CA WALLAH KUNAL MANDHANIA

Chapter I
PRELIMINARY

Q Section Topic
1 2(85) Small company
2 2(85) Small company
3 2(87) Holding and Subsidiary Company
4 8 Sec 8 Company
5 8 Sec 8 Company
6 8 Sec 8 Company
7 8 Sec 8 Company
8 2(57) Net Worth
9 2(43) Free Reserves
10 2(62) Opc
11 2(68) Private Company
12 2(85) Small company
13 2(71),1 Public co
14 2(85) Small company
15 8 Sec 8 Co
16 8 Sec 8 Co
17 8 Sec 8 Co
18 2(92) Unlimited Company
19 2(45) Government Company
20 455 Inactive Company
21 2(60) Officer in default
22 2(52) Listed company

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Q1.Define the term ‘Small Company’ as contained in the Companies Act, 2013.(MAY
2015)

Small Company
(i) According to sec 2 (85) A company shall be a small company only if it satisfies both
the following conditions:
(i) Its paid-up share capital does not exceed Rs. 4 crore or such higher amount as
may be prescribed which shall not be more than ten crore rupees; and
(ii) Its turnover (as per profit and loss account for the immediately preceding FY) does
not exceed Rs. 40 crore or such higher amount as may be prescribed which shall
not be more than one hundred crore rupees
(ii) A company shall not be a small company, if:
a. is a public company; or
b. It is a holding or a subsidiary company; or
c. It is a company registered u/s 8 ; or
d. It is a company or body corporate governed by any special Act.

PRACTICAL QUESTION
Question 2 1 MNP Private Ltd. is a company registered under the Companies Act, 2013
with a, Paid up Share Capital of 2cr and turnover of 60cr crores. Explain the
meaning of the "Small Company" and examine the following in accordance
with the provisions of the Companies Act, 2013:
(i) Whether the MNP Private Ltd. can avail the status of small company?
(ii) What will be your answer if the turnover of the company is 30 crore?(MTP
NOV 2020)(module)
Law: According to sec 2 (85) A company shall be a small company only if it satisfies both
the following conditions:
(i) Its paid-up share capital does not exceed Rs. 4 crore or such higher amount
as may be prescribed which shall not be more than ten crore rupees; and
(ii) Its turnover (as per profit and loss account for the immediately preceding FY)
does not exceed Rs. 40 crore or such higher amount as may be prescribed
which shall not be more than one hundred crore rupees

Conclusion: In present case

(i) MNP pvt ltd cannot avail status of small company as its turnover is 60 cr which
exceeds 40 cr
(ii) If turnover of company is 30 cr , MNP can avail status of small company as both
conditions specified in sec 2(85) has been complied

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PRACTICAL QUESTION
Question 3 The paid-up share capital of Saras Private Limited is ` 1 crore, consisting of 8 lacs
Equity Shares of ` 10 each, fully paid-up and 2 lacs Cumulative Preference Shares
of `10 each, fully paid-up. Jeevan (JVN) Private Limited and Sudhir Private
Limited are holding 3 lacs Equity Shares and 50,000 Equity Shares respectively
in Saras Private Limited. Jeevan Private Limited and Sudhir Private Limited are
the subsidiaries of Piyush Private Limited. With reference to the provisions of the
Companies Act, 2013 examine whether Saras Private Limited is a subsidiary of
Piyush Private Limited? Would your answer be different if Piyush Private
Limited has 8 out of 9 Directors on the Board of Saras Private Limited? (RTP
MAY 2018) (RTP MAY 2019)
Law: (i) According to sec 2(46) Holding company, in relation to one or more other
companies, means a company of which such companies are subsidiary companies.
(ii) Section 2(87) provides that a company shall be deemed to 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 at its own or together with one or more of its subsidiary companies; or through
its Subsidiaries
Conclusion: In present case –
(i) Saras Private Limited is a not subsidiary of Piyush Private Limited because
subsidiaries of piyush pvt ltd , Jeevan Private Limited and Sudhir Private
Limited only holds 3.5 lacs equity shares whereas in pursuant to sec 2(87) they
should hold more than more than half of 8 lac equity shares i.e more than 4 lac
shares .
(ii) Yes our answer be different if Piyush Private Limited has 8 out of 9 Directors
on the Board of Saras Private Limited as now it controls composition of board
of directors of saras pvt ltd.

4.Explain the provisions of the Companies Act, 2013- who can get a licence to operate as
a section 8 company (non-profit organization)?(5 Marks) (MTP Nov 24)

As per section 8 of the Companies Act, 2013, the Central Government (ROC in its behalf) may
grant a licence (to operate as a non profit organisation) if it is proved to the satisfaction
that a person or an association of persons proposed to be registered under the Companies
Act, 2013, as a limited company
(i) has in its objects the promotion of commerce, art, science, sports, education, research,
social welfare, religion, charity, protection of environment or any such other object;
(ii) intends to apply its profits (if any) or other income in promoting its objects; and
(iii) intends to prohibit payment of any dividend to its members.

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PRACTICAL QUESTION
Question 5 A group of enthusiastic women is planning to establish the Nursing Medicare
Association, a limited liability company with the objective of providing
comprehensive theory and practical training to aspiring nurses. The association
aims to operate under the provisions of section 8 of the Companies Act, 2013, with
a core objective of education. The intended duration for the association's
operation is set at ten years, after which a dissolution will be initiated. In the event
of dissolution, any remaining assets exceeding liabilities will be allocated among
the members according to the standard procedures permitted by the Companies
Act. Assess the viability of the proposal and offer guidance to the promoters,
taking into account the regulations outlined in the Companies Act, 2013. 5 M (Nov
23)
Law: (i) A company may be formed u/s 8 if
(a) the objects of the company are to promote commerce, art, science, sports,
education, research, social welfare, religion, charity, protection of
environment or such other object;
(b) the company intends to apply its profits in promoting its objects; and
(c) the company intends to prohibit the payment of dividend to its members.

(ii) The CG (R.D) may revoke the licence issued to the company if the company:
(a) contravenes any of the provisions of Sec. 8; or
(b) contravenes any condition subject to which the licence was issued; or
(c) the affairs of the company are carried on fraudulently or not as within the
object of the company.
Conclusion: In present case , our guidance to promoters will be that proposal to allocate surplus to members
is not viable as sec 8 company cannot distribute surplus or profits to members . If they do so ,
this is contravention of sec 8 and their license will be revoked by central government ( Regional
director )

PRACTICAL QUESTION
Question 6 Alpha Ltd., a Section 8 company is planning to declare dividend in the Annual
General Meeting for the Financial Year ended 31-03-2020. Mr. Chopra is holding
800 equity shares as on date. State whether the act of the company is according to
the provisions of the Companies Act, 2013. [May 2018 2M]
Law: A company may be formed u/s 8 if
(a) the objects of the company are to promote commerce, art, science, sports,
education, research, social welfare, religion, charity, protection of
environment or such other object;
(b) the company intends to apply its profits in promoting its objects; and
(c) the company intends to prohibit the payment of dividend to its members.

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Conclusion: In present case , Act of Alpha Ltd , a section 8 company is not in compliance of sec 8 of
companies act as sec 8 company cannot distribute dividend to its members.

PRACTICAL QUESTION
Question 7 Trinity school started imparting education on 1st April, 2010, with the sole
objective of providing education to children of weaker society either free of cost
or at a very nominal fee depending upon the financial condition of their parents.
However, on 30th March 2024, it came to the knowledge of the Central
Government that the said school was operating by violating the objects of its
objective clause due to which it was granted the status of a section 8 company
under the Companies Act, 2013. Describe what powers can be exercised by the
Central Government against the Trinity school, in such a case?(5 Marks) (MTP
Dec 24)
Law: (i) A company may be formed u/s 8 if
(a) the objects of the company are to promote commerce, art, science, sports,
education, research, social welfare, religion, charity, protection of
environment or such other object;
(b) the company intends to apply its profits in promoting its objects; and
(c) the company intends to prohibit the payment of dividend to its members.

(ii) The CG (R.D) may revoke the licence issued to the company if the company:
(a) contravenes any of the provisions of Sec. 8; or
(b) contravenes any condition subject to which the licence was issued; or
(c) the affairs of the company are carried on fraudulently or not as within the
object of the company.

(iii) Where a licence is revoked and the Central Government is satisfied, that it is essential
in the public interest; then after giving a reasonable opportunity of being heard; by
order it may direct that
(a) wound up; or
(b) amalgamated with any other company registered u/s 8 and having similar
objects

Conclusion: In present case , C.G can ask trinity school to wind up or amalgamate with other company
having similar object

PRACTICAL QUESTION
Question 8 The statutory auditors of a company were required to issue a certificate on the net
worth of the company as per the requirement of the management as on 30th
September 2024 computed as per the provision of section 2(57) of the Companies
Act, 2013.The company had fair valued its property, plant and equipment in the

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current year which was mistakenly taken into retained earnings of the company
in its books of accounts. Advise whether this fair valuation would be covered in
the net worth of the company as per the legal requirements.(module)
Law: According to section 2(57) "Net worth" means the aggregate value of the paid-up share
capital and all reserves created out of the profits, securities premium account and
debit or credit balance of profit and loss account after deducting the aggregate value
of the accumulated losses, deferred expenditure and miscellaneous expenditure not
written off, as per the audited balance sheet, but does not include reserves created out
of revaluation of assets, write-back of depreciation and amalgamation.
Conclusion: In present case , Even if the company has taken the fair valuation to the retained
earnings in its books of accounts, the resultant credit in reserves (by whatever name
called) would be in the category of ‘reserves created out of revaluation of assets’ which
is specifically excluded in the definition of ‘net worth’ in section 2 (57) and hence
should be excluded by the company.

9. MNO Limited are finalising its financial statements and found that the value of one of
its properties has increased. The company came across certain other transactions also
and got confused as to what should be included as ‘free reserves’.The company has
approached you to define to them the meaning of the term "free reserves" for dividend
distribution as per the provisions of the Companies Act, 2013.(5 Marks) (MTP Nov 24)
Free Reserves 2(43)
According to section 2(43) of companies act,2013,Free reserves means such reserves which, as
per the latest audited balance sheet of a company, are available for distribution as dividend:
Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognized in equity,
including surplus in profit and loss account on measurement of the asset or the liability at fair
value, shall not be treated as free reserves.

Some Extra Questions for Practice

PRACTICAL QUESTION
Question 10
Prashant incorporated a "One Person Company" making his sister Priya as the
nominee. Priya is an Indian citizen. She was born and brought up in Kanpur.
However, now Priya and her husband are leaving India permanently to stay with their
son who is settled abroad for the last 15 years. Due to this fact, she is withdrawing
her consent of nomination in the said One Person Company. Taking into
considerations the provisions of the Companies Act, 2013 answer the questions
given below.

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(i) If Priya is leaving India permanently, is it mandatory for her to withdraw her
nomination in the said One Person Company?
(ii) In case Priya withdraws her nomination as a nominee to the OPC, whether
Prashant can appoint his minor son Rushang as the nominee of the OPC?
(RTP sep24)
Law: According to Rule 3 of the Companies (Incorporation) Rules, 2014 and Sec 2(62)
(i) only a natural person who is an Indian citizen whether resident in India or
otherwise shall be eligible to incorporate a One Person Company.
(ii) The memorandum of One Person Company shall also indicate the name of the
natural person, other than minor; who is an Indian citizen, whether resident in
India or otherwise (as nominee), along with his prior written consent, who
shall, in the event of the subscriber’s death or his incapacity to contract
become the member of the company.
(iii) Minor cannot be member or nominee in OPC
Conclusion: In present situation
(i) In the given question Priya is an Indian citizen and a resident of India.
Thus, if Priya is able to maintain her Indian citizenship status in India
after moving abroad then she can remain as nominee in OPC of
Prashant irrespective of her residential status.
(ii) A minor cannot be appointed as a nominee/ member of OPC. Hence,
Prashant cannot appoint his son Rushang as a nominee to his OPC.

PRACTICAL QUESTION
Question 11
1. ABC Limited is a registered public company having the following:

i Directors and their Relatives 20

ii Employees 15
iii Ex-Employees (Shares were 20
allotted during
employment)
iv Members holding shares jointly (10 shares x 2 20
joint- holders each)
v Other Members 150

The Board of Directors of ABC Limited proposes to convert the company into a
private limited company. Referring the provisions of the Companies Act, 2013,
advise:
(i) Whether the company can be converted into a private company?
(ii) Whether existing number of members need to be reduced for the proposed
conversion into a private company?(5 Marks) (MTP sep 24)

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Law:
According to section 2(68) of the Companies Act, 2013,
(i) "Private company" means a company having prescribed minimum paid-up share
capital, and which by its articles, limits the number of its members to 200.
(ii) However, where two or more persons hold one or more shares in a company
jointly, they shall, for the purposes of this clause, be treated as a single
member.
(iii) It is further provided that following shall not be included in the number of
members -
(A) persons who are in the employment of the company; and
(B)
persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have
continued to be members after the employment ceased.
Conclusion: According to calculation of Sec 2(68), total Number of members in ABC Limited
are:

(i) Directors and their relatives 20

(ii) Joint shareholders (10x2) 10
(iii) Other Members 150
Total 180

(i) ABC Limited may be converted into a private company only if the total
members of the company are limited to 200. In the instant case, since
existing number of members are 180 which is within the prescribed
maximum limit of 200, so ABC Limited can be converted into a private
company.
(ii) There is no need for reduction in the number of members for the proposed
private company as existing number of members are 180 which does not
exceed maximum limit of 200.

PRACTICAL QUESTION
Question 12 Ram Pvt. Ltd. is the holding company of Laxman Pvt. Ltd. As per the last profit and
loss account for the year ending 31st March, 2023 of Laxman Pvt. Ltd., its turnover
was ` 1.80 crore; and paid up share capital was ` 80 lakh. The Board of Directors
wants to avail the status of a small company. The Company Secretary of the company
advised the directors that the company cannot be categorized as a small company. In
the light of the above facts and in accordance with the provisions of the Companies
Act, 2013, you are required to examine whether the contention of Company Secretary
is correct, explaining the relevant provisions of the Act.(RTP May24)
Law: As per section 2(85) of the Companies Act, 2013, small company means a company, other than
a public company:
(i) paid-up share capital of which does not exceed four crore rupees, and

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(ii) turnover of which as per profit and loss account for the immediately preceding
financial year does not exceed forty crore rupees:
Provided that nothing in this clause shall apply to—
a) a holding company or a subsidiary company;
b) a company registered under section 8; or
c) a company or body corporate governed by any special Act.
Conclusion: In the instant case, as per the last profit and loss account for the year ending 31st March, 2023
of Laxman Pvt. Ltd., its turnover was to the extent of ` 1.80 crore, and paid-up share capital was
` 80 lakh. Though Laxman Pvt. Ltd., as per the turnover and paid-up share capital norms,
qualifies for the status of a ‘small company’ but it cannot be categorized as a ‘small company’
because it is the subsidiary of another company (Ram Pvt. Ltd.).
Hence, the contention of the Company Secretary is correct.

PRACTICAL QUESTION
Question 13 Cross Limited is a company incorporated under the erstwhile the Companies Act, 1956
while XYZ Private Limited is a company registered under the Companies Act, 2013.
XYZ Private Limited has issued ' 1,00,000 convertible preference shares (carrying right
to vote) of Z 100 each and 10,00,000 equity shares of Z 10 each fully paid. Cross
Limited is holding all the preference share and 1,00,000 equity shares of XYZ Private
Limited. Examine whether:
(i)The provisions of the Companies Act, 2013 are applicable on Cross Limited?
(ii)XYZ Private Limited is a public company as per the Companies Act, 2013?(5 Marks)
(MTP April 24)
Law: (i) Section 1 of the Companies Act, 2013, provides that the provisions of this Act shall apply to
companies incorporated under this Act or under any previous company law.
(ii) According to section 2(71) of the Companies Act, 2013, public company means a company
which is not a private company.
Provided that a company which is a subsidiary of a company, not being a private company, shall
be deemed to be public company for the purposes of this Act even where such subsidiary
company continues to be a private company in its articles.
(iii) According to section 2(87) of the Companies Act, 2013, "subsidiary company" or
"subsidiary", in relation to any other company (that is to say the holding company), means a
company in which the holding company:
(1) controls the composition of the Board of Directors; or
(2) exercises or controls more than one-half of the total voting power either at its own or together
with one or more of its subsidiary companies.
Conclusion: In the given question,
(i) the provisions of the Companies Act, 2013 are also applicable on Cross Limited.

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(ii) Cross Limited holds more than one- half of the total voting power [(Rs 10,00,000
equity shares+ rs 1,00,00,000 preference shares (since carrying voting rights)out of rs
2,00,00,000]. Therefore, XYZ Private Limited is a subsidiary of Cross
Limited.Further, in terms of the provisions of section 2(71), XYZ Private Limited
being subsidiary of Cross Limited (a public company), shall also be deemed to be a
public company.

PRACTICAL QUESTION
Question 14 Ram Pvt. Ltd. is the holding company of Laxman Pvt. Ltd. As per the last profit
and loss account for the year ending 31st March, 2023 of Laxman Pvt. Ltd., its
turnover was ` 1.80 crore; and paid up share capital was ` 80 lakh. The Board of
Directors wants to avail the status of a small company. The Company Secretary
of the company advised the directors that the company cannot be categorized as
a small company. In the light of the above facts and in accordance with the
provisions of the Companies Act, 2013, you are required to examine whether the
contention of Company Secretary is correct, explaining the relevant provisions
of the Act.(RTP – May 24)
Law: According to sec 2 (85) A company shall be a small company only if it satisfies both
the following conditions:
(i) Its paid-up share capital does not exceed Rs. 4 crore or such higher amount
as may be prescribed which shall not be more than ten crore rupees; and
(ii) Its turnover (as per profit and loss account for the immediately preceding
FY) does not exceed Rs. 40 crore or such higher amount as may be
prescribed which shall not be more than one hundred crore rupees
(iii) A company shall not be a small company, if:
a. is a public company; or
b. It is a holding or a subsidiary company; or
c. It is a company registered u/s 8 ; or
d. It is a company or body corporate governed by any special Act.
Conclusion: In given Question , contention of company secretary is correct , Laxman pvt ltd is not a small
company as subsidiary of a company cannot be catogerised as small company

PRACTICAL QUESTION
Question 15 P Cricket Club was formed as a Limited Liability Company under Section 8 of the Companies
Act,2013 with the object of promoting cricket by arranging introductory cricket courses at
district level and friendly matches. The club has been earning surplus. Of late, the affairs of the
company are conducted fraudulently and dividend was paid to its members. Mr. Y, a member
decided make a complaint with Regulatory Authority to curb the fraudulent activities by
cancelling the licence given to the company.

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(i) Is there any provision under the Companies Act, 2013 to revoke the licence? If so, state
the provisions.
(ii) Whether the Company may be wound up?
(iii) Whether the P Cricket Club can be merged with Z Net Private Limited, a company engaged
in the business of networking? (5 Marks) (MTP Oct. 22)
Conclusion: (i)According to section 8(6) of the Companies Act, 2013, the Central Government may by order
revoke the licence of the company where the company contravenes any of the requirements or
the conditions of section 8 subject to which a licence is issued or where the affairs of the
company are conducted fraudulently, or in violation of the objects of the company or prejudicial
to public interest, and on revocation, the Registrar shall put ‘Limited’ or ‘Private Limited’
against the company’s name in the register. But before such revocation, the Central Government
must give it a written notice of its intention to revoke the licence and opportunity to be heard in
the matter.
Hence, in the instant case, the Central Government can revoke the license given to P Cricket
Club as section 8 company, as the affairs of the company are conducted fraudulently and
dividend was paid to its members which is in contravention to the conditions given under section
8.
(ii) Where a licence is revoked, the Central Government may, by order, if it is satisfied
that it is essential in the public interest, direct that the company be wound up under this Act or
amalgamated with another company registered under this section.However, no such order shall
be made unless the company is given a reasonable opportunity of being heard. [Section 8(7)]
Hence, the stated company may be wound up.
(iii) A company registered under this section shall amalgamate only with another
company registered under this section and having similar objects. [Section 8(10)]In the instant
case, P Cricket Club cannot be merged with Z Net Private Limited as the objects of both the
companies are different and not similar.

PRACTICAL QUESTION
Question 16 Sai along with his six friends desires to incorporate a Section 8 Company under the Companies
Act, 2013. He is seeking your advice in the following matters :
(i) What is the minimum paid-up capital requirement in case of a Section 8 Company ?
(ii) Whether a firm can be member of the Section 8 Company ?
(iii) Whether the Section 8 Company can pay dividend to its members ?
Advise, Sai with reference to the provisions of Companies Act, 2013. (April 22)(5 Marks)
Law: (i) A company may be formed u/s 8 if
(a) the objects of the company are to promote commerce, art, science, sports,
education, research, social welfare, religion, charity, protection of
environment or such other object;
(b) the company intends to apply its profits in promoting its objects; and
(c) the company intends to prohibit the payment of dividend to its members.
(ii) Further it must be noted that even a firm can be member of sec 8 company

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Conclusion: (i) The requirement of having a minimum paid up share capital shall not apply to a section 8
company
(ii) Yes, under section 8(3) of the Companies Act, 2013, a firm may be a member of the
company registered under section 8.
(iii) According to Section 8(1)(c) of the Companies Act, 2013, section 8 company cannot pay
dividend to its members as it prohibits the payment of dividends to its members.

PRACTICAL QUESTION
Question 17 One of the matters contained in the articles of Dhimaan Foundation, incorporated as a limited
company under section 8 of the Companies Act, 2013, was altered by passing a special
resolution in its general meeting and thereafter, intimation for the same was given to Registrar
of Companies.However, such alteration in the articles was opposed by Dhwaj & Co., a
partnership firm which is its member that there such alteration was not valid.
Advise, as per the provisions of the Companies Act, 2013, whether the contention of Dhwaj &
Co. was valid and whether it can be a member in such company? (RTP May 2022)
Law: (i)According to section 8 of the Companies Act, 2013, 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 (the power has been delegated to Registrar of Companies).
(ii)Also, a firm may be a member of the company registered under section 8
Conclusion: Here, one of the matters of articles of Dhimaan Foundation was altered by passing a special
resolution in its general meeting and thereafter, intimation for the same was given to Registrar
of Companies.
As per the provisions of the Act, it is necessary to take previous approval of the Registrar of
Companies for the same which was not done in the present case and thus the contention of
Dhwaj & Co. was valid.
Also, section 8 allows a firm to be a member of such company and hence, Dhwaj & Co. can be
its member.

PRACTICAL QUESTION
Question 18 Nolimit Private Company is incorporated as unlimited company having share capital of `
10,00,000. One of its creditors, Mr. Samuel filed a suit against a shareholder Mr. Innocent for
recovery of his debt against Nolimit Private Company. Mr. Innocent has given his plea in the
court that he is not liable as he is just a shareholder. Explain whether Mr. Samuel will be
successful in recovering his dues from Mr. Innocent? CA Foundation (MTP May 24) (4 Marks)
(RTP Sep 24)
Law: Section 2(92) of Companies Act, 2013, provides that an unlimited company means a company
not having any limit on the liability of its members. The liability of each member extends to the
whole amount of the company’s debts and liabilities, but he will be entitled to claim contribution
from other members.

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A Company is a separate legal entity which can sue or be sued in its own name
Conclusion: On the basis of above, it can be said that Mr. Samuel cannot directly claim his dues against the
company from Mr. Innocent, the shareholder of the company even the company is an unlimited
company. Mr. Innocent is liable upto his share capital. His unlimited liability will arise when
official liquidator calls the members for their contribution towards the liabilities and debts of
the company at the time of winding up of company.

PRACTICAL QUESTION
Question 19 The State Government of X, a state in the country is holding 48 lakh shares of Y Limited. The
paid up capital of Y Limited is ₹ 9.5 crore (95 lakh shares of ₹ 10 each). Y Limited directly holds
2,50,600 shares of Z Private Limited which is having share capital of ₹ 5crore in the form of 5
lakh shares of ₹ 100 each. Z Private Limited claimed the status of a subsidiary company of ₹
100 each. Z Private Limited claimed the status of a subsidiary company of Y Limited as well as
a Government company. Advise as a legal advisor, whether Z Private Limited is a subsidiary
company of Y Limited as well as a Government company under the provisions of the Companies
Act, 2013?[Dec 2023(4 Marks)]CA Foundation
Law: According to Section 2(45) of the Companies Act, 2013, Government Company means any
company in which not less than 51% 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.
As per Section 2(87) of the Companies Act, 2013, “subsidiary company” in relation to
any other company (that is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at
its own or together with one or more of its subsidiary companies.
Conclusion: In the instant case, the State Government of X, a state in the country is holding 48 Lakh shares
in Y Limited which is below 51% of the paid up share capital of Y Limited i.e. 48.45 Lakh
shares (51% of 95 Lakh shares). Hence Y Limited is not a Government Company.
Further, Y Limited directly holds 2,50,600 shares in Z Private Limited, which is more
than one-half of the total shares of Z Limited i.e. 2,50,000 shares (50% of 5 Lakh shares). Thus,
the Company controls more than one-half of the total voting power of Z Limited. Hence Z
Private Limited is a subsidiary of Y Limited.
Therefore, we can conclude that Z Private Limited is a subsidiary of Y Limited but not
a Government Company since Y Limited is not a Government Company.

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PRACTICAL QUESTION
Question 20 MTK Private Limited is a company registered under the Companies Act, 2013 on 5th January,
2021. The company has not started its business till now. On 7th April, 2023, a notice has been
received from ROC for non-filing of FORM No-INC-20A. Identify under which category MTK
Private Limited company is classified. Explain the definition of the category of the company in
detail. [Dec 2023(3 Marks)]CA Foundation
Law: “Inactive company” means a company which has not been carrying on any business or
operation, or has not made any significant accounting transaction during the last two financial
years, or has not filed financial statements and annual returns during the last two financial years.
[Explanation (i) to Section 455 of the Companies Act, 2013]
“Significant accounting transaction” means any transaction other than—
(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.
[Explanation (ii) to Section 455 of the Companies Act, 2013]
Conclusion: In the instant case, MTK Private Limited was registered on 5th January, 2021 and has not started
its business till now. On 7th April, 2023, a notice has been received from ROC for non-filing of
Form No. INC-20A. Since the Company has not started its business and a period of more than
two years have already elapsed, it will be treated as an inactive company.

PRACTICAL QUESTION
Question 21 Johnson Ltd goes public for share issue.Issue is over subscribed . A default was commiteed wit
respect to allotment of shares by officers of the company . There is no M.D , WTD or any person
designated by board with responsibility of complying with provisions of Act.
State who are persons considered as officer in default under Companies Act,2013 (5M) (J
Law: Officer who is in default [Section 2(60)]
"Officer who is in default", for the purpose of any provision in this Act which enacts
that an officer of the company who is in default shall be liable to any penalty or
punishment by way of imprisonment, fine or otherwise, means any of the following
officers of a company, namely:—
(i) whole-time director;
(ii) key managerial personnel;
(iii) where there is no key managerial personnel, such director or directors as
specified by the Board in this behalf and who has or have given his or their
consent in writing to the Board to such specification, or all the directors,
if no director is so specified;
(iv) Charged person- any person who, under the immediate authority of the Board
or any key managerial personnel, is charged with any responsibility including
maintenance, filing or distribution of accounts or records, authorises, actively

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participates in, knowingly permits, or knowingly fails to take active steps to

prevent, any default;
(v) Promoters - any person in accordance with whose advice, directions or
instructions the Board of Directors of the company is accustomed to act, other
than a person who gives advice to the Board in a professional capacity;
(vi) Aware but no Action - every director, in respect of a contravention of any of
the provisions of this Act, who is aware of such contravention by virtue of the
receipt by him of any proceedings of the Board or participation in such
proceedings without objecting to the same, or where such contravention had
taken place with his consent or connivance;
(vii) Merchant Bankers – in respect of the issue or transfer of any shares of a
company, the share transfer agents, registrars and merchant bankers to the issue
or transfer.
Conclusion: In given case , since there is no M.D , WTD or any person designated by board with
responsibility of complying with provisions of Act then all directors will be officer in default.

Q22 Following are some of the securities, issued by different companies related with each other, as
follows:-
Company Securities Issued Remarks
Kleshrahit Ltd. Listed non-convertible redeemable preference Has the power to
shares issued on private placement basis in terms appoint 2/3rd directors
of relevant SEBI Regulations. in Indriyadaman Ltd.
Indriyadaman Listed non-convertible debt securities issued on Holding 60% voting
Ltd private placement basis in terms of relevant SEBI power in
Regulations. Sajagta (P) Ltd.
Sajagta (P) Ltd. Listed non-convertible debt securities issued on Holding 60% voting
private placement basis in terms of relevant SEBI power in
Regulations. Sajagta (P) Ltd.
Equity shares issued by the Kleshrahit Ltd. and Indriyadaman Ltd. are not listed in any of the recognized
stock exchanges.
In the context of aforesaid facts, answer the following question(s):-
(a) Whether the aforesaid companies can be considered as listed company(ies)?
(b) Explain the relationship between the aforesaid companies? (RTP May 2022)
Solution-
According to section 2(52) of the Companies Act, 2013, listed company means 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.

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According to rule 2A of the Companies (Specification of definitions details) Rules, 2014, the following
classes of companies shall not be considered as listed companies, namely:-
(a) Public companies which have not listed their equity shares on a recognized stock exchange but have
listed their –
(i) non-convertible debt securities issued on private placement basis in terms of SEBI (Issue and
Listing of Debt Securities) Regulations, 2008; or
(ii) non-convertible redeemable preference shares issued on private placement basis in terms of
SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013; or
(iii) both categories of (i) and (ii) above.
(b) Private companies which have listed their non-convertible debt securities on private placement basis
on a recognized stock exchange in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008;
(c) Public companies which have not listed their equity shares on a recognized stock exchange but
whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of
section 23 of the Act.
Company Name Analysis and Conclusion
Kleshrahit Ltd. Equity shares issued by the company are not listed. However, the company
has issued listed non-convertible redeemable preference shares issued on
private placement basis in terms of relevant SEBI Regulations which falls
in the exceptions to the listed company, given as per clause (a)(ii) to Rule
2A, as aforesaid, and accordingly, Kleshrahit Ltd. shall not be considered
as a listed company.
Indriyadaman Ltd. Equity shares issued by the company are not listed. However, the company
has issued listed non‑ convertible debt securities issued on
private placement basis in terms of relevant SEBI Regulations which falls
in the exceptions to the listed company, given as per clause (a)(i) to Rule
2A, as aforesaid, and accordingly, Indriyadaman Ltd. shall not be
considered as a listed company.
Sajagta (P) Ltd. The company has issued listed non-convertible debt securities issued on
private placement basis on a recognised Stock Exchange in terms of
relevant SEBI Regulations which falls in the exceptions to the listed
company given as per clause (b) to Rule 2A, as aforesaid, and accordingly,
Sajagta (P) Ltd. shall not be considered as a listed company.

(i) Relationship between Kleshrahit Ltd. & Indriyadaman Ltd.

It is given that Kleshrahit Ltd. has the power to appoint 2/3rd directors in Indriyadaman Ltd. i.e. majority
of the directors can be appointed by Kleshrahit Ltd.
Accordingly, as per sub-clause (i) to section 2(87) read with the Explanation given in point (b), it can be
understood that Indriyadaman Ltd. is the subsidiary company of Kleshrahit Ltd. while the latter is the
holding company of Indriyadaman Ltd.

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(ii) Relationship between Indriyadaman Ltd. & Sajagta (P) Ltd.

It is given that Indriyadaman Ltd. is holding 60% voting power in Sajagta (P) Ltd.
Accordingly, as per sub-clause (ii) to section 2(87), it can be understood that Sajagta (P) Ltd. is the
subsidiary company of Indriyadaman Ltd. while the latter is the holding company of Sajagta (P) Ltd. as
Indriyadaman Ltd. controls more than one-half of the total voting power of Sajagta (P) Ltd.
(iii) Relationship between Kleshrahit Ltd. & Sajagta (P) Ltd.
It is given that Indriyadaman Ltd. is holding 60% voting power in Sajagta (P) Ltd. and it has been derived
that Indriyadaman Ltd. is the subsidiary company of Kleshrahit Ltd. and Sajagta (P) Ltd. is the subsidiary
company of Indriyadaman Ltd., respectively.
Accordingly, as per sub-clause (ii) to section 2(87) read with the Explanation given in point (a), that a
company shall be deemed to be a subsidiary company of the holding company even if the control is of
another subsidiary company of the holding company i.e. subsidiary of subsidiary company will be
deemed to be a subsidiary of the holding company.
Hence, it can be understood that Sajagta (P) Ltd. is deemed to be subsidiary company of Kleshrahit Ltd.
while the latter would be considered as the holding company of Sajagta (P) Ltd.
(iv) Relationship between Sajagta (P) Ltd. & Pratibodh Ltd.
It is given that Sajagta (P) Ltd. holds 52% equity shares in Pratibodh Ltd. as an investment on behalf of
another company in a capacity of a trustee i.e. in a fiduciary capacity.
As per the notification dated 27th December 2013, Ministry (MCA) clarified that the shares held by a
company or power exercisable by it in another company in a fiduciary capacity shall not be counted for
the purpose of determining the holding–subsidiary relationship in terms of the provision of section 2(87)
of the Companies Act, 2013.
Accordingly, Sajagta (P) Ltd. & Pratibodh Ltd. do not share any holding– subsidiary relationship as the
former holds shares in latter just in a fiduciary capacity on behalf of another company.

Case Scenario 1 (MTP Jan 25)

Mr. V started a new venture of on-line business of supply of grocery items at the door- step of
consumers. Initially it was having the area of operations of Saharanpur city only. He employed some
young boys having their own bikes and allocated the areas which they were accustomed of it, for making
delivery of the grocery items as per their orders. He also got developed a website and Mobile App to
receive the orders on-line. His friend Sundaram who is a Chartered Accountant, suggested him to
corporatize this business form, from proprietorship business to a One Person Company (OPC). Mr. V
agreed and a OPC was incorporated in the name of “Ask V Online Grocery (OPC) Pvt Ltd.” (for short
OPC-1). In this OPC Mr. V became the member and director and Sudha (the mother of Mr. V) was
made as nominee.
After a year Mr. V got married with Vani. Since the business of on-line supply of grocery was on rising
trend, day by day, he thought to start a new business of supply of Milk and Milk Products and another
OPC in the name of “Vani Milk Products (OPC) Pvt Ltd” (for short OPC-2) was incorporated with the
help of his professional friend Sundaram. In this OPC-2, Vani (his wife) became the member and director
and Mr. V was named as Nominee.

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To summarise the position, the information is tabulated as under:

Name of OPC Ask Mr. V4Online Grocery Vani Milk Products
(OPC) Pvt Ltd [OPC-1] (OPC) Pvt Ltd [OPC-2]

Member and Mr. V Vani

Director
Nominee Sudha (Mother of Mr. V) Mr. V (Husband of Vani)

After some time, Sudha (the mother of Mr. V) passed away. However, before the death, Sudha had made
a WILL, in which she mentioned that after her demise, her another son Krishh be made nominee in the
OPC-1. When Krishh came to know this fact, he argued with Mr. V to fulfil the wish of Sudha as
per her WILL (Mother of Mr. V and Krishh), but Mr. V denied this and appointed Vani (his wife) as
nominee.
Aggrieved from the decision of Mr. V for not nominating him (Krishh), Krishh threatened Mr. V to take
appropriate legal action against him for not honouring the WILL of Sudha and consulted his lawyer.
Meanwhile due to continuous threatening and unpleasant conversation between Krishh and Mr. V, Vani
became mentally upset and became insane, as certified by the medical doctor, so lost her capacity to
contract. In this situation, Mr. V being the nominee in OPC-2 became member and director of this OPC-
2.
One of the friends of Mr. V advised him to do some charitable work of providing free education to
the girl children of his native village near by Saharanpur. Mr. V thought about this proposal and asked his
professional friend Sundaram to convert this OPC-2 into Section 8 company.
On the basis of above facts and by applying applicable provisions of the Companies Act, 2013 and the
applicable Rules therein, choose the correct answer (one out of four) of the following Multiple Choice
Questions (MCQs 1-5, of 2 marks each) given herein under:
1. Since Vani, being insane, lost the capacity to contract, Mr. V (who was nominee) became the
member of OPC-2. Now who will make nomination for this OPC:
(a) Mr. V in the capacity of husband of Vani can nominate any person as Nominee of OPC-2
(b) Mr. V (who was nominee) of OPC-2 has now become member of this OPC and now as a
member of this OPC he can nominate any person as per his choice as Nominee for this OPC.
(c) When no person is nominated, the Central Govt. will make nomination of such OPC-2.
(d) When no person is nominated the Registrar shall order the company to be wound up.
2. Whether conversion of OPC-2 into a company governed by Section 8 is permissible?
(a) Yes, OPC can be converted into Section 8 company
(b) No, OPC cannot be converted into Section 8 company
(c) This OPC-2 can be converted into section 8 company, provided the Central Govt give license
(d) Providing of free education to girl child do not come under the specified objects mentioned
for eligibility incorporation of section 8 company

3. Mr. V is a member in OPC-1 and became a member in another OPC-2 (on 2nd April, 2024) by virtue
of his being a nominee in that OPC-2. Mr. V shall, by what date, meet the eligibility criteria that an

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individual can be a member in only one OPC:

(a) 17th May 2024

(b) 25th August 2024

(c) 26th August 2024

(d) 29th September 2024

4. After the demise of Sudha (the mother of Mr. V), Vani was nominated by
Mr. V for OPC-1 as Nominee. But now Vani has become insane, so what recourse you will
suggest to Mr. V:
(a) Mr. V is required to nominate another person as nominee
(b) Mr. V should wait till Vani becomes good of her health and able to have the capacity to
contract
(c) Although Vani has become insane, but if she is able to sign, her nomination in
OPC-1 may continue
(d) Sundaram (the Chartered Accountant) who helped in incorporation of OPC-1, may act as
legal consultant on behalf of Vani
5. Mr. V is preparing the financial statements for "Ask V Online Grocery (OPC) Pvt Ltd" for the
financial year. Which of the following statements is correct regarding compliance with section 129
of the Companies Act, 2013?
(a) Financial statements of OPC-1 must include a cash flow statement.
(b) The financial statements must be presented and approved by a general meeting of members.
(c) Mr. V, as the sole director, is responsible for approving the financial statements before filing
with the RoC.
(d) Consolidated financial statements must be prepared for OPC-1.

1. (b)
2. (b)
3. (d)
4. (a)
5. (c)

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Chapter II
INCORPORATION OF COMPANY AND MATTERS
INCIDENTAL
Q Section Topic

1 2(69) Promoters

2 5 Entrenchment Clause

3 5 Entrenchment Clause

4 5 Entrenchment Clause

5 10 MOA,AOA doesn’t bind outsider

6 Doctrine Ultra vires Act

7 Doctrine Indoor management and Exceptions

8 Doctrine Indoor management vs Constructive Notice

9 Doctrine Exception to Indoor management

10 Doctrine Exception to Indoor management

11 Doctrine Exception to Indoor management

12 16 Name too identical to name of existing company

13 13 Procedure to alter Object clause

14 14 Procedure to alter AOA

15 3A Reduction below statutory minimum

16 7 company incorporated by furnishing false or incorrect information

17 19 Subsidiary not to hold shares in holding

18 19 Subsidiary not to hold shares in holding

19 19 Subsidiary not to hold shares in holding

20 19 Subsidiary not to hold shares in holding

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21 19 Subsidiary not to hold shares in holding

22 20 Service of Documents

PRACTICAL QUESTION

Question 1 Mr. Abhi is a Chartered Accountant and MBA by profession, has been appointed
as an Executive Director on the Board of XYZ Limited. His job profile includes
advising the Board of Directors of the company on various compliance matters,
strategies, business plans, and risk matters relating to the company. Keeping in
view of above position whether Mr. Abhi can be classified as the Promoter of XYZ
Limited? Please examine the same under the provisions of the Companies Act,
2013. (RTP May 2022) (5 Marks) (MTP Dec 24)

Law: As per section 2(69) of companies Act,2013

(i)Promoter means a person

a) who has been named as such in a Prospectus; or

b) is identified by the Company in the Annual Return;

c) who has control over the affairs of the company directly or indirectly,

d) in accordance with whose advice, directions or instructions; the BOD of a

company is accustomed to Act.

(ii)However, a person acting merely in a professional capacity shall not be

regarded as promoter under point (d).

Conclusion: In present case, As the job profile of Mr. Kaushal is only limited to advise the Board
of Directors on various compliance matters, strategies, business plans and risk
matters relating to business of the company and that to only in a professional
capacity, he will not be classified as a Promoter of XYZ Limited.

PRACTICAL QUESTION

Question 2 Mr. Shyamlal is a B. Tech in computer science. He has promoted an IT start

up and got it registered as a Private Limited Company. Initially, only he and
his family members are holding all the shares in the company. While
drafting the Articles of Association of the company, it has been included that
Mr. Shyamlal will remain as a director of the company for lifetime.

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Mr. Mehra, a close friend of Mr. Shyamlal has warned him (Mr. Shyamlal)
that in future if 75% or more shares in the company are held by non- family
members then by passing a Special Resolution, the relevant articles can be
amended and Mr. Shyamlal may be removed from the post of director.
Mr. Shyamlal has approached you to advise him for protecting his position
as a director for lifetime. Give your answer as per the provisions of the
Companies Act, 2013. (6 Marks) (MTP M 21)

Law: As per the provisions of section 5 of the Companies Act, 2013,

(i) Usually, an article of association may be altered by passing a special
resolution but entrenchment makes it one difficult to change it. So,
entrenchment means making something more protective.
(ii)As per the provisions of sub-section (4) of section 5 of the Companies Act,
2013, the provisions of entrenchment shall only be made either on
formation of a company, or by an amendment in the Articles of Association
as agreed to by all the members of the company in the case of a private
company and by a special resolution in case of a public company.
Conclusion: In the said situation , the IT startup company is a private company.
Therefore, Mr. Shyamlal can get the articles altered which is agreed to by
all the members whereby the amended article will say that he can be
removed from the post of director only if, say, 95% votes are cast in favour
of the resolution and give notice of the same to the Registrar.

PRACTICAL QUESTION

Question 3 Yadav Dairy Products Private limited has registered its articles along with
memorandum at the time of registration of company in December, 2014.
Now directors of the company are of the view that provisions of articles
regarding forfeiture of shares should not be changed except by a
resolution of 90% majority. While as per section 14 of the Companies Act,
2013 articles may be changed by passing a special resolution only. Hence,
one of the directors is of the view that they cannot make a provision
against the Companies Act, 2013. You are required to advise the company
on this matter. (RTP MAY 2020)

Law: (i) As per section 5 of the Companies Act, 2013 the article may contain
provisions for entrenchment to the effect that specified provisions
of the articles may be altered only if more restrictive conditions than
a special resolution, are met.

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(ii) The provisions for entrenchment shall only be made either on

formation of a company, or by an amendment in the articles agreed
to by all the members of the company in the case of a private
company and by a special resolution in the case of a public company.
(iii) Where the articles contain provisions for entrenchment, whether
made on formation or by amendment, the company shall give notice
to the Registrar of such provisions in prescribed manner.
Conclusion: In the present case, Yadav Dairy Products Private Limited is a private
company and wants to protect provisions of articles regarding forfeiture of
shares. It means it wants to make entrenchment of articles, which is
allowed. But the company will have to pass a resolution taking permission
of all the members and it should also give notice to Register of Companies
regarding entrenchment of articles.

4.The Articles of Association of a Company may contain provisions for entrenchment

under Section 5 of the Companies Act, 2013. What is meant by entrenchment provisions
in this context? Also State the relevant provisions of the said Act dealing with
entrenchment provisions.(3 Marks)(Nov 2020) (MTP Oct. 22)
Entrenchment Clause
1.Usually an AOA may be altered by passing special resolution but entrenchment makes it
more difficult to change it. So entrenchment means making something more protective.
2.The AOA may contain the provisions for entrenchment, i.e. certain specified provisions
of the articles can be altered only by complying with such conditions or procedures as are
more restrictive than those as are applicable in case of a SR.
3.The provisions for entrenchment may be made at the time of formation of the company;
or by an amendment of articles,
(a) In case of a private company, with the consent of all the members;
(b) In case of a public company, by passing Special Resolution.
4.Where the articles contains the provisions for entrenchment, the company shall give
notice of such provisions to the Registrar:
(i) In Form No. INC-2 & SPICe+ INC-32, as the case may be, at the time of
incorporation of the company;
(ii) In Form No. MGT-14, within 30 days from the date of entrenchment of the articles
in case of existing companies.

PRACTICAL QUESTION

Question 5 The Articles of a Public Company clearly stated that Mr. A will be the
solicitor of the company. The company in its general meeting of the
shareholders resolved unanimously to appoint B in place of A as the
solicitor of the company by altering the articles of association. Examine,

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whether the company can do so? State the reasons clearly. Does it make
any difference if A also member of the company (RTP May 2015) (RTP May
2016) (MAY 2013)

Law: (i)According to Section 10(1) of the Companies Act, 2013, the memorandum
and articles shall, when registered, bind the company and the members
thereof to the same extent as if they respectively had been signed by the
company and by each member
(ii) MoA and AoA binds
a) Company to members
b) Members to company
c) Members Interse
(iii)The Memorandum and Articles do not bind either the company or the
members to any third party.
(iv)Further, under Section 14 (1) subject to the provisions of this Act and to
the conditions contained in the Memorandum, a company may, by a special
resolution, alter its Articles.
Ref Case Eley v Positive Life Insurance Co

Conclusion: In the present case,

(i)Since sec 10 do not bind outsiders so A can be terminated ,the company
has altered the Articles by a unanimous resolution of the members passed
at a general meeting. Hence, the alteration is valid and after registration of
the altered Articles, the appointment of B will stand and A will be
terminated.
(ii)No it doesn’t make any difference if he is also member of company as
being solicitor is not right attached with membership

PRACTICAL QUESTION

Question 6 The object clause of the Memorandum of Association of Miranda Private

Ltd, Kolkata authorized it to do trading in fruits and vegetables. The
company, however, entered into a Partnership with Mr. Karan and traded
in steel and incurred liabilities to Mr. Karan. The company, subsequently,
refused to admit the liability to Karan on the ground that the deal was
‘Ultra Vires’ the company. Examine the validity of the company’s refusal to
admit the liability to Karan. Give reasons in support of your answer. (RTP
Nov 2016)

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Law: As per Doctrine of Ultra Vires, the acts beyond the powers of a
company/Memorandum/object clause are ultra vires and void and cannot
be ratified even though every member of the company may give his consent
[Ashbury Railway Carriage Company Vs Richee]
Conclusion: Miranda Pvt. Ltd is authorized to trade directly on fruits and vegetables. It
has no power to enter into a partnership for iron and steel with Mr. Karan.
Such act cannot be treated as being within either the ‘express’ or ‘implied’
powers of the company. Mr. Karan who entered into partnership is deemed
to be aware of the lack of powers of Miranda Pvt. Ltd. In the light of the
above, Mr. Karan cannot enforce the agreement or liability against Miranda
Pvt. Ltd under the Companies Act, 2013. Mr. Karan should be advised
accordingly.

7.The Doctrine of Indoor Management always protects the persons (outsiders) dealing
with a company.” Explain the above statement. Also, state the exceptions to the above
rule(MAY 2015) (NOV 2018) (MTP Sep 22)

Doctrine of Indoor Management

(i)As per this doctrine, outsiders dealing with the company are not required to
enquire into the internal management of the company.

(ii)Outsiders dealing with the company are entitled to assume that as far as
internal proceedings of the company are concerned, everything has been done
regularly.

(iii)If not, company is in fault and cannot deny liability on said ground

(iv)Thus, the doctrine protects an innocent outsider from any irregularity present
in the working of the company

Exceptions to Doctrine of Indoor Management

Relief on the ground of ‘indoor management’ cannot be claimed by an outsider

dealing with the company in the following circumstances:

1. Knowledge of irregularity - In case this ‘outsider’ has actual knowledge of

irregularity within the company, the benefit under the rule of indoor
management would no longer be available. In fact, he/she may well be
considered part of the irregularity.
2. Negligence: If with a minimum of effort, the irregularities within a company
could be discovered, the benefit of the rule of indoor management would
not apply. The protection of the rule is also not available where the
circumstances surrounding the contract are so suspicious as to invite inquiry,

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and the outsider dealing with the company does not make proper inquiry.
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.
4. Where the question is in regard to the very existence of an agency.
5. Where a pre-condition is required to be fulfilled before company itself can
exercise a particular power. In other words, the act done is not merely
ultra vires the directors/officers but ultra vires the company itself.

8.The role of doctrine of 'Indoor management' is opposed to that of the role of

'Constructive notice'. Comment on this statement with reference to the Companies Act,
2013.(6 Marks) (MTP Nov. 23)
Yes doctrine of 'Indoor management' is opposed to that of the role of 'Constructive
notice' because of following reasons
(i)It protects outsiders from company whereas 'Constructive notice protects company
from outsiders.
(ii) In Constructive notice outsider is at fault whereas in indoor management company is
at fault
(iii)In Constructive notice outsider is presumed to have knowledge of Moa and AoA
whereas in indoor management he is presumed that all internal proceeding are done
regularly
(iv)Constructive notice makes contract void whereas Indoor management makes contract
valid

PRACTICAL QUESTION

Question 9 The directors of Smart Computers limited borrowed a sum of money from
Mr. Tridev. The company's articles provided that the directors may borrow
on bonds such sums as may, from time to time, be authorized by resolution
passed at a general meeting of the company. The shareholders claimed that
there had been no such resolution authorizing the loan, and therefore, it
was taken without their authority and the company is not bound to repay
the loan to Tridev. In the light of the contention of shareholders, decide
whether the company is bound to pay the loan.(MTP MAY 2020) (NOV 2016)

Law: Doctrine of Indoor Management: According to this doctrine, persons

dealing with the company need not enquire whether internal proceedings
relating to the contract are followed correctly, once they are satisfied that

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the transaction is in accordance with the memorandum and articles of

association.
Ref Case Royal British Bank vs Turquand.

Conclusion: In the given question, Mr. Tridev being a person external to the company,
need not enquire whether the necessary meeting was convened and held
properly or whether necessary resolution was passed properly. Even if the
shareholders claim that no resolution authorizing the loan was passed, the
company is bound to pay the loan to Mr. Tridev.

PRACTICAL QUESTION

Question 10 The Secretary of a company issued a share certificate to ‘A’ under the
company’s seal with his own signature and the signature of a Director
forged by him. ‘A’ borrowed money from ‘B’ on the strength of this
certificate. ‘B’ wanted to realize the security and requested the company
to register him as a holder of the shares. Explain whether ‘B’ will succeed
in getting the share registered in his name. (RTP Nov 2013)

Law: As per doctrine of Indoor Management which says that persons dealing with
the company are entitled to assume that the acts of the directors or the
officers of the company are validly performed, if they are within the scope
of their apparent authority. The rule of Indoor Management is not
applicable if the transaction involves forgery. A company can never be held
bound for forgeries committed by its officers.
Ref case Ruben vs Great Fingall consolidated company.

Conclusion: In the stated problem, the doctrine of indoor management can apply only
in case of irregularities which might otherwise affect the transaction, but it
cannot apply to forgery which must be regarded as nullity. Hence, ‘B’ will
not succeed in getting the share registered in his name.

PRACTICAL QUESTION

Question 11 Under the Articles of Association of ABC Ltd. Company, directors had
power to borrow up to ₹ 10,000 without the consent of the general
meeting. The Directors themselves lent ₹ 35,000 to the company without
such consent and took debentures of the Company. Decide under the
provisions of the Companies Act, 2013, whether the company is liable? If

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so, what is the extent of liability of the company in this case? (MTP MAY
2013)

Law: As per exception to doctrine of Indoor management, where a person

dealing with a company has actual or constructive notice of the irregularity
as regards internal management, he cannot claim the benefit under the rule
of indoor management and such contract will not be enforceable on the
company.
Ref case Howard vs Patent Ivory Manufacturing Company

Conclusion: In this case, the directors of a company could borrow any amount up to ₹
10,000/- without the resolution of the company in a general meeting. But
for any amount beyond ₹ 10,000/- they had to obtain the consent of the
shareholders in a general meeting. The directors themselves lent ₹ 35,000/-
to the company without such consent and took debentures. The directors
had the notice of the internal irregularity and hence the company was liable
to them only for ₹ 10,000/-.

