CAFC | CA Inter | CA Final

INTER CA
CORPORATE AND
OTHER LAWS
THEORY BOOK
[AS PER NEW SYLLABUS NOTIFIED BY THE ICAI
FROM 01.07.2023]

Ednovate

ednovateofficial

Ednovate Official

Ednovate Classes
 PREFACE

Welcome to the threshold of a defining journey in your pursuit of becoming a

Chartered Accountant. The Inter CA examination is more than a test; it’s a gateway
to your future, shaping your path towards achieving your dream articleship and
beyond.

At Team EDNOVATE, we stand with you at this crossroads, ready to illuminate the
path with expert guidance and unwavering support. The transition from CAFC to
Inter CA is a leap that demands more than just hard work; it requires a strategic
mindset, a deep understanding of the subject matter, and the resilience to meet
the ICAI’s standards.

We are here to ensure that you are not just prepared, but primed to excel in both
groups of the Inter CA exam on your very first attempt.

Our mission is clear: to transform your potential into success by providing focused,
tailored guidance that addresses the unique challenges of this critical phase.

Let this book be your companion on this journey, offering insights, strategies, and
encouragement every step of the way. Together, through your commitment and our
expert guidance, we strive to forge a promising future for you.

Thank you for choosing us as your guide. Here’s to a journey of growth, success, and
excellence. Welcome aboard!
 TABLE OF CONTENTS
THEORY BOOK
PART A - CORPORATE LAW
1.1 Management & 7.1
1 Preliminary to
1.15
7 Administration
to
7.34

Incorporation Of 2.1 Declaration And 8.1

2 Company And Matters to
2.23
8 Payment Of Dividend
to
8.9
Incidental Thereto

Prospectus And 3.1 9.1

3 Allotment Of Securities
to
3.17
9 Accounts Of Companies to
9.19

Share Capital And 4.1

4 Debentures
to
4.18
10 Audit And Auditor 10.1

5.1 Companies 11.1

Acceptance Of
5 Deposits By Companies
to
5.10
11 Incorporated Outside to
11.15
India

6.1
6 Registration Of Charges to
6.8

PART B - OTHERS LAW

The Foreign Exchange 12.1 The Limited Liability 13.1

1 Management Act, 1999
to
12.21
2 Partnership Act, 2008
to
13.28

The General Clauses 14.1 Interpretation Of 15.1

3 Act, 1897
to
14.11
4 Statutes
to
15.15
 Part A
CORPORATE LAW
 01 PRELIMINARY

CHAPTER OVERVIEW

BACKGROUND APPLICABILITY CITIZENSHIP, CLASSIFICATION

AND AIM OF OF THIS ACT NATIONALITY AND OF COMPANY
THE ACT RESIDENCE OF
COMPANY

MEANING AND CHARACTERISTICS LIFTING OR CONVERSION OF

DEFINITION OF OF COMPANY PIERCING THE COMPANY
COMPANY CORPORATE VEIL

BACKGROUND AND AIM OF THE ACT

It came into existence at once from the date of notification in the Official Gazette i.e., from
30th August, 2013, however, the remaining provisions of the Act shall come into force on
such date as the Central Government may, by notification in the Official Gazette, appoint
and different dates may be appointed for different provisions of this Act.
It extends to the whole of India.

Structure of the Act, 2013

470 Sections (covered in 29 Chapters) and 7 Schedules

Purpose/ Objective of the Act

To promote the To encourage To recognize To enforce To set up To cater to

development transparency, various new stricter action institutional the need
of the economy accountability concepts and against fraud structure in the for more
by encouraging and high procedures and gross non- form of various effective and
entrepreneurship standards of facilitating compliance with authorities, time bound
and enterprise corporate convenience of company law bodies and approvals and
panels as well
efficiency and governance; doing business provisions; compliance
as by including
creating flexibility while protecting requirements
recognition of
and simplicity in interests of all relevant in
various roles for
the formation and the stakeholders; the present
professionals and
maintenance of other experts; context.
companies; and

1.1 PRELIMINARY
 COMPANY

MEANING OF COMPANY DEFINITION OF COMPANY

The word ‘company’ is derived The term ‘company’ has been defined under Section
from the Latin words (com= with 2(20) of the Companies Act, 2013. As per this,
or together; and panis = bread ‘company’ means a company incorporated under
or meal); and originally referred Companies Act, 2013 or under any of the previous
to an association of persons who laws relating to companies.
took their meals together. It may be noted the term ‘Company’ shall be used in
the sense as defined above for the entire Companies
Act, 2013, unless the context otherwise requires.

ACT APPLICABLE TO:

Short title, extent, commencement and application Section 1

It extends companies insurance banking companies any other such body

to the incorporated companies, companies, engaged company corporate,
whole of under this except in except in in the governed by incorporated
India. Act or under so far as so far as generation any special by any Act
The any previous the said the said or supply of Act for the for the time
provisions company law; provisions provisions electricity, time being in being in force,
of this Act are are except in force, except as the Central
shall apply inconsistent inconsistent so far as in so far Government
to- with the with the the said as the said may, by
provisions of provisions of provisions provisions notification,
the Insurance the Banking are are specify in
Act, 1938 or Regulation inconsistent inconsistent this behalf,
the Insurance Act, 1949; with the with the subject
Regulatory provisions provisions of to such
and of the such special exceptions,
Development Electricity Act; and modifications
Authority Act, 2003; or adaptation,
Act, 1999; as may be
specified
in the
notification.

PRELIMINARY 1.2
 CHARACTERISTICS/FEATURES OF COMPANY
1 2
Separate legal entity: A company is an artificial Limited liability: A company limited
person having a personality which is distinct from by shares is a registered company
the members constituting it. Thus, a company has having the liability of its members
got an entity which is separate from its members. limited to the amount, if any,
And since this separate entity concept is conferred unpaid on the shares respectively
by law, it is said that a company has got a separate
held by them. If his shares are fully
legal entity.
paid - up, he has nothing more to
1. Salomon v. Salomon & Co. Ltd.
pay.
Salomon had, for some years, carried on a
3
prosperous business as a leather merchant
Perpetual Succession: An
and boot manufacturer. He formed a limited
incorporated company never dies.
company consisting of himself, his wife and a
Perpetual succession, therefore,
daughter, and his 4 sons as the shareholders, all
means that the membership of a
of whom subscribed for one share of 1 pound
company may keep changing from
each. Salomon was the managing director and
two of his sons were other directors. time to time but does not affect its
Salomon sold his business (which was perfectly continuity. Members may come and
solvent at that time) to the Company for the sum go but the company will continue
of 38,782 £. He got the following consideration:- forever.
10,000 Secured Debentures of 1£ each
4
20,000 Fully - paid Shares of 1 £ each Separate Property: No member can
8,782 Cash claim himself to be the owner of the
The company soon ran into difficulties and the company’s properties either during
debenture holders appointed a receiver and its existence or in its winding up.
the company went into liquidation. The total A member does not even have an
assets of the company amounted to 6,050£, its insurable interest in the property
liabilities were 10,000£ secured debentures and of the company.
8,000£ owing to unsecured trade creditors. The 5
unsecured trade creditors claimed the whole of Transferability of Shares: The
the company’s assets, viz. 6,050 £ on the ground capital of a company is divided
that as the company was a mere agent for Salomon into parts called shares. The shares
and thus they were entitled to payment of their are said to be movable property
debts in priority to debentures. and subject to certain conditions,
The House of Lords rejected these contentions and freely transferable for that. No
held that a company, on registration, has its own shareholder is permanently or
existence or personality separate and distinct from necessarily wedded to a company.
its members and, as a result, a shareholder cannot It may be noted that this right of
be equated with a company, even if he holds shareholder is restricted in the
virtually the entire share capital of the company. case of a private company.

1.3 PRELIMINARY
 6
Common Seal: Since a company has no physical existence, it must act through its
agents. All the important documents of a company must be under the seal of the
company. The common seal, thus, acts as the official signature of a company. The
Companies (Amendment) Act, 2015 has made the common seal optional by omitting
the words “and a common seal” from Section 9 so as to provide an alternative mode
of authorization for companies who opt not to have a common seal. Reason for this
amendment is that common seal is considered as an old concept now.
7 8 9
Capacity to sue and Separate Management: The Voluntary Association for
be sued: A company, members of a company Profit: A company is a
being a body may derive profits without voluntary association for
corporate, can sue being burdened with the profit. It is formed for the
and be sued in its own management of the company. accomplishment of some
name. The company is administered public goals and whatsoever
and managed by its own profit is gained is divided
managerial personnel. among its shareholders.

IMPORTANT CONCEPTS

IS COMPANY A HAS COMPANY A NATIONALITY LIFTING OR PIERCING THE

CITIZEN? AND RESIDENCE? CORPORATE VEIL

Although, a It is established Corporate veil: It refers to a separate legal existence

company is through judicial enjoyed by the company which is distinct from people
regarded as a decisions that a who own & manage it.
legal person company cannot It is an artificial curtain created by law which separates
(though artificial), be a citizen, yet the company from the people who own and manage
it is not a citizen it has nationality, it.
either under domicile and Effect of corporate veil: Only Company is liable for the
the Constitution residence. acts/defaults done in name of company, even though
of India or the directors/employees acted on behalf of company.
Citizenship Act, Lifting of corporate veil: It means looking behind
1955. the company as a legal person, i.e., disregarding the
corporate entity and paying regard, instead, to the
realities behind the legal facade. Where the Courts
ignore the company and concern themselves directly
with the members or managers, the corporate veil
may be said to have been lifted. Only in appropriate
circumstances, the Courts shall lift the corporate veil.

PRELIMINARY 1.4
 CLASSIFICATION OF COMPANY

A. BASED ON LIABILTY B. BASED ON MEMBERS C. BASED ON CONTROL

1. Company limited by 4. Private Company 8. SUBSIDIARY COMPANY
shares Section 2(22) Section 2(68) SECTION 2(87)
2. Company limited by 5. Public Company 9. HOLDING COMPANY
guarantee Section Section 2(71) SECTION 2(46)
2(21) 6. One Person Company
10. Associate company
3. Unlimited Company Section 2(62)
Section 2(92) 7. Small Company Section 2(6)
Section 2(85)

D. BASED ON CAPITAL E. OTHER COMPANIES

11. Listed company 12. Government Company Section 2(45)
section 2(52) 13. Foreign Company Section 2(42)
14. Company not for profit/Non-Profit companies Section 8
15. Dormant company Section 455
16. Nidhi company Section 406
17. Pubic financial institutions Section 2(72)
A. BASED ON LIABILTY
1. Company limited by shares Section 2(22) :
As per Section 2(22),A company limited by shares is a registered company having the liability
of its members limited to the amount, if any, unpaid on the shares respectively held by them.
The unpaid amount can be called anytime. If his shares are fully paid - up, he has nothing
more to pay.

2. Company limited by guarantee Section 2(21):

1. As per Section 2(21), a company limited by guarantee or a “guarantee company” is a
company having the liability of its members limited to such an amount as the members
may respectively thereby undertake, by the memorandum of association of the company,
to contribute to the assets of the company.
2. A special feature of this type of company is that the liability of members to pay their
guaranteed amounts arises only when the company has gone into liquidation and not
when it is a going concern.
3. Clubs, trade associations and societies for promoting different objects are examples of
companies limited by guarantee.
4. A guarantee company without share capital does not obtain its initial and working funds,
from its members, but from some other source or sources e.g. grants, endowments,
fees, subscriptions and the like.

1.5 PRELIMINARY
5. But a guarantee company having a share capital raises its initial capital from its members,
while the normal working funds would be provided from other sources, such as fees,
charges, subscriptions.
If a guarantee company has share capital, the shareholders have two-fold liability; to
pay the amount which remains unpaid on their share whenever called upon to pay, and
secondly, to pay the amount payable under the guarantee when the company goes into
liquidation.
6. The voting power of a guarantee company having a share capital is determined by the
shareholding and not by the guarantee.

3. Unlimited Company Section 2(92) :

1. As per Section 2(92), unlimited company is a company not having any limit on the liability
of its members. In such a company the liability of a member ceases when he ceases to
be a member.
2. Thus, the maximum liability of the members of such a company could extend to their
entire personal property to meet the debts and obligations of the company.
3. The members of an unlimited company are not liable directly to the creditors of the
company, unlike in the case of partners of a firm. The liability of the members is only
towards the company, so long it is a going concern; and in the event of its being wound
up, only the Liquidator can ask the members to contribute to the assets of the company.

B. BASED ON MEMBERS
4. Private Company Section 2(68) :
(Q.2- Page No : 1.1)
As per Section 2(68), private company is a company which by its articles,—
(i) restricts the right to transfer its shares;
(ii) limits the number of its members to two hundred (except in case of One Person Company):
The clause provides that where two or more persons hold one or more shares in a company
jointly, they shall be treated as a single member:
However following shall not be included in the number of members:
1. persons who are in the employment of the company; and
2. persons who, having been formerly in the employment of the company, were members
of the company while in that employment and have continued to be members after the
employment ceased.
(iii) prohibits any invitation to the public to subscribe for any securities of the company.
There should be at least two persons to form a private company i.e., the minimum no. of
members in a private company is two. A private company should have at least two directors.
The name of a private limited company must end with the words “Private Limited”.
5. Public Company Section 2(71) :
As per Section 2(71),public company is a company which-
1. is not a private company and
2. Seven or more members are required to form the company.
3. a private company which is a subsidiary of a public company shall also be deemed to
be a public company for the purposes of this Act, even where such subsidiary company
continues to be a private company in its articles (three restrictions).

PRELIMINARY 1.6
There should be at least seven persons to form a public company i.e., the minimum no. of
members in a public company is seven. A public company should have at least three directors.
The name of a public limited company must end with the word “Limited”.

SEVERALLY LIABLE IN CERTAIN CASES - SECTION 3A

If at any time the number of members of a company is reduced, in the case of a public
company, below seven, in the case of a private company, below two, and the company carries
on business for more than six months while the number of members is so reduced, every
person who is a member of the company during the time that it so carries on business after
those six months and is cognisant of the fact that it is carrying on business with less than seven
members or two members, as the case may be, shall be severally liable for the payment of
the whole debts of the company contracted during that time, and may be severally sued there
for.”

6. One Person Company Section 2(62):

Definition: As per Section 2(62),one person company is a company which- One Person Company’
means a company which has only one person as a member.
It is basically a private company with some unique features.

As regards the name of a One Person Company, the Act provides that the words “One Person
Company” or ‘OPC’ shall be mentioned in brackets below the name of such Company, wherever
its name is printed, affixed or engraved.
Relaxation for OPC:
a) An OPC is primarily a private company. However, certain provisions which are applicable
to a private company will not apply to an OPC. For instance, only one director is sufficient
(as against two in the case of private company).
b) OPC is not required to hold annual general meeting.
c) Information to be provided in the directors’ report has been significantly reduced (as
compared to a private company).
d) Annual return in other companies shall be signed by director and company secretary and
in case of no company secretary by a practicing company secretary whereas in the case
of OPC annual return shall be signed by company secretary and in case of his absence it
will be signed by director of the company.
e) The requirement of a minimum number of Board meetings to be convened shall not apply
to an OPC having one director. However, in case of OPC having more than one director,
the OPC shall hold at least one meeting of the Board of directors in each half of calendar
year and the gap between two meetings is not less than ninety days.
f) One Person Company need not have a Cash Flow Statement.

Law with respect to formation of OPC provides that—

1. The memorandum of OPC shall indicate the name of the other person, who shall, in the
event of the subscriber’s death or his incapacity to contract, become the member of the
company.
2. The other person whose name is given in the memorandum shall give his prior written
consent in prescribed form and the same shall be filed with Registrar of companies at the
time of incorporation.

1.7 PRELIMINARY
3. Such other person may be given the right to withdraw his consent.
4. The member of OPC may at any time change the name of such other person by giving
notice to the company and the company shall intimate the same to the Registrar.
5. Any such change in the name of the person shall not be deemed to be an alteration of
the memorandum.
6. Only a natural person who is an Indian citizen and resident in India or even a Non-
resident (person who has stayed in India for a period of not less than 120 days during the
immediately preceding one financial year)-
a) Shall be eligible to incorporate a OPC;
b) Shall be a nominee for the sole member of a OPC.
 Amendment by Finance Act, 2021
7. A natural person shall not be a member of more than a OPC at any point of time and the
said person shall not be a nominee of more than a OPC.
8. No minor shall become member or nominee of the OPC or can hold share with beneficial
interest.
9. Such Company cannot be incorporated or converted into a company under section 8 of
the Act. Though it may be converted to private or public companies in certain cases.
10. Such Company cannot carry out Non-Banking Financial Investment activities including
investment in securities of anybody corporate.
11. An OPC can voluntarily convert itself into any kind of company at any time without
meeting any of the criteria’s as to paid up share capital and average annual turnover.
 Amendment by Finance Act, 2021
12. The requirement of compulsory conversion on exceeding the specified turnover or paid-
up capital is done away with and now the One Person Company can grow without any
restriction. Amendment by Finance Act, 2021

7. Small Company Section 2(85):

(Q.1 - Page No: 1.1)
Definition: As per Section 2(85),small company means a company, other than a public company,-
(i) Paid-up share capital of which does not exceed 4 crores rupees or such higher amount as
may be prescribed which shall not be more than ten crore rupees;
and
(ii) Turnover of which as per as per profit and loss account for the immediately preceding
financial year does not exceed 40 crores rupees or such higher amount as may be
prescribed which shall not be more than one hundred crore rupees.

Provided that nothing in this clause shall apply to--

(i) a holding company or a subsidiary company;
(ii) a company registered under section 8; or
(iii) a company or body corporate governed by any special Act. It is basically a private
company meeting prescribed threshold.
Following are some of the important relaxations provided to a small company:
(i) Financial statements of small company may not include the cash flow statement.
(ii) Small company shall be deemed to have complied with the provisions relating to Board
meeting if at least one meeting of the Board of directors has been conducted in each half
of a calendar year and the gap between the two meetings is not less than ninety days.
(iii) Merger or amalgamations between two or more small companies have been simplified
without the requirement of court process.

PRELIMINARY 1.8
 C. BASED ON CONTROL
Holding & Subsidiary Company
8. SUBSIDIARY COMPANY SECTION 2(87)
(Q.6 - Page No: 1.3)
1. As per Section 2(87) provides that a company shall be a subsidiary of another, if any of
the following conditions are satisfied :-
(a) that other controls the composition of its Board of Directors;
(b) that other exercises or-controls more than one-half of the total voting power either
on its own or together with one or more of its subsidiary companies; or
(c) the first-mentioned company is a subsidiary of any company which is that other’s
subsidiary.
Provided that such class or classes of holding companies as may be prescribed shall
not have layers of subsidiaries beyond such numbers as may be prescribed.
2. For the purpose of clause (a) above, the control of the composition of the Board of
directors of a company means that the holding company has power, at its discretion, to
appoint or remove all or majority of the directors of the subsidiary company without the
consent of the other persons.
3. It should be noted that holding and subsidiary companies are incorporated companies
and each is a separate legal entity.
4. For the purpose of this clause, the term ‘company’ includes any body corporate. Thus,
holding and subsidiary relationship can be established between an Indian Company and
a Foreign Company.

9. HOLDING COMPANY SECTION 2(46)

As per Section 2(46), ‘Holding Company’, in relation to one or more other companies, means
a company of which such companies are subsidiary companies.

Subsidiary company not to hold shares in its holding company Section 19 :

(Q.3 - Page No: 1.2) (Q.5 - Page No: 1.2)
Section 19 deals with the restrictions on the subsidiary company with respect to holding of
shares in its holding company and no holding company shall allot or transfer its shares to any
of its subsidiaries companies and any such allotment or transfer of shares of a company to its
subsidiary company shall be void.
Following are the exceptions -
(a) where the subsidiary company holds such shares as the legal representative of a deceased
member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) where the subsidiary company is a shareholder even before it became a subsidiary
company of the holding company.
The subsidiary company referred to in the above exceptions shall have a right to vote
at a meeting of the holding company only in respect of the shares held by it as a legal
representative or as a trustee, as referred to in clause (a) or clause (b) of the said
exceptions.

1.9 PRELIMINARY
10. Associate company Section 2(6)
1. As per Section 2(6), In relation to another company, means a company in which that
other company has a significant influence, but which is not a subsidiary company of the
company having such influence and includes a joint venture company.
2. The expression “significant influence” means control of at least twenty per cent. of total
voting power, or control of or participation in business decisions under an agreement;
3. The expression “joint venture” means a joint arrangement whereby the parties that
have joint control of the arrangement have rights to the net assets of the arrangement;

D. BASED ON CAPITAL

11. Listed company section 2(52):

As per the definition given in the section 2(52), it is a company which has any of its securities
listed on any recognised stock exchange.

Provided that such class of companies, which have listed or intend to list such class of
securities, as may be prescribed in consultation with the Securities and Exchange Board, shall
not be considered as listed companies Companies Amendment Act, 2020
Unlisted company: Means a company other than listed company.

E. OTHER COMPANIES
12. Government Company Section 2(45)
As per Section 2(45), government company means any company in which not less than fifty-
one per cent. of the paid-up share capital is held by-
(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments,
And the section includes a company which is a subsidiary company of such a Government
company;

13. Foreign Company Section 2(42)

As per Section 2(42), foreign company means any company or body corporate incorporated
outside India which-
(i) has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
(ii) conducts any business activity in India in any other manner

14. Company not for profit/Non-Profit companies Section 8

1. Object of formation of Section 8 Company : Section 8 of the Companies Act, 2013 deals
with the formation of companies which are formed to promote the charitable objects
of commerce, art, science, sports, education, research, social welfare, religion, charity,
protection of environment etc.
2. Restrictions on such company:
(i) Such company is prohibited from declaring any dividend to its members
(ii) Such company has to apply its surplus only in promoting its objects

PRELIMINARY 1.10
3. Power of Central government to issue the license :
(i) This section allows the Central Government to register such person or association of
persons as a company with limited liability without the addition of words ‘Limited’
or ‘Private limited’ to its name, by issuing licence on such conditions as it deems
fit. The registrar shall on application register such person or association of persons
as a company under this section.
(ii) Central Government has delegated its powers to the ROC. The Central Government
may revoke such delegation of powers or may itself exercise the powers & functions,
if in its opinion, such course of action is necessary in the public interest.
4. Privileges of Limited Company: On registration the company shall enjoy same privileges
and obligations as of a limited company.
5. A firm may be a member of the company registered under section 8.
6. Alteration of Memorandum and Articles: A company registered under this section shall
not alter the provisions of its memorandum or articles except with the previous approval
of the Central Government.
7. Conversion into any other kind of Company: A company registered under this section may
convert itself into company of any other kind only after complying with such conditions
as may be prescribed. A company registered under section 8 which intends to convert
itself into a company of any other kind shall pass a special resolution at a general
meeting for approving such conversion.
8. A company registered under this section shall amalgamate only with another company
registered under this section and having similar objects.

Revocation of license:
(i) The Central Government may by order revoke the licence of the company where the
company contravenes any of the requirements or the conditions of this sections subject to
which a licence is issued or where the affairs of the company are conducted fraudulently,
or violative of the objects of the company or prejudicial to public interest, and on
revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s
name in the register.
(ii) But before such revocation, the Central Government must give it a written notice of its
intention to revoke the licence and opportunity to be heard in the matter.
(iii) The Central Govt. has delegate to the Regional Directors, subject to the condition that
the Central Govt. may revoke such delegation of powers or may itself exercise the
powers & functions under this section if in its opinion, such course of action is necessary
in the public interest.
(iv) Such order shall be made only after the company is given a reasonable opportunity of
eing heard.
(v) Where a licence is revoked, the Central Government may, by order, if it is satisfied that
it is essential in the public interest, direct that:

1.11 PRELIMINARY
The company has to converts its status and change its name
The company be wound up under this Act

If on the winding up or dissolution of a company registered under this section, after the
satisfaction of its debts and liabilities if any asset remains, they may be transferred to
another company registered under this section and having similar objects, subject to such
conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to the
Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy
Code, 2016
The company be amalgamated with another company registered under this section

Where a licence is revoked and where the Central Government is satisfied that it is essential
in the public interest that the company registered under this section should be amalgamated
with another company registered under this section and having similar objects, then, the
Central Government may, by order, provide for such amalgamation to form a single company
with such constitution, properties, powers, rights, interest, authorities and privileges and
with such liabilities, duties and obligations as may be specified in the order.

Penalty/ punishment in contravention:

If a company makes any default in complying with any of the requirements laid down in this
section, the company shall, be punishable with fine varying from ten lakh rupees to one
crore rupees and the directors and every officer of the company who is in default shall be
punishable or with fine of twenty- five lakh rupees. And where it is proved that the affairs of
the company were conducted fraudulently, every officer in default shall be liable for action
under section 447. Companies Amendment Act, 2020

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

15. Dormant company Section 455:

1. Where a company is formed and registered under this Act for a future project or to hold
an asset or intellectual property and has no significant accounting transaction, such
a company or an inactive company may make an application to the Registrar in such
manner as may be prescribed for obtaining the status of a dormant company.

PRELIMINARY 1.12
2. “Significant accounting transaction” means any transaction other than—
(i) payment of fees by a company to the Registrar;
(ii) payments made by it to fulfil the requirements of this Act or any other law;
(iii) allotment of shares to fulfil the requirements of this Act; and
(iv) payments for maintenance of its office and records.

16. Nidhi company Section 406 :

As per Section 406, a company which has been incorporated as a nidhi with the object of
cultivating the habit of thrift (cost cutting) and savings amongst its members, receiving
deposits from, and lending to, its members only, for their mutual benefits and which complies
with such rules as are prescribed by the Central Government for regulation of such class of
companies.

17. Pubic financial institutions Section 2(72)

As per Section 2(72), following institutions are to be regarded as public financial institutions.
(i) The Life Insurance Corporation of India, established under the Life Insurance Corporation
Act, 1956;

(ii) The Infrastructure Development Finance Company Limited,

(iii) Specified company referred to in the Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002;

(iv) Institutions notified by the Central Government under section 4A(2) of the Companies
Act, 1956 so repealed under section 465 of this Act;

(v) Such other institution as may be notified by the Central Government in consultation with
the Reserve Bank of India:

Provided that no institution shall be so notified unless—

(A) it has been established or constituted by or under any Central or State Act other than
this Act or the previous company law; or

(B) not less than fifty-one per cent of the paid-up share capital is held or controlled by
the Central Government or by any State Government or Governments or partly by the
Central Government and partly by one or more State Governments

1.13 PRELIMINARY
CONVERSIONS OF PRIVATE COMPANY INTO PUBLIC COMPANY AND VICE VERSA (Section 18)

1. Conversion of a Private Company into a 2. Conversion of a Public Company into

Public Company: a Private Company:
1. Pass special resolution for alteration 1. Pass special resolution for alteration
of its articles thereby deleting of its articles thereby adding the three
the three restrictions of a private restrictions of a private company +
company Obtain Central Government Approval
2. Pass special resolution for alteration 2. Pass special resolution for alteration
of its memorandum for changing its of its memorandum for changing
name thereby deleting the word its name thereby adding the word
‘private’ from its name ‘private’ from its name
3. File following documents with ROC 3. File following documents with ROC
within 15 days: within 15 days:
(i) Copy of altered Articles (i) Copy of altered Articles
(ii) Copy of altered Memorandum (ii) Copy of altered Memorandum
4. File copy of the special resolution (iii) Copy of CG Approval
with the Registrar of Companies 4. File copy of the special resolution with
within thirty days from the date of the Registrar of Companies within
passing such resolution in Form No. thirty days from the date of passing
MGT. 14. such resolution in Form No. MGT. 14.
5. The Registrar of Companies shall 5. Registrar of Companies shall register
register and issue fresh certificate and issue fresh certificate of
of incorporation incorporation
6. Further, if the number of members 6. Further, if the number of members
is below 7, steps should be taken to exceeds 200 then steps should be
increase the number of members taken to reduce the number of
to atleast 7 and that the number members to 200.
of directors should be increased to
atleast 3, if they are only 2 directors.

PRELIMINARY 1.14
CONVERSIONS OF PRIVATE COMPANY INTO PUBLIC COMPANY AND VICE VERSA (Section 18)

3. CONVERSION OF OPC TO 4. CONVERSION OF PRIVATE COMPANY TO OPC

PRIVATE/ PUBLIC COMPANY (Section 18)
(Section 18) 1. A private company other than a company
Voluntary conversion registered under section 8 (non-profit
1. OPC can get itself converted company) of the Act by passing a special
into a Private or Public resolution in the general meeting.
company after increasing the 2. Obtain No objection in writing from members
minimum number of members and creditors.
to 2/7 and directors to 2/3 as 3. File copy of the special resolution with the
the case may be. Registrar of Companies within thirty days
2. Pass resolutions for alteration from the date of passing such resolution in
of memorandum and articles Form No. MGT. 14.
3. File an application to the 4. The company shall file an application in
Registrar Form No. INC.6 for its conversion into One
4. The Registrar, who shall Person Company along with fees as provided
after satisfying himself that in the Companies (Registration offices and
the provisions applicable for fees) Rules, 2014, by attaching the following
registration of companies documents, namely:-
have been complied with, (i) The directors of the company shall give
close the former registration a declaration by way of affidavit duly
of the company and issue fresh sworn in confirming that all members
certificate of incorporation and Creditors of the company have
given their consent for conversion,
(ii) The list of members and list of
creditors;
(iii) The latest Audited Balance Sheet and
the Profit and Loss Account; and
5. On being satisfied and complied with
requirements stated herein the Registrar
shall issue the Revised Certificate of
Incorporation, mentioning that now it has
become a One Person Company.

1.15 PRELIMINARY
 02 INCORPORATION OF COMPANY AND
MATTERS INCIDENTAL THERETO

INCORPORATION OF COMPANY AND 2.1

MATTERS INCIDENTAL THERETO
 PROMOTER

Meaning: A promoter is a one (i.e. individual firm, company etc.) who performs the preliminary duties necessary to bring
the company into being and float it, i.e. who brings the company into existence.

(Individual/Co.) Promoter - Section 2(69) means

Who conceives (a) (b) (c)

the IDEA of who has been who has control in accordance with
Business named as such over the affairs whose advice,

2.2
in a prospectus of the company, directions or
or is identified directly or instructions the
by the company indirectly whether Board of Directors
in the annual as a shareholder, of the company is
return referred director or accustomed to act.
to in section 92; otherwise; or
or

A person who merely acts in a professional capacity on behalf of the promoter,

such as a solicitor or an accountant and who is paid by him is not a promoter.

MATTERS INCIDENTAL THERETO

INCORPORATION OF COMPANY AND
 PRE — INCORPORATION / PRELIMINARY / PROMOTERS’ CONTRACT

Pre-incorporation Contracts are contracts purported to be made on behalf of a company before its incorporation. Before

MATTERS INCIDENTAL THERETO

INCORPORATION OF COMPANY AND
incorporation, a company is non- existent and has no capacity to contract.

Post Incorporation

2.3
(1) OR (2)
Contract Adopted By Contract Not Adopted By
Company Company

Company Liable for Breach Promoter Liable for Breach

 INCORPORATION OF COMPANIES [SECTION 7 READ WITH COMPANIES (INCORPORATION) RULES, 2014]
8 steps
“Procedure of incorporation” 7 submission of documents

1st 2nd 4th

3rd
Selection Preliminary requirement Preparation of MOA/AOA
Reservation of name
of type of regarding 1st director
company
Any of the promoters should apply to the Registrar Drafting of the MOA and AOA is
• Every director to of Companies (ROC) regarding the reservation of generally a step subsequent to the
The promoters of have a DIN.
a company may name. reservation of name made by the
• Atleast 1 Registrar. MOA and AOA shall be in
select the type
director to have the respective forms as specified in
of a company as An application for reservation of name shall be
DSC. Schedule - I.
they wish to form made by using web service SPICe+ (Simplified
themselves Proforma for Incorporating Company Electronically These two documents are basically

2.4
Plus: INC-32), and for change of name by using web the charter and internal rules
service RUN (Reserve Unique Name) along with fee and regulations of the company.
1. Pub. Co. OR
+ Rs. 1000/- fees Therefore, it must be drafted with
2. Pvt. Co. OR
utmost care and with the advice of
3. OPC OR Maximum 6 names.
the experts and the ancillary clause
4. Sec 8 Co. OR
for attainment of the main object
5. Nidhi Co.
i) the Registrar may, on the basis of information clause should be drafted in a very
and documents furnished along with the broader sense.
All other type of application:
ii) reserve the name for a period of 20 days
company are only TABLE A - MOA
from the date of approval
status and cannot iii) Provided that in case of an application for TABLE F - AOA
be incorporated. change of its name by an existing company,
the Registrar may reserve the name for a
period of 60 days from the date of approval.

MATTERS INCIDENTAL THERETO

iv) After 20/60 days, if documents for

INCORPORATION OF COMPANY AND

incorporation are not filed with the Registrar,
the reservation made by the Registrar shall
lapse automatically.
 5th 6th 7th 8th
Filing of document with ROC COI + CIN Effect of Commencement of business
registration
An application shall be filed, with the Registrar of Companies 10A Commencement of Business etc.
within whose jurisdiction the registered office of the company is If the Registrar (1) A Company incorporated after the commencement
of Companies SECTION 9
proposed to be situated of Companies (Amendment) Act, 2019 and having
is satisfied that a share capital shall not commence any business
everything has On registration or exercise any borrowing powers unless-
OPC – INC -2 been complied subscribers (a) A declaration is filed by a director within a
Other Co. – INC -7 with in regard to period of 1 0 days of the date of incorporation
incorporation of become of company in such form and verified in such

MATTERS INCIDENTAL THERETO

companies, he shall members an manner as maybe prescribed, with the Registrar

INCORPORATION OF COMPANY AND

Within 20 days of name reservation. issue a certificate all features of that every subscriber to the memorandum has
of incorporation in Co. become paid the value of the shares agreed to be taken
Form No. INC.11, by him on the date of making of such declaration
a. MOA+AOA duly signed by all subscribers to MOA (1st shareholders) normally within 7 applicable.
b. Declaration in INC-8: by Advocate/CA/CS/CWA in practice, who is days of the receipt (b) The company has filed with registrar a verification
engaged in the formation of the company of its registered office as provided in section 12

2.5
of documents, 2) If any default is made in complying with the
+ to the company requirements of this section the company shall
Director/Manager/Secretary That all the requirements of this Act and signed & dated be liable to a penalty of 50,000 and every officer
the rules made there under in respect of registration and matters under his hand. who is in default shall be liable to a penalty of
precedent or incidental thereto have been complied with. 1000 for each day during which such default
c. Declaration in INC-9: subscriber + All first directors –No conviction continues but not exceeding an amount of
in Preceding 5 years. of any offence in connection with the promotion, 1,00,000
formation or management of any company, or guilty of any fraud or 1. COI does not legalize any illegal (3) Where no declaration has been filed with the
misfeasance or of any breach of duty to any company under this Act object clause. In fact, it is for registrar under clause (a) of sub-section (1) within
the incorporation only that the a period of 180 days of the date of incorporation
d. DIR-12: All subscribers + All 1st Directors (DIN) – PAN + Passport certificate is made conclusive
e. DIR-12 : First directors consent + interest in other firm/body of the company and the registrar has reasonable
evidence by the legislature. cause to believe that the company is not carrying
corporate. 2 Date on COI & not date of signing
f. The address for correspondence till its registered office is established on any business or operations,
by registrar to be considered for he may, without prejudice to the provisions of
g. INC-22: Verification of registered office. incorporation. subsection (2), initiate action for the removal of
the name of the company from the registrar of
companies under Chapter XVIII
1. Registered agreement of purchase. OR
2. Notarized rent agreement along with a copy of rent paid receipt not older than one month. OR
3. Authorization letter from owner to use the premises by the company as its registered office. AND
4. Latest 2 months utility bills.
5. There shall be attached to Form INC-22 the list of all other companies with their CIN, if any, having the same unit/tenement/premises as their registered office
address.
 EFFECT OF FURNISHING OF FALSE OR INCORRECT INFORMATION OR SUPPRESSION OF MATERIAL FACT [Section 7]

Furnishing false/ Incorrect Information OR Suppression of Material facts:

During Incorporation After Incorporation

Any person Found Liable Promoter, Director, Person who

has Filed Documents with ROC
Penalty u/s 447
Penalty u\s 447

AND

2.6
On Application to NCLT following order:
i. Pass such orders, as it may think fit, for regulation
of the management of the company including,
Alter MOA/AOA
OR
ii. Direct that Liability of members to be Unlimited
OR
iii. Removal of Name of Co from ROC.
OR
iv. Pass an order for the winding up of the company

MATTERS INCIDENTAL THERETO

Subject to OOBH by NCLT

INCORPORATION OF COMPANY AND

 MEMORANDUM OF ASSOCIATION

Definition and Meaning of Memorandum: “Memorandum” means memorandum of association of a company as originally
Section 2(56) of the Companies Act, 2013. framed or as altered from time to time in pursuance of any previous companies’
law or of this Act.

The memorandum of association is a document, which contains the fundamental provisions of the company’s constitution.
It defines as well as confines the powers of the company. It not only shows the objects of formation but also determines the
utmost possible scope of its operations beyond which its action cannot go.
Purpose of The purpose of memorandum is two-fold.
Memorandum: 1. The Prospective shareholder who contemplates the investment of his savings, should know the field

MATTERS INCIDENTAL THERETO

in, or the purpose for which it is going to be used and what risk he is taking in making the investment.

INCORPORATION OF COMPANY AND

2. Outsiders or Creditors dealing with the company will know without reasonable doubt whether the
contractual relation into which he contemplates entering with the company is one relating to a
matter within its corporate objects.

2.7
Form of • Table A = companies limited by shares;
Memorandum • Table B = companies limited by guarantee and not having a share capital;
[Section 4]: • Table C = the companies limited by guarantee and having a share capital;
• Table D = unlimited companies and not having a share capital;
• Table E = unlimited companies and having a share capital.

Printing and Signing of Memorandum [Section 4]: The memorandum of association must be
a. Printed,
b. Divided into paragraphs, numbered consecutively and Signed by each subscriber (7 in the case of a public company; 2
in the case of a private company and 1 in the case of OPC) in the presence of at least one witness who shall attest the
signatures of the subscribers.
Both artificial and natural persons can subscribe to memorandum.

Contents of Memorandum: Section 4 of the Companies Act provides that the memorandum of association of every company must
contain the following clauses:-
1. Name Clause 2. Situation or Registered Office Clause
3. Objects Clause 4. Liability Clause
5. Capital Clause (only in the case of a company having a share capital) 6. Association Clause/Subscription Clause
7. Succession Clause (only in the case of OPC)
 “MOA of a Company” –Section 2(56)
Charter/Constitution of Co. , Divided into Paragraphs, Signed by 1/2/7 subscribers in case of OPC/Pvt./Public Co. + 1 Witness, 7 clauses

1st 2nd 3rd 4th 5th 6th 7th

Name Clause Situation Clause Object Clause Liability Clause Capital Clause Association/ Succession/
(read with Subscription Nomination
Voluntary Alteration • Within city • No Section 66) clause clause
Purpose for Liability of members:
- SR (Sec 13) • Different city alteration incorporation of 1. Limited by shares
Compulsory same state of MOA Company 2. Limited by 1. Authorized 1. MOA to be • Only for
Rectification- OR • Different • MGT-14 guarantee share capital signed by OPC
city same • INC 22 3. Unlimited 2. Types of share subscribers. • Mention
(Sec 16) 2. Each subscriber
different ROC • Postal Alteration: capital name of
1. Equity to purchase nominee
Ballot • S.R. Alteration:
2. Preference atleast 1 share.
• RUN – 6 names • Different • MGT-14 within • In general 3. Mention name
• Within 60 days liability clause 3. Nominal value
State/UT 30 days of share and no. of
complete other cannot be

2.8
• ROC to register shares of every
filings. altered. subscriber.
• Alteration of MOA alteration
• Fresh COI • As per Sec. 18: Alteration Section 61
• MGT-14 within • Fresh COI by New within 30 days.
state ROC Alteration of • Authorization in AOA +
30 days
• MGT-14 liability clause • O.R. of members. + No alteration of these
To protect minority possible when • SH-7 within 30 days Sec 64.
• INC 22 interest read with clauses of MOA
change in form of
Section 27 company.
Methods of Alteration:
COI contains ONLY 3INFO. a. Increase in authorised capital
1. Name – Can be altered For listed public co. SEBI b. Diminution in authorised capital
2. State – Can be altered Regulates dissenting shareholders c. Consolidation of shares
3. Date of incorporation – Cannot to be given exit option. d. Sub-division of shares
be altered (Dissenting shareholders who do e. Conversion of shares to stock or
not agree to alteration in object) vicesersa

MATTERS INCIDENTAL THERETO

No change in voting in point 'c' and

INCORPORATION OF COMPANY AND

'd' without NCLT Approval.
 NAME CLAUSE
1. The first clause in the memorandum must state the name by which a company is known.
2. It may be noted that the name of a company shall not be identical with or too nearly
resembles the name of an existing company.
3. It further provides that no company shall have a name which, in the opinion of the
Central Government, is undesirable.
4. The name should not be such that its use by the company will constitute an offence
under any law.
5. The object is to prevent the use of name likely to mislead the public. For example, a
company will not be allowed to use a name, which is prohibited under the Emblems and
Names (Prevention of Improper Use) Act, 1950.
6. Unless the previous approval of the Central Government is obtained, a company shall
not be registered with a name which contains any word or expression which suggest of
any connection with Government or of State patronage or which contain such word or
expression, as may be prescribed.

Change of Name [Section 13] :

(Q.1- Page No : 2.1)
1. The name of the company can be changed by a special resolution and with the written
approval of the Central Government.
2. The powers of the Central Government for approving change in the name have been
delegated to the Registrar of Companies.
3. Approval of the Central Government is not necessary if the change relates to the addition/
deletion of the word ‘private’ to the name.
4. Form MGT.14 shall be filed to the Registrar of Companies within 30 days of passing the
special resolution. Further, a copy of the approval of the Central Government shall also
be filed with ROC.
5. Because of the aforesaid reasons, for adopting the new name, the company shall have
to follow the same procedure as is applicable for reservation of name at the time of
incorporation of a company.
6. In case of an application for reservation of name or for change of its name by an existing
company, the Registrar may reserve the name for a period of 60 days from the date of
approval

INCORPORATION OF COMPANY AND 2.9

MATTERS INCIDENTAL THERETO
Rectification of Name (Sec. 16)
(Q.2- Page No: 2.1)

16(1)(a) Central Government 16(1)(b) The registered proprietor of a trade mark that
gives directions to the the name is identical with or too nearly resembles to
company suomoto to rectify an existing trade mark makes an application to Central
its name if in its opinion, the Government.
name registered is identical
with or too nearly resembles Central Government gives directions to company to
the name, by which a rectify the name on the basis of application received
company in existence has
been previously registered. The company- shall change its name within a period of
3 months from the issue of such directions after passing
The company- shall change an ordinary resolution.
its name within a period of  Companies Amendment Act, 2020
3 months from the issue of 
such directions after passing A registered trade mark owner has to file an application
an ordinary resolution. to the Central Government for rectification of name
which is similar to name of its trade mark within 3
years of incorporation of company or change of name.

16(2) Where a company changes its name or obtains a new name, it shall within a period of
15 days from the date of such change, give notice of the change to the Registrar along with
the order of the Central Government, who shall carry out necessary changes in the certificate
of incorporation and the memorandum.

16(3) If a company is in default in complying with any direction given under sub-section (1),
the Central Government shall allot a new name to the company in such manner as may be
prescribed and the Registrar shall enter the new name in the register of companies in place
of the old name and issue a fresh certificate of incorporation with the new name, which
the company shall use thereafter: Provided that nothing in this sub-section shall prevent a
company from subsequently changing its name in accordance with the provisions of section
13."
 Companies Amendment Act, 2020

It may be noted that whenever there is a change in the name of accompany because of any
reason whatsoever, the new name becomes effective, only after the issue of revised or fresh
certificate of incorporation by the ROC.

2.10 INCORPORATION OF COMPANY AND

MATTERS INCIDENTAL THERETO
 SITUATION OR REGISTERED OFFICE CLAUSE
The name of the State in which the registered office of the company is to be situated must be given in the memorandum. But the
exact address of the registered office is not required to be stated therein.
As per Section 12, a company shall, on and from the 30th day of its incorporation, shall have a registered office.
The company shall furnish to the Registrar verification of its registered office within a period of 30 days of its incorporation.
Methods of shifting of Registered Office within same state: (Q.16-Page No: 2.9)

Change within the local Change from one city to another Change from one city to another within the same State involving change of
limits of same town within the same State and which does jurisdiction of Registrar of Companies [Sec. 12]:
[Sec. 12]: not involve the change of jurisdiction

MATTERS INCIDENTAL THERETO

A special resolution has to be passed in the general meeting of the company.

INCORPORATION OF COMPANY AND

A company can change of Registrar of Companies, [Sec.
its registered office from 12]:
one place to another Apply to Regional Director for approval
within the local limits of A special resolution has to be
the city, town or village, Regional Director shall communicate within a period of 30 days from the date
passed in the general meeting of
where it is situated

2.11
the company. The special Resolution of receipt of application
by passing a Board
Resolution. shall be passed by Postal Ballot in
case of public company. The company shall file the confirmation with the Registrar within a period of 60
Form No. MGT.14 shall days of the date of confirmation
be filed to the Registrar Form No. MGT.14 shall be filed to
of Companies within 30 the Registrar of Companies within
days of passing the BOARD 30 days of passing the special ROC shall register the same and certify the registration within a period of 30
resolution. resolution. days from the date of filing of such confirmation.
Also within 30 days of the change of
the registered office, a notice to the Form No. MGT.14 shall be filed to the Registrar of Companies within 30 days of
A notice of the change Registrar should be given of the new
is to be given to the passing the special resolution.
location of the office in Form No.
Registrar of Companies
INC.22.
in Form INC.22 within 30 Also within 30 days of the change of the registered office, a notice to the
days of such change.
This change of registered
office also does not involve Registrar should be given of the new location of the office in Form No. INC.22.
This change of
registered office does alteration of memorandum. This change of registered office also does not involve alteration of memorandum.
not involve alteration
of memorandum.
 (Q.14 - Page No: 2.7)
Change from one State to another State [Sec.13]

Step 1. Step 2. Step 3. Step 4.

A special Apply to Central Central Government shall communicate within \File following documents
resolution has to Government for a period of 60 days from the date of receipt of with Registrar of both
be passed in the approval application states:
general meeting The Central Government, before passing its a) A certified copy of
of the company. order, may satisfy itself that the alteration has the order of the
the consent of the creditors, debenture-holders Central Government
and other persons concerned with the company approving the
or that the sufficient provision has been made by alteration for

2.12
the company either for the due discharge of all its change.
debt and obligations or that adequate security has b) Altered copy of MOA
been provided for such discharge.

Step 5. Step 6.
Step 7.
The ROC of the State where Also Form No. MGT.14 shall be filed to the Registrar
This change of
the registered office is being of Companies within 30 days of passing the special
registered office
shifted to, shall issue a fresh resolution. Also within 30 days of the change of the
INVOLVES alteration of
certificate of incorporation registered office, a notice to the Registrar should be given
memorandum.
indication the alteration. of the new location of the office in Form No. INC.22.

MATTERS INCIDENTAL THERETO

INCORPORATION OF COMPANY AND
 Important Judgments
A State Government cannot oppose shifting of the registered office of a company from
one state to another on the ground that by this change the State would be deprived of its
revenue. The question of loss of revenue to one state would have to be considered in the
context of total revenue of the Republic of India and in the interest of the country as a
whole.

It was held that employees’ union, which is a registered body and which represents quite
a number of the employees employed at a registered office of the company, has the right
to appear and to oppose the application made to the Central Government u/s 13 on the
ground that their interests would be likely to be prejudicially affected if such special
resolution would be confirmed by the Central Government

OBJECT CLAUSE
It determines the purpose and the capacity of the company. It indicates the purpose for which
the company has been set up and its actual capability, besides its sphere of activities.
The object clause of memorandum shall state “the objects for which the company is proposed
to be incorporated and any matter considered necessary in furtherance thereof”.
The subscribers to the memorandum of association enjoy almost unrestricted freedom to
choose the objects. The only restriction is that objects should not be illegal and against the
provisions of the Companies Act, 2013.

Alteration of Object Clause (Section 13)

A special resolution has to be passed in the general meeting of the company. The special
Resolution shall be passed by Postal Ballot in case of public company.

Form No. MGT.14 shall be filed to the Registrar of Companies within 30 days of passing the
special resolution + Altered Memorandum

The ROC shall register the same and certify the registration under his hand within 30 days
from the date of filing of such documents. The effective date of alteration of object clause is
the date when the Registrar of Companies registers the alteration.

Read with Section 27 (Listed Public Company Only)

To protect the minority interest, restriction has been imposed on the change of object
clause. Now a company, which has raised money from public through prospectus and still has
any unutilized amount out of the money so raised, shall not change its object for which it
raised the money through prospectus unless:
(i) a special resolution is passed by the company,
(ii) An exit option is given to the dissenting shareholders in terms of the regulations prescribed
by SEBI and
(iii) Prescribed details are published in one English and one vernacular language newspapers
which is in circulation at a place where registered office of the company is situated and
also placed on company’s website indicating justification for such change.

INCORPORATION OF COMPANY AND 2.13

MATTERS INCIDENTAL THERETO
 LIABILTY CLAUSE
The fourth clause of memorandum of every company must state whether the liability of its
members is limited by shares or limited by guarantee or is unlimited.
In a company limited by shares, no member can be called upon to pay more than what remains
unpaid. If his shares are fully paid-up, his liability is nil.
In a company limited by guarantee, the liability clause will state the amount, which each
member should undertake to contribute to the assets of the company in the event of liquidation
of the company. He cannot be called upon to pay anything before the company goes into
liquidation.
In an unlimited company, the clause shall specify that the liability of members is unlimited
and can extend to personal assets of the members.

Alteration of Liability Clause

In general, liability clause of a company cannot be altered.
However, Section 18 permits a company of any class registered under this Act to convert itself
in some other class of company by altering its memorandum and articles of association.
By using these provisions, if an unlimited company gets converted into a limited company or
vice-versa, the liability of the members will be changed and thereby leading to alteration of
liability Clause of memorandum.

CAPITAL CLAUSE(ONLY IN THE CASE OF A COMPANY HAVING A SHARE CAPITAL):

This clause must state the amount of the capital with which the company is registered.
The shares into which the capital is divided must be of fixed value, which is commonly known
as the nominal value of the share.
The capital is variously described as “nominal”, “authorised” or “registered”.

Power of Limited Company to alter its share capital (Section 61)

(1) A limited company having a share capital may, if so authorised by its articles, alter its
memorandum in its general meeting to-
(a) increase its authorised share capital by such amount as it thinks expedient;

(b) consolidate and divide all or any of its share capital into shares of a larger amount
than its existing shares:

Provided that no consolidation and division which results in changes in the voting
percentage of shareholders shall take effect unless it is approved by the Tribunal on an
application made in the prescribed manner;

(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock
into fully paid-up shares of any denomination;

(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed
by the memorandum, so, however, that in the sub-division the proportion between
the amount paid and the amount, if any, unpaid on each reduced share shall be the
same as it was in the case of the share from which the reduced share is derived;

2.14 INCORPORATION OF COMPANY AND

MATTERS INCIDENTAL THERETO
 (e) cancel shares which, at the date of the passing of the resolution in that behalf,
have not been taken or agreed to be taken by any person, and diminish the amount
of its share capital by the amount of the shares so cancelled.

(2) The cancellation (Diminution) of shares under sub-section (1) shall not be deemed to be
a reduction of share capital under section 66.

ASSOCIATION CLAUSE AND SUBSCRIPTION CLAUSE

In this clause, the persons (includes a body corporate) subscribing to the memorandum declare
their desire to be formed into a company and agree to take the shares indicated opposite
their respective names.
Following are the statutory requirements regarding subscription of memorandum:-
(i) The memorandum must be signed by each subscriber in the presence of at least one
witness who must attest the signatures;
(ii) Each subscriber must take at least one share; if any and
(iii) Each subscriber must write opposite his name the number of shares (if any) which he
agrees to take.

SUCCESSION CLAUSE (ONLY IN THE CASE OF OPC):

This clause shall state the name of the person who, in the event of the death of the subscriber,
shall become the member of the company.
Any such change in the name of the person shall not be deemed to be an alteration of
the memorandum as the whole process of alteration of memorandum is not required to be
followed.
The above clauses are compulsory and are designated by the Companies Act as "conditions",
on the basis of which alone a company is incorporated

INCORPORATION OF COMPANY AND 2.15

MATTERS INCIDENTAL THERETO
 Reduction of share capital – Section 66
“AND REDUCED” written in B/s

As a principle of sound financial management, a company is required to keep its capital intact. At times, however, it may become
necessary for the company to bring about a reduction in its capital. Accumulated business losses, assets of reduced or doubtful
value like unsound investments proving bad or having paidup capital in excess of the requirements of the company or surplus
capital which cannot be employed gainfully, require corrective measures to be taken to keep the financial health of the company
in a reasonably well position. Accordingly, the company may find it necessary to reduce its share capital. Section 66 deals with the
reduction of share capital. The provisions are stated as under:

Reduction of Share Capital by Special Resolution to be confirmed by Tribunal:

Section 66 (1) provides that subject to confirmation by the Tribunal on an application by the company, a company limited by shares
or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in
particular, may—
(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up;
Example : In respect of a share of ` 10, a company has called only ` 7 per share and the same has been paid by all the
shareholders. The company decides not to call remaining ` 3 per share and reduces its shareholders’ liability. If done, the
company is said to have reduced its share of `10 to ` 7 as fully paid-up share.

2.16
(b) either with or without extinguishing or reducing liability on any of its shares,—
(i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or
(ii) pay off any paid-up share capital which is in excess of the wants of the company,

The company shall also alter its memorandum by reducing the amount of its share capital and of its shares accordingly.
Reduction not permitted: Section 66 (1) further Provides that no such reduction
shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement
of this Act, or the interest payable thereon.

Approvals:
1. S.R. of members + MGT-14 within 30 days.
2. NCLT Approval. Sec 66(3)

NCLT shall give notice to: Sec 66(2)

To give representation to NCLT
3. CG

MATTERS INCIDENTAL THERETO

within 3 months

INCORPORATION OF COMPANY AND

4. Registrar (ROC)
5. SEBI (in case of listed company)
6. Creditors If no reply assumed, no objection
 7. Approval of NCLT to publish in newspaper. Sec 66(4)

8. Exemption to Buy-Back: According to Section 66 (6), nothing in this section shall apply to buy-back of its own securities
by a company under Section 68.

9. No Liability of Members: Section 66 (7) states that a member of the company, past or present, shall not be liable to any call
or contribution in respect of any share held by him exceeding the amount of difference, if any, between the amount paid
on the share, or reduced amount, if any, which is to be deemed to have been paid thereon, as the case may be, and the
amount of the share as fixed by the order of reduction.

