provides for keeping of dividend etc., in
abeyance pending registration of transfer of shares, unless the registered
holder has authorized the company to pay the dividend to the purchaser.
Example 10:
The Directors of East West Limited proposed dividend at 15% on equity shares
for the financial year 2017-2018. The company announced 28th September
2018 as the record date for payment of dividend. The dividend was approved
in the Annual General Meeting held on 30th September 2018.
Mr. Binoy was the holder of 2000 equity of shares on 31st March, 2018, but he
transferred the shares to Mr. Mohan, whose name has been entered in the
register of members on 18th June, 2018. Who will be entitled to the above
dividend?
Answer: According to section 123, dividend shall be paid by a company
only to the registered shareholder of such share.
Record date is the date announced by the company for determining
entitlement to dividend. All those persons whose name is included in the
register of members on that date shall be entitled to dividend.
In the instant case, on the date announced by the company as the record
date, Mr. Mohan’s name is present in the register of members (i.e. Mr.
Binoy’s name is NOT present therein). Therefore, the dividend should be
paid to Mr. Mohan who is the registered shareholder on the record date.
Example 11: The Board of Directors of Som Mechanical Toys Limited
proposed a dividend at 12% on equity shares for the financial year 2019-20.
The same was approved at the Annual General Meeting of the company
held on 25th June, 2020.
Mr. Nitin Jha was holding 1,000 equity shares as on 31st March, 2020, but
the same were transferred by him to Mr. Raj, whose name was registered on
20th April, 2020 in the Register of Members. State as to who will be entitled
to the dividend declared by the company.
Answer: According to section 123(5), dividend shall be payable only to the
registered shareholder of the shares or to his order or to his banker. Facts in
the given case state that Mr. Nitin Jha, the holder of equity shares
transferred his shares to Mr. Raj whose name was registered on 20th April,

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 DECLARATION AND PAYMENT OF DIVIDEND 8.15

2020. Since, Mr. Raj became the registered shareholder before the
declaration of the dividend in the Annual General Meeting of the company
held on 25th June, 2020, he will be entitled to the dividend.
Note: In terms of Section 51, a company may, if so authorised by its articles,
pay dividend in proportion to the amount paid-up on each share. Suppose,
some of the shareholders have paid only ` 5 (face value ` 10) on each share
held by them. In case of declaration of dividend at the rate of ` 5 per share,
the company, if authorised by its articles, shall be justified in paying
dividend of ` 2.50 per share in respect of such partly paid shares.
(b) Dividends are payable in cash and not in kind. Dividends that are
payable to the shareholders in cash may also be paid by cheque or
dividend warrant or through any electronic mode.
Section 127 requires that the declared dividend must be paid to the entitled
shareholders within the prescribed time limit of thirty days from the date of
declaration of dividend. In case dividend is paid by issuing dividend
warrants, such warrants must be posted at the registered addresses within
the prescribed time. Once posted, it is immaterial whether the same are
received within thirty days by the shareholders or not.
Note: Dividends shall be paid only in cash. The exception to this is the
capitalization of profits or reserves of a company for the purpose of issuing
fully paid-up bonus shares or paying up any amount for the time being unpaid
on any shares held by the members of the company 10.
But you may note that while Declaration of dividend does not affect the
company’s power to issue fully paid up bonus shares, such shares cannot be
issued in lieu of dividend.
(c) Applicability of Section 123 (5) to Nidhis: In terms of Notification No. GSR
465 (E), dated 05-06-2015, this sub-section shall apply to the Nidhis, subject
to the modification that any dividend payable in cash may be paid by
crediting the same to the account of the member, if the dividend is not
claimed within 30 days from the date of declaration of the dividend.

10
First Proviso to Section 123 (5)

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 8.16 CORPORATE AND OTHER LAWS

Payment of dividend

Payable in Payable to Nidhis

Cash
the registered
shareholder of any dividend payable in cash may be
cheque the share, or paid by crediting the same to the
account of the member, if the
warrant dividend is not claimed within 30
to his order, days from the date of declaration of
or the dividend.
any electronic
mode
to his banker

F. Prohibition on Declaration of Dividend

In the following cases declaration and payment of dividend is prohibited.
(i) Prohibition in case of any Defaulting Company:11 A company which fails to
comply with the provisions of section 73 (Prohibition on acceptance of deposits
from public) and section 74 (Repayment of deposits, etc., accepted before the
commencement of this Act of 2013) shall not, so long as such failure continues,
declare any dividend on its equity shares.
(ii) Prohibition in case of Section 8 Companies:
According to section 8 (1), a company having
licence under Section 8 (Formation of
companies with charitable objects, etc.) is
prohibited from paying any dividend to its
members. Its profits are intended to be applied
only in promoting the objects for which it is formed.

4. UNPAID DIVIDEND ACCOUNT (UDA)

Section 124 of the Act contains the provisions relating to Unpaid Dividend
Account (UDA). These are as follows:
(i) Unpaid or Unclaimed Dividend to be transferred to the Unpaid
Dividend Account- Where a dividend has been declared by a company but has
not been paid or claimed within thirty (30) days from the date of declaration, the

11
Section 123 (6)

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 DECLARATION AND PAYMENT OF DIVIDEND 8.17

company shall, within seven (7) days from the expiry of the said period of 30 days,
transfer the total amount of unpaid or unclaimed dividend to a special account
called the Unpaid Dividend Account (UDA). The UDA shall be opened by the
company in any scheduled bank.
(ii) Preparing of Statement of the Unpaid Dividend- Within 90 days of
transferring any amount to the Unpaid Dividend Account, the company shall
prepare a statement containing the names, last known addresses and the amount
of unpaid dividend to be paid to each person and place such statement on its
web-site, if any, and also on any other web-site approved by the Central
Government for this purpose.
(iii) Payment of Interest if default is made in transferring the Amount- If
any default is made in transferring the total unpaid dividend amount or any part
thereof to the Unpaid Dividend Account, the company shall pay, from the date of
such default, interest at the rate of twelve per cent per annum on the amount not
so transferred to the said account. The interest accruing on such amount shall
ensure i.e. be available to the benefit of the members of the company in
proportion to the amount remaining unpaid to them.
(iv) Claimant to apply for payment of Claimed Amount- Any person claiming
to be entitled to any money transferred to the Unpaid Dividend Account may
apply to the company concerned for payment of the money so claimed.
(v) Transfer of Unclaimed Amount to Investor Education and Protection
Fund (IEPF)- Any money transferred to the Unpaid Dividend Account which
remains unpaid or unclaimed for seven (7) years from the date of such transfer
shall be transferred by the company along with interest accrued thereon to the
Investor Education and Protection Fund.
Further, the company shall send a prescribed statement containing the details of
such transfer to the IEPF Authority and in turn, the Authority shall issue a receipt
to the company as evidence of such transfer.
(vi) Transfer of Shares to IEPF- All shares in respect of which dividend has not
been paid or claimed for 7 consecutive years or more shall be transferred by the
company in the name of Investor Education and Protection Fund along with a
statement containing the prescribed details.
By way of Explanation, it is clarified that in case any dividend is paid or claimed
for any year during the said period of seven consecutive years, the share shall not
be transferred to Investor Education and Protection Fund.

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 8.18 CORPORATE AND OTHER LAWS

(vii) Right of Owner of ‘transferred shares’ to Reclaim- Any claimant of shares

so transferred to IEPF shall be entitled to reclaim the ‘transferred shares’ from
Investor Education and Protection Fund in accordance with the prescribed
procedure and on submission of prescribed documents.
(viii) Punishment for Contravention- If a company fails to comply with any
of the requirements of this section, such company shall be liable to a penalty
of one lakh rupees and in case of continuing failure, with a further penalty of
five hundred rupees for each day after the first during which such failure
continues, subject to a maximum of ten lakh rupees and every officer of the
company who is in default shall be liable to a penalty of twenty-five
thousand rupees and in case of continuing failure, with a further penalty of
one hundred rupees for each day after the first during which such failure
continues, subject to a maximum of two lakh rupees.

Declared Dividend

30 Days

Dividend Not Paid/ Claimed

7 Days

Deposit the unpaid/ unclaimed If not done Pay Interest @

dividend amount in Scheduled Bank 12% p.a. (from the
(Called Unpaid Dividend Account) date of default)

90 Days
Prepare Statement (Name, Last known
address, Unpaid dividend amount)

Place on
Website of Website approved by
Company Govt. for this purpose

After the expiry of 7 Years

Transfer unpaid/unclaimed dividend along with interest to

IEPF

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 DECLARATION AND PAYMENT OF DIVIDEND 8.19

5. INVESTOR EDUCATION AND PROTECTION

FUND (IEPF)
Section 125 of the Act along with various Rules framed from time to time
including 12Investor Education and Protection Fund Authority (Accounting, Audit,
Transfer and Refund) Rules, 2016 deal with the Investor Education and Protection
Fund (IEPF). This fund, being established by the Central Government, shall be
credited with specified amounts and utilized for refund of unclaimed and unpaid
amounts, promotion of investors’ awareness and protection of the interests of
investors, etc.
The relevant provisions are discussed below:
1. Credit of Specified Amounts to the Fund: Following specified amounts
shall be credited to the Fund:
(a) Amount given by the Central Government- The amount given by the
Central Government by way of grants after due appropriation made by
Parliament;
(b) Donations by the Central Government- Donations given by the Central
Government, State Governments, companies or any other institution for the
purposes of the Fund;
(c) Amount lying in the Unpaid Dividend Account- The amount lying in the
Unpaid Dividend Account (UDA) of companies which is transferred by them
to the Fund under section 124(5);
(d) Amount in the General Revenue Account of the Central Government-
The amount in the General Revenue Account of the Central Government
which had been transferred to that account under section 205A(5) of the
Companies Act, 1956 as it stood immediately before the commencement of
the Companies (Amendment) Act, 1999 and remaining unpaid or unclaimed
on the commencement of the Act of 2013;
(e) Amount in IEPF- The amount lying in the Investor Education and Protection
Fund under section 205C of the Companies Act, 1956;
(f) Income from Investments- The interest or other income received out of
investments made from the Fund;

12
Notified vide Notification No. GSR 854 (E), dated 05.09.2016 w.e.f. 07.09.2016.

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 8.20 CORPORATE AND OTHER LAWS

(g) Amount received through disgorgement or disposal of Securities- The

amount received under section 38(4) i.e. amount received through
disgorgement 13or disposal of securities seized from a person who has been
convicted for personation for acquisition of securities as provided in
section 38(3);
(h) Application Money- The application money received by companies for
allotment of any securities and due for refund (only if such amount has
remained unclaimed and unpaid for a period of seven years from the date it
became due for payment);
(i) Matured Deposits- Matured deposits with companies other than banking
companies (only if such amount has remained unclaimed and unpaid for a
period of seven years from the date it became due for payment);
(j) Matured Debentures- Matured debentures with companies (only if such
amount has remained unclaimed and unpaid for a period of seven years
from the date it became due for payment);
(k) Interest- Interest accrued on the amounts referred to in clauses (h) to (j);
(l) Amount received from Sale Proceeds- Amount received from sale
proceeds of fractional shares arising out of issuance of bonus shares,
merger and amalgamation for seven or more years;
(m) Redemption Amount- Redemption amount of preference shares remaining
unpaid or unclaimed for seven or more years; and
(n) Other Amounts- Such other amounts as prescribed in Rule 3 of the Investor
Education and Protection Fund Authority (Accounting, Audit, Transfer and
Refund) Rules, 2016. They are as under:
(a) all amounts payable as mentioned in clause (a) to (n) of section 125
(2) of the Act [as stated above];
(b) all shares in accordance with section 124 (6) i.e. all those shares in
whose case dividends have not been claimed or paid for seven
consecutive years or more;
(c) all the resultant benefits arising out of shares held by the Authority
under clause (b) above;

13
Disgorgement is the legally enforced repayment of ill-gotten gains imposed on wrongdoers
by the courts. Funds that were received through illegal or unethical business transactions are
disgorged, or paid back, often with interest and/or penalties to those affected by the action.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.21

(d) all grants, fees and charges received by the Authority under these
rules;
(e) all sums received by the Authority from such other sources as may be
decided upon by the Central Government;
(f) all income earned by the Authority in any year;
(g) all amounts payable as mentioned in sub-section (3) of section 10B of
the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970, section 10B of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1980 sub-section (3) of section 38A of
the State Bank of India Act, 1955 and section 40A of the State Bank of
India (Subsidiary Bank) Act, 1959; and; and
(h) all other sums of money collected by the Authority as envisaged in the
Act.
Further, according to Rule 3 (3), in case of term deposits and debentures of
companies, due unpaid or unclaimed interest shall be transferred to the
Fund along with the transfer of the matured amount of such term deposits
and debentures.
2. Utilization of the Fund: According to section 125 (3) the Fund shall be
utilized for:
(a) refund of unclaimed dividends, matured deposits, matured
debentures, the application money due for refund and interest
thereon;
(b) promotion of investors’ education, awareness and protection;
(c) distribution of any disgorged amount among eligible and identifiable
applicants for shares or debentures, shareholders, debenture-holders
or depositors who have suffered losses due to wrong actions by any
person, in accordance with the orders made by the Court which had
ordered disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action
suits under sections 37 and 245 by members, debenture-holders or
depositors as may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto in accordance with the rules
framed under the Investor Education and Protection Fund Authority
(Accounting, Audit, Transfer and Refund) Rules, 2016.

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 8.22 CORPORATE AND OTHER LAWS

Refund of Amount- A person amounts referred to in clauses (a) to (d) of sub-

section (2) of section 205C were transferred to IEPF, after the expiry of 7 years as
per provisions of the Companies Act, 1956, shall be entitled to get refund out of
the fund in respect of such claims in accordance with rules made under this
section.
3. Application to the Authority for payment: According to section 125 (4),
any person claiming to be entitled to the amount referred in section 125 (2) may
apply to the Authority constituted under section 125 (5) for the payment of the
money claimed.
4. Other Provisions governing the IEPF
(i) Constitution of the Authority for Administration of Fund- In terms
of Notification dated 13.01.2016 14, the Ministry of Corporate Affairs
has notified sub-section (5), sub-section (6) (except with respect to the
manner of administration of the Fund) and sub-section (7) of section
125 of the Act w.e.f. 13.01.2016. With this Notification, an Authority is
being constituted for the administration and maintenance of accounts
as well as other relevant records of the Fund.
Further, with the notification of IEPF Authority (Appointment of
Chairperson and Members, holding of Meetings and provision for
Offices and Officers) Rules, 2016 on 13.01.2016, the Secretary, Ministry
of Corporate Affairs shall be the ex-officio Chairperson of the
Authority. In addition, there shall be six members (maximum limit
seven) and a Chief Executive Officer who shall be the convenor of the
Authority.
(ii) Provision of required Resources by the Central Government for
Administration of the Fund- The Central Government may provide to
the Authority such offices, officers, employees and other resources in
accordance with the IEPF Authority (Appointment of Chairperson and
Members, holding of Meetings and provision for Offices and Officers)
Rules, 2016.
(iii) Authority to work in consultation with CAG of India- The Authority
shall administer the Fund and maintain separate accounts and other
relevant records in relation to the Fund in such form as may be

14
Vide Notification No. GSR 26 (E), dated 13.01.2016.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.23

prescribed after consultation with the Comptroller and Auditor-

General of India.
(iv) Spending of Money- The Authority shall be competent to spend
money out of the Fund for carrying out the objects specified in section
125 (3) i.e. purposes for which the fund shall be utilized.
(v) Audit of the Fund- The accounts of the Fund shall be audited by the
Comptroller and Auditor-General of India at such intervals as may be
specified by him. Such audited accounts together with the audit report
thereon shall be forwarded annually by the Authority to the Central
Government.
(vi) Preparation of Annual Report by the Authority- For each financial
year, the Authority shall prepare in the prescribed form and at
prescribed time its annual report giving full account of its activities
during the financial year and forward a copy thereof to the Central
Government. In turn, the Central Government shall cause the annual
report and the audit report given by the Comptroller and Auditor-
General of India to be laid before each House of Parliament.

6. RIGHT OF DIVIDEND, RIGHTS SHARES AND

BONUS SHARES TO BE HELD IN ABEYANCE
PENDING REGISTRATION OF TRANSFER OF
SHARES
According to Section 126, in case any instrument of transfer of shares has been
delivered by a shareholder for registration and the transfer of such shares has not
been registered by the company, such company shall take the following steps:
(a) Transfer the dividend in relation to such shares to the Unpaid Dividend
Account unless it is authorised by the registered holder of such share in
writing to pay such dividend to the transferee specified in the instrument of
transfer; and
(b) Keep in abeyance in relation to such shares any offer of rights shares under
section 62 (1) (a) and any issue of fully paid-up bonus shares in pursuance
of first proviso to section 123 (5).

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 8.24 CORPORATE AND OTHER LAWS

7. PUNISHMENT FOR FAILURE TO DISTRIBUTE

DIVIDENDS WITHIN 30 DAYS
Section 127 of the Act contains time limit for distribution of dividends and
punishment for failure to distribute dividend on time. Certain exemptions from
punishments are also provided. These provisions are stated as under:

A. Time Limit for Distribution of Dividends

Where a company declares dividend, it must be paid or the dividend

warrant thereof must be posted within 30 days from the date of declaration
of dividend to the shareholders entitled to the same. Posting of dividend
warrants within 30 days absolves the company from any punishment
irrespective of whether it is received by the shareholder concerned within
this time or not. The offence is committed only when the company fails to
post dividend warrants to the registered address of the members within 30
days of declaration. Non-receipt of dividend warrants by the shareholders
within the prescribed time does not attract any punishment.

B. Punishment for Failure

In case a company fails to pay declared dividends or fails to post dividend

warrants within 30 days of declaration, following punishments are
applicable:

(i) Every director of the company shall be punishable with imprisonment

of up to two years, if he is knowingly a party to the default. And, he
shall also be liable to pay minimum fine of ` 1,000 for every day
during which such default continues.

(ii) The company shall be liable to pay simple interest at the rate of 18%
p.a. during the period for which such default continues.

C. Exemption from Punishment

Under the following cases, where the company has failed to pay declared
dividend within 30 days of declaration, no offence shall be deemed to have
been committed and therefore, no punishment is attracted:

(a) where the dividend could not be paid by reason of the operation of
any law;

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 DECLARATION AND PAYMENT OF DIVIDEND 8.25

(b) where a shareholder has given directions to the company regarding

the payment of the dividend and those directions cannot be complied
with and the same has been communicated to him;

(c) where there is a dispute regarding the right to receive the dividend;

(d) where the dividend has been lawfully adjusted by the company
against any sum due to it from the shareholder;

(e) where, for any other reason, the failure to pay the dividend or to post
the warrant within the prescribed period of 30 days was not due to
any default on the part of the company.

Exemption from
Punishment
under Section 127

Dividend Shareholder Dispute Dividend for any

could not gave regarding has been other
be paid by directions right to lawfully reason, the
reason of regarding receive adjusted failure to
operation payment of dividend; against any pay/ post
of any dividend, AND sum due dividend
law; from warrant
shareholder within the
those to prescribed
directions company; time, was
cannot be not due to
complied with any default
and the same on the part
has been of the
communicated company.
to him;

Example 12: Mr. Alok, holding equity shares of face value of ` 10 lakhs, has not
paid ` 80,000 towards call money due on shares. Can the dividend amount
payable to him be adjusted against such dues? Give reasons for your answer.
Answer: Yes. As per clause (d) of Proviso to Section 127, where the dividend
is declared by a company and there remains calls in arrears or any other
sum due from a member, then the dividend can be lawfully adjusted by the
company against any such dues.

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 8.26 CORPORATE AND OTHER LAWS

Thus, the action of the company adjusting dividend payable to Mr. Alok
towards call money due on shares amounting to ` 80,000 is justified and
therefore, no punishment is attracted.
D. Applicability of Section 127 to Nidhis
In terms of Notification No. GSR 465 (E), dated 05-06-2015, Section 127 dealing
with punishment shall apply to the Nidhis, subject to the following
modification:
In case the dividend payable to a member is ` 100 or less, it shall be
sufficient compliance of the provisions of the section 127, if the declaration
of the dividend is announced in the local language in one local newspaper
of wide circulation and announcement of the said declaration is also
displayed on the notice board of the Nidhis for at least 3 months.

SUMMARY
♦ Section 2(35) of the Companies Act, 2013, states that “dividend” includes
any interim dividend.
♦ Dividend can be declared out of:
 Profits of the current year after depreciation,
 Profits for any previous financial year or years arrived at after
providing for depreciation and remaining undistributed,
 Both of the above,
 Money provided by the Central Government or a State Government
for the payment of dividend by the company in pursuance of a
guarantee given by that Government.
[Note: Depreciation shall be provided in accordance with the
provisions of Schedule II.]
♦ Before declaration of dividend, the company may, at its discretion, transfer
any appropriate percentage of its profits to the reserves.
♦ When there is inadequacy or absence of profits, the company may declare
dividend out of free reserves after following the conditions prescribed in the
Rules.
♦ Amount of dividend (including interim dividend) shall be deposited in a
separate bank account maintained with a scheduled bank within 5 days
from the date of declaration of dividend.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.27

♦ Payment of dividend-
 Payable
 in cash; or
 by cheque; or
 by dividend warrant; or
 by any electronic mode
 Payable
 to the registered shareholder of the shares; or
 to his order; or
 to his banker.
 In case of Nidhis
 any dividend payable in cash may be paid by crediting the same to
the account of the member, if the dividend is not claimed within 30
days from the date of declaration of the dividend.
♦ Unpaid Dividend Account (UDA)
 Declared dividend not paid or claimed to be transferred to the Unpaid
Dividend Account (UDA).
 Prepare statement of particulars of the unpaid dividend.
 Default in transferring of amount to UDA - Interest @ 12% p.a.
 Entitled shareholders can apply for payment of amount from UDA.
 Transfer unpaid or unclaimed amount of dividend (and shares thereof) to
Investor Education and Protection Fund (IEPF) after the expiry of seven
years from the date of such transfer to UDA.
 Right of owner of shares transferred to IEPF to claim from IEPF: Claimant
of transferred shares is entitled to reclaim the transfer of shares from IEPF
by following the prescribed procedure and on submission of prescribed
documents.
 In case any dividend is paid or claimed for any year during the said
period of 7 consecutive years, the shares shall not be transferred to IEPF.
 Punishment: In case a company fails to pay declared dividends or fails to
post dividend warrants within 30 days of declaration, company shall be
liable to a penalty of one lakh rupees and in case of continuing failure,
with a further penalty of five hundred rupees for each day after the

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 8.28 CORPORATE AND OTHER LAWS

first during which such failure continues, subject to a maximum of ten

lakh rupees and every officer of the company who is in default shall be
liable to a penalty of twenty-five thousand rupees and in case of
continuing failure, with a further penalty of one hundred rupees for
each day after the first during which such failure continues, subject to
a maximum of two lakh rupees.
♦ Exemptions from punishment under section 127
 dividend could not be paid by reason of operation of any law;
 shareholder gave directions regarding payment of dividend but those
directions could not be complied with and the same had been
communicated to him;
 dispute regarding right to receive dividend;
 dividend had been lawfully adjusted against any sum due from the
shareholder to the company;
 for any other reason and the failure to pay/post dividend warrant within
the prescribed time was not due to any default on the part of the
company.

TEST YOUR KNOWLEDGE

Question 1
The Annual General Meeting of ABC Bakers Limited held on 30th May, 2019,
declared a dividend at the rate of 30% payable on its paid-up equity share capital
as recommended by Board of Directors. However, the Company was unable to post
the dividend warrant to Mr. Ranjan, an equity shareholder, up to 25th July, 2019.
Mr. Ranjan filed a suit against the Company for the payment of dividend along with
interest at the rate of 20 percent per annum for the period of default. Decide in the
light of provisions of the Companies Act, 2013, whether Mr. Ranjan would succeed?
Also, state the directors’ liability in this regard under the Act.
Answer
Section 127 of the Companies Act, 2013 lays down the penalty for non-payment
of dividend within the prescribed time period of 30 days. According to this
section where a dividend has been declared by a company but has not been paid
or the warrant in respect thereof has not been posted within 30 days from the
date of declaration of dividend to any shareholder entitled to the payment of
dividend:

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 DECLARATION AND PAYMENT OF DIVIDEND 8.29

(a) every director of the company shall, if he is knowingly a party to the default,
be punishable with imprisonment maximum up to two years and with
minimum fine of rupees one thousand for every day during which such
default continues; and
(b) the company shall be liable to pay simple interest at the rate of 18% per
annum during the period for which such default continues.
Therefore, in the given case Mr. Ranjan will not succeed if he claims interest at
20% interest as the limit under section 127 is 18% per annum.
Question 2
The Board of Directors of Future Fashions Limited at its meeting recommended a
dividend on its paid-up equity share capital which was later on approved by the
shareholders at the Annual General Meeting. Thereafter, the directors at another
meeting of the Board passed a board resolution for diverting the total dividend to
be paid to the shareholders for purchase of certain short-term investments in the
name of the company. As a result, dividend was paid to shareholders after 45 days.
Examining the provisions of the Companies Act, 2013, state whether the act of
directors is in violation of the provisions of the Act and if so, state the consequences
that shall follow for the above violative act.
Answer
According to section 124 of the Companies Act, 2013, where a dividend has been
declared by a company but has not been paid or claimed within 30 days from the
date of the declaration, the company shall, within 7 days from the date of expiry
of the said period of 30 days, transfer the total amount of dividend which remains
unpaid or unclaimed to a special account to be opened by the company in any
scheduled bank to be called the Unpaid Dividend Account.
Further, according to section 127 of the Companies Act, 2013, where a dividend
has been declared by a company but has not been paid or the warrant in respect
thereof has not been posted within 30 days from the date of declaration to any
entitled shareholder, every director of the company shall, if he is knowingly a
party to the default, be liable for punishment.
In the present case, the Board of Directors of Future Fashions Limited at its
meeting recommended a dividend on its paid-up equity share capital which was
later on approved by the shareholders at the Annual General Meeting. Thereafter,
the directors at another meeting of the Board decided by passing a board
resolution for diverting the total dividend to be paid to the shareholders for

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 8.30 CORPORATE AND OTHER LAWS

purchase of certain short-term investments in the name of the company. As a

result, dividend was paid to shareholders after 45 days.
1. Since, declared dividend has not been paid within 30 days from the date of
the declaration to any shareholder entitled to the payment of dividend, the
company shall, within 7 days from the date of expiry of the said period of 30
days, transfer the total amount of dividend which remains unpaid or
unclaimed to a special account to be opened by the company in any
scheduled bank to be called the Unpaid Dividend Account.
2. The Board of Directors of Future Fashions Limited has violated section 127
of the Companies Act, 2013 as it failed to pay dividend to shareholders
within 30 days due to its decision to divert the total dividend to be paid to
shareholders for purchase of certain short-term investments in the name of
the company.
Consequences: The following are the consequences for violation of the
above provisions:
(a) Every director of the company shall, if he is knowingly a party to the
default, be punishable with maximum imprisonment of two years and
shall also be liable for a minimum fine rupees one thousand for every
day during which such default continues.
(b) The company shall also be liable to pay simple interest at the rate of 18%
p.a. during the period for which such default continues.
Question 3
Referring to the provisions of the Companies Act, 2013, examine the validity of the
following:
The Board of Directors of ABC Tractors Limited proposes to declare dividend at the
rate of 20% to the equity shareholders, despite the fact that the company has
defaulted in repayment of public deposits accepted before the commencement of
this Act.
Answer
Section 123(6) of the Companies Act, 2013, specifically provides that a company
which fails to comply with the provisions of section 73 (Prohibition of acceptance
of deposits from public) and section 74 (Repayment of deposits, etc., accepted
before the commencement of this Act) shall not, so long as such failure continues,
declare any dividend on its equity shares.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.31

In the given instance, the Board of Directors of ABC Tractors Limited proposes to
declare dividend at the rate of 20% to the equity shareholders, in spite of the fact
that the company has defaulted in repayment of public deposits accepted before
the commencement of the Companies Act, 2013. Hence, according to the above
provision, declaration of dividend by the ABC Tractors Limited is not valid.
Question 4
Star Computers Limited declared and paid dividend in time to all its equity holders
for the financial year 2018-19, except in the following two cases:
(i) Mrs. Sheela Bhatt, holding 250 shares had mandated the company to directly
deposit the dividend amount in her bank account. The company, accordingly
remitted the dividend but the bank returned the payment on the ground that
there was difference in surname of the payee in the bank records. The
company, however, did not inform Mrs. Sheela Bhatt about this discrepancy.
(ii) Dividend amount of ` 50,000 was not paid to the successor of Late
Mr. Mohan, in view of the court order restraining the payment due to family
dispute about succession.
You are required to analyse these cases with reference to provisions of the
Companies Act, 2013 regarding failure to distribute dividends.
Answer
(i) Section 127 of the Companies Act, 2013 provides for punishment for failure
to distribute dividend on time. One of such situations is where a
shareholder has given directions to the company regarding the payment of
the dividend and those directions could not be complied with but the non-
compliance was not communicated to him.
In the given situation, the company has failed to communicate to the shareholder
Mrs. Sheela Bhatt about non-compliance of her direction regarding payment of
dividend. Hence, the penal provisions under section 127 will be applicable.
(ii) Section 127, inter-alia, provides that no offence shall be deemed to have
been committed where the dividend could not be paid by reason of
operation of law.
In the present case, the dividend could not be paid because it was not allowed
to be paid by the court until the matter was resolved about succession. Hence,
there will not be any liability on the company and its directors, etc.