PRACTICAL QUESTION

Question 12 Paritosh and friends got registered a company in the name of Taxmann advisory
Private Limited.Taxmann is a registered trademark. After 5 years when the
owner of trademark came to know about the same, it filed an application with
relevant authority. Can the company be compelled to change its name by the
owner of trademark? Can the owner of registered trademark request the
company and then company changes its name at its discretion? (April 22)(6
Marks) (RTP Mar 23)

Law: According to section 16 of the Companies Act, 2013

(i)if a company is registered by a name which,in the opinion of the Central

Government, is identical with the name by which a company.had been
previously registered, it may direct the company to change its name. Then
the company shall by passing an ordinary resolution change its name within
3 months.

(ii)If it is identical with a registered trade mark and owner of that trade mark
apply to the Central Government within three years of incorporation of
registration of the company, it may direct the company to change its name.
Then the company shall change its name by passing an ordinary resolution
within 3 months.

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Conclusion: In the given case, owner of registered trade- mark is filing objection after 5
years of registration of company with identical name. While it should have
filed the same within 3 years. Therefore, the company cannot be compelled
to change its name.

As per section 13, company can anytime change its name by passing a
special resolution and taking approval of Central Government. Therefore, if
owner of registered trademark requests the company for change of its
name and the company accepts the same then it can change its name
voluntarily by following the provisions of section 13.

13.Rishi Pharmacy Ltd. decided to take up the business of food processing because of
the downward trend in pharmacy business. There is no provision in the object clause of
the Memorandum of Association to enable the company to carry on such business.
State whether its object clause can be amended? Mention briefly the procedure to be
adopted for change in the object clause. (MAY 2016)

Procedure to alter Object Clause

Company can pursue only that object which is mentioned in object clause of
memorandum. Any contract not supported by object clause of MOA is void ab initio
Following are procedure to alter object clause of MOA
(i) A company may alter its object clause by passing SR.
(ii) If a company has raised money from the public by issue of a prospectus, and any
part of it remains unutilized with the company, then the company shall alter its
objects for which it raised the money through prospectus if following conditions are
satisfied:
a) the company has published the prescribed details and justification for such
alteration in 2 -newspapers (one English newspaper and one newspaper in
vernacular language) circulating at the place where the registered office of the
company is situated;
b) the prescribed details and justification for such change have been placed on the
website of the company, if any, and
c) the dissenting shareholders have been given an exit opportunity by the
promoters and shareholders having control in accordance with the regulations
to be specified by SEBI
(iii)The company shall file a copy of SR with the Registrar within 30 days.
(iv)The Registrar shall register the alteration and issue a certificate of registration within
30 days of receipt of the SR.

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14.The Board of Directors of Sindhu Limited wants to make some changes and to alter
some Clauses of the Articles of Association which are to be urgently carried out, which
include the increase in Authorized Capital of the company, issue of shares, increase in
borrowing limits and increase in the number of directors. Discuss about the provisions
of the Companies Act, 2013 to be followed for alteration of Articles of Association. (RTP
NOV 2018)

Alteration of Articles of Association

Section 14 of the Companies Act, 2013, vests companies with power to alter its
articles. The law with respect to alteration of articles is as follows:

(i)A company may alter its articles by a special resolution, subject to the
provisions of this Act and the conditions contained in its memorandum.
(ii)Every alteration of the articles and a copy of the order of the Central
Government approving the alteration, shall be filed with the Registrar, together
with a printed copy of the altered articles, within a period of fifteen days in
Form No. INC 27

PRACTICAL QUESTION

Question 15 Red Limited was incorporated on 1st April, 2014 is facing severe effects of
depression of the economy. Owing to its bad financial status most of the
members have started withdrawing their holding from the company. The
company had 250 members on 10th January, 2019. By 15th January, 2019, 244
members had withdrawn their holding. No new member has invested in the
company after 15th February till date. Now, Mr. A, an existing member has
approached you to advise him regarding his liabilities in such a situation. (RTP
NOV 2019)

Law: As per sec 3A of the Companies Act, 2013, If at any time the number of
members of a company is reduced below 2/7, {in the case of a private company,
below 2, and in the case of a public company, below 7}, and the company carries
on business for more than 6 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 6 months and is cognizant of the fact that it is carrying on
business with less than 2/7 members, shall be severally liable (personally liable) for
the payment of the whole debts of the company contracted during that time

Conclusion: In present case , since 244 out of 250 members has withdrawn membership
is restricted to 6 i.e less than 7 if the membership remains less than 7 till 6
months from 10th January , every contract entered by company after that

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will make personally liable to A and all existing members who knew about
such reduction.

16.ABC Pvt. Ltd., a company that has been operational for two years, was incorporated
with the submission of false information and suppression of material facts. The
company’s founders, Mr. X and Ms. Y, provided incorrect financial statements and
concealed significant liabilities during the incorporation process. This
misrepresentation was recently uncovered during an internal audit initiated by the
company's new CFO, Mr. Z.Upon discovering these fraudulent actions, Mr. Z has filed
an application with the National Company Law Tribunal (NCLT). Explain the provisions
of the Companies Act, 2013 in respect where a company has been incorporated by
furnishing false or incorrect information. (RTP sep 24)

company incorporated by furnishing false or incorrect information

According to section 7(7) of the Companies Act, 2013, where a company has been got
incorporated by furnishing false or incorrect information or representation or by
suppressing any material fact or information in any of the documents or declaration filed
or made for incorporating such company or by any fraudulent action, the Tribunal may, on
an application made to it, on being satisfied that the situation so warrants—
(a) pass such orders, as it may think fit, for regulation of the management of the
company including changes, if any, in its memorandum and articles, in public interest or in
the interest of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit.
However, before making any order under this sub-section, -
(i) the company shall be given a reasonable opportunity of being heard in the matter;
and
(ii) the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any liability.

PRACTICAL QUESTION

Question 17 As at 31st March, 2018, the paid up share capital of S Ltd. is ` 1,00,00,000
divided into 10,00,000 equity shares of ` 10 each. Of this, H Ltd. is holding
6,00,000 equity shares and 4,00,000 equity shares are held by others.
Simultaneously, S Ltd. is holding 5% equity shares of H Ltd. out of which
1% shares are held as a legal representative of a deceased member of H
Ltd. On the basis of the given information, examine and answer the

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following queries with reference to the provisions of the Companies Act,

2013 : (MAY 2019)

(i)Can S Ltd. make further investment in equity shares of H Ltd. during

2018-19?

(ii)Can S Ltd. exercise voting rights at Annual general meeting of H Ltd.?

(iii)Can H Ltd. allot or transfer some of its shares to S Ltd.?

Law: (i) Section 2(87) provides that a company shall be deemed to 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 at its own or together with one or more of its subsidiary companies; or
through its Subsidiaries

(ii) As per sec 19 of the Companies Act, 2013

a) A subsidiary company shall not hold any shares in its holding company
either itself or through its nominee.
b) A holding company shall not allot or transfer its shares to any of its
subsidiary companies and if so done, it shall be void.
Sec. 19 is not applicable to a case:

(a) where the subsidiary company holds such shares as the legal representative
of a deceased member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) where the subsidiary company is a shareholder even before it became a
subsidiary company of the holding company:
However, the subsidiary company to whom section 19 does not apply, shall have
a right to vote at a meeting of the holding company only in case (a) or (b)
mentioned above.

Conclusion: In the instant case,

(i) As per the provisions of sub-section (1) of Section 19 of the

Companies Act, 2013, no company shall, either by itself or through its
nominees, hold any shares in its holding company. Therefore, S Ltd. cannot
make further investment in equity shares of H Ltd. during 2018-19.

(ii) As per second proviso to Section 19, a subsidiary company 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. Therefore, S Ltd.
can exercise voting rights at the Annual General Meeting of H Ltd. only in

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respect of 1% shares held as a legal representative of a deceased member

of H Ltd.

(iii) Section 19 also provides that no holding company shall allot or

transfer its shares to any of its subsidiary companies and any such allotment
or transfer of shares of a company to its subsidiary company shall be void.
Therefore, H Ltd. cannot allot or transfer some of its shares to S Ltd.

PRACTICAL QUESTION

Question 18 Octagon Limited is holding 58% of the paid up share capital of Pentagon Limited.
Vijay, one of the shareholders of Octagon Limited, holding 10% shares of the
company, has made a charitable trust. He donated his 10% shareholding in
Octagon Limited and ` 20 crore to the trust. He appointed Pentagon Limited as
the trustee. All the assets of the trust are held in the name of Pentagon
Limited.As per the provisions of the Companies Act, 2013, decide whether
Pentagon Limited can hold shares of Octagon Limited.(6 Marks) (MTP Sep. 22) (5
Marks) (MTP Aug 24)
Law: Hint – similar to above question

Conclusion: In the given case, one of the shareholders of holding company (Octagon Limited)
has transferred his shares in the holding company to a trust where the shares will
be held by subsidiary company (Pentagon Limited). It means now subsidiary will
hold shares in the holding company. But it will hold shares in the capacity of a
trustee. Therefore, we can conclude that in the given situation Pentagon Limited
can hold shares in Octagon Limited.

PRACTICAL QUESTION

Question 19 ABC Limited issued equity shares worth 1,00,000 (10,000 shares of 10 each) on
1st April, 2023 which has been fully subscribed, whereby XYZ Limited holds 3,500
equity shares and PQR Limited holds 2,500 equity shares. Prior to the issue of
equity shares, ABC Limited already hold 20% of the equity shares of MNP Limited.
Further, XYZ Limited holds 10% of MNP Limited's equity shares as a trustee. MNP
Limited controls the composition of the Board of Directors of XYZ Limited and
PQR Limited on 01.07.2023. Examine with reference to the relevant provisions of
the Companies Act, 2013 —
(i) Whether ABC Limited is a subsidiary of MNP Limited ?
(ii) Whether ABC Limited and XYZ Limited have the right to vote on the
Annual General Meeting of MNP Limited held on 30th September, 2023
? (Nov 23) 5 Marks

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Law: Similar to above question

Conclusion: In present case ,

(i)since MNP Limited controls the composition of the Board of Directors of XYZ
Limited and PQR Limited they are subsidiaries of MNP ltd and since XYZ Limited
holds 3,500 equity shares and PQR Limited holds 2,500 equity shares i.e
subsidiaries of MNP holds more than half of its voting rights(6000 out of 10000
shares) in ABC ltd , ABC ltd is subsidiary of MNP ltd

(ii)ABC ltd has no voting rights in MNP ltd as it held shares before becoming
subsidiary but XYZ Limited have the right to vote on the Annual General
Meeting of MNP Limited as it held shares as a trustee

PRACTICAL QUESTION

Question 20 S Ltd acquired 10% paid up share capital of H Ltd on 15th March 2017. H Ltd
acquired 55% paid up share capital of S Ltd on 10th March 2018. H Ltd. on
25th September, 2020 decided to issue bonus shares in the ratio of 1:1 to
the existing shareholders. Accordingly, bonus shares were allotted to S Ltd.
Examine under the provisions of the Companies Act, 2013 and decide
(i) the validity of holding of shares by S Ltd. in H Ltd.
(ii) allotment of Bonus shares by H Ltd. to S Ltd. (Nov 2020)
Law:
As per Section 19 of the Companies Act, 2013, no company shall, hold any
shares in its holding company and no holding company shall allot or transfer
its shares to any of its subsidiary companies and any such allotment or
transfer of shares of a company to its subsidiary company shall be void.
However, this shall not apply where the subsidiary company is a
shareholder even before it became a subsidiary company of the holding
company.
Conclusion:
In the given case, H Ltd. has acquired 55% paid up share capital of S Ltd. on
10th March 2018. Whereas, S Ltd. has been holding 10% paid up share
capital of H Ltd. since 15th March, 2017. The said instance as asked in the
question falls under the exception stated above.
Therefore -
(i) Holding of shares by S Ltd. in H Ltd. is valid in view of the proviso
(c) to sub-section
of section 19 of the Act, which states that the restrictions of

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provisions of section 19(1) will not be applicable where the

subsidiary company is a shareholder even before it became a
subsidiary company of the holding company.
(ii) Allotment of bonus shares by H Ltd. to S Ltd. is also valid in view of
the above proviso.

PRACTICAL QUESTION

Question 21 New Ltd. is a company in which Old Ltd. is holding 65% of its paid up share
capital. One of the shareholder of Old Ltd. made a charitable trust and
donated his 10% shares in Old Ltd. and `50 crore to the trust. He appoints
New Ltd. as the trustee. All the assets of the trust are held in the name
of New Ltd. Can a subsidiary hold shares in its holding company in this way?
(MTP Sept 24)

Law: According to section 19 of the Companies Act, 2013 a company shall not
hold any shares in its holding company either by itself or through its
nominees. Also, holding company shall not allot or transfer its shares to
any of its subsidiary companies and any such allotment or transfer of
shares of a company to its subsidiary company shall be void.

Following are the exceptions to the above rule:

a) where the subsidiary company holds such shares as the legal

representative of a deceased member of the holding company; or
b) where the subsidiary company holds such shares as a trustee; or
c) where the subsidiary company is a shareholder even before it
became a subsidiary company of the holding company but in this case
it will not have a right to vote in the meeting of holding company.
Conclusion: In the given case one of the shareholders of holding company has
transferred his shares in the holding company to a trust where the shares
will be held by subsidiary company. It means now subsidiary will hold
shares in the holding company. But it will hold shares in the capacity of
a trustee. Therefore, we can conclude that in the given situation New Ltd.
can hold shares in Old Ltd.

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22.Explain the provisions of the Companies Act, 2013 relating to the ‘Service
of Documents’ on a company and the members of the company? (MTP May
25)

Service of Documents
Under section 20 of the Companies Act, 2013
(i)a document may be served on a company or an officer thereof by sending it to the company
or the officer at the registered office of the company by registered post or by speed post or by courier
service or by leaving it at its registered office or by means of such electronic or other mode as
may be prescribed.
(ii) However, in case where securities are held with a depository, the records of the beneficial
ownership may be served by such depository on the company by means of electronic or other
mode.
(iii)Under section 20(2), save as provided in the Act or the rule thereunder for filing of documents
with the registrar in electronic mode, a document may be served on Registrar or any member by
sending it to him by post or by registered post or by speed post or by courier or by delivering
at his office or address, or by such electronic or other mode as may be prescribed.
(iv) However, a member may request for delivery of any document through a particular mode, for
which he shall pay such fees as may be determined by the company in its annual general meeting.

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Chapter III
Prospectus and allotment of shares
Q Section Topic

1 23 Allotment without prospectus

2 26 Reports which shall be included in the prospectus

3 27 Procedure for variation in the objects in the prospectus

4 27 variation in the objects or terms in the prospectus

5 29 Securities to be in Demat Form

6 30 Contents of its memorandum to be specified in every advertisement

7 31 Shelf prospectus

8 34,35 Liability and protection in case of mis-statement in prospectus

9 34,35 Liability and protection in case of mis-statement in prospectus

10 34,35 Liability and protection in case of mis-statement in prospectus

11 34,35 Liability and protection in case of mis-statement in prospectus

12 34,35 Liability and protection in case of mis-statement in prospectus

13 34,35 Liability and protection in case of mis-statement in prospectus

14 39,40 Allotment of securities

15 39,40 Allotment of securities

16 40(6) Underwriting Commission

17 40(6) Underwriting Commission

18 40(6) Underwriting Commission

19 42 Private Placement

20 42 Private Placement

21 - Irregular allotment

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PRACTICAL QUESTION

Question 1 Examine the validity of these allotments in the light of the provisions of the
Companies Act, 2013

The Board of Directors of Reckless Investments Ltd. have allotted shares to the
investors of the company without issuing a prospectus with the concerned
Registrar of Companies.Explain the remedy available to the investors in this
regard. (MTP NOV 2018)

Law: According to Section 23 of the Companies Act, 2013, a public company can issue
securities to the public only by issuing a prospectus. Section 26 (1) lays down the
matters required to be disclosed and included in a prospectus and requires the
registration of the prospectus with the Registrar before its issue.

Conclusion: In the given case, the company has violated with the above provisions of the Act
and hence the allotment made is void. The company will have to refund the entire
moneys received and will also be punishable under section 26 of the Act.

2.The Board of Directors of Ramesh Ltd. proposes to issue the prospectus inviting
offers from the public for subscribing the shares of the Company. State the reports
which shall be included in the prospectus for the purposes of providing financial
information under the provisions of the Companies Act, 2013. (RTP nov 2020) (NOV
2019)

Reports which shall be included in the prospectus

(i) As per section 26(1) of the Companies Act, 2013, every prospectus issued shall
be dated and signed
(ii) It shall state such information and set out such reports on financial information
as may be specified by the Securities and Exchange Board in consultation with
the Central Government.

(iii) Every prospectus shall make a declaration about the compliance of the provisions
of this Act and a statement to the effect that nothing in the prospectus is contrary to
the provisions of:
a. Companies Act, 2013
b. Securities Contracts (Regulation) Act, 1956
c. Securities and Exchange Board of India Act, 1992
d. Rules and regulations made under above Acts.
(iv) Every prospectus shall contain the following disclosures on the cover page [Sec.
26(6)] :
(a) A statement that a copy of the prospectus has been filed with the Registrar.
(b) A list of all such documents as are required to be attached with the prospectus.

(v) General Information , Financial Information and terms and conditions of the issue
as prescribed by roC

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(vi) Report by Expert

PRACTICAL QUESTION

Question 3 Lotus valley Ltd. issued a prospectus with the object of setting up of a chain of
hotels. However, later it decided to set-up a Pharmaceutical Manufacturing
unit. Keeping in view of the provisions of the Companies Act, 2013, state
whether Lotus valley Ltd. can do so and if it can be done, also state the
procedure to be followed for variation in the objects in the prospectus. (RTP
May 2016)

Law: Procedure for variation in the objects in the prospectus

As per section 27 the Companies Act, 2013,A company shall vary the terms of
contract or object for which the prospectus was issued only if following conditions
are satisfied:

(i) Special resolution is passed in GM; and

(ii) the prescribed details of the notice of GM (indicating clearly the
justification for such variation) are published in 2 newspapers (one in
English language and one in vernacular language) circulating in the city in
which the registered office of the company is situated. in Form PAS-1.
(iii) The dissenting shareholders (the shareholders who did not agree to the
variation at the time of passing SR) shall be given an exit offer by the
promoters or controlling shareholders.
Conclusion: Thus, Lotus valley Ltd. can change the object mentioned in the prospectus from
setting up a chain of hotels to setting up of a pharmaceutical manufacturing unit by
following the above mentioned procedure of section 27

PRACTICAL QUESTION

Question 4 XYZ Limited issued a prospectus to raise funds for a new manufacturing
project. After successfully raising the funds, the company identified an
investment opportunity in a different industry six months later, requiring
a significant portion of the funds. The proposed investment involved trading
in equity shares of other listed companies.The board of directors suggested
varying the original objectives for which the funds were raised to allow this
new investment and recommended passing a special resolution in the
company’s general meeting. While the promoters and controlling
shareholders supported this change, some shareholders expressed
concerns, particularly regarding the deviation from the initially stated
purpose of the funds.

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Based on the provisions of the Companies Act, 2013, advise on the

validity of the proposal to redirect the funds toward this new investment.
(RTP Jan 25)

Law: According to section 27(1) of the Companies Act, 2013,

(i)the terms of a contract referred to in the prospectus or objects for which the
prospectus has been issued can be varied, but only with the authority of the
company given by it in general meeting by way of special resolution.

(ii)The second proviso to sub-section (1) prescribes that such company is not
to use any amount raised by it through the prospectus for buying, trading or
otherwise dealing in equity shares of any other listed company.

Conclusion: In the given question, XYZ Limited, is planning to use the amount initially
raised for investing in a different industry, which also involves trading in equity
shares of other listed companies.

Though XYZ Limited has passed a special resolution for the said proposal but
it cannot use any amount raised by it through the prospectus for buying, trading
or otherwise dealing in equity shares of any other listed company. Hence, the
said proposal for new investment is not valid.

PRACTICAL QUESTION

Question 5 Grab Ltd., an unlisted company, intends to make a public offer of

securities. However, they are not sure about the compliance requirements
for issuing securities in dematerialised form. You being an expert, guide Grab
Ltd, on the relevant provisions of the Companies Act, 2013 and whether
Grab Ltd. is eligible to issue its securities? (RTP May 25)

Law: The given issue is based on section 29 of the Companies Act, 2013 read with the
relevant 9A (Issue of securities in dematerialised form by unlisted public
companies) of the Companies (Prospectus and Allotment of Securities) Rules,
2014.

(i)As per Section 29 every company making a public offer and unlisted
company, have to issue their securities only in dematerialised form by
complying with the provisions of the Depositories Act, 1996 and regulations made
under it.

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

(iii)Every unlisted public company making any offer for issue or buyback or
bonus shares or rights offer shall ensure that before making such offer, entire

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holding of securities of its promoters, directors, key managerial personnel has

been demateriarised in accordance with provisions of the Depositories Act 1996
and regulations made there under.

(iv)Following Unlisted Public Co. are exempted from Demat:

a) Nidhi Company.
b) Government Company.
c) 100% Subsidiary
Conclusion: Accordingly, in the given case, Grab Ltd., an unlisted company, falls in the
prescribed classes of companies, must ensure that its securities are issued and
transferred in dematerialised form in compliance with the Depositories Act,
1996.

6.Keya Limited decides to issue 1,00,000 securities of the company. The company
decides to publish an advertisement of the prospectus. Enumerate to the company
about necessary contents of its memorandum to be specified therein. (RTP MAY
2021)

Contents of its memorandum to be specified in every advertisement

According to Section 30, where an advertisement of any prospectus of a company is

published in any manner, it shall be necessary to specify therein the contents of its
memorandum as regards the following:

(i) the objects,

(ii) the liability of members and the amount of share capital of the company,

(iii) the names of the signatories to the memorandum,

(iv) the number of shares subscribed for by the signatories, and

(v) the capital structure of the company.

PRACTICAL QUESTION

Question 7 Prakhar Ltd. intends to raise share capital by issuing Equity Shares in different
stages over a certain period of time. However, the company does not wish to
issue prospectus each and every time of issue of shares. Considering the
provisions of the Companies Act, 2013, discuss what formalities Prakhar Ltd.
should follow to avoid repeated issuance of prospectus?(RTP NOV 2018)
What is a Shelf-Prospectus? State the important provisions relating to the
issuance of Shelf-Prospectus under the provisions of Companies
Act,2013.(NOV 2018) (NOV 2016)
Law: Considering sec 31 of companies act,2013

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(i)Shelf Prospectus means a prospectus in respect of which the securities are issued
for subscription in one or more issues over a certain period without the issue of a
further prospectus.

(ii) Provisions of shelf prospectus is applicable to companies as prescribed by

SEBI

(iii) Any class of company to whom shelf prospectus is applicable, may file a shelf
prospectus with the Registrar at the stage of the 1st offer of securities specified
in the shelf prospectus.

(iv) The shelf prospectus shall remain valid for period not exceeding 1 year from
the date of opening of the first offer of securities

(v) Prior to the issue of a subsequent offer of securities under the shelf prospectus,
the company shall be required to file an information memorandum with the
Registrar. in Form PAS - 2 and filed with ROC along with fee, within 1 month
prior to issue of subsequent offer. contain material facts relating to:
(a) new changes created;
(b) changes in the financial position of the company as have occurred
between the previous offer and the succeeding offer of securities; and
(c)such other changes as may be prescribed.

(vi)the information memorandum together with the shelf prospectus shall be

deemed to be a prospectus.

Conclusion: In present case, Prakhar Ltd. intends to raise share capital by issuing Equity Shares
in different stages over a certain period of time and want to avoid repeated issuance
of prospectus we suggest it to file shelf prospectus and follow above procedures as
mentioned in sec 31

8.What is the extent of liability of an expert, in relation to publication of prospectus,

for any mis-statement in the report given by him?(MTP MAY 2017)

For any misstatement in report given by prospectus, an expert can be liable for
(a) Criminal liability (sec 35)
(b)Civil Liability (sec 34)
A) Criminal liability
(i) If a prospectus includes any statement by expert; which is misleading; or omission of
any matter in the prospectus is misleading and such statement is intentional then, he will
be liable u/s 447.

(ii)However, this section shall not apply to a person:

(a) If he proves that such statement or omission was immaterial; or

(b) He had reasonable grounds to believe that the statement was true or the
inclusion or omission was necessary

B) Civil Liability

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(i)If a prospectus includes any statement by expert; which is misleading; or omission of

any matter in the prospectus is misleading and such statement is unintentional then, he will
be liable compensate to every person who has sustained any loss or damage

(ii) However, this section shall not apply to a expert if

(a)he withdrew his consent before the issue of the prospectus

(b)that the prospectus was issued without his knowledge or consent

PRACTICAL QUESTION

Question 9 An allottee of shares in a Company brought action against a Director in respect

of false statements in prospectus. The director contended that the statements
were prepared by the promoters and he has relied on them. Is the Director
liable under the circumstances? Decide referring to the provisions of the
Companies Act, 2013. (RTP Nov 2014) (MTP NOV 2019) (6 Marks) (MTP M
21)

Law: As under Section 34 and 35 of the Companies Act, 2013 A Director shall not be
liable if he puts up the following defences:

(i) Such statement or omission in the prospectus was immaterial, or

(ii) Director had reasonable grounds to believe, and did up to the time of
issue of the prospectus believe, that the statement was true (Section 34,
the Companies Act, 2013)
(iii) Where a person having consented to become a director of the company,
withdrew his consent before the issue of the prospectus, and that it was
issued without his authority or consent; or where the prospectus was
issued without the knowledge or consent of a person, and that on
becoming aware of its issue, he forthwith gave a reasonable public
notice that it was issued without his knowledge or consent.(Section 35,
the Companies Act, 2013).
(iv) He relied on public document or experts opinion

Conclusion: Yes, the Director shall be held liable. A director can escape liability for mis-
statements in a prospectus only on the grounds specified under Section 34 and 35 of
the Companies Act, 2013. Relying on statements prepared by promoters is not a
ground included there under also a promoter cannot be expert. Accordingly, no
defense shall be available to the Director.

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PRACTICAL QUESTION

Question 10 Green Ltd. was dealing in export of rubber to specified foreign countries. The
company was willing to purchase rubber trees in A.P. State. The prospectus
issued by the company contained some important extracts of the expert report
and number of trees in A.P. State. The report was found untrue. Mr. Andrew
purchased the shares of Green Ltd. on the basis of the expert’s report published
in the prospectus. However, he did not suffer any loss due to purchase of such
shares. Will Mr. Andrew have any remedy against the company? State also the
circumstances where an expert is not liable under the Companies Act, 2013.
(RTP MAY 2020)

Law: As per case Derry vs peek, in case of mis-statement in prospectus remedy is

available to such allottee to whom personal loss has been caused.

Conclusion: In the present case, Mr. Andrew purchased the shares of Green Ltd. on the basis of
the expert report published in the prospectus. Mr. Andrew can claim compensation
for any loss or damage that he might have sustained from the purchase of shares.
However, he did not suffer any loss due to purchase of such shares.Hence, Mr.
Andrew will have no remedy against the company.

Circumstances when an expert is not liable: An expert will not be liable for any
mis- statements in the prospectus under the following situations:

(i) Such statement or omission in the prospectus was immaterial, or

(ii) Director had reasonable grounds to believe, and did up to the time of
issue of the prospectus believe, that the statement was true (Section
34, the Companies Act, 2013)
(iii) Where a person having consented to become a director of the company,
withdrew his consent before the issue of the prospectus or was
issued without his authority or consent;.

PRACTICAL QUESTION

Question 11 A company issued a prospectus. All the statements contained therein were
literally true. It also stated that the company had paid dividends for a number
of years, but did not disclose the fact that the dividends were not paid out of
trading profits, but out of capital profits. An allottee of shares wants to
avoid the contract on the ground that the prospectus was false in material
particulars. Decide. (RTP May 2015) (RTP MAY 2018) (MAY 2013)

Law: As per case Rex vs Kylsant Prospectus must disclose all material facts; no fact must
be omitted due to which the nature or quality of privileges disclosed by prospectus
is affected; and no facts must be suppressed.

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Conclusion: The non-disclosure of the fact that dividends were paid out of capital profits is
a concealment of material fact as a company is normally required to distribute
dividend only from trading or revenue profits and under exceptional
circumstances can do so out of capital profits. Hence, a material
misrepresentation has been made.

PRACTICAL QUESTION

Question 12 P Ltd. issued and published its prospectus to invite the investors to purchase
its shares. The said prospectus contained a false statement.

Mr. X purchased some partly paid shares of the company in good faith from
the Stock Exchange. Subsequently, the company was wound up and the name
of Mr. X was included in the list of contributories. Decide:

(i) Whether Mr. X is liable to pay the unpaid amount?

(ii) Can Mr. X sue the directors of the company to recover damages? (MAY
2016)

Law: A person who has applied for shares in the company, and who has been allotted
shares has certain remedies against the company and the persons issuing the
prospectus.

However as per case Peek vs gurney, the right to claim damage from Company or
Directors etc. shall lie only if the person has purchased shares on the strength of a
statement in prospectus. If a person buys shares from another shareholder or from
open market, he cannot bring a claim for damages.

Conclusion: (i) Yes, X is liable to pay the unpaid amount on the shares as he cannot avoid
contract since he purchased shares from stock exchange As X has purchased partly
paid shares, so he is liable for the remaining value of the shares. At the time of
winding up he is liable to contribute as a contributory.

(ii) No, X cannot sue the directors to recover damages for the misstatement in
the prospectus. If a person purchases shares in the open market, the prospectus is
non operative as far as he is concerned. In the present case, Mr. X purchased shares
on the stock exchange even if he did so in good faith he had not relied on the
statement in the prospectus.In view of the above, he cannot sue the directors of
the company to recover damages.

PRACTICAL QUESTION

Question 13 With a view to issue shares to the general public a prospectus containing some false
information was issued by a company. Mr. X received copy of the prospectus from
the company, but did not apply for allotment of any shares. The allotment of shares

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to the general public was completed by the company within the stipulated period. A
few months later, Mr. X bought 2000 shares through the stock exchange at a higher
price which later on fell sharply. X sold these shares at a heavy loss. Mr. X claims
damages from the company for the loss suffered on the ground the prospectus issued
by the company contained a false statement. Referring to the provisions of the
Companies Act, 2013 examine whether X’s claim for damages is justified. (MTP
MAY 2018)

Law: A person who has applied for shares in the company, and who has been allotted
shares has certain remedies against the company and the persons issuing the
prospectus.

However as per case Peek vs gurney, the right to claim damage from Company or
Directors etc. shall lie only if the person has purchased shares on the strength of a
statement in prospectus. If a person buys shares from another shareholder or from
open market, he cannot bring a claim for damages.

Conclusion: Since, X purchased shares through the stock exchange (open market) which cannot
be said to have bought shares on the basis of prospectus. X cannot bring action for
deceit against the directors. Hence, X will not succeed. It was also held in the case
of Peek Vs. Gurney that the above-mentioned remedy by way of damage will not
be available to a person if he has not purchased the shares on the basis of prospectus.

PRACTICAL QUESTION

Question 14 Alfa Ltd. after receiving 80% of the minimum subscription as stated in the
prospectus, has allotted 100 equity shares in favour of Mr. X. The company
deposited the said amount in the bank but withdrew 50% of the amount, before
finalization of the allotment, for the purchase of certain assets. Mr. X refuses
to accept the allotment of shares on the ground that the allotment is violative
of the provisions of the Companies Act, 2013. Discuss in the light of the
provisions of the Companies Act, 2013. (MTP NOV 2017)

Law: According to Section 39 of companies Act,2013

(i)no allotment of any securities of a company offered to the public for subscription
shall be made unless the amount stated in the prospectus as the minimum amount
has been subscribed and the sums payable on application for the amount so stated
have been paid to and received by the company

(ii)Further, according to Section 39(3), if the stated minimum amount has not been
subscribed and the sum payable on application is not received within a period of
thirty days from the date of issue of the prospectus, the amount received under sub-
section (1) shall be returned within of 15 days from the closure of the issue.

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(iii) If such money is not repaid within such period, the directors of the company
who are officers in default shall jointly and severally be liable to repay that money
along with interest at the rate of 15% p.a.
Conclusion: The company has received 80% of the minimum subscription as stated in the
prospectus whereas required minimum subscription as per SEBI act is 90% .Hence,
the allotment is in contravention of section 39(1) of the Companies Act, 2013 it is
required to refund the money received (i.e. 80% of the minimum subscription) to
the applicants. It has no other option available.

Therefore, in the present case, X is within his rights refuses to accept the allotment
of shares which has been illegally made by the company.

PRACTICAL QUESTION

Question 15 Kite Limited issued 1,00,000 equity shares of ` 100 each at par to the public by
issuing a prospectus. The prospectus discloses the minimum subscription
amount of ` 15,00,000 required to be received on application of shares and
share application money shall be payable at ` 20 per share. The prospectus
further reveals that Kite Limited has applied for listing of shares in 3
recognized stock exchanges of which 1 application has been rejected. The issue
was fully subscribed and Kite Limited received an amount of ` 20,00,000 on
share application. Kite Limited, then proceeded for allotment of shares.
Examine the three disclosures in the above case study which are the deciding
factors in an allotment of shares and the consequences for violation, if any
under the provisions of the Companies Act, 2013.(6 Marks) (MTP Sep. 23)
Law: As per section 39,40 of companies act , 2013 there are 3 important criteria for
allotment of shares in case of public offer

(i)Every company shall, before making public offer, make an application to one
or more recognised stock exchange and obtain permission for the securities to be
dealt with in such stock exchange and The prospectus shall state the name or names
of the stock exchange in which the securities shall be dealt with Also none of the
stock exchange should reject application

(ii) The company shall obtain minimum application money on every security which
shall not be less than at least:

(a) 5% of the nominal amount of the security; or

(b) such other percentage or amount, as may be specified by SEBI by making
regulations in this behalf.

(iii)no allotment of any securities of a company offered to the public for subscription
shall be made unless the amount stated in the prospectus as the minimum amount
has been subscribed and the sums payable on application for the amount so stated
have been paid to and received by the company

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Conclusion: In above case since Kite Limited has applied for listing of shares in 3 recognized
stock exchanges of which 1 application has been rejected, he cannot proceed to issue
shares and if allotted, issue will be void

PRACTICAL QUESTION

Question 16 Kapoor Builders Limited decides to pay 2.5 percent of the value of debentures
as underwriting commission to the underwriters but the Articles of the company
authorize only 2.0 percent underwriting commission on debentures. The
company further decides to pay the underwriting commission in the form of flats.
Examine the validity of the above arrangements under the provisions of the
Companies Act,2013. (RTP MAY 2018) (MTP NOV 2017)

Law: As per Section 40 (6) of the Companies Act 2013, The rate of commission paid or
agreed to be paid shall not exceed, in case of shares, five percent (5%) of the price
at which the shares are issued or a rate authorised by the articles, whichever is less,
and in case of debentures, shall not exceed two and a half per cent (2.5 %) of the
price at which the debentures are issued, or as specified in the company’s articles,
whichever is less;

Conclusion: (i) In view of the above, the decision of Kapoor Builders Ltd. to pay
underwriting commission exceeding 2% as prescribed in the Articles is
invalid.
(ii) The company may pay the underwriting commission in the form of flats as
both the Companies Act and the Rules do not impose any restriction on the
mode of payment though the source has been restricted to either the
proceeds of the issue or profits of the company.

PRACTICAL QUESTION

Question 17 Modem Jewellery Ltd. decides to pay 5% of the issue price gap of shares as
underwriting commission to the underwriters, but the Articles of the company
authorize only 4% underwriting commission on shares. Examine the validity of
the above decision under the provision of the Companies Act, 2013. (MAY 2019)

Law: Section 40(6) of the Companies Act, 2013 provides that a company may pay
commission to any person in connection with the subscription to its
securities subject to such conditions as may be prescribed. Rule 13 of the
Companies (Prospectus and Allotment of Securities) Rules, 2014 provides the
conditions. As per Rule 13(c) of the Companies (Prospectus and Allotment of
Securities) Rules, 2014, the rate of commission paid or agreed to be paid shall not
exceed, in case of shares, five per cent of the price at which the shares are issued or
a rate authorised by the articles, whichever is less.

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Conclusion: In the instant case, Modern Jewellery Ltd. decides to pay 5% of the issue price gap
of shares as underwriting commission to the underwriters, but the Articles of the
company authorize only 4% underwriting commission on shares. Hence the
company can only pay a maximum of 4% underwriting commission on shares.

PRACTICAL QUESTION

Question 18 “The Articles of Association of X Ltd. contained a provision that upto 4% of

issue price of’ the shares may be paid as underwriting commission to the
underwriters. The Board of Directors of X Ltd. decided to pay 5%
underwriting commission. (MTP MAY 2019)

Law: Section 40 (6) of the Companies Act 2013, provides that a company may pay
commission to any person in connection with the subscription or
procurement of subscription to its securities, whether absolute or conditional,
subject to the number of conditions which are prescribed under Companies
(Prospectus and Allotment of Securities) Rules, 2014. Under the Companies
(Prospectus and Allotment of Securities) Rules, 2014 the rate of commission
paid or agreed to be paid shall not exceed, in case of shares, five percent (5%)
of the price at which the shares are issued or a rate authorised by the articles,
whichever is less.

Conclusion: In the given problem, the articles of X Ltd. have prescribed 4% underwriting
commission but the directors decided to pay 5% underwriting commission.

Therefore, the decision of the Board of Directors to pay 5% commission to

the underwriters is invalid.

PRACTICAL QUESTION

Question 19 Prakash Limited wants to raise funds for its upcoming project. Accordingly,
it has issued private placement offer letters for issuing equity shares to 55
persons, of which four are qualified institutional buyers and remaining are
individuals. Before the completion of allotment of equity shares under this
offer letter, company issued another private placement offer letter to another
155 persons in their individual names for issue of its debentures.

Being a public company is it possible for Prakash Limited to issue securities

under a private placement offer? By doing so, whether the company is in
compliance with provisions relating to private placement or should these
offers be treated as public offers? What if the offer for debentures is given

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after allotment of equity shares but within the same financial year? (6 Marks)
(MTP M 21)(May 25 MTP)

Law: According to section 42 of the Companies Act, 2013 any private or public
company may make private placement through issue of a private placement offer
letter.

(i) However, the offer shall be made to the persons not exceeding two
hundred in a financial year. For counting number of persons, Qualified
Institutional Buyers (QIBs) and employees of the company being offered
securities under a scheme of employees’ stock option will not be
considered.

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

the prescribed number of persons, it shall be deemed to be an offer to the
public and accordingly, it shall be governed by the provisions relating to
prospectus.

(iii) Also, a company is not permitted to make fresh offer under this section if
the allotment with respect to any offer made earlier has not been completed
or otherwise, that offer has been withdrawn or abandoned by the company.
This provision is applicable even if the issue is of different kind of security.

Any offer or invitation not in compliance with the provisions of this section shall
be treated as a public offer and all provisions will apply accordingly.

Conclusion: (i) In the given case Prakash Limited, though a public company but the private
placement provisions allow even a public company to raise funds through
this route. The company has given offer to 55 persons out of which 4 are
qualified institutional buyers and hence, the offer is given effectively to
only 51 persons which is well within the limit of 200 persons. From this
point of view, the company complies the private placement provisions.

(ii) However, as per the question, the company has given another private
placement offer of debentures before completing the allotment in respect
of first offer and therefore, the second offer does not comply with the
provisions of section 42. Hence, the offers given by the company will be
treated as public offer.

(iii) In case the company gives offer for debentures in the same financial year
after allotment of equity shares is complete then both the offers can well be
treated as private placement offers.

20.Ram Limited is planning to make a private placement of securities. The Managing

Director arranged to obtain a brief note from some source explaining the salient
features of the issue of private placement that the Board of Directors shall keep in
mind while approving the proposal on this subject. The brief note includes, inter alia,
the information / suggestions on the following points:
(i) A private placement shall be made only to a select group of identified persons
not exceeding 200 in a financial year.

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(ii) The aforesaid ceiling of identified persons shall not apply to the offer made to
the qualified institutional buyers but is applicable to the employees of the
Company who will be covered under the Company's Employees Stock Option
Scheme.
(iii) The offer on private placement basis shall be made only once in a
financial year for any number of identified persons not exceeding 200.
(iv) The Company solicits your remarks on the points referred above as to
whether they are valid or not? Reasoned remarks should be given in
accordance with the provisions of the Companies Act, 2013.(5 Marks) (MTP
Sep. 23)
(i)The statement is valid as private placement shall be made only to a select group of
identified persons not exceeding 200 in a financial year but such limit is per kind of security
and for a financial year.
(ii) The statement is invalid as The aforesaid ceiling of identified persons shall not only
apply to the offer made to the qualified institutional buyers but also to the Company's
Employees Stock Option Scheme.
(iii)The statement is valid as private placement shall be made only to a select group of
identified persons not exceeding 200 in a financial year but such limit is per kind of security
and for a financial year.

21.Explain various instances which make the allotment of securities as irregular allotment under
the Companies Act, 2013. (MAY 2019)

The Companies Act, 2013 does not specifically provide for the term “Irregular Allotment” of
securities. Hence, we have to examine the requirements of a proper issue of securities and consider
the consequences of non- fulfillment of those requirements.

In broad terms an allotment of shares is deemed to be irregular when it has been made by a company
in violation of Sections 23, 26, 39 or 40. Irregular allotment therefore arises in the following
instances:

1 Where a company does not issue a prospectus in a public issue as required by section 23;
or

2 Where the prospectus issued by the company does not include any of the matters required to
be included therein under section 26 (1), or the information given is misleading, faulty and
incorrect; or

3 Where the prospectus has not been filed with the Registrar for registration under section 26
(4); or

4 The minimum subscription as specified in the prospectus has not been received in terms of
section 39; or

5 The minimum amount receivable on application is less than 5% of the nominal value of the
securities offered or lower than the amount prescribed by SEBI in this behalf; or

6 In case of a public issue, approval for listing has not been obtained from one or more of the
recognized stock exchanges under section 40 of the Companies Act, 2013.

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Chapter IV
SHARES AND DEBENTURES
Q Section Topic

1 43 Equity shares with DVR

2 48 Variation of Rights

3 48 Variation of Rights

4 48 Variation of Rights

5 50 Calls in advance

6 52 Application of shares at premium

7 54 Sweat Equity shares

8 54 Sweat Equity shares

9 54 Sweat Equity shares

10 54 Sweat Equity shares

11 55 Redemption of preference shares

12 55 Renewal of Preference shares

13 56 Share certificate

14 - Forged transfer

15 58 Refusal of transfer

16 61 Alteration of share capital

17 61 Alteration of share capital

18 62 Right Issue

19 62 Right Issue

20 62 Right Issue

21 62 Right Issue

22 62 Prefrential Allotment

23 63 Bonus shares

24 63 Bonus shares

25 66 Reduction and sAlteration

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26 67 Prohibition for financial assistance

27 67 Prohibition for financial assistance

28 67 Prohibition for financial assistance

29 68 Buy back

30 68 Buy back

31 68 Buy back

32 68 Buy back

33 68 Buy back

34 71 Debentures

1.To prevent excessive concentration of control among a group of shareholders, describe with the help of
an example how the Companies Act, 2013, imposes limits and regulates the voting power of shares with
differential rights (equity shares)? (MTP May 25)

Can equity share with differential voting rights be issued? If yes, state the conditions under
which such shares may be issued.(MAY 2018)

Equity shares with differential voting rights(DVR)

Sec 43 Companies Act, 2013, allows companies to issue equity shares with differential voting rights (DVRs),
which provide different voting power compared to ordinary equity shares. However, to prevent excessive
concentration of control in the hands of a few shareholders, the Act places specific restrictions on the total voting power
that can be assigned to DVR shares.
Conditions to issue shares with differential rights

(i) The issue of shares with differential rights must be authorised by the articles
(ii) Must be authorised by passing ‘OR’ in general meeting. However, where equity shares of
a company are listed on a recognized stock exchange, the issue of such shares shall be
approved by shareholders through postal ballot
(iii) The voting power w.r.t such shares shall not exceed 74% of the total voting power
including voting power in respect of equity shares with differential rights issued at any point
of time.
(iv) The company has not defaulted in filing financial statements and annual returns for 3
immediately preceding financial years.
(v) The company has no subsisting default w.r.t.
a. Payment of declared dividend; or
b. Repayment of matured deposits or interest on deposits; or
c. Redemption of debentures or interest on it; or
d. Redemption of preference shares.
(vi) The company has not defaulted in –
a. Payment of dividend on preference shares; or
b. Repayment of term loan from Public Financial Institution or State Level Financial
Institution or Scheduled Bank; or
c. Dues w.r.t statutory payment relating to its employees; or

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d. Crediting the amount in IEPF to C.G.

i. However, a company may issue shares with differential rights upon
expiry of 5 years from the end of F.Y. in which such default was made
good.
(vii) The company has not been penalized by Court or Tribunal during last 3 years of any offence
under –
a. Reserve Bank of India Act, 1934; or
b. Securities and Exchange Board of India Act, 1992; or
c. Securities Contracts (Regulation) Act, 1956; or
d. Foreign Exchange Management Act, 1999; or
(viii) The company shall not convert its existing equity share capital with voting rights into equity
share capital carrying differential voting rights and vice versa.
Example to understand the above rule.

Hind Ltd. has 2,000 total shareholders, including:

Regular Equity Shareholders (with normal voting rights)
DVR Shareholders (with differential voting rights)
Step 1: Understanding Voting Power Distribution
Let’s assume Hind Ltd. issues DVR shares where each shareholder has twice the voting power compared to regular
equity shareholders.
Regular Equity Shareholders = 600 shareholders → 600 votes
DVR Shareholders = 400 shareholders → Each holding 2 votes → 800 votes Total Voting Power in the Company
= 600 + 800 = 1,400 votes
Step 2: Applying the 74% Rule

74% of 1,400 total votes = 1,036 votes

The DVR shareholders collectively hold 800 votes, which is below 1,036 votes. Hence this provision strikes a balance
by allowing companies to issue differential voting rights shares and restrict the over concentration of power with
dominating few group of peoples. By capping DVR voting power at 74%, the company ensures that the control is not
excessively prejudiced in favor of DVR shareholders.

2.Growmore Limited’s share capital is divided into different classes. Now,

Growmore Limited intends to vary the rights attached to a particular class of shares.
Explain the provisions of the Companies Act, 2013 to Growmore Limited as to
obtaining consent from the shareholders in relation to variation of rights. (RTP NOV
2018) (MTP NOV 2017)

Variation in rights of shareholders with consent

According to section 48 of the Companies Act, 2013-
(i)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 if
authorized by MOA/AOA and such variation is not prohibited by the terms of issue of the
shares of that class:

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Provided that if variation by one class of shareholders affects the rights of any other class
of shareholders, the consent of three-fourths of such other class of shareholders shall also
be obtained and the provisions of this section shall apply to such variation.
(ii)Application to Tribunal: 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 within twenty-one days after the date
on which the consent was given or the resolution was passed to have the variation cancelled,
and where any such application is made, the variation shall not have effect unless and until
it is confirmed by the Tribunal:

PRACTICAL QUESTION

Question 3 The share capital of Lego Ltd. is divided as under:

(i) Authorised Share capital: Rs. 10,00,000

(ii) Rate per share: Rs. 100
(iii) Number of equity shares: 8,000
(iv) Number of 10% preference shares: 2,000
Lego Ltd. wants to vary the rights attached to the preference shares. Lego Ltd. has
obtained the consent of 1600 preference shareholders. However, 350 preference
shareholders have not given consent to such variation.

In the light of the provisions of the Companies Act, 2013, advise does the non-
consenting shareholders of Lego Ltd. have any rights for not bringing into effect the
variation of their rights.(MTP NOV 2017)

Law: Hint – Law similar to previous question above

Conclusion: In present case, since 1600 out of 2000 i.e 80% consented in writing about variation which
is more than 75% , Lego ltd can vary the rights attached to the preference shares .

Since 350 out of 2000 i.e more than 10% are dissenting shareholders they may apply
to tribunal

PRACTICAL QUESTION

Question 4 Moringa Ltd. initially issued preference shares with a fixed 10% dividend. Later, the
company decided to reduce the dividend rate to 8%, as the company’s profit margins declined
in the last two quarters. Some preference shareholders opposed this change, arguing that their
rights were being altered unfairly. The company, however, claimed that the change was valid
under its Articles of Association. Will Moringa Ltd. be able to proceed with the change. What
legal provisions under the Companies Act, 2013, govern such variations in shareholders'
rights, and what procedural requirements must be followed? (MTP May 25)

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Law: When a company modifies or alters the rights associated with a specific class of shares, it must
comply with Section 48 of the Companies Act, 2013, to ensure fairness and transparency as
follows

1. There should be a provision in the Company's Articles of Association (AOA) or

Memorandum of Association (MOA) permitting the variation of class rights. If there is
no such provision, the terms of the issue of preference shares must not prohibit such a
variation.
2. The company must obtain written consent from the holders of at least 75% of the issued
shares of that class of affected shareholders (preference shareholders in this case).
3. Alternatively, a special resolution approving the variation must be passed at a separate
class meeting of preference shareholders.
4. If the change in preference share rights affects equity shareholders, then three-fourths of
such equity shareholders must also approve the variation.
5. Shareholders holding at least 10% of that class who did not consent or vote in favor of the
resolution can apply to the Tribunal. The variation will only take effect if confirmed by
the Tribunal.
Conclusion: In present case, Moringa Ltd. cannot alone reduce the preference dividend from 10% to 8% without
taking ¾ rth majority or passing special resolution. Therefore such variation is invalid and affected
shareholders may challenge the decision in the Tribunal.

PRACTICAL QUESTION

Question 5 Sujeev, a shareholder, holding 2000 shares of ₹ 100 per share of Touchwood Pharma
Ltd. The company has called and collected ₹ 60 per share. Sujeev has paid ₹ 40 per
share (the balance amount not yet demanded by the company) as calls in advance. At
the time of annual general meeting of the company, he demanded that he is entitled to
vote in respect of the advance money paid by him. The directors of the company
rejected his demand. He claimed for refund of calls in advance amount paid by him
with interest.

Examine the validity of Sujeev’s claim for voting or refund of money with interest
with reference to the provisions of the Companies Act, 2013.(RTP May 2016) (MTP
NOV 2017)

Law: According to Section 50 of the Companies Act, 2013,

(i)a company may, if so authorized by the Articles, accept from any member, the whole or
a part of the amount remaining unpaid on any shares by him, even if no part of that
amount has been called up. The amount so received or accepted is described as payment
in advance of calls.

(ii)When a company receives payment in advance of calls the shareholder is not entitled
to voting rights in respect of the moneys so paid by him until the same would, but for such
payment, become presently payable [Section 50)].

Conclusion: Therefore, according to the above provisions: -

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Sujeev is not entitled to vote in respect of the moneys so paid by him until the same would,
but for such payment, become presently payable.

As per the provisions of law, the amount received in advance of calls is not refundable.
However, Sujeev is entitled to claim interest on the amount of the call to the extent payable
according to the Articles of Association. If there are no profits, it must be paid out of capital,
because shareholder becomes the creditor of the company in respect of this amount.

6.Navni Ltd. has accumulated a significant amount in its securities premium account.
The company is considering different ways to utilize these funds. Advise the directors of the
company on the application of the securities premium account as per the provisions of the
Companies Act, 2013. (MTP Sept 24),or

Walnut Limited has an authorized share capital of 1,00,000 equity shares of ` 100 per share
and an amount of ` 3 crores in its Share Premium Account as on 31-3-2018. The Board of
Directors seeks your advice about the application of share premium account for its business
purposes. Please give your advice.(RTP MAY 2019),or

State the purposes for which the securities premium account can be utilized? (5 Marks) (MTP
Sep. 23)
Application of Premium received on Issue of Shares

The provisions of the Companies Act, 2013, allow the companies to apply securities
premium account for:

a. Issue of fully paid bonus shares;

b. Writing off the preliminary expenses;
c. Writing off the issue expenses (expenses including commission paid or discount
allowed on any issue of shares or debentures);
d. Premium payable on the redemption (of any preference shares or of any debentures);
or
e. Buy-back (purchase of its own shares or other securities under section 68).

