INDEX

PART A –: COMPANY LAW – PRINCIPLES AND CONCEPTS

CHAP – 1 INTRODUCTION TO COMPANY LAW 01-24

CHAP – 2 LEGAL STATUS AND TYPES OF REGISTERED COMPANIES 25 - 63
CHAP – 3 MEMORANDUM AND ARTICLES OF ASSOCIATION AND ITS ALTERATION 64 - 106
CHAP – 4 SHARE AND SHARE CAPITAL – CONCEPTS 107– 169

CHAP – 5 MEMBERS AND SHAREHOLDERS 170- 190

CHAP – 6 DEBT INSTRUMENTS – CONCEPTS 191- 215
CHAP – 7 CHARGES 216- 233
CHAP – 8 DISTRIBUTION OF PROFITS 234- 251
CHAP – 9 ACCOUNTS AND AUDITORS 252-275

CHAP – 10 COMPROMISE, ARRANGEMENT AND AMALGATION – CONCEPTS 276-293

CHAP – 11 DORMANT COMPANY 294-301
CHAP – 12 INSPECTION, INQUIRY AND INVESTIGATION 302-315

PART B –: COMPANY ADMINISTRATION AND MEETINGS

CHAP – 13 GENERAL MEETINGS 317-350
CHAP – 14 DIRECTORS 351-384
CHAP – 15 BOARD COMPOSITION AND POWERS OF THE BOARD 385-413
CHAP – 16 MEETINGS OF BOARD AND ITS COMMITTEES 414-427
CHAP – 17 COPORATE SOCIAL RESPONSIBILITY – CONCEPTS 428-438

CHAP – 18 ANNUAL REPORT – CONCEPTS 439-459

CHAP – 19 KEY MANAGERIAL PERSONS AND THEIR REMUNERATION 460-476
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CHAPTER – 1

INTRODUCTION TO COMPANY LAW

INTRODUCTION
The word ‘company’ derived from the LATIN WORD (COM- with or together ; PANIS – bread). And it
refers to an association of persons who took their meals together.

Company is an association of both artificial and natural persons incorporated under the existing law.

This Photo by Unknown Author is licensed under CC BY-

COMPANY – DEFINITION
Section - 2(20): 'Company' means a company incorporated under this Act or under any
previous company law.

COMPANY

REGISTERED UNDER
THE COMPANIES
REGISTERED UNDER THE
ACT,2013
PREVIOUS COMPANIES
ACT.
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APPLICABILITY OF COMPANIES ACT, 2013

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

(a) Companies incorporated under this Act or under any previous company law;
(b) Insurance companies, except in so far as the said provisions are inconsistent with the
provisions of the Insurance Act, 1938 (4 of 1938) or the Insurance Regulatory and
Development Authority Act, 1999

(c) Banking companies, except in so far as the said provisions are inconsistent with the
provisions of the Banking Regulation Act, 1949
(d) Companies engaged in the generation or supply of electricity, except in so far as the said
provisions are inconsistent with the provisions of the Electricity Act, 2003
(e) Any other company governed by any special Act for the time being in force, except in so
far as the said provisions are inconsistent with the provisions of such special Act; and
(f) Such body corporate, incorporated by any Act for the time being in force, as the Central
Government may, by notification, specify in this behalf, subject to such exceptions,
modifications or adaptation, as may be specified in the notification.

DOCTRINE OF ULTRA VIRES [ mere khilaf nhi ja skte]

Ultra vires is a Latin term made up of two words “ultra” which means beyond and “vires”
meaning or authority.
Ultra vires acts are any acts that lie beyond the authority of a company to perform.
[COMPANY KI AUTHORITY KE BHAR JAKE ACT KRNA]

Ultra vires acts divided into following three divisions –

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ULTRA VIRES
THE COMPANIES ACT

ULTRA VIRES
THE MEMORANDUM OF ASSOCIATION

ULTRA VIRES
THE ARTICLES OF ASSOCIATION

ULTRA VIRES the Companies Act [Companies Act ke scope ke bhar act krna]
 Any act done contrary to or in excess of the scope of activity of the Companies Act will be
ULTRA VIRES the Companies Act.
 Such an act is void and cannot be ratified even by Unanimous Resolution of all the
shareholders.
 It also declares a provisions contained in the memorandum, articles, agreement or resolutions
void if it is contrary to any provisions of the act.
 FOR EXAMPLE – if board members are appointed or removed without following the statutory
provisions.
[company ka koi bhi provision jo uske moa, aoa me likha h ya kisi article, agreement or
resolution me likha h void/ultra vires hoga if wo companies act ke contradictory h]

What is Memorandum of
ULTRA VIRES the Memorandum of Association?
Association It is the document listing out
the constitution of a company.
 The memorandum of association of company
restricts the powers of a company while It contains clauses detailing
defining the object of the company. the boundaries of company’s
activities and its relation with
 A company can’t do anything, which is
outside world.
beyond the purview of the object clause.
 Any act done in contrary to object to the object clause will be ULTRA VIRES to the
Memorandum.
 Such ultra vires act is void and does not bind the company. Neither the company nor
the contracting party can sue on it.
 Such an act can’t be ratified even by unanimous resolution of all the shareholders.
[koi bhi act if company ke moa ke object clause ke andar nhi h to wo void h aur
company uske liye liable nhi hogi]
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What is Articles of Association?

ULTRA VIRES the Articles of SECTION 5(1) OF THE COMPANIES ACT,
Association 2013 – It shall contain the bye laws
and regulations for the management
 If a company acts which are ultra vires the of the internal affairs of the company.
Articles of Association but intra vires the It plays a vital role in governing a
memorandum of association (i.e. outside company’s affairs.
the scope of the articles but within the
powers of the memorandum) will be ultra
vires the articles of association.
 These acts are also void, but the company in general meeting may alter the articles by
passing a special resolution and ratify the unauthorized acts.
 The general rule is that the act which is ultra vires the company is incapable of
ratification. An act which is intra vires the company but outside the authority of the
directors may be ratified by the company in proper form.
[ if koi act AOA ke bhar h but MOA ki authority me h to wo void honge but company
unko general meeting me SR pass krke rectify kr skti ]

CASELAWS

 Re. South Durham Brewery Company

 The MOA of the company was unclear as to the classes of the shares to be issued
by it, but the AOA of the company gave power to issue shares of different
classes as described therein.
 The Hon’ble Court held that Articles can be used to explain the ambiguity
contained in the memorandum.
[ in this case – company ke moa me different classes of shares issue krne ke liye
clarity nhi thi but aoa me describe thi ye power so court ne decide kiya articles ko
use krne ke liye.]

 Ashbury Railway Carriage and iron co. ltd. V. Riche

FACTS –
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In the given case law The objects for which the company is established are to make and
sell, or lend or hire, railway plants to carry on the business of mechanical engineers and general
contractors.

The company entered into a contract with M/s. Riche to finance the construction of a
railway line in Belgium and after sometime the company repudiate the contract on the ground that
it is ultra vires after that riche sued company for damages of breach of contract as according to
him the words “general contractors” in the objects clause gave power to the company to enter
into such a contract and, therefore, it was within the powers of the company.

[ company m/s riche ke sath ek railway line ko finance krne ke contract me enter
hoti h and kuch time ke bad contract tod deti ye khke ki ye contract ultra vires hai
but m/s riche company pr case krta h aur breach of contract ke damages mangta
h ye khke ki company ke object clause me general contractors likha h aur
company ke shareholders ne bhi rectify kiya h jiske according ye contract valid h
aur company ke power me h ]

JUDGEMENT –
 The House of Lords held that the contract was ultra vires the company and,
therefore, null and void. The court said that even the shareholders of the
company rectify the contract but it is still ultra vires because it is beyond
the object clause of the company.
[ court ne bhi ultra vires act kha company ke contract ko and decision diya
ki doctrine of ultra vires presumed hota h jb tk specifically prohibit na kiya
jaye ]

LOANS, BORROWINGS, GUARRANTEES AND ULTRA VIRES RULE

 An ultra vires borrowing does not create a relationship of a debtor and creditor.
 In case the company accepted the deposits from outsiders which was outside the
scope of the memorandum the relationship between the company and the depositors
was not that of creditor and debtors. But if the lender had lent the amount for
discharging lawful expenses, he may recover the amount.
[ if company ne outsiders se deposit accept kiye h moa ke scope kr bhar to wo
company aur depositors ke bich me debtor or creditor ka relation ni hoga ]
 Whether a transaction is ultra vires the company can be decided on the following
basis :-
1) if a transaction entered into by a company falls within the objects, it
is not ultra vires and hence not void
2) if a transaction is outside the capacity (objects) of the company, it is
ultra vires;
3) if a transaction is in excess or abuse of the company’s powers, it is
ultra vires and such transaction will be set aside by the shareholders
or even ratification by the shareholders would not validate the acts
done beyond the authority of the company itself.
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IMPLIED POWERS
 The powers exercisable by the company are to be confined to the objects specified in
the memorandum. While the objects of the company are to be specified the powers
exercisable need not to be express or implied.
 Every company may necessarily posses some powers which are implied, such as, a
power to appoint and act through agents. Such powers are incidental and can be
inferred from the powers of the memorandum.

POWERS WHICH ARE NOT IMPLIED

The following powers have been held not to be implied and it is, therefore, prudent
to include them expressly in the objects clauses:-
 acquiring any business similar to the company’s own business.
 entering into an agreement with other persons or companies for carrying on
business in partnership or for sharing profit, joint venture or other
arrangements.
 taking shares in other companies having similar objects.
 taking shares of other companies where such investment authorizes the
doing indirectly that which will not be intra vires if done directly
 promoting other companies or helping them financially.
 a power to sell and dispose of the whole of a company’s undertaking
 a power to use funds for political purposes
 a power to give gifts and make donations or contribution for charities not
relating to the objects state.

SHAREHOLDER’S RIGHT IN RESPECT OF ULTRA VIRES ACTS

 A shareholder can get back the money paid by him to the company under an ultra
vires allotment of shares.
 A transferee of shares would have not been allowed.
[ shareholders ko ultra vires allotment ke against money return ho jyega ]

EFFECTS OF ULTRA VIRES TRANSACTIONS

1) Void ab initio – Ultra vires contracts are void ab initio and hence cannot
become intra vires by reason of estoppel or ratification.[starting se void
hota or ratify ke baad bhi valid nhi hota]
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2) Injunction - The members can get an injunction to restrain a company

wherein ultra vires act has been or is about to be undertaken. [members
company pr injunction lga skte]

3) Personal liability of Directors – It is the duty of directors to ensure that

corporate capital is used for business purpose only if capital is diverted the
directors will be personally liable for it. [company ki capital business ke
alwa kisi or purpose m use hui to director personal liable h]

4) Where a company’s money has been used ultra vires to acquire some
property, the company’s right over such property is held secure and the
company will be the right party to protect the property because the
property represents the money of the company.[company ke money se
ultra vires act kiya or koi property li to company ka property pr valid right
h]

5) Ultra vires borrowing does not create the relationship of the debtor and
creditors.

EXCEPTIONS TO THE DOCTRINE OF ULTRA VIRES

Any act which is if any act deemed to

performed be within the
irregularly, but authority of the
otherwise it is intra company by the
vires to the company companies act then
can be validate by they will not be
shareholders in considered as ultra
general meeting. vires.

any incidental or any act which is

consequentisal effect outside the authority
of the ultra vires act of the directors of
will not be invalid the company but not
unless the otherwise it is intra
companies act vires the company
expressely prohibts can be ratified it by
such act. shareholders.
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DOCTRINE OF INDOOR MANAGEMENT [tumhare ghar ke

kaam me kyu dekhu]

 The principal of indoor management operates to protect the outsiders against

the company. It is also known as TURQUAND RULE.
 If an outsider whose actions are in good faith and has entered into a transaction
with the company can have a presumption that the procedural requirements
have been complied by the company.
[ Ye doctrine outsiders ko protect krta h company se jo good faith me transaction
me enter hote h company ke sath]
 SECTION 176 of Companies Act 2013 provides for the validity of acts of directors
– The object of this section is to protect the outsiders dealing with the company
by providing that the acts of the persons acting as directors will be treated as
valid although it may afterwards be found that his appointment was invalid or
that it had been terminated under any provisions of the act or the articles.

EXAMPLE - Question: Planet Limited received a cheque from Earth Limited. The Articles
of Association of Earth Limited provided that cheques issued by the company need to
be signed by two directors and countersigned by the secretary. The directors nor the
secretary who signed the cheque was appointed properly and thus the cheque issued
was not valid. Planet Limited sued the company for the irregularities in the procedure.
Is Planet Limited liable for relief?

Answer: Planet Limited is entitled to relief and the company has to pay the amount of
the cheque since the
appointment of directors is a part of the internal management of the company and a
person dealing with the company is not required to enquire about it.
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CASE LAW [ROYAL BRITISH TANK v. TURQUAND]

FACTS - The directors of a banking company were authorized by the articles to borrow
money by bonds by passing a resolution in general meeting but directors gave bond to
turquand without resolution. [ banking company ke directors ko authority di gyi ki wo
money ke liye bonds issue kr skte but resolution pass krke lekin directors bina resolution
ke bond issue kr dete ]

DECISION - It was held that Turquand could sue the company on the strength of the bond,
as he was entitled to assume that the necessary resolution had been passed. Lord Hatherly
observed:
“Outsiders are bound to know the external position of the company but are not bound to
know its indoor management”. [ turquand ne company ko sued kr diya because usne
assume kiya ki resolution pass hogya h aur court ne same grounds pr turquand ke favor m
decision diya ]

DIRECTORS NOT AWARE OF THEIR DISQUALIFICATION

CASE LAW CASE LAW CASE LAW

[Shiromani sugar mills [BAMFORD V. [Seth mohanlal V.
ltd. V. Devi prasad] BAMFORD] Green chambers ltd.]

Where the directors in

The allotment and This section does not question were not aware of
forfeiture of shares made apply if the company the fact that by virtue of
by the directors who may in general meeting certain provisions in the
continued to act even articles, they had vacated
after they were
ratify allotment of their office, their acts in
disqualified but were not shares even if made by passing resolutions for
aware of it, were saved by de facto directors with starting certain business
the Section 176. mala fide intention. transactions were held to
be valid

Aise directors jo Agr koi company If director aware nhi h

disqualify ho chuke disqualify director ki articles me kuch
hai but usse aware ke kiye act ko provisions ki wjah se
wo disqualify ho gya h
ni h agr koi shares general meeting aur kuch resolutions
ka allotment ya me rectify krti h to pass krta h to wo
forfeiture krte to ye section apply ni transactions valid
wo valid hota. hota. hoti.
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EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT

The relief on the ground of ‘indoor management’ cannot be claimed by an outsider dealing with
the company in the following circumstances –

1) Where the outsider had knowledge of irregularity – The rule does not protect any person
who has an actual or even an implied notice of the lack of authority of the person acting
on behalf of the company.

CASE LAW – [ HOWARD V. PATENT IVORY CO.]

 Company empowered director to borrow up to 1000 pound only and exceeds such limit by
consent in general meeting.
 Without consent they borrowed 3500 pounds from one director and company refused to
pay the amount because the director had notice of internal irregularity.

2) No knowledge of memorandum and articles – Again the rule can’t be invoked in favor
of a person who did not consult the memorandum and articles and thus did not rely on
them.
CASE LAW – [ RAMA CORPORATION V. PROVED TIN ]
 T was a director in the company pretended to be acted on behalf of company and
entered into a contract with rama corporation and latter on received a cheque.
 Later it was found that in companies articles that directors did not delegate their
power to T and rama corporation did not read the articles and was not aware about
it.
 So the rama corporation not be entitled to any relief.

3) Forgery – The rule of indoor management does not extend to transactions involving
forgery or to transactions which are otherwise void or illegal ab initio.

CASE LAW – [ ROUBEN V. GREAT FINGAL CONSOLIDATED]

 CS of a company forged signatures of 2 directors required under articles on share
certificate and issued certificate without authority.
 The certificate was held to be invalid and holder does not allow to take advantage of
indoor management.

4) Negligence – This doctrine does not apply on officer of company who does something
which shall not ordinarily be within his powers and behave negligently.

CASE LAW – [ Anand beharilal v. Dinshaw ]

 An accountant of a company transferred some company’s property in favor of anand
behari.
 Accountant brought an action against anand behari for breach of contract and court held
that transfer to be void accountant has no authority to transferring the property.

5) The doctrine does not apply where the question is in regard to the very existence of the
agency.

6) This doctrine is also not applicable where a pre-condition is required to be fulfilled before
company itself can exercise a particular power.
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Illustration

Question: Butterfly Limited receives a share certificate of Flower Limited issued under
the seal of the company. The company secretary issues the certificate after affixing the
seal and forging the signature of the two directors. Butterfly Limited files a lawsuit
claiming that the forging of signatures is a part of the internal management of the
company. Is the claim by Butterfly Limited valid and is liable to get relief?

Answer: According to the exceptions to the doctrine of indoor management, a

transaction involving forgery is null and void. Since the document issued to Butterfly
Limited is null and void, the claim made by him is not valid. Thus, he is not entitled to any
relief.

DOCTRINE OF CONSTRUCTIVE NOTICE [rules pta hone chiye]

 In this doctrine the persons dealing with the company are deemed to have knowledge
of the company’s Articles and Memorandum of Association.
 The memorandum and articles when registered becomes public document and can be
inspected by anyone by paying a nominal fee so every person dealing with company is
deemed to have constructive notice of the contents of its memorandum and articles.
 [MOHONY V. EAST HOLYFROD MINING CO.] – If a person enters into a contract
which is beyond the powers of the company or outside the limits of the director’s
authority he can’t acquire any right under the contract against the company.
[ ye doctrine company ko outsiders se protect krta h jo person company
se deal krte h unse ye presume kiya jata unhone company ke moa aoa
padhe h aur unko company ke authorities ki information h sab. Future me
koi bhi breach hone pr company liable ni hogi.]

DOCTRINE OF ALTER EGO [ Parde ke piche chup nhi skte ]

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 The term “Alter Ego” is a Latin word. Literally translated, it means the “Other I”.
 Alter ego is the doctrine which prevents the stakeholders of the corporation, i.e.,
shareholders and directors from taking the refuge of doctrine of separate legal entity.
Hence, the Doctrine of alter ego is based on lifting of the corporate veil between the
directors/ shareholders and the corporation and treating both as one entity.
 The doctrine of alter ego is based on the assumption that the company as well as the
shareholders and the managing directors are the alter egos of each other, i.e., one is the
shadow or reflection of the other or can be understood as two sides of the same coin.
[This doctrine helps the stakeholders if company ke director company ke name pr koi
fraud krte h or separate legal entity ke law ke through bachne ki koshish krte h. ye
doctrine assumption pr based h ki shareholders and md are joint to each other.]

CASE LAW [Sunil Bharti Mittal v. CBI ]

 In this case law the court clarified the law of "alter ego"
 The Special Judge held that the reason for summoning these persons and
proceeding against them prima facie, are:
i) These persons were/are in the control of affairs of the respective companies.
ii) Because of their controlling position, they represent the directing mind and will
of each company.
iii) State of mind of these persons is the state of mind of the companies.
 Thus, they are described as "alter ego" of their respective companies.
 The Apex Court while overruling the decision of the Special Judge, said that the
criminal mens rea had been attributed to the directors on the assumption that they
are the directing minds behind the acts of the Company.
 The Supreme Court observed that the Special Judge had ignored the fact that
such an interpretation of the alter ego doctrine would go against the position of
law that there is no vicarious liability in criminal law, unless expressly provided in
the statute.

DOCTRINE OF LIFTING OR PIERCING THE CORPORATE VEIL

[galat kaam kroge to parda utha diya jyega]

This Photo by Unknown Author is licensed under CC BY-SA-NC

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 After incorporation of a company, it enjoys the benefits of separate personality. Such benefits
are only available for legitimate business.
 In reality, sometime the members of the companies misuse the advantage of separate
personality of a company for their fraudulent and dishonest intention.
 Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned
will not be allowed to take shelter behind the corporate personality.

 The Court will break through the corporate shell and apply the principle of that is known as
"lifting of corporate veil."
 The Court will look behind the corporate entity and take action as though no entity separate
from the members existed and make the members or the controlling persons liable for debts
and obligations of the company.
[Company me kuch members or directors separate personality ka benefit
lete h aur fraud krte h aise cases me court lifting of corporate veil krti h
mtlb company ke piche kin individuals ka hath h wo dekhti h aur sbko
personally liable krti h unke acts ke liye]

STATUTORY
PROVISIONS
LIFTING OF
CORPORATE
VEIL
VISIONS
JUDICIAL
PRONOUN-
CEMENT

UNDER STATUTORY PROVISIONS

The veil of corporate personality can be lifted under the following provisions of the
Companies Act, 2013:

FALSE INFORMATION

REMOVAL OF NAME

OTHER REASONS
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Submission of False Information [Sec.7(7)] [Galat information diya]

 The members become personally liable where a company has been got incorporated
by furnishing any false or incorrect information or by suppressing any material fact in
any documents or declaration filed at the time of incorporation with ROC.
 NCLT may pass the following orders in this regard for regulation of the management of
the company in its memorandum and articles, in public interest or in the interest of
the company and its members and creditors; or
■ Direct that liability of the members shall be unlimited; or
■ Direct removal of the name of the company from the register of companies; or
■ Pass an order for the winding-up of the company; or
■ Pass such other orders as it may deem fit.
[if company ke members false information ke basis pr company
incorporate krte h ya koi material fact hide krte h to members personally
liable honge]

Fraudulent application for removal of the name of Company [Sec.251(1)] [Fraud

krke bhag rhi h]
 Where it is found that an application by a company has been made with the object of
evading the liabilities of the company or with the intention to deceive the creditors or
to defraud any other persons, the persons in charge of the management of the
company shall be
■ Jointly and severally liable to any person or persons who had incurred loss or
damage; and
■ Punishable for fraud.
[if company ke members creditors ko defraud krne ke liye ya company ki
liability na pay krne ke liye company ka name remove kr rhe h to
members personally liable honge]
Other reasons [Sec. 339]
 Every person shall be personally liable for fraudulent conduct of the
business during the course of winding up.

UNDER JUDICIAL PRONOUNCEMENTS

 The Court may lift the corporate veil in the following situations;
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(a) Prevention of Fraud or Improper Conduct [me aayi hi hu fraud krne]

If a company has been incorporated only for the purpose for commission of fraud
or improper conduct, in such cases, Courts may lift the veil and look at the
realities.
[company incorporate hi fraud krne ke liye hui to court lift the corporate veil]

Case Law: [ Jones v. Lipman (1962)]

Facts: A agreed to sell certain land to B but in between of the deal A transferred the land to
a company which is incorporated by him to escape a decree for specific performance in a suit
brought by B.

Judgment: The Court held that the company was the creature of A and a mask to avoid
recognition and A must complete the contract, since he had the full control of the limited
company in which the property was vested.

(b) Where corporate façade is really only as an agency instrumentality

[me agent hu]
where a company works like an agent of other company then the court
may lift the corporate veil.[ek company dusri company ki agent ki trh
work krti h]

CASE LAW: [R.G. Films ltd.]

Facts: An American company produced a film in India technically in the name of a
British Company, 90% of whose capital was held by the President of the American
company which financed the production of the film.

Judgement: Board of Trade refused to register the film as a British film which
stated that English company acted merely as the nominee of the American corporation.

(c) Conflicts with Public Policy [mene public policy k against kaam kiya hai]
Where the doctrine of any company conflicts with public policy, the court may lift
the corporate veil for protecting the public policy.
[company ke rules public policy ke against h]
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Case Law: Connors Bros. v. Connors (1940)

Facts: This principle was applied against the managing director who made use of his
position contrary to public policy. Since the persons who were de facto in control of its
affairs, were residents of Germany, which was at war with England at that time. The alien
company was not allowed to proceed with the action, as that would have meant giving
money to the enemy, which was considered as against the public policy.

Judgment: In this case the House of Lords determined the character of the company as
"enemy company".

(d) Protection of Revenue [me tax chura lungi]

Where the corporate has been used only for evasion of taxes and
duties, the court may lift the corporate veil to look at the real
transactions. [company bani hi tax evade krne ke liye h]

Case Law: Sir Dinshaw Maneekjee Petit

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

Judgment: The Court held that the company was formed by the assesses
purely and simply as a means of avoiding super-tax and the company was
nothing more than the assesses himself. It did no business, but was created
simply as a legal entity to apparently receive the dividends & interests and to
hand them over to the assesses as pretended loans. Accordingly, the Court
decided to disregard the corporate entity as it was being used.

(e) Determination of the Enemy Character of a Company [me enemy se

mili hui hu]
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Company being an artificial person cannot be enemy or friend. But

during war or war like situation, it may become necessary to lift the
corporate veil and see the persons behind as to whether they are
enemies or friend.[ artificial person hone ki wjh se company kisi ki
enemy ya friend ni ho skti but war ke time pr company ke piche ke log
enemy ya friend h dekhna jrori hota]

Case Law: Daimler Co. Ltd. v. Continental Tyre & Rubber Co.
Facts: A Company was incorporated in England by a German Company for the
purpose of selling tires in England which were manufactured in Germany. The
Germany Company virtually held the entire share capital in the English
Company. All Directors were the resident of Germany. During the 1st World
War. The English company commenced an action for recovery of a trade debt
from another English Company.

Judgment: It was held that a company will be regarded as having enemy

character, if the persons having de facto control of its affairs are resident in an
enemy country and therefore the Company was not allowed to proceed with
the action.

(f) Avoidance of Welfare Legislation [me law ko avoid karungi]

Where a company was formed only for reducing the statutory
liabilities (like payment of bonus, PF & ESIC), the Court may lift the
corporate veil to look at the real transactions. [company bani hi
statutory liabilities ko avoid ya reduce krne ke liye h]

Case Law: The Workmen Employed in Associated Rubber Industries Limited,

Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another.

Facts: A new company was created wholly by the principal company with no
assets of its own except those transferred to it by the principal company, with
no business or income of its own except receiving dividends from shares
 P a g e | 19

transferred to it by the principal company i.e. only for the purpose of splitting
the profits into two hands and thereby reducing the obligation to pay bonus.

Judgment: The Supreme Court of India held that the new company was formed
as a device to reduce the gross profits of the principal company and thereby
reduce the amount to be paid by way of bonus to workmen. The amount of
dividends received by the new company should, therefore, be taken into
account as assessing the gross profit of the principal company.

(g) Acquisition of Small Scale Industry for taking benefits & exemption
[mujhe ssi ka benefit chiye]
Where a small scale industry is owned and controlled by the
Companies or persons for availing the benefits or exemptions (i.e.
excise & VAT), the Court may lift the corporate veil. [company ne
benefits or exemptions ke liye SSI formed ki h]

Case Law: Inalsa Ltd. v. Union of India

Facts: In this case, A small scale industry (SSI) was owned and controlled by
some group of persons or companies for availing benefits or exemptions.

Judgement: In this case, it was held to lift the corporate veil of the company to
see whether the SSI was the subsidiary of another company or not.

(h) Concealment of criminal activities [crime karunga]

Where the corporate structure is used as a device to conceal the
criminal activities (i.e. evasion of customs and excise duties), the Court
may lift the corporate veil and treat the assets of the company as the
realizable property of the shareholder. [company ka use criminal
activities ke liye ho rha h to court veil utha ke dekhegi aur company ke
assets use kregi liabilities pay off ke liye]
 P a g e | 20

Case Law: H. and Others (Restraint Order: Realisable Property)

Facts: In a case, 3 defendants had been charged with evasion of Excise Duty
and they caused loss to the exchequer in excess of £100 million. They owned &
controlled 100% issued share capital of two-family companies through which it
was alleged the fraud had been committed.

Judgment: The Court held that the defendants had used the corporate
structure as a device or facade to conceal the criminal activities. In this case, the
court lifted the corporate veil and treated the assets of the company as the
realizable property of the defendants.

E-GOVERNANCE AND MCA-21

E-GOVERNANCE –
 Electronic Governance (e-Governance) is the application of Information
Technology to the Government functioning in order to bring about Simple, Moral,
Accountable, Responsive and Transparent (SMART) Governance. e-Governance is
a highly complex process requiring provision of hardware, software, networking
and re-engineering of the procedures for better delivery of service
 Earlier the businessmen and professionals had to visit MCA offices to file the
statutory forms, to review public documents or to fulfil any compliance in physical
mode. It was very hectic and time consuming.
 So keeping in tune with the e-Governance initiatives the world over, Ministry of
Corporate Affairs (MCA), Government of India, has initiated the MCA-21 project,
to enable an easy and secure access to MCA services.

MCA-21 –
 MCA-21 is an ambitious e-Governance initiative of Government of India that builds
on the Government’s vision of National e-Governance in the country.
 P a g e | 21

 MCA project was launched as a flagship initiative of Ministry of Corporate Affairs

(MCA). MCA-21 has resulted in improved procedures for better delivery of services
by the MCA.
 The portal is designed to fully automate all processes related to enforcement and
compliance of legal requirements under the Companies Act, 2013, Limited Liability
Partnership Act, 2008 & other allied Acts and rules & regulations framed there
under mainly for regulating the functioning of the corporate sector in accordance
with law.

SUBSTANTIAL BENEFITS OF MCA-21

 Elimination of interface with the offices of ROCs, RDs and the MCA

MCA-21 has been designed virtually to eliminate the physical interface between
the companies and the offices of ROCs, RDs and even MCA. It has not only saved
time and energy of the company representatives but also enabled them to focus
on other creative tasks.

 Effective use of database

With the help of database collected, the vital information has been collected,
segregated in such a way that it can be used by various stakeholders for various
purposes.

 Better supervision and monitoring of compliance

MCA-21 has ensured better supervision and control of the MCA over Companies with
regard to compliance with the provisions of the Companies Act.

 Mutually beneficial system

The focus of the MCA-21 program is on bringing about a fine balance between trade
facilitation on one hand and enforcement requirements on the other.

 Speed, transparency and efficiency

MCA-21 project aims to bring speed, transparency and efficiency in the delivery of the
services rendered by the MCA to all the stakeholders through a set of pre-defined
service levels.
 P a g e | 22

MCA-21 SERVICES
The MCA-21 application is designed to fully automate all processes related to the
proactive enforcement and compliance of the legal requirements under the
Companies Act, 2013 and Limited Liability Partnership Act, 2008. This helps the
business community to meet their statutory obligations.

 Register Digital Signature Certificate - all filings done by the companies/LLPs under
MCA-21 e-Governance programme are required to be filed using Digital Signatures by
the person authorized to sign the documents. An user can register DSC and update
particulars of the DSC through the MCA Portal.

 Apply for Director Identification Number (DIN) - The concept of a Director

Identification Number (DIN) was introduced for the first time with the insertion of
Sections 266A to 266G of Companies (Amendment) Act, 2006, since then the system
has evolved and Companies Act, 2013 also makes a provision for obtaining DIN.

 view Master details of any Company/LLP registered with Registrar of Companies - A

facility has been made available to the general public to view master details of any
company/LLP registered with Registrar of Companies. This facility may be availed by
clicking “View Company Master Data”.

 Index of Charges - A similar facility has also been made available in respect of the
‘Register of Charges’ for the Companies/LLPs by clicking on to the ‘View Index of
Charges’ and for the viewing the details of the signatories of any company/LLP by
clicking on ‘View Signatory Details’.

 LLP Services - A user can check LLP name, find LLPIN (Limited Liability Partnership
Identification Number), avail services related to incorporation of an LLP, services
related to annual e-Filing for an LLP, services related to change in LLP information
and services related to closure of an LLP.

 E-Filing – to be used if the user wants to avail LLP e-filing services. LLP e-filing
services are available in the V3 system.

KEY COMPONENTS OF MCA-21

The key components of MCA-21 are:

 e-Scrutiny: MCA is in process of setting up a Central Scrutiny Cell which will

scrutinize certain Straight the companies for more in depth scrutiny.
 P a g e | 23

 e-adjudication: E-adjudication module, has been conceptualized to manage

the increased volume of adjudication proceedings by Registrar of
Companies (RoC) and Regional Directors (RD) and will facilitate end to end
digitization of the process of adjudication, for the ease of users.

 e-Consultation: To automate and enhance the current process of public

consultation on proposed amendments and draft rules etc., e-consultation
module of MCA-21 V 3.0 will provide an online platform wherein, proposed
amendments/draft legislations will be posted on MCA’s website for external
users.

 Compliance Management System (CMS): CMS will assist MCA in identifying

non-compliant companies/ LLPs, issuing e-notices to the said defaulting
companies/LLPs, generating alerts for internal users of MCA.

 MCA Lab: As part of MCA21 V 3.0, a MCA LAB is being set up, which will consist
of corporate law experts. The primary function of MCA Lab will be to evaluate the
effectiveness of Compliance Management System, e-consultation module,
enforcement module, etc. and suggest enhancements to the same on an on-going
basis.

E-FORMS

 An e-form is only a re-engineered conventional form notified and represents a

document in electronic format for filing with MCA authorities through the
Internet. This may be either a form filed for compliance or information purpose
or an application seeking approval from the MCA.
 Filling and filing of forms is an important part of the secretarial function of a
Company Secretary. Filling and filing of forms, returns and applications under
various provisions demand intimate knowledge of substantive as well as
procedural law.

PREREQUSITES OF FILING OF E-FORMS

 Digital Signature certificate (DSC) of either Class 2 and Class 3 signing certificate
category issued by a licensed Certifying Authority (CA) needs to be obtained for e-
Filing on the MCA Portal.
 Hardware and Software Requirements under e-filing –
The minimum system requirements for e-filing on MCA-21 are as under:
 Any computer or laptop
 P a g e | 24

 An efficient operating system

 Latest Browser
 Adobe Reader from version 11 or later
 Scanner (above 200 DPI) for converting the attachments in the PDF format
 Java Runtime Environment (JRE) updated version.
 P a g e | 25

CHAPTER – 2

LEGAL STATUS AND

TYPES OF REGISTERED COMPANIES

INTRODUCTION
In terms of the Companies Act, 2013 a
“company” means a company
incorporated under this Act or under any
previous company law [Section 2(20)].
Chief Justice Marshall - “A corporation is an artificial being, invisible, intangible, existing
only in contemplation of the law. Being a mere creation of law, it possesses only the
properties which the charter of its creation confers upon it, either expressly or as
incidental to its very existence.”

Justice James - “A company is an association of person’s united for a common object.

CASE LAW – [ Re G.V. Pratap Reddy Through G.P.A. TSR Research Pvt. Ltd. vs.
K.V.V.S.N. Associates and others]
The Supreme Court of India held that, where notice inviting tender by State of Telangana
required that bidder must be an individual/company, word company in notice inviting
tender could only mean a company as understood under Companies Act and cannot be
read to include a firm and, therefore, bid of respondent which was neither an individual
nor a company but a firm was rightly rejected by State

[company word ka meaning whi hoga jo uski definition me derive h]

 P a g e | 26

LEGAL STATUS OF REGISTERED COMPANIES

On incorporation basis

A COMPANY ARTIFICIAL JUDICIAL

PERSON

 Since a corporate body (i.e., a company) is the creation of law, it is not a human
being, it is an artificial juridical person (i.e., created by law) and it is clothed with
many rights, obligations, powers and duties prescribed by law.
 It can, however, do everything what a natural person can do except certain acts
which require personal execution. [ company ek artificial person h jisko law ne
bnaya h aur bhut sare powers, duties, rights bhi diye h]

CHARACTERISTICS OF A COMPANY
The most striking characteristics of a company are discussed below –

CORPORATE ARTIFICIAL PERPETUAL

PERSONALITY PERSON SUCCESSION

SEPARATE TRANSFER-
CAPACITY TO SUE
ABILITY OF
PROPERTY OR BE SUED
SHARES

LIMITED CONTRACTUAL
NOT A CITIZEN
LIABILITY RIGHTS
 P a g e | 27

1) CORPORATE PERSONALITY [ Company ki alag

personality hai]
A company incorporated under the Act is vested with a corporate personality.

o It bears its own name and act thereunder

o Its assets are separate and distinct from its members
o It can incur debt, borrow money, open bank account
o It can sue or can be sued
o It is capable of owning property

NOTE
The shareholders are not the agents of the
company and so they cannot bind it by their acts.
The company does not hold its property as an
agent or trustee for its members and they cannot
sue to enforce its rights, nor can they be sued in
respect of its liabilities.

Case Law: [Salomon v. Salomon and Co. Ltd.]

Facts: Salomon had a prosperous business of leather and boot. He formed a
limited liability company i.e.; Salomon and Co. Ltd. and shareholders of the
company are:
(a) Salomon himself,
(b) His wife
(c) His daughter and his four sons.
All shareholders were holding 1 share each and rest all shares were held by
Salomon. He sold his business to the company for £38,782/- and the company
had issued shares in favor of Salomon as purchase consideration.
The purchase consideration was as follows:
Shares - £20,000 Debentures - £10,000 And Balance Paid in Cash
Salomon was the MD and two of his sons were other directors of the Company.
After one year, the company ran into financial difficulties and the debenture
holders appointed a receiver and the company went into liquidation. The assets
of the company were not even sufficient to discharge the secured debentures
which were held by the Salomon and nothing was left for unsecured creditors.
 P a g e | 28

The unsecured creditors claimed that the Company was a mere agent for
Salomon and they were entitled to the payment of their unsecured debts in
priority to the debenture holders. They also pleaded that Salomon as primary
beneficiary, was ultimately responsible for all the debts.

Judgment: The House of Lords held that:

(a) The said company comes into existence after its registration under the
existing law.
(b) The company had been validly constituted as per the requirement of the
existing law like 7 members were required to form a company.
Therefore, the company has its own existence or personality separate and
distinct from its members and, as a result, a shareholder cannot be held liable for
the acts of a company

Case Law: [ Lee v. Lee's Air Farming Ltd.]

Facts: Lee, a qualified pilot, formed a company "Lee's Air Farming Ltd." and was
holding all shares except one. He was also the MD and got himself appointed as
chief pilot at salary. He had full and unrestricted control over the affairs of the
Company. While piloting the company's plane, he was killed in an air crash. As
the workers of the company were insured, workers were entitled for
compensation on death or injury. His wife filed a claim for insured amount for the
death of her husband in the course of his employment.
The question was while holding the position of MD, could Lee be treated as an
employee for the purpose of insurance claim?

Judgment: It was held that: "Lee was a separate person from the company he
formed and his widow was held entitled to get the compensation. In effect the
magic of corporate personality enabled him (Lee) to be the master and servant at
the same time and enjoy the advantages of both."
 P a g e | 29

2) ARTIFICIAL PERSON – [ Insan hu par insan nhi ]

A Company is an artificial person created by law. It is not a human being but it

acts through human beings. It is considered as a legal person who can enter into
contracts, possess properties in its own name, sue and can be sued by others etc.
It is called an artificial person since it is:
 Invisible What is Artificial Person?
 Intangible An artificial person means a juridical
 Existing only in the name of law
person; it has a legal name and has
certain rights, protections, privileges,
 Capable of enjoying rights. responsibilities, and liabilities in law,
similar to those of a natural person.

CASE LAW – [Union Bank of India v. Khader International Construction and Other]
FACTS – In this case, the question which arose before the Court was whether a
company is entitled to sue as an indigent (poor) person under Order 33, Rule 1 of the
Civil Procedure Code, 1908?
The appellant in this case had objected to the contention of the company which had
sought permission to sue as an indigent person.
The point of contention was that, the appellant being a public limited company, it was
not a ‘person’ within the purview of Order 33, Rule 1 of the Code and the ‘person’
referred to only a natural person and not to other juristic persons.

JUDGEMENT – The Supreme Court held that the word ‘person’ mentioned in Order
33, Rule 1 of the Civil Procedure Code, 1908, included any company as association or
body of individuals, whether incorporated or not. Thus, a company may also file a suit as
an indigent person.

3) PERPETUAL SUCCESSION – [ me amar hu mujhe koi

mar nhi sakta]
 P a g e | 30

 Perpetual Succession means that the membership of the company may change
from time to time, but this does not affect its continuity.
 An incorporated company never dies, except when it is wound up as per law.
 A being a separate legal person is unaffected by death, insolvency, retirement of
any member or director.
 It remains same entity despite total change in membership.
 A company can be treated as dead if it is declared by the law by way of winding up
or liquidation of a company.

Professor L.C.B. Gower rightly mentions, “Members may come and go, but
the company can go on forever.”

illustration:
M/s ABC Pvt. Ltd. has three directors and all the three directors are also the
shareholders of the company.
All the directors died in the car accident while going for a meeting. In this case,
principle of perpetual succession applies and even if all the directors of M/s ABC
Pvt. Ltd. died, the company will continue to have existence and the successors of
directors can take over the affairs of the company.

4) SEPARATE PROPERTY – [ Meri property alag h]

The Company being a separate legal entity, it

can buy any property in its own name.
Further, a company being a legal person and
entirely distinct from its members, is capable
of owning, enjoying and disposing of
property in its own name. Therefore, "No
member can claim himself to be the owner of
the company's property during the existence
of the Company". [ company ek separate
entity h isiliye usko apne name pr property
buy krne sell krne transfer krne ka full right hota koi member company ki property
pr right claim ni kr skta.]
 P a g e | 31

CASE LAWS
[Mrs. Bacha F. Guzdar v. [Macaura V. Northen
The Commissioner of Asurance Company Ltd.]
Income Tax, Bombay] [R.T. Perumal v. John
Deavin And Anr] FACTS - In this case, Macaura
FACTS - MRS. guzdar received held all except one share of a
dividend in respect of shares timber company. He had also
of tea company. The advanced substantial amount
agriculture income is it was stated that no
member should to the company. He insured
exempted from tax so the the company’s timber in his
plaintiff claimed that the claim ownership of any own name. One timber being
dividend income in her hands company’s property destroyed by fire, his claim
is exempted. during the association’s was rejected for want of
JUDGEMENT - The SC held that existence or dissolution. insurable interest.
the income of tea company is A company
entitled to be exempted from
JUDGEMENT- The court
cannot even have an observed: “No shareholder
tax upto 60% but when the
same income received by a insurable interest in the has any right to any item of
share holder in the form of company’s property. property owned by the
dividend can't be regarded as company or he has no legal or
agriculture income. equitable interest herein.”

illustration:
Mr. Amit incorporated a company in the name of ABC Public Ltd., the company provides
catering services. Mr. Amit decides to purchase a new building and a company van. As
an ABC Public Ltd., the company can legally purchase property under the business’s
information. Mr. Amit do not have to purchase the property under his personal
information.
Mr. Amit can begin the property purchase process using his business’s name and
banking information. On completion of the paperwork, the deed to the property is under
the business’s name.
 P a g e | 32

5) TRANSFERABILLITY OF SHARES – [Mere shares ko transfer

kr skte ho]

 the shares held by the members are movable

property and can be transferred from one person
to another in the manner provided.
 In the listed companies, the shares are
transferable through electronic mode i.e.,
through Depository Participants in
dematerialized form instead of physical
transfers.
 However, there are restrictions with respect to
transferability of shares of a Private Limited Company. Even if share of a Private
Limited Company is in demat form, restrictions by the Articles of the company shall
apply.

CASE LAW
in the case of Western Maharashtra Development Corporation Ltd. Vs. Bajaj Auto Ltd,
the court held that the Company Act makes a clear distinction regarding the
transferability of shares relating to private and public companies.

Question. In case of any shareholders’ agreement amongst the shareholders with

specific restriction like right of first refusal or pre-emptive right given to any
shareholders, whether such restrictions are enforceable or not if the same are not
part of the articles of association?
Answer. As per the decision of Supreme Court in V.B. Rangarajan v. V.B
Gopalakrishnan and other it was held that the clause of shareholders agreement shall
be enforceable provided the same are main part of the article of association.

6) CAPACITY TO SUE OR BE SUED – [case file kar skta hu]

 P a g e | 33

 A company being a body corporate can sue and be sued in its own name.
 To sue means to institute/file legal proceedings against or to bring a suit in a court of law.
 All legal proceedings against the company are to be instituted in its own name and the
company may also bring an action against anyone in its own name.
 A company, as a person distinct from its members, may even sue one of its own
members.

[TVS Employees Federation v. TVS and Sons Ltd].,

In This Case video cassettes were prepared by the workmen of a company showing,
their struggle against the company’s management.
A company has a right to seek damages where a defamatory material published about
it, affects its business.
so, it was held to be not actionable unless shown that the contents of the cassette
would be defamatory. The court did not restrain the exhibition of the cassette.

[In Rajendra Nath Dutta Vs. Shibendra Nath Mukherjee]

FACTS – In the referred case, a lease deed was executed by the director of the
company without seal of the company. Subsequently, a suit was filed by the directors
and not the company to avoid lease on ground that a new term had been fraudulently
included in the lease deed by the defendants.

JUDGEMENT – It was held that a director of the Board of Directors or a managing

director could not file a suit, unless it was by the company.
It the company was aggrieved; it was the company which was to file the suit and not
the directors. Therefore, the suit was not maintainable in the eyes of court.

illustration:

Suppose there is a company Antriksh Limited. Antriksh Limited can file a defamation
case against a defamatory article that was published against it. It can also file police
complaints for various offences. It can basically undertake all sorts of litigations
through an Authorized Representative.
It is pertinent to note that an Authorized Representative of a Company can be
changed during the course of the litigation and doing so would not hamper the
pending case before the Courts / Authorities.
 P a g e | 34

7) COMPANY IS NOT A CITIZEN – [ Me citizen nhi hu]

 Only a natural person can get

Citizenship under the Indian Citizenship
Act, 1955 or the Constitution of India.
 Therefore, a company being an artificial
person cannot become citizen under the
Constitution of India or the Citizenship
Act, 1955.

The Supreme Court in the matter "State

Trading Corp. of India Ltd. v. CTO held
that a corporation cannot have the
status of a citizen under the Constitution
of India. Therefore, a company has no
fundamental rights which are expressly
available to the citizen of India.

[In R.C. Cooper v. Union of India]

In that case, the court entertained the petition under Article 32 of the Constitution at
the instance of a director as shareholder of a company and granted relief.
It is, therefore, to be noted that an individual’s right is not lost by reason of the fact
that he is a shareholder of the company.

[Bennet Coleman Co. v. Union of India]

In this case, the Supreme Court stated that:
“It is now clear that the Fundamental Rights of shareholders as citizens are not lost
when they associate to form a company. When their Fundamental Rights as
shareholders are impaired by State action, their rights as shareholders are protected.
The reason is that the shareholders’ rights are equally and necessarily affected if the
rights of the company are affected.”
[ in this SC clear that if koi shareholder company se associate h to
uske rights as a citizen lost nhi honge because if company ke
rights affect hote h to shareholder ke right bhi equally effect hote]
 P a g e | 35

COMPANY HAS NATIONALITY AND RESIDENCE – [ Mujhe bhi

nationality or residency di h]

 Though it is established through judicial

decisions that a company cannot be a citizen,
yet it has nationality, domicile and residence.

In Gasque v. Inland Revenue Commissioners,

a limited company is capable of having a domicile
and its domicile is the place of its registration and
that domicile clings to it throughout its existence.

In Tulika v. Parry and Co

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

8) LIMITED LIABILITY [Me ek paisa jyda ni dunga]

 The company, being a separate person, is

the owner of its assets and bound by its
liabilities.
 The liability of a member as shareholder,
extends to the contribution to the capital of
the company up to the nominal value of the
shares held and not paid by him.
 In the case of a company limited by
guarantee, the liability of members is limited
to a specified amount of the guarantee
mentioned in the memorandum.
 P a g e | 36

For example, if A holds shares of the total nominal value of 1,000 and has already paid
Rs.500/- (or 50% of the value) as part payment at the time of allotment, he cannot be
called upon to pay more than Rs. 500/-, the amount remaining unpaid on his shares.

EXCEPTIONS TO THE RPINCIPLE OF LIMITED LIABILITY

 Members are severally liable in certain cases-
1. The number of members of the Company is reduced to below seven in case of
public company or below two in case of private company;
2. The company carries on business for more than six months with such a smaller
number of members;
3. The members are cognizant of fact that the company is carrying business with
such a smaller number of members.
In such case the remaining members so continuing in the company shall be liable for
the payment of whole debts of the company contracted during that time.

 When the company is incorporated as an Unlimited Company.

 Where a company has been got incorporated by furnishing any false or incorrect
information or by suppressing any material fact or information in any of the
documents or declaration filed the Tribunal may, on an application made to it, on
being satisfied that the situation so warrants, direct that liability of the members of
such company shall be unlimited.

 where in the course of winding up it appears that any business of the company has
been carried on with an intent to defraud creditors of the company or any other
persons or for any fraudulent purpose, the Tribunal may declare the persons who
were knowingly parties to the carrying on of the business in the manner aforesaid as
personally liable, without limitation of liability, for all or any of the debts/liabilities of
the company.

 where a company fails to repay the deposit or part thereof or any interest thereon
within the time specified or such further time as may be allowed by the Tribunal and it
is proved that the deposits had been accepted with intent to defraud the depositors or
for any fraudulent purpose, every officer of the company who was responsible for the
acceptance of such deposit shall, without prejudice to other liabilities, also be
personally responsible, without any limitation of liability, for all or any of the losses or
damages that may have been incurred by the depositors.
 P a g e | 37

9) CONTRACTUAL RIGHTS – [ me bhi contract me enter ho skta]

 A company, being a legal entity different from its

members, can enter into contracts for the conduct of
the business in its own name.
 A shareholder cannot enforce a contract made by his
company; he is neither a party to the contract, nor be
entitled to the benefit derived from it, as a company
is not a trustee for its shareholders.
 Similarly, a member of a company cannot sue in
respect of torts committed against the company, nor
can he be sued for torts committed by the company.
Therefore, the company as a legal person can take action to
enforce its legal rights or be sued for breach of its legal duties.

DISADVANTAGES OF REGISTERED COMPANIES

 Formality and Expense: Registration of a company involves a lot of statutory
formalities and the consequent expense. The affairs and working of a company have
to be conducted strictly in accordance with the applicable legal provisions.

 Privacy Loss: Another form of disadvantage of a company of loss of privacy.

Various returns, resolutions and documents are to be uploaded and filed with the
Registrar of Companies and accessible to public on payment of prescribed fees for
inspection.

 Diversified Control: The members of the company cannot have as effective control
over the workings of company as in sole proprietorship and partnership business
models.

 Public Accountability: The Company cannot work in contravention to public

interest, because as and when the public interest will come in conflict with corporate
working, intervention by regulatory authorities will be triggered.

 Fraud Possibilities: The company operates through control of economic resources

in a few hands, there is a possibility that the other people who have contributed funds
to the company either as shareholder or debenture holder or creditor or lender.
 P a g e | 38

TYPES OF COMPANIES

STATUTORY COMPANY
REGISTERED COMPANIES
A company may be UNREGISTERED
incorporated by any COMPANIES
The company
speacial act of the
registered under the
parliament or any state An unregistered
companies act 2013 or
legislation to carry out company is a company
under any previous
some special which is not registered
company law are called
undertakings are called or covered under the
registered companies.
statutory companies. provisions of
companies act 2013.

CLASSIFICATION OF COMPANIES

INCORPOR
ATION

NATION- MEMBER-
ALITY SHIP

CONTROL OBJECTS

MEMBER
LIABILITY
 P a g e | 39

1) Classification on the basis of Incorporation:

Companies may be incorporated under the following categories:

(a) Registered Companies: The companies which are incorporated under the
Companies Act, 2013 or under any previous company law and registered with the
Registrar of Companies, fall under this category.

(b) Statutory Companies: These are constituted by a Special Act of Parliament or

State Legislature. The provisions of the Companies Act, 2013 do not apply to them.
For examples: Life Insurance Corporation of India.

2) Classification on the basis of Liability:

Under this category there are three types of companies: -

(a) Companies limited by shares: Section 2(22) of the Companies Act, 2013
provides that “Company limited by shares” means a company having the
liability of its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them.
For example, a shareholder who has paid Rs.75 on a share of face value
Rupees 100 can be called upon to pay the balance of Rupees.25 only.

(b) Companies limited by guarantee: Section 2(21) of the Companies Act, 2013
provides that a company that has the liability of its members limited to such
amount as the members may respectively undertake, by the memorandum, to
contribute to the assets of the company in the event of its being wound-up,
is known as a company limited by guarantee.

(c) Unlimited Companies: Section 2(92) of the Companies Act, 2013 provides
that unlimited company means a company not having any limit on the liability
of its members, such companies may or may not have share capital. They
may be either a public company or a private company.

3) OTHER FORMS OF COMPANIES:

a) Section 8 Company/Non-Profit Oriented Company: A company whose sole

objective is to promote commerce, art, science, sports education, research,
social welfare, religion, charity, protection of environment or any other useful
purpose and not having any profit motive will be termed as a not-for-profit
company. Such a company must apply its profits or other incomes in promoting
its objects.

b) Domestic Company: A domestic company is a company that conducts its

affairs in its home country. It should be registered under the provisions of the
Companies Act, 2013 or earlier law applicable in India. The domestic company
shall have registered office in India.
 P a g e | 40

PRIVATE COMPANY

As per Section 2(68) of the Companies Act,

2013,
“Private company” means a company having
a minimum paid- up share capital as may be
prescribed, and which by its articles: –

(i) restricts the right to transfer its shares

(ii) except in case of One Person Company,

limits the number of its members to two
hundred
Provided that where two or more persons hold
one or more shares in a company jointly, they
shall, for the purposes of this clause, be treated as a single member
Provided further that -
(a) persons who are in the employment of the company; and
(b) persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased, shall not be included in the number of
members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the
company.

As per proviso to Section 14 (1) of the Act , if a company being a private company
alters its articles in such a manner that they no longer include the restrictions and
limitations which are required to be included in the articles of a private company under
this Act, such company shall, as from the date of such alteration, cease to be a private
company.
 P a g e | 41

CHARACTERISTICS OF PRIVATE COMPANY

a) Limit on Members: To start a company, minimum number of 2 members is

required and a maximum number of 200 members as per the provisions of the
Companies Act, 2013.
if a director is also employed by the company in any other capacity such as works
Manages, Sales Manager or as the Company Secretary, he may be treated as
employee of the company notwithstanding his directorship.

Can number of Debenture Holders exceed the limit of 200?

It may be noted that it is only the number of members that is limited to two
hundred. Private Company may route for and issue debentures to any number of
persons, the only condition being that an invitation to the public to subscribe for
debentures cannot be made.

b) Limited Liability structure: The liability of each member or shareholders is

limited. It means that if a company faces loss under any circumstances, then its
shareholders are not liable to sell their own assets for payment.

c) Perpetual succession: The Company keeps on existing in the eyes of law even
in the case of death, insolvency, the bankruptcy of any of its members. This leads
to perpetual succession of the company.

d) Index of members: An index of the names entered in the respective registers of

members and the index shall, in respect of each folio, contain sufficient indication
to enable the entries relating to that folio in the register to be readily found. The
maintenance of index of members is not necessary in case the number of
members of the company is less than fifty.

e) A number of directors: When it comes to directors, a private company needs to

have minimum two directors. With the existence of 2 directors, a private company
can come into existence and can start with its operations.

f) Paid up capital: There is no minimum capital requirement in case of private

limited companies.

g) Name: It is mandatory for all the private companies to use the word “private
limited” after its name.
 P a g e | 42

EXEMPTIONS OF PRIVATE COMPANIES

a) Easy to Form: Under the Companies Act, 2013, a private limited company is
relatively easier to form than a public limited company. A mere two persons can
form a private company as opposed to the requirement of seven or more persons
for a Public limited company.

b) Provisions for Alteration of Articles of the Company: Articles of Association

of Private Limited Company may contain provisions for Entrenchment to the effect
that specified provisions may be altered only if conditions or procedures as that
are more restrictive than those applicable in case of special resolution are met or
complies with.

c) Lesser Compliance for Issue of Shares: A Private Company, while issuing

further capital, is not required to make a prospectus or submit a statement in lieu
of this prospectus to the Registrar of companies because it does not have the
capability of making a public offer.

d) Closure of Register of Members or Debenture Holders or Other Security

Holders: A private company closing the register of members or debenture
holders shall give at least seven days’ notice but it is not required to give any
advertisement in newspaper or website.

e) Lesser Compliances related to Directors of Private Companies: A Private

Company can form with two directors and it is not required for it to retire its
directors by rotation at every annual general meeting.

f) Appointment of Woman Director: private companies are exempted from the

appointed of women director.

g) Appointment of Independent Director: provision for the appointment of

independent director is exempted to the private companies.

h) Disqualifications for Appointment of Director: A private company may by its

AOA provide for any disqualifications for appointment as a director.

i) vacation of office of Director: Private companies may by its AOA, provide any
other ground for the vacation of the office of a director.

j) Key Managerial Personnel: Appointment of Managing Director, Chief Executive

Officer (CEO), Manager, Whole time Director, Chief Finance Officer (CFO) as per
Section 203 is not applicable. However, all Private Companies having a paid-up
share capital of Rs. 10 crores or more is required to appoint a Whole Time
Company Secretary.
 P a g e | 43

k) Overall Maximum Managerial Remuneration: There is no restriction on Private

Company and they allowed to pay the justifiable managerial remuneration as per
the Articles of Association and authorized resolutions.

l) Report on Annual general Meeting: Private companies are not required to file
report on annual general meeting through E Form MGT-15.

m) Audit Committee and Nomination and Remuneration Committee: Private

Companies are exempted from constituting such committees.

n) vigil Mechanism: Vigil mechanism is applicable to a Private Company only if it

has borrowed money from banks and public financial institutions in excess of fifty
crore rupees.

o) Internal Audit: Section 138 provides that only private companies having:
turnover of two hundred crore rupees or more during the preceding financial year;
or outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year shall be required to appoint an internal auditor.

p) Corporate Social Responsibility Committee: Section 135 read with CSR Rules
provides that a private company having only two directors on its Board is required
to constitute its CSR Committee with two such directors only.

PUBLIC COMPANY

By virtue of Section 2(71), a public company means a

company which:

 is not a private company

 has a minimum paid-up share capital as This Photo by Unknown Author is licensed under CC
may be prescribed
 subsidiary of a public company shall be deemed to be a public company.

Some examples of Public Limited Companies in India:

 Bharat Heavy Electricals Ltd. (BHEL)
 Bharat Petroleum Corporation Ltd. (BPCL)
 Coal India Ltd.
 P a g e | 44

As per section 3(1)(a), a public company may be said to be an association consisting of

not less than 7 members, which is registered under the Act. In principle, any member of
the public who is willing to pay the price may acquire shares in or debentures of it. The
securities of a public company may be quoted on a Stock Exchange. The number of
members is not limited to two hundred.

CHARACTERISTICS OF PUBLIC COMPANY

a) board of Directors: The Board of the Public company comprises of a

minimum number of three directors and a maximum of 15. The company
may appoint more than 15 directors after passing a special resolution.

b) Limited Liability: Shareholder liability for the losses of the company is

limited to their share contribution only. This is what makes it a separate
legal entity from its shareholders.

c) Number of Members: A public limited company have a minimum number of

seven shareholders or members and no maximum limit of members. It can
have as many shareholders as its share capital can accommodate.

d) Transferable shares: Shares of a public limited company are bought and

sold by the shareholders, however, in case of listed company the shares
are traded on a stock exchange where the shares of the company are listed.
They are freely transferable between its members and people trading in the
stock exchange.

e) Life Span: A public limited company is not affected by death of one of its
shareholders, but the shares are transferred to the next kin or legal heir of
such deceased shareholder and the company continues to run its business
as usual.

f) Financial Privacy: Public limited companies are strictly regulated and are
required by law to publish their complete financial statements annually.
This ensures that they reveal their true financial position to their owners
and to potential investors so that they can determine the true worth of its
shares.

g) Capital: Public limited companies enjoy an increased ability to raise capital

since they can issue shares to the public through the stock market. They
can also raise additional capital by issuing debentures and bonds through
the same market from the public.
 P a g e | 45

ADVANTAGES OF PUBLIC COMPANY

 raising capital through public issue of shares

 prestigious profile and confidence
 growth and expansion opportunities
 widening the shareholders base and spreading the risk
 transferability of shares

DISADVANTAGES OF PUBLIC COMPANY

LACK OF
CONFIDEN-
TIALITY

INCREASED OWNERSHIP
GOVT AND AND
REGULATORY CONTROL
SCRUTINY ISSUES

MORE HIGH LEVEL OF

VULNERABLE TRANSPARENCY
TO TAKEOVERS REQUIRED
 P a g e | 46

DISTINCTION BETWEEN PRIVATE AND PUBLIC COMPANY

Following are the main points of distinction between a private company and a
public company:

1. Minimum Number of Members:

In case of a private company, the minimum number of persons to form a

company are two, while it is seven in the case of public company.

2. Maximum number of Members:

In case of private company, the maximum number must not cross the limit of two
hundred whereas there is no such restriction on the maximum number of
members in the case of a public company.

3. Transferability of Shares:

As per section 44 of the Companies, Act, 2013, the shares of any members in a
company shall be movable property and transferable in the manner provided by
the Article of Association of the company.
In a private company, by its very definition, Article of Association of a private
company have to contain restrictions on transferability of shares.

4. Prospectus:

A private company cannot issue a prospectus, while a public company may,

through prospectus; invite the general public to subscribe for its securities.

5. Minimum numbers of Directors:

A private company must have a least two directors on Board, whereas a public
company must have at least three directors on Board.
 P a g e | 47

6. Retirement of Directors:

Directors of a private company are not required to retire by rotation, but in

case of a public company at least 2/3rd of the directors must be such whose
period of office is subject to retirement by rotation.

7. quorum for general Meetings:

Unless the Articles of Association of the company provide for a larger number, in
case of public company the quorum for general meeting shall be:
i) five members personally present if the number of members as on the date of
meeting is not more than one thousand; [ 5 if members = 1000]
ii) 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; [ 15 if members
>1000 but up to 5000]
iii) thirty members personally present if the number of members as on the date of
the meeting exceeds five thousand. [ 30 if members = >5000]

In case of a private company, unless Articles of Association provide for a higher

number, two members personally present, hall be quorum for a meeting of the
company.

SMALL COMPANY

“Small company” means a company, other than a public

company, —

 paid-up share capital of which does not exceed

four crore rupees or such higher amount as may
be prescribed which shall not be more than ten
crore rupees

 turnover of which as per profit and loss account

for the immediately preceding financial year forty
crore rupees or such higher amount as may be This Photo by Unknown Author is licensed
prescribed which shall not be more than one under CC BY
hundred 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.
 P a g e | 48

ADVANTAGES OF SMALL COMPANY

LESSER NUMBER OF
LENIENT COMPLAINCE
BOARD
REQUIREMENT
MEETINGS
LESSER
NUMBER OF
CERTIFICETION
NO NEED TO BY
PROFESSIONAL ABRIDGE
ENCLOSE CASH
ANNUAL
FLOW
REPORT
STATEMENT

POINTS ABOUT SMALL COMPANY

1. Filing of annual return: The annual return of a private limited company

classified as a small company, can be signed by a Company Secretary, or
where there is no company secretary, by a director of that company.

2. board’s Report: As per Section 134(3A) of the Companies Act, 2013, the
Central Government has prescribed an abridged form of Board’s report for a
small company.
Rule 8A of the Companies (Accounts) Rules, 2014 has been notified for small
companies which includes the following disclosures:

(a) the web address, if any, where annual return referred to in sub-section (3)
of section 92 has been placed;

(b) number of meetings of the Board;

(c) Directors’ Responsibility Statement as referred to in sub-section (5) of

section 134;

(d) details in respect of frauds reported by auditors under sub-section (12) of

section 143 other than those which are reportable to the Central Government;

(e) explanations or comments by the Board on every qualification, reservation

or adverse remark or disclaimer made by the auditor in his report;

(f) the state of the company’s affairs

 P a g e | 49

(g) the particulars of contracts or arrangements with related parties referred to

in sub-section (1) of section 188 in the Form AOC-2;

(h) the financial summary or highlights;

(i) material changes from the date of closure of the financial year in the nature
of business and their effect on the financial position of the company;

( j) the details of directors who were appointed or have resigned during the
year;

3. board Meeting: It is sufficient for a small company to conduct only two

Board Meetings in a calendar year, one in every half calendar year with a gap
of not less than 90 days between these two meetings.

4. Cash Flow Statement: A private limited company classified as a small

company need not prepare cash flow statement as a part of the financial
statements.

5. Rotation of Auditors:
Private limited company classified as a small company are not required to
rotate their statutory Auditors.

Further, as per the definition of a small company, holding and subsidiary companies are
specifically excluded from the concept of small company.

Any company registered under Section 8 of the Companies Act, 2013 would not be small
company though it may be a private company.

Further, Section 233 of the Companies Act, 2013 deals with fast-track mergers.
Two or more small companies are permitted to undertake fast track merger.
Such merger would require approval of Registrar of Companies having jurisdiction over
the company, the Official liquidator, members holding at least 90% of total number of
shares and majority of creditors representing 9/10th in value of the creditors or class of
creditors of respective companies indicated in a meeting convened by the company by
giving a notice of twenty-one days along with the scheme to its creditors for the purpose,
or otherwise approved in writing.

6. Reduced Penalties for non-compliance: If penalty is payable for non-

compliance of any of the provisions of this Act by a small company or by any of its
officer in default, or any other person in respect of such company, then such company,
its officer in default or any other person, as the case may be, shall be liable to a penalty
which shall not be more than one-half of the penalty specified in such provisions subject
to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an
 P a g e | 50

officer who is in default or any other person, as the case may be. This provision has
overriding effect on any other contradictory provisions of the Act.

7. E-forms Certifications: As per the provisions of the Act, there is no necessity of

certification of the e-forms of a Small Company from Professional (CA/CS/CMA).

HOLDING OR PARENT COMPANY

 Clause (46) of section 2 of the Companies Act,

2013 states as under:
A “holding company” in relation to one or
more other companies, means a company of
which such companies are subsidiary
companies.
 Holding companies are popular in India, mainly
in two forms –
a) Corporate groups running multiple and varied businesses
b) Private equity funds looking to create platforms to consolidate multiple assets
within the specific sectors or verticals, in which there are not the companies of
the required scale.
 Examples of a Holding Company:
 Alphabet Inc.
 Sony Corporation

BENEFITS OF HOLDING COMPANY

1) Greater control for a smaller investment – it gives the holding company

owner a controlling interest in the another without having to invest much.

2) Independent entities – if a holding company exercises control over several

companies, each of the subsidiaries is considered as an independent legal
entity.

3) Management continuity – whenever a parent company acquire other

subsidiaries, it almost always retains the management.

4) Tax effects – holding companies generally reap tax benefits by filing

consolidated tax returns.
 P a g e | 51

TYPES OF HOLDING COMPANIES

PURE HOLDING
A holding company is described as
pure it is formed for the sole purposse
of owning stock in other companies.

INTERMEDIATE MIXED HOLDING

HOLDING TYPES OF
This is a company
It is a firm that is both
HOLDING which not only controls
a holding company of COMPANI another but also
another entity and ES engages in its
subsidiary of large. operations.

IMMEDIATE HOLDING
It is a company that retains voting stock
or control of another company, in spite
of the fact that the company itself is
already controlled by another entity.

DISADVANTAGES OF HOLDING COMPANY

 Over capitalization: Since capital of holding company and its subsidiaries

companies may be pooled together, it may result in over capitalization. Shareholders
would get not get a fair return on their invested capital.

 Exploitation of subsidiaries: The subsidiaries companies might face

challenging situation where they are compelled to buy goods from the holding at
high prices and vice versa.
 P a g e | 52

 Manipulation: Information about subsidiaries may be used for personal gains.

For example, information of the financial performance of subsidiary companies may
be misused to indulge in speculative activities.

 Concentration of economic power: There is concentration of economic

power in the hands of those who manage the holding company.

 Monopoly: Holding companies, by absorbing more and more subsidiaries

companies, may also create conglomerates and a monopolistic market if they may
own multiple companies in the same industry

Provisions in the Companies Act, 2013 relating to holding company:

The summarized provisions relating to financial statements as contained in

Section 129 and the Companies (Accounts) Rules, 2014 are given below:

Financial Statements of Holding Company:

The Consolidated Financial Statement of holding company is required to disclose
prescribed details about subsidiary companies, associate companies and joint
ventures.

If Holding Company has more than one subsidiary:

If a Company has one or more subsidiaries, associate companies and joint
ventures, it shall, prepare a consolidated financial statement of the company and
of all the subsidiaries, associate companies and joint venture in the same form
and manner as that of its own.

Separate financial statement of Holding Company:

This Statement is in addition to the separate financial statement of the holding
company. The consolidated financial statement shall also be placed before the
annual general meeting of the holding company along with the laying of its own
financial statement.

Disclosure in balance Sheet of Holding Company:

Balance sheet of holding company shall specifically disclose investments in the
subsidiaries.

Disclosure in Profit and Loss account of Holding Company:

Profit and Loss account of Holding company shall disclose:
(a) Dividends from subsidiary Companies
(b) Provisions for losses of subsidiary Companies
 P a g e | 53

Every Company having a subsidiary or subsidiaries has to submit consolidated

financial statements in addition to its own ‘financial statements’ to Registrar of
Companies within 30 days from the date of Annual General Meeting along with
the prescribed fees.

In case the company has a website:

The Company is required to place separate audited accounts in respect of each of
its subsidiary on its website, if any, and provide a copy of separate audited
financial statements in respect of each of its subsidiary, to any shareholder of the
Company, who asks for it.

SUBSIDIARY COMPANY
As per Section 2(87), a “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 –
 Controls the composition of the board of
directors
 Exercise or control more than half of the total
voting power either at its own or together
with one or more of its subsidiaries

Provided that Under Rule 2 of the said Rules, no

company, other than a company belonging to a
class specified in sub-rule (2) of the said Rules shall
have more than two layers of subsidiaries.

The following classes of companies are exempt from restriction on number of

layers;
a) A banking companies
b) A non-banking financial company which is registered with the Reserve
Bank of India and considered as systematically important non-banking
financial company by the Reserve Bank of India;
c) An insurance company being a company which carries on the business of
insurance; and
d) A Government companies
 P a g e | 54

The term ‘control’ is defined under section 2(27) as under:

‘Control’ shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting individually
or in concert, directly or indirectly, including by virtue of their shareholding or
management rights or shareholders agreements or voting agreements or in any other
manner.

In Re Oriental Industrial Investments Corporation Ltd vs. Union of India

Control over the composition of a subsidiary company’s Board of Directors can arise
from provisions in subsidiary’s memorandum or articles or from a contract with
subsidiary empowering holding company to appoint directors to subsidiary’s Board.

Illustration:
Where the composition of the Board of Directors of a company (including body
corporate), say S Ltd., is controlled by another company (holding company), say H Ltd.,
either directly (on its own) or together with its one or more subsidiaries, then such
company (or body corporate) [S Ltd.] is said to be subsidiary of the other company, H
Ltd. Such control can also be through any subsidiary of the holding company, H Ltd. The
composition of a company’s Board of Directors shall be deemed to be controlled by
another company, even if the same is not actually so controlled, if that other company by
exercise of some power exercisable by it at its discretion can appoint or remove all or a
majority of the directors.

illustration:

Where more than one-half of the total voting power of a company (including body
corporate), Z Ltd., is controlled by another company (holding company), Y Ltd., either
directly (on its own) or together with its one or more subsidiaries, then such company (or
body corporate), Z Ltd., is said to be subsidiary of the other company, Y Ltd. Such
control can be through any one or more subsidiary / subsidiaries of the holding
company.
 P a g e | 55

BENEFITS OF A SUBSIDIARY COMPANY

limited financial liability for the bigger holding

company, containing potential losses within
the subsidiary company.

subsidiaries focusing on specific product

development can strengthen the corporation
as whole.

specific brand or product as subsidiaries own

legal entity to maintain independence.

mantain an acquired company's independence

whilst exerting managerial control

favourable tax rates

What Is a Wholly Owned Subsidiary Company?

A wholly owned subsidiary company is a company that is incorporated under the
provisions of the Companies Act, 2013 and in which holds hundred percent share capital
of such company. In other words, a wholly owned subsidiary company can be defined as
an entity whose entire share capital is held by another Indian or foreign company.

Example:
Starbucks company Japan is a wholly-owned subsidiary of the Starbucks group.

Reliance Industrial Investment and Holdings Limited (RIIHL), is a wholly owned

subsidiary of the Reliance Group of Company.
 P a g e | 56

ASSOCIATE COMPANY
Under section 2(6) of the Companies Act, 2013,
“Associate company”, in relation to another
company, means a company in which that other
company has a significant influence, but which is
not a subsidiary company of the company having
such influence and includes a joint venture
company.

For the purpose of “significant Influence”, the following conditions need to be fulfilled:
(i) Control of at least 20% of total voting power but less than 50% of Share Capital by
another company.
(ii) Control of business decisions under an agreement

Additional compliances/restrictions under the Companies Act:

If a company has an Associate Company-

It will be considered as Related Party. where the transactions are being entered
by the company with its Associate Company it will be considered as the related
party transactions.

Section 129
Consolidated Financial Statements shall also include financial statements of
Associate Company.

Section 149(6)
Following persons cannot be appointed as independent director in a company if
they are:
1. A promoter or related to promoters or Director of an Associate Company.
2. Has/had or any of his relatives has or had pecuniary relationship with
Associate Company.
3. Holding or any of their relative(s) held the position of key managerial personnel
or has been employee of an Associate Company.

Section 192
If directors of an Associate Company want to do any non-Cash transactions with
the company, then they need to pass Ordinary resolution.
 P a g e | 57

ADVANTAGES OF ASSOCIATE COMPANY

Investing in both the parent and

associate assosiate company
companies allows can the advantage
of stable financial
larger companies
support, research
to expand their and technology and
operations or improved
enter into new production
markets capabalities.

An associate
Companies that
company helps
are looking to
boost the parent
purchase a major
company's
stake in another
profitability and
business.
overall value.

DIFFERENCE BETWEEN ASSCOCIATE AND SUBSDIARY COMPANY

ASSOCIATE COMPANY SUBSIDIARY COMPANY

The parent company holds a minimum Parent company holds more than 50%
of 20% but less than 50% of total of the total voting power.
voting power.
The parent company has significant The parent company has control over
influence that is the power to the financial and operating decisions
participate in financial and operating of the subsidiary company.
decision of associate company.
There may be presence of certain The parent company controls the
number of common promoters or management of the subsidiary
directors. company.
 P a g e | 58

DORMANT COMPANY / INACTIVE COMPANY

The definition of an Inactive Company can be
found in the explanation to Section 455(1) of the
Companies Act, 2013. It reads as under:

“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.

Why Obtain Dormant Status?

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

Procedural aspects relating to dormant company / inactive company:

 To obtain the status of dormant company, an application is to be filed in Form

MSC-1 with the Registrar. After considering the same, the Registrar shall issue a
certificate in Form MSC-2 allowing the status of a Dormant Company.

 A company shall be eligible to apply for dormant status only if:

 no inspection, inquiry or investigation has been ordered or taken up

or carried out against the company.
 No prosecution has been initiates and pending against the company
under any law
 The company is neither having any public deposits which are
outstanding nor the company is in default in payment thereof or
interest there in
 The company is not having any outstanding loan, whether secured
or unsecured: provided that if there is any outstanding unsecured
loan, the company may apply under this rule after obtaining
 P a g e | 59

occurrence of the lender and enclosing the same with the form MSC-
1
 There is no dispute in the management or the ownership of the
company and a certificate in this regard is enclosed with the form
MSC-1
 The company does not have any outstanding statutory taxes, duties,
dues etc. payable to the central government or any state government
or local authorities etc.
 The company has not defaulted in the payment of workmen’s dues
 The securities of the company ae not listed on any stock exchange
within or outside India.

 A dormant company shall file a “Return of Dormant Company” annually indicating

financial position duly audited by a chartered accountant in practice in Form MSC-
3 within 30 days from the end of each financial year. The company shall continue
to file returns of allotment and change in directors within the time specified in the
Act, whenever the company allots any security to any person or there is any
change in the directors of the company.

Compliance Process for Dormant Company:

Passing of a special resolution or

consent of atleast 3/4th shareholders

Application to ROC in form MSC-1

issuance of certificate by registrar in

form MSC-2

Filing of return of dormant company

[audited by PCA] within 30 days of end
of each financial year.

Filing forms for allotment and changes

in directors.
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GOVERNMENT COMPANY

Section 2(45) of the Companies Act, 2013 contains

the definition of Government Company.
According to the said sub section, “Government
company” means any company in which not less than
fifty-one per cent 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.

EXEMPTIONS TO THE GOVERNMENT COMPANIES

Name: The name of all Government Companies shall end with the word “Limited”, be it
Public or a Private Company. The word “STATE” is allowed in name.

Transfer of Shares: Provisions of Transfer of Shares are not applicable on Government

Company in respect of Securities held by nominees of the Government.

Transfer of bonds: In case of transfer of Bonds issued by a Government Company,

Instrument of transfer is not required to be executed and delivered to the Company.

Declaration of dividends out of accumulated profits of previous year: The second

proviso to sub-section (1) of section 123 do not apply to the company in which the entire
paid-up share capital is held by the Central Government, or by any Stale Government or
Governments or by the Central Government and one or more State Governments.

Deposit of dividend in a scheduled bank within five days from the date of
declaration: Sub-section (4) of section 123 shall not apply to the company in which the
entire paid-up share capital is held by the Central Government, or by any Stale
Government or Governments or by the Central Government and one or more State
Governments or by one or more Government Company.

Exemption from Accounting Standard 17 relating to Segment Reporting: Section

129 shall not apply to the extent of application of Accounting Standard 17 (Segment
Reporting) to the companies engaged in defense production.

Exemption from certain disclosure requirements in board’s Report: The

requirement of disclosing the Company’s nomination and remuneration policy etc. and
certain disclosures in the Board’s Report has been relaxed for Government Company

Appointment of more than 15 Directors: a Government Company can have more than
15 directors. Such a company is now no longer required to pass a special resolution for
appointing more than 15 directors.
 P a g e | 61

Place of Annual general Meeting: Every Annual General Meeting shall be called during
business hours, on any day that is not a National Holiday and shall be held either at the
registered office of the Company or at some other place as the Central Government may
approve in this behalf

Appointment of Director - The requirement of seeking consent from a director to hold

office of director and filing the same within 30 days of appointment to ROC is relaxed
where appointment of such Director is done by the Central Government or State
Government as the case may be.

Right of persons other than retiring directors to stand for directorship [section 160]
The section is not applicable to –
(i) A Government Company,
(ii) A subsidiary of a government Company

Disqualification of directors - Disqualifications for appointment as Director – Director

of a Company which has not filed financial statements/ annual returns for continuous 3
years not repaid deposits or interest thereon, etc. shall not apply to Government
Company.

Register of Directors, KMP and their shareholding & its inspection: Section 170
(Maintenance of Register of Directors and KMPs and their shareholding) and 171
(Members right to inspect – Register of directors and KMP and their shareholding) shall
not apply to a Government Company.

Loan to Director - The restrictions contained in Section 185 regarding loans to director
shall not apply to Government company.

Loan and Investment by Company - The requirement of seeking member’s approval by

means of a Special Resolution for making loan/investments or giving guarantee/security
in excess of the threshold limits specified in Section 186 has been relaxed for
Government Companies.

