What is a Company?

The term "Company" was originally derived from 2 latin words

 Com (means together)

 Panis (means bread/meal)

Thus the term "Company" was originally used for that group of person who took their
meal together.
From here we can say that "company" means that group of persons who get associated
for common lawful purpose.
A company, in common parlance, means a group of persons associated together for
the attainment of a common end, social or economic. It has “no strictly technical or
legal meaning.”
 According to sec. 3 (1) (ii) of the Companies Act, 1956 a company means a
company formed and registered under the Companies Act, 1956 or any of the
preceding Acts. Thus, a Company comes into existence only by registration
under the Act, which can be termed as incorporation.
 Definition of Company under Companies Act, 2013
According to Section 2(20) of Companies Act, 2013, company means a
company incorporated (formed and registered) under this Act or under any of
the previous companies laws.
 Chief Justice Marshall of the USA defines, “A corporation is an artificial
being, invisible, intangible, existing only in contemplation of the law. Being a
mere creation of law, it possesses only the properties which the Charter of its
creation confers upon it, either expressly or as incidental to its very existence.”
 According to Prof Haney, ”A company is an artificial person created by law,
having separate entity, with a perpetual succession and common seal.”
 CHARACTERISTICS OF A COMPANY

1. Voluntary Association: A company is a voluntary association of two or more

persons. A single person cannot constitute a company. At least two persons must join
hands to form a private company. While a minimum of seven persons are required to
form a public company. The maximum membership of a private company is restricted
to fifty, whereas, no upper limit has been laid down for public companies.

2. Incorporation: A company comes into existence the day it is

incorporated/registered. In other words, a company cannot come into being unless it is
incorporated and recognized by law. This feature distinguishes a company from
partnership which is also a voluntary association of persons but in whose case
registration is optional.

Minimum number required for this purpose is seven in the case of a public company‘
and two in case of a private company i.e., Section 12. It may also be mentioned that an
association of more than 10 persons in case of banking business and 20 persons in
other commercial activities, if not registered as a company or under any other law,
becomes an illegal association i.e., Section 11.

3. Artificial Person: In the eyes of law there are two types of persons viz:

(a) Natural persons i.e. human beings and

(b) Artificial persons such as companies, firms, institutions etc.

Legally, a company has got a personality of its own. Like human beings it can buy,
own or sell its property. It can sue others for the enforcement of its rights and likewise
be sued by others.

4. Separate Entity: The law recognizes the independent status of the company. A
company has got an identity of its own which is quite different from its members. This
implies that a company cannot be held liable for the actions of its members and vice
versa. The distinct entity of a company from its members was upheld in the famous
Salomon Vs. Salomon & Co case and Lee V. Lee‘s

5. Perpetual Existence: A company enjoys a continuous existence. Retirement,

death, insolvency and insanity of its members do not affect the continuity of the
company. The shares of the company may change millions of hands, but the life of the
company remains unaffected. In an accident all the members of a company died but
the company continued its operations.

6. Common Seal: A company being an artificial person cannot sign for itself. A seal
with the name of the company embossed on it acts as a substitute for the company’s
signatures. The company gives its assent to any contract or document by the common
seal. A document which does not bear the common seal of the company is not binding
on it.

7. Transferability of Shares: The capital of the company is contributed by its

members. It is divided into shares of predetermined value. The members of a public
company are free to transfer their shares to anyone else without any restriction. The
private companies, however, do impose some restrictions on the transfer of shares by
their members.

8. Limited Liability: The liability of the members of a company is invariably limited

to the extent of the face value of shares held by them. This means that if the assets of a
company fall short of its liabilities, the members cannot be asked to contribute
anything more than the unpaid amount on the shares held by them. Unlike the
partnership firms, the private property of the members cannot be utilized to satisfy the
claims of company’s creditors.
9. Diffused Ownership: The ownership of a company is scattered over a large
number of persons. According to the provisions of the Companies Act, a private
company can have a maximum of fifty members. While, no upper limit is put on the
maximum number of members in public companies.

10. Separation of Ownership from Management: Though shareholders of a

company are its owners, yet every shareholder, unlike a partner, does not have a right
to take an active part in the day to day management of the company. A company is
managed by the elected representatives of its members. The elected representatives are
individually known as directors and collectively as ‘Board of Directors’.

History of Company Law in India

The earliest business associations in England were the ‘Merchant Guilds’. Some of the
merchant guilds were called regulated companies. A Royal Charter established the
East India Company in the year 1600. In England the Joint Stock Companies Act was
passed for the first time in 1844. Under this act, a provision was made for the
registration of companies.

In the year 1850, taking the English Joint Stock Companies Act 1844 as a base, a
provision was made for registration of joint stock companies in India. After this the
Joint Stock Companies Act was passed in India in the year 1857. Under this Act the
concept of limited liability1 was introduced for the first time in India. Thereafter the
Companies Act was passed in the year 1866. The Act consolidated and amended the
law relating to incorporation, regulation and winding-up of trading companies and
other associations.

The Act was later replaced by The Indian Companies Act 1913.The Indian companies
Act was based on the English Acts, therefore in cases pertaining to Company Law, the
Indian Courts closely followed the decisions of the English courts.
However, after independence, the Government appointed a Committee under the
chairmanship of Shri H.C. Bhaba in the year 1950 to revise the Indian Companies Act
of 1913. The committee submitted its report in the year 1952. Based on the
recommendation of the committee and the provisions of the English Companies Act
1948, the Companies Act 1956 was introduced in the parliament.

The Companies Act 1956 came into force on 1st April, 1956. The Companies Act has
been amended from time to time. The latest amendments were made in 2006. To
overhaul the Company Law in a comprehensive way, the Companies Act
(Amendment) Bill 2009 was introduced in the parliament in August 2009. Some of
the major amendments made in the Companies Act in the year 2002 are given below:

The Company Law Board (CLB) has been abolished. Instead a Tribunal is formed
which is called ‘National Company Law Tribunal (NCLT)’. The matters pending with
the CLB can be transferred to the NCLT and the orders already passed by CLB would
be valid and can be enforced through court.2

The rehabilitation of sick companies will be undertaken by the Tribunal and not by the
Board for Industrial & Financial Reconstruction (BIFR). Earlier the BIFR3 was
entrusted with the rehabilitation of sick companies as the matter came under the
jurisdiction of the Sick Industrial Companies Act 1985 (SICA)4 , but now the Sick
Industrial Companies Repeal Act 2003 has replaced SICA and the work of revival and
rehabilitation has been entrusted to NCLT.
CLASSIFICATION OF COMPANIES
 Types of companies on the basis of formation

1. Chartered companies
2. Statutory companies
3. Registered companies

1. Chartered Companies : Companies which are incorporated under special charter

or proclamation issued by the head of state, are known as chartered companies. The
Bank of England, The East India Company, Chartered Bank etc. are the examples of
chartered companies.

2. Statutory Companies: Companies which are formed or incorporated by a special

act of parliament, are known as statutory companies. The activities of such companies
are governed by their respective acts and are not required to have any Memorandum
or Articles of Association.

3. Registered Companies: Registered companies are those companies which are

formed by registration under the Company Act. Registered companies may be divided
into two categories.
* Private Company: A company is said to be a private company which by its
Memorandum of Association restricts the right of its members to transfer shares,
limits the number of its members and does not invite the public to subscribe its shares
or debentures.

* Public Company: A company, which is not private, is known as public company. It

needs minimum seven persons for its registration and maximum to the limit of its
registered capital. There is no restriction on issue or transfer of its shares and this type
of company can invite the public to purchase its shares and debentures.

Types of companies on The Basis of Liability

1. Companies having limited liability and

2. Companies having unlimited liability.

1. Companies Having Limited Liability: This liability can be limited in two ways:
A. Liability Limited by Shares: These are those companies in which the capital
is divided into shares and liability of members (share holders) is limited to the
extent of face value of shares held by them. This is the most popular class of
company.
B. Liability Limited by Guarantee: These are such companies where
shareholders promise to pay a fixed amount to meet the liabilities of the
company in the case of liquidation.

2. Companies Having Unlimited Liability: A company not having any limit on the
liability of its members as in the case of a partnership or sole trading concern is an
unlimited company. If such a company goes into liquidation, the members can be
called upon to pay an unlimited amount even from their private properties to meet the
claim of the creditors of the company.

Types of Companies on The Basis Of Ownership

1. Government Companies: A government company is a company in which at least

51% of the paid up capital has been subscribed by the government.
2. Non-government Companies: If the government does not subscribe a minimum
51% of the paid up capital, the company will be a non-government company.

Types of Companies on The Basis Of Domicile

1. National Companies: A company, which is registered in a country by restricting

its area of operations within the national boundary of such country is known as a
national company.

2. Foreign Companies: A foreign company is a company having business in a

country, but not registered in that country.

3. Multinational Companies: Multinational companies have their presence and

business in two or more countries. In other words, a company, which carries on
business activities in more than one country, is known as multinational company.

Types of Companies on The Basis Of Control

1. Holding Companies: A holding company is a company, which holds all, or

majority of the share capital in one or more companies so as to have a controlling
interest in such companies.

2. Subsidiary Company: A company, which operates its business under the control
of another company (i.e holding company), is known as a subsidiary company.

Advantages of Incorporation of a Company

Incorporation offers certain advantages to a company as compared with all other kinds
of business organizations. They are
1) Independent corporate existence- the outstanding feature of a company is its
independent corporate existence. By registration under the Companies Act, a company
becomes vested with corporate personality, which is independent of, and distinct from
its members. A company is a legal person. The decision of the House of Lords
in Salomon v. Salomon & Co. Ltd. (1897 AC 22) is an authority on this principle:

One S incorporated a company to take over his personal business of manufacturing

shoes and boots. The seven subscribers to the memorandum were all his family
members, each taking only one share. The Board of Directors composed of S as
managing director and his four sons. The business was transferred to the company at
40,000 pounds. S took 20,000 shares of 1 pound each n debentures worth 10,000
pounds. Within a year the company came to be wound up and the state if affairs was
like this: Assets- 6,000 pounds; Liabilities- Debenture creditors-10,000 pounds,
Unsecured creditors- 7,000 pounds.

It was argued on behalf of the unsecured creditors that, though the co was
incorporated, it never had an independent existence. It was S himself trading under
another name, but the House of Lords held Salomon & Co. Ltd. must be regarded as a
separate person from S.

2) Limited liability- limitation of liability is another major advantage of

incorporation. The company, being a separate entity, leading its own business life, the
members are not liable for its debts. The liability of members is limited by shares;
each member is bound to pay the nominal value of shares held by them and his
liability ends there.

3) Perpetual succession- An incorporated company never dies. Members may

come and go, but the company will go on forever. During the war all the members of a
private company, while in general meeting, were killed by a bomb. But the company
survived, not even a hydrogen bomb could have destroyed it (K/9 Meat Supplies
(Guildford) Ltd., Re, 1966 (3) All E.R. 320).

Re Noel Tedman Holdings Pty Ltd (1967) Qd R 56 stated that a companies members
may come and go but this does not affect the legal personality of the company

4) Common seal- Since a company has no physical existence, it must act through
its agents and all such contracts entered into by such agents must be under the seal of
the company. The common seal acts as the official seal of the company.
5) Transferable shares- when joint stock companies were established the great
object was that the shares should be capable of being easily transferred. Sec 82 gives
expression to this principle by providing that “the shares or other interest of any
member shall be movable property, transferable in the manner provided by the articles
of the company.”

6) Separate property- The property of an incorporated company is vested in the

corporate body. The company is capable of holding and enjoying property in its own
name. No members, not even all the members, can claim ownership of any asset of
company’s assets. The Supreme Court, in the case of Bacha F. Guzdar v CIT
Bombay stated that a company being a legal person, in which all its property is vested
and by which it is controlled, managed and disposed of a member cannot, ensure the
companies property on its own name. In Macaura v. Northern Assurance Co. Ltd., a
shareholder of a timber company, held all shares of the company but one. He also
insured the timber (asset of the company) on his own name, which was destroyed in
fire. When he sought compensation, it was held that they were not liable to pay any
money to the shareholder, in lieu of the timber since he did not own the timber and
that timber, which the company owned was not insured.

7) Capacity for suits- A company can sue and be sued in its own name. The
names of managerial members need not be impleaded.

8) Professional management- A company is capable of attracting professional

managers. It is due to the fact that being attached to the management of the company
gives them the status of business or executive class.

Disadvantages of Incorporation of a Company

1. Cost – The initial cost of incorporation includes the fee required to file
your articles of incorporation, potential attorney or accountant fees, or the cost of
using an incorporation service to assist you with completion and filing of the
paperwork. There are also ongoing fees for maintaining a corporation.
2. Double Taxation – Some types of corporations such as a C Corporation, have the
potential to result in “double taxation.” Double taxation occurs when a company is
taxed once on profits, and again on the dividends paid to shareholders.
3. Loss of Personal “Ownership” – If a corporation is a stock corporation, one
person doesn’t retain complete control of the entity. The corporation is governed
by a board of directors who are elected by shareholders.
4. Required Structure – When you form a corporation, you are required to follow
all of the rules outlined by the state in which you filed. This includes the
management of the corporation, operational requirements and the corporation’s
accounting practices.
5. Ongoing Paperwork – Most corporations are required to file annual reports on
the financial status of the company. The ongoing paperwork also includes tax
returns, accounting records, meeting minutes and any required licenses and
permits for conducting business.
6. Difficulty Dissolving – While perpetual existence is a benefit of incorporating, it
can also be a disadvantage because it can require significant time and money to
complete the necessary procedures for dissolution.
7. Lifting of Corporate Veil – From the juristic point of view, a company is a legal
person distinct from its members [Salomon v. Salomon and Co. Ltd. (1897) A.C
22]. This principle may be referred to as the ‘Veil of incorporation’. The courts, in
general, consider themselves bound by this principle. The effect of this Principle is
that there is a fictional veil between the company and its members. That is, the
company has a corporate personality which is distinct from its members. But, in a
number of circumstances, the Court will pierce the corporate veil or will ignore
the corporate veil to reach the person behind the veil or to reveal the true form and
character of the concerned company. The rationale behind this is probably that the
law will not allow the corporate form to be misused or abused. In those
circumstances in which the Court feels that the corporate form is being misused, it
will rip through the corporate veil and expose its true character and nature.
 DISTINCTION BETWEEN COMPANY AND PARTNERSHIP

Content Company Partnership

Mode of creation By Registration or by Statute. by Agreement
Governing statute The Companies Act The Partnership Act
Legal Statute Legal entity distinct from Firm and partners are not
members, perpetual separate; no separate entity;
succession. uncertain life
Liability Limited liability of members Unlimited joint and several
liability of partners
Number: The minimum number in a in case of a private
public company is seven and companies two and
maximum limit of members in maximum In partnership the
case of a private company is number should not exceed
 fifty but in case of public twenty, while in case of
company there is no maximum banking business, it should
limit not exceed ten.
Management: The affairs of a company are On the other hand every
managed by its directors. Its partner of a firm has a right
members have no right to take to participate in the
part in the day to day management of the business
management. unless the partnership deed
provides otherwise.
Capital: he share capital of a company whereas partners can alter
can be increased or decreased the amount of their capital
only in accordance with the by mutual agreement.
provisions of the Companies
Act,
Insolvency/Death: Insolvency or death of a On the other hand a
shareholder does not affect the partnership ceases to exist if
existence of a company. any partner retires, dies or is
declared insolvent.
Transfer of Shares in a public company while a partner cannot
Interest: are freely transferable from transfer his interest to others
one person to another person. without the consent of other
In private company the right partners.
to transfer shares is restricted,
Winding up: A company comes to an end A firm is dissolved by an
only when it is wound up agreement or by the order of
according to the provisions of court. It is also automatically
the Companies Act. dissolved on the insolvency
of a partner.
Audit Audit of accounts of a whereas it is generally,
company is compulsory discretionary in case of a
firm.
Authority of A shareholder is not an agent A partner is an agent of a
Members: of a company and has no firm. He can enter into
power to bind the company by contracts with outsiders and
his acts. incur liabilities so long as he
 acts in the ordinary course of
firm’s business.
Commencement of A company has to comply a firm is not required to
Business: with various legal formalities fulfill legal formalities.
and has to file various
documents with the Registrar
of Companies before the
commencement of business

CHARACTERISTIC FEATURES OF COMPANIES ACT

The Companies Bill,2011 was passed by Rajya sabha and after that in august 2013, it
was renamed as the Companies Bill 2013. After assent of the President of India ,It was
now called as Companies Act 2013. The main provision of this act is to change in
national and international economy format and expand economic growth by using
advance technology in our country. The Act aims to provides greater economy and
innovation with reasonable cost and process. The Companies Act, 2013 extend the
whole India and comes into force after assention by president to Companies act 2013.

The Indian Companies Act 2013 replaced the Indian Companies Act, 1956. The
Companies Act 2013 makes comprehensive provisions to govern all listed and
unlisted companies in the country. The Companies Act 2013 implemented many new
sections and repealed the relevant corresponding sections of the Companies Act 1956.
This is a landmark legislation with far-reaching consequences on all companies
incorporated in India.
Objectives of the Act:

The Companies Act 2013 comes with broad objectives are as follow –

1. To encourage Investment in companies by making suitable provisions.

2. To avoid overlapping and conflict of jurisdiction in sectoral regulation.
3. To provide innovative process and compliance cost.
4. To protect shareholders interest by participation and control.
5. To achieve objectives of economic and social policy.

Comparison of Companies Act 1956 and Companies Act 2013

Indian Companies Act 2013 has fewer sections (470) than Companies Act 1956 (658).

Details 1956 Act 2013 Act

Parts 13 NA
Chapters 26 29
Sections 658 470
Schedules 15 7
SALIENT FEATURES OF THE COMPANIES ACT 2013

1. Class action suits for Shareholders: The Companies Act 2013 has introduced
new concept of class action suits with a view of making shareholders and other
stakeholders, more informed and knowledgeable about their rights.
2. More power for Shareholders: The Companies Act 2013 provides
for approvals from shareholders on various significant transactions.
3. Women empowerment in the corporate sector: The Companies Act
2013 stipulates appointment of at least one woman Director on the Board (for
certain class of companies).
4. Corporate Social Responsibility: The Companies Act 2013 stipulates certain
class of Companies to spend a certain amount of money every year on
activities/initiatives reflecting Corporate Social Responsibility.
5. National Company Law Tribunal: The Companies Act 2013 introduced
National Company Law Tribunal and the National Company Law Appellate
Tribunal to replace the Company Law Board and Board for Industrial and
 Financial Reconstruction. They would relieve the Courts of their burden while
simultaneously providing specialized justice.
6. Fast Track Mergers: The Companies Act 2013 proposes a fast track and
simplified procedure for mergers and amalgamations of certain class of
companies such as holding and subsidiary, and small companies after obtaining
approval of the Indian government.
7. Cross Border Mergers: The Companies Act 2013 permits cross border
mergers, both ways; a foreign company merging with an India Company and
vice versa but with prior permission of RBI.
8. Prohibition on forward dealings and insider trading: The Companies Act
2013 prohibits directors and key managerial personnel from purchasing call and
put options of shares of the company, if such person is reasonably expected to
have access to price-sensitive information.
9. Increase in number of Shareholders: The Companies Act 2013 increased the
number of maximum shareholders in a private company from 50 to 200.
10.Limit on Maximum Partners: The maximum number of persons/partners in
any association/partnership may be upto such number as may be prescribed but
not exceeding one hundred. This restriction will not apply to an association or
partnership, constituted by professionals like lawyer, chartered accountants,
company secretaries, etc. who are governed by their special laws. Under the
Companies Act 1956, there was a limit of maximum 20 persons/partners and
there was no exemption granted to the professionals.
11.One Person Company: The Companies Act 2013 provides new form of private
company, i.e., one person company. It may have only one director and one
shareholder. The Companies Act 1956 requires minimum two shareholders and
two directors in case of a private company.
12.Entrenchment in Articles of Association: The Companies Act 2013 provides
for entrenchment (apply extra legal safeguards) of articles of association have
been introduced.
13.Electronic Mode: The Companies Act 2013 proposed E-Governance for
various company processes like maintenance and inspection of documents in
electronic form, option of keeping of books of accounts in electronic form,
financial statements to be placed on company’s website, etc.
14.Indian Resident as Director: Every company shall have at least one director
who has stayed in India for a total period of not less than 182 days in the
previous calendar year.
15.Independent Directors: The Companies Act 2013 provides that all listed
companies should have at least one-third of the Board as independent directors.
Such other class or classes of public companies as may be prescribed by the
Central Government shall also be required to appoint independent directors. No
independent director shall hold office for more than two consecutive terms of
five years.
16.Serving Notice of Board Meeting: The Companies Act 2013 requires at least
seven days’ notice to call a board meeting. The notice may be sent by electronic
means to every director at his address registered with the company.
17.Duties of Director defined: Under the Companies Act 1956, a director had
fiduciary (legal or ethical relationship of trust)duties towards a company.
However, the Companies Act 2013 has defined the duties of a director.
18.Liability on Directors and Officers: The Companies Act 2013 does not
restrict an Indian company from indemnifying (compensate for harm or loss) its
directors and officers like the Companies Act 1956.
19.Rotation of Auditors: The Companies Act 2013 provides for rotation of
auditors and audit firms in case of publicly traded companies.
20.Prohibits Auditors from performing Non-Audit Services: The Companies
Act 2013 prohibits Auditors from performing non-audit services to the
company where they are auditor to ensure independence and accountability of
auditor.
21.Rehabilitation and Liquidation Process: The entire rehabilitation and
liquidation process of the companies in financial crisis has been made time
bound under Companies Act 2013.
 Incorporation of companies

1. Name clause
2. Articles of association
3. Memorandam of association
4. Documents

PROCEDURAL ASPECTS WITH REGARD TO INCORPORATION

1. Application for Availability of Name of company: As per section 4(4) 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—

a) the name of the proposed company; or

b) the name to which the company proposes to change its name.

As per Rule 9 of Companies (incorporation) Rules 2014, an application for the

reservation of a name shall be made in Form No. INC.1 along with the fee as provided
in the Companies (Registration offices and fees) Rules, 2014.

According to section 4(2), the name stated in the memorandum of association 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 its use by the company—
(i) will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the Central Government.

Section 4(3) provides that without prejudice to the provisions of section 4(2), a
company shall not be registered with a name which contains—

(a) 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
(b) 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.

Section 4(5)(i) lays down that 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 60 days from the date of the application.
Rule 8 of Companies(incorporation) Rules, 2014 states that in determining whether a
proposed name is identical with another, the differences on account of certain aspects
may be disregarded, the details of the same is stated in that rule.

2. Preparation of Memorandum and Articles of Association

3. Filing of documents

Section 7(1) that the following documents and information for registration shall be
filed with the Registrar within whose jurisdiction the registered office of a company is
proposed to be situated:

4. Issue of Certificate of Incorporation by Registrar

Section 7(2) states that the Registrar on the basis of documents and information filed
under sub-section (1) of section 7, shall register all the documents and information
referred to in that sub- section 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.

5. Allotment of Corporate identity number

Section 7(3) states that on and from the date mentioned in the certificate of
incorporation issued under sub-section (2), 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. Preservation of Documents of
incorporation Section 7(4) states that the company shall maintain and preserve at its
registered office copies of all documents and information as originally filed under
sub-section (1) till its dissolution under this Act.

PUNISHMENT FOR FURNISHING FALSE OR INCORRECT INFORMATION AT

THE TIME OF INCORPORATION

The Companies Act, 2013 imposes severe punsihment for incorporation of a company
by furnishing false or incorrect information. The persons furnishing false or incorrect
information shall be liable for following punishment:-

(i) 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
punishable for fraud under section 447. [Section 7(5)]

(ii) Without prejudice to the above liability, 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 section 7(1)
(b) shall each be punishable for fraud under section 447. [Section 7(6)]

Powers of the Tribunal in case of Incorporation of a Company by furnishing false or

incorrect information As per Section 7(7), where a company has been got incorporated
by furnishing any false or incorrect information or representation or by suppressing
any material fact or information in any of the documents or declaration filed or made
for incorporating such company or by any fraudulent action, the Tribunal may, on an
application made to it, on being satisfied that the situation so warrants:-

(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. Provided that before making any
order under this sub-section,—
(i) the company shall be given a reasonable opportunity of being heard in the
matter; and
 (ii) the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any
liability.

Memorandam of Association

Memorandum is the document of the company which contain all the information regarding company
and also known as company foundation . It contains name, registered office, objects and company
capital as well as limit of liabilities of the members of the company.It is signed by the company
members and required for registration of company to its registrar.

According to Lord Justice Cairns,“ The memorandum of association of a company is its charter
and defines the limitations of the company established under the Act.”

According to Justice Charlesworth, “Memorandum is the company charter and defines the
limitations of powers of the company.”

Lord Justice Bowen states that,“ the memorandum of association of a company contains
fundamental conditions upon which alone the company is allowed to be incorporated.”

Thus, a memorandum is a fundamental document of a company which contains information about

the company including name ,place of registered office, objects , liability of company members and
capital of company. It contain name, signatures and other particulars of the persons of company
members.

Characteristics/ features:

The main features of memorandum of association are discuss below –

1. It is a fundamental document of a company.

2. It is essential to every company to prepare its own memorandum.
3. It should be in written form.
4. It contains Name, signature and other particulars of persons.
5. On registration of memorandum , the company is deemed to have been registered.
6. It contains information regarding company information.
7. Memorandum is a public document after registration and inspected by any person.
8. It is a binding of company and its members

Importance of Memorandum of Association :

The Memorandum of association is important document of an organisation , and it is very
significant and vital document of every company.It is not only important for company also important
for shareholders , creditors and every person who deals with company.The importance of
memorandum are discuss below :-

1. Basis for the company – Memorandum of association is the basic document of company
and company cant get registered without it.
2. Determines company scope – It lay down the scope of company activities which they
perform and company cannot go beyond that.
3. Source of company’s Power – Memorandum of association also defines the the company
powers and help company members in workings.
4. Guide to directors – It serves as a guide to the directors of the company. It guides them to
work for achieving the objectives of company and restrains them from doing anything
beyond memorandum.
5. Protect Investors – Memorandum protects the interest of investors because their is a risk
when person invest money on a company.