PRACTICAL QUESTION

Question 7 Alpha Limited (listed on Stock Exchange) was incorporated on 1st

October, 2019 with a paid- up share capital of ₹ 200 crore. Within this small
time of 4 months, it has earned huge profits and has topped the charts for its
high employee friendly environment. The company wants to issue sweat
equity to its employees. A friend of the CEO of the company has told him that
they cannot issue sweat equity shares as 5 years have not elapsed since the time
company has commenced its business. The CEO of the company has
approached you to advise them about the essential conditions to be fulfilled
before the issue of sweat equity shares especially since their company is just
a few months old? (MTP Jan 25)(RTP MAY 2019) (MTP MAY 2019) (MTP
MAY 2020) (MTP Nov 24) (5 Marks)

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Law:
Sweat equity shares are the shares that are issued by a company to its employees or
directors at a discount or for consideration, other than cash. These shares are given as a
reward for their contribution to the company’s growth, such as providing intellectual
property, technical expertise, or other valuable services. The holders of sweat equity
shares shall rank pari-passu with other equity shareholders.
The issuance of sweat equity shares is regulated under Section 54 of the Companies
Act, 2013, along with the Companies (Share Capital and Debentures) Rules, 2014.
1. the issue is authorised by a special resolution passed by the company;
2. 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;
3. where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the
regulations made by the Securities and Exchange Board in this behalf and
if they are not so listed, the sweat equity shares are issued in accordance with
such rules as prescribed under Rule 8 of the Companies (Share and
Debentures) Rules, 2014,
4. Maximum Issue in a Year- Higher of 15% of PAID-UP equity share capital
(PUESC) or Rs 5 crores of ISSUE VALUE of Equity Shares.
5. Maximum Ratio to Other equity capital - 25% of PAID-UP equity share
capital (PUESC) of the Company at any time except in start up company it
can be upto 50% for first 10 years
6. The sweat equity shares issued shall be locked in i.e non-transferable for a
period of 3 years from the date of allotment.
7. The holders of sweat equity shares shall rank pari-passu with other equity
shareholders.
Conclusion:
In present case, Alpha Limited can issue sweat equity shares by following the
conditions as mentioned above. It does not make a difference that the company is
just a few months old. A friend of the CEO is incorrect as there is no provision
in companies act or rules which deny companies to issue sweat equity shares after
certain period from commencement of business

PRACTICAL QUESTION

Question 8 XYZ Tech Solutions Limited is a growing technology company that has seen
significant contributions from its employees and directors in the development
of a ground breaking software product. To reward these key
contributors, the board proposed issuing sweat equity shares to certain
employees and directors. XYZ Tech Solutions Limited already has issued
ordinary equity shares but has never issued sweat equity shares before.

The company has a paid-up equity share capital ₹ 20 crore. The company has
proposed to issue sweat equity shares worth ₹ 4 crore of face value. The
company’s board has drafted a special resolution outlining the proposed
issuance of sweat equity shares and including specific details, such as the

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number of shares, the current market price, consideration (if any), and the
classes of directors and employees eligible to receive the shares.

The company has approached you to advise them about the issue of the said
sweat equity shares, in line with the provisions of the Companies Act,
2013. (RTP Jan 25)

Law:
Law similar to above question
Conclusion: In the given question, the company has proposed to issue sweat equity shares to
the tune of ₹ 4 crore. However, the maximum limit to which it can issue such
shares is- Higher of:

a. 15% of the issued paid up share capital, i.e. ₹ 3 crore, or

b. 5 crore

Thus, company can issue sweat equity shares to the tune of ₹ 5 crore. However,
the company cannot issue such shares more than 25% of the paid-up equity
capital= 25% of ₹ 20 crore= ₹ 5 crore.

Hence, the company can issue sweat equity shares of ₹ 4 crore.

PRACTICAL QUESTION

Question 9 Innovative Ltd. is a start-up by a few qualified professionals, which was

incorporated in 2014. The Company is booming and favoring the younger
generation to work. The Capital Structure of the Company is as follows:
Particulars I N R (Crores)
Authorised Share Capital100,00,000 10
Equity Shares of Z 10 Each
Issued, Subscribed and Paid-up Share 5
Capital 50,00,000 Equity Shares of
`10 Each
Share Premium 1
General Reserve 3.52
Profit & Loss Account 1.58

The company decided to issue 30% sweat equity shares to a class of directors
and permanent employees to keep them motivated and partner in growth.
Lock-in period for sweat equity will be five years. For this purpose, a resolution
in General meeting of Company was passed in this manner.

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"The Resolution specifies 15 lakh sweat equity shares, Current Market price!
25 per share with a consideration of rs 5 per share to be issued to a class of
directors and employees."

The company seeks your advice with reference to the provision of issue of sweat
equity shares company under the Companies Act, 2013.

(i) Whether size of issue of sweat equity shares was appropriate?

(ii) Whether lock-in period was justifiable? 6 Marks (May 23)
Law:
Sweat equity shares are the shares that are issued by a company to its employees or directors
at a discount or for consideration, other than cash. These shares are given as a reward for their
contribution to the company’s growth, such as providing intellectual property, technical expertise,
or other valuable services. The holders of sweat equity shares shall rank pari-passu with other
equity shareholders.
The issuance of sweat equity shares is regulated under Section 54 of the Companies Act, 2013,
along with the Companies (Share Capital and Debentures) Rules, 2014.
Maximum Limit: To prevent excessive dilution of ownership, the law imposes certain limits on
the amount of sweat equity shares a company can issue. As per Sub-rule 4 of the Companies
(Share Capital and Debentures) Rules, 2014, a company can issue sweat equity shares within
the following limits:
i) Annual Limit:The company can issue sweat equity shares up to the higher of the 15%
of the existing paid-up equity share capital, or Shares worth ₹ 5 crore.
ii) Overall Limit: At any point in time, the total sweat equity shares issued (including
all previous issues) cannot exceed 25% of the total paid-up equity share capital of
the company. Except 50% for start up company upto 10 years
iii) Lock in period - The sweat equity shares issued shall be locked in i.e non-
transferable for a period of 3 years from the date of allotment.
Conclusion: In present case ,

(i) Company wants to issue 30% equity shares of rs 10 which is 15 lakh

shares of rs 10 each at rs 5 which is of 1.5 cr (allowed within the
maximum sweat equity share limit of 5 cr in a year) , also it is a start up
company so they can have ratio to total paid up equity upto 50% for
first 10 years , so considering both the factors size of equity shares is
appropriate
(ii) Lock in period of 5 years is not justified as mximum lock in period can
be upto 10 years

PRACTICAL QUESTION

Question 10 One X Ltd., a technology-based company, has a paid-up equity share capital of ₹ 40 crore.
The company previously issued sweat equity shares worth on ₹ 8 crore and now plans to
issue an additional ₹ 7 crore this year.

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Describe sweat equity shares, and to whom are they issued? What is the overall maximum
limit to issue sweat equity share, and does the proposed issuance exceed the limit? (MTP
May 25)

Law:
Law same like above question except lock in period
Conclusion: In the present case the paid-up share capital of the company is ₹ 40 crore. The company has
previously issued sweat equity shares worth ₹ 8 crore and now plans to issue ₹ 7 crore more
this year. So according to annual limit imposed, 15% of ₹ 40 crore is ₹ 6 crore. The fixed limit is
₹ 5 crore. So considering the higher value in the current financial year, company can issue
up to ₹6 crore in sweat equity shares.

Secondly, as per the overall limit imposed to issue sweat equity shares is 25% of Paid-Up
Capital. So 25% of ₹ 40 crore is ₹ 10 crore. Previously the company issued sweat equity
shares worth ₹ 8 crore. Since the company has already issued ₹ 8 crore worth of sweat equity
shares, it cannot issue more than ₹ 2 crore under the 25% overall limit.

However, according to the annual limit, the company can issue shares worth ₹ 6 crore, but can
issue further more upto ₹ 2 crore in sweat equity shares while staying within overall legal
limits.

Yes, proposal to issue an additional ₹ 7 crore this year exceed the limits. Hence if the company
wants to issue more sweat equity shares, it will have to increase its paid-up equity share capital
to expand the permissible limit.

PRACTICAL QUESTION

Question 11
Vardha Ltd., a textile company, had issued 5,00,000 preference shares of ₹ 100
each in 2015, which are now due for redemption in 2025. The company has
retained earnings of ₹ 3 crore and free reserves of ₹ 2 crore.
Being an expert, you are asked to recommend possible options that the
management can avail as regard redemption of shares according to the provisions of the
Companies Act, 2013? (MTP May 25)

Law: The redemption of preference shares is governed by Section 55(2) of the Companies Act,
2013, which outlines specific conditions for redemption and payment of premium on
redemption, if any. In the given case, the company can redeem the preference shares out of the
following sources:

1. Out of profits that would otherwise be available for dividend distribution.

2. From the proceeds of a fresh issue of shares, specifically made for the purpose of
redemption.
3. Where such shares are proposed to be redeemed out of the profits of the company,
there the sum to be redeemed, shall be transferred to a reserve, called Capital Redemption
Reserve (CRR). The Capital Redemption Reserve (CRR) is a mandatory reserve that must

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be created when preference shares are redeemed using profits or free reserves. The amount
to be transferred to CRR should be equal to the nominal value of the shares redeemed.
4. However, if the company issues fresh equity shares to fund the redemption, it is not
required to create a CRR since the redemption is backed by new capital inflow. Once created,
the CRR is treated with the same sanctity as paid-up share capital.
Conclusion: Since the company has retained earnings of ₹ 3 crore and free reserves of ₹ 2 crore, it can opt for
redemption from these sources. Alternatively, it can issue new equity shares to raise funds for
redemption.Hence in the present case, the company has two options, firstly if it redeems
shares using profits and reserves, it must transfer ₹ 5 crore to CRR and secondly if it issues
fresh equity shares, it does not need to create CRR.

PRACTICAL QUESTION

Question 12 Due to insufficient profits, Silver Robotics Limited is unable to redeem its
existing preference shares amounting to ` 10,00,000 (10,000 preference shares
of ` 100 each) though as per the terms of issue they need to be redeemed within
next two months. It did not, however, default in payment of dividend as and
when it became due. What is the remedy available to the company in respect
of outstanding preference shares as per the Companies Act, 2013? (module)

Law: Renewal of Preference shares

According to section 55(3) of the Companies Act, 2013,
(i)where a company is not able to redeem any preference shares or to pay
dividend, if any, on such shares in accordance with the terms of issue (such shares
hereinafter referred to as unredeemed preference shares), it may—
i. with the consent of the holders of three-fourths in value of such preference
shares, and
ii. with the approval of the Tribunal on a petition made by it in this behalf,
issue further redeemable preference shares equal to the amount due, including
the dividend thereon, in respect of the unredeemed preference shares, and on the
issue of such further redeemable preference shares, the unredeemed preference
shares shall be deemed to have been redeemed
(ii)Provided that the Tribunal shall, while giving approval under this sub-section,
order the redemption forthwith of preference shares held by such persons who have
not consented to the issue of further redeemable preference shares.
Conclusion: In view of the provisions of section 55 (3), Silver Robotics Limited can initiate steps
for the issue of further redeemable preference shares equal to the amount due i.e. `
10,00,000. For this purpose, it shall obtain the consent of the holders of three-fourths
in value of such preference shares and also seek approval of the Tribunal by making
a petition. In case, there are certain preference shareholders who have not accorded
their consent for the proposal of issuing further redeemable preference shares, the
Tribunal may order the company to redeem forthwith such preference shares.

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Accordingly, Silver Robotics Limited must be ready with sufficient funds for the
redemption of preference shares held by those who have not consented.
On the issue of such further redeemable preference shares by the company, the
unredeemed preference shares shall be deemed to have been redeemed

13.Ramesh, a resident of New Delhi, sent a transfer deed duly signed by him as
transferee and his brother Suresh as transferor, for registration of transfer of shares to
Ryan Entertainment Private Limited at its Registered Office in Mumbai. He did not
receive the transferred shares certificates even after the expiry of four months from the
date of dispatch of transfer deed. Is there any liability of company and officer in default
in the said matter? (module)

According to section 56 (4) of the Companies Act, 2013, every company, unless prohibited
by any provision of law or of any order of court, Tribunal or other authority, shall deliver
the certificates of all shares transferred within a period of one month from the date of receipt
by the company of the instrument of transfer.
Further, as per section 56 (6), where any default is made in complying with the provisions
of sub-sections (1) to (5), the company and every officer of the company who is in default
shall be liable to a penalty of fifty thousand rupees.

PRACTICAL QUESTION

Question 14 Mr. A was having 500 equity shares of Open Sky Aircrafts Limited. Mr. B
acquired these shares of the company from Mr. A but the signature of Mr. A,
the transferor on the transfer deed was forged. The company registered the
shares in the name of Mr. B by issuing share certificate. Mr. B sold 100 equity
shares to Mr. C on the basis of share certificate issued by Open Sky Aircrafts
Ltd. Mr. B and Mr. C are not having the knowledge of forgery. State the
rights of Mr. A, Mr. B and Mr. C under the Companies Act, 2013. (MTP
MAY 2020)

Law: According to the Companies Act, 2013,

Where the company has registered the transferee as a member on the basis of a
forged transfer, following shall be the consequences:
(i) A forged transfer is nullity. It does not give the transferee (Mr. B) any
title to the shares The original owner can compel the company to restore
his name on the ROM.
(ii) The company shall cancel the share certificate issued to the transferee
and remove the name of transferee from the ROM.
(iii) Where the transferee has already transferred the shares to an innocent
purchaser:
(a) They shall claim damages from the company. The company shall have
right to recover damages from the person who had deposited the forged
transfer deed.

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(b) Instead new purchaser can directly sue person who has done forgery
Conclusion: A forged transfer is nullity Therefore, if the company acts on a forged transfer and
removes the name of the real owner (Mr. A) from the Register of Members, then the
company is bound to restore the name of Mr. A as the holder of the shares and to
pay him any dividends which he ought to have received (Barton v. North
Staffordshire Railway Co.).In the above case, ‘therefore, Mr. A has the right against
the company to get the shares recorded in his name.
However, Mr. B and Mr. C being innocent purchaser can claim damages from the
company. The company shall have right to recover damages from the person who
had deposited the forged transfer deed or alternatively sue person who has done
forgery

PRACTICAL QUESTION

Question 15 Mr Nilesh has transferred 1000 shares of Perfect Ltd. to Ms. Mukta. The
company has refused to register transfer of shares and does not even send a
notice of refusal to Mr. Nilesh or Ms. Mukta respectively within the prescribed
period. Discuss as per the provisions of the Companies Act, 2013, whether
aggrieved party has any right(s) against the company for such refusal? (RTP
MAY 2018) (MTP MAY 2019) (MTP NOV 2019) (MAY 2018)
Law: The problem as asked in the question is governed by Section 58 of the Companies
Act, 2013 dealing with the refusal to register transfer and appeal against refusal.
i)Under section 58 (4), if a public company without sufficient cause refuses to
register the transfer of securities within a period of thirty days from the date on
which the instrument of transfer is delivered to the company, the transferee may,
within a period of sixty days of such refusal or where no intimation has been
received from the company, within ninety days of the delivery of the instrument
of transfer, appeal to the Tribunal.
(ii)Section 58 (5) further provides that the Tribunal, while dealing with an appeal
made under sub-section (4), may, after hearing the parties, either dismiss the appeal,
or by order—
(a) direct that the transfer or transmission shall be registered by the company and
the company shall comply with such order within a period of ten days of the
receipt of the order; or
(b) direct rectification of the register and also direct the company to pay damages,
if any, sustained by any party aggrieved;
Conclusion: In the present case Ms. Mukta can make an appeal before the tribunal and claim
damages.

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16.The Directors of Mars India Ltd. desire to alter capital clause of Memorandum of
Association of their company. Advise them, under the provisions of the Companies
Act, 2013 about the ways in which the said clause may be altered.(MTP NOV 2019)
Alteration of Capital
Under section 61 (1) a limited company having a share capital may, if authorised by its
Articles, alter its Memorandum in its general meeting to:
(i) increase its authorized share capital
(ii) 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
(iii)consolidate and divide all or any of its share capital into shares of a larger amount than
its existing shares;
(iv)sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the
Memorandum; .
However, no consolidation and division which results in changes in the voting percentage
of shareholders shall take effect unless it is approved by the Tribunal on an application made
in the prescribed manner
(v)convert all or any of its paid- up shares into stock and reconvert that stock into fully paid
shares of any denomination.
Procedure
(i)The capital clause of memorandum, if authorised by the Articles, shall be altered by
passing an ordinary resolution
(ii)Further, under section 64 where a company alters its share capital in any of the above-
mentioned ways, the company shall file a notice in the Form No. SH-7 as per Rule 15 of
the Companies (Share Capital and Debentures) Rules, 2014 with the Registrar, along with
an altered memorandum within thirty days of alteration.

PRACTICAL QUESTION

Question 17 Shenoy Limited is a company with an authorized share capital of

20,00,000 equity shares of ₹100 each. At the Annual General Meeting (AGM),
the shareholders proposed to reduce the face value of each share from
₹100 to ₹10 and correspondingly increase the number of shares from 20
lakh to 2 crore, keeping the total authorized share capital unchanged. Analyse
whether the request of the shareholders is considerable and if so, how
can the company alter its share capital as per the provisions of the
Companies Act 2013? (RTP May 25) (RTP Nov 23)

Law: According to section 61(1)(d) of the Companies Act, 2013 (the Act), a limited
company having a share capital may, if so authorised by its articles, alter its
memorandum in its general meeting to 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.

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Procedure
(i)The capital clause of memorandum, if authorised by the Articles, shall be altered
by passing an ordinary resolution
(ii)Further, under section 64 where a company alters its share capital in any of the
above-mentioned ways, the company shall file a notice in the Form No. SH-7 as
per Rule 15 of the Companies (Share Capital and Debentures) Rules, 2014 with
the Registrar, along with an altered memorandum within thirty days of
alteration.

Conclusion: In the given situation, shareholders of Shenoy Limited, in the AGM requested the
company to reduce the face value of each share (from

₹ 100 to ₹ 10) and increase the number of shares than fixed by the memorandum
(i.e. from 20 Lakh to 2 crore).

According to the above provision, Shenoy Limited, having authorized capital of

20,00,000 equity shares (face value ₹ 100 each) can reduce the face value of each
share to ₹ 10 each and increase the shares to 2,00,00,000 [thereby keeping the
total amount of authorized share capital to ₹ 20,00,00,000], if authorised by the
articles of association. Hence, the request of the shareholders can be considered.

The company has to alter its memorandum in its general meeting as per the
procedure contained in section 13 of the Companies Act, 2013 and give notice to
the Registrar along with an altered memorandum.

PRACTICAL QUESTION

Question 18 VRS Company Ltd. is holding 45% of total equity shares in SV Company Ltd. The
Board of Directors of SV Company Ltd. (incorporated on January 1, 2019)
decided to raise the share capital by issuing further equity shares. The Board of
Directors resolved not to offer any shares to VRS Company Ltd., on the ground
that it was already holding a high percentage of the total number of shares issued
by SV Company Ltd. The Articles of Association of SV Company Ltd. provided
that the new shares should first be offered to the existing shareholders of the
company. On March 1, 2019 SV Company Ltd. offered new equity shares to all
the shareholders, except VRS Company Ltd.

Referring to the provisions of the Companies Act, 2013 examine the validity of
the decision of the Board of Directors of SV Company Ltd. of not offering any
further shares to VRS Company Limited.(module)

Law: The legal issues involved herein are covered under Section 62 (1) of the Companies
Act, 2013.

Section 62 (1) (a) of the Companies Act, 2013 provides that if, at any time, a
company having a share capital proposes to increase its subscribed capital by issue
of further shares, such shares should first be offered to the existing equity

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shareholders of the company as at the date of the offer, in proportion to the paid-up
capital on those shares. Hence, the company cannot ignore a section of the existing
shareholders and must offer the shares to the existing equity shareholders in
proportion of their holdings.

Conclusion: As per facts of the case, the Articles of SV Company Ltd. provide that the new
shares should first be offered to the existing shareholders. However, the company
offered new shares to all shareholders excepting VRS Company Ltd., which held a
major portion of its equity shares. It is to be noted that under the Companies Act,
2013, SV Company Ltd. did not have any legal authority to do so.

Therefore, in the given case, decision of the Board of Directors of SV Company

Ltd. not to offer any further equity shares to VRS Company Ltd. on the ground that
VRS Company Ltd. already held a high percentage of shareholding in SV Company
Ltd. is not valid. Such a decision violates the provisions of section 62 (1) (a) as well
as Articles of the issuing company

19.Earth Ltd., a Public Company offer the new shares (further issue of shares) to persons
other than the existing shareholders of the Company. Explain the conditions when shares
can be issued to persons other than existing shareholders. Discuss whether these shares
can be offered to the Preference Shareholders? (RTP NOV 2018)

Issue of Further Shares:

Section 62 (1) (a) of the Companies Act, 2013 provides that if, at any time, a company
having a share capital proposes to increase its subscribed capital by the issue of further
shares, such shares should be offered to the existing equity shareholders of the company as
at the date of the offer, in proportion to the capital paid up on those shares.
However, certain exceptions have been provided in the Companies Act, 2013 when such
further shares of a company may-be offered to other persons as well. These are as under-
a. Under section 62 (1) (b) issue of further shares may be offered to employees under a
scheme of employees’ stock option subject to a special resolution passed by the
company and subject to such conditions as may be prescribed.
b. Under section 62 (1) (c) such shares may be offered to any persons, if it is authorised
by a special resolution, 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,
c. if any shareholder to whom the shares are offered in terms of section 62 (1) (a) as
described above, declines such offer, the Board of Directors may dispose of the shares
in such manner as is not disadvantageous to the shareholders or to the company.
Preference Shareholders: From the wordings of Section 62 (1) (c), it is quite clear that
these shares can be issued to any persons who may be preference shareholders as well
provided such issue is authorized by a special resolution of the company and are issued on
such conditions as may be prescribed.

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PRACTICAL QUESTION

Question 20 Mr. Shashidhar holding shares in Green Ltd., wants to renounce the right
issue offer in favour of Mr. Tuli. However, Mr. Tuli is currently not holding
any share in Green Ltd. Analyse the given situation in the light of the
provisions of the Companies Act, 2013. (MTP NOV 2017)

Law: According to section 62(1)(a)(ii), 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 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.
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 member or not; and the notice referred to in clause (i) of section
62(1)(a) shall contain a statement of this right, unless the articles of the company
otherwise provide.
Conclusion: Therefore, Mr. Shashidhar can renounce the shares offered to him in rights issue in
favour of Mr. Tuli unless the articles provide otherwise.

PRACTICAL QUESTION

Question 21 Dhyan Dairy Ltd., a dairy products manufacturing company wants to set-up
a new processing unit at Udaipur. Due to paucity of funds, the existing
shareholders are not willing to fund for expansion. Hence, the Company
approached Shayam Ltd. for subscribing to the shares of the Company for
expansion purposes. Can Dhyan Dairy Ltd. issue shares only to Shayam Ltd.
under the provisions of the Companies Act, 2013? If so, state the conditions.
(MTP MAY 2018)

Law: According to Section 62 (1) of the Companies Act, 2013 if at any time, a company
having a share capital proposes to increase its subscribed capital by the issue of
further shares, such shares should be offered to –
(i) the existing equity shareholders of the company as at the date of the offer, in
proportion to the capital paid up on those shares.
(ii) employees under a scheme of employees’ stock option subject to a special
resolution passed by the company and subject to such conditions as may be
prescribed.
(iii) to any persons, if it is authorised by a special resolution, whether or not those
persons include the persons referred to in clause (i) or clause (ii), 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 such conditions as may
be prescribed.

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Conclusion: Since, in the given case Dhyan Dairy Ltd. approached Shayam Ltd. for subscribing
to the shares of the company for its expansion and Shayam Ltd. is neither an existing
equity shareholder of the company nor an employee, Dhyan Dairy Ltd., if it is
authorised by a special resolution, may issues shares to Shayam Ltd. either for cash
or for a consideration other than cash, subject to the condition that the price of such
shares is determined by the valuation report of a registered valuer.

PRACTICAL QUESTION

Question 22 Examine the validity of these allotments in the light of the provisions of the
Companies Act, 2013

Mars India Ltd. owed to Sunil Rs.1,000. On becoming this debt

payable, the company offered Sunil 10 shares of Rs.100 each in full
settlement of the debt. The said shares were fully paid and were
allotted to Sunil. (MTP NOV 2018)

Law: Under section 62 (1) (c) of the Companies Act, 2013 where at any time, a
company having a share capital proposes to increase its subscribed capital
by the issue of further shares, either for cash or for a consideration other
than cash, such shares may be offered to any persons, if it is authorised by
a special resolution and if the price of such shares is determined by a
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.

Conclusion: In the present case, Mars India Ltd is empowered to allot the shares to Sunil
in settlement of its debt to him. The issue will be classified as issue for
consideration other than cash must be approved by the members by a
special resolution. Further, the valuation of the shares must be done by a
registered valuer, subject to the compliance with the applicable provisions
of Chapter III and any other conditions as may be prescribed.

PRACTICAL QUESTION

Question 23 Surya Ltd. is engaged in the manufacture of consumer goods and has got a
good brand value. Over the years, it has built a good reputation and its Balance
Sheet as at March 31, 2019 shows the following position:
• Authorized Share Capital (25,00,000 equity shares of face value of ` 10/-
each) ` 2,50,00,000

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• Issued, subscribed and paid-up capital (10,00,000 equity shares of face

value of `10/- each, fully paid-up) ` 1,00,00,000
• Free Reserves ` 3,00,00,000
The Board of Directors are proposing to declare a bonus issue of 1 share for
every 2 shares held by the existing shareholders. The Board wants to know the
conditions and the manner of issuing bonus shares under the provisions of the
Companies Act, 2013. Discuss.(RTP NOV 2020) (RTP MAY 2021) (MTP MAY
2018) (MTP May 24)

Law: According to section 63 of the Companies Act, 2013, a company may issue
fully paid-up bonus shares to its members, in any manner whatsoever, out
of:

(i) its free reserves;

(ii) the securities premium account; or
(iii) the capital redemption reserve account.
Provided that no issue of bonus shares shall be made by capitalising
reserves created by the revaluation of assets.
Conditions for issue of Bonus Shares: No company shall
capitalise its profits or reserves for the purpose of issuing fully paid-up
bonus shares, unless—

(i) it is authorised by its Articles;

(ii) it has, on the recommendation of the Board, been authorised in the
general meeting of the company;
(iii) it has not defaulted in payment of interest or principal in respect of
fixed deposits or debt securities issued by it;
(iv) it has not defaulted in respect of payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and
bonus;
(v) the partly paid-up shares, if any, outstanding on the date of
allotment, are made fully paid-up;
(vi) it complies with conditions as are prescribed by Rule 14 of the
Companies (Share Capital and debentures) Rules, 2014 which states
that the company which has once announced the decision of its
Board recommending a bonus issue, shall not subsequently
withdraw the same.
Further, the company has to ensure that the bonus shares shall not be
issued in lieu of dividend.
Conclusion: For the issue of bonus shares surya ltd will require reserves of ₹
50,00,000 (i.e. half of ₹ 1,00,00,000 being the paid-up share capital), which
is readily available with the company. Hence, after following the above
conditions relating to the issue of bonus shares, the company may proceed
for a bonus issue of 1 share for every 2 shares held by the existing
shareholders.

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PRACTICAL QUESTION

Question 24 ABC Ltd. has following balances in their Balance Sheet as on 31st March, 2018:
1. Equity shares capital (3.00 lakhs equity shares of ` 30.00 lacs
10 each)
2. Free reserves 5.00 lacs
3. Securities Premium Account 3.00 lacs
4. Capital redemption reserve account 4.00 lacs
5. Revaluation Reserve 3.00 lacs

Directors of the company seeks your advice in following cases:

(i) Whether company can give bonus shares in the ratio of 1:3?
(ii) What if company decide to give bonus shares in the ratio of 1:2?(NOV
2018)
Law: Same like above questions

Conclusion: As per the given facts, ABC Ltd. has total eligible amount of `12 lakhs (i.e.
5.00+3.00+4.00) out of which bonus shares can be issued and the total share capital
is ` 30.00 lakhs.

Accordingly:

(i)For issue of 1:3 bonus shares, there will be a requirement of ` 10 lakhs (i.e., 1/3 x
30.00 lakh) which is well within the limit of available amount of ` 12 lakhs. So,
ABC Limited can go ahead with the bonus issue in the ratio of 1:3.
(ii)In case ABC Limited intends to issue bonus shares in the ratio of 1:2, there will
be a requirement of ` 15 lakhs (i.e., 1/2 x 30.00 lakh). Here in this case, the company
cannot go ahead with the issue of bonus shares in the ratio of 1:2

25.The Authorized share capital of SSP Limited is ` 5 crore divided into 50 Lakhs
equity shares of ` 10 each. The Company issued 30 Lakhs equity shares for
subscription which was fully subscribed. The Company called so far ` 8 per share
and it was paid up. Later on the Company proposed to reduce the Nominal Value of
equity share from ` 10 each to ` 8 each and to carry out the following proposals:

(i)Reduction in Authorized Capital from ` 5 crore divided into 50 Lakhs equity

shares of ` 10 each to ` 4 crore divided into 50 Lakhs equity shares of ` 8 each.

(ii)Conversion of 30 Lakhs partly paid-up equity shares of ` 8 each to fully paid up

equity shares of ` 8 each there by relieving the shareholders from making further
payment of ` 2 per share.

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State the procedures to be followed by the Company to carry out the above proposals
under the provisions of the Companies Act, 2013. (MTP MAY 21)(5 Marks)

Hint –
(i)Reduction in Authorized Capital from ` 5 crore divided into 50 Lakhs equity shares
of ` 10 each to ` 4 crore divided into 50 Lakhs equity shares of ` 8 each. – is alteration
of share capital so follow procedure of sec 61(refer book)

(ii)Conversion of 30 Lakhs partly paid-up equity shares of ` 8 each to fully paid up

equity shares of ` 8 each there by relieving the shareholders from making further
payment of ` 2 per share. – It is reduction of share capital so follow procedure of sec 66
which is as follows-
(i)Special Resolution -The reduction in share capital shall be made only by passing a
Special Resolution.
(ii)Application to Tribunal -The reduction in share capital shall be subject to
confirmation by the Tribunal on an application by the company.
(iii)Representation from CG, ROC, Creditors - The Tribunal shall give notice
of every application made to it;
a. to the Central Government (power delegated to Regional
Directors)
b. to the Registrar and
c. to the Securities and Exchange Board, in the case of listed
companies, and
d. the creditors of the company
(iv)Time limit for representation -Tribunal shall consider the representations (if
any) made by them within a period of three months from the date of receipt of
the notice.
(v)Order of Tribunal - Tribunal when satisfied that The debt or claim of every
creditor of the company has been either discharged, determined , secured or consent
is obtained and accounting treatment, proposed by the company for such
reduction is in conformity with the accounting standards specified in Section 133
makes a order confirming reduction on terms and conditions deems fit.
(vi) Deliver NCLT’s order with Roc within 30 days of receipt of copy of order.
(vii)Registrar on receipt, shall register the same and issue a certificate to that
effect

PRACTICAL QUESTION

Question 26 K Limited, a subsidiary of Old Limited, decides to give a loan of ₹ 4,00,000 to the
Human Resource Manager, who is not a Key Managerial Personnel of K Limited,
drawing salary of ₹ 30,000 per month, to buy 500 partly paid-up equity Shares of
₹ 1000 each in K Limited. Examine the validity of company's decision under the

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provisions of the Companies Act, 2013. (RTP MAY 2020) (MTP NOV 2018)
(MTP NOV 2020)

Law: As per section 67 (3) of the Companies Act, 2013 a company is allowed to give a
loan to its employees subject to the following limitations:
(a) The employee must not be a Key Managerial Personnel;
(b) The amount of such loan shall not exceed an amount equal to six months’ salary
of the employee.
(c) The shares to be subscribed must be fully paid shares.
Conclusion: In the given instance, Human Resource Manager is not a Key Managerial Personnel
of the K Ltd. He is drawing salary of ` 30,000 per month and took loan taken to buy
500 partly paid up equity shares of ` 1000 each in K Ltd.
Keeping the above provisions of law in mind, the company’s (K Ltd.) decision is
invalid due to two reasons:
(a) The amount of loan being more than 6 months’ salary of the HR Manager, which
should have restricted the loan to ` 1.8 Lakh.
(b) The shares subscribed are partly paid shares whereas the benefit is available
only for subscribing fully paid shares.

27.Heavy Metals Limited wants to provide financial assistance to its employees, to

enable them to subscribe for certain number of fully paid shares. Considering the
provision of the Companies Act, 2013, what advice would you give to the company in
this regard? (RTP NOV 2018) (MTP MAY 2017) (5 Marks) (MTP M 21)
As per section 67 (3) of the Companies Act, 2013 a company is allowed to give a loan to
its employees subject to the following limitations:
(a) The employee must not be a Key Managerial Personnel;
(b) The amount of such loan shall not exceed an amount equal to six months’ salary of the
employee.
(c) The shares to be subscribed must be fully paid shares.

PRACTICAL QUESTION

Question 28 Silk Segment Private Ltd. (SSPL) is a wholly owned subsidiary of Silk Block
Ltd. (SBL), a listed public limited company. The Board of Directors of Silk
Segment Private Ltd. have collectively decided upon the proposal to grant
loans of ₹15,00,000 and ₹20,00,000 to Mr. Sohan and Ms. Subarna respectively
for the purchase of fully paid-up shares in Silk Segment Private Ltd. (3 + 2 = 5
Marks) (Jan25)
Mr. Sohan is the Deputy Marketing Manager of Silk Segment Private Ltd. with
a monthly salary of ₹ 1,00,000; whereas Ms. Subarna, a qualified Chartered

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Accountant, is the Chief Financial Officer of Silk Segment Private Ltd. with a
monthly salary of ₹2,00,000. (jan 25)
In view of the provisions of the Companies Act, 2013, decide:
(i)Whether the proposed loans to Mr. Sohan as well as Ms. Subarna can be
disbursed by the company keeping in view that Silk Segment is a private
limited company?
(ii) Whether the answer would be different in case only 25% shares of SSPL
are held by SBL?
Law: (i) No public company can give financial assistance to purchase
(a) Its shares or
(b) Of its holding company
Except Giving of loans by company to its employees (other than directors / KMP)
for an amount not exceeding their 6 months of salary / wages.

Sec. 67 is not applicable to a private company satisfying the following

conditions:

(a) No other body corporate has invested any money in such company.
(b) The borrowing of such private company from banks or financial
institutions or anybody corporate is less than twice its paid up share
capital or 50 crore; whichever is less.
(c) Such company is not in default in repayment of such borrowings subsisting
at the time of making transaction under Sec. 67.
Conclusion: In present case

(i)As SSPL is pvt company who is wholly owned subsidiary of Silk Block Ltd.
(SBL) a public limited company so it is deemed to be public company.
Therefore, it cannot give loan of 15 lac to sohan as sohan’s salary is 1 lac per
month, so he can get maximum 6 months salary i.e upto 6 lac rs. Also, company
cannot give loan of 20 lac rs to subarna of Rs 20 lac as subarna is CFO i.e KMP of
company and company cannot give loan to its KMP

(ii) No, our answer would be same,Although only 25% shares of SSPL as now it
will not be deemed to be public company, but sec 67 applies to private company in
which a body corporate has invested any money so restriction of giving loan is not
applicable to SSPL

29.Which fund may be utilized by a public limited company for purchasing (buy
back) its own shares? Also explain the provisions of the Companies Act, 2013
regarding the circumstances in which a company is prohibited to buy back its own
shares.(MAY 2019)

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Funds utilized for purchase of its own securities: Section 68 of the Companies Act, 2013
states that a company may purchase its own securities out of:
(i) its free reserves; or
(ii) the securities premium account; or
(iii) the proceeds of the issue of any shares or other specified securities.
However, buy-back of any kind of shares or other specified securities cannot be made out
of the proceeds of an earlier issue of the same kind of shares or same kind of other
specified securities.
Prohibition for buy-back in certain circumstances [Section 70]
(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, then such buy-back is not prohibited.
(2) No company shall directly or indirectly purchase its own shares or other specified
securities in case such company has not complied with provisions of Sections 92 (Annual
Report), 123 (Declaration of dividend), 127 (Punishment for failure to distribute dividends),
and section 129 (Financial Statements).

30."The offer of buy-back of its own shares by a company shall not be made within a
period of six months from the date of the closure of the preceding offer of buy-back, if
any and cooling period to make further issue of same kind of shares including allotment of
further shares shall be a period of one year from the completion of buy back subject to
certain exceptions." Examine the validity of this statement by explaining the provisions of
the Companies Act, 2013 in this regard. (MTP May 24)

According to proviso to section 68(2) of the Companies Act, 2013, no offer of buy-back,
shall be made within a period of one year from the date of the closure of the preceding
offer of buy- back, if any.

Section 68 (8) casts an obligation that where a company completes a buy-back of its
shares or other specified securities under this section, it shall not make further issue of
same kind of shares including allotment of further shares under section 62 (1) (a) or other
specified securities within a period of six months except by way of bonus issue or in the
discharge of subsisting obligations such as conversion of warrants, stock option schemes,
sweat equity or conversion of preference shares or debentures into equity shares.

Keeping in view of the above provisions, the statement “the offer of buy-back of its own
shares by a company shall not be made within a period of six months from the date of the

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closure of the preceding offer of buy back, if any and cooling period to make further issue
of same kind of shares including allotment of further shares shall be a period of one year
from the completion of buy back subject to certain exceptions” is not valid.

PRACTICAL QUESTION

Question 31 Xgen Limited has a paid-up equity capital and free reserves to the extent of `
50,00,000. The company is planning to buy-back shares to the extent of `
4,50,000. The company approaches you for advice with regard to the following
a. Is special resolution required to be passed?
b. What is the time limit for completion of buy-back?
c. What should be ratio of aggregate debts to the paid-up capital-and free
reserves after buy-back? (MAY 2018)
Law: According to sec 68, A company may purchase its own shares or other specified
securities, if met with the following conditions, namely:

(i)The buy-back is authorised by its articles;

(ii)A special resolution authorising the buy-back is passed in general meeting of the
company

(iii)A special resolution is not necessary where The buy-back is, not exceeding ten
percent of the total paid-up equity capital and free reserves of the company; and
Such buy-back has been authorised by the Board resolution passed at its meeting

Conclusion: In present case,

(i)Xgen Limited has a paid-up equity capital and free reserves to the extent of `
50,00,000. The company is planning to buy-back shares to the extent of ` 4,50,000
i.e less than 10% so board resolution is required and not special resolution

(ii) Every buy-back shall be completed within 1 year from the date of passing the
special resolution or board resolution authorising the buy-back

(iii) After the buyback, the ratio between the debts (secured and unsecured)
owed by the company should not be more than twice the paid-up capital and free
resources of the company

PRACTICAL QUESTION

Question 32 XYZ Company Ltd, at general meeting of members of the company pass an ordinary
resolution to buy-back 30% of its equity share capital. The Articles of the company
empower the company for buy-back of equity shares. The company further decides
that the payment for buy-back be made out of the proceeds of the company’s earlier
issue of equity shares. Explaining the provisions of the Companies Act, 2013, and

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stating the sources through which the buy-back of companies own shares be executed.
Examine:

(i) Whether company’s proposal is in order?

(ii) Would your answer be still the same in case the company instead of 30% decide to
buy-back only 20% of its equity share capital? (NOV 2016) (NOV 2019)
Law: According to sec 68, A company may purchase its own shares or other specified securities,
if met with the following conditions, namely:

(i)The buy-back is authorised by its articles;

(ii)A special resolution authorising the buy-back is passed in general meeting of the
company

(iii)A special resolution is not necessary where The buy-back is, not exceeding ten percent
of the total paid-up equity capital and free reserves of the company; and Such buy-back has
been authorised by the Board resolution passed at its meeting

(iv) A company may buy-back its own shares or other specified securities out of :
a) Free Reserves ; or
b) Securities Premium Account ; or
c) Proceeds of fresh issue of shares or other specified securities (but not of same kind of
shares issued earlier)
d) Maximum Number of ES that can be bought back - = 25% of Total No. of ES
Conclusion: In Present case,

(i)Company’s proposal is not in order as company need special resolution instead of ordinary
resolution and company cannot buy back more than 25% of Total No. of ES and third
violation is that company decides that the payment for buy-back be made out of the
proceeds of the company’s earlier issue of equity shares however it can use fresh issue
of shares

(ii) In case the company instead of 30% decide to buy-back only 20% of its equity share
capital even then company has violated with laws related to resolution and source of
payment.

33.State the legal provisions in respect of ‘Declaration of Solvency’, which an unlisted public
company needs to adhere to while taking steps to buy-back its own shares. (module)

Declaration Of solvency

(i)According to section 68 (6), where an unlisted public company has passed a special resolution
under section 68 (2) (b) or the Board has passed a resolution under item (ii) of the proviso to section
68 (2) (b) to buy-back its own shares, it shall, before making such buy-back, file with the Registrar
a ‘Declaration of Solvency’ in Form SH-9.

(ii)The declaration shall be verified by an affidavit to the effect that the Board has made a full inquiry
into the affairs of the company as a result of which they have formed an opinion that it is capable of
meeting its liabilities and will not be rendered insolvent within a period of one year from the date of
declaration of solvency adopted by the Board.

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(iii)The declaration shall be signed by at least two directors of the company, one of whom shall be
the managing director, if any.

PRACTICAL QUESTION

Question 34 What are the provisions of the Companies Act, 2013 relating to the
appointment of 'Debenture Trustee' by a company? Whether the following can
be appointed as 'Debenture Trustee':

(i) A shareholder who has no beneficial interest.

(ii) A creditor whom the company owes 499 only.
(iii) A person who has given a guarantee for repayment of amount of
debentures issued by the company. (Module) (Nov 2016) (MTP Oct.
23) (Nov 23)
Law: Eligibility criteria for becoming a Debenture Trustee

A person shall not be appointed as a debenture trustee, if he-

1. Beneficially holds shares in the company;

2. Is a promoter, director or key managerial personnel or any other officer or an
employee of the company or its holding, subsidiary or associate company;
3. Is beneficially entitled to moneys which are to be paid by the company
otherwise than as remuneration payable to the debenture trustee;
4. Is indebted to the company, or its subsidiary or its holding or associate
company or a subsidiary of such holding company;
5. Has furnished any guarantee in respect of the principal debts secured by the
debentures or interest thereon
6. Has any pecuniary relationship with the company amounting to 2% or more
of its gross turnover or total income or 50 lacs or such higher amount as may
be prescribed, whichever is lower, during the 2 immediately preceding financial
years or during the current financial year;
7. Is relative of any promoter or any person who is in the employment of the
company as a director or key managerial personnel.
Conclusion: (i)A shareholder who has no beneficial interest can be appointed as a debenture
trustee.
(ii)A creditor whom company owes Rs 499 can be so appointed. The amount owed
is immaterial.
(iii)A person who has given guarantee for repayment of principal and interest
thereon in respect of debentures also cannot be appointed as a debenture trustee.

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Chapter V
ACCEPTANCE OF DEPOSITS
Q Section Topic

1 Rule 2(1)(c) Negative list of Deposits

2 Rule 2(1)(c) Negative list of Deposits

3 Rule 2(1)(c) Negative list of Deposits

4 Rule 2(1)(c) Negative list of Deposits

5 Rule 2(1)(c) Negative list of Deposits

6 73(2) Procedure for acceptance of deposits from member

7 76 Eligible company – conditions and procedures

8 76 Eligible company

9 Rule 3 Maximum deposit to be accepted

10 76 Eligible company and tenure

11 - Mix

12 Rule 7 Appointment of deposit trustee

13 Rule 13 Use of DRRA

14 Rules Mix

15 Rules Mix

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PRACTICAL QUESTION

Question 1 Excel Pvt. Ltd. received `50 lakh from Mr. Giver. Mr. Giver was a director of the
company at the time of the transaction. However, Mr. Giver did not submit any
written declaration stating that the amount was not given out of borrowed funds. The
company utilized the said funds for business expansion and disclosed the receipt of money
in the Board’s report.

Considering the provisions of the Companies Act, 2013, assess the following situations:

1. Was Excel Pvt. Ltd. compliant with the requirements w.r.t acceptance of the
money from Mr. Giver?

2. If Mr. Giver had given the money out of funds borrowed from another person,
whether this amount will be considered as deposit? (RTP May 25)
Law: According to Rule 2(1)(c) of the Companies (Acceptance of Deposit) Rules, 2014,
following categories of amounts, inter alia, are not considered as deposit:

Any amount received from a person who, at the time of the receipt of the amount,
was a director of the company or a relative of the director of the private company;

However, the director of the company or relative of the director of the private company, as
the case may be, from whom money is received, is required to furnish to the company at
the time of giving the money, a declaration in writing to the effect that the amount is
not being given out of funds acquired by him by borrowing or accepting loans or
deposits from others and the company shall disclose the details of money so accepted
in the Board's report.

Conclusion: Accordingly,

1. Excel Pvt. Ltd. failed to obtain a written declaration from Mr. Giver at the time
of receiving the amount. The declaration is mandatory to confirm that the funds
are not borrowed or sourced from loans or deposits from others. Therefore, Excel
Pvt. Ltd. was not in compliance with the requirements w.r.t acceptance of the money
from Mr. Giver.
2. If Mr. Giver had given the money out of funds borrowed from another person, the
transaction would not be eligible under an exempted category under the Companies
Act, 2013. Consequently, Excel Pvt. Ltd. would treat such an amount as a deposit.

PRACTICAL QUESTION

Question 2 Mr. Romit is an employee of PQR Trading Private Limited. As per his contract of
employment, his annual salary is ₹ 5,00,000. Mr. Romit paid to the company ₹ 5,30,000
in the nature of non-interest bearing security deposit. Referring to the provisions of the
Companies Act, 2013, decide whether this amount received from Mr. Romit will be
considered as deposit as per rule 2(1)(c)? (MTP Jan 25) (MTP May 24)

Law: Rule 2(1)(c) of the Companies (Acceptance of Deposit) Rules, 2014, states various amounts
received by a company which will not be considered as deposits. As per rule 2(1)(c)(x) any
amount received from an employee of the company not exceeding his annual salary under a

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QUESTION BANK
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contract of employment with the company in the nature of non-interest- bearing security
deposit is not considered as deposit.

Conclusion: In the instant case, ₹ 5,30,000 was received by PQR Trading Private Limited as a non-
interest-bearing security deposit, from its employee, Mr. Romit, who draws an annual
salary of ₹ 5,00,000 under a contract of employment. Accordingly, amount of ₹ 5,30,000
received from Mr. Romit, will be considered as deposit in terms of sub-clause (x) of Rule
2(1)(c) of the Act, as the amount received from Mr. Romit is more than his annual salary
of ₹ 5,00,000.

PRACTICAL QUESTION

Question 3 The Promoters of J Limited contributed in the shape of unsecured loan to the company in fulfilment
of the margin money requirements stipulated by State Industries Development Corporation Ltd.
(SIDCL) for granting loan. In the light of the provisions of the Companies Act, 2013 and Rules made
thereunder whether the unsecured loan will be regarded as Deposit or not. What will be your answer
in case the entire loan obtained from SIDCL is repaid? (MTP May 24)

Law: According to Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014, the following
amount is not considered as deposit:

Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of
the stipulation of any lending financial institution or a bank subject to the fulfillment of following
conditions:

i. the loan is brought because of the stipulation imposed by the lending institutions on the
promoters to contribute such finance;
ii. the loan is provided by the promoters themselves or by their relatives or by both; and
iii. such exemption shall be available only till the loans of financial institution or bank are
repaid and not thereafter.

Conclusion: Hence, in the instant case, the unsecured loan contributed by promoters of J Limited will not be
regarded as deposit as the unsecured loan is brought because of the stipulation imposed by the
SIDCL and the loan is provided by the promoters themselves.

In case the entire loan obtained from SIDCL is repaid, then the unsecured loan provided by
promoters of J Limited will be regarded as deposit.

PRACTICAL QUESTION

Question 4 Define the term 'deposit' under the provisions of the Companies Act, 2013 and comment
with relevant provisions that the following amount received by a company will be
considered as deposit or not;

(i) Rs.5,00,000 raised by Rishi Ltd. through issue of non-convertible debenture not
constituting a charge on the assets of the company and listed on a recognised stock
exchange as per applicable regulations made by Securities and Exchange Board of India.

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(ii) Rs.2,00,000 received from Mr. T, an employee of the company who is drawing
annual salary of r 1,50,000 under a contract of employment with the company in the nature
of non-interest bearing security deposit.

(iii) Amount of Rs.3,00,000 received by a private company from a relative of a

Director, declared by the depositor as out of gift received from his mother. (NOV 2019)

Conclusion: According to section 2 (31) of the Companies Act, 2013, the term ‘deposit’ includes any
receipt of money by way of deposit or loan or in any other form, by a company, but does not
include such categories of amount as prescribed in the Rule 2 (1) of the Companies
(Acceptance of deposit) Rules, 2014, in consultation with the Reserve bank of India.
(i)where ` 5,00,000 raised by the Rishi Ltd. through issue of non-convertible debenture not
constituting a charge on the assets of the company and listed on recognised stock exchange
as per the applicable regulations made by the SEBI, will not be considered as deposit in
terms of sub-clause (ixa) of the said rule.
(ii)` 2,00,000 was received from Mr. T, an employee of the company drawing annual salary
of ` 1,50,000 under a contract of employment with the company in the nature of non-interest
bearing security deposit. This amount received by company from employee, Mr. T will be
considered as deposit in terms of sub-clause (x) of the said rule, as amount received is more
than his annual salary under a contract of employment with the company in the nature of
non-interest bearing security deposit.
(iii)Amount of `3,00,000 received by a private company from a relative of a Director,
declaring details of the amounts so deposited as out of gift received from his mother. This
amount received by the private Company will not be considered as deposit in terms of sub-
clause (viii) of the said rule. Here as per the requirement, the relative of the director of the
private company, from whom money is received, furnished the declaration in writing to the
effect that the amount is given out of gift received from his mother and not being given out
of funds acquired by him by borrowing or accepting loans or deposits from others.

5.Enumerate the amounts which when received by a company in the ordinary

course of business are not to be considered as deposits.(ICAI Study Module)

According to Rule 2 (1) (c) (xii) of the Companies (Acceptance of Deposits) Rules, 2014,
following amounts if received by a company in the course of, or for the purposes of, the
business of the company, shall not be considered as deposits:
(a)any advance for the supply of goods or provision of services to be appropriated
within a period of three hundred and sixty-five days from the date of acceptance of such
advance: However, in case any advance is subject matter of any legal proceedings before
any court of law, the time limit of three hundred and sixty-five days shall not apply.
(b)any advance in connection with consideration for an immovable property under an
agreement or arrangement. However, such advance is required to be adjusted against such
property in accordance with the terms of agreement or arrangement;
(c)any security deposit for the performance of the contract for supply of goods or provision
of services;
(d)any advance under long term projects for supply of capital goods except those
covered under item (b) above;
(e)any advance towards warranty or maintenance contract as per written agreement or
arrangement, if the period for providing such services does not exceed the period prevalent

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as per common business practice or five years, from the date of acceptance of such service
whichever is less;
(f)any advance and as allowed by any sectoral regulator or in accordance with directions
of Central or State Government;
(g)any advance for subscription towards publication, whether in print or in electronic to
be adjusted against receipt of such publications;

However, if the amount received under items (a), (b) and (d) above becomes refundable
(with or without interest) due to the reasons that the company accepting the money does not
have necessary permission or approval, wherever required, to deal in the goods or properties
or services for which the money is taken, then the amount received shall be deemed to be
a deposit under these rules. the expiry of fifteen days from the date it became due for
refund

6.State the procedure to be followed by companies for acceptance of deposits from its
members according to the Companies Act, 2013. What are the exemptions available to a
private limited company? (ICAI Study Module)

As per section 73(2) of the Companies Act, 2013, a company may, subject to the passing Ordinary
resolution in general meeting and Following Companies (acceptance of deposit) rules,2014 accept
deposits from member by complying with following conditions ;-

(a)Issuance of a circular to its membersin DPT-1 including therein a statement showing the
financial position of the company,
(i) the credit rating obtained,
(ii) the total number of depositors and
(iii) the amount due in respect of any previous deposits
(iv) such other particulars may be prescribed;
(b) Filing a copy of the circular (DPT-1)along with the Registrar atleast 30 days before the date of
issue of the circular;
(c)Maintain Liquidity - Depositing, on or before the thirtieth day of April each year, such sum
which shall not be less than twenty per cent of the amount of its deposits maturing during the
following financial year and kept in a scheduled bank in a separate bank account to be called
deposit repayment reserve account;
(d)No subsisiting Default - Certifying that the company has not committed any default in the
repayment of deposits or interest accepted either before or after the commencement of this Act and
where a default had occurred, the company made good the default and a period of five years had
lapsed since the date of making good the default; and
(e)Providing security, if any for the due repayment of the amount of deposit or the interest thereon
including the creation of such charge on the property or assets of the company

Exemption to certain private companies

sub-section (2) of section 73 with respect to issue of circular, filing the copy of such circular
with the Registrar, depositing of certain amount and certification as to no default committed,
shall not apply to a private company:
(A)which accepts from its members monies not exceeding one hundred per cent of aggregate of
the paid-up share capital, free reserves and securities premium account; or
(B)which is a start-up, for ten years from the date of its incorporation; or
(C)which fulfils all of the following conditions, namely:

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(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).