Related Party Transaction - Exemptions to Government Companies under Section 188

of the Companies Act, 2013

Appointment of Managerial Personnel [SECTION 196]

The following provisions of Section 196(2), (4) and (5) shall not apply to Government
Companies:
a) Requirement of Appointment/Re-appointment of MD/WTD/Manager for a term not
exceeding 5 years at a time.
b) Requirement of seeking approval of Board and Members at a meeting for
appointment of Managerial Personnel and also of Central Government where such
appointment/ remuneration of Managerial Personnel is not in accordance with
provisions of Schedule V.
c) Requirement of filing return of appointment of Managerial Personnel within 60
days with the ROC in Form MR-1.
 P a g e | 62

d) Provision that where an appointment of a Managing Director, Whole Time Director

or Manager is not approved by the Company at a General Meeting, any act done
by him before such approval shall not be deemed to be invalid.

Appointment of Key Managerial Personnel [ section 203]

The provisions of this section shall not be applied to a Managing Director or Chief
Executive Officer or Manager and in their absence, a Whole-Time Director of the
Government Company.

PROVISIONS RELATING TO AUDITOR

1) Appointment of first auditor in a government company –

 In the case of Government Company, the First Auditor shall be appointed by the
Comptroller and Auditor General of India (C & AG) within 60 (Sixty) days from the
date of registration of the Company.
 If CAG fails to appoint first Auditor within 60 days, then the Board of Directors of
the Company shall appoint the Auditor within the next 30 days and in the case of
failure of the Board to appoint such auditor within the next thirty days, it shall
inform the members of the company who shall appoint such auditor within the
sixty days at an extraordinary general meeting.
 The First Auditor holds office till the conclusion of the First Annual General
Meeting.

2) Appointment of auditor for subsequent financial year –

 The appointment of Auditor in a Government Company in every subsequent

financial year shall be made by C & AG within period of 180 days from the
commencement of the financial year.
 The Auditor shall hold office up to the conclusion of the Annual General Meeting.

3) Appointment in case of casual vacancy –

 Where a casual vacancy arises in the office of the Auditor in a Government

Company it is required to be filled by the Comptroller and Auditor-General of India
within thirty days
 Provided that in case the Comptroller and Auditor-General of India does not fill the
vacancy within the said period, the Board of Directors shall fill the vacancy within
next thirty days.

AUDITOR REPORT IN A GOVERNMENT COMPANY –

In case of Government Company, the Controller and Auditor General of India shall
appoint the auditor and direct such Auditor the manner in which the Accounts of the
Company are required to be audited. Accordingly, the Auditor shall submit a copy of the
report to the C&AG which shall include the directions, if any, issued by the C&AG, the
action taken thereon and its impact on the accounts and financial statement of the
Company.
 P a g e | 63

Supplementary Audit Ordered by C & Ag –

The C & AG shall, with in 60 (Sixty) days of the receipt of the Audit Report, have
a right to –
(a) Conduct a supplementary audit of the Company’s accounts by himself or by such
person or persons as he may authorize and for the purpose of such audit require
information or additional information to be furnished to any person or persons, so
authorized, on such matters, by such person or persons and in such form as the C&AG
may direct.
(b) Comment upon the Audit Report or supplement such Audit Report.

Annual Report of Government Company –

where the Central Government is a member of a Government company, the Central
Government shall cause an annual report on the working and affairs of that company to
be—
(a) prepared within three months of its annual general meeting before which the
comments given by the Comptroller and Auditor-General of India and the audit report is
placed and
(b) as soon as may be after such preparation, laid before both Houses of Parliament
together with a copy of the audit report and comments upon or supplement to the audit
report, made by the Comptroller and Auditor General of India.
 P a g e | 64

CHAPTER – 3

MEMORANDUM AND ARTICLES

OF ASSOCIATION AND ITS ALTERATION

WHAT IS MEMORANDUM OF
ASSOCIATION? [ kya krna hai kya nhi
main btaunga]

Memorandum of Association is a legal document which

describes the purpose for which the company is formed
and therefore identified the possible scope of its
operations beyond which its action cannot go. It defines
as well as confines the powers of the company. If anything is done beyond these powers
that will be ultra vires (beyond the powers) of the company and so void.

Definition and provisions pertaining to Memorandum under the Companies Act, 2013:

According to Section 2(56) of the Act “memorandum” means the memorandum of

association of a company as originally framed and altered, from time to time, in
pursuance of any previous company law or this Act.

Section 4 of the Act specifies in clear terms:

 The contents of Memorandum, which is the charter of the company.

 The Memorandum of association of company contains the objects of the
company which it shall pursue.
 P a g e | 65

 It not only shows the objects of formation of the company but also determines
the scope of its operation beyond which its actions cannot go.

In Re Attorney General Vs. Great Eastern Railway

It was held that the court will consider ancillary/incidental objectives along with main
objects of the company.

Question: Do all the companies require MoA?

Answer: Yes, it is mandatory for every company to have a MoA as it defines the scope of
its operations. The entire structure of the company is detailed in the MoA. It is to be
submitted to the Registrar of Companies. It is a public document, and any person can
view the MoA of the company by paying the required fees to the Ministry of Corporate
Affairs (MCA).

FORM OF MEMORANDUM OF ASSOCIATION

Section 4(6) of the Act provides that the memorandum of association should be in any
one of the Forms specified in Tables A, B, C, D or E of Schedule I to the Act, as may be
applicable in relation to the type of company proposed to be incorporated or in a Form as
near thereto as the circumstances admit.

A company shall adopt any of the model Forms of the memorandum of association
mentioned above, as may be applicable to it.
 P a g e | 66

CONTENTS OF MEMORANDUM
[SECTION 4 READ WITH SCHEDULE I]

Memorandum of Association (MoA) consists of the following clauses:

As per Section 4(1), the memorandum of a limited company must state the
following:

(a) the name of the company with “Limited” as its last word in the case of a public
company; and “Private Limited” as its last words in the case of a private
company; (Name Clause)
This shall not apply in case of companies registered under section 8 and
government companies.

(b) the State in which the registered office of the company is to be situated
(Situation Clause);

(c) the objects for which the company is proposed to be incorporated and any
matter considered necessary in furtherance thereof (Objects Clause);

(d) the liability of members of the company, whether limited or unlimited, and
also state, — (Liability Clause):
 P a g e | 67

(i) in the case of a company limited by shares, that liability of its members is limited to
the amount unpaid, if any, on the shares held by them; and

(ii) in the case of a company limited by guarantee, the amount up to which each member
undertakes to contribute –
A) to the assets of the company in the event of its being wound-up while he is a
member or within one year after he ceases to be a member, for payment of the
debts and liabilities of the company or of such debts and liabilities as may have
been contracted before he ceases to be a member, as the case may be; and
B) to the costs, charges and expenses of winding-up and for adjustment of the
rights of the contributories among themselves.

(e) in the case of a company having a share capital, — (Capital Clause) the amount of
share capital with which the company is to be registered and the division thereof into
shares of a fixed amount;

(f) Subscription Clause:

 the number of shares which the subscribers to the memorandum agree to subscribe
which shall not be less than one share; and
 the number of shares each subscriber to the memorandum intends to take, indicated
opposite his name;

(g) in the case of a One Person Company, the name of the person who, in the
event of the death of the subscriber, shall become the member of the company.

According to section 4(7), any provision in the memorandum or articles, in the case of
a company limited by guarantee and not having a share capital, purporting to give any
person a right to participate in the divisible profits of the company otherwise than as a
member, shall be void.

It is to be noted that the Companies Act, 2013 shall override the provisions in the
Memorandum and Articles of a company, if the latter contains anything contrary to the
provisions in the Act (Section 6).
 P a g e | 68

NAME CLAUSE: -
According to section 4(2), the name stated in the
memorandum shall not –
(a) be identical with or resemble too nearly to the
name of an existing company registered under
this Act or any previous company law; or
(b) be such that its use by the company –

 will constitute an offence under any law for the time being in force; or
 is undesirable in the opinion of the Central Government.

Section 4(3) of the Act provides that without prejudice to the provisions of section 4(2), a
company shall not be registered with a name which contains –
(a) any word or expression which is likely to give the impression that the company is
in any way connected with, or having the patronage of, the Central Government,
any State Government, or any local authority, corporation or body constituted by
the Central Government or any State Government under any law for the time being
in force; or
(b) such word or expression, as prescribed in rule 8 of the Companies (Incorporation)
Rules, 2014, unless the previous approval of the Central Government has been
obtained for the use of any such word or expression.

As per section 4(4) a person may make an application for reservation of name shall be
made by using web service Spice+ (Simplified Proforma for Incorporating Company
Electronically Plus: INC-32), and for change of name by using web service RUN (Reserve
Unique Name), in prescribed manner and accompanied by prescribed fee to the Registrar
for the reservation of a name set out in the application as –
(a) the name of the proposed company; or
(b) the name to which the company proposes to change its name.

Section 4(5)(i) lays down that upon receipt of an application under sub-section (4), the
Registrar may, on the basis of information and documents furnished along with the
application, reserve the name for a period of twenty days from the date of the application.

Provided that in case of an application for reservation of name or for change of its name
by an existing company, the Registrar may reserve the name for a period of sixty days
from the date of approval.
 P a g e | 69

CASE LAWS

[Methodist Church v. Union of India].

The Registrar must make preliminary enquiries to ensure that the name allowed by him is
not misleading or intended to deceive with reference to the Objects Clause of the
memorandum. [ registrar ko companies ko name allow krne se phle enquiry krni chiye ki
name misleading or deceiving to nhi h]

[T.V. Krishna v. Andhra Prabha]

The Registrar is not, however, required to carry out any elaborate investigation at the
time of registration of the company. Unless the purpose of the company appears to be
unlawful ex-facie or is transparently illegal or prohibited by any statute, it cannot be
regarded as an unlawful association. [ company ke registration ke time par ROC ko detail
investigation ki requirement nhi h unless company unlawful or illegal ho]

Atlas Cycles (Haryana) Ltd. v. Atlas Products Pvt. Ltd

In this case use of the brand name as corporate name was settled.
Both the plaintiff and the defendant companies belong to the same family. The
Appellant-plaintiff was the proprietor of the trade mark in the name “Atlas” and
Respondent- defendant company containing the name “Atlas” in its corporate name
started dealing in bicycles.
The plaintiff objected to the use of the name “Atlas” by the defendant company. The
Defendants were restrained from using the word ‘Atlas’ in their corporate/trade name in
respect of bicycles and bicycle parts.

[Halifax Plc v. Halifax Repossessions Ltd.]

Where a company is directed to change the name, the court cannot directly tell the
Registrar to effect the change in the name of the company. The Court can only direct the
company to do so. The company cannot simply file the Court order regarding the change,
but it will have to follow the prescribed procedure. [court name change krne ka order
only company ko de skti h direct ROC ko nhi or company bhi procedure follow krke hi
name change kr skti h]
 P a g e | 70

[K.G. Khosla Compressors Ltd. v. Khosla Extractions Ltd.,]

A person cannot be permitted to name a company even after his personal name if that
name resembles the name of an existing company. [ if person apne personal name pr
company ka name rkhta h aur wo name existing company ke name se resemble krta h to
company uss name ko nhi rkh skti]

SITUATION CLAUSE
This clause connotes the name of the State in which the
registered office of the company is situated. This helps to
determine the jurisdiction of the Registrar of Companies
(RoC). The company is required to inform the location of
the registered office to the Registrar of Companies within
30 days from the date of incorporation of the company
and all time thereafter, the company must have a registered office to which all
communications and notices may be sent.
Publication of Name and Address of the Company:
According to Section 12(3) of the Act, every company is required to display its name and
address in legible letters in conspicuous position and in all its business letters, bill
heads, letter papers. Accordingly, the company shall –
(a) paint or affix its name, and the address of its registered office, and keep the same
painted or affixed, on the outside of every office or place in which its business is
carried on, in a conspicuous position, in legible letters.
(b) have its name engraved in legible characters on its seal, if any;
(c) get its name, address of its registered office and the Corporate Identity Number
along with telephone number, fax number, if any, e-mail and website addresses, if
any, printed in all its business letters, billheads, letter papers and in all its notices
and other official publications; and
(d) have its name printed on negotiable instruments such as hundis, promissory
notes, bills of exchange and such other document as may be prescribed.

Every company which has a website for conducting online business or otherwise, shall
disclose/publish its name, address of its registered office, the Corporate Identity Number,
Telephone number, fax number if any, email and the name of the person who may be
contacted in case of any queries or grievances on the landing/home page of the said
website.
However, where a company has changed its name or names during the last two years, it
shall paint or affix or print, as the case may be, along with its name, the former name or
names so changed during the last two years.
 P a g e | 71

[Dr. H.L. Batliwalla Sons & Company Ltd. v. Emperor]

The words ‘outside of every office’ do not mean outside the premises in which the office
is situated. Where office is situated within a compound, the display outside the office
room, though inside the building, is sufficient.

OBJECT CLAUSE
Under section 4(1)(c) of the Act, all companies must state in
their memorandum the objects for which the company is
proposed to be incorporated and any matter considered
necessary in furtherance thereof.
It defines the objects for which the company is proposed to
be incorporated and any matter considered necessary in
furtherance thereof.
The purpose of the objects clause is to enable the persons
dealing with the company to know its permitted range of
activities. The acts beyond this ambit are ultra vires and hence void. Even the entire body
of shareholders cannot ratify such acts.

[Attorney General v. G.E. Rly. Co.]

Although express powers are necessary, a company may do anything which is incidental
to and consequential upon the powers specified, and the act will not be ultra vires

Cotman v. Brougham
The memorandum of association of a company is its charter defining the objects of its
existence and operations and its purpose is ‘to enable the shareholders, creditors and
those dealing with the company to know what is the permitted range of the enterprise.
 P a g e | 72

[Egyptian Salt and Soda Co. Ltd. v. Port Said Salt Association Ltd]
The objects clause or clauses in the memorandum are to be so construed as to confer on
the company all powers reasonably required to the attainment of the objects.’
“A memorandum of association like any other document must be read fairly and its
importance derived from a reasonable interpretation of the language which it employs.

LIABILITY CLAUSE
It states the liability of the members of the company.
In case of an unlimited company, the liability of the
members is unlimited whereas in case of a company
limited by shares, the liability of the members is
restricted by the amount unpaid on their share.
For a company limited by guarantee, the liability of the This Photo by Unknown Author is licensed under
members are restricted by the amount each member has agreed to contribute at the time
of incorporation.
Section 4 sub-section 1(d) of the Act, states that the liability of members of the company
is to be specifically mentioned in the MoA. It is provided that the liability of member may
either be limited or unlimited.

CAPITAL CLAUSE
This clause specifies the maximum capital that a company can
raise which is also called the authorized/ nominal capital of the
company. This also explains the division of such capital amount
into the number of shares of a fixed amount each.
The capital is variously described as “nominal”, “authorized” or
“registered”.
The amount of nominal capital is determined having regard to the
present as well as future requirements of the company with
reference to its objects.
This amount lays down the maximum limit beyond which the company cannot issue
shares without altering the memorandum as provided by Section 61 of the Companies
Act, 2013. A company is not authorized to issue capital beyond its
authorized/nominal/registered capital.
Out of the issued capital, the total amount actually subscribed or agreed to be
subscribed is known as subscribed capital. The amount actually paid by the
shareholders is called the paid- up capital.
 P a g e | 73

SUBSCRIPTION CLAUSE
The Subscription Clause defines who are signing the memorandum of company. Each
subscriber must state the number of shares he is subscribing to. The subscribers have
to sign the memorandum in the presence of two witnesses.
Each subscriber must subscribe to at least one share.
The statutory requirements regarding subscription of memorandum are that:

ALTERATION OF MEMORANDUM OF ASSOCIATION (MOA)

Section 13(1) of the Act provides that same as provided in section 61 (Dealing with power
of limited company to alter its share capital), a company may, by a special resolution and
after complying with the procedure specified in this section, alter the provisions of its
memorandum.
Section 13(6) provides that a company shall, in relation to any alteration of its
memorandum, file with the Registrar the special resolution passed by the company U/S
13(1).
Section 13(10) provides that no alteration made under this section shall have any effect
until it has been registered in accordance with the provisions of the said section.
The memorandum of association of a company may be altered in the following respects:
 P a g e | 74

A) ALTERATION OF MOA DUE TO CHANGE IN NAME [SECTION 13 (2) AND (3)]

 The name of the company can be altered by a special resolution and with the
approval of the Central Government in writing. Approval of the Central
Government is not required, in case where the change in the name of the company
relates to the addition/deletion of the word ‘Private’ to the name of the company
consequent to the conversion of a company into a public company and vice versa
[Section 13 (2)].
 If through inadvertence or otherwise, a company on its first registration or on its
registration by a new name has been registered with a name which, in the opinion
of the Central Government, is identical with or too closely resemble the name of
an existing company, the company may change its name within a period of three
months from the issue of such direction by passing an ordinary resolution and by
obtain the approval of the Central Government in writing. (Section 16)
 When any change in the name of a company is made the Registrar shall enter
the new name in the register of companies in place of the old name and issue a
fresh certificate of incorporation with the new name and such change in the name
shall be complete and effective only on the issue of such a certificate [Section
13(3)].
 According to Rule 29 of Companies (Incorporation) Rules, 2014, the change of
name shall not be allowed to a company which has not filed annual returns or
financial statements due for filing with the Registrar or which has failed to pay or
repay matured deposits or debentures or interest thereon.
Provided that the change of name shall be allowed upon filing necessary
documents or payment or repayment of matured deposits or debentures or
interest thereon as the case may be.
 An application shall be filed in Form No. INC-24 along with the fee for change in
the name of the company and a new certificate of incorporation in Form No. INC-
25 shall be issued to the company consequent upon change of name.
 P a g e | 75

CASE LAW –
[Re cGMP Pharmaplan (Pvt) Ltd. Vs. Regional Director, Ministry of Corporate Affairs]
FACTS –
NNE Pharmaplan Ltd. filed a representation before the office of Regional Director of
MCA under section 16 (the then section 22) seeking a direction that the petitioner
company incorporated on later date with the name cGMP Pharmaplan (Pvt) Ltd, it should
change its name.
JUDGEMENT –
Regional Director of the MCA and Hon’ble Delhi HC concluded that the use of name by
petitioner of the word ‘pharmaplan” in its name would have a misleading effect in the
minds of general public and directed petitioner to delete the word ‘pharmaplan” from its
existing name and change its name to some other name.

Procedure for Alteration in Name Clause of Memorandum:

1. Calling of board Meeting
 Issue notice for convening a meeting of the Board of Directors to consider the
reason for changing name of the company and get its approval for change in
name of the Company.
 Pass a Board resolution authorizing the Company Secretary/ Director to make the
required application to the Registrar of Companies.

2. Seeking name availability for proposed new name from the ROC
 File an application for the reservation/availability of name through the web service
available at [Link]. in by using RUN (Reserve Unique Name) along with fee
as provided which may either be approved or rejected, as the case may be, by the
Registrar, Central Registration Centre.

3. Obtaining ROC Approval and Name Availability Letter

 After approval of name, ROC will issue a name availability letter w.r.t. approval for
availability of name for a proposed company.
 As per section 4(5), upon receipt of an application for reservation of name, the
Registrar may, on the basis of information and documents furnished along with
the application, reserve the name for a period of twenty days from the date of
approval or such other period as may be prescribed.
 Provided that in case of an application for reservation of name or for change of its
name by an existing company, the Registrar may reserve the name for a period of
sixty days from the date of approval.
 On receipt of approval of name, the Company Secretary/Director shall convene
another Board meeting:
a) To take note of the name approval received from ROC.
 P a g e | 76

b) To fix date, time and place for holding Extra-ordinary General meeting (EGM)
to get approval of shareholders, by way of Special Resolution, for amendment
in Name clause of Memorandum.
c) To approve notice of EGM along with agenda and explanatory statement to be
annexed to the notice of General Meeting.
d) To authorize the Director or Company Secretary to issue Notice of the Extra-
ordinary General meeting (EGM) as approved by the board.

4. Issue of Notice of Extra-ordinary general Meeting (EGM)

 Issue Notice of the EGM to all the Members, Legal Representatives of any
deceased member or assignee of an insolvent member, Directors and the Auditors
of the company in accordance with the provisions of Section 101 of the
Companies Act, 2013.

5. Holding of Extra ordinary general Meeting

 Hold the Extra-ordinary General meeting on the fixed date and pass the necessary
Special Resolution under section 13(1) of the Companies Act, 2013, for change in
the Name clause of Memorandum.

6. ROC filings
 As per section 13(6), the Company is required to file Special Resolution passed by
shareholders for alteration of Memorandum with concerned ROC and file Form
MGT -14 (certified by a Practicing Professional i.e., CS/ CA/CWA) within 30 days of
passing the resolution with prescribed fees.
 Also, the application for the fresh certificate of incorporation in the new name of
the company be made in form INC-24 to the Registrar within the 30 days along
with the prescribed fees.

7. After scrutiny of the documents filed, the ROC shall issue a fresh certificate of
incorporation digitally signed in Form INC-25.

8. Intimate all concerned persons/authorities about the changed name of the

Company, particularly the Stock Exchanges, National Securities Depository Ltd.,
Central Depository Services (India) Ltd., statutory and other authorities.

9. Arrange for a new Common Seal and have the same adopted at a meeting of the
Board of directors and keep it under safe custody and get stationery printed with
the new name and/or affix rubber stamp of the new name on all the existing
documents.

10. Get the new name of the Company painted on all the signboards or name boards
wherever they are displayed.

11. Correct all records, registers including the Register of Members, every copy of
Memorandum and Articles of Association, other books and documents pertaining
to the company’s business and affairs to display the new name along with the
former name so changed during last two years.
 P a g e | 77

Name change requirement under regulation 45 of the Sebi (Listing Obligations and
Disclosure Requirements) Regulations, 2015
All listed companies which decide to change their names shall be required to comply
with the following conditions;
1) A time period of at least 1 year should have elapsed from the last name change;
2) At least 50% of its total revenue in the preceding 1year period should have been
accounted for by the new activity suggested by the new name; or
3) The amount invested in the new activity/project (Fixed Assets + Advances + Work
in Progress + Inventories + Investments+ Trade Receivables + Cash & Cash
equivalents) is at least 50% of the assets of the company. The ‘advances’ shall
include only those extended to contractors and suppliers towards execution of
project, specific to new activity as reflected in the new name;
4) To confirm the compliance, the company would have to submit auditor’s certificate
to the stock exchange;
5) The new name along with the old name shall be disclosed through the web sites of
the respective stock exchange/s where the company is listed for a continuous
period of one year, from the date of the last name change (Regulation 46).
If any listed entity has changed its activities which are not reflected in its name, it shall
change its name in line with the activities within a period of six months from the change
of activities in compliance of provisions as prescribed in the Companies Act, 2013
(Regulation 45).

EFFECT OF CHANGE IN NAME CLAUSE

CASE LAWS
[ Re Malhati Tea Syndicate Ltd. v. Revenue Officer]
Where a company changes its name and the new name has been registered by the
Registrar, the commencing of legal proceedings in the former name is not valid.
[ Re Pioneer Protective Glass Fibre (P) Ltd. v. Fibre Glass Pilkington Ltd.,]
In spite of a change in name the entity of the company continues. The company is not
dissolved nor does any new company come into existence. If any legal proceeding is
commenced, after change in the name, against the company in its old name, the
company should be treated as if it is not in existence. It is not an incurable defect and the
plaint can be amended to substitute the new name.
 P a g e | 78

Methods of changing the name

After incorporation, a company can change their name through following methods:

B) ALTERATION OF SITUATION/REGISTERED OFFICE CLAUSE IN THE MOA

[SECTION 13(4)(5) AND (7)]

1) Change within the local limits of same town

2) Change outside the local limits of any city, town or village

According to Section 12(5) of the Act except on the authority of a special

resolution passed by a company, the registered office of the company shall
not be changed –
 P a g e | 79

(i) in the case of an existing company, outside the local limits of any city,
town or village where such office is situated at the commencement of this
Act or where it may be situated later by virtue of a special resolution
passed by the company; and

(ii) in the case of any other company, outside the local limits of any city,
town or village where such office is first situated or where it may be
situated later by virtue of a special resolution passed by the company.

In case the company is eligible for conducting business through postal ballot any
change in place of registered office outside the local limits of any city, town or
village the same shall be transacted only by means of voting through a Postal
Ballot [Rule 22 of Companies (Management and Administration) Rules, 2014]

3) Change within the same State from the jurisdiction of one Registrar of Companies
to the jurisdiction of another Registrar of Companies

 No company shall change the place of its registered office from the jurisdiction of
one Registrar to the jurisdiction of another Registrar within the same State unless
such change is confirmed by the Regional Director. {Proviso to Section 12(5)}
 Section 12(6) states that the Regional Director, after hearing the parties shall pass
necessary orders within a period of thirty days from the date of the receipt of the
application.
 Thereafter, the company concerned shall file a copy of the said order with the
Registrar of Companies (ROC) within a period of sixty days from the date of the
confirmation order by Regional Director.
 The said ROC shall record the ordered changes in its records.
 The ROC of the state where the registered office of the company was previously
situated, shall transfer all the documents and papers to the new ROC.
Rule 28 of Companies (Incorporation) Rules 2014 states that an application seeking
confirmation from the Regional Director for shifting the registered office within the same
State from the jurisdiction of one Registrar of Companies to the jurisdiction of another
Registrar of Companies, shall be filed by the company with the Regional Director in Form
[Link].23 along with the fee and following documents, -
A) Board Resolution for shifting of registered office;
B) Special Resolution of the members of the company approving the shifting of
registered office;
C) a declaration given by the Key Managerial Personnel or any two directors
authorized by the Board, that the company has not defaulted in payment of dues
to its workmen and has either the consent of its creditors for the proposed
shifting or has made necessary provision for the payment thereof;
 P a g e | 80

D) a declaration not to seek change in the jurisdiction of the Court where cases for
prosecution are pending;
E) acknowledged copy of intimation to the Chief Secretary of the state as to the
proposed shifting and that the employees’ interest is not adversely affected
consequent to proposed shifting.
The Regional Director shall examine the application and the application may be put
up for orders without hearing and the order either approving or rejecting the
application shall be passed within fifteen days of the receipt of application complete
in all respects.
The certified copy of order of the Regional Director, approving the alternation of
memorandum for transfer of registered office company within the same State, shall be
filed in Form [Link]-28 along with fee with the Registrar of State within thirty days
from the date of receipt of certified copy of the order.

4) Change of registered office from one state to another

 The change of registered office from one State to another State involves
alteration of memorandum, and the change can be affected by a special
resolution passed by the company which must be confirmed by the Central
Government on an application made to it [Section 13(4)].
 The Central Government shall dispose of the application within a period of
sixty days and before passing its order may satisfy itself that the alteration
has the consent of the creditors, debenture-holders and other persons
concerned with the company or that a sufficient provision has been made
by the company either for the due discharge of all its debts and obligations
or that adequate security has been provided for such discharge. [Section
13(5)].
 A company shall, in relation to any alteration of its memorandum involving
change of registered office from one State to another, file with the Registrar
the special resolution passed by it in MGT- 14 [Section 13(6)].
 Where an alteration of the memorandum results in the shifting of the
registered office of a company from one State to another, a certified copy
of the order of the Central Government approving the alteration shall be
filed by the company with the Registrar of each of the States within 30
days’ time from the receipt of the certified copy of the order and in INC-28,
who shall register the same, and the Registrar of the State where the
registered office is being shifted to, shall issue a fresh certificate of
incorporation indicating the alteration. [Section 13(7) read with Rule 31 of
the Companies (Incorporation) Rules, 2014]
 P a g e | 81

Procedure to be followed as laid down in Rule 30 of the Companies (Incorporation)

Rules, 2014 (as amended from time to time) are enumerated below:
1) Send notice of Board Meeting at least seven days before the date of Board
Meeting for:
 Shifting of Registered office form one state to another state.
 Approval of Notice for Calling of Extraordinary General Meeting (EGM) for
passing special resolution for altering the memorandum.
 Authorization to Director/ Company Secretary to sign the documents.
 Engagement of Company Secretary to represent the company before
Regional Director (RD).

2) In Case of Listed Company, at least 7 days before of the Board Meeting, publish
notice of the board meeting in the newspaper. Simultaneously, send the copies of
said publication to the Stock exchanges.

3) Hold the Board Meeting and approve the:

 Resolution Shifting of Registered office from one state to another state.
 Notice for Calling of EGM for passing special resolution for shifting of
registered office.
 Authorization to Director/ Company Secretary to sign the documents.
 Engagement of Company Secretary to represent the company before RD.

4) Intimate the Stock Exchanges about passing of resolution in the board meeting at
the earliest within 24 hours. [Regulation 30(6) of the SEBI (LODR) Regulations,
2015].

5) Send Notice of the EGM at least 21 days clear days before to the members of the
company. Send copies of the notice to the stock exchanges simultaneously. Also,
an intimation to be sent to the concerned stock exchanges that the notice of the
extra-ordinary general meeting was sent to the shareholders of the company at
the earliest within 24 hours of the occurrence of such event. [Regulation 30(6) of
SEBI (LODR) Regulations, 2015].

6) Publish the notice of EGM in newspaper and send the copy of such publication to
the stock exchanges.

7) Hold EGM of the company and pass the special resolution for shifting of
registered office from one state to another state and authorize Director/ Company
Secretary to sign/ file/ deal with department.

8) Intimate about the proceedings of the EGM and the amendments to the
memorandum and articles of association to the stock exchanges at the earliest
within 24 hours of the conclusion of such extra-ordinary general meeting and in
case of any delay the disclosure should be made along with an explanation for
such delay. [Regulation 30(6) of SEBI (LODR) Regulations, 2015].
 P a g e | 82

9) File e-form MGT-14 with ROC for registering special resolution passed in the EGM
within 30 days from the date of passing such resolution.

10) Prepare the application for shifting of registered office to be filed to RD. File a
copy of the application along with all annexures to ROC in form INC-23 along with
the following annexures/ attachments: -

A) Copy of the Memorandum and Articles of association.

B) Certified true copy of the special resolution passed approving the shifting of
the registered office of the company and Copy of the notice convening the
extra-ordinary general meeting along with relevant explanatory statement.
C) Copy of the minutes of the general meeting at which the resolution authorizing
such alteration was passed, giving details of the number of votes cast in favor
or against the resolution.
D) An affidavit verifying the application.
E) The list of creditors and debenture holders entitled to object to the application.
F) An affidavit verifying the list of creditors.
G) An affidavit from the directors of the company that no employee shall be
retrenched as a consequence of shifting of the registered office from one state
to another state.
H) Details that objecting creditors/depositors/debenture holders have been
discharged with their due debts/ has given consent to such alteration.
I) Details of prosecution/inquiry/inspection.
J) Statement of reasons for shifting the registered office of the company from
one state to another/ from jurisdiction of one RoC to another.

11) The company shall, not more than thirty days before the date of filing the
application in Form No. INC- 23 –
A) advertise in the Form [Link]-26 in the vernacular newspaper in the principal
vernacular language in the district and in English language in an English
newspaper with the widest circulation in the State in which the registered
office of the company is situated:
Provided that a copy of advertisement shall be served on the Central
Government immediately on its publication.
B) serve, by registered post with acknowledgement due, individual notice to each
debenture-holder and creditor of the company; and
C) serve, by registered post with acknowledgement due, a notice together with
the copy of the application to the Registrar and to the Securities and Exchange
Board of India, in the case of listed companies and to the regulatory body, if
the company is regulated under any special Act or law for the time being in
force.

12) There shall be attached to the application a duly authenticated copy of the
advertisement and notices, a copy each of the objection received by the applicant,
and tabulated details of responses along with the counter response from the
company received either in the electronic mode or in physical mode in response
to the advertisements and notices.
 P a g e | 83

13) There no objection has been received from any person in response to the
advertisement or notice under sub- rule (5) or otherwise, the application
may be put up for orders without hearing and the order either approving or
rejecting the application shall be passed within fifteen days of the receipt
of the application.

14) Where an objection has been received,

 the Central Government shall hold a hearing or hearings, as

required and direct the company to file an affidavit to record the
consensus reached at the hearing, upon executing which, the
Central Government shall pass an order approving the shifting,
within sixty days of filing the application.
 where no consensus is reached at the hearings the company shall
file an affidavit specifying the manner in which objection is to be
resolved within a definite time frame, duly reserving the original
jurisdiction to the objector for pursuing its legal remedies, even after
the registered office is shifted, upon execution of which the Central
Government shall pass an order confirming or rejecting the alteration
within sixty days of the filing of application.

15) The order passed by the Central Government confirming the alteration may
be on such terms and conditions, if any, as it thinks fit, and may include
such order as to costs as it thinks proper:
Provided that the shifting of registered office shall not be allowed if any
inquiry, inspection or investigation has been initiated against the company
or any prosecution is pending against the company under the Act.

16) The change of address of the registered office shall be effective from the
date of issue of registration certificate by the ROC of the State to which the
registered office is shifted.

17) Once the order is passed by the RD, approving shifting of the registered
office, file form INC- 22 with the ROC along with supportive documents –

 the registered document of the title of the premises of the registered

office in the name of the company; or
 the notarized copy of lease or rent agreement in the name of the
company along with a copy of rent paid receipt not older than one
month;
 the authorization from the owner or authorized occupant of the
premises along with proof of ownership or occupancy authorization,
to use the premises by the company as its registered office; and
 the proof of evidence of any utility service like telephone, gas,
electricity, etc. depicting the address of the premises in the name of
 P a g e | 84

the owner or document, as the case may be, which is not older than
two months;
 Copy of order passed by the competent Authority.

If the documents are in order, Registrars of both states will approve the forms
and the change in registered office will be updated in register of companies with
the Registrar and new Certificate of Incorporation will be issued by the Registrar
of the State within 30 days, where the company’s registered office is going to be
shifted.

Rule 31 the Companies (Incorporation) Rules, 2014: The certified copy of the
order of the Central Government, approving the alteration of the memorandum for
transfer of registered office of the company from one State to another, shall be
filed in Form [Link]-28 along with the fee as with the Registrar of the State within
thirty days from the date of receipt of certified copy of the order.

Steps after obtaining new certificate from ROC

 Make alteration in the MOA with respect to the state in every copy of
Memorandum.
 Each stationery, banner, signboard, bills, invoice etc. should show the new
address and necessary advice should be sent to shareholders, debenture holders,
and other concerned parties.
 Necessary changes are required to be made in the letter heads, books, records
etc. of the company.
 The necessary changes are required to be made in PAN, TAN or various returns
under the GST etc and inform all the Government departments, banks, customers
and others wherever required.

CASE LAWS

[Usha Beltron Re,]

A company was allowed to shift its registered office from Bihar to West Bengal in spite of
the fact that Bihar Government had granted lease of land for the company’s factory on
the condition that it would not shift its registered office. The CLB also held that interest
free loans, sales tax, electricity and other subsidies would have no bearing on the
shifting Employees’ right.
 P a g e | 85

[Satya Shree Balaji Wires & Cables (P) Ltd]

No notice of the petition is required to be served on the State, but in view of the wider
language of Section 17 [Corresponds to section 13 of the Companies Act, 2013] Central
Government may direct notice to be served on the State if it is of the view that the
interest of the State will be affected by the alteration. [ state ko alteration ki petition ka
notice serve krne ki need nhi h unless interest of affected from such alteration]
The decision to shift the registered office of the company to another state being a
domestic matter rests with shareholders and the company is the best judge of how to run
its business more economically, efficiently or conveniently, even though it would result
in loss of revenue to the State.

Employees’ right to object in case of shifting of registered office from one state to
another –
Some legal cases

[Bharat Commerce and Industries Ltd.]

it was held that employees’ union, which was a registered body and which represented
quite a number of the employees at the registered office of the company, would have the
legal standing to appear before the court and oppose the application on the ground that
their interests are likely to be prejudicially affected if the resolution for shifting the
registered office of the company from one state to another is confirmed by the court.
However, it was held that the employees’ union cannot oppose on the ground
that there would be loss of revenue or unemployment in the State or that the meeting at
which the special resolution was passed was itself not valid.
[ employees union ko shifting ki application pr oppose krne ka right h jb employees ke
rights shifting se affect ho rhe ho but union in grounds pr oppose nhi kr skti ki state me
unemployment hoga ya loss of revenue hoga]

[Metal Box India Ltd.]

it was held that where the shifting of the registered office was in accordance with a
scheme approved by the BIFR, it was held that the workers had no right of objection
because their continuation in the company’s employment was ensured unless, of course,
a worker preferred voluntary retirement.
[ if shifting BIFR approved scheme ke according h to workers ko objection ka right ni h
kyuki unki employment company me ensure h]
 P a g e | 86

C) ALTERATION OF MOA DUE TO CHANGE IN OBJECT CLAUSE [SECTION 13 (8)

AND (9)]

 According to section 13(1), a company may, by a special resolution and after

complying with the procedure specified in this section, alter the provisions of
its memorandum.
 It means that a company can change its objects by passing a special
resolution.
 Further section 13(6)(a) provides that a company shall, in relation to any
alteration of its memorandum, file with the Registrar the special resolution
passed by the company.
 As per section 13(9), the Registrar shall register any alteration of the
memorandum with respect to the objects of the company and certify the
registration within a period of thirty days from the date of filing of the special
resolution.
Further, in case the company is eligible for conducting business through postal ballot
any alteration in the objects clause of the Memorandum of Association, shall implement
the same through Postal Ballot in terms of section 110 read with Rule 22 of the
Companies (Management & Administration) Rules, 2014.

Further, section 13(8) lays down that a company, which has raised money from public
through prospectus and has any unutilized amount out of the money so raised, shall not
change its objects for which it raised the money through prospectus unless a special
resolution is passed by the company and –
(a) the details in respect of such resolution shall be published in the newspapers
(one in English and one in vernacular language) which is in circulation at the
place where the registered office of the company is situated and shall also be
placed on the website of the company.
(b) the dissenting shareholders shall be given an opportunity to exit by the
promoters and shareholders having control in accordance with regulations to
be specified by the Securities and Exchange Board.
Following companies are required to pass special resolution for alteration of Object
clause of Memorandum of Association by means of Postal Ballot only:

 All Companies having more than 200 members.

 Company which has raised money from public through prospectus and still has
any unutilized amount out of the money so raised.

Procedure is to be followed for alteration of objects clause of MOA under Section 13 read
with Rule No.32 of Companies (Incorporation) Rules, 2014 and Rule No 22 (Postal ballot,
if applicable) of Companies (Management and Administration) Rules, 2014:
 P a g e | 87

1) call a Board Meeting to consider the proposal of alteration of objects

clause of memorandum of association of company and also follow the
procedure prescribed for issuing and signing of notice of Board Meeting.

2) Hold a meeting of Board of Directors –

 To pass the Board Resolution for approving the proposed
amendments to the objects clause of MOA of the company subject to
the approval of shareholders in General meeting.
 To delegate authority to any one director of the company to sign,
certify and file the requisite forms with ROC and to do all such acts
and deeds as may be necessary to give effect to the proposed
alteration.
 To fix day, date, time and venue for holding the general meeting of
the Company for passing a special resolution.
 To approve the draft notice of general meeting along with
explanatory statement annexed.
 To authorize the Director or Company Secretary to sign and issue
notice of the general meeting.

3) If the company has raised money from public through prospectus and has
any unutilized amount out of the money so raised, it shall follow the
following additional steps for altering the objects clause of MOA of the
Company:
a) Pass special resolution for alteration of Object clause of
Memorandum of Association by means of Postal Ballot only.
b) Notice of the resolution for altering the objects shall contain the
following particulars:
 total money received;
 total money utilized for the objects stated in the prospectus;
 unutilized amount out of the money so raised through
prospectus,
 particulars of proposed alteration/ change in the objects;
 justification for the alteration/change;
 amount proposed to be utilized for the new objects;
 estimated financial impact of the proposed alteration on the
earnings and cash flow of the company;
 other relevant information which is necessary for the members
to take an informed decision on the proposed resolution;
 Place from where any interested person may obtain a copy of
the notice of the resolution to be passed.

c) Publish an advertisement, giving above mentioned details of special

resolution to be passed at least once in a vernacular newspaper in
the principal vernacular language and in English language in an
English newspaper circulating at the place where the registered
office of the company is situated and on the website of company.
 P a g e | 88

d) Give an opportunity to the dissenting shareholders to exit by the

promoters and shareholders having control in accordance with
regulations to be specified by the Securities and Exchange Board.

4) Send notice of the General meeting proposing the aforementioned special

resolution to all the shareholders, directors, auditors and other persons
entitled to receive it.

5) Hold a shareholder meeting and pass the Special Resolution for altering
the object clause of Memorandum of Association.
Special Resolution shall be passed by means of Postal ballot, if company
has more than 200 members or the company has raised money from public
through prospectus and still has any unutilized amount out of the money
so raised.

6) After passing special resolution, file a certified copy of special resolution with the
Registrar in form MGT- 14 under Section 117 of the Act within 30 days of passing
Special Resolution in general meeting along with the following attachments:

 Copy of Special Resolution passed along with explanatory statement.

 Notice for convening the General Meeting of the Company
 Altered Memorandum of Association.
 Shorter Notice Consent Letters from the members in case the General
Meeting was convened and held at a shorter notice.
 Any other attachment as may be considered as necessary in this regard.

The Registrar shall register the alteration of objects in Memorandum and certify the
registration within a period of 30 days from the date of filing of the special resolution.
Every Alteration made in the memorandum of the company shall be noted in every copy
of the Memorandum of Association.

D) ALTERATION OF LIABILITY CLAUSE

According to section 13(1) of the Act, a company may, by a special resolution and
after complying with the procedure specified in this section, alter the provisions
of its memorandum.

It means that a company can change the liability clause of its memorandum of
association by passing a special resolution.

Further section 13(6)(a) provides that a company shall, in relation to any

alteration of its memorandum, file with the Registrar the special resolution
passed by the company through E-Form MGT-14.
 P a g e | 89

E) ALTERATION OF CAPITAL CLAUSE IN MOA [SECTION 61 READ WITH

SECTION 64]

Types of alteration of capital clause in the general meeting of a company limited by

shares as per section 61 (1) of the Companies Act, 2013 can be enumerated as
below: -

a) increase its authorized share capital by such amount as it thinks expedient;

b) consolidate and divide all or any of its share capital into shares of a larger amount
than its existing shares:
Provided that no consolidation and division which results in changes in the voting
percentage of shareholders shall take effect unless it is approved by the Tribunal
on an application made in the prescribed manner;
c) convert all or any of its fully paid-up shares into stock, and reconvert that stock
into fully paid-up shares of any denomination;
d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed
by the memorandum
e) cancel shares which, at the date of the passing of the resolution in that behalf,
have not been taken or agreed to be taken by any person, and diminish the
amount of its share capital by the amount of the shares so cancelled.

All the above alterations do not require the confirmation by the Tribunal except that
alteration relating to consolidation and division which results in changes in the voting
percentage of shareholders shall not take effect unless it is approved by the Tribunal on
an application made in the prescribed manner.

These alterations are, however, required to be notified and a copy of the resolution
should be filed with the Registrar within 30 days of the passing of the resolution along
with an altered memorandum. [Section 64(1)]

The Registrar shall record the notice and make any alteration which may be necessary in
the company’s memorandum or articles or both.

Procedure for altering the Memorandum of Association for increasing the

Authorized Capital of the Company under Section 61 and 64 of the Companies Act
2013 read with Rule No. 15 of Companies (Share Capital and Debenture) Rules,
2014

1) Section 61 of the Companies Act, 2013, mandates that for increasing

the Authorised share capital, authorization in Articles of Association is a
pre-condition.
If there is no such provision then the company has to take steps for
alteration of its Articles of Association.
 P a g e | 90

2) Call board meeting and main agenda for the meeting would be:

a) To get in-principal approval of Directors for Increase in authorized share

Capital;
b) Fix date, time and place for holding Extra-ordinary General meeting
(EGM) to get approval of shareholders, by way of Ordinary Resolution,
for amendment in authorized share Capital clause of Memorandum of
Association.
c) To approve notice of EGM along with Agenda and explanatory
statement.
d) To authorize the Director or Company Secretary to issue Notice of the
Extra-ordinary General meeting (EGM).

3) Issue Notice of the EGM to all members, legal representative of deceased

member, assignee of an insolvent member if any, directors and the auditors
of the company.

4) Hold the EGM on fixed date and pass the necessary ordinary resolution
for increase in the authorized share capital of the Company.

5) File Form SH-7 within 30 days of passing of Ordinary Resolution with the
concerned ROC and along with following attachments:
a. Notice of EGM;
b. Certified True copy of Ordinary Resolution along with the explanatory
statement.
c. Altered Memorandum of Association.

6) Concerned ROC will check the e-form and attached documents and will
approve the increase in authorize share capital.

7) The company shall file a notice in the prescribed form with the Registrar
within a period of 30 days of alteration to its share capital along with a copy
of altered Memorandum. [Section 64].

8) No need to pass Special Resolution for increase in authorized share

capital.
However, in case the alteration of capital clause of the Memorandum of
Association of the company requires the alteration of the Articles of Association
of the company then, the special resolution for the alteration of articles of
association of the company be passed and form MGT-14 should also be filed for
the filing of copy of such special resolution with the concerned Registrar within
30 days from the date of passing of such resolution along with the prescribed
fees.
 P a g e | 91

REGISTRATION OF ALTERATION

Section 13(6)(a) provides that a company shall, in relation to any alteration of its
memorandum, file with the Registrar:

(a) the special resolution passed by the company under section 13(1); and
(b) the approval of the Central Government under section 13(2), if the alteration involves
any change in the name of the company.

The special resolution shall be filed with the Registrar within thirty days of the passing or
making thereof in the prescribed manner and payment of prescribed fees within the time
specified under section 403.

As per section 13(9), the Registrar shall register any alteration of the memorandum with
respect to the objects of the company and certify the registration within a period of thirty
days from the date of filing of the special resolution in accordance with section 13 (6)(a).

ARTICLES OF ASSOCIATION

According to Section 2(5) of the Companies Act, 2013,

‘articles’ means the articles of association of a company

as originally framed or as altered from time to time or
applied in pursuance of any previous company law or of
this Act. It also includes the regulations contained in
Table A in Schedule I of the Act, in so far as they apply to
the company.

Further, in terms of section 5(1), the articles of a company shall contain the regulations
for management of the company.

The memorandum lays down the scope and powers of the company, and the articles
govern the ways in which the objects of the company are to be carried out and can be
framed and altered by the members.

The articles must be printed, divided into paragraphs, numbered consecutively, stamped
adequately, signed by each subscriber to the memorandum and duly witnessed and filed
along with the memorandum.

The articles must not contain anything illegal or ultra vires the memorandum, nor should
it be contrary to the provisions of the Companies Act 2013.
 P a g e | 92

CASE LAWS

[Naresh Chandra Sanyal v. The Calcutta Stock Exchange Association Ltd]

The articles regulate the internal management of the affairs of the company by way of
defining the powers of its officers and establishing a contract between the company and
the members and between the members inter se.

[Kinetic Engineering Ltd. v. Sadhana Gadia]

The Hon’ble CLB held that if any provision of the articles or the memorandum is contrary
to any provisions of any law, it will be invalid in total.

Articles Subordinate to Memorandum

CASE LAWS

[Ashbury v. Watson]

The articles of a company are subordinate to and subject to the memorandum of

association and the Act and any clause in the articles going beyond memorandum will be
ultra vires.
But the articles are only internal regulations, over which the members of the company
have full control and may alter them according to what they think fit.
Articles that go beyond the company’s sphere of action are inoperative, and anything
done under the authority of such article is void and incapable of ratification.

[ articles subordinate hote h memorandum ke aur company ke internal regulations btate

h jisko members alter kr skte h but if article ka koi clause contrary hota memorandum ke
to wo invalid hota]

[See Re Peveril Gold Mines]

neither the articles nor the memorandum can authorize the company to do anything so
as to contravene any of the provisions of the Act.
 P a g e | 93

REGISTRATION OF ARTICLES

Section 7(1) provides that at the time of incorporation of a company the company shall
file with the Registrar within whose jurisdiction the registered office of a company is
proposed to be situated, the memorandum and articles of the company duly signed by all
the subscribers to the memorandum in the prescribed manner.

The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J

in Schedule I as may be applicable to such company either in totality or otherwise.
[Section 5(6)].

A company may adopt all or any of the regulations contained in the model articles
applicable to such company. [Section 5(7)]

In terms of Section 5 of the Companies Act, 2013, a public company limited by shares
may at its option register its articles of association signed by the same subscribers as to
the memorandum, or alternatively it may adopt all or any of the regulations contained in
Table F of First Schedule of the Act.

If articles are not registered, automatically Table F in Schedule I would apply, and if
registered, Table F in Schedule I would apply except in so far as it is excluded or
modified by the articles.

However, nothing in section 5 shall apply to the articles of a company registered under
any previous company law unless amended under this Act [Section 5(9)]

Alignment of AOA with the Companies Act, 2013:

Section 6 of the Companies Act, 2013 provides that:

(a) the provisions of this Act shall have effect notwithstanding anything to the
contrary contained in the memorandum or articles of a company, or in any
agreement executed by it, or in any resolution passed by the company in general
meeting or by its Board of Directors, whether the same be registered, executed or
passed, as the case may be, before or after the commencement of this Act

(b) any provision contained in the memorandum, articles, agreement or resolution

shall, to the extent to which it is repugnant to the provisions of this Act, become
void, as the case may be.

In the light of above provisions, if there is a provision in the Articles empowering the
Directors of the company to expel any member of the company under any of the given
conditions, then such a provision shall be totally inconsistent with the provisions of
Section 6 of the Act. It is opposed to the fundamental principles of the
company’s jurisprudence and is ultra vires of the company.
 P a g e | 94

CASE LAW

[Madras Stock Exchange Ltd. v. S.S.R. Rajkumar]

The regulation of stock exchanges is mainly governed by Securities Contracts

Regulation Act, 1956 (SCRA) and SEBI, Act, 1992 which are Special Acts.
Hence, the Articles of Stock Exchange may provide for additional matters as per SCRA
Act, which may not be possible for inclusion in the Articles of a company, as per the
provisions of the Companies Act.

ENTRENCHMENT PROVISIONS

The articles may contain provisions for entrenchment to the

effect that specified provisions of the articles may be altered
only if conditions or procedures that are more restrictive
than those applicable in the case of a special resolution, are
met or complied with. [Section 5 (3)]

According to section 5(4), the provisions for entrenchment

referred in shall be made either:

Where the articles contain provisions for entrenchment the company shall give notice to
the Registrar of such provisions in SPICE+ (Simplified Proforma for Incorporating
company Electronically Plus: INC-32) at the time of incorporation of the company or in
case of existing companies, the same shall be filed in Form [Link].14 within thirty days
from the date of entrenchment of the articles, as the case may be, along with the
fee as provided in the Companies (Registration offices and fees) Rules, 2014.

CONTENTS OF ARTICLES

it includes the following:

 Exclusion wholly or in part of Table F

 Adoption of preliminary contracts
 Share capital variation of rights, Number and value of shares.
 Meetings and rules regarding committees of the Board.
 Provisions on shareholder meetings
 P a g e | 95

INTERPRETATION OF MEMORANDUM AND ARTICLES

[Egyptian Salt & Soda Co. Ltd. v. Port Said Salt Assn Ltd.] & [A Lakshamanaswami
Mudaliar v. LIC of India]

The memorandum must like any other document be construed according to accepted
principles applicable to the interpretation of all legal documents. No rigid canon of
construction is to be applied to such a document.
[memorandum ko other legal documents ke principles ki trah hi interpretate krenge koi
rigid construction ka use ni krenge]

[Holmes v. Keyes]

Articles should be construed as a business document so as to give business efficacy

preference to a construction which will prove unworkable. [ articles ko business
document ki trah ki construct krenge

[Krishnaswamy (S) v. South India film Chamber of Commerce] & [Sunil Dev v. Delhi and
District Cricket Assn.]

Where the conduct of the parties reveals that there has been some practice in vogue for
several years which was accepted by everyone concerned without any challenge or
question, then that practice in the course of long years in itself becomes an indication
that the rules or articles which are framed by way of internal management were
understood in that sense.

[Angostura Bitters & Co. Ltd. v. Kerr],

The memorandum and articles must be read together in the event of any ambiguity.
the Privy Council held, “Except in respect of such matters as must be statutorily
provided for by the conjunction with the articles. The two documents must be read
together at all events so far as may be necessary to explain any ambiguity appearing in
the terms of the memorandum or to supplement it upon any matter as to which it is
silent”
[if memorandum me kisi clause ko leke ambiguity h ya silent h to memorandum aur
articles dono ko sath me read krenge]
 P a g e | 96

DISTINCTION BETWEEN MEMORANDUM AND ARTICLES

The main points of distinction between the memorandum and articles are given below:

LEGAL EFFECT OF THE MEMORANDUM AND ARTICLES

According to section 10(1):

The memorandum and articles, when registered, bind the company and its members to
the same extent as if they have been signed by the company and by each member to
observe and be bound by all the provisions of the memorandum and of the articles.

Further sub-section 2 of section 10 of the Act states that, all monies payable by any
member to the company under the memorandum or articles shall be a debt due from him
to the company.

We shall examine the extent to which the memorandum and articles bind:
(a) the members to the company;
(b) the company to the members
c) the members inter se; and
(d) the company to outsiders.
 P a g e | 97

1) Members bound to the Company

The memorandum and articles constitute a contract binding on the members of

the company. The members, as members, are bound to the company. Each
member must, therefore, observe the provisions of the memorandum and articles.

Each member is bound by the covenants of the Memorandum as originally made

and as altered from time to time [Malleson v. National Insurance Co.].

In another case, the shareholders could not enter into an agreement which was
contrary to or inconsistent with the articles of association of the company [V.B.
Rangaraj v. V.B. Gopalkrishnan].

CASE LAW

[In Boreland’s Trustee v. Steel Brother and Co. Ltd.]

the articles of a company contained a clause that on the bankruptcy of a member

his shares would be sold to other persons and at a price fixed by the directors. B,
a shareholder was adjudicated bankrupt. His trustee in bankruptcy claimed that he
was not bound by these provisions and should be at liberty to sell the shares at
their true value. It was held that the trustee was bound by the articles, as the
shares were purchased by B in terms of the articles.

[ shareholders ke trustee pr bhi articles ke provisions bound krenge because

shareholder ne share articles ke terms pr purchase kiye hote]

2) COMPANY BOUND TO THE MEMBERS

Since the articles constitute a contract binding the company to its members in their
capacity as members, a member can bring an action against the company for
infringement by it of the memorandum or articles.
Further, the company is bound to individual members in respect of their ordinary rights
as members.
an individual member can sue the company for an injunction restraining it from improper
payment of dividend [Hoole v. Great Western Railway]

3) Member bound to Member

As between the members inter se each member is bound by the articles to the other
members but that does not mean the memorandum and articles create an express
contract among the members of the company.
Thus, a member of a company has no right to bring a suit to enforce the articles in his
own name against any other member or members. It is the company alone which can sue
the offender so as to protect the aggrieved member. It is in this way that the rights of
members inter se are regulated.
 P a g e | 98

4) COMPANY NOT BOUND TO OUTSIDERS

The term “outsider” signifies a person who is not a member of the company even if he is
a director of or solicitor to the company. Even in regard to members, the articles bind the
company to them in their capacity as members.
As between outsiders and the company, neither the memorandum nor the articles would
give any contractual rights to outsiders against the company or its members even
though the names of outsiders are mentioned in those documents in connection with the
arrangements that the company might have contemplated for carrying on its business.

[Eely v. Positive Life Insurance Co.]

In this case the articles provided that the solicitor to the company would not be removed
from office except for misconduct. Eely acted as solicitor to the company and also
became a member of the company. The company discontinued his services and then he
sued the company for damages for breach of contract.
It was held that he had no cause of action because the articles did not constitute any
contract between the company and himself. His action was dismissed.

ALTERATION OF ARTICLES OF ASSOCIATION OF A COMPANY

A Company may alter its articles in accordance with the above provisions in any of the
following manner:
(a) by adoption of new set of articles;
(b) by addition/insertion of a new Clause/s;
(c) by deletion of a Clause/s;
(d) by amendment of a specific Clause/s;
(e) by substitution of a specific Clause/s

 Section 14(1) provides that subject to the provisions of the Act and the conditions
contained in its memorandum, if any, a company may, by a special resolution,
alter its articles including alterations having the effect of conversion of –

A) a private company into a public company; or

B) a public company into a private company.

First proviso to section 14(1) lays down that where a company being a private company
alters its articles in such a manner that they no longer include the restrictions and
limitations which are required to be included in the articles of a private company under
this Act, the company shall, as from the date of such alteration, cease to be a private
company.
 P a g e | 99

Further, the second proviso to section 14(1) stipulates that any alteration having the
effect of conversion of a public company into a private company shall not take effect
unless it is approved by an order of the Central Government on an application made in
prescribed form shall make such order as it may deem fit.

 Every alteration of the articles under this section and a copy of the order of the
Central Government approving the alteration shall be filed with the Registrar,
together with a printed copy of the altered articles, within a period of fifteen days
in such manner as may be prescribed, who shall register the same. [Section 14 (2)]

 Any alteration of the articles registered under section 14(2) shall, subject to the
provisions of this Act, be valid as if it were originally in the articles. [Section 14(3)]

CASE LAWS
In Re Cyrus Investments (P.) Ltd. vs. Tata Sons Ltd.
If any company decides to alter its articles having effect of conversion of a 'Private
Company' into a 'Public Company' or a 'Public Company' into a 'Private Company', it is
required to pass a special resolution and as per sub-section (2) of section 14, it requires
approval by Tribunal
In Re Walker v. London Tramway Co.
The right to alter the articles is so important that a company cannot in any manner, either
by express provisions in the articles or by independent contract, deprive itself of the
powers to alter its articles

Alterations of memorandum or articles to be noted in every copy

Every alteration made in the memorandum or articles of a company shall be noted in

every copy of the memorandum or articles, as the case may be. [Section 15(1)]
If a company makes any default in complying with the provisions of section 15(1), the
company and every officer who is in default shall be liable to a penalty of one thousand
rupees for every copy of the memorandum or articles issued without such alteration.
[Section 15(2)]
 P a g e | 100

Limitations on power to alter Articles

In spite of the power to alter its articles, a company can exercise this power subject only
to certain limitations. These are:
1) The alteration must not exceed the powers given by the memorandum. In the
event of conflict between the memorandum and the articles, it is the memorandum
that will prevail.
2) The alteration must not be inconsistent with any provisions of the Companies Act
or any other statute. On the other hand, articles may impose on the company
conditions stricter than those provided under the law

Similarly, where a resolution was passed expelling a member and authorizing the
director to register the transfer of his shares without an instrument of transfer, the
resolution was held to be invalid as being against the provisions of the Act
[Madhava Ramachandra Kamath v. Canara Banking Corporation]

3) The Articles must not include anything which is illegal or opposed to public
policy.
4) The alteration must be bona fide for the benefit of the company as a whole.
5) The alteration must not constitute a fraud on the minority by a majority.

In other words, an alteration to the articles must not discriminate between the
majority shareholders and the minority shareholders so as to give the former an
advantage over the latter. [All India Railway Mens Benefit Fund v. Jamadar
Baheshwarnath Bali]

[In Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd.]
the Hon’ble Kerala High Court held that no majority of shareholders can, by
altering the article retrospectively, affect, the prejudice of the consenting owners
of shares, the right already existing under a contract nor take away the right
accrued.

6) Articles cannot be altered so as to compel an existing member to take or

subscribe for more shares or in any way increase his liability to contribute to the
share capital, unless he gives his consent in writing.
7) By effecting alteration in its articles, a company cannot defeat escape from its
contractual obligation with any person. The company will always be liable in such
a case.
8) The Articles of Association cannot be altered so as to have retrospective effects.
The articles only operate from the date of the amendment [Pyare Lal Sharma v.
Managing Director, J.K. Industries Ltd.]
 P a g e | 101

CASE LAWS

[In Re See Menier N. Hooper Telegraph Works]

A section or a class of shareholders cannot be unfairly or oppressively treated. Thus,
though the requisite majority of members could pass a special resolution to alter the
Articles and if the alteration has the effect of making a fraud on the minority, the minority
shareholders not being less than the number specified under law could move the Court
for redressing their grievances. The Courts have entertained such applications
from shareholders even where they are smaller in number.
[ Majority shareholders requisite majority ke sath bhi articles ko alter ni kr skte if uss
alteration se minority ko fraud hota h]

In Re Southern Foundries v. Shirlaw, [1940] AC 701

As already mentioned, a company is not prevented from altering its articles on the
ground that such an alteration would be breach of a contract but an action for damages
may lie against the company.

In Re Foss v. Harbottle
the court held that no individual shareholder nor a minority of shareholders in a
company can take it upon himself or themselves to remedy an alleged wrong involved in
the actions of directors if the said wrongful act is something which the majority can
regularize and approve.
 P a g e | 102

Procedure for alteration of AOA under Section 14

1) Meeting of board of Directors:

Call a Board Meeting to consider the proposal of alteration of articles of association of a
company.
a) Hold a meeting of Board of Directors-

 To consider and decide the articles required to be changed/altered.

 To pass the necessary Board Resolution for approving proposal of
alteration of articles of association.
 To delegate authority to any one director of the company to sign, certify
and file the requisite forms with Registrar of Companies or any
statutory authority to do all such acts necessary.
 To fix day, date, time and venue for holding general meeting of the
Company for passing a special resolution.
 To approve the draft notice of general meeting along with Explanatory
Statement.
 To authorize the Director or Company Secretary to sign and issue
notice of the general meeting.
 P a g e | 103

b) Prepare and circulate draft minutes within 15 days from the date of the
conclusion of the Board Meeting, by hand/speed post/registered
post/courier/e-mail to all the Directors for their comments.

2) general Meeting of the company:

Send notice of the General meeting proposing the aforementioned special resolution to
all the shareholders, directors, auditors and other persons entitled to receive it.
A) Hold a shareholder’s meeting on the date fixed for the meeting and pass the
Special Resolution for altering the Articles of Association.
B) After passing special resolution, file a certified copy of special resolution with the
Registrar in e-Form MGT- 14 within 30 days of passing Special Resolution in
general meeting along with the following attachments:

 Copy of Special Resolution passed along with explanatory statement.

 Notice for convening the General Meeting of the Company along with
explanatory statement as an optional attachment.
 Certified True copy of the Altered Articles including the provisions of
entrenchment inserted in the articles, if any.
 Shorter Notice Consent Letters from at least 95% of the members in case
the General Meeting was convened at a shorter notice.
 Any other attachment as may be required/applicable.

C) Follow the procedure prescribed for preparing, signing and compiling of minutes
of General Meeting.

3) Make necessary amendments in all the copies of Articles of association of the

Company.

4) Compliance with Companies Act, 2013 and Memorandum of Association

The alteration to AOA should conform to the provisions of the Companies Act,
2013. Likewise, the alteration of the articles should not violate the memorandum
of association of the company. The alteration should be in accordance with the
powers conferred by the memorandum.

5) Stamp duty on alteration of articles:

The company need not pay any stamp duty on the alteration of articles. Stamp
duty has to be paid only at the time of incorporation of a company.

Effect of Altered Articles:

 The altered articles shall bind the company and the members to the same extent
as if they had been signed by the company and by each member, means the
articles as originally framed, or as they may from time-to-time stand altered are
valid under the provisions of the Act.
 P a g e | 104

 There is clear power to alter the articles, and as altered, they bind members just in
the same way as did the original articles.
 The alteration is effective only when the procedure laid down in the Companies
Act and Memorandum is followed.
 The changes shall be made in all the copies of the Articles of Association.

Incorporation Contracts and Agreements

A company being an artificial person can contract only
through its agents. A contract will be binding on a
company only, if it is made on its behalf by any person
acting under its authority, express or implied.
The powers of the company are defined by its
Memorandum of Association and any contract made
beyond the limits laid down in the Memorandum of Association, will be ultra vires to the
company and void even if all the shareholders assent to it
There are two situations as discussed below in the case of every company (whether
public or private) in which contracts are made:
(a) Contracts made on behalf of the company before its incorporation—preliminary or
pre-incorporation contracts.
(b) Contracts made after the incorporation.

Pre-incorporation Contracts
the promoters may enter into contracts on behalf of proposed company, like purchase of
land, ordering machinery, employing key personnel, investment tie up etc. and also incur
expenses relating to incorporation of the company. These must be ratified on the
incorporation of the company.
The Articles must authorize the directors to pay the expenses relating to registration of
the company. The directors do not have any implied power to incur pre-incorporation
expenses.
PROMOTER’S LIABILITY
the promoters act as company’s agent to represent their interest, the principal is not in
existence while registration. The contracts entered into by the promoters are therefore
not binding on the company or third parties.
However, pre-incorporation contracts are not binding upon the company, if these are not
adopted or accepted by the company after its incorporation.
A Board resolution should be passed for adoption of pre-incorporation contracts at the
first Board meeting of the company. On passing such resolution, the contract shall be
binding on the company.
 P a g e | 105

As per section 15 of Specific Relief Act, 1963; if promoters have made a contract before
incorporation of a company for the purpose of the proposed company, and if the contract
is warranted by the terms of incorporation, the company may adopt and enforce the
contract.
The term ‘warranted by the terms of incorporation’ means ‘within the scope of the
company’s objects as stated in the memorandum of the company’. Thus, the contract
should be for the purposes of the company.
As per section 19 of Specific Relief Act, 1963, if the pre-incorporation contract is adopted
or accepted by the company after its incorporation and if it is within the terms of
incorporation, the other party can also enforce the contract, if such acceptance was
communicated to other party to the contract.

In Kelner v. Baxter
FACTS –
three persons A B and C purported to enter into a contract as agents on behalf of a
company before its incorporation for the purchase of certain goods from Kelner and
signed it : “A, B and C, Directors”. The company later obtained the certificate of
incorporation but collapsed before the money was paid for the goods which were
supplied to it by Kelner.
JUDGEMENT –
It was held that A, B and C were personally liable on the agreement and no subsequent
ratification by the company would relieve them from that liability without the assent of
Kelner.

A company cannot acquire shares prior to its incorporation. Where a company was
named as the transferee in the share transfer forms prior to its incorporation, it was held
that such transfers could not be registered.
[Inlec Investment (P) Ltd. v. Dynamatic Hydraulics Ltd]
 P a g e | 106

In Weavers Mills Ltd. v. Balkies Ammal

In this case, the promoters had agreed to purchase some properties for and on behalf of
the company which was yet to be incorporated. After incorporation of the company, the
company assumed possession of the properties and constructed some structures on
the property.
It was held that even in absence of conveyance of property by the promoter in favor of
the company after its incorporation, the company’s title over the property could not be
set aside.

The procedure for ratification of pre-incorporation contract is as under:-

 Ensure that the power to enter and adopt pre-incorporation contracts is given in
the objects, incidental or ancillary to the attainment of the main objects clause of
the memorandum of the company.
 Ensure that the articles also give power to the directors to adopt such pre-
incorporation contracts in the board meeting.
 Prepare a statement of the pre-incorporation contracts giving the amount involved
in each contract separately.
 Convene the first board meeting after giving notice to all the directors of the
company.
 The statement should be initialed by the Chairman of the Board meeting and then
pass a resolution adopting the pre-incorporation contract.
 P a g e | 107

CHAPTER – 4

SHARE AND SHARE CAPITAL – CONCEPTS

CHAP – 4.1
MEANING AND TYPES OF SHARE CAPITAL

MEANING AND DEFINITION OF ‘CAPITAL

‘Capital’ can be defined as the significant element for
initiating and running the business for its day to day
operations.
For a business or say a company can have the capital
can be from two sources:

 Debt: That a company owes and required to be

paid back.
 Equity: The amount which investors put in the company in exchange to have
ownership of the company and the same amount is not required to be paid.
In relation to a company limited by shares, the word ‘capital’ means the share capital.

Definition of Share:
Under Section 2(84) of the Companies Act, 2013, “share” means a share in the share
capital of a company and includes stock.
 P a g e | 108

DEFINING THE CLASSES OF SHARE CAPITAL UNDER THE COMPANIES ACT 2013
Share Capital can be classified in the following categories:

1) Nominal or Authorized or Registered Capital: [maximum share capital]

[Section 2(8) of the Companies Act, 2013] Registered Capital means such capital as is
authorized by the memorandum of a company to be the maximum amount of share
capital of the company.
2) Issued Capital: [company issue karti hai]
[Section 2(50) of the Companies Act, 2013] Issued capital means such capital as the
company issues from time to time for subscription.
It is that part of the authorized capital which the company issues for the time being for
public subscription and allotment.
3) Subscribed Capital: [public ne apply kiya]
[Section 2(86) of the Companies Act, 2013] Subscribed capital means such part of the
capital which is for the time being subscribed by the members of a company.
It is that portion of the issued capital which has been subscribed by the subscribers of
shares in the company.
4) Called-Up Capital: [joh public se mangwati hai]
[Section 2(15) of the Companies Act, 2013] Called-up capital means such part of the
capital, which has been called for payment.
It is that portion of the subscribed capital which has been demanded by the Company for
payment of remaining portion of share.
5 ) Paid-Up Capital: [joh paise mil chuke hai]
[Section 2(64) of the Companies Act, 2013] Paid-up share capital means such aggregate
amount of money credited as paid-up as is equivalent to the amount received as paid-up
in respect of shares issued
And also includes any amount credited as paid-up in respect of shares of the company,
but does not include any other amount received in respect of such shares, by whatever
name called.

Types of Share Capital

Pursuant to Section 43 of Companies Act, 2013,
the share capital of a company limited by shares
shall be of two kinds, namely: —
 P a g e | 109

1) Equity share capital: It means all share capital which is not preference share
capital.
Equity share capital—
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with
such rules as may be prescribed;
It consists of the following features:

 Equity Shares have voting rights at all general meetings of the company. These
votes have the effect of the controlling the management of the company.
 Equity Shares have the right to share the profits of the company in the form of
dividend and bonus shares.
 equity shareholders cannot demand declaration of dividend by the company
which is left to the discretion of the Board of Directors.
 When the company is wound up, payment towards the equity share capital will be
made to the respective shareholders only after payment of the claims of all the
creditors and the preference share capital.

2) Preference share capital: It means that part of the issued share capital of the
company which carries or would carry a preferential right with respect to-

 payment of dividend, either as a fixed amount or an amount calculated at a

fixed rate, which may either be free of or subject to income-tax; and
 repayment, in the case of a winding up or repayment of capital, of the amount
of the share capital paid-up or deemed to have been paid-up, whether or not,
there is a preferential right to the payment of any fixed premium or premium on
any fixed scale, specified in the memorandum or articles of the company.
 P a g e | 110

TYPES OF PREFERENCE SHARE CAPITAL

1) Cumulative and Non-Cumulative

Cumulative preference shares: [ Purana dividend bhi lunga]
The dividends are accumulated and therefore paid before
anything paid to equity shares.
Non-Cumulative preference shares: [ Raat gyi baat gyi]
if company does not pay dividend in current year, claim of preference shareholder is lost
to that extent.

2) Convertible and Non-Convertible

Convertible preference shares: [ Me badal jaunga]

These possess an option or right whereby they can be converted into an ordinary equity
share at some agreed terms and conditions.
Non-Convertible preference shares: [ me nhi badal ne wala]
These shares do not have the option to convert but has all other normal characteristic of
a preference share.

3) Participating and Non-participating

Participating preferences share: [ mera leke tera bhi lunga]

These shares have an additional benefit of participating in ‘surplus profits or ‘surplus
assets’ of the company apart from preferential dividend.
Non-participating preference shares: [ sirf mera dedo]
These are those which are not entitled to participate in the ’surplus profits’ or surplus
assets’’ of the company. They are entitled to only a fixed rate of dividend.

4) Redeemable and Non-Redeemable

Redeemable preference share: [ meri life limited h]

These shares have a maturity date on which date the company will repay the
capital amount to the preference shareholders. The paying back of capital is called
redemption dividend.
Preference share shall be redeemed within a period not exceeding 20 years (however
infrastructure companies can issue preferences shares redeemable within a period not
exceeding 30 years).
 P a g e | 111

Irredeemable Preference Share: [ me marte dam tk sath dunga]

These shares do not have any maturity date and are repayable only at the time of
winding up of the company. However, as per section 55 of the Companies Act, 2013 no
company can issue irredeemable preference shares.

VOTING RIGHTS OF EQUITY SHAREHOLDERS AND PREFERENCE SHAREHOLDERS

Voting Rights of Equity Shareholders
According to section 47, subject to the provisions of section 43, sub-section (2) of
section 50 and sub-section (1) of section 188 –
(a) every member of a company limited by shares and holding equity share capital
therein, shall have a right to vote on every resolution placed before the company; and
(b) his voting right on a poll shall be in proportion to his share in the paid-up equity share
capital of the company.
Voting Rights of Preference Shareholders
Section 47(2) states that every member of a company limited by shares and holding any
preference share capital therein shall, in respect of such capital, have a right to vote
only on resolutions placed before the company which directly affect the rights attached
to his preference shares and, any resolution for the winding up of the company or
for the repayment or reduction of its equity or preference share capital and his voting
right on a poll shall be in proportion to his share in the paid-up preference share
capital of the company.
Provided further that where the dividend in respect of a class of preference shares has
not been paid for a period of two years or more, such class of preference shareholders
shall have a right to vote on all the resolutions placed before the company.
 P a g e | 112

CHAP – 4.2
BASIC TERMS RELATED TO ISSUE & ALLOTMENT OF SECURITIES

PROSPECTUS [offer document- muje dekho fir shares kharido]

Sec. 2(70) of the Companies Act, 2013:
Prospectus means any document described or issued as a
prospectus and includes a red herring prospectus referred to
in section 32 or shelf prospectus referred to in section 31 or
any notice, circular, advertisement or other document
inviting offers from the public for the subscription or
purchase of any securities of a body corporate;

CLASSIFICATION OF PROSPECTUS
 P a g e | 113

RED-HERRING PROSPECTUS [ price aur quantity

missing h]
Definition:
Red-herring Prospectus means a prospectus which does
not include complete particulars of the quantum or price
of the securities included therein (under explanation to
section 32).
Timelines for issue:
a company proposing to make an offer of securities may issue a red-herring prospectus
prior to the issue of a prospectus.
Timeline for filing with ROC:
Such company proposing to issue a red herring prospectus shall file it with the Registrar
at least three days prior to the opening of the subscription list and the offer.
Other conditions:
A red-herring prospectus shall carry the same obligations as are applicable to
prospectus and any variation between the red herring prospectus and a prospectus shall
be highlighted as variations in the prospectus.
Upon the closing of the offer of securities under this section, the prospectus stating
therein the total capital raised, whether by way of debt or share capital, and the closing
price of the securities and any other details as are not included in the red-herring
prospectus and shall be filed with the Registrar and the Securities and Exchange Board.

SHELF PROSPECTUS [ Validity wala prospectus]

Definition:
Shelf Prospectus means a prospectus in respect of
which the securities or class of securities included
therein are issued for subscription in one or more
issues over a certain period without the issue of a
further prospectus.
validity Period:
Such prospectus is to be submitted at the stage of the first offer of securities which shall
indicate a period not exceeding one year as the period of validity of such prospectus.
The validity period shall commence from the date of opening of the first offer of
securities under that prospectus.
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Filing of Information Memorandum (FORM PAS-2) with ROC:

An information memorandum is required to be filed by a company filing a shelf
prospectus which shall contain all material facts relating to:

 new charges created;

 changes in the financial position of the company as have occurred between the
first offer of securities or the previous offer of securities and the succeeding offer
of securities; and
 such other changes as may be prescribed.
Filed with the Registrar within one month prior to the issue of a second or subsequent
offer of securities under the shelf prospectus.
Advantages to investors:

If a company has received application for the allotment of securities along with advance
payments before filing the required changes with ROC.
If the applicants express a desire to withdraw their application, the company shall refund
subscription within 15 days from the date of his withdrawal application.

Illustration:
XYZ 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. What can be the way out to the company to follow to
avoid repeated issuance of prospectus?
Solution: Company can issue shelf prospectus to avoid repeated issuance of prospectus

ABRIDGED PROSPECTUS [ Chota wala prospectus]

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

OFFER FOR SALE/DEEMED PROSPECTUS [ lo maan liya humne ho prospectus

tum bhi]
Definition:
Under section 25 of the act If a company allots or agrees to allot any securities of the
company with a view to all or any of those securities being offered for sale to the public,
any document by which the offer for sale to the public is made shall, for all purposes, be
deemed to be a prospectus.
The document "Offer for sale" is an invitation to the general public to purchase the
shares of a company through an intermediary, such as an issuing house or a merchant
bank.
In short, any document issued on behalf of the company for the purpose to sale
securities to the public shall be treated as deemed prospectus.
Conditions to be fulfilled:

 An offer of all or any of the securities for sale to the public was made within 6
months after the allotment or agreement to allot; or
 At the date when the offer for sale to the public was made, the company had not
received the whole consideration in respect of the said shares or debentures.
Additional information:
The following additional information is required to be given in the deemed prospectus:
1) The net amount of the consideration received or to be received by the company in
respect of the shares or debentures to which the offer relates;

2) The place and time at which the contract under which the said shares or
debenture have been or are to be allotted may be inspected.

3) It is sufficient if the prospectus is signed on behalf of the company or firm by 2

directors of the company or by not less than one-half of the partners in the firm,
as the case may be, either themselves or by their agents authorised in writing.
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4) Further Section 28 permits certain members of a company, in consultation with

Board of Directors, to offer the whole or a part of their holdings of shares to the
public.

5) The document by which the offer of sale to the public is made shall be deemed as
prospectus issued by company.

6) Provisions of Prospectus and Allotment of Securities and rulers made there under
shall be applicable to an offer of sale referred to in section 28 except for the
following namely: -

 The provisions relating to minimum subscription;

 The provisions for minimum application value;
 The provisions requiring any statement to be made by the Board of
Directors in respect of the utilization of money; and
 Any other provision or information which cannot be complied or gathered
by the offeror, with detailed justifications for not being able to comply with
such provisions.
 Further the rules provide that such offer document or prospectus issued
under the section shall disclose the name of the entity bearing the cost of
making the offer for sale along with reasons.

SHARE CERTIFICATE [ proof of ownership]

Meaning of Share Certificate:
Share certificate is prima facie evidence of the title of the
person to such share.
According to Section 45 of the Companies Act, 2013 each
share of the share capital of the company shall be
distinguished with a distinct number for its individual
identification.
Who can sign share certificate:
In terms of Section 46(1) of the Act, a share certificate issued under the common seal, if
any, of the company or signed by two Directors or by a Director and the Company
Secretary.
Time line for issue of share certificates:
Under Section 56(4) of the Act, every company, unless prohibited by any provision of law
or any order of any Court, Tribunal or other authority must deliver the certificates of all
securities allotted, transferred or transmitted:
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NOTE:
In case of Specified IFSC Public Company/Specified IFSC Private Company- It shall
deliver the certificates of all securities to subscribers after incorporation, allotment,
transfer or transmission with in a period of 60 days.

Duplicate Share Certificate:

Section 46 (2) states that a duplicate certificate of shares may be issued, if such
certificate —
(a) is proved to have been lost or destroyed; or
(b) has been defaced, mutilated or torn and is surrendered to the company.