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 8.32 CORPORATE AND OTHER LAWS

Question 5
Alpha Herbals, a Section 8 company is planning to declare dividend in the Annual
General Meeting for the Financial Year ended 31-03-2019. Mr. Chopra is holding
800 equity shares as on date. State whether the act of the company is according to
the provisions of the Companies Act, 2013.
Answer
According to Section 8(1) of the Companies Act, 2013, the companies licenced
under Section 8 of the Act (Formation of companies with Charitable Objects, etc.)
are prohibited from paying any dividend to their members. Their profits are
intended to be applied only in promoting the objects for which they are formed.
Hence, in the instant case, the proposed act of Alpha Herbals, a company licenced
under Section 8 of the Companies Act, 2013, which is planning to declare dividend, is
not according to the provisions of the Companies Act, 2013.
Question 6
(i) YZ Medical Instruments Limited is a manufacturing company & has proposed
a dividend @ 10% for the year 2018-19 out of the profits of current year. The
company has earned a profit of ` 910 crores during 2018-19. The company
does not intend to transfer any amount to the general reserves out of the
profits. Is YZ Medical Instruments Limited allowed to do so? Comment.
(ii) Karan, holder of 5000 equity shares of ` 100 each of M/s. Rachit Leather
Shoes Limited did not pay final call of ` 10 per share. M/s. Rachit Leather
Shoes Limited declared dividend of 10%. Examine with reference to relevant
provisions of the Companies Act, 2013, the amount of dividend Karan should
receive.
Answer
(i) According to section 123 of the Companies Act, 2013 a company may,
before the declaration of any dividend in any financial year, transfer such
percentage of its profits for that financial year as it may consider
appropriate to the reserves of the company. Such transfer is not mandatory
and the percentage to be transferred to reserves is at the discretion of the
company.
As per the given facts, YZ Medical Instruments Limited has earned a profit
of ` 910 crores for the financial year 2018-19. It has proposed a dividend @
10%. However, it does not intend to transfer any amount to the reserves of
the company out of the profits of current year.

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 DECLARATION AND PAYMENT OF DIVIDEND 8.33

As per the provisions stated above, the amount to be transferred to reserves

out of profits for any financial year is at the discretion of the company
acting through its Board of Directors. Therefore, at its discretion, if YZ
Medical Instruments Limited decides not to transfer any profit to reserves
before the declaration of dividend at 10%, it is legally allowed to do so.
(ii) As per the proviso to section 127 of the Companies Act, 2013, no offence
will be deemed to have been committed by a director for adjusting the calls
in arrears remaining unpaid or any other sum due from a member against
the dividend declared by the company.
Thus, as per the given facts, M/s. Rachit Leather Shoes Limited can adjust the
unpaid call money of ` 50,000 against the declared dividend of 10%, i.e.
5,00,000 x 10/100 = 50,000. Hence, call money of ` 50,000 not paid by Karan
can be adjusted fully from the entitled dividend amount of ` 50,000 payable to
him.
Question 7
PQ Ltd. declared and paid 10% dividend to all its shareholders except Mr. Kumar,
holding 500 equity shares, who instructed the company to deposit the dividend
amount directly in his bank account. The company accordingly remitted the
dividend, but the bank returned the payment on the ground that the account
number as given by Mr. Kumar doesn't tally with the records of the bank. The
company, however, did not inform Mr. Kumar about this discrepancy. ·Comment on
this issue with reference to the provisions of the Companies Act, 2013 regarding
failure to distribute dividend.
Answer
Section 127 of the Companies Act, 2013 provides for punishment for failure to
distribute dividend on time. One of such situations is where a shareholder has given
directions to the company regarding the payment of the dividend and those directions
cannot be complied with and the same has not been communicated to the
shareholder.
In the instant case, PQ Ltd. has failed to communicate to the shareholder Mr. Kumar
about non-compliance of his direction regarding payment of dividend. Hence, the
penal provisions under section 127 will be attracted.
Question 8
Alex limited is facing loss in business during the financial year 2018-2019. In the
immediate preceding three financial years, the company had declared dividend at

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 8.34 CORPORATE AND OTHER LAWS

the rate of 7%, 11% and 12% respectively. The Board of Directors has decided to
declare 12% interim dividend for the current financial year atleast to be in par with
the immediate preceding year. Is the act of the Board of Directors valid?
Answer
As per Section 123(3) of the Companies Act, 2013, the Board of Directors of a
company may declare interim dividend during any financial year out of the
surplus in the profit and loss account and out of profits of the financial year in
which such interim dividend is sought to be declared.
Provided that in case the company has incurred loss during the current financial
year up to the end of the quarter immediately preceding the date of declaration
of interim dividend, such interim dividend shall not be declared at a rate higher
than the average dividends declared by the company during the immediately
preceding three financial years.
According to the given facts, Alex Ltd. is facing loss in business during the
financial year 2018-2019. In the immediate preceding three financial years, the
company declared dividend at the rate of 7%, 11% and 12% respectively.
Accordingly, the rate of dividend declared shall not exceed 10%, the average of
the rates (7+11+12=30/3) at which dividend was declared by it during the
immediately preceding three financial years.
Therefore, the act of the Board of Directors as to declaration of interim dividend
at the rate of 12% during the F.Y 2018-2019 is not valid.

© The Institute of Chartered Accountants of India

CHAPTER 9

ACCOUNTS OF
COMPANIES

LEARNING OUTCOMES

At the end of this chapter, you will be able to:

 Know about preparation and maintenance of books of
accounts etc. to be kept by company.
 Know about the requirements as to preparation and filing of
financial statements and other related matters.
 Know about the reopening and revision of financial statements.
 Know about constitution, working and power of National
Financial Reporting Authority (NFRA).
 Explain various concepts related to Corporate Social
Responsibility (CSR).
 Explain procedure related to internal audit of companies.

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 9.2 CORPORATE AND OTHER LAWS

Books of accounts
Types of accounts to
be maintained Relevant books and
(section 128 and papers
129)
Financial statement

Reopening and recasting of

accounts on Court's or Tribunal's
Orders (Section 130)

Voluntary revision of accounts

Accounts of Companies

(section 131)
(Section 128- 138)

Constitution of NFRA & power of CG

to prescribe accounting standards
( Section 132- 133)

Financial Statements, Board

reports,etc (Section 134)

CSR (Section135)

Right of members & Filing of Financial

statement with Registrar
(Section 136- 137)

Internal Audit (Section 138)

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 ACCOUNTS OF COMPANIES 9.3

1. INTRODUCTION
There is a need for disclosing the annual information to the shareholders by the
directors about the working and financial position of the company so that the
shareholders are aware of the affairs of the company. The Companies Act, 2013,
lays down various provisions related to maintenance of proper books of account of
the companies.

2. BOOKS OF ACCOUNTS, ETC., TO BE KEPT BY

COMPANY [SECTION 128]
Company shall prepare

Books of accounts Books and papers

Financial statement

On accrual basis and Double Entry System of Subsidiary

Accounting BOAs
inspection –
Keep at its registered office/any other place in Only on
India as the Board of Directors (BOD) may decide authorisation
by BOD’s
resolution
Open for inspection by directors

Other Financial
Preserved for 8 years information
outside India on
written request
Failure in compliance by director.

Fine (INR 50,000- 5 lacs)

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 9.4 CORPORATE AND OTHER LAWS

General requirement
Every company shall prepare books of accounts and other relevant books and
records and financial statement for every financial year.
These books of accounts should give a true and fair view of the state of the affairs
of the company, including that of its branch office(s)and explain the transactions
effected both at the registered office and its branches
These books of accounts must be kept on accrual basis and according to the double
entry system of accounting.
Accrual basis and double-entry system of accounting
Accrual basis of accounting is an accounting assumption or an accounting concept
followed in preparation of the financial statements. Accrual concept is one of the
four principles of accounting concepts, which involves recording income and
expenses as they accrue; distinct from when they are received or paid.
Double entry book-keeping is a method of recording any transaction of a business
in a set of accounts, in which every transaction has a dual aspect of debit and credit
and therefore, needs to be recorded in at least two accounts. Double aspect enables
effective control of business because all the books of accounts must balance.
“Books of account” as defined in Section 2(13) includes records maintained in
respect of—
 all sums of money received and expended by a company and matters in
relation to which the receipts and expenditure take place;
 all sales and purchases of goods and services by the company;
 the assets and liabilities of the company; and
 the items of cost as may be prescribed under section 148 (Cost Audit) of the
Companies Act 2013 (“Act”) in the case of a company which belongs to any
class of companies specified under that section.
“Book and paper” and “book or paper” as defined in Section 2(12) include books of
account, deeds, vouchers, writings, documents, minutes and registers maintained on
paper or in electronic form;
Place of keeping books of account
Section 128(1) requires every company to prepare and keep the books of account and
other relevant books and papers and financial statements at its registered office.
Provided all or any of the books of accounts may be kept at such other place in

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 ACCOUNTS OF COMPANIES 9.5

India as the Board of directors may decide. Where such a decision is taken by the
Board the company shall within seven days thereof file with the registrar a notice
in writing in form AOC-5 giving full address of that other place.
Maintenance of books of account in electronic form
A company has an option of keeping books of account or other relevant papers in
electronic mode as per Rule 3 of the Companies (Accounts) Rules, 2014. Rule 3 lays
down the manner of books of account to be kept in electronic mode.
(1) The books of account and other relevant books and papers maintained in
electronic mode shall remain accessible in India so as to be usable for
subsequent reference.
Provided that for the financial year commencing on or after the 1st day
of April, 2022, every company which uses accounting software for
maintaining its books of account, shall use only such accounting
software which has a feature of recording audit trail of each and every
transaction, creating an edit log of each change made in books of
account along with the date when such changes were made and ensuring
that the audit trail cannot be disabled.
(2) The books of account and other relevant books and papers referred to in sub-
rule (1) shall be retained completely in the format in which they were
originally generated, sent or received, or in a format which shall present
accurately the information generated, sent or received and the information
contained in the electronic records shall remain complete and unaltered.
(3) The information received from branch offices shall not be altered and shall
be kept in a manner where it shall depict what was originally received from
the branches.
(4) The information in the electronic record of the document shall be capable of
being displayed in a legible form.
(5) There shall be a proper system for storage, retrieval, display or printout of the
electronic records as the Audit Committee, if any, or the Board may deem
appropriate and such records shall not be disposed of or rendered unusable,
unless permitted by law.
The back-up of the books of account and other books and papers of the
company maintained in electronic mode, including at a place outside India, if
any, shall be kept in servers physically located in India on a periodic basis.

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 9.6 CORPORATE AND OTHER LAWS

(6) The company shall intimate to the Registrar on an annual basis at the time of
filing of financial statement following relevant information related to service
provider—
(a) the name of the service provider;
(b) the internet protocol (IP) address of service provider;
(c) the location of the service provider (wherever applicable);
(d) where the books of account and other books and papers are maintained
on cloud, such address as provided by the service provider.
Books of account - Branch Office
Where a company has a branch office in or outside India, it shall be deemed to have
complied with the provisions of sub-section (1), if proper books of account relating
to the transactions effected at the branch office are kept at that office.
The summarised returns of the books of account of the company kept and
maintained outside India shall be sent to the registered office at quarterly intervals,
which shall be kept and maintained at the registered office of the company and kept
open to directors for inspection.
Inspection by Directors
As per Section 128 (3), any director can inspect the books of account and other
books and papers of the company during business hours. Such inspection may be
done by any type of director - nominee, independent, promoter or whole time.
The proviso to sub-section 3 provides that a person can inspect the books of
account of the subsidiary, only on authorisation by way of the resolution of Board
of Directors.
Assistance by officers and Employees
As per Section 128 (4), where an inspection is made under sub-section (3), the
officers and other employees of the company shall give to the person making such
inspection all assistance in connection with the inspection which the company may
reasonably be expected to give.
Other financial information: Where any other financial information maintained
outside the country is required by a director, the director shall furnish a request to
the company setting out the full details of the financial information sought, the
period for which such information is sought.

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 ACCOUNTS OF COMPANIES 9.7

The company shall produce such financial information to the director within fifteen
days of the date of receipt of the written request.
The Director can seek the information only individually and not by or through his
attorney holder or agent or representative with respect to financial information
maintained outside the country [Rule 4(4) of the Companies (Accounts) Rules, 2014].
Period for preservation of books [Section 128(5)]
The books of accounts, together with vouchers relevant to any entry in such books,
are required to be preserved in good order by the company for a period of not less
than eight years immediately preceding the relevant financial year.
In case of a company incorporated less than eight years before the financial year,
the books of accounts for the entire period preceding the financial year together
with the vouchers shall be so preserved.
As per proviso to sub-section 5, where an investigation has been ordered in respect
of a company under Chapter XIV of the Act related to inspection, inquiry or
investigation, the Central Government may direct that the books of account may
be kept for such period longer than 8 years, as it may deem fit and give directions
to that effect.
Persons responsible and Penalty
As per Section 128 (6) the person responsible for the maintenance of books of
account etc. shall be:
(i) Managing Director,
(ii) Whole-Time Director, in charge of finance
(iii) Chief Financial Officer
(iv) Any other person of a company charged by the Board with duty of complying
with provisions of section 128.
Penalty for contravention
In case the aforementioned persons fail to take reasonable steps to secure
compliance, they shall in respect of each offence, be punishable with fine which
shall not be less than fifty thousand rupees but which may extend to five lakh
rupees.
Example 1: XYZ Ltd. wants to maintain its books of account on cash basis. Is this
a valid act of XYZ Ltd?

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 9.8 CORPORATE AND OTHER LAWS

Answer: The Companies Act 2013 vide section 128(1) requires every company to
prepare books of account and other relevant books and papers and financial
statement for every financial year on accrual basis and double entry system of
accounting. No exception has been given by the Act to any class or classes of
companies from the above requirement. Hence XYZ Ltd. cannot maintain its books
of accounts on cash basis.

3. FINANCIAL STATEMENT [SECTION 129] 1

Financial Statement — Definition
Financial Statement is defined under Section 2 (40), to include–

Profit and Loss Cash flow

account or Statement Statement of
Income and change in equity,
Expenditure account if applicable
[for Section 8 co.]

any explanatory notes

Balance Sheet Financial annexed to or
Statement forming part of
financial statements

However, the financial statement with respect to one Person Company, small
company and dormant company, may not include the cash flow statement.
Exemption: For private companies, the proviso to section 2(40) shall be read as follows:
“Provided that the financial statement, with respect to one person company, small
company, dormant company and private company (if such private company is a
start-up) may not include the cash flow statement;
Explanation – For the purposes of this Act, the term “start-up‟ or “start-up
company” means a private company incorporated under the Companies Act, 2013
or the Companies Act, 1956 and recognised as start-up in accordance with the

1
Section 129 shall not apply to the Government Companies engaged in defence production
to the extent of application of relevant Accounting Standard on segment reporting”.
[notification number G.S.R. 463(E) dated the 5th June, 2015]

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 ACCOUNTS OF COMPANIES 9.9

notification issued by the Department of Industrial Policy and Promotion, Ministry

of Commerce and Industry.”
The exceptions, modifications and adaptations shall be applicable to a private
company which has not committed a default in filing its financial statements under
section 137 of the said Act or annual return under section 92 of the said Act with
the Registrar.
Financial statement should be prepared for financial year and as per the
requirements of Schedule III.
“Financial year” [Section 2(41)], in relation to any company or body corporate,
means the period ending on the 31st day of March every year, and where it has
been incorporated on or after the 1st day of January of a year, the period ending
on the 31st day of March of the following year, in respect whereof financial
statement of the company or body corporate is made up:
Example 2: Mahindra and Mahindra Company Limited was incorporated as a
company on 22nd February 2014. Now for the purpose of the first financial
statements, the period ending shall be 31st March of the following year i.e. 31st
March 2015.
Provided that where a company or body corporate, which is a holding company or
a subsidiary or associate company of a company incorporated outside India and is
required to follow a different financial year for consolidation of its accounts outside
India, the Central Government may, on an application made by that company or
body corporate in such form and manner as may be prescribed, allow any period
as its financial year, whether or not that period is a year:
Provided further that any application pending before the Tribunal as on the date
of commencement of the Companies (Amendment) Ordinance, 2018, shall be
disposed of by the Tribunal in accordance with the provisions applicable to it before
such commencement.
Provided further that a company or body corporate, existing on the
commencement of this Act, shall, within a period of two years from such
commencement, align its financial year as per the provisions of this clause.
Schedule III has been amended vide Notification No. G.S.R. 404(E) dated 6th April
2016 according to which Schedule III has been divided into two divisions.

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 9.10 CORPORATE AND OTHER LAWS

Division I deals with financial statement for a company whose financial statement
are required to comply with the Companies (Accounting Standards) Rules, 2006 2.
Division II deals with financial statement for a company whose financial statement is
required to comply with the Companies (Indian Accounting Standards) Rules, 2015 3.
True and fair view
As per section 129(1), the financial statements shall give a true and fair view of the
state of affairs of the company or companies. It shall comply with the accounting
standards notified under section 133 and shall be in the form or forms as may be
provided for different class or classes of companies in Schedule III.
Provided that the items contained in such financial statements shall be in
accordance with the accounting standards.
Non-applicability
Provided further that nothing contained in this sub-section shall apply to any
insurance or banking company or any company engaged in the generation or
supply of electricity, or to any other class of company for which a form of financial
statement has been specified in or under the Act governing such class of company:
Provided also that the financial statements shall not be treated as not disclosing a true
and fair view of the state of affairs of the company, merely by reason of the fact that
they do not disclose—

Type of company Matters

Insurance company Matters which are not required to be disclosed
by the Insurance Act, 1938, or the Insurance
Regulatory and Development Authority Act, 1999
Banking company Matters which are not required to be disclosed
by the Banking Regulation Act, 1949
Company engaged in the Matters which are not required to be disclosed
generation or supply of by the Electricity Act, 2003
electricity

2
As amended from time to time.
3
As amended from time to time.

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 ACCOUNTS OF COMPANIES 9.11

Company governed by any Matters which are not required to be disclosed

other law by that law

Note: The proviso to section 129(1) with respect to non-applicability states that
merely because of the matters which are not required to be disclosed under the
above given acts, in the financial statements of the above given companies, the
financial statements of such companies shall not be treated as not disclosing a true
and fair view of the state of affairs of the company.
Laying of financial Statements [Section 129(2)]
At every annual general meeting of a company, the Board of Directors of the
company shall lay before such meeting financial statements for the financial year.
Consolidation of financial statements [Section 129(3)]
(1) Where a company has one or more subsidiaries or associate companies, it
shall, in addition to financial statements provided under sub-section (2),
prepare a consolidated financial statement (CFS) of the company and of all
the subsidiaries and associate companies in the same form and manner as
that of its own and in accordance with applicable accounting standards, which
shall also be laid before the annual general meeting of the company along
with the laying of its financial statement under sub-section (2).
The company shall also attach along with its financial statement, a separate
statement containing the salient features of the financial statement of its
subsidiary or subsidiaries and associate company or companies in Form AOC-
1 as per Rule 5 of the Companies (Accounts) Rules, 2014.
Provided further that the Central Government may provide for the
consolidation of accounts of companies in such manner as may be prescribed
under Rule 6 of the Companies (Accounts) Rules, 2014.
Explanation - For the purposes of this sub-section, the word “subsidiary”
shall include associate company and joint venture.
Rule 6 of the Companies (Accounts) Rules, 2014 provides for the
consolidation of accounts of companies in the following manner

Manner of consolidation of Accounts: The consolidation of financial

statements of the company shall be made in accordance with the provisions
of Schedule III of the Act and the applicable accounting standards.

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 9.12 CORPORATE AND OTHER LAWS

In case where company is not required to prepare CFS: A company covered

under sub-section (3) of section 129 which is not required to prepare
consolidated financial statements under the Accounting Standards, it shall be
sufficient if the company complies with provisions of consolidated financial
statements provided in Schedule III of the Act.
Exemptions from preparation of CFS: As per Companies (Accounts)
Amendment Rules, 2016, preparation of consolidated financial statements by
a company is not required if it meets the following conditions:
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of
another company and all its other members, including those not
otherwise entitled to vote, having been intimated in writing and for
which the proof of delivery of such intimation is available with the
company, do not object to the company not presenting consolidated
financial statements;

(ii) it is a company whose securities are not listed or are not in the process
of listing on any stock exchange, whether in or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated
financial statements with the Registrar which are in compliance with the
applicable Accounting Standards.
Provided also that nothing contained in this rule shall subject to any other
law or regulation, apply for the financial year commencing from the 1st day
of April, 2014 and ending on the 31st March, 2015, in case of a company
which does not have a subsidiary or subsidiaries but has one or more
associate companies or Joint ventures or both, for the consolidation of
financial statement in respect of associate companies or joint ventures or
both, as the case may be.
Explanation: The above proviso states that for a company which does not
have a subsidiary or subsidiaries but has one or more associate companies or
Joint Ventures or both will not be required to comply with this rule of
consolidation of financial statements in respect of associate companies or
joint ventures or both, as the case may be, only for the financial year
commencing from the 1st day of April, 2014 and ending on the 31st day of
March, 2015.

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 ACCOUNTS OF COMPANIES 9.13

Provided also that nothing in this rule shall apply in respect of consolidation
of financial statement by a company having subsidiary or subsidiaries
incorporated outside India commencing on or after 1st April 2014.
(2) The provisions applicable to the preparation, adoption and audit of the
financial statements of a holding company shall, mutatis mutandis, also apply
to the consolidated financial statements [Section 129(4)].
(3) Without prejudice to sub-section (1), where the financial statements of a
company do not comply with the accounting standards referred to in sub-
section (1), the company shall disclose in its financial statements, the
deviation from the accounting standards, the reasons for such deviation and
the financial effects, if any, arising out of such deviation [Section 129(5)].
(4) The Central Government may, on its own or on an application by a class or
classes of companies, by notification, 4 exempt any class or classes of
companies from complying with any of the requirements of this section or
the rules made thereunder, if it is considered necessary to grant such
exemption in the public interest and any such exemption may be granted
either unconditionally or subject to such conditions as may be specified in
the notification [Section 129(6)].

Penal provisions [Section 129(7)]

If a company contravenes the provisions of this section, the managing director, the
whole-time director in charge of finance, the Chief Financial Officer or any other
person charged by the Board with the duty of complying with the requirements of
this section and in the absence of any of the officers mentioned above, all the
directors shall be punishable with imprisonment for a term which may extend to
one year or with fine which shall not be less than fifty thousand rupees but which
may extend to five lakh rupees, or with both.

4
For exemptions granted to government companies engaged in production of Defence
Equipments Vide notification dated 4-9-2015.

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 9.14 CORPORATE AND OTHER LAWS

Company Contravenes the provisions of section 129

Whether mentioned officers are present

MD WTD in charge of Finance CFO Any other person

Yes No (Absence)

Mentioned Officers All directors

Imprisonment (upto 1yr)

Fine (50,000 to 5 lacs),
Or Both

Explanation: For the purposes of section 129, any reference to the financial
statement shall include any notes annexed to or forming part of such financial
statement, giving information required to be given and allowed to be given in the
form of such notes under this Act.

4. PERIODICAL FINANCIAL RESULTS [SECTION

129A]
The Central Government may, require such class or classes of unlisted
companies, as may be prescribed,—
(a) to prepare the financial results of the company on such periodical basis
and in such form as may be prescribed;
(b) to obtain approval of the Board of Directors and complete audit or
limited review of such periodical financial results in such manner as may
be prescribed; and
(c) file a copy with the Registrar within a period of thirty days of completion
of the relevant period with such fees as may be prescribed.

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 ACCOUNTS OF COMPANIES 9.15

5. RE-OPENING OF ACCOUNTS ON COURT’S OR

TRIBUNAL’S ORDERS [SECTION 130]
This section seeks to provide for the re-opening of books of accounts and recasting
of financial statements.

Application to be made by:

Central Govt. SEBI Any other person

Income Tax authorities Statutory regulatory body

Application made to Court/

Tribunal

Court/Tribunal passes an order to the effect that

Earlier accounts prepared in Affairs of company were mis-

fraudulent manner managed related to accounts

Notice to be served to applicants

Time Limit for

Take Representation into reopening: Maximum
consideration, if any period of 8 FY
immediately preceding
the current FY except
Pass order to revise/ recast the where direction by
accounts Central Government to
maintain books of
accounts is beyond 8
The revised accounts shall be final

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(1) Apply to court for re-opening of accounts—A company shall not re-open
its books of account and not recast its financial statements, unless an application
in this regard is made by-
(a) the Central Government,
(b) the Income-tax authorities,

(c) the Securities and Exchange Board of India (SEBI),

(d) any other statutory regulatory body or authority or any person concerned
and an order is made by a court of competent jurisdiction or the Tribunal to
the effect that—

(i) the relevant earlier accounts were prepared in a fraudulent manner; or

(ii) the affairs of the company were mismanaged during the relevant period,
casting a doubt on the reliability of financial statements:

Serving of notice: Provided that the Court or the Tribunal, as the case may be,
shall give notice to the Central Government, the Income-tax authorities, the
Securities and Exchange Board or any other statutory regulatory body or authority
concerned or any other person concerned and shall take into consideration the
representations, if any, made by that Government or the authorities, SEBI or the
body or authority concerned or the other person concerned before passing any
order under this section [Sub- section (1)].