MATTERS INCIDENTAL THERETO

10. In case where Creditor is entitled to object but was not included in the list of Creditors: According to Section 66 (8),

INCORPORATION OF COMPANY AND

where the name of any creditor entitled to object to the reduction of share capital under this section is, by reason of his
ignorance of the proceedings for reduction or of their nature and effect with respect to his debt or claim, not entered
on the list of creditors, and after such reduction, the company commits a default, within the meaning of section 6 of the
Insolvency and Bankruptcy Code, 2016, in respect of the amount of his debt or claim-

2.17
(a) every person, who was a member of the company on the date of the registration of the order for reduction by the
Registrar, shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount
which he would have been liable to contribute if the company had commenced winding up on the day immediately
before the said date; and
(b) if the company is wound up, the Tribunal may, on the application of any such creditor and proof of his ignorance as
aforesaid, if it thinks fit, settle a list of persons so liable to contribute, and make and enforce calls and orders on the
contributories settled on the list, as if they were ordinary contributories in a winding up.

11. Liability of Officers: Section 66 (10) deals with the liability of defaulting officers. Accordingly, if any officer of the company—
(a) knowingly conceals the name of any creditor entitled to object to the reduction;
(b) knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
(c) abets or is privy to any such concealment or misrepresentation as aforesaid, he shall be liable under Section 447.
 Difference between diminution of share capital and reduction of share capital:

Diminution of share capital(Sec 61) Reduction of share capital (Sec 66)

1. Affects Authorised share capital 1. Affects Paid up share capital
2. Ordinary Resolution 2. Special Resolution
3. No NCLT Approval required 3. NCLT Approval required
4. Balance Sheet is not affected 4. Balance Sheet is affected
5. Interest of creditors is not affected 5. Interest of creditors is affected
6. The words “And reduced” are not 6. The words “And reduced” are to be
be used used

Notice to be given to Registrar for Alteration of share capital (Section 64)

(1) Where-

2.18
(a) A company has power to Alter its Capital Clause as per Section 61
(b) As per order of CG under Section 62 to Convert Debentures/Loans into Shares of a Company
(c) Redemption of Preference Shares as per section 55
Company Shall file with ROC form SH -7 within 30 days Along with Altered MOA

(2) Where any company fails to comply with the provisions of sub-section (1), such company and every officer who is in
default shall be liable to a penalty of 500 rs for each day during which such default continues subject to a maximum of
five lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.
 Companies Amendment Act, 2020

MATTERS INCIDENTAL THERETO

INCORPORATION OF COMPANY AND
 ARTICLES OF ASSOCIATION
The articles of a company are its by — laws or rules and regulations that govern the management of its internal affairs and the
conduct of its business. The articles of a company are sub—ordinate to and are controlled by the memorandum of association.
The memorandum lays down the scope and powers of the company and the articles govern the ways in which the objects of the
company are to be carried out.
Definition and Meaning of Articles Section 2(5) of the Companies Act, 2013:
'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 or of this Act.
Form and Schedule I

MATTERS INCIDENTAL THERETO

INCORPORATION OF COMPANY AND
Contents Table F = companies limited by shares;
of
Articles Table G= is applicable to companies limited by guarantee and having a share capital;
[Section Table H = companies limited by guarantee and not having a share capital;
5]:

2.19
Table I= unlimited companies and having a share capital;
Table J = unlimited companies and not having a share capital.

COPIES OF MEMORANDUM, ARTICLES, ETC., TO BE GIVEN TO MEMBERS (SECTION 17)

(Q.9 - Page No: 2.5)
According to section 17 every company on being so requested by a member, shall send copies of the following documents within
seven days of the request on the payment of fees—
(a) the memorandum;
(b) the articles; and
(c) every agreement and every resolution referred in section 117 (Resolutions and agreements to be filed), if and in so far
as they have not been embodied in the memorandum or articles. In case of default, the company and every officer who
is in default shall be liable for each default, to a penalty of one thousand rupees for each day during which such default
continues or one lakh rupees, whichever is less.
 (Q.13- Page No : 2.7)
Articles of Association (AOA): (Q.7-Page No:2.4)
(Q.15-Page No:2.8)
1 2 3 4 5 6 7

It is Section 5 Section 6 Section 10 Section 14 Section 14 Section 15

ENTRENCHMENT ACT TO OVERRIDE MOA PROVISIONS FOR LIMITATION ON
By - Laws/ EFFECT OF ALTERATION
PROVISION AND AOA ALTERATION OF
REGISTRATION OF ALTERNATION OF
ARTICLES: TO BE NOTED
rules/regulations AOA:
Articles may contain Section 6 provides that MOA & AOA However, where articles
provision for the provisions of the are altered in such a IN EVERY COPY
entrenchment to sections of Companies way that it has the 1. AOA must Not
Which Govern the effect that the Act, 2013 shall have On Registration effect of converting a
Conflict with Every
specified provisions of overriding effect over public company into a alteration
Internal Affairs MOA & AOA are MOA
articles can be altered the provisions contained private company then made in the
& Conduct of only if the more in memorandum and Like contract approval of the Central 2. It must Not be memorandum
restrictive conditions articles of the company, Government is also or articles of
which Bind Co. & inconsistent
Business or procedures as Any provision, contained required, in addition to a company
members with shall be noted
compared to those in the memorandum special resolution. in every
applicable in case or articles, which is provisions of copy of the

2.20
Made for Insiders: of special resolution contrary to the provisions Every alteration of the Co. Act /other memorandum
However, Nothing or articles,
are met or complied of the Act, shall be void. articles and a copy of Law.
1. BOD with. written in MOA/ the order of the Central as the case
3. It must be may be. If
Such provision for It may, however, be noted Government approving a company
2. Employees AOA can bind Bonafide for
entrenchment in the that the provisions of the the alteration shall be makes any
3. Existing articles shall only be articles will prevail over a Co against filed with the Registrar, Benefit of Co. default in
made either the provisions of the Act, outsiders together with a printed complying
as a whole.
Shareholders provided they are more copy of the altered with the
4. Must Not be stated
1. On Incorporation stringent or more strict articles, within a period provisions, the
OR than what is specified in For that outsider of 15 days. iIlegal/Against
as per company and
2. Subsequently by the Act and that there Public Policy. every officer
needs to have who is in
Schedule I Alteration of AOA:- is no inconsistency with By Special resolution 5. If cannot
Pub Co. 75% votes the provisions of the Act. separate AND default shall
provide for be liable to
Pvt. Co. 100% votes contract with the MGT-14 within 30 days a penalty of
Expulsion of
Table F one thousand
Co. Altered copy of AOA to members rupees
Co-Limited eg:- Law Officer. by filed with ROC in 15 for every
copy of the

MATTERS INCIDENTAL THERETO

days
memorandum

INCORPORATION OF COMPANY AND

by Shares
or articles
issued
without such
alteration.
 Doctrines (Q.12-Page No:2.6)

Ultra Vires Constructive Notice Indoor Management

i) The meaning of the term 'ultra

vires' is 'beyond the powers of. i) When the memorandum and i) While persons dealing with a company are presumed to have
Anything which is outside the articles of association of a read the public documents and understood their contents
specified objects and powers or company are registered, they and ascertain that the transaction is not inconsistent
not reasonably incidental to or become public documents therewith, they are entitled to assume that the provisions
necessary for the attainment of of the articles have been observed by the officers of the
and are open to inspection by
objects of the company is ultra company.
vires the company and therefore is anyone on payment of nominal
fee. Hence, every person ii) It is no part of the duty of an outsider to see how the
void.
ii) An act, which is ultra vires the dealing with the company company carries out its own internal proceedings or indoor

MATTERS INCIDENTAL THERETO

is under an obligation to management. He can assume that all is being done regularly.

INCORPORATION OF COMPANY AND

company, does not bind the
company and neither the company know the contents of these iii) The doctrine of indoor management, thus, imposes
nor the other contracting party can documents. an important restrictions on the scope of doctrine of
sue on it. ii) Doctrine of “constructive constructive "notice. While the doctrine of “constructive
iii) An act which is ultra vires the notice” protects the company notice” seeks to protect the company against the outsiders,
company being void, cannot against the outsiders the principle of indoor management operates to protect the

2.21
be ratified by the shareholders iii) This Doctrine operates as dark outsiders against the company.
of the company. cloud for the outsiders iv) This doctrine is silver lining to doctrine of constructive
notice
iv) Sometimes, act which is ultra
vires can be regularised by Royal British Bank v. Turquand
ratifying it subsequently.
For instance, if the act is ultra the directors of a banking company were authorized by the articles to borrow on bonds such sums of money as should
vires the power of the directors, from time to time by resolution of the company in general meeting, be authorized to borrow. The directors gave a bond to
the shareholders can ratify it; if Turquand without the authority of any such resolution. The shareholders claimed that there had been no such resolution
it is ultra vires the articles of the authorizing the loan and therefore it was taken without their authority. Once it was found that the directors could borrow
company, the company can alter subject to a resolution, Turquand had the right to conclude that the necessary resolution must have been passed.
the articles;
It was held that Turquand could sue the company on the bond as he was entitled to assume that the necessary resolution
Ashbury Railway Company Ltd. vs. Riche has been passed.
Ashbury Railway Carriage and Iron Com-
pany Ltd’s memorandum, said its ob- Exceptions : The doctrine of indoor management is subject to the following exceptions or limitations:-
jects were "to make and sell, or lend on
hire, railway-carriages " The directors 1. Knowledge of irregularity: In case this ‘outsider’ has actual knowledge of irregularity within the
entered into a contract with Riche to fi- company, the benefit under the rule of indoor management would no longer be available. In fact,
nance the construction of railway line. he/she may well be considered part of the irregularity.
The shareholders later rejected the con- 2. Negligence: If, with a minimum of effort, the irregularities within a company could be discovered,
tract as ultravires. the benefit of the rule of indoor management would not apply. The protection of the rule is also
The court held that the contract was ul- not available where the circumstances company does not make proper inquiry.
travires and therefore null and void. 3. Forgery: The rule does not apply where a person relies upon a document that turns out to be
forged since nothing can validate forgery. A company can never be held bound for forgeries
committed by its officers.
 SERVICE OF DOCUMENTS [SECTION 20]
(Q.5-Page No:2.3)
Section 20 of the Companies Act, 2013, provides the mode in which documents may be served
on the company, on the members and also on the registrars.

(1) Serving of document to company: (2) Serving of document to registrar

A document may be served on a or member: Save as provided in
company or an officer thereof by this Act or the rules made there
sending it to the company or the under for filing of documents with
officer at the registered office of the Registrar in electronic mode,
the company by- a document may be served on
1. registered post, or Registrar or any member by sending
2. speed post, or it to him by—
3. courier service, or 1. registered post, or
4. leaving it at its registered 2. speed post, or
office, or 3. courier, or
5. means of such electronic 4. by delivering at his office or
or other mode as may be address, or
prescribed: 5. by such electronic or other
mode as may be prescribed:
However, where securities
are held with a depository, However, a member may request for
the records of the beneficial delivery of any document through a
ownership may be served by particular mode, for which he shall
such depository on the company pay such fees as may be determined
by means of electronic or other by the company in its annual general
mode. meeting.

Exemption-Section 20 (2) shall apply to a Nidhi Company, subject to the modification that in
the case of a Nidhi, the document may be served only on members who hold shares of more
than ` 1,000 in face value or more than 1%, of the total paid-up share capital of the Nidhis
whichever is less.
For other shareholders, document may be served by a public notice in newspaper circulated in
the district where the Registered Office of the Nidhi is situated; and publication of the same
on the notice board of the Nidhi. [Notification dated 5th June, 2015.]

2.22 INCORPORATION OF COMPANY AND

MATTERS INCIDENTAL THERETO
AUTHENTICATION OF DOCUMENTS, PROCEEDINGS AND CONTRACTS [SECTION 21]
As per Sec.21 these may be signed by any "key managerial personnel" or an officer or employee
of the company duly authorised by the Board in this behalf.
As per Sec.2(51) -Key managerial personnel, in relation to a company, means—
(i) the CEO or the MD or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the CFO;
(v) such other officer, not more than one level below the directors who is in whole-time
employment, designated as key managerial personnel by the Board; and
(vi) such other officer as may be prescribed;

EXECUTION OF BILLS OF EXCHANGE, ETC. [SECTION 22]

(Q.4-Page No:2.2)
(1) A bill of exchange, hundi or promissory note shall be deemed to have been made,
accepted, drawn or endorsed on behalf of a company if made, accepted, drawn, or
endorsed in the name of, or on behalf of or on account of, the company by any person
acting under its authority, express or implied.
(2) A company may, by writing under its common seal, if any, authorise any person, either
generally or in respect of any specified matters, as its attorney to execute other deeds
on its behalf in any place either in or outside India.
However, in case a company does not have a common seal, the above authorisation
shall be made by 2 directors or by a director and the Company Secretary, wherever the
company has appointed a Company Secretary.
(3) A deed signed by such an attorney on behalf of the company and under his seal shall bind
the company.

Co. having com-

mon seal

Yes No

*In writing authorise any person

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

Where the Co. has a

In India, or 2 directors, or
Company Secretary

A director
outside India.
+ Company
Secretary

INCORPORATION OF COMPANY AND 2.23

MATTERS INCIDENTAL THERETO
 PROSPECTUS AND
03 ALLOTMENT OF SECURITIES

3.1 PROSPECTUS AND ALLOTMENT OF

SECURITIES
PROSPECTUS AND ALLOTMENT OF 3.2
SECURITIES
 SEC 23 – ISSUE OF SECURITIES BY A COMPANY (PUBLIC OFFER AND PRIVATE PLACEMENT) (Q.1-Page No: 3.1)

Fund Raising process by a company

Public Company Section 23(1) Private Company Section 23(2)

Summary of modes (for issue of securities)

Mode of Issue Public Company Private Company
Public Offer (including IPO, FPO or OFS) Yes No
Private Placement Yes Yes
Rights issue / Bonus Issue Yes Yes
Compliance with SEBI rules & Yes* No
regulations

3.3
*For a listed company or a company proposed to be listed.

As per Section 23(3), Such class of public companies may issue such class of securities for the purposes of listing on permitted
stock exchanges in permissible foreign jurisdictions or such other jurisdictions, as may be prescribed.

As per Section 23(4), The Central Government may, by notification, exempt any class or classes of public companies referred
to in sub-section (3) from any of the provisions of this Chapter, Chapter IV, section 89, section 90 or section 127 and a copy of
every such notification shall, as soon as may be after it is issued, be laid before both Houses of Parliament.".

SECURITIES
 Companies Amendment Act, 2020
[FM Nirmala Sitaraman has given an Aprroval for DIRECT LISTING of INDIAN COMPANIES on Foreign Stock Exchanges - JULY
2023]

PROSPECTUS AND ALLOTMENT OF

 Sec 2(70) - Prospectus

Out of four constituents of prospectus

definition, first three are quite clear; but the
fourth one i.e. document inviting offer from
the public (considered as deemed prospectus
or prospectus by implication) need to be
decoded further
that too in context to section 25 and landmark

SECURITIES
judicial pronouncements.

PROSPECTUS AND ALLOTMENT OF

Contents u/s 26(1) Types of Prospectus Section 26(2)
Prospectus NOT to be issued

3.4
1. Red Herring Prospectus in the following situation
According to Section 26 (1), every prospectus issued (Section 32)
by or on behalf of a public company either with 2. Shelf (Section 31)
reference to its formation or subsequently, or by or 3. Deemed (Section 25 r.w. 1. Rights Issue of shares/
on behalf of any person who is or has been engaged Section 28) debentures to existing
or interested in the formation of a public company, members
shall be dated and signed and shall state such 4. Abridged Prospectus 2. Issue of shelf prospectus
information and set out such reports on financial (For 1 year period)
information as may be specified by the Securities
and Exchange Board in consultation with the Central 1. It shall be dated
Government. 2. Signed as per Section 21
3. General Information of Company
26(3) 4. Financial Information of Company
Subject to sub-section (2), the provisions of sub- 5. Statutory Information of Company
section (1) shall apply to a prospectus or a form of 6. Details if Promoters
application, whether issued on or with reference to 7. Details of Directors
the formation of a company or subsequently. The 8. Consent of :
date indicated in the prospectus shall be deemed to Directors + Experts + L/A + u/w
be the date of its publication.
 9. Prospectus shall state such information and set out such reports on financial information as may be specified by the
SEBI in consultation with the CG:
Provided that until the SEBI specifies the information and reports on financial information under this sub-section, the
regulations made by the SEBI under SEBI Act, 1992, in respect of such financial information or reports on financial
information shall apply.

Punishment for contravention of Section 26(9)

Company Every person knowingly party to issue of prospectus

Penalty - ≥ 50,000/- ≤ 3,00,000/- Penalty - ≥ 50,000/- ≤ 3,00,000/-

Companies Amendment Act, 2020

3.5
Section 29

(1) Notwithstanding anything contained in any other provisions of this Act,-

(a) every company making public offer; and
(b) Every unlisted public company
shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 and the
regulations made thereunder.

(2) Any company, other than a company mentioned in sub-section (1), may convert its securities into dematerialised form or
issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with
the provisions of the Depositories Act, 1996 and the regulations made thereunder.

Rule 9A (11) states that Rule 9A shall not apply to an unlisted public company

SECURITIES
which is:
(a) a Nidhi;
(b) a Government company; or
(c) a wholly owned subsidiary.
It is to be noted that only unlisted public companies (subject to exceptions) are

PROSPECTUS AND ALLOTMENT OF

covered by Rule 9A and therefore, it is not necessary for a private limited
company to get its securities dematerialised.
 Flow of IPO/FPO
1st
BOD of the company along with the help of merchant bank (example:- JP Morgan) shall prepare a “Draft prospectus”

2nd
Draft prospectus to be filed 1st with SEBI for approval Power of CG u/s 24 is Delegated to SEBI.

SECURITIES
May grant OR May reject

3rd
Prospectus approved by SEBI to be filed with ROC u/s 26 for Registration Sec 26(4) (5) & (6)

PROSPECTUS AND ALLOTMENT OF

26(4)
No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless on or before the
date of its publication, there has been delivered to the Registrar for registration, a copy thereof signed by every person who
is named therein as a director or proposed director of the company or by his duly authorised attorney

3.6
26(5)
A prospectus issued under sub-section (1) shall not include a statement purporting to be made by an expert unless the expert
is a person who is not, and has not been, engaged or interested in the formation or promotion or management, of the
company and has given his written consent to the issue of the prospectus and has not withdrawn such consent before the
delivery of a copy of the prospectus to the Registrar for registration and a statement to that effect shall be included in the
prospectus.

26(6)
Every prospectus issued under sub-section (1) shall, on the face of it—
(a) state that a copy has been delivered for registration to the Registrar as required under sub-section (4); and
(b) specify any documents required by this section to be attached to the copy so delivered or refer to statements included
in the prospectus which specify these documents.
 Register the prospectus Refuse to register prospectus u/s 26 reasons

u/s 26(8) u/s 26(7)

4th The Registrar shall not register a prospectus unless the requirements of
1. Issue to general public within 90 days this section with respect to its registration are complied with and the
of registration with ROC prospectus is accompanied by the consent in writing of all the persons
2. No prospectus shall be valid if it is named in the prospectus.
issued more than ninety days after
the date on which a copy thereof is 1. It is not dated
delivered to the Registrar under sub- 2. It does not have prescribed content
section (4). 3. Director of company acts as an expert in prospectus
After 90 days it shall be deemed Expert meaning – CA/CS/cost accountant/Valuer in prospectus
as issue made without prospectus 4. It does not contain consent from:- Director/Expert/L.A./ U.W

3.7
5th
After Prospectus is issued to general public they shall make an application for subscription of shares or security. For making
application 3 days

6th
On the basis of subscription received, company to decide the issue price of shares (book building method used)

7th
On the basis of issue price decided, company to do allotment of securities u/s 39

SECURITIES
Abridged Prospectus
The term ‘Abridged Prospectus’ has been defined by Section 2 (1). According to it, ‘Abridged Prospectus’ means a memorandum
containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations

PROSPECTUS AND ALLOTMENT OF

in this behalf. In fact, ‘Abridged Prospectus’ is a summarised form of actual prospectus.
 Allotment means apportionment by BOD of the un-apportioned capital

“Allotment” means the appropriation out of previously un-appropriated capital of a company, of a certain number of shares to
a person. Till such allotment, the shares do not exist as such. It is on allotment that the shares come into existence.

AND AND
(Q.7-Page

SECURITIES
General principles of Statutory provisions section 39 No:3.4) Statutory provisions section 40(Q.14-Page No:3.8)
allotment
1. Application money: >5% of F.V. OR as 1. In accordance to Section 40(1) every company
1. By proper authority specified by SEBI to be kept in escrow making public offer shall, before making such

PROSPECTUS AND ALLOTMENT OF

of BOD by BOD account. offer, make an application to one or more
resolution. 2. Minimum subscription of 90% shall be recognised stock exchange or exchanges and
2. Within reasonable received in 30 days. obtain permission for the securities to be dealt
time 60 days. 3. If not the issue fails, refund within with in such stock exchange or exchanges.

3.8
3. Absolute and 15 days, beyond 15 days with interest Where a prospectus states that an application
unconditional. @15% per annum. has been made, such prospectus shall also state
4. Must be the name or names of the stock exchange in
communicated to which the securities shall be dealt with.
allottee (posting a. Return of allotment in PAS-3 to be 2. All monies received on application shall be kept
letter). filed with ROC in 30 days in a separate bank account in a scheduled bank
5. Company to Pay b. List of allottees- name, address, and shall not be utilised for any purpose other
Commission on number of shares, consideration. than-
allotment to broker c. If shares issued for other than cash (a) for adjustment against allotment of securities;
NOT the allottee. attach report of registered value or
(b) for the repayment of monies within the time
Penalty u/s 39 specified by SEBI, where the company is unable
Company & Every officer : 1000 per day to allot securities.
Maximum 1L 3. No waiver of above conditions.
4. Penalty under section 40
Company = >5L <50L
Officer = fine = >50K <3L
 Underwriting(U/W) commission – Section 40(6) (Q.5-Page No:3.3)

- It is Insurance of Public Issue

 Company may appoint 1 or more U/W
 Commission to be paid once contract entered into irrespective of under/over subscription

Payment of commission: A company may pay commission to any person in connection with the subscription to its securities,
whether absolute or conditional.

Conditions for the payment of commission:

(a) the payment of such commission shall be authorized in the company’s articles of association;
(b) the commission may be paid out of proceeds of the issue or the profit of the company or both;
(c) Rate of commission: Following is the rate of commission to be paid to the person:

3.9
in case of shares in case of debentures
shall not exceed 5% of the price at which the shares are shall not exceed 2.5% of the price at which the debentures are
issued, or issued, or
a rate authorised by the articles as specified in the company’s articles,
whichever is less whichever is less

(d) Disclosure of the particulars: the prospectus of the company shall disclose the following particulars -
(i) the name of the underwriters;
(ii) the rate and amount of the commission payable to the underwriter; and

SECURITIES
(iii) the number of securities which is to be underwritten or subscribed by the underwriter absolutely or conditionally.

PROSPECTUS AND ALLOTMENT OF

 Shelf Prospectus – Section 31 (Q.10-Page No:3.6) (Q.15-Page No:3.9)

Meaning of Shelf Prospectus [explanation to section 31]

The expression “shelf prospectus” means a prospectus in respect of which the securities or class of securities included therein
are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.
Need of Shelf Prospectus
A company is required to issue a prospectus each time it accesses the capital market. It leads to unnecessary repetition for a
company which makes more than one offer of securities in a year to mobile funds from the public. A way out is shelf prospectus
which remains valid (on the shelf) for a specified time period during which offers for securities may be made by a company to

SECURITIES
the public without going through the arduous exercise of issuing fresh prospectus every time.
Filing of shelf prospectus with the Registrar [Sub-section 1]
Shelf prospectus may be filled with the Registrar at the stage of first offer of securities, by class or classes of companies as the
Securities and Exchange Board of India may provide by regulations in this behalf.

PROSPECTUS AND ALLOTMENT OF

It has to indicate a period not exceeding one year as the period of validity of such shelf prospectus.
The period of validity is to commence from the date of opening of the first offer of securities under such prospectus.
In respect of any second or subsequent offer of such securities issued during the period of validity of such prospectus, no further
prospectus is required.
Filing of ‘Information Memorandum’ with the Shelf Prospectus [Sub-section 2]

3.10
A company filing a shelf prospectus shall be required to file an information memorandum with the Registrar within the prescribed
time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus containing;
a. All material facts relating to new charges created,
b. 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
c. Such other changes as may be prescribed,
Proviso to Sub-section 2, provides a safeguard (in case of changes) to applicants who made payment in advance. It is provided
that where a company or any other person has received applications for the allotment of securities along with advance payments
of subscription before the making of any such change, the company or other person shall intimate the changes to such applicants
and if they express a desire to withdraw their application, the company or other person shall refund all the monies received as
subscription within fifteen days thereof.
Procedural Aspects
Rule 10 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 The information memorandum shall be prepared
in Form PAS-2.
It shall be 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.
Information Memorandum together with Shelf Prospectus is deemed Prospectus [Sub-section 3]
Where an information memorandum is filed, every time an offer of securities is made under sub-section (2), such memorandum
together with the shelf prospectus shall be deemed to be a prospectus.
 Red Herring Prospectus – (Section 32)

1. The expression “red herring prospectus” means a prospectus which does not include complete particulars of the
quantum or price of the securities included therein. It is a prospectus issued before ‘ A Prospectus”
2. Here, ‘A Prospectus’ means the ‘Final Prospectus”
3. Red herring means an Incomplete Prospectus
4. Issued to facilitate Book Building Method
5. Under Book Building Method Issuing company does not know the issue price per share OR No. of shares as it gives
the investor a “Price Band” to apply for it’s shares.
6. A company proposing to issue a red herring prospectus shall file it with the Registrar at least three days prior to the
opening of the subscription list and the offer.
7. A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation
between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.
8. 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 are
not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board.

Red Herring Prospectus

3.11
V/S Final Prospectus

All contents of Prospectus u/s 26 [9 Points] All contents of Prospectus u/s 26 [9 Points]
EXCLUDING INCLUDING
Issue Price per share Final issue price per share
No. of shares to be issued &
No. of shares issued

To be filed/Circulated to:
1. SEBI To be filed/Circulated to:
2. ROC 1. SEBI

SECURITIES
3. Public 2. ROC

Follow Book Building Method

PROSPECTUS AND ALLOTMENT OF

NOTE: Every company going for IPO/FPO shall always issue a Red herring prospectus, therefore it is compulsory for every
public offer
 Deemed prospectus/By implication-section 25 r.w. Section 28
Documents which are deemed to be a prospectus: As per Section 25(1), where a company allots or agrees to allot any securities of the company
with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made
shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law as to the contents of prospectus
and as to liability in respect of mis-statements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply
1 2 3 4 6 7
ABC limited ABC limited TO Issuing house TO Offer shares of ABC ltd. Such documents Basically,
(A public Co.)

SECURITIES
to shall be signed by issuing house
(Under writer) “General public” issuing house on is an agent on
Wants to make Issues OR agrees to issue by behalf of ABC behalf of ABC
an IPO/FPO shares shares issuing a document limited which

PROSPECTUS AND ALLOTMENT OF

called If issuing house is:- issues shares
Section 28 1. Company- by > of ABC limited
Such prospectus shall be OFFER FOR SALE 2 directors to public for
28.Offer of sale of shares by certain members of considered as prospectus document which shall
company- Or Commission
of ABC limited ONLY. be deemed to be a 2. Firm- by > 50% from ABC

3.12
(1) Where certain members of a company propose, Although issued by issuing prospectus partners limited.
in consultation with the Board of Directors to offer, house.
in accordance with the provisions of any law for the
time being in force, whole or part of their holding of 5
shares to the public, they may do so in accordance
with such procedure as may be prescribed. Section 26 [9 Points] and misstatement in [SECTION
applicable prospectus applicable 34,35,36 & 37]
(2) Any document by which the offer of sale to the
public is made shall, for all purposes, be deemed
to be a prospectus issued by the company and all
laws and rules made thereunder as to the contents
of the prospectus and as to liability in respect of For the purposes of this Act, it shall, unless the contrary is proved, be evidence
mis-statements in and omission from prospectus that an allotment of, or an agreement to allot, securities was made with a view to
or otherwise relating to prospectus shall apply
as if this is a prospectus issued by the company. the securities being offered for sale to the public if it is shown

(3) The members, whether individuals or bodies

corporate or both, whose shares are proposed to be Issuing House to offer shares of ABC When shares are offered to public by
offered to the public, shall collectively authorise the limited to public within 6 months of OR issuing house, ABC limited has not
company, whose shares are offered for sale to the
public, to take all actions in respect of offer of sale receipt from ABC limited. received full consideration,
for and on their behalf and they shall reimburse the
company all expenses incurred by it on this matter.
 Liability for Misstatement

Criminal Liability Civil Liability

Every person who authorized prospectus Company director, proposed director, Promoter, Expert,
One who authorized

Punishable U/s 447

Pay compensation to Investors

3.13
Defenses
Defenses

Immaterial Reasonable ground to believe

Withdrew consent to Believed on Consent Issued without his

be director u/s 26(5) knowledge , public
Notice

SECURITIES
PROSPECTUS AND ALLOTMENT OF
 MIS-STATEMENTS IN PROSPECTUS
In common parlance, mis-statement is the act of stating something that is false or not accurate. It could either be by commission or
by omission or by both.

CRIMINAL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS [SECTION 34]

Where a prospectus, issued, circulated or distributed under this Chapter, includes any statement which is untrue or misleading in form
or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises

SECURITIES
the issue of such prospectus shall be liable under section 447:
Provided that nothing in this section shall apply to a person if he proves that such statement or omission was immaterial or that he had

PROSPECTUS AND ALLOTMENT OF

reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion
or omission was necessary.

CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS [SECTION 35] (Q.2-Page No:3.1) (Q.8-Page No:3.5) (Q.11-Page No:3.6)

3.14
(1) Liabilities of persons: According to Section 35(1), where a person has subscribed for securities of a company acting on any
statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any
loss or damage as a consequence thereof, the company and every person who—
(a) is a director of the company at the time of the issue of the prospectus;
(b) is named in the prospectus as a director of the company, or has agreed to become such director,
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred to in section 26,
-shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation
to every person who has sustained such loss or damage.
 (2) Exceptions: No person shall be liable if he proves—
(a) that, having consented to become a director of the company, he withdrew his consent before the issue of the prospectus,
and that it was issued without his authority or consent; or
(b) that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith
gave a reasonable public notice that it was issued without his knowledge or consent.
(c) that, as regards every misleading statement purported to be made by an expert
or contained in an extract from a report
or valuation of an expert,
it was a correct and fair representation of the statement or Report ;
and he had reasonable ground to believe that the person making the statement was competent to make it and that the said
person had given the consent required by section 26

(3) Liability on defraud: Where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities

3.15
of a company or any other person or for any fraudulent purpose, every person referred to in subsection (1) shall be personally
responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any
person who subscribed to the securities on the basis of such prospectus.

PUNISHMENT FOR FRAUDULENTLY INDUCING PERSONS TO INVEST MONEY [SECTION 36]

Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or
deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into—
(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities; or

SECURITIES
(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of
securities or by reference to fluctuations in the value of securities; or
(c) any agreement for, or with a view to obtaining credit facilities from any bank or financial institution,

PROSPECTUS AND ALLOTMENT OF

-shall be liable for action under section 447.
 ACTION BY AFFECTED PERSONS [SECTION 37]
A suit may be filed or any other action may be taken under section 34 or section 35 or section 36 by any person, group of persons
or any association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus.

Class action suit is for a group of people filing a suit against a defendant who has caused common harm to the entire group or class.
This is not like a common litigation method where one defendant files a case against another defendant while both the parties are

SECURITIES
available in court. In the case of class action suit, the class or the group of people filing the case need not be present in the court and
can be represented by one petitioner. The benefit of these type of suits is that if several people have been injured by one defendant,
each one of the injured people need not file a case separately but all of the people can file one single case together against the

PROSPECTUS AND ALLOTMENT OF

defendant.

PUNISHMENT FOR FRAUD

According to section 447 of the Act, any person who is found to be guilty of fraud.

3.16
Fine Imprisonment
(i) Fraud involving less than 10 lakh Up to ` 50 lakhs⁶ or/and Up to 5 years
rupees or 1% of turnover, whichever
is lower (public interest not involved)
(ii) Fraud involving at least 10 lakh Minimum fine equal to and Minimum 6
rupees or 1% of turnover, whichever amount of fraud; and months; and
is lower (public interest not Maximum fine three times Maximum 10
involved) of amount of fraud Years

(iii) Fraud at (ii) involves Minimum fine equal to and Minimum 3

public interest amount of fraud; and years; and
Maximum fine three times Maximum 10
of amount of fraud Years
 Private Placements – Section 42 (Q.6-Page No:3.3)
1. Applicable to public as well as private company.
2. It is not a PUBLIC Offer.
3. Offer of securities on a private basis to identified persons (persons whose record is available with company).
4. Persons shall be “Identified” by BOD of Company .
5. Maximum Allottee per annum 50. However as per Rules, it is 200 (therefore, follow 200 p.a.).
6. Following shall NOT be counted in Number of Allottees (a) QIB (Qualified Institutional Buyers Registered with SEBI) (b) ESOP.
7. Private placement shall require (S.R. + MGT – 14).
8. Company can make multiple private placement issues in one F.Y. but maximum Allottee 200. AND
9. New issue only after completion OR cancellation of previous issue.
10. NO Renunciation Rights.
11. Consideration through banking channel.
12. NO prospectus but Private Placement offer document in PAS-4.

3.17
13. NO public advertisement allowed.
14. Allotment of securities to be made in 60 days from receipt of application money.
15. If NO Allotment, repay within 15 days from end of 60 days.
16. If NOT repaid, interest @ 12% p.a. from 61st day.
17. Company to file PAS - 3 within 15 days.
18. Failure to file, Penalty on Company, Promoters and Directors – 1000/- per days per default < 25L.
19. Offer made/money accepted in contravention:

SECURITIES
Company, Promoters AND Directors liable for penalty: Amount raised u/s 42 OR 2 crores whichever is lower + Refund money.
20. “Provided also that no offer or invitation of any securities under this rule shall be made to a body corporate incorporated in, or
a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be,

PROSPECTUS AND ALLOTMENT OF

have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached
the same with the private placement offer cum application letter.”.
 04 SHARE CAPITAL AND
DEBENTURES

SHARE CAPITAL AND DEBENTURES 4.1

 Share capital
1. Authorised Capital-Section 2(8): “authorised capital” or “nominal capital” means such capital as is authorised by
the memorandum of a company to be the maximum amount of share capital of the company;

2. Subscribed capital-section 2(86): “subscribed capital” means such part of the capital which is for the time being
subscribed by the members of a company;

3. Called-up capital Section 2(15): “called-up capital” means such part of the capital, which has been called for
payment;

4. Paid-up share capital Section 2(64): “paid-up share capital” or “share capital paid-up” means such aggregate
amount of money credited as paid-up as is equivalent to the amount received as paid- up in respect of shares issued
and also includes any amount credited as paid-up in respect of shares of the company, but does not include any
other amount received in respect of such shares, by whatever name called;

5. Shares 2(84): “share” means a share in the share capital of a company and includes stock;

4.2
DEMAT shares Physical shares
Compulsory for every: Applicable for every other company (they
1. Listed public company “may” issue demat shares)
2. Every unlisted Public company
- Share certificate is the ownership
- Proof of Ownership is record of depository. - Every share certificate has a unique
- Shares does not have a unique number. number
- Depository is like bank.
- NSDL & CDSL are 2 depositories in India. • numbering of shares-section 45
- Depository participant is an agent of • Share certificate-section 46
depository
Example Zerodha/ Sharekhan etc.

SHARE CAPITAL AND DEBENTURES

 Following diagram depicts kinds of share capital:

with voting rights

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

According to Section 43, the share capital of a company limited by shares shall be of two kinds, namely:—
(a) equity share capital—

SHARE CAPITAL AND DEBENTURES

(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and
(b) preference share capital

4.3
Explanation—For the purposes Section 43
(i) "equity share capital", with reference to any company limited by shares, means all share capital which is not preference share
capital;
(ii) "preference share capital", with reference to any company limited by shares, means that part of the issued share capital of
the company which carries or would carry a preferential right with respect to—

(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject
to income-tax; and

(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have
been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale,
specified in the memorandum or articles of the company;
 numbering of shares-section 45 - Share certificate-section 46 : (ONLY FOR PHYSICAL SHARES) (Q.7-Page No: 4.3)

Purpose:
Signing and sealing of share
1. It is ‘prima facie’ evidence of title of Duplicate share certificate
shares. certificate
1. Every share certificate shall (1) Company may issue duplicate share
2. Share certificate shall be issued if: issued under common seal of certificate for:
a. Approved by BOD resolution AND • Consolidation /sub division
b. Surrender to company letter of allotment company (if any) • lost/defaced
by member (LOA) • Pages for recording transfer are fully
2. It shall be signed by: 2 directors utilised
3. If LOA is lost /destroyed BOD to impose authorised by BOD and
condition of evidence and indemnity AND company secretary (if company
payment of out of pocket expense by has appointed) (2) Conditions
shareholder to company.
1. BOD resolution
4.Where a share is held in depository form, 3. Directors may sign by machines 2. Original certificate if available is cancelled

4.4
the record of the depository is the prima but it is not allowed for CS . OR surrender to company.
facie evidence of the interest of the beneficial
owner. 3. Pay rupees 2 to 50 per certificate.
4. In case of OPC, it shall be 4. Evidence and indemnity by member to
5.Notwithstanding anything contained in the signed by 1 director or person company.
articles of a company, the manner of issue authorized by BOD 5. Chai-pani expense incurred by company to
of a certificate of shares or the duplicate be paid by members.
thereof, the form of such certificate, the 6. Word “Duplicates issued in lieu of share
particulars to be entered in the register of certificate number” printed on duplicates
members and other matters shall be such as share certificate.
may be prescribed.

Form of share certificate Duplicate share certificate with Fraudulent

- Share certificate shall we in form no. SH-1 motive:
- Every certificate shall state:
1. Name of company. Penalty on - > 5 times F.V of shares OR
2. Date of issue. company < 10 times F.V of shares OR
10,00,00,000 whichever is more

SHARE CAPITAL AND DEBENTURES

3. Name of person in whose favour certificate
is issued.
4. Number of shares. Every officer of company - liable u/s 447 for
5. Amount paid up. proven fraud.
 Physical shares and share certificates

Section 49 to 51- Meaning of calls on shares (only for physical shares)

1. Call is a demand by the company from investors upon which shareholders pay whole or part of balance still due on each
class of shares allotted OR held by them.
2. Call may also be made by a liquidator in the event of winding up of a company .
3. Amount payable on application on each share shall be > 5% of F.V.

Essential of valid calls: Manner of making call Payment in advance of calls

1. 50.Company to accept unpaid share

SHARE CAPITAL AND DEBENTURES

1. Power off BOD by passing a BOD resolution 1. Calls to be made as per AOA capital, although not called up
+ MGT -14 2. At least 14 day notice to BOD may if allowed by AOA allow members
2. BOD must follow provisions of AOA otherwise members for each call. to pay calls in advance (Section 50)
call is invalid. 3. Minimum one month between 2 2. Company may pay interest on such advance

4.5
3. Directors making call are duly appointed calls. calls as per AOA
and qualified. 4. Maximum call < 25% of F.V. , but 3. Interest may be out of capital if profits
4. BOD meeting for approval of call shall have AOA may provide more limit. NOT available
valid quorum. 5. BOD may revoke or postpone 4. Such advance is NOT refundable except in
5. State amount, time and place of payment the call. winding up where it is paid after creditors
in BOD resolution 6. Joint shareholders shall be but before other shareholders
6. Give notice to shareholders and intimate jointly and severally liable 5. No voting rights for advance calls paid.
amount, time and place. 7. Members may make a call in Voting rights ONLY after advance gets
7. Call to be made for benefit of company and advance and may get interest adjusted against future calls.
NOT private ends of the director. as per AOA 6. Payment of Dividend in
8. Calls on same class of shares must be made 8. Defaulting member shall not proportion to amount paid-up
on “Uniform” basis all members pay same. have proportionate voting A company may, if so authorised by its
Section 49 rights to the extent of arrears articles, pay dividends in proportion to the
amount paid-up on each share.
If shares are partly paid up:
• Proportionate voting rights AND
• Proportionate dividend (Section 51)
 Types of shares

Preference shares Equity Share

(SECTION 55 READ WITH 64) Equity Shares with Differential Rights
It has 2 preferential rights: Conditions for the issue of equity shares with differential rights: According to Rule 4 (1), a company limited
1. Payment of dividend AND by shares may issue equity shares with differential rights as to dividend, voting or otherwise, if it complies
2. Repayment of capital on winding up with the following conditions, namely:
Issue of preference shares (section 55) (a) the articles of association of the company authorizes the issue of shares with differential rights;
1. Only redeemable preference shares. (b) the issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders.
2. Issue only allowed as per AOA Where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares
3. S.R. of member + MGT - 14 shall be approved by the shareholders through postal ballot;
(c) the voting power in respect of shares with differential rights of the company shall not exceed seventy-
4. No subsisting default in redemption of
four per cent of total voting power including voting power in respect of equity shares with differential
preference shares or payment of dividend
rights issued at any point of time;
5. Maximum tenure < 20 years ordinary Co. (d) Omitted;
6. < 30 years for infrastructure company

4.6
(e) the company has not defaulted in filing financial statements and annual returns for three financial years
however at option of preference immediately preceding the financial year in which it is decided to issue such shares;
shareholders redemption of 10% of such (f) the company has no subsisting default in the payment of a declared dividend to its shareholders or
preferences from 21st year repayment of its matured deposits or redemption of its preference shares or debentures that have
Redemption of preference shares (section 55) become due for redemption or payment of interest on such deposits or debentures or payment of
1. Shares to be fully paid up dividend;
2. Redemption out of: (g) the company has not defaulted in payment of the dividend on preference shares or repayment of any
• Capital/revaluation reserve -  term loan from a public financial institution or State level financial institution or scheduled Bank that
• Profit/Fresh issue/GR -  has become repayable or interest payable thereon or dues with respect to statutory payments relating
3. Notified company can only use security to its employees to any authority or default in crediting the amount in Investor Education and Protection
premium for redemption (u/s 133) Fund to the Central Government;
Provided that a company may issue equity shares with differential rights upon expiry of five years from the
4. Create CRR if reserve used
end of the financial Year in which such default was made good.
5. Company may redeem preference shares by issuing
(h) the company has not been penalized by Court or Tribunal during the last three years of any offence under
fresh preference shares if approved by 75% of the RBI Act, 1934, the SEBI Act, 1992.
preference shares with NCLT Approval Tata Motors to Cancel DVR shares and Delist them instead Members to get 7 Ordinary shares for 10 DVR

SHARE CAPITAL AND DEBENTURES

6. Dissenting preferential holders to be paid cash shares.[July 2023]
7. File SH - 7 within 30 days (section 64)
 Voting Rights [Section 47] Variations of shareholders’ rights [Section 48]

Where share capital of a company is divided into different classes of shares, it may
sometimes be necessary for it to amend the rights attached to one or more classes of
shares. The Companies Act states the following laws on the variations of shareholders’
right:
(1) Variation in rights of shareholders with consent: Where a share capital of the
company is divided into different classes of shares, the rights attached to the
shares of any class may be varied with the consent in writing of the holders
of not less than three-fourths of the issued shares of that class or by means of
a special resolution passed at a separate meeting of the holders of the issued
shares of that class,—
(a) if provision with respect to such variation is contained in the memorandum
or articles of the company; or

SHARE CAPITAL AND DEBENTURES

(b) in the absence of any such provision in the memorandum or articles, if
such variation is not prohibited by the terms of issue of the shares of
that class:

Provided that if variation by one class of shareholders affects the rights of any

4.7
other class of shareholders, the consent of three-fourths of such other class of
shareholders shall also be obtained and the provisions of this section shall apply
to such variation.

(2) No consent for variation: Where the holders of not less than ten per cent of the
issued shares of a class did not consent to such variation or vote in favour of
the special resolution for the variation, they may apply to the Tribunal to have
Note: the variation cancelled, and where any such application is made, the variation
Voting right of preference share holder, on a poll shall be in proportion shall not have effect unless and until it is confirmed by the Tribunal:
to his share in the paid-up preference share capital of the company.
Second Proviso to section 47 (2) empowers preference shareholder with Provided that an application under this section shall be made within twenty-one
right to vote on all the resolutions placed before the company, in days after the date on which the consent was given or the resolution was passed,
case where the dividend in respect of his class of preference shares as the case may be, and may be made on behalf of the shareholders entitled to
has not been paid for a period of two years or more. make the application by such one or more of their number as they may appoint
First Proviso to section 47 (2), provides that in case of resolutions in writing for the purpose. [Sub – section (2)]
wherein both equity shareholders and preference shareholders (3) Binding decision of tribunal: The decision of the Tribunal on any application
are entitled to vote, the proportion of the voting rights of equity under sub-section (2) shall be binding on the shareholders.
shareholders to the voting rights of the preference shareholders
shall be in the same proportion as the paid-up capital in respect of (4) Filing copy of order with the Registrar: The Company shall, within thirty days of
the equity shares bears to the paid-up capital in respect of the preference the date of the order of the Tribunal, file a copy thereof with the Registrar.
shares.
 Transfer/Transmission & Refusal to register securities
(1) A company shall not register a transfer of securities of the company, or the interest of a member in the company in the case of a company
having no share capital, other than the transfer between persons both of whose names are entered as holders of beneficial interest
in the records of a depository, unless a proper instrument of transfer, in such form as may be prescribed, duly stamped, dated and
executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee
has been delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution, along
with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities:
Provided that where the instrument of transfer has been lost or the instrument of transfer has not been delivered within
the prescribed period, the company may register the transfer on such terms as to indemnity as the Board may think fit.
#Exemption to Government companies

(2) Nothing in sub-section (1) shall prejudice the power of the company to register, on receipt of an intimation of transmission of any right to
securities by operation of law from any person to whom such right has been transmitted.

(3) Where an application is made by the transferor alone and relates to partly paid shares, the transfer shall not be registered, unless the
company gives the notice of the application, in such manner as may be prescribed, to the transferee and the transferee gives no objection
to the transfer within two weeks from the receipt of notice.
Company delivering the certificate: Every company shall, unless prohibited by any provision of law or any order of Court,

4.8
Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted—
Different conditions Period of the delivering the certificates
In the case of subscribers to the memorandum; Within 2 months from the date of incorporation
In the case of any allotment of any of its shares Within a period of two months from the date of allotment
In the case of a transfer or transmission of securities Within a period of one month from the date of receipt by the
company of the instrument of transfer or the intimation of
transmission
In the case of any allotment of debenture Within a period of six months from the date of allotment
Transfer of security of the deceased: The transfer of any security or other interest of a deceased person in a company made by his legal
representative shall, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the
execution of the instrument of transfer.

Default in compliance of the provisions [Section 56]

(Q.6-Page No: 4.3)

SHARE CAPITAL AND DEBENTURES

Where any default is made in complying with the provisions of sub-sections (1) to (5), the company and every officer of the company who
is in default shall be liable to a penalty of fifty thousand rupees.". Companies Amendment Act, 2020
Liability of depository: Where any depository or depository participant, with an intention to defraud a person, has transferred shares, it
shall be liable under section 447 of the Companies Act, 2013 with the liability mentioned under the Depositories Act, 1996.
 4. Registration/ Refusal to Register by Co. (Section 58) (Q.5-Page No: 4.2) (Q.11-Page No: 4.6)

Private Co. Public Co.

Register the transfer Doesn’t Register the Register the transfer Doesn’t Register the transfer (sufficient cause)
transfer (Rejected by BOD)
Issue share certificate in
Issue share 1 month Intimate within 30 days to No intimation by Co.
certificate in Intimate within 30 days No intimation by Co. seller/ buyer
1 month to seller/ buyer
Buyer may appeal to NCLT in 60 Buyer may appeal to NCLT within Buyer may appeal to NCLT in 90
60 days of intimation days of delivery of document
Buyer may appeal to NCLT days of delivery of document to Co.

SHARE CAPITAL AND DEBENTURES

to Co.
within 30 days of intimation

NCLT may dismiss OR Accept the appeal AND pass order in 3 months. If appeal accepted then NCLT to order Co. to register the transfer within 10
days & pay damages.
(6) If a person contravenes the order of the Tribunal under this section, he shall be punishable with imprisonment for a term which shall not be

4.9
less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to
five lakh rupees.
Rectification of register of members after transfer: Section 59

1. If name of any person is entered in register of members Without Sufficient Cause OR

• After having been entered in register is omitted OR
• Default is made OR Delay takes place in entering name.
2. The person aggrieved OR Any member of Co. OR the Co.
3. May appeal to NCLT OR Competent court outside India in respect of foreign members for rectification.
4. The NCLT may either dismiss appeal OR direct transfer OR transmission shall be registered by Co. within 10 days of NCLT order.

Transmission (By operation of Law)

Procedure for transmission shall be the same:
1. On death OR lunacy of original member : shares vest in his legal representative & he can sell shares without being registered.
2. On Insolvency of original member: shares vest in official assignee OR receiver. He may disclaim (disown) partly/ fully paid sh. Which are
under mortgage/ encumbrance.
3. Documents in transmission:
a. No instrument of transfer but intimation of transmission required.
b. Along with letter of indemnity AND Probate (Attested copy of will) AND NOC in case of > 1 claimants.
 Buy – Back of shares & CRR Section 68 & 69 (Q.4-Page No: 4.2) (Q.12-Page No: 4.6)

1. Purpose of Buy-back 11. Cooling Period : Where a company completes a buy-back of its shares
a. Improve EPS & Market price. or other specified securities under this section, it shall not make further
b. Safeguard hostile takeover. issue of same kind of shares (including allot­ment of further shares under
c. Exit route to shareholders incase of penny stock.
d. Return surplus cash to shareholders. clause (a) of Sub-section (1) of Section 62 or other specified securities
within a period of six months except by way of bonus issue or in the
2. Sources of money to Buy-back discharge of subsisting obligations such as conversion of warrants,
a. Free reserves. stock option schemes, sweat equity or conversion of preference shares
b. Security premium OR or debentures into equity shares. [Sections 68(8)]
c. Proceeds of earlier Issue Not of same class.
12. Declaration of Solvency: Where a company has passed a special
3. How much money can be used for buy-back: resolution or the Board has passed a resolution to buy-back its own
a. By BOD Resolution - upto 10% [ Paid –up equity capital shares or other securities under this section, it shall, before making such
+ FR + SP] buy-back, file with the Registrar and the Securities and Exchange Board
b. By BOD Resolution + S.R. of members – upto 25% [Paid of India a declaration of solvency in the form as may be prescribed
up eq + Paid up Pref. + FR + SP]
SH-9 – Declaration of solvency with ROC & SEBI
4. How much shares can be bought –back at Once?
< 25% of paid-up eq capital 13. Register of Buy Back: Where a company buys-back its shares or other
specified securities under this section, it shall maintain a register
5. After buy-back – Debt: Equity < 2:1

4.10
of the shares or securities so bought, the consideration paid for the
6. Buy Back authorized by AOA & only fully paid shares shares or securities bought- back, the date of cancellation of shares or
securities, the date of extinguishing and physically destroying the shares
7. Time Gap Between 2 Buy-Back - 1 year from completion Of Earlier BuyBack or securities and such other particulars as may be prescribed. [Sections
Time for fresh Issue – 6m from completion Of Earlier BuyBack 68(9)]
8. Time limit for completion of buy-back: Every buy-back shall be completed within 12 SH-10 – Register of buyback maintained by Co.
months from the date of passing the special resolution or a resolution passed by the
Board at general meeting authorising the buy-back. [Sections 68(4)]. 14. Filing of Buy-back Return: A company shall, after completion of the buy-
back under this section, file with the Registrar and the Securities and
9. Buy-Back from Whom?: The buy-back under Sub-section (1) may be—
(a) from the existing share holders or security holders on a proportionate Exchange Board of India, a return containing such particulars relating
basis; or to the buy-back within thirty days of such completion, as may be
(b)
from the open market; L&T Buyback from Open Market [July 2023] or prescribed:
(c)
by purchasing the securities issued to employees of the company pursuant to a SH-11 – Details of buyback file with ROC & SEBI
scheme of stock option or sweat equity. [Sections 68(5)]
Swiggy to buyback only from Employees [July 2023]
15. In case of default – Company penalty - > 1L < 3L AND
10. Extinguishment of Securities: Where a company buys-back its own securities or other Every officer penalty - > 1L < 3L

SHARE CAPITAL AND DEBENTURES

specified securities, it shall extinguish and physically destroy the shares or securities
so bought-back within seven days of the last date of completion of buy-back. [Sections 16. As per Section 69: Buyback out of reserves then Co. to transfer sum
68(7)] equal to F.V. of Buyback to CRR.
 Prohibition for buy-back in certain circumstances [Section 70]
This section of the Companies Act, 2013 prohibits the company for buy back in the certain circumstances.
(1) The provision says that no company shall directly or indirectly purchase its own shares or other specified securities-
(a) through any subsidiary company including its own subsidiary companies; or
(b) through any investment company or group of investment companies; or
(c) if a default, is made by the company, in repayment of deposits or interest payment thereon, redemption of debentures or
prefer­ence shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to
any finan­cial institutions or banking company;

But where the default is remedied and a period of three years has lapsed after such default ceased to subsist, there such buy-back
is not prohibited.

SHARE CAPITAL AND DEBENTURES

(2) No company shall directly or indirectly purchase its own shares or other specified securities in case such company has not
complied with provisions of Sections 92 (Annual Report), 123 (Declaration of dividend), 127 (Punishment for failure to distribute
dividends), and section 129 (Financial Statements).

Section 67: Co. Limited by share/guarantee shall not buy its own shares OR Give Financial Assistance to anyone:

4.11
(Q.8-Page No: 4.4)
(1) No company limited by shares or by guarantee and having a share capital shall have power to buy its own shares unless the
consequent reduction of share capital is effected under the provisions of this Act.
#Exemption to Nidhi companies
(2) No public company shall give, whether directly or indirectly and whether by means of a loan, guarantee, the provision of
security or otherwise, any financial assistance for the purpose of, or in connection with, a purchase or subscription made or to
be made, by any person of or for any shares in the company or in its holding company.
(3) Nothing in sub-section (2) shall apply to-
Exception: A Public Co. MAY Give Financial Assistance in:
a. Lending by Banking Co. in ordinary course of business.
b. Lending by a co. as per ESOP by S.R. of member to a trust & trust to purchase sh. of the Co. for future benefit of employee (i.e.
Trust will purchase sh. of the Co. & allot to employee as ESOP on behalf of Co.)
c. Lending by Co. to employees (other than directors OR KMP) < 6m Salary enabling them to purchase share of the Company from
market (Indirect ESOP)
• Section N.A. to : 1. Pvt. Co. 2. IFSC Public Co. 3. Nidhi Co.
• Penalty of Co:- > 1L < 25L AND
• Every Officers: Imprisonment < 3 years AND Penalty > 1L < 25L
(4) Nothing in this section shall affect the right of a company to redeem any preference shares issued by it under this Act or under
any previous company law.
 Debentures may be issued by Public Co. - By Public offer IPO/FPO or By Private placement
Private Co. - By Private placement

Debentures section 71 (Q.10-Page No: 4.5)

1 2 3 4 5
Meaning u/s 2(30) Types of debentures Debenture trust deed Debenture trustee Redemption of
1. Convertible: 1. Co. shall execute 1. When company issues debentures
It is an
acknowledgement • Into shares of debenture trust deed prospectus OR issue to public 1. Company shall
of debt by company company in form SH – 12. > 500 it shall be mandatory to create DRR out of
Includes debenture • Wholly/partially 2. It shall be executed appoint debenture trustee. free reserves
convertible. within 60 days 2. Trustee shall act as watchdog 2. DRR to be used only
stocks/bonds.
• Issue only with S.R. of allotment of of debenture holders. for redemption.
Features of debenture. 3. Company to appoint trustee
of members.
debentures • < 10 years OR < 30 for supervision of common 3. Failure to redeem:
1. Like share years 3. Advantages of deed: interest of debenture holders. Before Redemption
certificate issued 2. Unsecured: a. Trustee holds title of 4. Name of debenture trustee to a. If trustee concludes
under common • Not secured by any mortgage property, be written in letter of offer. assets of co.