Difference between original share certificates and duplicate share certificates

BASIS Original Share Certificate Duplicate Share Certificate

governing Rule 5 of the Companies Rule 6 of the Companies
Provisions (Share Capital and (Share Capital and
Debentures) Rules 2014 Debentures) Rules 2014

Issues On allotment of shares Renewal to be made only

on surrender of old
certificate

Fee No fee is chargeable in Company may charge fee

case of original share for duplicate share
certificates certificate as the Board
decides but not exceeding
Rs. 50 per certificate
 P a g e | 118

Timeline for Subscribers to Listed Company: 45 days

issue Memorandum: 2 months Unlisted Company: 3
Allotment: 2 months months from date of
Transfer/Transmission: 1 submission of documents
month

Record FORM MBP-2 (Register of FORM SH-2 (Register of

Maintenance Members) Renewed and Duplicate
Share Certificates)

Penalty the company and every if a company with an

officer of the company who intention to defraud, issues
is in default shall be liable a duplicate certificate of
to a penalty of fifty shares, the company shall
thousand rupees. be punishable with fine
which shall not be less
than five times the face
value of the shares
involved in the issue of the
duplicate certificate but
which may extend to ten
times the face value of
such shares or rupees ten
crores whichever
is higher
and every officer of the
company who is in default
shall be liable for action
under section 447, for
fraud.

Records of Certificates
a) Particulars of every share certificate issued shall be entered in the Register of
Members as circumstances admit against name of person to whom it has been
issued.
b) Particulars of every share certificate issued shall be entered in a Register of
Renewed and Duplicate Certificates indicating against the name of the person to
whom the certificate is issued the number and the date of issue of the share
certificate in lieu of which the new certificate is issued, and the necessary
changes indicated in the Register of Members.
c) All entries made in the Register of Members or the Register of Renewed and
Duplicate Certificates shall be authenticated by the secretary or such other person
as appointed by the Board for the purpose of sealing and signing the share
certificate.
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Case Laws depicting Significance of Share Certificate

This certificate is a prime facie evidence of title to the shares in the possession of
shareholders [Society Generale De Paris vs. Walker]
Share certificate is the only documentary evidence of title and that the share certificate is
a declaration by the company that the person in whose name the certificate is issued is a
shareholder in the company [Ghanshyam Chhaturbhuj vs. Industrial Ceramics (Pvt.) Ltd.
Also, the company cannot dispute the amount mentioned on the certificate as already
paid [Bloomenthal v. Ford]
a person acting on the share certificate issued by the company may recover
compensation for the damages suffered by him. [Bahla and San Francisco Rly. Co.],

query: In case the company on registering the transfer of shares has sent certificate to
another person. Elucidate.

Solution: In that case the company should surrender the original share certificate and if
the said certificate is not so surrendered, the same should be cancelled by the company
and duplicate certificate should be issued to the real owner. It was held in BPL Sanyo
Technology Ltd. vs. Rahul Agarwal decided by the Rajasthan High Court.

Whether Share Certificate an Official Publication

shares are movable property transferable in the manner provided in the articles of the
company and that the share certificates are certificates of title and are movable property
but are not publications in the nature of prospectus, balance sheet, profit and loss
account, notice or advertisement.

Legal Effect of Share Certificate

a share certificate once issued by the company binds it in two ways, namely:
(a) by estoppel as to title, and
(b) by estoppel as to payment
 P a g e | 120

Estoppel as to Title:
it is a declaration by the company to the entire world that the person in whose name the
certificate is made out and to whom it is given is a shareholder in the company. In other
words, the company is estopped from denying his title to the shares.
Estoppel as to Payment:
If the certificate states that on each of the shares full amount has been paid, the
company is estopped as against a bona fide purchaser of the shares, from alleging that
they are not fully paid
If a person knows that the statements in a certificate are not true, he cannot claim an
estoppel against the company Barrow case.
 P a g e | 121

CHAP 4.3
ISSUE AND ALLOTMENT OF SECURITIES

INTRODUCTION
Chapter III of the Companies Act, 2013 deals with “Prospectus and allotment of
securities”, the chapter is divided into two parts:

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

a) to public through prospectus (“public offer”)
b) through private placement
c) through a rights issue or a bonus issue.
Section 23(2) provides that a private company may issue securities:
a) by way of rights issue or bonus issue
b) through private placement

KINDS OF ISSUE OF SHARES

Issue of Securities at a Premium [ face value se upr] [section 52]

Meaning:
Premium means an amount collected by the company from its shareholders over the face
value of securities.
Company may issue securities at a premium when it is able to sell them at a price above
par or above nominal value.
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The Companies Act, 2013 does not impose any conditions regulating the issues of
securities by a company at a premium.

Share Premium to be transferred to ‘Securities Premium Account’

Section 52(1) states that when a company issue shares at a premium, whether for cash or
otherwise, a sum equal to the aggregate amount of the premium received on those
shares shall be transferred to a “securities premium account”

Utilisation of Securities premium

In accordance with the provisions of Section 52(2) of the Act, the securities premium can
be utilised only for:
a) issuing fully paid bonus shares to members;
b) writing off the balance of the preliminary expenses of the company;
c) writing off commission paid or discount allowed, or the expenses incurred on
issue of shares or debentures of the company;
d) for providing for the premium payable on redemption of any redeemable
preference shares or debentures of the company; or
e) for the purchase of its own shares or other securities under section 68

Note:
Certain class of companies (who comply with applicable accounting standard) can utilize
securities premium account:

 In paying up unissued equity shares of the company to be issued to members of

the company as fully paid bonus shares; or
 In writing off the expenses of or the commission paid or discount allowed on any
issue of equity shares of the company; or
 For the purchase of its own shares or other securities.

SPECIAL NOTE

 the premium cannot be treated as profit and as such the amount of premium is not
available for distribution as dividend.
 the amount of premium whether received in cash or in kind must be kept in a
separate account, known as the “Securities Premium Account”.
 the amount of premium is to be maintained with the same sanctity as the share
capital.
 Monies in the securities premium account cannot be treated as free reserves, as
they are in the nature of capital reserve.
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CASE LAWS

Utilisation of securities premium account for selective capital reduction

Brillio Technologies Pvt. Ltd. (Appellant) vs. Registrar of Companies, Karnataka & Ors.
(Respondents)
The NCLAT observed that Security Premium Account can be utilized for making payment
to non-promoter shareholders.
Further, it can be held that selective reduction is permissible if the non-promoter
shareholders are being paid fair value of their shares, whose shares have been
extinguished pursuant to selective capital reduction, after obtaining prior approval of the
NCLT.

ISSUE OF SHARES AT A DISCOUNT (Section 53) [face value se kam]

When a company issues its shares at a price less than the face (nominal) value of shares,
is known as "Shares issued at a discount".
As per the provision of section 53 of the Companies Act, 2013, no company can issue
shares at a discount except issue of sweat equity shares.
Exception:
A company may issue shares at a discount to its creditors when its debt is converted
into shares in pursuance of any statutory resolution plan or debt restructuring scheme in
accordance with any guidelines or directions or regulations specified by the Reserve
Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act,
1949.

Penalty:
every officer who is in default shall be liable to a penalty which may extend to an amount
equal to the amount raised through the issue of shares at a discount or five lakh rupees,
whichever is less.
the company shall also be liable to refund all monies received with interest at the rate of
twelve percent per annum.
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CONCEPT OF ALLOTMENT OF SECURITIES [ AB SHARES MILENGE]

Allotment of shares means the act of appropriation of issue proceeds by the Board of
Directors of the company.
An allotment is the acceptance of an offer to take shares by an applicant, and such
acceptance must be communicated to allottees.
General Principles regarding Allotment of shares:
(i) The allotment should be made by the Board of Directors of the Company.
(ii) The allotment of shares must be made within a reasonable time.
(iii) The allotment should be absolute and unconditional: it means there is no condition
for allotment of shares or securities.
(iv) The allotment must be communicated to all the allottees.
(v) The allotment shall only be made against application.
(vi) Allotment should not be in contravention of any other law.

Note:
Allotment made without proper authority shall be treated invalid.
■ Allotment of shares made by an irregularly constituted Board shall be treated as invalid
(it means quorum must be present in such Board Meeting).
■ It is necessary that the Board should be duly constituted and should pass a valid
resolution for allotment of shares at a valid Board meeting.

Process for allotment of Securities:

1) Filling of prospectus/SLP with ROC:

The issuer company shall file a prospectus or a statement in lieu of prospectus (SLP)
with ROC before making an allotment.
No allotment of any securities of a company offered to the public for subscription shall
be made unless the amount stated in the prospectus as the minimum amount has been
subscribed and the sums payable on application for the amount so stated have been
paid to and received by the company by cheque or other instrument.
 P a g e | 125

2) Opening and closing of public issue:

The subscription list must be kept open for at least 3 working days and not more than 10
working days.
In case of Rights issue, the SEBI ICDR Regulations provide that the issue shall remain
open for at least 15 days and not more than 30 days.
3) Minimum Application Money:
The amount payable on application on every security shall not be less than 5% of the
nominal amount of the security.
4) Minimum Subscription:
If minimum amount has not been subscribed and the sum payable on application is not
received within 30 days from the date of issue of the prospectus, the amount so received
shall be returned within 15 days from the closure of the issue.
If any such money is not so repaid within such period the directors of the company who
are officers in default shall jointly and severally be liable to repay that money with
interest at 15% P.A.
5) Separate bank account
The company shall receive in cash the amount payable on application which shall not be
less than 5% of the nominal value of the shares and such amount shall be kept in
separate bank account i.e. "ESCROW A/C" till the allotment is made and until the
certificate to commence business has been obtained.
6) Allotment by Board:
The Board of Directors or its committee authorised to allot the securities after receiving
the minimum subscription.
7) Filing of return of allotment:
Whenever a company having a share capital makes any allotment of securities, it shall
file with the Registrar a return of allotment in Form PAS-3.

CASE LAWS [Related to allotment]

(A) An allotment may be valid even if some defect was there in the appointment of
Directors but which was subsequently discovered. [Section 290 and the Rule in
Royal British Bank vs. Turquand]

(B) An allotment by a Board irregularly constituted may be subsequently ratified by a

regular Board. [Portugese Consolidated Copper Mines]

(C) A director who has joined in an allotment to himself will be estopped from alleging
the invalidity of the allotment [Yark Tramways Co. vs. Willows]
 P a g e | 126

(D) Grant applied for certain shares in a company, the company dispatched letter of
allotment to him which never reached him. It was held that he was liable for the
balance amount due on the shares. [Household Fire And Carriage Accident
Insurance Co. Ltd. vs. Grant]

(E) There can be no proper allotment of shares unless the applicant has been
informed of the allotment [British and American Steam Navigation Co. Re.]

FILING OF RETURN OF ALLOTMENT:

Whenever a company makes any allotment of its securities, shall file a return of allotment
in Form PAS-3 along with fee within thirty days from the date of allotment.
The following documents should be attached with the return of allotment:
(a) A list of allottees stating their names, address, occupation and number of
securities allotted to each of the allottees.
Note: The list shall be certified by the signatory of the Form PAS-3 as being
complete and correct as per the records of the company.
(b) Copy of contract in case securities allotted as fully or partly paid-up for consideration
other than cash
(c) In the case of issue of bonus shares, a copy of the resolution passed in the general
meeting authorizing the issue of such shares shall be attached to the Form PAS-3.

Penalty for default:

In case of any default, the company and its officer who is in default shall be liable to a
penalty, for each default, of Rs.1000/- for each day during which such default continues
or Rs.1,00,000/, whichever is less.

CASE LAWS [ REALTED TO RELATED OF ALLOTMENT]

In case of Alote Estate vs. R.B. Seth Hiralal Kalyanmal Kasliwal inadequacy of
consideration, the shares will be treated as not fully paid and the shareholder will be
liable to pay for them in full, unless the contract is fraudulent;
Harmony and Montage Tin and Copper Mining Company
Any payment which is presently enforceable against the company such as consideration
payable for property purchased, will constitute payment in cash;
In case of Chokkalingam vs. Official Liquidator allotment of shares against promissory
notes shall not be valid.
 P a g e | 127

ISSUE OF SECURITIES

PRIVATE PLACEMENT OF SHARES [(Section 42(2)]

Meaning:
As per Explanation I to Section 42(3), “private placement” means any offer or invitation
to subscribe or issue of securities to a select group of persons by a company (other than
by way of public offer) through private placement offer-cum-application, which satisfies
the conditions specified in this section.
Private Placement offer-cum-application:
A company making private placement shall issue private placement offer and application
in Form PAS-4 serially numbered and addressed specifically to the person to whom the
offer is made and shall be sent to him, either in writing or in electronic mode within 30
days of recording the name of such person.
The private placement offer and application shall not carry any right of renunciation.
Maximum number of persons to whom offer can be made
As per section 42(2), a private placement shall be made only to a select group of persons
who have been identified by the Board, whose numbers shall not exceed 200, excluding
the qualified institutional buyers and employees of the company being offered securities
under a scheme of employees’ stock option.
Further sub-rule (7) provides that the provisions of sub-rule (2) shall not be applicable to:
 P a g e | 128

a) Non-banking financial companies which are registered with the Reserve Bank of
India under the Reserve Bank of India Act, 1934; and
b) Housing finance companies which are registered with the National Housing Bank
under the National Housing Bank Act, 1987.

Application to Private Placement:

As per section 42(4) states that every identified person willing to subscribe to the private
placement issue shall apply in the private placement and application issued to such
person along with subscription money paid either by cheque or demand draft or other
banking channel and not by cash.
However, a company shall not utilise monies raised through private placement unless
allotment is made and the return of allotment is filed with the Registrar.
Time limit for allotment and payment of interest/refund of subscription money:
Section 42(6) states that a company:

 Allot the securities within 60 days from receipt of application money.

 If not allotted, Repay the application money within 15 days from the expiry of 60
days.
 If not repaid, liable to pay interest @12% p.a. from the expiry of the 60th day.
Subscription money to be kept in a separate bank account
Proviso to Section 42(6) states that monies received on application received by the
company shall be kept in a separate bank account in a scheduled bank and shall not be
utilised for any purpose other than-

 for adjustment against allotment of securities; or

 for the repayment of monies where the company is unable to allot securities.

No information to Public about issue:

Section 42(7) states that no company issuing securities under this section shall release
any public advertisements to inform the public at large about such an issue.

Return of allotment:
A) Filing with the Registrar a return of allotment (FORM PAS-3) within fifteen days
from the date of the allotment, including a complete list of all allottees and all the
necessary details about securities.
B) Penalty for non-filing Form PAS-3: The company, its promoters and directors shall
be liable to a penalty for each default of one thousand rupees for each day during
which such default continues but not exceeding twenty-five lakh rupees.

Penalty:
if a company contravenes the companies act provisions, the company, its promoters
and directors shall be liable for a penalty which may extend to the amount raised
through the private placement or two crore rupees, whichever is lower, and the company
 P a g e | 129

shall also refund all monies with interest to subscribers within a period of thirty days of
the order imposing the penalty.

CONDITIONS APPLICABLE TO PRIVATE PLACEMENT

A) The proposed offer of securities must have been previously approved by a special
resolution of the shareholders of the company.
The explanatory statement to the notice in respect of special resolution for
General Meeting must justify the price (including premium) at which the offer or
invitation is being made.

B) In case of offer or invitation for non-convertible debentures, it shall be sufficient if

the company passes a previous special resolution only once in a year for all the
offers or invitation for such debentures during the year.

C) The Company shall maintain a complete record of private placement offers in

Form PAS-5.

D) Filing with ROC:

 FORM PAS-3 within 15 days of allotment.

 FORM MGT-14 for filing with ROC Special Resolution/Board Resolution
within 30 days.

EQUITY SHARES WITH DIFFERENTIAL VOTING RIGHTS [ me alag hu]

Section 43 and Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014:

Applicability of the rules:

 All unlisted public companies

 All private companies
 All public companies

Conditions for issuing shares with differential rights:

Only a company limited by shares can issue equity shares with differential rights as to
dividend, voting or otherwise. Such company has to comply with the following
conditions: -
 Authorization in Articles of Association:
The articles of association of the company authorizes the issue of shares with
differential rights.
 P a g e | 130

 Passing of Ordinary Resolution at general Meeting:

The issue of shares is authorized by an ordinary resolution passed at a general
meeting of the shareholders.
Note: In case of listed companies, the issue of such shares shall be approved by
the shareholders through postal ballot.

 Limit for voting power not exceeding 74 percent:

DVR shall not exceed 74% of total voting power including previous DVR.

 No defaults:
The company has not defaulted in the following:
a) The Company has not defaulted in filing financial statements and annual
returns for 3 financial years immediately preceding the financial year in which
it is decided to issue such shares.
b) No Default in the Payment of Dividend, Deposits or Debentures etc.
c) The Company has no subsisting default in the payment of a declared dividend
to its shareholders or repayment of its matured deposits or redemption of its
preference shares or debentures that have become due for redemption or
payment of interest on such deposits or debentures or payment of dividend or
default in term loan and interest thereon or default in payment of statutory
dues o default in creating the amount in IEPF.
Note - Can issue DVR after 5 years from default made good.
Note - The company has not been penalized by Court or Tribunal during the
last three years of any offence

 Conversion of existing equity share capital into differential voting rights and vice-
versa not possible:
The company shall not convert its existing equity share capital with voting rights
into equity share capital carrying differential voting rights and vice versa.

 Register of Members:
The Register of Members maintained under section 88 shall contain all the
relevant particulars of the shares so issued along with details of these.

 The holders of the equity shares with differential rights enjoys all other rights
such as bonus shares, rights shares etc., which the holders of equity shares are
entitled to, subject to the differential rights with which such shares have been
issued.

Disclosures in the explanatory statement to the notice of the meeting

The explanatory statement shall contain the following particulars: -
a) the total number of shares to be issued with differential rights;
b) the details of the differential rights
c) the price at which such shares are proposed to be issued either at par or at
premium;
 P a g e | 131

d) the basis on which the price has been arrived at

e) the percentage of voting right which the equity share capital with differential
voting right shall carry the total voting right of the aggregate equity share capital
f) the pre and post issue share holding pattern along with voting rights

Disclosures in the boards’ Report

The Board of Directors are required to disclose the details of the issue of equity shares
with differential rights in the Board’s Report for the financial year in which was
completed: -
a) the total number of shares allotted with differential rights;
b) the details of the differential rights relating to voting rights and dividends;
c) the percentage of the shares with differential rights to the total post issue equity
share capital with differential rights.
d) the price at which such shares have been issued;
e) the particulars of promoters, directors or key managerial personnel to whom such
shares are issued
f) the change in control, if any, in the company consequent to the issue of equity
shares with differential voting rights;
g) the diluted Earnings Per Share pursuant to the issue of each class of shares
h) the pre and post issue shareholding pattern along with voting rights.

ISSUE AND REDEMPTION OF PREFERENCE SHARES

Section 55 and Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014.

CONDITIONS FOR ISSUE OF PREFERENCE SHARES

1) Company cannot issue irredeemable preference shares or redeemable preference
shares with the redemption period beyond 20 years.
A company engaged in the setting up and dealing with of infrastructural projects
may issue preference shares for a period exceeding 20 years but not exceeding 30
years.

2) A company limited by shares authorize by its articles to issue preference shares

redeemed within a period not exceeding 20 years.

3) the issue of such shares has been authorized by passing a special resolution in
the general meeting of the company.
 P a g e | 132

4) the company, at the time of such issue of preference shares, has no subsisting
default in the redemption of preference shares issued earlier or in payment of
dividend due on any preference shares.

5) Redeemed out of the profits of the company which would otherwise be available
for dividend or out of the proceeds of a fresh issue of shares made for the
purposes of such redemption.

6) Such shares shall be redeemed only if they are fully paid.

7) the premium, if any, payable on redemption shall be provided for out of the profits
of the company or out of the company’s securities premium account, before such
shares are redeemed.

In case Company is not in position to redeem preference shares:

In case, a company is not in a position to redeem any preference shares or to pay
dividend on such shares as per the terms of issue.
Under such circumstance, a company may with the consent of 3/4th preference
shareholders in value subject to the approval of the NCLT, 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.

Note: The issue of further redeemable preference shares or the redemption of preference
shares shall not be deemed to be an increase or, a reduction, in the share capital of the
company.

Explanatory statement to special resolution to set out certain particulars:

a) the size of the issue and number of preference shares to be issued and nominal
value of each share
b) the nature of such shares i.e. cumulative or non-cumulative, participating or non-
participating, convertible or non-convertible;
c) the objectives of the issue;
d) the manner of issue of shares;
e) the price at which such shares are proposed to be issued;
f) the basis on which the price has been arrived at;
g) the terms of issue, including terms and rate of dividend on each share, etc.;
h) the terms of redemption, including the tenure of redemption, redemption of shares
at premium and if the preference shares are convertible, the terms of conversion;
i) the manner and modes of redemption;
j) the current share holding pattern of the company;
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Redemption of preference shares:

the preference shares may be redeemed: -

Procedure of Issue of Preference Shares

 Check authority in AOA, if Articles do not authorize, first amend the AOA

 No subsisting default in the payment of dividend and redemption of

preference shares earlier

 Check whether all the conditions relating to issue are met

 Hold BM and Issue Notice to call GM along with Explanatory statement

 Hold GM and pass Special Resolution at GM.

 File the Special Resolution so passed with ROC in MGT 14 within 30 days
of passing the SR

 Allot the shares and file Return of allotment in PAS- 3 within 30 days of
allotment.

 If shares held in Dematerialized form, inform depositories about allotment.

 Update Member Register by making allotment entries. Issue Share

Certificates
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Procedure of Redemption of Preference Shares

 The redemption should be as per the agreed terms at the time of issue and
amended later.

 Hold BM and pass Board Resolution for approval of Redemption of Preference

Shares.

 The notice of redemption to be filed by the company with the ROC in Form SH-7.

FURTHER ISSUE OF SHARE CAPITAL [ section 62]

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:

RIGHT ISSUES

EMPLYOEES STOCK
OPTION SCHEME

ISSUE ON
PREFERENTIAL BASIS

RIGHT ISSUE [ phle gharwale]

Rights offering (issue) is an issue of right to a company's existing shareholders to entitle
them to buy additional shares directly from the company in proportion to their existing
holdings.
The objective is to raise fund and to ensure equal distribution of Rights.
The Company shall offer the shares to the persons who, at the date of the offer, are
holders of equity shares of the company in proportion to the paid-up share capital.
The offer shall be made by notice specifying the number of shares offered.
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The offer shall be open not less than 15 days before and not exceeding 30 days from the
date of the offer. If the offer is not accepted within the period, it shall be deemed to have
been declined.

Special Note: In case of private limited company, time limit for acceptance of offer by
existing shareholders may be less than 15 days, if 90% of the members of the company
have given their consent either in writing or through electronic mode.

Note:
After expiry of the offer or on receipt of decline of offer, the Board of Directors may
dispose of such offered shares in any manner which is not disadvantageous to the
shareholders and the company.
The notice of offer shall be sent either by registered post or speed post or by electronic
mode to all the existing shareholders at least 3 days before the opening of the issue.

The provisions regarding issue of further shares do not apply to:

(a) Increase of the subscribed capital:

Increase of the subscribed capital of a company caused due to conversion of convertible
debentures issued or Convertible Preference shares into shares.
(b) Conversion of Govt. Loans:
Conversion of part or whole of the debentures issued to or loans obtained from any
Government in shares of the company in pursuance of a direction issued by that
Government in public interest on such terms and conditions as appear to be fair and
reasonable to the Government even if the terms of issue of such debentures or loans do
not contain a term providing for an option for such conversion.

Case Law: [Nanalal Zaver v. Bombay Life Assurance Co. Ltd.]

Facts: Section 81 (Corresponding to section 62 of the Companies Act, 2013) is intended
to cover cases where the directors decide to increase the capital by issuing further
shares within the authorised limit, because it is within that limit that the directors can
decide to issue further shares, unless, of course, they are precluded from doing that by
the Articles of Association of the company.
Judgment: In this case, it was held that this section (62 of the Companies Act, 2013)
becomes applicable only when the directors decide to increase the capital within the limit
of authorized capital, by issue of further shares.
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[Mathalone (R) v. Bombay Life Assurance Co. Ltd.]

In this case, the Court held that the transferor could not be compelled by the transferee
to take up on his behalf the rights shares offered to the transferor and all that he could
require the transferor to do was to renounce the rights issue in the transferee's favor.

EMPLOYEE STOCK OPTION SCHEME [ ab employee ki bari]

Definition:
“employees’ stock option” means the option given to the directors, officers or employees
of a company or of its holding company or subsidiary company or companies, if any,
which gives the benefit or right to purchase, or to subscribe for, the shares of the
company at a future date at a pre-determined price.
Type of Resolution:
 For public Company: Special Resolution
 For Private Company: Ordinary Resolution

Who are employees?

a) a permanent employee of the company who has been working in India or outside
India; or
b) a director of the company, whether a whole time Director or not but excluding an
Independent Director;
c) an employee of a subsidiary, in India or outside India, or of a holding company of
the company but does not include –

 an employee who is a promoter or a person belonging to the promoter

group; or
 Director who either himself or through his relative or through any body
corporate, directly or indirectly, holds more than ten percent of the
outstanding equity shares of the company.

IMP NOTE – In case of a startup company the conditions shall not apply upto ten years
from the date of its incorporation or registration
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Details in explanatory statement

a) total number of stock options to be granted;
b) identification of classes of employees entitled to participate in the Employees
Stock Option Scheme;
c) the appraisal process for determining the eligibility of employees to the
Employees Stock Option Scheme;
d) the requirements of vesting and period of vesting;
e) the maximum period within which the options shall be vested;
f) the exercise price or the formula for arriving at the same;
g) the exercise period and process of exercise;
h) the Lock-in period, if any;
i) the maximum number of options to be granted per employee and in aggregate;
j) the method which the company shall use to value its options;
k) the conditions under which option vested in employees may lapse e.g. in case of
termination of employment form is conduct;
l) the specified time period within which the employee shall exercise the vested
options in the event of a proposed termination of employment or resignation of
employee; and
m) a statement to the effect that the company shall comply with the applicable
accounting standards

Free pricing in conformity with accounting policies

The companies granting option to its employees pursuant to Employees Stock Option
Scheme will have the freedom to determine the exercise price in conformity with the
applicable accounting policies.

varying the terms of ESOP requires special resolution

the company may by special resolution, vary the terms of Employees Stock Option
Scheme not yet exercised by the employees provided such variation is not prejudicial to
the interests of the option holders.

Minimum one year vesting period

there shall be a minimum period of one year between the grant of options and vesting
of option.
In a case where options are granted by a company under its Employees Stock Option
Scheme in lieu of options held by the same person under an Employees Stock Option
Scheme in another company, which has merged or amalgamated with the first mentioned
company, the period during which the options granted by the merging or amalgamating
company were held by him shall be adjusted against the minimum vesting period
required under this clause.
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Company has freedom to specify lock-in period

the company shall have the freedom to specify the lock-in period for the shares issued
pursuant to exercise of option.

No right of dividend or voting till exercise of option

the Employees shall not have right to receive any dividend or to vote or in any manner
enjoy the benefits of a shareholder in respect of option granted to them, till shares are
issued on exercise of option.

Forfeiture/refund
the amount, if any, payable by the employees, at the time of grant of option –
a) may be forfeited by the company if the option is not exercised by the employees
within the exercise period; or
b) the amount maybe refunded to the employees if the options are not vested due to
non-fulfillment of conditions relating to vesting of option as per the Employees
Stock Option Scheme.

Conditions
a) The option granted to employees shall not be transferable to any other person.
b) The option granted to the employees shall not be pledged, hypothecated,
mortgaged or otherwise encumbered or alienated in any other manner.
c) No person other than the employees to whom the option is granted shall be
entitled to exercise the option.

Status of ESOP option in cases of : -

a) Death of Employee:
In the event of the death of employee while in employment, all the options granted to him
till such date shall vest in the legal heirs or nominees of the deceased employee.
b) Permanent incapacity:
In case the employee suffers a permanent incapacity while in employment, all the options
granted to him as on the date of permanent incapacitation, shall vest in him on that day.
(c) Resignation of Employment:
In the event of resignation or termination of employment, all options not vested in the
employee as on that day shall expire.

Disclosure in the board’s Report

the Board of Directors, shall, inter alia, disclose in the Directors’ Report for the year, the
following details of the Employees Stock Option Scheme issued during the year.
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Maintenance of Register
the company shall maintain a Register of Employee Stock Options in Form No.
SH.6 and shall forthwith enter therein the particulars of option granted.
The Register of Employee Stock Options shall be maintained at the registered office of
the company or such other place as the Board may decide. The entries in the register
shall be authenticated by the Company Secretary of the company or by any other person
authorized by the Board for the purpose.

ISSUE OF SHARES ON PREFERENTIAL BASIS [ Jo karib h unko hi milega]

Section 62(1)(C) and Rule 13 of The Companies (Share Capital and Debentures) Rules,
2014

Meaning:
The expression ‘Preferential Offer’ means an issue of shares or other securities, by a
company to any select person or group of persons on a preferential basis and does not
include shares or other securities offered through a public issue, rights issue, employee
stock option scheme, employee stock purchase scheme or an issue of sweat equity
shares or bonus shares or depository receipts issued in a country outside India or
foreign securities.

Conditions for Preferential Offer

 The issue is authorized by its articles of association.
 The issue has been authorized by a special resolution of the members;
 The allotment of securities on a preferential basis shall be completed within a
period of twelve months from the date of passing of the special resolution;
 The price of the shares or other securities to be issued on a preferential basis,
either for cash or for consideration other than cash, shall be determined on the
basis of valuation report of a registered valuer
 where convertible securities are offered on a preferential basis with an option to
apply for and get equity shares allotted, the price of the resultant shares pursuant
to conversion shall be determined-
a) either up front at the time when the offer of convertible securities is made
b) at the time, which shall not be earlier than thirty days to the date when the
holder of convertible security becomes entitled to apply for shares
 the price of shares or other securities to be issued on preferential basis shall not
be less than the price determined on the basis of valuation report of a registered
valuer.
 In case the preferential offer is made by a company to one or more existing
members only, few provisions relating to private placement in PAS-5 & offer letter
in PAS-4 shall not apply.
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Contents of Explanatory Statement:

a) The objects of the issue;
b) The total number of shares or other securities to be issued;
c) The price or price band at/within which the allotment is proposed;
d) Basis on which the price has been arrived at along with report of the registered
valuer;
e) Relevant date with reference to which the price has been arrived at;
f) The class or classes of persons to whom the allotment is proposed to be made;
g) Intention of promoters, directors or key managerial personnel to subscribe to the
offer;
h) The proposed time within which the allotment shall be completed;

Difference between Private Placement and Preferential Allotment

PARTICULARS PRIVATE PLACEMENT PREFERENTIAL ALLOTMENT

Governing Section 42 Section 62(1)(c)
Meaning Offer or invitation made to a Issue of shares to any
select group of persons persons whether or not they
include members and
employees
Securities to be issued Any security including Equity, Only Equity and other
Preference and Debentures securities convertible into
Equity can be issued
Shareholders’ Approval Required Required
Allottees Any person as identified by To members, employees or
the Board any other persons
Disclosures in Explanatory Only a few as per Rule 14 of Detailed disclosures as per
Statement the Companies (Prospectus Rule 13 of the Companies
and Allotment of Securities) (Share Capital and
Rules, 2014 Debentures) Rules, 2014
Offer Letter In prescribed format (PAS-4) No format prescribed
Mode of payment Through any banking channel Either for cash or
but not cash consideration other than cash
Time limit for allotment Within 60 days of receipt of Within 12 months from the
subscription money date of passing Special
Resolution
Authorization in Articles Not Required Required
bank Account Separate Bank account is No such requirement
required
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Difference between Right Issue and Preferential Allotment

PARTICULARS RIGHT ISSUE PREFERENTIAL

ALLOTMENT
Provisions Section 62(1)(a) of the Section 62(1)(c) of the
Companies Act, 2013 Companies Act, 2013.
In addition to the above, it is
subject to the compliance
with the applicable provisions
of Chapter III (i.e. Public
Offer and Private Placement)

Person to whom offer is Shares are issued in Shares may be issued to

made proportion to existing both existing shareholders
shareholding. and even outsiders

Approval Board approval through Both Board Resolution and

Board Meeting is required. Special Resolution is needed
to approve Preferential
Allotment.

Period of Offer Offer remains open for the No provisions for offer period
minimum period 15 days and
maximum 30 days.

Offer Letter No specific format has been Offer letter shall be in

prescribed. Offer letter can prescribed format i.e.
be in any format. PAS-4

Filing with ROC before No filing required Offer letter can be issued
issue of offer letter only after SR has been filed
with ROC in MGT14

Return of Allotment E-form PAS-3 for allotment of PAS-3 for allotment of shares
shares within 30 days within 15 days of allotment

Period of Allotment Allot shares within 60 days of The allotment shall be made
receipt of application money of the earlier of these two -
– 12 months of Special
Resolution; or
– 60 days from receipt of
application money

Separate bank Account No separate Bank account is Separate Bank account is

required to receive mandatorily required to
application money. receive application money
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Valuation Report No need of any valuation Valuation Report is

report mandatory for making
preferential allotment

Right to renounce Shareholders under this No such right under this

option have right to option
renounce, reject or approve
the offer.

Explanatory Statement Not applicable because no Notice should contain

shareholder approval is Explanatory statement
required.

BONUS SHARES [ YE TO FREE KA HAI] [ SECTION 63]

Meaning:
Bonus shares mean shares issued by the company to its existing shareholders at free of
cost.
The issue of bonus shares by a company is a common feature. The vesting of rights in
bonus shares takes place when the shares are actually allotted; and not from any earlier
date.

Benefits of Issuing Bonus Shares:

1) It is meant for capitalizing undistributed profits.
2) Fund flow is not affected adversely.
3) Market value of the company’s shares comes down to their nominal value by
issue of bonus shares.
4) Market value of the members’ shareholdings increases with the increase in
number of shares in the company.
5) ‘Bonus shares’ is not an income. Hence, it is not a taxable income

The company which has once announced the decision of its Board recommending a
bonus issue, shall not subsequently withdraw the same.

Sources for issue of bonus Shares

According to section 63(1), a company may issue fully paid-up bonus shares to its
members, in any manner whatsoever, out of-
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NOTE – No issue of bonus shares shall be made by capitalizing reserves created by the
revaluation of assets.

Conditions for issue of bonus Shares:

 It is authorised by its articles;
 Passing of Ordinary Resolution: It has, on the recommendation of the Board, been
authorised in the general meeting of the company;
 No defaults:
 it has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
 it has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus.
 The partly paid-up shares, if any outstanding on the date of allotment, are made
fully paid-up.
 The bonus shares shall not be issued in lieu of dividend.

FORMS TO BE FILED WITH ROC:

FORM MgT-14: In case special resolution for altering the Article of Association for
authorizing bonus issues of shares, then to file Form MGT-14 within 30 days of passing
the special resolution.
FORM PAS-3: Within 30 days of allotment file with the Registrar the Return of allotment
in Form PAS-3 along with fee as specified in Companies (Registration of Offices and
Fees), Rules 2014.

Illustration:
ABC Private Limited has the following:
 Authorised Equity Share Capital: Rs. 85 Crores.
 Paid Up Equity Share Capital: Rs.60 Crores.
 Reserves & Surplus: Rs.780 Crore.
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However, ABC Private Limited has defaulted in making payment towards contribution of
provident fund for last two years. The Board plans to issue bonus shares in ratio of 1:1.
Can the Board do so?
Answer:
As the Company has defaulted in making payment of statutory dues , it do not satisfy the
conditions permissible to issue bonus shares. Therefore, ABC Private Limited can’t issue
bonus shares.

SWEAT EQUITY SHARES [SECTION 54] [ jo bhayega paseena usko milegi

haseena]
What are Sweat Equity Shares?
According to section 2 (88), sweat equity shares means such equity shares issued by a
company to its directors or employees at a discount or for consideration, other than cash
for providing their know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.

Who are Employees?

The expressions ‘‘Employee’’ means –
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Conditions for Issue of Sweat Equity Shares:

 The issue has been authorized by a special resolution passed by the company in
the general meeting.
 The following are clearly specified in the resolution:
(a) number of shares;
(b) current market price;
(c) consideration, if any; and
(d) class or classes of directors or employees to whom such equity shares are to
be issued
 Where shares are listed on a recognized stock exchange, the company issuing
sweat equity shares should comply with the regulations made in this behalf by
SEBI.
 the special resolution authorising the issue of sweat equity shares shall be valid
for making the allotment within a period of not more than twelve months from the
date of passing of the special resolution.
 The sweat equity shares issued to directors or employees shall be locked for a
period of three years from the date of allotment

Limitations on issue of sweat equity shares:

the company shall not issue sweat equity shares for more than fifteen percent
of the existing paid-up equity share capital in a year or shares of the issue value of
rupees five crores, whichever is higher. The issuance of sweat equity shares in the
company shall not exceed twenty five percent, of the paid-up equity capital of the
company at any time.
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Sweat equity shares for non-cash consideration:

The non-cash consideration shall be treated in the following manner in the books of
account of the company –
(a) where the non-cash consideration takes the form of a depreciable or amortizable
asset, it shall be carried to the balance sheet of the company in accordance with the
accounting standards; or
(b) where clause (a) is not applicable, it shall be expensed as provided in the accounting
standards

Sweat equity shares forming part of managerial remuneration:

The amount of sweat equity shares issued shall be treated as part of managerial
remuneration if the following conditions are fulfilled, namely –
(a) the sweat equity shares are issued to any director or manager; and
(b) they are issued for consideration other than cash, which does not take the form of
an asset which can be carried to the balance sheet of the company in accordance
with the applicable accounting standards.

Sweat equity shares and compensation aspects:

a) If the sweat equity shares are not issued pursuant to acquisition of an asset
sweat equity shares issued during an accounting period, the accounting value of sweat
equity shares (i.e., fair value by Registered valuer shall be treated as a form of
compensation to the employee or the director in the financial statements of the company.
b) If the shares are issued pursuant to acquisition of an asset
if the shares are issued pursuant to acquisition of an asset, the value of the asset, as
determined by the valuation report, shall be carried in the balance sheet as per the
Accounting Standards and such amount to the accounting value of the sweat equity
shares that is in excess value of the asset acquired, as per the valuation report, shall be
treated as a form of compensation to the employee or the director in the financial
statements of the company.

Disclosure in board Report:

a) the class of director or employee to whom sweat equity shares were issued;
b) the class of shares issued as Sweat Equity Shares;
c) the number of sweat equity shares issued to the directors, key managerial
personnel or other employees showing separately the number of such shares
issued to them , if any, for consideration other than cash and the individual names
of allottees holding one percent or more of the issued share capital;
d) the reasons or justification for the issue;
e) the principal terms and conditions for issue of sweat equity shares, including
pricing formula;
f) the total number of shares arising as a result of issue of sweat equity shares;
g) the percentage of the sweat equity shares of the total post issued and paid up
share capital;
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h) the consideration (including consideration other than cash) received or benefit

accrued to the company from the issue of sweat equity shares;
i) the diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.

Maintenance of Register
the company shall maintain a Register of Sweat Equity Shares in Form No. SH.3 and shall
be maintained at the registered office of the company or such other place as the Board
may decide. The entries in the register shall be authenticated by the Company
Secretary of the company or by any other person authority.

ILLUSTRATION:
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CHAPTER 4.4
ALTERATION IN SHARE CAPITAL, BUY-BACK AND REDUCTION OF
SHARE CAPITAL

ALTERATION OF SHARE CAPITAL (SECTION 61)

a limited company having a share capital may, if so authorised by its articles, alter its
memorandum in its general meeting.

A) Increase Authorised Capital:

It includes to increase its authorised share capital by such amount, as it thinks
expedient;

B) Consolidation and division of shares:

It includes to consolidate and divide, all or any of its existing shares into a larger
denomination than of its existing shares.
e.g., by consolidating ten shares of Rs. 10/- each into one share of Rs. 100/- each.
Proviso to Section 61(1)(b) states that no consolidation and division which results in
changes in the voting percentage of shareholders shall take effect unless it is approved
by the Tribunal on an application made in the prescribed manner;
C) Conversion in stock:
It includes to convert all or any of its fully paid-up shares into stock or reconvert
that stock into fully paid-up shares of any denomination;
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D) Sub-division:

It includes to sub-divide its existing 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
shall be the same as it was in the case of the share from which the reduced share is
derived;
E) Cancellation of Shares:
It includes to cancel shares which, at the date of the passing of the resolution in that
behalf, have not been taken up or agreed to be taken by any person and diminish the
amount of the share capital by the amount of the shares so cancelled.

Filing of FORM SH-7 with ROC:

Section 64(1) states that when-

 a company alters its share capital

 an order made by the Government has the effect of increasing authorised capital
of a company; or
 a company redeems any redeemable preference shares.
The company shall file a notice in the prescribed Form SH-7 with the Registrar with in a
period of thirty days of such alteration or increase or redemption, as the case may be,
along with an altered memorandum.

PENALTY:
As per Section 64 (2), contravention in this case will make the such company and every
officer who is in default shall be liable to a penalty of five hundred rupees for each day
during which such default continues, subject to a maximum of five lakh rupees in case of
a company and one lakh rupees in case of an officer who is in default.

BUY-BACK OF SECURITIES: [ Paisa bhut

h shareholders se shares kharid lo]
Meaning of buy – back:
Buy-back of share means purchase of its own
shares by the company.
In short, buy-back is a process when a company
makes an offer to buy-back its own issued shares.
 P a g e | 150

Sources:
According to Section 68(1) of the Companies Act, 2013 a company may purchase its own
shares or other specified securities out of:

 Its free reserves

 The securities premium account
 The proceeds of the issue of any shares or other specified securities.
However, no buy-back of any kind of shares or other specified securities can be made
out of the proceeds of an earlier issue of the same kind of shares or same kind of other
specified securities.

What are Free Reserves?

Free reserves have been defined under section 2(43) of the Act as such reserves which,
as per the latest audited balance sheet of a company, are available for distribution as
dividend:
Further it has been provided that the following shall not be treated as free reserves:

 any amount representing unrealised gains, notional gains or revaluation of assets,

whether shown as a reserve or otherwise, or
 any change in carrying amount of an asset or of a liability recognised 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.

Conditions for buy back:

1) Authorisation by AOA:
The primary requirement is that the articles of association of the company
should authorise buy-back. In case, such a provision is not available, it would be
necessary to alter the articles of association to authorise buy-back.

2) Approval:
Board of Directors can approve buy-back up to 10% of the total paid-up equity
capital and free reserves of the company and authorize such buy-back by means
of a resolution passed at the meeting.
Shareholders by a special resolution can approve buy-back up to 25% of the total
paid-up capital and free reserves of the company, in respect of any financial year.

3) quantum:
The buy-back is twenty-five per cent. or less of the aggregate of paid-up capital
and free reserves of the company.
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4) Debt Equity Ratio after buy back

The ratio of the aggregate of secured and unsecured debts owed by the company
after buy-back is not more than twice the paid-up capital and its free reserves.

5) Fully paid-up shares:

all the shares or other specified securities for buy-back are fully paid-up.

6) Time gap between two buy back:

No offer of buy- back shall be made within a period of one year reckoned from the
date of the closure of the preceding offer of buy-back, if any.

7) Completion of buy back:

Every buy-back shall be completed within a period of one year from the date
of passing of the special resolution, or as the case may be, the resolution passed
by the Board.

8) Methods of buy back:

The buy-back may be —
(a) from the existing shareholders or security holders on a proportionate basis;
(b) from the open market;
(c) by purchasing the securities issued to employees of the company pursuant to
a scheme of stock option or sweat equity.

9) Extinguishment of shares:
When a company buys-back its own shares or other specified securities, it
shall extinguish and physically destroy the shares or securities so bought back
within seven days of the last date of completion of buy-back.

10) Prohibition of further issue of shares:

Where a company completes a buy-back of its shares or other specified securities
it shall not make a further issue of the same kind of shares or other specified
securities within a period of six months except by way of a 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.

11) Period of offer for buy-back:

The offer for buy-back shall remain open for a period of not less than 15 days and
not exceeding 30 days from the date of dispatch of the letter of offer.
Provided that where all members of a company agree, the offer for buy-back may
remain open for a period less than fifteen days.

12) Register of buy back:

When a company buys-back its shares or other specified securities it shall
maintain a register of the shares or securities so bought in Form No. SH-10, the
consideration paid for the shares or securities bought back.
The said register shall be maintained at the registered office of the company and
shall be kept in the custody of Secretary of the company or any other person
authorized by the Board in this behalf.
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13) Dispatch of letter of offer to shareholders:

The letter of offer shall be dispatched to the shareholders or security holders
immediately after filing the same with the Registrar of Companies but not later
than 21 days from its filing with the Registrar of Companies.

14) Filing with ROC:

 Filing of Special Resolution (Form MgT-14) Within 30 days of passing for

buy back.
 Letter of Offer (Form No. SH-8) file with the Registrar of Companies in Form
No. SH.8, dated and signed on behalf of the Board
of directors of the company by not less than two directors of the company,
one of whom shall be the managing director, where there is one.
 Declaration of Solvency (Form No. SH-9) file with the Registrar, and in case
of a listed company with the Registrar and the Securities and
Exchange Board, signed
by at least two directors of the company, one of whom shall be the
managing director, if any, and by an affidavit to the effect that the Board of
Directors of the company 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
with in a period of one year from the date of declaration adopted by the
Board.
 Return (Form No. SH-11) after the completion of the buy-back shall file with
the Registrar, and in case of a listed company with the Registrar and the
Securities and Exchange Board of India, and a certificate in Form No. SH.15
signed by two directors of the company including the managing director, if
any, certifying that the buy-back of securities has been made in compliance
with the provisions of the Act and the rules made thereunder.

15) Completion of verification of offers:

The company shall complete the verifications of the offers received
within fifteen days from the date of closure of the offer and the shares or other
securities lodged shall be deemed to be accepted unless a communication of
rejection is made within twenty-one days from the date of closure of the offer.

16) Opening of bank Account:

The company shall immediately after the date of closure of the offer, open
a separate bank account and deposit therein, the entire sum due and payable as
consideration for the shares tendered for buy-back in terms of these rules.

The company shall within seven days of the time specified –

 make payment of consideration in cash to those shareholders or security
holders whose securities have been accepted; or
 return the share certificates to the shareholders or security holders whose
securities have not been accepted.
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Penalty:

If a company makes any default shall be punishable with fine which shall not be less than
one lakh rupees but which may extend to three lakh rupees and every officer of the
company who is in default shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to three lakh rupees.

Transfer to and application of Capital Redemption Reserve Account [Section 69]

When a company purchases its own shares out of free reserves or securities premium
account, a sum equal to the nominal value of the shares so purchased shall be
transferred to the capital redemption reserve account and details of such transfer shall
be disclosed in the balance sheet.

Circumstances prohibiting buy-back: [section 70]

A company cannot buy-back shares or other specified securities, directly or indirectly—

 Through any subsidiary company including its own subsidiaries; or

 Through investment or group of investment companies; or
 When the company has defaulted in the repayment of deposit or interest thereon,
redemption of debentures or preference shares or payment of dividend or
repayment of any term loan or interest thereon to any financial institution or bank.
 Company has defaulted in:
 Filing of Annual Return (section 92)
 Declaration of dividend (section 123)
 Punishment for failure to distribute dividend (section 127)
 Giving financial statement (section 129)

Special Note: A Company cannot buy-back its own shares in cases of any default
regarding filing of the annual return, failure to distribute dividend and fails to give true &
fair view on financial statement.

BENEFITS OF BUY – BACK:

 It is an alternative mode of reduction in capital without requiring approval of the

Court/NCLT;
 to improve the earnings per share;
 to improve return on capital, return on net worth and to enhance the long-term
shareholders value;
 to provide an additional exit route to shareholders when shares are under valued
or thinly traded;
 to enhance consolidation of stake in the company;
 to prevent unwelcome takeover bids;
 to return surplus cash to shareholders;
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REDUCTION OF SHARE CAPITAL (SECTION 66)

The need of reducing share capital may arise in various circumstances such as follows:

 Returning of surplus to shareholders;

 Eliminating losses, which may be preventing the payment of dividends;
 As a part of scheme of compromise or arrangements; simplify capital structure;
 When the company is making losses, the financial position does not present a
true and fair view of the company.

Conditions for reduction of share capital

1) the matter for reduction in share capital to get it approved with member’s approval
by special resolution.
2) Special resolution passed for reduction of share capital is required to be filed with
ROC within 30 days.
3) Subject to confirmation by the Tribunal on an application by the company,
a company limited by shares or limited by guarantee and having a share capital
may, by a special resolution, reduce the share capital.
4) the debt or claim of every creditor of the company has been discharged or
determined or has been secured or his consent is obtained,
5) A certificate to that fact that the accounting treatment, proposed by the company
for such reduction is in conformity with the accounting standards by the
company’s auditor has been filed with the Tribunal.
6) The order of confirmation of the reduction of share capital by the Tribunal shall be
published by the company in such manner as the Tribunal may direct.
7) The company shall deliver a certified copy of the order of the Tribunal and details
of reduction approved by the Tribunal showing –
a) the amount of share capital;
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b) the number of shares into which it is to be divided;

c) the amount of each share; and
d) the amount, if any, at the date of registration deemed to be paid-up on each
share, to the Registrar within thirty days of the receipt of the copy of the order,
who shall register the same and issue a certificate to that effect.

No liability of member:
A member of the company, past or present, shall not be liable to any call or contribution
in respect of any share held by him exceeding the amount of difference, if any, between
the amount paid on the share, or reduced amount, if any, which is to be deemed to have
been paid thereon, as the case may be, and the amount of the share as fixed by the order
of reduction.

Action under Section 447 i.e., Punishment for Fraud

If any officer of the company:

 knowingly conceals the name of any creditor entitled to object to the reduction;
 knowingly misrepresents the nature or amount of the debt or claim of any
creditor; or
 abets or is privy to any such concealment or misrepresentation as aforesaid; He
shall be liable under section 447.

Methods for reduction of share capital:

a) extinguish or reduce the liability on any of its shares in respect of the share
capital not paid-up; or

Example: Where the shares are of face value of `100 each with `65 has been paid, the
company may reduce them to `65 fully paid-up shares and thus relieve the shareholders
from liability on the uncalled capital of `35 per share.

b) either with or without extinguishing or reducing liability on any of its shares, –

 cancel any paid-up share capital which is lost or is unrepresented by available

assets; or

Example: Where the shares of face value of `100 each fully paid-up is represented by `65
worth of assets. In such a case, reduction of share capital may be effected by cancelling
`35 per share and writing off similar amount of assets.
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 pay off any paid-up share capital which is in excess of the wants of the company,
alter its memorandum by reducing the amount of its share capital and of its
shares accordingly:

Example: Shares of face value of `100 each fully paid-up can be reduced to face value of
`75 each by paying back `25 per share.

NOTE - No Reduction of Capital would be allowed in case of Arrears in the Repayment of

Deposits and Interest there on

Notice by Tribunal:

The Tribunal shall give notice of every application made to it to:

 The creditors of the company

 Registrar
 The securities and the exchange board, in case of listed companies
 Central government [ powers have been delegated to regional director

It shall take into consideration there presentations, if any, made to it by that Central
Government, Registrar, the Securities and Exchange Board and the creditors within a
period of three months from the date of receipt of the notice.

If no representation has been received from the Central Government, Registrar, the SEBI
or the creditors within the said period, it shall be presumed that they have no objection to
the reduction.

CASE LAW [ Consent affidavits from the creditors is mandatory for reduction of share
capital]
In case of the case of Brillio Technologies Pvt. Ltd vs Registrar Of Companies, The
NCLAT, New Delhi, while giving its judgment held that “Consent affidavits from the
creditors is mandatory for reduction of share capital, SPA cannot be utilized for making
payment to non- promoter shareholders.”
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Case laws on reduction of capital

Sandvik Asia Ltd. v. Bharat Kumar Padamsi

Here the court held that once it is established that non-promoter shareholders are being
paid fair value of their shares, and an overwhelming majority of them have voted in favor
of resolution for reduction of share capital, the court will not be justified in withholding
the sanction to the resolution

Elpro International Ltd.

The Bombay High Court while dealing with a special resolution passed in favour of
reduction of capital, held that a company can reduce the share capital of any shareholder
in any way so long as the procedure is fair and gets the approval of the majority
shareholders.

Josco Jewellers Private Limited Vs. RoC, Kerala

The Petitioner Company had filed a petition under Section 66 of the Companies Act, 2013
against the Registrar of Companies, Kerela seeking reduction of its share capital from
Rs. 120 crores to Rs. 1 crore because after review board of company observed that
company’s paid up capital and it would be beneficial for the company to remit back its
excess capital by way of reduction of share capital.

The NCLT, Kochi Bench held that since all the requisite statutory procedures have been
fulfilled and no objections has been received from any shareholders, the company
petition filed for reduction of its share capital is hereby allowed.

DIMINUTION OF SHARE CAPITAL IS NOT A REDUCTION OF CAPITAL

As per section 61(1)(e) of the Companies Act, 2013, diminution of capital is the
cancellation of the unsubscribed part of the issued capital.
It can be effected by an ordinary resolution provided articles of the company authorises
to do so.

Reduction of share capital by following methods also do not need any sanction/approval
of the Tribunal:
a) Redemption of redeemable preference shares.
b) Purchase of shares of a member by the Company on order of the tribunal
c) Buy-back of its own securities.

In the following cases, the diminution of share capital is not to be treated as reduction of
the capital:
a) Where the company cancels shares which have not been taken or agreed to be
taken by any person
b) Where redeemable preference shares are redeemed in accordance with the
provisions of Section 55
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c) Where any shares are forfeited for non-payment of calls and such forfeiture
amounts to reduction of capital;
d) Where the company buys-back its own shares under Section 68 of the Act
e) Where the reduction of share capital is effected in pursuance of the order of the
Tribunal sanctioning any compromise or arrangement under section 230.

Case Law: SIEL Ltd. (2008)

Facts:
the view was that reduction of the share capital of a company is a domestic concern of
the company and the decision of the majority would prevail. If the majority by special
resolution decides to reduce the share capital of the company, it has the right to decide
to reduce the share capital of the company and it has the right to decide how this
reduction should be effected. While reducing the share capital, the company can decide
to extinguish some of its shares without dealing in the same manner with all other shares
of the same class.

Judgment:
A selective reduction is permissible within the frame work of law for any company limited
by shares.

British and American Trustee and Finance Corpn. vs. Couper,

the Act does not prescribe the manner in which the reduction of capital is to be effected.
Nor is there any limitation of the power of the Court to confirm the reduction except that
it satisfied that all the creditors entitled to object to the reduction have either consented
or been paid or secured.

REDUCTION OF SHARE CAPITAL WITHOUT SANCTION OF THE TRIBUNAL

The following are cases which amount to reduction of share capital and where no
confirmation by the Tribunal is necessary:

a) Surrender of Shares:
It is a voluntary initiative by a registered shareholder for surrender of shares to
the Company for any reason including for settlement of a dispute.
It will have the same effect as a transfer in favour of the company and amounts to
a reduction of capital.
The surrender of shares shall be treated as valid only when Articles of
Association provide for the same and—

• Where forfeiture of such shares is justified; or

• When shares are surrendered in exchange for new shares of same nominal
value.
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b) Forfeiture of Shares:
A company may if authorised by its articles, forfeit shares for nonpayment of calls
and the same will not require confirmation of the Court.

Conclusiveness of certificate for reduction of capital

Where the Registrar have issued his certificate confirming the reduction, the same shall
be held conclusive, even if it is later discovered that company have no authority under its
article to reduce capital or special resolution passed is invalid.
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CHAPTER 4.5

TRANSFERABILITY OF SHARES

INTRODUCTION
When the owner of shares transfers his ownership of
shares to another person is called as transfer of shares.

The person who transfers is known as ‘Transferor’ and

the person to whom shares are transferred is known as
‘Transferee’.

Transferability of securities

Section 44 of the Companies Act, 2013 states that the shares or debentures or other
interest of any member in a company shall be movable property, transferable in the
manner provided by the articles of the company.
Therefore, there cannot be an absolute prohibition on the right to transfer shares.
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TRANSFERABILITY IN CASE OF PRIVATE COMPANIES

Shares of a private company are not marketable securities due to restriction on right to
transfer. Such shares by their very nature are not freely transferable in the market.

section 2(68) of the Companies Act, 2013 restricts the right to transfer shares but does
not prohibit the right to transfer shares.

Restrictions upon transfer of shares in private companies are not applicable in following
cases: -
 On the right of a member to transfer his/her shares in a case where the shares are
to be transferred to his/her representative(s).
 In the event of death of a shareholder, legal representatives may require the
registration of shares in the names of heirs, on whom the shares have been
devolved.
 In respect of shares which are proposed to be issued on a right basis, existing
members would have a right to renounce shares likely to be allotted to them. If the
existing shareholder’s renounce their shares, then these shares will be allotted to
the renounces for the first time and therefore no transfer of shares will take place.

Restriction on right to transfer shares is generally placed by using following two

methods:

 Right of pre-emption: [pahle gharwale fir baharwale]

If a member wishes to sell some or all of his shares, such shares shall first be offered to
other existing members of the company at a price determined by the directors or by the
auditor of the company or by the use of formula set out in the articles(Transfer by Demat
mode only) If no existing member is ready to acquire shares, then shares can be
transferred by the transferor to the proposed transferee.

 Powers of directors to refuse registration of transfer of shares:

The Powers of directors to refuse registration of transfer of shares are specified in the
articles of association of the company. This power is to be exercised by the Board of
Directors in good faith.

TRANSFERABILITY OF PUBLIC COMPANY

As per section 58(2), the securities or other interest of any member in a public company
shall be freely transferable. The Board of Directors of a company or the concerned
depository has no discretion to refuse or withhold transfer of any security. The transfer
has to be effected by the company/depository automatically and immediately.

However, proviso to section 58(2) provides that any contract or arrangement between
two or more persons in respect of transfer of securities shall be enforceable as a
contract.
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Transfer Rules (Section 56 & Rule 11 of Companies (Shares Capital and

Debentures) Rules, 2014):

a) Execution of Transfer Instrument:

An instrument of transfer of securities held in physical form shall be in Form [Link].4

and every instrument of transfer shall be delivered to the company within 60 days
from the date of such execution.

b) Registration of Partly paid-up shares:

A company shall not register a transfer of partly paid shares, unless the company
has given a notice in Form No. SH.5 to the transferee and the transferee has given no
objection to such transfer within 2 weeks from the date of receipt of notice.

c) Delivery of shares certificate:

Every Company has to deliver the share certificate in respect of allotment, transfer &
transmission of securities within 1 month from the date of receipt by the Company.

Transfer of Shares by Legal Representative

A transfer of the shares in a company of a deceased member shall be completed by

his legal representative although the legal representative is not himself a member
of the Company.

Transfer Instrument lost/not delivered

Where the transfer instrument has been lost or has not been reached to the Company for
transfer then the Company may register the transfer on the basis of submission of
Indemnity Bond by the transferee. The company may also ask for submission of
affidavits (as proof for loss of share certificate) from the transferor or transferee before
registering the transfer.

Intimation to depository

Where the securities are dealt with in a depository, the company shall intimate the
details of allotment of securities to depository immediately on allotment of such
securities.

Stamp duty payable and affixation/ cancellation of stamps at the time of transfer
of shares

Before the transfer is lodged with the company, the transfer instrument should be
duly stamped.
Only the Central Government can levy stamp duty on share transfers. The stamp duty
payable on transfer of debentures is State matter and may vary from State to State.
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The amount of consideration is required to be mentioned in the share transfer deed

as otherwise the companies cannot verify whether share transfer stamp duty has
been correctly charged thereby attracting the penal provisions of the Stamp Act in
case of a default.
Thus, in case where question of consideration does not arise like in the case of a gift
of shares, stamp duty will be paid on the basis of the market value of shares and in
case of unquoted shares or where quotations are not available at the face value of
the shares.

Note: A company cannot register the transfer of securities unless a proper instrument of
transfer duly stamped, dated and executed by or on behalf of the transferor and the
transferee has been delivered to the company along with the certificate relating to the
securities in question.

The Share Transfer details shall be given to ROC in Annual Return of the
company in Form MGT-7.

STATUTORY REMEDY IN CASE BOARD REFUSES REGISTRATION OF

TRANSFER/TRANSMISSION OF SHARES [ section 58]

Private Company:

If a private company limited by shares refuses to register the transfer or transmission,

the transferee may appeal to the Tribunal (NCLT) against the refusal within 30 days from
the date of receipt of the notice or in case no notice has been sent by the company,
within 60 days from the date on which the instrument of transfer or the intimation of
transmission was delivered to the company.
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Public Company:

If a public company without sufficient cause refuses to register the transfer of securities
within 30 days from the date on which the instrument of transfer or the intimation of
transmission, as the case may be, is delivered to the company, the transferee may, within
60 days of such refusal or where no intimation has been received from the company,
within 90 days of the delivery of the instrument of transfer or intimation of transmission,
appeal to the Tribunal.

The Tribunal, while dealing with an appeal may, after hearing the parties, either dismiss
the appeal, or by order-

(a) direct that the transfer or transmission shall be registered by the company and the
company shall comply with such order within a period of ten days of the receipt of the
order; or
(b) direct rectification of the register and also direct the company to pay damages, if any,
sustained by any party aggrieved.

Can a company refuse to register the transfer in the name of an employee?

Case Law: Shri Nirmal Kumar v. Jaipur Metal and Electrical Limited (1976)

Facts:
A company was refused to register the transfer of shares in favour of its
employee on the following grounds:
• The employee would create nuisance in general meetings and
• Would seek access to the records of the company.

Judgment:
In this case, the court held that refusal to register share transfer on suspicion that the
employee if admitted as a member will attend general meetings of the company and may
create nuisance by raising irrelevant issues and also obtain access to the records to the
company as a shareholder is not a valid reason.

RECTIFICATION OF REGISTER OF MEMBERS (SECTION 59)

Section 59 of the Companies Act, 2013 provides the procedure for the rectification of
register of members after the transfer of securities.
The provision states that –
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1) Remedy to the aggrieved for not carrying the changes in the register of members:
Grounds of appeal:

 The name of any person is entered in the register of members; or

 The name of any person having entered in the register of members is
without sufficient reason omitted there from; or
 Default or unnecessary delay is being made in entering in the register,
 Default or unnecessary delay is being made in entering in the register, the
fact of any person having ceased to be a member; or
 The person aggrieved, or any member of the company, or the company
may appeal in such form as may be prescribed, to the Tribunal.

2) Order of the Tribunal:

The Tribunal may, after hearing the parties to the appeal by order, either dismiss
the appeal or direct that the transfer or transmission shall be registered by the
company within a period of ten days of the receipt of the order, or direct
rectification of the records of the depository or the register.

3) Right to transfer not restricted:

Section 59 of the Act shall not restrict the right of a holder of securities, to transfer
such securities.

TRANSMISSION OF SECURITIES [ section 56(2)]

The transmission of shares takes place because of
death or lunacy of the registered shareholders or on
his being adjudged as insolvent.
If the holder of securities is a company, when it goes
into liquidation because of merger or amalgamation.
A company shall have power to register on receipt of
an intimation of transmission of any right to securities
by operation of law from any person to whom such
right has been transmitted. By virtue of this section, the legal representative or nominee
of the deceased shareholder shall be entitled to transfer the shares.

Operation of Law Who is entitled to the shares?

Due to death / Lunacy Legal representative or nominee

Due to insolvency Official Assignee or Receiver

Due to merger or amalgamation The resultant company

(Companies)
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Distinction between Transfer and Transmission

FORGED TRANSFER:
An instrument on which the signature of the transferor is forged is called a forged
transfer which is null and void. A forged instrument of transfer is presented to the
company for registration.
In order to avoid the consequences because of a forged transfer, companies normally
write to the transferor about the lodgment of the transfer instrument so that he can
object if he wishes.

Consequences of a forged transfer:

(i) Transfer null and void:
A forged transfer is a nullity and, therefore, the original owner of the shares continues to
be with the shareholder and the company is bound to restore his name on the register of
members.
(ii) No denial of transfer of shares sold to innocent purchaser:
If company issues a share certificate to transferee and he sells the shares to an innocent
purchaser, the company is liable to compensate such a purchaser, if it refuses to register
him as a member, or if his name has to be removed on the application of the true owner.
 P a g e | 167

(iii) Indemnify the losses:

If the company is put to loss by reason of the forged transfer, as it may have paid
damages to an innocent purchaser, it may recover the same independently from the
person who lodged the forged transfer.

DEATH OF A JOINT SHAREHOLDER

Where shares are held in joint names, and one of the joint shareholders dies, the
survivor alone will be recognized as the holder of the said shares.
It would be sufficient for the company to delete the name of the deceased shareholder
after obtaining satisfactory evidence of his death.

TRANSPOSITION (rearrangement) OF NAMES OR JOINT NAMES

In the case of joint-shareholders, one or more of them may require the company to alter
or rearrange the serial order of their names in the register of members of the company or
all joint holders wish to hold shares individually.
In this process, there will be need for effecting consequential changes in the share
certificates issued to them. If the company provides in its articles that the senior-most
among the joint-holders will be recognised for all purposes like service of notice, a copy
of balance sheet, profit and loss account, voting at a meeting etc., the request of
transposition may be duly considered and approved by the Board or other authorised
officer of the company.
Since no transfer of any interest in the shares takes place on such transposition, the
question of insisting on filing transfer deed with the company, may not arise.
Transposition does not also require stamp duty.

DEPOSITORY SYSTEM - AN OVERVIEW

It is like the banking system.
A depository holds securities in accounts for its clients
and transfers securities from one account to another.
Earlier, the investors were using the share certificate
which has many risks like risk of losing share certificate
and risk of bad deliveries.
In depository system, above risks have been phased out and it is as safe like your bank
account.
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Benefits of Depository system

a) Elimination of bad deliveries
b) Elimination of all risks associated with the physical certificates.
c) It facilitates the immediate transfer and registration of the securities.
d) It facilitates faster disbursement of non-cash corporate benefits like rights, bonus,
etc.
e) It reduces the brokerage for trading in dematerialized securities.
f) Elimination of paper work and recording of transactions like transfer of shares.
g) Elimination of problems related to change of the address of investor,
transmission, etc.
h) Elimination of problems related to selling securities on behalf of minor.

Models of Depository
Dematerialization:
It is a process of conversion of physical share certificate into electronic form.
So, when a shareholder uses the dematerialization facility, a company takes back the
shares, through depository system and equal number of shares is credited in his Demat
account in electronic form.

Immobilization:
Where physical share certificates are kept in vaults with the depository for safe custody.
All subsequent transactions in these securities take place in book entry form.
The actual owner has the right to withdraw his physical securities as and when desired.
The immobilization of fresh issue may be achieved by issuing a jumbo certificate
representing the entire issue in the name of depository, as nominee of the beneficial
owners.

Depository Participant
A Depository Participant (DP) is the representative of the investor in the depository
system providing link between the Company and investors through depositories.
An investor opens its Demat Account with a Depository Participant for keeping its
securities in electronic form.

Functions of Depository participant in connection with Demateralisation

(i) Acts as the agent of Depository;
(ii) Customer interface of Depository;
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(iii) Functions like securities Bank;

(iv) Account Opening;
(v) Facilitates dematerialization;
(vi) Instant transfer on payout;
(vii) Credits to investor on IPO, rights and bonus;
(viii) Settles trades in the electronic segment.

Remateralisation
Rematerialisation is conversion of electronic securities into physical certificates of such
securities.
This can be done in the following manner
(i) Client submits Rematerialisation Request Form (RRF) to DP;
(ii) DP intimates Depository;
(iii) Depository intimates the Registrar/Issuer;
(iv) DP sends RRF to the Registrar/Issuer;
(v) Registrar prints certificates and sends to the investors;
(vi) Registrar confirms the Remat to the depository;
(vii) Investor's account with DP debited.
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CHAPTER – 5

MEMBERS AND SHAREHOLDERS

Members defined under the Companies Act, 2013

According to Section 2(55) of the Companies Act, 2013,

member, in relation to a company, means,

1) The subscribers to the memorandum of a company

who shall be deemed to have agreed to become
members of the company, and on its registration,
shall be entered as members in its register of members;
2) Every other person who agrees in writing to become a member of a company and
whose name is entered in its register of members shall, be a member of the
company;
3) Every person holding shares of a company and whose name is entered as a
beneficial owner in the records of a depository shall be deemed to be a member of
the concerned company.

Definition-“Members” in different kinds of the company

a) Company limited by shares

Shareholders are the members.

b) Company limited by guarantee

The persons who are liable under the guarantee clause of MOA are the members
of the company.

c) Unlimited company
Members are the persons who are liable to the company, each in proportion to the
extent of their interest in the company.
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Essential Elements for Membership of the Company

There are two important elements which must be present before a person can acquire
membership of a company: -
 An agreement to become a member; and
 Entry of the name of the person so agreeing, in the register of members of the
company.

In Herdilia Unimers Ltd. v. Renu Jain [1995]

it was held that the moment the shares were allotted and share certificate signed and the
name entered in the register of members, the allottee became the shareholder,
irrespective of whether the allottee received the shares or not.

Member -Competency to Contract under Indian Contract Act, 1872

The person desirous of becoming a member of a company must have the legal capacity
of entering into an agreement in accordance with the Section 11 of the Indian Contract
Act.
Every person is competent to contract who:-
(i) is of the age of majority according to the law to which he is subject.
(ii) is of sound mind.
(iii) is not disqualified from contracting by any law to which he is subject.

WAYS TO ACQUIRE MEMBERSHIP OF THE COMPANY

As per Section 2(55) of the Companies Act, 2013, a person may acquire the membership
of a company:

 By subscribing to the Memorandum of Association (deemed agreement); or

 By entering into an agreement to become a member:

a) Allotment: by making an application to the company for allotment of shares; or

b) Transfer: by executing an instrument of transfer of shares as transferee; or
c) Transmission: by consenting to the transfer of share of a deceased member in
his name; or
d) Estoppel: by acquiescence or estoppel.

 By holding shares of a company and whose name is entered as beneficial owner in

the records of a depository.

 On his name being entered in the register of members of company.

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A) Subscribers to the memorandum

In the case of a subscriber, no application or allotment is necessary to become a

member.
By virtue of his subscribing to the memorandum, he is deemed to have agreed to
become a member.
A subscriber to the memorandum cannot rescind the contract for the purchase of
shares even on the ground of fraud by the promoters.

B) Agreement in Writing

1. By an Application and Allotment: A person who applies for shares becomes a

member when shares are allotted to him, a notice of allotment is issued to him
and his name is entered on the register of members.
There is an offer to take shares and acceptance of this offer when the shares are
allotted.

2. By Transfer of Shares: Shares in a company are movable property and are

transferable in the manner as prescribed in the articles of the company. A person
can become a member by acquiring shares from an existing member and by
having the transfer of shares registered in the books of the company.

3. By Transmission of Shares: A person may become a member of a company by

operation of law i.e. if he succeeds to the estate of a deceased member.
Membership by this method is a legal consequence.

4. By Acquiescence or Estoppels: A person is deemed to be a member of a company

if he allows his name, without sufficient cause, to be on the register of members
of the company or otherwise holds himself out or allows him to be held out as a
member.
In such a case, he is estopped from denying his membership.

C) Holding Shares as beneficial Owner in the Records of Depository

Every person holding shares of the company and whose name is entered as a beneficial
owner in the records of the depository shall be deemed to be a member of the concerned
company.

Differences between Members and Shareholders

The following are the differences between members and shareholders:

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MEMBER SHARE HOLDERS

Section 2(55) of the Companies Act, 2013 the meaning of ‘shareholder’ is not
specifies the meaning of ‘member’ defined
under the Companies Act, 2013
A shareholder becomes a member of a The person who has ownership of shares
company, once his name is entered into of a company is known as shareholder
the company’s register of members or if Further, in case of companies limited by
he guarantee do not have a share capital, and
is a subscriber to the incorporation of the consequently, their members are not
company shareholders

The person who signs the memorandum After signing the memorandum, a person
of may become shareholder only when the
association with the company becomes a shares are allotted to him
member
The bearer of a share warrant is not a Whereas, the holder of a share warrant is
member a shareholder

WHO MAY BECOME A MEMBER

The following are points about the members:

a) Company as a member of another company:

A company is a legal person and so is competent to contract. Therefore, it can
become a member of any other company.
a subsidiary company cannot become a member of its holding company.

b) Partnership firm as a member of the company:

A partnership firm is not a legal person and as such it cannot, in its own name,
become a member of a company except in company registered u/s 8 of Act.
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c) Limited Liability Partnership as a member of the company, being an incorporated

body under Limited Liability Partnership Act, 2008 can become a member.

d) Section 8 Company as a member of the company:

A non-profit making company licensed under Section 8 of the Act, can become a
member of another company if it is authorised by its Memorandum of Association
to invest into shares of the other company.

e) Foreigners as members:
A foreigner may take shares in an Indian company and become a member
subject to the provisions of the Foreign Exchange Management Act, 1999, but in
the event of war with his country, he becomes an alien enemy and his power of
voting and his rights to receive notices are suspended.

f) Minor as member:
a minor, is wholly incompetent to enter into a contract and as such cannot
become a member of a company

Consequently, an agreement by a minor to take shares is void ab-initio.

After attaining majority, the minor, if he does not want to be a member, must
repudiate his liability on the shares on ground of minority, and if he does so, the
company cannot plead estoppel on the ground of his having received dividends
during his minority or that he had fraudulently misrepresented his age in his
application for shares.
If shares are transferred to a minor, the transferor will remain liable for all future
calls on such shares so long as they are held by the minor even if the transferor
was ignorant of his minority.
If the company knows of his minority it may refuse to register the transfer, unless
the transfer was made through the guardian.

g) Insolvent as Member:
An insolvent may be a member of a company as long as he is on the register of
members. He is entitled to vote, but he loses all beneficial interest in the shares
and company will pay dividend on his shares to the Official Assignee or Receiver.

h) Pawnee:
Pawnee has no right of foreclosure since he never had the absolute ownership at
law and his equitable title cannot exceed what is specifically granted by law.
In this sense, a pledge differs from a mortgage. In view of the above, a Pawnee
cannot be treated as the holder of the shares pledged in his favour, and the
Pawner continues to be a member and can exercise the rights of a member.

i) Receiver:
A receiver whose name is not entered in the register of members cannot exercise
any of the membership rights attached to a share unless in a proceeding to which
company is a party and an order is made therein.

j) Persons taking shares in fictitious names:

A person who takes shares in the name of a fictitious person, becomes liable as a
member besides incurring criminal liability under Section 38 of the Act, wherein
punishment is provided for commission of fraud.
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k) Trade Union as Member:

A trade union registered under the Trade Unions Act, can be registered as a
member and can hold shares in a company in its own corporate name.

A holder of global Depository Receipts (GDRs) – Can became a Member of the

Company?

A holder of American Depository Receipts (ADR) / Global Depository Receipts (GDR)

cannot be treated as a member of the Company.

It was clarified by the MCA on the following grounds:

 A person is a member of a company

 Who is a subscriber to MOA or
 Whose name has been entered in the register of members
 A person holding share capital of the company and whose name is entered as
beneficial owner in the records of the depository is deemed to be a member of the
Company.

A holder of ADR/GDR may become a member of the Company only on

transfer/redemption of ADR/GDR into equity shares.
Since the underlying equity shares are allotted in the name of overseas depository
bank, the name of such overseas bank is to be entered in the register of members of
the issuing company.

Note: Since the overseas depository bank is neither the depository as defined under the
Companies Act, 2013 & the Depositories Act, 1996 non holding share capital.
Therefore, it cannot be deemed to be a member of the Company.

Special Note: Since, a holder of ADR/GDR is neither the subscriber to the Memorandum
nor a holder of the shares, his name cannot be entered in the Register of Members.
Therefore, a holder of Global Depository Receipts cannot be called a member of the
company.

Joint Membership: [4 log sath me shares hold kar sakte hai]

If two or more persons apply for shares in a company and shares are allotted to them,
each one of such applicant becomes a member.
Joint holders of shares in a public company are not a single member except for the
purpose of voting rights, dividend rights, and right to receive notice & other documents
of General Meeting.
Each of the joint holders of shares is a member of the company except in case of
private company for the purpose of determining the maximum number of members.
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Minimum Number of Members

Restriction on membership:

 By virtue of Section 2(68)(ii) of the Companies Act, 2013, the maximum number of
members of a private company except in the case of One Person Company is
limited to two hundred excluding the present and past employees of the company
who continue to be members of the company.
 There is no restriction with regard to the maximum number of members of a public
company.

CESSATION OF MEMBERSHIP [ Ab me member nhi rha]

A person ceases to be a member of a company when his name is removed from its
register of members, which may occur in any of the following situations:
 He transfers his share to another person
 His shares are forfeited;
 His shares are sold by the company to enforce a lien;
 He dies (his estate, however, remains liable for calls);
 He is adjudged insolvent and the Official Assignee disclaims his shares
 His redeemable preference shares are redeemed;
 He rescinds the contract of membership on the ground of fraud or
misrepresentation or a genuine mistake;
 His shares are purchased either by another member or by the company itself
under an order of the Tribunal under Section 242 of the Companies Act, 2013;
 The member is a company which is being wound-up in India, and the liquidator
disclaims the shares;
 The company is wound up.
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Expulsion of a Member:

Expulsion of a member of a company by the Board of Directors by amending the Articles

of Association of a company is illegal and void.

Case Law: "Bajaj Auto Ltd. v. N.K. Firodia"

The Supreme Court held that any provisions relating to the expulsion of a member by the
(BOD) of a company will be treated as illegal & ultra vires. Based on this judgment, the
DCA (now MCA) clarified that assumption by the Board of Directors of a company of any
power to expel a member by amending its articles of association is illegal and void.

REGISTER OF MEMBERS:

Section 88 of the Companies Act, 2013 lays down:

 Every company shall keep and maintain the following registers in such form and
in such manner as may be prescribed,
a. Register of securityholders separately for each class of equity or
preference shares
b. Register of debentureholders
c. Register of any other security holders.

 Every register maintained shall include an index of the names included therein.

 The register and index of beneficial owners maintained by a depository shall be

deemed to be the corresponding register and index for the purposes of this Act.

 A company may, if so authorised by its articles, keep in any country outside India,
a part of the register called “foreign register” containing the names and
particulars of the members, debenture-holders, other security holders or
beneficial owners residing outside India.

 If a company does not maintain a register of members or debenture-holders or

other security holders or fails to maintain them the company shall be liable to a
penalty of three lakh rupees and every officer of the company who is in default
shall be liable to a penalty of fifty thousand rupees.

CONTENTS OF REGISTER OF MEMBERS IN CASE COMPANY NOT HAVING

SHARE CAPITAL:

In the case of a company not having share capital, the register of members shall contain
the following particulars, in respect of each member, namely:-

i. name of the member & its details

ii. date of becoming member;
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iii. date of cessation;

iv. amount of guarantee, if any;
v. any other interest if any; and
vi. Instructions, if any, given by the member with regard to sending of notices etc

Important points relating to maintain of registers:

1) Time period to make entries in Register of members:

The entries in the Member's registers shall be made within seven days of the
approval of allotment or transfer by the Board of Directors.