Contents of memorandum

Section 4 of the Companies Act,2013 deals with MOA. The Memorandum of a company shall
contain the following;

1. 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.
2. Situation Clause:
The State in which the registered office of the company is to be situated.
3. Object Clause:
The objects for which the company is proposed to be incorporated and any matter considered
necessary in furtherance thereof.
4. Liability Clause:
The liability of members of the company, whether limited or unlimited, and also state,—
(i) in the case of a company limited by shares– liability of its members is limited to the amount
unpaid, if any, on the shares held by them; and
(ii) in the case of a company limited by guarantee-the amount up to which each member undertakes
to contribute—
(A) 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
(B) to the costs, charges and expenses of winding-up and for adjustment of the rights of the
contributories among themselves;
5. Capital Clause:
(i) 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
(ii) the number of shares each subscriber to the memorandum intends to take, indicated opposite his
name;
In the case of One Person Company, the name of the person who, in the event of death of the
subscriber, shall become the member of the company.
6. Subscription Clause – It contains the names and addresses of the first subscribers. The
subscribers to the Memorandum must take at least one share. The minimum number of members is
two in case of a private company and seven in case of a public company.

Form of Memorandum:
The memorandum of a company shall be in respective forms as outlined below

S.No Table Form

1 Table A MOA of a company limited by shares

2 Table B MOA of a company limited by guarantee and not having

share capital

3 Table C MOA of a company limited by guarantee and having

share capital
 4 Table D MOA of an unlimited company and not having share
capital

5 Table E MOA of an unlimited company and having share capital

Any provision in the memorandum or articles, in the case of 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
MOA- CA2013 Vs CA1956:

S. CA, 2013 CA, 1956

No
1 It requires classification of objects as(i) Objects for The objects of the company should be classified
which the company is proposed to be incorporated in the memorandum as(i) main objects(ii)
and(ii) Any other matter considered necessary in Incidental or ancillary objects
furtherance thereof. (iii) Other objects

2 It requires that the memorandum shall state liability of The unlimited companies were not required to
members of the company whether unlimited or limited state in the memorandum that liability of the
members of the company is unlimited.

3 A company shall not be registered with a name which There is no such provision
contains 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

4 It incorporates the procedural aspects of application for There is no such provision

availability of name of proposed company or proposed
new name for existing company

5 It provides that the MOA of a company shall be in It provides that the MOA of a company shall be
respective forms specified in Tables A,B,C,D,E of in a such one of the forms in Table B,C,D,E of
Schedule I of the 2013 Act as may be applicable to the Schedule I of the 1956 Act as may be applicable
company.It does not allow the memorandum to be in a to the case or in a Form as near thereto as the
form as near to the applicable Forms in Schedule I as circumstances admit.
the circumstances admit

Articles of Association
‘Articles’ means the articles of association of a company as originally framed or as altered from time
to time in pursuance of any previous companies law of this act. The articles of association are the
rules and regulations of a company framed for the purpose of internal management of its affairs. It
deals with the rights of the member of the company inter-se. The articles are framed for carrying out
the aims and object of the Memorandum of association. The articles of association of a company are
sub -ordinate to and are controlled by the memorandum of association. Lord Cairns observed in this
regard, “The memorandum is as it were the area beyond which the action of the company cannot go;
inside that area the shareholder may make such regulation for their own government as they think
fit.”
It is not obligatory to register articles in the case of a public company limited by shares. In such a
case model articles contained in ‘Table A’ of schedule I will apply. However, a private company, a
company limited by guaranteed and an unlimited company must register their articles along with the
memorandum. (section26)
In the case of an unlimited company, the articles shall state the number of the members, with which
the company is to be registered, and if it has a share capital, the amount of share capital with which it
is to be registered. [section 27(1)]
In the case of a company limited by guarantee, the articles shall state the number of members with
which the company is to be registered.
In the case of a private company, articles must contain provisions which
(a) Restrict the right to transfer its shares;
(b) Limit the number of its member to fifty excluding past and the present employees of the
company;
(c) Prohibit any invitation to the public to subscribe for any share in or debenture of the company.
The articles must be printed and divided into paragraph, numbered consecutively. The articles must
be signed by each subscriber of the memorandum in the presence of at least one witness who will
attest the signature and likewise add his address, description and occupation, if any.
Contents of articles:
The articles usually contain the following matter:
1. Exclusion wholly or in part of Table A.
2. Adoption of preliminary contracts.
3. Number and value of shares.
4. Allotment of shares.
5. Calls on shares.
6. Lien on shares.
7. Transfer and Transmission of shares.
8. Forfeiture of share.
9. Alteration of capital.
10. Share certificates.
11. Conversion of share into stock.
12. Voting rights and proxies.
13. Meeting.
 14. Directors their appointment etc.
15. Borrowing powers.
16. Dividends and reserves.
17. Accounts and audit.
18. Winding up.
Alteration of Articles:

Companies have wide powers to alter their articles. Any restriction on the exercise of their powers
will be invalid. Articles of association may be altered by a company by passing a special resolution
to that effect. The altered articles will bind the members in the same way as did the original articles.
The company must file with the registrar a copy of the special resolution within one month from the
date of its passing.
Limitations:

The right of alteration of articles is subject to the following conditions:

1. The alteration must not be inconsistent with or go beyond the provisions of the memorandum.
2. The alteration must not provide for anything which is opposed to the provisions of the act; for
example, articles cannot authorize a company to purchase its own shares.
3. The alteration of articles must be made in good faith for the benefit of the company as a whole.
4. The alteration of articles must not constitute a fraud on minority.
5. No member of a company will be bound by any alteration made in the memorandum or the
articles after he become a member which requires him to take or subscribe for more shares or in any
way increases his liability to contribute to the share capital of or otherwise to pay money to the
company, unless he agrees in writing before or after the alteration is made.
6. No alteration can be made in the articles which has the effect of converting the public company
into a private company unless such alteration has been approved by the central government.
7. An alteration in the articles which causes a breach of contract with an outsider will be inoperative.
8. The alteration must not sanction anything which is illegal.

Form of Article :
The articles of a company shall be in respective forms as outlined below;

S.No Table Form

1 Table F AOA of a company limited by shares

2 Table G AOA of a company limited by guarantee and having

 share capital

3 Table H AOA of a company limited by guarantee and not having

share capital

4 Table I AOA of an unlimited company and having share capital

5 Table J AOA of an unlimited company and not having share

capital

AOA- CA,2013 Vs CA,1956:

S.No CA,2013 CA,1956

1` It is compulsory for every company to have its own articles Optional for a Public company limited by
and file the same with ROC for registration. shares.Compulsory for other Companies

2 The articles may contain provisions for entrenchment.The There is no such provision
provisions for entrenchment shall only be made by;
Private 1. on formation of a company, or
Company 2. by an amendment in the
articles agreed to by all the
members of the company

Public company By a special resolution

The company shall give notice to the Registrar for
entrenchment provisions.

3 The articles of a company shall be in the respective forms The articles of any company, not being a
specified in Tables G,H,I,J in Schedule I as may be company limited by shares shall be in such
applicable to such company. The liberty to have articles or Tables C,D,E in Schedule I as may be
in a form as near thereto as circumstances admit, which applicable or in a form as near thereto as
was available in the 1956 Act is no longer available in the circumstances admit.
2013 Act.

Difference between articles of association and memorandum of association:

I. As to alteration:
M. O. A is regarded unalterable document in it.
A O A is regarded alterable document company can change conditions mentioned in it at any time.
II. As to subordination:
M. O. A is like a controller of company.
A. O. A is the subordinate to M. O. A.
III. As to importance:
M. O. A has primary importance.
A. O. A has the secondary importance in the formation of the company.
IV. As to compulsion:
M. O. A is a compulsory document for formation of company.
A. O. A is optional document for formation of company.
V. As to clauses:
M. O. A has usually six clauses.
A. O. A has many clauses. table A of the companies ordinance has 85 clauses.
VI. As to legal effect:
Any act beyond the limit of M. O. A is illegal.
Any act beyond the limit of A. O. A is not illegal.
VII. As to object:
M. O. A lays down the objects of the company.
A. O. A contains the procedure for achieving objects.
VIII. As to limits business:
M. O A determines the company business.
Business limits are not mentioned in A. O. A
IX. As to nature:
M. O. A is the charter of the company which defines the internal powers of the company.
A. O. A contains the rules and regulation for internal management.
X. As to relation:
M. O. A defines the relationship between company and out sides.
A. O. A defines the relationship between management and shareholders.
XI. As to rights and duties:
In M.O.A rights and duties of company are ascertained.
An A.O.A right and duties of members and directors are ascertained.
XII. As to certificate of commencement:
M.O.A is essential for getting certificate of commencement.
A.O.A is not essential for getting certificate of commencement.
XIII. As to incorporation:
M.O.A contains the conditions upon which the company is granted incorporation.
A.O.A gives a final touch to the conditions described in it.
XIV. As to scope:
M.O.A. has wider scope.
A.O.A has lessor scope.
XV. As to registration:
M.O.A has to be registered in case of company limited by shares.
It is not compulsory to register A.O.A.
XVI As to permission for alteration:
For alteration of M.O.A prior permission is to be given by federal govt.
There is no need of permission for alteration in A.O.A

1. IMPORTANCE :-
Memorandum of Association : It has primary importance in the formation of company.
Article of Association : It has a secondary importance in the formation of company.

2. CONSTITUTION :-
Memorandum of Association : It is a constitution of the company.
Article of Association : It contains rules which govern the administration of the company.
3. OBJECTS :-
Memorandum of Association : It lays down the objects of the company.
Article of Association : It contains the procedure of achieving objects. The provision can be changed
by the special resolution easily.

4. ALTERNATE :-
Memorandum of Association : It is not alterable but it can be amended by special resolution and
sanction of the court or central Govt.
Article of Association : Article of association can be alternate by a special resolution.

5. RELATION :-
Memorandum of Association : Its nature is like the contract between the company and outsiders like
bankers and creditors.
Article of Association : It maintains relation between the company and the persons inside the
company.

6. REGULATION :-
Memorandum of Association : It contains rules which governs the administration of the company.
Article of Association : The registration of articles is optional for the company limited by shares. It
may adopt all or any of regulation.

7. NATURE OF DOCUMENT :-
Memorandum of Association : It does not allow the company to act against the company ordinance.
Article of Association : It is a subsidiary document to Memorandum Association.

8. LIMITS :-
Memorandum of Association : This documents determines the limits of the company business.
Article of Association : Business limits are not mentioned in it.

Difference between MOA and AOA

The fundamental points of distinction between MOA and AOA are as follows:

BASIS FOR MEMORANDUM OF ARTICLES OF

COMPARISON ASSOCIATION ASSOCIATION

Definition Memorandum of Association Articles of Association (AOA) is

(MOA) is a document that a document containing all the
contains all the fundamental data rules and regulations that governs
which are required for the
 company incorporation. the company

MOA must be registered at the The articles may or may not be

Registration
time of incorporation. registered.

The articles demonstrate

The Memorandum is the charter, obligations, rights and powers of
which characterizes and limits individuals, who are endowed
Scope
powers and constraints of the with the responsibility of running
organization. the organization and
administration.

It is subordinate to the
Status Supreme document.
memorandum.

The articles are constrained by

The memorandum cannot give
the act, but they are also
the company power to do
Power subsidiary to the memorandum
anything opposed to the
and cannot exceed the powers
provision of the companies act.
contained therein.

The articles can be drafted

A memorandum must contain six
Contents according to the decision of the
clauses.
Company.

The articles provide the

The memorandum contains the
regulations by which those
Objectives objectives and powers of the
objectives and powers are to be
company.
conveyed into impact.

The memorandum is the Any provision, as opposed to

Validity dominant instrument and controls memorandum of association, is
articles. invalid.

UNIT – 2

INCORPORATION

Synopsis
  Procedure of Incorporation
 Certificate of Incorporation
 Memorandum of Association
 Doctrine of Ultra Vires
 Articles of Association
 Provisions for Entrenchment
 Alteration of Articles of Association
 Binding effect of Memorandum and Articles of Association
 The doctrine of Constructive Notice
 Distinction Between Memorandum and Articles of Association
 The doctrine of Indoor Management
 Exceptions to the Doctrine of Indoor Management
 Prospectus

Procedure of Incorporation

The Companies Act of 1956 sets down rules for the establishment of both public and private
companies. The most commonly used corporate form is the limited company, unlimited
companies being relatively uncommon. A company is formed by registering the Memorandum
and Articles of Association with the State Registrar of Companies of the state in which the main
office is to be located.

Foreign companies engaged in manufacturing and trading activities abroad are permitted by the
Reserve Bank of India to open branch offices in India for the purpose of carrying on the
following activities in India:

 To represent the parent company or other foreign companies in various matters in India,
for example, acting as buying/selling agents in India, etc.
  To conduct research work in which the parent company is engaged provided the results
of the research work are made available to Indian companies
 To undertake export and import trading activities
 To promote possible technical and financial collaboration between Indian companies
and overseas companies.

Application for permission to open a branch, a project office or liaison office is made via the
Reserve Bank of India by submitting form FNC-5 to the Controller, Foreign Investment and
Technology Transfer Section of the Reserve Bank of India. For opening a project or site office,
application may be made on Form FNC-10 to the regional offices of the Reserve Bank of India.
A foreign investor need not have a local partner, whether or not the foreigner wants to hold full
equity of the company. The portion of the equity thus not held by the foreign investor can be
offered to the public.

Approval of Name

The first step in the formation of a company is the approval of the name by the Registrar of
Companies (ROC) in the State/Union Territory in which the company will maintain its
Registered Office. This approval is provided subject to certain conditions: for instance, there
should not be an existing company by the same name. Further, the last words in the name are
required to be "Private Ltd." in the case of a private company and "Limited" in the case of a
Public Company. The application should mention at least four suitable names of the proposed
company, in order of preference. In the case of a private limited company, the name of the
company should end with the words "Private Limited" as the last words. In case of a public
limited company, the name of the company should end with the word "Limited" as the last word.
The ROC generally informs the applicant within seven days from the date of submission of the
application, whether or not any of the names applied for is available. Once a name is approved, it
is valid for a period of six months, within which time Memorandum of Association and Articles
of Association together with miscellaneous documents should be filed. If one is unable to do so,
an application may be made for renewal of name by paying additional fees. After obtaining the
name approval, it normally takes approximately two to three weeks to incorporate a company
depending on where the company is registered.
Memorandum and Articles

The Memorandum of Association and Articles of Association are the most important documents
to be submitted to the ROC for the purpose of incorporation of a company. The Memorandum of
Association is a document that sets out the constitution of the company. It contains, amongst
others, the objectives and the scope of activity of the company besides also defining the
relationship of the company with the outside world.

The Articles of Association contain the rules and regulations of the company for the management
of its internal affairs. While the Memorandum specifies the objectives and purposes for which the
Company has been formed, the Articles lay down the rules and regulations for achieving those
objectives and purposes.

The ROC will give the certificate of incorporation after the required documents are presented
along with the requisite registration fee, which is scaled according to the share capital of the
company, as stated in its Memorandum. A private company can commence business on receipt
of its certificate of incorporation.

A public company has the option of inviting the public for subscription to its share capital.
Accordingly, the company has to issue a prospectus, which provides information about the
company to potential investors. The Companies Act specifies the information to be contained in
the prospectus.

The prospectus has to be filed with the ROC before it can be issued to the public. In case the
company decides not to approach the public for the necessary capital and obtains it privately, it
can file a "Statement in Lieu of Prospectus" with the ROC.

On fulfillment of these requirements, the ROC issues a Certificate of Commencement of

Business to the public company. The company can commence business immediately after it
receives this certificate.

Miscellaneous Documents

The documents/forms stated below are filed along with Memorandum of Association and Articles
of Association on payment of filing fees (depending on the authorised capital of the company):

 Declaration of compliance, duly stamped

  Notice of the situation of the registered office of the company
 Particulars of Directors, Manager or Secretary
 Authority executed on a non-judicial stamp paper, in favour of one of the subscribers to
the Memorandum of Association or any other person authorizing him to file the
documents and papers for registration and to make necessary corrections, if any
 The ROC's letter (in original) indicating the availability of the name.

Tax Registration

Businesses liable for income tax must obtain a tax identification card and number [known as
Permanent Account Number (PAN)] from the Revenue Department. In addition to this,
businesses liable to withhold tax must necessarily obtain a Tax Deduction Account Number
(TAN). Both the PAN and the TAN must be indicated on all the returns, documents and
correspondence filed with the Revenue Department. The PAN is also required to be stated in
various other documents such as the documents pertaining to sale or purchase of any immovable
property (exceeding Rs. five lakh), sale or purchase of a motor vehicle, time deposit (exceeding
Rs. 5 lakh), contract for sale or purchase of securities (exceeding Rs. 10 lakh), to name a few.

Rules Applicable

 Companies (Central Governments') General Rules and Forms,1956

 Filing Registering/Approving Authority
 One copy has to be submitted along with a forwarding letter addressed to the
concerned Registrar of Companies.

Enclosures

The declaration must be submitted with the following annexure

 Document evidencing payment of fee

 Memorandum and Articles of Association
 Copy of agreement if any, which the proposed company wishes to enter into with
any individual for appointment as its managing or whole-time director or manager
 Form 18
 Form 32 (except for section 25 company)
  Form 29 (only in case of public companies)
 Power of Attorney from subscribers
 Letter from Registrar of Companies making names available
 No objection letters from directors/promoters
 Requisite fees either in cash or demand draft

Fees

Fee payable depends on the nominal capital of the company to be registered and may be paid in
one of the following modes. Cash/postal order (upto Rs.501-), demand draft favouring Registrar
of Companies/Treasury Challan should be payable into specified branches of Punjab National
Bank for credit

Time-Limit

It should be submitted before incorporation or within 6 months of the name being made available.
Top

Requirements

The declaration has to be signed by an advocate of Supreme Court or High Court or an attorney
or pleader entitled to appear before the High Court or a secretary or chartered accountant in
whole- time practice in India who is engaged in the formation of the proposed company or
person named in the articles as director, manager or secretary.

The Registrar of Companies has to be satisfied that not only the requirements of section 33(1) and
(2) have been complied with but be also satisfied that provisions relating to number of
subscribers, lawful nature of objects and name are complied with.

The Registrar will check whether the documents have been duly stamped and also whether the
requirements of other laws are met.

Any defect in any of the documents filed has to be rectified either by all the subscribers or their
attorney, or by any one subscriber holding the power of attorney on behalf of other subscribers.

This form is to be presented to the Registrar of Companies within three months from the date of
letter of Registrar allowing the name.
This declaration is to be given on a non-judicial stamp paper of the requisite value. The stamp
paper should be purchased in the name of the person signing the declaration.

This declaration is to be given by all the companies at, the time of registration, public or private.

The place of Registration No. of the company should be filled up by mentioning New Company
therein.

The Registrar of Companies will now accept computer laser printed documents for purposes of
registration provided the documents are neatly and legibly printed and comply with the other
requirements of the Act. This will be an additional option available to the public to use laser print
besides offset printing for submitting the memorandum and articles for the registration of
companies.

Where the executants of a memorandum of association is illiterate, he shall give his thumb
impression or marks which should be described as such by the subscriber or person writing for
him.

An agent may sign a memorandum on behalf of a subscriber if he is authorised by a power-of-

attorney to do so. In the case of an illiterate subscriber to the memorandum and articles of
association, the thumb impression or mark duly attested by the person writing for him should be
given. The person attesting the thumb mark should make an endorsement on the document to the
effect that it has been read and explained to the subscriber. The Registrar of Companies will not
accept zerox copies of the memorandum and articles of association for the purposes of
registration of companies.

This declaration is to be presented by the person signing the declaration or by his bearer at the
counter of the Registrar of Companies office.

Managerial Remuneration

 Any person in order to be appointed as the Managing Director of the company should
be a resident of India. Any person, being a non-resident in India, must obtain an
Employment Visa from the concerned Indian mission abroad at the time of their
appointment as the Managing Director.
  Whereas private companies are free to pay any remuneration to its directors, public
companies can remunerate their directors only within the specified limits.
 In case of public companies, in the event of absence or inadequacy of net profits in any
financial year, managerial remuneration is limited to amounts varying from Rs 75,000 to
Rs 2,00,000 per month, depending on the effective capital of the company. In case of an
expatriate managerial person, perquisites in the form of children's education allowance,
holiday passage money and leave travel concession provided to him would not form
part of the said ceiling of remuneration.
 In case of a managerial position in two companies, remuneration can be drawn from
one or both companies provided that the total remuneration drawn from the companies
does not exceed the higher maximum limit admissible from any one of the companies of
which he is a managerial person.

With whom to be filed

With the Registrar of Companies of the State in which the company is to be registered.

Documents required to be submitted

 A printed copy each of the Memorandum and Articles of Association of the proposed
company filed along with the declaration duly stamped with the requisite value of
adhesive stamps from the State/ Union Territory Treasury (For value of stamps to be
affixed see Schedule printed in Part III Chapter 23). Below the subscription clause the
subscribers to the Memorandum should write in his own handwriting his full name and
father's, or husband's full name in block letters, full address, occupation, e.g., ‘business
executive, engineer, housewife, etc. and number of equity shares taken and then put his
or her signatures in the column meant for signature. Similarly, at the end of the Articles
of Association the subscriber should write in his own handwriting: his full name and
father's full name in block letters, full address, occupation. The signatures of the
subscribers to the Memorandum and the Article of Association should be witnessed by
one person preferably by the person representing the subscribers, for registration of the
proposed company before the Registrar of Companies. Under column 'Total number of
equity shares' write the total
 of the shares taken by the subscribers e.g., 20 (Twenty) only. Mention date e.g. 5th day of
August 1996. Place-e.g., 'New Delhi'.
 With the stamped copy, one spare copy each of the Memorandum and Articles
of Association of the proposed company.
 Original copy of the letter of the Registrar of Companies intimating the availability of
name.
 Form No. 18 - Situation of registered office of the proposed company.
 Form No. 29-Consent to act as a director etc. Dates on the consent Form and the
undertaking letters should be the same as is mentioned in the Memorandum of
Association signed by the director himself. A private company and a wholly owned
Government company are not required to file Form No. 29.
 Form No. 32 (in duplicate). Particulars of proposed, directors, manager or secretary.
 Power of attorney duly typed on a non-judicial stamp paper of the requisite value. The
stamp paper should be purchased in the name of the persons signing the authority.
 No objection letter from the persons whose name has been given in application for
availability of name in Form No. 1-A as promoters/directors but are not interested at a
later stage should be obtained filed with the Registrar at the time of submitting
documents, for registration
 The agreements, if any, which the company proposes to enter with any individual for,
appointment as managing or whole-time director or manager are also to be filed.

Fee payable

Cash or a bank draft/ pay order treasury challan should be drawn in the name of the Registrar of
Companies of the State in which the Company is proposed to be registered as per Schedule X.

Reporting Requirements

Annual Accounts

The Indian company law does not prescribe the books of accounts required to be maintained by a
company. It, however, provides that the same should be kept on accrual basis and according to
the double entry system of accounting and should be such as may be necessary to give a true and
fair state of affairs of the company.
The Indian company law requires every company to maintain proper books of account with
respect to the following:

 All sums of money received and expended and the matters in respect of which the
receipt and expenditure take place
 All sales and purchases of goods by the company
 The assets and liabilities of the company
 In case of companies engaged in manufacturing, processing, mining etc., such
particulars relating to utilization of material or labour or other items of cost.

The first annual accounts of a newly incorporated company should be drawn from the date of its
incorporation upto to the day not preceding the AGM date by more than 9 months. Thereafter,
the accounts should be drawn from date of last account upto the day not preceding the AGM date
by more than 6 months subject to the extension of the time limit in certain cases. The accounts of
the company must relate to a financial year (comprising of 12 months) but must not exceed 15
months. The company can obtain an extension of the accounting period to the extent of 18
months by seeking a prior permission from the ROC.

The annual accounts must be filed with the ROC within 30 days from the date on which the
Annual General Meeting (AGM) of the company was held or where the AGM is not held, then
within 30 days of the last date on which the AGM was required to be held.

Books of accounts to be kept by company

Every company is required to maintain proper books of account with respect to all sums of
money received and expended, all sales and purchases of goods, the assets and liabilities.
Central Government may also specifically require the maintenance of certain additional
particulars with respect to certain classes of Companies. The books of account relating to eight
years immediately preceding the current year together with supporting vouchers are required to
be preserved in good order. Every profit and loss account and balance sheet of the company
(together referred to as financial statements) is required to comply with the accounting standards
issued by the Institute of Chartered Accountants of India. Any deviations from the accounting
standards, including the reasons and consequent financial effect, is required to be disclosed in the
financial statements.
The responsibility for the preparation of financial statements on a going concern basis is that of
the management. The management is also responsible for selection and consistent application of
appropriate accounting policies, including implementation of applicable accounting standards
along with proper explanation relating to any material departures from those accounting
standards. The management is also responsible for making judgements and estimates that are
reasonable and prudent so as to give a true and fair view of the state of affairs of the entity at the
end of the financial year and of the profit or loss of the entity for that period.

Annual Return

Every company having a share capital is required to file an annual return with the ROC within 60
days from the date on which the AGM of the company was held or where the AGM is not held,
then within 60 days of the last date on which the AGM was required to be held.

Certain Accounting related issues

Depreciation

The company law in India permits the use of depreciation rates according to the nature of the
classes of assets. Assets can be depreciated either on the basis of straight-line method (based on
the estimated life of the asset) or on the basis of reducing balance method. The law prescribes the
minimum rates of depreciation. A company may, however, provide for a higher rate of
depreciation, based on a bonafide technological evaluation of the asset. Adequate disclosure in
the annual accounts must be made in this regard.

Dividend

There is no limit on the rate of dividend but there are certain conditions prescribed with regard to
computation of profits that can be distributed as dividend. Generally, no dividend can be paid for
any financial year except out of the profits of that year after making an adequate provision for
depreciation subject to certain conditions. Dividends may also be distributed out of accumulated
profits.
Repatriation of profits

A company has to retain a maximum of 10% of the profits as reserves before the declaration of
dividends. These reserves, inter alia, can be subsequently converted into equity by way of issue
of bonus shares. Dividends are freely repatriable once the investment approval is granted.

Imposition of taxes

Currently, domestic companies are taxable at the rate of 35.875% (inclusive of surcharge of
2.5%) on its taxable income. Foreign companies are taxed at a marginally higher rate of 41%
(including surcharge of 2.5%). However, in case where the income tax liability of the company
under the provisions of the domestic tax laws works out to less than 7.5% of the book profits
(derived after making the necessary adjustments), a Minimum Alternate Tax of 7.6875%
(including a surcharge of 2.5%) on the book profits, would be payable. Domestic companies are
required to pay a dividend distribution tax of 12.8125% (including surcharge of 2.5%) on the
dividends distributed during the year.