4.12
seal if any within mortgage /charge on which prevent co. 5. Company to obtain written insufficient to
6 months of any property of co. from misuse. consent from trustee OR redeem, then he
allotment. 3. Secured: b. Trustee given power trustees act as such and may apply to NCLT.
2. Fix payment on • Secured by mortgage by deed so that such consent to be attached On Redemption
maturity. OR charge on mortgage property is in every letter of offer of b. Company fails to
3. Fix interest property of the kept insured. debenture. redeem debentures
company. c. Company can with 6. Function of trustee: on maturity
payment.
• < 10 years or consent of trustee – • Protect interest of debenture OR fails to pay
4. No voting rights sell the asset (under holders.
< 30 years for interest trustee/ or
5. Maximum tenure infrastructure Co. hypothecation.) • Redress grievances of Holder. debenture holder
< 10 years; < • Security only in Without prejudice to 7. Liability of trustee: may apply to NCLT.
30 years for form of mortgage- Debentureholders Shall be liable for breach of c. Default in
infrastructure co. fixed charge OR d. Through trust deed trust complying with
hypothecation- on default trustee however, may escape if: NCLT order
floating charge. can realise the • Can prove he was diligent AND d. Every officer-
• Compulsory security without • > 3/4th in value of debenture imprisonment - < 3
appointment of court process. holders agree to excuse years or penalty >

SHARE CAPITAL AND DEBENTURES

debenture trustee. trustee. 2L < 5L or both.
Compulsory Appointment of Debenture Trustee:
1. Secured Debentures 2. Public offer of Debentures 3. Issue of Debentures > 500 persons
 As per the Companies (Share Capital and Debentures) Rules, 2014, the company shall create a Debenture Redemption Reserve for
the purpose of redemption of debentures, in accordance with the conditions given below-
(a) the Debenture Redemption Reserve shall be created out of the profits of the company available for payment of dividend;
(b) the company shall create Debenture Redemption Reserve (DRR) in accordance with following conditions:-

SHARE CAPITAL AND DEBENTURES

4.13
Also company shall (on or before the 30th day of April in each year) deposit minimum fifteen percent of the amount of its debentures
maturing during the year in any one or more of the following methods, namely:-
(i) in deposits with any scheduled bank;
(ii) in securities of the Central Government or of any State Government;
(iii) in securities mentioned in section 20 of the Indian Trusts Act, 1882;

Above investments can not be charged for securing any loan etc. Also it should be used only for redemption of debentures.
Also it should not at any time fall below 15% of the amount of the debentures maturing during the year ending on the 31st day of
March of that year;
CALLS AND INCIDENTAL MATTERS [SECTION 49 TO SECTION 51]
Calls are made by the company on security holders to pay the amount called up in respect
of partly paid up securities.

As per Section 49, these calls have to uniformly made and there should be no differentiation
for a given class of security holders.

Explanation.—For the purposes of this section, shares of the same nominal value on which
different amounts have been paid-up shall not be deemed to fall under the same class (i.e.
the provision is not applicable in case where different amounts are paid for a same class for
security.)

Calls in Advance
As per Section 50, a company may, if so authorised by its articles, accept from any member,
the whole or a part of the amount remaining unpaid on any shares held by him, even if no
part of that amount has been called up (i.e. if authorised by the articles, a company can
keep advance subscription or call money received in advance.)

However, in case of member of a company limited by shares there would be no voting right on
that advance amount till the amount is duly called for and adjusted.

The company could pay proportionate dividends in proportion to amount paid on each share,
if authorised by the articles [Section 51].

In other words, advance payment will never lead to increased voting rights but delayed
payment of call money could be the reason of decreased voting rights.

Application of premiums received on issue of shares [Section 52]

Where a company issues shares at a premium, whether for cash or otherwise, a sum equal
to the aggregate amount of the premium received on those shares shall be transferred to
a securities premium account and the provisions of this Act relating to reduction of share
capital (which are very stringent) of a company shall, except as provided in this section, apply
as if the securities premium account were the paid-up share capital of the company.

Application of securities premium account: The securities premium account may be applied
by the company—
(a) towards the issue of unissued shares of the company to the members of the company as
fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue
of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.

4.14 SHARE CAPITAL AND DEBENTURES

Who may apply the securities premium account: The securities premium account may be
applied by such class of companies, as may be prescribed and whose financial statement
comply with the accounting standards prescribed for such class of companies under section
133,—
(a) in paying up unissued equity shares of the company to be issued to members of the
company as fully paid bonus shares; or
(b) in writing off the expenses of or the commission paid or discount allowed on any issue of
equity shares of the company; or
(c) for the purchase of its own shares or other securities under section 68.

Prohibition on issue of shares at discount [Section 53]

A company cannot issue shares in disregard of Section 53 of the Companies Act, 2013.
1. According to section 53, a company shall not issue shares at a discount, except in the
case of an issue of sweat equity shares given under section 54 of the Companies Act,
2013. [Sub section (1)]
2. Any share issued by a company at a discount shall be void. [Sub section (2)]
3. Exception: Notwithstanding anything contained in sub-sections (1) and (2), a company
may issue shares at a discount to its creditors when its debt is converted into shares in
pursuance of any statutory resolution plan or debt restructuring scheme in accordance
with any guidelines or directions or regulations specified by the Reserve Bank of India
under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.
4. Where any company fails to comply with the provisions of this section, such company
and every officer who is in default shall be liable to a penalty which may extend to
an amount equal to the amount raised through the issue of shares at a discount or five
lakh rupees, whichever is less, and the company shall also be liable to refund all monies
received with interest at the rate of twelve per cent. per annum from the date of issue
of such shares to the persons to whom such shares have been issued.

Issue of Sweat equity shares [Section 54]

(Q.15-Page No: 4.8)
As per Section 2(88)-sweat equity shares means such equity shares as are issued by a company
to its directors or employees at a discount or for consideration, other than cash, for providing
their know-how or making available rights in the nature of intellectual property rights or
value additions, by whatever name called;
Section 54 of the Companies Act, 2013 provides the conditions where a company may issue
sweat equity shares of a class of shares already issued.
Conditions: A company may issue sweat equity shares of a class of shares already issued, if the
following conditions are fulfilled, namely—
(a) the issue is authorised by a special resolution passed by the company;
(b) the resolution specifies the number of shares, the current market price, consideration,
if any, and the class or classes of directors or employees to whom such equity shares are
to be issued;
(c) where the equity shares of the company are listed on a recognised stock exchange, the
sweat equity shares are issued in accordance with the regulations made by the Securities
and Exchange Board in this behalf

SHARE CAPITAL AND DEBENTURES 4.15

The rights, limitations, restrictions and provisions as are for the time being applicable to
equity shares shall be applicable to the sweat equity shares issued under this section and the
holders of such shares shall rank pari passu with other equity shareholders.
As per the Rule 8 of the Companies (Share and Debentures) Rules, 2014,
‘‘Employee’’ means-(a) a permanent employee of the company who has been working in India
or outside India; or
(b) a director of the company, whether a whole- time director or not; or
(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in
India or outside India, or of a holding company of the company;

Special Points
(1) The company shall not issue sweat equity shares for more than fifteen percent of the
existing paid up equity share capital in a year or shares of the issue value of rupees five
crores, whichever is higher:
Provided that the issuance of sweat equity shares in the Company shall not exceed
twenty five percent, of the paid up equity capital of the Company at any time.
Provided further that a startup company, may issue sweat equity shares not exceeding
fifty per cent of its paid up capital upto ten years from the date of its incorporation or
registration.
(2) The sweat equity shares issued to directors or employees shall be locked in/non
transferable for a period of three years from the date of allotment and the fact that the
share certificates are under lock-in and the period of expiry of lock in shall be stamped
in bold or mentioned in any other prominent manner on the share certificate.

Punishment for personation of shareholder [Section 57]

If any person deceitfully personates as—
• an owner of any security or interest in a company, or
• of any share warrant or coupon issued in pursuance of this Act, and thereby obtains or
attempts to obtain any such security or interest or any such share warrant or coupon, or
receives or attempts to receive any money due to any such owner,
Such person shall be punishable with imprisonment for a term which shall not be less
than one year but which may extend to three years and with fine which shall not be less
than one lakh rupees but which may extend to five lakh rupees.

Further issue of share capital – Rights Issue; Preferential Allotment [Section 62]
A rights issue involves pre-emptive subscription rights to buy additional securities in a company
offered to the company’s existing security holders. It is a non- dilutive pro rata way to raise
capital.
As per the section 62 of the Companies Act, 2013-
(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, 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

4.16 SHARE CAPITAL AND DEBENTURES

 and limiting a time not being less than fifteen days or such lesser number of
days as may be prescribed and not exceeding thirty days from the date of the
offer within which the offer, if not accepted, shall be deemed to have been
declined; Companies Amendment Act, 2020
(ii) unless the articles of the company otherwise provide, the offer aforesaid shall
be deemed to include a right exercisable by the person concerned to renounce
the shares offered to him or any of them in favour of any other person; and
the notice referred to in clause (i) shall contain a statement of this right;
(iii) after the expiry of the time specified in the notice aforesaid, or on receipt
of earlier intimation from the person to whom such notice is given that he
declines to accept the shares offered, the Board of Directors may dispose of
them in such manner which is not dis- advantageous to the shareholders and
the company;
(b) to employees under a scheme of employees’ stock option, subject to & special
resolution passed by company and subject to the conditions as may be prescribed;
or
(c) to any persons, if it is authorised by a special resolution, whether or not those
persons include the persons referred to in clause (a) or clause (b), either for cash
or for a consideration other than cash, if the price of such shares is determined by
the valuation report of a registered valuer, subject to the compliance with the
applicable provisions of Chapter III and any other conditions as may be prescribed.

(2) Exception: This section shall not apply to the increase of the subscribed capital of a
company caused by the exercise of an option attached to the debentures issued or loan
raised by the company to convert such debentures or loans into shares in the company.

SHARE CAPITAL AND DEBENTURES 4.17

 Issue of bonus shares [Section 63]
Bonus shares are shares issued proportionately by a company to its current shareholders as
fully paid shares free of any cost to them.

This section 63 of the Companies Act, 2013 deals with the condition and the manner of issue
of fully paid-up bonus shares by a company to its members.
(1) Section 63 says that a company may issue fully paid-up bonus shares to its members, in
any manner whatsoever, out of—
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account:

Provided that no issue of bonus shares shall be made by capitalising reserves created by
the revaluation of assets.

(2) No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up
bonus shares unless—
(a) it is authorised by its articles;
(b) it has on the recommendation of the Board, been authorised in the general meeting
of the company;
(c) it has not defaulted in payment of interest or principal in respect of fixed deposits
or debt securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the employees,
such as, contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are made
fully paid-up;
(f) it complies with such conditions as may be prescribed*.

(3) The bonus shares shall not be issued in lieu of dividend.

4.18 SHARE CAPITAL AND DEBENTURES

 05 ACCEPTANCE OF DEPOSITS
BY COMPANIES

ACCEPTANCE OF DEPOSITS BY 5.1

COMPANIES
 2(31) “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount
as may be prescribed in consultation with the Reserve Bank of India;
Q.7-Page No: 5.2 Q.1-Page No: 5.1
Acceptance of deposits by companies - Definition of deposit rule 2(1)(C) Deposit does not include the following: Negative list
1 2 5 7 9 12
Section 73 and Any amount received Amount received Amount received Any non interest a. Amount brought in by
section 76 not from by company from from employee < bearing amount promoters as unsecured
applicable to 1. CG director or Relative annual salary not held in trust loans.
of Director of A
deposits accepted 2. SG PRIVATE company bearing interest Held on behalf b. Loan was brought because
by: 3. Amount guaranteed Provided not given (Security deposit of a condition by bank/
1. Banking CO. by C/ SG out of borrowed 6 from employee) F.I./ Funding the project
2. NBFC 4. Local authority funds 8
a. Secured bonds debentures + any amount received in the course of, or for the of company
3. Housing 5. Statutory authority compulsorily convertible in 10 purposes of, the business of the company– c. Loan to be brought from
finance co. 6. Foreign government years - Not a deposit (a) advance for the supply of goods or provision of own/relatives NOT from
4. Company 7. Foreign bank b. Unsecured bonds+ compulsory services
convertible in 10 years-Not a (b) consideration for an immovable property friends and business
notified by CG 8. Multi lateral financial (c) security deposit

5.2
deposit (d) term projects for supply of capital goods associates
5. Chit fund co. institution (example c. Secure debentures or bonds + (e) long future services
6. Nidhi co. IMF/UN non convertible- Not a deposit (f) as an advance received and as allowed by any Such loan will NOT be
d. Unsecured bonds debentures + sectoral regulator
non convertible-Deposit (g) as an advance for subscription towards considered as deposits
Received as grants/Subsidy e. Unsecured bonds + non publication, only until bank loan is
convertible + listed on Stock Amount to be refunded within 15 days from due date repaid. If bank loan paid
3 4 Exchange. Not a deposit
then loan of promoters
-Loan from bank/ any amount received and held pursuant to an offer made in After 15 days considered as deposits considered as deposits
financial institution accordance with the provisions of the Act towards subscription
to any securities (including share application money or advance accepted by company.
-Commercial paper
towards allotment of securities, pending allotment), so long as 10 11
issued such amount is appropriated only against the amount due on
-Inter corporate allotment of the securities applied for; Any amount received by company as Amount received by a start-up

COMPANIES
It is clarified by way of Explanation that if the securities for which company as ‘convertible note’
loans application money or advance for such securities was received 1. Collective investment scheme
cannot be allotted within 60 days from the date of receipt of 2. Alternate investment fund Convertible within 10 yrs (same
Recognize as loans the application money or advance for such securities and such as debenture)
application money or advance is not refunded to the subscribers 3. Domestic venture capital fund

ACCEPTANCE OF DEPOSITS BY
not deposits within 15 days from the date of completion of 60 days, such 4. Mutual funds etc
amount shall be treated as a deposit under these rules. In a single Tranche > 25L
Above funds received as per SEBI Not considered deposits.
Else shall be considered deposit regulation-NOT considered deposits
 Acceptance of deposits by company

Acceptance of deposits from members (section 73) Acceptance of deposits from public (section 76)
Q.6-Page No: 5.5 Q.3-Page No: 5.3 Q.4-Page No: 5.4
(1) no company shall invite, accept or renew deposits under this Act from Only eligible company can accept deposits from public
the public except in a manner provided under this Chapter

COMPANIES
(2) A company may, subject to the passing of a resolution in general meeting,
accept deposits from its members on such terms and conditions, subject Eligible public company:
to the fulfilment of the following conditions, namely:-
Net worth > 100 crores OR
(a) issuance of a circular to its members including therein a statement

ACCEPTANCE OF DEPOSITS BY
showing the financial position of the company, the credit rating obtained, Turnover > 500 crores
the total number of depositors and the amount due towards deposits in
respect of any previous deposits accepted by the company;
Net worth = P.SC.+ALL reserve + security premium
(b) filing a copy of the circular along with such statement with the Registrar
within thirty days before the date of issue of the circular;
(c) depositing, on or before the 30th day of April each year, such sum which

5.3
(1) Notwithstanding anything contained in section 73, an Eligible
shall not be less than 20% of the amount of its deposits maturing during public company, may accept deposits from persons other than
the following financial year and kept in a scheduled bank in a separate its members subject to compliance with the requirements
bank account to be called deposit repayment reserve account. provided in sub-section(2) of section 73.
(d) Omitted w.e.f. 15th August, 2018 Provided that such a company shall be required to obtain the
(e) certifying that the company has not committed any default in the rating (including its networth, liquidity and ability to pay its
repayment of deposits accepted either before or after the commencement deposits on due date) from a recognised credit rating agency
of this Act or payment of interest on such deposits and where a default for informing the public.
had occurred, the company made good the default and a period of 5 Provided further that every company accepting secured
years had lapsed since the date of making good the default; and deposits from the public shall within 30 days of such
(f) providing security, if any for the due repayment of the amount of deposit acceptance, create a charge on its assets of an amount not
or the interest thereon including the creation of such charge on the less than the amount of deposits accepted.
property or assets of the company.
(2) The provisions of this Chapter shall, mutatis mutandis, apply
(3) Every deposit accepted by a company shall be repaid with interest in to the acceptance of deposits from public under this section.
accordance with the terms and conditions of the agreement referred to
in that sub-section.

If company fails to repay deposit OR part thereof depositor MAY apply to NCLT for remedy.
 Acceptance of deposits by company
Default in repayment of deposits

Deposit accepted before commencement of Deposit accepted after commencement of

companies at, 2013( section 74) Companies Act 2013 (section 76A)

If a company has accepted deposits in companies act, If company has accepted deposits in Companies Act
1956 and fails to repay within: 2013 and fails to repay as per section 73 or section
1. 3 months of commencement of Companies Act, 76:
2013 OR
Punishment:
2. On the maturity date OR a. Company:
Minimum- 1 crore OR 2 times deposit amount
3. Within 3 years or commencement of new act OR whichever is lower

5.4
4. Within extended time granted by NCLT Maximum- 10 crore

Punishment b. Every officer of company:

a. Company: > 1 crores < 10 crores Imprisonment < 7 years AND
Penalty > 25L < 2 crores
b. Every officer of company: Officer contravenes knowingly and willfully
Imprisonment < 7 years OR
Penalty > 25L < 2crores OR Liable under section 447
BOTH

COMPANIES
ACCEPTANCE OF DEPOSITS BY
 PROVISIONS REGARDING ACCEPTANCE OF PROVISIONS REGARDING ACCEPTANCE
DEPOSITS FROM MEMBERS OF DEPOSITS FROM PUBLIC BY ELIGIBLE
COMPANIES
(1) Any company may accept or renew (1) Only ‘eligible companies’ are permitted
deposits from its members by following to accept deposits from the public, in
the provisions as set out below: addition to their members.

Exemption to certain private companies:

(A) which accepts from its members monies not exceeding one hundred per cent. of
aggregate of the paid-up share capital, free reserves and securities premium account;
or
(B) which is a start-up, for 10 years from the date of its incorporation; or
(C) which fulfils all of the following conditions, namely:
(a) which is not an associate or a subsidiary company of any other company;
(b) if the borrowings of such a company from banks or financial institutions or any
body corporate is less than twice of its paid-up share capital or fifty crore rupees,
whichever is lower; and
(c) such a company has not defaulted in the repayment of such borrowings subsisting
at the time of accepting deposits under this section.
However, such a company [as referred to in clauses (A), (B) or (C)] shall file the details
of monies accepted to the Registrar in the specified manner (i.e. in Form DPT-3).

(2) Passing of a Resolution: A company is (2) Passing of Special Resolution: The

required to pass a resolution in general ‘eligible company’ is required to
meeting for acceptance of deposits from obtain the prior consent by means of
its members. [section 73 (2)]. a special resolution in general meeting
and also file the said resolution with
the Registrar of Companies before
making any invitation to the public for
acceptance of deposits.

ACCEPTANCE OF DEPOSITS BY 5.5

COMPANIES
(3) Issuance of a Circular containing (3) Issuance of Circular in the Form of
Statement: The company is required to Advertisement : An ‘eligible company’
issue a circular to its members including intending to invite deposits is required
therein a statement showing the financial to issue a circular in the form of an
position of the company, the credit rating advertisement in DPT-1.
obtained, the total number of depositors
and the amount due towards deposits Such advertisement shall be published
in respect of any previous deposits in English in an English newspaper and
accepted by the company and such other in vernacular language in a vernacular
particulars in the prescribed form and newspaper. Both newspapers should
manner. DPT-1. [section 73 (2) (a)] have wide circulation in the State in
Filing of Circular: The company is required which the registered office of the
to file a copy of the circular containing company is situated.
the statement with the Registrar within
30 days before the date of issue of the If the company has its website, the
circular. [section 73 (2) (b)] circular shall also be placed on the
Certification as to No default in website.
Repayment: The company needs to
certify that it has not committed any Obtaining of Credit Rating: The ‘eligible
default in the repayment of deposits company’ shall be required to obtain
accepted either before or after the the rating (including its net-worth,
commencement of this Act or payment liquidity and ability to pay its deposits
of interest on such deposits. on due date) from a recognised credit
rating agency. The given rating which
In case a default had occurred, the ensures safety shall be informed to
company made good the default and a the public at the time of invitation of
period of five years had lapsed since the deposits from the public. Further, the
date of making good the default. [section rating shall be obtained for every year
73 (2) (e)] during the tenure of deposits.
(5) Requirement of Deposit Repayment Reserve Account: The company is required to
deposit, on or before 30th of April each year, at least 20% of the amount of its deposits
maturing during the following financial year and kept in a scheduled bank in a separate
bank account to be called deposit repayment reserve account. [section 73 (2) (c)]
Such amount shall not at any time fall below twenty percent of the amount of deposits
maturing during the financial year.
(6) Provision of Security: The company may provide security, if any, for the due repayment
of the amount of deposit or the interest thereon. Further, if security is provided, the
company shall take steps for the creation of charge on the property or assets of the
company.

5.6 ACCEPTANCE OF DEPOSITS BY

COMPANIES
(7) Appointment of Trustee for Depositors: Following provisions are required to be observed
in this respect:
 One or more trustees for depositors need to be appointed by the company for
creating security for the deposits.
 A written consent shall be obtained from the trustee before their appointment.
 A statement shall appear in the circular or advertisement with reasonable
prominence to the effect that the trustees for depositors have given their consent
to the company for such appointment.
 The company shall execute a deposit trust deed in Form DPT-2 at least seven days
before issuing the circular or circular in the form of advertisement.
 No person including a company that is in the business of providing trusteeship
services shall be appointed as a trustee for the depositors, if the proposed trustee:
(a) is a director, key managerial personnel or any other officer or an employee of the
company or of its holding, subsidiary or associate company or a depositor in the
company;
(b) is indebted to the company, or its subsidiary or its holding or associate company
or a subsidiary of such holding company;
(c) has any material pecuniary relationship with the company;
(d) has entered into any guarantee arrangement in respect of principal debts secured
by the deposits or interest thereon;
(e) is related to any person specified in clause (a) above.
 No trustee for depositors shall be removed from office after the issue of circular
or advertisement and before the expiry of his term except with the consent of all
the directors present at a meeting of the board.
(8) Maximum Amount of Deposits from (8) Maximum Amount of Deposits : An
Members: A company is permitted to eligible company is permitted to
accept or renew any deposit from its accept or renew deposits as under:
members including other such deposits From its members:
outstanding as on the date of acceptance Member = < 10% [PSC+FR+SP]
or renewal.
Max = < 35% [PSC + FR + SP] From Persons other than its Members:
Public = < 25% [PSC+FR+SP]

Maximum Amount of Acceptable Deposit in

case of an Eligible Government Company:
Members + Public = < 35% [PSC+FR+SP]

(9) Repayment of deposit: Every deposit accepted by a company shall be repaid with interest
in accordance with the terms and conditions of the agreement. [Section 73 (3)]
(10) Application to Tribunal if the Company fails to Repay: In case a company fails to repay
the deposit or part thereof or any interest thereon, the depositor concerned may apply
to the Tribunal for an order directing the company to pay the sum due or for any loss
or damage incurred by him as a result of such non- payment and for such other orders
as the Tribunal may deem fit. [Section 73 (4)

ACCEPTANCE OF DEPOSITS BY 5.7

COMPANIES
(11) Tenure for which Deposits can be Accepted: A company is not permitted to accept or
renew deposits (whether secured or unsecured) which is repayable on demand or in
less than six months. Further, the maximum period of acceptance of deposit cannot
exceed thirty six months.
Exception to the rule of tenure of six months: For the purpose of meeting any of
its short-term requirements of funds, a company may accept or renew deposits for
repayment earlier than six months subject to the condition that:
(i) such deposits shall not exceed ten per cent. of the aggregate of the paid-up
share capital, free reserves and securities premium account of the company;
and
(ii) such deposits are repayable only on or after three months from the date of such
deposits or renewal.
(12) Register of Deposits:
 Every company accepting deposits shall maintain one or more separate registers
for deposits accepted or renewed at its registered office.
Following particulars shall be entered separately in the case of each depositor:
(a) name, address and PAN of the depositor/s;
(b) particulars of the guardian, in case of a minor;
(c) particulars of the nominee;
(d) deposit receipt number;
(e) date and the amount of each deposit;
(f) duration of the deposit and the date on which each deposit is repayable;
(g) rate of interest on such deposits to be payable to the depositor;
(h) due date for payment of interest;
(i) mandate and instructions for payment of interest and for non- deduction of tax
at source, if any;
(j) date or dates on which the payment of interest shall be made;
(l) particulars of security or charge created for repayment of deposits;
(m) any other relevant particulars.

 The entries shall be made within seven days from the date of issuance of the
receipt duly authenticated by a director or secretary of the company or by any
other officer authorised by the Board for this purpose.

 The said register shall be preserved in good order for a period of not less than
eight years from the financial year in which the latest entry is made in the register.
(13) Ceiling on Rate of Interest and Brokerage Payable on Deposits: A company is permitted
to invite or accept or renew any deposit at any rate of interest or pay any amount of
brokerage but in no case, it shall exceed the maximum rate of interest or brokerage
prescribed by the Reserve Bank of India in case of non-banking financial companies
(NBFCs) for acceptance of deposits.

5.8 ACCEPTANCE OF DEPOSITS BY

COMPANIES
(14) Deposits in Joint Names: In case the depositors so desire, deposits may be accepted
in joint names not exceeding three. A joint deposit may be accepted with or without
any of the clauses, namely, “Jointly”, “Either or Survivor”, “First named or Survivor”,
“Anyone or Survivor”. These clauses operate on maturity.
(15) Filing of Return of Deposits with the Registrar: A duly audited return of deposits in
DPT-3 (containing particulars as on 31st March of every year) shall be filed with the
Registrar of Companies along with requisite fee on or before the 30th June of that year
(other than a Government company).
(16) No Right to Alter: The company has no right to alter any of the terms and conditions
of the deposit, deposit trust deed and deposit insurance contract which may prove
detrimental to the interest of the depositors after circular or circular in the form of
advertisement is issued and deposits are accepted.
(17) Penal Rate of Interest : In case the company fails to repay deposits (both secured and
unsecured) on maturity, after they are claimed, it shall pay penal rate of interest of
eighteen per cent per annum for the overdue period.
(18) Punishment for Contravention: If any company inviting deposits or any other person
contravenes any of the ‘deposit rules’ for which no punishment is provided in the Act,
the company and every officer-in-default shall be punishable as under:
• with fine extendable to five thousand rupees; and
• in case the contravention is a continuing one, with a further fine up to five hundred
rupees for every day during which the contravention continues.
(19) Premature Repayment of Deposits : After the expiry of six months but before the actual
date of maturity, if a depositor requests for premature repayment, the rate of interest
payable shall be one percent less than the rate which would be payable for the period
for which the deposit has actually run.

PUNISHMENT FOR CONTRAVENTION OF SECTION 73 OR SECTION 76

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

ACCEPTANCE OF DEPOSITS BY 5.9

COMPANIES
 REPAYMENT OF DEPOSITS ACCEPTED BEFORE COMMENCEMENT OF THE COMPANIES ACT,
2013
The provisions regarding repayment of deposits accepted before commencement of the
Companies Act, 2013, has been dealt with in section 74. These provisions are explained as
under:
(i) Filing of Statement of Deposits with the Registrar of Companies and Repayment
Thereafter: As per section 74 (1), in case any deposit was accepted by a company before
the commencement of this Act (i.e. before 1.4.2014), and the amount of such deposit or
any interest remains unpaid as on 1.4.2014 or becomes due at any time thereafter, the
company shall take the following steps:
(a) file, within a period of 3 months from such commencement or from the date on
which such payments are due, with the Registrar:
 a statement of all the deposits accepted by the company and sums remaining
unpaid on such amount with the interest payable thereon along with the
arrangements made for such repayment. This is to be done notwithstanding
anything contained in any other law for the time being in force or under
the terms and conditions subject to which the deposit was accepted or any
scheme framed under any law; and
(b) repay within three years from such commencement or on or before expiry of the
period for which the deposits were accepted, whichever is earlier.

(ii) Extension of Time for Repayment of Deposits by the Tribunal: As per section 74 (2), the
Tribunal may, on an application made by the company, after considering the financial
condition of the company, the amount of deposit and the interest payable thereon and
such other matters, allow further time as considered reasonable to the company to
repay the deposit.

(iii) Punishment for Non-Repayment of Deposits: As per section 74 (3), if a company fails
to repay the deposit or part thereof or any interest thereon within the time specified
in section 74 (1) or such further extended time allowed by the Tribunal under section
74 (2), the company shall, in addition to the payment of the amount of deposit or part
thereof and the interest due, be punishable as under:
• company: with fine minimum of one crore rupees and maximum of ten crore rupees;
and
• every officer-in-default: with imprisonment extendable to seven years or with fine
minimum of 25 lakh rupees and maximum of two crore rupees, or with both.

5.10 ACCEPTANCE OF DEPOSITS BY

COMPANIES
 06 REGISTRATION OF CHARGES

REGISTRATION OF CHARGES 6.1

 • Chapters is from the view point of Borrowing Company
• Charge to be Registrered for Assets in as well as Outside India
• Charge can be for both Tangible/Intangible Assets

Registration of Charges

Charge means security given for securing loan/debenture.

Fix charge Floating charge

1. On specific asset. 1. On a class of asset. (Current Asset) On default it gets
2. Loss of ownership 2. Neither loss of ownership nor converted to fix charge
possession.
Not Registered
Within 30 days Within 30 days within 60 days If NOT then CG Approval Certificate of
Section 77 + If Within further CHG-8
Registration CHG-1/CHG-9 with Registration
(Debenture) ADDITIONAL FEES 60 days with [Section 87] CHG-2
ADVALOREM

6.2
Not Modified CG Approval
Within 30 days Within 30 days Certificate of
Section 79 + If within 60 days If NOT then CHG-8
Modification CHG-1/CHG-9 with Within further Modification
(Debenture) ADDITIONAL FEES [Section 87]
60 days with CHG-3
ADVALOREM
270 days CG Approval Certificate of
Section 82 Within 30 days If NOT then CHG-8
+ with If Not Satisfied Satisfaction
Satisfaction CHG-4* within 300 days [Section 87]
ADDITIONAL FEES CHG-5

Consequence of non-registration of charge – Section 86

if any person wilfully furnishes:

Company Penalty 5 Lacs Every Officer • any false or incorrect information; or

REGISTRATION OF CHARGES
Penalty 50000 • knowingly suppresses any material information;
which is required to be registered under section 77, he
shall be liable for action under section 447.
An unregistered charge still will be valid & Lender shall
have Power to Recover the Money from Borrower
 CHG-4*

CHG - 4 + No Dues letter Only CHG-4

signed by lender (form 19)

No notice to be sent ROC to send notice

to lender to lender

Lender to give NOC

within 14 days

REGISTRATION OF CHARGES
RECTIFICATION BY CENTRAL GOVERNMENT IN REGISTER OF CHARGES [SECTION 87]
(Q.3-Page No:6.1)
The Central Government on being satisfied that-

6.3
(a) The omission to give intimation to the registrar of the payment or
satisfaction of a charge within the time required under this chapter; or

(b) The omission or misstatement of any particulars in any filing previously made to the Registrar with respect to any such
charge or modification or with respect to any memorandum of satisfaction or other entry made in pursuance of section 82
or section 83,
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,
it may on the application of the company or any person interested and on such terms and conditions as the central
government deems just and expedient direct that the time for giving of intimation of payment or
satisfaction shall be extended or
as the case may require that the omission or misstatement shall be rectified.
 INTRODUCTION

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

Fixed Charge Floating Charge

A ‘floating charge’ is created on assets which are of fluctuating

A ‘fixed charge’ is a charge which attaches specific
nature like raw material, stock-in-trade, debtors, etc. A floating
assets of the borrowing company. These assets are
charge is created by way of hypothecation or lien. The assets
of permanent nature like land and building, office
under floating charge keep on changing because the borrowing
premises, machinery installed by the company, etc.

6.4
company is permitted to use them for producing final goods
and are identified at the time of creation of charge.
for sale e.g. in case of a company which manufactures leather
When a charge is created on such assets, the charge
goods, the raw material in the form of leather, which is subject
remains ‘fixed’ and the borrowing company is not
matter of floating charge, shall be used to manufacture leather
permitted to sell such assets though it may use them. A
goods without seeking any permission from the lender. The
fixed charge is created by way of mortgage or deposit
raw material (i.e. leather) which was attached at the time of
of title deeds. Assets under fixed charge can be sold
creation of A floating charge remains dormant until it becomes
only with the permission of the charge-holder. A fixed
fixed or crystallises. On crystallisation, the security (i.e. raw
charge is vacated when the money borrowed against
material, stock-in-trade, etc.) becomes fixed and is available for
the assets subject to fixed charge is repaid in full.
realization so that borrowed money is repaid.

REGISTRATION OF CHARGES
DUTY TO REGISTER CHARGES, ETC. [SECTION 77] (Q.5-Page No:6.2)

Charge Created on or after 02-11-2018

Within 30 days
Register Charge
If not registered in 30 days
Register in next 30 days (i.e. within 60 days
from creation) with additional fees
If not registered in next 30 days
Register within a further period of sixty days with advalorem fees

Section 77 of the Companies Act, 2013 contains provisions regarding registration of charges
with the Registrar of Companies.

Latest Amendment
Nothing contained in this rule shall apply to any charge required to be created or modified
by a banking company under section 77 in favour of the Reserve Bank of India when any loan
or advance has been made to it on Promissory Note under section 17 of the Reserve Bank of
India Act, 1934

APPLICATION FOR REGISTRATION OF CHARGE BY CHARGE-HOLDER [SECTION 78]

SECTION 77 TO APPLY IN CERTAIN MATTERS [SECTION 79]

Section 79 of the Act covers two situations. One relates to acquisition of any property already
subject to charge by a company. Other relates to modification in the terms and conditions
or modification in the extent of any charge already registered. In both the cases another
registration (in place of existing one) becomes necessary and the provisions contained in
section 77 relating to registration of charge shall equally apply.

REGISTRATION OF CHARGES 6.5

A. Company acquiring any Property subject to Charge [Section 79 (a)]
In case of a property where charge is already registered and if it is sold with the permission
of the holder of charge, it shall be the duty of the company acquiring it to get the charge
registered in accordance with Section 77. In other words, the earlier charge should get
vacated and, in its place, new charge should get registered by the company which has
acquired it.
B. Modification of Charge when there is Change in Terms and Conditions, etc. [Section 79
(b)]
Section 79 (b) requires any modification in charge (i.e. change in terms and conditions
or change in extent of any charge, etc.) to be registered by the company in accordance
with Section 77.
Some other examples of ‘modification’ are as under:
1. where the charge is modified by varying any terms and conditions of the existing
charge through an agreement;
2. where the modification is in pursuance of an agreement for enhancing or decreasing
the limits;
3. where the modification is by ceding a pari passu charge;
4. where there is change in rate of interest (other than bank rate);
5. where there is change in repayment schedule of loan; (not applicable in case of
working loans which are repayable on demand); and
6. where there is partial release of the charge on a particular asset or property.
C. Issue of Certificate of Modification
As per Rule 6, where the particulars of modification of charge is registered under section
79, the Registrar shall issue a certificate of modification of charge in Form CHG-3.

DEEMED NOTICE OF CHARGE [SECTION 80]

(Q.2-Page No:6.1)
Section 80 of the Companies Act, 2013 deals with the deemed notice of charge from the date
of its registration. Accordingly, where any charge on any property or assets of a company or
any of its undertakings is registered under section 77, any person acquiring such property,
assets, undertakings or part thereof or any share or interest therein shall be deemed to have
notice of the charge from the date of such registration.

COMPANY TO REPORT SATISFACTION OF CHARGE [SECTION 82]

(Q.4-Page No:6.2)
1. Intimation regarding Satisfaction of Charge
Section 82 of the Act of 2013, requires a company to give intimation of payment or
satisfaction in full of any charge earlier registered, to the Registrar in the prescribed
form. The intimation needs to be given within a period of 30 days from the date of such
payment or satisfaction.
Extended period of intimation: Proviso to Section 82 (1) extends the period of intimation
from thirty days to three hundred days. Accordingly, it is provided that the Registrar may,
on an application by the company or the charge holder, allow such intimation of payment
or satisfaction to be made within a period of three hundred days of such payment or
satisfaction on payment of prescribed additional fees.

6.6 REGISTRATION OF CHARGES

2. Notice to the Holder of Charge by the Registrar
On receipt of intimation, the Registrar shall cause a notice to be sent to the holder of
the charge calling upon him to show cause within such time as specified in the notice but
not exceeding 14 days, as to why payment or satisfaction in full should not be recorded.
If no cause is shown by the charge-holder, the Registrar shall order entering of a
memorandum of satisfaction in the register of charges kept by him and accordingly, he
shall inform the company of having done so.
However, no notice is required to be sent, in case the intimation to the Registrar in this
regard is in the specified form19 and signed by the holder of charge.

3. No Effect of Section 82 on the Powers of the Registrar

According to sub-section (4), Section 82 shall not be deemed to affect the powers of the
Registrar to make an entry in the register of charges under section 83 or otherwise than
on receipt of an intimation from the company i.e. even if no intimation is received by
him from the company.

4. Issue of Certificate
As per Rule 8 (2), in case the Registrar enters a memorandum of satisfaction of charge
in full, he shall issue a certificate of registration of satisfaction of charge in Form No.
CHG-5.

POWER OF REGISTRAR TO MAKE ENTRIES OF SATISFACTION AND RELEASE IN ABSENCE OF

INTIMATION FROM COMPANY [SECTION 83]
Section 83 of the Act of 2013 empowers the Registrar to make entries with respect to the
satisfaction and release of charges even if no intimation has been received by him from the
company.
Accordingly, with respect to any registered charge if an evidence is shown to the satisfaction
of Registrar that the debt secured by charge has been paid or satisfied in whole or in part or
that the part of the property or undertaking charged has been released from the charge or
has ceased to form part of the company’s property or undertaking, then he may enter in the
register of charges a memorandum of satisfaction that:
• the debt has been satisfied in whole or in part; or
• the part of the property or undertaking has been released from the charge or has ceased
to form part of the company’s property or undertaking.
This power can be exercised by the Registrar despite the fact that no intimation has been
received by him from the company.
Information to affected parties: The Registrar shall inform the affected parties within 30 days
of making the entry in the register of charges.
Issue of Certificate: As per Rule 8 (2), in case the Registrar enters a memorandum of satisfaction
of charge in full, he shall issue a certificate of registration of satisfaction of charge in Form
No. CHG-5.

REGISTRATION OF CHARGES 6.7

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

On ceasing to hold such appointment, the person appointed as above shall give a notice to
that effect to the company and the Registrar. In turn, the Registrar shall register such notice.

6.8 REGISTRATION OF CHARGES

 07 MANAGEMENT &
ADMINISTRATION

MANAGEMENT & ADMINISTRATION 7.1

 Declaration of beneficial interest in shares
If legal owner i.e. name on shares & beneficial owner i.e. investment by are different, then section 89 and 90 apply.

Section 89 Section 90

(1) Where the name of a person is entered in the register of members of a Disclosure of significant beneficial ownership to company:
company as the holder of shares in that company but who does not hold 1. Every individual, who acting alone or together, or through one or more
the beneficial interest in such shares, such person shall make a declaration persons or trust, including a trust and persons resident outside India, holds
to the company specifying the name and other particulars of the person beneficial interests, of not less than twenty-five per cent. or such other
who holds the beneficial interest in such shares. percentage as may be prescribed, in shares of a company or the right to
(2) Every person who holds or acquires a beneficial interest in share of a exercise, or the actual exercising of significant influence or control shall
company shall make a declaration to the company specifying the nature make a declaration to the company, specifying the nature of his interest
of his interest, particulars of the person in whose name the shares stand and other particulars.
registered in the books of the company. 2. Company to maintain register of such significant beneficial ownership.
(3) Where any change occurs in the beneficial interest in such shares, the 3. Such register shall be open for inspection by members for fees.
person shall, within a period of thirty days from the date of such change, 4. Company to file return of such significant beneficial owners & changes to

7.2
make a declaration to the company. ROC
(4) The Central Government may make rules to provide for the manner of 5. If a person who is significant beneficial owner but does not give declaration
holding and disclosing beneficial interest and beneficial ownership under to company then - company to give NOTICE to such person.
this section. 6. Such person to give information asked in notice to company in 30 days.
(5) If any person fails to make a declaration as required under sub-section 7. If such person fails to give information to company OR gives unsatisfactory
(1) or sub-section (2) or sub-section (3), he shall be liable to a penalty information then company to apply to NCLT in 15 days for an order
of fifty thousand rupees and in case of continuing failure, with a further suspending ALL rights attached to the significant beneficial owner.
penalty of two hundred rupees for each day after the first during which 8. NCLT after giving OOBH pass an order of restriction in 60 days
such failure continues, subject to a maximum of five lakh rupees. 9. The company or the person aggrieved by the order of the tribunal may
(6) Where any declaration under this section is made to a company, the make an application to the tribunal for relaxation or lifting of the
company shall make a note of such declaration in the register concerned restrictions placed within a period of one year from the date of such
and shall file, within thirty days from the date of receipt of declaration order:
by it, a return in the prescribed form with the Registrar 10. Failure by person to file declaration: Companies Amendment Act, 2020
(7) If a company, required to file a return under sub-section (6), fails to do Penalty 50000 + 1000 per day Maximum 2 lacs
so before the expiry of the time specified therein, the company and every 11. Wilful wrong declaration penalty under section 447.
officer of the company who is in default shall be liable to a penalty of one 12. Company fails to:
thousand rupees for each day during which such failure continues, subject a. Maintain register OR
to a maximum of five lakh rupees in the case of a company and two lakh b. Allow inspection OR

MANAGEMENT & ADMINISTRATION

rupees in case of an officer who is in default. c. File with ROC
• Exercise rights of member eg. Voting/ bonus/rights issue Company : Incase of officer :
• Receive dividends Penalty 1 lac + 500 per day Penalty 25000 + 200 per day Maximum 1 lac
Eg. Guardian is a legal owner and minor is a beneficial owner. maximum 5 lacs Companies Amendment Act, 2020
 “significant beneficial owner” in relation to a reporting company means an individual referred to in subsection (1) of section
90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or
entitlements in such reporting company, namely:-
(i) holds indirectly, or together with any direct holdings, not less than 10% of the shares;

(ii) holds indirectly, or together with any direct holdings, not less than 10% of voting rights in the shares;

(iii) has right to receive or participate in not less than 10% of the total distributable dividend, through indirect holdings alone,
or together with any direct holdings;

MANAGEMENT & ADMINISTRATION

(iv) has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct
holdings alone.

7.3
Significant influence: The term “significant influence” was previously not defined specifically for the rules, and hence, to
provide clarity, the following definition has been inserted through SBO rules: “Significant influence” means the power to
participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control
or joint control of those policies. [Rule 2 (1) (i)]
 General meeting
As per section 122 :- provisions of chapter VII shall be not applicable to OPC

Annual general meeting - Section 96 Extraordinary general meeting -

Section 98 & 100

1. Time limit for conducting

a. 1st AGM - < 9 months from the end of financial year- No extension of time limit. It is general meeting called for emergency
b. Subsequent AGM - < 6 months from the end of F.Y. - May be extended by ROC by 3 No time limit to conduct EGM.
months.
c. Time gap between 2 AGMs < 15 months.
d. 1 AGM in every cal endar year.
e. ROC can ignore requirement of 1 AGM in calendar year during extension.
f. Delay in completion of “Audit” cannot be a “separate reason” of extension.
g. If police seizes BOA of company, then company exempted from AGM.

7.4
Proper authority to call AGM is BOD. 2. Meeting called by: 1. EGM can be called by:
• BOD
• Requisitionists (member)
• NCLT

3. Mandatory:
AGM to be held in every calendar year is a statutory requirement To conduct EGM is NOT mandatory

4. Business to be transacted:
Both ordinary and special business shall be transacted at AGM All business done at EGM shall be
deemed to be special business.

5. Day of holding general meeting

a. AGM held on any day which is not declared by CG as “National holiday” EGM shall be held on a ‘working day’ ,

MANAGEMENT & ADMINISTRATION

b. If CG declares a national holiday after company issues notice of AGM it other than national holiday
shall not be a national holiday for that AGM.
c. CG me exempt a company from this requirement.
 6. Time of conducting meeting:
AGM to be conducted during business hours 9:00 AM to 6:00 PM but it may EGM may be conducted at anytime-
continue after 6:00 PM No specific provision

7. Place of holding meeting:

a. AGM to be held at registered office of the company OR within city of EGM to be held at registered office OR City
register office OR any place as central government may approve. of registered office.
b. AGM of unlisted company may be held at any place in India if consent by No specific provision
all members in advance (UNANIMOUS APPROVAL).

MANAGEMENT & ADMINISTRATION

8. Default in holding meeting
Any member may apply to NCLT to direct company to conduct AGM No penalty provision: But if demanded
Company and officer: Penalty < 1L AND < 5000/- per day Section 99 by members then members get power to

7.5
conduct on own.

9. Report on meeting:
Every listed public company to prepare report on AGM in form MGT-15 and No such report required.
file with ROC in 30 days from AGM. Section 121
 Who can call Extraordinary General Meeting

1. BOD: 2. Demand of members 3. NCLT - Section 98*

Suo-moto OR on requisition Requisition to be made by members
and sent to co.
BOD if it thinks fit may call EGM Suo-moto Application by director/
member of Co.
Co. which has Co. without
By BOD Resolution share capital share capital
Order meeting of Co.
Any General Meeting called to be called, held &
without authority of BOD is NOT Member with > Member with > 10% of
conducted as per NCLT
Valid unless ratified by BOD 10% of voting right voting as per AOA
Direction
before it is held.
On receipt of requisition
It may order that 1
member himself OR

7.6
Power of NCLT to Direct* BOD to conduct EGM within > 21 days < 45 days Proxy shall be deemed to
constitute meeting.
If BOD fails in conducting EGM OR transacts only
AGM EGM part of business specified in requisition Such meeting shall be
considered general
Sec 97 Sec 98 Requisitionists may themselves call & conduct EGM within meeting of the Co.
3 months from date of deposit of requisition with Co.
Failure to call meeting as
Any expenses incurred by requisitionists shall be per NCLT order
reimbursed by Co. AND such sum shall be deducted
from remuneration of such directors who were in
default in conducting such EGM. Section 99-Penalty
Co. & Every officer:

MANAGEMENT & ADMINISTRATION

EGM to be held at registered office OR City of registered office. < 100000/- AND < 5000/-
All Decision taken shall be considered VALID. per day
 Notice of General Meeting - Section 101

1.Whom to give 2. How to give 3. When to give 4. What to give

Notice of every As per Section 20 1. A general meeting

general meeting 1. Registered Post shall be called > 21 a. A company shall b. Agenda
shall be given to all OR days specify: (it refers to
of the following: 2. Speed Post OR 2. AOA may provide for purpose of meeting
1. Every member of 3. Courier OR more than 21 days 1. Place statement of
the Co. 4. Leaving it at 3. 21 clear days i.e. 2. Day business transacted)
2. Legal registered without counting 3. Date
representative/ office OR days of sending and

MANAGEMENT & ADMINISTRATION

4. Time
receiver 5. Email. day of meeting AND Ordinary Business Special Business
appointed. 4. If notice sent by 5. A copy of
3. Auditor of Co. post then exclude 48 1. Consideration Every other
annual report + of financial
4. Every director hours for counting 21 Audited financial business shall be
5. Preference days statements.
statement + Audit considered as a

7.7
shareholder 5. Section 8 Co. may 2. Declaration of
report + directors dividend special business
a. They can attend give > 14 clear days report
general meeting notice. 3. Appointment of
6. A proxy form in directors. Every special
b. But Can’t vote on 6. Notice of < 21 days MGT-11
ALL resolution maybe given if 4. Appointment of business shall have
consent is given by auditors. a explanatory
> 95% of members. statement
There are only 4
attached.
ordinary business.
O.R. shall be It requires a O.R./
required. S.R.

Default in complying with Notice - Section 101: Section 102 Explanatory statement shall have the following facts:
1. Financial Interest of every director, manager & KMP in each item.
Accidental omission to give notice OR Non-receipt of 2. In case of Business affecting other Co., shareholding interest of
notice shall not invalidate general meeting. every promoter, director, manager AND KMP of atleast 2% in such
other Co.
If omission to send notice is not accidental – Meeting
Penalty : Every Promoter/Director/ Manager/ other KMP who is in
Invalid
default < 50000 or 5 times the amount of benefit (whichever is high)
 QUORUM - Section 103

Minimum numbers of members required to be present at general meeting to validly transact any business.

Preference shareholders not to be counted Joint shareholders to be counted as 1 Proxy not counted

Private company:- Quorum 2 members Public company:- < 1000 members =5

> 1000 < 5000 =15
> 5000 members =30

1. Representative of company if it hold shares of the other company’ shall be deemed to be a member u/s 113 and counted
for quorum
2. Representative of CG/SG in case of government company shall be deemed to be member u/s 112 and counted for quorum.

7.8
- Quorum to be present within half an hour of schedule:
- If quorum is not present then:
a. Meeting shall stand adjourned to next week, same time and same place unless it is a national holiday.
b. Adjourn meeting such other time and place as BOD may determine OR
c. If EGM called by members, it shall stand cancelled

Adjournment of general meeting

By resolution at general meeting by members By chairman in case of disorder (chaos) By lack of quorum within 30 minutes

MANAGEMENT & ADMINISTRATION

 Adjourned meeting:
1. Should notice be given?
Yes > 3 days notice individually OR advertisement in 1 English and 1 vernacular newspaper

2. Can there be change in agenda? NO

3. What is the quorum?

a. In case of adjournment due to lack of quorum: Number of members > 2 shall be deemed as quorum
b. Adjournment for any other reason: Quorum same as original general meeting.

4. Effective date of resolution? Section 116

Resolution passed at adjourned general meeting shall be effective from the date of adjourned meeting AND not from any

MANAGEMENT & ADMINISTRATION

prior date

5. Eg. 25/09/2023 2/10/2023

no 3/10/2023

7.9
Date of original quorum
meeting at date of adjourned meeting
meeting

a. General meeting held on 3/10/2023, is the time limit of 6 months violated? :- No

b. Adjourned meeting on 3/10/2023, is company liable for penalty of belated general meeting? :- No
c. Extension required from ROC for conducting general meeting after 6 months? :- No approval

Adjournments - Temporary suspension at the general meeting.

Postponement - Implies putting off meeting before commencement.

Cancellation - Such meeting NO longer exists proceedings are NOT suspended by exhausted (EGM called by Requisitionists.)
 Chairman of meeting - Section 104 :

He is the presiding officer of the meeting

Appointment of chairman

Under AOA: Under section 104: By NCLT:

1. Chairman of BOD shall act as If AOA has no provision for Where NCLT directs calling
chairman of general meeting. appointment of chairman of EGM under section 97
2. If there is NO chairman/He is not then and 98.
present within 15 minutes - One
director to be elected as chairman. Members present at the It may appoint any
3. If NO director present /director NOT meeting shall elect 1 of person as chairman of the

7.10
willing - One of the members present them as chairman (by show meeting
to be appointed as chairman. of hands.)

In case of equality of votes, chairman shall have the second OR casting vote
He may cast such vote different from original vote

MANAGEMENT & ADMINISTRATION

 Proxy - Section 105 Minutes Register - Section 118
1. Minutes are a record of business done at meetings.
1st meaning 2nd meaning 2. A distinct minute book shall be maintained for:
Means a person appointed by It means a document by which 1. General meeting of members
member of Co. to attend & such (agent )person is appointed. 2. Meeting of Creditors Separate Books
vote on his behalf @ meeting It shall be in Form MGT-11 3. Board meeting
3. Minutes must be recorded within 30 days of meeting
Terms and Conditions: along with date of such recording.
1. Every member of Co. entitled to vote can appoint proxy. 4. Co. may maintain minutes in loose leaf form and are
2. A proxy may/may not be member of the Co. However, in case of bound at reasonable intervals.
Section 8 Co. only member of Co. can be proxy. 5. Every page of minutes book shall be signed OR initials
3. A person can act as proxy on behalf of < 50 members AND holding put AND last page must be dated and signed.

MANAGEMENT & ADMINISTRATION

in aggregate < 10% voting rights.
4. But for acting as proxy of 1 member voting power shall not be
counted. In BOD Meeting: In General Meeting: In resolution by
5. A co. shall along with notice of every general meeting send a postal ballot :

7.11
proxy form. Default – 5,000/- chairman of the said meeting within the aforesaid period
6. A member willing to appoint a proxy shall deposit form with Co. of 30 days or in the event of the death or inability of that
> 48 hours before to General meeting. AOA may provide < 48 chairman within that period, by a director duly authorised
hours before. by the Board
7. Proxy form shall be writing & signed by appointing member If
6. All appointments made at any meeting shall be included
appointer is Co. under Common seal (If Any)
in the minutes of the meeting.
8. Proxy cannot be counted in Quorum.
7. Chairman may in his opinion NOT include in minutes:
9. Proxy cannot inspect list of proxies & Minutes Book.
1. Any defamatory matter OR Negative
10. Proxy can demand a Poll & vote in poll method.
2. Irrelevant/ immaterial matter OR Points
11. Proxy can be revoked as follows:
3. Matter detrimental to interest of Co.
1. By deposit of new proxy within stipulated time.
8. Preservation of minutes: (of G.M. OR BOD Meeting)
2. Member himself attends the meeting
1. Kept at the registered office of the Co. AND
3. Death OR insanity of member
Provided Co. receive Info. 2. Shall be preserved permanently.
4. Transfer of shares.
3. Kept in custody of Company Secretary/ Director.
12. Member entitled to vote @ meeting may inspect proxy list
9. Tampering with minutes:
beginning 24 hours prior until end of meeting.
Imprisonment < 2 years AND Penalty > 25,000 < 1,00,000

By giving atleast 3days advance notice.

 Section 106 Restriction on voting rights. (1) Notwithstanding anything contained in this Act, the articles of a company may provide that no member shall exercise any voting
right in respect of any shares registered in his name on which any calls or other sums presently payable by him have not been paid, or in regard to which the company has
exercised any right of lien.
(2) A company shall not, except on the grounds specified in sub-section (1), prohibit any member from exercising his voting right on any other ground.