2) Maintaining Register of Members:

The registers shall be maintained at the registered office of the company.
It can also be kept at any of the following two places if a special resolution is
passed at General Meeting:

■ At any other place within the city, town or village in which the registered office
is situated or
■ Any other place in India in which more than one-tenth of the total members
reside.

3) Changes to be recoded:
Any changes consequent to issue of right, bonus, preferential allotment,
transmission, transfer, etc. shall be recorded within 7 days of the approval of
Board.
Death and Insolvency shall also be recorded.

4) Rectification in Register pursuant to order of authority:

If any rectification is made in the register by the company pursuant to any order
passed by the competent authority under the Act, the necessary reference of such
order shall be indicated in the respective register.

5) Particulars of Pledge, charge, lien or hypothecation:

In case of companies whose securities are listed on a stock exchange in or
outside India, the particulars of any pledge, charge, lien or hypothecation created
by the promoters in respect of any securities of the company held by the promoter
including the names of pledgee/pawnee and any revocation therein shall be
entered in the register within fifteen days from such an event.

6) Authentication of entries in register of members:

The entries in the registers including foreign registers shall be authenticated by
the company secretary of the company or by any other person authorised by the
Board for the purpose, and the date of the board resolution authorising the same
shall be mentioned.
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A firm in its own name cannot be registered as a member, as a firm is not a legal person
like a company incorporated under the Act. Only the partners can be recognised and
registered as joint holders.
[See Re Vagliano & Anthracite Collieries Ltd.]

Inspection of registers:

The member, debenture-holder, other security holder or beneficial owner, can inspect the
registers during business hours without payment of any fees.
Any other person can inspect that on payment of such fees as may be specified in the
articles of association of the company but not exceeding Rs. 50 for each inspection.

CASE LAW

The non-shareholder of the company/companies who has no commercial interest in the

company/companies, is not entitled to file petition seeking inspection and supply of
copies of statutory documents claiming as “any other person” under section 163.
[Held in Anlikumar Poddar v. Darshan Securities (P.) Ltd. (2017) NCLT- Mumbai.]

Copies of Registers and Annual Return:

Any member, debenture-holder, other security holder or beneficial owner of the company
or any other person on payment of such fee as may be specified in the Articles of
Association of the company but not exceeding rupees ten for each page and such copy
can request to supply extract of register.
The company should supply it within a period of 7 days from the date of deposit of fee to
the company.

Penalty:
If any inspection or the making of any extract or copy required under this section is
refused, the company and every officer of the company who is in default shall be liable,
for each such default, to a penalty of 1000 rupees per day subject to maximum of one
lakh rupees.

Register – an evidence:
Section 95 of the Companies Act, 2013 provides that the registers, their indices and
copies of annual returns shall be prima facie evidence of any matter. A register of
members is prima facie evidence of the truth of its contents.
Accordingly, if a person's name, to his knowledge, is there in the register of members of
a company, he shall be deemed to be a member and onus lies on him to prove that he is
not a member.
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Case Law: M.F.R.D. Cruz (1939)

Facts:
The plaintiff applied for 4,000 shares in a company but no allotment was made to
him. Subsequently 4,000 shares were transferred to him without his request and his
name was entered in the register of members. The plaintiff knew it but took no steps for
rectification of the register of members. The company went into liquidation and he was
held liable as a contributory.

Judgment:
The Court held "when a person knows that his name is included in the register
of shareholders and he stands by and allows his name to remain, he is holding out to the
public that he is a shareholder and thereby he loses his right to have his name removed".

Foreign Register:

Every company has to maintain or keep a register of foreign members or debenture-

holders, other security holders or beneficial owners residing outside India.

Foreign Register contains the names and particulars of the members, debenture holders,
other security holders or beneficial owners residing outside India."

Closing of Register of Members:

Section 91 of the Companies Act, 2013 contains guidelines for closing the register of
members. It lays down:

 A company may close the register of members or the register of debenture-

holders or the register of other security holders for any period or periods not
exceeding 45 days in each year, but not exceeding 30 days at any one time,
subject to giving of previous notice of atleast 7 days.

 If the register of members or of debenture-holders or of other security holders is

closed without giving the notice, or after giving shorter notice than that so
provided, or for a continuous or an aggregate period in excess of the limits as
specified, the company and every officer of the company who is in default shall be
liable to a penalty of Rs.5000/- for every day subject to a maximum of Rs.1,00,000/-
during which the register is kept closed.

 Record date (Regulation - 42 of the listing Regulation) is the date on which the
records of a company are closed for the purpose of determining the stockholders
to whom dividends, proxy's rights etc. are to be sent.
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 The listed company should give notice of record date in a newspaper at least 7
days before the fixation of the record date.

Preservation of Registers:

Rule 15 of Companies (Management and Administration) Rules, 2014 regulates the

preservation and disposal of registers which the companies registered under the
Companies Act, 2013 or previous company law are required to maintain.

DECLARATION BY PERSONS NOT HOLDING BENEFICIAL INTEREST IN ANY

SHARE:

A) A person whose name is entered in the register of members of a company as the

holder of shares in that company but who does not hold the beneficial interest in
such shares shall file with the company, a declaration to that effect in Form No.
MGT 4, within a period of 30 days from the date on which his name is entered in
the register of members of such company:
When any change occurs in the beneficial interest in such shares, the registered
owner shall, within a period of 30 days from the date of such change, make a
declaration of such change to the company in Form No. MGT 4.

B) Every person holding and exempted from furnishing declaration or acquiring a

beneficial interest in shares of a company not registered in his name shall
file with the company, a declaration disclosing such interest in Form No. MGT 5,
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within 30 days after acquiring such beneficial interest in the shares of the
company:
Provided that where any change occurs in the beneficial interest in such shares,
the beneficial owner shall, within a period of thirty days from the date of such
change, make a declaration of such change to the company in Form No. MGT 5.

C) Where any declaration under section 89 of the Act, is received by the company,
the company shall make a note of such declaration in the register of members and
shall file, within a period of 30 days from the date of receipt of declaration by it, a
return in Form No. MGT. 6 with the Registrar in respect of such declaration with
fee.

Provided that nothing contained in this rule shall apply in relation to a trust which is
created, to set up a Mutual Fund or Venture Capital Fund or such other fund as may be
approved by SEBI.

SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY [SECTION 90 R/W THE

COMPANIES (SIGNIFICANT BENEFICIAL OWNERS) RULES, 2018]

“Significant beneficial owner”

Means an individual who acting alone or together, or through one or more persons or
trust, possesses one or more of the following rights or entitlements in such reporting
company, namely:

 holds indirectly, or together with any direct holdings, not less than 10% of the
shares;
 holds indirectly, or together with any direct holdings, not less than 10% of the
voting rights in the shares;
 has right to receive or participate in not less than 10% of the total distributable
dividend, or any other distribution, in a financial year through indirect holding
alone, or together with any direct holdings;
 has right to exercise, or actually exercises, significant influence or control, in any
manner other than through direct holdings alone.
 When member of reporting Co. is body corporate (except LLP) and such individual
holds majority stay in body corporate or
 Holds majority stake in holding company of that body corporate member
 Member is HUF and such individual is Karta.

SOME ILLUSTRATIONS FOR UNDERSTANDING SBO

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Declarations to be made by Significant beneficial Owner

 Initial Disclosure:
On the date of commencement of the Companies (Significant Beneficial Owners)
Amendment Rules, 2019, every individual who is a significant beneficial owner in
a reporting company, was required to file a declaration in Form No. bEN-1 to the
reporting company within ninety days from such commencement i.e., February 08,
2019.

 Continual Disclosure:
Every individual, who subsequently becomes a SBO/ or where his significant
beneficial ownership undergoes any change shall file a declaration in Form No.
BEN-1 to the reporting company, within 30 days of acquiring such significant
beneficial ownership or any change therein.
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Obligations of the Reporting Company:

 Filing of Returns with ROC:

Upon receipt of a declaration from the Significant Beneficial Owner of the
company and changes therein, the reporting company shall file a return in Form
No. bEN-2 with the Registrar in respect of such declaration, within a period of 30
days from the date of receipt of such declaration, along with the prescribed fees.

According to Section 90(5) a company shall give notice, in the prescribed manner, to any
person (whether or not a member of the company) whom the company knows or has
reasonable cause to believe –

a) to be a significant beneficial owner of the company;

b) to be having knowledge of the identity of a significant beneficial owner or another
person likely to have such knowledge; or
c) to have been a significant beneficial owner of the company at any time during the
three years immediately preceding the date on which the notice is issued, and who
is not registered as a significant beneficial owner with the company as required
under this section.

The abovementioned particulars should be submitted in writing to the registered address

of the company by concerned person not later than 30 days of the date of this notice.

Consequences of Non-Reporting under Section 90 (5)

As per Rule 7 of The Companies (Significant Beneficial Owners) Rules, 2018, the
reporting company shall apply to the Tribunal within a period of 15 days of the expiry of
the period specified in BEN-4,
(i) where any person fails to give the information required by the notice in Form No.
BEN-4, within the time specified therein; or
(ii) where the information given is not satisfactory.

Order of Tribunal

The Tribunal may:

 After giving an opportunity of being heard to the parties concerned, make such
order restricting the rights attached with the shares.
 Within a period of 60 days of receipt of application or such other period as may be
prescribed.

The company or the person aggrieved by the order of the Tribunal may make an
application to the Tribunal for relaxation or lifting of the restrictions placed by the
Tribunal within a period of one year from the date of such order.

However, if no such application has been filed within a period of one year from the date
of the order, such shares shall be transferred to the Investor Education and Protection
Fund.
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Register of Significant beneficial Owners:

According to Rule 5 of the Companies (Significant Beneficial Owners) Rules, 2018, the
company shall maintain a register of significant beneficial owners in Form No. BEN-3
which includes:
a) the name of individual,
b) his date of birth,
c) address,
d) details of ownership in the company, and
e) Such other details.

The register shall be open for inspection during business hours, at such reasonable time
of not less than two hours, on every working day as the board may decide, by any
member of the company on payment of such fee as may be specified by the company but
not exceeding fifty rupees for each inspection.

Non-Applicability

As Per Rule 8 of the Companies (Significant Beneficial Owners) Rules, 2018 shall not be
made applicable to the extent the share of the reporting company is held by:
 IEPF Authority;
 It’s holding reporting company
 The Central Government, State Government or any local Authority;
 Reporting company or a body corporate an entity, controlled by the Central
Government or by any State Government or partially by the Central Government
and partly by one or more State Governments;
 SEBI registered Investment Vehicles such as mutual funds, alternative investment
funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust
(InVITs) regulated by SEBI; and
 Investment Vehicles regulated by RBI, or IRDA, or Pension Fund Regulatory and
Development Authority

RIGHTS OF MEMBERS

Individual Rights
Members of a company enjoy certain rights in their individual capacity, which they can
enforce individually.
These rights can be categorized as under:

1) Right to receive copies of the following documents from the company:

 A copy of the financial statements, including consolidated financial

statements
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 Abridged financial statement and auditor’s report in the case of a listed

company
 Report of the Cost Auditor, if so directed by the Government;
 Notices of the general meetings of the company (Sections 101-102).

2) Right to inspect statutory registers/returns and get copies thereof without

payment on any fee or on payment of prescribed fee.
The members have been given right to inspect the following registers etc.:
 Debenture trust deed (Section 71);
 Register of Charges and instrument of charges (Section 85 & 87);
 Copies of contract of employment with Managing or Whole-time Directors);
 Shareholders’ Minutes Book (Section 119);
 Register of Contracts, Companies and Firms in which Directors are
interested (Section 189);
 Register of directors and key managerial personnel and their shareholding
(Section 170).

3) Right to attend meetings of the shareholders and exercise voting rights at these
meetings either personally or through proxy (Sections 96, 100, 105 and 107).

4) Other rights:
(i) To transfer shares
(ii) To resist and safeguard against increase in his liability without his written
consent;
(iii) To receive dividend when declared (Section 123);
(iv) To have rights shares (Section 62);
(v) To appoint directors (Section 152);
(vi) To share the surplus assets on winding up (Section 320);

Collective Shareholder Rights

Members of a company have certain rights which can be exercised by members

collectively by means of democratic process:

 Application to board in case of Oppression and Management:

 Making a requisition for calling Extra Ordinary general Meeting

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Voting Rights of Members

Member's rights are determined by the Companies Act, Memorandum of association,

Articles of association of the company and the terms of issue of shares.

Rights attached to a class of shares are known as "class rights".

Member's rights relate to dividend, voting at members' meetings and return of capital.
Preference shareholders may have rights to a fixed amount or a fixed rate of dividend or
to cumulative dividend.
Where ordinary shareholders are conferred the right to participate in the surplus assets
on winding-up of a company, it is not deemed to be a class right as it is implied even in
the absence of any express provision in the articles.

Note: If the variation by one class affects the rights of any other class of shareholders,
the consent of three- fourth of such other class of shareholders needs to be obtained.

Further, the variation of rights of shareholders can be effected only:

(i) If provision with respect to such variation is contained in the Memorandum or Articles
of association of the company; or
(ii) In the absence of any provision in a Memorandum or Articles of association of the
company, if such a variation is not prohibited by terms of issue of the shares of that
class.
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Rights of Dissenting Shareholders

According to section 48(2), where the rights of any class of shares are varied, the holders
of not less than 10% of the issued shares of that class, being persons who did not
consent to such variation or vote in favour of the special resolution for the variation, can
apply to the Tribunal (NCLT) to have the variation cancelled.

Where any such application is made to the Tribunal, the variation will not be effective
unless and until it is confirmed by the Tribunal.

The above application shall be made within 21 days after the date on which the consent
was given or the resolution was passed, as the case may be, and may be made on behalf
of the shareholders entitled to make the application by such one or more of their number
as they may appoint in writing for the purpose.

Nomination by Security holders (including members)—Section 72 of the Companies

Act, 2013
Every holder of securities of a company may, at any time, nominate, in the prescribed
manner, any person to whom his securities shall vest in the event of his death.

When the securities of a company are held by more than one person jointly, the joint
holders may together nominate, in the prescribed manner, any person to whom all the
rights in the securities shall vest in the event of death of all the joint holders.

When the nominee is a minor, it shall be lawful for the holder of the securities, making
the nomination to appoint, in the prescribed manner, any person to become entitled to
the securities of the company, in the event of the death of the nominee during his
minority.

SHAREHOLDERS’ DEMOCRACY

Democracy means the rule of people, by the people

and for the people. In that context the shareholders
democracy means the rule of shareholders, by the
shareholders, and for the shareholders in the
corporate enterprise, to which the shareholders
belong.
Under the Companies Act the powers have been
divided between two segments: one is the Board of
Directors and the other is of shareholders. The
directors exercise their powers through meetings of Board of directors and
shareholders exercise their powers through General Meetings.
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Shareholders’ Agreement

Shareholders’ agreement is a contractual arrangement between the shareholders of a

company describing how the company should be operated and the defining inter-se
shareholders’ rights and obligations.

Shareholders’ agreement (SHAs) are the result of mutual understanding among the
shareholders of a company to which, the company generally becomes a consenting
party.
Such agreements are specifically drafted to provide specific rights, impose definite
restrictions over and above those provided by the Companies Act.

SHA creates personal obligation between the members signing such agreement
however, such agreements do not become a regulation of the company in the way the
provisions of Articles are.

The Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan, AIR held that a restriction
which is not specified in the articles of association is not binding either on the company
or on the shareholders.
This decision was reiterated by the Bombay High Court in IL & FS Trust Co. Ltd. v. Birla
Perucchini Ltd. [2004]

VETO POWER

Meaning of the term – “veto”

A veto – Latin for “I forbid” – is the power to
unilaterally stop an official action, especially the
enactment of legislation.

A veto may give power only to stop changes, thus

allowing its holder to protect the status quo. This Photo by Unknown Author is licensed under

There are some instances where the consent of the shareholders is mandatory to
approve any decision or transaction which is said to be as the veto power or veto right of
shareholders of the company.
For instance in case of related-party transactions, promoters, who are majority
shareholders, cannot vote in special resolutions in cases of related-party transactions.
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Difference between veto Power and Casting vote

Veto power is different than casting vote of Chairman.

Casting vote is applicable on in case of equality of votes in favour and against.

In case of equality the Chairman may give vote either in favour or against the resolution
and it can be carried accordingly.

Veto power has not been defined in Companies Act.

However, dictionary meaning of veto power is: "to refuse to admit or approve;
specifically: to refuse assent to (a legislative bill) so as to prevent enactment or cause
reconsideration."
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CHAPTER – 6

DEBT INSTRUMENTS – CONCEPTS

PART – A
[ BORROWING POWERS OF COMPANY AND DEBT CAPITAL]

Borrowings - “the act of one who borrows”.

Borrowing can be defined as to obtain or receive money

on loan with the promise or understanding that it will be
repaid.

What is Loan ?

A loan is a sum of money that one or more individuals or

companies borrow from banks or other financial institutions so as to financially manage
planned or unplanned events.

Debts vs. Loans

LOANS – A loan is money borrowed from a lender. The lender can be a bank or a
financial institution.

DEBTS – The term debt connotes that debt is the money that the company raises through
the issuance of bonds and debentures.
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Powers & Restrictions of board u/s 179 and 180 of the Companies Act, 2013

While section 179 of the Companies Act deals with Powers of Board and section 180 of
the Companies Act, 2013 deals with restrictions on powers of Board.

Under Section 179 of the Companies Act, 2013, the Board of Directors of a company are
entitled to exercise its power to borrow monies subject to the provisions contained in the
Act and the memorandum or articles of association of the Company by passing a
resolution at duly convened meeting of Board of Directors of the Company.

In terms of First proviso to section 179(3) of the Companies Act, 2013 the Board may, by
a resolution passed at a meeting may delegate the power to borrow monies.

Section 180(1) of the Companies Act, 2013 states that the Board of Directors of a
company shall exercise the powers conferred under this section only with the consent of
the company by a special resolution.

Power of Company to Borrow Section 180(l)(c)

The Board of Directors cannot borrow the money in excess of the aggregate of the paid-
up share capital and free reserves of the Company apart from temporary loans.

The prior approval of shareholders via special resolution is required in case the
company exceeds the above limits of borrowing.

Provided that the acceptance by a banking company, in the ordinary course of its
business shall not be deemed to be a borrowing of monies by the banking company
within the meaning of this clause.

“temporary loans” means loans repayable on demand or within six months from the date
of the loan.

EXEMPTION
Private companies have been exempted to comply the entire provisions of Section 180 of
the Companies Act 2013, as a result special resolution is not required for private
companies to borrow monies.

Unauthorised / Ultra Vires borrowings [ hadh kar di apne]

Doctrine of Ultra vires

A company can also do anything which is incidental to the main objects provided by the
memorandum. Anything which is beyond the objects authorized by the memorandum is
an ultra-vires act.
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Consequences of ultra vires borrowings

a) Void ab initio:

The ultra-vires acts are null and void ab initio. These acts are not binding on the
company. Neither the company can sue, nor it can be sued for such acts.

b) Estoppel:

Estoppel or ratification cannot convert an ultra-vires act into an intra-vires act.

c) Injunction:

the lender has been given authority under law to restrain the company for using
the money lent. ‘The members can restrain it from doing so by getting an
injunction from the court”.

d) Subrogation:

Where the money of an ultra-vires borrowing has been used to pay off lawful
debts of the company, he would be subrogated to the position of the creditor paid
off and to that extent would have the right to recover his loan from the company.

e) Liability of directors:

In case of ultra-vires borrowing, the lender may be able to sue the directors for
breach of warranty of authority, especially if the directors deliberately
misrepresented their authority.

Intra vires borrowing but outside the Scope of Agents’ Authority [ directors ki
powers se jyda but companies ki powers ke andar]

A distinction should always be made between a company's borrowing powers and

the authority of the directors to borrow.

Where the directors borrowed money beyond their authority and the borrowing is not
ultra vires the company, such borrowing is called Intra vires borrowing but outside the
Scope of Agent's Authority.

The company will be liable to such borrowing if the borrowing is within the director's
ostensible authority and the lender acted in good faith or if the transaction was ratified
by the company.

Where the borrowing is intra vires the company but outside the authority of the directors
the directors can be ratified by the company and become binding on the company.

The company would be liable, particularly if the money has been used for the benefit of
the company.
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CASE LAWS – [ Related to borrowing powers of company]

If the borrowing by the directors is ultra-vires their powers, the directors may, in certain
circumstances, be personally liable for damages to the lender, on the ground of the
implied warranty given by them, that they had power to borrow
[Firbank’s Executors vs. Humphreys, (1886) 18 QBD 54; Garrard v. James, 1925 Ch. 616].

In V.K.R.S.T Firm v. Oriental Investment Trust Ltd., AIR 1944

Under the authority of the company, its managing director borrowed large sums of
money and misappropriated it.
The company was held liable stating that where the borrowing is within the powers of the
company, the lender will not be prejudiced simply because its officer have applied the
loan to unauthorized activities provided the lender had no knowledge of the intended
misuse.

Sometimes it happens that a power to borrow exists but is restricted to a stated amount,
in such a case if by a single transaction an amount in excess is borrowed, only the
excess would be ultra-vires and not the whole transaction
[Deonarayan Prasad Bhadani v. Bank of Baroda, (1957) 27 Com Cases 223 (Bom)].

Types of borrowings
A company uses various kinds of borrowing to finance its operations. The various types
of borrowings can generally be categorized into:
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1) Long term Borrowing:

means liabilities that represent money borrowed from banks or other lenders to
fund the on-going operations of a business for a period ranging for five years or
more are termed as long-term borrowings.

2) Short term Borrowing:

The funds are borrowed for a short period of up to one year. It is a temporary
support for business and meeting the working capital needs is the main purpose.

3) Medium Term Borrowing:

Where the funds to be borrowed are for a period ranging from one to five
years, such borrowings are termed as medium term borrowing.

4) Secured Borrowing:
A debt obligation is considered secured, if creditors have recourse to the assets
of the company on a proprietary basis or otherwise ahead of general claims
against the company.

5) Unsecured Borrowing:
Under this, the debt consists of financial obligation. There is no collateral issued
against the unsecured borrowings.

6) Syndicated borrowing:
If a borrower requires a large or sophisticated borrowing facility this is commonly
provided by a group of lenders known as a syndicate under a syndicated loan
agreement. The borrower uses one agreement covering the whole group of banks
and different types of facility rather than entering into a series of separate loans,
each with different terms and conditions.

7) Bilateral borrowing:
Refers to a borrowing made by a company from a particular bank/financial
institution. In this type of borrowing, there is a single contract between the
company and the lender.

8) Private borrowing:
Under this, the company takes a loan from the bank of a financial institution. It
consists of bank loan obligations.

9) Public Borrowing:
Is a general definition covering all financial instruments that are freely tradable on
a public exchange or over the counter, with few, if any, restrictions i.e.
Debentures, Bonds etc.
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Debenture and bonds

Bonds and Debentures both are debt instrument issued

by the government or companies. Both of these are
fund raising tools for the issuer / forms of borrowed
capital for companies.

Debenture – Under the Companies Act, 2013 Section

2(30)

“Debenture” includes debenture stock, bonds or any other instrument of a company

evidencing a debt, whether constituting a charge on the assets of the company or not.

Provided that–
(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934;
(b) such other instrument, as may be prescribed by the Central Government in
consultation with the Reserve Bank of India,
issued by a company, shall not be treated as debenture;

Bonds – Bonds are debt financial instruments issued by large corporations, financial
institutions and government agencies that are backed up by collaterals or physical
assets.

Difference between bonds and Debentures

Basis of Difference Debentures Bonds
Nature Debentures are debt financial Bonds are debt financial
instruments issued by private instruments issued by large
/ public companies, for corporations, financial
raising capital from the institutions and government
investors. agencies for raising
additional fund from the
public.

Security Debentures can be secured Bonds are secured in nature.

as well as unsecured.

Owner The owner of a debenture is The owner of a bond is called

called a debenture holder. a bondholder.

Collateral Debentures do not get Bonds get secured by the

secured by the collateral or collateral or physical assets
physical assets of the of the issuing company
issuing company.

Tenure Debentures are generally Bonds are long term

short to medium term investments and their tenure
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investments and their tenure is generally higher than

is usually lower than bonds. debentures.

Convertibility Issuing company can convert Bonds cannot be converted

only convertible and also into equity shares of the
partially convertible company.
debentures into shares on
the expiry as specified in the
clause.

Rate of Interest The debentures carry a fixed The bonds carry a fixed or
or floating interest rate that is floating interest rate that is
generally higher than generally lower than
bonds debentures

Liquidation During liquidation, the During company liquidation,

debenture holders are paid Bondholders are given
after the bondholders. priority over the debenture
holders.

Payment Structure The payment of interest for The payment of interest for
bonds is done on a periodical bonds is on an accrual basis.
basis and depends on the
company’s performance.

Nature of Debentures

As per Section 44 of the Companies Act 2013, the debentures or other interest of any
member in a company shall be movable property transferable in the manner provided by
the Articles of Association of the company.
As per the provisions of Section 56, securities will be transferable vide form SH-4

Kinds of Debentures

Debentures are generally classified into different categories:

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On the basis of Convertibility

a) Non-Convertible Debentures (NCD):

These instruments retain the debt character for the whole of the tenure and cannot
be converted into equity shares or any other form of security.

b) Partly Convertible Debentures (PCD):

Partly convertible debentures, as the name suggests, a certain portion of these
debentures are partially converted into equity shares upon exhaustion of the
specified duration.

c) Fully convertible Debentures (FCD):

These are fully convertible into Equity shares or any other form of security at the
issuer’s notice. The ratio of conversion is decided by the issuer. Upon conversion
the investors enjoy the same status as shareholders of the company.

d) Optionally Convertible Debentures (OCD):

The investor has the option to either convert these debentures into shares at price
decided by the issuer/agreed upon at the time of issue.

On the basis of Security

a) Secured Debentures:
Debentures that are issued against a security are called secured debentures. A
charge is made against the assets of the issuing company.

b) Unsecured Debentures:
Debentures which are issued without any charge against the issuing company’s
assets are called unsecured debentures.
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On the basis of Tenure

a) Redeemable Debentures:
It refers to the debentures which are issued with a condition that the debentures
will be redeemed at a fixed date or upon demand, or after notice etc.

b) Irredeemable Debentures:
An irredeemable debenture is a type of debenture in which there is not fixed time
for the issuer to repay the amount.

On the basis of Registration

a) Registered Debentures:
Registered debentures are made out in the name of a particular person, whose
name appears on the debenture certificate and who is registered by the company
as holder on the Register of debenture holders.

b) Bearer debentures:
Bearer debentures on the other hand, are made out to bearer, and are negotiable
instruments, and so transferable by mere delivery like share warrants.

Pari Passu Clause in case of Debentures

Debentures are usually issued in a series with a Pari passu clause and it follows that
they would be on an equal footing as to security and should the security be enforced,
the amount realised shall be divided pro-rata, i.e., they are to be discharged ratably.

The expression 'Pari passu' implies with equal step, equally treated, at the same
rate, or at par with. When it is said that existing debentures shall be issued pari
passu clause, it implies that no difference will be made between the old and new
debentures.

Debenture Stock

A company, instead of issuing debentures, each in respect of separate and distinct debt,
may raise one aggregate loan fund or composite stock known as ‘debenture stock

Accordingly, a debenture stock is a borrowed capital consolidated into one mass for the
sake of convenience.

Debenture stock is the indebtedness itself, and the debenture stock certificate furnishes
evidence of the title or interest of the holder in the indebtedness.
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ISSUE OF DEBENTURES

Conditions for issue of debentures: -

 Section 71(1) of the Act states that a company may issue debentures with an
option to convert such debentures into shares, either wholly or partly at the time
of redemption approved by passing a special resolution.

 No company shall issue any debentures carrying any voting rights

 Redemption Clause - The date of redemption of Secured Debentures shall not

exceed ten years from the date of issue.
The following classes of Companies may issue secured debentures for a period
exceeding 10 years but not exceeding 30 years,

a) Companies engaged in setting up of infrastructure projects;

b) Infrastructure Finance Companies
c) Infrastructure Debt Fund Non-Banking Financial Companies’
d) Companies permitted by a Ministry or Department of the Central Government
or by Reserve Bank of India or by the National Housing Bank or by any other
statutory authority to issue debentures for a period exceeding ten years.

 Appointment of Debenture Trustee & execution of Debenture Trust deed

 An issue of secured debentures shall be secured by the creation of a charge on

the properties or assets of the company or its subsidiaries or its holding company
or its associates companies, having a value which is sufficient for the due
repayment of the amount of debentures and interest thereon.

 the security for the debentures by way of charge or mortgage shall be treated in
favour of the debenture trustee on:

a) any specific movable property of the company or its holding company or

subsidiaries or associate companies or otherwise;
b) any specific immovable property wherever situated, or any interest therein.

In case of a non-banking financial company, the charge or mortgage as

aforesaid may be created on any movable property.

Process for issue of debentures

1) Obtain a valuation report from the registered valuer with respect to the
Convertible Debentures to be issued.

2) Hold a meeting of Board:

a) To consider and approve issue of Debentures including the

terms and conditions of issue
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b) To identify the group of persons to whom debentures are proposed to be

offered
c) To approve the offer letter
d) To fix day, date and time and agenda for General Meeting for passing Special
Resolution
e) To approve draft notice of General Meeting.

3) In case of a Public Company, a copy of Board Resolution for issue of debentures

with ROC is required to be filed by the company in E-Form MGT-14 within 30 days
of passing of Board Resolution

4) Convene and hold EGM to consider and approve the issue of debentures and file
E- form MGT 14 along with explanatory statement within 30 days of passing
special resolution.

5) Open a separate Bank Account in a scheduled bank for keeping monies received
on the application.

6) Prepare the list of such persons to whom offer to subscribe debenture will be
given in draft offer letter under Form PAS-4.

7) Dispatch of Letter of Offer to identified persons and maintain a complete record of

persons to whom offer letter is sent in Form PAS-5.

8) Receiving of Application Money through cheque or demand draft or other banking

channel and not by cash

9) Convene Board meeting within a period of 60 days from the date of receipt of
subscription money:

a) to consider the allotment of Debentures

b) Approval of draft agreement for Charge creation & authorizing the director for
signing the same and filing of form CHG 9 within 30 days of charge creation.
c) Approval of the draft of Debenture Trust Deed [SH–12], if applicable.
d) Issue of Debentures Certificate and authorize two directors and a person to
sign the same.

10) Filing Return of Allotment in Form PAS-3 within 15 days of allotment

11) Make necessary entries in the Register of Debenture holders in Form MGT-2 and
register of charges in form CHG-7 within 7 days of board meeting.

12) Issue of Debenture Certificate. Within 6 months from date of allotment of

debentures
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Process for redemption of debentures

1) Conduct Board Meeting for the redemption of debentures

2) Intimate the debenture holders about the redemption
3) Coordinate with banks for refund
4) Changes in debenture register
5) Changes in charge register, if any charge created on debentures
6) Further in case of Compulsory/Optionally Convertible Debentures, if at the time of
issue, the shareholders’ approval was not taking for the conversion part, then the
approval of shareholders is necessary while such conversion.
7) The redemption of secured debentures not to exceed 10 years from issue date

DEBENTURE REDEMPTION RESERVE (DRR)

Meaning of DRR:

Debenture Redemption Reserve (DRR) is a fund maintained by companies who have

issued debentures. Its purpose is to minimize the risk of default on repayment of
debentures.

the concept of a DRR provides for two requirements:

 Annually, a portion of the profit is ‘earmarked’ for transfer to the DRR. Such
earmarked amount cannot be used until repayment of the debentures is made
 Every year, investments are purchased for an amount equal to the transfer made
to the DRR. Only securities approved by the government can be purchased for
investments.

Creation of Debenture Redemption Reserve under Companies Act 2013 and its Adequacy

 The company shall comply with the requirements with regard to Debenture
Redemption Reserve (DRR) and investment or deposit of sum in respect of
debentures maturing during the year ending on the 31st day of March of next year,
in accordance with the conditions given under said Rule.

 Debenture Redemption Reserve shall be created out of profits of the company

available for payment of dividend.

 The limits with respect to adequacy of Debenture Redemption Reserve and

investment or deposits, as the case may be, shall be as under:
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Investments / Deposits from DRR

Every company which is required to create DRR shall on or before the 30th day of April in
each year, in respect of debentures issued by such a company, invest or deposit, as the
case may be, a sum which shall not be less than fifteen percent., of the amount of its
debentures maturing during the year, ending on the 31st day of March of the next year.

Methods of investments/ Deposits:

a) in deposits with any scheduled bank,

b) in unencumbered securities of the Central methods of deposits or from any
charge or lien; Government or any State Government;
c) in unencumbered securities
d) in unencumbered bonds

Creation of Debenture Redemption Reserve in case of partly convertible debentures:

Debenture Redemption Reserve shall be created in respect of non-convertible portion of

debenture issue in accordance with said rule.

The amount which is transferred as Debenture Redemption Reserve is to be disclosed in

Directors’ Report.
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DEBENTURE TRUSTEES

Appointment of debenture trustee

No company shall issue a prospectus or make an offer to its members exceeding 500 for
the subscription of its debentures, unless the company has appointed debenture trustee.

Conditions for appointment of Debenture Trustees

1) The names of the debenture trustees must be stated in letter of offer for
debentures.
2) A written consent must be obtained from the debenture trustee before his
appointment as debenture

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

a) beneficially holds shares in the company;

b) 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;

c) is beneficially entitled to moneys which are to be paid by the company otherwise

than as remuneration payable to the debenture trustee;

d) is indebted to the company, or its subsidiary or its holding or associate company

or a subsidiary of such holding company;

e) has furnished any guarantee in respect of the principal debts secured by the
debentures or interest thereon;

f) has any pecuniary relationship with the company amounting to two per cent. or
more of its gross turnover or total income or fifty lakh rupees or such higher
amount as may be prescribed, whichever is lower, during the two immediately
preceding financial years or during the current financial year;

g) is relative of any promoter or any person who is in the employment of the

company as a director or key managerial personnel.

Casual Vacancy and Removal:

In terms of Rule 18(2)(d) of the Companies (Share Capital and Debenture) Rules, 2014,
the Board may fill any casual vacancy in the office of the trustee but while any such
vacancy continues, the remaining trustee or trustees, if any, may act:
Provided that where such vacancy is caused by the resignation of the debenture
trustee, the vacancy shall only be filled with the written consent of the majority of the
debenture holders.
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Any debenture trustee may be removed from office before the expiry of his term only if it
is approved by the holders of not less than three fourth in value of the debentures
outstanding, at their meeting.

Duties of Debenture Trustee

a) To satisfy himself that the letter of offer does not contain any matter which is
inconsistent with the terms of the issue of debentures or with the trust deed;

b) To satisfy himself that the covenants in the trust deed are not prejudicial to the
interest of the debenture holders;

c) To call for periodical status or performance reports from the company;

d) To appoint a nominee director on the Board of the company in the event of-
(i) two consecutive defaults in payment of interest to the debenture holders; or
(ii) default in creation of security for debentures; or
(iii) default in redemption of debentures.

e) To inform the debenture holders immediately of any breach of the terms of issue
of debentures or covenants of the trust deed;

f) To do such acts as are necessary in the event the security becomes enforceable;

g) To call for reports on the utilization of funds raised by the issue of debentures;

h) To take steps to convene a meeting of the holders of debentures as and when

such meeting is required to be held;

Meetings of Debenture holders

In terms of Rule 18(4) of the Companies (Share Capital and Debenture) Rules, 2014, the
meeting of all the debenture holders shall be convened by the debenture trustee on-

a) requisition in writing signed by debenture holders holding at least one-tenth in

value of the debentures for the time being outstanding;
b) the happening of any event, which constitutes a breach, default or which in the
opinion of the debenture trustees affects the interest of the debenture holders.

Debenture trust deed

A debenture trust deed is an instrument that a company executes in favour of a

debenture trustee, thereby appointing them and defining their role and duties to protect
the interest of debenture holders before debentures are offered for public subscription.
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The company shall not later than sixty days after the allotment of the debentures,
execute a debenture trust deed to protect the interest thereon in Form No. SH.12

Trust Deed in Form SH-12 contains the following:

 Description of Debenture issue

 Details of charge created
 Particulars of the appointment of Debenture Trustee
 Events of defaults
 Obligations of the company
 Miscellaneous

Liability of the debenture trustee:

The liability of the debenture trustee shall be subject to such exemptions as may be
agreed upon by a majority of debenture-holders holding not less than three-fourths in
value of the total debentures at a meeting held for the purpose.

Rights to inspect Trust Deed:

In terms of Rule 18(8) of the Companies (Share Capital and Debenture) Rules, 2014, a
trust deed for securing any issue of debentures shall be open for inspection to any
member or debenture holder of the company, in the same manner, as if it were the
register of members of the company.
A copy of the trust deed shall be forwarded to any member or debenture holder of the
company, at his request, within 7 days of the making thereof, on payment of fee

Power of debenture trustee to file petition before the Tribunal in event of insufficient
assets:

Where at any time the debenture trustee comes to a conclusion that the assets of
Duties of Debenture Trustees the company are insufficient or are likely to become
insufficient to discharge the principal amount as and when it becomes due, the
debenture trustee may file a petition before the Tribunal.

Tribunal may, after hearing the company and any other person interested in the
matter, impose restrictions necessary in the interests of the debenture-holders.
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PART – B

[OVERVIEW OF COMPANIES DEPOSITS]

Meaning of Deposits:-
Section 2(31) of the Companies Act, 2013 read with Rule
2(1)(c) of Companies (Acceptance of Deposits) Rules,
2014,
‘deposit’ includes any receipt of money by way of
deposit or loan or in any other form by a company,

But does not include the followings –

a) any amount received from any other source whose repayment is guaranteed by
the Central Government or a State Government or any amount received from a
local authority, or any amount received from a statutory authority.

b) any amount received from the Central government or a State government,

c) Any amount received from foreign Governments, foreign/international banks,

multilateral financial Institutions, foreign government owned development
financial institutions, foreign export credit agencies, foreign collaborators, foreign
bodies corporate and foreign citizens etc.,

d) any amount received as a loan or facility from any banking company or from the
State bank of India or any of its subsidiary banks or from a banking institution

e) any amount received as a loan or financial assistance from Public Financial

Institutions

f) any amount received against issue of commercial paper or any other instruments
issued in accordance with the guidelines or notification issued by the Reserve
Bank of India

g) any amount received by a company from any other company

h) Any amount received towards subscription to any securities, including share

application money or advance towards allotment of securities.

Note - If the securities for which application money or advance for such securities
were received cannot be allotted within 60 days from the date of receipt of the
application money or advance for such securities and such application money or
advance is not refunded to the subscribers within 15 days from the date of
completion of 60 days, such amount shall be treated as a deposit under these
rules.
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i) Any amount received from a person who was a director of the company at the
time of receipts; relative of the director of the Private Company.

Special Note: If the above-mentioned person from whom money is received, furnishes a
declaration in writing 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;

j) any amount raised by the issue of bonds or debentures secured by a first charge
or a charge ranking pari passu.

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

charge on the assets of the company and listed on a recognised stock exchange.

l) any amount received from an employee of the company not exceeding his annual
salary

m) any non-interest bearing amount received and held in trust;

n) any amount received in the course of, or for the purposes of, the business of the
company,

 as an advance for the supply of goods or provision of services

 as advance received in connection with consideration for an immovable
property
 as security deposit for the performance of the contract for supply of goods
or provision of services;
 as advance received under long term projects for supply of capital goods
 as an advance towards consideration for providing future services in the
form of a warranty
 as an advance received and as allowed by any sectoral regulator
 as an advance for subscription towards publication,

o) any amount brought in by the promoters of the company by way of unsecured

loan

p) any amount accepted by a Nidhi company as per the provisions

q) any amount received by way of subscription in respect of a chit

r) any amount received by the company under any collective investment scheme

s) an amount of twenty five lakh rupees or more received by a start-up company, by

way of a convertible note

t) any amount received by a company from Alternate Investment Funds, Domestic

Venture Capital Funds, “Infrastructure Investment Trusts”, “Real Estate
Investment Trusts” and Mutual Funds registered with the Securities and Exchange
Board of India.
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Meaning of depositor:-

In terms of Rule 2(1)(d) of the Companies (Acceptance of Deposits) Rules 2014

‘Depositor’ means –
a) any member of the company who has made a deposit with the company in
accordance with section 73(2) of the Act; or
b) any person who has made a deposit with a public company in accordance with
section 76 of the Act.

Applicability

1) From Members – every company can accept deposits from members.

2) From Public – only eligible company can accept deposits from public.

Companies exempted from Sec. 73 of the Companies Act 2013

a) A banking companies
b) A non-banking financial company
c) A Housing finance company
d) Any other company as the central govt may after consultation with RBI specify.

Terms and Conditions for Acceptance of Deposits from its Members - Section 73(2)

There are a few conditions that have to be fulfilled in order for a company to accept
deposits. They are:-

 A resolution has to be passed in the General Meeting.


 A circular has to be issued to the members with the following details:- a) Financial
statements b) Credit rating obtained c) Total number of depositors d) Amount due
to the depositors with regard to prior deposits e) Other particulars as may be
prescribed

 File a copy of the circular and the statements with the Registrar at least 30 days
prior to the issue of the circular.

 20% of the total amount of deposits maturing in the following financial year to be
deposited with a Scheduled bank in a separate account, “Deposit Repayment
Reserve Account” before the 30th of April, of every year.

 Certification of the fact that the company has not defaulted on the repayment of the
deposits or any payment of interest on such deposits, whether those deposits were
accepted before or after the commencement of the Act. Where there was a default
on the part of the company, and the company has made good of the same, and a
period of five years has passed since the default has been made good.
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 A security has to be provided for the deposits accepted, and where there is no
security provided, such deposits will be shown as Unsecured Deposits in all
documents pertaining to the deposits.

Acceptance of Deposits from Public by Certain Companies (Sec 76)

Deposits from the public may be accepted only by a eligible companies, as per the
provisions of Section 76.
Eligible company means a company whose:-

 Has a networth not less than Rs. 100 crore.

 Has a turnover not less than Rs. 500 crore.
 Has already obtained the consent via Special Resolution in the General Meeting.
 Has already filed the Special Resolution with the Registrar.

Prior to inviting deposits from the public. Additional Requirements

 Obtain a rating from the credit rating agency: a) Initially, at the time of inviting
deposits, so that the public is informed. b) Every year during the tenure of the
deposits.
 Once the deposits are received, within 30 days, a charge is to be created on the
company’s assets, the charge amount to be at least the amount of deposits
accepted.

Acceptance Limits for Deposits

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Exemptions to Specified IFSC Public company and Private Company

A Specified IFSC Public company and a private company may accept from its members
monies not exceeding one hundred per cent. of aggregate of the paid-up share capital,
free reserves and securities premium account and such company shall file the details of
monies so accepted to the Registrar in Form DPT-3.

Exemptions to private companies: -

The maximum limit in respect of deposits to be accepted from members shall not apply
to following classes of private companies,

a) a private company which is a start-up, for ten years from the date of its
incorporation;
b) a private company which fulfils all of the following conditions: -

 which is not an associate or a subsidiary company of any other

company;
 the borrowings of such a company from banks or financial
institutions or any body corporate is less than twice of its paid up
share capital or fifty crore rupees, whichever is less ; and
 such a company has not defaulted in the repayment of such
borrowings subsisting at the time of accepting deposits under
section 73:

Acceptance of deposits based on time period - Rule 3 of the Companies (Acceptance of

Deposits) Rules 2014

No company shall accept or renew any deposit, whether secured or unsecured, which is
repayable on demand or upon receiving a notice within a period of less than six months
or more than thirty-six months from the date of acceptance or renewal of such deposit.

Note: A company may accept or renew deposits for the purpose of meeting any of
its short-term requirements for a period less than 6 months if such deposits:

 do not exceed 10% of the aggregate of paid -up capital and free reserves
 are repayable not earlier than 3 months.

Rate of interest of deposits

As prescribed by the RBI for Non-Banking Finance Companies (NBFC)

Repayment of Deposits –
Every deposit accepted by a company shall be repaid with interest in accordance with
the terms and conditions of the agreement.
The deposit repayment reserve account shall not be used by the company for any
purpose other than repayment of deposits.
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Section 74 lays out the provisions for the repayment of those deposits which have been
accepted by the company before the commencement of the Act; wherein there is any
amount of principal or the interest that stands unpaid. The company must:-

 File Form DPT – 4 with the Registrar within 3 months of the commencement of the
Act or from the date on which the payments become due. The form will include
details of:- a) All the deposits accepted by the Company. b) Amount remaining
unpaid on those deposits including the interest element c) Arrangements made
for these payments

 Repay the deposits within 3 years of the commencement of the Act or the expiry
of the term of those deposits, based on whichever is the earliest.

 Where the Company requires an extension of time to fulfill the payments, it may
make an application to the Tribunal for such extension. The Tribunal shall allow
the company the extension requested for after reviewing the following:- a) The
financial position of the company. b) The amount of deposits to be repaid,
including the interest on the same c) Such other related matters.

 Where the company fails to repay the deposit money within the stipulated time or
such extended period granted by the Tribunal, the company will be punishable
with a fine in addition to the repayment of the deposits as specified below –

Particulars Fine
The Company Rs. 1 crore – Rs. 10 crore
a) Imprisonment that may extend to 7 year
Every officer found
b) Or Rs. 25 lakh – Rs. 2 crore
in default
c) Or both

Trustee for Depositors

Appointment of Trustee for Depositors:

No company shall issue a circular or advertisement inviting secured deposits unless the
company has appointed one or more trustees for depositors for creating security for the
deposits:
A written consent shall be obtained from the trustee for depositors before their
appointment.
The company shall execute a deposit trust deed in Form DPT-2 at least seven days
before issuing the circular or circular in the form of advertisement.

Persons who cannot be appointed as Deposit trustees :

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 –
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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

Removal of deposit trustees:

No trustee for depositors shall be removed from office after the issue of circular or
advertisement and before the expiry of his term except with the consent of all the
directors present at a meeting of the Board.
Provided that in case the company is required to have independent directors, at least one
independent director shall be present in such meeting of the Board.

Duties of Trustees for Depositors –

 To ensure that the assets of the company on which the charge is created together
with the amount of deposit to insurance are sufficient to cover the repayment of
the principal amount.
 To ensure that the company does not commit any breach of the trust deed.
 To take reasonable steps to necessary to procure a remedy for breach of the trust
deed.
 To take steps to call meeting for the holders of the depositors as and when
required.
 To supervise the implementation of the conditions regarding creation of security
for deposits.

Meeting of Depositors

Rule 9 of the Companies (Acceptance of Deposits) Rules 2014

The trustee for depositors shall call a meeting of all the depositors on-

(a) requisition in writing signed by at least one-tenth of the depositors in value for the
time being outstanding;

(b) the happening of any event, which constitutes a default or which, in the opinion of the
trustee for depositors, affects the interest of the depositors.

Maintenance of Liquid Assets and Creation of Deposit Repayment Reserve

Account.
Rule 13 of the Companies (Acceptance of Deposits) Rules 2014
Every company shall on or before the 30th day of April of each year deposit the sum as
specified in clause (c) of the said sub-section with any scheduled bank and the amount
so deposited shall not be utilised for any purpose other than for the repayment
of deposits:
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Provided that the amount remaining deposited shall not at any time fall below 20% of the
amount of deposits maturing during the financial year.

Register of deposits:

 Every company accepting deposits shall, from the date of such acceptance, keep
at its registered office one or more separate registers for deposits
accepted/renewed, in which there shall be entered separately in the case of each
depositor the following particulars, namely: -

1) Name, address and PAN of the depositor/s;

2) Particulars of guardian, in case of a minor;
3) Particulars of the nominee;
4) Deposit receipt number;
5) Date and amount of each deposit;
6) Duration of the deposit and the date on which each deposit is repayable;
7) Rate of interest;
8) Due date(s) for payment of interest;

 Entries in the register shall be made within 7 days from the date of issuance of the
deposit receipt and such entries shall be authenticated by a director or secretary
of the company or by any other officer authorized by the Board for this purpose.
 The register or registers shall be preserved in good order for a period of not less
than 8 years from the financial year in which the latest entry is made in
the register.

Premature repayment of deposits:

When a company makes a repayment of deposits, on the request of the depositor,

after the expiry of a period of 6 months from the date of such deposit but before
the expiry of the period for which such deposit was accepted, the rate of interest
payable on such deposit shall be reduced by 1%.

Return of Deposits to be Filed with the Registrar

Every company to which these rules apply, shall on or before the 30th day of June,
of every year, file with the Registrar, a return in Form DPT-3 along with the
prescribed fee as provided in Companies (Registration Offices and Fees) Rules,
2014 and furnish the information contained therein as on the 31st day of March of
that year duly audited by the auditor of the company.

Penal Rate of Interest

Rule 17 of the Companies (Acceptance of Deposits) Rules 2014
Every company shall pay a penal rate of interest of 18% per annum for the overdue
period in case of deposits, whether secured or unsecured, matured and claimed but
remaining unpaid.
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Disclosure in board Report

Sec. 134 of the Companies Act 2013 read with Rule 8 of the Companies (Accounts) Rules,
2014
Following shall be disclosed in the Board Report-
I. Details relating to deposits, covered under Chapter V of the Act
(a) accepted during the year;
(b) remained unpaid or unclaimed as at the end of the year;
(c) whether there has been any default in repayment of deposits or payment of interest
thereon during the year and if so, number of such cases and the total amount involved-
(i) at the beginning of the year;
(ii) maximum during the year;
(iii) at the end of the year.
II. Details of deposits which are not in compliance with the requirements of Chapter V of
the Act.
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CHAPTER – 7

CHARGES

INTRODUCTION
A charge is a form of security for a loan under which certain property is agreed to be
“charged”.
It is a right created by a Company (“the borrower”) on its assets or properties or any of
its undertakings present and future, in favor of a lender.

DEFINITION:
Charge as defined under the Companies Act, 2013- Section 2(16) of the Companies Act,
2013 defines the term “charge” as an interest or lien created on the property or assets of
a company or any of its undertakings or both as security and includes a mortgage.
Charge also includes a lien and an equitable charge whether created by an instrument in
writing or by the deposit of title deed

In the case of the Bank of India Ltd. vs. Rustom Fakirji Cowasjee
it was held that negative lien, like any other type of lien, is merely an assurance to keep
the property unencumbered and does not amount to right to sale. As per the inclusive
definition of ‘charge’ such type of lien shall also be included.

Essential Features of Charge

In general, a charge has the following essential features:

 Parties to the charge

 Subject matter
 Agreement
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Types of Charges

On the basis of nature or charge

a) Fixed charge – A charge is fixed or specific when it covers assets which are
ascertained and definite or are capable of being ascertained and defined, at the
time of creating charge.
Example: Charges created on land, building, or heavy machinery.
A fixed charge is a charge created against certain specific property and the
company loses its right to dispose off that property.
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b) Floating charge – A floating charge is a charge created on floating assets or

unidentified assets of the Company.
In other words, a floating charge is not attached to any definite property but
covers property of a fluctuating type like stock-in-trade.

Difference between Fixed or Specific Charge and Floating Charge

BASIS FIXED CHARGE FLOATING CHARGE

Nature It is a legal Charge It is an equitable Charge

Meaning Security in terms of certain Security remains dormant

specific property until it is fixed or crystallised

Scope It is created to cover assets It is created on variable

which are ascertained and property which keeps on
definite or are capable of changing or moving.
being ascertained and
defined,

Created on It is created on fixed assets It is created on floating

like land, building, or plant assets like stock-in-trade,
and machinery debtors etc

Priority It has priority over floating No such priority

Charge
Disposing of assets The Mortgagor i.e., Company The Mortgagor is free to deal
cannot dispose off the with the property as it sees fit
property without the consent until the holders of charge
of the charge holder take steps to enforce their
security

On the basis on the conditions of the charge :

The charge may be created in favor of the charge holders as per the terms and
conditions agreed by the parties in the following manner:
a) Pari-Passu charge - Under this, the charge is shared by more than one lender in
the ratio of their outstanding amount. The prior consent of the existing charge
holder is required by the company.

b) Exclusive charge - The security under the exclusive charge is provided to a

particular lender only.
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c) Further charge - With the consent on the first charge holder, the particular assets
on which charge is already created may be provided to other lenders as second
charge.
In case of liquidation of assets, the first charge holder has the right to recover his
dues and the balance is recovered by the second charge holder followed by
others.

Crystallization of Floating Charge

A floating charge is a charge created on floating assets or unidentified assets of the
Company.
A floating charge attaches to the company’s property generally and remains dormant till
it crystallizes or becomes fixed.
This conversion of the floating charge into a fixed charge known as crystallization can be
triggered by following events:
a) Cessation of business, including winding up and ceasing business operations as
a going concern prior to winding up; and
b) Debenture holder intervention, including appointment of a receiver or manager,
taking possession as debenture holder and obtaining an injunction against
company dealings with charged asset generally;
c) On the happening of event specified in deed.

Effect of Crystallisation of a Floating Charge:

On crystallization, the floating charge converts into a fixed charge on the property of the
company. It has priority over any subsequent equitable charge and other unsecured
creditors.
But preferential creditors who have priority for payment over secured creditors in the
winding-up, gets priority over the claims of the debenture holders having floating charge.

Whether Preferential Creditors having priority over the floating charge-holder?

Yes, Preferential Creditors who have priority for payment over secured creditors in the
winding up get priority over the claims of the Debenture holders having floating charge.
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Difference between Mortgage and Charge

Mortgage Charge

A mortgage is created by the act of the A charge may be created either through the
parties. act of parties or by operation of law.

A mortgage requires registration under A charge created by operation of law does

the Transfer of Property Act, 1882 not require registration but a charge created
by act of parties requires registration.

A mortgage is a transfer of an interest in A charge only gives a right to receive

specific immovable property payment out of a particular property. There is
no such transfer of interest in the case of a
charge.

A mortgage is for a fixed term. The charge may be in perpetuity.

A mortgage is good against subsequent A charge is good against subsequent

transferees. transferees with notice

A simple mortgage carries personal In case of charge, no personal liability is

liability unless excluded by express created. But where a charge is the result of a
contract. contract, there may be a personal remedy.

Difference between Charge and Pledge

Charge Pledge

It is not a physical transfer of property of It is a bailment of personal property as

one to another. security for some debt or engagement,
redeemable on certain terms, and with an
implied power of sale on default.

It is a right created in favor of one, It consists of a delivery of goods by a debtor

referred to as “the lender” in the to his creditor as security for a debt or other
immovable property of another, referred obligation, to be held until the debt is repaid
to as “the borrower” along with interest.

Both a pledge and a charge are the result of voluntary act of parties. Both create
security but the nature of the security is different.
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Registrable Charges
Section 2(16) and section 77 of the Act require to register the charge created by way of
every kind of interest or lien (including negative lien) on the property or assets, tangible
or otherwise, of a company as security, including mortgage.
The following is an indicative list of charges to be registered with the Registrar: -
a) a charge created for the purpose of securing any issue of debentures or deposits;
b) a charge on uncalled share capital of the company;
c) charge on any immovable property, wherever situate, or any interest therein. This
includes mortgage by deposit of title deeds.
d) a charge on any book debt of the company. Assignment of book-debts as security
is covered.
e) a lien on sub freight is a charge on book-debt of the company.
f) a charge, on any movable property of the company;
g) a floating charge on the undertaking or any property of the company including
stock-in-trade;
h) a charge on calls made but not paid;
i) a charge on a ship or any share in a ship;
j) a charge on intangible assets, including goodwill, patent, a license under a patent,
trade mark, copyright or a license under a copyright;
k) a charge or assignment on insurance policies obtained by the company;
l) all and every kind of pledge margin money, including shares, is a pledge;
m) Lien on shares in the company.

REGISTRATION OF CHARGES (SECTION 77, 78 &79)

Under section 77(1) of the Act, every company creating a charge is required to register
the particulars of charge signed by the company and its charge-holder together with the
instruments creating the charge.
The provisions applicable to the registration of a charge under Section 77 shall mutatis
mutandis apply to modification of the charge.
It is the duty of every company to register or modify the charge within or outside india
created assets, property or any undertaking of company whether tangible or intangible.

Modification of Charge
Modification of charge is a stage subsequent to the creation of charge. It is quite likely
that the terms and conditions or limits of charge already created/registered with the
concerned Registrar are subsequently changed or modified due to further developments
by creation of equitable mortgage on a subsequent date or enhancement or reduction of
credit facilities, etc.
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Time Limit for Registration:

The particulars of the charge together with a copy of the instrument, if any, creating or
modifying the charge shall be filed with the Registrar within a period of 30 days of the
date of creation or modification of charge in Form No. CHG-1 (for other than debentures)
Form No. CHG-9 (for debentures).
If the particulars of a charge are not filed within the prescribed period of 30 days, then
such creation or modification shall be filed on payment of additional fee or ad-valorem
fee in a manner as prescribed below:
a) in case of charges created or modified before the commencement of the
Companies (Amendment) Act, 2019 within a period of 300 days of such creation;
or 6 months as the case may be, the following additional fees is payable:

b) in case of charges created or modified on or after the commencement of the

Companies (Amendment) Act, 2019 within a period of 60 days of such creation or
modification, on payment of such additional fees as prescribed or Registrar may,
on an application, allow such registration to be made within a further period of 60
days after payment of such ad-valorem fees as prescribed:

After amendments in Section 77 of the Act, the provisions restricts the ability of the
company to register charge after expiry of 120 days resulting beyond 120 days the
charge cannot be registered. In such case the lending institution or the company
should ensure registration before 120 days.
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ILLUSTRATION:

Subsequent Registration shall not Prejudice any Right

Third Proviso to Section 77(1) states that any subsequent registration of a charge shall
not prejudice any right acquired in respect of any property before the charge is actually
registered which means that the rights of the former charge holder will not be affected in
case of the creation of the subsequent charge.
Consequences of Non-Registration of Charges
void against the liquidator
means that the liquidator on winding up of the company can ignore the charge and can
treat the concerned creditor as unsecured creditor. The property will be treated as free of
charge i.e. the creditor cannot sell the property to recover its dues.
void against any creditor
if any subsequent charge is created on the same property and the earlier charge is not
registered, the earlier charge would have no consequence and the latter charge if
registered would enjoy priority.
In other words, the latter charge holder can have the property sold in order to recover its
money.

non-filing of particulars of a charge does not invalidate the charge against the company
as a going concern. It is void only against the liquidator and the creditors at the time of
liquidation. The company itself cannot have a cause of action arising out of non-
registration
[Independent Automatic Sales Ltd. v. Knowles & Foster (1962) 32 Comp Cas].
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Certificate of Registration of Charge & Certificate of Modification of Charge Section 77(2)

read with Rule 6 of Companies (Registration of Charges) Rules, 2014:

Procedure to be followed for creation or modification of charge

a) Hold a board meeting to pass necessary resolution to consider borrowing and
creating charge on the assets of the company, subject to shareholders approval.

b) Authorize the directors/managing director of the company to sign and execute

necessary documents and file necessary forms for creation or modification of
charge after taking shareholders approval.

c) Hold general meeting and pass special resolution to authorize company to create
or modify charge on the assets of the company.

d) Filing of forms –

 MGT-14 on the Board Resolution to power exercised to Borrow money by

all companies except the Private Company.
 E-Form CHg-1 (other than Debentures)/CHg-9 (Debentures) shall be filed
with the concerned Registrar of Companies within 30 days of creation of
charge/ modification of charge
 If the particulars of charge cannot be filed within 30 days due to
unavoidable reasons, then it may be filed:
a) within the period next 30 days after payment of such additional fee 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.
b) If the particulars of charge cannot be filed within 60 days as above, then
the Registrar may on an application, allow such registration to be made
within the period next 60 days by paying additional fees and ad valorem
fee.
 Attach the following documents with e-Form No. CHG-1/CHG-9:
(a) A certified true copy of every instrument evidencing any creation or
modification of charge;
(b) Instrument(s) evidencing creation or modification of charge in
case of acquisition of property
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e) e-Form-CHg-7
 The register of charges maintained by the company in Form No. CHG.7 and
enter therein particulars of creation/modification of charge registered with the
Registrar on any of the property, assets or undertaking of the company.
 The register is to be kept at the registered office of the company
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Registration for registration of charge by chargeholder [section 78]

 Where a company fails to register the charge within the period of thirty days the
person in whose favor the charge is created may apply to the Registrar for
registration of the charge along with the instrument created for the charge within
the period as specified in Section 77 duly signed along with payment of
additional fee or ad valorem fee.

 The registrar may, on such application, give notice to the company about such
application. The company may either itself register the charge or shows sufficient
cause why such charge should not be registered.

 On failure on part of the company, the Registrar may allow registration of such
charge within 14 days after giving notice to the company. This does not extinguish
the liability of the company in case any offence has been committed in registration
like delay to register the charge.

 Where registration is affected on application of the person in whose favour the

charge is created, that person shall be entitled to recover from the company, the
amount of any fee or additional fees paid by him to the Registrar for the purpose
of registration of charge.
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SATISFACTION OF CHARGES (SECTION 82 R/W RULE 8 OF THE COMPANIES

(REGISTRATION OF CHARGES) RULES, 2014
Satisfaction of Charge is another important aspect relating to debts secured by a charge.
In case of a full and complete payment of the secured charge registered with the
Registrar, the company or charge-holder shall within a period of 30 days from the date of
payment or satisfaction in full of any charge registered under Chapter VI of the
Companies Act, 2013, give intimation of the same to the Registrar in Form No-CHg-4
along with the prescribed fees.
The Registrar may, on an application by the company or the charge holder, allow such
intimation of payment or satisfaction to be made within a period of 300 days of such
payment or satisfaction on payment of such additional fees as may be prescribed.

In the case of Karnataka District Central Co-Operative Bank Ltd. vs. Murudeshwar Food &
Exports Ltd. (in liquidation), where there was no material to show that the charge is
satisfied and yet the records of the Registrar showed that the loans have been satisfied
on the basis of the statement of affair filed by the directors of the Company in liquidation,
the Registrar was directed to hold enquiry and delete the entry of satisfaction in the
register of charges.

Recording of satisfaction of charge by Registrar [Section 82(2)]

On receipt of such intimation, the Registrar shall issue a notice to the holder of the
charge calling upon him to show cause within 14 days.
If no cause is shown, by such holder of the charge, the Registrar shall order that a
memorandum of satisfaction shall be entered in the register of charges and shall inform
the company.
If the cause is shown to the Registrar shall record a note to that effect in the register of
charges and shall inform the company.
However, the aforesaid notice shall not be sent, in case intimation to the Registrar is in
specified form along with the Letter of the charge holder stating that the amount has
been satisfied, which is a mandatory attachment in all cases of FORM CHg-4 and is
signed by the holder of charge.
Certificate of registration of satisfaction of charge

As per Rule 8 of the Companies (Registration of Charges) Rules, 2014 the Registrar
enters a memorandum of satisfaction of charge he shall issue a certificate of registration
of satisfaction of charge in Form [Link]-5.
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Procedure for Satisfaction of Charge

 Hold a board meeting to consider the letter of satisfaction obtained from

the charge holder and filing of e-form CHG-4 with the ROC for satisfaction
of charge.

 Authorise a director or secretary of the company to sign the documents

and form related to satisfaction of charges.

 The Company is required to intimate the satisfaction in full of any charge

registered to the Registrar in Form [Link]-4 within a period of 30 days
from the date of the payment with normal fees.

 In case the satisfaction of charge is not filed with the Registrar within 30
days, it can be filed within 300 days from the date on such payment of
satisfaction with additional fees, along with an application to Central
Government for extension of time in filing of satisfaction of charge in Form
CHG-8.

 The order passed by the Central Government shall be required to be filed

with the Registrar in Form No. INC-28

 The register of charges maintained by the company in Form No. CHG-7 and
enter therein particulars of satisfaction of charge registered with the
Registrar.

 Where the ROC is satisfied and enters a memorandum of satisfaction of

charge in full, then obtain certificate in Form CHG-5
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Summary of provisions of Satisfaction of Charge

Power of registrar to make entries of satisfaction in absence of intimation from the

company
There may be times where a company may fail to send intimation of satisfaction of
charge to the Registrar but Registrar may on receipt of satisfactory evidence of
satisfaction register memorandum of satisfaction.
The Registrar shall inform affected parties within 30 days of making the entry in the
registrar of charges.
The evidences may be:
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COMPANY’S REGISTER OF CHARGES (SECTION 85 R/W RULE 10)

Manner of keeping register of charges:

 Every company shall keep at its registered office a register of charges in Form No.
CHG-7 which shall include therein all charges and floating charges registered with
the Registrar.
 All the entries in the register shall be authenticated by a director or the secretary
of the company or any other person authorised by the Board.
 The register of charges shall be preserved permanently and the instrument
creating a charge or modification thereon shall be preserved for a period of 8
years from the date of satisfaction of charge by the company.
Inspection of Charges – Section 85(2)
The register of charges and the instrument of charges kept by the company shall be
open for inspection during business hours –
(a) by any member or creditor of the company without fees;
(b) by any other person on payment of fee subject to reasonable restriction as the
company by its articles impose.
Punishment for Contravention (Section 86)
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RECTIFICATION BY CENTRAL GOVERNMENT IN REGISTER OF CHARGES

Section 87 read with Rule 12 of the Companies (Registration of Charges) Rules, 2014
provides that the Central Government may on an application filed in Form No. CHG-8, on
being satisfied that –
a) The omission to give intimation to the Registrar of the payment or satisfaction of a
charge, within the time required.
b) The omission or misstatement of any particulars, in any filing previously made to
the registrar
was accidental or due to inadvertence or some other sufficient cause or it is not of a
nature to prejudice the position of creditors or shareholders of the company, it may, on
the application of the company or any person interested and, on such terms, and
conditions as it deems just and expedient:

 direct rectification of the omission or misstatement of any particulars, in any

filing, previously recorded with the Registrar with respect to any charge or
modification thereof, or with respect to any memorandum of satisfaction
 direct extension of time for satisfaction of charge, if such filing is not made within
a period of 300 days from the date of such payment or satisfaction.
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SEARCH AND STATUS REPORT

A Search and Status Report traces the history of a Company’s property and how it has
charged / mortgaged its assets with various Banks/Financial Institutions/Lenders over a
period of time, before reaching the present bank that has demanded for the Search and
Status Report.
A Search and Status report prepared by a Company Secretary in Practice helps Banks/
Financial Institutions/Lenders/ Investors to take conscious decision regarding the
quantum of loan/ credit facility to be sanctioned and investment to be made.
It inter alia includes:

 Name of Company
 CIN of the Company
 Registered Office Address of the Company
 Capital Structure of the Company
 Date of Incorporation
 List of Directors of the company since incorporation
 List of Shareholders of the company since incorporation
 Secured Loans
 List of Registered Charges since incorporation etc
The following basic information about the existing loans taken by the Company is given
by the Company Secretary through such reports:
a) The date of loan taken by the company and the charge created in such respect.
b) The name and address of the charge holders.
c) The type of charge i.e. whether joint charge or consortium charge.
d) The amount of loan.
e) The property charged / pledged against such loan.
f) The terms and conditions of such loan i.e. rate of interest, terms of repayment,
margin money and extent of operation.
Examination of documents Registered on MCA 21 portal
The MCA website provides many information relating to the Company.
Some information are available without payment of fees like: Name of the Company, CIN,
Authorised and paid up capital, Name of the Directors etc.
The website also provides for the viewing of document by public on payment of requisite
fee.
Public documents include the following:
a. Incorporation documents;
b. Certificates, including Incoporation certificate and Charge creation, modification and
satisfaction certificates;
c. Charge documents;
d. Annual returns and balance sheet;
e. Change in directors; and
f. Other e-forms.
However, there are certain documents which are not allowed for public inspection.
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Checklist for preparation of Search Report

a) Check whether the prescribed particulars of the charge requiring registration were
filed with the ROC in e-form no. CHG-1 duly signed by the company as well as the
charge-holder and along with the original/ certified copy of the instrument, if any,
within 30 days after the date of its creation or within the time permitted by the
ROC
b) In case of issue of debentures of a series, if there has been any charge to the
benefit of debenture holders of that series, check whether the required particulars
have been filed with the Registrar in e-form [Link]-9 within 30 days from the date
of execution of or the modification of the trust deed;
c) In case commission, allowance, discount is paid or made in consideration for
subscribing, etc., to debentures, check whether the forms included particulars of
such commission, etc. has been filed;
d) Check whether abstract of registration is duly endorsed on every debenture or
certificate of debenture stock issued, the payment of which is secured by the
charge registered;
e) Check whether particulars of modification of charges were filed in eform no. CHG-
1/CHG-9 duly signed with the ROC within 30 days of the modification or within the
extended period;
f) Check whether a copy of the instrument creating/modifying charge/ a copy of
debenture of the series, if any, required to be registered was kept at the registered
office;
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CHAPTER – 8

DISTRIBUTION OF PROFITS

PROFIT AND ASCERTAINMENT OF DIVISIBLE PROFIT [ Kaddu ktega sab me btega ]

Profit earning and maximisation of shareholders wealth is the main objectives of every
business concern.
The shareholders contribute to the capital of the
company and these shareholders are entitled to a
share in the profits of the company. However, not all
the profits made by company is to be distributed to
the shareholders. Only divisible profits are available
for distribution to the shareholders.
Divisible profits are that portion of the profit which
can be distributed legally among the shareholders of
the company.

DECLARATION AND PAYMENT OF DIVIDEND

Meaning and Definition of Dividend
Dividend is a return on the share capital subscribed for and paid to its shareholders by a
company.
out of its distributable profits.
Section 2(35) of companies act, 2013 “dividend” includes any interim dividend.
Secretarial Standard-3 defines dividend so as to mean a distribution of any sums to
Members out of profits and wherever permitted out of free reserves available for the
purpose.
Dividend implies two things –
(i) payment out of profits, and
(ii) actual release of some assets
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Issue of bonus shares or right shares to the existing members is not considered as
dividend because the former does not involve release of any assets and the latter has no
relation with the profits of the company.

In the case of Griffith, Carr v. Griffith [(1879) 12 ChD 655],

it was also held that dividend payment usually occurs periodically. Where profits are
distributed outside these periodic dates, these are usually referred to as “bonuses or
bonus dividend”.

INTEREST VS. DIVIDEND

Nature of Difference Interest Dividend

Meaning Interest is the return on Return on the investment

borrowed capital made in the share capital of a
company

Nature It is a charge against profit It is appropriation of profit

Calculations It is a liability which has to be It is appropriation of profit

discharged even if the which is arrived after
company has suffered loss providing of all expenses
including interest

Commitment Interest is always a It is not a commitment

commitment which is to
be paid by the borrower

Paid to The lenders, creditors and Equity Shareholders and

debenture holders Preference Shareholders

Expenditure Interest on bonds or other It is not an expense of the

debt is an expense of the company.
company

Mandatory Interest is to be paid even if To distribute dividend, profits

there is no chance of making are necessary
profit

Rate Fixed Remains constant in the case

of preference
shares, but fluctuates in case
of equity shares.
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Types of Companies and provisions related to payment of dividend

The dividend in other types of entities is as follows:
a) Section 8 Companies:
According to Section 8(1) of the Companies Act, 2013 the company having license
under Section 8 (Formation of Companies with Charitable Objects etc.) are
prohibited from paying any dividend to its members.

b) Producer Companies:
In case of producer companies, dividend is termed as ‘Limited Return’ as defined
in clause (d) of section 378A of the Companies Act, 2013. It is the maximum
dividend as the Articles of the producer company may specify.

c) Nidhi Companies:
In terms of Rule 18 of Nidhi Rules, 2014, a Nidhi shall not declare dividend
exceeding 25% in a financial year.

d) Companies Limited by guarantee:

A Company Limited by Guarantee is primarily used for non- profit purposes and
the profits are reinvested and used for promoting its non-profit activities.
Although the Companies Act, 2013 does not specifically prohibit distribution of
dividend in such companies.

Types of Dividends
There are two types of Dividend:
a) Final Dividend
b) Interim Dividend

Final dividend: [AGM me denge]

Dividend is said to be a final dividend if it is declared at the annual general meeting of the
company. Final dividend once declared becomes a debt enforceable against the
company.

Interim dividend: [2 AGM ke bich me denge]

Dividend is said to be an interim dividend if it is declared by the Board of Directors
between two annual general meetings of the company.

Difference between final and interim dividend

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Basis Final Dividend Interim Dividend

Meaning The Dividend recommended Dividend paid by the

by the Board of Directors and Company between two
declared by the Members at annual general meetings
an Annual General Meeting

Power to declare Dividend Recommended by the Board Declared by the Company’s

at the board meeting and Board of Directors
declared by the Members of
the Company

Meetings Declared in Annual General Declared at the Meeting of

Meeting of Members the Board

Time of Declaration It is declared after the end of It is declared on the basis of

the financial year after the provincial financial
amount of distributable statements or estimates
profit has been computed

Frequency of payment It can be paid only once in a It can be paid more than
financial year once in a financial year

Source of Payment Paid out of profit earned in Paid:-

the previous financial year (i) out of surplus in the profit
and loss account
(ii) out of profit of the financial
year in which such interim
dividend is sought to be
declared
(iii) profits generated by the
Company till the quarter
preceding the date of
declaration of interim
dividend.
Quantum of Dividend Members cannot declare It shall not be declared at a
dividend over and above the rate higher than the average
amount recommended by the dividends declared by the
Board Company during the
immediately preceding three
financial years
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While Final Dividend is recommended by the Board and declared by the Members,
approval of Members is not required for declaration of Interim Dividend. Where a
company has an Audit Committee, this Committee shall consider the financial results
which shall thereafter be submitted to the Board for its consideration and declaration of
Interim Dividend.

In the case of Tarajan TeaCo. (P) Ltd. v. CIT,

it was held that a dividend declared by the members at an annual general meeting is a
debt against the company and is recoverable by the members only after declaration by
members and not at the time of recommendation made by the board of directors.

In the case of J. Dalmia v. Commissioner of Income Tax, New Delhi,

it was held that power to pay interim dividend is usually vested, by the articles of
association, in the directors.
If the directors want to pay any interim dividend then only resolution is not required, they
must be authorized by the articles.

Provisions of SS-3 for interim dividend

 SS-3 while clarifying the interim dividend provides that while declaring the Interim
Dividend, the Board shall consider the financial results for the period for which
Interim Dividend is to be declared and should be satisfied that the financial
position of the company justifies and supports the declaration of such Dividend.

 The financial results shall take into account –

(a) Depreciation for the full year,
(b) Tax on profits of the company including deferred tax for full year,
(c) Other anticipated losses for the financial year,
(d) Dividend that would be required to be paid at the fixed rate on preference
shares,
(e) The losses incurred, if any, during the current financial year upto the end of the
quarter, immediately preceding the date of declaration of Interim Dividend.

 Further, in case of clause (e) above, Interim Dividend shall not be declared at a
rate higher than average Dividend declared during the immediately preceding
three financial years.
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 Further SS-3 provides that Interim Dividend shall be declared at a meeting of the
Board.

 In the event of a loss or inadequacy of profits during a financial year, no Interim

Dividend shall be declared/ paid out of Free Reserves.

Source of payment of Dividend (Section 123)

Section 123(1) of Companies Act 2013 provides that the dividend shall be declared or
paid by a company for any financial year only out of —
a) the current year’s profit providing for depreciation.
b) out of the profits of the company for any previous financial year or years arrived.
c) out of both
d) out of money provided by the Central Government or a State Government for the
payment of dividend by the company in pursuance of a guarantee given by that
Government.
no company shall declare Dividend unless carried over previous losses and depreciation
not provided in the previous year or years are set off against profit of the company for
the current year.
A company shall also not declare any Dividend, if it has defaulted in –
(a) Redemption of debentures or payment of interest thereon or creation of debenture
redemption reserve,
(b) Redemption of preference shares or creation of capital redemption reserve,
(c) Payment of Dividend declared in the current or previous financial year(s), or
(d) Repayment of any term loan to a bank or financial institution or interest thereon, till
such time the default is subsisting.
No dividend shall be declared or paid by a company from its reserves other than free
reserves.

Free reserves as defined under section 2(43) of the Companies Act, 2013 means such
reserves which, as per the latest audited balance sheet of a company, are available for
distribution as dividend:
Provided that the following shall not be treated as free reserves:—
a) any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise, or
b) any change in carrying amount of an asset or of a liability recognised in equity,
including surplus in profit and loss account on measurement of the asset or the
liability at fair value.
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Transfer of profits to Free reserves

A company may transfer some specified of its profit percentage to the free reserves of
the company before the declaration of any dividend in any financial year.

Declaration of dividend in case of loss or inadequacy of profit [ profit ni h fir bhi denge]
In case of inadequacy or absence of profits in any financial year, any company may
declare the dividend out of the previous year's accumulated profits.
Rule 3 of Companies (Declaration and Payment of Dividend) Rules. 2014
In the event of inadequacy or absence of profits in any year, a company may declare
dividend out of previous year surplus subject to the fulfilment of the following
conditions:
a) Rate of dividend: The rate of dividend declared shall not exceed the average of the
rates at which dividend was declared by it in the 3 years immediately preceding
that year.
Note: This rule shall not apply to a company which has not declared any
dividend in immediately preceding 3 financial years.

b) Total withdrawal from accumulated profits: The total amount to be drawn from
such accumulated profits shall not exceed 1/10 of the sum of its paid-up share
capital and free reserves as per the latest audited financial statement.

c) Setting off the losses: The amount so drawn shall first be utilized to set off the
losses incurred in the financial year in which dividend is declared before any
dividend in respect of equity shares is declared.

d) To maintain reserve: The balance of reserves after withdrawal shall not fall below
15% of its paid-up share capital as per the latest audited financial statement.

e) Dividend to be declared only from free reserves: No dividend shall be declared or

paid by a company from its reserves other than free reserves.

Dividend Distribution Policy

While considering the financial statements for declaration of Dividend, the Board should
take into account the Dividend Policy of the company.
The various determinants of the Dividend Policy ordinarily include:
a) Legal and contractual restrictions: This includes the restrictions/ conditions
imposed under the applicable laws or by the financial institutions/banks in the
loan agreement;
b) Earnings of the company: Current earnings provide the best index of what a
company can pay;
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c) Cash position and liquidity: The cash position of a company is an important

consideration in paying Dividends, the greater the cash availability and overall
liquidity the greater is the ability to pay Dividend;
d) Financial needs: There are many financial needs of a company such as meeting
the cost of capital borrowed, non-availability of external capital and making
provisions for any expansion or growth plans of the company;
e) Tax considerations: The tax burden is a determining factor in the formulation of a
Dividend Policy.
As per Regulation 43A of SEBI (LODR) Regulations, 2015
the top 1000 listed entities based on market capitalization shall formulate a dividend
distribution policy which shall be disclosed on the website of the listed entity and a web-
link shall also be provided in their annual reports.
The dividend distribution policy shall include the following parameters:
a) the circumstances under which the shareholders of the listed entities may or may
not expect dividend;
b) the financial parameters that shall be considered while declaring dividend;
c) internal and external factors that shall be considered for declaration of dividend;
d) policy as to how the retained earnings shall be utilized; and
e) parameters that shall be adopted with regard to various classes of shares.
Date for determining entitlement to dividend

 The company may close its registers or fix a record date for deciding the
entitlement to receive dividend
 Regulation 60 of SEBI (LODR) Regulations, 2015 provides for fixing of record date
for payment of dividend. All shareholders on the record date irrespective of the
holding period of shares shall be eligible to receive dividend.
 In case of unlisted companies, the company may close its register of members by
complying with provision of section 91 of the Act.