Companies are required to withhold tax under the domestic law from certain payments including
salaries paid to employees, interest, professional fee, payments to contractors, commission,
winnings from games / lottery / horse races etc. Moreover, taxes have to be withheld from all
payments made to non-residents at the lower of rates specified under the domestic law or under
the applicable tax treaty, if any.

Penalty

 Imprisonment up to two years and fine

 Person liable for default
 Person signing the declaration

Certificate of Incorporation

After the duly stamped Memorandum of Association and Articles of Association, documents and
forms are filed and the filing fees are paid, the ROC scrutinizes the documents and, if necessary,
instructs the authorised person to make necessary corrections. Thereafter, a Certificate of
Incorporation is issued by the ROC, from which date the company comes into existence. It takes
one to two weeks from the date of filing Memorandum of Association and Articles of
Association
to receive a Certificate of Incorporation. Although a private company can commence business
immediately after receiving the certificate of incorporation, a public company cannot do so until
it obtains a Certificate of Commencement of Business from the ROC.

Memorandum of Association

A company is formed when a number of people come together for achieving a specific purpose.
This purpose is usually commercial in nature. Companies are generally formed to earn profit
from business activities. To incorporate a company, an application has to be filed with the
Registrar of Companies (ROC). This application is required to be submitted with a number of
documents. One of the fundamental documents that are required to be submitted with the
application for incorporation is the Memorandum of Association.

Definition of Memorandum of Association

Section 2(56) of the Companies Act, 2013 defines Memorandum of Association. It states that a
“memorandum” means two things:

 Memorandum of Association as originally framed.

Memorandum as originally framed refers to the memorandum as it was during the incorporation
of the company.

 Memorandum as altered from time to time.

This means that all the alterations that are made in the memorandum from time to time will also
be a part of Memorandum of Association.

The section also states that the alterations must be made in pursuance of any previous company
law or the present Act.

In addition to this, according to Section 399 of the Companies Act, 2013, any person can inspect
any document filed with the Registrar in pursuance of the provisions of the Act. Hence, any
person who wants to deal with the company can know about the company through the
Memorandum of Association.
Meaning of Memorandum of Association

Memorandum of Association is a legal document which describes the purpose for which the
company is formed. It defines the powers of the company and the conditions under which it
operates. It is a document that contains all the rules and regulations that govern a company’s
relations with the outside world.

It is mandatory for every company to have a Memorandum of Association which defines the
scope of its operations. Once prepared, the company cannot operate beyond the scope of the
document. If the company goes beyond the scope, then the action will be considered ultra vires
and hence will be void.

It is a foundation on which the company is made. The entire structure of the company is detailed
in the Memorandum of Association.

The memorandum is a public document. Thus, if a person wants to enter into any contracts with
the company, all he has to do is pay the required fees to the Registrar of Companies and obtain
the Memorandum of Association. Through the Memorandum of Association, he will get all the
details of the company. It is the duty of the person who indulges in any transactions with the
company to know about its memorandum.

Object of registering a Memorandum of Association or MOA

Memorandum of Association is an essential document that contains all the details of the
company. It governs the relationship between the company and its stakeholders. Section 3 of the
Companies Act, 2013 describes the importance of memorandum by stating that, for registering a
company,

(a) In case of a public company, seven or more people are required.

(b) In case of a private company, two or more people are required.
(c) In case of a one-person company, only one person is required.

In all the above cases, the concerned people should first subscribe to a memorandum before
registering the company with Registrar.

Thus, Memorandum of Association is essential for registration of a company. Section 7(1)(a) of

the Act states that for incorporation of a company, Memorandum of Association and Articles of
Association of the company should be duly signed by the subscribers and filed with the Registrar.
In addition to this, a memorandum has other objects as well. These are,

1. It allows the shareholders to know about the company before buying it shares. This
helps the shareholders determine how much capital will they invest in the company.
2. It provides information to all the stakeholders who are willing to associate with
the company in any way.

Format of Memorandum of Association

Section 4(5) of the Companies Act states that a memorandum should be in any form as given in
Tables A, B, C, D, and E of Schedule 1. The Tables are of different kinds because of different
kinds of companies.

Table A – It is applicable to a company limited by shares.

Table B – It is applicable to a company limited by guarantee and not having a share capital.

Table C – It is applicable to a company limited by guarantee and having a share capital.

Table D – It is applicable to an unlimited company not having a share capital.

Table E – It is applicable to an unlimited company having a share capital.

The memorandum should be printed, numbered and divided into paragraphs. It should also be
signed by the subscribers of the company.

Content of Memorandum of Association

Section 4 of the Companies Act, 2013 states the contents of the memorandum. It details all the
essential information that the memorandum should contain.

Name Clause

The first clause states the name of the company. Any name can be chosen for the company. But
there are certain conditions that need to be complied with.
Section 4(1)(a) states:

 If a company is a public company, then the word ‘Limited’ should be there in the name.
Example, “Robotics”, a public company, its registered name will be “Robotics Limited”.
 If a company is a private company, then ‘Private Limited’ should be there in the
name. “Secure “a private company, its registered name will be “Secure Private
Limited”.
 This condition is not applicable to Section 8 companies.

What are Section 8 companies?

Section 8 Company is named after Section 8 of the Companies Act,2013. It describes companies
which are established to promote commerce, art, sports, education, research, social welfare,
religion etc. Section 8 companies are similar to Trust and Societies, but they have a better
recognition and legal standing than Trust and Societies.

What kind of names are not allowed?

The name stated in the memorandum shall not be,

 Identical to the name of another company.

 Too nearly resembling the name of an existing company.

According to Rule 8 of the Company (Incorporation) Rules,2014.

 If a company adds ‘Limited’, ‘Private Limited’, ‘LLP’, ‘Company’, ‘Corporation’, ‘Corp’,

‘inc’ and any other kind of designation to its name to differentiate it from the name of
the other company, the name would still not be accepted.

Illustration: Precious Technology Limited is same as Precious Technology Company.

 If plural or singular forms are added to differentiate between names.

Illustrations: Greentech Solution is same as GreenTech Solutions.

 If type, and case of letters, or punctuation marks are added.

Illustration: Wework is same as We.work.

 Different tenses are used in names.

Illustration: Ascend Solution is same as Ascended Solutions.

 If there is an intentional spelling mistake in the name or phonetic changes in the name.

Illustrations: Greentech is same as Greentek.

 Internet related designations are used like .org, .com, etc.

Illustration: Greentech Solution Ltd. is same as Greentech Solutions.com Ltd.

Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.

 Change in order of combination of words.

Illustration: Shah Builders and Contractors is same as Shah Contractors and Builders.

Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.

 Addition of a definite or indefinite article.

Illustration: Greentech Solutions Ltd is same as The Greentech Solutions Ltd.

Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.

 Slight variation in spelling of two names, including a grammatical variation.

Illustration: Colours TV Channel is same as Colors TV Channel.

 Translation of a name, from one language to another.

Illustration: Om Electricity Corporation is same as Om Vidyut Nigam.

 Addition of the name of a place to the name.

Illustration: Greentech Solutions Ltd. Is same as Greentech Mumbai Solutions Ltd.

Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.
  Addition, deletion or modification of numericals in the name.

Illustration: Greentech Solutions Ltd. Is same as 5 Greentech Solutions Ltd.

Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.

In addition to this, an undesirable name will also not be allowed to be chosen.

Undesirable names are those names which in the opinion of the Central Government are:

1. Prohibited under the Provisions of Section 3 of Emblems and Names (Prevention

and Improper Use) Act, 1950.
2. Names which resemble each other, which are chosen to deceive.
3. The name includes a registered trademark.
4. The name includes any word or words which are offensive to a section of people.
5. Name which is identical to or too nearly resembles the name of an existing
Limited Liability Partnership.

Furthermore, statutory names such as the UN, Red Cross, World Bank, Amnesty International etc.
are also not allowed to be chosen.

Names which in any way indicate that the company is working for the government are also not
allowed.

Reservation of a Name

Section 4(5)(i) of the Act states that for formation of the Company, the Registrar on receiving the
required documents can reserve a name for 20 days. If the application is made by an existing
company, then once the application is accepted, the name will be reserved for 60 days from the
date of application. The company should get incorporated with the reserved name in these 60
days.

If after making the reservation of a name, it is found that some wrong information is given. Then
two cases arise.

 In case the company has not been incorporated. In this case, the Registrar can cancel
the reservation of the name and impose a fine of Rupees 1,00,000.
  In case the company has been incorporated. In this case, after hearing the reasons of
the company, the Registrar has 3 options. These are,
o
On being satisfied, he can give 3 months’ time to the company to change the
name by passing an ordinary resolution.
o
He can strike off the name from the Register of Companies.
o
He can file a petition of winding up of the company.

Rule 8 and 9 of the Company (Incorporation) Rules, 2014 state that the application for reservation
of name under section 4(4) should be filed on Form INC – 1.

Registered Office Clause

The Registered Office of a company determines its nationality and jurisdiction of courts. It is a
place of residence and is used for the purpose of all communications with the company.

Section 12 of the Companies Act, 2013 talks about Registered Office of the company.

Before incorporation of the company, it is sufficient to mention only the name of the state where
the company is located. But after incorporation, the company has to specify the exact location of
the registered office. The company has to then get the location verified as well, within 30 days of
incorporation.

It is mandatory for every company to fix its name and address of its registered office on the
outside of every office in which the business of the company takes place. If the company is a
one-person company, then “One-person Company” should be written in brackets below the
affixed name of the company.

Change in place of Registered Office should be notified to the Registrar within the prescribed
time period.

Object Clause

Section 4(c) of the Act details the object clause. The Object Clause is the most important clause
of Memorandum of Association. It states the purpose for which the company is formed. The
object clause contains both, the main objects and matters which are necessary for achieving the
stated objects also known as incidental or ancillary objects. The stated objects must be well
defined and lawful according to Section 6(b) of the Companies Act, 2013.
By limiting the scope of powers of the company. The object clause provides protection to:

Shareholders – The object clause clearly states what operations will the company perform. This
helps the shareholders know their investment in the company will be used for what purpose.

Creditors – It ensures the creditors that capital is not at risk and the company is working within
the limits as stated in the clause.

Public Interest – The object clause limits the number of matters the company can deal with thus,
prohibiting diversification of activities of the company.

Doctrine of Ultra Vires

If the company operates beyond the scope of the powers stated in the object clause, then the
action of the company will be ultra vires and thus void.

Consequences of Ultra Vires

1. Liability of Directors: The directors of the company have a duty to ensure that
company’s capital is used for the right purpose only. If the capital is diverted for another
purpose not stated in the memorandum, then the directors will be held personally
liable.
2. Ultra Vires Borrowing by the Company: If a bank lends to the company for the purpose
not stated in the object clause, then the borrowing would be Ultra Vires and the bank
will not be able to recover the amount.
3. Ultra Vires Lending by the Company: If the company lends money for an ultra vires
purpose, then the lending would be ultra vires.
4. Void ab initio – Ultra Vires acts of the company are considered void from the beginning.
5. Injunction – Any member of the company can use the remedy of injunction to prevent
the company from doing ultra vires acts.

Liability Clause

The Liability Clause provides legal protection to the shareholders by protecting them from being
held personally liable for the loss of the company.

There are two kinds of limited liabilities:

Limited by Shares – Section 2(22) of the Companies Act, 2013 defines a company limited by
shares. In a company limited by shares, the shareholders only have to pay the price of the shares
they have subscribed to. If for some reason they have not paid the full amount for the shares and
the company winds up, then their liability will only be limited to the unpaid amount.

Limited by Guarantee – It is defined in Section 2(21) of the Companies Act, 2013.A company
limited by guarantee has members instead of shareholders. These members undertake to
contribute to the assets of the company at the time of winding up. The members give guarantee
of a fixed amount that they will be liable for.

Non-profit Organizations and other charities usually have a structure of companies limited by
guarantee.

Capital Clause

It states the total amount of share capital in the company and how it is divided into shares. The
way the amount of capital is divided into what kind of shares. The shares can be equity shares or
preference shares.

Illustration: The share capital of the company is 80,00,000 rupees, divided into 3000 shares of
4000 rupees each.

Subscription Clause

The Subscription Clause states who are signing the memorandum. Each subscriber must state the
number of shares he is subscribing to. The subscribers have to sign the memorandum in the
presence of two witnesses. Each subscriber must subscribe to at least one share.

Association Clause

In this clause, the subscribers to the memorandum make a declaration that they want to associate
themselves to the company and form an association.

Memorandum of Association for One-Person-Company

A one-person company is called so because it can be formed by one person. The minimum capital
required to form a one-person company is 1,00,000 Rupees.
It is a new concept which has been introduced to promote entrepreneurship. All the laws which
are applicable on private companies will be applicable on one-person company.

Section 2(62) of the Companies Act, 2013 defines one-person company.

A one-person company is a separate legal entity from its owner. It is mandatory for the company
to be converted into a private limited company in case its annual turnover crosses the 2 Crore
mark.

In case of one-person-company, in addition to all the other clauses, the Memorandum of

Association contains a clause called the Nomination Clause. This clause mentions the name of an
individual who will become the member in case the subscriber dies or becomes incapacitated.
The nominee must be an Indian citizen and resident of India i. e. he must have been living in
India for at least 182 days in the preceding year. A minor cannot be a nominee.

The individual whose name is mentioned should give his consent in written form and it is
required to be filed with the Registrar of Companies at the time of incorporation.

If the nominee wants to withdraw, he shall give it in writing and the owner of the company will
have to nominate a new person within 15 days.

What’s the use of Memorandum of Association?

1. It defines the scope & powers of a company, beyond which the company cannot operate.
2. It regulates company’s relation with the outside world.
3. It is used in the registration process; without it the company cannot be incorporated.
4. It helps anyone who wants to enter into a contractual relationship with the company to
gain knowledge about the company.
5. It is also called the charter of the Company, as it contains all the details of the
company, its members and their liabilities.

Subscription of Memorandum of Association

Subscribers are the first shareholders of the company. They are the people who agreed to come
together and form the company. The name of each subscriber along with their particulars are
mentioned in the memorandum.
Different kinds of companies require different number of subscribers for incorporation.
  Private Company: In case of a private company, the minimum number of
subscribers required are 2.
 Public Company: In case of a public company, 7 or more subscribers are required.
 One-Person-Company: In case of one-person-company, only one person is required.

Who can Subscribe?

Rule 13 of the Companies (Incorporation) Rules, 2014 describes the provisions of subscribing to
the memorandum.

There are specific kinds of persons (natural or artificial) who can subscribe to the memorandum.
These are:

 Individuals – An individual or a group of individuals can subscribe to the memorandum.

 Foreign citizens and Non-Resident Indians – Rule 13(5) of the Companies (Incorporation)
Rules, states that for a foreign citizen to subscribe to a company in India, his signature,
address and proof of identity will need to be notarized.

The foreign national must have visited India and should have a Business Visa.

For a Non-Resident Indian, the photograph, address and identity proof should be attested at the
Embassy with a certified copy of a passport. There is no requirement of Business Visa.

1. Minor – A minor can only be a subscriber through his guardian.

2. Company incorporated under the Companies Act – The company can be a subscriber to
the memorandum. The Director, officer or employee of the company or any other
person authorized by the board of resolution.
3. Company incorporated outside India – Foreign Company is defined in Section 2(42) of
the act; it states that a foreign company is a company incorporated outside India. A
company registered outside India can also subscribe to the memorandum by fulfilling
the additional formalities.
4. Society registered under the Societies Registration Act, 1860.
5. Limited Liability Partnership – A partner of a limited liability partnership can sign the
memorandum with the agreement of all the other partners.
 6. Body corporate incorporated under an Act of Parliament or State Legislature can also be
a subscriber to the memorandum.

Subscription to Memorandum of Association

Every subscriber should sign the memorandum in presence of at least one witness. The following
particulars of the witness should also be mentioned.

1. Name of the witness

2. Address
3. Description
4. Occupation

If the signature is in any other language then, then an affidavit is required that declares that the
signature is the actual signature of the person.

According to Circular No. 8/15/8, dated 1-9-1958. The subscriber can also authorize another
person to affix the signature by granting a power of attorney to the person. Department Circular
No. 1/95, dated 16th February 1995 states that only one power of attorney is required.

The person who is granted the power of attorney may be known as an agent.

He should also state the following particulars in the memorandum:

1. Name of the agent

2. Address
3. Description
4. Occupation

Particulars to be Mentioned in Memorandum of Association

Rule 16 of the Companies (Incorporation) Rules, 2014 details the particulars that are to be
mentioned in the memorandum.

Every Subscriber’s following details should be mentioned.

1. Name (includes last name and family name), a photograph should be affixed and
scanned with the memorandum.
2. Father’s Name and Mother’s Name
 3. Nationality
4. Date of Birth
5. Place of Birth
6. Qualifications
7. Occupation
8. Permanent Account Number
9. Permanent and Current Address
10. Contact Number
11. Fax Number (Optional)
12. 2 Identity Proofs in which Permanent Account Number is mandatory.
13. Residential Proof (not older than 2 months)
14. Proof of nationality, if subscriber is a foreign national
15. If the subscriber is a current director or promoter, then his designation along with
Name and Company Identity Number

If a body corporate is subscribing to the memorandum then the following particulars should be
mentioned.

1. Corporate identity number of the company or registration number of the body corporate.
2. Global location number, which is used to identify the location of the legal entity. (Optional)
3. The name of the body corporate.
4. The registered address of the business.
5. Email address.

In case the body corporate is a company, then a certified copy of Board resolution which
authorizes the subscription to the memorandum. The particulars required in this case are,

1. Number of shares to be subscribed by a body corporate.

2. Name, designation and address of the authorized person.

In case the body corporate is a limited liability partnership. The particulars required are,

1. A certified copy of the resolution.

2. The number of shares that the firm is subscribing to.
3. The name of the authorized partner.
In case the body corporate is registered outside the country. The particulars required are,

1. The copy of certificate of incorporation.

2. The address of the registered office.

Printing and Signing of Memorandum of Association

Section 7(1)(a) states that the memorandum should be duly signed by all the subscribers and
should be in a manner prescribed by the Act.

Rule 13 of the Company (Incorporation) Rules, 2014 describes the manner in which the
memorandum should be signed.

1. The Memorandum of Association should be signed by each subscriber to the

memorandum. The subscriber shall mention his name, address, occupation and the
number of shares he is subscribing to. The documents should be signed in the presence
of at least one witness. The witness would also mention his name, address, and
occupation. By signing the memorandum, the witness states that, “I witness to
subscriber/subscriber(s)who has/have subscribed and signed in my presence (date and
place to be given); further I have verified his or their Identity Details (ID) for their
identification and satisfied myself of his/her/their identification particulars as filled in.”
2. If the person subscribing to the document is illiterate, he can either authorize an agent
to sign the document through Power of Attorney or he can put his thumb impression on
the column for signatures. The person’s name, address, occupation and the number of
shares he is subscribing to should be written by a person who has been allowed to write
for him. The person who is writing for the illiterate person should read and explain the
contents of the document to an illiterate person.
3. Where the person subscribing to the memorandum is an artificial person i. e. a body
corporate the memorandum shall be signed by the employee, officer or any person
authorized by the Board of Resolution.
4. Where the person subscribing to the memorandum is a foreign national who does not
reside in India but in a country,
  in any part of the Commonwealth, his signatures and address on the memorandum
and proof of identity shall be notarized by a Notary (Public) in that part of the
Commonwealth.
 in a country which is a signatory to the Hague Apostille Convention, 1961, his
signature and proof of identity and address on the memorandum shall be notarized
before the Notary (Public) of the country of his origin and be duly approved in
accordance with the said Hague Convention.
 in a country outside the Commonwealth and which is not a party to the Hague
Apostille Convention, 1961, his signatures and address on the memorandum
and proof of identity, shall be notarized before the Notary (Public) of such country
and the certificate of the Notary (Public) shall be authenticated by a Diplomatic or
Consular Officer empowered in this behalf under section 3 of the Diplomatic and
Consular Officers (Oaths and Fees) Act, 1948 (40 of 1948).

Section 3 of the Diplomatic and Consular Officers states that, every Diplomat or any officer in a
foreign country can perform the functions of a notary public.

 Where there is no Diplomatic or Consular officer by any of the officials mentioned in

section 6 of the Commissioners of Oaths Act, 1889.
 If the foreign national visited India and intended to incorporate a company, in such a
case the incorporation shall be allowed if, he is having a valid Business Visa.

Section 15 of the Companies Act, 2013 states that the memorandum should be in printed form.

The Ministry of Corporate Affairs has clarified that a document printed in form laser printers will
be considered valid provided it is legible and fulfills other requirements as well.

The submission of xerox copies is not allowed. The xerox copies can be submitted to the
members of the company.

Alteration, Amendment & Change in Memorandum of Association under Companies Act, 2013

The term “alter” or “alteration” is defined in Section 2(3) of the Act, as any additions, omissions
or substitutions. A company can alter the memorandum only to the extent as permitted by the Act.
According to Section 13, the company can alter the clauses in the memorandum by passing a
special resolution.

A resolution is a formal decision taken in a meeting. There are two kinds of resolutions, ordinary
and special. A special resolution is one which requires at least 2/3rd majority to be effective. The
alteration to the clauses also requires the approval of the Central Government in writing.

The alteration of memorandum can happen for a variety of reasons. The alteration can be made if,

1. Enables the company to carry its business more effectively.

2. Helps to achieve the objectives.
3. Helps the company to amalgamate with another company.
4. Helps the company dispose off any undertaking.

Alteration of Memorandum

The alteration of various clauses of the memorandum have different procedures:

1. Alteration to the Name Clause: To alter the name of the company, a special resolution is
required. After the resolution is passed, the copy is sent to the registrar. For changing
the name, the application needs to be filed in Form INC- 24 with the prescribed fees.
After the name is changed, a new certificate of incorporation is issued.
2. Alteration to the Registered Office Clause: The application for changing the place for
Registered Office of the company shall be filed with the Central Government in Form
INC- 23 with the prescribed fees.

If the company is changing its Registered Office from one to another, then the approval of the
Central Government is required. The Central Government is required to dispose off the matter
within 60 days and should ensure that the change of place has the consent of all the stakeholders
of the company.

 Alteration to the Object Clause: To alter the object clause, a special resolution is
required to be passed. The changes must be confirmed by the authority. The document
which confirms the changes by authority with a printed copy of the altered
memorandum should be filed with the Registrar.
If the company is a public company, then the alteration should be published in the newspaper
where the Registered Office of the company is located. The changes to the object clause must
also mentioned on the company’s website.

 Alteration to the Liability Clause: The Liability clause of the memorandum cannot be
altered except with the written consent of all the members of the company. By altering
the liability clause, the liability of the directors of the company can be made unlimited.
In any case, the liability of the shareholders cannot be made unlimited. Changes in the
liability clause can be made by passing a special a special resolution and sending a copy
of the resolution to the Registrar of Companies.

Alteration to the Capital Clause: The capital clause of a company can be altered by an ordinary
resolution.

The company can,

1. Increase its authorised share capital.

2. Convert the shares into stock.
3. Consolidate and divide all of its shares.
4. Cancel the shares which have not been subscribed to.
5. Diminish the share capital of the shares cancelled.

The altered Memorandum of Association should be submitted to the Registrar within 30 days of
passing the resolution.

Articles of Association

The Companies Act, 2013 defines ‘articles’ as the “articles of association of a company
originally framed, or as altered from time to time in pursuance of any previous company laws or
of the present.” The Articles of Association of a company are that which prescribe the rules,
regulations and the bye-laws for the internal management of the company, the conduct of its
business, and is a document of paramount significance in the life of a company. The Articles of a
company have often been compared to a rule book of the company’s working, that regulates the
management and powers of the company and its officers. It prescribes several details of the
company’s inner
workings such as the manner of making calls, director’s/employees’ qualifications, powers and
duties of auditors, forfeiture of shares etc.

In fact, the articles of association also establish a contract between the members and between the
members and the company. This contract is established, governs the ordinary rights and
obligations that are incidental to having membership in the company.

It must be noted, however, that the articles of association, are subordinate to the memorandum of
association of a company, which is the dominant, fundamental constitutional document of the
company. Further, as laid down in Shyam Chand v. Calcutta Stock Exchange, any and all articles
that go beyond the memorandum of association will be deemed ultra vires. Therefore, there
should not be any provisions in the articles that go beyond the memorandum. In the event of a
conflict between the memorandum and the articles, the provisions in the memorandum will
prevail. In case of any ambiguity or uncertainty regarding details in the memorandum, it should
be read along with the articles.

Nature and Content of Articles of Association

As per the Companies Act, 2013, the articles of association of different companies are supposed
to be framed in the prescribed form, since the model form of articles is different for companies
limited by shares, companies limited by guarantee having share capital, companies limited by
guarantee not having share capital, an unlimited company having share capital and an unlimited
company not having share capital.

The signing of the Articles of Association

The Companies (Incorporation) Rules, 2014 prescribes that both the Memorandum and the
Articles of a company are to be signed in a specific manner.

 Memorandum and Articles of a company, are both required to be signed by all

subscribers, who are further required to add their names, addresses and occupation, in
the presence of at least one witness, who must attest the signatures with his own
signature and details.
 Where a subscriber is illiterate, he must affix a thumb impression in place of his
signature and appoint a person to authenticate the impression with his signature and
details. This
 appointed person should also read out the content of the documents to the illiterate
subscriber for his understanding.
 Where a subscriber is a body corporate, the memorandum and articles must be signed
by any director of the body corporate who is duly authorised to sign on behalf of the
body corporate, by a passing a resolution of the board of directors of the body
corporate.
 Where the subscriber is a Limited Liability Partnership, the partner of the LLP who is
duly authorised to sign on the behalf of the LLP by a resolution of all the partners shall
sign.

Provisions for Entrenchment

The concept of Entrenchment was introduced in the Companies Act, 2013 in Section 5(3) which
implies that certain provisions within the Articles of Association will not be alterable by merely
passing a special resolution and will require a much more lengthy and elaborate process. The
literal definition of the word “entrench” means to establish an attitude, habit, or belief so firmly
that bringing about a change is unlikely. Thus, an entrenchment clause included in the Articles is
one which makes certain changes or amendments either impossible or difficult.

Provisions for entrenchment can only be introduced in the articles of a company during its
incorporation, or an amendment to the articles brought about by a special resolution in case of a
public company, and an agreement between all the members in case of a private company.