Methods of Voting (Any method of voting can be converted into voting by poll method to Count 1 share = 1 vote) Public Co.
< 1000
members
Physical
Section 107 Section 108 Section 109 Shares Section 110
Show of Hands Electronic Means Poll Postal Ballot Method
1. At any general a. A Poll can be ordered by chairman at anytime before OR
meeting, a resolution Compulsory for:
or after declaration of result on voting by show of Voting by post Voting by any
put to the vote of the 1. Every listed company, hands. electronic mode
meeting shall, unless OR b. 1 share = 1 vote. (email)
a poll is demanded 2. Co. > 1,000 members c. Proxy allowed to vote.
under section 109 or d. Poll has to be demanded and can be done by:
the voting is carried a. Voting done before the AGM.
b. At the doorstep of member.
out electronically, be a. Voting by display of Co. with share capital Co. without share capital
c. Provisions requiring postal
decided on a show of electronic ballots ballot:
hands. b. Voting counted in 1. Members/proxy holding Members/proxy holding  Alteration of MOA/AOA.
centralized server with
• 1st method to adequate cyber security. > 10% of voting OR > 10% of voting as per AOA  Sec 12(5), 13(8), 43, 48, 68,

7.12
decide fate of c. Co. to send notice of 2. Paid-up share capital 151, 180, 186 (read once)
motion. meeting & method of > 5,00,000 This method N.A. to:
voting. Poll maybe withdrawn by
• 1 member = 1 vote. 1. OPC
• Done at the d. Co. to provide voting person demanding it at 2. Other Co. < 200 members.
facility electronically (3 Poll on: any time
meeting. days). Procedure :
• Proxy not allowed 1. Adjournment of meeting. Taken at the meeting a. Co. to send notice to all
e. If members didn’t vote
to vote. electronically they can 2. Election of Chairman u/s 104 immediately. share holders along with draft
come to meeting & vote 3. On any other reason resolution.
physically. b. Notice maybe sent by post or
• Only for shares email allowing members to
in demat form. f. Those who have already Taken within 48 hrs.
voted cannot recast vote vote within 30 days.
• Done on behalf at meeting. c. Publishing advertisement of
1. Chairman to appoint a scrutinizer for observing poll dispatching notice in 1 Eng &
of Co. by NSDL/ g. Proxy not allowed to process & reporting. 1 vernacular newspaper.
CDSL vote. 2. Scrutinizer shall give report of poll to chairman in d. BOD to appoint scrutinizer
h. Advertisement of
MGT-13. to conduct voting & report

MANAGEMENT & ADMINISTRATION

Dispatch of notice >
21 days before AGM in 3. Scrutinizer to distribute polling paper to member & within 7 days after last date
newspaper proxy for voting. of receipt of postal ballot.
(Polling paper format MGT-12)
Section 88 – Register of members, etc.
Section 88(1) of the Companies Act, 2013 seeks to provide that every company shall keep
and maintain the register of members, register of debenture-holders and register of any
other security holders.
• Maintenance of Register of members: Section 88(1)(a) requires a register of members
to be maintained and that the holding of each class of equity and preference shares by
each member residing in or outside India will have to be shown separately in the register
of members. The form and manner in which these registers are to be maintained, is
contained in Rule 3 of the Companies (Management & Administration) Rules, 2014;
whereas Rule 5 provides for the maintenance of the register of members.
• Time period for entries in register: As per Rule 5, entries have to be made in the Register
within 7 days of the date of approval by the Board or Committee thereof by approving
the allotment or transfer as the case may be.
• Place where register shall be maintained: Rule 5 also states that the registers shall be
maintained at the registered office of the company unless a special resolution is passed
in a general meeting authorising the keeping of the register at any other place within the
city, town or village in which the registered office is situated or any other place in India
in which more than 1/10th of the total members entered in the register of members
reside.
• Other informations also to be referred in register: Any order passed by the authority
attaching the shares or relating to dividends is also required to be referred in the register
of members. Hypothecation and pledge of shares is also required to be entered in the
register of members as per Rule 5(7) and 5(8).
• Updation of records of members: Rule 5 also states that the changes relating to the
status of the member should be effectively captured and updated accordingly in the
relevant register. If any change occur in the status of a member or debenture-holder or
any other security holder whether due to death or insolvency or change of name or due
to transfer to Investor Education Protection Fund or due to any other reason, entries
shall be made in the respective registers.
• Index of names: Section 88(2) mentions that every register maintained under section
88(1) shall include an index of names included therein. The relevant rule here is, Rule
6 of the Companies (Management & Administration) Rules, 2014 which state that the
maintenance of index is not necessary where the number of members is less than 50. It
also states that the company shall make the necessary entries in the index simultaneously
with the entry for allotment or transfer of any security in such Register.
• Register index of beneficial owner to be maintained of a depository: Section 88(3) is
basically an enabling provision, which sets out that the register and index of beneficial
owners maintained by a depository under section 11 of the Depositories Act, 1996, shall
be deemed to be the corresponding register and index for the purposes of this Act.
• Penalty on failure to maintain register: Section 88(5) If a company does not maintain a
register of members or debenture-holders or other security holders or fails to maintain
them in accordance with the provisions of sub-section (1) or sub-section (2), the company
shall be liable to a penalty of three lakh rupees and every officer of the company who is
in default shall be liable to a penalty of fifty thousand rupees.".
 Companies Amendment Act, 2020

MANAGEMENT & ADMINISTRATION 7.13

SECTION 91 – POWER TO CLOSE REGISTER OF MEMBERS OR DEBENTURE- HOLDERS OR
OTHER SECURITY HOLDERS:
The section seeks to provide that a company may close the register of members, debenture-
holders and other security holders by giving minimum 7 days’ notice or such lesser period as
specified by Securities Exchange Board of India (‘SEBI’).

Section 91(1) further states that the registers may be closed for any period not exceeding 30
days at any one time and for an aggregate period of 45 days in one year.

ANNUAL RETURN [SECTION 92-94]

The provisions of preparation and filing of annual return of a company are contained in section
92 of the Companies Act, 2013.

The section is particularly important from the compliance point of view, since this is an
annual compliance and essentially captures all the important events that have taken place in
the company during the financial year. Every company is required to file with the RoC, the
annual return as prescribed in section 92, in Form MGT– 7 as per Rule 11(1) of the Companies
(Management & Administration) Rules, 2014.

The particulars contained in an annual return, to be filed by every company are as follows–
1. Its registered office, principal business activities, particulars of its holding, subsidiary
and associate companies.
2. Its shares, debentures and other securities and shareholding pattern
3. Its indebtedness
4. Its members and debenture-holders along with the changes therein since the close of the
previous financial year
5. Its promoters, directors, key managerial personnel along with changes therein since the
close of the previous financial year.
6. Meetings of members or a class thereof, Board and its various committees along with
attendance details.
*7. Remuneration of directors and key managerial personnel
8. Penalty or punishment imposed on the company, its directors or officers and details of
compounding of offences and appeals made against such penalty or punishment.
9. Matters relating to certification of compliances, disclosures.
10. Details in respect of shares held by or on behalf of the Foreign Institutional Investors
including their names, addresses, countries of incorporation, registration and percentage
of shareholding held by them.

Penalty : If any company fails to file its annual return under sub-section (4) before the expiry
of the period specified therein, such company and its every officer who is in default shall be
liable to a penalty of ten thousand rupees and in case of continuing failure with further pen-
alty of One Hundred rupees for each day after the first during which such failure continues,
subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in
case of an officer who is in default.

7.14 MANAGEMENT & ADMINISTRATION

 Section 94 – Place of keeping and inspection of registers, returns, etc.
Preservation of register of members etc. and annual return–
1. Preservation of register of members: Rule 15 of the Companies (Management &
Administration) Rules, 2014 states that the register of members along with the index
shall be preserved permanently and shall be kept in the custody of company preservation
of register of members secretary of the company or any other person authorised by the
Board for such purpose; and
2. Preservation of register of debenture holders/ other security holders: The register of
debenture-holder or any other security holder along with the index shall be preserved
for a period of 8 years from the date of redemption of debentures or securities, as the
case may be, and shall be kept in the custody of the company secretary of the company
or any other person authorized by the Board for such purpose.
3. Copies of documents filled with ROC to be preserved: Copies of all annual returns
prepared under section 92 and copies of all certificates and documents required to be
annexed thereto shall be preserved for a period of 8 years from the date of filing with
the RoC.
4. Preservation of foreign register: shall be preserved permanently, unless it is discontinued
and all the entries are transferred to any other foreign register or to the principal register.
Foreign register of debenture-holder or any other security holder shall be preserved for
a period of 8 years from the date of redemption of debenture or securities.

Penalty for refusing the inspection or making any extract or copy required –
• If any inspection or the making of any extract or copy required under this section is
refused, the company and every officer of the company who is in default, shall be liable
for each such default, to a penalty of ` 1,000 for every day subject to a maximum of `
1,00,000 during which the refusal or default continues.

Latest Amendment
the following particulars of the register or index or return in respect of the members of a
company shall not be made available for any inspection under sub-section (2) or for taking
extracts or copies under sub-section (3) of section 94, namely: —
(i) address or registered address (in case of a body corporate);
(ii) e-mail ID
(iii) Unique Identification Number
(iv) PAN Number

Section 95 – Registers, etc. to be evidence–

The section simply seeks to provide that the registers, indices and copies of annual return
shall be prima facie evidence of any matter directed or authorised to be inserted therein by
or under this Act.

MANAGEMENT & ADMINISTRATION 7.15

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

Annual General Meeting

Section 96

General Meetings

Extra-ordinary General Meeting

Section 100 read with Rule 17 and
Explanation under Rule 18(3)

SECTION 96–ANNUAL GENERAL MEETING (‘AGM’)

(Q.12-Page No:7.6)
• Section 96(1) of the Companies Act, 2013 states that every company, whether public or
private, except One Person Company, shall hold an annual general meeting every year
and that the gap between two AGMs shall not be more than 15 months.
• The company shall specify the meeting as such [i.e. as AGM] in the notices calling it.
• In case of the First AGM of a company, it shall be held within a period of 9 months from
the date of closing of the 1st financial year (i.e. April to March next year).
• In any other case, AGM shall be held within a period of 6 months from the date of closing
of its financial year.
• The section further states that where a company holds its first AGM as aforesaid, it shall
not be necessary for the company to hold any AGM in the year of its incorporation.
• Moreover, the Registrar may grant an extension by 3 months, for holding the AGM to any
company for special reasons, except in the case of first AGM of the company.

“SECTION 97: POWER OF TRIBUNAL TO CALL ANNUAL GENERAL MEETING

(1) If any default is made in holding the annual general meeting of a company under section
96, the Tribunal may, notwithstanding anything contained in this Act or the articles of the
company, on the application of any member of the company, call, or direct the calling
of, an annual general meeting of the company and give such ancillary or consequential
directions as the Tribunal thinks expedient:
Provided that such directions may include a direction that one member of the company
present in person or by proxy shall be deemed to constitute a meeting.

(2) A general meeting held in pursuance of sub-section (1) shall, subject to any directions
of the Tribunal, be deemed to be an annual general meeting of the company under this
Act.

7.16 MANAGEMENT & ADMINISTRATION

 SECTION 98: POWER OF TRIBUNAL TO CALL MEETINGS OF MEMBERS, ETC
(1) If for any reason it is impracticable to call a meeting of a company, other than an annual
general meeting, in any manner in which meetings of the company may be called, or to
hold or conduct the meeting of the company in the manner prescribed by this Act or the
articles of the company, the Tribunal may, either suomotu or on the application of any
director or member of the company who would be entitled to vote at the meeting,—
(a) order a meeting of the company to be called, held and conducted in such manner
as the Tribunal thinks fit; and
(b) give such ancillary or consequential directions as the Tribunal thinks expedient,
including directions modifying or supplementing in relation to the calling, holding
and conducting of the meeting, the operation of the provisions of this Act or articles
of the company:
Provided that such directions may include a direction that one member of the company
present in person or by proxy shall be deemed to constitute a meeting.

(2) Any meeting called, held and conducted in accordance with any order made under sub-
section (1) shall, for all purposes, be deemed to be a meeting of the company duly
called, held and conducted.”

Punishment for default in complying with the provisions of section 96 to 98–

Section 99 lists out the punishment for contravention of section 96 to 98, i.e. default in holding
a meeting of the company as AGM or on the directions issued by the Tribunal. It states that
the company and every officer of the company who is in default, shall be punishable with fine
which may extend to ` 1,00,000 and in the case of a continuing default, with a further fine
which may extend to ` 5,000 for every day during which the default continues.

SECTION 121: REPORT ON ANNUAL GENERAL MEETING

This section is applicable to listed public companies and states that they shall prepare a
report in the Form MGT – 15 as prescribed in Rule 31 of the Companies (Management and
Administration) Rules, 2014, on each AGM including the confirmation to the effect that the
meeting was convened, held and conducted as per the provisions of this Act and the rules
made thereunder.
• The company shall file with the Registrar a copy of the report referred to in sub-section
(1) within 30 days of the conclusion of the annual general meeting with such fees as may
be prescribed, or with such additional fees as may be prescribed.

• If the company fails to file the report under sub-section (2) before the expiry of the
period specified therein, such company shall be liable to a penalty of one lakh rupees
and in case of continuing failure, with further penalty of five hundred rupees for each
day after the first during which such failure continues, subject to a maximum of five lakh
rupees and every officer of the company who is in default shall be liable to a penalty
which shall not be less than twenty-five thousand rupees and in case of continuing failure,
with further penalty of five hundred rupees for each day after the first during which such
failure continues, subject to a maximum of one lakh rupees.

MANAGEMENT & ADMINISTRATION 7.17

 SECTION 100: EXTRA-ORDINARY GENERAL MEETINGS
(Q.9-Page No:7.4)
Who can call an EGM?
1. The Board may, whenever it deems fit, call an extraordinary general meeting of the
company.
Provided that an extraordinary general meeting of the company, other than of the wholly
owned subsidiary of a company incorporated outside India, shall be held at a place
within India;

2. The Board shall on the requisition of –

(a) In the case of company having a share capital, such number of members who hold,
on the date of receipt of requisition, at least 1/10th of such paid-up capital of the
company as on that date carries the right of voting;
(b) In the case of company not having a share capital, such number of members who
hold, on the date of receipt of requisition, at least 1/10th of total voting power of
all the members having on the said date a right to vote.
Call an EGM of the company within the period specified in sub-section (4).Other provisions
related to calling of meeting by requisitionists

1. The requisition shall set out the matters for the consideration of which the meeting is
to be called and shall be signed by the requisitionists and sent to the registered office of
the company.
2. If the Board does not, within twenty-one days from the date of receipt of a valid
requisition in regard to any matter, proceed to call a meeting for the consideration
of that matter on a day not later than forty-five days from the date of receipt of such
requisition, the meeting may be called and held by the requisitonists themselves within
a period of three months from the date of the requisition. [Sub section (4)]
3. A meeting under sub-section (4) by the requisitionists shall be called and held in the
same manner in which the meeting is called and held by the Board.
4. Any reasonable expenses incurred by the requisitionists in calling a meeting under sub-
section (4) shall be reimbursed to the requisitionists by the company and the sums so
paid shall be deducted from any fee or other remuneration under section 197 payable to
such of the directors who were in default in calling the meeting.

Calling of Extraordinary general meeting by requistionists.

(1) The members may requisition convening of an extraordinary general meeting in
accordance with sub-section (4) of section 100, by providing such requisition in writing
or through electronic mode at least clear twenty-one days prior to the proposed date of
such extraordinary general meeting.
(2) Where the meeting is not convened, the requistionists shall have a right to receive list
of members together with their registered address and number of shares held and the
company concerned is bound to give a list of members together with their registered
address made as on twenty first day from the date of receipt of valid requisition together
with such changes, if any, before the expiry of the forty-five days from the date of
receipt of a valid requisition.

7.18 MANAGEMENT & ADMINISTRATION

(3) The notice of the meeting shall be given by speed post or registered post or through
electronic mode. Any accidental omission to give notice to, or the non-receipt of such
notice by, any member shall not invalidate the proceedings of the meeting.

APPLICABILITY OF THIS CHAPTER TO ONE PERSON COMPANY [SECTION 122]

(1) The section states that the provisions of section 98 and section 100 to 111 shall not apply
to One Person Company.
(2) The ordinary businesses as mentioned under section 102(2)(a), which a company is
required to transact at an AGM, shall be transacted in the case of One Person Company,
as provided in Sub-section (3).
(3) For the purposes of section 114, any business which is required to be transacted at an
annual general meeting or other general meeting of a company by means of an ordinary
or special resolution, it shall be sufficient if, in case of One Person Company, the
resolution is communicated by the member to the company and entered in the minutes-
book required to be maintained under section 118 and signed and dated by the member
and such date shall be deemed to be the date of the meeting for all the purposes under
this Act.
(4) Notwithstanding anything in this Act, where there is only one director on the Board of
Director of a One Person Company, any business which is required to be transacted at
the meeting of the Board of Directors of a company, it shall be sufficient if, in case of
such One Person Company, the resolution by such director is entered in the minutes book
required to be maintained under section 118 and signed and dated by such director and
such date shall be deemed to be the date of the meeting of the Board of Directors for all
the purposes under this Act.

SECTION 101: NOTICE OF A MEETING

Section 101 of the Companies Act, 2013 states the length of notice for calling a meeting. It
states that in order to properly call a general meeting the notice should be sent at least 21
clear days’ 7 before the meeting, to all the members, legal representative of any deceased
member or the assignee of insolvent members, the auditors and directors, in writing or
electronic mode or other prescribed mode.
Mode of sending the notice:
As per Rule 18 of the Companies (Management & Administration) Rules, 2014, sending of
notices through electronic mode has been statutorily recognized by the Act.
• The said rule mentions that a notice may be sent through e-mail as a–
• Text; or
• As an attachment to e-mail; or
• As a notification providing electronic link; or
• Uniform Resource Locator for accessing such notice.

Length of serving the notice – 21 clear days:

Note that, the section mentions that the notice shall be sent 21 clear days’ before the date
of meeting. It’s quite obvious to question as to what the term ‘clear days’ means. 21 clear
days mean that the date on which notice is served and the date of meeting are excluded for
sending the notice. A company cannot curtail by its articles of association the requirement of
21 clear days.

MANAGEMENT & ADMINISTRATION 7.19

Who is entitled to receive the notice of the general meeting? (Section 101(3))
The notice of every meeting of the company shall be given to—
(a) every member of the company, legal representative of any deceased member or the
assignee of an insolvent member;
(b) the auditor or auditors of the company; and
(c) every director of the company.

Meetings held at shorter notice–

Generally, general meetings need to be called by giving at least a notice of 21 clear days.
However, a general meeting may be called after giving shorter notice than that specified in
this sub-section if consent, in writing or by electronic mode, is accorded thereto—
(i) in the case of an annual general meeting, by not less than ninty-five per cent. of the
members entitled to vote thereat; and
(ii) in the case of any other general meeting, by members of the company—
(a) holding, if the company has a share capital, majority in number of members entitled
to vote and who represent not less than ninety-five per cent. of such part of the
paid-up share capital of the company as gives a right to vote at the meeting; or
(b) having, if the company has no share capital, not less than ninty-five per cent. of the
total voting power exercisable at that meeting:

Contents of the Notice – Section 101(2):

A valid notice must state the day, date, hour of the meeting and place of the meeting and
shall contain a statement of business to be transacted in that meeting. It must be issued on
the authority of the Board of Directors under the name of an authorised official.

Omission to send notice – Section 101(4):

Section 101(4) states that any accidental omission to give notice to, or non-receipt of such
notice to any member or other person who is entitled to such notice for any meeting shall not
invalidate the proceedings of the meeting.
This essentially means, that the omission must not be designed or deliberate. Failure to send
notice to a member, under a belief that it will not reach him at the address mentioned in the
register of members is deliberate and not accidental, even if the belief is based on a mistaken
impression.
The onus is on the company to prove that the omission was not deliberate.

*EXPLANATORY STATEMENT TO BE ANNEXED TO NOTICE (SECTION 102)

Section 102 of the Companies Act, 2013 mentions that where any special business is to be
transacted at the company’s general meeting, then an ‘Explanatory Statement’ should
be annexed to the notice calling such general meeting, which must specify,
(a) the nature of concern or interest, financial or otherwise, if any, in respect of each items
of—
(i) every director and the manager, if any;
(ii) every other key managerial personnel; and
(iii) relatives of the persons mentioned in sub-clauses (i) and (ii);

7.20 MANAGEMENT & ADMINISTRATION

(b) any other information and facts that may enable members to understand the meaning,
scope and implications of the items of business and to take decision thereon.
Ordinary business are the following business which are transacted at the annual general
meeting of the company–
1. Consideration
of financial statement
and the reports of the
Board of Directors and
auditors

4. Appointment of, Ordinary 2.

and fixing of the business Declaration of any
remuneration of the
Section 102(2) dividend
auditors

3. Appointment of
Directors in place of
those retiring

Extract of Sub section (4) of Section 102

Penalty for contravention of the provisions of this section–
Without prejudice to the provisions of sub-section (4), if any default is made in complying
with the provisions of this section, every promoter, director, manager or other key managerial
personnel of the company who is in default shall be liable to a penalty of fifty thousand
rupees or five times the amount of benefit accruing to the promoter, director, manager or
other key managerial personnel or any of his relatives, whichever is higher.

QUORUM FOR MEETINGS [SECTION 103]

(Q.10-Page No:7.5)
The said section of the Companies Act, 2013 states that unless the articles of the company
provide for a larger number, the quorum for the meeting shall be as follows–

Public Company - Private Company -

1. If number of members is not more Quorum -2 members personally present
than 1000, quorum shall be 5 members
personally present
2. if the number of members is more than
1000 but upto 5000, then the quorum shall
be 15 members personally present
3. If the number of members exceed
5000, then quorum shall be 30 members
personally present.

MANAGEMENT & ADMINISTRATION 7.21

Adjourned Meeting due to want of Quorum–
If the quorum is not present within half-an-hour from the time appointed for holding a meeting
of the company—
(a) the meeting shall stand adjourned to the same day in the next week at the same time and
place, or to such other date and such other time and place as the Board may determine;
or
(b) the meeting, if called by requisitionists under section 100, shall stand cancelled:

Provided that in case of an adjourned meeting or of a change of day, time or place of meeting
under clause (a), the company shall give not less than three days notice to the members
either individually or by publishing an advertisement in the newspapers (one in English and
one in vernacular language) which is in circulation at the place where the registered office of
the company is situated.

• Where quorum is not present in the adjourned meeting also within half an hour, then the
members present shall form the quorum.

CHAIRMAN OF MEETING [SECTION 104]

Election of chairman by members: Section 104 of the Companies Act, 2013 seeks to provide
that unless the articles of association of the Company otherwise provide, the members,
personally present, shall elect among themselves to be the Chairman by show of hands.

Demand of poll: The section further provides that if a poll is demanded on the election of the
Chairman, the Chairman elected by show of hands shall continue to be the Chairman of the
meeting until some other person is elected as Chairman as a result of poll, and such other
elected person shall be the Chairman for rest of the meeting.

Right to cast casting vote: The Chairman has a casting vote in Board Meetings and general
meetings, if specifically empowered by the articles of the Company. A casting vote means that
in event of the equality of vote on a particular business being transacted at the meeting, the
Chairman of the meeting shall have a right to cast a second vote. If there is no provision in
the articles for a casting vote, an ordinary resolution on which there is equality of votes is
deemed to be dropped.

Proxies [Section 105]

(Q.11-Page No:7.5)
The section provides following laws related to proxy:
• Section 105 of the Companies Act, 2013 deals with the provisions of proxy for meetings.
Sub-section (1) provides that any member of a company who is entitled to attend and
vote at a meeting of the company shall be entitled to appoint another person as a proxy
to attend and vote at the meeting on his behalf.
However, a proxy shall not have the right to speak at such meeting and shall not be
entitled to vote except on a poll.

7.22 MANAGEMENT & ADMINISTRATION

• A person appointed as proxy shall act on behalf of such member or number of members
not exceeding fifty and holding in aggregate not more than 10 per cent of the total share
capital of the company carrying voting rights. However, a member who is holding more
than 10 per cent of the total share capital of the Company carrying voting rights, may
appoint a single person as a proxy and such person shall not act as a proxy for any other
person or shareholder.

• As per Rule 19(3) of the Companies (Management & Administration) Rules, 2014, the
appointment of proxy shall be in the Form MGT – 11.

• Section 105(4) of the Act provides that a proxy received 48 hours before the meeting will
be valid even if the articles provide for a longer period.

• Section 105(8) provides for inspection of proxies during the meeting and 24 hours before
the meeting before its commencement, and the inspection is to be given only during
business hours. At least 3 days’ notice in writing is required to be given to the company
for conducting the inspection.

• Penalty for default–

• If default is made in complying with sub-section (2), every officer of the company
who is in default shall be liable to penalty of five thousand rupees.
• For refusing the inspection to members at any time during the business hours, the
company and every officer who is in default, shall be punishable with fine upto `
10,000 and where the contravention is a continuing one, with a further fine upto `
1,000 per day of default.

• Rule 19 of the Companies (Management & Administration) Rules, 2014

provides as under–
• Restriction on the maximum number of members (50) and shareholding (10 percent)
that a proxy holder can represent.
• Only a member can be a proxy holder in a company registered under section 8 of
the Companies Act, 2013.

VOTING [SECTION 106-109]

Ever pondered as to why is voting important in the meetings? The meeting takes places with
an agenda or say, the decisions to be taken by the company’s members which are crucial
for the working of the company. So, the meeting takes place to discuss and decide upon the
topics which are important – thus this decision requires consensus of the members attending
the meeting. This consensus is reached through voting. As per the Companies Act, 2013, the
voting in a meeting can take place in the following ways–

VOTING BY SHOW OF HANDS [SECTION 107]

• The general meaning set out by this section of the Companies Act, 2013 is that unless the
voting is demanded by way of poll or by electronic means, the voting should be by way
of show of hands in the first instance.
• Also, section 107(2) states that the declaration by the Chairman of the meeting in the
minutes books shall be the conclusive evidence that the resolution is passed.

MANAGEMENT & ADMINISTRATION 7.23

VOTING THROUGH ELECTRONIC MEANS [SECTION 108]
Companies providing its members to exercise right to vote by electronic means: Every company
which has listed its equity shares on a recognised stock exchange and every company having
not less than one thousand members shall provide to its members facility to exercise their
right to vote on resolutions proposed to be considered at a general meeting by electronic
means:

Procedure: A company which provides the facility to its members to exercise voting by
electronic means shall comply with the following procedure, namely:-
(i) Notice of meeting: The notice of the meeting shall be sent to all the members, directors
and auditors of the company either-
(a) by registered post or speed post; or
(b) through electronic means, namely, registered e-mail ID of the recipient; or
(c) by courier service;

(ii) Notice to be hosted on website: the notice shall also be placed on the website, if any, of
the company and of the agency forthwith after it is sent to the members;

(iii) Notice containing the particular: the notice of the meeting shall clearly state -
(a) that the company is providing facility for voting by electronic means and the
business may be transacted through such voting;

(b) that the facility for voting, either through electronic voting system or ballot or
polling paper shall also be made available at the meeting and members attending
the meeting who have not already cast their vote

(c) that the members who have cast their vote by remote e-voting prior to the meeting
may also attend the meeting but shall not been titled to cast their vote again;

(iv) the notice shall:

(a) indicate the process and manner for voting by electronic means;
(b) provide the details about the login ID;
(c) specify the process and manner for generating or receiving the password and for
casting of vote in a secure manner.

(v) Publication of notice: the company shall cause a public notice by way of an advertisement
to be published, immediately on completion of dispatch of notices for the meeting
under clause (i) of sub-rule (4) but at least twenty- one days before the date of general
meeting, at least once in a vernacular newspaper and at least once in English language
in an English newspaper having country-wide circulation,

(vi) Time for opening of e-voting: the facility for remote e-voting shall remain open for not
less than three days and shall close at 5.00 p.m. on the date preceding the date of the
general meeting;

7.24 MANAGEMENT & ADMINISTRATION

(vii) Option for remote e-voting: During the period when facility for remote e- voting is
provided, the members of the company, holding shares either in physical form or in
dematerialized form, as on the cut-off date, may opt for remote e-voting:
Provided that once the vote on a resolution is cast by the member, he shall not be
allowed to change it subsequently or cast the vote again:

(viii) At the end of the remote e-voting period, the facility shall forthwith be blocked:

(ix) Appointment of scrutinizer: The Board of Directors shall appoint one or more scrutinizer,
who may be Chartered Accountant in practice, Cost Accountant in practice, or Company
Secretary in practice or an Advocate, or any other person who is not in employment of
the company and is a person of repute who, in the opinion of the Board can scrutinize
the voting and remote e-voting process in a fair and transparent manner:

(x) Function of scrutinizer: the scrutinizer shall be willing to be appointed and be available
for the purpose of ascertaining the requisite majority;

(xi) Role of Chairman: The Chairman shall, at the general meeting, at the end of discussion
on the resolutions on which voting is to be held, allow voting, with the assistance of
scrutinizer, by use of ballot or polling paper or by using an electronic voting system for
all those members who are present at the general meeting but have not cast their votes
by availing the remote e-voting facility.

(xii) Counting of votes: The scrutinizer shall, immediately after the conclusion of voting at
the general meeting, first count the votes cast at the meeting,

(xiii) Access to details: For the purpose of ensuring that members who have cast their votes
through remote e-voting do not vote again at the general meeting, the scrutiniser shall
have access, after the closure of period for remote e-voting and before the start of
general meeting, to details relating to members, such as their names, folios, number of
shares held

(xiv) Maintenance of Register: The scrutiniser shall maintain a register either manually or
electronically to record the assent or dissent received,

(xv) Safe Custody of register: The register and all other papers relating to voting by electronic
means shall remain in the safe custody of the scrutiniser until the Chairman considers,
approves and signs the minutes and thereafter, the scrutiniser shall hand over the register
and other related papers to the company.

MANAGEMENT & ADMINISTRATION 7.25

 DEMAND FOR POLL [SECTION 109]
The section discusses four things –
• Who can demand poll at the meeting;
• What should be the time for taking the poll;
• Appointment of Scrutinizer for poll; and
• Manner of taking poll and result thereof.
• Section 109 provides that before or on declaration of result of the voting on any resolution
by a show of hands, the Chairman of the meeting on his own, or on demand made by the
‘specified’ members order for a poll.
Members who can demand for poll –
• In case of a company having a share capital, by the members present in person or
proxy, where allowed, and having not less than 1/10th of the total voting power or
holding shares on which an aggregate sum of not less than ` 5,00,000 or such higher
amount has been prescribed has been paid – up.
• In the case of any other company, by any member or members present in person or
by proxy, where allowed, and having not less than 1/10th of the total voting power.
• The section further provides that the demand for poll may be withdrawn by the persons
who made the demand, at any time.
• A poll demanded for adjournment of the meeting or appointment of Chairman of the
meeting shall be taken forthwith.
• A poll demanded on any question other than adjournment of the meeting or appointment
of Chairman shall be taken at such time, not being later than 48 hours from the time
when the demand was made, as the Chairman of the meeting may direct.
• Where a poll is to be taken, the Chairman of the meeting shall appoint a scrutinizer for
observing the poll process and votes given on poll and to report thereon.
• The Chairman of the meeting shall ensure that –
(a) The Scrutinizers are provided with the Register of Members, specimen
signatures of the members, Attendance Register and Register of Proxies.
(b) The Scrutinizers shall arrange for Polling papers and distribute them to the
members and proxies present at the meeting; in case of joint shareholders,
the polling paper shall be given to the first named holder or in his absence to
the joint holder attending the meeting as appearing in the chronological order
in the folio and the Polling paper shall be in Form No. MGT.12.
(c) The Scrutinizers shall count the votes cast on poll and prepare a report thereon
addressed to the Chairman.
(d) Where voting is conducted by electronic means under the provisions of section
108 and rules made thereunder, the company shall provide all the necessary
support, technical and otherwise, to the Scrutinizers in orderly conduct of the
voting and counting the result thereof.
(e) The Scrutinizers’ report shall state total votes cast, valid votes, votes in favour
and against the resolution including the details of invalid polling papers and
votes comprised therein.
(f) The Scrutinizers shall submit the Report to the Chairman who shall counter-
sign the same.
(g) The Chairman shall declare the result of Voting on poll. The result may either
be announced by him or a person authorized by him in writing.

7.26 MANAGEMENT & ADMINISTRATION

POSTAL BALLOT [SECTION 110]
Shareholders who are unable to attend the meetings, there should a requirement which will
enable them to vote by postal ballot for key decisions15.

Extract of the Act

“(1) Notwithstanding anything contained in this Act, a company—
(a) shall, in respect of such items of business as the Central Government may, by
notification, declare to be transacted only by means of postal ballot; and
(b) may, in respect of any item of business, other than ordinary business and any
business in respect of which directors or auditors have a right to be heard at any
meeting, transact by means of postal ballot.

(2) If a resolution is assented to by the requisite majority of the shareholders by means of

postal ballot, it shall be deemed to have been duly passed at a general meeting convened
in that behalf.”

• Manner in which postal ballot shall be conducted is prescribed in Rule 22 of the Companies
(Management & Administration) Rules, 2014. The same is described as follows–
• Where a company is required or decides to pass any resolution by way of postal
ballot, it shall send a notice to all the shareholders, along with a draft resolution
explaining the reasons therefor and requesting them to send their assent or dissent
in writing on a postal ballot because postal ballot means voting by post or through
electronic means within a period of thirty days from the date of dispatch of the
notice.
• An advertisement shall be published at least once in a vernacular newspaper in
the principal vernacular language of the district in which the registered office of
the company is situated, and having a wide circulation in that district, and at least
once in English language in an English newspaper having a wide circulation in that
district, about having dispatched the ballot papers.
• The notice of the postal ballot shall also be placed on the website of the company
forthwith after the notice is sent to the members and such notice shall remain on
such website till the last date for receipt of the postal ballots from the members.
• The Board of directors shall appoint one scrutinizer, who is not in employment of
the company and who, in the opinion of the Board can conduct the postal ballot
voting process in a fair and transparent manner.
• The scrutinizer shall be willing to be appointed and be available for the purpose of
ascertaining the requisite majority.
• Postal ballot received back from the shareholders shall be kept in the safe custody
of the scrutinizer and after the receipt of assent or dissent of the shareholder in
writing on a postal ballot, no person shall deface or destroy the ballot paper or
declare the identity of the shareholder.
• The scrutinizer shall submit his report as soon as possible after the last date of
receipt of postal ballots but not later than seven days thereof;
• The assent or dissent received after thirty days from the date of issue of notice
shall be treated as if reply from the member has not been received.
• The results shall be declared by placing it, along with the scrutinizer’s report, on
the website of the company.

MANAGEMENT & ADMINISTRATION 7.27

 7. CIRCULATION OF MEMBER’S RESOLUTIONS [SECTION 111]
Circulation of members’ resolution and statements: Students should carefully note the
circumstances in which the members can make use of the administrative machinery of a
company for introducing resolutions for consideration at next annual general meeting or for
circulation of statements in regard to any resolution to be proposed at an extraordinary
general meeting or business to be dealt with at any general meeting. Such circumstances are
stated below:
(1) Notice to members: As per section 111 of the Companies Act, 2013, a company shall,
on requisition in writing of such number of members, as required in section 100(Calling
of EGM), give notice to members of any resolution which may properly be moved and
is intended to be moved at a meeting; and circulate to members any statement with
respect to the matters referred to in proposed resolution or business to be dealt with at
that meeting.

(2) Exemption from serving notice: A company shall not be bound under this section to give
notice of any resolution or to circulate any statement, unless-
(a) a copy of the requisition signed by the requisitionists (or two or more copies which,
between them, contain the signatures of all the requisitionists) is deposited at the
registered office of the company,- (i) in the case of a requisition requiring notice
of a resolution, not less than six weeks before the meeting; (ii) in the case of any
other requisition, not less than two weeks before the meeting; and
(b) there is deposited or tendered with the requisition, a sum reasonably sufficient to
meet the company’s expenses in giving effect thereto.
Where however, after a copy of a requisition requiring notice of a resolution has been
deposited at the registered office of the company, an annual general meeting is called
on a date within six weeks after the copy has been deposited, the copy, although not
deposited within the time required by this subsection, shall be deemed to have been
properly deposited for the purposes thereof.

(3) Exception from circulation of any statement: The company shall not be bound to circulate
any statement, if on the application either on behalf of the company or of any other
person who claims to be aggrieved, then the 16Central Government, by order, declares
that the rights conferred are being abused to secure needless publicity for defamatory
matter.

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

7.28 MANAGEMENT & ADMINISTRATION

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

REPRESENTATIONS OF CORPORATIONS MEETING OF COMPANIES AND CREDITORS [SECTION

113]
Section 113 of the Companies Act, 2013 seeks to provide that where a body corporate is
member or creditor of the company, they may authorize a person to act as its representative
in the meeting of the company. The provision is as under-
(1) Appointment of representative by a body corporate: A body corporate, whether a
company within the meaning of this Act or not, may-
(a) if it is a member of company-by resolution of its Board of Directors or other
governing body, authorise such person as it thinks fit to act as its representative
at any meeting of the company, or at any meeting of any class of members of the
company;
(b) if it is a creditor, including a holder of debentures, of a company-, by resolution
of its directors or other governing body, authorise such person as it thinks fit to
act as its representative at any meeting of any creditors of the company held
in pursuance of this Act or of any rules made thereunder, or in pursuance of the
provisions contained in any debenture or trust deed, as the case may be.

(2) Powers and rights of an authorised person: A person authorised by resolution as above,
shall be entitled to exercise the same rights and powers, including the right to vote by
proxy and by postal ballot, on behalf of the body corporate which he represents as that
body could exercise if it were an individual member, creditor or holder of debentures of
the company.

RESOLUTIONS [SECTION 114–117]

Difference between Motion & Resolution—
• Most matters come before a meeting by way of a motion recommending that the meeting
may express approval or disapproval or take certain action or order something to be
done.
• A motion is a proposal, and a resolution is the adoption of a motion duly made and
seconded. But every motion need not be followed by a resolution, as where a motion is
made for the adjournment of the meeting.
• A motion whether it is passed for the closure of discussion or adjournment, etc. can be
passed by an ordinary resolution unless there is a specific provisions in the articles.

MANAGEMENT & ADMINISTRATION 7.29

 SECTION 114–ORDINARY & SPECIAL RESOLUTION:
Ordinary Resolution—
Section 114(1) Simply put, the votes cast in the favour of the resolution, by any mode of
voting should exceed the votes cast against it.

Special Resolution—
As per Section 114(2) of the Act, In simple words, a resolution shall be a special resolution,
when it is duly specified in the notice, calling the general meeting and votes cast in favour is
3 times the votes cast against the resolution.

RESOLUTIONS REQUIRING SPECIAL NOTICE [SECTION 115]

Section 115 of the Companies Act, 2013 states that where any provision of this Act specifically
requires or Articles of Association of a company so require that a special notice is required
for passing any resolution, then the notice of the intention to move such resolution shall be
given to the company by such number of members holding not less than 1% of the total voting
power, or holding shares on which such aggregate sum not exceeding five lakh rupees, as may
be prescribed, has been paid-up. In such a case, the company shall give its members notice
of the resolution in the manner as prescribed in Rule 22 of the Companies (Management &
Administration) Rules, 2014.

As per section 115 of the Act, special notice is required in the following cases –
(a) To appoint as auditor a person other than a retiring auditor (Section 140 of the Act);
(b) To stand for directorship by a person other than retiring director 14 days’ notice is
required under section 160(1) of the Act;
(c) To remove a director under section 169(2) or to appoint a person to fill the vacancy
caused by the dismissal of a director under section 169 at the same meeting.

Rule 23–Special Notice—

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

7.30 MANAGEMENT & ADMINISTRATION

 RESOLUTIONS PASSED AT ADJOURNED MEETING [SECTION 116]
The section simply states that where a resolution is passed at an adjourned meeting of–
• A company; or
• The holder of any class of shares in a company; or
• The Board of Directors of a company,
And states that if a meeting is adjourned then the date of passing of the resolution shall be
the date on which it is actually passed and not an earlier date.

RESOLUTIONS AND AGREEMENTS TO BE FILED [SECTION 117]

[Section 117(1)]
“A copy of every resolution or any agreement, in respect of matters specified in sub-section
(3) together with the explanatory statement under section 102, if any, annexed to the notice
calling the meeting in which the resolution is proposed, shall be filed with the Registrar within
thirty days of the passing or making thereof in such manner and with such fees as may be
prescribed:

Section 117(3) states that the following resolutions and agreements shall be filed with the RoC
in Form MGT – 14 within 30 days of its passing –
• Special Resolutions
• Resolutions which have been agreed to by all the members of a company, but which, if
not so agreed to, would not have been effective for their purpose unless they had been
passed as special resolutions;
• Any resolution of the Board of Directors of a company or agreement executed by a
company, relating to the appointment, re-appointment or renewal of the appointment,
or variation of the terms of appointment, of a managing director;

Penalty under the Act-

Section 117(2) If any company fails to file the resolution or the agreement under sub-section
(1) before the expiry of the period specified therein, such company shall be liable to a penalty
of ten thousand rupees and in case of continuing failure, with a further penalty of one hundred
rupees for each day after the first during which such failure continues, subject to a maximum
of two lakh rupees and every officer of the company who is in default including liquidator
of the company, if any, shall be liable to a penalty of ten thousand rupees and in case of
continuing failure, with a further penalty of one hundred rupees for each day after the first
during which such failure continues, subject to a maximum of fifty thousand rupees.
 Companies Amendment Act, 2020

MANAGEMENT & ADMINISTRATION 7.31

 MINUTES (SECTION 118)
Section 118 prescribes that Every company shall cause minutes of the proceedings of every
general meeting of any class of shareholders or creditors, and every resolution passed by
postal ballot and every meeting of its Board of Directors or of every committee of the Board,
to be prepared and signed in such manner as may be prescribed and kept within 30 days of the
conclusion of every such meeting concerned, or passing of resolution by postal ballot in books
kept for that purpose with their pages consecutively numbered. [Sub section (1)]
• The minute book shall be consecutively numbered.
• In the case of a Board Meeting or a meeting of a committee of the Board, the minutes
shall also contain–
• The names of the directors present at the meeting; and
• In the case of each resolution passed at the meeting, the names of the directors, if
any, dissenting from, or not concurring with the resolution.
• Any of the following matter shall not be included in the minutes of the meeting, which
in the opinion of the Chairman of the meeting–
• Is or could reasonably be regarded as defamatory of any person; or
• Is irrelevant or immaterial to the proceedings; or
• Is detrimental to the interests of the company.
• Penalty for contravention–
• If any default is made in complying with the provisions of this section in respect of
any meeting, the company shall be liable to a penalty of ` 25,000 and every officer
of the company who is in default shall be liable to a penalty of ` 5,000.
• If a person is found guilty of tampering with the minutes of the proceedings of the
meeting, he shall be punishable with imprisonment for a term which may extend to
2 years and with fine which shall not be less than ` 25,000 but which may extend to
` 1,00,000.

Rule 25 of the Companies (Management & Administration) Rules, 2014 prescribes the procedure
for maintenance of minutes of proceedings of general meeting, meeting of Board of Directors
and other meetings and resolutions passed by postal ballot as follows–
• A distinct minute book shall be maintained for each type of meeting namely:
(i) general meetings of the members;
(ii) meetings of the creditors
(iii) meetings of the Board; and
(iv) meetings of each of the committees of the Board.
• The minutes of proceedings of each meeting shall be entered in the books maintained
for that purpose along with the date of such entry within thirty days of the conclusion of
the meeting.
• Each page of every such book shall be initialled or signed and the last page of the record
of proceedings of each meeting or each report in such books shall be dated and signed –
(i) in the case of minutes of proceedings of a meeting of the Board or of a committee
thereof, by the chairman of the said meeting or the chairman of the next succeeding
meeting;
(ii) in the case of minutes of proceedings of a general meeting, by the chairman of the
same meeting within the aforesaid period of thirty days or in the event of the death
or inability of that chairman within that period, by a director duly authorised by
the Board for the purpose;

7.32 MANAGEMENT & ADMINISTRATION

 (iii) In case of every resolution passed by postal ballot, by the chairman of the Board
within the aforesaid period of thirty days or in the event of there being no chairman
of the Board or the death or inability of that chairman within that period, by a
director duly authorized by the Board for the purpose.

• The minute books of general meetings, shall be kept at the registered office of the
company and shall be preserved permanently and kept in the custody of the company
secretary or any director duly authorised by the board.
• The minute-books of the Board and committee meetings shall be preserved permanently
and kept in the custody of the company secretary of the company or any director duly
authorized by the Board for the purpose and shall be kept in the registered office or such
place as Board may decide.

INSPECTION OF MINUTE-BOOKS OF GENERAL MEETING [SECTION 119]

How shall the inspection take place?
As per section 119 of the Companies Act, 2013, the books containing the minutes of the
proceedings of any general meeting of a company shall–
• Be kept at the registered office of the company; and
• Be open for inspection, during business hours, by any member, without charge, subject
to such reasonable restrictions as specified in the articles of the company or as imposed
in the general meeting. However, at least 2 hour in each business day shall be allowed
for inspection [Sub – Section (1)].
Any member shall be entitled to be furnished, within seven working days after he has made
a request in that behalf to the company, and on payment of such fees as may be prescribed,
with a copy of any minutes referred [Sub – Section (2)].

What is the penalty for contravention of the provisions of the Act? [Sub section (3)]
If any inspection under sub – section (1), is refused by the company to the member, or if the
copy of minute-book is not furnished within the time specified under sub – section (2), then
the company shall be liable to a penalty of ` 25,000 and every officer of the company who is
in default shall be liable to a penalty of ` 5,000 for each such refusal or default as the case
may be.

Power of Tribunal [Sub – Section (4)]

In the case of any such refusal or default, the Tribunal may, without prejudice to any action
being taken under sub-section (3), by order, direct an immediate inspection of the minute-
books or direct that the copy required shall forthwith be sent to the person requiring it.

Rule 26–Copy of minute book of general meeting–

Any member shall be entitled to be furnished, within seven working days after he has made a
request in that behalf to the company, with a copy of any minutes of any general meeting, on
payment of such sum as may be specified in the articles of association of the company, but
not exceeding a sum of ten rupees for each page or part of any page:

Provided that a member who has made a request for provision of soft copy in respect of
minutes of any previous general meetings held during a period immediately preceding three
financial years shall be entitled to be furnished, with the same free of cost.

MANAGEMENT & ADMINISTRATION 7.33

 MAINTENANCE AND INSPECTION OF DOCUMENTS IN ELECTRONIC FORM [SECTION 120]
The said section seeks to provide that any document, record, register or minute, etc., required
to be kept by a company or allowed to be inspected or copies given to any person by a
company under this Act, may be kept or inspected or copies given, as the case may be, in
electronic form in such form and manner as may be specified in Rule 27, 28 and 29 of the
Companies (Management and Administration) Rules, 2014.
• Rule 27 of the Companies (Management and Administration) Rules, 2014 talks about the
maintenance and inspection of documents in electronic form. It states that every listed
company or a company having at least 1000 shareholders, debenture-holders and other
security holders, may maintain its records, as required to be maintained under the Act
or rules made thereunder, in electronic form.

• Rule 28 sets out the security of records maintained in electronic forms and mentions
that the Managing Director, Company Secretary or any other director or officer of the
company as the Board may decide shall be responsible for the maintenance and security
of electronic records.

• Rule 29 states that where a company maintains its records in electronic form, any
duty imposed by the Act or rules made there under to make those records available
for inspection or to provide copies of the whole or a part of those records, shall be
construed as a duty to make the records available for inspection in electronic form or
to provide copies of those records containing a clear reproduction of the whole or part
thereof, as the case may be on payment of not exceeding 10 rupees per page.

7.34 MANAGEMENT & ADMINISTRATION

 08 DECLARATION AND PAYMENT
OF DIVIDEND

DECLARATION AND PAYMENT OF 8.1

DIVIDEND
 Section 2(35) - Dividend includes Intrim Dividend PART A: Co. fails to pay dividend after expiry of 30 days
(Section 127)

Dividend 1. Co. to pay int to members @ 18% p.a. from 31st day.
2. Director liable for – imprisonment < 2 years AND Penalty 1,000/
day.
3. No liability if:
Final Dividend Interim Dividend Manner of payment of
Declared by Declared by BOD Dividend a. Dividend not paid out of operation of law
members at AGM at Board Meeting b. Dividend is under court dispute.
c. Co. unable to pay in a demanded manner and informed
1. No dividend in Section 8 Co. member about the same.
Section 123 Section 123 2. No dividend if default in d. Adjusted against arrears of courts.
deposit Section 73 and 74. e. Any other reason where co. not at fault for failure to pay.
Sources of dividend Sources:
3. Dividend only in cash/
1. Current yr. Profit. 1. Surplus in P/L A/c AND PART B: If member fails to claim dividend (Section 124 & 125)
cheque ECS/NEFT – Not in
2. Profit of previous year OR 2. Profits of F.Y. in which Kind 1. If member fails to claim in 30 days, dividend kept in the same
years. interim dividend is to 4. Once declared co. to pay escrow A/c for UPTO further 7 days i.e. total 30+7 = 37days.
3. Both Above OR be declared. within 30 days: 2. After expiry of 37 days i.e. MAXIMUM on 38th day unclaimed

8.2
4. Money provided by CG/ dividend to be transferred to “Unpaid Dividend A/c” by Co. “New
SG as guarantee to Co. Escrow”
If Co. incurs loss in F.Y.
Within 5 days Within 3. Within 90 days of transfer, Co. to upload details of such members
5. Incase of no profit or upto immediately pr. on its website – So members can claim
inadequate profit, out of Quarter upto declaration transfer to further 25
4. If Co. fails to transfer unclaimed dividend to unpaid dividend A/c:
free reserve of interim dividend ESCROW A/c (NA days pay off a. Co. to pay interest @ 12% p.a. to members who did not
to gov. company) to members. claim.
b. Co. liable for penalty 1 Lac + 500 per day Maximum 10 Lacs.
• Profit arrived at after c. Officers liable for penalty 25000 + 100 per day Maximum 2 Lacs
depreciation as per Co. Then such dividend shall
After expiry of 30 days  Companies Amendment Act, 2020
Act (Sch. II) be < average rate of 5. Any money which remains unclaimed from unpaid dividend A/c for
• While computing profits, dividend of previous 3 7 years shall be transferred to IEFP A/c.
• Co. pays off entire dividend
unrealised gains, notional F.Y.

DIVIDEND
(No action required) Can an investor who failed to claim dividend for 7 years 37 days
gains (revaluation) NOT OR claim his dividend from IEPF A/c (i.e. CG)??
to be considered If no dividend in pr. 3 F.Y. • Co fails to pay dividend
Amount can also Amount can also be
then interim dividend = (Part-A) be claimed if co. is YES claimed by legal

DECLARATION AND PAYMENT OF

Co. may before declaring ZERO OR liquidated. representative.
dividend transfer such % of • Members fails to claims
By making application to IEPF
profits to general reserve dividend (Part –B)
Authority. (iepf.gov.in)
 TYPES OF DIVIDEND
Dividend payable on the basis of Time (When declared)

Interim Dividend
Section 123 (3) and also section 123 (4) contain provisions regarding interim dividend. Following
points are noteworthy:
• Interim dividend is declared by the Board of Directors.
• It can be declared during any financial year.
• Further, it can be declared at any time during the period from closure of the financial
year till holding of the Annual General Meeting (AGM).
• The declaration of interim dividend is done out of profits before the final passing of the
accounts and therefore, effectively, interim dividend is said to be declared and paid
between two AGMs.
• The sources for declaring interim dividend include:
• Surplus in the profit and loss account; or
• Profits of the financial year in which such dividend is sought to be declared; or
• Profits generated in the financial year till the quarter preceding the date of
declaration of the interim dividend.
• If the company has incurred loss during the current financial year up to the end of the
quarter immediately preceding the date of declaration of interim dividend, such interim
dividend shall not be declared at a rate higher than the average dividends declared by
the company during the immediately preceding three financial years.
• All provisions which are applicable to the payment of dividend shall also apply in case of
interim dividend.

Final Dividend
• When the dividend is declared at the Annual General Meeting of the company, it is known
as ‘final dividend’.
• The rate of dividend recommended by the Board cannot be increased by the members.

PROVISIONS REGARDING DECLARATION AND PAYMENT OF DIVIDEND

(Q.5-Page No: 8.4)
A. Sources for Declaration of Dividend
According to Section 123 (1), the dividend for any financial year shall be declared or paid
from the following sources:
(a) Profits of the current financial year- Profits arrived at after providing for depreciation
in accordance with Schedule II.

(b) Profits of any previous financial year or years- Profits of any previous financial
DECLARATION AND PAYMENT OF 8.3
DIVIDEND
 year(s) arrived at after providing for depreciation in accordance with Schedule II
and remaining undistributed i.e. credit balance in profit and loss account and free
reserves. It is to be noted that only free reserves4 and no other reserves are to be
used for declaration or payment of dividend5.

(c) Both (a) and (b).

Note 1: Before declaration of any dividend, carried over previous losses and
depreciation not provided in previous year or years are required to be set off against
profit of the company for the current year6.

Note 2: In computing profits any amount representing unrealised gains, notional

gains or revaluation of assets and any change in carrying amount of an asset or
of a liability on measurement of the asset or the liability at fair value shall be
excluded7.

Note 3: Capital profits are not same as distributable profits because they are not
earned in the normal course of business; and therefore, normally not available for
distribution as dividend.

(d) Provision of money by the Government- Money provided by the Central Government
or a State Government for the payment of dividend by the company in pursuance of
a guarantee given by that Government.

B. Transfer to Reserves
As per First Proviso to Section 123 (1), it is not mandatory for a company to transfer a
particular percentage of its profits to reserves before the declaration of any dividend in
any financial year. Thus, a company may, as per its discretion, transfer any appropriate
percentage of its profits to reserves before the declaration of dividend.

C. Declaration of Dividend when there is Inadequacy or Absence of Profits

As per Second Proviso to Section 123 (1), in the event of inadequacy or absence of
profits in any financial year, a company may declare dividend out of the accumulated
profits of previous years which have been transferred to the free reserves. However,
such declaration shall be subject to the following conditions8:
(a) The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by the company in the immediately preceding three years.
However, this condition shall not apply if the company has not declared any dividend in
each of the three preceding financial year.

(b) The total amount to be drawn from such accumulated profits shall not exceed 10%
of its paid-up share capital and free reserves as appearing in the latest audited
financial statement. In other words:

Total amount that can be drawn ≤ 10% of (paid up share capital +

from accumulated profits free reserves)

8.4 DECLARATION AND PAYMENT OF

DIVIDEND
 (c) The amount so drawn shall first be utilised to set off the losses incurred in the
financial year in which dividend is declared and only thereafter, any dividend in
respect of equity shares shall be declared.

(d) The balance of reserves after such withdrawal shall not fall below 15% of its paid-
up share capital as appearing in the latest audited financial statement.

D. Depositing of Amount of Dividend

In terms of section 123(4), the amount of the dividend (including interim dividend), shall
be deposited in a separate account maintained with a scheduled bank. This is to be done
within 5 days from the date of declaration of dividend9.

E. Payment of Dividend
Section 123(5) contains provisions regarding payment of dividend. These are stated as
under:
(a) Dividend shall be payable only to the registered shareholder or to his order or to his
banker.

In case a shareholder informs the company to pay dividend to a particular banker

and if the payment is so made by the company, then it shall be deemed to be made
to the shareholder himself.