Persons entitled to dividend

 Dividend should be paid by the company only to its registered shareholders or to

his order or to his Banker and not to any other person.

 Where the company has received intimation of death of a member, the dividend
may be paid by the company to the nominee of the single holder.

 where shares are held by more than one person jointly and any joint holder dies,
to the surviving first joint holder and where shares are held by more than one
person jointly and all the joint holders die, to the nominee appointed by all the
joint holders.
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 In case of insolvency of a member, the dividend may be paid to the assignee of

the insolvent member and in case of a company or body corporate which is being
wound up, to the liquidator.

 In case of administration of assets of the deceased, dividend is to be paid to the

account of administrator.

 In case of shares transfer to IEPF, dividend is to be paid to IEPF.

 When bonus shares are issued ranking pari passu with the existing equity shares,
shareholders are entitled to Dividend in respect of such bonus shares also.

Dividend on preference shares

A Preference share carries a preferential right with regard to dividend in accordance with
the term of issue and the articles of association subject to the availability of distributable
profits. Preference shares can carry dividend of a fixed amount, before any dividend is
paid on the equity shares.
Where there are two or more classes of preference shares, the shareholders of the class
which has priority are similarly entitled to their preferential dividend before any dividend
is paid in respect of the other class but these rights are subject to three conditions:
a) Preference shares are part of the company's share capital.
b) A dividend becomes payable to the shareholders only when it is declared by the
shareholders.
c) There should have been a formal declaration. Preference shareholders are not
entitled to treat the preference dividend as a debt and sue for its payment.
Note: If the articles specify that the company’s profit shall be applied, by way of payment
of the preference dividend, the preference shareholder can sue for it even though it has
not been declared.

Dividend in case of beneficial Owner

As provided under Section 89(9) of the Companies Act, 2013, the obligation of the
company of payment of dividend is towards the member and not towards the beneficial
owner. However, the dividend may be paid to a beneficial owner where the shareholder
instructs the company to do so.

Deemed dividend
only where a loan is advanced by the company to a registered shareholder and the other
conditions set out in the Income Tax Act, 1961 are satisfied that the amount of the loan
would be liable to be regarded as “deemed dividend”.
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Discount coupons given by the company with respect to its products or services, to all
the shareholders, should not be treated as deemed Dividend. It is a general practice
adopted by the company for promotion of its products or services.

Waiver of right to receive Dividend

Receipt of dividend is a right of shareholder and not an obligation. There is no provision
under the act to deal with the waiver of dividend. Hence, such provisions may be
contained in the articles of the company. Further, such waiver can either be full or partial.

[Indowind Energy Ltd. v. ICICI Bank Ltd. [2010] 153 Com Cases 394 (CLB)]
non- declaration of dividend would not amount to oppression and mismanagement.

Dividend to be deposited in separate bank account

 the amount of Dividend, including Interim Dividend, shall be deposited in a

scheduled bank in a separate account within 5 days from the date of declaration
of such Dividend.
Any amount which remains unpaid or unclaimed after the period of 30 days shall
be transferred to the Unpaid Dividend Account to be opened by the company.
Remittance of Dividend to Non-Resident members
Dividend can be remitted to Non-Resident members provided it is allowed under the
terms of the permission given by the Reserve Bank of India (RBI).
For remittance of Dividend to non-resident members, the company shall apply to
authorised dealer along with the documents as may be required by the authorized dealer
for this purpose.

Rate of Dividend
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Mode of Payment of Dividend (Section 123(5))

 Dividend can be paid in cash through cheque or warrant or in any electronic mode
of payment approved by the Reserve Bank of India and not in kind.

Note - Where a company gifts to its shareholders, shares held by it in another company
under a scheme, it is nothing but payment of dividend in kind which is expressly
prohibited under section 123; hence, such scheme could not have been sanctioned

 Closely held companies also use the method of purchasing demand drafts on the
name of the shareholders. In such situation dividend would be treated as paid on
the date of issue of demand draft by bank by debiting dividend account of the
company.

 In order to minimize pilferage and fraudulent encashment of Dividend warrants by

unauthorized persons, companies should ascertain from the Member, his Bank
Account Number and name and address of the Bank branch where he maintains
the account and indicate these details on the face of the Dividend warrant.
Moreover, companies may also introduce holograms on Dividend warrants as a
security measure.

 In case of payment of Dividend through warrant or cheque payable at par, if the

amount of Dividend exceeds one thousand and five hundred rupees, the company
shall ensure to send such Dividend warrant or cheque either by speed post or
registered post to the concerned Member at his registered address.

 Initial validity of the Dividend cheque or warrant shall be for three months.

 Dividend shall be paid proportionately on the paid-up value of shares.

 Nothing in this Section i.e. 123(5) of the Companies Act, 2013 shall be deemed to
prohibit the capitalization of profits or reserves of a company for the purpose of
 P a g e | 245

issuing fully paid-up bonus shares or paying up any amount for the time being
unpaid on any shares held by the members of the company.

QUESTION: -
The board of Directors of Peculiar Ltd. proposes to recommend a final dividend of Rs.25
each to all the equity shareholders of the company. The company seeks your opinion on
the following :
(1) The company wants to deposit the dividend amount to co-operative bank.
(2) The company is a defaulter in the repayment of deposits and proposes to repay its all
deposit after the payment of dividend within 10 days.
(3) Dividend will be declared out of the capital reserves of the company.
SOLUTION: -
The Peculiar Ltd has to follow below procedure for recommending final dividend:
a) the amount of the dividend has to be deposited in a scheduled bank. The company
should first ensure that said co-operative bank is scheduled bank from the list of
scheduled bank available at RBI website, and then it may deposit the dividend
amount in the scheduled Co-operative Bank.
b) a company which fails to comply with the provisions relating to acceptance and
repayment of deposits shall not, so long as such failure continues, declare any
dividend on its equity shares. Hence Peculiar ltd. cannot declare dividend till the
failure persists.
c) no dividend shall be declared or paid by a company from its reserves other than
free reserves.
Hence dividend cannot be declared out of the capital reserves of the company.

UNPAID DIVIDEND ACCOUNT (SECTION 124)

 The company is required to deposit the amount of dividend in a separate bank

account in a scheduled bank within 5 days from the date of its declaration.

 In case dividend has been declared by a company but has not been paid to or
claimed by any shareholder entitled to the payment of the dividend within 30 days
from the date of declaration, the company shall within 7 days from the date of
expiry of the said period of 30 days, transfer the total amount of dividend which
remains unpaid or unclaimed to a special bank account to be opened by the
company in that behalf in any scheduled bank to be called “Unpaid Dividend
Account”.

 The company shall, within a period of 90 days of making any transfer of an

amount to the Unpaid Dividend Account, prepare a statement containing the
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names, their last known addresses and the unpaid dividend to be paid to each
person and place it on the web-site of the company, if any, and also on any other
web-site approved by the Central Government.

 Section 124(5) prescribes that, any money transferred to the Unpaid Dividend
Account of a company which remains unpaid or unclaimed for a period of seven
years from the date of such transfer shall be transferred by the company along
with interest accrued, if any, thereon to the Investor Education and Protection
Fund.

The Investor Education and Protection Fund (IEPF) (Section 125) [ jiska koi nhi uska
IEPF ]
The Central Government has established an Investor Education and Protection Fund
[IEPF] for the purpose to educate investors and to protect the interest of investors.
The following amount is being credited to this fund:
A. amounts in the unpaid dividend accounts of companies;
B. unpaid or unclaimed application moneys received by companies for allotment of any
securities and due for refund;
C. unpaid or unclaimed amount of matured deposits with companies;
 P a g e | 247

D. unpaid or unclaimed amount of matured debentures with companies;

E. the interest accrued on the account referred to in clauses (a) to (d);
F. grants and donations given to the Fund by the Central Government, State
Governments, companies or any other institutions for the purposes of the Fund; and
G. the interest or other income received out of the investments made from the Fund.

The amount of IEPF shall be utilized for:

A. The refund in respect of unclaimed dividends, matured deposits, matured debentures,
the application money due for refund and interest thereon;
B. Promotion of investors' education, awareness and protection;
C. Distribution of any disgorged amount among eligible and identifiable applicants for
shares or debentures, shareholders, debenture-holders or depositors who have suffered
losses due to wrong actions by any person, in accordance with the orders made by the
Court which had ordered disgorgement;
D. Reimbursement of legal expenses incurred in pursuing class action suits by members,
debenture-holders or depositors as sanctioned by the NCLT; and any other purpose.

Note: The Statement of amounts to be credited to IEPF shall be filed in Form DIV 5.

Procedure for Transfer of shares u/s 90(9) to The Investor Education and Protection Fund
The company shall follow the following procedure while transferring the shares,
a) Where the shares are dealt with in a demat form

 The company shall inform the depository by way of corporate action, where
the shareholders have their accounts for transfer in favor of the Authority.

 On receipt of such intimation, the depository shall effect the transfer of

shares in favor of DEMAT account of the Authority.
While effecting such transfer, the company shall send a statement to the
Authority in Form No. IEPF-4 within thirty days of the corporate action
taken containing details of such transfer and the company shall also attach
following documents:

I. a copy of order of the Tribunal

II. a declaration that no application has been made or is pending
before the Tribunal.
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b) Where the shares are dealt with in physical form

 The Company Secretary or the person authorized by the Board shall make
an application, on behalf of the concerned shareholder, to the company, for
issue of a new share certificate.
 On receipt of the application above, a new share certificate for each such
shareholder shall be issued
 After issue of a new share certificate, the company shall inform the
depository by way of corporate action to convert the share certificates into
DEMAT form and transfer in favour of the Authority.
 While effecting such transfer, the company shall send a statement to the
Authority in Form No. IEPF-4 within thirty days of the corporate action
taken containing details of such transfer and the company shall also attach
following documents:

a) a copy of order of the Tribunal

b) a declaration that no application has been made or is pending
before the Tribunal.

Effect of non-transfer
In terms of sub-section (3) of Section124 of the Act, if a company fails to transfer unpaid/
unclaimed Dividend amount to the Unpaid Dividend Account within 7 days from the
expiry of 30 days of declaration,
the company shall pay, from the date of such default, interest on so much of the amount
as has not been transferred to the said account at the rate of 12% per annum and the
interest accruing on such amount shall ensure to the benefit of the Members in
proportion to the amount of Dividend remaining unpaid to them.

Penalty for default in complying with Section 124

Company - penalty of one lakh rupees and in case of continuing failure, with a further
penalty of five hundred rupees for each day after the first during which such failure
continues, subject to a maximum of five lakh rupees.

Officer in default - penalty of twenty-five thousand rupees and in case of continuing

failure, with a further penalty of two hundred rupees for each day after the first during
which such failure continues, subject to a maximum of one lakh rupees.
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PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS (Section 127 of Companies Act,

2013)
When a dividend has been declared by a company but has not been paid within 30 days
from the date of declaration to any shareholder entitled to the payment of the dividend,
every director of the company shall, if he is knowingly a party to the default, be
punishable with imprisonment which may extend to 2 years and with fine which shall not
be less than Rs.1000/- for every day during which such default continues and the
company shall be liable to pay simple interest at the rate of 18% per annum during the
period for which such default continues.

Exceptions
Proviso to section 127 has provided a list where no offence under this section shall be
deemed to have been committed:
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of
the dividend and those directions cannot be complied with and the same has been
communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due
to it from the shareholder; or
(e) for any other reason,

PROCEDURE FOR DECLARATION OF DIVIDEND OUT OF RESERVES

 Check whether AOA authorizes declaration of Interim Dividend. If not the

first amend the AOA

 Hold the BM for declaration of dividend.

 The Board before passing BR should consider all the pre-requisites and
conditions imposed by the Act for declaration of interim dividend.

 Closure of register of members for declaration of record date for payment

of interim dividend. Adequate notice of closure of register should be given
as per the Act as well as SEBI (LODR)

 Before commencement of closure hold a BM for addressing all the pending

transfers of shares, if any.

 Open a separate bank account called "Interim Dividend Account of Ltd."

with the bank as resolved by the Board and transfer the total dividend
within 5 days of declaration
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 Ensure that the dividend tax is paid to the tax authorities within the
prescribed time.

 Prepare list of members and print sufficient number of dividend warrants

 Dispatch dividend warrants within 30 days of the declaration of dividend. In

case of joint shareholders, dispatch the dividend warrant to the first named
shareholder.

 Instruct to banks to pay dividend at par on presentation of dividend warrant

 Issue bank drafts and/or cheques to those members who inform that they
received the dividend warrants after the expiry of their currency period or
their dividend warrants were lost in transit after satisfyinq that the same
have not been encashed.

 Instruct to banks to pay dividend at par on presentation of dividend warrant

 Arrange for transfer of unpaid or unclaimed dividend to a special account

named "Unpaid dividend A/c" within 7 days after expiry of the period of 30
days of declaration of dividend.

 Confirm the interim dividend in the next Annual General Meeting.

PROCEDURE FOR DECLARATION AND DISTRIBUTION OF FINAL DIVIDEND

 Hold the BM for proposal of dividend. Approve notice to call GM for approval of
shareholders.

 In the same BM, decide about the date of closure of register\record date.
Authorize to open separate bank account for payment of dividend.

 the company may transfer such amount as may be desired.

 Closure of register of members for declaration of record date for payment of

dividend. Adequate notice of closure of register should be given as per the Act as
well as SEBI (LODR).

 Before commencement of closure hold a BM for addressing all the pending

transfers of shares, if any.

 Hold the GM and pass an ordinary resolution declaring the payment of dividend to
the shareholders of the company as per recommendation of the Board.
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 Transfer amount to separate bank account with the bank as resolved by the Board
within 5 days of declaration of dividend.

 Ensure that the dividend tax is paid to the tax authorities within the prescribed
time.

 Prepare list of members and print sufficient number of dividend warrants

 Dispatch dividend warrants within 30 days of the declaration of dividend. In case

of joint shareholders, dispatch the dividend warrant to the first named
shareholder.

 Instruct to banks to pay dividend at par on presentation of dividend warrant

 Issue bank drafts and/or cheques to those members who inform that they received
the dividend warrants after the expiry of their currency period or their dividend
warrants were lost in transit after satisfvinq that the same have not been
encashed.

 Instruct to banks to pay dividend at par on presentation of dividend warrant

 Arrange for transfer of unpaid or unclaimed dividend to a special account named

"Unpaid dividend A/c" within 7 days after expiry of the period of 30 days of
declaration of dividend.
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CHAPTER – 9

ACCOUNTS AND AUDITS

REQUIREMENT OF KEEPING BOOKS OF ACCOUNTS

(SECTION 128)
Every company shall prepare and keep at its registered
office books of account and other relevant books and
papers and financial statement for every financial year.
The section specifies that: -
a) the books of account must be kept on accrual basis
and according to the double entry system.
b) the books of account must give a true and fair view of the state of affairs of the
company or its branches
c) the books of account and other relevant documents must be kept at the registered
office of the company.

PLACE OF KEEPING BOOKS OF ACCOUNT

Section 128(1) of the Act requires every company to prepare and keep the books of
account and other relevant books and papers and financial statements at its registered
office.
However, all or any of the books of accounts may be kept at such other place in India as
the Board of directors may decide.
When the Board so decides, the company is required within 7 days of such decision to
file with the Registrar of Companies a notice in writing giving full address of that other
place in e-form AOC-5.

MAINTENANCE OF BOOKS OF ACCOUNT IN ELECTRONIC FORM (RULE 3 OF THE

COMPANIES (ACCOUNTS) RULES, 2014)
The important provisions with respect to maintenance of books of accounts in electronic
form are given below:
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 The maintenance of books of account or other relevant papers in electronic mode

is permitted and shall remain accessible in india, at all times.

 For the financial year commencing on or after the 1st day of April, 2023, every
company which uses accounting software for maintaining its books of account,
shall use only such accounting software which has a feature of recording audit
trail of each and every transaction, creating an edit log of each change made in
books of account along with the date when such changes were made and
ensuring that the audit trail cannot be disabled

 The information received from branch offices shall not be altered in any manner
and shall be kept where it shall depict what was originally received from the
branches.

 The information in the electronic record of the document shall be capable of being
displayed in a legible form

 There shall be a proper system for storage, retrieval, display or printout of the
electronic records as the Audit Committee or the Board may deem appropriate
and such records shall not be disposed of or rendered unusable, unless permitted
by law

 the back-up of the books of account and other books and papers of the company
maintained in electronic mode, including at a place outside India, if any, shall be
kept in servers physically located in India on a daily basis

 The company shall intimate to the Registrar on an annual basis at the time of filing
of financial statement -
(a) the name of the service provider;
(b) the internet protocol address of service provider;
(c) the location of the service provider (wherever applicable);
(d) where the books of account and other books and papers are maintained on
cloud, such address as provided by the service provider.

BOOKS OF ACCOUNT IN RESPECT OF BRANCH OFFICE

 The branches of the company, if any, in India or outside India shall also keep the
books of account in the same manner as specified in sub- section (1) of Section
128 of the Act, for the transaction effected at the branch office.
The books of account and other books and papers maintained by the company
within India shall be open for inspection at the registered office of the company or
at such other place in India by any director during business hours only by the
person authorized in this behalf by resolution.
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 proper summarized return of the books of account of the company kept and
maintained outside India shall be sent to the registered office at quarterly
intervals, which shall be kept and maintained at the registered office of the
company and which shall be kept open to directors for inspection.

 Where any other financial information maintained outside the country is required
by a director, the director shall furnish a request to the company and the company
shall produce such financial information to the director within 15 days of the date
of receipt of the written request

PRESERVATION OF BOOKS OF ACCOUNTS

The books of account of every company shall be kept for a period of not less than eight
financial years immediately preceding a financial year.
where the company had been in existence for a period less than eight years, in respect of
all the preceding years [Section 128(5)].
However, where an investigation has been ordered in respect of the company, the
Central Government may direct that the books of account may be kept for such longer
period as it may deem fit.

PERSONS RESPONSIBLE TO MAINTAIN BOOKS

According to section 128(6) of the Act, the following persons are responsible of
maintenance of books of accounts etc.
(i) Managing Director;
(ii) Whole-Time Director, in charge of finance;
(iii) Chief Financial Officer; or
(iv) Any other person of a company charged by the Board.

FINANCIAL STATEMENT [SECTION 129]

Financial Statement includes

(a) Balance Sheet

(b) Profit and Loss account or Income and Expenditure account

(c) Cash flow Statement

This Photo by Unknown Author is licensed under CC
(d) Statement of change in equity, if applicable

(e) Any explanatory notes annexed to or forming part of financial statements, giving information
required to be given and allowed to be given in the form of notes.
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The financial statements shall give a true and fair view of the state of affairs of the
company and shall comply with accounting standards notified under section 133 of the
Companies Act.
However, insurance companies, banking company, companies engaged in generation/
supply of electricity or any other class of companies shall make financial statements in
the form as has been specified in or under the Act governing such companies [Section
129(1)].
The financial statement shall be laid in the annual general meeting of that financial year
[Section 129(2)]

PENALTY
Each offence be punishable with imprisonment for a term which may extend to one year
or with fine which shall not be less than fifty thousand rupees but which may extend to
five lakh rupees or with both.

CONSOLIDATED FINANCIAL STATEMENTS

 The Companies Act, 2013 has made preparation of consolidated accounts

mandatory for all companies including unlisted companies and private companies
having one or more subsidiaries or associates or joint ventures.

 Prepare a consolidated financial statement of the company and of all the

subsidiaries and associates companies in accordance with applicable accounting
standard, which shall also be laid before the annual general meeting of the
company along with the laying of its financial statement.

 The company shall also attach along with its financial statement, a separate
statement containing the salient features of the financial statement of its
subsidiary or associate/s or joint venture/s in Form AOC-1
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MANNER OF CONSOLIDATION OF ACCOUNTS [RULE 6 OF THE COMPANIES

(ACCOUNTS) RULES, 2014]
The consolidation of financial statements of the company shall be made in accordance
with the provisions of Schedule III of the Act and the applicable accounting standards.
Provided further that nothing in this rule shall apply in respect of preparation of
consolidated financial statements by a company if it meets the following conditions: -

 it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another

company and all its other members do not object to the company not presenting
consolidated financial statements;
 it is a company whose securities are not listed or are not in the process of listing
on any stock exchange, whether in India or outside India; and
 its ultimate or any intermediate holding company files consolidated financial
statements with the Registrar which are in compliance with the applicable
Accounting Standards

PERIODICAL FINANCIAL STATEMENTS (SECTION 129A)

The Central Government may, require such class or classes of unlisted companies, as
may be prescribed -
a) to prepare the financial results of the company on such periodical basis
b) to obtain approval of the Board of Directors and complete audit or limited review
of such periodical financial results
c) file a copy with the Registrar within a period of 30 days of completion of the
relevant period.

RE-OPENING OF ACCOUNTS ON COURT’S OR TRIBUNAL’S ORDERS (SECTION 130)

Section 130 of the Act, provides for provisions relating to re-opening or re-casting of
books of accounts of the company.

 A company shall not re-open its books of account and shall not recast its financial
statements, unless an application to the tribunal or by court of competent
jurisdiction, in this regard is made by any one or more of the following -
(a) the Central Government, or
(b) the Income-tax authorities, or
(c) the Securities and Exchange Board of India (SEBI), or
(d) any other statutory regulatory body or authority or any person concerned, and
(e) An order in this regard is made by a court of competent jurisdiction or the
Tribunal.

 The re- opening and recasting of financial statements is permitted only for the
following reasons –
(a) the relevant earlier accounts were prepared in a fraudulent manner; or
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(b) The affairs of the company were mismanaged during the relevant period,
casting a doubt on the reliability of financial statements.

 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

VOLUNTARY REVISION OF FINANCIAL STATEMENTS OR BOARD’S REPORT [SECTION

131]

 Section 131 of the Act, allows the directors to prepare revised financial statement
or a revised Board’s report in respect of any of the three preceding financial years
after obtaining approval of the Tribunal

 The Tribunal shall give notice to the Central Government and the Income-tax
authorities and shall take into consideration the representations before passing
the order.

 Such revised financial statement or report shall not be prepared or filed more than
once in a financial year.

 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
(b) the making of any necessary consequential alternation.

SIGNING OF FINANCIAL STATEMENT [SECTION 134]

Financial statement (including consolidated financial statements) of the private and
public companies should be approved by the Board of Directors, before such statements
are signed.
Financial statement should be signed on behalf of the Board by at least:
(a) Chairperson of company, if so authorised by the Board, or 2 directors (one should be
the managing director, if any), and
(b) Chief Executive Officer, if he is director, chief financial officer and company secretary,
if any in the company.
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IMPORTANT POINTS: -
(a) One Person Company's financial statements shall be signed by only one director for
submission to the auditor for his report.
(b) Auditor's report is required to be attached to every financial statement.
(d) Board's report shall be attached to the statements laid before the company in general
meeting.

QUESTION: Is it mandatory to sign financial statement from the company secretary?

Answer: As per Section 134(1), the company in which the Whole-time Company Secretary
is appointed, then it is mandatory that the Financial Statement is signed from the Whole-
time Company Secretary.

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

Following persons have right to get a copy of financial statements including
consolidated financial statement, if any, auditor's report along with every other document
required by law which are to be laid before a company in its general meeting:

 every member of the Company,

 every trustee for the debenture holder and
 all other persons who are so entitled,
The copies should be sent to the above mentioned persons atleast 21 days before the
date of General Meeting (atleast 14 days in case of Section 8 companies).
A shorter period than 21 days is sufficient if it is agreed as follows—
> In case of Company having share capital: It is agreed by majority of members in
number who are entitled to vote and atleast 95% of the paid up share capital having
voting rights.
> In case of Company not having share capital: It is agreed by atleast 95% of the
members holding voting power.
In case of listed companies this section shall be deemed to have been complied with if:

 The copies of the documents are made available for inspection at its registered
office, during working hours, for a period of 21 days before the date of the
meeting and
 A statement containing the salient features of such documents in the prescribed
form [i.e. form AOC- 3] is sent to the eligible parties at least 21 days before the
date of meeting.
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Note: A listed company is required to supply a copy of the complete financial statements
with auditor’s report and director’s report, to such shareholders who ask for full financial
statements.
A listed companies and such public companies which have a net worth of more than Rs.
1 crore and turnover of more than Rs. 10 crore can send the copies of financial
statements in the following manner:

 In electronic form to members who hold share in demat form and whose e-mail
id's are registered with the depositories.
 In electronic form to members who hold shares in physical form but positively
consented in writing to receive financial statements in electronic form.
 In physical copies to other members.
Penalty: If any default is made in complying with the provisions of this section, the
company shall be liable to a penalty of—
(i) Rs. 25000/- and
(j) every officer of the company who is in default shall be liable to a penalty of Rs.
5000/-

COPY OF FINANCIAL STATEMENT TO BE FILED WITH REGISTRAR [SECTION 137]

 every company to file the financial statements including consolidated financial

statement together with Form AOC- 4 and AOC-4 (CFS) with the Registrar of
Companies (RoC) within 30 days from the day on which the annual general
meeting held and adopted the financial statements.

 If the financial statements are not adopted at the annual general meeting or
adjourned annual general meeting, such unadopted financial statements along
with the required documents be filed with the RoC with in thirty days of the date of
annual general meeting.
The RoC shall take them in his record as provisional, until the adoption at annual
general meeting.

 The One Person Company shall file the copy of financial statements duly adopted
by its member within a period of one hundred and eighty days from the closure of
financial year

 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 annual
general meeting shall be filed with the Registrar within thirty days of the last date
before which the annual general meeting should have been held
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The following class of companies shall file their financial statements and other
documents under section 137 of the Act with the Registrar in e-Form AOC-4 XBRL:
a) companies listed with stock exchanges in India and their Indian subsidiaries;
b) companies having paid up capital of five crore rupees or above;
c) companies having turnover of one hundred crore rupees or above;
d) all other companies
Further non-banking financial companies, housing finance companies and companies
engaged in the business of banking and insurance sector are exempted from filing of
financial statements under these rules

PENALTY FOR NON-COMPLIANCE

Company – the company shall be liable to a penalty of: Rs.10,000 and in case of
continuing failure, with a further penalty of Rs.100 for each day during which such failure
continues, subject to a maximum of Rs. 2 lakhs, and
Officer in default – liable to a penalty of Rs.10,000 and in case of continuing failure, with
further penalty of Rs.100 for each day after the first during which such failure continues,
subject to a maximum of Rs.50,000.

NATIONAL FINANCIAL REPORTING AUTHORITY (NFRA)

The National Financial Reporting Authority is a quasi – judicial body to regulate matters
related to accounting and auditing. With increasing demand of non–financial reporting, it
may be referred to as a national level business Reporting Authority to regulate standards
of all kind of reporting- financial as well as non–financial, by the companies in future.
OBJECTIVES OF NFRA
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CONSTITUTION OF NFRA
 It consists of a chairperson, who shall be a person of eminence & having
expertise in accountancy, auditing, finance, or law, to be nominated by Central
Government, and such other prescribed members not exceeding 15 consisting of
part-time and full-time members.

 There shall be an executive body of the National Financial Reporting Authority

consisting of the Chairperson and full-time Members of such Authority for
efficient discharge of its functions.

 The chairperson and all members shall make a declaration in prescribed form
about no conflict of interest or lack of independence in respect of their
appointment.

 The chairperson and all full–time members shall not be associated with any audit
firm or related consultancy firm during course of their appointment and two years
after ceasing to hold such appointment.

 The Central Government may appoint a secretary and such other employees as it
may consider necessary for the efficient performance of functions by the National
Financial Reporting Authority.

 The head office of National Financial Reporting Authority is at New Delhi and it
may, meet at such other places in India,

AUDIT OF NFRA AND ANNUAL REPORT TO CENTRAL GOVERNMENT

The accounts of the National Financial Reporting Authority is required be audited by the
Comptroller and Auditor General of India such accounts together with the audit report
thereon shall be forwarded annually to the Central Government.

Powers of National Financial Reporting Authority:

 NFRA has the power to investigate either on suo-moto or on reference by Central

Government for such class of body corporates or persons as may be prescribed
into the matter of professional or other misconduct committed by any member or
firm of Chartered Accountants

 The Authority shall have powers as are vested in a civil court under Code of Civil
Procedure, 1908 in respect of following matters:
(a) Discovery and production of books of accounts and other documents at such
place and at such time as may be specified by the National Financial Reporting
Authority;
(b) Summoning and enforcing the attendance of persons and examining them on
oath;
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(c) Inspection of any books, registers and other documents of any person;
(d) Issuing commission for examination of witness or documents.

 Where professional or other misconduct is proved, the Authority shall have

powers to make an order in relation to:

• not less than one lakh rupees which may

extend to five times of the fees received in case
Imposing a penalty of individuals
• not less than five lakh rupees which may
of extend to ten times of the fees received in case
of firms.

• being appointed as an auditor or internal

auditor or undertaking any audit of any
Debarring member company or body corporate
• Performing any valuation as provided under
or the firm from section 247 for a minimum period of 6 months
or such higher period not exceeding ten years

AUDITORS- APPOINTMENT, RESIGNATION AND PROCEDURE RELATING TO REMOVAL,

QUALIFICATION AND DISQUALIFICATION

INTRODUCTION
An auditor is a person who is authorized to review and
verify the accuracy of financial records and ensure that
the financial statements represent true and fair view of
the state of affairs of the company.

APPOINTMENT OF AUDITORS (SECTION-139)

The Board of Directors of a company shall appoint an
individual or firm as the first auditor of a company, other
than a Government company, within 30 days from the date of registration of the
company.
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In the case of failure of the Board to appoint the first 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 of the company.
Every company shall, at the first annual general meeting, appoint an individual or a firm
as an auditor who shall hold the office from the conclusion of that meeting till the
conclusion of sixth annual general meeting.

CONDITIONS FOR APPOINTMENT AND NOTICE TO REGISTRAR [RULE 4 OF THE

COMPANIES (AUDIT AND AUDITORS) RULES, 2014
The written consent of the auditor must be taken before appointment. The auditor
appointed shall submit a certificate that:
a) the individual/firm is eligible for appointment and is not disqualified for
appointment
b) the proposed appointment is as per the term provided under the Act;
c) the proposed appointment is within the limits
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 Company shall inform the auditor concerned of his or its appointment and also file a
notice of such appointment with the Registrar in Form ADT-1 within 15 days of the
meeting in which the auditor is appointed.

APPOINTMENT OF AUDITOR IN GOVERNMENT COMPANY- SECTION 139(5) & 139(7)

The appointment of auditor in Government Company shall be held in accordance with the
following provisions:
The First auditor shall be appointed by the Comptroller and Auditor General within 60
days from the date of incorporation and in case of failure to do so, the Board shall
appoint auditor within next 30 days and on failure to do so by Board of Directors, it shall
inform the members, who shall appoint the auditor within 60 days at an extraordinary
general meeting (EGM), such auditor shall hold office till conclusion of first Annual
General Meeting.
In case of subsequent auditor for existing Government Companies, the Comptroller &
Auditor General shall appoint the auditor within a period of 180 days from the
commencement of the financial year and the auditor so appointed shall hold his position
till the conclusion of the Annual General Meeting.
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MANDATORY ROTATION OF AUDITORS

Applicability

 all listed companies;

 all unlisted public companies having paid up share capital of rupees 10 crore or
more;
 all private limited companies having paid up share capital of rupees 50 crore or
more;
 all companies having public borrowings from financial institutions, banks or
public deposits of rupees 50 crore or more;
Rotation of auditors shall not applicable to OPC and small companies.
All the companies mentioned above shall not appoint or re-appoint an individual as an
auditor of the for 5 years from the date of completion;
All the companies mentioned above shall not appoint or re-appoint an audit firm as an
auditor of the company for more than two terms of 5 consecutive years.
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.
ROTATION OF AUDITORS ON EXPIRY OF THEIR TERM
Rotation of auditors on expiry of auditor’s term then same procedure will be followed as
required for appointment of auditors.
RE-APPOINTMENT OF RETIRING AUDITOR [SECTION 139 (9)]
At any annual general meeting, a retiring auditor shall be reappointed as auditor of the
company except under the following circumstances:
(a) He is not qualified for re-appointment;
(b) He has given the company a notice in writing of his unwillingness to be re-appointed;
and
(c) A special resolution has not been passed at that meeting appointing somebody else
instead of him or providing expressly that retiring auditor shall not be re-appointed

CASUAL VACANCY IN THE OFFICE OF AUDITOR [SECTION 139 (8)]

The provisions for filling of casual vacancy in the office of auditor are as follows:
a) The Board of the company shall have power to fill the casual vacancy in the office
of auditor within 30 days.
b) In case casual vacancy has occurred due to resignation of auditor, such
appointment should also be approved by the company in general meeting
convened within 3 months of the recommendation of the Board and auditor shall
hold the office till the conclusion of the next annual general meeting.
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c) In case of government company such vacancy should be filled by the Comptroller

and Auditor General of India within 30 days. In case the CAG of India does not fill
the vacancy the Board of Directors shall fill the vacancy within next 30 days.

APPOINTMENT OF AUDITOR OTHER THAN RETIRING AUDITOR (Section 140(4) of

Companies Act, 2013)
Special notice shall be required from members proposing to move a resolution at the
next AGM to appoint a person other than the retiring auditor or to provide that the
retiring auditor shall not be reappointed.
The special notice be served to the Company at least 14 days before the AGM.
Special notice shall not be required in case where the retiring auditor has completed a
consecutive tenure of five years or ten years as per section 139(2).
Important Points for special notice
1. On receipt of special notice for removing auditor, the Company should forthwith
forward a copy of the same to the retiring auditor.
2. If the auditor makes a representation in writing to the company and requests for its
notification to the members, the company shall —
(a) State the fact of representation in any notice of resolution, and
(b) Send copy of representation to all members,
(c) If the copy of representation is not so sent, copy thereof should be filed with the ROC.
3. Such representation should be of a reasonable length and not too long.
4. For circulation to members, it should not be received by the company too late.
5. Auditor may require the company to read out the representation in the meeting if it is
not so notified to members because it was too late or because of company's default.

POWERS OF TRIBUNAL [SECTION-140 (5)]

1) A National Company Law Tribunal (NCLT) can direct the company to change the
auditor Suo moto or on an application from Central Government, or on an application
from person concerned.
2) The NCLT will exercise such power only 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.
3) If the NCLT is satisfied that the auditor needs to be changed, it shall pass an order
within 15 days of the receipt of application for removal of such auditor.
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4) If the application for removal was made by CG, then CG will appoint an auditor in place
of removed auditor.
5) The auditor so removed 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 such order.
6) In addition to the removal he shall be liable for fraud under section 447.

REMOVAL OF AUDITOR [NIKAL DO]

The auditor may be removed from his office before the expiry of the term only by:
(a) Prior approval from CG:
The Company has to obtain prior approval of the Central Government. (The Company
shall file an application in Form ADT-2 within 30 days of resolution passed by the Board)
(b) Approval from Members:
The Company shall hold the general meeting within 60 days of receipt of approval of the
Central Government for passing the special resolution.
(c) Reasonable Opportunity:
The auditor concerned shall be given a reasonable opportunity of being heard.

RESIGNATION OF AUDITOR [WHO NIKAL GAYA]

The auditor who has resigned from the company shall file a statement in Form ADT- 3 to
ROC indicating the reasons and other facts with regard to his resignation as follows:
(a) Company other than Government Company:
The auditor shall within 30 days from the date of resignation, file a statement about the
reasons of resignation to the Company and the ROC.
(b) Govt. Companies:
The Auditor shall within 30 days from the date of resignation, file a statement to the
company and the ROC and also file same statement with CAG.
Penal provisions if not filing Statement: Fine: Minimum Rs.50,000 and Maximum Rs.5
lakh.
REMUNERATION OF AUDITOR
The remuneration of the auditor shall be fixed in its general meeting or in such manner
as may be determined therein. The Board of Directors may fix remuneration of the 1st
auditor.
The remuneration will be in addition to the out of pocket expenses incurred by the
auditor in connection with the audit of the company.
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AUDITOR NOT TO RENDER CERTAIN SERVICES (PROHIBITED SERVICES) [SECTION

144]
(a)accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and

(Qualification of Auditors (Section 141 (1) & (2) of the Companies Act, 2013)

➢ For Individual or firm:

Only a Chartered Accountant (individual) or a firm where majority of partners practicing

in India are Chartered Accountants can be appointed as auditor for a company.

➢ For LLP:

Where a firm including a limited liability partnership (LLP) is appointed as an auditor of a

company, only the partners who are chartered accountants shall be authorized to act and
sign on behalf of the firm.i) Any other kind of services as may be prescribed

Disqualification of Auditors [Tumse na ho payega]

The following persons shall not be eligible for appointment as an auditor of a company,
namely:
• A body corporate, except LLP;
• An officer or employee of the company;
• Any partner/employee of officer or employee of company;
• A person who himself or his relative/partner is holding any security or interest in the
company, or any company which is its holding, subsidiary, associate;
• A person whose relative is holding security or interest not exceeding Rs.1 Lakh face
value in companies as mentioned above.
Note: This condition shall also be applicable in the case of a company not having share
capital or other securities, wherever relevant. In the event of acquiring any security or
interest by a relative, above Rs. 1 lac, the corrective action to maintain the limits (T one
lac) shall be taken by the auditor within 60 days of such acquisition or interest.
• A person who or whose 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 Rs.5 lakh shall not be eligible for appointment;
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• A person who or whose relative or partner has given a guarantee or provided any
security in connection with the indebtedness of any third person to the company, or its
subsidiary, or its holding or associate company or a subsidiary of such holding
company, in excess of Rs.1 Lakh shall not be eligible for appointment;
• A person or a firm who, whether directly or indirectly, has "business relationship" with
the company, or its subsidiary, or its holding or associate company;
• A person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
• A person who is in full time employment elsewhere;
• Person who is auditor of more than 20 companies;
• A person who has been convicted by a court of an offence involving fraud and a period
of 10 years has not elapsed from the date of such conviction;
• a person who, directly or indirectly, renders any service referred to in section 144 to the
company or its holding company or its subsidiary company.

Note: Where a person appointed as an auditor of a company incurs any of the

disqualifications mentioned as above after his appointment, he shall vacate his office
and such vacation shall be deemed to be a casual vacancy in the office of the auditor.

Business Relationship means any transaction entered into for a commercial purpose,
except -
(a) commercial transactions which are in the nature of professional services permitted to
be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act,
1949 and the rules or the regulations made under those Acts;
(b) commercial transactions which are in the ordinary course of business of the company
at arm's length price like sale of products or services to the auditor, as customer, in the
ordinary course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other similar businesses.

AUDITOR’S RIGHT TO ATTEND GENERAL MEETING

All notices of any general meeting shall be forwarded to the auditor and he must attend
any general meeting either by himself or through his authorized representative and shall
have right to be heard at such meeting on any part of the business which concerns him
as the auditor.
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POWERS AND DUTIES OF AUDITORS [KAR SAKTE HAI]

Every auditor can access at all times to the books of accounts, vouchers and seek such
information and explanation from the company and enquire such matters as he
considers necessary.
Powers & Duties of the Auditors
(a) Inquire about the Loans & Advances:
The auditor shall inquire about the loans and advances made by the company on the
basis of security have been properly secured and whether the terms on which they have
been made are not prejudicial to the interest of the company or its members.
(b) Transactions represented by book entries:
Auditor shall inquire about the transactions of the company which represented merely by
book entries.
(c) Sale of investments:
Auditor shall inquire about the assets of the company (except an investment company or
a banking company) including shares, debentures and other securities.
(d) Auditor must verify the cases where securities are sold at a price less than their cost
of acquisition and if he finds that such sale is bona fide and the price realised is
considered to be reasonable, having regards to the circumstances of each case, no
further reporting is required.
(e) Loans and Advances shown as deposits:
Auditor must verify the loans and advances made by the company which have been
shown as deposits.
(f) Charging of Personal expenses to revenue account:
Auditor must ensure that no personal expenses of directors and officers of the company
have been charged to revenue account.

AUDIT REPORT [LIKH K DEUNGA]

Auditor shall make a report to the members on the accounts examined by him and on
every financial statement which is required to be laid in the AGM of the company.
The Audit report should take into consideration the provisions of the Companies Act, the
Accounting and Auditing standards.
The Audit report should state that to the best of his information and knowledge, the said
accounts and financial statements give a true and fair view of the state of the company's
affair as at the end of the financial year and the profit or loss and the cash flow for the
year.
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Auditor's report shall also state other details which are mentioned below:
(a) whether he has sought and obtained all the information and explanations which were
necessary and if not, the details thereof and the effect of such information on the
financial statements;
(b) whether, in his opinion, proper books of account as required by law have been kept
by the company and proper returns adequate for the purposes of his audit have been
received from branches not visited by him;
(c) whether the branch audit report prepared by a person other than the company's
auditor has been sent to him;
(d) whether the company's balance sheet and profit and loss account dealt with in the
report are in agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting
standards;
(f) the observations or comments of the auditors on financial transactions or matters
which have any adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director under section
164(2);
(h) any qualification, reservation or adverse remark relating to the maintenance of
accounts and other matters connected therewith;
(i) whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls;

Auditor's Report shall also include their views and comments on the following matters,
namely: —
(a) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement;
(b) whether the company has made provision, as required under any law or accounting
standards, for material foreseeable losses, if any, on long-term contracts including
derivative contracts;
(c) whether there has been any delay in transferring amounts, required to be transferred,
to the Investor Education and Protection Fund by the company.
(d) whether the company had provided requisite disclosures in its financial statements
as to holdings as well as dealings in Specified Bank Notes during the period from 8th
November, 2016 to 30th December, 2016 and if so, whether these are in accordance with
the books of accounts maintained by the company.
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COMPANIES (AUDITOR’S REPORT) ORDER, 2020

CARO 2020 will be applicable to all the companies including foreign companies except
banking company, insurance company, section 8 company, OPC, small company, certain
private limited companies.
CARO 2020 will not be applied with respect to auditor’s report on Consolidated Financial
Statements except clause (xxi) of paragraph 3 (Reporting requirements on qualifications
or adverse remarks by the auditors in the CARO reports)
the following details of the subject-matter are described CARO applied:

 Whether the company is maintaining proper records showing full particulars such
as:
i) The quantitative detail and situation of property, plant, and equipment,
ii) Physical verification of the property, plant, and equipment by the management
at reasonable intervals,
iii) The details of the title deeds of the immovable properties held in the name of
company,
iv) Revaluation of the property, plant, and equipment or intangible assets or both
and if there is more than 10% of the change in the property, plant, and equipment
or intangible assets.

 Details of proceedings against the company on the holding of any Benami

property.

 Physical verifications of inventory by the management at reasonable intervals and

proper treatment of any discrepancies of 10% or more found.

 Quarterly returns or statement filed by company having working capital limit more
than 5 crore rupees with such banks or financial institution.

 Details of the investments made by the company (except companies dealing in

loans), security or guarantee given by the company.

 Details of the payment pertaining to the undisputed statutory dues such as GST,
provident Funds, Custom Duty, etc.

 Details of any default done by the company in making the repayment of the loan.

 Details of the funds raised by a company by the way of the Initial public offer.

 Details of fraud done by the company, and many more.

 The Auditor’s Report Order 2020 of any company is supposed to state the reasons
for unfavorable or qualified answers
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COST AUDIT [RULE 6 OF THE COMPANIES (COST RECORDS AND AUDIT) RULES, 2014]
Cost audit is an important and continuous process that
company has to execute properly during its entire existence
in the market. It accounts for the complete verification of the
cost records of the company and also takes into
consideration the other different types of accounts.

Appointment of Cost Auditor

The category of companies specified in rule 3 and the

thresholds limits laid down in rule 4, shall within 180 days of the commencement of every
financial year, shall appoint a cost auditor

The cost auditor appointed shall submit a certificate that-

(a) the individual or the firm is eligible for appointment and is not disqualified for
appointment
(b) the individual or the firm satisfies the criteria provided in section 141 of the Act, so far
as may be applicable;
(c) the proposed appointment is within the limits laid down by or under the authority of
the Act; and
(d) The list of proceedings against the cost 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.

Every company shall inform the cost auditor concerned of his or its appointment and file
a notice of such appointment with the Central Government within a period of 30 days of
the Board meeting in which such appointment is made or within a period of 180 days of
the commencement of the financial year, whichever is earlier, through electronic mode,
in Form CRA-2.

Cost audit report

Every cost auditor, who conducts an audit of the cost records of a company, shall submit
the cost audit report along with his or its reservations or qualifications or observations
or suggestions, if any, in Form CRA-3.

a) The cost auditor shall forward his duly signed report to the Board of Directors of
the company within a period of 180 days from the closure of the financial year

b) Every company covered under these rules shall, within a period of 30 days from
the date of receipt of a copy of the cost audit report, furnish the Central
Government with such report along with full information and explanation on every
reservation or qualification contained therein, in Form CRA-4 in Extensible
Business Reporting Language format.

c) The cost statements, including other statements to be annexed to the cost audit
report, shall be approved by the Board of Directors before they are signed on
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behalf of the Board by any of the director authorized by the Board, for submission
to the cost auditor to report thereon.

SECRETARIAL AUDIT (Section 204 of the Companies Act, 2013)

Secretarial Audit means correction and verification

of secretarial records and compliances to be maintained by
the Company.
In other words, secretarial audit is a compliance audit and it
is a part of total compliance management in an
Organization.
It is an effective tool for corporate compliance management.
It helps to detect non-compliance and to take corrective
measures.

APPLICABILITY

The following companies are required to do the secretarial audit:

(a) Every listed companies; or

(b) Every public company having a paid-up share capital of Rs.50 crore or more;or
(c) Every public company having a turnover of Rs.250 crore or more.

OBJECTIVES

The objective of secretarial audit is as follows:

• To check & report on compliances of applicable laws and Secretarial Standards;
• To point out non-compliances and inadequate compliances;
• To protect the interest of various stakeholders i.e. the customers, employees, society
etc;
• To avoid any unwarranted legal actions/penalties by law enforcing agencies and other
persons as well.

SCOPE

The scope of Secretarial Audit comprises verification of the compliances under the
following enactments, rules, regulations, notifications and guidelines:

> The Companies Act, 2013 (the Act) and the Rules made thereunder
> The Securities Contracts (Regulation) Act, 1956 and the Rules made under that act
> The Depositories Act, 1996 and the Regulations and Bye-laws framed under that Act;
> The Foreign Exchange Management Act, 1999 and the Rules and Regulations made
thereunder;
> Securities and Exchange Board of India Act, 1992 along with its regulations;
> Other applicable laws depending upon industry location, etc;
> Adherence to Secretarial Standards;
> Board Structure, Material event etc.
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Who will conduct the Secretarial Audit of the Companies? [Kaam mila hame]

Only a practicing company secretary can conduct the secretarial audit of the Companies.

It shall be the duty of the company to give all assistance and facilities to the company
secretary in practice, for auditing the secretarial and related records.

Appointing Authority

The Secretarial auditor is appointed by Board of Directors, and he submits his secretarial
report to the Board whichis annexed to the Director's Report.

Note: Secretarial Audit should be an independent, objective assurance intended to add

value and improve an organization’s operations. It helps to accomplish the
organization’s objectives by bringing a systematic, disciplined approach to evaluate
and improve effectiveness of risk management, control, and governance processes.
The Board of Directors shall explain, in their report, in full any qualification made in
the Secretarial Audit Report.

INTERNAL AUDIT (Section 138 of the Companies Act, 2013)

Applicability of Internal Audit [khud se hi karo]

Internal Audit applies to all companies as under:

1. Every listed company;

2. Every unlisted public company having:

a) Paid-up share capital of Rs.50 crore or more during the preceding financial year;
or
b) Turnover of Rs.200 crore rupees or more during the preceding financial year; or
c) Outstanding loans from banks or public financial institutions exceeding Rs.100
crore or more at any point of time during the preceding financial year; or
d) Outstanding deposits of Rs.25 crore or more at any point of time during the
preceding financial year; and
3. Every private company having:

a) Turnover of Rs.200 crore or more during the preceding financial year;

b) Outstanding loans from banks or public financial institutions exceeding Rs.100
crore or more at any point of time during the preceding financial year.

Note: An existing company covered under the above parameter shall comply
within 6 months with the provisions of Internal Audit.
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Who can be appointed as internal auditor?

The following professionals may conduct the Internal Audit of the above mentioned
Companies:

(a) a Chartered Accountant; or

(b) a Cost Accountant; or
(c) Other professional as may be decided by the Board of Directors

For conducting the internal audit by the above mentioned professional, the Internal
Auditor should have knowledge about:

(a) Legal and regulatory framework within which the auditee entity operates.
(b) Accounting, internal control systems and procedure along with accounting policies.
(c) Determine the effectiveness of internal control and check procedures adopted by the
entity.
(d) Understand the business and other technical details of the auditee entity.
(e) Determine nature, timing and extent of procedures to be carried out or performed.
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CHAPTER – 10

COMPROMISE, ARRANGEMENT AND AMALGAMATION – CONCEPTS

PROVISIONS OF THE COMPANIES ACT, 2013

Power to Compromise or make Arrangements with

Members or Creditors

Section 230(1) states that when a compromise or

arrangement is proposed –

(a) between a company and its creditors or any class of

them; or
(b) between a company and its members or any class of them

the Tribunal may, on the application of the (i) company, or (ii) any creditor or (iii) member
of the company, or (iv) in the case of a company which is being wound up, of the
liquidator, appointed under the Companies Act, 2013 order a meeting of the creditors or
class of creditors, or of the members or class of members, as the case may be, to be
called, held and conducted in such manner as the Tribunal directs.

Affidavit by the applicant to disclose certain material facts

Section 230(2) states that the company or any other person, by whom an application
shall disclose to the Tribunal by affidavit–

a) all material facts relating to the company, such as the latest financial position of
the company, the latest auditor’s report on the accounts of the company and the
pendency of any investigation or proceedings against the company;

b) reduction of share capital of the company, if any, included in the compromise or

arrangement

c) any scheme of corporate debt restructuring consented to by not less than

seventy-five per cent of the secured creditors in value, including—
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 a creditors’ responsibility statement in form CAA – 1

 safeguards for the protection of other secured and unsecured creditors
 report by the auditor that the fund requirements of the company after the
corporate debt restructuring as approved shall conform to the liquidity test
based
 where the company proposes to adopt the corporate debt restructuring
guidelines specified by the Reserve Bank of India, a statement to that
effect;
 a valuation report in respect of the shares and the property and all assets,
tangible and intangible, movable and immovable, of the company by a
registered valuer.

Notice of the meeting

On receiving the application when the tribunal decides to call the meeting, notice of such
meeting shall be sent to all the creditors or class of creditors and to all the members or
class of members and the debenture-holders of the company, individually at the address
registered with the company which shall be accompanied by: -

• a statement disclosing the details of the compromise or arrangement,

• a copy of the valuation report, if any, and
• explaining their effect on creditors, key managerial personnel, promoters and non-
promoter members, and the debenture-holders, and
• the effect of the compromise or arrangement on any material interests of the directors
of the company or the debenture trustees, and
• such other matters as may be prescribed.

Such notice and other documents shall also be placed on the website of the company, if
any, and in case of a listed company, these documents shall be sent to the Securities
and Exchange Board and stock exchange where the securities of the companies are
listed, for placing on their website and shall also be published in newspapers.

Who can object to the scheme?

(a) A person who holds not less than 10% of the shareholding or
(b) A person who is having outstanding debt amounting to not less than 5% of the total
outstanding debt.

Note: the above percentages shall be counted as per the latest audited financial
statement.

Notice to be sent to the regulators:

Section 230(5) states that a notice along with all the documents in such form as may be
prescribed shall also be sent to:

• the Central Government,

• the income-tax authorities,
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• the Reserve Bank of India,

• the Securities and Exchange Board,
• the Registrar,
• the respective stock exchanges,
• the Official Liquidator,
• the Competition Commission of India

Note: if necessary, and such other sectorial regulators or authorities which are likely to
be affected by the compromise or arrangement and shall require that representations, if
any, to be made by them shall be made within a period of 30 days from the date of receipt
of such notice.

Affidavit of Service

The chairperson appointed for the meeting of the company or other person directed to
issue the advertisement and the notices of the meeting shall file an affidavit before the
Tribunal not less than seven days before the date fixed for meeting or date of the first of
the meetings.
In case of default, the application along with copy of the last order issued shall be posted
the Tribunal for such orders as it may think fit to make.

Approval and sanction of the scheme

The scheme will be approved if a majority in number representing 3/4th in value of

the creditors, or members, as the case may be, present and voting, agree to any
compromise or arrangement.

Note: Such order shall be binding on the company, all the creditors, or class of
creditors or members or class of members or on the liquidator and the
contributories of the company.

Order of the Tribunal sanctioning the scheme to provide for the following matters

An order made by the Tribunal shall provide for all or any of the following matters,
namely: -

a) where the compromise or arrangement provides for conversion of preference

shares into equity shares, such preference shareholders shall be given an option
to either obtain arrears of dividend in cash or accept equity shares equal to the
value of the dividend payable
b) the protection of any class of creditors
c) if the compromise or arrangement results in the variation of the shareholders’
rights
d) if the compromise or arrangement is agreed to by the creditors any proceedings
pending before the Board for Industrial and Financial Reconstruction shall abate.
e) such other matters
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Order of tribunal to be filed with ROC:

Section 230(8) states that the order of the Tribunal shall be filed with the ROC by
the company within a period of 30 days of the receipt of the order.

Tribunal may dispense with calling of meeting of creditors

Section 230(9) states that the Tribunal may dispense with calling of a meeting of
creditors or class of creditors where such creditors or class of creditors, having at least
ninety per cent value, agree and confirm, by way of affidavit, to the scheme of
compromise or arrangement.

Power of the tribunal to enforce compromise or arrangement:

Once the Tribunal passes the order of compromise or arrangement it also has
power to supervise the implementation of the compromise or arrangement or give
such directions to ensure proper implementation of the scheme.

Note: If the Tribunal is satisfied that the compromise or arrangement sanctioned

under section 230 cannot be implemented satisfactorily with or without modifications,
and the company is unable to pay its debts as per the scheme, it may make an order for
winding up the company and such an order shall be deemed to be an order made under
section 273.

MERGER AND AMALGAMATION OF COMPANIES

Tribunal’s power to call meeting [Section 232]

With respect to merger or amalgamation, when an

application is made to the Tribunal U/S 230 for the
sanctioning of a compromise or an arrangement
proposed between a company and any such persons as
are mentioned in that section, and it is shown to the
Tribunal:

• that the compromise or arrangement has been proposed for the purposes of, or in
connection with, a scheme for the reconstruction of the company or companies involving
merger or the amalgamation of any two or more companies; and

• that under the scheme, the whole or any part of the undertaking, property or liabilities
of any company ("Transferor Company") is required to be transferred to another
company ("Transferee Company"), or is proposed to be divided among and transferred
to two or more companies, the Tribunal may on such application, order a meeting of the
creditors or class of creditors or the members or class of members, as the case may be,
to be called, held and conducted in such manner as the Tribunal may direct.
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Circulation of documents for members’/creditors’ meeting

Section 232(2) states that when an order has been made by the Tribunal, merging
companies or the companies in respect of which a division is proposed, shall also be
required to circulate the following for the meeting so ordered by the Tribunal,
namely:

 The draft of the proposed terms of the scheme drawn up and adopted by the
directors of the merging company;

 Confirmation that a copy of the draft scheme has been filed with the Registrar;

 A report adopted by the directors of the merging companies explaining effect of

compromise on each class of shareholders, key managerial personnel, promoters
and non-promoter shareholders laying out in particular the share exchange ratio,
specifying any special valuation difficulties;

 The report of the expert with regard to valuation, if any;

 A supplementary accounting statement if the last annual accounts of any of the

merging company relate to a financial year ending more than six months before
the first meeting of the company summoned for the purposes of approving the
scheme.

Sanctioning of scheme by tribunal:

Section 232(3) states that the Tribunal, after satisfying itself that the procedure has been
complied with, may, by order, sanction the compromise or arrangement or by a
subsequent order, make provision for the following matters, namely:

a) The transfer to the transferee company of the whole or any part of the
undertaking, property or liabilities of the transferor company from a date to be
determined by the parties unless the Tribunal, for reasons to be recorded by it in
writing, decides otherwise;

b) The allotment or appropriation by the transferee company of any shares,

debentures, policies or other like instruments in the company which, under the
compromise or arrangement, are to be allotted or appropriated by that company to
or for any person.
No transferee company can hold shares in its own name or under any trust. A
transferee company shall not, as a result of the compromise or arrangement, hold
any shares in its own name or in the name of any trust whether on its behalf or on
behalf of any of its subsidiary or associate companies and any such shares shall
be cancelled or extinguished;

c) The continuation by or against the transferee company of any legal proceedings

pending by or against any transferor company on the date of transfer;
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d) Dissolution, without winding-up, of any transferor company;

e) The provision to be made for any persons who, within such time and in such
manner as the Tribunal directs, dissent from the compromise or arrangement;

f) Where share capital is held by any non-resident shareholder under the foreign
direct investment norms or guidelines, the allotment of shares of the transferee
company to such shareholder shall be in the manner specified;

g) The transfer of the employees of the transferor company to the transferee

company;

h) When the transferor company is a listed company and the transferee company is
an unlisted company, the transferee company shall remain an unlisted company
until it becomes a listed company;

if shareholders of the transferor company decide to opt out of the transferee company,
provision shall be made for payment of the value of shares held by them and other
benefits in accordance with a pre-determined price formula or after a valuation is made,
and the arrangements under this provision may be made by the Tribunal;

The amount of payment or valuation under this clause for any share shall not be less
than what has been specified by the Securities and Exchange Board under any
regulations framed by it;

Auditor’s certificate as to conformity with accounting standards

No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate

by the company's auditor has been filed with the Tribunal to the effect that the
accounting treatment, if any, proposed in the scheme of compromise or arrangement is
in conformity with the accounting standards.

Transfer of property or liabilities

An order for the transfer of any property or liabilities, then, by virtue of the order,
that property shall be transferred to the transferee company and the liabilities shall be
transferred to and become the liabilities of the transferee company and any property
may, if the order so directs, be freed from any charge which shall by virtue of the
compromise or arrangement, cease to have effect.

Certified copy of the order to be filed with ROC:

Every company in relation to which the order is made shall file a certified copy of the
order with the ROC for registration within 30 days of the receipt of certified copy of the
order.
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Effective date of the scheme:

The scheme shall clearly indicate an appointed date from which it shall be effective
and the scheme shall be deemed to be effective from such date and not at any later
date.

Annual statement certified by CA/CS/CWA to be filed with Registrar every year until the
completion of the scheme

Every company in relation to which an order is made shall until the scheme is fully
implemented, file with the registrar of companies, the statement in Form [Link].8 within
two hundred and ten days {210 days} from the end of each financial year.

Punishment

if a company fails to file Certified copy of the order with the Registrar, the company and
every officer of the company who is in default shall be liable to a penalty of twenty
thousand rupees, and where the failure is a continuing one, with a further penalty of one
thousand rupees for each day after the first during which such failure continues, subject
to a maximum of three lakh rupees.

MERGER AND AMALGAMATION OF CERTAIN COMPANIES

Section 233 prescribes simplified procedure for Merger or amalgamation of –

 two or more small companies; or

 between a holding company and its wholly-owned subsidiary company; or
 such other class or classes of companies as may be prescribed.

Merger of small companies/holding and subsidiary companies

A scheme of merger or amalgamation may be entered into between 2 or more small

companies or between a holding company and its wholly-owned subsidiary company
or such other class or classes of companies as may be prescribed, subject to the
following, namely:

Notice for inviting Objection:

A notice of the proposed scheme inviting objections or suggestions from the ROC and
Official Liquidators where registered office of the respective companies are situated or
persons affected by the scheme within 30 days is issued by the transferor company or
companies and the transferee company FORM CAA-9.

Approval by members:
The objections and suggestions received are considered by the companies in their
respective general meetings and the scheme is approved by the respective members or
class of members at a general meeting holding at least 90% of the total number of
shares;
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Filing of declaration of insolvency:

Each of the companies involved in the merger files a declaration of solvency in FORM
CAA- 10 with the ROC of the place where the registered office of the company is situated;

Approval by creditors:
The scheme is approved by majority representing 9/10 in value of the creditors or
class of creditors of respective companies.

Transferee Company to file a copy of scheme:

The transferee company shall file a copy of the scheme so approved with the
Central Government, ROC and the Official Liquidator where the registered office
of the company is situated.

Central Government to issue confirmation order, where there are no objections or

suggestions from registrar or official liquidator:

On the receipt of the scheme, if the ROC or the Official Liquidator has no objections or
suggestions to the scheme, the Central Government shall register the same and issue a
confirmation thereof to the companies.
If the ROC or Official Liquidator has any objections or suggestions, he may communicate
the same in writing to the Central Government within a period of 30 days.
If no such communication is made, it shall be presumed that he has no objection
to the scheme.

Application by Central government to the Tribunal

If the Central Government after receiving the objections or suggestions or for any reason
is of the opinion that such a scheme is not in public interest or in the interest of the
creditors, it may file an application before the Tribunal within a period of 60 days of the
receipt of the scheme stating its objections and requesting that the Tribunal may
consider the scheme.

Tribunal's Action to Central Government's application:

On receipt of an application from the Central Government or from any person, if the
Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should
be considered as per the procedure laid down, the Tribunal may direct accordingly or it
may confirm the scheme by passing such order as it deems fit.

ROC having jurisdiction over Transferee Company has to be communicated:

A copy of the order, confirming the scheme shall be communicated to the ROC having
jurisdiction over the transferee company.

Transferee Company to file an application with ROC along with the scheme
registered:
The transferee company shall file an application with the ROC along with the scheme
registered, indicating the revised authorised capital and pay the prescribed fees due on
revised capital.
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CROSS BORDER MERGERS (Section - 234 of the Companies Act, 2013)

[firangi se shadi]

Merger or amalgamation of a Company with a foreign company is subject to the

provisions of any other law for the time being in force, a foreign company may, with
the prior approval of the RBI, merge into a company registered under this Act or vice
versa and the terms and conditions of the scheme of merger may provide, among other
things, for the payment of consideration to the shareholders of the merging company in
cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as
the case may be, as per the scheme to be drawn up for the purpose.

Foreign Company means any company or body corporate incorporated outside India
whether having a place of business in India or not.

MERGER OR AMALGAMATION OF COMPANIES IN PUBLIC INTEREST

(Section – 237) { SAMAJ KI BHLAI KE LIYE }

Power of Central Government to provide for amalgamation of Companies

When the Central Government is satisfied that it is essential in the public interest
that two or more companies should amalgamate, the Central Government may, by
order notified in the Official Gazette, provide for the amalgamation of those
companies into a single company.

Interest or rights of members, creditors, debenture holders not to be affected:

The rights of every member or creditor, including a debenture holder, of each of the
transferor companies before the amalgamation shall and after the amalgamation be
nearly same.
In case the interest or rights of such member or creditor in or against the
transferee company are less than his interest in or rights against the original
company, he shall be entitled to compensation to that extent.

Appeal to tribunal:

Any person aggrieved by any assessment of compensation made by the prescribed

authority may, within a period of 30 days from the date of publication of such
assessment in the Official Gazette, prefer an appeal to the Tribunal and thereupon the
assessment of the compensation shall be made by the Tribunal.

Conditions for order:

No order shall be made under this section unless—

a) A copy of the proposed order has been sent in draft to each of the companies
concerned;
b) The time for preferring an appeal has expired, or where any such appeal has been
preferred, the appeal has been finally disposed off;
c) The Central Government has considered, and made such modifications, if any, in
the draft order as it may deem fit in the light of suggestions and objections which
may be received by it from any such company within such period as the Central
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Government may fix in that behalf, not being less than 2 months from the date on
which the copy aforesaid is received by that company, or from any class of
shareholders therein, or from any creditors or any class of creditors thereof;
d) Copies of order to be laid before each house of Parliament; and
e) Registration of offer of schemes involving transfer of shares.

POWER TO ACQUIRE SHARES OF SHAREHOLDERS DISSENTING FROM SCHEME OR

CONTRACT APPROVED BY MAJORITY [Section 235(1)]

Meaning of dissenting shareholders

As per the explanation to Section 235, dissenting shareholder includes a shareholder

who has not assented to the scheme or contract and any shareholder who has failed or
refused to transfer his shares to the transferee company in accordance with the scheme
or contract.

Offer to dissenting shareholders

Where a scheme or contract involving the transfer of shares has within four months after
making of an offer have been approved by the holders of not less than nine-tenths in
value of the shares whose transfer is involved, the transferee company may, at any time
within two months after the expiry of the said four months, give notice to any dissenting
shareholder that it desires to acquire his shares.

Acquisition of shares of dissenting shareholders

The transferee company shall, unless on an application made by the dissenting

shareholder to the Tribunal, within one month from the date on which the notice was
given and the Tribunal thinks fit to order otherwise, be entitled to and bound to acquire
those dissenting shareholders.

MAJORITY RULE AND MINORITY RIGHTS

The Principle of Non-interference

This principle says that the court will not intervene at the instance of shareholders in
matters of internal administration, and will also not interfere with the management of a
company by its directors till the time they are acting within the powers of the articles of
the company.

Whereas the company law provides for adequate protection for the minority
shareholders when their rights are crushed by the majority of shareholders but the
protection of the minority is not generally available when the majority does anything
within their power.
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Case Law: Rule in Foss v. Harbottle

Facts:

There are two shareholders (Foss and Turton) filed a suit.

They alleged that the director of the Company had carried out various fraudulent and
illegal transactions whereby the property of the company was wasted and lost.

On the basis of such allegations, the minority shareholders brought an action against the
directors of the Company.
The majority shareholders resolved the action taken by the directors alleging that they
were not responsible for the loss to the Company.

Judgment:

In this case, the court dismissed the suit filed against the directors of the Company since
the acts of directors were confirmed by the majority of shareholders of the company.

In this case, the court further observed that if the alleged wrong can be confirmed or
ratified by a simple majority of the members in a General Meeting, then the court will not
interfere.
It was further stated on the basis of privity of contract the right party to sue is the
company and not the 2 shareholders. The Company represented by majority shareholder
shall file the suit to claim relief.

Justification and Advantages of the Rule in Foss v. Harbottle

The main advantages that flow from the Rule in Foss v. Harbottle are of a purely practical
nature and are as follows:

a) Recognition of the separate legal personality of company:

b) Need to preserve right of majority to decide:
c) Multiplicity of futile suits avoided:
d) Litigation at suit of a minority futile if majority does not wish it:

Exception to the Rule in Foss v. Harbottle

The cases in which the majority rule does not prevail are commonly known as exceptions
to the rule in Foss v. Harbottle and are available to the minority.

a) Ultra Vires Acts: Where the directors representing the majority of shareholders
perform an illegal or ultra vires act for the company, an individual shareholder has
right to bring an action. The majority of shareholders have no right to confirm an
illegal or ultra vires transaction of the company.
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b) Fraud on Minority: Where an act done by the majority amounts to a fraud on the
minority; an action can be brought by an individual shareholder.

c) Wrongdoers in Control: If the wrongdoers are in control of the company, the

minority shareholders' representative action for fraud on the minority will be
entertained by the court.

d) Resolution requiring Special Majority but is passed by a simple majority: A

shareholder can sue if an act requires a special majority but is passed by a simple
majority.

e) Personal Actions: Individual membership rights cannot be invaded by the majority

of shareholders. An individual shareholder can insist on the strict compliance
with the legal rules, statutory provisions.
Provisions in the memorandum and the articles are mandatory in nature and
cannot be waived by a bare majority of shareholders.

f) Breach of Duty: The minority shareholder may bring an action against the
company, where although there is no fraud, there is a breach of duty by directors
and majority shareholders to the detriment of the company.

PREVENTION OF OPPRESSION AND MISMANAGEMENT (Sections 241 to 246)

The words "oppression" and "mismanagement" are not defined in the Companies Act,
2013 & the erstwhile Companies Act, 1956.

Meaning of Oppression

Oppression means unjust or cruel exercise of the authority or power especially by

the imposition of burdens or the conditions.
An attempt to force new and more risky objects upon an unwilling minority may in
circumstances amount to oppression.
In other words, "oppression" means any act done by "the majority who exercised
their authority wrongfully, in a manner burdensome, harsh and wrongful".

APPLICATION TO TRIBUNAL FOR RELIEF IN CASE OF OPPRESSION &

MISMANAGEMENT (SECTION 241)

• By Members
Any member of a company, who has right to apply under section 244, may apply to
the Tribunal for complaints that—

1. The affairs of the company have been or are being conducted -

➢ in a manner prejudicial to public interest, or
➢ in a manner prejudicial to member or members, or
in a manner prejudicial to the interests of the company; or
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2. The material change, has taken place in the management or control of the
company, whether by

an alteration in the Board of Directors, or manager, or in the ownership of

the company's shares, or if it has no share capital, in its membership, or
In any other manner whatsoever (But not change in creditors or debenture
holders)

• By Central Government

The Central Government, if it is of the opinion that the affairs of the company are
being conducted in a manner prejudicial to public interest, it may itself apply to the
Tribunal for an order.

RIGHT TO APPLY UNDER SECTION 241 (SECTION 244)

following members of a company shall have the right to apply under

section 241, namely:—

a) In the case of a company having a share capital –

(i) not less than one hundred members of the company; or

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

b) In the case of a company not having a share capital –

(i) not less than one-fifth of the total number of its members shall have the right
to apply under section 241.

Special Note: Tribunal may, waive the requirement of minimum members, if it

deems fit.

POWER OF TRIBUNAL TO ISSUE ORDERS [SECTION 242(1)]

The Tribunal has power to issue order on receiving application if it has following
opinion:
a) Prejudicial and oppressive to the members or public: The affairs of the company
have been or are being conducted in a manner prejudicial or oppressive to any
member or members or prejudicial to public interest or in a manner prejudicial to
the interests of the company; and
b) Winding-up of the Company: If winding-up would be justified at the circumstance
but would unfairly prejudice such member or members. Then the Tribunal would
avoid the extreme step of winding up and instead pass an order under this
section.
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Filing of copy of Order of Tribunal [Section 242(3)]

a certified copy of the order of the Tribunal shall be filed by the company with the
Registrar within 30 days of the order of the Tribunal.

Details in Order passed by Tribunal [Section 242(2)]

The Tribunal can pass order related to following matters:

a) Affairs of the Company: It can pass an order to regulate the affairs of the
Company.

b) Purchase of shares by other member(s): It can pass an order for purchase of

shares or interests of any members of the company by other members of the
company.

c) Purchase of shares by the Company: It can pass an order for purchase of shares
by the Company, thereby resulting into reduction of share capital.

d) Modification of Agreement with MD, Director, and Manager: The Tribunal may set
aside, terminate or modify, any agreement between the company and the
managing director, any other director or manager.

Special Note:
No Claim against the Company by any person for damages or for compensation for loss
of office or in any other respect either due to modification of Agreement.
No MD or other director or manager whose agreement is so terminated or set aside shall,
for a period of 5 years from the date of the order terminating or setting aside the
agreement be appointed, or act, as the managing director or other director or manager of
the company.

e) Modification of Agreement with any other person: The Tribunal may set aside,
terminate or modify, any agreement between the company and any other person.

Special Note: No Claim against the Company by any person for damages or for
compensation for loss of office or in any other respect either due to modification of
Agreement.

f) Setting aside or cancelling fraudulent preferences: The Tribunal can set aside, any
fraudulent preference within 3 months before the date of the application.

g) Removal of MD/Manager/ Director: The Tribunal can pass an order for removal of
the managing director, manager or any of the directors of the company.

h) Appointment of Director: The Tribunal can pass an order for appointment of new
directors if required.
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i) Recovery of Undue Gains: The Tribunal may pass an order to recover any undue
gains made by any managing director, manager or director during the period of
his appointment.

j) Manner of appointment of MD/Manager: The Tribunal can pass an order stating

the manner in which the managing director or manager of the company may be
appointed after removal of the existing managing director or manager of the
company.

k) Imposing Cost: The Tribunal can pass order of imposition of costs.

l) Other Matters: Any other matter for which, in the opinion of the Tribunal, it is just
and equitable that provision should be made.

Interim Order [Section 242(4)]

The Tribunal may make any interim order which it thinks fit for regulating the conduct of
the company's affairs.

Alteration in Memorandum or Articles

Where an order of the Tribunal makes any alteration in the MOA or AOA of a company,
then, the company shall not have power to make any alteration without the order of
Tribunal.

Note: If a company contravenes the orders of Tribunal or the altered MOA or AOA, the
company shall be punishable with fine which shall not be less than Rs.1 lakh but which
may extend to Rs.25 lakh and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to 6 months or with fine
which shall not be less than Rs.25,000/- but which may extend to Rs.1 lakh, or with both.

CONSEQUENCE OF TERMINATION OR MODIFICATION OF AGREEMENTS (SECTION 243)

 Where an order made under Section 242 terminates, sets aside or modifies an
agreement –
a) such order shall not give rise to any claims whatever against the company by
any person for damages or for compensation for loss of office or in any other
respect either in pursuance of the agreement or otherwise;

b) no managing director or other director or manager whose agreement is so

terminated or set aside shall, for a period of five years from the date of the
order terminating or setting aside the agreement, without the leave of the
Tribunal, be appointed, or act, as the managing director or other director or
manager of the company.
Any person who knowingly acts as a managing director or other director or manager of a
company who is knowingly a party to such contravention, shall be punishable with fine
which may extend to five lakh rupees.
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CLASS ACTION SUITS (SECTION 245)

A class action suit is a lawsuit where a group of people representing a common interest
may approach the Tribunal to sue or be sued.
It is a procedural instrument that enables one or more plaintiffs to file and prosecute
litigation on behalf of a larger group or class having common rights and grievances.

Application of Class Action

In the case of a company having a share capital (Minimum Members)

Lowest of
- 100 members
- Prescribed number of the total number of members
- Members holding prescribed percentage of the Issued Share Capital

In the case of a company NOT having a share capital (Minimum Members)

-1/5th of the total number of members

By Depositor (Minimum Depositor)

Lowest of
- 100 members
- Prescribed number of the total number of depositors
- Depositors holding prescribed percentage of the Total Deposit

Relief under a class action:

The applicant may ask for the following relief from the Tribunal:

a) to restrain the company from committing an act which is ultra vires to AOA or
MOA of the company;
b) to restrain the company from committing breach of any provision of the
company's MOA or AOA;
c) to declare a resolution altering the MOA or AOA of the company as void if the
resolution was passed by suppression of material facts or obtained by
misstatement to the members or depositors;
d) to restrain the company and its directors from acting on such resolution;
e) to restrain the company from doing an act which is contrary to the provisions of
this Act or any other law for the time being in force;
f) to restrain the company from taking action contrary to any resolution passed;

g) to claim damages or compensation or demand any other suitable action from or

against:
- the company or its directors for any fraudulent, unlawful or wrongful act or
omission or conduct or any likely act or omission or conduct on its or their part;
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- the auditor including audit firm of the company for any improper or misleading
statement of particulars made in his audit report or for any fraudulent, unlawful or
wrongful act or conduct; or

- any expert or advisor or consultant or any other person for any incorrect or
misleading statement made to the company or for any fraudulent, unlawful or
wrongful act or conduct or any likely act or conduct on his part;

As per Rule 84 of the NCLT Rules, in case of a company having a share capital, the
requisite prescribed number of member or members to file an application under
shall be: -

a) at least 5% of the total number of members or 100 members of the company,

whichever is less;

b) member or members holding not less than five per cent. of the issued share
capital of the company, in case of an unlisted company;

member or members holding not less than two per cent. of the issued share
capital of the company, in case of a listed company.

c) at least 5% of the total number of depositors or 100 depositors of the company,

whichever is less; or;

depositor or depositors to whom the company owes five per cent. of total
deposits of the company.

In case of admission of application

Section 245(5) provides that if an application filed for class action is admitted, then the
Tribunal shall have regard to the following, namely:—

a) public notice shall be served on admission of the application to all the members
or depositors of the class
b) all similar applications prevalent in any jurisdiction should be consolidated into a
single application and the class members or depositors should be allowed to
choose the lead applicant.
c) two class action applications for the same cause of action shall not be allowed;
d) the cost or expenses connected with the application for class action shall be
defrayed by the company or any other person responsible for any oppressive act.
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Effects of Order

Any order passed by the Tribunal shall be binding on the company and all its members,
depositors and auditor including audit firm or expert or consultant or advisor or any
other person associated with the company.

Punishment for non-compliance:

Any company which fails to comply with an order passed by the Tribunal under this
section shall be punishable with fine which shall not be less than five lakh rupees but
which may extend to twenty-five lakh rupees and every officer of the company who is in
default shall be punishable with imprisonment for a term which may extend to three
years and with fine which shall not be less than twenty-five thousand rupees but which
may extend to one lakh rupees.
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CHAPTER – 11

DORMANT COMPANY

INTRODUCTION

A dormant company means a company which is

inactive or inoperative i.e., not carrying out any
business activity and has applied to the Registrar of
Companies (“ROC”) to change its status in the
Register of Companies maintained by the said
Registrar of Companies from “Active Company “to
“Dormant Company”

“Dormant companies are also known as inactive companies”

DEFINITION

Section 455 of the Companies Act, 2013

Where a company is formed and registered under this Act for a future project or to hold
an asset or intellectual property without having any significant accounting transaction,
such a company or an inactive company may make an application to the ROC in such a
manner as may be prescribed for obtaining the status of a dormant company.

‘inactive company’ means a company which:

a) has not been carrying on any business or operation; or

b) has not made any significant accounting transaction during last two financial
years; or
c) has not filed financial statements and annual returns during the last two financial
years.
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‘Significant Accounting Transaction’ means any transaction made by the company

except transactions mentioned below:

a) payment of fees by a company to the Registrar;

b) payments made by the company 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

IMPORTANT POINTS

 The Registrar on consideration of the application shall allow the status of a

dormant company to the applicant and issue a certificate allowing the status of a
Dormant Company to the applicant and the Registrar shall also maintain a register
of dormant companies.

 A company may retain its status of Dormant Company for five (5) years once it
has obtained the dormant company status, after it Registrar may strike off the
name of the company from the register of companies, if such company failed to
comply with the requirements of section 455.

ADVANTAGES OF DORMANT COMPANIES

a) It helps in preserving the domain name and hence a company may be founded to
prepare for a future undertaking.

b) A Dormant Company offers excellent advantage to the promoters who want to

hold an asset or intellectual property under the corporate shield for its usage at a
later stage.

c) It assists the company in projecting a more positive image to potential consumers

and/or lenders.

d) Once a company is registered as a dormant company, the annual return for the
company can be filed using a simplified Form MSC-3.

e) the number of Board Meetings to be conducted by the Company is reduced. The

compliance burden of the company is also reduced.

f) Dormant Company is not liable to pay any taxes until it is reactive.