Alteration of Articles of Association

Section 14 of the Companies Act, 2013, permits a company to alter its articles, subject to the
conditions contained in the memorandum of association, by passing a special resolution. This
power is extremely important for the functioning of the company. The company may alter its
articles to the effect that would turn:

A public company into a private company

For a company wanting to convert itself from public to a private company simply passing a
special resolution is not enough. The company will have to acquire the consent and approval of
the Tribunal. Further, a copy of the special resolution must be filed with the Registrar of
Companies within 30 days of passing it. Further, a company must then file a copy of the altered,
new articles
of association, as well as the approval order of the Tribunal with the Registrar of Companies
within 15 days of the order being received.

A private company into a public company

For a company wanting to convert from its private status to public, it may do so by
removing/omitting the three clauses as per section 2(68) which defines the requisites of a private
company. Similar to the conversion of the public to a private company, a copy of the resolution
and the altered articles are to be filed with the Registrar within the stipulated period of time.

Limitations on power to alter articles

 The alteration must not contravene provisions of the memorandum, since the
memorandum supersedes the articles, and the memorandum will prevail in the event of
a conflict.
 The alteration cannot contravene the provisions of the Companies Act, or any other
company law since it supersedes both the memorandum and the articles of the
company.
 Cannot contravene the rules, alterations or suggestions of the Tribunal.
 The alteration cannot be illegal or in contravention with public policy. Further, it must
be for the bona fide benefit and interest of the company. The alterations cannot be an
effort to constitute a fraud on the minority and must be for the benefit of the company
as a whole.
 Any alteration made to convert a public company into a private company, cannot be
made until the requisite approval is obtained from the Tribunal.
 A company may not use the alteration to cover up or rectify a breach of contract with
third parties or use it to escape contractual liability.
 A company cannot alter its articles for the purpose of expelling a member of the board
of directors is against company jurisprudence and hence cannot occur.

Binding effect of Memorandum and Articles of Association

After the Articles and the Memorandum of a company are registered, they bind the company and
its members to the same extent as if they had been signed by each of the members of the
company. However, while the company’s articles have a binding effect, it does not have as much
force as a statute does. The effect of binding may work as follows:
Binding the company to its members

The company is naturally completely bound to its members to adhere to the articles. Where the
company commits or is in a place to commit a breach of the articles, such as making ultra vires
or otherwise illegal transaction, members can restrain the company from doing so, by way of an
injunction. Members are also empowered to sue the company for the purpose of enforcement of
their own personal rights provided under the Articles, for instance, the right to receive their share
of declared divided.

It should be noted, however, that only a shareholder/member, and only in his capacity as a
member, can enforce the provisions contained in the Articles. For instance, in the case of Wood
v. Odessa Waterworks Co., the articles of Waterworks Co. provided that the directors can declare
a dividend to be paid to the members, with the sanction of the company at a general meeting.
However, instead of paying the dividend to the shareholders in cash a resolution was passed to
give them debenture bonds. It was finally held by the court, that the word “payment” referred to
payment in cash, and the directors were thus restrained from acting on the resolution so passed.

Members bound to the company

Each member of the company is bound to the company and must observe and adhere to the
provisions of the memorandum and the articles. All the money that may be payable by any
member to the company shall be considered as a debt due. Members are bound by the articles
just as though each and every one of them has signed and contracted to conform to their
provisions. In Borland’s Trustees v. Steel Bros. & Co. Ltd., the articles the company provided
that in the event of bankruptcy of any member, his shares would be sold at a price affixed by the
directors. Thus, when Borland went bankrupt, his trustee expressed his wish to sell these shares
at their original value and contended that he could do so since he was not bound by the articles. It
was held, however, that he was bound to abide by the company’s articles since the shares were
bought as per the provisions of the articles.

Binding between members

The articles create a contract between and amongst each member of the company. However, such
rights can only be enforced by or even against a member of the company. Courts have been
known to make exceptions and extend the articles to constitute a contract even between
individual
members. In the case of Rayfield v Hands Rayfield was a shareholder in a particular company.,
who was required to inform directors if he intended to transfer his shares, and subsequently, the
directors were required to buy those shares at a fair value. Thus, Rayfield remained in adherence
to the articles and informed the directors. The directors, however, contended that they were not
bound to pay for his shares and the articles could not impose this obligation on them. The courts,
however, dismissed the directors’ argument and compelled them to buy Rayfield’s shares at a fair
value. The court further held that it was not mandatory for Rayfield to join the company to be
allowed to bring a suit against the company’s directors.

No binding in relation to outsiders

Contrary to the above conditions, neither the memorandum nor the articles constitute a contract
between the company and any third party. The company and its members are not bound to the
outsiders with respect to the provisions of the memorandum and the articles. For instance, in the
case of Browne v La Trinidad, the articles of the company included a clause that implied that
Browne should be a director that should not be removed or removable. He was, however,
removed regardless and thus brought an action to restrain the company from removing him. Held
that since there was no contract between Browne and the company, being an outsider, he cannot
enforce articles against the company even if they talk about him or give him any rights.
Therefore, an outsider may not take undue advantage of the articles to make any claims against
the company.

The doctrine of Constructive Notice

When the Memorandum and Articles of Association of any company, are registered with the
Registrar of Companies they become “public documents” as per section 399 of the Act. This
implies that any member of the general public may view and inspect these documents at a
prescribed fee. A member of the public may make a request to a specific company, and the
company, in turn, must, within seven days send that person a copy of the memorandum, the
articles and all agreements and resolutions that are mentioned in section 117(1) of the Act.

If the company or its officers or both, fail to provide the copies of the requisite documents, every
defaulting officer will be liable to a fine of Rs. 1000, for every day, until the default continues, or
Rs. 1,00,000 whichever is less.
Therefore, it is the duty of every person that deals with the company to inspect these public
documents and ensure in his own capacity that the workings of the company are in conformity
with the documents. Irrespective of whether a person has actually read the documents or not, it is
assumed that he familiar with the contents of these documents, and that he has understood them
in their proper meaning. The memorandum and articles of association are thus deemed as notices
to the public, hence a ‘constructive notice’.

Illustration: If the articles of Company A, provided that any bill of exchange must be signed by a
minimum of two directors, and the payee receives a bill of exchange signed only by one, he will
not have the right to claim the amount.

Distinction Between Memorandum and Articles of Association

Sl.No. Memorandum of Association Articles of Association

Contains fundamental conditions

upon Contain the provisions for internal
1
which the company is incorporated. regulations of the company.

Meant for the benefit and clarity of Regulate the relationship between the
the
company and its members, as well
2 public and the creditors, and the
amongst the members themselves.
shareholders.

Lays down the area beyond which

the Articles establish the regulations for
3 working within that area.
company’s conduct cannot go.

Memorandum lays down the

parameters Articles prescribe details within those
4 parameters.
for the articles to function.

Can only be altered under specific Permission of the Central

circumstances and only as per the Government is also required in
5 provisions of the Companies Act, 2013. certain cases.
Articles can be altered a lot more easily, by
passing a special resolution.
 Memorandum cannot include Articles cannot include provisions contrary
provisions
to the memorandum. Articles are
contrary to the Companies Act.
6 subsidiary to both the Companies Act and
Memorandum is only subsidiary to the
the Memorandum.
Companies Act.

Acts done beyond the memorandum Acts done beyond the Articles can be
7 are ultra vires and cannot be ratified ratified by the shareholders as long as the
even by the shareholders. act is not beyond the memorandum.

The doctrine of Indoor Management

The concept of the Doctrine of Indoor Management can be most elaborately explained by
examining the facts of the case of Royal British Bank v. Turquand, which in fact, first laid down
the doctrine. It is due to this that the doctrine of indoor management is also known as the
“Turquand Rule”.

The directors of a particular company were authorised in its articles to engage in the borrowing
of bonds from time to time, by way of a resolution passed by the company in a general meeting.
However, the directors gave a bond to someone without such a resolution being passed, and
therefore the question that arose was whether the company was still liable with respect to the
bond. The company was held liable, and the Chief Justice, Sir John Jervis explained that the
understanding behind this decision was that the person receiving the bond was entitled to assume
that the resolution had been passed, and had accepted the bond in good faith.

However, the judgement, in this case, was not fully accepted into in law until it was accepted and
endorsed by the House of Lords in the case of Mahony v East Holyford Mining Co.

Therefore, the primary role of the doctrine of indoor management is completely opposed to that
of constructive notice. Quite simply, while constructive notice seeks to protect the company from an
outsider, indoor management seeks to protect outsiders from the company. The doctrine of
constructive notice is restricted to the external and outside position of the company and, hence,
follows that there is no notice regarding how the internal mechanism of the company is operated
by its officers, directors and employees. If the contract has been consistent with the documentson
public record, the person so contracting shall not be prejudiced by any and all irregularities that
may beset the inside, or “indoor” operation of the company.

This doctrine has since then been adopted into Indian Law as well in cases such as Official
Liquidator, Manabe & Co. Pvt. Ltd. v. Commissioner of Police and more recently, in M.
Rajendra Naidu v. Sterling Holiday Resorts (India) Ltd. wherein the judgment was that the
organizations lending to the company should acquaint themselves well with the memorandum
and the articles, however, they cannot be expected to be aware of every nook and corner of every
resolution, and to be aware of all the actions of a company’s directors. Simply put, people
dealing with the company are not bound to inquire into every single internal proceeding that
takes place within the company.

Exceptions to the Doctrine of Indoor Management

Where the outsider had knowledge of the irregularity— Although people are not expected to
know about internal irregularities within a company, a person who did, in fact, have knowledge,
or even implied notice of the lack of authority, and went ahead with the transaction regardless,
shall not have the protection of this doctrine. Illustration: In Howard v. Patent Ivory Co. (38 Ch.
D 156), the articles of a company only allowed the directors to borrow a maximum amount of
one thousand pounds, however, they could exceed this amount by obtaining the consent of the
company in a general meeting. However, in this case, without obtaining this requisite consent,
the directors borrowed a sum of 3,500 Pounds from one of the directors in exchange for
debentures. The company then refused to pay the amount. It was eventually held that the
debentures were only good to the extent of one thousand pounds since the director had full
knowledge and notice of the irregularity since he was a director himself involved in the internal
working of the company.

Lack of knowledge of the articles— Naturally, this doctrine cannot and will not protect someone
who has not acquainted himself with the articles or the memorandum of the company for
example in the case of Rama Corporation v. Proved Tin & General Investment Co. wherein the
officers of Rama Corporation had not read the articles of the investment company that they were
undertaking a transaction with.

Negligence— This doctrine does not offer protection to those who have dealt with a company
negligently. For example, if an officer of a company very evidently takes an action which is not
within his powers, the person contracting should undertake due diligence to ensure that the
officer is duly authorized to take that action. If not, this doctrine cannot help the person so
contracting, such as in the case of Al Underwood v. Bank of Liverpool.

Forgery— Any transaction which involves forgery or is illegal or void ab initio, implies the lack
of free will while entering into the transaction, and hence does not invoke the doctrine of indoor
management. For example, in the case of Ruben v. Great Fingal Consolidated, the secretary of a
company illegally forged the signatures of two directors on a share certificate so as to issue
shares without the appropriate authority. Since the directors had no knowledge of this forgery,
they could not be held liable. The share certificate was held to be in nullity and hence, the
doctrine of indoor management could not be applied. The wrongful an unauthorized use of the
company’s seal is also included within this exception.

Further, this doctrine cannot include situations where there was third agency involved or existent.
For example, in the case of Varkey Souriar v. Keraleeya Banking Co. Ltd. this doctrine could not
be applied where there was any scope of power exercised by an agent of the company. The
doctrine cannot be implied even in cases of Oppression

Prospectus

The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be defined as
“any document which is described or issued as a prospectus”. This also includes any notice,
circular, advertisement or any other document acting as an invitation to offers from the public.
Such an invitation to offer should be for the purchase of any securities of a corporate body. Shelf
prospectus and red herring prospectus are also considered as a prospectus.

Essentials for a document to be called as a prospectus

For any document to considered as a prospectus, it should satisfy following conditions.

 The document should invite the subscription to public share or debentures, or it

should invite deposits.
 Such an invitation should be made to the public.
 The invitation should be made by the company or on the behalf company.
 The invitation should relate to shares, debentures or such other instruments.
Statement in lieu of prospectus

Every public company either issue a prospectus or file a statement in lieu of prospectus. This is
not mandatory for a private company. But when a private company converts from private to
public company, it must have to either file a prospectus if earlier issued or it has to file a
statement in lieu of prospectus.

The provisions regarding the statement in lieu of prospectus have been stated under section 70 of
the Companies Act 2013.

Advertisement of prospectus

Section 30 of the Companies Act 2013 contains the provisions regarding the advertisement of the
prospectus. This section states that when in any manner the advertisement of a prospectus is
published, it is mandatory to specify the contents of the memorandum of the company regarding
the object, member’s liabilities, amount of the company’s share capital, signatories and the
number of shares subscribed by them and the capital structure of the company. Types of the
prospectus as follows.

 Shelf Prospectus
 Red Herring Prospectus
 Abridged prospectus
 Deemed Prospectus

Shelf Prospectus

Shelf prospectus can be defined as a prospectus that has been issued by any public financial
institution, company or bank for one or more issues of securities or class of securities as
mentioned in the prospectus. When a shelf prospectus is issued then the issuer does not need to
issue a separate prospectus for each offering, he can offer or sell securities without issuing any
further prospectus.

The provisions related to shelf prospectus has been discussed under section 31 of the Companies
Act, 2013.
The regulations are to be provided by the Securities and Exchange Board of India for any class
or classes of companies that may file a shelf prospectus at the stage of the first offer of securities
to the registrar.

The prospectus shall prescribe the validity period of the prospectus and it should be not be
exceeding one year. This period commences from the opening date of the first offer of the
securities. For any second or further offer, no separate prospectus is required.

While filing for a shelf prospectus, a company is required to file an information memorandum
along with it.

Information Memorandum [Section 31(2)]

The company which is filing a shelf prospectus is required to file the information memorandum.
It should contain all the facts regarding the new charges created, what changes have undergone
in the financial position of the company since the first offer of the security or between the two
offers.

It should be filed with the registrar within three months before the issue of the second or
subsequent offer made under the shelf prospectus as given under Rule 4CCA of section 60A(3)
under the Companies (Central Government’s) General Rules and Forms, 1956.

When any company or a person has received an application for the allotment of securities with
advance payment of subscription before any changes have been made, then he must be informed
about the changes. If he desires to withdraw the application within 15 days, then the money must
be refunded to them.

After the information memorandum has been filed, if any offer or securities is made, the
memorandum along with the shelf prospectus is considered as a prospectus.

Red herring prospectus

Red herring prospectus is the prospectus which lacks the complete particulars about the quantum
of the price of the securities. A company may issue a red herring prospectus prior to the issue of
prospectus when it is proposing to make an offer of securities.

This type of prospectus needs to be filed with the registrar at least three days prior to the opening
of the subscription list or the offer. The obligations carried by a red herring prospectus are same
as a prospectus. If there is any variation between a red herring prospectus and a prospectus then
it should be highlighted in the prospectus as variations.

When the offer of securities closes then the prospectus has to state the total capital raised either
raised by the way of debt or share capital. It also has to state the closing price of the securities.
Any other details which have not been included in the prospectus need to be registered with the
registrar and SEBI.

The applicant or subscriber has right under Section60B (7) to withdraw the application on any
intimation of variation within 7 days of such intimation and the withdrawal should be
communicated in writing.

Abridged Prospectus

The abridged prospectus is a summary of a prospectus filed before the registrar. It contains all
the features of a prospectus. An abridged prospectus contains all the information of the
prospectus in brief so that it should be convenient and quick for an investor to know all the
useful information in short.

Section33(1) of the Companies Act, 2013 also states that when any form for the purchase of
securities of a company is issued, it must be accompanied by an abridged prospectus.

It contains all the useful and materialistic information so that the investor can take a rational
decision and it also reduces the cost of public issue of the capital as it is a short form of a
prospectus.

Deemed Prospectus

A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013.

When any company to offer securities for sale to the public, allots or agrees to allot securities, the
document will be considered as a deemed prospectus through which the offer is made to the
public for sale. The document is deemed to be a prospectus of a company for all purposes and all
the provision of content and liabilities of a prospectus will be applied upon it.
In the case of SEBI v. Kunnamkulam Paper Mills Ltd., it was held by the court that where a
rights issue is made to the existing members with a right to renounce in the favour of others, it
becomes a deemed prospectus if the number of such others exceeds fifty.

Process for filing and issuing a prospectus

Application forms

As stated under section 33, the application form for the securities is issued only when they are
accompanied by a memorandum with all the features of prospectus referred to as an abridged
prospectus.

The exceptions to this rule are:

 When an application form is issued as an invitation to a person to enter into

underwriting agreement regarding securities.
 Application issued for the securities not offered to the public.

Contents

For filing and issuing the prospectus of a public company, it must be signed and dated and contain
all the necessary information as stated under section 26 of the Companies Act,2013:

1. Name and registered address of the office, its secretary, auditor, legal advisor,
bankers, trustees, etc.
2. Date of the opening and closing of the issue.
3. Statements of the Board of Directors about separate bank accounts where receipts of
issues are to be kept.
4. Statement of the Board of Directors about the details of utilization and non-utilisation
of receipts of previous issues.
5. Consent of the directors, auditors, bankers to the issue, expert opinions.
6. Authority for the issue and details of the resolution passed for it.
7. Procedure and time scheduled for the allotment and issue of securities.
8. The capital structure of the in the manner which may be prescribed.
9. The objective of a public offer.
10. The objective of the business and its location.
 11. Particulars related to risk factors of the specific project, gestation period of the project,
any pending legal action and other important details related to the project.
12. Minimum subscription and what amount is payable on the premium.
13. Details of directors, their remuneration and extent of their interest in the company.
14. Reports for the purpose of financial information such as auditor’s report, report of profit
and loss of the five financial years, business and transaction reports, statement of
compliance with the provisions of the Act and any other report.

Filing of copy with the registrar

As stated under sub-section 4 of section26 of the Companies Act, 2013, the prospectus is not to
be issued by a company or on its behalf unless on or before the date of publication, a copy of the
prospectus is delivered to the registrar for registration.

The copy should be signed by every person whose name has been mentioned in the prospectus as
a director or proposed director or the assigned attorney on his behalf.

Delivery of copy of the prospectus to the registrar

As per section26(6) of the Companies Act 2013, the prospectus should mention that its copy has
been delivered to the registrar on its face. The statement should also mention the document
submitted to the registrar along with the copy of the prospectus.

Registration of prospectus

Section26(7) states about the registration of a prospectus by the registrar. According to this section,
when the registrar can register a prospectus when:

 It fulfils the requirements of this section, i.e., section 26 of the Companies Act, 2013; and
 It contains the consent of all the persons named in the prospectus in writing.

Issue of prospectus after registration

If a prospectus is not issued before 90 days from the date from which a copy was delivered before
the registrar, then it is considered to be invalid.
Contravention of section

If a prospectus is issued in contravention of the provision under section 26 of the Companies Act
2013, then the company can be punished under section 26(9). The punishment for the
contravention is:

 Fine of not less than Rs. 50,000 extending up to 3,00,000.

If any person becomes aware of such prospectus after knowing the fact that such prospectus is
being issued in contravention of section 26 then he is punishable with the following penal
provisions.

 Imprisonment up to a term of 3 years, or

 Fine of more than Rs. 50,000 not exceeding Rs. 3,00,000.

UNIT – III

MANAGEMENT AND CONTROL OF COMPANIES

Synopsis

 Introduction to Company Meetings

 Board of Directors
 Committee Meetings
 Members’ meetings
 Distribution of powers between Board of Directors and Shareholders
 Directors
 Corporate Social Responsibility
 Oppression and Mismanagement
 Class Actions

Introduction to Company Meetings

A number of meetings are convened in a company and are generally classified as members’
meetings, directors’ meetings and other meetings. Members’ meetings include the annual general
meeting, which is the mandatory meeting of the members that every company is required to
convene each year. However, there exists no embargo on holding more than one general meeting
of the members, which are called the extra-ordinary general meetings. The meetings of the
directors are called the Board meetings and the meetings of the committees of the directors are
the Committee meetings. Other meetings include creditors meetings and class meetings.

The focus of the Companies Act, 2013 has been on enhancing transparency, shareholders’
democracy and protection of the interest of the investors. It has made few changes for regulating
meetings for example, the requirement of holding a statutory meeting of members at the time of
commencement of business of a company for any public company (required under the
Companies Act, 1956) has been done away with, the concepts of video-conferencing and e-
voting have been introduced.
Board of Directors

The Board of directors of a company is a nucleus, selected according to the procedure prescribed
in the Act and the Articles of Association. Members of the Board of directors are known as
directors, who unless especially authorised by the Board of directors of the Company, do not
possess any power of management of the affairs of the company. The Board of Directors
oversees how the management serves and protects the long-term interests of all the stakeholders
of the company. The institution of Board of Directors is based on the premise that a group of
trustworthy people look after the interests of the large number of shareholders who are not
directly involved in the management of the company. The position of board of directors is that of
trust as the board is entrusted with the responsibility to act in the best interests of the company.
Acting collectively as a Board of directors, they can exercise all the powers of the company
except those, which are prescribed by the Act to be specifically exercised by the company in
general meeting.

The Board formulate policies and establish organisational set up for implementing those policies
and to achieve the objectives contained in the Memorandum, muster resources for achieving the
company objectives and control, guide, direct and manage the affairs of the company. Section
2(10) of the Companies Act, 2013 defines that “Board of Directors” or “Board”, in relation to a
company, means the collective body of the directors of the company. The term ‘Board of
Directors’ means a body duly constituted to direct, control and supervise the affairs of a
company. As per Section 149 of the Companies Act, 2013, the Board of Directors of every
company shall consist of individual only. Thus, no body corporate, association or firm shall be
appointed as director.

Directors’ Meetings

Board Meetings [Section 173 read with Rules 3 and 4 of the Companies (Meetings of Board
and its Powers), 2014]

The Board of directors of a company are responsible for overseeing the management of the
company and thereby exercise their power of day-to-day decision making by convening and
holding Board meetings.

Within 30 days of their incorporation, the companies must hold their first board meeting.
Thereafter, the companies must hold at least four board meetings in a year, where there must not
be more than 120 days’ gap between two consecutive meetings.
One of the striking features of the present legislation is that it allows the directors to take part in
the board meeting through videoconferencing or any other audio-visual means. However, there is
an embargo from dealing certain matters through the video-conferencing or audio-visual mode.

A notice of at least seven days must be given to each of the director for a board meeting. In case
of urgency a shorter notice may be given where at least one independent director is present at
such meeting.

The notice of a board meeting must be sent to all the directors, otherwise the proceedings of the
meeting and the resolution passed thereat may be declared as invalid by the Court of law.

Also, it has been held in the case of Dankha Devi Agarwal v. Tara Properties Private Limited that
a decision taken in a meeting without due notice of such meeting for removal or induction
would be instance of oppression and mismanagement.

At least two directors or one-third of the total strength (higher of the two) constitutes quorum for
a board meeting. Here the directors, both personally attending or through the audio-video means
would be counted for the purposes of the quorum (section 174).

Board Composition

Minimum/Maximum Number of Directors in a Company [Section 149(1)] Section 149(1) of the

Companies Act, 2013 requires that every company shall have a minimum number of 3 directors
in the case of a public company, two directors in the case of a private company, and one director
in the case of a One Person Company. A company can appoint maximum 15 fifteen directors
without any specific compliance. A company may appoint more than fifteen directors after
passing a special resolution in general meeting.

The restriction of maximum number of directors shall not apply to section 8 companies.
Minimum number of directors;

 Public Company - 3 Directors

 Private Company - 2 directors
 One Person Company (OPC) - 1 Director

Maximum Number of Director is 15, which can be increased by passing a special resolution.
Section 8 companies can have more than 15 directors.
Section 149(3) provides that every company shall have at least one director who has stayed in
India for a total period of not less than one hundred and eighty-two days in the previous calendar
year. Further, Second proviso to Section 149(1) read Rule 3 of Companies (Appointment and
Qualification of Directors) Rules, 2014 following class of companies must have at least one
Women Director. Alternate directorship shall also be included while calculating the directorship
of 20 companies. Section 8 company will not be counted for the purpose of maximum number of
Directorship

Maximum limit on total number of directorship has been fixed at 20 companies and the
maximum number of public companies in which a person can be appointed as a director shall not
exceed ten. The members of a company may, by special resolution, specify any lesser number of
companies in which a director of the company may act as director.

Quorum for Board meeting Requirement

 Quorum for Board Meeting = 1/3rd of its Total strength or two directors, whichever
is higher
 A Director participating through video conferencing/audio visual modes will also
be counted for quorum
 Any fraction of a member will be rounded off as one
 Total strength shall not include directors whose places are vacant.

Power of Board [Section 179] Section 179 of the Act deals with the powers of the board; all
powers to do such acts and things for which the company is authorised is vested with board of
directors. But the board can act or do the things for which powers are vested with them and not
with general meeting.

The following [Section 179(3) read with Rule 8 of Companies (Management & Administration)
Rules, 2014] powers of the Board of directors shall be exercised only by means of resolutions
passed at meetings of the Board, namely :-

3. to make calls on shareholders in respect of money unpaid on their shares;

4. to authorise buy-back of securities under section 68;
5. to issue securities, including debentures, whether in or outside India;
6. to borrow monies;
 7. to invest the funds of the company;
8. to grant loans or give guarantee or provide security in respect of loans;
9. to approve financial statement and the Board’s report;
10. to diversify the business of the company;
11. to approve amalgamation, merger or reconstruction;
12. to take over a company or acquire a controlling or substantial stake in another company;
13. to make political contributions; Lesson 15 Board Constitution and its Powers 533
14. to appoint or remove key managerial personnel (KMP);
15. to appoint internal auditors and secretarial auditor; The Board may, by a resolution
passed at a meeting, delegate to any committee of directors, the managing director, the
manager or any other principal officer of the company or in the case of a branch office
of the company, the principal officer of the branch office, the powers specified in (4) to
(6) above on such conditions as it may specify. The banking company is not covered
under the purview of this section.

Restriction on Powers of Board

[Section 180] The board can exercise the following powers only with the consent of the company
by special resolution, namely – (a) to sell, lease or otherwise dispose of the whole or
substantially the whole of the undertaking of the company or where the company owns
more than one undertaking, of the whole or substantially the whole of any of such undertakings.
(b) to invest otherwise in trust securities the amount of compensation received by it as a result of
any merger or amalgamation; (c) to borrow money, where the money to be borrowed, together
with the money already borrowed by the company will exceed aggregate of its paid-up share
capital, free reserves and securities premium apart from temporary loans obtained from the
company’s bankers in the ordinary course of business; (d) to remit, or give time for the
repayment of, any debt due from a director

Contributions to Charitable Funds and Political Parties [Section 181] The power of making
contribution to ‘bona fide’ charitable and other funds is available to the board subject to certain
limits
Prohibitions and Restrictions Regarding Political Contributions [Section 182] According to
Section 182 of the Act, a company, other than a government company which has been in
existence
for less than three financial years, may contribute any amount directly to any political party.
Further, the limit of contribution to political parties is 7.5% of the average net profits during the
three immediately preceding financial years.