(b) Dividends are payable in cash and not in kind. Dividends that are payable to the
shareholders in cash may also be paid by cheque or dividend warrant or through any
electronic mode.

(c) Applicability of Section 123 (5) to Nidhis: In terms of Notification No. GSR 465
(E), dated 05-06-2015, this sub-section shall apply to the Nidhis, subject to the
modification that any dividend payable in cash may be paid by crediting the same
to the account of the member, if the dividend is not claimed within 30 days from
the date of declaration of the dividend.

F. Prohibition on Declaration of Dividend

Following prohibitions are applicable:
(i) Prohibition in case of any Defaulting Company: Section 123 (6) contains prohibition
on declaration of dividend by a company. It specifically provides that a company
which fails to comply with the provisions of section 73 (Prohibition on acceptance
of deposits from member) and section 74 (Repayment of deposits, etc., accepted
before the commencement of this Act of 2013) shall not, so long as such failure
continues, declare any dividend on its equity shares.

(ii) Prohibition in case of Section 8 Companies: According to section 8 (1), a company

having licence under Section 8 (Formation of companies with charitable objects,
etc.) is prohibited from paying any dividend to its members. Its profits are intended
to be applied only in promoting the objects for which it is formed.
DECLARATION AND PAYMENT OF 8.5
DIVIDEND
 UNPAID DIVIDEND ACCOUNT (UDA)
Section 124 of the Act contains the provisions relating to Unpaid Dividend Account (UDA).
These are as follows:
(1) Unpaid or Unclaimed Dividend to be transferred to the Unpaid Dividend Account- In case
a dividend has been declared by a company but has not been paid or claimed within 30
days from the date of declaration, the company shall, within 7 days from the expiry
of the 30 days, transfer the total amount of unpaid or unclaimed dividend to a special
account called the Unpaid Dividend Account (UDA). The UDA shall be opened by the
company in any scheduled bank.

(2) Preparing of Statement of the Unpaid Dividend- Within 90 days of transferring any amount
to the Unpaid Dividend Account, the company shall prepare a statement containing the
names, their last known addresses and the unpaid dividend to be paid to each person and
place such statement on its web- site, if any, and also on any other web-site approved
by the Central Government for this purpose.

(3) Payment of Interest if default is made in transferring the Amount- If any default is made
in transferring the total unpaid dividend amount or any part thereof to the Unpaid
Dividend Account, the company shall pay, from the date of such default, interest at the
rate of twelve per cent per annum on the amount not so transferred to the said account.
The interest accruing on such amount shall enure to the benefit of the members of the
company in proportion to the amount remaining unpaid to them.

(4) Claimant to apply for payment of Claimed Amount- Any person claiming to be entitled
to any money transferred to the Unpaid Dividend Account may apply to the company
concerned for payment of the money so claimed.

(5) Transfer of Unclaimed Amount to Investor Education and Protection Fund (IEPF)- Any
money transferred to the Unpaid Dividend Account which remains unpaid or unclaimed
for 7 years from the date of such transfer shall be transferred by the company along with
interest accrued thereon to the IEPF.

(6) Transfer of Shares to IEPF- All shares in respect of which dividend has not been paid
or claimed for 7 consecutive years or more shall be transferred by the company in the
name of Investor Education and Protection Fund along with a statement containing the
prescribed details.
Right of Owner of ‘transferred shares’ to Reclaim- Any claimant of shares so transferred
to IEPF shall be entitled to reclaim the ‘transferred shares’ from Investor Education
and Protection Fund in accordance with the prescribed procedure and on submission of
prescribed documents.

(7) Punishment for Contravention- If a company fails to comply with any of the requirements
of this section, such company shall be liable to a penalty of one lakh rupees and in case
of continuing failure, with a further penalty of five hundred rupees for each day after
the first during which such failure continues, subject to a maximum of ten lakh rupees

8.6 DECLARATION AND PAYMENT OF

DIVIDEND
 and every officer of the company who is in default shall be liable to a penalty of twenty-
five thousand rupees and in case of continuing failure, with a further penalty of one
hundred rupees for each day after the first during which such failure continues, subject
to a maximum of two lakh rupees. Companies Amendment Act, 2020

INVESTOR EDUCATION AND PROTECTION FUND (IEPF)

The relevant provisions are given as under:
1. Credit of Specified Amounts to the Fund: Following specified amounts shall be credited
to the Fund:
(a) Amount given by the Central Government- The amount given by the Central
Government by way of grants after due appropriation made by Parliament;
(b) Donations by the Central Government- Donations given by the Central Government,
State Governments, companies or any other institution for the purposes of the
Fund;
(c) Amount lying in the Unpaid Dividend Account- The amount lying in the Unpaid
Dividend Account (UDA) of companies transferred to the Fund under section 124(5)
i.e. remaining unpaid and unclaimed for a period of seven years;
(d) Income from Investments- The interest or other income received out of investments
made from the Fund;
(e) Application Money- The application money received by companies for allotment of
any securities and due for refund (only if such amount has remained unclaimed and
unpaid for a period of seven years from the date it became due for payment);
(f) Matured Deposits- Matured deposits with companies other than banking companies
(only if such amount has remained unclaimed and unpaid for a period of seven
years from the date it became due for payment);
(g) Matured Debentures- Matured debentures with companies (only if such amount
has remained unclaimed and unpaid for a period of seven years from the date it
became due for payment);
(h) Interest- Interest accrued on the amounts referred to in clauses (h) to (j);
(i) Amount received from Sale Proceeds- Amount received from sale proceeds of
fractional shares arising out of issuance of bonus shares, merger and amalgamation
for seven or more years;
(j) Redemption Amount- Redemption amount of preference shares remaining unpaid or
unclaimed for seven or more years; and

2. Utilization of the Fund: According to section 125 (3) the Fund shall be utilized for:
(a) refund of unclaimed dividends, matured deposits, matured debentures, the
application money due for refund and interest thereon;
(b) promotion of investors’ education, awareness and protection;
(c) reimbursement of legal expenses incurred in pursuing class action suits under
sections 37 and 245 by members, debenture-holders or depositors as may be
sanctioned by the Tribunal; and
(d) any other purpose incidental thereto in accordance with the rules framed under
the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer
and Refund) Rules, 2016.
DECLARATION AND PAYMENT OF 8.7
DIVIDEND
3. Other Provisions governing the IEPF
(i) Provision of required Resources by the Central Government for Administration of the
Fund- The Central Government may provide to the Authority such offices, officers,
employees and other resources in accordance with the IEPF Authority (Appointment
of Chairperson and Members, holding of Meetings and provision for Offices and
Officers) Rules, 2016.
(ii) Audit of the Fund- The accounts of the Fund shall be audited by the Comptroller and
Auditor-General of India at such intervals as may be specified by him. Such audited
accounts together with the audit report thereon shall be forwarded annually by the
Authority to the Central Government.
(iii) Preparation of Annual Report by the Authority- For each financial year, the Authority
shall prepare in the prescribed form and at prescribed time its annual report giving
full account of its activities during the financial year and forward a copy thereof to
the Central Government. In turn, the Central Government shall cause the annual
report and the audit report given by the Comptroller and Auditor- General of India
to be laid before each House of Parliament.

RIGHT OF DIVIDEND, RIGHTS SHARES AND BONUS SHARES TO BE HELD IN ABEYANCE PENDING
REGISTRATION OF TRANSFER OF SHARES
According to Section 126, in case any instrument of transfer of shares has been delivered by
a shareholder for registration and the transfer of such shares has not been registered by the
company, such company shall take the following steps:
(a) transfer the dividend in relation to such shares to the Unpaid Dividend Account. Such
action of transferring dividend to Unpaid Dividend Account may not be initiated by the
company if it is authorised by the registered holder of such share in writing to pay such
dividend to the transferee specified in the instrument of transfer; and
(b) keep in abeyance in relation to such shares any offer of rights shares under section 62
(1) (a) and any issue of fully paid-up bonus shares in pursuance of first proviso to section
123 (5).

PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS WITHIN 30 DAYS

(2-Page No:8.1) (Q.4-Page No:8.3) (Q.6-Page No:8.5) (Q.7-Page No:8.5) (Q.9-Page No:8.7)
Section 127 of the Act contains time limit for distribution of dividends and punishment for
failure to distribute dividend on time. Certain exemptions from punishments are also provided.
These provisions are stated as under:

A. Punishment for Failure

In case a company fails to pay declared dividends or fails to post dividend warrants
within 30 days of declaration, following punishments are applicable:
(i) Every director of the company shall be punishable with imprisonment maximum
up to two years, if he is knowingly a party to the default. Further, he shall also
be liable to pay minimum fine of ` 1,000 for every day during which such default
continues.
(ii) The company shall be liable to pay simple interest at the rate of 18% p.a. during
the period for which such default continues.

8.8 DECLARATION AND PAYMENT OF

DIVIDEND
B. Exemption from Punishment
Under the following cases where the company has failed to pay declared dividend
within 30 days of declaration, no offence shall be deemed to have been committed and
therefore, no punishment is attracted:
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of
the dividend and those directions cannot be complied with and the same has been
communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due
to it from the shareholder;
(e) where, for any other reason, the failure to pay the dividend or to post the warrant
within the prescribed period of 30 days was not due to any default on the part of
the company.

DECLARATION AND PAYMENT OF 8.9

DIVIDEND
09 ACCOUNTS OF COMPANIES

9.1 ACCOUNTS OF COMPANIES

 BOA etc to be kept by Company – Section 128
(Q.1-Page No:9.1) (Q.3-Page No:9.2) (Q.11-Page No:9.7)
1. BOA u/s 2(13) –
“Book and paper” and “book
or paper” as defined in
“Books of account” as defined in Section 2(13) includes records maintained in Section 2(12) include books
respect of— of account, deeds, vouchers,
• all sums of money received and expended by a company and matters in writings, documents, minutes
relation to which the receipts and expenditure take place; and registers maintained on
• all sales and purchases of goods and services by the company; paper or in electronic form;
• the assets and liabilities of the company; and

ACCOUNTS OF COMPANIES
• the items of cost as may be prescribed under section 148 of the Companies
Act 2013 (“Act”) in the case of a company which belongs to any class of
companies specified under that section.
2.
(1) Every company shall prepare and keep at its registered office BOA and other relevant books and papers and financial
statement for every financial year which give a true and fair view of the state of the affairs of the company,
Including that of its branch office or offices, if any.

9.2
Provided that all or any of the books of accountaforesaid and other relevant papers may be kept at such other place
in India as the BOD may decide and where such a decision is taken, the company shall, within 7 days thereof, file
with the Registrar a notice in writing giving the full address of that other place:
Provided further that the company may keep such books of account or other relevant papers in electronic mode in
such manner as may be prescribed.

(2) Where a company has a branch office in India or outside India, it shall be deemed to have complied with the
provisions of sub-section (1), if proper BOA relating to the transactions effected at the branch office are kept at
that office and proper summarised returns periodically are sent by the branch office to the company at its registered
office or the other place referred to in sub-section (1).

(3) The BOA and other books and papers maintained by the company within India shall be open for inspection at the
registered office of the company or at such other place in India by ANY DIRECTOR during business hours, and in the
case of financial information, if any, maintained outside the country, copies of such financial information shall be
maintained and produced for inspection by any director subject to such conditions as may be prescribed.

Provided that the inspection in respect of any subsidiary of the company shall be done only by the person authorised
in this behalf by a resolution of the BOD.
 3.Maintenance of books of account in electronic form (Latest Amendment)
A company has an option of keeping books of account or other relevant papers in electronic mode.
(A) Such books of accounts or other relevant books or papers maintained in electronic mode shall remain accessible
in India at all the times so as to be usable for subsequent reference.
(B) The information in the electronic record of the document shall be capable of being displayed in a legible form.
(C) The back-up of the books of account and other books and papers of the company maintained in electronic
mode, including at a place outside India, if any, shall be kept in servers physically located in India on a daily
basis.
(D) The company shall intimate to the Registrar on an annual basis at the time of filing of financial statement
following relevant information related to service provider—
(a) the name of the service provider;
(b) the internet protocol address of service provider;
(c) the location of the service provider (wherever applicable);
(d) where the books of account and other books and papers are maintained on cloud, such address as
provided by the service provider.
(E) where the service provider is located outside India, the name and address of the person in control of the
books of account and other books and papers in India.

4. BOA must be kept on:

9.3
a. Accrual Basis
b. According to double entry system
c. Manual OR electronic mode

5. Boa shall give true and fair view.

6. BOA shall be preserved for 8 years. Where an investigation has been ordered in respect of a company, the Central
Government may direct that the books of account may be kept for such period longer than 8 years, as it may deem
fit and give directions to that effect.

7. The following shall be responsible for maintenance of BOA etc:

a. MD
b. WTD
c. CFO

ACCOUNTS OF COMPANIES
d. Any person charged by BOD.

8. Penalty for Non-maintenance:

Penalty > 50k < 5L
Company Amendment Act, 2020
 Financial statements – Section 129
(Q.4-Page No:9.2) (Q.8-Page No:9.5) (Q.10-Page No:9.7)

1. “Financial year” [Section 2(41)], in relation to any company or body corporate, means the period ending on the 31st day of
March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the
31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made
up:
Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary or associate
company of a company incorporated outside India and is required to follow a different financial year for consolidation of its
accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is
a year:

ACCOUNTS OF COMPANIES
2. Financial statements u/s 2(40) – Includes as per Schedule III :
a. Balance sheet
b. P&L Statement
c. CFS
d. Notes to Accounts
e. Statement of changes in equity.

9.4
3.Laying of financial Statements [Section 129(2)]
(1) The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with
the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different
class or classes of companies in Schedule III:
Provided that the items contained in such financial statements shall be in accordance with the accounting standards:
Provided further that nothing contained in this sub-section shall apply to
A. any insurance or
B. banking company or
C. any company engaged in the generation or supply of electricity, or
D. to any other class of company for which a form of financial statement has been specified in the Act governing
such class of company.
(2) At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting
financial statements for the financial year.
(3) Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements
prepare a CFS of the company and of all the subsidiaries and associate companies in the same form and manner as that
of its own and in accordance with applicable accounting standards.
Provided that the company shall also attach along with its financial statement, a separate statement containing the
salient features of the financial statement of its subsidiary or associate company in form AOC -1
 (4) The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding
company shall, mutatis mutandis, apply to the CFS.
(5) Where the financial statements of a company do not comply with the accounting standards referred to in sub-section
(1), the company shall disclose in its financial statements,
A. the deviation from the accounting standards, B. the reasons for such deviation and
C. the financial effects, if any, arising out of such deviation.

4. Exemption from preparation of CFS:

A Ltd.
Exemption can be claimed by B Ltd. if:
Sub. Co. 1. It is a sub. Co./ WOS and ALL its other members have given NOC. (+)
B Ltd.
2. It is NOT a listed/potential listed Co. in India/ outside India. (+)
3. It’s ultimate H. Co. (A ltd) has filed CFS with ROC.
Sub. Co.
C Ltd.
#

9.5
5. Penalty for Non- compliance
a. Imprisonment < 1 year OR 133.Central Government to prescribe accounting standards
1. The Central Government may prescribe the standards of
b. Penalty > 50K < 5L OR
accounting or any addendum thereto,
c. Both. 2. As recommended by the ICAI.
3. In consultation with and after examination of the
recommendations made by the NFRA.

Section 129A
The Central Government may, require such class or classes of unlisted companies, as may be prescribed,—
(a) to prepare the financial results of the company on such periodical basis and in such form as may be prescribed;
(b) to obtain approval of the Board of Directors and complete audit or limited review of such periodical financial results in such

ACCOUNTS OF COMPANIES
manner as may be prescribed; and
(c) file a copy with the Registrar within a period of thirty days of completion of the relevant period with such fees as may be
prescribed. Companies Amendment Act, 2020
 Re-opening of accounts on court/NCLT order – Section 130
Application is made by:

CG Income Tax SEBI Other Regulatory Body Other Person (e,g,

(e.g. RBI) Creditor)

(1) A company shall not re-open its BOA and not recast its financial statements, unless an application in this regard is made by

ACCOUNTS OF COMPANIES
the CG, the Income-tax authorities, the SEBI, any other statutory regulatory body or authority or any person concerned and an
order is made by a court of competent jurisdiction or the NCLT to the effect that-
(i) the relevant earlier accounts were prepared in a fraudulent manner; or
(ii) the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial
statements:

9.6
Provided that the court or NCLT, as the case may be, shall give notice to the CG, the Income-tax authorities, the SEBI or any
other statutory regulatory body or any other person concerned and shall take into consideration the representations, if any,
made by them Before passing any order under this section.

(2) Without prejudice to the provisions contained in this Act the accounts so revised or re-cast under sub-section (1) shall be final.

(3) No order shall be made under sub-section (1) in respect of re-opening of books of account relating to a period earlier than 8
financial years immediately preceding the current financial year:
Provided that where a direction has been issued by the CG section 128 for keeping of BOA for a period longer than 8 years, the
BOA may be ordered to be re-opened within such longer period.
 Voluntary revision of F.S. OR BOD report section 131

(1) If it appears to the directors of a company that-

(a) the financial statement of the company; or
(b) the report of the Board, do not comply with the provisions of section 129 or section 134
They may prepare revised financial statement or a revised report in respect of any of the 3 preceding financial years after
obtaining approval of NCLT on an application made by the company and a copy of the order passed by the NCLT shall be filed
with the Registrar.
Provided that the Tribunal shall give notice to the CG and the Income- tax authorities and shall take into consideration the
representations, if any, made by them before passing any order under this section.
Provided further that such revised financial statement or report shall not be prepared or filed more than once in a financial
year.
Provided also that the detailed reasons for revision of such financial statement or report shall also be disclosed in the Board's
report in the relevant financial year in which such revision is being made.

9.7
(2) Where copies of the previous financial statement or report have been sent out to members or delivered to the Registrar or
laid before the company in general meeting, the revisions must be confined to-
(a) the correction in respect of which the previous financial statement or report do not comply with the provisions of
section 129 or section 134; and
(b) the making of any necessary consequential alternation.

(3) The CG may make rules as to the application of the provisions of this Act in relation to revised financial statement or a
revised director's report and such rules may, in particular-
(a) make different provisions according to which the previous financial statement or report are replaced or are supplemented
by a document indicating the corrections to be made;
(b) make provisions with respect to the functions of the company's auditor in relation to the revised financial statement

ACCOUNTS OF COMPANIES
or report;
(c) require the directors to take such steps as may be prescribed.
 NFRA - Section 132
(1) The Central Government may, by notification, constitute a National (3B) There shall be an executive body of the National Financial Reporting Authority
Financial Reporting Authority to provide for matters relating to accounting consisting of the Chairperson and full-time Members of such Authority
and auditing standards under this Act. for efficient discharge of its functions.
(1A) The National Financial Reporting Authority shall perform its functions through (4) Notwithstanding anything contained in any other law for the time being in
such divisions as may be prescribed. force, the National Financial Reporting Authority shall-
(2) Notwithstanding anything contained in any other law for the time being in (a) have the power to investigate, either suo motu or on a reference made
force, the National Financial Reporting Authority shall- to it by the Central Government, for such class of bodies corporate
(a) make recommendations to the Central Government on the formulation or persons, in such manner as may be prescribed into the matters of
and laying down of accounting and auditing policies and standards for professional or other misconduct committed by any member or firm of
adoption by companies or class of companies or their auditors , as the chartered accountants, registered under the Chartered Accountants
case may be Act, 1949:
(b) monitor and enforce the compliance with accounting standards and (b) have the same powers as are vested in a civil court under the Code of

ACCOUNTS OF COMPANIES
auditing standards in such manner as may be prescribed Civil Procedure, 1908, while trying a suit, in respect of the following
(c) oversee the quality of service of the professions associated with matters, namely:-
ensuring compliance with such standards, and suggest measures (i) discovery and production of books of account and other documents,
required for improvement in quality of service and such other related at such place and at such time as may be specified by the National
matters as may be prescribed ; and Financial Reporting Authority;
(d) perform such other functions relating to clauses (a), (b) and (c) as may (ii) summoning and enforcing the attendance of persons and examining
be prescribed. them on oath;
(3) The composition of Authority.- (1) The Authority shall consist of the following (iii) inspection of any books, registers and other documents of any person

9.8
persons to be appointed by the Central Government, namely:- referred to in clause (b) at any place;
(a) a chairperson; (iv) issuing commissions for examination of witnesses or documents;
(b) three full-time members; and
(c) nine part-time members. (c) where professional or other misconduct is proved, have the power to
(2) The chairperson shall be a person of eminence, ability, integrity and standing make order for-
and having expertise and experience of not less than twenty-five years in the (A) imposing penalty of-
field of accountancy, auditing, finance or law (I) not less than 1 lakh rupees, but which may extend to 5 times of the
(3) A full-time member shall be a person of ability, integrity, and standing and fees received, in case of individuals; and
having expertise and experience of not less than twenty years in the field of (II) not less than 5 lakh rupees, but which may extend to 10 times of the
accountancy, auditing, finance or law. fees received, in case of firms;
(4) The chairperson and all members, before being appointed, shall submit a
declaration to the Central Government confirming that they have no conflict (B) debarring the member or the firm from—
of interest or lack of independence in respect of such appointment as I. being appointed as an auditor or internal auditor or undertaking any
chairperson or members in Form I annexed to these rules, failing which their audit in respect of financial statements or internal audit of the
appointment shall not be considered. functions and activities of any company or body corporate; or
(5) The chairperson and full-time members, shall not be associated with any II. performing any valuation as provided under section 247, for a minimum
audit firm including related consultancy firms during the course of their period of 6 months or such higher period not exceeding 10 years as
appointment and two years after ceasing to hold such appointment. may be determined by the National Financial Reporting Authority.
(6) A part-time member shall be a person, who shall not have any such financial (5) Any person aggrieved by any order of the National Financial Reporting
or other interest as is likely to affect prejudicially his functions as a part-time Authority may prefer an appeal before the NCLAT
member.
(3A) Each division of the National Financial Reporting Authority shall be presided
over by the Chairperson or a full-time Member authorised by the
Chairperson.
 As per NFRA rules, NFRA shall have power to monitor and enforce compliance with accounting standards and auditing standards,
oversee the quality of service under sub-section (2) of section 132 or undertake investigation under sub-section (4) of such
section of the auditors of the following class of companies and bodies corporate:

a) companies whose securities are listed on any stock exchange in India or outside India;
b) unlisted public companies having paid-up capital of not less than rupees five hundred crores or having annual turnover of not
less than rupees one thousand crores or having, in aggregate, outstanding loans, debentures and deposits of not less than
rupees five hundred crores as on the 31st March of immediately preceding financial year;
c) insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by
any special Act for the time being in force
d) any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the NFRA by
the Central Government in public interest; and
e) a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate

9.9
incorporated or registered in India as referred to in clauses (a) to (d) above, if the income or networth of such subsidiary
or associate company exceeds 20% of the consolidated income or consolidated networth of such company or the body
corporate, as the case may be, referred to in clauses (a) to (d) above.

BOA of NFRA: Same for IEPF u/s 125

a. Shall maintain BOA and other books and papers in such manner as per CG in consultation CAG.
b. Account shall be audited by CAG.
c. Such audited accounts with audit report forwarded annually to CG by NFRA
d. NFRA to prepare annual report and forward to CG.
e. CG to lay annual report + audit report in parliament (LS + RS)

ACCOUNTS OF COMPANIES
 Financial Statement, BOD Report, etc. – Section 134
(Q.2-Page No:9.1) (Q.5-Page No:9.3) (Q.6-Page No:9.3) (Q.14-Page No:9.9)

1. Authentication of Financial Statements:

A. Ordinary Company:

i. Chairman of Company (+) By 2 Directors (1 MD & Other CEO, if Director) (+)

ii. CEO (+) ii. CEO (+)
OR
iii. CFO (+) iii. CFO (+)
iv. C.S. iv. C.S.

ACCOUNTS OF COMPANIES
B. OPC : By only 1 director
OR
2. Authentication of BOD Report: 1. 1MD + 1 CEO Director 1. 1MD + 1 Director
2. CFO 2. CEO
A. Ordinary Company :
3. CS 3. CFO

9.10
Chairman of the Co. if authorized OR 4. CS
2 directors (1 of whom is MD)
B. OPC : By only 1 director.

3. Director Responsibility Statement :

Directors’ Responsibility Statement [Section 134(5)]: The Directors’ Responsibility Statement referred to in 134(3) (c) shall
state that—
(1) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper
explanation relating to material departures;

(2) the directors had selected such accounting policies and applied them consistently and made judgments and estimates
that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of
the financial year and of the profit and loss of the company for that period;

(3) the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance
with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and
other irregularities;
 (4) the directors had prepared the annual accounts on a going concern basis; and

(5) the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company
and that such internal financial controls are adequate and were operating effectively.

(6) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such
systems were adequate and operating effectively.

4. Contravention [Section 134(8)]:

Persons liable Punishment for contravention of any provision of this section
Company ` 3 Lacs
Every officer of the company who is in 50,000
default
 Companies Amendment Act, 2020

9.11
ACCOUNTS OF COMPANIES
 CORPORATE SOCIAL RESPONSIBILITY [SECTION 135]
(Q.9-Page No:9.6) (Q.15-Page No:9.10)
According to section 135 of the Companies Act, 2013 read with the Companies (Corporate
Social Responsibility) Rules, 2014:
(i) Which company is required to constitute CSR committee:
(a) According to section 135(1), every company having
(1) net worth of rupees 500 crore or more, or
(2) turnover of rupees 1000 crore or more or
(3) a net profit of rupees 5 crore or more
during the immediately preceding financial year shall constitute a Corporate Social
Responsibility Committee of the Board consisting of three or more directors, out of
which at least one director shall be an independent director.
Provided that where a company is not required to appoint an independent director
under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility
Committee two or more directors.
(ii) Exclusion of Companies [Rule 3(2) of the Companies (CSR) Rules, 2014]
Every company which ceases to be a company covered under subsection (1) of section
135 of the Act for three consecutive financial years shall not be required to-
(a) constitute a CSR Committee; and
(b) comply with the provisions contained in sub-section (2) to (5) of the said section,
till such time it meets the criteria specified in sub-section (1) of section 135.
(iii) Composition of CSR Committee:
(1) The CSR Committee shall be consisting of three or more directors, out of which at
least one director shall be an independent director.

Provided that where a company is not required to appoint an independent director

under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility
Committee two or more directors.
(2) According to Rule 5(1) of the Companies (CSR) Rules, 2014,
The companies mentioned in the rule 3 shall constitute CSR Committee as under.-
(i) an unlisted public company or a private company covered under subsection
(1) of section 135 which is not required to appoint an independent director
pursuant to sub-section (4) of section 149 of the Act, shall have its CSR
Committee without such director ;
(ii) a private company having only two directors on its Board shall constitute its
CSR Committee with two such directors;
(iii) with respect to a foreign company covered under these rules, the CSR
Committee shall comprise of at least two persons

(iv) Duties of CSR Committee [Section 135(3)]:

The CSR Committee shall-
(a) formulate and recommend to the Board, a CSR Policy which shall indicate the activities
to be undertaken by the company in areas or subject, specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities referred to in
clause (a); and
(c) monitor the CSR Policy of the company from time to time.

ACCOUNTS OF COMPANIES 9.12

 (vi) Duties of the Board in relation to CSR [Section 135(4)]:
The Board of every company referred to in sub-section (1) shall—
(1) after taking into account the recommendations made by the CSR Committee, approve
the CSR Policy for the company and disclose contents of such Policy in its report and also
place it on the company’s website, if any, in such manner as may be prescribed; and

(vii) Amount of contribution towards CSR [Section 135(5)]:

(a) The Board of every company shall ensure that the company spends, in every financial
year, at least two per cent of the average net profits of the company made during the
three immediately preceding financial years, in pursuance of its CSR Policy.
(b) Provided that the company shall give preference to the local area and areas around it
where it operates, for spending the amount earmarked for CSR activities.
(c) Provided further that if the company fails to spend such amount, the Board shall, in its
report, specify the reasons for not spending the amount.
(d) Provided also that if the company spends an amount in excess of the requirements
provided under this sub-section, such company may set off such excess amount against
the requirement to spend under this sub-section for such number of succeeding financial
years and in such manner, as may be prescribed.
 Companies Amendment Act, 2020
(viii) Exceptions to CSR Activities:
The Companies (CSR Policy) Rules, 2014 provides for some activities which are not
considered as CSR activities:
(1) The CSR projects or programs or activities undertaken outside India [Rule 4(4)].
(2) The CSR projects or programs or activities that benefit only the employees of the
company and their families [Rule 4(5)].
(3) Contribution of any amount directly or indirectly to any political party under section
182 of the Act [Rule 4(7)].
(ix) Penalty
If a company is in default in complying with the provisions of sub-section (5) or sub-
section (6), the company shall be liable to a penalty of twice the amount required to be
transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate
Social Responsibility Account, as the case may be, or one crore rupees, whichever is less,
and every officer of the company who is in default shall be liable to a penalty of one-
tenth of the amount required to be transferred by the company to such Fund specified
in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may
be, or two lakh rupees, whichever is less. Companies Amendment Act, 2020
(x) Exemption
Where the amount to be spent by a company under sub-section (5) does not exceed fifty
lakh rupees, the requirement under sub-section (1) for constitution of the Corporate
Social Responsibility Committee shall not be applicable and the functions of such
Committee provided under this section shall, in such cases, be discharged by the Board
of Directors of such company. Companies Amendment Act, 2020
(xi) Activities specified under Schedule VII:
Activities which may be included by companies in their CSR Policies (i.e. Activities as
specified under Schedule VII) are as follows:

9.13 ACCOUNTS OF COMPANIES

 (1) eradicating hunger, poverty and malnutrition, promoting health care including
preventive health care and sanitation including contribution to the Swach Bharat
Kosh set-up by the Central Government for the promotion of sanitation and making
available safe drinking water;
(2) promoting education, including special education and employment enhancing
vocation skills especially among children, women, elderly, and the differently abled
and livelihood enhancement projects;
(3) promoting gender equality, empowering women, setting up homes and hostels for
women and orphans; setting up old age homes, day care centres and such other
facilities for senior citizens and measures for reducing inequalities faced by socially
and economically backward groups;
(4) ensuring environmental sustainability, ecological balance, protection of flora
and fauna, animal welfare, agro forestry, conservation of natural resources and
maintaining quality of soil, air and water including contribution to the Clean Ganga
Fund set up by the Central Government for rejuvenation of river Ganga;
(5) protection of national heritage, art and culture including restoration of buildings
and sites of historical importance and works of art; setting up public libraries;
promotion and development of traditional arts and handicrafts;
(6) measures for the benefit of armed forces veterans, war widows and their dependents;
(7) training to promote rural sports, nationally recognised sports, paralympic sports
and Olympic sports;
(8) contribution to the Prime Minister’s National Relief Fund or any other - fund set up
by the Central Government for socio-economic development and relief and welfare
of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities
and women;
(9) contributions or funds provided to technology incubators located within academic
institutions which are approved by the Central Government;
(10) rural development projects;
(11) slum area development. [For the purposes of this item, the term ‘slum area’ shall
mean any area declared as such by the Central Government or any State Government
or any other competent authority under any law for the time being in force.]

Latest Amendment

1. The Ministry of Corporate Affairs have made a clarification with respect to CSR:
Spending of CSR funds for COVID-19 is an eligible CSR activity,
it is further clarified that spending of CSR funds for ‘creating health infrastructure for COVID
care’, ‘establishment of medical oxygen generation and storage plants’, ‘manufacturing
and supply of Oxygen concentrators, ventilators, cylinders and other medical equipment for
countering COVID-19’ or similar such activities are eligible CSR activities.

ACCOUNTS OF COMPANIES 9.14

2. Every company covered under the provisions of sub-section (1) to section 135 shall
furnish a report on Corporate Social Responsibility in Form CSR-2 to the Registrar for the
preceding financial year (2020-2021) and onwards as an addendum to Form AOC-4 or AOC-4
XBRL or AOC-4 NBFC (Ind AS), as the case may be:
Provided that for the preceding financial year (2020-2021), Form CSR-2 shall be filed
separately on or before 31st March 2022, after filing Form AOC-4 or AOC-4 XBRL or AOC-4
NBFC (Ind AS), as the case may be.
3. In the Companies (Corporate Social Responsibility Policy) Rules, 2014, in rule 4, for
sub- rule (1), the following sub-rule shall be substituted, namely: -
‘(1) The Board shall ensure that the CSR activities are undertaken by the company itself or
through, –
(a) a company established under section 8 of the Act, or a registered public trust or a
registered society, or registered under section 12A and approved under 80 G of the
Income Tax Act, 1961, established by the company, either singly or along with any other
company; or
(b) a company established under section 8 of the Act or a registered trust or a registered
society, established by the Central Government or State Government; or
(c) any entity established under an Act of Parliament or a State legislature; or
(d) a company established under section 8 of the Act, or a registered public trust or a
registered society, or registered under section 12A and approved under 80 G of the
Income Tax Act, 1961, and having an established track record of at least three years in
undertaking similar activities.
Explanation.- For the purpose of clause (c), the term “entity” shall mean a statutory body
constituted under an Act of Parliament or State legislature to undertake activities covered
in Schedule VII of the Act.’.

RIGHT TO MEMBERS TO COPIES OF AUDITED FINANCIAL STATEMENT [SECTION 136]

(1) a copy of the financial statements, including consolidated financial statements, if any,
auditor’s report and every other document required by law to be annexed or attached to
the financial statements, which are to be laid before a company in its general meeting,
shall be sent to every member of the company, to every trustee for the debenture-holder
of any debentures issued by the company, and to all persons other than such member or
trustee, being the person so entitled, not less than twenty-one days before the date of
the meeting.

Provided that if the copies of the documents are sent less than twenty-one days before
the date of the meeting, they shall, notwithstanding that fact, be deemed to have been
duly sent if it is so agreed by members—
(a) holding, if the company has a share capital, majority in number entitled to vote
and who represent not less than ninety-five per cent. of such part of the paid-up
share capital of the company as gives a right to vote at the meeting; or

(b) having, if the company has no share capital, not less than ninety five per cent. of
the total voting power exercisable at the meeting

9.15 ACCOUNTS OF COMPANIES

 Provided further that in the case of a listed company, the provisions of this sub-section
shall be deemed to be complied with,
if the copies of the documents are made available for inspection at its registered office
during working hours for a period of twenty-one days before the date of the meeting and
a statement containing the salient features of such documents in the prescribed form or
copies of the documents, as the company may deem fit, is sent to every member of the
company and to every trustee for the holders of any debentures issued by the company
not less than twenty-one days before the date of the meeting unless the shareholders
ask for full financial statements:

Provided also that the Central Government may prescribe the manner of circulation
of financial statements of companies having such net worth and turnover as may be
prescribed:

Provided also that a listed company shall also place its financial statements including
consolidated financial statements, if any, and all other documents required to be attached
thereto, on its website, which is maintained by or on behalf of the company.
(2) A company shall allow every member or trustee of the holder of any debentures issued
by the company to inspect the documents stated under sub-section (1) at its registered
office during business hours.

(3) If any default is made in complying with the provisions of this section, the company shall
be liable to a penalty of twenty-five thousand rupees and every officer of the company
who is in default shall be liable to a penalty of five thousand rupees.

ACCOUNTS OF COMPANIES 9.16

 COPY OF FINANCIAL STATEMENT TO BE FILED WITH REGISTRAR [SECTION 137] r.w. Sec. 92
(Q.7-Page No:9.4)
This section provides that copies of financial statement including consolidated financial
statement, if any, along with all the documents annexed to financial statement and adopted
at AGM shall be filed with Registrar.

(i) Filing of financial statements [Section 137(1)]:

(1) A copy of the financial statements, including consolidated financial statement, if
any, along with all the documents which are required to be or attached to such
financial statements under this Act, duly adopted at the AGM of the company, shall
be filed with the Registrar within 30 days of the date of AGM in such manner, with
such fees or additional fees as may be prescribed.

As per Rule 3 of the Companies (Filing of Documents and forms in Extensible Business
Reporting Language) Rules, 2015-
The following class of companies shall file their financial statements and other
documents under section 137 of the Act with the Registrar in e-form AOC- 4 XBRL
as per Annexure-I:
(i) companies listed with stock exchanges in India and their Indian subsidiaries;
(ii) companies having paid up capital of five crore rupees or above;
(iii) companies having turnover of one hundred crore rupees or above;
(iv) all companies which are required to prepare their financial statements in
accordance with Companies (Indian Accounting Standards) Rules, 2015.

9.17 ACCOUNTS OF COMPANIES

 Provided further that non-banking financial companies, housing finance companies
and companies engaged in the business of banking and insurance sector are
exempted from filing of financial statements under these rules.

(ii) If the financial statements are not adopted [Section 137(1)]:

(a) Where the financial statements are not adopted at AGM or adjourned AGM, such
unadopted financial statements along with the required documents shall be filed
with the Registrar within 30 days of the date of AGM.

(b) The Registrar shall take them in his records as provisional till the financial statements
are filed with him after their adoption in the adjourned AGM for that purpose.

(c) If the financial statements are adopted in the adjourned AGM, then they shall be
filed with the Registrar within 30 days of the date of such adjourned AGM with such
fees or such additional fees as may be prescribed.

(iii) Filing by One Person Company [Section 137(1)]:

A One Person Company shall file a copy of the financial statements duly adopted by
its member, along with all the documents which are required to be attached to such
financial statements, within 180 days from the closure of the financial year.

(iv) Annual General meeting not held [Section 137(2)]:

Where the AGM of a company for any year has not been held, the financial statements
along with the documents required to be attached, duly signed along with the statement
of facts and reasons for not holding the AGM shall be filed with the Registrar within thirty
days of the last date before which the AGM should have been held and in such manner,
with such fees or additional fees as may be prescribed.

(v) Penalty [Section 137(3)]:

Person liable Punishment for contravention of section 137
Company ten thousand rupees and in case of continuing
failure, with a further penalty of one hundred
rupees for each day during which such failure
continues, subject to a maximum of two lakh
rupees Companies Amendment Act, 2020
Officers— Penalty of 10,000 and incase of continuing failure
managing director and the Chief with the further penalty of 100 Rupees for each
Financial Officer of the company, if day during wich such failure continues subject to
any maximum 50,000 rupees.
In their absence, any other director Companies Amendment Act, 2020
who is charged by the Board with
the responsibility
In its absence, all the directors of
the company.

ACCOUNTS OF COMPANIES 9.18

INTERNAL AUDIT [SECTION 138]

Who is Internal Auditor

(a) Internal Auditor shall either be a Chartered Accountant or a Cost Accountant, or such
other professional as may be decided by the Board to conduct internal audit of the
functions and activities of the company.
The term “Chartered Accountant” or “Cost Accountant” shall mean a “Chartered
Accountant” or a “Cost Accountant”, as the case may be, whether engaged in practice
or not’.

(b) The internal auditor may or may not be an employee of the company.

9.19 ACCOUNTS OF COMPANIES

 10 AUDIT AND AUDITOR

AUDIT AND AUDITOR 10.1

 11 COMPANIES INCORPORATED
OUTSIDE INDIA

COMPANIES INCORPORATED 11.1

OUTSIDE INDIA
INTRODUCTION
(Q.4-Page No:11.4)
Chapter XXII Consists of sections 379 to 393A as well as the Companies (Registration
of Foreign Companies) Rules, 2014.

Foreign Company [Section 2(42)]: “Foreign company” means any company or body corporate
incorporated outside India which-
(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner.

Example 1: ABC Entertainment Limited (Indian Company) having foreign subsidiary UVW
Limited rendering satellite services to the group will be covered under the definition of
Foreign Company under the Companies Act, 2013.
Example 2: Airline companies who operate through their booking agents in India will be
covered under the definition of Foreign Company under the Companies Act, 2013.

According to the 1Companies (Registration of Foreign Companies) Rules, 2014, “electronic

mode” means carrying out electronically based, whether main server is installed in India or
not, including, but not limited to –
(a) business to business and business to consumer transactions, d a t a
interchange and other digital supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in
securities, in India or from citizens of India;
(c) financial settlements, web based marketing, advisory and transactional services, database
services and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine,
education and information research; and
(e) all related data communication services,
whether conducted by e-mail, mobile devices, social media, cloud computing, document
management, voice or data transmission or otherwise.
Explanation- For the purposes of this clause, electronic based offering of securities,
subscription thereof or listing of securities in the International Financial Services Centres
set up under section 18 of the Special Economic Zones Act, 2005 shall not be construed as
‘electronic mode’ for the purpose of clause (42) of section 2 of the Act.

Example 3: Zakpak Ltd. is a shipping company incorporated in Japan. The Company has set
up a branch office in India after obtaining necessary approvals from RBI. Branch Offices are
generally considered as a reflection of the Parent Company’s office. Thus, branch offices of
a company incorporated outside India are considered as a place of business for conducting
business activity in India and will be required to follow provisions of this chapter and such
other provisions as may be specified elsewhere under Companies Act, 2013.

11.2 COMPANIES INCORPORATED

OUTSIDE INDIA
Facts: Union Minister of State for Corporate Affairs Shri Rao Inderjit Singh in a written reply to
a question in Rajya Sabha stated that 320 foreign companies were registered in India between
2018 and 2021.

APPLICATION OF ACT TO FOREIGN COMPANIES [SECTION 379]

According to this section:
(i) Applicability of Act to foreign companies: Sections 380 to 386 (both inclusive) and
sections 392 and 393 shall apply to all foreign companies. It implies that all companies
which falls within the definition of foreign company as per section 2(42), shall comply
with the provisions of this Chapter.
(ii) Requirement of holding of paid up share capital: Where not less than 50% of the paid-
up share capital, whether equity or preference or partly equity and partly preference,
of a foreign company incorporated outside India is held by:
(i) one or more citizens of India; or
(ii) by one or more companies or bodies corporate incorporated in India; or
(iii) by one or more citizens of India and one or more companies or bodies corporate
incorporated in India,
whether singly or in the aggregate, such foreign company shall also comply with the
provisions of Chapter XXII and such other provisions of this Act as may be prescribed with
regard to the business carried on by it in India as if it were a company incorporated in
India. [Section 379(2)]
Note: Chapter XXII referred to above deals with the legal provisions for companies
incorporated outside India.

Example 4: The shareholding of Emaar Company LLC, incorporated in Dubai and having a
place of business in India, is as follows:
1. Hinduja Company Limited (Indian Company): 26%
2. Vaishali Company Limited (Indian Company): 25%
3. Citizens of Dubai: Remaining holding
As per section 379(2), Emaar Company LLC will also be required to comply with the provisions
of Chapter XXII as not less than 50% of the shareholders of Emaar Company LLC consists of
body corporates incorporated in India. Emaar Company LLC will also be required to comply
with other provisions of this Act as may be prescribed with regard to the business carried on
by its place of business in India as if it were a company incorporated in India.

DOCUMENTS, ETC., TO BE DELIVERED TO REGISTRAR BY FOREIGN COMPANIES [SECTION 380]

(Q.1-Page No:11.1), (Q.2-Page No:11.1), (Q.7-Page No:11.6)
According to section 380 (1) of the Companies Act, 2013,
(i) Every foreign company shall, within 30 days of the establishment of its place of business
in India, deliver to the Registrar for registration:
(a) a certified copy of the charter, statutes or memorandum and articles, of the company
or other instrument constituting or defining the constitution of the company. If the
instrument is not in the English language, a certified translation thereof in the
English language;
COMPANIES INCORPORATED 11.3
OUTSIDE INDIA
 (b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company containing such particulars as
may be prescribed;
In relation to the nature of particulars to be provided as above, 3the Companies
(Registration of Foreign Companies) Rules, 2014, provide that the list of directors and
secretary or equivalent (by whatever name called) of the foreign company shall contain
the following particulars, for each of the persons included in such list, namely:
(1) personal name and surname in full;
(2) any former name or names and surname or surnames in full;
(3) 4father’s name or mother’s name or spouse’s name;
(4) date of birth;
(5) residential address;
(6) nationality;
(7) if the present nationality is not the nationality of origin, his nationality of origin;
(8) passport Number, date of issue and country of issue; (if a person holds more than
one passport then details of all passports to be given)
(9) income-tax permanent account number (PAN), if applicable;
(10) occupation, if any;
(11) whether directorship in any other Indian company, (Director Identification Number
(DIN), Name and Corporate Identity Number (CIN) of the company in case of holding
directorship);
(12) other directorship or directorships held by him;
(13) Membership Number (for Secretary only); and
(14) e-mail ID.
(d) the name and address or the names and addresses of one or more persons
resident in India authorised to accept on behalf of the company service of process
and any notices or other documents required to be served on the company;
(e) the full address of the office of the company in India which is deemed to be its
principal place of business in India;
(f) particulars of opening and closing of a place of business in India on earlier occasion
or occasions;
(g) declaration that none of the directors of the company or the authorised
representative in India has ever been convicted or debarred from formation of
companies and management in India or abroad; and
(h) any other information as may be prescribed.

(ii) Form, procedure and time for making application and submission of prescribed
documents: According to the Companies (Registration of Foreign Companies) Rules,
2014, the above information shall be filed with the Registrar within 30 days of the
establishment of its place of business in India, in Form FC-1 along with prescribed fees
and documents required to be furnished as provided in section 380(1). The application
shall also be supported with an attested copy of approval from the Reserve Bank of
India under the Foreign Exchange Management Act or Regulations, and also from other
regulators, if any, approval is required by such foreign company to establish a place of
business in India or a declaration from the authorised representative of such foreign
company that no such approval is required.

11.4 COMPANIES INCORPORATED

OUTSIDE INDIA
(iii) Office where documents to be delivered and fee for registration of documents:
1. According to the Companies (Registration of Foreign Companies)
Rules, 2014, any document which any foreign company is required to deliver to the
Registrar shall be delivered to the Registrar having jurisdiction over New Delhi.
2. It shall be accompanied with the prescribed fees6.
3. If any foreign company ceases to have a place of business in India, it shall forthwith
give notice of the fact to the Registrar, and from the date on which such notice is
so given, the obligation of the company to deliver any document to the Registrar
shall cease, provided it has no other place of business in India.

(iv) Under section 380(2) every foreign company existing at the commencement of the
Companies Act 2013, which has not delivered to the Registrar the documents and
particulars specified in section 592(1) of the Companies Act, 1956, it shall continue to be
subject to the obligation to deliver those documents and particulars in accordance with
the Companies Act, 1956.

(v) Form, procedure and time within which alteration in documents shall be intimated
to Registrar: Section 380(3) provides that where any alteration is made or occurs in the
documents delivered to the Registrar under section 380, the foreign company shall, within
30 days of such alteration, deliver to the Registrar for registration, a return containing
the particulars of the alteration in the prescribed form. The Companies (Registration of
Foreign Companies) Rules, 2014, has prescribed that the return containing the particulars
of the alteration shall be filed in form FC-2 along with prescribed fees.

Illustration 1: Search & Find Pte. Ltd., incorporated in Singapore. The Company sells its goods
through electronic mode on the e-commerce platforms in India, however, it does not have any
branch or office in India. Is the Company required to submit the documents as required under
Section 380 of the Companies Act, 2013.
Answer: Yes, as per 2(42) of Companies Act, 2013, any company or body corporate incorporated
outside India which (a) has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and Rule 12 of the Companies (Registration Offices and
Fees) Rules, 2014

(b) conducts any business activity in India in any other manner shall be considered as a
foreign company. Accordingly, as Search & Find Pte. Ltd., is conducting its business
through electronic mode, it is considered a foreign company as per Companies Act, 2013
and is required to submit the documents mentioned under Section 380 of the Companies
Act, 2013.

COMPANIES INCORPORATED 11.5

OUTSIDE INDIA
 ACCOUNTS OF FOREIGN COMPANY [SECTION 381]
(Q.3-Page No:11.3)
According to this section:
(i) Every foreign company shall, in every calendar year,—
(a) make out a balance sheet and profit and loss account in such form, containing such
particulars and including or having attached or annexed thereto such documents as
may be prescribed, and
(b) deliver a copy of those documents to the Registrar.
According to the 7Companies (Registration of Foreign Companies) Rules, 2014, every
foreign company shall prepare financial statement of its Indian business operations
in accordance with Schedule III or as near thereto as possible for each financial year
including:
(1) documents that are required to be annexed should be in accordance with Chapter
IX i.e. Accounts of Companies.
(2) The documents relating to copies of latest consolidated financial statements of
the parent foreign company, as submitted by it to the prescribed authority in the
country of its incorporation under the applicable laws there.
Note: “financial year” in relation to any company or body corporate, means
the period ending on the 31st day of March every year, and where it has been
incorporated on or after the 1st day of January of a year, the period ending on the
31st day of March of the following year, in respect whereof financial statement of
the company or body corporate is made up:
Provided that where a company or body corporate, which is a holding company or
a subsidiary or associate company of company incorporated outside India and is
required to follow a different financial year for consolidation of its accounts outside
India, the Central Government may, on an application made by that company or
body corporate in such form and manner as may be prescribed, allow any period as
its financial year, whether or not that period is a year.
Provided further that any application pending before the Tribunal as on the date of
commencement of the Companies (Amendment) Ordinance, 2018, shall be disposed
of by the Tribunal in accordance with the provisions applicable to it before such
commencement.
It is important to note that a foreign company having its place of business in India
may not necessarily follow a financial year ending on the 31st day of March every
year provided it has obtained the requisite approvals from the Central Government
for the same.

Example 5:
ROK Limited, is a company incorporated outside India having a place of business in India.
ROK Limited is a subsidiary of HOK Limited (Holding company), registered in Australia and
is required to consolidate its accounts with HOK Limited. Accordingly, if HOK Limited is
required to follow financial year other than 31st day of March every year, ROK can make an
application to Central Government to follow the financial year as per HOK Limited.

11.6 COMPANIES INCORPORATED

OUTSIDE INDIA
(ii) The Central Government is empowered to direct that, in the case of any foreign company
or class of foreign companies, the requirements of clause
(a) given above shall not apply, or shall apply subject to such exceptions and
modifications as may be specified in notification in that behalf [Section 381(1)].
(iii) If any of the specified documents are not in the English language, a certified translation
thereof in the English language shall be annexed. [Section 381 (2)]
(iv) Every foreign company shall send to the Registrar along with the documents required
to be delivered to him, a copy of a list in the prescribed form, of all places of business
established by the company in India as at the date with reference to which the balance
sheet referred to in section 381(1) is made.
According to the Companies (Registration of Foreign Companies) Rules, 2014, every
foreign company shall file with the Registrar, along with the financial statement, in Form
FC-3 with such fee as provided under Companies (Registration Offices and Fees) Rules,
2014 a list of all the places of business established by the foreign company in India as on
the date of balance sheet.
According to the 9Companies (Registration of Foreign Companies) Rules, 2014, if any
foreign company ceases to have a place of business in India, it shall forthwith give
notice of the fact to the Registrar, and as from the date on which notice is so given, the
obligation of the company to deliver any document to the Registrar shall cease, if it does
not have other place of business in India.
(v) According to the 10Companies (Registration of Foreign Companies) Rules, 2014,
(a) Further, every foreign company shall, along with the financial statement required
to be filed with the Registrar, attach thereto the following documents; namely:-
(1) Statement of related party transaction
(2) Statement of repatriation of profits
(3) Statement of transfer of funds (including dividends, if any)
The above statements shall include such other particulars as are prescribed in the
Companies (Registration of Foreign Companies) Rules, 2014.
(b) All these documents shall be delivered to the Registrar within a period of 6 months
of the close of the financial year of the foreign company to which the documents
relate.
Provided that the Registrar may, for any special reason, and on application made in
writing by the foreign company concerned, extend the said period by a period not
exceeding three months.

Example 6: Mukesh & Jordan LLC is a foreign company and is required to file its financial
statements within six months of the close of the financial year with Registrar on an annual
basis alongwith following additional documents:
(1) Statement of related party transaction
(2) Statement of repatriation of profits
(3) Statement of transfer of funds (including dividends, if any)
However, where the Central Government has exempted or specified different documents
for any foreign company or a class of foreign companies, then documents as specified
shall be submitted.

COMPANIES INCORPORATED 11.7

OUTSIDE INDIA
(vi) Audit of accounts of foreign company: According to the 11Companies (Registration of
Foreign Companies) Rules, 2014,
(a) Every foreign company shall get its accounts, pertaining to the Indian business
operations prepared in accordance with section 381(1) and Rules thereunder, shall
be audited by a practicing Chartered Accountant in India or a firm or limited liability
partnership of practicing chartered accountants.
(b) The provisions of Chapter X i.e. Audit and Auditors and rules made there under, as
far as applicable, shall apply, mutatis mutandis, to the foreign company.

DISPLAY OF NAME, ETC., OF FOREIGN COMPANY [SECTION 382]

Every foreign company shall—
(a) conspicuously exhibit on the outside of every office or place where it carries on business
in India, the name of the company and the country in which it is incorporated, in letters
easily legible in English characters, and also in the characters of the language or one of
the languages in general use in the locality in which the office or place is situate;
(b) cause the name of the company and of the country in which the company is incorporated,
to be stated in legible English characters in all business letters, bill-heads and letter
paper, and in all notices, and other official publications of the company; and
(c) if the liability of the members of the company is limited, cause notice of that fact—
(i) to be stated in every such prospectus issued and in all business letters, bill-heads,
letter paper, notices, advertisements and other official publications of the company,
in legible English characters; and
(ii) to be conspicuously exhibited on the outside of every office or place where it carries
on business in India, in legible English characters and also in legible characters of
the language or one of the languages in general use in the locality in which the
office or place is situated.

SERVICE ON FOREIGN COMPANY [SECTION 383]

Any process, notice, or other document required to be served on a foreign company shall be
deemed to be sufficiently served, if addressed to any person whose name and address have
been delivered to the Registrar under section 380 and left at, or sent by post to, the address
which has been so delivered to the Registrar or by electronic mode.

DEBENTURES, ANNUAL RETURN, REGISTRATION OF CHARGES, BOOKS OF ACCOUNT AND

THEIR INSPECTION [SECTION 384]
(i) The provisions of section 71 (Issue of Debentures) shall apply mutatis mutandis to a
foreign company.
(ii) The provisions of section 92 (Preparation and filing of Annual return) shall, subject to
such exceptions, modifications and adaptations as may be made therein by rules made
under this Act, apply to a foreign company as they apply to a company incorporated in
India. Further, as per Rule 3 of the Companies (Corporate Social Responsibility Policy)
Rules 2014, a foreign company which fulfils the criteria specified under Section 135(1)
of the Companies Act 2013 is required to comply with Section 135 of the Companies Act,
2013, subject to such exceptions, modifications and adaptations as may be made therein
by rules made under this Act, apply to a foreign company as they apply to a company
incorporated in India.

11.8 COMPANIES INCORPORATED

OUTSIDE INDIA
 According to the Companies (Registration of Foreign Companies) Rules, 2014, every foreign
company shall prepare and file an annual return in Form FC-4 along with prescribed
fees, within a period of 60 days from the last day of its financial year, to the Registrar
containing the particulars as they stood on the close of the financial year.
(iii) The provisions of section 128 (Books of account, etc., to be kept by company) shall
apply to a foreign company to the extent of requiring it to keep at its principal place
of business in India, the books of account referred to in that section, with respect to
monies received and spent, sales and purchases made, and assets and liabilities, in the
course of or in relation to its business in India.
(iv) The provisions of Chapter VI (Registration of Charges) shall apply mutatis mutandis to
charges on properties which are created or acquired by any foreign company.
(v) The provisions of Chapter XIV (Inspection, inquiry and investigation) shall apply mutatis
mutandis to the Indian business of a foreign company as they apply to a company
incorporated in India.