(2) Revised accounts shall be final: The accounts so revised or re-casted, shall
be final.

(3) Time Limit in respect of re-opening of books of account: No order shall

be made under sub-section (1) in respect of re-opening of books of account
relating to a period earlier than eight financial years immediately preceding the
current financial year:

Provided that where a direction has been issued by the Central Government under
the proviso to sub-section (5) of section 128 for keeping of books of account for a
period longer than eight years, the books of account may be ordered to be re-
opened within such longer period.

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6. VOLUNTARY REVISION OF FINANCIAL

STATEMENTS OR BOARD’S REPORT
[SECTION 131]
If it appears to the directors
that company

FS and Board report not in

complaince with section 129
and section 134

Prepare revised FS
Copy of order of
revised FS & Report
On approval and
to be filed with
order of tribunal
Regsitrar
Revise report (any 3
Previous F.Y.)

(1) Preparation of revised financial statement or revised report on the

approval of Tribunal: If it appears to the directors of a company that—
(a) the financial statement of the company; or
(b) the report of the Board,
do not comply with the provisions of section 129 or section 134, they may prepare
revised financial statement or a revised report in respect of any of the three
preceding financial years after obtaining approval of the Tribunal on an application
made by the company in such form and manner as may be prescribed and a copy
of the order passed by the Tribunal shall be filed with the Registrar.
Explanation: Section 131 deals with the revision of financial statement or boards
report, as the case may be, on a voluntary basis in the opinion of the board of
directors unlike section 130.
Tribunal to serve the notice:
Provided that the Tribunal shall give notice to the Central Government and the
Income tax authorities and shall take into consideration the representations, if any,

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made by that Government or the authorities before passing any order under this
section.
Number of times of revision and recast:
Provided further that such revised financial statement or report shall not be
prepared or filed more than once in a financial year.
Explanation: The above provision states that when a company has revised its
financial statement or boards report pertaining to any of the three preceding
financial years than such revised financial statement or boards report, as the case
may be, shall not be revised again for the period it has been so revised.
Reason for revision to be disclosed:
Provided also that the detailed reasons for revision of such financial statement or
report shall also be disclosed in the Board’s report in the relevant financial year in
which such revision is being made.
(2) Limits of revisions: Where copies of the previous financial statement or
report have been sent out to members or delivered to the Registrar or laid before
the company in general meeting, the revisions must be confined to—
(a) the correction in respect of which the previous financial statement or report
do not comply with the provisions of section 129 or section 134; and
(b) the making of any necessary consequential alternation.
(3) Framing of rules by the Central Government in relation to revised
financial statement or director’s report: The Central Government may make rules
as to the application of the provisions of this Act in relation to revised financial
statement or a revised director’s report and such rules may, in particular—
(a) make different provisions according to which the previous financial statement
or report are replaced or are supplemented by a document indicating the
corrections to be made;
(b) make provisions with respect to the functions of the company’s auditor in
relation to the revised financial statement or report;
(c) require the directors to take such steps as may be prescribed.

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7. CONSTITUTION OF NATIONAL FINANCIAL

REPORTING AUTHORITY [SECTION 132]
(1) The Central Government may, 5 by notification, constitute the National
Financial Reporting Authority (NFRA) to provide for matters relating to accounting
and auditing standards under this Act.
(1A) The National Financial Reporting Authority shall perform its functions through
such divisions as may be prescribed.
(2) Notwithstanding anything contained in any other law for the time being in
force, the NFRA shall—
(a) make recommendations to the Central Government on the formulation and
laying down of accounting and auditing policies and standards for adoption
by companies or class of companies or their auditors, as the case may be;
(b) monitor and enforce the compliance with accounting standards and auditing
standards in such manner as may be prescribed;
(c) oversee the quality of service of the professions associated with ensuring
compliance with such standards, and suggest measures required for
improvement in quality of service and such other related matters as may be
prescribed; and
(d) perform such other functions relating to clauses (a), (b) and (c) as may be
prescribed.
(3) The NFRA shall consist of a chairperson, who shall be a person of eminence and
having expertise in accountancy, auditing, finance or law to be appointed by the
Central Government and such other members not exceeding fifteen consisting of part-
time and full-time members as may be prescribed:
(3A) Each division of the National Financial Reporting Authority shall be presided
over by the Chairperson or a full-time Member authorised by the Chairperson.
(3B) There shall be an executive body of the National Financial Reporting Authority
consisting of the Chairperson and full-time Members of such Authority for efficient

5
The Central Government hereby appoints the 1st October 2018 as the date of constitution of
National Financial Reporting Authority.

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discharge of its functions under sub-section (2) [other than clause (a)] and sub-
section (4).
Provided that the terms and conditions and the manner of appointment of the
chairperson and members shall be such as may be prescribed.
Provided further that the chairperson and members shall make a declaration to the
Central Government in the prescribed form regarding no conflict of interest or lack
of independence in respect of his or their appointment.
Provided also that the chairperson and members, who are in full-time employment
with NFRA shall not be associated with any audit firm (including related consultancy
firms) during the course of their appointment and two years after ceasing to hold
such appointment.
(4) Notwithstanding anything contained in any other law for the time being in
force, the NFRA shall—
(a) have the power to investigate, either suo moto or on a reference made to it
by the Central Government, for such class of bodies corporate or persons, in
such manner as may be prescribed into the matters of professional or other
misconduct committed by any member or firm of chartered accountants,
registered under the Chartered Accountants Act, 1949.
Provided that no other institute or body shall initiate or continue any
proceedings in such matters of misconduct where the NFRA has initiated an
investigation under this section;
(b) have the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908, while trying a suit, in respect of the following matters,
namely:—
(i) discovery and production of books of account and other documents, at
such place and at such time as may be specified by the NFRA;
(ii) summoning and enforcing the attendance of persons and examining
them on oath;
(iii) inspection of any books, registers and other documents of any person
referred to in clause (b) at any place;
(iv) issuing commissions for examination of witnesses or documents;

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(c) where professional or other misconduct is proved, the NFRA shall have the
power to make order for—
(A) imposing penalty of—
(I) not less than one lakh rupees, but which may extend to five times
of the fees received, in case of individuals; and
(II) not less than five lakh rupees, but which may extend to ten times
of the fees received, in case of firms;
(B) debarring the member or the firm from-
I. being appointed as an auditor or internal auditor or undertaking
any audit in respect of financial statements or internal audit of the
functions and activities of any company or body corporate; or
II. performing any valuation as provided under section 247,
for a minimum period of six months or such higher period not
exceeding ten years as may be determined by the National Financial
Reporting Authority.
Explanation — For the purposes of this sub-section, the expression "professional
or other misconduct" shall have the same meaning assigned to it as given under
section 22 of the Chartered Accountants Act, 1949.
Appeal against orders of NFRA
Any person aggrieved by any order of the National Financial Reporting Authority
issued under clause (c) of sub-section (4), may prefer an appeal before the
Appellate Tribunal in such manner and on payment of such fee as may be
prescribed.
Meetings of NFRA
The National Financial Reporting Authority shall meet at such times and places and
shall observe such rules of procedure in regard to the transaction of business at its
meetings in such manner as may be prescribed.
Secretary and other employees
The Central Government may appoint a secretary and such other employees as it
may consider necessary for the efficient performance of functions by the National
Financial Reporting Authority under this Act and the terms and conditions of service
of the secretary and employees shall be such as may be prescribed.

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Head office of NFRA

The head office of the National Financial Reporting Authority shall be at New Delhi
and the National Financial Reporting Authority may, meet at such other places in
India as it deems fit.
Maintenance of books by NFRA
The National Financial Reporting Authority shall cause to be maintained such books
of account and other books in relation to its accounts in such form and in such
manner as the Central Government may, in consultation with the Comptroller and
Auditor-General of India prescribe.
Audit of account of NFRA
The accounts of the National Financial Reporting Authority shall be audited by the
Comptroller and Auditor-General of India at such intervals as may be specified by
him and such accounts as certified by the Comptroller and Auditor-General of India
together with the audit report thereon shall be forwarded annually to the Central
Government by the National Financial Reporting Authority.
Annual Report on working of NFRA
The National Financial Reporting Authority shall prepare in such form and at such
time for each financial year as may be prescribed its annual report giving a full
account of its activities during the financial year and forward a copy thereof to the
Central Government and the Central Government shall cause the annual report and
the audit report given by the Comptroller and Auditor-General of India to be laid
before each House of Parliament.
In exercise of the powers conferred under sub-sections (2) and (4) of section 132,
the Central Government made the National Financial Reporting Authority Rules,
2018 (NFRA Rules).
As per NFRA rules, NFRA shall have power to monitor and enforce compliance with
accounting standards and auditing standards, oversee the quality of service under
sub-section (2) of section 132 or undertake investigation under sub-section (4) of
such section of the auditors. Rule 3 provides for the classes of companies and
bodies corporate governed by the NFRA. These include:
(a) companies whose securities are listed on any stock exchange in India or
outside India;

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(b) unlisted public companies having paid-up capital of not less than rupees five
hundred crores or having annual turnover of not less than rupees one
thousand crores or having, in aggregate, outstanding loans, debentures and
deposits of not less than rupees five hundred crores as on the 31st March of
immediately preceding financial year;
(c) insurance companies, banking companies, companies engaged in the
generation or supply of electricity, companies governed by any special Act
for the time being in force or bodies corporate incorporated by an Act in
accordance with clauses (b), (c), (d), (e) and (f) of section 1 (4) of the
Companies Act, 2013;
Explanation.- For the purpose of this clause, “banking company” includes
‘corresponding new bank’ as defined in section 2 (d) of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 and section
2(b) of the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1980 and ‘subsidiary bank’ as defined in section 2(k) of the State Bank
of India (Subsidiary Bank) Act, 1959.
(d) any body corporate or company or person, or any class of bodies corporate
or companies or persons, on a reference made to the NFRA by the Central
Government in public interest; and
(e) a body corporate incorporated or registered outside India, which is a
subsidiary or associate company of any company or body corporate
incorporated or registered in India as referred to in clauses (a) to (d) above,
if the income or networth of such subsidiary or associate company exceeds
20% of the consolidated income or consolidated networth of such company
or the body corporate, as the case may be, referred to in clauses (a) to (d)
above.
Every existing body corporate other than a company governed by these rules, shall
inform the NFRA within 30 days of the commencement of NFRA rules, in Form
NFRA-1, the particulars of the auditor as on the date of commencement of these
rules.
A company or a body corporate other than a company governed under NFRA Rules
shall continue to be governed by the NFRA for a period of 3 years after it ceases to
be listed or its paid-up capital or turnover or aggregate of loans, debentures and
deposits falls below the limit stated therein [i.e. mentioned in points (a) to (e)
above].

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Punishment in case of non-compliance - If a company or any officer of a company

or an auditor or any other person contravenes any of the provisions of NFRA Rules,
the company and every officer of the company who is in default or the auditor or
such other person shall be punishable as per the provisions of section 450 of the
Act.

8. CENTRAL GOVERNMENT TO PRESCRIBE

ACCOUNTING STANDARDS [SECTION 133]
Section 133 of the Companies Act, 2013 deals with the power of the Central
Government to prescribe the accounting standards.
The Central Government may prescribe the standards of accounting or any
addendum thereto, as recommended by the ICAI in consultation with and after
examination of the recommendations made by the NFRA.
Provided that until the NFRA is constituted under section 132 of the Companies
Act, 2013, the Central Government may prescribe the standards of accounting or
any addendum thereto, as recommended by the ICAI in consultation with and after
examination of the recommendations made by the National Advisory Committee
on Accounting Standards (NACAS) constituted under the previous company law.

9. FINANCIAL STATEMENT, BOARD’S REPORT,

ETC. [SECTION 134]
Section 134 provides that the financial statement including consolidated financial
statements should be approved by the Board of Directors before they are signed
and submitted to auditors for their report. The auditor’s report is to be attached to
every financial statement. A report by the Board of Directors containing details on
the matters specified including Director’s responsibility statement shall be attached
to every financial statement laid before the company. The Board’s report and every
annexure has to be duly signed. A signed copy of every financial statement shall be
circulated, issued or published along with all notes or documents, the auditor’s
report and Board’s report. The clause also provides for penal provisions for the
company and every officer of the company in case of any contravention.

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(i) Authentication of Financial statements [Section 134(1), (2) & (7)]:

Financial
statement

signed on
behalf of the
Board

chairperson Chief
Chief Executive Financial Company
(authorised by the
Officer Officer secretary
Board)/ two directors
(1 shall be MD,if any)

(a) The financial statement, including consolidated financial statement, if any,

shall be approved by the Board of Directors before they are signed on behalf
of the Board at least by the chairperson of the company where he is
authorised by the Board OR by two directors out of which one shall be
managing director, if any, and the Chief Executive Officer, the Chief Financial
Officer and the company secretary of the company, wherever they are
appointed, or in the case of One person company, only by one director, for
submission to the auditor for his report thereon.
(b) The auditors’ report shall be attached to every financial statement [Sub-
section (2)].
(c) A signed copy of every financial statement, including consolidated financial
statement, if any, shall be issued, circulated or published along with a copy
of [Section 134(7)] —
(1) Any notes annexed to or forming part of such financial statement;
(2) The auditor’s report; and
(3) The Board’s report referred to in sub section 3.
Example 3: The Board of Directors of ABC Ltd. wants to circulate unaudited
accounts before the Annual General Meeting of the shareholders of the Company.
Whether such an act of ABC Ltd. is tenable?

Answer: Section 129(2) of the Companies Act, 2013 provides that at every annual
general meeting of a company, the Board of Directors of the company shall lay
before such meeting financial statements for the financial year. Further section
134(7) provides that signed copy of every financial statement, including

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consolidated financial statement, if any, shall be issued, circulated or published

along with a copy each of:

(a) any notes annexed to or forming part of such financial statement;

(b) the auditor’s report; and

(c) the Board’s report.

It, therefore, follows that unaudited accounts cannot be sent to members or

unaudited accounts cannot be filed with the Registrar of Companies. So, such an
act of ABC Ltd, is not tenable.

(ii) Board’s report [Section 134(3) & (4) read with Rule 8 of the Companies
(Accounts) Rules, 2014]:
(1) According to 6Rule 8 of the Companies (Accounts) Rules, 2014, the Board’s
Report shall be prepared based on the standalone financial statement of the
company and shall report on the highlights of performance of subsidiaries,
associates and joint venture companies and their contribution to the overall
performance of the company during the period under report.
(2) Sub-section (3) of section 134 read with rule 8 prescribes the following
contents of the board’s report:
(a) the web address, if any, where annual return referred to in sub-section
(3) of section 92 (Annual Return) has been placed;
(b) number of meetings of the Board;
(c) directors’ responsibility statement;
(ca) details in respect of frauds reported by auditors under sub-section (12)
of section 143 (Powers and duties of auditors and auditing
standards) other than those which are reportable to the Central
Government;

6
This rule (i.e. Rule 8) shall not apply to One Person Company or Small Company. [Sub Rule (6)
of Rule 8]

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(d) a statement on declaration given by independent directors under sub-

section (6) of section 149 (Company to have board of board of Directors
in relation to independent director);
(e) in case of a company covered under sub-section (1) of section 178
(Nomination and Remuneration Committee and Stakeholders
Relationship Committee), company’s policy on directors’ appointment
and remuneration including criteria for determining qualifications,
positive attributes, independence of a director and other matters
provided under sub-section (3) of section 178;
Note: The above clause (e) shall not apply in the case of a government
company.
(f) explanations or comments by the Board on every qualification,
reservation or adverse remark or disclaimer made—
(i) by the auditor in his report; and
(ii) by the company secretary in practice in his secretarial audit report;
(g) particulars of loans, guarantees or investments under section 186;
(h) particulars of contracts or arrangements with related parties referred to
in sub-section (1) of section 188 in the form AOC-2;
(i) the state of the company’s affairs;
(j) the amounts, if any, which it proposes to carry to any reserves;
(k) the amount, if any, which it recommends should be paid by way of
dividend;
(l) material changes and commitments, if any, affecting the financial
position of the company which have occurred between the end of the
financial year of the company to which the financial statements relate
and the date of the report;
(m) the conservation of energy, technology absorption, foreign exchange
earnings and outgo, in such manner as may be prescribed; However,
the Govt. companies engaged in producing defence equipment is
exempted from disclosure under this clause.
(n) a statement indicating development and implementation of a risk
management policy for the company including identification therein of

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elements of risk, if any, which in the opinion of the Board may threaten
the existence of the company;
(o) the details about the policy developed and implemented by the
company on corporate social responsibility initiatives taken during the
year;
(p) in case of a listed company and every other public company having such
paid-up share capital as may be prescribed, a statement indicating the
manner in which formal annual evaluation of the performance of the
Board, its Committees and of individual directors has been made;
According to Rule 8(4), every listed company and every other public
company having a paid up share capital of twenty five crore rupees or
more calculated at the end of the preceding financial year shall include,
in the report by its Board of directors, a statement indicating the
manner in which formal annual evaluation has been made by the Board
of its own performance and that of its committees and individual
directors.
Exemption to Government company- The above clause (p) of Sub-
section (3) of Section 134 shall not apply, in case the directors are
evaluated by the Ministry or Department of the Central Government
which is administratively in charge of the company, or, as the case may
be, the State Government, as per its own evaluation methodology [vide
Notification dated 5 June 2015].
(q) such other matters as may be prescribed [See **].
Provided that where disclosures referred to in this sub-section have been
included in the financial statements, such disclosures shall be referred to
instead of being repeated in the Board's report.
Provided further that where the policy referred to in clause (e) or clause (o) is
made available on company's website, if any, it shall be sufficient compliance
of the requirements under such clauses if the salient features of the policy
and any change therein are specified in brief in the Board's report and the
web-address is indicated therein at which the complete policy is available.
**According to Rule 8 of the Companies (Accounts) Rules, 2014, the report of
the Board shall also contain–
(i) the financial summary or highlights;

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(ii) the change in the nature of business, if any;

(iii) the details of directors or key managerial personnel who were
appointed or have resigned during the year;
(iiia) a statement regarding opinion of the Board with regard to integrity,
expertise and experience (including the proficiency) of the independent
directors appointed during the year.
Explanation.-For the purposes of this clause, the expression
“proficiency” means the proficiency of the independent director as
ascertained from the online proficiency self-assessment test conducted
by the institute notified under sub-section (1) of section 150 (Manner
of selection of Independent Directors and maintenance of databank of
independent directors).
(iv) the names of companies which have become or ceased to be its
subsidiaries, joint ventures or associate companies during the year;
(v) the details relating to deposits like-
(a) accepted during the year;
(b) remained unpaid or unclaimed as at the end of the year;
(c) whether there has been any default in repayment of deposits or
payment of interest thereon during the year and if so, number of
such cases and the total amount involved-
(1) at the beginning of the year;
(2) maximum during the year;
(3) at the end of the year;
(vi) the details of deposits which are not in compliance with the
requirements of Chapter V (Acceptance of Deposits by Companies) of
the Act;
(vii) the details of significant and material orders passed by the regulators
or courts or tribunals impacting the going concern status and
company’s operations in future;
(viii) the details in respect of adequacy of internal financial controls with
reference to the Financial Statements.

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(ix) a disclosure, as to whether maintenance of cost records as specified by

the Central Government under sub-section (1) of section 148 of the
Companies Act, 2013, is required by the Company and accordingly such
accounts and records are made and maintained,
(x) a statement that the company has complied with provisions relating to
the constitution of Internal Complaints Committee under the Sexual
Harassment of Women at Workplace (Prevention, Prohibition and
Redressal) Act, 2013.
(xi) the details of application made or any proceeding pending under
the Insolvency and Bankruptcy Code, 2016 during the year
alongwith their status as at the end of the financial year.
(xii) the details of difference between amount of the valuation done at
the time of one time settlement and the valuation done while
taking loan from the Banks or Financial Institutions along with the
reasons thereof.
Non- applicability of Rule 8 of Companies (Accounts) Rules, 2014: This
rule shall not apply to One Person Company or Small Company.
(3) Abridged Board's report [Section 134(3A)]: The Central Government may
prescribe an abridged Board's report, for the purpose of compliance with this
section by One Person Company or small company.
(4) Board’s Report in case of OPC [Section 134(4)]: In case of a One Person
Company, the report of the Board of Directors to be attached to the financial
statement under this section shall, mean a report containing explanations or
comments by the Board on every qualification, reservation or adverse remark
or disclaimer made by the auditor in his report.
(iii) Directors’ Responsibility Statement [Section 134(5)]: The Directors’
Responsibility Statement referred to in 134(3)(c) shall state that—
(1) in the preparation of the annual accounts, the applicable accounting
standards had been followed along with proper explanation relating to
material departures;
(2) the directors had selected such accounting policies and applied them
consistently and made judgments and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the company

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at the end of the financial year and of the profit and loss of the company for
that period;
(3) the directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of this Act for
safeguarding the assets of the company and for preventing and detecting
fraud and other irregularities;
(4) the directors had prepared the annual accounts on a going concern basis;
and
(5) the directors, in the case of a listed company, had laid down internal financial
controls to be followed by the company and that such internal financial
controls are adequate and were operating effectively.
Here, the term “internal financial controls” means the policies and procedures
adopted by the company for ensuring the orderly and efficient conduct of its
business, including adherence to company’s policies, the safeguarding of its
assets, the prevention and detection of frauds and errors, the accuracy and
completeness of the accounting records, and the timely preparation of
reliable financial information;
(6) the directors had devised proper systems to ensure compliance with the
provisions of all applicable laws and that such systems were adequate and
operating effectively.
(iv) Signing of Board’s Report [Section 134(6)]:
The Board’s report and any annexures thereto under sub-section (3) shall be
signed by its chairperson of the company if he is authorised by the Board and
where he is not so authorised, shall be signed by at least two directors, one
of whom shall be a managing director, or by the director where there is one
director.
(v) Contravention [Section 134(8)]:
If a company is in default in complying with the provisions of this
section, the company shall be liable to a penalty of three lakh rupees and
every officer of the company who is in default shall be liable to a penalty
of fifty thousand rupees.

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Persons liable Punishment for contravention of

any provision of this section
Company Rs. 3 lakh
Every officer of the company who is in Rs. 50,000
default

Example 4: ABC Company is a one person company and has only one
director. Who shall authenticate the balance sheet and statement of profit &
loss and the Board‘s report?
Answer: In case of a One Person Company, the financial statements shall be
signed by only one director, for submission to the auditor for his report
thereon. So, the financial statements signed by one director shall be
considered in order.

10. CORPORATE SOCIAL RESPONSIBILITY

[SECTION 135] 7
The Companies Act, 2013 lays down the provisions requiring corporates to
mandatorily spend a prescribed percentage of their profits on certain specified
areas of social upliftment in discharge of their social responsibilities. Broadly,
Corporate Social Responsibility (CSR) implies a concept, whereby companies decide
to contribute to a better society and a cleaner environment – a concept, whereby
the companies integrate social and other useful concerns in their business
operations for the betterment of its stakeholders and society in general.
The provisions related with Corporate Social Responsibility has been enshrined
under section 135 and Companies (Social Responsibility Policy) Rules, 2014 8.
DEFINITIONS
1. “Corporate Social Responsibility (CSR)” means the activities undertaken
by a Company in pursuance of its statutory obligation laid down in section

7
In case of specified IFSC public & IFSC private company, section 135 shall not apply for period
of 5 years from the commencement of business of a specified IFSC public company and
specified IFSC private company.
8
These rules have been recently amended by the Companies (CSR Policy) Amendment Rules,
2021 dated 22nd January, 2021.

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135 of the Act in accordance with the provisions contained in these rules, but
shall not include the following, namely:-
(i) activities undertaken in pursuance of normal course of business of the
company:
Provided that any company engaged in research and development
activity of new vaccine, drugs and medical devices in their normal course
of business may undertake research and development activity of new
vaccine, drugs and medical devices related to COVID-19 for financial
years 2020-21, 2021-22, 2022-23 subject to the conditions that
(a) such research and development activities shall be carried out in
collaboration with any of the institutes or organisations mentioned
in item (ix) of Schedule VII to the Act;
(b) details of such activity shall be disclosed separately in the Annual
report on CSR included in the Board’s Report;
(ii) any activity undertaken by the company outside India except for training
of Indian sports personnel representing any State or Union territory at
national level or India at international level;
(iii) contribution of any amount directly or indirectly to any political party
under section 182 of the Act;
(iv) activities benefitting employees of the company as defined in clause (k)
of section 2 of the Code on Wages, 2019;
(v) activities supported by the companies on sponsorship basis for deriving
marketing benefits for its products or services;
(vi) activities carried out for fulfilment of any other statutory obligations
under any law in force in India; [Rule 2(d)]
2. "CSR Committee" means the Corporate Social Responsibility Committee
of the Board referred to in section 135 of the Act; [Rule 2(e)]
3. "CSR Policy" means a statement containing the approach and direction
given by the board of a company, taking into account the recommendations of
its CSR Committee, and includes guiding principles for selection,
implementation and monitoring of activities as well as formulation of the
annual action plan; [Rule 2(f)]

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4. “Administrative overheads” means the expenses incurred by the

company for ‘general management and administration’ of Corporate Social
Responsibility functions in the company but shall not include the expenses
directly incurred for the designing, implementation, monitoring, and
evaluation of a particular Corporate Social Responsibility project or
programme; [Rule 2(b)]
5. “International Organisation” means an organisation notified by the
Central Government as an international organisation under section 3 of the
United Nations (Privileges and Immunities) Act, 1947, to which the provisions
of the Schedule to the said Act apply; [Rule 2(g)]
6. "Net profit" means the net profit of a company as per its financial
statement prepared in accordance with the applicable provisions of the Act,
but shall not include the following, namely:-
(i) any profit arising from any overseas branch or branches of the company,
whether operated as a separate company or otherwise; and
(ii) any dividend received from other companies in India, which are covered
under and complying with the provisions of section 135 of the Act:
Provided that in case of a foreign company covered under these rules, net
profit means the net profit of such company as per profit and loss account
prepared in terms of clause (a) of sub-section (1) of section 381, read with
section 198 of the Act; [Rule 2(h)]
7. “Ongoing Project” means a multi-year project undertaken by a Company
in fulfilment of its CSR obligation having timelines not exceeding three years
excluding the financial year in which it was commenced, and shall include
such project that was initially not approved as a multi-year project but whose
duration has been extended beyond one year by the board based on reasonable
justification; [Rule 2(i)]
8. “Public Authority” means ‘Public Authority’ as defined in clause (h) of
section 2 of the Right to Information Act, 2005; [Rule 2(j)]
COMPANIES REQUIRED TO CONSTITUTE CSR COMMITTEE
According to section 135(1), every company having net worth of rupees five
hundred crore or more, or turnover of rupees one thousand crore or more or a
net profit of rupees five crore or more during the immediately preceding
financial year shall constitute a Corporate Social Responsibility Committee of

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the Board consisting of three or more directors, out of which at least one
director shall be an independent director.
Provided that where a company is not required to appoint an independent
director under sub-section (4) of section 149, it shall have in its Corporate
Social Responsibility Committee two or more directors.
As per Rule 3(1), every company including its holding or subsidiary, and a
foreign company defined under clause (42) of section 2 of the Act having its
branch office or project office in India, which fulfills the criteria specified in
sub-section (1) of section 135 of the Act shall comply with the provisions
of section 135 of the Act and these rules:
Provided that net worth, turnover or net profit. of a foreign company of the
Act shall be computed in accordance with balance sheet and Profit and loss
account of such company prepared in accordance with the provisions of clause
(a) of sub-section (1) of section 381 and section 198 of the Act.
“Net worth” [As per Section 2(57)] means the aggregate value of the paid-up
share capital and all reserves created out of the profits, securities premium
account and debit or credit balance of the profit and loss account, after
deducting the aggregate value of the accumulated losses, deferred
expenditure and miscellaneous expenditure not written off, as per the audited
balance sheet, but does not include reserves created out of revaluation of
assets, write-back of depreciation and amalgamation. 9
Example 5: The statutory auditors of a company were required to issue a
certificate on the net worth of the company as per the requirement of the
management as on 30th September 2020 computed as per the provision of
section 2(57) of the Companies Act, 2013.
The company had fair valued its property, plant and equipment in the current
year which was mistakenly taken into retained earnings of the company in its
books of accounts. Please advise whether this fair valuation would be covered
in the net worth of the company as per the legal requirements.