Power of Board and other Persons to make Contributions to National Defence Fund, etc.
[Section 183] The Board is authorised to contribute such amount as it thinks fit to the National
Defence Fund or any other fund approved by the Government for the purpose of national
defence. The company is required to disclose in its profit and loss account the total amount or
amounts contributed by it during the financial year.

In P.S Offshore Interland Services P Ltd v. Bombay Offshore Suppliers Ltd, it was held that
a closed or out of function unit of a company may be an undertaking. Also in Pramod Kumar
Mittal v. Andhra Steel Corpn Ltd, 11 it was held that an undertaking in a complete and
complex weft and the various types of business and assets are threads which cannot be taken a
part from the weft. ( b) To remit or give time for payment of any debt to the company by a
director,12 except in the case of renewal or continuance of an advance made by a banking
company to its directors in the ordinary course of business. (c) To invest (excluding trust
securities) the amount of compensation received in respect of the compulsory acquisition of any
undertaking or property of the company. (d) To borrow moneys and where the moneys to be
borrowed (together with the moneys already borrowed by the company) are more than paid up
capital of the company and its free reserves. That is to say reserves in the share premium
account, general reserve, profit and a loss account, and capital redemption account).The amount
of temporary loans raised from banks in the ordinary course of business is excluded. This,
however, does not include loans raised for the purpose of financing expenditure of a capital-'
nature. (e) To contribute to charitable and other funds not directly relating to the business of the
company or the welfare of its employees, amounts exceeding in any financial year, fifty thousand
or 5 percent of the average net profits of the three preceding financial years, whichever is greater.

Power of directors to allot the shares

Directors of a company have powers to allot shares but this power must be exercised bonafide for
the benefit of the company as a whole because this power is t / a fiduciary one. In Grant v. John
Grant& Sons Ltd, it was held that when the company not in need of further capital and the
directors issued shares only to maintain their control or for defeating the wishes of the existing
majority of the shareholders, the allotment was improper. In another case of Punt v. Symons
&Co Ltd, the directors used the shares with the object of creating a sufficient majority to enable
them to pass a special resolution depriving other shareholders special rights conferred on them
by the company’s articles. It was held that when issue of shares to persons who are, obviously
meant and intended to secure the necessary statutory majority in a particular interest, it could not
be fair and bonafide exercise of the power.

Similarly, in the case of Pierey v. S Mills &Co Ltd, the directors had issued shares to enable
them to resist the election of three additional directors which would have put the existing
directors in a minority on the board. The issue was held to be improper.

Power of Directors to Make Calls on Shares

The Articles of Association of companies generally provide that the power to make calls in
advance from the shareholders in respect of unpaid amount on shares vest in the directors. The
power to make calls is a fiduciary one and shall not be used by the directors for their own
benefit. This power cannot be delegated by the directors to any committee of directors, the
managing agent, secretaries, treasurers or the manager, In Poiner Alkali Works Ltd v.
Amiruddins. Tayyabji, it was held that where the articles provide that every shareholder shall be
liable to pay the amount of every call to the persons and at the time and place appointed by the
directors, the resolution should specify the time, place and amount of the payment of the call. In
East and West Insurance Co Ltd v. Mrs. Kamla Jayanti Lsl Mehta, it was held that when the
time for the payment of the call is not fixed by the board of directors, the call is valid although
there was an omission in specifying the place and person whom the call is to be paid. A valid
resolution making a call must state; (a) The amount of the call, (b) The time when the call should
be paid, (c) The person to whom the payment is to be made and (d) The place where the payment
is to be made.

Committee Meetings

The Companies Act, 2013 provides for four mandatory committees of the board of directors
under the Act which are namely, Audit Committee, Nomination & Remuneration Committee,
Stakeholders Relationship Committee and Corporate Social Responsibility Committee. The
committees so formulated are not to be appointed by every company but they get triggered or are
required to be formulated based on certain thresholds.
i. Audit Committee meeting is required to be convened by every listed company and only those
public companies which have a paid up share capital of Rs. 10 crore or more or have a turnover
of Rs. 50 crore or more or have aggregate outstanding loan, debenture and deposit exceeding
INR 50 Crore or more. The terms of reference of such a committee include monitoring auditor’s
appointment, remuneration and his performance etc. Every minutes of the meeting of the
Audit Committee shall be noted in the ensuing meeting of the Board of Directors and also, a
distinct minutes’ book shall be maintained for the meeting of the Committee. The Chairman of
the Audit Committee is required to address the concerns of the shareholders at the Annual
General Meeting.

ii. Nomination and Remuneration Committee meeting are also a mandate for every listed
company and only those public company which have a paid-up share capital of Rs. 10 crore or
more or have a turnover of R. 100 crore or more having aggregate outstanding loan, debenture
and deposit exceeding INR 50 Crore or more. The committee is required to ensure that the level
and composition of remuneration is reasonable and sufficient to attract, retain and motivate
directors of the quality required to run the company successfully.

iii. Stakeholders Relationship Committee meetings are required to address the grievances of
the stakeholders of the company. This committee is to be constituted by every company which
has the strength of more than 1000 shareholders, debenture-holders, deposit-holders and any
other security holders at any time during the financial year.

iv. Corporate Social Responsibility Committee meeting shall take all decisions as regards the
CSR policy of the company in its meetings. Such committee shall consist of at least three
directors, of which at least one director shall be an independent director.

Members’ meetings

Annual General Meeting (Section 96): One of the opportunities annually given to the members
of a company is to take part in the business of the company by exercising their power to take
decisions. For this purpose, each year every company is required to hold at least one meeting of
its members’ which is known as an annual general meeting (AGM). An exemption from holding
an annual general meeting is only given to a one-person company.

The first general meeting of a company must be held within nine months from the date of closing
the financial year of the company, and then the company need not hold any annual general
meeting
in its year of incorporation. The subsequent annual general meetings shall take place within six
months of the date of closing of the financial year. The time prescribed for the first annual
general meeting cannot be extended, however, the time period for subsequent annual general
meetings may be extended to a maximum of three months with the leave of the Registrar of
companies.

Following chart depicts the date, time and venue for holding an annual general meeting. Here the
Central Government is empowered to exempt, subject to conditions, any company from the
holding such meeting in accordance with the date, time and venue as prescribed.

When a company defaults in holding an annual general meeting as required, the Tribunal has the
power to call such meeting upon receipt of an application from any member of the company. The
Tribunal may even direct to hold a one-member meeting. Such meetings shall be deemed as an
annual general meeting as per provisions of this Act. Upon such default, the company and every
officer in default would be liable for punishment as prescribed.

Business to be transacted at an annual general meeting (section

102)

The business transacted at the annual general meeting is called the ordinary business (this is the
reason a general meeting is also referred to as an ordinary meeting). Items of ordinary business
constitutes consideration of financial statements, Board reports and auditor’s report, declaring
dividends, appointment of directors and appointment and salary fixation of the auditors of the
company.

Extra-Ordinary general meeting (Section 100): All other general meetings convened and held
in a company besides the annual general meeting are regarded as extraordinary general meetings.
All the business transacted at an extra-ordinary general meeting is called special business (all
other businesses except ordinary business). The following diagram illustrates, who all can call
anextra- ordinary general meeting:

The shareholders making a requisition must possess at least one-tenth of the paid up share capital
of the company and where the company is without the share capital, the shareholders must
possess at least one-tenth of the voting powers of the company. Such share-holders,
requisitioning a general meeting, must sign upon the matters required to be addressed at the
meeting. The Board upon receipt of such valid requisition must call a general meeting within 21
days. The date of the meeting in any case must not be later than 45 days from such requisition.

In case these dead-lines are not met by the Board, the shareholders making requisition may go
ahead to call and hold a general meeting themselves. They can do so within 3 months from the
requisition date. All the reasonable expenses incurred by the shareholders on holding such
meeting,
are to be reimbursed to them by the company by deducting such amounts from the fees of the
defaulting directors.

In LIC of India v. Escorts Ltd, the Supreme Court observed that every shareholder of a company
possesses a right to call/requisition an extra-ordinary general meeting, subject to the provisionsof
the Act. Once the requisition is made in compliance of the prescribed law, the shareholder cannot
be restrained from calling such meeting.

In another case, Rathnavelu Chettiar v. M.Chettiar, the shareholders gave a requisition in

compliance of the provision of the Act for removing the MD of the company. Where the
directors failed to call a meeting within the prescribed time, the shareholders themselves
requisitioned the meeting. The venue of the meeting was decided as the registered office of the
company. However, on the day of the meeting, the registered office was locked, thus the meeting
was held at some other place. The court held such meeting to be a validly convened meeting.

The Tribunal may also, under certain circumstances order to hold and convene a meeting (other
than an annual general meeting). Here the Tribunal may on its own motion or upon the
application made by any director or members having voting rights may call such a meeting. The
Tribunal may give necessary directions for conduct of the meeting including the permission for
holding one - member meeting in person or through proxy (section 98).

Notice of the meeting (Section101)

For calling a general meeting a notice is required to be given to every member of the company or
to his legal representative (in case of a deceased member), every director and auditor of the
company. Such notice must be given to the aforesaid parties at least 21 clear days before the
meeting. The notice can be sent either in writing or through electronic means. The requirement of
21 days’ notice can be done away with, if at least 95 percent of the members voting at the
meeting agree to a shorter notice for such meeting.

The notice of a meeting must provide for the date, time and venue of the meeting along with the
statement of the business to be dealt at the meeting. It is necessary to send such notice of the
meeting as prescribed, however inadvertent failure to send notices or in case any member or
other persons do not receive the notice shall not per se affect the validity of the meeting.
Quorum (Section 103)

For holding a valid meeting, a minimum requisite number of members must attend the meeting
to transact the business, which constitutes quorum of the meeting. Following charts, provides at a
glance, the quorum required to be present at general meetings:

Adjournment of a meeting

Where the requisite number of members are not present within half an hour of the allotted time
of the meeting, such meeting is adjourned to be held on the same day next week at same time and
venue or as scheduled by the Board. The only exception to the rule is, when the meeting is called
by the requisitionists, in such a case the meeting is not adjourned for the want of quorum and is
cancelled. In other cases, members present within half an hour of the adjourned meeting shall
constitute the quorum.

Chairman of a meeting (section 104)

A chairman is elected by the members personally present at a meeting by the show of hands.
Such chairman is required for orderly conduct of the meeting. In case a poll is demanded for
electing a
Chairman, the provisions of the Act shall apply and the earlier chairman shall continue unless a
new one is appointed.

Proxies (section 105)

Members entitled to attend and vote at the meeting, may participate in the decision making
process by voting in the meeting, either personally or through a duly appointed proxy. The
proxy is another person, whom a member appoints to attend and vote at the meeting on his
behalf. However, such a proxy does not possess the right to speak at such meeting on behalf of
the member, nor is he entitled to vote except in case of a voting by poll. Section 105 of the Act,
further deliberates upon the provisions for appointing a proxy. A member can revoke his proxy
by a notice in writing.

A member can appoint more than one proxies for the same meeting, in case he possesses
different shares of that company. But in case, the said member appoints more than one proxies
for the same bunch of shares, then all the proxies shall be jointly and severally liable.

Voting at a meeting (section106)

A member can participate in the decision-making process of the company by voting at the
meetings. Such a right to vote can only be restricted by the articles of a company, where it
stipulates that the shares in respect of which any call money or sums remains due or shares upon
which the company has exercised any lien, such shareholders do not have right to vote.

Voting by show of hands (Section 107)

When a resolution is to be passed at a general meeting, voting takes place by show of hands
unless the members ask for a poll or voting happens electronically. Such voting is evidenced
though the Chairman’s declaration and an entry to this effect in the minutes of the meeting.
Voting through electronic means [Section 108 read with Rule
20 Companies (Management and Administration) Rules,
2014]

The Central Government may prescribe in accordance with the Rule 20, certain class or classes
of companies and also the manner in which a member may vote by the electronic means.
Demand for a Poll (Section 109 read with Rule 21 Companies (Management and
Administration) Rules, 2014): A poll may be either ordered by the chairman suo moto or may
be demanded by such number of members prescribed under this section.

Where a resolution is to be passed through poll, the Chairman shall require the assistance of
certain persons for scrutinising the poll and the votes and to prepare a report in accordance with
the Rule 21 of Companies (Management and Administration) Rules, 2014). The Chairman has
the power to regulate the poll in accordance with the said rules.

Postal Ballot (Section 110 read with Rule 22 Companies (Management and Administration)
Rules, 2014): A Central Government notification may declare certain business items (excluding
the items of ordinary business) to be dealt vide the postal ballot. A resolution passed by the
required majority by a postal ballot shall be deemed to be passed at a duly convened general
meeting.

Ordinary and Special resolution (Section 114)

Decisions in a company are taken by passing resolutions to that regard. The resolutions can be
ordinary, special and resolutions requiring special notice, depending upon the nature of the
decision to be taken.

Ordinary resolution is said to be passed when the votes cast by the eligible members in favour
exceed the votes casted against any resolution. Here the members can either vote in person or
through proxy. The Chairman of the meeting possesses a casting vote in case of a tie.

Whereas a special resolution is said to be passed for a resolution when a notice duly given for
the purpose clearly specifies that the resolution to be passed is a special one. Such resolutions
require that the votes by the eligible members must be three times in favour in comparison to the
votes cast against the resolution. Here the person can either vote in person or through a proxy.
Resolutions requiring special notice (Section 115 read with
Rule 23 Companies (Management and Administration)
Rules, 2014)

There are certain resolutions which require special notice. According to section 115, any such
notice required to be given shall be brought at the instance of member(s) holding not less than
one percent of total voting power (in case of company not having share capital) or member(s)
holding shares on which an aggregate sum of not exceeding five lakh rupees, paid up on the date
of notice. Rule 23 further provides the time and means of sending such special notice.

Minutes of the meeting (section 118 read with Rule 25

Companies (Management and Administration) Rules, 2014)

Companies are required to maintain and keep the records of the proceedings of every meeting
called the minutes of the meeting, which are to be prepared according to the provisions of this
Act and the Secretarial Standards. The minutes of each of the meeting are to be recorded
succinctly including all the details like the new appointments made. The minutes prepared in the
loose sheets must be signed by the Chairman within 30 days of the meeting in the form of a book
with pages consecutively numbered. The minute book of each kind of company viz. the general
meetings, creditors’ meetings are to be kept separately.

The minutes of the meetings shall have an evidentiary value for the proceedings mentioned
therein.

Distribution of powers between Board of Directors and Shareholders

Company’s powers can be exercised by the board of directors and at meetings of members of a
company. Except for the powers which are expressly required to be exercised by the company in
general meeting, in all other cases the directors can exercise all the company’s powers. This
division of company’s powers has been dealt with Greer L J, in John Shaw and Sons {Salford
Ltd),
v. Shaw, in the following words: “A company is an entity distinct from its shareholders and its
directors. Some of its powers may according to its articles, be exercised by directors, certain
other powers may be reserved for the shareholders in general meeting. If powers of
management are vested in the directors, they and they alone can exercise these powers. The
only way in which the general body of the shareholders can control the exercise of the powers
vested by the articles, in
the directors is by altering the articles, or if the opportunity arises under the articles by refusing
to re -elect the directors whose actions they disapprove.”

The shareholders cannot usurp the powers which by the articles are vested in the directors any
more than the directors can usurp the powers vested by the articles in general body of
shareholders. The powers of directors include to issue preference shares, borrow money by
mortgaging the company’s property and to do acts necessary for the management of the
company. The power to sell the assets of the company is vested in the board and if the board
thinks that it is not for the interest of the company to sell its assets, it is not bound to do so,
notwithstanding a resolution to 2 contrary in the general meeting.

The directors are the only persons who can bring an action on behalf of the company. They may
also compromise a suit in the interest of the company. The directors cannot by contract deprive
themselves of the power to control a manager so as to confer powers on him to the exclusion of
himself. While the directors are to follow the directions given by the general meeting, they are
not bound to act or adopt a particular line of action at the instance of the shareholders. The
exercise by the directors of discretionary powers will not be interfered with unless it is proved
that they have acted for some improper motive or arbitrary or capriciously. The following are
some of the important powers of the board of directors of companies in India.

Directors

The Companies Act 2013 does not contain an exhaustive definition of the term “director”.
Section 2(34) of the Act prescribed that “director” means a director appointed to the Board of a
company. Section 2(10) of the Companies Act, 2013 defined that “Board of Directors” or
“Board”, in relation to a company, means the collective body of the directors of the company.
The term ‘Board of Directors’ means a body duly constituted to direct, control and supervise the
affairs of a company. As per Section 149 of the Companies Act, 2013, the Board of Directors of
every company shall consist of individual only. Thus, no body corporate, association or firm
shall be appointed as director. Again Section 166 (6) of Companies Act, 2013, prohibits
assignment of office of director to any other person. Any assignment of office made by a director
shall be void.

As per Section 153 of the Act, every individual intending to be appointed as director of a
company shall make an application electronically in Form DIR-3 for allotment of Director
Identification
 Number to the Central Government along with the prescribed fees. Further, DINs to the proposed
first Directors in respect of new companies would be mandatorily required to be applied for in
SPICe forms (subject to a ceiling of 3 new DINs) only.

Types of Director

A director so appointed may either be executive director or non-executive director. An Executive

Director can be either a Whole-time Director of the company (i.e., one who devotes his whole
time of working hours to the company and has a significant personal interest in the company as
his source of income), or a Managing Director (i.e., one who is employed by the company as
such and has substantial powers of management over the affairs of the company subject to the
superintendence, direction and control of the Board). They are generally responsible for
overseeing the administration, programs and strategic plan of the organization. Other key duties
include fund raising, marketing, and community out reach. The position reports directly to the
Board of Directors. In contrast, a non-executive Director is a Director who is neither a Whole-
time Director nor a Managing Director. A director to the Board may be appointed as

• First Director

Section 152 of the Act provides for the appointment of first directors, accordingly, where there is
no provision made in Articles of Association of the company for appointment of first directors
then the subscribers to the memorandum who are individuals shall be deemed to be the first
directors of the company until the directors are duly appointed.

• Resident Director

Section 149(3) provides that every company shall have at least one director who has stayed in
India for a total period of not less than one hundred and eighty-two days during the financial year
Provided that in case of a newly incorporated company the requirement under this sub-section
shall apply proportionately at the end of the financial year in which it is incorporated.

• Women Director
Second proviso to Section 149(1) read Rule 3 of Companies (Appointment and Qualification of
Directors) Rules, 2014 following class of companies must have at least one Women Director.
 All Listed Companies Public companies with paid up capital of `100 crore or more or with
turnover of `300 crore or more. Additionally for listed entities SEBI vide recent notification
provides that the Board of directors of the top 500 listed entities shall have at least one
independent woman director by April 1, 2019 and the Board of directors of the top 1000 listed
entities shall have at least one independent woman director by April 1, 2020. The top 500 and
1000 entities shall be determined on the basis of market capitalisation, as at the end of the
immediate previous financial year.

• Alternate Director

Section 161(2) of the Act empowers the Board, if so authorized by its articles or by a resolution
passed by the company in general meeting, to appoint a director (termed as ‘alternate director) to
act in the absence of a original director during his absence for a period of not less than three
months from India.

• Additional Director

Section 161(1) of the Companies Act, 2013, provides that the articles of a company may confer
on its Board Lesson 16 Directors 569 of Directors the power to appoint any person, other than a
person who fails to get appointed as a director in a general meeting, as an additional director at
any time who shall hold office up to the date of the next annual general meeting or the last date
on which the annual general meeting should have been held, whichever is earlier. In case of
default in holding annual general meeting, the additional director shall vacate his office on the
last day on which the annual general meeting ought to held. A person who fails to get appointed
as a director in a general meeting cannot be appointed as Additional Director. Section 161(1) of
the Act applies to all companies, whether public or private.

• Small Shareholder Director

According to section 151 of the Act every listed company may have one director elected by such
small shareholders in such manner and on such terms and conditions as may be prescribed.
“Small shareholder” means a shareholder holding shares of nominal value of not more than
twenty thousand rupees or such other sum as may be prescribed.
 Rule 7 of Companies (Appointment and Qualification of Directors) Rules, 2014 laid down the
following terms and conditions for appointment of small shareholder’s director, which are as
under: (i) Election of small shareholders’ director: A listed company, may upon notice of not less
than (a) One thousand small shareholders; or (b) one-tenth of the total number of such
shareholders, whichever is lower; have a small shareholder’s director elected by the small
shareholder. A ‘Small Shareholders’ Director’ may be elected voluntarily by any listed company.
Thus, a listed company, may, on its own, act to appoint a Small Shareholders’ Director. In such a
case, no notice from small shareholder(s) is required.

• Nominee Director

Section 161(3) of the Companies Act, 2013, provides that subject to the articles of a company,
the Board may appoint any person as a director nominated by any institution in pursuance of the
provisions of any law for the time being in force or of any agreement or by the Central
Government or the State Government by virtue of its shareholding in a Government company

• Casual Vacancy

Section 161(4) provides that If any vacancy is caused by death or resignation of a director
appointed by the shareholders in General meeting, before expiry of his term, the Board of
directors can appoint a director to fill up such vacancy. The appointed director shall hold office
only up to the term of the director in whose place he is appointed. Section 161(4) in the case of a
public company, if the office of any director appointed by the company in general meeting is
vacated before his term of office expires in the normal course, the resulting casual vacancy may,
in default of and subject to any regulations in the articles of the company, be filled by the Board
of Directors at a meeting of the Board which shall subsequently approved by the members in the
immediate next general meeting. The person so appointed shall hold office only upto the day
upto which the director in whose place he has been appointed, would have held office if he had
not vacated as aforesaid. Where a person appointed by the Board vacates his office it is not a
case of casual vacancy and cannot be filled by the Board in the place.

 Independent director
Section 149(4) read with Rule 4 of Companies (Appointment and Qualification of Directors)
Rules, 2014 provides the rules for companies to have specified number of independent directors.
All listed public companies should have At least 1/3rd of total number directors as independent
Directors, Other public companies with paid up capital of `10 crore or more or with turnover of
`100 crore or more or with outstanding loans, debentures and deposits of `50 crore or more
should have At least 2 independent Directors

However, the following classes of unlisted public company shall not be covered under sub-rule
as above (a) a joint venture; (b) a wholly owned subsidiary; and (c) a dormant company as
defined under section 455 of the Act. In case a company covered under this rule is required
appoint higher number of independents directors due to composition of its audit committee and
then they shall appoint such higher number of independent directors. Further if there is any
intermittent vacancy of an independent director then it shall be filled up by the board of directors
within 3 months from the date of such vacancy or not later than immediate next board meeting,
whichever is later. Once the company covered under above sub-rule (i) to (iii) of Rule 4, ceases
to fulfill any of three conditions for three consecutive years then it shall not be required to
comply these provisions until such time as it meets any of such conditions. The definition of
Independent directors is provided in section 149(6).

Disqualifications for appointment of Director- Section 164

Section 164(1) Provides that a person shall not be eligible for appointment as a director of a
company, if –

(a) He is of unsound mind and stands so declared by a competent court;

(b) He is an undischarged insolvent;

(c) He has applied to be adjudicated as an insolvent and his application is pending;

(d) He has been convicted by a court of any offence, whether involving moral turpitude or
otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a
period of five years has not elapsed from the date of expiry of the sentence. Provided that if a
person has been convicted of any offence and sentenced in respect thereof to imprisonment
for a period of seven years or more, he shall not be eligible to be appointed as a director in any
company.
(e) An order disqualifying him for appointment as a director has been passed by a court or
Tribunal and the order is in force;
(f) He has not paid any calls in respect of any shares of the company held by him, whether
alone or jointly with others, and six months have elapsed from the last day fixed for the
payment of the call;

(g) He has been convicted of the offence dealing with related party transactions under section
188 at any time during the last preceding five years; or

(h) He has not complied with sub-section (3) of section 152.

(i) if he accepts directorships exceeding the maximum number of directorships provided in

section 165.

Whenever a company fails to file the financial statements or annual returns, or fails to repay any
deposit, interest, dividend, or fails to redeem its debentures, as specified in sub-section (2) of
section 164, the company shall immediately file Form DIR-9, to the Registrar furnishing therein
the names and addresses of all the directors of the company during the relevant financial years.
When a company fails to file the Form DIR-9 within a period of thirty days of the failure that
would attract the disqualification under sub-section (2) of section 164, officers of the company
specified in clause (60) of section 2 of the Act shall be the officers in default. Upon receipt of the
Form DIR-9 under sub-rule (2), the Registrar shall immediately register the document and place
it in the document file for public inspection. Any application for removal of disqualification of
directors shall be made in Form DIR-10. However, a private company may by its articles provide
for any disqualifications for appointment as a director in addition to those specified in sub-
sections
(1) and (2).The disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall
continue to apply even if the appeal or petition has been filed against the order of conviction or
disqualification.

Removal of Directors

Under section 169 of the Act, a company may, by ordinary resolution remove a director before
the expiry of the period of his office. The provisions of section 169 shall apply regardless of the
way in which the director concerned was appointed and notwithstanding anything contained in
the articles of the company or any agreement with the director concerned.
Rights and duties of Directors

The duties of directors as contained in section 166 of the Companies Act, 2013 are described as
follows

1. Duty to act as per the articles of the company The director of a company shall act in
accordance with the articles of the company.

2. Duty to act in good faith A director of a company shall act in good faith in order to promote
the objects of the company for the benefit of its members as a whole, and in the best interests
of the company, its employees, the shareholders, the community and for the protection of
environment.

3. Duty to exercise due care A director of a company shall exercise his duties with due and
reasonable care, skill and diligence and shall exercise independent judgment.

4. Duty to avoid conflict of interest A director of a company shall not involve in a situation in
which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the
interest of the company.

5. Duty not to make any undue gain A director of a company shall not achieve or attempt to
achieve any undue gain or advantage either to himself or to his relatives, partners, or associates
and if such director is found guilty of making any undue gain, he shall be liable to pay an
amount equal to that gain to the company.

6. Duty not to assign his office A director of a company shall not assign his office and any
assignment so made shall be void.