PRACTICAL QUESTION

Question 7 Ashish Ltd. having a net-worth of ` 80 crores and turnover of ` 30 crores wants to accept
deposits from public other than its members. Referring to the provisions of the Companies
Act, 2013, state the conditions and the procedures to be followed by Ashish Ltd. for
accepting deposits from public other than its members. (RTP MAY 2019)

Law: According to section 76 of the Companies Act, 2013, a public company, having net worth
of not less than 100 crore rupees or turnover of not less than 500 crore rupees, can accept
deposits from persons other than its members subject to compliance with the requirements
provided in sub-section (2) of section 73 and subject to some extra conditions as follows –

Extra Conditions to be followed by an Eligible Company for accepting Public Deposits

1 Every eligible company shall be required to obtain the credit rating from a recognised
credit rating agency which ensures adequate safety and the rating shall be obtained for
every year during the tenure of deposits.
2 Every eligible company accepting secured deposits from the public shall within 30 days
of such acceptance, create a charge on its assets of an amount not less than the
amount of deposits accepted in favour of the deposit holders, failing which it shall be
described as 'Unsecured Deposits'.
Note - In respect of creation of security, Rule 6 of the Companies (Acceptance of
Deposit) Rule, 2014, states that the company accepting secured deposits shall create
security by way of charge on its tangible assets only.

3.An 'eligible company' intending to invite deposits is required to issue a circular in the
form of an advertisement in DPT-1. Such advertisement shall be published in English in
an English newspaper and in vernacular language in a vernacular newspaper. Both
newspapers should have wide circulation in the State in which the registered office of the
company is situated.

Conclusion: Since, Ashish Ltd. has a net worth of ` 80 crores and turnover of ` 30 crores, which is less
than the prescribed limits, hence, it cannot accept deposit from public other than its
members. If the company wants to accept deposits from public other than its members, it
has to fulfill the eligibility criteria of net worth or Turnover or both and then the other
conditions as stated above.

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PRACTICAL QUESTION

Question 8 ABC Limited having a net worth of 120 crore rupees wants to accept deposit from its
members. They have approached you to advise them regarding that if they fall within the
category of eligible company, what special care has to be taken while accepting such
deposit from members.(MTP MAY 2019)

Law: (i) “Eligible company” means a public company as referred to in sub-section (1) of
section 76, having a net worth of not less than one hundred crore rupees or a
turnover of not less than five hundred crore rupees and which has obtained the prior
consent of the company in general meeting by means of a special resolution and
also filed the said resolution with the Registrar of Companies before making any
invitation to the Public for acceptance of deposits:
(ii) However, an eligible company, which is accepting deposits within the limits
specified under clause (c) of sub-section (1) of section 180, may accept deposits by
means of an ordinary resolution.
(iii) An eligible company shall accept or renew any deposit from its members, if the
amount of such deposit together with the amount of deposits outstanding as on the
date of acceptance or renewal of such deposits from members exceeds ten per cent.
of the aggregate of the Paid-up share capital, free Reserves and securities premium
account of the company.
Conclusion: (i) ABC Limited is having a net worth of 120 crore rupees. Hence, it can fall in the
category of eligible company.
(ii) Thus, ABC has to ensure that acceptance deposits from members should not exceed
10% of the aggregate of the Paid-up share capital, free Reserves and securities
premium account of the company.

PRACTICAL QUESTION

Question 9 State, with reasons, whether the following statements are True or False?

(i)ABC Private Limited may accept the deposits from its members to the extent of
` 50.00 Lakh, if the aggregate of its paid-up capital; free reserves and security
premium account is ` 50.00 Lakh.

(ii)A Government Company, which is eligible to accept deposits under Section 76

of the Companies Act, 2013 cannot accept deposits from public exceeding 25% of
the aggregate of its paid- up capital, free reserves and security premium account.

(i)As per the provisions of Section 73(2) of the Companies Act, 2013 read with Rule 3 of the
Companies (Acceptance of Deposits) Rules, 2014, as amended by the Companies (Acceptance of
Deposits) Amendment Rules, 2016, private company may accept from its members monies not
exceeding one hundred per cent of aggregate of the paid up share capital, free reserves and
securities premium account and such company shall file the details of monies so accepted to the
Registrar in such manner as may be specified.
Therefore, the given statement of eligibility of ABC Private Ltd. to accept deposits from its members
to the extent of ` 50.00 lakh is True.
(ii)A Government company is not eligible to accept or renew deposits under section 76, if the
amount of such deposits together with the amount of other deposits outstanding as on the date of

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acceptance or renewal exceeds thirty five per cent of the aggregate of its Paid -up share capital,
free Reserves and securities premium account of the company.
Therefore, the given statement prescribing the limit of 25% to accept deposits is False.

PRACTICAL QUESTION

Question 10 Viki Limited engaged in the business of consumer durables. It is managed by a team of
professional managers. The Company has not made default in payment of statutory
dues, and repayment of debenture/ Institutional loan with interest. The Company
advertised a circular in the newspaper dated 20th September 2020 inviting the deposits
from the members and public for the first time. The latest audited financial statement of
the Company revealed the following data, as on 31.3.2020:

Paid up share capital ` 70 Crores

Securities Premium ` 20 Crores

Free Reserves ` 20 Crores

Long-term borrowings ` 50 Crores

The Company in the advertisement invited public deposit for a period of 4 Months Plan A
and Plan B for 36 Months.

(i) Explain the term 'eligible company' and calculate the Maximum amount of
Deposit that can be accepted from Public (Non-Member) for Plan A and Plan B based on
latest audited Financial Statement under the provisions of the Companies Act, 2013.

(ii) Calculate the maximum amount of deposit Viki Limited can accept from the
public under Plan B in case it is a wholly owned Government Company under the
provisions of the said Act. (6 Marks)(Nov 2020)

Law: (i) According to Rule 2(1)(e) of the Companies (Acceptance of Deposits) Rules, 2014
"eligible company" means a public company as referred to in sub-section (1) of section
76 of the Companies Act, 2013, having a net worth of not less than one hundred crore
rupees or a turnover of not less than five hundred crore rupees and which has obtained the
prior consent of the company in general meeting by means of a special resolution and
also filed the said resolution with the Registrar of Companies before making any
invitation to the Public for acceptance of deposits.
Net worth of Viki Limited as per section 2(57) of the Companies Act, 2013 can be
calculated as follows:
Paid up share capital: ` 70 crores Free Reserves: ` 20 crores Securities premium: ` 20 crores
Total: ` 110 crores
Hence, Viki Limited is an eligible company, since its Net worth is in excess of ` 100 crores.
Tenure for which Deposits can be Accepted: As per Rule 3(1)(a) of the Companies
(Acceptance of Deposits) Rules, 2014, 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: As per the proviso to the above rule,
for the purpose of meeting any of its short-term requirements of funds, a company may

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accept or renew deposits for repayment earlier than six months subject to the condition
that 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.
As per Rule 3(1)(b) of the Companies (Acceptance of Deposits) Rules, 2014, such
deposits are repayable not earlier than three months from the date of such deposits or
renewal thereof.
Maximum Amount of Deposits: As per Rule 3(4)(b) of the Companies (Acceptance of
Deposits) Rules, 2014, an eligible company is permitted to accept or renew deposits from
persons other than its members. As per the law the amount of such deposit together with
the amount of outstanding deposits (excluding deposits from members) on the date of
acceptance or renewal can be maximum twenty-five per cent. of the aggregate of its paid-
up share capital, free reserves and securities premium account of the company.

Conclusion:
For Plan A: Since the maximum period of deposits is 4 months, the maximum amount
of 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.
Maximum amount of deposits: 10% of 110 crores (70 + 20 + 20) = 11 crores.
For Plan B: Maximum amount of deposits: 25% of 110 crores (70 + 20 + 20) -11 crores
(outstanding deposit under plan A) = 16.5 crores.
(ii) In terms of Rule 3(5) of the Companies (Acceptance of Deposits) Rules, 2014, in
case Viki Limited is a wholly owned Government Company, so it can accept deposit
together with the amount of other outstanding deposits as on the date of acceptance or
renewal maximum up to thirty-five per cent. of the aggregate of its paid-up share capital,
free reserves and securities premium account.
For Plan Bif wholly owned govt co: Maximum amount of deposits: 35% of 110 crores
(70 + 20 + 20) = 38.5 crores.

PRACTICAL QUESTION

Question 11 NOP Limited, since its incorporation in 2002, is engaged in the production of
premium quality glass bottles. According to financial results of the company
as on 31.3.2023 net worth of the company was` 90 crore and turnover for the
year 2022-23 was ` 510 crore. The company proposed to accept the deposits as
on 1st February, 2024, which would be due for repayment on 30th September,
2028 from the public for expansion and redevelopment programs of company.

Furthermore, the company has accepted a loan of ` 1.5 crore from Mr. P Kishore
(Director) and the loan was to be repaid after 24 months. Company in its
books of account, records the receipt as a loan under non-current liabilities.
At the time of advancing loan, Mr. P Kishore affirms in writing that such
amount is not being given out of funds acquired by him by borrowing or
accepting loans or deposits from others and complete details of such loan
transaction is furnished in the boards' report.

On the basis of above facts answer the following questions:

(i)Whether company was eligible to accept deposit from public? What is the
criteria for acceptance of deposit and tenure for which deposit can be accepted?
Whether the tenure decided by company was in accordance with provisions of

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the Companies Act, 2013?

(ii)With reference to the loan advanced by Mr. P Kishore to company, state whether
the same is to be classified as a deposit or not? (RTP May 24)

Law: (i) As per Rule 2(1)(e) of the Companies (Acceptance of Deposits) Rules, 2014,
the term “eligible company” means a public company as referred to in section
76(1) of the Companies Act, 2013, which is ‘eligible’ to accept deposits from the
public at large only if it meets the below-mentioned criteria. Accordingly:

(i)It should be a public company.

(ii)It should have net worth of minimum ` 100 crore or a turnover of minimum
` 500 crore.
(iii)It has obtained the prior consent by means of a special resolution passed in
general meeting.
(iv)The special resolution has been filed with the Registrar of Companies.
(v)An ordinary resolution is sufficient if an eligible company is accepting deposits
within the limits specified under section 180 (1) (c).
(ii) In terms of Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits)
Rules, 2014, any amount received from a person who is director of the company at
the time of giving loan to the company shall not be treated as deposit if such director
furnishes to the company at the time of giving money, a written declaration to the
effect that the amount is not being given out of funds acquired by him by borrowing
or accepting loans or deposits from others and further, the company shall disclose
the details of money so accepted in the Board's report

Conclusion: (i) In the instant case, the turnover of NOP Limited is ` 510 crore, hence it is
eligible to accept deposits from the public.

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.

The tenure for the proposed deposits dated 1st February, 2024 which would be
due for repayment on 30th September, 2028, is not valid, as the maximum period
of acceptance of deposit cannot exceed 36 months. Hence, it is not in
compliance with the provisions of the Companies Act, 2013.

(ii) In the given case, the said deposits by Mr. P Kishore shall not be treated as
deposit

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12.Explain provisions for 'Appointment of Trustee for Depositors' under the Companies Act,
2013.(MAY 2018)

Appointment of Trustee for Depositors [Rule 7 of the Companies (Acceptance of Deposits)

Rules, 2014]:
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.

PRACTICAL QUESTION

Question 13 Samay Publishing Limited facing acute cash crunch wants to utilise a portion of ‘Deposit
Repayment Reserve Account’ to pay off its short- term creditors who are pressing hard
for repayment of ` 20,00,000. Is it justified to use funds lying in ‘Deposit Repayment
Reserve Account’ in this manner? Give your answer as per the provisions of the
Companies Act, 2013. (MTP Jan 25)

Law:
Rule 13 of the Companies (Acceptance of Deposits) Rules, 2014, states that the amount
deposited in the ‘Deposit Repayment Reserve Account’ shall not be used by a company for
any purpose other than repayment of deposits.
Conclusion: In the given question, Samay Publishing Limited wants to utilise a portion of ‘Deposit
Repayment Reserve Account’ to pay off its short-term creditors. Since there is a
prohibition, Samay Publishing Limited is not permitted to utilise its ‘Deposit Repayment
Reserve Account’ to pay off its short-term creditors.

PRACTICAL QUESTION

Question 14 Discuss the following situations in the light of ‘deposit provisions’ as contained in the
Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014, as amended
from time to time. (ICAI Study Module)

(i)Samit, one of the directors of Zarr Technology Private Limited, a start-up company,
requested his close friend Ritesh to lend to the company 30 lakh in a single tranche by way
of a convertible note repayable within a period six years from the date of its issue. Advise
whether it is a deposit or not.
(ii)Polestar Traders Limited received a loan of ` 30 lakh from Rachna who is one of its
directors. Advise whether it is a deposit or not.

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(iii)City Bakers Limited failed to repay deposits of ` 50 crore and interest due thereon even
after the extended time granted by the Tribunal. Is the company or Swati, its officer-in-
default, liable to any penalty?
(iv)Shringaar Readymade Garments Limited wants to accept deposits of
` 50 lakh from its members for a tenure which is less than six months. Is it a possibility?
(v)Is it in order for the Diamond Housing Finance Limited to accept and renew deposits
from the public from time to time?

(i) In the given case, Zarr Technology Private Limited, a start-up company, received ` 30 lakh from Ritesh in
a single tranche by way of a convertible note which is repayable within a period of six years from the date of
its issue. In view of Rule 2 (1) (c) (xvii) which requires a convertible note of amount 25 lacs or more to be
repayable within a period of ten years from the date of its issue, the amount of ` 30 lakh shall not be considered
as deposit.

(ii)In the given case, it is assumed that Rachna was one of the directors of Polestar Traders Limited when the
company received a loan of ` 30 lakh from her. Further, it is assumed that she had furnished to the company at
time of giving money, a written declaration to the effect that the amount was not being given out of funds
acquired by her by borrowing or accepting loans or deposits from others and in addition, the company had
disclosed the details of money so accepted in the appropriate Board's report. So all conditions of Rule 2 are
satisfied ,` 30 lakh shall not be treated as deposit

(iii) By not repaying the deposit of ` 50 crore and the interest due thereon even after the extended time granted
by the Tribunal, City Bakers Limited has contravened the conditions prescribed under Section 73 of the Act.
Accordingly, following penalty is leviable:

Punishment for the company: fine which shall not be less than rupees one crore or twice the amount of deposit
accepted by the company, whichever is lower but which may extend to rupees ten crore.

Punishment for officer-in-default: Swati, being the officer-in-default, shall be punishable with imprisonment
which may extend to seven years and with fine which shall not be less than rupees twenty-five lakh but which
may extend to rupees two crore.

Further, if it is proved that Swati had contravened such provisions knowingly or wilfully with the intention to
deceive the company or its shareholders or depositors or creditors or tax authorities, she will be liable for action
under section 447 (Punishment for fraud).

(iv) In the given case of Shringaar Readymade Garments Limited, it wants to accept deposits of ` 50 lakh
from its members for a tenure which is less than six months. It can do so if According to Rule 3

a. 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
b. such deposits are repayable only on or after three months from the date of such deposits or renewal.

5)In the given case, it is assumed that Diamond Housing Finance Limited is registered with the National
Housing Bank and therefore, the ‘Acceptance of Deposits’ Rules shall not apply to it. because Proviso to
Section 73 (1) states that nothing in this sub-section shall apply to a housing finance company registered with
the National Housing Bank established under the National Housing Bank Act, 1987.

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PRACTICAL QUESTION

Question 15 Answer the following citing relevant provisions: (ICAI Study Module)

(a)Prayas Electricals Limited having paid-up capital of ` 1 crore availed a

term loan of ` 10,00,000 from Beta Bank Limited to purchase electrical
items. Mr. Sambhav, one of the directors of the company, is of the opinion
that it shall be considered as ‘deposit’. Is his contention correct?

(b)Eklavya Publishing Company Limited facing acute cash crunch wants to

utilise a portion of ‘Deposit Repayment Reserve Account’ to pay off its
short-term creditors who are pressing hard for repayment of
` 20,00,000. Is it justified to use funds lying in ‘Deposit Repayment Reserve
Account’ in this manner?

(c)Sanjiv is a shareholder in Utsah Textiles Private Limited holding 10,000

shares of ` 10 each. His wife Sneha and his three sons Aayush, Pranav and
Himanshu are also shareholders in the company holding 1,000 shares
each. In response to the invitation from the company inviting deposits
from its members, Sanjiv wants to deposit ` 1,00,000 for 36 months jointly
with his wife and three sons. Whether Utsah Textiles Private Limited can
accede to the request of Sanjiv and accept deposit jointly in five names
since all the depositors are shareholders of the company.(module)

(a) In terms of Rule 2 (1) (c) (iii) of the Companies (Acceptance of Deposits) Rules, 2014,
any amount received as a loan or facility from any banking company shall not be considered
as ‘deposit’.In view of the above, the contention of Mr. Sambhav that the term loan of
10,00,000 availed by the company from Beta Bank Limited shall be considered as ‘deposit’
is not correct.

(b)Rule 13 of the Companies (Acceptance of Deposits) Rules, 2014, states that the amount
deposited in the ‘Deposit Repayment Reserve Account’ shall not be used by a company for
any purpose other than repayment of deposits.Since there is a prohibition, Eklavya
Publishing Company Limited is not permitted to utilise its ‘Deposit Repayment Reserve
Account’ to pay off its short-term creditors.

(c)Rule 3 (2) of the Companies (Acceptance of Deposits) Rules, 2014, provides that where
depositors so desire, deposits may be accepted in joint names not exceeding three.In view of
this provision, Sanjiv can deposit ` 1,00,000 with Utsah Textiles Private Limited jointly with
two other persons only irrespective of the fact that all the five persons are members of the
company.

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Chapter VI
REGISTRATION OF CHARGES

Q Section Topic

1 2(16) Basics

2 77 Registration of Charge

3 77 Verification of instrument creating charge

4 basics Fixed and floating charge

5 basics Crystallisation of charges

6 2(16).77 Registration of Charge

7 77,79 Charged property sold

8 80 Deemed notice of charge

9 82 Satisfaction of charge

10 83 Power of Roc to register satisfaction

11 83 Power of Roc to register satisfaction

12 85 Inspection of charges

13 86 Punishment for default

14 87 Condonation for delay

15 mix mix

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1.Explain the term 'charge'. State the circumstances under which necessity to create a charge
arises. What is the time limit for registration of charge with the registrar? (MAY 2018)

Charge: 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.
Why creating a charge is a necessity for companies? The answer to this lies in the setup of raising
capital by the companies. Generally, companies depend on share capital and borrowed capital for
funding their projects. When the company raises money through borrowings, they may issue
debentures or by obtaining loans from banks/ financial institutions. These banks/ financial
institutions need a surety regarding the repayment of their funds. Thus, they create a mortgage or
hypothecation on the assets of the company for safe and secured lending of the funds. This creation
of right on the assets and properties of the borrower companies, is known as a charge on assets.
Once charge is registered and filed, it becomes an information in public domain as to how much
company has borrowed against its assets and from whom.
Time limit for registration of charge with the registrar:
(i)It shall be duty of the company creating a charge within or outside India, on its property or assets
or any of its undertakings, whether tangible or otherwise and situated in or outside India, to register
the particulars of the charge signed by the company and the charge holder together with the
instruments, if any, creating such charge in form CHG-1 or in case of debentures – CHG-9, on
payment of such fees and in such manner as may be prescribed, with the registrar within 30 days of
creation.
(ii)In cases registration of charge was not effected within the original period of 30 days, the
Registrar may, on an application by the company, allow such registration to be made within a period
of 60 days of such creation. In other words, a grace period of another 30 days is granted after the
expiry of the original 30 days, on payment of additional fees as prescribed.
If the charge is not registered within the extended period as above, the company shall make an
application and the Registrar is empowered to allow such registration to be made within a
further period of sixty days after payment of prescribed ad valorem fees

PRACTICAL QUESTION

Question 2 Krish Limited created a charge on its assets on 2nd February, 2021. However, the
company did not register the charge with the Registrar of companies till 15th March,
2021.
(a)What procedure should the company follow to get the charge registered?

(b)Suppose the company realises its mistake of not registering the charge on 27th May,
2021 (instead of 15th March, 2021), can it still register the charge?

Advise with reference to the relevant provisions of the Companies Act, 2013. (RTP
May 2022)

Law: As per sec 77 of companies act,2013

(i)It shall be duty of the company creating a charge within or outside India, on its property
or assets or any of its undertakings, whether tangible or otherwise and situated in or outside
India, to register the particulars of the charge signed by the company and the charge

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holder together with the instruments, if any, creating such charge in form CHG-1 or in
case of debentures – CHG-9, on payment of such fees and in such manner as may be
prescribed, with the registrar within 30 days of creation.
(ii)In cases registration of charge was not effected within the original period of 30 days,
the Registrar may, on an application by the company, allow such registration to be made
within a period of 60 days of such creation. In other words, a grace period of another 30
days is granted after the expiry of the original 30 days, on payment of additional fees as
prescribed.
(iii)If the charge is not registered within the extended period as above, the company shall
make an application and the Registrar is empowered to allow such registration to be
made within a further period of sixty days after payment of prescribed ad valorem fees
Conclusion: (a)Krish Limited should immediately file the particulars of charge with the Registrar after
satisfying him through making an application that it had sufficient cause for not filing the
particulars of charge within 30 days of its creation.
(b)Clause (b) of second Proviso to Section 77 (1) provides another opportunity for
registration of charge by granting a further period of sixty days but the company is required
to pay ad valorem fees.
If the company realises its mistake of not registering the charge on 27th May, 2021 instead
of 15th March, 2021, it shall be noted that a period of sixty days has already expired from
the date of creation of charge.
Since the first sixty days from creation of charge have expired on 3rd April, 2021, Krish
Limited can still get the charge registered within a further period of sixty days from 3rd
April, 2021 after paying the prescribed ad valorem fees. The company is required to make
an application to the Registrar in this respect giving sufficient cause for non-registration of
charge.

3.How will a copy of an instrument evidencing creation of charge and required to be filed
with the Registrar be verified?(3 Marks) (MTP M 21)

A copy of every instrument evidencing any creation or modification of charge and required to be
filed with the Registrar shall be verified as follows:
(i) in case property is situated outside India: where the instrument or deed relates solely to
the property situated outside India, the copy shall be verified by a certificate issued
either under the seal, if any, of the company, or under the hand of any director or company
secretary of the company or an authorised officer of the charge holder or under the hand of
some person other than the company who is interested in the mortgage or charge;
(ii) in case property is situated in India (whether wholly or partly): where the instrument or
deed relates to the property situated in India (whether wholly or partly), the copy shall be
verified by a certificate issued under the hand of any director or company secretary of the
company or an authorised officer of the charge holder.

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PRACTICAL QUESTION

Question 4 Adhar Ltd. and Mittal Ltd. both took loans from different banks and provided security against
them. Adhar Ltd. mortgaged its factory building and machinery, while Mittal Ltd. pledged its
stock-in-trade, raw materials, and accounts receivable.Specify the type of charges created in both
cases. Justify your answer in light with the relevant provisions under the Companies Act, 2013. Also,
analyze what would happen if both companies fail to repay their loans. (MTP May 25)

Law: A charge may be either fixed or floating.

Fixed Charge

A ‘Fixed Charge’ is a charge on specific assets of the borrowing company. These assets are of permanent
nature like land and building, machinery, office premises, etc. Further, these assets are identified at the
time of creation of charge. A fixed charge is usually created by way of mortgage or by deposit of title
deeds. When a charge is created on such assets, the charge remains ‘fixed’ and the borrowing company
is not permitted to sell such assets during the period of charge though it may use them.Assets under fixed
charge can be sold only with the permission or consent of the charge-holder.

Floating Charge

A ‘Floating Charge’ is created on assets or a class of assets which are of fluctuating or changing in
nature- like raw material, stock-in-trade, debtors, etc. It is a charge upon assets both present and future. The
assets under floating charge keep on changing because the borrowing company is permitted to use them for
trading or producing final goods for sale.

Conclusion: In the given scenario, following nature of charges are created w.r.t the following companies:

(i)Fixed Charge (Adhar Ltd.):

The company mortgaged its factory building and machinery, which are permanent, identifiable assets.
Since these assets do not change frequently, the bank created a fixed charge over them. The company
cannot sell these assets without the bank’s approval during the loan tenure. In case the company fails to
repay the loan, the bank can take possession of the factory and machinery to recover its dues.

(ii)Floating Charge (Mittal Ltd.):

The company pledged stock-in-trade, raw materials, and accounts receivable, which are changing in
nature. The bank created a floating charge, allowing Mittal Ltd. to use, sell, and replenish these assets in
the normal course of business. In case if the company repays the loan, the floating charge automatically
ceases.

However, if the company fails to repay, the floating charge crystallizes, meaning:

• The bank converts the floating charge into a fixed charge.

• Mittal Ltd. loses control over its assets.
• The bank can seize and sell the assets to recover its loan amount.

Hence in the above case, Adhar Ltd., loan is secured by a fixed charge, limiting its ability to dispose of the
secured assets where as in the case of Mittal Ltd., loan is secured by a floating charge, allowing normal
business operations unless a default occurs. If both companies default, the bank can take control of the
respective assets and sell them to recover the loans.

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5.Explain the meaning of Crystallization of a Floating Charge. (MTP Sept 24)

Crystallization of a Floating Charge

Conversion of fixed Charge into floating charge is called crystallization of a floating charge
A floating charge remains dormant until it becomes fixed or crystallizes.

A floating charge crystallizes or gets fixed when:

1. the terms and conditions of floating charge are violated

2. The company goes into liquidation or
3. The company ceases to carry on business or
4. A receiver is appointed or
5. A default is made in paying the principal and/ or interest and the holder of the charge
brings an action to enforce his security.

PRACTICAL QUESTION

Question 6 Rose (Private) Limited on 3rd April 2019 obtained ` 30 lakhs working capital loan by
offering its Stock and Accounts Receivables as security and ` 5 Lakhs adhoc
overdraft on the personal guarantee of a Director of Rose (Private) Limited, from a
financial institution.

(i)Is it required to create charge for working capital loan and adhoc overdraft in
accordance with the provisions of the Companies Act, 2013?

(ii)State the provisions relating to extension of time and procedure for registration of
charges in case the above charge was not registered within 30 days of its creation.
(MTP May 25)(4 Marks) (nov 2020)

Law: As per the provisions of Section 2(16) of the Companies Act, 2013, “charge” means an
interest or lien created on the property or assets of a company or any of its undertakings or
both as security and includes mortgage.
(i) Whenever a company obtains working capital loans from financial institutions by
offering stock and Accounts Receivables as security, Rose (Private) Limited is
required to create a charge on such property or assets in favour of the lender.
Hence, for ` 30 Lakhs working capital loan, it is required to create a charge on it.
Rose (Private) Limited is not required to create a charge for ` 5 Lakh adhoc
overdraft on the personal guarantee of a director. Since charge is always created on
the property or assets of a company and personal guarantee of director is not a
property or asset of company.
(ii) As per the provisions of Section 77 of the Companies Act, 2013, in case the above
charge was not registered within 30 days of creation of the charge, the Registrar
may, on an application by the company, allow such registration to be made within
a period of 60 days of such creation (i.e. another 30 days are granted after the
expiry of original 30 days), on payment of additional fees as prescribed.
Conclusion: Procedure for Extension of Time Limit: For seeking extension of time, the company is
required to make an application to the Registrar in the prescribed form. It should be
supported by a declaration from the company signed by its company secretary or a director
that such belated filing shall not adversely affect the rights of any other intervening creditors

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of the company.
The application so made must satisfy the Registrar that the company had sufficient cause for
not filing the particulars and the instrument of charge, if any, within the original period of
thirty days. Only then he will allow registration of charge within the extended period.
Further, requisite additional fee or advalorem fee, as applicable, must also be paid.

PRACTICAL QUESTION

Question 7 PQR Limited, a manufacturing company, is in the process of expanding its

operations. To support this expansion, PQR Limited has acquired a plot of land
along with the buildings on it from ABC Limited, another company in the same
industry. The property, however, is subject to an existing charge, created in favor of a
bank as security for a loan taken by ABC Limited. This charge had been
registered by ABC Limited at that time. The directors of PQR Limited are of
the opinion that as the charge for the property was already created, there is no
further obligation to be fulfilled from the side of PQR Limited.

After negotiations, the bank, as the charge holder, consents to the sale and
transfer of the property to PQR Limited with the condition that PQR Limited must
register a new charge over the acquired property as security for its own loan
obligations.

Advise whether the contention of directors of PQR Limited is correct. Give your
answer in terms of the provisions of the Companies Act, 2013. (RTP Jan 25)

Law:
The provisions of section 77 relating to registration of charges shall, so far as may
be, apply to:
a. a company acquiring any property subject to a charge within the meaning of that
section; or
b. any modification in the terms or conditions or the extent or operation of any
charge registered under that section.
According to section 79(a) of the Companies Act, 2013, 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.

Conclusion: According to the provisions of section 77, when a company acquires property that is
subject to an existing charge, it is the duty of the acquiring company (PQR Limited
in this case) to register the charge as its own. This means that PQR Limited must
create a fresh charge over the acquired property and register it with the Registrar of
Companies (RoC) as per section 77.

Now upon acquisition, it is PQR Limited’s responsibility to ensure that the previous
charge is effectively discharged and that the new charge is registered in its name, reflecting
PQR Limited as the current owner and debtor of the charge. Hence, the contention of
directors of PQR Limited that since the charge for the property was already created, there
is no further obligation on part of PQR Limited, is not correct.

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PRACTICAL QUESTION

Question 8 Mr. Prakash purchased a commercial property in Mumbai belonging to PQR

Limited after entering into an agreement with the company. At the time of
registration, Mr. Prakash came to know that the title deed of the company was
not free and the company expressed its inability to get the title deed
transferred in Prakash’s name contending that he ought to have the
knowledge of charge created on the property of the company. In line with
the provisions of the Companies Act, 2013, advise whether the contention of
PQR Limited is correct? (MTP Jan 25) (RTP MAY 2018) (4 Marks) (MPT M 21)

Law: According to section 80 of the Companies Act, 2013, where any charge on any
property or assets of a company or any of its undertakings is registered under section
77 of the Companies Act, 2013, any person acquiring such property, assets,
undertakings or part thereof or any share or interest therein shall be deemed to
have notice of the charge from the date of such registration.

Conclusion: Thus, section 80 clarifies that if any person acquires a property, assets or
undertaking in respect of which a charge is already registered, it would be deemed
that he has complete knowledge of charge from the date of its registration. Mr.
Prakash, therefore, ought to have been careful while purchasing property and
should have verified beforehand that PQR Limited had already created a charge on
the property.

In view of above, the contention of PQR Limited is correct.

9.DN Limited hypothecated its plant to a Nationalised Bank and availed a term loan. The
Company registered the charge with the Registrar of Companies. The Company settled the
term loan in full, The Company requested the Bank to issue a letter confirming the settlement
of the term loan. The Bank did not respond to the request. State the relevant provisions of the
Companies Act, 2013 to register the satisfaction of charge in the above circumstance. State
the time frame up to which the Registrar of Companies may allow the Company to intimate
satisfaction of charges.(NOV 2019)

Intimation regarding Satisfaction of Charge

Section 82 of the Companies Act, 2013, requires a company to give intimation of payment or
satisfaction in full of any charge earlier registered, to the Registrar in Form CHG-4 within 30 days
from the date of payment or satisfaction.
Extended period of intimation:
On application by the company or the charge holder, the Registrar may, allow such intimation of
payment or satisfaction to be made within 300 day from the date of payment or satisfaction along
with additional fees.

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PRACTICAL QUESTION

Question 10 Ranjit acquired a property from ABC Limited which was mortgaged to OK Bank. He
settled the dues to Ok Bank in full and the same was registered with the sub-
registrar who has noted that the mortgage has been settled. But neither the company
nor OK Bank has filed particulars of satisfaction of charge with the Registrar of
Companies. Can Mr. Ranjit approach the Registrar and seek any relief in this
regard? Discuss this matter in the light of provisions of the Companies Act,
2013.(MTP NOV 2020) (MTP Jan 25)

Law: Section 83 of the Companies Act, 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.
(i)Accordingly, with respect to any registered charge if an evidence is shown to the
satisfaction of Registrar that
(a)the debt has been satisfied in whole or in part; or
(b)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.
then he may enter in the register of charges a memorandum of satisfaction This power can
be exercised by the Registrar despite the fact that no intimation has been received by him
from the company.
(ii)Information to affected parties: The Registrar shall inform the affected parties within
30 days of making the entry in the register of charges.
(iii)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.
Conclusion: Therefore, Ranjit can approach the Registrar and show evidence to his satisfaction that the
charge has been duly settled and satisfied and request the Registrar to enter a memorandum
of satisfaction noting the release of charge.

11.What are the powers of Registrar to make entries of satisfaction and release of
charges in the absence of any intimation from the company. Discuss this matter in
the light of provisions of the Companies Act, 2013.(RTP NOV 2020) (MTP MAY
2019) (MTP Sept 24)

Section 83 of the Companies Act, 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

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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.

12.Explain the provisions of the Companies Act, 2013, in respect of ‘Inspection of Register of
Charges and Instrument of Charges’.

Inspection of Register of Charges and Instrument of Charges

As regards inspection, section 85 (2) of the Companies Act, 2013, states that the register of charges
and the instrument of charges shall be open for inspection during business hours:
(i)by any member or creditor without any payment of fees; or
(ii)by any other person on payment of prescribed fees. subject to such reasonable restrictions as the
company may, by its articles, impose.

13.Define the term “charge” and also explain what is the punishment for default with
respect to registration of charge as per the provisions of the Companies Act, 2013.(MTP
MAY 2019)

The term charge has been defined in section 2 (16) of the Companies Act, 2013 as an
interest or lien created on the property or assets of a company or any of its undertakings or
both as security and includes a mortgage.
Every company is under an obligation to keep at its registered office a register of charges
and enter therein all charges specifically affecting property of the company and all floating
charges on the undertaking or any property of the company.
Punishment for contravention –
(i)According to section 86 (1) of the Companies Act, 2013, if any company is in default in
complying with any of the provisions of this Chapter, the company shall be liable to a
penalty of five lakh rupees and every officer of the company who is in default shall be liable
to a penalty of fifty thousand rupees.
(ii)According to section 86 (2) if any person wilfully furnishes:
(a)any false or incorrect information; or
(b)knowingly suppresses any material information;
which is required to be registered under section 77, he shall be liable for action under section
447.

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PRACTICAL QUESTION

Question 14 ABC Limited created a charge in favour of Z Bank. The charge was duly
registered. Later, the Bank enhanced the facility by another ` 20 crores. Due to
inadvertence, this modification in the original charge was not registered.
Advise the company as to the course of action to be pursued in this
regard.(MTP NOV 2020)

Explain the provisions of the Companies Act, 2013 relating to Rectification by

Central Government in register of Charges.(MTP MAY 2018)

Law: 1.Section 87 of the Act of 2013 and Rule 12 empowers the Central Government to
order rectification of Register of Charges in the following cases of default:
(i) when there was omission in giving intimation to the Registrar with respect
to payment or satisfaction of charge within the specified time;
(ii) when there was omission or mis-statement of any particulars in any filing
previously made to the Registrar. Such filing may relate to any charge or
any modification of charge or with respect to any memorandum of
satisfaction or other entry made under Section 82 (Company to report
satisfaction of charge) or Section 83 (Power of Registrar to make entries of
satisfaction and release).
2.Before directing that the ‘time for giving the intimation of payment or satisfaction
shall be extended’ or the ‘omission or mis-statement shall be rectified’, the Central
Government needs to be satisfied that such default was accidental or due to
inadvertence or because of some other sufficient cause or it did not prejudice the
position of creditors or shareholders.
3.The application in Form CHG-8 shall be filed by the company or any interested
person.
4.The order of rectification shall be made by the Central Government on such terms
and conditions as it deems just and expedient.
Conclusion: The company is advised to immediately file an application for rectification of the
Register of Charges in Form No CHG- 8 to the Central Government under Section
87 of the Companies Act, 2013

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15.What is the time limit for registration of charge with the registrar? Where
should the company's Register of charges be kept? State the persons who have the
right to inspect the Company's Register of charges.(NOV 2018)

Time limit for registration of charge with the registrar: According to section 77 of
the Companies Act, 2013, it shall be duty of the company creating a charge within
or outside India, on its property or assets or any of its undertakings, to register the
particulars of the charge, on payment of such fees and in such manner as may be
prescribed, with the registrar within 30 days of creation.
The Registrar may, on being satisfied that the company had sufficient cause for not
filing the particulars and instrument of charge, if any, within a period of 30 days of
the date of creation of the charge, allow the registration of the same after 30 days
but within a period of 300 days of the date of such creation of charge or
modification of charge on payment of such additional fees as may prescribed.
The application for delay shall be made and supported by a declaration from the
company signed by its secretary or director that such belated filing shall not
adversely affect rights of any other intervening creditors of the company [The
companies (Registration of charges) Rules, 2014].
Provided that if registration is not made within a period of 300 days of such
creation, the company shall seek extension of time from the Central Government
in accordance with the provisions of Section 87.Place of keeping company’s
register of charges: According to section 85 of the Companies Act, 2013, every
company shall keep at its registered office a register of charges.
Inspection of the register of charges and instrument of charges:
The register of charges and instrument of charges, shall be open for inspection
during business hours—
(a) by any member or creditor without any payment of fees; or
(b) by any other person on payment of such fees as may be prescribed, -subject to
such reasonable restrictions as the company may, by its articles, impose.

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Chapter VII
MANAGEMENT AND ADMINISTRATION
Q Section Topic
1 88 Foreign Register
2 92 Annual Return
3 92 Annual Return
4 92 Annual Return
5 92 Annual Return
6 92 Annual Return
7 92 Annual Return
8 94 Maintenance and Inspection Of Register of members
9 96 AGM
10 96 AGM
11 96 AGM

12 96 AGM
13 96 AGM
14 96 AGM
15 100 EGM
16 100 EGM
17 100 EGM
18 101 Notice
19 101 Notice
20 101 Notice
21 101 Notice
22 101 Notice
23 102 Business and explanatory statement
24 102 Business and explanatory statement
25 102 Business and explanatory statement
26 103 Quorum
27 103 Quorum
28 103 Quorum
29 103 Quorum
30 103 Quorum
31 103 Quorum

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32 105 Proxy
33 105 Proxy
34 106 Voting
35 106 Voting
36 108 E-Voting
37 108 E-Voting
38 109 poll
39 109 poll
40 111 Members Resolution
41 114 Ordinary and special resolution

42 114 Ordinary and special resolution

43 115 Special Notice
44 118 Minutes
45 118 Minutes
46 121 Report on AGM

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PRACTICAL QUESTION

Question 1 The paid-up share capital of Golden Shoes Limited is ` 25,00,000 divided into
2,50,000 equity shares of ` 10 each. Some of the shareholders holding 2,500
equity shares are residents of London for whom a foreign register of
shareholders is opened thereat on November 1, 2022. Advise Golden Shoes
Limited, within how much time after opening of ‘foreign register’, it is required
to file with the Registrar of Companies, a notice of situation of the London
office. (RTP Nov 23)
Law: Section 88 (4) of the Companies Act, 2013, permits a company to keep in any country
outside India, a part of the register of members, called ‘foreign register’, containing the
names and particulars of the members, debenture-holders, other security holders or
beneficial owners residing outside India.
Rule 7 of the Companies (Management and Administration) Rules, 2014 requires that
the company shall, within 30 days from the date of the opening of any foreign register,
file with the Registrar notice of the situation of the office along with the fee where such
Register is kept.
Conclusion: Accordingly, Golden Shoes Limited is required to file with the jurisdictional Registrar
of Companies a notice of situation of the London office within 30 days from November
1, 2022 (i.e. the date on which the ‘foreign register’ is opened) along with requisite fee.

2.Explain the following as per the provisions of the Companies Act, 2013:
(i) Abridged Form of Annual Return
(ii) Signing of Annual Return(5 Marks) (MTP April 24)
(i) Abridged Form of Annual Return
In terms of Second Proviso to Section 91(1) of the Companies Act,
2013, the Central Government may prescribe abridged form ofannual return for One Person
Company, small company and such other class or classes of companies as may be prescribed.
As per Rule 11 (1) One Person Company and small company shall file the annual return in
Form No. MGT-7A.
(ii) Signing of Annual Return
The annual return shall be signed by a director of the company and the company secretary;
and in case, there is no company secretary, by a company secretary in practice.
In relation to One Person Company, small company and private company (if such private
company is a start-up), the annual return shall be signed by the company secretary, or where
there is no company secretary, by the director of the company.

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PRACTICAL QUESTION

Question 3
ABC Pvt. Ltd. is a One Person Company (OPC) incorporated in 2024. The
company has not appointed a company secretary due to its small scale of
operations. At the end of the financial year 2024-25, the company needs to
file its annual return. The director in state of dilemma, consulted the
company law expert whether they need to submit a full- fledged annual return
or an abridged version and who should sign the document.
Based on the provisions of the Companies Act, 2013, advise on the
following:
(i) What form should ABC Pvt. Ltd. use to file its annual return?
(ii) Who is authorized to sign the annual return? (RTP May 25)
Law:
Law same like above question
Conclusion:
Accordingly, following are the advise given by the expert:
(i) As per Section 92 and Rule 11(1), since ABC Pvt. Ltd. is a One Person Company
(OPC), it should file its annual return in Form MGT-7A (abridged form) for the
financial year 2024-25.
(ii)In the absence of a company secretary, the annual return should be signed by the
sole director of the company as per the provisions applicable to One Person
Companies

4.Enumerate the provisions of the Companies Act, 2013 in respect to the following:
1. Time limit for filing of annual return when Annual General Meeting is held.
2. Time limit for filing of annual return when Annual General Meeting is not
held.(5 Marks) (MTP Sep 24)

Time limit for Filing of Annual Return

(i)A copy of annual return shall be filed with the Registrar of Companies (RoC) within 60 days
from the date on which the Annual General Meeting (‘AGM’) is held.
(ii)Where no annual general meeting is held in any year, it shall be filed with the Registrar of
Companies (RoC) within 60 days from the date on which the annual general meeting should
have been held, along with the reasons for not holding the AGM.

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PRACTICAL QUESTION

Question 5 Due to heavy rains and floods Chennai Handloom Limited was unable to convene
annual general meeting upto 30th September, 2017. The company has not filed the
annual financial statements, or the annual return as the directors of the company
are of the view that since the annual general meeting did not take place, the period
of 60 days for filing of annual return is not applicable and thus, there is no
contravention of Section 92 of the Companies Act, 2013. Discuss whether the
contention of directors is correct. (NOV 2018)

Law: As per the provisions of Section 92(4) of the Companies Act, 2013, every company
shall file with the Registrar a copy of the annual return, within 60 days from the date
on which the annual general meeting is held or where no annual general meeting is held
in any year, within 60 days from the date on which the annual general meeting should
have been held, together with the statement specifying the reasons for not holding the
annual general meeting, with such fees or additional fees as may be prescribed
Conclusion: In the given question, even in the case of not holding of Annual General Meeting, the
company shall file with the Registrar a copy of the annual return along with a statement
specifying the reasons for not holding the annual general meeting within 60 days from
the date on which the annual general meeting should have been held. Hence, the
contention of directors is not correct.

PRACTICAL QUESTION

Question 6 Bazaar Limited called its AGM in order to lay down the financial statements for
Shareholders’ approval. Due to want of Quorum, the meeting was cancelled. The
directors did not file the annual returns with the Registrar. The directors were of
the idea that the time for filing of returns within 60 days from the date of AGM
would not apply, as AGM was cancelled. Has the company contravened the
provisions of Companies Act, 2013? If the company has contravened the
provisions of the Act, how will it be penalized?(MAY 2018) (MTP NOV 2020) (Nov
23)

Law: According to section 92(4) of the Companies Act, 2013, every company shall file with
the Registrar a copy of the annual return, within sixty days from the date on which the
annual general meeting is held or where no annual general meeting is held in any year
within sixty days from the date on which the annual general meeting should have been
held together with the statement specifying the reasons for not holding the annual
general meeting, within the time specified under section 403.
Sub-section (5) of Section 92 also states that if a company fails to file its annual return
under sub-section (4), before the expiry of the period specified under section 403 with
additional fees, the company shall be punishable with fine which shall not be less than

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fifty thousand rupees but which may extend to five lakhs rupees and every officer of
the company who is in default shall be punishable with imprisonment for a term which
may extend to six months or with fine which shall not be less than fifty thousand rupees
but which may extend to five lakh rupees, or with both.
Conclusion: In the instant case, the idea of the directors that since the AGM was cancelled, the
provisions requiring the company to file annual returns within 60 days from the date of
AGM would not apply is incorrect.
In the above case, the annual general meeting of Bazaar Limited should have been held
within a period of six months, from the date of closing of the financial year but it did
not take place. Thus, the company has contravened the provisions of section 92 of the
Companies Act, 2013 for not filing the annual returns and shall attract the penal
provisions along with every officer of the company who is in default as specified in
Section 92(5) of the Act.

7.As per the provisions of the Companies Act, 2013, every company is required to file
with the Registrar of Companies, the Annual Return as prescribed in section 92, in
Form MGT -7. Explain the particulars required to be contained in it.(MAY 2018)
Every company is required to file with the Registrar of Companies, 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;
11 Such other matters as may be prescribed

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PRACTICAL QUESTION

Question 8 M/s. Techno Ltd. maintains its Register of Members at its registered office in
Mumbai. A group of members residing in Kolkata want to keep the register of
members at Kolkata.
(i) Explain with provisions of Companies Act, 2013, whether the company
can keep the Registers and Returns at Kolkata.
(ii) Does Mr. Ranjit, Director (but not a shareholder) of the company have the
right to inspect the Register of Members?(MAY 2018)

Maintenance of the Register of Members etc.:

(i) As per section 94(1) of the Companies Act, 2013, the registers required to be kept
and maintained by a company under section 88 and copies of the annual return filed
under section 92 shall be kept at the registered office of the company:
Provided that such registers or copies of return may also be kept at any other place
in India in which more than one-tenth of the total number of members entered in
the register of members reside, if approved by a special resolution passed at a
general meeting of the company.
So, Techno Ltd. can also keep the registers and returns at Kolkata after compliance
with the above provisions, provided more than one-tenth of the total number of
members entered in the register of members reside in Kolkata.
(ii) As per section 94(2) of the Companies Act, the inspection of the records, i.e.
registers and indices, and annual return can be done by members, debenture-
holders, other security holders or beneficial owners of the company.
Accordingly, a director Mr. Ranjit, who is not a shareholder of the company, has
no right to inspect the Register of Members of company, as per the provisions of
this section.

PRACTICAL QUESTION

Question 9 Rijwan Limited, a listed company, is in the business of garment manufacturing

and has its registered office at 123, N Tower, Commercial Beta Complex, Biwadi,
Rajasthan. The company has called its 6th Annual General Meeting at 3 PM on
22nd August, 2019 at Hintal Plaza, Bhiwadi. Some of the members of the company
have opposed to calling of the meeting at Hintal Plaza. The company has
approached you to advise them in this regard.Suppose, Rijwan Limited is an
unlisted company and wants to call their 6th AGM at Jaipur, will your answer
differ.(RTP NOV 2019)
Law: As per sec 96 of companies act,2013, AGM shall be held at the:
(i) Registered office of the company; or

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(ii) Some other place within the city, town or village in which the registered office
is situated.
However, AGM of an unlisted company may be held at any place in India if consent
is given in advance either in writing or by electronic mode by all the members.
Conclusion: In present case ,
(i) Opposition of members of Rijwan ltd of taking AGM at hintal plaza is not
tenable as AGM of listed company can be held not only in registered office of
company but some other place within the city, town or village in which the
registered office is situated. And therefore can be held in hintal plaza in
Rajasthan.
(ii) If Rijwan ltd is unlisted company , it can hold AGM anywhere in India
including Jaipur as AGM of an unlisted company may be held at any place in
India if consent is given in advance either in writing or by electronic mode by
all the members

PRACTICAL QUESTION

Question 10 Shambhu Limited was incorporated on 1.4.2018. The company did not have much
to report to its shareholders, so no general meeting of the company has been held
till 30.4.2020. The company has recently appointed a new accountant. The new
accountant has pointed out that the company required to hold the Annual General
Meeting. The company has approached you a senior Chartered Accountant.
Please advise the company regarding the time limit for holding the first annual
general meeting of the Company and the power of the Registrar to grant extension
of time for the First Annual General Meeting. (5 Marks)(MTP M 21)
Law: According to Section 96 of the Companies Act, 2013,
(i) every company shall be required to hold its first annual general meeting within
a period of 9 months from the date of closing of its first financial year.
(ii) Registrar does not have the power to grant extension to time limit for the first
AGM of the company.

Conclusion: In Present case, The first financial year of Shambhu Ltd is for the period 1st April 2018
to 31st March 2019, the first annual general meeting (AGM) of the company should be
held on or before 31st December, 2019. Further, the Registrar does not have the power
to grant extension to time limit for the first AGM of the company

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PRACTICAL QUESTION

Question 11 Pran Limited is an unlisted company, having its registered office at Agartala. The
company scheduled its Annual General Meeting (AGM) on 31st July, 2024 in Goa.
The meeting commenced at 3:00 PM and concluded at 6:00 PM. It is also provided
that by 1st July, 2024, the company had obtained written consent from all members
via email, agreeing to hold the AGM at this out-of-state location. As per the
Companies Act, 2013, evaluate whether the AGM was validly conducted. (RTP Jan
25)

Law: According to Section 96 of the Companies Act, 2013,

(i)every annual general meeting shall be called during business hours, that is, between
9 AM and 6 PM on any day that is not a National Holiday
(ii)It shall be held either at the registered office of the company or at some other place
within the city, town or village in which the registered office of the company is situated.
Provided that annual general meeting of an unlisted company may be held at any place
in India if consent is given in writing or by electronic mode by all the members in
advance.
Conclusion: In the given question, Pran Limited is an unlisted company and consent of all members
to conduct the AGM at Goa has been received in advance (by 1st July, 2024). Also, the
meeting was started well within the prescribed time i.e. at 3.00 PM. Hence, the meeting
was validly called.

PRACTICAL QUESTION

Question 12 Kedar Limited, an unlisted company, registered in the state of Haryana with 100
shareholders want to organize the Annual General Meeting of the company for the
financial year 2023-2024 as under:
(i) The meeting shall be held on 28th September 2024 which happens to be
Rakshanda, a declared as holiday by the Haryana Government.
(ii)The venue for the meeting shall be Lonavala, a hill resort in Maharashtra. Out of
100 shareholders, 98 have given their consent in writing for conducting the meeting
in Lonavala.
Advise the company on the feasibility of the above with reference to the provisions of
the Companies Act, 2013.(5 Marks) (MTP Jan 25)

Law: Section 96(2) of the Companies Act, 2013, states that every Annual General Meeting
(AGM) shall be called during business hours, that is, between 9 a.m. and 6 p.m. on any
day that is not a National Holiday and shall be held either at the registered office of the

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company or at some other place within the city, town or village in which the registered
office of the company is situated.
However, AGM of an unlisted company may be held at any place in India if consent is
given in writing or by electronic mode by all the members in advance.
Explanation—For the purposes of this sub-section, ‘National Holiday’ means and
includes a day declared as National Holiday by the Central Government.
Conclusion: In the instant case
(i)Kedar Limited, an unlisted company, can hold its AGM on 28th September, 2024
which happens to be a holiday declared by Haryana Government because this is not a
national holiday.
(ii)Kedar Limited cannot hold its AGM in Lonavala, a hill resort in Maharashtra
because consent for this has to be given by all the members in advance and here only
98 members out of 100 have given their consent for conducting the meeting in
Lonavala.

13.Discuss the provisions of the Companies Act, 2013 regarding the time limit for
holding the first annual general meeting of a company. Also, state the power of the
Registrar to grant extension of time for the First Annual General Meeting. Explain with
the help of an example.(5 Marks) (MTP Mar. 24)
First Annual general meeting
(i) According to section 96 of the Companies Act, 2013, every company shall be
required to hold its first Annual General Meeting within a period of 9 months from
the date of closing of its first financial year.
(ii) No extension of time can be granted by the Registrar for the holding of the first
annual general meeting.
(iii) Example: ABC Limited was incorporated on 1.4.2021. No General Meeting of the
company was held till 30.4.2023. The first financial year of ABC Ltd is for the period
1st April 2021 to 31st March 2022, the first Annual General Meeting (AGM) of the
company should be held on or before 31st December, 2022.