9
For the purposes of this section (i.e. section 135) "net profit" shall not include such sums
as may be prescribed, and shall be calculated in accordance with the provisions of section
198.
For details about more about refer later pages- heading ‘Calculation of Net Profits’

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 9.36 CORPORATE AND OTHER LAWS

Answer: As per sec 2(57) of the Companies Act 2013, any reserves created out
of revaluation of assets doesn’t form part of net worth. The company fair
valued its property, plant and equipment and took that to retained earnings.
Even if the company has taken the fair valuation to the retained earnings in
its books of accounts, the resultant credit in reserves (by whatever name
called) would be in the category of ‘reserves created out of revaluation of
assets’ which is specifically excluded in the definition of ‘net worth’ in section
2 (57) and hence should be excluded by the company.
Further the auditors should also consider the matter related to accounting of
this reserve separately at the time of audit of books of accounts of the
company.
Example 6: ABC Ltd is a company with a turnover of more than Rs.1000 crores
in the preceding three financial years and having incurred a loss in one of the
preceding three financial years. Will it be required to comply with CSR?
Answer: As per section 135(1) of the Act, if any one of the three criteria
(whether net worth, or turnover or net profit) gets satisfied then the company
is mandatorily required to comply with the CSR provisions. Hence, ABC Ltd.
will be required to comply with CSR based on its turnover. The mere fact that
company has incurred loss in one of the preceding three financial years will
not be considered for determining the applicability of CSR to the companies.
Exclusion of Companies [Rule 3(2) of the Companies (CSR) Rules, 2014]
Every company which ceases to be a company covered under subsection (1)
of section 135 of the Act for three consecutive financial years shall not be
required to-
(a) constitute a CSR Committee; and
(b) comply with the provisions contained in sub-section (2) to (6) of the said
section,
till such time it meets the criteria specified in sub-section (1) of section 135.
Composition of CSR Committee
Corporate Social Responsibility Committee of the Board shall consist of three
or more directors, out of which at least one director shall be an independent
director.

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Provided that where a company is not required to appoint an independent

director under sub-section (4) of section 149, it shall have in its Corporate
Social Responsibility Committee two or more directors.
According to Rule 5(1) of the Companies (CSR) Rules, 2014:
The companies mentioned in the rule 3 shall constitute CSR Committee as
under.-
(i) a company covered under subsection (1) of section 135 which is not
required to appoint an independent director pursuant to sub-section (4)
of section 149 of the Act, shall have its CSR Committee without such director;
(ii) a private company having only two directors on its Board shall constitute
its CSR Committee with two such directors;
(iii) with respect to a foreign company covered under these rules, the CSR
Committee shall comprise of at least two persons of which one person shall be
as specified under clause (d) of sub-section (1) of section 380 of the Act and
another person shall be nominated by the foreign company.
Disclosure of composition of CSR Committee
As per SECTION 135(2), the Board's report under sub-section (3) of section
134 shall disclose the composition of the Corporate Social Responsibility
Committee.
Duties of CSR Committee
According to section 135(3),
The Corporate Social Responsibility Committee shall,—
(a) formulate and recommend to the Board, a Corporate Social
Responsibility Policy which shall indicate the activities to be undertaken by
the company in areas or subject, specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities
referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from
time to time.
According to Rule 5(2) of Companies (CSR) Rules, 2014,

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 9.38 CORPORATE AND OTHER LAWS

The CSR Committee shall formulate and recommend to the Board, an annual
action plan in pursuance of its CSR policy, which shall include the following,
namely:-
(a) the list of CSR projects or programmes that are approved to be
undertaken in areas or subjects specified in Schedule VII of the Act;
(b) the manner of execution of such projects or programmes as specified in
sub-rule (1) of rule 4;
(c) the modalities of utilisation of funds and implementation schedules for
the projects or programmes;
(d) monitoring and reporting mechanism for the projects or programmes;
and
(e) details of need and impact assessment, if any, for the projects undertaken
by the company:
Provided that Board may alter such plan at any time during the financial year,
as per the recommendation of its CSR Committee, based on the reasonable
justification to that effect.
DUTIES OF THE BOARD IN RELATION TO CSR
According to 135(4), the Board of every company referred to in sub-section (1)
shall,—
(a) after taking into account the recommendations made by the Corporate
Social Responsibility Committee, approve the Corporate Social Responsibility
Policy for the company and disclose contents of such Policy in its report and
also place it on the company's website, if any, in such manner as may be
prescribed; and
(b) ensure that the activities as are included in Corporate Social
Responsibility Policy of the company are undertaken by the company.
Display of CSR activities on its website. - The Board of Directors of the
Company shall mandatorily disclose the composition of the CSR Committee,
and CSR Policy and Projects approved by the Board on their website, if any,
for public access. [Rule 9 of the Companies (CSR Policy) Rules, 2014]

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AMOUNT OF CONTRIBUTION TOWARDS CSR

According to section 135(5),
The Board of every company referred to in sub-section (1), shall ensure that
the company spends, in every financial year, at least two per cent. of the
average net profits of the company made during the three immediately
preceding financial years or where the company has not completed the period
of three financial years since its incorporation, during such immediately
preceding financial years, in pursuance of its Corporate Social Responsibility
Policy:
Provided that the company shall give preference to the local area and areas
around it where it operates, for spending the amount earmarked for Corporate
Social Responsibility activities:
Provided further that if the company fails to spend such amount, the Board
shall, in its report made under clause (o) of sub-section (3) of section
134, specify the reasons for not spending the amount and, unless the unspent
amount relates to any ongoing project referred to in sub-section (6), transfer
such unspent amount to a Fund specified in Schedule VII, within a period of
six months of the expiry of the financial year.
Provided also that if the company spends an amount in excess of the
requirements provided under this sub-section, such company may set off such
excess amount against the requirement to spend under this sub-section for
such number of succeeding financial years and in such manner, as may be
prescribed.
Explanation.—For the purposes of this section "net profit" shall not include
such sums as may be prescribed, and shall be calculated in accordance with
the provisions of section 198.
According to section 135(6), any amount remaining unspent under sub-section
(5), pursuant to any ongoing project, fulfilling such conditions as may be
prescribed, undertaken by a company in persuance of its Corporate Social
Responsibility Policy, shall be transferred by the company within a period of
thirty days from the end of the financial year to a special account to be opened
by the company in that behalf for that financial year in any scheduled bank
to be called the Unspent Corporate Social Responsibility Account, and such
amount shall be spent by the company in pursuance of its obligation towards
the Corporate Social Responsibility Policy within a period of three financial

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years from the date of such transfer, failing which, the company shall transfer
the same to a Fund specified in Schedule VII, within a period of thirty days
from the date of completion of the third financial year.
‘Calculation of Net Profits’
1. For the purposes of this section (i.e. section 135) "net profit" shall not
include such sums as may be prescribed, and shall be calculated in accordance
with the provisions of section 198. [Explanation in section 135(5)]
2. "Net profit" means the net profit of a company as per its financial
statement prepared in accordance with the applicable provisions of the Act,
but shall not include the following, namely:-
(i) any profit arising from any overseas branch or branches of the company,
whether operated as a separate company or otherwise; and
(ii) any dividend received from other companies in India, which are covered
under and complying with the provisions of section 135 of the Act:
Provided that in case of a foreign company covered under these rules, net
profit means the net profit of such company as per profit and loss account
prepared in terms of clause (a) of sub-section (1) of section 381, read with
section 198 of the Act; [Rule 2(h)]
CSR EXPENDITURE [Rule 7 of Companies (CSR) Rules, 2014]
(1) The board shall ensure that the administrative overheads shall not
exceed five percent of total CSR expenditure of the company for the financial
year.
(2) Any surplus arising out of the CSR activities shall not form part of the
business profit of a company and shall be ploughed back into the same project
or shall be transferred to the Unspent CSR Account and spent in pursuance of
CSR policy and annual action plan of the company or transfer such surplus
amount to a Fund specified in Schedule VII, within a period of six months of
the expiry of the financial year.
(3) Where a company spends an amount in excess of requirement provided
under sub-section (5) of section 135, such excess amount may be set off
against the requirement to spend under sub-section (5) of section 135 up to
immediate succeeding three financial years subject to the conditions that –

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(i) the excess amount available for set off shall not include the surplus
arising out of the CSR activities, if any, in pursuance of sub-rule (2) of
this rule.
(ii) the Board of the company shall pass a resolution to that effect.
(4) The CSR amount may be spent by a company for creation or acquisition
of a capital asset, which shall be held by -
(a) a company established under section 8 of the Act, or a Registered Public
Trust or Registered Society, having charitable objects and CSR
Registration Number under sub-rule (2) of rule 4; or
(b) beneficiaries of the said CSR project, in the form of self-help groups,
collectives, entities; or
(c) a public authority:
Provided that any capital asset created by a company prior to the
commencement of the Companies (Corporate Social Responsibility Policy)
Amendment Rules, 2021, shall within a period of one hundred and eighty days
from such commencement comply with the requirement of this rule, which may
be extended by a further period of not more than ninety days with the approval
of the Board based on reasonable justification.
Transfer of unspent CSR amount [Rule 10 of Companies (CSR Policy) Rules,
2014
Until a fund is specified in Schedule VII for the purposes of subsection (5) and
(6) of section 135 of the Act, the unspent CSR amount, if any, shall be
transferred by the company to any fund included in schedule VII of the Act.
Penal Provisions
If a company is in default in complying with the provisions of sub-section (5)
or sub-section (6), the company shall be liable to a penalty of twice the amount
required to be transferred by the company to the Fund specified in Schedule
VII or the Unspent Corporate Social Responsibility Account, as the case may
be, or one crore rupees, whichever is less, and every officer of the company
who is in default shall be liable to a penalty of one-tenth of the amount
required to be transferred by the company to such Fund specified in Schedule
VII, or the Unspent Corporate Social Responsibility Account, as the case may
be, or two lakh rupees, whichever is less. [Section 135(7)].

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SPECIAL INSTRUCTIONS OF THE CENTRAL GOVERNMENT

The Central Government may give such general or special directions to a
company or class of companies as it considers necessary to ensure compliance
of provisions of this section and such company or class of companies shall
comply with such directions. [Section 135(8)]
WHEN IT IS NOT NECESSARY TO CONSTITUTE A CSR COMMITTEE
According to section 135(9), where the amount to be spent by a company under
sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-
section (1) for constitution of the Corporate Social Responsibility Committee
shall not be applicable and the functions of such Committee provided under
this section shall, in such cases, be discharged by the Board of Directors of
such company.
CSR IMPLEMENTATION [Rule 4 of the Companies (CSR Policy) Rules, 2014]:
(1) The Board shall ensure that the CSR activities are undertaken by the
company itself or through-
(a) a company established under section 8 of the Act, or a registered public
trust or a registered society, registered under section 12A and 80 G of the
Income Tax Act, 1961, established by the company, either singly or along
with any other company, or
(b) a company established under section 8 of the Act or a registered trust or
a registered society, established by the Central Government or State
Government; or
(c) any entity established under an Act of Parliament or a State legislature;
or
(d) a company established under section 8 of the Act, or a registered public
trust or a registered society, registered under section 12A and 80G of the
Income Tax Act, 1961, and having an established track record of at least
three years in undertaking similar activities.
(2) (a) Every entity, covered under sub-rule (1), who intends to undertake
any CSR activity, shall register itself with the Central Government by filing the
form CSR-1 electronically with the Registrar, with effect from the 01st day of
April 2021:

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 ACCOUNTS OF COMPANIES 9.43

Provided that the provisions of this sub-rule shall not affect the CSR
projects or programmes approved prior to the 01st day of April 2021.
(b) Form CSR-1 shall be signed and submitted electronically by the entity
and shall be verified digitally by a Chartered Accountant in practice or a
Company Secretary in practice or a Cost Accountant in practice.
(c) On the submission of the Form CSR-1 on the portal, a unique CSR
Registration Number shall be generated by the system automatically.
(3) A company may engage international organisations for designing,
monitoring and evaluation of the CSR projects or programmes as per its CSR
policy as well as for capacity building of their own personnel for CSR.
(4) A company may also collaborate with other companies for undertaking
projects or programmes or CSR activities in such a manner that the CSR
committees of respective companies are in a position to report separately on
such projects or programmes in accordance with these rules.
(5) The Board of a company shall satisfy itself that the funds so disbursed
have been utilised for the purposes and in the manner as approved by it and
the Chief Financial Officer or the person responsible for financial management
shall certify to the effect.
(6) In case of ongoing project, the Board of a Company shall monitor the
implementation of the project with reference to the approved timelines and
year-wise allocation and shall be competent to make modifications, if any, for
smooth implementation of the project within the overall permissible time
period.
CSR REPORTING (Rule 8):
(1) The Board's Report of a company covered under these rules pertaining to
any financial year shall include an annual report on CSR containing
particulars specified in Annexure I or Annexure II, as applicable.
(2) In case of a foreign company, the balance sheet filed under clause (b) of
sub-section (1) of section 381 of the Act, shall contain an annual report on CSR
containing particulars specified in Annexure I or Annexure II, as applicable.
(3) (a) Every company having average CSR obligation of ten crore rupees
or more in pursuance of subsection (5) of section 135 of the Act, in the three
immediately preceding financial years, shall undertake impact assessment,
through an independent agency, of their CSR projects having outlays of one

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crore rupees or more, and which have been completed not less than one year
before undertaking the impact study.
(b) The impact assessment reports shall be placed before the Board and shall
be annexed to the annual report on CSR.
(c) A Company undertaking impact assessment may book the expenditure
towards Corporate Social Responsibility for that financial year, which
shall not exceed five percent of the total CSR expenditure for that
financial year or fifty lakh rupees, whichever is less.
ACTIVITIES SPECIFIED UNDER SCHEDULE VII
Activities which may be included by companies in their CSR Policies (i.e. Activities
as specified under Schedule VII) are as follows:
(1) eradicating hunger, poverty and malnutrition, promoting health care
including preventive health care and sanitation including contribution to the
Swach Bharat Kosh set-up by the Central Government for the promotion of
sanitation and making available safe drinking water;
(2) promoting education, including special education and employment
enhancing vocation skills especially among children, women, elderly, and the
differently abled and livelihood enhancement projects;
(3) promoting gender equality, empowering women, setting up homes and
hostels for women and orphans; setting up old age homes, day care centres
and such other facilities for senior citizens and measures for reducing
inequalities faced by socially and economically backward groups;
(4) ensuring environmental sustainability, ecological balance, protection of flora
and fauna, animal welfare, agroforestry, conservation of natural resources and
maintaining quality of soil, air and water including contribution to the Clean
Ganga Fund set up by the Central Government for rejuvenation of river
Ganga;
(5) protection of national heritage, art and culture including restoration of
buildings and sites of historical importance and works of art; setting up public
libraries; promotion and development of traditional arts and handicrafts;
(6) measures for the benefit of armed forces veterans, war widows and their
dependents, Central Armed Police Forces (CAPF) and Central Para Military
Forces (CPMF) veterans, and their dependents including widows;

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(7) training to promote rural sports, nationally recognised sports, paralympic

sports and Olympic sports;
(8) contribution to the Prime Minister’s National Relief Fund or Prime Minister’s
Citizen Assistance and Relief in Emergency situations Fund (PM CARES FUND)
any other fund set up by the Central Government for socio-economic
development and relief and welfare of the Scheduled Castes, Tribes, other
backward classes, minorities and women;
(9) (a) Contribution to incubators or research development projects in the field
of science, technology, engineering and medicine, funded by Central
Government or State Government or any agency or Public Sector
Undertaking of Central Government or State Government, and
(b) contributions to public funded Universities; Indian Institute of
Technology (IITs); National Laboratories and Autonomous Bodies
established under Department of Atomic Energy (DAE); Department of
Biotechnology (DBT); Department of Science and Technology (DST);
Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and
Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of
Electronics and Information Technology and other bodies, namely Defense
Research and Development Organisation (DRDO);Indian Council of
Agricultural Research (ICAR); Indian Council of Medical Research (ICMR)
Council of Scientific and Industrial Research (CSIR), engaged in conducting
research in science, technology, engineering and medicine aimed at
promoting Sustainable Development Goals (SDGs);
(10) rural development projects;
(11) slum area development. [For the purposes of this item, the term ‘slum area’
shall mean any area declared as such by the Central Government or any State
Government or any other competent authority under any law for the time
being in force.
(12) disaster management, including relief, rehabilitation and reconstruction
activities.
CLARIFICATIONS
The MCA vide General Circular No. 21/2014 dated 18 June 2014 has provided many
clarifications with regard to provisions of Corporate Social Responsibility under
section 135 of the Companies Act, 2013 which are as under:

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 9.46 CORPORATE AND OTHER LAWS

(i) The statutory provision and provisions of CSR Rules, 2014, is to ensure that while
activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII
of the Companies Act 2013, the entries in the said Schedule VII must be interpreted
liberally so as to capture the essence of the subjects enumerated in the said Schedule.
The items enlisted in the amended Schedule VII of the Act, are broad-based and are
intended to cover a wide range of activities as illustratively mentioned in the Annexure.
(ii) It is further clarified that CSR activities should be undertaken by the companies
in project/ programme mode. One-off events such as marathons/ awards/ charitable
contribution/ advertisement/ sponsorships of TV programmes etc. would not be
qualified as part of CSR expenditure.
(iii) Expenses incurred by companies for the fulfillment of any Act/ Statute of
regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR
expenditure under the Companies Act.
(v) “Any financial year” referred under sub-section (1) of section 135 of the Act read
10

with the Companies CSR Rule, 2014, implies ‘any of the three preceding financial years.
(vi) Expenditure incurred by Foreign Holding Company for CSR activities in India will
qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed
through Indian subsidiaries and if the Indian subsidiary is required to do so as per
section 135 of the Act.
(vii) ‘Registered Trust’ would include Trusts registered under Income Tax Act 1956,
for those States where registration of Trust is not mandatory.
(viii) Contribution to Corpus of a Trust/ society/ section 8 companies etc. will qualify
as CSR expenditure as long as (a) the Trust/ society/ section 8 companies etc. is created
exclusively for undertaking CSR activities or (b) where the corpus is created exclusively
for a purpose directly relatable to a subject covered in Schedule VII of the Act.
Clarifications with respect to CSR on COVID
1. General Circular No. 10/2020 dated 23rd March, 2020
The Ministry of Corporate Affairs have clarified that keeping in view of the
spread of novel Corona Virus (COVID-19) in India, its declaration as pandemic
by the World Health Organisation (WHO), and, decision of Government of
India to treat this as a notified disaster, spending of CSR funds for COVID-19
is eligible CSR activity.

10
Point (iv) has been omitted (Refer clarification dated 17.09.2014)

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Funds may be spent for various activities related to COVID-19 under item nos.
(i) and (xii) of Schedule VII relating to promotion of health care, including
preventive health care and sanitation, and, disaster management. Further, as
per General Circular No. 21/2014 dated 18.06.2014, items in Schedule VII are
broad based and may be interpreted liberally for this purpose.
2. General Circular No. 01/2021 dated 13th January, 2021
The Ministry of Corporate Affairs, have made a clarification on spending of CSR
funds for Awareness and public outreach on COVID-19 Vaccination programme.
This Circular is in continuation to this Ministry's General Circular No. 10/2020 dated
23.03.2020 wherein it was clarified that spending of CSR funds for COVID19 is an
eligible CSR activity , it is further clarified that spending of CSR funds for carrying
out awareness campaigns/ programmes or public outreach campaigns on COVID-19
Vaccination programme is an eligible CSR activity under item no. (i),(ii) and (xii) of
Schedule VII of the Companies Act, 2013 relating to promotion of health care,
including preventive health care and sanitization, promoting education, and,
disaster management respectively.
The companies may undertake the aforesaid activities subject to fulfillment of
Companies (CSR Policy) Rules, 2014 and the circulars related to CSR, issued by this
ministry from time to time.
3. General Circular No. 05/2021, dated 22nd April, 2021
A clarification has been issued on spending of CSR funds for setting up makeshift
hospitals and temporary COVID Care facilities.
In continuation to this Ministry's General Circular No. 10/2020 dated 23.03.2020
wherein it was clarified that spending of CSR funds for COVID-19 is an eligible CSR
activity, it is further clarified that spending of CSR funds for 'setting up makeshift
hospitals and temporary COVID Care facilities ' is an eligible CSR activity under item
nos. (i) and (xii) of Schedule VII of the Companies Act, 2013 relating to promotion of
health care, including preventive health care, and, disaster management respectively.

11. RIGHT OF MEMBERS TO COPIES OF AUDITED

FINANCIAL STATEMENT [SECTION 136]
Section 136 provides that a copy of financial statements including consolidated
financial statement, if any, auditor’s report and every other document required by
law to be annexed or attached to the financial statements, which are to be laid

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before a company in its general meeting, shall be sent to every member of the
company, to every trustee for the debenture-holder of any debentures issued by
the company, and to all persons other than such member or trustee, being the
person so entitled, not less than twenty-one days before the date of the meeting.

Copies of audited FS + CFS + Audit Report + other document

Sent to

Every trustee for debenture

Every member Other persons
holder

At least 21 days before GM

Circulation of Financial statement

Listed companies Public co. (Net worth > 1 crore

and Turn over > 10 crores)

Electronic mode Dispatch of physical

copies (under Section 20)

Shareholders Shareholders not holding in all other cases

holding shares in shares in Demat form (not
Demat form relevant any more) +
Consent given

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(i) What if the documents are sent less than 21 days before the date of
meeting?
According to Section 136, If the copies of the documents are sent less than
twenty-one days before the date of the meeting, they shall, notwithstanding
that fact, be deemed to have been duly sent if it is so agreed by members—
(a) holding, if the company has a share capital, majority in number entitled
to vote and who represent not less than ninety-five per cent. Of such
part of the paid-up share capital of the company as gives a right to vote
at the meeting; or
(b) having, if the company has no share capital, not less than ninety five
percent of the total voting power exercisable at the meeting:
Provided further that in the case of a listed company, the provisions of this
sub-section shall be deemed to be complied with, if the copies of the
documents are made available for inspection at its registered office during
working hours for a period of twenty-one days before the date of the meeting
and a statement containing the salient features of such documents in
the prescribed form or copies of the documents, as the company may deem
fit, is sent to every member of the company and to every trustee for the
holders of any debentures issued by the company not less than twenty-one
days before the date of the meeting unless the shareholders ask for full
financial statements.
Provided further that the Central Government may prescribe the manner of
circulation of financial statements of companies having such net worth and
turnover as may be prescribed.
Provided further that a listed company shall also place its financial statements
including consolidated financial statements, if any, and all other documents
required to be attached thereto, on its website, which is maintained by or on
behalf of the company.
Provided also that every listed company having a subsidiary or subsidiaries
shall -
(a) place separate audited accounts in respect of each of subsidiary on its
website, if any;

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(b) provide a copy of separate audited or unaudited financial statements,

as the case may be, as prepared in respect of each of its subsidiary, to
any member of the company who asks for it.
Provided also that a listed company which has a subsidiary incorporated
outside India (herein referred to as "foreign subsidiary")—
(a) where such foreign subsidiary is statutorily required to prepare
consolidated financial statement under any law of the country of its
incorporation, the requirement of this proviso shall be met if
consolidated financial statement of such foreign subsidiary is placed on
the website of the listed company;
(b) where such foreign subsidiary is not required to get its financial
statement audited under any law of the country of its incorporation and
which does not get such financial statement audited, the holding Indian
listed company may place such unaudited financial statement on its
website and where such financial statement is in a language other than
English, a translated copy of the financial statement in English shall also
be placed on the website.
Example 7: Reliance Industries Limited, a company incorporated under
the Companies Act, 2013, has its shares listed on a recognized Stock
Exchange in India. One of the subsidiary of Reliance Industries Limited
is a foreign company incorporated outside India. In the annual general
meeting of the company, Reliance Industries Limited has placed its
audited financial statement including consolidated financial statement
on its website. Reliance Industries Limited has also placed on its website
separate audited accounts of all its subsidiary located in India except
one subsidiary, which is a foreign company and located outside India
on the grounds that such foreign company is not required to get its
financial statement audited under the company law of its incorporation.
You are required to examine whether Reliance Industries Limited has
complied with the provisions of section 136?
Answer: No, Reliance Industries Limited has not complied with the
provisions of section 136 because Reliance Industries Limited is also
required to place unaudited financial statement of its foreign subsidiary
on its website even if such foreign subsidiary is not required to get its
financial statement audited as per the provisions of section 136.

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if the copies of the documents are made available for

In the case of a listed company, the provision
136(1) shall be deemed to be complied with,
inspection at its registered office during working hours for a
period of not less than 21 days before the date of the meeting

Along with it a statement containing the salient features of

such documents in the Form AOC-3 [AOC-3A for companies
which are required to comply with Companies (Indian
Accounting Standard) Rules, 2015 ]or copies of the
documents, as the company may deem fit, is sent to every
member of the company and to every trustee for the holders
of any debentures issued by the company

The statement is to be sent not less than 21 days before the

date of the meeting unless the shareholders ask for full
financial statements.

***Exemption to Section 8 Companies: In case of section 8 company - in

Sub-section (1) of Section 136 for the words "twenty one days", the words
"fourteen days" shall be substituted.
In case of Nidhi company - Section 136 (1) shall apply, subject to the
modification that, in the case of members who do not individually or jointly
hold shares of more than one thousand rupees in face value or more than
one per cent, of the total paid-up share capital, whichever is less, it shall be
sufficient compliance with the provisions of the section if an intimation is sent
by public notice in newspaper circulated in the district in which the Registered
Office of the company is situated stating the date, time and venue of AGM
and the financial statement with its enclosures can be inspected at the
registered office of the company and the financial statement with enclosures
are affixed in the notice board of the company and a member is entitled to
vote either in person or through proxy
A company shall also allow every member or trustee of the debenture holder
to inspect the audited financial statement at its registered office during
business hours.
(ii) Manner of circulation of financial statements in certain cases:
(a) In case of all listed companies and such public companies which have a
net worth of more than one crore rupees and turnover of more than ten

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crore rupees, the financial statements may be sent [Rule 11 of the

Companies (Accounts) Rules, 2014]-
(1) by electronic mode to such members whose shareholding is in
dematerialized format and whose email Ids are registered with
Depository for communication purposes;
(2) where shareholding is held otherwise than by dematerialized
format, to such members who have positively consented in writing
for receiving by electronic mode (this may not be relevant
considering that shareholding is not held otherwise than by
dematerialized form anymore); and
(3) by dispatch of physical copies through any recognised mode of
delivery as specified under section 20 of the Act, in all other cases.
(iii) Contravention:
(a) If any default is made in complying with the provisions of section 136,
the company shall be liable to a penalty of 25,000 rupees and
(b) Every officer of the company who is in default shall be liable to a penalty
of 5,000 Rupees.
Vide General Circular No. 11/2015, dated 21 July 2015, clarification was issued
by MCA with regard to circulation and filing of financial statement.
It has been clarified that a company holding general meeting after giving
shorter notice as provided under section 101 of the Act may also circulate
financial statements (to be laid/ considered in the same general meeting) at
such shorter notice.
It has also been clarified that in case of foreign company which is not required
to get its accounts audited as per the legal requirements prevalent in the
country of its incorporation and which does not get such accounts audited,
the holding or parent Indian company may place or file such unaudited
accounts to comply with requirements of section 136(1) and 137(1), as
applicable. These, however, would need to be translated in English, if the
original accounts are not in English. Further, the format of accounts of foreign
subsidiaries should be, as far as possible, in accordance with requirements
under the Companies Act, 2013. In case this is not possible, a statement
indicating the reasons for deviation may be placed/ filed along with such
accounts.