Corporate Social Responsibility

India`s new Companies Act 2013 (Companies Act) has introduced several new provisions which
change the face of Indian corporate business" Companies Act 2013 (Companies Act) has
introduced several new provisions which change the face of Indian corporate business. One of
such new provisions is Corporate Social Responsibility (CSR). The concept of CSR rests on the
ideology of give and take. Companies take resources in the form of raw materials, human
resources etc. from the society. By performing the task of CSR activities, the companies are
giving something back to the society.
Ministry of Corporate Affairs has recently notified Section 135 and Schedule VII of the Companies
Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules,
2014 (CRS Rules) which has come into effect from 1 April 2014.

Applicability: Section 135 of the Companies Act provides the threshold limit for applicability of
the CSR to a Company i.e. (a) net worth of the company to be Rs 500 crore or more; (b) turnover
of the company to be Rs 1000 crore or more; (c) net profit of the company to be Rs 5 crore or
more. Further as per the CSR Rules, the provisions of CSR are not only applicable to Indian
companies, but also applicable to branch and project offices of a foreign company in India.

CSR Committee and Policy: Every qualifying company requires spending of at least 2% of its
average net profit for the immediately preceding 3 financial years on CSR activities. Further, the
qualifying company will be required to constitute a committee (CSR Committee) of the Board of
Directors (Board) consisting of 3 or more directors. The CSR Committee shall formulate and
recommend to the Board, a policy which shall indicate the activities to be undertaken (CSR
Policy); recommend the amount of expenditure to be incurred on the activities referred and
monitor the CSR Policy of the company. The Board shall take into account the recommendations
made by the CSR Committee and approve the CSR Policy of the company.

Definition of the term CSR: The term CSR has been defined under the CSR Rules which includes
but is not limited to:

 Projects or programs relating to activities specified in the Schedule; or

Projects or programs relating to activities undertaken by the Board in pursuance of

recommendations of the CSR Committee as per the declared CSR policy subject to the condition
that such policy covers subjects enumerated in the Schedule.

This definition of CSR assumes significance as it allows companies to engage in projects or

programs relating to activities enlisted under the Schedule. Flexibility is also permitted to the
companies by allowing them to choose their preferred CSR engagements that are in conformity
with the CSR policy.

Activities under CSR: The activities that can be done by the company to achieve its CSR
obligations include eradicating extreme hunger and poverty, promotion of education, promoting
gender equality and empowering women, reducing child mortality and improving maternal
health, combating human immunodeficiency virus, acquired, immune deficiency syndrome,
malaria and other diseases, ensuring environmental sustainability, employment enhancing
vocational skills, social business projects, contribution to the Prime Minister's National Relief
Fund or any other fund set up by the Central Government or the State Governments for socio-
economic development and relief and funds for the welfare of the Scheduled Castes, the
Scheduled Tribes, other backward classes, minorities and women and such other matters as may
be prescribed.

Local Area: Under the Companies Act, preference should be given to local areas and the areas
where the company operates. Company may also choose to associate with 2 or more companies
for fulfilling the CSR activities provided that they are able to report individually. The CSR
Committee shall also prepare the CSR Policy in which it includes the projects and programmes
which is to be undertaken, prepare a list of projects and programmes which a company plans to
undertake during the implementation year and also focus on integrating business models with
social and environmental priorities and process in order to create share value.

The company can also make the annual report of CSR activities in which they mention the
average net profit for the 3 financial years and also prescribed CSR expenditure but if the
company is unable to spend the minimum required expenditure the company has to give the
reasons in the Board Report for non compliance so that there are no penal provisions are
attracted by it.

Prevention of Oppression and Mismanagement

Shareholders and creditors are those two groups who has given or invested their money in
corporate bodies. However, it is not necessary that all the shareholders have the controlling
power in the company. The group of shareholders is divided into two parts i.e. Majority
Shareholders and Minority Shareholders. Minority shareholders are those who have invested
their money in the company but they are not holding so many shares that can give them
controlling powers; and because of this their interest in the company and its affairs sometimes
get neglected. The first is the positive acts done by the management which result in prejudice
being caused to the company; secondly, even where no action at all is taken by the management,
such non-action results in prejudice being caused to the company
“The protection of the minority shareholders within the domain of corporate activity constitutes
one of the most difficult problems facing modern company law. The aim must be to strike a
balance between the effective control of the company and the interest of the small individual
shareholders”

Rule of Foss v. Harbottle[(1843) 67 ER 189]

The basic rule laid down in this case was that “the courts will not, in general, intervene at the
instance of shareholders in matters of internal administration; and, will not interfere with the
management of a company, by its directors so long as they are acting within the powers
conferred on them under the articles of the company”. However, the Court has also given certain
exceptions to this rule, among which one is “oppression and mismanagement”. It has been stated
by SINHA J of the Calcutta High Court in Kanika Mukherji v. Rameshwar Dayal Dubey
[(1966) 1 Comp LJ 65 Cal.] that the principle embodied in Sections 397 and 398 of the Indian
Companies Act, 1956 which provide for prevention of oppression and mismanagement is an
exception to the rule in Foss
v. Harbottle which lays down the sanctity of the majority rule.

Exceptions to the rule of Foss v. Harbottle

1. Act is Ultra vires

2. Fraud on minority

3. Acts requiring special Majority

4. Wrongdoers in control

5. Oppression and mismanagement

Meaning of ‘Oppression’ and ‘Mismanagement’

The meaning of the term ‘oppression’ as explained by Lord COOPER in the Scottish case of Elder
v. Elder & Watson Ltd [(1952) SC49 Scotland] was cited with approval by WANCHOO J of the
Supreme Court of India in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965) 1 Comp LJ 193], “The
essence of the matter seems to be that the conduct complained of should at the lowest involve
a visible departure from the standards of fair dealing, and a violation of the conditions of fair
play on which every shareholder who entrusts his money to the company is entitled to rely.”
‘Mismanagement’ again is an atrocious act of the majority shareholders. An illustration
explaining the conduct of mismanagement is the case of Rajahmundry Electric Supply Corpn v.
Nageshwara Rao [AIR 1956 SC 213], in this, a petition was brought against a company by
certain shareholders on the ground of mismanagement by directors. The court found that the Vice
Chairman grossly mismanaged the affairs of the company and had drawn considerable amounts
for his personal purposes, that large amounts were owing to the Government for charges for
supply of electricity, that machinery was in a state of disrepair, that the directorate had become
greatly attenuated and “a powerful local junta was ruling the roost” and that the shareholders
outside the group of the Chairman were powerless to set matters right. This was held to be
sufficient evidence of mismanagement.

Remedies

Sec. 241 of the Companies Act, 2013 provides that, any member of a company who complains
regarding any oppression or mismanagement being occurred in a company, may apply to the
Tribunal. Moreover, even the Central Government, if of the opinion that the affairs of the
company are being conducted in a manner prejudicial to the public interest, then it may itself
apply to the Tribunal for an order.

S. 241 has been amended in 2019 and new sub-s (3), (4) and (5) have been newly inserted in the
section as given below:

S. 241 provides that

(1) Any member of a company who complains that-

(a) the affairs of the company have been or are being conducted in a manner prejudicial to
public interest or in a manner prejudicial or oppressive to him or any other member or
members or in a manner prejudicial to the interests of the company; or (b) the material change,
not being a change brought about by, or in the interests of, any creditors, including debenture
holders or any class of shareholders of the company, has taken place in the management or
control of the company, whether by an alteration in the Board of Directors, or manager, or in
the ownership of the company’s shares, or if it has no share capital, in its membership, or in any
other manner whatsoever, and that by reason of such change, it is likely that the affairs of the
company will be conducted in a manner prejudicial to its interests or its members or any class
of members,
may apply to the Tribunal, provided such member has a right to apply under section 244, for an
order under this Chapter.

Personal Action

In this, the shareholder claims their personal rights which arise from the constitution of the
company i.e. Memorandum of Association and Articles of Association. However, in Indian
Companies Law, personal actions of the shareholders aggrieved from the acts of oppression or
management do not possess any statutory provision.

Derivative Action

An interesting area of law is the law governing derivative action mechanism which enables the
shareholders of a company to bring an action on behalf of the company against a third party
before a regular civil court. Again, there is no specific statutory provision for derivative action in
the Indian companies law. However, the doctrine of derivative action is recognised by the Indian
courts. If a shareholder alleges that a wrong has been done to the company by persons in control
thereof, he may bring a derivative action where he derives the authority from his corporate right
to sue on behalf of the company. The premise on which the court entertains this extraordinary
form of action is upon the complaining shareholder’s assertion that the company cannot sue as
the persons in control would not bring an action on its behalf or for its benefit.

Derivative action is defined as an action by one or more shareholders of a company where the
cause of action is vested in the company and relief is accordingly sought on its behalf. Since the
company has a distinct legal personality with its own rights and liabilities which are different
from those personal rights of individual shareholders, this action is brought by a shareholder not
to enforce his or her own personal rights but, rather, the rights and liabilities of the company on
its behalf and for the benefit of the company; which the company cannot itself do, as it is
controlled by the 'wrong-doers'.

In order to be classified as a derivative action, the following aspects must be satisfied:

It must be brought in a representative form, even though it is the company, rather than the other
shareholders, whom the person initiating the legal action / proceedings seeks to represent. Thus,
by implication, all the other shareholders are bound by the result of the action.
Although the action is brought on behalf of the company, the company appears as a defendant, so
that the action takes the form of a representative action by the initiating shareholder on behalf of
himself and all the other shareholders (other than the alleged 'wrong-doers'), against the alleged
'wrong-doers' (who are, in fact, in control of the company) and the company. Derivative claims
may be brought by a shareholder or shareholders in the following instances, as described as
follows:

Ultra Vires

A shareholder may bring an action against the company and its Directors in respect of matters
which are ultra vires the Memorandum or the Articles of the company and which no majority
shareholders can sanction. For example, Directors of the company sanctioning an action that is
contrary to the objects of the company.

Fraud on Minority

Directors and the company would also be liable if the conduct of the majority of the shareholders
constitutes a "fraud on minority", i.e., a

discriminatory action. For example, where the shareholders have passed a special resolution with
an effect of discriminating between the majority shareholders and minority shareholders, so as to
give the former an advantage of which the latter were deprived.

Required Resolution

Certain actions of the company can be approved only by passing a special resolution at a general
meeting of shareholders. If the majority seek to circumvent this legal requirement and pass only
an ordinary resolution, or do not pass such a special resolution in the manner required by law,
any member or members can bring an action to restrain the majority.

To safeguard Interests of the Company

For instance, an obvious wrong may have been done to the company by the Directors, but
because of the control of such Directors on the majority shareholders, such shareholders may not
permit an action to be brought against the 'wrong-doer' Directors. Therefore, to safeguard the
interests of the company, any member or members may bring a derivative action.
Individual Membership Rights

As a general rule, personal rights per se are not to be enforced through derivative actions;
however, some exceptions have been recognized. These exceptions often arise in cases of rights
that have been conferred upon the shareholders by the Companies Act itself or the respective
Articles (commonly known as "individual membership rights"). For example, the right to vote,
the right to have one's vote recorded, or the right to be nominated as a candidate for the post of a
Director during the election of Directors at a general meeting of the shareholders.

Prevention of Oppression and Mis-management: A representative action may be brought for

prevention of oppression and mismanagement, which are cases where the majority acts in a
manner that oppresses the minority; or where the affairs of the company are being conducted in a
manner prejudicial to public interests or oppressive to any member(s) or in a manner prejudicial
to the interests of the company including an adverse material change in the management or
control of the company. Since these proceedings are initiated for the benefit of the company, it
can be considered a form of derivative action and find specific place in the scheme of the Indian
company law under the Companies Act. In order to obtain relief, the NCLT can be approached
by:

S. 244, Comapanies Act, 2013 gives the right to apply to

NCLT:

S. 244 (1) provides that the following members of a company shall have the right to apply under
section 241, namely-

(a) in the case of a company having a share capital, not less than one hundred members of the
company or not less than one-tenth of the total number of its members, whichever is less, or
any member or members holding not less than one tenth of the issued share capital of the
company, subject to the condition that the applicant or applicants has or have paid all calls and
other sums due on his or their shares;

(b) in the case of a company not having a share capital, not less than one-fifth of the total
number of its members:
Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of
the requirements specified in clause (a) or clause (b)so as to enable the members to apply under
section 241.
This power of waiver of requirements of s. 244 is very important and was used by NCLAT in the
case of accepting Cyrus Mistry’s application for oppression and mismanagement.

Class Actions

The provision for class actions was recommended in the Companies Bill, 2012. The J J Irani
committee recommended in its report as follows:

“In case of fraud on the minority by wrongdoers, who are in control and prevent the company
itself bringing an action in its own name, derivative actions in respect of such wrong non-
rectifiable decisions have been allowed by courts. Such derivative actions are brought out by
shareholder(s) on behalf of the company, and not in their personal capacity, in respect of wrong
done to the company. Similarly the principles of “Class/Representative Action” by one
shareholder on behalf of one or more of the shareholders of the same kind have been allowed by
courts on the grounds of persons having same locus standi.”

Class suit is not limited to corporate law but extends to the whole realm of civil procedures. In
fact, class suits are not so much a provision of law as a procedure. For example, Order 1 Rule 8
of the Civil Procedure Code, 1908 provides that where there are numerous persons having the
same interest in a suit, one or more persons may, with the permission of the court, either sue, or
defend the suit, for the benefit of all interested. Sub-rule (2) provides for the power of the court
to publicize a representative suit either by service, or depending on the number of persons
involved, by public advertisement. The procedure has widely been used in India for what is
commonly termed as public interest litigation.

The Companies Act, 2013 in its Sec. 245 contains the provision with regard to ‘class actions’.

The concept of class actions and derivative actions are very close to each other. In fact, at the
time of proposing the addition of this provision in Companies Law Bill, it was not clear that
whether the Parliament was seeking to introduce the ‘class action’ provision or the ‘derivative
action’ provision.
 UNIT – 4

FINANCIAL STRUCTURE OF COMPANY

Synopsis

 Introduction
 Further issue of Shares and Right issue
 Rights of shareholders
 Buy-Back of Shares
 Issue of Securities
 Private Placement
 Debentures
 Company Deposits
 Charge on Assets
 Effect of non-registration of charge

Introduction

The words ‘capital’ and ‘share capital’ are synonymous. Although requirement of share capital is
not compulsory for the purposes of incorporation but companies prefer to get incorporated with
share capital because of their objectives of running business requiring capital. S. 13(4)(a) of the
Companies Act, 1956 (CA, 1956) provided that the last clause i.e the capital clause of the
memorandum of association must state the amount of nominal capital of the company and the
number and value of shares into which it is divided. S. 4 (e) of the Companies Act, 2013 (CA,
2013) provides that in case of a company having a share capital, the amount of share capital with
which the company is being registered should be stated. Division of the share capital into shares
of a fixed amount and the number of shares which each subscriber to memorandum has agreed to
subscribe should also be stated. In no case a subscriber should agree to have less than one share.

It is also necessary to know here that the company law also prescribes the minimum capital
requirement for incorporating a company as a public or a private company. The Companies Act,
2013 provided that a public company must have a minimum paid-up share capital of a five lakh
rupees or such higher paid-up share capital as may be prescribed [s. 2(71), CA, 2013). Similarly,
a private company was also defined as a company having a minimum paid-up share capital of
one lakh rupees or such higher paid-up share capital as would be prescribed [s. 2(68), CA,
2013)]. However, such requirements of minimum paid-up capital has been removed by the
amendment in view of facilitating ease of incorporating companies to encourage business and
startup companies. Only a public company can raise funds from the public through public
offerings and increase its share capital. Private companies can raise finance through private
placement of securities. Even a public company can raise capital through private placement of
securities. A company may meet its fund requirements either through raising share capital or
through borrowings. Such a decision depends upon the business of the company and its
requirement of capital, existing interest rates, and availability of assets with the company to give
as security for borrowing, profitability of the company and the number of shareholders etc. The
company does a proper financial analysis before making such a decision. Similarly, the company
also has to make a choice between issue of equity shares and preference shares in case it decides
to raise capital through share capital.

a. Share Capital:

As we discussed earlier, for a company to have share capital, it is necessary that its memorandum
should state the amount and its division. The amount that is stated in the memorandum is known
as the ‘authorized capital’ of the company. ‘Authorised capital’ or ‘nominal capital’ means such
capital as is authorized by the memorandum of a company to be the maximum amount of share
capital of the company [s. 2(8), CA, 2013]. Whole of the authorized share capital or any part of it
can be issued by the company depending upon fund requirement of the company. Part of the
share capital which is issued to the public is called ‘issued capital’ of the company. ‘Issued
capital’ means such capital as the company issues from time to time for subscription [s. 2(50),
CA, 2013]. Whole of the issued capital may be subscribed by the public. That part of the issued
capitalwhich is subscribed by the public or allotted to the public is known as ‘subscribed capital’
of the company. As per s. 2(86), CA, 2013, ‘subscribed capital’ means such part of the capital
which is for the time being subscribed by the members of a company. Minimum subscription
requirement presently is ninety percent of the issued capital. The company has the flexibility of
calling the subscribed capital wholly or partially. The actual amount received by the company
from the subscribed capital is called the ‘paid-up capital’ of the company. The un-called capital
of the company can be converted into reserve capital by passing a special resolution.
 b. Shareholders and Members:

In relation to a company, a ‘member’ under s. 2(55), CA, 2013 means:

i. the subscribers to the memorandum of the company. They are deemed to have agreed to
become members of the company and after registration of the company; their name is entered
in register of members.

ii. every other person who agrees to become a member of a company in writing and whose
name is entered on the register of members.

iii. every person holding shares of the company and whose name is entered as beneficial owner
in the records of a depository.

Therefore, a shareholder is also a member of the company. Although the terms ’shareholder’ and
‘member’ are used interchangeably, member is a broader term. Companies limited by guarantee
and unlimited companies may not have shareholders as such companies may not have share
capital. However, they have members.

A person may become member of a company by subscribing to memorandum, by allotment of

shares or by agreeing in writing to become a member and whose name is entered on register of
members, beneficial owners in depository records, by transfer or transmission of shares.
  Nominal, Authorised or Registered Capital: 2(8)

Such capital as is authorised by the memorandum of a company to be the maximum amount of

share capital of the company.

 Issued Capital 2(50)

Such capital as the company issues from time to time for subscription. It is that part of the
authorised or nominal capital which the company issues for the time being for public subscription
and allotment. This is computed at the face or nominal value.

 Subscribed Capital 2(86)

Such part of the capital which is for the time being subscribed by the members of a company. It
is that portion of the issued capital at face value which has been subscribed for or taken up by the
subscribers of shares in the company. It is clear that the entire issued capital may or may not be
subscribed.

 Paid-up Share Capital 2(64)

Such aggregate amount of money credited as paid-up as is equivalent to the amount received as
paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of
shares of the company, but does not include any other amount received in respect of such shares,
by whatever name called.

c. Kinds of share capital:

Share capital must be divided into shares of a fixed amount. The CA, 1956 permitted only two
kinds of share to be issued, namely, ‘equity share capital’ (ordinary shares) and “preference share
capital” (preference shares). S. 86 of the CA, 1956 provided that equity share capital shall be
issued with voting rights or with differential rights as to dividend, voting or otherwise. Two other
categories of shares namely, ‘derivative’ and ‘hybrid’ were also introduced by the Companies
(Amendment) Act, 2000. ‘Derivative’ was given the same meaning as in s. 2 of the Securities
Contracts (Regulation) Act, 1956. ‘Hybrid’ meant any security which has the characteristics of
more than one type of security, including their derivatives.
Chapter IV of the CA, 2013 deals with share capital. S. 43 deals with kinds of share capital and it
provides that the share capital of a company limited by shares can be of two types, namely,
equity share capital and preference share capital.

 ‘‘equity share capital’’, with reference to any company limited by shares, means all
share capital which is not preference share capital;

 Preference share, which receive dividends before ordinary shares but which have no
voting rights, it must satisfy the following conditions:

• As regards dividends, it must carry a preferential right to fixed amount or amount calculated
at a fixed rate and

• As regards the capital, in the event of a winding up or other arrangement to repayment of

capital, there must be a preferential right to be repaid the amount of the capital paid up on
such share. A Preference share capital may or may not carry such other rights as specified. All
share capital, not falling within the above description of preference capital, is equity share
capital, which has no guaranteed amount of dividend but carries voting rights.

Equity capital is also known as “Common Stock” or common share capital that represents
ownership in a company. Common share capital is generally divided into units known shares.
These unit holders are called equity shareholders. They are the real owners of the company and
policy makers of the company. However, they do not have access to the day to day affairs of the
company. They appoint their representatives called board of directors to look after the affairs of
the company. Equity shareholders are entitled to vote on resolutions of the company, get a return
by way of dividend if declared and take part in surplus in assets of the company at time of
winding- up.

d. Preference share capital:

It means that part of the issued share capital of the company which either carries or would carry a
preferential right with respect to payment of dividend and a preferential right of repayment in
case of winding up or repayment of capital. Dividend may be paid as a fixed amount or amount
calculated at a fixed rate. Right of repayment would be irrespective of preferential right to the
payment of any fixed premium or premium on a fixed scale specified in memorandum or articles
of the company. Apart from these two preferential rights, preference shares can be of
participating or non-participating type depending upon their right to participate in dividend
payment with capital not entitled to the preferential right. That means that if shareholders are
participating type they will have the right to extra dividend apart from their preferential dividend
in case the company decides to distribute more profits as dividend. Similarly, preferences
shareholders may have also the right to participate in any surplus capital which may remain after
the entire capital has been repaid.

S. 55 of the CA, 2013 provides for issue and redemption of preference shares. It prohibits issue
of irredeemable preference shares by any company limited by shares. A company may, if it is
authorised by its articles, issue preference shares liable to be redeemed within a period not
exceeding twenty years. Only for infrastructure projects, a company may issue such shares for a
period of more than twenty years but not exceeding thirty years. This is subject to redemption of
minimum of 10% of such shares per year from twenty first year onwards or earlier at the option
of preference shareholders. This redemption will be on proportionate basis. Redemption will be
subject to the conditions that only fully paid shares can be redeemed. Redemption can be made
only from company’s profits available for dividend or out of the proceeds of a fresh issue made
for this purpose. A sum equal to nominal value of shares to be redeemed should be transferred to
a reserve known as Capital Redemption Reserve Account from the profits out of which
redemption will take place. Capital Redemption Reserve is to be preserved with same sanctity as
share capital. Redemption of preference shares is not treated as reduction of share capital.
Premium on redemption can be paid from profits of the company or securities premium account.
If a company is not in a position to redeem preference shares or to pay dividend, it may with the
consent of holders of three-fourths in value of such preference shares and with the approval of
the Tribunal further issue redeemable preference shares of the same value including dividend.
This will be deemed redemption of unredeemed preference shares. A company has to notify the
Registrar about the redemption of preference shares within a period of thirty days of redemption.

e. Bonus shares:

A bonus share is an accretion. A bonus share is issued when a company capitalizes its profits by
transferring an amount equal to the face value of the share from its reserves to the nominal
capital. If the articles of accompany authorize, it may convert its accumulated undivided profits
into bonus shares. This is a mechanism to provide capital to the company by utilizing its own
accumulated profits instead of public offering or borrowing by the company. S. 63, CA, 2013
provides that a company may issue bonus shares to its members in any manner whatsoever, out
of its free reserves or amount lying in the securities premium account or capital redemption
reserve. Reserves created from revaluation of assets cannot be utilized or capitalized for the
purpose of issuing bonus shares. Bonus shares cannot be issued in lieu of dividend.

f. Sweat Equity Shares:

Sweat equity shares are equity shares issued by the company at a discount or for consideration
other than cash. They are issued only to directors or employees of the company for providing
technical know-how to the company or making available intellectual property rights to the
company or for any value addition to company.

g. ‘Employee Stock Option’ (ESOP)

has been defined under sub-section (37) of Section 2 of the Companies Act, 2013, according to
which “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, whichgives
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. As discussed earlier, Section
62(1)(b) provides that a company may issue further shares to its employees under a scheme of
employees’ stock option, subject to special resolution passed by company and subject to such
conditions as may be prescribed. In case of private company special resolution has been
substituted by ordinary resolution.

Further issue of Shares and Right issue

A rights issue is a direct offer of shares to all the existing shareholders of the Company in
proportion to their current holding. The company also sets a time limit for the shareholder to buy
the shares. Companies pursue Rights Issue as an avenue to raise funds for various reasons,
ranging from expansion or acquisitions to paying down debts.

Section 62 of Companies Act, 2013 contains provisions on “further issue of capital”, and enacts
the principle of pre-emptive rights of shareholders of a company to subscribe to new shares of the
company
Provisions of Section 62 of Companies Act, 2013 are mandatory for all Private companies,
public companies, and listed as well as unlisted companies.

a. Relevant Provisions of Companies Act, 2013

Sec 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:

a. to persons who, at the date of the offer, are holders of equity shares of the company in
proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by
sending a letter of offer subject to the following conditions, namely:—

i. the offer shall be made by notice specifying the number of shares offered and limiting a
time not being less than fifteen days 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. Procedure for allotment of shares on right issue basis

i. Issue notice in writing to every Director at least seven days’ before convening the Board
meeting. [Sec 173 (3)]

ii. Convene a Board Meeting

iii. Pass a Board resolution for approving “Letter of offer”. The offer letter shall include right
 of renunciation also.

iv. Dispatch Letter of offer to all existing shareholders through registered post or speed
post or through electronic mode at least three days before the opening of the issue.
 v. Receive acceptance, renunciations, rejection of rights from shareholders.

vi. Issue notice in writing to every Director at least seven days’ before convening the Board
meeting. [Sec 173 (3)]

vii. Convene a Board Meeting

viii. Pass Board resolution for approving allotment and issue of shares.

ix. File E-form MGT 14 within 30 days of Issue of securities.

x. File with Registrar a return of allotment in E-Form PAS-3 within 30 days of allotment of
shares.

Nanalal Zaver v. Bombay Life Assurance Co. Ltd., AIR 1950 SC 172: (1950) 20 Com Cases
179: Section 81 (Corresponding to section 62 of the Companies Act, 2013) is intended to cover
cases where the directors decide to increase the capital by issuing further shares within the
authorised limit, because it is within that limit that the directors can decide to issue further
shares, unless, of course, they are precluded from doing that by the Articles of Association of the
company. Accordingly, the section becomes applicable only when the directors decide to
increase the capital within the authorised limit, by issue of further shares.

Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981) 51
Com Cases 743 at 816: AIR 1981 SC 1298: (1982) 1 Comp LJ1. The Court pointed out that the
directors of a company must exercise their powers for the benefit of the company. The directors
are in a fiduciary position and if they does not exercise powers for the benefit of the company but
simply and solely for personal aggrandizement and to the detriment of the company, the court
will interfere and prevent the directors from doing so; (B) See Needle Industries (India) Ltd. v.
Needle Industries Newey (India) Holding Ltd. The power to issue shares need not be used only
when there is a need to raise additional capital. The power can be used to create a sufficient
number of shareholders to enable a company to exercise statutory powers or to enable it to
comply with statutory requirements. The Department of Company Affairs, now Ministry of
Corporate Affairs has clarified that ‘one year’ specified in the section is to be counted from the
date on which the company has allotted any share for the first time;
Balkrishan Gupta v. Swadeshi Polytex Ltd. (1985) 58 Com Cases 563: AIR 1985 SC 520].
Although the term ‘holders of the equity shares’ is used in Sub-section (1)(a) and ‘members’ in
Subsection (1A)(b) of Section 81 (Corresponding to section 62 of the Companies Act, 2013), the
two terms are synonymous and mean persons whose names are entered in the register of
members;

Rights of shareholders:

Important rights of shareholders or members of a company are as under:

1. Voting Rights: Section 47, CA, 2013 provides that every equity shareholder of a company has
the right to vote on every resolution placed before the company. Equity shareholder’s voting
right on a poll will be in proportion to his share in the paid-up equity share capital of a
company.

Every preference shareholder of a company will have a right to vote only on resolutions placed
before the company directly affecting his rights attached to the preference shares and any
resolution for winding up of the company or for repayment or reduction of its equity or
preference share capital. Voting rights of every preference shareholder on a poll shall be in
proportion to his share in the paid-up preference share capital of the company. Proportion of the
voting rights of the equity shareholders to preference shareholders will be in the proportion of
the paid-up equity share capital and paid-up preference share capital held by them. If dividend in
respect of a class of preference shares is not paid for a period of two years or more, such class of
preference shareholders will have the right to vote on all the resolutions placed before the
company.

Voting rights under s. 47 are subject to provisions of s. 43 (kinds of share capital), s. 50 (2)
(company to accept unpaid share capital, although not called up) and s. 188(1) (related party
transactions).

Where the company accepts unpaid share capital which is not yet called up by the company, such
shareholders will not be entitled to any voting rights in respect of such share capital paid by
them.

2. Dividend: Every equity shareholder has the right to receive dividend declared by directors of
the company yearly as well as interim dividend if declared by the directors in accordance with s.
143 of the CA, 2013. Every preference shareholder has the right to receive preferred dividend
as per the terms of issue of preference shares. Participating preference shareholders have
also the
right to receive extra dividend from surplus profits. A company may pay dividends in proportion
to the amount paid-up on each share if its articles authorize it to do so.

3. Right to uniform calls on shares: Where any calls are made by the company for a class of
shares from uncalled capital of the company, such calls should be made uniformly for all shares
of that class.

4. Right to be paid at winding up of the company: Every preference shareholder has the
preferred right of payment at the winding up of the company or repayment of capital. They
may also have the right to participate in surplus capital if they are participating type. Equity
shareholders also have the right of payment from the capital of the company left after repaying
creditors and preference shareholders of the company at the winding up of the company.

5. Variation of shareholder’ rights: S. 48, CA, 2013 restricts the variation of shareholders’ rights
except with the consent in writing of the holders of not less than three-fourths of the issued
shares of the class of shares whose rights are being modified. Such a variation may also be
made by means of a special resolution passed at a separate meeting of shareholders of that
class if provision in respect of such variation is contained in memorandum or articles of the
company or in its absence such variation is not prohibited by terms of issue of shares of that
class.

If variation by one class of shareholders affects the rights of any other class of shareholders,
consent of three-fourths of such other class of shareholders shall also be obtained.

Dissenting shareholders by not less than ten percent of the issued shares of that class whose
shares are under variation may apply to Tribunal for cancellation of variation.

6. Right of participation in Annual General Meeting: Shareholders have the right to receive
notice for attending the AGM of the company. Each shareholder has the right to receive
financial statements, including auditors’ report and other documents annexed to financial
statements, along with directors’ report presented by Board of directors at AGM.

7.Right to transfer shares/securities or other interest in company: Securities or other interest of

any member in a public company are freely transferable under s. 44, CA, 2013. Shareholders of
a public company have freely transferable shares/ securities without any restriction on
transferability of shares. In case of private companies, approval of the Board of directors may
be necessary before
any transfer of shares. Members also have the right of transmission of shares/securities or other
interest in the company. The company has the power to register on receipt of intimation of
transmission of any right to securities by operation of law from any person to whom such right
has been transmitted under s. 56, CA, 2013. Every holder of securities has also been given the
power to nominate any person to whom his securities will vest in the event of his death. In case
the nominee is a minor, holder has to appoint a person who will be entitled to securities of the
company in the event of death of nominee during his minority [s. 72, CA, 2013].

8. Rights Issue: Every equity shareholder of a company has a right to be offered shares when
the company goes for further issue of capital. Such right falls under pre-emptive rights of
existing shareholders of any company having a share capital and is protected by s. 62 of the
Companies Act, 2013.

Duties and Liabilities of shareholders/ members: All rights and liabilities of shareholders are
subject to terms and conditions contained in the articles of the company. The provisions of the
CA, 2013 are also applicable. The members are under a duty to participate in the meetings of the
companies and vote on resolutions of the companies. They should not merely be ‘functionless
rentiers’ of capital. They should not only be bothered about their dividend but also take active
interest in the decision-making. Appointment of directors, auditors, alteration of memorandum
and articles of company are few of the important resolutions where their participation is
necessary.
Minority shareholders should also be vigilant for their rights in the company. Shareholders of
companies are under a liability to pay the full amount of their shareholding.

The Companies (Amendment) Act, 2017 added s. 3-A about members’ several liabilities after
section 3 relating to formation of companies in case the number of members is reduced below the
statutory requirement but the company continues with its business. Public companies and private
companies are required to have minimum seven and two members respectively. S. 3-A provides
that if any time the number of members of a company is reduced below statutorily required in
case of a public or private company and the company carries on business for than six months
while the number of members is so reduced, every person who is a member of the company
during the time that it so carries on business after those six months and is cognizant of the fact
that it is carrying on business with less than seven or two members, shall be severally liable for
the whole debts of the company contracted during that time, and may be severally sued therefor.

Shareholders, if required, may also pledge or mortgage their shares since shares are a movable
property. Where share certificate is in physical form, it can be pledged for raising a loan. Where
it is given as security, pledge retains possession of it till the loan amount is repaid. In case some
right or interest in shares is transferred to the creditor, then it amounts to mortgage of shares.
Where shares are in dematerialized form and with the depositories, pledge or mortgage of shares
has to be registered with the depository.

Dividend

Every Company requires funds to operate its business successfully. Shareholders are an integral
part of every company where they raise funds and in the process of same become its
stakeholders. They have a control over the share of profits in proportion to the money they
invest. This share of profit by shareholders is termed as dividend.

The word “Dividend” has origin from the Latin word “Dividendum” Dividend refers to that
portion of profit that is paid to the shareholders of the company. It is often paid in one financial
year to the shareholders after the final accounts of profit are ready and the same has to be
distributed. Section 2 of the Act defines that ‘includes any interim dividend’.

The rights of shareholders on profits as dividends only arise after the declaration of dividends by
the company done generally on the approval of board of directors. The amount paid of the
dividend
is in proportion to the amount paid on the share by the shareholder as provided in section 51 of
the Act. There are two types of dividends: Interim dividends and Final dividends.

Interim dividend

The Act defines Dividend in terms of interim dividends which refer to the dividend declared by
company’s board during any time of the year before official closing of financial year and calling
of Annual General Meeting. According to the Act the company can declare interim dividend out
of profits accumulated of current or previous financial years. The provisions of the Act which are
generally for final dividend are applicable to interim dividends also.

Features of interim dividend

 It is declared by board of directors in one financial year out of surplus generated in

profit and loss accounts and out of profits in which interim dividend is bound to be
declared. It has been held in Judgments that mere declaration by the directors in a
general meeting does not obligate them to pay dividends as the decision can be
rescinded.
 If the company registers loss before the stipulated declaration of dividends, it has to be
declared at an average rate calculated on the basis of dividends declared in previous 3
financial years.
 It is deposited in a scheduled bank account within five days of the declaration. The same
is irrespective of intervening holidays.

Final dividends

The dividends declared by the company after closing of the financial year and approval of Board
of Directors in AGM. The term Dividend used except in the definition in Companies Act, 2013
refers to final dividends only. Majority of the provisions for both Interim and Final are same but
there are some differentiated provisions for the Interim dividends in the Act. The liability on
default arises only in case of declaration of Final Dividend and not Interim dividend.
Declaration of dividends

Section 123 of Companies Act 2013 lays down guidelines for the conditions when the
companies are permitted to declare or pay dividends in a financial year:
  Source of dividend: The dividends can be declared out of –
1. It can be paid after providing for depreciation fund out of the profits of the current or
previous financial year.
2. It can also be paid out of the money which Central or State Governments provide
against a guarantee for the payment of dividend.
 Transfer of reserves: The Company before declaring the dividends has to reserve the
required amount of cash to run the affairs of the company. These are the appropriate
reserves of the company to manage its affairs.
 Declaration of dividends: If the company decides to declare dividend on the basis of
profit accumulated in the previous years, such declaration has to be made on the basis
of prescribed rules and the dividend paid has to be from free reserves only. The
dividends can be declared only after approval of board of directors generally done in a
‘general meeting’. There cannot be any declaration of dividend unless the same is
approved by Board and by General body of the company.
 Separate account for dividends: The amount of dividends has to be kept in aseparate
bank account within 5 days from the date of declaration.
 To be paid only in cash: The dividend has to be paid only in cash (includes payment by
cash or other electronic means) and is payable only to the registered shareholder
himself or to his banker. The objective of specifying payment in cash is to necessitate
that some assets of the company have flown out to the shareholder.
 Failure of section 73&74: If a company fails to adhere to provisions in section 73 and 74
which are related to borrowings from public and repayment of deposits, such company
cannot declare any dividend as long as failure continues.

Unpaid Dividend Account

Sometimes, there may arise a situation that after declaration of dividend, the dividends remain
unpaid or unclaimed and the amount may be unused in the bank. The Act well defines provisions
in case such situation arises:

 Transfer of unclaimed dividend: When the dividend has been declared by the company
but has not been claimed by the shareholder within thirty days, then within 7 days of
expiry of period of 30 days (that is within 30-37 days of the declaration), the company
has to transfer
 the unpaid amount to the special account in the bank known as Unpaid Dividend Account.
If the company defaults on transferring the amount to unpaid dividend account within
specified time period, the company has to pay a set interest on the sum unpaid at 12 %per
annum.
 Notification of it on the website: After transferring money to unpaid dividend account,
within the period of ninety days, the company is required to prepare a statement
containing names of, addresses of (last known) and the amount of dividend to be
paid to the shareholder and put the same on its website and on any other website
provided by central government for the same. The person claiming the amount
transferred has to apply to the company for payment of dividend. If such claim is not
paid in required time (generally 7 years), than the company is ‘relieved of the
responsibility of holding the shares or reflecting it in its list of shareholders’
 Transfer of unpaid dividend to Investor Education and Protection Fund: The Act provides
for a fund which has to be established by central government. If any amount remains
unclaimed for more than 7 years has to be transferred to the company under this
Investor Education and Protection Fund and the declaration of same has to be made to
the authority maintaining the fund. Moreover the authority also has to issue a receipt as
evidence of such transfer. But there has to be a condition that the claimant can obtain it
back from the fund whenever required by him.
 Note – the fund also includes grants by governments, donations made to the company,
matured debentures and various other funds in the requirements of the Act.
 Penalty in case of default: The Company is liable to be penalised with fine extending
from 5 lakh to 25 lakh and every particular officer responsible for it is to be punished
individually with a fine from one lakh to 5 lakhs.

Right to Dividend

Section 126 of the Act provides that if the instrument of shares has not been registered with the
company, than the dividend against such shares is to be transferred to Unpaid Dividend Account
under Section 124 of the Act. Those dividends have to be kept pending until specified by the
registered holder of such shares to transfer as specified. ‘The dividend has to be paid by the
company in the name of the registered shareholders and it is the registered shareholders alone
who claim dividend’

Failure to distribute dividends

There arises a penalty if the company fails to comply with the provisions of the Act:

 After the declaration of dividend the company has to pay it within 30 days from the date
of declaration. ‘It becomes a debt against the company and it is deemed to be
receivable by the members only in the year at which the members declared the
dividend.’
 If there is default then the directors are liable to be punished with imprisonment which
may extend to two years and with fine which won’t be less than Rs. 1000 per day which
might continue till the default continues with a simple interest of 18%.
 Exceptions to default: no offence or default would have been committed in case of any
of the following:
a. If the dividend could not be paid by reason of operation of law.
b. If the shareholder has given some special directions for payment of dividend
which could not be complied and same has been communicated to him.
c. If there is a dispute regarding right to receive dividend and same delays it payment.
d. If the dividend has been adjusted against any due of shareholder that he had to pay
to the company.
e. If the delay in payment was not due to the fault of the company.

Procedure of Declaration and Payment of Dividend

There has to be a well-defined procedure to be followed by companies to declare and pay dividends
which is follows:

 Notification of Meeting of directors: Under section 173 of the Act, the matter related to
dividends has to be declared in a meeting of Board of Directors. The same has to be
notified to the directors concerned.
 Hold required meetings – All the resolutions related to dividends have to be
discussedand passed in board meetings. The resolutions may include approving the
annual accounts of loss and profit; deciding the final amount of dividend; determining
the date of book closure
 and approving the notice of AGM as the same has to be discussed and approved in annual
general meeting of the company.
 Declaration of dividends– After careful consideration and approval of resolutions, the
company has to declare dividends after compulsorily abiding by provisions of section
123. It is not mandatory for companies to declare dividends every year and ‘the board of
directors has a discretion to declare dividend…There is no company law…obliges aboard
of directors to use up all its profits by declaring dividend.
 Open bank account – related to dividends a separate bank account has to be opened for
making dividend payment and credit the total amount payable within five days of
declaration.
 Payment of dividend– The dividend has to be paid to the shareholders in cash within 30
days of declaration. The company has to also comply with section 73 and 74 of the Act.
 Processing of unpaid dividend – the company has to transfer the amount left in the
dividend account which has not been laimed to the unpaid dividend account under
section 124? After 7 years same amount has to be transferred to Investor Education and
Protection Fund if not claimed.

Buy-Back of Shares

Buy-back is the process by which Company buy-back it’s Shares from the existing Shareholders
usually at a price higher than the market price. When the Company buy-back the Shares, the
number of Shares outstanding in the market reduces/fall. It is the option available to Shareholder
to exit from the Company business. It is governed by section 68 of the Companies Act, 2013.

Reasons of Buy-back:-

To improve Earning per Share;

 To use ideal cash;

 To give confidence to the Shareholders at the time of falling price;
 To increase promoters shareholding to reduce the chances of takeover;
 To improve return on capital ,return on net-worth;
 To return surplus cash to the Shareholder.
Modes of Buy-back:- A Company may buy-back its Shares or other specified Securities by any
of the following method- From the existing shareholders or other specified holders on a
proportionate basis through the tender offer;

From the open market through

1. Book-Building process
2. Stock Exchange Provided that no buy-back for fifteen percent or more of the paid up
capital and reserves of the Company can be made through open market.

Sources of Buy-back:-

A Company can purchase its own shares and other specified securities out of – its free reserve; or
the securities premium account; or 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 the earlier issue of same kind of shares or same kind of other specified securities.

Conditions of Buy-back:- As per Section 68 of the Companies Act, 2013 the conditions for Buy-
back of shares are- Articles must authorise otherwise Amend the Article by passing Special
Resolution in General Meeting. For buy-back we need to pass Special Resolution in General
Meeting, but if the buy-back is upto 10%, then a Resolution at Board Meeting need to be passed.

Maximum number of Shares that can be brought back in a financial year is twenty-five percent
of its paid up share capital. Maximum amount of Shares that can be brought back in a financial
year is twenty-five percent of paid up share capital and free reserves (where paid up share capital
includes equity share capital and preference share capital; & free reserves includes securities
premium). Post buy-back debt-equity ratio cannot exceed 2:1. And only fully paid up shares can
be brought back in a financial year.

The notice of the meeting for which the Special Resolution is proposed to be passed shall be
accompanied by a explanatory statement stating

1. a full and complete disclosure of all the material facts;

2. the necessity of buy-back;
3. the class of shares intended to be bought back;
 4. the amount invested under the buyback;
5. the time limit for completion of buyback;

The Company must maintain a Register of buy-back in Form SH-10. Now, Submit Return of
buy- back in Form SH-11 Annexed with Compliance Certificate in Form SH-15, Signed by 2
Directors out of which One must be a Managing Director, if any. A Company should extinguish
and physically destroy shares bought back within 7 days of completion of the buy-back. Observe
6 months cooling period i.e. no fresh issue of share is allowed.

No offer of buy-back should be made by a company within a period of one year from the date of
the closure of the preceding offer of buy-back. The buy-back should be completed within a
period of one year from the date of passing of Special Resolution or Board Resolution, as the
case may be. Transfer of certain sum to Capital Redemption Reserve Account (CRR) According
to section 69 of the Companies Act, 2013, where a Company brought back shares out of free
reserves or out of the securities premium account, then an amount equal to the nominal value of
the shares need to be transferred to the Capital Redemption Reserve Account. Such transfer
detailed to be disclosed in the Balance sheet.

The Capital Redemption Reserve account may be utilized for paying unissued shares of the
company to the members as fully paid bonus shares. Restrictions on Buy-back of Securities in
certain circumstances According to section 70 of the Companies Act, 2013, A Company should
not buy-back its securities or other specified securities , directly or indirectly - Through any
subsidiary including its own subsidiaries; or Through investment or group of investment
Companies; or When Company has defaulted in repayment of deposits or interest payable
thereon, or in redemption of debentures or preference shares or repayment of any term loan.

The prohibition is lifted if the default has been remedied and a period of 3 years has elapsed after
such default ceased to subsist. When Company has defaulted in filing of Annual Return,
declaration of dividend & financial statement. Conclusion Thus, it can be concluded that Indian
companies announce buyback in response to undervaluation position of their stocks in capital
markets and they are well supported by availability of sufficient cash balance available for the
same. Thus, on one hand, premium offered in terms of buyback prices announced offers an exit
opportunity for shareholders and on the other hand, it offers an opportunity for the company to
use its liquidity position to extinguish its shares today and issue them again in future. It
prevents
takeovers and mergers thus preventing monopolization and aiding the survival of consumer
sovereignty. On the other hand Buy back can help in manipulating the records in flatting share
prices Price-Earning Ratio, Earning per share, thus misleading shareholders. Thus, knowledge of
the impacts of Buy-back becomes vital and every shareholder must reconsider all his views
before purchasing the shares of companies involved in the process of Buyback

SIEL Ltd., In re. [(2008) 144 Com Cases 469 (Del)], the view was that reduction of the share
capital of a company is a domestic concern of the company and the decision of the majority
would prevail. If the majority by special resolution decides to reduce the share capital of the
company, it has the right to decide to reduce the share capital of the company and it has the right
to decide how this reduction should be effected. While reducing the share capital, the company
can decide to extinguish some of its shares without dealing in the same manner with all other
shares of the same class. A selective reduction is permissible within the frame work of law for
any company limited by shares.

Indian National Press (Indore) Ltd., In re. (1989) 66 Com Cases 387, 392 (MP): The need for
reducing capital may arise in various circumstances for example trading losses, heavy capital
expenses and assets of reduced or doubtful value. As a result, the original capital may either have
become lost or a capital may find that it has more resources than it can profitably employ. In
either case, the need may arise to adjust the relation between capital and assets.

Elpro International Ltd., In re [(2009) 149 Com Cases 646 (Bom.)], a company proposed to
extinguish and cancel 8, 89,169 shares held by shareholders constituting 25 per cent of the issued
and paid up share capital and return capital to such shareholders at Rs. 183 per equity share of
Rs. 10 each so cancelled and extinguished in accordance with Section 100 of the Act
(corresponds to section 66 of the Companies Act, 2013). According to the scheme as approved
by the shareholders, the reducing of 25 percent of the issued and paid up capital was to take place
from amongst 3,835 shareholders which included 112 shareholders who voted for the resolution,
and 3,723 shareholders who did not object to the resolution. It was held that a selective reduction
of share capital is legally permissible. The shareholders who did not cast their votes were those
who had abstained from voting at the meeting. Moreover, there was no objection from any of the
shareholders to the proposed reduction.
Issue of Securities

Primarily, issues can be classified as a Public, Rights or preferential issues (also known as private
placements). While public and rights issues involve a detailed procedure, private placements or
preferential issues are relatively simpler.

Chapter III of the Companies Act, 2013 deals with “Prospectus and allotment of securities”, the
chapter is divided into two parts, Part I deals with Public Offer and Part II deals with Private
Placement. Section 23 of the Companies Act, 2013 provides that a company whether public or
private may issue securities. A public company may issue securities:

(a) to public through prospectus ("public offer") by complying with the provisions of Part I of
Chapter III of the Act; or (b) through private placement by complying with the provisions of Part
II of Chapter III of the Act; or (c) through a rights issue or a bonus issue in accordance with the
provisions of this Act and in case of a listed company or a company which intends to get its
securities listed also with the provisions of the SEBI Act, 1992 and the rules and regulations
made thereunder.

For a private company the section provides that a private company may issue securities (a) by
way of rights issue or bonus issue in accordance with the provisions of this Act; or (b) through
private placement by complying with the provisions of Part II Chapter III of the Act. The section
deals with issue of securities, which is a wider term not restricted to equity, preference or
debentures. Securities has been defined under section 2(81) to mean the securities as defined in
clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. The relevant section
lays that securities include:- As per Section 2(h) of the Securities Contracts (Regulation) Act,
1956, ‘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; (id) units or any other such instrument issued to the investors under any
mutual fund scheme; (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. Thus, the word ‘securities’ includes shares and other instruments. A
public company may issue any of the aforesaid securities by way of a public offer or rights/
bonus issue or private placement. Public Offer here includes initial public offer (IPO) or further
public offer (FPO) of securities to the public by a company, or an offer for sale (OFS) of
securities to the public by an existing shareholder, through issue of a prospectus. Public offer has
been defined for the first time Explanation to Section 23 states that "public offer" includes initial
public offer or further public offer of securities to the public by a company, or an offer for sale of
securities to the public by an existing shareholder, through issue of a prospectus. To increase the
accountability of companies and enhance protection to small investors the term private placement
has been defined for the first time in the Act. Explanation I to Section 42 defines private
placement as 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 this section.

Private Placement

PRIVATE PLACEMENT OF SHARES As per Explanation I to Section 42(3), "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 this section.

Private Placement Offer – cum Application Section 42(1) provides that a company may, subject
to the provisions of this section, make a private placement of securities. Section 42(3) reads, 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. The private placement offer and
application shall not carry any right of renunciation.

Maximum number of persons to whom offer can be made and other incidental matters As per
section 42(2), 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
buyersand
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. "qualified institutional buyer" has been defined under the
section to mean that the qualified institutional buyer as defined in the SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009, as amended from time to time. Accordingly 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 number of identified persons. Where 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 the public offer and shall be accordingly dealt.

Applying to private placement As per section 42(4) states that 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: Hence all the payments have to be made either by cheque
or demand draft or other banking channel and not by cash. However, a company shall not utilise
monies raised through private placement unless allotment is made and the return of allotment is
filed with the Registrar. According to subsection (5) the company shall make any fresh offer or
invitation with respect to private placement 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. A company may, at any time, make more than one issue of
securities to such class of identified persons as may be prescribed subject to the maximum
number of identified persons as stated above.

Prospectus

In general parlance prospectus refers to an information booklet or offer document on the basis of
which an investor invests in the securities of an issuer company. It has been defined under
section 2(70) so as to mean any document described or issued as a prospectus and includes a red
herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or
any notice,
circular, advertisement or other document inviting offers from the public for the subscription or
purchase of any securities of a body corporate. Red herring Prospectus under Explanation to
section 32 has been referred to mean a prospectus which does not include complete particulars of
the quantum or price of the securities included therein. Shelf Prospectus under Explanation to
section 31 has been referred to mean 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. The definition clarifies that any notice, circular,
advertisement or any other document inviting offers from public for the subscription or purchase
of securities shall be included in the definition of Prospectus

Matters to be stated in the prospectus: Every Prospectus 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: 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.

SHELF PROSPECTUS: 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. In simple terms Shelf Prospectus is a
single prospectus for multiple public. Issuer is permitted to offer and sell securities to the public
without a separate prospectus for each act of offering for a certain period. Under the Act any
class or classes of companies, as the Securities and Exchange Board (SEBI) may provide by
regulations in this behalf, may file a shelf prospectus with the Registrar. Such prospectus is to be
submitted at the stage of the first offer of securities which shall indicate a period not exceeding
one year as the period of validity of such prospectus. The validity period shall commence from
the date of opening of the first offer of securities under that prospectus, and in respect of a
second or subsequent offer of such securities issued during the period of validity of that
prospectus, no further prospectus is required. An information memorandum is required to be
filed by a company filing a shelf prospectus which shall contain 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. According to the rules 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. The section
also provides a benefitting provision for the investors, the proviso provides 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.

RED HERRING PROSPECTUS Red herring Prospectus means a prospectus which does not
include complete particulars of the quantum or price of the securities included therein. In simple
terms a red herring prospectus contains most of the information pertaining to the company’s
operations and prospects, but does not include key details of the issue such as its price and the
number of shares offered. According to section 32 a company proposing to make an offer of
securities may issue a red herring prospectus prior to the issue of a prospectus. Such 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. A red herring prospectus shall carry the same
obligations as are applicable to prospectus and any variation between the red herring prospectus
and a prospectus shall be highlighted as variations in the prospectus. 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 and any other
details as arenot included in the red herring prospectus shall be filed with the Registrar and the
Securities and Exchange Board.