FEE FOR REGISTRATION OF DOCUMENTS [SECTION 385]

There shall be paid to the Registrar for registering any document required by the provisions
of this Chapter to be registered by him, such fee, as may be prescribed.
According to the Companies (Registration of Foreign Companies) Rules, 2014, the fees to be
paid to the Registrar for registering any document relating to a foreign company shall be such
as provided in the Companies (Registration Offices and Fees) Rules, 2014.

INTERPRETATION [SECTION 386]

For the purposes of the foregoing provisions of this Chapter, the expression:
(a) “Certified” means certified in the prescribed manner to be a true copy or a correct
translation;
(b) “Director”, in relation to a foreign company, includes any person in accordance with
whose directions or instructions the Board of Directors of the company is accustomed to
act; and
(c) “Place of business” includes a share transfer or registration office.

Illustration 2: Examine with reference to the provisions of the Companies Act, 2013 whether
the following companies can be treated as foreign companies:
(i) A company incorporated outside India having a share registration office at Mumbai.
(ii) Indian citizens incorporated a company in Singapore for the purpose of carrying on
business there.

Answer: Section 2(42) of the Companies Act, 2013 defines a “foreign company” as
any company or body corporate incorporated outside India which:
(a) Has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
(b) Conducts any business activity in India in any other manner.
According to section 386 of the Companies Act, 2013, for the purposes of Chapter XXII of the
Companies Act, 2013 (Companies incorporated outside India), expression “Place of business”
includes a share transfer or registration office.
COMPANIES INCORPORATED 11.9
OUTSIDE INDIA
Further, to qualify as a ‘foreign company’ a company must have the following features:
(a) it must be incorporated outside India; and
(b) it should have a place of business in India.
(c) That place of business may be either in its own name or through an agent or may even
be through the electronic mode; and
(d) It must conduct a business activity of any nature in India.
(i) Therefore, a company incorporated outside India having a share registration office
at Mumbai will be treated as a foreign company provided it conducts any business
activity in India.
(ii) In the case of a company incorporated in Singapore for the purpose of carrying on
business in Singapore, it will not fall within the definition of a foreign company. Its
incorporation outside India by Indian citizen is immaterial. In order to be a foreign
company it has to have a place of business in India and must also conduct a business
activity in India.

DATING OF PROSPECTUS AND PARTICULARS TO BE CONTAINED THEREIN [SECTION 387]

According to this section:
(i) Prospectus to be dated and signed [Section 387(1)]: No person shall issue, circulate
or distribute in India any prospectus offering to subscribe for securities of a company
incorporated or to be incorporated outside India, whether the company has or has not
established, or when formed will or will not establish, a place of business in India, unless
the prospectus is dated and signed, and—
(a) contains particulars with respect to the following matters, namely:—
(1) the instrument constituting or defining the constitution of the company;
(2) the enactments or provisions by or under which the incorporation of the
company was effected;
(3) address in India where the said instrument, enactments or provisions, or
copies thereof, and if the same are not in the English language, a certified
translation thereof in the English language can be inspected;
(4) the date on which and the country in which the company would be or was
incorporated; and
(5) whether the company has established a place of business in India and, if so,
the address of its principal office in India; and
(b) states the matters specified under section 26 (Matters to be stated in prospectus).
Provided that points (1), (2) and (3) of point (a) above shall not apply in the case of a
prospectus issued more than 2 years after the date at which the company is entitled to
commence business.

11.10 COMPANIES INCORPORATED

OUTSIDE INDIA
 Example 7: Mir Company LLC, a company incorporated in Dubai, on 28th April 2017. Mir
Company LLC has established a place of Business in Mumbai in the year 2020. Now the place
of business in India proposes to offer subscription to securities of Mir Company LLC. Now the
place of business in India before going with the subscription will have to file a prospectus dated
and signed and the prospectus shall not be required to contain the particulars mentioned
in points (1), (2) and (3) of point (a) above as the prospectus will be getting issued after a
period of more than 2 years since the Mir Company LLC has commenced its business.

(ii) No waiver of compliance in prospectus [Section 387(2)]: Any condition requiring or

binding an applicant for securities to waive compliance with any requirement imposed
by virtue of section 387(1) or purporting to impute him with notice of any contract,
documents or matter not specifically referred to in the prospectus, shall be void.
It is to be understood that section 387 (2) does not provides any exception with respect
to the non-compliance of the requirements stated under section 387 (1) by any person
responsible for issuing or circulating prospectus.
(iii) Form of application for securities to be issued along with prospectus [Section 387(3)]:
No person shall issue to any person in India a form of application for securities of such
a company or intended company as is mentioned in section 387(1), unless the form is
issued with a prospectus which complies with the provisions of this Chapter (Chapter
XXII) and such issue does not contravene the provisions of section 388:
Exception: If it is shown that the form of application was issued in connection with a
bona fide invitation to a person to enter into an underwriting agreement with respect to
securities.
(iv) Section 387(4) further provides that the provisions of section 387—
(a) shall not apply to the issue to existing members or debenture holders of a company of
a prospectus or form of application relating to securities of the company, whether an
applicant for securities will or will not have the right to renounce in favour of other
persons; and
(b) except in so far as it requires a prospectus to be dated, to the issue of a prospectus relating
to securities which are or are to be in all respects uniform with securities previously
issued and for the time being dealt in or quoted on a recognised stock exchange, but,
subject as aforesaid, section 387 shall apply to a prospectus or form of application
whether issued on or with reference to the formation of a company or subsequently.
According to section 387(4), the provisions of section 387 shall not apply to the issue
of prospectus or form of application relating to securities of the company to existing
member or debenture holders of a company; and
The provisions of section 387 shall not apply in respect of issue of prospectus dealing
with offer for securities which are uniform in all respects with securities previously
issued and such previously issued securities are listed on a recognised stock exchange.
However, provisions relating to dating of prospectus shall continue to apply.
(v) Nothing in Section 387 shall limit or diminish any liability which any person may incur
under any law for the time being in force in India or under the Companies Act, 2013 apart
from Section 387.

COMPANIES INCORPORATED 11.11

OUTSIDE INDIA
 PROVISIONS AS TO EXPERT’S CONSENT AND ALLOTMENT [SECTION 388]
According to this section:
(i) No person shall issue, circulate or distribute in India any prospectus offering for
subscription in securities of a company incorporated or to be incorporated outside India,
whether the company has or has not been established, or when formed will or will not
establish, a place of business in India,—
(a) if, where the prospectus includes a statement purporting to be made by an expert,
he has not given, or has before delivery of the prospectus for registration withdrawn,
his written consent to the issue of the prospectus with the statement included
in the form and context in which it is included, or there does not appear in the
prospectus a statement that he has given and has not withdrawn his consent
as aforesaid; or
(b) if the prospectus does not have the effect, where an application is made in pursuance
thereof, of rendering all persons concerned bound by all the provisions of section
33 (Issue of application forms for securities) and section 40 (Securities to be dealt
with in stock exchanges), so far as applicable.
(ii) For the purposes of this section, a statement shall be deemed to be included in a
prospectus, if it is contained in any report or memorandum appearing on the face thereof
or by reference incorporated therein or issued therewith.

REGISTRATION OF PROSPECTUS [SECTION 389]

(Q.5-Page No:11.5)
According to this section:
No person shall issue, circulate or distribute in India any prospectus offering for subscription
in securities of a company incorporated or to be incorporated outside India, whether the
company has or has not established, or when formed will or will not establish, a place of
business in India, unless before the issue, circulation or distribution of the prospectus in India;
 a copy thereof certified by the chairperson of the company and two other directors of
the company as having been approved by resolution of the managing body has been
delivered for registration to the Registrar; and
 the prospectus states on the face of it that a copy has been so delivered, and
 there is endorsed on or attached to the copy, any consent to the issue of the prospectus
required by section 388 and such documents as may be prescribed.

According to the Companies (Registration of Foreign Companies) Rules, 2014, the following
documents shall be annexed to the prospectus, namely:
(a) any consent to the issue of the prospectus required from any person as an expert;
(b) a copy of contracts for appointment of managing director or manager and in case of
a contract not reduced into writing, a memorandum giving full particulars thereof;
(c) a copy of any other material contracts, not entered in the ordinary course of business,
but entered within preceding 2 years;
(d) a copy of underwriting agreement; and
(e) a copy of power of attorney, if prospectus is signed through duly authorized agent of
directors.

11.12 COMPANIES INCORPORATED

OUTSIDE INDIA
 OFFER OF INDIAN DEPOSITORY RECEIPTS [SECTION 390]
For the purposes of this section, and according to the 15Companies (Registration of Foreign
Companies) Rules, 2014, Indian Depository Receipts (IDR) means any instrument in the form of
a depository receipt created by a Domestic Depository in India and authorized by a company
incorporated outside India making an issue of such depository receipts.
According to section 390, notwithstanding anything contained in any other law for the time
being in force, the Central Government may make rules applicable for—
(i) the offer of Indian Depository Receipts (IDR);
(ii) the requirement of disclosures in prospectus or letter of offer issued in connection
with IDR;
(iii) the manner in which the IDR shall be dealt with in a depository mode and by custodian
and underwriters; and
(iv) the manner of sale, transfer or transmission of IDR,
by a company incorporated or to be incorporated outside India, whether the company has or
has not established, or will or will not establish, any place of business in India.
According to Rule 13 of the Companies (Registration of Foreign Companies) Rules, 2014, no
company incorporated or to be incorporated outside India, whether the company has or has
not established, or may or may not establish, any place of business in India shall make an
issue of Indian Depository Receipts (IDRs) unless it complies with the conditions mentioned
under this rule, in addition to the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009 and any directions issued by the Reserve Bank of
India.
The Rules relating to offer, disclosure requirements and manner of transfer, sale etc., related
to IDR are contained in Companies (Registration of Foreign Companies) Rules, 2014.
Standard Chartered PLC was the first global company to file for an issue of IDR in India in
2010.

Application of Chapter XV (Compromises, Arrangements and Amalgamations): Section 234

of the Companies Act, 2013 deals with merger or amalgamation of company with foreign
company.
Section 234(1) states that the provisions of Chapter XV unless otherwise provided under any
other law for the time being in force, shall apply mutatis mutandis to schemes or mergers
and amalgamations between companies registered under this Act and companies incorporated
in the jurisdictions of such countries as may be notified from time to time by the Central
Government. Provided that the Central Government may make rules, in consultation with the
Reserve Bank of India, in connection with mergers and amalgamations provided under this
section.
Section 234(2) states that subject to the provisions of any other law for the time being in
force, a foreign company, may with the prior approval of the Reserve Bank of India, merge
into a company registered under this Act or vice versa and the terms and conditions of the
scheme of merger may provide, among other things, for the payment of consideration to the
shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and
partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the
purpose.

COMPANIES INCORPORATED 11.13

OUTSIDE INDIA
Explanation: For the purposes of sub-section (2) above, the expression “foreign company”
means any company or body corporate incorporated outside India whether having a place of
business in India or not.

APPLICATION OF SECTIONS 34 TO 36 AND CHAPTER XX [SECTION 391]

Section 391 of the Companies Act, 2013 provides for Application of sections 34 to 36 and
Chapter XX. According to this section:
According to sub-section (1), the provisions of sections 34 to 36 (both inclusive) shall apply
to—
(i) the issue of a prospectus by a company incorporated outside India under section 389 as
they apply to prospectus issued by an Indian company;
(ii) the issue of IDR by a foreign company.
Section 34 deals with criminal liability for mis-statements in prospectus. Section 35 deals with
Civil Liability for mis-statement in prospectus.
Section 36 deals with punishment for fraudulently inducing persons to invest money.
Sub-section (2) provides that, subject to the provisions of section 376 (Power to wind up
Foreign companies although dissolved), the provisions of Chapter XX (i.e. Chapter on Winding
up) shall apply mutatis mutandis for closure of the place of business of a foreign company in
India as if it were a company incorporated in India in case such foreign company has raised
monies through offer or issue of securities under this Chapter which have not been repaid or
redeemed.

PUNISHMENT FOR CONTRAVENTION [SECTION 392]

Without prejudice to the provisions of section 391, if a foreign company contravenes the
provisions of Chapter XXII of the Companies Act, 2013 (i.e. Chapter on Companies incorporated
outside India), the foreign company shall be punishable with fine which shall not be less than
1,00,000 rupees but which may extend to 3,00,000 rupees and in the case of a continuing
offence, with an additional fine which may extend to 50,000 rupees for every day after the
first during which the contravention continues and every officer of the foreign company who
is in default shall be punishable with fine which shall not be less than 25,000 rupees but which
may extend to 5,00,000 rupees.
Thus, the punishment for contravention may be summed up as under:
1. Fine on defaulting foreign company in the range of 1 lac rupees to 3 lac rupees.
2. In case of continuing default an additional fine on the foreign company to the tune of
50,000 rupees per day after the first during which the contravention continues.
3. Punishment for every officer of the foreign company who is in default shall be imposition
of a fine of a minimum amount of 25,000 rupees, but which may extend to 5,00,000
rupees.

COMPANY’S FAILURE TO COMPLY WITH PROVISIONS OF THIS CHAPTER NOT TO AFFECT

VALIDITY OF CONTRACTS, ETC [SECTION 393]
Any failure by a company to comply with the provisions of Chapter XXII of the Companies
Act, 2013, shall not affect the validity of any contract, dealing or transaction entered into
by the company or its liability to be sued in respect thereof. However, the company shall not
be entitled to bring any suit, claim any set-off, make any counter-claim or institute any legal
proceeding in respect of any such contract, dealing or transaction, until the company has
complied with the provisions of the Companies Act, 2013, applicable to it.

11.14 COMPANIES INCORPORATED

OUTSIDE INDIA
 RULE 12 OF COMPANIES (REGISTRATION OF FOREIGN COMPANIES) RULES, 2014
Action for Improper Use or Description as Foreign Company: It states that if any person or
persons trade or carry on business in any manner under any name or title or description as a
foreign company registered under the Act or the rules made thereunder, that person or each
of those persons shall, unless duly registered as foreign company under the Act and rules
made thereunder, shall be liable for investigation under section 210 of the Act and action
consequent upon that investigation shall be taken against that person.

EXEMPTIONS UNDER THIS CHAPTER

The Central Government may, by notification, exempt any class of-
(a) foreign companies;
(b) companies incorporated or to be incorporated outside India, whether the company has
or has not established, or when formed may or may not establish, a place of business in
India,
in so far as they relate to the offering for subscription in the securities, requirements related
to the prospectus, and all matters incidental thereto in the International Financial Services
Centres set up under section 18 of the Special Economic Zones Act, 2005.

SUMMARY
Foreign company” means any company or body corporate incorporated outside India which-
(a) has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
(b) conducts any business activity in India in any other manner.

Every foreign company shall, in every calendar year,—

(a) make out a balance sheet and profit and loss account in prescribed format, and
(b) deliver a copy of those documents to the Registrar.

The punishment for contravention is as under:

1. Fine on defaulting foreign company in the range of 1 lac rupees to 3 lac rupees.
2. In case of continuing default an additional fine on the foreign company to the tune of
50,000 rupees per day after the first during which the contravention continues.
3. Punishment for every officer of the foreign company who is in default shall be imposition
of a fine of a minimum amount of 25,000 rupees, but which may extend to 5,00,000
rupees.

COMPANIES INCORPORATED 11.15

OUTSIDE INDIA
 Part B
OTHERS LAW

1 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
12 THE FOREIGN EXCHANGE
MANAGEMENT ACT, 1999

12.1 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
 INTRODUCTION
Need for the Act
The change in the economic scenario, globalization of capital, free trade across the globe,
necessitated the need for managing foreign exchange in the country in an orderly manner.
To facilitate cross border trade and cross border capital flows, exchange control law was
required. Foreign exchange control led to introduction of exchange control law through
Defense of India rules by the Britishers in 1939. Subsequently, Foreign Exchange Regulation Act
(FERA) was enacted in 1947 which was later replaced with ‘the Foreign Exchange Regulation
Act, 1973’ (FERA).
Government as part of its agenda of liberalization of the Indian economy in 1991, permitted
free movement of foreign exchange in connection to trade related receipts and payments as
well as Foreign Investment in various sectors. This increased the flow of foreign exchange
to India and consequently foreign exchange reserves increased substantially. The Foreign
Exchange Management Act, 1999 was enacted and made effective from 1st June, 2000. This
Act enables management of foreign exchange reserves for the country.

Salient Features of the Act: It provides for-

• Regulation of transactions between residents and non-residents
• Investments in India by non-residents and overseas investments by Indian residents
• Freely permissible transactions on current account subject to reasonable restrictions
that may be imposed
• Reserve Bank of India (RBI) and Central Government control over capital account
transactions
• Requirement for realisation of export proceeds and repatriation to India
• Dealing in foreign exchange through ‘Authorised Persons’ like Authorised Dealer/ Money
Changer/ Off-shore banking unit
• Adjudication and Compounding of Offences
• Investigation of offences by Directorate of Enforcement
• Appeal provisions including Special Director (Appeals) and Appellate Tribunal.

Enforcement of FEMA: Though RBI exercises overall control over foreign exchange transactions,
enforcement of FEMA has been entrusted to a separate ‘Directorate of Enforcement’ formed
for this purpose. [Section 36].

Act FEMA:
How to Read

Rules* & Regulations**

Notifications & Circulars

Master Directions

FAQs

*Rules are notified by the Ministry of Finance, Government of India

** Regulations are notified by the Reserve Bank of India

THE FOREIGN EXCHANGE MANAGEMENT 12.2

ACT, 1999
Broad Structure of FEMA
Now let us have a glance at the broad structure the Act. The Act consists of 7 Chapters dealing
with following areas:
Chapters Matters Sections
I Preliminary 1–2
II Regulation and Management of Foreign Exchange 3–9
III Authorised Person 10 – 12
IV Contravention and Penalties 13 – 15
V Adjudication and Appeal 16 – 35
VI Directorate of Enforcement 36 – 38
VII Miscellaneous 39 – 49

PREAMBLE, EXTENT, APPLICATION AND COMMENCEMENT OF FEMA, 1999

(A) Preamble: This Act aims to consolidate and amend the law relating to foreign exchange
with the objective of —
(i) facilitating external trade and payments and
(ii) for promoting the orderly development and maintenance of foreign exchange
market in India.

(B) Extent and Application [Section 1]: FEMA, 1999 extends to the whole of India. In
addition, it shall also apply to all branches, offices and agencies outside India owned
or controlled by a person resident in India and also to any contravention thereunder
committed outside India by any person to whom this Act applies.
The scope of the Act has been extended to include branches, offices and agencies outside
India. The scope is thus wide enough because the emphasis is on the words “Owned or
Controlled”. Contravention of the FEMA committed outside India by a person to whom
this Act applies will also be covered by FEMA.

(C) Commencement: The Act, 1999 came into force with effect from 1stJune, 2000 vide
Notification G.S.R. 371(E), dated 1.5.2000.

DEFINITIONS [SECTION 2]
In this Act, unless the context otherwise requires:
(1) “Authorised person” means an authorised dealer, money changer, off-shore banking unit
or any other person for the time being authorised under section 10(1) to deal in foreign
exchange or foreign securities; [Section 2(c)]
(2) “Capital Account Transaction” means a transaction, which alters the assets or liabilities,
including contingent liabilities, outside India of persons resident in India or assets or
liability in India of persons resident outside India, and includes transactions referred to
in Section 6(3); [Section 2(e)]
(3) “Currency” includes all currency notes, postal notes, postal orders, money orders,
cheques, drafts, travelers’ cheques, letters of credit, bills of exchange and promissory
notes, credit cards or such other similar instruments, as may be notified by the Reserve
Bank. [Section 2(h)]

12.3 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
(4) “Currency Notes” means and includes cash in the form of coins and bank notes;
[Section 2(i)]
(5) “Current Account Transaction” means a transaction other than a capital account
transaction and without prejudice to the generality of the foregoing such transaction
includes,
(i) payments due in connection with foreign trade, other current business, services,
and short-term banking and credit facilities in the ordinary course of business.
(ii) payments due as interest on loans and as net income from investments.
(iii) remittances for living expenses of parents, spouse and children residing abroad,
and
(iv) expenses in connection with foreign travel, education and medical care of parents,
spouse and children; [Section 2(j)]
(6) “Export”, with its grammatical variations and cognate expressions means;
(i) the taking out of India to a place outside India any goods.
(ii) provision of services from India to any person outside India;[Section 2(l)]
(7) “Foreign Currency” means any currency other than Indian currency; [Section 2(m)]
(8) “Foreign Exchange” means foreign currency and includes:
(i) deposits, credits and balances payable in any foreign currency,
(ii) drafts, travelers’ cheques, letters of credit or bills of exchange, expressed or drawn
in Indian currency but payable in any foreign currency,
(iii) drafts, travelers’ cheques, letters of credit or bills of exchange drawn by banks,
institutions or persons outside India, but payable in Indian currency; [Section 2(n)]
(9) “Foreign Security” means any security, in the form of shares, stocks, bonds, debentures
or any other instrument denominated or expressed in foreign currency and includes
securities expressed in foreign currency, but where redemption or any form of return
such as interest or dividends is payable in Indian currency; [Section 2(o)]
(10) “Import”, with its grammatical variations and cognate expressions, means bringing into
India any goods or services; [Section 2(p)]
(11) “Person” includes:
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the preceding sub-clauses,
and;
(vii) any agency, office or branch owned or controlled by such person; [Section 2(u)]
(12) “Person resident in India” means:
(i) a person residing in India for more than 182 days during the course of the preceding
financial year but does not include—
(A) a person who has gone out of India or who stays outside India, in either case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay
outside India for an uncertain period;

THE FOREIGN EXCHANGE MANAGEMENT 12.4

ACT, 1999
 (B) a person who has come to or stays in India, in either case, otherwise than:
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay
in India for an uncertain period;
(ii) any person or body corporate registered or incorporated in India,
(iii) an office, branch or agency in India owned or controlled by a person resident outside
India,
(iv) an office, branch or agency outside India owned or controlled by a person resident
in India; [Section 2(v)]
(13) “Person Resident Outside India” means a person who is not resident in India;
[Section 2(w)]
(14) “Transfer” includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other
form of transfer of right, title, possession or lien. [Section 2(ze)]

RESIDENTIAL STATUS UNDER FEMA, 1999

The definition of “person” is similar to the definition contained in the Income-tax Act, 1961.
The term ‘person’ includes entities such as companies, firms, individuals, HUF, Association of
Persons (AOP), artificial juridical persons agencies, as well as offices and branches. Agencies,
offices and branches do not have independent status separate from their owners. Yet these
have been considered as persons. Under FEMA such offices and branches are included in
definition of Person Resident in India. Therefore, they have been included in the definition
of “Person”.
The term ‘person resident in India’ means the following entities:
1. A person who resides in India for more than 182 days during the preceding financial
year;
The following persons are NOT persons resident, in India even though they may have
resided in India for more than 182 days.
A. A person who has gone out of India or stays outside India for any of the three
purposes given below,
B. A person who has come to or stays in India OTHERWISE THAN for any of the three
purposes given below;
Three Purposes
(i) For or on taking up Employment
(ii) For carrying on a business or Vacation
(iii) For any other purpose in such circumstances as would indicate stay for an uncertain
period.
2. Any person or body corporate registered or incorporated in India;
3. An office, branch or agency in India owned or controlled by a person resident outside
India;
4. An office, branch or agency outside India owned or controlled by a person resident in
India.

Person resident outside India means a person who is not resident in India.

12.5 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
 During the relevant previous year did he reside in India for more than 182 days

Yes No

Did he go out or stay outside Did he come to or stay in

India during the current year? India during the current year?

Yes No Yes No

3 3
Purposes Purposes
? ?

Yes
Yes
No No

PROI PRII PRII PRII PROI PROI

As the definitions of Person Resident in India (PRII) and Person Resident outside India (PROI)
are quite relevant for determining the applicability of the Act on an entity, let us analyse and
understand it better.
In the case of individuals, to be considered as “resident”, the person should have resided in
India in the preceding financial year for more than 182 days. Citizenship is not the criteria
for determining whether or not a person is resident in India.
There are three limbs in the definition. The first limb prescribes the number of days stay. Then
there are two limbs which are exceptions to the first limb.
First limb – It states that a person who is in India for more than 182 days in the “preceding
year” will be a Person Resident in India. Thus, at the threshold or basic level, one has to
consider the period of stay during the preceding year.

Example 1: If a person resides in India for more than 182 days during FY 2020-21, then for
the FY 2021-22, the person will be an Indian resident. For FY 2020-21, one will have to con-
sider residence during FY 2019-20, and so on.

THE FOREIGN EXCHANGE MANAGEMENT 12.6

ACT, 1999
There are two exceptions provided in clauses (A) and (B). Clause (A) is for persons going out of
India. Clause (B) is for persons coming into India. Exceptions carve out situations that do not
fall under the main body of a section, even though they satisfy the criteria. This means that
even if a person is an Indian resident based on the test provided in the first limb, the person
will be a “Person Resident Outside India (PROI) if he falls within limb (A) or limb (B).
Clause (A) – second limb – It states that if a person leaves India in any of the THREE PURPOSES
we saw above, he will not be a PRII. He will be a PROI.
Thus, in the example given for the first limb above, if a person leaves India on 1st November
2021, he will be a non-resident from 2nd November 2021 – even though his number of days in
India was more than 182 days in FY 2020-2021. Similarly, if a person goes and stays out of India
for carrying on any business, he will be a PROI from that date. For FY 2021-2022 the person
will be a PRII till 1st November 2021. He will then be a PROI. From 1st April 2022, the person
will continue to be a PROI as long as he stays out of India for employment.
An example for clause (iii) can be a person who has a green card in the USA. The green card
entitles a person to stay in the USA and eventually become a US citizen. If a person goes
abroad and starts staying in the USA, he will be a non-resident from that date as his stay
abroad indicates that he is going to stay there for an uncertain period.

Clause (B) – third limb – This is a complex clause as first limb read with third limb has two
exceptions. Limb one uses the phrase “but does not include”. Third limb uses the phrase
“otherwise than”. Use of two exceptions make it complex reading.
It states that if a person has come to India for any reason otherwise than for - employment,
business or circumstances which indicate his intention to stay for uncertain period – he will be
a non-resident. This will be so even if the person has stayed in India for more than 182 days
in the preceding year.
For example, if a person comes to India on 1st June 2021 for visiting his parents. However, his
parents fall sick and he stays till 31st March 2022. Thereafter he continues to stay in India. It
is however certain that he will leave India in next 6 months when his parents recover. His stay
in India is neither for employment, nor for business, nor for circumstances which show that
he will stay in India for an uncertain period. In such a case, even if he has resided in India for
more than 182 days in FY 2021-2022, he will continue to be a non-resident from 1st April 2022
also. In FY 2021-2022, he is of course a PROI as he did not reside in India for more than 182
in FY 2020-2021.
If a person comes to India on 1st June 2021 for employment, business or circumstances which
indicate his intention to stay in India for an uncertain period, he will be a PRII from 1st June
2021.
Residential status is not for a year. It is from a particular date. This is different from income-
tax law. Under income-tax law, a person has to pay tax in respect of the income of the
previous year. Therefore, it is possible to look at a complete year for determining residential
status under the Income Tax Act, 1961. FEMA is a regulatory law. One has to know the person’s
status at the time of undertaking a transaction. If for example, a person comes to India for
employment, and if his status can be known only when the year is completed, how will he and
other people enter into commercial transactions with each other? If he is considered as a PROI
till the year is over, then people will not be able to enter into transactions with him. This is
the reason why the residential status is not for a year but from particular date.

12.7 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
It is understood that this condition applies only to individuals. It will not apply to HUF, AOP
or artificial juridical person as they cannot get employed, cannot go out of India or come to
India. Hence, they do not come within the ambit of the second and third limbs. These entities
like HUF and AOP are not required to be registered or incorporated like corporate entities nor
the definition can be far stretched to cover by applying the criteria of ‘owned or controlled’.
Hence legally the definition for HUF, AOP, BOI fail. Practically if the HUF, AOP etc. are in India,
they will be considered as Indian residents.
Person or Body corporate: Any person or body corporate registered or incorporated in India,
will be considered a PRII. This definition too, does not apply to AOP, BOI etc.
Office, branch or agency: Any agency, branch or agency outside India but owned or controlled
by PRII will be considered as person resident in India (PRII). Thus, one cannot set up a branch
outside India and attempt to avoid FEMA provisions.
Any agency, branch or agency in India but owned or controlled by a person resident outside
India (PROI) will be considered as a person resident in India. This is relevant as Indian residents
can deal with such branch in India without considering FEMA. If such branch is considered as
a PROI then it will be difficult to undertake several transactions.

Illustration 1
Mr. X had resided in India during the financial year 2019-2020 for less than 182 days. He had
come to India on April 1, 2020 for carrying on business. He intends to leave the business on
April 30, 2021 and leave India on June 30, 2021. Determine his residential status for the
financial years 2020-2021 and 2021-2022 up to the date of his departure?

Answer
As explained in the above illustration, Mr. X will be considered as a ‘person resident in India’
from 1st April 2020. As regards, financial year 2021-2022, Mr. X would continue to be an Indian
resident from 1st April 2021.
If he leaves India for the purpose of taking up employment or for business/vocation outside
India, or for any other purpose as would indicate his intention to stay outside India for an
uncertain period, he would cease to be person resident in India from the date of his departure.
It may be noted that even if Mr. X is a foreign citizen, has not left India for any of these
purposes, he would be considered, ‘person resident in India’ during the financial year 2021-
2022. Thus, it is the purpose of leaving India which will decide his status from 1st July 2021.

Illustration 2
Mr. Z had resided in India during the financial year 2019-2020. He left India on 1st August, 2020
for United States for pursuing higher studies for three years. What would be his residential
status during financial year 2020-2021 and during 2021- 2022?

Answer
Mr. Z had resided in India during financial year 2019-2020 for more than 182 days. After that
he has gone to USA for higher studies. He has not gone out of or stayed outside India for or on
taking up employment, or for carrying a business or for any other purpose, in circumstances
as would indicate his intention to stay outside India for an uncertain period. Accordingly,
he would be ‘person resident in India’ during the financial year 2020-2021. RBI has however

THE FOREIGN EXCHANGE MANAGEMENT 12.8

ACT, 1999
clarified in its AP circular no. 45 dated 8th December 2003, that students will be considered as
non-residents. This is because usually students start working there to take care of their stay
and cost of studies.
For the financial year 2021-2022, he would not have been in India in the preceding financial
year (2020-2021) for a period exceeding 182 days. Accordingly, he would not be ‘person
resident in India’ during the financial year 2021-2022.

Illustration 3
Toy Ltd. is a Japanese company having several business units all over the world. It has a
robotic unit with its head quarters in Mumbai and has a branch in Singapore. The Headquarters
at Mumbai controls the Singapore branch of the robotic unit. What would be the residential
status of the robotic unit in Mumbai and that of the Singapore branch?

Answer
Toy Ltd. being a Japanese company would be a person resident outside India. [Section 2(w)].
Section 2(u) defines ‘person’. Under clause (viii) thereof person would include any agency,
office or branch owned or controlled by such ‘person’. The term such ‘person’ appears to
refer to a person who is included in clauses (i) to (vi). Accordingly, robotic unit in Mumbai,
being a branch of a company, would be a ‘person’.
Section 2(v) defines ‘person resident in India’. Under clause (iii) thereof ‘person resident
in India’ would include an office, branch or agency in India owned or controlled by a person
resident outside India. Robotic unit in Mumbai is owned or controlled by a person ‘resident
outside India’. Hence, it would be ‘person resident in India’.
The robotic unit headquartered in Mumbai, which is a person resident in India as discussed
above, controls the Singapore branch, Hence, the Singapore branch is a ‘person resident in
India’.

Illustration 4
Miss Alia is an airhostess with the British Airways. She flies for 12 days in a month and thereafter
takes a break for 18 days. During the break, she is accommodated in ‘base’, which is normally
the city where the Airline is headquartered. However, for security considerations, she was
based at Mumbai. During the financial year, she was accommodated at Mumbai for more than
182 days. What would be her residential status under FEMA?

Answer
Miss Alia stayed in India at Mumbai ‘base’ for more than 182 days in the preceding financial
year. She is however employed in UK. She has not come to India for employment, business or
circumstances which indicate her intention to stay for uncertain period. Under section 2(v)
(B), such persons are not considered as Indian residents even if their stay exceeds 182 days in
the preceding year. Thus, while Miss Alia may have stayed in India for more than 182 days, she
cannot be considered to be a Person Resident in India.
If however she has been employed in Mumbai branch of British Airways, then she will be
considered a Person Resident in India.

12.9 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
 REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE
Dealing in foreign exchange, etc. [Section 3]
No person shall-
(a) deal in or transfer any foreign exchange or foreign security to any person not being an
authorised person (AP);
(b) make any payment to or for the credit of any person resident outside India in any manner;
(c) receive otherwise than through an authorised person, any payment by order or on behalf
of any person resident outside India in any manner.
Explanation—For the purpose of this clause, where any person in, or resident in, India
receives any payment by order or on behalf of any person resident outside India through
any other person (including an authorised person) without a corresponding inward
remittance from any place outside India, then, such person shall be deemed to have
received such payment otherwise than through an authorised person;
(d) enter into any financial transaction in India as consideration for or in association with
acquisition or creation or transfer of a right to acquire, any asset outside India by any
person.
The above transactions may carried on:
(a) as otherwise provided in this Act; or
(b) with the general or special permission of the Reserve Bank.
Explanation — For the purpose of this clause, “financial transaction” means making any
payment to, or for the credit of any person, or receiving any payment for, by order or on
behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory
note, or transferring any security or acknowledging any debt.
This section imposes blanket restrictions on the specified transactions. This section applies
to PRIIs and PROIs. The purpose of this section is to regulate inflow and outflow of Foreign
Exchange through Authorised dealers and in a permitted manner.
Consider following examples:
(i) Example pertaining to clause (a)- Dealing in foreign exchange – A PROI comes to India
and would like to sell US$ 1,000 to his friend who is resident in India. The friend offers
him a rate better than the banks. This cannot be done as it would amount to dealing in
foreign exchange.
(ii) Example pertaining to clause (b) – A PROI has an insurance policy in India. He requests
his brother in India to pay the insurance premium. This will amount to payment for the
credit of non-resident. This is not permitted.
(iii) Example pertaining to clause (c)– A foreign tourist comes to India and he takes food
at a restaurant. He would like to pay US$ 20 in cash to the restaurant. The restaurant
cannot accept cash as it will be a receipt otherwise than through Authorised Person. The
restaurant will have to take a money changers license to accept foreign currency.
(iv) Example pertaining to clause (d)–Transactions covered by this sub-section are known as
Hawala transactions. An Indian resident gives ` 70,000 in cash to an Indian dealer. For
this transaction, the brother in Dubai will get US$ 1,000 from a Dubai dealer. The two
dealers may settle the transactions later. However, transaction is not permitted.

THE FOREIGN EXCHANGE MANAGEMENT 12.10

ACT, 1999
 Holding of foreign exchange [Section 4]
Except as provided in this Act, no person resident in India shall acquire, hold, own, possess or
transfer any foreign exchange, foreign security or any immovable property situated outside
India.
This section prevents Indian residents to acquire, hold, own, possess or transfer any foreign
exchange, foreign security or immovable property abroad. Then through separate notifications,
acquisition of these assets has been permitted subject to certain conditions and compliance
rules.

Example 2: If an Indian resident receives bank balance of US$ 10,000 from his uncle in Lon-
don, the Indian resident cannot hold on to the foreign funds. He is supposed to bring back
the funds as provided in section 8.

Current account transactions [Section 5]

The term ‘Current Account Transaction’ is defined negatively by Section 2(j) of the Act. It
means a transaction other than a capital account transaction and includes the following
types of transactions:
(i) Payments in the course of ordinary course of foreign trade, other services such as short-
term banking and credit facilities in the ordinary course of business etc.
(ii) Payments in the form of interest on loans or income from investments.
(iii) Remittances for living expenses of parents, spouse, or children living abroad
(iv) Expenses in connection with foreign travel, education etc.

Example 3: An Indian resident imports machinery from a vendor in UK for installing in his
factory. As per accounts and income-tax law, machinery is a “capital expenditure”. However,
under FEMA, it does not alter (create) an asset in India for the UK vendor. It does not create
any liability to a UK vendor for the Indian importer. Once the payment is made, the Indian
resident or the UK vendor neither owns nor is owed anything in the other country. Hence it
is a Current Account Transaction.
Example 4: An Indian resident imports machinery from a vendor in UK for installing in his
factory on a credit period of 3 months. As per accounts and income-tax law, for the credit
period of 3 months, there is a liability of the Indian importer to the UK vendor. Technically
under FEMA also, it is a liability outside India. However, under definition of Current Account
Transaction [Section 2(j)(i)], “short-term banking and credit facilities in the ordinary course
of business” are considered as a Current Account Transaction. Hence, import of machinery
on credit terms is Current Account Transaction.
Example 5: A Person Resident in India transfers US$ 1,000 to his NRI brother in New York as
“gift”. The funds are sent from the PRII’s Indian bank account to the NRI brother’s bank ac-
count in New York. Under accounts and income-tax law, gift is a “capital receipt”. However,
under FEMA, once the gift is accepted by the NRI, no one owns or owes anything to anyone
in India or USA. The transaction is over. Hence, it is a Current Account Transaction.

12.11 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
If gift is a current account transaction, why is there a restriction under Current Account
regulations? It is because while there is no restriction on Current Account transactions, some
reasonable restrictions can be imposed. Otherwise, people may transfer funds abroad under
the garb of current account transactions.
If however the PRII gives a PROI a gift in India in Indian currency, for the PROI it will result
in funds lying in India (alteration of Indian asset). For PRII, there is no creation of asset or
a liability. As this transaction creates an asset in India for the PROI, it is a Capital Account
transaction.
In a similar manner, if a PROI gives a gift to a PRII by remitting funds in India, there is no
restriction. However, if the PROI gives the funds abroad, the resident cannot keep it abroad.
He has to bring it to India.
Any person may sell or draw foreign exchange to or from an authorised person if such sale or
drawal is a current account transaction.

The general rule to be understood is that Current Account transactions are freely
permitted unless specifically prohibited and Capital Account transactions are prohibited
unless specifically or generally permitted.

Section 5 of the Act permits any person to sell or draw Foreign Exchange to or from an
Authorised person to undertake any current account transaction. The Central Government
has the power to impose reasonable restrictions, in consultation with the RBI and in public
interest on current account transactions. The Central Government has in exercise of this
power issued the Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Let us now see the various schedules to the Rules that lay down the restrictions:

I. SCHEDULE I - Transactions for which drawal of foreign exchange is prohibited:

(i) Remittance out of lottery winnings.
(ii) Remittance of income from racing/riding, etc., or any other hobby.
(iii) Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools,
sweepstakes etc.
(iv) Payment of commission on exports made towards equity investment in Joint Ventures/
Wholly Owned Subsidiaries abroad of Indian companies.
(v) Remittance of dividend by any company to which the requirement of dividend balancing
is applicable.
(vi) Payment of commission on exports under Rupee State Credit Route, except commission
up to 10% of invoice value of exports of tea and tobacco.
(vii) Payment related to “Call Back Services” of telephones.
(viii) Remittance of interest income on funds held in Non-resident Special Rupee Scheme a/c.

THE FOREIGN EXCHANGE MANAGEMENT 12.12

ACT, 1999
II. SCHEDULE II - Transactions, which require prior approval of the Government of India
for drawal of foreign exchange:

Purpose of Remittance Ministry/Department of Govt. of India

whose approval is required
Cultural Tours Ministry of Human Resources Development
(Department of Education and Culture)
Advertisement in foreign print media for Ministry of Finance, Department of
the purposes other than promotion of Economic Affairs
tourism, foreign investments and
international bidding (exceeding US$
10,000) by a State Government and its
Public Sector Undertakings.
Remittance of freight of vessel charted by Ministry of Surface Transport (Chartering
a PSU Wing)
Payment of import through ocean Ministry of Surface Transport (Chartering
transport by a Govt. Department or a PSU Wing)
on c.i.f. basis (i.e., other than f.o.b. and
f.a.s. basis)
Multi-modal transport operators making Registration Certificate from the Director
remittance to their agents abroad General of Shipping
Remittance of hiring charges of Ministry of Information and Broadcasting
transponders by Ministry of Communication and
(a) TV Channels Information Technology.
(b) Internet service providers
Remittance of container detention Ministry of Surface Transport (Director
charges exceeding the rate prescribed by General of Shipping)
Director General of Shipping
Remittance of prize money/ sponsorship Ministry of Human Resource Development
of sports activity abroad by a person (Department of Youth Affairs and Sports)
other than International/ National/
State Level sports bodies, if the amount
involved exceeds US $ 100,000
Remittance for membership of P & I Club Ministry of Finance (Insurance Division)

12.13 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
SCHEDULE III - Transactions which require RBI’s prior approval for drawal of foreign
exchange:
(Q.2-Page No:12.3), (Q.3-Page No:12.4), (Q.4-Page No:12.4),
(Q.5-Page No:12.5), (Q.6-Page No:12.6), (Q.7-Page No:12.6).
1. Facilities for individuals—Individuals can avail of foreign exchange facility for the
following purposes within the limit of USD 250,000 only.:
(i) Private visits to any country (except Nepal and Bhutan)
(ii) Gift or donation.
(iii) Going abroad for employment
(iv) Emigration
(v) Maintenance of close relatives abroad
(vi) Travel for business or attending a conference or specialised training or for meeting
expenses for meeting medical expenses, or check-up abroad, or for accompanying
as attendant to a patient going abroad for medical treatment/ check-up.
(vii) Expenses in connection with medical treatment abroad
(viii) Studies abroad
(ix) Any other current account transaction

Any additional remittance in excess of the said limit for the said purposes shall
require prior approval of the Reserve Bank of India.
However, for the purposes mentioned at item numbers (iv), (vii) and (viii) above, the
individual may avail of exchange facility for an amount in excess of the limit prescribed
under the Liberalised Remittance Scheme if it is so required by a country of emigration,
medical institute offering treatment or the university, respectively:

Further, if an individual remits any amount under the said Liberalised Remittance Scheme
in a financial year, then the applicable limit for such individual would be reduced from USD
250,000 (US Dollars Two Hundred and Fifty Thousand Only) by the amount so remitted:

Further, that for a person who is resident but not permanently resident in India and-
(a) is a citizen of a foreign State other than Pakistan; or
(b) is a citizen of India, who is on deputation to the office or branch of a foreign
company or subsidiary or joint venture in India of such foreign company, may make
remittance up to his net salary (after deduction of taxes, contribution to provident
fund and other deductions).

Explanation: For the purpose of this item, a person resident in India on account of his
employment or deputation of a specified duration (irrespective of length thereof) or
for a specific job or assignments, the duration of which does not exceed three years, is
a resident but not permanently resident:

2. Facilities for persons other than individual—The following remittances by persons
other than individuals shall require prior approval of the Reserve Bank of India:
(i) Donations exceeding one per cent. of their foreign exchange earnings during the
previous three financial years or USD 5,000,000, whichever is less, for-
THE FOREIGN EXCHANGE MANAGEMENT 12.14
ACT, 1999
 a. creation of Chairs in reputed educational institutes,
b. contribution to funds (not being an investment fund) promoted by educational
institutes; and
c. contribution to a technical institution or body or association in the field of
activity of the donor Company.
(ii) Commission, per transaction, to agents abroad for sale of residential flats or
commercial plots in India exceeding USD 25,000 or five percent of the inward
remittance whichever is more.
(iii) Remittances exceeding USD 10,000,000 per project for any consultancy services
in respect of infrastructure projects and USD 1,000,000 per project, for other
consultancy services procured from outside India.
(iv) Remittances exceeding five per cent of investment brought into India or USD
100,000 whichever is higher, by an entity in India by way of reimbursement of pre-
incorporation expenses.

3. If the transaction is not listed in any of the above three schedules, it can be freely
undertaken.

Exemption for remittance from RFC Account – No approval is required where any
remittance has to be made for the transactions listed in Schedule II and Schedule III
above from an Resident Foreign Currency (RFC) account.

Exemption for remittance from EEFC Account – If any remittance has to be made for
the transactions listed in Schedule II and Schedule III above from Exchange Earners’
Foreign Currency (EEFC) account, then also no approval is required. However, if payment
has to be made for the following transactions, approval is required even if payment is
from EEFC account:
• Remittance for membership of P & I Club.
• Commission, per transaction, to agents abroad for sale of residential flats or
commercial plots in India exceeding USD 25,000 or five per cent of the inward
remittance whichever is more. Remittances exceeding five per cent of investment
brought into India or USD 100,000 whichever is higher, by an entity in India by way
of reimbursement of pre- incorporation expenses.

Exemption for payment by International Credit Card while on a visit abroad – If a

person is on a visit abroad, he can incur expenditure stated in Schedule III if he incurs it
through International credit card.

Note: Liberalised Remittance Scheme (LRS): Under the Liberalised Remittance Scheme (LRS),
all resident individuals, including minors, are allowed to freely remit up to USD 250,000 per
financial year (April – March) for any permissible current or capital account transaction or a
combination of both. This is inclusive of foreign exchange facility for the purposes mentioned
in Para 1 of Schedule III of Foreign Exchange Management (CAT) Amendment Rules 2015, dated
May 26, 2015.

12.15 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
In case of remitter being a minor, the LRS declaration form must be countersigned by the
minor’s natural guardian. The Scheme is not available to corporates, partnership firms, HUF,
Trusts etc.
Consolidation of remittance of family members - Remittances under the Scheme can be
consolidated in respect of family members subject to individual family members complying
with its terms and conditions.
Exception: Clubbing is not permitted by other family members for capital account transactions
such as opening a bank account/investment/purchase of property, if they are not the co-
owners/co-partners of the overseas bank account/investment/property.

Capital account transactions [Section 6]

The definitions of “Capital Account Transactions” and its opposite “current account
transactions are contained in clauses (e) and (j) of Section 2. The regulations under FEMA
apply to a transaction based on whether the transaction is “Capital Account Transaction” or
a “Current Account Transaction”. These transactions broadly outline the basics and whole
approach of the Act. Basically these two transactions have to be understood as being similar
to the concepts of items relating to the profit and loss account or revenue items (with respect
to current account transactions) and of Balance Sheet or capital items (with respect to capital
account transactions).

Capital Accounts Transaction in India can be carried out only to the extent permitted
because Indian Rupee is not yet fully convertible. Capital and current account transactions
are intended to be mutually exclusive. A transaction which alters the asset or liabilities
in India of non-residents falls under the category of capital account. However, as far as
residents are concerned transactions which alter the contingent liabilities outside India
are also capital account transactions. The Reserve Bank of India may by regulations place
restrictions on various specified capital account transactions. In simple terms, cross border
transactions pertaining to investments, loans, immovable property, transfer of assets are
Capital Account Transactions.
(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign
exchange to or from an authorised person for a capital account transaction.
(2) Reserve Bank had the power to specify the Capital Account transactions which are
permitted and the relevant limits, terms and conditions. By Finance Act 2015, powers
for regulation of Capital Account Transactions for Non-debt instruments were transferred
to Central Government. RBI continued to have powers to regulate debt instruments.
The amendments have however been made effective from 15th October 2019. Now the
regulations are as under:
The Reserve Bank may, in consultation with the Central Government, specify:
(a) any class or classes of capital account transactions,5involving debt instruments, which
are permissible;
(b) the limit up to which foreign exchange shall be admissible for such transactions;
(c) any conditions which may be placed on such transactions;
Provided that the Reserve Bank or the Central Government shall not impose any restrictions
on the drawal of foreign exchange for payment due on account of amortisation of loans or for
depreciation of direct investments in the ordinary course of business.

THE FOREIGN EXCHANGE MANAGEMENT 12.16

ACT, 1999
RBI has issued notification for Debt instruments specifying the terms and conditions. These
regulations for foreign investment in debt instruments. For investment by Indian residents
outside India, RBI continues to have power to regulate the transactions for equity and debt.
(2A) The Central Government may, in consultation with the Reserve Bank, prescribe— (a) any
class or classes of capital account transactions, not involving debt instruments, which
are permissible; (b) the limit up to which foreign exchange shall be admissible for such
transactions; and (c) any conditions which may be placed on such transactions.
Central Government has issued notification for Non-debt instruments specifying the
terms and conditions. RBI has issued notification for mode of payment and reporting of
Non-debt instruments.
(3) Before 15th October 2019, Section 6(3) specified a list of capital account transactions
which could be regulated by RBI [apart from the general powers which it had under
Section 6(2)]. This list has now been deleted from 15th October 2019.
(4) A person resident in India may hold, own, transfer or invest in foreign currency, foreign
security or any immovable property situated outside India if such currency, security or
property was acquired, held or owned by such person when he was resident outside
India or inherited from a person who was resident outside India.
The RBI vide A.P. (DIR Series) Circular No. 90 dated 9thJanuary, 2014 has issued a
clarification on section 6(4) of the Act. This circular clarifies that section 6(4) of the Act
covers the following transactions:
(i) Foreign currency accounts opened and maintained by such a person when he was
resident outside India;
(ii) Income earned through employment or business or vocation outside India taken up
or commenced which such person was resident outside India, or from investments
made while such person was resident outside India, or from gift or inheritance
received while such a person was resident outside India;
(iii) Foreign exchange including any income arising therefrom, and conversion or
replacement or accrual to the same, held outside India by a person resident in India
acquired by way of inheritance from a person resident outside India.
(iv) A person resident in India may freely utilize all their eligible assets abroad as well
as income on such assets or sale proceeds thereof received after their return to
India for making any payments or to make any fresh investments abroad without
approval of Reserve Bank, provided the cost of such investments and/or any
subsequent payments received therefor are met exclusively out of funds forming
part of eligible assets held by them and the transactions is not in contravention to
extant FEMA provisions.
(5) A person resident outside India may hold, own, transfer or invest in Indian currency,
security or any immovable property situated in India if such currency, security or
property was acquired, held or owned by a such person when he was resident in India
or inherited from a person who was resident in India.
(6) Without prejudice to the provisions of this section, the Reserve Bank may, by regulation,
prohibit, restrict, or regulate establishment in India of a branch, office or other place of
business by a person resident outside India, for carrying on any activity relating to such
branch, office or other place of business.

12.17 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
 Capital Account Transactions [Sec. 6(4) & 6(5)]

(7) For the purposes of this section, the term “debt instruments” shall mean, such instruments
as may be determined by the Central Government in consultation with the Reserve Bank.

Capital account transaction is basically split into the following categories under Foreign
Exchange Management (Permissible capital account transactions) Regulations, 20006 -:
(I) transaction, which are permissible in respect of persons resident in India and outside
India.
(II) transaction on which restrictions cannot be imposed; and
(III) transactions, which are prohibited.

I. Permissible Transactions
Under sub-section (2) of Section 6, the RBI has issued the Foreign Exchange Management
(Permissible Capital Account Transactions) Regulations, 2000. The Regulations specify the list
of transaction, which are permissible in respect of persons resident in India in Schedule-I and
the classes of capital account transactions of persons resident outside India in Schedule-II.
Further, subject to the provisions of the Act or the rules or regulations or direction or orders
made or issued thereunder, any person may sell or draw foreign exchange to or from an
authorised person for a capital account transaction specified in the Schedules; provided
that the transaction is within the limit, if any, specified in the regulations relevant to the
transaction.

THE FOREIGN EXCHANGE MANAGEMENT 12.18

ACT, 1999
SCHEDULE I
The list of permissible classes of transactions made by persons resident in India is:
(a) Investment by a person resident in India in foreign securities.
(b) Foreign currency loans raised in India and abroad by a person resident in India.
(c) Transfer of immovable property outside India by a person resident in India.
(d) Guarantees issued by a person resident in India in favour of a person resident outside
India.
(e) Export, import and holding of currency/currency notes.
(f) Loans and overdrafts (borrowings) by a person resident in India from a person resident
outside India.
(g) Maintenance of foreign currency accounts in India and outside India by a person resident
in India.
(h) Taking out of insurance policy by a person resident in India from an insurance company
outside India.
(i) Loans and overdrafts by a person resident in India to a person resident outside India.
(j) Remittance outside India of capital assets of a person resident in India.
(k) Undertake derivative contracts

SCHEDULE II
The list of permissible classes of transactions made by persons resident outside India is:
(a) Investment in India by a person resident outside India, that is to say,
(i) issue of security by a body corporate or an entity in India and investment therein
by a person resident outside India; and
(ii) investment by way of contribution by a person resident outside India to the capital
of a firm or a proprietorship concern or an association of a person in India.
(b) Acquisition and transfer of immovable property in India by a person resident outside
India.
(c) Guarantee by a person resident outside India in favour of, or on behalf of, a person
resident in India.
(d) Import and export of currency/currency notes into/from India by a person resident
outside India.
(e) Deposits between a person resident in India and a person resident outside India.
(f) Foreign currency accounts in India of a person resident outside India.
(g) Remittance outside India of capital assets in India of a person resident outside India.
(h) Undertake derivative contracts

Transactions with no restriction

They are:
(1) For amortisation of loan and
(2) For depreciation of direct investments in ordinary course of business.
Also, restrictions cannot be imposed when drawal is of the purpose of repayments of loan
installments.

Prohibited Transactions

12.19 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
On certain transactions, the Reserve Bank of India imposes prohibition.
(a) no person shall undertake or sell or draw foreign exchange to or from an authorised
person for any capital account transaction, provided that-
(i) subject to the provisions of the Act or the rules or regulations or directions or orders
made or issued thereunder, a resident individual may, draw from an authorized
person foreign exchange not exceeding USD 250,000 per financial year or such
amount as decided by Reserve Bank from time to time for a capital account
transaction specified in Schedule I.
(ii) Where the drawal of foreign exchange by a resident individual for any capital
account transaction specified in Schedule I exceeds USD 250,000 per financial
year, or as decided by Reserve Bank from time to time as the case may be,
the limit specified in the regulations relevant to the transaction shall apply with
respect to such drawal.
Provided further that no part of the foreign exchange of USD 250,000, drawn under
proviso (a) shall be used for remittance directly or indirectly to countries notified as non-
co-operative countries and territories by Financial Action Task Force (FATF) from time to
time and communicated by the Reserve Bank of India to all concerned.

(b)
The person resident outside India is prohibited from making investments in India
in any form, in any company, or partnership firm or proprietary concern or any entity
whether incorporated or not which is engaged or proposes to engage:
(i) In the business of chit fund; Registrar of Chits or an officer authorised by the
state government in this behalf, may, in consultation with the State Government
concerned, permit any chit fund to accept subscription from Non-resident Indians.
Non- resident Indians shall be eligible to subscribe, through banking channel and on
non- repatriation basis, to such chit funds, without limit subject to the conditions
stipulated by the Reserve Bank of India from time to time
(ii) As Nidhi company;
(iii) In agricultural or plantation activities;
(iv) In real estate business, or construction of farm houses or
Explanation: In “real estate business” the term shall not include development
of townships, construction of residential/commercial premises, roads or bridges
and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI
(REITs) Regulations 2014 .; or
(v) In trading in Transferable Development Rights (TDRs).
‘Transferable Development Rights’ means certificates issued in respect of category of land
acquired for public purpose either by Central or State Government in consideration of
surrender of land by the owner without monetary compensation, which are transferable
in part or whole;

(c) No person resident in India shall undertake any capital account transaction which is
not permissible in terms of Order S.O. 1549(E) dated April 21, 2017, as amended from
time to time, of the Government of India, Ministry of External Affairs, with any person
who is, a citizen of or a resident of Democratic People’s Republic of Korea, or an
entity incorporated or otherwise, in Democratic People’s Republic of Korea, until

THE FOREIGN EXCHANGE MANAGEMENT 12.20

ACT, 1999
 further orders, unless there is specific approval from the Central Government to carry
on any transaction.