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12. COPY OF FINANCIAL STATEMENT TO BE

FILED WITH REGISTRAR [SECTION 137]
This section provides that copies of financial statement including consolidated
financial statement, if any, along with all the documents annexed to financial
statement and adopted at AGM shall be filed with Registrar.

AGM

Not held
Held [137(1)]
[137(2)]

[Copy of FS + CFS + Prescribed documents

other documents to be + Statement of Facts
presented]: Prescribed & Reasons for not
documents holding AGM

Un- adopted in
Adopted AGM/ Adjourned File with ROC
AGM

Filed within 30
Within 30 days
Filed with days of AGM.
of the last date
registrar within Registrar takes
before which
30 days of the them as
the AGM should
date of AGM Provisional in
have been held
their records

Further adopted in Adjourned

AGM - filed with Registrar within
30 days of the said meeting

(i) Filing of financial statements [Section 137(1)]:

(1) Section 137 read with Rule 12 of the Companies (Account Rules), 2014 states
that - A copy of the financial statements with form AOC-4, including
consolidated financial statement with form AOC-4 CFS, along with all the
documents which are required to be or attached to such financial statements
under this Act, duly adopted at the AGM of the company, shall be filed with

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the Registrar within 30 days of the date of AGM in such manner, with such
fees or additional fees as may be prescribed.
(1A) Every Non-Banking Financial Company (NBFC) that is required to comply with
Indian Accounting Standards (Ind AS) shall file the financial statements with
Registrar together with FORM AOC-4 NBFC (Ind AS) and the consolidated
financial statement, if any with FORM AOC-4 CFS NBFC (Ind AS).
As per Rule 1 of the Companies (Filing of Documents and forms in Extensible
Business Reporting Language) Rules, 2015-
The following class of companies shall file their financial statements and other
documents under section 137 of the Act with the Registrar in e-form AOC-
4 XBRL as per Annexure-I:
(i) companies listed with stock exchanges in India and their Indian
subsidiaries;
(ii) companies having paid up capital of five crore rupees or above;
(iii) companies having turnover of one hundred crore rupees or above;
(iv) all companies which are required to prepare their financial statements
in accordance with Companies (Indian Accounting Standards) Rules,
2015.
Provided that the companies preparing their financial statements under the
Companies (Accounting Standards) Rules, 2006 shall file the statements using the
Taxonomy provided in Annexure-II and companies preparing their financial
statements under Companies (Indian Accounting Standards) Rules, 2015, shall file
the statements using the Taxonomy provided in Annexure-II A.
Provided further that non-banking financial companies, housing finance
companies and companies engaged in the business of banking and insurance
sector are exempted from filing of financial statements under these rules.
(2) The companies which have filed their financial statements under sub-rule (1)
and erstwhile rules shall continue to file their financial statements and other
documents though they may not fall under the class of companies specified
therein in succeeding years.
The companies which have filed their financial statements under the erstwhile
rules, namely the Companies (Filing of Documents and Forms in Extensible
Business Reporting Language) Rules, 2011, shall continue to file their financial

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statements and other documents as prescribed in sub-rule (1) though they

do not fall under the class of companies specified therein.
Example 8: Amazon Company Limited, a company incorporated under the
Companies Act, 2013, has a turnover of Rs. 150 crores and Rs. 90 crores during
the financial year ended 31st March 2019 and 31st March 2020 respectively.
Now Amazon Company Limited shall continue to file the financial statements
and other documents under section 137 in e-form AOC-4 XBRL for the financial
year ended 31st March 2020 even if the company does not fall in the class of
companies provided under Rule 3 of the Companies (Filing of documents and
forms in Extensible Business Reporting Language) Rules, 2015.
(ii) If the financial statements are not adopted [Section 137(1)]:
(a) Where the financial statements are not adopted at AGM or adjourned
AGM, such unadopted financial statements along with the required
documents shall be filed with the Registrar within 30 days of the date
of AGM.
(b) The Registrar shall take them in his records as provisional till the financial
statements are filed with him after their adoption in the adjourned AGM
for that purpose.
(c) If the financial statements are adopted in the adjourned AGM, then they
shall be filed with the Registrar within 30 days of the date of such
adjourned AGM with such fees or such additional fees as may be
prescribed.
(iii) Filing by One Person Company [Section 137(1)]:
A One Person Company shall file a copy of the financial statements duly
adopted by its member, along with all the documents which are required to
be attached to such financial statements, within 180 days from the closure of
the financial year.
(iv) Company having subsidiaries [Section 137(1)]:
A company shall, along with its financial statements to be filed with the
Registrar, attach the accounts of its subsidiary or subsidiaries which have
been incorporated outside India and which have not established their place
of business in India (fourth proviso to Section 137(1)).
Provided also that in the case of a subsidiary which has been incorporated
outside India (herein referred to as "foreign subsidiary"), which is not required

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to get its financial statement audited under any law of the country of its
incorporation and which does not get such financial statement audited, the
requirements of the fourth proviso shall be met if the holding Indian company
files such unaudited financial statement along with a declaration to this effect
and where such financial statement is in a language other than English, along
with a translated copy of the financial statement in English.
It has also been clarified vide General Circular no. 11/2015 dated 21 July 2015
that in case of foreign company which is not required to get its accounts
audited as per the legal requirements prevalent in the country of its
incorporation and which does not get such accounts audited, the holding or
parent Indian company may place or file such unaudited accounts to comply
with requirements of section 136(1) and 137(1) as applicable. These, however,
would need to be translated in English, if the original accounts are not in
English. Further, the format of accounts of foreign subsidiaries should be, as
far as possible, in accordance with requirements under the Companies Act,
2013. In case this is not possible, a statement indicating the reasons for
deviation may be placed/ filed along with such accounts.
Example 9: Vandana Ltd., based out of India, has many subsidiaries in India
and outside India. It also had associates and joint ventures. For the purpose
of finalization of the consolidated financial statements of the company for
the year ended 31 March 2019, the company’s management requested its
foreign subsidiary, based out of Italy, to provide its standalone financial
statements. The Italian subsidiary company prepares its financial statements
in the local language of the country and the same is provided to the Indian
parent company as unaudited as the audit is not required by the Italian
subsidiary company. Please advise how should the Indian parent deal with
this financial statement.
Answer: Vandana Ltd. would have to get the standalone financial statements
of Italian subsidiary company translated in English language and also get
those aligned as per the its accounting policies for the purpose of
consolidation.
Further as per the requirements of section 137(1) of the Companies Act 2013,
Vandana Ltd. would need to file such unaudited financial statement of Italian
subsidiary company along with a declaration to this effect along with a
translated copy of the financial statement in English.

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Further the format of accounts of Italian subsidiary company should be, as far
as possible, in accordance with requirements under the Companies Act, 2013.
In case this is not possible, a statement indicating the reasons for deviation
may be placed/ filed along with such accounts.
(v) Annual General meeting not held [Section 137(2)]:
Where the AGM of a company for any year has not been held, the financial
statements along with the documents required to be attached, duly signed
along with the statement of facts and reasons for not holding the AGM shall
be filed with the Registrar within thirty days of the last date before which the
AGM should have been held and in such manner, with such fees or additional
fees as may be prescribed.
(vi) Penalty [Section 137(3)]: If any of the provisions of this section are contravened-
(a) The company shall be liable to a penalty of ten thousand rupees and in
case of continuing failure, with a further penalty of one hundred
rupees for each day during which such failure continues, subject to
a maximum of two lakh rupees; and
(b) The managing director and the Chief Financial Officer of the company, if
any, and, in the absence of the managing director and the Chief Financial
Officer, any other director who is charged by the Board with the
responsibility of complying with the provisions of this section, and, in the
absence of any such director, all the directors of the company, shall be liable
to a penalty which shall not be less than ten thousand rupees, and in case
of continuing failure, with further penalty of one hundred rupees for each
day after the first during which such failure continues, subject to a maximum
of fifty thousand rupees.

Person liable Punishment for contravention of

section 137
Company with fine of ten thousand rupees
and in case of continuing failure,
with a further penalty of one
hundred rupees for each day
during which such failure
continues, subject to a maximum
of two lakh rupees.

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Officers— Fine which shall not be less than

MD and CFO of the company, if ten thousand rupees, and in case of
any; continuing failure, with further penalty
In their absence, any other of one hundred rupees for each day
director who is charged by the after the first during which such failure
Board with the responsibility; continues, subject to a maximum of
fifty thousand rupees.
In its absence, all the directors of
the company.

Example 10: The AGM of R Ltd., for laying the Annual Accounts there at for
the year ended 31 March 2018 was not held. What remedy is available with
the company regarding compliance of the provisions of section 137 of the
Companies Act, 2013 for filing of copies of financial statements with the
Registrar of Companies?
Answer: In the present case, though AGM was not held, it ought to be held
by 30 September 2018 under sections 96 of the Companies Act, 2013.
Therefore, under the provisions of section 137(2), the financial statements
along with the documents required to be attached under this Act, duly signed
along with the statement of facts and reasons for not holding the AGM shall
be filed with the Registrar within thirty days of the last date before which the
AGM should have been held i.e. by 30 October 2018 along with such fees or
additional fees as may be prescribed.
Example 11: Will it make any difference in case the Annual Accounts were
duly laid before the AGM held on 27 September 2018 but the same were not
adopted by the shareholders?
Answer: Since the AGM has been held in time on 27 September 2018, the
un-adopted financial statements along with the required documents under
sub-section (1) of section 137 shall be filed with the Registrar within thirty
days of the date of AGM and the Registrar shall take them in his records as
provisional till the financial statements are filed with him after its adoption in
the adjourned AGM for that purpose.

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 ACCOUNTS OF COMPANIES 9.59

13. INTERNAL AUDIT [SECTION 138]11

Section 138 read with Rule 13 of the Companies (Accounts) Rules 2014, provides
for internal audit in a company.
Section 138 states that:
“(1) Such class or classes of companies as may be prescribed shall be required to
appoint an internal auditor, who shall either be a chartered accountant or a cost
accountant, or such other professional as may be decided by the Board to conduct
internal audit of the functions and activities of the company.
(2) The Central Government may, by rules, prescribe the manner and the intervals
in which the internal audit shall be conducted and reported to the Board.”
Rule 13 of the Companies (Accounts) rules, 2014 states that:
(i) Companies required to appoint Internal Auditor:
(a) The following class of companies shall be required to appoint an internal
auditor which may be either an individual or a partnership firm or a body
corporate, namely:
(1) every listed company;
(2) every unlisted public company having-
(A) paid up share capital of 50 crore rupees or more during the
preceding financial year; or
(B) turnover of 200 crore rupees or more during the preceding
financial year; or
(C) outstanding loans or borrowings from banks or public
financial institutions exceeding 100 crore rupees or more at
any point of time during the preceding financial year; or
(D) outstanding deposits of 25 crore rupees or more at any point
of time during the preceding financial year; and

11
In case of a specified IFSC public company & IFSC private company, section 138 shall
apply if the articles of the company provides for the same.

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(3) every private company having—

(A) turnover of 200 crore rupees or more during the preceding
financial year; or
(B) outstanding loans or borrowings from banks or public
financial institutions exceeding 100 crore rupees or more at
any point of time during the preceding financial year.
(b) The Audit Committee of the company or the Board shall, in consultation
with the Internal Auditor, formulate the scope, functioning, periodicity and
methodology for conducting the internal audit.

Paid up share capital ( 50 cr or more during P.F.Y)

Listed co.
Turn over 200 cr or more during P.F.Y
Companies eligible for

Unlisted public co. Outstanding loan/borrowing from banks or PFI

internal audit

exceeding100 cr or more at any point of time during

P.F.Y

Outstanding deposits 25 cr or more at any point of time

during P.F.Y

Turnover (200 Cr or more)

Private Co. Outstanding loans/ borrowings from banks or PFI

exceeding 100 crores or more at any point of time during
P.F.Y

(ii) Transitional period:

An existing company covered under any of the above criteria shall comply
with the requirements of section 138 and this rule within 6 months of
commencement of such section.
(iii) Who is Internal Auditor
(a) Internal Auditor shall either be a Chartered Accountant or a Cost
Accountant, or such other professional as may be decided by the Board
to conduct internal audit of the functions and activities of the company.

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The term “Chartered Accountant” or “Cost Accountant” shall mean a

“Chartered Accountant” or a “Cost Accountant”, as the case may be,
whether engaged in practice or not’.

(b) The internal auditor may or may not be an employee of the company.

Example 12: Perfect Ltd is a listed company. The company is in the business
of manufacturing of steel and had its head office at Karnataka. The company’s
operations are spread out across India. The company appointed a firm of
Chartered Accountants, N & Co LLP, as its internal auditors for the year ended
31st March 2019. However, for the financial year 2019-20, the company is
planning to have an in-house internal audit system commensurate with its
size and operations. If the company does that then it is planning not to
continue with N & Co LLP as its internal auditors. Please advise.
Answer
In the given situation, if the internal audit function of the company is fine as
per its size and operations then it may decide not to continue with N & Co
LLP.

SUMMARY
 Financial statement- Section 2(40)

Financial statement in relation to a company includes:

 A balance sheet as at the end of the FY;
 A profit & loss account, or in case of a company carrying on any activity
not for profit an income & exp. Account for the FY;
 Cash flow statement for the FY;
 A statement of changes in equity, if applicable; and
 Any explanatory note annexed to, or forming part of, any document
referred above. the financial statement with respect to one Person
Company, small company and dormant company, may not include the
cash flow statement.
 Financial Year–Section 2(41)
 Uniform financial year in Companies Act, 2013.

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 Financial year in relation to a company means the period ending on 31st

day of March every year.
 Section 128– Books of Accounts to be kept by Company
 Books of Accounts to be kept at registered office of the Company;
 Books of Accounts & relevant papers, books & financial statements
shall give a true fair view of the financial position of the Company
including that of its branch offices or other offices, if any;
 The books of accounts shall remain open for inspection by directors of
the Company or such other place, during business hours;
 The books of accounts relating to a period not less than eight preceding
financial years, shall be kept in good order;
 Penalty for contravention: Officer in default under this section shall be
punishable with a fine minimum of ` 50,000 and maximum of ` 5 lakhs.
 Proviso to section 128(1)
 Books of Accounts & other relevant papers, can be kept at such other
place in India as the Board of Directors may decide;
 The Company shall within seven days, file with the registrar a notice in
writing giving full address of that other place.
 Section 129-Financial Statement

 The financial statements shall give a true and fair view of the state of
affairs of the company or companies.

 It shall comply with the accounting standards notified under section 133
and shall be in the form or forms as may be provided for different class
or classes of companies in Schedule III.

 Re-opening of Accounts- Section-130

The Company may, if it appears to the directors that the Financial Statements
or Board’s Report are not in compliance with the provisions of the Act, may
prepare revised financial statement or a revised Board’s Report with the
approval of Tribunal.

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 Internal Audit-Section 138

 Every Listed Co.
 Every Public Co. having – Paid up Share Capital of ` 50 Crores or more
/Turnover of ` 200 crores or more / outstanding loans & borrowing
from banks & Public financial institutions exceeding ` 100 crore.
 Every Pvt Co. having – turnover of 200 crore or more / outstanding loans
& borrowing from banks & Public financial institutions exceeding `100
crore
 Above Companies are required to appoint Internal Auditors
 Audit committee in consultation with Internal Auditor formulates the
scope, functioning and methodology for internal audit.

TEST YOUR KNOWLEDGE

Question 1
The registered office of the Bharat Ltd. is situated in a classified backward area of
Maharashtra. The Board wants to keep its books of account at its corporate office in
Mumbai which is conveniently located. The Board seeks your advice about the feasibility
of maintaining the accounting records at a place other than the registered office of the
company. Please advise.
Answer
According to section 128(1) of the Companies Act, 2013, every company is required
to prepare and keep the books of accounts and other relevant books and papers
and financial statement for every financial year which give a true and fair view of
the state of the affairs of the company, including that of its branch office or offices,
if any, and explain the transactions effected both at the registered office and its
branches and such books shall be kept on accrual basis and according to the double
entry system of accounting.
The proviso to section 128(1) further provides that all or any of the books of
account aforesaid and other relevant papers may be kept at such other place in
India as the Board of Directors may decide and where such a decision is taken, the
company shall, within seven days thereof, file with the Registrar a notice in writing
giving the full address of that other place. Further company may keep such books
of accounts or other relevant papers in electronic mode as per the Rule 3 of
the Companies (Accounts) Rules, 2014.

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Therefore, the Board of Bharat Ltd. can keep its books of account at its corporate
office in Mumbai by following the abovementioned procedure.
Question 2
The Board of Directors of Vishwakarma Electronics Limited consists of Mr. Ghanshyam
(Director), Mr. Hyder (Director) and Mr. Indersen (Managing Director). The company has
also employed a full time Secretary.
The Profit and Loss Account and Balance Sheet of the company were signed by Mr.
Ghanshyam and Mr. Hyder. Examine whether the authentication of financial statements
of the company was in accordance with the provisions of the Companies Act, 2013?
Answer
According to section 134(1) of the Companies Act, 2013, the financial statement,
including consolidated financial statement, if any, shall be approved by the Board
of Directors before they are signed on behalf of the Board by the chairperson of
the company where he is authorised by the Board or by two directors out of which
one shall be managing director, if any, and the Chief Executive Officer, the Chief
Financial Officer and the company secretary of the company, wherever they are
appointed, or in the case of One Person Company, only by one director, for
submission to the auditor for his report thereon.
In the instant case, the Balance Sheet and Profit and Loss Account have been signed
only by Mr. Ghanshyam and Mr. Hyder, the directors. In view of Section 134(1) of
the Companies Act, 2013, Mr. Indersen, the Managing Director should be one of
the two signing directors. Since, the company has also employed a full- time
Secretary, he should also sign the Balance Sheet and Profit and Loss Account.
Question 3
A Housing Finance Ltd. is a housing finance company having a paid up share capital
of ` 11 crores and a turnover of ` 145 crores during the financial year 2017-18.
Explain with reference to the relevant provisions and rules, whether it is necessary for
A Housing Finance Ltd. to file its financial statements in XBRL mode.
Answer
Filing of financial statements in XBRL Mode
As per Rule 1 of the Companies (Filing of Documents and forms in Extensible Business
Reporting Language) Rules, 2015, following class of companies shall file their

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financial statements and other documents under section 137 of the Act with the
Registrar in e-form AOC-4 XBRL as per Annexure-I:
(i) companies listed with stock exchanges in India and their Indian subsidiaries;
(ii) companies having paid up capital of five crore rupees or above;
(iii) companies having turnover of one hundred crore rupees or above;
(iv) all companies which are required to prepare their financial statements in
accordance with Companies (Indian Accounting Standards) Rules, 2015.
Provided further that non-banking financial companies, housing finance companies
and companies engaged in the business of banking and insurance sector are
exempted from filing of financial statements under these rules.
Hence A housing Finance Ltd., being a housing finance company, is exempted from
filing its financial statement in XBRL mode.
Question 4
Herry Limited is a company registered in Thailand. SKP Limited (Registered in India),
a wholly owned subsidiary company of Herry Limited decided to follow different
financial year for consolidation of its accounts outside India. State the procedure to
be followed in this regard.
Answer
Where a company or body corporate, which is a holding company or a subsidiary
or associate company of a company incorporated outside India and is required to
follow a different financial year for consolidation of its accounts outside India, the
Central Government may, on an application made by that company or body
corporate in such form and manner as may be prescribed, allow any period as its
financial year, whether or not that period is a year. Any application pending before
the Tribunal as on the date of commencement of the Companies (Amendment)
Ordinance, 2018, shall be disposed of by the Tribunal in accordance with the
provisions applicable to it before such commencement. Also, a company or body
corporate, existing on the commencement of this Act, shall, within a period of two
years from such commencement, align its financial year as per the provisions of this
clause. SKP Limited is advised to follow the above procedure accordingly.

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 9.66 CORPORATE AND OTHER LAWS

Question 5
(i) Ravi Limited maintained its books of accounts under Single Entry System of
Accounting. Is it permitted under the provisions of the Companies Act, 2013?
(ii) State the persons responsible for complying with the provisions regarding
maintenance of Books of Accounts of a Company.
(iii) Whether a Company can keep books of Accounts in electronic mode accessible
only outside India?
Answer
(i) According to Section 128(1) of the Companies Act, 2013, every company shall
prepare “books of account” and other relevant books and papers and
financial statement for every financial year. These books of account should
give a true and fair view of the state of the affairs of the company, including
that of its branch office(s). These books of account must be kept on accrual
basis and according to the double entry system of accounting. Hence,
maintenance of books of account under Singly Entry System of Accounting
by Ravi Limited is not permitted.
(ii) Persons responsible to maintain books: As per Section 128 (6) of the
Companies Act, 2013, the person responsible to take all reasonable steps to
secure compliance by the company with the requirement of maintenance of
books of account etc. shall be:
(a) Managing Director,
(b) Whole-Time Director, in charge of finance
(c) Chief Financial Officer

(d) Any other person of a company charged by the Board with duty of
complying with provisions of section 128.
(iii) A Company has the option of keeping such books of account or other relevant
papers in electronic mode as per Rule 3 of the Companies (Accounts) Rules,
2014. According to such Rule,
(a) The books of account and other relevant books and papers maintained
in electronic mode shall remain accessible in India so as to be usable
for subsequent reference.

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 ACCOUNTS OF COMPANIES 9.67

Provided that for the financial year commencing on or after the 1st day
of April, 2022, every company which uses accounting software for
maintaining its books of account, shall use only such accounting
software which has a feature of recording audit trail of each and every
transaction, creating an edit log of each change made in books of
account along with the date when such changes were made and
ensuring that the audit trail cannot be disabled.
(b) There shall be a proper system for storage, retrieval, display or printout
of the electronic records as the Audit Committee, if any, or the Board
may deem appropriate and such records shall not be disposed of or
rendered unusable, unless permitted by law.
(c) The back-up of the books of account and other books and papers of
the company maintained in electronic mode, including at a place
outside India, if any, shall be kept in servers physically located in India
on a periodic basis.
Hence, a company cannot keep books of Account in electronic mode
accessible only outside India.
Question 6
The Government of India is holding 51% of the paid-up equity share capital of Sun
Ltd. The Audited financial statements of Sun Ltd. for the financial year 2017-18 were
placed at its annual general meeting held on 31st August, 2018. However, pending
the comments of the Comptroller and Auditor General of India (CAG) on the said
accounts the meeting was adjourned without adoption of the accounts. On receipt of
CAG comments on the accounts, the adjourned annual general meeting was held on
15th October, 2018 whereat the accounts were adopted. Thereafter, Sun Ltd. filed its
financial statements relevant to the financial year 2017-18 with the Registrar of
Companies on 12th November, 2018. Examine, with reference to the applicable
provisions of the Companies Act, 2013, whether Sun Ltd. has complied with the
statutory requirement regarding filing of accounts with the Registrar?
Answer
According to first proviso to section 137(1) of the Companies Act, 2013, where the
financial statements are not adopted at annual general meeting or adjourned
annual general meeting, such unadopted financial statements along with the
required documents shall be filed with the Registrar within thirty days of the date
of annual general meeting and the Registrar shall take them in his records as

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provisional till the financial statements are filed with him after their adoption in the
adjourned annual general meeting for that purpose.
According to second proviso to section 137(1) of the Companies Act, 2013, financial
statements adopted in the adjourned AGM shall be filed with the Registrar within
thirty days of the date of such adjourned AGM with such fees or such additional
fees as may be prescribed. In the instant case, the accounts of Sun Ltd. were
adopted at the adjourned AGM held on 15th October, 2018 and filing of financial
statements with Registrar was done on 12th November, 2018 i.e. within 30 days of
the date of adjourned AGM But Sun Ltd. has not filed its unadopted financial
statements within 30 days of the date of the annual general meeting held on 31st
August 2018.
Hence, Sun Ltd. has not complied with the statutory requirement regarding filing
of unadopted accounts with the Registrar, but has certainly complied with the
provisions by filing of adopted accounts within the due date with the Registrar.
Question 7
The Income Tax Authorities in the current financial year 2019-20 observed, during
the assessment proceedings, a need to re-open the accounts of Chetan Ltd. for the
financial year 2008-09 and, therefore, filed an application before the National
Company Law Tribunal (NCLT) to issue the order to Chetan Ltd. for re-opening of its
accounts and recasting the financial statements for the financial year 2008-09.
Examine the validity of the application filed by the Income Tax Authorities to NCLT.
Answer
As per section 130 of the Companies Act, 2013, a company shall not re-open its
books of account and not recast its financial statements, unless an application in
this regard is made by the Central Government, the Income-tax authorities, the
Securities and Exchange Board, any other statutory body or authority or any person
concerned and an order is made by a court of competent jurisdiction or the Tribunal
to the effect that—
(i) the relevant earlier accounts were prepared in a fraudulent manner; or
(ii) the affairs of the company were mismanaged during the relevant period,
casting a doubt on the reliability of financial statements:
However, no order shall be made in respect of re-opening of books of account
relating to a period earlier than eight financial years immediately preceding the
current financial year.

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In the given instance, an application was filed for re-opening and re-casting of the
financial statements of Chetan Ltd. for the financial year 2008-2009 which is beyond
8 financial years immediately preceding the current financial year.
Though application filed by the Income Tax Authorities to NCLT is valid, its
recommendation for reopening and recasting of financial statements for the period
earlier than eight financial years immediately preceding the current financial year
i.e. 2019-2020, is invalid.

© The Institute of Chartered Accountants of India

CHAPTER 10

AUDIT AND AUDITORS

LEARNING OUTCOMES

At the end of this chapter, you will be able to:

 Understand the procedure for appointment of auditors, their

removal, resignation, eligibility, qualifications, disqualifications
and remuneration.
 Know the powers and duties of auditors.
 Know about auditing services and certain services which an
auditor cannot render.