ABRIDGED PROSPECTUS According to section 2(1) of the Act “abridged prospectus” means
a memorandum containing such salient features of a prospectus as may be specified by the
Securities and Exchange Board by making regulations in this behalf. Section 33 of the Act
provides that no form of application for the purchase of any of the securities of a company shall
be issued
unless such form is accompanied by an abridged prospectus. A copy of the prospectus shall, on a
request being made by any person before the closing of the subscription list and the offer, be
furnished to him. Nothing aforesaid shall apply if it is shown that the form of application was
issued— (a) in connection with a bona fide invitation to a person to enter into an underwriting
agreement with respect to such securities; or (b) in relation to securities which were not offered
to the public. The penal provisions provide that a company which makes any default in
complying with the provisions shall be liable to a penalty of fifty thousand rupees for each
default

OFFER FOR SALE Public Offer includes or an offer for sale (OFS) of securities to the public
by an existing shareholder, through issue of a prospectus. Under section 25 of the Act 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. In
simple terms any document by which the offer or sale of shares or debentures to public is made
shall for all purposes be treated as prospectus. The document “Offer for sale” is an invitation to
the general public to purchase the shares of a company through an intermediary, such as an
issuing house or a merchant bank. A company may allot or agree to allot any shares or
debentures to an “Issue house” without there being any intention on the part of the company to
make shares or debentures available directly to the public through issue of prospectus. The issue
house in turn makes an “Offer for sale” to the public. All enactments and rules of law as to the
contents of prospectus and as to liability in respect of misstatements, in and omissions from,
prospectus, or otherwise relating to prospectus, shall apply to Offer for sale. Following additional
information to the matters required 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; According to the section in order to construe
“Offer for Sale” either of the following conditions needs to be fulfilled: (a) “Offer for sale” to the
public was made within six months after the allotment or agreement to allot; or (b) 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. As for the signing of the Prospectus the section
provides that where a person making an offer to which this section relates is a company or a
firm, it shall be sufficient if the Offer
document is signed on behalf of the company by two directors of the company and in case of a
firm by not less than one-half of the partners in the firm, as the case may be.

In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. 1963-(033)-Com
Cases-0862-SC, the Supreme Court held that the exchange was not liable to file any return of the
forfeited shares under Section 75(1) of the Companies Act, 1956 [Corresponds to section 39 of
the Companies Act, 2013] when the same were re-issued. The Court observed that when a share
is forfeited and re-issued, there is no allotment, in the sense of appropriation of shares out of the
authorised and unappropriated capital and approved the observations of Harries C.J. in S.M.
Nandy’s case that: “On such forfeiture all that happened was that the right of the particular
shareholder disappeared but the shares considered as a unit of issued capital continued to exist
and was kept in suspense until another shareholder was found for it”;

Alote Estate v. R.B. Seth Hiralal Kalyanmal Kasliwal [1970] 40 Com Cases 1116 (SC). In case of
inadequacy of consideration, the shares will be treated as not fully paid and the shareholder
will be liable to pay for them in full, unless the contract is fraudulent;

Harmony and Montage Tin and Copper Mining Company; Spargo’s case (1873) 8 Ch. App.

407. Any payment which is presently enforceable against the company such as consideration
payable for property purchased, will constitute payment in cash; (D) Chokkalingam v. Official
Liquidator AIR 1944 Mad. 87. Allotment of shares against promissory notes shall not be valid.

Debentures

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

necessary. In some cases capital arranged through internal resources i.e. by way of issuing equity
share capital or using accumulated profit is not adequate and the organisation is resorted to
external resources of arranging capital i.e. External Commercial borrowing (ECB), Debentures,
Bank Loan, Public Fixed Deposits etc. Thus, borrowing is a mechanism used whereby the money
is arranged through external resources with an implied or expressed intention of returning
money.

Power of Company to Borrow The power of the company to borrow is exercised by its directors,
who cannot borrow more than the sum authorized. The powers to borrow money and to issue
debentures whether in or outside India can only be exercised by the Directors at a duly convened
meeting. Pursuant to Section 179(3) (c) & (d) directors have to pass resolution at a duly
convened
Board Meeting to borrow money. The power to issue debentures cannot be delegated by the
Board of directors. However, the power to borrow monies can, be delegated by a resolution
passed at a duly convened meeting of the directors to a committee of directors, managing
director, manager or any other principal officer of the company. The resolution must specify the
total amount up to which the moneys may be borrowed by the delegates. Often the power of the
company to borrow is unrestricted, but the authority of the directors acting as its agents is limited
to a certain extent. For example, Section 180(1)(c) of the Act prohibits the Board of directors of a
company from borrowing a sum which together with the monies already borrowed exceeds the
aggregate of the paid-up share capital of the company and its free reserves apart from temporary
loans obtained from the company’s bankers in the ordinary course of business unless they have
received the prior sanction of the company by a special resolution in general meeting.
Explanation to section 180(1)(c) provides that the expression “temporary loans” means loans
repayable on demand or within six months from the date of the loan such as short-term, cash
credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal
character, but does not include loans raised for the purpose of financial expenditure of a capital
nature. It is further provided in proviso to Section 180(1)(c) that the acceptance by a banking
company, in the ordinary course of its business, of deposits of money from the public, repayable
on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be
deemed to be borrowing of monies by the banking company within the meaning of clause (c)
of Sub-section (1) of Section
180. It is important at this stage to distinguish between, borrowing which is ultra vires the
company and borrowing which is intra vires the company but outside the scope of the director’s
authority. The provisions of Sub-section (5) of Section 180 clearly lay down that debts incurred
in excessof the limit fixed by clause (c) of Sub-section (1) shall not be valid unless the lender
proves that he lent his money in good faith and without knowledge of the limit imposed by Sub-
section (1) being exceeded. With recent exemption notification no 464(E) private companies
have been exempted to comply the entire provisions of Section 180 of the Companies Act 2013,
resultantly special resolution is not required to exercise powers under section 180 for private
companies.

The behaviour of the directors, as the company’s agents, can have no effect whatsoever on the
validity of the loan for no agent can have more capacity than his principal. No agent can have a
power which is not with the principal. If, therefore, the borrowing is ultra vires the company so
that the company has no capacity to undertake it, the lender can have no rights at common law.
No
debt is created and any security which may have been created in respect of the borrowing is also
void. The lender cannot sue the company for the repayment of the loan. [Sinclain v.
Brouguham(1914) 88 LJ Ch 465].

If the borrowing by the directors is ultra vires their powers, the directors may, in certain
circumstances, be personally liable for damages to the lender, on the ground of the implied
warranty given by them, that they had power to borrow [Firbank’s Executors v. Humphreys,
(1886) 18 QBD 54; Garrard v. James, 1925 Ch. 616]. (G) Sometimes it happens that a power to
borrow exists but is restricted to a stated amount, in such a case if by a single transaction an
amount in excess is borrowed, only the excess would be ultra vires and not the whole transaction
[Deonarayan Prasad Bhadani v. Bank of Baroda, (1957) 27 Com Cases 223 (Bom)].

The acquiescence of all shareholders in excess loans contracted by directors beyond their powers
but not ultra vires the powers of the company would be sufficient to validate such excess debts.
[Sri Balasar aswathi Ltd. v. Parameswara Aiyar, (1956) 26 Com Cases 298, 308: AIR 1957
Mad 122].

If the borrowing is unauthorized, the company will be liable to repay, if it is shown that the
money had gone into the company’s coffers [Lakshmi Ratan Cotton Mills Co. Ltd. v. J.K. Jute
Mills Co. Ltd., (1957) 27 Com Cases 660: AIR 1957 All 311].

TYPES OF BORROWINGS A company uses various kinds of borrowing to finance its

operations. The various types of borrowings can generally be categorized into:

1. Long term/short term borrowing,

2. Secured/unsecured borrowing,
3. Syndicated/ Bilateral borrowing,
4. Private/Public borrowing.

1A. Long Terms Borrowings - Funds borrowed for a period ranging for five years or more are
termed as long-term borrowings. A long term borrowing is made for getting a new project
financed or for making big capital investment etc. Generally Long term borrowing is made
against charge on fixed Assets of the company.
1B. Short Term Borrowings - Funds needed to be borrowed for a short period say for a period up
to one year or so are termed as short term borrowings. This is made to meet the working capital
need of the company. Short term borrowing is generally made on hypothecation of stock and
debtors.

1C. Medium Term Borrowings - Where the funds to be borrowed are for a period ranging from
two to five years, such borrowings are termed as medium term borrowings. The commercial
banks normally finance purchase of land, machinery, vehicles etc.

2A Secured/unsecured borrowing – A debt obligation is considered secured, if creditors have

recourse to the assets of the company on a proprietary basis or otherwise ahead of general claims
against the company.

2B Unsecured debts comprise financial obligations, where creditors do not have recourse to the
assets of the company to satisfy their claims.

3A Syndicated borrowing – if a borrower requires a large or sophisticated borrowing facility this

is commonly provided by a group of lenders known as a syndicate under a syndicated loan
agreement. The borrower uses one agreement covering the whole group of banks and different
types of facility rather than entering into a series of separate loans, each with different terms and
conditions.

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

bank/financial institution. In this type of borrowing, there is a single contract between the
company and the borrower.

4A Private borrowing comprises bank-loan type obligations whereby the company takes loan
from a bank/financial Institution.

4B Public borrowing is a general definition covering all financial instruments that are freely
tradable on a public exchange or over the counter, with few if any restrictions i.e. Debentures,
Bonds etc.

Debentures According to Section 2(30) of Companies Act, 2013, “debenture” includes debenture
stock, bonds or any other instrument of a company evidencing a debt, whether constituting a
charge on the assets of the company or not. Further it is provided that— (a) the instruments
referred to in
Sl. No
Debenture Share

1. Debentures constitute a loan. Shares are part of the capital of a company.

Shareholders are members/owners of the

2. Debenture holders are
creditors. company.

Debenture holder gets fixed

interest
3. which carries a priority over Shareholder gets dividends with a varying

dividend rate.

Debentures generally have a

charge
4. Shares cannot be issued at a discount

Debentures can be issued at a

5.
discount without restrictions.
on the assets of the company
Whereas on equity shares the dividend
The rate of interest is fixed in
the varies from year to year depending upon the
6. profit of the company and the Board of
case of debentures.
directors decides to declare dividends or
not.

Debenture holders do not have

any
7.
voting rights Shareholders enjoy voting rights.

Interest on debenture is payable Dividend can be paid to shareholders only

8. even if there are no profits i.e. out of the profits of the company and not
even out of capital. otherwise.

Interest paid on debenture is a

9. business expenditure and
Dividend is not allowable deduction as
allowable deduction from profits
business expenditure.
 Shares do not carry any such charge

Debenture Trust deed Debenture Trust deed is a written instrument legally conveying property to
a trustee often for the purpose of securing a loan or mortgage. It is the document creating and
setting out the terms of a trust. It will usually contain the names of the trustees, the identity of the
beneficiaries and the nature of the trust property, as well as the powers and duties of the trustees.
It constitutes trustees charged with the duty of looking after the rights and interests of the
debenture holders. As per 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 there of 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:
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.

A trust deed for securing any issue of debentures shall be open for inspection to any member or
debenture holder of the company, in the same manner, to the same extent and on the payment of
the same fees, as if it were the register of members of the company; and a copy of the trust deed
shall be forwarded to any member or debenture holder of the company, at his request, within
seven days of the making thereof, on payment of fee. As per section 71 and sub-rule (1) of Rule
18 of the Companies (Share Capital and Debentures) Rules, 2014 a trust deed in Form No. SH.
12 or as near there to as possible shall be executed by the company issuing debentures in favour
of the debenture trustees within three months of closure of the issue or offer. [Rule18(5)]

Rule 18(8) states that a trust deed for securing any issue of debentures shall be open for
inspection to any member or debenture holder of the company, in the same manner, to the same
extent and on the payment of the same fees, as if it were the register of members of the company.
Further, a copy of the trust deed shall be forwarded to any member or debenture holder of the
company, at his request, within seven days of the making thereof, on payment of fee.

Acceptance of Deposit by Companies

Companies aim to secure finance by different cost-effective methods to suit their financial
requirements. Companies have always been attracted towards financing through deposits and, at
times, problems have arisen in the context of such deposits. In order to control the malpractices,
the Companies Act, 2013 has introduced strict provisions under the deposit regime. Sections 73
to 76 of the Companies Act 2013 read with the Companies (Acceptance of Deposits) Rules, 2014
regulate the invitation, acceptance and repayment of deposits by Companies.

Applicability The provisions under Sections 73 to 76 of the Companies Act 2013 and the
Companies (Acceptance of Deposits) Rules, 2014 shall apply to all companies except –

 a banking company and

 a non- banking financial company as defined in the Reserve Bank of India Act, 1934
and
  a housing finance company registered with the National Housing Bank established
under the National Housing Bank Act, 2013; and
 such other company as the Central Government may, after consultation with the
Reserve Bank of India, specify in this behalf. [Section 73(1) read with Rule 1(3)]

Deposits have been defined under the Companies Act, 2013 ("2013 Act") to include any receipt
of money by way of deposit or loan or in any other form by a company. However deposits do not
include such categories of amounts as may be prescribed in consultation with the Reserve Bank
of India ("RBI"). Chapter V of the 2013 Act and the Companies (Acceptance of Deposits) Rules,
2014 as amended from time to time ("Deposits Rules") primarily cover regulations relating to
deposits. The Deposits Rules provide an exhaustive definition of deposits which is exclusionary
in nature and exclude certain amounts received by a company, from the ambit of deposits. It may
also be noted that the Companies Act, 1956 ("1956 Act") and the Companies (Acceptance of
Deposits) Rules, 1975 also defined deposits in a similar manner and excluded certain amounts
which were not to be considered deposits.

The dilemma is that some of the exclusions introduced under the Deposits Rules lack clarity. At
times these exclusions are contradictory to related provisions under the Deposits Rules. In this
article, we have attempted to analyse some of these contradictions and examine the broad
practical difficulties attached with the definition of deposits along with the framework devised
for their repayment under the 2013 Act.

II. Exclusions under the 2013 Act and Deposits Rules

The amounts which do not fall within the ambit of the definition of deposits under the 2013 Act
and Deposits Rules are inter alia:

a. Loans taken by a company from another company;

b. Loans from directors or a relative of a director subject to the directors/relative

furnishing a declaration that such amounts are not being funded by borrowing or
accepting loans or deposits from others and the company disclosing the same in the
Board's' report;

c. Any non-interest bearing amount received and held in trust;

 d. Any amount received from an employee of the company not exceeding his annual
salary in the nature of non-interest bearing security deposit; and

e. Such other items mentioned in Rule 2 (c) of the Deposits Rules.

One of the exclusions that necessitate discussion is set out in Rule 2(c) (ii) of the Deposits Rules
which excludes from the ambit of deposits any amount received from foreign institutions, foreign
governments or foreign banks, foreign corporate bodies, foreign citizens ("Foreign Bodies")
subject to the provisions of Foreign Exchange Management Act, 1999 and the rules and
regulations made there under ("FEMA").

FEMA prescribes that capital instruments should be issued by the company within a period of
180 (one hundred and eighty) days from receipt of inward remittance by the company, failing
which the inward remittance should be refunded immediately. Failure to follow these timelines
may attract penalties. In exceptional cases, refund of the amount of consideration outstanding
beyond a period of 180 (one hundred and eighty) days from the date of receipt may be
considered by the RBI, on the merits of the case. This is where the dichotomy lies. The Deposits
Rules stipulate that an amount received towards share application money will not be considered a
deposit as long as allotment against the amount is made within 60 (sixty) days of receipt of such
money or the money is refunded within 15 (fifteen) days from the completion of 60 (sixty) days.
The question that arises is whether the allotment should be made within the 60 (sixty) day's
period prescribed under the Deposits Rules or within the 180 (one hundred and eighty) day's
period prescribed under FEMA.

This anomaly has given rise to two interpretations. The 2013 Act has been enacted to govern and
encompass within its domain companies incorporated in India and all matters relating thereto.
FEMA provides a framework and lays down guidelines with respect to foreign investment.
Hence it may be argued that the 2013 Act is a specific legislation which governs the subject of
companies as opposed to FEMA which governs foreign investment and contains a general
provision with respect to the issuance of securities to foreign investors. Therefore, following
the principle of generalia specialibus non derogant, the provisions under FEMA which are
general in nature, should yield to 2013 Act which is a specific legislation with respect to the
issuance procedure. Therefore share application money will not be treated as a deposit for a
period of 60 (sixty) days. Hence, securities should be issued within 60 (sixty) days from the
receipt of money as opposed to
180 (one hundred and eighty) days prescribed under FEMA failing which the share application
money will be treated as a deposit.

An alternative interpretation is that considering FEMA governs the framework with respect to
foreign investment, foreign investors should be able to enjoy the leniency afforded under FEMA.
However this interpretation seems to provide a foreign investor a superior position vis-a-vis a
domestic investor. Considering the conundrum, in order to avoid having to comply with the
procedure prescribed under Deposits Rules with respect to accepting deposits and therefore
potentially having to comply with regulations on external commercial borrowings, allotment of
shares should be made within 60 (sixty) days of receipt of the application money.

The other exclusion which prompts a discussion is set out in Rule 2(c) (ix) which excludes from
the definition of Deposits the amounts 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 of the 2013 Act excluding intangible assets of the company or bonds or debentures
compulsorily convertible into shares of the company within 10 (ten) years 1. This exclusion
essentially signifies that a secured debenture, regardless of its tenure or convertibility, shall be
exempt from the purview of deposits. However, an unsecured debenture shall only be exempt
from the purview of deposits as long as it is compulsorily convertible within 10 (ten) years. This
would mean that non- convertible unsecured debentures would be considered as deposits.
However, any amount raised by issue of non-convertible and unsecured debentures listed on a
stock exchange as per regulations framed by SEBI shall not be considered as deposits 2. It needs
to be noted here that FEMA does not prescribe any timeline for conversion of debentures. When
the exclusions stated in Rule 2(c)(ii) and Rule 2(c)(ix) are read together, one needs to determine
whether an unsecured debenture issued by a company to a Foreign Body which is convertible in
more than 10 (ten) years, where such issuance is in conformity with FEMA, will amount to a
deposit.

Further, it may be noted that Rule 2 (c) (vi) exempts from the definition of deposits any amount
received by a company from another company.Based on a bare reading of the aforementioned
provisions, one may argue that since amounts received from a Foreign Body are exempt from the
purview of deposits debentures issued to such Foreign Body, regardless of its secured, unsecured,
convertible or unconvertible nature and regardless of the tenure shall not attract the provisions
pertaining to Deposits.
III. Exclusions under the 1956 Act

Another continuously discussed topic is whether the term 'deposits' as used and defined in the
2013 Act and the Deposits Rules meant to exclude from its scope the amounts which were not
considered as deposits under the 1956 Act. Interestingly after more than a year of the provision
being notified3, the Ministry of Corporate Affairs decided to put this debate to rest and issued a
circular on March 30, 20154 ("Circular"). The Circular clarified that amounts not treated as
deposits under the 1956 Act i.e. amounts received by private companies from their members,
directors or their relatives prior to April 01, 2014, will not be treated as deposits under the 2013
Act and Rules, subject to the condition that appropriate disclosures are made in the financial
statements of the company of such amounts. The Circular further clarified that any renewal or
acceptance of fresh deposits on or after April 01, 2014 shall be in accordance with the 2013 Act
and the Rules.

IV. Repayment of Deposits

Section 74 of the 2013 Act stipulates that the deposits accepted by a company before the
commencement of the Act should be repaid by a company within one year from the
commencement of the Act or from the date on which payment of such deposit becomes due,
whichever is earlier. It is interesting to note that though the debate around the usage of the term
'deposit' in Section 74 of the 2013 Act has been largely put to rest, the term 'repay' which has
been
extensively used in the Section has not been given much air-time. The debate on the term 'repay'
may seem redundant as more than 2 (two) years have elapsed since the commencement of the
Section however, since a company may with the permission of the tribunal seek an extension and
repay the amount in the time permitted by the tribunal, the discussion around the term may still
be relevant. Further, the Companies Amendment Bill, 2016 proposes to revise Section 74 to state
that deposits accepted by a company before the commencement of the Act should be repaid by a
company within three years from the commencement of the Act or on or before expiry of the
period for which the deposits were accepted, whichever is earlier whichever is earlier. In light of
this, it may be imperative to explore what 'repay' would mean.

The confusion around the term 'repay' in Section 74(1) (b) of the Act is a question of
interpretation of the term. A traditional interpretation would be that the sub-section stipulates the
actual repayment of the amounts by a company to its lenders in cash or cash equivalents. Some
may differ from such interpretation since sub-section (b) of Section 74 seems to be open ended
and does not suggest that the deposits are necessarily required to be repaid only in cash or cash
equivalents.

Hence one may ask whether the sub-section necessitates actual payment of deposits by a
company to its lenders in cash or cash equivalents; or does it include a scenario where the
repayment can be done in any other manner as well, which may even include issuance of
securities to the lenders against the deposits accepted (the issuance being in accordance with the
other provisions of the Act).

One may subscribe to a view that since Section 74(1) (b) does not precisely require a company to
repay the 'amount' of deposit, it need not be read to mean the actual payment of the amount of
deposit in cash or cash equivalent. It can be asserted that the term 'repay' in this context has been
used to suggest extinguishment of liability and not actual payment of the amount of deposit.
Using this interpretation if a company, upon receiving instructions from its lender, repays the
deposit in the manner required by the lender, such repayment of the deposits will satisfy the
requirement of Section 74(1) (b) of the Act. It would be appropriate if such instruction by a
lender be accompanied with a statement or an acknowledgment that such application would
amount to repayment of the deposit.

On the other hand it may be argued to the contrary that Section 74, when read in its entirety,
contemplates the actual payment of the amounts of deposits by a company and does not merely
suggest extinguishment of liability in any manner. The basis to substantiate this view is that the
other sub-sections of Section 74 use the phrase 'amount of deposits' rather than 'deposits', which
seem to suggest that payment of such deposits should be done in cash or cash equivalent and not
in any other manner.

Charge on Assets

Borrowing funds is an important source for a company to raise capital for financing large-scale
projects and expanding its business. Corporate borrowings involve loans obtained by a company
by way of creating a charge on its assets as security to the lender company. As defined in the
Companies Act, 2013, ("Act") "charge" means an interest or lien created on the property or assets
of a company or any of its undertakings or both as security and includes a mortgage. The Act
prescribes for registration of charges with the Registrar of Companies.

According to Section 77(1) of the Act, it is the duty of every 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 signed by the
company and the charge-holder together with the instruments, if any, creating such charge, with
the Registrar of Companies within thirty days of its creation. The provisions of Section 77 of the
Act relating to registration of charges shall, so far as may be, apply to a company acquiring any
property subject to a charge within the meaning of that section; or any modification in the terms
or conditions or the extent or operation of any charge registered under that section. Where a
charge is registered with the Registrar of Companies, he shall issue a certificate of registration of
such charge to the company and/ or to the person in whose favor the charge is created.

Form and manner of Registration

The method of registration of a charge is the filing of particulars of charge along with the
instrument creating charge, with the Registrar of Companies within the period prescribed in
Section 77(1) of the Act. However, in the event of failure to file the particulars within the
prescribed period, the company can get the charge registered by seeking condonation from the
Central Government. This is also known as "rectification of the register of charges".1
The application for registration of charge is to be submitted to the Registrar of Companies in
such form, on payment of such fees and in such manner as prescribed in the Companies
(Registration of Charge) Rules, 2014.

For registration of charge as provided in Section 77(1), Section 78 and Section 79 of the Act, the
particulars of the charge (together with a copy of the instrument, if any, creating or modifying
the charge) shall be filed with the Registrar of Companies within a period of thirty days of the
date of creation or modification of charge along with the fee, in Form No.CHG-1 (for other than
Debentures) or Form No.CHG-9 (for debentures including rectification), as the case may be, duly
signed by the company and the charge holder.

Extension of time for Registration

The proviso to Section 77(1) of the Act provides for extension of time for filing particulars for
registration of charge. It is stated therein, that the Registrar of Companies may allow such
registration to be made within a period of three hundred days of such creation on payment of
additional fees. Rule 4 provides that the application for delay shall be made in Form No.CHG-1
and supported by a declaration from the company signed by its secretary or director that such
belated filing shall not adversely affect the rights of any other intervening creditors of the company.

However, if registration is not made within a period of three hundred days of such creation, the
company shall seek extension of time for filing of the particulars or for the registration of the
charge from the Central Government (in eForm CHG-8) in accordance with Rule 12 and Section
87 of the Act. The eForm CHG-1 for registration of charge, will be processed by the Registrar of
Companies office after the order of Central Government for approval for condonation of delay
(in eForm INC 28) has been filed with the Registrar of Companies. The Central Government can
provide for extension of time on the ground that the omission to file with the Registrar of
Companies, the particulars of any charge or, the omission to register such charge, was accidental
or due to inadvertence or some other sufficient cause or it is not of a nature to prejudice the
position of creditors or shareholders of the company, or any other grounds, it is just and equitable
to grant relief.

In the case of Tristar Container Service (Asia) P. Ltd. v. WW Shipping Agencies P. Ltd. 2, an
application for extension of time was filed by a creditor. The petitioners were under the
impression
that respondents have filed the particulars of charges, but on a search conducted into records of
the Registrar of Companies, it was found that the particulars of charges were not filed. However,
in spite of the petitioners requesting the respondents to cause registration of the charges, the
respondents did not effect the registration of the charges and therefore, the petitioners filed the
said petition, which, if allowed would not cause prejudice to any stakeholder or the respondents,
including the creditors. It was held that, in these circumstances the delay in filing of the
particulars of the charges be condoned and time be extended for filing such particulars, with
direction to the respondents to sign Form No. 8 as well for its registration. In the said case the
petitioners showed that the delay was due to a sufficient cause and therefore, extension of time
was granted for filing particulars of the charge.

Effect of non-registration of charge

Section 77(3) of the Act states that, in case no charge is created by a company, i.e. a charge is not
registered, and a certificate of registration is not issued by the Registrar of Companies, then the
charge shall not be taken into account by the liquidator or any other creditor. However, nothing
provided in Section 77(3) of the Act shall prejudice any contract or obligation for the repayment
of the money secured by a charge.

Section 86 of the Act, provides for punishment for contraventions of Section 77 of the Act. It is
provided that, the company shall be punishable with fine which shall not be less than one lakh
rupees but which may extend to ten lakh rupees and every officer of the company who is in
default shall be punishable with imprisonment for a term which may extend to six months or
with fine which shall not be less than twenty-five thousand rupees but which may extend to one
lakh rupees, or with both.

Therefore, an application must be made for registration of charges to the Registrar of Companies
in the prescribed format so that the Registrar of Companies after being satisfied with the
application, may issue a certificate of registration of charge and entitle the company and its
creditors to rights at the time of liquidation.