(d) The existing investment transactions, with any person who is, a citizen of or resident
of Democratic People’s Republic of Korea, or an entity incorporated or otherwise in
Democratic People’s Republic of Korea, or any existing representative office or other
assets possessed in Democratic People’s Republic of Korea, by a person resident in
India, which is not permissible in terms of Order S.O. 1549(E) dated April 21, 2017, as
amended from time to time, of the Government of India, Ministry of External Affairs shall
be closed/ liquidated/disposed/settled within a period of 180 days from the date of
issue of this Notification, unless there is specific approval from the Central Government
to continue beyond that period.”

Thus, a capital account transaction is permitted only if it is specifically permitted under

the regulations. If the transaction is not stated as generally permitted, a prior specific
approval is required.

SUMMARY
• FEMA makes provisions in respect of dealings in foreign exchange.
• FEMA regulates transactions between residents and non-residents.
• Broadly, all current account transactions are free. However, Central Government can
impose reasonable instructions by issuing rules.
• Capital account transactions are regulated by Reserve Bank of India (RBI) and Central
Government.
• FEMA envisages that RBI will have a controlling role in management of foreign exchange.

12.21 THE FOREIGN EXCHANGE MANAGEMENT

ACT, 1999
 13 THE LIMITED LIABILITY
PARTNERSHIP ACT, 2008

THE LIMITED LIABILITY PARTNERSHIP 13.1

ACT, 2008
 INTRODUCTION
The Ministry of Law and Justice on 9th January 2009 notified the Limited Liability Partnership
Act, 2008.
The Parliament passed the Limited Liability Partnership Bill on 12th December, 2008 and the
President of India has assented the Bill on 7th January, 2009 and called as the Limited Liability
Partnership Act, 2008 (the “LLP Act, 2008”).
This Act has been enacted to make provisions for the formation and regulation of Limited
Liability Partnerships and for matters connected there with or incidental thereto.
The LLP Act, 2008 has 81 sections (of which section 81 is now omitted with effect from 1st
April 2022) and 4 schedules.
The First Schedule deals with mutual rights and duties of partners and limited liability
partnership and its partners where there is absence of a formal agreement amongst them.
The Second Schedule deals with conversion of a firm into LLP.
The Third Schedule deals with conversion of a private company into LLP.
The Fourth Schedule deals with conversion of unlisted public company into LLP.
The Ministry of Corporate Affairs and the Registrar of Companies (ROC) are entrusted with the
task of administrating the LLP Act, 2008. The Central Government has the authority to frame
the Rules with regard to the LLP Act, 2008, and can amend them by notifications in the Official
Gazette, from time to time.
It is also to be noted that the Indian Partnership Act, 1932 is not applicable to LLPs.
Note
The Limited Liability Partnership Act, 2008 has been recently amended through the Limited
Liability Partnership (Amendment) Act, 2021 dated 13 th August, 2021.

Need of new form of Limited Liability Partnership

The lawmakers envisaged the need for bringing out a new legislation for creation of the
Limited Liability Partnership to meet with the contemporary growth of the Indian economy.
A need has been felt for a new corporate form that would provide an alternative to the
traditional partnership with
unlimited personal liability on the one hand and the statute-based governance structure of
the limited liability company on the other hand. In order to enable
professional expertise and entrepreneurial initiative and to combine and operate in flexible,
innovative and efficient manner, the LLP Act, 2008 was enacted.
Thus, LLP as a form of business organization is an alternative corporate business vehicle. It
provides the benefits of limited liability but allows its members the flexibility of organizing
their internal structure as a partnership based on a mutually arrived agreement. The LLP
form enables entrepreneurs, professionals and enterprises providing services of any kind or
engaged in scientific and technical disciplines, to form commercially efficient vehicles suited
to their requirements. Owing to flexibility in its structure and operation, the LLP is a suitable
vehicle for small enterprises and for investment by venture capital.

13.2 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
 LIMITED LIABILITY PARTNERSHIP - MEANING AND CONCEPT
(Q.1-Page No:13.1)
Meaning: LLP is a new form of legal business entity with limited liability. It is an alternative
corporate business vehicle that not only gives the benefits of limited liability at low compliance
cost but allows its partners the flexibility of organising their internal structure as a traditional
partnership. The LLP is a separate legal entity and, while the
LLP itself will be liable to the full extent of its assets, the liability of the partners will be
limited to the extent of their capital contribution.
LLP as a separate legal entity and business organisation is an alternative corporate business
form that gives the benefits of limited liability of a company and the flexibility of a partnership.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm
structure’ LLP is called a hybrid between a company and a partnership.

DEFINITIONS
1. Address [(Section 2(1)(a)]: “Address” in relation to a partner of a limited liability
partnership, means—
(i) if an individual, his usual residential address; and
(ii) if a body corporate, the address of its registered office.
2. Body Corporate [(Section 2(1)(d)]: It means a company as defined in clause (20) of
section 2 of the Companies Act, 2013 and includes—
(i) a LLP registered under this Act;
(ii) a LLP incorporated outside India; and
(iii) a company incorporated outside India, but does not include—
(i) a corporation sole;
(ii) a co-operative society registered under any law for the time being in force; and
(iii) any other body corporate (not being a company as defined in clause
(20) of section 2 of the Companies Act, 2013 or a limited liability partnership as
defined in this Act), which the Central Government may, by notification in the
Official Gazette, specify in this behalf.

THE LIMITED LIABILITY PARTNERSHIP 13.3

ACT, 2008
 Means Does not include – corporation
A company & includes - sole; co- operative society & any
LLP, foreign LLP, foreign other body corporate notified by
company, Central Government.

3. Business [Section 2(1)(e)]: “Business” includes every trade, profession, service and
occupation except any activity which the Central Government may, by notification,
exclude.
4. Chartered Accountant [Section 2(1)(f)]: means a Chartered Accountant as defined in
clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 and who
has obtained a certificate of practice under sub-section (1) of section 6 of that Act.
5. Designated Partner [Section 2(1)(j)]: “Designated partner” means any partner
designated as such pursuant to section 7.
6. Entity [Section 2(1)(k)]: ‘’Entity” means any body corporate and includes, for the
purposes of sections 18, 46, 47, 48, 49, 50, 52 and 53, a firm setup under the Indian
Partnership Act, 1932.
7. Financial Year [Section 2(1)(l)]: “Financial year”, in relation to a LLP, means the period
from the 1st day of April of a year to the 31st day of March of the following year.
However, in the case of a LLP incorporated after the 30th day of September of a year,
the financial year may end on the 31st day of March of the year next following that year.

Example 1: If a LLP has been incorporated on 15th October, 2022, then its financial
year may be from 15th October, 2022 to 31st March, 2024. However, the LLP can
always maintain its first accounts from 15th October, 2022 to 31st March, 2023 i.e.
for a period of less than 12 months. The period for which the first accounts of LLP are
prepared shall not exceed 18 months.
The Income Tax department has prescribed uniform financial year from 1st April to
31st March of next year. In keeping with the Income tax law, the financial year for LLP
should always be from 1st April to 31st March each year.
8. Foreign LLP [section 2(1)(m)]: It means a LLP formed, incorporated or registered outside
India which establishes a place of business within India.
9. Limited liability partnership [Section 2(1)(n)]: Limited Liability Partnership means a
partnership formed and registered under this Act.
10. Limited Liability partnership agreement [Section 2(1)(o)]: It means any written
agreement between the partners of the LLP or between the LLP and its partners which
determines the mutual rights and duties of the partners and their rights and duties in
relation to that LLP.
The First Schedule shall be applicable for all matters not covered by the Agreement w.r.t
the mutual rights and duties of the partners and their rights and duties in relation to the
LLP.
11. Name [Section 2(1)(p)]: in relation to a partner of a limited liability partnership, means—
(i) if an individual, his forename, middle name and surname; and
(ii) if a body corporate, its registered name;

13.4 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
12. Partner [Section 2(1)(q)]: Partner, in relation to a LLP, means any person who becomes
a partner in the LLP in accordance with the LLP agreement.
13. Regional Director [Section 2(1)(ra)]: means a person appointed as such by the Central
Government for the purpose of this Act or the Companies Act 2013, as the case may be.
14. Registrar [Section 2(1)(s)]: means a person appointed by Central Government as
Registrar, an Additional Registrar, a Joint Registrar, a Deputy Registrar or an Assistant
Registrar, for the purpose of this Act or the Companies Act, 2013, as the case may be.
15. Small limited liability partnership [Section 2(1)(ta)]: It means a limited liability
partnership—
(i) the contribution of which, does not exceed twenty-five lakh rupees or such higher
amount, not exceeding five crore rupees, as may be prescribed; and
(ii) the turnover of which, as per the Statement of Accounts and Solvency for the
immediately preceding financial year, does not exceed forty lakh rupees or such
higher amount, not exceeding fifty crore rupees, as may be prescribed; or
(iii) which meets such other requirements as may be prescribed, and fulfils such terms
and conditions as may be prescribed;
Contribution Up to ` 25L, &
Turnover for immediately preceding F.Y Up to ` 40 L, or
Fulfills prescribed terms and conditions

16. Tribunal [Section 2(1)(u)]: means the National Company Law Tribunal constituted u/s
408 of Companies Act 2013.

Note:
Applicability of the Companies Act, 2013: Words and expressions used and not defined
in this Act but defined in the Companies Act, 2013 shall have the meanings respec-
tively assigned to them in that Act. [Section 2(2)]
Non-applicability of the Indian Partnership Act, 1932: Save as otherwise provided, the
provisions of the Indian Partnership Act, 1932 shall not apply to a LLP. [Section 4]

CHARACTERISTIC OF LLP
1. LLP is a body corporate: Section 2(1)(d) of the LLP Act, 2008 provides that a LLP is a
body corporate formed and incorporated under this Act. Section 3 of the LLP Act provides
that LLP is a legal entity separate from that of its partners and shall have perpetual
succession. Therefore, any change in the partners of a LLP shall not affect the existence,
rights or liabilities of the LLP.
2. Perpetual Succession: The LLP can continue its existence irrespective of changes in
partners. Death, insanity, retirement or insolvency of partners has no impact on the
existence of LLP. It is capable of entering into contracts and holding property in its own
name.
3. Separate Legal Entity: Section 3 of LLP Act provides that a LLP is a body corporate
formed and incorporated under this Act and is a legal entity separate from that of its
partners. The LLP is liable to the full extent of its assets but liability of the partners is
limited to their agreed contribution in the LLP. In other words, creditors of LLP shall be
the creditors of LLP alone.

THE LIMITED LIABILITY PARTNERSHIP 13.5

ACT, 2008
4. Mutual Agency: No partner is liable on account of the independent or un- authorized
actions of other partners, thus individual partners are shielded from joint liability
created by another partner’s wrongful business decisions or misconduct. In other words,
all partners will be the agents of the LLP alone. No one partner can bind the other
partner by his acts.
5. LLP Agreement: Mutual rights and duties of the partners within a LLP are governed by
an agreement between the partners. The LLP Act, 2008 provides flexibility to partner
to devise the agreement as per their choice. In the absence of any such agreement, the
mutual rights and duties shall be governed by Schedule I of the LLP Act, 2008.
6. Artificial Legal Person: A LLP is an artificial legal person because it is created by a legal
process and is clothed with all rights of an individual. It can do everything which any
natural person can do, except of course that, it cannot be sent to jail, cannot take an
oath, cannot marry or get divorce nor can it practice a learned profession like CA or
Medicine. A LLP is invisible, intangible, immortal (it can be dissolved by law alone) but
not fictitious because it really exists.
7. Common Seal: A LLP being an artificial person can act through its partners and designated
partners. LLP may have a common seal, if it decides to have one [Section 14(c)]. Thus, it
is not mandatory for a LLP to have a common seal. It shall remain under the custody of
some responsible official and it shall be affixed in the presence of at least 2 designated
partners of the LLP.
8. Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the
agent of the LLP, but not of other partners (Section 26). The liability of the partners will
be limited to their agreed contribution in the LLP. Such contribution may be of tangible
or intangible nature or both.

Example 2: The professionals like Engineering consultants, Legal Advisors and

Accounting Professional are afraid of entering into business due to unlimited liability.
Hence, the LLP Act provides an avenue for these professionals to enter into Limited
Liability Partnership firms which restrict their liability to the agreed amount. This has
encouraged Professionals to form LLP.

9. Management of Business: The partners in the LLP are entitled to manage the business
of LLP. But only the designated partners are responsible for legal compliances.
10. Minimum and Maximum number of Partners: Every LLP shall have at least two partners
and shall also have at least 2 individuals as designated partners, of whom at least one
shall be resident in India. There is no maximum limit on the partners in LLP.
11. Business for Profit Only: The essential requirement for forming LLP is carrying on a
lawful business with a view to earn profit. Thus, LLP cannot be formed for charitable or
non-economic purpose.
12. Investigation: The Central Government shall have powers to investigate the affairs of an
LLP by appointment of competent authority for the purpose.
13. Compromise or Arrangement: Any compromise or agreements including merger and
amalgamation of LLPs shall be in accordance with the provisions of the LLP Act, 2008.
14. Conversion into LLP: A firm, private company or an unlisted public company would be
allowed to be converted into LLP in accordance with the provisions of LLP Act, 2008.

13.6 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
15. E-Filling of Documents: Every form or application of document required to be filed or
delivered under the act and rules made thereunder, shall be filed in computer readable
electronic form on its website www.mca.gov.in and authenticated by a partner or
designated partner of LLP by the use of electronic or digital signature.
16. Foreign LLPs: Section 2(1)(m) defines foreign limited liability partnership “as a limited
liability partnership formed, incorporated, or registered outside India which established
a place of business within India”. Foreign LLP can become a partner in an Indian LLP.

ADVANTAGES OF LLP FORM

LLP form is a form of business model which:
1. Is organised and operates on the basis of an agreement.
2. Provides flexibility without imposing detailed legal and procedural
requirements.
3. Easy to form.
4. All partners enjoy limited liability.
5. Easy to dissolve.

Partners [Section 5]
(Q.2-Page No:13.1)
Any individual or body corporate may be a partner in a LLP. However, an individual shall not
be capable of becoming a partner of a LLP, if—
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the
finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending.

The following persons can become partner in LLP:

(i) Individuals (Resident Indians including Non Resident Indians & Overseas Citizen of
India as well as foreign nationals)*
(ii) Limited Liability Partnerships
(iii) Companies (including foreign companies)*
(iv) Foreign Limited Liability Partnerships*
(v) Limited Liability Partnerships incorporated outside India
(vi) Foreign Companies.
Co-operative society and corporation sole cannot become partner in a LLP.
*In case of introduction of capital / acquisition of existing stake in LLP by Persons
resident outside India (other than NRIs & OCIs investing on a non- repatriation basis),
the Foreign Direct Investment (FDI) compliances shall have to be undertaken by the LLP
in which such investment is made.

THE LIMITED LIABILITY PARTNERSHIP 13.7

ACT, 2008
 Minimum number of Partners [Section 6]
(i) Every LLP shall have at least two partners.
(ii) If at any time the number of partners of a LLP is reduced below two and the LLP carries
on business for more than six months while the number is so reduced, the person, who is
the only partner of the LLP during the time that it so carries on business after those six
months and has the knowledge of the fact that it is carrying on business with him alone,
shall be liable personally for the obligations of the LLP incurred during that period.

Designated Partners [Section 7]

(Q.3-Page No:13.2)
(1) Every LLP shall have at least two designated partners who are individuals and at least
one of them shall be a resident in India.
Provided, if in LLP, all the partners are bodies corporate or in which one or more partners
are individuals and bodies corporate, at least two individuals who are partners of such
LLP or nominees of such bodies corporate shall act as designated partners.

Example 3: A LLP has three partners, one individual i.e. Mr. X and two bodies corporates
viz. M/s XYZ Ltd and M/s ABC Ltd. In this case Mr. X and one nominee of any body’s
corporate shall be designated partners.
Example 4: A LLP by the name SMY LLP has three partners namely 1. SI Limited, 2. MIS
Limited, 3. YI Private Limited. As there is no individual as partner in LLP, nominees of
any two said body corporates shall act as designated partners.
Resident in India: For the purposes of this section, the term “resident in India” means
a person who has stayed in India for a period of not less than one hundred twenty days
during the financial year.

Example 5: There is a LLP by the name Indian Helicopters LLP having 5 partners namely
Mr. A (Non Resident), Mr. B (Non Resident) Ms. C (resident), Ms. D (resident) and Ms. E
(resident). In this case, at least 2 should be named as Designated Partner out of which
1 should be resident. Hence, if Mr. A and Mr. B are designated then it will not serve the
purpose. One of the designated partners should be there out of Ms. C, Ms. D and Ms. E.

2. (i) If the incorporation document

(a) specifies who are to be designated partners, such persons shall be designated
partners on incorporation; or
(b) states that each of the partners from time to time of LLP is to be designated
partners, every partner shall be a designated partners;
(ii) any partner may become a designated partner by and in accordance with the LLP
Agreement and a partner may cease to be a designated partners in accordance with
LLP agreement.
3. An individual shall not become a designated partner in any LLP unless he has given his
prior consent to act as such to the LLP in such form and manner as may be prescribed.
13.8 THE LIMITED LIABILITY PARTNERSHIP
ACT, 2008
4. Every LLP shall file with the Registrar the particulars of every individual who has given
his consent to act as designated partners in such form and manner as may be prescribed
within 30 days of his appointment.
5. An individual eligible to be a designated partner shall satisfy such conditions and
requirements as may be prescribed.
6. Every designated partner of the LLP shall obtain a Designated Partner Identification
Number (DPIN) from the Central Government and the provisions of sections 153 to 159 of
the Companies Act, 2013 shall apply mutatis mutandis for the said purpose.

Liabilities of Designated Partners [Section 8]

Unless expressly provided otherwise in this Act, a designated partner shall be—
(a) responsible for the doing of all acts, matters and things as are required to be done by
the limited liability partnership in respect of compliance of the provisions of this Act
including filing of any document, return, statement and the like report pursuant to
the provisions of this Act and as may be specified in the limited liability partnership
agreement; and
(b) liable to all penalties imposed on the limited liability partnership for any contravention
of those provisions.

Changes in Designated Partners [Section 9]

A limited liability partnership may appoint a designated partner within 30 days of a vacancy
arising for any reason and provisions of sub-section (4) and sub-section (5) of section 7 shall
apply in respect of such new designated partner, provided that if no designated partner is
appointed, or if at any time there is only one designated partner, each partner shall be
deemed to be a designated partner.

Punishment for contravention of sections 7 and 9 [Section 10]

1. If the LLP contravenes the provisions of sub-section (1) of section 7 (meaning that the
number of designated partners are less than two or none of the designated partner is a
resident in India), the LLP and its every partner shall be liable to a penalty of `10,000
and in case of continuing contravention, with further penalty of `100 per day subject to
maximum `1,00,000 for LLP and `50,000 for every partner of such LLP.
2. If the LLP contravenes the provisions of sub-section (4) of section 7 (failure to file the
consent of appointment of designated partner within 30 days of his appointment), the
LLP and its every designated partner shall be liable to a penalty of `5,000 and in case
of continuing contravention, with further penalty of `100 per day subject to maximum
`50,000 for LLP and `25,000 for every designated partner.
3. If the LLP contravenes the provisions of sub-section (5) of section 7 or section 9, the LLP
and its every partner shall be liable to a penalty of `10,000 and in case of continuing
contravention, with further penalty of `100 per day subject to maximum `1,00,000 for
LLP and `50,000 for every partner of such LLP.

THE LIMITED LIABILITY PARTNERSHIP 13.9

ACT, 2008
 INCORPORATION OF LLP
Incorporation Document [Section 11]
The most important document needed for registration is the incorporation document.
(1) For a LLP to be incorporated:
(a) two or more persons associated for carrying on a lawful business with a view to
earn profit shall subscribe their names to an incorporation document;
(b) the incorporation document shall be filed in such manner and with such fees, as
may be prescribed with the Registrar of the State in which the registered office of
the LLP is to be situated (Incorporation documents are now processed electronically
by Registrar, Central Registration Centre since 2nd October 2018); and
(c) Statement to be filed:
• there shall be filed along with the incorporation document, a statement in the
prescribed form:
o made by either an advocate, or a Company Secretary or a Chartered Accountant
or a Cost Accountant, who is engaged in the formation of the LLP and
o by any one who subscribed his name to the incorporation document,
o that all the requirements of this Act and the rules made thereunder have been
complied with,
o in respect of incorporation and matters precedent and incidental thereto.

(2) The incorporation document shall—

(a) be in a form as may be prescribed;
(b) state the name of the LLP;
(c) state the proposed business of the LLP;
(d) state the address of the registered office of the LLP;
(e) state the name and address of each of the persons who are to be partners of the
LLP on incorporation;
(f) state the name and address of the persons who are to be designated partners of the
LLP on incorporation;
(g) contain such other information concerning the proposed LLP as may be prescribed.

(3) If a person makes a statement as discussed above which he—

(a) knows to be false; or
(b) does not believe to be true,
shall be punishable (Penalty for false declaration)
 with imprisonment for a term which may extend to 2 years and
 with fine which shall not be less than `10,000 but which may extend to `5 Lakhs.

Incorporation by Registration [Section 12]

(1) When the requirements imposed by clauses (b) and (c) of sub-section (1) of section 11
have been complied with, the Registrar shall retain the incorporation document and,
unless the requirement imposed by clause (a) of that sub-section has not been complied
with, he shall, within a period of 14 days—
(a) register the incorporation document; and
(b) give a certificate that the LLP is incorporated by the name specified therein.

13.10 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
(2) The Registrar may accept the statement delivered under clause (c) of sub- section (1)
of section 11 as sufficient evidence that the requirement imposed by clause (a) of that
sub-section has been complied with.
(3) The certificate issued under clause (b) of sub-section (1) shall be signed by the Registrar
and authenticated by his official seal.
(4) The certificate shall be conclusive evidence that the LLP is incorporated by the name
specified therein.

Registered Office of LLP and Change therein [Section 13]

(1) Every LLP shall have a registered office to which all communications and notices may be
addressed and where they shall be received.
(2) A document may be served on a LLP or a partner or designated partner thereof by
sending it by post under a certificate of posting or by registered post or by any other
manner, as may be prescribed, at the registered office and any other address specifically
declared by the LLP for the purpose in such form and manner as may be prescribed.
(3) A LLP may change the place of its registered office and file the notice of such change
with the Registrar in such form and manner and subject to such conditions as may be
prescribed and any such change shall take effect only upon such filing.
(4) If the LLP contravenes any provisions of this section, the LLP and its every partner shall
be punishable with penalty of ` 500 per day subject to maximum ` 50,000.

Effect of registration [Section 14]

On Registration, LLP shall by its name, be capable of -
i. Suing and being sued;
ii. Acquiring, owning, holding and developing or disposing of property, whether movable or
immovable, tangible or intangible;
iii. Having a common seal, if it decides to have one; and
iv. Doing and suffering other acts and things as bodies corporate may lawfully do and suffer.

Name [Section 15]

(Q.5-Page No:13.2)
(1) Every limited liability partnership shall have either the words “limited liability
partnership” or the acronym “LLP” as the last words of its name.
(2) No LLP shall be registered by a name which, in the opinion of the Central Government
is—
(a) undesirable; or
(b) identical or too nearly resembles to that of any other LLP or a company or a
registered trademark of any other person under the Trade Marks Act, 1999.

Reservation of name [Section 16]

(1) A person may apply 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 a proposed LLP; or
(b) the name to which a LLP proposes to change its name.

THE LIMITED LIABILITY PARTNERSHIP 13.11

ACT, 2008
(2) Upon receipt of an application under sub-section (1) and on payment of the prescribed
fee, the Registrar may, if he is satisfied, subject to the rules prescribed by the Central
Government in the matter, that the name to be reserved is not one which may be rejected
on any ground referred to in sub-section (2) of section 15, reserve the name for a period
of 3 months from the date of intimation by the Registrar.

Rectification of name of LLP [Section 17]

1. Notwithstanding anything contained in sections 15 and 16, if through inadvertence,
or otherwise, the LLP, on its first registration or on its registration by new name, is
registered by a name which is identical with or too nearly resembles to-
(a) that of any other LLP or a company; or
(b) a registered trade mark of a proprietor under the Trade Marks Act, 1999
as likely to be mistaken, then on an application of such LLP or proprietor referred to in
clauses (a) and (b) respectively or a company, the Central Government may direct such
LLP to change its name or new name within a period of 3 months from the date of issue
of such direction,
Provided that an application of the proprietor of the registered trade marks shall be
maintainable within a period of 3 years from the date of incorporation or registration or
change of name of the LLP under this Act.
2. Where an LLP changes its name or obtains new name, it shall within a period of 15 days
from the date of such change, give notice of the change to Registrar along with the order
of the Central Government, who shall carry out necessary changes in the certificate of
incorporation and within 30 days of such change in the certificate of incorporation, such
LLP shall change its name in the LLP agreement.
3. If the LLP is in default in complying with any direction given under sub- section (1), the
Central Government shall allot a new name to the LLP and the Registrar shall enter the
new name in the register of LLP in place of the old name and issue a fresh certificate of
incorporation with new name.
Provided that nothing contained in this sub-section shall prevent a LLP from subsequently
changing its name.

STEPS TO INCORPORATE LLP

Step1 Step2 Step3

Reservation of name File e- Form FiLLiP for Execution of LLP
of LLP: Applicant has to incorporating a new Agreement is mandatory
file e-Form RUNLLP, for LLP: contains the details as per Section 23 of Act.
ascertaining availability of proposed LLP, details It will be filed in e-Form
and reservation of the of partners/designated 3 within 30 days of
name of a LLP. partners and their incorporation
consent. of LLP.

13.12 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
 PARTNERS AND THEIR RELATIONS
Eligibility to be partners [Section 22]
On the incorporation of a LLP, the persons who subscribed their names to the incorporation
document shall be its partners and any other person may become a partner of the LLP by and
in accordance with the LLP agreement.

Relationship of partners [Section 23]

(1) Save as otherwise provided by this Act, the mutual rights and duties of the partners of a
LLP, and the mutual rights and duties of a LLP and its partners, shall be governed by the
LLP agreement between the partners, or between the LLP and its partners.
(2) The LLP agreement and any changes, if any, made therein shall be filed with the Registrar
in such form, manner and accompanied by such fees as may be prescribed.
(3) An agreement in writing made before the incorporation of a LLP between the persons
who subscribe their names to the incorporation document may impose obligations on the
LLP, provided such agreement is ratified by all the partners after the incorporation of the
LLP.
(4) In the absence of agreement as to any matter, the mutual rights and duties of the partners
and the mutual rights and duties of the LLP and the partners shall be determined by the
provisions relating to that matter as are set-out in the First Schedule.

Cessation of partnership interest [Section 24]

(Q.6-Page No:13.3)
(1) A person may cease to be a partner of a LLP in accordance with an agreement with the
other partners or, in the absence of agreement with the other partners as to cessation
of being a partner, by giving a notice in writing of not less than 30 days to the other
partners of his intention to resign as partner.
(2) A person shall cease to be a partner of a LLP—
(a) on his death or dissolution of the LLP; or
(b) if he is declared to be of unsound mind by a competent court; or
(c) if he has applied to be adjudged as an insolvent or declared as an insolvent.
(3) Where a person has ceased to be a partner of a LLP (hereinafter referred to as “former
partner”), the former partner is to be regarded (in relation to any person dealing with
the LLP) as still being a partner of the LLP unless—
(a) the person has notice that the former partner has ceased to be a partner of the
LLP; or
(b) notice that the former partner has ceased to be a partner of the LLP has been
delivered to the Registrar.
(4) The cessation of a partner from the LLP does not by itself discharge the partner from any
obligation to the LLP or to the other partners or to any other person which he incurred
while being a partner.
(5) Where a partner of a LLP ceases to be a partner, unless otherwise provided in the LLP
agreement, the former partner or a person entitled to his share in consequence of the
death or insolvency of the former partner, shall be entitled to receive from the LLP—
(a) an amount equal to the capital contribution of the former partner actually made to
the LLP; and
THE LIMITED LIABILITY PARTNERSHIP 13.13
ACT, 2008
 (b) his right to share in the accumulated profits of the LLP, after the deduction of
accumulated losses of the LLP, determined as at the date the former partner ceased
to be a partner.
(6) A former partner or a person entitled to his share in consequence of the death or
insolvency of the former partner shall not have any right to interfere in the management
of the LLP.

Registration of changes in partners [Section 25]

(1) Every partner shall inform the LLP of any change in his name or address within a period
of 15 days of such change.

(2) A LLP shall—

(a) where a person becomes or ceases to be a partner, file a notice with the Registrar
within 30 days from the date he becomes or ceases to be a partner; and
(b) where there is any change in the name or address of a partner, file a notice with
the Registrar within 30 days of such change.
(3) A notice filed with the Registrar under sub-section (2)—
(a) shall be in such form and accompanied by such fees as may be prescribed;
(b) shall be signed by the designated partner of the LLP and authenticated in a manner
as may be prescribed; and
(c) if it relates to an incoming partner, shall contain a statement by such partner that
he consents to becoming a partner, signed by him and authenticated in the manner
as may be prescribed.
(4) If the LLP contravenes the provisions of sub-section (2), the LLP and every designated
partner of the LLP shall be ‘liable to penalty of `10,000.
(5) If any partner contravenes the provisions of sub-section (1), such partner shall be ‘liable
to penalty of `10,000.
(6) Any person who ceases to be a partner of a LLP may himself file with the Registrar
the notice referred to in sub-section (3) if he has reasonable cause to believe that the
LLP may not file the notice with the Registrar and in case of any such notice filed by a
partner, the Registrar shall obtain a confirmation to this effect from the LLP unless the
LLP has also filed such notice.
However, where no confirmation is given by the LLP within 15 days, the registrar shall
register the notice made by a person ceasing to be a partner under this section.
.

13.14 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
 EXTENT AND LIMITATION OF LIABILITY OF LLP AND PARTNER
Partner as agent [Section 26]:
Every partner of a LLP is, for the purpose of the business of the LLP, the agent of the LLP, but
not of other partners.

Extent of liability of LLP [Section 27]

(1) A LLP is not bound by anything done by a partner in dealing with a person if—
(a) the partner in fact has no authority to act for the LLP in doing a particular act; and
(b) the person knows that he has no authority or does not know or believe him to be a
partner of the LLP.
(2) The LLP is liable if a partner of a LLP is liable to any person as a result of a wrongful act
or omission on his part in the course of the business of the LLP or with its authority.
(3) An obligation of the LLP whether arising in contract or otherwise, shall be solely the
obligation of the LLP.
(4) The liabilities of the LLP shall be met out of the property of the LLP.

Extent of liability of partner [Section 28]

(1) A partner is not personally liable, directly or indirectly for an obligation referred to in
sub-section (3) of section 27 solely by reason of being a partner of the LLP.
(2) The provisions of sub-section (3) of section 27 and sub-section (1) of this section shall
not affect the personal liability of a partner for his own wrongful act or omission, but
a partner shall not be personally liable for the wrongful act or omission of any other
partner of the LLP.

Holding out [Section 29]

(1) Any person,
• who by words spoken or written or by conduct,
• represents himself, or knowingly permits himself to be represented to be a partner in a
LLP
• is liable to any person
• who has on the faith of any such representation
• given credit to the LLP, whether the person representing himself or represented to be a
partner does or does not know that the representation has reached the person so giving
credit.
However,
• where any credit is received by the LLP as a result of such representation,
• the LLP shall,
• without prejudice to the liability of the person so representing himself or represented to
be a partner,
• be liable to the extent of credit received by it or any financial benefit derived thereon.

(2) Where after a partner’s death the business is continued in the same LLP name, the
continued use of that name or of the deceased partner’s name as a part thereof shall
not by itself make his legal representative or his estate liable for any act of the LLP done
after his death.

THE LIMITED LIABILITY PARTNERSHIP 13.15

ACT, 2008
 Unlimited liability in case of fraud [Section 30]
(1) In case of fraud:
• In the event of an act carried out by a LLP, or any of its partners,
• with intent to defraud creditors of the LLP or any other person, or for any fraudulent
purpose,
• the liability of the LLP and partners who acted with intent to defraud creditors or
for any fraudulent purpose
• shall be unlimited for all or any of the debts or other liabilities of the LLP.
However, in case any such act is carried out by a partner, the LLP is liable to the same
extent as the partner unless it is established by the LLP that such act was without the
knowledge or the authority of the LLP.
(2) Where any business is carried on with such intent or for such purpose as mentioned
in sub-section (1), every person who was knowingly a party to the carrying on of the
business in the manner aforesaid shall be punishable with
• imprisonment for a term which may extend to five years and
• with fine which shall not be less than ` 50,000 but which may extend to ` 5 Lakhs.
(3) Where a LLP or any partner or designated partner or employee of such LLP has conducted
the affairs of the LLP in a fraudulent manner, then without prejudice to any criminal
proceedings which may arise under any law for the time being in force, the LLP and any
such partner or designated partner or employee shall be liable to pay compensation to
any person who has suffered any loss or damage by reason of such conduct.
However, such LLP shall not be liable if any such partner or designated partner or
employee has acted fraudulently without knowledge of the LLP.

Whistle blowing [Section 31]

(1) The Court or Tribunal may reduce or waive any penalty leviable against any partner or
employee of a LLP, if it is satisfied that—
• such partner or employee of an LLP has provided useful information during
investigation of such LLP; or
• when any information given by any partner or employee (whether or not during
investigation) leads to LLP or any partner or employee of such LLP being convicted
under this Act or any other Act.
(2) No partner or employee of any LLP may be discharged, demoted, suspended, threatened,
harassed or in any other manner discriminated against the terms and conditions of his
LLP or employment merely because of his providing information or causing information
to be provided pursuant to sub-section (1).

CONTRIBUTIONS
Form of contribution [Section 32]
(1) A contribution of a partner may consist of tangible, movable or immovable or intangible
property or other benefit to the limited liability partnership, including money, promissory
notes, other agreements to contribute cash or property, and contracts for services
performed or to be performed.
(2) The monetary value of contribution of each partner shall be accounted for and disclosed
in the accounts of the limited liability partnership in the manner as may be prescribed.

13.16 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
 Obligation to contribute [Section 33]
(1) The obligation of a partner to contribute money or other property or other benefit or to
perform services for a limited liability partnership shall be as per the limited liability
partnership agreement.
(2) A creditor of a limited liability partnership, which extends credit or otherwise acts in
reliance on an obligation described in that agreement, without notice of any compromise
between partners, may enforce the original obligation against such partner.

FINANCIAL DISCLOSURES
1. Maintain proper books of account in presribed manner.
2. File Statement of Account and Solvency within 6 months from end of each F.Y.
3. Statement of Account and Solvency shall be filed with the Registrar every year in
prescribed form and manner and with prescribed fees.
4. Audit of Accounts. Central Government may exempt.

Maintenance of books of account, other records and audit, etc. [Section 34]
(1) Proper Books of account:
• The LLP shall maintain such proper books of account as may be prescribed
• relating to its affairs for each year of its existence
• on cash basis or accrual basis and
• according to double entry system of accounting and
• shall maintain the same at its registered office
• for such period as may be prescribed.
(2) Statement of Account and Solvency:
• Every LLP shall,
• within a period of 6 months from the end of each financial year,
• prepare a Statement of Account and Solvency
• for the said financial year as at the last day of the said financial year
• in such form as may be prescribed, and
• such statement shall be signed by the designated partners of the LLP.
(3) Every LLP shall file within the prescribed time, the Statement of Account and Solvency
prepared pursuant to sub-section (2) with the Registrar every year in such form and
manner and accompanied by such fees as may be prescribed.
(4) The accounts of LLP shall be audited in accordance with such rules as may be prescribed.
However, the Central Government may, by notification in the Official Gazette, exempt
any class or classes of LLP from the requirements of this sub-section.
(5) Penalty for non-compliance of provisions of sub-section 3-
LLP – `100 per day subject to maximum `1,00,000
Every Designated Partners - `100 per day subject to maximum `50,000.
(6) Penalty for non-compliance of provisions of sub-section 1, 2 & 4 - LLP – not less than
`25,000 which may extend to ` 5 Lakhs.
Every designated partner –not less than `10,000 which may extend to `1 Lakh.

THE LIMITED LIABILITY PARTNERSHIP 13.17

ACT, 2008
 Accounting and auditing standards [Section 34A]
Central Government may, in consultation with the National Financial Reporting Authority
constituted under Section 132 of the Companies Act 2013 —
(a) Prescribe the standards of accounting; and
(b) Prescribe the standards of auditing, as recommended by ICAI.

Annual Return [Section 35]

(1) Every LLP shall file an annual return duly authenticated with the Registrar within 60 days
of closure of its financial year in such form and manner and accompanied by such fee as
may be prescribed.
Example 6: Suppose, the financial year of a LLP closes on 31st March, 2022 then the
LLP has to file an annual return with the Registrar latest by 30th May, 2022.

Note
The LLP contra-distinct from Partnership Act, 1932 has prescribed the filing of Annual
Return in accordance with Companies Act, 2013. This is a new feature of the LLPs.

(2) Penalty for non-filing of annual return –

LLP – `100 per day subject to maximum `1,00,000
Every Designated Partners - `100 per day subject to maximum `50,000

INSPECTION OF DOCUMENTS KEPT BY REGISTRAR [SECTION 36]

The incorporation document, name of partners and changes, if any, made therein, Statement
of Account and Solvency and annual return filed by each LLP with the Registrar shall be
available for inspection by any person in such manner and on payment of such fee as may be
prescribed.

PENALTY FOR FALSE STATEMENT [SECTION 37]

If in any return, statement or other document required by or for the purposes of any of the
provisions of this Act, any person makes a statement—
(a) which is false in any material particular, knowing it to be false; or
(b) which omits any material fact knowing it to be material,
he shall, save as otherwise expressly provided in this Act, be punishable with imprisonment
for a term which may extend to 2 years, and shall also be liable to fine which may extend to
5 lakh rupees but which shall not be less than 1 lakh rupees.

POWER OF REGISTRAR TO OBTAIN INFORMATION [SECTION 38]

(1) In order to obtain such information as the Registrar may consider necessary for the
purposes of carrying out the provisions of this Act, the Registrar may require any person
including any present or former partner or designated partner or employee of a limited
liability partnership to answer any question or make any declaration or supply any details
or particulars in writing to him within a reasonable period.
(2) In case any person referred to in sub-section (1) does not answer such question or make
such declaration or supply such details or particulars asked for by the Registrar within a

13.18 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
 reasonable time or time given by the Registrar or when the Registrar is not satisfied with
the reply or declaration or details or particulars provided by such person, the Registrar
shall have power to summon that person to appear before him or an inspector or any
other public officer whom the Registrar may designate, to answer any such question or
make such declaration or supply such details, as the case may be.
(3) Any person who, without lawful excuse, fails to comply with any summons or requisition
of the Registrar under this section shall be punishable with fine which shall not be less
than two thousand rupees but which may extend to twenty-five thousand rupees.

COMPOUNDING OF OFFENCES [SECTION 39]

(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Regional
Director or any other officer not below the rank of Regional Director authorised by the
Central Government may compound any offence under this Act which is punishable with
fine only, by collecting from a person reasonably suspected of having committed the
offence, a sum which may extend to the amount of the maximum fine provided for the
offence but shall not be lower than the minimum amount provided for the offence.
(2) Nothing contained in sub-section (1) shall apply to an offence committed by a limited
liability partnership or its partner or its designated partner within a period of three years
from the date on which similar offence committed by it or him was compounded under
this section.
Explanation.—For the removal of doubts, it is hereby clarified that any second or
subsequent offence committed after the expiry of the period of three years from the
date on which the offence was previously compounded, shall be deemed to be the first
offence.
(3) Every application for the compounding of an offence shall be made to the Registrar who
shall forward the same, together with his comments thereon, to the Regional Director
or any other officer not below the rank of Regional Director authorised by the Central
Government, as the case may be.
(4) Where any offence is compounded under this section, whether before or after the
institution of any prosecution, intimation thereof shall be given to the Registrar within a
period of seven days from the date on which the offence is so compounded.
(5) Where any offence is compounded before the institution of any prosecution, no
prosecution shall be instituted in relation to such offence.
(6) Where the compounding of any offence is made after the institution of any prosecution,
such compounding shall be brought by the Registrar in writing, to the notice of the court
in which prosecution is pending and on such notice of the compounding of the offence
being given, the offender in relation to which the offence is so compounded shall be
discharged.
(7) The Regional Director or any other officer not below the rank of Regional Director
authorised by the Central Government, while dealing with the proposal for compounding
of an offence may, by an order, direct any partner, designated partner or other employee
of the LLP to file or register, or on payment of fee or additional fee as required to be
paid under this Act, such return, account or other document within such time as may be
specified in the order.

THE LIMITED LIABILITY PARTNERSHIP 13.19

ACT, 2008
(8) Notwithstanding anything contained in this section, if any partner or designated partner
or other employee of the LLP who fails to comply with any order made by the Regional
Director or any other officer not below the rank of Regional Director authorised by
the Central Government, under sub- section (7), the maximum amount of fine for the
offence, which was under consideration Regional Director or such authorised officer for
compounding under this section shall be twice the amount provided in the corresponding
section in which punishment for such offence is provided.

ASSIGNMENT AND TRANSFER OF PARTNERSHIP RIGHTS

PARTNER’S TRANSFERABLE INTEREST [SECTION 42]
(1) The rights of a partner to a share of the profits and losses of the limited liability
partnership and to receive distributions in accordance with the limited liability
partnership agreement are transferable either wholly or in part.
(2) The transfer of any right by any partner pursuant to sub-section (1) does not by itself
cause the disassociation of the partner or a dissolution and winding up of the limited
liability partnership.
(3) The transfer of right pursuant to this section does not, by itself, entitle the transferee
or assignee to participate in the management or conduct of the activities of the limited
liability partnership, or access information concerning the transactions of the limited
liability partnership.

CONVERSION INTO LLP

Conversion from firm into LLP [Section 55]: A firm may convert into an LLP in accordance
with the provisions of this Chapter and the Second Schedule.
Conversion from private company into LLP [Section 56]: A private company may convert
into an LLP in accordance with the provisions of this Chapter and the Third Schedule.
Conversion from unlisted public company into LLP [Section 57]: An unlisted public company
may convert into an LLP in accordance with the provisions of this Chapter and the Fourth
Schedule.

Registration and effect of conversion [Section 58]

(i) The Registrar, on satisfying that a firm, private company or an unlisted public company,
as the case may be, has complied with the respective Schedules, provisions of this Act
and the rules made thereunder, register the documents submitted under such schedules
and issue a certificate of registration in such form as the Registrar may determine stating
that the LLP is, on and from the date specified in the certificate, registered under this
Act.
(ii) The LLP shall, within 15 days of the date of registration, inform the concerned Registrar
of Firms or Registrar of Companies, as the case may be, with which it was registered
under the provisions of the Indian Partnership Act, 1932 or the Companies Act, 1956 (Now
Companies Act, 2013) as the case may be, about the conversion and of the particulars of
the LLP in such form and manner as may be prescribed.
(iii) Upon such conversion, the partners of the firm, the shareholders of private company or
unlisted public company, as the case may be, the LLP to which such firm or such company
has converted, and the partners of the LLP shall be bound by the respective Schedules,

13.20 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
 as the case may be, applicable to them.
(iv) Upon such conversion, on and from the date of certificate of registration, the effects of
the conversion shall be such as specified in the respective schedules, as the case may be.

Effect of Registration: Notwithstanding anything contained in any other law for the time
being in force, on and from the date of registration specified in the certificate of registration
issued under the respective Schedule, as the case may be,—
(a) there shall be a LLP by the name specified in the certificate of registration registered
under this Act;
(b) all tangible (movable or immovable) and intangible property vested in the firm or
the company, as the case may be, all assets, interests, rights, privileges, liabilities,
obligations relating to the firm or the company, as the case may be, and the whole of
the undertaking of the firm or the company, as the case may be, shall be transferred to
and shall vest in the limited liability partnership without further assurance, act or deed;
and
(c) the firm or the company, as the case may be, shall be deemed to be dissolved and
removed from the records of the Registrar of Firms or Registrar of Companies, as the
case may be.

FOREIGN LLP
Foreign limited liability partnerships [Section 59]
The Central Government may make rules for provisions in relation to establishment of place
of business by foreign LLP within India and carrying on their business therein by applying or
incorporating, with such modifications, as appear appropriate, the provisions of the Companies
Act, 2013 or such regulatory mechanism with such composition as may be prescribed.

COMPROMISE, ARRANGEMENT OR RECONSTRUCTION OF LIMITED LIABILITY PARTNERSHIPS

Compromise or arrangement of limited liability partnerships [Section 60]
(1) Where a compromise or arrangement is proposed—
(a) between a limited liability partnership and its creditors; or
(b) between a limited liability partnership and its partners,
the Tribunal may, on the application of the limited liability partnership or of any creditor
or partner of the limited liability partnership, or, in the case of a limited liability
partnership which is being wound up, of the liquidator, order a meeting of the creditors
or of the partners, as the case may be, to be called, held and conducted in such manner
as may be prescribed or as the Tribunal directs.
(2) If a majority representing three-fourths in value of the creditors, or partners, as the case
may be, at the meeting, agree to any compromise or arrangement, the compromise or
arrangement shall, if sanctioned by the Tribunal, by order be binding on all the creditors
or all the partners, as the case may be, and also on the limited liability partnership, or
in the case of a limited liability partnership which is being wound up, on the liquidator
and contributories of the limited liability partnership:
Provided that no order sanctioning any compromise or arrangement shall be made by the
Tribunal unless the Tribunal is satisfied that the limited liability partnership or any other
person by whom an application has been made under sub-section (1) has disclosed to
THE LIMITED LIABILITY PARTNERSHIP 13.21
ACT, 2008
 the Tribunal, by affidavit or otherwise, all material facts relating to the limited liability
partnership, including the latest financial position of the limited liability partnership
and the pendency of any investigation proceedings in relation to the limited liability
partnership.
(3) An order made by the Tribunal under sub-section (2) shall be filed by the limited liability
partnership with the Registrar within thirty days after making such an order and shall
have effect only after it is so filed.
(4) If default is made in complying with the provisions of sub-section (3), the LLP and
its every designated partner shall be ‘liable to a penalty of `10,000 and in case of
continuing default, with further penalty of `100 for each day after the first during which
such default continues, subject to maximum `1,00,000 for LLP and `50,000 for every
designated partner’.
(5) The Tribunal may, at any time after an application has been made to it under this section,
stay the commencement or continuation of any suit or proceeding against the limited
liability partnership on such terms as the Tribunal thinks fit, until the application is
finally disposed of.

Power of Tribunal to enforce compromise or arrangement (Section 61)

(1) Where the Tribunal makes an order under section 60 sanctioning a compromise or an
arrangement in respect of a limited liability partnership, it—
(a) shall have power to supervise the carrying out of the compromise or an arrangement;
and
(b) may, at the time of making such order or at any time thereafter, give such
directions in regard to any matter or make such modifications in the compromise or
arrangement as it may consider necessary for the proper working of the compromise
or arrangement.
(2) If the Tribunal aforesaid is satisfied that a compromise or an arrangement sanctioned
under section 60 cannot be worked satisfactorily with or without modifications, it may,
either on its own motion or on the application of any person interested in the affairs
of the limited liability partnership, make an order for winding up the limited liability
partnership, and such an order shall be deemed to be an order made under section 64 of
this Act.

Provisions for facilitating reconstruction or amalgamation of limited liability partnerships

[Section 62]
(1) Where an application is made to the Tribunal under section 60 for sanctioning of a
compromise or arrangement proposed between a limited liability partnership and any
such persons as are mentioned in that section, and it is shown to the Tribunal that—
(a) compromise or arrangement has been proposed for the purposes of, or in connection
with, a scheme for the reconstruction of any limited liability partnership or limited
liability partnerships, or the amalgamation of any two or more limited liability
partnerships; and
(b) under the scheme the whole or any part of the undertaking, property or liabilities
of any limited liability partnership concerned in the scheme (in this section
referred to as a “transferor limited liability partnership”) is to be transferred to

13.22 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
 another limited liability partnership (in this section referred to as the “transferee
limited liability partnership”), the Tribunal may, either by the order sanctioning the
compromise or arrangement or by a subsequent order, make provisions for all or
any of the following matters, namely:—
(i) the transfer to the transferee limited liability partnership of the whole or any
part of the undertaking, property or liabilities of any transferor limited liability
partnership;
(ii) the continuation by or against the transferee limited liability partnership of any
legal proceedings pending by or against any transferor limited liability partnership;
(iii) the dissolution, without winding up, of any transferor limited liability partnership;
(iv) the provision to be made for any person who, within such time and in such manner
as the Tribunal directs, dissent from the compromise or arrangement; and
(v) such incidental, consequential and supplemental matters as are necessary to secure
that the reconstruction or amalgamation shall be fully and effectively carried out:
Provided that no compromise or arrangement proposed for the purposes of, or in connection
with, a scheme for the amalgamation of a limited liability partnership, which is being
wound up, with any other limited liability partnership or limited liability partnerships,
shall be sanctioned by the Tribunal unless the Tribunal has received a report from the
Registrar that the affairs of the limited liability partnership have not been conducted in
a manner prejudicial to the interests of its partners or to public interest:
Provided further that no order for the dissolution of any transferor limited liability
partnership under clause (iii) shall be made by the Tribunal unless the Official Liquidator
has, on scrutiny of the books and papers of the limited liability partnership, made a
report to the Tribunal that the affairs of the limited liability partnership have not been
conducted in a manner prejudicial to the interests of its partners or to public interest.
(2) Where an order under this section provides for the transfer of any property or liabilities,
then, by virtue of the order, that property shall be transferred to and vest in, and those
liabilities shall be transferred to and become the liabilities of, the transferee limited
liability partnership; and in the case of any property, if the order so directs, freed from
any charge which is, by virtue of the compromise or arrangement, to cease to have
effect.
(3) Within thirty days after the making of an order under this section, every limited liability
partnership in relation to which the order is made shall cause a certified copy thereof to
be filed with the Registrar for registration.
(4) If default is made in complying with the provisions of sub-section (3), the LLP and its
every designated partner shall be ‘liable to a penalty of `10,000 and in case of continuing
contravention, with further penalty of `100 for each day after the first during which
such default continues, subject to maximum `1,00,000 for LLP and `50,000 for every
designated partner’.
Explanation: (i) In this section “property” includes property, rights and powers of every
description; and “liabilities” includes duties of every description.
(ii) a LLP shall not be amalgamated with a company.

THE LIMITED LIABILITY PARTNERSHIP 13.23

ACT, 2008
 WINDING UP AND DISSOLUTION
Winding up and dissolution [Section 63]: The winding up of a LLP may be either voluntary or
by the Tribunal and LLP, so wound up may be dissolved.
Circumstances in which LLP may be wound up by Tribunal [Section 64]: A LLP may be
wound up by the Tribunal:
(a) if the LLP decides that LLP be wound up by the Tribunal;
(b) if, for a period of more than six months, the number of partners of the LLP is reduced
below two;
(c) if the LLP has acted against the interests of the sovereignty and integrity of India, the
security of the State or public order1;
(d) if the LLP has made a default in filing with the Registrar the Statement of Account and
Solvency or annual return for any five consecutive financial years; or
(e) if the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.
Rules for winding up and dissolution [Section 65]: The Central Government may make rules
for the provisions in relation to winding up and dissolution of LLP.

MISCELLANEOUS
Business Transactions of Partner with LLP [Section 66]:
A partner may lend money to and transact other business with the LLP and has the same rights
and obligations with respect to the loan or other transactions as a person who is not a partner.

Application of the Provisions of the Companies Act [Section 67]

(1) The Central Government may, by notification in the Official Gazette, direct that any of
the provisions of the Companies Act, 1956 specified in the notification—
• shall apply to any LLP; or
• shall apply to any LLP with such exception, modification and adaptation, as may be
specified, in the notification.
(2) A copy of every notification proposed to be issued under sub-section (1)
• shall be laid in draft before each House of Parliament, while it is in session,
• for a total period of 30 days which may be comprised in one session or in two or
more successive sessions, and
• if, before the expiry of the session immediately following the session or the
successive sessions aforesaid, both Houses agree in disapproving the issue of the
notification or both Houses agree in making any modification in the notification,
• the notification shall not be issued or, as the case may be,
shall be issued only in such modified form as may be agreed upon by both the
Houses.

Payment of Additional Fee [Section 69]

Any document or return required to be registered or filed under this Act with Registrar, if, is
not registered or filed in time provided therein, may be registered or filed after that time, on
payment of such additional fee as may be prescribed in addition to any fee as is payable for
filing of such document or return:
Provided that such document or return shall be filed after the due date of filing, without
prejudice to any other action or liability under this Act:
Provided further that a different fee or additional fee may be prescribed for different classes
of limited liability partnerships or for different documents or returns required to be filed
under this Act or rules made thereunder.

13.24 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
 Enhanced Punishment [Section 70]
In case a limited liability partnership or any partner or designated partner of such limited
liability partnership commits any offence, the limited liability partnership or any partner
or designated partner shall, for the second or subsequent offence, be punishable with
imprisonment as provided, but in case of offences for which fine is prescribed either along
with or exclusive of imprisonment, with fine which shall be twice the amount of fine for such
offence.

DIFFERENCES WITH OTHER FORMS OF RGANISATION

Distinction between LLP and Partnership Firm: The points of distinction between a limited
liability partnership and partnership firm are tabulated as follows:
Basis LLP Partnership firm
1. Regulating Act The Limited Liability The Indian Partnership Act, 1932.
Partnership Act, 2008
2. Body corporate It is a body corporate. It is not a body corporate,
3. Separate legal It is a legal entity separate It is a group of persons with no
entity from its members. separate legal entity.
4. Creation It is created by a legal process It is created by an agreement
called registration under the between the partners.
LLP Act, 2008.
5. Registration Registration is mandatory. LLP Registration is voluntary. Only the
can sue and be sued in its own registered partnership firm can
name. sue the third parties.
6. Perpetual The death, insanity, retirement The death, insanity, retirement
succession or insolvency of the partner(s) or insolvency of the partner(s)
does not affect its existence may affect its existence. It has no
of LLP. Members may join perpetual succession.
or leave but its existence
continues forever.
7. Name Name of the LLP to contain the No guidelines. The partners can
word limited liability partners have any name as per their choice.
(LLP) as suffix.
8. Liability Liability of each partner Liability of each partner is
limited to the extent to unlimited. It can be extended
agreed contribution except up to the personal assets of the
in case of willful fraud. partners.
9. Mutual agency Each partner can bind the LLP Each partner can bind the firm as
by his own acts but not the well as other partners by his own
other partners. acts.
10. Designated At least two designated There is no provision for such
partners partners and at least one of partners under the Partnership
them shall be resident in India. Act, 1932.
11. Common seal It may have its common seal There is no such concept in
as its official signatures. partnership

THE LIMITED LIABILITY PARTNERSHIP 13.25

ACT, 2008
12. Legal Only designated partners All partners are responsible for
compliances are responsible for all the all the compliances and penalties
compliances and penalties under the Act.
under this Act.
13. Annual filing of LLP is required to file: Partnership firm is not required to
documents (i) Statement of accounts file any annual document with the
and solvency (to be filed registrar of firms.
annually)
(ii) Annual return with the
registration of LLP every
year.
14. Foreign Foreign nationals can become Foreign nationals cannot become
partnership a partner in a LLP. a partner in a partnership firm.
15. Minor as partner Minor cannot be admitted to Minor can be admitted to the
the benefits of LLP. benefits of the partnership with
the prior consent of the existing
partners.