14.Examine the validity of the following statements in respect of Annual General

Meeting (AGM) as per the provisions of the Companies Act, 2013:
(i) The first AGM of a company shall be held within a period of six months from the
date of closing of the first financial year.
(ii) The Registrar may, for any special reason, extend the time within which the first
AGM shall be held. (Mar. 22)(4 Marks)

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(i) According to section 96 of the Companies Act, 2013, first annual general meeting of the
Company should be held within nine months from the closing of the first financial year.
Hence, the statement that the first Annual General Meeting (AGM) of a company shall be
held within a period of six months from the date of closing of the first financial year is
Incorrect.
(ii) According to proviso to section 96(1), the Registrar may, for any special reason, extend the
time within which any annual general meeting, other than the first annual general meeting,
Shall be held, by a period not exceeding three months. Thus, the Registrar cannot extend (for
any reason) the time period within which the first AGM shall be held. Given statement is
incorrect.

PRACTICAL QUESTION

Question 15 Verma Limited has Equity Share Capital of 20,000 shares @ `10 each. The Company
has received a requisition from Mr. Jai and Mr. Narayan each holding 3,000 equity
shares to call an Extraordinary General Meeting to remove Managing Director of
the company who has been found to be involved in some malpractices. The company
failed to call the said meeting. The requisitionist desires to call the meeting by
themselves to pass the resolution to remove the Managing Director. Explain the
validity of such resolution passed in the said meeting referring the provisions of the
Companies Act, 2013.(5 Marks) (MTP Jan 25)

Law: (i) As per section 100(2) of the Companies Act, 2013, read with Rule 17 of the
Companies (Management and Administration) Rules, 2014, the Board shall on the
requisition of, 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, shall call for the meeting.
(ii) The requisition made under sub-section (2) 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.
(iii) The Board must, within 21 days from the date of receipt of a valid requisition,
proceed to call a meeting on a day not later than 45 days from the date of receipt of
such requisition.
(iv) If the Board does not, within 21 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 45 days from the date of receipt of such requisition, the meeting
may be called and held by the requisitionists themselves within a period of three months
from the date of the requisition. [Sub-Section 4].
(v)Sub-section (5) of Section 100 provides that the requisitionists shall call and hold
the meeting in the same manner in which the meeting is called and held by the Board.

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(vi) Sub-section (6) of Section 100 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.
Conclusion: In the given case, meeting called by requisitionists to pass the resolution to remove the
Managing Director in the said meeting can be said to be valid as the requisition moved
from Mr. Jai and Mr. Narayan holding 60,000 (each holding ` 30,000) equity share
capital (1/10th of 1,00,000) is in compliance with the legal requirement and will be
binding on the company, its officers and members provided if all the conditions for a
valid meeting are satisfied

PRACTICAL QUESTION

Question 16 The Board of Directors of a company refuse to convene the extraordinary general
meeting of the members on the ground that the requisitionists have not given
explanatory statement for the resolution proposed to be passed at the meeting. .(3
Marks) (MTP Oct. 23)
Law: (i) As per section 100(2) of the Companies Act, 2013, read with Rule 17 of the
Companies (Management and Administration) Rules, 2014, the Board shall on the
requisition of, 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, shall call for the meeting.
(ii) The requisition made under sub-section (2) 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.
(iii) No explanatory statement need be annexed to the notice of an extraordinary
general meeting convened by the requisitionists and the requisitionists need not
disclose the reasons for the resolution(s) which they propose to move at the
meeting.(Rule 17)
Conclusion: Hence, the Board of Directors cannot refuse to convene the extraordinary general
meeting of the members on the ground that the requistionists have not given the
explanatory statement i.e reason for holding meeting for the resolution proposed to be
passed at the meeting.

PRACTICAL QUESTION

Question 17 Primal Limited is a company incorporated in India. It owns two subsidiaries- Privy Limited
(in which it holds 75% shares) and Malvy Limited (a wholly owned subsidiary). Both the
subsidiaries are incorporated outside India. The Board of Directors of Primal Limited intends

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to call an Extraordinary General Meeting (EGM) of Primal Limited on urgent basis. Advise
the Board of Directors on the following:
(i) EGM be held in India
(ii)EGM be held in Netherlands (RTP MAY 2019)
Law: According to section 100 of the Companies Act, 2013, 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 any place within
India.
Conclusion: In the light of the above provisions:
(i) The Board of Directors can call the EGM in India.
(ii) The Board of Directors cannot call the EGM of Primal Limited outside India as it is a
company incorporated in India.

18.Enumerate the persons who are entitled to receive the Notice of the General Meeting, as per
the provisions of the Companies Act, 2013.(5 Marks) (MTP Sep 24)

Persons entitled to receive the Notice of the General Meeting

According to section 101(3) of the Companies Act, 2013, the notice of every meeting of the company
shall be given to:
(1) every member of the company, legal representative of any deceased member or the assignee of
insolvent member;
(2) the auditor or auditors of the company;
(3) every director of the company.

PRACTICAL QUESTION

Question 19 Madurai Bakes Ltd. issued a notice for holding of its Annual General Meeting on
7th September, 2024. The notice was posted to the members on 16th August, 2024.
Some members of the company alleged that the company had not complied with the
provisions of the Companies Act, 2013 with regard to the period of notice and as such
the meeting was not valid. Referring to the provisions of the Act, decide:
(i) Whether the meeting has been validly called?
(ii) If there is a shortfall, state and explain by how many days does the notice fall
short of the statutory requirement?
(iii) Can the delay in giving notice be condoned?(Module) (RTP NOV 2020) (MAY
2019)
Law: According to section 101(1) of the Companies Act, 2013,

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(i) A general meeting of a company may be called by giving not less than clear twenty-
one days' notice either in writing or through electronic mode in such manner as may be
prescribed.
(ii) Also, it is to be noted that 21 clear days mean exclude that the date on which notice
is served and the date of meeting
(iii) Further in case of delivery by post, such service shall be deemed to have been
effected- in the case of a notice of a meeting, at the expiration of forty eight hours after
the letter containing the same is posted.
Conclusion: Hence, in the given question:
(i) In the given question, only 19 clear days’ notice is served (after excluding 48 hours
from the time of its posting and the day of sending and date of meeting). Therefore, the
meeting was not validly called.
(ii) As explained in (i) above, notice falls short by 2 days.
(iii)The Companies Act, 2013 does not provide anything specific regarding the
condonation of delay in giving of notice. Hence, the delay in giving the notice calling
the meeting cannot be condoned. However , company may take prior consent to give
shorter notice to avoid invalidation of meeting .

PRACTICAL QUESTION

Question 20 With a view to transact some urgent business, Ratna, Rimpi and Ratnesh, the three
directors of Shilpkaar Constructions Limited are desirous of calling a general
meeting of shareholders by giving shorter notice than 21 days’ clear notice. The
fourth director, Nilesh is of the opinion that such an action will attract penalty
provisions since there is contravention. The paid-up share capital of the company is
` 30 crore divided into 3 crore shares of ` 10 each. Keeping in view the applicable
provisions of the Companies Act, 2013, discuss regarding the possibility of calling a
general meeting by giving shorter notice (module).

Law: (i) Normally, general meetings are to be called by giving at least 21 clear days’ notice
as required by Section 101 (1) of the Companies Act, 2013.
(ii)As an exception, first proviso to Section 101 (1) states that a general meeting may
be called after giving shorter notice than that specified in sub-section (1) of Section
101, if consent, in writing or by electronic mode, is accorded thereto—
(A) in the case of an annual general meeting, by not less than ninety-five per cent. of
the members entitled to vote thereat; and
(B) in the case of any other general meeting, by members of the company—

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(a) Holding, if the company has a share capital, majority in number of members
entitled to vote and who represent not less than ninety- five per cent. of such part of
the paid-up share capital of the company as gives a right to vote at the meeting; or
(b) Having, if the company has no share capital, not less than ninety- five per cent. of
the total voting power exercisable at that meeting.
Conclusion: In view of the above provisions, Shilpkaar Constructions Limited is permitted to call
the requisite general meeting by giving a shorter notice. However, the members holding
at least ninety-five per cent of the paid-up share capital of the company which gives
them a right to vote at the meeting must consent to the shorter notice.Hence, the opinion
of Nilesh that there shall be contravention of relevant provisions attracting penalty if a
general meeting is called at shorter notice than usually required is not correct.

PRACTICAL QUESTION

Question 21 Amar, a director of Gokul Electricals Ltd. gave in writing to the company that the
notice for any general meeting and of the Board of Directors' meeting be sent to him
only by registered post at his residential address at Kanpur for which he deposited
sufficient money. The company sent notice to him by ordinary mail under certificate
of posting. Amar did not receive this notice and could not attend the meeting and
contended that the notice was improper.Decide, as per the provisions of the
Companies Act, 2013:
(i) Whether the contention of Amar is valid.
(ii) Will your answer be the same if Amar remains in U.S.A. for one month during
which the notice of the meeting was served and the meeting was held? (April 22)(5
Marks)
Law: According to section 20(2) read with sec 101 of the Companies Act, 2013, a document
may be served on Registrar or any member by sending it to him by post or by registered
post or by speed post or by courier or by delivering at his office or address, or by such
electronic or other mode as may be prescribed.
Provided that a member may request for delivery of any document through a particular
mode, for which he shall pay such fees as may be determined by the company in its
annual general meeting
Conclusion: Accordingly, the questions as asked may be answered as under:
(i) The contention of Amar shall be tenable, for the reason that the notice was not
properly served. However company may claim accidental omission to preserve notice
from making invalid
(ii) In the given circumstances, the company is bound to serve a valid notice to Amar
by registered post at his residential address at Kanpur and not outside India.

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PRACTICAL QUESTION

Question 22 P Limited had called its Annual General Meeting on 30th August 2019. Mr. Pawan has filed a
complaint against the company, that he could attend the meeting as the company did not serve
the notice to him for attending the annual general meeting. The company, in turn, provided the
proof that they had sent the notice, by way of an email to Mr. Pawan, inviting him to attend the
annual general meeting of the company. Mr. Pawan alleged that he never received the email.
In the light of the provisions of the Companies Act, 2013, advise the whether the company has
erred in serving the notice of Annual General Meeting to Mr. Pawan. (4 Marks) (MTP M 21)
Law: As per Rule 18 of the Companies (Management & Administration) Rules, 2014, read with sec
101 of companies Act,2013 ,the company’s obligation shall be satisfied when it transmits the e-
mail and the company shall not be held responsible for a failure in transmission beyond its
control. Also, if the member entitled to receive the notice fails to provide or update relevant e-
mail address to the company, or to the depository participant as the case may be, the company
shall not be in default for not delivering notice via e-mail.
Conclusion: Hence, the company has not erred in serving notice of Annual General Meeting to Mr. Pawan.
23.Referring to the provisions of the Companies Act, 2013 state the matters relating to ‘Ordinary
Business’ which may be transacted at the Annual General Meeting of a Company. (MTP MAY
2017)
Ordinary Business [Sec. 102]
At a AGM Following business shall be ordinary business:
(i) Consideration and adoption of Financial Statements, Auditor’s Report and Board’s
Report.
(ii) Declaration of Dividend.
(iii) Appointment & Removal of directors
(iv) Appointment, Reappointment and Removal of auditors and fixing of remuneration of
auditors.

PRACTICAL QUESTION

Question 24
Om Ltd. served a notice of General Meeting upon its members. The notice stated
that the following resolutions will be considered at such meeting:
(i) Resolution to increase the authorised share capital of the company.
(ii) Appointment and fixation of the remuneration of Mr. Pramod as the statutory
auditor.
A shareholder complained that the amount of the proposed increase and the
remuneration was not specified in the notice. Is the notice valid under the provisions of
the Companies Act, 2013. (RTP Sep 24) (5 Marks) (MTP sep 24)
Law: 1.At a AGM Following business shall be ordinary business:
(i) Consideration and adoption of Financial Statements, Auditor’s Report and
Board’s Report.

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(ii) Declaration of Dividend.

(iii) Appointment & Removal of directors
(iv) Appointment, Reappointment and Removal of auditors and fixing of
remuneration of auditors.
2.At EGM - No business is ordinary.
3.Under section 102(2)(b) of the Companies Act, 2013, in the case of any meeting other than an
Annual General Meeting, all business transacted thereat shall be deemed to be special business.

4.Following are contents of explanatory statement

(a) All material facts concerning each item of business to enable members to take decisions.
(b)The nature of concern or interest (financial or non-financial) of:
(i) Every director and manager;
(ii) Every other key managerial person;
(iii) Relatives of (i) and (ii) above.
(c) If any item of the special business affects any other company, then the extent of shareholding
of every director and manager in that company in case their shareholding interest is atleast 2%
of the paid up share capital of the other company [Proviso to Sec. 102(2)]
(d) If special business refers to any document which is to be considered at the GM, the time and
place where such document can be inspected shall be specified in the Explanatory Statement.
[Sec. 102(3)]
5. Section 102 also prescribes ordinary businesses for which explanatory statement is not
required.
Conclusion: In present case,
(i) Part (i) of the question relating to increase in the Authorized Capital falls under special
business and The information about the amount is a material fact with reference to the proposed
increase of authorized share capital ,hence in the absence of amount of proposed increase of
share capital, the notice will be treated as invalid.
(ii) Part (ii) is an ordinary business and hence explanatory statement is not required. However,
considering the two resolutions mentioned in the question are to be passed in the same meeting,
notice of the meeting is invalid.
(iii)The notice is, therefore, not a valid notice under Section 102 of the Companies Act, 2013

PRACTICAL QUESTION

Question 25 Zorab Garments Limited served a notice of General Meeting upon its members. The notice
stated that a resolution to increase the share capital of the company would be considered at
such meeting. Roshni, a shareholder of the company complained that the amount of the
proposed increase was not specified in the notice. Is the notice valid? (5 Marks) (MTP sep
24) (5 Marks) (MTP Jan 25)

Law: Same as above question

Conclusion: Thus, the objection of the shareholder is valid since the details of the item to be considered at
the general meeting are not fully disclosed i.e information about the amount is a material fact
with reference to the proposed increase of share capital. The notice is, therefore, not a valid
notice considering the provisions of section 102 of the Companies Act, 2013.

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PRACTICAL QUESTION

Question 26
KMN Ltd. scheduled its annual general meeting to be held on 11 th March, 2024 at 11:00
A.M. The company has 900 members. On 11th March, 2024 following persons were
present by 11:30 A.M.

(1) P1, P2 & P3 shareholders

(2) P4 representing ABC Ltd.

(3) P5 representing DEF Ltd.

(4) P6 & P7 as proxies of the shareholders

(i) Examine with reference to relevant provisions of the Companies Act, 2013,
whether quorum was present in the meeting.

(ii) What will be your answer if P4 representing ABC Ltd., reached in the meeting
after 11:30 A.M.?

(iii) In case lack of Quorum, discuss the provisions as applicable for an adjourned
meeting in terms of date, time & place.

(iv) What happens if there is no Quorum in the Adjourned meeting?(5 Marks) (MTP
sep 24)
Law: (i)According to section 103 of the Companies Act, 2013, unless the articles of the company
provide for a larger number, the quorum for the meeting of a Public Limited Company shall be
5 members personally present, if the number of members is not more than 1000
(ii) The following shall be counted as quorum:
1. Members personally present.
2. Representative of:
(a) President
(b) Governor of States
(c) Body corporate
3. Person in more than one capacity is counted as such for quorum. One person can be an
authorized representative of more than one body corporate. In such a case, he is treated as
more than one member for the purpose of quorum.
4. Joint members are considered as one member for counting as quorum.
(iii)The following shall not be counted as quorum:
1. Proxy is not counted as quorum.
2. Preference shareholders are not counted for quorum except for business
which affects their rights.
Conclusion:
(i) (1) P1, P2 and P3 will be counted as three members.
(2) P4 and P5 representing ABC Ltd. and DEF Ltd. respectively will be counted as
two members.
(3) P6 and P7 shall not be counted in quorum.
In the light of the provision of the Act and the facts of the question, it can be concluded that
the quorum for Annual General Meeting of KMN Ltd. is 5 members personally present. Total

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5 members (P1, P2, P3, P4 and P5) were present. Hence, the requirement of quorum is fulfilled.
(ii) The section further states that, if the required quorum is not present within half an hour,
the meeting shall stand adjourned for the next week at the same time and place or such
other time and place as decided by the Board of Directors.Since, P4 is an essential part
for meeting the quorum requirement, and he reaches after 11:30 AM (i.e. half an hour
after the starting of the meeting), the meeting will be adjourned as provided above.
(iii) In case of lack of quorum, the meeting will be adjourned as provided in section 103.In
case of the adjourned meeting or change of day, time or place of meeting, the company
shall give not less than 3 days' notice to the members either individually or by
publishing an advertisement in the newspaper.
(iv) Where quorum is not present in the adjourned meeting also within half an hour, then
the members present shall form the quorum

PRACTICAL QUESTION

Question 27 The Articles of Association of ABC Limited require the personal presence of 7 members
to constitute quorum of General Meetings. The company has 870 members as on the date
of meeting. The following persons were present in the extra-ordinary meeting to consider
the appointment of Managing Director:
(i) A, the representative of Governor of Karnataka.
(ii) B and C, shareholders of preference shares,
(iii) D, representing Green Limited and Blue Limited
(iv) E, F, G and H as proxies of shareholders.
Can it be said that the quorum was present in the meeting?(6 Marks) (MTP Sep. 22)
Law: Same like above
Conclusion: Calculation of Quorum u/s 103
Particulars Counting u/s 103
(i) A, the representative of Governor of Karnataka. 1
(ii) B and C, shareholders of preference shares, 0
(iii) D, representing Green Limited and Blue Limited 2
(iv) E, F, G and H as proxies of shareholders. 0
In view of the above there are only three members personally present however quourum
required is 7 . Thus, it can be said that the requirement of quorum has not been met and
it shall not constitute a valid quorum for the meeting.

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PRACTICAL QUESTION

Question 28 The Board of Directors of ABC Ltd. called an extra-ordinary general meeting upon the
requisition of members. However, the meeting was adjourned on the ground that the
quorum was not present at the meeting. In the light of the provisions of the Companies
Act, 2013, the Board of directors on the decision to adjournment of the meeting. (5
Marks) (MTP sep 24)
Law: As per section 103(2)(b) of the Companies Act, 2013, if the quorum is not present within
half an hour from the appointed time for holding a meeting of the company, the meeting, if
called on the requisition of members, shall stand cancelled
Conclusion: Therefore, the meeting stands cancelled and the stand taken by the Board of Directors to
adjourn it, is not proper and valid.

PRACTICAL QUESTION

Question 29 Kurt Limited is a company engaged in the business of manufacturing papers. The
company has approached you to explain them the following as per the provisions of the
Companies Act, 2013:
(a) Quorum for the general meeting if the company has 800 members.
(b) Quorum for the general meeting if the company has 6500 members.
(c) Quorum for the general meeting if the company has 5500 members. The articles of
association has prescribed the quorum for the meeting to be 50.(April 22) (5 Marks)
Law: According to section 103(1) of the Companies Act, 2013, unless the articles of the company
provide for a larger number, in case of a public company:
(1) five members personally present if the number of members as on the date of meeting is not
more than one thousand,
(2) fifteen members personally present if the number of members as on the date of meeting is
more than one thousand but up to five thousand,
(3) thirty members personally present if the number of members as on the date of the meeting
exceeds five thousand.
The term ‘members personally present’ as mentioned above refers to the members entitled to
vote in respect of the items of business on the agenda of the meeting.
Conclusion: Thus,
(a) If the company has 800 members, quorum shall be 5 members personally present.
(b) If the company has 6500 members, quorum shall be 30 members personally present.

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(c) If the company has 5500 members, quorum shall be 30 members personally
present.However, since the articles of association has prescribed the quorum for the meeting
to be 50, the quorum shall be 50 (higher of 30 and 50).

PRACTICAL QUESTION

Question 30 The Annual General Meeting of KMP Limited was held on 30th April, 2015. The
Articles of Association of the company is silent regarding the quorum of the
General Meeting. Only 10 members were personally present in the above meeting,
out of the total 2,750 members of the company. The Chairman adjourned the
meeting for want of quorum. Referring to the provisions of the Companies Act,
2013, examine the validity of Chairman’s decision. (MAY 2015)

Law: (i) Section 103 of the Companies Act, 2013 provides that fifteen members
personally present if the number of members as on the date of meeting is more
than one thousand but up to five thousand;
(ii) CONSEQUENCES OF NO 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
b) to such other date and such other time and place as the Board may determine;
or
c) the meeting, if called by requisitions (under section 100 ), shall stand cancelled.
Conclusion:
In the instant case, KMP Limited is a public company with total number of 2750
members, hence atleast 15 members should have been personally present in order to
constitute a valid quorum for the Annual General Meeting.
Thus, the meeting shall automatically stand adjourned to the same day in the next week
at the same time and place, if the quorum is not present within half –an-hour from the
time appointed for holding a meeting of the company. Further, the Board of Directors
may decide for such other date and such other time and place, which they may deem
fit. Section 103 of the said Act itself provides for automatic adjournment of the meeting
to the same day in the next week at the same time and place, rather the Chairman
obviating to take a decision on the matter of the meeting. The question of validity of
Chairman’s decision does not arise.

PRACTICAL QUESTION

Question 31 PQ Limited is a public company having its registered office in Mumbai. It has 3680 members.
The company sent notice to all its members for its Annual general Meeting to be held on
2nd September 2019 (Monday) at 11 :00 AM at its registered office. On the day of meeting
there were only 12 members personally present upto 11:30 AM. The Chairman adjourned the
meeting to same day in next week at the same time and place.

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On the day of adjourned meeting only 10 members were personally present. The Chairman
initiated the meeting after 11:30 AM and passed the resolutions after discussion as per the
agenda of the meeting given in the notice. Comment whether the AGM conducted after
adjournment is valid or not as per the provisions of section 103 of Companies Act 2013 by
explaining the relevant provisions in this regard.
What would be your answer in the above case, if PQ Limited is a Private company?(2 + 2 = 4
Marks) (Nov 2020)

Law: (i) According to section 103 of the Companies Act, 2013, unless the articles of the
company provide for a larger number, in case of a public company, fifteen members
personally present may fulfil the requirement of quorum, if the number of members as
on the date of meeting is more than one thousand but up to five thousand.
(ii) If the specified quorum is not present within half an hour from the time appointed for
holding a meeting of the company, 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 place as the
Board may determine.
(iii) If at the adjourned meeting also, a quorum is not present within half-an-hour from the
time appointed for holding meeting, the members present shall be the quorum.
Conclusion:
In the instant case, there were only 12 members personally present on the day of meeting of
PQ Limited upto 11:30 AM. This was not in compliance with the required quorum as per the
law. In the adjourned meeting also, the required quorum was not present but in the adjourned
meeting, the members present shall be considered as quorum in line with the provisions of
section 103.
Hence, the AGM conducted by PQ Limited after adjournment is valid.
As per the provisions of section 103(1)(b), in case of a private company, two members
personally present, shall be quorum for the meeting of a company. Therefore, in case, PQ
Limited is a private company, then only two members personally present shall be the quorum
for AGM and there was no need for adjournment

PRACTICAL QUESTION

Question 32 A General Meeting of ABC Private Ltd was scheduled to be held on 15thApril, 2024 at 3.00
P.M. As per the notice, the members who will be unable to attend the meeting in person can
appoint a proxy and the proxy forms duly filled should be sent to the company, so that the
company can receive it within time. Mr. X, a member of the company appoints Mr. Y as his
proxy and the proxy form dated 10-04-2024 was deposited by Mr. Y with the company at its
registered office on 11-04-2024. Similarly, another member, Mr. W, also gives two separate
proxies to two individuals named Mr. M and Mr. N. In the case of Mr. M, the proxy dated 12-
04-2024 was deposited with the company on the same day and the proxy form in favour of
Mr. N was deposited on 14-04-2024. All the proxies viz., Y, M and N were present before the
meeting.
According to the provisions of the Companies Act 2013, who would be the persons allowed to
represent as proxies for members X and W respectively? (5 Marks) (MTP Jan 25) (RTP MAY
2021) (MTP MAY 2019)

Law:
A Proxy is an instrument in writing executed by a shareholder authorizing another person to

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attend a meeting and to vote thereat on his behalf and in his absence.
As per the provisions of section 105 of the Companies Act, 2013,
(i)every shareholder who is entitled to attend and vote has a statutory right to appoint another
person as his proxy.
(ii)Section 105(4) provides that a proxy received 48 hours before the meeting will be valid.
(iii) If more than one proxy is appointed by the same member, the proxy received later in time
shall be considered provided it has been duly received by the company 48 hours before the
meeting.
Conclusion: Thus, in case of member X, the proxy Y will be permitted to represent as proxy on his behalf
as form for appointing proxy was submitted within the permitted time.
However, in the case of member W, the proxy M will be permitted to represent as the proxy.
Whereas submission of form authorizing N to represent as proxy was deposited in less than 48
hours before the meeting, so N will not be allowed to represent W

PRACTICAL QUESTION

Question 33 Sekhar, a shareholder, gives a notice for inspecting proxies, five days before the meeting is
scheduled and approaches the company two days before the scheduled meeting for inspecting
the same. What is the legal position relating to his actions (as per the provisions of the
Companies Act, 2013)? (MTP MAY 2017)

Law: Under section 105 (8) of the Companies Act, 2013 every member entitled to vote at a meeting
of the company, or on any resolution to be moved thereat, shall be entitled during the period
beginning twenty-four hours before the time fixed for the commencement of the meeting and
ending with the conclusion of the meeting, to inspect the proxies lodged, at any time during the
business hours of the company, provided not less than three days’ notice in writing of the
intention so to inspect is given to the company.
Conclusion: In the given case, Sekhar has given proper notice.However, such inspection can be undertaken
only during the period beginning 24 hours before the time fixed for the commencement of the
meeting and ending with the conclusion of the meeting. So, Sekhar can undertake the inspection
only during the above mentioned period and not two days prior to the meeting

PRACTICAL QUESTION

Question 34 Mr. John held certain partly paid up shares of Ltd. company. The company asked him to
pay the final call money on the shares. Due to some unavoidable circumstances he was
unable to pay the amount of call money to the company. At a general meeting of the
shareholders, the chairman disallowed him to cast his vote on the ground that the articles
do not permit a shareholder to vote if he has not paid the calls on the shares held by him.
John contested the decision of the Chairman. Referring to the provisions of the Companies
Act, 2013 decide whether the contention of John is valid. (RTP May 2015) (MTP NOV
2017)

Law: Section 106 (1) of the Companies Act, 2013 states that the articles of a company may provide
that no member shall exercise any voting right in respect of any shares registered in his name

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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.
Conclusion: In the present case the articles of the company do not permit a shareholder to vote if he has not
paid the calls on the shares held by him. Therefore, the chairman at the meeting is well within
its right to refuse him the right to vote at the meeting and Mr. John’s contention is not valid.

PRACTICAL QUESTION

Question 35 'X' a member of LKM Ltd. is holding 250 shares, which are partly paid. The company
held its general meeting where voting right was denied to 'X' claiming he has not paid the
calls on the shares held by him. Examine the validity of company's denial to 'X' with
reference to the relevant provisions of the Companies Act, 2013, assuming that Articles of
association of the Company do not restrict the voting right of such members. (NOV 2018)
Law:
According to the Section 106 of companies act , 2013:
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 are 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.
Conclusion: In the given question, Mr. X (member) holding 250 shares of LKM Ltd. has not paid certain
calls on the shares. The company has denied his voting rights in the general meeting though the
Articles of association of the company does not contain any restriction in the voting rights of
such members.
On examination of the above provisions of the Act and the facts of the case, LKM Ltd.’s denial
to ‘X’ for exercising his voting rights is not valid.

PRACTICAL QUESTION

Question 36 Prabhas Limited is a company having its shares listed on a recognised stock exchange. The
company has 5,000 members. The Annual General Meeting of the company is to be held
on 07-09-2022. As per the provisions of the Companies Act, 2013, advise the company, the
remote e- voting period and the time of closing of remote e-voting.(RTP Nov. 22)

Law: Sec 108 read with Rule 20 of the Companies (Management & Administration) Rules, 2014,
provides that:
1.Every company which has listed its equity shares on a recognised stock exchange and
company having not less than one thousand members shall provide to its members facility to
exercise their right to vote on resolutions proposed to be considered at a general meeting by
electronic means.
2.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.

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Conclusion: In the question, Prabhas Limited has its shares listed on recognised stock exchange and has
5,000 members, hence, it has to provide to its members facility to exercise their right to vote
on resolutions proposed to be considered at a general meeting by electronic means. Thus, if
the Annual General Meeting of Prabhas Limited is going to be held on 7.9.2022, the facility
for remote e- voting shall open on 4.9.2022 and close at 5.00 p.m. on 6.9.2022.

PRACTICAL QUESTION

Question 37 If a member of a listed company who has casted his vote through electronic voting can
attend general meeting of the company and change his vote subsequently and can he
appoint a proxy?(MAY 2019)
Law: According to sec 108 read with Rule 20 of the Companies (Management and Administration)
Rules, 2014, the notice of the meeting shall clearly state that the members who have cast their
vote by remote e-voting prior to the meeting may also attend the meeting but shall not be entitled
to cast their vote again.
Conclusion: - In the instant case, a member of a listed company who has casted his vote through electronic
voting can attend general meeting of the company but cannot change his vote subsequently and
is not permitted to appoint a proxy.

PRACTICAL QUESTION

Question 38 Examine the validity of the following decision of the Board of Directors with reference to the
provisions of the Companies Act, 2013:
In an Annual General Meeting of a company having share capital, 80 members present in
person or by proxy holding more than 1/10th of the total voting power, demanded for poll. The
chairman of the meeting rejected the request on the ground that only the members present in
person can demand for poll.(5 Marks) (MTP Jan 25)

Law:
Section 109 of the Companies Act, 2013 provides for the demand of poll before or on the
declaration of the result of the voting on any resolution on show of hands. Accordingly, law
says that:-
Before or on the declaration of the result of the voting on any resolution on show of hands, a
poll may be ordered to be taken by the Chairman of the meeting on his own motion, and shall
be ordered to be taken by him on a demand made in that behalf:-
(i)In the case a company having a share capital, by the members present in person or by proxy,
where allowed, and having not less than one-tenth of the total voting power or holding shares
on which an aggregate sum of not less than five lakh rupees or such higher amount as may be
prescribed has been paid-up; and
(ii)in the case of any other company, by any member or members present in person or by proxy,
where allowed, and having not less than one tenth of the total voting power
Conclusion:
In the given question, 80 members present in person or by proxy holding more than 1/10 th of
the total voting power, demanded for poll. Hence, the contention of the Chairman is not valid.

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PRACTICAL QUESTION

Question 39 ‘A’ and his wife ‘B’ has joint Demat Account in Vrinda Limited. The company’s Annual
General Meeting is to be held on 28.08.2022. In such a case, who will cast the vote in the
Annual General Meeting? Give your answer as per the provisions of the Companies Act,
2013. (RTP Nov. 22)
Law: According to sec 109 read with Rule 21 of the Companies (Management and Administration)
Rules, 2014
(i)The voting in case of joint shareholders is done in the order of seniority, which is determined
on the basis of the order in which their names appear in the register of members/ shareholders.
The joint- holders have a right to instruct the company as to the order in which their names are
to appear in the register
(ii)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
Conclusion: Thus, in the given case, ‘A’ or his wife ‘B’, whosoever names appears first in chronological
order in the register of members/ shareholders shall be entitled to vote.

PRACTICAL QUESTION

Question 40 Prakash and some of his friends are members of Focus Limited, a company with a paid-
up share capital of ` one crore. They all intend to propose a resolution at the forthcoming
General Meeting of the company which is going to be held in CP, New Delhi i.e. the place
where Registered Office of Focus Limited is situated.
(i)Kindly provide guidance to Prakash and his friends on the requisite minimum paid-up
share capital they should hold to initiate a members' resolution.
(ii)What are the other requirements that Prakash and his friends need to keep in mind
for moving a members’ resolution. (RTP May24)
Law: In terms of section 111 of the Companies Act, 2013, the members of a company are given a
statutory right to propose resolutions for consideration at the general meetings. According to
sub-section (1), the number of members required to make a requisition for moving resolution
shall be same as required to requisition a general meeting as per section 100 (2). The
requirement is as under:
“In case of a company having share capital, such number of members who hold minimum
1/10th of the paid-up share capital that carries right of voting shall be eligible to make a
requisition for moving a resolution at the general meeting.”
Conclusion: (i)Accordingly, Prakash and his friends must hold minimum 1/10th of paid-up share capital
(i.e. ` 10 lakh worth of share capital carrying right to vote) of Focus Limited in order to be
eligible for moving a resolution at the general meeting.
(ii) The other requirements as per section 111 for making a requisition to move a resolution at
the general meeting which Prakash and his friends should keep in mind are as under:

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a)Two or more copies of the requisition are required to contain signatures of all the
requisitionists i.e. Prakash and friends.
b)The requisition must be deposited by them at CP where the registered office of Focus
Limited is situated.
c)In the case of a requisition requiring notice of a resolution, it needs to be deposited by them
not less than six weeks before the meeting.
d)In case of any other resolution, the same is to be deposited by them not less than two weeks
before the meeting.
e)A sum reasonably sufficient to meet the expenses to be incurred by Focus Limited in giving
effect to proposing the resolution shall also be deposited by Prakash and his friends along with
the requisition.

PRACTICAL QUESTION

Question 41 At a General meeting of a XYZ Limted, a matter was to be passed by a special

resolution. Out of 40 members present, 20 voted in favour of the resolution, 5
voted against it and 5 votes were found invalid. The remaining 10 members
abstained from voting. The Chairman of the meeting declared the resolution as
passed. With reference to the provisions of the Companies Act, 2013, examine the
validity of the Chairman’s declaration.(MTP NOV 2019)

Law: (i)As per Section 114(2) of the Act, a resolution shall be a special resolution, when–
(a) The intention to propose the resolution as a special resolution has been duly
specified in the notice calling the general meeting or other intimation given to the
members of the resolution;
(b) The notice required under this Act has been duly given; and
(c) The votes cast in favour of the resolution, are required to be not less than 3 times
the number of the votes, if any, cast against the resolution by members so entitled
and voting
(ii)Thus, in terms of the requisite majority, votes cast in favour have to be compared
with votes cast against the resolution.
(iii)Abstentions or invalid votes, if any, are not to be taken into account.
Conclusion: Accordingly, in the given problem, the votes cast in favour (20) being more than 3
times of the votes cast against (5), and presuming other conditions of Section 114(2)
are satisfied, the decision of the Chairman is in order

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42.Give the points of distinction between ordinary resolution and special resolution. (MAY 2019)

(i) Meaning - Section 114(1) of the Companies Act, 2013 states that a resolution shall be ordinary
resolution, if the notice required under this Act has been duly given and the votes cast in the favour of
the resolution, by any mode of voting should exceed the votes cast against it. Whereas As per Section
114(2) of the Act, a resolution shall be a special resolution, when–
(d) The intention to propose the resolution as a special resolution has been duly specified in the notice
calling the general meeting or other intimation given to the members of the resolution;
(e) The notice required under this Act has been duly given; and
(f) The votes cast in favour of the resolution, are required to be not less than 3 times the number of the
votes, if any, cast against the resolution by members so entitled and voting
(ii)Matter – Special resolution are required on more critical matters as compared to matters requiring
ordinary resolution
(iii)Filing with ROC- Copy of every special resolution is filed with ROC within 30 days in MGt-14
whereas only in some cases required by law , ordinary resolution need to be file with ROC

PRACTICAL QUESTION

Question 43 Members of ZA Ltd. holding less than 1% of total voting power want the company
to give a special notice to move a resolution for appointment of an auditor other
than retiring auditor. Explain whether members have complied with relevant
provisions of the Companies Act, 2013 in making their request.(NOV 2018)

Law:
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 ` 5,00,000/- has been paid-up.
Conclusion: According to the given facts in the question, there is non-compliance of requirement of
section 115 as stated above i.e. the notice of the intention to move such resolution as to
appointment of auditor other than retiring auditor was given by members of ZA Ltd.
holding less than 1% of the total voting power.

44.Enumerate the provisions of the Companies Act, 2013 in respect to the following:
(i)Matters not to be included in the minute, as per the opinion of the Chairman.
(ii)Maximum time allowed for entering minutes of proceedings. (5 Marks) (MTP April 24)

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As per sec 118 of companies Act,2013

(i) What to include or exclude in minutes is solely at discretion of Chairman . There shall not be
included in the minutes, any matter which, in the opinion of the Chairman of the meeting—

a) is or could reasonably be regarded as defamatory of any person; or

b) is irrelevant or immaterial to the proceedings; or
c) is detrimental to the interests of the company.

(ii) Maximum time allowed for entering minutes of proceedings: 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 30 days of the conclusion of the meeting.

PRACTICAL QUESTION

Question 45 In a General Meeting of Amit Limited, the Chairman directed to exclude certain matters
detrimental to the interest of the company from the minutes. Manoj, a shareholder contended that
the minutes must contain fair and correct summary of the proceedings thereat. Decide, whether the
contention of Manoj is maintainable under the provisions of the Companies Act, 2013?(RTP MAY
2018) (MTP NOV 2019)

Law: Under Section 118 (5) of the Companies Act, 2013, chairman can exclude certain matters in Minutes of a
meeting, which, in the opinion of the Chairman of the meeting:
(i) is or could reasonably be regarded as defamatory of any person;
(ii) is irrelevant or immaterial to the proceeding; or
(iii) is detrimental to the interests of the company;
Conclusion: Hence, in view of the above, the contention of Manoj, a shareholder of Amit Limited is not valid because
the Chairman has absolute discretion on the inclusion or exclusion of any matter in the minutes for
aforesaid reasons.

PRACTICAL QUESTION

Question 46 Pristine Limited, a listed public company, conducted its Annual General Meeting on 31 st
August, 2020. However, 10 days have passed since 31 st August, 2020, but it has still not
filed report on Annual General Meeting. The Accountant of the company has approached
you to advise them whether Pristine Limited is required to file report on Annual General
Meeting?(RTP MAY 2021)

Law: According to Section 121,

(i)every listed public company shall prepare a report on each annual general meeting including
the confirmation to the effect that the meeting was convened held and conducted as per the
provisions of the Act and the rules made thereunder.
(ii)A copy of the report is to be filed with the Registrar in Form No. MGT. 15 within thirty days
of the conclusion of AGM along with the prescribed fee.
Conclusion: Since, Pristine Ltd. is a listed company, hence it has to file a copy of report of AGM with the
Registrar within 30 days from 31st August, 2020.

29 | P a g e
QUESTION BANK
CA WALLAH KUNAL MANDHANIA

30 | P a g e
QUESTION BANK
Chapter IX
ACCOUNTS OF COMPANY

PRACTICAL QUESTION

Question Sriram Private Limited is a start-up company. Mr. Lovely has been appointed
as Accounts Manager of Sriram Private Limited. The Board meeting for
approval of accounts is to be held on 1st August, 2024 and he has to prepare
the financial statements for approval by the Board. Referring to section 2(40)
of the Companies Act, 2013, advise Mr. Lovely about the statements that
are required to be prepared. (MTP May 25)

Law: As per section 2(40) of the Companies Act, 2013, Financial Statement in relation to a
company, includes—

1. a balance sheet as at the end of the financial year;

2. a profit and loss account, or in the case of a company carrying on any
activity not for profit, an income and expenditure account for the financial year;
3. cash flow statement for the financial year;
4. a statement of changes in equity, if applicable; and
5. any explanatory note annexed to, or forming part of, any document referred to in
sub-clause (i) to sub-clause (iv):

Exemption: As per the proviso to section 2(40), the financial statement, with respect
to one person company, small company, dormant company and private company (if such
private company is a start-up) may not include the cash flow statement.

Conclusion: In the instant case, Mr. Lovely has to prepare the above financial statements except
Cash Flow Statement; since Sriram Private Limited is a start-up private company.

PRACTICAL QUESTION

Question Nath Private Limited is a start-up company. Mr. P has been appointed
as Accounts Manager of Nath Private Limited. The Board meeting for
approval of accounts is to held be on 01.08.2024. For this he has to prepare
the financial statements for approval by the Board. Referring to section
2(40) of the Companies Act, 2013, advise Mr. P about the statements that
are required to be prepared. (MTP Jan 25)
Law:
As per section 2(40) of the Companies Act, 2013, Financial Statement in
relation to a company, includes—
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company
carrying on any activity not for profit, an income and
expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any
document referred to in sub-clause (i) to sub-clause (iv):
Exemption: As per the proviso to section 2(40), the financial statement,
with respect to one person company, small company, dormant company and
private company (if such private company is a start-up) may not include the
cash flow statement.

Conclusion: In the instant case, Mr. P has to prepare the prescribed financial statements
except Cash Flow Statement; since Nath Private Limited is a start-up
private company.

PRACTICAL QUESTION

Question (i) K Ltd. in its first year of incorporation maintained its books of account
under Single Entry System of Accounting. Is it permitted under the
provisions of the Companies Act, 2013?

(ii) State the person responsible for complying with the provisions
regarding maintenance of Books of Accounts, etc. of a Company. (RTP
Sept 24)

Law: (i) According to section 128(1) of the Companies Act, 2013, every
company shall prepare books of account and other relevant books and
papers and financial statement for every financial year, which give a true
and fair view of the state of the affairs of the company, including that of its
branch office(s) if any, and explain the transactions effected both at the
registered office and its branches and such books shall be kept on accrual
basis and according to the double entry system of accounting.

(ii) Persons responsible to maintain books

 As per section 128 (6) of the Companies Act, 2013, the person responsible
to take all reasonable steps to secure compliance by the company with
the requirement of maintenance of books of accounts etc. shall be:

• Managing Director,
• Whole-Time Director, in charge of finance
• Chief Financial Officer
• Any other person of a company charged by the Board
with duty of complying with provisions of section 128.

Conclusion: (i) Hence, maintenance of books of account under Singly Entry System
of Accounting by K Ltd. is not permitted.

PRACTICAL QUESTION

Question Madan Pvt. Ltd. is a partially owned subsidiary of Puri Ltd., holding
90% of its shares. The company does not have any listed securities and
is not in the process of listing on any stock exchange. Puri Ltd., the holding
company, prepares and files consolidated financial statements (CFS) with
the Registrar in compliance with applicable Accounting Standards.

Considering the above, analyze and examine the following situations:

1. Is Madan Pvt. Ltd. required to prepare its own consolidated

financial statements? What are the requisite conditions for the
same?
2. How does it matters, if Madan Pvt. Ltd. had securities listed on a
recognized stock exchange? (RTP May 25)

Law: As per section 129 of the Companies Act, 2013, where a company has
one or more subsidiaries or associate companies, it shall (in addition to
financial statements prepare a consolidated financial statement (CFS) of
the company and of all the subsidiaries, associate companies and joint
ventures in the same form and manner as that of its own and in accordance
with applicable accounting standards. Such CFS shall also be laid before
the annual general meeting of the company along with the laying of its
financial statement.

Exemptions from preparation of CFS

 According to section 129(3), the preparation of consolidated financial
statements by a company is not required if it meets the following
conditions:

a. It is a wholly owned subsidiary, or is a partially owned subsidiary of

another company and all its other members, including those not otherwise
entitled to vote, having been intimated in writing and for which the
proof of delivery of such intimation is available with the company, do
not object to the company not presenting consolidated financial statements;

b. It is a company whose securities are not listed or are not in the process
of listing on any stock exchange, whether in or outside India; and

c. Its ultimate or any intermediate holding company files consolidated

financial statements with the Registrar which are in compliance with the
applicable Accounting Standards.

Conclusion: In line with stated legal requirements, following are the answers:

1. Madan Pvt. Ltd. may qualify for an exemption from preparing

consolidated financial statements because:
• It is a partially owned subsidiary (90% ownership by Puri Ltd.).
• It does not have any listed securities and is not in the process of
listing on any stock exchange i.e., have no publicly trading of
securities.
• Its holding company, Puri Ltd., prepares and files consolidated
financial statements with the Registrar in compliance with
applicable Accounting Standards.

Since Madan Pvt. Ltd. is a partially owned subsidiary, it must ensure

that all its members, including remaining shareholders (10% in this
case), are informed in writing about the decision not to present CFS, and
it must maintain proof of delivery of such communication. No member
should object to this exemption.

2. If Madan Pvt. Ltd. had its securities listed on a recognized stock

exchange or was in the process of being listed, it would not qualify
for the exemption and would be required to prepare and present
its own consolidated financial statements as per the applicable
provisions.
 SKP Limited (Registered in India), a wholly owned subsidiary company of Herry
Limited decided to follow different financial year for consolidation of its
accounts outside India. State the procedure to be followed in this regard. (NOV
2019)

Where a company or body corporate, which is a holding company or a

subsidiary or associate company of a company incorporated outside India and
is required to follow a different financial year for consolidation of its accounts
outside India, the Central Government may, on an application made by that
company or body corporate in such form and manner as may be prescribed,
allow any period as its financial year, whether or not that period is a year.
Any application pending before the Tribunal as on the date of commencement of
the Companies (Amendment) Act, 2019, shall be disposed of by the Tribunal in
accordance with the provisions applicable to it before such commencement.
Also, a company or body corporate, existing on the commencement of this Act,
shall, within a period of two years from such commencement, align its financial
year as per the provisions of this clause.
SKP Limited is advised to follow the above procedure accordingly.
[Note: This answer is based on the assumption that Herry limited is a
foreign
Company registered outside India as inferred from part (i) of the question].

PRACTICAL QUESTION

Question Crystal Limited recently received a communication from the Central

Government requesting the preparation of periodical financial results along
with the completion of either a full audit or a limited review of these
financial results. The Board of Directors, however, has raised an objection,
arguing that Crystal Limited, being an unlisted company, are not obligated
to prepare periodical financial results.

Analyze the situation, citing relevant provisions of the Companies Act,

2013, with respect to the company's obligation regarding the preparation of
periodical financial results. (MTP May 24)

Law: Periodical Financial Results [Section 129A of the Companies Act, 2013]
 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

periodical basis and in prescribed form
(b) to obtain approval of the Board of Directors and complete
audit or limited review of such periodical financial results
in the prescribed manner; 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.
Conclusion: Therefore, the objection of the Board of Directors on the ground that as
Crystal Limited is an unlisted company, periodical financial results need
not be prepared, is not correct. Section 129A clearly specifies that even
unlisted company has to prepare Periodical Financial Results.

PRACTICAL QUESTION

Question The Income Tax Authorities in the current financial year 2019-20
observed, during the assessment proceedings, a need to re-open the
accounts of Chetan Ltd. for the financial year 2008 -09 and, therefore,
filed an application before the National Company Law Tribunal (NCLT) to
issue the order to Chetan Ltd. for re-opening of its accounts and
recasting the financial statements for the financial year 2008-09.
Examine the validity of the application filed by the Income Tax
Authorities to NCLT. (MTP NOV 2020)

Law: As per section 130 of the Companies Act, 2013, a company shall not re-open
its books of account and not recast its financial statements, unless an
application in this regard is made by the Central Government, the Income-
tax authorities, the Securities and Exchange Board, any other statutory body
or authority or any person concerned and an order is made by a court of
competent jurisdiction or the Tribunal to the effect that—
(i) the relevant earlier accounts were prepared in a fraudulent
manner; or
(ii) the affairs of the company were mismanaged during the relevant
period, casting a doubt on the reliability of financial statements.
However, no order shall be made in respect of re-opening of books of
account relating to a period earlier than eight financial years immediately
preceding the current financial year.
Conclusion: In the given instance, an application was filed for re-opening and re-casting
of the financial statements of Chetan Ltd. for the financial year 2008-2009.
Though application filed by the Income Tax Authorities to NCLT is valid, its
recommendation for reopening and recasting of financial statements for
the period earlier than eight financial years immediately preceding the
current financial year i.e. 2019-2020, is invalid.

PRACTICAL QUESTION

Question The Income Tax Authorities in the current financial year 2019-20
observed, during the assessment proceedings, a need to re-open the
accounts of Chetan Ltd. for the financial year 2008-09 and, therefore,
filed an application before the National Company Law Tribunal (NCLT) to
issue the order to Chetan Ltd. for re-opening of its accounts and
recasting the financial statements for the financial year 2008-09.
Examine the validity of the application filed by the Income Tax
Authorities to NCLT. (MAY 2019)

Law: As per section 130 of the Companies Act, 2013, a company shall not re-
open its books of account and not recast its financial statements, unless
an application in this regard is made by the Central Government, the
Income-tax authorities, the Securities and Exchange Board, any other
statutory body or authority or any person concerned and an order is made
by a court of competent jurisdiction or the Tribunal to the effect that—
(a) the relevant earlier accounts were prepared in a fraudulent
manner; or
(b) the affairs of the company were mismanaged during the relevant
period, casting a doubt on the reliability of financial statements:
However, no order shall be made in respect of re-opening of books of
account relating to a period earlier than eight financial years immediately
preceding the current financial year.In the given instance, an application
was filed for re-opening and re-casting of the financial statements of Chetan
Ltd. for the financial year 2008-2009.
Conclusion: Though application filed by the Income Tax Authorities to NCLT is valid, its
recommendation for reopening and recasting of financial statements for
the period earlier than eight financial years immediately preceding the
current financial year i.e. 2019-2020, is invalid.

The directors of Ninu Ltd. want to voluntary revise the Financial statements of
the company. They have approached you to state to them the provisions of the
Companies Act, 2013 regarding voluntary revision of financial statements.(MTP
MAY 2018)

According to section 131 of the Companies Act, 2013,

(1) Preparation of revised financial statement or revised report on the approval
of Tribunal: If it appears to the directors of a company that—
(a) the financial statement of the company; or
(b) the report of the Board,
do not comply with the provisions of section 129 or section 134, they may prepare
revised financial statement or a revised report in respect of any of the three
preceding financial years after obtaining approval of the Tribunal on an application
made by the company in such form and manner as may be prescribed and a copy
of the order passed by the Tribunal shall be filed with the Registrar:
Tribunal to serve the notice: Provided that the Tribunal shall give notice to the
Central Government and the Income tax authorities and shall take into
consideration the representations, if any, made by that Government or the
authorities before passing any order under this section:
Number of times of revision and recast: provided further that such revised
financial statement or report shall not be prepared or filed more than once in a
financial year:
Reason for revision to be disclosed: Provided also that the detailed reasons for
revision of such financial statement or report shall also be disclosed in the Board's
report in the relevant financial year in which such revision is being made.
(2) Where copies of the previous financial statement or report have been sent out
to members or delivered to the Registrar or laid before the company in general
meeting, the revisions must be confined to—
(a) the correction in respect of which the previous financial statement or report do
not comply with the provisions of section 129 or section 134; and
(b) the making of any necessary consequential alternation.
 (3) Framing of rules by the Central Government in relation to revised financial
statement or director's report: The Central Government may make rules as to the
application of the provisions of this Act in relation to revised financial statement
or a revised director's report and such rules may, in particular—
(a) make different provisions according to which the previous financial statement
or report are replaced or are supplemented by a document indicating the
corrections to be made;
(b) make provisions with respect to the functions of the company's auditor in
relation to the revised financial statement or report;
(c) require the directors to take such steps as may be prescribed.

PRACTICAL QUESTION

Question Altar Limited has on its Board, four Directors viz. W, X, Y and Z. In addition,
the company has Mr. D as the Managing Director. The company also has a
full time Company Secretary, Mr. Wise, on its rolls. The financial
statements of the company for the year ended 31st March, 2017 were
authenticated by two of the directors, Mr. X and Y under their signatures.
(RTP MAY 2018)
Referring to the provisions of the Companies Act, 2013:
(i) Examine the validity of the authentication of the Balance Sheet
and Statement of Profit & Loss and the Board’s Report.
(ii) What would be your answer in case the company is a One Person
Company (OPC) and has only one Director, who has authenticated
the Balance Sheet and Statement of Profit & Loss and the Board’s
Report?
Law: In accordance with the provisions of the Companies Act, 2013, as contained
under section 134 (1), the financial statements, including consolidated
financial statement, if any, shall be approved by the Board of Directors
before they are signed on behalf of the Board by at least:
1 The Chairperson of the company where he is authorized by the Board;
or
2 Two directors out of which one shall be the managing director and other
the Chief Executive Officer, if he is a director in the company
3 The Chief Financial Officer and the Company Secretary of the company,
wherever they are appointed.
 In case of a One Person Company, the financial statements shall be
signed by only one director, for submission to the auditor for his report
thereon.
The Board’s report and annexures thereto shall be signed by its
Chairperson of the company, if he is authorized by the Board and where
he is not so authorized, shall be signed by at least two directors one of
whom shall be a managing director or by the director where there is one
director.
Conclusion: (i) In the given case, the Balance Sheet and Profit & Loss Account
have been signed by Mr. X and Mr. Y, the directors. In view of
the provisions of Section 134 (1), the Managing Director Mr. D
should be one of the two signatories. Since, the company has
also employed a full time Secretary, he should also sign the
Balance Sheet and Profit & Loss Account. Therefore,
authentication done by two directors is not valid.
(ii) In case of OPC, the financial statements should be signed by one
director and hence, the authentication is in order.