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g) Dormant Company is not required to include the statement of cash flow in its
financial statement.

h) The provision of rotation of auditors is not applicable in case of a dormant

company.

i) It is easier for dormant companies to reacquire its active status and it also
reduces the cost of incorporation of a new company

COMPLIANCES FOR DORMANT COMPANY

a) Company needs to have minimum number director as required by Companies Act,

2013 i.e. at least 3 Directors in case of a Public Company, 2 for Private Company
and 1 for OPC.

b) The company shall continue to file the returns of allotment and change in
directors, whenever the company allots any security to any person or there is any
change in the directors of the company.

c) The Dormant Company is required to hold at least one meeting of the Board of
Directors in every half year. The gap between two meetings shall not be more than
90 days.

d) The maximum tenure for which a company can remain dormant is 5 consecutive
financial years. If a company remains dormant for more than 5 years, the Registrar
commences the process of striking off the name of the company from the
Records.

e) A dormant company is required to file a “Return of Dormant Company” in Form

MSC-3 annually, inter- alia, indicating financial position duly audited by a
Chartered Accountant in Practice within a period of thirty days from the end of
each financial year.

f) No need not enclose cash flow statements in its annual accounts.

g) The provisions of the Act in relation to the rotation of auditors are not applicable
to dormant companies.
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PROCEDURE TO OBTAIN THE STATUS OF A DORMANT COMPANY

Suo-Moto application :

A company which meets the above criteria can apply suo-moto to ROC for the status
of a “Dormant company” in Form MSC-1.

Dormant by ROC :

In case of a company which has not filed financial statements or annual returns for two
financial years consecutively, the ROC shall issue a notice to the company and enter the
name of such company in the register maintained for dormant companies.

Hence, it is not always the company which applies for the status of the dormant
company; even the ROC is empowered suo moto to change the status of a company into
a dormant company.

The Registrar shall initiate the process of striking off the name of the company, if the
company remains as a dormant company for a period of five consecutive years.

PRE-REQUISITES FOR OBTAINING THE STATUS OF DORMANT

COMPANY

As per rule 3 of the Companies (Miscellaneous) Rules, 2014, the Registrar shall not grant
the status of a dormant company if:

a) Any inspection, inquiry or investigation has been ordered or taken up or carried

out against the company.

b) Any prosecution has been initiated and pending against the company under any
law.

c) There are public deposits which are outstanding or the company is in default in
payment thereof or interest thereon.

d) In case the company has any outstanding unsecured loan, the company must
apply for the status of a dormant company after obtaining the concurrence or
approval of the lender which is required to be enclosed with Form MSC-1.

e) There is no dispute in the management or ownership of the company. A certificate

in this regard is required to be taken from the management enclosed with Form
MSC-1 which is required to be filed with ROC.

f) There are outstanding statutory taxes, dues, duties, etc., payable to the Central
Government or any State Government or local authorities etc.
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g) There is default in payment of its workmen’s dues.

h) The Company is a listed company within or outside India.

Approvals/documents required for obtaining the status of Dormant Company:

 Board Resolution.

 Special Resolution or consent of 3/4th shareholders of the company.

 Copy of Memorandum and Articles of Association

 Consent of lender, if any loan is subsisting.

 Statement of affairs duly certified by a Chartered Accountant or Auditor.

 Latest financial statement and annual return of the company.

 No objection certificate from regulatory authority, if company, is regulated by any

such authority.

 Certificate that company has not defaulted in the payment of workmen’s dues.

 Certificate that company does not have any outstanding taxes, dues, duties, etc
payable to Central or State Government or local authority.

 Certificate regarding no inspection, inquiry or investigation has been ordered or

taken up or carried out against the company.

 Certificate regarding no prosecution has been initiated and pending against the
company under any law.

Step by step procedure for obtaining the status of Dormant Company:

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Holding a board Meeting:

Prepare notice of board meeting send to all directors at least 7 days before the date of
meeting.
Hold board meeting to fix day, date, time and venue for general meeting of company’s
members to pass a special resolution for making application to the ROC to obtain the
status of dormant company.
The company shall obtain Statement of affairs from the Auditor of the company. The
statement of affairs shall give the financial position of the company at the time of passing
said resolution in the shareholders meeting.

Hold general Meeting:

The Company shall hold the General Meeting at the appointed time, place and date and
pass a special resolution for obtaining the status of a dormant company and authorize
the director(s) to make application to ROC after issuing a notice to all the shareholders of
the company for this purpose and obtaining consent of at least 3/4 th shareholders (in
value).

Filing of Form MgT-14:

After passing the special resolution, the company shall file Form MGT-14 with ROC for
filing special resolution and notice along with explanatory statement within 30 days from
the date of passing of the said special resolution.

Filing of Form MSC-1:

After filing of Form MGT-14, the company shall file an application in Form MSC-1 with the
ROC within 30 days of passing special resolution for change of status of the company as
dormant company.

Attachments to be filed with MSC-1

a) Copy of board resolution authorizing making application.

b) Copy of special resolution.
c) Statement of affairs duly certified by the Chartered Accountant or auditor of
company.
d) Concurrence of lender if the company is having any outstanding loans, whether
secured or unsecured.
e) Latest financial statement and annual return of the company.
f) Copy of approval or no objection certificate from the regulatory authority in case
company is regulated by such authority.
g) Certificate that there is no dispute in the management or ownership of the
company.

Issue of Dormant Company Status Certificate:

On being satisfied with the merits of the application, the ROC shall issue a certificate in
Form MSC -2 for confirming the application and allowing the status of a dormant
company to the applicant.
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PROCEDURE TO OBTAIN THE STATUS OF ACTIVE COMPANY FROM DORMANT

COMPANY

An application shall be made in Form MSC-4 for obtaining the status of an active
company from dormant company before the end of five consecutive years from the date
of becoming a dormant company.

Moreover, if any company has contravened any of the conditions mentioned in the
grounds of application for obtaining the status of dormant company, the directors
should, within seven days of such contravention, file an application for obtaining the
status of an active company.

The dormant company shall follow the below procedure for obtaining status of an active
company on its own:

Hold board meeting:

The Company shall prepare notice of board meeting along with draft resolutions
to be passed in the board meeting. Send the notice of board meeting to all the directors
at least 7 days before the date of board meeting.

The following resolutions needs to be passed at the board meeting:

– To make an application with the Registrar of Companies for obtaining status of
dormant company as an active company.
– To authorize a director to make an application and sign the documents or forms and to
complete all the formalities relating to the application.

Prepare return in Form MSC-3:

The return in form MSC-3 shall be prepared in respect of the financial year in which the
application for obtaining the status of an active company is being filed.

File e-Form MSC-4:

An application for obtaining the status of an active company is required to be made

in Form MSC-4 which should be accompanied by a return in Form MSC-3 in respect of
the financial year in which the application for obtaining the status of an active company
is being filed.

Certificate for active company:

The ROC after considering the application filed for obtaining the status of the active
company from dormant company shall issue a certificate in Form MSC-5 allowing the
status of an active company to the applicant.
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When ROC shall change the status of the dormant company to active company?

a) Where a dormant company does or omits to do any act mentioned in the grounds
in the application made for obtaining status of a dormant company and such act
or omission affects its status of dormant company, the directors of such a
company are required to file an application within seven days from such event for
obtaining the status of an active company.

b) Where the ROC has reasonable cause to believe that any company registered as
‘dormant company’ under his jurisdiction has been functioning in any manner,
directly or indirectly affecting the status of dormant company, the ROC can initiate
the proceedings for enquiry under section 206 of the Companies Act, 2013 and if,
after giving a reasonable opportunity of being heard to the company in this
regard, it is found that the company has actually been active, the ROC can remove
the name of such company from Register of dormant companies and treat it as an
active company.
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CHAPTER – 12

Inspection, Inquiry and Investigation

Meaning of Inquiry, Inspection and Investigation

Inquiry:
 The word ‘inquiry’ is derived from the French
word “enquerre” which means “to ask”.
 It is a process questioning and interrogation by
way of researching and probing in order to find a
solution to the problem. This is the process to bring
clarity or clear any doubt on any subject matter.

Inspection:
 The word ‘inspection’ is derived from the Latin word ”inspectus” means to look
into, inspect.
 “A careful examination of something such as goods (to determine their fitness for
purchase) or items produced in response to a discovery request to determine their
relevance to a lawsuit.”

Investigation:

 The word ‘investigation’ is derived from the latin word “Investigatus” which is the
past participate of ‘investigare” meaning “to track or investigation.’
 the word ‘investigation’ is defined as to inquire into (a matter) systematically; to
make (a suspect) the subject of a criminal inquiry.
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PURPOSE OF CONDUCTING INSPECTION- SECTION 206

Some of the objectives of conducting such inspections may be thus:

a) To detect concealment of income by falsification of accounts.

b) To secure knowledge about the mismanagement of the business of a company

and transactions entered into with an intent to defraud creditors, shareholders or
otherwise for fraudulent or unlawful purposes.

c) To ascertain whether the statutory auditors have discharged their functions and
duties in certifying the true and fair view of a company’s accounts and their
proper maintenance.

d) To enable the Government to ascertain the quantum of profits accrued but not
adequately accounted for.

e) To detect misapplication of funds leading a company to a state of perpetual

financial crisis.

f) To keep a watch on performance of a company.

g) To detect misuse of fiduciary responsibilities by the company’s management for

personal aggrandizement.

POWER TO CALL FOR INFORMATION, INSPECT BOOK AND CONDUCT INQUIRIES –

SECTION 206(1) AND (2)

Issuance of notice by registrar- Section 206(1)

The Registrar by a written notice issued under sub-section (1) of section 206 may require
a company to:
(a) furnish in writing information or explanation; or
(b) to produce documents, within a given reasonable specified time.
The Registrar may ask such information after framing his opinion:
(a) on scrutiny of any document filed by the company; or
(b) on any information received by him.

Duty of the company to furnish information- Section 206(2)

On receipt of the notice issued by the Registrar it shall be a duty of the company and of
its officers:
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(a) to furnish the information or explanation to the best of their knowledge and power;
and
(b) to produce the documents within the specified or extended time.

NOTE - the Registrar through a notice in writing may require the officers who were
employees during that past period to furnish such information or explanation to the best
of their knowledge.

INSPECTION- SECTION 206(3), 206(5) AND 206(6)

Inspection ordered by the Registrar by Another Notice – Section 206(3)

Inspection may be ordered by the Registrar, where –
a) If no information or explanation is furnished to the Registrar within the time

b) if the Registrar on an examination of the documents furnished is of the opinion

that the information or explanation furnished is inadequate; or

c) if the Registrar is satisfied on a scrutiny of the documents furnished that an

unsatisfactory state of affairs exists in the company and does not disclose a full
and fair statement of the information required.
Then the Registrar may by another written notice, call on the company to produce for his
inspection such further books of accounts, books, papers and explanations as he may
require at such place and at such time as specified in the notice.

Inspection ordered by the Regional Director- Section 206(5)

The Central Government may, on satisfaction that circumstance so warrant, direct
inspection of books and papers of a company by an inspector appointed for the purpose.
This power given under sub – section (5) to the Central Government has been delegated
to jurisdictional Regional Directors.

Inspection ordered by the Central government- Section 206(6)

The Central Government may by general or special order authorize any statutory
authority to carry out the inspection of books of account of a company or class of
companies. While issuing such general or special order, the Central Government will give
consider the circumstances.
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INQUIRY- SECTION 206(4)

If the Registrar is satisfied that the business of the company is being carried on –

 for a fraudulent purpose;

 unlawful purpose; or
 not in compliance with the provision of this Act; or
 investors grievances not being addressed.
Then, the Registrar may initiate inquiry under sub-section (4) of section 206,
The order shall be made by the Registrar to carry out such inquiry as he deemed fit after
giving the company a reasonable opportunity of being heard.
Provided further that where business of a company has been or is being carried on for a
fraudulent or unlawful purpose, every officer of the company who is in default shall be
punishable for fraud under Section 447.

Contravention of Section 206

If a company fails to furnish any information or explanation or produce any document
required under this section, the company and every officer of the company, who is in
default shall be punishable with a fine which may extend to one lakh rupees and in the
case of a continuing failure, with an additional fine which may extend to five hundred
rupees for every day after the first during which the failure continues.

CONDUCT OF INSPECTION AND INQUIRY {SECTION 207}

Where a Registrar or inspector calls for the books of account or other books and papers,
it shall be duty of every director, officer or other employee of the company to produce all
these documents to the Registrar or inspector.

Make Copies or Place Mark- Section 207(2)

The Registrar or inspector, making an inspection or inquiry under section 206 may,
during the course of such inspection or inquiry, as the case may be —
(a) make or cause to be made copies of books of account or other books and papers; or
(b) place or cause to be placed any mark of identification on such books in token of the
inspection having made.

Same Powers as CPC- Section 207(3)

The Registrar or inspection making an inspection or inquiry shall have all powers of a
civil court under the Code of Civil Procedure, 1908 while trying a suit in respect of the
following matters, namely –
(a) the discovery and production of books of account and other documents;
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b) summoning and enforcing the attendance of persons and examining them on oath;
(c) inspection of any books, registers and other documents of the company at any place.

Contravention of Section 207-

If any director or officer of the company disobeys the direction issued by the Registrar or
the inspector under this section, the director or the officer shall be punishable with
imprisonment which may extend to one year and with fine which shall not be less than
twenty-five thousand rupees but which may extend to one lakh rupees.

INSPECTION REPORT- SECTION 208

The Registrar or inspector shall, after the inspection of the books of account or an
inquiry submit a report in writing to the Central Government and such report may, if
necessary, include a recommendation that further investigation into the affairs of the
company is necessary giving his reasons in support.
On receipt of report, the Regional Director –
a) shall examine the report and obtain the legal advice.
b) shall direct initiation of prosecution if he agrees with the recommendation of the
Registrar or inspector to initiate prosecution against the company, or any other person
connected with the affairs of the company; and
c) shall inform the Central Government about the action taken on the report submitted by
the Registrar or inspector.

SEARCH AND SEIZURE- SECTION 209

Seizing only after obtaining permission of Special Court- Section 209(1)
Where, upon information in his possession or otherwise, the Registrar or inspector has
reasonable ground to believe that the books and papers of a company, or relating to the
key managerial personnel or any director or auditor or company secretary in practice if
the company has not appointed a company secretary, are likely to be destroyed,
mutilated, altered, falsified or secreted, he may, after obtaining an order from the Special
Court for the seizure of such books and papers –
a) enter, with such assistance as may be required, and search, the place or places
where such books or papers are kept; and
b) seize such books and papers as he considers necessary after allowing the
company to take copies of, or extracts from, such books or papers at its cost.
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Returning of books and Papers in 180 days- Section 209(2)

The Register or inspector shall return the books and papers within one hundred and
eighty days after such seizure to the company from whose custody or power such books
or papers were seized.
These books and papers may be called for by the Registrar or inspector for a further
period of one hundred and eighty days by an order in writing if they are needed again.

INVESTIGATION (SECTION 210 - 229)

KINDS OF INVESTIGATION
The Companies Act, 2013 provides for carrying out the following kinds of investigation:
a) Investigation of the affairs of the company if it is necessary to investigate into the
affairs of the company in public interest (Section 210);
b) Investigation of the affairs of related companies (Section 219);
c) Investigation about the ownership of a Company (Section 216);
d) Investigation of foreign companies (Section 228);
e) Investigation by Serious Fraud Investigation Office directed by Central
government under (Section 212);
f) Investigation on the order of Tribunal (Section 213)

INVESTIGATION INTO AFFAIRS OF COMPANY IN PUBLIC INTEREST- SECTION 210

Report or Special Resolution or Public Interest- Section 210(1)

Where the Central Government is of the opinion, that it is necessary to investigate into
the affairs of a company,—
a) on the receipt of a report of the Registrar or inspector under section 208;
b) on intimation of a special resolution passed by a company that the affairs of the
company ought to be investigated;
c) in public interest
it may order an investigation into the affairs of the company.
On Court’s order- Section 210(2)
Where an order is passed by a court or the Tribunal in any proceedings before it that the
affairs of a company ought to be investigated, the Central Government shall order an
investigation into the affairs of that company.
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Appointment of Inspectors- Section 210(3)

For the purpose of investigation, the Central Government may appoint one or more
inspectors to investigate the affairs of the company.
the Central Government may before appoint an inspector require the applicant to give a
security not exceeding twenty-five thousand rupees for payment of the costs and
expenses of investigation as per the criteria given below –

The security shall be refunded to the applicant if the investigation results in prosecution.

INVESTIGATION INTO THE COMPANY’S AFFAIRS ON APPLICATION MADE BY

MEMBERS OR OTHER PERSONS (SECTION 213)

Application to the tribunal

The Tribunal may on an application made by –
a) not less one hundred members or members holding not less than one – tenth of
the total voting power, in case of a company having a share capital; or
b) not less than one – fifth of the persons on the company’s register of members, in
case company having no share capital
and supported by evidence showing good reason for seeking and order for conducting
an investigation into affairs of the company.
Grounds of application to tribunal
The Tribunal if satisfied that the circumstance suggests that –
a) the business of the company is being conducted with intent to defraud its
creditors, members or any other person or otherwise for a fraudulent or unlawful
purpose.
b) person concerned in the formation of the company or the management of its
affairs have been guilty of fraud, misfeasance or other misconduct towards the
company or towards its members; or
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c) the members of the company have not been given all reasonable information
including information relating to the calculation of commission payable to a
managing or other director or the manager of the company.

If after investigation it is proved that –

a) the business of the company is being conducted with intent to defraud its
creditors, members or any other persons or otherwise for a fraudulent or unlawful
purpose, or that the company was formed for any fraudulent or unlawful purpose;
or
b) any person concerned in the formation of the company or the management of its
affairs have in connection therewith been guilty of fraud, then,
every officer of the company who is in default and the person or persons concerned in
the formation of the company or the management of its affairs shall be punishable for
fraud under Section 447.

CASE LAWS
In Re Bhadreshwar Vidyut (P.) Ltd vs. Turbo Aviation (P.) Ltd.
It was held that, without circumstances suggesting that business of company was being
conducted in a fraudulent manner with intent to defraud creditors, instigation into affairs
of the said company only on basis of irregularities in financial statements, could not have
been ordered.

INVESTIGATION OF OWNERSHIP OF COMPANY (SECTION 216)

Appointment for determining true persons- Section 216(1)

Where it appears to the Central Government that there is a reason so to do, it may
appoint one or more inspectors to investigate and report on matters relating to the
company, and its membership for the purpose of determining the true persons –
a) who are or have been financially interested in the success or failure, whether real
or apparent, of the company; or
b) who are or have been able to control or to materially influence the policy of the
company; or
c) who have or had beneficial interest in shares of a company or who are or have
been beneficial owners or significant beneficial owner of a company.
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Scope by Central government- Section 216(3)

The Central Government may define the scope of the investigation and may limit the
investigation to particular shares or debentures.

Extended Power of Inspector- Section 216(4)

The powers of inspector shall extend to the investigation of any circumstances
suggesting the existence of any arrangement or understanding which, though not legally
binding, is or was observed or is likely to be observed in practice and which is relevant
for the purposes of his investigation.

PROCEDURE, POWERS, ETC., OF INSPECTORS-SECTION 217

a) It shall be the duty of all officers and other employees and agents including the
former officers, employees and agents of a company which is under investigation
to preserve and to produce to an inspector or any person authorized by him in
this behalf all books and papers.

b) The inspector may require any body corporate to furnish such information to, or
produce such books and papers before him or any person authorized by him in
this behalf as he may consider necessary, if the furnishing of such information or
the production of such books and papers is relevant or necessary for the
purposes of his investigation.

c) The inspector shall not keep in his custody any books and papers produced for
more than one hundred and eighty days and return the same to the company,
body corporate, firm or individual by whom or on whose behalf the books and
papers were produced.

d) An inspector may examine on oath –

(a) any of the persons and
(b) with the prior approval of the Central Government, any other person,
in relation to the affairs of the company, or other body corporate or person, as the
case may be, and for that purpose may require any of those persons to appear
before him personally.

e) The notes of any examination shall be taken down in writing and shall be read
over to, or by, and signed by, the person examined, and may thereafter be used in
evidence against him.

f) The officers of the Central Government, State Government, police or statutory

authority shall provide assistance to the inspector for the purpose of inspection,
inquiry or investigation, which the inspector may, with the prior approval of the
Central Government, require.
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PROTECTION OF EMPLOYEES DURING INVESTIGATION (SECTION 218)

No Action against employees without Tribunal’s approval

This protection is available to employees during the investigation of the affairs or other
matters of or relating to a company, other body corporate or person or of the
membership, ownership of shares or debentures.
Following action are not permitted without approval of the Tribunal -
(a) To discharge or suspend any employee;
(b) To punish any employee, whether by dismissal, removal, reduction in rank or
otherwise; or
(c) To change the terms of employment to his disadvantage.

Action on Employees –
If the applicant does not receive within thirty days of making of application the approval
of the Tribunal, only then applicant concerned may proceed to take against the employee
the action proposed.
Appeal against Tribunal to Appellate Tribunal-
If the applicant is dissatisfied with the objection raised by the tribunal it may within a
period of thirty days of the receipt of the notice of the objection, prefer an appeal to the
Appellate Tribunal.

POWER OF INSPECTOR TO CONDUCT INVESTIGATION INTO AFFAIRS OF

RELATED COMPANIES- SECTION 219
An inspector shall subject to prior approval of the Central Government, investigate the
affairs of –
a) Any other body corporate which is or has at any relevant time been the company’s
subsidiary company or holding company or a subsidiary of its holding company

b) Any other body corporate which is or has any relevant time been managed by any
person as managing director or as manager of the company;

c) Any other body corporate whose Board of Directors comprises nominees of the
company or is accustomed to act in accordance with the directions or instructions
of the company or any of its directors; or

d) Any person who is or has at any relevant time been the company’s managing
director or manager or employee.
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FREEZING OF ASSETS OF COMPANY ON INQUIRY AND INVESTIGATION (SECTION 221)

No transfer or Restrictive Transfer-

The Tribunal –

 on a reference made to it by the Central Government; or

 in connection with any inquiry or investigation into affairs of a company; or
 on any complaint made by members under Section 244; or
 a creditor having one lakh amount outstanding against the company; or
 any other person having a reasonable ground to believe;
it may by order direct that such transfer, removal or disposal shall not take place during
a specified period not exceeding three years or may take place subject to such
conditions and restrictions as it may deem fit.

VOLUNTARY WINDING UP OF COMPANY, ETC., NOT TO STOP INVESTIGATION

PROCEEDINGS- Section 226
As per section 226 of the Act, an investigation under Chapter XIV may be initiated
notwithstanding, and no such investigation shall be stopped or suspended by reason
only of, the fact that–
(a) an application has been made under section 241;
(b) the company has passed a special resolution for voluntary winding up; or
(c) any other proceeding for the winding up of the company is pending before the
Tribunal

LEGAL ADVISERS AND BANKERS NOT TO DISCLOSE CERTAIN INFORMATION-

SECTION 227
Nothing in Chapter XIV shall require the disclosure to the Tribunal or to the Central
Government or to the Registrar or to an inspector appointed by the Central Government–
a) by a legal adviser, of any privileged communication made to him in that capacity,
except as respects the name and address of his client; or

b) by the bankers of any company, body corporate, or other person, of any

information as to the affairs of any of their customers, other than such company,
body corporate, or person.
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PREPARATION BY A COMPANY SECRETARY TO FACE INVESTIGATION

Before an inspector commences investigation into the affairs of a company, it is
advisable for the Secretary to prepare a report touching upon various aspects of the
activities of his company particularly those transactions in respect of which fraud or
misfeasance or mismanagement is alleged.
The aspects which should be considered by the company secretary include:
a) Basic information about the company – Name of the company; date of
incorporation; location of the registered office, branches, factories and other
offices; status of the company.
b) Debentures, bank finance and deposits.
c) Whether the Annual filing of the Company is up-to-date.
d) Whether the event-based filing is completely done?
e) Foreign collaboration agreements.
f) Management—Brief history of past management set up; existing management set
up; composition of Board of Directors; whether the terms and conditions of the
appointment of managerial personnel are being adhered to.
g) Whether all the statutory registers including minute’s books are being maintained
up-to-date?
h) Whether the internal checks and internal control system is being properly
followed?
i) Compliance by the company and its officers with the provisions of the Companies
Act, 1956/2013.
j) Compliance with the provisions of other Acts applicable to the company.

ESTABLISHMENT OF SERIOUS FRAUD

INVESTIGATION OFFICE (SECTION 211)
It is a multi-disciplinary organization under the
Ministry of Corporate Affairs, consisting of experts
in the field of accountancy, forensic auditing,
banking, law, information technology,
investigation, company law, capital market and
taxation etc., for detecting and prosecuting or
recommending for prosecution white collar
crimes/frauds.
The office shall be headed by a Director and consist of experts of following fields:
(a) Banking,
(b) Corporate Affairs,
(c) Taxation,
(d) Forensic auditing,
(e) Capital Market,
(f) Information Technology,
(g) Law, or
(h) Other fields as may be prescribed.
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Process of Investigation by Serious Fraud Investigation Office (SFIO)

central govt is of the opinion, that it is the necessary to investigate into the
affairs of a company by the SFIO.

on intimation of a
on receipt of special resolution on request from
report of the passed by a in the public any department of
registrar or company that its interest the central govt or
inspector U/S 208 affairs are requred state govt.
to be investigated.

 On receipt of such order from CG, SFIO may designate inspectors as he

may consider necessary for the purpose of such investigation.

 If investigation is pending with other agencies, such concerned agency

shall transfer the relevant documents and records in respect of such
offences to SFIO.

 SFIO shall conduct the investigation in the manner and follow the
procedure provided and submit its report to the CG within period.

 Investigating officer who shall have the power of the inspector U/S217 of
the companies act. 2013

 The company and its officers and past present employees of the company
shall be responsible to provide all information to the officer as he may
required for investigation.

 Officers covered under section 447 of the companies act, 2013 shall be
cognizable and no person accused of any offence under those sections
shall be released on bail.

 the concerned officers of SFIO may arrest the guilty person if he has
reason to believe and inform such person forward a copy of the order
along with the material in his possession to the SFIO.
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 every person arrested shall within 24 hours be taken to special court or

judicial magistrate or metropolitan magistrate having jurisdiction

 submission of interim report and investigation report to the CG.

 The CG, may after examination of the report direct the SFIO to initiate
prosecution against the company and its officers or any person directly or
indirectly connected with the affairs of the company.
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PART – B
[ 40 MARKS ]

COMPANY ADMINISTRATION
AND MEETINGS
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CHAPTER – 13

GENERAL MEETINGS

INTRODUCTION
A meeting may be generally defined as a gathering or
assembly or getting together of a number of persons
for transacting any lawful business. There must be at
least two persons to constitute a meeting. Therefore,
one shareholder usually cannot constitute a company
meeting even if he holds proxies for other shareholders.
The decision-making powers of a company are vested in
the members and the directors. They exercise their
respective powers through resolutions passed by them. General meetings of the
members provide a platform to express their will in regard to the management of the
affairs of the company.
Secretarial Standard on General Meetings of companies:
Secretarial Standard on General Meeting (SS-2) is issued by the Institute of Company
Secretaries of India (ICSI) and approved by Central Government. Compliance of
Secretarial Standards is a must as per the provision of Section 118(10) of Companies
Act, 2013.
This Standard is applicable to all types of General Meetings of all companies
incorporated under the Act except One Person Company (OPC) and class or classes of
companies which are exempted by the Central Government through notification.
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Corporate Meetings and Collective Decision making

Members’ Meetings

ANNUAL GENERAL MEETING (SECTION 96)

Section 96 provides that every company, other than a one-person company is
required to hold an annual general meeting every year.
Broadly there are two types of business that are transacted at an Annual General Meeting
– Ordinary Business and Special Business.

Consideration of financial statements & consolidated financial statements, reports of the

Board of Directors and the auditors, declaration of dividend, appointment of Directors in
place of those retiring and approval of appointment of the Auditors and fixing their
remuneration are Ordinary Business.
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Holding of Annual General Meeting

 Annual general meeting should be held once in each calendar year.

 First annual general meeting of the company should be held within 9 months from
the closing of the first financial year.
Hence it shall not be necessary for the company to hold any annual general
meeting in the year of its incorporation.

 Subsequent annual general meeting of the company should be held within 6

months from the date of closing of the relevant financial year.

 The gap between two annual general meetings shall not exceed 15 months

Extension of validity period of AGM

In case, it is not possible to hold a 2nd & subsequent AGM within the prescribed time,
the Registrar may grant extension of time.
Such extension can be for a period not exceeding 3 months.

Meaning of First Financial Year

As per Section 2(41) of Companies Act, 2013 "Financial year" in relation to any company
or body corporate means the period ending on 31st day of March every year, and where it
has been incorporated on or after the 1st day of January of year, the period ending on
the 31st day of the March of the following year, in respect whereof financial statement of
company or body corporate is made up.

Illustrations:
1. M/s XYZ Limited company was incorporated on 10th December 2018, “financial year”
of that company would end on 31st March 2019, in view of sub-section (41) of Section 2
of the Act and therefore the last date for holding the first Annual General Meeting would
be 31st December 2019 (9 months from 31 st March 2019).

2. If a company was incorporated on 10th April 2018, its first financial year would end on
31st March 2019, only and therefore, the last date for holding the first Annual General
Meeting will be 31st December 2019. In this manner, almost 21 months elapse between the
date of incorporation and date of first Annual General Meeting. In this case, the company
need not hold any Annual General Meeting in the year of its incorporation i.e. 2018.
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Day, Time and Place for holding an Annual general Meeting

Date:
Every AGM should be held on any other day except on National Holiday as specified by
the GOI. (15th August, 26th Jan., 2nd Oct. or any other day as notified by the Central
Govt.).
National Holiday means and includes a day declared as National Holiday by the Central
Government.
Time:
Every AGM should be held during the business hours on any day excluding national
holiday. Here, business hour is between 9.00 A.M. and 6.00 P.M.
Place:

Business to be transacted at Annual general Meeting: [ ADDA]

An AGM of a company must consider the following ordinary businesses:
(a) Annual Accounts; (A)
(b) Declaration of dividend; (D)
(c) Appointment of directors (D) (retire by rotation); and
(d) Appointment and fixing of remuneration of the auditors. (A)
Other than the above mentioned businesses every other item of AGM and every item of
EGM will be treated as special business.
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CASE LAWS
Where there was non-compliance of certain provisions of the Companies Act, 2013 in
conducting Annual General Meeting of the company, same amounted to an act of
oppression or mismanagement.
[Held by National Company Law Tribunal, Chandigarh Bench in the case of Ramprasad
Dalmia v. Board of Directors (2017)]

Penalty for default in holding the Annual general Meeting [Section 99] [ Nhi le paye AGM]
If any default is made in holding the annual general meeting of a company, any member
of the company may make an application to the NCLT to call or direct the calling of, an
annual general meeting of the company and give such ancillary or consequential
directions as the Tribunal thinks expedient.
Such directions may include a direction that one member of the company present in
person or by proxy shall be deemed to constitute quorum for the meeting.
Penalty:
The Company and every officer of the Company who is in default shall be punishable
with fine which may extend to Rs.1,00,000/- and in case of continuous default with a
further fine which may extend to Rs.5,000/- for every day during which such default
continues.

EXTRA-ORDINARY GENERAL MEETING (SECTION 100) [ SPECIAL MULAKAT]

An extraordinary general meeting (EGM) is any general meeting of a company other than
the annual general meeting.
Generally, a company convenes an EGM to transact all urgent matter for which it cannot
wait till next annual general meeting.
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Who may convene an EGM?

■ By the Board of Directors
An extraordinary general meeting may be convened by the directors if some business of
special importance requires an approval from the members whenever required.

■ By Board on requisition of members:

The members of a company may ask for an extraordinary meeting to be held.

 Persons entitled to requisition: A requisition for convening an EGM may be made

by members:
(a) holding 10% of the paid-up share capital and having a right to vote of the
Company or
(b) holding 10% voting rights, if the company has no share capital, at the date of
the deposit of requisition on the matter to be discussed.

 Compliance of requisition: The Board of Directors are under obligation to proceed

within 21 days of the deposit of the requisition to convene an EGM which should
be held within 45 days of such deposit of the requisition with the company.
Any reasonable expenses incurred by the requisitionists by reason of the failure
of the Board to call a meeting duly shall be repaid to the requisitionists by the
company. Any sum so repaid shall be recovered by the company from the
Directors.

 Notice issued by the requisitionists: The Board may call an extra-ordinary general
meeting (EGM) whenever they deem it fit.
They may also call EGM on the requisition of shareholders carrying at least 1/10th
of paid- up share capital or 1/10th of voting power.
The requisition shall set out matters for which the meeting is called and be sent to the
registered office. The Board has to call within 21 days of the receipt of the requisition an
EGM not later than 45 days.

■ Meeting to be convened by the requisitionists:

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 then the
requisitionists may call an EGM themselves within 3 months from the date of requisition.
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■ By the Tribunal (Section 98):

If for any reason it is impracticable to call a meeting of a company or to hold or conduct
the meeting of the company, the Tribunal may, either suo motu or on the application of
any director or member of the company who would be entitled to vote at the meeting:
a) order a meeting of the company to be called, held and conducted in such manner
as the Tribunal thinks fit; and
b) give such ancillary or consequential directions as the Tribunal thinks expedient,
including directions modifying or supplementing in relation to the calling, holding
and conducting of the meeting. Such directions may include a direction that one
member of the company present in person or by proxy shall be deemed to
constitute a meeting.
Meeting held pursuant to such order shall be deemed to be a meeting of the
company duly called, held and conducted.

Day, Time & Place

• Day:
An EGM can be held on any day including National Holiday as specified by the GOI. (15th
August, 26th Jan., 2nd Oct. or any other day as notified by the Central Govt.).

• Time:
An EGM can be held on any time.

• Place of Meeting
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CLASS MEETINGS:
Class meetings are those meetings which are held by holders of a particular class of
securities, e.g. preference shares and debentures.
Need for such meetings arises when it is proposed to vary the rights of a particular class
of shares.

MEETINGS OF DEBENTURE HOLDERS:

It is a meeting of debenture holders to protect their interest relating to redemption of
debentures and interest thereon.
As per the SEBI regulation, when a company issues debentures it provides in the trust
deed executed for securing the issue for the holding of meetings of debenture holders
and also gives power to them to vary the terms of security or to alter their rights in
certain circumstances.

RESOLUTIONS
Decisions of a company are made by resolutions passed by the prescribed majority of
the members present at the meetings.
The purpose of a meeting is to arrive at decisions and the sense of a meeting is
ascertained by voting upon proposals put to the meeting.
A formal proposal put to the meeting is resolution.
A company expresses its will by the means of resolutions.
There are three types namely, ordinary, special and resolutions requiring special notice.

ORDINARY RESOLUTIONS (Section 114 of the Companies Act, 2013)

A resolution shall be an ordinary resolution if the notice required under this Act has been
duly given and it is required to be passed by the votes cast (whether on a show of hands,
or electronically or on a poll) in favour of the resolution, including the casting vote
(Chairman) by members who vote in person, or where proxies are allowed, by proxy or by
postal ballot, exceed the votes cast against the resolution by members.
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SPECIAL RESOLUTIONS (Section 114 of the Companies Act, 2013)

A resolution shall be a special resolution when it is duly specified in the notice calling
the general meeting and the votes cast in favour of the resolution (whether on a show of
hands, or electronically or on a poll) by members who vote in person or by proxy or by
postal ballot are required to be not less than 3 times the number of the votes cast against
the resolution by members.

RESOLUTION REQUIRING SPECIAL NOTICE (Section 115 of the Companies Act, 2013)
Special notice is required of any resolution, 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 total voting power or holding shares on which such aggregate sum not
exceeding Rs.5,00,000/- as may be prescribed has been paid-up and the company shall
give its members notice of the resolution in the following manner as prescribed in Rules.

Procedure for special notice:

a) Eligibility for sending Special Notice:

A special notice required to be given to the company shall be signed, either

individually or collectively by such number of members holding not less than 1%
of total voting power or holding shares on which an aggregate sum of not less
than Rs.5,00,000/- has been paid-up on the date of the notice.

b) Notice Period:

Such notice shall be sent by members to the company not earlier than three
months but at least 14 days before the date of the meeting at which the resolution
is to be moved, exclusive of the day on which the notice is given and the day of
the meeting.

c) Notice for holding meeting:

The company shall immediately after receipt of the notice, give its members notice
of the resolution at least 7 days before the meeting, exclusive of the day of
dispatch of notice and day of the meeting, in the same manner as it gives notice of
any general meetings.

d) Publication in the Newspapers:

If it is not practicable to give the notice of any general meetings, the notice shall
be published in English language in English newspaper and in vernacular
language in a vernacular newspaper, both having wide circulation in the State
where the registered office of the Company is situated.
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Such notice shall be published at least 7 days before the meeting, exclusive of the
day of publication of the notice and day of the meeting.

Filing of Resolutions and Agreements with ROC (MGT-14) (Section 117 of the
Companies Act, 2013)
Section 117 provides that a copy of every resolution and an agreement shall be filed in
Form No. MGT.14 with the Registrar, within 30 days of its passing or making thereof.
Resolutions and agreements to be filed with the Registrar are as under:
 Special resolutions;

 Resolutions which have been agreed to by all the members of a company, but
which, if not so agreed to, would not have been effective for their purpose unless
they had been passed as special resolutions;

 Any resolution of the Board of Directors of a company or agreement executed by

a company, relating to the appointment, re-appointment or renewal of the
appointment, or variation of the terms of appointment, of a managing director;

 Resolutions or agreements which have been agreed to by any class of members

but which, if not so agreed to, would not have been effective for their purpose
unless they had been passed by a specified majority or otherwise in some
particular manner; and all resolutions or agreements which effectively bind such
class of members though not agreed to by all those members;

 Resolutions requiring a company to be wound up voluntarily passed in pursuance

of section 59 of the Insolvency and Bankruptcy Code, 2016;

 Resolutions passed in pursuance of sub-section (3) of section 179. No person

shall be entitled under Section 399 to inspect or obtain copies of such resolutions;
this clause shall not apply to a banking company in respect of a resolution passed
to grant loans, or give guarantee or provide security in respect of loans under
clause (f) of sub-section (3) of section 179 in the ordinary course of its business.
This sub-clause is not applicable to private.

 Any other resolution or agreement as may be prescribed and placed in the public
domain
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Q11. At a general meeting of a company, 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.

A11. In the given problem, the votes cast in favour (20) being more than 3 times of the
votes cast against (5) , if other conditions of Section 114 are satisfied, the decision of the
Chairman is in order.

NOTICE (SECTION 101 OF THE COMPANIES ACT, 2013) [Invitation]

A general meeting of a company may be called by giving not less than clear 21 days'
notice either in writing or through electronic mode.
Where a notice of general meeting is sent by post, it shall be deemed to be served at the
expiration of 48 hours after the letter containing the same is posted.
In simple words, an extra 48 hours be granted in addition to 21 days.
The day on which the notice is deemed to be served on the member, and the day of the
general meeting have to be in addition to the 21 days.
In case of section 8 company, 14 days’ clear notice is required instead of 21 days.

Note: Any accidental omission to give notice to, or the non-receipt of such notice by,
any member or other person who is entitled to such notice for any meeting shall not
invalidate the General Meeting.
However, omission to serve notice of meeting on a member on the mistaken ground that
he is not a shareholder cannot be said to be an accidental omission.
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Shorter notice

CONTENTS OF NOTICE
The notice of a general meeting shall specify the place, date, day and the hour of the
meeting. Agenda i.e. a statement of the business to be transacted at such meeting.
Proxy clause with reasonable prominence- a statement that a member entitled to attend
and vote is entitled to appoint a proxy.

RECIPIENT OF NOTICE
The notice of every meeting of the company shall be given to:
(a) every member of the company, legal representative of any deceased member or the
assignee of an insolvent member;
(b) the auditor or auditors of the company; and
(c) every director of the company.
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Recipients as per Secretarial Standard on GM (SS-2) As stated in SS-2 Notice shall be

sent to:
(a) Every member of the Company
(b) Legal representative of any deceased member
(c) Assignee of an insolvent member
(d) The auditor or auditors of the company
(e) Every director of the company
(f) Secretarial Auditor of the Company
(g) Debenture trustee
(h) To other specified persons

MODE OF NOTICE
A Company may give notice either in writing or through electronic mode.

Mode of Notice as per Secretarial Standard on GM (SS-2)

As stated in SS-2 Notice shall be sent by hand or by ordinary post or by speed post or by
registered post or by courier or by facsimile or by e-mail or by any other electronic
means.
Notice shall be sent to Members by registered post or speed post or courier or e-mail and
not by ordinary post in the following cases:
• if the company provides the facility of e-voting ;
• if the item of business is being transacted through postal ballot;

Illustration
ABC Ltd. issued a notice on 1st August, 2020 to hold its AGM on 24th August, 2020.
Check the validity of the notice referring to the provisions of the relevant act, in case it is
sent by post.
Answer: Date of holding AGM: 24th August, 2020; Date of dispatch of notice: 1st August,
2020; Days to be excluded:
(a) Day of holding AGM i.e 24th August, 2020.
(b) Day of dispatch of notice i.e. 1st August, 2020.
(c) 2 additional days for service of notice i.e 2nd & 3rd August, 2020 (SS-2 Para 1.2.6)
Number of days’ notice given: 20 days.
Number of days’ notice required under section 101 of the Act is 21 days. Therefore, it is
not a case of valid notice. However, shortfall of 1 day can be condoned if consent is
given for such shorter notice by at least 95% of the members entitled to vote at such
AGM.
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Explanatory Statement to be attached to Notice for Special Business Item

Section 102 requires that a statement detailing the material facts of the businesses to be
transacted as special business be annexed to the notice of the general meeting.

Explanatory Statement as per Secretarial Standard on GM (SS-2)

Every Special Business item shall be in form of a Resolution and shall be accompanied
by an explanatory statement which shall set out all such facts as would enable a Member
to understand the meaning, scope and implications of the item & to take a decision
thereon.
In respect of Ordinary business items, explanatory statement is not required.
Resolutions format are not required in case of Ordinary Business Item except where the
auditors or directors to be appointed are other than the retiring auditors or directors.

QUORUM FOR MEETINGS (SECTION-103)

Quorum means presence of minimum number of members in a meeting. Quorum is
required for transaction of business.
Section 103 of the Companies Act, 2013 provides that where the articles of the company
do not provide for a larger number, there the quorum shall depend on number of
members as on date of a meeting.

The above-mentioned minimum of members is required to be present personally in the

General Meeting for forming a Quorum. In other words, the proxies shall not be counted
for the purpose to form a [Link] joint holders shall be counted as two for quorum if
both joint holders personally present in the General Meeting.
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The representative of Governor of any State or President of India or Company shall be

counted as member for the purpose of quorum and will have all rights of a member.

Quorum provisions in Secretarial Standard on GM (SS-2)

If the quorum provided in the Articles is higher than that provided under the Act, the
quorum should be as per the AOA. One person can be an authorized representative of
more than one body corporate in that case he will be counted separate members for the
purpose of quorum.
But there should be at least one more individual present at the meeting other than the
individual
A member who is not entitled to vote on any particular item of business being a related
party, if present, shall be counted for the purpose of quorum.

Consequences Of No Quorum:
Unless otherwise provided in the Articles, if the quorum is not present within half-an-
hour from the time appointed for holding a meeting:
(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 fixed by the Board; or the
meeting, if called by requisitions shall stand cancelled.

Illustration:
The articles of association of XYZ Ltd. having 700 members as on cutoff date, prescribe
for physical presence of 7 members to constitute quorum of general meetings. Following
are the status of persons present in a general meeting of XYZ Ltd to consider the
appointment of MD. Check the quorum of the meeting.
(a) Mr. A, the representative of Governor of Maharashtra.
(b) Mr. B & Mr. C are preference shareholders.
(c) Mr. D representing ABC Ltd. and SKY Ltd.
(d) Mr. E, Mr. F, Mr. G and Mr. H are proxies of shareholders.
solution:
(a) Since Mr. A is the representative of the Governor of Maharashtra, shall be treated as a
member personally present (Section 112).
(b) Preference shareholders can vote only in relation to such matters which directly
affect their rights.
In this case, meeting was called to take decision on appointment of MD, which does not
affect their rights. Therefore, Mr. B & Mr. C are not members personally present.
(c) Since Mr. D represents two body corporates, he would be treated as two members
personally present. (Section 113)
(d) Since Mr. E, Mr. F, Mr. G and Mr. H are proxies of shareholders and members are not
personally present. They are not considered while counting quorum.
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Adjourned meeting
Notice of an adjourned meeting:
In case of an adjourned meeting or of a 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 newspapers (one in English and one in vernacular
language) which is in circulation at the place where the registered office of the company
is situated.

Adjourned meeting provisions in Secretarial Standard on GM (SS-2)

Notice of Adjourned meeting to be served as follows:

No quorum in an adjourned meeting:

If at the adjourned meeting also, a quorum is not present within 1/2 an hour from the time
appointed for holding meeting, the members present shall form the quorum.

Resolution passed at adjourned meetings.

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

Chairman of Meetings (Section 104)

The Chairman plays a crucial role in a company meeting and is usually appointed by the
articles.
The members present in person at a meeting shall elect on a show of hands one of their
members to be the Chairman.
Unless the articles of the company otherwise provide, the members personally present at
 P a g e | 333

the meeting shall elect one of themselves to be the Chairman thereof on a show of
hands.
If a poll is demanded on the election of the Chairman, it shall be taken forthwith in
accordance with the provisions of this Act and the Chairman elected on a show of hands
shall continue to be the Chairman of the meeting until some other person is elected as
Chairman as a result of the poll, and such other person shall be the Chairman for the rest
of the meeting.

Role of Chairman
The Chairman is responsible for the successful conduct of a meeting. The Chairman has
a duty to keep order, to see that the business is properly conducted and to ensure that
the sense of the meeting is properly ascertained in regard to any question before it.
Duties of Chairman

 He must ensure that the meeting is properly convened and constituted (i.e. proper
notice has been served and quorum has also been observed).

 He must ensure that the provisions of the Act and the articles in regard to the
meeting and its procedures are observed, and that the business is taken in the
order set out in the agenda, and that the business is within the scope of the
meeting.

 He must act at all times bonafidely and in the interest of the company as a whole.
He must give a reasonable chance to the members present, to discuss any
proposed resolution and ensure that views of all are adequately heard.

 He must decide questions arising for decisions during the meeting and must
ensure that the majority hears the minority.

 He must ensure that the sense of the meeting is properly ascertained in regard to
any question before it.

 He must exercise correctly his powers of adjournment. He has no powers to

adjourn the meeting at his own will and pleasure. It is his duty to preserve order
and to see that the business is properly conducted.

 He must ensure the preparation of the minutes of meeting.

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PROXY (Section 105 of the Companies Act, 2013)

A member, who is entitled to attend to vote, can appoint another person as a proxy to
attend and vote at the meeting on his behalf.
Provisions related to proxy:
(a) Any member of a company who is entitled to attend and vote at a meeting of the
company shall be entitled to appoint another person as a proxy to attend and vote at the
meeting on his behalf.
(b) A proxy shall not have the right to speak at such meeting and shall not be entitled to
vote except on a poll.

Note:
 A member of a company not having share capital cannot appoint proxy except the
articles of such company provide otherwise.

 A proxy is not counted for the purpose of Quorum.

 A proxy need not be a member of the Company (In case of Section 8 Companies
only member can be appointed as a proxy).
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 A person may act as proxy for maximum 50 members and holding in the
aggregate not more than 10% of the total share capital of the company carrying
Voting Rights.
However, a Member holding more than ten percent of the total share capital of the
company carrying Voting Rights may appoint a single person as Proxy for his
entire shareholding and such person shall not act as a Proxy for another person
or shareholder.

 The proxy form (MGT-11) shall be deposited with the Company 48 hours before
the general meeting of a company.

 Time limit for deposit of proxy forms: The instrument appointing the proxy must
be deposited with the company, 48 hours before the meeting. Any provision
contained in the articles, requiring a longer period than 48 hours shall have effect
as if a period of 48 hours had been specified.

 The instrument appointing a proxy shall:

(a) be in writing; and

(b) be signed by the appointer or his attorney duly authorised in writing or, if the
appointer is a body corporate, be under its seal or be signed by an officer or an
attorney duly authorised by it.

Revocation of proxy:
If after appointment of proxy, the member himself attends the meeting, it amounts to
automatic revocation of proxy. But once the proxy has voted, it cannot be revoked.
If a Proxy had been appointed for the original meeting and such meeting is adjourned,
any Proxy given for the adjourned Meeting revokes the Proxy given for the original
Meeting, a proxy later in date revokes any Proxy/Proxies dated prior to such Proxy.
Proxy is valid until written notice of revocation has been received by the Company before
the commencement of the Meeting or adjourned Meeting, as the case may be.

Note: A notice of revocation shall be signed by the same Member (s) who had signed the
Proxy, in the case of joint Membership.
A Proxy need not be informed of the revocation of the Proxy issued by the Member.

Question: (1) Mr. A holds 10% of the total share capital of the Company and appoints Mr.
B as the proxy holder. Can Mr. B accept appointment as proxy by any other shareholder?
Hint : Mr. B cannot accept appointment as proxy by any other shareholder.
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Question: Annual General Meeting of a Public Company was scheduled to be held on

15.12.2020. Mr. A, a shareholder, issued two Proxies in respect of the shares held by him
in favor of Mr. ‘X’ and Mr. ‘Y’. The proxy in favor of ‘Y’ was lodged on 12.12.2020 and the
one in favor of Mr. X was lodged on15.12.2020. The company rejected the proxy in favor
of Mr. Y as the proxy in favor of Mr. Y was of dated 12.12.2020 and in favor of Mr. X was of
dated15.12.2020. Is the rejection by the company in order?

Hint: As per Section 105 of the Companies Act, 2013 a proxy should be deposited 48
hours before the time of the meeting. In the given case, the proxies should have,
therefore, been deposited on or before 13.12.2020 (the date of the meeting being
15.12.2020). Mr. X deposited the proxy on 15.12.2020.
Therefore, proxy in favour of Mr. X has become invalid. Thus, rejecting the proxy in
favour of Mr. Y is unsustainable. Proxy in favor of Mr. Y is valid since it is deposited in
time.

PROCESS OF CONDUCTING MEETING

The procedure for conducting the Annual General Meeting is explained in detail below:

 Conduct a Board Meeting [Section 173 and Secretarial Standard on Board Meeting
(SS-1)]

 To fix the day, date, time and agenda for the Annual General Meeting.
 To approve the draft notice of Annual General Meeting along with explanatory
statement.
 To authorize Company Secretary or any other officer to issue notice of Annual
General Meeting to every member or to every person entitled to receive this notice.
 To appoint a scrutinizer for scrutinizing the voting process, if providing e-voting
facility to the shareholders.

 Every Annual General Meeting shall be called during business hours, that is,
between 9 a.m. and 6 p.m. on any day that is not a National Holiday and shall be
held either at the Registered Office of the Company or at some other place within
the city, town or village in which the Registered Office of the Company is situated.
For Unlisted company it may be held at any place in India if consent is given in
writing or by electronic mode by all the members in advance.

 Notice of the meeting must be given at least 21 days before the Meeting either in
writing or through electronic mode.

 The Notice should specify the day, date, time and full address of the venue, Route
Map of the Meeting and procedure of e-voting and Proxy Form. A Meeting may be
convened at any time and place, on any day, excluding a National Holiday.
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 Notice shall clearly specify the nature of the Meeting and the business to be
transacted thereat. In respect of items of Special Business, each such item shall
be in the form of a Resolution and shall be accompanied by an explanatory
statement which shall set out all such facts as would enable a Member to
understand the meaning, scope and implications of the item of business and to
take a decision thereon. In respect of items of Ordinary Business, Resolutions are
not required to be stated in the Notice.

 Quorum should be present throughout the Meeting. No business should be

transacted when the Quorum is not so present.

 Presence of Chairperson must be required.

 Maintain the Minutes Book for Signing the minutes.

VOTING

Voting by show of hands: [Sonia Gandhi]

In this method, the Chairman calls upon the persons present who are entitled to vote to
raise hands in favor of the motion and on counting them he proceeds to count the hands
raised against the motion also.
On comparison of the hands shown for and against the motion, the Chairman announces
his verdict whether the resolution is carried or lost.
Each member, irrespective of his shareholding, or voting right, has one vote.

Voting by poll: [Manmohan Singh]

Poll means counting of heads.

In this method, the poll is taken if the Chairman or a prescribed number of members are
dissatisfied with the result of voting by show of hands.
In a poll, since the votes are counted on the basis of shareholdings of members,
the true sense of meeting can be ascertained. Further in a poll proxies can also exercise
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their vote.
In this system, the poll papers are given to persons who are entitled to vote who indicate
on them their names and whether they are voting for or against the motion and also
indicate there in the number of votes which they are entitled to.
The Chairman appoints two scrutinizers to scrutinize these poll papers and submit the
report to him, who declares the result of the poll.

Who can demand Poll?

> 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
1/10th of the total voting power or holding shares on which an aggregate sum of not less
than Rs.5,00,000/- or such higher amount as may be prescribed, has been paid-up.

> In the case of any other company:

By any member or members present in person or by proxy, where allowed, and having
not less than one-tenth of the total voting power.

Special Note: In case of Companies for which e-voting is mandatory, poll is the only
method that can be exercised in the meeting for casting votes by remaining
shareholders.

Voting by Postal ballot: [home delivery]

Where a company decides to pass a resolution by postal ballot, it shall send notice to all
the shareholders along with a draft resolution.
In this method, MCA has notified certain business only to be transacted through the
Postal Ballot like merger & amalgamation.
In the notice, the shareholders are asked to send their assent or dissent in writing on a
postal ballot within a period of 30 days from the date of posting of the letter.
Such notice must be sent by registered post acknowledgement due or by any other
method as may be prescribed by the Central Government.

Voting by Electronic Mode: [Narendra Modi]

Section 108 of Companies Act, 2013 read with Rule 20 of Companies (Management &
Administration) Rules, 2014, it is mandatory for the following companies to have e-voting
facility:
□ Listed Companies
□ Companies having 1,000 or more Shareholders

A member may exercise his right to vote at any general meeting by electronic means and
company may pass any resolution by electronic voting system.
Voting by electronic or Electronic voting system means a 'secured system' based
process of display of electronic ballots, recording of votes of the members and the
number of votes polled in favour or against, such that the entire voting exercised by way
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of electronic means gets registered and counted in an electronic registry in a centralized

server with adequate 'cyber security'.

VOTING THROUGH ELECTRONIC MEANS (Section 108 of the Companies Act, 2013)

It is practically not possible for every member specially members holding minor shares
to travel up to the venue of GM to participate.
To eliminate this difficulty and to enhance the participation of minority members,
concept of e- voting has been introduced by the Companies Act, 2013.
E-voting does not eliminate member's right to physically attend and vote at the general
meeting. However, member can cast his vote through one mode only.
A member after casting his vote through e-voting can go and attend the general meeting
but cannot cast vote in that general meeting.

And if he casts his vote at the GM as well, his electronic vote will be considered as valid.

Applicability:
Section 108 of the Act shall apply to—
• All companies whose equity shares are listed on a recognized stock exchange; and
• All companies having
1000 or more members.

Non- Applicability:
Following companies are out of ambit of e-voting: —
• Companies having whose debenture/preference shares are only listed.
• Companies listed on SME trading platform.
• Companies listed on institutional trading platform.

PROCEDURAL REQUIREMENT OF E-VOTING FACILITY

 The Board shall appoint:

■ Any person as a scrutinizer who is a person of repute who is not in the

employment of the company and who can, in the opinion of the Board, scrutinise
the e-voting process or the ballot process, as the case may be, in a fair and
transparent manner.

■ Appoint an Agency - NSDL, CDSL, etc.

 Additional Disclosure in Notice of GM

The Notice shall additionally disclose the following:

 Indicate the process and manner for voting by electronic means;
 Indicate the time schedule including the time period during which the votes
may be cast by remote e- voting;
 Provide the details about the login ID;
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 Specify the process for generating or receiving the password and for
casting of vote in a. secure manner.

 Public Notice by way of Advertisement

The public notice shall be published at least 21 days before the date of general
meeting in a vernacular newspaper and in English newspaper having country-wide
circulation giving details about availability of electronic voting.

 Remote E-Voting

The facility for remote e-voting shall remain open for not less than three days and
shall close at 5.00 p.m. on the date preceding the date of the general meeting.

 Voting at the General Meeting

The Company may provide either Physical or electronic voting at the General
Meeting as well. The Company which falls into ambit of Section 108 has to
mandatorily follow voting by Poll, i.e. they cannot carry out voting by show of
hands.

DECLARATION OF RESULT OF VOTING

 The scrutinizer shall, immediately after the conclusion of voting at the general
meeting, first count the votes cast at the meeting, thereafter unblock the votes
cast through remote e- voting in the presence of at least two witnesses not in the
employment of the company.
The Scrutinizer will submit the scrutinizer's report within 3 days of the conclusion
of the GM.

 The result should be displayed at Notice Board at Registered Office, Head Office,
and Corporate Office as well as on the website of the Company.
The resolution if passed shall be deemed to be passed on the date of relevant
general meeting. In case of listed Company report shall also be submitted to Stock
Exchange.

PASSING OF RESOLUTIONS BY POSTAL BALLOT

Section 2(65) - "Postal Ballot" means voting by post or through any electronic mode.
Applicability:
The postal ballot is applicable to all types of companies except One Person Company, or
a Company having members up to 200.
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The Companies as stated above shall get following resolution passed by postal ballot,
instead of transacting the business in general meeting of the company:
a) Alteration of the Object Clause of Memorandum;
b) Alteration of Articles of Association in relation to defining private
company;
c) Buy-back of own shares by the company;
d) Issue of shares with differential voting rights as to voting or dividend or
otherwise;
e) Change in place of Registered Office outside local limits of any city, town
or village;
f) Sale of whole or substantially the whole of undertaking of a company;
g) Giving loans or extending guarantee or providing security in excess of the
limit;
h) Election of a director;
i) Variation in the rights attached to a class of shares or debentures or other
securities.
Any item of business required to be transacted by means of postal ballot (as stated
above), may be transacted at a general meeting by a company which is required to
provide the facility to members to vote by electronic means under section 108, in the
manner provided in that section.
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PROCEDURE FOR CONDUCTING BUSINESS THROUGH POSTAL BALLOT

Notice:
Where a company is required or decides to pass any resolution by way of postal ballot, it
shall send a notice to all the shareholders in writing on a postal ballot or by electronic
means within a period of 30 days from the date of dispatch of the notice.
The notice shall be sent either:
a) by Registered Post or speed post, or
b) through electronic means like registered e-mail id or
c) through courier service for facilitating the communication of the assent or dissent
of the shareholder to the resolution within 30 days.
Notice of postal ballot provisions in Secretarial Standard on GM (SS-2)
Notice shall also specify the mode of declaration of the results of the voting by postal
ballot. Notice shall also be given to the Directors and Auditors of the company, to the
Secretarial Auditor, to Debenture Trustees, if any, wherever required.
In case the facility of e-voting has been made available, the information about its
availability and details thereof should be mentioned.
Notice shall clearly specify that any Member cannot vote both by post and e-voting and if
he votes both by post and e-voting, his vote by post shall be treated as invalid.
Advertisement:
An advertisement shall be published at least once in a vernacular newspaper in the
principal vernacular language of the district in which the registered office of the company
is situated, and having a wide circulation in that district, and at least once in English
language in an English newspaper having a wide circulation in that district.

Notice to be placed on the website:

The notice of the postal ballot shall also be placed on the website of the company
forthwith after the notice is sent to the members.
Such notice shall remain on such website till the last date for receipt of the postal ballots
from the members.

Appointment of scrutinizer:
The Board of Directors shall appoint one scrutinizer, who is not in employment of the
company and who, in the opinion of the Board can conduct the postal ballot voting
process in a fair and transparent manner.

Submission of report of the scrutinizer:

The scrutinizer shall submit his report as soon as possible after the last date of receipt of
postal ballots but not later than 7 days thereof.
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Declaration of result:
The results shall be declared by placing it, along with the scrutinizer's report, on the
website of the company.
Miscellaneous Postal ballot provisions in Secretarial Standard on GM (SS-2)

 Rescinding of Resolution
A Resolution passed by postal ballot shall not be rescinded otherwise than by a
Resolution passed subsequently through postal ballot.

 Modification to the Resolution

No amendment or modification shall be made to any Resolution circulated to the
Members for passing by means of postal ballot.

PROCESS FOR POSTAL BALLOT

> Step-1:
Where a company decides to pass any resolution by resorting to postal ballot, it shall
send a notice to all the shareholders, along with a draft resolution explaining the reasons
therefore, and requesting them to send their assent or dissent in writing on a postal
ballot within a period of 30 days from the date of posting of the letter.
> Step-2:
The notice shall be sent by registered post acknowledgement due, or by any other
method as may be prescribed by the Central Government in this behalf.
Also with the notice, there shall be included a postage pre-paid envelope for facilitating
the communication of the assent or dissent of the shareholder to the resolution within
the said period.
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> Step -3:

If resolution is assented to by a requisite majority of the shareholders by means of postal
ballot, it shall be deemed to have duly passed at general meeting convened in that behalf.

> Other Important Steps:

 The board of directors shall appoint one scrutinizer, who is not in employment of
the company;
 The scrutinizer shall submit his report as soon as possible after the last date of
receipt of Postal Ballots;
 The scrutinizer will be willing to be appointed and he is available at the Registered
Office of the company for the purpose of ascertaining the requisite majority;
 The scrutinizer shall maintain a register to record the consent or otherwise
received, including electronic media, mentioning the particulars of name, address,
folio number, number of shares, nominal value of shares, whether the shares have
voting, differential voting or non-voting rights and the Scrutinizer shall also
maintain record for postal ballot which are received in defaced or mutilated form.

MINUTES OF PROCEEDINGS OF MEETINGS (Section 118)

Every company is required to keep minutes of the proceedings of general meetings and
of the meetings of Board of Directors and its committees.

➢ Important provisions relating to the Minutes of the Meeting:

Every company shall record minutes of the proceedings of every general meeting of any
class of shareholders or creditors, and every resolution passed by postal ballot and
every meeting of its Board of Directors or of every committee of the Board.
a) Record minutes within 30 days: Every company shall record within 30 days of the
conclusion of every such meeting concerned, or passing of resolution by postal
ballot in books kept for that purpose with their pages consecutively numbered.

b) Fair and Correct Summary: The minutes of each meeting shall contain a fair and
correct summary of the proceedings.

c) Appointment to be included: All appointments made at any of the meetings shall

be included in the minutes of the meeting.

In the case of a meeting of the Board of Directors or of a committee of the Board, the
minutes shall also contain—
(a) the names of the directors present at the meeting; and
(b) in the case of each resolution passed at the meeting, the names of the directors, if
any, dissenting from, or not concurring with the resolution.
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The Chairman of the meeting has the authority to add or delete anything which:
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.

The Chairman shall exercise absolute discretion in regard to the inclusion or non-
inclusion of any matter in the minutes.

d) The minutes kept shall be evidence of the proceedings recorded therein.

No document purporting to be a report of the proceedings of any general meeting
of a company shall be circulated or advertised at the expense of the company,
unless it includes the matters required by this section to be contained in the
minutes of the proceedings of such meeting.

e) Compliances with Secretarial Standard: Every company shall observe secretarial

standards with respect to general and Board meetings specified by the ICSI.

Note: Every company has to follow the Secretarial Standard for convening its General
Meeting and preparing its Minutes.
f) Fine & Punishments: If any default is made in complying with the provisions of
this section in respect of any meeting, the company shall be liable to a penalty of
Rs.25,000/- and every officer of the company who is in default shall be liable to a
penalty of Rs.5,000/-.

g) Fine & Punishment for Tampering of minutes: If a person is found guilty of

tampering with the minutes of the proceedings of meeting, he shall be punishable
with imprisonment for a term which may extend to two years and with fine which
shall not be less than Rs.25,000/- which may extend to Rs. 1,00,000/-.

Minutes provisions in Secretarial Standard on GM (SS-2)

■ A distinct Minutes Book shall be maintained for Meetings of the Members of the
company, creditors and others as may be required under the Act. Resolutions passed by
postal ballot shall be recorded in the Minutes book of General Meetings.
■ Every company shall follow a uniform and consistent form of maintaining the Minutes.
■ The pages of the Minutes Books shall be consecutively numbered.
■ Minutes shall not be pasted or attached to the Minutes Book, or tampered with in any
manner.
■ Loose Leaf- Minutes of Meetings, if maintained in loose-leaf form, shall be bound
periodically depending on the size and volume. There shall be a proper locking device to
ensure security and proper control to prevent removal or manipulation of the loose
leaves.
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■ Place of keeping minutes: Minutes Books shall be kept at the Registered Office of the
company or at such other place, as may be approved by the Board.
■ In case a Meeting is adjourned, the Minutes in respect of the original Meeting as well as
the adjourned Meeting shall be entered in the Minutes Book within thirty days from the
date of the respective Meetings.
■ Minutes of all Meetings shall be preserved permanently at the registered office of the
Company with the Custody of Company Secretary in physical or in electronic form with
Timestamp.

REPORT ON ANNUAL GENERAL MEETING (Section 121 of the Companies Act, 2013)
Every listed public company is required to 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.

Filing with ROC:

A copy of the report is to be filed with the ROC in Form No. MGT. 15 within 30 days of the
conclusion of annual general meeting along with the prescribed fee.
Rule 31 of the Companies (Management and Administration) Rules, 2014 The report shall
be prepared in the following manner:
a) A report shall be prepared in addition to the minutes of the general meeting.

b) The report shall be signed and dated by the Chairman of the meeting or in case of
his inability to sign, by any two directors of the company, one of whom shall be
the Managing director, if there is one.

c) Such report shall contain the details in respect of the following:

 The day, date, hour and venue of the annual general meeting.
 Confirmation with respect to appointment of Chairman of the meeting.
 Number of members attending the meeting.
 Confirmation of quorum.
 Confirmation with respect to compliance of the Act and the Rules,
secretarial standards made There under with respect to calling, convening
and conducting the meeting.
 Business transacted at the meeting and result thereof.
 Particulars with respect to any adjournment, postponement of meeting,
change in venue.
 Any other points relevant for inclusion in the Report.
d) Such Report shall contain fair and correct summary of the proceedings of the
meeting.
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Default in filing the Report:

If the company fails to file the report with the prescribed period then the company shall
be liable for fine not less than Rs.1 lac but not more than Rs.5 lacs and every officer who
is in default shall be punishable with fine not less than Rs.25,000/- but not more than
Rs.l,00,000/-

VIRTUAL MEETINGS:
Present-day shareholders are spread across the
country and also in different countries, and as the
AGMs can only conducted in the city or place in
which the registered office of the company is
located, it makes it more difficult for the
shareholders located in faraway locations and cites
to attend the meetings as it involves lot of travel time
and cost.
Virtual meetings will help in increasing shareholder
participation as compared to physical meetings because of improved access,
shareholders who cannot attend in person due to location or other reasons can attend
virtually and do not have to incur the time and costs of travel to a physical meeting.

Advantages of virtual AGM/EGMs

 Increase shareholder participation in meetings.

 Save time on travel and cost because of remote voting.
 Encourages more participation by investors across the world.
 Provides greater accessibility to shareholders who cannot be physically present
due to distance.
 Enables institutional investors to attend more than one meeting in a day and
protect shareholder’s interest.
 Reduce the cost of holding and conducting shareholder meeting, including the
costs of the venue, stationary, transport and refreshments.
 Saves time of the Company’s personnel.
Difficulties in holding virtual Meetings of Members:

 Security of the systems used.

 Streaming with quality without interruption.
 Providing with secure login and shareholder authentication for attendance, with
ease of access for shareholders, and remote voting.
 Combined registration, voting and reporting software.
 Customized instant results screen and detailed audit reporting.
 Data Security of Logins and Passwords.
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 Allowing the shareholders, the choice of device.

 The technology used must give all shareholders a reasonable opportunity to
participate.
 The company must provide a digital record of the meeting.

As per Regulation 44 of the SEBI (LODR) Regulations, 2015 the top 100 listed entities
shall provide one-way live webcast of the proceedings of the annual general meetings.

Practical Situations arising in Meetings through video-Conferencing

a) How to accommodate the shareholders who wants to ask questions in view of the
large attendance of shareholders throughout the length and breadth of the
country?
Ans In the notice to the AGM it may be mentioned that shareholders whoever wants to
speak to get their names registered and it’s also to be mentioned that at the discretion of
the Chairman the speakers will be allowed to speak depending upon the availability of
time.

b) Why the proxy provisions are dispensed with in case of general meetings held
through video conferencing?
Ans. In case of VC meetings there is no question of proxy attendance. A shareholder can
himself attend the meeting from wherever he is located. Same applies to the case with e-
voting. In case of e-voting also there is no proxy to vote on behalf of the shareholder.

c) Is it required to give venue of the meeting in the Notice? If so what would be the
venue of the meeting, for meetings held through video conferencing?
Ans. Yes, place of the meeting shall be provided in the Notice. In case of virtual meetings
deemed venue is to be given.

d) For conduct of AGMs through VC/OAVM, can the Companies mention in their
AGM notices that the Company holds the right to restrict the number of speaker
shareholders depending on the availability of time. Are the companies allowed to
restrict speakers?
Ans. Yes, companies can restrict the speakers depending upon the availability of time.
The notice calling for meeting should require the speaker shareholders to register
themselves in advance and depending upon the time availability, it shall be at the
discretion of the Chairman to allow the speakers.
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e) The number of speakers registering to speak at the meeting has gone up

considerably. Companies are forced to choose those speakers who are favorably
disposed to the company. Is this a correct practice? How can this be managed?
Ans. If the number of speaker’s shareholders registering is considerably more, the
Chairman should put a cut-off as it may not be feasible to allow all the registered
speakers due to time constraints.

f) Is it mandatory to share the question / query well in advance with the Company by
the Shareholder at the time of registering himself as speaker. Can a shareholder
refuse to share the question, even if asked to share, by the Company?
Ans. Shareholder may share his query well in advance with the Company so that even if
he could not get connected, his query may be read out and answered. However, the
shareholder may prefer to raise his query at the meeting only and in such case, he need
not share his query in advance with the Company.

g) How can the companies keep registers open for inspection at the AGM held via VC
or OAVM, if the Company does not maintain the registers in electronic form and
nor the company has scanned the same?
Ans. In case the registers are not maintained in an electronic form, the physical
registers/documents should be scanned for uploading in a virtual data room established
for the purpose. Login ID and password can be provided for inspection and it is to be
ensured that only view rights are given for inspection and the registers/documents
cannot be deleted, copied or downloaded or the register/ documents may be made
available for inspection on a virtual platform (e.g., Zoom, Microsoft teams, etc.), and
displayed in a presentation form.

h) What are the consequences if during the AGM held through VC or OAVM, the
Chairman gets disconnected due to poor net connectivity etc. and unable to join
again? How can the Company proceed with the AGM for remaining items?
Ans. In case, the Chairman of the meeting gets disconnected due to poor connectivity,
etc. for 5-10 minutes, it does not necessarily lead to adjournment of the meeting.
However, if the Chairman is unable to join again and depending on the size, structure,
dynamics of the company, there are two options available: either adjourn the meeting or
if the meeting so decides elect another Chairman to proceed with the AGM, the company
is required to follow the Articles/Section 104 of the Companies Act, 2013 and proceed
accordingly.

i) Do Shareholders and Directors have any rights to ask recording of AgM

conducted through VC or OAVM?
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Ans. Recording of the General Meetings held through VC or OAVM is not mandatory as
per law and only the recorded transcript has to be maintained. Therefore, a
shareholder/director cannot ask for the recording of meeting conducted through VC or
OAVM. Even if the company records the meeting its only for their internal purpose.

j) Do Shareholders and Directors have any rights to ask for the copy of recorded
transcript of AGM conducted through VC or OAVM?
Ans. Public companies have to mandatorily upload the recorded transcript on the web
site of the company, if any. In case where a company has no website and has not
uploaded the transcript, may provide a copy of the same to the shareholder who ever has
asked for the same.
In case of a private company there is no such requirement of uploading the recorded
transcript on the website of the company. However, even in such cases as a good
Governance measure copy of the recorded transcript may be made available, since there
is no confidentiality as such is involved.
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CHAPTER – 14

DIRECTORS

INTRODUCTION
The Companies Act 2013 defines the term Director in
Section 2(34) which prescribed that “director” means
a director appointed to the board of a company.
Section 2(10) of the Companies Act, 2013 defined that
“board of Directors” or “board”, in relation to a
company, means the collective body of the directors of
the company.
By virtue of Section 149 of the Companies Act, 2013, the
Board of Directors of every company shall consist of
individual only. Thus, no body corporate, association or firm shall be appointed as
director.
Section 166 (6) of Companies Act, 2013, prohibits assignment (transfer) of office of
director to any other person. Any assignment of office made by a director shall be void.

DIRECTOR’S IDENTIFICATION NUMBER (DIN) [ director ki phehchan]

Director Identification Number (DIN) is a unique identification number allotted by the
Ministry of Corporate Affairs, Central Government to any individual, intending to be
appointed as director or to any existing director of a company, for the purpose of his
identification as a director of a company.
Only ONE DIN can be obtained by one individual. If an individual generates two DINs
inadvertently, he has to surrender his unused DIN immediately.
Section 152 (4) mandates that every person proposed to be appointed as a director by
the company in general meeting or otherwise, shall furnish his Director Identification
Number.
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OBTAINING DIN

DOCUMENTS REQUIRED FOR OBTAINING DIN

DOCUMENTS TO BE ATTACHED IN E-FORM DIR-3:
a) Proof of identity of applicant

 In case of Indian nationals, duly attested copy of:

1. Income-tax PAN; and
2. Voters Identity Card/ Passport/ Driving License are mandatory
requirement for proof of identity.
 In case of foreign nationals, duly attested copy of passport is a mandatory
requirement for proof of identity.

b) Proof of residence of applicant

 Duly attested Address proofs- ANY ONE of the below is mandatory:

Latest (not more than two months old) Bank Statement/ Electricity
Bill/Telephone Bill/ Mobile bill etc., shall be attached and should be in the
name of applicant only.

c) Photograph

d) Board resolution

 A Board Resolution proposing his appointment as director in an existing

company.
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e) A specimen signature duly verified.

f) Obtain Digital Signature Certificate before applying for DIN and ensure that the
applicant does not have any DIN allotted earlier as the Companies Act, 2013
prohibits to obtain and retain more than 1 DIN.

Procedure for application for allotment of DINs to the proposed first Directors in
respect of new companies: e-Form SPICe + (Simplified Proforma for Incorporating
company Electronically Plus: INC-32)

 Any person (not having approved DIN) proposed to become a first director
in a new company shall have to make an application through web form
SPICe+ (Simplified Proforma for Incorporating company Electronically
Plus: INC-32) for allotment of DIN.

 Allotment of Director Identification Number (DIN) to maximum of three

proposed directors shall be permitted in case of proposed directors not
having approved Director Identification Number.

 The applicant is required to attach the proof of Identity and address along
with the application. DIN would be allocated to User only after approval of
the form.

Procedure for application for allotment of DIN before Appointment in an existing

Company - Section 153 read with Rule 9 of the Companies (Appointment and
qualifications of Directors) Rules, 2014.

 Every individual, who is to be appointed as director of an existing company shall

make an application electronically in Form DIR-3 (Application for allotment of
Director Identification Number) to the Central Government for the allotment of a
Director Identification Number (DIN) along with such fees as may be prescribed.

 MCA 21 portal facilitates submission of application for the allotment of DIN.

 The applicant shall attach photograph; proof of identity; proof of residence; board
resolution proposing his appointment as director in an existing company and
specimen signature duly verified and sign the form digitally.

 In case of foreign nationals Details of a valid passport should be filled and a

certified copy of same should be attached with the application.
All supporting documents including photograph should be certified by the Indian
Embassy or a notary in the home country of the applicant.
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 Form DIR-3 shall be signed and submitted electronically by the applicant using his
or her own Digital Signature Certificate and shall be verified digitally by a
Company Secretary in full time employment of the company or by the Managing
Director or Director or CEO or CFO of the existing company in which the applicant
is intended to be appointed as a director.

Procedure for generation of DIN- Section 154 read with Rule 10 of the Companies
(Appointment and qualifications of Directors) Rules, 2014.
The Central Government shall, within one month from the receipt of the application allot
a Director Identification Number to an applicant in such manner as mentioned below:
a) On the submission of the Form DIR-3 on the portal and payment of the requisite
amount of fees through online mode an application number shall be generated by
the system automatically.

b) The Central Government shall process the applications and decide on the
approval or rejection thereof and communicate the same to the applicant along
with DIN allotted in case of approval by way of a letter by post or electronically or
in any other mode within a period of one month from the receipt of such
application.

c) If the Central Government, on examination, finds such application to be defective

or incomplete in any respect, it shall give intimation of such defect or
incompleteness, by placing it on the website and by email to the applicant who
has filed such application, directing the applicant to rectify such defects or
incompleteness by resubmitting the application within a period of fifteen days.

d) In case of rejection or invalidation of application, the fee so paid with the

application shall neither be refunded nor adjusted with any other application.

e) The Director Identification Number so allotted under these rules is valid for the
life-time of the applicant and shall not be allotted to any other person.

Intimation of changes in particulars of Director- Rule 12 of the Companies

(Appointment and qualifications of Directors) Rules, 2014.

 Every individual who has been allotted a DIN in the event of any change in his
particulars as stated in Form DIR-3, intimate such change(s) to the Central
Government within a period of 30 days of such change(s) in Form DIR-6.

 The applicant shall verify the form and attach duly scanned copy of the proof of
the changed particulars and submit electronically. Form requires pre-certification
by the professional CA/CS/CMA in practice.
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 The Central Government, upon being satisfied, after verification of such changed
particulars from the enclosed proofs, shall incorporate the said changes and
inform the applicant by way of a letter by post or electronically or in any other
mode.

 The concerned individual shall also intimate the change(s) in his particulars to the
company or companies in which he is a director within fifteen days of such
change.

Cancellation/Surrender/Deactivation of DIN- Rule 11 of the Companies (Appointment

and qualifications of Directors) Rules, 2014.
The Competent Authority (Central Government/RD (North), Noida/ Authorised Officer by
the RD) may cancel or deactivate the DIN in case –

 The DIN is found to be duplicated in respect of the same person provided the data
related to both the DIN shall be merged with the validly retained number;

 The DIN was obtained in a wrongful manner or by fraudulent means.

 death of the concerned individual;

 the concerned individual has been declared as a lunatic or of unsound mind by a

competent Court;

 if the concerned individual has been adjudicated an insolvent;

Provided that before cancellation or deactivation of DIN pursuant to clause (b), an
opportunity of being heard shall be given to the concerned individual;

 on an application made in Form DIR-5 by the DIN holder to surrender his or her
DIN along with declaration that he has never been appointed as director in any
company.