DISTINCTION BETWEEN LLP AND LIMITED LIABILITY COMPANY

Basis LLP Limited Liability Company

1. Regulating Act The LLP Act, 2008. The Companies Act, 2013.
2. Members/ The persons who contribute The persons who invest the money
Partners to LLP are known as partners in the shares are known as members
of the LLP. of the company.
3. Internal The internal governance The internal governance structure
governance structure of a LLP is governed of a company is regulated by
structure by contract agreement statute (i.e., Companies Act,
between the partners. 2013).
4. Name Name of the LLP to contain Name of the public company to
the word “Limited Liability contain the word “limited” and
partnership” or “LLP” as Pvt. Co. to contain the word
suffix. “Private limited” as suffix.
5. No. of Minimum – 2 members Private company: Minimum – 2
members/ Maximum – No such limit on members Maximum 200 members
partners the members in the Act. The Public company: Minimum – 7
members of the LLP can be members
individuals/or body corporate Maximum – No such limit on the
through the nominees. members.
Members can be organizations,
trusts, another business form or
individuals.
6. Liability Liability of a partners is Liability of a member is limited to
of members/ limited to the extent of the amount unpaid on the shares
partners agreed contribution in case of held by them.
intention is fraud.

13.26 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
7. Management The business of the company The affairs of the company are
is managed by the partners managed by board of directors
including the designated elected by the shareholders.
partners authorized in the
agreement.
8. Minimum Minimum 2 designated Pvt. Co. – 2 directors Public co. – 3
number of partners directors
directors/
designated
partners

SUMMARY
• Applicability: From 31st March, 2009 (Extends whole of India)
• Non- Applicability: The Indian Partnership Act, 1932 to LLPs.
• Who can be a partner in LLP: Any individual or body corporate may be a partner in a
LLP. But not, person of unsound mind, undischarged insolvent; or who has applied to be
adjudicated as an insolvent.
• Minimum partners:
1. Two partners.
2. If LLP carries on business for more than 6 months with only one partner, he shall be
liable personally for the obligations of the LLP incurred during that period.
• Designated Partners:
1. At least two designated partners who are individuals and at least one of them shall
be a resident in India.
2. Resident in India: a person who has stayed in India for a period of not less than 120
days during the immediately preceding one year.
• Registration of conversion to LLP
1. Registrar, on satisfying, will register the documents and issue a certificate of
registration.
2. Information of conversion to Registrar of Firms or Companies by LLP, within 15 days
from registration.
3. Upon such conversion, provisions of LLP will be applicable.
• Effect of Registration of conversion
1. There shall be a LLP by name specified in certificate of registration.
2. All tangible (movable or immovable) and intangible property of firm or the company,
shall vest in LLP 3. Firm or company shall be deemed to be dissolved.

THE LIMITED LIABILITY PARTNERSHIP 13.27

ACT, 2008
• Name of LLP:
1. Use of words “limited liability partnership” or “LLP” as the last words of its
name.
2. No LLP registration by a name which, in the opinion of the CG is—
a) undesirable; or
b) identical or too nearly resembles to any other partnership firm or LLP or
company or a registered trade mark.
• Change of name of LLP: If name of registered LLP is identical or too nearly resembles
to any other partnership firm or LLP or company or a registered trade mark, CG may
direct such LLP to change its name within 3 months. (On Application)
• Extent & Limitation of Liability of LLP & Partner
• Partner as agent: Agent of the LLP, but not of other partners.
• Liability of LLP:
1. LLP not bound by anything done by a partner if Partner has no authority.
2. Obligation of the LLP shall be solely the obligation of the LLP.
3. Liabilities of LLP shall be met out of the property of LLP.
• Liability of partner:
1. Partner is not personally liable for obligations of the LLP.
2. Partner is personally liable for his own wrongful act or omission
• Unlimited liability in case of Fraud:
1. If act carried out by a LLP or partner to defraud creditors, liability of LLP and
partners shall be unlimited.
2. Penalty: imprisonment upto 5 years and fine of `50,000 to `5 Lakhs.
3. Defaulted person also liable to pay compensation.

13.28 THE LIMITED LIABILITY PARTNERSHIP

ACT, 2008
 14 THE GENERAL
CLAUSES ACT, 1897
OBJECT, PURPOSE AND IMPORTANCE OF THE GENERAL CLAUSES ACT
The objects of the Act are several, namely:
(1) to shorten the language of Central Acts;
(2) to provide, as far as possible, for uniformity of expression in Central Acts, by giving
definitions of a series of terms in common use;
(3) To state explicitly certain convenient rules for the construction and interpretation of
central acts.
(4) To guard against slips and oversights by importing into every act certain common form
clauses, which otherwise ought to be inserted in every central act
The purpose of the General Clauses Act is to place in one single statute different provisions
as regards interpretation of words and legal principles which would otherwise have to be
specified separately in many different Acts and Regulations. So, whatever General Clauses Act
says whether as regards to the meaning of words or as regards legal principles, has to be read
in every statute to which it applies.

APPLICATION OF THE GENERAL CLAUSES ACT

The Act not defines any “territorial extent” clause. Its application is primarily with reference
to all Central legislation and also to rules and regulations made under a Central Act. It is in a
sense a part of every Central Acts or Regulations. If a Central Act is extended to any territory,
the General Clauses Act would also deem to be applicable in that territory and would apply in
the construction of that Central Act. The Central Acts to which this Act apply are: —
(a) Acts of the Indian Parliament (central act) along with the rules and regulations made
under the central act;
(b) Acts of the Dominion Legislature passed between the 15th August, 1947 and the 26th
January, 1950;
(c) Acts passed before the commencement of the Constitution by the Governor-General in
Council or the Governor-General acting in a legislative capacity. The Act does not define
any “territorial extent” clause.

PRELIMINARY [SECTION 1]
“Short title” [Section 1(1)]: This Act may be called the General Clauses Act, 1897.
The General Clauses Act, 1897 contains only short title in the Preliminary part of the Act.
Note: Section 2 of the General Clauses Act, 1897 has been repealed.

DEFINITIONS [SECTION 3]
1. “Act” [Section 3(2)]: ‘Act’, used with reference to an offence or a civil wrong, shall
include a series of acts, and words which refer to acts done extend also to illegal
omissions;

THE GENERAL CLAUSES ACT, 1897 14.1

2. “Affidavit” [Section 3(3)]: ‘Affidavit’ shall include affirmation and declaration in the
case of persons by law allowed to affirm or declare instead of swearing.

There are two important points derived from the above definition:
1. Affirmation and declaration,
2. In case of persons allowed affirming or declaring instead of swearing.
The above definition is inclusive in nature. It states that Affidavit shall include affirmation
and declarations. This definition does not define affidavit. However, we can understand
this term in general parlance. Affidavit is a written statement confirmed by oath or
affirmation for use as evidence in Court or before any authority.

3. “Central Act” [Section 3(7)]: ‘Central Act’ shall mean an Act of Parliament, and shall
include-
(a) An Act of the Dominion Legislature or of the Indian Legislature passed before the
commencement of the Constitution*, and
(b) An Act made before such commencement by the Governor General in Council or the
Governor General, acting in a legislative capacity;

4.“Central Government” [Section 3(8)]: ‘Central Government’ shall-

(a) In relation to anything done before the commencement of the Constitution, mean
the Governor General in Council, as the case may be; and shall include,-
(i) In relation to functions entrusted under sub-section (1) of the section 124
of the Government of India Act, 1935, to the Government of a Province, the
Principal Government acting within the scope of the authority given to it
under that sub- section; and
(ii) In relation to the administration of a Chief Commissioner’s Province, the Chief
Commissioner acting within the scope of the authority given to him under sub-
section (3) of section 94 of the said Act; and

(b) In relation to anything done or to be done after the commencement of the

constitution of the Constitution, mean the President; and shall include;-
(i) In relation to function entrusted under clause (1) of the article of the
Constitution, to the Government of a state, the State Government acting
within the scope of the authority given to it under that clause;
(ii) In relation to the administration of a Part C State before the commencement
of the Constitution (Seventh Amendment) Act, 1956*, the Chief Commissioner
or the Lieutenant Governor or the Government of a neighboring State or other
authority acting within the scope of the authority given to him or it under
article 239 or article 243 of the Constitution, as the case may be; and
(iii) In relation to the administration of a Union territory, the administrator thereof
acting within the scope of the authority given to him under article 239 of the
Constitution;
5. “Commencement” [Section 3(13)]: ‘Commencement’ used with reference to an Act or
Regulation, shall mean the day on which the Act or Regulation comes into force;
Coming into force or entry into force (also called commencement) refers to the process
by which legislation; regulations, treaties and other legal instruments come to have
legal force and effect.

14.2 THE GENERAL CLAUSES ACT, 1897

 Any matter written, expressed or
6.
described upon any substance
By means of letters, or figures or by
Document Shall
more than one of those means
[Sec. 3 (18)] include
Which is intended to be used or which
may be used
For the purpose of recording that matter

7. “Enactment” [Section 2(19)]: ‘Enactment’ shall include a Regulation (as hereinafter

defined) and any Regulation of Bengal, Madras or Bombay Code, and shall also include
any provision contained in any Act or in any such Regulation as aforesaid;

8. “Financial Year” [Section 3(21)]:

(Q.1-Page No:14.1)
Financial year shall mean the year commencing on the first day of April.
The term Year has been defined under Section 3(66) as a year reckoned according to the
British calendar. Thus, as per General Clauses Act, Year means calendar year which starts
from January to December.

Difference between Financial Year and Calendar Year: Financial year starts from first
day of April but Calendar Year starts from first day of January.

Financial Shall include Commencing on the

The year
Year first day of April

9. “Good Faith” [Section 3(22)]: A thing shall be deemed to be done in “good faith” where
it is in fact done honestly, whether it is done negligently or not;
The question of good faith under the General Clauses Act, 1897 is one of fact. It is to
determine with reference to the facts and circumstances of each case. Thus, anything
done with due care and attention, which is not malafide is presumed to have been done
in good faith. For eg: An authority is not acting honestly where it had a suspicion that
there was something wrong and did not make further enquiries
The term “good faith” has been defined differently in different enactments. This
definition of the good faith does not apply to that enactment which contains a special
definition of the term “good faith” and the definition given in that particular enactment
has to be followed. This definition may be applied only if there is nothing repugnant in
subject or context.

10. “Government” [Section 3(23)]: ‘Government’ or ‘the Government’ shall include both
the Central Government and State Government.
Hence, wherever, the word ‘Government’ is used, it will include Central Government
and State Government both.

THE GENERAL CLAUSES ACT, 1897 14.3

11. “Government Securities” [Section 3(24)]: ‘Government securities’ shall mean securities
of the Central Government or of any State Government, but in any Act or Regulation
made before the commencement of the Constitution shall not include securities of the
Government of any Part B state.

12. “Immovable Property” [Section 3(26)]:

(Q.2-Page No:14.1) (Q.5-Page No:14.2)
‘Immovable Property’ shall include:
i) Land,
ii) Benefits to arise out of land, and
iii) Things attached to the earth, or
iv) Permanently fastened to anything attached to the earth.

Where, in any enactment, the definition of immovable property is in the negative and
not exhaustive, the definition as given in the General Clauses Act will apply to the
expression given in that enactment.

Example :. In Shantabai v. State of Bombay, the Supreme Court pointed out that trees
must be regarded as immovable property because they are attached to or rooted in the
earth.
An agreement to convey forest produce like tendu leaves, timber, bamboos etc., the soil
for making bricks, the right to build on and occupy the land for business purposes and the
right to grow new trees and to get leaves from trees that grow in further are all included
in the term immovable property.

13. “Imprisonment” [Section 3(27)]: ‘Imprisonment’ shall mean imprisonment of either

description as defined in the Indian Penal Code (45 of 1860);

14. “Indian law” [Section 3(29)] : ‘Indian law’ shall mean any Act, Ordinance, Regulation,
rule, order, bye law or other instrument which before the commencement of the
Constitution, had the force of law in any Province of India or part thereof or thereafter
has the force of law in any Part A or Part C State or part thereof, but does not include
any Act of Parliament of the United Kingdom or any Order in Council, rule or other
instrument made under such Act;

15. “Month” [Section 3(35)]: ‘Month’ shall mean a month reckoned according to the British
calendar;

16. “Movable Property” [Section 3(36)]: ‘Movable Property’ shall mean property of every
description, except immovable property.
Thus, any property which is not immovable property is movable property. Debts, share,
electricity are moveable property.

17. “Oath” [Section 3(37)]: ‘Oath’ shall include affirmation and declaration in the case of
persons by law allowed to affirm or declare instead of swearing.

14.4 THE GENERAL CLAUSES ACT, 1897

18. “Offence” [Section 3(38)]: ‘Offence’ shall mean any act or omission made punishable
by any law for the time being in force.
Any act or omission which is if done, is punishable under any law for the time being in
force, is called as offence.

19. “Official Gazette” [Section 3(39)]: ‘Official Gazette’ or ‘Gazette’ shall mean:
(i) The Gazette of India, or
(ii) The Official Gazette of a state.

20. “Person” [Section 3(42)]: “Person” shall include:

(i) any company, or
(ii) association, or
(iii) body of individuals, whether incorporated or not

21. “Registered” [Section 3(49)]: ‘Registered’ used with reference to a document, shall
mean registered in India under the law for the time being force for the registration of
documents.

22. “Rule” [Section 3(51)]: ‘Rule’ shall mean a rule made in exercise of a power conferred
by any enactment, and shall include a Regulation made as a rule under any enactment;

23. “Schedule” [Section 3(52)]: ‘Schedule’ shall mean a schedule to the Act or Regulation
in which the word occurs;

24. “Section” [Section 3(54)]: ‘Section’ shall mean a section of the Act or Regulation in
which the word occurs;

25. “Sub-section” [Section 3(61)]: ‘Sub-section’ shall mean a sub-section of the section in
which the word occurs;

26. “Swear” [Section 3(62)]: “Swear”, with its grammatical variations and cognate
expressions, shall include affirming and declaring in the case of persons by law allowed
to affirm or declare instead of swearing.
Note: The terms “Affidavit”, “Oath” and “Swear” have the same definitions in the Act.
27. “Writing” [Section 3(65)]: Expressions referring to ‘writing’ shall be construed as including
references to printing, lithography, photography and other modes of representing or
reproducing words in a 1visible forms; and

28. “Year” [Section 3(66)]: ‘Year’ shall mean a year reckoned according to the British
calendar.

Application to foregoing definitions to previous enactments [Section 4]

There are certain definitions in section 3 of the General Clauses Act, 1897 which would also
apply to the Acts and Regulations made prior to 1987 i.e., on the previous enactments of 1868
and 1887. This provision is divided into two parts-

THE GENERAL CLAUSES ACT, 1897 14.5

(1) Application of terms/expressions to all [Central Acts] made after 3rd January, 1868,
and to all Regulations made on or after the 14th January, 1887-
Here the given relevant definitions in section 3 of the following words and expressions,
that is to say, ‘affidavit’, ‘immovable property’, ‘imprisonment’, ‘‘month’, ‘movable
property’, ‘oath’, ‘person’, ‘section’, ‘and ‘year’ apply also, unless there is anything
repugnant in the subject or context, to all Central Acts made after the 3rd January,
1868, and to all Regulations made on or after the 14th January, 1887.

(2) Application of terms/expressions to all Central Acts and Regulations made on or after
the fourteenth day of January, 1887- The relevant given definitions in the section 3 of
the following words and expressions, that is to say, ‘commencement’, ‘financial year’,
‘offence’, ‘registered’, schedule’, ‘sub-section’ and ‘writing’ apply also, unless there is
anything repugnant in the subject or context, to all Central Acts and Regulations made
on or after the fourteenth day of January, 1887.

Application of certain definitions to Indian Laws [Section 4A]-

(1) The definitions in section 3 of the expressions ‘Central Act’, ‘Central Government’,
‘‘Gazette’, ‘Government’, ‘Government Securities’, ‘Indian Law’, and ‘‘Official Gazette’,
‘shall apply, unless there is anything repugnant in the subject or context, to all Indian
laws.
(2) In any Indian law, references, by whatever form of words, to revenues of the Central
Government or of any State Government shall, on and from the first day of April, 1950,
be construed as references to the Consolidated Fund of India or the Consolidated Fund
of the State, as the case may be.

GENERAL RULES OF CONSTRUCTION: [SECTION 5 TO SECTION 13]

(Q.10-Page No:14.5)
“Coming into operation of enactment” [Section 5]:
Where any Central Act has not specifically mentioned a particular date to come into force, it
shall be implemented on the day on which it receives the assent of the Governor General in
case of a Central Acts made before the commencement of the Indian Constitution and/or, of
the President in case of an Act of Parliament.

“Effect of Repeal” [Section 6]:

Where any Central legislation or any regulation made after the commencement of this Act
repeals any Act made or yet to be made, unless another purpose exists, the repeal shall not:
• Revive anything not enforced or prevailed during the period at which repeal is effected
or; Sec. 9 of wealth tax was not notified ever : Even after Repeat it cannot be
Revived OR Notified.
• Affect the previous operation of any enactment so repealed or anything duly done or
suffered thereunder; or
• Affect any right, privilege, obligation or liability acquired, accrued or incurred under
any enactment so repealed; or Refund of Tax with interest
• Affect any penalty, forfeiture or punishment incurred in respect of any offence committed
against any enactment so repealed; or Penalty/Tax Payable
14.6 THE GENERAL CLAUSES ACT, 1897
• Affect any inquiry, litigation or remedy with regard to such claim, privilege, debt or
responsibility or any inquiry, litigation or remedy may be initiated, continued or insisted.
1. In State of Uttar Pradesh v. Hirendra Pal Singh, (2011), 5 SCC 305, SC held that whenever
an Act is repealed, it must be considered as if it had never existed. Object of repeal
is to obliterate the Act from statutory books, except for certain purposes as provided
under Section 6 of the Act.
2. In Kolhapur Canesugar Works Ltd. V, Union of India, AIR 2000, SC 811, Supreme Court
held that Section 6 only applies to repeal and not to omissions and applies when the
repeal is of a Central Act or Regulation and not of a Rule.
3. In Navrangpura Gam Dharmada Milkat Trust v. Ramtuji Ramaji, AIR 1994 Guj 75: ‘Repeal’
of provision is in distinction from ‘deletion’ of provision. ‘Repeal’ ordinarily brings
about complete obliteration of the provision as if it never existed, thereby affecting
all incoherent rights and all causes of action related to the ‘repealed’ provision while
‘deletion’ ordinarily takes effect from the date of legislature affecting the said deletion,
never to effect total effecting or wiping out of the provision as if it never existed. For
the purpose of this section, the above distinction between the two is essential.
“Repeal of Act making textual amendment in Act or Regulation” [Section 6A]
Where any Central Act or Regulation made after the commencement of this Act repeals any
enactment by which the text of any Central Act or Regulation was amended by the express
omission, insertion or substitution of any matter, then unless a different intention appears,
the repeal shall not affect the continuance of any such amendment made by the enactment
so repealed and in operation at the time of such repeal.

“Revival of repealed enactments” [Section 7]

(1) In any Central Act or Regulation made after the commencement of this Act, it shall be
necessary, for the purpose of reviving, either wholly or partially, any enactment wholly or
partially repealed, expressed to state that purpose.
In other words, to revive a repealed statute, it is necessary to state an intention to do so.
“Construction of references to repealed enactments” [Section 8]
(1) Where this Act or Central Act or Regulation made after the commencement of this Act, re-
peals and re-enacts, with or without modification, any provision of a former enactment, then
references in any other enactment or in any instrument to the provision so repealed shall, un-
less a different intention appears, be construed as references to the provision so re-enacted.
(2) Where before the fifteenth day of August, 1947, any Act of Parliament of the United
Kingdom repealed and re-enacted, with or without modification, any provision of a former
enactment, then reference in any Central Act or in any Regulation or instrument to the pro-
vision so repealed shall, unless a different intention appears, be construed as references to
the provision so re-enacted.
In Gauri Shankar Gaur v. State of U.P., AIR 1994 SC 169, it was held that every Act has its own
distinction. If a later Act merely makes a reference to a former Act or existing law, it is only
by reference and all amendments, repeals new law subsequently made will have effect unless
its operation is saved by the relevant provision of the section of the Act.

THE GENERAL CLAUSES ACT, 1897 14.7

“Commencement and termination of time”[Section 9]:
(Q.7-Page No:14.3) (Q.9-Page No:14.4)
In any legislation or regulation, it shall be sufficient, for the purpose of excluding the first in
a series of days or any other period of time to use the word “from” and for the purpose of
including the last in a series of days or any other period of time, to use the word “to”.

30/9/22  within 30 days  1/10/22 “FROM” to 30/10/22 “TO”

“Computation of time” [Section 10]:

Where by any legislation or regulation, any act or proceeding is directed or allowed to be done
or taken in any court or office on a certain day or within a prescribed period then, if the Court
or office is closed on that day or last day of the prescribed period, the act or proceeding shall
be considered as done or taken in due time if it is done or taken on the next day afterwards
on which the Court or office is open.

“Duty to be taken pro rata in enactments” [Section 12]:

Where, by any enactment now in force or hereafter to be in force, any duty of customs or
excise or in the nature thereof, is leviable on any given quantity, by weight, measure or value
of any goods or merchandise, then a like duty is leviable according to the same rate on any
greater or less quantity. Same Rate to be Levied on Greater OR Less Quantity

“Gender and number” [Section 13]:

(Q.3-Page No:14.1)
In all legislations and regulations, unless there is anything repugnant in the subject or context-
(1) Words importing the masculine gender shall be taken to include females, and
(2) Words in singular shall include the plural and vice versa.

POWER AND FUNCTIONARIES [SECTION 14 TO SECTION 19]

“Power conferred to be exercisable from time to time” [Section 14]:

(1) Where, by any Central Act or Regulation made after the commencement of this Act, any
power is conferred, then unless a different intention appears that power may be exercised
from time to time as occasion requires. eg:- Lok Sabha Elections voting every 5 years
“Power to appoint to include power to appoint ex-officio” [Section 15]:
Where by any legislation or regulation, a power to appoint any person to fill any office or
execute any function is conferred, then unless it is otherwise expressly provided, any such
appointment, may be made either by name or by virtue of office.
Ex-officio is a Latin word which means by virtue of one’s position or office. Provision under
this section states that where there is a power to appoint, the appointment may be made by
appointing ex-officio as well.

“Power to appoint to include power to suspend or dismiss” [Section 16]:

The authority having for the time being power to make the appointment shall also have power
to suspend or dismiss any person appointed whether by itself or any other authority in exer-
cise of that power. Members shall have power to Appoint as well as Remove the Auditor

14.8 THE GENERAL CLAUSES ACT, 1897

 “Substitution of functionaries” [Section 17]:
(1) In any Central Act or Regulation made after the commencement of this Act, it shall be
sufficient, for the purpose of indicating the application of a law to every person or number of
persons for the time being executing the functions of an office, to mention the official title
of the officer at present executing the functions, or that of the officer by whom the functions
are commonly executed.
(2) This section applies also to all Central Acts made after the third day of January, 1868 and
to all Regulations made on or after the fourteenth day of January, 1887.

“Successors” [Section 18]:

(1) In any Central Act or Regulation made after the commencement of this Act, it shall be suf-
ficient, for the purpose of indicating the relation of a law to the successors of any functionar-
ies or of corporations having perpetual succession, to express its relation to the functionaries
or corporations.

Law which Applies to Superiors shall Equally Apply to Subordinates

“Official Chiefs and subordinates” [Section 19]:
A law relative to the chief or superior of an office shall apply to the deputies or subordinates
lawfully performing the duties of that office in the place of their superior, to prescribe the
duty of the superior.

PROVISION AS TO ORDERS, RULES ETC. MADE UNDER ENACTMENTS [SECTION 20 TO SEC-

TION 24]

Notification, Order, rule, by-law shall be considered as a part of the Act.

“Construction of orders, etc., issued under enactments” [Section 20]:
Where by any legislation or regulation, a power to issue any notification, order, scheme, rule,
form, or by-law is conferred, then expression used in the notification, order, scheme, rule,
form or bye-law, shall, unless there is anything repugnant in the subject or context, have the
same respective meaning as in the Act or regulation conferring power.

“Power to issue, to include power to add to, amend, vary or rescind notifications, orders,
rules or bye-laws” [Section 21]:
Where by any legislations or regulations a power to issue notifications, orders, rules or bye-
laws is conferred, then that power, exercisable in the like manner and subject to the like
sanction and conditions (if any), to add, to amend, vary or rescind any notifications, orders,
rules or bye laws so issued.

Authority who has power to issue notification, order, rule, by laws shall have to Power to
Amend, vary OR Recind the same

THE GENERAL CLAUSES ACT, 1897 14.9

“Making of rules or bye-laws and issuing of orders between passing and commencement of
enactment” [Section 22]:
Where, by any Central Act or Regulation which is not to come into force immediately, on the
passing thereof, a power is conferred to make rules or bye-laws, or to issue orders with re-
spect to the application of the Act or Regulation or with respect to the establishment of any
Court or the appointment of any Judge or officer thereunder, or with respect to the person by
whom, or the time when, or the place where, or the manner in which, or the fees for which,
anything is to be done under the Act or Regulation, then that power may be exercised at any
time after passing of the Act or Regulation; but rules, bye-laws or orders so made or issued
shall not take effect till the commencement of the Act or Regulation.
“Provisions applicable to making of rules or bye-laws after previous publications”
[Section 23]:
Where, by any Central Act or Regulation, a power to make rules or bye-laws is expressed to be
given subject to the condition of the rules or bye-laws being made after previous publication,
then the following provisions shall apply, namely:-
(1) The authority having power to make the rules or bye-laws shall, before making them,
publish a draft of the proposed rules or bye-laws for the information of persons likely to
be affected thereby;
(2) The publication shall be made in such manner as that authority deems to be sufficient,
or, if the condition with respect to previous publication so requires, in such manner as
the Government concerned prescribes;
(3) There shall be published with the draft a notice specifying a date on or after which the
draft will be taken into consideration;
(4) The authority having power to make the rules or bye-laws, and, where the rules or bye-
laws are to be made with the sanction, approval or concurrence of another authority,
that authority also shall consider any objection or suggestion which may be received by
the authority having power to make the rules or bye-laws from any person with respect
to the draft before the date so specified;
(5) The publication in the Official Gazette of a rule or bye-law purporting to have been
made in exercise of a power to make rules or bye-laws after previous publication shall
be conclusive proof that the rule or bye-laws has been duly made.
Section 23(5) raises a conclusive presumption that after the publication of the rules
in the Official Gazette, it is to be inferred that the procedure for making the rules had
been followed. Any irregularities in the publication of the draft cannot therefore be
questioned.
MISCELLANEOUS [SECTION 25 TO SECTION 30]
“Recovery of fines” [Section 25]: Arrears of Land Revenue
Section 63 to 70 of the Indian Penal Code and the provisions of the Code of Criminal Procedure
for the time being in force in relation to the issue and the execution of warrants for the levy
of fines shall apply to all fines imposed under any Act, Regulation, rule or bye-laws, unless the
Act, Regulation, rule or bye-law contains an express provision to the contrary.

“Provision as to offence punishable under two or more enactments” [Section 26]: Where
an act or omission constitutes an offence under two or more enactments, then the offender
shall be liable to be prosecuted and punished under either or any of those enactments, but
shall not be punished twice for the same offence.

14.10 THE GENERAL CLAUSES ACT, 1897

Article 20(2) of the Constitution states that no person shall be prosecuted and punished for
the same offence more than once.

According to the Supreme Court, a plain reading of section 26 shows that there is no bar to
the trial or conviction of an offender under two enactments, but there is only a bar to the
punishment of the offender twice for the same offence. In other words, the section provides
that where an act or omission constitutes an offence under two enactments, the offender may
be prosecuted and punished under either or both the enactments but shall not be liable to be
punished twice for the same offence.

In State of M.P. v. V.R. Agnihotri, AIR 1957 SC 592 it was held that when there are two alterna-
tive charges in the same trial, e.g., section 409 of the Indian Penal Code and section 5(2) of
the Prevention of Corruption Act, the fact that the accused is acquitted of one of the charges
will not bar his conviction on the other.

Provisions of Section 26 and Article 20(2) of the Constitution apply only when the two of-
fences which form the subject of prosecution is the same, i.e., the ingredients which consti-
tute the two offences are the same. If the offences under the two enactments are distinct and
not identical, none of these provisions will apply.

“Meaning of Service by post” [Section 27]:

(Q.4-Page No:14.2) (Q.6-Page No:14.3)
Where any legislation or regulation requires any document to be served by post, then unless
a different intention appears, the service shall be deemed to be effected by:
(i) Properly addressing
(ii) Pre-paying, and
(iii) Posting by registered post.

A letter containing the document to have been effected at the time at which the letter would
be delivered in the ordinary course of post.

“Citation of enactments” [Section 3(28)]:

(1) In any Central Act or Regulation, and in any rule, bye law, instrument or document, made
under, or with reference to any such Act or Regulation, any enactment may be cited by refer-
ence to the title or short title (if any) conferred thereon or by reference to the number and
years thereof, and any provision in an enactment may be cited by reference to the section or
sub-section of the enactment in which the provision is contained.

(2) In this Act and in any Central Act or Regulation made after the commencement of this Act,
a description or citation of a portion of another enactment shall, unless a different intention
appears, be construed as including the word, section or other part mentioned or referred to
as forming the beginning and as forming the end of the portion comprised in the description
or citation.

THE GENERAL CLAUSES ACT, 1897 14.11

15 INTERPRETATION
OF STATUTES

15.1 INTERPRETATION OF STATUTES

 Interpretation of statutes

1. Rule of literal interpretation:

1. Literal means “as it is”
2. Meaning of the word is clear.
3. There is NO ambiguity.
4. Multiple meaning cannot be derived.
5. Such sections / provisions shall be interpreted literally
Example: Penalty for dishonour of a cheque in NI Act: Imprisonment < 2 years OR penalty twice the amount of cheque OR Both

2. Things to be considered:

INTERPRETATION OF STATUTES
Ordinary/Natural meaning:

Example: - Term ‘cheque’ shall include a bearer as well as crossed cheque.

-‘Word' contract shall mean return as well as oral contract

15.2
3. Technical meaning:
Example: Finder of goods has right to sell goods however technically if he incurs > 2/3rd value of goods as expenditure.

4. Grammatical meaning:
Example: As per general clause ‘HE' includes ‘SHE'

5. Trade Meaning:
Party Ordinary - celebration
Business – client

‘SALE’ Ordinary – Selling goods

Business – Discount
 II. Rule of reasonable Interpretation
(Q.2-Page No:15.1)
1. Where meaning of the word is not clear.
2. There is ambiguity.
3. Multiple meanings can be derived..
4. Such provisions shall be interpreted “liberally” i.e. “as it should be.”

This rule gives consideration to the Intention of the Law maker (purpose of law)

Eg:
1. As per NI Act, the stamp on the negotiable instrument should be cancelled by the signature, but the intention of the law
maker is to make the drawer sign across the stamp.
2. As per NI Act, “Notice of dishonour” shall be served within reasonable period of time… Intention is to allow time on factual
basis.
3. As per IT Act, definition of the term “spouse” shall reasonable mean only “one spouse”
4. Inadequate consideration shall be interpreted reasonably.

15.3
III. Haydon’s Rule/Beneficial Construction/ Mischief Rule
(Q.1-Page No:15.1)
1. There is an existing law.
2. Existing law consists loopholes.
3. The user of the law (assessee) misuses the loophole.
4. Government discovers the misuse.
5. As a result the government alters the law.

Objective of this rule is to enhance the remedy and suppress the mischief.

Eg:
1. Amendment in Income Tax Act (Section 54 & 54F)
2. Capital Gains.

INTERPRETATION OF STATUTES
3. Essential Services during lockdown.
4. Demonetization – RBI Circulars.
 IV. Rule of Harmonious Construction

When on a given subject two or more laws are applicable then the ideal way to interpret the subject is to:
1. Co. apply both the laws i.e. Harmonize.
2. In the event of conflict, following shall be done
A. The specific law will prevail over the general law.
B. Amended law shall prevail over the old law.

Eg: HDFC Bank Ltd. is a Bank & therefore baking regulation Act, 1949 shall be applicable. But since it is also a company,
companies Act shall also apply to it. However, in the event of conflict. Banking regulation Act shall prevail over the Co. Act.

INTERPRETATION OF STATUTES
V. Rule of Exceptional Construction

1. Common Sense Rule: Full Effect must be given to every word contained in a statue. But words may be eliminated if no sensible
meaning can be drawn.

15.4
2. “AND” = Conjunction eg: Non-compounding offence “Imprisonment AND Fine”

3. “OR” = Voluntary Choice. eg: Compounding offence “Imprisonment AND Fine”

4. “MAY” = Voluntary/ Discretionary eg: A Bills of exchange MAY be made payable to a bearer or order

5. “SHALL” = Mandatory/ Compulsory eg: A Promisory Note SHALL be made payable only to an order .

6. “MAY to be treated as SHALL”eg: Section 3 of Companies Act, 2013, A Company may be incorporated for lawful objects. Here
the word “May” is to be treated as “SHALL”

7. “A”- General Reference – eg: “A High court”“THE”- Specific Reference – eg: The Supreme Court
 (vi) Rule of Ejusdem Generis:
The term ‘ejusdem generis’ means ‘of the same kind or species’. Simply stated, the rule is as follows:
Where specific words pertaining to a class or category or genus are followed by general words, the general
words shall be construed as limited to the things of the same kind as those specified.
This rule applies when
1. The statute contains an enumeration of specific words
2. The subject of enumeration constitutes a class or category;
3. That class or category is not exhausted by the enumeration
4. General terms follow the enumeration; and
5. There is no indication of a different legislative intent.

15.5
The rule of ejusdem generis is not an absolute rule of law but only a part of a wider principle of construction
and therefore this rule has no application where the intention of the legislature is clear.

INTERPRETATION OF STATUTES
UNIT OVERVIEW
Introduction of relevant
terms

Importance of
interpretation of statutes
Primary Rules

Rules of Interpretation
Interpretation of Secondary Rules
statutes, deeds
and documents

Internal aids

Aids to interpretation

External aids

Rules of interpretation of
deeds and documents

INTRODUCTION
As a Chartered Accountant in practice or in service, you will be required to read various laws
and statutes. Often these enactments may be capable of more than one interpretation. It
is in this context that awareness of interpretation as a skill becomes relevant. This chapter
will enable you to understand certain rules of interpretation as well as the various internal
and external aids to interpretation. We shall also discuss the art of interpreting deeds and
documents.

‘Statute’: To the common man the term ‘Statute’ generally means laws and regulations of
various kinds irrespective of the source from which they emanate.

In short ‘statute’ signifies written law as against unwritten law.

‘Interpretation’: By interpretation is meant the process by which the Courts seek to ascertain
the meaning of the legislature through the medium of the words in which it is expressed. Simply
stated, ‘interpretation’ is the process by which the real meaning of an Act (or a document)
and the intention of the legislature in enacting it (or of the parties executing the document)
is ascertained.

Importance of Interpretation: Interpretation, thus, process of considerable significance. In

relation to statute law, interpretation is of importance because of the inherent nature of
legislation as a source of law. The process of statute making and the process of interpretation
of statutes take place separately from each other, and two different agencies are concerned.
Interpretation serves as the bridge of understanding between the two.

INTERPRETATION OF STATUTES 15.6

RULES OF INTERPRETATION/ CONSTRUCTION
Over a period, certain rules of interpretation/construction have come to be well recognized.
However, these rules are considered as guides only and are not inflexible. These rules can be
broadly classified as follows:

• Rule of Literal Construction

• Rule of Reasonable Construction
• Rule of Harmonious Construction
Primary Rules • The Rule in Heydon’s Case or Mischief Rule
• Rule of Beneficial Construction
• Rule of Exceptional Construction
• Rule of Ejusdem Generis

Secondary • Doctrine of Noscitur a Sociis

Rules • Doctrine of Contemporanea Expositio

(A) PRIMARY RULES

(Q.7-Page No:15.4)
(1) Rule of Literal Construction:
The first and primary rule of construction is that the intention of the legislature must be
found in the words used by the legislature itself. Thus, if the words of a statute are capable
of one construction only, then it would not be open to the courts to adopt any hypothetical
construction on the ground that such hypothetical construction is more consistent with the
alleged object and policy of the Act.

It is a cardinal rule of construction that a statute must be construed literally and grammatically
giving the words their ordinary and natural meaning. Therefore, the language used in the
statute must be construed in its grammatical sense. The correct course is to take the words
themselves and arrive if possible, at their meaning without reference to cases, in the first
instance.

If the phraseology of a statute is clear and unambiguous and capable of one and only one
interpretation, then it would not be correct to extrapolate these words out of their natural
and ordinary sense. When the language of a statute is plain and unambiguous it is not open to
the courts to adopt any other hypothetical construction simply with a view to carrying out the
supposed intention of the legislature.
Thus, it is the primary duty of the court to interpret the words used in legislation according
to their ordinary grammatical meaning in the absence of any ambiguity or doubt.

15.7 INTERPRETATION OF STATUTES

Normally, where the words of a statute are in themselves clear and unambiguous, then these
words should be construed in their natural and ordinary sense and it is not open to the court
to adopt any other hypothetical construction. This is called the rule of literal construction.

Sometimes, occasions may arise when a choice has to be made between two interpretations –
one narrower and the other wider or bolder. In such a situation, if the narrower interpretation
would fail to achieve the manifest purpose of the legislation, one should rather adopt the
wider one.

This Rule of literal interpretation can be read and understood under the following headings:
Natural and grammatical meaning: Statutes are to be first understood in their natural, ordinary,
or popular sense and must be construed according to their plain, literal and grammatical
meaning. If there is an inconsistency with any express intention or declared purpose of the
statute, or it involves any absurdity, repugnancy, inconsistency, the grammatical sense must
then be modified, extended or abridged only to avoid such an inconvenience, but no further.
[(State of HP v. Pawan Kumar (2005)]

Technical words are to be understood in technical sense: This point of literal construction
is that technical words are understood in the technical sense only.

(2) Rule of Reasonable Construction:

Generally the words or phrases of a statute are to be given their ordinary meaning. It is only
when the words of an enactment are capable of two constructions that there is scope for
interpretation or construction. Then, that interpretation, which furthers the object, can be
preferred to that which is likely to defeat or impair the policy or object.

Similarly, when the grammatical interpretation leads to a manifest absurdity then the courts
shall interpret the statute so as to resolve the inconsistency and make the enactment a
consistent whole. This principle is based on the rule that the words of a statute must be
construed reasonably so as to give effect to the enactment rather than reduce it to a futility.
This principle is contained in the

Thus, when grammatical interpretation leads to certain absurdity, it is permissible to depart

there from and to interpret the provision of the statutes in a manner so as to avoid that
absurdity. This departure from the grammatical construction is permissible only to the extent
it avoids such absurdity and no further. This is also called the Golden Rule of Interpretation.
Thus, if the Court finds that giving a plain meaning to the words will not be a fair or reasonable
construction, it becomes the duty of the court to depart from the dictionary meaning and
adopt the construction which will advance the remedy and suppress the mischief provided
the Court does not have to resort to conjecture or surmise. A reasonable construction will be
adopted in accordance with the policy and object of the statute.

(3) Rule of Harmonious Construction:

It is a recognized rule of interpretation of statutes and deeds that the expressions used therein
should ordinarily be understood in a sense in which they best harmonize with the object of

INTERPRETATION OF STATUTES 15.8

the statute. The opposite of “harmony” is conflict. Thus, this rule is applied when there is a
conflict between two provisions of a statute. Similarly, this Rule comes to our aid when there
is conflict between the provisions of a statute and the object, which the legislature had in
view.

Thus, where an expression is susceptible of a narrow or technical meaning, as well as a popular

meaning, the court would be justified in assuming that the legislature used the expression in
the sense, which would carry out its objects and reject that which renders it invalid. (New
India Sugar Mills Ltd., Vs. Commissioner, Sales Tax)

It is a basic rule of interpretation that if it is possible to avoid a conflict between two provisions
on a proper construction thereof, then it is the duty of the court to so construe them that they
are in harmony with each other. The statute must be read as a whole and every provision in
the statute must be construed with reference to the context and other clauses in the statute
so as to make the statute a consistent enactment and not reduce it to a futility. But where
it is not possible to give effect to both the provisions harmoniously, collision may be avoided
by holding that one section which is in conflict with another merely provides for an exception
or a specific rule different from the general rule contained in the other. A specific rule
will override a general rule. This principle is usually expressed by the maxim, “generalia
specialibus non derogant”.

(4) The Rule in Heydon’s Case or Mischief Rule:

Where the language used in a statute is capable of more than one interpretation, the most
firmly established rule for construction is the principle laid down in Heydon’s case.
The intention of this rule is always to make such construction as shall suppress the mischief
and advance the remedy according to the true intention of the legislation.

In Heydon’s case (1584 3 Co Rep 79 P. 637), it was laid down by the Barons of the Exchequer
that “for the true and sure interpretation of all statutes in general, four things are to be
discerned and considered.

1. What was the law before the making of the act?

2. What was the defect, mischief, hardship caused by the earlier law?
3. How does the act of Parliament seek to resolve or cure the mischief or deficiency?
4. What are the true reasons for the remedy?

And then the courts shall make such construction as will suppress the mischief and advance the
remedy and suppress the subtle inventions and evasions for the continuance of the mischief.”

Thus, applying Heydon’s case courts will be bound to look at the state of the law at the time
of the passing of the enactment and not only as it then stood, but under previous statutes too.

15.9 INTERPRETATION OF STATUTES

(5) Rule of Beneficial Construction:
This is strictly speaking not a rule but a method of interpreting a provision liberally so as to
give effect to the declared intention of the legislation. Beneficial construction will be given
to a statute, which brings into effect provisions for improving the conditions of certain classes
of people who are under privileged or who have not been treated fairly in the past. In such
cases it is permissible to give an extended meaning to words or clauses in enactments. But this
can only be done when two constructions are reasonably possible and not when the words in
a statute are quite unequivocal.

(6) Rule of Exceptional Construction:

We have already seen that the words of a statute must be construed so as to give a sensible
meaning to them if possible. They ought to be construed ut res magis valeat quam pereat.
In fact, Maxwell goes to the extent of stating, “notwithstanding the general rule that full
effect must be given to every word, yet if no sensible meaning can be given to a word or
phrase, or if it would defeat the real object of the enactment, it may, or rather it should, be
eliminated.”

“And” and “Or”

“And” is a particle joining words and sentences and expressing the relation of connection or
addition. The word “and” is normally conjunctive. In its conjunctive sense the word is used
to conjoin words, clauses or sentences, signifying that something is to follow in addition to
that, which precedes.

The word “or” is a disjunctive particle that marks an alternative, generally corresponding to
“either”, as “either this or that”.

Can “and” be read as “or” and vice versa?

Not only in statutes but also in documents the two words “and” and “or” are sometimes used
synonymously and in the same sense. That would depend on the context and meaning of other
provisions in the same statute or document. Similarly where statements or stipulations are
coupled by “and/or” they are to read either disjunctively or conjunctively.

“May”, “Must” and “Shall”

(Q.6-Page No:15.3)
Let us first appreciate the distinction between mandatory and directory provisions. Where
the enactment or provision prescribes that the contemplated action be taken without any
option or discretion, then such statute or provision or enactment will be called mandatory.
Where, the acting authority is vested with discretion, choice or judgment, the statute or
provision will be called directory. In deciding whether the statute is directory or mandatory,
the question is whether there is anything that makes it the duty of the person on whom the
power is conferred to exercise that power. If it is so then the Statute is a mandatory one;
otherwise it is directory.
The words ‘may’, ‘shall’, and ‘must’ should initially be deemed to have been used in their
natural and ordinary sense.
“Shall” though mandatory is to be read as may.

INTERPRETATION OF STATUTES 15.10

(B) OTHER (SECONDARY) RULES OF INTERPRETATION.
(1) Doctrine of Noscitur a Sociis
Noscitur a Sociis means that when two or more words that are susceptible of analogous
meaning, are coupled together they are understood to be used in their cognate sense.
They take, as it were, their colour from each other, that is the meaning of the more
general word being restricted to a sense analogous to that of the less general.

(2) Doctrine of Contemporanea Expositio

This doctrine is based on the concept that a statute or a document is to be interpreted
by referring to the exposition it has received from contemporary authority. The maxim
“Contemporanea Expositio est optima et fortissima in lege” means “contemporaneous
exposition is the best and strongest in the law.” This means a law should be understood
in the sense in which it was understood at the time when it was passed.

But remember that this maxim is to be applied for construing ancient statutes, but not
to acts that are comparatively modern.

INTERNAL AIDS TO INTERPRETATION/ CONSTRUCTION

The various parts of an enactment enumerated below may be referred to while interpreting
or construing an enactment. They are referred to as internal aids to interpretation and can
be of immense help in interpreting/construing the enactment or any of its parts.
(a) Long Title:
An enactment would have what is known as a ‘Short Title’ and also a ‘Long Title’. The
‘Short Title’ merely identifies the enactment and is chosen merely for convenience, the
‘Long Title’ on the other hand, describes the enactment and does not merely identify it.

It is now settled that the Long Title of an Act is a part of the Act. We can, therefore,
refer to it to ascertain the object, scope and purpose of the Act and so is admissible as
an aid to its construction.

(b) Preamble:
(Q.8-Page No:15.4) (Q.10-Page No:15.5)
The Preamble expresses the scope, object and purpose of the Act more comprehensively
than the Long Title. The Preamble may recite the ground and the cause of making a
statute and the evil which is sought to be remedied by it.

(c) Heading and Title of a Chapter:

If we glance through any Act, we would generally find that a number of its sections
referring to a particular subject are grouped together, sometimes in the form of chapters,
prefixed by headings and/or Titles. These Heading and Titles prefixed to sections or
groups of sections can legitimately be referred to for the purpose of construing the
enactment or its parts.

(d) Marginal Notes:

Marginal notes are summaries and side notes often found at the side of a section or group
of sections in an act, purporting to sum up the effect of that section or sections.

15.11 INTERPRETATION OF STATUTES

(e) Definitional Sections/Interpretation Clauses:
The legislature has the power to embody in a statute itself the definitions of its language
and it is quite common to find in the statutes ‘definitions’ of certain words and expressions
used in the body of the statute.

Construction of definitions may understood under the following headings:

(Q.5-Page No:15.3)
(i) Restrictive and extensive definitions: The definition of a word or expression in the
definition section may either be restricting of its ordinary meaning or may be extensive
of the same.
When a word is defined to ‘mean’ such and such, the definition is ‘prima facie’ restrictive
and exhaustive we must restrict the meaning of the word to that given in the definition
section.
But where the word is defined to ‘include’ such and such, the definition is ‘prima facie’
extensive: here the word defined is not restricted to the meaning assigned to it but
has extensive meaning which also includes the meaning assigned to it in the definition
section.
We may also find a word being defined as ‘means and includes’ such and such. In this
case, the definition would be exhaustive.
On the other hand, if the word is defined ‘to apply to and include’, the definition is
understood as extensive.
(ii) Definitions subject to a contrary context: When a word is defined to bear a number of
inclusive meanings, the sense in which the word is used in a particular provision must be
ascertained from the context of the scheme of the Act, the language of the provision and
the object intended to be served thereby.

(f) Illustrations: We would find that many, though not all, sections have illustrations
appended to them. These illustrations follow the text of the Sections and, therefore,
do not form a part of the Sections. However, illustrations do form a part of the statute
and are considered to be of relevance and value in construing the text of the sections.
However, illustrations cannot have the effect of modifying the language of the section
and can neither curtail nor expand the ambit of the section.

(g) Proviso:
The normal function of a proviso is to except something out of the enactment or to
qualify something stated in the enactment which would be within its purview if the
proviso were not there. Usually, a proviso is embedded in the main body of the section
and becomes an integral part of it. Provisos that are so included begin with the words,
“provided that”
Distinction between Proviso, exception and saving Clause
‘Exception’ is intended ‘Proviso’ is used to remove ‘Saving clause’ is used to
to restrain the enacting special cases from general preserve from destruction
clause to particular cases enactment and provide for certain rights, remedies or
them specially privileges already existing

INTERPRETATION OF STATUTES 15.12

(h) Explanation:
(Q.3-Page No:15.2)
An Explanation is at times appended to a section to explain the meaning of certain
words or phrases used in the section or of the purport of the section. An Explanation may
be added to include something within the section or to exclude something from it. An
Explanation should normally be so read as to harmonise with and clear up any ambiguity
in the main section. It should not be so construed as to widen the ambit of the section.

(i) Schedules:
The Schedules form part of an Act. Therefore, they must be read together with the
Act for all purposes of construction. However, the expressions in the Schedule cannot
control or prevail over the expression in the enactment. If there appears to be any
inconsistency between the schedule and the enactment, the enactment shall always
prevail. They often contain details and forms for working out the policy underlying the
sections of the statute for example schedules appended to the Companies Act, 2013, to
the Constitution of India.

(j) ‘Read the Statute as a Whole’:

It is the elementary principle that construction of a statute is to be made of all its parts
taken together and not of one part only. The deed must be read as a whole in order to
ascertain the true meaning of its several clauses, and the words of each clause should be
so interpreted as to bring them into harmony with other provisions – if that interpretation
does no violence to the meaning of which they are naturally susceptible. And the same
approach would apply with equal force with regard to Acts and Rules passed by the
legislature.
EXTERNAL AIDS TO INTERPRETATION/ CONSTRUCTION
Society does not function in a void. Everything done has its reasons, its background, the par-
ticular circumstances prevailing at the time, and so on. These factors apply to enactments as
well. These factors are of great help in interpreting/construing an Act and have been given
the convenient nomenclature of ‘External Aids to Interpretation’. Apart from the statute it-
self there are many matters which may be taken into account when the statute is ambiguous.
These matters are called external aids. Some of these factors are enumerated below:
External Aids
Earlier
Consolidating & Later Use of
Historical Dictionary
Statutes & Usage Acts and Foreign
Setting Definitions
Previous Law Analogous Decisions
Acts
(a) Historical Setting: The history of the external circumstances which led to the enactment
in question is of much significance in construing any enactment. We have, for this
purpose, to take help from all those external or historical facts which are necessary in the
understanding and comprehension of the subject matter and the scope and object of the
enactment. History in general and Parliamentary History in particular, ancient statutes,
contemporary or other authentic works and writings all are relevant in interpreting
and construing an Act. We have also to consider whether the statute in question was
intended to alter the law or leave it where it stood before.

15.13 INTERPRETATION OF STATUTES

(b) Consolidating Statutes & Previous Law: The Preambles to many statutes contain
expressions such as “An Act to consolidate” the previous law, etc. In such a case, the
Courts may stick to the presumption that it is not intended to alter the law. They may
solve doubtful points in the statute with the aid of such presumption in intention,
rejecting the literal construction.

(c) Usage: Usage is also sometimes taken into consideration in construing an Act. The acts
done under a statute provide quite often the key to the statute itself. It is well known
that where the meaning of the language in a statute is doubtful, usage – how that
language has been interpreted and acted upon over a long period – may determine its true
meaning. It has been emphasized that when a legislative measure of doubtful meaning
has, for several years, received an interpretation which has generally been acted upon
by the public, the Courts should be very unwilling to change that interpretation, unless
they see cogent reasons for doing so.
(d) Earlier & Later Acts and Analogous Acts: Exposition of One Act by Language of Another:
The general principle is that where there are different statutes in ‘pari materia’ (i.e. in
an analogous case), though made at different times, or even expired and not referring to
each other, they shall be taken and construed together as one system and as explanatory
of each other.

If two Acts are to be read together then every part of each Act has to be construed as
if contained in one composite Act. But if there is some clear discrepancy then such a
discrepancy may render it necessary to hold the later Act (in point of time) had modified
the earlier one. However, this does not mean that every word in the later Act is to be
interpreted in the same way as in the earlier Act.

(e) Dictionary Definitions:

(Q.9-Page No:15.5)
First we have to refer to the Act in question to find out if any particular word or expression
is defined in it. Where we find that a word is not defined in the Act itself, we may refer
to dictionaries to find out the general sense in which that word is commonly understood.
However, in selecting one out of the several meanings of a word, we must always take
into consideration the context in which it is used in the Act. It is the fundamental rule
that the meanings of words and expressions used in an Act must take their colour from
the context in which they appear. Further, judicial decisions laying down the meaning of
words in construing statutes in ‘pari materia’ will have greater weight than the meaning
furnished by dictionaries. However, for technical terms reference may be made to
technical dictionaries.

(f) Use of Foreign Decisions: Foreign decisions of countries following the same system
of jurisprudence as ours and given on laws similar to ours can be legitimately used
for construing our own Acts. However, prime importance is always to be given to the
language of the Indian statute. Further, where guidance can be obtained from Indian
decisions, reference to foreign decisions may become unnecessary.

INTERPRETATION OF STATUTES 15.14

RULES OF INTERPRETATION/ CONSTRUCTION OF DEEDS AND DOCUMENTS
The first and foremost point that has to be borne in mind is that one has to find out what a
reasonable man, who has taken care to inform himself of the surrounding circumstances of a
deed or a document, and of its scope and intendments, would understand by the words used
in that deed or document. The principle of construction in case of a document and a deed,
as of statute, does not differ so much except in some minor details. A deed must be read as
a whole in order to ascertain the true meaning of its several clauses and the words of each
clause should be so interpreted as to bring them in harmony with other provisions if that in-
terpretation does no violence to the meaning of which they are naturally susceptible.

The golden rule of construction is to ascertain the intention of the parties to the instru-
ment after considering all the words in their ordinary, natural sense. To ascertain this in-
tention the Court has to consider the relevant portion of the document as a whole and also to
take into account the circumstances under which the particular words were used. Very often
the status and the training of the parties using the words have to be taken into consideration.
It has to be borne in mind that very many words are used in more than one sense and that
sense differs in different circumstances.

It is an elementary rule of construction that the same word cannot have two different mean-
ings in the same document, unless the context compels the adoption of such a course. The
document must be read as a whole and the intention deduced therefrom as to what the actual
term the parties intended to agree.

It may also happen that there is a conflict between two or more clauses of the same docu-
ment. An effort must be made to resolve the conflict by interpreting the clauses so that all the
clauses are given effect to. If, however, it is not possible to give effect to all of them, then it
is the earlier clause that will over-ride the latter one.

Similarly, if one part of the document is in conflict with another part, an attempt should al-
ways be made to read the two parts of the document harmoniously, if possible. If that is not
possible, then the earlier part will prevail over the latter one which should, therefore, be
disregarded.

15.15 INTERPRETATION OF STATUTES