PRACTICAL QUESTION

Question ABC Limited has on its Board, four Directors viz. W, X, Y and Z. In
addition, the company has Mr. D as the Managing Director. The company
also has a full time Company Secretary, Mr. C, on its rolls. The financial
statements of the company for the year ended 31 March,2019 were
authenticated by two of the directors, Mr. X and Mr. Y under their
signatures.

Referring to the provisions of the Companies Act, 2013:

(i) Examine the validity of the authentication of the Balance Sheet and
Statement of Profit & Loss and the Board’s Report.

(ii) What would be your answer in case the company is a One Person
Company (OPC) and has only one Director, who has authenticated the
Balance Sheet and Statement of Profit & Loss and the Board’s Report?

(MTP MAY 2020)

Law: In accordance with the provisions of the Companies Act, 2013, as contained under
section 134 (1), the financial statement, including consolidated financial statement,
if any, shall be approved by the Board of Directors before they are signed on behalf
of the Board by the chairperson of the company where he is authorised by the
 Board or by two directors out of which one shall be managing director, if any, and
the Chief Executive Officer, the Chief Financial Officer and the company secretary
of the company, wherever they are appointed, or in the case of One Person
Company, only by one director, for submission to the auditor for his report thereon.
The Board’s report and annexures thereto under section 134(3), shall be signed
by its Chairperson of the company, if he is authorized by the Board and where
he is not so authorized, shall be signed by at least two directors one of whom
shall be a managing director or by the director where there is one director.

Conclusion: (i) In the given case, the Balance Sheet and Profit & Loss Account have
been signed by Mr. X and Mr. Y, the directors. In view of the provisions
of Section 134 (1), the Managing Director, Mr. D should be one of the
two signatories. Since, the company has also employed a full- time
Secretary Mr. C, he should also sign the Balance Sheet and Profit & Loss
Account. Therefore, authentication done by two directors is not valid.
(ii) In case of OPC, the financial statements should be signed by one
director and hence, the authentication is in order.

State any four contents of a Directors Responsibility Statement as

required under Section 134 of the Companies Act, 2013.(MAY 2018) (MTP May
24)

Contents of Directors Responsibility Statement [Section 134(5) of the Companies

Act, 2013]: 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;
5. the directors, in the case of a listed company, had laid down internal financial
controls to be followed by the company and that such internal financial
 controls are adequate and were operating effectively.
Here, the term “internal financial controls” means the policies and
procedures adopted by the company for ensuring the orderly and efficient
conduct of its business, including adherence to company’s policies, the
safeguarding of its assets, the prevention and detection of frauds and errors,
the accuracy and completeness of the accounting records, and the timely
preparation of reliable financial information; and
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.

PRACTICAL QUESTION

Question The balances extracted from the financial statement of Pacific Limited
are as below:
Sr. Particulars Balances as on 31-03-2023 Balances as on 30-09-2023
as per Audited Financial
No. Statement (₹ in crore) (Provisional ₹ in crore)

1. Net Worth 100.00 100.00

2. Turnover 500.00 1000.00

3. Net Profit 1.00 5.00

Explaining the provisions of the Companies Act, 2013, you are requested to
examine whether Pacific Limited is required to constitute 'Corporate Social
Responsibility Committee' (CSR Committee) during the second half of the
financial year 2023-24. (MTP May 24)

Law: According to section 135(1) of the Companies Act, 2013, every company having net
worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or
more or a net profit of rupees five crore or more during the immediately preceding
financial year shall constitute a Corporate Social Responsibility Committee of the Board
consisting of three or more directors, out of which at least one director shall be an
independent director.

Conclusion: In the given question, the company does not fulfil any of the given criteria (net worth/
turnover/ net profit) for the immediately preceding financial year (i.e., 1.4.2022 to
 31.3.2023). Hence, Pacific Limited is not required to constitute Corporate Social
Responsibility Committee for the financial year 2023-24.

PRACTICAL QUESTION

Question Tirupati Limited, a listed company has made the following profits, the
profits reflect eligible profits under the relevant section of the Companies
Act, 2013.
Financial year Amount (In ₹)
2012-13 crores)
20
2013-14 40
2014-15 30
2015-16 70
2016-17 50
(i) Calculate the amount that the company has to spend towards CSR
for the financial year 2017-18.
(ii) State the composition of the CSR committee unlisted company and
a private company.
(RTP MAY 2018)

Law: Section 135 read with Companies (Corporate Social Responsibility Policy)
Rules, 2014 of the Companies Act, 2013 deals with the provisions related to
the Corporate Social Responsibility.
As per the given facts, following are the answers in the given situations-
(i) Amount that Company has to spend towards CSR: According to
section 135 of the Companies Act, 2013, 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.
Accordingly, net profits of Tirupati Ltd. for three immediately
preceding financial years is 150 crores (30+70+50) and 2% of the
average net profits of the company made during these three
immediately preceding financial years will constitute 1 crore, can be
spent towards CSR in financial year 2017-2018.
(ii) Composition of CSR Committee: The CSR Committee shall be
consisting of 3 or more directors, out of which at least one director
shall be an independent director.
(a) an unlisted public company or a private company covered under
 section 135(1) which is not required to appoint an independent
director, shall have its CSR Committee without such director;
(b) a private company having only two directors on its Board shall
constitute its CSR Committee with two such directors;

Conclusion:

PRACTICAL QUESTION

Question Rera Ltd., a company incorporated under the Companies Act, 2013 having
turnover of ` 100 crore, net profit ` 3 crore, accumulated loss of ` 50 crore
and securities premium ` 300 crore as per the audited accounts of the
company for the Financial Year 2016-17.
The CFO of the company informed the directors of the company that
the Corporate Social Responsibility (CSR) committee is required to be
constituted as per the Companies Act, 2013. The directors seek your
advice as a professional regarding the criteria required to constitute
CSR committee and whether it is applicable to Rera Ltd or not,(MAY
2018)

Law: Corporate Social Responsibility Committee: According to Section 135 of

the Companies Act, 2013 read with the Companies (Corporate Social
Responsibility) Rules, 2014, every company including its holding or
subsidiary, and a foreign company defined under section 2(42) of the
Companies Act, 2013, having its branch office or project office in India,
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 any financial year shall constitute a Corporate Social Responsibility
Committee of the Board.
"Net worth" [Section 2(57)] means the aggregate value of the paid-up
share capital and all reserves created out of the profits and securities
premium account, after deducting the aggregate value of the accumulated
losses, deferred expenditure and miscellaneous expenditure not written
off, as per the audited balance sheet, but does not include reserves
 created out of revaluation of assets, write-back of depreciation and
amalgamation.

Conclusion: In the present case,

-turnover of Rera Ltd. is ` 100 crore,
-net profit of ` 3 crore and
-net worth of ` 253 crore (Net profit + securities premium -accumulated
loss= 3 + 300 – 50=253 crore).
Hence, RERA Ltd. is not fulfilling any criteria prescribed for constitution of
CSR committee. So, it is not obligatory for Rera Ltd. to constitute CSR
Committee.
[Note 1: - It can also by presumed that net profit of the current year has
already been considered while calculating accumulated losses.]
[Note 2: Since paid-up share capital value is not given in the question, it has
been presumed that accumulated losses as stated in the question is given
after taking into consideration the paid-up share capital, i.e. net of
accumulated losses less paid-up share capital].

State any four contents of a Directors Responsibility Statement as

required under Section 134 of the Companies Act, 2013.(MAY 2018)

Contents of Directors Responsibility Statement [Section 134(5) of the Companies

Act, 2013]: The Directors’ Responsibility Statement referred to in 134(3) (c) shall
state that—
7. in the preparation of the annual accounts, the applicable accounting standards
had been followed along with proper explanation relating to material
departures;
8. 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;
9. 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;
10. the directors had prepared the annual accounts on a going concern basis;
11. the directors, in the case of a listed company, had laid down internal financial
controls to be followed by the company and that such internal financial
controls are adequate and were operating effectively.
Here, the term “internal financial controls” means the policies and
procedures adopted by the company for ensuring the orderly and efficient
conduct of its business, including adherence to company’s policies, the
safeguarding of its assets, the prevention and detection of frauds and errors,
the accuracy and completeness of the accounting records, and the timely
preparation of reliable financial information; and
12. 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.

The Companies Act, 2013 has prescribed an additional duty on the Board of
directors to include in the Board’s Report a ‘Directors’ Responsibility Statement’.
Briefly mention any four matters to be furnished in the said statement.

Directors’ Responsibility Statement: According to section 134(5) of the Companies

Act, 2013, 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 irregularit ies;

(4) the directors had prepared the annual accounts on a going concern basis; and

(5) the directors, in the case of a listed company, had laid down internal financial controls
to be followed by the company and that such internal financial controls are adequate and
were operating effectively.
Here, the term “internal financial controls” means the policies and procedures adopted by the
company for ensuring the orderly and efficient conduct of its business, including adherence to
company’s policies, the safeguarding of its assets, the prevention and detection of frauds and
errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable
financial information;

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

Examine the concept of Corporate Social Responsibility (CSR) and also

explain in brief some of the key strategies which can be used by companies
while implementing CSR policies and practices.

(NOV 2014)

CSR Concept- Some companies have established committees that are specifically
responsible for identifying and addressing social or environmental issues, or have
broadened the scope of more traditional standing committees to include
responsibility for CSR; while others have strategically appointed directors on the
board based on the unique expertise and experience they bring on specific
issues, who then serve as advisors to others on the board. Moreover, companies
are finding that a board that is diverse in terms of gender, ethnicity and
professional experience is better equipped to grapple with emerging and
complex challenges.
Companies implement CSR by putting in place internal management systems that
generally promote:
1 Adherence to labour standards by them as well their business patterns;
2 Respect for human rights;
3 Protection of the local and global environment;
4 Reducing the negative impacts of operating in conflict zones;
5 Avoiding bribery and corruption and;
6 Consumer protection.
Key strategies which can be used by companies while implementing CSR
policies and practice-Some of the key strategies which can be used by companies
when implementing CSR policies and practices are as follows:
(a) Mission, vision and values statements
(b) Cultural values
(c) Management structures
 (d) Strategic planning
(e) General accountability
(f) Employee recognition and rewards
(g) Communication, education and training
(h) CSR reporting

“CSR can mean different things to different people”, explain.

(MTP NOV 2017)

Corporate Social Responsibilities (CSR) is an integrated combination of policies,

programs, education, and practices which extend throughout a corporation’s
operations and into the communities in which they operate, about how companies
voluntarily manage the business processes to produce an overall positive impact
on society. CSR can mean different things to different people:
(a) for an employee it can mean fair wages, no discrimination, acceptable working
conditions etc.
(b) for a shareholder it can mean making responsible and transparent decisions
regarding the use of capital.
(c) for suppliers it can mean receiving payment on time.
(d)for customers it can mean delivery on time, etc.
(e) for local communities and authorities it can mean taking measures to protect
the environment from pollution.
(f) for non-governmental organisations and pressure groups it can mean
disclosing business practices and performance on issues ranging from energy
conservation and global warming to human rights and animal rights, from
protection of the rainforests and endangered species to child and forced
labour, etc.
For a company, however, it can simply be seen as responding to the needs and
concerns of people who can influence the success of the company and/or whom
the company can impact through its business activities, processes and products.

What is Corporate Social Responsibility? Why it is needed in Indian Business

environment?
(MTP NOV 2017)

The concept of Corporate Social Responsibility (CSR) focuses on the idea that
beyond making profit, a business has social obligations. It is the responsibility of
the companies to produce an overall positive impact on the society. CSR is pursued
by business to balance their economic, environmental and social objectives while
at the same time addressing stakeholders’ expectations and enhancing
shareholders’ values. Stakeholders, including shareholders, analysts, regulators,
labour unions, employees, community organisations and mass media expect
companies to be accountable not only for their own performance but for the
performance of their entire supply chain. Issues such as peace, sustainable
development, security, poverty alleviation, environmental quality and human rights
have a profound effect on business and its environment.
Corporate Social Responsibility is the continuing commitment by businesses to
behave ethically and contribute to economic development while improving the
quality of life of the workforce and their families as well as of the local community
and society at large.
Need for social responsibility:
1 The iron law of responsibility
2 To fulfil long term self-interest
3 To establish a better public image
4 To avoid government regulation and control
5 To avoid misuse of National Resources and Economic Power
6 To convert Resistances into Resources
7 To minimise Environmental damage.

Explain the following in brief with reference to Companies Act 2013:

(i) National Financial Reporting Authority (NFRA)
Corporate Social Responsibility (CSR) Committee(3 + 3 = 6 Marks)(Nov 2020)
(i) National Financial Reporting Authority (NFRA)
According to section 132 of the Companies Act, 2013, the Central Government
may, by notification, constitute the National Financial Reporting Authority (NFRA)
to provide for matters relating to accounting and auditing standards under this
Act.
Notwithstanding anything contained in any other law for the time being in force,
the NFRA shall—
(a) make recommendations to the Central Government on the formulation and
laying down of accounting and auditing policies and standards for adoption
by companies or class of companies or their auditors, as the case may be;
(b) monitor and enforce the compliance with accounting standards and auditing
standards in such manner as may be prescribed;
(c) oversee the quality of service of the professions associated with ensuring
compliance with such standards, and suggest measures required for
improvement in quality of service and such other related matters as may be
prescribed; and
(d) perform such other functions relating to clauses (a), (b) and (c) as may be
prescribed.
(ii) Corporate Social Responsibility (CSR)Committee:
According to section 135(1) of the Companies Act, 2013, 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.
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
monitor the CSR Policy of the company from time to time.
 Form Limited is engaged in the business of manufacturing shoes for kids. It is
required to hold its Annual General Meeting (AGM) for the financial year ending
31st March 2024 by 30th September 2024. However, due to internal disputes
among the directors, the company was unable to convene the AGM by the due
date.

Explain the relevant provisions of the Companies Act, 2013, with respect to the
filing of the financial statements with the Registrar in this case. (MTP Jan 25)

As per section 137 of the Companies Act, 2013, where the Annual General
Meeting 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 30 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.

PRACTICAL QUESTION

Question The Government of India is holding 51% of the paid-up equity share capital
of Surya Ltd. The Audited financial statements of Surya Ltd. for the
financial year 2023-24 were placed at its annual general meeting held on
1st August, 2024. However, pending the comments of the Comptroller and
Auditor General of India (CAG) on the said accounts the meeting was
adjourned without adoption of the accounts. On receipt of CAG comments
on the accounts, the adjourned annual general meeting was held on 29 th
September, 2024 whereat the accounts were adopted. Thereafter, Surya Ltd.
filed its financial statements relevant to the financial year 2023-24 with the
Registrar of Companies on 20th October, 2024. Examine, with reference to
the applicable provisions of the Companies Act, 2013, whether Surya Ltd.
has complied with the statutory requirement regarding filing of accounts
(unadopted and adopted) with the Registrar? (MTP Sept 24) (MAY 2019)

Law: According to first proviso to section 137(1) of the Companies Act, 2013,
where the financial statements are not adopted at annual general meeting
or adjourned annual general meeting, such unadopted financial statements
along with the required documents shall be filed with the Registrar within
thirty days of the date of annual general meeting and the Registrar shall
take them in his records as provisional till the financial statements are filed
 with him after their adoption in the adjourned annual general meeting for
that purpose.

According to second proviso to section 137(1) of the Companies Act, 2013,

financial statements adopted in the adjourned AGM shall be filed with the
Registrar within thirty days of the date of such adjourned AGM with such
fees or such additional fees as may be prescribed.

Conclusion: In the instant case, the accounts of Surya Ltd. were adopted at the
adjourned AGM held on 29th September, 2024 and filing of financial
statements with Registrar was done on 20th October, 2024 i.e. within 30
days of the date of adjourned AGM.

Hence, Surya Ltd. has not complied with the statutory requirement
regarding filing of unadopted accounts with the Registrar, but has certainly
complied with the provisions by filing of adopted accounts within the due
date with the Registrar.

PRACTICAL QUESTION

Question PQR Private Limited operates as a manufacturing company, generating a

turnover of ₹ 150 crore and holds an outstanding loan of ₹ 75 crore
from a public financial institution solely in the previous financial year
(with a total loan availed of ₹ 110 crore, but ₹ 35 crore were repaid
during the same year). The company's Board has delegated the authority to
Chief Executive Officer (CEO) to designate an internal auditor to
conduct internal audit. However, the CEO believes that the company is
not legally obligated to have an internal auditor.

Analyse the accuracy of the CEO's perspective by referring to the

provisions outlined in the Companies Act, 2013. What would be your
response if the Board of Directors wanted to appoint the Mr. Nagendra
(an ex- employee who is a qualified Chartered Accountant) as an internal
auditor? (RTP May 24)

Law: According to the provisions of section 138 of the Companies Act, 2013,
read with Rule 13 of the Companies (Accounts) Rules, 2014, every
private company having—

(A) turnover of 200 crore rupees or more during the preceding

financial year; or
(B) outstanding loans or borrowings from banks or public financial
 institutions exceeding 100 crore rupees or more at any point
of time during the preceding financial year.
shall be required to appoint an internal auditor which may be either an
individual or a partnership firm or a body corporate.

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 internal auditor may or may not be an employee of the company.

Conclusion: Thus, PQR Private Limited is required to appoint an internal auditor as

the outstanding loans from public financial institutions during the year
have exceeded 100 crore (irrespective of the fact that the outstanding
loan during the year is 75 crore rupees).

Hence, the advice of CEO is not correct.

Internal Auditor may be any professional as decided by the Board and

may be even an employee of the company. Hence, the Board of
Directors may appoint Mr. Nagendra, an ex- employee who is a qualified
Chartered Accountant, as an internal auditor.

PRACTICAL QUESTION

Question ABC Private Limited was incorporated on 30th September 2020. It has a
paid-up share capital of ₹ 45 crore. The company had a turnover of 250 crore
for the financial year 2023-24. The accounts manager of the company has
intimated to the company that they are not required to appoint internal auditor
for the financial year 2024-25. The management of the company have
approached you to advise them about the appointment of internal auditor, as
per the provisions of the Companies Act, 2013. (MTP May 25)

Law: According to section 138 read along with Rules of the Companies Act, 2013, every private
company having:
(A) turnover of 200 crore rupees or more during the preceding financial year; or
(B) outstanding loans or borrowings from banks or public financial institutions
exceeding 100 crore rupees or more at any point of time during the preceding
financial year.
shall be required to appoint an internal auditor which may be either an individual or a
partnership firm or a body corporate.
Conclusion: In the given question, the company has a paid-up capital of ₹ 45 crore and turnover of ₹
250 crore for the financial year 2023-24.
Since, the company is fulfilling the criteria of turnover (i.e. more than ₹ 200 crore), hence, it
is required to appoint an internal auditor for the financial year 2024-25.
CA WALLAH KUNAL MANDHANIA

Chapter X
AUDIT AND AUDITORS
Q Section Topic

1 139 Certificate for auditor

2 139(2,3,4) Rotation of Auditor

3 139(2,3,4) Rotation of Auditor

4 139(2,3,4) Rotation of Auditor

5 139(2,3,4) Rotation of Auditor

6 139(2,3,4) Rotation of Auditor

7 139(1) Appointment of auditor in non government company

8 139 mix

9 139 Appointment of first and subsequent auditor in non government company

10 139 Appointment of first and subsequent auditor in government company

11 139(8) Resignation

12 139(6) First Auditor – non government company

13 - Mix

14 140(5) Removal by Tribunal

15 140(1) Removal

16 140(1) Removal

17 141 Disqualification

18 141 Disqualification

19 141 Disqualification

20 141 Disqualification

21 141 Disqualification

22 141 Disqualification

23 141 Disqualification

24 142 Remuneration

25 24 142

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26 145 Signing of Audit report

PRACTICAL QUESTION

Question 1 PKC Ltd., wants to appoint Mr. Praveen Kumar, a practicing Chartered
Accountant as the statutory auditor of the company and asked the proposed auditor
to give a certificate in this regard. What are the contents of the certificate to be
issued in accordance with the Companies (Audit & Auditors Rules, 2014)? (MAY
2018)

Law: Contents of Certificate by Auditor

As per proviso to section 139(1) of the Companies Act, 2013, before the
appointment is made, a written consent of the auditor to such appointment, and a
certificate from him or it that the appointment, if made, shall be in accordance with
the conditions as may be prescribed, shall be obtained.
The Companies (Audit and Auditors) Rules, 2014 provides the content of the
Certificate. According to this, the auditor appointed shall submit a certificate that –
(a) the individual or the firm, as the case may be, is eligible for appointment and is
not disqualified for appointment under the Act, the Chartered Accountants Act,
1949 and the rules or regulations made thereunder;
(b) the proposed appointment is as per the term provided under the Act;
(c) the proposed appointment is within the limits laid down by or under the
authority of the Act;
(d) the list of proceedings against the auditor or audit firm or any partner of the
audit firm pending with respect to professional matters of conduct, as disclosed
in the certificate, is true and correct.
The certificate shall also indicate whether the auditor satisfies the criteria provided
in section 141.
Conclusion: Mr. Praveen Kumar, the proposed auditor has to give the above certificate to the
company before accepting the appointment as the auditor of PKC Ltd.

PRACTICAL QUESTION

Question 2 Mr. Ramchandra is a partner and in- charge (and certifies financial statements) of
A & Associates. The firm is appointed as an auditor firm of Badri Limited
(listed company). Mr. Ramchandra retires from A & Associates and after some
time join Gupta & Gupta firm as a partner, on 20/05/24. In the general meeting of
Badri Limited held on 15/06/24, the company appointed Gupta & Gupta firm as
next auditor of the company. Advise Badri Limited, whether the company has
adhered to the provision of the Company Act, 2013, by appointing Gupta & Gupta
as auditor for the company? (MTP Jan 25)

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Law: According to section 139(2) of the Companies Act, 2013, no listed company or a
company belonging to such class or classes of companies as may be prescribed
i.eAll companies (excluding one person companies & small companies), which
are

a. Unlisted public companies and having paid up share

capital of rupees ten crore or more;
b. Private limited companies and having paid up share
capital of rupees fifty crore or more;
c. Having public borrowings from financial institutions,
banks or public deposits of rupees fifty crore or more.
shall appoint or re-appoint—

(i)an individual as auditor for more than one term of five consecutive years; and
(ii)an audit firm as auditor for more than two terms of five consecutive years.
Provided that –

(i)an individual auditor or audit firm who has completed his term shall not be
eligible for re-appointment as auditor in the same company for five years from the
completion of his term;

(ii)as on the date of appointment no audit firm having a common partner or

partners to the other audit firm, whose tenure has expired in a company
immediately preceding the financial year, shall be appointed as auditor of the
same company for a period of five years.

(iii)As per Explanation II in Rule 6(3) of the Companies (Audit and Auditors)
Rules, 2014, if a partner, who is in charge of an audit firm and also certifies the
financial statements of the company, retires from the said firm and joins another
firm of chartered accountants, such other firm shall also be ineligible to be
appointed for a period of five years.

Conclusion: Here, Mr. Ramchandra has retired from A & Associates and joined Gupta &
Gupta Firm. Mr. Ramchandra was a partner, in- charge Associates (and certifies
the financial statement of the company) in A & Associates. He retires from A &
Associates and joins Gupta & Gupta firm.

As per the facts of the question and provisions of law, Gupta & Gupta Firm will
also be ineligible, to be appointed as auditor of Badri Limited (listed company) for
a period of 5 years.

PRACTICAL QUESTION

Question 3 M/s Sharma & Associates is an audit firm with two partners, Mr. Sharma and Mr.
Raj. Mr. Raj is also a partner in another audit firm, M/s Mehta & Associates. M/s
Sharma & Associates was appointed as the statutory auditor for Bright Future

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QUESTION BANK
CA WALLAH KUNAL MANDHANIA

Ltd. (listed company, on which provisions related to rotation of auditor apply)

for two consecutive terms of 5 years each, from 2017 to 2027.

If Bright Future Ltd. now wants to appoint M/s Mehta & Associates as its audit
firm, can it do so? If not, when will the restriction be lifted? (RTP May 25)

Law: Law similar to Q no 2 above

Conclusion: Bright Future Ltd. cannot appoint M/s Mehta & Associates as its auditor
immediately after the completion of M/s Sharma & Associates’ tenure.

Since Mr. Raj is a common partner in both firms, regulatory provisions impose a
cooling-off period of 5 years before either of these firms can be reappointed.

Therefore, Bright Future Ltd. can appoint M/s Mehta & Associates or M/s
Sharma & Associates only after the cooling-off period ends in the year 2032.

PRACTICAL QUESTION

Question 4 Lemon & Company, Chartered Accountants a Limited Liability Partnership firm
with CA. L, CA. M and CA. N as partners, is the statutory auditor of a listed
company M/s Big Limited for past 6 years as on 01.04.2014.

CA.M is also a partner in other Chartered Accountant firm Dew & Company,
Chartered Accountants. Advise under the provisions of the Companies Act, 2013 :

(i) Upto how many years can Lemon & Company continue as statutory
auditors of M/s Big Limited?

(ii) What shall be the cooling-off period for Lemon & Company with respect
to M/s Big Limited?

(iii) Can Dew & Company; be appointed as statutory auditors of M/s Big
Limited and it's another listed subsidiary M/s Dark Limited during such cooling-
off period?

(iv) Can Lemon & Company be appointed as internal auditors of M/s Big
Limited and it's another listed subsidiary M/s Dark Limited, during such cooling-
off period?(RTP NOV 2018)

Law: Law similar to Q no 2

Conclusion: (i) Lemon & Company can continue as statutory auditors of M/s Big Limited
for 4 more years from 1.4.2014, i.e. they can continue in office only till
31.3.2018.
(ii) The cooling- off period shall be of 5 years.
(iii) Dew & Company cannot be appointed as a statutory auditor of M/s Big
Limited during the cooling – off period of Lemon & Company, as CA. M
is the common partner in both Lemon & Company and Dew & Company.

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However, Dew & Company can be appointed as a statutory auditor of M/s

Dark Limited (a listed subsidiary of M/s Big Limited), during the cooling –
off period.
(iv) As per Section 138 (1) of the Companies Act, 2013, every listed company
and other prescribed class of companies, shall be required to appoint an
internal auditor, who shall either be a chartered accountant or a cost
accountant, or such other professional (which may be either an individual
or a partnership firm or a body corporate) as may be decided by the Board
to conduct internal audit of the functions and activities of the company.
Accordingly, M/s Lemon & Company can be appointed as an internal auditors of
M/s Big Limited and in its subsidiary M/S Dark Limited (a listed company). The
provision of cooling off period as given under Section 139 of the Companies Act,
2013, shall not be applicable on the Internal auditors.

PRACTICAL QUESTION

Question 5 CA. M is a partner in SM & Company (Chartered Accountants) and ML &

Company (Chartered Accountants). SM & Company are statutory auditors of M/s.
Global Ltd. (listed) for past seven years as on 1-04-2018. Advice under relevant
provisions of the Companies Act, 2013:

(i) For how many more years SM & Company can continue as statutory
auditors of M/s. Global Ltd. (listed)?

(ii) Can ML & Company be appointed as statutory auditor of M/s. Global Ltd.
during cooling off period for SM & Company? (NOV 2018)(MTP Sept 24)

Law: Law similar to above question no 2 except last point

Conclusion: (i)As per the stated facts, SM & Co. are statutory auditors of M/s. Global Ltd. for
past seven years as on 1.04.2018. Accordingly, SM & Co. can continue as statutory
auditors of M/s. Global Ltd. for 3 more years i.e., till 31.03.2021.
(ii)ML & Co. cannot be appointed as statutory auditor of M/s. Global Ltd. during
cooling period because CA. M was the common partner in both the Audit firms.
This prohibition is only for 5 years i.e. up to year 2026. After 5 years, M/s. Global
Ltd. is free to appoint ML & Co. as its statutory auditors.

PRACTICAL QUESTION

Question 6 Rupa Limited, a listed company appointed M/s. VG &ASSOCIATES an audit

firm as Company's auditor in the Annual General Meeting held on 30-09-2017.
Explain the provisions of the Companies Act, 2013 relating to the appointment or
reappointment of an auditor in relation to the tenure of an auditor. (MAY 2018)

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QUESTION BANK
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Law: Law similar to Q 2 above except last point

Conclusion: In terms of the above provisions, Rupa Limited, which is a listed company, can
appoint M/S VG & ASSOCIATES an audit firm, for a term of 5 years, i.e. from the
conclusion of the AGM held on 30.09.2017 to the conclusion of the AGM to be held
in the year 2022. Now, in terms of Section 139(2), since M/S VG & ASSOCIATES is
an audit firm, it can be re-appointed as auditor for one more term of five years,
i.e., up to the conclusion of the AGM to be held in 2027.

PRACTICAL QUESTION

Question 7 One-fourth of the subscribed capital of AMC Limited was held by the Government
of Rajasthan. Mr. Vikas, a Chartered Accountant, was appointed as an auditor of
the Company at the Annual General Meeting held on 30th April, 2020 by an
ordinary resolution. Mr. Mukesh, a shareholder of the Company, objects to the
manner of appointment of Mr. Vikas on the ground of violation of the Companies
Act, 2013. Decide whether the objection of Mr. Mukesh is tenable? Also examine
the consequences of the above appointment under the said Act.(MTP NOV 2020)

Law: (i)According to section 2(45) of the Companies Act, 2013, "Government company"
means any company in which not less than 51% of the paid-up share capital is held
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, and
includes a company which is a subsidiary company of such a Government
company.
(ii) Acccording to sec 139 Auditor of government company is appointed by CAG
whereas in non-government company power to appoint vests generally with the
members of the company
Conclusion: As per the section 2(45) of the Companies Act, 2013, the holding of 25% shares of
AMC Ltd. by the Government of Rajasthan does not make it a government
company. Hence, it will be treated as a non-government company.Therefore, the
contention of Mr. Mukesh is not tenable. The appointment is valid under the
Companies Act, 2013.

9.Maya Limited is a public company. Maharashtra Bank (a nationalized bank) is a

shareholder holding 18% of the subscribed capital of the company. Explain how the
following shall be appointed:

(i) First auditor

(ii) Subsequent auditor (6 Marks) (MTP M 21)

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QUESTION BANK
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(i)According to section 2(45) of the Companies Act, 2013, "Government company" means
any company in which not less than 51% of the paid-up share capital is held 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, and includes a company which
is a subsidiary company of such a Government company.
(iii)In the given case, the total shareholding of the Maharashtra Bank in Maya Limited, is
just 18% of the subscribed capital of the company. Hence, Maya Limited is not a
government company. Hence, the provisions applicable to non-government companies in
relation to the appointment of auditors shall apply.
(iii)Appointment of First Auditor of non government company
According to section 139(6) of the Companies Act, 2013, the first auditor of a company,
other than a Government company, shall be appointed by the Board of Directors within 30
days from the date of registration of the company and in the case of failure of the Board to
appoint such auditor, it shall inform the members of the company, who shall within 90 days
at an extraordinary general meeting appoint such auditor and such auditor shall hold office
till the conclusion of the first annual general meeting.
(iv) Appointment of Subsequent Auditor of non government company
u/s 139(5) The company shall, at the first annual general meeting, appoint an individual or
a firm as an auditor who shall hold office from the conclusion of that meeting till the
conclusion of its sixth annual general meeting and thereafter till the conclusion of every
sixth meeting.
Further, the company shall inform the auditor concerned of his or its appointment, and also
file a notice of such appointment with the Registrar within 15 days of the meeting in which
the auditor is appointed.

PRACTICAL QUESTION

Question 10 Shiv Limited is incorporated on 3.10.2020. The company is having a paid- up

share capital of Rs. 5 crores. Following are key shareholders of the company:

Name of the Party holding shares Amount (in Rs.)

Central Government 1.50

Punjab Government 1.23

Others 2.27

The first auditor of the company has been appointed by the Board of Directors on
31.10.2020. The members of the company have objected to such an appointment
by the Board of Directors. According to the members it’s only the members who
can appoint the first auditor.

Advise the company on the validity of such appointment as per the provisions of
the Companies Act, 2013. Also, advise whether the contention of members of the
company is correct. (6 Marks) (MTP M 21)

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Law: According to section 2(45) of the Companies Act, 2013, "Government company"
means any company in which not less than 51% of the paid-up share capital is held
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, and
includes a company which is a subsidiary company of such a Government company.
As per section 139(7), in the case of a Government company or any other company
owned or controlled, directly or indirectly, by the Central Government, or by any
State Government, or Governments, or partly by the Central Government and partly
by one or more State Governments, the first auditor shall be appointed by the
Comptroller and Auditor-General of India within 60 days from the date of
registration of the company and in case the Comptroller and Auditor - General of
India does not appoint such auditor within the said period, the Board of Directors of
the company shall appoint such auditor within the next 30 days; and in the case of
failure of the Board to appoint such auditor within the next 30 days, it shall inform
the members of the company who shall appoint such auditor within the 60 days at
an extraordinary general meeting, who shall hold office till the conclusion of the
first annual general meeting .
Conclusion: In the given question, Shiv Limited is a government company as 54.6% [(1.5+1.23)/
5= 54.6%] of the share capital is held by Central government and State Government
(Punjab Government). Thus, the first auditor of Shiv Limited shall be appointed by
the Comptroller and Auditor-General of India within 60 days from the date of
registration. Thus, the appointment of first auditor by Board of Directors on
31.10.2020 is not valid. The Board of Directors can appoint the first auditor in case
the Comptroller and Auditor-General of India does not appoint such auditor within
the said period of period 60 days. The Board of Directors of the company shall
appoint such auditor within the next 30 days.
In the case of failure of the Board to appoint such auditor within the next 30 days,
it shall inform the members of the company who shall appoint such auditor within
60 days at an extraordinary general meeting, who shall hold office till the conclusion
of the first annual general meeting. Thus, the contention of members that it’s only
the members who can appoint the first auditor of the Government company, is not
correct.

11.The auditor of ABC Limited (not a government company) has resigned on

31st December, 2023, while the Financial year of the company ends on 31st
March, 2024. Explain how such an auditor shall be appointed, as per the
provisions of the Companies Act, 2013. (MTP Jan 25) (MTP NOV 2019)

Casual Vacancy due to resignation

Under section 139 (8)(i) any casual vacancy in the office of an auditor arising
as a result of his resignation, such vacancy can be filled by the Board of Directors
within 30 days thereof and in addition the appointment of the new auditor shall
also be approved by the company at a general meeting convened within three
months of the recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting.

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12.Shivam Limited is incorporated on 1.1.2020. The company wants to

appoint its first auditor. Please enumerate to the company the relevant
provisions of the Companies Act, 2013 with respect to the appointment of first
auditor. (3 Marks)(MTP M 21)

According to section 139(6) of the Companies Act, 2013,

(i)the first auditor of a company, other than a Government Company, shall be
appointed by the Board of directors within 30 days of the date of registration of
the company and the auditor so appointed shall hold office until the conclusion of
the first AGM.
(ii)If the Board fails to exercise its powers i.e. appointment of first auditor, it shall
inform the members of the company and the company may appoint the first
auditor within 90 days at an extra ordinary general meeting (EGM) and such
auditor shall hold office till the conclusion of the first AGM.

PRACTICAL QUESTION

Question 13 The Board of Directors of Moon Light Limited, a listed company appointed Mr.
Tel, Chartered Accountant as its first auditor within 30 days of the date of
registration of the Company to hold office from the date of incorporation to
conclusion of the first Annual General Meeting (AGM). At the first AGM, Mr. Tel
was re-appointed to hold office from the conclusion of its first AGM till the
conclusion of 6th AGM. In the light of the provisions of the Companies Act, 2013,
examine the validity of appointment/ reappointment in the following cases:

(i) Appointment of Mr. Tel by the Board of Directors.

(ii) Re-appointment of Mr. Tel at the first AGM in the above situation.

In case Mr. Bell, Chartered Accountant, was appointed as auditor at the first AGM
to hold office from the conclusion of its first AGM till the conclusion of 5th AGM.
ie., 4 years tenure. (6 Marks)(Nov 2020)

Law: As per section 139(6) of the Companies Act, 2013, the first auditor of a company,
other than a Government company, shall be appointed by the Board of Directors
within thirty days from the date of registration of the company and such auditor
shall hold office till the conclusion of the first annual general meeting.
Whereas Section 139(1) of the Companies Act, 2013 states that every company
shall, at the first annual general meeting (AGM), appoint an individual or a firm as
an auditor of the company who shall hold office from the conclusion of 1st AGM
till the conclusion of its 6th AGM and thereafter till the conclusion of every sixth

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AGM.
As per section 139(2), no listed company or a company belonging to such class or
classes of companies as may be prescribed, shall appoint or re-appoint an
individual as auditor for more than one term of five consecutive years.
Conclusion: As per the given provisions following are the answers:
(i) Appointment of Mr. Tel by the Board of Directors is valid as per the
provisions of section 139(6).
(ii) Appointment of Mr. Tel at the first Annual General Meeting is valid
due to the fact that the appointment of the first auditor made by the
Board of Directors is a separate appointment and the period of such
appointment is not to be considered, while Mr. Tel is appointed in the
first Annual General Meeting, which is for the period from the
conclusion of the first Annual General Meeting to the conclusion of
the sixth Annual General Meeting.
(iii) As per law, auditor appointed shall hold office from the conclusion of
1st AGM till the conclusion of its 6th AGM i.e., for 5 years. Accordingly,
here appointment of Mr. Bell, which is for 4 years, is not in compliance
with the said legal provision, so his appointment is not valid.

14.Mr. Honest, an auditor of MM company ltd. has colluded with the company for
a fraud. The Central Government has applied to Tribunal about the said fraud by
Mr. Honest. State the provisions of the Companies Act, 2013 regarding the steps
that can be taken by Tribunal when it finds that the auditor of a company has acted
in a fraudulent manner.(MTP NOV 2018)

Removal of Auditor by Tribunl [Section 140(5) of the Companies Act, 2013]

(i) On satisfaction of Tribunal that the auditor of a company has acted in a
fraudulent manner etc.: Without prejudice to any action under the
provisions of this Act or any other law for the time being in force, the
Tribunal either suo moto or on an application made to it by the Central
Government or by any person concerned, if it is satisfied that the auditor
of a company has, whether directly or indirectly, acted in a fraudulent
manner or abetted or colluded in any fraud by, or in relation to, the
company or its directors or officers, it may, by order, direct the company to
change its auditors.
(ii) Requirement for change of auditor: If the application is made by the
Central Government and the Tribunal is satisfied that any change of the
auditor is required, it shall within fifteen days of receipt of such application,
make an order that he shall not function as an auditor and the Central
Government may appoint another auditor in his place.
(iii) whether individual or firm, against whom final order has been passed by the
Tribunal under this section shall not be eligible to be appointed as an auditor of any
company for a period of 5 years from the date of passing of the order & the auditor

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shall also be liable for action u/s 447.

PRACTICAL QUESTION

Question 15 Mr. Suresh, a Chartered Accountant, was appointed by the Board of

Directors of AB Limited as the First Auditor. The company in General
Meeting removed Mr. Suresh without seeking the approval of the Central
Government and appointed Mr. Gupta as Auditor in his place?(MTP NOV
2018)

Law: Section 140(1) stipulates that any auditor appointed under section 139 may
be removed from office before the expiry of his term by passing special
resolution in general meeting, after obtaining the previous approval of the
Central Government in that behalf.
Provided that before taking any action under subsection (1) of Section 140,
the auditor concerned shall be given a reasonable opportunity of being
heard.
Conclusion: The first auditors appointed by Board of Directors can be removed in
accordance with the provision of Section 140(1) of the Companies Act, 2013.
Hence, the removal of the first auditor appointed by the Board without
seeking approval of the Central Government is invalid. The company
contravened the provision of the Act.

PRACTICAL QUESTION

Question 16 ABC & Associates, a firm of Chartered Accountants was re-appointed as auditors
at the Annual General Meeting of X Ltd. held on 30-09-2022. However, the Board
of Directors recommended to remove them before expiry of their term by passing
a resolution in the Board Meeting held on 31-03-2023. Subsequently, having given
consideration to the Board recommendation, ABC & Associates were removed at
the general meeting held on 25-05-2023 by passing a special resolution but
without obtaining approval of the Central Government. Examine the validity
of removal of ABC & Associates by X Ltd. under the provisions of the Companies
Act, 2013. (MTP May 24)

Law: Section 140 of the Companies Act, 2013 prescribes procedure for removal of
auditors. Under section 140 (1) the auditor appointed under section 139 may be
removed from his office before the expiry of his term only by a special resolution

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of the company, after obtaining the previous approval of the Central Government
in that behalf in the prescribed manner.

From this sub section it is clear that the approval of the Central Government shall
be taken first and thereafter the special resolution of the company should be
passed.

Provided that before taking any action under this sub-section, the auditor
concerned shall be given a reasonable opportunity of being heard.

Conclusion: Hence, in the instant case, the decision of X Ltd. to remove ABC & Associates,
auditors of the company at the general meeting held on 25-5-2023, is not valid.
The approval of the Central Government shall be taken before passing the special
resolution in the general meeting.

PRACTICAL QUESTION

Question 17 Examine the following situations in the light of the Companies Act, 2013:

(i) Mr. Prem, a Chartered Accountant, has been appointed as an auditor of A

Limited in the Annual General Meeting of the company held in September 2023,
in which he accepted the assignment. Subsequently, in January 2024 he joined as a
partner in the consultancy firm where Mr. Ajay is also a partner. Mr. Ajay is also
working as a Finance Executive of A Limited.

(ii) Mr. Tom, a practicing Chartered Accountant, holds securities in B Limited

with a face value of ₹ 1,00,000. Considering this, can Mr. Tom be appointed
as the auditor of B Limited, or does his holding disqualify him from the role?
(MTP Jan 25)

Law: (i) Section 141(3)(c) of the Companies Act, 2013 prescribes that any person who
is a partner or in employment of an officer or employee of the company will be
disqualified to act as an auditor of a company. Section 141(4) provides where a
person appointed as an auditor of a company incurs any of the disqualifications
mentioned in section 141(3) after his appointment, he shall vacate his office
as such auditor and such vacation shall be deemed to be a casual vacancy in the
office of the auditor.

(ii) As per section 141(3)(d)(i), an auditor is disqualified to be appointed as

an auditor if he, or his relative or partner holds any security of or interest in the
company or its subsidiary, or of its holding or associate company or a subsidiary
of such holding company.

Conclusion: (i) In the present case, Mr. Prem, an auditor of A Limited, joined as partner with
consultancy firm where Mr. Ajay has become a partner and Mr. Ajay is also the
Finance executive of A Limited. Hence, Mr. Prem has attracted clause (3)(c) of

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section 141 and, therefore, he shall be deemed to have vacated office of the
auditor of A Limited.

(ii) In the present case, Mr. Tom is holding security of ₹ 1,00,000 in the B Limited,
therefore, he is not eligible for appointment as an auditor of B Limited.

PRACTICAL QUESTION

Question 18 Examine the following situations in the light of the Companies Act, 2013

(i) Mr. Ayush, a Chartered accountant has been appointed as an auditor of X

Ltd. in the Annual General Meeting of the company held in September, 2018, in
which he accepted the assignment. Subsequently, in January, 2019 he joined B, as
a partner for the consultancy firm of Mr. B. Mr. B is working also working as a
Finance Executive of X Ltd.

(ii) “Mr. Abhi”, a practicing Chartered Accountant, is holding securities of

“Abhiman Ltd.” having face value of ` 1000/-. Whether Mr. Abhi is qualified for
appointment as an Auditor of Abhiman Ltd.”?

(RTP MAY 2019) (MTP MAY 2020)

Law: (i) Law:- Section 141(3) (c) of the Companies Act, 2013 prescribes that any
person who is a partner or in employment of an officer or employee of the
company will be disqualified to act as an auditor of a company. Subsection
(4) of Section 141 provides that an auditor who becomes subject, after his
appointment, to any of the disqualifications specified in sub-sections (3) of
Section 141, he shall be deemed to have vacated his office as an auditor.
Conclusion: In the present case, Ayush, an auditor of X Ltd., joined as
partner with B, who is Finance executive of X Ltd., has attracted clause (3)
(c) of Section 141 and, therefore, he shall be deemed to have vacated
office of the auditor of X Limited.
(ii) Law - As per section 141 (3)(d) (i) an auditor is disqualified to be appointed
as an auditor if he, or his relative or partner holding any security of or
interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company:

Conclusion: In the present case, Mr. Abhi. is holding security of ` 1000 in the Abhiman Ltd,
therefore he is not eligible for appointment as an Auditor of “Abhiman Ltd.”

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PRACTICAL QUESTION

Question 19
Assess the eligibility of the following individuals for appointment as Auditors in
accordance with the regulations outlined in the Companies Act, 2013:
(i) Chintamani is a practicing Chartered Accountant, and his spouse, Chitralekha,
holds securities of Nagmani Ltd. valued at a face value amount of ₹ 80,000 (with a
market value of ₹ 50,000). The directors of Nagmani Ltd. are considering the
appointment of Chintamani as an auditor for the company.

(ii) Mani, the real sister of Mr. Priyanshu, a Chartered Accountant, holds the
position of CFO at Parivar Ltd. The directors of Parivar Ltd. are considering the
appointment of Mr. Priyanshu as an auditor for the company. (MTP Sept 24)

Law: (i) As per section 141(3)(d)(i) of the Companies Act, 2013, an auditor is
disqualified to be appointed as an auditor if he, or his relative or partner holding
any security of or interest in the company or its subsidiary, or of its holding or
associate company or a subsidiary of such holding company. Further the proviso
provides that, the relative of the auditor may hold the securities or interest in the
company of face value not exceeding of ₹ 1,00,000.

(ii) As per section 141(3)(f), an auditor is disqualified to be appointed as an

auditor if a person whose relative is a director or is in the employment of the
company as a director or a Key Managerial Personnel.

Conclusion: (i) In the present case, Chitralekha (spouse of Chintamani, the auditor), is having
securities of Nagmani Limited having face value of ₹ 80,000, which is within the
prescribed limits under the proviso to section 141(3)(d)(i). Therefore, Chintamani
will be eligible to be appointed as an auditor of Nagmani Limited.

(ii) In the instant case, since Mani, real sister of Mr. Priyanshu (Chartered
Accountant) is the CFO (a KMP) of Parivar Ltd., hence, Mr. Priyanshu will be
disqualified to be appointed as an auditor in the said company.

PRACTICAL QUESTION

Question 20 XYZ Ltd., a prominent manufacturing company, is in the process of appointing a

new auditor for the upcoming financial years. Mr. A is a renowned auditor being
considered for the role. During the due diligence process, the following details
come to light:

1. Mr. B and Mr. A are partners in ABC & Co. Mr. B has taken a personal
loan of ₹ 4 Lacs from XYZ Ltd.'s subsidiary, EFG Ltd., six months ago.

2. Mr. A's relative, Ms. C, has an outstanding debt of ₹ 2 Lacs with DEF Ltd., an
associate company of XYZ Ltd., which was taken three months ago.

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Discuss about the eligibility of Mr. A for being appointed as an auditor of

XYZ Ltd. in view of the provisions of the Companies Act, 2013.(RTP Sept 24)

Law: According to section 141(3)(d)(ii) of the Companies Act, 2013, an auditor is

disqualified to be appointed as an auditor if he or his relative or partner
is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of ₹ 5 Lacs.

Conclusion: In this scenario:

1. Mr. A's partner, Mr. B, has a debt of ₹ 4 Lacs from EFG Ltd., a
subsidiary of XYZ Ltd.

2. Mr. A's relative, Ms. C, has a debt of ₹ 2 Lacs from DEF Ltd., an
associate company of XYZ Ltd.

The total indebtedness linked to Mr. A's partner and relative is ₹ 6 Lacs (₹ 4
Lacs + ₹ 2 Lacs), which exceeds the ₹ 5 Lacs threshold mentioned in the
provision.

Therefore, Mr. A is disqualified from being appointed as the auditor of XYZ

Ltd. under section 141(3)(d)(ii) of the Companies Act, 2013, as the combined
indebtedness of his partner and relative surpasses the permissible limit.

PRACTICAL QUESTION

Question 21 Mrs. Sita, wife of CA. ‘Arjun' the statutory auditor of Stellar Builders Limited,
acquired shares in the company for a face value of `75000/- on 15th March, 2018.
CA. ‘Arjun’, issued his audit report on 25th April, 2018. Examine the validity of
this transaction under the Companies Act, 2013. Would your answer be different if
face value of the shares have been ` 150000/- (market value ` 95000/-)?(RTP NOV
2018) (NOV 2018)

Law: As per Section 141(3)(d)(i) of the Companies Act, 2013, a person who, or his
relative or partner is holding any security of or interest in the company or its
subsidiary, or of its holding or associate company or a subsidiary of such holding
company, shall not be appointed as an auditor of the company.
However, Rule 10 of the Companies (Audit and Auditors) Rules, 2014, states that a
relative of an auditor may hold securities in the company of face value not
exceeding rupees one lakh.

Conclusion: 1 In the given case Mrs. Sita, wife of CA. Arjun acquired shares in Stellar
Builders Limited, in which he was a statutory auditor on 15th March, 2018.
Since, the securities held by Mrs. Sita is within the prescribed limit of ` 1
lakh, such a transaction is valid.

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2 Yes, the answer will be different in case where the face value of acquired
shares is ` 1,50,000. Then in that case:
(i) Corrective action to maintain the limit specified (i.e., 1 lac) shall be
taken by the auditor within 60 days of such acquisition, or
(ii) Auditor has to vacate his office.

PRACTICAL QUESTION

Question 22 Shekhar Limited appointed an individual firm, Suresh & Company,

Chartered Accountants, as Auditors of the company at the Annual General
Meeting held on 30th September, 2019. Mrs. Kamala, wife of Mr. Suresh,
invested in the equity shares having face value of ` 1 lakh of Shekhar
Limited on 15th October, 2019. But Suresh & Company continues to
function as statutory auditors of the company. Advice.(RTP NOV 2020)
(RTP MAY 2020) (MTP NOV 2018) (MTP MAY 2019)

Law: According to section 141(3) of the Companies Act, 2013, a person who, or
his relative or partner holds any security of the company or its subsidiary or
of its holding or associate company a subsidiary of such holding company,
which carries voting rights, such person cannot be appointed as auditor of
the company. Provided that the relative of such person may hold security
or interest in the company of face value not exceeding 1 lakh rupees as
prescribed under the Companies (Audit and Auditors) Rules, 2014.

Conclusion: In this case, Mr. Suresh, Chartered Accountants, did not hold any such
security. But Mrs. Kamala, his wife held equity shares of Shekhar Limited of
face value ` 1 lakh, which is within the specified limit.Hence, Suresh &
Company can continue to function as auditors of the Company even after
15th October, 2019 i.e. after the investment made by his wife in the equity
shares of Shekhar Limited.

PRACTICAL QUESTION

Question 23 Examine the following situations in the light of the Companies Act, 2013

(i) Mr. Ayush, a Chartered accountant has been appointed as an auditor

of X Ltd. in the Annual General Meeting of the company held in
September, 2018, in which he accepted the assignment. Subsequently, in
January, 2019 he joined B, as a partner for the consultancy firm of Mr. B.
Mr. B is working also working as a Finance Executive of X Ltd.