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 10.2 CORPORATE AND OTHER LAWS

CHAPTER OVERVIEW

First Auditor
Appointment of Auditors
Subsequent
Removal, resignation of Auditor
auditor and giving of special
notice

Eligibility, Qualification &

Disqualification

Remuneration of Auditor

Powers & Duties of auditors

Audit & Auditors and auditing standards

Segment of Audit Reports

Prohibited Services

Signing of Audit Reports

Auditor to attend AGM

Punishment Provisions

Cost Auditor

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 AUDIT AND AUDITORS 10.3

1. INTRODUCTION
Large business corporations are managed by the directors who represent the
members who are the real owners of the company through board. In the absence of
any check the directors may mismanage the finances of the organisation. Thus,
members appoint auditor/auditors to look into the true and fair view of the financial
affairs of the company. These auditors are independent from the management of the
company. Hence, they can express an un-biased opinion on the financials of the
company.

2. APPOINTMENT OF AUDITORS [SECTION 139]

Section 139 of the Companies Act, 2013 provides provision for appointment of
auditors. According to this section:
(i) Appointment of auditor [Section 139(1)]:
(a) Every company shall appoint an individual or a firm as an auditor of
the company at the first annual general meeting (AGM).
Example 1: Rashail Techlabs Private Limited incorporated during the
financial year 2019-20. First AGM of the company held on 30.09.2020.
The company appointed M/s. Rams & Associates, Chartered
Accountant firm for the period of 5 Years as a subsequent statutory
auditor.
(b) The auditor shall hold office from the conclusion of 1stAGM till the
conclusion of its 6th AGM and thereafter till the conclusion of every
sixth AGM. The manner and procedure of selection of auditors by the
members of the company at AGM has been prescribed under the
Companies (Audit and Auditors) Rules, 2014.
(c) Manner and procedure of selection and appointment of auditors:
(1)
Categories of Competent Responsibility of the competent
Companies authority authority
A company Audit (i) The competent authority shall
which is required Committee take into consideration the
to constitute an qualifications and experience of the
Audit Committee individual or the firm proposed to

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 10.4 CORPORATE AND OTHER LAWS

under section be considered for appointment as

177 1 auditor and such qualifications and
A Company Board of experience are commensurate with
which is not Directors the size and requirements of the
required to company.
constitute an (ii) It shall have regard to any order
Audit Committee or pending proceeding relating to
under section professional matters of conduct
177 against the proposed auditor before
the Institute of Chartered
Accountants of India (ICAI) or any
competent authority or any Court.
(iii) It may call for such other
information from the proposed
auditor as it may deem fit.
(2)
Categories of Competent Responsibility of the
Companies authority competent authority
A company which is Audit the committee shall
required to constitute Committee recommend the name of an
an Audit Committee individual or a firm as auditor
under section 177 to the Board for
consideration
A Company which is Board the Board shall consider and
not required to recommend an individual or

1
Companies that require to constitute an audit committee
For the purpose of constitution of Audit Committee, section 177 of the Act, read with
Companies (Meetings of Board and its Powers) Rules, 2014 provides that:
The Board of directors of every listed public companies and the following classes of
companies shall constitute an Audit Committee-
(i) all public companies with a paid up capital of ten crore rupees or more;
(ii) all public companies having turnover of one hundred crore rupees or more;
(iii) all public companies, having in aggregate, outstanding loans or borrowings or
debentures or deposits exceeding fifty crore rupees or more.
Explanation: The paid up share capital or turnover or outstanding loans, or borrowings
or debentures or deposits, as the case may be, as existing on the date of last audited
financial statements shall be taken into account for the purposes of this rule.

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 AUDIT AND AUDITORS 10.5

constitute an Audit a firm as auditor to the

Committee under members in the AGM for
section 177 appointment

(3) If the Board agrees with the recommendation of the Audit

Committee, it shall further recommend the appointment of an
individual or a firm as auditor to the members in the AGM.
(4) If the Board disagrees with the recommendation of the Audit
Committee, it shall refer back the recommendation to the
committee for reconsideration citing reasons for such
disagreement.
(5) If the Audit Committee, after considering the reasons given by
the Board, decides not to reconsider its original
recommendation, the Board shall record reasons for its
disagreement with the committee and send its own
recommendation for consideration of the members in the AGM;
and if the Board agrees with the recommendations of the Audit
Committee, it shall place the matter for consideration by
members in the AGM.
Example 2: Audit Committee recommended KPM & Associates,
Chartered Accountants firm for appointment as statutory auditor
to the board of Surya Solar Limited. However, board of the
company disagreed with the recommendation of the audit
committee. In such condition, board shall refer back the
recommendation to the committee for reconsideration citing
reasons for such disagreement.
(d) Before the appointment is made, the written consent of the auditor to
such appointment and a certificate shall be obtained from the auditor
that the appointment, if made, shall be in accordance with the
conditions as may be prescribed.
Conditions for appointment and notice to the Registrar: As per
second proviso of section 139(1) read with rule 4 stipulates that
written consent of the auditor must be taken before appointment. The
auditor appointed shall submit a certificate that–
(A) the individual or the firm (as the case may be) is eligible for
appointment and is not disqualified for appointment under the

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 10.6 CORPORATE AND OTHER LAWS

Act, the Chartered Accountants Act, 1949 and the rules or

regulations made thereunder;
(B) the proposed appointment is as per the term provided under the
Act;
(C) the proposed appointment is within the limits laid down by or
under the authority of the Act;
(D) the list of proceedings against the auditor or audit firm or any
partner of the audit firm pending with respect to professional
matters of conduct, as disclosed in the certificate, is true and
correct.
(e) The certificate shall also indicate whether the auditor satisfies the
criteria provided in section 141 [Section 141 provides provisions on
eligibility, qualification and disqualification of Auditor which will be
discussed later] of the Companies Act, 2013
(f) Communication to Auditor: Further the company shall inform the
concerned auditor of his or its appointment, and also file a notice (in the
Form ADT-1) of such appointment with the Registrar within 15 days of
the meeting in which the auditor is appointed.
Here, “appointment” includes re-appointment.
National Financial Reporting Authority Rules, 2018 (NFRA Rules)
As per Rule 3 (2) of NFRA Rules, every existing body corporate other than a
company governed by NFRA rules, shall inform the National Financial
Reporting Authority (NFRA) within 30 days of the commencement of the
NFRA rules, in Form NFRA-1, the particulars of the auditor as on the date of
commencement of the NFRA rules.
According to Rule 3(3) of NFRA Rules, every body corporate, other than a
company as defined in clause (20) of section 2 of the Act, formed in India
and governed under NFRA Rules shall, within 15 days of appointment of an
auditor under sub-section (1) of section 139, inform the NFRA in Form
NFRA-1, the particulars of the auditor appointed by such body corporate,
provided that a body corporate governed under clause (e) of sub-rule (1) of
NFRA Rules shall provide details of appointment of its auditor in Form
NFRA-1.

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 AUDIT AND AUDITORS 10.7

(ii) Term of Auditor [Section 139(2)]:

(a) Section 139(2) provides that listed companies and other prescribed
class or classes of companies (except one person companies and small
companies) shall not appoint or re-appoint—
(1) an individual as auditor for more than one term of five
consecutive years; and
(2) an audit firm as auditor for more than two terms of five
consecutive years.
(b) Rule 5 of the Companies (Audit and Auditors) Rules, 2014 has
prescribed the following classes of companies for the purposes of
section 139(2):
(1) all unlisted public companies having paid up share capital of
rupees 10 crores or more;
(2) all private limited companies having paid up share capital of rupees
50 crore or more;
(3) all companies having paid up share capital of below threshold
limit mentioned in (2) and (3) above, but having public
borrowings from financial institutions, banks or public deposits
of rupees 50 crores or more.
(c) Cooling Period:
(1) An individual auditor who has completed his term (i.e. one term
of five consecutive years) shall not be eligible for re-
appointment as auditor in the same company for five years from
the completion of his term;
(2) An audit firm which has completed its term (i.e. two terms of five
consecutive years) shall not be eligible for re- appointment as
auditor in the same company for five years from the completion
of such term.
Example 3: XYZ Ltd. which is a listed company appoints individual Mr.
Raghav as an auditor in its AGM dated 29th September, 2016. Mr.
Raghav will hold office of Auditor from the conclusion of this meeting
upto conclusion of sixth AGM i.e. AGM to be held in the year 2021.
Now as per sub-section (2), Mr. Raghav shall not be re-appointed as

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 10.8 CORPORATE AND OTHER LAWS

Auditor in XYZ Ltd. for further term of five years i.e. he cannot be
appointed as Auditor in XYZ Ltd. upto year 2026.
Example 4: XYZ Ltd. which is a listed company appoints M/s Raghav
& Associates as an audit firm in its AGM dated 29th September, 2016.
M/s Raghav & Associates will hold office from the conclusion of this
meeting upto conclusion of sixth AGM to be held in the year 2021.
Now as per sub-section (2), M/s Raghav & Associates can be
appointed or re-appointed as auditor for one more term of five years
i.e. upto year 2026. It shall not be re-appointed as Audit firm in XYZ
Ltd. for further term of five years after year 2026 to year 2031.
(d) Further, as on the date of appointment no audit firm having a
common partner or partners to the other audit firm, whose tenure has
expired in a company immediately preceding the financial year, shall
be appointed as auditor of the same company for a period of five
years.
Example 5: M/s Krishna & Associates is an audit firm having 2
partners namely Mr. Krishna and Mr. Shyam. Mr. Shyam is also a
partner of another audit firm named M/s Kukreja & Associates. M/s
Krishna & Associates was appointed as the auditors in the company
Golden Smith Ltd. for two consecutive periods of 5 years i.e. from year
2016 to year 2026. Now, if Golden Smith Ltd. wants to appoint M/s
Kukreja & Associates as its audit firm, it cannot do so because Mr.
Shyam is the common partner between both the Audit firms. This
prohibition is only for 5 years i.e. upto year 2031. After 5 years, Golden
Smith Ltd. may appoint M/s Kukreja & Associates or M/s. Krishna &
Associates as its auditors.
(e) Transitional period: Every company, existing on or before the
commencement of this Act which is required to comply with the
provisions as mentioned in above mentioned points (a) to (d) (i.e.
provisions of this sub-section), shall comply with those provisions within
a period which shall not be later than the date of the first AGM of the
company held, within the period specified under sub-section (1) of
section 96, after three years from the date of commencement of this Act.”
(f) It is also provided that nothing contained in above mentioned points
(a) to (d) (i.e. this sub-section) shall prejudice the right of the company

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 AUDIT AND AUDITORS 10.9

to remove an auditor or the right of the auditor to resign from such

office of the company.
(iii) Rotation of auditor [section 139(3) and (4)]:
(a) Members of a company may resolve to provide that—
(1) in the audit firm appointed by them, the auditing partner and his
team shall be rotated at such intervals as may be resolved by
members; or
(2) the audit shall be conducted by more than one auditor.
(b) The Central Government may, by rules, prescribe the manner in which
the companies shall rotate their auditors.
(c) Manner of rotation of auditors by the companies on expiry of their
term as provided under the Companies (Audit and Auditors) Rules,
2014:
(1) The Audit Committee shall recommend to the Board, the name
of an individual auditor or of an audit firm who may replace the
incumbent auditor on expiry of the term of such incumbent.
(2) Where a company is required to constitute an Audit Committee,
the Board shall consider the recommendation of such
committee, and in other cases, the Board shall itself consider the
matter of rotation of auditors and make its recommendation for
appointment of the next auditor by the members in annual
general meeting.
(3) For the purpose of the rotation of auditors:
(i) in case of an auditor (whether an individual or audit firm), the
period for which the individual or the firm has held office as
auditor prior to the commencement of the Act shall be taken
into account for calculating the period of five consecutive
years or ten consecutive years, as the case may be;
(ii) the incoming auditor or audit firm shall not be eligible if
such auditor or audit firm is associated with the outgoing
auditor or audit firm under the same network of audit firms.

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 10.10 CORPORATE AND OTHER LAWS

The term “same network” includes the firms operating or

functioning, hitherto or in future, under the same brand
name, trade name or common control.
(iii) For the purpose of rotation of auditors:
(A) a break in the term for a continuous period of five
years shall be considered as fulfilling the requirement
of rotation.
(B) if a partner, who is in charge of an audit firm and also
certifies the financial statements of the company,
retires from the said firm and joins another firm of
chartered accountants, such other firm shall also be
ineligible to be appointed for a period of five years.
Illustration explaining rotation in case of individual auditor:
Number of consecutive Maximum number of Aggregate
years for which an consecutive years for period which the
individual auditor has which he may be auditor would
been functioning as appointed in the complete in the
auditor in the same same company same company
company [in the first (including in view of
AGM held after the transitional period) column I and II
commencement of
provisions of section
139(2)]
I II III
5 years (or more than 5 3 years 8 years or more
years)
4 years 3 years 7 years
3 years 3 years 6 years
2 years 3 years 5 years
1 year 4 years 5 years

Here,
(a) Individual auditor shall include other individuals or firms
whose name or trademark or brand is used by such
individual, if any.

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 AUDIT AND AUDITORS 10.11

(b) Consecutive years shall mean all the preceding financial

years for which the individual auditor has been the auditor
until there has been a break by five years or more.
Illustration explaining rotation in case of audit firm
Number of consecutive Maximum number Aggregate
years for which an of consecutive years period which
audit firm has been for which the firm the firm would
functioning as auditor may be appointed in complete in the
in the same company the same company same company
[in the first AGM held (including in view of
after the transitional period) column I and II
commencement of
provisions of section
139(2)]
I II III
10 years (or more than 3 years 13 years or
10 years) more
9 years 3 years 12 years
8 years 3 years 11 years
7 years 3 years 10 years
6 years 4 years 10 years
5 years 5 years 10 years
4 years 6 years 10 years
3 years 7 years 10 years
2 years 8 years 10 years
1 year 9 years 10 years
Here,
(a) Audit Firm shall include other firms whose name or trade
mark or brand is used by the firm or any of its partners.
(b) Consecutive years shall mean all the preceding financial years
for which the firm has been the auditor until there has been a
break by five years or more.
(4) Where a company has appointed two or more individuals or firms
or a combination thereof as joint auditors, the company may follow
the rotation of auditors in such a manner that both or all of the

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joint auditors, as the case may be, do not complete their term in
the same year.
(d) Here, the word “firm” shall include a limited liability partnership
incorporated under the Limited Liability Partnership Act, 2008.
(iv) First auditors [Section 139(6)]:
(a) Notwithstanding anything contained in sub-section (1) of Section 139
i.e. point 2(i) mentioned above, the first auditor of a company, other
than a Government Company, shall be appointed by the Board of
directors within 30 days of the date of registration of the company
and the auditor so appointed shall hold office until the conclusion of
the first AGM.

First auditor shall within 30 days of to hold office until

be appointed by the date of the conclusion of
the BOD registration the first AGM

Example 6: Unicorn Steel Private Limited is incorporated as on

02.06.2020, board of directors of the company held board meeting as
on 15.06.2020 to appoint Jain Ajmera & Associates as a first auditor of
the company for a term of 5 years. As per section 139(6) of the
Companies Act, 2013, the board shall appoint first director within 30
days from the date of registration of the company. State the validity
of the aforesaid situation.
(i) Invalid
(ii) Valid after approval of shareholder in General Meeting
(iii) Valid only after approval of Central Government
Answer: The given situation is Invalid i.e. option (iii)
(b) If the Board fails to exercise its powers i.e. appointment of first
auditor, it shall inform the members of the company and the company

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 AUDIT AND AUDITORS 10.13

may appoint the first auditor within 90 days at an extra ordinary

general meeting (EGM) and such auditor shall hold office till the
conclusion of the first AGM.
Example 7: Managing Director of PQR Ltd. himself wants to appoint
Shri Ganpati, a practicing Chartered Accountant, as first auditor of the
company. Comment on the proposed action of the Managing Director.
Answer: Provisions and Explanation: Section 139(6) of the
Companies Act, 2013 provides that “the first auditor or auditors of a
company shall be appointed by the Board of directors within 30 days
from the date of registration of the company”. In the instant case, the
appointment of Shri Ganapati, a practicing Chartered Accountant as
first auditors by the Managing Director of PQR Ltd by himself is in
violation of Section 139(6) of the Companies Act, 2013, which requires
the Board of Directors to appoint the first auditor of the company.
Conclusion: In view of the above, the Managing Director of PQR Ltd.
cannot appoint the first auditor of the company himself.
(v) Filling up casual vacancy [Section 139(8)]:
(a) The Board may fill any casual vacancy in the office of an auditor
within 30 days but where such vacancy is caused by the resignation
of an auditor, such appointment shall also be approved by the
company at a general meeting convened within three months of the
recommendation of the Board.
(b) Any auditor appointed in a casual vacancy shall hold office until the
conclusion of the next annual general meeting.

Casual vacancy of Auditor

Filling the casual vacancy by Board within 30 days

If vacancy is caused by Resignation- appointment by Board shall

also be approved by company at GM convened within 3 months
of recommendation of Board

the Auditor so appointed shall hold office until the conclusion of

next AGM.

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 10.14 CORPORATE AND OTHER LAWS

Example 8: Prakash Carriers Limited appointed Mr. Raman as its auditor in

the Annual General Meeting held on 30th September, 2019. Initially, he
accepted the appointment. But he resigned from his office on 31st October,
2019 for personal reasons. The Board of directors seeks advice for filling up
the vacancy by appointment of Mr. Albert as auditor.
In the present case, as the auditor has resigned, the casual vacancy so
created can be filled up by the Board appointing Mr. Albert. However, the
appointment of Mr. Albert must be approved by the company by passing of
an ordinary resolution at a general meeting of the company which must be
convened by the Board within 3 months of the recommendation of the
Board. Mr. Albert will be entitled to hold office till the conclusion of the next
Annual General Meeting.
(vi) Appointment of auditors in case of Government Company or any other
company controlled by the State Government or the Central
Government [Section 139(5), 139(7) and 139(8)]
(a) As per section 139(5), the Comptroller and Auditor-General of India
(CAG) shall, in respect of a financial year, appoint an auditor duly
qualified to be appointed as an auditor of companies under this Act in
the case of:
(1) a Government company; or
(2) 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.
(b) The auditor shall be appointed within a period of 180 days from the
commencement of the financial year. The auditor appointed shall hold
office till the conclusion of the annual general meeting.

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 AUDIT AND AUDITORS 10.15

Comptroller and Auditor-General of India (CAG)

within 180 days from the

commencement of the FY, appoint
an auditor duly qualified to be Shall hold office till the
appointed as an auditor of conclusion of AGM
companies under this Act

Government company

Appointment of auditor
by CAG in respect of a any other company owned or controlled, directly
financial year (FY) 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

(c) First auditor [section 139(7)]:

(1) in the case 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, the first auditor shall be appointed by the
Comptroller and Auditor General of India (CAG) within 60 days
from the date of registration of the company.
(2) In case the CAG does not appoint first auditor within the said
period, the Board of Directors of the company shall appoint such
auditor within the next 30 days.
(3) Further, in the case of failure of the Board to appoint such
auditor within the next 30 days, it shall inform the members of
the company who shall appoint such auditor within the 60 days
at an EGM, who shall hold office till the conclusion of the first
annual general meeting.

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 10.16 CORPORATE AND OTHER LAWS

(d) Casual vacancy [section 139(8)]:

(1) In the case of a company whose accounts are subject to audit by
an auditor appointed by the CAG, casual vacancy of an auditor
shall be filled by the CAG within 30 days.
(2) In case the CAG does not fill the vacancy within the said period,
the Board of Directors shall fill the vacancy within next 30 days.
(vii) Re-appointment of retiring auditor [section 139(9), (10) and (11)]:
(a) A retiring auditor may be re-appointed at an AGM if—
(1) he is not disqualified for re-appointment;
(2) he has not given a notice in writing to the company of his
unwillingness to be re-appointed; and
(3) a special resolution has not been passed at that meeting
appointing some other auditor or providing expressly that he
shall not be re-appointed.
(b) Where at any AGM, no auditor is appointed or re-appointed, the
existing auditor shall continue to be the auditor of the company.
(viii) Audit committee’s recommendation [Section 139(11)]:
Where a company is required to constitute an Audit Committee under
section 177, all appointments, including the filling of a casual vacancy of an
auditor under this section shall be made after taking into account the
recommendations of such committee.
As per NFRA Rules, every auditor referred to in Rule 3 shall file a return with
the NFRA on or before 30th April every year in such form as may be
specified by the Central Government.
As per NFRA Rules, following provisions are relevant for the understanding of
the students:
Monitoring and enforcing compliance with auditing standards -
(1) For the purpose of monitoring and enforcing compliance with auditing
standards (SA) under the Act by a company or a body corporate governed
under rule 3, the NFRA may:
(i) review working papers (including audit plan and other audit
documents) and communications related to the audit;

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 AUDIT AND AUDITORS 10.17

(ii) evaluate the sufficiency of the quality control system of the auditor
and the manner of documentation of the system by the auditor; and
(iii) perform such other testing of the audit, supervisory, and quality
control procedures of the auditor as may be considered necessary or
appropriate.
(2) The NFRA may require an auditor to report on its governance practices and
internal processes designed to promote audit quality, protect its reputation
and reduce risks including risk of failure of the auditor and may take such
action on the report as may be necessary.
(3) The NFRA may seek additional information or may require the personal
presence of the auditor for seeking additional information or explanation in
connection with the conduct of an audit.
(4) The NFRA shall perform its monitoring and enforcement activities through
its officers or experts with sufficient experience in audit of the relevant
industry.
(5) The NFRA shall publish its findings relating to non-compliances on its
website and in such other manner as it considers fit, unless it has reasons
not to do so in the public interest and it records the reasons in writing.
(6) The NFRA shall not publish proprietary or confidential information, unless it
has reasons to do so in the public interest and it records the reasons in
writing.
(7) The NFRA may send a separate report containing proprietary or confidential
information to the Central Government for its information.
(8) Where the NFRA finds or has reason to believe that any law or professional
or other standard has or may have been violated by an auditor, it may
decide on the further course of investigation or enforcement action through
its concerned Division.
Overseeing the quality of service and suggesting measures for improvement (As
per NFRA Rules)
(1) On the basis of its review, the NFRA may direct an auditor to take measures
for improvement of audit quality including changes in their audit processes,
quality control, and audit reports and specify a detailed plan with time-
limits.

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(2) It shall be the duty of the auditor to make the required improvements and
send a report to the NFRA explaining how it has complied with the
directions made by the NFRA.
(3) The NFRA shall monitor the improvements made by the auditor and take
such action as it deems fit depending on the progress made by the auditor.
(4) The NFRA may refer cases with regard to overseeing the quality of service of
auditors of companies or bodies corporate referred to in rule 3 to the Quality
Review Board constituted under the Chartered Accountants Act, 1949 (38 of
1949) or call for any report or information in respect of such auditors or
companies or bodies corporate from such Board as it may deem appropriate.
(5) The NFRA may take the assistance of experts for its oversight and monitoring
activities.

3. REMOVAL, RESIGNATION OF AUDITOR AND

GIVING OF SPECIAL NOTICE [SECTION 140]
Section 140 of the Companies Act, 2013 provides for removal, resignation of
auditor and giving of special notice. According to this section:
(i) Removal of auditor before the expiry of his term [Section 140(1)]:
(a) The auditor appointed under section 139 may be removed from his
office before the expiry of his term only by a special resolution of the
company and after obtaining the previous approval of the Central
Government 2 by making an application in Form ADT-2 and shall be
accompanied with the prescribed fees.
(b) The application shall be made to the Central Government within 30
days of the resolution passed by the Board.
(c) The Company shall hold the general meeting within 60 days of receipt of
approval of the Central Government for passing the special resolution.
(d) Giving opportunity of being heard (Audi Alteram Partem): Before taking
any action for removal of auditor before the expiry of his term, the auditor
concerned shall be given a reasonable opportunity of being heard.

2
Powers are delegated to Regional Director

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 AUDIT AND AUDITORS 10.19

STEPS FOR REMOVAL OF AUDITOR

A Special Notice is
received for Auditor shall be given Auditor removal
Removal of auditor a reasonable can be done only
opportunity of being through Special
heard Resolution
A board meeting will be
held (To decide about
removal and then After approval from
Auditor will be
authorising the filing of CG, Special Notice
removed
application to CG) to be sent for AGM

Application to CG (To
be made in ADT-2), Approval of CG
within 30 days of received
Board meeting

Example 9: Mr. Suresh, a Chartered Accountant, was appointed by the

Board of Directors of AB Limited as the First Auditor. The company in
General Meeting removed Mr. Suresh without seeking the approval of the
Central Government and appointed Mr. Gupta as an auditor in his place. The
first auditor appointed by the Board of Directors can be removed in
accordance with the provision of Section 140(1) of the Companies Act, 2013.
Hence, the removal of the first auditor in this case is invalid. The company
contravened the provision of the Act.
(ii) Resignation by Auditor [Section 140(2) & (3)]
(a) If the Auditor has resigned from the company, he shall file a statement
in the form ADT-3 with the company and the Registrar within a period
of 30 days from the date of such resignation.
(b) The auditor shall indicate the reasons and other facts as may be
relevant with regard to his resignation, in the statement.
(c) In case of government companies or companies controlled by Central
Government or State Government, the auditor shall file such
statement with the CAG along with the company and the Registrar
indicating the reasons and other facts as may be relevant with regard
to his resignation.
(d) Penalty for contravention: If the auditor does not comply with
aforesaid provision, he or it shall be liable to a penalty of `50,000 or

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 10.20 CORPORATE AND OTHER LAWS

an amount equal to the remuneration of the auditor, whichever is less,

and in case of continuing failure, with a further penalty of ₹ 500 for
each day after the first during which such failure continues, subject to
a maximum of ` 2 lacs.

• Form ADT-3
Resignation by auditor of • within 30 days of resignation
Non-Government co. • with Company and Registrar

Resignation by auditor of • Form ADT-3 [Rule 8 of Companies Audit and

Government company or Audiors Rule, 2014]
company controlled by CG or • within 30 days of resignation
SG • with Company, Registrar & CAG

(iii) Appointing Auditor other than the Retiring Auditor [Section 140(4)]
(a) If the retiring auditor has not completed a consecutive tenure of 5
years or 10 years, as the case may be, as provided under sub-section
(2) of section 139, special notice shall be required for a resolution at
an annual general meeting appointing as auditor a person other than
a retiring auditor, or providing expressly that a retiring auditor shall
not be re-appointed.
(b) On receipt of notice of such a resolution, the company shall forthwith
send a copy thereof to the retiring auditor.
(c) Where notice is given of such a resolution and the retiring auditor
makes with respect thereto representation in writing to the company
(not exceeding a reasonable length) and requests its notification to
members of the company, the company shall, unless the
representation is received by it too late for it to do so,—
(1) in any notice of the resolution given to members of the
company, state the fact of the representation having been made;
and
(2) send a copy of the representation to every member of the
company to whom notice of the meeting is sent, whether before
or after the receipt of the representation by the company.