Impact of Non-Compliance of DIR-3 KYC/DIR-3 KYC Web

The Central Government or Regional Director (Northern Region), or any officer
authorized by the Central Government or Regional Director (Northern Region) shall,
deactivate the Director Identification Number (DIN), of an individual who does not
intimate his particulars in e-form DIR-3-KYC 3 [or the web service DIR-3-KYC-WEB as
the case may be] within stipulated time in accordance with rule 12A.
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Company to inform DIN to Registrar

Section 157 (1) provides that every company shall, within fifteen days of the receipt of
intimation furnish the Director Identification Number of all its directors to the Registrar or
any other officer or authority as may be specified by the Central Government with
requisite fee in Form DIR-3C.
If any company fails to furnish such company and officer in default shall be liable to a
penalty of twenty-five thousand rupees and in case of continuing failure, with further
penalty of one hundred rupees for each day after the first during which such failure
continues, subject to a maximum of one lakh rupees.

Rule 12A of the Companies (Appointment and qualifications of Directors) Rules, 2014 –
Directors KYC

 Every individual who holds a Director Identification Number (DIN) shall, submit e-
form DIR-3-KYC for the said financial year to the Central Government on or before
30th September of immediate next financial year.
 Where an individual who has already submitted e-form DIR-3 KYC in relation to
any previous financial year, submits web-form DIR-3 KYC-WEB through the web
service in relation to any subsequent financial year.
 Provided also that in case an individual desire to update his personal mobile
number or the e-mail address, as the case may be, he shall update the same by
submitting e-form DIR-3 KYC only.
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TYPES OF DIRECTORS

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

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

Woman Director
Section 149(1) read Rule 3 of Companies (Appointment and Qualification of Directors)
Rules, 2014 following class of companies must have at least one Women Director:
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Regulation 17 of the SEBI (Listing Obligations and Disclosures Requirements)

Regulations, 2015 the Board of directors of the top 1000 listed entities shall have at least
one independent woman director.
Following companies are not required to appoint woman director:
1. Specified IFSC Public Company
2. Private Company which is not subsidiary of public company

Director elected by Small Shareholders [Section 151]

According to Section 151 of the Act, a listed company may have one director elected by
such small shareholders in such manner and on such terms and conditions as may be
prescribed.
“Small shareholder” means a shareholder holding shares of nominal value of not more
than twenty thousand rupees or such other sum as may be prescribed.

Terms & Conditions for Small Shareholders’ Director

 A listed company, may upon notice of not less than:

(a) One thousand small shareholders; or
(b) one-tenth of the total number of such shareholders,
whichever is lower; have a small shareholders’ director elected by the small
shareholder.

 The small shareholders intending to propose a person for the post of small
shareholder’s director shall leave a signed notice of their intention with the
company at least 14 days before the meeting.

 The notice shall be accompanied by a statement signed by the proposed director

for the post of small shareholders’ director stating:

(a) his Director Identification Number;

(b) that he is not disqualified to become a director under the Act; and
(c) his consent to act as a director of the company.
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 Small shareholders’ director shall be considered as an independent director, if-

(a) he is eligible for appointment as an independent director
(b) he gives a declaration of his independence

 The tenure of small shareholders’ director shall not exceed a period of 3

consecutive years and he shall not be liable to retire by rotation. Further he shall
not be eligible for re-appointment after the expiry of his tenure.

 A Small shareholders’ director shall vacate the office if –

(a) he ceases to be a small shareholder, on and from the date of cessation;

(b) he incurs any of the disqualifications specified in section 164;
(c) the office of the director becomes vacant in pursuance of section 167;
(d) he ceases to meet the criteria of independence as provided section 149

 A person shall not hold the office of small shareholders’ director in more than two
companies. If second company is in competitive business or is in conflict with
business of the first company, he shall not be appointed in second company.

 He shall directly or indirectly not be appointed or associated in any other capacity

with the company either directly or indirectly for a period of 3 years from the date
of cessation.

 A small shareholders’ director may be removed by passing an ordinary resolution

in the general meeting.

 A small shareholders’ director shall be included in the ‘total number of directors’.

Independent Directors

Section 149(4) read with Rule 4 of Companies (Appointment and Qualification of

Directors) Rules, 2014 provides following companies to have specified number of
independent directors:
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However, the following classes of unlisted public company shall not be covered under
sub-rule as above:
(a) a joint venture;
(b) a wholly owned subsidiary; and
(c) a dormant company as defined under section 455 of the Act.

In case a company covered under this rule is required to appoint higher number of
independents directors due to composition of its audit committee and then they shall
appoint such higher number of independent directors.

In case of section 8 companies and specified IFSC public companies this sub section is
not applicable.

if there is any intermittent vacancy of an independent director then it shall be filled up by

the board of directors within 3 months from the date of such vacancy or not later than
immediate next board meeting, whichever is later.

Once the company covered ceases to fulfil any of three conditions for three consecutive
years then it shall not be required to comply these provisions until such time as it meets
any of such conditions.
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Definition of an Independent Director –

Independent Director, in relation to a company, means a director other than a managing

director or a whole-time director or a nominee director—

a) Who in the opinion of the Board, is a person of integrity and possesses relevant
industrial expertise and experience;

b) Such individual shall not be a promoter or related to promoter of the company or

its holding, subsidiary or associate company;

c) Such individual who has or had no pecuniary relationship, other than

remuneration as such director or having transaction not exceeding ten per cent. of
his total income or such amount as may be prescribed, with the company, its
holding, subsidiary or associate company, or their promoters, or directors, during
the two immediately preceding financial years or during the current financial year;

d) none of whose relatives—

 is holding any security of or interest in the company, its holding,

subsidiary or associate company during the two immediately preceding
financial years or during the current financial year:
Provided that the relative may hold security or interest in the company of
face value not exceeding fifty lakh rupees or two per cent. of the paid-up
capital of the company, its holding, subsidiary or associate company or
such higher sum as may be prescribed;

 is indebted to the company, its holding, subsidiary or associate company

or their promoters, or directors, in excess of such amount as may be
prescribed during the two immediately preceding financial years or during
the current financial year;

 has given a guarantee or provided any security in connection with the

indebtedness of any third person to the company, its holding, subsidiary or
associate company or their promoters, or directors of such holding
company, for such amount as may be prescribed during the two
immediately preceding financial years or during the current financial year;

 has any other pecuniary transaction or relationship with the company, or

its subsidiary, or its holding or associate company amounting to two per
cent. or more of its gross turnover or total income singly or in combination
with the transactions.

e) who, neither himself nor any of his relatives—

 holds or has held the position of a key managerial personnel or is or has

been employee of the company or its holding, subsidiary or associate
company in any of the 3 financial years immediately preceding the financial
year in which he is proposed to be appointed for his employment during
preceding three financial years.
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 is or has been an employee or proprietor or a partner, in any of the 3

financial years immediately preceding the financial year in which he is
proposed to be appointed, of:

a) a firm of auditors or company secretaries in practice or cost auditors of

the company or its holding, subsidiary or associate company; or
b) any legal or a consulting firm that has or had any transaction with the
company, its holding, subsidiary or associate company amounting to
10% or more of the gross turnover of such firm;

 holds together with his relatives 2% or more of the total voting power of the
company; or

 is a Chief Executive or director, by whatever name called, of any non-profit

organization that receives 25% or more of its receipts from the company,
any of its promoters, directors or its holding, subsidiary or associate
company or that holds 2% or more of the total voting power of the
company; or

f) who possesses such other qualifications as may be prescribed.

Issue: Can a friend of a director be considered as independent?

view: Law does not prohibit the appointment of a friend of a director of the company as
an independent director, if he fulfils all the legal requirements.

Declaration by an Independent Director- Section 149 (7)

every independent director shall give a declaration that he meets the criteria of
independence when:
(a) he attends the first meeting of the Board as a director;
(b) thereafter at the first meeting of the Board in every financial year; and
(c) whenever there is any change in the circumstances which may affect his status as an
independent director.

Remuneration of an Independent Director- Section 149(9)

an independent director shall not be entitled to any stock option. He may receive
remuneration by way of fee as provided under section 197(5) of the Companies Act, 2013,
reimbursement of expenses incurred for participation in the Board and other meetings
and profit related commission as may be approved by the members.

Tenure of Independent Director

An independent director shall hold office for 5 years in a row, but shall be eligible for
reappointment on passing of a special resolution and other conditions.
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No independent director shall hold office for more than 2 consecutive terms.
It means no independent director shall hold office for more than 10 years in a row.

Note: An Independent director shall be eligible for appointment after the expiration of
three years of ceasing to become an independent director.
The above appointment is only possible when an independent director has not been
associated with the company in any other capacity either directly or indirectly.

It has been clarified that as such while appointment of an ID for a term of less than 5
years would be permissible, appointment for any term (whether for 5 years or less) is to
be treated as a one term.

Role of Independent Director:

Independent directors are required because they perform the following important role:

 Balance the often-conflicting interests of the stakeholders.

 Facilitate withstanding and countering pressures from owners.
 Fulfill a useful role in succession planning.
 Act as a coach, mentor and sounding Board for their full-time colleagues.
 Provide independent judgment and wider perspectives.

Code for Independent Directors

 Uphold ethical standards of integrity and probity;

 Act objectively and constructively while exercising his duties;
 Exercise his responsibilities in a bona fide manner in the interest of the company;
 Devote sufficient time and attention to his professional obligations for informed
and balanced decision making;
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 Not allow any extraneous (unrelated) considerations that will vitiate his exercise
of objective independent judgment in the paramount interest of the company as a
whole, while concurring in or dissenting from the collective judgment of the Board
in its decision making;
 Not abuse his position to the detriment of the company or its shareholders or for
the purpose of gaining direct or indirect personal advantage or advantage for any
associated person;
 Refrain from any action that would lead to loss of his independence;
 Where circumstances arise which make an independent director lose his
independence, the independent director must immediately inform the Board
accordingly;
 Assist the company in implementing the best corporate governance practices

Separate Meeting of Independent Director:

The independent directors of the company shall hold at least one meeting in a financial
year, without the attendance of non-independent directors and members of management.

Appointment of Independent directors

Selection of Independent Director:

The Board shall select a person for the position of independent director who has
appropriate skills, experience and knowledge to discharge its functions and duties
effectively.

Approval from shareholders:

The appointment of independent director(s) of the company shall be approved at the
meeting of the shareholders.

Note: The explanatory statement attached to the notice of the meeting shall include the
opinion of the Board for the proposed appointment of the independent director.
The opinion of the Board shall explain fulfilment of the conditions as specified in
Companies Act, 2013 and its rules.

Finalization of the terms of appointment:

The appointment of independent directors shall be finalized through a letter of
appointment, which shall cover:
(a) The term (period) of appointment;
(b) The expectation of the Board from the Independent director;
(c) The fiduciary duties that come with such an appointment along with accompanying
liabilities;
(d) Provision for providing insurance to the Independent Directors;
(e) The Code of Business Ethics of the company;
(f) List of actions that a director should not do while functioning
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Open to the General Public for Inspection:

The terms and conditions of appointment of independent directors shall be open for
inspection at the registered office by any member during normal business hours.

Terms & Conditions of Appointment on the Company's website:

The terms and conditions of appointment of independent directors shall also be posted
on the company's website.

Resignation or removal of Independent Director:

An independent director shall be resigned or removed subject to the fulfilment of the

following conditions:

Notice in writing:
An Independent director may resign from his office by giving a notice in writing to the
company and the Board.
The receipt of such notice shall be taken into account and shall also be informed to ROC
by the company.

Note: The resignation of a director shall take effect from the date on which the notice is
received by the company or the date as specified by the director, whichever is later.

Replacement of Independent Director:

An independent director who resigns or is removed shall be replaced by an independent
director within 180 days from the date of such resignation or removal.

No Replacement till resignation or removal:

Where the company fulfils the requirement of independent directors even without filling
the vacancy created by resignation or removal, the requirement of Replacement by a new
independent director shall not apply.

Retirement of independent directors:

The provisions in respect of retirement of directors by rotation shall not apply to the
independent directors.

Re-appointment of Independent Director:

The re-appointment of independent director shall be on the basis of report of

performance evaluation for another tenure of 5 years.

LODR Requirement:

A person shall not serve as an independent director in more than seven listed entities.
Provided that any person who is serving as a whole-time director in any listed entity shall
serve as an independent director in not more than three listed entities.
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QUALIFICATION OF INDEPENDENT DIRECTORS

Rule 5 of Companies (Appointment and Qualification of Directors) Rules, 2014

An independent director shall possess appropriate skills, experience and knowledge in
one or more fields of finance, law, management, sales, marketing, administration,
research, corporate governance, technical operations or other disciplines related to the
company's business.

Manner of selection of an Independent Director

a) Selection from Data Bank: Independent directors may be selected from a data
bank of eligible and willing persons maintained by the agency (Anybody, institute
or association as may be authorised by Central Government like ICSI).

b) Approval from Shareholders: The appointment of independent directors has to be

approved by members in a General meeting and the explanatory statement
annexed to the notice must indicate justification for such appointment.

c) Application for adding the name in the databank: Any person who desires to get
his name included in the data bank of independent directors shall make an
application to the agency in Form DIR-1 Application for inclusion of name in the
databank of Independent Directors which includes the personal, educational,
professional, work experience, other Board details of the applicant.

The agency may charge a reasonable fee from the applicant for inclusion of his name in
the data bank of independent directors.
An existing or applicant of such data bank of independent directors shall intimate any
changes in his Particulars within 15 days of such change to the agency.

APPOINTMENT OF DIRECTORS
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Appointment of First Director

Generally, the first directors of the companies are named in AOA of the Company.
If the names of the 1st Director are not given in the AOA of a company, then subscribers
to the MOA who are individuals shall be deemed to be the first directors of the company
until the directors are duly appointed.

In case of OPC, an individual being a member shall be deemed to be its first director until
the director(s) are duly appointed by the member.

DIRECTORS APPOINTED BY BOARD

ADDITIONAL DIRECTOR [Section 161(1)] [kaam jyada hai]

The Board can appoint additional directors provided they are authorised by the Articles
of Association of the Company.
The additional director shall hold office only upto the date of next annual general
meeting or the last date on which the annual general meeting should have been held,
whichever is earlier.
In case, the AGM gets postponed due to any reason, the additional director has to vacate
his office on the date of AGM.

Note: A person who fails to get appointed as a director in a general meeting cannot be
appointed as Additional Director.

Procedure for appointment of Additional Director

 Ensure that the Articles of the company authorise the Board to appoint an
additional director and within the maximum limit of directors mentioned.
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 Ensure that individual proposed to be appointed as an additional director, does

not suffer from any disqualification mentioned.

 Before appointing a person obtain his consent (Form No. DIR-2) to act as director
should be obtained.

 Check whether the additional director to be appointed in the board meeting has
obtained Director Identification Number (DIN). If not then ask such director to
make application to Central Government for obtaining DIN.

 Issue not less 7 days’ notice and agenda of Board Meeting and pass board
resolution for appointment of an additional director to hold office upto the date of
next annual general meeting or due date of next annual general meeting,
whichever is earlier.

 Obtain the declaration from the appointed Director regarding his interest in other
entities in Form MBP-1.

 File a return containing the particulars of appointment of director with RoC in E

Form DIR-12 within 30 days of such appointment.

 Lodging of entries in the register of directors and key managerial personnel and
their shareholding.

 Inform all concerned government authorities about the appointment.

ALTERNATE DIRECTOR [Section 161(2)]

Authorisation for appointment:

The Board of Directors may appoint they are Authorised by AOA of the Company or
By a resolution passed in GM for appointment of alternate director.

Conditions for appointment of alternate director:

a) Outside India for at least 3 months:

The person in whose place the Alternate Director is being appointed should be
absent for a period of not less than 3 months from India.

b) Who cannot be appointed as Alternate Director:

Following persons cannot be appointed as the Alternate Director

 Person holding any alternate directorship for any other Director in the
Company.
 Person holding directorship in the same company.
 A Director cannot be appointed as Alternate Director in the same Company.
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c) Alternate to an Independent Director:

If it is proposed to appoint an Alternate Director to an Independent Director, it
must satisfy the criteria for appointment of an Independent Director.

d) Vacation of Alternate Director Office:

An alternate director shall vacate the office when the original director comes to
India or as permitted by the original director.

Note: If the term of office of the original director is determined before he so returns to
India, any provision for the automatic re-appointment of retiring directors in default of
another appointment shall apply to the original, and not to the alternate director.

NOMINEE DIRECTOR [Section 161(3)] [represent karega]

The Board of Directors may appoint any person as a director nominated by any financial
institution/ Bank or also by private equity partners.
The appointment of Nominee Director is based on the agreement between the financial
institution/Bank for providing loan to the Company.
The Company and the Board of Directors have no option except to appoint such
nominated person as nominated by the Bank/Financial Institution.
Nominee directors are appointed only for the purpose to take care of interest of the
Bank/Financial Institution.

Special Note: The Board is bound to follow instruction or suggestion of Financial

Institution/ Bank etc.

CASUAL VACANCY [Section 161(4)]

The Board of Directors can appoint any person as a director in place of casual vacancy
caused by death or resignation before expiry of the term of a director appointed at
General Meeting.
The appointed director shall hold office only up to the term of the director in whose place
he is appointed. This section applies to every Company whether Private or Public.

APPOINTMENT OF DIRECTORS BY TRIBUNAL

While giving order on an application made under section 241, i.e., for relief in cases of
oppression the Tribunal may provide order for appointment of such numbers of persons
as directors of the company and ask them to report to the Tribunal on matters as the
Tribunal may direct.
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APPOINTMENT OF DIRECTOR BY SYSTEM OF PROPORTIONAL REPRESENTATION

According to section 163 the articles of a company may provide for the appointment of
not less than two-thirds of the total number of the directors of a company in accordance
with the principle of proportional representation,
whether by the single transferable vote or by a system of cumulative voting or otherwise
and such appointments may be made once in every three years and casual vacancies of
such directors shall be filled.

In case of Government Companies, section 163 shall not apply to –

 a Government Companies in which the entire paid up share capital is held by the
Central Government, or by any State Government or by both
 a subsidiary of a Government Company

Appointment of Directors by Members at general Meeting

 Every director shall be appointed by the company in general meeting except

otherwise provided.

 Director Identification Number or any other number prescribed by the CG which

shall be treated as DIN is compulsory for appointment of director of a company.
Every person proposed to be appointed as a director shall furnish his DIN and a
declaration that he is not disqualified to be appointed as director.

 A person appointed as a director shall on or before the appointment give his

consent to hold the office of director in physical Form DIR-2 i.e. Consent to act as
a director of a company.

 The Company has to file Form DIR-12 (particulars of appointment of directors and
KMP along with the Form DIR- 2) within 30 days of the appointment of a director.

RETIREMENT BY ROTATION [AB AARAM KA TIME HAI]

Applicability:

The provisions relating to retire by rotation only applies to the Public Companies.

Non-Applicability:

The provisions relating to retire by rotation will not apply to -

1. Private Company
2. Unlisted Government Company
3. Subsidiary of unlisted Government Company
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Rotational & Non-Rotational Directors [ghumne wale aur fixed director]

Retirement of Rotational Director: [Inko jane do]

At every Annual General Meeting of a public company l/3rd of the Rotational Director
shall retire.

Note:
1. If their number is neither 3 nor a multiple of 3, then, the number nearest to 1/3, shall
retire from office (the number will be rounded off to nearest to l/3rd)

2. The independent directors shall not be included for the computation of total number of
directors retire by rotation.

Who shall retire 1st?

Longest in the office (Method 1):

The directors to retire by rotation at every annual general meeting shall be those who
have been longest in office since their last appointment.

Agreement (Method 2):

If 2 or more directors were appointed on the same day and 1st method fails, then as
agreed by them.

Bv Draw of Lots (Method 3):

If 2 or more directors were appointed on the same day and there is no agreement
between them, then lot will be drawn.
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How to deal with Vacancy in the Office of Retiring Director?

Case I: Re- Appointment of Retiring Director [Tum hi chaiye]

At the annual general meeting at which a director retires as aforesaid, the company may
fill up the vacancy by appointing the retiring director.

 Ensure that the retiring director is not subject to any disqualification for re-
appointment as director of the Company.

 Ensure that the consent of the director as well as the declaration from the director
has been obtained.

 Convene a Board meeting after giving notice to all directors of the company

 Fix the time, place and agenda of the annual general meeting to pass an ordinary
resolution for the reappointment of retiring director

 Send the notice in writing at least 21 clear days before the date of annual general
meeting to the members such notice is required to be sent to the Stock
Exchanges where the shares of company are listed.

 Hold the annual general meeting and pass an ordinary resolution for re-
appointment of the retiring director.

 In case of listed companies, forward a copy of the proceedings of the annual

general meeting to the stock exchanges where the company’s shares are listed.
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Case II: Appointment: of a person other than Retiring Directors (Section 160)
[teri jagah koi aur aayega]

Notice:
A person who is not a retiring director shall be eligible for appointment as director shall
give notice not less than 14 days before the general meeting at the registered office of
the company.

Deposits:
The notice must be in writing under his hand signifying his candidature along with a
deposit of Rs.1,00,000/- which shall be refunded to such person if the person proposed
gets elected as a director or gets more than 25% of the valid votes casted.

The deposit is not required in the following cases:

 Appointment of Independent Director

 A person who is recommended to be appointed as director by NRC or Board (if
NRC constitution is not required by the Company)

7 days' advance Notice:

The Company shall inform its members of the candidature of a person for the office of a
director or the intention of a member to propose such person as a candidate for that
office, at least 7 days before the general meeting by serving individual notices to
members through e-mail and by post.

Advertisement:
If a company advertises such candidature in a vernacular newspaper in the principal
vernacular language of the registered office's district and also in English language not
less than 7 days before the General Meeting then there is no requirement for serving
individual notices to the members.
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Non-Applicability:
The provisions of section 160 will not apply to:

1. Private Company
2. Government Company in which entire capital is held by CG/SG/ both
3. Wholly Owned Subsidiary of such Government Company.
4. Section 8 Company (if it’s AOA provides for election of directors by ballot)

Case III: Resolution is passed that the vacancy need not be filled [na tu nahi koi aur
mangta]

At the annual general meeting at which a director retires as aforesaid, the company may
pass a resolution that the vacancy need not be filled up.

Case IV: Neither vacancy filled nor resolution is passed for not filling the vacancy
[hamse kuch nahi huwa toh?]

If the vacancy of the retiring director is not so filled-up and the meeting has not
expressly resolved not to fill the vacancy then the following procedure be followed:

Step 1: The meeting shall stand adjourned till the same day in the next week, at the same
time and place, or if that day is a national holiday, till the next succeeding day which is
not a holiday, at the same time and place.

Step 2: If at the adjourned meeting also, the vacancy of the retiring director is not filled
up and that meeting also has not expressly resolved not to fill the vacancy, the retiring
director shall be deemed to have been re-appointed at the adjourned meeting, unless:

a) A resolution for the re-appointment of such director has been put to the meeting
and lost;
b) The retiring director has expressed his unwillingness to be so re-appointed;
c) He is not qualified or is disqualified for appointment;
d) A resolution, whether special or ordinary, is required for his appointment or re-
appointment by virtue of any provisions of this Act; or
e) Appointment of directors to be voted individually.

Qualifications of a Director

The Companies Act, 2013 does not prescribe any qualification for holding the position of
directorship by any individually. It means any individual can be appointed as director in
any company subject to fulfilment of the following conditions:

1. He must have obtained Director Identification Number (DIN) before his appointment
from MCA. Central Government may prescribe any identification number which shall be
treated as DIN for the purpose of the Act, and holding that number will be considered
sufficient.
2. He has not been disqualified under section 164.
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Disqualifications of a Director (Section 164) [Tum se na ho payega]

Basic disqualifications

A person shall not be eligible for appointment as a director of a company, if:

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

b) He is an undischarged insolvent;
c) He has applied to be adjudicated as an insolvent and his application is pending;
d) He has been convicted by a court of any offence, whether involving moral
turpitude or otherwise, and sentenced in respect thereof to imprisonment for not
less than 6 months and a period of 5 years has not elapsed from the date of expiry
of the sentence.

Note: If a person has been convicted of any offence and sentenced in respect thereof to
imprisonment for a period of 7 years or more, he shall never be eligible to be appointed
as a director in any company.

e) An order disqualifying him for appointment as a director has been passed by a

court or Tribunal and the order is in force;
f) He has not paid any calls in respect of any shares of the company held by him,
whether alone or jointly with others, and 6 months have elapsed from the last day
fixed for the payment of the call;
g) He has been convicted of the offence dealing with related party transactions at
any time during the last preceding 5 years; or
h) He has not got the DIN.

The above disqualifications mentioned in clauses (d), (e) and (g) shall continue to apply
even if the appeal or petition has been filed against the order of conviction or
disqualification.

Additional disqualification based on Non-Compliances (Section 164(2) :

A director shall also be treated as disqualified in case of following non-compliances:

What are the non-Compliances?

(a) non-filing of financial statement and annual return for continuous 3 financial years; or
(b) Defaulted in payment of debentures/deposit/dividend in any year.

Impact of the above Disqualifications:

Such director shall
 Not be eligible for appointment as director in any company for 5 years from the
date of default,
 Not be eligible for re-appointment in the same company for 5 years from the date
of default.

Note: A private company may prescribe additional disqualifications for appointment of a

director in its Articles in addition to the above disqualifications of a Director.
"Provided that where a person is appointed as a director of a company which is in default
 P a g e | 376

of Section 164(2) he shall not incur the disqualification for a period of six months from
the date of his appointment."

Rule 14 of the Companies (Appointment and Qualification of Directors) Rules,

2014
Every director who is disqualified as above, shall inform to the company before his
appointment or re-appointment (in Form DIR-8).

The company shall immediately file Form DIR-9 to the ROC relating to such directors of
the company within 30 days from the date of failure.

Upon receipt of the Form DIR-9, the Registrar shall immediately register the document
and place it in the document file for public inspection.

VACATION OF OFFICE OF DIRECTOR (Section 167 of the Companies Act, 2013)

[Maine chodh diya]

The office of a director shall become vacant in case:

 He disqualifies as per section 164.

"Provided that where he incurs disqualification under sub-section (2) of section
164, the office of the director shall become vacant in all the companies, other than
the company which is in default under that sub-section”

 He absents himself from all the Board meetings during a period of 12 months with
or without leave of absence from the Board;

 He acts in contravention of the provisions of section 184 relating to entering into

contracts or arrangements in which he is directly or indirectly interested;

 He fails to disclose his interest (direct or indirect) in any contract or arrangement.

 He becomes disqualified by an order of a court or the Tribunal;

 He is convicted by a court of any offence, whether involving moral turpitude or

otherwise and sentenced in respect to imprisonment for not less than 6 months:
PROVIDED that the office shall be vacated by the director even if he has filed an
appeal against the order of such court;

 He is removed in pursuance of the provisions of this Act;

 He, having been appointed a director by virtue of his holding any office or other
employment in the holding, subsidiary or associate company, ceases to hold such
office or other employment in that company.
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Imprisonment & Fine: In case of failure to vacate the position of directorship, the
person shall be liable for punishment for a term which may extend to 1 year or with fine
not less than Rs.1,00,000/- but not more than Rs.5,00,000/- or with both.

Special Note: Section 167(3) of the Act provides that if due to any happening vacation of
office arises in case of all the directors.
Then required number of directors be appointed by Promoter and in absence of promoter
by Central Government. The directors appointed will hold the position until regular
directors are appointed in General Meeting.

Note: A private company may prescribe additional grounds of vacation of a director in its
articles in addition to the above disqualifications of a director.

RESIGNATION OF DIRECTOR (Section 168 of the Companies Act, 2013) [ muje nahi
karna kaam]

According to section 168 –

a) A director may resign from its office by giving a notice with the reasons of
resignation in writing to the company.

b) The Board shall on receipt of such a notice from a director shall take note of the
same.

c) The company shall within 30 days from the date of receipt of notice of resignation
from a director, intimate the registrar in Form DIR-12 and post the information on
its website.

d) The board shall place the facts of such resignation by the director in the Report of
Directors laid in immediately following general meeting by the company.
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e) The Director may within 30 days from his resignation, forward to the registrar a
copy of his resignation along with reasons for resignation with reasons provided
therein in Form DIR-11 along with the fee provided.
In case of Specified IFSC public and private company, a director may file Form
DIR-11 to the Registrar.

f) The resignation shall be effective from the date on which the notice is received by
the company or the date specified by the Director in the notice whichever is later.

g) When all the Directors resign at the same time under section 167, in such case the
required number of directors are to be appointed by the promoter or in his
absence, the Central Government.
The Directors so appointed shall hold office till the Directors are appointed by the
company in general meeting.

The proviso to sub section (2) of section 168 of Companies Act, 2013 clarifies that the
Director who shall be liable even after his resignation for the offences which occurred
during his tenure.

REMOVAL OF DIRECTORS (Section 169 of the Companies Act, 2013)

Under section 169 of the Act, a company may, by ordinary resolution remove a director
before the expiry of the period of his office.

Removal of Director by Shareholders

a company may, by ordinary resolution, remove a director, not being a director

appointed by the Tribunal under section 242, before the expiry of the period of his office
after giving him a reasonable opportunity of being heard.

The provision relating to removal shall not apply where the company has availed itself of
the option to appoint not less than two – thirds of the total number of directors according
to the principle of proportional representation.

Removal of Director by the National Company Law Tribunal

Where an application has been made to the National Company Law Tribunal under
Section 241 of the Companies Act 2013 for prevention of oppression or mismanagement
and the Tribunal has conducted its proceedings on the application, it has the power
under Section 242(2)(h) of the Act, to remove any director.

Procedure for Removal of Director

The following procedure is required to be adopted for removal of a director:

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a) A special notice from a member of the company proposing an ordinary resolution

for removing the director is necessary.

b) Send forthwith a copy of the special notice to the director proposed to be

removed.

c) Decision to call a general meeting through the Board resolution.

d) Issue notice of the general meeting in writing at least twenty-one clear days before
the date of the meeting informing about the special notice and proposing the
ordinary resolution for removal.

e) In the notice of the meeting, state the facts of the representation made by the
director concerned and also send a copy of the representation to every member of
the company to whom notice of the meeting is sent.

f) If the representation is received too late and it could not be sent to the members,
the director concerned may require that the representation shall be read out at the
meeting. The director concerned has also the right of being heard at the meeting.

g) However, the National Company Law Tribunal on an application of the company or

any other person who claims to be aggrieved, on having satisfied, may dispense
with the procedure of sending a copy of representation and reading thereof at the
meeting if it is being used to secure needless publicity for defamatory matter.

h) In case of listed company, send notice of the general meeting to the stock
exchange(s) within 24 hours of the occurrence of the event where the company is
listed and forward a copy of proceedings of meeting.

i) The company has to file particulars of director in Form DIR – 12 with the Registrar
of Companies within thirty days of the removal after paying the requisite fee
electronically.
the following attachments are required:
(a) Notice of resignation;
(b) Evidence of Cessation;
(c) Interest in other entities.
Ensure that said Form is digitally signed by managing director or manager or secretary
of the company and also certified by a Company Secretary or Chartered accountant or
Cost accountant in Whole time practice by digitally signing it.

j) The particulars of the director and other aspects of the director have accordingly
to be modified in the registers maintained.

k) Give a general public notice in newspaper regarding removal of the director if it is

so warranted for the protection of the company and benefit of the general public.
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RIGHTS AND DUTIES OF DIRECTORS

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

 Duty to act as per the articles of the company-

The director of a company shall act in accordance with the articles of the
company.

 Duty to act in good faith-

A director of a company shall act in good faith in order to promote the company,
its employees, the shareholders, and the community and for the protection of
environment.

 Duty to exercise due care-

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

 Duty to avoid conflict of interest-

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

 Duty not to make any undue gain-

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

 Duty not to assign his office-

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

Punishment for contravention

If a director of the company contravenes the provisions of this section such director
shall be punishable with fine which shall not be less than 1 lakh rupees but which may
extend to 5 lakh rupees.

REGISTER OF DIRECTORS AND KEY MANAGERIAL PERSONNEL AND THEIR

SHAREHOLDING

Section 170 makes it obligatory for every company to maintain a register containing the
prescribed particulars of all its directors and Key Managerial Personnel and their
shareholding.
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 Every company shall keep at its registered office a register containing such
particulars of its directors and key managerial personnel as may be prescribed
and which shall include details of securities held by each of them in the company
or its holding, subsidiary, subsidiary of its holding companies or associate
companies.
 A return containing such particulars and documents as may be prescribed, of the
directors and the key managerial personnel shall be filed with the Registrar in e-
form DIR-12 within 30 days from the appointment of every director and key
managerial personnel, as the case may be, and within 30 days of any change
taking place.

MEMBERS RIGHT TO INSPECT (SECTION 171)

 The register of directors and Key Managerial Personnel kept under section 170(1)
shall be open for inspection during business hours and the members shall have
the right to take extracts there from and copies thereof, on request and will be
provided within 30 days free of cost.

 Such register shall also be kept open for inspection at every annual general
meeting of the company and shall be made accessible to any person attending the
meeting.

 If any inspection during business hours is refused, or if any copy required as

above is not sent within thirty days from the date of receipt of such request, the
Registrar shall on an application made to him order immediate inspection and
supply of copies required there under. [Section 171(2)]

In case of Government Company - Section 171 shall not apply to Government Company
in which the entire share capital is held by the Central Government, or by any State
Government or Governments or by the Central Government or by one or more State
Government.

LOANS TO DIRECTORS (SECTION 185)

This section puts restriction on company in connection with giving loan or guarantee or
provides any securities to its directors or to any person in whom director is interested.

The content is as per Amendment and Substitution by Companies (Amendment) Act,

2017.

To understand this section let us divide the loans to directors or any other person in
whom director is interested in three parts:
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I. PROHIBITED CATEGORY:

Any Company shall not (directly or indirectly) Advance any loan (including book debt) to

■ Any director of Company or its Holding Company; or

■ Any partner or relative of any such director; or
■ Any firm in which any such director or relative is partner

Given any guarantee or provide any security in connection with any loan taken by any
director of Company or its Holding Company; or Any partner or relative of any such
director; or Any firm in which any such director or relative is partner.

II. RESTRICTED CATEGORY

A company may subject to the conditions mentioned below

■ Advance any loan (including book debt) to any person in whom any of the director is
interested, or
■ Given any guarantee or provide any security in connection with any loan taken by any
person in whom any of the director of the company is interested

Meaning of Any person in whom any of the director of the company is interested
means—

 Any private company of which any such director is a director or member;

 Any body corporate at a general meeting of which 25% or more of the total voting
power may be exercised or controlled by any such director, or by two or more
such directors, together; or
 Any body corporate, the Board of Directors, managing director or manager,
whereof is accustomed to act in accordance with the directions or instructions of
the Board, or of any director or directors, of the lending company.
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Condition to grant above loans and guarantee/securities-

1. Special Resolution-
SR needs to be passed by the company in general meeting.
The explanatory statement to the notice of GM shall disclose the full particulars of the
loans given, or guarantee given or security provided and the purpose for which the loan
or guarantee or security is proposed to be utilised by the recipient of the loan or
guarantee or security.

2. The loans are utilised by the borrowing company for its principal business activities.

III. PERMITTED CATEGORY

The section does not apply to loans granted under following 4 categories and therefore
these loans/securities/guarantees can be provided by the Company:

1. Loan to MD, WTD:

The section will not apply to loan given to Managing Director, Whole Time Director,
therefore loan can be provided if any of the following 2 conditions are satisfied:

Conditions:

• The loan is given as a part of the conditions of service extended by the company to all
its employees; or
• The loan is granted pursuant to any scheme approved by the members by a special
resolution.

2. Loan/Guarantee/Security in Ordinary Course of Business:

A company which in the ordinary course of its business provides loans or gives
guarantees or securities can grant such loans if it satisfies the following condition:

Condition:

Interest is charged at a rate not less than the rate of prevailing yield of one year, three
years, five years or ten years Government security closest to the tenor of the loan.

3. Loan/Guarantee/Security to Wholly Owned Subsidiary:

Any loan made by a holding company to its wholly owned subsidiary company or any
guarantee given or security provided by a holding company in respect of any loan made
to its wholly owned subsidiary company.

Condition:

The loans are utilised by the wholly owned subsidiary company for its principal
business activities.
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4. Guarantee/Security in case of Subsidiary Company:

Any guarantee given or security provided by a holding company in respect of loan made
by any bank or financial institution to its subsidiary company.

Condition:

The loans are utilised by the subsidiary company for its principal business activities

Note: A company may give loan to managing or whole-time director as part of the
conditions of service extended by the company to all its employees or pursuant to any
scheme approved by the members by a special resolution.

PUNISHMENT OF CONTRAVENTION:

■ To the Company: Fine Minimum Rs.5 lakh to Maximum Rs.25 lakh

■ To the Office in Default: Imprisonment upto 6 months or Fine of Minimum Rs.5 lakh to
Maximum Rs.25 lakh or Both

➢ To the person to whom Loan/Guarantee/Security is given: Imprisonment

upto 6 months or Fine: Minimum Rs.5 lakh to Maximum Rs.25 lakh or Both.
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CHAPTER – 15

Board Composition
and Powers of the board

INTRODUCTION

The power of management of the company is vested in

the Board of Directors as a result of the Companies
Act as well as the Articles of Association of the
company unless and until the general body by the
policy of its Articles chooses to take them away, and
substitute others more to its taste, the Board of
Directors in its right continues to manage the affairs of the
company. The decisions of the Board of Directors are to be taken by a majority.

Section 2(10) of the Companies Act, 2013 defines that “Board of Directors” or “Board”, in
relation to a company, means the collective body of the directors of the company.

BOARD COMPOSITION

Only Individuals as Directors-

Section 149(1) of the Companies Act, 2013 provides that only an individual can
become a director.
As per clause (34) of Section 2 of the Act, “director” means a director appointed to the
Board of a company. Therefore, an individual who is appointed to the Board of a
company is a director.

Minimum number of Directors:

Section 149(1) of the Companies Act, 2013 requires that Board needs to have a minimum
of:
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(i) 3 Directors in case of a public company;

(ii) 2 Directors in the case of a private company; and
(iii) 1 Director in the case of a One Person Company.

Regulation 17 of the SEBI (LODR) Regulations, 2015 prescribes that the board of
directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000
listed entities (with effect from April 1, 2020) shall comprise of not less than six directors.

Minimum number of Directors in case of Producer Companies

Section 378(o) provides that Every Producer Company shall have at least 5 and not more
than 15 directors:
Provided that in the case of an inter-State co-operative society incorporated as a
Producer Company, such company may have more than fifteen directors for a period of
one year from the date of its incorporation as a Producer Company.

Maximum number of Directors

Section 149(1) of the Companies Act, 2013 permits a maximum of 15 directors on the
Board. However, a company may appoint more than 15 directors after passing a special
resolution.
Government and Section 8 Companies are allowed to appoint more than 15 directors
without passing special resolution.

Number of Directors falling below minimum

If strength of directors falls below statutory minimum prescribed in the Act or Articles,
the decisions taken shall not be valid. If the Articles prescribe for a higher limit of
quorum than the higher number will have to be complied with.
If the number of directors is as per statutory minimum but less than that as per the
articles than also the decision taken shall not be valid for want of quorum.

Board Composition in Listed Entities [ REGULATION 17]

Board of Directors shall have optimum combination of executive and non-executive

directors with at least one- woman director and not less than fifty per cent. of the board
of directors shall comprise of non-executive directors.

However, the Board of directors of the top 1000 listed entities shall have at least one
independent woman director by April 1, 2020.

No listed entity shall appoint a person or continue the directorship of any person as a
non-executive director who has attained the age of seventy-five years unless a special
resolution is passed.
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What is the difference between the term “Non Executive” and “Independent Director” of
the Company?

Non-Executive Director of a company simply means a person not holding a position as

an executive in the company. Such a director may or may not be an independent director.

An independent director on the other hand means a director, other than a managing
director or a whole-time director or a nominee director and is one who fulfills the criteria
laid down under Section 149 of the Companies Act 2013, in addition, to the criteria laid
down under regulation 16(1)(b) of the SEBI (LODR) Regulations, 2015.

All non- executive directors need not be independent directors, but all independent
directors are non- executive director.

Number of Directorships [Section 165]

Limit on Number of Directorships:

As per the provisions of section 165(1) of the Act, the maximum number of directorships
shall be as under:

 Maximum directorships in aggregate (including alternate directorships) is 20 at

the same time;
 Maximum directorship in public companies is 10 companies. This includes
directorship in private companies that are either holding or subsidiary company of
a public company.
 the Directorship in a dormant company shall not be included.
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 Maximum number of Directorship that a person can hold including alternate

Directorship to be twenty companies - shall not be applicable to a section 8
company.

In case a person accepts an appointment as a director in violation of Section 165, he

shall be liable to a penalty of two thousand rupees for each day after the first during
which such violation continues, subject to a maximum of two lakh rupees.

Additional Requirements for Listed Companies

Maximum number of Directorship [Regulation 17A of the SEBI (LODR) Regulations, 2015]

 A person shall not be a director in more than seven listed entities with effect from
April 1, 2020.
However, a person shall not serve as an independent director in more than seven
listed entities.
 Any person who is serving as a whole time director/managing director in any
listed entity shall serve as an independent director in not more than three listed
entities.

Maximum Number of Committee Membership & Chairpersonship [REGULATION 26]

 A director shall not be a member in more than ten committees or act as

chairperson of more than five committees across all listed entities in which he /
she is a director which shall be determined as follows:

a) the limit of the committees on which a director may serve in all public limited
companies, whether listed or not, shall be included and all other companies
including private limited companies, foreign companies and companies under
Section 8 of the Companies Act, 2013 shall be excluded;

b) for the purpose of determination of limit, chairpersonship and membership of

the audit committee and the Stakeholders’ Relationship Committee alone shall
be considered.

Question- Mr. A is a Director in the following Companies:

1. SSS Limited
2. PPP Private Limited
3. UUU Limited (A Subsidiary of SSS Limited)
4. HHH Private Limited (A Subsidiary of SSS Limited)
5. LLL Limited (A Dormant Company)
6. FFF Private Limited

In how many Companies, Mr. A can further be appointed as Director?

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Answer-

He is already a Director in following three Public Companies i.e. SSS Limited, UUU
Limited and HHH Private Limited which is a deemed public Company by virtue of Section
165. LLL Limited is excluded from the number of directorship since it is a Dormant
Company.
He is Director in two Private Companies namely PPP Private Limited and FFF Private
Limited. He is Director in total five Companies. He can further be appointed as Director in
Fifteen Companies out of which not more than seven shall be Public Companies.

BOARD COMMITTEES

A board committee is a small working group

identified by the board, consisting of board
members, for the purpose of supporting the board’s
work.
These committees prepare the groundwork for
decision-making and report at the subsequent
board meeting.

AUDIT COMMITTEE

Audit Committee is one of the main pillars of the Corporate Governance mechanism in
any company.
The main function of an Audit Committee is oversight of financial disclosures, reporting,
internal and external audits, internal control, accounting, regulatory compliance and risk
management.

Constitution of Audit Committee

Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings
of the Board and its Powers) Rules, 2014,
provides that the Board of Directors of following companies are required to constitute an
Audit Committee –

 Every listed public company;

 All public companies with a paid-up share capital of 10 crore rupees or more; or
 All public companies having turnover of 100 crore rupees or more; or
 All public companies, having in aggregate, outstanding loans, debentures and
deposits exceeding 50 crore rupees
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The following classes of unlisted public companies shall not be covered for the above
purpose: -

(a) a joint venture;

(b) a wholly owned subsidiary; and
(c) a dormant company as defined under section 455 of the Act.

Composition of the Audit Committee

Category Provisions of Provisions of Regulation 18

Section 177 of SEBI (LODR)
of the Companies Act, 2013 Regulations, 2015

Number of Minimum 3 directors as Minimum 3 directors as

Directors members members

Independent Independent directors need At least two-thirds of the

Directors to form majority except members of audit committee
Section 8 Company. shall be independent
directors.

In case of outstanding SR
equity shares, only comprise
of independent directors

Chairperson The Companies Act, 2013 An Independent Director

does not prescribe that the
Chairman shall be an
independent Director.

Educational Majority of members of Audit All members of audit

qualification Committee including its committee need to be
chairperson must have ability financially literate and at least
to read and understand the one member shall have
financial statement accounting or related
financial management
expertise.

Presence in AGM/ GM Not provided in the Act, The chairperson of the audit
however, SS-2 provides that committee shall be present at
can attend the general Annual general meeting to
meeting. answer shareholder queries.

Secretary of the Committee Not provided Company Secretary

Meeting of the Audit As per SS-1, Audit At least 4 times in a year and
Committee Committee shall meet as not more than 120 daysshall
prescribed by any law or any elapse between two meetings
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authority or as stipulated by
the Board.

quorum for the meeting The Quorum for Meetings of Two members or one third of
Committee constituted by the members of the audit
the Board shall be as committee, whichever is
specified by the Board. If no greater, with at least two
such Quorum is specified, the independent directors.
presence of all the members
of such Committee.

Power of Audit Committee The Audit committee has The audit committee shall
authority to investigate into have powers to investigate
any matter in relation to the any activity within its terms
items specified under Section of reference, seek
177(4) of the Act or referred information from any
to it by the Board. employee, obtain outside
legal or other professional
advice and secure
attendance of outsiders with
relevant expertise.

Functions/Role of the Audit Committee

 The recommendation for appointment, remuneration and terms of appointment of

auditors of the company;
 Approval of payment to statutory auditors for any other services rendered by the
statutory auditors;
 Reviewing, with the management, the quarterly financial statements before
submission to the Board for approval
 Approval or any subsequent modification of transactions of the listed entity with
related parties;
 Scrutiny of inter-corporate loans and investments;
 Valuation of undertakings or assets of the listed entity, wherever it is necessary;
 Evaluation of internal financial controls and risk management systems
 To review the functioning of the whistle blower mechanism;

The Audit Committee shall mandatorily review the following information:

 Management discussion and analysis of financial condition and results of

operations;
 Statement of significant related party transaction (as defined by the audit
committee), submitted by management;
 Management letters / letters of internal control weaknesses issued by the
statutory auditors;
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 Internal audit reports relating to internal control weaknesses; and

 The appointment, removal and terms of remuneration of the chief internal auditor
shall be subject to review by the audit committee.
 Statement of deviations.

Omnibus approval of Related Party Transactions [Rule 6A of the Companies (Meetings of

board and its Powers) Rules, 2014].
The Audit Committee must, after obtaining approval of the Board of Directors, specify the
criteria for making omnibus approval for related party transactions proposed to be
entered into by the company, which need to include the following conditions, namely:

a) maximum value of the transactions, in aggregate, which can be allowed under the
omnibus route in a year;
b) the maximum value per transaction which can be allowed;
c) extent and manner of disclosures to be made to the Audit Committee at the time
of seeking omnibus approval;
d) review, at such intervals as the Audit Committee may deem fit, related party
transaction entered into by the company pursuant to each of the omnibus
approval made;
e) transactions which cannot be subject to the omnibus approval by the Audit
Committee.

The Audit Committee need to consider the following factors while specifying the criteria
for making omnibus approval, namely: -

a) repetitiveness of the transactions (in past or in future);

b) justification for the need of omnibus approval.

The omnibus approval shall contain or indicate the following: -

a) name of the related parties;

b) nature and duration of the transaction;
c) maximum amount of transaction that can be entered into;
d) the indicative base price or current contracted price and the formula for variation
in the price, if any; and
e) any other information relevant or important for the Audit Committee to take a
decision on the proposed transaction:

Provided that where the need for related party transaction cannot be foreseen and
aforesaid details are not available, audit committee may make omnibus approval for such
transactions subject to their value not exceeding rupees one crore per transaction.

Omnibus approval shall be valid for a period not exceeding one financial year and shall
require fresh approval after the expiry of such financial year.

Omnibus approval shall not be made for transactions in respect of selling or disposing of
the undertaking of the company.
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Transaction involving less than Rs. 1 Crore-

As per third proviso to clause (iv) of Section 177(4) in case of related party transaction
involving any amount not exceeding one crore rupees is entered into by a director or
officer of the company without obtaining the approval of the Audit Committee and it is
not ratified by the Audit Committee within three months from the date of the transaction,
such transaction shall be voidable at the option of the Audit Committee and if the
transaction is with the related party to any director or is authorised by any other director,
the director concerned shall indemnify the company against any loss incurred by it.

Transaction between Holding Company and Wholly Owned Subsidiary

As per fourth proviso to clause (iv) of Section 177(4), for any related party transaction
other than section 188, between a holding company and its wholly owned subsidiary
company the approval of audit committee is not required.

However, if such transaction is covered under section 188, between a holding company
and its wholly owned subsidiary company or between a holding company and its other
than wholly owned subsidiary company the approval of audit committee is must.

VIGIL MECHANISM [SECTION 177(9) TO 177(10)]

Section 177(9) of the Act read with Rule 7 of the Companies (Meetings of Board and its
Powers) Rules, 2014 provides for establishment of Vigil Mechanism for their directors
and employees to report their genuine concerns or grievances as under:

 Every listed company;

 the companies which accept deposits from the public;
 the companies which have borrowed money from banks and public financial
institutions in excess of fifty crore rupees.

Regulation 22 of the SEBI (LODR) Regulations, 2015 provides that the listed company
shall formulate a vigil mechanism/ whistle blower policy for directors and employees to
report genuine concerns and such mechanism shall provide for adequate safeguards
against victimization of director(s) or employee(s) or any other person who avail the
mechanism and also provide for direct access to the chairperson of the audit committee
in appropriate or exceptional cases.

The details of establishment of the Vigil Mechanism is required to be disclosed by the

company on its website, if any, and in the Board’s report.

NOMINATION AND REMUNERATION COMMITTEE [SECTION 178]

The Nomination and Remuneration Committee helps the Board of Directors in the
preparations relating to the election of members of the Board of Directors, and in
handling matters within its scope of responsibility that relate to the conditions of
employment and remuneration.
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Constitution of Nomination and Remuneration Committee

The Board of Directors of following companies shall constitute Nomination and

Remuneration Committee of the Board:

a) Every listed Public Company; or

b) all public companies with a paid-up share capital of ten crore rupees or more;
c) all public companies having turnover of one hundred crore rupees or more;
d) all public companies, having in aggregate, outstanding loans, debentures and
deposits, exceeding fifty crore rupees.

The following classes of unlisted public company shall not be covered for above
purpose: -
(a) a joint venture;
(b) a wholly owned subsidiary; and
(c) a dormant company as defined under section 455 of the Act.
(d) section 8 companies

Composition of Nomination and Remuneration Committee

Category Provisions of Section 178 Provisions of Regulation 19

of the Companies Act, 2013 of SEBI (LODR)
Regulations, 2015

Number of Directors Minimum 3 or more non- Minimum 3 non-executive

executive directors as directors as members.
members.
The chairperson of the listed
The chairperson of the entity (whether executive or
company (whether executive non-executive) may be
or non-executive) may be appointed as a member of
appointed as a member of the Committee but shall not
the Committee but shall not chair such Committee.
chair such Committee.

Independent Directors Of the total members, one- At least two-thirds of the

half shall be independent members of the committee
directors. shall be independent
directors.

Chairperson Not Provided An Independent Director.

Presence in AGM/GM The chairperson of The Chairperson of the

committee or, in his absence, nomination and remuneration
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any other member of the committee may be present at

committee authorized by him the annual general meeting,
in this behalf shall attend to answer the shareholders’
the general meetings of the queries’
company.

Meeting of the Nomination As per SS-1, Committees At least once in a year.

and Remuneration shall meet as often as
Committee necessary subject to the
minimum number and
frequency prescribed by any
law.

Quorum for the meeting As per SS-1, Unless Two members or one-third of
otherwise stipulated in the the members of the
Act or the Articles or under committee, whichever is
any other law, the Quorum greater, including at least one
for Meetings of Committee independent director in
constituted by the Board shall attendance.
be as specified by the Board.

Functions of Nomination and Remuneration Committee

 the level and composition of remuneration is reasonable and sufficient to attract,

retain and motivate the directors of the quality required to run the company
successfully.
 relationship of remuneration to performance is clear and meets appropriate
performance benchmarks;
 Formulation of criteria for evaluation of performance of Independent Directors and
the Board of Directors;
 Devising a policy on diversity of Board of Directors;
 Whether to extend or continue the term of appointment of the Independent
Director, on the basis of the report of performance evaluation of Independent
Directors;
 Recommend to the Board, all remuneration, in whatever form, payable to senior
management.

STAKEHOLDERS RELATIONSHIP COMMITTEE [SECTION 178]

Constitution of Stakeholders Relationship Committee

The Board of Directors of a company which consists of more than 1000 shareholders,
debenture-holders, deposit- holders and any other security holders at any time during a
financial year shall constitute a Stakeholders Relationship Committee.
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Composition of Stakeholders Relationship Committee

Category Provisions of Section Provisions of Regulation 20

178(5) of the Companies of SEBI (LODR)
Act, 2013 Regulations, 2015

Number of Directors Stakeholders Relationship i) Minimum 3 directors as

Committee shall consist of a members with at least one
chairperson and such other being an independent
members as may be decided director;
by the Board.

ii) In case of a listed entity

having outstanding SR equity
shares, at least two thirds
shall comprise of
independent directors.

Chairperson Chairperson shall be a non- Chairperson shall be a non-

executive director executive director

Presence in AGM/GM The Chairperson of The Chairperson of the

Stakeholder’s Relationship Stakeholders Relationship
Committee or, in his Committee shall be present
absence, any other member at the annual general
of the committee authorized meetings to answer queries
by him in this behalf shall of the security holders.
attend the general meetings
of the company.

Meeting of the As per SS-1, Committees At least once in a year.

Stakeholder’s Relationship shall meet as often as
Committee necessary subject to the
minimum number and
frequency prescribed by any
law or any authority or as
stipulated by the Board.

quorum for the meeting As per SS-1, Unless Not specified.

otherwise stipulated in the
Act or the Articles or under
any other law, the Quorum
for Meetings of Committee
constituted by the Board shall
be as specified by the Board

Functions of Stakeholders Relationship Committee

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 Resolving the grievances of the security holders of the listed entity including
complaints related to transfer/ transmission of shares, non-receipt of annual
report, non-receipt of declared dividends, issue of new/ duplicate certificates,
general meetings etc.
 Review of measures taken for effective exercise of voting rights by shareholders.
 Review of adherence to the service standards adopted by the listed entity in
respect of various services being rendered by the Registrar & Share Transfer
Agent.
 Review of the various measures and initiatives taken by the listed entity for
reducing the quantum of unclaimed dividends and ensuring timely receipt of
dividend warrants/annual reports/statutory notices by the shareholders of the
company.
Penalty for Contravention of Section 177 and 178
In case of any contravention of the provisions of section 177 and section 178, 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 one lakh rupee.
However, inability to resolve or consider any grievance by the Stakeholders Relationship
Committee in good faith shall not constitute a contravention of this section.

RISK MANAGEMENT COMMITTEE

A Risk Management Committee fosters an integrated, enterprise-wide approach to
identify and manage risk and provides an impetus toward improving the quality of risk
reporting and monitoring, both for management and the Board.

Constitution of Risk Management Committee

The Companies Act, 2013 does not specifically contain any provisions with respect to
constitution of a Risk Management Committee.
Regulation 21 of the SEBI (LODR) Regulations, 2015 requires that the company through
its Board of Directors shall constitute a Risk Management Committee.
The provisions of this regulation shall be applicable to top 1000 listed entities.

Composition of Risk Management Committee

 The Risk Management Committee shall have minimum 3 members with majority of
them being members of the board of directors, including at least one independent
director.
 In case of a listed entity having outstanding SR equity shares, at least two-thirds
of the Risk Management Committee shall comprise of independent directors.
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 The Chairperson of the Risk management committee shall be a member of the

board of directors and senior executives of the listed entity may be members of
the committee.

Meetings/quorum

 The risk management committee shall meet at least twice in a year not more than
180 days shall elapse between any two consecutive meetings.
 The quorum for a meeting of the Risk Management Committee shall be either two
members or one-third of the members of the committee, whichever is higher,
including at least one member of the board of directors in attendance.

Functions/Role of Risk Management Committee

 To formulate a detailed risk management policy

 To ensure that appropriate methodology, processes and systems are in place to
monitor and evaluate risks associated with the business of the Company;
 To monitor and oversee implementation of the risk management policy, including
evaluating the adequacy of risk management systems;
 To periodically review the risk management policy, at least once in two years,
including by considering the changing industry dynamics and evolving
complexity;
 To keep the board of directors informed about the nature and content of its
discussions, recommendations and actions to be taken.

CORPORATE SOCIAL RESPONSIBILITY COMMITTEE [SECTION 135]

Applicability of CSR Committee

 Every company having net worth of Rs.500 crore or more, or turnover of Rs.1000
crore or more or a net profit of Rs.5 Crore or more during the immediately
preceding financial year shall constitute a Corporate Social Responsibility
Committee of the Board.
 Where the CSR obligation of the company does not exceed Rs.50 Lakhs, the
requirement for constitution of the Committee shall not be applicable and the
functions of such Committee shall be discharged by the Board of Directors of
such company.
 A company having any amount in its Unspent Corporate Social Responsibility
Account as per Section 135(6) shall constitute a CSR Committee and comply with
the provisions.
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Composition of CSR Committee

 The CSR Committee shall consist of 3 or more Directors, out of which at least 1
Director shall be an Independent Director.
 Where a company is not required to appoint an Independent Director it shall have
in its Committee two or more Directors.
 A private company having only 2 directors on its Board shall constitute its CSR
Committee with two such directors.
 With respect to a foreign company, the CSR Committee shall comprise of at least
2 persons out of which one person shall be nominated by the foreign company.

Meetings/Quorum

 As per SS-1, the committee shall meet as minimum number and frequency
prescribed by any law or any authority or as stipulated by the Board.

 A member of the Committee appointed by the Board or elected by the Committee

as Chairman of the Committee, in accordance with the Act or any other law or the
Articles, shall conduct the Meetings of the Committee.
If no Chairman has been so elected or if the elected Chairman is unable to attend
the Meeting, the Committee shall elect one of its members present to chair and
conduct the Meeting of the Committee, unless otherwise provided in the Articles.

 Quorum of CSR Committee- Unless otherwise stipulated in the Act or the Articles
or under any other law, the Quorum for Meetings of CSR Committee constituted
by the Board shall be as specified by the Board.
If no such Quorum is specified, the presence of all the members of such
Committee is necessary to form the Quorum.

Functions of CSR Committee

 To formulate and recommend to the Board, a CSR Policy which shall indicate the
activities to be undertaken by the company in areas or subjects as specified in
Schedule VII of the Companies Act, 2013.
 To recommend the amount of expenditure to be incurred on the CSR activities.
 To monitor the Corporate Social Responsibility Policy of the company from time
to time.
 the modalities of utilisation of funds and implementation schedules for the
projects or programmes;
 monitoring and reporting mechanism for the projects or programmes; and
 details of need and impact assessment, if any, for the projects undertaken by the
company.
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Disclosures related to CSR Committee

 The Board of Directors of every company required to form a CSR Committee shall
after taking into account the recommendations made by such Committee, approve
the Corporate Social Responsibility Policy for the company and disclose contents
of such Policy in its report and also place it on the company’s website.
 The Board of Directors of the Company are mandatorily required to disclose the
composition of the CSR Committee, and CSR Policy and Projects approved by the
Board on their website, if any, for public access.

OTHER BOARD COMMITTEES

1. Corporate Governance Committee;
2. Science, Technology & Sustainability Committee;
3. Regulatory, Compliance & Government Affairs Committee;
4. Investment Committee;
5. Ethics Committee etc.

POWERS OF BOARD [SECTION 179]

Powers to be exercised in board Meeting
Section 179 of the Companies Act, 2013 empowers the Board to exercise all powers, and
to do all such acts and things, as the company is authorised to exercise and do, except
those powers which can only be exercised or done by the company in a general meeting.
Powers of the Board of Directors shall be exercised only by means of resolutions passed
at meetings of the board, namely :-
a) to make calls on shareholders in respect of money unpaid on their shares;
b) to authorise buy-back of securities under section 68;
c) to issue securities, including debentures, whether in or outside India;
d) to borrow monies;
e) to invest the funds of the company;
f) to grant loans or give guarantee or provide security in respect of loans;
g) to approve financial statement and the Board’s report;
h) to diversify the business of the company;
i) to approve amalgamation, merger or reconstruction;
j) to take over a company or acquire a controlling or substantial stake in another
company;
k) to make political contributions;
l) to appoint or remove key managerial personnel (KMP);
m) to appoint internal auditors and secretarial auditor.
Delegation of Powers of board
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The Board may, by a resolution passed at a meeting, delegate to any committee of

directors, the managing director, the manager or any other principal officer of the
company or in the case of a branch office of the company, the principal officer of the
branch office, the powers specified in (4) to (6) above on such conditions as it may
specify.
Note: in case of Section 8 companies resolutions related to clauses (d), (e) and (f) of sub-
section (3) of Section 179 of the Act i.e., borrow monies, to invest funds of the company
and to grant loans or give guarantee or provide security in respect of loans by section 8
companies may be decided by the Board by circulation.

Restriction on Powers of board [Section 180] [karne k pehle shareholders se pucho]

The Board can exercise the specified powers herein mentioned only with the approval via
Special Resolution (SR) passed by the shareholders.
Powers which require Special Resolution:
a) Sale, lease, etc. of Undertaking
Approval via SR be required by the Board to sell, lease or otherwise dispose of
• the whole or undertaking(s) of the company
• substantially the whole of the undertaking(s) of the company

Undertaking means: A unit is termed as undertaking under this section if it satisfies any
of the following conditions:
• If investment in such unit exceeds 20% of net worth of the Company as per audited
balance sheet of preceding FY.
• If it generated 20% or more of the Total Income during the preceding FY.
Substantially the whole of the undertaking means 20% or more of the value of the
undertaking.
In simple words, an undertaking will be treated as substantially sold out if 20% or more of
its value is sold out.
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Note: If the undertaking is sold or leased in contravention of Section 180(l)(a) the right of
the buyer or lessee will not be affected if he acted in good faith.
b) Investment of compensation received on Merger/Amalgamation
• Approval via SR be required by the Board to invest compensation received due to
Merger/ Amalgamation.

Note: SR is not required if the funds are invested in specified securities of Indian Trust
Act.
c) Borrowing Power
o Approval via SR be required by the Board to borrow money, where the money to be
borrowed, together with the money already borrowed by the company will exceed
aggregate of its paid-up share capital, free reserves and Securities Premium Account,
apart from temporary loans obtained from the company's bankers in the ordinary course
of business.

Note: If the borrowing is made in contravention of Section 180(l)(c) the right of the lender
will not be affected if he acted in good faith and he has no knowledge that the limit u/s
180(l)(c) has exceeded.
d) Rescheduling of Repayment of any debt due from a director
Approval via SR be required by the Board to remit, or give time for the repayment of,
any debt due from a director. Private Companies are exempted from the ambit of
Section 180.

CONTRIBUTIONS TO CHARITABLE FUNDS (Section 181 of the Companies Act, 2013)

[kuch donation ho jaye. Samajseva]
The power of making contribution to 'bona fide' charitable and other funds is available to
the board, but it must be authorised by board by passing Board Resolution in Board
Meeting only.
The permission of company in general meeting is required if such contribution exceeds
5% of its average net profits for the 3 immediately preceding previous years.
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Prohibitions and Restrictions Regarding Political Contributions [Section 182]

Section 182 of the Companies Act, 2013 prohibits certain companies to make political
contribution
a) A Government Company
b) A company which has been in existence for less than three financial years.
Other than above mentioned companies all companies can directly or indirectly make
political contribution to any Political party subject to the following compliances:
a) Every company shall pass a Board resolution at a meeting of the Board of
Directors to authorize such political contribution, and such resolution shall,
subject to the other provisions of this section, be deemed to be the justification in
law for making such contribution authorised by it.

b) Every company shall disclose in its profit and loss account the total amount
contributed by it under this section during the financial year to which the account
relates.

c) The contribution shall be made by an account payee cheque drawn on a bank or

an account payee bank draft or use of electronic clearing system through a bank
account.

d) A company may make contribution through any instrument, issued pursuant to

any scheme notified under any law for the time being in force, for contribution to
the political parties.

CONTRIBUTION TO NATIONAL DEFENCE FUND (Section 182 of the Companies Act,

2013)
The Board can contribute such amount as it thinks fit to the National Defence Fund or
any other fund approved by the Government for the purpose of national defence. It can
also authorise other person to do so.
The company is required to disclose in its profit and loss account the total amount or
amounts contributed by it during the financial year.

INTER CORPORATE LOANS, INVESTMENTS GUARANTEES AND SECURITY

LOAN AND INVESTMENT BY COMPANIES (SECTION 186)
Company to make investments through not more than two layers of investment
companies – [Section 186(1)]
A company shall make investment not more than two layers of investment companies.
However, the aforesaid provisions shall not be applicable in case:
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 Foreign Company incorporated outside India;

 A subsidiary company from having any investment subsidiary for the purposes of
meeting the requirements under any law.

PROCEDURES INVOLVED IN MAKING LOAN GIVING GUARANTEE AND PROVIDING

SECURITY
Section 186(2) stipulates that, no company shall directly or indirectly –
a) give any loan to any person or other body corporate;
b) give any guarantee, or provide security, in connection with a loan to any other
body corporate or person; and
c) acquire, by way of subscription, purchase or otherwise the securities of any other
body corporate;
exceeding 60% of its paid-up share capital, free reserves and securities premium
account or 100% of its free reserves and securities premium account, whichever is
more.
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Note:
1. Person here does not include any individual who is in employment of the Company.
2. Meaning of Free Reserve
Section 2(43) “free reserves” means such reserves which, as per the latest audited
balance sheet of a company, are available for distribution as dividend:
But does not include

 Any amount representing unrealized gains, notional gains or revaluation of

assets, whether shown as a reserve or otherwise, or
 Any change in carrying amount of an asset or of a liability recognised in equity,
including surplus in profit and loss account on measurement of the asset or the
liability at fair value Coverage of Section 186.

LIMITS ON LOAN, INVESTMENT, SECURITY, GUARANTEE Section 186(2) of

the Companies Act, 2013.
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PROCEDURE UNDER SECTION 186

 Approval of the board

a) The approval of the Board is required by passing an unanimous resolution at

Board Meeting only.
b) The approval should be taken prior of making any loan, security, guarantee,
investment, irrespective of amount involved.
c) The essential ingredients of the approval by Board is it should be Prior to
making such loan, security, guarantee, investment, etc. (means cannot be
ratified later)
d) It should be Unanimous approval
e) It should be taken only at Board Meeting (means cannot be passed by circular)

 Approval of Members by passing Special Resolution

A prior approval of the Members is required by passing Special Resolution in

General Meeting if the aggregate of the loans, investments, guarantee or security
so far provided along with the investment, loan, guarantee or security
proposed to be made, exceed the specified limit given under this section.

When is the approval required?

(a) 60% of Paid up share capital, Free Reserve & Securities premium account
(b) 100% of Free Reserve & Securities premium account, whichever is higher.

Cases in which no approval of the members is required No approval of the

members is required in following cases:
When a Holding Company gives Loans to its wholly owned subsidiary, Joint Venture Co.
When a Holding Company gives security/guarantee to third party who has given loan to
the wholly owned substitute Joint Venture Co.
When Holding Company acquires shares in the Wholly owned subsidiary a resolution
passed at a general meeting to give any loan or guarantee or investment or providing any
security or the acquisition shall specify the total amount up to which the Board of
Directors are authorised to give such loan or guarantee, to provide such security or make
such acquisition.

 Approval of Financial Institution

A prior approval of the Financial Institution from which the Company has acquired
term loan has to be obtained.

Note: The prior approval of Public Financial Institution or Bank shall not be required
where the aggregate of loans and investments does not exceed the limit as specified
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above and there is no default in repayment of loan instalments or payment of interest

thereon as per the terms and conditions of such loan to the public financial
institution.

 Rate of interest:
Loan given under inter-corporate loan shall carry the rate of interest not lower than
the prevailing yield of one year, three-year, five-year or ten-year Government Security
closest to the tenure of the loan.
The condition of minimum interest rate is not applicable in following cases:
a) Section 8 Company
b) Company in which 26% or more paid up share capital is held by CG or SG or both.
c) If loan is provided by such company for funding Industrial Research and
Development projects in furtherance of objects as stated in its memorandum of
association.

 No subsisting Default with respect to repayment of deposits

No company, which is in default in repayment of any deposits accepted before or
after the commencement of the Companies Act, 2013 or in payment of interest
thereon, shall give any loan or give any guarantee, or provide any security or make an
acquisition till such default is subsisting.

 Disclosure in financial statements

The Company shall disclose to the members in the financial statement the full
particulars of the loans given, investment made or guarantee given or security
provided and the purpose for which the loan or guarantee or security is proposed to
be utilised by the recipient of the loan or guarantee or security.

NON-APPLICABILITY OF SECTION 186

The section will not apply:
a) To any loan made, any guarantee given or any security provided or any
investment made by:

 Insurance company in the ordinary course of its business, or Banking company in

the ordinary course of its business, or Housing finance company in the ordinary
course of its business, or
 A company established with the object of and engaged in the business of
financing industrial enterprises or infrastructural facilities

b) To any investment:
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Made by an investment company; Right Issue To any Loan or Investment Made by

NBFC.
Exemption from applicability of Section 186 to Government Companies
■ Government Company engaged in defence production;
■ Government company, other than a listed company, in case such company obtains
approval of the Ministry or Department of the Central Government which is
administratively in charge of the company, or, as the case may be, the State Government
before making any loan or giving any guarantee or providing any security or making any
investment under the section.

Penalty for Contravention of Section 186

For Company:
If a company contravenes the provisions of this section, the company shall be
punishable with fine which shall not be less than twenty-five thousand rupees but which
may extend to five lakh rupees; and
For Officers:
Every officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to two years and with fine which shall not be less than twenty-
five thousand rupees but which may extend to one lakh rupees.

INVESTMENTS IN THE NAME OF THE COMPANY (Section 187 of Companies Act,

2013)
All investments made or held by a company in any property, security or other asset shall
be made and held by it in its own name.
The company may hold any shares in its subsidiary company in the name of any
nominee or nominees of the company, if it is necessary to do so, to ensure that the
number of members of the subsidiary company is not reduced below the statutory limit.
Where the shares of a company were registered in the joint names of the company and
one of its directors, it was held that the director was a nominee of the company for that
purpose and could only act jointly as he had no rights of his own.
If company holds shares in dematerialised form, the name of depository is entered in the
register of members as member of the company and the name of the investing company
as the beneficial owner of the said shares.

Register of investments not held in company's own name

Any shares or securities in which investments have been made by a company are not
held by it in its own name, the company shall maintain a register which shall contain
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such particulars as may be prescribed and such register shall be open to inspection by
any member or debenture-holder of the company without any charge during business
hours subject to such reasonable restrictions as the company may by its articles or in
general meeting impose.
Therefore, a company is only required to maintain a register for securities not held in the
name of the company, when the investments are held in the name of a depository.

Q1. As on 31st March, 2010, the balance sheet of ABC Ltd. shows the following:

Amount in Crores (Rs.)

Paid-up share capital 30

Reserves and surplus 40
Reserve for redemption of debenture 20
Capital reserve 10

The company made loan/stood guarantee for loans to other companies as below:

Loan to DEF Ltd. Rs.15 crore

Guarantee given on behalf of GHK Ltd. Rs.5 crore
LKP Ltd. approached ABC Ltd. for loan of an amount of Rs.20 crore

Advise the management of ABC Ltd. as to whether the company can give loan
ofRs.20 crore to LKP Ltd.

A1. Section 186 of the Companies Act, 2013: No Company shall, directly or indirectly:
a) give any loan to any person or other body corporate;

b) give any guarantee or provide security in connection with a loan to any other body
corporate or person; and acquire, by way of subscription, purchase or otherwise
the securities of any other body corporate, exceeding 60% of its paid-up share
capital, free reserves and securities premium account or 100% of its free reserves
and securities premium account, whichever is more
unless the same is previously authorised by a special resolution passed in a general
meeting. The paid-up capital of ABC Ltd. is Rs.30 Cr. And its free reserves is Rs.40 Cr.
Board of Directors of ABC Ltd. therefore, can give loan/guarantee upto.
60% of (30 + 40) crore = 42 crore or 100% of 40 crore = 40 crore whichever is more. Hence
Rs.42 crore is limit beyond which the company needs shareholders’ approval for giving
loan/guarantee.
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Existing loans and guarantee-

Loan to DEF Ltd. Rs. 15 Crore
Guarantee to GHK Ltd. Rs. 15 Crore
Total Rs.30 Crore
Proposed loan to LKP Ltd. Rs.20 Crore Total Rs.50 Crore
In the given situation, Board of Directors is authorised upto Rs.42 Crore to give loan to
other companies. And if Company proposes to give loan to LKP (i.e. more than the
authority of Board) requires approval of the shareholders by a special resolution.

RELATED PARTY TRANSACTION (Section 188) [apno k sath transaction kiya]

Related party transaction means any transaction with a company where a director
or his relative is directly or indirectly interested in such transactions.

Related Party Transactions under the Companies Act, 2013

A transaction shall be treated as the related party transaction if it is made between a
Company and its directors or their relative, KMP or their relative, with a firm or company
in which directors are interested.
For understanding the entire concept of Related Party Transactions, we have to know
the meaning of the following terms:
(a) Related Parties
(b) Related Party Transactions
(c) Office or Place of profit
(d) Arm's Length transactions.

Related parties (Section 188 of the Companies Act, 2013) [apne wale]
A related party means and includes:
a) A director or his relative,
b) Key Managerial Personnel or their relative,
c) A firm in which a director, manager or his relative is a partner,
d) A private company in which a director or manager is a director or member,
e) A public company in which a director or Manager is a director or holds along
with his relatives more than 2% of its paid-up share capital.
f) A person on whose advice, directions or instruction (except given in professional
capacity) a director or manager is accustomed to act,
g) A holding/subsidiary or associate company, subsidiary's subsidiary, and such
person as would be prescribed.
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Related parties transaction (Section 188(1) of the Companies Act, 2013)

The following contracts or arrangements come under the category 'related party
transactions':
a) Sale, purchase or supply of any goods or materials;
b) Selling or otherwise disposing of, or buying, property of any kind;
c) Leasing of property of any kind;
d) Availing or rendering of any services;
e) Appointment of any agent for purchase or sale of goods, materials, services or
property;
f) Such related party's appointment to any office or place of profit in the company,
its subsidiary company or associate company; and
g) Underwriting the subscription of any securities or derivatives thereof, of the
company.

Office or Place of profit means any office or place:

a) For Director:
where such office or place is held by a director, if the director holding it receives from the
company anything by way of remuneration over and above the remuneration to which he
is entitled as director, by way of salary, fee, commission, perquisites, any rent-free
accommodation, or otherwise;
b) For Individual:
where such office or place is held by an individual other than a director or by any firm,
private company or other body corporate, if the individual, firm, private company or body
corporate holding it receives from the company anything by way of remuneration, salary,
fee, commission, perquisites, any rent-free accommodation, or otherwise.

Arm's length transaction [apno ko paraya hi samjo]

Arm's length transaction means a transaction between two related parties that is
conducted as if they were unrelated, so that there is no conflict of interest.
In simple words, it means a transaction which is made at the market price (without giving
any special discount or concession) that is Arm's length transaction between a company
or related parties.
In other words, Arm's length transaction would mean transaction between two
related or affiliated parties that is conducted as if they were unrelated.
The concept of an arm's length transaction is to ensure that both parties in the deal are
acting in their own self-interest and are not subject to any pressure from either party.
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Agenda for Board meeting:

Where a related party transaction is to be approved by the Board of Directors in their
meeting, the Agenda of Board should disclose:
a) The name of the related party and nature of relationship;
b) The nature, duration of the contract and particulars of the contract or
arrangement;
c) The important terms of the contract or arrangement including the value;
d) Any advance paid or received;
e) The method of determining the pricing and other commercial terms;
f) Any other information relevant or important for the Board on the proposed
transaction.
Non-presence of Interested Director:
An interested director shall not be present and voting at the meeting during discussions
on the subject-matter of the resolution relating to such contract or arrangement in which
he is interested.
This restriction will not apply to a Company in which 90% or more members in number
are relatives of promoters or are related party.
Approval from shareholders:
The prior approval from shareholders via Ordinary resolution as is required in the
following circumstances:
1. A company having a paid-up share capital of Rs.10 crore or more; or
2. A company shall not enter into a transaction or transactions except the prior approval
in Ordinary resolution, where the transaction or transactions to be entered into.

Threshold of Transaction Value for Member's Approval

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Exemption from Section 188

Exemption to Government co U/S 188 contract entered into by it with any other
Government company or with CG or SG or any combination.
Unlisted Government Company entered into contract except with other government
co,/CG/SG required prior approval of Government.

Disclosure in board’s Report

Section 188(2) of the Act, provides that every related party contract or arrangement shall
have to be disclosed in the Board’s report and referred to shareholders along with the
justification for entering into such type of transactions in the prescribed form i.e., Form
no. AOC-2.

Form AOC-2 shall be signed by the persons who have signed the Board’s Report.
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CHAPTER – 16

Meetings of board
and its Committees

INTRODUCTION
“Meeting of Board” means a duly convened, held and
conducted meeting of the Board or any Committee
thereof.

A Board Meeting is a formal meeting of the board of

directors of an organization and invitees, wherever
required, held at definite period of time and as and
when needed to review performance, consider policy issues, address major problems
and perform the legal business of the board.

Meetings of the board [Section 173]

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 The first board meeting should be held within thirty days of the date of
incorporation. Thereafter, there shall be minimum number of four board meetings
every year and not more than one hundred and twenty days shall intervene
between two consecutive Board meetings.

 Secretarial Standard on Board Meetings (SS-1) issued by ICSI clarifies that the
company shall hold at least four Meetings of its Board in each Calendar Year with
a maximum interval of one hundred and twenty days between any two consecutive
Meetings.

 In case of one person company (OPC), small company, dormant company and
private company which is start- up, at least one Board meeting should be
conducted in each half of the calendar year and the gap between two meetings
should not be less than ninety days.

 However, this provision would not apply to a one person company in which there
is only one director on its Board.

 A Director cannot appoint another person as his proxy to attend a Board Meeting
since the right to appoint a proxy is not a common law right and can only be given
by statute.

Venue of the meeting

 A Meeting may be held at the Registered Office of the company or at any other
place, including a remote place in India or abroad.

 Notice of the Meeting shall clearly mention a venue, whether registered office or
otherwise, to be the venue of the Meeting and all the recordings of the
proceedings of the Meeting, if conducted through Electronic Mode, shall be
deemed to be made at such place.