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(ii) “Mr. Abhi”, a practicing Chartered Accountant, is holding securities

of “Abhiman Ltd.” having face value of Rs. 1000/-. Whether Mr. Abhi is
qualified for appointment as an Auditor of Abhiman Ltd.”?(MTP MAY
2019)

Law: (i)Section 141(3) (c) of the Companies Act, 2013 prescribes that any person
who is a partner or in employment of an officer or employee of the company
will be disqualified to act as an auditor of a company. Sub-section (4) of
Section 141 provides that an auditor who becomes subject, after his
appointment, to any of the disqualifications specified in sub-sections (3) of
Section 141, he shall be deemed to have vacated his office as an auditor.
(ii) As per section 141 (3)(d) (i) an auditor is disqualified to be appointed as
an auditor if he, or his relative or partner holding any security of or interest
in the company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company:
Conclusion: (i)In the present case, Ayush, an auditor of X Ltd., joined as partner with B,
who is Finance executive of X Ltd., has attracted clause (3) (c) of Section 141
and, therefore, he shall be deemed to have vacated office of the auditor of
X Limited.
(ii)In the present case, Mr. Abhi. is holding security of ` 1000 in the Abhiman
Ltd, therefore he is not eligible for appointment as an Auditor of “Abhiman
Ltd.”

PRACTICAL QUESTION

Question 24 HD Software Limited is engaged in the business of providing software services.

The company appointed its statutory auditors (not the first auditor). The Board of
directors of the company informed the auditor that the fees shall be fixed by
the Board of directors only.But the auditor objected to the same. Now the
directors have approached you to advise them whether they can solely fix the
remuneration of the auditor. (RTP Jan 25)

Law: Section 142 of the Companies Act, 2013, provides for remuneration of auditors.
According to this section the remuneration of the auditors of a company shall be
fixed by the company in general meeting or in such manner as the company in
general meeting may determine. However, the Board may fix remuneration of
the first auditor appointed by it.

The remuneration shall, in addition to the fee payable to an auditor, include the
expenses, if any, incurred by the auditor in connection with the audit of the
company and any facility extended to him but does not include any
remuneration paid to him for any other service rendered by him at the request of
the company.

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Conclusion: As per the facts of the question and stated provision, remuneration of the
appointed statutory auditors of a company shall be fixed by the company in
general meeting or in such manner as the company in general meeting may
determine as they are not the first auditor.

Hence, the contention of the Board of directors that they can fix the remuneration
of the auditor on their own is not valid.

PRACTICAL QUESTION

Question 25 The Board of Directors of Avni Ltd. requested its Statutory Auditor to accept the
assignment of designing and implementation of suitable financial information
system to strengthen the internal control mechanism of the Company. How will
you approach to this proposal, as a Statutory Auditor of Avni Ltd., taking into
account the consequences, if any, of accepting this proposal? (MTP Sept 24)

Law: According to section 144 of the Companies Act, 2013, an auditor appointed
under this Act shall provide to the company only such other services as are
approved by the Board of Directors or the audit committee, as the case may be.
But such services shall not include designing and implementation of any
financial information system.

Conclusion: In the said instance, the Board of directors of Avni Ltd. requested its Statutory
Auditor to accept the assignment of designing and implementation of suitable
financial information system to strengthen the internal control mechanism of the
company. As per the above provision said service is strictly prohibited.

In case the Statutory Auditor accepts the assignment, he will attract the penal
provisions as specified in Section 147 of the Companies Act, 2013.

In the light of the above provisions, we shall advise the Statutory Auditor not to
take up the above stated assignment.

Under the Companies Act, 2013, an auditor appointed by a company is allowed to provide
only those services that are approved by the Board of Directors or the Audit Committee.
However, there are certain services that an auditor is expressly prohibited from rendering,
whether directly or indirectly, to the company, its holding company, or its subsidiary
company.
List any seven such restricted services that an auditor cannot provide. (MTP May 25)

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An auditor appointed under the Companies Act, 2013, shall provide to the company only such other
services as are approved by the Board of Directors or the audit committee, as the case may be.
But such services shall not include any of the following services (whether such services are rendered
directly or indirectly to the company or its holding company or subsidiary company), namely:
1. Accounting and book keeping services;
2. Internal audit;
3. Design and implementation of any financial information system;
4. Actuarial services;
5. Investment advisory services;
6. Investment banking services;
7. Rendering of outsourced financial services;
8. Management services; and
9. Any other kind of services as may be prescribed

State the provisions of the Companies Act, 2013 regarding the signing of the Audit
report by the Auditors of the company.(MTP MAY 2018)

Section 145 of the Companies Act, 2013 provides for auditors to sign audit reports, etc.
According to this section:
(i) The person appointed as an auditor of the company shall sign the auditor’s report
or sign or certify any other document of the company in accordance with the
provisions of sub-section (2) of section 141 (i.e. in case of firm including LLP, only
Chartered Accountants are authorised to act and sign).
(ii) The qualifications, observations or comments on financial transactions or matters,
which have any adverse effect on the functioning of the company mentioned in the
auditor’s report shall be read before the company in general meeting and shall be
open to inspection by any member of the company.

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Question (i) In the light of the provisions of the Companies Act, 2013, discuss the
status of Gram Pte, which is a company registered in Singapore, that is
conducting online business through telemarketing in India without a
physical place of business. It is also informed that for the telemarketing
business in India, its main server located outside India.

(ii) In continuance of (i) above, Prism Ltd. (registered in India), a

wholly owned subsidiary company of Gram Pte decided to follow different
financial year for consolidation of its accounts outside India. State the
procedure to be followed in this regard.

Law: (i) According to section 2(42) of the Companies Act, 2013, “foreign
company” means any company or body corporate incorporated outside
India which –

has a place of business in India whether by itself or through an agent,

physically or through electronic mode; and

conducts any business activity in India in any other manner.

According to Rule 2(1)(c)(iv) of the Companies (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, online services such as telemarketing,
telecommuting, telemedicine, education and information research.

(ii) Where a company or body corporate, which is a holding company or

a subsidiary or associate company of a company incorporated outside India
and is required to follow a different financial year for consolidation of its
accounts outside India, the Central Government may, on an application
made by that company or body corporate in such form and manner as may
be prescribed, allow any period as its financial year, whether or not that
period is a year.

Conclusion: (i) In view of the above provisions of the Companies Act, 2013 and
the facts of the question, it can be said that being involved in online
business of telemarketing services in India having its main server outside
India, Gram Pte will be treated as foreign company.

(ii) Here, Prism Ltd. is advised to follow the above procedure

accordingly.
 Namaste Limited, a foreign company having its Indian principal place of business
at Ranchi, Jharkhand is required to deliver various documents to Registrar of
Companies under the provisions of the Companies Act, 2013. State where
should the said company deliver such documents. (MTP May 25)

The Companies Act, 2013 vide section 380 state that every foreign company is required to deliver
to the Registrar for registration, within 30 days of the establishment of office in India,
documents which have been specified therein. 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.
However due to amendment only for section 380 all documents will be delivered to central
registration centre , Gurugram

PRACTICAL QUESTION

Question Shaltom Ltd., an international corporation headquartered outside Japan, is

interested in expanding its investor base and thus is planning to issue a
prospectus for the subscription of its securities to potential investors in
India. However, the company has not yet established a physical place of
business within India.

As a consultant for Shaltom Ltd., you have been asked to provide guidance
on the legal procedures and compliance requirements that the company
must follow to issue this prospectus in India. (MTP Sept 24)

Law: As per section 389 of the Companies Act, 2013, 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 under Rule 11 of the Companies (Incorporated outside India)
Rules, 2014.
Conclusion: Accordingly, the Shaltom Ltd. a foreign company shall proceed with the
issue of prospectus in compliance with the above stated provisions of
section 379 of the Act.

PRACTICAL QUESTION

Question XYZ Limited, a company incorporated outside India and to which

provisions of Chapter XXII of the Companies Act, 2013 are applicable,
entered into a contract with ABC Limited, an Indian company, for the
supply of machinery. After the machinery was delivered, ABC Limited
failed to make the payment citing defects in the machinery.

XYZ Limited discovered that it had failed to comply with certain

provisions of Chapter XXII of the Companies Act, 2013, relating to the
registration of foreign companies in India. Despite this, XYZ Limited
intends to file a suit against ABC Limited for payment.

Discuss whether XYZ Limited can initiate legal proceedings against ABC
Limited in light of the non-compliance with Chapter XXII of the
Companies Act, 2013.

Give your answer as per the provisions of the Companies Act, 2013 [read
along with the Companies (Registration of Foreign Companies) Rules,
2014]. (MTP Jan 25)

Law: According to section 393 of the Companies Act, 2013, 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.

Conclusion: In this given question, XYZ Limited, a company incorporated outside

India, has failed to comply with certain provisions of Chapter XXII of the
Companies Act, 2013, which governs the registration and compliance
requirements for foreign companies operating in India.

According to the Companies Act, 2013, non-compliance with Chapter

XXII does not affect the validity of any contract, dealing, or transaction
entered into by the company. Therefore, the contract between XYZ Limited
 and ABC Limited remains valid, and ABC Limited is still legally bound to
fulfill its contractual obligations, including the payment for the machinery
supplied.

Further, XYZ Limited cannot bring a suit, claim any set-off, make any
counter-claim, or institute any legal proceeding related to the contract as it
has not complied with certain provisions of Chapter XXII.

Explain the provisions of the Companies Act, 2013 [read along with the
Companies (Registration of Foreign Companies) Rules, 2014] in respect of ‘Audit
of accounts of foreign company’. (MTP Jan 25)

Audit of accounts of foreign company

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

(i) Every foreign company shall get its accounts, pertaining to the Indian business
operations prepared in accordance with section 381(1) of the Companies Act, 2013
and Rules thereunder, shall be audited by a practicing Chartered Accountant in
India or a firm or limited liability partnership of practicing chartered
accountants.

(ii)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.

Gato Limited dealing in coloured contact lenses, is a company incorporated in

Singapore. The said company is operating in India through its branch office in
Kolkata. The company has approached its legal department to state the relevant
provisions of the Companies Act, 2013 and rules made thereunder relating to
preparation and filing of financial statements in case of such a company. (MTP
May 24)

Preparation and filing of financial statements by a foreign company

According to section 381 of the Companies Act, 2013:

(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 Companies (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.

(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) of section 381(1)
shall not apply, or shall apply subject to such exceptions and modifications as may be
specified in notification in that behalf.

(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.

What are the documents that must be annexed to a prospectus offering for
subscription in securities of a company incorporated or to be incorporated outside
India, as per the Companies (Registration of Foreign Companies) Rules, 2014?
(MTP May 24)
 According to section 389 of the Companies Act, 2013:

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:

(1) any consent to the issue of the prospectus required from any
person as an expert;
(2) 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;
(3) a copy of any other material contracts, not entered in the ordinary
course of business, but entered within preceding 2 years;
(4) a copy of underwriting agreement; and
(5) a copy of power of attorney, if prospectus is signed through duly
authorized agent of directors.

Students are advised to see module questions as well for this chapter
Define the term ‘Financial Year’ as per the provisions of the Limited Liability
Partnership Act, 2008. (MTP Jan 25)

Financial Year: According to section 2(1)(l) of the Limited Liability Partnership

Act, 2008, “Financial year”, in relation to a Limited Liability Partnership (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.

Define the term ‘Small limited liability partnership’ as per the provisions of the
Limited Liability Partnership Act, 2008. (MTP Jan 25)

Small limited liability partnership

According to section 2(1)(ta) of the Limited Liability Partnership Act, 2008, small
limited liability partnership means a limited liability partnership:

(i) the contribution of which, does not exceed 25 lakh rupees or such
higher amount, not exceeding 5 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 40 lakh
rupees or such higher amount, not exceeding 50 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.

Define the term ‘Body Corporate’ as per the provisions of the Limited Liability
Partnership Act, 2008. (MTP Sep 24)
 Body Corporate: According to section 2(1)(d) of the Limited Liability Partnership
Act, 2008, body corporate means a company as defined in section 2(20) of the
Companies Act, 2013 and includes:

(i) a LLP registered under the Limited Liability Partnership Act,

2008;
(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 section
2(20) of the Companies Act, 2013 or a limited liability partnership
as defined in the Limited Liability Partnership Act, 2008), which
the Central Government may, by notification in the Official Gazette,
specify in this behalf.

PRACTICAL QUESTION

Question Mr. Prateek (an individual) has started a Limited Liability Partnership firm
along with Brown Limited and Picture Limited. As per the provisions of the
Limited Liability Partnership Act, 2008, advise Limited Liability Partnership
firm, about who can be the designated partners of the firm. (MTP May 24)

Law: According to section 7 of the Limited Liability Partnership Act, 2008, every
Limited Liability Partnership (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.

Conclusion: In the given question, at least Mr. Prateek and one nominee of any bodies
corporate shall be designated partners.
PRACTICAL QUESTION

Question Mohan and Rakul are college friends and intend to do trading in musical
instruments. They have met Mr. John and Ms. Kate who are non-resident
Indian and they all have decided to form a Limited Liability Partnership (LLP)
under the name and style of Mohan John LLP with an initial capital
contribution of ₹ 1,00,000 each. The LLP was incorporated on October 15,
2020. The LLP intends to appoint Mr. John and Ms. Kate as designated
partners and consults same with its Company Secretary. You as the
Company Secretary advise the LLP on the appointment of Mr. John and
Ms. Kate as the only designated partners of the LLP. (MTP May 24)

Law: According to section 7 of the Limited Liability Partnership Act, 2008, every Limited
Liability Partnership shall have at least two designated partners who are individuals and at least
one of them shall be a resident in India.

Conclusion: In the given case, Mohan John LLP intends to appoint Mr. John and Ms. Kate (both are non-
resident Indians) as the only designated partners. This is not in consonance with provisions
of the Limited Liability Partnership Act, 2008, as at least one of the designated partners
should be a resident in India.

PRACTICAL QUESTION

Question Analyzing the role and liabilities of Designated Partners in a Limited Liability
Partnership (LLP) under the LLP Act, 2008, answer the following questions:

1. In a LLP where all partners are corporate entities, can a corporate body be appointed as
a designated partner?
2. If an LLP agreement does not specify the designated partners, whether LLP can be
validly formed without designated partners under the LLP Act, 2008?
3. A designated partner of an LLP in India is planning to relocate permanently to
another country.
4. XYZ LLP was penalized for non-compliance, but one of the designated partners
claims he was unaware of the regulatory requirements. Can he avoid liability?
(MTP May 25)
Law: The LLP Act, 2008, under Sections 7 and 8, outlines the eligibility, responsibilities, and
liabilities of Designated Partners (DPs). Following are the answers:

1. Every LLP must have at least two designated partners, and at least one must be a
resident of India. Where if, all partners are bodies corporate, at least two individuals
must be appointed as designated partners. Therefore, as per the stated law a
corporate body cannot be appointed as a designated partner. Only individuals are
eligible to be appointed as DPs.
2. The incorporation document must specify the designated partners, or they must be
appointed per the LLP agreement. Accordingly, if an LLP agreement does not specify
the designated partners, they the partners specified in the incorporation
document containing designated partners can validly form the LLP in compliance
with the LLP Act, 2008.
3. As per the LLP Act, 2008, at least one designated partner of the LLP must be a
resident of India. A resident of India is defined as a person who has stayed in India
for at least 120 days in the financial year. If the designated partner is permanently
relocating, he may no longer require to fulfill the residency criteria of staying in
India for at least 120 days in the financial year.
4. Designated partners are responsible for ensuring that the LLP complies with the
LLP Act, 2008.
• If the LLP fails to comply with statutory requirements, designated partners are held
personally liable for penalties.
• They may face fines or legal consequences for any violations of the LLP Act.

Conclusion: Where if, the designated partners, claims he was unaware of the regulatory requirements. He
cannot take plead of the ignorance and cannot avoid the liability.

PRACTICAL QUESTION

Question XYZ LLP was incorporated on 15th March, 2023, with its registered office in
Mumbai. The LLP received a legal notice from a supplier at this address.
However, the partners claim they never received the notice, as they had
shifted their office to Pune on 10th January, 2024, but had not informed the
Registrar about the change.
 Based on the provisions of the provisions of the Limited Liability Partnership
(LLP) Act, 2008, advise whether the service of notice at the Mumbai address
is legally valid. (MTP May 25)

Law: Registered Office of LLP and Change therein

As per section 13 of the Limited Liability Partnership Act, 2013,

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.

Conclusion: In the given question, the registered office of XYZ LLP is at Mumbai. Further, the
question informs that the LLP has shifted their office to Pune.

In the light of the provisions of the Act and the facts of question, the registered office
of XYZ LLP will be Mumbai as it is registered with the Registrar. The changed office to
Pune cannot be treated as a registered office.

Thus, the service of notice at the Mumbai address is legally valid.

PRACTICAL QUESTION

Question M/s Sulbha LLP was incorporated on 01.09.2022. On 01.01.2023, one partner
of a partnership firm named M/s Sulbha which is registered with Indian
Partnership Act, 1932 since 01.01.2000 requested ROC that as the name of
LLP nearly resembles with the name of already registered partnership firm, the
name of LLP should be changed. Explain whether M/s Sulbha LLP is liable to
change its name under the provisions of Limited Liability Act, 2008? (MTP
Sep 24)
Law: Section 15 of Limited Liability Partnership Act, 2008 provides 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 trade mark of any other person
under the Trade Marks Act, 1999’.
Further, section 17 provides, if the name of LLP 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
then on an application of such LLP or proprietor referred to in clauses (a)
and (b) respectively or a company, the CG may direct that such LLP to
change its name within a period of 3 months from the date of issue of such
direction.

Conclusion: Following the above provisions, LLP need not change its name if its name
resembles with the name of a partnership firm. These provisions are applicable
only in case where name is resembles with LLP, company or a registered trade
mark of a proprietor.

Hence, M/s Sulbha LLP need not change its name even it resembles with
the name of partnership firm.

PRACTICAL QUESTION

Question XYZ LLP was registered under the Limited Liability Partnership Act, 2008
(LLP Act) with a name that was later found to be identical to an existing
company's name, XYZ OPC Pvt Ltd. This similarity was not noticed at the
time of registration.

Explain the provisions of the Limited Liability Partnership Act, 2008, in

respect of the following:

(i) When the name of LLP is identical.

(ii) Formalities with the Registrar of Companies after name
change of LLP. (RTP Sep 24)
Law: According to section 17 of the LLP Act, 2008,

(i) 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-

• that of any other LLP or a company; or

• 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 tradem arks

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.

Conclusion: (ii) 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.

PRACTICAL QUESTION

Question Kishore, Kanshik, Yuvan and Bhora were partners in ABC & Associates LLP.
Yuvan resigned from the firm effective from 11th November, 2024 but this was
not informed to the Registrar of Companies by the Limited Liability Partnership
or Yuvan. Whether Yuvan will still be liable for the loss of firm of the
transactions entered after 11th November, 2024? Give your answer as per the
provisions of the Limited Liability Partnership Act, 2008. (MTP Jan 25)

Law: According to section 24(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.

Conclusion: Hence, by virtue of the above provisions, as no notice of resignation was given
to ROC, Yuvan will still be liable for the loss of firm of the transactions
entered after 11th November, 2024.

PRACTICAL QUESTION

Question Priya, Smita, Shilpa, and Shefali were partners in Sharma & Associates LLP.
Shilpa resigned from the firm effective 7th May 2024. However, neither
Sharma & Associates LLP nor Shilpa informed the Registrar of Companies
about her resignation. Is Shilpa still liable for any losses incurred by the firm
from transactions entered into after 7th May 2024? Analyze this situation with
reference to the provisions of the Limited Liability Partnership Act, 2008.
(MTP Sep 24)

Law: According to section 24(3) of the Limited Liability Partnership Act, 2008,
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.
Conclusion: Hence, by virtue of the above provisions, as no notice of resignation was given
to Registrar of Companies, Shilpa will still be liable for the loss of firm of the
transactions entered after 7th May 2024.
PRACTICAL QUESTION

Question JEET LLP is a small scale consulting firm. For the financial year 2024-
25, the firm reported a total contribution of ₹ 20 lakh and an annual
turnover of ₹ 35 lakh as per its Statement of Accounts and Solvency. The LLP
intends to avail benefits granted to small LLPs under the Limited Liability
Partnership Act, 2008.

(a) Based on the given financial details, determine whether JEET LLP
qualifies as a "Small LLP" under the LLP Act, 2008.

(b) If JEET LLP plans to expand its business and projects and resulting
turnover exceeding ₹ 50 crore in the next financial year, determine the legal
position as to the nature of the LLP as a “Small LLP”. (RTP May 25)

Law: (a) According to section 2(1)(ta) of the LLP Act, 2008, a LLP is classified as
a "Small LLP" if:

(i) Its contribution does not exceed ₹ 25 lakh (or a higher

prescribed amount, up to ₹ 5 crore). Here,
contribution of JEET LLP is ₹ 20 lakh, which is within
the limit.
(ii) Its turnover does not exceed ₹ 40 lakh (or a higher
prescribed amount, up to ₹ 50 crore). Here turnover
of JEET LLP is ₹ 35 lakh, which is within the limit.)

Conclusion: Since JEET LLP meets both conditions, it qualifies as a "Small LLP" under
the Act.

(b) If JEET LLP's turnover exceeds ₹50 crore in the next financial year, it
will no longer meet the requirements as a Small LLP and will be subject to
full compliance requirements applicable to regular LLPs.

PRACTICAL QUESTION

Question Amit and Priya are partners in XYZ LLP, a consulting firm. Recently, Priya
moved to a new address but forgot to notify the LLP within the required
period. A month later, Amit’s cousin, Ramesh, expressed interest in
 joining XYZ LLP as a partner, and after a few discussions, he was
accepted as a new partner.

However, XYZ LLP did not immediately update the Registrar of

Companies (RoC) regarding Priya’s address change or Ramesh’s admission
as a partner. Two months after Ramesh joined, the LLP filed a notice with the
RoC about these changes.

Advise the LLP about the default on part of LLP about the non
compliance in respect to not informing the ROC about:

(i) Priya’s address change

(ii) Ramesh’s admission as a partner. (RTP Jan 25)

Law: According to section 25 of the Limited Liability Partnership Act, 2008,

(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.

Conclusion: (i) Priya’s Address Change: Under the provision, Priya was required to
inform XYZ LLP of her address change within 15 days of the move.
 Following that, XYZ LLP was required to file a notice with the RoC
within 30 days of being notified of Priya's new address. As

Priya did not inform the LLP about change of address and consequently LLP
did not file a notice regarding the change in address of Priya with the
Registrar, XYZ LLP is not in compliance with the required timeline.

(ii) Ramesh’s Admission as a Partner: For new partners, XYZ LLP must
file a notice with the RoC within 30 days of a person becoming a partner.
This notice should include Ramesh’s consent statement, signed by him and
authenticated as prescribed. The delay in filing means XYZ LLP did not
meet the 30-day requirement.

“LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership”. Explain. (MTP May 24)
Limited Liability Partnership (LLP) is an alternative corporate business form that gives the benefits
of limited liability of a company and the flexibility of a partnership

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 of the LLP Act, 2008). The liability of the
partners will be limited to their agreed contribution in the LLP, while the LLP it self will be liable for
the full extent of its assets.

Flexibility of a partnership: The LLP 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.

PRACTICAL QUESTION

Question A, B, C and D are the partners of Alpha LLP and have equal share in the
profits and losses of the LLP. A has made an agreement to transfer 70%
of his share in the profits of Alpha LLP to his daughter X.

X wanted to access information about the trading transactions of Alpha LLP

claiming that she is entitled to the information as she receives a percentage
 of profits from the LLP. The partners refused to grant her access. Does X
have any remedy against the denial according to the provisions of the
Limited Liability Partnership Act, 2008? Are the partners correct in denying
access to X? (PYQ Sep 24)

Law: According to section 42 of the Limited Liability Partnership Act, 2008, 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.

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.

Conclusion: In the given question, the partners of Alpha LLP are correct in denying access
of information about trading transactions to X (daughter of A).

X does not have any remedy against the denial by the partners of Alpha
LLP.

PRACTICAL QUESTION

Question Mohit is a creditor of ABC LLP. He has a claim of ₹ 10,00,000 against the
LLP. However, the assets of the LLP are valued at only ₹ 7,00,000. Now,
Mohit seeks to hold the partners of the LLP personally accountable for the
shortfall of ₹ 3,00,000. Under the provisions of the Limited Liability Act,
2008, can Mohit demand for the deficit from the partners of ABC LLP?
(RTP May 24)

Law: A limited liability partnership is a body corporate formed and incorporated

under the Limited Liability Partnership Act, 2008 and is a legal entity separate
from that of its partners. The LLP itself will be liable for the full extent of its
assets but the liability of the partners will be limited. Creditors of LLP shall
be the creditors of LLP alone. In other words, creditors of LLP cannot claim
from partners. The liability of the partners will be limited to their agreed
contribution in the LLP.
Conclusion: Hence, the creditors of ABC LLP are the creditors of ABC LLP only.
Partners of LLP are not personally liable towards creditors. Thus, Mohit
cannot claim his deficiency of ₹ 3,00,000 from the partners of ABC LLP.

PRACTICAL QUESTION

Question M/s Strong Steels Limited Liability Partnership firm was incorporated on
01st April 2010 with ten partners. The LLP had very good business and made
considerable profits during the past years. Recently due to obsolete
practices, M/s Strong Steels Limited LLP started making loss. Also,
M/s Strong Steels LLP did not file its annual returns from 2020-21. Three
partners decided that the LLP be wound up by the Tribunal. The remaining
partners objected to it. Referring to section 64 of the Limited Liability
Partnership Act, 2008, can the Tribunal pass an order to wound up M/s
Strong Steels LLP? Also state the provisions and penalty for not filling annual
return with the Registrar. (PYQ Sep 24)

Law: According to section 63 of the Limited Liability Partnership Act, 2008, the
winding up of a LLP may be either voluntary or by the Tribunal and LLP,
so wound up, may be dissolved.

As per section 64 of the Limited Liability Partnership Act, 2008, a LLP may
be wound up by the Tribunal, if the LLP has made a default in filing with
the Registrar the Statement of Account and Solvency or Annual Return for any 5
consecutive financial years.

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.

(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.

Conclusion: In the present case, M/s Strong Steels LLP did not file its Annual Returns from
2020-21. In the financial year 2024-25, the default in filing of annual return has
 not continued for 5 consecutive years. In view of the facts of the question
and provisions of the Act, the Tribunal cannot pass an order to wind up M/s
Strong Steels LLP.

The objection of remaining partners is correct.

Enumerate the circumstances in which a Limited Liability Partnership may be

wound up by the Tribunal. Give your answer in respect of the provisions of the
Limited Liability Partnership Act, 2008. (MTP May 24)

Circumstances in which LLP may be wound up by Tribunal [Section 64 of the

Limited Liability Partnership Act, 2008]

A LLP may be wound up by the Tribunal:

(1) if the LLP decides that LLP be wound up by the Tribunal;

(2) if, for a period of more than six months, the number of partners of
the LLP is reduced below two;
(3) if the LLP has acted against the interests of the sovereignty and
integrity of India, the security of the State or public order;
(4) 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
(5) if the Tribunal is of the opinion that it is just and equitable that the
LLP be wound up.

Note – Apart from above questions, students are also advised to solve module questions of ICAI
in this chapter
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Chapter XIII
The GENERAL CLAUSES ACT,1897
Q Section Topic

1 3(3) Affidavit

2 3(13) Commencement

3 3(22) Good faith

4 3(18) Documents

5 3(18) Documents

6 3(21) Financial year and calendar year

7 3(22) Good faith

8 3(26) Immovable property

9 3(27) Imprisonment

10 3(36,37) Movable Property and Oath

11 3(26) Immovable property

12 3(39) Official gazette

13 3(42) Person

14 5 Coming into operation

15 5 Coming into operation

16 5 Coming into operation

17 5 Coming into operation

18 6 repeal

19 6 Repeal vs deletion

20 9 Commencement of time

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21 9 Commencement of time

32 10 Computation of time

22 11,12 Mix

33 11 Measurement of distance

23 12 Duty to be taken pro-rata

24 13 Gender

25 13 Gender

34 16 Power to appoint to include suspend and dismiss

35 19 Chief and subordinate

26 23 To make rules after previous publication

27 26 Offence punishable under two or more enactment

28 27 Service by post

29 27 Service by post

30 27 Service by post

31 27 Service by post

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1.Explain the following with reference to the provisions of the General Clauses Act,
1897:Affidavit(MTP May 25)

“Affidavit” [Section 3(3) of the General Clauses Act, 1897]:

i. ‘Affidavit’ shall include affirmation and declaration in the case of persons by
law allowed to affirm or declare instead of swearing.
ii. The above definition is inclusive in nature.
iii. It states that Affidavit shall include affirmation and declarations.
iv. In general parlance. Affidavit is a written statement confirmed by oath or
affirmation for use as evidence in Court or before any authority.

2.Elucidate the term “Commencement” as per the General Clauses Act,

1897.(MTP M 21)

Section 3(13) of the General Clauses Act, 1897, defines the term "Commencement".
"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 a legal force and effect.
A law cannot be said to be in force unless it is brought into operation by legislative
enactment, or by the exercise of authority by a delegate empowered to bring it into
operation. The theory of a statute being "in operation in a constitutional sense"
though it is not in fact in operation has no validity. (State of Orissa Vs. Chandrasekhar
Singh Bhai — AIR1970

3.Explain the following with reference to the provisions of the General Clauses Act,
1897: Good Faith (MTP May 25)

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“Good Faith” [Section 3(22) of the General Clauses Act, 1897]:

i. 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.
ii. The question of good faith under the General Clauses Act is one of fact. It is to
be determined with reference to the circumstances of each case.
iii. Thus, anything done with due care and attention, which is not malafide, whether
it is done negligently or not is presumed to have been done in good faith.

4.CCTV recording of an incident can be considered as a document. Explain what do you understand
by the word document and how will you justify your answer in accordance with the provision of the
General Clauses Act, 1897? (MTP May 25)

Law -As per Section 3 of the Indian Evidence Act, 1872, a document refers to any matter that is expressed
or described upon a substance using letters, figures, or marks with the intention of recording
information. Similarly, Section 3(18) of the General Clauses Act, 1897, states that a document
includes any material on which information is written, expressed, or described through various
means.

A document generally consists of four key elements:

a) Matter – The content or subject recorded in the document.

b) Record – The process of fixing or storing the matter on a particular medium.
c) Substance – The physical medium on which the information is recorded (paper, digital file,
stone engraving, etc.).
d) Means – The method used to record the information, such as letters, numbers, symbols,
or figures.
So a contract agreement between two businesses is a document because it contains matter (terms
and conditions of the agreement). It is recorded in writing on a substance (paper or electronic
document). It is written using letters and symbols to communicate between the parties.

Conclusion- A CCTV recording of an incident is a document. Even though it is not written on paper,
it is still a document because it records matter (the incident), is stored on a medium (hard drive or
tape) and can be used as proof in a legal proceeding.

5.State what do you understand by the term ‘Document’ as per the General
Clauses Clauses Act, 1897? Discuss which of the following will be treated as
document?

(a) Power-of-attorney.

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(b) Cheque (MTP MAY 2018)

According to section 3(18) of the General Clauses Act, 1897, ‘Document’ shall include
any matter written, expressed or described upon any substance by means of letters,
figures or marks or by more than one of those means which is intended to be used or
which may be used, for the purpose or recording that matter.
Thus,
(a) Yes, power-of-attorney is a document.
(b) Yes, cheque upon a banker is a document.

6.A confusion regarding the meaning of ‘financial year’ arose among the financial
executive and accountant of a company. Both were having different arguments
regarding the meaning of financial year & calendar year. What is the correct meaning
of the financial year under the provision of the General Clauses Act, 1897? How it is
different from calendar year? (MTP May 24)

Apar and Mr. New, both aspiring Chartered Accountants have met in a
conference for CA students. Both are having an argument about the meaning of
Financial Year. They have approached you as a senior in the profession to guide
them about the meaning of Financial Year as per the provisions of the General
Clauses Act, 1872. Also, brief them about the difference between a calendar year
and financial year. (RTP MAY 2021)

Financial Year: According to Section 3(21) of the General Clauses Act, 1897, 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 the General Clauses Act, 1897, 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.

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PRACTICAL QUESTION

Question 7 What do you understand by the term 'Good Faith'. Explain it as per the
provisions of the General Clauses Act, 1897. Mr. X purchased a watch from
Mr. Y carelessly without proper enquiry. Whether the purchase made
could said to be made in good faith.(NOV 2019)

Law: As per Section 3(22) of the General Clauses Act, 1897, the term “good faith”
means 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 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 there the definition
given in that particular enactment has to be followed.
The question of good faith under the General Clauses Act is one of fact. It is to
determine with reference to the 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.
Conclusion: In the given problem in the question, Mr. X purchased a watch from Mr. Y
carelessly without proper enquiry. Such a purchase made could not be said to
be made in good faith as it was done without due care and attention as is
expected with a man of ordinary prudence. An honest purchase made
carelessly without making proper enquiries cannot be said to have been made
in good faith so as to convey good title.

PRACTICAL QUESTION

Question 8 8.M owned a land with fifty tamarind trees. He sold his land and the timber
(obtained after cutting the fifty trees) to N. M wants to know whether the
sale of timber tantamount to sale of immovable property. Advise him with
reference to provisions of "General Clauses Act, 1897”.(MTP MAY 2019)
(3 Marks) (MTP M 21)

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Law: “Immovable Property” [Section 3(26) of the General Clauses Act, 1897]:
‘Immovable Property’ shall include:
• Land,
• Benefits to arise out of land, and
• Things attached to the earth, or
• Permanently fastened to anything attached to the earth.
It is an inclusive definition. It contains four elements: land, benefits to arise out
of land, things attached to the earth and things 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.

Conclusion: In the instant case, M sold Land along with timber (obtained after cutting trees)
of fifty tamarind trees of his land. According to the above definition, Land is
immovable property; however, timber cannot be immovable property since
the same are not attached to the earth.

PRACTICAL QUESTION

Question 9 9.Mr. N is caught stealing a bicycle, an offense punishable under the

Indian Penal Code. According to Section 379 of the IPC, the punishment
for theft was charged against him. Elaborate how the term "imprisonment"
levied under the General Clauses Act, 1897, can be applied in line with the
relevant law specified in the IPC? (RTP May 25)

Law: According to section 3(27) of the General Clauses Act, 1897 states that
‘Imprisonment’ shall mean imprisonment of either description as defined in
the Indian Penal Code. By section 53 of the Indian Penal Code, the punishment
to which offenders are liable under that Code are imprisonment which is of two
descriptions, namely, rigorous, that is with hard labor and simple. So, when an
Act provides that an offence is punishable with imprisonment, the Court may,
in its discretion, make the imprisonment rigorous or simple.

Conclusion: In this case:

If the court considers Mr. N's offense as a minor theft and believes it does
not warrant harsh punishment, it might sentence him to simple imprisonment.

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However, if the theft involved force, was committed in a violent manner, or

if Mr. N has a history of criminal behavior, the court may decide to impose
rigorous imprisonment.

10.Explain the following with reference to the provisions of the General Clauses Act,
1897:

1 Movable Property

2 Oath (MTP Jan 25)

1) Movable Property

According to section 3(36) of the General Clauses Act, 1897, ‘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.

2) Oath

According to section 3(37) of the General Clauses Act, 1897, ‘Oath’ shall include
affirmation and declaration in the case of persons by law allowed to affirm or declare
instead of swearing.

PRACTICAL QUESTION

Question 11 Yogveer Singh has a mango orchard at Manchanga Village, Bilaspur. The
orchard has more than one hundred Mango trees. Yogveer Singh has sold
orchard along with all the mango trees. Explain, in the lights of provisions of
the General Clauses Act 1897, whether the sale of trees will be considered as
sale of Immovable Property? (RTP May 24)

Law: According to section 3(36) of the General Clauses Act 1897, ‘Movable
Property’ shall mean property of every description, except immovable
property. While section 3(26) provides, ‘Immovable Property’ shall
include:

(i) Land,
(ii) Benefits to arise out of land, and

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(iii) Things attached to the earth, or

(iv) Permanently fastened to anything attached to the earth.

Conclusion: In the given question, Yogveer Singh has sold mango orchard along with all
the mango trees. In the lights of provisions of the Act, as trees are benefits
arise out of the land and attached to the earth, hence, mango trees are
immovable property.

12.Define the term ‘Official Gazette’ as per the provisions of the General Clauses
Act, 1897. (MTP Sep 24)

Official Gazette

According to section 3(39) of the General Clauses Act, 1897, ‘Official Gazette’ or
‘Gazette’ shall mean:

(i) The Gazette of India, or

(ii) The Official Gazette of a state.

The Gazette of India is a public journal and an authorised legal document of the
Government of India, published weekly by the Department of Publication, Ministry of
Housing and Urban Affairs. As a public journal, the Gazette prints official notices from
the government. It is authentic in content, accurate and strictly in accordance with
the Government policies and decisions. The gazette is printed by the Government of
India Press.

13.Explain the following with reference to the provisions of the General Clauses Act,
1897:Person(MTP Jan 25)

Person

According to section 3(42) of the General Clauses Act, 1897, ‘Person’ shall include
any company or association or body of individuals, whether incorporated or not.

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PRACTICAL QUESTION

Question 14 The Parliament recently passed the Environment Protection Amendment Act,
2024, to strengthen regulations on industrial waste disposal. The Act specified
the commencement date as 1st September, 2024. The President gave assent to
the Act on 15th July, 2024.

Green Earth Limited, an industrial company, is uncertain about when the

provisions of the Environment Protection Amendment Act, 2024, will start
to apply. The company’s legal team has raised question on whether they need
to immediately comply with the new regulations or if they have a grace
period until the commencement date. Give your answer in reference to the
provisions of the General Clauses Act, 1897. (RTP Jan 25)

Law: According to section 5 of the General Clauses Act, 1897, 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.

Conclusion: In the given question, the Environment Protection Amendment Act, 2024,
received assent of President of India on 15th July, 2024. The commencement
date is prescribed as 1st September 2024. Accordingly, the Environment
Protection Amendment Act, 2024, shall come into enforcement 1st September,
2024.

15.Referring to the provisions of the General Clauses Act, 1897, answer the following
questions:Whenever a new law is enacted by the Government of India, what shall be
its date of coming into force? (PYQ Sep 24)

1. As per section 5 of the General Clauses Act, 1897, 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 Act made before the commencement of the Indian
Constitution and/or, of the President, in case of an Act of Parliament.

Where, if any specific date of enforcement is prescribed in the Official Gazette, the
Act shall into enforcement from such date

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16.When does an enactment is said to have come into operation if the Act has not
specified any particular date of its enforcement. Explain with the help of an
example as per the provisions of the General Clauses Act, 1897. (MTP MAY
2018)

“Coming into operation of enactment”: According to section 5 of the General

Clauses Act, 1897, 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.
Example: The Companies Act, 2013 received assent of President of India on 29th
August, 2013 and was notified in official gazette on 30th August, 2013 with the
enforcement of section 1 of the Act. Accordingly, the Companies Act, 2013 came into
enforcement on the date of its publication in the Official Gazette.

17.Referring to the provisions of the General Clauses Act, 1897, find out the day/
date on which the following Act/Regulation comes into force. Give reasons also.

(i) An Act of Parliament which has not specifically mentioned a particular date.

(ii) The Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) (Fifth Amendment) Regulations, 2015 was issued by SEBI vide
Notification dated 14th August, 2015 with effect from 1st January, 2016.(RTP
NOV 2020)

(i) According to section 5 of the General Clauses Act, 1897, 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 President in
case of an Act of Parliament.
(ii) If any specific date of enforcement is prescribed in the Official Gazette, the Act
shall come into enforcement from such date.
Thus, in the given question, the SEBI (Issue of Capital and Disclosure Requirements)
(Fifth Amendment) Regulations, 2015 shall come into enforcement on 1 st January,
2016 rather than the date of its notification in the gazette.

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18.Whenever a new law is enacted to replace the existing law, it repeals the old
enactment. Describe the points which shall not have any effect of repeal of the
old enactment. (PYQ Sep 24)

According to section 6 of the General Clauses Act, 1897, 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;
• 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
• Affect any penalty, forfeiture or punishment incurred in respect of any offence
committed against any enactment so repealed; or

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.

19.‘Repeal’ of provision is different from ‘deletion’ of provision. Explain as per

the General Clauses Act, 1897.

(MTP NOV 2019)

(i) ‘Repeal’ of provision is in distinction from ‘deletion’ of provision.

(ii) ‘Repeal’ ordinarily brings about complete obliteration (abolition) of the provision
as if it never existed, thereby affecting all incoherent rights and all causes of action
related to the ‘repealed’ provision However 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.
(iii) Repeal has retrospective effect whereas deletion has prospective effect

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PRACTICAL QUESTION

Question 20 Excel Ltd. declared dividend for its shareholder in its Annual General
Meeting held on 30/09/2017. Under the provisions of the Companies Act,
2013, company is required to pay declared dividend within 30 days from
the date of declaration. As per the provisions of the General Clauses Act,
1897, discuss what will be the commencement and termination time for
posting of declared dividend.(MTP MAY 2018)

Law: As per the provisions of Section 9 of the General Clauses Act, 1897, 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”.
Section127 of the Companies Act, 2013 uses the words, ‘thirty days from’.
Conclusion: Thus, in the given situation Excel Ltd. is required to pay declared dividend
within 30 days from the date of declaration i.e. from 01/10/2016 to
30/10/2016. In this series of 30 days, 30/09/2016 will be excluded and last 30th
day i.e. 30/10/2016 will be included.

PRACTICAL QUESTION

Question 21 Komal Ltd. declares a dividend for its shareholders in its Annual General
Meeting held on 27thSeptember, 2019. Referring to provisions of the
General Clauses Act, 1897 and Companies Act, 2013, advice:
(a) The dates during which Komal Ltd. is required to pay the dividend?
(b) The dates during which Komal Ltd. is required to transfer the unpaid or
unclaimed dividend to unpaid dividend account?(MTP MAY 2020)

Law: As per section 9 of the General Clauses Act, 1897, for computation of time, the
section states that 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”.

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Conclusion: (i) Payment of dividend: In the given instance, Komal Ltd. declares
dividend for its shareholder in its Annual General Meeting held on
27/09/2019. Under the provisions of Section 127 of the Companies
Act, 2013, a company is required to pay declared dividend within 30
days from the date of declaration, i.e. from 28/09/2019 to
27/10/2019. In this series of 30 days, 27/09/2019 will be excluded and
last 30thday, i.e. 27/10/2019 will be included. Accordingly, Komal Ltd.
will be required to pay dividend within 28/09/2019 and 27/10/2019
(both days inclusive).
(ii) Transfer of unpaid or unclaimed divided: As per the provisions of
Section 124 of the Companies Act, 2013, where a dividend has been
declared by a company but has not been paid or claimed within 30
days from the date of the declaration, to any shareholder entitled to
the payment of the dividend, the company shall, within 7 days from
the date of expiry of the said period of 30 days, transfer the total
amount of dividend which remains unpaid or unclaimed to a special
account to be opened by the company in that behalf in any scheduled
bank to be called the “Unpaid Dividend Account” (UDA). Therefore,
Komal Ltd. shall transfer the unpaid/unclaimed dividend to UDA within
the period of 28th October, 2019 to 3rd November, 2019 (both days
inclusive).

22.Define the following with reference to the provisions of the General Clauses Act,
1897:

1. Measurement of Distances
2. Duty to be taken pro rata in enactments (MTP Sep 24)

(1) Measurement of Distances

According to section 11 of the General Clauses Act, 1897, in the measurement of any
distance, for the purposes of any Central Act or Regulation made after the
commencement of this Act, that distance shall, unless a different intention appears, be
measured in a straight line on a horizontal plane.

(2) Duty to be taken pro rata in enactments

According to section 12 of the General Clauses Act, 1897, 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.

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Pro rata is a Latin term used to describe a proportionate allocation.

PRACTICAL QUESTION

Question 23 Mr. Chaggan Lal is an importer dealing in luxury perfumes. Recently, a

new enactment was passed which imposes a duty of 15% on the value of
luxury goods, including perfumes.

Now Mr. Chaggan Lal has approached you to explain to him the
provisions in relation to ‘Duty to be taken pro rata in enactments’ of the
General Clauses Act, 1897. Also, help him to calculate the amount of
duty on a Shipment of 100 bottles of perfumes, each valued at $50. (RTP
Sep 24)

Law: According to section 12 of the General Clauses Act, 1897, 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.

Conclusion: The amount of duty would be= (100* 50)*15%= $750.

PRACTICAL QUESTION

Question 24 As per the provisions of the Companies Act, 2013, a whole time Key
Managerial Personnel (KMP) shall not hold office in more than one company
except its subsidiary company at the same time. Referring to the Section 13
of the General Clauses Act, 1897, examine whether a whole time KMP can be
appointed in more than one subsidiary company?(MTP NOV 2020)(module)

Law: Section 203(3) of the Companies Act, 2013 provides that whole time key
managerial personnel shall not hold office in more than one company except
in its subsidiary company at the same time. With respect to the issue that
whether a whole time KMP of holding company be appointed in more than
one subsidiary companies or can be appointed in only one subsidiary
company.

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It can be noted that Section 13 of General Clauses Act, 1897 provides that the
word ‘singular’ shall include the ‘plural’, unless there is anything repugnant to
the subject or the context.

Conclusion: Thus, a whole time key managerial personnel may hold office in more than one
subsidiary company as per the present law.

PRACTICAL QUESTION

Question 25 Ms. Alka was director in Sweets Private Limited. Once while dealing with
supplier of raw materials for company, she agreed to get some secret
commission from supplier for making the deal. Afterwards, on finding the
facts, the company has filed the suit against Ms. Alka. She contended that
section 166 of the Companies Act, 2013, provides “A director of a company
shall not achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives, partners, or associates and if such director is
found guilty of making any undue gain, he shall be liable to pay an amount
equal to that gain to the company.” She contended that section 166 is
applicable to male director only, she being female will not be liable.

In the light of the provisions of the General Clauses Act, 1897, decide whether
she is bound by the provisions of section 166 of the Companies Act, 2013.
(MTP May 25)

Mrs. Neelu Chandra was director in Laddoo Sweets Private Limited. Once while
dealing with supplier of raw materials for company, she agreed to get some secret
commission from supplier for making the deal. Afterwards, on finding the facts, the
company has filed the suit against Mrs. Neelu Chandra. She contended that section
166 of the Companies Act, 2013, provides “A director of a company shall not achieve
or attempt to achieve any undue gain or advantage either to himself or to his
relatives, partners, or associates and if such director is found guilty of making any
undue gain, he shall be liable to pay an amount equal to that gain to the company.”
She contended that section 166 is applicable to male director only, she being female
will not be liable.
In the light of the provisions of the General Clauses Act, 1897, decide whether she
is bound by the provisions of section 166 of the Companies Act, 2013?(RTP Nov 23)

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Law: By virtue of provisions of section 13 of the General Clauses Act, 1897, in all Central
Acts or Regulations, unless there is anything repugnant in the subject or context, words
importing the masculine gender shall be taken to include females.

Conclusion: Ms. Alka, director in Sweets Private Limited, made an undue gain in the form of
commission (from supplier for making the deal) in dealing for Sweets Private Limited
but she denied accepting the liability by saying that the language of section 166 provides
penalty only for male directors not for females.

On the basis of provisions of the General Clauses Act, 1897 and facts of the case, the provisions
of section 166 of the Companies Act, 2013, are not only applicable to males but also to females.
Therefore, Ms. Alka is bound to comply by section 166 of the Companies Act, 2013.

26.Explain various provisions applicable to rules or bye-laws being made after

previous publications as enumerated in Section-23 of the General Clauses Act, 1897.
(MTP Sep 25) (NOV 2018)

Making of rules or bye-laws after previous publications [Section 23 of the

General Clauses Act, 1897]:

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) Make a draft manner decided by govt. / authority

(2) Notice annexed with the published draft: There shall be published with the
draft a notice specifying a date on or after which the draft will be taken into
consideration;
(3) Publish Draft mentioning time for suggestions / objections / comments from
affected person and regulatory authorities
(4) Consideration on suggestions/objections received from other authorities:
consider any objection or suggestion which may be received by the authority
(5) Notified in the official gazette: 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 have been duly made.

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PRACTICAL QUESTION

Question 27 Mr. Ram, an advocate has fraudulently deceived his client Mr. Shyam,
who was taking his expert advise on taxation matters. Now, Mr. Ram is
liable to a fine for acting fraudulently both under the Advocates Act, 1961
as well as the Income Tax Act, 1961. State the provision as to whether his
offence is punishable under the both the Acts, as per the General Clauses
Act, 1897.

(RTP NOV 2018)

Law: “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.

Conclusion: Thus, Mr. Ram shall be liable to punished under the Advocates Act, 1961 or the
Income Tax Act, 1961, but shall not be punished twice for the same offence.

28.What is the meaning of service by post as per provisions of the General

Clauses Act, 1897? (RTP MAY 2021)

Meaning of Service by post: According to section 27 of the General Clauses Act, 1897,
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:
(a) properly addressing
(b) pre-paying, and
(c) 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.

PRACTICAL QUESTION

Question 29 Mr. Rachit purchased a new house and after some time he shifted to his new
house. He was regularly filing his Income Tax Return but he did not update his
address with the Income Tax Department. The Income Tax department sent a

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show cause notice to Mr. Rachit whereby the time limit for reply was 15
days from service of notice. The notice was properly sent by registered post to
his address which was in the records of the Income Tax Department. The notice
reached at old house and present owner of that house refused to accept that
notice. After a certain period, the Income Tax Department took a penal action
against Mr. Rachit. He requested the department, that he should not be charged
as he did not receive the said notice. Advise in terms of the provisions of the
General Clauses Act, 1897, whether sending of the show cause notice by the
Income Tax Department would be considered proper service of notice?
Give your answer with reference to the provisions of the General Clauses Act,
1897. (MTP May 24)

Mr. Mike has lent his house property to Mr. Wise at a monthly rent of Rs.
15,0000 per month. The yearly rent agreement was due to expire in near
future. However, Mr. Mike does not intend to continue this agreement and he
has sent a notice to Mr. Wise for the termination of the agreement. Mr. Wise
on the other hand does not want to vacate the property and hence has returned
the notice with an endorsement of refusal. Now, Mr. Wise has contended that
the no notice was served to him and hence there is no need for him to vacate
the property. As per the provisions of the General Clauses Act, 1897, discuss
whether a notice was served to Mr. Wise. (MTP NOV 2018)

Mr. Vyas is the owner of House No. 20 in Geeta Colony, Delhi. He has
rented two rooms in this house to Mr. Iyer. The Income Tax Authority
has served a show cause notice to Mr. Vyas. The said notice was received
by Mr. Iyer and returned the notice with an endorsement of refusal.
Decide with reference to provisions of "General Clauses Act, 1897”,
whether the notice was rightfully served on Mr. Vyas. (RTP MAY 2020)

Law: According to section 27 of the General Clauses Act, 1897, 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.
Further, on the basis of decision taken by the apex court in case of Jagdish Singh
vs Natthu Singh, where a notice is sent to the landlord by registered post and
the same is returned by the tenant with an endorsement of refusal, it will be
presumed that the notice has been served.

Conclusion: In the given case, the Income Tax Department sent the show cause notice properly by a registered
post at the address which was in the records of the department. Hence, it was a proper service

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of notice. Further, refusal by current owner of house to accept the notice, will not amount
to- that the notice was not properly served by the Income Tax Department. It was the duty
of Mr. Rachit to update his address. Therefore, Income Tax Department is correct in its
decision.

PRACTICAL QUESTION

Question 30 A notice was served on Mr. P for appearing in the court. However, the notice
could not be served on account of the fact that the house of the Mr. P was
found locked. Thus, Mr. P. did not appear in the court at the said date.
Examine the situation as per the provisions of the General Clauses Act, 1897
and determine whether Mr. P. will be liable in the given situation.

(MTP MAY 2019)

Law: According to section 27 of the General Clauses Act, 1897, 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:
(a) properly addressing
(b) pre-paying, and
(c) 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.

Conclusion: Hence, where the where the notice could not be served on account of the fact
that the house of Mr P was found locked, it will be deemed that the notice was
properly served as per the provisions of Section 27 of the General Clauses Act,
and it would be for Mr. P to prove that it was not really served and that he was
not responsible for such non- service.

PRACTICAL QUESTION

Question 31 A notice when required under the Statutory rules to be sent by “registered post
acknowledgment due” is instead sent by “registered post” only. Whether the
protection of presumption regarding serving of notice by “registered post”

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under the General Clauses Act is tenable? Referring to the provisions of the
General Clauses Act, 1897, examine the validity of such notice in this case.
(RTP NOV 2019)(module)

Law: As per the provisions of Section 27 of the General Clauses Act, 1897, 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:
(a) properly addressing,
(b) pre-paying, and
(c) posting by registered post.
Furthermore, in similar case of In United Commercial Bank v. Bhim Sain
Makhija, AIR 1994 Del 181: A notice when required under the statutory rules
to be sent by ‘registered post acknowledgement due’ is instead sent by
‘registered post’ only, the protection of presumption regarding serving of
notice under ‘registered post’ under this section of the Act neither tenable not
based upon sound exposition of law.