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(d) If a copy of the representation is not sent as aforesaid because it was

received too late or because of the company’s default, the auditor
may (without prejudice to his right to be heard orally) require that the
representation shall be read out at the meeting.
(e) However, if a copy of representation is not sent as aforesaid, a copy
thereof shall be filed with the Registrar.
(f) If the Tribunal is satisfied on an application either of the company or
of any other aggrieved person that the rights conferred by this sub-
section are being abused by the auditor, then the copy of the
representation may not be sent and the representation need not be
read out at the meeting.
(iv) Auditor acts in a fraudulent manner or abetted or colluded in any fraud
[Section 140(5)]

(a) On satisfaction of Tribunal that the auditor of a company has

acted in a fraudulent manner etc.: Without prejudice to any action
under the provisions of this Act or any other law for the time being in
force, the Tribunal either—

- suo motu; or
- on an application made to it by the Central Government; or
- by any person concerned,

if it is satisfied that the auditor of a company has, whether directly or

indirectly, acted in a fraudulent manner or abetted or colluded in any
fraud by, or in relation to, the company or its directors or officers, it
may, by order, direct the company to change its auditors.
(b) Requirement for change of auditor: If the application is made by the
Central Government and the Tribunal is satisfied that any change of
the auditor is required, it shall within 15 days of receipt of such
application, make an order that he shall not function as an auditor and
the Central Government may appoint another auditor in his place.
(c) Ineligibility of auditor to be appointed: An auditor, whether
individual or firm, against whom final order has been passed by the
Tribunal under this section shall not be eligible to be appointed as an
auditor of any company for a period of 5 years from the date of

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passing of the order and the auditor shall also be liable for action
under section 447 of the Companies Act 2013.
(d) Explanation I. — It is hereby clarified that the case of a firm, the
liability shall be of the firm and that of every partner or partners who
acted in a fraudulent manner or abetted or colluded in any fraud by,
or in relation to, the company or its director or officers.
(e) Explanation II.—For the purposes of this Chapter the word “auditor”
includes a firm of auditors.

suo motu
If tribunal is satisfied, within
15 days of receipt of
on application by application, it shall order
TRIBUNAL CG that he shall not function as
Auditor and CG may
appoint another auditor
on application by
any person
concerned
Satisfied that Auditor has
directly or indirectly acted in
fraudulent manner

Direct the company to

change its auditors

The removed auditor shall not be

eligible to be appointed as auditor of
any company for 5 years and liable for
action u/s 447

Example 10: FLP Ltd, engaged in the business of real estate and energy,
defaulted on its borrowings which amounted to thousands of crores. During
the year ended 31st March 2019, a fraud was uncovered in respect of
various transactions of the company and it was observed by the Central
Government that the auditors of the company were involved in such fraud.
Please suggest what can be the course of action in this case.
Answer: The Central Government may apply to the Tribunal in respect of
such matter highlighting that the auditors miserably failed to fulfill their

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 AUDIT AND AUDITORS 10.23

duties as auditors of the company. If the Tribunal is satisfied that the

auditors were involved in the fraud with the company, the Tribunal may
direct the company to change its auditors and those auditors shall not be
eligible to be appointed as auditor of any company for 5 years and also
liable for action under section 447 of the Companies Act 2013.

4. ELIGIBILITY, QUALIFICATIONS AND

DISQUALIFICATIONS OF AUDITORS
[SECTION 141]
Section 141 of the Companies Act, 2013 provides for eligibility, qualifications and
disqualifications of auditors. This section deals with:
(i) Qualifications of an auditor [Section 141(1) & (2)]:
(a) A person shall be eligible to be appointed as an auditor of a company
only if he is a Chartered Accountant within the meaning of the
Chartered Accountants Act, 1949.
(b) A firm whereof majority of partners practicing in India are qualified for
appointment as aforesaid may be appointed by its firm name to be
auditor of a company.
(c) Where a firm including a Limited Liability Partnership is appointed as
an auditor of a company, only the partners who are Chartered
Accountants shall be authorized to act and sign on behalf of the firm.
(ii) Disqualifications of auditors [Section 141(3)]:
(a) Section 141 (3) of the Act read with Rule 10 of Companies (Audit and
Auditors) Rule, 2014 prescribes following persons shall not be
qualified for appointment as auditor of a company—
(1) A body corporate other than a limited liability partnership
registered under the Limited Liability Partnership Act, 2008;
(2) an officer or employee of the company;
(3) a person who is a partner, or who is in the employment, of an
officer or employee of the company;
Example 11: Mr. Anil, a Chartered accountant, is a partner of a
firm and has been appointed as an auditor of Laxman Ltd. in the
Annual General Meeting of the company held in September

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 10.24 CORPORATE AND OTHER LAWS

2018 in which he accepted the assignment. Subsequently, in

January 2019, he offered Bharat, another Chartered Accountant,
who is the Manager Finance of Laxman Ltd., to join the firm of
Anil as a partner.
Answer: Provisions and Explanation: Section 141(3)(c) of the
Companies Act, 2013 prescribes that any person who is a partner
or in employment of an officer or employee of the company will
be disqualified to act as an auditor of a company. Sub-section
(4) of Section 141 provides that an auditor who becomes
subject, after his appointment, to any of the disqualifications
specified in sub-sections (3) of Section 141, shall be deemed to
have vacated his office as an auditor.
Conclusion: In the present case, Anil is auditor of M/s Laxman
Limited and any employee of Laxman Limited cannot become
the Partner of the firm where Anil is a Partner. In case that
happens, he/the firm shall be deemed to have vacated office of
the auditor of M/s Laxman Limited.
(4) a person who, or his relative or partner—
(A) is holding any security of or interest in the company or
its subsidiary, or of its holding or associate company or a
subsidiary of such holding company (i.e. fellow subsidiary):
Provided that the relative may hold security or interest in
the company of face value not exceeding `1,00,000 as
prescribed under Rule 10 of the Company (Audit and
Auditors) Rules, 2014.
Further, the above condition shall, wherever relevant, be
also applicable in the case of a company not having share
capital or other securities. If the relative acquires any
security or interest above the prescribed threshold i.e.
`1,00,000, the corrective action to maintain the limits as
specified above shall be taken by the auditor within 60
days of such acquisition or interest.
Example 12: “Mr. Ashish”, a practicing Chartered
Accountant, is holding securities of “XYZ Ltd.” having face
value of ` 900/-. Whether Mr. Ashish is qualified for
appointment as an Auditor of “XYZ Ltd.”?

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 AUDIT AND AUDITORS 10.25

Answer: As per section 141 (3)(d) (i) an auditor is

disqualified to be appointed as an auditor if he, or his
relative or partner holding any security of or interest in the
company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company:
In the present case, Mr. Ashish is holding security of ` 900
in the XYZ Ltd, therefore he is not eligible for appointment
as an Auditor of “XYZ Ltd”.
Example 13: “Mr. P” is a practicing Chartered Accountant
and “Mr. Q”, the relative of “Mr. P”, is holding securities of
“ABC Ltd.” Having face value of ` 90,000/-. Whether “Mr.
P” is qualified for being appointed as an auditor of “ABC
Ltd.”?
Answer: As per section 141 (3)(d)(i), an auditor is
disqualified to be appointed as an auditor if he, or his
relative or partner holding any security of or interest in the
company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company. Further
as per proviso to this Section, the relative of the auditor
may hold the securities or interest in the company of face
value not exceeding of ` 1,00,000.
In the present case, Mr. Q. (relative of Mr. P, an auditor), is
having securities of ` 90,000 face value in ABC Ltd., which
is as per requirement of proviso to section 141 (3)(d)(i).
Therefore, Mr. P will not be disqualified to be appointed as
an auditor of ABC Ltd.
Example 14: “BC & Co.” is an audit firm having partners
“Mr. B” and “Mr. C” and “Mr. A”, relative of “Mr. C”, is
holding securities of “MWF Ltd.” having face value of
`1,01,000. Whether “BC & Co.” is qualified for appointment
as auditor of “MWF Ltd.”?
Answer: As per section 141(3)(d)(i) an auditor is
disqualified to be appointed as an auditor if he, or his
relative or partner holding any security of or interest in the
company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company. Further

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 10.26 CORPORATE AND OTHER LAWS

as per proviso to this Section, the relative of the auditor

may hold the securities or interest in the company of face
value not exceeding of ` 1,00,000.
In the instant case, BC & Co, will be disqualified for
appointment as an auditor of MWF Ltd as the relative of
Mr. C i.e. partner of BC & Co., is holding the securities in
MWF Ltd which is exceeding the limit mentioned in proviso
to section 141(3)(d)(i).
(B) is indebted to the company, or its subsidiary, or its holding
or associate company or a subsidiary of such holding
company, in excess of ` 5 Lacs; or
(C) has given a guarantee or provided any security in
connection with the indebtedness of any third person to
the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in
excess of ` 1 Lac.
(5) a person or a firm who, whether directly or indirectly, has
business relationship with the company, or its subsidiary, or its
holding or associate company or subsidiary of such holding
company or associate company. According to the Companies
(Audit and Auditors) Rules, 2014, the term “business relationship”
shall be construed as any transaction entered into for a
commercial purpose, except–
(A) commercial transactions which are in the nature of
professional services permitted to be rendered by an
auditor or audit firm under the Act and the Chartered
Accountants Act, 1949 and the rules or the regulations
made under those Acts;
(B) commercial transactions which are in the ordinary course
of business of the company at arm’s length price like sale
of products or services to the auditor as customer by the
companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such
other similar businesses.
(6) a person whose relative is a director or is in the employment of
the company as a director or key managerial personnel;

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 AUDIT AND AUDITORS 10.27

(7) a person who is in full time employment elsewhere or a person

or a partner of a firm holding appointment as its auditor, if such
persons or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than 20
companies other than one person companies, small companies
and private companies having paid-up share capital less than
100 crores rupees.
Ceiling on numbers of audits: Before appointment is given to
any auditor, the company must obtain a certificate from him to
the effect that the appointment, if made, will not result in an
excess holding of company audit by the auditor concerned over
the limit laid down in section141(3)(g) of the Companies Act,
2013 which prescribes that a person who is in full time
employment elsewhere or a person or a partner of a firm
holding appointment as its auditor, if such person or partner is
at the date of such appointment or reappointment holding
appointment as auditor of more than 20 companies other than
one person companies, dormant companies, small companies
and private companies having paid-up share capital less than
` 100 crore (MCA notification dated 5 June 2015).
Example 15: “ABC & Co.” is an audit firm having partners “Mr.
A”, “Mr. B” and “Mr. C”, Chartered Accountants. “Mr. A”, “Mr. B”
and “Mr. C” are holding appointment as auditors in 4, 6 and 10
companies respectively.
(i) Provide the maximum number of audits remaining in the
name of “ABC & Co.”
(ii) Provide the maximum number of audits remaining in the
name of individual partner i.e. Mr. A, Mr. B and Mr. C.
Fact of the Case: In the instant case, Mr. A is holding
appointment in 4 companies, Mr. B is having appointment in 6
companies and Mr. C is having appointment in 10 companies. In
aggregate all three partners are having 20 audits.
Provisions and Explanations: As per section 141(3)(g) of the
Companies Act, 2013, a person shall not be eligible for
appointment as an auditor if he is in full time employment
elsewhere or a person or a partner of a firm holding

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 10.28 CORPORATE AND OTHER LAWS

appointment as its auditor, if such person or partner is at the

date of such appointment or reappointment holding
appointment as auditor of more than twenty companies other
than one person companies, dormant companies, small
companies and private companies having paid-up share capital
less than ` 100 crores.
As per section 141 (3)(g), this limit of 20 company audits is per
person. In the case of an audit firm having 3 partners, the overall
ceiling will be 3 × 20 = 60 companies’ audit. Sometimes, a
Chartered Accountant may be a partner in a number of auditing
firms. In such a case, all the firms in which he is partner or
proprietor will be together entitled to 20 company audits only
on his account.
Conclusion:
(i) Therefore, ABC & Co. can hold appointment as an auditor
of 40 more companies:
Total Number of audits for which the firm would be
eligible = 20*3 = 60
Number of audits already taken by all the partners
In their individual capacity = 4+6+10 = 20
Remaining number of audits available to the firm = 40
(ii) With reference to above provisions, an auditor can hold
more appointment as auditor = ceiling limit as per section
141(3)(g)- already holding appointments as an auditor.
Hence
(1) Mr. A can hold: 20 – 4 = 16 more audits.
(2) Mr. B can hold 20 - 6 = 14 more audits and
(3) Mr. C can hold 20-10 = 10 more audits.
Note:
It has been assumed that the companies given in the question are
not one person companies, dormant companies, small companies
and private companies having paid-up share capital less than
` 100 crore.

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(8) a person who has been convicted by a court of an offence

involving fraud and a period of 10 years has not elapsed from
the date of such conviction;
(9) a person who, directly or indirectly, renders any service referred
to in section 144 to the company or its holding company or its
subsidiary company.
Explanation— For the purposes of this clause, the term "directly
or indirectly" shall have the meaning assigned to it in the
Explanation to section 144 (section 144 deals with certain
services not to be tendered by auditor).
(iii) Vacation of office by an auditor [Section 141(4)]:
If a person appointed as an auditor of a company incurs any of the
disqualifications specified in Section 141(3), he shall be deemed to have
vacated his office. Such vacation shall be deemed to be a casual vacancy in
the office of the auditor.

5. REMUNERATION OF AUDITORS [SECTION 142]

Section 142 of the Companies Act, 2013 provides for remuneration of auditors.
According to this section:
(i) The remuneration of the auditors of a company shall be fixed by the
company in general meeting or in such manner as the company in general
meeting may determine.
(ii) In the case of first auditor, remuneration may be fixed by the Board.
(iii) The remuneration mentioned aforesaid shall, in addition to the fee payable
to an auditor, include the expenses, if any, incurred by the auditor in
connection with the audit of the company and any facility extended to him.
But the remuneration does not include any remuneration paid to him for
any other service rendered by him at the request of the company.
Example 16: SHRD Private Ltd is engaged in the business of software and
consultancy. The company has an annual turnover of INR 2,000 crores but
its profit margins are not very good as compared to the industry standards.
For the financial year ended 31st March 2019, the company proposed
appointment of its statutory auditors at its Board meeting, however, the
remuneration was not finalized. The statutory auditors completed the
engagement formalities including the engagement letter between the

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company and the auditors and it was decided that the engagement letter be
signed without fee i.e. with the clause that the fee to be mutually decided.
In this situation, engagement letter with such arrangement is valid.

6. POWERS AND DUTIES OF AUDITORS AND

AUDITING STANDARDS [SECTION 143]
(i) Powers of Auditors [Section 143(1)]:
(a) Access to books of account and vouchers: Every auditor of a
company shall have a right of access at all times to the books of
accounts and vouchers of the company, whether kept at the registered
office of the company or at any other place.
(b) Entitled to have necessary information and explanation: He shall
be entitled to require from the officers of the company such
information and explanations as the auditor may consider necessary
for the performance of his duties as auditor.
(c) Access to record of all its subsidiaries: The auditor of a company
which is a holding company shall also have the right of access to the
records of all its subsidiaries and associate companies in so far as it
relates to the consolidation of its financial statements with that of its
subsidiaries and associate companies.
(ii) Duties of Auditors
(a) Matters of inquiry: The auditor shall inquire into the following
matters, namely—
(1) Whether loans and advances made by the company on the basis
of security have been properly secured and whether the terms
on which they have been made are prejudicial to the interests of
the company or its members;
(2) Whether transactions of the company which are represented
merely by book entries are prejudicial to the interests of the
company;
(3) Where the company not being an investment company or a
banking company, whether so much of the assets of the
company as consist of shares, debentures and other securities

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have been sold at a price less than that at which they were
purchased by the company;
(4) Whether loans and advances made by the company have been
shown as deposits;
(5) Whether personal expenses have been charged to revenue
account;
(6) Where it is stated in the books and documents of the company
that any shares have been allotted for cash, whether cash has
actually been received in respect of such allotment, and if no
cash has actually been so received, whether the position as
stated in the account books and the balance sheet is correct,
regular and not misleading.
(b) The auditor shall make a report to the members of the company on
the following:
(1) On the accounts examined by him; and
(2) On every financial statements which are required by or under
this Act to be laid before the company in general meeting; and
(c) The auditor while making the report shall take into account the
provisions of the Act, the accounting and auditing standards and
matters which are required to be included in the audit report under
the provisions of this Actor any rules made thereunder or under any
order made under section 143(11).
(d) The auditor shall express his opinion on the accounts and financial
statements examined by him. He shall express an opinion, according
to him and to the best of his information and knowledge, whether the
said accounts/financial statements give a true and fair view of the
state of the company’s affairs as at the end of its financial year and
profit or loss and cash flow for the year and such other matters as may
be prescribed.
(e) The auditors’ report shall also state—
(1) whether he has sought and obtained all the information and
explanations which to the best of his knowledge and belief were
necessary for the purpose of his audit and if not, the details

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 10.32 CORPORATE AND OTHER LAWS

thereof and the effect of such information on the financial

statements;
(2) whether, in his opinion, proper books of account as required by
law have been kept by the company so far as appears from his
examination of those books and proper returns adequate for the
purposes of his audit have been received from branches not
visited by him;
(3) whether the report on the accounts of any branch office of the
company audited under sub-section (8) by a person other than
the company’s auditor has been sent to him under the proviso
to that sub-section and the manner in which he has dealt with it
in preparing his report;
(4) whether the company’s balance sheet and profit and loss
account dealt with in the report are in agreement with the books
of account and returns;
(5) whether, in his opinion, the financial statements comply with the
accounting standards;
(6) the observations or comments of the auditors on financial
transactions or matters which have any adverse effect on the
functioning of the company;
(7) whether any director is disqualified from being appointed as a
director under sub section (2) of section 164;
(8) any qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected
therewith;
(9) whether the company has adequate internal financial controls
with reference to financial statements in place and the operating
effectiveness of such controls;
As per the Rule 10A inserted by the Companies(Audit and
Auditors) Amendments Rules, 2014 vide Notification dated 14th
October, 2014,for the purposes of clause (i) of sub-section (3)
of section 143 (i.e. point 9 mentioned above), for the financial
years commencing on or after 1st April 2015, the report of the
auditor shall state about existence of internal financial controls

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 AUDIT AND AUDITORS 10.33

with reference to financial statements and its operating

effectiveness.
Provided that auditor of a company may voluntarily include the
statement referred to in this rule for the financial year
commencing on or after 1st April 2014 and ending on or before
31st March 2015.
3
Exemption to Private Company: ‘In case of Private Company -
Clause (i) of Sub-Section (3) of Section 143 shall not apply to a
private company:-
(i) which is a one person company or a small company; or
(ii) which has turnover less than rupees fifty crore as per latest
audited financial statement and which has aggregate
borrowings from banks or financial institutions or any body
corporate at any point of time during the financial year
less than rupees 25 crore. - Notification Dated 13th June,
2017.
The aforesaid exceptions, modifications and adaptations shall be
applicable to a Private company which has not committed a
default in filing of its financial statements under section 137 or
annual return under section 92 of the said Act with the
Registrar.’
(10) such other matters as may be prescribed.
(f) Rule 11 of the Companies (Audit and Auditors) Rules, 2014 provides
that the auditor’s report shall also include their views and comments
on the following matters, namely:

3[Notification No. G.S.R. 583(E) dated 13th June, 2017 stated that requirements of reporting
under section 143(3)(i) read with Rule 10A of the Companies (Audit and Auditors) Rules, 2014
of the Companies Act 2013 shall not apply to certain private companies. Through issue of this
circular, it was clarified that the exemption shall be applicable for those audit reports in
respect of financial statements pertaining to financial year, commencing on or after 1st April
2016, which are made on or after the date of the said notification. (Clarification regarding
applicability of exemption given to certain private companies under section 143(3)(i) vide
circular no. 08/2017 dated 25th July 2017)]

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 10.34 CORPORATE AND OTHER LAWS

(1) whether the company has disclosed the impact, if any, of

pending litigations on its financial position in its financial
statement;
(2) whether the company has made provision, as required under any
law or accounting standards, for material foreseeable losses, if
any, on long term contracts including derivative contracts;
(3) whether there has been any delay in transferring amounts,
required to be transferred, to the Investor Education and
Protection Fund by the company.
4
(4) (i) Whether the management has represented that, to the
best of it’s knowledge and belief, other than as
disclosed in the notes to the accounts, no funds have
been advanced or loaned or invested (either from
borrowed funds or share premium or any other sources
or kind of funds) by the company to or in any other
person(s) or entity(ies), including foreign entities
(“Intermediaries”), with the understanding, whether
recorded in writing or otherwise, that the Intermediary
shall, whether, directly or indirectly lend or invest in
other persons or entities identified in any manner
whatsoever by or on behalf of the company (“Ultimate
Beneficiaries”) or provide any guarantee, security or
the like on behalf of the Ultimate Beneficiaries;
(ii) Whether the management has represented, that, to the
best of it’s knowledge and belief, other than as
disclosed in the notes to the accounts, no funds have
been received by the company from any person(s) or
entity(ies), including foreign entities (“Funding
Parties”), with the understanding, whether recorded in
writing or otherwise, that the company shall, whether,
directly or indirectly, lend or invest in other persons or
entities identified in any manner whatsoever by or on
behalf of the Funding Party (“Ultimate Beneficiaries”)

4
Clause (d) to Rule 11 of the Companies (Audit and Auditors) Rules, 2014 has been omitted
through the Companies (Audit and Auditors) Amendment Rules, 2021 (w.e.f. 1st April, 2021).

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 AUDIT AND AUDITORS 10.35

or provide any guarantee, security or the like on behalf

of the Ultimate Beneficiaries; and
(iii) Based on such audit procedures that the auditor has
considered reasonable and appropriate in the
circumstances, nothing has come to their notice that
has caused them to believe that the representations
under sub-clause (i) and (ii) contain any material mis-
statement.
(5) Whether the dividend declared or paid during the year by the
company is in compliance with section 123 of the Companies
Act, 2013.
(6) Whether the company, in respect of financial years
commencing on or after the 1st April, 2022, has used such
accounting software for maintaining its books of account
which has a feature of recording audit trail (edit log) facility
and the same has been operated throughout the year for all
transactions recorded in the software and the audit trail
feature has not been tampered with and the audit trail has
been preserved by the company as per the statutory
requirements for record retention.
(g) Where any of the matters is answered in the negative or with a
qualification, the auditor’s report shall state the reason for the same.
Example 17: MNO Ltd. is a listed company engaged in the business of
trading of various products. The company also plans to start
manufacturing of certain products which are currently traded.
During the course of its audit, the auditors completed all the
procedures related to audit of financial statements. However, the
auditor got stuck on one procedure because of which audit has not
got concluded.
Auditors are waiting for certain additional information – Directors
report and Management Discussion and Analysis (MD&A) for their
review. However, the management is not ready with this information
and wants the auditors to complete their work without review of this
information. Please advise as per the legal requirements.

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Answer: In the given case, the requirement of the auditors regarding

additional information i.e. Directors report and MD&A without which
they have not been able to conclude the audit doesn’t look valid. The
auditor is required to audit the financial statements and express an
opinion on the same. The auditor does not audit these additional
information.
Hence the auditor should conclude the work without delaying because
of this additional information.
(h) Compliance with auditing standards [Section 143(9) and 143(10)]:
(1) Every auditor shall comply with the auditing standards.
(2) The Central Government may prescribe the standards of auditing
or any addendum thereto, as recommended by the ICAI, in
consultation with and after examination of the recommendations
made by the National Financial Reporting Authority (NFRA).
(3) It is further provided that until any auditing standards are
notified, any standard or standards of auditing specified by the
ICAI shall be deemed to be the auditing standards.
(i) Additional matters to be reported in case of specified companies
[Section 143(11)]: In respect of such class or description of
companies, as may be specified in the general or special order by the
Central Government, may in consultation with the NFRA direct, the
auditor’s report shall also include a statement on such matters as may
be specified therein.
CARO 2020 issued by MCA should be complied by the statutory
auditor of every company on which it applies.
(iii) Reporting of frauds by auditors [Section 143(12)]:
Notwithstanding anything contained in this section, if an auditor of a
company, in the course of the performance of his duties as auditor, has
reason to believe that an offence involving fraud is being or has been
committed against the company by officers or employees of the company,
he shall immediately report the matter to the Central Government within
such time and in such manner as may be prescribed.
Provided that in case of a fraud involving lesser than the specified amount,
the auditor shall report the matter to the audit committee constituted

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 AUDIT AND AUDITORS 10.37

under section 177 or to the Board in other cases within such time and in
such manner as may be prescribed:
Provided further that the companies, whose auditors have reported frauds
under this sub-section to the audit committee or the Board but not
reported to the Central Government, shall disclose the details about such
frauds in the Board's report in such manner as may be prescribed.
(1) The Companies (Audit and Auditors) Amendment Rules, 2015, issued
by the Ministry of Corporate Affairs, on 14 December 2015, amended
Rule 13 of the Companies (Audit and Auditors) Rules, 2014. The
amended Rule 13 has introduced the thresholds for the purpose of
reporting on frauds and a differential reporting responsibilities of the
statutory auditor with respect to the fraud(s) above or below the
notified threshold.
As per the amended Rule 13, if an auditor of a company in the course
of the performance of his duties as auditor, has reason to believe that
an offence of fraud, which involves or is expected to involve an
amount of ` 1 crore or above, is being or has been committed in the
company by its officers or employees, the auditor shall report the
matter to the Central Government in following manner:
(a) the auditor shall report the matter to the Board or the Audit
Committee, as the case may be, immediately but not later than 2
days of his knowledge of the fraud, seeking their reply or
observations within 45 days;
(b) on receipt of such reply or observations, the auditor shall
forward his report and the reply or observations of the Board or
the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee) to the
Central Government within 15 days from the date of receipt of
such reply or observations;
(c) in case the auditor fails to get any reply or observations from the
Board or the Audit Committee within the stipulated period of 45
days, he shall forward his report to the Central Government
along with a note containing the details of his report that was
earlier forwarded to the Board or the Audit Committee for which
he has not received any reply or observations;

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(d) the report shall be sent to the Secretary, Ministry of Corporate

Affairs (MCA) in a sealed cover by Registered Post with
Acknowledgement Due or by Speed Post followed by an e-mail
in confirmation of the same;
(e) the report shall be on the letter-head of the auditor containing
postal address, e-mail address and contact telephone number or
mobile number and be signed by the auditor with his seal and
shall indicate his Membership Number; and
(f) The report shall be in the form of a statement as specified
in Form ADT-4.
(2) In case of a fraud involving lesser than the specified amount, the
auditor shall report the matter to the audit committee constituted
under section 177 or to the Board immediately but not later than two
days of his knowledge of fraud and he shall report the matter
specifying the following:
(i) Nature of fraud with description;
(ii) Approximate amount involved; and
(iii) Parties involved.
(3) The following details of each of the fraud reported to the Audit
Committee or the Board under sub-rule (3) of amended Rule 13
during the year shall be disclosed in the Board’s Report:
(i) Nature of fraud with description;
(ii) Approximate amount involved;
(iii) Parties involved, if remedial action not taken; and
(iv) Remedial actions taken.
(4) The provision of this section shall mutatis mutandis apply to a Cost
Auditor and a Secretarial Auditor during the performance of his duties
under section 148 and section 204 respectively.
Penalty for non-compliance of section 143(12): If any auditor, cost
accountant, or company secretary in practice does not comply with the
provisions of sub-section (12), he shall,—
(a) in case of a listed company, be liable to a penalty of five lakh
rupees; and

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 AUDIT AND AUDITORS 10.39

(b) in case of any other company, be liable to a penalty of one lakh

rupees.