Board Meeting through video Conferencing:

 The board members can make their participation in meeting of the Board either in
person or through video conferencing or other audio visual means, as may be
prescribed, which are capable of recording and recognizing the participation of
the directors and of recording and storing the proceedings of such meetings
along with date and time.
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Meetings of the board – The SEBI (LODR) Regulations, 2015

Regulation 29: The listed entity shall give prior intimation to stock exchange about the
meeting of the board of directors in which any of the following proposals is due to be
considered:

a) Two working days intimation in advance in which any of the following proposals
is due to be considered:

 Proposal for buyback of securities;

 proposal for voluntary delisting by the listed entity from the stock exchange(s)
 Fund raising by way of further public offer, rights issue, American Depository
Receipts/Global Depository Receipts/Foreign Currency Convertible Bonds,
qualified institutions placement, debt issue, preferential issue or any other method
and for determination of issue price;
 Declaration/ recommendation of dividend, issue of convertible securities
including convertible debentures or of debentures carrying a right to subscribe to
equity shares or the passing over of dividend;
 The proposal for declaration of bonus securities.

b) Intimation regarding financial results, viz., quarterly, half yearly, or annual, as the
case may be, to be discussed at the meeting of board of directors shall be given at
least five days in advance.

c) Eleven working days intimation in advance in which any of the following

proposals is due to be considered:

 any alteration in the form or nature of any of its securities that are listed on
the stock exchange or in the rights or privileges of the holders thereof.

 any alteration in the date on which, the interest on debentures or bonds, or

the redemption amount of redeemable shares or of debenture.

NOTICE OF BOARD MEETINGS:

 Notice of Original Meeting

Notice should be given to every director of the Company not less than 7 days before
the date of Board Meeting. The notice should be sent at the registered address of
every director as available with the company.

 Notice of an Adjourned Meeting

Notice of at least 7 days before the date of Adjourned meeting shall be given
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to all Directors Including those who did not attend the Meeting on the originally
convened date and unless the date of adjourned Meeting is decided at the Meeting.
 Mode of Sending Notice:

The notice can be given by hand delivery or by post or by electronic means i.e.
registered email id.
For Section 8 Company The Board of Directors, of such companies shall hold at least
one meeting within every six calendar months.

Note: Where a Director specifies a particular means of delivery of Notice, the Notice
shall be given to him by such means.

 Mode of Sending as per Secretarial Standard on BM (SS-1)

SS-1 provides that a notice in writing of every Meeting shall be given to every Director
by hand or by speed post or by registered post or by facsimile or by e-mail or by any
other electronic means. It will not be given by ordinary post.

In case the company sends the Notice by speed post or by registered post or by
courier, an additional 2 days shall be added for the service of Notice. ([Link] the
day of serving the notice and date of meeting)

 Shorter Notice:

A meeting can be called at shorter notice if the following conditions are satisfied:

a) If the company is required to have independent director:

b) Presence of at least one independent director is required.
c) In case of absence of independent director, decision taken at such meeting shall
be circulated to all the directors, and shall be final only on ratification thereof by at
least one independent director.
d) If the company does not require appointing independent director, meeting can be
called up at a shorter notice without any conditions to be complied with.

 Shorter Notice as per Secretarial Standard on BM (SS-1)

In case the company does not have an Independent Director, the decisions shall be
final only on ratification thereof by a majority of the Directors of the company, unless
such decisions were approved at the Meeting itself by a majority of Directors of the
company.
The fact that the meeting is being held at a shorter notice shall be stated in
the notice.

 Miscellaneous points

a) Proof of sending Notice and its delivery shall be maintained by the company
for a minimum period of 3 years from the date of the Meeting.
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b) Notice shall be issued by the Company Secretary or where there is no Company

Secretary, any Director or any other person authorised by the Board for the
purpose.

c) The Notice shall specify the serial number, day, date, time and full address of
the venue of the Meeting.

d) The Notice shall inform the Directors about the option available to them to
participate through Electronic Mode and provide them all the necessary
information.

e) The Notice of a Meeting shall be given even if Meetings are held on pre-
determined dates or at predetermined intervals.

f) If notice of meeting is not given to one of its directors, meeting of board of

directors is invalid and resolutions passed at such meeting are inoperative.

AGENDA OF THE BOARD MEETING

The Act does not prescribe any requirement to circulate Agenda etc.
On the other hand Secretarial Standard on Board Meetings provide exhaustively
about Agenda.

Agenda as per Secretarial Standard on BM (SS-1)

 The Agenda and Notes on Agenda shall be given to the Directors at least 7 days
before the date of the Meeting, unless the Articles prescribe a longer period.

 Agenda and Notes on Agenda shall be sent to all Directors by hand or by speed
post or by registered post or by e- mail or by any other electronic means.

 In case the company sends the Agenda and Notes on Agenda by speed post or by
registered post, an additional 2 days shall be added for the service of Agenda and
Notes on Agenda.

 Where a Director specifies a particular means of delivery of Agenda and Notes on

Agenda, these papers shall be sent to him by such means.

 However, in case of a Meeting conducted at a shorter Notice, the company may

choose an expedient mode of sending Agenda and Notes on Agenda.

 Proof of sending Agenda and Notes on Agenda and their delivery shall be
maintained by the company for atleast 3 years from the date of the Meeting.

 Agenda Item shall be supported by a note setting out the details of the
proposal, interested director, etc.
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 Each item of business to be taken up at the Meeting shall be serially numbered.

 Any item not included in the Agenda may be taken up for consideration with the
permission of the Chairman and with the consent of a majority of the Directors
present in the Meeting.

Illustrative List of Agenda Items for board Meeting as per SS 1 in addition to those
prescribed under Companies Act:

General business Items:

 Noting Minutes of Meetings of Audit Committee and other Committees.

 Considering the Compliance Certificate to ensure compliance with the provisions
of all the laws applicable to the company.
 Specifying list of laws applicable specifically to the company.
 The Board is required to take note of the specific list of laws applicable to the
company.
 Appointment of Secretarial Auditors and Internal Auditors.

Specific Items:

 Approving remuneration of Managing Director, Whole-time Director and Manager.

 Making political contributions.
 According sanction for transactions with Related Party which are not in the
ordinary course of business or which are not on arm’s length basis.
 Appointment or Removal of Key Managerial Personnel.
 Approving purchase and sale of material tangible/intangible assets not in the
normal course of business.

QUORUM [kam se kam kitne log]

Quorum means the minimum number of directors which is required to validate meeting
of the Board. Quorum should be present throughout the meeting of Board, it means at
beginning of the meeting and also at conclusion of the Meeting.

If any decision (resolution) is taken without the presence of quorum, then such decision
(resolution) shall be treated as null and void.

General Quorum:

1/3 of total strength of Board or 2 directors, whichever is higher, shall be treated the
quorum for a Board Meeting of a Company.
If due to resignations or removal of director(s), the number of directors of the company is
reduced below the quorum as fixed by the Articles of Association of the company, then,
the continuing Directors may act for the purpose of increasing the number of Directors to
that required for the quorum or for summoning a general meeting of the Company.
It shall not act for any other purpose.
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Special Note:

The participation by a director in the Board Meeting through Video Conferencing or other
audio visual mode shall also be counted for the purpose of quorum, unless it is to be
excluded for any item of business under any provisions of the Act or the rules.

Even if he cannot be counted for the purpose of quorum, does not impact his right
to participate in the meeting. Therefore generally a director participating trough video
conferencing will be counted for the purpose of quorum. But if due to any provision or
rules they cannot be counted in quorum they can still participate in the meeting.

Quorum in case of Interested Director:

If at any time the number of interested directors exceeds or is equal to 2/3 of the total
strength of Board, the remaining directors shall be counted for quorum provided the
number should not be less than 2.

Note: If a Board meeting has been adjourned due to want of quorum, unless the articles
provide otherwise, the Board Meeting shall be held on the same day at the same time and
same place in the next week or if the day is National Holiday, the next working day at the
same time and place.

Note - In case of section 8 company, either eight members or twenty-five per cent, of its
total strength whichever is less” shall form a quorum. However, the quorum shall not be
less than two members

ATTENDANCE REGISTER

Every company shall maintain separate attendance registers for the meetings of the
Board and meetings of the committee.

 Loose Leaf & Serially numbered

The pages of the respective attendance registers shall be serially numbered.

If an attendance register is maintained in loose leaf form, it shall be bound
periodically depending on the size and volume.

 Place of Keeping Attendance Register

The attendance register shall be maintained at the Registered Office of the

company or such other place as may be approved by the Board. The attendance
register may be taken to any place where a Meeting of the Board or Committee is
held.

 Inspection of Attendance Register

The attendance register is open for inspection by the Directors. Even after a
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person ceases to be a Director, he shall be entitled to inspect the attendance

register of the Meetings held during the period of his Directorship.

 Particulars of attendance register

a) Serial number and date of the Meeting;

b) In case of a Committee Meeting name of the Committee;
c) Place of the Meeting;
d) Time of the Meeting;
e) Names and signatures of the Directors,
f) The Company Secretary and also of persons attending the Meeting by
invitation and Their mode of presence, if participating through Electronic
Mode.

 Preservation of Attendance Register

The attendance register shall be preserved for a period of at least 8 financial years
from the date of last entry made therein and may be destroyed thereafter with the
approval of the Board. It shall be in the custody of the Company Secretary.

Leave of Absence

Leave of absence shall be granted to a Director only when a request for such leave has
been communicated to the Company Secretary or to the Chairman or to any other person
authorised by the Board to issue Notice of the Meeting.

The office of a director shall become vacant in case the director absents himself from all
the meetings of the Board held during a period of twelve months with or without seeking
leave of absence of the Board.

Chairman of the Meeting

The Chairman of the Company shall be the chairman of the Board. If the company does
not have a Chairman, the Directors may elect one of themselves to be the chairman of the
Board.
If no Chairman has been so elected or if the elected chairman is unable to attend the
meeting, the Board/ Committee shall elect one of its members present to chair and
conduct the meeting of the Board unless otherwise provided in the articles.

MINUTES

Section 118 provides that every company shall prepare, sign and keep minutes of
proceedings of meeting. Minutes are evidence of the proceedings at the meeting.

a) Circulation of draft minutes:

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The draft minutes shall be circulated among all the directors within 15 days from
the date of board meeting either in writing or in electronic mode.

b) Confirmation from Directors:

Every director who attended the board meeting (whether personally or through
electronic mode) shall confirm or give his comments, about the accuracy of
recording of the proceedings within 7 days after receipt of the draft minutes.

c) Entry in the Minute Books:

After completion of above confirmation procedure of the meeting, the minutes

shall be entered in the minute book within 30 days of conclusion of BM. and
signed by the Chairperson.

Note: Date of entry to be recorded by Company Secretary or any authorized person.

d) Signing of Minutes:

Minutes of the meeting of Board to be signed by Chairman of the meeting or

Chairman of the next meeting.
All pages of the minutes are to be initialed and the last page of the minutes to
be signed and dated.

e) Preservation of Minutes:

Minutes should be preserved permanently whether in physical or electronic form.

Special Note:

The following matters shall not be dealt with in any meeting held through video
conferencing or other audio visual mode:

(a) the approval of the annual financial statements;

(b) the approval of the Board’s report;
(c) the approval of the prospectus;
(d) the Audit Committee Meetings for consideration of accounts; and
(e) the approval of the matter relating to amalgamation, merger, demerger, acquisition
and takeover.
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TYPES OF RESOLUTIONS

Board Resolution:

A board resolution is a recorded form of decisions made by the Board of Directors

during a board meeting. It is maintained along with the Board meeting minutes.

The Board of Directors of a company shall exercise certain powers on behalf of the
company only by means of Resolutions passed at a Meeting of the Board and not by a
Resolution passed by circulation, such as:
 To make calls on shareholders in respect of money unpaid on their shares;
 To authorise buy-back of securities;
 To invest the funds of the company;
 To approve financial statement and the Board’s report;
 To grant loans or give guarantee or provide security in respect of loans etc.

Unanimous Resolution:

Unanimous consent board resolution is a form of voting used by boards to take

decisions on certain matters.
A unanimous resolution is the agreement of all of the directors on the agenda who are
present at a duly convened meeting of Board of Directors.

A list of powers of the Board to be exercised by Unanimous Consent is as under:

 Power to appoint or employ a person as its Managing Director under Section 203
of the Act if he is the Managing Director or Manager of one and not more than one
other company;
 Power to invest or to give loans or guarantee or security under Section 186(5) of
the Act.
 Power to remove trustees for the depositors after issue of circular or
advertisement and before expiry of his term.

RESOLUTION BY CIRCULATION

Considering the urgency of matters there can be situations when calling of board
/committee meeting is not possible. At such times, the company may pass the
resolutions through circulation.

The resolution in draft form together with the necessary papers may be circulated to all
the directors or members of committee at their address registered with the company in
India by hand or by speed post or by courier or through electronic means which may
include e-mail or fax.
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Salient points related to circular resolution

a) Passing of Circular Resolution: The said resolution must be passed by majority of

directors or members entitled to vote.

b) Request of Directors to consider the matter at Board Meeting only: If more than
one third of directors require that the resolution most be decided, at the meeting,
the chairperson shall put the resolution to be decided at the meeting.

c) Noting of the Circular Resolution: The resolution passed through circulation be

noted at a subsequent meeting and made part of the minutes of such meeting.

d) Time Limit to respond to the Circular resolution: Not more than seven days from
the date of circulation of the draft of the resolution shall be given to the directors
to respond.

e) Effective date of passing of resolution: The Resolution, if passed, shall be deemed

to have been passed on the earlier of:
■ the last date specified for signifying assent or dissent by the Directors, or
■ the date on which assent has been received from the required majority.

f) Recording in the Subsequent Board Meeting Minutes: The Circular resolution so

passed shall be recorded in the minutes of subsequent meeting.

VIRTUAL MEETINGS: TECHNOLOGICAL ADVANCEMENT IN CONDUCT OF

BOARD COMMITTEE

Meaning of virtual Meetings:

A meeting held totally by means of either Video conferencing or

other audio-visual means is known as Virtual Meeting.

A Virtual meeting is when people around the world, regardless

of their location, use video, audio, and text to link up online.
Virtual meetings allow people to share information and data in
real-time without being physically located together.

Brief Requirements for virtual Meeting

The brief requirements of virtual meetings are given below:

 Meeting rooms;
 Software, which can be either purchased or can be provided by vendor for a fee
on yearly rental basis;
 Hardware equipment like Monitor or LED screen, Webcams;
 High quality mike system;
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 Projectors;
 Document scanners;
 Leased Lines;
 High speed wireless internet;
 Recording & Storage Equipment for recording the proceeding and Proper storage
for future reference as many be required under law;
 Have trial run before the meeting to ensure all the systems are working properly;
 Ensure that the proper arrangements are made in the Meeting room.

VIRTUAL BOARD MEETINGS

Any Director may participate through Electronic Mode in a Meeting unless the Act or any
other law specifically prohibits such participation through Electronic Mode. Directors
shall not participate through Electronic Mode in the discussion on certain restricted
items.

Salient points:

a) The notices of the meeting shall be sent to all the directors in accordance with the
provisions of section 173 of the Act. The Notice shall inform the Directors about
the option available to them to participate through Electronic Mode and provide
them all the necessary information.

b) If a Director intends to participate through Electronic Mode, he shall give sufficient

prior intimation to the Chairman or the Company Secretary to enable them to
make suitable arrangements in this behalf.
The Director may intimate his intention of participation through Electronic Mode at
the beginning of the Calendar Year also, which shall be valid for such Calendar
Year.
Though such declaration shall not debar him from participation in the meeting in
person, in such case a sufficient intimation of attending in person is required to
be sent to the company.

c) Directors participating through Electronic Mode in a Meeting shall be counted for

the purpose of Quorum, unless they are to be excluded for any items of business
under the provisions of the Act or any other law.
Even if the law does not allow to be a part of quorum they can still participate in
an item if the quorum is present in the meeting.

d) The attendance register shall be deemed to have been signed by the Directors
participating through Electronic Mode, if their attendance is recorded in the
attendance register and authenticated by the Company Secretary or where there is
no Company Secretary, by the Chairman or by any other Director present at the
Meeting.
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Brief Procedure of Video Conferencing/Virtual Meeting

 Roll call by chairperson

 Directors to introduce themselves at each and every time they speak on matters
 Presence will be counted for quorum
 No unauthorized access.
 Differently abled Director may have person accompanying them
 Directors to repeat if there is any disturbance
 Chairperson to announce summary at the end of the Meeting
 Minutes of the meeting to contain the names of Directors who participated
through Video conference.

NEED AND SCOPE OF SECRETARIAL STANDARDS

The Institute of Company Secretaries of India (ICSI), recognizing the need for integration,
harmonization and Standardization of diverse secretarial practices prevalent in the
corporate sector, has constituted the Secretarial Standards Board (SSB) in the year 2000
with the objective of formulating Secretarial Standards.

Need of Secretarial Standards:

The SSB formulates Secretarial Standards taking into consideration the applicable laws,
usages, business environment, practical applicability and the best secretarial practices
prevalent. Secretarial Standards are developed;

 in a transparent manner;
 after extensive deliberations, analysis, research; and
 after taking views of corporate, regulators and the public at large.

Compliance with Secretarial Standards:

Section 118(10) of the Companies Act, 2013 requires every company to observe the
secretarial standards with respect to Board Meetings and General Meetings specified by
the Institute of Company Secretaries of India (ICSI) and approved as such by the Central
Government.
Secretarial Standard on Meetings of the Board of Directors (SS-1) and Secretarial
Standard on General Meetings (SS-2) issued by the Institute of Company Secretaries of
India (ICSI) and approved by the Central Government are applicable to all companies.
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SECRETARIAL STANDARDS 1: SECRETARIAL STANDARD ON MEETINGS OF THE

BOARD OF DIRECTORS

This Standard prescribes a set of principles for convening and conducting Meetings of
the Board of Directors and matters related thereto.

Scope of SS- 1:

In terms of sub-section (10) of Section 118 of the Act, every company is required to
observe SS-1. SS-1 is thus applicable to the Meetings of the Board of all companies
incorporated under the Act, including private and small companies, except One Person
Companies (OPC) having only one Director on its Board and such other class or classes
of companies which are exempted by the Central Government through Notification.

Applicability to companies governed under Special Acts:

SS-1 is also applicable to Banking Companies, Insurance Companies, Companies

engaged in generation or supply of electricity, and Companies governed by any Special
Acts, if incorporated under the Act.
However,if the provisions of these Special Acts such as the Banking Regulation Act,
1949, the Insurance Act, 1938, etc. applicable to these companies are inconsistent with
SS-1, then the provisions of such Special Acts shall prevail.

Applicability to Meetings of the Committees:

SS-1 is also applicable to the Meetings of Committee(s) of the Board constituted in

compliance with the requirements of the Act. At present, the Act provides for the
constitution of following committees of the Board:

(a) Audit Committee

(b) Nomination and Remuneration Committee
(c) Corporate Social Responsibility (CSR) Committee
(d) Stakeholders Relationship Committee
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CHAPTER – 17

Corporate Social Responsibility

– Concepts

Meaning of Corporate Social Responsibility

CSR is a concept whereby companies not only consider

their profitability and growth, but also the interests of
society and the environment by taking responsibility for
the impact of their activities on stakeholders,
environment, consumers, employees, communities, and
all other members in the public sphere.

CSR under the Companies Act, 2013

Applicability

As per section 135(1) of the Companies Act 2013, the CSR provision is applicable to
companies which fulfills any of the following criteria during the immediately preceding
financial year: -
 Companies having net worth of Rs. 500 crore or more; or
 Companies having turnover of Rs. 1000 crore or more; or
 Companies having a net profit of Rs. 5 crore or more.

According to the CSR Rules, the CSR provision will also be applicable to every company
including its holding or subsidiary, and a foreign company having its branch office or
project office in India.
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CSR COMMITTEE

As per section 135(9) of the Act, where the amount to be spent by a company under does
not exceed Rs. 50 Lakh, the requirement for constitution of the Corporate Social
Responsibility Committee shall not be applicable and the functions of such Committee
provided under this section shall, in such cases, be discharged by the Board of Directors
of such company.
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The functions of CSR Committee

The role and responsibilities of the CSR Committee are:

 To formulate and recommend to the Board, a CSR Policy which would indicate the
activities to be undertaken by the company in areas or subject, specified in
Schedule VII of the Act.
 To recommend the amount of the expenditure to be incurred on the activities
undertaken in pursuance of the CSR policy.
 To monitor the CSR policy of the company time to time.

The CSR Committee shall formulate and recommend to the Board, an annual action plan
in pursuance of its CSR policy, which shall include the following, namely:-

a) the list of CSR projects or programmes that are approved to be undertaken in

areas or subjects specified in Schedule VII of the Act;

b) the manner of execution of such projects or programmes

c) the modalities of utilisation of funds and implementation schedules for the

projects or programmes;

d) monitoring and reporting mechanism for the projects or programmes; and

e) details of need and impact assessment, if any, for the projects undertaken by the
company.

However, the Board may alter such plan at any time during the financial year, as per the
recommendation of its CSR Committee.

Functions and Responsibilities of the board

The Board of the Company shall be fully accountable and responsible for the execution
and implementation of the CSR policy and all of the projects that are formulated
thereunder and ensure:

a) Provisions of the resources for the establishment, implementation, maintenance

and continual improvement of the system required for CSR;
b) Involvement of all concerned stakeholders in CSR Implementation;
c) Awareness and promotion of CSR as an integral part of the business and culture.

Identifying appropriate Implementing Agency

Identifying an appropriate Implementing Agency for undertaking CSR activities is an

important task as the proper utilization of funds allocated depends on how capable the
Implementing Agency is.
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While finalizing the Implementing Agency, the following points should be kept in mind:

 The Implementing Agency should have well established track record of 3 years or
more;
 The Implementing Agency should not have any association with any political party
– directly or indirectly.
 The Implementing Agency has no direct or indirect benefit to any of the
employees of the company or their family members;
 The Implementing Agency should have registration under section 12A and section
80G of the Income Tax Act and also be registered with the MCA for undertaking
CSR activities;
 The antecedents of the Implementing Agency, its past reputation, the reputation of
persons associated with the same should also be subjected to scrutiny before
selection.
 Any other requirement as may be prescribed by Government / Regulatory
Authorities is being followed by the Implementing Agency.

CSR ACTIVITIES [SCHEDULE VII OF THE COMPANIES ACT, 2013]

a) eradicating hunger, poverty and malnutrition, promoting health care including

preventive health care and sanitation including contribution to the Swach Bharat
Kosh set-up by the Central Government for the promotion of sanitation and
making available safe drinking water;

b) promoting education, including special education and employment enhancing

vocation skills especially among children, women, elderly and the differently abled
and livelihood enhancement projects;

c) promoting gender equality, empowering women, setting up homes and hostels for
women and orphans; setting up old age homes, day care centres and such other
facilities for senior citizens and measures for reducing inequalities faced by
socially and economically backward groups;

d) ensuring environmental sustainability, ecological balance, protection of flora and

fauna, animal welfare, agro forestry, conservation of natural resources and
maintaining quality of soil, air and water including contribution to the Clean Ganga
Fund set-up by the Central Government for rejuvenation of river Ganga;

e) protection of national heritage, art and culture including restoration of buildings

and sites of historical importance and works of art; setting up public libraries;
promotion and development of traditional arts and handicrafts;

f) measures for the benefit of armed forces veteran, war widows and their
dependents, Central Armed Police Forces (CAPF) and Central Para Military Forces
(CPMF) veterans, and their dependents including widows;
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g) training to promote rural sports, nationally recognized sports, paralympic sports

and Olympic sports;

h) contribution to the Prime Minister’s National Relief Fund or Prime Minister’s

Citizen Assistance and Relief in Emergency Situations Fund (PM Cares Fund) or
any other fund set up by the Central Government for socio- economic
development and relief and welfare of the Scheduled Castes, the Scheduled
Tribes, other backward classes, minorities and women;

i) rural development projects;

j) slum area development where ‘slum area’ shall mean any area declared as such
by the Central Government or any State Government or any other competent
authority under any law for the time being in force;

k) disaster management, including relief, rehabilitation and reconstruction activities.

However, in determining CSR activities to be undertaken, preference would need to be

given to local areas and the areas around where the company operate.

Computation of net profit

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CSR Expenditure-Rule 7 of the CSR Rules, 2014

The Board of every eligible 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 or where the company has not
completed the period of three financial years since its incorporation, during such
immediately preceding financial years in pursuance of its Corporate Social
Responsibility Policy, this amount will be CSR expenditure.

Administrative Overheads

The board shall ensure that the administrative overheads shall not exceed 5% of total
CSR expenditure of the company for the financial year.

Surplus arising out of the CSR Activities

Any surplus arising out of the CSR activities shall not form part of the business profit of
a company and shall be ploughed back into the same project or shall be transferred to
the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan
of the company or transfer such surplus amount to a Fund specified in Schedule VII,
within a period of six months of the expiry of the financial year
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Excess CSR spends may be set off

 Where a Company spent on CSR in excess of the requirement (i.e. 2%), such
excess amount may be set- off against the requirement of the CSR Spending upto
the immediate succeeding 3 financial year subject to the conditions that:

 The excess amount available for set off shall not include the surplus arising out of
the CSR activities

 The Board of the company shall pass a resolution to that effect.

Acquisition of Capital Assets

a) The CSR amount may be spent by a company for creation or acquisition of a

capital asset, which shall be held by –

 Section 8 Company, or a Registered Public Trust or Registered Society,

having charitable objects and CSR Registration Number;
 beneficiaries of the said CSR project, in the form of self-help groups,
collectives, entities;
 a public authority:

However, any capital asset created by a company prior to the commencement of the
Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, shall within
a period of one hundred and eighty days from such commencement comply with the
requirement of this rule, which may be extended by a further period of not more than
ninety days with the approval of the Board based on reasonable justification.

Spending mandate and consequences of not spending (Change in CSR regime from
voluntary to Mandatory)

 If the company fails to spend the CSR target, the Board in its report shall specify
the reasons for not spending the amount.

 Analysis of the “unspent amount” related to ongoing project:

a) Unspent amount relating to an ongoing project, undertaken by a company in

pursuance of its Corporate Social Responsibility Policy, shall be transferred by
the company within a period of 30 days from the end of the financial year to a
special account (Unspent CSR Account) to be opened by the company in that
behalf for that financial year in any scheduled bank, and such amount shall be
spent by the company in pursuance of its obligation towards the Corporate
Social Responsibility Policy within a period of 3 financial years from the date
of such transfer.
b) failing which, the company shall transfer the same to a Fund specified in
Schedule VII of the Companies Act, 2013, within a period of thirty days from
the date of completion of the third financial year.
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 Unspent amount not relating to ongoing projects to be transferred to Funds

notified in Schedule VII of the Companies Act, 2013 within a period of 6 months of
the end of the financial year.

PENALTY

Penalty on the Company:

Upto twice the amount required to be transferred by the company to the Fund specified
in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may
be, or
Rs. 1 Crore, whichever is less.

Penalty on every officer of the company who is in default

1/10th of the amount required to be transferred by the company to such Fund specified in
Schedule VII of the Companies Act, 2013, or the Unspent Corporate Social Responsibility
Account, as the case may be, or
Rs.2 Lakhs, whichever is less.
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CSR Reporting (Rule 8 of CSR Rules, 2014]

Preparation of CSR Report

It is mandatory to include an Annual Report on CSR in the prescribed format, in the

Board’s report of the Company. The report containing the details of CSR Activities
undertaken by the company and contents of CSR policy shall be made available on
Company’s website.

Directors Report:

The Company shall annex with its Board Report an annual report on CSR.

IMPACT ASSESSMENT FOR BIG CSR PROJECTS IN TERMS OF THE PROVISIONS

OF RULE 8(3)A) OF THE COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY)
RULES, 2014

 Companies with average CSR obligation of Rs.10 Crore or more in the 3

immediately preceding financial years shall undertake impact assessment through
an independent agency of their CSR projects having outlays of Rs.1 crore rupees
or more which have been completed not less than 1 year before undertaking the
impact study.

 The impact assessment reports shall be placed before the Board and shall be
annexed to the annual report on CSR.

 A Company undertaking impact assessment may book the expenditure towards

Corporate Social Responsibility for that financial year, which shall not exceed two
per cent of the total CSR expenditure for that financial year or fifty lakh rupees,
whichever is higher.

Website Disclosure (Rule 9 of the CSR Rules, 2014)

The Board of Directors of the Company shall ensure essential disclosure of the following
on the website of the Company, if any:

 The composition of the CSR Committee;

 CSR Policy and Projects approved by the Board.

Tax benefit under CSR

No specific tax exemptions have been extended to CSR expenditure per se. The Finance
Act, 2014 also clarifies that expenditure on CSR does not form part of business
expenditure. While no specific tax exemption has been extended to expenditure incurred
on CSR, spending on several activities.
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CSR Portal

The National Corporate Social Responsibility Data Portal is an initiative by Ministry of

Corporate Affairs, Government of India to establish a platform to disseminate Corporate
Social Responsibility related data and information filed by the companies registered with
it.

The National CSR Awards

The National CSR Awards seek to:

 Recognize the companies that have positively impacted both business and
society by taking a strategic approach to CSR through collaborative program.

 Recognize the companies that are leading transformation by integrating

sustainability in their core business model.

 Recognize companies for implementing measures for conservation and

sustainable management of the biodiversity and ecosystem in the value chain.

 Identifying innovative approaches and employing application and technologies

that will help to build a robust CSR programs to further the cause of inclusive and
sustainable development.

The NCSRA seeks to recognize outstanding projects in following three categories:

a) Four awards for excellence in CSR, based on CSR spend;

b) Five awards for CSR projects in Aspirational Districts;
c) Eleven awards for CSR projects in National Priority Areas.

Three separate awards are for micro, small and medium enterprises (MSMEs).

Business Responsibility Reports by Listed Companies

In terms of Regulation 34(2)(f) of SEBI’s Listing Regulations, the top 1000 listed entities
are required to include Business Responsibility Report, as part of their annual report,
describing the initiatives taken by them from an environmental, social and governance
perspective, in the format as specified by the SEBI from time to time.
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Guidelines on CSR and Sustainability for Central Public Sector Enterprises (CPSEs)

DPE guidelines on CSR and Sustainability has been on inclusive growth, development of
backward regions, upliftment of the marginalized and under privileged and weaker
sections of the society, empowerment of women, environment sustainability, promotion
of green and energy efficiency technologies and sustainability development in all its
diverse aspects.
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CHAPTER – 18

Annual Report – Concepts

ANNUAL REPORT

The annual report is a comprehensive report provided

by most public companies to disclose their corporate
activities over the past year. The report is typically
issued to shareholders and other stakeholders who use
it to evaluate the firm’s performance including both
operating and financial highlights.

As per Regulation 34 of the SEBI (LODR), Regulations,

2015, the listed entity shall submit to the stock
exchange and publish on its website-

a) A copy of the annual report sent to the shareholders along with the notice of the
annual general meeting not later than the day of commencement of dispatch to its
shareholders;
b) In the event of any changes to the annual report, the revised copy along with the
details of and explanation for the changes shall be sent not later than 48 hours
after the annual general meeting.
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Such annual report shall contain the following:

a) Audited financial statements i.e. balance sheet, profit and loss account etc, and
Statement on Impact of Audit Qualifications if applicable;

b) Consolidated financial statements audited by its statutory auditors;

c) Cash flow statement presented only under the indirect method as prescribed in
Accounting Standard-3 or Indian Accounting Standard 7, as applicable.

d) Directors Report;

e) Management discussion and analysis report - either as a part of directors report

or addition thereto.

f) For the top 1000 listed entities based on market capitalization, a business
responsibility report describing the initiatives taken by the listed entity from an
environmental, social and governance perspective, in the format as specified by
the Board from time to time.

with effect from the financial year 2022–23, the top one thousand listed entities based on
market capitalization shall submit a business responsibility and sustainability report in
the format as specified by the board from time to time.
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Related Party Disclosure

a) The listed entity which has listed its non-convertible securities shall make
disclosures in compliance with the Accounting Standard on “Related Party
Disclosures”.

b) The disclosure requirements shall be as follows:

For the purpose of above disclosures directors’ interest shall have the same meaning as
given in Section 184 of Companies Act, 2013.

c) Disclosures of transactions of the listed entity with any person or entity belonging
to the promoter/ promoter group which hold(s) 10% or more shareholding in the
listed entity, in the format prescribed in the relevant accounting standards for
annual results.

d) The above disclosures shall not be applicable to listed banks.

Management Discussion and Analysis

This section shall include discussion on the following matters within the limits set by the
listed entity’s competitive position:

a) Industry structure and developments;

b) Opportunities and Threats;
c) Segment–wise or product-wise performance;
d) Outlook;
e) Risks and concerns;
f) Internal control systems and their adequacy;
g) Discussion on financial performance with respect to operational performance;
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h) Details of significant changes in key financial ratios, along with detailed

explanations therefor, including:
 Debtors Turnover
 Inventory Turnover
 Interest Coverage Ratio
 Current Ratio
 Debt Equity Ratio
or sector-specific equivalent ratios, as applicable.

Disclosure of Accounting Treatment:

Where in the preparation of financial statements, a treatment different from that

prescribed in an Accounting Standard has been followed, the fact shall be disclosed in
the financial statements.

Corporate governance Report

The following disclosures shall be made in the section on the corporate governance of
the annual report.

a) A brief statement on listed entity’s philosophy on code of governance.

b) Board of Directors:

 composition and category of directors

 attendance of each director at the meeting of the board of directors and the
last annual general meeting;
 number of meetings of the board of directors held and dates on which held;
 disclosure of relationships between directors inter-se;
 number of shares and convertible instruments held by non- executive
directors;
 web link where details of familiarisation programmes imparted to
independent directors is disclosed;

c) Audit Committee:

 brief description of terms of reference;

 composition, name of members and chairperson;
 meetings and attendance during the year.
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d) Nomination and Remuneration Committee:

 brief description of terms of reference;
 composition, name of members and chairperson;
 meeting and attendance during the year;
 performance evaluation criteria for independent directors.

e) Stakeholders’ Relationship Committee:

 name of the non-executive director heading the committee;
 name and designation of the compliance officer;
 number of shareholders’ complaints received during the financial year;
 number of complaints not solved to the satisfaction of shareholders;

f) Risk Management Committee:

 brief description of terms of reference;
 composition, name of members and chairperson;
 meetings and attendance during the year;

g) Remuneration of Directors:

h) General body meetings

i) The corporate governance report shall also disclose the extent to which the
discretionary requirements as specified in Part E of Schedule II have been
adopted.

Disclosures with respect to demat suspense account/ unclaimed suspense

account

The listed entity shall disclose the following details in its annual report, as long as there
are shares in the demat suspense account or unclaimed suspense account,
as applicable :

a) aggregate number of shareholders and the outstanding shares in the suspense

account lying at the beginning of the year;
b) number of shareholders who approached listed entity for transfer of shares from
suspense account during the year;
c) number of shareholders to whom shares were transferred from suspense account
during the year;
d) aggregate number of shareholders and the outstanding shares in the suspense
account lying at the end of the year;
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Statement of deviation(s) or variation(s)

As per Regulation 32 of SEBI(LODR) Regulations, 2015, The listed entity shall submit to
the stock exchange the following statement(s) on a quarterly basis for public issue,
rights issue, preferential issue etc:

a) indicating deviations, if any, in the use of proceeds from the objects stated in the
offer document or explanatory statement to the notice for the general meeting, as
applicable;
b) indicating category wise variation (capital expenditure, sales and marketing,
working capital etc.) between projected utilisation of funds made by it in its offer
document or explanatory statement to the notice for the general meeting, as
applicable and the actual utilisation of funds.

The statement(s) shall be continued to be given till such time the issue proceeds have
been fully utilised or the purpose for which these proceeds were raised has been
achieved and shall be placed before the audit committee for review and after such
review, shall be submitted to the stock exchange(s).

Where the listed entity has appointed a monitoring agency to monitor utilisation of
proceeds the listed entity shall submit to the stock exchange(s) any comments or report
received from the monitoring agency within forty-five days from the end of each quarter.

Documents & Information to shareholders

According to Regulation 36 of SEBI (LODR) the listed entity shall send the annual report
in the following manner to the shareholders:

a) Soft copies of full annual report to all those shareholder(s) who have registered
their email address(es) either with the listed entity or with any depository;

b) Hard copy of statement containing the salient features of all the documents, as
prescribed in Section 136 of Companies Act, 2013 or rules made thereunder to
those shareholder(s) who have not so registered;

c) Hard copies of full annual reports to those shareholders, who request for the
same.

The listed entity shall send annual report to the holders of securities, not less than
twenty-one days before the annual general meeting.
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BOARD’S REPORT
The Board’s Report is the most important means of communication by the Board of
Directors of a company with its shareholders. It is a comprehensive document which
serves to inform the shareholders about the performance and various other aspects of
the company.
The Board’s Report is a document, preparation of which requires thorough
understanding of the subject. The Secretarial Audit Report is also required to be annexed
to the Board’s Report.

DISCLOSURE IN BOARD’S REPORT PURSUANT TO THE COMPANIES ACT, 2013

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Secretarial Standard on Report of the board of Directors” (SS-4)

The “Secretarial Standard on Report of the Board of Directors” (SS-4), formulated by the
Secretarial Standards Board (SSB) of the Institute of Company Secretaries of India (ICSI)
and issued by the Council of the ICSI, has been effective from 1st October, 2018.

Adherence to SS-4 is recommendatory. SS-4 prescribes a set of principles for making

disclosures in the Report of the Board of Directors of a company and matters related
thereto.

SS-4 is in conformity with the provisions of the Companies Act, 2013. This Standard is in
conformity with the provisions of the Act. However, if due to subsequent changes in the
Act, any part of this Standard becomes inconsistent with the Act, the provisions of the
Act shall prevail.

Disclosures under Section 134(3)

Section 134 of the Act enjoins upon the Board a responsibility to make out its report to
the shareholders and attach the said report to financial statements laid before the
shareholders at the annual general meeting.

The Board’s Report shall include:

a) The web address, if any, where annual return has been placed;

b) Number of meetings of the board: Board’s Report should contain total number of
Board Meetings held during the year;

c) Directors’ Responsibility Statement: the Directors’ Responsibility Statement shall

set out the following affirmations:

 in the preparation of the annual accounts, the applicable accounting

standards had been followed.
 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;
 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;
 the directors had prepared the annual accounts on a going concern basis;
 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;
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d) Details in respect of frauds reported by auditors under other than those which are
reportable to the Central government:
 Nature of Fraud with description;
 Approximate Amount involved;
 Parties involved, if remedial action not taken; and
 Remedial action taken.

The auditor shall report the matter related to details of frauds to the Central Government
involving an amount of Rupees One Crore or above.

e) A statement on declaration given by independent directors under sub-section (6)

of section 149: Every Independent Director shall give a declaration that he meets
the criteria of independence which is to be given by him at the first meeting of the
Board in which he participates as a director and thereafter at the first meeting of
the Board in every financial year or whenever there is any change in the
circumstances which may affect his status as an independent director.

f) Company’s policy on directors’ appointment and remuneration including criteria

for determining qualifications, positive attributes, independence of a director and
other matters provided under sub- section (3) of section 178.

g) Explanations or comments by the board on every qualification, reservation or

adverse remark or disclaimer made –

 Auditor’s report under section 143

 Cost Audit Report under section 148
 Secretarial Audit Report under Section 204(3)

h) Particulars of loans, guarantees or investments under section 186.

i) Particulars of contracts or arrangements with related parties referred to in sub-

section (1) of section 188 in the prescribed form;

j) The amount, if any, which it recommends should be paid by way of dividend.

According to SS-4, following should be disclosed in the Board’s Report:

 The amount and the percentage of interim dividend declared, if any, during
the year.
 The total amount of dividend for the year.
 A statement on compliance with the Dividend Distribution Policy, if
applicable, and the reasons for deviation and the rationale for additional
parameters considered, if any.
 Payment of dividend from reserves.
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k) Material changes and commitments, if any, affecting the financial position of the
company which have occurred between the end of the financial year of the
company to which the financial statements relate and the date of the report.

l) The conservation of energy, technology absorption, foreign exchange earnings

and outgo, in such manner as prescribed:
Rule 8(3) of the Companies (Accounts) Rules, 2014, prescribes the following
details:
A. Conservation of energy
(i) the steps taken or impact on conservation of energy;
(ii) the steps taken by the company for utilising alternate sources of energy;
(iii) the capital investment on energy conservation equipment.

b. Technology absorption
(i) the efforts made towards technology absorption;
(ii) the benefits derived like product improvement, cost reduction, product
development or import substitution;
(iii) in case of imported technology (imported during the last three years reckoned
from the beginning of the financial year.
(iv) the expenditure incurred on Research and Development.

m) A statement indicating development and implementation of a risk management

policy for the company including identification therein of elements of risk, if any,
which in the opinion of the board may threaten the existence of the company:

n) Details about the policy developed and implemented by the company on

Corporate Social Responsibility initiatives taken during the year.

o) Board evaluation:

p) Such other matters as prescribed

Abridged Board Report for OPC and Small Company

Rule 8A of the Companies (Accounts) Rules, 2014, prescribes the Matters to be included
in Board’s Report for One Person Company and Small Company.

The Board’s Report of One Person Company and Small Company shall be prepared
based on the stand-alone financial statement of the company, which shall be in abridged
form and contain the following: -

a) the web address, if any, where annual return has been placed;
b) number of meetings of the Board;
c) Directors’ Responsibility Statement
d) details in respect of frauds reported by auditors other than those which are
reportable to the Central Government;
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e) explanations or comments by the Board on every qualification, reservation or

adverse remark or disclaimer made by the auditor in his report;
f) the state of the company’s affairs;
g) the financial summary or highlights;
h) material changes from the date of closure of the financial year in the nature of
business and their effect on the financial position of the company;
i) the details of directors who were appointed or have resigned during the year;
j) the details or significant and material orders passed by the regulators or courts or
tribunals impacting the going concern status and company’s operations in future.

The Report of the Board shall contain the particulars of contracts or arrangements
with related parties referred to in sub-section (1) of section 188 in the Form AOC-2.

Disclosures pertaining to Issue of Equity Shares with differential rights

Rule 4(4) of the Companies (Share Capital and Debentures) Rules, 2014, provides that the
Board of Directors shall, inter alia, disclose in the Board’s Report for the financial year in
which the issue of equity shares with differential rights as to dividend, voting or
otherwise was completed, the following details, namely:

a) total number of shares allotted with differential rights;

b) details of the differential rights relating to voting rights and dividends;
c) percentage of shares with differential rights to the total post-issue equity share
capital with differential rights issued at any point of time and percentage of voting
rights which the equity share capital with differential voting rights shall carry to
the total voting rights of the aggregate equity share capital;
d) price at which such shares have been issued;
e) particulars of promoters, directors or key managerial personnel to whom such
shares are issued;
f) change in control, if any, in the company consequent to the issue of equity shares
with differential voting rights;
g) diluted Earnings Per Share pursuant to the issue of each class of shares,
calculated in accordance with the applicable accounting standards;
h) pre and post issue shareholding pattern along with voting rights shall be in the
format specified as per clause 35 of the listing agreement issued by Security
Exchange Board of India from time to time.

Disclosures pertaining to Issue of Sweat Equity Shares

Rule 8 of Companies (Share Capital and Debentures) Rules, 2014, the Board of Directors
shall, inter alia, disclose in the Directors’ Report for the year in which such shares are
issued, the following details of issue of sweat equity shares namely: -

a) the date of the Board meeting at which the proposal for issue of sweat equity
shares was approved;
b) the reasons or justification for the issue;
c) the class of shares under which sweat equity shares are intended to be issued;
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d) the total number of shares to be issued as sweat equity;

e) the class or classes of directors or employees to whom such equity shares are to
be issued;
f) the principal terms and conditions on which sweat equity shares are to be issued,
including basis of valuation;
g) the time period of association of such person with the company;

Disclosures of Details of Employees Stock Option Scheme - Section 62(1)(b)

Section 62(1)(b) of the Act read with Rule 12(9) of the Companies (Share Capital and
Debentures) Rules, 2014 provides that the Board of directors, shall, inter alia, disclose in
the Directors’ Report for the year, the following details of the Employees Stock Option
Scheme:
a) options granted;
b) options vested;
c) options exercised;
d) the total number of shares arising as a result of exercise of option;
e) options lapsed;
f) the exercise price;
g) variation of terms of options;
h) money realized by exercise of options;

Disclosures pertaining to Restrictions on purchase by company or giving of loans by it

for purchase of its shares – Section 67

Proviso to Section 67(3) read with Rule 16(4) of Companies (Share Capital and
Debentures) Rules, 2014 provides that where the voting rights are not exercised directly
by the employees in respect of shares to which the scheme for provision of money for
purchase of or subscription for shares by employees or by trustees for the benefit of
employees relates, the Board of Directors shall, inter alia, disclose in the Board’s Report
for the relevant financial year the following details, namely:-

a) the names of the employees who have not exercised the voting rights directly;
b) the reasons for not voting directly;
c) the name of the person who is exercising such voting rights;
d) the number of shares held by or in favour of, such employees and the percentage
of such shares to the total paid up share capital of the company;
e) the date of the general meeting in which such voting power was exercised
f) the resolutions on which votes have been cast by persons holding such voting
power.
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Disclosures pertaining to Consolidated Financial Statements

Rule 8(1) of the Companies (Accounts) Rules, 2014 specifies that the Board’s Report:

a) shall be prepared on the basis of standalone financial statements of the company;

b) shall report on the highlights of performance of subsidiaries, associates and joint
venture companies and their contribution to the overall performance of the
company during the period under report.

the company shall also attach along with its financial statement a separate statement
containing the salient features of the financial statements of a company’s subsidiary or
subsidiaries, associate company or companies and joint venture or ventures in Form
AOC-1.

Voluntary revision of Financial Statements or board’s Report – Section 131(1)

Section 131(1) of the Act provides that revised financial statements or a revised report
may be prepared in respect of any of the three preceding financial years after obtaining
approval from the Tribunal, where it appears to the directors of a company that the
financial statements or the report of the Board, do not comply with the provisions of
section 129 or section 134 of the Act, and the detailed reasons for revision of such
financial statements or report should be disclosed in the Board’s Report in the relevant
financial year in which such revision is being made.

Disclosure Requirements under the Sexual Harassment of Women at Workplace

(Prevention, Prohibition & Redressal) Act, 2013

The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal)

Act, 2013 is applicable to every workplace, establishment, company or organisation
employing 10 or more employees irrespective of its location or nature of industry. The
said Act provides for constitution of a committee to be known as the “Internal
Complaints Committee”.

Rule 14 of Sexual Harassment of Women at Workplace (Prevention, Prohibition &

Redressal) Rules,2013 provides that the annual report which the Complaints Committee
is required to prepare under Section 21 of the Sexual Harassment of Women at
Workplace (Prevention, Prohibition & Redressal) Act, 2013 shall contain the following
details:
 Number of complaints of sexual harassment received in the year;
 Number of complaints disposed off during the year;
 Number of cases pending for more than 90 days;
 Number of workshops or awareness programme against sexual harassment
carried out;
 Nature of action taken by the employer or District Officer.
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Investor Education and Protection Fund

According to SS-4, the disclosure shall include the following:

a) details of the transfer/s to the IEPF made during the year as mentioned below:

 amount of unclaimed/unpaid dividend and the corresponding shares;

 redemption amount of preference shares;
 amount of matured deposits, for companies other than banking companies,
along with interest accrued thereon;
 amount of matured debentures along with interest accrued thereon;
 application money received for allotment of any securities and due for
refund along with interest accrued;
 sale proceeds of fractional shares arising out of issuance of bonus shares,
merger and amalgamation.

b) details of the resultant benefits arising out of shares already transferred to the
IEPF;
c) year wise amount of unpaid/unclaimed dividend lying in the unpaid account upto
the year and the corresponding shares, which are liable to be transferred to the
IEPF, and the due dates for such transfer;
d) The amount of donation, if any, given by the company to the IEPF;
e) Such other amounts transferred to the IEPF, if any, during the year.

Credit Rating of Securities

According to SS-4, as a good governance practice the disclosure on credit rating should
also be included in the Board’s Report:
a) credit rating obtained in respect of various securities;
b) name of the credit rating agency;
c) date on which the credit rating was obtained;
d) revision in the credit rating;
e) reasons provided by the rating agency for a downward revision, if any.

In addition to the above, as per the Listing Regulations, listed companies are required to
disclose in the Corporate Governance Report a list of all credit ratings obtained by the
company along with any revisions thereto during the relevant financial year.

In case a company obtains the credit rating but has not used / using the same, the
reasons thereof should be mentioned in the Report.
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APPROVAL OF THE BOARD’S REPORT

The Board’s Report should be considered, approved and signed at a meeting of the
Board duly convened or held through video conferencing or other audio visual means.

Signing of board’s Report - Section 134(6)

The Board’s Report and any annexures thereto under section 134(3) shall be signed by
the chairperson of the company if he is authorised by the Board and where he is not so
authorised, shall be signed by at least two directors, one of whom shall be a managing
director, or by the director where there is one director.

Situation where the Company is under CIRP and powers of the board are suspended

In the case of M/s. Subasri Realty Private Limited strengthens this view by stating that
after appointment of the Resolution Professional (RP) and declaration of moratorium, the
Board of Director stands suspended, but that does not amount to suspension of
Managing Director or any of the Director or officer or employee of the Corporate Debtor.

To ensure that the Corporate Debtor remains a going concern, all the Director/employees
are required to function and to assist the Resolution Professional who manages the
affairs of the Corporate Debtor during the period of moratorium.

Since the ultimate responsibility and powers of the Board lies with IRP/ RP, in the
aforesaid context, it appears that IRP/RP should approve and sign the Report. The
IRP/RP may also direct the Directors/Officials of the Corporate Debtor to sign the Report
and take all necessary actions for compliance of applicable laws.

RIGHT OF MEMBERS TO RECEIVE COPIES OF FINANCIAL STATEMENTS, BOARD’S

REPORT, ETC.

Section 136 of the Act provides that, a copy of the financial statements, including
consolidated financial statements, if any, auditor’s report and every other document
required by law to be annexed or attached to the financial statements, which are to be
laid before a company in its general meeting, shall be sent to:

 every member of the company,

 every trustee for the debenture holder of any debentures issued by the company,
and
 all persons other than such member or trustee, being the person so entitled, not
less than 21 clear days before the date of the meeting.

However, if the copies of the documents are sent less than twenty-one days before the
date of the meeting, they shall, notwithstanding that fact, be deemed to have been duly
sent if it is so agreed by members —
 P a g e | 454

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

Exceptions:

In case of section 8 companies, the said documents shall be sent to the members not
less than fourteen clear days before the date of the annual general meeting.

FILING OF THE BOARD’S REPORT

Section 137(1) of the Act provides that copies of financial statement along with all
documents required to be annexed should be filed with the Registrar of Companies
within 30 days along with the prescribed fees, after the financial statements, including
consolidated financial statements have been adopted at the annual general meeting.
The Board’s Report has to be attached to the financial statements.

In case a company does not hold an annual general meeting in any year, a statement of
facts and reasons along with financial statement and attachment shall be filed with
Registrar.

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

a company shall, along with its financial statements to be filed with the Registrar, attach
the accounts of its subsidiary or subsidiaries which have been incorporated outside
India and which have not established their place of business in India.

ANNUAL RETURN

Annual Return is a significant document for the stakeholders of a company as it provides

in a nutshell, very comprehensive information about various aspects of a company. It is
perhaps the most important document required to be filed by every company with the
Registrar of Companies.
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Applicability

As per section 92 of the Companies Act, 2013, every company is required to prepare the
Annual Return in Form No. MgT-7 except One Person Company (OPC) and Small
Company which is required to file in Form [Link]-7A with the Registrar within 60 days
from the date on which Annual General Meeting (AGM) is actually held or from the last
day on which AGM should have been held.

Applicability to Foreign Companies

every foreign company shall prepare and file, within a period of sixty days from the last
day of its financial year, to the Registrar annual return in Form FC-4 along with fee,
containing the particulars as they stood on the close of the financial year.

Contents of Annual Return

Annual Return shall contain the following particulars in consonance with the Section
92(1) of the Act:

a) its registered office, principal business activities, particulars of its holding,

subsidiary and associate companies;
b) its shares, debentures and other securities and shareholding pattern;
c) its indebtedness;
d) its members and debenture-holders along with changes therein since the close of
the previous financial year;
e) its promoters, directors, key managerial personnel along with changes therein
since the close of the previous financial year;
f) meetings of members or a class thereof, Board and its various committees along
with attendance details;
g) remuneration of directors and key managerial personnel;
h) such other matters as may be prescribed.

Attachments to E-form MgT-7/MgT-7 A

 List of Shareholders/ debenture holders

 Approval letter for extension of AGM (if any)
 Copy of MGT-8 (if applicable)
 List of Directors
 Optional Attachments, if any

Signing of Annual Return

Under section 92(1) of the Act, the Annual Return is required to be signed both by a
director and the Company Secretary, or where there is no Company Secretary, by a
Company Secretary in Practice.
The Annual Return of One Person Company and Small Company shall be signed by the
Company Secretary or where there is no company secretary, by the director of the
company.
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Certification of Annual Return

Certification of Annual Return under sub-section (2) of section 92 of the Act read with
rule 11(2) of the Companies (Management and Administration) Rules, 2014,
the Annual Return of a listed company or a company having a

 paid-up share capital of Rs. 10 Crores or more or

 turnover of Rs. 50 Crores or more

shall be certified by a Company Secretary in Practice in the Form No. MGT-8.

Indicative list of Required Documents / Records for Annual Return

preparation/certification

 Memorandum and Articles of Association;

 Shareholding pattern and its breakup;
 List of Promoters;
 Statutory Registers
 Minutes of the Meetings
 Attendance Registers of all Meetings;
 Forms & receipts filed with the Registrar of Companies;
 Copy of Notices and agenda papers for convening meetings of the Board /
Committees / Annual General Meeting/Extraordinary General Meetings/Postal
Ballots/Court convened Meetings / Creditors Meetings / Class Meetings/
Debenture holders Meeting;
 Copy of Latest Financial Statements along with the Board’s Report and Auditor’s
Report;
 Certificate from RTA stating the number of shareholders as on the close of the
financial year;
 Board Resolution for any type of corporate actions taken by the company;
 Other prescribed documents.

Inclusion in board’s Report & Website

According to Section 92(3), every company shall place a copy of the annual return on the
website of the company, if any, and the web-link of such annual return shall be disclosed
in the Board’s Report.

Filing of Annual Return with Registrar

Every company is required to file with the Registrar a copy of the annual return, within
sixty days from the date on which the AGM is held or where no AGM is held in any year
within sixty days from the date on which the AGM should have been held together with
the statement specifying the reasons for not holding the AGM in Form MGT-7 and in case
of One Person Company and Small Company shall file return in Form MgT-7A.

For foreign company the filing is to be done in E-Form FC-4.

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Preservation of Annual Return

According to Rule 15 of the Companies (Management and Administration) Rules, 2014:

 The Company is required to keep and maintain copies of the Annual Return filed
under Section 92 of the Companies Act, 2013 at the registered office of the
company.
 However, such copies of Annual 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 resides, if approved by a special resolution passed at a
general meeting of the company.
 Copies of all Annual Returns and copies of all certificates and documents
required to be annexed thereto shall be preserved for a period of eight years from
the date of filing with the Registrar.

Inspection of Annual Return - Section 94 r/w Rule 14 of the Companies (Management &
Administration) Rules, 2014

 Copies of Annual returns prepared pursuant to Section 92, shall be open for
inspection during business hours, of not less than two hours on every working
day as the board may decide, by any member, debenture holder, other security
holder or beneficial owner without payment of fee and by any other person on
payment of such fee as may be specified in the articles of association of the
company but not exceeding 50 rupees for each inspection.

 Any such member, debenture holder, security holder or beneficial owner or any
other person may require a copy of return on payment of such fee as may be
specified in the articles of association of the company but not exceeding 10
rupees for each page. Such copy of return shall be supplied within 7 days of
deposit of such fee.

 The Central Government may also, by order, direct an immediate inspection of the
document, or direct that the extract required shall forthwith be allowed to be taken
by the person requiring it.

Contravention and Consequences

If any company fails to file its annual return under section 92(4), before the expiry of the
period specified therein, such company and its every officer who is in default shall be
liable to a penalty of 10,000 and in case of continuing failure, with further penalty of 100
for each day during which such failure continues, subject to a maximum of 2 lakh rupees
in case of a company and 50,000 in case of an officer who is in default.

In terms of section 92(6), if a Company Secretary in Practice certifies the annual return
otherwise than in conformity with the requirements of section 92 or the rules made
thereunder, he shall liable to a penalty of two lakh rupees.
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In the matter of Anil kumar Poddar vs. Nessville Trading (P.) Ltd.

FACTS

Appellant made an application for inspection of register of members and annual return of
respondent company for the years 2009 to [Link] company failed to provide copies
of aforementioned documents, he filed petition for supply of documents. The appellant
said that he is covered under the any other persons mentioned in Section 163(2) of the
erstwhile Companies Act, 1956 (corresponding to section 94 of the Companies Act,
2013).

JUDGEMENT

The NCLT, Mumbai Bench held that, since petitioner was neither a shareholder, nor
debenture holder nor holding commercial interest in respondent company, he was not
entitled to seek relief under Section 163 of the erstwhile Companies Act, 1956
(corresponding to section 94 of the Companies Act, 2013) regarding supply of copies of
documents for inspection.

Active Company Tagging Identities and Verification (ACTIVE)

Rule 25A of the Companies (Incorporation) Rules, 2014

 Every company incorporated on or before the 31st December, 2017 shall file the
particulars of the company and its registered office, in e-Form ACTIVE (Active
Company Tagging Identities and Verification) on or before 15.06.2019.

 Provided that any company which has not filed its due financial statements or due
annual returns or both with the Registrar shall be restricted from filing e-Form-
ACTIVE, unless such company is under management dispute and the Registrar
has recorded the same on the register:

 Provided further that companies which have been struck off or are under process
of striking off or under liquidation or amalgamated or dissolved, as recorded in
the register, shall not be required to file e-Form ACTIVE.

 Provided also that in case a company does not intimate the said particulars, the
Company shall be marked as “ACTIVE-non-compliant”

 Provided also that no request for recording the following event based information
or changes shall be accepted by the Registrar from such companies marked as
“ACTIVE-non-compliant”, unless “e-Form ACTIVE” is filed –
 P a g e | 459

a) SH-07 (Change in Authorized Capital);

b) PAS-03 (Change in Paid-up Capital);
c) DIR-12 (Changes in Director)
d) INC-22 (Change in Registered Office);
e) INC-28 (Amalgamation, de-merger).

Where a company files “e-Form ACTIVE”, on or after 16th June, 2019, the company shall
be marked as “ACTIVE Compliant”, on payment of fee of ten thousand rupees.
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CHAPTER – 19

Key Managerial Personnel (KMP’s)

and their Remuneration

INTRODUCTION

Key Managerial Personnel (KMP) or Key

Management Personnel refers to whole time
employees of a company who are vested with
the most important roles and functionalities.
They are the first point of contact between the
company and its stakeholders and are
responsible for the formulation of strategies
and its implementation.
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VARIOUS KMP’S POSITIONS & DEFINITION THEREOF UNDER THE COMPANIES

ACT, 2013

Chief Executive Officer [(Section 2(18)]: "Chief Executive Officer" mean an officer of a
company, who has been designated as such by it.

Chief Financial Officer [(Section 2(19)]: "Chief Financial Officer" means a person
appointed as the Chief Financial Officer of a company.

Managing Director [(Section 2(54)]: "Managing Director" means a director who, by

virtue of the articles of a company or an agreement with the company or a resolution
passed in its general meeting, or by its Board of Directors, is entrusted with substantial
powers of management of the affairs of the company and includes a director occupying
the position of managing director, by whatever name called.

Whole Time Director [Section 2 (94)]: Whole-Time Director means a director who is in
the whole time employment of the company.

Manager [(Section 2(53)]: "Manager" means an individual who, subject to the

superintendence, control and direction of the Board of Directors, has the management of
the whole, or substantially the whole, of the affairs of a company, and includes a director
or any other person occupying the position of a manager, by whatever name called,
whether under a contract of service or not.

Company Secretary [(Section 2(24)]: "Company Secretary or Secretary" means a

company secretary as defined in clause (c) of sub-section (1) of section 2 of the
Company Secretaries Act, 1980 who is appointed by a company to perform the functions
of a company secretary under this Act.

APPOINTMENT OF KEY MANAEGRIAL PERSONNEL

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As per section 203(1) of the Companies Act, 2013 read with the Rule 8 of Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014, the following
class of Companies are required to appoint KMP-

 Every listed company, and

 Every other public company having paid up share capital of Rs. 10 Crores or
more.

Such Companies shall have the following whole time key managerial personnel, -

 Managing Director, or Chief Executive Officer or manager and in their absence, a

whole-time director;
 Company secretary; and
 Chief Financial Officer.

as per Rule 8A of the Companies (Appointment and Remuneration of Managerial

Personnel) Rules, 2014, a company other than a company which is required to appoint a
whole-time key managerial personnel as discussed above and which is having paid up
share capital of Rs. 10 Crores or more shall have a whole time Company Secretary.

Appointment of KMP by the Board

Every whole-time key managerial personnel of a company shall be appointed by passing

a Board Resolution containing the terms and conditions of the appointment including the
remuneration.

Note:

 No KMP shall become the Chairperson unless the articles of such a company
provide otherwise.

 Whole-time key managerial personnel shall not hold office in more than one
company except in its subsidiary company at the same time. However, he can
hold directorship in other companies with the permission of the Board.

 A company may appoint or employ a person as its managing director, if he is the

managing director or manager of one, and of not more than one, other company if
the following conditions are satisfied:

 In addition to the current employment, he can be appointed as MD or manager in

only 1 more company.

 Such appointment is made or approved by a resolution passed at a meeting of the

Board with the consent of all the directors present at the meeting.

 Specific notice has been given to all the directors then in India.
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Re-appointment of KMP by the Board

If the office of any whole-time key managerial personnel is vacated, the resulting vacancy
shall be filled- up by the Board within 6 months from the date of such vacancy.

Note: A whole-time key managerial personnel holding office in more than one company
at the same time has to choose one company within 6 months from the date of
commencement of this Act.

Intimations Regarding appointment of KMP

File with the Registrar the e-Form MGT-14 [Private Companies are exempted from filing e-
form MGT-14 regarding appointment of KMP.

All companies need to file a return containing the particulars of appointment of key
managerial personnel with the Registrar in e-form DIR-12 along with specified fees within
thirty days of such appointment.

In case of listed entity, intimation to Stock Exchange about appointment of KMP as soon
as reasonably possible and not later than twenty-four hours from the occurrence of
event.

Role of KMP

 Financial statement to be signed by CEO, if any, if director & by CFO & by CS.
 Prohibited from insider trading/forward dealing in securities.
 Included in officer/officer in default/related party along with relatives.
 Sign document/ proceedings/contract on behalf of company.
 Disclosure in annual return about KMP.
 Names fall under register of KMP & their shareholding in
holding/subsidiary/associate.
 Disclose interest/concern & changes to company within 30 days of
appointment/relinquishment.
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APPOINTMENT OF MANAGING DIRECTOR, WHOLE-TIME DIRECTOR OR MANAGER

Section 196 of the Companies Act, 2013 provides the provision for appointment of
Managing Director, Whole- Time Director, and Manager:

 No company shall appoint or employ at the same time a managing director and a
manager.
 Appointment of Managing Director, Whole-Time Director or Manager shall not be
for a term exceeding five years at a time.
 The company may re-appoint them for next term before expiry of their present
term but not earlier than one year before expiry of the current term.
 No company shall appoint or continue the employment of any person as
managing director, whole-time director or manager who –

a) is below the age of twenty-one years or has attained the age of seventy years
b) is an undischarged insolvent or has at any time been adjudged as an insolvent;
c) has at any time suspended payment to his creditors or makes, or has at any time
made, a composition with them; or
d) has at any time been convicted by a court of an offence and sentenced for a
period of more than six months.
e) The person had been sentenced to imprisonment for any period, or to a fine
exceeding one thousand rupees, for the conviction of an offence under any of the
Acts as specified under Schedule V of the Companies Act, 2013.
f) The person had not been detained for any period under the Conservation of
Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
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Filing of return for the appointment of KMP

Rule 3 of Companies (Appointment and Remuneration of Managerial Personnel) Rules,

2014 A company shall file a return of appointment of a MD, WTD or Manager, CEO, CS
and CFO within 60 days of their appointment, with the ROC in Form No. MR-1.

Note: Where an appointment of a MD, WTD or manager is not approved by the company
at a general meeting, any act done by him before such approval shall be treated as valid.
No company shall appoint at the same time a Managing Director or a Manager.

PROCEDURE FOR APPROVAL OF CENTRAL GOVERNMENT

An application seeking approval to the appointment of a MD, WTD or Manager shall be

made to the Central Government in e-Form No. MR-2.

The Central Government shall consider the following with regard to the appointment of a
MD, WTD or Manager:

➢ the financial position of the company;

➢ the remuneration or commission drawn by the individual concerned in any other
capacity;
➢ the remuneration or commission drawn by him from any other company;
➢ professional qualifications and experience of the individual concerned;
➢ such other matters as may be prescribed.

Exemption to Specified Companies:

1. Private Companies:

Private Companies are exempted from Section 196(4) which deals with appointment of
Managing Director/Whole time director/manager/approval of Central Government.
Section 196(5) deals with validating actions of Managing/Whole time Director/manager, if
the appointment is not approved by a company in general meeting.

2. Government Companies:

Government Companies are exempted from Section 196(4) which deals with appointment
of Managing Director/Whole time director/manager/approval of Central Government.
Section 196(5) deals with validating actions of Managing/Whole time Director/manager, if
the appointment is not approved by a company in general meeting. Section 196(2) relates
to term of managing director not to exceed five years.

3. IFSC Public Companies:

International Financial Services Centers are exempted from Section 196(4) which deals
with appointment of Managing Director/Whole time director/manager/approval of Central
Government.
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Procedure for appointment of MD

Hold BM and pass BR


Hold GM and pass resolution

File MR-2 (application to seek approval of CG)

Special Note: The person must have obtained the proper Employment Visa from the
concerned Indian

Mission abroad.

File MGT-14 within 30 days of appointment.

File DIR-12 within 30 days

File MR-1 within 60 days of appointment

POWERS, DUTIES, AND RESPONSIBILITIES OF THE MANAGING DIRECTOR

 Being a member of the board of directors participates in policy-making functions

and formulating the objectives of the Board;
 Execute policies laid down by the Board of Directors;
 Act as the intermediary officer between the organization and the Board of
Directors;
 Communicate and interpret the policies of the company to sub employees;
 To review and present the operations of the company to the Board periodically
accounts and statistics showing the progress and the present position of the
company;
 Appoint high officials of the company;
 Formulate the compensation and employment plan by the accepted policies of the
company;
 Plan the expansion and development of the business;
 Organize meetings with department heads;

Chief Executive Officer [Section 2(18)] and Chief Financial Officer [Section 2(19)]

“Chief Executive Officer” means an officer of a company, who has been designated as
such by it.
Any person appointed as a CEO of the company shall be one of the key managerial
personnel (KMP) as per definition of clause (51) of section 2 of the Act when such person
is designated /appointed under section 203 the Act. Such officer shall be one of the
officers who is in default under clause (60) of section 2 of the Act in the event of violation
of provisions of the Act.
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“Chief Financial Officer” means a person appointed as the chief financial officer of a
company. The CFO may be appointed either by the board of directors or by the managing
director unless such person is designated as a key managerial person under section 203.
He shall be a person who is occupying the position as CFO having involved in day to day
financial affairs of the company.

The CFO need not be a director of the company. However, he has been recognised as a
KMP under Section 203 and his designation is equated with other managerial personnel
such as the managing director, the manager or in their absence, the whole time director.

APPOINTMENT OF COMPANY SECRETARY

Section 2(24) of the Companies Act, 2013 defines "company secretary" or "secretary"
means a company secretary as defined in clause (c) of sub-section (1) of section 2 of the
Company Secretaries Act, 1980 who is appointed by a company to perform the functions
of a company secretary under this Act.

Definition as per Company Secretaries Act, 1980

According to clause (c) of sub-section (1) of Section 2 of the Company Secretaries Act,
1980, a company secretary means a person who is a member of the Institute of Company
Secretaries of India.

Areas where Company Secretary render services

 Corporate governance Services

 Corporate Secretarial Services
 Secretarial/Compliance Audit and Certification Services
 Corporate Laws Advisory Services
 Representation Services
 Arbitration and Conciliation Services
 Securities Compliance and Certification Services
 Corporate Communications and Public Relations
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COMPANY SECRETARY AS KEY MANAGERIAL PERSONNEL (KMP)

Company Secretary has been recognized as Key Managerial Personnel and has placed
along with Managing Director (MD) or Chief Executive officers (CEO) or Manager, Whole
time director(s) or Chief Financial Officer (CFO) under Section 203 of the Companies Act,
2013. Accordingly, every listed company and every other public company having paid-up
share capital of ten crore rupees or more is required to appoint the whole time Company
Secretary as the Key Managerial Personnel.

Company Secretary as Compliance Officer

Under Regulation 6 of the SEBI (LODR) Regulations, 2015, a listed company is required
to appoint a qualified company secretary as the compliance officer. The compliance
officer of the Company is responsible for:

a) ensuring conformity with the regulatory provisions applicable to the listed entity
in letter and spirit;
b) co-ordination with and reporting to the Board, recognised stock exchange(s) and
depositories with respect to compliance with rules, regulations and other
directives of these authorities in the manner as specified from time to time;
c) ensuring that the correct procedures have been followed that would result in the
correctness, authenticity and comprehensiveness of the information, statements
and reports filed by the listed entity under these regulations;
d) monitoring email address of grievance redressal division as designated by the
listed entity for the purpose of registering complaints by investors:

Company Secretary as a part of Senior Management

the senior management will also include chief executive officer/managing director/whole
time director/manager (including chief executive officer/manager, in case they are not
part of the board) and specifically include company secretary and chief financial officer.

Procedure For Appointment Of Company Secretary

Conduct Interviews and select an Individual


Hold BM and pass a Board Resolution for appointment

File DIR-12 within 30 days of appointment.

File MGT-14 within 30 days of appointment.

Make entries in Directors and KMP Register

Inform Stock Exchange in case of Listed Company
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Procedure For Removal Of Company Secretary

Check out the terms and conditions of appointment


Hold BM and pass a Board Resolution for removal

File DIR-12 within 30 days of removal

File MGT-14 within 30 days of appointment.

Make entries in Directors and KMP Register

Inform Stock Exchange in case of Listed Company.

The vacancy should be filed within 6 months.

Duties of a Company Secretary in India

According to section 205 of the Companies Act, 2013 and rule 10 of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014, the company
secretary must perform the following functions and duties:

a) to report to the Board about compliance with the provisions of this Act, the rules
made thereunder and other laws applicable to the company;
b) to ensure that the company complies with the applicable secretarial standards;
c) to provide to the directors of the company, collectively and individually, such
guidance as they may require, with regard to their duties, responsibilities and
powers;
d) to facilitate the convening of meetings and attend Board, committee and general
meetings and maintain the minutes of these meetings;
e) to obtain approvals from the Board, general meeting, the government and such
other authorities as required under the provisions of the Act;
f) to represent before various regulators, and other authorities under the Act in
connection with discharge of various duties under the Act;
g) to assist the Board in the conduct of the affairs of the company
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REMUNERATION OF MANAGERIAL PERSONNEL

Overall Maximum Managerial Remuneration

The total managerial remuneration payable by a public company, to its directors,

including managing director and whole-time director, and its manager in respect of any
financial year shall not exceed 11% of the net profits of that company for that financial
year computed in the manner laid down in section 198 of the Companies Act, 2013,
except that the remuneration of the directors shall not be deducted from the gross
profits.

The Company may pay the remuneration to the managerial personnel exceeding total
limit of 11% of net with the approval of members at the general meeting. However, limit of
remuneration shall be as per Schedule V.

The Section applies only to Public Companies and hence Private Companies are free to
pay remuneration at any rate to such directors in case of adequacy or inadequacy of
profits.

Individual Limit for each director

Provided further that, except with the approval of the company in general meeting, by a
special resolution—

 the remuneration payable to any one managing director; or whole-time director or

manager shall not exceed five per cent. of the net profits of the company and if
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there is more than one such director remuneration shall not exceed ten per cent.
of the net profits to all such directors and manager taken together;

 the remuneration payable to directors who are neither managing directors nor
whole-time directors shall not exceed,-

a) one per cent. of the net profits of the company, if there is a managing or
whole-time director or manager;
b) three per cent. of the net profits in any other case.
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Provisions relating to sitting fees

The above mentioned limit of managerial remuneration shall be exclusive of sitting fees
payable to directors for attending the board meetings/committees meetings.
The maximum sitting fees payable to each director for attending the Board Meeting or
any committee meeting shall not exceed Rs. 1 lakh per meeting.

Note: The Board may decide different sitting fee payable to independent and non-
independent directors other than whole-time directors. Any director can take sitting fees
including MD or WTD. The siting fee of women director cannot be less than other
Directors).

Remuneration to Directors in other Capacity:

The remuneration payable to the directors including MD, WTD or Manager shall be
inclusive of the remuneration payable for the services rendered by him in any other
capacity except the services of a professional nature and in the opinion of the
Nomination and Remuneration Committee or the Board, the director possesses the
requisite qualification for the services of the professional nature.

Other provisions relating to Remuneration to Director or Manager

a) Permissible forms of Remuneration:

A director or manager may be paid remuneration either by way of a monthly

payment or at a specified percentage of the net profits of the company or partly by
one way and partly by the other.

b) Commission or remuneration from holding or subsidiary company:

Any director who is in receipt of any commission from the company and who is a
MD, WTD or Manager of the company shall not be disqualified from receiving any
remuneration or commission from any holding company or subsidiary company of
such company subject to its disclosure by the company in the Board's report.

c) Independent directors are not entitled to stock options:

An independent director shall not be entitled to any stock option and may receive
remuneration by way of fees, reimbursement of expenses for participation in the
Board and other meetings and profit related commission as may be approved by
the members.

d) Insurance Premium not part of Remuneration:

Where any insurance is taken by a company on behalf of its MD, WTD, Manager,
CEO, CFO or CS for indemnifying against any liability in respect of any
negligence, default, or breach of trust for which they may be guilty in relation to
the company, such insurance premium shall not be treated managerial
remuneration.
 P a g e | 473

Note: If such KMP is proved to be guilty, the premium paid on such insurance
shall be treated as part of the remuneration

Section-198:
Calculation of Profit for purpose to pay managerial remuneration under section 197
Remuneration in case of Inadequate or No Profits (Schedule V- Part II- Section II) In case
of no or inadequate profits a Company can pay remuneration to directors only by
complying Schedule V.

Where in any financial year, if a company has no profits or inadequate profits, it may pay
the remuneration to the managerial person not exceeding the limits as mentioned in
Table A and Table B below:

Table – A

Note: The above limits shall be doubled if a special resolution is passed by the
shareholders. It is clarified that for a period less than one year, the limits shall be pro-
rated. Calculation of Effective capital:
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Table – B

If the following conditions are satisfied then remuneration can be paid without any limits:

a) The managerial person functions in a professional capacity

b) He does not hold any share at any time in the Company, Holding or Subsidiary
during 2 years preceding the appointment.
- As on the date of appointment After the date of appointment

Note: However, holding shares upto 0.5% of paid up share capital allotted under
ESOP is permitted.

c) He is not related to the Directors or promoters of the Company, Holding or

Subsidiary during 2 years preceding the appointment.
As on the date of appointment after the date of appointment
d) He should possess graduate level qualification with expertise and specialised
knowledge in the field in which the company operates.

Procedural Requirements under Schedule V

a) Approval by the Board & Committee: Payment of remuneration is approved by a

resolution passed by the Board & also approved by nomination and remuneration
committee and while doing so record in writing clear reason and justification for
payment of remuneration beyond the said limit;

b) No default on repayments: The company has not made any default in repayment
of any of its debts or debentures or interest payable thereon for a continuous
period of 30 days in the preceding financial year before the date of appointment of
such managerial person;

c) Approval from shareholders: Prior approval of shareholders by following way to

be taken: Within limits specified under Table A- Ordinary Resolution Double the
specified limit- Special resolution Payment to professional person- Special
Resolution.

d) Statement with Notice: Statement along with a notice calling the general meeting
as referred above is given to the shareholders containing the following
information, namely: —

General Information:

 Nature of industry
 Date or expected date of commencement of commercial production
 In case of new companies, expected date of commencement of activities as
per project approved by financial institutions appearing in the prospectus
 Financial performance based on given indicators
 Foreign investments or collaborations, if any.
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Information about the appointee:

a) Background details
b) Past remuneration
c) Recognition or awards
d) Job profile and his suitability
e) Remuneration proposed
f) Comparative remuneration profile with respect to industry, size of the company,
profile of the position and person (in case of expatriates the relevant details would
be with respect to the country of his origin)
g) Pecuniary relationship directly or indirectly with the company, or
h) Relationship with the managerial personnel, if any.

Other information:

 Reasons of loss or inadequate profits

 Steps taken or proposed to be taken for improvement
 Expected increase in productivity and profits in measurable terms. Disclosures:
 The following disclosures shall be mentioned in the Board of Directors' report
under the heading "Corporate Governance", if any, attached to the financial
statement: —
a) All elements of remuneration package such as salary, benefits, bonuses, stock
options, pension, etc., of all the directors;
b) Details of fixed component and performance linked incentives along with the
performance criteria;
c) Service contracts, notice period, severance fees;
d) stock option details, if any, and whether the same has been issued at a
discount as well as the period over which accrued and over which exercisable.

Section III: Remuneration in Special Circumstances

Where the company is having no profit or inadequate profit can pay remuneration to its
managerial personnel in excess of amount as mentioned in Section II above, without
Central Government's approval.
The following companies are covered in this section:
(a) Foreign Company
(b) New incorporated Company (for a period of 7 years from the date of Incorporation)
(c) Sick Company (as order passed by BIFR or NCLT for five years from date of sanction
of scheme.

Remuneration payable to a managerial person in two companies:

A managerial person shall draw remuneration from one or more companies, provided
that the total remuneration drawn from the companies does not exceed the higher
maximum limit admissible from any one of the companies of which he is a managerial
person.
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Recovery of Managerial Remuneration (Section 197 of the Companies Act, 2013)

If any director draws or receives, directly or indirectly, by way of remuneration any such
sums in excess of the limit prescribed he shall refund such sums to the company and
until such sum is refunded, hold it in trust for the company.

Note: The Company shall not waive the recovery of any amount unless permitted by the
Central Government.

Section 199 of the Companies Act, 2013:

This section provides for recovery of remuneration including stock options received by
the Managerial Personnel, where the benefits given to them are found to be in excess of
what is reflected in the restated financial statements.

Compensation for Loss of Office Section 202 of the Companies Act, 2013

A company may make payment to a MD, WTD or Manager, but not to any other director,
by way of compensation for loss of office, or as consideration for loss of office.

No payment shall be made in the following cases:

a) In case of resignation by the directors due to reconstruction/amalgamation of the

company and is appointed as the MD, WTD or Manager or other officer of the
resulting company.
b) Where the director resigns from his office otherwise than on the reconstruction/
amalgamation of the company;
c) Where the office of the director is vacated due to disqualification;
d) Were the company is being wound up due to the negligence or default of the
director;
e) Where the director has been found guilty of fraud or breach of trust or gross
negligence or mismanagement.

Note: Any payment made to a MD, WTD or Manager shall not exceed the remuneration
which he would have earned if he had been in office for his remaining term or three
years, whichever is shorter, calculated on the basis of the average remuneration actually
earned by him during a period of three years immediately preceding the date on which he
ceased to hold office, or where he held the office for a lesser period than three years,
during such period.