Conclusion: Therefore, in view of the above provision, since, the statutory rules itself
provides about the service of notice that a notice when required under said
statutory rules to be sent by ‘registered post acknowledgement due’, then, if
notice was sent by ‘registered post’ only it will not be the compliance of said
rules. However, if such provision was not provided by such statutory rules,
then service of notice if by registered post only shall be deemed to be effected.

PRACTICAL QUESTION

Question 32 Kiran and Naman had a long dispute regarding the ownership of a land for which a
legal suit was pending in the court. The court fixed the date of hearing on
29.04.2023, which was announced to be a holiday subsequently by the Government.
What will be the computation of time of the hearing in this case under the General
Clauses Act, 1897? (MTP Sep. 23)
Law: “Computation of time” [Section 10]:

• Where 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

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• 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.
Note: Nothing in this section shall apply to any act or proceeding to which the Indian
Limitation Act, 1877 applies.

Conclusion: Kiran and Naman can sue when the court reopens

PRACTICAL QUESTION

Question 33 ABC Limited operates a factory situated near a river. As per a recent Central
Act, factories must be located at least 5 kilometers away from any river. A
dispute arises when an environmental agency claims that ABC Limited's factory
is only 4.5 kilometers away from the river, while ABC Limited contends that the
distance is 5.3 kilometers as per the road distance measured along the winding
path leading to the river.
Based on the provisions of the General Clauses Act, 1897, advise whether the
contention of ABC Limited is correct.(4 Marks) (MTP Dec 24)
Law: “Measurement of Distances” [Section 11]:
unless a different intention appears, be measured in a straight line on a horizontal
plane.

Conclusion: In this case, the distance between ABC Limited’s factory and the river must be
measured in a straight line on a horizontal plane, not based on the road or path distance.
The environmental agency's claim that the factory is only 4.5 kilometers away in a
straight line is correct. Since this measurement is less than the required 5 kilometers,
the factory does not comply with the law.Therefore, ABC Limited’s contention is not
correct

PRACTICAL QUESTION

Question 34 Examine the validity of the following statements with reference to the General
Clauses Act, 1897:
Board of Directors of Sabarwal Construction Private Limited authorised by passing
resolution in board meeting Mr. Munim to appoint five employees for accounts

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department of company. Mr. Munim appointed five employees including Mr. Rupal
who was relative of one of the director of company. After one month, Mr. Munim
observed that Mr. Rupal was not performing his duties honestly. Mr. Munim issued
the order of dismissal of Mr. Rupal with proper reasons. Mr. Rupal filed a petition
in the court that his dismissal order is not valid as Board of Directors had authorized
Mr. Munim only for appointment of employees not for dismissal. Whether is Mr.
Rupal correct with his words? (April 22)(4 Marks)

Law: “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 exercise of that power.
Conclusion: No Mr.Rupal is not correct. Since Mr munim has power to appoint employees ,
if nothing is specified he has power to suspend or dismiss employee as well

PRACTICAL QUESTION

Question 35 In 2022, the Central Government enacted the "Digital Communications Act" to
regulate and manage digital communications across the country. The Act provides
specific duties and responsibilities for the Director of Digital Communications,
including the oversight of digital infrastructure, enforcement of regulations, and
ensuring compliance with data protection standards.
In 2023, the Director of Digital Communications, Mr. Arjun Patel, was appointed
to lead the implementation of this Act. However, in January 2024, Mr. Patel took
a medical leave of absence for six months. During his absence, Ms. Priya Sharma,
the Deputy Director of Digital Communications, was lawfully assigned to perform
the duties of the Director.
While Mr. Patel was on leave, a major data breach incident occurred involving a
significant violation of the Digital Communications Act. Ms. Sharma took
immediate action to investigate the breach, enforce penalties, and implement new
compliance measures to prevent future incidents.
The actions taken by Ms. Sharma, while performing the duties of the Director, led
to a legal challenge. The opposing party argued that only the Director, as specified
in the Act, had the authority to enforce such penalties and measures, and that Ms.
Sharma's actions were not valid.
Analyze the validity of Ms. Priya Sharma's actions in the context of the General
Clauses Act, 1897, considering the provisions related to ‘Official chiefs and
subordinates’.(4 Marks) (MTP july 24)

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Law: “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.
Conclusion: In the instant case, Ms. Priya, the Deputy Director of Digital Communications, was
lawfully assigned to perform the duties of the Director. Hence, the actions taken by Ms.
Priya Sharma were valid.

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Chapter XIV
INTERPRETATION OF STATUES
Q Topic

1 Significance of Construction

2 Interpretation vs construction

3 Means vs Includes

4 Grammatical interpretation and exceptions

5 Technical words vs plain meaning

6 Narrower vs broader sense

7 Grammatical vs Logical interpretation – Court’s duties

8 Generalia specialibus Non derogant

9 Nothwithstanding

10 Nothwithstanding

11 Without prejudice

12 Heydon’s case

13 Heydon’s case

14 Mandatory vs directory provision

15 Ejusdem generis

16 Contemporanea Expositio

17 Heading/Title of chapter

18 Preamble

19 Proviso

20 Explanation

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21 Statute as a whole

22 Usage or customs

23 Ambiguous and subject to contrary definition

24 History and foreign decisions

25 Rules to interpret deeds and documents

1."No vehicles are allowed in the park." Comment on the statement, explaining the concept of
'Construction' in legal interpretation. Mention its significance in determining the legal
interpretation. (MTP May 25)

In legal interpretation, ‘construction’ refers to the process of determining the true meaning and intent
behind a statute or legal document. It extends beyond the literal words of the text and considers the
broader legislative purpose, historical context, and other relevant factors. This method helps
courts and legal professionals resolve ambiguities and apply laws in a just and reasonable manner.

As per the stated statement "No vehicles are allowed in the park" can have a strict literal interpretation
which would mean that all types of vehicles, including bicycles, baby strollers, and even
wheelchairs, are prohibited in the park. However, through legal construction, courts may consider
the legislative intent behind the law. If the primary goal is to prevent pollution and ensure pedestrian
safety, the restriction may only apply to motorized vehicles, while bicycles and strollers may still be
allowed.

Significance of Construction in Legal Interpretation:

1. Clarifies Legislative Intent: Construction ensures that laws are interpreted in alignment with
the intention of the lawmakers rather than relying solely on the literal meaning of the
words.
2. Resolves Ambiguities: Many legal texts contain vague or unclear language. Construction helps
eliminate confusion and ensures a consistent application of the law.
3. Ensures Justice: By considering context and broader objectives, legal construction
prevents unfair or unintended consequences that could arise from rigid literal
interpretations.
4. Adapts Laws to Changing Contexts: Societal norms and circumstances evolve over time.
Construction allows laws to be interpreted in a way that remains relevant and applicable to
modern situations.

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2.What are the differences between interpretation and construction in the legal
context, and how do these two concepts relate to each other as per Interpretation of
Statute? (MTP Jan 25)

Difference and Relationship between Interpretation and Construction

In practice construction includes interpretation and the terms are frequently used
synonymously. The two terms- ‘Interpretation’ and ‘Construction’, are used
interchangeably to denote a process adopted by the courts to ascertain the meaning of
the legislature from the words with which it is expressed, these two terms have
different connotations.

Meaning

Interpretation is the art of ascertaining the meaning of words and the true sense in
which the author intended that they should be understood. Construction involves
drawing conclusions beyond the actual expressions used in the text

Court

Thus, where the Court adheres to the plain meaning of the language used by the
legislature, it would be ‘interpretation’ of the words, but where the meaning is not
plain, the court has to decide whether the wording was meant to cover the situation
before the court. I n c o n s t r u c t i o n , court goes beyond the words to understand
intent of legislator

Conclusions drawn

Conclusions drawn by Interpretation are within the letter of law Conclusions

drawn by means of construction are within the spirit though not necessarily within
the letter of the law.

3.Explain the impact of the two words "means" and "includes" in a definition, while
interpreting such definition. (MTP May 24)

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Impact of the words “Means” and “Includes” in the 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.

Example:

Definition of Director [section 2(34) of the Companies Act, 2013]: Director means a director

appointed to the board of a company. The word “means” suggests exhaustive definition.

Definition of Whole time director [Section 2(94) of the Companies Act, 2013]: Whole time
director includes a director in the whole time employment of the company. The word “includes” suggests
extensive definition. Other directors may be included in the category of the whole time director.

4.Define Grammatical Interpretation. What are the exceptions to grammatical

interpretation? (ICAI STUDY MATERIAL)

Grammatical Interpretation and its exceptions

‘Grammatical interpretation’ concerns itself exclusively with the verbal expression of
the law, it does not go beyond the letter of the law. In all ordinary cases, ‘grammatical
interpretation’ is the sole form allowable. The Court cannot take from or add to modify
the letter of the law.
This rule, however, is subject to some exceptions:
(i) Where the letter of the law is logically defective on account of ambiguity,
inconsistency or incompleteness. As regard the defect to ambiguity, the Court is
under a duty to travel beyond the letter of the law so as to determine from the
other sources the true intention of the legislature. In the case of the statutory
expression being defective on account of inconsistency, the court must ascertain
the spirit of the law.
(ii) If the text leads to a result which is so unreasonable that it is self-evident that the
legislature could not mean what it says, the court may resolve such impasse by
inferring logically the intention of the legislature.

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5.Explain the rule which suggests that the 'Plain word requires no explanation'
and 'Technical words be understood in technical sense only’. (PYQ Sep 24)

Rule that suggests ‘Plain Word requires no explanation’

This Rule is called “Rule of Literal Construction”.

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.

This principle is contained in the Latin maxim “absoluta sententia expositore non
indiget” which literally means “an absolute sentence or preposition needs not an
expositor”. In other words, plain words require no explanation.

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.

Technical words are to be understood in a Technical sense only

This point of literal construction is that technical words are understood in the
technical sense only.

In construing the word ‘practice’ in the Supreme Court Advocates Act, 1951, it
was observed that practice of law generally involves the exercise of both the
functions of acting and pleading on behalf of a litigant party. When legislature
confers upon an advocate the right to practice in a court, it is legitimate to
understand that expression as authorizing him to appear and plead as well as to act
on behalf of suitors in that court. (Ashwini Kumar Ghose v. Arabinda Bose AIR
1952 SC 369).

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6.Nehul, a director of a Company, not being personally concerned or interested,

financially or otherwise, in a matter of a proposed motion placed before the Board
Meeting, did not disclose his interest although he has knowledge that his sister is
interested in that proposal. He restrains from making any disclosure of his interest on
the presumption that he is not required by law to disclose any interest as he is not
personally interested or concerned in the proposal. He made his presumption relying on
the 'Rule of Literal Construction'. Explaining the scope of interpretation under this rule
in the given situation, decide whether the decision of Nehul is correct? (3 Marks) (MTP
Sep. 23)

Law - If two interpretation – Narrower & Broader → if the narrower interpretation would fail
to achieve the manifest purpose of the legislation, one should rather adopt the wider one

Conclusion - When we talk of disclosure of ‘the nature of concern or interest, financial or

otherwise’ of a director or the manager of a company in the subject-matter of a proposed
motion (as referred to in section 102 of the Companies Act, 2013), we have to interpret in its
broader sense of referring to any concern or interest containing any information and facts
that may enable members to understand the meaning, scope and implications of the items of
business and to take decisions thereon. What is required is a full and frank disclosure without
reservation or suppression, as, for instance where a son or daughter or father or mother or
brother or sister is concerned in any contract or matter, the shareholders ought fairly to be
informed of it and the material facts disclosed to them. Here a restricted narrow
interpretation would defeat the very purpose of the disclosure.
Therefore , Nehul should also disclose interest of his sister as well

7.Explain the principles of “Grammatical Interpretation” and “Logical Interpretation”

of a Statute. What are the duties of a court in this regard? (ICAI STUDY MATERIAL)

Principles of Grammatical Interpretation and Logical Interpretation: In order to

ascertain the meaning of any law/ statute the principles of Grammatical and Logical
Interpretation is applied to conclude the real meaning of the law and the intention of
the legislature behind enacting it.
Meaning: Grammatical interpretation concerns itself exclusively with the verbal
expression of law. It does not go beyond the letter of the law, whereas Logical
interpretation on the other hand, seeks more satisfactory evidence of the true
intention of the legislature.
Application of the principles in the court: In all ordinary cases, the grammatical
interpretation is the sole form allowable. The court cannot delete or add to modify the
letter of the law. However, where the letter of the law is logically defective on account

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of ambiguity, inconsistency or incompleteness, the court is under a duty to travel

beyond the letter of law so as to determine the true intentions of the legislature. So
that a statute is enforceable at law, however, unreasonable it may be. The duty of the
court is to administer the law as it stands rather it is just or unreasonable.However, if
there are two possible constructions of a clause, the courts may prefer the logical
construction which emerges from the setting in which the clause appears and the
circumstances in which it came to be enacted and also the words used therein

8.What is the meaning and legal significance of the principle "generalia specialibus
non derogant"? Explain with an example. (RTP May 25)

The principle "generalia specialibus non derogant" means that when a general law
and a specific law address the same subject matter, the specific law prevails. This
ensures that specialized laws designed for particular situations are not overridden by
broader, more general provisions.

Example:

1. General Law: "All contracts must be in writing to be legally enforceable."

2. Specific Law: "An oral contract for the sale of goods under ` 5000 is legally
valid."

Here, the general rule states that all contracts must be in writing. However, the
specific rule creates an exception for oral contracts involving goods under `5000.
According to the principle of "generalia specialibus non derogant", the specific rule
will revail in cases involving small-value goods, making oral agreements enforceable
despite the broader general rule.

This principle helps maintain legal clarity by ensuring that specialized provisions are
applied without being overridden by more general laws.

A clause that begins with the words "notwithstanding anything contained" is a clause that
has the effect of making the provision prevail over others. It can operate at four levels.
Explain any two of them.4 Marks (Nov 23 )

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(i)A clause that begins with the words “notwithstanding anything contained” is called a non-
obstante clause. Unlike the “subject to” clause, the notwithstanding clause has the effect of
making the provision prevail over others.
(ii) A notwithstanding clause can operate at four levels
1.Notwithstanding anything contained in another section or sub– section of that statute.- The
clause will override such other section(s) / sub-section(s)
2. Notwithstanding anything contained in a statute.- The clause will override the entire
enactment.
3. Notwithstanding anything contained in specific section(s) or sub-section(s) or all the
provisions contained in another statute. - The clause will prevail over the other enactment.
4. Notwithstanding anything contained in any other law for the time being in force.- The
clause will override all other laws.

10.Imagine you are a legal advisor for a company drafting a new contract. One of the
clauses in the contract states: "Notwithstanding anything contained in any other
provisions of this agreement, the company reserves the right to terminate the
agreement without notice if there is a breach of confidentiality by the employee."
Explain to the management of the company the meaning of a non-obstante clause
in legal documents and its effect on overriding other provisions with reference to
decided case law. (RTP Sep 24)

A clause that begins with the words “notwithstanding anything contained” is called
a non-obstante clause. Unlike the “subject to” clause, the notwithstanding clause has
the effect of making the provision prevail over others. When this term is used then
the clause will prevail over the other provision(s) mentioned therein. (K.
Parasurammaiah v. Pakari Lakshman AIR 1965 AP 220)
In conclusion, a non-obstante clause plays a crucial role in legal drafting by ensuring
that the specified provision prevails over conflicting provisions, thereby enhancing
legal certainty and consistency in judicial interpretation.

11.Explain the meaning of ‘Without Prejudice’ as a Harmonious aid to interpretation of

statutes. Support your answer with the help of an example. (RTP Nov 23)

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When certain particular provisions follow general provisions and when it is stated that the
particular provisions are without prejudice to those general provisions the particular
provisions would not restrict or circumscribe the operation and generality of the preceding
general provisions. In other words, the particular provisions shall operate in addition to and
not in derogation of the general provisions.
Example: Section 4(3) of the Companies Act, 2013, “Without prejudice to the provisions of
sub-section (2), a company shall not be registered with a name which contains ”
This implies that while registering (and deciding) the name of the company [as per section
4(3)], provisions of section 4(2) shall also be operative.

12.Explain the rule in ‘Heydon’s Case’ while interpreting the Statutes quoting an
example. (ICAI STUDY MATERIAL)

(i) Rule - It is Primary rule of interpretation

ii) Meaning- Where statute does not give intended result , Words in statute may be
extended to give intended meaning
(iii) Applicable
i. Where actual law is different but intention of lawmaker is different
ii. Where law was made to grant remedy to a problem
(iv) Not – Applicable – where Language is plain simple, unambiguous and has only 1
meaning and give intended results
(v) How to apply –
Court shall consider:
a) What was the earlier law ?
b) What was the mischief ?
c) What is the remedy ?
d) Reason for the remedy.
Then suppress mischief & advance remedy
(vi) Draftsman – Here it is assumed that draftsman is faulty
(vii) Other Imp Pts. - , it has been emphasized by the Supreme Court that the rule in
Heydon’s case is applicable only when the words used are ambiguous and are

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reasonably capable of more than one meaning [CIT v. Sodra Devi (1957) 32 ITR 615
(SC)].

13.Give four matters 'Mischief Rule' considers in construing an Act

Court shall consider:

a) What was the earlier law ?
b) What was the mischief ?
c) What is the remedy ?
d) Reason for the remedy.

14.Differentiate Mandatory Provision from a Directory Provision. What factors

decide whether a provision is directory or mandatory? (Module)

whether it is mandatory or directory depends upon

i. the nature of the thing empowered to be done,
ii. the object for which it is done, and
iii. the person for whose benefit the power is to be exercised.

15.Enumerate when does the rule of Ejusdem Generis apply. (3 Marks) (MTP
Sep. 22)

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.
Not – Applicable
1. If the preceding term is general, as well as that which follows this rule cannot be
applied.

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2. Where the particular words exhaust the whole genus.

16.Explain the Doctrine of Contemporanea Expositio. (MTP Sep 25)

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 fortissinia 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.

This maxim is to be applied for construing ancient statutes, but not to Acts that are
comparatively modern.

The Latin maxim of 'Optima legum interpres est consuetude' which means that the best
interpreter of laws is custom, has been recognised as one of the oldest principle in construing
statutes.

17.In what way is ‘Heading and Title of a Chapter’ considered as internal aid in
the interpretation of statutes. (MTP May 24)

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.

The headings of different portions of a Statute can be referred to determine the sense
of any doubtful expression in a section ranged under any particular heading.

They cannot control the plain meaning of the words of the enactment though, they
may, in some cases be looked at in the light of preamble if there is any ambiguity in
the meaning of the sections on which they can throw light.

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It may be noted that headings may sometimes be referred to know the scope of a
section in the same way as the preamble. But a heading cannot control or override a
section.

18.When can the Preamble be used as an aid to interpretation of a statute? (MTP Sep
25)(MTP May 25)

Preamble does not over-ride the plain provision of the Act. Comment. Also give suitable
example. (Module)

It Express more comprehensively scope, object and purpose than long title.

Preamble discloses primary intention of legislature but can only be used as aid if
statute is not clear ,

It Does not override sections

It can be used as an aid to interpretation of a statute? (RTP Mar 23) (MTP July
24)

Situation 1: Where there is any ambiguity

Situation 2: Where the words of an enactment appear to be too general

Situation 3 – Where intention cannot be ascertained

Preamble – Example - The preamble of the Hindu Marriage Act, 1955 reads, 'An
Act to amend and codify the law relating to marriage among Hindus'. Section 5
of the Act reads, 'A marriage may be solemnised between any two Hindus...'. A
question arose that whether use of the word 'may' in Section 5 of the Act can be
construed mandatory in the sense that both parties to the marriage must be
Hindus. The court having regard to, inter alia, preamble of the Act held that a
marriage between a Christian male and a Hindu female solemnised under the
Hindu Marriage Act was void. [Gullipoli Sowria Raj v. Bandaru Pavani — (SC)
2009]

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19.What is the effect of proviso? Does it qualify the main provisions of the
enactment? Explain it with reference to Interpretation of Statutes. (MTP Jan 25)

i. 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.

ii. The effect of the proviso is to qualify the preceding enactment which is
expressed in terms which are too general.

iii. As a general rule, a proviso is added to an enactment to qualify or create

an exception to what is in the enactment.

iv. Ordinarily a proviso is not interpreted as stating a general rule.

v. It is a cardinal rule of interpretation that a proviso to a particular

provision of a statute only embraces the field which is covered by the
main provision

20.Write short note on Explanation(MTP Sep 24)

Does an explanation added to a section widen the ambit of a section? (MTP May 25)

Explanation:

i. An Explanation is at times appended to a section to explain the meaning of the

text of the section.

ii. An Explanation may be added to include something within the section or to

exclude something from it.

iii. An Explanation should normally be so read as to harmonise with and clear up

any ambiguity in the main section.

iv. It should not be so construed as to widen the ambit of the section.

v. The meaning to be given to an explanation will really depend upon its terms
and not on any theory of its purpose.

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21.What does the principle of "reading the statute as a whole" imply in the
interpretation of statutes? Explain with the help of an example. (RTP May 24)
(MTP May 24)

(i) 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.
(ii) The deed must be read as a whole in order to ascertain the true meaning of its
several clauses, and to bring them into harmony with other provisions
(iii) Reading statute as a whole helps to give context of other laws and how a
expression is used in enactement
(iv) If we find that a number of such expressions have to be subjected to
limitations and qualifications and that such limitations and qualifications are of the
same nature, that circumstance forms a strong argument for subjecting the
expression in dispute to a similar limitation and qualification.

Example: If one section of an Act requires ‘notice’ should be given, then

a verbal notice would generally be sufficient. But, if another section provides

that ‘notice’ should be ‘served’ on the person or ‘left’ with him, or in a particular
manner or place, then it would obviously indicate that a written notice was
intended.

22.At the time of interpreting a Statute what will be the effect of ‘Usage’ or
‘customs and Practices’? (RTP Jan 25)

Effect of usage: Usage or practice developed under the statute is indicative of the
meaning recognized to its words by contemporary opinion. A uniform notorious
practice continued under an old statute and inaction of the Legislature to amend
the same are important factors to show that the practice so followed was based on
correct understanding of the law. When the usage or practice receives judicial or
legislative approval it gains additional weight.

In this connection, we have to bear in mind two Latin maxims:

1. 'Optima Legum interpres est consuetude' (the custom is the best interpreter of the
law); and

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2. ‘Contemporanea Expositio est optima et fortissinia in lege’ (the best way to

interpret a document is to read it as it would have been read when made).

Therefore, the best interpretation/construction of a statute or any other document is

that which has been made by the contemporary authority. Simply stated, old statutes
and documents should be interpreted as they would have been at the time when they
were enacted/written.

Contemporary official statements throwing light on the construction of a statute and

statutory instruments made under it have been used as contemporanea expositio to
interpret not only ancient but even recent statutes in India.

23.Write short notes on the following in understanding definitions while interpreting

statutes:

1 Ambiguous definitions

2 Definitions subject to a contrary context (MTP Jan 25)

1 Ambiguous definitions: Sometime, we may find that the definition section may
itself be ambiguous, and so it may have to be interpreted in the light of the other
provisions of the Act and having regard to the ordinary meaning of the word defined.
Such type of definition is not to be read in isolation. It must be read in the context of
the phrase which it defines, realising that the function of a definition is to give
accuracy and certainty to a word or phrase which would otherwise be vague and
uncertain but not to contradict it or depose it altogether.

2 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.

24.In what way are the following terms considered as external aid in the interpretation
of statutes:

1. Historical Setting
2. Use of Foreign Decisions (MTP May 24)

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(1) 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.
(2) 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.

25.Gaurav Textile Company Limited has entered into a contract with a Company. You
are invited to read and interpret the document of contract. What rules of
interpretation of deeds and documents would you apply while doing so? (ICAI STUDY
MATERIAL)
The rules regarding interpretation of deeds and documents are as follows:
(i)First and the foremost point that has to be borne in mind is that one has to find out
what 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.
(ii)It is inexpedient to construe the terms of one deed by reference to the terms of
another.
(iii)Further, it is well established that the same word cannot have two different
meanings in the same documents, unless the context compels the adoption of such a
rule.
(iv)The Golden Rule is to ascertain the intention of the parties of the instrument after
considering all the words in the documents/deed concerned in their ordinary, natural
sense. For this purpose, the relevant portions of the document have to be considered
as a whole.
(v)The circumstances in which the particular words have been used have also to be
taken into account. Very often, the status and training of the parties using the words
have also to be taken into account as the same words maybe used by an ordinary

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person in one sense and by a trained person or a specialist in quite another sense and
a special sense.
(vi)It has also to be considered that very many words are used in more than one sense.
It may happen that the same word understood in one sense will give effect to all the
clauses in the deed while taken in another sense might render one or more of the
clauses ineffective. In such a case the word should be understood in the former and
not in the latter sense.
(vii)It may also happen that there Is a conflict between two or more clauses of the
same documents. An effect must be made to resolve the conflict by interpreting the
clauses so that all the clauses are given effect. If, however, it is not possible to give
effect of all of them, then it is the earlier clause that will override the latter one.

Dear students for general Questions on a particular rule follow our class book and its
format…All primary rules are important for exams

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Chapter XV
FEMA
Q Section Topic

1 2 Definition of Authorised person and Currency

2 2 Definition of Foreign exchange

3 2(v) Residential status

4 2(v) Residential status

5 2(v) Residential status

6 2(j) CUAT Definition

7 5 CUAT-Questions

8 5 CUAT-Questions

9 5 CUAT-Questions

10 5 CUAT-Questions

11 5 CUAT-Questions

12 5 CUAT-Questions

13 5 CUAT-Questions

14 5 CUAT-Questions

15 5 CUAT-Questions

16 5 CUAT-Questions

17 5 CUAT-Questions

18 5 CUAT-Questions

19 6 Permissible CAT

20 6 Prohibited CAT
21 6(4) CAT – cannot prohibit

22 6(4) CAT – cannot prohibit

1.Explain the meaning of the followings terms as defined under the Foreign Exchange
Management Act, 1999:

1 Authorised person

2 Currency (MTP Jan 25)

1 Authorised person

According to section 2(c) of the Foreign Exchange Management Act, 1999,

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.

2 Currency

According to section 2(h) of the Foreign Exchange Management Act, 1999,

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.

2.Explain the meaning of term ‘Foreign Exchange’ as per the provisions of the
Foreign Exchange Management Act, 1999.

According to section 2(n) of the Foreign Exchange Management Act, 1999, ‘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.
PRACTICAL QUESTION

Question 3 Ravi, an Indian citizen, works as a software engineer for an international

company. During the previous financial year (2023-2024), Ravi resided in
India for 200 days. However, in April of the current financial year, he
accepted a job offer in Canada and left India with a long-term work visa,
planning to settle in Canada indefinitely.

Analyse the residential status of Ravi for the financial year 2024-2025, as per
the provisions of the Foreign Exchange Management Act, 1999. (RTP Jan
25)

Law: As per section 2(v) of the Foreign Exchange Management Act, 1999, the term
‘person resident in India’ means the following entities:

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

(1) For or on taking up Employment

(2) For carrying on a business or Vacation
For any other purpose in such circumstances as would indicate stay for
an uncertain period.

Conclusion: Ravi's Residential Status: Ravi resided in India for more than 182 days in
the preceding financial year, which would typically qualify him as a "person
resident in India." However, his decision to leave India for long- term
employment in Canada changes his status. According to the provision, a person
who has left India for the purpose of employment abroad is not considered a
"person resident in India" even if they meet the 182-day requirement. Thus,
Ravi does not qualify as a resident for the current financial year.
PRACTICAL QUESTION

Question 4 Mr. P resided in India during the Financial Year 2023-2024. He left India on 15th July 2024
for Switzerland for pursuing higher studies in Biotechnology for 2 years. What would be his
residential status under the Foreign Exchange Management Act, 1999 during the Financial
Years 2024-2025 and 2025-2026?

Mr. P requires every year USD 25,000 towards tuition fees and USD 30,000 for incidental
and stay expenses for studying abroad. Is it possible for Mr. P to get the required Foreign
Exchange and, if so, under what conditions?

Give your answer as per the provisions of the Foreign Exchange Management Act, 1999.
(MTP May 25)

Law: Residential Status: According to section 2(v) of the Foreign Exchange Management
Act, 1999, ‘Person resident in India’ means a person residing in India for more than 182 days
during the course of preceding financial year [Section 2(v)(i)]. However, it does not include
a person who has gone out of India or who stays outside India for employment outside India
or for any other purpose in such circumstances as would indicate his intention to stay outside
India for an uncertain period.

Generally, a student goes out of India for a certain period. In this case, Mr. P who resided in
India during the financial year 2023-2024 left on 15.7.2024 for Switzerland for pursuing
higher studies in Biotechnology for 2 years, he will be resident as he has gone to stay
outside India for a ‘certain period’. RBI has however 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.

Conclusion: Mr. P will be treated as person resident in India for Financial Year 2024-2025 till 16th July
2024 and from 17th July 2024, he will be considered as person resident outside India.

However, during the Financial Year 2025-2026, Mr. P will be considered as person resident
outside India as he left India on 15th July 2024.

Foreign Exchange for studies abroad: According to Para I of Schedule III to Foreign
Exchange Management (Current Account Transactions), Amendment Rule, 2015 dated 26th
May, 2015, individuals can avail of foreign exchange facility for the studies abroad within the
limit of USD 2,50,000 only. Any additional remittance in excess of the said limit shall
require prior approval of the RBI. Further proviso to Para I of Schedule III states that
individual may be allowed remittances (without seeking prior approval of the RBI)
exceeding USD 2,50,000 based on the estimate received from the institution abroad. In this case
 the foreign exchange required is only USD 55,000 per academic year and hence approval of
RBI is not required.

PRACTICAL QUESTION

Question 5 ‘Printex Computer’ is a Singapore based company having several business units
all over the world. It has a unit for manufacturing computer printers with its
Headquarters in Pune. It has a Branch in Dubai which is controlled by the
Headquarters in Pune. What would be the residential status under the FEMA,
1999 of printer units in Pune and that of Dubai branch? (ICAI STUDY MAT)
Law: Section 2(v) defines a 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

Conclusion: Printex Computer being a Singapore based company would be person resident
outside India [(Section 2(w)]. Section 2 (u) defines ‘person’ under clause (viii)
thereof, as 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 clause (i) to (vi). Accordingly, Printex unit in Pune, being a
branch of a company would be a ‘person’.
Section 2(v) defines a 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. Printex unit in Pune
is owned or controlled by a person resident outside India, and hence it, would
be a ‘person resident in India.’
However, Dubai Branch though not owned is controlled by the Printer unit in
Pune which is a person resident in India. Hence, the Dubai Branch is a person
resident in India
 6.Explain the meaning of term ‘Current Account transactions’ as defined under the
Foreign Exchange Management Act, 1999. (MTP Jan 25)

According to section 2(j) of the Foreign Exchange Management Act, 1999, ‘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.

PRACTICAL QUESTION

Question 7 (i) Mr. Amrish has been admitted to a postgraduate program at a foreign
university and intends to join soon. The annual course fee is approximately `
3,50,000. Kindly advise his parents on how they can make the remittance for
the fees under the provisions of the Foreign Exchange Management Act
(FEMA), 1999.

(ii) After completing his studies, Mr. Amrish is employed by a joint venture
of a foreign company in India. The company intends to send him on
deputation to handle business operations abroad. His family resides in India,
and he would like to know if he can remit his salary to support their
maintenance in India. Advise Mr. Amrish as per the provisions of the
Foreign Exchange Management Act, 1999. (RTP May 25)

Law: (i) Under the Foreign Exchange Management Act (FEMA), 1999 read with
the Schedule III of the FEM (Current Account Transactions) Rules, 2000, the
overall limit prescribed is generally USD 250,000. Any additional remittance in
excess of such limit shall require prior approval of the RBI.
 (ii) Under the Foreign Exchange Management Act (FEMA), 1999, Mr.
Amrish can remit his salary earned abroad to his family in India, subject to the
following regulations:

A person (who is resident but not permanently resident in India) 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).

Conclusion: (i) In the given case, the remittance of fees of Amrish for pursuing education
abroad, may avail exchange facility for an amount in excess of the limit
prescribed under the LRS in a Financial Year. In such a case, the applicable
limit for such an individual would be reduced from USD 250,000 by the amount
so remitted.

(ii) As per the stated law, 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.

PRACTICAL QUESTION

Question 8 Mr. Shivesh, an Indian National desires to obtain Foreign Exchange for
the following purposes:

(i) Remittance of US Dollar 50,000 out of winnings on a lottery

ticket.
(ii)US Dollar 100,000 for sending a cultural troupe on a tour of
U.S.A.
Advise him whether he can get Foreign Exchange and if so, under what
conditions? (RTP May 24)

Law: Under provisions of section 5 of the Foreign Exchange Management Act, 1999
certain Rules have been made for drawal of Foreign Exchange for Current
Account transactions. As per these Rules, Foreign Exchange for some of the
Current Account transactions is prohibited. As regards some other Current
Account transactions, Foreign Exchange can be drawn with prior permission
of the Central Government while in case of some Current Account
transactions, prior permission of Reserve Bank of India is required.
 1. Remittance out of lottery winnings is prohibited as the same is included
in First Schedule to the Foreign Exchange Management (Current
Account Transactions) Rules, 2000. Hence, Mr. Shivesh cannot
withdraw Foreign Exchange for this purpose.
2. Foreign Exchange for meeting expenses of cultural tour can be
withdrawn by any person after obtaining permission from Government
of India, Ministry of Human Resources Development, (Department of
Education and Culture) as prescribed in Second Schedule to the Foreign
Exchange Management (Current Account Transactions) Rules, 2000.
Hence, Mr. Shivesh can withdraw the Foreign Exchange after obtaining
such permission.
Conclusion: In all the cases, where remittance of Foreign Exchange is allowed, either by
general or specific permission, the remitter has to obtain the Foreign Exchange
from an Authorised Person as defined in Section 2(c).

PRACTICAL QUESTION

Question 9 Mitali Diamonds Limited is a company engaged in the business of cutting,

polishing and trading of diamonds in and outside India. The company
exports the diamonds to USA. For the last five financial years, the foreign
exchange earned by the company in exporting diamonds is as under:

FY 2023-24 USD 1,25,000

FY 2022-23 USD 1,10,000

FY 2021-22 USD 95,000

FY 2020-21 USD 98,000

FY 2019-20 USD 93,000

The company wants to give donation of USD 10,000 to an institution

situated in USA which provides technical support and training in the field of
cutting and polishing of raw diamonds. This will help the company in
guiding its own employees, posted in USA to get the requisite training.

Referring to the provisions of the Foreign Exchange Management Act, 1999,

state whether the company can give donation to such institution in USA?
(PYQ Sep 24)
Law: As per Schedule III to the Foreign Exchange Management Act, 1999,
remittances by persons other than individuals shall require prior approval
of the Reserve Bank of India, for donations exceeding 1% of their foreign
exchange earnings during the previous three financial years or USD
5,000,000, whichever is less, for:

• Creation of Chairs in reputed Educational Institutes,

• Contribution to Funds (not being an investment fund) promoted by
Educational Institutes; and
• Contribution to a Technical Institution or Body or Association in the
field of activity of the Donor Company.

Conclusion: In the given question, Mitali Diamonds Limited can donate lower of
USD 3,300 [1% of (1,25,000 + 1,10,000 + 95,000)] or USD 5,000,000.

Thus, Mitali Diamonds Limited can give a donation of USD 3,300

without RBI approval and for USD 10,000 it shall require prior approval of the
Reserve Bank of India to the said institution as this institution is a
Technical Institution or Body or Association in the field of activity of the
Donor Company.

PRACTICAL QUESTION

Question 10 Analyse the below mentioned situation in the light of the provisions of the
Foreign Exchange Management Act, 1999.

1. Mr. New has won a big lottery and wants to remit US Dollar 20,000 out of
his winnings to his son who is in Singapore.

2. Mr. Manoj requires US Dollar 5,000 for remittance towards hiring charges
of transponders. (MTP May 25)

Law: According to section 5 of the Foreign Exchange Management Act, 1999, any person
may sell or draw foreign exchange to or from an authorized person if such a sale or drawal
is a current account transaction. Provided that Central Government may, in public interest
and in consultation with the reserve bank, impose such reasonable restrictions for current
account transactions as may be prescribed.
 As per the rules, drawal of foreign exchange for current account transactions are categorized
under three headings-

1. Transactions for which drawal of foreign exchange is prohibited,

2. Transactions which need prior approval of appropriate government of India for
drawal of foreign exchange, and
3. Transactions which require RBI's prior approval for drawl of foreign exchange.

Conclusion: (1) Mr. New wanted to remit US Dollar 20,000 out of his lottery winnings to
his son residing in Singapore. Such remittance is prohibited and the same is
included in the Foreign Exchange Management (Current Account Transactions)
Rules, 2000.

Hence Mr. New cannot withdraw foreign exchange for this purpose.

(2) In the given situation, it is a current account transaction, where Mr. Manoj
is required to take approval of the Central Government for drawal of foreign
exchange for remittance of hire charges of transponders.

PRACTICAL QUESTION

Question 11 Examine the given situations in the light of the FEMA, 1999:

1. LMN Ltd. had total foreign exchange earnings of USD 600 million in the last three
financial years. What is the maximum amount the company can donate without
RBI approval?
2. STU Ltd. had foreign exchange earnings of USD 250 million over the last three
financial years. It plans to donate USD 3 million to a university fund. Does it need
RBI approval? (MTP May 25)

Law: The given situations can be examined in the light of the Schedule II of the FEM (Current
Account Transactions) Rules, 2000. According to the Regulation, wherever, Donations
exceeding one per cent. of their foreign exchange earnings during the previous three
financial years or USD 5,000,000, whichever is less, it shall require prior approval of RBI.
Conclusion: Accordingly, following shall be the answers:

1. 1% of Foreign Exchange Earnings = (1/100) × 600 million = USD 6 million USD 5

million limit (whichever is less) applies.

Since USD 5 million is less than USD 6 million, LMN Ltd. can donate up to USD 5
million without RBI approval.

2. 1% of Foreign Exchange Earnings = (1/100) × 250 million = USD 2.5 million

Maximum limit before requiring RBI approval = Lesser of USD 2.5 million or USD 5
million = USD 2.5 million

Since USD 3 million exceeds the limit of USD 2.5 million, STU Ltd. needs RBI approval.

PRACTICAL QUESTION

Question 12 Referring to the provisions of the Foreign Exchange Management Act, 1999,
state the kind of approval required for the following transactions:

1. A requires U.S. $ 5,000 for remittance towards hiring charges of

transponders.
2. B requires U.S. $ 2,000 for payment related to call back services of
telephones. (MTP Jan 25)

Law: Under provisions of section 5 of the Foreign Exchange Management Act, 1999
certain Rules have been made for drawal of Foreign Exchange for Current
Account transactions. As per these Rules, Foreign Exchange for some of the
Current Account transactions is prohibited. As regards some other Current
Account transactions, Foreign Exchange can be drawn with prior permission
of the Central Government while in case of some Current Account transactions,
prior permission of Reserve Bank of India is required.

Conclusion: Accordingly,

1. It is a current account transaction, where A is required to take approval of

the Central Government for drawal of foreign exchange for remittance of hire
charges of transponders.
 2. Withdrawal of foreign exchange for payment related to call back services of
telephone is a prohibited transaction. Hence, Mr. B cannot obtain US $ 2,000
for the said purpose.

In all the cases, where remittance of Foreign Exchange is allowed, either by

general or specific permission, the remitter has to obtain the Foreign Exchange
from an Authorised Person.

PRACTICAL QUESTION

Question 13 Mr. A, an Indian National desires to obtain Foreign Exchange for the
following purposes:

1. Remittance of US Dollar 50,000 out of winnings on a lottery ticket.

2. US Dollar 100,000 for sending a cultural troupe on a tour of U.S.A.

Advise him whether he can get Foreign Exchange and if so, under what
conditions?

Law: Under provisions of section 5 of the Foreign Exchange Management Act, 1999
certain Rules have been made for drawal of Foreign Exchange for Current
Account transactions. As per these Rules, Foreign Exchange for some of the
Current Account transactions is prohibited. As regards some other Current
Account transactions, Foreign Exchange can be drawn with prior permission
of the Central Government while in case of some Current Account transactions,
prior permission of Reserve Bank of India is required.

Conclusion: (1) In respect of item No.(i), i.e., remittance out of lottery winnings, such
remittance is prohibited and the same is included in First Schedule to the
Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Hence, Mr. A cannot withdraw Foreign Exchange for this purpose.

(2) Foreign Exchange for meeting expenses of cultural tour can be withdrawn
by any person after obtaining permission from Government of India, Ministry
of Human Resources Development, (Department of Education and Culture) as
prescribed in Second Schedule to the Foreign Exchange Management (Current
Account Transactions) Rules, 2000. Hence, in respect of item (ii), Mr. A can
withdraw the Foreign Exchange after obtaining such permission.
 In all the cases, where remittance of Foreign Exchange is allowed, either by
general or specific permission, the remitter has to obtain the Foreign Exchange
from an Authorised Person.

PRACTICAL QUESTION

Question 14 Mr. Pravesh, an Indian National desires to obtain Foreign Exchange for the
following purposes:

1) US$ 140,000 for studies abroad on the basis of estimates given by the
foreign university.
2) U.S. $ 10,000 for remittance towards hiring charges of transponders.
Advise him whether he can get Foreign Exchange, as per the provisions of the
Foreign Exchange Management Act, 1999. (MTP May 24)

Law: (i) Remittance of Foreign Exchange for studies abroad: According to the
provisions of the Foreign Exchange Management Act, 1999, foreign exchange may be released
for studies abroad up to a limit of US $ 250,000 for the studies abroad without any
permission from the Reserve Bank of India (RBI). Above this limit, RBI’s prior approval is
required. Further, proviso to Para I of Schedule III states that individual may be allowed
remittances exceeding USD 250,000 based on the estimate received from the institution
abroad.

(ii)Under section 5 of the Foreign Exchange Management Act, 1999, and Rules relating
thereto, some current account transactions require prior approval of the Central Government,
some others require the prior approval of the Reserve Bank of India, some are freely
permitted transactions and some others are prohibited transactions.

Conclusion: (i) In this case since US $ 140,000 is the drawal of foreign exchange, so permission of the
RBI is not required by Mr. Pravesh.

(ii)This is a current account transaction, where Pravesh is required to take approval of the Central
Government for drawal of foreign exchange for remittance of hire charges of transponders.

In all the cases, where remittance of Foreign Exchange is allowed, either by general or specific
permission, the remitter has to obtain the Foreign Exchange from an Authorised Person as
defined in Section 2(c).
PRACTICAL QUESTION

Question 15 Ms. Prabha, a classical dancer of Bharatnatyam, wants to go to the USA for a
performance. In this connection she requires foreign exchange drawal of US$
50,000. Explain Ms. Prabha, the provision of the Foreign Exchange
Management Act, 1999, in respect of permission required for such drawal of
foreign exchange. (MTP May 24)

Law: According to the provisions of the Foreign Exchange Management Act, 1999 read with
respective Rules and Schedule, foreign exchange drawals for cultural tours require prior
permission/approval of the Ministry of Human Resources Development (Department of
Education and Culture) irrespective of the amount of foreign exchange required.

Conclusion: Therefore, in the given case, Ms. Prabha is required to seek permission of the said Ministry of
the Government of India.

PRACTICAL QUESTION

Question 16 Mr. Rohan Sharma, an international cricket player has started its cricket
academy, namely, Rohan Sharma Cricket Academy, a private coaching club,
which provides coaching for cricket. The Academy has a cricket team which
participates in cricket matches all over India as well as outside India.

Rohan Sharma Cricket Academy in a collaboration with Melbourne Cricket

Academy is organizing a cricket event in Melbourne, Australia in the month of
May 2024 and June 2024. Rohan Sharma Academy is required to remit USD
200,000 to Melbourne Cricket academy as a part of its share for organizing
the cricket event in Melbourne. Advise whether it can get Foreign Exchange
and if so, under what conditions? (MTP May 24)

Law: Section 5 of the Foreign Exchange Management Act, 1999 provides that any
person may sell or draw foreign exchange to or from an authorized person if
such sale or drawal is a current account transaction. The Central Government
in consultation can, in public interest and in consultation with Reserve Bank of
India, impose reasonable restrictions for such transactions.

Schedule II of the Foreign Exchange Management (Current Account

Transactions) Rules, 2000 provides that no person shall draw foreign
exchange for a transaction without approval of the Central Government. One
of the transaction included in Schedule II is remittance of prize money/
 sponsorship of sports activity abroad by a person other than International/
National/ State level sports bodies, if the amount involved exceeds USD
100,000.

Conclusion: Accordingly, Rohan Sharma Cricket Academy can withdraw foreign exchange
of USD 100,000 as participation fee after obtaining permission from Ministry
of Human Resource Development (Department of Youth Affairs and Sports) as
prescribed in Schedule II of Foreign Exchange Management (Current Account
Transactions) Rules, 2000.

PRACTICAL QUESTION

Question 17 University of Oxford is one of the leading institutes of UK. In the month
of May 2024, they are planning a cultural event in UK. The University
has invited Ms. Kanika Tripathi and her group, an Indian artist to perform in
the event.

Ms. Kanika Tripathi needs to withdrawal foreign exchange of USD

75,000 for the purpose of visit to UK for performing at cultural event of
University of Oxford in UK. Advise whether she can withdraw Foreign
Exchange and if so, under what conditions?

Law: Section 5 of the Foreign Exchange Management Act, 1999 provides that any
person may sell or draw foreign exchange to or from an authorized person if
such sale or drawal is a current account transaction. The Central Government
in consultation can, in public interest and in consultation with Reserve Bank of
India, impose reasonable restrictions for such transactions.

Schedule II of the Foreign Exchange Management (Current Account

Transactions) Rules, 2000 provides that no person shall draw foreign
exchange for a transaction without approval of the Central Government. One
of the transaction included in Schedule II is ‘cultural tours’.

Conclusion: Accordingly, Ms. Kanika Tripathi can withdraw foreign exchange of USD
75,000 for meeting expenses of cultural tour after obtaining permission from
Ministry of Human Resource Development (Department of Education and
Culture) as prescribed in Schedule II of Foreign Exchange Management
(Current Account Transactions) Rules, 2000.
18.Referring to the provisions of the Foreign Exchange Management Act, 1999, state
the kind of approval required for Payment of commission of U.S. $ 20,000 on
exports made towards equity investment in Joint Ventures/Wholly Owned
Subsidiaries abroad of Indian companies.

Under provisions of section 5 of the Foreign Exchange Management Act, 1999 certain
Rules have been made for drawal of Foreign Exchange for Current Account
transactions. As per these Rules, Foreign Exchange for some of the Current Account
transactions is prohibited. As regards some other Current Account transactions,
Foreign Exchange can be drawn with prior permission of the Central Government
while in case of some Current Account transactions, prior permission of Reserve
Bank of India is required.

Accordingly, Payment of commission on exports made towards equity investment in

Joint Ventures/ Wholly Owned Subsidiaries abroad of Indian companies, is a
transactions for which drawal of foreign exchange is prohibited.

In all the cases, where remittance of Foreign Exchange is allowed, either by general or
specific permission, the remitter has to obtain the Foreign Exchange from an
Authorised Person.

19.List any seven permissible classes of Capital account transactions that a person
resident in India can undertake, under the Foreign Exchange Management Act
(FEMA), 1999. (MTP May 25)

The list of permissible classes of transactions made by persons resident in India is:

1. Investment by a person resident in India in foreign securities.

2. Foreign currency loans raised in India and abroad by a person resident in India.
3. Transfer of immovable property outside India by a person resident in India.
4. Guarantees issued by a person resident in India in favour of a person resident
outside India.
5. Export, import and holding of currency/currency notes.
6. Loans and overdrafts (borrowings) by a person resident in India from a person
resident outside India.
7. Maintenance of foreign currency accounts in India and outside India by a person
resident in India.
8. Taking out of insurance policy by a person resident in India from an
insurance company outside India.
 9. Loans and overdrafts by a person resident in India to a person resident outside
India.
10. Remittance outside India of capital assets of a person resident in India.
11. Undertake derivative contracts

20.Analyse the following situations and comment upon the legal validity of the transactions in
the light of the FEMA,1999.

1. John, a foreign national (not of Indian origin), wants to buy agricultural land in India.
2. An NRI wants to open a fixed deposit account in an Indian bank using foreign currency.
(MTP May 25)

(1) No, said transaction cannot take place being invalid in nature. As per the Foreign Exchange
Management (Permissible Capital Account Transactions) Regulations, 2000, 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 in agricultural. Therefore, John cannot buy an agricultural land in India.

(2) Yes, the given statement or act of a NRI is valid under Schedule II(e) of the Foreign
Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.
According to which deposits between a resident and a non-resident are permitted. So, NRI can
open NRE (Non- Resident External) or FCNR (Foreign Currency Non-Resident) deposit
accounts in India, which allow foreign currency deposits.

PRACTICAL QUESTION

Question 21 Mr. Arjun, an Indian resident, had been working abroad for the past 10 years.
During his tenure abroad, he acquired foreign currency and held investments in
foreign securities. He also inherited a property located in New York from his
late grandfather, who was a non-resident Indian. After returning to India
permanently, Mr. Arjun wishes to understand the provisions under the Foreign
Exchange Management Act, 1999 (FEMA) regarding the ownership and
utilization of his foreign assets. (RTP Sep 24)

Law: Under the provisions of the Foreign Exchange Management Act, 1999 (FEMA),
Mr. Arjun, being a resident in India, can hold, own, transfer, or invest in foreign
 currency, foreign securities, or immovable property situated outside India under
certain conditions. These conditions are clarified by the RBI through A.P. (DIR
Series) Circular No. 90 dated 9th January, 2014, which elaborates on section
6(4) of the Act.

Clarifications under section 6(4) of FEMA

1 Foreign Currency Accounts

o Mr. Arjun can maintain foreign currency accounts that

were opened and maintained by him when he was
resident outside India.
2 Income and Investments

o Income earned through employment, business, or

vocation outside India while Mr. Arjun was a non-
resident.
o Investments made abroad during his non-resident status.
o Gifts or inheritance received from a non-resident Indian.
3 Foreign Exchange and Income therefrom

o Foreign exchange holdings, including income arising

from them, held outside India by Mr. Arjun, acquired
through inheritance from a non-resident Indian.
4 Utilization of Assets After Return to India

o Mr. Arjun may freely utilize all eligible assets abroad,

including the income on such assets or sale proceeds
received after his return to India.
o He can make payments or fresh investments abroad
without the approval of the Reserve Bank of India,
provided the funds used are from eligible assets held
by him abroad and the transaction complies with
FEMA provisions.

Conclusion: Therefore, Mr. Arjun is eligible to hold and utilize his foreign assets as per the
provisions outlined in section 6(4) of FEMA and the RBI circular. These
provisions allow him to manage his foreign currency, securities, and inherited
property located outside India in compliance with the regulations governing
residents' dealings in foreign assets under FEMA.
PRACTICAL QUESTION

Question 22 Ms. Rose was an Indian citizen who got a job in a software company in
USA. She went to USA and stayed there for 12 years. During her stay, she
purchased a house in USA for her residence. Then due to some personal
issues she moved back to India and joined a software company in India. As
she had moved back to India, she let out her house in USA and deposited
the rent in her account in USA. Out of that amount, she purchased another
house in USA.

Based on the above facts, answer the following referring to the provisions of
the Foreign Exchange Management Act, 1999.

1. Whether Ms. Rose can purchase the house in USA and continue to
retain it even after returning to India?
2. Whether Ms. Rose can purchase another house in USA after
returning to India? (PYQ Sep 24)

Law: (1) Can Ms. Rose purchase the house in USA and continue to retain it even
after returning to India?

According to section 6(4) of the Foreign Exchange Management Act, 1999,

(the Act) 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.

(2) Can Ms. Rose purchase another house in USA after returning to India?

Ms. Rose deposited the amount of rent from the house to her account in
USA. Out of that amount she purchased another house in USA after returning
to India. Ms. Rose is a person resident in India due to joining an
employment in India.

As per section 6(4)(iv) of the Foreign Exchange Management Act, 1999

(FEMA), 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 her and the
transactions is not in contravention to extant FEMA provisions.

Conclusion: (1) Ms. Rose stayed in USA for 12 years, hence she must have become a
non–resident for those years. She purchased a house during this time.

As per the above provisions, Ms. Rose can rightfully purchase the
house in USA and continue to retain it after returning to India.

(2) In view of the above, Ms. Rose can rightfully purchase another house
in USA after returning to India.