Penalty for Non- compliance:

By
Any Auditor, Cost Accountant, or CS in practice

In case of Listed Co. In case of Other Companies

` 5 lakh ` 1 lakh

Good Faith [Section 143 (13)]: No duty to which an auditor of a company

may be subject to shall be regarded as having been contravened by reason
of his reporting the matter referred to in sub-section (12) if it is done in
good faith.
Example 18: NSH Ltd is engaged in the business of retail and is listed on
National stock exchange. The company recently acquired a business
undertaking to expand its business. During the year, certain transactions
amounting to thousands of rupees were carried out by the employees/
directors of the company which the management found suspicious and
appointed a forensic consultant to carry out their review. Pursuant to this
review process, certain suspect transactions were identified by the
management and the management reported these transactions to the
appropriate authorities. During the course of statutory audit, such
transactions were also made known to the statutory auditors. How should
the auditor dealt with such matter?
Answer: The auditors need to report about this matter appropriately in
their CARO report.
As per Section 143(12) of the Companies Act, 2013, the auditor is required
to report to the Audit Committee or to the Board of Directors and, where
applicable, to the Central Government an offence of fraud in the company
by its officers or employees only if he is the first person to identify/note

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such instance in the course of performance of his duties as an auditor. In

this case, the suspicious transactions have been identified by the
management first and information about the same has been given by the
management to the auditor. Accordingly, the auditor should report about
this matter to the Audit Committee/ Board of Directors but the auditor
would not be required to report the same to Central Government.
(iv) Audit of Government Companies [Section 143(5), (6) & (7)]:
(a) In the case 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, the CAG
shall appoint the auditor under section 139(5) or 139(7) and direct
such auditor the manner in which the accounts of the Government
company are required to be audited and thereupon the auditor so
appointed shall submit a copy of the audit report to the CAG.
(b) The audit report among other things, include the following:
(1) the directions, if any, issued by the CAG;
(2) the action taken thereon; and
(3) its impact on the accounts and financial statement of the company.
(c) The CAG shall within 60 days from the date of receipt of the audit
report have a right to—
(1) conduct a supplementary audit of the financial statement of the
company by such person or persons as he may authorize in this
behalf; and for the purposes of such audit, require information
or additional information to be furnished to any person or
persons, so authorized, on such matters, by such person or
persons, and in such form, as the CAG may direct; and
(2) comment upon or supplement such audit report.
(d) Any comments given by the CAG upon, or supplement to, the audit
report shall be sent by the company to every person entitled to copies
of audited financial statements under section 136(1) and also be
placed before the AGM of the company at the same time and in the
same manner as the audit report.

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 AUDIT AND AUDITORS 10.41

(e) Test Audit: For Government Company or Company controlled by

State Government or Central Government, the CAG may, if he
considers necessary, by an order, cause test audit to be conducted of
the accounts of such company, without prejudice to the provisions
related to Audit and Auditors. The provisions of section 19A of the
Comptroller and Auditor-General’s (Duties, Powers and Conditions of
Service) Act, 1971, shall apply to the report of such test audit.
(v) Audit of accounts of branch office of company [Section 143(8)]:
(a) Branch office in India:
Where a company has a branch office, the accounts of that office shall
be audited either by:
(A) the company’s auditor appointed under section 139, or
(B) by any other person qualified for appointment as an auditor of
the company under section 139.
(b) Branch office outside India:
If the branch office is situated in a country outside India, the accounts
of the branch office shall be audited either by:
(A) the company’s auditor or
(B) by an accountant or
(C) by any other person duly qualified to act as an auditor of the
accounts of the branch office in accordance with the laws of that
country.
(c) The duties and powers of the company’s auditor with reference to the
audit of the branch and the branch auditor, if any, shall be as
contained in sub-sections (1) to (4) of section 143.
(d) The branch auditor shall prepare a report on the accounts of the
branch examined by him and send it to the auditor of the company
who shall deal with it in his report in such manner as he considers
necessary.
(e) The provisions regarding reporting of fraud by the auditor shall also
extend to such branch auditor to the extent it relates to the concerned
branch.

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(vi) Application of provisions of section 143 to Cost Accountants and

Company Secretary [Section 143(14)]: The provisions of this section shall
mutatis mutandis apply to:
(a) the cost accountant conducting cost audit under section 148; or
(b) the company secretary in practice conducting secretarial
audit under section 204.

7. AUDITOR NOT TO RENDER CERTAIN

SERVICES [SECTION 144]
Section 144 of the Companies Act, 2013 provides for Auditor not to render certain
services. According to this section:
(i) An auditor appointed under this Act shall provide to the company only such
other services as are approved by the Board of Directors or the audit
committee, as the case may be. But such services shall not include any of
the following services (whether such services are rendered directly or
indirectly to the company or its holding company or subsidiary company),
namely—
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed. [However no other
kind of services has been prescribed till date]

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 AUDIT AND AUDITORS 10.43

Accounting
and book
keeping
Any other kind services;
of services as Internal
may be audit;
prescribed.

Design and
implementation
Management
of any financial
services; and
information
Prohibited
system;
services

Rendering
of
Actuarial
outsourced
services;
financial
services;

Investment
Investment
banking
advisory
services;
services;

(ii) Explanation: The term “directly or indirectly” shall include rendering of

services by the auditor,—
(1) in case of auditor being an individual, either himself or through his
relative or any other person connected or associated with such
individual or through any other entity, whatsoever, in which such
individual has significant influence or control, or whose name or
trademark or brand is used by such individual;
(2) in case of auditor being a firm, either itself or through any of its
partners or through its parent, subsidiary or associate entity or
through any other entity, whatsoever, in which the firm or any partner
of the firm has significant influence or control, or whose name or
trademark or brand is used by the firm or any of its partners.

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 10.44 CORPORATE AND OTHER LAWS

Rendering of Services ‘Directly or Indirectly’

In case of auditor In case of auditor

being INDIVIDUAL being FIRM

Self Firm

Relatives Partners of firm

Other person connected or

Parent of firm
associated with such individual

Entity in which such individual has

Subsidiary of firm
significant influence or control

Entity whose name or trademark or

Associate entity of firm
brand is used by such individual

Entity in which the firm has significant

influence

Entity in which any partner of the firm has

significant influence or control

Entity whose name or trademark or brand is

used by the firm or any of its partners

Example 19: MNP Ltd is a medium-sized company engaged in the business of

pharmaceuticals. For the year ended 31st March 2018, the company is looking for
appointment of GST (Goods and Services Tax) auditor. The company wants to
appoint somebody for this work who is familiar with the business of the company
i.e. who would have worked with the company in the past so that lesser efforts
are required to get the GST audit completed. The company has options of
Statutory auditors that can be appointed for this work for betterment of
company.

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 AUDIT AND AUDITORS 10.45

8. AUDITORS TO SIGN AUDIT REPORTS, ETC.

[SECTION 145]
Section 145 of the Companies Act, 2013 provides for auditors to sign audit
reports, etc. According to this section:
(i) The person appointed as an auditor of the company shall sign the auditor’s
report or sign or certify any other document of the company in accordance
with the provisions of sub-section (2) of section 141 (i.e. in case of firm
including LLP, only Chartered Accountants are authorized to act as statutory
auditors and sign).
(ii) The qualifications, observations or comments on financial transactions or
matters, which have any adverse effect on the functioning of the company
mentioned in the auditor’s report shall be read before the company in
general meeting and shall be open to inspection by any member of the
company.

9. AUDITORS TO ATTEND GENERAL MEETING

[SECTION 146]
Section 146 of the Companies Act, 2013 provides for auditors to attend general
meeting. According to this section:
(i) All notices of, and other communications relating to, any general meeting
shall be forwarded to the auditor of the company.
(ii) The auditor shall, unless otherwise exempted by the company, attend either
by himself or through his authorized representative, who shall also be
qualified to be an auditor, any general meeting.
(iii) The auditor shall have right to be heard at such meeting on any part of the
business which concerns him as the auditor.

10. PUNISHMENT FOR CONTRAVENTION

[SECTION 147]
Section 147 of the Companies Act, 2013 provides for punishment for
contravention. According to this section:

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(i) Penalty on company [Section 147(1)]:

If any of the provisions of sections 139 to 146 (both inclusive) is
contravened, the company shall be punishable with fine which shall not be
less than ` 25,000 but which may extend to ` 5 lacs.
(ii) Penalty on officers [Section 147(1)]:
If any of the provisions of sections 139 to 146 (both inclusive) is
contravened, every officer of the company who is in default shall be
punishable with fine which shall not be less than ten thousand rupees
but which may extend to one lakh rupees.
(iii) Penalty on auditor [Section 147(2) & (3)]:
(a) If an auditor of a company contravenes any of the provisions of
section 139, section 144 or section 145, the auditor shall be
punishable with fine which shall not be less than ` 25,000 but which
may extend to ` 5 lacs or four times the remuneration of the auditor,
whichever is less.
(b) If an auditor has contravened such provisions knowingly or willfully
with the intention to deceive the company or its shareholders or
creditors or tax authorities, he shall be punishable with-
(1) imprisonment for a term which may extend to 1 year and
(2) with fine which shall not be less than fifty thousand rupees but
which may extend to twenty-five lakh rupees or eight times the
remuneration of the auditor, whichever is less.
(c) Further, where an auditor has been convicted as above, he shall be
liable to—
(1) refund the remuneration received by him to the company; and
(2) pay for damages to the company, statutory bodies or authorities
or to members or creditors of the company for loss arising out
of incorrect or misleading statements of particulars made in his
audit report.
(iv) The Central Government shall, by notification, specify any statutory body or
authority or an officer for ensuring prompt payment of damages to the
company or the persons. Such body, authority or officer shall after payment
of damages to such company or persons file a report with the Central

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Government in respect of making such damages in such manner as may be

specified in the said notification. [Section 147(4)]
(v) Liability of Audit firm [Section 147(5)]:
Where, in case of audit of a company being conducted by an audit firm, it is
proved that the partner or partners of the audit firm has or have acted in a
fraudulent manner or abetted or colluded in any fraud by, or in relation to
or by, the company or its directors or officers, the liability, whether civil or
criminal as provided in the Companies Act, 2013, or in any other law for the
time being in force, for such act shall be of the partner or partners
concerned of the audit firm and of the firm jointly and severally and shall
also be liable under section 447.
Provided that in case of criminal liability of an audit firm, in respect of
liability other than fine, the concerned partner or partners, who acted in a
fraudulent manner or abetted or, as the case may be, colluded in any fraud
shall only be liable.

11. CENTRAL GOVERNMENT TO SPECIFY AUDIT

OF ITEMS OF COST IN RESPECT OF CERTAIN
COMPANIES [SECTION 148]
Section 148 of the Companies Act, 2013 provides the provisions for Central
Government to specify audit of items of cost in respect of certain companies.
According to this section:
(i) Notwithstanding anything contained in the provisions related to audit and
auditor (Chapter X), the Central Government may, by order, in respect of
such class of companies engaged in the production of such goods or
providing such services as may be prescribed, direct that particulars relating
to the utilisation of material or labour or to other items of cost as may be
prescribed shall also be included in the books of account kept under section
128 by that class of companies.
(ii) The Central Government shall, before issuing such order in respect of any
class of companies regulated under a special act, consult the regulatory
body constituted or established under such special Act.
(iii) If the Central Government is of the opinion, that it is necessary to do so, it may,
by order, direct that the audit of cost records of class of companies, which are

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 10.48 CORPORATE AND OTHER LAWS

covered aforesaid and which have a net worth of such amount as may be
prescribed or a turnover of such amount as may be prescribed, shall be
conducted in the manner specified in the order. An audit conducted under this
section shall be in addition to the audit conducted under section 143.
(iv) The cost audit shall be conducted by a Cost Accountant who shall be
appointed by the Board on such remuneration as may be determined by the
members in such manner as may be prescribed.
(v) Rule 14 of the Companies (Audit and Auditors) Rules, 2014 provides that—
(1) in the case of companies which are required to constitute an audit
committee-
(A) the Board shall appoint an individual, who is a cost accountant,
or a firm of cost accountants in practice, as cost auditor on the
recommendations of the Audit committee, which shall also
recommend remuneration for such cost auditor;
(B) the remuneration recommended by the Audit Committee under
(A) shall be considered and approved by the Board of Directors
and ratified subsequently by the shareholders.
(2) in the case of other companies which are not required to constitute an
audit committee, the Board shall appoint an individual who is a cost
accountant or a firm of cost accountants in practice as cost auditor
and the remuneration of such cost auditor shall be ratified by
shareholders subsequently.
Companies required to Companies not required to
constitute Audit Committee constitute Audit Committee
(a) The Board shall appoint the (a) The Board shall appoint the
cost auditor on the cost auditor.
recommendation of the (b) The remuneration of such
Audit Committee. cost auditor shall be ratified
(b) The Audit Committee shall by shareholders
recommend the subsequently.
remuneration for cost
auditor.
(c) Such remuneration as
recommended by the Audit
Committee shall be

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 AUDIT AND AUDITORS 10.49

considered and approved by

the Board of Directors.
(d) Then this remuneration
subsequently to be ratified
by the shareholders.

(vi) No person appointed under section 139 as an auditor of the company (i.e.
company auditor) shall be appointed for conducting the audit of cost
records.
(vii) Cost auditor to comply with cost auditing standards: The auditor
conducting the cost audit shall comply with the cost auditing standards.
Here, the expression “cost auditing standards” mean such standards as are
issued by the Institute of Cost and Works Accountants of India (ICWA),
constituted under the Cost and Works Accountants Act, 1959, with the
approval of the Central Government.
(viii) An audit conducted under section 148 shall be in addition to the audit
conducted under section 143.
(ix) The qualifications, disqualifications, rights, duties and obligations applicable
to auditors (i.e. applicable to company auditor) shall, so far as may be
applicable, apply to a cost auditor appointed under section 148 and it shall
be the duty of the company to give all assistance and facilities to the cost
auditor appointed under this section for auditing the cost records of the
company.
(x) The report on the audit of cost records shall be submitted by the cost
accountant to the Board of Directors of the company.
(xi) A company shall within 30 days from the date of receipt of a copy of the
cost audit report furnish the Central Government with such report along
with full information and explanation on every reservation or qualification
contained therein.
Vide Notification dated 9th September, 2015 under the Rule 4 of the
Companies (Filing of Documents and forms in Extensible Business Reporting
Language) Rules, 2015, a company which is required to furnish cost audit
report and other documents to the Central Government under sub- section
6 of the section 148 of the Act and rules made thereunder, shall file such
report and other documents using the XBRL taxonomy given in Annexure III

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for the financial year commencing on or after 1 April 2014 in e-form CRA-4
specified under the Companies(Cost Records and Audit) Rules, 2014.
(xii) If, after considering the cost audit report and the information and
explanation furnished by the company, the Central Government is of the
opinion that any further information or explanation is necessary, it may call
for such further information and explanation and the company shall furnish
the same within such time as may be specified by that Government.
(xiii) Contravention: If any default is made in complying with the provisions of
section 148—
(a) The company and every officer of the company who is in default shall
be punishable in the manner as provided in section 147(1);
(b) the cost auditor of the company who is in default shall be punishable
in the manner as provided in sub-sections (2) to (4) of section 147.
(xiv) The provisions of section 143 shall mutatis mutandis apply to the cost
accountant conducting cost audit under section 148.

SUMMARY
 First auditor: The first auditor of a company, other than a Government
company, shall be appointed by the Board of Directors within 30 days of the
date of registration of the company, and the auditor so appointed shall hold
office until the conclusion of the first AGM.
If the Board fails to appoint first auditor, it shall inform the members of the
company and the company may appoint the first auditor within 90 days at
an extra ordinary general meeting.
 Appointment of Auditors:
 Auditor is to be appointed at 1st AGM for period of 5 years
 Consent of auditors required
 Auditors to attend AGM (have right to be heard in matters concerning
him)
 Rotation of Auditors:
 Individual auditors: one term of 5 years
 Audit Firm: Two terms of 5 years each

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 AUDIT AND AUDITORS 10.51

 No reappointment for 5 years from expiry of term i.e. Cooling period.

 Removal of Auditors:
 Auditor to be given reasonable opportunity to be heard
 Prior approval of CG required
 Special resolution in GM
 Special notice to be given in case retiring auditor is not appointed in
AGM.

TEST YOUR KNOWLEDGE

Question 1
State the procedure for the following, explaining the relevant provisions of the
Companies Act, 2013:
(i) Appointment of First Auditor, when the Board of directors did not appoint the
First Auditor within one month from the date of registration of the company.
(ii) Removal of Statutory Auditor (appointed in last Annual General Meeting)
before the expiry of his term.
Answer
(i) Section 139(6) of the Companies Act, 2013 lays down that the first auditor of a
company shall be appointed by the Board of Directors within 30 days of the
registration of the company.
Section 139 (6) continues to provide further that if the Board of Directors fails
to appoint such auditor, it shall inform the members of the company, who shall
within ninety days at an extraordinary general meeting appoint such auditor
and such auditor shall hold office till the conclusion of the first annual general
meeting.
From the above provisions of law if the Board of Directors fails to appoint the
first auditors within the stipulated 30 days, it shall take the following steps:
a. Inform the members of the Company;
b. Immediately take steps to convene an extra ordinary general meeting not
later than 90 days;
c. Members shall at that extra ordinary meeting appoint the first auditors of
the company;

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 10.52 CORPORATE AND OTHER LAWS

d. The first auditors so appointed shall hold office upto the conclusion of
the first AGM of the company.
(ii) Section 140 of the Companies Act, 2013 prescribes certain procedure for
removal of auditors. Under section 140 (1) the auditor appointed under section
139 may be removed from his office before the expiry of his term only by a
special resolution of the company, after obtaining the previous approval of the
Central Government in that behalf in the prescribed manner. From this sub
section it is clear that the approval of the Central Government shall be taken
first and thereafter the special resolution of the company should be passed.
Provided that before taking any action under this sub-section, the auditor
concerned shall be given a reasonable opportunity of being heard.
Therefore, in terms of section 140 (1) of the Companies Act, 2013 read with
Rule 7 of the Companies (Audit & Auditors) Rules, 2014, following steps should
be taken for the removal of an auditor before the completion of his term:
The application to the Central Government for removal of auditor shall be
made in Form ADT-2 and accompanied with fees as provided for this purpose
under the Companies (Registration Offices and Fees) Rules, 2014.
The application shall be made to the Central Government within thirty days of
the resolution passed by the Board.
The company shall hold the general meeting within sixty days of receipt of
approval of the Central Government for passing the special resolution.
Question 2
One-fourth of the subscribed capital of AMC Limited was held by the Government
of Rajasthan. Mr. Neeraj, a Chartered Accountant, was appointed as an auditor of
the Company at the Annual General Meeting held on 30 April, 2018 by an ordinary
resolution. Mr. Sanjay, a shareholder of the Company, objects to the manner of
appointment of Mr. Neeraj on the ground of violation of the Companies Act, 2013.
Decide whether the objection of Mr. Sanjay is tenable? Also examine the
consequences of the above appointment under the said Act.
Answer
As per the section 2(45) of the Companies Act, 2013, the holding of 25% shares of
AMC Ltd. by the Government of Rajasthan does not make it a government
company. Hence, it will be treated as a non-government company.
Under section 139 of the Companies Act, 2013, the appointment of an auditor by
a company vests generally with the members of the company except in the case

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 AUDIT AND AUDITORS 10.53

of the first auditors and in the filling up of the casual vacancy not caused by the
resignation of the auditor, in which case, the power to appoint the auditor vests
with the Board of Directors. The appointment by the members is by way of an
ordinary resolution only and no exceptions have been made in the Act whereby a
special resolution is required for the appointment of the auditors.
Therefore, the contention of Mr. Sanjay is not tenable. The appointment is valid
under the Companies Act, 2013.
Question 3
EF Limited appointed an individual firm, Naresh & Company, Chartered
Accountants, as Auditors of the company at the Annual General Meeting held on 30
September 2019. Mrs. Kamala, wife of Mr. Naresh, invested in the equity shares
face value of ` 1 lakh of EF Limited on 15 October 2019. But Naresh & Company
continues to function as statutory auditors of the company. Advice
Answer
Disqualification of auditor: According to section 141(3)(d)(i) of the Companies
Act, 2013, a person who, or his relative or partner holds any security of the
company or its subsidiary or of its holding or associate company a subsidiary of
such holding company, which carries voting rights, such person cannot be
appointed as auditor of the company. Provided that the relative of such person
may hold security or interest in the company of face value not exceeding 1 lakh
rupees as prescribed under the Companies (Audit and Auditors) Rules, 2014.
In the case Mr. Naresh, Chartered Accountants, did not hold any such security. But
Mrs. Kamala, his wife held equity shares of EF Limited of face value ` 1 lakh, which
is within the specified limit.
Further Section 141(4) provides that if an auditor becomes subject, after his
appointment, to any of the disqualifications specified in sub-section 3 of section 141,
he shall be deemed to have vacated his office of auditor. Hence, Naresh & Company
can continue to function as auditors of the Company even after 15 October 2019 i.e.
after the investment made by his wife in the equity shares of EF Limited.
Question 4
Explain how the auditor will be appointed in the following cases:
(i) A Government company within the meaning of section 394 of the Companies
Act, 2013.

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 10.54 CORPORATE AND OTHER LAWS

(ii) A public company whose shareholders include XYZ Bank (a nationalized

bank) holding 18% of the subscribed capital of the company.
Answer
(i) The appointment and re-appointment of auditor of a Government Company or
a government controlled company is governed by the provisions of section 139
of the Companies Act, 2013 which are summarized as under:
The first auditor shall be appointed by the Comptroller and Auditor General of
India within 60 days from the date of incorporation and in case of failure to do
so, the Board shall appoint auditor within next 30 days and on failure to do so
by Board of Directors, it shall inform the members, who shall appoint the
auditor within 60 days at an extraordinary general meeting (EGM), such auditor
shall hold office till conclusion of first Annual General Meeting.
In case of subsequent auditor for existing government companies, the
Comptroller & Auditor General of India shall appoint the auditor within a
period of 180 days from the commencement of the financial year and the
auditor so appointed shall hold his position till the conclusion of the Annual
General Meeting.
(ii) In the given case as the total shareholding of the XYZ Bank is just 18% of
the subscribed capital of the company, it is not a government company.
Hence the provisions applicable to non-government companies in relation
to the appointment of auditors shall apply.
The auditor shall be appointed as follows:
(1) The company shall, at the first annual general meeting, appoint an
individual or a firm as an auditor who shall hold office from the
conclusion of that meeting till the conclusion of its sixth annual general
meeting and thereafter till the conclusion of every sixth meeting.
(2) Before such appointment of auditor is made, the written consent of the
auditor to such appointment, and a certificate from him or firm of auditors
that the appointment, if made, shall be obtained from the auditor:
Further, the company shall inform the auditor concerned of his or its
appointment, and also file a notice of such appointment with the Registrar
within 15 days of the meeting in which the auditor is appointed.

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 AUDIT AND AUDITORS 10.55

Question 5
Examine the following situations in the light of the Companies Act, 2013
(i) Mr. Ayush, a Chartered Accountant, has been appointed as an auditor of X
Ltd. in the Annual General Meeting of the company held in September2018, in
which he accepted the assignment. Subsequently, in January2019 he joined B,
as a partner in the consultancy firm of Mr. B. Mr. B is also working as a
Finance Executive of X Ltd.
(ii) “Mr. Abhi”, a practicing Chartered Accountant, is holding securities of
Abhiman Ltd. having face value of ` 1000/-. Whether Mr. Abhi is qualified for
appointment as an Auditor of Abhiman Ltd.?
Answer
(i) Provisions and Explanation: Section 141(3) (c) of the Companies Act, 2013
prescribes that any person who is a partner or in employment of an officer
or employee of the company will be disqualified to act as an auditor of a
company. Sub-section (4) of Section 141 provides that an auditor who
becomes subject, after his appointment, to any of the disqualifications
specified in sub-sections (3) of Section 141, he shall be deemed to have
vacated his office as an auditor.
Conclusion: In the present case, Ayush, an auditor of X Ltd., joined as
partner with consultancy firm where B is also a partner and B is also the
Finance executive of X Ltd. Hence, Ayush has attracted clause (3)(c) of
Section 141 and, therefore, he shall be deemed to have vacated office of the
auditor of X Limited.
(ii) As per section 141(3)(d)(i), an auditor is disqualified to be appointed as an
auditor if he, or his relative or partner holds any security of or interest in the
company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company.
In the present case, Mr. Abhi is holding security of `1000 in the Abhiman Ltd,
therefore, he is not eligible for appointment as an auditor of Abhiman Ltd.
Question 6
Examine whether the following persons are eligible for being appointed as auditor
under the provisions of the Companies Act, 2013:
(i) "Mr. Prakash" is a practicing Chartered Accountant and "Mr. Aakash", who is
a relative of "Mr. Prakash" is holding securities of "ABC Ltd." having face

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value of ` 70,000/- (market value ` 1, 10,000/-). Directors of ABC Ltd. want

to appoint Mr. Prakash as an auditor of the company.
(ii) Mr. Ramesh is a practicing Chartered Accountant indebted to MNP Ltd. for
rupees 6 lakh. Directors of MNP Ltd. want to appoint Mr. Ramesh as an
auditor of the company.
(iii) Mrs. KVJ spouse of Mr. Kumar, a Chartered Accountant, is the store keeper of
PRC Ltd. Directors of PRC Ltd. want to appoint Mr. Kumar as an auditor of the
company
Answer
(i) As per section 141 (3)(d)(i) of the Companies Act, 2013, an auditor is
disqualified to be appointed as an auditor if he, or his relative or partner
holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company.
Further as per proviso to this Section, the relative of the auditor may hold
the securities or interest in the company of face value not exceeding of
` 1,00,000. In the present case, Mr. Aakash (relative of Mr. Prakash, an
auditor), is having securities of ABC Ltd. having face value of ` 70,000
(market value ` 1,10,000), which is within the limit as per requirement of
under the proviso to section 141 (3)(d)(i). Therefore, Mr. Prakash will not be
disqualified to be appointed as an auditor of ABC Ltd.
(ii) As per section 141(3)(d)(ii), an auditor is disqualified to be appointed as an
auditor if he or his relative or partner is indebted to the company, or its
subsidiary, or its holding or associate company or a subsidiary of such
holding company, in excess of rupees 5 Lacs. In the instant case, Mr.
Ramesh will be disqualified to be appointed as an auditor of MNP Ltd. as he
indebted to MNP Ltd. for rupees 6 lacs.
(iii) As per section 141(3)(f), an auditor is disqualified to be appointed as an
auditor if a person whose relative is a director or is in the employment of
the company as a director or a key managerial personnel. In the instant
case, since Mrs. KVJ Spouse of Mr. Kumar (Chartered Accountant) is the
store keeper (not a director or KMP) of PRC Ltd., hence Mr. Kumar will not
be disqualified to be appointed as an auditor in the said company.
Question 7
The Board of Directors of A Limited requested its Statutory Auditor to accept the
assignment of designing and implementation of suitable financial information

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system to strengthen the internal control mechanism of the Company. How will you
approach to this proposal, as a Statutory Auditor of A Ltd., taking into account the
consequences, if any, of accepting this proposal?
Answer:
According to section 144 of the Companies Act, 2013, an auditor appointed under
this Act shall provide to the company only such other services as are approved by
the Board of Directors or the audit committee, as the case may be. But such
services shall not include designing and implementation of any financial
information system.
In the said instance, the Board of directors of A Ltd. requested its Statutory
Auditor to accept the assignment of designing and implementation of suitable
financial information system to strengthen the internal control mechanism of the
company. As per the above provision said service is strictly prohibited.
In case the Statutory Auditor accepts the assignment, he will attract the penal
provisions as specified in Section 147 of the Companies Act, 2013.
In the light of the above provisions, we shall advise the Statutory Auditor not to
take up the above stated assignment.

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